POLIAND INDUSTRIAL LIMITED, petitioner, vs.

NATIONAL DEVELOPMENT COMPANY, DEVELOPMENT BANK OF THE PHILIPPINES, and THE HONORABLE COURT OF APPEALS (Fourteenth Division) respondents.

ANTECEDENTS The following factual antecedents are matters of record. Between October 1979 and March 1981, Asian Hardwood Limited (Asian Hardwood), a Hong Kong corporation, extended credit accommodations in favor of GALLEON totaling US$3,317,747.32. [2] At that time, GALLEON, a domestic corporation organized in 1977 and headed by its president, Roberto Cuenca, was engaged in the maritime transport of goods. The advances were utilized to augment GALLEONs working capital depleted as a result of the purchase of five new vessels and two second-hand vessels in 1979 and competitiveness of the shipping industry. GALLEON had incurred an obligation in the total amount of US$3,391,084.91 in favor of Asian Hardwood. To finance the acquisition of the vessels, GALLEON obtained loans from Japanese lenders, namely, Taiyo Kobe Bank, Ltd., Mitsui Bank Ltd. and Marubeni Benelux. On October 10, 1979, GALLEON, through Cuenca, and DBP executed a Deed of Undertaking[3] whereby DBP guaranteed the prompt and punctual payment of GALLEONs borrowings from the Japanese lenders. To secure DBPs guarantee under the Deed of Undertaking, GALLEON promised, among others, to secure a first mortgage on the five new vessels and on the second-hand vessels. Thus, GALLEON executed on January 25, 1982 a mortgage contract over five of its vessels namely, M/V Galleon Honor, M/V Galleon Integrity, M/V Galleon Dignity, M/V Galleon Pride, and M/V Galleon Trust in favor of DBP.[4] Meanwhile, on January 21, 1981, President Ferdinand Marcos issued Letter of Instruction (LOI) No. 1155, directing NDC to acquire the entire shareholdings of GALLEON for the amount originally contributed by its shareholders payable in five (5) years without interest cost to the government. In the same LOI, DBP was to advance to GALLEON within three years from its effectivity the principal amount and the interest thereon of GALLEONs maturing obligations. On August 10, 1981, GALLEON, represented by its president, Cuenca, and NDC, represented by Minister of Trade Roberto

[G.R. No. 143877. August 22, 2005]

NATIONAL DEVELOPMENT COMPANY, petitioner, vs. POLIAND INDUSTRIAL LIMITED, respondent. DECISION TINGA, J.: Before this Court are two Rule 45 consolidated petitions for review seeking the review of the Decision[1] of the Court of Appeals (Fourth Division) in CA-G.R. CV No. 53257, which modified the Decision of the Regional Trial Court, Branch 61, Makati City in Civil Case No. 91-2798. Upon motion of the Development Bank of the Philippines (DBP), the two petitions were consolidated since both assail the same Decision of the Court of Appeals. In G.R. No. 143866, petitioner Poliand Industrial Limited (POLIAND) seeks judgment declaring the National Development Company (NDC) and the DBP solidarily liable in the amount of US$2,315,747.32, representing the maritime lien in favor of POLIAND and the net amount of loans incurred by Galleon Shipping Corporation (GALLEON). It also prays that NDC and DBP be ordered to pay the attorneys fees and costs of the proceedings as solidary debtors. In G.R. No. 143877, petitioner NDC seeks the reversal of the Court of Appeals Decision ordering it to pay POLIAND the amount of One Million Nine Hundred Twenty Thousand Two Hundred Ninety-Eight and 56/100 United States Dollars (US$1,920,298.56), corresponding to the maritime lien in favor of POLIAND, plus interest.

Ongpin, forged a Memorandum of Agreement,[5] whereby NDC and GALLEON agreed to execute a share purchase agreement within sixty days for the transfer of GALLEONs shareholdings. Thereafter, NDC assumed the management and operations of GALLEON although Cuenca remained president until May 9, 1982.[6] Using its own funds, NDC paid Asian Hardwood on January 15, 1982 the amount of US$1,000,000.00 as partial settlement of GALLEONs obligations.[7] On February 10, 1982, LOI No. 1195 was issued directing the foreclosure of the mortgage on the five vessels. For failure of GALLEON to pay its debt despite repeated demands from DBP, the vessels were extrajudicially foreclosed on various dates and acquired by DBP for the total amount of P539,000,000.00. DBP subsequently sold the vessels to NDC for the same amount.[8] On April 22, 1982, the Board of Directors of GALLEON amended the Articles of Incorporation changing the corporate name from Galleon Shipping Corporation to National Galleon Shipping Corporation and increasing the number of directors from seven to nine.[9] Asian Hardwood assigned its rights over the outstanding obligation of GALLEON of US$2,315,747.32 to World Universal Trading and Investment Company, S.A. (World Universal), embodied in a Deed of Assignment executed on April 29, 1989.[10] World Universal, in turn, assigned the credit to petitioner POLIAND sometime in July 1989.[11] On March 24, 1988, then President Aquino issued Administrative Order No. 64, directing NDC and Philippine Export and Foreign Loan Guarantee Corporation (now Trade and Investment Development Corporation of the Philippines) to transfer some of their assets to the National Government, through the Asset Privatization Trust (APT) for disposition. Among those transferred to the APT were the five GALLEON vessels sold at the foreclosure proceedings. On September 24, 1991, POLIAND made written demands on GALLEON, NDC, and DBP for the satisfaction of the outstanding balance in the amount of US$2,315,747.32.[12] For failure to heed the demand, POLIAND instituted a collection suit against NDC, DBP and

GALLEON filed on October 10, 1991 with the Regional Trial Court, Branch 61, Makati City. POLIAND claimed that under LOI No. 1155 and the Memorandum of Agreement between GALLEON and NDC, defendants GALLEON, NDC, and DBP were solidarily liable to POLIAND as assignee of the rights of the credit advances/loan accommodations to GALLEON. POLIAND also claimed that it had a preferred maritime lien over the proceeds of the extrajudicial foreclosure sale of GALLEONs vessels mortgaged by NDC to DBP. The complaint prayed for judgment ordering NDC, DBP, and GALLEON to pay POLIAND jointly and severally the balance of the credit advances/loan accommodations in the amount of US$2,315,747.32 and attorneys fees of P100,000.00 plus 20% of the amount recovered. By way of an alternative cause of action, POLIAND sought reimbursement from NDC and DBP for the preferred maritime lien of US$1,193,298.56.[13] In its Answer with Compulsory Counterclaim and Cross-claim, DBP denied being a party to any of the alleged loan transactions. Accordingly, DBP argued that POLIANDs complaint stated no cause of action against DBP or was barred by the Statute of Frauds because DBP did not sign any memorandum to act as guarantor for the alleged credit advances/loan accommodations in favor of POLIAND. DBP also denied any liability under LOI No. 1155, which it described as immoral and unconstitutional, since it was rescinded by LOI No. 1195. By way of its Affirmative Allegations and Defenses, DBP countered that it was unaware of the maritime lien on the five vessels mortgaged in its favor and that as far as GALLEONs foreign borrowings are concerned, DBP agreed to act as guarantor thereof only under the conditions laid down under the Deed of Undertaking. DBP prayed for the award of actual, moral and exemplary damages and attorneys fees against POLIAND as compulsory counterclaim. In the event that it be adjudged liable for the payment of the loan accommodations and the maritime liens, DBP prayed that its codefendant GALLEON be ordered to indemnify DBP for the full amount.[14] For its part, NDC denied any participation in the execution of the loan accommodations/credit advances and acquisition of ownership of GALLEON, asserting that it acted only as manager of GALLEON. NDC specifically denied having agreed to the assumption of GALLEONs liabilities because no purchase and sale agreement was

executed and the delivery of the required shares of stock of GALLEON did not take place.[15] Upon motion by POLIAND, the trial court dropped GALLEON as a defendant, despite vigorous oppositions from NDC and DBP. At the pre-trial conference on April 29, 1993, the trial court issued an Order limiting the issues to the following: (1) whether or not GALLEON has an outstanding obligation in the amount of US$2,315,747.32; (2) whether or not NDC and DBP may be held solidarily liable therefor; and (3) whether or not there exists a preferred maritime lien of P1,000,000.00 in favor of POLIAND.[16] After trial on the merits, the court a quo rendered a decision on August 9, 1996 in favor of POLIAND. Finding that GALLEONs loan advances/credit accommodations were duly established by the evidence on record, the trial court concluded that under LOI No. 1155, DBP and NDC are liable for those obligations. The trial court also found NDC liable for GALLEONs obligations based on the Memorandum of Agreement dated August 1981 executed between GALLEON and NDC, where it was provided that NDC shall prioritize repayments of GALLEONs valid and subsisting liabilities subject of a meritorious lawsuit or which have been arranged and guaranteed by Cuenca. The trial court was of the opinion that despite the subsequent issuance of LOI No. 1195, NDC and DBPs obligation under LOI No. 1155 subsisted because vested rights of the parties have arisen therefrom. Accordingly, the trial court interpreted LOI No. 1195s directive to limit and protect to mean that DBP and NDC should not assume or incur additional exposure with respect to GALLEON.[17] The trial court dismissed NDCs argument that the Memorandum of Agreement was merely a preliminary agreement, noting that under paragraph nine thereof, the only condition for the payment of GALLEONs subsisting loans by NDC was the determination by the latter that those obligations were incurred in the ordinary course of GALLEONs business. The trial court did not regard the non-execution of the stock purchase agreement as fatal to POLIANDs cause since its non-happening was solely attributable to NDC. The trial court also ruled that POLIAND had preference to the maritime lien over the proceeds of the extrajudicial foreclosure sale of GALLEONs vessels since the

loan advances/credit accommodations utilized for the payment of expenses on the vessels were obtained prior to the constitution of the mortgage in favor of DBP. In sum, NDC and DBP were ordered to pay POLIAND as follows: WHEREFORE, premises above considered, judgment is hereby rendered for plaintiff as against defendants DBP and NDC, who are hereby ORDERED as follows: 1. To jointly and severally PAY plaintiff POLIAND the amount of TWO MILLION THREE HUNDRED FIFTEEN THOUSAND SEVEN HUNDRED FORTY SEVEN AND 21/100 [sic] United States Dollars (US$2,315,747.32) computed at the official exchange rate at the time of payment, plus interest at the rate of 12% per annum from 25 September 1991 until fully paid; 2. To PAY the amount of ONE MILLION (P1,000,000.) Pesos, Philippine Currency, for and as attorneys fees; and 3. To PAY the costs of the proceedings.

SO ORDERED.[18] Both NDC and DBP appealed the trial courts decision. The Court of Appeals rendered a modified judgment, absolving DBP of any liability in view of POLIANDs failure to clearly prove its action against DBP. The appellate court also discharged NDC of any liability arising from the credit advances/loan obligations obtained by GALLEON on the ground that NDC did not acquire ownership of GALLEON but merely assumed control over its management and operations. However, NDC was held liable to POLIAND for the payment of the preferred maritime lien based on LOI No. 1195 which directed NDC to discharge such maritime liens as may be necessary to allow the foreclosed vessels to engage on the international shipping business, as well as attorneys fees and costs of suit. The dispositive portion of the Decisionreads:

WHEREFORE, the assailed decision is MODIFIED, in accordance with the foregoing findings, as follows: The case against defendant-appellant DBP is hereby DISMISSED. Defendant-appellant NDC is hereby ordered to pay plaintiff-appellee POLIAND the amount of US$1,920,298.56 plus legal interest effective September 12, 1984. The award of attorneys fees and cost of suit is addressed only against NDC. Costs against defendant-appellant NDC. SO ORDERED.
[19]

GALLEON CARRIED WITH IT THE ASSUMPTION OF THE LATTERS LIABILITIES TO THIRD PARTIES SUCH AS ASIAN HARDWOOD, PETITIONER POLIANDS PREDECESSOR-ININTEREST. B. RESPONDENT COURT OF APPEALS, IN VIOLATION OF THE CONSTITUTION AND THE RULES OF COURT, DISMISSED THE CASE AGAINST RESPONDENT DBP WITHOUT STATING CLEARLY AND DISTINCTLY THE REASONS FOR SUCH A DISMISSAL. C. CONTRARY TO THE FINDINGS OF RESPONDENT COURT OF APPEALS, PETITIONER POLIAND WAS ABLE TO ESTABLISH THAT RESPONDENT DBP IS SOLIDARILY LIABLE, TOGETHER WITH RESPONDENT NDC, WITH RESPECT TO THE NET TOTAL AMOUNT OWING TO PETITIONER POLIAND. D. RESPONDENT COURT OF APPEALS GRAVELY ERRED ALSO IN NOT FINDING THAT RESPONDENT DBP IS JOINTLY AND SOLIDARILY LIABLE WITH RESPONDENT NDC FOR THE PAYMENT OF MARITIME LIENS PLUS INTEREST PURSUANT TO SECTION 17 OF PRESIDENTIAL DECREEE 1521.[20] On August 25, 2000, NDC filed its petition, docketed as G.R. No. 143877, imputing the following errors to the Court of Appeals: I. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER NDC IS LIABLE TO PAY GALLEONS OUTSTANDING OBLIGATION TO RESPONDENT POLIAND IN THE AMOUNT OF US$ 1,920,298.56, TO SATISFY THE

Not satisfied with the modified judgment, both POLIAND and NDC elevated it to this Court via two separate petitions for review on certiorari. In G.R. No. 143866 filed on August 21, 2000, petitioner POLIAND raises the following arguments: RESPONDENT COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERRORS IN ITS QUESTIONED DECISION DATED 29 JUNE 2000 AND DECIDED QUESTIONS CONTRARY TO LAW AND THE APPLICABLE DECISIONS OF THE HONORABLE COURT WHEN IT MODIFIED THE DECISION DATED 09 AUGUST 1996 RENDERED BY THE REGIONAL TRIAL COURT (BRANCH 61) CONSIDERING THAT: A. CONTRARY TO THE FINDINGS OF RESPONDENT COURT OF APPEALS, RESPONDENT NDC NOT ONLY TOOK OVER TOTALLY THE MANAGEMENT AND CONTROL OF GALLEON BUT ALSO ASSUMED OWNERSHIP OF GALLEON PURSUANT TO LOI NO. 1155 AND THE MEMORANDUM OF AGREEMENT DATED 10 AUGUST 1981; THUS, RESPONDENT NDCS ACQUISITION OF FULL OWNERSHIP AND CONTROL OF

PREFERRED MARITIME LIENS OVER THE PROCEEDS OF THE FORECLOSURE SALE OF THE FIVE GALLEON VESSELS. (A) PRESIDENTIAL DECREE NO. 1521 OTHERWISE KNOWN AS THE SHIP MORTGAGE DECREE OF 1978 IS NOT APPLICABLE IN THE CASE AT BAR. (B) PETITIONER NDC DOES NOT HOLD THE PROCEEDS OF THE FORECLOSURE SALE OF THE FIVE (5) GALLEON VESSELS. (C) THE FORECLOSURE SALE OF THE FIVE (5) GALLEON VESSELS EXTINGUISHES ALL CLAIMS AGAINST THE VESSELS. II. THE COURT OF APPEALS ERRED IN AWARDING ATTORNEYS FEES TO RESPONDENT POLIAND.[21] The two petitions were consolidated considering that both petitions assail the same Court of Appeals Decision, although on different fronts. In G.R. No. 143866, POLIAND questions the appellate courts finding that neither NDC nor DBP can be held liable for the loan accommodations to GALLEON. In G.R. No. 143877, NDC asserts that it is not liable to POLIAND for the preferred maritime lien.

RULING of the COURT I. Liability on loan accommodations and credit advances incurred by GALLEON The Court of Appeals reversed the trial courts conclusion that NDC and DBP are both liable to POLIAND for GALLEONs debts on the basis of LOI No. 1155 and the Memorandum of Agreement. It ratiocinated thus: With respect to appellant NDC, resolution of the matters raised in its assignment of errors hinges on whether or not it acquired the shareholdings of GALLEON as directed by LOI 1155; and if in the negative, whether or not it is liable to pay GALLEONs outstanding obligation. The Court answers the issue in the negative. The MOA executed by GALLEON and NDC following the issuance of LOI 1155 called for the execution of a formal share purchase agreement and the transfer of all the shareholdings of seller to Buyer. Since no such execution and consequent transfer of shareholdings took place, NDC did not acquire ownership of GALLEON. It merely assumed actual control over the management and operations of GALLEON in the exercise of which it, on January 15, 1982, after being satisfied of the existence of GALLEONs obligation to ASIAN HARDWOOD, partially paid the latter One Million ($1,000,000.00) US dollars.[22] ....

ISSUES The bone of contention revolves around two main issues, namely: (1) Whether NDC or DBP or both are liable to POLIAND on the loan accommodations and credit advances incurred by GALLEON, and (2) Whether POLIAND has a maritime lien enforceable against NDC or DBP or both.

With respect to defendant-appellant DBP, POLIAND failed to clearly prove its cause of action against it. This leaves it unnecessary to dwell on DBPs other assigned errors, including that bearing on its claim for damages and attorneys fees which does not persuade.[23] POLIANDs cause of action against NDC is premised on the theory that when NDC acquired all the shareholdings of GALLEON, the former also assumed the latters liabilities, including the loan advances/credit accommodations obtained by GALLEON from POLIANDs predecessors-in-interest. In G.R. No. 143866, POLIAND

argues that NDC acquired ownership of GALLEON pursuant to paragraphs 1 and 2 of LOI No. 1155, which was implemented through the execution of the Memorandum of Agreement. It believes that no conditions were required prior to the assumption by NDC of GALLEONs ownership and subsisting loans. Even assuming that conditions were set, POLIAND opines that the conditions were deemed fulfilled pursuant to Article 1186 of the Civil Code because of NDCs apparent intent to prevent the execution of the share purchase agreement.[24] On the other hand, NDC asserts that it could not have acquired GALLEONs equity and, consequently, its liabilities because LOI No. 1155 had been rescinded by LOI No. 1195, and therefore, became inoperative and non-existent. Moreover, NDC, relying on the pronouncements in Philippine Association of Service Exporters, Inc. et al. v. Ruben D. Torres[25] and Parong, et al. v. Minister Enrile,[26] is of the opinion that LOI No. 1155 does not have the force and effect of law and cannot be a valid source of obligation.[27] NDC denies POLIANDs contention that it deliberately prevented the execution of the share purchase agreement considering that Cuenca remained GALLEONs president seven months after the signing of the Memorandum of Agreement.[28] NDC contends that the Memorandum of Agreement was a mere preliminary agreement between Cuenca and Ongpin for the intended purchase of GALLEONs equity, prescribing the manner, terms and conditions of said purchase.[29] NDC, not liable under LOI No. 1155 As a general rule, letters of instructions are simply directives of the President of the Philippines, issued in the exercise of his administrative power of control, to heads of departments and/or officers under the executive branch of the government for observance by the officials and/or employees thereof.[30] Being administrative in nature, they do not have the force and effect of a law and, thus, cannot be a valid source of obligation. However, during the period when then President Marcos exercised extraordinary legislative powers, he issued certain decrees, orders and letters of instruction which the Court has declared as having the force and effect of a statute. As pointed out by the Court in Legaspi v. Minister of Finance,[31] paramount considerations compelled the

grant of extraordinary legislative power to the President at that time when the nation was beset with threats to public order and the purpose for which the authority was granted was specific to meet the exigencies of that period, thus: True, without loss of time, President Marcos made it clear that there was no military take-over of the government, and that much less was there being established a revolutionary government, even as he declared that said martial law was of a double-barrelled type, unfamiliar to traditional constitutionalists and political scientistsfor two basic and transcendental objectives were intended by it: (1) the quelling of nation-wide subversive activities characteristic not only of a rebellion but of a state of war fanned by a foreign power of a different ideology from ours, and not excluding the stopping effectively of a brewing, if not a strong separatist movement in Mindanao, and (2) the establishment of a New Society by the institution of disciplinary measures designed to eradicate the deeprooted causes of the rebellion and elevate the standards of living, education and culture of our people, and most of all the social amelioration of the poor and underprivileged in the farms and in the barrios, to the end that hopefully insurgency may not rear its head in this country again.[32] Thus, before a letter of instruction is declared as having the force and effect of a statute, a determination of whether or not it was issued in response to the objectives stated in Legaspi is necessary. Parong, et al. v. Minister Enrile[33] differentiated between LOIs in the nature of mere administrative issuances and those forming part of the law of the land. The following conditions must be established before a letter of instruction may be considered a law: To form part of the law of the land, the decree, order or LOI must be issued by the President in the exercise of his extraordinary power of legislation as contemplated in Section 6 of the 1976 amendments to the Constitution, whenever in his judgment, there exists a grave emergency or threat or imminence thereof, or whenever the interim Batasan Pambansa or the regular National Assembly fails or is unable to act adequately on any matter for any reason that in his judgment requires immediate action.[34]

Only when issued under any of the two circumstances will a decree, order, or letter be qualified as having the force and effect of law. The decree or instruction should have been issued either when there existed a grave emergency or threat or imminence or when the Legislature failed or was unable to act adequately on the matter. The qualification that there exists a grave emergency or threat or imminence thereof must be interpreted to refer to the prevailing peace and order conditions because the particular purpose the President was authorized to assume legislative powers was to address the deteriorating peace and order situation during the martial law period. There is no doubt that LOI No. 1155 was issued on July 21, 1981 when then President Marcos was vested with extraordinary legislative powers. LOI No. 1155 was specifically directed to DBP, NDC and the Maritime Industry Authority to undertake the following tasks: LETTER OF INSTRUCTIONS NO. 1155 DEVELOPMENT BANK OF THE PHILIPPINES NATIONAL DEVELOPMENT COMPANY MARITIME INDUSTRY AUTHORITY DIRECTING A REHABILITATION PLAN FOR GALLEON SHIPPING CORPORATION .... 1. NDC shall acquire 100% of the shareholdings of Galleon Shipping Corporation from its present owners for the amount of P46.7 million which is the amount originally contributed by the present shareholders, payable after five years with no interest cost. 2. NDC to immediately infuse P30 million into Galleon Shipping Corporation in lieu of is previously approved subscription to Philippine National Lines. In addition, NDC is to provide additional equity to Galleon as may be required.

3. DBP to advance for a period of three years from date hereof both the principal and the interest on Galleon's obligations falling due and to convert such advances into 12% preferred shares in Galleon Shipping Corporation. 4. DBP and NDC to negotiate a restructuring of loans extended by foreign creditors of Galleon. 5. MARINA to provide assistance to Galleon by mandating a rational liner shipping schedule considering existing freight volumes and to immediately negotiate a bilateral agreement with the United States in accordance with UNCTAD resolutions. .... Although LOI No. 1155 was undoubtedly issued at the time when the President exercised legislative powers granted under Amendment No. 6 of the 1973 Constitution, the language and purpose of LOI No. 1155 precludes this Court from declaring that said LOI had the force and effect of law in the absence of any of the conditions set out in Parong. The subject matter of LOI No. 1155 is not connected, directly or remotely, to a grave emergency or threat to the peace and order situation of the nation in particular or to the public interest in general. Nothing in the language of LOI No. 1155 suggests that it was issued to address the security of the nation. Obviously, LOI No. 1155 was in the nature of a mere administrative issuance directed to NDC, DBP and MARINA to undertake a policy measure, that is, to rehabilitate a private corporation. NDC, not liable under the Corporation Code The Court cannot accept POLIANDs theory that with the effectivity of LOI No. 1155, NDC ipso facto acquired the interests in GALLEON without disregarding applicable statutory requirements governing the acquisition of a corporation. Ordinarily, in the merger of two or more existing corporations, one of the combining corporations survives and continues the combined business, while the rest are dissolved and all their rights, properties and liabilities are acquired by the surviving corporation.[35] The merger, however, does

not become effective upon the mere agreement of the constituent corporations.[36] As specifically provided under Section 79[37] of said Code, the merger shall only be effective upon the issuance of a certificate of merger by the Securities and Exchange Commission (SEC), subject to its prior determination that the merger is not inconsistent with the Code or existing laws. Where a party to the merger is a special corporation governed by its own charter, the Code particularly mandates that a favorable recommendation of the appropriate government agency should first be obtained. The issuance of the certificate of merger is crucial because not only does it bear out SECs approval but also marks the moment whereupon the consequences of a merger take place. By operation of law, upon the effectivity of the merger, the absorbed corporation ceases to exist but its rights, and properties as well as liabilities shall be taken and deemed transferred to and vested in the surviving corporation.[38] The records do not show SEC approval of the merger. POLIAND cannot assert that no conditions were required prior to the assumption by NDC of ownership of GALLEON and its subsisting loans. Compliance with the statutory requirements is a condition precedent to the effective transfer of the shareholdings in GALLEON to NDC. In directing NDC to acquire the shareholdings in GALLEON, the President could not have intended that the parties disregard the requirements of law. In the absence of SEC approval, there was no effective transfer of the shareholdings in GALLEON to NDC. Hence, NDC did not acquire the rights or interests of GALLEON, including its liabilities. DBP, not liable under LOI No. 1155 POLIAND argues that paragraph 3 of LOI No. 1155 unequivocally obliged DBP to advance the obligations of GALLEON. [39] DBP argues that POLIAND has no cause of action against it under LOI No. 1155 which is void and unconstitutional.[40] The Court affirms the appellate courts ruling that POLIAND does not have any cause of action against DBP under LOI No. 1155. Being a mere administrative issuance, LOI No. 1155 cannot be a valid source of obligation because it did not create any privity of contract between DBP and POLIAND or its predecessors-in-interest.

At best, the directive in LOI No. 1155 was in the nature of a grant of authority by the President on DBP to enter into certain transactions for the satisfaction of GALLEONs obligations. There is, however, nothing from the records of the case to indicate that DBP had acted as surety or guarantor, or had otherwise accommodated GALLEONs obligations to POLIAND or its predecessors-in-interest.

II.

Liability on maritime lien

On the second issue of whether or not NDC is liable to POLIAND for the payment of maritime lien, the appellate court ruled in the affirmative, to wit: Non-acquisition of ownership of GALLEON notwithstanding, NDC is liable to pay ASIAN HARDWOODs successor-in-interest POLIAND the equivalent of US$1,930,298.56 representing the proceeds of the loan from Asian Hardwood which were spent by GALLEON for ship modification and salaries of crew, to satisfy the preferred maritime liens over the proceeds of the foreclosure sale of the 5 vessels.[41] POLIAND contends that NDC can no longer raise the issue on the latters liability for the payment of the maritime lien considering that upon appeal to the Court of Appeals, NDC did not assign it as an error.[42] Generally, an appellate court may only pass upon errors assigned. However, this rule is not without exceptions. In the following instances, the Court ruled that an appellate court is accorded a broad discretionary power to waive the lack of assignment of errors and consider errors not assigned: (a) (b) Grounds not assigned as errors but affecting the jurisdiction of the court over the subject matter; Matters not assigned as errors on appeal but are evidently plain or clerical errors within contemplation of law; 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

(c)

serve the interests of a justice or to avoid dispensing piecemeal justice; (d) 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; Matters not assigned as errors on appeal but closely related to an error assigned; Matters not assigned as errors on appeal but upon which the determination of a question properly assigned, is dependent.[43]

Articles 578 and 580 of the Code of Commerce, not applicable NDC cites Articles 578[47] and 580[48] of the Code of Commerce to bolster its argument that the foreclosure of the vessels extinguished all claims against the vessels including POLIANDs claim.[49] Article 578 of the Code of Commerce is not relevant to the facts of the instant case because it governs the sale of vessels in a foreign port. Said provision outlines the formal and registration requirements in order that a sale of a vessel on voyage or in a foreign port becomes effective as against third persons. On the other hand, the resolution of the instant case depends on the determination as to which creditor is entitled to the proceeds of the foreclosure sale of the vessels. Clearly, Article 578 of the Code of Commerce is inapplicable. Article 580, while providing for the order of payment of creditors in the event of sale of a vessel, had been repealed by the pertinent provisions of Presidential Decree (P.D.) No. 1521, otherwise known as the Ship Mortgage Decree of 1978. In particular, Article 580 provides that in case of the judicial sale of a vessel for the payment of creditors, the debts shall be satisfied in the order specified therein. On the other hand, Section 17 of P.D. No. 1521[50] also provides that in the judicial or extrajudicial sale of a vessel for the enforcement of a preferred mortgage lien constituted in accordance with Section 2 of P.D. No. 1521, such preferred mortgage lien shall have priority over all pre-existing claims against the vessel, save for those claims enumerated under Section 17, which have preference over the preferred mortgage lien in the order stated therein. Since P.D. No. 1521 is a subsequent legislation and since said law in Section 17 thereof confers on the preferred mortgage lien on the vessel superiority over all other claims, thereby engendering an irreconcilable conflict with the order of preference provided under Article 580 of the Code of Commerce, it follows that the Code of Commerce provision is deemed repealed by the provision of P.D. No. 1521, as the posterior law.[51]

(e) (f)

It is noteworthy that the question of NDC and DBPs liability on the maritime lien had been raised by POLIAND as an alternative cause of action against NDC and DBP and was passed upon by the trial court. The Court of Appeals, however, reversed the trial courts finding that NDC and DBP are liable to POLIAND for the payment of the credit advances and loan accommodations and instead found NDC to be solely liable on the preferred maritime lien although NDC did not assign it as an error. The records, however, reveal that the issue on the liability on the preferred maritime lien had been properly raised and argued upon before the Court of Appeals not by NDC but by DBP who was also adjudged liable thereon by the trial court. DBPs appellants brief[44] pointed out POLIANDs failure to present convincing evidence to prove its alternative cause of action, which POLIAND disputed in its appellees brief.[45] The issue on the maritime lien is a matter of record having been adequately ventilated before and passed upon by the trial court and the appellate court. Thus, by way of exception, NDC is not precluded from again raising the issue before this Court even if it did not specifically assign the matter as an error before the Court of Appeals. Besides, this Court is clothed with ample authority to review matters, even if they are not assigned as errors in the appeal if it finds that their consideration is necessary in arriving at a just decision of the case.[46]

P.D. No. 1521 is applicable, not the

Civil Code provisions on concurrence/preference of credits Whether or not the order of preference under Section 17, P.D. No. 1521 may be properly applied in the instant case depends on the classification of the mortgage on the GALLEON vessels, that is, if it falls within the ambit of Section 2, P.D. No. 1521, defining how a preferred mortgage is constituted. NDC and DBP both argue that POLIANDs claim cannot prevail over DBPs mortgage credit over the foreclosed vessels because the mortgage executed in favor of DBP pursuant to the October 10, 1979 Deed of Undertaking signed by GALLEON and DBP was an ordinary ship mortgage and not a preferred one, that is, it was not given in connection with the construction, acquisition, purchase or initial operation of the vessels, but for the purpose of guaranteeing GALLEONs foreign borrowings.[52] Section 2 of P.D. No. 1521 recognizes the constitution of a mortgage on a vessel, to wit: SECTION 2. Who may Constitute a Ship Mortgage. Any citizen of the Philippines, or any association or corporation organized under the laws of the Philippines, at least sixty per cent of the capital of which is owned by citizens of the Philippines may, for the purpose of financing the construction, acquisition, purchase of vessels or initial operation of vessels, freely constitute a mortgage or any other lien or encumbrance on his or its vessels and its equipment with any bank or other financial institutions, domestic or foreign. If the mortgage on the vessel is constituted for the purpose stated under Section 2, the mortgage obtains a preferred status provided the formal requisites enumerated under Section 4[53] are complied with. Upon enforcement of the preferred mortgage and eventual foreclosure of the vessel, the proceeds of the sale shall be first applied to the claim of the mortgage creditor unless there are superior or preferential liens, as enumerated under Section 17, namely:

SECTION 17. Preferred Maritime Lien, Priorities, Other Liens. (a) Upon the sale of any mortgaged vessel in any extra-judicial sale or by order of a district court of the Philippines in any suit in rem in admiralty for the enforcement of a preferred mortgage lien thereon, all pre-existing claims in the vessel, including any possessory common-law lien of which a lienor is deprived under the provisions of Section 16 of this Decree, shall be held terminated and shall thereafter attach in like amount and in accordance with the priorities established herein to the proceeds of the sale. The preferred mortgage lien shall have priority over all claims against the vessel, except the following claims in the order stated: (1) expenses and fees allowed and costs taxed by the court and taxes due to the Government; (2) crew's wages; (3) general average; (4) salvage including contract salvage; (5) maritime liens arising prior in time to the recording of the preferred mortgage; (6) damages arising out of tort; and (7) preferred mortgage registered prior in time. (b) If the proceeds of the sale should not be sufficient to pay all creditors included in one number or grade, the residue shall be divided among them pro rata. All credits not paid, whether fully or partially shall subsist as ordinary credits enforceable by personal action against the debtor. The record of judicial sale or sale by public auction shall be recorded in the Record of Transfers and Encumbrances of Vessels in the port of documentation. (Emphasis supplied.) There is no question that the mortgage executed in favor of DBP is covered by P.D. No. 1521. Contrary to NDCs assertion, the mortgage constituted on GALLEONs vessels in favor of DBP may appropriately be characterized as a preferred mortgage under Section 2, P.D. No. 1521 because GALLEON constituted the same for the purpose of financing the construction, acquisition, purchase of vessels or initial operation of vessels. While it is correct that GALLEON executed the mortgage in consideration of DBPs guarantee of the prompt payment of GALLEONs obligations to the Japanese lenders, DBPs undertaking to pay the Japanese banks was a condition sine qua non to the acquisition of funds for the purchase of the GALLEON vessels. Without DBPs guarantee, the Japanese lenders would not have provided the funds utilized in the

10

purchase of the GALLEON vessels. The mortgage in favor of DBP was therefore constituted to facilitate the acquisition of funds necessary for the purchase of the vessels. NDC adds that being an ordinary ship mortgage, the Civil Code provisions on concurrence and preference of credits and not P.D. No. 1521 should govern. NDC contends that under Article 2246, in relation to Article 2241 of the Civil Code, the credits guaranteed by a chattel mortgage upon the thing mortgaged shall enjoy preference (with respect to the thing mortgaged), to the exclusion of all others to the extent of the value of the personal property to which the preference exists.[54] Following NDCs theory, DBPs mortgage credit, which is fourth in the order of preference under Article 2241, is superior to POLIANDs claim, which enjoys no preference. NDCs argument does not persuade the Court. The provision of P.D. No. 1521 on the order of preference in the satisfaction of the claims against the vessel is the more applicable statute to the instant case compared to the Civil Code provisions on the concurrence and preference of credit. General legislation must give way to special legislation on the same subject, and generally be so interpreted as to embrace only cases in which the special provisions are not applicable.[55] POLIANDs alternative cause of action for the payment of maritime liens is based on Sections 17 and 21 of P.D. No. 1521. POLIAND also contends that by virtue of the directive in LOI No. 1195 on NDC to discharge maritime liens to allow the vessels to engage in international business, NDC is liable therefor.[56]

considered to be superior to the preferred mortgage lien is a maritime lien arising prior in time to the recording of the preferred mortgage. Such maritime lien is described under Section 21, P.D. No. 1521, which reads: SECTION 21. Maritime Lien for Necessaries; persons entitled to such lien. Any person furnishing repairs, supplies, towage, use of dry dock or marine railway, or other necessaries to any vessel, whether foreign or domestic, upon the order of the owner of such vessel, or of a person authorized by the owner, shall have a maritime lien on the vessel, which may be enforced by suit in rem, and it shall be necessary to allege or prove that credit was given to the vessel. Under the aforequoted provision, the expense must be incurred upon the order of the owner of the vessel or its authorized person and prior to the recording of the ship mortgage. Under the law, it must be established that the credit was extended to the vessel itself.
[57]

The trial court found that GALLEONs advances obtained from Asian Hardwood were used to cover for the payment of bunker oil/fuel, unused stores and oil, bonded stores, provisions, and repair and docking of the GALLEON vessels.[58] These expenses clearly fall under Section 21, P.D. No. 1521. The trial court also found that the advances from Asian Hardwood were spent for ship modification cost and the crews salary and wages. DBP contends that a ship modification cost is omitted under Section 17, P.D. No. 1521, hence, it does not have a status superior to DBPs preferred mortgage lien. As stated in Section 21, P.D. No. 1521, a maritime lien may consist in other necessaries spent for the vessel. The ship modification cost may properly be classified under this broad category because it was a necessary expenses for the vessels navigation. As long as an expense on the vessel is indispensable to the maintenance and navigation of the vessel, it may properly be treated as a maritime lien for necessaries under Section 21, P.D. No. 1521.

POLIANDs maritime lien is superior to DBPs mortgage lien Before POLIANDs claim may be classified as superior to the mortgage constituted on the vessel, it must be shown to be one of the enumerated claims which Section 17, P.D. No. 1521 declares as having preferential status in the event of the sale of the vessel. One of such claims enumerated under Section 17, P.D. No. 1521 which is

11

With respect to the claim for salary and wages of the crew, there is no doubt that it is also one of the enumerated claims under Section 17, P.D. No. 1521, second only to judicial costs and taxes due the government in preference and, thus, having a status superior to DBPs mortgage lien. All told, the determination of the existence and the amount of POLIANDs claim for maritime lien is a finding of fact which is within the province of the courts below. Findings of fact of lower courts are deemed conclusive and binding upon the Supreme Court except when the findings are grounded on speculation, surmises or conjectures; when the inference made is manifestly mistaken, absurd or impossible; when there is grave abuse of discretion in the appreciation of facts; when the factual findings of the trial and appellate courts are conflicting; when the Court of Appeals, in making its findings, has gone beyond the issues of the case and such findings are contrary to the admissions of both appellant and appellee; when the judgment of the appellate court is premised on a misapprehension of facts or when it has failed to notice certain relevant facts which, if properly considered, will justify a different conclusion; when the findings of fact are conclusions without citation of specific evidence upon which they are based; and when findings of fact of the Court of Appeals are premised on the absence of evidence but are contradicted by the evidence on record.[59] The Court finds no sufficient justification to reverse the findings of the trial court and the appellate court in respect to the existence and amount of maritime lien.

In its defense, DBP reiterates the following arguments: (1) The salary and crews wages cannot be claimed by POLIAND or its predecessors-in-interest because none of them is a sailor or mariner; [61] (2) Even if conceded, POLIANDs preferred maritime lien is unenforceable pursuant to Article 1403 of the Civil Code; and (3) POLIANDs claim is barred by prescription and laches.[62] The first argument is absurd. Although POLIAND or its predecessors-in-interest are not sailors entitled to wages, they can still make a claim for the advances spent for the salary and wages of the crew under the principle of legal subrogation. As explained in Philippine National Bank v. Court of Appeals,[63] a third person who satisfies the obligation to an original maritime lienor may claim from the debtor because the third person is subrogated to the rights of the maritime lienor over the vessel. The Court explained as follows: From the foregoing, it is clear that the amount used for the repair of the vessel M/V Asean Liberty was advanced by Citibank and was utilized for the purpose of paying off the original maritime lienor, Hong Kong United Dockyards, Ltd. As a person not interested in the fulfillment of the obligation between PISC and Hong Kong United Dockyards, Ltd., Citibank was subrogated to the rights of Hong Kong United Dockyards, Ltd. as a maritime lienor over the vessel, by virtue of Article 1302, par. 2 of the New Civil Code. By definition, subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights. Considering that Citibank paid off the debt of PISC to Hong Kong United Dockyards, Ltd. it became the transferee of all the rights of Hong Kong Dockyards, Ltd. as against PISC, including the maritime lien over the vessel M/V Asian Liberty.[64] DBPs reliance on the Statute of Frauds is misplaced. Article 1403 (2) of the Civil Code, which enumerates the contracts covered by the Statue of Frauds, is inapplicable. To begin with, there is no privity of contract between POLIAND or its predecessors-in-interest, on one hand, and DBP, on the other. POLIAND hinges its claim on the maritime lien based on LOI No. 1195 and P.D. No. 1521, and not on any contract or agreement. Neither can DBP invoke prescription or laches against POLIAND. Under Article 1144 of the Civil Code, an action upon an

Only NDC is liable on the maritime lien POLIAND maintains that DBP is also solidarily liable for the payment of the preferred maritime lien over the proceeds of the foreclosure sale by virtue of Section 17, P.D. No. 1521. It claims that since the lien was incurred prior to the constitution of the mortgage on January 25, 1982, the preferred maritime lien attaches to the proceeds of the sale of the vessels and has priority over all claims against the vessels in accordance with Section 17, P.D. No. 1521.[60]

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obligation created by law must be brought within ten years from the time the right of action accrues. The right of action arose after January 15, 1982, when NDC partially paid off GALLEONs obligations to POLIANDs predecessor-in-interest, Asian Hardwood. At that time, the prescriptive period for the enforcement by action of the balance of GALLEONs outstanding obligations had commenced. Prescription could not have set in because the prescriptive period was tolled when POLIAND made a written demand for the satisfaction of the obligation on September 24, 1991, or before the lapse of the ten-year prescriptive period. Laches also do not lie because there was no unreasonable delay on the part of POLIAND in asserting its rights. Indeed, it instituted the instant suit seasonably. All things considered, however, the Court finds that only NDC is liable for the payment of the maritime lien. A maritime lien is akin to a mortgage lien in that in spite of the transfer of ownership, the lien is not extinguished. The maritime lien is inseparable from the vessel and until discharged, it follows the vessel. Hence, the enforcement of a maritime lien is in the nature and character of a proceeding quasi in rem.[65] The expression action in rem is, in its narrow application, used only with reference to certain proceedings in courts of admiralty wherein the property alone is treated as responsible for the claim or obligation upon which the proceedings are based.[66] Considering that DBP subsequently transferred ownership of the vessels to NDC, the Court holds the latter liable on the maritime lien. Notwithstanding the subsequent transfer of the vessels to NDC, the maritime lien subsists. This is a unique situation where the extrajudicial foreclosure of the GALLEON vessels took place without the intervention of GALLEONs other creditors including POLIANDs predecessors-ininterest who were apparently left in the dark about the foreclosure proceedings. At that time, GALLEON was already a failing corporation having borrowed large sums of money from banks and financial institutions. When GALLEON defaulted in the payment of its obligations to DBP, the latter foreclosed on its mortgage over the GALLEON ships. The other creditors, including POLIANDs predecessors-in-interest who apparently had earlier or superior rights over the foreclosed vessels, could not have participated as they were unaware and were not made parties to the case.

On this note, the Court believes and so holds that the institution of the extrajudicial foreclosure proceedings was tainted with bad faith. It took place when NDC had already assumed the management and operations of GALLEON. NDC could not have pleaded ignorance over the existence of a prior or preferential lien on the vessels subject of foreclosure. As aptly held by the Court of Appeals: NDCs claim that even if maritime liens existed over the proceeds of the foreclosure sale of the vessels which it subsequently purchased from DBP, it is not liable as it was a purchaser in good faith fails, given the fact that in its actual control over the management and operations of GALLEON, it was put on notice of the various obligations of GALLEON including those secured from ASIAN HARDWOOD as in fact it even paid ASIAN HARDWOOD US$1,000,000.00 in partial settlement of GALLEONs obligations, before it (NDC) mortgaged the 5 vessels to DBP on January 25, 1982. Parenthetically, LOI 1195 directed NDC to discharge such maritime liens as may be necessary to allow the foreclosed vessels to engage on the international shipping business. In fine, it is with respect to POLIANDs claim for payment of US$1,930,298.56 representing part of the proceeds of GALLEONs loan which was spent by GALLEON for ship modification and salaries of crew that NDC is liable.[67] Thus, NDC cannot claim that it was a subsequent purchaser in good faith because it had knowledge that the vessels were subject to various liens. At the very least, to evince good faith, NDC could have inquired as to the existence of other claims against the vessels apart from DBPs mortgage lien. Considering that NDC was also in a position to know or discover the financial condition of GALLEON when it took over its management, the lack of notice to GALLEONs creditors suggests that the extrajudicial foreclosure was effected to prejudice the rights of GALLEONs other creditors. NDC also cannot rely on Administrative Order No. 64,[68] which directed the transfer of the vessels to the APT, on its hypothesis that

13

such transfer extinguished the lien. APT is a mere conduit through which the assets acquired by the National Government are provisionally held and managed until their eventual disposal or privatization. Administrative Order No. 64 did not divest NDC of its ownership over the GALLEON vessels because APT merely holds the vessels in trust for NDC until the same are disposed. Even if ownership was transferred to APT, that would not be sufficient to discharge the maritime lien and deprive POLIAND of its recourse based on the lien. Such denouement would smack of denial of due process and taking of property without just compensation.

final order while the opinion in the body is merely a statement ordering nothing. However, where the inevitable conclusion from the body of the decision is so clear as to show that there was a mistake in the dispositive portion, the body of the decision will prevail. [75] In the instant case, it is clear from the trial court records and the Court of Appeals Rollo that the bigger amount awarded in the dispositive portion of the Court of Appeals Decision was a typographical mistake. Considering that the appellate courts Decision merely affirmed the trial courts finding with respect to the amount of maritime lien, the bigger amount stated in the dispositive portion of the Court of Appeals Decision must have been awarded through indavertence. WHEREFORE, both Petitions in G.R. No. 143866 and G.R. No. 143877 are DENIED. The Decision of the Court of Appeals in CAG.R. CV No. 53257 is MODIFIED to the extent that National Development Company is liable to Poliand Industrial Limited for the amount of One Million One Hundred Ninety Three Thousand Two Hundred Ninety Eight US Dollars and Fifty-Six US Cents (US$ 1,193,298.56), plus interest of 12% per annum computed from 25 September 1991 until fully paid. In other respects, said Decision is AFFIRMED. No pronouncement as to costs. SO ORDERED.

