G.R. No.

L-21486

May 14, 1966

LA MALLORCA and PAMPANGA BUS COMPANY, petitioner,

vs.
VALENTIN DE JESUS, MANOLO TOLENTINO and COURT OF APPEALS, respondents.
Manuel O. Chan for petitioners.Sixto T. Antonio for respondents.
MAKALINTAL, J.:
La Mallorca and Pampanga Bus Company, Inc., commonly known as La Mallorca-Pambusco, filed this appeal by certiorari from
the decision of the Court of Appeals which affirmed that rendered by the Court of First Instance of Bulacan in its civil case No.
2100, entitled "Valentin de Jesus and Manolo Tolentino vs. La Mallorca-Pambusco." The court a quo sentenced the defendant,
now petitioner, "to pay to plaintiffs the amount of P2,132.50 for actual damages; P14,400.00 as compensatory damages;
P10,000.00 to each plaintiff by way of moral damages; and P3,000.00 as counsel fees."
Two errors are attributed to the appellate Court: (1) "in sustaining the decision (of the court a quo) holding that the petitioners were
liable for the accident which was caused by a blow-out of one of the tires of the bus and in not considering the same as caso
fortuito," and (2) in holding petitioners liable for moral damages.
The suit arose by reason of the death of Lolita de Jesus, 20-year old daughter of Valentin de Jesus and wife of Manolo Tolentino,
in a head-on collision between petitioner's bus, on which she was a passenger, and a freight truck traveling in the opposite
direction, in a barrio in Marilao Bulacan, in the morning of October 8, 1959. The immediate cause of the collision was the fact that
the driver of the bus lost control of the wheel when its left front tire suddenly exploded.
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 vs. Red Line Transportation Co., CA-G.R. No. 8136, December 29, 1954, and People vs. Palapad,
CA-G.R. No. 18480, June 27, 1958. These rulings, however, not only are not not binding on this Court but were based on
considerations quite different from those that obtain in the at bar. The appellate Court there made no findings of any specified 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 present case, the cause of the blow-out was known.
The inner tube of the left front tire, according to petitioner's own evidence and as found by the Court of Appeals "was pressed
between the inner circle of the left wheel and the rim which had slipped out of the wheel." This was, said Court correctly held, a
mechanical defect of the conveyance or a fault in its equipment which was easily discoverable if the bus had been subjected to a
more thorough, or rigid check-up before it took to the road that morning.
Then again both the trial court and the Court of Appeals found as a fact that the bus was running quite fast immediately before the
accident. Considering that the tire which exploded was not new petitioner describes it as "hindi masyadong kalbo," or not so
very worn out the plea of caso fortuito cannot be entertained.1wph1.t
The second issue raised by petitioner is already a settled one. In this jurisdiction moral damages are recoverable by reason of the
death of a passenger caused by the breach of contract of a common carrier, as provided in Article 1764, in relation to Article 2206,
of the Civil Code. These articles have been applied by this Court in a number of cases, among them Necesito, etc. vs. Paras, et
al., L-10605-06, June 30, 1958; Mercado vs. Lira, L-13328-29, Sept. 29, 1961; Villa-Rey Transit vs. Bello, L-18957, April 23, 1963.
Wherefore, the judgment appealed from is affirmed, with costs against petitioners.

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.

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:
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 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 third-party 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.
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 above-enumerated 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 of (Record on Appeal, pp. 275-276; Rollo, L-47851, 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 third-party 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 the construction 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 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 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. Pepsi-Cola 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 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 (L-47896, 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 (L-47896,
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 (L-47896, 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, 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 defendants- appellants 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.
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 cross-sectional 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.
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 third- party 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 to disturb the
findings of the Commissioner that there were defects and deficiencies in the design, plans and specifications prepared by thirdparty 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 semi-circles 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.
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,
(4) Column D7 Lack of lateral ties,
(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,
(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,
(2) Column A5 Spirals are cut,
(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.
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 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.
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 B-7. 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 A-5, 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 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 afore-mentioned amounts from finality until paid.
Solidary costs against the defendant and third-party defendants (except Roman Ozaeta).
SO ORDERED.

G.R. No. 146018

June 25, 2003

EDGAR COKALIONG SHIPPING LINES, INC., Petitioner,

vs.
UCPB GENERAL INSURANCE COMPANY, INC., Respondent.
DECISION
PANGANIBAN, J.:
The liability of a common carrier for the loss of goods may, by stipulation in the bill of lading, be limited to the value declared by
the shipper. On the other hand, the liability of the insurer is determined by the actual value covered by the insurance policy and
the insurance premiums paid therefor, and not necessarily by the value declared in the bill of lading.
The Case
Before the Court is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to set aside the August 31, 2000 Decision 2
and the November 17, 2000 Resolution 3 of the Court of Appeals 4 (CA) in CA-GR SP No. 62751. The dispositive part of the
Decision reads:
"IN THE LIGHT OF THE FOREGOING, the appeal is GRANTED. The Decision appealed from is REVERSED. [Petitioner] is
hereby condemned to pay to [respondent] the total amount of P148,500.00, with interest thereon, at the rate of 6% per annum,
from date of this Decision of the Court. [Respondents] claim for attorneys fees [is] DISMISSED. [Petitioners] counterclaims are
DISMISSED."5
The assailed Resolution denied petitioners Motion for Reconsideration.
On the other hand, the disposition of the Regional Trial Courts 6 Decision,7 which was later reversed by the CA, states:
"WHEREFORE, premises considered, the case is hereby DISMISSED for lack of merit.
"No cost."8

The Facts
The facts of the case are summarized by the appellate court in this wise:
"Sometime on December 11, 1991, Nestor Angelia delivered to the Edgar Cokaliong Shipping Lines, Inc. (now Cokaliong Shipping
Lines), [petitioner] for brevity, cargo consisting of one (1) carton of Christmas dcor and two (2) sacks of plastic toys, to be
transported on board the M/V Tandag on its Voyage No. T-189 scheduled to depart from Cebu City, on December 12, 1991, for
Tandag, Surigao del Sur. [Petitioner] issued Bill of Lading No. 58, freight prepaid, covering the cargo. Nestor Angelia was both
the shipper and consignee of the cargo valued, on the face thereof, in the amount of P6,500.00. Zosimo Mercado likewise
delivered cargo to [petitioner], consisting of two (2) cartons of plastic toys and Christmas decor, one (1) roll of floor mat and one
(1) bundle of various or assorted goods for transportation thereof from Cebu City to Tandag, Surigao del Sur, on board the said
vessel, and said voyage. [Petitioner] issued Bill of Lading No. 59 covering the cargo which, on the face thereof, was valued in the
amount of P14,000.00. Under the Bill of Lading, Zosimo Mercado was both the shipper and consignee of the cargo.
"On December 12, 1991, Feliciana Legaspi insured the cargo, covered by Bill of Lading No. 59, with the UCPB General
Insurance Co., Inc., [respondent] for brevity, for the amount of P100,000.00 against all risks under Open Policy No. 002/9
1/254 for which she was issued, by [respondent], Marine Risk Note No. 18409 on said date. She also insured the cargo covered
by Bill of Lading No. 58, with [respondent], for the amount of P50,000.00, under Open Policy No. 002/9 1/254 on the basis of
which [respondent] issued Marine Risk Note No. 18410 on said date.
"When the vessel left port, it had thirty-four (34) passengers and assorted cargo on board, including the goods of Legaspi. After
the vessel had passed by the Mandaue-Mactan Bridge, fire ensued in the engine room, and, despite earnest efforts of the officers
and crew of the vessel, the fire engulfed and destroyed the entire vessel resulting in the loss of the vessel and the cargoes
therein. The Captain filed the required Marine Protest.
"Shortly thereafter, Feliciana Legaspi filed a claim, with [respondent], for the value of the cargo insured under Marine Risk Note
No. 18409 and covered by Bill of Lading No. 59. She submitted, in support of her claim, a Receipt, dated December 11, 1991,
purportedly signed by Zosimo Mercado, and Order Slips purportedly signed by him for the goods he received from Feliciana
Legaspi valued in the amount of P110,056.00. [Respondent] approved the claim of Feliciana Legaspi and drew and issued UCPB
Check No. 612939, dated March 9, 1992, in the net amount of P99,000.00, in settlement of her claim after which she executed a
Subrogation Receipt/Deed, for said amount, in favor of [respondent]. She also filed a claim for the value of the cargo covered by
Bill of Lading No. 58. She submitted to [respondent] a Receipt, dated December 11, 1991 and Order Slips, purportedly signed
by Nestor Angelia for the goods he received from Feliciana Legaspi valued at P60,338.00. [Respondent] approved her claim and
remitted to Feliciana Legaspi the net amount of P49,500.00, after which she signed a Subrogation Receipt/Deed, dated March 9,
1992, in favor of [respondent].
"On July 14, 1992, [respondent], as subrogee of Feliciana Legaspi, filed a complaint anchored on torts against [petitioner], with the
Regional Trial Court of Makati City, for the collection of the total principal amount of P148,500.00, which it paid to Feliciana
Legaspi for the loss of the cargo, praying that judgment be rendered in its favor and against the [petitioner] as follows:
WHEREFORE, it is respectfully prayed of this Honorable Court that after due hearing, judgment be rendered ordering [petitioner]
to pay [respondent] the following.
1. Actual damages in the amount of P148,500.00 plus interest thereon at the legal rate from the time of filing of this complaint until
fully paid;
2. Attorneys fees in the amount of P10,000.00; and
3. Cost of suit.
[Respondent] further prays for such other reliefs and remedies as this Honorable Court may deem just and equitable under the
premises.
"[Respondent] alleged, inter alia, in its complaint, that the cargo subject of its complaint was delivered to, and received by,
[petitioner] for transportation to Tandag, Surigao del Sur under Bill of Ladings, Annexes A and B of the complaint; that the loss
of the cargo was due to the negligence of the [petitioner]; and that Feliciana Legaspi had executed Subrogation Receipts/Deeds
in favor of [respondent] after paying to her the value of the cargo on account of the Marine Risk Notes it issued in her favor
covering the cargo.
"In its Answer to the complaint, [petitioner] alleged that: (a) [petitioner] was cleared by the Board of Marine Inquiry of any
negligence in the burning of the vessel; (b) the complaint stated no cause of action against [petitioner]; and (c) the
shippers/consignee had already been paid the value of the goods as stated in the Bill of Lading and, hence, [petitioner] cannot
be held liable for the loss of the cargo beyond the value thereof declared in the Bill of Lading.
"After [respondent] rested its case, [petitioner] prayed for and was allowed, by the Court a quo, to take the depositions of Chester
Cokaliong, the Vice-President and Chief Operating Officer of [petitioner], and a resident of Cebu City, and of Noel Tanyu, an officer
of the Equitable Banking Corporation, in Cebu City, and a resident of Cebu City, to be given before the Presiding Judge of Branch
106 of the Regional Trial Court of Cebu City. Chester Cokaliong and Noel Tanyu did testify, by way of deposition, before the Court
and declared inter alia, that: [petitioner] is a family corporation like the Chester Marketing, Inc.; Nestor Angelia had been doing
business with [petitioner] and Chester Marketing, Inc., for years, and incurred an account with Chester Marketing, Inc. for his
purchases from said corporation; [petitioner] did issue Bills of Lading Nos. 58 and 59 for the cargo described therein with
Zosimo Mercado and Nestor Angelia as shippers/consignees, respectively; the engine room of the M/V Tandag caught fire after it
passed the Mandaue/Mactan Bridge resulting in the total loss of the vessel and its cargo; an investigation was conducted by the
Board of Marine Inquiry of the Philippine Coast Guard which rendered a Report, dated February 13, 1992 absolving [petitioner] of
any responsibility on account of the fire, which Report of the Board was approved by the District Commander of the Philippine
Coast Guard; a few days after the sinking of the vessel, a representative of the Legaspi Marketing filed claims for the values of the
goods under Bills of Lading Nos. 58 and 59 in behalf of the shippers/consignees, Nestor Angelia and Zosimo Mercado;
[petitioner] was able to ascertain, from the shippers/consignees and the representative of the Legaspi Marketing that the cargo
covered by Bill of Lading No. 59 was owned by Legaspi Marketing and consigned to Zosimo Mercado while that covered by Bill
of Lading No. 58 was purchased by Nestor Angelia from the Legaspi Marketing; that [petitioner] approved the claim of Legaspi

Marketing for the value of the cargo under Bill of Lading No. 59 and remitted to Legaspi Marketing the said amount under
Equitable Banking Corporation Check No. 20230486 dated August 12, 1992, in the amount of P14,000.00 for which the
representative of the Legaspi Marketing signed Voucher No. 4379, dated August 12, 1992, for the said amount of P14,000.00 in
full payment of claims under Bill of Lading No. 59; that [petitioner] approved the claim of Nestor Angelia in the amount of
P6,500.00 but that since the latter owed Chester Marketing, Inc., for some purchases, [petitioner] merely set off the amount due to
Nestor Angelia under Bill of Lading No. 58 against his account with Chester Marketing, Inc.; [petitioner] lost/[misplaced] the
original of the check after it was received by Legaspi Marketing, hence, the production of the microfilm copy by Noel Tanyu of the
Equitable Banking Corporation; [petitioner] never knew, before settling with Legaspi Marketing and Nestor Angelia that the cargo
under both Bills of Lading were insured with [respondent], or that Feliciana Legaspi filed claims for the value of the cargo with
[respondent] and that the latter approved the claims of Feliciana Legaspi and paid the total amount of P148,500.00 to her;
[petitioner] came to know, for the first time, of the payments by [respondent] of the claims of Feliciana Legaspi when it was served
with the summons and complaint, on October 8, 1992; after settling his claim, Nestor Angelia x x x executed the Release and
Quitclaim, dated July 2, 1993, and Affidavit, dated July 2, 1993 in favor of [respondent]; hence, [petitioner] was absolved of any
liability for the loss of the cargo covered by Bills of Lading Nos. 58 and 59; and even if it was, its liability should not exceed the
value of the cargo as stated in the Bills of Lading.
"[Petitioner] did not anymore present any other witnesses on its evidence-in-chief. x x x" 9 (Citations omitted)
Ruling of the Court of Appeals
The CA held that petitioner had failed "to prove that the fire which consumed the vessel and its cargo was caused by something
other than its negligence in the upkeep, maintenance and operation of the vessel." 10
Petitioner had paid P14,000 to Legaspi Marketing for the cargo covered by Bill of Lading No. 59. The CA, however, held that the
payment did not extinguish petitioners obligation to respondent, because there was no evidence that Feliciana Legaspi (the
insured) was the owner/proprietor of Legaspi Marketing. The CA also pointed out the impropriety of treating the claim under Bill of
Lading No. 58 -- covering cargo valued therein at P6,500 -- as a setoff against Nestor Angelias account with Chester Enterprises,
Inc.
Finally, it ruled that respondent "is not bound by the valuation of the cargo under the Bills of Lading, x x x nor is the value of the
cargo under said Bills of Lading conclusive on the [respondent]. This is so because, in the first place, the goods were insured with
the [respondent] for the total amount of P150,000.00, which amount may be considered as the face value of the goods." 11
Hence this Petition.12
Issues
Petitioner raises for our consideration the following alleged errors of the CA:
"I
"The Honorable Court of Appeals erred, granting arguendo that petitioner is liable, in holding that petitioners liability should be
based on the actual insured value of the goods and not from actual valuation declared by the shipper/consignee in the bill of
lading.
"II
"The Court of Appeals erred in not affirming the findings of the Philippine Coast Guard, as sustained by the trial court a quo,
holding that the cause of loss of the aforesaid cargoes under Bill of Lading Nos. 58 and 59 was due to force majeure and due
diligence was [exercised] by petitioner prior to, during and immediately after the fire on [petitioners] vessel.
"III
"The Court of Appeals erred in not holding that respondent UCPB General Insurance has no cause of action against the
petitioner."13
In sum, the issues are: (1) Is petitioner liable for the loss of the goods? (2) If it is liable, what is the extent of its liability?
This Courts Ruling
The Petition is partly meritorious.
First Issue:
Liability for Loss
Petitioner argues that the cause of the loss of the goods, subject of this case, was force majeure. It adds that its exercise of due
diligence was adequately proven by the findings of the Philippine Coast Guard.
We are not convinced. The uncontroverted findings of the Philippine Coast Guard show that the M/V Tandag sank due to a fire,
which resulted from a crack in the auxiliary engine fuel oil service tank. Fuel spurted out of the crack and dripped to the heating
exhaust manifold, causing the ship to burst into flames. The crack was located on the side of the fuel oil tank, which had a mere
two-inch gap from the engine room walling, thus precluding constant inspection and care by the crew.
Having originated from an unchecked crack in the fuel oil service tank, the fire could not have been caused by force majeure.
Broadly speaking, force majeure generally applies to a natural accident, such as that caused by a lightning, an earthquake, a
tempest or a public enemy.14 Hence, fire is not considered a natural disaster or calamity. In Eastern Shipping Lines, Inc. v.
Intermediate Appellate Court,15 we explained:
"x x x. This must be so as it arises almost invariably from some act of man or by human means. It does not fall within the category
of an act of God unless caused by lighting or by other natural disaster or calamity. It may even be caused by the actual fault or
privity of the carrier.
"Article 1680 of the Civil Code, which considers fire as an extraordinary fortuitous event refers to leases or rural lands where a

reduction of the rent is allowed when more than one-half of the fruits have been lost due to such event, considering that the law
adopts a protective policy towards agriculture.
"As the peril of fire is not comprehended within the exceptions in Article 1734, supra, Article 1735 of the Civil Code provides that in
all cases other than those mentioned in Article 1734, the common carrier shall be presumed to have been at fault or to have acted
negligently, unless it proves that it has observed the extraordinary diligence required by law."
Where loss of cargo results from the failure of the officers of a vessel to inspect their ship frequently so as to discover the
existence of cracked parts, that loss cannot be attributed to force majeure, but to the negligence of those officials. 16
The law provides that a common carrier is presumed to have been negligent if it fails to prove that it exercised extraordinary
vigilance over the goods it transported. Ensuring the seaworthiness of the vessel is the first step in exercising the required
vigilance. Petitioner did not present sufficient evidence showing what measures or acts it had undertaken to ensure the
seaworthiness of the vessel. It failed to show when the last inspection and care of the auxiliary engine fuel oil service tank was
made, what the normal practice was for its maintenance, or some other evidence to establish that it had exercised extraordinary
diligence. It merely stated that constant inspection and care were not possible, and that the last time the vessel was dry-docked
was in November 1990. Necessarily, in accordance with Article 1735 17 of the Civil Code, we hold petitioner responsible for the loss
of the goods covered by Bills of Lading Nos. 58 and 59.
Second Issue:
Extent of Liability
Respondent contends that petitioners liability should be based on the actual insured value of the goods, subject of this case. On
the other hand, petitioner claims that its liability should be limited to the value declared by the shipper/consignee in the Bill of
Lading.
The records18 show that the Bills of Lading covering the lost goods contain the stipulation that in case of claim for loss or for
damage to the shipped merchandise or property, "[t]he liability of the common carrier x x x shall not exceed the value of the goods
as appearing in the bill of lading."19 The attempt by respondent to make light of this stipulation is unconvincing. As it had the
consignees copies of the Bills of Lading, 20 it could have easily produced those copies, instead of relying on mere allegations and
suppositions. However, it presented mere photocopies thereof to disprove petitioners evidence showing the existence of the
above stipulation.
A stipulation that limits liability is valid 21 as long as it is not against public policy. In Everett Steamship Corporation v. Court of
Appeals,22 the Court stated:
"A stipulation in the bill of lading limiting the common carriers liability for loss or destruction of a cargo to a certain sum, unless the
shipper or owner declares a greater value, is sanctioned by law, particularly Articles 1749 and 1750 of the Civil Code which
provides:
Art. 1749. A stipulation that the common carriers liability is limited to the value of the goods appearing in the bill of lading, unless
the shipper or owner declares a greater value, is binding.
Art. 1750. A contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction, or deterioration of the
goods is valid, if it is reasonable and just under the circumstances, and has been freely and fairly agreed upon.
"Such limited-liability clause has also been consistently upheld by this Court in a number of cases. Thus, in Sea-Land Service,
Inc. vs. Intermediate Appellate Court, we ruled:
It seems clear that even if said section 4 (5) of the Carriage of Goods by Sea Act did not exist, the validity and binding effect of
the liability limitation clause in the bill of lading here are nevertheless fully sustainable on the basis alone of the cited Civil Code
Provisions. That said stipulation is just and reasonable is arguable from the fact that it echoes Art. 1750 itself in providing a limit to
liability only if a greater value is not declared for the shipment in the bill of lading. To hold otherwise would amount to questioning
the justness and fairness of the law itself, and this the private respondent does not pretend to do. But over and above that
consideration, the just and reasonable character of such stipulation is implicit in it giving the shipper or owner the option of
avoiding accrual of liability limitation by the simple and surely far from onerous expedient of declaring the nature and value of the
shipment in the bill of lading.
"Pursuant to the afore-quoted provisions of law, it is required that the stipulation limiting the common carriers liability for loss must
be reasonable and just under the circumstances, and has been freely and fairly agreed upon.
"The bill of lading subject of the present controversy specifically provides, among others:
18. All claims for which the carrier may be liable shall be adjusted and settled on the basis of the shippers net invoice cost plus
freight and insurance premiums, if paid, and in no event shall the carrier be liable for any loss of possible profits or any
consequential loss.
The carrier shall not be liable for any loss of or any damage to or in any connection with, goods in an amount exceeding One
Hundred Thousand Yen in Japanese Currency (100,000.00) or its equivalent in any other currency per package or customary
freight unit (whichever is least) unless the value of the goods higher than this amount is declared in writing by the shipper before
receipt of the goods by the carrier and inserted in the Bill of Lading and extra freight is paid as required.
"The above stipulations are, to our mind, reasonable and just.1avvphi1 In the bill of lading, the carrier made it clear that its liability
would only be up to One Hundred Thousand (Y100,000.00) Yen. However, the shipper, Maruman Trading, had the option to
declare a higher valuation if the value of its cargo was higher than the limited liability of the carrier. Considering that the shipper
did not declare a higher valuation, it had itself to blame for not complying with the stipulations." (Italics supplied)
In the present case, the stipulation limiting petitioners liability is not contrary to public policy. In fact, its just and reasonable
character is evident. The shippers/consignees may recover the full value of the goods by the simple expedient of declaring the
true value of the shipment in the Bill of Lading. Other than the payment of a higher freight, there was nothing to stop them from
placing the actual value of the goods therein. In fact, they committed fraud against the common carrier by deliberately

undervaluing the goods in their Bill of Lading, thus depriving the carrier of its proper and just transport fare.
Concededly, the purpose of the limiting stipulation in the Bill of Lading is to protect the common carrier. Such stipulation obliges
the shipper/consignee to notify the common carrier of the amount that the latter may be liable for in case of loss of the goods. The
common carrier can then take appropriate measures -- getting insurance, if needed, to cover or protect itself. This precaution on
the part of the carrier is reasonable and prudent. Hence, a shipper/consignee that undervalues the real worth of the goods it seeks
to transport does not only violate a valid contractual stipulation, but commits a fraudulent act when it seeks to make the common
carrier liable for more than the amount it declared in the bill of lading.
Indeed, Zosimo Mercado and Nestor Angelia misled petitioner by undervaluing the goods in their respective Bills of Lading.
Hence, petitioner was exposed to a risk that was deliberately hidden from it, and from which it could not protect itself.
It is well to point out that, for assuming a higher risk (the alleged actual value of the goods) the insurance company was paid the
correct higher premium by Feliciana Legaspi; while petitioner was paid a fee lower than what it was entitled to for transporting the
goods that had been deliberately undervalued by the shippers in the Bill of Lading. Between the two of them, the insurer should
bear the loss in excess of the value declared in the Bills of Lading. This is the just and equitable solution.
In Aboitiz Shipping Corporation v. Court of Appeals,23 the description of the nature and the value of the goods shipped were
declared and reflected in the bill of lading, like in the present case. The Court therein considered this declaration as the basis of
the carriers liability and ordered payment based on such amount. Following this ruling, petitioner should not be held liable for
more than what was declared by the shippers/consignees as the value of the goods in the bills of lading.
We find no cogent reason to disturb the CAs finding that Feliciana Legaspi was the owner of the goods covered by Bills of Lading
Nos. 58 and 59. Undoubtedly, the goods were merely consigned to Nestor Angelia and Zosimo Mercado, respectively; thus,
Feliciana Legaspi or her subrogee (respondent) was entitled to the goods or, in case of loss, to compensation therefor. There is no
evidence showing that petitioner paid her for the loss of those goods. It does not even claim to have paid her.
On the other hand, Legaspi Marketing filed with petitioner a claim for the lost goods under Bill of Lading No. 59, for which the latter
subsequently paid P14,000. But nothing in the records convincingly shows that the former was the owner of the goods.
Respondent was, however, able to prove that it was Feliciana Legaspi who owned those goods, and who was thus entitled to
payment for their loss. Hence, the claim for the goods under Bill of Lading No. 59 cannot be deemed to have been extinguished,
because payment was made to a person who was not entitled thereto.
With regard to the claim for the goods that were covered by Bill of Lading No. 58 and valued at P6,500, the parties have not
convinced us to disturb the findings of the CA that compensation could not validly take place. Thus, we uphold the appellate
courts ruling on this point.
WHEREFORE, the Petition is hereby PARTIALLY GRANTED. The assailed Decision is MODIFIED in the sense that petitioner is
ORDERED to pay respondent the sums of P14,000 and P6,500, which represent the value of the goods stated in Bills of Lading
Nos. 59 and 58, respectively. No costs.
SO ORDERED.

G.R. Nos. 81100-01 February 7, 1990

BACOLOD-MURCIA MILLING CO., INC., petitioner,
vs.
HON. COURT OF APPEALS AND ALONSO GATUSLAO, respondents.
BACOLOD-MURCIA MILLING CO., INC., petitioner,
vs.
HON. COURT OF APPEALS, ALONSO GATUSLAO, AGRO-INDUSTRIAL DEVELOPMENT OF SILAY-SARAVIA (AIDSISA)
AND BACOLOD-MURCIA AGRICULTURAL COOPERATIVE MARKETING ASSOCIATION (BM-ACMA), respondents.
Jalandoni, Herrera, Del Castillo & Associates for petitioner.
Taada, Vico & Tan for respondent AIDSISA.
San Juan, Gonzalez, San Agustin & Sinense for respondents Alfonso Gatuslao and BM-ACMA.
PARAS, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals in CA-G.R. CV Nos. 59716-59717 promulgated on
September 11, 1987 affirming in toto the decision of the Court of First Instance of Negros Occidental in two consolidated civil
cases, the dispositive portion of which reads as follows:
PREMISES CONSIDERED, the decision appealed from is hereby affirmed in toto.
The uncontroverted facts of the case 1 are as follows:
1. xxx xxx xxx
2. BMMC is the owner and operator of the sugar central in Bacolod City, Philippines;
3. ALONSO GATUSLAO is a registered planter of the Bacolod-Murcia Mill District with Plantation Audit No. 3-79, being a
registered owner of Lot Nos. 310, 140, 141 and 101-A of the Cadastral Survey of Murcia, Negros Occidental, otherwise known as
Hda. San Roque;
4. On May 24, 1957 BMMC and Alonso Gatuslao executed an 'Extension and Modification of Milling Contract (Annex 'A' of the

complaint in both cases) which was registered on September 17, 1962 in the Office of the Register of Deeds of Negros
Occidental, and annotated on Transfer Certificates of Title Nos. T-24207, RT-2252, RT-12035, and RT-12036 covering said Lot
Nos. 310, 140, 141 and 101-A;
5. That since the crop year 1957-1958 up to crop year 1967-1968, inclusive, Alonso Gatuslao has been milling all the sugarcane
grown and produced on said Lot Nos. 310, 140, 141 and 101-A with the Mill of BMMC;.
6. Since the crop year 1920-21 to crop year 1967-1968, inclusive, the canes of planters adhered to the mill of BMMC were
transported from the plantation to the mill by means of cane cars and through railway system operated by BMMC;
7. The loading points at which planters Alonso Gatuslao was and should deliver and load all his canes produced in his plantation,
Hda. San Roque, were at the Arimas Line, Switch 2, and from which loading stations, BMMC had been hauling planter Gatuslao's
sugar cane to its mill or factory continuously until the crop year 1967-68;
8. BMMC had not been able to use its cane cars and railway system for the cargo crop year 1968-1969;
9. Planter Alonso Gatuslao on various dates requested transportation facilities of BMMC to be sent to his loading stations or
switches for purposes of hauling and milling his sugarcane crops of crop year 1968-1969;
10. The estimated gross production of Hda. San Roque for the crop year 1968-1969 is 4,500 piculs.
The records show that since the crop year 1920-1921 to the crop year 1967-1968, the canes of the adhered planters were
transported from the plantation to the mill of BMMC by means of cane cars and through a railway system operated by BMMC
which traversed the land of the adherent planters, corresponding to the rights of way on their lands granted by the planters to the
Central for the duration of the milling contracts which is for "un periodo de cuarenta y cinco anos o cosechas a contar desde la
cosecha de 1920-1921" 2 (a period of 45 years or harvests, beginning with a harvest of 1920-1921).
BMMC constructed the railroad tracks in 1920 and the adherent planters granted the BMMC a right of way over their lands as
provided for in the milling contracts. The owners of the hacienda Helvetia were among the signatories of the milling contracts.
When their milling contracts with petitioner BMMC expired at the end of the 1964-1965 crop year, the corresponding right of way
of the owners of the hacienda Helvetia granted to the Central also expired.
Thus, the BMMC was unable to use its railroad facilities during the crop year 1968-1969 due to the closure in 1968 of the portion
of the railway traversing the hacienda Helvetia as per decision of the Court in Angela Estate, Inc. and Fernando F. Gonzaga, Inc.
v. Court of First Instance of Negros Occidental, G.R. No. L-27084, (24 SCRA 500 [1968]). In the same case the Court ruled that
the Central's conventional right of way over the hacienda Helvetia ceased with the expiration of its amended milling contracts with
the landowners of the hacienda at the end of the 1964-1965 crop year and that in the absence of a renewal contract or the
establishment of a compulsory servitude of right of way on the same spot and route which must be predicated on the satisfaction
of the preconditions required by law, there subsists no right of way to be protected.
Consequently, the owners of the hacienda Helvetia required the Central to remove the railway tracks in the hacienda occupying at
least 3,245 lineal meters with a width of 7 meters or a total of 22,715 square meters, more or less. That was the natural
consequence of the expiration of the milling contracts with the landowners of the hacienda Helvetia (Angela Estate, Inc. and
Fernando Gonzaga, Inc. v. Court of First Instance of Negros Occidental, ibid). BMMC filed a complaint for legal easement against
the owners of the hacienda, with the Court of First Instance of Negros Occidental which issued on October 4, 1965 an ex parte
writ of preliminary injunction restraining the landowners from reversing and/or destroying the railroad tracks in question and from
impeding, obstructing or in any way preventing the passage and operation of plaintiffs locomotives and cane cars over defendants'
property during the pendency of the litigation and maintained the same in its subsequent orders of May 31, and November 26,
1966. The outcome of the case, however, was not favorable to the plaintiff BMMC. In the same case the landowners asked this
Court to restrain the lower court from enforcing the writ of preliminary injunction it issued, praying that after the hearing on the
merits, the restraining order be made permanent and the orders complained of be annulled and set aside. The Court gave due
course to the landowner's petition and on August 10, 1967 issued the writ of preliminary injunction enjoining the lower court from
enforcing the writ of preliminary injunction issued by the latter on October 4, 1965.
The writ of preliminary injunction issued by the Court was lifted temporarily on motion that through the mediation of the President
of the Philippines the Angela Estate and the Gonzaga Estate agreed with the Central to allow the use of the railroad tracks
passing through the hacienda Helvetia during the 1967-1968 milling season only, for the same purpose for which they had been
previously used, but it was understood that the lifting of the writ was without prejudice to the respective rights and positions of the
parties in the case and not deemed a waiver of any of their respective claims and allegations in G.R. No. L-27084 or in any other
case between the same parties, future or pending. The Court resolved to approve the motion only up to and including June 30,
1968 to give effect to the agreement but to be deemed automatically reinstated beginning July 1, 1968 (Angela Estate, Inc. and
Fernando F. Gonzaga, Inc. v. Court of First Instance of Negros Occidental, ibid.).
The temporary lifting of the writ of preliminary injunction assured the milling of the 1967-1968 crop but not the produce of the
succeeding crop years which situation was duly communicated by the President and General Manager of the BMMC to the
President of Bacolod-Murcia Sugar Farmers Corporation (BMSFC) on January 2, 1968. 3
On October 30, 1968, Alonso Gatuslao, one of private respondents herein, and his wife, Maria H. Gatuslao, filed Civil Case No.
8719 in the Court of First Instance of Negros Occidental, against petitioner herein, Bacolod-Murcia Milling Co., Inc. (BMMC), for
breach of contract, praying among others, for the issuance of a writ of preliminary mandatory injunction ordering defendant to
immediately send transportation facilities and haul the already cut sugarcane to the mill site and principally praying after hearing,
that judgment be rendered declaring the rescission of the milling contract executed by plaintiffs and defendant in 1957 for
seventeen (17) years or up to crop year 1973-74, invoking as ground the alleged failure and/or inability of defendant to comply
with its specific obligation of providing the necessary transportation facilities to haul the sugarcane of Gatuslao from plaintiffs
plantation specifically for the crop year 1967-1968. Plaintiffs further prayed for the recovery of actual and compensatory damages
as well as moral and exemplary damages and attorney's fees. 4
In answer, defendant BMMC claimed that despite its inability to use its railways system for its locomotives and cane cars to haul
the sugarcanes of all its adhered planters including plaintiffs for the 1968-69 crop year allegedly due to force majeure, in order to
comply with its obligation, defendant hired at tremendous expense, private trucks as prime movers for its trailers to be used for

hauling of the canes, especially for those who applied for and requested transportation facilities. Plaintiffs, being one of said
planters, instead of loading their cut canes for the 1968-69 crop on the cargo trucks of defendant, loaded their cut canes on trucks
provided by the Bacolod-Murcia Agricultural Cooperative Marketing Association, Inc. (B-M ACMA) which transported plaintiffs'
canes of the 1968-69 sugarcanes crop. Defendant prayed in its counterclaim for the dismissal of Civil Case No. 8719 for the
recovery of actual damages, moral and exemplary damages and for attorney's fees. 5
On November 21, 1968, BMMC filed in the same court Civil Case No. 8745 against Alonso Gatuslao, the Agro-Industrial
Development of Silay-Saravia (AIDSISA) and the Bacolod-Murcia Agricultural Cooperative Marketing Associations, Inc. (B-M
ACMA), seeking specific performance under the mining contract executed on May 24, 1957 between plaintiff and defendant
Alonso Gatuslao praying for the issuance of writs of preliminary mandatory injunction to stop the alleged violation of the contract
by defendant Alonso Gatuslao in confederation, collaboration and connivance with defendant BM-ACMA, AIDSISA, and for the
recovery of actual, moral and exemplary damages and attorney's fees. 6
Defendant Alonso Gatuslao and the Bacolod-Murcia Agricultural Cooperative Marketing Association, Inc. filed their answer on
January 27, 1969 with compulsory counter-claims, stating by way of special and affirmative defense, among others, that the case
is barred by another action pending between the same parties for the same cause of action. 7
Defendant Agro-Industrial Development Corporation of Silay-Saravia, Inc. filed its answer on February 8, 1969, alleging among
others by way of affirmative defense that before it agreed to mill the sugarcane of its co-defendant Alonso Gatuslao, it carefully
ascertained and believed in good faith that: (a) plaintiff was incapable of the sugarcane of AIDSISA's co-defendant planters as well
as the sugarcane of other planters formerly adherent to plaintiff, (b) plaintiff had in effect agreed to a rescission of its milling
contracts with its adhered planters, including the defendant planter, because of inadequate means of transportation. and had
warned and advised them to mill their sugarcane elsewhere, and had thus induced them to believe and act on the belief, that it
could not mill their sugarcane and that it would not object to their milling with other centrals; and (c) up to now plaintiff is incapable
of hauling the sugarcane of AIDSISA's co-defendants to plaintiffs mill site for milling purposes.
The two cases, Civil Cases Nos. 8719 and 8745 were consolidated for joint trial before Branch II of the Court of First Instance of
Negros Occidental. 8 On September 8, 1969, the parties in both civil cases filed their partial stipulation of facts which included a
statement of the issues raised by the parties. 9
On February 6, 1976, the lower court rendered judgment declaring the milling contract dated May 24, 1957 rescinded. The
dispositive portion of the decision 10 reads:
WHEREFORE, judgment is hereby rendered as follows:
(1) In Civil Case No. 8719 the milling contract (Exh. "121") dated May 24, 1957 is hereby declared rescinded or resolved and the
defendant Bacolod-Murcia Company, Inc. is hereby ordered to pay plaintiffs Alonso Gatuslao and Maria H. Gatuslao the amount of
P2,625.00 with legal interest from the time of the filing of the complaint by way of actual damages; P5,000.00 as attorney's fees
and the costs of the suit; defendant's counterclaim is dismissed; and
(2) The complaint in Civil Case No. 8745 as well as the counterclaims therein are ordered dismissed, without costs.
Bacolod-Murcia Milling Co., Inc. defendant in Civil Case No. 8719 and plaintiff in Civil Case No. 8745 appealed the case to
respondent Court of Appeals which affirmed in toto (Rollo, p. 81) the decision of the lower court. The motion for reconsideration
filed by defendant-appellant Bacolod-Murcia Milling Company, petitioner herein, was denied by the appellate court for lack of
merit. 11 Hence, this petition.
The issues 12 raised by petitioner are as follows:
I
WHETHER OR NOT THE CLOSURE OF PETITIONER'S RAIL ROAD LINES CONSTITUTE FORCE MAJEURE.
II
WHETHER OR NOT PRIVATE RESPONDENT GATUSLAO HAS THE RIGHT TO RESCIND THE MILLING CONTRACT WITH
PETITIONER UNDER ARTICLE 1191 OF THE CIVIL CODE.
III
WHETHER OR NOT PRIVATE RESPONDENT GATUSLAO WAS JUSTIFIED IN VIOLATING HIS MILLING CONTRACT WITH
PETITIONER.
IV
WHETHER OR NOT PRIVATE RESPONDENTS GATUSLAO AND B-M ACMA ARE GUILTY OF BAD FAITH IN THE EXERCISE
OF THEIR DUTIES AND ARE IN ESTOPPEL TO QUESTION THE ADEQUACY OF THE TRANSPORTATION FACILITIES OF
PETITIONER AND ITS CAPACITY TO MILL AND HAUL THE CANES OF ITS ADHERENT PLANTERS.
The crux of the issue is whether or not the termination of petitioner's right of way over the hacienda Helvetia caused by the
expiration of its amended milling contracts with the landowners of the lands in question is a fortuitous event or force majeure
which will exempt petitioner BMMC from fulfillment of its contractual obligations.
It is the position of petitioner Bacolod-Murcia Milling Co., Inc. (BMMC) that the closure of its railroad lines constitute force majeure,
citing Article 1174 of the Civil Code, exempting a person from liability for events which could not be foreseen or which though
foreseen were inevitable.
This Court has consistently ruled that when an obligor is exempted from liability under the aforecited provision of the Civil Code for
a breach of an obligation due to an act of God, the following elements must concur: (a) the cause of the breach of the obligation
must be independent of the wig 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; (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 [1985]; Juan F. Nakpil &
Sons v. Court of Appeals, 144 SCRA 596 [1986]). Applying the criteria to the instant case, there can be no other conclusion than

that the closure of the railroad tracks does not constitute force majeure.
The terms of the milling contracts were clear and undoubtedly there was no reason for BAMC to expect otherwise. The closure of
any portion of the railroad track, not necessarily in the hacienda Helvetia but in any of the properties whose owners decided not to
renew their milling contracts with the Central upon their expiration, was forseeable and inevitable.
Petitioner Central should have anticipated and should have provided for the eventuality before committing itself. Under the
circumstances it has no one to blame but itself and cannot now claim exemption from liability.
In the language of the law, the event must have been impossible to foresee, or if it could be foreseen, must have been impossible
to avoid. There must be an entire exclusion of human agency from the cause of the injury or loss (Vasquez v. Court of Appeals,
supra). In the case at bar, despite its awareness that the conventional contract of lease would expire in Crop Year 1964-1965 and
that refusal on the part of any one of the landowners to renew their milling contracts and the corresponding use of the right of way
on their lands would render impossible compliance of its commitments, petitioner took a calculated risk that all the landowners
would renew their contracts. Unfortunately, the sugar plantation of Angela Estate, Inc. which is located at the entrance of the mill
was the one which refused to renew its milling contract. As a result, the closure of the railway located inside said plantation
paralyzed the entire transportation system. Thus, the closure of the railway lines was not an act of God nor does it constitute force
majeure. It was due to the termination of the contractual relationships of the parties, for which petitioner is charged with
knowledge. Verily, the lower court found that the Angela Estate, Inc. notified BMMC as far back as August or September 1965 of
its intention not to allow the passage of the railway system thru its land after the aforesaid crop year. Adequate measures should
have been adopted by BMMC to forestall such paralyzation but the records show none. All its efforts were geared toward the
outcome of the court litigation but provided no solutions to the transport problem early enough in case of an adverse decision.
The last three issues being inter-related will be treated as one. Private respondent Gatuslao filed an action for rescission while
BMMC filed in the same court an action against Gatuslao, the Agro Industrial Development Silay Saravia (AIDSISA) and the
Bacolod-Murcia Agricultural Cooperative Marketing Associations, Inc. (B-M ACMA) for specific performance under the milling
contract.
There is no question that the contract in question involves reciprocal obligations; as such party is a debtor and creditor of the
other, such that the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously so
that the performance of one is conditioned upon the simultaneous fulfillment of the other (Boysaw v. Interphil Promotions, Inc., 148
SCRA 643 [1987]).
Under Article 1191 of the Civil Code, 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. In fact, it is well established that the party who deems the contract violated
may consider it revoked or rescinded pursuant to their agreement and act accordingly, even without previous court action (U.P. v.
de los Angeles, 35 SCRA 102 [1970]; Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 94 [1972]).
It is the general rule, however, 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. The question of
whether a breach of a contract is substantial depends upon the attendant circumstances (Universal Food Corporation v. Court of
Appeals, et al., 33 SCRA 1 [1970]).
The issue therefore, hinges on who is guilty of the breach of the milling contract.
Both parties are agreed that time is of the essence in the sugar industry; so that the sugarcanes have to be milled at the right time,
not too early or too late, if the quantity and quality of the juice are to be assured. As found by the trial court, upon the execution of
the amended milling contract on May 24, 1957 for a period of 17 crop years, BMMC undertook expressly among its principal
prestations not only to mill Gatuslao's canes but to haul them by railway from the loading stations to the mill. Atty. Solidum, Chief
Legal Counsel and in Charge of the Legal-Crop Loan Department of the BMMC Bacolod City admits that the mode of
transportation of canes from the fields to the mill is a vital factor in the sugar industry; precisely for this reason the mode of
transportation or hauling the canes is embodied in the milling contract. 13 But BMMC is now unable to haul the canes by railways
as stipulated because of the closure of the railway lines; so that resolution of this issue ultimately rests on whether or not BMMC
was able to provide adequate and efficient transportation facilities of the canes of Gatuslao and the other planters milling with
BMMC during the crop year 1968-1969. As found by both the trial court and the Court of Appeals, the answer is in the negative.
Armando Guanzon, Dispatcher of the Transportation Department of BMMC testified that when the Central was still using the
railway lines, it had between 900 to 1,000 cane cars and 10 locomotives, each locomotive pulling from 30 to 50 cane cars with
maximum capacity of 8 tons each. 14 This testimony was corroborated by Rodolfo Javelosa, Assistant Crop Loan Inspector in the
Crop Loan Department of petitioner. 15 After the closure of the railway lines, petitioner on February 5, 1968 through its President
and General Manager, informed the National Committee of the National Federation of Sugarcane Planters that the trucking
requirement for hauling adherent planters produce with a milling average of 3,500 tons of canes daily at an average load of 5 tons
per truck is not less than 700 trucks daily plus another 700 empty trucks to be shuttled back to the plantations to be available for
loading the same day. 16 Guanzon, however, testified that petitioner had only 280 units of trailers, 20 tractors and 3 trucks plus 20
trucks more or less hired by the Central and given as repartos (allotments) to the different planters. 17 The 180 trailers that the
Central initially had were permanently leased to some planters who had their own cargo trucks while out of the 250 BMMC trailers
existing during the entire milling season only 70 were left available to the rest of the planters pulled by 3 trucks. 18
It is true that BMMC purchased 20 units John Deere Tractors (prime movers) and 230 units, Vanguard Trailers with land capacity
of 3 tons each but that was only on October 1968 as registered in the Land Transportation Commission, Bacolod City. 19
The evidence shows that great efforts had been exerted by the planters to enter into some concrete understanding with BMMC
with a view of obtaining a reasonable assurance that the latter would be able to haul and mill their canes for the 1968-1969 crop
year, but to no avail. 20
As admitted by BMMC itself, in its communications with the planters, it is not in a position to provide adequate transportation for
the canes in compliance with its commitment under the milling contract. Said communications 21 were quoted by the Court of
Appeals as follows:
We are sorry to inform you that unless we can work out a fair and equitable solution to this problem of closure of our railroad lines,

the milling of your canes for the crop year 1968-69 would be greatly hampered to the great detriment of our economy and the near
elimination of the means of livelihood of most planters and the possible starvation of thousands of laborers working in the sugar
District of Bacolod-Murcia Milling Co.
and
We are fully conscious of our contractual obligations to our existing Milling Contract. But, if prevented by judicial order we will find
ourselves unable to serve you in the hauling of the canes through our railroad lines. It is for this reason that we suggest you
explore other solutions to the problem in the face of such an eventuality so that you may be able to proceed with the planting of
your canes with absolute peace of mind and the certainty that the same will be properly milled and not left to rot in the fields.
also,
In the meantime, and before July 1, 1968, the end of the temporary arrangement we have with Fernando Gonzaga, Inc. and the
Angela Estate, Inc. for the use of the rights of ways, our lawyers are studying the possibility of getting a new injunction from the
Supreme Court or the Court of First Instance of Negros Occidental based on the new grounds interposed in said memorandum
not heretofore raised previously nor in the Capitol Subdivision case. And if we are doing this, it is principally to prevent any injury
to your crops or foreclosure of your property, which is just in line with the object of your plans.
On March 26, 1968 the President of the Bacolod-Murcia Sugar Farmer's Corporation writing on behalf of its planter-members
demanded to know the plans of the Central for the crop year 1968-1969, stating that if they fail to hear from the Central on or
before the 15th of April they will feel free to make their own plans in order to save their crops and the possibility of foreclosure of
their properties. 22
In its letter dated April 1, 1968, the president of BMMC simply informed the Bacolod-Murcia Sugar Farmer's Corporation that they
were studying the possibility of getting a new injunction from the court before expiration of their temporary arrangement with
Fernando Gonzaga, Inc. and the Angela Estate, Inc. 23
Pressing for a more definite commitment (not a mere hope or expectation), on May 30, 1968 the Bacolod-Murcia Sugar Farmer's
Corporation requested the Central to put up a performance bond in the amount of P13 million within a 5-day period to allay the
fears of the planters that their sugar canes can not be milled at the Central in the coming milling season. 24
BMMC's reply was only to express optimism over the final outcome of its pending cases in court.
Hence, what actually happened afterwards is that petitioner failed to provide adequate transportation facilities to Gatuslao and
other adherent planters.
As found by the trial court, the experience of Alfonso Gatuslao at the start of the 1968-1969 milling season is reflective of the
inadequacies of the reparto or trailer allotment as well as the state of unpreparedness on the part of BMMC to meet the problem
posed by the closure of the railway lines.
It was established that after Gatuslao had cut his sugarcanes for hauling, no trailers arrived and when two trailers finally arrived on
October 20, 1968 after several unheeded requests, they were left on the national highway about one (1) kilometer away from the
loading station. Such fact was confirmed by Carlos Butog the driver of the truck that hauled the trailers. 25
Still further, Javelosa, Assistant Crop Loan Inspector, testified that the estimated production of Gatuslao for the crop year 19681969 was 4,400 piculs hauled by 10 cane cars a week with a maximum capacity of 8 tons. 26 Compared with his later schedule of
only one trailer a week with a maximum capacity of only 3 to 4 tons, 27 there appears to be no question that the means of
transportation provided by BMMC is very inadequate to answer the needs of Gatuslao.
Undoubtedly, BMMC is guilty of breach of the conditions of the milling contract and that Gatuslao is the injured party. Under the
same Article 1191 of the Civil Code, the injured party may choose between the fulfillment and the rescission of the obligation, with
the payment of damages in either case. In fact, he may also seek rescission even after he had chosen fulfillment if the latter
should become impossible.
Under the foregoing, Gatuslao has the right to rescind the milling contract and neither the court a quo erred in decreeing the
rescission claimed nor the Court of Appeals in affirming the same.
Conversely, BMMC cannot claim enforcement of the contract. As ruled by this Court, by virtue of the violations of the terms of the
contract, the offending party has forfeited any right to its enforcement (Boysaw v. Interphil Promotions, Inc., 148 SCRA 645
[1987]).
Likewise, the Bacolod-Murcia Agricultural Cooperative Marketing Association, Inc. (B-M ACMA) cannot be faulted for organizing
itself to take care of the needs of its members. Definitely, it was organized at that time when petitioner could not assure the
planters that it could definitely haul and mill their canes. More importantly, as mentioned earlier in a letter dated January 12, 1968,
J. Araneta, President & General Manager of the Central itself suggested to the Bacolod-Murcia Sugar Farmer's Corporation that it
explore solutions to the problem of hauling the canes to the milling station in the face of the eventuality of a judicial order
permanently closing the railroad lines so that the planters may be able to proceed with their planting of the canes with absolute
peace of mind and the certainty that they will be properly milled and not left to rot in the fields. As a result, the signing of the milling
contract between private respondents AIDSISA and B-M-ACMA on June 19, 1968 28 was a matter of self-preservation inasmuch as
the sugarcanes were already matured and the planters had crop loans to pay. Further delay would mean tremendous losses. 29
In its defense AIDSISA stressed as earlier stated, that it agreed to mill the sugarcanes of Gatuslao only after it had carefully
ascertained and believed in good faith that BMMC was incapable of milling the sugarcanes of the adherent planters because of
inadequate transportation and in fact up to now said Central is incapable of hauling the sugarcanes of the said planters to its mill
site for milling purposes.
As an extra precaution, AIDSISA provided in paragraph 15

30

of its milling contract that

If any member of the planter has an existing milling contract with other sugar central, then this milling contract with the Central
shall be of no force and effect with respect to that member or those members having such contract, if that other sugar central is
able, ready and willing, to mill said member or members' canes in accordance with their said milling contract. (Emphasis supplied)

The President of BANC himself induced the planters to believe and to act on the belief that said Central would not object to the
milling of their canes with other centrals.
Under the circumstances, no evidence of bad faith on the part of private respondents could be found much less any plausible
reason to disturb the findings and conclusions of the trial court and the Court of Appeals.
PREMISES CONSIDERED, the petition is hereby DENIED for lack of merit and the decision of the Court of Appeals is hereby
AFFIRMED in toto.
SO ORDERED.

G.R. No. 85691 July 31, 1990

BACHELOR EXPRESS, INCORPORATED, and CRESENCIO RIVERA, petitioners,
vs.
THE HONORABLE COURT OF APPEALS (Sixth Division), RICARDO BETER, SERGIA BETER, TEOFILO RAUTRAUT and
ZOETERA RAUTRAUT, respondents.
Aquino W. Gambe for petitioners.
Tranquilino O. Calo, Jr. for private respondents.

GUTIERREZ, JR., J.:

This is a petition for review of the decision of the Court of Appeals which reversed and set aside the order of the Regional Trial
Court, Branch I, Butuan City dismissing the private respondents' complaint for collection of "a sum of money" and finding the
petitioners solidarily liable for damages in the total amount of One Hundred Twenty Thousand Pesos (P120,000.00). The
petitioners also question the appellate court's resolution denying a motion for reconsideration.
On August 1, 1980, Bus No. 800 owned by Bachelor Express, Inc. and driven by Cresencio Rivera was the situs of a stampede
which resulted in the death of passengers Ornominio Beter and Narcisa Rautraut.
The evidence shows that the bus came from Davao City on its way to Cagayan de Oro City passing Butuan City; that while at
Tabon-Tabon, Butuan City, the bus picked up a passenger; that about fifteen (15) minutes later, a passenger at the rear portion
suddenly stabbed a PC soldier which caused commotion and panic among the passengers; that when the bus stopped,
passengers Ornominio Beter and Narcisa Rautraut were found lying down the road, the former already dead as a result of head
injuries and the latter also suffering from severe injuries which caused her death later. The passenger assailant alighted from the
bus and ran toward the bushes but was killed by the police. Thereafter, the heirs of Ornominio Beter and Narcisa Rautraut, private
respondents herein (Ricardo Beter and Sergia Beter are the parents of Ornominio while Teofilo Rautraut and Zoetera [should be
Zotera] Rautraut are the parents of Narcisa) filed a complaint for "sum of money" against Bachelor Express, Inc. its alleged owner
Samson Yasay and the driver Rivera.
In their answer, the petitioners denied liability for the death of Ornominio Beter and Narcisa Rautraut. They alleged that ... the
driver was able to transport his passengers safely to their respective places of destination except Ornominio Beter and Narcisa
Rautraut who jumped off the bus without the knowledge and consent, much less, the fault of the driver and conductor and the
defendants in this case; the defendant corporation had exercised due diligence in the choice of its employees to avoid as much as
possible accidents; the incident on August 1, 1980 was not a traffic accident or vehicular accident; it was an incident or event very
much beyond the control of the defendants; defendants were not parties to the incident complained of as it was an act of a third
party who is not in any way connected with the defendants and of which the latter have no control and supervision; ..." (Rollo, pp.
112-113).itc-asl
After due trial, the trial court issued an order dated August 8, 1985 dismissing the complaint.
Upon appeal however, the trial court's decision was reversed and set aside. The dispositive portion of the decision of the Court of
Appeals states:
WHEREFORE, the Decision appealed from is REVERSED and SET ASIDE and a new one entered finding the appellees jointly
and solidarily liable to pay the plaintiffs-appellants the following amounts:
1) To the heirs of Ornominio Beter, the amount of Seventy Five Thousand Pesos (P75,000.00) in loss of earnings and support,
moral damages, straight death indemnity and attorney's fees; and,
2) To the heirs of Narcisa Rautraut, the amount of Forty Five Thousand Pesos (P45,000.00) for straight death indemnity, moral
damages and attorney's fees. Costs against appellees. (Rollo, pp. 71-72)
The petitioners now pose the following questions
What was the proximate cause of the whole incident? Why were the passengers on board the bus panicked (sic) and why were
they shoving one another? Why did Narcisa Rautraut and Ornominio Beter jump off from the running bus?
The petitioners opine that answers to these questions are material to arrive at "a fair, just and equitable judgment." (Rollo, p. 5)
They claim that the assailed decision is based on a misapprehension of facts and its conclusion is grounded on speculation,
surmises or conjectures.
As regards the proximate cause of the death of Ornominio Beter and Narcisa Rautraut, the petitioners maintain that it was the act
of the passenger who ran amuck and stabbed another passenger of the bus. They contend that the stabbing incident triggered off
the commotion and panic among the passengers who pushed one another and that presumably out of fear and moved by that
human instinct of self-preservation Beter and Rautraut jumped off the bus while the bus was still running resulting in their untimely

death." (Rollo, p. 6) Under these circumstances, the petitioners asseverate that they were not negligent in the performance of their
duties and that the incident was completely and absolutely attributable to a third person, the passenger who ran amuck, for
without his criminal act, Beter and Rautraut could not have been subjected to fear and shock which compelled them to jump off
the running bus. They argue that they should not be made liable for damages arising from acts of third persons over whom they
have no control or supervision.
Furthermore, the petitioners maintain that the driver of the bus, before, during and after the incident was driving cautiously giving
due regard to traffic rules, laws and regulations. The petitioners also argue that they are not insurers of their passengers as ruled
by the trial court.
The liability, if any, of the petitioners is anchored on culpa contractual or breach of contract of carriage. The applicable provisions
of law under the New Civil Code are as follows:
ART. 1732. Common carriers are persons, corporations, firms or associations engaged in the business of carrying or transporting
passengers or goods or both by land, water, or air, for compensation, offering their services to the public.
ART. 1733. Common carriers, from the nature of their business and for reasons of public policy, are bound to observe
extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all
the circumstances of each case.
xxx xxx xxx
ART. 1755. A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the
utmost diligence of very cautious persons, with a due regard for all the circumstances.
ART. 1756. In case of death of or injuries to passengers, common carriers are presumed to have been at fault or to have acted
negligently, unless they prove that they observed extraordinary diligence as prescribed in Articles 1733 and 1755.
There is no question that Bachelor Express, Inc. is a common carrier. Hence, from the nature of its business and for reasons of
public policy Bachelor Express, Inc. is bound to carry its passengers safely as far as human care and foresight can provide using
the utmost diligence of very cautious persons, with a due regard for all the circumstances.
In the case at bar, Ornominio Beter and Narcisa Rautraut were passengers of a bus belonging to petitioner Bachelor Express, Inc.
and, while passengers of the bus, suffered injuries which caused their death. Consequently, pursuant to Article 1756 of the Civil
Code, petitioner Bachelor Express, Inc. is presumed to have acted negligently unless it can prove that it had observed
extraordinary diligence in accordance with Articles 1733 and 1755 of the New Civil Code.
Bachelor Express, Inc. denies liability for the death of Beter and Rautraut on its posture that the death of the said passengers was
caused by a third person who was beyond its control and supervision. In effect, the petitioner, in order to overcome the
presumption of fault or negligence under the law, states that the vehicular incident resulting in the death of passengers Beter and
Rautraut was caused by force majeure or caso fortuito over which the common carrier did not have any control.
Article 1174 of the present Civil Code states:
Except in cases expressly specified by law, or when it is otherwise declared by stipulations, 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 above-mentioned provision was substantially copied from Article 1105 of the old Civil Code which states"
No one shall be liable for events which could not be foreseen or which, even if foreseen, were inevitable, with the exception of the
cases in which the law expressly provides otherwise and those in which the obligation itself imposes liability.
In the case of Lasam v. Smith (45 Phil. 657 [1924]), we defined "events" which cannot be foreseen and which, having been
foreseen, are inevitable in the following manner:
... The Spanish authorities regard the language employed as an effort to define the term 'caso fortuito' and hold that the two
expressions are synonymous. (Manresa Comentarios al Codigo Civil Espaol, vol. 8, pp. 88 et seq.; Scaevola, Codigo Civil, vol.
19, pp. 526 et seq.)
The antecedent to Article 1105 is found in Law II, Title 33, Partida 7, which defines caso fortuito as 'occasion que acaese por
aventura de que non se puede ante ver. E son estos, derrivamientos de casas e fuego que enciende a so ora, e quebrantamiento
de navio, fuerca de ladrones' (An event that takes place by incident and could not have been foreseen. Examples of this are
destruction of houses, unexpected fire, shipwreck, violence of robbers ...)
Escriche defines caso fortuito as an unexpected event or act of God which could neither be foreseen nor resisted, such as floods,
torrents, shipwrecks, conflagrations, lightning, compulsion, insurrections, destruction of buildings by unforeseen accidents and
other occurrences of a similar nature.
In discussing and analyzing the term caso fortuito the Enciclopedia Juridica Espaola says: '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) Enciclopedia
Juridica Espaola, 309)
As will be seen, these authorities agree that some extraordinary circumstance independent of the will of the obligor or of his
employees, is an essential element of a caso fortuito. ...
The running amuck of the passenger was the proximate cause of the incident as it triggered off a commotion and panic among the
passengers such that the passengers started running to the sole exit shoving each other resulting in the falling off the bus by
passengers Beter and Rautraut causing them fatal injuries. The sudden act of the passenger who stabbed another passenger in

the bus is within the context of force majeure.

