1
G.R. No. L-48194 March 15, 1990
JOSE M. JAVIER and ESTRELLA F. JAVIER, petitioners,
vs.
COURT OF APPEALS and LEONARDO TIRO, respondents.
Eddie Tamondong for petitioners.
Lope Adriano and Emmanuel Pelaez, Jr. for private respondent.
REGALADO, J.:
Petitioners pray for the reversal of the decision of respondent Court of
Appeals in CA-G.R. No. 52296-R, dated March 6, 1978, 1 the dispositive
portion whereof decrees:
WHEREFORE, the judgment appealed from is hereby set aside and another
one entered ordering the defendants-appellees, jointly and solidarily, to
pay plaintiff-appellant the sum of P79,338.15 with legal interest thereon
from the filing of the complaint, plus attorney's fees in the amount of
P8,000.00. Costs against defendants-appellees.2
3
As found by respondent court or disclosed by the records,   this case was
generated by the following antecedent facts.
Private respondent is a holder of an ordinary timber license issued by the
Bureau of Forestry covering 2,535 hectares in the town of Medina, Misamis
Oriental. On February 15, 1966 he executed a "Deed of Assignment" 4 in
favor of herein petitioners the material parts of which read as follows:
x x x           x x x          x x x
I, LEONARDO A. TIRO, of legal age, married and a resident of Medina,
Misamis Oriental, for and in consideration of the sum of ONE HUNDRED
TWENTY THOUSAND PESOS (P120,000.00), Philippine Currency, do by
these presents, ASSIGN, TRANSFER AND CONVEY, absolutely and forever
unto JOSE M. JAVIER and ESTRELLA F. JAVIER, spouses, of legal age and a
resident (sic) of 2897 F.B. Harrison, Pasay City, my shares of stocks in the
TIMBERWEALTH CORPORATION in the total amount of P120,000.00,
payment of which shall be made in the following manner:
1. Twenty thousand (P20,000.00) Pesos upon signing of this contract;
2. The balance of P100,000.00 shall be paid P10,000.00 every shipment of
export logs actually produced from the forest concession of Timberwealth
Corporation.
That I hereby agree to sign and endorse the stock certificate in favor of Mr.
& Mrs. Jose M. Javier, as soon as stock certificates are issued.
x x x           x x x          x x x
At the time the said deed of assignment was executed, private respondent
had a pending application, dated October 21, 1965, for an additional forest
concession covering an area of 2,000 hectares southwest of and adjoining
the area of the concession subject of the deed of assignment. Hence, on
February 28, 1966, private respondent and petitioners entered into
another "Agreement" 5 with the following stipulations:
x x x           x x x          x x x
1. That LEONARDO TIRO hereby agrees and binds himself to transfer, cede
and convey whatever rights he may acquire, absolutely and forever, to
TIMBERWEALTH CORPORATION, a corporation duly organized and existing
under the laws of the Philippines, over a forest concession which is now
pending application and approval as additional area to his existing licensed
area under O.T. License No. 391-103166, situated at Medina, Misamis
Oriental;
2. That for and in consideration of the aforementioned transfer of rights
over said additional area to TIMBERWEALTH CORPORATION, ESTRELLA F.
JAVIER and JOSE M. JAVIER, both directors and stockholders of said
corporation, do hereby undertake to pay LEONARDO TIRO, as soon as said
additional area is approved and transferred to TIMBERWEALTH
CORPORATION the sum of THIRTY THOUSAND PESOS (P30,000.00), which

amount of money shall form part of their paid up capital stock in
TIMBERWEALTH CORPORATION;
3. That this Agreement is subject to the approval of the members of the
Board of Directors of the TIMBERWEALTH CORPORATION.
x x x           x x x          x x x
On November 18, 1966, the Acting Director of Forestry wrote private
respondent that his forest concession was renewed up to May 12, 1967
under O.T.L. No. 391-51267, but since the concession consisted of only
2,535 hectares, he was therein informed that:
In pursuance of the Presidential directive of May 13, 1966, you are hereby
given until May 12, 1967 to form an organization such as a cooperative,
partnership or corporation with other adjoining licensees so as to have a
total holding area of not less than 20,000 hectares of contiguous and
compact territory and an aggregate allowable annual cut of not less than
25,000 cubic meters, otherwise, your license will not be further renewed. 6
Consequently, petitioners, now acting as timber license holders by virtue of
the deed of assignment executed by private respondent in their favor,
entered into a Forest Consolidation Agreement 7 on April 10, 1967 with
other ordinary timber license holders in Misamis Oriental, namely, Vicente
L. De Lara, Jr., Salustiano R. Oca and Sanggaya Logging Company. Under
this consolidation agreement, they all agreed to pool together and merge
their respective forest concessions into a working unit, as envisioned by
the aforementioned directives. This consolidation agreement was
approved by the Director of Forestry on May 10, 1967. 8 The working unit
was subsequently incorporated as the North Mindanao Timber
Corporation, with the petitioners and the other signatories of the aforesaid
Forest Consolidation Agreement as incorporators. 9
On July 16, 1968, for failure of petitioners to pay the balance due under the
two deeds of assignment, private respondent filed an action against
petitioners, based on the said contracts, for the payment of the amount of
P83,138.15 with interest at 6% per annum from April 10, 1967 until full
payment, plus P12,000.00 for attorney's fees and costs.
2
On September 23, 1968, petitioners filed their answer admitting the due
execution of the contracts but interposing the special defense of nullity
thereof since private respondent failed to comply with his contractual
obligations and, further, that the conditions for the enforceability of the
obligations of the parties failed to materialize. As a counterclaim,
petitioners sought the return of P55,586.00 which private respondent had
received from them pursuant to an alleged management agreement, plus
attorney's fees and costs.
On October 7, 1968, private respondent filed his reply refuting the defense
of nullity of the contracts in this wise:
What were actually transferred and assigned to the defendants were
plaintiff's rights and interest in a logging concession described in the deed
of assignment, attached to the complaint and marked as Annex A, and
agreement Annex E; that the "shares of stocks" referred to in paragraph II
of the complaint are terms used therein merely to designate or identify
those rights and interests in said logging concession. The defendants
actually made use of or enjoyed not the "shares of stocks" but the logging
concession itself; that since the proposed Timberwealth Corporation was
owned solely and entirely by defendants, the personalities of the former
and the latter are one and the same. Besides, before the logging
concession of the plaintiff or the latter's rights and interests therein were
assigned or transferred to defendants, they never became the property or
assets of the Timberwealth Corporation which is at most only an
association of persons composed of the defendants. 10
and contending that the counterclaim of petitioners in the amount of
P55,586.39 is actually only a part of the sum of P69,661.85 paid by the
latter to the former in partial satisfaction of the latter's claim. 11
After trial, the lower court rendered judgment dismissing private
respondent's complaint and ordering him to pay petitioners the sum of
P33,161.85 with legal interest at six percent per annum from the date of
the filing of the answer until complete payment. 12

As earlier stated, an appeal was interposed by private respondent to the
Court of Appeals which reversed the decision of the court of a quo.
On March 28, 1978, petitioners filed a motion in respondent court for
extension of time to file a motion for reconsideration, for the reason that
they needed to change counsel. 13 Respondent court, in its resolution dated
March 31, 1978, gave petitioners fifteen (15) days from March 28, 1978
within which to file said motion for reconsideration, provided that the
subject motion for extension was filed on time. 14 On April 11, 1978,
petitioners filed their motion for reconsideration in the Court of
Appeals. 15 On April 21, 1978, private respondent filed a consolidated
opposition to said motion for reconsideration on the ground that the
decision of respondent court had become final on March 27, 1978, hence
the motion for extension filed on March 28, 1978 was filed out of time and
there was no more period to extend. However, this was not acted upon by
the Court of Appeals for the reason that on April 20, 1978, prior to its
receipt of said opposition, a resolution was issued denying petitioners'
motion for reconsideration, thus:
The motion for reconsideration filed on April 11, 1978 by counsel for
defendants-appellees is denied. They did not file any brief in this case. As a
matter of fact this case was submitted for decision without appellees' brief.
In their said motion, they merely tried to refute the rationale of the Court
in deciding to reverse the appealed judgment. 16
Petitioners then sought relief in this Court in the present petition for
review on certiorari. Private respondent filed his comment, reiterating his
stand that the decision of the Court of Appeals under review is already
final and executory.
Petitioners countered in their reply that their petition for review presents
substantive and fundamental questions of law that fully merit judicial
determination, instead of being suppressed on technical and insubstantial
reasons. Moreover, the aforesaid one (1) day delay in the filing of their
motion for extension is excusable, considering that petitioners had to
change their former counsel who failed to file their brief in the appellate
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court, which substitution of counsel took place at a time when there were
many successive intervening holidays.
On July 26, 1978, we resolved to give due course to the petition.
The one (1) day delay in the filing of the said motion for extension can
justifiably be excused, considering that aside from the change of counsel,
the last day for filing the said motion fell on a holiday following another
holiday, hence, under such circumstances, an outright dismissal of the
petition would be too harsh. Litigations should, as much as possible, be
decided on their merits and not on technicalities. In a number of cases, this
Court, in the exercise of equity jurisdiction, has relaxed the stringent
application of technical rules in order to resolve the case on its
merits. 17 Rules of procedure are intended to promote, not to defeat,
substantial justice and, therefore, they should not be applied in a very rigid
and technical sense.
We now proceed to the resolution of this case on the merits.
The assignment of errors of petitioners hinges on the central issue of
whether the deed of assignment dated February 15, 1966 and the
agreement of February 28, 1966 are null and void, the former for total
absence of consideration and the latter for non-fulfillment of the
conditions stated therein.
Petitioners contend that the deed of assignment conveyed to them the
shares of stocks of private respondent in Timberwealth Corporation, as
stated in the deed itself. Since said corporation never came into existence,
no share of stocks was ever transferred to them, hence the said deed is
null and void for lack of cause or consideration.
We do not agree. As found by the Court of Appeals, the true cause or
consideration of said deed was the transfer of the forest concession of
private respondent to petitioners for P120,000.00. This finding is
supported by the following considerations, viz:

1. Both parties, at the time of the execution of the deed of assignment
knew that the Timberwealth Corporation stated therein was non-
existent. 18
2. In their subsequent agreement, private respondent conveyed to
petitioners his inchoate right over a forest concession covering an
additional area for his existing forest concession, which area he had
applied for, and his application was then pending in the Bureau of Forestry
for approval.
3. Petitioners, after the execution of the deed of assignment, assumed the
operation of the logging concessions of private respondent. 19
4. The statement of advances to respondent prepared by petitioners
stated: "P55,186.39 advances to L.A. Tiro be applied to succeeding
shipments. Based on the agreement, we pay P10,000.00 every after (sic)
shipment. We had only 2 shipments" 20
5. Petitioners entered into a Forest Consolidation Agreement with other
holders of forest concessions on the strength of the questioned deed of
assignment. 21
The aforesaid contemporaneous and subsequent acts of petitioners and
private respondent reveal that the cause stated in the questioned deed of
assignment is false. It is settled that the previous and simultaneous and
subsequent acts of the parties are properly cognizable indica of their true
intention. 22 Where the parties to a contract have given it a practical
construction by their conduct as by acts in partial performance, such
construction may be considered by the court in construing the contract,
determining its meaning and ascertaining the mutual intention of the
parties at the time of contracting. 23 The parties' practical construction of
their contract has been characterized as a clue or index to, or as evidence
of, their intention or meaning and as an important, significant, convincing,
persuasive, or influential factor in determining the proper construction of
the agreement. 24
The deed of assignment of February 15, 1966 is a relatively simulated
contract which states a false cause or consideration, or one where the
4
parties conceal their true agreement. 25 A contract with a false
consideration is not null and void per se. 26 Under Article 1346 of the Civil
Code, a relatively simulated contract, when it does not prejudice a third
person and is not intended for any purpose contrary to law, morals, good
customs, public order or public policy binds the parties to their real
agreement.
The Court of Appeals, therefore, did not err in holding petitioners liable
under the said deed and in ruling that —
. . . In view of the analysis of the first and second assignment of errors, the
defendants-appellees are liable to the plaintiff-appellant for the sale and
transfer in their favor of the latter's forest concessions. Under the terms of
the contract, the parties agreed on a consideration of P120,000.00.
P20,000.00 of which was paid, upon the signing of the contract and the
balance of P100,000.00 to be paid at the rate of P10,000.00 for every
shipment of export logs actually produced from the forest concessions of
the appellant sold to the appellees. Since plaintiff-appellant's forest
concessions were consolidated or merged with those of the other timber
license holders by appellees' voluntary act under the Forest Consolidation
Agreement (Exhibit D), approved by the Bureau of Forestry (Exhibit D-3),
then the unpaid balance of P49,338.15 (the amount of P70,661.85 having
been received by the plaintiff-appellant from the defendants-appellees)
became due and demandable. 27
As to the alleged nullity of the agreement dated February 28, 1966, we
agree with petitioners that they cannot be held liable thereon. The efficacy
of said deed of assignment is subject to the condition that the application
of private respondent for an additional area for forest concession be
approved by the Bureau of Forestry. Since private respondent did not
obtain that approval, said deed produces no effect. When a contract is
subject to a suspensive condition, its birth or effectivity can take place only
if and when the event which constitutes the condition happens or is
fulfilled. 28 If the suspensive condition does not take place, the parties
would stand as if the conditional obligation had never existed. 29
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The said agreement is a bilateral contract which gave rise to reciprocal

obligations, that is, the obligation of private respondent to transfer his
rights in the forest concession over the additional area and, on the other
hand, the obligation of petitioners to pay P30,000.00. The demandability of
the obligation of one party depends upon the fulfillment of the obligation
of the other. In this case, the failure of private respondent to comply with
his obligation negates his right to demand performance from petitioners.
Delivery and payment in a contract of sale, are so interrelated and
intertwined with each other that without delivery of the goods there is no
corresponding obligation to pay. The two complement each other. 30

Moreover, under the second paragraph of Article 1461 of the Civil Code,
the efficacy of the sale of a mere hope or expectancy is deemed subject to
the condition that the thing will come into existence. In this case, since
private respondent never acquired any right over the additional area for
failure to secure the approval of the Bureau of Forestry, the agreement
executed therefor, which had for its object the transfer of said right to
petitioners, never became effective or enforceable.

WHEREFORE, the decision of respondent Court of Appeals is hereby

MODIFIED. The agreement of the parties dated February 28, 1966 is
declared without force and effect and the amount of P30,000.00 is hereby
ordered to be deducted from the sum awarded by respondent court to
private respondent. In all other respects, said decision of respondent court
is affirmed.

SO ORDERED.

Melencio-Herrera, Paras, Padilla and Sarmiento JJ., concur.

G.R. No. L-5267           October 27, 1953


LUZ HERMOSA, as administratrix of the Intestate Estate of Fernando
Hermosa, Sr., and FERNANDO HERMOSA, JR., petitioners,
vs.
EPIFANIO M. LONGARA, respondent.
Manuel O. Chan for petitioners.
Jacinto R. Bohol for respondent.
LABRADOR, J.:
This is an appeal by way of certiorari against a decision of the Court of
Appeals, fourth division, approving certain claims presented by Epifanio M.
Longara against the testate estate of Fernando Hermosa, Sr. The claims are
of three kinds, namely, P2,341.41 representing credit advances made to
the intestate from 1932 to 1944, P12,924.12 made to his son Francisco
Hermosa, and P3,772 made to his grandson, Fernando Hermosa, Jr. from
1945 to 1947, after the death of the intestate, which occurred in
December, 1944. The claimant presented evidence and the Court of
Appeals found, in accordance therewith, that the intestate had asked for
the said credit advances for himself and for the members of his family "on
condition that their payment should be made by Fernando Hermosa, Sr. as
soon as he receive funds derived from the sale of his property in Spain."
Claimant had testified without opposition that the credit advances were to
be "payable as soon as Fernando Hermosa, Sr.'s property in Spain was sold
and he receive money derived from the sale." The Court of Appeals held
that payment of the advances did not become due until the administratrix
received the sum of P20,000 from the buyer of the property. Upon
authorization of the probate court in October, 1947, and the same was
paid for subsequently. The Claim was filed on October 2, 1948.
It is contended on this appeal that the obligation contracted by the
intestate was subject to a condition exclusively dependent upon the will of
the debtor (a condicion potestativa) and therefore null and void, in
accordance with article 1115 of the old Civil Code. The case of Osmeña vs.
Rama, (14 Phil. 99) is cited to support appellants contention. In this case,
this court seems to have filed that a promise to pay an indebtedness "if a
house of strong materials is sold" is an obligation the performance of
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which depended on the will of the debtor. We have examined this case and
we find that the supposed ruling was merely an assumption and the same
was not the actual ruling of the case.
A careful consideration of the condition upon which payment of the sums
advanced was made to depend, "as soon as he (intestate) receive funds
derived from the sale of his property in Spain," discloses the fact that the
condition in question does not depend exclusively upon the will of the
debtor, but also upon other circumstances beyond his power or control. If
the condition were "if he decides to sell his house." or "if he likes to pay
the sums advanced," or any other condition of similar import implying that
upon him (the debtor) alone payment would depend, the condition would
be protestativa, dependent exclusively upon his will or discretion. In the
form that the condition was found by the Court of Appeals however the
condition implies that the intestate had already decided to sell his house,
or at least that he had made his creditors believe that he had done so, and
that all that we needed to make his obligation (to pay his indebtedness)
demandable is that the sale be consummated and the price thereof
remitted to the islands. Note that if the intestate would prevent or would
have prevented the consummation of the sale voluntarily, the condition
would be or would have been deemed or considered complied with (article
1119, old Civil Code).The will to sell on the part of the intestate was,
therefore, present in fact, or presumed legally to exist, although the price
and other conditions thereof were still within his discretion and final
approval. But in addition of the sale to him (the intestate-vendor), there
were still other conditions that had no concur to effect the sale, mainly
that of the presence of a buyer, ready, able and willing to purchase the
property under the conditions demanded by the intestate. Without such a
buyer the sale could not be carried out or the proceeds thereof sent to the
islands. It is evident, therefore sent to the islands. It is evident, therefore,
that the condition of the obligation was not a purely protestative one,
depending exclusively upon the will of the intestate, but a mixed one,
depending partly upon the will of intestate and partly upon chance, i.e.,
the presence of a buyer of the property for the price and under the
conditions desired by the intestate. The obligation is clearly governed by
the second sentence of article 1115 of the old Civil Code (8 Manresa, 126).

The condition is, besides, a suspensive condition, upon the happening of
which the obligation to pay is made dependent. And upon the happening
of the condition, the debt became immediately due and demandable.
(Article 1114, old Civil Code; 8 Manresa, 119).
One other point needs to be considered, and this is the fact that the sale
was not effected in the lifetime of the debtor (the intestate), but after his
death and by his administrator, the very wife of the claimant. On this last
circumstance we must bear in mind that the Court of Appeals found no
evidence to show that the claim was the product of a collusion or
connivance between the administratrix and the claimant. That there was
really a promise made by the intestate to pay for the credit advances
maybe implied from the fact that the receipts thereof had been preserved.
Had the advances been made without intention of demanding their
payment later, said receipts would not have been preserved. Regularity of
the advances and the close relationship between the intestate and the
claimant also support this conclusion.
As to the fact that the suspensive condition took place after the death of
the debtor, and that advances were made more than ten years before the
sale, we supported in our conclusion that the same is immaterial by
Sanchez Roman, who says, among other things, as to conditional
obligations:
1a La obligacion contractual afectada por condicion suspensiva. no es
exigible hasta que se cumpla la condicion, . . .
2 a El cumplimiento de la condicion suspensiva retrotae los efectos del
acto juridico originario de la obligacion a que aquella afecta, al tiempo de
lacelebracion de este;
3 a La referida retroaccion, no solo tiene lugar cuando el cumplimiento de
la condicion se verifica en vida de los contrayentes, que tambien se
produce cuando aquel se realiza despues de la muerte de estos. (4 Sanchez
Roman, p. 122) (Emphasis supplied.)
As the obligation retroacts to the date when the contract was entered into,
all amounts advanced from the time of the agreement became due, upon
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the happening of the suspensive condition. As the obligation to pay
became due and demandable only when the house was sold and the
proceeds received in the islands, the action to recover the same only
accrued, within the meaning of the statute of limitations, on date the
money became available here hence the action to recover the advances
has not yet prescribed.
The above considerations dispose of the most important questions raised
on this appeal. It is also contended that the third group of claims, i.e.,
credits furnished the intestate's grandson after his (intestate's) death in
1944, should have been allowed. We find merit in this contention. Even if
authorization to furnish necessaries to his grandson may have been given,
this authorization could not be made to extend after his death, for two
obvious reasons. First because the obligation to furnish support is personal
and is extinguished upon the death of the person obliged to give
support(article 150, old Civil Code), and second because upon the death of
a principal (the intestate in this case), his agent's authority or authorization
is deemed terminated (article 1732, old Civil Code). That part of the
decision allowing this group of claims, amounting to P3,772 should be
reversed.
One last contention of the appellant is that the claims are barred by the
statute of non-claims. It does not appear from the record that this question
was ever raised in any of the courts below. We are, therefore, without
authority under our rules to consider this issue at this stage of the
proceedings.
The judgment appealed from is hereby affirmed in so far as it approves the
claims of appellee in the amounts of P2,341 and P12,942.12, and reversed
as to that of P3,772. Without costs.
Bengzon, Padilla, Tuason, Montemayor, Reyes, Jugo, and Bautista Angelo,
JJ., concur.
 8

Separate Opinions
PARAS, C. J., concurring and dissenting:
I concur in the majority decision insofar as it reverses the appealed
judgment allowing the claim for P3,772, but dissent therefrom insofar as it
affirms the appealed judgment approving appellee's other claims.
The principal question is whether the stipulation to pay the advances "on
condition that their payment should be made by Fernando Hermosa, Sr. as
soon as he receives funds derived from the sale of his property in Spain,
and making said advances "payable as soon as Fernando Hermosa, Sr.'s
property in Spain was sold and he received money derived from the
sale," condicion potestativa  and therefore null and void in accordance with
article 1115 of the old Civil Code. My answer is in the affirmative, because
it is very obvious that the matter of the sale of the house rested on the sole
will of the debtor, unaffected by any outside consideration or influence.
The majority admit that if the condition were "if he decides to sell his
house" or "if he likes to pay the sums advanced, the same would be
potestative. I think a mere play or words is invoked, as I cannot see any
substantial difference. Under the condition imposed by Fernando Hermosa,
Sr., it is immaterial whether or not he had already decided to sell his
house, since there is no pretence that acceptable conditions of the sale
had been made the subject of an agreement, such that if such conditions
presented themselves the debtor would be bound to proceed with the
sale. In the case at bar, the terms are still subject to the sale judgment — if
not whims and caprice — of Fernando Hermosa, Sr. In fact no sale was
effected during his lifetime.
defendant a period within which to pay his debts. As the promissory notes
do not affix this period, it is for the court to fix the same. (Citing cases.) The
action to ask the court to fix the period has already prescribed in
accordance with section 43 (1) of the Code of Civil Procedure. This period
of prescription is ten years, which has already elapsed from the execution
of the promissory notes until the filing of the action on June 1, 1934. The
action which should be brought in accordance with articles 1128 is
different from the action for the recovery of the amount of the notes,
although the effects of both are the same, being, like other civil actions,
subject to the rules of prescription.
The majority also contend that the condition in question depended on
other factors than the sole will of the debtor, and cite the presence of a
buyer, ready, able and willing to purchase the property. This is of no
moment, because, as already stated, in the absence of any contract setting
forth the minimum or maximum terms which would be acceptable to the
debtor, nobody could legally compel Fernando Hermosa, Sr. to make any
sale.