NDCs liability for attorneys fees The lower court awarded attorneys fees to POLIAND in the amount of P1,000,000.00 on account of the amount involved in the case and the protracted character of the litigation.[69] The award was affirmed by the Court of Appeals as against NDC only.[70] This Court finds no reversible error with the award as upheld by the appellate court. Under Article 2208[71] of the Civil Code, attorneys fees may be awarded inter alia when the defendants act or omission has compelled the plaintiff to incur expenses to protect his interest or in any other case where the court deems it just and equitable that attorneys fees and expenses of litigation be recovered. One final note. There is a discrepancy between the dispositive portion of the Court of Appeals Decision and the body thereof with respect to the amount of the maritime lien in favor of POLIAND. The dispositive portion ordered NDC to pay POLIAND the amount of US$1,920,298.56 plus interest[72] despite a finding that NDCs liability to POLIAND represents the maritime lien[73] which according to the complaint[74] is the alternative cause of action of POLIAND in the smaller amount of US$1,193,298.56, as prayed for by POLIAND in its complaint. The general rule is that where there is conflict between the dispositive portion or the fallo and the body of the decision, the fallo controls. This rule rests on the theory that the fallo is the

POLIAND INDUSTRIAL LTD. VS.NDCFACTS: Between 1979 and 1981, Asian Hardwoodextended credit accommodations in favor of GALLEON. The advances were utilized to augment GALLEONSworking capital depleted as a result of thepurchase of five new vessels and two second-handvessels in 1979 and competitiveness of shippingcompany. To obtain the acquisition of vessels, GALLEONobtained loans from Japanese lenders.

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In October 1979, GALLEON and DBP executed aDeed of Undertaking whereby DBP guaranteed thepayment of GALLEONS borrowings from the Japanese lenders. To secure DBPs guarantee, GALLEON promised tosecure first mortgage on the five new vessels andon the second-hand vessels. In January 1981, Pres. Marcos issued Letter of Instruction No. 1155, directing NDC to acquirethe entire shareholdings of GALLEON to thegovernment and DBP was to advance toGALLEON the principal amount and interestof GALLEONs maturing obligation. In August 1981, GALLEON and DBP forged aMemorandum Of Agreement, whereby NDCand GALLEON agreed to execute a sharepurchase agreement for the transfer of GALLEONs shareholdings. Then, NDC assumed the management andoperations of GALLEON. Using NDCs funds, it paid Asian Hardwood apartial settlement of GALLEONs obligations. In Feb. 1982, LOI No. 1195 was issueddirecting the foreclosure of the mortgage onthe five vessels for failure of GALLEON to pay itsdebt despite repeated demands from DBP. DBP subsequently sold the vessels to NDC. Asian Hardwood assigned its rights over theoutstanding obligation of GALLEON to WorldUniversal which in turn assigned the credit topetitioner POLIAND. In March 1988, Pres. Aquino issuedAdministrative Order No. 64, directing NDC

and Phil. Export and Foreign Loan Guarantee Corporation to transfer some of their assetsto the National Government, through theASSET PRIVATIZATION TRUST (APT) fordisposition. Among those transferred to theAPT were the five GALLEON vessels sold at the foreclosure proceedings. In Sept. 1991, POLIAND made written demandson GALLEON, NDC and DBP for thesatisfaction of the outstanding balance. POLIAND claimed that under LOI No. 1155and the Memorandum Of Agreement between GALLEON and NDC, defendant GALLEON, NDC AND DBP were solidarily liable to POLIAND as assignee of the rightsof the credit advances/loan accommodationsto GALLEON. DBPs contention: POLIAND has no cause of action against DBPbecause DBP did not sign any memorandum to actas guarantor for the alleged credit advances/loanaccommodations in favor of POLIAND. DBP alsodenied any liability under LOI No. 1155. NDCs contention: NDC denied having agreed to the assumption of GALLEONs liabilities because no purchase andsale agreement was executed and the delivery of the required shares to stock of GALLEON did nottake place. The court a quo decided in favor of POLIANDconcluding that under LOI No. 1155, DBP and NDCare liable for those obligations. But the CA absolved DBP of any liability. The CA also discharged NDC of any liability arisingfrom the credit advances/ loan obligationsobtained by GALLEON on the ground that NDC didnot acquire ownership of GALLEON but merelyassumed control over its management andoperations.

15

ISSUE: WON NDC or DBP or both are liable to POLIAND on theloan accommodations and credit advances incurred byGALLEON RULING: NDC not liable under LOI No. 1155 As a general rule, LOIs are simply directives of thePres. Of the Phils., issued in the exercise of his administrative power of control, to heads anddepartments and/or officers under the executivebranch of the government for observance by theofficials and/or employees thereof. LOIs do not have the force and effect of a law andcannot be valid source of obligation. LOI should be qualified as having the force andeffect of law only when issued either when thereexisted a grave emergency or threat or imminenceor when the legislative failed or was unable to actadequately on the matter. LOI No. 1155 was not connected, directly orremotely, to a grave emergency or threat to thepeace and order situation of the nation inparticular or to the public interest in general. LOI No. 1155 was in the nature of a mereadministrative issuance directed to NDC, DBP andMARINA to undertake a policy measure torehabilitate a private corporation.NDC not liable under the corporation code The court cannot accept POLIANDs theory thatwith the effectivity of LOI No. 1155, NDC acquiredthe interest in GALLEON without disregardingapplicable statutory requirements governing theacquisition of a corporation.

In the merger of two or more existing corporations,one of the combining corporations survives andcontinues the combined business, while the restare dissolved and all their rights, properties andliabilities are acquired by the survivingcorporation. The merger, however, does notbecome effective upon the mere agreement of the constituent corporations. The merger shall only be effective upon theissuance of a certificate of merger by theSecurities and Exchange Commission, subject toits prior determination that the merger is notinconsistent with the code or existing laws. Uponthe effectivity of the merger, the absorbedcorporation ceases to exist but its rights andproperties and liabilities shall transferred to andvested in the surviving corporation. The records do not show SEC approval of themerger. POLIAND cannot assert that noconditions were required prior to the assumptionby NDC of ownership of GALLEON and itssubsisting loans

Compliance with the statutory requirements is acondition precedent to the effective transfer of the shareholdings in GALLEON to NDC. In the absence of SEC approval, there was noeffective transfer of the shareholdings inGALLEON to NDC. Hence, NDC did not acquirethe rights or interests of GALLEON, including itsliabilities.DBP, not liable under LOI No. 1155 POLIAND does not have any cause of actionagainst DBP under LOI No. 1155. Being administrative issuance, LOI No. 1155cannot be a valid source of obligation because itdid not create any privity of contract between DBPand POLIAND or its predecessor-in-interest.

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 The directives in LOI No. 1155 was in the nature of a grant of authority by the President on DBP toenter into certain transactions for the satisfactionof GALLEONs obligations. There is nothing in the records that indicate thatDBP has acted as surety or guarantor, or hadotherwise accommodated GALLEONs obligation toPOLIAND or its predecessors-in-interest. DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL ANTONIO B. BOE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners, vs.PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and Communications, respondents, MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS CORPORATION, MACROASIAEUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES CORPORATION, MIASCOR CATERING SERVICES CORPORATION, MIASCOR AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR LOGISTICS CORPORATION, petitioners-inintervention,

vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS, DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS, SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and Communications, and SECRETARY SIMEON A. DATUMANONG, in his capacity as Head of the Department of Public Works and Highways,respondents, JACINTO V. PARAS, RAFAEL P. NANTES, EDUARDO C. ZIALCITA, WILLY BUYSON VILLARAMA, PROSPERO C. NOGRALES, PROSPERO A. PICHAY, JR., HARLIN CAST ABAYON, and BENASING O. MACARANBON, respondents-intervenors,

[G.R. No. 155661. May 5, 2003]

[G.R. No. 155547. May 5, 2003]

CEFERINO C. LOPEZ, RAMON M. SALES, ALFREDO B. VALENCIA, MA. TERESA V. GAERLAN, LEONARDO DE LA ROSA, DINA C. DE LEON, VIRGIE CATAMIN RONALD SCHLOBOM, ANGELITO SANTOS, MA. LUISA M. PALCON and SAMAHANG MANGGAGAWA SA PALIPARAN NG PILIPINAS (SMPP), petitioners, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS, SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and Communications, respondents. DECISION

SALACNIB F. BATERINA, CLAVEL A. MARTINEZ and CONSTANTINO G. JARAULA, petitioners,

PUNO, J.:

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Petitioners and petitioners-in-intervention filed the instant petitions for prohibition under Rule 65 of the Revised Rules of Court seeking to prohibit the Manila International Airport Authority (MIAA) and the Department of Transportation and Communications (DOTC) and its Secretary from implementing the following agreements executed by the Philippine Government through the DOTC and the MIAA and the Philippine International Air Terminals Co., Inc. (PIATCO): (1) the Concession Agreement signed on July 12, 1997, (2) the Amended and Restated Concession Agreement dated November 26, 1999, (3) the First Supplement to the Amended and Restated Concession Agreement dated August 27, 1999, (4) the Second Supplement to the Amended and Restated Concession Agreement dated September 4, 2000, and (5) the Third Supplement to the Amended and Restated Concession Agreement dated June 22, 2001 (collectively, the PIATCO Contracts). The facts are as follows: In August 1989, the DOTC engaged the services of Aeroport de Paris (ADP) to conduct a comprehensive study of the Ninoy Aquino International Airport (NAIA) and determine whether the present airport can cope with the traffic development up to the year 2010. The study consisted of two parts: first, traffic forecasts, capacity of existing facilities, NAIA future requirements, proposed master plans and development plans; and second, presentation of the preliminary design of the passenger terminal building. The ADP submitted a Draft Final Report to the DOTC in December 1989. Some time in 1993, six business leaders consisting of John Gokongwei, Andrew Gotianun, Henry Sy, Sr., Lucio Tan, George Ty and Alfonso Yuchengco met with then President Fidel V. Ramos to explore the possibility of investing in the construction and operation of a new international airport terminal. To signify their commitment to pursue the project, they formed the Asias Emerging Dragon Corp. (AEDC) which was registered with the Securities and Exchange Commission (SEC) on September 15, 1993. On October 5, 1994, AEDC submitted an unsolicited proposal to the Government through the DOTC/MIAA for the development of NAIA International Passenger Terminal III (NAIA IPT III) under a build-operate-and-transfer arrangement pursuant to RA 6957 as amended by RA 7718 (BOT Law).[1]

On December 2, 1994, the DOTC issued Dept. Order No. 94832 constituting the Prequalification Bids and Awards Committee (PBAC) for the implementation of the NAIA IPT III project. On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the proposal of AEDC to the National Economic and Development Authority (NEDA). A revised proposal, however, was forwarded by the DOTC to NEDA on December 13, 1995. On January 5, 1996, the NEDA Investment Coordinating Council (NEDA ICC) Technical Board favorably endorsed the project to the ICC Cabinet Committee which approved the same, subject to certain conditions, on January 19, 1996. On February 13, 1996, the NEDA passed Board Resolution No. 2 which approved the NAIA IPT III project. On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two daily newspapers of an invitation for competitive or comparative proposals on AEDCs unsolicited proposal, in accordance with Sec. 4-A of RA 6957, as amended. The alternative bidders were required to submit three (3) sealed envelopes on or before 5:00 p.m. of September 20, 1996. The first envelope should contain the Prequalification Documents, the second envelope the Technical Proposal, and the third envelope the Financial Proposal of the proponent. On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the availment of the Bid Documents and the submission of the comparative bid proposals. Interested firms were permitted to obtain the Request for Proposal Documents beginning June 28, 1996, upon submission of a written application and payment of a non-refundable fee of P50,000.00 (US$2,000). The Bid Documents issued by the PBAC provided among others that the proponent must have adequate capability to sustain the financing requirement for the detailed engineering, design, construction, operation, and maintenance phases of the project. The proponent would be evaluated based on its ability to provide a minimum amount of equity to the project, and its capacity to secure external financing for the project. On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all bidders to a pre-bid conference on July 29, 1996.

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On August 16, 1996, the PBAC issued PBAC Bulletin No. 3 amending the Bid Documents. The following amendments were made on the Bid Documents: a. Aside from the fixed Annual Guaranteed Payment, the proponent shall include in its financial proposal an additional percentage of gross revenue share of the Government, as follows: i. ii. iii. First 5 years Next 10 years Next 10 years 5.0% 7.5% 10.0%

e. Amendments to the draft Concession Agreement shall be issued from time to time. Said amendments shall only cover items that would not materially affect the preparation of the proponents proposal. On August 29, 1996, the Second Pre-Bid Conference was held where certain clarifications were made. Upon the request of prospective bidder Peoples Air Cargo & Warehousing Co., Inc (Paircargo), the PBAC warranted that based on Sec. 11.6, Rule 11 of the Implementing Rules and Regulations of the BOT Law, only the proposed Annual Guaranteed Payment submitted by the challengers would be revealed to AEDC, and that the challengers technical and financial proposals would remain confidential. The PBAC also clarified that the list of revenue sources contained in Annex 4.2a of the Bid Documents was merely indicative and that other revenue sources may be included by the proponent, subject to approval by DOTC/MIAA. Furthermore, the PBAC clarified that only those fees and charges denominated as Public Utility Fees would be subject to regulation, and those charges which would be actually deemed Public Utility Fees could still be revised, depending on the outcome of PBACs query on the matter with the Department of Justice. In September 1996, the PBAC issued Bid Bulletin No. 5, entitled Answers to the Queries of PAIRCARGO as Per Letter Dated September 3 and 10, 1996. Paircargos queries and the PBACs responses were as follows: 1. It is difficult for Paircargo and Associates to meet the required minimum equity requirement as prescribed in Section 8.3.4 of the Bid Documents considering that the capitalization of each member company is so structured to meet the requirements and needs of their current respective business undertaking/activities. In order to comply with this equity requirement, Paircargo is requesting PBAC to just allow each member of (sic) corporation of the Joint Venture to just execute an agreement that embodies a commitment to infuse the required capital in case the project is awarded to the Joint Venture instead of increasing each corporations current authorized capital stock just for prequalification purposes.

b. The amount of the fixed Annual Guaranteed Payment shall be subject of the price challenge. Proponent may offer an Annual Guaranteed Payment which need not be of equal amount, but payment of which shall start upon site possession. c. The project proponent must have adequate capability to sustain the financing requirement for the detailed engineering, design, construction, and/or operation and maintenance phases of the project as the case may be. For purposes of pre-qualification, this capability shall be measured in terms of: i. Proof of the availability of the project proponent and/or the consortium to provide the minimum amount of equity for the project; and ii. a letter testimonial from reputable banks attesting that the project proponent and/or the members of the consortium are banking with them, that the project proponent and/or the members are of good financial standing, and have adequate resources. d. The basis for the prequalification shall be the proponents compliance with the minimum technical and financial requirements provided in the Bid Documents and the IRR of the BOT Law. The minimum amount of equity shall be 30% of the Project Cost.

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In prequalification, the agency is interested in ones financial capability at the time of prequalification, not future or potential capability. A commitment to put up equity once awarded the project is not enough to establish that present financial capability. However, total financial capability of all member companies of the Consortium, to be established by submitting the respective companies audited financial statements, shall be acceptable. 2. At present, Paircargo is negotiating with banks and other institutions for the extension of a Performance Security to the joint venture in the event that the Concessions Agreement (sic) is awarded to them. However, Paircargo is being required to submit a copy of the draft concession as one of the documentary requirements. Therefore, Paircargo is requesting that theyd (sic) be furnished copy of the approved negotiated agreement between the PBAC and the AEDC at the soonest possible time. A copy of the draft Concession Agreement is included in the Bid Documents. Any material changes would be made known to prospective challengers through bid bulletins. However, a final version will be issued before the award of contract. The PBAC also stated that it would require AEDC to sign Supplement C of the Bid Documents (Acceptance of Criteria and Waiver of Rights to Enjoin Project) and to submit the same with the required Bid Security. On September 20, 1996, the consortium composed of Peoples Air Cargo and Warehousing Co., Inc. (Paircargo), Phil. Air and Grounds Services, Inc. (PAGS) and Security Bank Corp. (Security Bank) (collectively, Paircargo Consortium) submitted their competitive proposal to the PBAC. On September 23, 1996, the PBAC opened the first envelope containing the prequalification documents of the Paircargo Consortium. On the following day, September 24, 1996, the PBAC prequalified the Paircargo Consortium.

On September 26, 1996, AEDC informed the PBAC in writing of its reservations as regards the Paircargo Consortium, which include: a. The lack of corporate approvals and financial capability of PAIRCARGO; b. The lack of corporate approvals and financial capability of PAGS; c. The prohibition imposed by RA 337, as amended (the General Banking Act) on the amount that Security Bank could legally invest in the project; d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint Venture, for prequalification purposes; and e. The appointment of Lufthansa as the facility operator, in view of the Philippine requirement in the operation of a public utility. The PBAC gave its reply on October 2, 1996, informing AEDC that it had considered the issues raised by the latter, and that based on the documents submitted by Paircargo and the established prequalification criteria, the PBAC had found that the challenger, Paircargo, had prequalified to undertake the project. The Secretary of the DOTC approved the finding of the PBAC. The PBAC then proceeded with the opening of the second envelope of the Paircargo Consortium which contained its Technical Proposal. On October 3, 1996, AEDC reiterated its objections, particularly with respect to Paircargos financial capability, in view of the restrictions imposed by Section 21-B of the General Banking Act and Sections 1380 and 1381 of the Manual Regulations for Banks and Other Financial Intermediaries. On October 7, 1996, AEDC again manifested its objections and requested that it be furnished with excerpts of the PBAC meeting and the accompanying technical evaluation report where each of the issues they raised were addressed.

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On October 16, 1996, the PBAC opened the third envelope submitted by AEDC and the Paircargo Consortium containing their respective financial proposals. Both proponents offered to build the NAIA Passenger Terminal III for at least $350 million at no cost to the government and to pay the government: 5% share in gross revenues for the first five years of operation, 7.5% share in gross revenues for the next ten years of operation, and 10% share in gross revenues for the last ten years of operation, in accordance with the Bid Documents. However, in addition to the foregoing, AEDC offered to pay the government a total of P135 million as guaranteed payment for 27 years while Paircargo Consortium offered to pay the government a total of P17.75 billion for the same period. Thus, the PBAC formally informed AEDC that it had accepted the price proposal submitted by the Paircargo Consortium, and gave AEDC 30 working days or until November 28, 1996 within which to match the said bid, otherwise, the project would be awarded to Paircargo. As AEDC failed to match the proposal within the 30-day period, then DOTC Secretary Amado Lagdameo, on December 11, 1996, issued a notice to Paircargo Consortium regarding AEDCs failure to match the proposal. On February 27, 1997, Paircargo Consortium incorporated into Philippine International Airport Terminals Co., Inc. (PIATCO). AEDC subsequently protested the alleged undue preference given to PIATCO and reiterated its objections as regards the prequalification of PIATCO. On April 11, 1997, the DOTC submitted the concession agreement for the second-pass approval of the NEDA-ICC. On April 16, 1997, AEDC filed with the Regional Trial Court of Pasig a Petition for Declaration of Nullity of the Proceedings, Mandamus and Injunction against the Secretary of the DOTC, the Chairman of the PBAC, the voting members of the PBAC and Pantaleon D. Alvarez, in his capacity as Chairman of the PBAC Technical Committee. On April 17, 1997, the NEDA-ICC conducted an ad referendum to facilitate the approval, on a no-objection basis, of the

BOT agreement between the DOTC and PIATCO. As the ad referendum gathered only four (4) of the required six (6) signatures, the NEDA merely noted the agreement. On July 9, 1997, the DOTC issued the notice of award for the project to PIATCO. On July 12, 1997, the Government, through then DOTC Secretary Arturo T. Enrile, and PIATCO, through its President, Henry T. Go, signed the Concession Agreement for the Build-Operate-andTransfer Arrangement of the Ninoy Aquino International Airport Passenger Terminal III (1997 Concession Agreement). The Government granted PIATCO the franchise to operate and maintain the said terminal during the concession period and to collect the fees, rentals and other charges in accordance with the rates or schedules stipulated in the 1997 Concession Agreement. The Agreement provided that the concession period shall be for twentyfive (25) years commencing from the in-service date, and may be renewed at the option of the Government for a period not exceeding twenty-five (25) years. At the end of the concession period, PIATCO shall transfer the development facility to MIAA. On November 26, 1998, the Government and PIATCO signed an Amended and Restated Concession Agreement (ARCA). Among the provisions of the 1997 Concession Agreement that were amended by the ARCA were: Sec. 1.11 pertaining to the definition of certificate of completion; Sec. 2.05 pertaining to the Special Obligations of GRP; Sec. 3.02 (a) dealing with the exclusivity of the franchise given to the Concessionaire; Sec. 4.04 concerning the assignment by Concessionaire of its interest in the Development Facility; Sec. 5.08 (c) dealing with the proceeds of Concessionaires insurance; Sec. 5.10 with respect to the temporary take-over of operations by GRP; Sec. 5.16 pertaining to the taxes, duties and other imposts that may be levied on the Concessionaire; Sec. 6.03 as regards the periodic adjustment of public utility fees and charges; the entire Article VIII concerning the provisions on the termination of the contract; and Sec. 10.02 providing for the venue of the arbitration proceedings in case a dispute or controversy arises between the parties to the agreement. Subsequently, the Government and PIATCO signed three Supplements to the ARCA. The First Supplement was signed on

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August 27, 1999; the Second Supplement on September 4, 2000; and the Third Supplement on June 22, 2001 (collectively, Supplements). The First Supplement to the ARCA amended Sec. 1.36 of the ARCA defining Revenues or Gross Revenues; Sec. 2.05 (d) of the ARCA referring to the obligation of MIAA to provide sufficient funds for the upkeep, maintenance, repair and/or replacement of all airport facilities and equipment which are owned or operated by MIAA; and further providing additional special obligations on the part of GRP aside from those already enumerated in Sec. 2.05 of the ARCA. The First Supplement also provided a stipulation as regards the construction of a surface road to connect NAIA Terminal II and Terminal III in lieu of the proposed access tunnel crossing Runway 13/31; the swapping of obligations between GRP and PIATCO regarding the improvement of Sales Road; and the changes in the timetable. It also amended Sec. 6.01 (c) of the ARCA pertaining to the Disposition of Terminal Fees; Sec. 6.02 of the ARCA by inserting an introductory paragraph; and Sec. 6.02 (a) (iii) of the ARCA referring to the Payments of Percentage Share in Gross Revenues. The Second Supplement to the ARCA contained provisions concerning the clearing, removal, demolition or disposal of subterranean structures uncovered or discovered at the site of the construction of the terminal by the Concessionaire. It defined the scope of works; it provided for the procedure for the demolition of the said structures and the consideration for the same which the GRP shall pay PIATCO; it provided for time extensions, incremental and consequential costs and losses consequent to the existence of such structures; and it provided for some additional obligations on the part of PIATCO as regards the said structures. Finally, the Third Supplement provided for the obligations of the Concessionaire as regards the construction of the surface road connecting Terminals II and III. Meanwhile, the MIAA which is charged with the maintenance and operation of the NAIA Terminals I and II, had existing concession contracts with various service providers to offer international airline airport services, such as in-flight catering, passenger handling, ramp and ground support, aircraft maintenance and provisions, cargo handling and warehousing, and other services,

to several international airlines at the NAIA. Some of these service providers are the Miascor Group, DNATA-Wings Aviation Systems Corp., and the MacroAsia Group. Miascor, DNATA and MacroAsia, together with Philippine Airlines (PAL), are the dominant players in the industry with an aggregate market share of 70%. On September 17, 2002, the workers of the international airline service providers, claiming that they stand to lose their employment upon the implementation of the questioned agreements, filed before this Court a petition for prohibition to enjoin the enforcement of said agreements.[2] On October 15, 2002, the service providers, joining the cause of the petitioning workers, filed a motion for intervention and a petitionin-intervention. On October 24, 2002, Congressmen Salacnib Baterina, Clavel Martinez and Constantino Jaraula filed a similar petition with this Court.[3] On November 6, 2002, several employees of the MIAA likewise filed a petition assailing the legality of the various agreements.[4] On December 11, 2002. another group of Congressmen, Hon. Jacinto V. Paras, Rafael P. Nantes, Eduardo C. Zialcita, Willie B. Villarama, Prospero C. Nograles, Prospero A. Pichay, Jr., Harlin Cast Abayon and Benasing O. Macaranbon, moved to intervene in the case as Respondents-Intervenors. They filed their Comment-InIntervention defending the validity of the assailed agreements and praying for the dismissal of the petitions. During the pendency of the case before this Court, President Gloria Macapagal Arroyo, on November 29, 2002, in her speech at the 2002 Golden Shell Export Awards at Malacaang Palace, stated that she will not honor (PIATCO) contracts which the Executive Branchs legal offices have concluded (as) null and void.[5] Respondent PIATCO filed its Comments to the present petitions on November 7 and 27, 2002. The Office of the Solicitor General and the Office of the Government Corporate Counsel filed their respective Comments in behalf of the public respondents.

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On December 10, 2002, the Court heard the case on oral argument. After the oral argument, the Court then resolved in open court to require the parties to file simultaneously their respective Memoranda in amplification of the issues heard in the oral arguments within 30 days and to explore the possibility of arbitration or mediation as provided in the challenged contracts. In their consolidated Memorandum, the Office of the Solicitor General and the Office of the Government Corporate Counsel prayed that the present petitions be given due course and that judgment be rendered declaring the 1997 Concession Agreement, the ARCA and the Supplements thereto void for being contrary to the Constitution, the BOT Law and its Implementing Rules and Regulations. On March 6, 2003, respondent PIATCO informed the Court that on March 4, 2003 PIATCO commenced arbitration proceedings before the International Chamber of Commerce, International Court of Arbitration (ICC) by filing a Request for Arbitration with the Secretariat of the ICC against the Government of the Republic of the Philippines acting through the DOTC and MIAA. In the present cases, the Court is again faced with the task of resolving complicated issues made difficult by their intersecting legal and economic implications. The Court is aware of the far reaching fall out effects of the ruling which it makes today. For more than a century and whenever the exigencies of the times demand it, this Court has never shirked from its solemn duty to dispense justice and resolve actual controversies involving rights which are legally demandable and enforceable, and to determine whether or not there has been grave abuse of discretion amounting to lack or excess of jurisdiction.[6] To be sure, this Court will not begin to do otherwise today. We shall first dispose of the procedural issues raised by respondent PIATCO which they allege will bar the resolution of the instant controversy. Petitioners Legal Standing to File the present Petitions a. G.R. Nos. 155001 and 155661

In G.R. No. 155001 individual petitioners are employees of various service providers[7] having separate concession contracts with MIAA and continuing service agreements with various international airlines to provide in-flight catering, passenger handling, ramp and ground support, aircraft maintenance and provisions, cargo handling and warehousing and other services. Also included as petitioners are labor unions MIASCOR Workers UnionNational Labor Union and Philippine Airlines Employees Association. These petitioners filed the instant action for prohibition as taxpayers and as parties whose rights and interests stand to be violated by the implementation of the PIATCO Contracts. Petitioners-Intervenors in the same case are all corporations organized and existing under Philippine laws engaged in the business of providing in-flight catering, passenger handling, ramp and ground support, aircraft maintenance and provisions, cargo handling and warehousing and other services to several international airlines at the Ninoy Aquino International Airport. PetitionersIntervenors allege that as tax-paying international airline and airportrelated service operators, each one of them stands to be irreparably injured by the implementation of the PIATCO Contracts. Each of the petitioners-intervenors have separate and subsisting concession agreements with MIAA and with various international airlines which they allege are being interfered with and violated by respondent PIATCO. In G.R. No. 155661, petitioners constitute employees of MIAA and Samahang Manggagawa sa Paliparan ng Pilipinas - a legitimate labor union and accredited as the sole and exclusive bargaining agent of all the employees in MIAA. Petitioners anchor their petition for prohibition on the nullity of the contracts entered into by the Government and PIATCO regarding the build-operate-and-transfer of the NAIA IPT III. They filed the petition as taxpayers and persons who have a legitimate interest to protect in the implementation of the PIATCO Contracts. Petitioners in both cases raise the argument that the PIATCO Contracts contain stipulations which directly contravene numerous provisions of the Constitution, specific provisions of the BOT Law and its Implementing Rules and Regulations, and public policy. Petitioners contend that the DOTC and the MIAA, by entering into

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said contracts, have committed grave abuse of discretion amounting to lack or excess of jurisdiction which can be remedied only by a writ of prohibition, there being no plain, speedy or adequate remedy in the ordinary course of law. In particular, petitioners assail the provisions in the 1997 Concession Agreement and the ARCA which grant PIATCO the exclusive right to operate a commercial international passenger terminal within the Island of Luzon, except those international airports already existing at the time of the execution of the agreement. The contracts further provide that upon the commencement of operations at the NAIA IPT III, the Government shall cause the closure of Ninoy Aquino International Airport Passenger Terminals I and II as international passenger terminals. With respect to existing concession agreements between MIAA and international airport service providers regarding certain services or operations, the 1997 Concession Agreement and the ARCA uniformly provide that such services or operations will not be carried over to the NAIA IPT III and PIATCO is under no obligation to permit such carry over except through a separate agreement duly entered into with PIATCO.[8] With respect to the petitioning service providers and their employees, upon the commencement of operations of the NAIA IPT III, they allege that they will be effectively barred from providing international airline airport services at the NAIA Terminals I and II as all international airlines and passengers will be diverted to the NAIA IPT III. The petitioning service providers will thus be compelled to contract with PIATCO alone for such services, with no assurance that subsisting contracts with MIAA and other international airlines will be respected. Petitioning service providers stress that despite the very competitive market, the substantial capital investments required and the high rate of fees, they entered into their respective contracts with the MIAA with the understanding that the said contracts will be in force for the stipulated period, and thereafter, renewed so as to allow each of the petitioning service providers to recoup their investments and obtain a reasonable return thereon. Petitioning employees of various service providers at the NAIA Terminals I and II and of MIAA on the other hand allege that with the closure of the NAIA Terminals I and II as international passenger

terminals under the PIATCO Contracts, they stand to lose employment. The question on legal standing is whether such parties have alleged such a personal stake in the outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of issues upon which the court so largely depends for illumination of difficult constitutional questions.[9] Accordingly, it has been held that the interest of a person assailing the constitutionality of a statute must be direct and personal. He must be able to show, not only that the law or any government act is invalid, but also that he sustained or is in imminent danger of sustaining some direct injury as a result of its enforcement, and not merely that he suffers thereby in some indefinite way. It must appear that the person complaining has been or is about to be denied some right or privilege to which he is lawfully entitled or that he is about to be subjected to some burdens or penalties by reason of the statute or act complained of.[10] We hold that petitioners have the requisite standing. In the above-mentioned cases, petitioners have a direct and substantial interest to protect by reason of the implementation of the PIATCO Contracts. They stand to lose their source of livelihood, a property right which is zealously protected by the Constitution. Moreover, subsisting concession agreements between MIAA and petitionersintervenors and service contracts between international airlines and petitioners-intervenors stand to be nullified or terminated by the operation of the NAIA IPT III under the PIATCO Contracts. The financial prejudice brought about by the PIATCO Contracts on petitioners and petitioners-intervenors in these cases are legitimate interests sufficient to confer on them the requisite standing to file the instant petitions. b. G.R. No. 155547 In G.R. No. 155547, petitioners filed the petition for prohibition as members of the House of Representatives, citizens and taxpayers. They allege that as members of the House of Representatives, they are especially interested in the PIATCO Contracts, because the contracts compel the Government and/or the House of Representatives to appropriate funds necessary to comply with the provisions therein.[11] They cite provisions of the PIATCO

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Contracts which require disbursement of unappropriated amounts in compliance with the contractual obligations of the Government. They allege that the Government obligations in the PIATCO Contracts which compel government expenditure without appropriation is a curtailment of their prerogatives as legislators, contrary to the mandate of the Constitution that [n]o money shall be paid out of the treasury except in pursuance of an appropriation made by law.[12] Standing is a peculiar concept in constitutional law because in some cases, suits are not brought by parties who have been personally injured by the operation of a law or any other government act but by concerned citizens, taxpayers or voters who actually sue in the public interest. Although we are not unmindful of the cases of Imus Electric Co. v. Municipality of Imus[13]and Gonzales v. Raquiza[14] wherein this Court held that appropriation must be made only on amounts immediately demandable, public interest demands that we take a more liberal view in determining whether the petitioners suing as legislators, taxpayers and citizens have locus standi to file the instant petition. In Kilosbayan, Inc. v. Guingona,[15] this Court held [i]n line with the liberal policy of this Court on locus standi, ordinary taxpayers, members of Congress, and even association of planters, and non-profit civic organizations were allowed to initiate and prosecute actions before this Court to question the constitutionality or validity of laws, acts, decisions, rulings, or orders of various government agencies or instrumentalities.[16] Further, insofar as taxpayers' suits are concerned . . . (this Court) is not devoid of discretion as to whether or not it should be entertained.[17] As such . . . even if, strictly speaking, they [the petitioners] are not covered by the definition, it is still within the wide discretion of the Court to waive the requirement and so remove the impediment to its addressing and resolving the serious constitutional questions raised.[18] In view of the serious legal questions involved and their impact on public interest, we resolve to grant standing to the petitioners. Other Procedural Matters Respondent PIATCO further alleges that this Court is without jurisdiction to review the instant cases as factual issues are involved which this Court is ill-equipped to resolve. Moreover, PIATCO

alleges that submission of this controversy to this Court at the first instance is a violation of the rule on hierarchy of courts. They contend that trial courts have concurrent jurisdiction with this Court with respect to a special civil action for prohibition and hence, following the rule on hierarchy of courts, resort must first be had before the trial courts. After a thorough study and careful evaluation of the issues involved, this Court is of the view that the crux of the instant controversy involves significant legal questions. The facts necessary to resolve these legal questions are well established and, hence, need not be determined by a trial court. The rule on hierarchy of courts will not also prevent this Court from assuming jurisdiction over the cases at bar. The said rule may be relaxed when the redress desired cannot be obtained in the appropriate courts or where exceptional and compelling circumstances justify availment of a remedy within and calling for the exercise of this Courts primary jurisdiction.[19] It is easy to discern that exceptional circumstances exist in the cases at bar that call for the relaxation of the rule. Both petitioners and respondents agree that these cases are oftranscendental importance as they involve the construction and operation of the countrys premier international airport. Moreover, the crucial issues submitted for resolution are of first impression and they entail the proper legal interpretation of key provisions of the Constitution, the BOT Law and its Implementing Rules and Regulations. Thus, considering the nature of the controversy before the Court, procedural bars may be lowered to give way for the speedy disposition of the instant cases. Legal Effect of the Commencement of Arbitration Proceedings by PIATCO There is one more procedural obstacle which must be overcome. The Court is aware that arbitration proceedings pursuant to Section 10.02 of the ARCA have been filed at the instance of respondent PIATCO. Again, we hold that the arbitration step taken by PIATCO will not oust this Court of its jurisdiction over the cases at bar.

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In Del Monte Corporation-USA v. Court of Appeals,[20] even after finding that the arbitration clause in the Distributorship Agreement in question is valid and the dispute between the parties is arbitrable, this Court affirmed the trial courts decision denying petitioners Motion to Suspend Proceedings pursuant to the arbitration clause under the contract. In so ruling, this Court held that as contracts produce legal effect between the parties, their assigns and heirs, only the parties to the Distributorship Agreement are bound by its terms, including the arbitration clause stipulated therein. This Court ruled that arbitration proceedings could be called for but only with respect to the parties to the contract in question. Considering that there are parties to the case who are neither parties to the Distributorship Agreement nor heirs or assigns of the parties thereto, this Court, citing its previous ruling in Salas, Jr. v. Laperal Realty Corporation,[21] held that to tolerate the splitting of proceedings by allowing arbitration as to some of the parties on the one hand and trial for the others on the other hand would, in effect, result in multiplicity of suits, duplicitous procedure and unnecessary delay.[22] Thus, we ruled that the interest of justice would best be served if the trial court hears and adjudicates the case in a single and complete proceeding. It is established that petitioners in the present cases who have presented legitimate interests in the resolution of the controversy are not parties to the PIATCO Contracts. Accordingly, they cannot be bound by the arbitration clause provided for in the ARCA and hence, cannot be compelled to submit to arbitration proceedings. A speedy and decisive resolution of all the critical issues in the present controversy, including those raised by petitioners, cannot be made before an arbitral tribunal. The object of arbitration is precisely to allow an expeditious determination of a dispute. This objective would not be met if this Court were to allow the parties to settle the cases by arbitration as there are certain issues involving non-parties to the PIATCO Contracts which the arbitral tribunal will not be equipped to resolve. Now, to the merits of the instant controversy. I Is PIATCO a qualified bidder?

Public respondents argue that the Paircargo Consortium, PIATCOs predecessor, was not a duly pre-qualified bidder on the unsolicited proposal submitted by AEDC as the Paircargo Consortium failed to meet the financial capability required under the BOT Law and the Bid Documents. They allege that in computing the ability of the Paircargo Consortium to meet the minimum equity requirements for the project, the entire net worth of Security Bank, a member of the consortium, should not be considered. PIATCO relies, on the other hand, on the strength of the Memorandum dated October 14, 1996 issued by the DOTC Undersecretary Primitivo C. Cal stating that the Paircargo Consortium is found to have a combined net worth of P3,900,000,000.00, sufficient to meet the equity requirements of the project. The said Memorandum was in response to a letter from Mr. Antonio Henson of AEDC to President Fidel V. Ramos questioning the financial capability of the Paircargo Consortium on the ground that it does not have the financial resources to put up the required minimum equity of P2,700,000,000.00. This contention is based on the restriction under R.A. No. 337, as amended or the General Banking Act that a commercial bank cannot invest in any single enterprise in an amount more than 15% of its net worth. In the said Memorandum, Undersecretary Cal opined: The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5, require that financial capability will be evaluated based on total financial capability of all the member companies of the [Paircargo] Consortium. In this connection, the Challenger was found to have a combined net worth of P3,926,421,242.00 that could support a project costing approximately P13 Billion. It is not a requirement that the net worth must be unrestricted. To impose that as a requirement now will be nothing less than unfair. The financial statement or the net worth is not the sole basis in establishing financial capability. As stated in Bid Bulletin No. 3, financial capability may also be established by testimonial letters issued by reputable banks. The Challenger has complied with this requirement.

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To recap, net worth reflected in the Financial Statement should not be taken as the amount of the money to be used to answer the required thirty percent (30%) equity of the challenger but rather to be used in establishing if there is enough basis to believe that the challenger can comply with the required 30% equity. In fact, proof of sufficient equity is required as one of the conditions for award of contract (Section 12.1 IRR of the BOT Law) but not for prequalification (Section 5.4 of the same document).[23] Under the BOT Law, in case of a build-operate-and-transfer arrangement, the contract shall be awarded to the bidder who, having satisfied the minimum financial, technical, organizational and legal standards required by the law, has submitted the lowest bid and most favorable terms of the project.[24] Further, the 1994 Implementing Rules and Regulations of the BOT Law provide: Section 5.4 Pre-qualification Requirements. . c. Financial Capability: The project proponent must have adequate capability to sustain the financing requirements for the detailed engineering design, construction and/or operation and maintenance phases of the project, as the case may be. For purposes of pre-qualification, this capability shall be measured in terms of (i) proof of the ability of the project proponent and/or the consortium to provide a minimum amount of equity to the project, and (ii) a letter testimonial from reputable banks attesting that the project proponent and/or members of the consortium are banking with them, that they are in good financial standing, and that they have adequate resources. The government agency/LGU concerned shall determine on a project-toproject basis and before pre-qualification, the minimum amount of equity needed. (emphasis supplied) Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3 dated August 16, 1996 amending the financial capability requirements for pre-qualification of the project proponent as follows:

6. Basis of Pre-qualification The basis for the pre-qualification shall be on the compliance of the proponent to the minimum technical and financial requirements provided in the Bid Documents and in the IRR of the BOT Law, R.A. No. 6957, as amended by R.A. 7718. The minimum amount of equity to which the proponents financial capability will be based shall be thirty percent (30%) of the project cost instead of the twenty percent (20%) specified in Section 3.6.4 of the Bid Documents. This is to correlate with the required debt-to-equity ratio of 70:30 in Section 2.01a of the draft concession agreement. The debt portion of the project financing should not exceed 70% of the actual project cost. Accordingly, based on the above provisions of law, the Paircargo Consortium or any challenger to the unsolicited proposal of AEDC has to show that it possesses the requisite financial capability to undertake the project in the minimum amount of 30% of the project cost through (i) proof of the ability to provide a minimum amount of equity to the project, and (ii) a letter testimonial from reputable banks attesting that the project proponent or members of the consortium are banking with them, that they are in good financial standing, and that they have adequate resources. As the minimum project cost was estimated to be US$350,000,000.00 or roughly P9,183,650,000.00,[25] the Paircargo Consortium had to show to the satisfaction of the PBAC that it had the ability to provide the minimum equity for the project in the amount of at least P2,755,095,000.00. Paircargos Audited Financial Statements as of 1993 and 1994 indicated that it had a net worth of P2,783,592.00 and P3,123,515.00 respectively.[26] PAGS Audited Financial Statements as of 1995 indicate that it has approximately P26,735,700.00 to invest as its equity for the project.[27] Security Banks Audited Financial Statements as of 1995 show that it has a net worth equivalent to its capital funds in the amount of P3,523,504,377.00.[28] We agree with public respondents that with respect to Security Bank, the entire amount of its net worth could not be invested in a

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single undertaking or enterprise, whether allied or non-allied in accordance with the provisions of R.A. No. 337, as amended or the General Banking Act: Sec. 21-B. The provisions in this or in any other Act to the contrary notwithstanding, the Monetary Board, whenever it shall deem appropriate and necessary to further national development objectives or support national priority projects, may authorize a commercial bank, a bank authorized to provide commercial banking services, as well as a government-owned and controlled bank, to operate under an expanded commercial banking authority and by virtue thereof exercise, in addition to powers authorized for commercial banks, the powers of an Investment House as provided in Presidential Decree No. 129, invest in the equity of a non-allied undertaking, or own a majority or all of the equity in a financial intermediary other than a commercial bank or a bank authorized to provide commercial banking services: Provided, That (a) the total investment in equities shall not exceed fifty percent (50%) of the net worth of the bank; (b) the equity investment in any one enterprise whether allied or non-allied shall not exceed fifteen percent (15%) of the net worth of the bank; (c) the equity investment of the bank, or of its wholly or majority-owned subsidiary, in a single non-allied undertaking shall not exceed thirty-five percent (35%) of the total equity in the enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in that enterprise; and (d) the equity investment in other banks shall be deducted from the investing bank's net worth for purposes of computing the prescribed ratio of net worth to risk assets. . Further, the 1993 Manual of Regulations for Banks provides: SECTION X383. Other Limitations and Restrictions. The following limitations and restrictions shall also apply regarding equity investments of banks.

a. In any single enterprise. The equity investments of banks in any single enterprise shall not exceed at any time fifteen percent (15%) of the net worth of the investing bank as defined in Sec. X106 and Subsec. X121.5. Thus, the maximum amount that Security Bank could validly invest in the Paircargo Consortium is only P528,525,656.55, representing 15% of its entire net worth. The total net worth therefore of the Paircargo Consortium, after considering the maximum amounts that may be validly invested by each of its members is P558,384,871.55 or only 6.08% of the project cost,[29] an amount substantially less than the prescribed minimum equity investment required for the project in the amount of P2,755,095,000.00 or 30% of the project cost. The purpose of pre-qualification in any public bidding is to determine, at the earliest opportunity, the ability of the bidder to undertake the project. Thus, with respect to the bidders financial capacity at the pre-qualification stage, the law requires the government agency to examine and determine the ability of the bidder to fund the entire cost of the project by considering the maximum amounts that each bidder may invest in the project at the time of pre-qualification. The PBAC has determined that any prospective bidder for the construction, operation and maintenance of the NAIA IPT III project should prove that it has the ability to provide equity in the minimum amount of 30% of the project cost, in accordance with the 70:30 debt-to-equity ratio prescribed in the Bid Documents. Thus, in the case of Paircargo Consortium, the PBAC should determine the maximum amounts that each member of the consortium may commit for the construction, operation and maintenance of the NAIA IPT III project at the time of pre-qualification. With respect to Security Bank, the maximum amount which may be invested by it would only be 15% of its net worth in view of the restrictions imposed by the General Banking Act. Disregarding the investment ceilings provided by applicable law would not result in a proper evaluation of whether or not a bidder is pre-qualified to undertake the project as for all intents and purposes, such ceiling or legal restriction determines the true maximum amount which a bidder may invest in the project.