However, in order that a common carrier may be absolved from liability in case of force majeure, it is not enough that the accident
was caused by force majeure. The common carrier must still prove that it was not negligent in causing the injuries resulting from
such accident. Thus, as early as 1912, we ruled:
From all the foregoing, it is concluded that the defendant is not liable for the loss and damage of the goods shipped on the lorcha
Pilar by the Chinaman, Ong Bien Sip, inasmuch as such loss and damage were the result of a fortuitous event or force majeure,
and there was no negligence or lack of care and diligence on the part of the defendant company or its agents. (Tan Chiong Sian v.
Inchausti & Co., 22 Phil. 152 [1912]; Emphasis supplied).
This principle was reiterated in a more recent case, Batangas Laguna Tayabas Co. v. Intermediate Appellate Court (167 SCRA
379 [1988]), wherein we ruled:
... [F]or their defense of force majeure or act of God to prosper the accident must be due to natural causes and exclusively without
human intervention. (Emphasis supplied)
Therefore, the next question to be determined is whether or not the petitioner's common carrier observed extraordinary diligence
to safeguard the lives of its passengers.
In this regard the trial court and the appellate court arrived at conflicting factual findings.
The trial court found the following facts:
The parties presented conflicting evidence as to how the two deceased Narcisa Rautruat and Ornominio Beter met their deaths.
However, from the evidence adduced by the plaintiffs, the Court could not see why the two deceased could have fallen off the bus
when their own witnesses testified that when the commotion ensued inside the bus, the passengers pushed and shoved each
other towards the door apparently in order to get off from the bus through the door. But the passengers also could not pass
through the door because according to the evidence the door was locked.
On the other hand, the Court is inclined to give credence to the evidence adduced by the defendants that when the commotion
ensued inside the bus, the two deceased panicked and, in state of shock and fear, they jumped off from the bus by passing
through the window.
It is the prevailing rule and settled jurisprudence that transportation companies are not insurers of their passengers. The evidence
on record does not show that defendants' personnel were negligent in their duties. The defendants' personnel have every right to
accept passengers absent any manifestation of violence or drunkenness. If and when such passengers harm other passengers
without the knowledge of the transportation company's personnel, the latter should not be faulted. (Rollo, pp. 46-47)
A thorough examination of the records, however, show that there are material facts ignored by the trial court which were discussed
by the appellate court to arrive at a different conclusion. These circumstances show that the petitioner common carrier was
negligent in the provision of safety precautions so that its passengers may be transported safely to their destinations. The
appellate court states:
A critical eye must be accorded the lower court's conclusions of fact in its tersely written ratio decidendi. The lower court
concluded that the door of the bus was closed; secondly, the passengers, specifically the two deceased, jumped out of the
window. The lower court therefore concluded that the defendant common carrier is not liable for the death of the said passengers
which it implicitly attributed to the unforeseen acts of the unidentified passenger who went amuck.
There is nothing in the record to support the conclusion that the solitary door of the bus was locked as to prevent the passengers
from passing through. Leonila Cullano, testifying for the defense, clearly stated that the conductor opened the door when the
passengers were shouting that the bus stop while they were in a state of panic. Sergia Beter categorically stated that she actually
saw her son fall from the bus as the door was forced open by the force of the onrushing passengers.
Pedro Collango, on the other hand, testified that he shut the door after the last passenger had boarded the bus. But he had quite
conveniently neglected to say that when the passengers had panicked, he himself panicked and had gone to open the door.
Portions of the testimony of Leonila Cullano, quoted below, are illuminating:
xxx xxx xxx
Q When you said the conductor opened the door, the door at the front or rear portion of the bus?
A Front door.
Q And these two persons whom you said alighted, where did they pass, the fron(t) door or rear door?
A Front door.
xxx xxx xxx
(Tsn., p. 4, Aug. 8, 1984)
xxx xxx xxx
Q What happened after there was a commotion at the rear portion of the bus?
A When the commotion occurred, I stood up and I noticed that there was a passenger who was sounded (sic). The conductor
panicked because the passengers were shouting 'stop, stop'. The conductor opened the bus.'
(Tsn. p. 3, August 8, 1984).
Accordingly, there is no reason to believe that the deceased passengers jumped from the window when it was entirely possible for
them to have alighted through the door. The lower court's reliance on the testimony of Pedro Collango, as the conductor and
employee of the common carrier, is unjustified, in the light of the clear testimony of Leonila Cullano as the sole uninterested

eyewitness of the entire episode. Instead we find Pedro Collango's testimony to be infused by bias and fraught with
inconsistencies, if not notably unreliable for lack of veracity. On direct examination, he testified:
xxx xxx xxx
Q So what happened to the passengers inside your bus?
A Some of the passengers jumped out of the window.
COURT:
Q While the bus was in motion?
A Yes, your Honor, but the speed was slow because we have just picked up a passenger.
Atty. Gambe:
Q You said that at the time of the incident the bus was running slow because you have just picked up a passenger. Can you
estimate what was your speed at that time?
Atty. Calo:
No basis, your Honor, he is neither a driver nor a conductor.
COURT:
Let the witness answer. Estimate only, the conductor experienced.
Witness:
Not less than 30 to 40 miles.
COURT:
Kilometers or miles?
A Miles.
Atty. Gambe:
Q That is only your estimate by your experience?
A Yes, sir, estimate.
(Tsn., pp. 4-5, Oct. 17, 1983).
At such speed of not less than 30 to 40 miles ..., or about 48 to 65 kilometers per hour, the speed of the bus could scarcely be
considered slow considering that according to Collango himself, the bus had just come from a full stop after picking a passenger
(Tsn, p. 4, Id.) and that the bus was still on its second or third gear (Tsn., p. 12, Id.).
In the light of the foregoing, the negligence of the common carrier, through its employees, consisted of the lack of extraordinary
diligence required of common carriers, in exercising vigilance and utmost care of the safety of its passengers, exemplified by the
driver's belated stop and the reckless opening of the doors of the bus while the same was travelling at an appreciably fast speed.
At the same time, the common carrier itself acknowledged, through its administrative officer, Benjamin Granada, that the bus was
commissioned to travel and take on passengers and the public at large, while equipped with only a solitary door for a bus its size
and loading capacity, in contravention of rules and regulations provided for under the Land Transportation and Traffic Code (RA
4136 as amended.) (Rollo, pp. 23-26)
Considering the factual findings of the Court of Appeals-the bus driver did not immediately stop the bus at the height of the
commotion; the bus was speeding from a full stop; the victims fell from the bus door when it was opened or gave way while the
bus was still running; the conductor panicked and blew his whistle after people had already fallen off the bus; and the bus was not
properly equipped with doors in accordance with law-it is clear that the petitioners have failed to overcome the presumption of fault
and negligence found in the law governing common carriers.
The petitioners' argument that the petitioners "are not insurers of their passengers" deserves no merit in view of the failure of the
petitioners to prove that the deaths of the two passengers were exclusively due to force majeure and not to the failure of the
petitioners to observe extraordinary diligence in transporting safely the passengers to their destinations as warranted by law. (See
Batangas Laguna Tayabas Co. v. Intermediate Appellate Court, supra).
The petitioners also contend that the private respondents failed to show to the court that they are the parents of Ornominio Beter
and Narcisa Rautraut respectively and therefore have no legal personality to sue the petitioners. This argument deserves scant
consideration. We find this argument a belated attempt on the part of the petitioners to avoid liability for the deaths of Beter and
Rautraut. The private respondents were Identified as the parents of the victims by witnesses during the trial and the trial court
recognized them as such. The trial court dismissed the complaint solely on the ground that the petitioners were not negligent.
Finally, the amount of damages awarded to the heirs of Beter and Rautraut by the appellate court is supported by the evidence.
The appellate court stated:
Ornominio Beter was 32 years of age at the time of his death, single, in good health and rendering support and service to his
mother. As far as Narcisa Rautraut is concerned, the only evidence adduced is to the effect that at her death, she was 23 years of
age, in good health and without visible means of support.
In accordance with Art. 1764 in conjunction with Art. 2206 of the Civil Code, and established jurisprudence, several factors may be
considered in determining the award of damages, namely: 1) life expectancy (considering the state of health of the deceased and
the mortality tables are deemed conclusive) and loss of earning capacity; (2) pecuniary loss, loss of support and service; and (3)
moral and mental suffering (Alcantara, et al. v. Surro, et al., 93 Phil. 470).

In the case of People v. Daniel (No. L-66551, April 25, 1985, 136 SCRA 92, at page 104), the High Tribunal, reiterating the rule in
Villa Rey Transit, Inc. v. Court of Appeals (31 SCRA 511), stated that the amount of loss of earring capacity is based mainly on two
factors, namely, (1) the number of years on the basis of which the damages shall be computed; and (2) the rate at which the
losses sustained by the heirs should be fixed.
As the formula adopted in the case of Davila v. Philippine Air Lines, 49 SCRA 497, at the age of 30 one's normal life expectancy is
33-1/3 years based on the American Expectancy Table of Mortality (2/3 x 80-32). itc-asl By taking into account the pace and
nature of the life of a carpenter, it is reasonable to make allowances for these circumstances and reduce the life expectancy of the
deceased Ornominio Beter to 25 years (People v. Daniel, supra). To fix the rate of losses it must be noted that Art. 2206 refers to
gross earnings less necessary living expenses of the deceased, in other words, only net earnings are to be considered (People v.
Daniel, supra; Villa Rey Transit, Inc. v. Court of Appeals, supra).
Applying the foregoing rules with respect to Ornominio Beter, it is both just and reasonable, considering his social standing and
position, to fix the deductible, living and incidental expenses at the sum of Four Hundred Pesos (P400.00) a month, or Four
Thousand Eight Hundred Pesos (P4,800.00) annually. As to his income, considering the irregular nature of the work of a daily
wage carpenter which is seasonal, it is safe to assume that he shall have work for twenty (20) days a month at Twenty Five Pesos
(P150,000.00) for twenty five years. Deducting therefrom his necessary expenses, his heirs would be entitled to Thirty Thousand
Pesos (P30,000.00) representing loss of support and service (P150,000.00 less P120,000.00). In addition, his heirs are entitled to
Thirty Thousand Pesos (P30,000.00) as straight death indemnity pursuant to Article 2206 (People v. Daniel, supra). For damages
for their moral and mental anguish, his heirs are entitled to the reasonable sum of P10,000.00 as an exception to the general rule
against moral damages in case of breach of contract rule Art. 2200 (Necesito v. Paras, 104 Phil. 75). As attorney's fees, Beter's
heirs are entitled to P5,000.00. All in all, the plaintiff-appellants Ricardo and Sergia Beter as heirs of their son Ornominio are
entitled to an indemnity of Seventy Five Thousand Pesos (P75,000.00).
In the case of Narcisa Rautraut, her heirs are entitled to a straight death indemnity of Thirty Thousand Pesos (P30,000.00), to
moral damages in the amount of Ten Thousand Pesos (P10,000.00) and Five Thousand Pesos (P5,000.00) as attorney's fees, or
a total of Forty Five Thousand Pesos (P45,000.00) as total indemnity for her death in the absence of any evidence that she had
visible means of support. (Rollo, pp. 30-31)
WHEREFORE, the instant petition is DISMISSED. The questioned decision dated May 19, 1988 and the resolution dated August
1, 1988 of the Court of Appeals are AFFIRMED.

G.R. Nos. 103442-45 May 21, 1993

NATIONAL POWER CORPORATION, ET AL., petitioners,
vs.
THE COURT OF APPEALS, GAUDENCIO C. RAYO, ET AL., respondents.
The Solicitor General for plaintiff-appellee.
Ponciano G. Hernandez for private respondents.

DAVIDE, JR., J.:

This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court urging this Court to set aside the 19 August
1991 consolidated Decision of the Court of Appeals in CA.-G.R. CV Nos. 27290-93 1 which reversed the Decision of Branch 5 of
the then Court of First Instance (now Regional Trial Court) of Bulacan, and held petitioners National Power Corporation (NPC) and
Benjamin Chavez jointly and severally liable to the private respondents for actual and moral damages, litigation expenses and
attorney's fees.
This present controversy traces its beginnings to four (4) separate complaints 2 for damages filed against the NPC and Benjamin
Chavez before the trial court. The plaintiffs therein, now private respondents, sought to recover actual and other damages for the
loss of lives and the destruction to property caused by the inundation of the town of Norzagaray, Bulacan on 26-27 October 1978.
The flooding was purportedly caused by the negligent release by the defendants of water through the spillways of the Angat Dam
(Hydroelectric Plant). In said complaints, the plaintiffs alleged, inter alia, that: 1) defendant NPC operated and maintained a multipurpose hydroelectric plant in the Angat River at Hilltop, Norzagaray, Bulacan; 2) defendant Benjamin Chavez was the plant
supervisor at the time of the incident in question; 3) despite the defendants' knowledge, as early as 24 October 1978, of the
impending entry of typhoon "Kading," they failed to exercise due diligence in monitoring the water level at the dam; 4) when the
said water level went beyond the maximum allowable limit at the height of the typhoon, the defendants suddenly, negligently and
recklessly opened three (3) of the dam's spillways, thereby releasing a large amount of water which inundated the banks of the
Angat River; and 5) as a consequence, members of the household of the plaintiffs, together with their animals, drowned, and their
properties were washed away in the evening of 26 October and the early hours of 27 October 1978. 3
In their Answers, the defendants, now petitioners, alleged that: 1) the NPC exercised due care, diligence and prudence in the
operation and maintenance of the hydroelectric plant; 2) the NPC exercised the diligence of a good father in the selection of its
employees; 3) written notices were sent to the different municipalities of Bulacan warning the residents therein about the
impending release of a large volume of water with the onset of typhoon "Kading" and advise them to take the necessary
precautions; 4) the water released during the typhoon was needed to prevent the collapse of the dam and avoid greater damage
to people and property; 5) in spite of the precautions undertaken and the diligence exercised, they could still not contain or control
the flood that resulted and; 6) the damages incurred by the private respondents were caused by a fortuitous event or force
majeure and are in the nature and character of damnum absque injuria. By way of special affirmative defense, the defendants
averred that the NPC cannot be sued because it performs a purely governmental function. 4
Upon motion of the defendants, a preliminary hearing on the special defense was conducted. As a result thereof, the trial court
dismissed the complaints as against the NPC on the ground that the provision of its charter allowing it to sue and be sued does

not contemplate actions based on tort. The parties do not, however, dispute the fact that this Court overruled the trial court and
ordered the reinstatement of the complaints as against the NPC. 5
Being closely interrelated, the cases were consolidated and trial thereafter ensued.
The lower court rendered its decision on 30 April 1990 dismissing the complaints "for lack of sufficient and credible evidence." 6
Consequently, the private respondents seasonably appealed therefrom to the respondent Court which then docketed the cases as
CA-G.R. CV Nos. 27290-93.
In its joint decision promulgated on 19 August 1991, the Court of Appeals reversed the appealed decision and awarded damages
in favor of the private respondents. The dispositive portion of the decision reads:
CONFORMABLY TO THE FOREGOING, the joint decision appealed from is hereby REVERSED and SET ASIDE, and a new one
is hereby rendered:
1. In Civil Case No. SM-950, ordering defendants-appellees to pay, jointly and severally, plaintiffs-appellants, with legal interest
from the date when this decision shall become final and executory, the following:
A. Actual damages, to wit:
1) Gaudencio C. Rayo, Two Hundred Thirty One Thousand Two Hundred Sixty Pesos (P231,260.00);
2) Bienvenido P. Pascual, Two Hundred Four Thousand Five Hundred Pesos (P204.500.00);
3) Tomas Manuel, One Hundred Fifty Five Thousand Pesos (P155,000.00);
4) Pedro C. Bartolome, One Hundred Forty Seven Thousand Pesos (P147,000.00);.
5) Bernardino Cruz, One Hundred Forty Three Thousand Five Hundred Fifty Two Pesos and Fifty Centavos (P143,552.50);
6) Jose Palad, Fifty Seven Thousand Five Hundred Pesos (P57,500.00);
7) Mariano S. Cruz, Forty Thousand Pesos (P40,000.00);
8) Lucio Fajardo, Twenty nine Thousand Eighty Pesos (P29,080.00); and
B. Litigation expenses of Ten Thousand Pesos (P10,000.00);
2. In Civil case No. SM-951, ordering defendants-appellees to pay jointly and severally, plaintiff-appellant, with legal interest from
the date when this decision shall have become final and executory, the following :
A. Actual damages of Five Hundred Twenty Thousand Pesos (P520,000.00);.
B. Moral damages of five hundred Thousand Pesos (P500,000.00); and.
C. Litigation expenses of Ten Thousand Pesos (P10,000.00);.
3. In Civil Case No. SM-953, ordering defendants-appellees to pay, jointly and severally, with legal interest from the date when this
decision shall have become final and executory;
A. Plaintiff-appellant Angel C. Torres:
1) Actual damages of One Hundred Ninety Nine Thousand One Hundred Twenty Pesos (P199,120.00);
2) Moral Damages of One Hundred Fifty Thousand Pesos (P150,000.00);
B. Plaintiff-appellant Norberto Torres:
1) Actual damages of Fifty Thousand Pesos (P50,000.00);
2) Moral damages of Fifty Thousand Pesos (P50,000.00);
C. Plaintiff-appellant Rodelio Joaquin:
1) Actual damages of One Hundred Thousand Pesos (P100,000.00);
2) Moral damages of One Hundred Thousand Pesos (P100,000.00); and
D. Plaintifsf-appellants litigation expenses of Ten Thousand Pesos (P10,000.00);
4. In Civil case No. SM-1247, ordering defendants-appellees to pay, jointly and severally, with legal interest from the date when
this decision shall have become final and executory :
A. Plaintiffs-appellants Presentacion Lorenzo and Clodualdo Lorenzo:
1) Actual damages of Two Hundred Fifty Six Thousand Six Hundred Pesos (P256,600.00);
2) Moral damages of Fifty Thousand Pesos (P50,000.00);
B. Plaintiff-appellant Consolacion Guzman :
1) Actual damages of One Hundred forty Thousand Pesos (P140,000.00);
2) Moral damages of Fifty Thousand Pesos (P50,000.00);
C. Plaintiff-appellant Virginia Guzman :
1) Actual damages of Two Hundred Five Hundred Twenty Pesos (205,520.00); and
D. Plaintiffs-appellants litigation expenses of Ten Thousand Pesos (10,000.00).

In addition, in all the four (4) instant cases, ordering defendants-appellees to pay, jointly and severally, plaintiffs-appellants
attorney fees in an amount equivalent to 15% of the total amount awarded.
No pronouncement as to costs. 7
The foregoing judgment is based on the public respondent's conclusion that the petitioners were guilty of:
. . . a patent gross and evident lack of foresight, imprudence and negligence . . . in the management and operation of Angat Dam.
The unholiness of the hour, the extent of the opening of the spillways, And the magnitude of the water released, are all but
products of defendants-appellees' headlessness, slovenliness, and carelessness. The resulting flash flood and inundation of even
areas (sic) one (1) kilometer away from the Angat River bank would have been avoided had defendants-appellees prepared the
Angat Dam by maintaining in the first place, a water elevation which would allow room for the expected torrential rains. 8
This conclusion, in turn, is anchored on its findings of fact, to wit:
As early as October 21, 1978, defendants-appellees knew of the impending onslaught of and imminent danger posed by typhoon
"Kading". For as alleged by defendants-appellees themselves, the coming of said super typhoon was bannered by Bulletin Today,
a newspaper of national circulation, on October 25, 1978, as "Super Howler to hit R.P." The next day, October 26, 1978, said
typhoon once again merited a headline in said newspaper as "Kading's Big Blow expected this afternoon" (Appellee's Brief, p. 6).
Apart from the newspapers, defendants-appellees learned of typhoon "Kading' through radio announcements (Civil Case No. SM950, TSN, Benjamin Chavez, December 4, 1984, pp. 7-9).
Defendants-appellees doubly knew that the Angat Dam can safely hold a normal maximum headwater elevation of 217 meters
(Appellee's brief, p. 12; Civil Case No. SM-951, Exhibit "I-6"; Civil Case No. SM-953, Exhibit "J-6"; Civil Case No. SM-1247,
Exhibit "G-6").
Yet, despite such knowledge, defendants-appellees maintained a reservoir water elevation even beyond its maximum and safe
level, thereby giving no sufficient allowance for the reservoir to contain the rain water that will inevitably be brought by the coming
typhoon.
On October 24, 1978, before typhoon "Kading" entered the Philippine area of responsibility, water elevation ranged from 217.61 to
217.53, with very little opening of the spillways, ranging from 1/2 to 1 meter. On October 25, 1978, when typhoon "Kading" entered
the Philippine area of responsibility, and public storm signal number one was hoisted over Bulacan at 10:45 a.m., later raised to
number two at 4:45 p.m., and then to number three at 10:45 p.m., water elevation ranged from 217.47 to 217.57, with very little
opening of the spillways, ranging from 1/2 to 1 meter. On October 26, 1978, when public storm signal number three remained
hoisted over Bulacan, the water elevation still remained at its maximum level of 217.00 to 218.00 with very little opening of the
spillways ranging from 1/2 to 2 meters, until at or about midnight, the spillways were suddenly opened at 5 meters, then increasing
swiftly to 8, 10, 12, 12.5, 13, 13.5, 14, 14.5 in the early morning hours of October 27, 1978, releasing water at the rate of 4,500
cubic meters per second, more or less. On October 27, 1978, water elevation remained at a range of 218.30 to 217.05 (Civil Case
No. SM-950, Exhibits "D" and series, "L", "M", "N", and "O" and Exhibits "3" and "4"; Civil Case No. SM-951, Exhibits "H" and "H1"; Civil Case No. SM-953, Exhibits "I" and "I-1"; Civil Case No. SM 1247, Exhibits "F" and "F-1").
xxx xxx xxx
From the mass of evidence extant in the record, We are convinced, and so hold that the flash flood on October 27, 1978, was
caused not by rain waters (sic), but by stored waters (sic) suddenly and simultaneously released from the Angat Dam by
defendants-appellees, particularly from midnight of October 26, 1978 up to the morning hours of October 27,
1978. 9
The appellate court rejected the petitioners' defense that they had sent "early warning written notices" to the towns of Norzagaray,
Angat, Bustos, Plaridel, Baliwag and Calumpit dated 24 October 1978 which read:
TO ALL CONCERN (sic):
Please be informed that at present our reservoir (dam) is full and that we have been releasing water intermittently for the past
several days.
With the coming of typhoon "Rita" (Kading) we expect to release greater (sic) volume of water, if it pass (sic) over our place.
In view of this kindly advise people residing along Angat River to keep alert and stay in safe places.
BENJAMIN L. CHAVEZ
Power Plant Superintendent 10
because:
Said notice was delivered to the "towns of Bulacan" on October 26, 1978 by defendants-appellees driver, Leonardo Nepomuceno
(Civil Case No. SM-950, TSN, Benjamin Chavez, December 4, 1984, pp. 7-11 and TSN, Leonardo Nepomuceno, March 7, 1985,
pp. 10-12).
Said notice is ineffectual, insufficient and inadequate for purposes of the opening of the spillway gates at midnight of October 26,
1978 and on October 27, 1978. It did not prepare or warn the persons so served, for the volume of water to be released, which
turned out to be of such magnitude, that residents near or along the Angat River, even those one (1) kilometer away, should have
been advised to evacuate. Said notice, addressed "TO ALL CONCERN (sic)," was delivered to a policeman (Civil Case No. SM950, pp. 10-12 and Exhibit "2-A") for the municipality of Norzagaray. Said notice was not thus addressed and delivered to the
proper and responsible officials who could have disseminated the warning to the residents directly affected. As for the municipality
of Sta. Maria, where plaintiffs-appellants in Civil Case No. SM-1246 reside, said notice does not appear to have been served. 11
Relying on Juan F. Nakpil & Sons vs. Court of Appeals, 12 public respondent rejected the petitioners' plea that the incident in
question was caused by force majeure and that they are, therefore, not liable to the private respondents for any kind of damage
such damage being in the nature of damnum absque injuria.

The motion for reconsideration filed by the petitioners, as well as the motion to modify judgment filed by the public respondents, 13
were denied by the public respondent in its Resolution of 27 December 1991. 14
Petitioners thus filed the instant petition on 21 February 1992.
After the Comment to the petition was filed by the private respondents and the Reply thereto was filed by the petitioners, We gave
due course to the petition on 17 June 1992 and directed the parties to submit their respective Memoranda, 15 which they
subsequently complied with.
The petitioners raised the following errors allegedly committed by the respondent Court :
I. THE COURT OF APPEALS ERRED IN APPLYING THE RULING OF NAKPIL & SONS V. COURT OF APPEALS AND
HOLDING THAT PETITIONERS WERE GUILTY OF NEGLIGENCE.
II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE WRITTEN NOTICES OF WARNING ISSUED BY PETITIONERS
WERE INSUFFICIENT.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE DAMAGE SUFFERED BY PRIVATE RESPONDENTS WAS
NOT DAMNUM ABSQUE INJURIA.
IV. THE COURT OF APPEALS ERRED IN NOT AWARDING THE COUNTERCLAIM OF PETITIONERS FOR ATTORNEY'S FEES
AND EXPENSES OF LITIGATION. 16
These same errors were raised by herein petitioners in G.R. No. 96410, entitled National Power Corporation, et al., vs. Court of
Appeals, et al., 17 which this Court decided on 3 July 1992. The said case involved the very same incident subject of the instant
petition. In no uncertain terms, We declared therein that the proximate cause of the loss and damage sustained by the plaintiffs
therein who were similarly situated as the private respondents herein was the negligence of the petitioners, and that the 24
October 1978 "early warning notice" supposedly sent to the affected municipalities, the same notice involved in the case at bar,
was insufficient. We thus cannot now rule otherwise not only because such a decision binds this Court with respect to the cause of
the inundation of the town of Norzagaray, Bulacan on 26-27 October 1978 which resulted in the loss of lives and the destruction to
property in both cases, but also because of the fact that on the basis of its meticulous analysis and evaluation of the evidence
adduced by the parties in the cases subject of CA-G.R. CV Nos. 27290-93, public respondent found as conclusively established
that indeed, the petitioners were guilty of "patent gross and evident lack of foresight, imprudence and negligence in the
management and operation of Angat Dam," and that "the extent of the opening of the spillways, and the magnitude of the water
released, are all but products of defendants-appellees' headlessness, slovenliness, and carelessness." 18 Its findings and
conclusions are biding upon Us, there being no showing of the existence of any of the exceptions to the general rule that findings
of fact of the Court of Appeals are conclusive upon this Court. 19 Elsewise stated, the challenged decision can stand on its own
merits independently of Our decision in G.R. No. 96410. In any event, We reiterate here in Our pronouncement in the latter case
that Juan F. Nakpil & Sons vs. Court of Appeals 20 is still good law as far as the concurrent liability of an obligor in the case of force
majeure is concerned. In the Nakpil case, We held:
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 moral 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 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). 21
Accordingly, petitioners cannot be heard to invoke the act of God or force majeure to escape liability for the loss or damage
sustained by private respondents since they, the petitioners, were guilty of negligence. The event then was not occasioned
exclusively by an act of God or force majeure; a human factor negligence or imprudence had intervened. The effect then of
the force majeure in question may be deemed to have, even if only partly, resulted from the participation of man. Thus, the whole
occurrence was thereby humanized, as it were, and removed from the laws applicable to acts of God.
WHEREFORE, for want of merit, the instant petition is hereby DISMISSED and the Consolidated Decision of the Court of Appeals
in CA-G.R. CV Nos. 27290-93 is AFFIRMED, with costs against the petitioners.
SO ORDERED.

G.R. No. 117190 January 2, 1997

JACINTO TANGUILIG doing business under the name and style J.M.T. ENGINEERING AND GENERAL MERCHANDISING,
petitioner,

vs.
COURT OF APPEALS and VICENTE HERCE JR., respondents.

BELLOSILLO, J.:
This case involves the proper interpretation of the contract entered into between the parties.
Sometime in April 1987 petitioner Jacinto M. Tanguilig doing business under the name and style J.M.T. Engineering and General
Merchandising proposed to respondent Vicente Herce Jr. to construct a windmill system for him. After some negotiations they
agreed on the construction of the windmill for a consideration of P60,000.00 with a one-year guaranty from the date of completion
and acceptance by respondent Herce Jr. of the project. Pursuant to the agreement respondent paid petitioner a down payment of
P30,000.00 and an installment payment of P15,000.00, leaving a balance of P15,000.00.
On 14 March 1988, due to the refusal and failure of respondent to pay the balance, petitioner filed a complaint to collect the
amount. In his Answer before the trial court respondent denied the claim saying that he had already paid this amount to the San
Pedro General Merchandising Inc. (SPGMI) which constructed the deep well to which the windmill system was to be connected.
According to respondent, since the deep well formed part of the system the payment he tendered to SPGMI should be credited to
his account by petitioner. Moreover, assuming that he owed petitioner a balance of P15,000.00, this should be offset by the
defects in the windmill system which caused the structure to collapse after a strong wind hit their place. 1
Petitioner denied that the construction of a deep well was included in the agreement to build the windmill system, for the contract
price of P60,000.00 was solely for the windmill assembly and its installation, exclusive of other incidental materials needed for the
project. He also disowned any obligation to repair or reconstruct the system and insisted that he delivered it in good and working
condition to respondent who accepted the same without protest. Besides, its collapse was attributable to a typhoon, a force
majeure, which relieved him of any liability.
In finding for plaintiff, the trial court held that the construction of the deep well was not part of the windmill project as evidenced
clearly by the letter proposals submitted by petitioner to respondent. 2 It noted that "[i]f the intention of the parties is to include the
construction of the deep well in the project, the same should be stated in the proposals. In the absence of such an agreement, it
could be safely concluded that the construction of the deep well is not a part of the project undertaken by the plaintiff." 3 With
respect to the repair of the windmill, the trial court found that "there is no clear and convincing proof that the windmill system fell
down due to the defect of the construction." 4
The Court of Appeals reversed the trial court. It ruled that the construction of the deep well was included in the agreement of the
parties because the term "deep well" was mentioned in both proposals. It also gave credence to the testimony of respondent's
witness Guillermo Pili, the proprietor of SPGMI which installed the deep well, that petitioner Tanguilig told him that the cost of
constructing the deep well would be deducted from the contract price of P60,000.00. Upon these premises the appellate court
concluded that respondent's payment of P15,000.00 to SPGMI should be applied to his remaining balance with petitioner thus
effectively extinguishing his contractual obligation. However, it rejected petitioner's claim of force majeure and ordered the latter to
reconstruct the windmill in accordance with the stipulated one-year guaranty.
His motion for reconsideration having been denied by the Court of Appeals, petitioner now seeks relief from this Court. He raises
two issues: firstly, whether the agreement to construct the windmill system included the installation of a deep well and, secondly,
whether petitioner is under obligation to reconstruct the windmill after it collapsed.
We reverse the appellate court on the first issue but sustain it on the second.
The preponderance of evidence supports the finding of the trial court that the installation of a deep well was not included in the
proposals of petitioner to construct a windmill system for respondent. There were in fact two (2) proposals: one dated 19 May
1987 which pegged the contract price at P87,000.00 (Exh. "1"). This was rejected by respondent. The other was submitted three
days later, i.e., on 22 May 1987 which contained more specifications but proposed a lower contract price of P60,000.00 (Exh. "A").
The latter proposal was accepted by respondent and the construction immediately followed. The pertinent portions of the first
letter-proposal (Exh. "1") are reproduced hereunder
In connection with your Windmill System and Installation, we would like to quote to you as follows:
One (1) Set Windmill suitable for 2 inches diameter deepwell, 2 HP, capacity, 14 feet in diameter, with 20 pieces blade, Tower
40 feet high, including mechanism which is not advisable to operate during extra-intensity wind. Excluding cylinder pump.
UNIT CONTRACT PRICE P87,000.00
The second letter-proposal (Exh. "A") provides as follows:
In connection with your Windmill system, Supply of Labor Materials and Installation, operated water pump, we would like to quote
to you as
follows
One (1) set Windmill assembly for 2 inches or 3 inches deep-well pump, 6 Stroke, 14 feet diameter, 1-lot blade materials, 40
feet Tower complete with standard appurtenances up to Cylinder pump, shafting U.S. adjustable International Metal.
One (1) lot Angle bar, G.I. pipe, Reducer Coupling, Elbow Gate valve, cross Tee coupling.
One (1) lot Float valve.
One (1) lot Concreting materials foundation.
F. O. B. Laguna
Contract Price P60,000.00

Notably, nowhere in either proposal is the installation of a deep well mentioned, even remotely. Neither is there an itemization or
description of the materials to be used in constructing the deep well. There is absolutely no mention in the two (2) documents that
a deep well pump is a component of the proposed windmill system. The contract prices fixed in both proposals cover only the
features specifically described therein and no other. While the words "deep well" and "deep well pump" are mentioned in both,
these do not indicate that a deep well is part of the windmill system. They merely describe the type of deep well pump for which
the proposed windmill would be suitable. As correctly pointed out by petitioner, the words "deep well" preceded by the prepositions
"for" and "suitable for" were meant only to convey the idea that the proposed windmill would be appropriate for a deep well pump
with a diameter of 2 to 3 inches. For if the real intent of petitioner was to include a deep well in the agreement to construct a
windmill, he would have used instead the conjunctions "and" or "with." Since the terms of the instruments are clear and leave no
doubt as to their meaning they should not be disturbed.
Moreover, it is a cardinal rule in the interpretation of contracts that the intention of the parties shall be accorded primordial
consideration 5 and, in case
of doubt, their contemporaneous and subsequent acts shall be principally considered. 6 An examination of such contemporaneous
and subsequent acts of respondent as well as the attendant circumstances does not persuade us to uphold him.
Respondent insists that petitioner verbally agreed that the contract price of P60,000.00 covered the installation of a deep well
pump. He contends that since petitioner did not have the capacity to install the pump the latter agreed to have a third party do the
work the cost of which was to be deducted from the contract price. To prove his point, he presented Guillermo Pili of SPGMI who
declared that petitioner Tanguilig approached him with a letter from respondent Herce Jr. asking him to build a deep well pump as
"part of the price/contract which Engineer (Herce) had with Mr. Tanguilig." 7
We are disinclined to accept the version of respondent. The claim of Pili that Herce Jr. wrote him a letter is unsubstantiated. The
alleged letter was never presented in court by private respondent for reasons known only to him. But granting that this written
communication existed, it could not have simply contained a request for Pili to install a deep well; it would have also mentioned
the party who would pay for the undertaking. It strains credulity that respondent would keep silent on this matter and leave it all to
petitioner Tanguilig to verbally convey to Pili that the deep well was part of the windmill construction and that its payment would
come from the contract price of P60,000.00.
We find it also unusual that Pili would readily consent to build a deep well the payment for which would come supposedly from the
windmill contract price on the mere representation of petitioner, whom he had never met before, without a written commitment at
least from the former. For if indeed the deep well were part of the windmill project, the contract for its installation would have been
strictly a matter between petitioner and Pili himself with the former assuming the obligation to pay the price. That it was
respondent Herce Jr. himself who paid for the deep well by handing over to Pili the amount of P15,000.00 clearly indicates that the
contract for the deep well was not part of the windmill project but a separate agreement between respondent and Pili. Besides, if
the price of P60,000.00 included the deep well, the obligation of respondent was to pay the entire amount to petitioner without
prejudice to any action that Guillermo Pili or SPGMI may take, if any, against the latter. Significantly, when asked why he tendered
payment directly to Pili and not to petitioner, respondent explained, rather lamely, that he did it "because he has ( sic) the money,
so (he) just paid the money in his possession." 8
Can respondent claim that Pili accepted his payment on behalf of petitioner? No. While the law is clear that "payment shall be
made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to
receive it," 9 it does not appear from the record that Pili and/or SPGMI was so authorized.
Respondent cannot claim the benefit of the law concerning "payments made by a third person." 10 The Civil Code provisions do not
apply in the instant case because no creditor-debtor relationship between petitioner and Guillermo Pili and/or SPGMI has been
established regarding the construction of the deep well. Specifically, witness Pili did not testify that he entered into a contract with
petitioner for the construction of respondent's deep well. If SPGMI was really commissioned by petitioner to construct the deep
well, an agreement particularly to this effect should have been entered into.
The contemporaneous and subsequent acts of the parties concerned effectively belie respondent's assertions. These
circumstances only show that the construction of the well by SPGMI was for the sole account of respondent and that petitioner
merely supervised the installation of the well because the windmill was to be connected to it. There is no legal nor factual basis by
which this Court can impose upon petitioner an obligation he did not expressly assume nor ratify.
The second issue is not a novel one. In a long line of cases 11 this Court has consistently held that in order for a party to claim
exemption from liability by reason of fortuitous event under Art. 1174 of the Civil Code the event should be the sole and proximate
cause of the loss or destruction of the object of the contract. In Nakpil vs. Court of Appeals, 12 four (4) requisites must concur: (a)
the cause of the breach of the obligation must be independent of the will of the debtor; (b) the event must be either unforeseeable
or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and,
(d) the debtor must be free from any participation in or aggravation of the injury to the creditor.
Petitioner failed to show that the collapse of the windmill was due solely to a fortuitous event. Interestingly, the evidence does not
disclose that there was actually a typhoon on the day the windmill collapsed. Petitioner merely stated that there was a "strong
wind." But a strong wind in this case cannot be fortuitous unforeseeable nor unavoidable. On the contrary, a strong wind should
be present in places where windmills are constructed, otherwise the windmills will not turn.
The appellate court correctly observed that "given the newly-constructed windmill system, the same would not have collapsed had
there been no inherent defect in it which could only be attributable to the appellee." 13 It emphasized that respondent had in his
favor the presumption that "things have happened according to the ordinary course of nature and the ordinary habits of life." 14 This
presumption has not been rebutted by petitioner.
Finally, petitioner's argument that private respondent was already in default in the payment of his outstanding balance of
P15,000.00 and hence should bear his own loss, is untenable. In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner with what is incumbent upon him. 15 When the windmill failed to
function properly it became incumbent upon petitioner to institute the proper repairs in accordance with the guaranty stated in the
contract. Thus, respondent cannot be said to have incurred in delay; instead, it is petitioner who should bear the expenses for the
reconstruction of the windmill. Article 1167 of the Civil Code is explicit on this point that if a person obliged to do something fails to

do it, the same shall be executed at his cost.

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

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 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:
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
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 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 gosignal 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 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. 119756 March 18, 1999

FORTUNE EXPRESS, INC., petitioner,
vs.
COURT OF APPEALS, PAULIE U.CAORONG, and minor childrenYASSER KING CAORONG, ROSE HEINNI and PRINCE
ALEXANDER, all surnamed CAORONG, and represented by their mother PAULIE U. CAORONG, respondents.

MENDOZA, J.:
This is an appeal by petition for review on certiorari of the decision, dated July 29, 1994, of the Court of Appeals, which reversed

the decision of the Regional Trial Court, Branch VI, Iligan City. The aforesaid decision of the trial court dismissed the complaint of
public respondents against petitioner for damages for breach of contract of carriage filed on the ground that petitioner had not
exercised the required degree of diligence in the operation of one of its buses. Atty. Talib Caorong, whose heirs are private
respondents herein, was a passenger of the bus and was killed in the ambush involving said bus.
The facts of the instant case are as follows:
Petitioner is a bus company in northern Mindanao. Private respondent Paulie Caorong is the widow of Atty. Caorong, while private
respondents Yasser King, Rose Heinni, and Prince Alexander are their minor children.
On November 18, 1989, a bus of petitioner figured in an accident with a jeepney in Kauswagan, Lanao del Norte, resulting in the
death of several passengers of the jeepney, including two Maranaos. Crisanto Generalao, a volunteer field agent of the
Constabulary Regional Security Unit No. X, conducted an investigation of the accident. He found that the owner of the jeepney
was a Maranao residing in Delabayan, Lanao del Norte and that certain Maranaos were planning to take revenge on the petitioner
by burning some of its buses. Generalao rendered a report on his findings to Sgt. Reynaldo Bastasa of the Philippine
Constabulary Regional Headquarters at Cagayan de Oro. Upon the instruction of Sgt. Bastasa, he went to see Diosdado Bravo,
operations manager of petitioner, its main office in Cagayan de Oro City. Bravo assured him that the necessary precautions to
insure the safety of lives and property would be taken. 1
At about 6:45 P.M. on November 22, 1989, three armed Maranaos who pretended to be passengers, seized a bus of petitioner at
Linamon, Lanao del Norte while on its way to Iligan City. Among the passengers of the bus was Atty. Caorong. The leader of the
Maranaos, identified as one Bashier Mananggolo, ordered the driver, Godofredo Cabatuan, to stop the bus on the side of the
highway. Mananggolo then shot Cabatuan on the arm, which caused him to slump on the steering wheel. The one of the
companions of Mananggolo started pouring gasoline inside the bus, as the other held the passenger at bay with a handgun.
Mananggolo then ordered the passenger to get off the bus. The passengers, including Atty. Caorong, stepped out of the bus and
went behind the bushes in a field some distance from the highway. 2
However, Atty. Caorong returned to the bus to retrieve something from the overhead rack. at that time, one of the armed men was
pouring gasoline on the head of the driver. Cabatuan, who had meantime regained consciousness, heard Atty. Caorong pleading
with the armed men to spare the driver as he was innocent of any wrong doing and was only trying to make a living. The armed
men were, however, adamant as they repeated the warning that they were going to burn the bus along with its driver. During this
exchange between Atty. Caorong and the assailants, Cabatuan climbed out of the left window of the bus and crawled to the canal
on the opposite side of the highway. He heard shots from inside the bus. Larry de la Cruz, one of the passengers, saw that Atty.
Caorong was hit. Then the bus was set on fire. Some of the passengers were able to pull Atty. Caorong out of the burning bus and
rush him to the Mercy Community Hospital in Iligan City, but he died while undergoing operation. 3
The private respondents brought this suit for breach of contract of carriage in the Regional Trial Court, Branch VI, Iligan City. In its
decision, dated December 28, 1990, the trial court dismissed the complaint, holding as follows:
The fact that defendant, through Operations Manager Diosdado Bravo, was informed of the "rumors" that the Moslems intended to
take revenge by burning five buses of defendant is established since the latter also utilized Crisanto Generalao as a witness. Yet
despite this information, the plaintiffs charge, defendant did not take proper precautions. . . . Consequently, plaintiffs now fault the
defendant for ignoring the report. Their position is that the defendant should have provided its buses with security guards. Does
the law require common carriers to install security guards in its buses for the protection and safety of its passengers? Is the failure
to post guards on omission of the duty to "exercise the diligence of a good father of the family" which could have prevented the
killing of Atty. Caorong? To our mind, the diligence demanded by law does not include the posting of security guard in buses. It is
an obligation that properly belongs to the State. Besides, will the presence of one or two security guards suffice to deter a
determined assault of the lawless and thus prevent the injury complained of? Maybe so, but again, perhaps not. In other words,
the presence of a security guard is not a guarantee that the killing of Atty. Caorong would have been definitely avoided.
xxx xxx xxx
Accordingly, the failure of defendant to accord faith and credit to the report of Mr. Generalao and the fact that it did not provide
security to its buses cannot, in the light of the circumstances, be characterized as negligence.
Finally, the evidence clearly shows that the assalants did not have the least intention of the harming any of the passengers. They
ordered all the passengers to alight and set fire on the bus only after all the passengers were out of danger. The death of Atty.
Caorong was an unexpected and unforseen occurrense over which defendant had no control. Atty. Caorong performed an act of
charity and heroism in coming to the succor of the driver even in the face of danger. He deserves the undying gratitude of the
driver whose life he saved. No one should blame him for an act of extraordinary charity and altruism which cost his life. But neither
should any blame be laid on the doorstep of defendant. His death was solely due to the willfull acts of the lawless which defendant
could neither prevent nor to stop.
WHEREFORE, in view of the foregoing, the complaint is hereby dismissed. For lack of merit, the counter-claim is likewise
dismissed. No costs. 4
On appeal, however, the Court of Appeals reversed. It held:
In the case at bench, how did defendant-appellee react to the tip or information that certain Maranao hotheads were planning to
burn five of its buses out of revenge for the deaths of two Maranaos in an earlier collision involving appellee's bus? Except for the
remarks of appellee's operations manager that "we will have our action . . . . and I'll be the one to settle it personally," nothing
concrete whatsoever was taken by appellee or its employees to prevent the execution of the threat. Defendant-appellee never
adopted even a single safety measure for the protection of its paying passengers. Were there available safeguards? Of course,
there were: one was frisking passengers particularly those en route to the area where the threats were likely to be carried out such
as where the earlier accident occurred or the place of influence of the victims or their locality. If frisking was resorted to, even
temporarily, . . . . appellee might be legally excused from liabilty. Frisking of passengers picked up along the route could have
been implemented by the bus conductor; for those boarding at the bus terminal, frisking could have been conducted by him and
perhaps by additional personnel of defendant-appellee. On hindsight, the handguns and especially the gallon of gasoline used by
the felons all of which were brought inside the bus would have been discovered, thus preventing the burning of the bus and the
fatal shooting of the victim.

Appellee's argument that there is no law requiring it to provide guards on its buses and that the safety of citizens is the duty of the
government, is not well taken. To be sure, appellee is not expected to assign security guards on all its buses; if at all, it has the
duty to post guards only on its buses plying predominantly Maranaos areas. As discussed in the next preceding paragraph, least
appellee could have done in response to the report was to adopt a system of verification such as the frisking of passengers
boarding at its buses. Nothing, and no repeat, nothing at all, was done by defendant-appellee to protect its innocent passengers
from the danger arising from the "Maranao threats." It must be observed that frisking is not a novelty as a safety measure in our
society. Sensitive places in fact, nearly all important places have applied this method of security enhancement. Gadgets and
devices are avilable in the market for this purpose. It would not have weighed much against the budget of the bus company if such
items were made available to its personnel to cope up with situations such as the "Maranaos threats."
In view of the constitutional right to personal privacy, our pronouncement in this decision should not be construed as an advocacy
of mandatory frisking in all public conveyances. What we are saying is that given the circumstances obtaining in the case at bench
that: (a) two Maranaos died because of a vehicular collision involving one of appellee's vehicles; (b) appellee received a written
report from a member of the Regional Security Unit, Constabulary Security Group, that the tribal/ethnic group of the two deceased
were planning to burn five buses of appellee out of revenge; and (c) appelle did nothing absolutely nothing for the safety of
its passengers travelling in the area of influence of the victims, appellee has failed to exercise the degree of dilegence required of
common carriers. Hence, appellee must be adjudge liable.
xxx xxx xxx
WHEREFORE the decision appealed from is hereby REVERSED and another rendered ordering defendant-appellee to pay
plaintiffs-appellants the following:
1) P3,399,649.20 as death indemnity;
2) P50,000.00 and P500.00 per appearance as attorney's fee and
Costs against defendant-appellee. 5
Hence, this appeal. Petitioner contends:
(A) THAT PUBLIC RESPONDENT ERRED IN REVERSING THE DECISION OF THE REGIONAL TRIAL COURT DATED
DECEMBER 28, 1990 DISMISSING THE COMPLAINT AS WELL AS THE COUNTERCLAIM, AND FINDING FOR PRIVATE
RESPONDENTS BY ORDERING PETITIONER TO PAY THE GARGANTUAN SUM OF P3,449,649.20 PLUS P500.00 PER
APPEARANCE AS ATTORNEY'S FEES, AS WELL AS DENYING PETITIONERS MOTION FRO RECONSIDERATION AND THE
SUPPLEMENT TO SAID MOTION, WHILE HOLDING, AMONG OTHERS, THAT THE PETITIONER BREACHED THE
CONTRACT OF THE CARRIAGE BY ITS FAILURE TO EXCERCISE THE REQUIRED DEGREE OF DILIGENCE;
(B) THAT THE ACTS OF THE MARANAO OUTLAWS WERE SO GRAVE, IRRESISTABLE, VIOLENT, AND FORCEFULL, AS TO
BE REGARDED AS CASO FORTUITO; AND
(C) THAT PUBLIC RESPONDENT COURT OF APPEALS SERIOUSLY ERRED IN HOLDING THAT PETITIONER COULD HAVE
PROVIDED ADEQUATE SECURITY IN PREDOMINANTLY MUSLIM AREAS AS PART OF ITS DUTY TO OBSERVE EXTRAORDINARY DILIGENCE AS A COMMON CARRIER.
The instant has no merit.
First. Petitioner's Breach of the Contract of Carriage.
Art. 1763 of the Civil Code provides that a common carrier is responsible for injuries suffered by a passenger on account of wilfull
acts of other passengers, if the employees of the common carrier could have prevented the act through the exercise of the
diligence of a good father of a family. In the present case, it is clear that because of the negligence of petitioner's employees, the
seizure of the bus by Mananggolo and his men was made possible.
Despite warning by the Philippine Constabulary at Cagayan de Oro that the Maranaos were planning to take revenge on the
petitioner by burning some of its buses and the assurance of petitioner's operation manager, Diosdado Bravo, that the necessary
precautions would be taken, petitioner did nothing to protect the safety of its passengers.
Had petitioner and its employees been vigilant they would not have failed to see that the malefactors had a large quantity of
gasoline with them. Under the circumstances, simple precautionary measures to protect the safety of passengers, such as frisking
passengers and inspecting their baggages, preferably with non-intrusive gadgets such as metal detectors, before allowing them
on board could have been employed without violating the passenger's constitutional rights. As this Court amended in Gacal v.
Philippine Air Lines, Inc., 6 a common carrier can be held liable for failing to prevent a hijacking by frisking passengers and
inspecting their baggages.
From the foregoing, it is evident that petitioner's employees failed to prevent the attack on one of petitioner's buses because they
did not exercise the diligence of a good father of a family. Hence, petitioner should be held liable for the death of Atty. Caorong.
Second. Seizure of Petitioner's Bus not a Case of Force Majeure
The petitioner contends that the seizure of its bus by the armed assailants was a fortuitous event for which it could not be held
liable.
Art. 1174 of the Civil Code defines a fortuitous event as an occurence which could not be foreseen, is inevitable. In Yobido v.
Court of Appeals, 7 we held that to considered as force majeure, it is necessary that (1) the cause of the breach of the obligation
must be independent of the human will; (2) the event must be either unforeseeable or unavoidable; (3) the occurence must be
render it impossible for the debtor to fulfill the obligation in a normal manner; and (4) the obligor must be free of participation in, or
aggravation of, the injury to the creditor. The absence of any of the requisites mentioned above would prevent the obligor from
being excused from liability.
Thus, in Vasquez v. Court of Appeals, 8 it was held that the common carrier was liable for its failure to take the necessary
precautions against an approaching typhoon, of which it was warned, resulting in the loss of the lives of several passengers. The

event was forseeable, and, thus, the second requisite mentioned above was not fulfilled. This ruling applies by analogy to the
present case. Despite the report of PC agent Generalao that the Maranaos were going to attack its buses, petitioner took no steps
to safeguard the lives and properties of its passengers. The seizure of the bus of the petitioner was foreseeable and, therefore,
was not a fortuitous event which would exempt petitioner from liabilty.
Petitioner invokes the ruling in Pilapil v. Court of Appeals, 9 and De Guzman v. Court of Appeals, 10 in support of its contention that
the seizure of its bus by the assailants constitutes force majeure. In Pilapil v. Court of Appeals, 11 it was held that a common carrier
is not liable for failing to install window grills on its buses to protect the passengers from injuries cause by rocks hurled at the bus
by lawless elements. On the other hand, in De Guzman v. Court of Appeals, 12 it was ruled that a common carriers is not
responsible for goods lost as a result of a robbery which is attended by grave or irresistable threat, violence, or force.
It is clear that the cases of Pilapil and De Guzman do not apply to the prensent case. Art. 1755 of the Civil Code provides that "a
common carrier is bound to carry the passengers as far as human care and foresight can provide, using the utmost diligence of
very cautious persons, with due regard for all the circumstances." Thus, we held in Pilapil and De Guzman that the respondents
therein were not negligent in failing to take special precautions against threats to the safety of passengers which could not be
foreseen, such as tortious or criminal acts of third persons. In the present case, this factor of unforeseeability (the second requisite
for an event to be considered force majeure) is lacking. As already stated, despite the report of PC agent Generalao that the
Maranaos were planning to burn some of petitioner's buses and the assurance of petitioner's operation manager (Diosdado
Bravo) that the necessary precautions would be taken, nothing was really done by petitioner to protect the safety of passengers.
Third. Deceased not Guilty of Contributory Negligence
The petitioner contends that Atty. Caorong was guilty of contributory negligence in returning to the bus to retrieve something. But
Atty. Caorong did not act recklessly. It should be pointed out that the intended targets of the violence were petitioners and its
employees, not its passengers. The assailant's motive was to retaliate for the loss of life of two Maranaos as a result of the
collision between petitioner's bus and the jeepney in which the two Maranaos were riding. Mananggolo, the leader of the group
which had hijacked the bus, ordered the passengers to get off the bus as they intended to burn it and its driver. The armed men
actually allowed Atty. Caorong to retrieve something from the bus. What apparently angered them was his attempt to help the
driver of the bus by pleading for his life. He was playing the role of the good Samaritan. Certainly, this act cannot considered an
act of negligence, let alone recklessness.
Fourth. Petitioner Liable to Private Respaondents for Damages
We now consider the question of damages that the heirs of Atty. Caorong, private respondents herein, are entitled to recover from
the petitioner.
Indemnity for Death. Art. 1764 of the Civil Code, in relation to Art. 2206 thereof, provides for the payment of indemnity for the
death of passengers caused by the breach of contract of carriage by a common carrier. Initially fixed in Art. 2206 at P3,000.00, the
amount of the said indemnity for death has through the years been gradually increased in view of the declining value of the peso.
It is presently fixed at P50,000.00. 13 Private respondents are entitled to this amount.
Actual Damages. Art. 2199 provides that "except as provided by law or by stipulation, one is entitled to an adequate compensation
only for such pecuniary loss suffered by him as has duly proved." The trial court found that the private respondents spent
P30,000.00 for the wake and burial of Atty. Caorong. 14 Since petitioner does not question this finding of the trial court, it is liable to
private respondent in the said amount as actual damages.
Moral Damages. Under Art. 2206, the "spouse, legitimate and illegitimate descendants and ascendants of the deceased may
demand moral damages for mental anguish by reason of the death of the deceased." The trial court found that private respondent
Paulie Caorong suffered pain from the death of her husband and worry on how to provide support for their minor children, private
respondents Yasser King, Rose Heinni, and Prince Alexander. 15 The petitioner likewise does not question this finding of the trial
court. Thus, in accordance with recent decisions of this Court, 16 we hold that the petitioner is liable to the private respondents in
the amount of P100,000.00 as moral damages for the death of Atty. Caorong.
Exemplary Damages. Art. 2232 provides that "in contracts and quasi-contracts, the court may award exemplary damages if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent reckless manner." In the present case, the petitioner
acted in a wanton and reckless manner. Despite warning that the Maranaos were planning to take revenge against the petitioner
by burning some of its buses, and contary to the assurance made by its operations manager that the necessary precautions would
be take, the petitioner and its employees did nothing to protect the safety of passengers. Under the circumtances, we deem it
reasonable to award private respondents exemplary damages in the amount of P100,000.00. 17
Attorney's Fees. Pursuant to Art. 2208, attorney's fees may be recovered when, as in the instant case, exemplary damages are
awarded. In the recent case of Sulpicio Lines, Inc. v. Court of Appeals, 18 we held an award of P50,000.00 as attorney's fees to be
reasonable. Hence, the private respondents are entitled to attorney's fees in that amount.
Compensation for Loss of Earning Capacity. Art. 1764 of the Civil Code, in relation to Art. 2206 thereof, provides that in addition to
the indemnity for death arising from the breach of contrtact of carriage by a common carrier, the "defendant shall be liable for the
loss of the earning capacity of the deceased, and the indemnity shall be paid to the heirs of the latter." The formula established in
decided cases for computing net earning capacity is as follows: 19
Gross Necessary
Net Earning = Life x Annual Living
Capacity Expectancy Income Expenses
Life expectancy is equivalent to two thirds (2/3) multiplied by the difference of eighty (80) and the age of the deceased. 20 Since
Atty. Caorong was 37 years old at that time of his death, 21 he had a life expectancy of 28 2/3 more years. 22 His projected gross
annual income, computed based on his monthly salary of P11,385.00. 23 as a lawyer in the Department of Agrarian Reform at the
time of his death, was P148,005.00. 24 Allowing for necessary living expenses of fifty percent (50%) 25 of his projected gross
annual income, his total earning capacity amounts to P2,121,404.90. 26 Hence, the petitioner is liable to the private respondents in
the said amount as a compensation for loss of earning capacity.

WHEREFORE, the decision, dated July 29, 1994, of the Court of Appeals is hereby AFFIRMED with the MODIFICATION that
petitioner Fortune Express, Inc. is ordered to pay the following amounts to private respondents Paulie, Yasser King, Rose Heinni,
and Prince Alexander Caorong:
1. death indemnity in the amount of fifty thousand pesos (P50,000.00);
2. actual damages in the amount of thirty thousand pesos (P30,000.00);
3. moral damages in the amount of one hundred thousand pesos (P100,000.00);
4. exemplary damages in the amount of one hundred thousand pesos (P100,000.00);
5. attorney's fees in the amount of fifty thousand pesos (P50,000.00);
6. compensation for loss of earning capacity in the amount of two million one hundred twenty-one thousand four hundred four
pesos and ninety centavos (P2,121,404.90); and
7. cost of suits.
SO ORDERED.

G.R. No. 131541

October 20, 2000

THERMOCHEM INCORPORATED and JEROME O. CASTRO, petitioners,

vs.
LEONORA NAVAL and THE COURT OF APPEALS, respondents.
YNARES-SANTIAGO, J.:
This damage suit arose from a collision of vehicles based on the following facts:
"(O)n May 10, 1992, at around 12:00 o'clock midnight, Eduardo Edem 1 was driving a "Luring Taxi" along Ortigas Avenue, near
Rosario, Pasig, going towards Cainta. Prior to the collision, the taxicab was parked along the right side of Ortigas Avenue, not far
from the Rosario Bridge, to unload a passenger. Thereafter, the driver executed a U-turn to traverse the same road, going to the
direction of EDSA. At this point, the Nissan Pathfinder traveling along the same road going to the direction of Cainta collided with
the taxicab. The point of impact was so great that the taxicab was hit in the middle portion and was pushed sideward, causing the
driver to lose control of the vehicle. The taxicab was then dragged into the nearby Question Tailoring Shop, thus, causing damage
to the said tailoring shop, and its driver, Eduardo Eden, sustained injuries as a result of the incident." 2
Private respondent, as owner of the taxi, filed a damage suit against petitioner, Thermochem Incorporated, as the owner of the
Nissan Pathfinder, and its driver, petitioner Jerome Castro. After trial, the lower court adjudged petitioner Castro negligent and
ordered petitioners, jointly and severally, to pay private respondent actual, compensatory and exemplary damages plus attorney's
fees and costs of suit. The dispositive portion of the Decision of the Regional Trial Court, Branch 150 of Makati City dated
September 25, 1995, reads:
In view of all the foregoing, judgment is hereby rendered ordering the defendants, jointly and severally, to pay plaintiff the
following:
1. The amount of P47,850.00 as actual damages;
2. The amount of P45,000.00 as compensatory damages for unrealized income;
3. The amount of P 10,000.00 as exemplary damages;
4. The amount of P10,000.00 as and for attorney's fees; and
5. Cost of suit.
SO ORDERED.3
On appeal, the Court of Appeals affirmed the judgment of the court a quo. 4 Hence, this petition for review on certiorari. The petition
was denied on February 2, 1998 for failure to submit an explanation why no personal service of copies of certain pleadings was
made as required by Rule 13, Section 11 of the 1997 Rules of Civil Procedure. 5 Upon petitioners' motion for reconsideration, the
petition was reinstated and private respondent was required to file her Comment in a Resolution dated June 22, 1998. 6 A copy of
the said Resolution was sent by registered mail to private respondent's counsel but the same was returned to sender. 7 In a
separate Resolution issued on the same date, this Court ordered that a copy of the June 22, 1998 Resolution be served
personally on private respondent's counsel.8 As the said Resolution was also returned unserved, "the Court Resolved to consider
the said Resolution as SERVED." 9 After more than a year, no Comment has been filed. Considering that private respondent was
given only ten (10) days to file her Comment, that period had already lapsed ten days after the June 23, 1999 Resolution which
stated that the June 22, 1998 resolution as "served".
Service of notice or other pleadings which are required by the rules to be furnished to the parties must be made on their last
address on record. If they are represented by counsel, such notices shall be sent instead to the counsel's last given address on
record in the absence of a proper and adequate notice to the court of a change of address, 10 unless service upon the party himself
is ordered by the court.11 It is the party and his counsel's responsibility to device a system for the receipt of mail intended for
them12 just as it is the duty of counsel to inform the court of a change in his address. In the case at bar, private respondent's
counsel never notified the Court of any change of his address or whether he no longer holds office in his last address of record.
Neither was the Court informed if his ties with his client has been severed. Insofar as the Court is concerned, the last address on
record is the place where all notices shall be served until the Court is officially informed to the contrary. What is the effect of the
failure of a private respondent to comply with a court order to file Comment?

Courts are given the option to dispense with the filing of the Comment and consider the case as deemed submitted for decision.
Under Rule 46, Section 7 of the 1997 Rules of Civil Procedure, 13 when the respondent in an original action filed with the court fails
to file its comment, the case may be decided on the basis of the evidence on record without prejudice to disciplinary action against
the disobedient party. Concomitant thereto is the rule that pursuant to Rule 51, Section 1(B)(1), 14 where no comment is filed upon
the expiration of the period to comment in an original action or a petition for review, the case shall be deemed submitted for
decision. Both provisions are applicable to a petition for review filed with the Supreme Court as provided in Rule 56, Section 2(a)
of the Rules.15 Moreover, a lawyer who fails to submit the required Comment manifests willful disobedience to a lawful order of the
Supreme Court, a clear violation of the Canon of Professional Ethics. 16 Counsel must remember that his actions and omissions
are binding on his client.17 He should not neglect legal matters entrusted to him as his negligence therefrom shall render him
liable. 18
The petition lacks merit.
The issue of whether a party is negligent is a question of fact. It is a time-honored precept that the Supreme Court is not a trier of
facts,19 although it has authority to review and reverse factual findings of lower courts if these do not conform to evidence. 20 It is
also settled that findings of fact of the trial court, particularly when affirmed by the Court of Appeals, is binding on the Supreme
Court21 and generally conclusive,22 especially if it has not been adequately shown that no significant facts and circumstances were
overlooked or disregarded which when considered would have altered the outcome of the disposition.
The driver of the oncoming Nissan Pathfinder vehicle was liable and the driver of the U-turning taxicab was contributorily liable.
Contrary to petitioners' contention, the fact that a party had no opportunity to avoid the collision is of his own making and this
should not relieve him of liability.23 From petitioner Castro's testimonial admissions, it is established that he was driving at a speed
faster than 50 kilometers per hour because it was a downhill slope coming from the Rosario bridge. But as he allegedly stepped
on the brake, it locked causing his Nissan Pathfinder to skid to the left and consequently hit the taxicab. The sudden malfunction
of the vehicle's brake system is the usual excuse of drivers involved in collisions which are the result of speedy driving, particularly
when the road is downhill.
Malfunction or loss of brake is not a fortuitous event. Between the owner and his driver, on the one hand, and third parties such as
commuters, drivers and pedestrians, on the other, the former is presumed to know about the conditions of his vehicle and is duty
bound to take care thereof with the diligence of a good father of the family. A mechanically defective vehicle should avoid the
streets. As petitioner's vehicle was moving downhill, the driver should have slowed down since a downhill drive would naturally
cause the vehicle to accelerate. Moreover, the record shows that the Nissan Pathfinder was on the wrong lane when the collision
occurred. This was a disregard of traffic safety rules. The law considers what would be reckless, blameworthy or negligent in a
man of ordinary diligence and prudence and determines liability by that. 24 Even assuming arguendo that loss of brakes is an act of
God, by reason of their negligence, the fortuitous event became humanized, rendering the Nissan driver liable for the ensuing
damages.25
As mentioned earlier, the driver of the taxi is contributorily liable. U-turns are not generally advisable particularly on major streets.
The taxi was hit on its side which means that it had not yet fully made a turn to the other lane. The driver of the taxi ought to have
known that vehicles coming from the Rosario bridge are on a downhill slope. Obviously, there was lack of foresight on his part,
making him contributorily liable. Most public utility drivers disregard signs and traffic rules especially during the night when traffic
enforcers manning the streets disappear with the light. In driving vehicles, the primary concern should be the safety not only of the
driver or his passengers, but also his fellow motorists.
Considering the contributory negligence of the driver of private respondent's taxi, the award of P47,850.00, for the repair of the
taxi, should be reduced in half. All other awards for damages are deleted for lack of merit.
WHEREFORE, based on the foregoing, the assailed decision is MODIFIED. Petitioners are ordered to pay, jointly and severally, to
private respondent the amount of P23,925.00 as actual damages. All other awards are DELETED.
SO ORDERED.