As the condition above referred to is null and void, the debt resulting from
the advances made to Fernando Hermosa, Sr. became either immediately
demandable or payable within a term to be fixed by the court. In both
cases the action has prescribed after the lapse of ten years. In the case of
Gonzales vs. De Jose (66 Phil., 369, 371), this court already held as follows:

We hold that the two promissory notes are governed by article 1128 .R. No. 146839               March 23, 2011
because under the terms thereof the plaintiff intended to grant the

ROLANDO T. CATUNGAL, JOSE T. CATUNGAL, JR., CAROLYN T. CATUNGAL
and ERLINDA CATUNGAL-WESSEL, Petitioners,
vs.
ANGEL S. RODRIGUEZ, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
Before the Court is a Petition for Review on Certiorari, assailing the
following issuances of the Court of Appeals in CA-G.R. CV No. 40627
consolidated with CA-G.R. SP No. 27565: (a) the August 8, 2000
Decision,1 which affirmed the Decision2 dated May 30, 1992 of the Regional
Trial Court (RTC), Branch 27 of Lapu-lapu City, Cebu in Civil Case No. 2365-
L, and (b) the January 30, 2001 Resolution,3 denying herein petitioners’
motion for reconsideration of the August 8, 2000 Decision.
The relevant factual and procedural antecedents of this case are as follows:
This controversy arose from a Complaint for Damages and Injunction with
Preliminary Injunction/Restraining Order4 filed on December 10, 1990 by
herein respondent Angel S. Rodriguez (Rodriguez), with the RTC, Branch
27, Lapu-lapu City, Cebu, docketed as Civil Case No. 2365-L against the
spouses Agapita and Jose Catungal (the spouses Catungal), the parents of
petitioners.
In the said Complaint, it was alleged that Agapita T. Catungal (Agapita)
owned a parcel of land (Lot 10963) with an area of 65,246 square meters,
covered by Original Certificate of Title (OCT) No. 105 5 in her name situated
in the Barrio of Talamban, Cebu City. The said property was allegedly the
exclusive paraphernal property of Agapita.
On April 23, 1990, Agapita, with the consent of her husband Jose, entered
into a Contract to Sell6 with respondent Rodriguez. Subsequently, the
Contract to Sell was purportedly "upgraded" into a Conditional Deed of
Sale7 dated July 26, 1990 between the same parties. Both the Contract to
Sell and the Conditional Deed of Sale were annotated on the title.
9
The provisions of the Conditional Deed of Sale pertinent to the present
dispute are quoted below:
1. The VENDOR for and in consideration of the sum of TWENTY[-]FIVE
MILLION PESOS (₱25,000,000.00) payable as follows:
a. FIVE HUNDRED THOUSAND PESOS (₱500,000.00) downpayment upon
the signing of this agreement, receipt of which sum is hereby
acknowledged in full from the VENDEE.
b. The balance of TWENTY[-]FOUR MILLION FIVE HUNDRED THOUSAND
PESOS (₱24,500,000.00) shall be payable in five separate checks, made to
the order of JOSE Ch. CATUNGAL, the first check shall be for FOUR MILLION
FIVE HUNDRED THOUSAND PESOS (₱4,500,000.00) and the remaining
balance to be paid in four checks in the amounts of FIVE MILLION PESOS
(₱5,000,000.00) each after the VENDEE have (sic) successfully negotiated,
secured and provided a Road Right of Way consisting of 12 meters in width
cutting across Lot 10884 up to the national road, either by widening the
existing Road Right of Way or by securing a new Road Right of Way of 12
meters in width. If however said Road Right of Way could not be
negotiated, the VENDEE shall give notice to the VENDOR for them to
reassess and solve the problem by taking other options and should the
situation ultimately prove futile, he shall take steps to rescind or cancel the
herein Conditional Deed of Sale.
c. That the access road or Road Right of Way leading to Lot 10963 shall be
the responsibility of the VENDEE to secure and any or all cost relative to
the acquisition thereof shall be borne solely by the VENDEE. He shall,
however, be accorded with enough time necessary for the success of his
endeavor, granting him a free hand in negotiating for the passage.
BY THESE PRESENTS, the VENDOR do hereby agree to sell by way of herein
CONDITIONAL DEED OF SALE to VENDEE, his heirs, successors and assigns,
the real property described in the Original Certificate of Title No. 105 x x x.
xxxx
 10

5. That the VENDEE has the option to rescind the sale. In the event the right to rescind the contract. Still, on November 15, 1990, Rodriguez
VENDEE exercises his option to rescind the herein Conditional Deed of Sale, purportedly received a letter dated November 9, 1990 15 from Atty.
the VENDEE shall notify the VENDOR by way of a written notice Catungal, stating that the contract had been cancelled and terminated.
relinquishing his rights over the property. The VENDEE shall then be
Contending that the Catungals’ unilateral rescission of the Conditional
reimbursed by the VENDOR the sum of FIVE HUNDRED THOUSAND PESOS
Deed of Sale was unjustified, arbitrary and unwarranted, Rodriquez prayed
(₱500,000.00) representing the downpayment, interest free, payable but
in his Complaint, that:
contingent upon the event that the VENDOR shall have been able to sell
the property to another party.8 1. Upon the filing of this complaint, a restraining order be issued enjoining
defendants [the spouses Catungal], their employees, agents,
In accordance with the Conditional Deed of Sale, Rodriguez purportedly
representatives or other persons acting in their behalf from offering the
secured the necessary surveys and plans and through his efforts, the
property subject of this case for sale to third persons; from entertaining
property was reclassified from agricultural land into residential land which
offers or proposals by third persons to purchase the said property; and, in
he claimed substantially increased the property’s value. He likewise alleged
general, from performing acts in furtherance or implementation of
that he actively negotiated for the road right of way as stipulated in the
defendants’ rescission of their Conditional Deed of Sale with plaintiff
contract.9
[Rodriguez].
Rodriguez further claimed that on August 31, 1990 the spouses Catungal
2. After hearing, a writ of preliminary injunction be issued upon such
requested an advance of ₱5,000,000.00 on the purchase price for personal
reasonable bond as may be fixed by the court enjoining defendants and
reasons. Rodriquez allegedly refused on the ground that the amount was
other persons acting in their behalf from performing any of the acts
substantial and was not due under the terms of their agreement. Shortly
mentioned in the next preceding paragraph.
after his refusal to pay the advance, he purportedly learned that the
Catungals were offering the property for sale to third parties. 10 3. After trial, a Decision be rendered:
Thereafter, Rodriguez received letters dated October 22, 1990, 11 October a) Making the injunction permanent;
24, 199012 and October 29, 1990,13 all signed by Jose Catungal who was a
lawyer, essentially demanding that the former make up his mind about b) Condemning defendants to pay to plaintiff, jointly and solidarily:
buying the land or exercising his "option" to buy because the spouses
Actual damages in the amount of ₱400,000.00 for their unlawful rescission
Catungal allegedly received other offers and they needed money to pay for
of the Agreement and their performance of acts in violation or disregard of
personal obligations and for investing in other properties/business
the said Agreement;
ventures. Should Rodriguez fail to exercise his option to buy the land, the
Catungals warned that they would consider the contract cancelled and that Moral damages in the amount of ₱200,000.00;
they were free to look for other buyers.
Exemplary damages in the amount of ₱200,000.00; Expenses of litigation
In a letter dated November 4, 1990,14 Rodriguez registered his objections and attorney’s fees in the amount of ₱100,000.00; and
to what he termed the Catungals’ unwarranted demands in view of the
terms of the Conditional Deed of Sale which allowed him sufficient time to Costs of suit.16
negotiate a road right of way and granted him, the vendee, the exclusive

On December 12, 1990, the trial court issued a temporary restraining order
and set the application for a writ of preliminary injunction for hearing on
December 21, 1990 with a directive to the spouses Catungal to show cause
within five days from notice why preliminary injunction should not be
granted. The trial court likewise ordered that summons be served on
them.17
Thereafter, the spouses Catungal filed their opposition 18 to the issuance of
a writ of preliminary injunction and later filed a motion to dismiss 19 on the
ground of improper venue. According to the Catungals, the subject
property was located in Cebu City and thus, the complaint should have
been filed in Cebu City, not Lapu-lapu City. Rodriguez opposed the motion
to dismiss on the ground that his action was a personal action as its subject
was breach of a contract, the Conditional Deed of Sale, and not title to, or
possession of real property.20
In an Order dated January 17, 1991,21 the trial court denied the motion to
dismiss and ruled that the complaint involved a personal action, being
merely for damages with a prayer for injunction.
Subsequently, on January 30, 1991, the trial court ordered the issuance of
a writ of preliminary injunction upon posting by Rodriguez of a bond in the
amount of ₱100,000.00 to answer for damages that the defendants may
sustain by reason of the injunction.
On February 1, 1991, the spouses Catungal filed their Answer with
Counterclaim22 alleging that they had the right to rescind the contract in
view of (1) Rodriguez’s failure to negotiate the road right of way despite
the lapse of several months since the signing of the contract, and (2) his
refusal to pay the additional amount of ₱5,000,000.00 asked by the
Catungals, which to them indicated his lack of funds to purchase the
property. The Catungals likewise contended that Rodriguez did not have an
exclusive right to rescind the contract and that the contract, being
reciprocal, meant both parties had the right to rescind. 23 The spouses
Catungal further claimed that it was Rodriguez who was in breach of their
agreement and guilty of bad faith which justified their rescission of the
contract.24 By way of counterclaim, the spouses Catungal prayed for actual
11
and consequential damages in the form of unearned interests from the
balance (of the purchase price in the amount) of ₱24,500,000.00, moral
and exemplary damages in the amount of ₱2,000,000.00, attorney’s fees in
the amount of ₱200,000.00 and costs of suits and litigation expenses in the
amount of ₱10,000.00.25 The spouses Catungal prayed for the dismissal of
the complaint and the grant of their counterclaim.
The Catungals amended their Answer twice, 26 retaining their basic
allegations but amplifying their charges of contractual breach and bad faith
on the part of Rodriguez and adding the argument that in view of Article
1191 of the Civil Code, the power to rescind reciprocal obligations is
granted by the law itself to both parties and does not need an express
stipulation to grant the same to the injured party. In the Second Amended
Answer with Counterclaim, the spouses Catungal added a prayer for the
trial court to order the Register of Deeds to cancel the annotations of the
two contracts at the back of their OCT.27
On October 24, 1991, Rodriguez filed an Amended Complaint, 28 adding
allegations to the effect that the Catungals were guilty of several
misrepresentations which purportedly induced Rodriguez to buy the
property at the price of ₱25,000,000.00. Among others, it was alleged that
the spouses Catungal misrepresented that their Lot 10963 includes a flat
portion of land which later turned out to be a separate lot (Lot 10986)
owned by Teodora Tudtud who sold the same to one Antonio Pablo. The
Catungals also allegedly misrepresented that the road right of way will only
traverse two lots owned by Anatolia Tudtud and her daughter Sally who
were their relatives and who had already agreed to sell a portion of the
said lots for the road right of way at a price of ₱550.00 per square meter.
However, because of the Catungals’ acts of offering the property to other
buyers who offered to buy the road lots for ₱2,500.00 per square meter,
the adjacent lot owners were no longer willing to sell the road lots to
Rodriguez at ₱550.00 per square meter but were asking for a price of
₱3,500.00 per square meter. In other words, instead of assisting Rodriguez
in his efforts to negotiate the road right of way, the spouses Catungal
allegedly intentionally and maliciously defeated Rodriguez’s negotiations
 12

for a road right of way in order to justify rescission of the said contract and guilty of misrepresentation which defeated Rodriguez’s efforts to acquire
enable them to offer the property to other buyers. the road right of way; and (e) the Catungals’ rescission of the contract had
no basis and was in bad faith. Thus, the trial court made the injunction
Despite requesting the trial court for an extension of time to file an
permanent, ordered the Catungals to reduce the purchase price by the
amended Answer,29 the Catungals did not file an amended Answer and
amount of acquisition of Lot 10963 which they misrepresented was part of
instead filed an Urgent Motion to Dismiss30 again invoking the ground of
the property sold but was in fact owned by a third party and ordered them
improper venue. In the meantime, for failure to file an amended Answer
to pay ₱100,000.00 as damages, ₱30,000.00 as attorney’s fees and costs.
within the period allowed, the trial court set the case for pre-trial on
December 20, 1991. The Catungals appealed the decision to the Court of Appeals, asserting the
commission of the following errors by the trial court in their appellants’
During the pre-trial held on December 20, 1991, the trial court denied in
brief38 dated February 9, 1994:
open court the Catungals’ Urgent Motion to Dismiss for violation of the
rules and for being repetitious and having been previously I
denied.31 However, Atty. Catungal refused to enter into pre-trial which
THE COURT A QUO ERRED IN NOT DISMISSING OF (SIC) THE CASE ON THE
prompted the trial court to declare the defendants in default and to set the
GROUNDS OF IMPROPER VENUE AND LACK OF JURISDICTION.
presentation of the plaintiff’s evidence on February 14, 1992. 32
II
On December 23, 1991, the Catungals filed a motion for
reconsideration33 of the December 20, 1991 Order denying their Urgent THE COURT A QUO ERRED IN CONSIDERING THE CASE AS A PERSONAL AND
Motion to Dismiss but the trial court denied reconsideration in an Order NOT A REAL ACTION.
dated February 3, 1992.34 Undeterred, the Catungals subsequently filed a
Motion to Lift and to Set Aside Order of Default 35 but it was likewise denied III
for being in violation of the rules and for being not meritorious. 36 On
GRANTING WITHOUT ADMITTING THAT VENUE WAS PROPERLY LAID AND
February 28, 1992, the Catungals filed a Petition for Certiorari and
THE CASE IS A PERSONAL ACTION, THE COURT A QUO ERRED IN
Prohibition37 with the Court of Appeals, questioning the denial of their
DECLARING THE DEFENDANTS IN DEFAULT DURING THE PRE-TRIAL WHEN
motion to dismiss and the order of default. This was docketed as CA-G.R.
AT THAT TIME THE DEFENDANTS HAD ALREADY FILED THEIR ANSWER TO
SP No. 27565.
THE COMPLAINT.
Meanwhile, Rodriguez proceeded to present his evidence before the trial
IV
court.
THE COURT A QUO ERRED IN CONSIDERING THE DEFENDANTS AS HAVING
In a Decision dated May 30, 1992, the trial court ruled in favor of
LOST THEIR LEGAL STANDING IN COURT WHEN AT MOST THEY COULD
Rodriguez, finding that: (a) under the contract it was complainant
ONLY BE CONSIDERED AS IN DEFAULT AND STILL ENTITLED TO NOTICES OF
(Rodriguez) that had the option to rescind the sale; (b) Rodriguez’s
ALL FURTHER PROCEEDINGS ESPECIALLY AFTER THEY HAD FILED THE
obligation to pay the balance of the purchase price arises only upon
MOTION TO LIFT THE ORDER OF DEFAULT.
successful negotiation of the road right of way; (c) he proved his diligent
efforts to negotiate the road right of way; (d) the spouses Catungal were V

THE COURT A QUO ERRED IN ISSUING THE WRIT [OF] PRELIMINARY
INJUNCTION RESTRAINING THE EXERCISE OF ACTS OF OWNERSHIP AND
OTHER RIGHTS OVER REAL PROPERTY OUTSIDE OF THE COURT’S
TERRITORIAL JURISDICTION AND INCLUDING PERSONS WHO WERE NOT
BROUGHT UNDER ITS JURISDICTION, THUS THE NULLITY OF THE WRIT.
VI
THE COURT A QUO ERRED IN NOT RESTRAINING ITSELF MOTU PROP[R]IO
FROM CONTINUING WITH THE PROCEEDINGS IN THE CASE AND IN
RENDERING DECISION THEREIN IF ONLY FOR REASON OF COURTESY AND
FAIRNESS BEING MANDATED AS DISPENSER OF FAIR AND EQUAL JUSTICE
TO ALL AND SUNDRY WITHOUT FEAR OR FAVOR IT HAVING BEEN SERVED
EARLIER WITH A COPY OF THE PETITION FOR CERTIORARI QUESTIONING
ITS VENUE AND JURISDICTION IN CA-G.R. NO. SP 27565 IN FACT NOTICES
FOR THE FILING OF COMMENT THERETO HAD ALREADY BEEN SENT OUT BY
THE HONORABLE COURT OF APPEALS, SECOND DIVISION, AND THE COURT
A QUO WAS FURNISHED WITH COPY OF SAID NOTICE.
VII
THE COURT A QUO ERRED IN DECIDING THE CASE IN FAVOR OF THE
PLAINTIFF AND AGAINST THE DEFENDANTS ON THE BASIS OF EVIDENCE
WHICH ARE IMAGINARY, FABRICATED, AND DEVOID OF TRUTH, TO BE
STATED IN DETAIL IN THE DISCUSSION OF THIS PARTICULAR ERROR, AND,
THEREFORE, THE DECISION IS REVERSIBLE.39
On August 31, 1995, after being granted several extensions, Rodriguez filed
his appellee’s brief,40 essentially arguing the correctness of the trial court’s
Decision regarding the foregoing issues raised by the Catungals.
Subsequently, the Catungals filed a Reply Brief 41 dated October 16, 1995.
From the filing of the appellants’ brief in 1994 up to the filing of the Reply
Brief, the spouses Catungal were represented by appellant Jose Catungal
himself. However, a new counsel for the Catungals, Atty. Jesus N.
Borromeo (Atty. Borromeo), entered his appearance before the Court of
Appeals on September 2, 1997.42 On the same date, Atty. Borromeo filed a
Motion for Leave of Court to File Citation of Authorities 43 and a Citation of
13
Authorities.44 This would be followed by Atty. Borromeo’s filing of an
Additional Citation of Authority and Second Additional Citation of Authority
both on November 17, 1997.45
During the pendency of the case with the Court of Appeals, Agapita
Catungal passed away and thus, her husband, Jose, filed on February 17,
1999 a motion for Agapita’s substitution by her surviving children. 46
On August 8, 2000, the Court of Appeals rendered a Decision in the
consolidated cases CA-G.R. CV No. 40627 and CA-G.R. SP No.
27565,47 affirming the trial court’s Decision.
In a Motion for Reconsideration dated August 21, 2000, 48 counsel for the
Catungals, Atty. Borromeo, argued for the first time that paragraphs 1(b)
and 549 of the Conditional Deed of Sale, whether taken separately or
jointly, violated the principle of mutuality of contracts under Article 1308
of the Civil Code and thus, said contract was void ab initio. He adverted to
the cases mentioned in his various citations of authorities to support his
argument of nullity of the contract and his position that this issue may be
raised for the first time on appeal.
Meanwhile, a Second Motion for Substitution50 was filed by Atty. Borromeo
in view of the death of Jose Catungal.
In a Resolution dated January 30, 2001, the Court of Appeals allowed the
substitution of the deceased Agapita and Jose Catungal by their surviving
heirs and denied the motion for reconsideration for lack of merit
Hence, the heirs of Agapita and Jose Catungal filed on March 27, 2001 the
present petition for review,51 which essentially argued that the Court of
Appeals erred in not finding that paragraphs 1(b) and/or 5 of the
Conditional Deed of Sale, violated the principle of mutuality of contracts
under Article 1308 of the Civil Code. Thus, said contract was supposedly
void ab initio and the Catungals’ rescission thereof was superfluous.
In his Comment,52 Rodriguez highlighted that (a) petitioners were raising
new matters that cannot be passed upon on appeal; (b) the validity of the
Conditional Deed of Sale was already admitted and petitioners cannot be

allowed to change theories on appeal; (c) the questioned paragraphs of the
Conditional Deed of Sale were valid; and (d) petitioners were the ones who
committed fraud and breach of contract and were not entitled to relief for
not having come to court with clean hands.
The Court gave due course to the Petition53 and the parties filed their
respective Memoranda.
The issues to be resolved in the case at bar can be summed into two
questions:
I. Are petitioners allowed to raise their theory of nullity of the Conditional
Deed of Sale for the first time on appeal?
II. Do paragraphs 1(b) and 5 of the Conditional Deed of Sale violate the
principle of mutuality of contracts under Article 1308 of the Civil Code?
On petitioners’ change of theory
Petitioners claimed that the Court of Appeals should have reversed the
trial courts’ Decision on the ground of the alleged nullity of paragraphs 1(b)
and 5 of the Conditional Deed of Sale notwithstanding that the same was
not raised as an error in their appellants’ brief. Citing Catholic Bishop of
Balanga v. Court of Appeals,54 petitioners argued in the Petition that this
case falls under the following exceptions:
(3) Matters not assigned as errors on appeal but consideration of which is
necessary in arriving at a just decision and complete resolution of the case
or to serve the interest of justice or to avoid dispensing piecemeal justice;
(4) Matters not specifically assigned as errors on appeal but raised in the
trial court and are matters of record having some bearing on the issue
submitted which the parties failed to raise or which the lower court
ignored;
(5) Matters not assigned as errors on appeal but closely related to an error
assigned; and
14
(6) Matters not assigned as errors but upon which the determination of a
question properly assigned is dependent. 55
We are not persuaded.
This is not an instance where a party merely failed to assign an issue as an
error in the brief nor failed to argue a material point on appeal that was
raised in the trial court and supported by the record. Neither is this a case
where a party raised an error closely related to, nor dependent on the
resolution of, an error properly assigned in his brief. This is a situation
where a party completely changes his theory of the case on appeal and
abandons his previous assignment of errors in his brief, which plainly
should not be allowed as anathema to due process.
Petitioners should be reminded that the object of pleadings is to draw the
lines of battle between the litigants and to indicate fairly the nature of the
claims or defenses of both parties.56 In Philippine National Construction
Corporation v. Court of Appeals,57 we held that "[w]hen a party adopts a
certain theory in the trial court, he will not be permitted to change his
theory on appeal, for to permit him to do so would not only be unfair to
the other party but it would also be offensive to the basic rules of fair play,
justice and due process."58
We have also previously ruled that "courts of justice have no jurisdiction or
power to decide a question not in issue. Thus, a judgment that goes
beyond the issues and purports to adjudicate something on which the
court did not hear the parties, is not only irregular but also extrajudicial
and invalid. The rule rests on the fundamental tenets of fair play." 59
During the proceedings before the trial court, the spouses Catungal never
claimed that the provisions in the Conditional Deed of Sale, stipulating that
the payment of the balance of the purchase price was contingent upon the
successful negotiation of a road right of way (paragraph 1[b]) and granting
Rodriguez the option to rescind (paragraph 5), were void for allegedly
making the fulfillment of the contract dependent solely on the will of
Rodriguez.