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Further, the determination of whether or not a bidder is prequalified to undertake the project requires an evaluation of the financial capacity of the said bidder at the time the bid is submitted based on the required documents presented by the bidder. The PBAC should not be allowed to speculate on the future financial ability of the bidder to undertake the project on the basis of documents submitted. This would open doors to abuse and defeat the very purpose of a public bidding. This is especially true in the case at bar which involves the investment of billions of pesos by the project proponent. The relevant government authority is dutybound to ensure that the awardee of the contract possesses the minimum required financial capability to complete the project. To allow the PBAC to estimate the bidders future financial capability would not secure the viability and integrity of the project. A restrictive and conservative application of the rules and procedures of public bidding is necessary not only to protect the impartiality and regularity of the proceedings but also to ensure the financial and technical reliability of the project. It has been held that: The basic rule in public bidding is that bids should be evaluated based on the required documents submitted before and not after the opening of bids. Otherwise, the foundation of a fair and competitive public bidding would be defeated. Strict observance of the rules, regulations, and guidelines of the bidding process is the only safeguard to a fair, honest and competitive public bidding.[30] Thus, if the maximum amount of equity that a bidder may invest in the project at the time the bids are submitted falls short of the minimum amounts required to be put up by the bidder, said bidder should be properly disqualified. Considering that at the prequalification stage, the maximum amounts which the Paircargo Consortium may invest in the project fell short of the minimum amounts prescribed by the PBAC, we hold that Paircargo Consortium was not a qualified bidder. Thus the award of the contract by the PBAC to the Paircargo Consortium, a disqualified bidder, is null and void. While it would be proper at this juncture to end the resolution of the instant controversy, as the legal effects of the disqualification of respondent PIATCOs predecessor would come into play and

necessarily result in the nullity of all the subsequent contracts entered by it in pursuance of the project, the Court feels that it is necessary to discuss in full the pressing issues of the present controversy for a complete resolution thereof. II Is the 1997 Concession Agreement valid? Petitioners and public respondents contend that the 1997 Concession Agreement is invalid as it contains provisions that substantially depart from the draft Concession Agreement included in the Bid Documents. They maintain that a substantial departure from the draft Concession Agreement is a violation of public policy and renders the 1997 Concession Agreement null and void. PIATCO maintains, however, that the Concession Agreement attached to the Bid Documents is intended to be a draft, i.e., subject to change, alteration or modification, and that this intention was clear to all participants, including AEDC, and DOTC/MIAA. It argued further that said intention is expressed in Part C (6) of Bid Bulletin No. 3 issued by the PBAC which states: 6. Amendments to the Draft Concessions Agreement Amendments to the Draft Concessions Agreement shall be issued from time to time. Said amendments shall only cover items that would not materially affect the preparation of the proponents proposal. By its very nature, public bidding aims to protect the public interest by giving the public the best possible advantages through open competition. Thus: Competition must be legitimate, fair and honest. In the field of government contract law, competition requires, not only `bidding upon a common standard, a common basis, upon the same thing, the same subject matter, the same undertaking,' but also that it be legitimate, fair and honest; and not designed to injure or defraud the government.[31]

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An essential element of a publicly bidded contract is that all bidders must be on equal footing. Not simply in terms of application of the procedural rules and regulations imposed by the relevant government agency, but more importantly, on the contract bidded upon. Each bidder must be able to bid on the same thing. The rationale is obvious. If the winning bidder is allowed to later include or modify certain provisions in the contract awarded such that the contract is altered in any material respect, then the essence of fair competition in the public bidding is destroyed. A public bidding would indeed be a farce if after the contract is awarded, the winning bidder may modify the contract and include provisions which are favorable to it that were not previously made available to the other bidders. Thus: It is inherent in public biddings that there shall be a fair competition among the bidders. The specifications in such biddings provide the common ground or basis for the bidders. The specifications should, accordingly, operate equally or indiscriminately upon all bidders.[32] The same rule was restated by Chief Justice Stuart of the Supreme Court of Minnesota: The law is well settled that where, as in this case, municipal authorities can only let a contract for public work to the lowest responsible bidder, the proposals and specifications therefore must be so framed as to permit free and full competition. Nor can they enter into a contract with the best bidder containing substantial provisions beneficial to him, not included or contemplated in the terms and specifications upon which the bids were invited.
[33]

upon, such changes must not constitute substantial or material amendments that would alter the basic parameters of the contract and would constitute a denial to the other bidders of the opportunity to bid on the same terms. Hence, the determination of whether or not a modification or amendment of a contract bidded out constitutes a substantial amendment rests on whether the contract, when taken as a whole, would contain substantially different terms and conditions that would have the effect of altering the technical and/or financial proposals previously submitted by other bidders. The alterations and modifications in the contract executed between the government and the winning bidder must be such as to render such executed contract to be an entirely different contract from the one that was bidded upon. In the case of Caltex (Philippines), Inc. v. Delgado Brothers, Inc.,[34] this Court quoted with approval the ruling of the trial court that an amendment to a contract awarded through public bidding, when such subsequent amendment was made without a new public bidding, is null and void: The Court agrees with the contention of counsel for the plaintiffs that the due execution of a contract after public bidding is a limitation upon the right of the contracting parties to alter or amend it without another public bidding, for otherwise what would a public bidding be good for if after the execution of a contract after public bidding, the contracting parties may alter or amend the contract, or even cancel it, at their will? Public biddings are held for the protection of the public, and to give the public the best possible advantages by means of open competition between the bidders. He who bids or offers the best terms is awarded the contract subject of the bid, and it is obvious that such protection and best possible advantages to the public will disappear if the parties to a contract executed after public bidding may alter or amend it without another previous public bidding.[35] Hence, the question that comes to fore is this: is the 1997 Concession Agreement the same agreement that was offered for public bidding, i.e., the draft Concession Agreement attached to the Bid Documents? A close comparison of the draft Concession

In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to support its argument that the draft concession agreement is subject to amendment, the pertinent portion of which was quoted above, the PBAC also clarified that [s]aid amendments shall only cover items that would not materially affect the preparation of the proponents proposal. While we concede that a winning bidder is not precluded from modifying or amending certain provisions of the contract bidded

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Agreement attached to the Bid Documents and the 1997 Concession Agreement reveals that the documents differ in at least two material respects: a. Modification on the Public Utility Revenues and Non-Public Utility Revenues that may be collected by PIATCO The fees that may be imposed and collected by PIATCO under the draft Concession Agreement and the 1997 Concession Agreement may be classified into three distinct categories: (1) fees which are subject to periodic adjustment of once every two years in accordance with a prescribed parametric formula and adjustments are made effective only upon written approval by MIAA; (2) fees other than those included in the first category which maybe adjusted by PIATCO whenever it deems necessary without need for consent of DOTC/MIAA; and (3) new fees and charges that may be imposed by PIATCO which have not been previously imposed or collected at the Ninoy Aquino International Airport Passenger Terminal I, pursuant to Administrative Order No. 1, Series of 1993, as amended. The glaring distinctions between the draft Concession Agreement and the 1997 Concession Agreement lie in the types of fees included in each category and the extent of the supervision and regulation which MIAA is allowed to exercise in relation thereto. For fees under the first category, i.e., those which are subject to periodic adjustment in accordance with a prescribed parametric formula and effective only upon written approval by MIAA,the draft Concession Agreement includes the following:[36] (1) aircraft parking fees; (2) aircraft tacking fees; (3) groundhandling fees; (4) rentals and airline offices; (5) check-in counter rentals; and

(6) porterage fees. Under the 1997 Concession Agreement, fees which are subject to adjustment and effective upon MIAA approval are classified as Public Utility Revenues and include:[37] (1) aircraft parking fees; (2) aircraft tacking fees; (3) check-in counter fees; and (4) Terminal Fees. The implication of the reduced number of fees that are subject to MIAA approval is best appreciated in relation to fees included in the second category identified above. Under the 1997 Concession Agreement, fees which PIATCO may adjust whenever it deems necessary without need for consent of DOTC/MIAA are Non-Public Utility Revenues and is defined as all other income not classified as Public Utility Revenues derived from operations of the Terminal and the Terminal Complex.[38] Thus, under the 1997 Concession Agreement, groundhandling fees, rentals from airline offices and porterage fees are no longer subject to MIAA regulation. Further, under Section 6.03 of the draft Concession Agreement, MIAA reserves the right to regulate (1) lobby and vehicular parking fees and (2) other new fees and charges that may be imposed by PIATCO. Such regulation may be made by periodic adjustment and is effective only upon written approval of MIAA. The full text of said provision is quoted below: Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments in the aircraft parking fees, aircraft tacking fees, groundhandling fees, rentals and airline offices, check-in-counter rentals and porterage fees shall be allowed only once every two years and in accordance with the Parametric Formula attached hereto as Annex F. Provided that adjustments shall be made effective only after the written express approval of the MIAA.

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Provided, further, that such approval of the MIAA, shall be contingent only on the conformity of the adjustments with the above said parametric formula. The first adjustment shall be made prior to the In-Service Date of the Terminal. The MIAA reserves the right to regulate under the foregoing terms and conditions the lobby and vehicular parking fees and other new fees and charges as contemplated in paragraph 2 of Section 6.01 if in its judgment the users of the airport shall be deprived of a free option for the services they cover.[39] On the other hand, the equivalent provision under the 1997 Concession Agreement reads: Section 6.03 Periodic Adjustment in Fees and Charges. . (c) Concessionaire shall at all times be judicious in fixing fees and charges constituting Non-Public Utility Revenues in order to ensure that End Users are not unreasonably deprived of services. While the vehicular parking fee, porterage fee and greeter/well wisher fee constitute Non-Public Utility Revenues of Concessionaire, GRP may intervene and require Concessionaire to explain and justify the fee it may set from time to time, if in the reasonable opinion of GRP the said fees have become exorbitant resulting in the unreasonable deprivation of End Users of such services.[40] Thus, under the 1997 Concession Agreement, with respect to (1) vehicular parking fee, (2) porterage fee and (3) greeter/well wisher fee, all that MIAA can do is to require PIATCO toexplain and justify the fees set by PIATCO. In the draft Concession Agreement, vehicular parking fee is subject to MIAA regulation and approval under the second paragraph of Section 6.03 thereof while porterage fee is covered by the first paragraph of the same provision. There is an obvious relaxation of the extent of control and regulation by MIAA with respect to the particular fees that may be charged by PIATCO.

Moreover, with respect to the third category of fees that may be imposed and collected by PIATCO, i.e., new fees and charges that may be imposed by PIATCO which have not been previously imposed or collected at the Ninoy Aquino International Airport Passenger Terminal I, under Section 6.03 of the draft Concession Agreement MIAA has reserved the right to regulate the same under the same conditions that MIAA may regulate fees under the first category, i.e., periodic adjustment of once every two years in accordance with a prescribed parametric formula and effective only upon written approval by MIAA. However, under the 1997 Concession Agreement, adjustment of fees under the third category is not subject to MIAA regulation. With respect to terminal fees that may be charged by PIATCO, as shown earlier, this was included within the category of Public Utility Revenues under the 1997 Concession Agreement. This classification is significant because under the 1997 Concession Agreement, Public Utility Revenues are subject to an Interim Adjustment of fees upon the occurrence of certain extraordinary events specified in the agreement.[42] However, under the draft Concession Agreement, terminal fees are not included in the types of fees that may be subject to Interim Adjustment.[43]
[41]

Finally, under the 1997 Concession Agreement, Public Utility Revenues, except terminal fees, are denominated in US Dollars[44] while payments to the Government are in Philippine Pesos. In the draft Concession Agreement, no such stipulation was included. By stipulating that Public Utility Revenues will be paid to PIATCO in US Dollars while payments by PIATCO to the Government are in Philippine currency under the 1997 Concession Agreement, PIATCO is able to enjoy the benefits of depreciations of the Philippine Peso, while being effectively insulated from the detrimental effects of exchange rate fluctuations. When taken as a whole, the changes under the 1997 Concession Agreement with respect to reduction in the types of fees that are subject to MIAA regulation and the relaxation of such regulation with respect to other fees are significant amendments that substantially distinguish the draft Concession Agreement from the 1997 Concession Agreement. The 1997 Concession Agreement, in this respect, clearly gives PIATCO more favorable terms than

32

what was available to other bidders at the time the contract was bidded out. It is not very difficult to see that the changes in the 1997 Concession Agreement translate to direct and concrete financial advantages for PIATCO which were not available at the time the contract was offered for bidding. It cannot be denied that under the 1997 Concession Agreement only Public Utility Revenues are subject to MIAA regulation. Adjustments of all other fees imposed and collected by PIATCO are entirely within its control. Moreover, with respect to terminal fees, under the 1997 Concession Agreement, the same is further subject to Interim Adjustments not previously stipulated in the draft Concession Agreement. Finally, the change in the currency stipulated for Public Utility Revenues under the 1997 Concession Agreement, except terminal fees, gives PIATCO an added benefit which was not available at the time of bidding. b. Assumption by the Government of the liabilities of PIATCO in the event of the latters default thereof Under the draft Concession Agreement, default by PIATCO of any of its obligations to creditors who have provided, loaned or advanced funds for the NAIA IPT III project does not result in the assumption by the Government of these liabilities. In fact, nowhere in the said contract does default of PIATCOs loans figure in the agreement. Such default does not directly result in any concomitant right or obligation in favor of the Government. However, the 1997 Concession Agreement provides: Section 4.04 . (b) In the event Concessionaire should default in the payment of an Attendant Liability, and the default has resulted in the acceleration of the payment due date of the Attendant Liability prior to its stated date of maturity, the Unpaid Creditors and Concessionaire shall immediately inform GRP in writing of such default. GRP shall, within one hundred eighty (180) Days from receipt of the joint written notice of the Unpaid Creditors and Concessionaire, either (i) take over the Assignment.

Development Facility and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified, to be substituted as concessionaire and operator of the Development Facility in accordance with the terms and conditions hereof, or designate a qualified operator acceptable to GRP to operate the Development Facility, likewise under the terms and conditions of this Agreement; Provided that if at the end of the 180-day period GRP shall not have served the Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be deemed to have elected to take over the Development Facility with the concomitant assumption of Attendant Liabilities. (c) If GRP should, by written notice, allow the Unpaid Creditors to be substituted as concessionaire, the latter shall form and organize a concession company qualified to take over the operation of the Development Facility. If the concession company should elect to designate an operator for the Development Facility, the concession company shall in good faith identify and designate a qualified operator acceptable to GRP within one hundred eighty (180) days from receipt of GRPs written notice. If the concession company, acting in good faith and with due diligence, is unable to designate a qualified operator within the aforesaid period, then GRP shall at the end of the 180-day period take over the Development Facility and assume Attendant Liabilities. The term Attendant Liabilities under the 1997 Concession Agreement is defined as: Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the books of the Concessionaire as owing to Unpaid Creditors who have provided, loaned or advanced funds actually used for the Project, including all interests, penalties, associated fees, charges, surcharges, indemnities, reimbursements and other related expenses, and further including amounts owed by Concessionaire to its suppliers, contractors and sub-contractors. Under the above quoted portions of Section 4.04 in relation to the definition of Attendant Liabilities, default by PIATCO of its loans used to finance the NAIA IPT III project triggers the

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occurrence of certain events that leads to the assumption by the Government of the liability for the loans. Only in one instance may the Government escape the assumption of PIATCOs liabilities, i.e., when the Government so elects and allows a qualified operator to take over as Concessionaire. However, this circumstance is dependent on the existence and availability of a qualified operator who is willing to take over the rights and obligations of PIATCO under the contract, a circumstance that is not entirely within the control of the Government. Without going into the validity of this provision at this juncture, suffice it to state that Section 4.04 of the 1997 Concession Agreement may be considered a form of security for the loans PIATCO has obtained to finance the project, an option that was not made available in the draft Concession Agreement. Section 4.04 is an important amendment to the 1997 Concession Agreement because it grants PIATCO a financial advantage or benefit which was not previously made available during the bidding process. This financial advantage is a significant modification that translates to better terms and conditions for PIATCO. PIATCO, however, argues that the parties to the bidding procedure acknowledge that the draft Concession Agreement is subject to amendment because the Bid Documents permit financing or borrowing. They claim that it was the lenders who proposed the amendments to the draft Concession Agreement which resulted in the 1997 Concession Agreement. We agree that it is not inconsistent with the rationale and purpose of the BOT Law to allow the project proponent or the winning bidder to obtain financing for the project, especially in this case which involves the construction, operation and maintenance of the NAIA IPT III. Expectedly, compliance by the project proponent of its undertakings therein would involve a substantial amount of investment. It is therefore inevitable for the awardee of the contract to seek alternate sources of funds to support the project. Be that as it may, this Court maintains that amendments to the contract bidded upon should always conform to the general policy on public bidding if such procedure is to be faithful to its real nature and purpose. By its very nature and characteristic, competitive public bidding aims to protect the public interest by giving the public the best possible

advantages through open competition.[45] It has been held that the three principles in public bidding are (1) the offer to the public; (2) opportunity for competition; and (3) a basis for the exact comparison of bids. A regulation of the matter which excludes any of these factors destroys the distinctive character of the system and thwarts the purpose of its adoption.[46] These are the basic parameters which every awardee of a contract bidded out must conform to, requirements of financing and borrowing notwithstanding. Thus, upon a concrete showing that, as in this case, the contract signed by the government and the contract-awardee is an entirely different contract from the contract bidded, courts should not hesitate to strike down said contract in its entirety for violation of public policy on public bidding. A strict adherence on the principles, rules and regulations on public bidding must be sustained if only to preserve the integrity and the faith of the general public on the procedure. Public bidding is a standard practice for procuring government contracts for public service and for furnishing supplies and other materials. It aims to secure for the government the lowest possible price under the most favorable terms and conditions, to curtail favoritism in the award of government contracts and avoid suspicion of anomalies and it places all bidders in equal footing.[47] Any government action which permits any substantial variance between the conditions under which the bids are invited and the contract executed after the award thereof is a grave abuse of discretion amounting to lack or excess of jurisdiction which warrants proper judicial action. In view of the above discussion, the fact that the foregoing substantial amendments were made on the 1997 Concession Agreement renders the same null and void for being contrary to public policy. These amendments convert the 1997 Concession Agreement to an entirely different agreement from the contract bidded out or the draft Concession Agreement. It is not difficult to see that the amendments on (1) the types of fees or charges that are subject to MIAA regulation or control and the extent thereof and (2) the assumption by the Government, under certain conditions, of the liabilities of PIATCO directly translates concrete financial advantages to PIATCO that were previously not available during the bidding process. These amendments cannot be taken as merely supplements to or implementing provisions of those already

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existing in the draft Concession Agreement. The amendments discussed above present new terms and conditions which provide financial benefit to PIATCO which may have altered the technical and financial parameters of other bidders had they known that such terms were available. III Direct Government Guarantee Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of the 1997 Concession Agreement provides: Section 4.04 Assignment . (b) In the event Concessionaire should default in the payment of an Attendant Liability, and the default resulted in the acceleration of the payment due date of the Attendant Liability prior to its stated date of maturity, the Unpaid Creditors and Concessionaire shall immediately inform GRP in writing of such default. GRP shall within one hundred eighty (180) days from receipt of the joint written notice of the Unpaid Creditors and Concessionaire, either (i) take over the Development Facility and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified to be substituted as concessionaire and operator of the Development facility in accordance with the terms and conditions hereof, or designate a qualified operator acceptable to GRP to operate the Development Facility, likewise under the terms and conditions of this Agreement; Provided, that if at the end of the 180-day period GRP shall not have served the Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be deemed to have elected to take over the Development Facility with the concomitant assumption of Attendant Liabilities. (c) If GRP, by written notice, allow the Unpaid Creditors to be substituted as concessionaire, the latter shall form and organize a concession company qualified to takeover the operation of the Development Facility. If the concession company should elect to designate an operator for the Development Facility, the concession

company shall in good faith identify and designate a qualified operator acceptable to GRP within one hundred eighty (180) days from receipt of GRPs written notice. If the concession company, acting in good faith and with due diligence, is unable to designate a qualified operator within the aforesaid period, then GRP shall at the end of the 180-day period take over the Development Facility and assume Attendant Liabilities. . Section 1.06. Attendant Liabilities

Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the books of the Concessionaire as owing to Unpaid Creditors who have provided, loaned or advanced funds actually used for the Project, including all interests, penalties, associated fees, charges, surcharges, indemnities, reimbursements and other related expenses, and further including amounts owed by Concessionaire to its suppliers, contractors and sub-contractors.[48] It is clear from the above-quoted provisions that Government, in the event that PIATCO defaults in its loan obligations, is obligated to pay all amounts recorded and from time to time outstanding from the books of PIATCO which the latter owes to its creditors.[49] These amounts include all interests, penalties, associated fees, charges, surcharges, indemnities, reimbursements and other related expenses.[50] This obligation of the Government to pay PIATCOs creditors upon PIATCOs default would arise if the Government opts to take over NAIA IPT III. It should be noted, however, that even if the Government chooses the second option, which is to allow PIATCOs unpaid creditors operate NAIA IPT III, the Government is still at a risk of being liable to PIATCOs creditors should the latter be unable to designate a qualified operator within the prescribed period.[51] In effect, whatever option the Government chooses to take in the event of PIATCOs failure to fulfill its loan obligations, the Government is still at a risk of assuming PIATCOs outstanding loans. This is due to the fact that the Government would only be free from assuming PIATCOs

35

debts if the unpaid creditors would be able to designate a qualified operator within the period provided for in the contract. Thus, the Governments assumption of liability is virtually out of its control. The Government under the circumstances provided for in the 1997 Concession Agreement is at the mercy of the existence, availability and willingness of a qualified operator. The above contractual provisions constitute a direct government guarantee which is prohibited by law. One of the main impetus for the enactment of the BOT Law is the lack of government funds to construct the infrastructure and development projects necessary for economic growth and development. This is why private sector resources are being tapped in order to finance these projects. The BOT law allows the private sector to participate, and is in fact encouraged to do so by way of incentives, such as minimizing the unstable flow of returns, [52] provided that the government would not have to unnecessarily expend scarcely available funds for the project itself. As such, direct guarantee, subsidy and equity by the government in these projects are strictly prohibited.[53] This is but logical for if the government would in the end still be at a risk of paying the debts incurred by the private entity in the BOT projects, then the purpose of the law is subverted. Section 2(n) of the BOT Law defines direct guarantee as follows: (n) Direct government guarantee An agreement whereby the government or any of its agencies or local government units assume responsibility for the repayment of debt directly incurred by the project proponentin implementing the project in case of a loan default. Clearly by providing that the Government assumes the attendant liabilities, which consists of PIATCOs unpaid debts, the 1997 Concession Agreement provided for a direct government guarantee for the debts incurred by PIATCO in the implementation of the NAIA IPT III project. It is of no moment that the relevant sections are subsumed under the title of assignment. The provisions providing for direct government guarantee which is prohibited by law is clear from the terms thereof.

The fact that the ARCA superseded the 1997 Concession Agreement did not cure this fatal defect. Article IV, Section 4.04(c), in relation to Article I, Section 1.06, of the ARCA provides: Section 4.04 Security . (c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in good faith and enter into direct agreement with the Senior Lenders, or with an agent of such Senior Lenders (which agreement shall be subject to the approval of the Bangko Sentral ng Pilipinas), in such form as may be reasonably acceptable to both GRP and Senior Lenders, with regard, inter alia, to the following parameters: . (iv) If the Concessionaire [PIATCO] is in default under a payment obligation owed to the Senior Lenders, and as a result thereof the Senior Lenders have become entitled to accelerate the Senior Loans, the Senior Lenders shall have the right to notify GRP of the same, and without prejudice to any other rights of the Senior Lenders or any Senior Lenders agent may have (including without limitation under security interests granted in favor of the Senior Lenders), to either in good faith identify and designate a nominee which is qualified under sub-clause (viii)(y) below to operate the Development Facility [NAIA Terminal 3] or transfer the Concessionaires [PIATCO] rights and obligations under this Agreement to a transferee which is qualified under sub-clause (viii) below; . (vi) if the Senior Lenders, acting in good faith and using reasonable efforts, are unable to designate a nominee or effect a transfer in terms and conditions satisfactory to the Senior Lenders within one hundred eighty (180) days after giving GRP notice as referred to respectively in (iv) or (v) above, then GRP and the Senior Lenders shall endeavor in good faith to enter into any other

36

arrangement relating to the Development Facility [NAIA Terminal 3] (other than a turnover of the Development Facility [NAIA Terminal 3] to GRP) within the following one hundred eighty (180) days. If no agreement relating to the Development Facility [NAIA Terminal 3] is arrived at by GRP and the Senior Lenders within the said 180-day period, then at the end thereof the Development Facility [NAIA Terminal 3] shall be transferred by the Concessionaire [PIATCO] to GRP or its designee and GRP shall make a termination payment to Concessionaire [PIATCO] equal to the Appraised Value (as hereinafter defined) of the Development Facility [NAIA Terminal 3] or the sum of the Attendant Liabilities, if greater. Notwithstanding Section 8.01(c) hereof, this Agreement shall be deemed terminated upon the transfer of the Development Facility [NAIA Terminal 3] to GRP pursuant hereto; . Section 1.06. Attendant Liabilities

Government are unable to enter into an agreement after the prescribed period, the Government must then pay PIATCO, upon transfer of NAIA IPT III to the Government, termination payment equal to the appraised value of the project or the value of the attendant liabilities whichever is greater. Attendant liabilities as defined in the ARCA includes all amounts owed or thereafter may be owed by PIATCO not only to the Senior Lenders with whom PIATCO has defaulted in its loan obligations but to all other persons who may have loaned, advanced funds or provided any other type of financial facilities to PIATCO for NAIA IPT III. The amount of PIATCOs debt that the Government would have to pay as a result of PIATCOs default in its loan obligations -- in case no qualified nominee or transferee is appointed by the Senior Lenders and no other agreement relating to NAIA IPT III has been reached between the Government and the Senior Lenders -- includes, but is not limited to, all principal, interest, associated fees, charges, reimbursements, and other related expenses . . . whether payable at maturity, by acceleration or otherwise.[55] It is clear from the foregoing that the ARCA provides for a direct guarantee by the government to pay PIATCOs loans not only to its Senior Lenders but all other entities who provided PIATCO funds or services upon PIATCOs default in its loan obligation with its Senior Lenders. The fact that the Governments obligation to pay PIATCOs lenders for the latters obligation would only arise after the Senior Lenders fail to appoint a qualified nominee or transferee does not detract from the fact that, should the conditions as stated in the contract occur, the ARCA still obligates the Government to pay any and all amounts owed by PIATCO to its lenders in connection with NAIA IPT III. Worse, the conditions that would make the Government liable for PIATCOs debts is triggered by PIATCOs own default of its loan obligations to its Senior Lenders to which loan contracts the Government was never a party to. The Government was not even given an option as to what course of action it should take in case PIATCO defaulted in the payment of its senior loans. The Government, upon PIATCOs default, would be merely notified by the Senior Lenders of the same and it is the Senior Lenders who are authorized to appoint a qualified nominee or transferee. Should the Senior Lenders fail to make such an appointment, the Government is then automatically obligated to directly deal and negotiate with the

Attendant Liabilities refer to all amounts in each case supported by verifiable evidence from time to time owed or which may become owing by Concessionaire [PIATCO] to Senior Lenders or any other persons or entities who have provided, loaned, or advanced funds or provided financial facilities to Concessionaire [PIATCO] for the Project [NAIA Terminal 3], including, without limitation, all principal, interest, associated fees, charges, reimbursements, and other related expenses (including the fees, charges and expenses of any agents or trustees of such persons or entities), whether payable at maturity, by acceleration or otherwise, and further including amounts owed by Concessionaire [PIATCO] to its professional consultants and advisers, suppliers, contractors and sub-contractors.[54] It is clear from the foregoing contractual provisions that in the event that PIATCO fails to fulfill its loan obligations to its Senior Lenders, the Government is obligated to directly negotiate and enter into an agreement relating to NAIA IPT III with the Senior Lenders, should the latter fail to appoint a qualified nominee or transferee who will take the place of PIATCO. If the Senior Lenders and the

37

Senior Lenders regarding NAIA IPT III. The only way the Government would not be liable for PIATCOs debt is for a qualified nominee or transferee to be appointed in place of PIATCO to continue the construction, operation and maintenance of NAIA IPT III. This pre-condition, however, will not take the contract out of the ambit of a direct guarantee by the government as the existence, availability and willingness of a qualified nominee or transferee is totally out of the governments control. As such the Government is virtually at the mercy of PIATCO (that it would not default on its loan obligations to its Senior Lenders), the Senior Lenders (that they would appoint a qualified nominee or transferee or agree to some other arrangement with the Government) and the existence of a qualified nominee or transferee who is able and willing to take the place of PIATCO in NAIA IPT III. The proscription against government guarantee in any form is one of the policy considerations behind the BOT Law. Clearly, in the present case, the ARCA obligates the Government to pay for all loans, advances and obligations arising out of financial facilities extended to PIATCO for the implementation of the NAIA IPT III project should PIATCO default in its loan obligations to its Senior Lenders and the latter fails to appoint a qualified nominee or transferee. This in effect would make the Government liable for PIATCOs loans should the conditions as set forth in the ARCA arise. This is a form of direct government guarantee. The BOT Law and its implementing rules provide that in order for an unsolicited proposal for a BOT project may be accepted, the following conditions must first be met: (1) the project involves a new concept in technology and/or is not part of the list of priority projects, (2) no direct government guarantee, subsidy or equity is required, and (3) the government agency or local government unit has invited by publication other interested parties to a public bidding and conducted the same.[56] The failure to meet any of the above conditions will result in the denial of the proposal. It is further provided that the presence of direct government guarantee, subsidy or equity will necessarily disqualify a proposal from being treated and accepted as an unsolicited proposal.[57] The BOT Law clearly and strictly prohibits direct government guarantee, subsidy and equity in unsolicited proposals that the mere inclusion of a provision

to that effect is fatal and is sufficient to deny the proposal. It stands to reason therefore that if a proposal can be denied by reason of the existence of direct government guarantee, then its inclusion in the contract executed after the said proposal has been accepted is likewise sufficient to invalidate the contract itself. A prohibited provision, the inclusion of which would result in the denial of a proposal cannot, and should not, be allowed to later on be inserted in the contract resulting from the said proposal. The basic rules of justice and fair play alone militate against such an occurrence and must not, therefore, be countenanced particularly in this instance where the government is exposed to the risk of shouldering hundreds of million of dollars in debt. This Court has long and consistently adhered to the legal maxim that those that cannot be done directly cannot be done indirectly.[58] To declare the PIATCO contracts valid despite the clear statutory prohibition against a direct government guarantee would not only make a mockery of what the BOT Law seeks to prevent -- which is to expose the government to the risk of incurring a monetary obligation resulting from a contract of loan between the project proponent and its lenders and to which the Government is not a party to -- but would also render the BOT Law useless for what it seeks to achieve - to make use of the resources of the private sector in the financing, operation and maintenance of infrastructure and development projects[59] which are necessary for national growth and development but which the government, unfortunately, could illafford to finance at this point in time. IV Temporary takeover of business affected with public interest Article XII, Section 17 of the 1987 Constitution provides: Section 17. In times of national emergency, when the public interest so requires, the State may, during the emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation of any privately owned public utility or business affected with public interest.

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The above provision pertains to the right of the State in times of national emergency, and in the exercise of its police power, to temporarily take over the operation of any business affected with public interest. In the 1986 Constitutional Commission, the term national emergency was defined to include threat from external aggression, calamities or national disasters, but not strikes unless it is of such proportion that would paralyze government service.[60] The duration of the emergency itself is the determining factor as to how long the temporary takeover by the government would last. [61] The temporary takeover by the government extends only to the operation of the business and not to the ownership thereof. As such the government is not required to compensate the private entityowner of the said business as there is no transfer of ownership, whether permanent or temporary. The private entity-owner affected by the temporary takeover cannot, likewise, claim just compensation for the use of the said business and its properties as the temporary takeover by the government is in exercise of its police power and not of its power of eminent domain. Article V, Section 5.10 (c) of the 1997 Concession Agreement provides: Section 5.10 Temporary Take-over of operations by GRP. . (c) In the event the development Facility or any part thereof and/or the operations of Concessionaire or any part thereof, become the subject matter of or be included in any notice, notification, or declaration concerning or relating to acquisition, seizure or appropriation by GRP in times of war or national emergency, GRP shall, by written notice to Concessionaire, immediately take over the operations of the Terminal and/or the Terminal Complex. During such take over by GRP, the Concession Period shall be suspended; provided, that upon termination of war, hostilities or national emergency, the operations shall be returned to Concessionaire, at which time, the Concession period shall commence to run again. Concessionaire shall be entitled to reasonable compensation for the duration of the temporary take over by GRP, which compensation shall take into account the reasonable cost for the use of the Terminal and/or Terminal

Complex, (which is in the amount at least equal to the debt service requirements of Concessionaire, if the temporary take over should occur at the time when Concessionaire is still servicing debts owed to project lenders), any loss or damage to the Development Facility, and other consequential damages. If the parties cannot agree on the reasonable compensation of Concessionaire, or on the liability of GRP as aforesaid, the matter shall be resolved in accordance with Section 10.01 [Arbitration]. Any amount determined to be payable by GRP to Concessionaire shall be offset from the amount next payable by Concessionaire to GRP.
[62]

PIATCO cannot, by mere contractual stipulation, contravene the Constitutional provision on temporary government takeover and obligate the government to pay reasonable cost for the use of the Terminal and/or Terminal Complex.[63] Article XII, section 17 of the 1987 Constitution envisions a situation wherein the exigencies of the times necessitate the government to temporarily take over or direct the operation of any privately owned public utility or business affected with public interest. It is the welfare and interest of the public which is the paramount consideration in determining whether or not to temporarily take over a particular business. Clearly, the State in effecting the temporary takeover is exercising its police power. Police power is the most essential, insistent, and illimitable of powers.[64] Its exercise therefore must not be unreasonably hampered nor its exercise be a source of obligation by the government in the absence of damage due to arbitrariness of its exercise. [65] Thus, requiring the government to pay reasonable compensation for the reasonable use of the property pursuant to the operation of the business contravenes the Constitution. V Regulation of Monopolies A monopoly is a privilege or peculiar advantage vested in one or more persons or companies, consisting in the exclusive right (or power) to carry on a particular business or trade, manufacture a particular article, or control the sale of a particular commodity.[66] The 1987 Constitution strictly regulates monopolies, whether private

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or public, and even provides for their prohibition if public interest so requires. Article XII, Section 19 of the 1987 Constitution states: Sec. 19. The state shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed. Clearly, monopolies are not per se prohibited by the Constitution but may be permitted to exist to aid the government in carrying on an enterprise or to aid in the performance of various services and functions in the interest of the public.[67] Nonetheless, a determination must first be made as to whether public interest requires a monopoly. As monopolies are subject to abuses that can inflict severe prejudice to the public, they are subject to a higher level of State regulation than an ordinary business undertaking. In the cases at bar, PIATCO, under the 1997 Concession Agreement and the ARCA, is granted the exclusive right to operate a commercial international passenger terminal within the Island of Luzon at the NAIA IPT III.[68] This is with the exception of already existing international airports in Luzon such as those located in the Subic Bay Freeport Special Economic Zone (SBFSEZ), Clark Special Economic Zone (CSEZ) and in Laoag City.[69] As such, upon commencement of PIATCOs operation of NAIA IPT III, Terminals 1 and 2 of NAIA would cease to function as international passenger terminals. This, however, does not prevent MIAA to use Terminals 1 and 2 as domestic passenger terminals or in any other manner as it may deem appropriate except those activities that would compete with NAIA IPT III in the latters operation as an international passenger terminal.[70] The right granted to PIATCO to exclusively operate NAIA IPT III would be for a period of twentyfive (25) years from the In-Service Date[71] and renewable for another twenty-five (25) years at the option of the government.[72] Both the 1997 Concession Agreement and the ARCA further provide that, in view of the exclusive right granted to PIATCO, the concession contracts of the service providers currently servicing Terminals 1 and 2 would no longer be renewed and those concession contracts whose expiration are subsequent to the In-Service Date would cease to be effective on the said date.
[73]

The operation of an international passenger airport terminal is no doubt an undertaking imbued with public interest. In entering into a BuildOperate-and-Transfer contract for the construction, operation and maintenance of NAIA IPT III, the government has determined that public interest would be served better if private sector resources were used in its construction and an exclusive right to operate be granted to the private entity undertaking the said project, in this case PIATCO. Nonetheless, the privilege given to PIATCO is subject to reasonable regulation and supervision by the Government through the MIAA, which is the government agency authorized to operate the NAIA complex, as well as DOTC, the department to which MIAA is attached.[74] This is in accord with the Constitutional mandate that a monopoly which is not prohibited must be regulated.[75] While it is the declared policy of the BOT Law to encourage private sector participation by providing a climate of minimum government regulations,[76] the same does not mean that Government must completely surrender its sovereign power to protect public interest in the operation of a public utility as a monopoly. The operation of said public utility can not be done in an arbitrary manner to the detriment of the public which it seeks to serve. The right granted to the public utility may be exclusive but the exercise of the right cannot run riot. Thus, while PIATCO may be authorized to exclusively operate NAIA IPT III as an international passenger terminal, the Government, through the MIAA, has the right and the duty to ensure that it is done in accord with public interest. PIATCOs right to operate NAIA IPT III cannot also violate the rights of third parties. Section 3.01(e) of the 1997 Concession Agreement and the ARCA provide: 3.01 Concession Period . (e) GRP confirms that certain concession agreements relative to certain services and operations currently being undertaken at the Ninoy Aquino International Airport passenger Terminal I have a validity period extending beyond the In-Service Date. GRP

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through DOTC/MIAA, confirms that these services and operations shall not be carried over to the Terminal and the Concessionaire is under no legal obligation to permit such carryover except through a separate agreement duly entered into with Concessionaire. In the event Concessionaire becomes involved in any litigation initiated by any such concessionaire or operator, GRP undertakes and hereby holds Concessionaire free and harmless on full indemnity basis from and against any loss and/or any liability resulting from any such litigation, including the cost of litigation and the reasonable fees paid or payable to Concessionaires counsel of choice, all such amounts shall be fully deductible by way of an offset from any amount which the Concessionaire is bound to pay GRP under this Agreement. During the oral arguments on December 10, 2002, the counsel for the petitioners-in-intervention for G.R. No. 155001 stated that there are two service providers whose contracts are still existing and whose validity extends beyond the In-Service Date. One contract remains valid until 2008 and the other until 2010.[77] We hold that while the service providers presently operating at NAIA Terminal 1 do not have an absolute right for the renewal or the extension of their respective contracts, those contracts whose duration extends beyond NAIA IPT IIIs In-Service-Date should not be unduly prejudiced. These contracts must be respected not just by the parties thereto but also by third parties. PIATCO cannot, by law and certainly not by contract, render a valid and binding contract nugatory. PIATCO, by the mere expedient of claiming an exclusive right to operate, cannot require the Government to break its contractual obligations to the service providers. In contrast to the arrastre and stevedoring service providers in the case of Anglo-Fil Trading Corporation v. Lazaro[78] whose contracts consist of temporary hold-over permits, the affected service providers in the cases at bar, have a valid and binding contract with the Government, through MIAA, whose period of effectivity, as well as the other terms and conditions thereof, cannot be violated. In fine, the efficient functioning of NAIA IPT III is imbued with public interest. The provisions of the 1997 Concession Agreement and the ARCA did not strip government, thru the MIAA, of its right to supervise the operation of the whole NAIA complex, including NAIA

IPT III. As the primary government agency tasked with the job,[79] it is MIAAs responsibility to ensure that whoever by contract is given the right to operate NAIA IPT III will do so within the bounds of the law and with due regard to the rights of third parties and above all, the interest of the public. VI CONCLUSION In sum, this Court rules that in view of the absence of the requisite financial capacity of the Paircargo Consortium, predecessor of respondent PIATCO, the award by the PBAC of the contract for the construction, operation and maintenance of the NAIA IPT III is null and void. Further, considering that the 1997 Concession Agreement contains material and substantial amendments, which amendments had the effect of converting the 1997 Concession Agreement into an entirely different agreement from the contract bidded upon, the 1997 Concession Agreement is similarly null and void for being contrary to public policy. The provisions under Sections 4.04(b) and (c) in relation to Section 1.06 of the 1997 Concession Agreement and Section 4.04(c) in relation to Section 1.06 of the ARCA, which constitute a direct government guarantee expressly prohibited by, among others, the BOT Law and its Implementing Rules and Regulations are also null and void. The Supplements, being accessory contracts to the ARCA, are likewise null and void. WHEREFORE, the 1997 Concession Agreement, the Amended and Restated Concession Agreement and the Supplements thereto are set aside for being null and void. SO ORDERED. agan jr v piatco Facts: In August 1989 the DOTC had a study conducted to determine whether or not the present Ninoy Aquino International Airport (NAIA) can cope with traffic development up to the year 2010. A draft final report was submitted to the DOTC in December 1989. Four years later, in 1993, six Filipino-Chinese business leaders met

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with then President Fidel Ramos to explore the possibility of investing in the construction and operation of a new international airport terminal. The six later formed the Asias Emerging Dragon Corp (AEDC) which submitted an unsolicited proposal for the development of NAIA International Passenger Terminal III more than a year after the first meeting with Ramos, in October 1994. In March 1995, the DOTC endorsed the AEDC proposal to the National Economic and Development Authority (NEDA). In January 1996, NEDA passed Board Resolution No. 2 which approved the NAIA IPT III project. In June 1996, the DOTC published an invitation for competitive bidding in two daily newspapers, as required by law (sec 4-A of RA6957). The alternative bidders had to submit three envelopes. The first contains the prequalification documents, the second the technical proposal, and the third the financial proposal of the proponent. The bidding was scheduled on September 20, 1996. The bid documents issued by the Prequalification Bids and Awards Committee said the proponent must have adequate capability to sustain the financing requirement for the engineering, design, construction, operation, and maintenance phases of the project. The proponent must have an equity that is at least 30% of the project cost, and be able to secure external financing for the project. Government was also guaranteed a five percent share in the gross revenue of the project for the first five years; 7.5% in the next 10 years, and 10% in the next 10 years. This would be in addition to a fixed annual guaranteed payment to the government. The basis for the prequalification shall be the proponents compliance with the minimum technical and financial requirements provided in the bid documents and the IRR of the BOT (build operate and transfer) Law. The bid documents allowed amendments to the draft concession agreement, but said that these should cover only items that would not materially affect the preparation of the proponents proposal. In August 1996, during the second pre-bid conference, the PBAC made several clarifications, upon the request of Peoples Air Cargo & Warehousing Co. Inc (PAIRCARGO), which wanted to challenge the AEDC bid. The PBAC said the list of revenue sources mentioned in the bid documents were merely indicative. The project proponent may add

other revenue sources, subject to approval by the DOTC/MIAA. Also, only fees and charges denominated as public utility fees would be subject to regulation, and these could still be revised, because the PBAC has a pending query with the justice department. In September 1996, PBAC issued a bid bulletin in which it said that since PAIRCARGO could not meet the required minimum equity prescribed in the bid documents, it would accept instead an audited financial statement of the financial capability of all member companies of the consortium. In September 1996, PAIRCARGO submitted their competitive proposal to the PBAC. The first envelope, containing the prequalification documents, was opened on September 23, 1996, and PBAC prequalified the PAIRCARGO consortium the following day. On September 26, AEDC filed with PBAC its reservations regarding PAIRCARGo, noting the lack of corporate approvals and financial capability of PAIRCARGO. For one, PAIRCARGO included in the computation of its financial capability the total net worth of Security Bank, when the Banking Law limits to 15% the total investment that a bank may make on one project. It also questioned the appointment of Lufthansa as facility operator, because Philippine laws limit to Filipinos the operation of a public utility. The PBAC, however, said on October 2, 1996 that based on the documents submitted and the prequalification criteria, PAIRCARGO was prequalified. The DOTC secretary approved PBACs findings. The AEDC reiterated its objections two more times. On October 16, the third envelope containing the financial proposals were opened, and PAIRCARGO had offered to pay the government higher. Both PAIRCARGO and AEDC offered to build the NAIA Passenger Terminal III for at least $350 million at no cost to the government and to pay the government a 5% share in gross revenues for the first five years of operation; a 7.5% share in gross revenues for the next 10 years of operation; and a 10% share in gross revenues for the last 10 years of operation. In addition to this, AEDC offered to pay the government P135 million as guaranteed payment for 27 years. Paircargo Consortium offered a total of P17.75 billion for the same period. PBAC informed AEDC it had accepted Paircagos price proposal, and given AEDC 30 working days to match the bid. When AEDC

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failed to do so, the DOTC issued a notice on December 11 1996 regarding AEDCs failure to match the proposal. In February 1997, Paircargo Consortium incorporated into Philippine International Airport Terminals Co Inc (PIATCO). AEDC protested the alleged undue preference given to PIATCO and reiterated its objections regarding the prequalification of PIATCO. In April 1997, it filed before the Pasig RTC a petition for declaration of nullity of the proceedings, mandamus and injunction against the DOTC secretary, the PBAC chair and its voting members, and the chair of the PBAC technical committee. On April 17, the NEDA ICC conducted an ad referendum to facilitate the approval of the BOT agreement between the DOTC and PIATCO. Because there were only four instead of the required six signatures, the NEDA merely noted the agreement. On July 9, 1997, the DOTC issued the notice of award for the project to PIATCO. The Concession Agreement was signed on July 12, 1997, granting PIATCO the franchise to operate and maintain the NAIA Passenger Terminal III for 25 years, with an option to renew for a period not exceeding 25 years. PIATCO was allowed to collect fees, rentals and other charges in accordance with the rates or schedules in the 1997 Concession Agreement. At the end of the concession period, PIATCO will transfer the airport to MIAA. In November 1998, the government and PIATCO signed an Amended and Restated Concession Agreement (ARCA). The ARCA amended provisions on the special obligations of the government, the exclusivity of the franchise given to PIATCO, the proceeds of the insurance, the taxes, duties and other charges that may be levied PIATCO, and the provisions on the termination of the contract. Three more supplements to the ARCA were signed afterwards: in August 1999, in September 2000, and in June 2001. The first redefined revenues, required government to construct an access road connecting NAIA II and III, and added to the special obligations of government. The second supplement required government to clear structures at the construction site and to pay PIATCO for these. The third provided for PIATCOs obligations regarding the construction of the surface road connecting Terminals II and III. In September 2002, workers of the international airline service providers filed before the Supreme Court a petition for prohibition

enjoining the enforcement of the agreements. They said the transfer to NAIA III could cost them their jobs, since under the agreements, PIATCO is not required to honor MIAAs existing concession contracts with various service providers for international airline airport services. In October 2002, the service providers filed a motion for intervention and a petition in intervention, joining the cause of the petitioning workers. Three congressmen Salacnib Baterina, Clavel Martinez and Constantino Jaraula filed a similar petition shortly after. In November 2002, several MIAA employees also filed a petition questioning the legality of the agreements. In December 2002, another group of congressmen Jacinto Paras, Rafael Nantes, Eduardo Zialcita, Willie Villarama, Prospero Nograles, Prospero Pichay Jr., Harlin Cast Abayon and Benasing Macarambon filed their comment in intervention defending the validity of the agreements and praying for the dismissal of the petitions. On December 10, 2002, the court heard the case on oral argument, the required the parties to file their respective memoranda, and to explore the possibility of arbitration as provided in the challenged contracts. In their consolidated memorandum, the Office of the Solicitor General and the Office of the Government Corporate Counsel prayed that the petitions be given due course and that the 1997 Concession Agreement, the ARCA and the supplements be declared void for being contrary to the Constitution, the BOT Law and its implementing rules and regulations. In March 2003, PIATCO commenced arbitration proceedings before the International Chamber of Commerce, International Court of Arbitration. Issue: Did the PIATCO agreements the 1997 Concession Agreement, the ARCA, and the three supplemental agreements violate the Constitution and the BOT Law? Held/Decision:

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YES. Ratio: In the first place, PIATCO was not a qualified bidder. The minimum project cost was estimated to be P9.183 billion, which meant that Paircargo Consortium had to prove it could provide at least P2.755 billion. Paircargos audited financial statement for 1994 showed it had a net worth of P3.123 billion, but that was because it included in the computation the total net worth of Security Bank, which as of 1995 was at P3.523 billion. Since banks are allowed to invest only 15% of it entire net worth, Security Bank could only invest P528 million, which brings down Paircargos equity to P558.384 million, or only 6% of the project cost. Disregarding the investment ceilings provided by applicable law would not result in a proper evaluation of whether or not a bidder is pre-qualified to undertake the project as for all intents and purposes, such ceiling or legal restriction determines the true maximum amount which a bidder may invest in the projectIf the maximum amount of equity that a bidder may invest in the project at the time the bids are submitted falls short of the minimum amounts required to be put up by the bidder, said bidder should be properly disqualifiedwe hold that Paircargo Consortium was not a qualified bidder. Thus the award of the contract by the PBAC to the Paircargo consortium is null and void. Other issues: 1. The signed agreement was different from the draft that was bidded on. Under the law, substantial changes require another bidding. The three principles in public bidding are: an offer to the public; opportunity for competition; and basis for the exact comparison of bids. Changing the parameters would change the agreement, which might have changed the technical and financial parameters of other bidders had they known that such terms were available. The 1997 Concession Agreement signed between PIATCO and the government was substantially different from the draft concession agreement that was bidded on. While it was a draft and was expected to amended from time to time, the PBAC bid bulletin also said that the amendments should only cover items that would not materially affect the preparation of the proposal. The changes should not be substantial or material enough to alter the basic parameters of the contract, and constitute a denial to the other bidders of the opportunity to bid on the same terms.