G.R. No. 147324

May 25, 2004

PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, petitioner,

vs.
GLOBE TELECOM, INC. (formerly Globe Mckay Cable and Radio Corporation), respondents.
x-----------------------------x
GLOBE TELECOM, INC., petitioner,
vs.
PHILIPPINE COMMUNICATION SATELLITE CORPORATION, respondent.
DECISION
TINGA, J.:
Before the Court are two Petitions for Review assailing the Decision of the Court of Appeals, dated 27 February 2001, in CA-G.R.
CV No. 63619.1
The facts of the case are undisputed.
For several years prior to 1991, Globe Mckay Cable and Radio Corporation, now Globe Telecom, Inc. (Globe), had been engaged
in the coordination of the provision of various communication facilities for the military bases of the United States of America (US)
in Clark Air Base, Angeles, Pampanga and Subic Naval Base in Cubi Point, Zambales. The said communication facilities were
installed and configured for the exclusive use of the US Defense Communications Agency (USDCA), and for security reasons,

were operated only by its personnel or those of American companies contracted by it to operate said facilities. The USDCA
contracted with said American companies, and the latter, in turn, contracted with Globe for the use of the communication facilities.
Globe, on the other hand, contracted with local service providers such as the Philippine Communications Satellite Corporation
(Philcomsat) for the provision of the communication facilities.
On 07 May 1991, Philcomsat and Globe entered into an Agreement whereby Philcomsat obligated itself to establish, operate and
provide an IBS Standard B earth station (earth station) within Cubi Point for the exclusive use of the USDCA. 2 The term of the
contract was for 60 months, or five (5) years. 3 In turn, Globe promised to pay Philcomsat monthly rentals for each leased circuit
involved.4
At the time of the execution of the Agreement, both parties knew that the Military Bases Agreement between the Republic of the
Philippines and the US (RP-US Military Bases Agreement), which was the basis for the occupancy of the Clark Air Base and Subic
Naval Base in Cubi Point, was to expire in 1991. Under Section 25, Article XVIII of the 1987 Constitution, foreign military bases,
troops or facilities, which include those located at the US Naval Facility in Cubi Point, shall not be allowed in the Philippines unless
a new treaty is duly concurred in by the Senate and ratified by a majority of the votes cast by the people in a national referendum
when the Congress so requires, and such new treaty is recognized as such by the US Government.
Subsequently, Philcomsat installed and established the earth station at Cubi Point and the USDCA made use of the same.
On 16 September 1991, the Senate passed and adopted Senate Resolution No. 141, expressing its decision not to concur in the
ratification of the Treaty of Friendship, Cooperation and Security and its Supplementary Agreements that was supposed to extend
the term of the use by the US of Subic Naval Base, among others. 5 The last two paragraphs of the Resolution state:
FINDING that the Treaty constitutes a defective framework for the continuing relationship between the two countries in the spirit of
friendship, cooperation and sovereign equality: Now, therefore, be it Resolved by the Senate, as it is hereby resolved, To express
its decision not to concur in the ratification of the Treaty of Friendship, Cooperation and Security and its Supplementary
Agreements, at the same time reaffirming its desire to continue friendly relations with the government and people of the United
States of America.6
On 31 December 1991, the Philippine Government sent a Note Verbale to the US Government through the US Embassy, notifying
it of the Philippines termination of the RP-US Military Bases Agreement. The Note Verbale stated that since the RP-US Military
Bases Agreement, as amended, shall terminate on 31 December 1992, the withdrawal of all US military forces from Subic Naval
Base should be completed by said date.
In a letter dated 06 August 1992, Globe notified Philcomsat of its intention to discontinue the use of the earth station effective 08
November 1992 in view of the withdrawal of US military personnel from Subic Naval Base after the termination of the RP-US
Military Bases Agreement. Globe invoked as basis for the letter of termination Section 8 (Default) of the Agreement, which
provides:
Neither party shall be held liable or deemed to be in default for any failure to perform its obligation under this Agreement if such
failure results directly or indirectly from force majeure or fortuitous event. Either party is thus precluded from performing its
obligation until such force majeure or fortuitous event shall terminate. For the purpose of this paragraph, force majeure shall mean
circumstances beyond the control of the party involved including, but not limited to, any law, order, regulation, direction or request
of the Government of the Philippines, strikes or other labor difficulties, insurrection riots, national emergencies, war, acts of public
enemies, fire, floods, typhoons or other catastrophies or acts of God.
Philcomsat sent a reply letter dated 10 August 1992 to Globe, stating that "we expect [Globe] to know its commitment to pay the
stipulated rentals for the remaining terms of the Agreement even after [Globe] shall have discontinue[d] the use of the earth station
after November 08, 1992."7 Philcomsat referred to Section 7 of the Agreement, stating as follows:
7. DISCONTINUANCE OF SERVICE
Should [Globe] decide to discontinue with the use of the earth station after it has been put into operation, a written notice shall be
served to PHILCOMSAT at least sixty (60) days prior to the expected date of termination. Notwithstanding the non-use of the earth
station, [Globe] shall continue to pay PHILCOMSAT for the rental of the actual number of T1 circuits in use, but in no case shall be
less than the first two (2) T1 circuits, for the remaining life of the agreement. However, should PHILCOMSAT make use or sell the
earth station subject to this agreement, the obligation of [Globe] to pay the rental for the remaining life of the agreement shall be at
such monthly rate as may be agreed upon by the parties. 8
After the US military forces left Subic Naval Base, Philcomsat sent Globe a letter dated 24 November 1993 demanding payment of
its outstanding obligations under the Agreement amounting to US$4,910,136.00 plus interest and attorneys fees. However, Globe
refused to heed Philcomsats demand.
On 27 January 1995, Philcomsat filed with the Regional Trial Court of Makati a Complaint against Globe, praying that the latter be
ordered to pay liquidated damages under the Agreement, with legal interest, exemplary damages, attorneys fees and costs of
suit. The case was raffled to Branch 59 of said court.
Globe filed an Answer to the Complaint, insisting that it was constrained to end the Agreement due to the termination of the RPUS Military Bases Agreement and the non-ratification by the Senate of the Treaty of Friendship and Cooperation, which events
constituted force majeure under the Agreement. Globe explained that the occurrence of said events exempted it from paying
rentals for the remaining period of the Agreement.
On 05 January 1999, the trial court rendered its Decision, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Ordering the defendant to pay the plaintiff the amount of Ninety Two Thousand Two Hundred Thirty Eight US Dollars
(US$92,238.00) or its equivalent in Philippine Currency (computed at the exchange rate prevailing at the time of compliance or
payment) representing rentals for the month of December 1992 with interest thereon at the legal rate of twelve percent (12%) per
annum starting December 1992 until the amount is fully paid;
2. Ordering the defendant to pay the plaintiff the amount of Three Hundred Thousand (P300,000.00) Pesos as and for attorneys

fees;
3. Ordering the DISMISSAL of defendants counterclaim for lack of merit; and
4. With costs against the defendant.
SO ORDERED.9
Both parties appealed the trial courts Decision to the Court of Appeals.
Philcomsat claimed that the trial court erred in ruling that: (1) the non-ratification by the Senate of the Treaty of Friendship,
Cooperation and Security and its Supplementary Agreements constitutes force majeure which exempts Globe from complying with
its obligations under the Agreement; (2) Globe is not liable to pay the rentals for the remainder of the term of the Agreement; and
(3) Globe is not liable to Philcomsat for exemplary damages.
Globe, on the other hand, contended that the RTC erred in holding it liable for payment of rent of the earth station for December
1992 and of attorneys fees. It explained that it terminated Philcomsats services on 08 November 1992; hence, it had no reason to
pay for rentals beyond that date.
On 27 February 2001, the Court of Appeals promulgated its Decision dismissing Philcomsats appeal for lack of merit and
affirming the trial courts finding that certain events constituting force majeure under Section 8 the Agreement occurred and
justified the non-payment by Globe of rentals for the remainder of the term of the Agreement.
The appellate court ruled that the non-ratification by the Senate of the Treaty of Friendship, Cooperation and Security, and its
Supplementary Agreements, and the termination by the Philippine Government of the RP-US Military Bases Agreement effective
31 December 1991 as stated in the Philippine Governments Note Verbale to the US Government, are acts, directions, or requests
of the Government of the Philippines which constitute force majeure. In addition, there were circumstances beyond the control of
the parties, such as the issuance of a formal order by Cdr. Walter Corliss of the US Navy, the issuance of the letter notification
from ATT and the complete withdrawal of all US military forces and personnel from Cubi Point, which prevented further use of the
earth station under the Agreement.
However, the Court of Appeals ruled that although Globe sought to terminate Philcomsats services by 08 November 1992, it is still
liable to pay rentals for the December 1992, amounting to US$92,238.00 plus interest, considering that the US military forces and
personnel completely withdrew from Cubi Point only on 31 December 1992. 10
Both parties filed their respective Petitions for Review assailing the Decision of the Court of Appeals.
In G.R. No. 147324,11 petitioner Philcomsat raises the following assignments of error:
A. THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING A DEFINITION OF FORCE MAJEURE DIFFERENT FROM
WHAT ITS LEGAL DEFINITION FOUND IN ARTICLE 1174 OF THE CIVIL CODE, PROVIDES, SO AS TO EXEMPT GLOBE
TELECOM FROM COMPLYING WITH ITS OBLIGATIONS UNDER THE SUBJECT AGREEMENT.
B. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS NOT LIABLE TO PHILCOMSAT
FOR RENTALS FOR THE REMAINING TERM OF THE AGREEMENT, DESPITE THE CLEAR TENOR OF SECTION 7 OF THE
AGREEMENT.
C. THE HONORABLE OCURT OF APPEALS ERRED IN DELETING THE TRIAL COURTS AWARD OF ATTORNEYS FEES IN
FAVOR OF PHILCOMSAT.
D. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS NOT LIABLE TO PHILCOMSAT
FOR EXEMPLARY DAMAGES.12
Philcomsat argues that the termination of the RP-US Military Bases Agreement cannot be considered a fortuitous event because
the happening thereof was foreseeable. Although the Agreement was freely entered into by both parties, Section 8 should be
deemed ineffective because it is contrary to Article 1174 of the Civil Code. Philcomsat posits the view that the validity of the
parties definition of force majeure in Section 8 of the Agreement as "circumstances beyond the control of the party involved
including, but not limited to, any law, order, regulation, direction or request of the Government of the Philippines, strikes or other
labor difficulties, insurrection riots, national emergencies, war, acts of public enemies, fire, floods, typhoons or other catastrophies
or acts of God," should be deemed subject to Article 1174 which defines fortuitous events as events which could not be foreseen,
or which, though foreseen, were inevitable.13
Philcomsat further claims that the Court of Appeals erred in holding that Globe is not liable to pay for the rental of the earth station
for the entire term of the Agreement because it runs counter to what was plainly stipulated by the parties in Section 7 thereof.
Moreover, said ruling is inconsistent with the appellate courts pronouncement that Globe is liable to pay rentals for December
1992 even though it terminated Philcomsats services effective 08 November 1992, because the US military and personnel
completely withdrew from Cubi Point only in December 1992. Philcomsat points out that it was Globe which proposed the five-year
term of the Agreement, and that the other provisions of the Agreement, such as Section 4.1 14 thereof, evince the intent of Globe to
be bound to pay rentals for the entire five-year term. 15
Philcomsat also maintains that contrary to the appellate courts findings, it is entitled to attorneys fees and exemplary damages. 16
In its Comment to Philcomsats Petition, Globe asserts that Section 8 of the Agreement is not contrary to Article 1174 of the Civil
Code because said provision does not prohibit parties to a contract from providing for other instances when they would be exempt
from fulfilling their contractual obligations. Globe also claims that the termination of the RP-US Military Bases Agreement
constitutes force majeure and exempts it from complying with its obligations under the Agreement. 17 On the issue of the propriety
of awarding attorneys fees and exemplary damages to Philcomsat, Globe maintains that Philcomsat is not entitled thereto
because in refusing to pay rentals for the remainder of the term of the Agreement, Globe only acted in accordance with its rights. 18
In G.R. No. 147334,19 Globe, the petitioner therein, contends that the Court of Appeals erred in finding it liable for the amount of
US$92,238.00, representing rentals for December 1992, since Philcomsats services were actually terminated on 08 November
1992.20

In its Comment, Philcomsat claims that Globes petition should be dismissed as it raises a factual issue which is not cognizable by
the Court in a petition for review on certiorari.21
On 15 August 2001, the Court issued a Resolution giving due course to Philcomsats Petition in G.R. No.
147324 and required the parties to submit their respective memoranda. 22
Similarly, on 20 August 2001, the Court issued a Resolution giving due course to the Petition filed by Globe in G.R. No. 147334
and required both parties to submit their memoranda. 23
Philcomsat and Globe thereafter filed their respective Consolidated Memoranda in the two cases, reiterating their arguments in
their respective petitions.
The Court is tasked to resolve the following issues: (1) whether the termination of the RP-US Military Bases Agreement, the nonratification of the Treaty of Friendship, Cooperation and Security, and the consequent withdrawal of US military forces and
personnel from Cubi Point constitute force majeure which would exempt Globe from complying with its obligation to pay rentals
under its Agreement with Philcomsat; (2) whether Globe is liable to pay rentals under the Agreement for the month of December
1992; and (3) whether Philcomsat is entitled to attorneys fees and exemplary damages.
No reversible error was committed by the Court of Appeals in issuing the assailed Decision; hence the petitions are denied.
There is no merit is Philcomsats argument that Section 8 of the Agreement cannot be given effect because the enumeration of
events constituting force majeure therein unduly expands the concept of a fortuitous event under Article 1174 of the Civil Code
and is therefore invalid.
In support of its position, Philcomsat contends that under Article 1174 of the Civil Code, an event must be unforeseen in order to
exempt a party to a contract from complying with its obligations therein. It insists that since the expiration of the RP-US Military
Bases Agreement, the non-ratification of the Treaty of Friendship, Cooperation and Security and the withdrawal of US military
forces and personnel from Cubi Point were not unforeseeable, but were possibilities known to it and Globe at the time they
entered into the Agreement, such events cannot exempt Globe from performing its obligation of paying rentals for the entire fiveyear term thereof.
However, Article 1174, which exempts an obligor from liability on account of fortuitous events or force majeure, refers not only to
events that are unforeseeable, but also to those which are foreseeable, but inevitable:
Art. 1174. Except in cases 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.
A fortuitous event under Article 1174 may either be an "act of God," or natural occurrences such as floods or typhoons, 24 or an "act
of man," such as riots, strikes or wars. 25
Philcomsat and Globe agreed in Section 8 of the Agreement that the following events shall be deemed events constituting force
majeure:
1. Any law, order, regulation, direction or request of the Philippine Government;
2. Strikes or other labor difficulties;
3. Insurrection;
4. Riots;
5. National emergencies;
6. War;
7. Acts of public enemies;
8. Fire, floods, typhoons or other catastrophies or acts of God;
9. Other circumstances beyond the control of the parties.
Clearly, the foregoing are either unforeseeable, or foreseeable but beyond the control of the parties. There is nothing in the
enumeration that runs contrary to, or expands, the concept of a fortuitous event under Article 1174.
Furthermore, under Article 130626 of the Civil Code, parties to a contract may establish such stipulations, clauses, terms and
conditions as they may deem fit, as long as the same do not run counter to the law, morals, good customs, public order or public
policy.27
Article 1159 of the Civil Code also provides that "[o]bligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith." 28 Courts cannot stipulate for the parties nor amend their agreement where the
same does not contravene law, morals, good customs, public order or public policy, for to do so would be to alter the real intent of
the parties, and would run contrary to the function of the courts to give force and effect thereto. 29
Not being contrary to law, morals, good customs, public order, or public policy, Section 8 of the Agreement which Philcomsat and
Globe freely agreed upon has the force of law between them. 30
In order that Globe may be exempt from non-compliance with its obligation to pay rentals under Section 8, the concurrence of the
following elements must be established: (1) the event must be independent of the human will; (2) the occurrence must render it
impossible for the debtor to fulfill the obligation in a normal manner; and (3) the obligor must be free of participation in, or
aggravation of, the injury to the creditor.31
The Court agrees with the Court of Appeals and the trial court that the abovementioned requisites are present in the instant case.
Philcomsat and Globe had no control over the non-renewal of the term of the RP-US Military Bases Agreement when the same

expired in 1991, because the prerogative to ratify the treaty extending the life thereof belonged to the Senate. Neither did the
parties have control over the subsequent withdrawal of the US military forces and personnel from Cubi Point in December 1992:
Obviously the non-ratification by the Senate of the RP-US Military Bases Agreement (and its Supplemental Agreements) under its
Resolution No. 141. (Exhibit "2") on September 16, 1991 is beyond the control of the parties. This resolution was followed by the
sending on December 31, 1991 o[f] a "Note Verbale" (Exhibit "3") by the Philippine Government to the US Government notifying
the latter of the formers termination of the RP-US Military Bases Agreement (as amended) on 31 December 1992 and that
accordingly, the withdrawal of all U.S. military forces from Subic Naval Base should be completed by said date. Subsequently,
defendant [Globe] received a formal order from Cdr. Walter F. Corliss II Commander USN dated July 31, 1992 and a notification
from ATT dated July 29, 1992 to terminate the provision of T1s services (via an IBS Standard B Earth Station) effective November
08, 1992. Plaintiff [Philcomsat] was furnished with copies of the said order and letter by the defendant on August 06, 1992.
Resolution No. 141 of the Philippine Senate and the Note Verbale of the Philippine Government to the US Government are acts,
direction or request of the Government of the Philippines and circumstances beyond the control of the defendant. The formal order
from Cdr. Walter Corliss of the USN, the letter notification from ATT and the complete withdrawal of all the military forces and
personnel from Cubi Point in the year-end 1992 are also acts and circumstances beyond the control of the defendant.
Considering the foregoing, the Court finds and so holds that the afore-narrated circumstances constitute "force majeure or
fortuitous event(s) as defined under paragraph 8 of the Agreement.

From the foregoing, the Court finds that the defendant is exempted from paying the rentals for the facility for the remaining term of
the contract.
As a consequence of the termination of the RP-US Military Bases Agreement (as amended) the continued stay of all US Military
forces and personnel from Subic Naval Base would no longer be allowed, hence, plaintiff would no longer be in any position to
render the service it was obligated under the Agreement. To put it blantly (sic), since the US military forces and personnel left or
withdrew from Cubi Point in the year end December 1992, there was no longer any necessity for the plaintiff to continue
maintaining the IBS facility. 32 (Emphasis in the original.)
The aforementioned events made impossible the continuation of the Agreement until the end of its five-year term without fault on
the part of either party. The Court of Appeals was thus correct in ruling that the happening of such fortuitous events rendered
Globe exempt from payment of rentals for the remainder of the term of the Agreement.
Moreover, it would be unjust to require Globe to continue paying rentals even though Philcomsat cannot be compelled to perform
its corresponding obligation under the Agreement. As noted by the appellate court:
We also point out the sheer inequity of PHILCOMSATs position. PHILCOMSAT would like to charge GLOBE rentals for the
balance of the lease term without there being any corresponding telecommunications service subject of the lease. It will be grossly
unfair and iniquitous to hold GLOBE liable for lease charges for a service that was not and could not have been rendered due to
an act of the government which was clearly beyond GLOBEs control. The binding effect of a contract on both parties is based on
the principle that the obligations arising from contracts have the force of law between the contracting parties, and there must be
mutuality between them based essentially on their equality under which it is repugnant to have one party bound by the contract
while leaving the other party free therefrom (Allied Banking Corporation v. Court of Appeals, 284 SCRA 357).33
With respect to the issue of whether Globe is liable for payment of rentals for the month of December 1992, the Court likewise
affirms the appellate courts ruling that Globe should pay the same.
Although Globe alleged that it terminated the Agreement with Philcomsat effective 08 November 1992 pursuant to the formal order
issued by Cdr. Corliss of the US Navy, the date when they actually ceased using the earth station subject of the Agreement was
not established during the trial. 34 However, the trial court found that the US military forces and personnel completely withdrew from
Cubi Point only on 31 December 1992. 35 Thus, until that date, the USDCA had control over the earth station and had the option of
using the same. Furthermore, Philcomsat could not have removed or rendered ineffective said communication facility until after 31
December 1992 because Cubi Point was accessible only to US naval personnel up to that time. Hence, the Court of Appeals did
not err when it affirmed the trial courts ruling that Globe is liable for payment of rentals until December 1992.
Neither did the appellate court commit any error in holding that Philcomsat is not entitled to attorneys fees and exemplary
damages.
The award of attorneys fees is the exception rather than the rule, and must be supported by factual, legal and equitable
justifications.36 In previously decided cases, the Court awarded attorneys fees where a party acted in gross and evident bad faith
in refusing to satisfy the other partys claims and compelled the former to litigate to protect his rights; 37 when the action filed is
clearly unfounded,38 or where moral or exemplary damages are awarded. 39 However, in cases where both parties have legitimate
claims against each other and no party actually prevailed, such as in the present case where the claims of both parties were
sustained in part, an award of attorneys fees would not be warranted. 40
Exemplary damages may be awarded in cases involving contracts or quasi-contracts, if the erring party acted in a wanton,
fraudulent, reckless, oppressive or malevolent manner.41 In the present case, it was not shown that Globe acted wantonly or
oppressively in not heeding Philcomsats demands for payment of rentals. It was established during the trial of the case before the
trial court that Globe had valid grounds for refusing to comply with its contractual obligations after 1992.
WHEREFORE, the Petitions are DENIED for lack of merit. The assailed Decision of the Court of Appeals in CA-G.R. CV No.
63619 is AFFIRMED.
SO ORDERED.

G.R. No. 186312

June 29, 2010

SPOUSES DANTE CRUZ and LEONORA CRUZ, Petitioners,

vs.
SUN HOLIDAYS, INC., Respondent.
DECISION
CARPIO MORALES, J.:
Spouses Dante and Leonora Cruz (petitioners) lodged a Complaint on January 25, 2001 1 against Sun Holidays, Inc. (respondent)
with the Regional Trial Court (RTC) of Pasig City for damages arising from the death of their son Ruelito C. Cruz (Ruelito) who
perished with his wife on September 11, 2000 on board the boat M/B Coco Beach III that capsized en route to Batangas from
Puerto Galera, Oriental Mindoro where the couple had stayed at Coco Beach Island Resort (Resort) owned and operated by
respondent.
The stay of the newly wed Ruelito and his wife at the Resort from September 9 to 11, 2000 was by virtue of a tour packagecontract with respondent that included transportation to and from the Resort and the point of departure in Batangas.
Miguel C. Matute (Matute),2 a scuba diving instructor and one of the survivors, gave his account of the incident that led to the filing
of the complaint as follows:
Matute stayed at the Resort from September 8 to 11, 2000. He was originally scheduled to leave the Resort in the afternoon of
September 10, 2000, but was advised to stay for another night because of strong winds and heavy rains.
On September 11, 2000, as it was still windy, Matute and 25 other Resort guests including petitioners son and his wife trekked to
the other side of the Coco Beach mountain that was sheltered from the wind where they boarded M/B Coco Beach III, which was
to ferry them to Batangas.
Shortly after the boat sailed, it started to rain. As it moved farther away from Puerto Galera and into the open seas, the rain and
wind got stronger, causing the boat to tilt from side to side and the captain to step forward to the front, leaving the wheel to one of
the crew members.
The waves got more unwieldy. After getting hit by two big waves which came one after the other, M/B Coco Beach III capsized
putting all passengers underwater.
The passengers, who had put on their life jackets, struggled to get out of the boat. Upon seeing the captain, Matute and the other
passengers who reached the surface asked him what they could do to save the people who were still trapped under the boat. The
captain replied "Iligtas niyo na lang ang sarili niyo" (Just save yourselves).
Help came after about 45 minutes when two boats owned by Asia Divers in Sabang, Puerto Galera passed by the capsized M/B
Coco Beach III. Boarded on those two boats were 22 persons, consisting of 18 passengers and four crew members, who were
brought to Pisa Island. Eight passengers, including petitioners son and his wife, died during the incident.
At the time of Ruelitos death, he was 28 years old and employed as a contractual worker for Mitsui Engineering & Shipbuilding
Arabia, Ltd. in Saudi Arabia, with a basic monthly salary of $900. 3
Petitioners, by letter of October 26, 2000, 4 demanded indemnification from respondent for the death of their son in the amount of
at least P4,000,000.
Replying, respondent, by letter dated November 7, 2000, 5 denied any responsibility for the incident which it considered to be a
fortuitous event. It nevertheless offered, as an act of commiseration, the amount of P10,000 to petitioners upon their signing of a
waiver.
As petitioners declined respondents offer, they filed the Complaint, as earlier reflected, alleging that respondent, as a common
carrier, was guilty of negligence in allowing M/B Coco Beach III to sail notwithstanding storm warning bulletins issued by the
Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA) as early as 5:00 a.m. of September 11,
2000.6
In its Answer,7 respondent denied being a common carrier, alleging that its boats are not available to the general public as they
only ferry Resort guests and crew members. Nonetheless, it claimed that it exercised the utmost diligence in ensuring the safety of
its passengers; contrary to petitioners allegation, there was no storm on September 11, 2000 as the Coast Guard in fact cleared
the voyage; and M/B Coco Beach III was not filled to capacity and had sufficient life jackets for its passengers. By way of
Counterclaim, respondent alleged that it is entitled to an award for attorneys fees and litigation expenses amounting to not less
than P300,000.
Carlos Bonquin, captain of M/B Coco Beach III, averred that the Resort customarily requires four conditions to be met before a
boat is allowed to sail, to wit: (1) the sea is calm, (2) there is clearance from the Coast Guard, (3) there is clearance from the
captain and (4) there is clearance from the Resorts assistant manager. 8 He added that M/B Coco Beach III met all four conditions
on September 11, 2000,9 but a subasco or squall, characterized by strong winds and big waves, suddenly occurred, causing the
boat to capsize.10
By Decision of February 16, 2005,11 Branch 267 of the Pasig RTC dismissed petitioners Complaint and respondents
Counterclaim.
Petitioners Motion for Reconsideration having been denied by Order dated September 2, 2005, 12 they appealed to the Court of
Appeals.
By Decision of August 19, 2008, 13 the appellate court denied petitioners appeal, holding, among other things, that the trial court
correctly ruled that respondent is a private carrier which is only required to observe ordinary diligence; that respondent in fact
observed extraordinary diligence in transporting its guests on board M/B Coco Beach III; and that the proximate cause of the
incident was a squall, a fortuitous event.
Petitioners Motion for Reconsideration having been denied by Resolution dated January 16, 2009, 14 they filed the present Petition

for Review.15
Petitioners maintain the position they took before the trial court, adding that respondent is a common carrier since by its tour
package, the transporting of its guests is an integral part of its resort business. They inform that another division of the appellate
court in fact held respondent liable for damages to the other survivors of the incident.
Upon the other hand, respondent contends that petitioners failed to present evidence to prove that it is a common carrier; that the
Resorts ferry services for guests cannot be considered as ancillary to its business as no income is derived therefrom; that it
exercised extraordinary diligence as shown by the conditions it had imposed before allowing M/B Coco Beach III to sail; that the
incident was caused by a fortuitous event without any contributory negligence on its part; and that the other case wherein the
appellate court held it liable for damages involved different plaintiffs, issues and evidence. 16
The petition is impressed with merit.
Petitioners correctly rely on De Guzman v. Court of Appeals17 in characterizing respondent as a common carrier.
The Civil Code defines "common carriers" in the following terms:
Article 1732. Common carriers are persons, corporations, firms or associations engaged in the business of carrying or transporting
passengers or goods or both, by land, water, or air for compensation, offering their services to the public.
The above article makes no distinction between one whose principal business activity is the carrying of persons or goods or both,
and one who does such carrying only as an ancillary activity (in local idiom, as "a sideline"). Article 1732 also carefully avoids
making any distinction between a person or enterprise offering transportation service on a regular or scheduled basis and one
offering such service on an occasional, episodic or unscheduled basis. Neither does Article 1732 distinguish between a carrier
offering its services to the "general public," i.e., the general community or population, and one who offers services or solicits
business only from a narrow segment of the general population. We think that Article 1733 deliberately refrained from making such
distinctions.
So understood, the concept of "common carrier" under Article 1732 may be seen to coincide neatly with the notion of "public
service," under the Public Service Act (Commonwealth Act No. 1416, as amended) which at least partially supplements the law on
common carriers set forth in the Civil Code. Under Section 13, paragraph (b) of the Public Service Act, "public service" includes:
. . . every person that now or hereafter may own, operate, manage, or control in the Philippines, for hire or compensation, with
general or limited clientele, whether permanent, occasional or accidental, and done for general business purposes, any common
carrier, railroad, street railway, traction railway, subway motor vehicle, either for freight or passenger, or both, with or without fixed
route and whatever may be its classification, freight or carrier service of any class, express service, steamboat, or steamship line,
pontines, ferries and water craft, engaged in the transportation of passengers or freight or both, shipyard, marine repair shop,
wharf or dock, ice plant, ice-refrigeration plant, canal, irrigation system, gas, electric light, heat and power, water supply and power
petroleum, sewerage system, wire or wireless communications systems, wire or wireless broadcasting stations and other similar
public services . . .18 (emphasis and underscoring supplied.)
Indeed, respondent is a common carrier. Its ferry services are so intertwined with its main business as to be properly considered
ancillary thereto. The constancy of respondents ferry services in its resort operations is underscored by its having its own Coco
Beach boats. And the tour packages it offers, which include the ferry services, may be availed of by anyone who can afford to pay
the same. These services are thus available to the public.
That respondent does not charge a separate fee or fare for its ferry services is of no moment. It would be imprudent to suppose
that it provides said services at a loss. The Court is aware of the practice of beach resort operators offering tour packages to factor
the transportation fee in arriving at the tour package price. That guests who opt not to avail of respondents ferry services pay the
same amount is likewise inconsequential. These guests may only be deemed to have overpaid.
As De Guzman instructs, Article 1732 of the Civil Code defining "common carriers" has deliberately refrained from making
distinctions on whether the carrying of persons or goods is the carriers principal business, whether it is offered on a regular basis,
or whether it is offered to the general public. The intent of the law is thus to not consider such distinctions. Otherwise, there is no
telling how many other distinctions may be concocted by unscrupulous businessmen engaged in the carrying of persons or goods
in order to avoid the legal obligations and liabilities of common carriers.
Under the Civil Code, common carriers, from the nature of their business and for reasons of public policy, are bound to observe
extraordinary diligence for the safety of the passengers transported by them, according to all the circumstances of each case. 19
They are bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very
cautious persons, with due regard for all the circumstances. 20
When a passenger dies or is injured in the discharge of a contract of carriage, it is presumed that the common carrier is at fault or
negligent. In fact, there is even no need for the court to make an express finding of fault or negligence on the part of the common
carrier. This statutory presumption may only be overcome by evidence that the carrier exercised extraordinary diligence. 21
Respondent nevertheless harps on its strict compliance with the earlier mentioned conditions of voyage before it allowed M/B
Coco Beach III to sail on September 11, 2000. Respondents position does not impress.
The evidence shows that PAGASA issued 24-hour public weather forecasts and tropical cyclone warnings for shipping on
September 10 and 11, 2000 advising of tropical depressions in Northern Luzon which would also affect the province of Mindoro. 22
By the testimony of Dr. Frisco Nilo, supervising weather specialist of PAGASA, squalls are to be expected under such weather
condition.23
A very cautious person exercising the utmost diligence would thus not brave such stormy weather and put other peoples lives at
risk. The extraordinary diligence required of common carriers demands that they take care of the goods or lives entrusted to their
hands as if they were their own. This respondent failed to do.
Respondents insistence that the incident was caused by a fortuitous event does not impress either.
The elements of a "fortuitous event" are: (a) the cause of the unforeseen and unexpected occurrence, or the failure of the debtors

to comply with their obligations, must have been independent of human will; (b) the event that constituted the caso fortuito must
have been impossible to foresee or, if foreseeable, impossible to avoid; (c) the occurrence must have been such as to render it
impossible for the debtors to fulfill their obligation in a normal manner; and (d) the obligor must have been free from any
participation in the aggravation of the resulting injury to the creditor.24
To fully free a common carrier from any liability, the fortuitous event must have been the proximate and only cause of the loss. And
it should have exercised due diligence to prevent or minimize the loss before, during and after the occurrence of the fortuitous
event.25
Respondent cites the squall that occurred during the voyage as the fortuitous event that overturned M/B Coco Beach III. As
reflected above, however, the occurrence of squalls was expected under the weather condition of September 11, 2000. Moreover,
evidence shows that M/B Coco Beach III suffered engine trouble before it capsized and sank. 26 The incident was, therefore, not
completely free from human intervention.
The Court need not belabor how respondents evidence likewise fails to demonstrate that it exercised due diligence to prevent or
minimize the loss before, during and after the occurrence of the squall.
Article 176427 vis--vis Article 220628 of the Civil Code holds the common carrier in breach of its contract of carriage that results in
the death of a passenger liable to pay the following: (1) indemnity for death, (2) indemnity for loss of earning capacity and (3)
moral damages.
Petitioners are entitled to indemnity for the death of Ruelito which is fixed at P50,000.29
As for damages representing unearned income, the formula for its computation is:
Net Earning Capacity = life expectancy x (gross annual income - reasonable and necessary living expenses).
Life expectancy is determined in accordance with the formula:
2 / 3 x [80 age of deceased at the time of death] 30
The first factor, i.e., life expectancy, is computed by applying the formula (2/3 x [80 age at death]) adopted in the American
Expectancy Table of Mortality or the Actuarial of Combined Experience Table of Mortality.31
The second factor is computed by multiplying the life expectancy by the net earnings of the deceased, i.e., the total earnings less
expenses necessary in the creation of such earnings or income and less living and other incidental expenses. 32 The loss is not
equivalent to the entire earnings of the deceased, but only such portion as he would have used to support his dependents or heirs.
Hence, to be deducted from his gross earnings are the necessary expenses supposed to be used by the deceased for his own
needs.33
In computing the third factor necessary living expense, Smith Bell Dodwell Shipping Agency Corp. v. Borja 34 teaches that when,
as in this case, there is no showing that the living expenses constituted the smaller percentage of the gross income, the living
expenses are fixed at half of the gross income.
Applying the above guidelines, the Court determines Ruelito's life expectancy as follows:
Life expectancy =

2/3 x [80 - age of deceased at the time of death]

2/3 x [80 - 28]
2/3 x [52]

Life expectancy =
Documentary evidence shows that Ruelito was earning a basic monthly salary of $900 35 which, when converted to Philippine peso
applying the annual average exchange rate of $1 = P44 in 2000,36 amounts to P39,600. Ruelitos net earning capacity is thus
computed as follows:
Net Earning Capacity

= life expectancy x (gross annual income - reasonable and

necessary living expenses).
= 35 x (P475,200 - P237,600)
= 35 x (P237,600)

Net Earning Capacity

8,316,000

Respecting the award of moral damages, since respondent common carriers breach of contract of carriage resulted in the death
of petitioners son, following Article 1764 vis--vis Article 2206 of the Civil Code, petitioners are entitled to moral damages.
Since respondent failed to prove that it exercised the extraordinary diligence required of common carriers, it is presumed to have
acted recklessly, thus warranting the award too of exemplary damages, which are granted in contractual obligations if the
defendant acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.37
Under the circumstances, it is reasonable to award petitioners the amount of P100,000 as moral damages and P100,000 as
exemplary damages.381avvphi1
Pursuant to Article 220839 of the Civil Code, attorney's fees may also be awarded where exemplary damages are awarded. The
Court finds that 10% of the total amount adjudged against respondent is reasonable for the purpose.
Finally, Eastern Shipping Lines, Inc. v. Court of Appeals 40 teaches that when an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for payment of interest in the
concept of actual and compensatory damages, subject to the following rules, to wit
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the

interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum 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.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit. (emphasis supplied).
Since the amounts payable by respondent have been determined with certainty only in the present petition, the interest due shall
be computed upon the finality of this decision at the rate of 12% per annum until satisfaction, in accordance with paragraph
number 3 of the immediately cited guideline in Easter Shipping Lines, Inc.
WHEREFORE, the Court of Appeals Decision of August 19, 2008 is REVERSED and SET ASIDE. Judgment is rendered in favor
of petitioners ordering respondent to pay petitioners the following: (1) P50,000 as indemnity for the death of Ruelito Cruz; (2)
P8,316,000 as indemnity for Ruelitos loss of earning capacity; (3) P100,000 as moral damages; (4) P100,000 as exemplary
damages; (5) 10% of the total amount adjudged against respondent as attorneys fees; and (6) the costs of suit.
The total amount adjudged against respondent shall earn interest at the rate of 12% per annum computed from the finality of this
decision until full payment.
SO ORDERED.

G.R. No. 177921

December 4, 2013

METRO CONCAST STEEL CORPORATION, SPOUSES JOSE S. DYCHIAO AND TIUOH YAN, SPOUSES GUILLERMO AND
MERCEDES DYCHIAO, AND SPOUSES VICENTE AND FILOMENA DYCHIAO, Petitioners,
vs.
ALLIED BANK CORPORATION, Respondent.
RESOLUTION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari 1 are the Decision2 dated February 12, 2007 and the Resolution 3 dated May 10,
2007 of the Court of Appeals (CA) in CA-G.R. CV No. 86896 which reversed and set aside the Decision 4 dated January 17, 2006
of the Regional Trial Court of Makati, Branch 57 (RTC) in Civil Case No. 00-1563, thereby ordering petitioners Metro Concast
Steel Corporation (Metro Concast), Spouses Jose S. Dychiao and Tiu Oh Yan, Spouses Guillermo and Mercedes Dychiao, and
Spouses Vicente and Filomena Duchiao (individual petitioners) to solidarily pay respondent Allied Bank Corporation (Allied Bank)
the aggregate amount of P51,064,094.28, with applicable interests and penalty charges.
The Facts
On various dates and for different amounts, Metro Concast, a corporation duly organized and existing under and by virtue of
Philippine laws and engaged in the business of manufacturing steel, 5 through its officers, herein individual petitioners, obtained
several loans from Allied Bank. These loan transactions were covered by a promissory note and separate letters of credit/trust
receipts, the details of which are as follows:
<<Reference: http://www.scribd.com/doc/196404620/177921>>
Date Document Amount
December 13, 1996 Promissory Note No. 96-213016
P2,000,000.00 November 7, 1995 Trust Receipt No. 96-202365 7
P608,603.04 May 13, 1996 Trust Receipt No. 96-960522 8
P3,753,777.40 May 24, 1996 Trust Receipt No. 96-960524 9
P4,602,648.08 March 21, 1997 Trust Receipt No. 97-204724 10
P7,289,757.79 June 7, 1996 Trust Receipt No. 96-203280 11
P17,340,360.73 July 26, 1995 Trust Receipt No. 95-201943 12
P670,709.24 August 31, 1995 Trust Receipt No. 95-202053 13
P313,797.41 November 16, 1995 Trust Receipt No. 96-202439 14
P13,015,109.87 July 3, 1996 Trust Receipt No. 96-203552 15
P401,608.89 June 20, 1995 Trust Receipt No. 95-201710 16

P750,089.25 December 13, 1995 Trust Receipt No. 96-379089 17

P92,919.00 December 13, 1995 Trust Receipt No. 96/202581 18
P224,713.58
The interest rate under Promissory Note No. 96-21301 was pegged at 15.25% per annum (p.a.), with penalty charge of 3% per
month in case of default; while the twelve (12) trust receipts uniformly provided for an interest rate of 14% p.a. and 1% penalty
charge. By way of security, the individual petitioners executed several Continuing Guaranty/Comprehensive Surety Agreements 19
in favor of Allied Bank. Petitioners failed to settle their obligations under the aforementioned promissory note and trust receipts,
hence, Allied Bank, through counsel, sent them demand letters, 20 all dated December 10, 1998, seeking payment of the total
amount of P51,064,093.62, but to no avail. Thus, Allied Bank was prompted to file a complaint for collection of sum of money 21
(subject complaint) against petitioners before the RTC, docketed as Civil Case No. 00-1563. In their second 22 Amended Answer,23
petitioners admitted their indebtedness to Allied Bank but denied liability for the interests and penalties charged, claiming to have
paid the total sum of P65,073,055.73 by way of interest charges for the period covering 1992 to 1997. 24
They also alleged that the economic reverses suffered by the Philippine economy in 1998 as well as the devaluation of the peso
against the US dollar contributed greatly to the downfall of the steel industry, directly affecting the business of Metro Concast and
eventually leading to its cessation. Hence, in order to settle their debts with Allied Bank, petitioners offered the sale of Metro
Concasts remaining assets, consisting of machineries and equipment, to Allied Bank, which the latter, however, refused. Instead,
Allied Bank advised them to sell the equipment and apply the proceeds of the sale to their outstanding obligations. Accordingly,
petitioners offered the equipment for sale, but since there were no takers, the equipment was reduced into ferro scrap or scrap
metal over the years. In 2002, Peakstar Oil Corporation (Peakstar), represented by one Crisanta Camiling (Camiling), expressed
interest in buying the scrap metal. During the negotiations with Peakstar, petitioners claimed that Atty. Peter Saw (Atty. Saw), a
member of Allied Banks legal department, acted as the latters agent. Eventually, with the alleged conformity of Allied Bank,
through Atty. Saw, a Memorandum of Agreement 25 dated November 8, 2002 (MoA) was drawn between Metro Concast,
represented by petitioner Jose Dychiao, and Peakstar, through Camiling, under which Peakstar obligated itself to purchase the
scrap metal for a total consideration of P34,000,000.00, payable as follows:
(a) P4,000,000.00 by way of earnest money P2,000,000.00 to be paid in cash and the other P2,000,000.00 to be paid in two (2)
post-dated checks of P1,000,000.00 each;26 and
(b) the balance of P30,000,000.00 to be paid in ten (10) monthly installments of P3,000,000.00, secured by bank guarantees from
Bankwise, Inc. (Bankwise) in the form of separate post-dated checks. 27
Unfortunately, Peakstar reneged on all its obligations under the MoA. In this regard, petitioners asseverated that:
(a) their failure to pay their outstanding loan obligations to Allied Bank must be considered as force majeure ; and
(b) since Allied Bank was the party that accepted the terms and conditions of payment proposed by Peakstar, petitioners must
therefore be deemed to have settled their obligations to Allied Bank. To bolster their defense, petitioner Jose Dychiao (Jose
Dychiao) testified28 during trial that it was Atty. Saw himself who drafted the MoA and subsequently received 29 the P2,000,000.00
cash and the two (2) Bankwise post-dated checks worth P1,000,000.00 each from Camiling. However, Atty. Saw turned over only
the two (2) checks and P1,500,000.00 in cash to the wife of Jose Dychiao. 30
Claiming that the subject complaint was falsely and maliciously filed, petitioners prayed for the award of moral damages in the
amount of P20,000,000.00 in favor of Metro Concast and at least P25,000,000.00 for each individual petitioner, P25,000,000.00
as exemplary damages, P1,000,000.00 as attorneys fees, P500,000.00 for other litigation expenses, including costs of suit.
The RTC Ruling
After trial on the merits, the RTC, in a Decision 31 dated January 17, 2006, dismissed the subject complaint, holding that the
"causes of action sued upon had been paid or otherwise extinguished." It ruled that since Allied Bank was duly represented by its
agent, Atty. Saw, in all the negotiations and transactions with Peakstar considering that Atty. Saw
(a) drafted the MoA,
(b) accepted the bank guarantee issued by Bankwise, and
(c) was apprised of developments regarding the sale and disposition of the scrap metal then it stands to reason that the MoA
between Metro Concast and Peakstar was binding upon said bank.
The CA Ruling
Allied Bank appealed to the CA which, in a Decision 32 dated February 12, 2007, reversed and set aside the ruling of the RTC,
ratiocinating that there was "no legal basis in fact and in law to declare that when Bankwise reneged its guarantee under the
[MoA], herein [petitioners] should be deemed to be discharged from their obligations lawfully incurred in favor of [Allied Bank]." 33
The CA examined the MoA executed between Metro Concast, as seller of the ferro scrap, and Peakstar, as the buyer thereof, and
found that the same did not indicate that Allied Bank intervened or was a party thereto. It also pointed out the fact that the postdated checks pursuant to the MoA were issued in favor of Jose Dychiao. Likewise, the CA found no sufficient evidence on record
showing that Atty. Saw was duly and legally authorized to act for and on behalf of Allied Bank, opining that the RTC was "indulging
in hypothesis and speculation"34 when it made a contrary pronouncement. While Atty. Saw received the earnest money from
Peakstar, the receipt was signed by him on behalf of Jose Dychiao. 35
It also added that "[i]n the final analysis, the aforesaid checks and receipts were signed by [Atty.] Saw either as representative of
[petitioners] or as partner of the latters legal counsel, and not in anyway as representative of [Allied Bank]." 36
Consequently, the CA granted the appeal and directed petitioners to solidarily pay Allied Bank their corresponding obligations
under the aforementioned promissory note and trust receipts, plus interests, penalty charges and attorneys fees. Petitioners
sought reconsideration37 which was, however, denied in a Resolution38 dated May 10, 2007. Hence, this petition.
The Issue Before the Court

At the core of the present controversy is the sole issue of whether or not the loan obligations incurred by the petitioners under the
subject promissory note and various trust receipts have already been extinguished.
The Courts Ruling
Article 1231 of the Civil Code states that obligations are extinguished either by payment or performance, the loss of the thing due,
the condonation or remission of the debt, the confusion or merger of the rights of creditor and debtor, compensation or novation.
In the present case, petitioners essentially argue that their loan obligations to Allied Bank had already been extinguished due to
Peakstars failure to perform its own obligations to Metro Concast pursuant to the MoA. Petitioners classify Peakstars default as a
form of force majeure in the sense that they have, beyond their control, lost the funds they expected to have received from the
Peakstar (due to the MoA) which they would, in turn, use to pay their own loan obligations to Allied Bank. They further state that
Allied Bank was equally bound by Metro Concasts MoA with Peakstar since its agent, Atty. Saw, actively represented it during the
negotiations and execution of the said agreement. Petitioners arguments are untenable. At the outset, the Court must dispel the
notion that the MoA would have any relevance to the performance of petitioners obligations to Allied Bank. The MoA is a sale of
assets contract, while petitioners obligations to Allied Bank arose from various loan transactions. Absent any showing that the
terms and conditions of the latter transactions have been, in any way, modified or novated by the terms and conditions in the MoA,
said contracts should be treated separately and distinctly from each other, such that the existence, performance or breach of one
would not depend on the existence, performance or breach of the other. In the foregoing respect, the issue on whether or not
Allied Bank expressed its conformity to the assets sale transaction between Metro Concast and Peakstar (as evidenced by the
MoA) is actually irrelevant to the issues related to petitioners loan obligations to the bank. Besides, as the CA pointed out, the fact
of Allied Banks representation has not been proven in this case and hence, cannot be deemed as a sustainable defense to
exculpate petitioners from their loan obligations to Allied Bank. Now, anent petitioners reliance on force majeure, suffice it to state
that Peakstars breach of its obligations to Metro Concast arising from the MoA cannot be classified as a fortuitous event under
jurisprudential formulation. As discussed in Sicam v. Jorge:39
Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is therefore, not enough that the event
should not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to avoid. The
mere difficulty to foresee the happening is not impossibility to foresee the same. To constitute a fortuitous event, the following
elements must concur: (a) the cause of the unforeseen and unexpected occurrence or of the failure of the debtor to comply with
obligations must be independent of human will; (b) it must be impossible to foresee the event that constitutes the caso fortuito
or, if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as to render it impossible for the
debtor to fulfill obligations in a normal manner; and (d) the obligor must be free from any participation in the aggravation of the
injury or loss.40 (Emphases supplied)
While it may be argued that Peakstars breach of the MoA was unforseen by petitioners, the same us clearly not "impossible"to
foresee or even an event which is independent of human will." Neither has it been shown that said occurrence rendered it
impossible for petitioners to pay their loan obligations to Allied Bank and thus, negates the formers force majeure theory
altogether. In any case, as earlier stated, the performance or breach of the MoA bears no relation to the performance or breach of
the subject loan transactions, they being separate and distinct sources of obligations. The fact of the matter is that petitioners loan
obligations to Allied Bank remain subsisting for the basic reason that the former has not been able to prove that the same had
already been paid41 or, in any way, extinguished. In this regard, petitioners liability, as adjudged by the CA, must perforce stand.
Considering, however, that Allied Banks extra-judicial demand on petitioners appears to have been made only on December 10,
1998, the computation of the applicable interests and penalty charges should be reckoned only from such date.
WHEREFORE, the petition is DENIED. The Decision dated February 12, 2007 and Resolution dated May 10, 2007 of the Court of
Appeals in CA-G.R. CV No. 86896 are hereby AFFIRMED with MODIFICATION reckoning the applicable interests and penalty
charges from the date of the extrajudicial demand or on December 10, 1998. The rest of the appellate courts dispositions stand.
SO ORDERED.

G.R. No. 149004

April 14, 2004

RESTITUTA M. IMPERIAL, petitioner,

vs.
ALEX A. JAUCIAN, respondent.
DECISION
PANGANIBAN, J.:
Iniquitous and unconscionable stipulations on interest rates, penalties and attorneys fees are contrary to morals. Consequently,
courts are granted authority to reduce them equitably. If reasonably exercised, such authority shall not be disturbed by appellate
courts.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the July 19, 2000 Decision 2 and the June 14,
2001 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 43635. The decretal portion of the Decision is as follows:
"WHEREFORE, premises considered, the appealed Decision of the Regional Trial Court, 5th Judicial Region, Branch 21, Naga
City, dated August 31, 1993, in Civil Case No. 89-1911 for Sum of Money, is hereby AFFIRMED in toto."4
The assailed Resolution denied petitioners Motion for Reconsideration.
The dispositive portion of the August 31, 1993 Decision, promulgated by the Regional Trial Court (RTC) of Naga City (Branch 21)
and affirmed by the CA, reads as follows:
"Wherefore, Judgment is hereby rendered declaring Section I, Central Bank Circular No. 905, series of 1982 to be of no force and

legal effect, it having been promulgated by the Monetary Board of the Central Bank of the Philippines with grave abuse of
discretion amounting to excess of jurisdiction; declaring that the rate of interest, penalty, and charges for attorneys fees agreed
upon between the parties are unconscionable, iniquitous, and in violation of Act No. 2655, otherwise known as the Usury Law, as
amended; and ordering Defendant to pay Plaintiff the amount of FOUR HUNDRED SEVENTY-EIGHT THOUSAND, ONE
HUNDRED NINETY-FOUR and 54/100 (P478,194.54) PESOS, Philippine currency, with regular and compensatory interests
thereon at the rate of twenty-eight (28%) per centum per annum, computed from August 31, 1993 until full payment of the said
amount, and in addition, an amount equivalent to ten (10%) per centum of the total amount due and payable, for attorneys fees,
without pronouncement as to costs."5
The Facts
The CA summarized the facts of the case in this wise:
"The present controversy arose from a case for collection of money, filed by Alex A. Jaucian against Restituta Imperial, on October
26, 1989. The complaint alleges, inter alia, that defendant obtained from plaintiff six (6) separate loans for which the former
executed in favor of the latter six (6) separate promissory notes and issued several checks as guarantee for payment. When the
said loans became overdue and unpaid, especially when the defendants checks were dishonored, plaintiff made repeated oral
and written demands for payment.
"Specifically, the six (6) separate loans obtained by defendant from plaintiff on various dates are as follows:
(a) November 13, 1987

50,000.00

(b) December 28, 1987

40,000.00

(c) January 6, 1988

30,000.00

(d) January 11, 1988

50,000.00

(e) January 12, 1988

50,000.00

(f) January 13, 1988

100,000.00

320,000.00
"The loans were covered by six (6) separate promissory notes executed by defendant. The face value of each promissory notes is
bigger [than] the amount released to defendant because said face value already include[d] the interest from date of note to date of
maturity. Said promissory notes, which indicate the interest of 16% per month, date of issue, due date, the corresponding
guarantee checks issued by defendant, penalties and attorneys fees, are the following:
1. Exhibit D for loan of P40,000.00 on December 28, 1987, with face value of P65,000.00;
2. Exhibit E for loan of P50,000.00 on January 11, 1988, with face value of P82,000.00;
3. Exhibit F for loan of P50,000.00 on January 12, 1988, with face value of P82,000.00;
4. Exhibit G for loan of P100,000.00 on January 13, 1988, with face value of P164,000.00;
5. Exhibit H This particular promissory note covers the second renewal of the original loan of P50,000.00 on November 13,
1987, which was renewed for the first time on March 16, 1988 after certain payments, and which was renewed finally for the
second time on January 4, 1988 also after certain payments, with a face value of P56,240.00;
6. Exhibit I This particular promissory note covers the second renewal of the original loan of P30,000.00 on January 6, 1988,
which was renewed for the first time on June 4, 1988 after certain payments, and which was finally renewed for the second time
on August 6, 1988, also after certain payments, with [a] face value of P12,760.00;
"The particulars about the postdated checks, i.e., number, amount, date, etc., are indicated in each of the promissory notes. Thus,
for Exhibit D, four (4) PB checks were issued; for Exhibit E four (4) checks; for Exhibit F four (4) checks; for Exhibit G four (4)
checks; for Exhibit H one (1) check; for Exhibit I one (1) check;
"The arrangement between plaintiff and defendant regarding these guarantee checks was that each time a check matures the
defendant would exchange it with cash.
"Although, admittedly, defendant made several payments, the same were not enough and she always defaulted whenever her
loans mature[d]. As of August 16, 1991, the total unpaid amount, including accrued interest, penalties and attorneys fees, [was]
P2,807,784.20.
"On the other hand, defendant claims that she was extended loans by the plaintiff on several occasions, i.e., from November 13,
1987 to January 13, 1988, in the total sum of P320,000.00 at the rate of sixteen percent (16%) per month. The notes mature[d]
every four (4) months with unearned interest compounding every four (4) months if the loan [was] not fully paid. The loan releases
[were] as follows:
(a) November 13, 1987

50,000.00

(b) December 28, 1987

40,000.00

(c) January 6, 1988

30,000.00

(d) January 11, 1988

50,000.00

(e) January 12, 1988

50,000.00

(f) January 13, 1988

100,000.00

320,000.00
"The loan on November 13, 1987 and January 6, 1988 ha[d] been fully paid including the usurious interests of 16% per month,
this is the reason why these were not included in the complaint.
"Defendant alleges that all the above amounts were released respectively by checks drawn by the plaintiff, and the latter must
produce these checks as these were returned to him being the drawer if only to serve the truth. The above amount are the real
amount released to the defendant but the plaintiff by masterful machinations made it appear that the total amount released was
P462,600.00. Because in his computation he made it appear that the true amounts released was not the original amount, since it
include[d] the unconscionable interest for four months.
"Further, defendant claims that as of January 25, 1989, the total payments made by defendants [were] as follows:
a. Paid releases on November 13, 1987 of P50,000.00 and
January 6, 1988 of P30,000.00 these two items were not
included in the complaint affirming the fact that these80,000.00
were paid
b. Exhibit 26 Receipt

231,000.00

c. Exhibit 8-25 Receipt

65,300.00

d. Exhibit 27 Receipt

65,000.00

441,780.00
Less:

320,000.00

Excess Payment

121,780.00

"Defendant contends that from all perspectives the above excess payment of P121,780.00 is more than the interest that could be
legally charged, and in fact as of January 25, 1989, the total releases have been fully paid.
"On 31 August 1993, the trial court rendered the assailed decision." 6
Ruling of the Court of Appeals
On appeal, the CA held that without judicial inquiry, it was improper for the RTC to rule on the constitutionality of Section 1, Central
Bank Circular No. 905, Series of 1982. Nonetheless, the appellate court affirmed the judgment of the trial court, holding that the
latters clear and detailed computation of petitioners outstanding obligation to respondent was convincing and satisfactory.
Hence, this Petition.7
The Issues
Petitioner raises the following arguments for our consideration:
"1. That the petitioner has fully paid her obligations even before filing of this case.
"2. That the charging of interest of twenty-eight (28%) per centum per annum without any writing is illegal.
"3. That charging of excessive attorneys fees is hemorrhagic.
"4. Charging of excessive penalties per month is in the guise of hidden interest.
"5. The non-inclusion of the husband of the petitioner at the time the case was filed should have dismissed this case." 8
The Courts Ruling
The Petition has no merit.
First Issue:
Computation of Outstanding Obligation
Arguing that she had already fully paid the loan before the filing of the case, petitioner alleges that the two lower courts
misappreciated the facts when they ruled that she still had an outstanding balance of P208,430.
This issue involves a question of fact. Such question exists when a doubt or difference arises as to the truth or the falsehood of
alleged facts; and when there is need for a calibration of the evidence, considering mainly the credibility of witnesses and the
existence and the relevancy of specific surrounding circumstances, their relation to each other and to the whole, and the
probabilities of the situation.9
It is a well-entrenched rule that pure questions of fact may not be the subject of an appeal by certiorari under Rule 45 of the Rules
of Court, as this remedy is generally confined to questions of law. 10 The jurisdiction of this Court over cases brought to it is limited
to the review and rectification of errors of law allegedly committed by the lower court. As a rule, the latters factual findings, when
adopted and affirmed by the CA, are final and conclusive and may not be reviewed on appeal. 11
Generally, this Court is not required
below.12 In the present case, we find
the loans extended to petitioner was
are supported by a preponderance

to analyze and weigh all over again the evidence already considered in the proceedings
no compelling reason to overturn the factual findings of the RTC -- that the total amount of
P320,000, and that she paid a total of only P116,540 on twenty-nine dates. These findings
of evidence. Moreover, the amount of the outstanding obligation has been meticulously

computed by the trial court and affirmed by the CA. Petitioner has not given us sufficient reason why her cause falls under any of
the exceptions to this rule on the finality of factual findings.
Second Issue:
Rate of Interest
The trial court, as affirmed by the CA, reduced the interest rate from 16 percent to 1.167 percent per month or 14 percent per
annum; and the stipulated penalty charge, from 5 percent to 1.167 percent per month or 14 percent per annum.
Petitioner alleges that absent any written stipulation between the parties, the lower courts should have imposed the rate of 12
percent per annum only.
The records show that there was a written agreement between the parties for the payment of interest on the subject loans at the
rate of 16 percent per month. As decreed by the lower courts, this rate must be equitably reduced for being iniquitous,
unconscionable and exorbitant. "While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the
said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead
to a hemorrhaging of their assets."13
In Medel v. CA,14 the Court found the stipulated interest rate of 5.5 percent per month, or 66 percent per annum, unconscionable.
In the present case, the rate is even more iniquitous and unconscionable, as it amounts to 192 percent per annum. When the
agreed rate is iniquitous or unconscionable, it is considered "contrary to morals, if not against the law. [Such] stipulation is void." 15
Since the stipulation on the interest rate is void, it is as if there were no express contract thereon. 16 Hence, courts may reduce the
interest rate as reason and equity demand. We find no justification to reverse or modify the rate imposed by the two lower courts.
Third and Fourth Issue:
Penalties and Attorneys Fees
Article 1229 of the Civil Code states thus:
"The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the
debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable."
In exercising this power to determine what is iniquitous and unconscionable, courts must consider the circumstances of each
case.17 What may be iniquitous and unconscionable in one may be totally just and equitable in another. In the present case,
iniquitous and unconscionable was the parties stipulated penalty charge of 5 percent per month or 60 percent per annum, in
addition to regular interests and attorneys fees. Also, there was partial performance by petitioner when she remitted P116,540 as
partial payment of her principal obligation of P320,000. Under the circumstances, the trial court was justified in reducing the
stipulated penalty charge to the more equitable rate of 14 percent per annum.
The Promissory Note carried a stipulation for attorneys fees of 25 percent of the principal amount and accrued interests. Strictly
speaking, this covenant on attorneys fees is different from that mentioned in and regulated by the Rules of Court. 18 "Rather, the
attorneys fees here are in the nature of liquidated damages and the stipulation therefor is aptly called a penal clause." 19 So long
as the stipulation does not contravene the law, morals, public order or public policy, it is binding upon the obligor. It is the litigant,
not the counsel, who is the judgment creditor entitled to enforce the judgment by execution.
Nevertheless, it appears that petitioners failure to comply fully with her obligation was not motivated by ill will or malice. The
twenty-nine partial payments she made were a manifestation of her good faith. Again, Article 1229 of the Civil Code specifically
empowers the judge to reduce the civil penalty equitably, when the principal obligation has been partly or irregularly complied with.
Upon this premise, we hold that the RTCs reduction of attorneys fees -- from 25 percent to 10 percent of the total amount due
and payable -- is reasonable.
Fifth Issue:
Non-Inclusion of Petitioners Husband
Petitioner contends that the case against her should have been dismissed, because her husband was not included in the
proceedings before the RTC.
We are not persuaded. The husbands non-joinder does not warrant dismissal, as it is merely a formal requirement that may be
cured by amendment.20 Since petitioner alleges that her husband has already passed away, such an amendment has thus
become moot.
WHEREFORE, the Petition is DENIED. Costs against petitioner.
SO ORDERED.

G.R. No. 172139

December 8, 2010

JOCELYN M. TOLEDO, Petitioner,

vs.
MARILOU M. HYDEN, Respondent.
DECISION
DEL CASTILLO, J.:
It is true that the imposition of an unconscionable rate of interest on a money debt is immoral and unjust and the court may come

to the aid of the aggrieved party to that contract. However, before doing so, courts have to consider the settled principle that the
law will not relieve a party from the effects of an unwise, foolish or disastrous contract if such party had full awareness of what she
was doing.
This Petition for Review on Certiorari1 assails the Decision2 dated August 24, 2005 of the Court of Appeals (CA) in CA-G.R. CV
No. 79805, which affirmed the Decision dated March 10, 2003 3 of the Regional Trial Court (RTC), Branch 22, Cebu City in Civil
Case No. CEB-22867. Also assailed is the
Resolution dated March 8, 2006 denying the motion for reconsideration.
Factual Antecedents
Petitioner Jocelyn M. Toledo (Jocelyn), who was then the Vice-President of the College Assurance Plan (CAP) Phils., Inc.,
obtained several loans from respondent Marilou M. Hyden (Marilou). The transactions are briefly summarized below:
1) August 15, 1993
2) April 21, 1994

30,000.00
100,000.00

3) October 2, 1995

30,000.00

4) October 9, 1995

30,000.00

5) May 22, 1997

100,000.00

with 6% monthly interest

TOTAL AMOUNT OF
LOAN

with 7% monthly interest

290,000.00

From August 15, 1993 up to December 31, 1997, Jocelyn had been religiously paying Marilou the stipulated monthly interest by
issuing checks and depositing sums of money in the bank account of the latter. However, the total principal amount of
P290,000.00 remained unpaid. Thus, in April 1998, Marilou visited Jocelyn in her office at CAP in Cebu City and asked Jocelyn
and the other employees who were likewise indebted to her to acknowledge their debts. A document entitled "Acknowledgment of
Debt"5 for the amount of P290,000.00 was signed by Jocelyn with two of her subordinates as witnesses. The said amount
represents the principal consolidated amount of the aforementioned previous debts due on December 25, 1998. Also on said
occasion, Jocelyn issued five checks to Marilou representing renewal payment of her five previous loans, viz:
Check No. 0010761 dated September
. . . . 2,
. . 1998
...

30,000.00

Check No. 0010762 dated September

. . . . 9,
. . 1998
...

30,000.00

Check No. 0010763 dated September

. . . . 15,
. . . 1998
..

30,000.00

Check No. 0010764 dated September

. . . . 22,
. . . 1998
..

100,000.00

Check No. 0010765 dated September

. . . . 25,
. . . 1998
..

100,000.00

TOTAL

290,000.00

In June 1998, Jocelyn asked Marilou for the recall of Check No. 0010761 in the amount of P30,000.00 and replaced the same with
six checks, in staggered amounts, namely:
Check No. 0010494 dated July 2, .1998
........

6,625.00

Check No. 0010495 dated August.2,

. .1998
......

6,300.00

Check No. 0010496 dated September

. . . . 2,
. . 1998
...

5,975.00

Check No. 0010497 dated October. .2,. .1998

.....

6,500.00

Check No. 0010498 dated November

. . . .2,. .1998
...

5,325.00

Check No. 0010499 dated December

. . . .2,. .1998
...