On the contrary, with respect to paragraph 1(b), the Catungals did not aver
in the Answer (and its amended versions) that the payment of the
purchase price was subject to the will of Rodriguez but rather they claimed
that paragraph 1(b) in relation to 1(c) only presupposed a reasonable time
be given to Rodriguez to negotiate the road right of way. However, it was
petitioners’ theory that more than sufficient time had already been given
Rodriguez to negotiate the road right of way. Consequently, Rodriguez’s
refusal/failure to pay the balance of the purchase price, upon demand, was
allegedly indicative of lack of funds and a breach of the contract on the
part of Rodriguez.
Anent paragraph 5 of the Conditional Deed of Sale, regarding Rodriguez’s
option to rescind, it was petitioners’ theory in the court a quo that
notwithstanding such provision, they retained the right to rescind the
contract for Rodriguez’s breach of the same under Article 1191 of the Civil
Code.
Verily, the first time petitioners raised their theory of the nullity of the
Conditional Deed of Sale in view of the questioned provisions was only in
their Motion for Reconsideration of the Court of Appeals’ Decision,
affirming the trial court’s judgment. The previous filing of various citations
of authorities by Atty. Borromeo and the Court of Appeals’ resolutions
noting such citations were of no moment. The citations of authorities
merely listed cases and their main rulings without even any mention of
their relevance to the present case or any prayer for the Court of Appeals
to consider them.1âwphi1 In sum, the Court of Appeals did not err in
disregarding the citations of authorities or in denying petitioners’ motion
for reconsideration of the assailed August 8, 2000 Decision in view of the
proscription against changing legal theories on appeal.
Ruling on the questioned provisions of the Conditional Deed of Sale
Even assuming for the sake of argument that this Court may overlook the
procedural misstep of petitioners, we still cannot uphold their belatedly
proffered arguments.
15
At the outset, it should be noted that what the parties entered into is a
Conditional Deed of Sale, whereby the spouses Catungal agreed to sell and
Rodriguez agreed to buy Lot 10963 conditioned on the payment of a
certain price but the payment of the purchase price was additionally made
contingent on the successful negotiation of a road right of way. It is
elementary that "[i]n conditional obligations, the acquisition of rights, as
well as the extinguishment or loss of those already acquired, shall depend
upon the happening of the event which constitutes the condition." 60
Petitioners rely on Article 1308 of the Civil Code to support their conclusion
regarding the claimed nullity of the aforementioned provisions. Article
1308 states that "[t]he contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them."
Article 1182 of the Civil Code, in turn, provides:
Art. 1182. When the fulfillment of the condition depends upon the sole will
of the debtor, the conditional obligation shall be void. If it depends upon
chance or upon the will of a third person, the obligation shall take effect in
conformity with the provisions of this Code.
In the past, this Court has distinguished between a condition imposed on
the perfection of a contract and a condition imposed merely on the
performance of an obligation. While failure to comply with the first
condition results in the failure of a contract, failure to comply with the
second merely gives the other party the option to either refuse to proceed
with the sale or to waive the condition.61 This principle is evident in Article
1545 of the Civil Code on sales, which provides in part:
Art. 1545. Where the obligation of either party to a contract of sale is
subject to any condition which is not performed, such party may refuse to
proceed with the contract or he may waive performance of the condition x
x x.
Paragraph 1(b) of the Conditional Deed of Sale, stating that respondent
shall pay the balance of the purchase price when he has successfully
negotiated and secured a road right of way, is not a condition on the
perfection of the contract nor on the validity of the entire contract or its

compliance as contemplated in Article 1308. It is a condition imposed only
on respondent’s obligation to pay the remainder of the purchase price. In
our view and applying Article 1182, such a condition is not purely
potestative as petitioners contend. It is not dependent on the sole will of
the debtor but also on the will of third persons who own the adjacent land
and from whom the road right of way shall be negotiated. In a manner of
speaking, such a condition is likewise dependent on chance as there is no
guarantee that respondent and the third party-landowners would come to
an agreement regarding the road right of way. This type of mixed condition
is expressly allowed under Article 1182 of the Civil Code.
Analogous to the present case is Romero v. Court of Appeals, 62 wherein the
Court interpreted the legal effect of a condition in a deed of sale that the
balance of the purchase price would be paid by the vendee when the
vendor has successfully ejected the informal settlers occupying the
property. In Romero, we found that such a condition did not affect the
perfection of the contract but only imposed a condition on the fulfillment
of the obligation to pay the balance of the purchase price, to wit:
From the moment the contract is perfected, the parties are bound not only
to the fulfillment of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in keeping with
good faith, usage and law. Under the agreement, private respondent is
obligated to evict the squatters on the property. The ejectment of the
squatters is a condition the operative act of which sets into motion the
period of compliance by petitioner of his own obligation, i.e., to pay the
balance of the purchase price. Private respondent's failure "to remove the
squatters from the property" within the stipulated period gives petitioner
the right to either refuse to proceed with the agreement or waive that
condition in consonance with Article 1545 of the Civil Code. This option
clearly belongs to petitioner and not to private respondent.
We share the opinion of the appellate court that the undertaking required
of private respondent does not constitute a "potestative condition
dependent solely on his will" that might, otherwise, be void in accordance
with Article 1182 of the Civil Code but a "mixed" condition "dependent not
16
on the will of the vendor alone but also of third persons like the squatters
and government agencies and personnel concerned." We must hasten to
add, however, that where the so-called "potestative condition" is imposed
not on the birth of the obligation but on its fulfillment, only the condition is
avoided, leaving unaffected the obligation itself. 63 (Emphases supplied.)
From the provisions of the Conditional Deed of Sale subject matter of this
case, it was the vendee (Rodriguez) that had the obligation to successfully
negotiate and secure the road right of way. However, in the decision of the
trial court, which was affirmed by the Court of Appeals, it was found that
respondent Rodriguez diligently exerted efforts to secure the road right of
way but the spouses Catungal, in bad faith, contributed to the collapse of
the negotiations for said road right of way. To quote from the trial court’s
decision:
It is therefore apparent that the vendee’s obligations (sic) to pay the
balance of the purchase price arises only when the road-right-of-way to
the property shall have been successfully negotiated, secured and
provided. In other words, the obligation to pay the balance is conditioned
upon the acquisition of the road-right-of-way, in accordance with
paragraph 2 of Article 1181 of the New Civil Code. Accordingly, "an
obligation dependent upon a suspensive condition cannot be demanded
until after the condition takes place because it is only after the fulfillment
of the condition that the obligation arises." (Javier v[s] CA 183 SCRA)
Exhibits H, D, P, R, T, FF and JJ show that plaintiff [Rodriguez] indeed was
diligent in his efforts to negotiate for a road-right-of-way to the property.
The written offers, proposals and follow-up of his proposals show that
plaintiff [Rodriguez] went all out in his efforts to immediately acquire an
access road to the property, even going to the extent of offering ₱3,000.00
per square meter for the road lots (Exh. Q) from the original ₱550.00 per
sq. meter. This Court also notes that defendant (sic) [the Catungals] made
misrepresentation in the negotiation they have entered into with plaintiff
[Rodriguez]. (Exhs. F and G) The misrepresentation of defendant (sic) [the
Catungals] as to the third lot (Lot 10986) to be part and parcel of the
subject property [(]Lot 10963) contributed in defeating the plaintiff’s
[Rodriguez’s] effort in acquiring the road-right-of-way to the property.

Defendants [the Catungals] cannot now invoke the non-fulfillment of the
condition in the contract as a ground for rescission when defendants [the
Catungals] themselves are guilty of preventing the fulfillment of such
condition.
From the foregoing, this Court is of the considered view that rescission of
the conditional deed of sale by the defendants is without any legal or
factual basis.64 x x x. (Emphases supplied.)
In all, we see no cogent reason to disturb the foregoing factual findings of
the trial court.
Furthermore, it is evident from the language of paragraph 1(b) that the
condition precedent (for respondent’s obligation to pay the balance of the
purchase price to arise) in itself partly involves an obligation to do, i.e., the
undertaking of respondent to negotiate and secure a road right of way at
his own expense.65 It does not escape our notice as well, that far from
disclaiming paragraph 1(b) as void, it was the Catungals’ contention before
the trial court that said provision should be read in relation to paragraph
1(c) which stated:
c. That the access road or Road Right of Way leading to Lot 10963 shall be
the responsibility of the VENDEE to secure and any or all cost relative to
the acquisition thereof shall be borne solely by the VENDEE. He shall,
however, be accorded with enough time necessary for the success of his
endeavor, granting him a free hand in negotiating for the
passage.66 (Emphasis supplied.)
The Catungals’ interpretation of the foregoing stipulation was that
Rodriguez’s obligation to negotiate and secure a road right of way was one
with a period and that period, i.e., "enough time" to negotiate, had already
lapsed by the time they demanded the payment of ₱5,000,000.00 from
respondent. Even assuming arguendo that the Catungals were correct that
the respondent’s obligation to negotiate a road right of way was one with
an uncertain period, their rescission of the Conditional Deed of Sale would
still be unwarranted. Based on their own theory, the Catungals had a
remedy under Article 1197 of the Civil Code, which mandates:
17
Art. 1197. If the obligation does not fix a period, but from its nature and
the circumstances it can be inferred that a period was intended, the courts
may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon
the will of the debtor.
In every case, the courts shall determine such period as may under the
circumstances have been probably contemplated by the parties. Once fixed
by the courts, the period cannot be changed by them.
What the Catungals should have done was to first file an action in court to
fix the period within which Rodriguez should accomplish the successful
negotiation of the road right of way pursuant to the above quoted
provision. Thus, the Catungals’ demand for Rodriguez to make an
additional payment of ₱5,000,000.00 was premature and Rodriguez’s
failure to accede to such demand did not justify the rescission of the
contract.
With respect to petitioners’ argument that paragraph 5 of the Conditional
Deed of Sale likewise rendered the said contract void, we find no merit to
this theory. Paragraph 5 provides:
5. That the VENDEE has the option to rescind the sale. In the event the
VENDEE exercises his option to rescind the herein Conditional Deed of Sale,
the VENDEE shall notify the VENDOR by way of a written notice
relinquishing his rights over the property. The VENDEE shall then be
reimbursed by the VENDOR the sum of FIVE HUNDRED THOUSAND PESOS
(₱500,000.00) representing the downpayment, interest free, payable but
contingent upon the event that the VENDOR shall have been able to sell
the property to another party.67
Petitioners posited that the above stipulation was the "deadliest" provision
in the Conditional Deed of Sale for violating the principle of mutuality of
contracts since it purportedly rendered the contract subject to the will of
respondent.
We do not agree.

It is petitioners’ strategy to insist that the Court examine the first sentence
of paragraph 5 alone and resist a correlation of such sentence with other
provisions of the contract. Petitioners’ view, however, ignores a basic rule
in the interpretation of contracts – that the contract should be taken as a
whole.
Article 1374 of the Civil Code provides that "[t]he various stipulations of a
contract shall be interpreted together, attributing to the doubtful ones that
sense which may result from all of them taken jointly." The same Code
further sets down the rule that "[i]f some stipulation of any contract should
admit of several meanings, it shall be understood as bearing that import
which is most adequate to render it effectual." 68
Similarly, under the Rules of Court it is prescribed that "[i]n the
construction of an instrument where there are several provisions or
particulars, such a construction is, if possible, to be adopted as will give
effect to all"69 and "for the proper construction of an instrument, the
circumstances under which it was made, including the situation of the
subject thereof and of the parties to it, may be shown, so that the judge
may be placed in the position of those whose language he is to interpret." 70
Bearing in mind the aforementioned interpretative rules, we find that the
first sentence of paragraph 5 must be taken in relation with the rest of
paragraph 5 and with the other provisions of the Conditional Deed of Sale.
Reading paragraph 5 in its entirety will show that Rodriguez’s option to
rescind the contract is not absolute as it is subject to the requirement that
there should be written notice to the vendor and the vendor shall only
return Rodriguez’s downpayment of ₱500,000.00, without interest, when
the vendor shall have been able to sell the property to another party. That
what is stipulated to be returned is only the downpayment of ₱500,000.00
in the event that Rodriguez exercises his option to rescind is significant. To
recall, paragraph 1(b) of the contract clearly states that the installments on
the balance of the purchase price shall only be paid upon successful
negotiation and procurement of a road right of way. It is clear from such
provision that the existence of a road right of way is a material
consideration for Rodriguez to purchase the property. Thus, prior to him
18
being able to procure the road right of way, by express stipulation in the
contract, he is not bound to make additional payments to the Catungals. It
was further stipulated in paragraph 1(b) that: "[i]f however said road right
of way cannot be negotiated, the VENDEE shall give notice to the VENDOR
for them to reassess and solve the problem by taking other options and
should the situation ultimately prove futile, he [Rodriguez] shall take steps
to rescind or [cancel] the herein Conditional Deed of Sale." The intention of
the parties for providing subsequently in paragraph 5 that Rodriguez has
the option to rescind the sale is undeniably only limited to the contingency
that Rodriguez shall not be able to secure the road right of way. Indeed, if
the parties intended to give Rodriguez the absolute option to rescind the
sale at any time, the contract would have provided for the return of all
payments made by Rodriguez and not only the downpayment. To our
mind, the reason only the downpayment was stipulated to be returned is
that the vendee’s option to rescind can only be exercised in the event that
no road right of way is secured and, thus, the vendee has not made any
additional payments, other than his downpayment.
In sum, Rodriguez’s option to rescind the contract is not purely potestative
but rather also subject to the same mixed condition as his obligation to pay
the balance of the purchase price – i.e., the negotiation of a road right of
way. In the event the condition is fulfilled (or the negotiation is successful),
Rodriguez must pay the balance of the purchase price. In the event the
condition is not fulfilled (or the negotiation fails), Rodriguez has the choice
either (a) to not proceed with the sale and demand return of his
downpayment or (b) considering that the condition was imposed for his
benefit, to waive the condition and still pay the purchase price despite the
lack of road access. This is the most just interpretation of the parties’
contract that gives effect to all its provisions.
In any event, even if we assume for the sake of argument that the grant to
Rodriguez of an option to rescind, in the manner provided for in the
contract, is tantamount to a potestative condition, not being a condition
affecting the perfection of the contract, only the said condition would be
considered void and the rest of the contract will remain valid. In Romero,
the Court observed that "where the so-called ‘potestative condition’ is
 19

imposed not on the birth of the obligation but on its fulfillment, only the period of thirty (30) days to agree on a course of action. Should the
condition is avoided, leaving unaffected the obligation itself." 71 discussions of the parties prove futile after the said thirty (30)-day period,
immediately upon the expiration of said period for discussion, Rodriguez
It cannot be gainsaid that "contracts have the force of law between the
may (a) exercise his option to rescind the contract, subject to the return of
contracting parties and should be complied with in good faith." 72 We have
his downpayment, in accordance with the provisions of paragraphs 1(b)
also previously ruled that "[b]eing the primary law between the parties,
and 5 of the Conditional Deed of Sale or (b) waive the road right of way
the contract governs the adjudication of their rights and obligations. A
and pay the balance of the deducted purchase price as determined in the
court has no alternative but to enforce the contractual stipulations in the
RTC Decision dated May 30, 1992.
manner they have been agreed upon and written."73 We find no merit in
petitioners’ contention that their parents were merely "duped" into WHEREFORE, the Decision dated August 8, 2000 and the Resolution dated
accepting the questioned provisions in the Conditional Deed of Sale. We January 30, 2001 of the Court of Appeals in CA-G.R. CV No. 40627
note that although the contract was between Agapita Catungal and consolidated with CA-G.R. SP No. 27565 are AFFIRMED with the following
Rodriguez, Jose Catungal nonetheless signed thereon to signify his marital modification:
consent to the same. We concur with the trial court’s finding that the
If still warranted, respondent Angel S. Rodriguez is given a period of thirty
spouses Catungals’ claim of being misled into signing the contract was
(30) days from the finality of this Decision to negotiate a road right of way.
contrary to human experience and conventional wisdom since it was Jose
In the event no road right of way is secured by respondent at the end of
Catungal who was a practicing lawyer while Rodriquez was a non-
said period, the parties shall reassess and discuss other options as
lawyer.74 It can be reasonably presumed that Atty. Catungal and his wife
stipulated in paragraph 1(b) of the Conditional Deed of Sale and, for this
reviewed the provisions of the contract, understood and accepted its
purpose, they are given a period of thirty (30) days to agree on a course of
provisions before they affixed their signatures thereon.
action. Should the discussions of the parties prove futile after the said
After thorough review of the records of this case, we have come to the thirty (30)-day period, immediately upon the expiration of said period for
conclusion that petitioners failed to demonstrate that the Court of Appeals discussion, Rodriguez may (a) exercise his option to rescind the contract,
committed any reversible error in deciding the present controversy. subject to the return of his downpayment, in accordance with the
However, having made the observation that it was desirable for the provisions of paragraphs 1(b) and 5 of the Conditional Deed of Sale or (b)
Catungals to file a separate action to fix the period for respondent waive the road right of way and pay the balance of the deducted purchase
Rodriguez’s obligation to negotiate a road right of way, the Court finds it price as determined in the RTC Decision dated May 30, 1992.
necessary to fix said period in these proceedings. It is but equitable for us
No pronouncement as to costs.
to make a determination of the issue here to obviate further delay and in
line with the judicial policy of avoiding multiplicity of suits. SO ORDERED.
If still warranted, Rodriguez is given a period of thirty (30) days from the
finality of this decision to negotiate a road right of way. In the event no
road right of way is secured by Rodriquez at the end of said period, the
parties shall reassess and discuss other options as stipulated in paragraph
1(b) of the Conditional Deed of Sale and, for this purpose, they are given a
 20

G.R. No. L-16449             August 31, 1962

PAUL SCHENKER, plaintiff-appellant,
vs.
WILLIAM F. GEMPERLE, defendant-appellee.

Campos, Mendoza & Hernandez, Jose C. Zulueta and A. R. Narvasa for

plaintiff-appellant.
Angel S. Gamboa for defendant-appellee.

PAREDES, J.:

The amended complaint, in a nutshell, avers that sometime in the summer

of 1953, at Zurich, Switzerland, plaintiff Paul Schenker and defendant

William F. Gemperle agreed to organize a Philippine Corporation, later
named as "The Philippine Swiss Trading Co., Inc.", and to divide the capital
stock equally between themselves and/or their associates. This verbal
agreement was acknowledged and confirmed in writing by defendant in his
letter of September 14, 1953 (Annex A, amended complaint). Defendant
caused articles of incorporation to be drafted and sent to plaintiff at Zurich.
In a moment of indiscretion and mistaken trust, according to him, the
plaintiff signed and remitted to the defendant at Manila, the said articles
which placed in the name of plaintiff only 24% of the total subscription and
the balance of 76% being in the name of defendant and his relatives.
Explaining the discrepancy between the articles and their verbal covenant,
the defendant stated in said letter Annex A, that "Temporarily, I had to
place in my name 75% of the shares because there is a local law which
provides that when one intends to make contracts with the government,
75% of the subscribed capital has to be Filipino as otherwise the Flag Law
will be applied." In the same letter, how ever defendant assured the
plaintiff that he would give the latter "exactly the same share holding as I
have". The plaintiff paid to the defendant the sum of P7,000. for his
subscription. In view of the consistent refusal of the defendant to live up to
their agreement, notwithstanding repeated demands, the plaintiff filed the
present complaint, praying that defendant be condemned:
(a) upon the first cause of action, to transfer or cause to be transferred or
assigned to the plaintiff 26% of the entire capital stock issued and
subscribed, as of the date he obeys said judgment, of Philippine Swiss
Trading Co., Inc., or enough thereof to make the plaintiff's interest and
participation in said corporation total 50% of said entire capital stock
issued an subscribed, which ever may be more;
(b) upon the second cause of action, to return to the plaintiff or properly
account to him for the unexpended balance, in the sum of P2,000.00,
Philippine Currency, of the remittance alleged in paragraph 18(a) of the
complaint;
21
(c) Upon the third cause of action, to pay the plaintiff the sum of
P25,000.00, Philippine Currency, by way of recompense for business lost,
profits unrealized and goodwill impaired or destroyed; and
(d) upon all three causes of actions, to pay the plaintiff the additional sum
of P100,000.00, Philippine Currency, .... The plaintiff also prays for costs,
and for such other an further relief as to the Court may appear just and
equitable.
An Answer was filed, with the customary admissions an denials and with
affirmative defenses and counterclaims.
On November 21, 1958, the defendant filed a pleading styled
"manifestation and motion to dismiss" (Section 10 Rule 9) — alleging that
— "With reference to the first cause of action, the amended complaint
states no cause of action".
In support of the motion to dismiss, defendant claimed that
There is no allegation in the amended complaint that the alleged obligation
of the defendant to have the plaintiff's share holding in the capital stock
subscribed in Articles of Incorporation in the proportion of 50% thereof
is already due.1äwphï1.ñët
Such being the situation, the demands allegedly made upon the defendant
for his compliance with the obligation sued upon have been futile, because
legally the alleged obligation is not yet due. It not having fixed a period for
its compliance, there has been no default thereof.
xxx     xxx     xxx
In his opposition to the motion to dismiss, filed on November 3, 1958,
plaintiff contended that the oral agreement was the actual as well as the
expressed basis of plaintiff's cause of action; the letter Annex A, was not
the agreement but only an evidence of it and if the references of Annex A
were deleted from the amended complaint, the latter would not, for that
reason alone, cease to state a cause of action; the obligation being pure, it
is demandable immediately (Art. 1179, Civil Code); the filing of the