There were two main differences between the draft agreement and the one that was signed. These concerned the fees that may be imposed and collected by PIATCO, and the extent of control and regulation that MIAA has over the fees that PIATCO will charge. The draft agreement classified aircraft parking and tacking fees, groundhandling fees, rentals and airlines offices, check-in counter rentals and porterage fees under those that are regulated subject to periodic adjustment of once every two years and in accordance to a certain formula. The signed agreement said fees subject to MIAA approval are public utility fees and took out groundhandling and rentals and airlines offices from the list. There was also an obvious relaxation of the extent of control and regulation by MIAA with respect to the particular fees that may be charged by PIATCO. The signed agreement also allowed PIATCO to charge in US dollars, while paying the government in pesos. When taken as a whole, the changes under the 1997 Concession Agreement with respect to reduction in the types of fees that are subject to MIAA regulation and the relaxation of such regulation with respect to other fees are significant amendments that substantially distinguish the draft Concession Agreement from the 1997 Concession Agreement. The 1997 Concession Agreement, in this respect, clearly gives PIATCO more favorable terms than what was available to other bidders at the time the contract was bidded out. It is not very difficult to see that the changes in the 1997 Concession Agreement translate to direct and concrete financial advantages for PIATCO which were not available at the time the contract was offered for bidding. It cannot be denied that under the 1997 Concession Agreement only Public Utility Revenues are subject to MIAA regulation. Adjustments of all other fees imposed and collected by PIATCO are entirely within its control. Moreover, with respect to terminal fees, under the 1997 Concession Agreement, the same is further subject to Interim Adjustments not previously stipulated in the draft Concession Agreement. Finally, the change in the currency stipulated for Public Utility Revenues under the 1997 Concession Agreement, except terminal fees, gives PIATCO an added benefit which was not available at the time of bidding. 2. Under the draft Concession Agreement, default by PIATCO of its obligations does not result in the assumption by government of these liabilities. Under the signed agreement, default by PIATCO of its loans used to finance the project eventually leads to government

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assumption of the liability for the loans. This is in violation of the BOT Law, which prohibits direct government guarantees. If a proposal can be denied by reason of the existence of direct government guarantee, then its inclusion in the contract executed after the said proposal has been accepted is likewise sufficient to invalidate the contract itselfTo declare the PIATCO contracts valid despite the clear statutory prohibition against a direct government guarantee would not only make a mockery of what the BOT Law seeks to prevent which is to expose the government to the risk of incurring a monetary obligation resulting from a contract of loan between the project proponent and its lenders and to which the Government is not a party to but would also render the BOT Law useless for what it seeks to achieve to make use of the resources of the private sector in the financing, operation and maintenance of infrastructure and development projects which are necessary for national growth and development but which the government, unfortunately, could ill-afford to finance at this point in time. 3. Sec. 5.10 of the 1997 Concession Agreement violates Article XII, Sec. 12 of the 1987 Constitution. The Constitutional provision allows for temporary takeover of public facilities in times of national emergency. Since the takeover is temporary and extends only to the operation of the business and not the ownership, government is not required to compensate the owner. Neither can the owner claim just compensation for the use of the business and its properties because the takeover is in exercise of the States police power and not of its power of eminent domain. The 1997 Concession Agreement, on the other hand, says that in the event of a takeover, Concessionaire shall be entitled to reasonable compensation for the duration of the temporary takeover PIATCO cannot, by mere contractual stipulation, contravene the Constitutional provision on temporary government and obligate the government pay reasonable cost for the use of Terminal and/or Terminal Complex. Police power is the most essential, insistent, and illimitable of powers. Its exercise must not be unreasonably hampered nor its exercise be a source of obligation by the government in the absence of damage due to arbitrariness of its exercise. 4. The 1987 Constitution strictly regulates monopolies. Art XII, Sec. 19 says: The State shall regulate or prohibit monopolies when the public interest so requires.

The 1997 Concession Agreement gave PIATCO the exclusive right to operate a commercial international passenger terminal within the island of Luzon, with the exception of already existing terminals such as those in the Subic Bay Freeport, Clark Special Economic Zone, and in Laoag City. This privilege, however, is subject to reasonable regulation and supervision and should not violate the rights of third parties. There are service providers at the NAIA I with existing contracts with the MIAA valid until 2010; since the 1997 Concession Agreement says PIATCO is not bound to honor existing contracts with MIAA, transferring operations from NAIA I to NAIA III would unduly prejudice them. PIATCO cannot, by law and certainly not by contract, render a valid and binding contract nugatory. PIATCO, by the mere expedient claiming an exclusive right to operate, cannot require the Government to break its contractual obligations to the service providers. IN SUM, THIS COURT RULES THAT IN VIEW OF THE ABSENCE OF THE REQUISITE FINANCIAL CAPACITY OF THE PAIRCARGO CONSORTIUM, PREDECESSOR OF RESPONDENT PIATCO, THE AWARD BY THE PBAC OF THE CONTRACT FOR THE CONSTRUCTION, OPERATION AND MAINTENANCE OF THE NAIA IPT III IS NULL AND VOID. FURTHER, CONSIDERING THAT THE 1997 CONCESSION AGREEMENT CONTAINS MATERIAL AND SUBSTANTIAL AMENDMENTS, WHICH AMENDMENTS HAD THE EFFECT OF CONVERTING THE 1997 CONCESSION AGREEMENT INTO AN ENTIRELY DIFFERENT AGREEMENT FROM THE CONTRACT BIDDED UPON, THE 1997 CONCESSION AGREEMENT IS SIMILARLY NULL AND VOID FOR BEING CONTRARY TO PUBLIC POLICY. THE PROVISIONS UNDER SECTIONS 4.04(B) AND (C) IN RELATION TO SECTION 1.06 OF THE 1997 CONCESSION AGREEMENT AND SECTION 4.04 (C) IN RELATION TO SECTION 1.06 OF THE ARCA, WHICH CONSTITUTE A DIRECT GOVERNMENT GUARANTEE EXPRESSLY PROHIBITED BY, AMONG OTHERS, THE BOT LAW AND ITS IMPLEMENTING RULES AND REGULATIONS ARE ALSO NULL AND VOID. THE SUPPLEMENTS, BEING ACCESSORY CONTRACTS TO THE ARCA, ARE LIKEWISE NULL AND VOID.

G.R. No. L-42283 March 18, 1985

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BUENAVENTURA ANGELES, ET AL., plaintiffs-appellees, vs. URSULA TORRES CALASANZ, ET AL., defendants-appellants.

payments. The plaintiffs' letter with their plea for reconsideration of the said cancellation was denied by the defendants-appellants. The plaintiffs-appellees filed Civil Case No. 8943 with the Court of First Instance of Rizal, Seventh Judicial District, Branch X to compel the defendants-appellants to execute in their favor the final deed of sale alleging inter alia that after computing all subsequent payments for the land in question, they found out that they have already paid the total amount of P4,533.38 including interests, realty taxes and incidental expenses for the registration and transfer of the land. The defendants-appellants alleged in their answer that the complaint states no cause of action and that the plaintiffs-appellees violated paragraph six (6) of the contract to sell when they failed and refused to pay and/or offer to pay the monthly installments corresponding to the month of August, 1966 for more than five (5) months, thereby constraining the defendants-appellants to cancel the said contract. The lower court rendered judgment in favor of the plaintiffsappellees. The dispositive portion of the decision reads: WHEREFORE, based on the foregoing considerations, the Court hereby renders judgment in favor of the plaintiffs and against the defendants declaring that the contract subject matter of the instant case was NOT VALIDLY cancelled by the defendants. Consequently, the defendants are ordered to execute a final Deed of Sale in favor of the plaintiffs and to pay the sum of P500.00 by way of attorney's fees. Costs against the defendants. A motion for reconsideration filed by the defendants-appellants was denied. As earlier stated, the then Court of Appeals certified the case to us considering that the appeal involves pure questions of law. The defendants-appellants assigned the following alleged errors of the lower court:

GUTIERREZ, JR., J.: This is an appeal from the decision of the Court of First Instance of Rizal, Seventh Judicial District, Branch X, declaring the contract to sell as not having been validly cancelled and ordering the defendants-appellants to execute a final deed of sale in favor of the plaintiffs-appellees, to pay P500.00 attorney's fees and costs. The facts being undisputed, the Court of Appeals certified the case to us since only pure questions of law have been raised for appellate review. On December 19, 1957, defendants-appellants Ursula Torres Calasanz and Tomas Calasanz and plaintiffs-appellees Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of land located in Cainta, Rizal for the amount of P3,920.00 plus 7% interest per annum. The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They promised to pay the balance in monthly installments of P 41.20 until fully paid, the installments being due and payable on the 19th day of each month. The plaintiffsappellees paid the monthly installments until July 1966, when their aggregate payment already amounted to P4,533.38. On numerous occasions, the defendants-appellants accepted and received delayed installment payments from the plaintiffs-appellees. On December 7, 1966, the defendants-appellants wrote the plaintiffsappellees a letter requesting the remittance of past due accounts. On January 28, 1967, the defendants-appellants cancelled the said contract because the plaintiffs-appellees failed to meet subsequent

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First Assignment of Error THE LOWER COURT ERRED IN NOT HOLDING THE CONTRACT TO SELL (ANNEX "A" OF COMPLIANCE) AS HAVING BEEN LEGALLY AND VALIDLY CANCELLED. Second Assignment of Error EVEN ASSUMING ARGUENDO THAT THE SAID CONTRACT TO SELL HAS NOT BEEN LEGALLY AND VALIDLY CANCELLED, THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO EXECUTE A FINAL DEED OF SALE IN FAVOR OF THE PLAINTIFF. Third Assignment of Error THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO PAY PLAINTIFFS THE SUM OF P500.00 AS ATTORNEY'S FEES. The main issue to be resolved is whether or not the contract to sell has been automatically and validly cancelled by the defendantsappellants. The defendants-appellants submit that the contract was validly cancelled pursuant to paragraph six of the contract which provides: xxx xxx xxx SIXTH.In case the party of the SECOND PART fails to satisfy any monthly installments, or any other payments herein agreed upon, he is granted a month of grace within which to make the retarded payment, together with the one corresponding to the said month of grace; it is understood, however, that should the month of grace herein granted to the

party of the SECOND PART expired; without the payments corresponding to both months having been satisfied, an interest of 10% per annum will be charged on the amounts he should have paid; it is understood further, that should a period of 90 days elapse, to begin from the expiration of the month of grace herein mentioned, and the party of SECOND PART has not paid all the amounts he should have paid with the corresponding interest up to that date, the party of the FIRST PART has the right to declare this contract cancelled and of no effect, and as consequence thereof, the party of the FIRST PART may dispose of the parcel of land covered by this contract in favor of other persons, as if this contract had never been entered into. In case of such cancellation of the contract, all the amounts paid in accordance with this agreement together with all the improvements made on the premises, shall be considered as rents paid for the use and occupation of the above mentioned premises, and as payment for the damages suffered by failure of the party of the SECOND PART to fulfill his part of the agreement; and the party of the SECOND PART hereby renounces all his right to demand or reclaim the return of the same and obliges himself to peacefully vacate the premises and deliver the same to the party of the FIRST PART. (Emphasis supplied by appellant) xxx xxx xxx The defendants-appellants argue that the plaintiffs-appellees failed to pay the August, 1966 installment despite demands for more than four (4) months. The defendants-appellants point to Jocson v. Capitol Subdivision (G.R. No. L-6573, February 28, 1955) where this Court upheld the right of the subdivision owner to automatically cancel a contract to sell on the strength of a provision or stipulation similar to paragraph 6 of the contract in this case. The defendantsappellants also argue that even in the absence of the aforequoted

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provision, they had the right to cancel the contract to sell under Article 1191 of the Civil Code of the Philippines. The plaintiffs-appellees on the other hand contend that the Jocson ruling does not apply. They state that paragraph 6 of the contract to sell is contrary to law insofar as it provides that in case of specified breaches of its terms, the sellers have the right to declare the contract cancelled and of no effect, because it granted the sellers an absolute and automatic right of rescission. Article 1191 of the Civil Code on the rescission of reciprocal obligations provides: 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. xxx xxx xxx Article 1191 is explicit. In reciprocal obligations, either party the right to rescind the contract upon the failure of the other to perform the obligation assumed thereunder. Moreover, there is nothing in the law that prohibits the parties from entering into an agreement that violation of the terms of the contract would cause its cancellation even without court intervention (Froilan v. Pan Oriental Shipping, Co., et al., 12 SCRA 276) Well settled is, however, the rule that a judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions' (Lopez v. Commissioner of Customs, 37 SCRA 327, and cases cited therein)

Resort to judicial action for rescission is obviously not contemplated . . . The validity of the stipulation can not be seriously disputed. It is in the nature of a facultative resolutory condition which in many cases has been upheld by this Court. (Ponce Enrile v. Court of Appeals, 29 SCRA 504). The rule that it is not always necessary for the injured party to resort to court for rescission of the contract when the contract itself provides that it may be rescinded for violation of its terms and conditions, was qualified by this Court in University of the Philippines v. De los Angeles, (35 SCRA 102) where we explained that: Of course, it must be understood that the 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. If the other party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced. In other words, the party who deems the contract violated many consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. ... . We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial action is necessary

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for the resolution of a reciprocal obligation; (Ocejo, Perez & Co. v. International Banking Corp., 37 Phil. 631; Republic v. Hospital de San Juan de Dios, et al., 84 Phil. 820) since in every case where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action will be necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription. The right to rescind the contract for non-performance of one of its stipulations, therefore, is not absolute. InUniversal Food Corp. v. Court of Appeals (33 SCRA 1) the Court stated that 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. (Song Fo & Co. v. HawaiianPhilippine Co., 47 Phil. 821, 827) The question of whether a breach of a contract is substantial depends upon the attendant circumstances. (Corpus v. Hon. Alikpala, et al., L-23707 & L-23720, Jan. 17, 1968). ... . The defendants-appellants state that the plaintiffs-appellees violated Section two of the contract to sell which provides: SECOND.That in consideration of the agreement of sale of the above described property, the party of the SECOND PART obligates himself to pay to the party of the FIRST PART the Sum of THREE THOUSAND NINE HUNDRED TWENTY ONLY (P3,920.00), Philippine Currency, plus interest at the rate of 7% per annum, as follows:

(a) The amount of THREE HUNDRED NINETY TWO only (P392.00) when this contract is signed; and (b) The sum of FORTY ONE AND 20/100 ONLY (P4l.20) on or before the 19th day of each month, from this date until the total payment of the price above stipulated, including interest. because they failed to pay the August installment, despite demand, for more than four (4) months. The breach of the contract adverted to by the defendants-appellants is so slight and casual when we consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had already paid the monthly installments for a period of almost nine (9) years. In other words, in only a short time, the entire obligation would have been paid. Furthermore, although the principal obligation was only P 3,920.00 excluding the 7 percent interests, the plaintiffs- appellees had already paid an aggregate amount of P 4,533.38. To sanction the rescission made by the defendants-appellants will work injustice to the plaintiffs- appellees. (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA 829) It would unjustly enrich the defendants-appellants. Article 1234 of the Civil Code which provides that: If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. also militates against the unilateral act of the defendants-appellants in cancelling the contract. We agree with the observation of the lower court to the effect that: Although the primary object of selling subdivided lots is business, yet, it cannot be denied that this

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subdivision is likewise purposely done to afford those landless, low income group people of realizing their dream of a little parcel of land which they can really call their own. The defendants-appellants cannot rely on paragraph 9 of the contract which provides: NINTH.-That whatever consideration of the party of the FIRST PART may concede to the party of the SECOND PART, as not exacting a strict compliance with the conditions of paragraph 6 of this contract, as well as any other condonation that the party of the FIRST PART may give to the party of the SECOND PART with regards to the obligations of the latter, should not be interpreted as a renunciation on the part of the party of the FIRST PART of any right granted it by this contract, in case of default or noncompliance by the party of the SECOND PART. The defendants-appellants argue that paragraph nine clearly allows the seller to waive the observance of paragraph 6 not merely once, but for as many times as he wishes. The defendants-appellants' contention is without merit. We agree with the plaintiffs-appellees that when the defendants-appellants, instead of availing of their alleged right to rescind, have accepted and received delayed payments of installments, though the plaintiffsappellees have been in arrears beyond the grace period mentioned in paragraph 6 of the contract, the defendants-appellants have waived and are now estopped from exercising their alleged right of rescission. In De Guzman v. Guieb (48 SCRA 68), we held that: xxx xxx xxx But defendants do not deny that in spite of the long arrearages, neither they nor their predecessor, Teodoro de Guzman, even took steps to cancel the option or to eject the appellees from the home-lot in

question. On the contrary, it is admitted that the delayed payments were received without protest or qualification. ... Under these circumstances, We cannot but agree with the lower court that at the time appellees exercised their option, appellants had already forfeited their right to invoke the abovequoted provision regarding the nullifying effect of the non-payment of six months rentals by appellees by their having accepted without qualification on July 21, 1964 the full payment by appellees of all their arrearages. The defendants-appellants contend in the second assignment of error that the ledger of payments show a balance of P671,67 due from the plaintiffs-appellees. They submit that while it is true that the total monthly installments paid by the plaintiffs-appellees may have exceeded P3,920.00, a substantial portion of the said payments were applied to the interests since the contract specifically provides for a 7% interest per annum on the remaining balance. The defendants-appellants rely on paragraph 2 of the contract which provides: SECOND.That in consideration of the agreement of sale of the above described property, the party of the SECOND PART obligates himself to pay to the party of the FIRST PART the Sum of THREE THOUSAND NINE HUNDRED TWENTY ONLY (P 3,920.00), Philippine Currency, plus interest at the rate of 7% per annum ... . (Emphasis supplied) The plaintiffs-appellees on the other hand are firm in their submission that since they have already paid the defendantsappellants a total sum of P4,533.38, the defendants-appellants must now be compelled to execute the final deed of sale pursuant to paragraph 12 of the contract which provides: TWELFTH.That once the payment of the sum of P3,920.00, the total price of the sale is completed, the party to the FIRST PART will execute in favor of

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the party of the SECOND PART, the necessary deed or deeds to transfer to the latter the title of the parcel of land sold, free from all hens and encumbrances other than those expressly provided in this contract; it is understood, however, that au the expenses which may be incurred in the said transfer of title shall be paid by the party of the SECOND PART, as above stated. Closely related to the second assignment of error is the submission of the plaintiffs-appellees that the contract herein is a contract of adhesion. We agree with the plaintiffs-appellees. The contract to sell entered into by the parties has some characteristics of a contract of adhesion. The defendants-appellants drafted and prepared the contract. The plaintiffs-appellees, eager to acquire a lot upon which they could build a home, affixed their signatures and assented to the terms and conditions of the contract. They had no opportunity to question nor change any of the terms of the agreement. It was offered to them on a "take it or leave it" basis. In Sweet Lines, Inc. v. Teves (83 SCRA 36 1), we held that: xxx xxx xxx ... (W)hile generally, stipulations in a contract come about after deliberate drafting by the parties thereto. . . . there are certain contracts almost all the provisions of which have been drafted only by one party, usually a corporation. Such contracts are called contracts of adhesion, because the only participation of the party is the signing of his signature or his "adhesion" thereto. Insurance contracts, bills of lading, contracts of sale of lots on the installment plan fall into this category. (Paras, Civil Code of the Philippines, Seventh ed., Vol. 1, p. 80.) (Emphasis supplied)

While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the defendants-appellants the sum of P3,920.00 plus 7% interest per annum, it is likewise true that under paragraph 12 the seller is obligated to transfer the title to the buyer upon payment of the P3,920.00 price sale. The contract to sell, being a contract of adhesion, must be construed against the party causing it. We agree with the observation of the plaintiffs-appellees to the effect that "the terms of a contract must be interpreted against the party who drafted the same, especially where such interpretation will help effect justice to buyers who, after having invested a big amount of money, are now sought to be deprived of the same thru the prayed application of a contract clever in its phraseology, condemnable in its lopsidedness and injurious in its effect which, in essence, and in its entirety is most unfair to the buyers." Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-appellees have already paid an aggregate amount of P4,533.38, the courts should only order the payment of the few remaining installments but not uphold the cancellation of the contract. Upon payment of the balance of P671.67 without any interest thereon, the defendants-appellants must immediately execute the final deed of sale in favor of the plaintiffs-appellees and execute the necessary transfer documents as provided in paragraph 12 of the contract. The attorney's fees are justified. WHEREFORE, the instant petition is DENIED for lack of merit. The decision appealed from is AFFIRMED with the modification that the plaintiffs-appellees should pay the balance of SIX HUNDRED SEVENTY ONE PESOS AND SIXTY-SEVEN CENTAVOS (P671.67) without any interests. Costs against the defendants-appellants. SO ORDERED. ANGELES VS. CALASANZ 135 SCRA 323

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FACTS: On December 19, 1957, defendants-appellants Ursula Torres Calasanz and plaintiffs-appellees Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of land located in Cainta, Rizal for the amount of P3,920.00 plus 7% interest per annum. The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They promised to pay the balance in monthly installments of P41.20 until fully paid, the installment being due and payable on the 19th day of each month. The plaintiffs-appellees paid the monthly installments until July 1966, when their aggregate payment already amounted to P4,533.38. On December 7, 1966, the defendants-appellants wrote the plantiffs-appellees a letter requesting the remittance of past due accounts. On January 28, 1967, the defendants-appellants cancelled the said contract because the plaintiffs failed to meet subsequent payments. The plaintiffs letter with their plea for reconsideration of the said cancellation was denied by the defendants. The plaintiffs-appellees filed a case before the Court of First Instance to compel the defendant to execute in their favor the final deed of sale alleging inter alia that after computing all subsequent payments for the land in question, they found out that they have already paid the total amount including interests, realty taxes and incidental expenses. The defendants alleged in their answer that the plaintiffs violated par. 6 of the contract to sell when they failed and refused to pay and/or offer to pay monthly installments corresponding to the month of August, 1966 for more than 5 months, thereby constraining the defendants to cancel the said contract.

The Court of First Instance rendered judgment in favor of the plaintiffs, hence this appeal. ISSUE: Has the Contract to Sell been automatically and validly cancelled by the defendants-appellants? RULING: No. While it is true that par.2 of the contract obligated the plaintiffs-appellees to pay the defendants the sum of P3,920 plus 7% interest per annum, it is likewise true that under par 12 the seller is obligated to transfer the title to the buyer upon payment of the said price. The contract to sell, being a contract of adhesion, must be construed against the party causing it. The Supreme Court agree with the observation of the plaintiffsappellees to the effect that the terms of a contract must be interpreted against the party who drafted the same, especially where such interpretation will help effect justice to buyers who, after having invested a big amount of money, are now sought to be deprived of the same thru the prayed application of a contract clever in its phraseology, condemnable in its lopsidedness and injurious in its effect which, in essence, and its entirety is most unfair to the buyers. Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-appellees have already paid an aggregate amount of P4,533.38, the courts should only order the payment of the few remaining installments but not uphold the cancellation of the contract. Upon payment of the balance of P671.67 without any interest thereon, the defendant must immediately execute the final deed of sale in favor of the plaintiffs and

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execute the necessary transfer of documents, as provided in par.12 of the contract. G.R. No. 80491 August 12, 1992 J. ARTIE VERGEL DE DIOS, petitioner, vs. COURT OF APPEALS AND EDUARDO LOPINGCO, respondents. Yulo, Aliling & Macamay Law Offices for petitioner. Pascual, Saligumba & Martin for Phil. Veterans Bank. Vicente Pascual Jr. & Jose Teoderico V. Molina for respondents. Leo Romero for private respondents.

ingenious gambits to this end are not unknown to the Court. It was not born yesterday. When it comes across any such subterfuge, it easily recognizes and rejects it, that the rules of procedure may not be perverted into engines of injustice. By its Board Resolution No. 939B-82, adopted on December 28, 1982, the Philippine Veterans Bank conveyed a parcel of land under a conditional sale to Averdi Marketing and Development Corporation. 1 Petitioner Artie Vergel de Dios, as general manager of Averdi, then transferred his rights to Eduardo Lopingco, herein private respondent, subject to the terms and conditions specified in their Memorandum of Agreement 2 and the Addendum thereto, 3 both concluded in February 1983. On June 21, 1984, Lopingco filed with the Regional Trial Court of Manila a complaint against the petitioner and the Philippine Veterans Bank for revocation of the said board resolution and the rescission of his contract with the petitioner. Copies of the complaint, together with the corresponding summons, were served on the defendants. On July 6, 1984, the Philippine Veterans Bank filed a motion to dismiss the complaint on the grounds of lack of a cause action and improper party. On July 13, 1984, at 9:15 o'clock in the morning, Lopingco filed an amended complaint and at the same time served a copy thereof on the petitioner by registered mail. On the same day, but after the filing of the amended complaint, the law firm of Fornier, Defensor, Rubinos and Fornier, through Atty. Alarico T. Mundin, filed its entry of appearance and motion for extension of time to file responsive pleading on behalf of the petitioner. The motion was subsequently granted but only for ten days. On August 10, 1984, the petitioner filed through counsel an omnibus motion asking that he be furnished a copy of the amended complaint. This was opposed by the private respondent, who said that the copy sought had already been sent directly to the petitioner by registered

CRUZ, J.: Procedural rules are designed to insure the orderly and expeditious administration of justice by providing for a practical system by which the parties to a litigation may be accorded a full and fair opportunity to present their respective positions and refute each other's submissions under the prescribed requirements, conditions and limitations. Adjective law is not the counterfoil of substantive law. In fact, there is a symbiotic relationship between them. By complying faithfully with the Rules of Court, the bench and the bar are better able to discuss, analyze and understand substantive rights and duties and consequently to more effectively protect and enforce them. The other alternative is judicial anarchy. It is unfortunate, however, that on occasion procedural rules are invoked not to uphold but to frustrate the prescriptions of substantive law. This usually happens where the party does not expect to win on the merits of his cause and so seeks to out-maneuver and delay his opponent by resorting to clever if futile technicalities. The many

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mail "because at the time said copy was mailed, there was as yet no appearance of counsel for said defendant." On September 12, 1984, at the hearing on the motion to dismiss, counsel for the private respondent moved for a declaration of default against the petitioner for failure to file his answer within the reglementary period. The trial court deferred resolution of the motion pending receipt of proof that the petitioner had indeed received the copy of the amended complaint sent to him by registered mail. On December 6, 1984, upon presentation of a certification from the Makati Central Post Office that the petitioner had received a copy of the amended complaint on July 17, 1984, he was declared in default and evidence for the other parties was subsequently received ex parte. On April 30, 1985, Judge Arsenio M. Gonong rendered a decision disposing as follows: WHEREFORE, based on the allegations and prayer on the complaint and the evidences adduced in support thereof, JUDGMENT is hereby rendered, ordering the rescission of the MemorandumAgreement and the Addendum thereto entered into between plaintiff Eduardo Lopingco and defendant J. Artie Vergel de Dios; ordering the defendant J. Artie Vergel de Dios to refund the plaintiff his downpayment of P725,000.00 with legal interest thereon from February 18, 1983; ordering defendant J. Artie de Dios to indemnify plaintiff in the amount of P 140,000.00 yearly from February 18, 1983 until plaintiff shall have received a complete refund of his investment; ordering defendant J. Artie Vergel de Dios to pay the plaintiff P20,000.00 as actual damages; P1,000.00 as litigation expenses; 10% of the total amount due as and for attorney's fees and to pay the costs.

The case is hereby DISMISSED in so far as defendant Philippine Veterans Bank is concerned. On June 5, 1985, the petitioner filed a motion for new trial alleging error on the part of the trial court for declaring him in default although he had not yet been served with a copy of the amended complaint and his omnibus motion had not yet been resolved. Assuming that such service was not necessary, he contented that he was nonetheless not negligent for failing to file his answer within the extended reglementary period. This motion was denied in an order dated August 7, 1985. 4 On the validity of the service of the amended complaint, the trial court declared: . . . To repeat, the service of amended complaint directly on defendant De Dios is in accordance with Sec. 2, R-13, Revised Rules of Court, to the effect that service of notice, pleadings, orders, and the like, should be made on the party, if not represented by counsel (Elli vs. Ditan, 5 SCRA 503; PLDT vs. NLRC, 128 SCRA 402-403) for "Without any record before it of any attorney appearing for said party, it certainly was in accordance with Section 2 of Rule 13 of the Rev. Rules of Court to serve the judgment upon the party affected thereby. It would be an absurdity to hold otherwise." (Luzon Rubber & Manufacturing Co. vs. Estaris, 52 SCRA 392). By analogy, the instant plaintiff could only serve his amended complaint directly on defendant De Dios. Because of all this, it is not correct then for movant De Dios to claim that this Court did not resolve his Omnibus Motion before declaring him in default and that the default order has no legal basis. The trial court also found that the petitioner was negligent in not filing his answer on time, for reasons to be cited below.

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On August 30, 1985, the petitioner filed an appeal with the respondent court, alleging that the trial court erred in declaring him in default without first ruling on his Omnibus Motion and in denying his motion for new trial. The appellate tribunal affirmed the questioned order. 5 The petitioner then came to this Court, contending that the Court of Appeals committed grave abuse of discretion: (a) in holding that he was properly declared in default; (b) in not setting aside the judgment by default as improper for unjustly depriving him of his constitutional right to be heard, the right to fair trial and the right to due process of law; (c) in not declaring that the proper remedy or action of respondent Lopingco is reformation and not rescission of the Memorandum of Agreement and the Addendum thereto; and (d) in not declaring that the decision appealed from as tainted with an award of excessive damages, insufficiency of evidence, and violation of the law. The petitioner submits that inasmuch as the amended complaint completely replaced the original complaint, the latter was stricken from the record and considered non-existent. So was the summons that accompanied it. As the amended complaint was a completely new pleading, a new summons should have been issued requiring the defendants to answer the same, conformably to Rule 14, Sec. 1, of the Rules of Court. For failing to do this and thereafter declaring him in default, the trial court denied him the right to be heard in violation of due process. This argument is not acceptable. The rule is that it is only when new causes of action are alleged in an amended complaint filed before the defendant has appeared in court that another summons must be served on the defendant with the amended complaint. 6 In determining whether a different cause of action is introduced by amendments to the complaint, the court must ascertain if the defendant shall be required to answer for a liability or legal obligation wholly different from that which was stated in the original complaint. 7 An amendment will not be considered as stating a new cause of action if the facts alleged in the amended complaint show

substantially the same wrong with respect to the same transaction, or if what are alleged refer to the same matter but are more fully and differently stated, or where averments which were implied are made in express terms, and the subject of the controversy or the liability sought to be enforced remains the same. 8 A reading of the amended complaint in the case at bar shows that it merely supplemented an incomplete allegation regarding the subject property. The purpose of the amendment was merely to include the additional information that the subject property "was and is still under litigation and the contract was entered into without the knowledge and approval of the litigants or of competent judicial authority." It is clear from a comparison of the allegations appearing in the original complaint and in the amended complaint that the cause of action of the private respondent had not been changed. The amended complaint also asked for the rescission of the Memorandum of Agreement and the Addendum and the return of the sum of P 725,000.00 which had been given by Lopingco to the petitioner as down payment on the subject property. Plainly, what was sought to be enforced against the petitioner both in the original complaint and in the amended complaint was his obligation to refund the said sum to the private respondent. The amended complaint did not change the cause of action but simply advanced the abovequoted additional information. We hold therefore that no new summons on the amended complaint was necessary. Apart from this, the record shows that, contrary to the petitioner's allegation, he received a copy of the amended complaint on July 17, 1984, through his authorized agent, as certified to by the Makati Central Post Office. The certification stated that Registered Letter No. 1933 (the amended complaint) posted on "July 13, 1984 at GSIS Post Office addressed to Artie Vergel de Dios, Studio 20, 3rd Floor, Makati Townhouse, 100 Gil J. Puyat Avenue, Makati, Metro Manila, was delivered to and received by the authorized representative of the addressee, administrator Dado on July 17, 1984." 9 This certification has not been denied by the petitioner.

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The trial court was correct in holding that when the private respondent sent by registered mail a copy of the amended complaint directly to the petitioner, he was acting in accordance with Sec. 2 of Rule 13 of the Rules of Court, allowing direct service on a party if not represented by counsel. At the time the amended complaint was filed, the defendant was not yet represented by counsel, which entered its appearance only after the private respondent had filed his amended complaint. It is noteworthy that the trial court cautiously suspended resolution of the motion to declare the petitioner in default until the private respondent shall have furnished proof of service of the amended complaint upon the petitioner. It was only on December 6, 1984, after the private respondent had submitted the above-quoted certification, that the trial court declared the petitioner in default. As the trial court granted the motion for extension before declaring the petitioner in default, he cannot say that it had unduly favored the private respondent. Neither has the petitioner been denied due process, for he was given adequate opportunity, even extended by ten days more beyond the reglementary period, to file his answer to the amended complaint. It is true that this Court looks with disfavor upon default judgments, preferring to give the parties full opportunity to argue their respective positions at a regular trial. But there are limits to our forbearance. As we held in Pahilanga vs. Luna: 10 It is within the sound discretion of the court to set aside an order of default and to permit a defendant to file his answer and to be heard on the merits even after the reglementary period for the filing of the answer has expired, but it is not error, or an abuse of discretion, on the part of the court to refuse to accept the answer where it finds no justifiable reason for the delay in the filing of the answer. In motions for reconsideration of an order of default, the moving party has the burden of showing such diligence as would justify his being excused from not filing the

answer within the reglementary period as provided by the Rules of Court, otherwise, these guidelines for an orderly and expeditious procedure would be rendered meaningless. Unless it is shown clearly that a party has justifiable reason for the delay, the court will not ordinarily exercise its discretion in his favor. In not exercising that discretion in the petitioner's favor, Judge Gonong correctly observed: . . . As a matter of fact, defendant De Dios was aware of his task to file his answer to the instant complaint within the time constraint provided by the Rules as can be gleaned from his motion through his counsel, Atty. Mundin, reading thus: 2. Undersigned counsel was informed by defendant that the LAST DAY FOR FILING HIS ANSWER AND/OR RESPONSIVE PLEADING IS TOMORROW, 13 July 1984, the summons and copy of the complaint having been received by herein defendant on 28 June, 1984' (par. 2, Entry of Appearance and Motion for Extension of Time to File Responsive Pleading, page 38, record; capitalization supplied). And yet, in spite of this consciousness upon receipt of the summons directing him within fifteen days after service to answer complaint, and also to serve a copy of said answer, within the same period, and failure to do so, judgment by default may be taken against him, still he (De Dios) did not upon receipt of the Amended Complaint sent on 13 July, 1984, and received by him four days after, on 17 July, 1984, rush to his counsel and handed to the latter the said amended complaint so that he would not run the risk of being declared in default. As it turned out, it was only when he filed, thru Atty. Defensor, his Motion For New trial on June 5, 1985, that he disclosed the fact that he did not consult his counsel as regards his receipt of the amended complaint (or 11 months and 18 days from July 17, 1984).

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This circumstance or inattention on his part simply demonstrates that defendant De Dios did not exercise due diligence and concern on the matter as an ordinary prudent person would do in order to have his answer filed within the reglementary period. Practical wisdom in taking care of one's affairs dictates that he should pay attention to the summons and at once see his lawyer without any delay. He did not. And so he has only himself to blame for the consequences of his act in treating the summons and complaint served upon him for granted. This court can do no less than to withhold exercising its discretion in his favor, it being convinced that said defendant's actuations of delay as pictured above can only be subsumed as one "not excusable negligence, mistake or accident." On the merits, the petition must also fail. The petitioner argues that the private respondent has no cause of action for rescission and contends that the proper action is for reformation of the Memorandum of Agreement and the Addendum. In the Memorandum of Agreement, the petitioner assigned to the private respondent the property rights he had acquired under Board Resolution No. 939B-82, subject to the following terms and conditions: 1. The down payment of 20% for the purchase of the land (P700,000.00) from the Philippine Veterans Bank shall be paid by the PARTY OF THE SECOND PART through the PARTY OF THE FIRST PART, on or before ___________, so that the latter could obtain a conditional sale of the property from the bank. 2. The PARTY OF THE SECOND PART shall pay the sum of P1,000,000.00 to the PARTY OF THE FIRST PART in the following manner:

a. P500,000.00 upon payment of the 20% downpayment over the land; b. P500,000.00 in five (5) equal installments for a period of five (5) months beginning on the date of this agreement. FINAL ASSIGNMENT: The sale by the bank of the property to the PARTY OF THE FIRST PART being conditioned upon the payment of the 20% down payment shall, upon fulfillment thereof, obligate the PARTY OF THE FIRST PART thereupon to automatically execute in favor of the PARTY OF THE SECOND PART a deed of assignment over the said property. We find that the above-quoted conditions, specifically the stipulation in the last paragraph, are susceptible of only one interpretation. The plain meaning is that upon the down payment of the amount of P700,000.00 to the Philippine Veterans Bank by Lopingco, De Dios, as the first party, shall execute in favor of Lopingco, as the second party, a deed of assignment over the property subject of the agreement. The petitioner does not deny that he has not executed that deed. He submits, though, that it was the private respondent who violated the express terms of the contracts for failing and refusing to pay the amount of P500,000.00 to the petitioner upon his payment of the 20% downpayment to Philippine Veterans Bank. We are not persuaded. What we read from the agreement is that the private respondent shall pay the P500,000.00 to the petitioner only upon execution by the latter of the deed of assignment in favor of the private respondent as required by the above-quoted last paragraph. Otherwise, the private respondent would be paying P700,000.00 to the Philippine Veterans Bank and P500,000.00 to the petitioner without one single document to prove that the property rights acquired by the petitioner under Board Resolution No. 939B-82 no longer belong to him but have already been transferred to Lopingco.

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Under the circumstances of this case, there is no question that the private respondent could avail himself of the remedy of rescission as authorized under Art. 1191 of the Civil Code, thus: 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. Interpreting this article in the case of Universal Food Corporation vs. Court of Appeals, 11 we stated that "rescission will be ordered only where the breach complained of is so substantial as to defeat the object of the parties in entering into the agreement." In the case at bar, we find that the non-performance by the petitioner of his obligation to execute the deed of assignment, which has not been denied, was a substantial breach that warranted rescission. We again quote the trial court with approval: If there be any actionable wrong under the facts obtaining hereunder it would be the act of defendant J. Artie Vergel de Dios. By entering into the contract (Memorandum-Agreement and its Addendum) conveying his rights arising from Veterans Bank

Board Resolution No. 9391-82 and having succeeded in having the plaintiff agree thereto on the assurance that defendant de Dios will be able to procure the approval and conformity of the Bank, of which he was not able to do so, and his subsequent receipt of the partial consideration of P700,000.00 and an additional amount of P25,000.00 knowing fully well that he could not transfer or convey his rights is a wrong, enforceable against him. Under the facts presented, rescission is the proper remedy and as provided for under Art. 1385 of the New Civil Code: Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore." In the case at bar, the plaintiff is very well entitled to the rescission of the Memorandum-Agreement and its Addendum, in fact the plaintiff was never in possession of the object of said contract as title and possession thereto cannot be transferred by the defendant de Dios, and pursuant to the same provision the plaintiff is likewise entitled to an indemnity for damages. The petitioner submits that by claiming that the agreements did not reflect the true intention of the parties, the private respondent thereby limited his recourse to reformation of the contract. We think not. Given a choice of remedies, the private respondent had a right to reject reformation of the contract as an available option and to choose rescission instead as the more effective relief for the protection of his interests. In demanding that the trial court serve new summons upon him because of the amendment of the complaint, the petitioner manifested his bad faith all too clearly. The amendment made was not substantial and did not change the original complaint so as to require the service of new summons upon him. Even if it was, it has

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been established that a copy of the amended complaint had been legally delivered to and received by him and that he in fact referred it to his counsel, albeit, through his own negligence, not soon enough. He cannot now claim that he was unaware of the amended complaint and was thus unable to answer it. That is a rank pretense. The trial court was not obliged to perform a charade. Courts do not lend themselves to empty gestures or useless rituals that can only impede the speedy a administration of justice. The petitioner's pious invocation of due process is nothing short of heretical and deserves to be dismissed. In these circumstances, the petitioner cannot complain that the damages awarded against him are excessive. Indeed they are not, and we sustain them completely. WHEREFORE, the petition is DENIED. The challenged decision is AFFIRMED, with costs against the petitioner.

by a seller in favor of two (2) different buyers. Both buyers now assert against each other a better title to the property. In dispute is an 18,260-square meter lot in the Poblacion of Tigbauan, Iloilo, described in Plan Psu-223696, L.R.C. Case No. N675, L.R.C. Record No. N-38846, and registered under Original Certificate of Title No. 0-7743 in the name of seller Severino Tolosa. On 20 August 1974, Tolosa mortgaged the land to the Philippine Veterans Bank and had the encumbrance annotated on his certificate of title under Entry No. 238353. On 17 March 1975, Tolosa and Pilar T. Ocampo, the latter being then represented by Teresa T. Borres, 1 entered into a contract whereby Tolosa undertook to sell the same parcel of land to Ocampo not later than 15 May 1975 for P22,000.00, P1,000.00 of which was paid upon execution thereof. 2 On 21 April 1975, the parties entered into an "Agreement to Sell Real Property" 3 whereby Tolosa "sells, cedes and transfers" the land to Ocampo in consideration of P25,000.00, P12,500.00 of which was paid upon signing of the deed and the balance to be due within six (6) months thereafter. Paragraph 4 of the contract provides that "immediately upon complete payment of the purchase price . . . by the VENDEE, the VENDOR . . . agrees to execute and deliver unto the VENDEE whatever pertinent document or documents necessary to implement this sale and to transfer title to the VENDEE." Before the six-month period to complete the payment of the purchase price expired, Ocampo paid but only the total of P16,700.00. 4 Nevertheless Tolosa accepted her subsequent late payments amounting to P3,900.00. 5Meanwhile, the subject property was involved in a boundary dispute. 6 On 6 June 1976, upon learning of the mortgage lien, Ocampo caused her adverse claim to be annotated on Tolosas certificate of title as Entry No. 279936. In his letter to Ocampo dated 15 March 1977, Tolosa sought the cancellation of Ocampos adverse claim and presented her with two

G.R. No. 97442 June 30, 1994 PILAR T. OCAMPO, petitioner, vs. COURT OF APPEALS and MAGDALENA S. VILLARUZ, respondents. Esteban C. Manuel for petitioner. Nery D. Duremdes for private respondent.