5,000.00

TOTAL

35,725.00

After honoring Check Nos. 0010494, 0010495 and 0010496, Jocelyn ordered the stop payment on the remaining checks and on
October 27, 1998, filed with the RTC of Cebu City a complaint 6 against Marilou for Declaration of Nullity and Payment, Annulment,
Sum of Money, Injunction and Damages.
Jocelyn averred that Marilou forced, threatened and intimidated her into signing the "Acknowledgment of Debt" and at the same
time forced her to issue the seven postdated checks. She claimed that Marilou even threatened to sue her for violation of Batas
Pambansa (BP) Blg. 22 or the Bouncing Checks Law if she will not sign the said document and draw the above-mentioned
checks. Jocelyn further claimed that the application of her total payment of P528,550.00 to interest alone is illegal, unfounded,
unjust, oppressive and contrary to law because there was no written agreement to pay interest.
On November 23, 1998, Marilou filed an Answer 7 with Special Affirmative Defenses and Counterclaim alleging that Jocelyn
voluntarily obtained the said loans knowing fully well that the interest rate was at 6% to 7% per month. In fact, a 6% to 7%
advance interest was already deducted from the loan amount given to Jocelyn.
Ruling of the Regional Trial Court
The court a quo did not find any showing that Jocelyn was forced, threatened, or intimidated in signing the document referred to
as "Acknowledgment of Debt" and in issuing the postdated checks. Thus, in its March 10, 2003 Decision the trial court ruled in
favor of Marilou, viz:
WHEREFORE, premised on the foregoing, the Court hereby declares the document "Acknowledgment of Debt" valid and binding.
PLAINTIFF is indebted to DEFENDANT [for] the amount of TWO HUNDRED NINETY THOUSAND (P290,000.00) PESOS since
December 25, 1998 less the amount of EIGHTEEN THOUSAND NINE HUNDRED (P18,900.00) PESOS, equivalent to the three

checks made good (P6,625.00 dated 07-02-1998; P6,300.00 dated 08-02-1998; and P5,975.00 dated 09-02-1998).
Consequently, PLAINTIFF is hereby ordered to pay DEFENDANT the amount of TWO HUNDRED SEVENTY ONE THOUSAND
ONE HUNDRED (P271,100.00) PESOS due on December 25, 1998 with a 12% interest per annum or 1% interest per month until
such time that the said amount shall have been fully paid.
No pronouncement as to costs.
SO ORDERED.8
On March 26, 2003, Jocelyn filed an Earnest Motion for Reconsideration, 9 which was denied by the trial court in its Order 10 dated
April 29, 2003 stating that it finds no sufficient reason to disturb its March 10, 2003 Decision.
Ruling of the Court of Appeals
On appeal, Jocelyn asserts that she had made payments in the total amount of P778,000.00 for a principal amount of loan of only
P290,000.00. What is appalling, according to Jocelyn, was that such payments covered only the interest because of the
excessive, iniquitous, unconscionable and exorbitant imposition of the 6% to 7% monthly interest.
On August 24, 2005, the CA issued its Decision which provides:
WHEREFORE, premises considered, the Decision dated March 10, 2003 and the Order dated April 29, 2003, of the Regional Trial
Court, 7th Judicial Region, Branch 22, Cebu City, in Civil Case No. CEB-22867 are hereby AFFIRMED. No pronouncement as to
costs.
SO ORDERED.11
The Motion for Reconsideration12 filed by Jocelyn was denied by the CA through its Resolution 13 dated March 8, 2006.
Issues
Hence, this petition raising the following issues:
I.
Whether the CA gravely erred when it held that the imposition of interest at the rate of six percent (6%) to seven percent (7%) is
not contrary to law, morals, good customs, public order or public policy.
II.
Whether the CA gravely erred when it failed to declare that the "Acknowledgment of Debt" is an inexistent contract that is void
from the very beginning pursuant to Article 1409 of the New Civil Code.
Petitioners Arguments
Jocelyn posits that the CA erred when it held that the imposition of interest at the rates of 6% to 7% per month is not contrary to
law, not unconscionable and not contrary to morals. She likewise contends that the CA erred in ruling that the "Acknowledgment of
Debt" is valid and binding. According to Jocelyn, even assuming that the execution of said document was not attended with force,
threat and intimidation, the same must nevertheless be declared null and void for being contrary to law and public policy. This is
borne out by the fact that the payments in the total amount of P778,000.00 was applied to interest payment alone. This only
proves that the transaction was iniquitous, excessive, oppressive and unconscionable.
Respondents Arguments
On the other hand, Marilou would like this Court to consider the fact that the document referred to as "Acknowledgment of Debt"
was executed in the safe surroundings of the office of Jocelyn and it was witnessed by two of her staff. If at all there had been
coercion, then Jocelyn could have easily prevented her staff from affixing their signatures to said document. In fact, petitioner had
admitted that she was the one who went to the tables of her staff to let them sign the said document.
Our Ruling
The petition is without merit.
The 6% to 7% interest per month paid by Jocelyn is not excessive under the circumstances of this case.
In view of Central Bank Circular No. 905 s. 1982, which suspended the Usury Law ceiling on interest effective January 1, 1983,
parties to a loan agreement have wide latitude to stipulate interest rates. Nevertheless, such stipulated interest rates may be
declared as illegal if the same is unconscionable. 14 There is certainly nothing in said circular which grants lenders carte blanche
authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. 15 In
fact, in Medel v. Court of Appeals,16 we annulled a stipulated 5.5% per month or 66% per annum interest with additional service
charge of 2% per annum and penalty charge of 1% per month on a P500,000.00 loan for being excessive, iniquitous,
unconscionable and exorbitant.
In this case, however, we cannot consider the disputed 6% to 7% monthly interest rate to be iniquitous or unconscionable vis--vis
the principle laid down in Medel. Noteworthy is the fact that in Medel, the defendant-spouses were never able to pay their
indebtedness from the very beginning and when their obligations ballooned into a staggering sum, the creditors filed a collection
case against them. In this case, there was no urgency of the need for money on the part of Jocelyn, the debtor, which compelled
her to enter into said loan transactions. She used the money from the loans to make advance payments for prospective clients of
educational plans offered by her employer. In this way, her sales production would increase, thereby entitling her to 50% rebate on
her sales. This is the reason why she did not mind the 6% to 7% monthly interest. Notably too, a business transaction of this
nature between Jocelyn and Marilou continued for more than five years. Jocelyn religiously paid the agreed amount of interest
until she ordered for stop payment on some of the checks issued to Marilou. The checks were in fact sufficiently funded when she
ordered the stop payment and then filed a case questioning the imposition of a 6% to 7% interest rate for being allegedly
iniquitous or unconscionable and, hence, contrary to morals.

It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the same carried with it an interest rate of
6% to 7% per month, yet she did not complain. In fact, when she availed of said loans, an advance interest of 6% to 7% was
already deducted from the loan amount, yet she never uttered a word of protest.
After years of benefiting from the proceeds of the loans bearing an interest rate of 6% to 7% per month and paying for the same,
Jocelyn cannot now go to court to have the said interest rate annulled on the ground that it is excessive, iniquitous,
unconscionable, exorbitant, and absolutely revolting to the conscience of man. "This is so because among the maxims of equity
are (1) he who seeks equity must do equity, and (2) he who comes into equity must come with clean hands. The latter is a
frequently stated maxim which is also expressed in the principle that he who has done inequity shall not have equity. It signifies
that a litigant may be denied relief by a court of equity on the ground that his conduct has been inequitable, unfair and dishonest,
or fraudulent, or deceitful as to the controversy in issue." 17
We are convinced that Jocelyn did not come to court for equitable relief with equity or with clean hands. It is patently clear from
the above summary of the facts that the conduct of Jocelyn can by no means be characterized as nobly fair, just, and reasonable.
This Court likewise notes certain acts of Jocelyn before filing the case with the RTC. In September 1998, she requested Marilou
not to deposit her checks as she can cover the checks only the following month. On the next month, Jocelyn again requested for
another extension of one month. It turned out that she was only sweet-talking Marilou into believing that she had no money at that
time. But as testified by Serapio Romarate, 18 an employee of the Bank of Commerce where Jocelyn is one of their clients, there
was an available balance of P276,203.03 in the latters account and yet she ordered for the stop payments of the seven checks
which can actually be covered by the available funds in said account. She then caught Marilou by surprise when she
surreptitiously filed a case for declaration of nullity of the document and for damages.
The document "Acknowledgment of Debt" is valid and binding.
Jocelyn seeks for the nullification of the document entitled "Acknowledgment of Debt" and wants this Court to declare that she is
no longer indebted to Marilou in the amount of P290,000.00 as she had already paid a total amount of P778,000.00. She claims
that said document is an inexistent contract that is void from the very beginning as clearly provided for by Article 1409 19 of the New
Civil Code.
Jocelyn further claims that she signed the said document and issued the seven postdated checks because Marilou threatened to
sue her for violation of BP Blg. 22.
Jocelyn is misguided. Even if there was indeed such threat made by Marilou, the same is not considered as threat that would
vitiate consent. Article 1335 of the New Civil Code is very specific on this matter. It provides:
Art. 1335. There is violence when in order to wrest consent, serious or irresistible force is employed.
xxxx
A threat to enforce ones claim through competent authority, if the claim is just or legal, does not vitiate consent.
(Emphasis supplied.)
Clearly, we cannot grant Jocelyn the relief she seeks.
As can be seen from the records of the case, Jocelyn has failed to prove her claim that she was made to sign the document
"Acknowledgment of Debt" and draw the seven Bank of Commerce checks through force, threat and intimidation. As earlier
stressed, said document was signed in the office of Jocelyn, a high ranking executive of CAP, and it was Jocelyn herself who went
to the table of her two subordinates to procure their signatures as witnesses to the execution of said document. If indeed, she was
forced to sign said document, then Jocelyn should have immediately taken the proper legal remedy. But she did not. Furthermore,
it must be noted that after the execution of said document, Jocelyn honored the first three checks before filing the complaint with
the RTC. If indeed she was forced she would never have made good on the first three checks.
It is provided, as one of the conclusive presumptions under Rule 131, Section 2(a), of the Rules of Court that, "Whenever a party
has, by his own declaration, act or omission, intentionally and deliberately led another to believe a particular thing to be true, and
to act upon such belief, he cannot, in any litigation arising out of such declaration, act or omission, be permitted to falsify it." This is
known as the principle of estoppel.
"The essential elements of estoppel are: (1) conduct amounting to false representation or concealment of material facts or at least
calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently
attempts to assert; (2) intent, or at least expectation, that this conduct shall be acted upon by, or at least influence, the other party;
and, (3) knowledge, actual or constructive, of the real facts." 20
Here, it is uncontested that Jocelyn had in fact signed the "Acknowledgment of Debt" in April 1998 and two of her subordinates
served as witnesses to its execution, knowing fully well the nature of the contract she was entering into. Next, Jocelyn issued five
checks in favor of Marilou representing renewal payment of her loans amounting to P290,000.00. In June 1998, she asked to
recall Check No. 0010761 in the amount of P30,000.00 and replaced the same with six checks, in staggered amounts. All these
are indicia that Jocelyn treated the "Acknowledgment of Debt" as a valid and binding contract.1avvphi1
More significantly, Jocelyn already availed herself of the benefits of the "Acknowledgment of Debt," the validity of which she now
impugns. As aptly found by the RTC and the CA, Jocelyn was making a business out of the loaned amounts. She was actually
using the money to make advance payments for her prospective clients so that her sales production would increase. Accordingly,
she did not mind the 6% to 7% interest per month as she was getting a 50% rebate on her sales.
Clearly, by her own acts, Jocelyn is estopped from impugning the validity of the "Acknowledgment of Debt." "[A] party to a contract
cannot deny the validity thereof after enjoying its benefits without outrage to ones sense of justice and fairness." 21 "It is a long
established doctrine that the law does not relieve a party from the effects of an unwise, foolish or disastrous contract, entered into
with all the required formalities and with full awareness of what she was doing. Courts have no power to relieve parties from
obligations voluntarily assumed, simply because their contracts turned out to be disastrous or unwise investments." 22
WHEREFORE, the instant petition for review on certiorari is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No.
79805 dated August 24, 2005 affirming the Decision dated March 10, 2003 of the Regional Trial Court, Branch 22, Cebu City, in

Civil Case No. CEB-22867 is AFFIRMED.

SO ORDERED.

G.R. No. 171925

July 23, 2010

SOLIDBANK CORPORATION, (now Metropolitan Bank and Trust Company), Petitioner,

vs.
ERMANENT HOMES, INCORPORATED, Respondent.
DECISION
CARPIO, J.:
G.R. No. 171925 is a petition for review 1 assailing the Decision2 promulgated on 29 June 2005 by the Court of Appeals (appellate
court) as well as the Resolution3 promulgated on 14 March 2006 in CA-G.R. CV No. 75926. The appellate court granted the
petition filed by Permanent Homes, Incorporated (Permanent) and reversed the decision of the Regional Trial Court of Makati City,
Branch 58 (trial court) dated 5 July 2002 in Civil Case No. 98-654. The appellate court ordered Solidbank Corporation (Solidbank)
and Permanent to enter into an express agreement about the applicable interest rates on Permanents loan. Solidbank was also
ordered to render an accounting of Permanents payments, not to impose interest on interest upon Permanents loans, and to
release the remaining amount available under Permanents omnibus credit line.
The Facts
The appellate court narrated the facts as follows:
The records disclose that PERMANENT HOMES is a real estate development company, and to finance its housing project known
as the "Buena Vida Townhomes" located within Merville Subdivision, Paraaque City, it applied and was subsequently granted by
SOLIDBANK with an "Omnibus Line" credit facility in the total amount of SIXTY MILLION PESOS. Of the entire loan, FIFTY NINE
MILLION as [sic] time loan for a term of up to three hundred sixty (360) days, with interest thereon at prevailing market rates, and
subject to monthly repricing. The remaining ONE MILLION was available for domestic bills purchase.
To secure the aforesaid loan, PERMANENT HOMES initially mortgaged three (3) townhouse units within the Buena Vida project in
Paraaque. At the time, however, the instant complaint was filed against SOLIDBANK, a total of thirty six (36) townhouse units
were mortgaged with said bank.
Of the 60 million available to PERMANENT HOMES, it availed of a total of 41.5 million pesos, covered by three (3) promissory
notes, which contain the following provisions, thus:
"xxx
5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this Note or Loan on the
basis of, among others, prevailing rates in the local or international capital markets. For this purpose, We/I authorize Solidbank to
debit any deposit or placement account with Solidbank belonging to any one of us. The adjustment of the interest rate shall be
effective from the date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was
sent.
6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note or Loan within thirty
(30) days from the receipt by anyone of us of the written notice. Otherwise, We/I shall be deemed to have given our consent to the
interest rate adjustment."
Contrary, however, to the specific provisions as afore-quoted, there was a standing agreement by the parties that any increase or
decrease in interest rates shall be subject to the mutual agreement of the parties.
For the first loan availment of PERMANENT HOMES on March 20, 1997, in the amount of 19.6 MILLION, from the initial interest
rate of 14.25% per annum (p.a.), the same was increased 15% p.a. effective May 19, 1997; it was again increased to 26% p.a.
effective July 18, 1997. It was thereafter reduced to 20% p.a. effective August 18, 1997, and then increased to 24% p.a. effective
September 17, 1997. The rate was increased further to 30% p.a. effective October 17, 1997, then decreased to 27% p.a. on
November 17, 1997, and again increased to 34% p.a. effective December 17, 1997. The rate then decreased to 30% p.a. on
January 16, 1998.
For the second loan availment in the amount of 18 million, the rate was initially pegged at 15.75% p.a. on June 24, 1997. A month
later, the rate increased to 23.5% p.a. It thereafter decreased to 20% p.a. effective August 24, 1997, but again increased to 22.5%
p.a. effective September 24, 1997. For the next month, the rate surged to 30% p.a., and decreased to 27% p.a. for the month of
November. The rate again surged to 34% p.a. for the month of December, and was decreased to 30% p.a. from January 22, 1998
to February 20, 1998.
For the third loan availment on July 15, 1997, in the amount of 3.9 million, the interest rate was initially pegged at 35% p.a., but
this was decreased to 21% p.a. from August 14 until September 11, 1997. The rate increased slightly to 23% p.a. on September
12, 1997, and surged to 27% p.a. on October 13, 1997. The rate went down slightly to 27% p.a. for the month of November, and
to 26% p.a. for the month of December. The rate, however, again surged to 30% p.a. on January 12, 1998 before settling at 29%
p.a. for the month of February.
It is [Permanents] stand that SOLIDBANK unilaterally and arbitrarily accelerated the interest rates without any declared basis of
such increases, of which PERMANENT HOMES had not agreed to, or at the very least, been informed of. This is contrary to their
earlier agreement that any interest rate changes will be subject to mutual agreement of the parties. PERMANENT HOMES further
admits that it was not able to protest such arbitrary increases at the time they were imposed by SOLIDBANK, for fear that
SOLIDBANK might cut off the credit facility it extended to PERMANENT HOMES. Permanent was then in the midst of the
construction of its project in Merville, Paraaque City, and SOLIDBANK knew that it was relying substantially on the credit facility

the latter extended to it.

[Permanent] thus filed a case before the trial court seeking the following: (1) the annulment of the increases in interest rates on the
loans it obtained from SOLIDBANK, on the ground that it was violative of the principle of mutuality of agreement of the parties, as
enunciated in Article 1409 of the New Civil Code, (2) the fixing of the interest rates at the applicable interest rate, and (3) for the
trial court to order SOLIDBANK to make an accounting of the payments it made, so as to determine the amount of refund
PERMANENT is entitled to, as well as to order SOLIDBANK to release the remaining available balance of the loan it extended to
PERMANENT. In addition, [Permanent] prays for the payment of compensatory, moral and exemplary damages.
SOLIDBANK, on the other hand, avers that PERMANENT HOMES has no cause of action against it, in view of the pertinent
provisions of the Omnibus Credit Line and the promissory notes agreed to and signed by PERMANENT HOMES. Thus, in
accordance with said provisions, SOLIDBANK was authorized to, upon due notice, periodically adjust the interest rates on
PERMANENT HOMES loan availments during the monthly interest repricing dates, depending on the changes in prevailing
interest rates in the local and international capital markets. In fact, SOLIDBANK avers that four (4) days before July 15, 1997, the
Bangko Sentral ng Pilipinas (BSP) declared that it could no longer support the Philippine currency from external speculative
forces, hence, the local currency was allowed to seek its own exchange rate level. As a result of the volatile exchange rate ratio,
banks were then hesitant to extend loans, and in some instances that it granted loans, they had to ensure that they will not be at
the losing end of the deal, so to speak, by the repricing of the interest rates every month. SOLIDBANK insists that PERMANENT
HOMES should not be allowed to renege on its contractual obligations, as it freely and voluntarily bound itself to the provisions of
the Omnibus Credit Line and the promissory notes.
PERMANENT HOMES presented as witnesses Jacqueline S. Lim, its Vice President and Chief Financial Officer, Engr. Rey A.
Romasanta, its Executive Vice President and Chief Operating Officer, and Martha Julia Flores, its Treasury Officer.
On March 24, 1998, the trial court issued a temporary restraining order (TRO), after a summary hearing, which enjoined
SOLIDBANK from implementing and collecting the increases in interest rates and from initiating any action, including the
foreclosure of the mortgaged properties.
Ms. Lims testimony centered on PERMANENT HOMES allegations that the repricing of the interest rates was done by
SOLIDBANK without any written agreement entered into between the parties. In fact, Ms. Lim accounted that SOLIDBANK will
merely advise them of the interest rate for the period, after said period had already commenced, and at times very late in the
period, by fax messages. When PERMANENT HOMES called SOLIDBANKs attention to the seemingly surging rates it imposed
on its loan, SOLIDBANK will merely answer that it was the banks policy, without offering any basis for such increase.
Furthermore, Ms. Lim also mentioned SOLIDBANKs alleged practice of imposing interest on unpaid interest, at the highest rate of
30% p.a.. Ms. Lim also presented a tabulation, which presents the number of days their billing statements were sent late, from the
time the interest period started. It is PERMANENT HOMES stand that since the purpose of the billing statements was to inform
them beforehand of the applicable interest rate for the period, the late billings will clearly show SOLIDBANKs arbitrary imposition
of the repriced interest rates, as well as its indifference to PERMANENT HOMES plight.
To illustrate, for the first loan availment in the amount of P19.6 million, the billing statements which should have notified
PERMANENT HOMES of the repriced interest rates were faxed to PERMANENT HOMES between eighteen (18) to thirty-three
(33) days late. For the second loan availment in the amount of P18 million, the faxed billings were late between six (6) to twentyone (21) days, and one instance where PERMANENT HOMES received no billing at all. For the third loan availment in the amount
of P3.9 million, the faxed billings were late between seven (7) to twenty-nine (29) days, and also an instance where PERMANENT
HOMES received no billing at all.
This practice, according to Ms. Lim, clearly affected its operations, as the completion of its construction project was unnecessarily
delayed, to its prejudice and its buyers. This was the import of the testimony of PERMANENT HOMES second witness, Engr. Rey
A. Romasanta. According to Engr. Rey, the target date of completion was August 1997, but in view of the shortage of funds by
reason of SOLIDBANKs refusal for PERMANENT HOMES to make further availments on its omnibus credit line, the project was
completed only on February 1998.
PERMANENT HOMES third and final witness was Martha Julia Flores, its Treasury Officer, who explained that as such, it was her
who received the late billings from SOLIDBANK. She would also call up SOLIDBANK to ask what the repriced interest rate for the
coming interest period, to no avail, as SOLIDBANK will merely fax its billings almost always, as abovementioned, late in the
period. Ms. Flores admitted that she prepared the tabulation presented before the court, which showed how late SOLIDBANKs
billings were sent to PERMANENT HOMES, as well as the computation of interest rates that SOLIDBANK had allegedly
overcharged on its loan, vis-a-vis the average of the high and the low published lending rates of SOLIDBANK.
SOLIDBANK, to establish its defense, presented its lone witness, Mr. Cesar Lugtu, who testified to the effect that, contrary to
PERMANENT HOMES assertions that it was not promptly informed of the repriced interest rates, SOLIDBANKs officers verbally
advised PERMANENT HOMES of the repriced rates at the start of the period, and even added that their transaction[s] were
based on trust. Aside from these allegations, however, no written memorandum or note was presented by SOLIDBANK to support
their assertion that PERMANENT HOMES was timely advised of the repriced interests. 4
The Trial Courts Ruling
On 5 July 2002, the trial court promulgated its Decision in favor of Solidbank. The trial court ratiocinated and ruled thus:
It becomes crystal clear that there is sufficient proof to show that the instant case was instituted by [Permanent] as an afterthought and as an obvious subterfuge intended to completely lay on the defendant the blame for the debacle of its Buena Vida
project. An afterthought because the records of the case show that the complaint was filed in March 16, 1998, already after it was
having difficulty making the amortization payments, the last of which being in February 1998. A subterfuge because plaintiff,
instead of blaming itself and its own business judgment that went sour, would rather put the blame on [Solidbank], taking
advantage of every conceivable gray area of its contract with [Solidbank] to avoid its own liabilities. In fact, this complaint was
made the very basis for [Permanent] to altogether stop the payment of its loan from [Solidbank] including the interest payment
(TSN, May 07, 1998, p. 60).
xxxx

WHEREFORE, finding the complaint not impressed with merit, judgment is hereby rendered dismissing the said complaint. The
Counterclaim is likewise dismissed for lack of evidence to support the same.
SO ORDERED.5
Permanent filed an appeal before the appellate court.
The Appellate Courts Ruling
The appellate court granted Permanents appeal, and set aside the trial courts ruling. The appellate court not only recognized the
validity of escalation clauses, but also underscored the necessity of a basis for the increase in interest rates and of the principle of
mutuality of contracts.
The dispositive portion of the appellate courts decision reads, thus:
THE FOREGOING CONSIDERED, the instant appeal is hereby GRANTED, the assailed decision dated July 5, 2002 is
REVERSED and SET ASIDE, and a new one is hereby entered as follows:
(1) Unless the parties herein subsequently enter into an express agreement regarding the applicable interest rates on
PERMANENT HOMES loan availments subsequent to the initial thirty-day (30) period, the legal rate of twelve percent (12%) per
annum is hereby FIXED, to be applied on the outstanding balance of the loan;
(2) SOLIDBANK is ordered to render an accounting of all the payments made by PERMANENT HOMES, and in case there is
excess payment by reason of the wrongful imposition of the repriced interest rates, to apply such amount to the interest payment
at the legal rate, and thereafter to the outstanding principal amount;
(3) SOLIDBANK is directed not to impose penalties, particularly interest on interest, upon PERMANENT HOMES loan, there
being no evidence that the latter was in default on its payments;
(4) SOLIDBANK is hereby ordered to release the remaining amount available under the omnibus credit line, subject, however, to
availability of funds on the part of SOLIDBANK.
No pronouncement as to costs.
SO ORDERED.6
The appellate court resolved to deny Solidbanks Motion for Reconsideration for lack of merit. 7
The Issues
Solidbank raised the following issues in their petition:
(A) Whether the Honorable Court of Appeals was correct in ruling that the increases in the interest rates on [Permanents] loans
are void for having been unilaterally imposed without basis.
(B) Whether the Honorable Court of Appeals was correct in ordering the parties to enter into an express agreement regarding the
applicable interest rates on Permanents loan availments subsequent to the initial thirty-day (30) period.
(C) Whether the Honorable Court of Appeals was correct in ruling that [Permanent] is entitled to attorneys fees notwithstanding
the absence of bad faith or malice on the part of [Solidbank]. 8
The Courts Ruling
The petition has merit.
The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982 of the Monetary Board of the
Central Bank, and later by Central Bank Circular No. 905 which took effect on 1 January 1983. These circulars removed the
ceiling on interest rates for secured and unsecured loans regardless of maturity. The effect of these circulars is to allow the parties
to agree on any interest that may be charged on a loan. The virtual repeal of the Usury Law is within the range of judicial notice
which courts are bound to take into account.9 Although interest rates are no longer subject to a ceiling, the lender still does not
have an unbridled license to impose increased interest rates. The lender and the borrower should agree on the imposed rate, and
such imposed rate should be in writing.
The three promissory notes between Solidbank and Permanent all contain the following provisions:
5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this Note or Loan on the
basis of, among others, prevailing rates in the local or international capital markets. For this purpose, We/I authorize Solidbank to
debit any deposit or placement account with Solidbank belonging to any one of us. The adjustment of the interest rate shall be
effective from the date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was
sent.
6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note or Loan within thirty
(30) days from the receipt by anyone of us of the written notice. Otherwise, We/I shall be deemed to have given our consent to the
interest rate adjustment.
The stipulations on interest rate repricing are valid because (1) the parties mutually agreed on said stipulations; (2) repricing takes
effect only upon Solidbanks written notice to Permanent of the new interest rate; and (3) Permanent has the option to prepay its
loan if Permanent and Solidbank do not agree on the new interest rate. The phrases "irrevocably authorize," "at any time" and
"adjustment of the interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no date is
indicated, from the time the notice was sent," emphasize that Permanent should receive a written notice from Solidbank as a
condition for the adjustment of the interest rates.
In order that obligations arising from contracts may have the force of law between the parties, there must be a mutuality between
the parties based on their essential equality.10 A contract containing a condition which makes its fulfillment dependent exclusively
upon the uncontrolled will of one of the contracting parties is void. 11 There was no showing that either Solidbank or Permanent

coerced each other to enter into the loan agreements. The terms of the Omnibus Line Agreement and the promissory notes were
mutually and freely agreed upon by the parties.
Moreover, Solidbanks range of lending rates were consistent with "prevailing rates in the local or international capital markets."
Permanent presented a tabulation12 of the range of Solidbanks lending rates, as reported to Bangko Sentral ng Pilipinas and
compared the lending rates with the interest rates charged by Solidbank on Permanents loans, thus:
Solidbanks range of lending rates as per BSP
records
Interest
rates Excess
charged Interest
by Rate Over the
Solidbank on Permanents
Averageloans
of High and Low Rates
Sept. 12, 1997

25.0%

22.0%

23.0%

Sept. 17, 1997

27.0%

24.0%

24.0%

Sept. 22, 1997

26.0%

23.0%

22.5%

Oct. 13, 1997

29.0%

26.0%

28.0%

Oct. 17, 1997

30.0%

27.0%

30.0%

Oct. 22, 1997

32.0%

29.0%

30.0%

Nov. 12, 1997

28.0%

25.0%

27.0%

Nov. 17, 1997

28.0%

25.0%

27.0%

Nov. 21, 1997

27.0%

24.0%

27.0%

Dec. 12, 1997

25.0%

23.0%

26.0%

Dec. 17, 1997

25.0%

23.0%

34.0%

Dec. 22, 1997

25.0%

23.0%

32.0%

Jan. 12, 1998

26.0%

24.0%

30.0%

Jan. 16, 1998

28.0%

25.0%

30.0%

Jan. 22, 1998

28.0%

25.0%

30.0%

Feb. 9, 1998

27.0%

24.0%

30.0%

Feb. 11, 1998

27.0%

24.0%

29.0%

Feb. 12, 1998

27.0%

24.0%

30.0%

10.0%

The repriced interest rates from 12 September to 21 November 1997 conformed to the range of Solidbanks lending rates to other
borrowers. The 12 December 1997 to 12 February 1998 repriced interest rates were not unconscionably out of line with the upper
range of lending rates to other borrowers. The interest rate repricing happened at the height of the Asian financial crises in late
1997, when banks clamped down on lendings because of higher credit risks across industries, particularly the real estate industry.
We also recognize that Solidbank admitted that it did not promptly send Permanent written repriced rates, but rather verbally
advised Permanents officers over the phone at the start of the period. Solidbank did not present any written memorandum to
support its allegation that it promptly advised Permanent of the change in interest rates. 13 Solidbank advised Permanent on the
repriced interest rate applicable for the 30-day interest period only after the period had begun. Permanent presented a tabulation
which showed that Solidbank either did not send a billing statement, or sent a billing statement 6 to 33 days late. 14 We reproduce
the tabulation below:
PN #435 P19.6MM
Reference No.

Interest Period

Date Billing Statements

Number ofwere
days Billing Statement
faxed to Permanentwas Late

03/20/97

04/18/97

04/17/97

04/18/97

05/19/97

05/16/97

05/19/97

06/19/97

06/19/97

07/18/97

07/12/97

07/18/97

08/18/97

08/05/97

08/18/97

09/17/97

09/10/97

09/17/97

10/17/97

10/06/97

10/17/97

11/17/97

11/11/97

11/17/97

12/17/97

12/12/97

12/17/97

01/16/98

01/09/98

no statement received

01/16/98

02/20/98

02/18/98

PN #969 P18MM
Reference No.

Interest Period

Date Billing Statements

Number ofwere
days Billing Statement
faxed to Permanentwas Late

06/24/97

07/24/97

07/12/97

07/24/97

08/22/97

08/05/97

08/22/97

09/22/97

09/10/97

09/22/97

10/22/97

10/06/97

10/22/97

11/21/97

11/11/97

11/21/97

12/22/97

12/12/97

12/22/97

01/22/98

01/09/98

01/22/98

02/12/97

02/12/98

02/20/98

no statement received
02/18/98

PN #1077 P3.9MM
Reference No.

Interest Period

Date Billing Statements

Number ofwere
days Billing Statement
faxed to Permanentwas Late

07/15/97

08/14/97

08/14/97

08/14/97

08/26/97

08/26/97

08/26/97

09/12/97

09/10/97

09/12/97

10/13/97

10/06/97

10/13/97

11/12/97

11/11/97

11/12/97

12/12/97

12/10/97

12/12/97

01/12/98

01/09/98

01/12/98

02/09/98

02/09/98

02/09/98

02/11/98

02/11/98

03/13/98

no statement received
02/18/98

We rule that Solidbanks computation of the interest due from Permanent should be adjusted to take effect only upon Permanents
receipt of the written notice from Solidbank.1avvphi1
WHEREFORE, we GRANT the petition in part. We SET ASIDE the Decision of the Court of Appeals promulgated on 29 June
2005 as well as the Resolution promulgated on 14 March 2006 in CA-G.R. CV No. 75926 and AFFIRM the decision of the
Regional Trial Court of Makati City, Branch 58 dated 5 July 2002 in Civil Case No. 98-654 with the MODIFICATION that the
repricing of the interest rates should take effect only upon Permanent Homes, Incorporateds receipt of the written notice from
Solidbank Corporation of the adjustment in interest rate. The records of this case are therefore remanded to the trial court for the
computation of the proper interest payments based on the dates of receipt of written notice.
SO ORDERED.

G.R. No. 189871

August 13, 2013

DARIO NACAR, PETITIONER,

vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.
DECISION
PERALTA, J.:
This is a petition for review on certiorari assailing the Decision 1 dated September 23, 2008 of the Court of Appeals (CA) in CAG.R. SP No. 98591, and the Resolution2 dated October 9, 2009 denying petitioners motion for reconsideration.
The factual antecedents are undisputed.

Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch of the National Labor Relations
Commission (NLRC) against respondents Gallery Frames (GF) and/or Felipe Bordey, Jr., docketed as NLRC NCR Case No. 0100519-97.
On October 15, 1998, the Labor Arbiter rendered a Decision 3 in favor of petitioner and found that he was dismissed from
employment without a valid or just cause. Thus, petitioner was awarded backwages and separation pay in lieu of reinstatement in
the amount of P158,919.92. The dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge the burden of showing that complainant was
dismissed from employment for a just or valid cause. All the more, it is clear from the records that complainant was never afforded
due process before he was terminated. As such, we are perforce constrained to grant complainants prayer for the payments of
separation pay in lieu of reinstatement to his former position, considering the strained relationship between the parties, and his
apparent reluctance to be reinstated, computed only up to promulgation of this decision as follows:
SEPARATION PAY
Date Hired

August 1990
198/day

Date of Decision

Aug. 18, 1998

Length of Service

8 yrs. & 1 month

198.00 x 26 days x 8 months = P41,184.00

BACKWAGES
Date Dismissed
Rate per day
Date of Decisions

January 24, 1997

196.00
Aug. 18, 1998

a) 1/24/97 to 2/5/98 = 12.36 mos.

196.00/day x 12.36 mos.

62,986.56

b) 2/6/98 to 8/18/98 = 6.4 months

Prevailing Rate per day
198.00 x 26 days x 6.4 mos.
T O TAL

62,986.00
32,947.20
95.933.76

xxxx
WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of constructive dismissal and are
therefore, ordered:
To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eighty-six pesos and 56/100
(P62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred thirty-three and 36/100
(P95,933.36) representing his backwages; and
All other claims are hereby dismissed for lack of merit.
SO ORDERED.4
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution 5 dated February 29, 2000.
Accordingly, the NLRC sustained the decision of the Labor Arbiter. Respondents filed a motion for reconsideration, but it was
denied.6
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24, 2000, the CA issued a Resolution
dismissing the petition. Respondents filed a Motion for Reconsideration, but it was likewise denied in a Resolution dated May 8,
2001.7
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding no reversible error on the part
of the CA, this Court denied the petition in the Resolution dated April 17, 2002. 8
An Entry of Judgment was later issued certifying that the resolution became final and executory on May 27, 2002. 9 The case was,
thereafter, referred back to the Labor Arbiter. A pre-execution conference was consequently scheduled, but respondents failed to
appear.10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages be computed from the date
of his dismissal on January 24, 1997 up to the finality of the Resolution of the Supreme Court on May 27, 2002. 11 Upon
recomputation, the Computation and Examination Unit of the NLRC arrived at an updated amount in the sum of P471,320.31.12
On December 2, 2002, a Writ of Execution 13 was issued by the Labor Arbiter ordering the Sheriff to collect from respondents the
total amount of P471,320.31. Respondents filed a Motion to Quash Writ of Execution, arguing, among other things, that since the
Labor Arbiter awarded separation pay of P62,986.56 and limited backwages of P95,933.36, no more recomputation is required to
be made of the said awards. They claimed that after the decision becomes final and executory, the same cannot be altered or
amended anymore.14 On January 13, 2003, the Labor Arbiter issued an Order 15 denying the motion. Thus, an Alias Writ of
Execution16 was issued on January 14, 2003.

Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution 17 granting the appeal in favor of the
respondents and ordered the recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be final and executory.
Consequently, another pre-execution conference was held, but respondents failed to appear on time. Meanwhile, petitioner moved
that an Alias Writ of Execution be issued to enforce the earlier recomputed judgment award in the sum of P471,320.31.18
The records of the case were again forwarded to the Computation and Examination Unit for recomputation, where the judgment
award of petitioner was reassessed to be in the total amount of only P147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original amount as determined by the
Labor Arbiter in his Decision dated October 15, 1998, pending the final computation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment award that was due to petitioner
in the amount of P147,560.19, which petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary award to include the appropriate
interests.19
On May 10, 2005, the Labor Arbiter issued an Order 20 granting the motion, but only up to the amount of P11,459.73. The Labor
Arbiter reasoned that it is the October 15, 1998 Decision that should be enforced considering that it was the one that became final
and executory. However, the Labor Arbiter reasoned that since the decision states that the separation pay and backwages are
computed only up to the promulgation of the said decision, it is the amount of P158,919.92 that should be executed. Thus, since
petitioner already received P147,560.19, he is only entitled to the balance of P11,459.73.
Petitioner then appealed before the NLRC, 21 which appeal was denied by the NLRC in its Resolution 22 dated September 27, 2006.
Petitioner filed a Motion for Reconsideration, but it was likewise denied in the Resolution 23 dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision 24 denying the petition. The CA opined that since petitioner no longer
appealed the October 15, 1998 Decision of the Labor Arbiter, which already became final and executory, a belated correction
thereof is no longer allowed. The CA stated that there is nothing left to be done except to enforce the said judgment.
Consequently, it can no longer be modified in any respect, except to correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated October 9, 2009.
Hence, the petition assigning the lone error:
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, COMMITTED GRAVE ABUSE OF
DISCRETION AND DECIDED CONTRARY TO LAW IN UPHOLDING THE QUESTIONED RESOLUTIONS OF THE NLRC
WHICH, IN TURN, SUSTAINED THE MAY 10, 2005 ORDER OF LABOR ARBITER MAGAT MAKING THE DISPOSITIVE
PORTION OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN OPINION
EXPRESSED IN THE BODY OF THE SAME DECISION.26
Petitioner argues that notwithstanding the fact that there was a computation of backwages in the Labor Arbiters decision, the
same is not final until reinstatement is made or until finality of the decision, in case of an award of separation pay. Petitioner
maintains that considering that the October 15, 1998 decision of the Labor Arbiter did not become final and executory until the
April 17, 2002 Resolution of the Supreme Court in G.R. No. 151332 was entered in the Book of Entries on May 27, 2002, the
reckoning point for the computation of the backwages and separation pay should be on May 27, 2002 and not when the decision
of the Labor Arbiter was rendered on October 15, 1998. Further, petitioner posits that he is also entitled to the payment of interest
from the finality of the decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were awarded to petitioner by the October
15, 1998 decision of the Labor Arbiter, no more recomputation is required to be made of said awards. Respondents insist that
since the decision clearly stated that the separation pay and backwages are "computed only up to [the] promulgation of this
decision," and considering that petitioner no longer appealed the decision, petitioner is only entitled to the award as computed by
the Labor Arbiter in the total amount of P158,919.92. Respondents added that it was only during the execution proceedings that
the petitioner questioned the award, long after the decision had become final and executory. Respondents contend that to allow
the further recomputation of the backwages to be awarded to petitioner at this point of the proceedings would substantially vary
the decision of the Labor Arbiter as it violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of Appeals (Sixth Division), 27
wherein the issue submitted to the Court for resolution was the propriety of the computation of the awards made, and whether this
violated the principle of immutability of judgment. Like in the present case, it was a distinct feature of the judgment of the Labor
Arbiter in the above-cited case that the decision already provided for the computation of the payable separation pay and
backwages due and did not further order the computation of the monetary awards up to the time of the finality of the judgment.
Also in Session Delights, the dismissed employee failed to appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of the labor arbiter's original computation of
the awards made, pegged as of the time the decision was rendered and confirmed with modification by a final CA decision, is
legally proper. The question is posed, given that the petitioner did not immediately pay the awards stated in the original labor
arbiter's decision; it delayed payment because it continued with the litigation until final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from the way the original labor arbiter
framed his decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has been confirmed with finality. This is the finding of

the illegality of the dismissal and the awards of separation pay in lieu of reinstatement, backwages, attorney's fees, and legal
interests.
The second part is the computation of the awards made. On its face, the computation the labor arbiter made shows that it was
time-bound as can be seen from the figures used in the computation. This part, being merely a computation of what the first part
of the decision established and declared, can, by its nature, be re-computed. This is the part, too, that the petitioner now posits
should no longer be re-computed because the computation is already in the labor arbiter's decision that the CA had affirmed. The
public and private respondents, on the other hand, posit that a re-computation is necessary because the relief in an illegal
dismissal decision goes all the way up to reinstatement if reinstatement is to be made, or up to the finality of the decision, if
separation pay is to be given in lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken place, also made a computation
of the award, is understandable in light of Section 3, Rule VIII of the then NLRC Rules of Procedure which requires that a
computation be made. This Section in part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as practicable, shall embody in any such
decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality of the labor arbiter's decision. As we noted above,
this implication is apparent from the terms of the computation itself, and no question would have arisen had the parties terminated
the case and implemented the decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the finding of illegality as well as on all the
consequent awards made. Hence, the petitioner appealed the case to the NLRC which, in turn, affirmed the labor arbiter's
decision. By law, the NLRC decision is final, reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through a timely filed Rule 65 petition for
certiorari. The CA decision, finding that NLRC exceeded its authority in affirming the payment of 13th month pay and indemnity,
lapsed to finality and was subsequently returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of the original labor arbiter's
decision, the implementing labor arbiter ordered the award re-computed; he apparently read the figures originally ordered to be
paid to be the computation due had the case been terminated and implemented at the labor arbiter's level. Thus, the labor arbiter
re-computed the award to include the separation pay and the backwages due up to the finality of the CA decision that fully
terminated the case on the merits. Unfortunately, the labor arbiter's approved computation went beyond the finality of the CA
decision (July 29, 2003) and included as well the payment for awards the final CA decision had deleted - specifically, the
proportionate 13th month pay and the indemnity awards. Hence, the CA issued the decision now questioned in the present
petition.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially considered the labor arbiter's
original decision in accordance with its basic component parts as we discussed above. To reiterate, the first part contains the
finding of illegality and its monetary consequences; the second part is the computation of the awards or monetary consequences
of the illegal dismissal, computed as of the time of the labor arbiter's original decision. 28
Consequently, from the above disquisitions, under the terms of the decision which is sought to be executed by the petitioner, no
essential change is made by a recomputation as this step is a necessary consequence that flows from the nature of the illegality of
dismissal declared by the Labor Arbiter in that decision. 29 A recomputation (or an original computation, if no previous computation
has been made) is a part of the law specifically, Article 279 of the Labor Code and the established jurisprudence on this
provision that is read into the decision. By the nature of an illegal dismissal case, the reliefs continue to add up until full
satisfaction, as expressed under Article 279 of the Labor Code. The recomputation of the consequences of illegal dismissal upon
execution of the decision does not constitute an alteration or amendment of the final decision being implemented. The illegal
dismissal ruling stands; only the computation of monetary consequences of this dismissal is affected, and this is not a violation of
the principle of immutability of final judgments.30
That the amount respondents shall now pay has greatly increased is a consequence that it cannot avoid as it is the risk that it ran
when it continued to seek recourses against the Labor Arbiter's decision. Article 279 provides for the consequences of illegal
dismissal in no uncertain terms, qualified only by jurisprudence in its interpretation of when separation pay in lieu of reinstatement
is allowed. When that happens, the finality of the illegal dismissal decision becomes the reckoning point instead of the
reinstatement that the law decrees. In allowing separation pay, the final decision effectively declares that the employment
relationship ended so that separation pay and backwages are to be computed up to that point. 31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v. Court of Appeals, 32 the Court
laid down the guidelines regarding the manner of computing legal interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum 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.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit. 33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated May 16, 2013,
approved the amendment of Section 234 of Circular No. 905, Series of 1982 and, accordingly, issued Circular No. 799, 35 Series of
2013, effective July 1, 2013, the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions governing the rate of interest
in the absence of stipulation in loan contracts, thereby amending Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the
absence of an express contract as to such rate of interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.1 36 of the Manual of Regulations for Banks and Sections 4305Q.1, 37 4305S.338
and 4303P.139 of the Manual of Regulations for Non-Bank Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the parties, the rate
of legal interest for loans or forbearance of any money, goods or credits and the rate allowed in judgments shall no longer be
twelve percent (12%) per annum - as reflected in the case of Eastern Shipping Lines 40 and Subsection X305.1 of the Manual of
Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial
Institutions, before its amendment by BSP-MB Circular No. 799 - but will now be six percent (6%) per annum effective July 1,
2013. It should be noted, nonetheless, that the new rate could only be applied prospectively and not retroactively. Consequently,
the twelve percent (12%) per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six
percent (6%) per annum shall be the prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral Monetary Board, 41
this Court affirmed the authority of the BSP-MB to set interest rates and to issue and enforce Circulars when it ruled that "the BSPMB may prescribe the maximum rate or rates of interest for all loans or renewals thereof or the forbearance of any money, goods
or credits, including those for loans of low priority such as consumer loans, as well as such loans made by pawnshops, finance
companies and similar credit institutions. It even authorizes the BSP-MB to prescribe different maximum rate or rates for different
types of borrowings, including deposits and deposit substitutes, or loans of financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory prior to July 1, 2013, said judgments shall not
be disturbed and shall continue to be implemented applying the rate of interest fixed therein.1awp++i1
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines 42 are accordingly modified
to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.1wphi1
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum 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.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded
may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially
or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be disturbed and
shall continue to be implemented applying the rate of interest fixed therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of Appeals in CA-G.R. SP No. 98591,
and the Resolution dated October 9, 2009 are REVERSED and SET ASIDE. Respondents are Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997 up to May 27, 2002, when the
Resolution of this Court in G.R. No. 151332 became final and executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month pay per year of service; and
(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from May 27, 2002 to June 30, 2013 and
six percent (6%) per annum from July 1, 2013 until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary benefits awarded and due to
petitioner in accordance with this Decision.

SO ORDERED.

G.R. No. 197861

June 5, 2013

SPOUSES FLORENTINO T. MALLARI and AUREA V. MALLARI, Petitioners,

vs.
PRUDENTIAL BANK (now BANK OF THE PHILIPPINE ISLANDS), Respondent.
DECISION
PERALTA, J.:
Before us is a Petition for Review on Certiorari under Rule 45, assailing the Decision 1 dated June 17, 2010 and the Resolution 2
dated July 20, 2011 of the Court of Appeals (CA) in CA-G.R. CV No. 65993.
The antecedent facts are as follows:
On December 11, 1984, petitioner Florentino T. Mallari (Florentino) obtained from respondent Prudential Bank-Tarlac Branch
(respondent bank), a loan in the amount of P300,000.00 as evidenced by Promissory Note (PN) No. BD 84-055. 3 Under the
promissory note, the loan was subject to an interest rate of 21% per annum (p.a.), attorney's fees equivalent to 15% of the total
amount due but not less than P200.00 and, in case of default, a penalty and collection charges of 12% p.a. of the total amount
due. The loan had a maturity date of January 10, 1985, but was renewed up to February 17, 1985. Petitioner Florentino executed
a Deed of Assignment4 wherein he authorized the respondent bank to pay his loan with his time deposit with the latter in the
amount of P300,000.00.
On December 22, 1989, petitioners spouses Florentino and Aurea Mallari (petitioners) obtained again from respondent bank
another loan of P1.7 million as evidenced by PN No. BDS 606-89 5 with a maturity date of March 22, 1990. They stipulated that the
loan will bear 23% interest p.a., attorney's fees equivalent to 15% p.a. of the total amount due, but not less than P200.00, and
penalty and collection charges of 12% p.a. Petitioners executed a Deed of Real Estate Mortgage 6 in favor of respondent bank
covering petitioners' property under Transfer Certificate of Title (TCT) No. T-215175 of the Register of Deeds of Tarlac to answer
for the said loan.
Petitioners failed to settle their loan obligations with respondent bank, thus, the latter, through its lawyer, sent a demand letter to
the former for them to pay their obligations, which when computed up to January 31, 1992, amounted to P571,218.54 for PN No.
BD 84-055 and P2,991,294.82 for PN No. BDS 606-89.
On February 25, 1992, respondent bank filed with the Regional Trial Court (RTC) of Tarlac, a petition for the extrajudicial
foreclosure of petitioners' mortgaged property for the satisfaction of the latter's obligation of P1,700,000.00 secured by such
mortgage, thus, the auction sale was set by the Provincial Sheriff on April 23, 1992. 7
On April 10, 1992, respondent bank's Assistant Manager sent petitioners two (2) separate Statements of Account as of April 23,
1992, i.e., the loan of P300,000.00 was increased to P594,043.54, while the P1,700,000.00 loan was already P3,171,836.18.
On April 20, 1992, petitioners filed a complaint for annulment of mortgage, deeds, injunction, preliminary injunction, temporary
restraining order and damages claiming, among others, that: (1) the P300,000.00 loan obligation should have been considered
paid, because the time deposit with the same amount under Certificate of Time Deposit No. 284051 had already been assigned to
respondent bank; (2) respondent bank still added the P300,000.00 loan to the P1.7 million loan obligation for purposes of applying
the proceeds of the auction sale; and (3) they realized that there were onerous terms and conditions imposed by respondent bank
when it tried to unilaterally increase the charges and interest over and above those stipulated. Petitioners asked the court to
restrain respondent bank from proceeding with the scheduled foreclosure sale.
Respondent bank filed its Answer with counterclaim arguing that: (1) the interest rates were clearly provided in the promissory
notes, which were used in computing for interest charges; (2) as early as January 1986, petitioners' time deposit was made to
apply for the payment of interest of their P300,000.00 loan; and (3) the statement of account as of April 10, 1992 provided for a
computation of interest and penalty charges only from May 26, 1989, since the proceeds of petitioners' time deposit was applied
to the payment of interest and penalty charges for the preceding period. Respondent bank also claimed that petitioners were fully
apprised of the bank's terms and conditions; and that the extrajudicial foreclosure was sought for the satisfaction of the second
loan in the amount of P1.7 million covered by PN No. BDS 606-89 and the real estate mortgage, and not the P300,000.00 loan
covered by another PN No. 84-055.
In an Order8 dated November 10, 1992, the RTC denied the Application for a Writ of Preliminary Injunction. However, in
petitioners' Supplemental Motion for Issuance of a Restraining Order and/or Preliminary Injunction to enjoin respondent bank and
the Provincial Sheriff from effecting or conducting the auction sale, the RTC reversed itself and issued the restraining order in its
Order9 dated January 14, 1993.
Respondent bank filed its Motion to Lift Restraining Order, which the RTC granted in its Order 10 dated March 9, 1993. Respondent
bank then proceeded with the extrajudicial foreclosure of the mortgaged property. On July 7, 1993, a Certificate of Sale was
issued to respondent bank being the highest bidder in the amount of P3,500,000.00.
Subsequently, respondent bank filed a Motion to Dismiss Complaint 11 for failure to prosecute action for unreasonable length of
time to which petitioners filed their Opposition. 12 On November 19, 1998, the RTC issued its Order 13 denying respondent bank's
Motion to Dismiss Complaint.
Trial thereafter ensued. Petitioner Florentino was presented as the lone witness for the plaintiffs. Subsequently, respondent bank
filed a Demurrer to Evidence.
On November 15, 1999, the RTC issued its Order14 granting respondent's demurrer to evidence, the dispositive portion of which
reads:

WHEREFORE, this case is hereby ordered DISMISSED. Considering there is no evidence of bad faith, the Court need not order
the plaintiffs to pay damages under the general concept that there should be no premium on the right to litigate.
NO COSTS.
SO ORDERED.15
The RTC found that as to the P300,000.00 loan, petitioners had assigned petitioner Florentino's time deposit in the amount of
P300,000.00 in favor of respondent bank, which maturity coincided with petitioners' loan maturity. Thus, if the loan was unpaid,
which was later extended to February 17, 1985, respondent bank should had just applied the time deposit to the loan. However,
respondent bank did not, and allowed the loan interest to accumulate reaching the amount of P594,043.54 as of April 10, 1992,
hence, the amount of P292,600.00 as penalty charges was unjust and without basis.
As to the P1.7 million loan which petitioners obtained from respondent bank after the P300,000.00 loan, it had reached the
amount of P3,171,836.18 per Statement of Account dated April 27, 1993, which was computed based on the 23% interest rate and
12% penalty charge agreed upon by the parties; and that contrary to petitioners' claim, respondent bank did not add the
P300,000.00 loan to the P1.7 million loan obligation for purposes of applying the proceeds of the auction sale.
The RTC found no legal basis for petitioners' claim that since the total obligation was P1.7 million and respondent bank's bid price
was P3.5 million, the latter should return to petitioners the difference of P1.8 million. It found that since petitioners' obligation had
reached P2,991,294.82 as of January 31, 1992, but the certificate of sale was executed by the sheriff only on July 7, 1993, after
the restraining order was lifted, the stipulated interest and penalty charges from January 31, 1992 to July 7, 1993 added to the
loan already amounted to P3.5 million as of the auction sale.
The RTC found that the 23% interest rate p.a., which was then the prevailing loan rate of interest could not be considered
unconscionable, since banks are not hospitable or equitable institutions but are entities formed primarily for profit. It also found
that Article 1229 of the Civil Code invoked by petitioners for the reduction of the interest was not applicable, since petitioners had
not paid any single centavo of the P1.7 million loan which showed they had not complied with any part of the obligation.
Petitioners appealed the RTC decision to the CA. A Comment was filed by respondent bank and petitioners filed their Reply
thereto.
On June 17, 2010, the CA issued its assailed Decision, the dispositive portion of which reads:
WHEREFORE, the instant appeal is hereby DENIED. The Order dated November 15, 1999 issued by the Regional Trial Court
(RTC), Branch 64, Tarlac City, in Civil Case No. 7550 is hereby AFFIRMED. 16
The CA found that the time deposit of P300,000.00 was equivalent only to the principal amount of the loan of P300,000.00 and
would not be sufficient to cover the interest, penalty, collection charges and attorney's fees agreed upon, thus, in the Statement of
Account dated April 10, 1992, the outstanding balance of petitioners' loan was P594,043.54. It also found not persuasive
petitioners' claim that the P300,000.00 loan was added to the P1.7 million loan. The CA, likewise, found that the interest rates and
penalty charges imposed were not unconscionable and adopted in toto the findings of the RTC on the matter.
Petitioners filed their Motion for Reconsideration, which the CA denied in a Resolution dated July 20, 2011.
Hence, petitioners filed this petition for review arguing that:
THE HON. COURT OF APPEALS ERRED IN AFFIRMING THE ORDER OF THE RTC-BRANCH 64, TARLAC CITY, DATED
NOVEMBER 15, 1999, DESPITE THE FACT THAT THE SAME IS CONTRARY TO SETTLED JURISPRUDENCE ON THE
MATTER.17
The issue for resolution is whether the 23% p.a. interest rate and the 12% p.a. penalty charge on petitioners' P1,700,000.00 loan
to which they agreed upon is excessive or unconscionable under the circumstances.
Parties are free to enter into agreements and stipulate as to the terms and conditions of their contract, but such freedom is not
absolute. As Article 1306 of the Civil Code provides, "The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public
policy." Hence, if the stipulations in the contract are valid, the parties thereto are bound to comply with them, since such contract is
the law between the parties. In this case, petitioners and respondent bank agreed upon on a 23% p.a. interest rate on the P1.7
million loan. However, petitioners now contend that the interest rate of 23% p.a. imposed by respondent bank is excessive or
unconscionable, invoking our ruling in Medel v. Court of Appeals, 18 Toring v. Spouses Ganzon-Olan,19 and Chua v. Timan.20
We are not persuaded.
In Medel v. Court of Appeals, 21 we found the stipulated interest rate of 66% p.a. or a 5.5% per month on a P500,000.00 loan
excessive, unconscionable and exorbitant, hence, contrary to morals if not against the law and declared such stipulation void. In
Toring v. Spouses Ganzon-Olan,22 the stipulated interest rates involved were 3% and 3.81% per month on a P10 million loan,
which we find under the circumstances excessive and reduced the same to 1% per month. While in Chua v. Timan, 23 where the
stipulated interest rates were 7% and 5% a month, which are equivalent to 84% and 60% p.a., respectively, we had reduced the
same to 1% per month or 12% p.a. We said that we need not unsettle the principle we had affirmed in a plethora of cases that
stipulated interest rates of 3% per month and higher are excessive, unconscionable and exorbitant, hence, the stipulation was
void for being contrary to morals.24
In this case, the interest rate agreed upon by the parties was only 23% p.a., or less than 2% per month, which are much lower
than those interest rates agreed upon by the parties in the above-mentioned cases. Thus, there is no similarity of factual milieu for
the application of those cases.
We do not consider the interest rate of 23% p.a. agreed upon by petitioners and respondent bank to be unconscionable.
In Villanueva v. Court of Appeals, 25 where the issue raised was whether the 24% p.a. stipulated interest rate is unreasonable
under the circumstances, we answered in the negative and held:
In Spouses Zacarias Bacolor and Catherine Bacolor v. Banco Filipino Savings and Mortgage Bank, Dagupan City Branch, this

Court held that the interest rate of 24% per annum on a loan of P244,000.00, agreed upon by the parties, may not be considered
as unconscionable and excessive. As such, the Court ruled that the borrowers cannot renege on their obligation to comply with
what is incumbent upon them under the contract of loan as the said contract is the law between the parties and they are bound by
its stipulations.
Also, in Garcia v. Court of Appeals, this Court sustained the agreement of the parties to a 24% per annum interest on an
P8,649,250.00 loan finding the same to be reasonable and clearly evidenced by the amended credit line agreement entered into
by the parties as well as two promissory notes executed by the borrower in favor of the lender.
Based on the above jurisprudence, the Court finds that the 24% per annum interest rate, provided for in the subject mortgage
contracts for a loan of P225,000.00, may not be considered unconscionable. Moreover, considering that the mortgage agreement
was freely entered into by both parties, the same is the law between them and they are bound to comply with the provisions
contained therein.26
Clearly, jurisprudence establish that the 24% p.a. stipulated interest rate was not considered unconscionable, thus, the 23% p.a.
interest rate imposed on petitioners' loan in this case can by no means be considered excessive or unconscionable.
We also do not find the stipulated 12% p.a. penalty charge excessive or unconscionable.
In Ruiz v. CA,27 we held:
The 1% surcharge on the principal loan for every month of default is valid.1wphi1 This surcharge or penalty stipulated in a loan
agreement in case of default partakes of the nature of liquidated damages under Art. 2227 of the New Civil Code, and is separate
and distinct from interest payment. Also referred to as a penalty clause, it is expressly recognized by law. It is an accessory
undertaking to assume greater liability on the part of an obligor in case of breach of an obligation. The obligor would then be
bound to pay the stipulated amount of indemnity without the necessity of proof on the existence and on the measure of damages
caused by the breach. x x x28 And in Development Bank of the Philippines v. Family Foods Manufacturing Co., Ltd., 29 we held that:
x x x The enforcement of the penalty can be demanded by the creditor only when the non-performance is due to the fault or fraud
of the debtor. The non-performance gives rise to the presumption of fault; in order to avoid the payment of the penalty, the debtor
has the burden of proving an excuse - the failure of the performance was due to either force majeure or the acts of the creditor
himself.30
Here, petitioners defaulted in the payment of their loan obligation with respondent bank and their contract provided for the
payment of 12% p.a. penalty charge, and since there was no showing that petitioners' failure to perform their obligation was due to
force majeure or to respondent bank's acts, petitioners cannot now back out on their obligation to pay the penalty charge. A
contract is the law between the parties and they are bound by the stipulations therein.
WHEREFORE, the petition for review is DENIED. The Decision dated June 17, 2010 and the Resolution dated July 20, 2011 of
the Court of Appeals are hereby AFFIRMED.
SO ORDERED.
G.R. No. 118203 July 5, 1996
EMILIO A. SALAZAR and TERESITA DIZON, petitioners,
vs.
COURT OF APPEALS and JONETTE BORRES, respondents.