complaint itself constituted a judicial demand for performance, thereby
making the defendant's obligation to become due; even if Annex A is
considered as the basis of the action, it is still a pure obligation, because it
says "will give you, however, exactly the same share holding as I have" —
which imparts an unconditional promise; and supposing that from the
allegations of the complaint, it may reasonably be inferred that it was
intended to give the defendant time to fulfill his obligation, the present
action can be considered one for the fixing of such time (Art. 1197, Civil
Code).
On September 30, 1959; the trial court granted the motion to dismiss in so
far as the first cause of action is concerned, predicating its ruling upon the
following considerations: that the agreement did not fix the time within
which the defendant sought to perform its alleged promise and, therefore,
the obligation was not due and the action for its compliance was
premature (Barreto v. City of Manila, 7 Phil. 416-420); that the obligation is
not pure, because its compliance is dependent upon a future or uncertain
event; that the alleged oral agreement had been novated, after the
execution of the articles of incorporation, and that the action being for
specific performance and there being a need to fix the period for
compliance of the agreement and the present complaint does not allege
facts or lacks the characteristics for an action to fix the period, a separate
action to that effect should have been filed, because the action to that
effect be brought in order to have a term fixed is different from the action
to enforce the obligation; thus conveying the notion that the fixing of the
period is incompatible with an action for specific performance. Plaintiff
appealed questions of law.
Article 1197 of the Civil Code, provides —
If the obligation does not fix a period, but from its nature and the
circumstances it can be inferred that a period was intended, the courts
may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon
the will of the debtor.
22
In every case, the courts shall determine such period may under the
circumstances have been probably contemplate by the parties. Once fixed
by the courts, the period cannot be changed by them.
The ultimate facts to be alleged in a complaint to properly and adequately
plead the right of action granted the above quoted provision of law are (1)
Facts showing that a contract was entered into, imposing on one the
parties an obligation or obligations in favor of the other; (2) Facts showing
that the performance of the obligation was left to the will of the obligor or
clean showing or from which an inference may reasonably drawn, that a
period was intended by the parties. The first cause of action, under
consideration, sets out fact describing an obligation with an indefinite
period, there by bringing the case within the pale of the article above
quoted, albeit it fails to specifically and categorically demand that the court
fix the duration of the period. Under the circumstances, the court could
render judgment granting the remedy indicated in said article 1197,
notwithstanding standing the fact that the complaint does not positive and
by explicit expression ask for such relief. What determines the nature and
character of an action is not the prayer but the essential basic allegations
of fact set forth in the pertinent pleading. A judgment may grant the relief
to which a party in whose favor it is entered is entitled, even if the party
has not demanded such relief in his pleadings (Sec. 9, Rule 35; Baguioro v.
Barrios, 77 Phil. 120). The amended complaint in question moreover,
"prays for . . . such other and further relief as the Court may appear just
and equitable" which is broad and comprehensive enough, to justify the
extension of a remedy different from or together with, the right to be
declared owner or to recover the ownership or the possession of Twenty-
six (26%) percent of the capital stock of the Philippine Swiss Trading Co.,
Inc. presently in the name of the defendant. The case of Barrette v. City of
Manila, supra, cited by the trial court, is of little help to the defendant-
appellee. It strengthens rather the plaintiff-appellant's position. In the
Barreto case as in the present, the essential allegations of the pleadings
made out an obligation subject to an indefinite period. In the Barretto case,
like the one at bar, the complaint did not risk for the fixing of the period,
but for immediate and more positive relief, yet this Court remanded the
said case to the court of origin "for determination of the time within which
 23

the contiguous property must be acquired by the city in order to comply

with the condition of the donation" — all of which go to show that the
fixing of the period in the case at bar, may and/or could be properly
undertaken by the trial court.

Even discarding the above considerations, still there is no gainsaying the

fact that the obligation in question, is pure, because "its performance does
not depend upon a future or uncertain event or upon a past event
unknown to the parties" and as such, "is demandable at once" (Art. 1179,
New York Code). It was so understood and treated by the defendant-
appellee himself. The immediate payment by the plaintiff-appellant of his
subscriptions, after the organization of the corporation, can only mean that
the obligation should be immediately fulfilled. giving the defendant only
such time as might reasonably be necessary for its actual fulfillment. The
contract was to organize the corporation and to divide equally, after its
organization, its capital stock.

IN VIEW HEREOF, the order appealed from is reversed and the case
remanded to the court of origin, for further and appropriate proceedings.
No costs.

Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.,

Barrera, Dizon, Regala and Makalintal, JJ., concur.

G.R. No. L-55665 February 8, 1989

DELTA MOTOR CORPORATION, petitioner,

vs.
EDUARDA SAMSON GENUINO, JACINTO S. GENUINO, Jr., VICTOR S.
GENUINO, HECTOR S. GENUINO, EVELYN S. GENUINO, and The COURT OF
APPEALS, respondents.

Alcasid, Villanueva & Associates for petitioner.

Luna, Puruganan, Sison & Ongkiko for respondents.


CORTES,  J.:
Petitioner, through this petition for review by certiorari, appeals from the
decision of respondent appellate court in CA-G.R. No. 59848-R entitled
"Eduarda Samson Genuino, et al. v. Delta Motor Corporation" promulgated
on October 27, 1980.
The facts are as follows:
Petitioner Delta Motor Corporation (hereinafter referred to as Delta) is a
corporation duly organized and existing under Philippine laws.
On the other hand, private respondents are the owners of an iceplant and
cold storage located at 1879 E. Rodriguez Sr. Avenue, Quezon City doing
business under the name "España Extension Iceplant and Cold Storage."
In July 1972, two letter-quotations were submitted by Delta to Hector
Genuino offering to sell black iron pipes. T
The letter dated July 3, 1972 quoted Delta's selling price for 1,200 length of
black iron pipes schedule 40, 2" x 20' including delivery at P66,000.00 with
the following terms of payment:
a. 20% of the net contract price or P13,200.00 will be due and payable
upon signing of the contract papers.
b. 20% of the net contract price or P13,200.00 will be due and payable
before commencement of delivery.
c. The balance of 60% of the net contract price or P39,600.00 with 8%
financing charge per annum will be covered by a Promissory Note bearing
interest at the rate of 14% per annum and payable in TWELVE (12) equal
monthly installment (sic), the first of which will become due thirty (30)
days after the completion of delivery. Additional 14% will be charged for all
delayed payments. [Exh. "A"; Exh. 1.]
The second letter-quotation dated July 18, 1972 provides for the selling
price of 150 lengths of black iron pipes schedule 40, 1 1/4" x 20' including
delivery at P5,400.00 with the following terms of payment:
24
a. 50% of the net contract price or P 2,700.00 will be due and payable upon
signing of the contract papers.
b. 50% of the net contract price or P 2,700.00 will be due and payable
before commencement of delivery. [Exh. "C"; Exh. "2".]
Both letter-quotations also contain the following stipulations as to delivery
and price offer:
DELIVERY
Ex-stock subject to prior sales.
xxx xxx xxx
Our price offer indicated herein shall remain firm within a period of thirty
(30) days from the date hereof. Any order placed after said period will be
subject to our review and confirmation. [Exh. "A" and "C"; Exhs. "l" and
"2".]
Hector Genuino was agreeable to the offers of Delta hence, he manifested
his conformity thereto by signing his name in the space provided on July
17, 1972 and July 24, 1972 for the first and second letter-quotations,
respectively.
It is undisputed that private respondents made initial payments on both
contracts — for the first contract, P13,200.00 and, for the second,
P2,700.00 — for a total sum of P15,900.00 on July 28, 1972 (Exhs. "B" and
"D"].
Likewise unquestionable are the following. the non-delivery of the iron
pipes by Delta; the non-payment of the subsequent installments by the
Genuinos; and the non-execution by the Genuinos of the promissory note
called for by the first contract.
The evidence presented in the trial court also showed that sometime in
July 1972 Delta offered to deliver the iron pipes but the Genuinos did not
accept the offer because the construction of the ice plant building where
the pipes were to be installed was not yet finished.

Almost three years later, on April 15, 1975, Hector Genuino, in behalf of
España Extension Ice Plant and Cold Storage, asked Delta to deliver the
iron pipes within thirty (30) days from its receipt of the request. At the
same time private respondents manifested their preparedness to pay the
second installment on both contracts upon notice of Delta's readiness to
deliver.
Delta countered that the black iron pipes cannot be delivered on the prices
quoted as of July 1972. The company called the attention of the Genuinos
to the stipulation in their two (2) contracts that the quoted prices were
good only within thirty (30) days from date of offer. Whereupon Delta sent
new price quotations to the Genuinos based on its current price of black
iron pipes, as follows:
P241,800.00 for 1,200 lengths of black iron pjpes schedule 40, 2" x 20'
[Exh. "G-1".]
P17,550.00 for 150 lengths of black iron pipes schedule 40, 1 1/4" x 20'
[Exh. "G-2".]
The Genuinos rejected the new quoted prices and instead filed a complaint
for specific performance with damages seeking to compel Delta to deliver
the pipes. Delta, in its answer prayed for rescission of the contracts
pursuant to Art. 1191 of the New Civil Code. The case was docketed as Civil
Case No. Q-20120 of the then Court of First Instance of Rizal, Branch XVIII,
Quezon City.
After trial the Court of First Instance ruled in favor of Delta,the dispositive
portion of its decision reading as follows:
WHEREFORE, premises considered, judgment is rendered:
1. Declaring the contracts, Annexes "A" and "C" of the complaint
rescinded;
2. Ordering defendant to refund to plaintiffs the sum of P15,900.00
delivered by the latter as downpayments on the aforesaid contracts;
25
3. Ordering plaintiffs to pay defendant the sum of P10,000.00 as attorney's
fees; and,
4. To pay the costs of suit. [CFI Decision, pp. 13-14; Rollo, pp. 53-54.]
On appeal, the Court of Appeals reversed and ordered private respondents
to make the payments specified in "Terms of Payment — (b)" of the
contracts and to execute the promissory note required in the first contract
and thereafter, Delta should immediately commence delivery of the black
iron pipes.* [CA Decision, p. 20; Rollo, p. 75.]
The Court of Appeals cited two main reasons why it reversed the trial
court, namely:
1. As Delta was the one who prepared the contracts and admittedly, it had
knowledge of the fact that the black iron pipes would be used by the
Genuinos in their cold storage plant which was then undergoing
construction and therefore, would require sometime before the Genuinos
would require delivery, Delta should have included in said contracts a
deadline for delivery but it did not. As a matter of fact neither did it insist
on delivery when the Genuinos refused to accept its offer of delivery. [CA
Decision, pp. 16-17; Rollo, pp. 71-72.]
2. Delta's refusal to make delivery in 1975 unless the Genuinos pay a price
very much higher than the prices it previously quoted would mean an
amendment of the contracts. It would be too unfair for the plaintiffs if they
will be made to bear the increase in prices of the black iron pipes when
they had already paid quite an amount for said items and defendant had
made use of the advance payments. That would be unjust enrichment on
the part of the defendant at the expense of the plaintiffs and is considered
an abominable business practice. [CA Decision, pp. 18-19; Rollo, pp. 73-74.]
Respondent court denied Delta's motion for reconsideration hence this
petition for review praying for the reversal of the Court of Appeals decision
and affirmance of that of the trial court.
Petitioner argues that its obligation to deliver the goods under both
contracts is subject to conditions required of private respondents as

vendees. These conditions are: payment of 20% of the net contract price or
P13,200.00 and execution of a promissory note called for by the first
contract; and payment of 50% of the net contract price or P2,700.00 under
the second contract. These, Delta posits, are suspensive conditions and
only upon their performance or compliance would its obligation to deliver
the pipes arise [Petition, pp. 9-12; Rollo, pp. 1720.] Thus, when private
respondents did not perform their obligations; when they refused to
accept petitioner's offer to deliver the goods; and, when it took them three
(3) long years before they demanded delivery of the iron pipes that in the
meantime, great and sudden fluctuation in market prices have occurred;
Delta is entitled to rescind the two (2) contracts.
Delta relies on the following provision of law on rescission:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon
him.
The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with articles 1385 and 1388
and the Mortgage Law.
In construing Art. 1191, the Supreme Court has stated that, "[r]escission
will be ordered only where the breach complained of is substantial as to
defeat the object of the parties in entering into the agreement. It will not
be granted where the breach is slight or casual." [Phil. Amusement
Enterprises, Inc. v. Natividad, G.R. No. L-21876, September 29, 1967, 21
SCRA 284, 290.] Further, "[t]he question of whether a breach of a contract
is substantial depends upon the attendant circumstances." [Universal Food
26
Corporation v. Court of Appeals, G. R. No. L-29155, May 13,1970,33 SCRA
1, 18].
In the case at bar, the conduct of Delta indicates that the Genuinos' non-
performance of its obligations was not a substantial breach, let alone a
breach of contract, as would warrant rescission.
Firstly, it is undisputed that a month after the execution of the two (2)
contracts, Delta's offer to deliver the black iron pipes was rejected by the
Genuinos who were "not ready to accept delivery because the cold storage
rooms have not been constructed yet. Plaintiffs (private respondents
herein) were short-funded, and did not have the space to accommodate
the pipes they ordered" [CFI Decision, p. 9; Rollo, p. 49].
Given this answer to its offer, Delta did not do anything. As testified by
Crispin Villanueva, manager of the Technical Service department of
petitioner:
Q You stated that you sent a certain Evangelista to the España Extension
and Cold Storage to offer the delivery subject matter of the contract and
then you said that Mr. Evangelista reported (sic) to you that plaintiff would
not accept delivery, is that correct, as a summary of your statement?
A A Yes, sir.
Q Now, what did you do in the premises (sic)?
A Yes, well, we take the word of Mr. Evangelista. We could not deliver the
said black iron pipes, because as per information the Ice Plant is not yet
finished.
Q Did you not report that fact to ... any other defendant-officials of the
Delta Motor Corporation?
A No.
Q And you did not do anything after that?

A Because taking the word of my Engineer we did not do anything. [TSN,
December 8, 1975, pp. 18-19.]
xxx xxx xxx
And secondly, three (3) years later when the Genuinos offered to make
payment Delta did not raise any argument but merely demanded that the
quoted prices be increased. Thus, in its answer to private respondents'
request for delivery of the pipes, Delta countered:
Thank you for your letter dated April 15, 1975, requesting for delivery of
Black Iron pipes;.
We regret to say, however, that we cannot base our price on our proposals
dated July 3 and July 18, 1972 as per the following paragraph quoted on
said proposal:
Our price offer indicated herein shall remain firm within a period of thirty
(30) days from the date hereof. Any order placed after said period will be
subject to our review and confirmation.
We are, therefore, enclosing our re-quoted proposal based on our current
price. [Exh. "G".]
Moreover, the power to rescind under Art. 1191 is not absolute. "[T]he act
of a party in treating a contract as cancelled or resolved on account of
infractions by the other contracting party must be made known to the
other and is always provisional, being ever subject to scrutiny and review
by the proper court." [University of the Phils. v. De los Angeles, G. R. No. L-
28602, September 29, 1970, 35 SCRA 102, 107; Emphasis supplied.]
In the instant case, Delta made no manifestation whatsoever that it had
opted to rescind its contracts with f-he Genuinos. It only raised rescission
as a defense when it was sued for specific performance by private
respondents.
Further, it would be highly inequitable for petitioner Delta to rescind the
two (2) contracts considering the fact that not only does it have in its
possession and ownership the black iron pipes, but also the P15,900.00
27
down payments private respondents have paid. And if petitioner Delta
claims the right to rescission, at the very least, it should have offered to
return the P15,900.00 down payments [See Art. 1385, Civil Code and
Hodges v. Granada, 59 Phil. 429 (1934)].
It is for these same reasons that while there is merit in Delta's claim that
the sale is subject to suspensive conditions, the Court finds that it has,
nevertheless, waived performance of these conditions and opted to go on
with the contracts although at a much higher price. Art. 1545 of the Civil
Code provides:
Art. 1545. Where the obligation of either party to a contract of sale is
subject to any condition which is not performed, such party may refuse to
proceed with the contract or he may waived performance of the condition.
. . . [Emphasis supplied.]
Finally, Delta cannot ask for increased prices based on the price offer
stipulation in the contracts and in the increase in the cost of goods.
Reliance by Delta on the price offer stipulation is misplaced. Said
stipulation makes reference to Delta's price offer as remaining firm for
thirty (30) days and thereafter, will be subject to its review and
confirmation. The offers of Delta, however, were accepted by the private
respondents within the thirty (30)-day period. And as stipulated in the two
(2) letter-quotations, acceptance of the offer gives rise to a contract
between the parties:
In the event that this proposal is acceptable to you, please indicate your
conformity by signing the space provided herein below which also serves
as a contract of this proposal. [Exhs. "A" and "C"; Exhs. "1" and "2".]
And as further provided by the Civil Code:
Art. 1319. Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the
contract.
 28

Art. 1475. The contract of sale is perfected at the moment there is a

meeting of minds upon thing which is the object of the contract and upon
the price.

Thus, the moment private respondents accepted the offer of Delta, the
contract of sale between them was perfected and neither party could
change the terms thereof.

Neither could petitioner Delta rely on the fluctuation in the market price of
goods to support its claim for rescission. As testified to by petitioner's Vice-
President of Marketing for the Electronics, Airconditioning and
Refrigeration division, Marcelino Caja, the stipulation in the two (2)
contracts as to delivery, ex-stock subject to prior sales, means that "the
goods have not been delivered and that there are no prior commitments
other than the sale covered by the contracts.. . once the offer is accepted,
the company has no more option to change the price." [CFI Decision, p. 5;
Rollo, p. 45; Emphasis supplied.] Thus, petitioner cannot claim for higher
prices for the black iron pipes due to the increase in the cost of goods.
Based on the foregoing, petitioner Delta and private respondents Genuinos
should comply with the original terms of their contracts.

WHEREFORE, the decision of the Court of Appeals is hereby AFFIRMED.

SO ORDERED.

Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.

Footnotes
* The Court of Appeals decision was penned by Justice German. Justice de
la Fuente wrote a separate concurring opinion. Justice Cenzon concurred
both with Justice German's decision and Justice de la Fuente's opinion.
Justice Gancayco, however, wrote a separate dissenting opinion to which
Justice Patajo concurred.
G.R. No. 73345. April 7, 1993.
SOCIAL SECURITY SYSTEM, petitioner,
vs.
MOONWALK DEVELOPMENT & HOUSING CORPORATION, ROSITA U.
ALBERTO, ROSITA U. ALBERTO, JMA HOUSE, INC., MILAGROS SANCHEZ
SANTIAGO, in her capacity as Register of Deeds for the Province of Cavite,
ARTURO SOLITO, in his capacity as Register of Deeds for Metro Manila

District IV, Makati, Metro Manila and the INTERMEDIATE APPELLATE
COURT, respondents.
The Solicitor General for petitioner.
K.V. Faylona & Associates for private respondents.
DECISION
CAMPOS, JR., J p:
Before Us is a petition for review on certiorari of decision 1 of the then
Intermediate Appellate Court affirming in toto the decision of the former
Court of First Instance of Rizal, Seventh Judicial District, Branch XXIX, Pasay
City.
The facts as found by the Appellate Court are as follows:
"On February 20, 1980, the Social Security System, SSS for brevity, filed a
complaint in the Court of First Instance of Rizal against Moonwalk
Development & Housing Corporation, Moonwalk for short, alleging that
the former had committed an error in failing to compute the 12% interest
due on delayed payments on the loan of Moonwalk — resulting in a chain
of errors in the application of payments made by Moonwalk and, in an
unpaid balance on the principal loan agreement in the amount of
P7,053.77 and, also in not reflecting in its statement or account an unpaid
balance on the said penalties for delayed payments in the amount of
P7,517,178.21 as of October 10, 1979.
Moonwalk answered denying SSS' claims and asserting that SSS had the
opportunity to ascertain the truth but failed to do so.
The trial court set the case for pre-trial at which pre-trial conference, the
court issued an order giving both parties thirty (30) days within which to
submit a stipulation of facts.
The Order of October 6, 1980 dismissing the complaint followed the
submission by the parties on September 19, 1980 of the following
stipulation of Facts:
29
"1. On October 6, 1971, plaintiff approved the application of defendant
Moonwalk for an interim loan in the amount of THIRTY MILLION PESOS
(P30,000,000.00) for the purpose of developing and constructing a housing
project in the provinces of Rizal and Cavite;
"2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00),
the sum of P9,595,000.00 was released to defendant Moonwalk as of
November 28, 1973;
"3. A third Amended Deed of First Mortgage was executed on December
18, 1973 Annex `D' providing for restructuring of the payment of the
released amount of P9,595,000.00.
"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and
daughter respectively, under paragraph 5 of the aforesaid Third Amended
Deed of First Mortgage substituted Associated Construction and Surveys
Corporation, Philippine Model Homes Development Corporation, Mariano
Z. Velarde and Eusebio T. Ramos, as solidary obligors;
"5. On July 23, 1974, after considering additional releases in the amount of
P2,659,700.00, made to defendant Moonwalk, defendant Moonwalk
delivered to the plaintiff a promissory note for TWELVE MILLION TWO
HUNDRED FIFTY FOUR THOUSAND SEVEN HUNDRED PESOS
(P12,254,700.00) Annex `E', signed by Eusebio T. Ramos, and the said
Rosita U. Alberto and Rosita U. Alberto;
"6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan
principal of P12,254,700.00 released to it. The last payment made by
Moonwalk in the amount of P15,004,905.74 were based on the Statement
of Account, Annex "F" prepared by plaintiff SSS for defendant;
"7. After settlement of the account stated in Annex 'F' plaintiff issued to
defendant Moonwalk the Release of Mortgage for Moonwalk's mortgaged
properties in Cavite and Rizal, Annexes 'G' and 'H' on October 9, 1979 and
October 11, 1979 respectively.