BELLOSILLO, J.: Two (2) documents, an "Agreement to Sell Real Property" and a "Contract to Sell," covering the same parcel of land were executed

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options, namely, a refund of payments made, or a share from the net proceeds if sold to a third party. 7 On even date, Ocampo through counsel wrote Tolosa expressing her readiness to pay the balance of the purchase price, which was P5,400.00, should Tolosa be ready to deliver to her the deed of absolute sale and the owners duplicate of OCT No. 0-7743 for purposes of registration. 8 On 3 June 1977, Tolosa and Magdalena S. Villaruz executed a "Contract to Sell" 9 whereby Tolosa "sells, cedes, transfers, and conveys" to Villaruz the same land in consideration of P94,300.00. The amount of P15,000.00 was to be paid upon execution and the balance upon cancellation of all liens and encumbrances from the certificate of title. The contract stipulated the immediate conveyance of the physical possession of the land to Villaruz, although no deed of definite sale would be delivered to her unless the price was fully paid. The contract noted the supposed judicial termination of the boundary dispute over the land. On 19 July 1977, Tolosa wrote Ocampo offering to reimburse her what she paid provided she would sign a document canceling her adverse claim. 10 Failing to convince Ocampo, Tolosa filed a petition in the Court of First Instance of Iloilo to cancel the adverse claim of Ocampo. On 30 July 1977, Judge Ricardo M. Ilarde denied the petition. 11 On 4 August 1977, another adverse claim was caused to be annotated by Ocampo on OCT No. 0-7743 under Entry No. 302257. 12 On 7 October 1977, Tolosa filed an action for "Breach of Contract, Damages and Quieting of Title" against Teresa Borres. 13 Borres claimed in her answer that she was merely the agent of Ocampo who was the real party in interest. Borres however died so that the trial court, on 2 July 1979, ordered her substitution by defendant Ocampo. Magdalena S. Villaruz, then claiming to have already bought the land, intervened in the case. On 9 October 1979, during the pendency of Civil Case No. 12163, Tolosa succeeded in securing from another branch of the court the cancellation of the adverse claims of Ocampo without notice to her. 14 This paved the way for the registration on 23 November 1979

of the contract of sale of Villaruz dated 8 August 1979 and the subsequent issuance of Transfer Certificate of Title No. T-100021 in her name which canceled the Original Certificate of Title No. 0-7743 of Tolosa. On 13 October 1981, Ocampo filed a third-party complaint against Villaruz. 15 On 7 January 1988, Judge Julian Y. Ereo of the Regional Trial Court of Iloilo, Branch 27, rendered a decision in Civil Case No. 12163 dismissing the complaint of Tolosa as well as the complaint in intervention of Villaruz 1. Declaring the contract to sell executed between plaintiff Severino Tolosa and third-party defendant Magdalena Villaruz as null and void as well as the Transfer of Certificate of Title issued in connection therewith, if any; 2. Ordering plaintiff Tolosa to execute the corresponding deed of sale in favor of third-party plaintiff Pilar T. Ocampo over the lot in litigation upon the latters payment of the balance of P4,400.00; 3. Ordering plaintiff Tolosa to vacate and deliver possession of the lot in question to Pilar T. Ocampo; 4. Ordering plaintiff to pay Pilar T. Ocampo P10,000.00 as attorneys fees, P30,000.00 as moral damages, P2,000.00 as litigation expenses, and costs. Her motion for reconsideration having been denied on 26 March 1988, Villaruz appealed to the Court of Appeals. On 11 October 1990, the 16th Division of the Court of Appeals, 16 in CA-G.R. No. 18428, reversed and set aside the trial courts decision

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1. Declaring Magdalena S. Villaruz the absolute owner of the parcel of land covered by TCT No. T100021 of the Register of Deeds of Iloilo; 2. Ordering the Register of Deeds of Iloilo to annotate at the back of TCT No. T-100021 the adverse claims filed by Pilar Ocampo under Entry No. 279936 and 302257 found in OCT No. 0-7743; and 3. Ordering the parties to pay proportionate costs. The appellate court upheld the sale in favor of Villaruz on the theory that the 21 April 1975 agreement of Tolosa and Ocampo was merely a contract to sell. It claimed that in the absence of a deed of absolute sale in favor of Ocampo, in relation to par. 4 of the contract, Tolosa retained ownership over the land and validly conveyed the same to Villaruz. The agreement between Tolosa and Ocampo dated 21 April 1975 although titled "Agreement to Sell Real Property" was a perfected contract of absolute sale wherein Tolosa forthwith sold, ceded and transferred the land to Ocampo. It provided "[T]hat for and in consideration of the sum of TWENTY-FIVE THOUSAND PESOS (P25,000.00), Philippine Currency, to be paid by the VENDEE unto the VENDOR, the latter hereby SELLS, CEDES and TRANSFERS in favor of the former her heirs and assigns, the above-described parcel of land, free from all liens and encumbrances." In Dignos v. CA, 17 we laid down the criteria that: . . . a deed of sale is absolute in nature although denominated as a "Deed of Conditional Sale" where nowhere in the contract in question is a proviso or stipulation to the effect that title to the property sold is reserved in the vendor until full payment of the purchase price, nor is there a stipulation giving the vendor the right to unilaterally rescind the contract

the moment the vendee fails to pay within a fixed period (Taguba v. Vda. de Leon, 132 SCRA 722; Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 86 SCRA 305). The conditions mentioned in Dignos, reiterating Taguba and Luzon Brokerage Co., Inc., were not found in the subject contract to indicate that it was indeed a mere contract to sell or a deed of conditional sale. Contrary to the interpretation of the appellate court, we find nothing significant about par. 4 of the contract which provides that . . . immediately upon complete payment of the purchase price herein by the VENDEE, the VENDOR hereby agrees to execute and deliver unto the VENDEE whatever pertinent document or documents necessary to implement this sale and to transfer title to the VENDEE. Paragraph 4 pertains to the undertaking of the seller to execute and deliver to the buyer any document deemed necessary by law to implement the sale and transfer title since the parties were unsure of what documents were pertinent. If the intent was for the seller to retain ownership and possession of the land through non-delivery of certain documents unless the price be fully paid, par. 4 alone should be inutile; it should have been complemented with a proviso that the sale would not be implemented nor the title considered transferred unless another document specifically for said purpose be first executed and delivered to the buyer. In this regard, no right to retain ownership and possession of the land pending full payment of the price can be inferred from the fact that no delivery was made to Ocampo. 18 The failure of the buyer to pay the price in full within a fixed period does not, by itself, bar the transfer of the ownership or possession, 19 much less dissolve the contract of sale. We held in De la Cruz v. Legaspi: 20

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. . . they err in the assertion that as plaintiff failed to pay the price after the execution of the document of sale as agreed previously, the contract became null and void for lack of consideration. It cannot be denied that when the document was signed the cause or consideration existed: P450. The document specifically said so; and such was undoubtedly the agreement. Subsequent non-payment of the price at the time agreed upon did not convert the contract into one without cause or consideration: a nudum pactum (Levy vs. Johnson, 4 Phil. 650; Puato vs. Mendoza, 64 Phil. 457). The situation was rather one in which there is failure to pay the consideration, with its resultant consequences. In other words, when after the notarization of the contract, plaintiff failed to hand the money to defendants, as he previously promised, there was default on his part at most, and defendants right was to demand interest legal interest for the delay, pursuant to article 1501 (3) of the Civil Code 21 (Villaruel vs. Tan King, 43 Phil. 251), or to demand rescission in court. (Escueta vs. Pardo, 42 Off. Gaz. 2759; Cortes vs. Bibao, 41 Phil. 298.) Such failure, however, did not ipso facto resolve the contract, no stipulation to that effect having been alleged (Cf. Warner Barnes & Co. vs. Inza, 43 Phil. 505). Neither was there any agreement nor allegation that payment on time was essential (Cf. Abella vs. Francisco, 55 Phil. 477; Berg vs. Magdalena Estate, 92 Phil. 110). Under Art. 1592 of the Civil Code, the failure of Ocampo to complete her payment of the purchase price within the stipulated period merely accorded Tolosa the option to rescind the contract of sale upon judicial or notarial demand. 22 However, the letter of 2 August 1977 claimed to have been sent by Tolosa to Ocampo rescinding the contract of sale 23 was defective because it was not notarized 24 and, more importantly, it was not proven to have been received by Ocampo. 25

Likewise, Civil Case No. 12163 could not be considered a judicial demand under Art. 1592 of the Civil Code because it did not pray for the rescission of the contract. Although the complaint sought the cancellation of Ocampos adverse claim on Tolosas OCT and for the refund of the payments made, these could not be equivalent to a rescission. In other words, seeking discharge from contractual obligations and an offer for restitution is not the same as abrogation of the contract. To rescind is "[t]o declare a contract void in its inception and to put an end to it as though it never were." 26 It is "[n]ot merely to terminate it and release parties from further obligations to each other but to abrogate it from the beginning and restore parties to relative positions which they would have occupied had no contract ever been made." 27 Even assuming arguendo that Civil Case No. 12163 was a valid judicial demand, rescission is not granted as a matter of course. Before Civil Case No. 12163 was filed on 7 October 1977, Ocampo not only paid Tolosa a total of P20,600.00 but also discharged Tolosas mortgage debt in the amount of P4,453.41. Had not Tolosa ordered the Philippine Veterans Bank to return the mortgage debt payment by Ocampo, 28 the purchase price would have been deemed fully paid. If only to accentuate her intention to make good her contractual obligations, Ocampo offered to pay the balance of the purchase price in her letter of 15 March 1977 or more than four months before Tolosa allegedly wrote his letter of rescission on 2 August 1977, and more than six months before the filing of Civil Case No. 12163 on 7 October 1977. This offer to pay prior to the demand for rescission is sufficient to defeat Tolosas prerogative under Art. 1592 of the Civil Code. Tolosa, on the other hand, is now precluded from raising the issue of late payments. His unqualified acceptance of payments after the sixmonth period expired constitutes waiver of the period and, hence, of the ground to rescind under Art. 1592. In any case, however, the breach on the part of Ocampo was only slight if not outweighed by the bad faith of Tolosa in reneging in his

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own prestations, hence, judicial rescission of the contract cannot be justified. Angeles v. Calasanz 29 is apropos The right to rescind the contract for non-performance of one of its stipulations . . . is not absolute. InUniversal Food Corp. v. Court of Appeals (33 SCRA 1) the Court stated: 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 (Song Fo & Co. v. Hawaiian-Philippine Co., 47 Phil., 821, 827). The question of whether a breach of a contract is substantial depends upon the attendant circumstances (Corpus v. Hon. Alikpala, et al., L23707 & L-23720, Jan. 17, 1968) . . . The defendants-appellants state that the plaintiffsappellees violated Section two of the contract to sell . . . because they failed to pay the August installment, despite demand, for more than four (4) months. The breach of the contract adverted to by the defendants-appellants is so slight and casual when we consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had already paid the monthly installments for a period of almost nine (9) years. In other words, in only a short time, the entire obligation would have been paid. Furthermore, although the principal obligation was only P3920.00 excluding the 7 percent interest, the plaintiffsappellees had already paid an aggregate amount of P4,533.38. To sanction the rescission made by the defendants-appellants will work injustice to the plaintiffs-appellees (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA 829). It would unjustly enrich the defendants-appellants.

Article 1234 of the Civil Code which provides that "[I]f the obligation has been substantially performed in good faith, the obligator may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee," also militates against the unilateral act of the defendantsappellants in canceling the contract. . . . We agree with the plaintiffs-appellees that when the defendants-appellants, instead of availing of their right to rescind, have accepted and received delayed payments of installments, though the plaintiffsappellees have been in arrears beyond the grace period mentioned in paragraph 6 of the contract, the defendants-appellants have waived and are now estopped from exercising their alleged right of rescission. In De Guzman v. Guieb (48 SCRA 68), we held . . . But defendants do not deny that in spite of the long arrearages, neither they nor their predecessor . . . even took steps to cancel the option or to eject the appellees from the home-lot in question. On the contrary, it is admitted that the delayed payments were received without protest or qualification. . . . Under these circumstances, We cannot but agree with the lower court that at the time appellees exercised their option, appellants had already forfeited their right to invoke the abovequoted provision regarding the nullifying effect of the non-payment of six-months rentals by appellees by their having accepted without qualification on July 21, 1964 the full payment by appellees of all their arrearages. While the contract dated 3 June 1977 in favor of Villaruz is also a contract of sale, that of Ocampo dated 21 April 1975 should prevail pursuant to Art. 1544 of the Civil code on double sales. 30 While Villaruz may have registered his contract or came into possession ahead of Ocampo, Villaruz was never in good faith.

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Since Ocampo had her adverse claim annotated on Tolosas OCT on 6 June 1976, Villaruz could not profess innocence thereof when she signed her contract on 3 June 1977; in fact, her full payment of the purchase price was made dependent, among others, on the cancelation of this claim. Moreover, Villaruz admitted having been informed by Tolosa of the first sale to Ocampo while still negotiating to buy the land. 31 Knowledge of the foregoing should have impelled Villaruz to investigate the circumstances of the annotation since this is equivalent to registration of Ocampos contract of sale as against Villaruz. In sum, Ocampo having the older title in good faith and considering that personal knowledge thereof by Villaruz constitutes registration as against the latter, Ocampo should be considered the preferred buyer. Incidentally, the stipulation in the contract of Villaruz conveying the land in her favor bows to Tolosas admission at the witness stand on 15 May 1980 that he never actually delivered the possession of the property to anyone. 32 From the foregoing, although the decision of the trial court ordering Tolosa to execute another deed of sale in favor of Ocampo already became final as against him for failing to appeal therefrom, there is no more need for it. For practical purposes, it is enough that we order Villaruz to reconvey the property to Ocampo. WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE and the decision dated 7 January 1988 of the Regional Trial Court of Iloilo, Branch 27, in Civil Case No. 12163 is REINSTATED, with the modification that respondent Magdalena S. Villaruz is directed to reconvey the subject land now covered by TCT No. T-100021 in her name to petitioner Pilar T. Ocampo, without prejudice to Severino Tolosa collecting from petitioner Pilar T. Ocampo the balance of the purchase price of P4,400.00 which nevertheless may be deducted from the monetary awards made by the trial court in favor of petitioner Ocampo. SO ORDERED.

G.R. No. 95641 September 22, 1994 SANTOS B. AREOLA and LYDIA D. AREOLA, petitionersappellants, vs. COURT OF APPEALS and PRUDENTIAL GUARANTEE AND ASSURANCE, INC., respondents-appellees. Gutierrez, Cortes & Gonzales for petitioners. Bengzon, Bengzon, Baraan & Fernandez Law Offices for private respondent.

ROMERO, J.: On June 29, 1985, seven months after the issuance of petitioner Santos Areola's Personal Accident Insurance Policy No. PA-20015, respondent insurance company unilaterally cancelled the same since company records revealed that petitioner-insured failed to pay his premiums. On August 3, 1985, respondent insurance company offered to reinstate same policy it had previously cancelled and even proposed to extend its lifetime to December 17, 1985, upon a finding that the cancellation was erroneous and that the premiums were paid in full by petitioner-insured but were not remitted by Teofilo M. Malapit, respondent insurance company's branch manager. These, in brief, are the material facts that gave rise to the action for damages due to breach of contract instituted by petitioner-insured before Branch 40 RTC, Dagupan City against respondent insurance company. There are two issues for resolution in this case:

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(1) Did the erroneous act of cancelling subject insurance policy entitle petitioner-insured to payment of damages? (2) Did the subsequent act of reinstating the wrongfully cancelled insurance policy by respondent insurance company, in an effort to rectify such error, obliterate whatever liability for damages it may have to bear, thus absolving it therefrom? From the factual findings of the trial court, it appears that petitionerinsured, Santos Areola, a lawyer from Dagupan City, bought, through the Baguio City branch of Prudential Guarantee and Assurance, Inc. (hereinafter referred to as Prudential), a personal accident insurance policy covering the one-year period between noon of November 28, 1984 and noon of November 28, 1985. 1 Under the terms of the statement of account issued by respondent insurance company, petitioner-insured was supposed to pay the total amount of P1,609.65 which included the premium of P1,470.00, documentary stamp of P110.25 and 2% premium tax of P29.40. 2 At the lower lefthand corner of the statement of account, the following is legibly printed: This Statement of Account must not be considered a receipt. Official Receipt will be issued to you upon payment of this account. If payment is made to our representative, demand for a Provisional Receipt and if our Official Receipts is (sic) not received by you within 7 days please notify us. If payment is made to our office, demand for an OFFICIAL RECEIPT. On December 17, 1984, respondent insurance company issued collector's provisional receipt No. 9300 to petitioner-insured for the amount of P1,609.65 3 On the lower portion of the receipt the following is written in capital letters:

Note: This collector's provisional receipt will be confirmed by our official receipt. If our official receipt is not received by you within 7 days, please notify us. 4 On June 29, 1985, respondent insurance company, through its Baguio City manager, Teofilo M. Malapit, sent petitioner-insured Endorsement No. BG-002/85 which "cancelled flat" Policy No. PA BG-20015 "for non-payment of premium effective as of inception dated." 5 The same endorsement also credited "a return premium of P1,609.65 plus documentary stamps and premium tax" to the account of the insured. Shocked by the cancellation of the policy, petitioner-insured confronted Carlito Ang, agent of respondent insurance company, and demanded the issuance of an official receipt. Ang told petitionerinsured that the cancellation of the policy was a mistake but he would personally see to its rectification. However, petitioner-insured failed to receive any official receipt from Prudential. Hence, on July 15, 1985, petitioner-insured sent respondent insurance company a letter demanding that he be insured under the same terms and conditions as those contained in Policy No. PA-BG20015 commencing upon its receipt of his letter, or that the current commercial rate of increase on the payment he had made under provisional receipt No. 9300 be returned within five days. 6 Areola also warned that should his demands be unsatisfied, he would sue for damages. On July 17, 1985, he received a letter from production manager Malapit informing him that the "partial payment" of P1,000.00 he had made on the policy had been "exhausted pursuant to the provisions of the Short Period Rate Scale" printed at the back of the policy. Malapit warned Areola that should be fail to pay the balance, the company's liability would cease to operate. 7 In reply to the petitioner-insured's letter of July 15, 1985, respondent insurance company, through its Assistant Vice-President Mariano M. Ampil III, wrote Areola a letter dated July 25, 1985 stating that the

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company was verifying whether the payment had in fact been issued therefor. Ampil emphasized that the official receipt should have been issued seven days from the issuance of the provisional receipt but because no official receipt had been issued in Areola's name, there was reason to believe that no payment had been made. Apologizing for the inconvenience, Ampil expressed the company's concern by agreeing "to hold you cover (sic) under the terms of the referenced policy until such time that this matter is cleared." 8 On August 3, 1985, Ampil wrote Areola another letter confirming that the amount of P1,609.65 covered by provisional receipt No. 9300 was in fact received by Prudential on December 17, 1984. Hence, Ampil informed Areola that Prudential was "amenable to extending PGA-PA-BG20015 up to December 17, 1985 or one year from the date when payment was received." Apologizing again for the inconvenience caused Areola, Ampil exhorted him to indicate his conformity to the proposal by signing on the space provided for in the letter. 9 The letter was personally delivered by Carlito Ang to Areola on August 13, 1985 10 but unfortunately, Areola and his wife, Lydia, as early as August 6, 1985 had filed a complaint for breach of contract with damages before the lower court. In its Answer, respondent insurance company admitted that the cancellation of petitioner-insured's policy was due to the failure of Malapit to turn over the premiums collected, for which reason no official receipt was issued to him. However, it argued that, by acknowledging the inconvenience caused on petitioner-insured and after taking steps to rectify its omission by reinstating the cancelled policy prior to the filing of the complaint, respondent insurance company had complied with its obligation under the contract. Hence, it concluded that petitioner-insured no longer has a cause of action against it. It insists that it cannot be held liable for damages arising from breach of contract, having demonstrated fully well its fulfillment of its obligation.

The trial court, on June 30, 1987, rendered a judgment in favor of petitioner-insured, ordering respondent insurance company to pay the former the following: a) P1,703.65 as actual damages; b) P200,000.00 as moral damages; and c) P50,000.00 as exemplary damages; 2. To pay to the plaintiff, as and for attorney's fees the amount of P10,000.00; and 3. To pay the costs. In its decision, the court below declared that respondent insurance company acted in bad faith in unilaterally cancelling subject insurance policy, having done so only after seven months from the time that it had taken force and effect and despite the fact of full payment of premiums and other charges on the issued insurance policy. Cancellation from the date of the policy's inception, explained the lower court, meant that the protection sought by petitionerinsured from the risks insured against was never extended by respondent insurance company. Had the insured met an accident at the time, the insurance company would certainly have disclaimed any liability because technically, the petitioner could not have been considered insured. Consequently, the trial court held that there was breach of contract on the part of respondent insurance company, entitling petitioner-insured to an award of the damages prayed for. This ruling was challenged on appeal by respondent insurance company, denying bad faith on its part in unilaterally cancelling subject insurance policy. After consideration of the appeal, the appellate court issued a reversal of the decision of the trial court, convinced that the latter had erred in finding respondent insurance company in bad faith for the cancellation of petitioner-insured's policy. According to the Court of

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Appeals, respondent insurance company was not motivated by negligence, malice or bad faith in cancelling subject policy. Rather, the cancellation of the insurance policy was based on what the existing records showed, i.e., absence of an official receipt issued to petitioner-insured confirming payment of premiums. Bad faith, said the Court of Appeals, is some motive of self-interest or ill-will; a furtive design of ulterior purpose, proof of which must be established convincingly. On the contrary, it further observed, the following acts indicate that respondent insurance company did not act precipitately or willfully to inflict a wrong on petitioner-insured: (a) the investigation conducted by Alfredo Bustamante to verify if petitioner-insured had indeed paid the premium; (b) the letter of August 3, 1985 confirming that the premium had been paid on December 17, 1984; (c) the reinstatement of the policy with a proposal to extend its effective period to December 17, 1985; and (d) respondent insurance company's apologies for the "inconvenience" caused upon petitioner-insured. The appellate court added that respondent insurance company even relieved Malapit, its Baguio City manager, of his job by forcing him to resign. Petitioner-insured moved for the reconsideration of the said decision which the Court of Appeals denied. Hence, this petition for review on certiorari anchored on these arguments: I Respondent Court of Appeals is guilty of grave abuse of discretion and committed a serious and reversible error in not holding Respondent Prudential liable for the cancellation of the insurance contract which was admittedly caused by the fraudulent acts and bad faith of its own officers. II Respondent Court of Appeals committed serious and reversible error and abused its discretion in ruling that the defenses of good faith and honest

mistake can co-exist with the admitted fraudulent acts and evident bad faith. III Respondent Court of Appeals committed a reversible error in not finding that even without considering the fraudulent acts of its own officer in misappropriating the premium payment, the act itself in cancelling the insurance policy was done with bad faith and/or gross negligence and wanton attitude amounting to bad faith, because among others, it was Mr. Malapit the person who committed the fraud who sent and signed the notice of cancellation. IV Respondent Court of Appeals has decided a question of substance contrary to law and applicable decision of the Supreme Court when it refused to award damages in favor of herein PetitionerAppellants. It is petitioner-insured's submission that the fraudulent act of Malapit, manager of respondent insurance company's branch office in Baguio, in misappropriating his premium payments is the proximate cause of the cancellation of the insurance policy. Petitioner-insured theorized that Malapit's act of signing and even sending the notice of cancellation himself, notwithstanding his personal knowledge of petitioner-insured's full payment of premiums, further reinforces the allegation of bad faith. Such fraudulent act committed by Malapit, argued petitioner-insured, is attributable to respondent insurance company, an artificial corporate being which can act only through its officers or employees. Malapit's actuation, concludes petitionerinsured, is therefore not separate and distinct from that of respondent-insurance company, contrary to the view held by the Court of Appeals. It must, therefore, bear the consequences of the erroneous cancellation of subject insurance policy caused by the

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non-remittance by its own employee of the premiums paid. Subsequent reinstatement, according to petitioner-insured, could not possibly absolve respondent insurance company from liability, there being an obvious breach of contract. After all, reasoned out petitioner-insured, damage had already been inflicted on him and no amount of rectification could remedy the same. Respondent insurance company, on the other hand, argues that where reinstatement, the equitable relief sought by petitioner-insured was granted at an opportune moment, i.e. prior to the filing of the complaint, petitioner-insured is left without a cause of action on which to predicate his claim for damages. Reinstatement, it further explained, effectively restored petitioner-insured to all his rights under the policy. Hence, whatever cause of action there might have been against it, no longer exists and the consequent award of damages ordered by the lower court in unsustainable. We uphold petitioner-insured's submission. Malapit's fraudulent act of misappropriating the premiums paid by petitioner-insured is beyond doubt directly imputable to respondent insurance company. A corporation, such as respondent insurance company, acts solely thru its employees. The latters' acts are considered as its own for which it can be held to account. 11 The facts are clear as to the relationship between private respondent insurance company and Malapit. As admitted by private respondent insurance company in its answer, 12 Malapit was the manager of its Baguio branch. It is beyond doubt that he represented its interest and acted in its behalf. His act of receiving the premiums collected is well within the province of his authority. Thus, his receipt of said premiums is receipt by private respondent insurance company who, by provision of law, particularly under Article 1910 of the Civil Code, is bound by the acts of its agent. Article 1910 thus reads: Art. 1910. The principal must comply with all the obligations which the agent may have contracted within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is not bound except when he ratifies it expressly or tacitly. Malapit's failure to remit the premiums he received cannot constitute a defense for private respondent insurance company; no exoneration from liability could result therefrom. The fact that private respondent insurance company was itself defrauded due to the anomalies that took place in its Baguio branch office, such as the non-accrual of said premiums to its account, does not free the same from its obligation to petitioner Areola. As held in Prudential Bank v. Court of Appeals 13 citing the ruling in McIntosh v. Dakota Trust Co.: 14 A bank is liable for wrongful acts of its officers done in the interests of the bank or in the course of dealings of the officers in their representative capacity but not for acts outside the scope of their authority. A bank holding out its officers and agent as worthy of confidence will not be permitted to profit by the frauds they may thus be enabled to perpetrate in the apparent scope of their employment; nor will it be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank therefrom. Accordingly, a banking corporation is liable to innocent third persons where the representation is made in the course of its business by an agent acting within the general scope of his authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his principal or some other person, for his own ultimate benefit. Consequently, respondent insurance company is liable by way of damages for the fraudulent acts committed by Malapit that gave occasion to the erroneous cancellation of subject insurance policy. Its earlier act of reinstating the insurance policy can not obliterate the injury inflicted on petitioner-insured. Respondent company should be reminded that a contract of insurance creates reciprocal obligations for both insurer and insured. Reciprocal obligations are those which

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arise from the same cause and in which each party is both a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. 15 Under the circumstances of instant case, the relationship as creditor and debtor between the parties arose from a common cause: i.e., by reason of their agreement to enter into a contract of insurance under whose terms, respondent insurance company promised to extend protection to petitioner-insured against the risk insured for a consideration in the form of premiums to be paid by the latter. Under the law governing reciprocal obligations, particularly the second paragraph of Article 1191, 16 the injured party, petitioner-insured in this case, is given a choice between fulfillment or rescission of the obligation in case one of the obligors, such as respondent insurance company, fails to comply with what is incumbent upon him. However, said article entitles the injured party to payment of damages, regardless of whether he demands fulfillment or rescission of the obligation. Untenable then is reinstatement insurance company's argument, namely, that reinstatement being equivalent to fulfillment of its obligation, divests petitioner-insured of a rightful claim for payment of damages. Such a claim finds no support in our laws on obligations and contracts. The nature of damages to be awarded, however, would be in the form of nominal damages 17 contrary to that granted by the court below. Although the erroneous cancellation of the insurance policy constituted a breach of contract, private respondent insurance company, within a reasonable time took steps to rectify the wrong committed by reinstating the insurance policy of petitioner. Moreover, no actual or substantial damage or injury was inflicted on petitioner Areola at the time the insurance policy was cancelled. Nominal damages are "recoverable where a legal right is technically violated and must be vindicated against an invasion that has produced no actual present loss of any kind, or where there has been a breach of contract and no substantial injury or actual damages whatsoever have been or can be shown. 18 WHEREFORE, the petition for review on certiorari is hereby GRANTED and the decision of the Court of Appeals in CA-G.R. No. 16902 on May 31, 1990, REVERSED. The decision of Branch 40,

RTC Dagupan City, in Civil Case No. D-7972 rendered on June 30, 1987 is hereby REINSTATED subject to the following modifications: (a) that nominal damages amounting to P30,000.00 be awarded petitioner in lieu of the damages adjudicated by court a quo; and (b) that in the satisfaction of the damages awarded therein, respondent insurance company is ORDERED to pay the legal rate of interest computed from date of filing of complaint until final payment thereof. SO ORDERED. G.R. No. 153004 November 5, 2004

SANTOS VENTURA HOCORMA FOUNDATION, INC., petitioner, vs. ERNESTO V. SANTOS and RIVERLAND, INC., respondents.

DECISION

QUISUMBING, J.: Subject of the present petition for review on certiorari is the Decision,1 dated January 30, 2002, as well as the April 12, 2002, Resolution2 of the Court of Appeals in CA-G.R. CV No. 55122. The appellate court reversed the Decision,3 dated October 4, 1996, of the Regional Trial Court of Makati City, Branch 148, in Civil Case No. 95811, and likewise denied petitioner's Motion for Reconsideration. The facts of this case are undisputed. Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc. (SVHFI) were the plaintiff and defendant, respectively, in several civil cases filed in different courts in the Philippines. On October 26,

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1990, the parties executed a Compromise Agreement4 which amicably ended all their pending litigations. The pertinent portions of the Agreement read as follows: 1. Defendant Foundation shall pay Plaintiff Santos P14.5 Million in the following manner: a. P1.5 Million immediately upon the execution of this agreement; b. The balance of P13 Million shall be paid, whether in one lump sum or in installments, at the discretion of the Foundation, within a period of not more than two (2) years from the execution of this agreement; provided, however, that in the event that the Foundation does not pay the whole or any part of such balance, the same shall be paid with the corresponding portion of the land or real properties subject of the aforesaid cases and previously covered by the notices of lis pendens, under such terms and conditions as to area, valuation, and location mutually acceptable to both parties; but in no case shall the payment of such balance be later than two (2) years from the date of this agreement; otherwise, payment of any unpaid portion shall only be in the form of land aforesaid; 2. Immediately upon the execution of this agreement (and [the] receipt of the P1.5 Million), plaintiff Santos shall cause the dismissal with prejudice of Civil Cases Nos. 88-743, 1413OR, TC-1024, 45366 and 18166 and voluntarily withdraw the appeals in Civil Cases Nos. 4968 (C.A.-G.R. No. 26598) and 88-45366 (C.A.-G.R. No. 24304) respectively and for the immediate lifting of the aforesaid various notices of lis pendens on the real properties aforementioned (by signing herein attached corresponding documents, for such lifting); provided, however, that in the event that defendant Foundation shall sell or dispose of any of the lands previously subject of lis pendens, the proceeds

of any such sale, or any part thereof as may be required, shall be partially devoted to the payment of the Foundation's obligations under this agreement as may still be subsisting and payable at the time of any such sale or sales; ... 5. Failure of compliance of any of the foregoing terms and conditions by either or both parties to this agreement shall ipso facto and ipso jure automatically entitle the aggrieved party to a writ of execution for the enforcement of this agreement. [Emphasis supplied]5 In compliance with the Compromise Agreement, respondent Santos moved for the dismissal of the aforesaid civil cases. He also caused the lifting of the notices of lis pendens on the real properties involved. For its part, petitioner SVHFI, paid P1.5 million to respondent Santos, leaving a balance of P13 million. Subsequently, petitioner SVHFI sold to Development Exchange Livelihood Corporation two real properties, which were previously subjects of lis pendens. Discovering the disposition made by the petitioner, respondent Santos sent a letter to the petitioner demanding the payment of the remaining P13 million, which was ignored by the latter. Meanwhile, on September 30, 1991, the Regional Trial Court of Makati City, Branch 62, issued a Decision6approving the compromise agreement. On October 28, 1992, respondent Santos sent another letter to petitioner inquiring when it would pay the balance of P13 million. There was no response from petitioner. Consequently, respondent Santos applied with the Regional Trial Court of Makati City, Branch 62, for the issuance of a writ of execution of its compromise judgment dated September 30, 1991. The RTC granted the writ. Thus, on March 10, 1993, the Sheriff levied on the real properties of petitioner, which were formerly subjects of the lis pendens. Petitioner, however, filed numerous motions to block the enforcement of the said writ. The challenge of the execution of the

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aforesaid compromise judgment even reached the Supreme Court. All these efforts, however, were futile. On November 22, 1994, petitioner's real properties located in Mabalacat, Pampanga were auctioned. In the said auction, Riverland, Inc. was the highest bidder for P12 million and it was issued a Certificate of Sale covering the real properties subject of the auction sale. Subsequently, another auction sale was held on February 8, 1995, for the sale of real properties of petitioner in Bacolod City. Again, Riverland, Inc. was the highest bidder. The Certificates of Sale issued for both properties provided for the right of redemption within one year from the date of registration of the said properties. On June 2, 1995, Santos and Riverland Inc. filed a Complaint for Declaratory Relief and Damages7 alleging that there was delay on the part of petitioner in paying the balance of P13 million. They further alleged that under the Compromise Agreement, the obligation became due on October 26, 1992, but payment of the remaining P12 million was effected only on November 22, 1994. Thus, respondents prayed that petitioner be ordered to pay legal interest on the obligation, penalty, attorney's fees and costs of litigation. Furthermore, they prayed that the aforesaid sales be declared final and not subject to legal redemption. In its Answer,8 petitioner countered that respondents have no cause of action against it since it had fully paid its obligation to the latter. It further claimed that the alleged delay in the payment of the balance was due to its valid exercise of its rights to protect its interests as provided under the Rules. Petitioner counterclaimed for attorney's fees and exemplary damages. On October 4, 1996, the trial court rendered a Decision9 dismissing herein respondents' complaint and ordering them to pay attorney's fees and exemplary damages to petitioner. Respondents then appealed to the Court of Appeals. The appellate court reversed the ruling of the trial court:

WHEREFORE, finding merit in the appeal, the appealed Decision is hereby REVERSED and judgment is hereby rendered ordering appellee SVHFI to pay appellants Santos and Riverland, Inc.: (1) legal interest on the principal amount of P13 million at the rate of 12% per annum from the date of demand on October 28, 1992 up to the date of actual payment of the whole obligation; and (2) P20,000 as attorney's fees and costs of suit. SO ORDERED. Hence this petition for review on certiorari where petitioner assigns the following issues: I WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN IT AWARDED LEGAL INTEREST IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND, INC., NOTWITHSTANDING THE FACT THAT NEITHER IN THE COMPROMISE AGREEMENT NOR IN THE COMPROMISE JUDGEMENT OF HON. JUDGE DIOKNO PROVIDES FOR PAYMENT OF INTEREST TO THE RESPONDENT II WHETHER OF NOT THE COURT OF APPEALS ERRED IN AWARDING LEGAL IN[T]EREST IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND, INC., NOTWITHSTANDING THE FACT THAT THE OBLIGATION OF THE PETITIONER TO RESPONDENT SANTOS TO PAY A SUM OF MONEY HAD BEEN CONVERTED TO AN OBLIGATION TO PAY IN KIND DELIVERY OF REAL PROPERTIES OWNED BY THE PETITIONER WHICH HAD BEEN FULLY PERFORMED III

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WHETHER OR NOT RESPONDENTS ARE BARRED FROM DEMANDING PAYMENT OF INTEREST BY REASON OF THE WAIVER PROVISION IN THE COMPROMISE AGREEMENT, WHICH BECAME THE LAW AMONG THE PARTIES10 The only issue to be resolved is whether the respondents are entitled to legal interest. Petitioner SVHFI alleges that where a compromise agreement or compromise judgment does not provide for the payment of interest, the legal interest by way of penalty on account of fault or delay shall not be due and payable, considering that the obligation or loan, on which the payment of legal interest could be based, has been superseded by the compromise agreement.11 Furthermore, the petitioner argues that the respondents are barred by res judicata from seeking legal interest on account of the waiver clause in the duly approved compromise agreement.12 Article 4 of the compromise agreement provides: Plaintiff Santos waives and renounces any and all other claims that he and his family may have on the defendant Foundation arising from and in connection with the aforesaid civil cases, and defendant Foundation, on the other hand, also waives and renounces any and all claims that it may have against plaintiff Santos in connection with such cases.13 [Emphasis supplied.] Lastly, petitioner alleges that since the compromise agreement did not provide for a period within which the obligation will become due and demandable, it is incumbent upon respondent Santos to ask for judicial intervention for purposes of fixing the period. It is only when a fixed period exists that the legal interests can be computed. Respondents profer that their right to damages is based on delay in the payment of the obligation provided in the Compromise Agreement. The Compromise Agreement provides that payment must be made within the two-year period from its execution. This was approved by the trial court and became the law governing their

contract. Respondents posit that petitioner's failure to comply entitles them to damages, by way of interest.14 The petition lacks merit. A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced.15 It is an agreement between two or more persons, who, for preventing or putting an end to a lawsuit, adjust their difficulties by mutual consent in the manner which they agree on, and which everyone of them prefers in the hope of gaining, balanced by the danger of losing.16 The general rule is that a compromise has upon the parties the effect and authority of res judicata, with respect to the matter definitely stated therein, or which by implication from its terms should be deemed to have been included therein.17 This holds true even if the agreement has not been judicially approved.18 In the case at bar, the Compromise Agreement was entered into by the parties on October 26, 1990.19 It was judicially approved on September 30, 1991.20 Applying existing jurisprudence, the compromise agreement as a consensual contract became binding between the parties upon its execution and not upon its court approval. From the time a compromise is validly entered into, it becomes the source of the rights and obligations of the parties thereto. The purpose of the compromise is precisely to replace and terminate controverted claims.21 In accordance with the compromise agreement, the respondents asked for the dismissal of the pending civil cases. The petitioner, on the other hand, paid the initial P1.5 million upon the execution of the agreement. This act of the petitioner showed that it acknowledges that the agreement was immediately executory and enforceable upon its execution. As to the remaining P13 million, the terms and conditions of the compromise agreement are clear and unambiguous. It provides:

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... b. The balance of P13 Million shall be paid, whether in one lump sum or in installments, at the discretion of the Foundation, within a period of not more than two (2) years from the execution of this agreement22[Emphasis supplied.] ... The two-year period must be counted from October 26, 1990, the date of execution of the compromise agreement, and not on the judicial approval of the compromise agreement on September 30, 1991. When respondents wrote a demand letter to petitioner on October 28, 1992, the obligation was already due and demandable. When the petitioner failed to pay its due obligation after the demand was made, it incurred delay. Article 1169 of the New Civil Code provides: 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. [Emphasis supplied] Delay as used in this article is synonymous to default or mora which means delay in the fulfillment of obligations. It is the non-fulfillment of the obligation with respect to time.23 In order for the debtor to be in default, it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially or extrajudicially.24 In the case at bar, the obligation was already due and demandable after the lapse of the two-year period from the execution of the contract. The two-year period ended on October 26, 1992. When the

respondents gave a demand letter on October 28, 1992, to the petitioner, the obligation was already due and demandable. Furthermore, the obligation is liquidated because the debtor knows precisely how much he is to pay and when he is to pay it. The second requisite is also present. Petitioner delayed in the performance. It was able to fully settle its outstanding balance only on February 8, 1995, which is more than two years after the extrajudicial demand. Moreover, it filed several motions and elevated adverse resolutions to the appellate court to hinder the execution of a final and executory judgment, and further delay the fulfillment of its obligation. Third, the demand letter sent to the petitioner on October 28, 1992, was in accordance with an extra-judicial demand contemplated by law. Verily, the petitioner is liable for damages for the delay in the performance of its obligation. This is provided for in Article 117025 of the New Civil Code. When the debtor knows the amount and period when he is to pay, interest as damages is generally allowed as a matter of right.26 The complaining party has been deprived of funds to which he is entitled by virtue of their compromise agreement. The goal of compensation requires that the complainant be compensated for the loss of use of those funds. This compensation is in the form of interest.27 In the absence of agreement, the legal rate of interest shall prevail.28 The legal interest for loan as forbearance of money is 12% per annum29 to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.30 WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 30, 2002 of the Court of Appeals and its April 12, 2002 Resolution in CA-G.R. CV No. 55122 are AFFIRMED. Costs against petitioner. SO ORDERED.

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G.R. No. L-44748 August 29, 1986 RADIO COMMUNICATIONS OF THE PHILS., INC. (RCPI). petitioner, vs. COURT OF APPEALS and LORETO DIONELA, respondents. O. Pythogoras Oliver for respondents.

(p. 19, Annex "A") Plaintiff-respondent Loreto Dionela alleges that the defamatory words on the telegram sent to him not only wounded his feelings but also caused him undue embarrassment and affected adversely his business as well because other people have come to know of said defamatory words. Defendant corporation as a defense, alleges that the additional words in Tagalog was a private joke between the sending and receiving operators and that they were not addressed to or intended for plaintiff and therefore did not form part of the telegram and that the Tagalog words are not defamatory. The telegram sent through its facilities was received in its station at Legaspi City. Nobody other than the operator manned the teletype machine which automatically receives telegrams being transmitted. The said telegram was detached from the machine and placed inside a sealed envelope and delivered to plaintiff, obviously as is. The additional words in Tagalog were never noticed and were included in the telegram when delivered. The trial court in finding for the plaintiff ruled as follows: There is no question that the additional words in Tagalog are libelous. They clearly impute a vice or defect of the plaintiff. Whether or not they were intended for the plaintiff, the effect on the plaintiff is the same. Any person reading the additional words in Tagalog will naturally think that they refer to the addressee, the plaintiff. There is no indication from the face of the telegram that the additional words in Tagalog were sent as a private joke between the operators of the defendant. The defendant is sued directly not as an employer. The business of the defendant is to transmit telegrams. It will open the door to frauds and allow the defendant to act with impunity if it can escape liability by the simple expedient of showing that its employees acted beyond the scope of their assigned tasks.

PARAS, J.: Before Us, is a Petition for Review by certiorari of the decision of the Court of Appeals, modifying the decision of the trial court in a civil case for recovery of damages against petitioner corporation by reducing the award to private respondent Loreto Dionela of moral damages from P40,000 to Pl5,000, and attorney's fees from P3,000 to P2,000. The basis of the complaint against the defendant corporation is a telegram sent through its Manila Office to the offended party, Loreto Dionela, reading as follows: 176 AS JR 1215PM 9 PAID MANDALUYONG JUL 22-66 LORETO DIONELA CABANGAN LEGASPI CITY WIRE ARRIVAL OF CHECK FER LORETO DIONELA-CABANGAN-WIRE ARRIVAL OF CHECK-PER 115 PM SA IYO WALANG PAKINABANG DUMATING KA DIYAN-WALA-KANG PADALA DITO KAHIT BULBUL MO

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The liability of the defendant is predicated not only on Article 33 of the Civil Code of the Philippines but on the following articles of said Code: ART. 19.- Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. ART. 20.-Every person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the latter for the same. There is sufficient publication of the libelous Tagalog words. The office file of the defendant containing copies of telegrams received are open and held together only by a metal fastener. Moreover, they are open to view and inspection by third parties. It follows that the plaintiff is entitled to damages and attorney's fees. The plaintiff is a businessman. The libelous Tagalog words must have affected his business and social standing in the community. The Court fixes the amount of P40,000.00 as the reasonable amount of moral damages and the amount of P3,000.00 as attorney's fee which the defendant should pay the plaintiff. (pp. 15-16, Record on Appeal) The respondent appellate court in its assailed decision confirming the aforegoing findings of the lower court stated: The proximate cause, therefore, resulting in injury to appellee, was the failure of the appellant to take the necessary or precautionary steps to avoid the occurrence of the humiliating incident now complained of. The company had not imposed any safeguard against such eventualities and this void in its operating procedure does not speak well of its

concern for their clientele's interests. Negligence here is very patent. This negligence is imputable to appellant and not to its employees. The claim that there was no publication of the libelous words in Tagalog is also without merit. The fact that a carbon copy of the telegram was filed among other telegrams and left to hang for the public to see, open for inspection by a third party is sufficient publication. It would have been otherwise perhaps had the telegram been placed and kept in a secured place where no one may have had a chance to read it without appellee's permission. The additional Tagalog words at the bottom of the telegram are, as correctly found by the lower court, libelous per se, and from which malice may be presumed in the absence of any showing of good intention and justifiable motive on the part of the appellant. The law implies damages in this instance (Quemel vs. Court of Appeals, L-22794, January 16, 1968; 22 SCRA 44). The award of P40,000.00 as moral damages is hereby reduced to P15,000.00 and for attorney's fees the amount of P2,000.00 is awarded. (pp. 22-23, record) After a motion for reconsideration was denied by the appellate court, petitioner came to Us with the following: ASSIGNMENT OF ERRORS I The Honorable Court of Appeals erred in holding that Petitioner-employer should answer directly and primarily for the civil liability arising from the criminal act of its employee. II

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The Honorable Court of Appeals erred in holding that there was sufficient publication of the alleged libelous telegram in question, as contemplated by law on libel. III The Honorable Court of Appeals erred in holding that the liability of petitioner-company-employer is predicated on Articles 19 and 20 of the Civil Code, Articles on Human Relations. IV

pursuit of petitioner's business is to deprive the general public availing of the services of the petitioner of an effective and adequate remedy. In most cases, negligence must be proved in order that plaintiff may recover. However, since negligence may be hard to substantiate in some cases, we may apply the doctrine of RES IPSA LOQUITUR (the thing speaks for itself), by considering the presence of facts or circumstances surrounding the injury. WHEREFORE, premises considered, the judgment of the appellate court is hereby AFFIRMED. SO ORDERED. G.R. No. 98695 January 27, 1993

The Honorable Court of Appeals erred in awarding Atty's. fees. (p. 4, Record) Petitioner's contentions do not merit our consideration. The action for damages was filed in the lower court directly against respondent corporation not as an employer subsidiarily liable under the provisions of Article 1161 of the New Civil Code in relation to Art. 103 of the Revised Penal Code. The cause of action of the private respondent is based on Arts. 19 and 20 of the New Civil Code (supra). As well as on respondent's breach of contract thru the negligence of its own employees. 1 Petitioner is a domestic corporation engaged in the business of receiving and transmitting messages. Everytime a person transmits a message through the facilities of the petitioner, a contract is entered into. Upon receipt of the rate or fee fixed, the petitioner undertakes to transmit the message accurately. There is no question that in the case at bar, libelous matters were included in the message transmitted, without the consent or knowledge of the sender. There is a clear case of breach of contract by the petitioner in adding extraneous and libelous matters in the message sent to the private respondent. As a corporation, the petitioner can act only through its employees. Hence the acts of its employees in receiving and transmitting messages are the acts of the petitioner. To hold that the petitioner is not liable directly for the acts of its employees in the

JUAN J. SYQUIA, CORAZON C. SYQUIA, CARLOTA C. SYQUIA, CARLOS C. SYQUIA and ANTHONY C. SYQUIA, petitioners, vs. THE HONORABLE COURT OF APPEALS, and THE MANILA MEMORIAL PARK CEMETERY, INC., respondents. Pacis & Reyes Law Offices for petitioners. Augusto S. San Pedro & Ari-Ben C. Sebastian for private respondents.