DAVIDE, JR., J.:p

Petitioners seek to set aside the decision 1 of 29 November 1994 of the Court of Appeals in CA-G.R. CV No. 40197, which
reversed the decision 2 of 3 September 1992 of Branch 66 of the Regional Trial Court (RTC) of Makati, Metro Manila, in Civil Case
No. 89-4468.
The primary issues presented for our resolution are whether (a) the so-called Deed of Absolute Sale executed by petitioner Emilio
A. Salazar in favor of private respondent Jonette Borres is a perfected contract of sale or a mere contract to sell, and (b) the action
for specific performance which the latter filed will lie to compel the former to deliver the Deed of Absolute Sale, the Transfer
Certificates of Title, and other documents relative to the property in question.
The factual antecedents of this case, as summarized by the trial court, are as follows:
That defendant Dr. Salazar is the owner of the two (2) parcels of land with improvements thereon located at 2914 Finlandia Street,
Makati, Metro Manila and covered by Transfer Certificate of Title Nos. 31038 and 31039 of the Registry of Deeds of Makati; that
Dr. Salazar offered to sell his properties to Jonette Borres for One Million pesos (P1,000,000.00) (TSN pp. 7 and 8, November 5,
1991). The initial proposal took place at the Dimsum Restaurant, Makati, whereby it was proposed that the payment of the
consideration was to be made within six (6) months but was objected to by Dr. Salazar and he reduced it to a three (3) months
period (TSN Direct Examination on Jonette Borres p. 22, November 12, 1991); that sometime on [May] 28, 1989, Jonette Borres
together with a certain Emilio T. Salazar went to see Dr. Salazar at the latter's residence in Bataan bearing a copy of a Deed of
Absolute Sale (Exhibit ("C") and Deed of Warranty (Exhibit "D") but Dr. Salazar refused to sign because Jonette Borres did not
have the money ready then. In said occasion Dr. Salazar further reduced the period within which plaintiff may purchase the lots, to
one (1) month or up to June 30, 1989 (TSN Direct Examination on Jonette Borres November 5, [1991], pp. 10 and 11).
Jonette Borres then met again Dr. Salazar on June 2, 1989 at the Ninoy International Airport who was about to leave for the
United States of America where he is a resident. Jonette Borres had with her the Deed of Absolute Sale and asked Dr. Salazar to
sign said document. Dr. Salazar reluctantly agreed to sign the document provided that Jonette Borres pays one half (1/2) of the
consideration or P500,000.00 in "cash" by June 15, 1989 and the balance was payable on June 30, 1989 (TSN Direct
Examination on Emilio A. Salazar, May 21, [1991], p. 9; TSN Cross Examination on Jonette Borres, November 12, [1991], pp. 29
and 30). It was during this occasion that Dr. Salazar again emphasized to Jonette Borres that he needed the money because he

was then buying a property in the United States (TSN pp. 15-20, November 5, 1991; pp. 22 and 23, May 21, 1991; and pp. 56-57,
May 21, 1991).
Plaintiff agreed to the above conditions (TSN Cross Examination on Jonette Borres November 12, 1989, p. 32) and Dr. Salazar
constituted co-defendant Teresa Dizon as custodian at the Deed of Absolute Sale (Exhibit "C") together with the Titles of the Land
in question with the instruction to Teresa Dizon not to surrender said documents to Jonette Borres until upon payment of the full
price in "cash" (TSN Direct Examination on Emilio A. Salazar, May 21, [1991], p. 11).
On June 14, 1989 Jonette Borres informed defendant Dizon that she will be able to pay the full amount of P1,000,000.00 on June
15, 1989 (TSN Direct Examination Jonette Borres, November 5, [1991], p. 25) and on the next day, she then went to the house of
Teresa Dizon to see and get the documents entrusted to her by Dr. Salazar. The documents not being in Dizon's possession, they
agreed to meet at Metro Bank West Avenue Branch to get the documents and then to proceed to Makati to meet the plaintiff's
business partner a certain Balao who allegedly gave plaintiff a Far East Bank and Trust Company check for the amount of
P1,500,000.00 (Exhibit "F") with which to buy the property (TSN Direct Examination on Jonette Borres November 5, [1991], pp.
30, 32 and 33). For some reason or another Jonette Borres and defendant Dizon failed to proceed to Makati.
In the meantime or on June 16, 1992, Dr. Salazar made an overseas call to co-defendant Dizon to inquire if Jonette Borres had
already paid the down payment of P500,000.00 and Teresa Dizon replied to Dr. Salazar that Jonette Borres had not paid the down
payment. Dr. Salazar then ordered Dizon to stop the sale (TSN Direct Examination on Emilio A. Salazar, May 21, [1991], pp. 12
and 13).
As maybe seen from the evidence presented by the plaintiff and the defendants, the terms and conditions of the agreement for the
sale of the two (2) parcels of land owned by Dr. Salazar in favor of the plaintiff Jonette Borres, are that the purchase price is in the
amount of P1,000,000.00, fifty percent (50%) of which or P500,000.00 was to paid on or before June 15, 1989 while the balance
thereof was to be paid on or before June 30, 1989 (TSN May 21, 1991, p. 27); that the payment was to be made in "cash" (TSN
May 21, 1991, p. 55); that the place of payment is at defendant's bank, Metropolitan Bank Quezon City Branch (TSN October 21,
1991, p. 23). 3
The trial court held that the Deed of Absolute Sale was in reality a contract to sell, and that since Borres failed to pay Salazar the
downpayment of P500,000.00 on the agreed date, 15 June 1989, the complaint for specific performance cannot prosper. It then
dismissed the complaint and ordered Borres to pay the petitioners P5,000.00 each as attorney's fees and litigation expenses. 4
In ruling that the Deed of Absolute Sale was a contract to sell, the trial court considered pertinent the circumstances attending its
execution. First, that the Deed of Absolute Sale was "reluctantly signed" by Dr. Salazar, who was then about to leave for the
United States of America, in order that if Borres would comply with the terms and conditions of their agreement, he need not come
to the Philippines just to sign it; hence, it does not bind Dr. Salazar until the suspensive condition, i.e., the downpayment of
P500,000.00 to be effected on or before 15 June 1989 and the balance to be paid on or before 30 June 1989, is complied with.
Second, Borres was not, in fact, financially prepared to buy the parcels of land on or before 15 June 1989 considering that
[s]he was just looking for possible buyers or business partners. First, she requested that the pertinent documents like the Deed of
Sale (Exhibit "C") and the corresponding Transfer Certificates of Titles Nos. 31038 and 31039 of the Register of Deeds of Rizal
(Exhibits "A" and "B") be entrusted to her even before making the downpayment of P500,000.00 purposely to raise the amount
needed. When Dr. Salazar refused her request, Jonette Borres approached a certain businessman P.D. Dionisio for loan and was
turned down when Jonette Borres cannot [sic] produce the Deed of Absolute Sale and the Titles of the parcels of land in question
(TSN November 5, 1991, pp. 20-25). Then she approached a certain Benjamin Balao a realtor developer. Although Balao had
issued to her his check in the amount of P1,500,000.00 (Exhibit "F") he instructed his bank not to honor his check without his
presence (TSN November 14, 1991, pp. 81 to 84). Jonette Borres admitted that she was not in a position to encash the check
(Exhibit "F") although it was payable to "cash" (TSN November 21, 1991, pp. 41 and 44). 5
Salazar's victory was short-lived. On Borre's appeal from the decision of the trial court, the Court of Appeals, in its challenged
decision of 29 November 1994, ruled that the Deed of Absolute Sale, whose existence and due execution was undisputed, is
perfected contract of sale, with a definite object and a specific consideration which the parties had agreed upon. As proof that it is
a contract of sale and not a contract to sell, the Court of Appeals stressed the absence of a proviso that the title to the property is
reserved in the vendor until full payment of the purchase price or that the vendor may unilaterally rescind the contract the moment
the vendee fails to pay within the fixed period. 6 Salazar's reluctance to sign it is of no moment, since there is no allegation of
fraud, forgery, or duress. And even assuming that Borres failed to pay the contract price, such failure did not convert the contract
into one without cause or consideration as to vitiate the validity of the contract, it not being essential for the existence of cause that
payment or full payment be made at the time of the contract. Neither did such failure ipso facto resolve the contract in question.
The remedy of the vendor, Dr. Emilio A. Salazar, is to demand specific performance or rescission, with damages in either case. On
the other hand, the vendee, Jonette Borres, may demand specific performance, i.e., compel the vendor to accept the price and
deliver the title of the land object of the contract.
The Court of Appeals disagreed with the trial court's finding that Borres was not in a position to pay the downpayment because
[o]n June 15, 1989, plaintiff-appellant had a Far East Bank check payable to her order, in the amount of P1,500,000.00 more
than the whole agreed purchase price of P1,000,000.00. Defendant-appellee Teresa Dizon agreed (on June 14, 1989) to meet her
on June 15, 1989, at Metro Bank West and thereafter to proceed to Makati in order to encash the Far East Bank check.
Defendant-appellee Teresa Dizon somehow managed to manipulate things by making herself unavailable so that the payment
could not be made on June 15, 1989. (TSN, Nov. 5, 1991, pp. 27-41). On the next day, June 16, 1989, defendant-appellee Teresa
Dizon informed plaintiff-appellant that defendant-appellee Dr. Emilio A. Salazar called up in the evening of June 15, 1989 asking
whether plaintiff-appellant paid on that day and upon being answered in the negative, said vendor said that he is revoking the
contract. (TSN, Nov. 5, 1991, pp. 41-42). Defendant-appellee Teresa Dizon having her own interested buyer, evidently acted in
bad faith, tried and indeed succeeded to frustrate the efforts of plaintiff-appellant to comply with her reciprocal obligation to pay the
agreed purchase price.
The fact that the Far East Bank check was payable to the Order of plaintiff-appellant, and it covers the amount of P1,500,000.00
which is much more than the agreed purchase price of P1,000,000.00 reveals that plaintiff-appellant was financially
prepared to comply with her reciprocal obligation. That plaintiff-appellant filed the present suit for specific performance on July 6,
1989, bolsters the fact that she is really willing and able to pay the agreed purchase price. How and from whom she

borrowed/obtained the said amount, is of no consequence. 7

Accordingly, the respondent Court reversed the decision of the trial court and handed down a new judgment ordering Emilio A.
Salazar to accept from Jonette Borres the payment representing the purchase price in the amount of P1 million and thereafter to
comply with his reciprocal obligation to surrender the original copies of the deed of absolute sale and torrens title covering the
parcels of land subject of the contract. Finding petitioner Teresita Dizon to have "acted in bad faith in frustrating the efforts" of
Borres to comply with her obligation to pay the purchase price, the appellate court ordered her to pay Borres the amounts of
P80,000.00 as moral damages; P50,000.00 as exemplary damages; and P100,000.00 as attorney's fees.
Unable to accept the reversal of the trial court's decision, the petitioners filed the instant petition wherein they submit that the
Court of Appeals committed grave and serious errors:
A. . . . in relying on the Deed of Absolute Sale dated May 30, 1989 notwithstanding the fact that:
1. BORRES EXECUTED A DEED OF WARRANTY (EXHS. "D" AND "2") STATING THEREIN THAT UNTIL AND UNLESS THE
AMOUNT OF P1,000,000.00 REPRESENTING THE PURCHASE PRICE FOR THAT PARCELS OF LAND COVERED BY TCT
NOS. S-31038 AND S-31039 BE PAID BY HER TO SALAZAR, SHE HAS NO RIGHT WHATSOEVER TO THE ORIGINAL
COPIES OF THE DEED OF ABSOLUTE SALE AND THAT SHE HAS NO LEGAL RIGHT WHATSOEVER TO ANY AND ALL
PERTINENT RECORDS OF THE ABOVE-MENTIONED LOTS;
2. UPON HERE BEHEST, BORRES WAS GIVEN A PHOTOCOPY OF THE DEED OF ABSOLUTE SALE BY DIZON BUT ONLY
AFTER THE LATTER ERASED THE SIGNATURE OF SALAZAR AS THE VENDEE THEREIN.
3. BORRES HAD NOT PAID ANY PORTION OF THE AGREED PURCHASE PRICE AND THUS RENDERS THE DEED OF
ABSOLUTE SALE VOID AB INITIO.
B. . . . in concluding that the agreement between SALAZAR and BORRES is a contract of sale and thus, perfected upon
agreement on the subject matter and consideration, notwithstanding the fact that:
1. THE AGREEMENT BETWEEN THE PARTIES IS ESSENTIALLY A CONTRACT TO SELL SUBJECT TO A SUSPENSIVE
CONDITION, THE BIRTH OR EFFECTIVITY OF WHICH SHOULD TAKE PLACE ONLY IF AND WHEN THE EVENT WHICH
CONSTITUTES THE CONDITION HAPPENS OR IS FULFILLED. SINCE BORRES FAILED TO COMPLY WITH HER
OBLIGATION, THE AGREEMENT TO SELL BECAME STILLBORN;
2. THERE WAS AN EXPRESS AGREEMENT BETWEEN THE PARTIES THAT BORRES SHALL BE ENTITLED TO THE
PROPERTY OR ANY RECORDS PERTAINING THERETO OR ORIGINAL COPIES OF THE DEED OF ABSOLUTE SALE ONLY
UPON FULL PAYMENT OF THE PURCHASE PRICE.
C. . . . in holding that DIZON acted in bad faith and succeeded to frustrate the efforts of BORRES to comply with her reciprocal
obligation to pay the purchase price notwithstanding the fact that:
1. AT THE TIME THAT BORRES WAS OBLIGED TO PAY AT LEAST 50% OF THE PURCHASE PRICE OR ON JUNE 15, 1989,
SHE WAS NOT READY, WILLING AND ABLE TO DO SO. EVEN ASSUMING FOR THE SAKE OF ARGUMENT THAT THE
LATTER HAD THE FINANCIAL CAPABILITY TO MEET HER OBLIGATION, THE FACT REMAINS THAT SHE FAILED TO
PROPERLY TENDER PAYMENT OF HER OBLIGATION AND IN CASE TENDER OF PAYMENT WAS REFUSED, TO CONSIGN
THE SAME IN COURT;
2. DIZON HAD NO REASON TO FRUSTRATE THE EFFORTS OF BORRES TO COMPLY WITH HER OBLIGATION TO PAY
THE AGREED PURCHASE PRICE SINCE SHE WAS MERELY CONSTITUTED AS CUSTODIAN OF THE DEED OF ABSOLUTE
SALE AND TITLES OF THE PROPERTY WITH SPECIFIC INSTRUCTIONS TO RELEASE THE SAME TO BORRES ONLY
UPON RECEIPT OF THE PURCHASE PRICE IN FULL AND IN CASH WITHIN THE AGREED PERIOD.
D. . . . in ordering Dizon to pay Borres the amount of P80,000.00 moral damages; P50,000.00 exemplary damages and
P100,000.00 as attorney's fees by way of damages notwithstanding the fact that the evidence adduced before the trial court
clearly shows that BORRES had no cause of action against the former. 8
We shall first the issue of whether the agreement between petitioner Salazar and private respondent Borres is a contract of sale or
a contract to sell.
In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold; in a contract to sell,
ownership is, by agreement, reserved in the vendor and is not to pass to the vendee until full payment of the purchase price.
Otherwise stated, in a contract of sale, the vendor loses ownership over the property and cannot recover it until and unless the
contract is resolved or rescinded; whereas in a contract to sell, title is retained by the vendor until full payment of the price. In the
latter contract, payment of the price is a positive suspensive condition, failure of which is not a breach but an event prevents the
obligation of the vendor to convey title from becoming effective. 9
If we are to consider only the Deed of Absolute Sale, 10 we can easily say that the contract between Salazar and Borres is one of
sale. However, the Deed of Warranty 11 and the oral testimony on the circumstances surrounding the execution of the Deed of
Absolute Sale, as well as the other pieces of evidence submitted by Borres, sustain the finding and conclusion of the trial court
that the true agreement between the parties was a contract to sell in that the true intent of Salazar was to transfer ownership of
the property to Borres only after the latter pays the full consideration.
From the beginning to the end, such intention of Salazar was unequivocal and manifest. He rejected Borre's offer to pay the
consideration within six months to give her time to secure a loan. When Borres proposed that he lend her the certificates of title of
the lots so that she could secure a loan from the banks in Manila and be able to pay, within three months, 12 the consideration out
of the proceeds of the loan, Salazar agreed provided that she would assure him that the title would not pass to her until he is fully
paid. Borres forthwith promised to execute a warranty. She then prepared a Deed of Absolute Sale for Salazar's signature and a
Deed of Warranty for her signature. When finally she presented to him the Deed of Absolute Sale, Salazar did not sign it and
insisted that he be paid the purchase price at the end of June 1989; he further told her that he would not lend her the certificates
of title until he is so paid. He signed it only after Borres agreed to pay by the end of June 1989 at a bank in Makati. But he did not
give the Deed of Absolute Sale to her; instead, he told her to just meet him at the Ninoy Aquino International Airport on 2 June

1989, when he would leave for the United States of America, so she would know to whom he would entrust the document and
other papers relative to the property. We quote verbatim Borre's own testimony on direct examination upon these points:
Q Have you met the owner of the lot mentioned a while ago?
A Yes, your Honor, I met Dr. Salazar, the owner, sometime last week of April, 1989 at Dimsum Restaurant.
Q You met at Dimsum, in what particular place was that?
A We met at Dimsum Restaurant in Makati after I was called by Emilio T. Salazar to meet at Dimsum because Dr. Salazar wanted
to sell the property and he wanted to talk to you [sic].
COURT:
Talk to you?
A To discuss the matter of sale to me at Dimsum Sir
ATTY. BORRES:
Q And so you really met at Dimsum.
A Yes, Ma'am.
Q What transpired at Dimsum?
A Dr. Salazar offered me to buy the properties for a total of ONE MILLION PESOS (P1,000,000.00) excluding all and any other
expenses that may be involved in the transfer of the properties in case I am interested to by [sic], in case Atty. Borres wanted to
buy.
Q What then was your reply?
A I am interested to buy.
Q Dr. Salazar. . . I asked . . . what did Dr. Salazar say after that?
A I answered Dr. Salazar that I could buy or able to buy the properties within six (6) months because I have to go home to the
province to secure a loan.
Q What did Dr. Salazar say regarding your proposal?
A I told Dr. Salazar. Dr. Salazar said that he could not wait for that six (6) months is a very long time.
Q What else did you say?
A I told Dr. Salazar that "it is possible I can pay within three (3) months' time if your can lend me the title of your property because
banks here in Manila usually release loans in three months' time and I will have less problem to complete the payment of ONE
MILLION PESOS (P1,000,000.00)."
Q So, what did Dr. Salazar say?
A Dr. Salazar said that "if it is the best for our transaction I can lend you the title provided I can be assured that the title will not
pass on you until you are fully paid.
Q What was your answer then?
A I told Dr. Salazar that I can execute a warranty to the effect that the property could not be transferred to me until I have fully paid
him.
Q What did Dr. Salazar say?
A Dr. Salazar said "I will agree to that"
COURT:
Dr. Salazar told you that he is agreeable to the proposal.
A Yes, Dr. Salazar said "you prepare a craft, the necessary document and bring it to Bataan.
ATTY. BORRES:
Q And what was your answer to Dr. Salazar
A I answered Dr. Salazar that "I will be ever willing to go to Bataan any time you wanted me to go.
Q And you really did go to Bataan.
A Yes, I did.
xxx xxx xxx
ATTY BORRES:
Q And what happened while there in Bataan?
xxx xxx xxx
Q And what happened while you got all seated in the sala of Dr. Salazar.
A I showed him a document which he instructed me to prepare and he has read it and agreed to the Deed of Absolute Sale and

the warranty I made. He gave me back the documents for signing.

Q And you did sign the document?
A Yes, I did sign it and passed it on to Dr. Salazar.
Q After you passed it to Dr. Salazar, what happened?
A Dr. Salazar did not sign the document and told me that he is only going to sign it if I am going to pay by the end of June and that
he could not lend me the title and he said he is going to sign it and not to give me a copy until the purchase price is fully paid.
Q And what was your reaction with the statement?
A I said "what about the loan that we have a greed at Dimsum if you will not lend me the title and the document that we have
signed new?" Dr. Salazar said "I could not lend you the title and I care less how your are going to loan the property and raise the
money you are going to pay me, what is important to me is you pay me the whole amount of One Million Pesos (P1,000,000.00)
not late than June 30, 1989."
Q And what did you say?
A Since I could not do anything and I really wanted to buy the property, I agreed to Dr. Salazar's condition that I pay the property
by the end of June and I will pay only at the bank in Makati.
Q And what did Dr. Salazar say?
A Dr. Salazar said "okey I will sign this and have this notarized but I could not lend you and never have a [copy] of the title as well
as the Deed of Sale and you just wait oat NAIA and wait if you could have this document because I am leaving on June 2 for the
US. You meet me there".
Q And after that what did Dr. Salazar do?
A It was only when that he signed the document after I have agreed to his proposal but he was very much stand [sic] to the
payments and he was no longer the same when I met him at Dimsum. 13
Clearly then, the original intention in the execution of the Deed of Absolute Sale was to implement the proposal of Borres that
Salazar "lend" her the transfer certificates of title so that she could secure a loan from a bank in Manila whose proceeds would be
applied to the payment of the purchase price of the property, and the original purpose of the Deed of Warranty was to assure
Salazar that, as demanded by him, title to the lots will not pass to her until she pays the full consideration. The lending of the
certificates of title for the above purpose could have been accomplished through a special power of attorney under which Salazar
will authorize her to obtain a loan and to mortgage the property as security therefor. But, perhaps anticipating Salazar's departure
to the United States of America where he resides, Borres, who is a lawyer, prepared instead a Deed of Absolute Sale and Deed of
Warranty. Notwithstanding Borre's deliberate characterizations of the documents, we are convinced that they were prepared in
connection with and in the implementation of the agreement regarding the lending of the certificates of title. They do not weaken
the adamantine position of Salazar not to part with his title to the two lots until full payment of the agreed price therefor. Borre's
execution of the Deed of Warranty was in fact a recognition of Salazar's position. Despite its careful wordings and phraseology to
make some sort of distinction between Borre's right to the ownership or title over the lots on the one hand, and her right to
possess or keep the Deed of Absolute Sale and the other documents relative to the lots, the totality of the Deed of Warranty
manifests an indubitable recognition by Borres of the aforementioned intention of Salazar. She declares therein as follows:
1. That until and unless the amount of ONE MILLION (P1,000,000.00) PESOS representing the purchase price for that parcels of
land covered by Transfer Certificate of Title Nos. S-31038 and S-31039 be paid by the undersigned unto Dr. Emilio A. Salazar, the
undersigned has no absolute right whatsoever to the original copies of the Deed of Absolute Sale executed by said Dr. Emilio A.
Salazar date May ____, 1989;
2. That she has no legal right whatsoever to any and all pertinent records of the aforementioned lots;
3. That upon payment of the aforementioned amount, Dr. Emilio A. Salazar or his representative is obliged to surrender the
original of these presents together with all the original documents and titles covering the sale of the aforementioned lots unto the
undersigned. 14
Then, too, in her Memorandum of Agreement with Monteland Realty Corporation, 15 dated 15 June 1989, Borres explicitly
mentioned only her "rights and interests" under the Deed of Absolute Sale signed by Salazar and therein conveyed, transferred,
and assigned to the said corporation only such "rights and interest." Also worth noting is the statement in the second whereas
clause of the Memorandum of Agreement that Monteland Realty Corporation
has full knowledge of the sales [sic] and conditions of the SELLER-OWNER of the property . . . that the buyer [Borres] has an
obligation to pay DR. EMILIO SALAZAR the amount of ONE MILLION PESOS (P1,000,000.00) and that there is already a Deed
of Absolute Deed of [sic] Sale in favor of [Borres] of which both copies of the titles of the properties for sale and all documents
including the Deed of Absolute Sale aforementioned are including the Deed of Absolute Sale aforementioned are under the
custody of MS. TERESA DIZON who will only release the Title and the Deed of Absolute Sale after the obligation of [Borres] is
fully
paid. 16
The withholding by Salazar through Dizon of the Deed of Absolute Sale, the certificates of title, and all other documents relative to
the lots is an additional indubitable proof that Salazar did not transfer to Borres either by actual or constructive delivery the
ownership of the two lots. While generally the execution of a deed of absolute sale constitutes constructive delivery of ownership,
the withholding by the vendor of that deed under explicit agreement that it be delivered together with the certificates of titles to the
vendee only upon the latter's full payment of the consideration amounts to a suspension of the effectivity of the deed of sale as a
binding contract.
Undoubtedly, Salazar and Borres mutually agreed that despite the Deed of Absolute Sale title to the two lots in question was not to
pass to the latter until full payment of the consideration of P1 million. The form of the instrument cannot prevail over the true intent

of the parties as established by the evidence.

Accordingly, since Borres was unable to pay the consideration, which was a suspensive condition, Salazar cannot be compelled to
deliver to her the deed of sale, certificates of title, and other documents concerning the two lots. In other words, no right in her
favor and no corresponding obligation on the part of Salazar were created. Article 1181 of the Civil Code provides:
In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired shall depend
upon the happening of the event which constitutes the condition.
Even granting for the sake of argument that, as ruled by the court of Appeals, the agreement of Salazar and Borres as evidenced
by the Deed of Absolute Sale was a perfected contract of sale, Borre's action for specific performance must likewise fail. We are in
full accord with the trial court and, perforce, disagree with the Court of Appeals, that Borres was not ready to pay P500,000.00 on
or before 15 June 1989. That Borres had a check of P1.5 million, or of more than the full consideration of the two lots, is of no
moment. The check, 17 dated 15 June 1989, is a crossed check payable to "Atty. Jonette Borres," or herein private respondent.
The crossing is of simple type two parallel lines at the upper left hand corner without the words "and company" between the
lines. Accordingly, it cannot be paid to anyone except Borres, or it can be deposited with a bank where she keeps an account. 18
There is absolutely no evidence that Borres encashed the check and tendered to Salazar thru Dizon the sum of P500,000.00 on
15 June 1989. On the contrary, the check itself was cancelled as shown by the word cancelled handwritten across it. Moreover,
the delivery of the check by Monteland Realty Corporation through Balao was not unconditional. Per the receipt 19 Borres signed
on 15 June 1989, encashment of the check "it subject to the verifications as to the authenticity of documents pertaining to the
subject property." Neither is there evidence that Borres paid the downpayment on 15 June 1989 with money she got from other
sources. No payment appears to have been made thereafter or during the pendency of the case before the trial court or the Court
of Appeals. She should have consigned the payment in court pursuant to Article 1256 of the Civil Code for her to be released from
her obligation and, consequently, exact fulfillment by Salazar of his corresponding obligation.
The challenged decision of the Court of Appeals must then be reversed. That of the trial court must be affirmed, with the
modification consisting in the deletion of the award of attorney's fees in favor of the petitioners which we find to be without basis.
The award of attorney's fees as damages is the exception rather than the rule; it is not to be given to the defendant every time the
latter prevails. The right to litigate is so precious that a penalty should not be charged on those who may exercise it erroneously,
unless, of course such party acted in bad faith. 20
WHEREFORE, the instant petition is hereby GRANTED. The challenged decision of 29 November 1994 of the Court of Appeals in
CA-G.R. CV No. 40197 is REVERSED and SET ASIDE, and the decision of 3 September 1992 of Branch 66 of the Regional Trial
Court of Manila in Civil Case No. 89-4468 is AFFIRMED, subject to the modification that the award for attorney's fees is deleted.
No pronouncement as to costs.
SO ORDERED.

G.R. No. 118203 July 5, 1996

EMILIO A. SALAZAR and TERESITA DIZON, petitioners,
vs.
COURT OF APPEALS and JONETTE BORRES, respondents.

DAVIDE, JR., J.:p

Petitioners seek to set aside the decision 1 of 29 November 1994 of the Court of Appeals in CA-G.R. CV No. 40197, which
reversed the decision 2 of 3 September 1992 of Branch 66 of the Regional Trial Court (RTC) of Makati, Metro Manila, in Civil Case
No. 89-4468.
The primary issues presented for our resolution are whether (a) the so-called Deed of Absolute Sale executed by petitioner Emilio
A. Salazar in favor of private respondent Jonette Borres is a perfected contract of sale or a mere contract to sell, and (b) the action
for specific performance which the latter filed will lie to compel the former to deliver the Deed of Absolute Sale, the Transfer
Certificates of Title, and other documents relative to the property in question.
The factual antecedents of this case, as summarized by the trial court, are as follows:
That defendant Dr. Salazar is the owner of the two (2) parcels of land with improvements thereon located at 2914 Finlandia Street,
Makati, Metro Manila and covered by Transfer Certificate of Title Nos. 31038 and 31039 of the Registry of Deeds of Makati; that
Dr. Salazar offered to sell his properties to Jonette Borres for One Million pesos (P1,000,000.00) (TSN pp. 7 and 8, November 5,
1991). The initial proposal took place at the Dimsum Restaurant, Makati, whereby it was proposed that the payment of the
consideration was to be made within six (6) months but was objected to by Dr. Salazar and he reduced it to a three (3) months
period (TSN Direct Examination on Jonette Borres p. 22, November 12, 1991); that sometime on [May] 28, 1989, Jonette Borres
together with a certain Emilio T. Salazar went to see Dr. Salazar at the latter's residence in Bataan bearing a copy of a Deed of
Absolute Sale (Exhibit ("C") and Deed of Warranty (Exhibit "D") but Dr. Salazar refused to sign because Jonette Borres did not
have the money ready then. In said occasion Dr. Salazar further reduced the period within which plaintiff may purchase the lots, to
one (1) month or up to June 30, 1989 (TSN Direct Examination on Jonette Borres November 5, [1991], pp. 10 and 11).
Jonette Borres then met again Dr. Salazar on June 2, 1989 at the Ninoy International Airport who was about to leave for the
United States of America where he is a resident. Jonette Borres had with her the Deed of Absolute Sale and asked Dr. Salazar to
sign said document. Dr. Salazar reluctantly agreed to sign the document provided that Jonette Borres pays one half (1/2) of the
consideration or P500,000.00 in "cash" by June 15, 1989 and the balance was payable on June 30, 1989 (TSN Direct
Examination on Emilio A. Salazar, May 21, [1991], p. 9; TSN Cross Examination on Jonette Borres, November 12, [1991], pp. 29
and 30). It was during this occasion that Dr. Salazar again emphasized to Jonette Borres that he needed the money because he

was then buying a property in the United States (TSN pp. 15-20, November 5, 1991; pp. 22 and 23, May 21, 1991; and pp. 56-57,
May 21, 1991).
Plaintiff agreed to the above conditions (TSN Cross Examination on Jonette Borres November 12, 1989, p. 32) and Dr. Salazar
constituted co-defendant Teresa Dizon as custodian at the Deed of Absolute Sale (Exhibit "C") together with the Titles of the Land
in question with the instruction to Teresa Dizon not to surrender said documents to Jonette Borres until upon payment of the full
price in "cash" (TSN Direct Examination on Emilio A. Salazar, May 21, [1991], p. 11).
On June 14, 1989 Jonette Borres informed defendant Dizon that she will be able to pay the full amount of P1,000,000.00 on June
15, 1989 (TSN Direct Examination Jonette Borres, November 5, [1991], p. 25) and on the next day, she then went to the house of
Teresa Dizon to see and get the documents entrusted to her by Dr. Salazar. The documents not being in Dizon's possession, they
agreed to meet at Metro Bank West Avenue Branch to get the documents and then to proceed to Makati to meet the plaintiff's
business partner a certain Balao who allegedly gave plaintiff a Far East Bank and Trust Company check for the amount of
P1,500,000.00 (Exhibit "F") with which to buy the property (TSN Direct Examination on Jonette Borres November 5, [1991], pp.
30, 32 and 33). For some reason or another Jonette Borres and defendant Dizon failed to proceed to Makati.
In the meantime or on June 16, 1992, Dr. Salazar made an overseas call to co-defendant Dizon to inquire if Jonette Borres had
already paid the down payment of P500,000.00 and Teresa Dizon replied to Dr. Salazar that Jonette Borres had not paid the down
payment. Dr. Salazar then ordered Dizon to stop the sale (TSN Direct Examination on Emilio A. Salazar, May 21, [1991], pp. 12
and 13).
As maybe seen from the evidence presented by the plaintiff and the defendants, the terms and conditions of the agreement for the
sale of the two (2) parcels of land owned by Dr. Salazar in favor of the plaintiff Jonette Borres, are that the purchase price is in the
amount of P1,000,000.00, fifty percent (50%) of which or P500,000.00 was to paid on or before June 15, 1989 while the balance
thereof was to be paid on or before June 30, 1989 (TSN May 21, 1991, p. 27); that the payment was to be made in "cash" (TSN
May 21, 1991, p. 55); that the place of payment is at defendant's bank, Metropolitan Bank Quezon City Branch (TSN October 21,
1991, p. 23). 3
The trial court held that the Deed of Absolute Sale was in reality a contract to sell, and that since Borres failed to pay Salazar the
downpayment of P500,000.00 on the agreed date, 15 June 1989, the complaint for specific performance cannot prosper. It then
dismissed the complaint and ordered Borres to pay the petitioners P5,000.00 each as attorney's fees and litigation expenses. 4
In ruling that the Deed of Absolute Sale was a contract to sell, the trial court considered pertinent the circumstances attending its
execution. First, that the Deed of Absolute Sale was "reluctantly signed" by Dr. Salazar, who was then about to leave for the
United States of America, in order that if Borres would comply with the terms and conditions of their agreement, he need not come
to the Philippines just to sign it; hence, it does not bind Dr. Salazar until the suspensive condition, i.e., the downpayment of
P500,000.00 to be effected on or before 15 June 1989 and the balance to be paid on or before 30 June 1989, is complied with.
Second, Borres was not, in fact, financially prepared to buy the parcels of land on or before 15 June 1989 considering that
[s]he was just looking for possible buyers or business partners. First, she requested that the pertinent documents like the Deed of
Sale (Exhibit "C") and the corresponding Transfer Certificates of Titles Nos. 31038 and 31039 of the Register of Deeds of Rizal
(Exhibits "A" and "B") be entrusted to her even before making the downpayment of P500,000.00 purposely to raise the amount
needed. When Dr. Salazar refused her request, Jonette Borres approached a certain businessman P.D. Dionisio for loan and was
turned down when Jonette Borres cannot [sic] produce the Deed of Absolute Sale and the Titles of the parcels of land in question
(TSN November 5, 1991, pp. 20-25). Then she approached a certain Benjamin Balao a realtor developer. Although Balao had
issued to her his check in the amount of P1,500,000.00 (Exhibit "F") he instructed his bank not to honor his check without his
presence (TSN November 14, 1991, pp. 81 to 84). Jonette Borres admitted that she was not in a position to encash the check
(Exhibit "F") although it was payable to "cash" (TSN November 21, 1991, pp. 41 and 44). 5
Salazar's victory was short-lived. On Borre's appeal from the decision of the trial court, the Court of Appeals, in its challenged
decision of 29 November 1994, ruled that the Deed of Absolute Sale, whose existence and due execution was undisputed, is
perfected contract of sale, with a definite object and a specific consideration which the parties had agreed upon. As proof that it is
a contract of sale and not a contract to sell, the Court of Appeals stressed the absence of a proviso that the title to the property is
reserved in the vendor until full payment of the purchase price or that the vendor may unilaterally rescind the contract the moment
the vendee fails to pay within the fixed period. 6 Salazar's reluctance to sign it is of no moment, since there is no allegation of
fraud, forgery, or duress. And even assuming that Borres failed to pay the contract price, such failure did not convert the contract
into one without cause or consideration as to vitiate the validity of the contract, it not being essential for the existence of cause that
payment or full payment be made at the time of the contract. Neither did such failure ipso facto resolve the contract in question.
The remedy of the vendor, Dr. Emilio A. Salazar, is to demand specific performance or rescission, with damages in either case. On
the other hand, the vendee, Jonette Borres, may demand specific performance, i.e., compel the vendor to accept the price and
deliver the title of the land object of the contract.
The Court of Appeals disagreed with the trial court's finding that Borres was not in a position to pay the downpayment because
[o]n June 15, 1989, plaintiff-appellant had a Far East Bank check payable to her order, in the amount of P1,500,000.00 more
than the whole agreed purchase price of P1,000,000.00. Defendant-appellee Teresa Dizon agreed (on June 14, 1989) to meet her
on June 15, 1989, at Metro Bank West and thereafter to proceed to Makati in order to encash the Far East Bank check.
Defendant-appellee Teresa Dizon somehow managed to manipulate things by making herself unavailable so that the payment
could not be made on June 15, 1989. (TSN, Nov. 5, 1991, pp. 27-41). On the next day, June 16, 1989, defendant-appellee Teresa
Dizon informed plaintiff-appellant that defendant-appellee Dr. Emilio A. Salazar called up in the evening of June 15, 1989 asking
whether plaintiff-appellant paid on that day and upon being answered in the negative, said vendor said that he is revoking the
contract. (TSN, Nov. 5, 1991, pp. 41-42). Defendant-appellee Teresa Dizon having her own interested buyer, evidently acted in
bad faith, tried and indeed succeeded to frustrate the efforts of plaintiff-appellant to comply with her reciprocal obligation to pay the
agreed purchase price.
The fact that the Far East Bank check was payable to the Order of plaintiff-appellant, and it covers the amount of P1,500,000.00
which is much more than the agreed purchase price of P1,000,000.00 reveals that plaintiff-appellant was financially
prepared to comply with her reciprocal obligation. That plaintiff-appellant filed the present suit for specific performance on July 6,
1989, bolsters the fact that she is really willing and able to pay the agreed purchase price. How and from whom she

borrowed/obtained the said amount, is of no consequence. 7

Accordingly, the respondent Court reversed the decision of the trial court and handed down a new judgment ordering Emilio A.
Salazar to accept from Jonette Borres the payment representing the purchase price in the amount of P1 million and thereafter to
comply with his reciprocal obligation to surrender the original copies of the deed of absolute sale and torrens title covering the
parcels of land subject of the contract. Finding petitioner Teresita Dizon to have "acted in bad faith in frustrating the efforts" of
Borres to comply with her obligation to pay the purchase price, the appellate court ordered her to pay Borres the amounts of
P80,000.00 as moral damages; P50,000.00 as exemplary damages; and P100,000.00 as attorney's fees.
Unable to accept the reversal of the trial court's decision, the petitioners filed the instant petition wherein they submit that the
Court of Appeals committed grave and serious errors:
A. . . . in relying on the Deed of Absolute Sale dated May 30, 1989 notwithstanding the fact that:
1. BORRES EXECUTED A DEED OF WARRANTY (EXHS. "D" AND "2") STATING THEREIN THAT UNTIL AND UNLESS THE
AMOUNT OF P1,000,000.00 REPRESENTING THE PURCHASE PRICE FOR THAT PARCELS OF LAND COVERED BY TCT
NOS. S-31038 AND S-31039 BE PAID BY HER TO SALAZAR, SHE HAS NO RIGHT WHATSOEVER TO THE ORIGINAL
COPIES OF THE DEED OF ABSOLUTE SALE AND THAT SHE HAS NO LEGAL RIGHT WHATSOEVER TO ANY AND ALL
PERTINENT RECORDS OF THE ABOVE-MENTIONED LOTS;
2. UPON HERE BEHEST, BORRES WAS GIVEN A PHOTOCOPY OF THE DEED OF ABSOLUTE SALE BY DIZON BUT ONLY
AFTER THE LATTER ERASED THE SIGNATURE OF SALAZAR AS THE VENDEE THEREIN.
3. BORRES HAD NOT PAID ANY PORTION OF THE AGREED PURCHASE PRICE AND THUS RENDERS THE DEED OF
ABSOLUTE SALE VOID AB INITIO.
B. . . . in concluding that the agreement between SALAZAR and BORRES is a contract of sale and thus, perfected upon
agreement on the subject matter and consideration, notwithstanding the fact that:
1. THE AGREEMENT BETWEEN THE PARTIES IS ESSENTIALLY A CONTRACT TO SELL SUBJECT TO A SUSPENSIVE
CONDITION, THE BIRTH OR EFFECTIVITY OF WHICH SHOULD TAKE PLACE ONLY IF AND WHEN THE EVENT WHICH
CONSTITUTES THE CONDITION HAPPENS OR IS FULFILLED. SINCE BORRES FAILED TO COMPLY WITH HER
OBLIGATION, THE AGREEMENT TO SELL BECAME STILLBORN;
2. THERE WAS AN EXPRESS AGREEMENT BETWEEN THE PARTIES THAT BORRES SHALL BE ENTITLED TO THE
PROPERTY OR ANY RECORDS PERTAINING THERETO OR ORIGINAL COPIES OF THE DEED OF ABSOLUTE SALE ONLY
UPON FULL PAYMENT OF THE PURCHASE PRICE.
C. . . . in holding that DIZON acted in bad faith and succeeded to frustrate the efforts of BORRES to comply with her reciprocal
obligation to pay the purchase price notwithstanding the fact that:
1. AT THE TIME THAT BORRES WAS OBLIGED TO PAY AT LEAST 50% OF THE PURCHASE PRICE OR ON JUNE 15, 1989,
SHE WAS NOT READY, WILLING AND ABLE TO DO SO. EVEN ASSUMING FOR THE SAKE OF ARGUMENT THAT THE
LATTER HAD THE FINANCIAL CAPABILITY TO MEET HER OBLIGATION, THE FACT REMAINS THAT SHE FAILED TO
PROPERLY TENDER PAYMENT OF HER OBLIGATION AND IN CASE TENDER OF PAYMENT WAS REFUSED, TO CONSIGN
THE SAME IN COURT;
2. DIZON HAD NO REASON TO FRUSTRATE THE EFFORTS OF BORRES TO COMPLY WITH HER OBLIGATION TO PAY
THE AGREED PURCHASE PRICE SINCE SHE WAS MERELY CONSTITUTED AS CUSTODIAN OF THE DEED OF ABSOLUTE
SALE AND TITLES OF THE PROPERTY WITH SPECIFIC INSTRUCTIONS TO RELEASE THE SAME TO BORRES ONLY
UPON RECEIPT OF THE PURCHASE PRICE IN FULL AND IN CASH WITHIN THE AGREED PERIOD.
D. . . . in ordering Dizon to pay Borres the amount of P80,000.00 moral damages; P50,000.00 exemplary damages and
P100,000.00 as attorney's fees by way of damages notwithstanding the fact that the evidence adduced before the trial court
clearly shows that BORRES had no cause of action against the former. 8
We shall first the issue of whether the agreement between petitioner Salazar and private respondent Borres is a contract of sale or
a contract to sell.
In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold; in a contract to sell,
ownership is, by agreement, reserved in the vendor and is not to pass to the vendee until full payment of the purchase price.
Otherwise stated, in a contract of sale, the vendor loses ownership over the property and cannot recover it until and unless the
contract is resolved or rescinded; whereas in a contract to sell, title is retained by the vendor until full payment of the price. In the
latter contract, payment of the price is a positive suspensive condition, failure of which is not a breach but an event prevents the
obligation of the vendor to convey title from becoming effective. 9
If we are to consider only the Deed of Absolute Sale, 10 we can easily say that the contract between Salazar and Borres is one of
sale. However, the Deed of Warranty 11 and the oral testimony on the circumstances surrounding the execution of the Deed of
Absolute Sale, as well as the other pieces of evidence submitted by Borres, sustain the finding and conclusion of the trial court
that the true agreement between the parties was a contract to sell in that the true intent of Salazar was to transfer ownership of
the property to Borres only after the latter pays the full consideration.
From the beginning to the end, such intention of Salazar was unequivocal and manifest. He rejected Borre's offer to pay the
consideration within six months to give her time to secure a loan. When Borres proposed that he lend her the certificates of title of
the lots so that she could secure a loan from the banks in Manila and be able to pay, within three months, 12 the consideration out
of the proceeds of the loan, Salazar agreed provided that she would assure him that the title would not pass to her until he is fully
paid. Borres forthwith promised to execute a warranty. She then prepared a Deed of Absolute Sale for Salazar's signature and a
Deed of Warranty for her signature. When finally she presented to him the Deed of Absolute Sale, Salazar did not sign it and
insisted that he be paid the purchase price at the end of June 1989; he further told her that he would not lend her the certificates
of title until he is so paid. He signed it only after Borres agreed to pay by the end of June 1989 at a bank in Makati. But he did not
give the Deed of Absolute Sale to her; instead, he told her to just meet him at the Ninoy Aquino International Airport on 2 June

1989, when he would leave for the United States of America, so she would know to whom he would entrust the document and
other papers relative to the property. We quote verbatim Borre's own testimony on direct examination upon these points:
Q Have you met the owner of the lot mentioned a while ago?
A Yes, your Honor, I met Dr. Salazar, the owner, sometime last week of April, 1989 at Dimsum Restaurant.
Q You met at Dimsum, in what particular place was that?
A We met at Dimsum Restaurant in Makati after I was called by Emilio T. Salazar to meet at Dimsum because Dr. Salazar wanted
to sell the property and he wanted to talk to you [sic].
COURT:
Talk to you?
A To discuss the matter of sale to me at Dimsum Sir
ATTY. BORRES:
Q And so you really met at Dimsum.
A Yes, Ma'am.
Q What transpired at Dimsum?
A Dr. Salazar offered me to buy the properties for a total of ONE MILLION PESOS (P1,000,000.00) excluding all and any other
expenses that may be involved in the transfer of the properties in case I am interested to by [sic], in case Atty. Borres wanted to
buy.
Q What then was your reply?
A I am interested to buy.
Q Dr. Salazar. . . I asked . . . what did Dr. Salazar say after that?
A I answered Dr. Salazar that I could buy or able to buy the properties within six (6) months because I have to go home to the
province to secure a loan.
Q What did Dr. Salazar say regarding your proposal?
A I told Dr. Salazar. Dr. Salazar said that he could not wait for that six (6) months is a very long time.
Q What else did you say?
A I told Dr. Salazar that "it is possible I can pay within three (3) months' time if your can lend me the title of your property because
banks here in Manila usually release loans in three months' time and I will have less problem to complete the payment of ONE
MILLION PESOS (P1,000,000.00)."
Q So, what did Dr. Salazar say?
A Dr. Salazar said that "if it is the best for our transaction I can lend you the title provided I can be assured that the title will not
pass on you until you are fully paid.
Q What was your answer then?
A I told Dr. Salazar that I can execute a warranty to the effect that the property could not be transferred to me until I have fully paid
him.
Q What did Dr. Salazar say?
A Dr. Salazar said "I will agree to that"
COURT:
Dr. Salazar told you that he is agreeable to the proposal.
A Yes, Dr. Salazar said "you prepare a craft, the necessary document and bring it to Bataan.
ATTY. BORRES:
Q And what was your answer to Dr. Salazar
A I answered Dr. Salazar that "I will be ever willing to go to Bataan any time you wanted me to go.
Q And you really did go to Bataan.
A Yes, I did.
xxx xxx xxx
ATTY BORRES:
Q And what happened while there in Bataan?
xxx xxx xxx
Q And what happened while you got all seated in the sala of Dr. Salazar.
A I showed him a document which he instructed me to prepare and he has read it and agreed to the Deed of Absolute Sale and

the warranty I made. He gave me back the documents for signing.

Q And you did sign the document?
A Yes, I did sign it and passed it on to Dr. Salazar.
Q After you passed it to Dr. Salazar, what happened?
A Dr. Salazar did not sign the document and told me that he is only going to sign it if I am going to pay by the end of June and that
he could not lend me the title and he said he is going to sign it and not to give me a copy until the purchase price is fully paid.
Q And what was your reaction with the statement?
A I said "what about the loan that we have a greed at Dimsum if you will not lend me the title and the document that we have
signed new?" Dr. Salazar said "I could not lend you the title and I care less how your are going to loan the property and raise the
money you are going to pay me, what is important to me is you pay me the whole amount of One Million Pesos (P1,000,000.00)
not late than June 30, 1989."
Q And what did you say?
A Since I could not do anything and I really wanted to buy the property, I agreed to Dr. Salazar's condition that I pay the property
by the end of June and I will pay only at the bank in Makati.
Q And what did Dr. Salazar say?
A Dr. Salazar said "okey I will sign this and have this notarized but I could not lend you and never have a [copy] of the title as well
as the Deed of Sale and you just wait oat NAIA and wait if you could have this document because I am leaving on June 2 for the
US. You meet me there".
Q And after that what did Dr. Salazar do?
A It was only when that he signed the document after I have agreed to his proposal but he was very much stand [sic] to the
payments and he was no longer the same when I met him at Dimsum. 13
Clearly then, the original intention in the execution of the Deed of Absolute Sale was to implement the proposal of Borres that
Salazar "lend" her the transfer certificates of title so that she could secure a loan from a bank in Manila whose proceeds would be
applied to the payment of the purchase price of the property, and the original purpose of the Deed of Warranty was to assure
Salazar that, as demanded by him, title to the lots will not pass to her until she pays the full consideration. The lending of the
certificates of title for the above purpose could have been accomplished through a special power of attorney under which Salazar
will authorize her to obtain a loan and to mortgage the property as security therefor. But, perhaps anticipating Salazar's departure
to the United States of America where he resides, Borres, who is a lawyer, prepared instead a Deed of Absolute Sale and Deed of
Warranty. Notwithstanding Borre's deliberate characterizations of the documents, we are convinced that they were prepared in
connection with and in the implementation of the agreement regarding the lending of the certificates of title. They do not weaken
the adamantine position of Salazar not to part with his title to the two lots until full payment of the agreed price therefor. Borre's
execution of the Deed of Warranty was in fact a recognition of Salazar's position. Despite its careful wordings and phraseology to
make some sort of distinction between Borre's right to the ownership or title over the lots on the one hand, and her right to
possess or keep the Deed of Absolute Sale and the other documents relative to the lots, the totality of the Deed of Warranty
manifests an indubitable recognition by Borres of the aforementioned intention of Salazar. She declares therein as follows:
1. That until and unless the amount of ONE MILLION (P1,000,000.00) PESOS representing the purchase price for that parcels of
land covered by Transfer Certificate of Title Nos. S-31038 and S-31039 be paid by the undersigned unto Dr. Emilio A. Salazar, the
undersigned has no absolute right whatsoever to the original copies of the Deed of Absolute Sale executed by said Dr. Emilio A.
Salazar date May ____, 1989;
2. That she has no legal right whatsoever to any and all pertinent records of the aforementioned lots;
3. That upon payment of the aforementioned amount, Dr. Emilio A. Salazar or his representative is obliged to surrender the
original of these presents together with all the original documents and titles covering the sale of the aforementioned lots unto the
undersigned. 14
Then, too, in her Memorandum of Agreement with Monteland Realty Corporation, 15 dated 15 June 1989, Borres explicitly
mentioned only her "rights and interests" under the Deed of Absolute Sale signed by Salazar and therein conveyed, transferred,
and assigned to the said corporation only such "rights and interest." Also worth noting is the statement in the second whereas
clause of the Memorandum of Agreement that Monteland Realty Corporation
has full knowledge of the sales [sic] and conditions of the SELLER-OWNER of the property . . . that the buyer [Borres] has an
obligation to pay DR. EMILIO SALAZAR the amount of ONE MILLION PESOS (P1,000,000.00) and that there is already a Deed
of Absolute Deed of [sic] Sale in favor of [Borres] of which both copies of the titles of the properties for sale and all documents
including the Deed of Absolute Sale aforementioned are including the Deed of Absolute Sale aforementioned are under the
custody of MS. TERESA DIZON who will only release the Title and the Deed of Absolute Sale after the obligation of [Borres] is
fully
paid. 16
The withholding by Salazar through Dizon of the Deed of Absolute Sale, the certificates of title, and all other documents relative to
the lots is an additional indubitable proof that Salazar did not transfer to Borres either by actual or constructive delivery the
ownership of the two lots. While generally the execution of a deed of absolute sale constitutes constructive delivery of ownership,
the withholding by the vendor of that deed under explicit agreement that it be delivered together with the certificates of titles to the
vendee only upon the latter's full payment of the consideration amounts to a suspension of the effectivity of the deed of sale as a
binding contract.
Undoubtedly, Salazar and Borres mutually agreed that despite the Deed of Absolute Sale title to the two lots in question was not to
pass to the latter until full payment of the consideration of P1 million. The form of the instrument cannot prevail over the true intent

of the parties as established by the evidence.

Accordingly, since Borres was unable to pay the consideration, which was a suspensive condition, Salazar cannot be compelled to
deliver to her the deed of sale, certificates of title, and other documents concerning the two lots. In other words, no right in her
favor and no corresponding obligation on the part of Salazar were created. Article 1181 of the Civil Code provides:
In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired shall depend
upon the happening of the event which constitutes the condition.
Even granting for the sake of argument that, as ruled by the court of Appeals, the agreement of Salazar and Borres as evidenced
by the Deed of Absolute Sale was a perfected contract of sale, Borre's action for specific performance must likewise fail. We are in
full accord with the trial court and, perforce, disagree with the Court of Appeals, that Borres was not ready to pay P500,000.00 on
or before 15 June 1989. That Borres had a check of P1.5 million, or of more than the full consideration of the two lots, is of no
moment. The check, 17 dated 15 June 1989, is a crossed check payable to "Atty. Jonette Borres," or herein private respondent.
The crossing is of simple type two parallel lines at the upper left hand corner without the words "and company" between the
lines. Accordingly, it cannot be paid to anyone except Borres, or it can be deposited with a bank where she keeps an account. 18
There is absolutely no evidence that Borres encashed the check and tendered to Salazar thru Dizon the sum of P500,000.00 on
15 June 1989. On the contrary, the check itself was cancelled as shown by the word cancelled handwritten across it. Moreover,
the delivery of the check by Monteland Realty Corporation through Balao was not unconditional. Per the receipt 19 Borres signed
on 15 June 1989, encashment of the check "it subject to the verifications as to the authenticity of documents pertaining to the
subject property." Neither is there evidence that Borres paid the downpayment on 15 June 1989 with money she got from other
sources. No payment appears to have been made thereafter or during the pendency of the case before the trial court or the Court
of Appeals. She should have consigned the payment in court pursuant to Article 1256 of the Civil Code for her to be released from
her obligation and, consequently, exact fulfillment by Salazar of his corresponding obligation.
The challenged decision of the Court of Appeals must then be reversed. That of the trial court must be affirmed, with the
modification consisting in the deletion of the award of attorney's fees in favor of the petitioners which we find to be without basis.
The award of attorney's fees as damages is the exception rather than the rule; it is not to be given to the defendant every time the
latter prevails. The right to litigate is so precious that a penalty should not be charged on those who may exercise it erroneously,
unless, of course such party acted in bad faith. 20
WHEREFORE, the instant petition is hereby GRANTED. The challenged decision of 29 November 1994 of the Court of Appeals in
CA-G.R. CV No. 40197 is REVERSED and SET ASIDE, and the decision of 3 September 1992 of Branch 66 of the Regional Trial
Court of Manila in Civil Case No. 89-4468 is AFFIRMED, subject to the modification that the award for attorney's fees is deleted.
No pronouncement as to costs.
SO ORDERED.

G.R. No. 103577 October 7, 1996

ROMULO A. CORONEL, ALARICO A. CORONEL, ANNETTE A. CORONEL, ANNABELLE C. GONZALES (for herself and on
behalf of Florida C. Tupper, as attorney-in-fact), CIELITO A. CORONEL, FLORAIDA A. ALMONTE, and CATALINA BALAIS
MABANAG, petitioners,
vs.
THE COURT OF APPEALS, CONCEPCION D. ALCARAZ, and RAMONA PATRICIA ALCARAZ, assisted by GLORIA F. NOEL as
attorney-in-fact, respondents.

MELO, J.:p
The petition before us has its roots in a complaint for specific performance to compel herein petitioners (except the last named,
Catalina Balais Mabanag) to consummate the sale of a parcel of land with its improvements located along Roosevelt Avenue in
Quezon City entered into by the parties sometime in January 1985 for the price of P1,240,000.00.
The undisputed facts of the case were summarized by respondent court in this wise:
On January 19, 1985, defendants-appellants Romulo Coronel, et al. (hereinafter referred to as Coronels) executed a document
entitled "Receipt of Down Payment" (Exh. "A") in favor of plaintiff Ramona Patricia Alcaraz (hereinafter referred to as Ramona)
which is reproduced hereunder:
RECEIPT OF DOWN PAYMENT
P1,240,000.00 Total amount
50,000 Down payment

P1,190,000.00 Balance
Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty Thousand Pesos purchase price of our
inherited house and lot, covered by TCT No. 119627 of the Registry of Deeds of Quezon City, in the total amount of
P1,240,000.00.
We bind ourselves to effect the transfer in our names from our deceased father, Constancio P. Coronel, the transfer certificate of
title immediately upon receipt of the down payment above-stated.
On our presentation of the TCT already in or name, We will immediately execute the deed of absolute sale of said property and

Miss Ramona Patricia Alcaraz shall immediately pay the balance of the P1,190,000.00.
Clearly, the conditions appurtenant to the sale are the following:
1. Ramona will make a down payment of Fifty Thousand (P50,000.00) Pesos upon execution of the document aforestated;
2. The Coronels will cause the transfer in their names of the title of the property registered in the name of their deceased father
upon receipt of the Fifty Thousand (P50,000.00) Pesos down payment;
3. Upon the transfer in their names of the subject property, the Coronels will execute the deed of absolute sale in favor of Ramona
and the latter will pay the former the whole balance of One Million One Hundred Ninety Thousand (P1,190,000.00) Pesos.
On the same date (January 15, 1985), plaintiff-appellee Concepcion D. Alcaraz (hereinafter referred to as Concepcion), mother of
Ramona, paid the down payment of Fifty Thousand (P50,000.00) Pesos (Exh. "B", Exh. "2").
On February 6, 1985, the property originally registered in the name of the Coronels' father was transferred in their names under
TCT
No. 327043 (Exh. "D"; Exh. "4")
On February 18, 1985, the Coronels sold the property covered by TCT No. 327043 to intervenor-appellant Catalina B. Mabanag
(hereinafter referred to as Catalina) for One Million Five Hundred Eighty Thousand (P1,580,000.00) Pesos after the latter has paid
Three Hundred Thousand (P300,000.00) Pesos (Exhs. "F-3"; Exh. "6-C")
For this reason, Coronels canceled and rescinded the contract (Exh. "A") with Ramona by depositing the down payment paid by
Concepcion in the bank in trust for Ramona Patricia Alcaraz.
On February 22, 1985, Concepcion, et al., filed a complaint for specific performance against the Coronels and caused the
annotation of a notice of lis pendens at the back of TCT No. 327403 (Exh. "E"; Exh. "5").
On April 2, 1985, Catalina caused the annotation of a notice of adverse claim covering the same property with the Registry of
Deeds of Quezon City (Exh. "F"; Exh. "6").
On April 25, 1985, the Coronels executed a Deed of Absolute Sale over the subject property in favor of Catalina (Exh. "G"; Exh.
"7").
On June 5, 1985, a new title over the subject property was issued in the name of Catalina under TCT No. 351582 (Exh. "H"; Exh.
"8").
(Rollo, pp. 134-136)
In the course of the proceedings before the trial court (Branch 83, RTC, Quezon City) the parties agreed to submit the case for
decision solely on the basis of documentary exhibits. Thus, plaintiffs therein (now private respondents) proffered their
documentary evidence accordingly marked as Exhibits "A" through "J", inclusive of their corresponding submarkings. Adopting
these same exhibits as their own, then defendants (now petitioners) accordingly offered and marked them as Exhibits "1" through
"10", likewise inclusive of their corresponding submarkings. Upon motion of the parties, the trial court gave them thirty (30) days
within which to simultaneously submit their respective memoranda, and an additional 15 days within which to submit their
corresponding comment or reply thereof, after which, the case would be deemed submitted for resolution.
On April 14, 1988, the case was submitted for resolution before Judge Reynaldo Roura, who was then temporarily detailed to
preside over Branch 82 of the RTC of Quezon City. On March 1, 1989, judgment was handed down by Judge Roura from his
regular bench at Macabebe, Pampanga for the Quezon City branch, disposing as follows:
WHEREFORE, judgment for specific performance is hereby rendered ordering defendant to execute in favor of plaintiffs a deed of
absolute sale covering that parcel of land embraced in and covered by Transfer Certificate of Title No. 327403 (now TCT No.
331582) of the Registry of Deeds for Quezon City, together with all the improvements existing thereon free from all liens and
encumbrances, and once accomplished, to immediately deliver the said document of sale to plaintiffs and upon receipt thereof,
the said document of sale to plaintiffs and upon receipt thereof, the plaintiffs are ordered to pay defendants the whole balance of
the purchase price amounting to P1,190,000.00 in cash. Transfer Certificate of Title No. 331582 of the Registry of Deeds for
Quezon City in the name of intervenor is hereby canceled and declared to be without force and effect. Defendants and intervenor
and all other persons claiming under them are hereby ordered to vacate the subject property and deliver possession thereof to
plaintiffs. Plaintiffs' claim for damages and attorney's fees, as well as the counterclaims of defendants and intervenors are hereby
dismissed.
No pronouncement as to costs.
So Ordered.
Macabebe, Pampanga for Quezon City, March 1, 1989.
(Rollo, p. 106)
A motion for reconsideration was filed by petitioner before the new presiding judge of the Quezon City RTC but the same was
denied by Judge Estrella T. Estrada, thusly:
The prayer contained in the instant motion, i.e., to annul the decision and to render anew decision by the undersigned Presiding
Judge should be denied for the following reasons: (1) The instant case became submitted for decision as of April 14, 1988 when
the parties terminated the presentation of their respective documentary evidence and when the Presiding Judge at that time was
Judge Reynaldo Roura. The fact that they were allowed to file memoranda at some future date did not change the fact that the
hearing of the case was terminated before Judge Roura and therefore the same should be submitted to him for decision; (2) When
the defendants and intervenor did not object to the authority of Judge Reynaldo Roura to decide the case prior to the rendition of
the decision, when they met for the first time before the undersigned Presiding Judge at the hearing of a pending incident in Civil
Case No. Q-46145 on November 11, 1988, they were deemed to have acquiesced thereto and they are now estopped from
questioning said authority of Judge Roura after they received the decision in question which happens to be adverse to them; (3)

While it is true that Judge Reynaldo Roura was merely a Judge-on-detail at this Branch of the Court, he was in all respects the
Presiding Judge with full authority to act on any pending incident submitted before this Court during his incumbency. When he
returned to his Official Station at Macabebe, Pampanga, he did not lose his authority to decide or resolve such cases submitted to
him for decision or resolution because he continued as Judge of the Regional Trial Court and is of co-equal rank with the
undersigned Presiding Judge. The standing rule and supported by jurisprudence is that a Judge to whom a case is submitted for
decision has the authority to decide the case notwithstanding his transfer to another branch or region of the same court (Sec. 9,
Rule 135, Rule of Court).
Coming now to the twin prayer for reconsideration of the Decision dated March 1, 1989 rendered in the instant case, resolution of
which now pertains to the undersigned Presiding Judge, after a meticulous examination of the documentary evidence presented
by the parties, she is convinced that the Decision of March 1, 1989 is supported by evidence and, therefore, should not be
disturbed.
IN VIEW OF THE FOREGOING, the "Motion for Reconsideration and/or to Annul Decision and Render Anew Decision by the
Incumbent Presiding Judge" dated March 20, 1989 is hereby DENIED.
SO ORDERED.
Quezon City, Philippines, July 12, 1989.
(Rollo, pp. 108-109)
Petitioners thereupon interposed an appeal, but on December 16, 1991, the Court of Appeals (Buena, Gonzaga-Reyes, Abad
Santos (P), JJ.) rendered its decision fully agreeing with the trial court.
Hence, the instant petition which was filed on March 5, 1992. The last pleading, private respondents' Reply Memorandum, was
filed on September 15, 1993. The case was, however, re-raffled to undersigned ponente only on August 28, 1996, due to the
voluntary inhibition of the Justice to whom the case was last assigned.
While we deem it necessary to introduce certain refinements in the disquisition of respondent court in the affirmance of the trial
court's decision, we definitely find the instant petition bereft of merit.
The heart of the controversy which is the ultimate key in the resolution of the other issues in the case at bar is the precise
determination of the legal significance of the document entitled "Receipt of Down Payment" which was offered in evidence by both
parties. There is no dispute as to the fact that said document embodied the binding contract between Ramona Patricia Alcaraz on
the one hand, and the heirs of Constancio P. Coronel on the other, pertaining to a particular house and lot covered by TCT No.
119627, as defined in Article 1305 of the Civil Code of the Philippines which reads as follows:
Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give
something or to render some service.
While, it is the position of private respondents that the "Receipt of Down Payment" embodied a perfected contract of sale, which
perforce, they seek to enforce by means of an action for specific performance, petitioners on their part insist that what the
document signified was a mere executory contract to sell, subject to certain suspensive conditions, and because of the absence of
Ramona P. Alcaraz, who left for the United States of America, said contract could not possibly ripen into a contract absolute sale.
Plainly, such variance in the contending parties' contentions is brought about by the way each interprets the terms and/or
conditions set forth in said private instrument. Withal, based on whatever relevant and admissible evidence may be available on
record, this, Court, as were the courts below, is now called upon to adjudge what the real intent of the parties was at the time the
said document was executed.
The Civil Code defines a contract of sale, thus:
Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price certain in money or its equivalent.
Sale, by its very nature, is a consensual contract because it is perfected by mere consent. The essential elements of a contract of
sale are the following:
a) Consent or meeting of the minds, that is, consent to transfer ownership in exchange for the price;
b) Determinate subject matter; and
c) Price certain in money or its equivalent.
Under this definition, a Contract to Sell may not be considered as a Contract of Sale because the first essential element is lacking.
In a contract to sell, the prospective seller explicity reserves the transfer of title to the prospective buyer, meaning, the prospective
seller does not as yet agree or consent to transfer ownership of the property subject of the contract to sell until the happening of
an event, which for present purposes we shall take as the full payment of the purchase price. What the seller agrees or obliges
himself to do is to fulfill is promise to sell the subject property when the entire amount of the purchase price is delivered to him. In
other words the full payment of the purchase price partakes of a suspensive condition, the non-fulfillment of which prevents the
obligation to sell from arising and thus, ownership is retained by the prospective seller without further remedies by the prospective
buyer. In Roque vs. Lapuz (96 SCRA 741 [1980]), this Court had occasion to rule:
Hence, We hold that the contract between the petitioner and the respondent was a contract to sell where the ownership or title is
retained by the seller and is not to pass until the full payment of the price, such payment being a positive suspensive condition and
failure of which is not a breach, casual or serious, but simply an event that prevented the obligation of the vendor to convey title
from acquiring binding force.
Stated positively, upon the fulfillment of the suspensive condition which is the full payment of the purchase price, the prospective
seller's obligation to sell the subject property by entering into a contract of sale with the prospective buyer becomes demandable
as provided in Article 1479 of the Civil Code which states:

Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise
is supported by a consideration distinct from the price.
A contract to sell may thus be defined as a bilateral contract whereby the prospective seller, while expressly reserving the
ownership of the subject property despite delivery thereof to the prospective buyer, binds himself to sell the said property
exclusively to the prospective buyer upon fulfillment of the condition agreed upon, that is, full payment of the purchase price.
A contract to sell as defined hereinabove, may not even be considered as a conditional contract of sale where the seller may
likewise reserve title to the property subject of the sale until the fulfillment of a suspensive condition, because in a conditional
contract of sale, the first element of consent is present, although it is conditioned upon the happening of a contingent event which
may or may not occur. If the suspensive condition is not fulfilled, the perfection of the contract of sale is completely abated (cf.
Homesite and housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984]). However, if the suspensive condition is fulfilled, the
contract of sale is thereby perfected, such that if there had already been previous delivery of the property subject of the sale to the
buyer, ownership thereto automatically transfers to the buyer by operation of law without any further act having to be performed by
the seller.
In a contract to sell, upon the fulfillment of the suspensive condition which is the full payment of the purchase price, ownership will
not automatically transfer to the buyer although the property may have been previously delivered to him. The prospective seller
still has to convey title to the prospective buyer by entering into a contract of absolute sale.
It is essential to distinguish between a contract to sell and a conditional contract of sale specially in cases where the subject
property is sold by the owner not to the party the seller contracted with, but to a third person, as in the case at bench. In a contract
to sell, there being no previous sale of the property, a third person buying such property despite the fulfillment of the suspensive
condition such as the full payment of the purchase price, for instance, cannot be deemed a buyer in bad faith and the prospective
buyer cannot seek the relief of reconveyance of the property. There is no double sale in such case. Title to the property will
transfer to the buyer after registration because there is no defect in the owner-seller's title per se, but the latter, of course, may be
used for damages by the intending buyer.
In a conditional contract of sale, however, upon the fulfillment of the suspensive condition, the sale becomes absolute and this will
definitely affect the seller's title thereto. In fact, if there had been previous delivery of the subject property, the seller's ownership or
title to the property is automatically transferred to the buyer such that, the seller will no longer have any title to transfer to any third
person. Applying Article 1544 of the Civil Code, such second buyer of the property who may have had actual or constructive
knowledge of such defect in the seller's title, or at least was charged with the obligation to discover such defect, cannot be a
registrant in good faith. Such second buyer cannot defeat the first buyer's title. In case a title is issued to the second buyer, the
first buyer may seek reconveyance of the property subject of the sale.
With the above postulates as guidelines, we now proceed to the task of deciphering the real nature of the contract entered into by
petitioners and private respondents.
It is a canon in the interpretation of contracts that the words used therein should be given their natural and ordinary meaning
unless a technical meaning was intended (Tan vs. Court of Appeals, 212 SCRA 586 [1992]). Thus, when petitioners declared in
the said "Receipt of Down Payment" that they
Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty Thousand Pesos purchase price of our
inherited house and lot, covered by TCT No. 1199627 of the Registry of Deeds of Quezon City, in the total amount of
P1,240,000.00.
without any reservation of title until full payment of the entire purchase price, the natural and ordinary idea conveyed is that they
sold their property.
When the "Receipt of Down Payment" is considered in its entirety, it becomes more manifest that there was a clear intent on the
part of petitioners to transfer title to the buyer, but since the transfer certificate of title was still in the name of petitioner's father,
they could not fully effect such transfer although the buyer was then willing and able to immediately pay the purchase price.
Therefore, petitioners-sellers undertook upon receipt of the down payment from private respondent Ramona P. Alcaraz, to cause
the issuance of a new certificate of title in their names from that of their father, after which, they promised to present said title, now
in their names, to the latter and to execute the deed of absolute sale whereupon, the latter shall, in turn, pay the entire balance of
the purchase price.
The agreement could not have been a contract to sell because the sellers herein made no express reservation of ownership or
title to the subject parcel of land. Furthermore, the circumstance which prevented the parties from entering into an absolute
contract of sale pertained to the sellers themselves (the certificate of title was not in their names) and not the full payment of the
purchase price. Under the established facts and circumstances of the case, the Court may safely presume that, had the certificate
of title been in the names of petitioners-sellers at that time, there would have been no reason why an absolute contract of sale
could not have been executed and consummated right there and then.
Moreover, unlike in a contract to sell, petitioners in the case at bar did not merely promise to sell the properly to private respondent
upon the fulfillment of the suspensive condition. On the contrary, having already agreed to sell the subject property, they undertook
to have the certificate of title changed to their names and immediately thereafter, to execute the written deed of absolute sale.
Thus, the parties did not merely enter into a contract to sell where the sellers, after compliance by the buyer with certain terms and
conditions, promised to sell the property to the latter. What may be perceived from the respective undertakings of the parties to the
contract is that petitioners had already agreed to sell the house and lot they inherited from their father, completely willing to
transfer full ownership of the subject house and lot to the buyer if the documents were then in order. It just happened, however,
that the transfer certificate of title was then still in the name of their father. It was more expedient to first effect the change in the
certificate of title so as to bear their names. That is why they undertook to cause the issuance of a new transfer of the certificate of
title in their names upon receipt of the down payment in the amount of P50,000.00. As soon as the new certificate of title is issued
in their names, petitioners were committed to immediately execute the deed of absolute sale. Only then will the obligation of the
buyer to pay the remainder of the purchase price arise.