"8. In letters to defendant Moonwalk, dated November 28, 1979 and
followed up by another letter dated December 17, 1979, plaintiff alleged
that it committed an honest mistake in releasing defendant.
"9. In a letter dated December 21, 1979, defendant's counsel told plaintiff
that it had completely paid its obligations to SSS;
"10. The genuineness and due execution of the documents marked as
Annex (sic) 'A' to 'O' inclusive, of the Complaint and the letter dated
December 21, 1979 of the defendant's counsel to the plaintiff are
admitted.
"Manila for Pasay City, September 2, 1980." 2
On October 6, 1990, the trial court issued an order dismissing the
complaint on the ground that the obligation was already extinguished by
the payment by Moonwalk of its indebtedness to SSS and by the latter's act
of cancelling the real estate mortgages executed in its favor by defendant
Moonwalk. The Motion for Reconsideration filed by SSS with the trial court
was likewise dismissed by the latter.
These orders were appealed to the Intermediate Appellate Court.
Respondent Court reduced the errors assigned by the SSS into this issue:
". . . are defendants-appellees, namely, Moonwalk Development and
Housing Corporation, Rosita U. Alberto, Rosita U. Alberto, JMA House, Inc.
still liable for the unpaid penalties as claimed by plaintiff-appellant or is
their obligation extinguished?" 3 As We have stated earlier, the respondent
Court held that Moonwalk's obligation was extinguished and affirmed the
trial court.
Hence, this Petition wherein SSS raises the following grounds for review:
"First, in concluding that the penalties due from Moonwalk are "deemed
waived and/or barred," the appellate court disregarded the basic tenet
that waiver of a right must be express, made in a clear and unequivocal
manner. There is no evidence in the case at bar to show that SSS made a
clear, positive waiver of the penalties, made with full knowledge of the
circumstances.
30
Second, it misconstrued the ruling that SSS funds are trust funds, and SSS,
being a mere trustee, cannot perform acts affecting the same, including
condonation of penalties, that would diminish property rights of the
owners and beneficiaries thereof. (United Christian Missionary Society v.
Social Security Commission, 30 SCRA 982, 988 [1969]).
Third, it ignored the fact that penalty at the rate of 12% p.a. is not
inequitable.
Fourth, it ignored the principle that equity will cancel a release on the
ground of mistake of fact." 4
The same problem which confronted the respondent court is presented
before Us: Is the penalty demandable even after the extinguishment of the
principal obligation?
The former Intermediate Appellate Court, through Justice Eduard P.
Caguioa, held in the negative. It reasoned, thus:
"2. As we have explained under No. 1, contrary to what the plaintiff-
appellant states in its Brief, what is sought to be recovered in this case is
not the 12% interest on the loan but the 12% penalty for failure to pay on
time the amortization. What is sought to be enforced therefore is the
penal clause of the contract entered into between the parties.
Now, what is a penal clause. A penal clause has been defined as
"an accessory obligation which the parties attach to a principal obligation
for the purpose of insuring the performance thereof by imposing on the
debtor a special presentation (generally consisting in the payment of a sum
of money) in case the obligation is not fulfilled or is irregularly or
inadequately fulfilled" (3 Castan 8th Ed. p. 118).
Now an accessory obligation has been defined as that attached to a
principal obligation in order to complete the same or take its place in the
case of breach (4 Puig Peña Part 1 p. 76). Note therefore that an accessory
obligation is dependent for its existence on the existence of a principal
obligation. A principal obligation may exist without an accessory obligation
 31

but an accessory obligation cannot exist without a principal obligation. For reason for the release of all the Real Estate Mortgages on October 9 and
example, the contract of mortgage is an accessory obligation to enforce 10, 1979 respectively.
the performance of the main obligation of indebtedness. An indebtedness
Now, besides the Real Estate Mortgages, the penal clause which is also an
can exist without the mortgage but a mortgage cannot exist without the
accessory obligation must also be deemed extinguished considering that
indebtedness, which is the principal obligation. In the present case, the
the principal obligation was considered extinguished, and the penal clause
principal obligation is the loan between the parties. The accessory
being an accessory obligation. That being the case, the demand for
obligation of a penal clause is to enforce the main obligation of payment of
payment of the penal clause made by plaintiff-appellant in its demand
the loan. If therefore the principal obligation does not exist the penalty
letter dated November 28, 1979 and its follow up letter dated December
being accessory cannot exist.
17, 1979 (which parenthetically are the only demands for payment of the
Now then when is the penalty demandable? A penalty is demandable in penalties) are therefore ineffective as there was nothing to demand. It
case of non performance or late performance of the main obligation. In would be otherwise, if the demand for the payment of the penalty was
other words in order that the penalty may arise there must be a breach of made prior to the extinguishment of the obligation because then the
the obligation either by total or partial non fulfillment or there is non obligation of Moonwalk would consist of: 1) the principal obligation 2) the
fulfillment in point of time which is called mora or delay. The debtor interest of 12% on the principal obligation and 3) the penalty of 12% for
therefore violates the obligation in point of time if there is mora or delay. late payment for after demand, Moonwalk would be in mora and therefore
Now, there is no mora or delay unless there is a demand. It is noteworthy liable for the penalty.
that in the present case during all the period when the principal obligation
Let it be emphasized that at the time of the demand made in the letters of
was still subsisting, although there were late amortizations there was no
November 28, 1979 and December 17, 1979 as far as the penalty is
demand made by the creditor, plaintiff-appellant for the payment of the
concerned, the defendant-appellee was not in default since there was no
penalty. Therefore up to the time of the letter of plaintiff-appellant there
mora prior to the demand. That being the case, therefore, the demand
was no demand for the payment of the penalty, hence the debtor was no
made after the extinguishment of the principal obligation which carried
in mora in the payment of the penalty.
with it the extinguishment of the penal clause being merely an accessory
However, on October 1, 1979, plaintiff-appellant issued its statement of obligation, was an exercise in futility.
account (Exhibit F) showing the total obligation of Moonwalk as
3. At the time of the payment made of the full obligation on October 10,
P15,004,905.74, and forthwith demanded payment from defendant-
1979 together with the 12% interest by defendant-appellee Moonwalk, its
appellee. Because of the demand for payment, Moonwalk made several
obligation was extinguished. It being extinguished, there was no more
payments on September 29, October 9 and 19, 1979 respectively, all in all
need for the penal clause. Now, it is to be noted that penalty at anytime
totalling P15,004,905.74 which was a complete payment of its obligation as
can be modified by the Court. Even substantial performance under Art.
stated in Exhibit F. Because of this payment the obligation of Moonwalk
1234 authorizes the Court to consider it as complete performance minus
was considered extinguished, and pursuant to said extinguishment, the
damages. Now, Art, 1229 Civil Code of the Philippines provides:
real estate mortgages given by Moonwalk were released on October 9,
1979 and October 10, 1979 (Exhibits G and H). For all purposes therefore "ART. 1229. The judge shall equitably reduce the penalty when the
the principal obligation of defendant-appellee was deemed extinguished as principal obligation has been partly or irregularly complied with by the
well as the accessory obligation of real estate mortgage; and that is the

debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable."
If the penalty can be reduced after the principal obligation has been partly
or irregularly complied with by the debtor, which is nonetheless a breach
of the obligation, with more reason the penal clause is not demandable
when full obligation has been complied with since in that case there is no
breach of the obligation. In the present case, there has been as yet no
demand for payment of the penalty at the time of the extinguishment of
the obligation, hence there was likewise an extinguishment of the penalty.
Let Us emphasize that the obligation of defendant-appellee was fully
complied with by the debtor, that is, the amount loaned together with the
12% interest has been fully paid by the appellee. That being so, there is no
basis for demanding the penal clause since the obligation has been
extinguished. Here there has been a waiver of the penal clause as it was
not demanded before the full obligation was fully paid and extinguished.
Again, emphasis must be made on the fact that plaintiff-appellant has not
lost anything under the contract since in got back in full the amount loan
(sic) as well as the interest thereof. The same thing would have happened
if the obligation was paid on time, for then the penal clause, under the
terms of the contract would not apply. Payment of the penalty does not
mean gain or loss of plaintiff-appellant since it is merely for the purpose of
enforcing the performance of the main obligation has been fully complied
with and extinguished, the penal clause has lost its raison d' entre." 5
We find no reason to depart from the appellate court's decision. We,
however, advance the following reasons for the denial of this petition.
Article 1226 of the Civil Code provides:
"Art. 1226. In obligations with a penal clause, he penalty shall substitute
the indemnity for damages and the payment of interests in case of
noncompliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty
of fraud in the fulfillment of the obligation.
32
The penalty may be enforced only when it is demandable in accordance
with the provisions of this Code." (Emphasis Ours.)
A penal clause is an accessory undertaking to assume greater liability in
case of breach. 6 It has a double function: (1) to provide for liquidated
damages, and (2) to strengthen the coercive force of the obligation by the
threat of greater responsibility in the event of breach. 7 From the
foregoing, it is clear that a penal clause is intended to prevent the obligor
from defaulting in the performance of his obligation. Thus, if there should
be default, the penalty may be enforced. One commentator of the Civil
Code wrote:
"Now when is the penalty deemed demandable in accordance with the
provisions of the Civil Code? We must make a distinction between a
positive and a negative obligation. With regard to obligations which are
positive (to give and to do), the penalty is demandable when the debtor is
in mora; hence, the necessity of demand by the debtor unless the same is
excused . . ." 8
When does delay arise? Under the Civil Code, delay begins from the time
the obligee judicially or extrajudicially demands from the obligor the
performance of the obligation.
"Art. 1169. Those obliged to deliver or to do something incur in delay from
the time the obligee judicially or extrajudicially demands from them the
fulfillment of their obligation."
There are only three instances when demand is not necessary to render
the obligor in default. These are the following:
"(1) When the obligation or the law expressly so declares;
(2) When from the nature and the circumstances of the obligation it
appears that the designation of the time when the thing is to be delivered
or the service is to be rendered was a controlling motive for the
establishment of the contract; or
 33

(3) When the demand would be useless, as when the obligor has rendered considered as demand for payment, the demand was complied with on
it beyond his power to perform." 9 time. Hence, no delay occurred and there was, therefore, no occasion
when the penalty became demandable and enforceable. Since there was
This case does not fall within any of the established exceptions. Hence,
no default in the performance of the main obligation — payment of the
despite the provision in the promissory note that "(a)ll amortization
loan — SSS was never entitled to recover any penalty, not at the time it
payments shall be made every first five (5) days of the calendar month
made the Statement of Account and certainly, not after the
until the principal and interest on the loan or any portion thereof actually
extinguishment of the principal obligation because then, all the more that
released has been fully paid," 10 petitioner is not excused from making a
SSS had no reason to ask for the penalties. Thus, there could never be any
demand. It has been established that at the time of payment of the full
occasion for waiver or even mistake in the application for payment
obligation, private respondent Moonwalk has long been delinquent in
because there was nothing for SSS to waive as its right to enforce the
meeting its monthly arrears and in paying the full amount of the loan itself
penalty did not arise.
as the obligation matured sometime in January, 1977. But mere
delinquency in payment does not necessarily mean delay in the legal SSS, however, in buttressing its claim that it never waived the penalties,
concept. To be in default ". . . is different from mere delay in the argued that the funds it held were trust funds and as trustee, the
grammatical sense, because it involves the beginning of a special condition petitioner could not perform acts affecting the funds that would diminish
or status which has its own peculiar effects or results." 11 In order that the property rights of the owners and beneficiaries thereof. To support its
debtor may be in default it is necessary that the following requisites be claim, SSS cited the case of United Christian Missionary Society v. Social
present: (1) that the obligation be demandable and already liquidated; (2) Security Commission. 14
that the debtor delays performance; and (3) that the creditor requires the
We looked into the case and found out that it is not applicable to the
performance judicially and extrajudicially. 12 Default generally begins from
present case as it dealt not with the right of the SSS to collect penalties
the moment the creditor demands the performance of the obligation. 13
which were provided for in contracts which it entered into but with its
Nowhere in this case did it appear that SSS demanded from Moonwalk the right to collect premiums and its duty to collect the penalty for delayed
payment of its monthly amortizations. Neither did it show that petitioner payment or non-payment of premiums. The Supreme Court, in that case,
demanded the payment of the stipulated penalty upon the failure of stated:
Moonwalk to meet its monthly amortization. What the complaint itself
"No discretion or alternative is granted respondent Commission in the
showed was that SSS tried to enforce the obligation sometime in
enforcement of the law's mandate that the employer who fails to comply
September, 1977 by foreclosing the real estate mortgages executed by
with his legal obligation to remit the premiums to the System within the
Moonwalk in favor of SSS. But this foreclosure did not push through upon
prescribed period shall pay a penalty of three (3%) per month. The
Moonwalk's requests and promises to pay in full. The next demand for
prescribed penalty is evidently of a punitive character, provided by the
payment happened on October 1, 1979 when SSS issued a Statement of
legislature to assure that employers do not take lightly the State's exercise
Account to Moonwalk. And in accordance with said statement, Moonwalk
of the police power in the implementation of the Republic's declared policy
paid its loan in full. What is clear, therefore, is that Moonwalk was never in
"to develop, establish gradually and perfect a social security system which
default because SSS never compelled performance. Though it tried to
shall be suitable to the needs of the people throughout the Philippines and
foreclose the mortgages, SSS itself desisted from doing so upon the
entreaties of Moonwalk. If the Statement of Account could properly be
 34

(to) provide protection to employers against the hazards of disability, the United Christian Missionary Society cannot apply in this case. First,
sickness, old age and death . . ." because what was not paid were installments on a loan but premiums
required by law to be paid by the parties covered by the Social Security
Thus, We agree with the decision of the respondent court on the matter
Act. Secondly, what is sought to be condoned or waived are penalties not
which We quote, to wit:
imposed by law for failure to remit premiums required by law, but a
"Note that the above case refers to the condonation of the penalty for the penalty for non payment provided for by the agreement of the parties in
non remittance of the premium which is provided for by Section 22(a) of the contract between them . . ." 15
the Social Security Act . . . In other words, what was sought to be condoned
WHEREFORE, in view of the foregoing, the petition is DISMISSED and the
was the penalty provided for by law for non remittance of premium for
decision of the respondent court is AFFIRMED. LLpr
coverage under the Social Security Act.
SO ORDERED.
The case at bar does not refer to any penalty provided for by law nor does
it refer to the non remittance of premium. The case at bar refers to a Narvasa, C .J ., Padilla, Regalado and Nocon, JJ ., concur.
contract of loan entered into between plaintiff and defendant Moonwalk
Footnotes
Development and Housing Corporation. Note, therefore, that no provision
of law is involved in this case, nor is there any penalty imposed by law nor
a case about non-remittance of premium required by law. The present case
refers to a contract of loan payable in installments not provided for by law
but by agreement of the parties. Therefore, the ratio decidendi of the case
of United Christian Missionary Society vs. Social Security Commission
which plaintiff-appellant relies is not applicable in this case; clearly, the
Social Security Commission, which is a creature of the Social Security Act
cannot condone a mandatory provision of law providing for the payment of
premiums and for penalties for non remittance. The life of the Social
Security Act is in the premiums because these are the funds from which
the Social Security Act gets the money for its purposes and the non-
remittance of the premiums is penalized not by the Social Security
Commission but by law.

xxx xxx xxx

It is admitted that when a government created corporation enters into a

contract with private party concerning a loan, it descends to the level of a G.R. No. L-29155 May 13, 1970
private person. Hence, the rules on contract applicable to private parties
are applicable to it. The argument therefore that the Social Security UNIVERSAL FOOD CORPORATION, petitioner,
Commission cannot waive or condone the penalties which was applied in vs.

THE COURT OF APPEALS, MAGDALO V. FRANCISCO, SR., and VICTORIANO
N. FRANCISCO, respondents.
Wigberto E. Tañada for petitioner.
Teofilo Mendoza for respondents.
 
CASTRO, J.:
Petition for certiorari  by the Universal Food Corporation against the
decision of the Court of Appeals of February 13, 1968 in CA-G.R. 31430-R
(Magdalo V. Francisco, Sr. and Victoriano V. Francisco, plaintiffs-appellants
vs. Universal Food Corporation, defendant-appellee), the dispositive
portion of which reads as follows: "WHEREFORE the appealed decision is
hereby reversed; the BILL OF ASSIGNMENT marked Exhibit A is hereby
rescinded, and defendant is hereby ordered to return to plaintiff Magdalo
V. Francisco, Sr., his Mafran sauce trademark and formula subject-matter
of Exhibit A, and to pay him his monthly salary of P300.00 from December
1, 1960, until the return to him of said trademark and formula, plus
attorney's fees in the amount of P500.00, with costs against defendant." 1
On February 14, 1961 Magdalo V. Francisco, Sr. and Victoriano V. Francisco
filed with the Court of First Instance of Manila, against, the Universal Food
Corporation, an action for rescission of a contract entitled "Bill of
Assignment." The plaintiffs prayed the court to adjudge the defendant as
without any right to the use of the Mafran trademark and formula, and
order the latter to restore to them the said right of user; to order the
defendant to pay Magdalo V. Francisco, Sr. his unpaid salary from
December 1, 1960, as well as damages in the sum of P40,000, and to pay
the costs of suit.1
On February 28, the defendant filed its answer containing admissions and
denials. Paragraph 3 thereof "admits the allegations contained in
paragraph 3 of plaintiffs' complaint." The answer further alleged that the
defendant had complied with all the terms and conditions of the Bill of
Assignment and, consequently, the plaintiffs are not entitled to rescission
35
thereof; that the plaintiff Magdalo V. Francisco, Sr. was not dismissed from
the service as permanent chief chemist of the corporation as he is still its
chief chemist; and, by way of special defenses, that the aforesaid plaintiff is
estopped from questioning 1) the contents and due execution of the Bill of
Assignment, 2) the corporate acts of the petitioner, particularly the
resolution adopted by its board of directors at the special meeting held on
October 14, 1960, to suspend operations to avoid further losses due to
increase in the prices of raw materials, since the same plaintiff was present
when that resolution was adopted and even took part in the consideration
thereof, 3) the actuations of its president and general manager in enforcing
and implementing the said resolution, 4) the fact that the same plaintiff
was negligent in the performance of his duties as chief chemist of the
corporation, and 5) the further fact that the said plaintiff was delinquent in
the payment of his subscribed shares of stock with the corporation. The
defendant corporation prayed for the dismissal of the complaint, and
asked for P750 as attorney's fees and P5,000 in exemplary or corrective
damages.
On June 25, 1962 the lower court dismissed the plaintiffs' complaint as well
as the defendant's claim for damages and attorney's fees, with costs
against the former, who promptly appealed to the Court of Appeals. On
February 13, 1969 the appellate court rendered the judgment now the
subject of the present recourse.
The Court of Appeals arrived at the following "uncontroverted" findings of
fact:
That as far back as 1938, plaintiff Magdalo V. Francisco, Sr. discovered or
invented a formula for the manufacture of a food seasoning (sauce)
derived from banana fruits popularly known as MAFRAN sauce; that the
manufacture of this product was used in commercial scale in 1942, and in
the same year plaintiff registered his trademark in his name as owner and
inventor with the Bureau of Patents; that due to lack of sufficient capital to
finance the expansion of the business, in 1960, said plaintiff secured the
financial assistance of Tirso T. Reyes who, after a series of negotiations,
formed with others defendant Universal Food Corporation eventually

leading to the execution on May 11, 1960 of the aforequoted "Bill of
Assignment" (Exhibit A or 1).
Conformably with the terms and conditions of Exh. A, plaintiff Magdalo V.
Francisco, Sr. was appointed Chief Chemist with a salary of P300.00 a
month, and plaintiff Victoriano V. Francisco was appointed auditor and
superintendent with a salary of P250.00 a month. Since the start of the
operation of defendant corporation, plaintiff Magdalo V. Francisco, Sr.,
when preparing the secret materials inside the laboratory, never allowed
anyone, not even his own son, or the President and General Manager Tirso
T. Reyes, of defendant, to enter the laboratory in order to keep the
formula secret to himself. However, said plaintiff expressed a willingness to
give the formula to defendant provided that the same should be placed or
kept inside a safe to be opened only when he is already incapacitated to
perform his duties as Chief Chemist, but defendant never acquired a safe
for that purpose. On July 26, 1960, President and General Manager Tirso T.
Reyes wrote plaintiff requesting him to permit one or two members of his
family to observe the preparation of the 'Mafran Sauce' (Exhibit C), but
said request was denied by plaintiff. In spite of such denial, Tirso T. Reyes
did not compel or force plaintiff to accede to said request. Thereafter,
however, due to the alleged scarcity and high prices of raw materials, on
November 28, 1960, Secretary-Treasurer Ciriaco L. de Guzman of
defendant issued a Memorandum (Exhibit B), duly approved by the
President and General Manager Tirso T. Reyes that only Supervisor Ricardo
Francisco should be retained in the factory and that the salary of plaintiff
Magdalo V. Francisco, Sr., should be stopped for the time being until the
corporation should resume its operation. Some five (5) days later, that is,
on December 3, 1960, President and General Manager Tirso T. Reyes,
issued a memorandom to Victoriano Francisco ordering him to report to
the factory and produce "Mafran Sauce" at the rate of not less than 100
cases a day so as to cope with the orders of the corporation's various
distributors and dealers, and with instructions to take only the necessary
daily employees without employing permanent employees (Exhibit B).
Again, on December 6, 1961, another memorandum was issued by the
same President and General Manager instructing the Assistant Chief
Chemist Ricardo Francisco, to recall all daily employees who are connected
36
in the production of Mafran Sauce and also some additional daily
employees for the production of Porky Pops (Exhibit B-1). On December
29, 1960, another memorandum was issued by the President and General
Manager instructing Ricardo Francisco, as Chief Chemist, and Porfirio
Zarraga, as Acting Superintendent, to produce Mafran Sauce and Porky
Pops in full swing starting January 2, 1961 with further instructions to hire
daily laborers in order to cope with the full blast protection (Exhibit S-2).
Plaintiff Magdalo V. Francisco, Sr. received his salary as Chief Chemist in
the amount of P300.00 a month only until his services were terminated on
November 30, 1960. On January 9 and 16, 1961, defendant, acting thru its
President and General Manager, authorized Porfirio Zarraga and Paula de
Bacula to look for a buyer of the corporation including its trademarks,
formula and assets at a price of not less than P300,000.00 (Exhibits D and
D-1). Due to these successive memoranda, without plaintiff Magdalo V.
Francisco, Sr. being recalled back to work, the latter filed the present
action on February 14, 1961. About a month afterwards, in a letter dated
March 20, 1961, defendant, thru its President and General Manager,
requested said plaintiff to report for duty (Exhibit 3), but the latter declined
the request because the present action was already filed in court (Exhibit
J).
1. The petitioner's first contention is that the respondents are not entitled
to rescission. It is argued that under article 1191 of the new Civil Code, the
right to rescind a reciprocal obligation is not absolute and can be
demanded only if one is ready, willing and able to comply with his own
obligation and the other is not; that under article 1169 of the same Code,
in reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is
incumbent upon him; that in this case the trial court found that the
respondents not only have failed to show that the petitioner has been
guilty of default in performing its contractual obligations, "but the record
sufficiently reveals the fact that it was the plaintiff Magdalo V. Francisco
who had been remiss in the compliance of his contractual obligation to
cede and transfer to the defendant the formula for Mafran sauce;" that
even the respondent Court of Appeals found that as "observed by the
lower court, 'the record is replete with the various attempt made by the