CAMPOS, JR., J.: Herein petitioners, Juan J. Syquia and Corazon C. Syquia, Carlota C. Syquia, Carlos C. Syquia, and Anthony Syquia, were the parents and siblings, respectively, of the deceased Vicente Juan Syquia. On March 5, 1979, they filed a complaint 1 in the then Court of First Instance against herein private respondent, Manila Memorial Park Cemetery, Inc. for recovery of damages arising from breach of contract and/or quasi-delict. The trial court dismissed the complaint.

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The antecedent facts, as gathered by the respondent Court, are as follows: On March 5, 1979, Juan, Corazon, Carlota and Anthony all surnamed Syquia, plaintiff-appellants herein, filed a complaint for damages against defendant-appellee, Manila Memorial Park Cemetery, Inc. The complaint alleged among others, that pursuant to a Deed of Sale (Contract No. 6885) dated August 27, 1969 and Interment Order No. 7106 dated July 21, 1978 executed between plaintiff-appellant Juan J. Syquia and defendant-appellee, the former, father of deceased Vicente Juan J. Syquia authorized and instructed defendant-appellee to inter the remains of deceased in the Manila Memorial Park Cemetery in the morning of July 25, 1978 conformably and in accordance with defendant-appellant's (sic) interment procedures; that on September 4, 1978, preparatory to transferring the said remains to a newly purchased family plot also at the Manila Memorial Park Cemetery, the concrete vault encasing the coffin of the deceased was removed from its niche underground with the assistance of certain employees of defendant-appellant (sic); that as the concrete vault was being raised to the surface, plaintiffs-appellants discovered that the concrete vault had a hole approximately three (3) inches in diameter near the bottom of one of the walls closing out the width of the vault on one end and that for a certain length of time (one hour, more or less), water drained out of the hole; that because of the aforesaid discovery, plaintiffs-appellants became agitated and upset with concern that the water which had collected inside the vault might have risen as it in fact did rise, to the level of the coffin and flooded the same as well as the remains of the deceased with ill effects thereto; that pursuant to an authority granted by the Municipal Court of

Paraaque, Metro Manila on September 14, 1978, plaintiffs-appellants with the assistance of licensed morticians and certain personnel of defendantappellant (sic) caused the opening of the concrete vault on September 15, 1978; that upon opening the vault, the following became apparent to the plaintiffsappellants: (a) the interior walls of the concrete vault showed evidence of total flooding; (b) the coffin was entirely damaged by water, filth and silt causing the wooden parts to warp and separate and to crack the viewing glass panel located directly above the head and torso of the deceased; (c) the entire lining of the coffin, the clothing of the deceased, and the exposed parts of the deceased's remains were damaged and soiled by the action of the water and silt and were also coated with filth. Due to the alleged unlawful and malicious breach by the defendant-appellee of its obligation to deliver a defect-free concrete vault designed to protect the remains of the deceased and the coffin against the elements which resulted in the desecration of deceased's grave and in the alternative, because of defendant-appellee's gross negligence conformably to Article 2176 of the New Civil Code in failing to seal the concrete vault, the complaint prayed that judgment be rendered ordering defendant-appellee to pay plaintiffs-appellants P30,000.00 for actual damages, P500,000.00 for moral damages, exemplary damages in the amount determined by the court, 20% of defendant-appellee's total liability as attorney's fees, and expenses of litigation and costs of suit. 2 In dismissing the complaint, the trial court held that the contract between the parties did not guarantee that the cement vault would be waterproof; that there could be no quasi-delict because the defendant was not guilty of any fault or negligence, and because there was a pre-existing contractual relation between the Syquias and defendant Manila Memorial Park Cemetery, Inc.. The trial court

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also noted that the father himself, Juan Syquia, chose the gravesite despite knowing that said area had to be constantly sprinkled with water to keep the grass green and that water would eventually seep through the vault. The trial court also accepted the explanation given by defendant for boring a hole at the bottom side of the vault: "The hole had to be bored through the concrete vault because if it has no hole the vault will (sic) float and the grave would be filled with water and the digging would caved (sic) in the earth, the earth would caved (sic) in the (sic) fill up the grave." 3 From this judgment, the Syquias appealed. They alleged that the trial court erred in holding that the contract allowed the flooding of the vault; that there was no desecration; that the boring of the hole was justifiable; and in not awarding damages. The Court of Appeals in the Decision 4 dated December 7, 1990 however, affirmed the judgment of dismissal. Petitioner's motion for reconsideration was denied in a Resolution dated April 25, 1991. 5 Unsatisfied with the respondent Court's decision, the Syquias filed the instant petition. They allege herein that the Court of Appeals committed the following errors when it: 1. held that the contract and the Rules and Resolutions of private respondent allowed the flooding of the vault and the entrance thereto of filth and silt; 2. held that the act of boring a hole was justifiable and corollarily, when it held that no act of desecration was committed; 3. overlooked and refused to consider relevant, undisputed facts, such as those which have been stipulated upon by the parties, testified to by private respondent's witnesses, and admitted in the answer, which could have justified a different conclusion;

4. held that there was no tort because of a preexisting contract and the absence of fault/negligence; and 5. did not award the P25,000.00 actual damages which was agreed upon by the parties, moral and exemplary damages, and attorney's fees. At the bottom of the entire proceedings is the act of boring a hole by private respondent on the vault of the deceased kin of the bereaved petitioners. The latter allege that such act was either a breach of private respondent's contractual obligation to provide a sealed vault, or, in the alternative, a negligent act which constituted a quasi-delict. Nonetheless, petitioners claim that whatever kind of negligence private respondent has committed, the latter is liable for desecrating the grave of petitioners' dead. In the instant case, We are called upon to determine whether the Manila Memorial Park Cemetery, Inc., breached its contract with petitioners; or, alternatively, whether private respondent was guilty of a tort. We understand the feelings of petitioners and empathize with them. Unfortunately, however, We are more inclined to answer the foregoing questions in the negative. There is not enough ground, both in fact and in law, to justify a reversal of the decision of the respondent Court and to uphold the pleas of the petitioners. With respect to herein petitioners' averment that private respondent has committed culpa aquiliana, the Court of Appeals found no negligent act on the part of private respondent to justify an award of damages against it. Although a pre-existing contractual relation between the parties does not preclude the existence of a culpa aquiliana, We find no reason to disregard the respondent's Court finding that there was no negligence. Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or

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negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict . . . . (Emphasis supplied). In this case, it has been established that the Syquias and the Manila Memorial Park Cemetery, Inc., entered into a contract entitled "Deed of Sale and Certificate of Perpetual Care" 6 on August 27, 1969. That agreement governed the relations of the parties and defined their respective rights and obligations. Hence, had there been actual negligence on the part of the Manila Memorial Park Cemetery, Inc., it would be held liable not for a quasi-delict or culpa aquiliana, but for culpa contractual as provided by Article 1170 of the Civil Code, to wit: Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. The Manila Memorial Park Cemetery, Inc. bound itself to provide the concrete box to be send in the interment. Rule 17 of the Rules and Regulations of private respondent provides that: Rule 17. Every earth interment shall be made enclosed in a concrete box, or in an outer wall of stone, brick or concrete, the actual installment of which shall be made by the employees of the Association. 7 Pursuant to this above-mentioned Rule, a concrete vault was provided on July 27, 1978, the day before the interment, and was, on the same day, installed by private respondent's employees in the grave which was dug earlier. After the burial, the vault was covered by a cement lid. Petitioners however claim that private respondent breached its contract with them as the latter held out in the brochure it distributed that the . . . lot may hold single or double internment (sic)

underground in sealed concrete vault." 8 Petitioners claim that the vault provided by private respondent was not sealed, that is, not waterproof. Consequently, water seeped through the cement enclosure and damaged everything inside it. We do not agree. There was no stipulation in the Deed of Sale and Certificate of Perpetual Care and in the Rules and Regulations of the Manila Memorial Park Cemetery, Inc. that the vault would be waterproof. Private respondent's witness, Mr. Dexter Heuschkel, explained that the term "sealed" meant "closed." 9 On the other hand, the word "seal" is defined as . . . any of various closures or fastenings . . . that cannot be opened without rupture and that serve as a check against tampering or unauthorized opening." 10 The meaning that has been given by private respondent to the word conforms with the cited dictionary definition. Moreover, it is also quite clear that "sealed" cannot be equated with "waterproof". Well settled is the rule that when the terms of the contract are clear and leave no doubt as to the intention of the contracting parties, then the literal meaning of the stipulation shall control. 11 Contracts should be interpreted according to their literal meaning and should not be interpreted beyond their obvious intendment. 12 As ruled by the respondent Court: When plaintiff-appellant Juan J. Syquia affixed his signature to the Deed of Sale (Exhibit "A") and the attached Rules and Regulations (Exhibit "1"), it can be assumed that he has accepted defendantappellee's undertaking to merely provide a concrete vault. He can not now claim that said concrete vault must in addition, also be waterproofed (sic). It is basic that the parties are bound by the terms of their contract, which is the law between them (Rizal Commercial Banking Corporation vs. Court of Appeals, et al. 178 SCRA 739). Where there is nothing in the contract which is contrary to law, morals, good customs, public order, or public policy, the validity of the contract must be sustained (Phil. American Insurance Co. vs. Judge Pineda, 175 SCRA 416). Consonant with this ruling, a contracting party cannot incur a liability more than what is

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expressly specified in his undertaking. It cannot be extended by implication, beyond the terms of the contract (Rizal Commercial Banking Corporation vs. Court of Appeals, supra). And as a rule of evidence, where the terms of an agreement are reduced to writing, the document itself, being constituted by the parties as the expositor of their intentions, is the only instrument of evidence in respect of that agreement which the law will recognize, so long as its (sic) exists for the purpose of evidence (Starkie, Ev., pp. 648, 655, Kasheenath vs. Chundy, 5 W.R. 68 cited in Francisco, Revised Rules of Court in the Phil. p. 153, 1973 Ed.). And if the terms of the contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control (Santos vs. CA, et al., G. R. No. 83664, Nov. 13, 1989; Prudential Bank & Trust Co. vs. Community Builders Co., Inc., 165 SCRA 285; Balatero vs. IAC, 154 SCRA 530). 13 We hold, therefore, that private respondent did not breach the tenor of its obligation to the Syquias. While this may be so, can private respondent be liable for culpa aquiliana for boring the hole on the vault? It cannot be denied that the hole made possible the entry of more water and soil than was natural had there been no hole. The law defines negligence as the "omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place." 14 In the absence of stipulation or legal provision providing the contrary, the diligence to be observed in the performance of the obligation is that which is expected of a good father of a family. The circumstances surrounding the commission of the assailed act boring of the hole negate the allegation of negligence. The reason for the act was explained by Henry Flores, Interment Foreman, who said that:

Q It has been established in this particular case that a certain Vicente Juan Syquia was interred on July 25, 1978 at the Paraaque Cemetery of the Manila Memorial Park Cemetery, Inc., will you please tell the Hon. Court what or whether you have participation in connection with said internment (sic)? A A day before Juan (sic) Syquia was buried our personnel dug a grave. After digging the next morning a vault was taken and placed in the grave and when the vault was placed on the grave a hole was placed on the vault so that water could come into the vault because it was raining heavily then because the vault has no hole the vault will float and the grave would be filled with water and the digging would caved (sic) in and the earth, the earth would (sic) caved in and fill up the grave. 15 (Emphasis ours) Except for the foreman's opinion that the concrete vault may float should there be a heavy rainfall, from the above-mentioned explanation, private respondent has exercised the diligence of a good father of a family in preventing the accumulation of water inside the vault which would have resulted in the caving in of earth around the grave filling the same with earth. Thus, finding no evidence of negligence on the part of private respondent, We find no reason to award damages in favor of petitioners. In the light of the foregoing facts, and construed in the language of the applicable laws and jurisprudence, We are constrained to

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AFFIRM in toto the decision of the respondent Court of Appeals dated December 7, 1990. No costs. SO ORDERED. G.R. No. 108164 February 23, 1995 FAR EAST BANK AND TRUST COMPANY, petitioner, vs. THE HONORABLE COURT OF APPEALS, LUIS A. LUNA and CLARITA S. LUNA, respondents.

In a letter, dated 11 October 1988, private respondent Luis Luna, through counsel, demanded from FEBTC the payment of damages. Adrian V. Festejo, a vice-president of the bank, expressed the bank's apologies to Luis. In his letter, dated 03 November 1988, Festejo, in part, said: In cases when a card is reported to our office as lost, FAREASTCARD undertakes the necessary action to avert its unauthorized use (such as tagging the card as hotlisted), as it is always our intention to protect our cardholders. An investigation of your case however, revealed that FAREASTCARD failed to inform you about its security policy. Furthermore, an overzealous employee of the Bank's Credit Card Department did not consider the possibility that it may have been you who was presenting the card at that time (for which reason, the unfortunate incident occurred). 1 Festejo also sent a letter to the Manager of the Bahia Rooftop Restaurant to assure the latter that private respondents were "very valued clients" of FEBTC. William Anthony King, Food and Beverage Manager of the Intercontinental Hotel, wrote back to say that the credibility of private respondent had never been "in question." A copy of this reply was sent to Luis by Festejo. Still evidently feeling aggrieved, private respondents, on 05 December 1988, filed a complaint for damages with the Regional Trial Court ("RTC") of Pasig against FEBTC. On 30 March 1990, the RTC of Pasig, given the foregoing factual settings, rendered a decision ordering FEBTC to pay private respondents (a) P300,000.00 moral damages; (b) P50,000.00 exemplary damages; and (c) P20,000.00 attorney's fees. On appeal to the Court of Appeals, the appellate court affirmed the decision of the trial court. Its motion for reconsideration having been denied by the appellate court, FEBTC has come to this Court with this petition for review.

VITUG, J.: Some time in October 1986, private respondent Luis A. Luna applied for, and was accorded, a FAREASTCARD issued by petitioner Far East Bank and Trust Company ("FEBTC") at its Pasig Branch. Upon his request, the bank also issued a supplemental card to private respondent Clarita S. Luna. In August 1988, Clarita lost her credit card. FEBTC was forthwith informed. In order to replace the lost card, Clarita submitted an affidavit of loss. In cases of this nature, the bank's internal security procedures and policy would appear to be to meanwhile so record the lost card, along with the principal card, as a "Hot Card" or "Cancelled Card" in its master file. On 06 October 1988, Luis tendered a despedida lunch for a close friend, a Filipino-American, and another guest at the Bahia Rooftop Restaurant of the Hotel Intercontinental Manila. To pay for the lunch, Luis presented his FAREASTCARD to the attending waiter who promptly had it verified through a telephone call to the bank's Credit Card Department. Since the card was not honored, Luis was forced to pay in cash the bill amounting to P588.13. Naturally, Luis felt embarrassed by this incident.

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There is merit in this appeal. In culpa contractual, moral damages may be recovered where the defendant is shown to have acted in bad faith or with malice in the breach of the contract. 2 The Civil Code provides: Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. (Emphasis supplied) Bad faith, in this context, includes gross, but not simple, negligence. 3 Exceptionally, in a contract of carriage, moral damages are also allowed in case of death of a passenger attributable to the fault (which is presumed 4) of the common carrier. 5 Concededly, the bank was remiss in indeed neglecting to personally inform Luis of his own card's cancellation. Nothing in the findings of the trial court and the appellate court, however, can sufficiently indicate any deliberate intent on the part of FEBTC to cause harm to private respondents. Neither could FEBTC's negligence in failing to give personal notice to Luis be considered so gross as to amount to malice or bad faith. Malice or bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity; it is different from the negative idea of negligence in that malice or bad faith contemplates a state of mind affirmatively operating with furtive design or ill will. 6 We are not unaware of the previous rulings of this Court, such as in American Express International, Inc., vs.Intermediate Appellate Court (167 SCRA 209) and Bank of Philippine Islands vs. Intermediate Appellate Court(206 SCRA 408), sanctioning the application of Article 21, in relation to Article 2217 and Article 2219 7 of the Civil Code to a contractual breach similar to the case at bench. Article 21 states:

Art. 21. Any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage. Article 21 of the Code, it should be observed, contemplates a conscious act to cause harm. Thus, even if we are to assume that the provision could properly relate to a breach of contract, its application can be warranted only when the defendant's disregard of his contractual obligation is so deliberate as to approximate a degree of misconduct certainly no less worse than fraud or bad faith. Most importantly, Article 21 is a mere declaration of a general principle in human relations that clearly must, in any case, give way to the specific provision of Article 2220 of the Civil Code authorizing the grant of moral damages in culpa contractual solely when the breach is due to fraud or bad faith. Mr. Justice Jose B.L. Reyes, in his ponencia in Fores vs. Miranda 8 explained with great clarity the predominance that we should give to Article 2220 in contractual relations; we quote: Anent the moral damages ordered to be paid to the respondent, the same must be discarded. We have repeatedly ruled (Cachero vs. Manila Yellow Taxicab Co. Inc., 101 Phil. 523; 54 Off. Gaz., [26], 6599; Necesito, et al. vs. Paras, 104 Phil., 75; 56 Off. Gaz., [23] 4023), that moral damages are not recoverable in damage actions predicated on a breach of the contract of transportation, in view of Articles 2219 and 2220 of the new Civil Code, which provide as follows: Art. 2219. Moral damages may be recovered in the following and analogous cases: (1) A criminal offense resulting in physical injuries; (2) Quasi-delicts causing physical injuries; xxx xxx xxx

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Art. 2220. Wilful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. By contrasting the provisions of these two articles it immediately becomes apparent that: (a) In case of breach of contract (including one of transportation) proof of bad faith or fraud (dolus), i.e., wanton or deliberately injurious conduct, is essential to justify an award of moral damages; and (b) That a breach of contract can not be considered included in the descriptive term "analogous cases" used in Art. 2219; not only because Art. 2220 specifically provides for the damages that are caused contractual breach, but because the definition of quasi-delict in Art. 2176 of the Code expressly excludes the cases where there is a "preexisitng contractual relations between the parties." Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter. The exception to the basic rule of damages now under consideration is a mishap resulting in the death of a passenger, in which case Article 1764 makes the common carrier expressly subject to the rule of Art. 2206, that entitles the spouse, descendants and ascendants of the deceased passenger to "demand moral damages for mental anguish

by reason of the death of the deceased" (Necesito vs. Paras, 104 Phil. 84, Resolution on motion to reconsider, September 11, 1958). But the exceptional rule of Art. 1764 makes it all the more evident that where the injured passenger does not die, moral damages are not recoverable unless it is proved that the carrier was guilty of malice or bad faith. We think it is clear that the mere carelessness of the carrier's driver does not per se constitute or justify an inference of malice or bad faith on the part of the carrier; and in the case at bar there is no other evidence of such malice to support the award of moral damages by the Court of Appeals. To award moral damages for breach of contract, therefore, without proof of bad faith or malice on the part of the defendant, as required by Art. 2220, would be to violate the clear provisions of the law, and constitute unwarranted judicial legislation. xxx xxx xxx The distinction between fraud, bad faith or malice in the sense of deliberate or wanton wrong doing and negligence (as mere carelessness) is too fundamental in our law to be ignored (Arts. 1170-1172); their consequences being clearly differentiated by the Code. Art. 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is liable shall be those that are the natural and probable consequences of the breach of the obligation, and which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted. In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation.

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It is to be presumed, in the absence of statutory provision to the contrary, that this difference was in the mind of the lawmakers when in Art. 2220 they limited recovery of moral damages to breaches of contract in bad faith. It is true that negligence may be occasionally so gross as to amount to malice; but the fact must be shown in evidence, and a carrier's bad faith is not to be lightly inferred from a mere finding that the contract was breached through negligence of the carrier's employees. The Court has not in the process overlooked another rule that a quasi-delict can be the cause for breaching a contract that might thereby permit the application of applicable principles on tort 9 even where there is a pre-existing contract between the plaintiff and the defendant (Phil. Airlines vs. Court of Appeals, 106 SCRA 143; Singson vs. Bank of Phil. Islands, 23 SCRA 1117; and Air France vs. Carrascoso, 18 SCRA 155). This doctrine, unfortunately, cannot improve private respondents' case for it can aptly govern only where the act or omission complained of would constitute an actionable tort independently of the contract. The test (whether a quasi-delict can be deemed to underlie the breach of a contract) can be stated thusly: Where, without a pre-existing contract between two parties, an act or omission can nonetheless amount to an actionable tort by itself, the fact that the parties are contractually bound is no bar to the application of quasi-delict provisions to the case. Here, private respondents' damage claim is predicated solely on their contractual relationship; without such agreement, the act or omission complained of cannot by itself be held to stand as a separate cause of action or as an independent actionable tort. The Court finds, therefore, the award of moral damages made by the court a quo, affirmed by the appellate court, to be inordinate and substantially devoid of legal basis. Exemplary or corrective damages, in turn, are intended to serve as an example or as correction for the public good in addition to moral, temperate, liquidated or compensatory damages (Art. 2229, Civil Code; seePrudenciado vs. Alliance Transport System, 148 SCRA 440; Lopez vs. Pan American World Airways, 16 SCRA 431). In criminal offenses, exemplary damages are imposed when the

crime is committed with one or more aggravating circumstances (Art. 2230, Civil Code). In quasi-delicts, such damages are granted if the defendant is shown to have been so guilty of gross negligence as to approximate malice (See Art. 2231, Civil Code; CLLC E.G. Gochangco Workers Union vs. NLRC, 161 SCRA 655; Globe Mackay Cable and Radio Corp. vs. CA, 176 SCRA 778). In contracts and quasi-contracts, the court may award exemplary damages if the defendant is found to have acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner (Art. 2232, Civil Code; PNB vs. Gen. Acceptance and Finance Corp., 161 SCRA 449). Given the above premises and the factual circumstances here obtaining, it would also be just as arduous to sustain the exemplary damages granted by the courts below (see De Leon vs. Court of Appeals, 165 SCRA 166). Nevertheless, the bank's failure, even perhaps inadvertent, to honor its credit card issued to private respondent Luis should entitle him to recover a measure of damages sanctioned under Article 2221 of the Civil Code providing thusly: Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him. Reasonable attorney's fees may be recovered where the court deems such recovery to be just and equitable (Art. 2208, Civil Code). We see no issue of sound discretion on the part of the appellate court in allowing the award thereof by the trial court. WHEREFORE, the petition for review is given due course. The appealed decision is MODIFIED by deleting the award of moral and exemplary damages to private respondents; in its stead, petitioner is ordered to pay private respondent Luis A. Luna an amount of P5,000.00 by way of nominal damages. In all other respects, the appealed decision is AFFIRMED. No costs.

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SO ORDERED.

binding on this Court in this petition. We concede to this reminder since, indeed, there appears to be no valid justification in the case at bench for us to take an exception from the rule. We shall, therefore, momentarily paraphrase these findings. On 31 March 1981, Bricktown Development Corporation (herein petitioner corporation), represented by its President and co-petitioner Mariano Z. Velarde, executed two Contracts to Sell (Exhs. "A" and "B") in favor of Amor Tierra Development Corporation (herein private respondent), represented in these acts by its Vice-President, Moises G. Petilla, covering a total of 96 residential lots, situated at the Multinational Village Subdivision, La Huerta, Paraaque, Metro Manila, with an aggregate area of 82,888 square meters. The total price of P21,639,875.00 was stipulated to be paid by private respondent in such amounts and maturity dates, as follows: P2,200,000.00 on 31 March 1981; P3,209,968.75 on 30 June 1981; P4,729,906.25 on 31 December 1981; and the balance of P11,500,000.00 to be paid by means of an assumption by private respondent of petitioner corporation's mortgage liability to the Philippine Savings Bank or, alternatively, to be made payable in cash. On even date, 31 March 1981, the parties executed a Supplemental Agreement (Exh. "C"), providing that private respondent would additionally pay to petitioner corporation the amounts of P55,364.68, or 21% interest on the balance of downpayment for the period from 31 March to 30 June 1981, and of P390,369.37 representing interest paid by petitioner corporation to the Philippine Savings Bank in updating the bank loan for the period from 01 February to 31 March 1981. Private respondent was only able to pay petitioner corporation the sum of P1,334,443.21 (Exhs. "A" to "K"). In the meanwhile, however, the parties continued to negotiate for a possible modification of their agreement, although nothing conclusive would appear to have ultimately been arrived at. Finally, on 12 October 1981, petitioner corporation, through its legal counsel, sent private respondent a "Notice of Cancellation of Contract" (Exh. "D") on account of the latter's continued failure to pay the installment due 30 June 1981 and the interest on the unpaid balance of the stipulated initial payment. Petitioner corporation

G.R. No. 112182 December 12, 1994 BRICKTOWN DEVELOPMENT CORP. (its new corporate name MULTINATIONAL REALTY DEVELOPMENT CORPORATION) and MARIANO Z. VERALDE, petitioners, vs. AMOR TIERRA DEVELOPMENT CORPORATION and the HON. COURT OF APPEALS, respondents. Tabaquero, Dela Torre, Simando & Associates for petitioners. Robles, Ricafrente & Aguirre Law Firm for private respondent.

VITUG, J.: A contract, once perfected, has the force of law between the parties with which they are bound to comply in good faith and from which neither one may renege without the consent of the other. The autonomy of contracts allows the parties to establish such stipulations, clauses, terms and conditions as they may deem appropriate provided only that they are not contrary to law, morals, good customs, public order or public policy. The standard norm in the performance of their respective covenants in the contract, as well as in the exercise of their rights thereunder, is expressed in the cardinal principle that the parties in that juridical relation must act with justice, honesty and good faith. These basic tenets, once again, take the lead in the instant controversy. Private respondent reminds us that the factual findings of the trial court, sustained by the Court of Appeals, should be considered

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advised private respondent, however, that it (private respondent) still had the right to pay its arrearages within 30 days from receipt of the notice "otherwise the actual cancellation of the contract (would) take place." Several months later, or on 26 September 1983, private respondent, through counsel, demanded (Exh. "E") the refund of private respondent's various payments to petitioner corporation, allegedly "amounting to P2,455,497.71," with interest within fifteen days from receipt of said letter, or, in lieu of a cash payment, to assign to private respondent an equivalent number of unencumbered lots at the same price fixed in the contracts. The demand, not having been heeded, private respondent commenced, on 18 November 1983, its action with the courta quo. 1 Following the reception of evidence, the trial court rendered its decision, the dispositive portion of which read: In view of all the foregoing, judgment is hereby rendered as follows: 1. Declaring the Contracts to Sell and the Supplemental Agreement (Exhibits "A", "B" and "C") rescinded; 2. Ordering the [petitioner] corporation, Bricktown Development Corporation, also known as Multinational Realty Development Corporation, to return to the [private respondent] the amount of One Million Three Hundred Thirty Four Thousand Four Hundred Forty-Three Pesos and Twenty-One Centavos (P1,334,443.21) with interest at the rate of Twelve (12%) percent per annum, starting November 18, 1983, the date when the complaint was filed, until the amount is fully paid; 3. Ordering the [petitioner] corporation to pay the [private respondent] the amount of Twenty-five

Thousand (P25,000.00) Pesos, representing attorney's fees; 4. Dismissing [petitioner's] counterclaim for lack of merit; and 5. With costs against the [petitioner] corporation. SO ORDERED. 2 On appeal, the appellate court affirmed in toto the trial court's findings and judgment. In their instant petition, petitioners contend that the Court of Appeals has erred in ruling that (1) By petitioners' acts, conduct and representation, they themselves delayed or prevented the performance of the contracts to sell and the supplemental agreement and were thus estopped from cancelling the same. (2) Petitioners were no justified in resolving the contracts to sell and the supplemental agreement. (3) The cancellation of the contract required a positive act on the part of petitioners giving private respondent the sixty (60) day grace period provided in the contracts to sell; and (4) In not holding that the forfeiture of the P1,378,197.48 was warranted under the liquidated damages provisions of the contracts to sell and the supplemental agreement and was not iniquitous nor unconscionable. The core issues would really come down to (a) whether or not the contracts to sell were validly rescinded or cancelled by petitioner

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corporation and, in the affirmative, (b) whether or not the amounts already remitted by private respondent under said contracts were rightly forfeited by petitioner corporation. Admittedly, the terms of payment agreed upon by the parties were not met by private respondent. Of a total selling price of P21,639,875.00, private respondent was only able to remit the sum of P1,334,443.21 which was even short of the stipulated initial payment of P2,200,000.00. No additional payments, it would seem, were made. A notice of cancellation was ultimately made months after the lapse of the contracted grace period. Paragraph 15 of the Contracts to Sell provided thusly: 15. Should the PURCHASER fail to pay when due any of the installments mentioned in stipulation No. 1 above, the OWNER shall grant the purchaser a sixty (60)-day grace period within which to pay the amount/s due, and should the PURCHASER still fail to pay the due amount/s within the 60-day grace period, the PURCHASER shall have the right to exparte cancel or rescind this contract, provided, however, that the actual cancellation or rescission shall take effect only after the lapse of thirty (30) days from the date of receipt by the PURCHASER of the notice of cancellation of this contract or the demand for its rescission by a notarial act, and thereafter, the OWNER shall have the right to resell the lot/s subject hereof to another buyer and all payments made, together with all improvements introduced on the aforementioned lot/s shall be forfeited in favor of the OWNER as liquidated damages, and in this connection, the PURCHASER obligates itself to peacefully vacate the aforesaid lot/s without necessity of notice or demand by the OWNER. 3 A grace period is a right, not an obligation, of the debtor. When unconditionally conferred, such as in this case, the grace period is effective without further need of demand either calling for the payment of the obligation or for honoring the right. The grace period

must not be likened to an obligation, the non-payment of which, under Article 1169 of the Civil Code, would generally still require judicial or extrajudicial demand before "default" can be said to arise. 4 Verily, in the case at bench, the sixty-day grace period under the terms of the contracts to sell became ipso factooperative from the moment the due payments were not met at their stated maturities. On this score, the provisions of Article 1169 of the Civil Code would find no relevance whatsoever. The cancellation of the contracts to sell by petitioner corporation accords with the contractual covenants of the parties, and such cancellation must be respected. It may be noteworthy to add that in a contract to sell, the non-payment of the purchase price (which is normally the condition for the final sale) can prevent the obligation to convey title from acquiring any obligatory force (Roque vs. Lapuz, 96 SCRA 741; Agustin vs. Court of Appeals, 186 SCRA 375). The forfeiture of the payments thus far remitted under the cancelled contracts in question, given the factual findings of both the trial court and the appellate court, must be viewed differently. While clearly insufficient to justify a foreclosure of the right of petitioner corporation to rescind or cancel its contracts with private respondent, the series of events and circumstances described by said courts to have prevailed in the interim between the parties, however, warrant some favorable consideration by this Court. Petitioners do not deny the fact that there has indeed been a constant dialogue between the parties during the period of their juridical relation. Concededly, the negotiations that they have pursued strictly did not result in the novation, either extinctive or modificatory, of the contracts to sell; nevertheless, this Court is unable to completely disregard the following findings of both the trial court and the appellate court. Said the trial court: It has been duly established through the testimony of plaintiff's witnesses Marcosa Sanchez and Vicente Casas that there were negotiations to enter into

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another agreement between the parties, after March 31, 1981. The first negotiation took place before June 30, 1981, when Moises Petilla and Renato Dragon, Vice-President and president, respectively, of the plaintiff corporation, together with Marcosa Sanchez, went to the office of the defendant corporation and made some proposals to the latter, thru its president, the defendant Mariano Velarde. They told the defendant Velarde of the plaintiff's request for the division of the lots to be purchased into smaller lots and the building of town houses or smaller houses therein as these kinds of houses can be sold easily than big ones. Velarde replied that subdivision owners would not consent to the building of small houses. He, however, made two counterproposals, to wit: that the defendant corporation would assign to the plaintiff a number of lots corresponding to the amounts the latter had already paid, or that the defendant corporation may sell the corporation itself, together with the Multinational Village Subdivision, and its other properties, to the plaintiff and the latter's sister companies engaged in the real estate business. The negotiations between the parties went on for sometime but nothing definite was accomplished. 5 For its part, the Court of Appeals observed: We agree with the court a quo that there is, therefore, reasonable ground to believe that because of the negotiations between the parties, coupled with the fact that the plaintiff never took actual possession of the properties and the defendants did not also dispose of the same during the pendency of said negotiations, the plaintiff was led to believe that the parties may ultimately enter into another agreement in place of the "contracts to sell." There was, evidently, no malice or bad faith on the part of the plaintiff in suspending payments. On the contrary, the defendants not only contributed, but

had consented to the delay or suspension of payments. They did not give the plaintiff a categorical answer that their counter-proposals will not materialize. 6 In fine, while we must conclude that petitioner corporation still acted within its legal right to declare the contracts to sell rescinded or cancelled, considering, nevertheless, the peculiar circumstances found to be extant by the trial court, confirmed by the Court of Appeals, it would be unconscionable, in our view, to likewise sanction the forfeiture by petitioner corporation of payments made to it by private respondent. Indeed, in the opening statement of this ponencia, we have intimated that the relationship between parties in any contract must always be characterized and punctuated by good faith and fair dealing. Judging from what the courts below have said, petitioners did fall well behind that standard. We do not find it equitable, however, to adjudge any interest payment by petitioners on the amount to be thus refunded, computed from judicial demand, for, indeed, private respondent should not be allowed to totally free itself from its own breach. WHEREFORE, the appealed decision is AFFIRMED insofar as it declares valid the cancellation of the contracts in question but MODIFIED by ordering the refund by petitioner corporation of P1,334,443.21 with 12% interest per annum to commence only, however, from the date of finality of this decision until such refund is effected. No costs. SO ORDERED. G.R. No. L-59980 October 23, 1984 BERLIN TAGUBA AND SEBASTIANA DOMINGO, SPOUSES PEDRO ASUNCION AND MARING ASUNCION,petitioners, vs. MARIA PERALTA VDA. DE DE LEON AND THE HONORABLE COURT OF APPEALS, respondents. Eligio A. Labog for petitioners.

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Romeo B. Calixto for respondents.

a) P3,500.00 Philippine Currency upon the signing and executed petition of this contract; b) To pay the amount of at least One Thousand (P1,000.00) Pesos, Philippine Currency MONTHLY to commence September 1972, until the whole amount would have been paid on or before December 3, 1972; c) That failure to pay the VENDOR the whole balance on December 31, 1972, the VENDEE shall be given an extension of Six (6) months with interest (legal rate) after which VENDOR may INCREASE the purchase price to P50.00 per sq. m. which the VENDEE agrees should she fail to pay within said period of time. Alleging that she (private respondent) had already paid the sum of P12,500.00 and had tendered payment of the balance of P5,500.00 to complete the stipulated purchase price of P18,000.00 to petitioner Berlin Taguba in May 1973 within the grace period but the latter refused to receive payment; and that since negotiations for settlement with the intervention of Governor Dy failed, private respondent instituted on April 29, 1976 a complaint for Specific Performance with Preliminary Mandatory Injunction with Damages against Spouses Berlin Taguba and Sebastiana Domingo, in the then Court of First Instance of Isabela (Civil Case No. II-1215.) In their Answer, Spouses Taguba admitted the sale of the property, but claimed that private respondent failed to comply with her obligation under the Deed of Conditional Sale despite the several extensions granted her, by reason of which petitioner was compelled but with the express knowledge and consent and even upon the proposal of private respondent, to negotiate the sale of a portion of the property sold, to the Spouses Asuncion who were actually in possession thereof. Petitioner further alleged that the parties had appeared before Governor Dy, who mediated to settle the dispute between them and that in the said conference, they had agreed that

CUEVAS, J.:+.wph!1 This is a Petition to Review on Certiorari, the decision of the defunct Court of Appeals in its CA-G.R. No. 65357-R which reversed on appeal the decision of the then Court of First Instance of Isabela in Civil Case No. Br. II-1215, entitled "Maria Peralta Vda. de De Leon, versus Berlin Taguba and Sebastiana Domingo" for "Specific Performance with Preliminary Mandatory Injunction with Damages". Berlin Taguba married to Sebastiana Domingo (now petitioner) is the owner of a residential lot with an area of 3,129 square meters located at Cauayan, Isabela. Spouses Pedro Asuncion and Marita Lungab, (also petitioners) and herein private respondent Maria Peralta Vda. de De Leon, were separately occupying portions of the aforementioned lot as lessees. On August 27, 1972, Berlin Taguba sold a portion of the said lot consisting of 400 square meters to private respondent Maria Peralta Vda de De Leon. The portion sold comprises the area occupied by the Asuncions and private respondent Vda de De Leon. The deed evidencing said sale was denominated as "Deed of Conditional Sale", 1 the only salient terms and conditions of which reads t. hqw NOW THEREFORE, for and in consideration of the sum of Eighteen Thousand (P18,000.00) Pesos, Philippine Currency, (P45.00 per sq. m.) to be paid in the manner herein below specified, the VENDOR hereby SELL, CEDE, TRANSFER, and CONVEY unto and in favor of the VENDEE, her heirs, executors, administrators or assigns the abovedescribed portion. The aforesaid sum of P18,000.00 shall be paid at the residence of the VENDOR as follows:

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private respondent and the Asuncion spouses will buy only the portions which they respectively and actually as lessees. The Asuncion spouses intervened and filed their Answer in Intervention alleging that they bought in good faith that portion of the land they actually occupy after private respondent defaulted in her undertaking in their contract with petitioner Berlin Taguba and after a confrontation in the house of Governor Faustino N. Dy. After trial, the lower court rendered judgment, the dispositive portion of which reads as follows t.hqw 1) Ordering a cadastral survey by a competent Geodetic Engineer of the actual area occupied by the plaintiff and the intervenors; 2) Ordering the defendant Berlin Taguba to execute a deed of absolute sale in favor of the plaintiff of the actual area actually occupied by her; 3) Ordering Berlin Taguba to reimburse the plaintiff of whatever amount he received from the plaintiff in excess of the costs of the area actually occupied by plaintiff at P45.00 per square meter; 4) The cost of survey shag be borne by the plaintiff and intervenor share and share alike; 5) The order granting preliminary injunction against plaintiff dated July 13, 1978 is hereby declared permanent. Without special pronouncement as to costs. SO ORDERED.1wph1.t On appeal under CA-G.R. No. 65357-R, the then Court of Appeals reversed the decision of the lower court in a decision promulgated on

October 22, 1981, the dispositive portion of which reads as follows t.hqw WHEREFORE, the decision of the lower court is hereby SET ASIDE and a new judgment rendered as follows: 1) Ordering defendant Berlin Taguba to execute a deed of absolute sale in favor of plaintiff over the 400 square meter portion of his property described in Exhibit "A" upon the payment by plaintiff of the sum of P7,500.00 within thirty (30) days from receipt of notice from the Clerk of Court of the lower court of receipt of the records of the case from the Court of Appeals as provided for in the last paragraph of Section 1, Rule 39 in relation to Section 11, Rule 51 of the Rules of Court; 2) Declaring the deed of sale executed by defendant Taguba in favor of defendant Asuncion in April 19, 1974, Exhibit '3' and void or of no force and effect in view of the prior sale of the property covered under said deed to plaintiff on August 27, 1972 Exhibit "A", 3) Ordering defendant Berlin Taguba to reimburse defendant Pedro Asuncion the purchase price received by him under the deed of sale of April 19, 1974, Exhibit "3"; and 4) Ordering defendants jointly and severally to deliver to plaintiff possession of the property described in Exhibit "A" with an area of 400 square meters, the portion sold by defendant Taguba to plaintiff. With costs against defendants-appellees. SO ORDERED.1wph1.t

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The motion for reconsideration of the aforesaid decision filed by petitioner Spouses Taguba and Spouses Asuncion having been denied, they now come before this Court through the instant petition praying that the decision of the then Court of Appeals be set aside and the decision of the lower court be affirmed in toto. The petition is without merit. We agree with respondent Court of Appeals (now Intermediate Appellate Court) that the contract of sale between petitioner Berlin Taguba and private respondent Maria Peralta Vda. de De Leon 2 was absolute in nature. Despite the denomination of the deed as a "Deed of Conditional Sale" a reading of the conditions (earlier quoted in this decision) therein set forth reveals the contrary. Nowhere in the said contract in question could we find a proviso or stipulation to the effect that title to the property sold is reserved in the vendor 3 until full payment of the purchase price. There is also no stipulation giving the vendor (petitioner Taguba) the right to unilaterally rescind the contract the moment the vendee (private respondent de Leon) fails to pay within a fixed period. 4 Indeed, a reading of the contract in its entirety would show that the only right of petitioner Taguba as vendor was to collect interest at the legal rate if private respondent-vendee fails to pay the full purchase price of P18,000.00 up to December 31, 1972 and to increase the price from P45.00 to P50.00 per square meter if vendee still fails to pay within the six months grace period from December 31, 1972. Thus Par. C of the deed provides- t. hqw c) That failure to pay the VENDOR the whole balance on December 31, 1972, the VENDEE shall be given an extension of six (6) months with interest (legal rate) after which VENDOR may INCREASE the purchase price to P50.00 per sq. m. which the VENDEE agrees should she fail to pay within said period of time. Considering, therefore, the nature of the transaction between petitioner Taguba and private respondent, which We affirm and sustain to be a contract of sale, absolute in nature 5 the applicable

provision is Article 1592 of the New Civil Code, which states t. hqw Art. 1592. In the sale of immovable property,eventhough may have been stipulated that upon failure to pay the price at the time agreed upon the rescission of the contract shall of right take place, the vendee may pay, even after the expiration of the period, as long as no demand for rescission of the contract has been made upon him either judicially or by notarial act. After the demand the court may not grant him a new term. (Emphasis supplied) In the case at bar, it is undisputed that petitioner Taguba never notified private respondent by notarial act that he was rescinding the contract, and neither had he filed a suit in court to rescind the sale. Finally, it has been ruled that "where time is not of the essence of the agreement, a slight delay on the part of one party in the performance of his obligation is not a sufficient ground for the rescission of the agreement. 6Considering that in the instant case, private respondent had already actually paid the sum of P12,500.00 of the total stipulated purchase price of P18,000.00 and had tendered payment of the balance of P5,500.00 within the grace period of six months from December 31, 1972, equity and justice mandate that she be given additional period within which to complete payment of the purchase price. 7 With the respect to the sale executed by petitioner Taguba in favor of the other petitioners, the Asuncion spouses, on April 19, 1974 of 233 square meters portion of his property which is a part of the 400 square meters previously sold to private respondent de Leon, We find that said sale cannot prevail over the previous sale in favor of private respondent. The Asuncion spouses cannot be considered buyers in good faith because they were aware of the earlier sale to private respondent. 8

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WHEREFORE, the judgment of respondent Appellate Court is hereby AFFIRMED with costs against petitioners. SO ORDERED.1wph1.t G.R. No. L-47986 July 16, 1984 AQUILINA P. MARIN and ANTONIO S. MARIN, SR., petitioners, vs. JUDGE MIDPANTAO L. ADIL, Branch 11, CFI, Iloilo; PROVINCIAL SHERIFF, CFI, South Cotabato; REGISTER OF DEEDS, General Santos City; MANUEL, P. ARMADA and ARISTON P. ARMADA, now substituted by his heirs, respondents. G.R. No. L-49018 July 16, 1984 AQUILINA P. MARIN, petitioner, vs. JUDGE MIDPANTAO L. ADIL, CFI of Iloilo, MANUEL P. ARMADA and ARISTON P. ARMADA, now substituted by his heirs, EVA SALAZAR VDA. DE ARMADA, ARISTON, JR., DONALD and CRISTINA, all surnamed ARMADA, and Heirs of MARGARITA M. ARMADA-HONORIO, respondents.

located in Cotabato covered by TCT No. 7252 and other properties in that province. The exchange would be rescindible when it is definitely ascertained that the parties have respectively no right to the properties sought to be exchanged. The exchange did not mean that the parties were definitely entitled to the properties being exchanged but it was executed "in anticipation of a declaration of said right". The deed of exchange reads as follows: DEED OF EXCHANGE WITH QUITCLAIM KNOW ALL MEN BY THESE PRESENTS: This DEED OF EXCHANGE WITH QUITCLAIM, made and entered into by and between: AQUILINA P. MARIN, of legal age, Filipino, married, to Antonio S. Marin, with residence and postal address at Bo. 8, Marbel, Koronadal, Province of Cotabato, hereinafter designated as MARIN; and

M.R. Flores and D. Marin-Flores for petitioners. Renato D. Munez for private respondents. MANUEL P. ARMADA, Filipino, of legal age, single, with residence and postal address at the Municipality of January, Province of Iloilo, Philippines, for him and in behalf of his brother, ARISTON P. ARMADA, likewise Filipino, of legal age, single, with residence and postal address at Stockton, California, U.S.A., hereinafter designated as the ARMADAS;

AQUINO, J.: This case is about the rescission of a deed of exchange. In a 1963 document, Aquiline P. Marin assigned to the brothers Manuel P. Armada and Ariston P. Armada her hereditary share in the testate estate of her deceased mother, Monica Pacificar Vda. de Provido, situated in January, Iloilo in exchange for the land of the Armadas

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WITNESSETH: WHEREAS, AQUILINA P. MARIN, is one of the legitimate children and compulsory heirs of the deceased MONICA PACIFICAR VDA DE PROVIDO, who died testate in the Municipality of January, Province of Iloilo Philippines, on June 3, 1960; WHEREAS, AQUILINA P. MARIN was named as an heir in that certain LAST WILL AND TESTAMENT executed by the said MONICA PACIFICAR VDA DE PROVIDO, on October 20, 1959, and duly acknowledged on the same date, before Sr. MANUEL B. LAURO, Notary Public for and in the Province of Iloilo, as per Doc. No. 262, Page No. 95, Book No. 1, Series of 1959, of his Notarial Register, a photostatic copy of which is hereto attached and made an integral part of this AGREEMENT as Annex A; WHEREAS, it is specifically provided in the attached LAST WILL AND TESTAMENT OF MONICA PACIFICAR VDA DE PROVIDO that AQUILINA P. MARIN will share equally with her co-heirs the estate of the decedent consisting of personal properties and registered and unregistered lands situated in the Municipality of January, Province of Iloilo Philippines: WHEREAS, the ARMADAS desire to acquire all the rights, interests, titles and participations that AQUILINA P. MARIN may have over the real and personal properties of MONICA PACIFICAR VDA DE PROVIDO aforementioned because of the proximity of the said properties to them, being residents of January, Iloilo, while AQUILINA P. MARIN is presently residing in Cotabato, Philippines;

WHEREAS, AQUILINA P. MARIN does by these presents hereby WAGE and QUITCLAIM all her rights, interests, titles and participations in all the real and personal properties of her deceased mother, MONICA PACIFICAR VDA DE PROVIDO, in favor of the ARMADAS, in exchange for whatever rights, interests, titles and participations the latter may have or could have in any real or personal properties situated at Cetabato, Philippines; NOW, THEREFORE,, for and ii consideration of the foregoing premises, and for such other good and valuable considerations, the parties hereto hereby covenant and stipulate as follows, to wit: 1. That AQUILINA P. MARIN hereby transfers, assigns, cede conveys and quitclaims unto the said ARMADAS, their heirs, successors and assigns, all her rights, titles, interests and participations in any and all real and personal properties representing her legitimate share in the estate of her deceased mother, the late MONICA PACIFICAR VDA DE PROVIDO, situated at the Municipality of January, Iloilo; 2. That the ARMADAS by virtue of these presents hereby likewise cede, transfer, assign, convey and quitclaim in favor of the said AQUILINA P. MARIN by way of exchange, all their rights, interests, titles and participations, that they may have or could have in any and all real and personal properties situated at the Province of Cotabato, Philippines, more particularly in that parcel of land formerly covered by TCT No. V-2354 and now covered by TCT No. 252 of the Cotabato Registry: 3. That, the ARMADAS know for a fact that the properties being assigned and quit-claimed in their favor by AQUILINA P. MARIN have long been and

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continue to be productive and are more valuable than the properties which they are exchange in under this document; 4. That both parties hereto hereby acknowledge that the e exchange contained herein operates to their individual and mutual benefit and advantage, for the reason that the property being ceded, transferred, conveyed and unclaimed by one party to the other is situated in the place where either is a resident resulting in better administration of the aforementioned properties; 5. That both parties furthermore acknowledge that the exchange contemplated herein is made in perfect good faith, and not attended by fraud, mistake, misrepresentation or the like and that they have no further claim for additional price or consideration against each other, both declaring that the properties received by way of exchange under this document is adequate consideration for the properties quit-claimed; 6. That the parties hereto intend this AGREEMENT to be absolute and irrevocable, except only when it is eventually ascertained and finally determined that they have respectively no right, interest, title or participation in any property, real or personal, which they have assigned or quitclaimed in favor of each other, and in the event of mutual restitution by reason of the above eventuality, the parties hereto are not , liable for any fruits or benefits which they may have received from the aforementioned properties during the existence and efficacy of this AGREEMENT and that no damage could be claimed by one against the other 7. That it is specifically understood and agreed that the execution of this document by parties parties

hereto shall in no way be construed as an acknowledgment on his or part that the other is or are entitled in the properties heretofore quit-claimed but only in anticipation of a declaration of said right; 8. That the parties hereto shall take possession of and make use of the properties subject of this DEED OF EXCHANGE AND QUITCLAIM upon the signing of the same; 9. That the parties hereto hereby agree that the lawful ownership and possession of each shall be protected by the other against any and all claims of any person or persons; 10. That to make this AGREEMENT valid, binding and effective Live, both parties hereby authorize each other the registration of this document with the register of Deeds of Iloilo, and the ARMADAS likewise grant a similar authority to MARIN IN WITNESS WHEREOF, the parties hereto have affixed their hand this 13 th day of June, 1963. (SGD.) AQUILINA P. MARIN (SGD.) MANUEL P. ARMADA (For himself and in behalf of his brother, Ariston P. Armada) (SGD.) ANTONIO S. MARIN (Witness and Notarial Acknowledgement are omitted) As background, it should be stated that the Armadas and Mrs. Marin are first cousins. The Armadas in 1963 expected to inherit some lots in General Santos City from their uncle, Proceso Pacificar, who died in 1954. Mrs. Marin, who resided in Koronadal, Cotabato, had hereditary rights in the estates of her parents, the deceased spouses, Francisco Provido and Monica Pacificar, of Janiuay Iloilo,

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where died in 1938 and 1960, respectively. Manuel P. Armada resided in Janiuay. In 1963, when the deed of exchange was executed, the estate of Proceso Pacificar, in which the Armadas expected to inherit a part, had been adjudicated to Soledad Pronido- Elevencionado a sister of Mrs. Marin and a first cousin also of the Armadas. Soledad claimed to be the sole heir of Proceso. So, the Armadas and the other heirs had to sue Soledad. The protracted litigation ended in a compromise in 1976 when the Armadas were awarded Lots 906-A-2 and 906-A-3, located in Barrio lagao, General Santos City with a total area of 8,124 square meters, Mrs. Marin never possessed these two lots. They were supposed to be exchange for her proindiviso share in her parents' estate in Janiuay. Did Mrs. Marin inherit actually anything from her parents? The answer is nothing. She chose to forget the deed. Her conduct showed that she considered herself not bound by it. Five years after that deed, or on November 14, 1968, she agreed to convey to her sister, Aurora Provido-Collado, her interest in two lots in January in payment of her obligation amounting to P1,700. Then, in the extra-judicial partition of her parents' estate on June 25, 1977 (where the instant case for rescission was already pending), her share with a total area of 9,010 square meters, was formally adjudicated to Aurora. It was stated therein that Mrs. Marin "has waived, renounced and quit-claimed her share" in favor of Aurora. As already stated, that share was supposed to be exchanged for the two lots in General Santos City which the Armadas received in 1976 after a pestiferous litigation. The Armadas filed the instant rescissory action against Mrs. Marin on December 7, 1976. They overlooked the fact that Ariston P. Armada was not bound at all by the deed since Manuel. who signed the deed for aim, had no authority to do so Manuel was not the attorney-in-fact of Ariston (See Art. 1403 [1], Civil Code).