There is no doubt that unlike in a contract to sell which is most commonly entered into so as to protect the seller against a buyer
who intends to buy the property in installment by withholding ownership over the property until the buyer effects full payment
therefor, in the contract entered into in the case at bar, the sellers were the one who were unable to enter into a contract of
absolute sale by reason of the fact that the certificate of title to the property was still in the name of their father. It was the sellers in
this case who, as it were, had the impediment which prevented, so to speak, the execution of an contract of absolute sale.
What is clearly established by the plain language of the subject document is that when the said "Receipt of Down Payment" was
prepared and signed by petitioners Romeo A. Coronel, et al., the parties had agreed to a conditional contract of sale,
consummation of which is subject only to the successful transfer of the certificate of title from the name of petitioners' father,
Constancio P. Coronel, to their names.
The Court significantly notes this suspensive condition was, in fact, fulfilled on February 6, 1985 (Exh. "D"; Exh. "4"). Thus, on said
date, the conditional contract of sale between petitioners and private respondent Ramona P. Alcaraz became obligatory, the only
act required for the consummation thereof being the delivery of the property by means of the execution of the deed of absolute
sale in a public instrument, which petitioners unequivocally committed themselves to do as evidenced by the "Receipt of Down
Payment."
Article 1475, in correlation with Article 1181, both of the Civil Code, plainly applies to the case at bench. Thus,
Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the
contract and upon the price.
From the moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of
contracts.
Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall
depend upon the happening of the event which constitutes the condition.
Since the condition contemplated by the parties which is the issuance of a certificate of title in petitioners' names was fulfilled on
February 6, 1985, the respective obligations of the parties under the contract of sale became mutually demandable, that is,
petitioners, as sellers, were obliged to present the transfer certificate of title already in their names to private respondent Ramona
P. Alcaraz, the buyer, and to immediately execute the deed of absolute sale, while the buyer on her part, was obliged to forthwith
pay the balance of the purchase price amounting to P1,190,000.00.
It is also significant to note that in the first paragraph in page 9 of their petition, petitioners conclusively admitted that:
3. The petitioners-sellers Coronel bound themselves "to effect the transfer in our names from our deceased father Constancio P.
Coronel, the transfer certificate of title immediately upon receipt of the downpayment above-stated". The sale was still subject to
this suspensive condition. (Emphasis supplied.)
(Rollo, p. 16)
Petitioners themselves recognized that they entered into a contract of sale subject to a suspensive condition. Only, they contend,
continuing in the same paragraph, that:
. . . Had petitioners-sellers not complied with this condition of first transferring the title to the property under their names, there
could be no perfected contract of sale. (Emphasis supplied.)
(Ibid.)
not aware that they set their own trap for themselves, for Article 1186 of the Civil Code expressly provides that:
Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.
Besides, it should be stressed and emphasized that what is more controlling than these mere hypothetical arguments is the fact
that the condition herein referred to was actually and indisputably fulfilled on February 6, 1985, when a new title was issued in the
names of petitioners as evidenced by TCT No. 327403 (Exh. "D"; Exh. "4").
The inevitable conclusion is that on January 19, 1985, as evidenced by the document denominated as "Receipt of Down
Payment" (Exh. "A"; Exh. "1"), the parties entered into a contract of sale subject only to the suspensive condition that the sellers
shall effect the issuance of new certificate title from that of their father's name to their names and that, on February 6, 1985, this
condition was fulfilled (Exh. "D"; Exh. "4").
We, therefore, hold that, in accordance with Article 1187 which pertinently provides
Art. 1187. The effects of conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the
constitution of the obligation . . .
In obligation to do or not to do, the courts shall determine, in each case, the retroactive effect of the condition that has been
complied with.
the rights and obligations of the parties with respect to the perfected contract of sale became mutually due and demandable as of
the time of fulfillment or occurrence of the suspensive condition on February 6, 1985. As of that point in time, reciprocal obligations
of both seller and buyer arose.
Petitioners also argue there could been no perfected contract on January 19, 1985 because they were then not yet the absolute
owners of the inherited property.
We cannot sustain this argument.
Article 774 of the Civil Code defines Succession as a mode of transferring ownership as follows:
Art. 774. Succession is a mode of acquisition by virtue of which the property, rights and obligations to be extent and value of the
inheritance of a person are transmitted through his death to another or others by his will or by operation of law.

Petitioners-sellers in the case at bar being the sons and daughters of the decedent Constancio P. Coronel are compulsory heirs
who were called to succession by operation of law. Thus, at the point their father drew his last breath, petitioners stepped into his
shoes insofar as the subject property is concerned, such that any rights or obligations pertaining thereto became binding and
enforceable upon them. It is expressly provided that rights to the succession are transmitted from the moment of death of the
decedent (Article 777, Civil Code; Cuison vs. Villanueva, 90 Phil. 850 [1952]).
Be it also noted that petitioners' claim that succession may not be declared unless the creditors have been paid is rendered moot
by the fact that they were able to effect the transfer of the title to the property from the decedent's name to their names on
February 6, 1985.
Aside from this, petitioners are precluded from raising their supposed lack of capacity to enter into an agreement at that time and
they cannot be allowed to now take a posture contrary to that which they took when they entered into the agreement with private
respondent Ramona P. Alcaraz. The Civil Code expressly states that:
Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon.
Having represented themselves as the true owners of the subject property at the time of sale, petitioners cannot claim now that
they were not yet the absolute owners thereof at that time.
Petitioners also contend that although there was in fact a perfected contract of sale between them and Ramona P. Alcaraz, the
latter breached her reciprocal obligation when she rendered impossible the consummation thereof by going to the United States of
America, without leaving her address, telephone number, and Special Power of Attorney (Paragraphs 14 and 15, Answer with
Compulsory Counterclaim to the Amended Complaint, p. 2; Rollo, p. 43), for which reason, so petitioners conclude, they were
correct in unilaterally rescinding rescinding the contract of sale.
We do not agree with petitioners that there was a valid rescission of the contract of sale in the instant case. We note that these
supposed grounds for petitioners' rescission, are mere allegations found only in their responsive pleadings, which by express
provision of the rules, are deemed controverted even if no reply is filed by the plaintiffs (Sec. 11, Rule 6, Revised Rules of Court).
The records are absolutely bereft of any supporting evidence to substantiate petitioners' allegations. We have stressed time and
again that allegations must be proven by sufficient evidence (Ng Cho Cio vs. Ng Diong, 110 Phil. 882 [1961]; Recaro vs. Embisan,
2 SCRA 598 [1961]. Mere allegation is not an evidence (Lagasca vs. De Vera, 79 Phil. 376 [1947]).
Even assuming arguendo that Ramona P. Alcaraz was in the United States of America on February 6, 1985, we cannot justify
petitioner-sellers' act of unilaterally and extradicially rescinding the contract of sale, there being no express stipulation authorizing
the sellers to extarjudicially rescind the contract of sale. (cf. Dignos vs. CA, 158 SCRA 375 [1988]; Taguba vs. Vda. de Leon, 132
SCRA 722 [1984])
Moreover, petitioners are estopped from raising the alleged absence of Ramona P. Alcaraz because although the evidence on
record shows that the sale was in the name of Ramona P. Alcaraz as the buyer, the sellers had been dealing with Concepcion D.
Alcaraz, Ramona's mother, who had acted for and in behalf of her daughter, if not also in her own behalf. Indeed, the down
payment was made by Concepcion D. Alcaraz with her own personal check (Exh. "B"; Exh. "2") for and in behalf of Ramona P.
Alcaraz. There is no evidence showing that petitioners ever questioned Concepcion's authority to represent Ramona P. Alcaraz
when they accepted her personal check. Neither did they raise any objection as regards payment being effected by a third person.
Accordingly, as far as petitioners are concerned, the physical absence of Ramona P. Alcaraz is not a ground to rescind the
contract of sale.
Corollarily, Ramona P. Alcaraz cannot even be deemed to be in default, insofar as her obligation to pay the full purchase price is
concerned. Petitioners who are precluded from setting up the defense of the physical absence of Ramona P. Alcaraz as aboveexplained offered no proof whatsoever to show that they actually presented the new transfer certificate of title in their names and
signified their willingness and readiness to execute the deed of absolute sale in accordance with their agreement. Ramona's
corresponding obligation to pay the balance of the purchase price in the amount of P1,190,000.00 (as buyer) never became due
and demandable and, therefore, she cannot be deemed to have been in default.
Article 1169 of the Civil Code defines when a party in a contract involving reciprocal obligations may be considered in default, to
wit:
Art. 1169. Those obliged to deliver or to do something, incur in delay from the time the obligee judicially or extrajudicially demands
from them the fulfillment of their obligation.
xxx xxx xxx
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner
with what is incumbent upon him. From the moment one of the parties fulfill his obligation, delay by the other begins. (Emphasis
supplied.)
There is thus neither factual nor legal basis to rescind the contract of sale between petitioners and respondents.
With the foregoing conclusions, the sale to the other petitioner, Catalina B. Mabanag, gave rise to a case of double sale where
Article 1544 of the Civil Code will apply, to wit:
Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may
have first taken possession thereof in good faith, if it should be movable property.
Should if be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in
Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the possession; and, in the
absence thereof to the person who presents the oldest title, provided there is good faith.
The record of the case shows that the Deed of Absolute Sale dated April 25, 1985 as proof of the second contract of sale was
registered with the Registry of Deeds of Quezon City giving rise to the issuance of a new certificate of title in the name of Catalina

B. Mabanag on June 5, 1985. Thus, the second paragraph of Article 1544 shall apply.
The above-cited provision on double sale presumes title or ownership to pass to the first buyer, the exceptions being: (a) when the
second buyer, in good faith, registers the sale ahead of the first buyer, and (b) should there be no inscription by either of the two
buyers, when the second buyer, in good faith, acquires possession of the property ahead of the first buyer. Unless, the second
buyer satisfies these requirements, title or ownership will not transfer to him to the prejudice of the first buyer.
In his commentaries on the Civil Code, an accepted authority on the subject, now a distinguished member of the Court, Justice
Jose C. Vitug, explains:
The governing principle is prius tempore, potior jure (first in time, stronger in right). Knowledge by the first buyer of the second
sale cannot defeat the first buyer's rights except when the second buyer first registers in good faith the second sale (Olivares vs.
Gonzales, 159 SCRA 33). Conversely, knowledge gained by the second buyer of the first sale defeats his rights even if he is first
to register, since knowledge taints his registration with bad faith (see also Astorga vs. Court of Appeals, G.R. No. 58530, 26
December 1984). In Cruz vs. Cabana (G.R. No. 56232, 22 June 1984, 129 SCRA 656), it has held that it is essential, to merit the
protection of Art. 1544, second paragraph, that the second realty buyer must act in good faith in registering his deed of sale (citing
Carbonell vs. Court of Appeals, 69 SCRA 99, Crisostomo vs. CA, G.R. No. 95843, 02 September 1992).
(J. Vitug Compendium of Civil Law and Jurisprudence, 1993 Edition, p. 604).
Petitioner point out that the notice of lis pendens in the case at bar was annoted on the title of the subject property only on
February 22, 1985, whereas, the second sale between petitioners Coronels and petitioner Mabanag was supposedly perfected
prior thereto or on February 18, 1985. The idea conveyed is that at the time petitioner Mabanag, the second buyer, bought the
property under a clean title, she was unaware of any adverse claim or previous sale, for which reason she is buyer in good faith.
We are not persuaded by such argument.
In a case of double sale, what finds relevance and materiality is not whether or not the second buyer was a buyer in good faith but
whether or not said second buyer registers such second sale in good faith, that is, without knowledge of any defect in the title of
the property sold.
As clearly borne out by the evidence in this case, petitioner Mabanag could not have in good faith, registered the sale entered into
on February 18, 1985 because as early as February 22, 1985, a notice of lis pendens had been annotated on the transfer
certificate of title in the names of petitioners, whereas petitioner Mabanag registered the said sale sometime in April, 1985. At the
time of registration, therefore, petitioner Mabanag knew that the same property had already been previously sold to private
respondents, or, at least, she was charged with knowledge that a previous buyer is claiming title to the same property. Petitioner
Mabanag cannot close her eyes to the defect in petitioners' title to the property at the time of the registration of the property.
This Court had occasions to rule that:
If a vendee in a double sale registers that sale after he has acquired knowledge that there was a previous sale of the same
property to a third party or that another person claims said property in a pervious sale, the registration will constitute a registration
in bad faith and will not confer upon him any right. (Salvoro vs. Tanega, 87 SCRA 349 [1978]; citing Palarca vs. Director of Land,
43 Phil. 146; Cagaoan vs. Cagaoan, 43 Phil. 554; Fernandez vs. Mercader, 43 Phil. 581.)
Thus, the sale of the subject parcel of land between petitioners and Ramona P. Alcaraz, perfected on February 6, 1985, prior to
that between petitioners and Catalina B. Mabanag on February 18, 1985, was correctly upheld by both the courts below.
Although there may be ample indications that there was in fact an agency between Ramona as principal and Concepcion, her
mother, as agent insofar as the subject contract of sale is concerned, the issue of whether or not Concepcion was also acting in
her own behalf as a co-buyer is not squarely raised in the instant petition, nor in such assumption disputed between mother and
daughter. Thus, We will not touch this issue and no longer disturb the lower courts' ruling on this point.
WHEREFORE, premises considered, the instant petition is hereby DISMISSED and the appealed judgment AFFIRMED.
SO ORDERED.

G.R. No. 119255

April 9, 2003

TOMAS K. CHUA, petitioner,

vs.
COURT OF APPEALS and ENCARNACION VALDES-CHOY, respondents.
CARPIO, J.:
The Case
This is a petition for review on certiorari seeking to reverse the decision1 of the Court of Appeals in an action for specific
performance2 filed in the Regional Trial Court3 by petitioner Tomas K. Chua ("Chua") against respondent Encarnacion ValdesChoy ("Valdes-Choy"). Chua sought to compel Valdes-Choy to consummate the sale of her paraphernal house and lot in Makati
City. The Court of Appeals reversed the decision4 rendered by the trial court in favor of Chua.
The Facts
Valdes-Choy advertised for sale her paraphernal house and lot ("Property") with an area of 718 square meters located at No. 40
Tampingco Street corner Hidalgo Street, San Lorenzo Village, Makati City. The Property is covered by Transfer Certificate of Title
No. 162955 ("TCT") issued by the Register of Deeds of Makati City in the name of Valdes-Choy. Chua responded to the
advertisement. After several meetings, Chua and Valdes-Choy agreed on a purchase price of P10,800,000.00 payable in cash.
On 30 June 1989, Valdes-Choy received from Chua a check for P100,000.00. The receipt ("Receipt") evidencing the transaction,

signed by Valdes-Choy as seller, and Chua as buyer, reads:

30 June 1989
RECEIPT
RECEIVED from MR. TOMAS K. CHUA PBCom Check No. 206011 in the amount of ONE HUNDRED THOUSAND PESOS ONLY
(P100,000.00) as EARNEST MONEY for the sale of the property located at 40 Tampingco cor. Hidalgo, San Lorenzo Village,
Makati, Metro Manila (Area : 718 sq. meters).
The balance of TEN MILLION SEVEN HUNDRED THOUSAND (P10,700,000.00) is payable on or before 155 July 1989. Capital
Gains Tax for the account of the seller. Failure to pay balance on or before 15 July 1989 forfeits the earnest money. This provided
that all papers are in proper order.6
CONFORME:
ENCARNACION VALDES
Seller
TOMAS K. CHUA
Buyer
x x x.7
In the morning of 13 July 1989, Chua secured from Philippine Bank of Commerce ("PBCom") a manager's check for P480,000.00.
Strangely, after securing the manager's check, Chua immediately gave PBCom a verbal stop payment order claiming that this
manager's check for P480,000.00 "was lost and/or misplaced."8 On the same day, after receipt of Chua's verbal order, PBCom
Assistant VicePresident Julie C. Pe notified in writing9 the PBCom Operations Group of Chua's stop payment order.
In the afternoon of 13 July 1989, Chua and Valdes-Choy met with their respective counsels to execute the necessary documents
and arrange the payments.10 Valdes-Choy as vendor and Chua as vendee signed two Deeds of Absolute Sale ("Deeds of Sale").
The first Deed of Sale covered the house and lot for the purchase price of P8,000,000.00.11 The second Deed of Sale covered
the furnishings, fixtures and movable properties contained in the house for the purchase price of P2,800,000.00.12 The parties
also computed the capital gains tax to amount to P485,000.00.
On 14 July 1989, the parties met again at the office of Valdes-Choy's counsel. Chua handed to Valdes-Choy the PBCom
manager's check for P485,000.00 so Valdes-Choy could pay the capital gains tax as she did not have sufficient funds to pay the
tax. Valdes-Choy issued a receipt showing that Chua had a remaining balance of P10,215,000.00 after deducting the advances
made by Chua. This receipt reads:
July 14, 1989
Received from MR. TOMAS K. CHUA PBCom. Check No. 325851 in the amount of FOUR HUNDRED EIGHTY FIVE THOUSAND
PESOS ONLY (P485,000.00) as Partial Payment for the sale of the property located at 40 Tampingco Cor. Hidalgo St., San
Lorenzo Village, Makati, Metro Manila (Area 718 sq. meters), covered by TCT No. 162955 of the Registry of Deeds of Makati,
Metro Manila.
The total purchase price of the above-mentioned property is TEN MILLION EIGHT HUNDRED THOUSAND PESOS only, broken
down as follows:
SELLING PRICE

P10,800,000.00

EARNEST MONEY

P100,000.00

PARTIAL PAYMENT

485,000.00
585,000.00

BALANCE DUE TO
ENCARNACION VALDEZ-CHOY

P10,215,000.00

PLUS P80,000.00 for documentary stamps paid

in advance by seller

80,000.00
P10,295,000.00

x x x.13
On the same day, 14 July 1989, Valdes-Choy, accompanied by Chua, deposited the P485,000.00 manager's check to her account
with Traders Royal Bank. She then purchased a Traders Royal Bank manager's check for P480,000.00 payable to the
Commissioner of Internal Revenue for the capital gains tax. Valdes-Choy and Chua returned to the office of Valdes-Choy's
counsel and handed the Traders Royal Bank check to the counsel who undertook to pay the capital gains tax. It was then also that
Chua showed to Valdes-Choy a PBCom manager's check for P10,215,000.00 representing the balance of the purchase price.
Chua, however, did not give this PBCom manager's check to Valdes-Choy because the TCT was still registered in the name of
Valdes-Choy. Chua required that the Property be registered first in his name before he would turn over the check to Valdes-Choy.
This angered Valdes-Choy who tore up the Deeds of Sale, claiming that what Chua required was not part of their agreement.14
On the same day, 14 July 1989, Chua confirmed his stop payment order by submitting to PBCom an affidavit of loss15 of the
PBCom Manager's Check for P480,000.00. PBCom Assistant Vice-President Pe, however, testified that the manager's check was
nevertheless honored because Chua subsequently verbally advised the bank that he was lifting the stop-payment order due to his
"special arrangement" with the bank.16

On 15 July 1989, the deadline for the payment of the balance of the purchase price, Valdes-Choy suggested to her counsel that to
break the impasse Chua should deposit in escrow the P10,215,000.00 balance.17 Upon such deposit, Valdes-Choy was willing to
cause the issuance of a new TCT in the name of Chua even without receiving the balance of the purchase price. Valdes-Choy
believed this was the only way she could protect herself if the certificate of title is transferred in the name of the buyer before she
is fully paid. Valdes-Choy's counsel promised to relay her suggestion to Chua and his counsel, but nothing came out of it.
On 17 July 1989, Chua filed a complaint for specific performance against Valdes-Choy which the trial court dismissed on 22
November 1989. On 29 November 1989, Chua re-filed his complaint for specific performance with damages. After trial in due
course, the trial court rendered judgment in favor of Chua, the dispositive portion of which reads:
Applying the provisions of Article 1191 of the new Civil Code, since this is an action for specific performance where the plaintiff, as
vendee, wants to pursue the sale, and in order that the fears of the defendant may be allayed and still have the sale materialize,
judgment is hereby rendered:
I. 1. Ordering the defendant to deliver to the Court not later than five (5) days from finality of this decision:
a. the owner's duplicate copy of TCT No. 162955 registered in her name;
b. the covering tax declaration and the latest tax receipt evidencing payment of real estate taxes;
c. the two deeds of sale prepared by Atty. Mark Bocobo on July 13, 1989, duly executed by defendant in favor of the plaintiff,
whether notarized or not; and
2. Within five (5) days from compliance by the defendant of the above, ordering the plaintiff to deliver to the Branch Clerk of Court
of this Court the sum of P10,295,000.00 representing the balance of the consideration (with the sum of P80,000.00 for stamps
already included);
3. Ordering the Branch Clerk of this Court or her duly authorized representative:
a. to make representations with the BIR for the payment of capital gains tax for the sale of the house and lot (not to include the
fixtures) and to pay the same from the funds deposited with her;
b. to present the deed of sale executed in favor of the plaintiff, together with the owner's duplicate copy of TCT No. 162955, real
estate tax receipt and proof of payment of capital gains tax, to the Makati Register of Deeds;
c. to pay the required registration fees and stamps (if not yet advanced by the defendant) and if needed update the real estate
taxes all to be taken from the funds deposited with her; and
d. surrender to the plaintiff the new Torrens title over the property;
4. Should the defendant fail or refuse to surrender the two deeds of sale over the property and the fixtures that were prepared by
Atty. Mark Bocobo and executed by the parties, the Branch Clerk of Court of this Court is hereby authorized and empowered to
prepare, sign and execute the said deeds of sale for and in behalf of the defendant;
5. Ordering the defendant to pay to the plaintiff;
a. the sum of P100,000.00 representing moral and compensatory damages for the plaintiff; and
b. the sum of P50,000.00 as reimbursement for plaintiff's attorney's fees and cost of litigation.
6. Authorizing the Branch Clerk of Court of this Court to release to the plaintiff, to be taken from the funds said plaintiff has
deposited with the Court, the amounts covered at paragraph 5 above;
7. Ordering the release of the P10,295,000.00 to the defendant after deducting therefrom the following amounts:
a. the capital gains tax paid to the BIR;
b. the expenses incurred in the registration of the sale, updating of real estate taxes, and transfer of title; and
c. the amounts paid under this judgment to the plaintiff.
8. Ordering the defendant to surrender to the plaintiff or his representatives the premises with the furnishings intact within seventytwo (72) hours from receipt of the proceeds of the sale;
9. No interest is imposed on the payment to be made by the plaintiff because he had always been ready to pay the balance and
the premises had been used or occupied by the defendant for the duration of this case.
II. In the event that specific performance cannot be done for reasons or causes not attributable to the plaintiff, judgment is hereby
rendered ordering the defendant:
1. To refund to the plaintiff the earnest money in the sum of P100,000.00, with interest at the legal rate from June 30, 1989 until
fully paid;
2. To refund to the plaintiff the sum of P485,000.00 with interest at the legal rate from July 14, 1989 until fully paid;
3. To pay to the plaintiff the sum of P700,000.00 in the concept of moral damages and the additional sum of P300,000.00 in the
concept of exemplary damages; and
4. To pay to the plaintiff the sum of P100,000.00 as reimbursement of attorney's fees and cost of litigation.
SO ORDERED.18
Valdes-Choy appealed to the Court of Appeals which reversed the decision of the trial court. The Court of Appeals handed down a
new judgment, disposing as follows:
WHEREFORE, the decision appealed from is hereby REVERSED and SET ASIDE, and another one is rendered:

(1) Dismissing Civil Case No. 89-5772;

(2) Declaring the amount of P100,000.00, representing earnest money as forfeited in favor of defendant-appellant;
(3) Ordering defendant-appellant to return/refund the amount of P485,000.00 to plaintiff-appellee without interest;
(4) Dismissing defendant-appellant's compulsory counter-claim; and
(5) Ordering the plaintiff-appellee to pay the costs.19
Hence, the instant petition.
The Trial Court's Ruling
The trial court found that the transaction reached an impasse when Valdes-Choy wanted to be first paid the full consideration
before a new TCT covering the Property is issued in the name of Chua. On the other hand, Chua did not want to pay the
consideration in full unless a new TCT is first issued in his name. The trial court faulted Valdes-Choy for this impasse.
The trial court held that the parties entered into a contract to sell on 30 June 1989, as evidenced by the Receipt for the
P100,000.00 earnest money. The trial court pointed out that the contract to sell was subject to the following conditions: (1) the
balance of P10,700,000.00 was payable not later than 15 July 1989; (2) Valdes-Choy may stay in the Property until 13 August
1989; and (3) all papers must be "in proper order" before full payment is made.
The trial court held that Chua complied with the terms of the contract to sell. Chua showed that he was prepared to pay ValdesChoy the consideration in full on 13 July 1989, two days before the deadline of 15 July 1989. Chua even added P80,000.00 for the
documentary stamp tax. He purchased from PBCom two manager's checks both payable to Valdes-Choy. The first check for
P485,000.00 was to pay the capital gains tax. The second check for P10,215,000.00 was to pay the balance of the purchase
price. The trial court was convinced that Chua demonstrated his capacity and readiness to pay the balance on 13 July 1989 with
the production of the PBCom manager's check for P10,215,000.00.
On the other hand, the trial court found that Valdes-Choy did not perform her correlative obligation under the contract to sell to put
all the papers in order. The trial court noted that as of 14 July 1989, the capital gains tax had not been paid because ValdesChoy's counsel who was suppose to pay the tax did not do so. The trial court declared that Valdes-Choy was in a position to
deliver only the owner's duplicate copy of the TCT, the signed Deeds of Sale, the tax declarations, and the latest realty tax receipt.
The trial court concluded that these documents were all useless without the Bureau of Internal Revenue receipt evidencing full
payment of the capital gains tax which is a pre-requisite to the issuance of a new certificate of title in Chua's name.
The trial court held that Chua's non-payment of the balance of P10,215,000.00 on the agreed date was due to Valdes-Choy's fault.
The Court of Appeals' Ruling
In reversing the trial court, the Court of Appeals ruled that Chua's stance to pay the full consideration only after the Property is
registered in his name was not the agreement of the parties. The Court of Appeals noted that there is a whale of difference
between the phrases "all papers are in proper order" as written on the Receipt, and "transfer of title" as demanded by Chua.
Contrary to the findings of the trial court, the Court of Appeals found that all the papers were in order and that Chua had no valid
reason not to pay on the agreed date. Valdes-Choy was in a position to deliver the owner's duplicate copy of the TCT, the signed
Deeds of Sale, the tax declarations, and the latest realty tax receipt. The Property was also free from all liens and encumbrances.
The Court of Appeals declared that the trial court erred in considering Chua's showing to Valdes-Choy of the PBCom manager's
check for P10,215,000.00 as compliance with Chua's obligation to pay on or before 15 July 1989. The Court of Appeals pointed
out that Chua did not want to give up the check unless "the property was already in his name."20 Although Chua demonstrated his
capacity to pay, this could not be equated with actual payment which he refused to do.
The Court of Appeals did not consider the non-payment of the capital gains tax as failure by Valdes-Choy to put the papers "in
proper order." The Court of Appeals explained that the payment of the capital gains tax has no bearing on the validity of the Deeds
of Sale. It is only after the deeds are signed and notarized can the final computation and payment of the capital gains tax be
made.
The Issues
In his Memorandum, Chua raises the following issues:
1. WHETHER THERE IS A PERFECTED CONTRACT OF SALE OF IMMOVABLE PROPERTY;
2. WHETHER VALDES-CHOY MAY RESCIND THE CONTRACT IN CONTROVERSY WITHOUT OBSERVING THE
PROVISIONS OF ARTICLE 1592 OF THE NEW CIVIL CODE;
3. WHETHER THE WITHHOLDING OF PAYMENT OF THE BALANCE OF THE PURCHASE PRICE ON THE PART OF CHUA
(AS VENDEE) WAS JUSTIFIED BY THE CIRCUMSTANCES OBTAINING AND MAY NOT BE RAISED AS GROUND FOR THE
AUTOMATIC RESCISSION OF THE CONTRACT OF SALE;
4. WHETHER THERE IS LEGAL AND FACTUAL BASIS FOR THE COURT OF APPEALS TO DECLARE THE "EARNEST
MONEY" IN THE AMOUNT OF P100,000.00 AS FORFEITED IN FAVOR OF VALDES-CHOY;
5. WHETHER THE TRIAL COURT'S JUDGMENT IS IN ACCORD WITH LAW, REASON AND EQUITY DESERVING OF BEING
REINSTATED AND AFFIRMED.21
The issues for our resolution are: (a) whether the transaction between Chua and Valdes-Choy is a perfected contract of sale or a
mere contract to sell, and (b) whether Chua can compel Valdes-Choy to cause the issuance of a new TCT in Chua's name even
before payment of the full purchase price.
The Court's Ruling
The petition is bereft of merit.

There is no dispute that Valdes-Choy is the absolute owner of the Property which is registered in her name under TCT No.162955,
free from all liens and encumbrances. She was ready, able and willing to deliver to Chua the owner's duplicate copy of the TCT,
the signed Deeds of Sale, the tax declarations, and the latest realty tax receipt. There is also no dispute that on 13 July 1989,
Valdes-Choy received PBCom Check No. 206011 for P100,000.00 as earnest money from Chua. Likewise, there is no controversy
that the Receipt for the P100,000.00 earnest money embodied the terms of the binding contract between Valdes-Choy and Chua.
Further, there is no controversy that as embodied in the Receipt, Valdes-Choy and Chua agreed on the following terms: (1) the
balance of P10,215,000.00 is payable on or before 15 July 1989; (2) the capital gains tax is for the account of Valdes-Choy; and
(3) if Chua fails to pay the balance of P10,215,000.00 on or before 15 July 1989, Valdes-Choy has the right to forfeit the earnest
money, provided that "all papers are in proper order." On 13 July 1989, Chua gave Valdes-Choy the PBCom manager's check for
P485,000.00 to pay the capital gains tax.
Both the trial and appellate courts found that the balance of P10,215,000.00 was not actually paid to Valdes-Choy on the agreed
date. On 13 July 1989, Chua did show to Valdes-Choy the PBCom manager's check for P10,215,000.00, with Valdes-Choy as
payee. However, Chua refused to give this check to Valdes-Choy until a new TCT covering the Property is registered in Chua's
name. Or, as the trial court put it, until there is proof of payment of the capital gains tax which is a pre-requisite to the issuance of
a new certificate of title.
First and Second Issues: Contract of Sale or Contract to Sell?
Chua has consistently characterized his agreement with Valdez-Choy, as evidenced by the Receipt, as a contract to sell and not a
contract of sale. This has been Chua's persistent contention in his pleadings before the trial and appellate courts.
Chua now pleads for the first time that there is a perfected contract of sale rather than a contract to sell. He contends that there
was no reservation in the contract of sale that Valdes-Choy shall retain title to the Property until after the sale. There was no
agreement for an automatic rescission of the contract in case of Chua's default. He argues for the first time that his payment of
earnest money and its acceptance by Valdes-Choy precludes the latter from rejecting the binding effect of the contract of sale.
Thus, Chua claims that Valdes-Choy may not validly rescind the contract of sale without following Article 159222 of the Civil Code
which requires demand, either judicially or by notarial act, before rescission may take place.
Chua's new theory is not well taken in light of well-settled jurisprudence. An issue not raised in the court below cannot be raised
for the first time on appeal, as this is offensive to the basic rules of fair play, justice and due process.23 In addition, when a party
deliberately adopts a certain theory, and the case is tried and decided on that theory in the court below, the party will not be
permitted to change his theory on appeal. To permit him to change his theory will be unfair to the adverse party.24
Nevertheless, in order to put to rest all doubts on the matter, we hold that the agreement between Chua and Valdes-Choy, as
evidenced by the Receipt, is a contract to sell and not a contract of sale. The distinction between a contract of sale and contract to
sell is well-settled:
In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold; in a contract to sell,
ownership is, by agreement, reserved in the vendor and is not to pass to the vendee until full payment of the purchase price.
Otherwise stated, in a contract of sale, the vendor loses ownership over the property and cannot recover it until and unless the
contract is resolved or rescinded; whereas, in a contract to sell, title is retained by the vendor until full payment of the price. In the
latter contract, payment of the price is a positive suspensive condition, failure of which is not a breach but an event that prevents
the obligation of the vendor to convey title from becoming effective.25
A perusal of the Receipt shows that the true agreement between the parties was a contract to sell. Ownership over the Property
was retained by Valdes-Choy and was not to pass to Chua until full payment of the purchase price.
First, the Receipt provides that the earnest money shall be forfeited in case the buyer fails to pay the balance of the purchase
price on or before 15 July 1989. In such event, Valdes-Choy can sell the Property to other interested parties. There is in effect a
right reserved in favor of Valdes-Choy not to push through with the sale upon Chua's failure to remit the balance of the purchase
price before the deadline. This is in the nature of a stipulation reserving ownership in the seller until full payment of the purchase
price. This is also similar to giving the seller the right to rescind unilaterally the contract the moment the buyer fails to pay within a
fixed period.26
Second, the agreement between Chua and Valdes-Choy was embodied in a receipt rather than in a deed of sale, ownership not
having passed between them. The signing of the Deeds of Sale came later when Valdes-Choy was under the impression that
Chua was about to pay the balance of the purchase price. The absence of a formal deed of conveyance is a strong indication that
the parties did not intend immediate transfer of ownership, but only a transfer after full payment of the purchase price.27
Third, Valdes-Choy retained possession of the certificate of title and all other documents relative to the sale. When Chua refused
to pay Valdes-Choy the balance of the purchase price, Valdes-Choy also refused to turn-over to Chua these documents.28 These
are additional proof that the agreement did not transfer to Chua, either by actual or constructive delivery, ownership of the
Property.29
It is true that Article 1482 of the Civil Code provides that "[W]henever earnest money is given in a contract of sale, it shall be
considered as part of the price and proof of the perfection of the contract." However, this article speaks of earnest money given in
a contract of sale. In this case, the earnest money was given in a contract to sell. The Receipt evidencing the contract to sell
stipulates that the earnest money is a forfeitable deposit, to be forfeited if the sale is not consummated should Chua fail to pay the
balance of the purchase price. The earnest money forms part of the consideration only if the sale is consummated upon full
payment of the purchase price. If there is a contract of sale, Valdes-Choy should have the right to compel Chua to pay the balance
of the purchase price. Chua, however, has the right to walk away from the transaction, with no obligation to pay the balance,
although he will forfeit the earnest money. Clearly, there is no contract of sale. The earnest money was given in a contract to sell,
and thus Article 1482, which speaks of a contract of sale, is not applicable.
Since the agreement between Valdes-Choy and Chua is a mere contract to sell, the full payment of the purchase price partakes of
a suspensive condition. The non-fulfillment of the condition prevents the obligation to sell from arising and ownership is retained
by the seller without further remedies by the buyer.30 Article 1592 of the Civil Code permits the buyer to 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. However, Article 1592 does not apply to a contract to sell where the seller reserves the ownership until full payment of
the price.31
Third and Fourth Issues: Withholding of Payment of the Balance of the Purchase Price and Forfeiture of the Earnest Money
Chua insists that he was ready to pay the balance of the purchase price but withheld payment because Valdes-Choy did not fulfill
her contractual obligation to put all the papers in "proper order." Specifically, Chua claims that Valdes-Choy failed to show that the
capital gains tax had been paid after he had advanced the money for its payment. For the same reason, he contends that ValdesChoy may not forfeit the earnest money even if he did not pay on time.
There is a variance of interpretation on the phrase "all papers are in proper order" as written in the Receipt. There is no dispute
though, that as long as the papers are "in proper order," Valdes-Choy has the right to forfeit the earnest money if Chua fails to pay
the balance before the deadline.
The trial court interpreted the phrase to include payment of the capital gains tax, with the Bureau of Internal Revenue receipt as
proof of payment. The Court of Appeals held otherwise. We quote verbatim the ruling of the Court of Appeals on this matter:
The trial court made much fuss in connection with the payment of the capital gains tax, of which Section 33 of the National Internal
Revenue Code of 1977, is the governing provision insofar as its computation is concerned. The trial court failed to consider
Section 34-(a) of the said Code, the last sentence of which provides, that "[t]he amount realized from the sale or other disposition
of property shall be the sum of money received plus the fair market value of the property (other than money) received;" and that
the computation of the capital gains tax can only be finally assessed by the Commission on Internal Revenue upon the
presentation of the Deeds of Absolute Sale themselves, without which any premature computation of the capital gains tax
becomes of no moment. At any rate, the computation and payment of the capital gains tax has no bearing insofar as the validity
and effectiveness of the deeds of sale in question are concerned, because it is only after the contracts of sale are finally executed
in due form and have been duly notarized that the final computation of the capital gains tax can follow as a matter of course.
Indeed, exhibit D, the PBC Check No. 325851, dated July 13, 1989, in the amount of P485,000.00, which is considered as part of
the consideration of the sale, was deposited in the name of appellant, from which she in turn, purchased the corresponding check
in the amount representing the sum to be paid for capital gains tax and drawn in the name of the Commissioner of Internal
Revenue, which then allayed any fear or doubt that that amount would not be paid to the Government after all.32
We see no reason to disturb the ruling of the Court of Appeals.
In a contract to sell, the obligation of the seller to sell becomes demandable only upon the happening of the suspensive condition.
In this case, the suspensive condition is the full payment of the purchase price by Chua. Such full payment gives rise to Chua's
right to demand the execution of the contract of sale.
It is only upon the existence of the contract of sale that the seller becomes obligated to transfer the ownership of the thing sold to
the buyer. Article 1458 of the Civil Code defines a contract of sale as follows:
Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price certain in money or its equivalent.
x x x. (Emphasis supplied)
Prior to the existence of the contract of sale, the seller is not obligated to transfer ownership to the buyer, even if there is a
contract to sell between them. It is also upon the existence of the contract of sale that the buyer is obligated to pay the purchase
price to the seller. Since the transfer of ownership is in exchange for the purchase price, these obligations must be simultaneously
fulfilled at the time of the execution of the contract of sale, in the absence of a contrary stipulation.
In a contract of sale, the obligations of the seller are specified in Article 1495 of the Civil Code, as follows:
Art. 1495. The vendor is bound to transfer the ownership of and deliver, as well as warrant the thing which is the object of the sale.
(Emphasis supplied)
The obligation of the seller is to transfer to the buyer ownership of the thing sold. In the sale of real property, the seller is not
obligated to transfer in the name of the buyer a new certificate of title, but rather to transfer ownership of the real property. There is
a difference between transfer of the certificate of title in the name of the buyer, and transfer of ownership to the buyer. The buyer
may become the owner of the real property even if the certificate of title is still registered in the name of the seller. As between the
seller and buyer, ownership is transferred not by the issuance of a new certificate of title in the name of the buyer but by the
execution of the instrument of sale in a public document.
In a contract of sale, ownership is transferred upon delivery of the thing sold. As the noted civil law commentator Arturo M.
Tolentino explains it, Delivery is not only a necessary condition for the enjoyment of the thing, but is a mode of acquiring dominion and determines the
transmission of ownership, the birth of the real right. The delivery, therefore, made in any of the forms provided in articles 1497 to
1505 signifies that the transmission of ownership from vendor to vendee has taken place. The delivery of the thing constitutes an
indispensable requisite for the purpose of acquiring ownership. Our law does not admit the doctrine of transfer of property by mere
consent; the ownership, the property right, is derived only from delivery of the thing. x x x.33 (Emphasis supplied)
In a contract of sale of real property, delivery is effected when the instrument of sale is executed in a public document. When the
deed of absolute sale is signed by the parties and notarized, then delivery of the real property is deemed made by the seller to the
buyer. Article 1498 of the Civil Code provides that
Art. 1498. When the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing
which is the object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred.
x x x.
Similarly, in a contract to sell real property, once the seller is ready, able and willing to sign the deed of absolute sale before a
notary public, the seller is in a position to transfer ownership of the real property to the buyer. At this point, the seller complies with

his undertaking to sell the real property in accordance with the contract to sell, and to assume all the obligations of a vendor under
a contract of sale pursuant to the relevant articles of the Civil Code. In a contract to sell, the seller is not obligated to transfer
ownership to the buyer. Neither is the seller obligated to cause the issuance of a new certificate of title in the name of the buyer.
However, the seller must put all his papers in proper order to the point that he is in a position to transfer ownership of the real
property to the buyer upon the signing of the contract of sale.
In the instant case, Valdes-Choy was in a position to comply with all her obligations as a seller under the contract to sell. First, she
already signed the Deeds of Sale in the office of her counsel in the presence of the buyer. Second, she was prepared to turn-over
the owner's duplicate of the TCT to the buyer, along with the tax declarations and latest realty tax receipt. Clearly, at this point
Valdes-Choy was ready, able and willing to transfer ownership of the Property to the buyer as required by the contract to sell, and
by Articles 1458 and 1495 of the Civil Code to consummate the contract of sale.
Chua, however, refused to give to Valdes-Choy the PBCom manager's check for the balance of the purchase price. Chua imposed
the condition that a new TCT should first be issued in his name, a condition that is found neither in the law nor in the contract to
sell as evidenced by the Receipt. Thus, at this point Chua was not ready, able and willing to pay the full purchase price which is
his obligation under the contract to sell. Chua was also not in a position to assume the principal obligation of a vendee in a
contract of sale, which is also to pay the full purchase price at the agreed time. Article 1582 of the Civil Code provides that
Art. 1582. The vendee is bound to accept delivery and to pay the price of the thing sold at the time and place stipulated in the
contract.
x x x. (Emphasis supplied)
In this case, the contract to sell stipulated that Chua should pay the balance of the purchase price "on or before 15 July 1989."
The signed Deeds of Sale also stipulated that the buyer shall pay the balance of the purchase price upon signing of the deeds.
Thus, the Deeds of Sale, both signed by Chua, state as follows:
Deed of Absolute Sale covering the lot:
xxx
For and in consideration of the sum of EIGHT MILLION PESOS (P8,000,000.00), Philippine Currency, receipt of which in full is
hereby acknowledged by the VENDOR from the VENDEE, the VENDOR sells, transfers and conveys unto the VENDEE, his heirs,
successors and assigns, the said parcel of land, together with the improvements existing thereon, free from all liens and
encumbrances.34 (Emphasis supplied)
Deed of Absolute Sale covering the furnishings:
xxx
For and in consideration of the sum of TWO MILLION EIGHT HUNDRED THOUSAND PESOS (P2,800,000.00), Philippine
Currency, receipt of which in full is hereby acknowledged by the VENDOR from the VENDEE, the VENDOR sells, transfers and
conveys unto the VENDEE, his heirs, successors and assigns, the said furnitures, fixtures and other movable properties thereon,
free from all liens and encumbrances.35 (Emphasis supplied)
However, on the agreed date, Chua refused to pay the balance of the purchase price as required by the contract to sell, the
signed Deeds of Sale, and Article 1582 of the Civil Code. Chua was therefore in default and has only himself to blame for the
rescission by Valdes-Choy of the contract to sell.
Even if measured under existing usage or custom, Valdes-Choy had all her papers "in proper order." Article 1376 of the Civil Code
provides that:
Art. 1376. The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall
fill the omission of stipulations which are ordinarily established.
Customarily, in the absence of a contrary agreement, the submission by an individual seller to the buyer of the following papers
would complete a sale of real estate: (1) owner's duplicate copy of the Torrens title;36 (2) signed deed of absolute sale; (3) tax
declaration; and (3) latest realty tax receipt. The buyer can retain the amount for the capital gains tax and pay it upon authority of
the seller, or the seller can pay the tax, depending on the agreement of the parties.
The buyer has more interest in having the capital gains tax paid immediately since this is a pre-requisite to the issuance of a new
Torrens title in his name. Nevertheless, as far as the government is concerned, the capital gains tax remains a liability of the seller
since it is a tax on the seller's gain from the sale of the real estate. Payment of the capital gains tax, however, is not a pre-requisite
to the transfer of ownership to the buyer. The transfer of ownership takes effect upon the signing and notarization of the deed of
absolute sale.
The recording of the sale with the proper Registry of Deeds37 and the transfer of the certificate of title in the name of the buyer
are necessary only to bind third parties to the transfer of ownership.38 As between the seller and the buyer, the transfer of
ownership takes effect upon the execution of a public instrument conveying the real estate.39 Registration of the sale with the
Registry of Deeds, or the issuance of a new certificate of title, does not confer ownership on the buyer. Such registration or
issuance of a new certificate of title is not one of the modes of acquiring ownership.40
In this case, Valdes-Choy was ready, able and willing to submit to Chua all the papers that customarily would complete the sale,
and to pay as well the capital gains tax. On the other hand, Chua's condition that a new TCT be first issued in his name before he
pays the balance of P10,215,000.00, representing 94.58% of the purchase price, is not customary in a sale of real estate. Such a
condition, not specified in the contract to sell as evidenced by the Receipt, cannot be considered part of the "omissions of
stipulations which are ordinarily established" by usage or custom.41 What is increasingly becoming customary is to deposit in
escrow the balance of the purchase price pending the issuance of a new certificate of title in the name of the buyer. Valdes-Choy
suggested this solution but unfortunately, it drew no response from Chua.
Chua had no reason to fear being swindled. Valdes-Choy was prepared to turn-over to him the owner's duplicate copy of the TCT,
the signed Deeds of Sale, the tax declarations, and the latest realty tax receipt. There was no hindrance to paying the capital

gains tax as Chua himself had advanced the money to pay the same and Valdes-Choy had procured a manager's check payable
to the Bureau of Internal Revenue covering the amount. It was only a matter of time before the capital gains tax would be paid.
Chua acted precipitately in filing the action for specific performance a mere two days after the deadline of 15 July 1989 when there
was an impasse. While this case was dismissed on 22 November 1989, he did not waste any time in re-filing the same on 29
November 1989.
Accordingly, since Chua refused to pay the consideration in full on the agreed date, which is a suspensive condition, Chua cannot
compel Valdes-Choy to consummate the sale of the Property. Article 1181 of the Civil Code provides that ART. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired shall
depend upon the happening of the event which constitutes the condition.
Chua acquired no right to compel Valdes-Choy to transfer ownership of the Property to him because the suspensive condition the full payment of the purchase price - did not happen. There is no correlative obligation on the part of Valdes-Choy to transfer
ownership of the Property to Chua. There is also no obligation on the part of Valdes-Choy to cause the issuance of a new TCT in
the name of Chua since unless expressly stipulated, this is not one of the obligations of a vendor.
WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 37652 dated 23 February 1995 is AFFIRMED in toto.
SO ORDERED.

G.R. No. 112127 July 17, 1995

CENTRAL PHILIPPINE UNIVERSITY, petitioner,
vs.
COURT OF APPEALS, REMEDIOS FRANCO, FRANCISCO N. LOPEZ, CECILIA P. VDA. DE LOPEZ, REDAN LOPEZ AND
REMARENE LOPEZ, respondents.

BELLOSILLO, J.:
CENTRAL PHILIPPINE UNIVERSITY filed this petition for review on certiorari of the decision of the Court of Appeals which
reversed that of the Regional Trial Court of Iloilo City directing petitioner to reconvey to private respondents the property donated
to it by their predecessor-in-interest.
Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a member of the Board of Trustees of the Central Philippine
College (now Central Philippine University [CPU]), executed a deed of donation in favor of the latter of a parcel of land identified
as Lot No. 3174-B-1 of the subdivision plan Psd-1144, then a portion of Lot No. 3174-B, for which Transfer Certificate of Title No.
T-3910-A was issued in the name of the donee CPU with the following annotations copied from the deed of donation
1. The land described shall be utilized by the CPU exclusively for the establishment and use of a medical college with all its
buildings as part of the curriculum;
2. The said college shall not sell, transfer or convey to any third party nor in any way encumber said land;
3. The said land shall be called "RAMON LOPEZ CAMPUS", and the said college shall be under obligation to erect a cornerstone
bearing that name. Any net income from the land or any of its parks shall be put in a fund to be known as the "RAMON LOPEZ
CAMPUS FUND" to be used for improvements of said campus and erection of a building thereon. 1
On 31 May 1989, private respondents, who are the heirs of Don Ramon Lopez, Sr., filed an action for annulment of donation,
reconveyance and damages against CPU alleging that since 1939 up to the time the action was filed the latter had not complied
with the conditions of the donation. Private respondents also argued that petitioner had in fact negotiated with the National
Housing Authority (NHA) to exchange the donated property with another land owned by the latter.
In its answer petitioner alleged that the right of private respondents to file the action had prescribed; that it did not violate any of
the conditions in the deed of donation because it never used the donated property for any other purpose than that for which it was
intended; and, that it did not sell, transfer or convey it to any third party.
On 31 May 1991, the trial court held that petitioner failed to comply with the conditions of the donation and declared it null and
void. The court a quo further directed petitioner to execute a deed of the reconveyance of the property in favor of the heirs of the
donor, namely, private respondents herein.
Petitioner appealed to the Court of Appeals which on 18 June 1993 ruled that the annotations at the back of petitioner's certificate
of title were resolutory conditions breach of which should terminate the rights of the donee thus making the donation revocable.
The appellate court also found that while the first condition mandated petitioner to utilize the donated property for the
establishment of a medical school, the donor did not fix a period within which the condition must be fulfilled, hence, until a period
was fixed for the fulfillment of the condition, petitioner could not be considered as having failed to comply with its part of the
bargain. Thus, the appellate court rendered its decision reversing the appealed decision and remanding the case to the court of
origin for the determination of the time within which petitioner should comply with the first condition annotated in the certificate of
title.
Petitioner now alleges that the Court of Appeals erred: (a) in holding that the quoted annotations in the certificate of title of
petitioner are onerous obligations and resolutory conditions of the donation which must be fulfilled non-compliance of which would
render the donation revocable; (b) in holding that the issue of prescription does not deserve "disquisition;" and, (c) in remanding
the case to the trial court for the fixing of the period within which petitioner would establish a medical college. 2
We find it difficult to sustain the petition. A clear perusal of the conditions set forth in the deed of donation executed by Don Ramon
Lopez, Sr., gives us no alternative but to conclude that his donation was onerous, one executed for a valuable consideration which

is considered the equivalent of the donation itself, e.g., when a donation imposes a burden equivalent to the value of the donation.
A gift of land to the City of Manila requiring the latter to erect schools, construct a children's playground and open streets on the
land was considered an onerous donation. 3 Similarly, where Don Ramon Lopez donated the subject parcel of land to petitioner
but imposed an obligation upon the latter to establish a medical college thereon, the donation must be for an onerous
consideration.
Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition of rights, as well as the extinguishment or loss of
those already acquired, shall depend upon the happening of the event which constitutes the condition. Thus, when a person
donates land to another on the condition that the latter would build upon the land a school, the condition imposed was not a
condition precedent or a suspensive condition but a resolutory one. 4 It is not correct to say that the schoolhouse had to be
constructed before the donation became effective, that is, before the donee could become the owner of the land, otherwise, it
would be invading the property rights of the donor. The donation had to be valid before the fulfillment of the condition. 5 If there
was no fulfillment or compliance with the condition, such as what obtains in the instant case, the donation may now be revoked
and all rights which the donee may have acquired under it shall be deemed lost and extinguished.
The claim of petitioner that prescription bars the instant action of private respondents is unavailing.
The condition imposed by the donor, i.e., the building of a medical school upon the land donated, depended upon the exclusive
will of the donee as to when this condition shall be fulfilled. When petitioner accepted the donation, it bound itself to comply with
the condition thereof. Since the time within which the condition should be fulfilled depended upon the exclusive will of the
petitioner, it has been held that its absolute acceptance and the acknowledgment of its obligation provided in the deed of donation
were sufficient to prevent the statute of limitations from barring the action of private respondents upon the original contract which
was the deed of donation. 6
Moreover, the time from which the cause of action accrued for the revocation of the donation and recovery of the property donated
cannot be specifically determined in the instant case. A cause of action arises when that which should have been done is not
done, or that which should not have been done is done. 7 In cases where there is no special provision for such computation,
recourse must be had to the rule that the period must be counted from the day on which the corresponding action could have
been instituted. It is the legal possibility of bringing the action which determines the starting point for the computation of the period.
In this case, the starting point begins with the expiration of a reasonable period and opportunity for petitioner to fulfill what has
been charged upon it by the donor.
The period of time for the establishment of a medical college and the necessary buildings and improvements on the property
cannot be quantified in a specific number of years because of the presence of several factors and circumstances involved in the
erection of an educational institution, such as government laws and regulations pertaining to education, building requirements and
property restrictions which are beyond the control of the donee.
Thus, when the obligation does not fix a period but from its nature and circumstances it can be inferred that a period was
intended, the general rule provided in Art. 1197 of the Civil Code applies, which provides that the courts may fix the duration
thereof because the fulfillment of the obligation itself cannot be demanded until after the court has fixed the period for compliance
therewith and such period has arrived. 8
This general rule however cannot be applied considering the different set of circumstances existing in the instant case. More than
a reasonable period of fifty (50) years has already been allowed petitioner to avail of the opportunity to comply with the condition
even if it be burdensome, to make the donation in its favor forever valid. But, unfortunately, it failed to do so. Hence, there is no
more need to fix the duration of a term of the obligation when such procedure would be a mere technicality and formality and
would serve no purpose than to delay or lead to an unnecessary and expensive multiplication of suits. 9 Moreover, under Art. 1191
of the Civil Code, when one of the obligors cannot comply with what is incumbent upon him, the obligee may seek rescission and
the court shall decree the same unless there is just cause authorizing the fixing of a period. In the absence of any just cause for
the court to determine the period of the compliance, there is no more obstacle for the court to decree the rescission claimed.
Finally, since the questioned deed of donation herein is basically a gratuitous one, doubts referring to incidental circumstances of
a gratuitous contract should be resolved in favor of the least transmission of rights and interests. 10 Records are clear and facts
are undisputed that since the execution of the deed of donation up to the time of filing of the instant action, petitioner has failed to
comply with its obligation as donee. Petitioner has slept on its obligation for an unreasonable length of time. Hence, it is only just
and equitable now to declare the subject donation already ineffective and, for all purposes, revoked so that petitioner as donee
should now return the donated property to the heirs of the donor, private respondents herein, by means of reconveyance.
WHEREFORE, the decision of the Regional Trial Court of Iloilo, Br. 34, of 31 May 1991 is REINSTATED and AFFIRMED, and the
decision of the Court of Appeals of 18 June 1993 is accordingly MODIFIED. Consequently, petitioner is directed to reconvey to
private respondents Lot No. 3174-B-1 of the subdivision plan Psd-1144 covered by Transfer Certificate of Title No. T-3910-A within
thirty (30) days from the finality of this judgment.
Costs against petitioner.
SO ORDERED.

G.R. No. L-5003

June 27, 1953

NAZARIO TRILLANA, administrator-appellee,

vs.
QUEZON COLLEGE, INC., claimant-appellant.
Singson, Barnes, Yap and Blanco for appellant.Delgado, Flores & Macapagal for appellee.
PARAS, J.:
Damasa Crisostomo sent the following letter to the Board of Trustees of the Quezon College:

June 1, 1948
The BOARD OF TRUSTEES
Quezon College
Manila
Gentlemen:
Please enter my subscription to dalawang daan (200) shares of your capital stock with a par value of P100 each. Enclosed you
will find (Babayaran kong lahat pagkatapos na ako ay makapag-pahuli ng isda) pesos as my initial payment and the balance
payable in accordance with law and the rules and regulations of the Quezon College. I hereby agree to shoulder the expenses
connected with said shares of stock. I further submit myself to all lawful demands, decisions or directives of the Board of Trustees
of the Quezon College and all its duly constituted officers or authorities (ang nasa itaas ay binasa at ipinaliwanag sa akin sa
wikang tagalog na aking nalalaman).
Very respectfully,
(Sgd.) DAMASA CRISOSTOMO
Signature of subscriber
Nilagdaan sa aming harapan:
JOSE CRISOSTOMO
EDUARDO CRISOSTOMO
Damasa Crisostomo died on October 26, 1948. As no payment appears to have been made on the subscription mentioned in the
foregoing letter, the Quezon College, Inc. presented a claim before the Court of First Instance of Bulacan in her testate
proceeding, for the collection of the sum of P20,000, representing the value of the subscription to the capital stock of the Quezon
College, Inc. This claim was opposed by the administrator of the estate, and the Court of First Instance of Bulacan, after hearing
issued an order dismissing the claim of the Quezon College, Inc. on the ground that the subscription in question was neither
registered in nor authorized by the Securities and Exchange Commission. From this order the Quezon College, Inc. has appealed.
It is not necessary for us to discuss at length appellant's various assignments of error relating to the propriety of the ground relief
upon by the trial court, since, as pointed out in the brief for the administrator and appellee, there are other decisive considerations
which, though not touched by the lower court, amply sustained the appealed order.
It appears that the application sent by Damasa Crisostomo to the Quezon College, Inc. was written on a general form indicating
that an applicant will enclose an amount as initial payment and will pay the balance in accordance with law and the regulations of
the College. On the other hand, in the letter actually sent by Damasa Crisostomo, the latter (who requested that her subscription
for 200 shares be entered) not only did not enclose any initial payment but stated that "babayaran kong lahat pagkatapos na ako
ay makapagpahuli ng isda." There is nothing in the record to show that the Quezon College, Inc. accepted the term of payment
suggested by Damasa Crisostomo, or that if there was any acceptance the same came to her knowledge during her lifetime. As
the application of Damasa Crisostomo is obviously at variance with the terms evidenced in the form letter issued by the Quezon
College, Inc., there was absolute necessity on the part of the College to express its agreement to Damasa's offer in order to bind
the latter. Conversely, said acceptance was essential, because it would be unfair to immediately obligate the Quezon College, Inc.
under Damasa's promise to pay the price of the subscription after she had caused fish to be caught. In other words, the relation
between Damasa Crisostomo and the Quezon College, Inc. had only thus reached the preliminary stage whereby the latter
offered its stock for subscription on the terms stated in the form letter, and Damasa applied for subscription fixing her own plan of
payment, a relation, in the absence as in the present case of acceptance by the Quezon College, Inc. of the counter offer of
Damasa Crisostomo, that had not ripened into an enforceable contract.
Indeed, the need for express acceptance on the part of the Quezon College, Inc. becomes the more imperative, in view of the
proposal of Damasa Crisostomo to pay the value of the subscription after she has harvested fish, a condition obviously dependent
upon her sole will and, therefore, facultative in nature, rendering the obligation void, under article 1115 of the old Civil Code which
provides as follows: "If the fulfillment of the condition should depend upon the exclusive will of the debtor, the conditional obligation
shall be void. If it should depend upon chance, or upon the will of a third person, the obligation shall produce all its effects in
accordance with the provisions of this code." It cannot be argued that the condition solely is void, because it would have served to
create the obligation to pay, unlike a case, exemplified by Osmea vs. Rama (14 Phil., 99), wherein only the potestative condition
was held void because it referred merely to the fulfillment of an already existing indebtedness.
In the case of Taylor vs. Uy Tieng Piao, et al. (43 Phil., 873, 879), this Court already held that "a condition, facultative as to the
debtor, is obnoxious to the first sentence contained in article 1115 and renders the whole obligation void."
Wherefore, the appealed order is affirmed, and it is so ordered with costs against appellant.

G.R. No. 117009 October 11, 1995

SECURITY BANK & TRUST COMPANY and ROSITO C. MANHIT, petitioners,
vs.
COURT OF APPEALS and YSMAEL C. FERRER, respondents.