defendant (herein petitioner) to secure the said formula from Magdalo V.
Francisco to no avail; and that upon the foregoing findings, the respondent
Court of Appeals unjustly concluded that the private respondents are
entitled to rescind the Bill of Assignment.
The threshold question is whether by virtue of the terms of the Bill of
Assignment the respondent Magdalo V. Francisco, Sr. ceded and
transferred to the petitioner corporation the formula for Mafran sauce. 2
The Bill of Assignment sets forth the following terms and conditions:
THAT the Party of the First Part [Magdalo V. Francisco, Sr.] is the sole and
exclusive owner of the MAFRAN trade-mark and the formula for MAFRAN
SAUCE;
THAT for and in consideration of the royalty of TWO (2%) PER CENTUM of
the net annual profit which the PARTY OF THE Second Part [Universal Food
Corporation] may realize by and/or out of its production of MAFRAN
SAUCE and other food products and from other business which the Party of
the Second Part may engage in as defined in its Articles of Incorporation,
and which its Board of Directors shall determine and declare, said Party of
the First Part hereby assign, transfer, and convey all its property rights and
interest over said Mafran trademark and formula for MAFRAN SAUCE unto
the Party of the Second Part;
THAT the payment for the royalty of TWO (2%) PER CENTUM of the annual
net profit which the Party of the Second Part obligates itself to pay unto
the Party of the First Part as founder and as owner of the MAFRAN
trademark and formula for MAFRAN SAUCE, shall be paid at every end of
the Fiscal Year after the proper accounting and inventories has been
undertaken by the Party of the Second Part and after a competent auditor
designated by the Board of Directors shall have duly examined and audited
its books of accounts and shall have certified as to the correctness of its
Financial Statement;
THAT it is hereby understood that the Party of the First Part, to improve
the quality of the products of the Party of the First Part and to increase its
production, shall endeavor or undertake such research, study, experiments
37
and testing, to invent or cause to invent additional formula or formulas,
the property rights and interest thereon shall likewise be assigned,
transferred, and conveyed unto the Party of the Second Part in
consideration of the foregoing premises, covenants and stipulations:
THAT in the operation and management of the Party of the First Part, the
Party of the First Part shall be entitled to the following Participation:
(a) THAT Dr. MAGDALO V. FRANCISCO shall be appointed Second Vice-
President and Chief Chemist of the Party of the Second Part, which
appointments are permanent in character and Mr. VICTORIANO V.
FRANCISCO shall be appointed Auditor thereof and in the event that the
Treasurer or any officer who may have the custody of the funds, assets and
other properties of the Party of the Second Part comes from the Party of
the First Part, then the Auditor shall not be appointed from the latter;
furthermore should the Auditor be appointed from the Party representing
the majority shares of the Party of the Second Part, then the Treasurer
shall be appointed from the Party of the First Part;
(b) THAT in case of death or other disabilities they should become
incapacitated to discharge the duties of their respective position, then,
their shares or assigns and who may have necessary qualifications shall be
preferred to succeed them;
(c) That the Party of the First Part shall always be entitled to at least two
(2) membership in the Board of Directors of the Party of the Second Part;
(d) THAT in the manufacture of MAFRAN SAUCE and other food products
by the Party of the Second Part, the Chief Chemist shall have and shall
exercise absolute control and supervision over the laboratory assistants
and personnel and in the purchase and safekeeping of the Chemicals and
other mixtures used in the preparation of said products;
THAT this assignment, transfer and conveyance is absolute and irrevocable
in no case shall the PARTY OF THE First Part ask, demand or sue for the
surrender of its rights and interest over said MAFRAN trademark and
mafran formula, except when a dissolution of the Party of the Second Part,
voluntary or otherwise, eventually arises, in which case then the property

rights and interests over said trademark and formula shall automatically
revert the Party of the First Part.
Certain provisions of the Bill of Assignment would seem to support the
petitioner's position that the respondent patentee, Magdalo V. Francisco,
Sr. ceded and transferred to the petitioner corporation the formula for
Mafran sauce. Thus, the last part of the second paragraph recites that the
respondent patentee "assign, transfer and convey all its property rights
and interest over said Mafran trademark and formula for MAFRAN SAUCE
unto the Party of the Second Part," and the last paragraph states that such
"assignment, transfer and conveyance is absolute and irrevocable (and) in
no case shall the PARTY OF THE First Part ask, demand or sue for the
surrender of its rights and interest over said MAFRAN trademark and
mafran formula."
However, a perceptive analysis of the entire instrument and the language
employed therein3 would lead one to the conclusion that what
was actually  ceded and transferred was only the use of the Mafran sauce
formula. This was the precise intention of the parties, 4 as we shall
presently show.
Firstly, one of the principal considerations of the Bill of Assignment is the
payment of "royalty  of TWO (2%) PER CENTUM of the net annual profit"
which the petitioner corporation may realize by and/or out of its
production of Mafran sauce and other food products, etc. The word
"royalty," when employed in connection with a license under a patent,
means the compensation paid for the use of a patented invention.
'Royalty,' when used in connection with a license under a patent, means
the compensation paid by the licensee to the licensor for the use of the
licensor's patented invention." (Hazeltine Corporation vs. Zenith Radio
Corporation, 100 F. 2d 10, 16.)5
Secondly, in order to preserve the secrecy of the Mafran formula and to
prevent its unauthorized proliferation, it is provided in paragraph 5-(a) of
the Bill that the respondent patentee was to be appointed "chief
chemist ... permanent in character," and that in case of his "death or other
38
disabilities," then his "heirs or assigns who may have necessary
qualifications shall be preferred to succeed" him as such chief chemist. It is
further provided in paragraph 5-(d) that the same respondent shall have
and shall exercise absolute control and supervision over the laboratory
assistants and personnel and over the purchase and safekeeping of the
chemicals and other mixtures used in the preparation of the said product.
All these provisions of the Bill of Assignment clearly show that the
intention of the respondent patentee at the time of its execution was to
part, not with the formula for Mafran sauce, but only its use, to preserve
the monopoly and to effectively prohibit anyone from availing of the
invention.6
Thirdly, pursuant to the last paragraph of the Bill, should dissolution of the
Petitioner corporation eventually take place, "the property rights and
interests over said trademark and formula shall automatically revert to the
respondent patentee. This must be so, because there could be no
reversion of the trademark and formula in this case, if, as contended by the
petitioner, the respondent patentee assigned, ceded and transferred the
trademark and formula — and not merely the right to use it — for then
such assignment passes the property in such patent right to the petitioner
corporation to which it is ceded, which, on the corporation becoming
insolvent, will become part of the property in the hands of the receiver
thereof.7
Fourthly, it is alleged in paragraph 3 of the respondents' complaint that
what was ceded and transferred by virtue of the Bill of Assignment is the
"use of the formula" (and not the formula itself). This incontrovertible fact
is admitted without equivocation in paragraph 3 of the petitioner's answer.
Hence, it does "not require proof and cannot be contradicted." 8 The last
part of paragraph 3 of the complaint and paragraph 3 of the answer are
reproduced below for ready reference:
3. — ... and due to these privileges, the plaintiff in return assigned to said
corporation his interest and rights over the said trademark and formula so
that the defendant corporation could use the formula in the preparation

and manufacture of the mafran sauce, and the trade name for the
marketing of said project, as appearing in said contract ....
3. — Defendant admits the allegations contained in paragraph 3 of
plaintiff's complaint.
Fifthly, the facts of the case compellingly demonstrate continued
possession of the Mafran sauce formula by the respondent patentee.
Finally, our conclusion is fortified by the admonition of the Civil Code that a
conveyance should be interpreted to effect "the least transmission of
right,"9 and is there a better example of least transmission of rights than
allowing or permitting only the use, without transfer of ownership, of the
formula for Mafran sauce.
The foregoing reasons support the conclusion of the Court of
Appeals 10 that what was actually ceded and transferred by the respondent
patentee Magdalo V. Francisco, Sr. in favor of the petitioner corporation
was only the use of the formula. Properly speaking, the Bill of Assignment
vested in the petitioner corporation no title to the formula. Without basis,
therefore, is the observation of the lower court that the respondent
patentee "had been remiss in the compliance of his contractual obligation
to cede and transfer to the defendant the formula for Mafran sauce."
2. The next fundamental question for resolution is whether the respondent
Magdalo V. Francisco, Sr. was dismissed from his position as chief chemist
of the corporation without justifiable cause, and in violation of paragraph
5-(a) of the Bill of Assignment which in part provides that his appointment
is "permanent in character."
The petitioner submits that there is nothing in the successive memoranda
issued by the corporate officers of the petitioner, marked exhibits B, B-1
and B-2, from which can be implied that the respondent patentee was
being dismissed from his position as chief chemist of the corporation. The
fact, continues the petitioner, is that at a special meeting of the board of
directors of the corporation held on October 14, 1960, when the board
decided to suspend operations of the factory for two to four months and
to retain only a skeletal force to avoid further losses, the two private
39
respondents were present, and the respondent patentee was even
designated as the acting superintendent, and assigned the mission of
explaining to the personnel of the factory why the corporation was
stopping operations temporarily and laying off personnel. The petitioner
further submits that exhibit B indicates that the salary of the respondent
patentee would not be paid only during the time that the petitioner
corporation was idle, and that he could draw his salary as soon as the
corporation resumed operations. The clear import of this exhibit was
allegedly entirely disregarded by the respondent Court of Appeals, which
concluded that since the petitioner resumed partial production of Mafran
sauce without notifying the said respondent formally, the latter had been
dismissed as chief chemist, without considering that the petitioner had to
resume partial operations only to fill its pending orders, and that the
respondents were duly notified of that decision, that is, that exhibit B-1
was addressed to Ricardo Francisco, and this was made known to the
respondent Victoriano V. Francisco. Besides, the records will show that the
respondent patentee had knowledge of the resumption of production by
the corporation, but in spite of such knowledge he did not report for work.
The petitioner further submits that if the respondent patentee really had
unqualified interest in propagating the product he claimed he so dearly
loved, certainly he would not have waited for a formal notification but
would have immediately reported for work, considering that he was then
and still is a member of the corporation's board of directors, and insofar as
the petitioner is concerned, he is still its chief chemist; and because
Ricardo Francisco is a son of the respondent patentee to whom had been
entrusted the performance of the duties of chief chemist, while the
respondent Victoriano V. Francisco is his brother, the respondent patentee
could not feign ignorance of the resumption of operations.
The petitioner finally submits that although exhibit B-2 is addressed to
Ricardo Francisco, and is dated December 29, 1960, the records will show
that the petitioner was set to resume full capacity production only
sometime in March or April, 1961, and the respondent patentee cannot
deny that in the very same month when the petitioner was set to resume
full production, he received a copy of the resolution of its board of

directors, directing him to report immediately for duty; that exhibit H, of a
later vintage as it is dated February 1, 1961, clearly shows that Ricardo
Francisco was merely the acting chemist, and this was the situation on
February 1, 1961, thirteen days before the filing of the present action for
rescission. The designation of Ricardo Francisco as the chief chemist
carried no weight because the president and general manager of the
corporation had no power to make the designation without the consent of
the corporation's board of directors. The fact of the matter is that although
the respondent Magdalo V. Francisco, Sr. was not mentioned in exhibit H
as chief chemist, this same exhibit clearly indicates that Ricardo Francisco
was merely the acting chemist as he was the one assisting his father.
In our view, the foregoing submissions cannot outweigh the
uncontroverted facts. On November 28, 1960 the secretary-treasurer of
the corporation issued a memorandum (exh. B), duly approved by its
president and general manager, directing that only Ricardo Francisco be
retained in the factory and that the salary of respondent patentee, as chief
chemist, be stopped for the time being until the corporation resumed
operations. This measure was taken allegedly because of the scarcity and
high prices of raw materials. Five days later, however, or on December 3,
the president and general manager issued a memorandum (exh. B-1)
ordering the respondent Victoria V. Francisco to report to the factory and
to produce Mafran sauce at the rate of no less than 100 cases a day to
cope with the orders of the various distributors and dealers of the
corporation, and instructing him to take only the necessary daily
employees without employing permanent ones. Then on December 6, the
same president and general manager issued yet another memorandum
(exh. B-2), instructing Ricardo Francisco, as assistant chief chemist, to recall
all daily employees connected with the production of Mafran sauce and to
hire additional daily employees for the production of Porky Pops. Twenty-
three days afterwards, or on December 29, the same president and general
manager issued still another memorandum (exh. S-2), directing "Ricardo
Francisco, as Chief Chemist" and Porfirio Zarraga, as acting superintendent,
to produce Mafran sauce and, Porky Pops in full swing, starting January 2,
1961, with the further instruction to hire daily laborers in order to cope
with the full blast production. And finally, at the hearing held on October
40
24, 1961, the same president and general manager admitted that "I
consider that the two months we paid him (referring to respondent
Magdalo V. Francisco, Sr.) is the separation pay."
The facts narrated in the preceding paragraph were the prevailing milieu
on February 14, 1961 when the complaint for rescission of the Bill of
Assignment was filed. They clearly prove that the petitioner, acting through
its corporate officers, 11 schemed and maneuvered to ease out, separate
and dismiss the said respondent from the service as permanent chief
chemist, in flagrant violation of paragraph 5-(a) and (b) of the Bill of
Assignment. The fact that a month after the institution of the action for
rescission, the petitioner corporation, thru its president and general
manager, requested the respondent patentee to report for duty (exh. 3), is
of no consequence. As the Court of Appeals correctly observed, such
request was a "recall to placate said plaintiff."
3. We now come to the question of rescission of the Bill of Assignment. In
this connection, we quote for ready reference the following articles of the
new Civil Code governing rescission of contracts:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon
him.
The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also
seek rescission even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with articles 1385 and 1388 of
the Mortgage Law.

ART. 1383. The action for rescission is subsidiary; it cannot be instituted
except when the party suffering damage has no other legal means to
obtain reparation for the same.
ART. 1384. Rescission shall be only to the extent necessary to cover the
damages caused.
At the moment, we shall concern ourselves with the first two paragraphs
of article 1191. The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is incumbent
upon him. The injured party may choose between fulfillment and rescission
of the obligation, with payment of damages in either case.
In this case before us, there is no controversy that the provisions of the Bill
of Assignment are reciprocal in nature. The petitioner corporation violated
the Bill of Assignment, specifically paragraph 5-(a) and (b), by terminating
the services of the respondent patentee Magdalo V. Francisco, Sr., without
lawful and justifiable cause.
Upon the factual milieu, is rescission of the Bill of Assignment proper?
The general rule is that rescission of a contract will not be permitted for a
slight or casual breach, but only for such substantial and fundamental
breach as would defeat the very object of the parties in making the
agreement. 12 The question of whether a breach of a contract is substantial
depends upon the attendant circumstances. 13 The petitioner contends that
rescission of the Bill of Assignment should be denied, because under article
1383, rescission is a subsidiary remedy which cannot be instituted except
when the party suffering damage has no other legal means to obtain
reparation for the same. However, in this case the dismissal of the
respondent patentee Magdalo V. Francisco, Sr. as the permanent chief
chemist of the corporation is a fundamental and substantial breach of the
Bill of Assignment. He was dismissed without any fault or negligence on his
part. Thus, apart from the legal principle that the option — to demand
performance or ask for rescission of a contract — belongs to the injured
party, 14 the fact remains that the respondents-appellees had no
alternative but to file the present action for rescission and damages. It is to
41
be emphasized that the respondent patentee would not have agreed to
the other terms of the Bill of Assignment were it not for the basic
commitment of the petitioner corporation to appoint him as its Second
Vice-President and Chief Chemist on a permanent basis; that in the
manufacture of Mafran sauce and other food products he would have
"absolute control and supervision over the laboratory assistants and
personnel and in the purchase and safeguarding of said products;" and that
only by all these measures could the respondent patentee preserve
effectively the secrecy of the formula, prevent its proliferation, enjoy its
monopoly, and, in the process afford and secure for himself a lifetime job
and steady income. The salient provisions of the Bill of Assignment,
namely, the transfer to the corporation of only the use of the formula; the
appointment of the respondent patentee as Second Vice-President and
chief chemist on a permanent status; the obligation of the said respondent
patentee to continue research on the patent to improve the quality of the
products of the corporation; the need of absolute control and supervision
over the laboratory assistants and personnel and in the purchase and
safekeeping of the chemicals and other mixtures used in the preparation of
said product — all these provisions of the Bill of Assignment are so
interdependent that violation of one would result in virtual nullification of
the rest.
4. The petitioner further contends that it was error for the Court of
Appeals to hold that the respondent patentee is entitled to payment of his
monthly salary of P300 from December 1, 1960, until the return to him of
the Mafran trademark and formula, arguing that under articles 1191, the
right to specific performance is not conjunctive with the right to rescind a
reciprocal contract; that a plaintiff cannot ask for both remedies; that the
appellate court awarded the respondents both remedies as it held that the
respondents are entitled to rescind the Bill of Assignment and also that the
respondent patentee is entitled to his salary aforesaid; that this is a gross
error of law, when it is considered that such holding would make the
petitioner liable to pay respondent patentee's salary from December 1,
1960 to "kingdom come," as the said holding requires the petitioner to
make payment until it returns the formula which, the appellate court itself
found, the corporation never had; that, moreover, the fact is that the said

respondent patentee refused to go back to work, notwithstanding the call
for him to return — which negates his right to be paid his back salaries for
services which he had not rendered; and that if the said respondent is
entitled to be paid any back salary, the same should be computed only
from December 1, 1960 to March 31, 1961, for on March 20, 1961 the
petitioner had already formally called him back to work.
The above contention is without merit. Reading once more the Bill of
Assignment in its entirety and the particular provisions in their proper
setting, we hold that the contract placed the use of the formula for Mafran
sauce with the petitioner, subject to defined limitations. One of the
considerations for the transfer of the use thereof was the undertaking on
the part of the petitioner corporation to employ the respondent patentee
as the Second Vice-President and Chief Chemist on a permanent status, at
a monthly salary of P300, unless "death or other disabilities supervened.
Under these circumstances, the petitioner corporation could not escape
liability to pay the private respondent patentee his agreed monthly salary,
as long as the use, as well as the right to use, the formula for Mafran sauce
remained with the corporation.
5. The petitioner finally contends that the Court of Appeals erred in
ordering the corporation to return to the respondents the trademark and
formula for Mafran sauce, when both the decision of the appellate court
and that of the lower court state that the corporation is not aware nor is in
possession of the formula for Mafran sauce, and the respondent patentee
admittedly never gave the same to the corporation. According to the
petitioner these findings would render it impossible to carry out the order
to return the formula to the respondent patentee. The petitioner's
predicament is understandable. Article 1385 of the new Civil Code provides
that rescission creates the obligation to return the things which were the
object of the contract. But that as it may, it is a logical inference from the
appellate court's decision that what was meant to be returned to the
respondent patentee is not the formula itself, but only its use and the right
to such use. Thus, the respondents in their complaint for rescission
specifically and particularly pray, among others, that the petitioner
42
corporation be adjudged as "without any right to use said trademark and
formula."
ACCORDINGLY, conformably with the observations we have above made,
the judgment of the Court of Appeals is modified to read as follows:
"Wherefore the appealed decision is reversed. The Bill of Assignment
(Exhibit A) is hereby rescinded, and the defendant corporation is ordered
to return and restore to the plaintiff Magdalo V. Francisco, Sr. the right to
the use of his Mafran sauce trademark and formula, subject-matter of the
Bill of Assignment, and to this end the defendant corporation and all its
assigns and successors are hereby permanently enjoined, effective
immediately, from using in any manner the said Mafran sauce trademark
and formula. The defendant corporation shall also pay to Magdalo V.
Francisco, Sr. his monthly salary of P300 from December 1, 1960, until the
date of finality of this judgment, inclusive, the total amount due to him to
earn legal interest from the date of the finality of this judgment until it
shall have been fully paid, plus attorney's fees in the amount of P500, with
costs against the defendant corporation." As thus modified, the said
judgment is affirmed, with costs against the petitioner corporation.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Barredo and
Villamor, JJ., concur.
Teehankee J., took no part.
 
 
Separate Opinions
 
REYES, J.B.L., J.,  concurring:
I concur with the opinion penned by Mr. Justice Fred Ruiz Castro, but I
would like to add that the argument of petitioner, that the rescission

demanded by the respondent-appellee, Magdalo Francisco, should be
denied because under Article 1383 of the Civil Code of the Philippines
rescission can not be demanded except when the party suffering damage
has no other legal means to obtain reparation, is predicated on a failure to
distinguish between a rescission for breach of contract under Article 1191
of the Civil Code and a rescission by reason of lesion or economic
prejudice, under Article 1381, et seq. The rescission on account of breach
of stipulations is not predicated on injury to economic interests of the
party plaintiff but on the breach of faith by the defendant, that violates the
reciprocity between the parties. It is not a subsidiary action, and Article
1191 may be scanned without disclosing anywhere that the action for
rescission thereunder is subordinated to anything other than the culpable
breach of his obligations by the defendant. This rescission is in principal
action retaliatory in character, it being unjust that a party be held bound to
fulfill his promises when the other violates his. As expressed in the old
Latin aphorism: "Non servanti fidem, non est fides servanda." Hence, the
reparation of damages for the breach is purely secondary.
On the contrary, in the rescission by reason of lesion  or economic
prejudice, the cause of action is subordinated to the existence of that
prejudice, because it is the raison d'etre  as well as the measure of the right
to rescind. Hence, where the defendant makes good the damages caused,
the action cannot be maintained or continued, as expressly provided in
Articles 1383 and 1384. But the operation of these two articles is limited to
the cases of rescission for lesion enumerated in Article 1381 of the Civil
Code of the Philippines, and does not, apply to cases under Article 1191.
It is probable that the petitioner's confusion arose from the defective
technique of the new Code that terms both instances as rescission without
distinctions between them; unlike the previous Spanish Civil Code of 1889,
that differentiated "resolution" for breach of stipulations from "rescission"
by reason of lesion or damage.1 But the terminological vagueness does not
justify confusing one case with the other, considering the patent difference
in causes and results of either action.
 