There was no trial. The case was submitted on the pleadings. The sole issue resolved by the trial court was prescription. It held that the Armadas' action had not prescribed because their right to rescind accrued only in 1976 when they discovered that Mrs. Marin could not perform her obligation under the deed since she had assigned her hereditary rights to her sister. Judge Midpantao L. Adil rescinded the deed of exchange, ordered restitution of whatever might have been received by Mrs. Marin, released the Armadas from their obligation under said deed and ordered Mrs. Marin to pay the Armadas P10,000 as moral and exemplary damages and P3,000 as attorney's fees. Mrs. Marin appealed to this Court on legal issues (L-49018). Judge Adil issued an order of execution pending appeal which Mrs. Marin assailed by certiorari in this Court. The enforcement of the execution was restrained by this Court (L-47986). The two related cases have been consolidated. It is evident from the deed of exchange that the intention of the parties relative to the lots, which are the objects of the exchange, cannot be definitely ascertained. We hold that this circumstance renders the exchange void or inexistent (Art. 1378, 2nd par. and Art. 1409 [6], Civil Code). Thus, as already noted, it is provided in paragraph 7 that the deed should not be construed as an acknowledgment by the Armadas and Mrs. Marin that they are entitled to the properties involved therein and that it was executed "in anticipation of a declaration of" their rights to the properties. Then, it is stipulated in paragraph 8 that the parties should take possession and make use of the properties involved in the deed. The two provisions are irreconcilable because paragraph contemplates that the properties are still to be awarded or adjudicated to the parties whereas paragraph 8 envisages a situation where the parties have already control and possession thereof.

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It should be noted that in paragraph 7 of Mrs. Marin's answer with affirmative defense she avers therein that her 1968 agreement with her sister means that she would convey her properties to the latter (Aurora) when the Armadas should be "adjudged to be without rights or interests to any properties in General Santos City" (p. 47, Rollo of L-49018). Such a qualifications is not found in her agreement with her sister. The instant rescissory action may be treated as an action to declare void the deed of exchange. The action to declare the inexistence of a contract does not prescribe (Art. 1410, Civil Code). The properties covered by the deed should have been specified and described. A perusal of the deed gives the impression that it involves many properties. In reality, it refers only to 8,124 square meters of land, which the Armadas would inherit from their uncle in General Santos City, and to the 9,000 square meters representing theproindiviso share of Mrs. Marin in her parents' estate. As we have seen, Mrs. Marin rendered impossible the performance of her obligation under the deed. Because of that impossibility, the Armadas could rescind extrajudicially the deed of exchange (Art. 1191 Civil Code; 4 Tolentino, civil Code, 1973 Ed., pp. 171-172). If Mrs. Marin should sue the Armadas, her action would be barred under the rule of exceptio non adimpleti contractus (plaintiff is not entitled to sue because he has not performed his part of the agreement). As no evidence was presented in this case, we cannot sustain the award of P10,000 as moral and exemplary damages and P3,000 as attorney's fees. WHEREFORE, the trial court's judgment and the order of execution pending appeal are set aside. The deed of exchange is hereby declared void and inexistent. The annotation thereof on TCT Nos. 10833 and 10834 should be cancelled. The Armadas' claim for damages and attorney's fees is denied. Aquilina Provido-Mrin's counterclaim is dismissed. No costs.

SO ORDERED. G.R. No. L-57552 October 10, 1986 LUISA F. MCLAUGHLIN, petitioner, vs. THE COURT OF APPEALS AND RAMON FLORES, respondents. R.C. Domingo Jr. & Associates for private respondent.

FERIA, Actg. C.J. This is an appeal by certiorari from the decision of the Court of Appeals, the dispositive part of which reads as follows: IN VIEW OF THE FOREGOING PREMISES, the petition for certiorari and mandamus is hereby GRANTED and the Orders of respondent court dated November 21 and 27 both 1980 are hereby nullified and set aside and respondent Judge is ordered to order private respondent to accept petitioner's Pacific Banking Corporation certified manager's Check No. MC-A-000311 dated November 17, 1980 in the amount of P76,059.71 in full settlement of petitioner's obligation, or another check of equivalent kind and value, the earlier check having become stale. On February 28, 1977, petitioner Luisa F. McLaughlin and private respondent Ramon Flores entered into a contract of conditional sale of real property. Paragraph one of the deed of conditional sale fixed the total purchase price of P140,000.00 payable as follows: a) P26,550.00 upon the execution of the deed; and b) the balance of P113,450.00 to be paid not later than May 31, 1977. The parties also agreed that the balance shall bear interest at the rate of 1% per

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month to commence from December 1, 1976, until the full purchase price was paid. On June 19, 1979, petitioner filed a complaint in the then Court of First Instance of Rizal (Civil Case No. 33573) for the rescission of the deed of conditional sale due to the failure of private respondent to pay the balance due on May 31, 1977. On December 27, 1979, the parties submitted a Compromise Agreement on the basis of which the court rendered a decision on January 22, 1980. In said compromise agreement, private respondent acknowledged his indebtedness to petitioner under the deed of conditional sale in the amount of P119,050.71, and the parties agreed that said amount would be payable as follows: a) P50,000.00 upon signing of the agreement; and b) the balance of P69,059.71 in two equal installments on June 30, 1980 and December 31, 1980. As agreed upon, private respondent paid P50,000.00 upon the signing of the agreement and in addition he also paid an "escalation cost" of P25,000.00. Under paragraph 3 of the Compromise Agreement, private respondent agreed to pay one thousand (P l,000.00) pesos monthly rental beginning December 5, 1979 until the obligation is duly paid, for the use of the property subject matter of the deed of conditional sale. Paragraphs 6 and 7 of the Compromise Agreement further state: That the parties are agreed that in the event the defendant (private respondent) fails to comply with his obligations herein provided, the plaintiff (petitioner) will be entitled to the issuance of a writ of execution rescinding the Deed of Conditional Sale of Real Property. In such eventuality, defendant (private respondent) hereby waives his right to appeal to (from) the Order of Rescission and the

Writ of Execution which the Court shall render in accordance with the stipulations herein provided for. That in the event of execution all payments made by defendant (private respondent) will be forfeited in favor of the plaintiff (petitioner) as liquidated damages. On October 15, 1980, petitioner wrote to private respondent demanding that the latter pay the balance of P69,059.71 on or before October 31, 1980. This demand included not only the installment due on June 30, 1980 but also the installment due on December 31, 1980. On October 30, 1980, private respondent sent a letter to petitioner signifying his willingness and intention to pay the full balance of P69,059.71, and at the same time demanding to see the certificate of title of the property and the tax payment receipts. Private respondent states on page 14 of his brief that on November 3, 1980, the first working day of said month, he tendered payment to petitioner but this was refused acceptance by petitioner. However, this does not appear in the decision of the Court of Appeals. On November 7, 1980, petitioner filed a Motion for Writ of Execution alleging that private respondent failed to pay the installment due on June 1980 and that since June 1980 he had failed to pay the monthly rental of P l,000.00. Petitioner prayed that a) the deed of conditional sale of real property be declared rescinded with forfeiture of all payments as liquidated damages; and b) the court order the payment of Pl,000.00 back rentals since June 1980 and the eviction of private respondent. On November 14, 1980, the trial court granted the motion for writ of execution. On November 17, 1980, private respondent filed a motion for reconsideration tendering at the same time a Pacific Banking Corporation certified manager's check in the amount of P76,059.71,

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payable to the order of petitioner and covering the entire obligation including the installment due on December 31, 1980. However, the trial court denied the motion for reconsideration in an order dated November 21, 1980 and issued the writ of execution on November 25, 1980. In an order dated November 27, 1980, the trial court granted petitioner's ex-parte motion for clarification of the order of execution rescinding the deed of conditional sale of real property. On November 28, 1980, private respondent filed with the Court of Appeals a petition for certiorari and prohibition assailing the orders dated November 21 and 27, 1980. As initially stated above, the appellate court nullified and set aside the disputed orders of the lower court. In its decision, the appellate court ruled in part as follows: The issue here is whether respondent court committed a grave abuse of discretion in issuing the orders dated November 21, 1980 and November 27,1980. The general rule is that rescission will not be permitted for a slight or casual breach of the contract, but only for such breaches as are substantial and fundamental as to defeat the object of the parties in making the agreement. (Song Fo & Co. vs. Hawaiian-Philippine Co., 47 Phil. 821) In aforesaid case, it was held that a delay in payment for a small quantity of molasses, for some twenty days is not such a violation of an essential condition of the contract as warrants rescission for non-performance. In Universal Food Corp. vs. Court of Appeals, 33 SCRA 1, the Song Fo ruling was reaffirmed.

In the case at bar, McLaughlin wrote Flores on October 15, 1980 demanding that Flores pay the balance of P69,059.71 on or before October 31, 1980. Thus it is undeniable that despite Flores' failure to make the payment which was due on June 1980, McLaughlin waived whatever right she had under the compromise agreement as incorporated in the decision of respondent court, to demand rescission. xxx xxx xxx It is significant to note that on November 17, 1980, or just seventeen (17) days after October 31, 1980, the deadline set by McLaughlin, Flores tendered the certified manager's check. We hold that the Song Fo ruling is applicable herein considering that in the latter case, there was a 20-day delay in the payment of the obligation as compared to a 17-day delay in the instant case. Furthermore, as held in the recent case of New Pacific Timber & Supply Co., Inc. vs. Hon. Alberto Seneris, L-41764, December 19, 1980, it is the accepted practice in business to consider a cashier's or manager's check as cash and that upon certification of a check, it is equivalent to its acceptance (Section 187, Negotiable Instrument Law) and the funds are thereby transferred to the credit of the creditor (Araneta v. Tuason, 49 O.G. p. 59). In the New Pacific Timber & Supply Co., Inc. case, the Supreme Court further held that the object of certifying a check is to enable the holder thereof to use it as money, citing the ruling in PNB vs. National City Bank of New York, 63 Phil. 711.

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In the New Pacific Timber case, it was also ruled that the exception in Section 63 of the Central Bank Act that the clearing of a check and the subsequent crediting of the amount thereof to the account of the creditor is equivalent to delivery of cash, is applicable to a payment through a certified check. Considering that Flores had already paid P101,550.00 under the contract to sell, excluding the monthly rentals paid, certainly it would be the height of inequity to have this amount forfeited in favor McLaughlin. Under the questioned orders, McLaughlin would get back the property and still keep P101,550.00. Petitioner contends that the appellate court erred in not observing the provisions of Article No. 1306 of the Civil Code of the Philippines and in having arbitrarily abused its judicial discretion by disregarding the penal clause stipulated by the parties in the compromise agreement which was the basis of the decision of the lower court. We agree with the appellate court that it would be inequitable to cancel the contract of conditional sale and to have the amount of P101,550.00 (P l48,126.97 according to private respondent in his brief) already paid by him under said contract, excluding the monthly rentals paid, forfeited in favor of petitioner, particularly after private respondent had tendered the amount of P76,059.71 in full payment of his obligation. In the analogous case of De Guzman vs. Court of Appeals, this Court sustained the order of the respondent judge denying the petitioners' motion for execution on the ground that the private respondent had substantially complied with the terms and conditions of the compromise agreement, and directing the petitioners to immediately execute the necessary documents transferring to the private respondent the title to the properties (July 23, 1985, 137 SCRA 730). In the case at bar, there was also substantial compliance with the compromise agreement.

Petitioner invokes the ruling of the Court in its Resolution of November 16, 1978 in the case of Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., to the effect that Republic Act 6552 (the Maceda Law) "recognizes and reaffirms the vendor's right to cancel the contract to sell upon breach and non-payment of the stipulated installments but requires a grace period after at least two years of regular installment payments ... . " (86 SCRA 305, 329) On the other hand, private respondent also invokes said law as an expression of public policy to protect buyers of real estate on installments against onerous and oppressive conditions (Section 2 of Republic Act No. 6552). Section 4 of Republic Act No. 6552 which took effect on September 14, 1972 provides as follows: In case where less than two years of installments were paid, the seller shall give the buyer a grace period of not less than sixty days from the date the installment became due. If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after thirty days from receipt by the buyer of the notice of the cancellation or the demand for rescission of the contract by a notarial act. Section 7 of said law provides as follows: Any stipulation in any contract hereafter entered into contrary to the provisions of Sections 3, 4, 5 and 6, shall be null and void. The spirit of these provisions further supports the decision of the appellate court. The record does not contain the complete text of the compromise agreement dated December 20, 1979 and the decision approving it. However, assuming that under the terms of said agreement the December 31, 1980 installment was due and payable when on October 15, 1980, petitioner demanded payment of the balance of P69,059.71 on or before October 31, 1980, petitioner

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could cancel the contract after thirty days from receipt by private respondent of the notice of cancellation. Considering petitioner's motion for execution filed on November 7, 1980 as a notice of cancellation, petitioner could cancel the contract of conditional sale after thirty days from receipt by private respondent of said motion. Private respondent's tender of payment of the amount of P76,059.71 together with his motion for reconsideration on November 17, 1980 was, therefore, well within the thirty-day period grants by law.. The tender made by private respondent of a certified bank manager's check payable to petitioner was a valid tender of payment. The certified check covered not only the balance of the purchase price in the amount of P69,059.71, but also the arrears in the rental payments from June to December, 1980 in the amount of P7,000.00, or a total of P76,059.71. On this point the appellate court correctly applied the ruling in the case of New Pacific Timber & Supply Co., Inc. vs. Seneris (101 SCRA 686, 692-694) to the case at bar. Moreover, Section 49, Rule 130 of the Revised Rules of Court provides that: An offer in writing to pay a particular sum of money or to deliver a written instrument or specific property is, if rejected, equivalent to the actual production and tender of the money, instrument, or property. However, although private respondent had made a valid tender of payment which preserved his rights as a vendee in the contract of conditional sale of real property, he did not follow it with a consignation or deposit of the sum due with the court. As this Court has held: The rule regarding payment of redemption prices is invoked. True that consignation of the redemption price is not necessary in order that the vendor may compel the vendee to allow the repurchase within the time provided by law or by contract. (Rosales vs. Reyes and Ordoveza, 25 Phil. 495.) We have held that in such cases a mere tender of payment is

enough, if made on time, as a basis for action against the vendee to compel him to resell. But that tender does not in itself relieve the vendor from his obligation to pay the price when redemption is allowed by the court. In other words, tender of payment is sufficient to compel redemption but is not in itself a payment that relieves the vendor from his liability to pay the redemption price. " (Paez vs. Magno, 83 Phil. 403, 405) On September 1, 1986, the Court issued the following resolution Considering the allegation in petitioner's reply brief that the Manager's Check tendered by private respondent on November 17, 1980 was subsequently cancelled and converted into cash, the Court RESOLVED to REQUIRE the parties within ten (10) days from notice to inform the Court whether or not the amount thereof was deposited in court and whether or not private respondent continued paying the monthly rental of P1,000.00 stipulated in the Compromise Agreement. In compliance with this resolution, both parties submitted their respective manifestations which confirm that the Manager's Check in question was subsequently withdrawn and replaced by cash, but the cash was not deposited with the court. According to Article 1256 of the Civil Code of the Philippines, if the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due, and that consignation alone shall produce the same effect in the five cases enumerated therein; Article 1257 provides that in order that the consignation of the thing (or sum) due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation; and Article 1258 provides that consignation shall be made by depositing the thing (or sum) due at the disposal of the

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judicial authority and that the interested parties shall also be notified thereof. As the Court held in the case of Soco vs. Militante, promulgated on June 28, 1983, after examining the above-cited provisions of the law and the jurisprudence on the matter: Tender of payment must be distinguished from consignation. Tender is the antecedent of consignation, that is, an act preparatory to the consignation, which is the principal, and from which are derived the immediate consequences which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement before proceeding to the solemnities of consignation. (8 Manresa 325). (123 SCRA 160,173) In the above-cited case of De Guzman vs. Court of Appeals (137 SCRA 730), the vendee was released from responsibility because he had deposited with the court the balance of the purchase price. Similarly, in the above-cited case of New Pacific Timber & Supply Co., Inc. vs. Seneris (101 SCRA 686), the judgment debtor was released from responsibility by depositing with the court the amount of the judgment obligation. In the case at bar, although as above stated private respondent had preserved his rights as a vendee in the contract of conditional sale of real property by a timely valid tender of payment of the balance of his obligation which was not accepted by petitioner, he remains liable for the payment of his obligation because of his failure to deposit the amount due with the court. In his manifestation dated September 19, 1986, private respondent states that on September 16, 1980, he purchased a Metrobank Cashier's Check No. CC 004233 in favor of petitioner Luisa F. McLaughlin in the amount of P76,059.71, a photocopy of which was enclosed and marked as Annex "A- 1;" but that he did not continue

paying the monthly rental of Pl,000.00 because, pursuant to the decision of the appellate court, petitioner herein was ordered to accept the aforesaid amount in full payment of herein respondent's obligation under the contract subject matter thereof. However, inasmuch as petitioner did not accept the aforesaid amount, it was incumbent on private respondent to deposit the same with the court in order to be released from responsibility. Since private respondent did not deposit said amount with the court, his obligation was not paid and he is liable in addition for the payment of the monthly rental of Pl,000.00 from January 1, 1981 until said obligation is duly paid, in accordance with paragraph 3 of the Compromise Agreement. Upon full payment of the amount of P76,059.71 and the rentals in arrears, private respondent shall be entitled to a deed of absolute sale in his favor of the real property in question. WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the following modifications: (a) Petitioner is ordered to accept from private respondent the Metrobank Cashier's Check No. CC 004233 in her favor in the amount of P76,059.71 or another certified check of a reputable bank drawn in her favor in the same amount; (b) Private respondent is ordered to pay petitioner, within sixty (60) days from the finality of this decision, the rentals in arrears of P l,000.00 a month from January 1, 1981 until full payment thereof; and (c) Petitioner is ordered to execute a deed of absolute sale in favor of private respondent over the real property in question upon full payment of the amounts as provided in paragraphs (a) and (b) above. No costs. SO ORDERED. G.R. No. L-45710 October 3, 1985

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CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver of Island Savings Bank, petitioners, vs. THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents. I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners. Antonio R. Tupaz for private respondent. MAKASIAR, CJ.: This is a petition for review on certiorari to set aside as null and void the decision of the Court of Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February 15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent Sulpicio M. Tolentino for injunction, specific performance or rescission, and damages with preliminary injunction. On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department, approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan, executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said title the next day. The approved loan application called for a lump sum P80,000.00 loan, repayable in semi-annual installments for a period of 3 years, with 12% annual interest. It was required that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to develop his other property into a subdivision. On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12% annual interest, payable within 3 years from the date of

execution of the contract at semi-annual installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering a 6-month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by the Bank that there was no fund yet available for the release of the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the release of the P63,000.00 balance (p. 113, rec.). On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was suffering liquidity problems, issued Resolution No. 1049, which provides: In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities, the Board, by unanimous vote, decided as follows: 1) To prohibit the bank from making new loans and investments [except investments in government securities] excluding extensions or renewals of already approved loans, provided that such extensions or renewals shall be subject to review by the Superintendent of Banks, who may impose such limitations as may be necessary to insure correction of the bank's deficiency as soon as possible; xxx xxx xxx (p. 46, rec.). On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to take charge of the assets of Island Savings Bank (pp. 48-49, rec).

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On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for January 22, 1969. On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan for injunction, specific performance or rescission and damages with preliminary injunction, alleging that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind the real estate mortgage (pp. 32-43, rec.). On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the mortgage (pp. 86-87, rec.). On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.). On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec. On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor collect the P17,000.00 loan pp. 30-:31. rec.).

Hence, this instant petition by the central Bank. The issues are: 1. Can the action of Sulpicio M. Tolentino for specific performance prosper? 2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note? 3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage be foreclosed to satisfy said amount? When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is ready and willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from doing further business. Such prohibition made it legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the validity of which is not in question.

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The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said resolution merely prohibited the Bank from making new loans and investments, and nowhere did it prohibit island Savings Bank from releasing the balance of loan agreements previously contracted. Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the contract by him (vol. 17A, 1974 ed., CJS p. 650) The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted interest was an exercise of his right to it, which right exist independently of his right to demand the completion of the P80,000.00 loan. The exercise of one right does not affect, much less neutralize, the exercise of the other. The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This Court previously ruled that bank officials and employees are expected to exercise caution and prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of the bank's officials and employees that before they approve the loan application of their customers, they must investigate the existence and evaluation of the properties being offered as a loan security. The recent rush of events where collaterals for bank loans turn out to be non-existent or grossly overvalued underscore the importance of this responsibility. The mere

reliance by bank officials and employees on their customer's representation regarding the loan collateral being offered as loan security is a patent non-performance of this responsibility. If ever bank officials and employees totally reIy on the representation of their customers as to the valuation of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued. The representation made by the customer is immaterial to the bank's responsibility to conduct its own investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had enjoined petitioners from presenting proof on the alleged over-valuation because of their failure to raise the same in their pleadings (pp. 198199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the same issue before the Supreme Court. Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific performance or rescission with damages in either case. But since Island Savings Bank is now prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant specific performance in favor of Sulpicio M, Tolentino. Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for payment of P17,000.00

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within 3 years, he would be entitled to ask for rescission of the entire loan because he cannot possibly be in default as there was no date for him to perform his reciprocal obligation to pay. Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated, they are both liable for damages. Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for the interest thereon. WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed to satisfy his P 17,000.00 debt. The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code). The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was then in existence, as there was no debt yet because Island Savings Bank had not made any release on the loan, does not make the real estate mortgage void for lack of

consideration. It is not necessary that any consideration should pass at the time of the execution of the contract of real mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when the consideration is subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of consideration, the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180). Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt. The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of this case. Article 2089 provides: A pledge or mortgage is indivisible even though the debt may be divided among the successors in interest of the debtor or creditor. Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.

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Neither can the creditor's heir who have received his share of the debt return the pledge or cancel the mortgage, to the prejudice of other heirs who have not been paid. The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY MODIFIED, AND 1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID; 2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND 3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO. NO COSTS. SO ORDERED. G.R. No. L-45637 May 31, 1985 ROBERTO JUNTILLA, petitioner, vs. CLEMENTE FONTANAR, FERNANDO BANZON and BERFOL CAMORO, respondents. Valentin A. Zozobrado for petitioner.

Ruperto N. Alfarara for respondents.

GUTIERREZ, JR., J.: This is a petition for review, on questions of law, of the decision of the Court of First Instance of Cebu which reversed the decision of the City Court of Cebu and exonerated the respondents from any liability arising from a vehicular accident. The background facts which led to the filing of a complaint for breach of contract and damages against the respondents are summarized by the Court of First Instance of Cebu as follows: The facts established after trial show that the plaintiff was a passenger of the public utility jeepney bearing plate No. PUJ-71-7 on the course of the trip from Danao City to Cebu City. The jeepney was driven by defendant Berfol Camoro. It was registered under the franchise of defendant Clemente Fontanar but was actually owned by defendant Fernando Banzon. When the jeepney reached Mandaue City, the right rear tire exploded causing the vehicle to turn turtle. In the process, the plaintiff who was sitting at the front seat was thrown out of the vehicle. Upon landing on the ground, the plaintiff momentarily lost consciousness. When he came to his senses, he found that he had a lacerated wound on his right palm. Aside from this, he suffered injuries on his left arm, right thigh and on his back. (Exh. "D"). Because of his shock and injuries, he went back to Danao City but on the way, he discovered that his "Omega" wrist watch was lost. Upon his arrival in Danao City, he immediately entered the Danao City Hospital to attend to his injuries, and also requested his fatherin-law to proceed immediately to the place of the accident and look for the watch. In spite of the efforts

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of his father-in-law, the wrist watch, which he bought for P 852.70 (Exh. "B") could no longer be found. xxx xxx xxx Petitioner Roberto Juntilla filed Civil Case No. R-17378 for breach of contract with damages before the City Court of Cebu City, Branch I against Clemente Fontanar, Fernando Banzon and Berfol Camoro. The respondents filed their answer, alleging inter alia that the accident that caused losses to the petitioner was beyond the control of the respondents taking into account that the tire that exploded was newly bought and was only slightly used at the time it blew up. After trial, Judge Romulo R. Senining of the Civil Court of Cebu rendered judgment in favor of the petitioner and against the respondents. The dispositive portion of the decision reads: WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants and the latter are hereby ordered, jointly and severally, to pay the plaintiff the sum of P750.00 as reimbursement for the lost Omega wrist watch, the sum of P246.64 as unrealized salary of the plaintiff from his employer, the further sum of P100.00 for the doctor's fees and medicine, an additional sum of P300.00 for attorney's fees and the costs. The respondents appealed to the Court of First Instance of Cebu, Branch XIV. Judge Leonardo B. Canares reversed the judgment of the City Court of Cebu upon a finding that the accident in question was due to a fortuitous event. The dispositive portion of the decision reads: WHEREFORE, judgment is hereby rendered exonerating the defendants from any liability to the plaintiff without pronouncement as to costs.

A motion for reconsideration was denied by the Court of First Instance. The petitioner raises the following alleged errors committed by the Court of First Instance of Cebu on appeal a. The Honorable Court below committed grave abuse of discretion in failing to take cognizance of the fact that defendants and/or their employee failed to exercise "utmost and/or extraordinary diligence" required of common carriers contemplated under Art. 1755 of the Civil Code of the Philippines. b. The Honorable Court below committed grave abuse of discretion by deciding the case contrary to the doctrine laid down by the Honorable Supreme Court in the case of Necesito et al. v. Paras, et al. We find the petition impressed with merit. The City Court and the Court of First Instance of Cebu found that the right rear tire of the passenger jeepney in which the petitioner was riding blew up causing the vehicle to fall on its side. The petitioner questions the conclusion of the respondent court drawn from this finding of fact. The Court of First Instance of Cebu erred when it absolved the carrier from any liability upon a finding that the tire blow out is a fortuitous event. The Court of First Instance of Cebu ruled that: After reviewing the records of the case, this Court finds that the accident in question was due to a fortuitous event. A tire blow-out, such as what happened in the case at bar, is an inevitable accident that exempts the carrier from liability, there being absence of a showing that there was misconduct or negligence on the part of the operator in the operation and maintenance of the vehicle involved. The fact that the right rear tire exploded,

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despite being brand new, constitutes a clear case of caso fortuito which can be a proper basis for exonerating the defendants from liability. ... The Court of First Instance relied on the ruling of the Court of Appeals in Rodriguez v. Red Line Transportation Co., CA G.R. No. 8136, December 29, 1954, where the Court of Appeals ruled that: A tire blow-out does not constitute negligence unless the tire was already old and should not have been used at all. Indeed, this would be a clear case of fortuitous event. The foregoing conclusions of the Court of First Instance of Cebu are based on a misapprehension of overall facts from which a conclusion should be drawn. The reliance of the Court of First Instance on the Rodriguez case is not in order. In La Mallorca and Pampanga Bus Co. v. De Jesus, et al. (17 SCRA 23), we held that: Petitioner maintains that a tire blow-out is a fortuitous event and gives rise to no liability for negligence, citing the rulings of the Court of Appeals in Rodriguez v. Red Line Transportation Co., CA G.R. No. 8136, December 29, 1954, and People v. Palapad, CA-G.R. No. 18480, June 27, 1958. These rulings, however, not only are not binding on this Court but were based on considerations quite different from those that obtain in the case at bar. The appellate court there made no findings of any specific acts of negligence on the part of the defendants and confined itself to the question of whether or not a tire blow-out, by itself alone and without a showing as to the causative factors, would generate liability. ... In the case at bar, there are specific acts of negligence on the part of the respondents. The records show that the passenger jeepney turned turtle and jumped into a ditch immediately after its right rear tire exploded. The evidence shows that the passenger jeepney was

running at a very fast speed before the accident. We agree with the observation of the petitioner that a public utility jeep running at a regular and safe speed will not jump into a ditch when its right rear tire blows up. There is also evidence to show that the passenger jeepney was overloaded at the time of the accident. The petitioner stated that there were three (3) passengers in the front seat and fourteen (14) passengers in the rear. While it may be true that the tire that blew-up was still good because the grooves of the tire were still visible, this fact alone does not make the explosion of the tire a fortuitous event. No evidence was presented to show that the accident was due to adverse road conditions or that precautions were taken by the jeepney driver to compensate for any conditions liable to cause accidents. The sudden blowing-up, therefore, could have been caused by too much air pressure injected into the tire coupled by the fact that the jeepney was overloaded and speeding at the time of the accident. In Lasam v. Smith (45 Phil. 657), we laid down the following essential characteristics of caso fortuito: xxx xxx xxx ... In a legal sense and, consequently, also in relation to contracts, a caso fortuito presents the following essential characteristics: (1) The cause of the unforeseen and unexpected occurrence, or of the failure of the debtor to comply with his obligation, must be independent of the human will. (2) It must be impossible to foresee the event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible to avoid. (3) The occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner. And (4) the obligor (debtor) must be free from any participation in the aggravation of the injury resulting to the creditor. (5 Encyclopedia Juridica Espanola, 309.)

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In the case at bar, the cause of the unforeseen and unexpected occurrence was not independent of the human will. The accident was caused either through the negligence of the driver or because of mechanical defects in the tire. Common carriers should teach their drivers not to overload their vehicles, not to exceed safe and legal speed limits, and to know the correct measures to take when a tire blows up thus insuring the safety of passengers at all times. Relative to the contingency of mechanical defects, we held in Necesito, et al. v. Paras, et al. (104 Phil. 75), that: ... The preponderance of authority is in favor of the doctrine that a passenger is entitled to recover damages from a carrier for an injury resulting from a defect in an appliance purchased from a manufacturer, whenever it appears that the defect would have been discovered by the carrier if it had exercised the degree of care which under the circumstances was incumbent upon it, with regard to inspection and application of the necessary tests. For the purposes of this doctrine, the manufacturer is considered as being in law the agent or servant of the carrier, as far as regards the work of constructing the appliance. According to this theory, the good repute of the manufacturer will not relieve the carrier from liability' (10 Am. Jur. 205, s, 1324; see also Pennsylvania R. Co. v. Roy, 102 U.S. 451; 20 L. Ed. 141; Southern R. Co. v. Hussey, 74 ALR 1172; 42 Fed. 2d 70; and Ed Note, 29 ALR 788.: Ann. Cas. 1916E 929). The rationale of the carrier's liability is the fact that the passenger has neither choice nor control over the carrier in the selection and use of the equipment and appliances in use by the carrier. Having no privity whatever with the manufacturer or vendor of the defective equipment, the passenger has no remedy against him, while the carrier usually has. It is but logical, therefore, that the carrier, while not an insurer of the safety of his passengers, should

nevertheless be held to answer for the flaws of his equipment if such flaws were at all discoverable. ... It is sufficient to reiterate that the source of a common carrier's legal liability is the contract of carriage, and by entering into the said contract, it binds itself to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of a very cautious person, with a due regard for all the circumstances. The records show that this obligation was not met by the respondents. The respondents likewise argue that the petitioner cannot recover any amount for failure to prove such damages during the trial. The respondents submit that if the petitioner was really injured, why was he treated in Danao City and not in Mandaue City where the accident took place. The respondents argue that the doctor who issued the medical certificate was not presented during the trial, and hence not cross-examined. The respondents also claim that the petitioner was not wearing any wrist watch during the accident. It should be noted that the City Court of Cebu found that the petitioner had a lacerated wound on his right palm aside from injuries on his left arm, right thigh and on his back, and that on his way back to Danao City, he discovered that his "Omega" wrist watch was lost. These are findings of facts of the City Court of Cebu which we find no reason to disturb. More so when we consider the fact that the Court of First Instance of Cebu impliedly concurred in these matters when it confined itself to the question of whether or not the tire blow out was a fortuitous event. WHEREFORE, the decision of the Court of First Instance of Cebu, Branch IV appealed from is hereby REVERSED and SET ASIDE, and the decision of the City Court of Cebu, Branch I is REINSTATED, with the modification that the damages shall earn interest at 12% per annum and the attorney's fees are increased to SIX HUNDRED PESOS (P600.00). Damages shall earn interests from January 27, 1975. SO ORDERED.

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G.R. No. L-47851 October 3, 1986 JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners, vs. THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and the PHILIPPINE BAR ASSOCIATION, respondents. G.R. No. L-47863 October 3, 1986 THE UNITED CONSTRUCTION CO., INC., petitioner, vs. COURT OF APPEALS, ET AL., respondents. G.R. No. L-47896 October 3, 1986 PHILIPPINE BAR ASSOCIATION, ET AL., petitioners, vs. COURT OF APPEALS, ET AL., respondents.

WHEREFORE, judgment is hereby rendered: (a) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman Ozaeta) to pay the plaintiff, jointly and severally, the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the date of the filing of the complaint until full payment; (b) Dismissing the complaint with respect to defendant Juan J. Carlos; (c) Dismissing the third-party complaint; (d) Dismissing the defendant's and third-party defendants' counterclaims for lack of merit; (e) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman Ozaeta) to pay the costs in equal shares. SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169). The dispositive portion of the decision of the Court of Appeals reads: WHEREFORE, the judgment appealed from is modified to include an award of P200,000.00 in favor of plaintiff-appellant Philippine Bar Association, with interest at the legal rate from November 29, 1968 until full payment to be paid jointly and severally by defendant United Construction Co., Inc. and third party defendants (except Roman Ozaeta). In all other respects, the judgment dated September 21, 1971 as modified in the December 8, 1971 Order of the lower court is hereby affirmed with COSTS to be paid by the

PARAS, J.: These are petitions for review on certiorari of the November 28, 1977 decision of the Court of Appeals in CA-G.R. No. 51771-R modifying the decision of the Court of First Instance of Manila, Branch V, in Civil Case No. 74958 dated September 21, 1971 as modified by the Order of the lower court dated December 8, 1971. The Court of Appeals in modifying the decision of the lower court included an award of an additional amount of P200,000.00 to the Philippine Bar Association to be paid jointly and severally by the defendant United Construction Co. and by the third-party defendants Juan F. Nakpil and Sons and Juan F. Nakpil. The dispositive portion of the modified decision of the lower court reads:

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defendant and third party defendant (except Roman Ozaeta) in equal shares. SO ORDERED. Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan J. Carlos in L-47863 seek the reversal of the decision of the Court of Appeals, among other things, for exoneration from liability while petitioner Philippine Bar Association in L-47896 seeks the modification of aforesaid decision to obtain an award of P1,830,000.00 for the loss of the PBA building plus four (4) times such amount as damages resulting in increased cost of the building, P100,000.00 as exemplary damages; and P100,000.00 as attorney's fees. These petitions arising from the same case filed in the Court of First Instance of Manila were consolidated by this Court in the resolution of May 10, 1978 requiring the respective respondents to comment. (Rollo, L-47851, p. 172). The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp. 269-348; pp. 520-521; Rollo, L-47851, p. 169) and affirmed by the Court of Appeals are as follows: The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated under the Corporation Law, decided to construct an office building on its 840 square meters lot located at the comer of Aduana and Arzobispo Streets, Intramuros, Manila. The construction was undertaken by the United Construction, Inc. on an "administration" basis, on the suggestion of Juan J. Carlos, the president and general manager of said corporation. The proposal was approved by plaintiff's board of directors and signed by its president Roman Ozaeta, a third-party defendant in this case. The plans and specifications for the building were prepared by the other thirdparty defendants Juan F. Nakpil & Sons. The building was completed in June, 1966.

In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and its environs and the building in question sustained major damage. The front columns of the building buckled, causing the building to tilt forward dangerously. The tenants vacated the building in view of its precarious condition. As a temporary remedial measure, the building was shored up by United Construction, Inc. at the cost of P13,661.28. On November 29, 1968, the plaintiff commenced this action for the recovery of damages arising from the partial collapse of the building against United Construction, Inc. and its President and General Manager Juan J. Carlos as defendants. Plaintiff alleges that the collapse of the building was accused by defects in the construction, the failure of the contractors to follow plans and specifications and violations by the defendants of the terms of the contract. Defendants in turn filed a third-party complaint against the architects who prepared the plans and specifications, alleging in essence that the collapse of the building was due to the defects in the said plans and specifications. Roman Ozaeta, the then president of the plaintiff Bar Association was included as a third-party defendant for damages for having included Juan J. Carlos, President of the United Construction Co., Inc. as party defendant. On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and Juan F. Nakpil presented a written stipulation which reads: 1. That in relation to defendants' answer with counterclaims and third- party complaints and the third-party defendants Nakpil & Sons' answer thereto, the plaintiff need not amend its complaint by including the said Juan F. Nakpil & Sons and Juan F. Nakpil personally as parties defendant.