PADILLA, J.:
In this petition for review under Rule 45 of the Rules of Court, petitioners seek a review and reversal of the decision * of

respondent Court of Appeals in CA-G.R. CV No. 40450, entitled "Ysmael C. Ferrer v. Security Bank and Trust Company, et. al."
dated 31 August 1994, which affirmed the decision ** of the Regional Trial Court, Branch 63, Makati in Civil Case No. 42712, a
complaint for breach of contract with damages.
Private respondent Ysmael C. Ferrer was contracted by herein petitioners Security Bank and Trust Company (SBTC) and Rosito
C. Manhit to construct the building of SBTC in Davao City for the price of P1,760,000.00. The contract dated 4 February 1980
provided that Ferrer would finish the construction in two hundred (200) working days. Respondent Ferrer was able to complete the
construction of the building on 15 August 1980 (within the contracted period) but he was compelled by a drastic increase in the
cost of construction materials to incur expenses of about P300,000.00 on top of the original cost. The additional expenses were
made known to petitioner SBTC thru its Vice-President Fely Sebastian and Supervising Architect Rudy de la Rama as early as
March 1980. Respondent Ferrer made timely demands for payment of the increased cost. Said demands were supported by
receipts, invoices, payrolls and other documents proving the additional expenses.
In March 1981, SBTC thru Assistant Vice-President Susan Guanio and a representative of an architectural firm consulted by
SBTC, verified Ferrer's claims for additional cost. A recommendation was then made to settle Ferrer's claim but only for
P200,000.00. SBTC, instead of paying the recommended additional amount, denied ever authorizing payment of any amount
beyond the original contract price. SBTC likewise denied any liability for the additional cost based on Article IX of the building
contract which states:
If at any time prior to the completion of the work to be performed hereunder, increase in prices of construction materials and/or
labor shall supervene through no fault on the part of the contractor whatsoever or any act of the government and its
instrumentalities which directly or indirectly affects the increase of the cost of the project, OWNER shall equitably make the
appropriate adjustment on mutual agreement of both parties.
Ysmael C. Ferrer then filed a complaint for breach of contract with damages. The trial court ruled for Ferrer and ordered
defendants SBTC and Rosito C. Manhit to pay:
a) P259,417.23 for the increase in price of labor and materials plus 12% interest thereon per annum from 15 August 1980 until
fully paid;
b) P24,000.00 as actual damages;
c) P20,000.00 as moral damages;
d) P20,000.00 as exemplary damages;
e) attorney's fees equivalent to 25% of the principal amount due; and
f) costs of suit.
On appeal, the Court of Appeals affirmed the trial court decision.
In the present petition for review, petitioners assign the following errors to the appellate court:
. . . IN HOLDING THAT PLAINTIFF-APPELLEE HAS, BY PREPONDERANCE OF EVIDENCE SUFFICIENTLY PROVEN HIS
CLAIM AGAINST THE DEFENDANTS-APPELLANTS.
. . . IN INTERPRETING AN OTHERWISE CLEAR AND UNAMBIGUOUS PROVISION OF THE CONSTRUCTION CONTRACT.
. . . IN DISREGARDING THE EXPRESS PROVISION OF THE CONSTRUCTION CONTRACT, THE LOWER COURT VIOLATED
DEFENDANTS-APPELLANTS' CONSTITUTIONAL GUARANTY OF NON IMPAIRMENT OF THE OBLIGATION OF CONTRACT.
1
Petitioners argue that under the aforequoted Article IX of the building contract, any increase in the price of labor and/or materials
resulting in an increase in construction cost above the stipulated contract price will not automatically make petitioners liable to pay
for such increased cost, as any payment above the stipulated contract price has been made subject to the condition that the
"appropriate adjustment" will be made "upon mutual agreement of both parties". It is contended that since there was no mutual
agreement between the parties, petitioners' obligation to pay amounts above the original contract price never materialized.
Respondent Ysmael C. Ferrer, through counsel, on the other hand, opposed the arguments raised by petitioners. It is of note
however that the pleadings filed with this Court by counsel for Ferrer hardly refute the arguments raised by petitioners, as the
contents of said pleadings are mostly quoted portions of the decision of the Court of Appeals, devoid of adequate discussion of the
merits of respondent's case. The Court, to be sure, expects more diligence and legal know-how from lawyers than what has been
exhibited by counsel for respondent in the present case. Under these circumstances, the Court had to review the entire records of
this case to evaluate the merits of the issues raised by the contending parties.
Article 22 of the Civil Code which embodies the maxim, Nemo ex alterius incommodo debet lecupletari (no man ought to be made
rich out of another's injury) states:
Art. 22. Every person who through an act of performance by another, or any other means, acquires or comes into possession of
something at the expense of the latter without just or legal ground, shall return the same to him.
The above-quoted article is part of the chapter of the Civil Code on Human Relations, the provisions of which were formulated as
"basic principles to be observed for the rightful relationship between human beings and for the stability of the social order, . . .
designed to indicate certain norms that spring from the fountain of good conscience, . . . guides for human conduct [that] should
run as golden threads through society to the end that law may approach its supreme ideal which is the sway and dominance of
justice." 2
In the present case, petitioners' arguments to support absence of liability for the cost of construction beyond the original contract
price are not persuasive.
Under the previously quoted Article IX of the construction contract, petitioners would make the appropriate adjustment to the
contract price in case the cost of the project increases through no fault of the contractor (private respondent). Private respondent

informed petitioners of the drastic increase in construction cost as early as March 1980.
Petitioners in turn had the increased cost evaluated and audited. When private respondent demanded payment of P259,417.23,
petitioner bank's Vice-President Rosito C. Manhit and the bank's architectural consultant were directed by the bank to verify and
compute private respondent's claims of increased cost. A recommendation was then made to settle private respondent's claim for
P200,000.00. Despite this recommendation and several demands from private respondent, SBTC failed to make payment. It
denied authorizing anyone to make a settlement of private respondent's claim and likewise denied any liability, contending that the
absence of a mutual agreement made private respondent's demand premature and baseless.
Petitioners' arguments are specious.
It is not denied that private respondent incurred additional expenses in constructing petitioner bank's building due to a drastic and
unexpected increase in construction cost. In fact, petitioner bank admitted liability for increased cost when a recommendation was
made to settle private respondent's claim for P200,000.00. Private respondent's claim for the increased amount was adequately
proven during the trial by receipts, invoices and other supporting documents.
Under Article 1182 of the Civil Code, a conditional obligation shall be void if its fulfillment depends upon the sole will of the debtor.
In the present case, the mutual agreement, the absence of which petitioner bank relies upon to support its non-liability for the
increased construction cost, is in effect a condition dependent on petitioner bank's sole will, since private respondent would
naturally and logically give consent to such an agreement which would allow him recovery of the increased cost.
Further, it cannot be denied that petitioner bank derived benefits when private respondent completed the construction even at an
increased cost.
Hence, to allow petitioner bank to acquire the constructed building at a price far below its actual construction cost would
undoubtedly constitute unjust enrichment for the bank to the prejudice of private respondent. Such unjust enrichment, as
previously discussed, is not allowed by law.
Finally, with respect to the award of attorney's fees to respondent, the Court has previously held that, "even with the presence of
an agreement between the parties, the court may nevertheless reduce attorney's fees though fixed in the contract when the
amount thereof appears to be unconscionable or unreasonable." 3 As previously noted, the diligence and legal know-how
exhibited by counsel for private respondent hardly justify an award of 25% of the principal amount due, which would be at least
P60,000.00. Besides, the issues in this case are far from complex and intricate. The award of attorney's fees is thus reduced to
P10,000.00.
WHEREFORE, with the above modification in respect of the amount of attorney's fees, the appealed decision of the Court of
Appeals in CA G.R. CV No. 40450 is AFFIRMED.
SO ORDERED.

G.R. No. 107207 November 23, 1995

VIRGILIO R. ROMERO, petitioner,
vs.
HON. COURT OF APPEALS and ENRIQUETA CHUA VDA. DE ONGSIONG, respondents.

VITUG, J.:
The parties pose this question: May the vendor demand the rescission of a contract for the sale of a parcel of land for a cause
traceable to his own failure to have the squatters on the subject property evicted within the contractually-stipulated period?
Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of production, manufacture and exportation of perlite
filter aids, permalite insulation and processed perlite ore. In 1988, petitioner and his foreign partners decided to put up a central
warehouse in Metro Manila on a land area of approximately 2,000 square meters. The project was made known to several
freelance real estate brokers.
A day or so after the announcement, Alfonso Flores and his wife, accompanied by a broker, offered a parcel of land measuring
1,952 square meters. Located in Barangay San Dionisio, Paraaque, Metro Manila, the lot was covered by TCT No. 361402 in the
name of private respondent Enriqueta Chua vda. de Ongsiong. Petitioner visited the property and, except for the presence of
squatters in the area, he found the place suitable for a central warehouse.
Later, the Flores spouses called on petitioner with a proposal that should he advance the amount of P50,000.00 which could be
used in taking up an ejectment case against the squatters, private respondent would agree to sell the property for only P800.00
per square meter. Petitioner expressed his concurrence. On 09 June 1988, a contract, denominated "Deed of Conditional Sale,"
was executed between petitioner and private respondent. The simply-drawn contract read:
DEED OF CONDITIONAL SALE
KNOW ALL MEN BY THESE PRESENTS:
This Contract, made and executed in the Municipality of Makati, Philippines this 9th day of June, 1988 by and between:
ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age, widow, Filipino and residing at 105 Simoun St., Quezon City, Metro
Manila, hereinafter referred to as the VENDOR;
-andVIRGILIO R. ROMERO, married to Severina L. Lat, of Legal age, Filipino, and residing at 110 San Miguel St., Plainview Subd.,
Mandaluyong Metro Manila, hereinafter referred to as the VENDEE:

W I T N E S S E T H : That
WHEREAS, the VENDOR is the owner of One (1) parcel of land with a total area of ONE THOUSAND NINE HUNDRED FIFTY
TWO (1,952) SQUARE METERS, more or less, located in Barrio San Dionisio, Municipality of Paraaque, Province of Rizal,
covered by TCT No. 361402 issued by the Registry of Deeds of Pasig and more particularly described as follows:
xxx xxx xxx
WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land and the VENDOR has accepted the offer, subject to the
terms and conditions hereinafter stipulated:
NOW, THEREFORE, for and in consideration of the sum of ONE MILLION FIVE HUNDRED SIXTY ONE THOUSAND SIX
HUNDRED PESOS (P1,561,600.00) ONLY, Philippine Currency, payable by VENDEE to in to (sic) manner set forth, the VENDOR
agrees to sell to the VENDEE, their heirs, successors, administrators, executors, assign, all her rights, titles and interest in and to
the property mentioned in the FIRST WHEREAS CLAUSE, subject to the following terms and conditions:
1. That the sum of FIFTY THOUSAND PESOS (P50,000.00) ONLY Philippine Currency, is to be paid upon signing and execution
of this instrument.
2. The balance of the purchase price in the amount of ONE MILLION FIVE HUNDRED ELEVEN THOUSAND SIX HUNDRED
PESOS (P1,511,600.00) ONLY shall be paid 45 days after the removal of all squatters from the above described property.
3. Upon full payment of the overall purchase price as aforesaid, VENDOR without necessity of demand shall immediately sign,
execute, acknowledged (sic) and deliver the corresponding deed of absolute sale in favor of the VENDEE free from all liens and
encumbrances and all Real Estate taxes are all paid and updated.
It is hereby agreed, covenanted and stipulated by and between the parties hereto that if after 60 days from the date of the signing
of this contract the VENDOR shall not be able to remove the squatters from the property being purchased, the downpayment
made by the buyer shall be returned/reimbursed by the VENDOR to the VENDEE.
That in the event that the VENDEE shall not be able to pay the VENDOR the balance of the purchase price of ONE MILLION
FIVE HUNDRED ELEVEN THOUSAND SIX HUNDRED PESOS (P1,511,600.00) ONLY after 45 days from written notification to
the VENDEE of the removal of the squatters from the property being purchased, the FIFTY THOUSAND PESOS (P50,000.00)
previously paid as downpayment shall be forfeited in favor of the VENDOR.
Expenses for the registration such as registration fees, documentary stamp, transfer fee, assurances and such other fees and
expenses as may be necessary to transfer the title to the name of the VENDEE shall be for the account of the VENDEE while
capital gains tax shall be paid by the VENDOR.
IN WITNESS WHEREOF, the parties hereunto signed those (sic) presents in the City of Makati MM, Philippines on this 9th day of
June, 1988.
(Sgd.) (Sgd.)
VIRGILIO R. ROMERO ENRIQUETA CHUA VDA.
DE ONGSIONG
Vendee Vendor
SIGNED IN THE PRESENCE OF:
(Sgd.) (Sgd.)
Rowena C. Ongsiong Jack M. Cruz 1
Alfonso Flores, in behalf of private respondent, forthwith received and acknowledged a check for P50,000.00 2 from petitioner. 3
Pursuant to the agreement, private respondent filed a complaint for ejectment (Civil Case No. 7579) against Melchor Musa and 29
other squatter families with the Metropolitan Trial Court of Paraaque. A few months later, or on 21 February 1989, judgment was
rendered ordering the defendants to vacate the premises. The decision was handed down beyond the 60-day period (expiring 09
August 1988) stipulated in the contract. The writ of execution of the judgment was issued, still later, on 30 March 1989.
In a letter, dated 07 April 1989, private respondent sought to return the P50,000.00 she received from petitioner since, she said,
she could not "get rid of the squatters" on the lot. Atty. Sergio A.F. Apostol, counsel for petitioner, in his reply of 17 April 1989,
refused the tender and stated:.
Our client believes that with the exercise of reasonable diligence considering the favorable decision rendered by the Court and the
writ of execution issued pursuant thereto, it is now possible to eject the squatters from the premises of the subject property, for
which reason, he proposes that he shall take it upon himself to eject the squatters, provided, that expenses which shall be
incurred by reason thereof shall be chargeable to the purchase price of the land. 4
Meanwhile, the Presidential Commission for the Urban Poor ("PCUD"), through its Regional Director for Luzon, Farley O. Viloria,
asked the Metropolitan Trial Court of Paraaque for a grace period of 45 days from 21 April 1989 within which to relocate and
transfer the squatter families. Acting favorably on the request, the court suspended the enforcement of the writ of execution
accordingly.
On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of the 45-day grace period and his client's willingness
to "underwrite the expenses for the execution of the judgment and ejectment of the occupants." 5
In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private respondent, advised Atty. Apostol that the Deed of
Conditional Sale had been rendered null and void by virtue of his client's failure to evict the squatters from the premises within the
agreed 60-day period. He added that private respondent had "decided to retain the property." 6
On 23 June 1989, Atty. Apostol wrote back to explain:

The contract of sale between the parties was perfected from the very moment that there was a meeting of the minds of the parties
upon the subject lot and the price in the amount of P1,561,600.00. Moreover, the contract had already been partially fulfilled and
executed upon receipt of the downpayment of your client. Ms. Ongsiong is precluded from rejecting its binding effects relying upon
her inability to eject the squatters from the premises of subject property during the agreed period. Suffice it to state that, the
provision of the Deed of Conditional Sale do not grant her the option or prerogative to rescind the contract and to retain the
property should she fail to comply with the obligation she has assumed under the contract. In fact, a perusal of the terms and
conditions of the contract clearly shows that the right to rescind the contract and to demand the return/reimbursement of the
downpayment is granted to our client for his protection.
Instead, however, of availing himself of the power to rescind the contract and demand the return, reimbursement of the
downpayment, our client had opted to take it upon himself to eject the squatters from the premises. Precisely, we refer you to our
letters addressed to your client dated April 17, 1989 and June 8, 1989.
Moreover, it is basic under the law on contracts that the power to rescind is given to the injured party. Undoubtedly, under the
circumstances, our client is the injured party.
Furthermore, your client has not complied with her obligation under their contract in good faith. It is undeniable that Ms. Ongsiong
deliberately refused to exert efforts to eject the squatters from the premises of the subject property and her decision to retain the
property was brought about by the sudden increase in the value of realties in the surrounding areas.
Please consider this letter as a tender of payment to your client and a demand to execute the absolute Deed of Sale. 7
A few days later (or on 27 June 1989), private respondent, prompted by petitioner's continued refusal to accept the return of the
P50,000.00 advance payment, filed with the Regional Trial Court of Makati, Branch 133, Civil Case No. 89-4394 for rescission of
the deed of "conditional" sale, plus damages, and for the consignation of P50,000.00 cash.
Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued an alias writ of execution in Civil Case No. 7579 on motion of
private respondent but the squatters apparently still stayed on.
Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial Court of Makati 8 rendered decision holding that private
respondent had no right to rescind the contract since it was she who "violated her obligation to eject the squatters from the subject
property" and that petitioner, being the injured party, was the party who could, under Article 1191 of the Civil Code, rescind the
agreement. The court ruled that the provisions in the contract relating to (a) the return/reimbursement of the P50,000.00 if the
vendor were to fail in her obligation to free the property from squatters within the stipulated period or (b), upon the other hand, the
sum's forfeiture by the vendor if the vendee were to fail in paying the agreed purchase price, amounted to "penalty clauses". The
court added:
This Court is not convinced of the ground relied upon by the plaintiff in seeking the rescission, namely: (1) he (sic) is afraid of the
squatters; and (2) she has spent so much to eject them from the premises (p. 6, tsn, ses. Jan. 3, 1990). Militating against her
profession of good faith is plaintiffs conduct which is not in accord with the rules of fair play and justice. Notably, she caused the
issuance of an alias writ of execution on August 25, 1989 (Exh. 6) in the ejectment suit which was almost two months after she
filed the complaint before this Court on June 27, 1989. If she were really afraid of the squatters, then she should not have pursued
the issuance of an alias writ of execution. Besides, she did not even report to the police the alleged phone threats from the
squatters. To the mind of the Court, the so-called squatter factor is simply factuitous (sic). 9
The lower court, accordingly, dismissed the complaint and ordered, instead, private respondent to eject or cause the ejectment of
the squatters from the property and to execute the absolute deed of conveyance upon payment of the full purchase price by
petitioner.
Private respondent appealed to the Court of Appeals. On 29 May 1992, the appellate court rendered its decision. 10 It opined that
the contract entered into by the parties was subject to a resolutory condition, i.e., the ejectment of the squatters from the land, the
non-occurrence of which resulted in the failure of the object of the contract; that private respondent substantially complied with her
obligation to evict the squatters; that it was petitioner who was not ready to pay the purchase price and fulfill his part of the
contract, and that the provision requiring a mandatory return/reimbursement of the P50,000.00 in case private respondent would
fail to eject the squatters within the 60-day period was not a penal clause. Thus, it concluded.
WHEREFORE, the decision appealed from is REVERSED and SET ASIDE, and a new one entered declaring the contract of
conditional sale dated June 9, 1988 cancelled and ordering the defendant-appellee to accept the return of the downpayment in the
amount of P50,000.00 which was deposited in the court below. No pronouncement as to costs. 11
Failing to obtain a reconsideration, petitioner filed this petition for review on certiorari raising issues that, in fine, center on the
nature of the contract adverted to and the P50,000.00 remittance made by petitioner.
A perfected contract of sale may either be absolute or conditional 12 depending on whether the agreement is devoid of, or subject
to, any condition imposed on the passing of title of the thing to be conveyed or on the obligation of a party thereto. When
ownership is retained until the fulfillment of a positive condition the breach of the condition will simply prevent the duty to convey
title from acquiring an obligatory force. If the condition is imposed on an obligation of a party which is not complied with, the other
party may either refuse to proceed or waive said condition (Art. 1545, Civil Code). Where, of course, the condition is imposed
upon the perfection of the contract itself, the failure of such condition would prevent the juridical relation itself from coming into
existence. 13
In determining the real character of the contract, the title given to it by the parties is not as much significant as its substance. For
example, a deed of sale, although denominated as a deed of conditional sale, may be treated as absolute in nature, if title to the
property sold is not reserved in the vendor or if the vendor is not granted the right to unilaterally rescind the contract predicated
on the fulfillment or non-fulfillment, as the case may be, of the prescribed condition. 14
The term "condition" in the context of a perfected contract of sale pertains, in reality, to the compliance by one party of an
undertaking the fulfillment of which would beckon, in turn, the demandability of the reciprocal prestation of the other party. The
reciprocal obligations referred to would normally be, in the case of vendee, the payment of the agreed purchase price and, in the
case of the vendor, the fulfillment of certain express warranties (which, in the case at bench is the timely eviction of the squatters

on the property).
It would be futile to challenge the agreement here in question as not being a duly perfected contract. A sale is at once perfected
when a person (the seller) obligates himself, for a price certain, to deliver and to transfer ownership of a specified thing or right to
another (the buyer) over which the latter agrees. 15
The object of the sale, in the case before us, was specifically identified to be a 1,952-square meter lot in San Dionisio, Paraaque,
Rizal, covered by Transfer Certificate of Title No. 361402 of the Registry of Deeds for Pasig and therein technically described. The
purchase price was fixed at P1,561,600.00, of which P50,000.00 was to be paid upon the execution of the document of sale and
the balance of P1,511,600.00 payable "45 days after the removal of all squatters from the above described property."
From the moment the contract is perfected, the parties are bound not only to the fulfillment of what has been expressly stipulated
but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. Under the
agreement, private respondent is obligated to evict the squatters on the property. The ejectment of the squatters is a condition the
operative act of which sets into motion the period of compliance by petitioner of his own obligation, i.e., to pay the balance of the
purchase price. Private respondent's failure "to remove the squatters from the property" within the stipulated period gives
petitioner the right to either refuse to proceed with the agreement or waive that condition in consonance with Article 1545 of the
Civil Code. 16 This option clearly belongs to petitioner and not to private respondent.
We share the opinion of the appellate court that the undertaking required of private respondent does not constitute a "potestative
condition dependent solely on his will" that might, otherwise, be void in accordance with Article 1182 of the Civil Code 17 but a
"mixed" condition "dependent not on the will of the vendor alone but also of third persons like the squatters and government
agencies and personnel concerned." 18 We must hasten to add, however, that where the so-called "potestative condition" is
imposed not on the birth of the obligation but on its fulfillment, only the obligation is avoided, leaving unaffected the obligation
itself. 19
In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows the obligee to choose between proceeding
with the agreement or waiving the performance of the condition. It is this provision which is the pertinent rule in the case at bench.
Here, evidently, petitioner has waived the performance of the condition imposed on private respondent to free the property from
squatters. 20
In any case, private respondent's action for rescission is not warranted. She is not the injured party. 21 The right of resolution of a
party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party that violates the
reciprocity between them. 22 It is private respondent who has failed in her obligation under the contract. Petitioner did not breach
the agreement. He has agreed, in fact, to shoulder the expenses of the execution of the judgment in the ejectment case and to
make arrangements with the sheriff to effect such execution. In his letter of 23 June 1989, counsel for petitioner has tendered
payment and demanded forthwith the execution of the deed of absolute sale. Parenthetically, this offer to pay, having been made
prior to the demand for rescission, assuming for the sake of argument that such a demand is proper under Article 1592 23 of the
Civil Code, would likewise suffice to defeat private respondent's prerogative to rescind thereunder.
There is no need to still belabor the question of whether the P50,000.00 advance payment is reimbursable to petitioner or
forfeitable by private respondent, since, on the basis of our foregoing conclusions, the matter has ceased to be an issue. Suffice it
to say that petitioner having opted to proceed with the sale, neither may petitioner demand its reimbursement from private
respondent nor may private respondent subject it to forfeiture.
WHEREFORE, the questioned decision of the Court of Appeals is hereby REVERSED AND SET ASIDE, and another is entered
ordering petitioner to pay private respondent the balance of the purchase price and the latter to execute the deed of absolute sale
in favor of petitioner. No costs.
SO ORDERED.

G.R. No. 112329

January 28, 2000

VIRGINIA A. PEREZ, petitioner,

vs.
COURT OF APPEALS and BF LIFEMAN INSURANCE CORPORATION, respondents.
YNARES-SANTIAGO, J.:
A contract of insurance, like all other contracts, must be assented to by both parties, either in person or through their agents and
so long as an application for insurance has not been either accepted or rejected, it is merely a proposal or an offer to make a
contract.
Petitioner Virginia A. Perez assails the decision of respondent Court of Appeals dated July 9, 1993 in CA-G.R. CV 35529 entitled,
"BF Lifeman Insurance Corporations; Plaintiff-Appellant versus Virginia A. Perez. Defendant-Appellee," which declared Insurance
Policy 056300 for P50,000.00 issued by private respondent corporation in favor of the deceased Primitivo B. Perez, null and void
and rescinded, thereby reversing the decision rendered by the Regional Trial Court of Manila, Branch XVI.
The facts of the case as summarized by respondent Court of Appeals are not in dispute.
Primitivo B. Perez had been insured with the BF Lifeman Insurance Corporation since 1980 for P20,000.00. Sometime in October
1987, an agent of the insurance corporation, Rodolfo Lalog, visited Perez in Guinayangan, Quezon and convinced him to apply for
additional insurance coverage of P50,000.00, to avail of the ongoing promotional discount of P400.00 if the premium were paid
annually.1wphi1.nt
On October 20, 1987, Primitivo B. Perez accomplished an application form for the additional insurance coverage of P50,000.00.
On the same day, petitioner Virginia A. Perez, Primitivo's wife, paid P2,075.00 to Lalog. The receipt issued by Lalog indicated the
amount received was a "deposit."1 Unfortunately, Lalog lost the application form accomplished by Perez and so on October 28,

1987, he asked the latter to fill up another application form.2 On November 1, 1987, Perez was made to undergo the required
medical examination, which he passed.3
Pursuant to the established procedure of the company, Lalog forwarded the application for additional insurance of Perez, together
with all its supporting papers, to the office of BF Lifeman Insurance Corporation at Gumaca, Quezon which office was supposed to
forward the papers to the Manila office.
On November 25, 1987, Perez died in an accident. He was riding in a banca which capsized during a storm. At the time of his
death, his application papers for the additional insurance of P50,000.00 were still with the Gumaca office. Lalog testified that when
he went to follow up the papers, he found them still in the Gumaca office and so he personally brought the papers to the Manila
office of BF Lifeman Insurance Corporation. It was only on November 27, 1987 that said papers were received in Manila.
Without knowing that Perez died on November 25, 1987, BF Lifeman Insurance Corporation approved the application and issued
the corresponding policy for the P50,000.00 on December 2, 1987.4
Petitioner Virginia Perez went to Manila to claim the benefits under the insurance policies of the deceased. She was paid
P40,000.00 under the first insurance policy for P20,000.00 (double indemnity in case of accident) but the insurance company
refused to pay the claim under the additional policy coverage of P50,000.00, the proceeds of which amount to P150,000.00 in
view of a triple indemnity rider on the insurance policy. In its letter' of January 29, 1988 to Virginia A. Perez, the insurance
company maintained that the insurance for P50,000.00 had not been perfected at the time of the death of Primitivo Perez.
Consequently, the insurance company refunded the amount of P2,075.00 which Virginia Perez had paid.
On September 21, 1990, private respondent BF Lifeman Insurance Corporation filed a complaint against Virginia A. Perez seeking
the rescission and declaration of nullity of the insurance contract in question.
Petitioner Virginia A. Perez, on the other hand, averred that the deceased had fulfilled all his prestations under the contract and all
the elements of a valid contract are present. She then filed a counterclaim against private respondent for the collection of
P150,000.00 as actual damages, P100,000.00 as exemplary damages, P30,000.00 as attorney's fees and P10,000.00 as
expenses for litigation.
On October 25, 1991, the trial court rendered a decision in favor of petitioner, the dispositive portion of which reads as follows:
WHEREFORE PREMISES CONSIDERED, judgment is hereby rendered in favor of defendant Virginia A. Perez, ordering the
plaintiff BF Lifeman Insurance Corporation to pay to her the face value of BF Lifeman Insurance Policy No. 056300, plus double
indemnity under the SARDI or in the total amount of P150,000.00 (any refund made and/or premium deficiency to be deducted
therefrom).
SO ORDERED.5
The trial court, in ruling for petitioner, held that the premium for the additional insurance of P50,000.00 had been fully paid and
even if the sum of P2,075.00 were to be considered merely as partial payment, the same does not affect the validity of the policy.
The trial court further stated that the deceased had fully complied with the requirements of the insurance company. He paid,
signed the application form and passed the medical examination. He should not be made to suffer the subsequent delay in the
transmittal of his application form to private respondent's head office since these were no longer within his control.
The Court of Appeals, however, reversed the decision of the trial court saying that the insurance contract for P50,000.00 could not
have been perfected since at the time that the policy was issued, Primitivo was already dead.6 Citing the provision in the
application form signed by Primitivo which states that:
. . . there shall be no contract of insurance unless and until a policy is issued on this application and that the policy shall not take
effect until the first premium has been paid and the policy has been delivered to and accepted by me/us in person while I/we,
am/are in good health
the Court of Appeals held that the contract of insurance had to be assented to by both parties and so long as the application for
insurance has not been either accepted or rejected, it is merely an offer or proposal to make a contract.
Petitioner's motion for reconsideration having been denied by respondent court, the instant petition for certiorari was filed on the
ground that there was a consummated contract of insurance between the deceased and BF Lifeman Insurance Corporation and
that the condition that the policy issued by the corporation be delivered and received by the applicant in good health, is
potestative, being dependent upon the will of the insurance company, and is therefore null and void.
The petition is bereft of merit.
Insurance is a contract whereby, for a stipulated consideration, one party undertakes to compensate the other for loss on a
specified subject by specified perils.7 A contract, on the other hand, is a meeting of the minds between two persons whereby one
binds himself, with respect to the other to give something or to render some service.8 Under Article 1318 of the Civil Code, there is
no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
Consent must be manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute
the contract. The offer must be certain and the acceptance absolute.
When Primitivo filed an application for insurance, paid P2,075.00 and submitted the results of his medical examination, his
application was subject to the acceptance of private respondent BF Lifeman Insurance Corporation. The perfection of the contract
of insurance between the deceased and respondent corporation was further conditioned upon compliance with the following
requisites stated in the application form:
there shall be no contract of insurance unless and until a policy is issued on this application and that the said policy shall not take

effect until the premium has been paid and the policy delivered to and accepted by me/us in person while I/We, am/are in good
health.9
The assent of private respondent BF Lifeman Insurance Corporation therefore was not given when it merely received the
application form and all the requisite supporting papers of the applicant. Its assent was given when it issues a corresponding
policy to the applicant. Under the abovementioned provision, it is only when the applicant pays the premium and receives and
accepts the policy while he is in good health that the contract of insurance is deemed to have been perfected.
It is not disputed, however, that when Primitivo died on November 25, 1987, his application papers for additional insurance
coverage were still with the branch office of respondent corporation in Gumaca and it was only two days later, or on November 27,
1987, when Lalog personally delivered the application papers to the head office in Manila. Consequently, there was absolutely no
way the acceptance of the application could have been communicated to the applicant for the latter to accept inasmuch as the
applicant at the time was already dead. In the case of Enriquez vs. Sun Life Assurance Co. of Canada,10 recovery on the life
insurance of the deceased was disallowed on the ground that the contract for annuity was not perfected since it had not been
proved satisfactorily that the acceptance of the application ever reached the knowledge of the applicant.
Petitioner insists that the condition imposed by respondent corporation that a policy must have been delivered to and accepted by
the proposed insured in good health is potestative being dependent upon the will of the corporation and is therefore null and void.
We do not agree.
A potestative condition depends upon the exclusive will of one of the parties. For this reason, it is considered void. Article 1182 of
the New Civil Code states: When the fulfillment of the condition depends upon the sole will the debtor, the conditional obligation
shall be void.
In the case at bar, the following conditions were imposed by the respondent company for the perfection of the contract of
insurance:
(a) a policy must have been issued;
(b) the premiums paid; and
(c) the policy must have been delivered to and accepted by the applicant while he is in good health.
The condition imposed by the corporation that the policy must have been delivered to and accepted by the applicant while he is in
good health can hardly be considered as a potestative or facultative condition. On the contrary, the health of the applicant at the
time of the delivery of the policy is beyond the control or will of the insurance company. Rather, the condition is a suspensive one
whereby the acquisition of rights depends upon the happening of an event which constitutes the condition. In this case, the
suspensive condition was the policy must have been delivered and accepted by the applicant while he is in good health. There
was non-fulfillment of the condition, however, inasmuch as the applicant was already dead at the time the policy was issued.
Hence, the non-fulfillment of the condition resulted in the non-perfection of the contract.
As stated above, a contract of insurance, like other contracts, must be assented to by both parties either in person or by their
agents. So long as an application for insurance has not been either accepted or rejected, it is merely an offer or proposal to make
a contract. The contract, to be binding from the date of application, must have been a completed contract, one that leaves nothing
to be done, nothing to be completed, nothing to be passed upon, or determined, before it shall take effect. There can be no
contract of insurance unless the minds of the parties have met in agreement.11
Prescinding from the foregoing, respondent corporation cannot be held liable for gross negligence. It should be noted that an
application is a mere offer which requires the overt act of the insurer for it to ripen into a contract. Delay in acting on the
application does not constitute acceptance even though the insured has forwarded his first premium with his application. The
corporation may not be penalized for the delay in the processing of the application papers. Moreover, while it may have taken
some time for the application papers to reach the main office, in the case at bar, the same was acted upon less than a week after
it was received. The processing of applications by respondent corporation normally takes two to three weeks, the longest being a
month.12 In this case, however, the requisite medical examination was undergone by the deceased on November 1, 1987; the
application papers were forwarded to the head office on November 27, 1987; and the policy was issued on December 2, 1987.
Under these circumstances, we hold that the delay could not be deemed unreasonable so as to constitute gross negligence.
A final note. It has not escaped our notice that the Court of Appeals declared Insurance Policy 056300 for P50,000.00 null and
void and rescinded. The Court of Appeals corrected this in its Resolution of the motion for reconsideration filed by petitioner, thus:
Anent the appearance of the word "rescinded" in the dispositive portion of the decision, to which defendant-appellee attaches
undue significance and makes capital of, it is clear that the use of the words "and rescinded" is, as it is hereby declared, a
superfluity. It is apparent from the context of the decision that the insurance policy in question was found null and void, and did not
have to be "rescinded".13
True, rescission presupposes the existence of a valid contract. A contract which is null and void is no contract at all and hence
could not be the subject of rescission.
WHEREFORE, the decision rendered by the Court of Appeals in CA-G.R. CV No. 35529 is AFFIRMED insofar as it declared
Insurance Policy No. 056300 for P50,000.00 issued by BF Lifeman Insurance Corporation of no force and effect and hence null
and void. No costs.1wphi1.nt
SO ORDERED.

G.R. No. 146839

March 23, 2011

ROLANDO T. CATUNGAL, JOSE T. CATUNGAL, JR., CAROLYN T. CATUNGAL and ERLINDA CATUNGAL-WESSEL,
Petitioners,
vs.

ANGEL S. RODRIGUEZ, Respondent.

DECISION
LEONARDO-DE CASTRO, J.:
Before the Court is a Petition for Review on Certiorari, assailing the following issuances of the Court of Appeals in CA-G.R. CV
No. 40627 consolidated with CA-G.R. SP No. 27565: (a) the August 8, 2000 Decision,1 which affirmed the Decision2 dated May
30, 1992 of the Regional Trial Court (RTC), Branch 27 of Lapu-lapu City, Cebu in Civil Case No. 2365-L, and (b) the January 30,
2001 Resolution,3 denying herein petitioners motion for reconsideration of the August 8, 2000 Decision.
The relevant factual and procedural antecedents of this case are as follows:
This controversy arose from a Complaint for Damages and Injunction with Preliminary Injunction/Restraining Order4 filed on
December 10, 1990 by herein respondent Angel S. Rodriguez (Rodriguez), with the RTC, Branch 27, Lapu-lapu City, Cebu,
docketed as Civil Case No. 2365-L against the spouses Agapita and Jose Catungal (the spouses Catungal), the parents of
petitioners.
In the said Complaint, it was alleged that Agapita T. Catungal (Agapita) owned a parcel of land (Lot 10963) with an area of 65,246
square meters, covered by Original Certificate of Title (OCT) No. 1055 in her name situated in the Barrio of Talamban, Cebu City.
The said property was allegedly the exclusive paraphernal property of Agapita.
On April 23, 1990, Agapita, with the consent of her husband Jose, entered into a Contract to Sell6 with respondent Rodriguez.
Subsequently, the Contract to Sell was purportedly "upgraded" into a Conditional Deed of Sale7 dated July 26, 1990 between the
same parties. Both the Contract to Sell and the Conditional Deed of Sale were annotated on the title.
The provisions of the Conditional Deed of Sale pertinent to the present dispute are quoted below:
1. The VENDOR for and in consideration of the sum of TWENTY[-]FIVE MILLION PESOS (P25,000,000.00) payable as follows:
a. FIVE HUNDRED THOUSAND PESOS (P500,000.00) downpayment upon the signing of this agreement, receipt of which sum
is hereby acknowledged in full from the VENDEE.
b. The balance of TWENTY[-]FOUR MILLION FIVE HUNDRED THOUSAND PESOS (P24,500,000.00) shall be payable in five
separate checks, made to the order of JOSE Ch. CATUNGAL, the first check shall be for FOUR MILLION FIVE HUNDRED
THOUSAND PESOS (P4,500,000.00) and the remaining balance to be paid in four checks in the amounts of FIVE MILLION
PESOS (P5,000,000.00) each after the VENDEE have (sic) successfully negotiated, secured and provided a Road Right of Way
consisting of 12 meters in width cutting across Lot 10884 up to the national road, either by widening the existing Road Right of
Way or by securing a new Road Right of Way of 12 meters in width. If however said Road Right of Way could not be negotiated,
the VENDEE shall give notice to the VENDOR for them to reassess and solve the problem by taking other options and should the
situation ultimately prove futile, he shall take steps to rescind or cancel the herein Conditional Deed of Sale.
c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility of the VENDEE to secure and any or
all cost relative to the acquisition thereof shall be borne solely by the VENDEE. He shall, however, be accorded with enough time
necessary for the success of his endeavor, granting him a free hand in negotiating for the passage.
BY THESE PRESENTS, the VENDOR do hereby agree to sell by way of herein CONDITIONAL DEED OF SALE to VENDEE, his
heirs, successors and assigns, the real property described in the Original Certificate of Title No. 105 x x x.
xxxx
5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his option to rescind the herein
Conditional Deed of Sale, the VENDEE shall notify the VENDOR by way of a written notice relinquishing his rights over the
property. The VENDEE shall then be reimbursed by the VENDOR the sum of FIVE HUNDRED THOUSAND PESOS
(P500,000.00) representing the downpayment, interest free, payable but contingent upon the event that the VENDOR shall have
been able to sell the property to another party.8
In accordance with the Conditional Deed of Sale, Rodriguez purportedly secured the necessary surveys and plans and through his
efforts, the property was reclassified from agricultural land into residential land which he claimed substantially increased the
propertys value. He likewise alleged that he actively negotiated for the road right of way as stipulated in the contract.9
Rodriguez further claimed that on August 31, 1990 the spouses Catungal requested an advance of P5,000,000.00 on the
purchase price for personal reasons. Rodriquez allegedly refused on the ground that the amount was substantial and was not due
under the terms of their agreement. Shortly after his refusal to pay the advance, he purportedly learned that the Catungals were
offering the property for sale to third parties.10
Thereafter, Rodriguez received letters dated October 22, 1990,11 October 24, 199012 and October 29, 1990,13 all signed by Jose
Catungal who was a lawyer, essentially demanding that the former make up his mind about buying the land or exercising his
"option" to buy because the spouses Catungal allegedly received other offers and they needed money to pay for personal
obligations and for investing in other properties/business ventures. Should Rodriguez fail to exercise his option to buy the land, the
Catungals warned that they would consider the contract cancelled and that they were free to look for other buyers.
In a letter dated November 4, 1990,14 Rodriguez registered his objections to what he termed the Catungals unwarranted
demands in view of the terms of the Conditional Deed of Sale which allowed him sufficient time to negotiate a road right of way
and granted him, the vendee, the exclusive right to rescind the contract. Still, on November 15, 1990, Rodriguez purportedly
received a letter dated November 9, 199015 from Atty. Catungal, stating that the contract had been cancelled and terminated.
Contending that the Catungals unilateral rescission of the Conditional Deed of Sale was unjustified, arbitrary and unwarranted,
Rodriquez prayed in his Complaint, that:
1. Upon the filing of this complaint, a restraining order be issued enjoining defendants [the spouses Catungal], their employees,
agents, representatives or other persons acting in their behalf from offering the property subject of this case for sale to third
persons; from entertaining offers or proposals by third persons to purchase the said property; and, in general, from performing

acts in furtherance or implementation of defendants rescission of their Conditional Deed of Sale with plaintiff [Rodriguez].
2. After hearing, a writ of preliminary injunction be issued upon such reasonable bond as may be fixed by the court enjoining
defendants and other persons acting in their behalf from performing any of the acts mentioned in the next preceding paragraph.
3. After trial, a Decision be rendered:
a) Making the injunction permanent;
b) Condemning defendants to pay to plaintiff, jointly and solidarily:
Actual damages in the amount of P400,000.00 for their unlawful rescission of the Agreement and their performance of acts in
violation or disregard of the said Agreement;
Moral damages in the amount of P200,000.00;
Exemplary damages in the amount of P200,000.00; Expenses of litigation and attorneys fees in the amount of P100,000.00; and
Costs of suit.16
On December 12, 1990, the trial court issued a temporary restraining order and set the application for a writ of preliminary
injunction for hearing on December 21, 1990 with a directive to the spouses Catungal to show cause within five days from notice
why preliminary injunction should not be granted. The trial court likewise ordered that summons be served on them.17
Thereafter, the spouses Catungal filed their opposition18 to the issuance of a writ of preliminary injunction and later filed a motion
to dismiss19 on the ground of improper venue. According to the Catungals, the subject property was located in Cebu City and
thus, the complaint should have been filed in Cebu City, not Lapu-lapu City. Rodriguez opposed the motion to dismiss on the
ground that his action was a personal action as its subject was breach of a contract, the Conditional Deed of Sale, and not title to,
or possession of real property.20
In an Order dated January 17, 1991,21 the trial court denied the motion to dismiss and ruled that the complaint involved a
personal action, being merely for damages with a prayer for injunction.
Subsequently, on January 30, 1991, the trial court ordered the issuance of a writ of preliminary injunction upon posting by
Rodriguez of a bond in the amount of P100,000.00 to answer for damages that the defendants may sustain by reason of the
injunction.
On February 1, 1991, the spouses Catungal filed their Answer with Counterclaim22 alleging that they had the right to rescind the
contract in view of (1) Rodriguezs failure to negotiate the road right of way despite the lapse of several months since the signing
of the contract, and (2) his refusal to pay the additional amount of P5,000,000.00 asked by the Catungals, which to them indicated
his lack of funds to purchase the property. The Catungals likewise contended that Rodriguez did not have an exclusive right to
rescind the contract and that the contract, being reciprocal, meant both parties had the right to rescind.23 The spouses Catungal
further claimed that it was Rodriguez who was in breach of their agreement and guilty of bad faith which justified their rescission of
the contract.24 By way of counterclaim, the spouses Catungal prayed for actual and consequential damages in the form of
unearned interests from the balance (of the purchase price in the amount) of P24,500,000.00, moral and exemplary damages in
the amount of P2,000,000.00, attorneys fees in the amount of P200,000.00 and costs of suits and litigation expenses in the
amount of P10,000.00.25 The spouses Catungal prayed for the dismissal of the complaint and the grant of their counterclaim.
The Catungals amended their Answer twice,26 retaining their basic allegations but amplifying their charges of contractual breach
and bad faith on the part of Rodriguez and adding the argument that in view of Article 1191 of the Civil Code, the power to rescind
reciprocal obligations is granted by the law itself to both parties and does not need an express stipulation to grant the same to the
injured party. In the Second Amended Answer with Counterclaim, the spouses Catungal added a prayer for the trial court to order
the Register of Deeds to cancel the annotations of the two contracts at the back of their OCT.27
On October 24, 1991, Rodriguez filed an Amended Complaint,28 adding allegations to the effect that the Catungals were guilty of
several misrepresentations which purportedly induced Rodriguez to buy the property at the price of P25,000,000.00. Among
others, it was alleged that the spouses Catungal misrepresented that their Lot 10963 includes a flat portion of land which later
turned out to be a separate lot (Lot 10986) owned by Teodora Tudtud who sold the same to one Antonio Pablo. The Catungals
also allegedly misrepresented that the road right of way will only traverse two lots owned by Anatolia Tudtud and her daughter
Sally who were their relatives and who had already agreed to sell a portion of the said lots for the road right of way at a price of
P550.00 per square meter. However, because of the Catungals acts of offering the property to other buyers who offered to buy
the road lots for P2,500.00 per square meter, the adjacent lot owners were no longer willing to sell the road lots to Rodriguez at
P550.00 per square meter but were asking for a price of P3,500.00 per square meter. In other words, instead of assisting
Rodriguez in his efforts to negotiate the road right of way, the spouses Catungal allegedly intentionally and maliciously defeated
Rodriguezs negotiations for a road right of way in order to justify rescission of the said contract and enable them to offer the
property to other buyers.
Despite requesting the trial court for an extension of time to file an amended Answer,29 the Catungals did not file an amended
Answer and instead filed an Urgent Motion to Dismiss30 again invoking the ground of improper venue. In the meantime, for failure
to file an amended Answer within the period allowed, the trial court set the case for pre-trial on December 20, 1991.
During the pre-trial held on December 20, 1991, the trial court denied in open court the Catungals Urgent Motion to Dismiss for
violation of the rules and for being repetitious and having been previously denied.31 However, Atty. Catungal refused to enter into
pre-trial which prompted the trial court to declare the defendants in default and to set the presentation of the plaintiffs evidence on
February 14, 1992.32
On December 23, 1991, the Catungals filed a motion for reconsideration33 of the December 20, 1991 Order denying their Urgent
Motion to Dismiss but the trial court denied reconsideration in an Order dated February 3, 1992.34 Undeterred, the Catungals
subsequently filed a Motion to Lift and to Set Aside Order of Default35 but it was likewise denied for being in violation of the rules
and for being not meritorious.36 On February 28, 1992, the Catungals filed a Petition for Certiorari and Prohibition37 with the
Court of Appeals, questioning the denial of their motion to dismiss and the order of default. This was docketed as CA-G.R. SP No.
27565.

Meanwhile, Rodriguez proceeded to present his evidence before the trial court.
In a Decision dated May 30, 1992, the trial court ruled in favor of Rodriguez, finding that: (a) under the contract it was complainant
(Rodriguez) that had the option to rescind the sale; (b) Rodriguezs obligation to pay the balance of the purchase price arises only
upon successful negotiation of the road right of way; (c) he proved his diligent efforts to negotiate the road right of way; (d) the
spouses Catungal were guilty of misrepresentation which defeated Rodriguezs efforts to acquire the road right of way; and (e) the
Catungals rescission of the contract had no basis and was in bad faith. Thus, the trial court made the injunction permanent,
ordered the Catungals to reduce the purchase price by the amount of acquisition of Lot 10963 which they misrepresented was
part of the property sold but was in fact owned by a third party and ordered them to pay P100,000.00 as damages, P30,000.00 as
attorneys fees and costs.
The Catungals appealed the decision to the Court of Appeals, asserting the commission of the following errors by the trial court in
their appellants brief38 dated February 9, 1994:
I
THE COURT A QUO ERRED IN NOT DISMISSING OF (SIC) THE CASE ON THE GROUNDS OF IMPROPER VENUE AND
LACK OF JURISDICTION.
II
THE COURT A QUO ERRED IN CONSIDERING THE CASE AS A PERSONAL AND NOT A REAL ACTION.
III
GRANTING WITHOUT ADMITTING THAT VENUE WAS PROPERLY LAID AND THE CASE IS A PERSONAL ACTION, THE
COURT A QUO ERRED IN DECLARING THE DEFENDANTS IN DEFAULT DURING THE PRE-TRIAL WHEN AT THAT TIME
THE DEFENDANTS HAD ALREADY FILED THEIR ANSWER TO THE COMPLAINT.
IV
THE COURT A QUO ERRED IN CONSIDERING THE DEFENDANTS AS HAVING LOST THEIR LEGAL STANDING IN COURT
WHEN AT MOST THEY COULD ONLY BE CONSIDERED AS IN DEFAULT AND STILL ENTITLED TO NOTICES OF ALL
FURTHER PROCEEDINGS ESPECIALLY AFTER THEY HAD FILED THE MOTION TO LIFT THE ORDER OF DEFAULT.
V
THE COURT A QUO ERRED IN ISSUING THE WRIT [OF] PRELIMINARY INJUNCTION RESTRAINING THE EXERCISE OF
ACTS OF OWNERSHIP AND OTHER RIGHTS OVER REAL PROPERTY OUTSIDE OF THE COURTS TERRITORIAL
JURISDICTION AND INCLUDING PERSONS WHO WERE NOT BROUGHT UNDER ITS JURISDICTION, THUS THE NULLITY
OF THE WRIT.
VI
THE COURT A QUO ERRED IN NOT RESTRAINING ITSELF MOTU PROP[R]IO FROM CONTINUING WITH THE
PROCEEDINGS IN THE CASE AND IN RENDERING DECISION THEREIN IF ONLY FOR REASON OF COURTESY AND
FAIRNESS BEING MANDATED AS DISPENSER OF FAIR AND EQUAL JUSTICE TO ALL AND SUNDRY WITHOUT FEAR OR
FAVOR IT HAVING BEEN SERVED EARLIER WITH A COPY OF THE PETITION FOR CERTIORARI QUESTIONING ITS
VENUE AND JURISDICTION IN CA-G.R. NO. SP 27565 IN FACT NOTICES FOR THE FILING OF COMMENT THERETO HAD
ALREADY BEEN SENT OUT BY THE HONORABLE COURT OF APPEALS, SECOND DIVISION, AND THE COURT A QUO
WAS FURNISHED WITH COPY OF SAID NOTICE.
VII
THE COURT A QUO ERRED IN DECIDING THE CASE IN FAVOR OF THE PLAINTIFF AND AGAINST THE DEFENDANTS ON
THE BASIS OF EVIDENCE WHICH ARE IMAGINARY, FABRICATED, AND DEVOID OF TRUTH, TO BE STATED IN DETAIL IN
THE DISCUSSION OF THIS PARTICULAR ERROR, AND, THEREFORE, THE DECISION IS REVERSIBLE.39
On August 31, 1995, after being granted several extensions, Rodriguez filed his appellees brief,40 essentially arguing the
correctness of the trial courts Decision regarding the foregoing issues raised by the Catungals. Subsequently, the Catungals filed
a Reply Brief41 dated October 16, 1995.
From the filing of the appellants brief in 1994 up to the filing of the Reply Brief, the spouses Catungal were represented by
appellant Jose Catungal himself. However, a new counsel for the Catungals, Atty. Jesus N. Borromeo (Atty. Borromeo), entered
his appearance before the Court of Appeals on September 2, 1997.42 On the same date, Atty. Borromeo filed a Motion for Leave
of Court to File Citation of Authorities43 and a Citation of Authorities.44 This would be followed by Atty. Borromeos filing of an
Additional Citation of Authority and Second Additional Citation of Authority both on November 17, 1997.45
During the pendency of the case with the Court of Appeals, Agapita Catungal passed away and thus, her husband, Jose, filed on
February 17, 1999 a motion for Agapitas substitution by her surviving children.46
On August 8, 2000, the Court of Appeals rendered a Decision in the consolidated cases CA-G.R. CV No. 40627 and CA-G.R. SP
No. 27565,47 affirming the trial courts Decision.
In a Motion for Reconsideration dated August 21, 2000,48 counsel for the Catungals, Atty. Borromeo, argued for the first time that
paragraphs 1(b) and 549 of the Conditional Deed of Sale, whether taken separately or jointly, violated the principle of mutuality of
contracts under Article 1308 of the Civil Code and thus, said contract was void ab initio. He adverted to the cases mentioned in his
various citations of authorities to support his argument of nullity of the contract and his position that this issue may be raised for
the first time on appeal.
Meanwhile, a Second Motion for Substitution50 was filed by Atty. Borromeo in view of the death of Jose Catungal.
In a Resolution dated January 30, 2001, the Court of Appeals allowed the substitution of the deceased Agapita and Jose Catungal
by their surviving heirs and denied the motion for reconsideration for lack of merit

Hence, the heirs of Agapita and Jose Catungal filed on March 27, 2001 the present petition for review,51 which essentially argued
that the Court of Appeals erred in not finding that paragraphs 1(b) and/or 5 of the Conditional Deed of Sale, violated the principle
of mutuality of contracts under Article 1308 of the Civil Code. Thus, said contract was supposedly void ab initio and the Catungals
rescission thereof was superfluous.
In his Comment,52 Rodriguez highlighted that (a) petitioners were raising new matters that cannot be passed upon on appeal; (b)
the validity of the Conditional Deed of Sale was already admitted and petitioners cannot be allowed to change theories on appeal;
(c) the questioned paragraphs of the Conditional Deed of Sale were valid; and (d) petitioners were the ones who committed fraud
and breach of contract and were not entitled to relief for not having come to court with clean hands.
The Court gave due course to the Petition53 and the parties filed their respective Memoranda.
The issues to be resolved in the case at bar can be summed into two questions:
I. Are petitioners allowed to raise their theory of nullity of the Conditional Deed of Sale for the first time on appeal?
II. Do paragraphs 1(b) and 5 of the Conditional Deed of Sale violate the principle of mutuality of contracts under Article 1308 of the
Civil Code?
On petitioners change of theory
Petitioners claimed that the Court of Appeals should have reversed the trial courts Decision on the ground of the alleged nullity of
paragraphs 1(b) and 5 of the Conditional Deed of Sale notwithstanding that the same was not raised as an error in their
appellants brief. Citing Catholic Bishop of Balanga v. Court of Appeals,54 petitioners argued in the Petition that this case falls
under the following exceptions:
(3) Matters not assigned as errors on appeal but consideration of which is necessary in arriving at a just decision and complete
resolution of the case or to serve the interest of justice or to avoid dispensing piecemeal justice;
(4) Matters not specifically assigned as errors on appeal but raised in the trial court and are matters of record having some
bearing on the issue submitted which the parties failed to raise or which the lower court ignored;
(5) Matters not assigned as errors on appeal but closely related to an error assigned; and
(6) Matters not assigned as errors but upon which the determination of a question properly assigned is dependent.55
We are not persuaded.
This is not an instance where a party merely failed to assign an issue as an error in the brief nor failed to argue a material point on
appeal that was raised in the trial court and supported by the record. Neither is this a case where a party raised an error closely
related to, nor dependent on the resolution of, an error properly assigned in his brief. This is a situation where a party completely
changes his theory of the case on appeal and abandons his previous assignment of errors in his brief, which plainly should not be
allowed as anathema to due process.
Petitioners should be reminded that the object of pleadings is to draw the lines of battle between the litigants and to indicate fairly
the nature of the claims or defenses of both parties.56 In Philippine National Construction Corporation v. Court of Appeals,57 we
held that "[w]hen a party adopts a certain theory in the trial court, he will not be permitted to change his theory on appeal, for to
permit him to do so would not only be unfair to the other party but it would also be offensive to the basic rules of fair play, justice
and due process."58
We have also previously ruled that "courts of justice have no jurisdiction or power to decide a question not in issue. Thus, a
judgment that goes beyond the issues and purports to adjudicate something on which the court did not hear the parties, is not only
irregular but also extrajudicial and invalid. The rule rests on the fundamental tenets of fair play."59
During the proceedings before the trial court, the spouses Catungal never claimed that the provisions in the Conditional Deed of
Sale, stipulating that the payment of the balance of the purchase price was contingent upon the successful negotiation of a road
right of way (paragraph 1[b]) and granting Rodriguez the option to rescind (paragraph 5), were void for allegedly making the
fulfillment of the contract dependent solely on the will of Rodriguez.
On the contrary, with respect to paragraph 1(b), the Catungals did not aver in the Answer (and its amended versions) that the
payment of the purchase price was subject to the will of Rodriguez but rather they claimed that paragraph 1(b) in relation to 1(c)
only presupposed a reasonable time be given to Rodriguez to negotiate the road right of way. However, it was petitioners theory
that more than sufficient time had already been given Rodriguez to negotiate the road right of way. Consequently, Rodriguezs
refusal/failure to pay the balance of the purchase price, upon demand, was allegedly indicative of lack of funds and a breach of
the contract on the part of Rodriguez.
Anent paragraph 5 of the Conditional Deed of Sale, regarding Rodriguezs option to rescind, it was petitioners theory in the court
a quo that notwithstanding such provision, they retained the right to rescind the contract for Rodriguezs breach of the same under
Article 1191 of the Civil Code.
Verily, the first time petitioners raised their theory of the nullity of the Conditional Deed of Sale in view of the questioned provisions
was only in their Motion for Reconsideration of the Court of Appeals Decision, affirming the trial courts judgment. The previous
filing of various citations of authorities by Atty. Borromeo and the Court of Appeals resolutions noting such citations were of no
moment. The citations of authorities merely listed cases and their main rulings without even any mention of their relevance to the
present case or any prayer for the Court of Appeals to consider them.1wphi1 In sum, the Court of Appeals did not err in
disregarding the citations of authorities or in denying petitioners motion for reconsideration of the assailed August 8, 2000
Decision in view of the proscription against changing legal theories on appeal.
Ruling on the questioned provisions of the Conditional Deed of Sale
Even assuming for the sake of argument that this Court may overlook the procedural misstep of petitioners, we still cannot uphold
their belatedly proffered arguments.

At the outset, it should be noted that what the parties entered into is a Conditional Deed of Sale, whereby the spouses Catungal
agreed to sell and Rodriguez agreed to buy Lot 10963 conditioned on the payment of a certain price but the payment of the
purchase price was additionally made contingent on the successful negotiation of a road right of way. It is elementary that "[i]n
conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend
upon the happening of the event which constitutes the condition."60
Petitioners rely on Article 1308 of the Civil Code to support their conclusion regarding the claimed nullity of the aforementioned
provisions. Article 1308 states that "[t]he contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them."
Article 1182 of the Civil Code, in turn, provides:
Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void. If it
depends upon chance or upon the will of a third person, the obligation shall take effect in conformity with the provisions of this
Code.
In the past, this Court has distinguished between a condition imposed on the perfection of a contract and a condition imposed
merely on the performance of an obligation. While failure to comply with the first condition results in the failure of a contract, failure
to comply with the second merely gives the other party the option to either refuse to proceed with the sale or to waive the
condition.61 This principle is evident in Article 1545 of the Civil Code on sales, which provides in part:
Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition which is not performed, such party
may refuse to proceed with the contract or he may waive performance of the condition x x x.
Paragraph 1(b) of the Conditional Deed of Sale, stating that respondent shall pay the balance of the purchase price when he has
successfully negotiated and secured a road right of way, is not a condition on the perfection of the contract nor on the validity of
the entire contract or its compliance as contemplated in Article 1308. It is a condition imposed only on respondents obligation to
pay the remainder of the purchase price. In our view and applying Article 1182, such a condition is not purely potestative as
petitioners contend. It is not dependent on the sole will of the debtor but also on the will of third persons who own the adjacent
land and from whom the road right of way shall be negotiated. In a manner of speaking, such a condition is likewise dependent on
chance as there is no guarantee that respondent and the third party-landowners would come to an agreement regarding the road
right of way. This type of mixed condition is expressly allowed under Article 1182 of the Civil Code.
Analogous to the present case is Romero v. Court of Appeals,62 wherein the Court interpreted the legal effect of a condition in a
deed of sale that the balance of the purchase price would be paid by the vendee when the vendor has successfully ejected the
informal settlers occupying the property. In Romero, we found that such a condition did not affect the perfection of the contract but
only imposed a condition on the fulfillment of the obligation to pay the balance of the purchase price, to wit:
From the moment the contract is perfected, the parties are bound not only to the fulfillment of what has been expressly stipulated
but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. Under the
agreement, private respondent is obligated to evict the squatters on the property. The ejectment of the squatters is a condition the
operative act of which sets into motion the period of compliance by petitioner of his own obligation, i.e., to pay the balance of the
purchase price. Private respondent's failure "to remove the squatters from the property" within the stipulated period gives
petitioner the right to either refuse to proceed with the agreement or waive that condition in consonance with Article 1545 of the
Civil Code. This option clearly belongs to petitioner and not to private respondent.
We share the opinion of the appellate court that the undertaking required of private respondent does not constitute a "potestative
condition dependent solely on his will" that might, otherwise, be void in accordance with Article 1182 of the Civil Code but a
"mixed" condition "dependent not on the will of the vendor alone but also of third persons like the squatters and government
agencies and personnel concerned." We must hasten to add, however, that where the so-called "potestative condition" is imposed
not on the birth of the obligation but on its fulfillment, only the condition is avoided, leaving unaffected the obligation itself.63
(Emphases supplied.)
From the provisions of the Conditional Deed of Sale subject matter of this case, it was the vendee (Rodriguez) that had the
obligation to successfully negotiate and secure the road right of way. However, in the decision of the trial court, which was affirmed
by the Court of Appeals, it was found that respondent Rodriguez diligently exerted efforts to secure the road right of way but the
spouses Catungal, in bad faith, contributed to the collapse of the negotiations for said road right of way. To quote from the trial
courts decision:
It is therefore apparent that the vendees obligations (sic) to pay the balance of the purchase price arises only when the road-rightof-way to the property shall have been successfully negotiated, secured and provided. In other words, the obligation to pay the
balance is conditioned upon the acquisition of the road-right-of-way, in accordance with paragraph 2 of Article 1181 of the New
Civil Code. Accordingly, "an obligation dependent upon a suspensive condition cannot be demanded until after the condition takes
place because it is only after the fulfillment of the condition that the obligation arises." (Javier v[s] CA 183 SCRA) Exhibits H, D, P,
R, T, FF and JJ show that plaintiff [Rodriguez] indeed was diligent in his efforts to negotiate for a road-right-of-way to the property.
The written offers, proposals and follow-up of his proposals show that plaintiff [Rodriguez] went all out in his efforts to immediately
acquire an access road to the property, even going to the extent of offering P3,000.00 per square meter for the road lots (Exh. Q)
from the original P550.00 per sq. meter. This Court also notes that defendant (sic) [the Catungals] made misrepresentation in the
negotiation they have entered into with plaintiff [Rodriguez]. (Exhs. F and G) The misrepresentation of defendant (sic) [the
Catungals] as to the third lot (Lot 10986) to be part and parcel of the subject property [(]Lot 10963) contributed in defeating the
plaintiffs [Rodriguezs] effort in acquiring the road-right-of-way to the property. Defendants [the Catungals] cannot now invoke the
non-fulfillment of the condition in the contract as a ground for rescission when defendants [the Catungals] themselves are guilty of
preventing the fulfillment of such condition.
From the foregoing, this Court is of the considered view that rescission of the conditional deed of sale by the defendants is without
any legal or factual basis.64 x x x. (Emphases supplied.)
In all, we see no cogent reason to disturb the foregoing factual findings of the trial court.
Furthermore, it is evident from the language of paragraph 1(b) that the condition precedent (for respondents obligation to pay the

balance of the purchase price to arise) in itself partly involves an obligation to do, i.e., the undertaking of respondent to negotiate
and secure a road right of way at his own expense.65 It does not escape our notice as well, that far from disclaiming paragraph
1(b) as void, it was the Catungals contention before the trial court that said provision should be read in relation to paragraph 1(c)
which stated:
c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility of the VENDEE to secure and any or
all cost relative to the acquisition thereof shall be borne solely by the VENDEE. He shall, however, be accorded with enough time
necessary for the success of his endeavor, granting him a free hand in negotiating for the passage.66 (Emphasis supplied.)
The Catungals interpretation of the foregoing stipulation was that Rodriguezs obligation to negotiate and secure a road right of
way was one with a period and that period, i.e., "enough time" to negotiate, had already lapsed by the time they demanded the
payment of P5,000,000.00 from respondent. Even assuming arguendo that the Catungals were correct that the respondents
obligation to negotiate a road right of way was one with an uncertain period, their rescission of the Conditional Deed of Sale would
still be unwarranted. Based on their own theory, the Catungals had a remedy under Article 1197 of the Civil Code, which
mandates:
Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was
intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of the debtor.
In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the
parties. Once fixed by the courts, the period cannot be changed by them.
What the Catungals should have done was to first file an action in court to fix the period within which Rodriguez should accomplish
the successful negotiation of the road right of way pursuant to the above quoted provision. Thus, the Catungals demand for
Rodriguez to make an additional payment of P5,000,000.00 was premature and Rodriguezs failure to accede to such demand did
not justify the rescission of the contract.
With respect to petitioners argument that paragraph 5 of the Conditional Deed of Sale likewise rendered the said contract void, we
find no merit to this theory. Paragraph 5 provides:
5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his option to rescind the herein
Conditional Deed of Sale, the VENDEE shall notify the VENDOR by way of a written notice relinquishing his rights over the
property. The VENDEE shall then be reimbursed by the VENDOR the sum of FIVE HUNDRED THOUSAND PESOS
(P500,000.00) representing the downpayment, interest free, payable but contingent upon the event that the VENDOR shall have
been able to sell the property to another party.67
Petitioners posited that the above stipulation was the "deadliest" provision in the Conditional Deed of Sale for violating the
principle of mutuality of contracts since it purportedly rendered the contract subject to the will of respondent.
We do not agree.
It is petitioners strategy to insist that the Court examine the first sentence of paragraph 5 alone and resist a correlation of such
sentence with other provisions of the contract. Petitioners view, however, ignores a basic rule in the interpretation of contracts
that the contract should be taken as a whole.
Article 1374 of the Civil Code provides that "[t]he various stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken jointly." The same Code further sets down the rule that "[i]f some
stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate
to render it effectual."68
Similarly, under the Rules of Court it is prescribed that "[i]n the construction of an instrument where there are several provisions or
particulars, such a construction is, if possible, to be adopted as will give effect to all"69 and "for the proper construction of an
instrument, the circumstances under which it was made, including the situation of the subject thereof and of the parties to it, may
be shown, so that the judge may be placed in the position of those whose language he is to interpret."70
Bearing in mind the aforementioned interpretative rules, we find that the first sentence of paragraph 5 must be taken in relation
with the rest of paragraph 5 and with the other provisions of the Conditional Deed of Sale.
Reading paragraph 5 in its entirety will show that Rodriguezs option to rescind the contract is not absolute as it is subject to the
requirement that there should be written notice to the vendor and the vendor shall only return Rodriguezs downpayment of
P500,000.00, without interest, when the vendor shall have been able to sell the property to another party. That what is stipulated
to be returned is only the downpayment of P500,000.00 in the event that Rodriguez exercises his option to rescind is significant.
To recall, paragraph 1(b) of the contract clearly states that the installments on the balance of the purchase price shall only be paid
upon successful negotiation and procurement of a road right of way. It is clear from such provision that the existence of a road
right of way is a material consideration for Rodriguez to purchase the property. Thus, prior to him being able to procure the road
right of way, by express stipulation in the contract, he is not bound to make additional payments to the Catungals. It was further
stipulated in paragraph 1(b) that: "[i]f however said road right of way cannot be negotiated, the VENDEE shall give notice to the
VENDOR for them to reassess and solve the problem by taking other options and should the situation ultimately prove futile, he
[Rodriguez] shall take steps to rescind or [cancel] the herein Conditional Deed of Sale." The intention of the parties for providing
subsequently in paragraph 5 that Rodriguez has the option to rescind the sale is undeniably only limited to the contingency that
Rodriguez shall not be able to secure the road right of way. Indeed, if the parties intended to give Rodriguez the absolute option to
rescind the sale at any time, the contract would have provided for the return of all payments made by Rodriguez and not only the
downpayment. To our mind, the reason only the downpayment was stipulated to be returned is that the vendees option to rescind
can only be exercised in the event that no road right of way is secured and, thus, the vendee has not made any additional
payments, other than his downpayment.
In sum, Rodriguezs option to rescind the contract is not purely potestative but rather also subject to the same mixed condition as
his obligation to pay the balance of the purchase price i.e., the negotiation of a road right of way. In the event the condition is
fulfilled (or the negotiation is successful), Rodriguez must pay the balance of the purchase price. In the event the condition is not

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

G.R. No. 136054

September 5, 2001

HEIRS OF SEVERINA SAN MIGUEL, namely: MAGNO LAPINA, PACENCIA LAPINA, MARCELO LAPINA, SEVERINO LAPINA,
ROSARIO LAPINA, FRANCISCO LAPINA, CELIA LAPINA assisted by husband RODOLFO TOLEDO, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, DOMINADOR SAN MIGUEL, GUILLERMO F. SAN ARTEMIO F. SAN MIGUEL,
PACIENCIA F. SAN MIGUEL, CELESTINO, assisted by husband, ANTERO CELESTINO, represented by their Attorney-in-Fact
ENRICO CELESTINO, AUGUSTO SAN MIGUEL, ANTONIO SAN MIGUEL, RODOLFO SAN MIGUEL, CONRADO SAN MIGUEL
and LUCITA SAN MIGUEL, respondents.
PARDO, J.:
The Case
The case is a petition for review on certiorari1 of the decision of the Court of Appeals,2 affirming that of the Regional Trial Court,
Cavite, Branch 19, Bacoor3 ordering petitioners, Heirs of Severina San Miguel (hereafter, "Severina's heirs") to surrender to
respondents Dominador San Miguel, et al. (hereafter, "Dominador, et al."), Transfer Certificate of Title No. 223511 and further
directing Severina's heirs to pay for the capital gains and related expenses for the transfer of the two (2) lots to Dominador, et al.
The Facts
This case involves a parcel of land originally claimed by Severina San Miguel (petitioners' predecessor-in-interest, hereafter,
"Severina"). The land is situated in Panapan, Bacoor, Cavite with an area of six hundred thirty two square meters (632 sq. m.),
more or less.