43
 
Separate Opinions
REYES, J.B.L., J.,  concurring:
I concur with the opinion penned by Mr. Justice Fred Ruiz Castro, but I
would like to add that the argument of petitioner, that the rescission
demanded by the respondent-appellee, Magdalo Francisco, should be
denied because under Article 1383 of the Civil Code of the Philippines
rescission can not be demanded except when the party suffering damage
has no other legal means to obtain reparation, is predicated on a failure to
distinguish between a rescission for breach of contract under Article 1191
of the Civil Code and a rescission by reason of lesion or economic
prejudice, under Article 1381, et seq. The rescission on account of breach
of stipulations is not predicated on injury to economic interests of the
party plaintiff but on the breach of faith by the defendant, that violates the
reciprocity between the parties. It is not a subsidiary action, and Article
1191 may be scanned without disclosing anywhere that the action for
rescission thereunder is subordinated to anything other than the culpable
breach of his obligations by the defendant. This rescission is in principal
action retaliatory in character, it being unjust that a party be held bound to
fulfill his promises when the other violates his. As expressed in the old
Latin aphorism: "Non servanti fidem, non est fides servanda." Hence, the
reparation of damages for the breach is purely secondary.
On the contrary, in the rescission by reason of lesion  or economic
prejudice, the cause of action is subordinated to the existence of that
prejudice, because it is the raison d'etre  as well as the measure of the right
to rescind. Hence, where the defendant makes good the damages caused,
the action cannot be maintained or continued, as expressly provided in
Articles 1383 and 1384. But the operation of these two articles is limited to
the cases of rescission for lesion enumerated in Article 1381 of the Civil
Code of the Philippines, and does not, apply to cases under Article 1191.
It is probable that the petitioner's confusion arose from the defective
technique of the new Code that terms both instances as rescission without
 44

distinctions between them; unlike the previous Spanish Civil Code of 1889,
that differentiated "resolution" for breach of stipulations from "rescission"
by reason of lesion or damage.1 But the terminological vagueness does not
justify confusing one case with the other, considering the patent difference
in causes and results of either action.

G.R. No. 147839             June 8, 2006

GAISANO CAGAYAN, INC. Petitioner,

vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision 1 dated
October 11, 2000 of the Court of Appeals (CA) in CA-G.R. CV No. 61848
which set aside the Decision dated August 31, 1998 of the Regional Trial
Court, Branch 138, Makati (RTC) in Civil Case No. 92-322 and upheld the
causes of action for damages of Insurance Company of North America
(respondent) against Gaisano Cagayan, Inc. (petitioner); and the CA
Resolution dated April 11, 2001 which denied petitioner's motion for
reconsideration.
The factual background of the case is as follows:
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue
Jeans. Levi Strauss (Phils.) Inc. (LSPI) is the local distributor of products
bearing trademarks owned by Levi Strauss & Co.. IMC and LSPI separately
obtained from respondent fire insurance policies with book debt
endorsements. The insurance policies provide for coverage on "book debts
in connection with ready-made clothing materials which have been sold or
delivered to various customers and dealers of the Insured anywhere in the
Philippines."2 The policies defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45 days after the time of
the loss covered under this Policy."3 The policies also provide for the
following conditions:
1. Warranted that the Company shall not be liable for any unpaid account
in respect of the merchandise sold and delivered by the Insured which are
outstanding at the date of loss for a period in excess of six (6) months from
the date of the covering invoice or actual delivery of the merchandise
whichever shall first occur.
2. Warranted that the Insured shall submit to the Company within twelve
(12) days after the close of every calendar month all amount shown in their
books of accounts as unpaid and thus become receivable item from their
customers and dealers. x x x4
xxxx
45
Petitioner is a customer and dealer of the products of IMC and LSPI. On
February 25, 1991, the Gaisano Superstore Complex in Cagayan de Oro
City, owned by petitioner, was consumed by fire. Included in the items lost
or destroyed in the fire were stocks of ready-made clothing materials sold
and delivered by IMC and LSPI.
On February 4, 1992, respondent filed a complaint for damages against
petitioner. It alleges that IMC and LSPI filed with respondent their claims
under their respective fire insurance policies with book debt
endorsements; that as of February 25, 1991, the unpaid accounts of
petitioner on the sale and delivery of ready-made clothing materials with
IMC was P2,119,205.00 while with LSPI it was P535,613.00; that
respondent paid the claims of IMC and LSPI and, by virtue thereof,
respondent was subrogated to their rights against petitioner; that
respondent made several demands for payment upon petitioner but these
went unheeded.5
In its Answer with Counter Claim dated July 4, 1995, petitioner contends
that it could not be held liable because the property covered by the
insurance policies were destroyed due to fortuities event or force majeure;
that respondent's right of subrogation has no basis inasmuch as there was
no breach of contract committed by it since the loss was due to fire which
it could not prevent or foresee; that IMC and LSPI never communicated to
it that they insured their properties; that it never consented to paying the
claim of the insured.6
At the pre-trial conference the parties failed to arrive at an amicable
settlement.7 Thus, trial on the merits ensued.
On August 31, 1998, the RTC rendered its decision dismissing respondent's
complaint.8 It held that the fire was purely accidental; that the cause of the
fire was not attributable to the negligence of the petitioner; that it has not
been established that petitioner is the debtor of IMC and LSPI; that since
the sales invoices state that "it is further agreed that merely for purpose of
securing the payment of purchase price, the above-described merchandise
remains the property of the vendor until the purchase price is fully paid",

IMC and LSPI retained ownership of the delivered goods and must bear the
loss.
Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA
rendered its decision setting aside the decision of the RTC. The dispositive
portion of the decision reads:
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED
and SET ASIDE and a new one is entered ordering defendant-appellee
Gaisano Cagayan, Inc. to pay:
1. the amount of P2,119,205.60 representing the amount paid by the
plaintiff-appellant to the insured Inter Capitol Marketing Corporation, plus
legal interest from the time of demand until fully paid;
2. the amount of P535,613.00 representing the amount paid by the
plaintiff-appellant to the insured Levi Strauss Phil., Inc., plus legal interest
from the time of demand until fully paid.
With costs against the defendant-appellee.
SO ORDERED.10
The CA held that the sales invoices are proofs of sale, being detailed
statements of the nature, quantity and cost of the thing sold; that loss of
the goods in the fire must be borne by petitioner since
the proviso contained in the sales invoices is an exception under Article
1504 (1) of the Civil Code, to the general rule that if the thing is lost by a
fortuitous event, the risk is borne by the owner of the thing at the time the
loss under the principle of res perit domino; that petitioner's obligation to
IMC and LSPI is not the delivery of the lost goods but the payment of its
unpaid account and as such the obligation to pay is not extinguished, even
if the fire is considered a fortuitous event; that by subrogation, the insurer
has the right to go against petitioner; that, being a fire insurance with book
debt endorsements, what was insured was the vendor's interest as a
creditor.11
46
Petitioner filed a motion for reconsideration 12 but it was denied by the CA
in its Resolution dated April 11, 2001.13
Hence, the present petition for review on certiorari anchored on the
following Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE
INSTANT CASE WAS ONE OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE
SUBJECT GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER
UPON DELIVERY THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS
AUTOMATIC SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN
FAVOR OF RESPONDENT.14
Anent the first error, petitioner contends that the insurance in the present
case cannot be deemed to be over credit since an insurance "on credit"
belies not only the nature of fire insurance but the express terms of the
policies; that it was not credit that was insured since respondent paid on
the occasion of the loss of the insured goods to fire and not because of the
non-payment by petitioner of any obligation; that, even if the insurance is
deemed as one over credit, there was no loss as the accounts were not yet
due since no prior demands were made by IMC and LSPI against petitioner
for payment of the debt and such demands came from respondent only
after it had already paid IMC and LSPI under the fire insurance policies. 15
As to the second error, petitioner avers that despite delivery of the goods,
petitioner-buyer IMC and LSPI assumed the risk of loss when they secured
fire insurance policies over the goods.
Concerning the third ground, petitioner submits that there is no
subrogation in favor of respondent as no valid insurance could be
maintained thereon by IMC and LSPI since all risk had transferred to
petitioner upon delivery of the goods; that petitioner was not privy to the
insurance contract or the payment between respondent and its insured
nor was its consent or approval ever secured; that this lack of privity

forecloses any real interest on the part of respondent in the obligation to
pay, limiting its interest to keeping the insured goods safe from fire.
For its part, respondent counters that while ownership over the ready-
made clothing materials was transferred upon delivery to petitioner, IMC
and LSPI have insurable interest over said goods as creditors who stand to
suffer direct pecuniary loss from its destruction by fire; that petitioner is
liable for loss of the ready-made clothing materials since it failed to
overcome the presumption of liability under Article 1265 16 of the Civil
Code; that the fire was caused through petitioner's negligence in failing to
provide stringent measures of caution, care and maintenance on its
property because electric wires do not usually short circuit unless there are
defects in their installation or when there is lack of proper maintenance
and supervision of the property; that petitioner is guilty of gross and
evident bad faith in refusing to pay respondent's valid claim and should be
liable to respondent for contracted lawyer's fees, litigation expenses and
cost of suit.17
As a general rule, in petitions for review, the jurisdiction of this Court in
cases brought before it from the CA is limited to reviewing questions of law
which involves no examination of the probative value of the evidence
presented by the litigants or any of them.18 The Supreme Court is not a
trier of facts; it is not its function to analyze or weigh evidence all over
again.19 Accordingly, findings of fact of the appellate court are generally
conclusive on the Supreme Court.20
Nevertheless, jurisprudence has recognized several exceptions in which
factual issues may be resolved by this Court, such as: (1) when the findings
are grounded entirely on speculation, surmises or conjectures; (2) when
the inference made is manifestly mistaken, absurd or impossible; (3) when
there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of facts are conflicting; (6)
when in making its findings the CA went beyond the issues of the case, or
its findings are contrary to the admissions of both the appellant and the
appellee; (7) when the findings are contrary to the trial court; (8) when the
findings are conclusions without citation of specific evidence on which they
47
are based; (9) when the facts set forth in the petition as well as in the
petitioner's main and reply briefs are not disputed by the respondent; (10)
when the findings of fact are premised on the supposed absence of
evidence and contradicted by the evidence on record; and (11) when the
CA manifestly overlooked certain relevant facts not disputed by the
parties, which, if properly considered, would justify a different
conclusion.21 Exceptions (4), (5), (7), and (11) apply to the present petition.
At issue is the proper interpretation of the questioned insurance policy.
Petitioner claims that the CA erred in construing a fire insurance policy on
book debts as one covering the unpaid accounts of IMC and LSPI since such
insurance applies to loss of the ready-made clothing materials sold and
delivered to petitioner.
The Court disagrees with petitioner's stand.
It is well-settled that when the words of a contract are plain and readily
understood, there is no room for construction.22 In this case, the
questioned insurance policies provide coverage for "book debts in
connection with ready-made clothing materials which have been sold or
delivered to various customers and dealers of the Insured anywhere in the
Philippines."23 ; and defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45 days after the time of
the loss covered under this Policy."24 Nowhere is it provided in the
questioned insurance policies that the subject of the insurance is the goods
sold and delivered to the customers and dealers of the insured.
Indeed, when the terms of the agreement are clear and explicit that they
do not justify an attempt to read into it any alleged intention of the parties,
the terms are to be understood literally just as they appear on the face of
the contract.25 Thus, what were insured against were the accounts of IMC
and LSPI with petitioner which remained unpaid 45 days after the loss
through fire, and not the loss or destruction of the goods delivered.
Petitioner argues that IMC bears the risk of loss because it expressly
reserved ownership of the goods by stipulating in the sales invoices that
"[i]t is further agreed that merely for purpose of securing the payment of

the purchase price the above described merchandise remains the property
of the vendor until the purchase price thereof is fully paid." 26
The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil
Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk
until the ownership therein is transferred to the buyer, but when the
ownership therein is transferred to the buyer the goods are at the buyer's
risk whether actual delivery has been made or not,  except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee
for the buyer, in pursuance of the contract and the ownership in the goods
has been retained by the seller merely to secure performance by the buyer
of his obligations under the contract, the goods are at the buyer's risk from
the time of such delivery; (Emphasis supplied)
xxxx
Thus, when the seller retains ownership only to insure that the buyer will
pay its debt, the risk of loss is borne by the buyer.27 Accordingly, petitioner
bears the risk of loss of the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have an
insurable interest until full payment of the value of the delivered goods.
Unlike the civil law concept of res perit domino, where ownership is the
basis for consideration of who bears the risk of loss, in property insurance,
one's interest is not determined by concept of title, but whether insured
has substantial economic interest in the property. 28
Section 13 of our Insurance Code defines insurable interest as "every
interest in property, whether real or personal, or any relation thereto, or
liability in respect thereof, of such nature that a contemplated peril might
directly damnify the insured." Parenthetically, under Section 14 of the
same Code, an insurable interest in property may consist in: (a) an existing
interest; (b) an inchoate interest founded on existing interest; or (c) an
48
expectancy, coupled with an existing interest in that out of which the
expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a
property interest in, or a lien upon, or possession of, the subject matter of
the insurance, and neither the title nor a beneficial interest is requisite to
the existence of such an interest, it is sufficient that the insured is so
situated with reference to the property that he would be liable to loss
should it be injured or destroyed by the peril against which it is
insured.29 Anyone has an insurable interest in property who derives a
benefit from its existence or would suffer loss from its
destruction.30 Indeed, a vendor or seller retains an insurable interest in the
property sold so long as he has any interest therein, in other words, so long
as he would suffer by its destruction, as where he has a vendor's lien. 31 In
this case, the insurable interest of IMC and LSPI pertain to the unpaid
accounts appearing in their Books of Account 45 days after the time of the
loss covered by the policies.
The next question is: Is petitioner liable for the unpaid accounts?
Petitioner's argument that it is not liable because the fire is a fortuitous
event under Article 117432 of the Civil Code is misplaced. As held earlier,
petitioner bears the loss under Article 1504 (1) of the Civil Code.
Moreover, it must be stressed that the insurance in this case is not for loss
of goods by fire but for petitioner's accounts with IMC and LSPI that
remained unpaid 45 days after the fire. Accordingly, petitioner's obligation
is for the payment of money. As correctly stated by the CA, where the
obligation consists in the payment of money, the failure of the debtor to
make the payment even by reason of a fortuitous event shall not relieve
him of his liability.33 The rationale for this is that the rule that an obligor
should be held exempt from liability when the loss occurs thru a fortuitous
event only holds true when the obligation consists in the delivery of a
determinate thing and there is no stipulation holding him liable even in
case of fortuitous event. It does not apply when the obligation is pecuniary
in nature.34
 49

Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic Petitioner failed to refute respondent's evidence.
thing, the loss or destruction of anything of the same kind does not
As to LSPI, respondent failed to present sufficient evidence to prove its
extinguish the obligation." If the obligation is generic in the sense that the
cause of action. No evidentiary weight can be given to Exhibit "F Levi
object thereof is designated merely by its class or genus without any
Strauss",42 a letter dated April 23, 1991 from petitioner's General Manager,
particular designation or physical segregation from all others of the same
Stephen S. Gaisano, Jr., since it is not an admission of petitioner's unpaid
class, the loss or destruction of anything of the same kind even without the
account with LSPI. It only confirms the loss of Levi's products in the amount
debtor's fault and before he has incurred in delay will not have the effect
of P535,613.00 in the fire that razed petitioner's building on February 25,
of extinguishing the obligation.35 This rule is based on the principle that the
1991.
genus of a thing can never perish. Genus nunquan perit. 36 An obligation to
pay money is generic; therefore, it is not excused by fortuitous loss of any Moreover, there is no proof of full settlement of the insurance claim of
specific property of the debtor.37 LSPI; no subrogation receipt was offered in evidence. Thus, there is no
evidence that respondent has been subrogated to any right which LSPI may
Thus, whether fire is a fortuitous event or petitioner was negligent are
have against petitioner. Failure to substantiate the claim of subrogation is
matters immaterial to this case. What is relevant here is whether it has
fatal to petitioner's case for recovery of the amount of P535,613.00.
been established that petitioner has outstanding accounts with IMC and
LSPI. WHEREFORE, the petition is partly GRANTED. The assailed Decision dated
October 11, 2000 and Resolution dated April 11, 2001 of the Court of
With respect to IMC, the respondent has adequately established its claim.
Appeals in CA-G.R. CV No. 61848 are AFFIRMED with
Exhibits "C" to "C-22"38 show that petitioner has an outstanding account
the MODIFICATION that the order to pay the amount of P535,613.00 to
with IMC in the amount of P2,119,205.00. Exhibit "E"39 is the check voucher
respondent is DELETED for lack of factual basis.
evidencing payment to IMC. Exhibit "F"40 is the subrogation receipt
executed by IMC in favor of respondent upon receipt of the insurance No pronouncement as to costs.
proceeds. All these documents have been properly identified, presented
and marked as exhibits in court. The subrogation receipt, by itself, is SO ORDERED.
sufficient to establish not only the relationship of respondent as insurer
and IMC as the insured, but also the amount paid to settle the insurance
claim. The right of subrogation accrues simply upon payment by the
insurance company of the insurance claim.41 Respondent's action against
petitioner is squarely sanctioned by Article 2207 of the Civil Code which
provides:

Art. 2207. If the plaintiff's property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of
the wrong or breach of contract complained of, the insurance company
shall be subrogated to the rights of the insured against the wrongdoer or
the person who has violated the contract. x x x
G.R. No. 117190 January 2, 1997
JACINTO TANGUILIG doing business under the name and style J.M.T.
ENGINEERING AND GENERAL MERCHANDISING, petitioner,

vs.
COURT OF APPEALS and VICENTE HERCE JR., respondents.
BELLOSILLO, J.:
This case involves the proper interpretation of the contract entered into
between the parties.
Sometime in April 1987 petitioner Jacinto M. Tanguilig doing business
under the name and style J.M.T. Engineering and General Merchandising
proposed to respondent Vicente Herce Jr. to construct a windmill system
for him. After some negotiations they agreed on the construction of the
windmill for a consideration of P60,000.00 with a one-year guaranty from
the date of completion and acceptance by respondent Herce Jr. of the
project. Pursuant to the agreement respondent paid petitioner a down
payment of P30,000.00 and an installment payment of P15,000.00, leaving
a balance of P15,000.00.
On 14 March 1988, due to the refusal and failure of respondent to pay the
balance, petitioner filed a complaint to collect the amount. In
his Answer before the trial court respondent denied the claim saying that
he had already paid this amount to the San Pedro General Merchandising
Inc. (SPGMI) which constructed the deep well to which the windmill system
was to be connected. According to respondent, since the deep well formed
part of the system the payment he tendered to SPGMI should be credited
to his account by petitioner. Moreover, assuming that he owed petitioner a
balance of P15,000.00, this should be offset by the defects in the windmill
system which caused the structure to collapse after a strong wind hit their
place.1
Petitioner denied that the construction of a deep well was included in the
agreement to build the windmill system, for the contract price of
P60,000.00 was solely for the windmill assembly and its installation,
exclusive of other incidental materials needed for the project. He also
disowned any obligation to repair or reconstruct the system and insisted
that he delivered it in good and working condition to respondent who
50
accepted the same without protest. Besides, its collapse was attributable
to a typhoon, a force majeure, which relieved him of any liability.
In finding for plaintiff, the trial court held that the construction of the deep
well was not part of the windmill project as evidenced clearly by the letter
proposals submitted by petitioner to respondent. 2 It noted that "[i]f the
intention of the parties is to include the construction of the deep well in
the project, the same should be stated in the proposals. In the absence of
such an agreement, it could be safely concluded that the construction of
the deep well is not a part of the project undertaken by the plaintiff." 3 With
respect to the repair of the windmill, the trial court found that "there is no
clear and convincing proof that the windmill system fell down due to the
defect of the construction."4
The Court of Appeals reversed the trial court. It ruled that the construction
of the deep well was included in the agreement of the parties because the
term "deep well" was mentioned in both proposals. It also gave credence
to the testimony of respondent's witness Guillermo Pili, the proprietor of
SPGMI which installed the deep well, that petitioner Tanguilig told him that
the cost of constructing the deep well would be deducted from the
contract price of P60,000.00. Upon these premises the appellate court
concluded that respondent's payment of P15,000.00 to SPGMI should be
applied to his remaining balance with petitioner thus effectively
extinguishing his contractual obligation. However, it rejected petitioner's
claim of  force majeure and ordered the latter to reconstruct the windmill
in accordance with the stipulated one-year guaranty.
His motion for reconsideration having been denied by the Court of
Appeals, petitioner now seeks relief from this Court. He raises two
issues:  firstly, whether the agreement to construct the windmill system
included the installation of a deep well and, secondly, whether petitioner is
under obligation to reconstruct the windmill after it collapsed.
We reverse the appellate court on the first issue but sustain it on the
second.