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2. That in the event (unexpected by the undersigned) that the Court should find after the trial that the above-named defendants Juan J. Carlos and United Construction Co., Inc. are free from any blame and liability for the collapse of the PBA Building, and should further find that the collapse of said building was due to defects and/or inadequacy of the plans, designs, and specifications p by the third-party defendants, or in the event that the Court may find Juan F. Nakpil and Sons and/or Juan F. Nakpil contributorily negligent or in any way jointly and solidarily liable with the defendants, judgment may be rendered in whole or in part. as the case may be, against Juan F. Nakpil & Sons and/or Juan F. Nakpil in favor of the plaintiff to all intents and purposes as if plaintiff's complaint has been duly amended by including the said Juan F. Nakpil & Sons and Juan F. Nakpil as parties defendant and by alleging causes of action against them including, among others, the defects or inadequacy of the plans, designs, and specifications prepared by them and/or failure in the performance of their contract with plaintiff. 3. Both parties hereby jointly petition this Honorable Court to approve this stipulation. (Record on Appeal, pp. 274-275; Rollo, L47851,p.169). Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which among others, the parties agreed to refer the technical issues involved in the case to a Commissioner. Mr. Andres O. Hizon, who was ultimately appointed by the trial court, assumed his office as Commissioner, charged with the duty to try the following issues:

1. Whether the damage sustained by the PBA building during the August 2, 1968 earthquake had been caused, directly or indirectly, by: (a) The inadequacies or defects in the plans and specifications prepared by third-party defendants; (b) The deviations, if any, made by the defendants from said plans and specifications and how said deviations contributed to the damage sustained; (c) The alleged failure of defendants to observe the requisite quality of materials and workmanship in the construction of the building; (d) The alleged failure to exercise the requisite degree of supervision expected of the architect, the contractor and/or the owner of the building; (e) An act of God or a fortuitous event; and (f) Any other cause not herein above specified. 2. If the cause of the damage suffered by the building arose from a combination of the aboveenumerated factors, the degree or proportion in which each individual factor contributed to the damage sustained; 3. Whether the building is now a total loss and should be completely demolished or whether it may still be repaired and restored to a tenantable condition. In the latter case, the determination of the cost of such restoration or repair, and the value of any remaining construction, such as the foundation, which may still be utilized or availed

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of (Record on Appeal, pp. 275-276; Rollo, L47851, p. 169). Thus, the issues of this case were divided into technical issues and non-technical issues. As aforestated the technical issues were referred to the Commissioner. The non-technical issues were tried by the Court. Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it may topple down in case of a strong earthquake. The motions were opposed by the defendants and the matter was referred to the Commissioner. Finally, on April 30, 1979 the building was authorized to be demolished at the expense of the plaintiff, but not another earthquake of high intensity on April 7, 1970 followed by other strong earthquakes on April 9, and 12, 1970, caused further damage to the property. The actual demolition was undertaken by the buyer of the damaged building. (Record on Appeal, pp. 278-280; Ibid.) After the protracted hearings, the Commissioner eventually submitted his report on September 25, 1970 with the findings that while the damage sustained by the PBA building was caused directly by the August 2, 1968 earthquake whose magnitude was estimated at 7.3 they were also caused by the defects in the plans and specifications prepared by the thirdparty defendants' architects, deviations from said plans and specifications by the defendant contractors and failure of the latter to observe the requisite workmanship in the construction of the building and of the contractors, architects and even the owners to exercise the requisite degree of supervision in the construction of subject building. All the parties registered their objections to aforesaid findings which in turn were answered by the Commissioner. The trial court agreed with the findings of the Commissioner except as to the holding that the owner is charged with full nine supervision of the construction. The Court sees no legal or

contractual basis for such conclusion. (Record on Appeal, pp. 309-328; Ibid). Thus, on September 21, 1971, the lower court rendered the assailed decision which was modified by the Intermediate Appellate Court on November 28, 1977. All the parties herein appealed from the decision of the Intermediate Appellate Court. Hence, these petitions. On May 11, 1978, the United Architects of the Philippines, the Association of Civil Engineers, and the Philippine Institute of Architects filed with the Court a motion to intervene as amicus curiae. They proposed to present a position paper on the liability of architects when a building collapses and to submit likewise a critical analysis with computations on the divergent views on the design and plans as submitted by the experts procured by the parties. The motion having been granted, the amicus curiae were granted a period of 60 days within which to submit their position. After the parties had all filed their comments, We gave due course to the petitions in Our Resolution of July 21, 1978. The position papers of the amicus curiae (submitted on November 24, 1978) were duly noted. The amicus curiae gave the opinion that the plans and specifications of the Nakpils were not defective. But the Commissioner, when asked by Us to comment, reiterated his conclusion that the defects in the plans and specifications indeed existed. Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord. No. 4131) and the 1966 Asep Code, the Commissioner added that even if it can be proved that the defects in theconstruction alone (and not in the plans and design) caused the damage to the building, still the deficiency in the original design and jack of specific provisions against

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torsion in the original plans and the overload on the ground floor columns (found by an the experts including the original designer) certainly contributed to the damage which occurred. (Ibid, p. 174). In their respective briefs petitioners, among others, raised the following assignments of errors: Philippine Bar Association claimed that the measure of damages should not be limited to P1,100,000.00 as estimated cost of repairs or to the period of six (6) months for loss of rentals while United Construction Co., Inc. and the Nakpils claimed that it was an act of God that caused the failure of the building which should exempt them from responsibility and not the defective construction, poor workmanship, deviations from plans and specifications and other imperfections in the case of United Construction Co., Inc. or the deficiencies in the design, plans and specifications prepared by petitioners in the case of the Nakpils. Both UCCI and the Nakpils object to the payment of the additional amount of P200,000.00 imposed by the Court of Appeals. UCCI also claimed that it should be reimbursed the expenses of shoring the building in the amount of P13,661.28 while the Nakpils opposed the payment of damages jointly and solidarity with UCCI. The pivotal issue in this case is whether or not an act of God-an unusually strong earthquake-which caused the failure of the building, exempts from liability, parties who are otherwise liable because of their negligence. The applicable law governing the rights and liabilities of the parties herein is Article 1723 of the New Civil Code, which provides: Art. 1723. The engineer or architect who drew up the plans and specifications for a building is liable for damages if within fifteen years from the completion of the structure the same should collapse by reason of a defect in those plans and specifications, or due to the defects in the

ground. The contractor is likewise responsible for the damage if the edifice fags within the same period on account of defects in the construction or the use of materials of inferior quality furnished by him, or due to any violation of the terms of the contract. If the engineer or architect supervises the construction, he shall be solidarily liable with the contractor. Acceptance of the building, after completion, does not imply waiver of any of the causes of action by reason of any defect mentioned in the preceding paragraph. The action must be brought within ten years following the collapse of the building. On the other hand, the general rule is that no person shall be responsible for events which could not be foreseen or which though foreseen, were inevitable (Article 1174, New Civil Code). An act of God has been defined as an accident, due directly and exclusively to natural causes without human intervention, which by no amount of foresight, pains or care, reasonably to have been expected, could have been prevented. (1 Corpus Juris 1174). There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act of God. To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an obligation due to an "act of God," the following 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 unforseeable 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. (Vasquez v. Court of Appeals, 138 SCRA 553; Estrada

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v. Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657). Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud, negligence, delay or violation or contravention in any manner of the tenor of the obligation as provided for in Article 1170 of the Civil Code, which results in loss or damage, the obligor cannot escape liability. The principle embodied in the act of God doctrine strictly requires that the act must be one occasioned exclusively by the violence of nature and all human agencies are to be excluded from creating or entering into the cause of the mischief. When the effect, the cause of which is to be considered, is found to be in part the result of the participation of man, whether it be from active intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it were, and removed from the rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175). Thus it has been held that when the negligence of a person concurs with an act of God in producing a loss, such person is not exempt from liability by showing that the immediate cause of the damage was the act of God. To be exempt from liability for loss because of an act of God, he must be free from any previous negligence or misconduct by which that loss or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657). The negligence of the defendant and the third-party defendants petitioners was established beyond dispute both in the lower court and in the Intermediate Appellate Court. Defendant United Construction Co., Inc. was found to have made substantial deviations from the plans and specifications. and to have failed to observe the requisite workmanship in the construction as

well as to exercise the requisite degree of supervision; while the third-party defendants were found to have inadequacies or defects in the plans and specifications prepared by them. As correctly assessed by both courts, the defects in the construction and in the plans and specifications were the proximate causes that rendered the PBA building unable to withstand the earthquake of August 2, 1968. For this reason the defendant and third-party defendants cannot claim exemption from liability. (Decision, Court of Appeals, pp. 30-31). It is well settled that the findings of facts of the Court of Appeals are conclusive on the parties and on this court (cases cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs. Sandiganbayan, January 17, 1985, 134 SCRA 105, 121), unless (1) the conclusion is a finding grounded entirely on speculation, surmise and conjectures; (2) the inference made is manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment is based on misapprehension of facts; (5) the findings of fact are conflicting , (6) the Court of Appeals went beyond the issues of the case and its findings are contrary to the admissions of both appellant and appellees (Ramos vs. PepsiCola Bottling Co., February 8, 1967, 19 SCRA 289, 291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651); (7) the findings of facts of the Court of Appeals are contrary to those of the trial court; (8) said findings of facts are conclusions without citation of specific evidence on which they are based; (9) the facts set forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the respondents (Garcia vs. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals, July 30, 1979, 92 SCRA 322, 366); (10) the finding of fact of the Court of Appeals is premised on the supposed absence of evidence and is contradicted by evidence on record (Salazar vs. Gutierrez, May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v. Sandiganbayan, July 10, 1986). It is evident that the case at bar does not fall under any of the exceptions above-mentioned. On the contrary, the records show that the lower court spared no effort in arriving at the correct appreciation of facts by the referral of technical issues to a Commissioner chosen by the parties whose findings and

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conclusions remained convincingly unrebutted by the intervenors/amicus curiae who were allowed to intervene in the Supreme Court. In any event, the relevant and logical observations of the trial court as affirmed by the Court of Appeals that "while it is not possible to state with certainty that the building would not have collapsed were those defects not present, the fact remains that several buildings in the same area withstood the earthquake to which the building of the plaintiff was similarly subjected," cannot be ignored. The next issue to be resolved is the amount of damages to be awarded to the PBA for the partial collapse (and eventual complete collapse) of its building. The Court of Appeals affirmed the finding of the trial court based on the report of the Commissioner that the total amount required to repair the PBA building and to restore it to tenantable condition was P900,000.00 inasmuch as it was not initially a total loss. However, while the trial court awarded the PBA said amount as damages, plus unrealized rental income for one-half year, the Court of Appeals modified the amount by awarding in favor of PBA an additional sum of P200,000.00 representing the damage suffered by the PBA building as a result of another earthquake that occurred on April 7, 1970 (L47896, Vol. I, p. 92). The PBA in its brief insists that the proper award should be P1,830,000.00 representing the total value of the building (L47896, PBA's No. 1 Assignment of Error, p. 19), while both the NAKPILS and UNITED question the additional award of P200,000.00 in favor of the PBA (L- 47851, NAKPIL's Brief as Petitioner, p. 6, UNITED's Brief as Petitioner, p. 25). The PBA further urges that the unrealized rental income awarded to it should not be limited to a period of one-half year but should be computed on a continuing basis at the rate of P178,671.76 a year until the judgment for the principal amount shall have been satisfied L- 47896, PBA's No. 11 Assignment of Errors, p. 19).

The collapse of the PBA building as a result of the August 2, 1968 earthquake was only partial and it is undisputed that the building could then still be repaired and restored to its tenantable condition. The PBA, however, in view of its lack of needed funding, was unable, thru no fault of its own, to have the building repaired. UNITED, on the other hand, spent P13,661.28 to shore up the building after the August 2, 1968 earthquake (L47896, CA Decision, p. 46). Because of the earthquake on April 7, 1970, the trial court after the needed consultations, authorized the total demolition of the building (L-47896, Vol. 1, pp. 53-54). There should be no question that the NAKPILS and UNITED are liable for the damage resulting from the partial and eventual collapse of the PBA building as a result of the earthquakes. We quote with approval the following from the erudite decision penned by Justice Hugo E. Gutierrez (now an Associate Justice of the Supreme Court) while still an Associate Justice of the Court of Appeals: There is no question that an earthquake and other forces of nature such as cyclones, drought, floods, lightning, and perils of the sea are acts of God. It does not necessarily follow, however, that specific losses and suffering resulting from the occurrence of these natural force are also acts of God. We are not convinced on the basis of the evidence on record that from the thousands of structures in Manila, God singled out the blameless PBA building in Intramuros and around six or seven other buildings in various parts of the city for collapse or severe damage and that God alone was responsible for the damages and losses thus suffered. The record is replete with evidence of defects and deficiencies in the designs and plans,

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defective construction, poor workmanship, deviation from plans and specifications and other imperfections. These deficiencies are attributable to negligent men and not to a perfect God. The act-of-God arguments of the defendantsappellants and third party defendants-appellants presented in their briefs are premised on legal generalizations or speculations and on theological fatalism both of which ignore the plain facts. The lengthy discussion of United on ordinary earthquakes and unusually strong earthquakes and on ordinary fortuitous events and extraordinary fortuitous events leads to its argument that the August 2, 1968 earthquake was of such an overwhelming and destructive character that by its own force and independent of the particular negligence alleged, the injury would have been produced. If we follow this line of speculative reasoning, we will be forced to conclude that under such a situation scores of buildings in the vicinity and in other parts of Manila would have toppled down. Following the same line of reasoning, Nakpil and Sons alleges that the designs were adequate in accordance with pre-August 2, 1968 knowledge and appear inadequate only in the light of engineering information acquired after the earthquake. If this were so, hundreds of ancient buildings which survived the earthquake better than the two-year old PBA building must have been designed and constructed by architects and contractors whose knowledge and foresight were unexplainably auspicious and prophetic. Fortunately, the facts on record allow a more down to earth explanation of the collapse. The failure of the PBA building, as a unique and distinct construction with no reference or comparison to other buildings, to weather the severe

earthquake forces was traced to design deficiencies and defective construction, factors which are neither mysterious nor esoteric. The theological allusion of appellant United that God acts in mysterious ways His wonders to perform impresses us to be inappropriate. The evidence reveals defects and deficiencies in design and construction. There is no mystery about these acts of negligence. The collapse of the PBA building was no wonder performed by God. It was a result of the imperfections in the work of the architects and the people in the construction company. More relevant to our mind is the lesson from the parable of the wise man in the Sermon on the Mount "which built his house upon a rock; and the rain descended and the floods came and the winds blew and beat upon that house; and it fen not; for it was founded upon a rock" and of the "foolish upon the sand. And the rain descended and man which built his house the floods came, and the winds blew, and beat upon that house; and it fell and great was the fall of it. (St. Matthew 7: 24-27)." The requirement that a building should withstand rains, floods, winds, earthquakes, and natural forces is precisely the reason why we have professional experts like architects, and engineers. Designs and constructions vary under varying circumstances and conditions but the requirement to design and build well does not change. The findings of the lower Court on the cause of the collapse are more rational and accurate. Instead of laying the blame solely on the motions and forces generated by the earthquake, it also examined the ability of the PBA building, as designed and constructed, to withstand and successfully weather those forces.

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The evidence sufficiently supports a conclusion that the negligence and fault of both United and Nakpil and Sons, not a mysterious act of an inscrutable God, were responsible for the damages. The Report of the Commissioner, Plaintiff's Objections to the Report, Third Party Defendants' Objections to the Report, Defendants' Objections to the Report, Commissioner's Answer to the various Objections, Plaintiffs' Reply to the Commissioner's Answer, Defendants' Reply to the Commissioner's Answer, Counter-Reply to Defendants' Reply, and Third-Party Defendants' Reply to the Commissioner's Report not to mention the exhibits and the testimonies show that the main arguments raised on appeal were already raised during the trial and fully considered by the lower Court. A reiteration of these same arguments on appeal fails to convince us that we should reverse or disturb the lower Court's factual findings and its conclusions drawn from the facts, among them: The Commissioner also found merit in the allegations of the defendants as to the physical evidence before and after the earthquake showing the inadequacy of design, to wit: Physical evidence before the earthquake providing (sic) inadequacy of design; 1. inadequate design was the cause of the failure of the building. 2. Sun-baffles on the two sides and in front of the building;

a. Increase the inertia forces that move the building laterally toward the Manila Fire Department. b. Create another stiffness imbalance. 3. The embedded 4" diameter cast iron down spout on all exterior columns reduces the crosssectional area of each of the columns and the strength thereof. 4. Two front corners, A7 and D7 columns were very much less reinforced. Physical Evidence After the Earthquake, Proving Inadequacy of design; 1. Column A7 suffered the severest fracture and maximum sagging. Also D7. 2. There are more damages in the front part of the building than towards the rear, not only in columns but also in slabs. 3. Building leaned and sagged more on the front part of the building. 4. Floors showed maximum sagging on the sides and toward the front corner parts of the building. 5. There was a lateral displacement of the building of about 8", Maximum sagging occurs at the column A7 where the floor is lower by 80 cm. than the highest slab level. 6. Slab at the corner column D7 sagged by 38 cm.

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The Commissioner concluded that there were deficiencies or defects in the design, plans and specifications of the PBA building which involved appreciable risks with respect to the accidental forces which may result from earthquake shocks. He conceded, however, that the fact that those deficiencies or defects may have arisen from an obsolete or not too conservative code or even a code that does not require a design for earthquake forces mitigates in a large measure the responsibility or liability of the architect and engineer designer. The Third-party defendants, who are the most concerned with this portion of the Commissioner's report, voiced opposition to the same on the grounds that (a) the finding is based on a basic erroneous conception as to the design concept of the building, to wit, that the design is essentially that of a heavy rectangular box on stilts with shear wan at one end; (b) the finding that there were defects and a deficiency in the design of the building would at best be based on an approximation and, therefore, rightly belonged to the realm of speculation, rather than of certainty and could very possibly be outright error; (c) the Commissioner has failed to back up or support his finding with extensive, complex and highly specialized computations and analyzes which he himself emphasizes are necessary in the determination of such a highly technical question; and (d) the Commissioner has analyzed the design of the PBA building not in the light of existing and available earthquake engineering knowledge at the time of the preparation of the design, but in the light of recent and current standards. The Commissioner answered the said objections alleging that third-party defendants' objections

were based on estimates or exhibits not presented during the hearing that the resort to engineering references posterior to the date of the preparation of the plans was induced by the third-party defendants themselves who submitted computations of the third-party defendants are erroneous. The issue presently considered is admittedly a technical one of the highest degree. It involves questions not within the ordinary competence of the bench and the bar to resolve by themselves. Counsel for the third-party defendants has aptly remarked that "engineering, although dealing in mathematics, is not an exact science and that the present knowledge as to the nature of earthquakes and the behaviour of forces generated by them still leaves much to be desired; so much so "that the experts of the different parties, who are all engineers, cannot agree on what equation to use, as to what earthquake co-efficients are, on the codes to be used and even as to the type of structure that the PBA building (is) was (p. 29, Memo, of thirdparty defendants before the Commissioner). The difficulty expected by the Court if tills technical matter were to be tried and inquired into by the Court itself, coupled with the intrinsic nature of the questions involved therein, constituted the reason for the reference of the said issues to a Commissioner whose qualifications and experience have eminently qualified him for the task, and whose competence had not been questioned by the parties until he submitted his report. Within the pardonable limit of the Court's ability to comprehend the meaning of the Commissioner's report on this issue, and the objections voiced to the same, the Court sees no compelling reasons

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to disturb the findings of the Commissioner that there were defects and deficiencies in the design, plans and specifications prepared by third-party defendants, and that said defects and deficiencies involved appreciable risks with respect to the accidental forces which may result from earthquake shocks. (2) (a) The deviations, if any, made by the defendants from the plans and specifications, and how said deviations contributed to the damage sustained by the building. (b) The alleged failure of defendants to observe the requisite quality of materials and workmanship in the construction of the building. These two issues, being interrelated with each other, will be discussed together. The findings of the Commissioner on these issues were as follows: We now turn to the construction of the PBA Building and the alleged deficiencies or defects in the construction and violations or deviations from the plans and specifications. All these may be summarized as follows: a. Summary of alleged defects as reported by Engineer Mario M. Bundalian. (1) Wrongful and defective placing of reinforcing bars. (2) Absence of effective and desirable integration of the 3 bars in the cluster.

(3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires no larger than 1 inch. (4) Reinforcement assembly is not concentric with the column, eccentricity being 3" off when on one face the main bars are only 1 1/2' from the surface. (5) Prevalence of honeycombs, (6) Contraband construction joints, (7) Absence, or omission, or over spacing of spiral hoops, (8) Deliberate severance of spirals into semicircles in noted on Col. A-5, ground floor, (9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground floor, (10) Undergraduate concrete is evident, (11) Big cavity in core of Column 2A-4, second floor, (12) Columns buckled at different planes. Columns buckled worst where there are no spirals or where spirals are cut. Columns suffered worst displacement where the eccentricity of the columnar reinforcement assembly is more acute. b. Summary of alleged defects as reported by Engr. Antonio Avecilla.

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Columns are first (or ground) floor, unless otherwise stated. (1) Column D4 Spacing of spiral is changed from 2" to 5" on centers, (2) Column D5 No spiral up to a height of 22" from the ground floor, (3) Column D6 Spacing of spiral over 4 l/2,

(13) Column A6 No spirals up to a height of 30' above the ground floor level, (14) Column A7 Lack of lateralties or spirals, c. Summary of alleged defects as reported by the experts of the Third-Party defendants. Ground floor columns. (1) Column A4 Spirals are cut,

(4) Column D7 Lack of lateral ties, (2) Column A5 Spirals are cut, (5) Column C7 Absence of spiral to a height of 20" from the ground level, Spirals are at 2" from the exterior column face and 6" from the inner column face, (6) Column B6 Lack of spiral on 2 feet below the floor beams, (7) Column B5 Lack of spirals at a distance of 26' below the beam, (8) Column B7 Spirals not tied to vertical reinforcing bars, Spirals are uneven 2" to 4", (9) Column A3 Lack of lateral ties, (10) Column A4 Spirals cut off and welded to two separate clustered vertical bars, (11) Column A4 (second floor Column is completely hollow to a height of 30" (12) Column A5 Spirals were cut from the floor level to the bottom of the spandrel beam to a height of 6 feet, (3) Column A6 At lower 18" spirals are absent, (4) Column A7 Ties are too far apart, (5) Column B5 At upper fourth of column spirals are either absent or improperly spliced, (6) Column B6 At upper 2 feet spirals are absent, (7) Column B7 At upper fourth of column spirals missing or improperly spliced. (8) Column C7 Spirals are absent at lowest 18" (9) Column D5 At lowest 2 feet spirals are absent, (10) Column D6 Spirals are too far apart and apparently improperly spliced, (11) Column D7 Lateral ties are too far apart, spaced 16" on centers.

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There is merit in many of these allegations. The explanations given by the engineering experts for the defendants are either contrary to general principles of engineering design for reinforced concrete or not applicable to the requirements for ductility and strength of reinforced concrete in earthquake-resistant design and construction. We shall first classify and consider defects which may have appreciable bearing or relation to' the earthquake-resistant property of the building. As heretofore mentioned, details which insure ductility at or near the connections between columns and girders are desirable in earthquake resistant design and construction. The omission of spirals and ties or hoops at the bottom and/or tops of columns contributed greatly to the loss of earthquake-resistant strength. The plans and specifications required that these spirals and ties be carried from the floor level to the bottom reinforcement of the deeper beam (p. 1, Specifications, p. 970, Reference 11). There were several clear evidences where this was not done especially in some of the ground floor columns which failed. There were also unmistakable evidences that the spacings of the spirals and ties in the columns were in many cases greater than those called for in the plans and specifications resulting again in loss of earthquake-resistant strength. The assertion of the engineering experts for the defendants that the improper spacings and the cutting of the spirals did not result in loss of strength in the column cannot be maintained and is certainly contrary to the general principles of column design and construction. And even granting that there be no loss in strength at the

yield point (an assumption which is very doubtful) the cutting or improper spacings of spirals will certainly result in the loss of the plastic range or ductility in the column and it is precisely this plastic range or ductility which is desirable and needed for earthquake-resistant strength. There is no excuse for the cavity or hollow portion in the column A4, second floor, and although this column did not fail, this is certainly an evidence on the part of the contractor of poor construction. The effect of eccentricities in the columns which were measured at about 2 1/2 inches maximum may be approximated in relation to column loads and column and beam moments. The main effect of eccentricity is to change the beam or girder span. The effect on the measured eccentricity of 2 inches, therefore, is to increase or diminish the column load by a maximum of about 1% and to increase or diminish the column or beam movements by about a maximum of 2%. While these can certainly be absorbed within the factor of safety, they nevertheless diminish said factor of safety. The cutting of the spirals in column A5, ground floor is the subject of great contention between the parties and deserves special consideration. The proper placing of the main reinforcements and spirals in column A5, ground floor, is the responsibility of the general contractor which is the UCCI. The burden of proof, therefore, that this cutting was done by others is upon the defendants. Other than a strong allegation and assertion that it is the plumber or his men who

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may have done the cutting (and this was flatly denied by the plumber) no conclusive proof was presented. The engineering experts for the defendants asserted that they could have no motivation for cutting the bar because they can simply replace the spirals by wrapping around a new set of spirals. This is not quite correct. There is evidence to show that the pouring of concrete for columns was sometimes done through the beam and girder reinforcements which were already in place as in the case of column A4 second floor. If the reinforcement for the girder and column is to subsequently wrap around the spirals, this would not do for the elasticity of steel would prevent the making of tight column spirals and loose or improper spirals would result. The proper way is to produce correct spirals down from the top of the main column bars, a procedure which can not be done if either the beam or girder reinforcement is already in place. The engineering experts for the defendants strongly assert and apparently believe that the cutting of the spirals did not materially diminish the strength of the column. This belief together with the difficulty of slipping the spirals on the top of the column once the beam reinforcement is in place may be a sufficient motivation for the cutting of the spirals themselves. The defendants, therefore, should be held responsible for the consequences arising from the loss of strength or ductility in column A5 which may have contributed to the damages sustained by the building. The lack of proper length of splicing of spirals was also proven in the visible spirals of the columns where spalling of the concrete cover had taken place. This lack of proper splicing contributed in a small measure to the loss of strength.

The effects of all the other proven and visible defects although nor can certainly be accumulated so that they can contribute to an appreciable loss in earthquake-resistant strength. The engineering experts for the defendants submitted an estimate on some of these defects in the amount of a few percent. If accumulated, therefore, including the effect of eccentricity in the column the loss in strength due to these minor defects may run to as much as ten percent. To recapitulate: the omission or lack of spirals and ties at the bottom and/or at the top of some of the ground floor columns contributed greatly to the collapse of the PBA building since it is at these points where the greater part of the failure occurred. The liability for the cutting of the spirals in column A5, ground floor, in the considered opinion of the Commissioner rests on the shoulders of the defendants and the loss of strength in this column contributed to the damage which occurred. It is reasonable to conclude, therefore, that the proven defects, deficiencies and violations of the plans and specifications of the PBA building contributed to the damages which resulted during the earthquake of August 2, 1968 and the vice of these defects and deficiencies is that they not only increase but also aggravate the weakness mentioned in the design of the structure. In other words, these defects and deficiencies not only tend to add but also to multiply the effects of the shortcomings in the design of the building. We may say, therefore, that the defects and deficiencies in the construction contributed greatly to the damage which occurred.

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Since the execution and supervision of the construction work in the hands of the contractor is direct and positive, the presence of existence of all the major defects and deficiencies noted and proven manifests an element of negligence which may amount to imprudence in the construction work. (pp. 42-49, Commissioners Report). As the parties most directly concerned with this portion of the Commissioner's report, the defendants voiced their objections to the same on the grounds that the Commissioner should have specified the defects found by him to be "meritorious"; that the Commissioner failed to indicate the number of cases where the spirals and ties were not carried from the floor level to the bottom reinforcement of the deeper beam, or where the spacing of the spirals and ties in the columns were greater than that called for in the specifications; that the hollow in column A4, second floor, the eccentricities in the columns, the lack of proper length of splicing of spirals, and the cut in the spirals in column A5, ground floor, did not aggravate or contribute to the damage suffered by the building; that the defects in the construction were within the tolerable margin of safety; and that the cutting of the spirals in column A5, ground floor, was done by the plumber or his men, and not by the defendants. Answering the said objections, the Commissioner stated that, since many of the defects were minor only the totality of the defects was considered. As regards the objection as to failure to state the number of cases where the spirals and ties were not carried from the floor level to the bottom reinforcement, the Commissioner specified groundfloor columns B-6 and C-5 the first one without spirals for 03 inches at the top, and in the latter, there were no spirals for 10 inches at the bottom. The Commissioner likewise specified the first storey columns where the spacings were greater than that called for in the specifications to be columns B-5, B-6, C-7, C-6, C-5, D-5 and B7. The objection to the failure of the Commissioner to specify the number of columns where there was lack of proper length of splicing of spirals, the Commissioner mentioned groundfloor

columns B-6 and B-5 where all the splices were less than 1-1/2 turns and were not welded, resulting in some loss of strength which could be critical near the ends of the columns. He answered the supposition of the defendants that the spirals and the ties must have been looted, by calling attention to the fact that the missing spirals and ties were only in two out of the 25 columns, which rendered said supposition to be improbable. The Commissioner conceded that the hollow in column A-4, second floor, did not aggravate or contribute to the damage, but averred that it is "evidence of poor construction." On the claim that the eccentricity could be absorbed within the factor of safety, the Commissioner answered that, while the same may be true, it also contributed to or aggravated the damage suffered by the building. The objection regarding the cutting of the spirals in Column A5, groundfloor, was answered by the Commissioner by reiterating the observation in his report that irrespective of who did the cutting of the spirals, the defendants should be held liable for the same as the general contractor of the building. The Commissioner further stated that the loss of strength of the cut spirals and inelastic deflections of the supposed lattice work defeated the purpose of the spiral containment in the column and resulted in the loss of strength, as evidenced by the actual failure of this column. Again, the Court concurs in the findings of the Commissioner on these issues and fails to find any sufficient cause to disregard or modify the same. As found by the Commissioner, the "deviations made by the defendants from the plans and specifications caused indirectly the damage sustained and that those deviations not only added but also aggravated the damage caused by the defects in the plans and specifications prepared by third-party defendants. (Rollo, Vol. I, pp. 128-142) The afore-mentioned facts clearly indicate the wanton negligence of both the defendant and the third-party defendants in effecting the plans, designs, specifications, and construction

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of the PBA building and We hold such negligence as equivalent to bad faith in the performance of their respective tasks. Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379, 4380) which may be in point in this case reads: One who negligently creates a dangerous condition cannot escape liability for the natural and probable consequences thereof, although the act of a third person, or an act of God for which he is not responsible, intervenes to precipitate the loss. As already discussed, the destruction was not purely an act of God. Truth to tell hundreds of ancient buildings in the vicinity were hardly affected by the earthquake. Only one thing spells out the fatal difference; gross negligence and evident bad faith, without which the damage would not have occurred. WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and environmental circumstances of this case, We deem it reasonable to render a decision imposing, as We do hereby impose, upon the defendant and the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra, p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with the exception of attorney's fees) occasioned by the loss of the building (including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum shall be imposed upon aforementioned amounts from finality until paid. Solidary costs against the defendant and third-party defendants (except Roman Ozaeta). SO ORDERED. G.R. No. 126389 July 10, 1998

SOUTHEASTERN COLLEGE INC., petitioner, vs. COURT OF APPEALS, JUANITA DE JESUS VDA. DE DIMAANO, EMERITA DIMAANO, REMEDIOS DIMAANO, CONSOLACION DIMAANO and MILAGROS DIMAANO, respondents.

PURISIMA, J.: Petition for review under Rule 45 of the Rules of Court seeking to set aside the Decision 1 promulgated on July 31, 1996, and Resolution 2 dated September 12, 1996 of the Court of Appeals 3 in CA-G.R. No. 41422, entitled "Juanita de Jesus vda. de Dimaano, et al. vs. Southeastern College, Inc.", which reduced the moral damages awarded below from P1,000,000.00 to P200,000.00. 4 The Resolution under attack denied petitioner's motion for reconsideration. Private respondents are owners of a house at 326 College Road, Pasay City, while petitioner owns a four-storey school building along the same College Road. On October 11, 1989, at about 6:30 in the morning, a powerful typhoon "Saling" hit Metro Manila. Buffeted by very strong winds, the roof of petitioner's building was partly ripped off and blown away, landing on and destroying portions of the roofing of private respondents' house. After the typhoon had passed, an ocular inspection of the destroyed building was conducted by a team of engineers headed by the city building official, Engr. Jesus L. Reyna. Pertinent aspects of the latter's Report 5 dated October 18, 1989 stated, as follows: 5. One of the factors that may have led to this calamitous event is the formation of the building in the area and the general direction of the wind. Situated in the peripheral lot is an almost U-shaped formation of 4-storey building. Thus, with the strong winds having a westerly direction, the general

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formation of the building becomes a big funnel-like structure, the one situated along College Road, receiving the heaviest impact of the strong winds. Hence, there are portions of the roofing, those located on both ends of the building, which remained intact after the storm. 6. Another factor and perhaps the most likely reason for the dislodging of the roofing structural trusses is the improper anchorage of the said trusses to the roof beams. The 1/2' diameter steel bars embedded on the concrete roof beams which serve as truss anchorage are not bolted nor nailed to the trusses. Still, there are other steel bars which were not even bent to the trusses, thus, those trusses are not anchored at all to the roof beams. It then recommended that "to avoid any further loss and damage to lives, limbs and property of persons living in the vicinity," the fourth floor of subject school building be declared as a "structural hazard." In their Complaint 6 before the Regional Trial Court of Pasay City, Branch 117, for damages based on culpa aquiliana, private respondents alleged that the damage to their house rendered the same uninhabitable, forcing them to stay temporarily in others' houses. And so they sought to recover from petitioner P117,116.00, as actual damages, P1,000,000.00, as moral damages, P300,000.00, as exemplary damages and P100,000.00, for and as attorney's fees; plus costs. In its Answer, petitioner averred that subject school building had withstood several devastating typhoons and other calamities in the past, without its roofing or any portion thereof giving way; that it has not been remiss in its responsibility to see to it that said school building, which houses school children, faculty members, and employees, is "in tip-top condition"; and furthermore, typhoon "Saling" was "an act of God and therefore beyond human control"

such that petitioner cannot be answerable for the damages wrought thereby, absent any negligence on its part. The trial court, giving credence to the ocular inspection report to the effect that subject school building had a "defective roofing structure," found that, while typhoon "Saling" was accompanied by strong winds, the damage to private respondents' houses "could have been avoided if the construction of the roof of [petitioner's] building was not faulty." The dispositive portion of the lower court's decision 7 reads, thus: WHEREFORE, in view of the foregoing, the Court renders judgment (sic) in favor of the plaintiff (sic) and against the defendants, (sic) ordering the latter to pay jointly and severally the former as follows: a) P117,116.00, as actual damages, plus litigation expenses; b) P1,000,000.00 as moral damages; c) P100,000.00 as attorney's fees; d) Costs of the instant suit. The claim for exemplary damages is denied for the reason that the defendants (sic) did in a wanton fraudulent, reckless, oppressive or malevolent manner. In its appeal to the Court of Appeals, petitioner assigned as errors, 8 that:

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I THE TRIAL COURT ERRED IN HOLDING THAT TYPHOON "SALING", AS AN ACT OF GOD, IS NOT "THE SOLE AND ABSOLUTE REASON" FOR THE RIPPING-OFF OF THE SMALL PORTION OF THE ROOF OF SOUTHEASTERN'S FOUR (4) STOREY SCHOOL BUILDING. II THE TRIAL COURT ERRED IN HOLDING THAT "THE CONSTRUCTION OF THE ROOF OF DEFENDANT'S SCHOOL BUILDING WAS FAULTY" NOTWITHSTANDING THE ADMISSION THAT THERE WERE TYPHOONS BEFORE BUT NOT AS GRAVE AS TYPHOON "SALING" WHICH IS THE DIRECT AND PROXIMATE CAUSE OF THE INCIDENT. III THE TRIAL COURT ERRED IN AWARDING ACTUAL AND MORAL DAMAGES AS WELL AS ATTORNEY'S FEES AND LITIGATION EXPENSES AND COSTS OF SUIT TO DIMAANOS WHEN THEY HAVE NOT INCURRED ACTUAL DAMAGES AT ALL AS DIMAANOS HAVE ALREADY SOLD THEIR PROPERTY, AN INTERVENING EVENT THAT RENDERS THIS CASE MOOT AND ACADEMIC. IV THE TRIAL COURT ERRED IN ORDERING THE ISSUANCE OF THE WRIT OF EXECUTION INSPITE OF THE PERFECTION OF SOUTHEASTERN'S APPEAL WHEN THERE IS NO

COMPELLING REASON FOR THE ISSUANCE THERETO. As mentioned earlier, respondent Court of Appeals affirmed with modification the trial court's disposition by reducing the award of moral damages from P1,000,000.00 to P200,000.00. Hence, petitioner's resort to this Court, raising for resolution the issues of: 1. Whether or not the award of actual damages [sic] to respondent Dimaanos on the basis of speculation or conjecture, without proof or receipts of actual damage, [sic] legally feasible or justified. 2. Whether or not the award of moral damages to respondent Dimaanos, with the latter having suffered, actual damage has legal basis. 3. Whether or not respondent Dimaanos who are no longer the owner of the property, subject matter of the case, during its pendency, has the right to pursue their complaint against petitioner when the case was already moot and academic by the sale of the property to third party. 4. Whether or not the award of attorney's fees when the case was already moot academic [sic] legally justified. 5. Whether or not petitioner is liable for damage caused to others by typhoon "Saling" being an act of God. 6. Whether or not the issuance of a writ of execution pending appeal, ex-parte or without hearing, has support in law. The pivot of inquiry here, determinative of the other issues, is whether the damage on the roof of the building of private

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respondents resulting from the impact of the falling portions of the school building's roof ripped off by the strong winds of typhoon "Saling", was, within legal contemplation, due to fortuitous event? If so, petitioner cannot be held liable for the damages suffered by the private respondents. This conclusion finds support in Article 1174 of Civil Code, which provides: Art 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. The antecedent of fortuitous event or caso fortuito is found in the Partidas which defines it as "an event which takes place by accident and could not have been foreseen." 9 Escriche elaborates it as "an unexpected event or act of God which could neither be foreseen nor resisted." 10 Civilist Arturo M. Tolentino adds that "[f]ortuitous events may be produced by two general causes: (1) by nature, such as earthquakes, storms, floods, epidemics, fires, etc. and (2) by the act of man, such as an armed invasion, attack by bandits, governmental prohibitions, robbery, etc." 11 In order that a fortuitous event may exempt a person from liability, it is necessary that he be free from any previous negligence or misconduct by reason of which the loss may have been occasioned. 12 An act of God cannot be invoked for the protection of a person who has been guilty of gross negligence in not trying to forestall its possible adverse consequences. When a person's negligence concurs with an act of God in producing damage or injury to another, such person is not exempt from liability by showing that the immediate or proximate cause of the damages or injury was a fortuitous event. When the effect is found to be partly the result of the participation of man whether it be from active intervention, or neglect, or failure to act the whole occurrence is hereby humanized, and removed from the rules applicable to acts of God. 13

In the case under consideration, the lower court accorded full credence to the finding of the investigating team that subject school building's roofing had "no sufficient anchorage to hold it in position especially when battered by strong winds." Based on such finding, the trial court imputed negligence to petitioner and adjudged it liable for damages to private respondents. After a thorough study and evaluation of the evidence on record, this Court believes otherwise, notwithstanding the general rule that factual findings by the trail court, especially when affirmed by the appellate court, are binding and conclusive upon this Court. 14 After a careful scrutiny of the records and the pleadings submitted by the parties, we find exception to this rule and hold that the lower courts misappreciated the evidence proffered. There is no question that a typhoon or storm is a fortuitous event, a natural occurrence which may be foreseen but is unavoidable despite any amount of foresight, diligence or care. 15 In order to be exempt from liability arising from any adverse consequence engendered thereby, there should have been no human participation amounting to a negligent act. 16 In other words; the person seeking exoneration from liability must not be guilty of negligence. Negligence, as commonly understood, is conduct which naturally or reasonably creates undue risk or harm to others. It may be the failure to observe that degree of care, precaution, and vigilance which the circumstances justify demand, 17 or the omission to do something which a prudent and reasonable man, guided by considerations which ordinarily regulate the conduct of human affairs, would do. 18 From these premises, we proceed to determine whether petitioner was negligent, such that if it were not, the damage caused to private respondents' house could have been avoided? At the outset, it bears emphasizing that a person claiming damages for the negligence of another has the burden of proving the existence of fault or negligence causative of his injury or loss. The facts constitutive of negligence must be affirmatively established by competent evidence, 19 not merely by presumptions and conclusions without basis in fact. Private respondents, in establishing the culpability of petitioner, merely relied on the aforementioned report submitted by a team which made an ocular inspection of petitioner's

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school building after the typhoon. As the term imparts, an ocular inspection is one by means of actual sight or viewing. 20 What is visual to the eye through, is not always reflective of the real cause behind. For instance, one who hears a gunshot and then sees a wounded person, cannot always definitely conclude that a third person shot the victim. It could have been self-inflicted or caused accidentally by a stray bullet. The relationship of cause and effect must be clearly shown. In the present case, other than the said ocular inspection, no investigation was conducted to determine the real cause of the partial unroofing of petitioner's school building. Private respondents did not even show that the plans, specifications and design of said school building were deficient and defective. Neither did they prove any substantial deviation from the approved plans and specifications. Nor did they conclusively establish that the construction of such building was basically flawed. 21 On the other hand, petitioner elicited from one of the witnesses of private respondents, city building official Jesus Reyna, that the original plans and design of petitioner's school building were approved prior to its construction. Engr. Reyna admitted that it was a legal requirement before the construction of any building to obtain a permit from the city building official (city engineer, prior to the passage of the Building Act of 1977). In like manner, after construction of the building, a certification must be secured from the same official attesting to the readiness for occupancy of the edifice. Having obtained both building permit and certificate of occupancy, these are, at the very least, prima facie evidence of the regular and proper construction of subject school building. 22 Furthermore, when part of its roof needed repairs of the damage inflicted by typhoon "Saling", the same city official gave the go-signal for such repairs without any deviation from the original design and subsequently, authorized the use of the entire fourth floor of the same building. These only prove that subject building suffers from no structural defect, contrary to the report that its "U-shaped" form was "structurally defective." Having given his unqualified imprimatur, the city building official is presumed to have properly performed his duties 23 in connection therewith.

In addition, petitioner presented its vice president for finance and administration who testified that an annual maintenance inspection and repair of subject school building were regularly undertaken. Petitioner was even willing to present its maintenance supervisor to attest to the extent of such regular inspection but private respondents agreed to dispense with his testimony and simply stipulated that it would be corroborative of the vice president's narration. Moreover, the city building official, who has been in the city government service since 1974, admitted in open court that no complaint regarding any defect on the same structure has ever been lodged before his office prior to the institution of the case at bench. It is a matter of judicial notice that typhoons are common occurrences in this country. If subject school building's roofing was not firmly anchored to its trusses, obviously, it could not have withstood long years and several typhoons even stronger than "Saling." In light of the foregoing, we find no clear and convincing evidence to sustain the judgment of the appellate court. We thus hold that petitioner has not been shown negligent or at fault regarding the construction and maintenance of its school building in question and that typhoon "Saling" was the proximate cause of the damage suffered by private respondents' house. With this disposition on the pivotal issue, private respondents' claim for actual and moral damages as well as attorney's fees must fail. 24 Petitioner cannot be made to answer for a purely fortuitous event. 25 More so because no bad faith or willful act to cause damage was alleged and proven to warrant moral damages. Private respondents failed to adduce adequate and competent proof of the pecuniary loss they actually incurred.26 It is not enough that the damage be capable of proof but must be actually proved with a reasonable degree of certainty, pointing out specific facts that afford a basis for measuring whatever compensatory damages are borne.27 Private respondents merely submitted an estimated amount needed for the repair of the roof their subject building. What is more, whether the "necessary repairs" were caused ONLY by petitioner's

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alleged negligence in the maintenance of its school building, or included the ordinary wear and tear of the house itself, is an essential question that remains indeterminable. The Court deems unnecessary to resolve the other issues posed by petitioner. As regards the sixth issue, however, the writ of execution issued on April 1, 1993 by the trial court is hereby nullified and set aside. Private respondents are ordered to reimburse any amount or return to petitioner any property which they may have received by virtue of the enforcement of said writ. WHEREFORE, the petition is GRANTED and the challenged Decision is REVERSED. The complaint of private respondents in Civil Case No. 7314 before the trial court a quo is ordered DISMISSED and the writ of execution issued on April 1, 1993 in said case is SET ASIDE. Accordingly, private respondents are ORDERED to return to petitioner any amount or property received by them by virtue of said writ. Costs against the private respondents. SO ORDERED. G.R. No. L-30771 May 28, 1984 LIAM LAW, plaintiff-appellee, vs. OLYMPIC SAWMILL CO. and ELINO LEE CHI, defendantsappellants. Felizardo S.M. de Guzman for plaintiff-appellee. Mariano M. de Joya for defendants-appellants.

This is an appeal by defendants from a Decision rendered by the then Court of First Instance of Bulacan. The appeal was originally taken to the then Court of Appeals, which endorsed it to this instance stating that the issue involved was one of law. It appears that on or about September 7, 1957, plaintiff loaned P10,000.00, without interest, to defendant partnership and defendant Elino Lee Chi, as the managing partner. The loan became ultimately due on January 31, 1960, but was not paid on that date, with the debtors asking for an extension of three months, or up to April 30, 1960. On March 17, 1960, the parties executed another loan document. Payment of the P10,000.00 was extended to April 30, 1960, but the obligation was increased by P6,000.00 as follows: That the sum of SIX THOUSAND PESOS (P6,000.00), Philippine currency shall form part of the principal obligation to answer for attorney's fees, legal interest, and other cost incident thereto to be paid unto the creditor and his successors in interest upon the termination of this agreement. Defendants again failed to pay their obligation by April 30, 1960 and, on September 23, 1960, plaintiff instituted this collection case. Defendants admitted the P10,000.00 principal obligation, but claimed that the additional P6,000.00 constituted usurious interest. Upon application of plaintiff, the Trial Court issued, on the same date of September 23, 1960, a writ of Attachment on real and personal properties of defendants located at Karanglan, Nueva Ecija. After the Writ of Attachment was implemented, proceedings before the Trial Court versed principally in regards to the attachment. On January 18, 1961, an Order was issued by the Trial Court stating that "after considering the manifestation of both counsel in Chambers, the Court hereby allows both parties to simultaneously submit a Motion for Summary Judgment. 1 The plaintiff filed his

MELENCIO-HERRERA, J.:

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Motion for Summary Judgment on January 31, 1961, while defendants filed theirs on February 2, 196l. 2 On June 26, 1961, the Trial Court rendered decision ordering defendants to pay plaintiff "the amount of P10,000.00 plus the further sum of P6,000.00 by way of liquidated damages . . . with legal rate of interest on both amounts from April 30, 1960." It is from this judgment that defendants have appealed. We have decided to affirm. Under Article 1354 of the Civil Code, in regards to the agreement of the parties relative to the P6,000.00 obligation, "it is presumed that it exists and is lawful, unless the debtor proves the contrary". No evidentiary hearing having been held, it has to be concluded that defendants had not proven that the P6,000.00 obligation was illegal. Confirming the Trial Court's finding, we view the P6,000.00 obligation as liquidated damages suffered by plaintiff, as of March 17, 1960, representing loss of interest income, attorney's fees and incidentals. The main thrust of defendants' appeal is the allegation in their Answer that the P6,000.00 constituted usurious interest. They insist the claim of usury should have been deemed admitted by plaintiff as it was "not denied specifically and under oath". 3 Section 9 of the Usury Law (Act 2655) provided: SEC. 9. The person or corporation sued shall file its answer in writing under oath to any complaint brought or filed against said person or corporation before a competent court to recover the money or other personal or real property, seeds or agricultural products, charged or received in violation of the provisions of this Act. The lack of taking an oath to an answer to a complaint will mean the admission of the facts contained in the latter. The foregoing provision envisages a complaint filed against an entity which has committed usury, for the recovery of the usurious interest

paid. In that case, if the entity sued shall not file its answer under oath denying the allegation of usury, the defendant shall be deemed to have admitted the usury. The provision does not apply to a case, as in the present, where it is the defendant, not the plaintiff, who is alleging usury. Moreover, for sometime now, usury has been legally non-existent. Interest can now be charged as lender and borrower may agree upon. 4 The Rules of Court in regards to allegations of usury, procedural in nature, should be considered repealed with retroactive effect. Statutes regulating the procedure of the courts will be construed as applicable to actions pending and undetermined at the time of their passage. Procedural laws are retrospective in that sense and to that extent. 5 ... Section 24(d), Republic Act No. 876, known as the Arbitration Law, which took effect on 19 December 1953, and may be retroactively applied to the case at bar because it is procedural in nature. ... 6 WHEREFORE, the appealed judgment is hereby affirmed, without pronouncement as to costs. SO ORDERED.

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