The preponderance of evidence supports the finding of the trial court that
the installation of a deep well was not included in the proposals of
petitioner to construct a windmill system for respondent. There were in
fact two (2) proposals: one dated 19 May 1987 which pegged the contract
price at P87,000.00 (Exh. "1"). This was rejected by respondent. The other
was submitted three days later, i.e., on 22 May 1987 which contained more
specifications but proposed a lower contract price of P60,000.00 (Exh. "A").
The latter proposal was accepted by respondent and the construction
immediately followed. The pertinent portions of the first letter-proposal
(Exh. "1") are reproduced hereunder —
In connection with your Windmill System and Installation, we would like to
quote to you as follows:
One (1) Set — Windmill suitable for 2 inches diameter deepwell, 2 HP,
capacity, 14 feet in diameter, with 20 pieces blade, Tower 40 feet high,
including mechanism which is not advisable to operate during extra-
intensity wind. Excluding cylinder pump.
UNIT CONTRACT PRICE P87,000.00
The second letter-proposal (Exh. "A") provides as follows:
In connection with your Windmill system, Supply of Labor Materials and
Installation, operated water pump, we would like to quote to you as
follows —
One (1) set — Windmill assembly for 2 inches or 3 inches deep-well pump,
6 Stroke, 14 feet diameter, 1-lot blade materials, 40 feet Tower complete
with standard appurtenances up to Cylinder pump, shafting U.S. adjustable
International Metal.
One (1) lot — Angle bar, G.I. pipe, Reducer Coupling, Elbow Gate valve,
cross Tee coupling.
One (1) lot — Float valve.
One (1) lot — Concreting materials foundation.
51
F. O. B. Laguna
Contract Price P60,000.00
Notably, nowhere in either proposal is the installation of a deep well
mentioned, even remotely. Neither is there an itemization or description of
the materials to be used in constructing the deep well. There is absolutely
no mention in the two (2) documents that a deep well pump is a
component of the proposed windmill system. The contract prices fixed in
both proposals cover only the features specifically described therein and
no other. While the words "deep well" and "deep well pump" are
mentioned in both, these do not indicate that a deep well is part of the
windmill system. They merely describe the type of deep well pump for
which the proposed windmill would be suitable. As correctly pointed out
by petitioner, the words "deep well" preceded by the prepositions "for"
and "suitable for" were meant only to convey the idea that the proposed
windmill would be appropriate for a deep well pump with a diameter of 2
to 3 inches. For if the real intent of petitioner was to include a deep well in
the agreement to construct a windmill, he would have used instead the
conjunctions "and" or "with." Since the terms of the instruments are clear
and leave no doubt as to their meaning they should not be disturbed.
Moreover, it is a cardinal rule in the interpretation of contracts that the
intention of the parties shall be accorded primordial consideration 5 and, in
case
of doubt, their contemporaneous and subsequent acts shall be principally
considered.6 An examination of such contemporaneous and subsequent
acts of respondent as well as the attendant circumstances does not
persuade us to uphold him.
Respondent insists that petitioner verbally agreed that the contract price
of P60,000.00 covered the installation of a deep well pump. He contends
that since petitioner did not have the capacity to install the pump the latter
agreed to have a third party do the work the cost of which was to be
deducted from the contract price. To prove his point, he presented
Guillermo Pili of SPGMI who declared that petitioner Tanguilig approached
him with a letter from respondent Herce Jr. asking him to build a deep well

pump as "part of the price/contract which Engineer (Herce) had with Mr.
Tanguilig."7
We are disinclined to accept the version of respondent. The claim of Pili
that Herce Jr. wrote him a letter is unsubstantiated. The alleged letter was
never presented in court by private respondent for reasons known only to
him. But granting that this written communication existed, it could not
have simply contained a request for Pili to install a deep well; it would have
also mentioned the party who would pay for the undertaking. It strains
credulity that respondent would keep silent on this matter and leave it all
to petitioner Tanguilig to verbally convey to Pili that the deep well was part
of the windmill construction and that its payment would come from the
contract price of P60,000.00.
We find it also unusual that Pili would readily consent to build a deep well
the payment for which would come supposedly from the windmill contract
price on the mere representation of petitioner, whom he had never met
before, without a written commitment at least from the former. For if
indeed the deep well were part of the windmill project, the contract for its
installation would have been strictly a matter between petitioner and Pili
himself with the former assuming the obligation to pay the price. That it
was respondent Herce Jr. himself who paid for the deep well by handing
over to Pili the amount of P15,000.00 clearly indicates that the contract for
the deep well was not part of the windmill project but a separate
agreement between respondent and Pili. Besides, if the price of P60,000.00
included the deep well, the obligation of respondent was to pay the entire
amount to petitioner without prejudice to any action that Guillermo Pili or
SPGMI may take, if any, against the latter. Significantly, when asked why he
tendered payment directly to Pili and not to petitioner, respondent
explained, rather lamely, that he did it "because he has (sic) the money, so
(he) just paid the money in his possession." 8
Can respondent claim that Pili accepted his payment on behalf of
petitioner? No. While the law is clear that "payment shall be made to the
person in whose favor the obligation has been constituted, or his successor
52
in interest, or any person authorized to receive it," 9 it does not appear
from the record that Pili and/or SPGMI was so authorized.
Respondent cannot claim the benefit of the law concerning "payments
made by a third person."10 The Civil Code provisions do not apply in the
instant case because no creditor-debtor relationship between petitioner
and Guillermo Pili and/or SPGMI has been established regarding the
construction of the deep well. Specifically, witness Pili did not testify that
he entered into a contract with petitioner for the construction of
respondent's deep well. If SPGMI was really commissioned by petitioner to
construct the deep well, an agreement particularly to this effect should
have been entered into.
The contemporaneous and subsequent acts of the parties concerned
effectively belie respondent's assertions. These circumstances only show
that the construction of the well by SPGMI was for the sole account of
respondent and that petitioner merely supervised the installation of the
well because the windmill was to be connected to it. There is no legal nor
factual basis by which this Court can impose upon petitioner an obligation
he did not expressly assume nor ratify.
The second issue is not a novel one. In a long line of cases 11 this Court has
consistently held that in order for a party to claim exemption from liability
by reason of fortuitous event under Art. 1174 of the Civil Code the event
should be the sole and proximate cause of the loss or destruction of the
object of the contract. In Nakpil vs.  Court of Appeals,12 four (4) requisites
must concur: (a) the cause of the breach of the obligation must be
independent of the will of the debtor; (b) the event must be either
unforeseeable or unavoidable; (c) the event must be such as to render it
impossible for the debtor to fulfill his obligation in a normal manner; and,
(d) the debtor must be free from any participation in or aggravation of the
injury to the creditor.
Petitioner failed to show that the collapse of the windmill was due solely to
a fortuitous event. Interestingly, the evidence does not disclose that there
was actually a typhoon on the day the windmill collapsed. Petitioner
merely stated that there was a "strong wind." But a strong wind in this
 53

case cannot be fortuitous — unforeseeable nor unavoidable. On the

contrary, a strong wind should be present in places where windmills are
constructed, otherwise the windmills will not turn.

The appellate court correctly observed that "given the newly-constructed

windmill system, the same would not have collapsed had there been no
inherent defect in it which could only be attributable to the appellee." 13 It
emphasized that respondent had in his favor the presumption that "things
have happened according to the ordinary course of nature and the
ordinary habits of life."14 This presumption has not been rebutted by
petitioner.

Finally, petitioner's argument that private respondent was already in

default in the payment of his outstanding balance of P15,000.00 and hence
should bear his own loss, is untenable. In reciprocal obligations, neither
party incurs in delay if the other does not comply or is not ready to comply
in a proper manner with what is incumbent upon him. 15 When the windmill
failed to function properly it became incumbent upon petitioner to
institute the proper repairs in accordance with the guaranty stated in the
contract. Thus, respondent cannot be said to have incurred in delay;
instead, it is petitioner who should bear the expenses for the
reconstruction of the windmill. Article 1167 of the Civil Code is explicit on
this point that if a person obliged to do something fails to do it, the same
shall be executed at his cost.

WHEREFORE, the appealed decision is MODIFIED. Respondent VICENTE

HERCE JR. is directed to pay petitioner JACINTO M. TANGUILIG the balance
of P15,000.00 with interest at the legal rate from the date of the filing of
the complaint. In return, petitioner is ordered to "reconstruct subject
defective windmill system, in accordance with the one-year
guaranty"16 and to complete the same within three (3) months from the
finality of this decision.

SO ORDERED.

Padilla, Vitug, Kapunan and Hermosisima, Jr., JJ., concur.

G.R. No. 124922 June 22, 1998

JIMMY CO, doing business under the name & style DRAGON METAL
MANUFACTURING, petitioner,
vs.
COURT OF APPEALS and BROADWAY MOTOR SALES
CORPORATION, respondents.
MARTINEZ, J.:
On July 18, 1990, petitioner entrusted his Nissan pick-up car 1988
model 1 to private respondent — which is engaged in the sale,
distribution and repair of motor vehicles — for the following job repair
services and supply of parts:
— Bleed injection pump and all nozzles;
— Adjust valve tappet;
— Change oil and filter;
— Open up and service four wheel brakes, clean and adjust;
— Lubricate accelerator linkages;
— Replace aircon belt; and
— Replace battery 2
Private respondent undertook to return the vehicle on July 21, 1990 fully
serviced and supplied in accordance with the job contract. After
petitioner paid in full the repair bill in the amount of P1,397.00 3 private
respondent issued to him a gate pass for the release of the vehicle on
said date. But came July 21, 1990, the latter could not release the vehicle
as its battery was weak and was not yet replaced. Left with no option,
petitioner himself bought a new battery nearby and delivered it to
private respondent for installation on the same day. However, the
battery was not installed and the delivery of the car was rescheduled to
July 24, 1990 or three (3) days later. When petitioner sought to reclaim
54
his car in the afternoon of July 24, 1990, he was told that it was
carnapped earlier that morning while being road-tested by private
respondent's employee along Pedro Gil and Perez Streets in Paco,
Manila. Private respondent said that the incident was reported to the
police.
Having failed to recover his car and its accessories or the value thereof,
petitioner filed a suit for damages against private respondent anchoring
his claim on the latter's alleged negligence. For its part, private
respondent contended that it has no liability because the car was lost as
result of a fortuitous event — the carnapping. During pre-trial, the parties
agreed that:
(T)he cost of the Nissan Pick-up four (4) door when the plaintiff
purchased it from the defendent is P332,500.00 excluding accessories
which were installed in the vehicle by the plaintiff consisting of four (4)
brand new tires, magwheels, stereo speaker, amplifier which amount all
to P20,000.00. It is agreed that the vehicle was lost on July 24, 1990
"approximately two (2) years and five (5) months from the date of the
purchase." It was agreed that the plaintiff paid the defendant the cost of
service and repairs as early as July 21, 1990 in the amount of P1,397.00
which amount was received and duly receipted by the defendant
company. It was also agreed that the present value of a brand new
vehicle of the same type at this time is P425,000.00 without accessories. 4
They likewise agreed that the sole issue for trial was who between the
parties shall bear the loss of the vehicle which necessitates the resolution
of whether private respondent was indeed negligent. 5 After trial, the
court a quo found private respondent guilty of delay in the performance
of its obligation and held it liable to petitioner for the value of the lost
vehicle and its accessories plus interest and attorney's fees. 6 On appeal,
the Court of Appeals (CA) reversed the ruling of the lower court and
ordered the dismissal of petitioner's damage suit. 7 The CA ruled that: (1)
the trial court was limited to resolving the issue of negligence as agreed
during pre-trial; hence it cannot pass on the issue of delay; and (2) the
vehicle was lost due to a fortuitous event.

In a petition for review to this Court, the principal query raised is
whether a repair shop can be held liable for the loss of a customer's
vehicle while the same is in its custody for repair or other job services?
The Court resolves the query in favor of the customer. First, on the
technical aspect involved. Contrary to the CA' s pronouncement, the rule
that the determination of issues at a pre-trial conference bars the
consideration of other issues on appeal, except those that may involve
privilege or impeaching matter, 8 is inapplicable to this case. The question
of delay, though not specifically mentioned as an issue at the pre-trial
may be tackled by the court considering that it is necessarily intertwined
and intimately connected with the principal issue agreed upon by the
parties, i.e., who will bear the loss and whether there was negligence.
Petitioner's imputation of negligence to private respondent is premised
on delay which is the very basis of the former's complaint. Thus, it was
unavoidable for the court to resolve the case, particularly the question of
negligence without considering whether private respondent was guilty of
delay in the performance of its obligation.
On the merits. It is a not defense for a repair shop of motor vehicles to
escape liability simply because the damage or loss of a thing lawfully
placed in its possession was due to carnapping. Carnapping  per se cannot
be considered as a fortuitous event. The fact that a thing was unlawfully
and forcefully taken from another's rightful possession, as in cases of
carnapping, does not automatically give rise to a fortuitous event. To be
considered as such, carnapping entails more than the mere forceful
taking of another's property. It must be proved and established that the
event was an act of God or was done solely by third parties and that
neither the claimant nor the person alleged to be negligent has any
participation. 9 In accordance with the Rules of evidence, the burden of
proving that the loss was due to a fortuitous event rests on him who
invokes it 10 — which in this case is the private respondent. However,
other than the police report of the alleged carnapping incident, no other
evidence was presented by private respondent to the effect that the
incident was not due to its fault. A police report of an alleged crime, to
which only private respondent is privy, does not suffice to establish the
55
carnapping. Neither does it prove that there was no fault on the part of
private respondent notwithstanding the parties' agreement at the pre-
trial that the car was carnapped. Carnapping does not foreclose the
pissibility of fault or negligence on the part of private respondent.
Even assuming arguendo that carnapping was duly established as a
fortuitous event, still private respondent cannot escape liability. Article
1165 11 of the New Civil Code makes an obligor who is guilty of delay
responsible even for a fortuitous event until he has effected the delivery.
In this case, private respondent was already in delay as it was supposed
to deliver petitioner's car three (3) days before it was lost. Petitioner's
agreement to the rescheduled delivery does not defeat his claim as
private respondent had already breached its obligation. Moreover, such
accession cannot be construed as waiver of petitioner's right to hold
private respondent liable because the car was unusable and thus,
petitioner had no option but to leave it.
Assuming further that there was no delay, still working against private
respondent is the legal presumption under Article 1265 that its
possession of the thing at the time it was lost was due to its fault. 12 This
presumption is reasonable since he who has the custody and care of the
thing can easily explain the circumstances of the loss. The vehicle owner
has no duty to show that the repair shop was at fault. All that petitioner
needs to prove, as claimant, is the simple fact that private respondent
was in possession of the vehicle at the time it was lost. In this case,
private respondent's possession at the time of the loss is undisputed.
Consequently, the burden shifts to the possessor who needs to present
controverting evidence sufficient enough to overcome that presumption.
Moreover, the exempting circumstances — earthquake, flood, storm or
other natural calamity — when the presumption of fault is not
applicable 13 do not concur in this case. Accordingly, having failed to rebut
the presumption and since the case does not fall under the exceptions,
private respondent is answerable for the loss.
It must likewise be emphasized that pursuant to Articles 1174 and 1262
of the New Civil Code, liability attaches even if the loss was due to a

fortuitous event if "the nature of the obligation requires the assumption
of risk". 14 Carnapping is a normal business risk for those engaged in the
repair of motor vehicles. For just as the owner is exposed to that risk so is
the repair shop since the car was entrusted to it. That is why, repair
shops are required to first register with the Department of Trade and
Industry (DTI) 15 and to secure an insurance policy for the "shop covering
the property entrusted by its customer for repair, service or
maintenance" as a pre-requisite for such
registration/accreditation.16 Violation of this statutory duty constitutes
negligence  per se.17 Having taken custody of the vehicle private
respondent is obliged not only to repair the vehicle but must also provide
the customer with some form of security for his property over which he
loses immediate control. An owner who cannot exercise the seven
(7)  juses or attributes of ownership — the right to possess, to use and
enjoy, to abuse or consume, to accessories, to dispose or alienate, to
recover or vindicate and to the fruits — 18 is a crippled owner. Failure of
the repair shop to provide security to a motor vehicle owner would leave
the latter at the mercy of the former. Moreover, on the assumption that
private respondent's repair business is duly registered, it presupposes
that its shop is covered by insurance from which it may recover the loss.
If private respondent can recover from its insurer, then it would be
unjustly enriched if it will not compensate petitioner to whom no fault
can be attributed. Otherwise, if the shop is not registered, then the
presumption of negligence applies.
One last thing. With respect to the value of the lost vehicle and its
accessories for which the repair shop is liable, it should be based on the
fair market value that the property would command at the time it was
entrusted to it or such other value as agreed upon by the parties
subsequent to the loss. Such recoverable value is fair and reasonable
considering that the value of the vehicle depreciates. This value may be
recovered without prejudice to such other damages that a claimant is
entitled under applicable laws.
56
WHEREFORE, premises considered, the decision of the Court Appeals is
REVERSED and SET ASIDE and the decision of the court a quo is
REINSTATED.
SO ORDERED.
Regalado, Puno and Mendoza, JJ., concur.
Melo, J., is on leave.
Footnotes
1 Registered in the name of petitioner with Plate No. PJK-666.
2 Rollo, p. 81.
3 Covered by CBC Receipt No. 691148; Rollo, p. 10.
4 Rollo, pp. 28-29.
5 Rollo, p. 29.
6 The dispositive portion of the trial court's decision reads:
"Accordingly, this Court finds the defendant liable to the plaintiff for the
value of the vehicle in question. Defendant is ordered to pay plaintiff the
value of the vehicle in the amount of Three Hundred Thirty Two
Thousand Five Hundred Pesos representing the acquisition cost of the
vehicle plus the amount of Twenty Thousand Pesos representing the cost
of the four brand new tires, magwheels, pioneer stereo speakers, air-
conditioner, which were installed by the plaintiff in his vehicle after the
plaintiff bought the vehicle from the defendant. While it is true that
plaintiff purchased from the defendant the vehicle about two years and
five months before the same was lost, and therefore the vehicle had
already depreciated from its original value at the time it was lost, it is
also true as agreed upon by the parties in the pre-trial, that the present
value of brand new vehicle of the same type has at this time increased to
Four Hundred Thousand Pesos without accessories, so whatever is
awarded by this Court to the plaintiff in this decision would not even be

sufficient to purcahse a brand new vehicle at the present prices. This
Court believes that the amount awarded to the plaintiff above-stated
represents a fair compromise, considering the depreciation of the vehicle
from the time it was purchased and to the time it was lost and which is
off-seted by the increase cost of a brand new vehicle at the present time.
Defendant is likewise ordered to pay plaintiff legal interest in the amount
above-stated from the date of the finality of this decision until full
payment of the obligation. Further, defendant is ordered to pay plaintiff
Ten Thousand Pesos by attorney's fees." (sic was not included so as no to
clutter the narration); Rollo, pp. 78, 94.
7 CA Decision promulgated August 31, 1995 penned by Justice Austria-
Martinez with Justices Lantin and Salas, concurring; Rollo, pp. 26-32.
8 Caltex v. CA, 212 SCRA 448; Bergado v. CA, 173 SCRA
497 citing Permanent Concrete Products, Inc. v. Teodoro, 26 SCRA 332. In
the Bergado case (p. 501), the court reiterated the rule that the specific
exceptions to the general rule to be observed in pre-trials emphasized in
Gicano v. Gegato, 157 SCRA 140 is "that trial court have authority and
discretion to dismiss an action on the ground of prescription when the
parties' pleadings or other facts on record show it to be indeed time-
barred; and it may do so on the basis of a motion to dismiss, or an
answer which sets up such ground as an affirmative defense; or even if
the ground is alleged after judgment on the merits, as in a motion for
reconsideration; or even if the defense has not been asserted at all, as
where no statement thereof is found in the pleadings, or where a
defendant had been declared in default. What is essential only, to repeat,
is that the facts demonstrating the lapse of the prescriptive period, be
otherwise sufficiently and satisfactorily apparent on the record; either in
the averments of the plaintiff's, or otherwise established by the
evidence."
9 Lasam v. Smith, 45 Phil. 657; General Enterprises, Inc., v. Llianga Bay
Logging Co., Inc., 120 Phil. 702; Tugade v. CA, 85 SCRA 226.
10 Sec. 1, Rule 131, 1989 Revised Rules on Evidence provides: "Burden of
proof. — Burden of proof is the duty of a party to present evidence on he
57
facts in issue necessary to establish his claim or defense by the amount of
evidence required by law." (Emphasis supplied).
11 Art. 1165. xxx xxx xxx
If the obligor delays, or has promised to deliver the same thing to two or
more persons who do not have the same interest, he shall be responsible
for fortuitous event until he has effected the delivery. (Emphasis
supplied).
12 Art. 1265. Whenever the thing is lost in the possession of the debtor, it
shall be presumed that the loss was due to his fault, unless there is proof
to the contrary, and without prejudice to the provisions of Article 1165.
This presumption does not apply in case of earthquake, flood, storm, or
other natural calamity. (Emphasis supplie).
13 New Civil Code, Article 1265.
14 Article 1174. Except in cases expressly specified by the law, or when it
is otherwise declared by stipulation, or when the nature of the obligation
requires the assumption of risk, no person shall be responsible for those
events which could not be foreseen, or which, though foreseen, were
inevitable.
Art. 1262. xxx xxx xxx
When by law or stipulation, the obligor is liable even for fortuitous event,
the loss of the thing does not extinguish the obligation, and he shall be
responsible for damages. The same rule applies when the nature of the
obligation requires the assumption of risk. (Emphasis supplied).
15 P.D. 1572 (EMPOWERING THE SECRETARY OF TRADE TO REGULATE
AND CONTROL THE OPERATION OF SERVICE AND REPAIR ENTERPRISES
FOR MOTOR VEHICLES, HEAVY EQUIPMENT AND ENGINES AND
ENGINEERING WORKS; ELECTRONICS, ELECTRICAL, AIRCONDITIONING
AND REFRIGERATION; OFFICE EQUIPMENT; MEDICAL AND DENTAL
EQUIPMENT; AND OTHER CONSUMER MECHANICAL AND INDUSTRIAL

EQUIPMENT; APPLIANCES OR DEVICES, INCLUDING THE TECHNICAL
PERSONNEL EMPLOYED THEREIN).
Section 1. Accreditation. All enterprises and technical personnel
employed therein engaged in the service and repair of motor vehicles,
heavy equipment, engines and engineering works; electronics, electrical,
air-conditioning and refrigeration; office equipment; medical and dental
equipment; and other consumer industrial electro-mechanical, chemical
and gaseous equipment, machinery, appliances or devices should apply
for accreditation with the Department of Trade within ninety (90) days
from the promulgation of this decree and should apply for renewal on or
before the 31st day of January of every year thereafter. No such service
or repair enterprices and technical personnel shall be licensed or
permitted to operate in the Philippines for the first time without being
accredited by the Department of Trade.
16 DTI Ministry Order No. 32, Rule III
Sec. 1. REQUIREMENTS FOR ACCREDITATION:
(1) Enterprise applying for original accreditation shall submit the
following:
1.1 List of machineries/equipment/tools in useful condition;
1.2 List of certified engineers/accredited technicians mechanics with their
personal data;
1.3 Copy of Insurance Policy of the shop covering the property entrusted
by its customer for repair, service or maintenance together with a copy of
the official receipt covering the full payment of premium;
1.4 Copy of Bond referred to under Section 7, Rule III of this Rules and
Regulations;
1.5 Written service warranty in the form prescribed by the Bureau;
58
1.6 Certification issued by the Securities and Exchange Commission and
Articles of Incorporation or Partnership in case of corporation or
partnership;
1.7 Such other additional documents which the director may require
from time to time.
Sec. 8. INSURANCE POLICY
The insurance policy for the following risks like theft, pilferage, fire, flood
and loss should cover exclusively the machines, motor vehicles, heavy
equipment engines electronics, electrical, airconditioners, refrigerators,
office machines, and data processing equipment, medical and dental
equipment, other consumer mechanical and industrial equipment stored
for repair and/or in the premises of the applicant." (Emphasis supplied).
17 Cipriano v. CA, 263 SCRA 711 citing F.F. Cruz and Co., Inc. v. CA, 164
SCRA 731 and Teague v. Fernandez, 51 SCRA 181.
18 Paras, Civil Code of the Philippines, Annotated, 1989 ed., vol. II, p. 70;
De Leon, Comments and Cases on Property, 1983 ed. p. 77; See
also Article 428 of the New Civil Code which states that "The owner has
the right to enjoy and dispose of a thing, without other limitations than
those established by law.
"The owner has also a right of action against the holder and possessor of
the thing in order to recover it."