Without Severina's knowledge, Dominador managed to cause the subdivision of the land into three (3) lots, to wit:4
"LRC Psu-1312 - with an area of 108 square meters;
"LRC Psu-1313 - Lot 1, with an area of 299 square meters;
"LRC Psu-1313 - Lot 2, with an area of 225 square meters."
On September 25, 1974, Dominador, et al. filed a petition with the Court of First Instance, Cavite, as a land registration court, to
issue title over Lots 1 and 2 of LRC Psu-1313, in their names.5
On July 19, 1977, the Land Registration Commission (hereafter "LRC") rendered a decision directing the issuance of Original
Certificate of Title No. 0-1816 in the names of Dominador, et al.
On or about August 22, 1978, Severina filed with the Court of First Instance of Cavite a petition for review of the decision alleging
that the land registration proceedings were fraudulently concealed by Dominador from her.6
On December 27, 1982, the court resolved to set aside the decision of July 19, 1977, and declared Original Certificate of Title No.
0-1816 as null and void.
On July 13, 1987, the Register of Deeds of Cavite issued Transfer Certificate of Title No. T-223511 in the names of Severina and
her heirs.7
On February 15, 1990, the trial court issued an order in favor of Severina's heirs, to wit:8
"WHEREFORE, as prayed for, let the writ of possession previously issued in favor of petitioner Severina San Miguel be
implemented."
However, the writ was returned unsatisfied.
On November 28, 1991, the trial court ordered:9
"WHEREFORE, as prayed for, let an alias writ of demolition be issued in favor of petitioners, Severina San Miguel."
Again, the writ was not satisfied.
On August 6, 1993, Severina's heirs, decided not to pursue the writs of possession and demolition and entered into a compromise
with Dominador, et al. According to the compromise, Severina's heirs were to sell the subject lots10 to Dominador, et al. for one
and a half million pesos (P1.5 M) with the delivery of Transfer Certificate of Title No. T-223511 (hereafter, "the certificate of title")
conditioned upon the purchase of another lot 11 which was not yet titled at an additional sum of three hundred thousand pesos
(P300,000.00). The salient features of the compromise (hereafter "kasunduan") are:12
"5. Na ang Lot 1 at Lot 2, plano LRC Psu-1313 na binabanggit sa itaas na ipinagkasundo ng mga tagapagmana ni Severina San
Miguel na kilala sa kasulatang ito sa taguring LAPINA (representing Severina's heirs), na ilipat sa pangalan nina SAN MIGUEL
(representing Dominador's heirs) alang alang sa halagang ISANG MILYON AT LIMANG DAANG LIBONG PISO (P1,500,000.00)
na babayaran nina SAN MIGUEL kina LAPINA;
"6. Na si LAPINA at SAN MIGUEL ay nagkakasundo na ang lote na sakop ng plano LRC-Psu-1312, may sukat na 108 metro
cuadrado ay ipagbibili na rin kina SAN MIGUEL sa halagang TATLONG DAANG LIBONG PISO (P300,000.00);
"7. Na kinikilala ni SAN MIGUEL na ang tunay na may-ari ng nasabing lote na sakop ng plano LRC Psu-1312 ay sina LAPINA at
sila na ang magpapatitulo nito at sina LAPINA ay walang pananagutan sa pagpapatitulo nito at sa paghahabol ng sino mang tao;
"8. Na ang nasabing halaga na TATLONG DAANG LIBONG PISO (P300,000.00) ay babayaran nina SAN MIGUEL kina LAPINA
sa loob ng dalawang (2) buwan mula sa petsa ng kasulatang ito at kung hindi mabayaran nina SAN MIGUEL ang nasabing halaga
sa takdang panahon ay mawawalan ng kabuluhan ang kasulatang ito;
"9. Na sina LAPINA at SAN MIGUEL ay nagkakadunso (sic) rin na ang owner's copy ng Transfer Certificate of Title No. T-223511
na sumasakop sa Lots 1 at 2, plano LRC Psu-1313 ay ilalagay lamang nina LAPINA kina SAN MIGUEL pagkatapos mabayaran
ang nabanggit na P300,000.00"
On the same day, on August 6, 1993, pursuant to the kasunduan, Severina's heirs and Dominador, et al. executed a deed of sale
designated as "kasulatan sa bilihan ng lupa."13
On November 16, 1993, Dominador, et al. filed with the trial court,14 Branch 19, Bacoor, Cavite, a motion praying that Severina's
heirs deliver the owner's copy of the certificate of title to them.15
In time, Severina's heirs opposed the motion stressing that under the kasunduan, the certificate of title would only be surrendered
upon Dominador, et al.'s payment of the amount of three hundred thousand pesos (P300,000.00) within two months from August
6, 1993, which was not complied with.16
Dominador, et al. admitted non-payment of three hundred thousand pesos (P300,000.00) for the reason that Severina's heirs have
not presented any proof of ownership over the untitled parcel of land covered by LRC-Psu-1312. Apparently, the parcel of land is
declared in the name of a third party, a certain Emiliano Eugenio.17
Dominador, et al. prayed that compliance with the kasunduan be deferred until such time that Severina's heirs could produce proof
of ownership over the parcel of land.18
Severina's heirs countered that the arguments of Dominador, et al. were untenable in light of the provision in the kasunduan
where Dominador, et al. admitted their ownership over the parcel of land, hence dispensing with the requirement that they produce
actual proof of title over it.19 Specifically, they called the trial court's attention to the following statement in the kasunduan:20
"7. Na kinikilala ni SAN MIGUEL na ang tunay na may-ari ng nasabing lote na sakop ng plano LRC Psu-1312 ay sina LAPINA at
sila na ang magpapatitulo nito at sina LAPINA ay walang pananagutan sa pagpapatitulo nito at sa paghahabol ng sino mang tao;"

According to Severina's heirs, since Dominador, et al. have not paid the amount of three hundred thousand pesos (P300,000.00),
then they were justified in withholding release of the certificate of title.21
The trial court conducted no hearing and then rendered judgment based on the pleadings and memoranda submitted by the
parties.
The Trial Court's Ruling
On June 27, 1994, the trial court issued an order to wit:22
"WHEREFORE, finding the Motion to Order to be impressed with merit, the defendants-oppositors-vendors Heirs of Severina San
Miguel are hereby ordered to surrender to the movant-plaintiffs-vendees-Heirs of Dominador San Miguel the Transfer Certificates
of Title No. 223511 and for herein defendants-oppositors-vendors to pay for the capital gains and related expenses for the transfer
of the two lots subject of the sale to herein movants-plaintiffs-vendees-Heirs of Dominador San Miguel."
"SO ORDERED."
On July 25, 1994, Severina's heirs filed with the trial court a motion for reconsideration of the afore-quoted order.23
On January 23, 1995, the trial court denied the motion for reconsideration for lack of merit and further ordered:24
"x x x . . . Considering that the Lots 1 and 2 covered by TCT No. T-223511 had already been paid since August 6, 1993 by the
plaintiffs-vendees Dominador San Miguel, et al. (Vide, Kasulatan sa Bilihan ng Lupa, Rollo, pp. 174-176), herein defendantsvendors-Heirs of Severina San Miguel is hereby ordered (sic) to deliver the aforesaid title to the former (Dominador San Miguel, et
al.) within thirty (30) days from receipt of this order. In case the defendants-vendors-Heirs of Severina San Miguel fail and refuse
to do the same, then the Register of Deeds of Cavite is ordered to immediately cancel TCT No. T-223511 in the name of Severina
San Miguel and issue another one in the name of plaintiffs Dominador San Miguel, et al.
"Also send a copy of this Order to the Register of Deeds of the Province of Cavite, Trece Martires City, for her information and
guidance.
"SO ORDERED."
On February 7, 1995, Severina's heirs appealed the orders to the Court of Appeals.25
The Court of Appeals' Ruling
On June 29, 1998, the Court of Appeals promulgated a decision denying the appeal, and affirming the decision of the trial court.
The Court of Appeals added that the other matters raised in the petition were "extraneous" to the kasunduan.26 The Court of
Appeals upheld the validity of the contract of sale and sustained the parties' freedom to contract. The Court of Appeals decided,
thus:27
"WHEREFORE, the decision appealed from is hereby AFFIRMED.
"SO ORDERED."
On August 4, 1998, Severina's heirs filed with the Court of Appeals a motion for reconsideration of the above decision.28 On
October 14, 1998, the Court of Appeals denied the motion for reconsideration for lack of merit.29
Hence, this appeal.30
The Issues
Severina's heirs submit that the Court of Appeals erred and committed grave abuse of discretion: First, when it held that the
kasunduan had no effect on the "kasulatan sa bilihan ng lupa." Second, when it ordered them to surrender the certificate of title to
Dominador, et al., despite non-compliance with their prior obligations stipulated under the kasunduan. Third, when it did not find
that the kasunduan was null and void for having been entered into by Dominador, et al. fraudulently and in bad faith.31
We find the above issues raised by Severina's heirs to be factual. The question whether the prerequisites to justify release of the
certificate of title to Dominador, et al. have been complied with is a question of fact.32
However, we sift through the arguments and identify the main legal issue, which is whether Dominador, et al. may be compelled to
pay the three hundred thousand pesos (P300,000.00) as agreed upon in the kasunduan (as a pre-requisite for the release of the
certificate of title), despite Severina's heirs' lack of evidence of ownership over the parcel of land covered by LRC Psu-1312.
The Court's Ruling
We resolve the issue in the negative, and find the petition without merit.
Severina's heirs anchor their claim on the kasunduan, stressing on their freedom to stipulate and the binding effect of contracts.
This argument is misplaced.33 The Civil Code provides:
ARTICLE 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient provided they are not contrary to law, morals, good customs, public order or public policy (italics ours).
It is basic that the law is deemed written into every contract.34 Although a contract is the law between the parties, the provisions
of positive law which regulate contracts are deemed written therein and shall limit and govern the relations between the parties.35
The Civil Code provisions on "sales" state:
ARTICLE 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay a price certain in money or its equivalent. . . .
ARTICLE 1459. The thing must be licit and the vendor must have a right to transfer the ownership thereof at the time it is
delivered.
ARTICLE 1495. The vendor is bound to transfer the ownership of and deliver, as well as warrant the thing which is the object of

sale (emphasis ours).

True, in contracts of sale, the vendor need not possess title to the thing sold at the perfection of the contract.36 However, the
vendor must possess title and must be able to transfer title at the time of delivery. In a contract of sale, title only passes to the
vendee upon full payment of the stipulated consideration, or upon delivery of the thing sold.37
Under the facts of the case, Severina's heirs are not in a position to transfer title. Without passing on the question of who actually
owned the land covered by LRC Psu -1312, we note that there is no proof of ownership in favor of Severina's heirs. In fact, it is a
certain Emiliano Eugenio, who holds a tax declaration over the said land in his name.38 Though tax declarations do not prove
ownership of the property of the declarant, tax declarations and receipts can be strong evidence of ownership of land when
accompanied by possession for a period sufficient for prescription.39 Severina's heirs have nothing to counter this document.
Therefore, to insist that Dominador, et al. pay the price under such circumstances would result in Severina's heirs' unjust
enrichment.40 Basic is the principle in law, "Niguno non deue enriquecerse tortizamente condano de otro."41 The essence of a
sale is the transfer of title or an agreement to transfer it for a price actually paid or promised.42 In Nool v. Court of Appeals,43 we
held that if the sellers cannot deliver the object of the sale to the buyers, such contract may be deemed to be inoperative. By
analogy, such a contract may fall under Article 1405, No. 5 of the Civil Code, to wit:
ARTICLE 1405. The following contracts are inexistent and void from the beginning: . . .
(5) Those which contemplate an impossible service.
xxx

xxx

xxx

Severina's heirs insist that delivery of the certificate of title is predicated on a condition payment of three hundred thousand
pesos (P300,000.00) to cover the sale of Lot 3 of LRO Psu 1312. We find this argument not meritorious. The condition cannot be
honored for reasons afore-discussed. Article 1183 of the Civil Code provides that,
"Impossible conditions, those contrary to good customs or public policy and those prohibited by law shall annul the obligation
which depends upon them. If the obligation is divisible, that part thereof which is not affected by the impossible or unlawful
condition shall be valid, x x x"
Hence, the non-payment of the three hundred thousand pesos (P300,000.00) is not a valid justification for refusal to deliver the
certificate of title.
Besides, we note that the certificate of title covers Lots 1 and 2 of LRC Psu-1313, which were fully paid for by Dominador, et al.
Therefore, Severina's heirs are bound to deliver the certificate of title covering the lots.
The Fallo
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV No. 48430 is AFFIRMED in toto.
No costs.
SO ORDERED.

G.R. No. 176625

MACTAN-CEBU INTERNATIONAL AIRPORT AUTHORITY and AIR TRANSPORTATION OFFICE, Petitioners,
vs.
BERNARDO L. LOZADA, SR., and the HEIRS OF ROSARIO MERCADO, namely, VICENTE LOZADA, MARIO M. LOZADA,
MARCIA L. GODINEZ, VIRGINIA L. FLORES, BERNARDO LOZADA, JR., DOLORES GACASAN, SOCORRO CAFARO and
ROSARIO LOZADA, represented by MARCIA LOZADA GODINEZ, Respondents.
DECISION
NACHURA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court, seeking to reverse, annul, and set aside the
Decision1 dated February 28, 2006 and the Resolution2 dated February 7, 2007 of the Court of Appeals (CA) (Cebu City),
Twentieth Division, in CA-G.R. CV No. 65796.
The antecedent facts and proceedings are as follows:
Subject of this case is Lot No. 88-SWO-25042 (Lot No. 88), with an area of 1,017 square meters, more or less, located in Lahug,
Cebu City. Its original owner was Anastacio Deiparine when the same was subject to expropriation proceedings, initiated by the
Republic of the Philippines (Republic), represented by the then Civil Aeronautics Administration (CAA), for the expansion and
improvement of the Lahug Airport. The case was filed with the then Court of First Instance of Cebu, Third Branch, and docketed as
Civil Case No. R-1881.
As early as 1947, the lots were already occupied by the U.S. Army. They were turned over to the Surplus Property Commission,
the Bureau of Aeronautics, the National Airport Corporation and then to the CAA.
During the pendency of the expropriation proceedings, respondent Bernardo L. Lozada, Sr. acquired Lot No. 88 from Deiparine.
Consequently, Transfer Certificate of Title (TCT) No. 9045 was issued in Lozadas name.
On December 29, 1961, the trial court rendered judgment in favor of the Republic and ordered the latter to pay Lozada the fair
market value of Lot No. 88, adjudged at P3.00 per square meter, with consequential damages by way of legal interest computed
from November 16, 1947the time when the lot was first occupied by the airport. Lozada received the amount of P3,018.00 by
way of payment.

The affected landowners appealed. Pending appeal, the Air Transportation Office (ATO), formerly CAA, proposed a compromise
settlement whereby the owners of the lots affected by the expropriation proceedings would either not appeal or withdraw their
respective appeals in consideration of a commitment that the expropriated lots would be resold at the price they were expropriated
in the event that the ATO would abandon the Lahug Airport, pursuant to an established policy involving similar cases. Because of
this promise, Lozada did not pursue his appeal. Thereafter, Lot No. 88 was transferred and registered in the name of the Republic
under TCT No. 25057.
The projected improvement and expansion plan of the old Lahug Airport, however, was not pursued.
Lozada, with the other landowners, contacted then CAA Director Vicente Rivera, Jr., requesting to repurchase the lots, as per
previous agreement. The CAA replied that there might still be a need for the Lahug Airport to be used as an emergency DC-3
airport. It reiterated, however, the assurance that "should this Office dispose and resell the properties which may be found to be no
longer necessary as an airport, then the policy of this Office is to give priority to the former owners subject to the approval of the
President."
On November 29, 1989, then President Corazon C. Aquino issued a Memorandum to the Department of Transportation, directing
the transfer of general aviation operations of the Lahug Airport to the Mactan International Airport before the end of 1990 and,
upon such transfer, the closure of the Lahug Airport.
Sometime in 1990, the Congress of the Philippines passed Republic Act (R.A.) No. 6958, entitled "An Act Creating the MactanCebu International Airport Authority, Transferring Existing Assets of the Mactan International Airport and the Lahug Airport to the
Authority, Vesting the Authority with Power to Administer and Operate the Mactan International Airport and the Lahug Airport, and
For Other Purposes."
From the date of the institution of the expropriation proceedings up to the present, the public purpose of the said expropriation
(expansion of the airport) was never actually initiated, realized, or implemented. Instead, the old airport was converted into a
commercial complex. Lot No. 88 became the site of a jail known as Bagong Buhay Rehabilitation Complex, while a portion thereof
was occupied by squatters.3 The old airport was converted into what is now known as the Ayala I.T. Park, a commercial
area.1avvphi1
Thus, on June 4, 1996, petitioners initiated a complaint for the recovery of possession and reconveyance of ownership of Lot No.
88. The case was docketed as Civil Case No. CEB-18823 and was raffled to the Regional Trial Court (RTC), Branch 57, Cebu
City. The complaint substantially alleged as follows:
(a) Spouses Bernardo and Rosario Lozada were the registered owners of Lot No. 88 covered by TCT No. 9045;
(b) In the early 1960s, the Republic sought to acquire by expropriation Lot No. 88, among others, in connection with its program
for the improvement and expansion of the Lahug Airport;
(c) A decision was rendered by the Court of First Instance in favor of the Government and against the land owners, among whom
was Bernardo Lozada, Sr. appealed therefrom;
(d) During the pendency of the appeal, the parties entered into a compromise settlement to the effect that the subject property
would be resold to the original owner at the same price when it was expropriated in the event that the Government abandons the
Lahug Airport;
(e) Title to Lot No. 88 was subsequently transferred to the Republic of the Philippines (TCT No. 25057);
(f) The projected expansion and improvement of the Lahug Airport did not materialize;
(g) Plaintiffs sought to repurchase their property from then CAA Director Vicente Rivera. The latter replied by giving as assurance
that priority would be given to the previous owners, subject to the approval of the President, should CAA decide to dispose of the
properties;
(h) On November 29, 1989, then President Corazon C. Aquino, through a Memorandum to the Department of Transportation and
Communications (DOTC), directed the transfer of general aviation operations at the Lahug Airport to the Mactan-Cebu
International Airport Authority;
(i) Since the public purpose for the expropriation no longer exists, the property must be returned to the plaintiffs.4
In their Answer, petitioners asked for the immediate dismissal of the complaint. They specifically denied that the Government had
made assurances to reconvey Lot No. 88 to respondents in the event that the property would no longer be needed for airport
operations. Petitioners instead asserted that the judgment of condemnation was unconditional, and respondents were, therefore,
not entitled to recover the expropriated property notwithstanding non-use or abandonment thereof.
After pretrial, but before trial on the merits, the parties stipulated on the following set of facts:
(1) The lot involved is Lot No. 88-SWO-25042 of the Banilad Estate, situated in the City of Cebu, containing an area of One
Thousand Seventeen (1,017) square meters, more or less;
(2) The property was expropriated among several other properties in Lahug in favor of the Republic of the Philippines by virtue of
a Decision dated December 29, 1961 of the CFI of Cebu in Civil Case No. R-1881;
(3) The public purpose for which the property was expropriated was for the purpose of the Lahug Airport;
(4) After the expansion, the property was transferred in the name of MCIAA; [and]
(5) On November 29, 1989, then President Corazon C. Aquino directed the Department of Transportation and Communication to
transfer general aviation operations of the Lahug Airport to the Mactan-Cebu International Airport Authority and to close the Lahug
Airport after such transfer[.]5
During trial, respondents presented Bernardo Lozada, Sr. as their lone witness, while petitioners presented their own witness,
Mactan-Cebu International Airport Authority legal assistant Michael Bacarisas.

On October 22, 1999, the RTC rendered its Decision, disposing as follows:
WHEREFORE, in the light of the foregoing, the Court hereby renders judgment in favor of the plaintiffs, Bernardo L. Lozada, Sr.,
and the heirs of Rosario Mercado, namely, Vicente M. Lozada, Marcia L. Godinez, Virginia L. Flores, Bernardo M. Lozada, Jr.,
Dolores L. Gacasan, Socorro L. Cafaro and Rosario M. Lozada, represented by their attorney-in-fact Marcia Lozada Godinez, and
against defendants Cebu-Mactan International Airport Authority (MCIAA) and Air Transportation Office (ATO):
1. ordering MCIAA and ATO to restore to plaintiffs the possession and ownership of their land, Lot No. 88 Psd-821 (SWO-23803),
upon payment of the expropriation price to plaintiffs; and
2. ordering the Register of Deeds to effect the transfer of the Certificate of Title from defendant[s] to plaintiffs on Lot No. [88],
cancelling TCT No. 20357 in the name of defendant MCIAA and to issue a new title on the same lot in the name of Bernardo L.
Lozada, Sr. and the heirs of Rosario Mercado, namely: Vicente M. Lozada, Mario M. Lozada, Marcia L. Godinez, Virginia L.
Flores, Bernardo M. Lozada, Jr., Dolores L. Gacasan, Socorro L. Cafaro and Rosario M. Lozada.
No pronouncement as to costs.
SO ORDERED.6
Aggrieved, petitioners interposed an appeal to the CA. After the filing of the necessary appellate briefs, the CA rendered its
assailed Decision dated February 28, 2006, denying petitioners appeal and affirming in toto the Decision of the RTC, Branch 57,
Cebu City. Petitioners motion for reconsideration was, likewise, denied in the questioned CA Resolution dated February 7, 2007.
Hence, this petition arguing that: (1) the respondents utterly failed to prove that there was a repurchase agreement or compromise
settlement between them and the Government; (2) the judgment in Civil Case No. R-1881 was absolute and unconditional, giving
title in fee simple to the Republic; and (3) the respondents claim of verbal assurances from government officials violates the
Statute of Frauds.
The petition should be denied.
Petitioners anchor their claim to the controverted property on the supposition that the Decision in the pertinent expropriation
proceedings did not provide for the condition that should the intended use of Lot No. 88 for the expansion of the Lahug Airport be
aborted or abandoned, the property would revert to respondents, being its former owners. Petitioners cite, in support of this
position, Fery v. Municipality of Cabanatuan,7 which declared that the Government acquires only such rights in expropriated
parcels of land as may be allowed by the character of its title over the properties
If x x x land is expropriated for a particular purpose, with the condition that when that purpose is ended or abandoned the property
shall return to its former owner, then, of course, when the purpose is terminated or abandoned the former owner reacquires the
property so expropriated. If x x x land is expropriated for a public street and the expropriation is granted upon condition that the
city can only use it for a public street, then, of course, when the city abandons its use as a public street, it returns to the former
owner, unless there is some statutory provision to the contrary. x x x. If, upon the contrary, however, the decree of expropriation
gives to the entity a fee simple title, then, of course, the land becomes the absolute property of the expropriator, whether it be the
State, a province, or municipality, and in that case the non-user does not have the effect of defeating the title acquired by the
expropriation proceedings. x x x.
When land has been acquired for public use in fee simple, unconditionally, either by the exercise of eminent domain or by
purchase, the former owner retains no right in the land, and the public use may be abandoned, or the land may be devoted to a
different use, without any impairment of the estate or title acquired, or any reversion to the former owner. x x x.8
Contrary to the stance of petitioners, this Court had ruled otherwise in Heirs of Timoteo Moreno and Maria Rotea v. Mactan-Cebu
International Airport Authority,9 thus
Moreover, respondent MCIAA has brought to our attention a significant and telling portion in the Decision in Civil Case No. R-1881
validating our discernment that the expropriation by the predecessors of respondent was ordered under the running impression
that Lahug Airport would continue in operation
As for the public purpose of the expropriation proceeding, it cannot now be doubted. Although Mactan Airport is being constructed,
it does not take away the actual usefulness and importance of the Lahug Airport: it is handling the air traffic both civilian and
military. From it aircrafts fly to Mindanao and Visayas and pass thru it on their flights to the North and Manila. Then, no evidence
was adduced to show how soon is the Mactan Airport to be placed in operation and whether the Lahug Airport will be closed
immediately thereafter. It is up to the other departments of the Government to determine said matters. The Court cannot substitute
its judgment for those of the said departments or agencies. In the absence of such showing, the Court will presume that the Lahug
Airport will continue to be in operation (emphasis supplied).
While in the trial in Civil Case No. R-1881 [we] could have simply acknowledged the presence of public purpose for the exercise of
eminent domain regardless of the survival of Lahug Airport, the trial court in its Decision chose not to do so but instead prefixed its
finding of public purpose upon its understanding that "Lahug Airport will continue to be in operation." Verily, these meaningful
statements in the body of the Decision warrant the conclusion that the expropriated properties would remain to be so until it was
confirmed that Lahug Airport was no longer "in operation." This inference further implies two (2) things: (a) after the Lahug Airport
ceased its undertaking as such and the expropriated lots were not being used for any airport expansion project, the rights vis--vis
the expropriated Lots Nos. 916 and 920 as between the State and their former owners, petitioners herein, must be equitably
adjusted; and (b) the foregoing unmistakable declarations in the body of the Decision should merge with and become an intrinsic
part of the fallo thereof which under the premises is clearly inadequate since the dispositive portion is not in accord with the
findings as contained in the body thereof.10
Indeed, the Decision in Civil Case No. R-1881 should be read in its entirety, wherein it is apparent that the acquisition by the
Republic of the expropriated lots was subject to the condition that the Lahug Airport would continue its operation. The condition
not having materialized because the airport had been abandoned, the former owner should then be allowed to reacquire the
expropriated property.11
On this note, we take this opportunity to revisit our ruling in Fery, which involved an expropriation suit commenced upon parcels of

land to be used as a site for a public market. Instead of putting up a public market, respondent Cabanatuan constructed residential
houses for lease on the area. Claiming that the municipality lost its right to the property taken since it did not pursue its public
purpose, petitioner Juan Fery, the former owner of the lots expropriated, sought to recover his properties. However, as he had
admitted that, in 1915, respondent Cabanatuan acquired a fee simple title to the lands in question, judgment was rendered in
favor of the municipality, following American jurisprudence, particularly City of Fort Wayne v. Lake Shore & M.S. RY. Co.,12
McConihay v. Theodore Wright,13 and Reichling v. Covington Lumber Co.,14 all uniformly holding that the transfer to a third party
of the expropriated real property, which necessarily resulted in the abandonment of the particular public purpose for which the
property was taken, is not a ground for the recovery of the same by its previous owner, the title of the expropriating agency being
one of fee simple.
Obviously, Fery was not decided pursuant to our now sacredly held constitutional right that private property shall not be taken for
public use without just compensation.15 It is well settled that the taking of private property by the Governments power of eminent
domain is subject to two mandatory requirements: (1) that it is for a particular public purpose; and (2) that just compensation be
paid to the property owner. These requirements partake of the nature of implied conditions that should be complied with to enable
the condemnor to keep the property expropriated.16
More particularly, with respect to the element of public use, the expropriator should commit to use the property pursuant to the
purpose stated in the petition for expropriation filed, failing which, it should file another petition for the new purpose. If not, it is
then incumbent upon the expropriator to return the said property to its private owner, if the latter desires to reacquire the same.
Otherwise, the judgment of expropriation suffers an intrinsic flaw, as it would lack one indispensable element for the proper
exercise of the power of eminent domain, namely, the particular public purpose for which the property will be devoted. Accordingly,
the private property owner would be denied due process of law, and the judgment would violate the property owners right to
justice, fairness, and equity.
In light of these premises, we now expressly hold that the taking of private property, consequent to the Governments exercise of
its power of eminent domain, is always subject to the condition that the property be devoted to the specific public purpose for
which it was taken. Corollarily, if this particular purpose or intent is not initiated or not at all pursued, and is peremptorily
abandoned, then the former owners, if they so desire, may seek the reversion of the property, subject to the return of the amount
of just compensation received. In such a case, the exercise of the power of eminent domain has become improper for lack of the
required factual justification.17
Even without the foregoing declaration, in the instant case, on the question of whether respondents were able to establish the
existence of an oral compromise agreement that entitled them to repurchase Lot No. 88 should the operations of the Lahug Airport
be abandoned, we rule in the affirmative.
It bears stressing that both the RTC, Branch 57, Cebu and the CA have passed upon this factual issue and have declared, in no
uncertain terms, that a compromise agreement was, in fact, entered into between the Government and respondents, with the
former undertaking to resell Lot No. 88 to the latter if the improvement and expansion of the Lahug Airport would not be pursued.
In affirming the factual finding of the RTC to this effect, the CA declared
Lozadas testimony is cogent. An octogenarian widower-retiree and a resident of Moon Park, California since 1974, he testified
that government representatives verbally promised him and his late wife while the expropriation proceedings were on-going that
the government shall return the property if the purpose for the expropriation no longer exists. This promise was made at the
premises of the airport. As far as he could remember, there were no expropriation proceedings against his property in 1952
because the first notice of expropriation he received was in 1962. Based on the promise, he did not hire a lawyer. Lozada was firm
that he was promised that the lot would be reverted to him once the public use of the lot ceases. He made it clear that the verbal
promise was made in Lahug with other lot owners before the 1961 decision was handed down, though he could not name the
government representatives who made the promise. It was just a verbal promise; nevertheless, it is binding. The fact that he could
not supply the necessary details for the establishment of his assertions during cross-examination, but that "When it will not be
used as intended, it will be returned back, we just believed in the government," does not dismantle the credibility and truthfulness
of his allegation. This Court notes that he was 89 years old when he testified in November 1997 for an incident which happened
decades ago. Still, he is a competent witness capable of perceiving and making his perception known. The minor lapses are
immaterial. The decision of the competency of a witness rests primarily with the trial judge and must not be disturbed on appeal
unless it is clear that it was erroneous. The objection to his competency must be made before he has given any testimony or as
soon as the incompetency becomes apparent. Though Lozada is not part of the compromise agreement,18 he nevertheless
adduced sufficient evidence to support his claim.19
As correctly found by the CA, unlike in Mactan Cebu International Airport Authority v. Court of Appeals,20 cited by petitioners,
where respondent therein offered testimonies which were hearsay in nature, the testimony of Lozada was based on personal
knowledge as the assurance from the government was personally made to him. His testimony on cross-examination destroyed
neither his credibility as a witness nor the truthfulness of his words.
Verily, factual findings of the trial court, especially when affirmed by the CA, are binding and conclusive on this Court and may not
be reviewed. A petition for certiorari under Rule 45 of the Rules of Court contemplates only questions of law and not of fact.21 Not
one of the exceptions to this rule is present in this case to warrant a reversal of such findings.
As regards the position of petitioners that respondents testimonial evidence violates the Statute of Frauds, suffice it to state that
the Statute of Frauds operates only with respect to executory contracts, and does not apply to contracts which have been
completely or partially performed, the rationale thereof being as follows:
In executory contracts there is a wide field for fraud because unless they be in writing there is no palpable evidence of the
intention of the contracting parties. The statute has precisely been enacted to prevent fraud. However, if a contract has been
totally or partially performed, the exclusion of parol evidence would promote fraud or bad faith, for it would enable the defendant to
keep the benefits already delivered by him from the transaction in litigation, and, at the same time, evade the obligations,
responsibilities or liabilities assumed or contracted by him thereby.22
In this case, the Statute of Frauds, invoked by petitioners to bar the claim of respondents for the reacquisition of Lot No. 88,
cannot apply, the oral compromise settlement having been partially performed. By reason of such assurance made in their favor,
respondents relied on the same by not pursuing their appeal before the CA. Moreover, contrary to the claim of petitioners, the fact

of Lozadas eventual conformity to the appraisal of Lot No. 88 and his seeking the correction of a clerical error in the judgment as
to the true area of Lot No. 88 do not conclusively establish that respondents absolutely parted with their property. To our mind,
these acts were simply meant to cooperate with the government, particularly because of the oral promise made to them.
The right of respondents to repurchase Lot No. 88 may be enforced based on a constructive trust constituted on the property held
by the government in favor of the former. On this note, our ruling in Heirs of Timoteo Moreno is instructive, viz.:
Mactan-Cebu International Airport Authority is correct in stating that one would not find an express statement in the Decision in
Civil Case No. R-1881 to the effect that "the [condemned] lot would return to [the landowner] or that [the landowner] had a right to
repurchase the same if the purpose for which it was expropriated is ended or abandoned or if the property was to be used other
than as the Lahug Airport." This omission notwithstanding, and while the inclusion of this pronouncement in the judgment of
condemnation would have been ideal, such precision is not absolutely necessary nor is it fatal to the cause of petitioners herein.
No doubt, the return or repurchase of the condemned properties of petitioners could be readily justified as the manifest legal effect
or consequence of the trial courts underlying presumption that "Lahug Airport will continue to be in operation" when it granted the
complaint for eminent domain and the airport discontinued its activities.
The predicament of petitioners involves a constructive trust, one that is akin to the implied trust referred to in Art. 1454 of the Civil
Code, "If an absolute conveyance of property is made in order to secure the performance of an obligation of the grantor toward the
grantee, a trust by virtue of law is established. If the fulfillment of the obligation is offered by the grantor when it becomes due, he
may demand the reconveyance of the property to him." In the case at bar, petitioners conveyed Lots No. 916 and 920 to the
government with the latter obliging itself to use the realties for the expansion of Lahug Airport; failing to keep its bargain, the
government can be compelled by petitioners to reconvey the parcels of land to them, otherwise, petitioners would be denied the
use of their properties upon a state of affairs that was not conceived nor contemplated when the expropriation was authorized.
Although the symmetry between the instant case and the situation contemplated by Art. 1454 is not perfect, the provision is
undoubtedly applicable. For, as explained by an expert on the law of trusts: "The only problem of great importance in the field of
constructive trust is to decide whether in the numerous and varying fact situations presented to the courts there is a wrongful
holding of property and hence a threatened unjust enrichment of the defendant." Constructive trusts are fictions of equity which
are bound by no unyielding formula when they are used by courts as devices to remedy any situation in which the holder of legal
title may not in good conscience retain the beneficial interest.
In constructive trusts, the arrangement is temporary and passive in which the trustees sole duty is to transfer the title and
possession over the property to the plaintiff-beneficiary. Of course, the "wronged party seeking the aid of a court of equity in
establishing a constructive trust must himself do equity." Accordingly, the court will exercise its discretion in deciding what acts are
required of the plaintiff-beneficiary as conditions precedent to obtaining such decree and has the obligation to reimburse the
trustee the consideration received from the latter just as the plaintiff-beneficiary would if he proceeded on the theory of rescission.
In the good judgment of the court, the trustee may also be paid the necessary expenses he may have incurred in sustaining the
property, his fixed costs for improvements thereon, and the monetary value of his services in managing the property to the extent
that plaintiff-beneficiary will secure a benefit from his acts.
The rights and obligations between the constructive trustee and the beneficiary, in this case, respondent MCIAA and petitioners
over Lots Nos. 916 and 920, are echoed in Art. 1190 of the Civil Code, "When the conditions have for their purpose the
extinguishment of an obligation to give, the parties, upon the fulfillment of said conditions, shall return to each other what they
have received x x x In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor,
are laid down in the preceding article shall be applied to the party who is bound to return x x x."23
On the matter of the repurchase price, while petitioners are obliged to reconvey Lot No. 88 to respondents, the latter must return
to the former what they received as just compensation for the expropriation of the property, plus legal interest to be computed from
default, which in this case runs from the time petitioners comply with their obligation to respondents.
Respondents must likewise pay petitioners the necessary expenses they may have incurred in maintaining Lot No. 88, as well as
the monetary value of their services in managing it to the extent that respondents were benefited thereby.
Following Article 118724 of the Civil Code, petitioners may keep whatever income or fruits they may have obtained from Lot No.
88, and respondents need not account for the interests that the amounts they received as just compensation may have earned in
the meantime.
In accordance with Article 119025 of the Civil Code vis--vis Article 1189, which provides that "(i)f a thing is improved by its nature,
or by time, the improvement shall inure to the benefit of the creditor x x x," respondents, as creditors, do not have to pay, as part of
the process of restitution, the appreciation in value of Lot No. 88, which is a natural consequence of nature and time.26
WHEREFORE, the petition is DENIED. The February 28, 2006 Decision of the Court of Appeals, affirming the October 22, 1999
Decision of the Regional Trial Court, Branch 87, Cebu City, and its February 7, 2007 Resolution are AFFIRMED with
MODIFICATION as follows:
1. Respondents are ORDERED to return to petitioners the just compensation they received for the expropriation of Lot No. 88,
plus legal interest, in the case of default, to be computed from the time petitioners comply with their obligation to reconvey Lot No.
88 to them;
2. Respondents are ORDERED to pay petitioners the necessary expenses the latter incurred in maintaining Lot No. 88, plus the
monetary value of their services to the extent that respondents were benefited thereby;
3. Petitioners are ENTITLED to keep whatever fruits and income they may have obtained from Lot No. 88; and
4. Respondents are also ENTITLED to keep whatever interests the amounts they received as just compensation may have earned
in the meantime, as well as the appreciation in value of Lot No. 88, which is a natural consequence of nature and time;
In light of the foregoing modifications, the case is REMANDED to the Regional Trial Court, Branch 57, Cebu City, only for the
purpose of receiving evidence on the amounts that respondents will have to pay petitioners in accordance with this Courts
decision. No costs.

SO ORDERED.

G.R. No. L-16109

October 2, 1922

M. D. TAYLOR, plaintiff-appellant,
vs.
UY TIENG PIAO and TAN LIUAN, doing business under the firm name and style of Tan Liuan & Company, defendants.
Uy TIENG PIAO, defendant-appellant.
Cohn, Fisher and DeWitt and William C. Brady for plaintiff-appellant. Gabriel La O for defendant-appellant Uy Tieng Piao.
Crossfield and O'Brien for Tan Liuan and Tan Liyan and Co.

STREET, J.:
This case comes by appeal from the Court of First Instance of the city of Manila, in a case where the court awarded to the plaintiff
the sum of P300, as damages for breach of contract. The plaintiff appeals on the ground that the amount of damages awarded is
inadequate; while the defendant Uy Tieng Piao appeals on the ground that he is not liable at all. The judgment having been
heretofore affirmed by us in a brief opinion, we now avail ourselves of the occasion of the filing of a motion to rehear by the
attorneys for the plaintiff to modify the judgment in a slight measure and to state more fully the reasons underlying our decision.
It appears that on December 12, 1918, the plaintiff contracted his services to Tan Liuan and Co., as superintendent of an oil
factory which the latter contemplated establishing in this city. The period of the contract extended over two years from the date
mentioned; and the salary was to be at the rate of P600 per month during the first year and P700 per month during the second,
with electric light and water for domestic consumption, and a residence to live in, or in lieu thereof P60 per month.
At the time this agreement was made the machinery for the contemplated factory had not been acquired, though ten expellers had
been ordered from the United States; and among the stipulations inserted in the contract with the plaintiff was a provision to the
following effect:
It is understood and agreed that should the machinery to be installed in the said factory fail, for any reason, to arrive in the city of
Manila within a period of six months from date hereof, this contract may be cancelled by the party of the second part at its option,
such cancellation, however, not to occur before the expiration of such six months.
The machinery above referred to did not arrive in the city of Manila within the six months succeeding the making of the contract;
nor was other equipment necessary for the establishment of the factory at any time provided by the defendants. The reason for
this does not appear with certainty, but a preponderance of the evidence is to the effect that the defendants, in the first months of
1919, seeing that the oil business no longer promised large returns, either cancelled the order for the machinery from choice or
were unable to supply the capital necessary to finance the project. At any rate on June 28, 1919, availing themselves in part of the
option given in the clause above quoted, the defendants communicated in writing to the plaintiff the fact that they had decided to
rescind the contract, effective June 30th then current, upon which date he was discharged. The plaintiff thereupon instituted this
action to recover damages in the amount of P13,000, covering salary and perquisites due and to become due under the contract.
The case for the plaintiff proceeds on the idea that the stipulation above quoted, giving to the defendants the right to cancel the
contract upon the contingency of the nonarrival of the machinery in Manila within six months, must be understood as applicable
only in those cases where such nonarrival is due to causes not having their origin in the will or act of the defendants, as delays
caused by strikes or unfavorable conditions of transporting by land or sea; and it is urged that the right to cancel cannot be
admitted unless the defendants affirmatively show that the failure of the machinery to arrive was due to causes of that character,
and that it did not have its origin in their own act or volition. In this connection the plaintiff relies on article 1256 of the Civil Code,
which is to the effect that the validity and fulfillment of contracts cannot be left to the will of one of the contracting parties, and to
article 1119, which says that a condition shall be deemed fulfilled if the obligor intentially impedes its fulfillment.
It will be noted that the language conferring the right of cancellation upon the defendants is broad enough to cover any case of the
nonarrival of the machinery, due to whatever cause; and the stress in the expression "for any reason" should evidently fall upon
the word "any." It must follow of necessity that the defendants had the right to cancel the contract in the contingency that occurred,
unless some clear and sufficient reason can be adduced for limiting the operation of the words conferring the right of cancellation.
Upon this point it is our opinion that the language used in the stipulation should be given effect in its ordinary sense, without
technicality or circumvention; and in this sense it is believed that the parties to the contract must have understood it.
Article 1256 of the Civil Code in our opinion creates no impediment to the insertion in a contract for personal service of a
resolutory condition permitting the cancellation of the contract by one of the parties. Such a stipulation, as can be readily seen,
does not make either the validity or the fulfillment of the contract dependent upon the will of the party to whom is conceded the
privilege of cancellation; for where the contracting parties have agreed that such option shall exist, the exercise of the option is as
much in the fulfillment of the contract as any other act which may have been the subject of agreement. Indeed, the cancellation of
a contract in accordance with conditions agreed upon beforehands is fulfillment.
In this connection, we note that the commentator Manresa has the following observation with respect to article 1256 of the Civil
Code. Says he: "It is entirely licit to leave fulfillment to the will of either of the parties in the negative form of rescission, a case
frequent in certain contracts (the letting of service for hire, the supplying of electrical energy, etc.), for in such supposed case
neither is the article infringed, nor is there any lack of equality between the persons contracting, since they remain with the same
faculties in respect to fulfillment." (Manresa, 2d ed., vol. 8, p. 610.) 1awph!l.net
Undoubtedly one of the consequences of this stipulation was that the employers were left in a position where they could dominate
the contingency, and the result was about the same as if they had been given an unqualified option to dispense with the services
of the plaintiff at the end of six months. But this circumstance does not make the stipulation illegal.

The case of Hall vs. Hardaker (61 Fla., 267) cited by the appellant Taylor, though superficially somewhat analogous, is not
precisely in point. In that case one Hardaker had contracted to render competent and efficient service as manager of a
corporation, to which position it was understood he was to be appointed. In the same contract it was stipulated that if "for any
reason" Hardaker should not be given that position, or if he should not be permitted to act in that capacity for a stated period,
certain things would be done by Hall. Upon being installed in the position aforesaid, Hardaker failed to render efficient service and
was discharged. It was held that Hall was released from the obligation to do the things that he had agreed to perform. Some of the
judges appear to have thought that the case turned on the meaning of the phrase "for any reason," and the familiar maxim was
cited that no man shall take advantage of his own wrong. The result of the case must have been the same from whatever point of
view, as there was an admitted failure on the part of Hardaker to render competent service. In the present case there was no
breach of contract by the defendants; and the argument to the contrary apparently suffers from the logical defect of assuming the
very point at issue.
But it will be said that the question is not so much one concerning the legality of the clause referred to as one concerning the
interpretation of the resolutory clause as written, the idea being that the court should adjust its interpretation of said clause to the
supposed precepts of article 1256, by restricting its operation exclusively to cases where the nonarrival of the machinery may be
due to extraneous causes not referable to the will or act of the defendants. But even when the question is viewed in this aspect
their result is the same, because the argument for the restrictive interpretation evidently proceeds on the assumption that the
clause in question is illegal in so far as it purports to concede to the defendants the broad right to cancel the contract upon
nonarrival of the machinery due to any cause; and the debate returns again to the point whether in a contract for the prestation of
service it is lawful for the parties to insert a provision giving to the employer the power to cancel the contract in a contingency
which may be dominated by himself. Upon this point what has already been said must suffice.
As we view the case, there is nothing in article 1256 which makes it necessary for us to warp the language used by the parties
from its natural meaning and thereby in legal effect to restrict the words "for any reason," as used in the contract, to mean "for any
reason not having its origin in the will or acts of the defendants." To impose this interpretation upon those words would in our
opinion constitute an unjustifiable invasion of the power of the parties to establish the terms which they deem advisable, a right
which is expressed in article 1255 of the Civil Code and constitutes one of the most fundamental conceptions of contract right
enshrined in the Code.
The view already expressed with regard to the legality and interpretation of the clause under consideration disposes in a great
measure of the argument of the appellant in so far as the same is based on article 1119 of the Civil Code. This provision supposes
a case where the obligor intentionally impedes the fulfillment of a condition which would entitle the obligee to exact performance
from the obligor; and an assumption underlying the provision is that the obligor prevents the obligee from performing some act
which the obligee is entitled to perform as a condition precedent to the exaction of what is due to him. Such an act must be
considered unwarranted and unlawful, involving per se a breach of the implied terms of the contract. The article can have no
application to an external contingency which, like that involved in this case, is lawfully within the control of the obligor.
In Spanish jurisprudence a condition like that here under discussion is designated by Manresa a facultative condition (vol. 8, p.
611), and we gather from his comment on articles 1115 and 1119 of the Civil Code that a condition, facultative as to the debtor, is
obnoxious to the first sentence contained in article 1115 and renders the whole obligation void (vol. 8, p. 131). That statement is
no doubt correct in the sense intended by the learned author, but it must be remembered that he evidently has in mind the
suspensive condition, such as is contemplated in article 1115. Said article can have no application to the resolutory condition, the
validity of which is recognized in article 1113 of the Civil Code. In other words, a condition at once facultative and resolutory may
be valid even though the condition is made to depend upon the will of the obligor.
If it were apparent, or could be demonstrated, that the defendants were under a positive obligation to cause the machinery to
arrive in Manila, they would of course be liable, in the absence of affirmative proof showing that the nonarrival of the machinery
was due to some cause not having its origin in their own act or will. The contract, however, expresses no such positive obligation,
and its existence cannot be implied in the fact of stipulation, defining the conditions under which the defendants can cancel the
contract.
Our conclusion is that the Court of First Instance committed no error in rejecting the plaintiff's claim in so far as damages are
sought for the period subsequent to the expiration of the first six months, but in assessing the damages due for the six-month
period, the trial judge evidently overlooked the item of P60, specified in the plaintiff's fourth assignment of error, which represents
commutation of house rent for the month of June, 1919. This amount the plaintiff is clearly entitled to recover, in addition to the
P300 awarded in the court below.
We note that Uy Tieng Piao, who is sued as a partner with Tan Liuan, appealed from the judgment holding him liable as a member
of the firm of Tan Liuan and Co.; and it is insisted in his behalf that he was not bound by the act of Tan Liuan as manager of Tan
Liuan and Co. in employing the plaintiff. Upon this we will merely say that the conclusion stated by the trial court in the next to the
last paragraph of the decision with respect to the liability of this appellant in our opinion in conformity with the law and facts.
The judgment appealed from will be modified by declaring that the defendants shall pay to the plaintiff the sum of P360, instead of
P300, as allowed by the lower court, and as thus modified the judgment will be affirmed with interest from November 4, 1919, as
provided in section 510 of the Code of Civil Procedure, and with costs. So ordered.

G.R. No. 172346

July 24, 2013

SPOUSES NAMEAL and LOURDES BONROSTRO, Petitioners,

vs.
SPOUSES JUAN and CONSTANCIA LUNA, Respondents.
DECISION
DEL CASTILLO, J.:
Questioned in this case is the Court of Appeals' (CA) disquisition on the matter of interest.

Petitioners spouses Nameal and Lourdes Bonrostro (spouses Bonrostro) assail through this Petition for Review on Certiorari1 the
April 15, 2005 Decision2 of the CA in CA-G.R. CV No. 56414 which affirmed with modifications the April 4, 1997 Decision3 of the
Regional Trial Court (RTC) of Quezon City, Branch 104 in Civil Case No. Q-94-18895. They likewise question the CA April17, 2006
Resolution4 denying their motion for partial reconsideration.
Factual Antecedents
In 1992, respondent Constancia Luna (Constancia), as buyer, entered into a Contract to Sell5 with Bliss Development Corporation
(Bliss) involving a house and lot identified as Lot 19, Block 26 of New Capitol Estates in Diliman, Quezon City. Barely a year after,
Constancia, this time as the seller, entered into another Contract to Sell6 with petitioner Lourdes Bonrostro (Lourdes) concerning
the same property under the following terms and conditions:
1. The stipulated price of P1,250,000.00 shall be paid by the VENDEE to the VENDOR in the following manner:
(a) P200,000.00 upon signing x x x the Contract To Sell,
(b) P300,000.00 payable on or before April 30, 1993,
(c) P330,000.00 payable on or before July 31, 1993,
(d) P417,000.00 payable to the New Capitol Estate, for 15 years at P6,867.12 a month,
2. x x x In the event the VENDEE fails to pay the second installment on time, the VENDEE will pay starting May 1, 1993 a 2%
interest on the P300,000.00 monthly. Likewise, in the event the VENDEE fails to pay the amount of P630,000.00 on the stipulated
time, this CONTRACT TO SELL shall likewise be deemed cancelled and rescinded and x x x 5% of the total contract price of
P1,250,000.00 shall be deemed forfeited in favor of the VENDOR. Unpaid monthly amortization shall likewise be deducted from
the initial down payment in favor of the VENDOR.7
Immediately after the execution of the said second contract, the spouses Bonrostro took possession of the property. However,
except for the P200,000.00 down payment, Lourdes failed to pay any of the stipulated subsequent amortization payments.
Ruling of the Regional Trial Court
On January 11, 1994, Constancia and her husband, respondent Juan Luna (spouses Luna), filed before the RTC a Complaint8 for
Rescission of Contract and Damages against the spouses Bonrostro praying for the rescission of the contract, delivery of
possession of the subject property, payment by the latter of their unpaid obligation, and awards of actual, moral and exemplary
damages, litigation expenses and attorneys fees.
In their Answer with Compulsory Counterclaim,9 the spouses Bonrostro averred that they were willing to pay their total balance of
P630,000.00 to the spouses Luna after they sought from them a 60-day extension to pay the same.10 However, during the time
that they were ready to pay the said amount in the last week of October 1993, Constancia and her lawyer, Atty. Arlene Carbon
(Atty. Carbon), did not show up at their rendezvous. On November 24, 1993, Lourdes sent Atty. Carbon a letter11 expressing her
desire to pay the balance, but received no response from the latter. Claiming that they are still willing to settle their obligation, the
spouses Bonrostro prayed that the court fix the period within which they can pay the spouses Luna.
The spouses Bonrostro likewise belied that they were not paying the monthly amortization to New Capitol Estates and asserted
that on November 18, 1993, they paid Bliss, the developer of New Capitol Estates, the amount of P46,303.44. Later during trial,
Lourdes testified that Constancia instructed Bliss not to accept amortization payments from anyone as evidenced by her March 4,
1993 letter12 to Bliss.
On April 4, 1997, the RTC rendered its Decision13 focusing on the sole issue of whether the spouses Bonrostros delay in their
payment of the installments constitutes a substantial breach of their obligation under the contract warranting rescission. The RTC
ruled that the delay could not be considered a substantial breach considering that Lourdes (1) requested for an extension within
which to pay; (2) was willing and ready to pay as early as the last week of October 1993 and even wrote Atty. Carbon about this
on November 24, 1993; (3) gave Constancia a down payment of P200,000.00; and, (4) made payment to Bliss.
The dispositive portion of the said Decision reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows:
1.) Declaring the Contract to Sell executed by the plaintiff Constancia and defendant Lourdes with respect to the house and lot
located at Blk. 26, Lot 19, New Capitol Estates, Diliman, Quezon City to be in force and effect. And that Lourdes Bonrostro must
remain in the possession of the premises.
2.) Ordering the defendants to pay plaintiffs within 60 days from receipt of this decision the sum of P300,000.00 plus an interest of
2% per month from April 1993 to November 1993.
3.) Ordering the defendants to pay plaintiffs within sixty (60) days from receipt of this decision the sum of P330,000.00 plus an
interest of 2% per month from July 1993 to November 1993.
4.) Ordering the defendants to reimburse plaintiffs the sum of P214,492.62 which plaintiffs paid to Bliss Development Corporation.
No pronouncement as to Cost.
SO ORDERED.14
As their Motion for Reconsideration15 was likewise denied in an Order16 dated July 15, 1997, the spouses Luna appealed to the
CA.17
Ruling of the Court of Appeals
In its Decision18 of April 15, 2005, the CA concluded that since the contract entered into by and between the parties is a Contract
to Sell, rescission is not the proper remedy. Moreover, the subject contract being specifically a contract to sell a real property on
installment basis, it is governed by Republic Act No. 655219 or the Maceda Law, Section 4 of which states:

Sec. 4. In case where less than two years of installment 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 cancellation or the demand for rescission of the contract by a notarial act.
(Emphases supplied)
The CA held that while the spouses Luna sent the spouses Bonrostro letters20 rescinding the contract for non-payment of the sum
of P630,000.00, the same could not be considered as valid and effective cancellation under the Maceda Law since they were
made within the 60-day grace period and were not notarized. The CA concluded that there being no cancellation effected in
accordance with the procedure prescribed by law, the contract therefore remains valid and subsisting.
The CA also affirmed the RTCs finding that Lourdes was ready to pay her obligation on November 24, 1993.
However, the CA modified the RTC Decision with respect to interest, viz:
Nevertheless, there is a need to modify the appealed decision insofar as (i) the interest imposed on the sum of P300,000.00 is
only for the period April 1993 to November 1993; (ii) the interest imposed on the sum of P330,000.00 is 2% per month and is only
for the period July 1993 to November 1993; (iii) it does not impose interest on the amount of P214,492.62 which was paid by
Constancia to BLISS in behalf of Lourdes x x x
The rule is that no interest shall be due unless it has been expressly stipulated in writing (Art. 1956, Civil Code). However, the
contract does not provide for interest in case of default in payment of the sum of P330,000.00 to Constancia and the monthly
amortizations to BLISS.
Considering that Lourdes had incurred x x x delay in the performance of her obligations, she should pay (i) interest at the rate of
2% per month on the sum of P300,000.00 from May 1, 1993 until fully paid and (ii) interest at the legal rate on the amounts of
P330,000.00 and P214,492.62 from the date of default (August 1, 1993 and April 4, 1997 date of the appealed decision,
respectively) until the same are fully paid x x x21
Hence, the dispositive portion of the said Decision:
WHEREFORE, the appealed decision is AFFIRMED with the MODIFICATIONS that paragraphs 2, 3, and 4 of its dispositive
portion shall now read:
2.) Ordering the defendants to pay plaintiffs the sum of P300,000.00 plus interest thereon at the rate of 2% per month from May 1,
1993 until fully paid;
3.) Ordering the defendants to pay plaintiffs the sum of P330,000.00 plus interest thereon at the legal rate from August 1, 1993
until fully paid; and
4.) Ordering the defendants to reimburse plaintiffs the sum of P214,492.62, which plaintiffs paid to Bliss Development Corporation,
plus interest thereon at the legal rate from filing of the complaint until fully reimbursed.
SO ORDERED.22
The spouses Luna no longer assailed the ruling. On the other hand, the spouses Bonrostro filed a Partial Motion for
Reconsideration23 questioning the above-mentioned modifications. The CA, however, denied for lack of merit the said motion in a
Resolution24 dated April 17, 2006.
Hence, this Petition for Review on Certiorari.
Issue
The basic issue in this case is whether the CA correctly modified the RTC Decision with respect to interests.
The Parties Arguments
As may be recalled, the RTC under paragraphs 2 and 3 of the dispositive portion of its Decision ordered the spouses Bonrostro to
pay the spouses Luna the sums of P300,000.00 plus interest of 2% per month from April 1993 to November 1993 and
P330,000.00 plus interest of 2% per month from July 1993 to November 1993, respectively. The CA modified these by reckoning
the payment of the 2% interest on the P300,000.00 from May 1, 1993 until fully paid and by imposing interest at the legal rate on
the P330,000.00 reckoned from August 1, 1993 until fully paid.
The spouses Bonrostro harp on the factual finding of the RTC, as affirmed by the CA, that Lourdes was willing and ready to pay
her obligation as evidenced by her November 24, 1993 letter to Atty. Carbon. They also assert that the sending of the said letter
constitutes a valid tender of payment on their part. Hence, they argue that they should not be assessed any interest subsequent to
the date of the said letter. Neither should they be ordered to pay interest on the amount of P214,492.62 which covers the
amortizations paid by the spouses Luna to Bliss. They point out that it was Constancia who prevented them from fulfilling their
obligation to pay the amortizations when she instructed Bliss not to accept payment from them.25
The spouses Luna, on the other hand, aver that the November 24, 1993 letter of Lourdes is not equivalent to tender of payment
since the mere sending of a letter expressing the intention to pay, without the accompanying payment, cannot be considered a
valid tender of payment. Also, if the spouses Bonrostro were really willing and ready to pay at that time and assuming that the
spouses Luna indeed refused to accept payment, the former should have resorted to consignation. Anent the payment of
amortization, the spouses Luna explain that under the parties Contract to Sell, Lourdes was to assume Constancias balance to
Bliss by paying the monthly amortization in order to avoid the cancellation of the earlier Contract to Sell entered into by
Constancia with Bliss.26 However, since Lourdes was remiss in paying the same, the spouses Luna were constrained to pay the
amortization. They thus assert that reimbursement to them of the said amount with interest is proper considering that by reason of
such payment, the spouses Bonrostro were spared from the interests and penalties which would have been imposed by Bliss if
the amortizations remained unpaid.
Our Ruling

The Petition lacks merit.

The spouses Bonrostros reliance on the RTCs factual finding that Lourdes was willing and ready to pay on November 24, 1993 is
misplaced.
As mentioned, the RTC in resolving the Complaint focused on the sole issue of whether the failure of spouses Bonrostro to pay
the installments of P300,000.00 on April 30, 1993 and P330,000.00 on July 31, 1993 is a substantial breach of their obligation
under the contract as to warrant the rescission of the same.27 The said court ratiocinated, viz:
After careful evaluation of the evidence testimonial and documentary, the Court believes that the defendants delay in the payment
of the two installments is not so substantial as to warrant rescission of contract. Although, the defendant failed to pay the two
installments in due time, she was able to communicate with the plaintiffs through letters requesting for an extension of two months
within which to pay the installments. In fact, on November 24, 1993 defendant informed Atty. Arlene Carbon that she was ready to
pay the installments and the money is ready for pick-up. However, plaintiff did not bother to get or pick-up the money without any
valid reason. It would be very prejudicial on the part of the defendant if the contract to sell be rescinded considering that she made
a downpayment of P200,000.00 and made partial amortization to the Bliss Development Corporation. In fact, the defendant
testified that she is willing and ready to pay the balance including the interest on November 24, 1993.
The Court is of the opinion that the delay in the payment of the balance of the purchase price of the house and lot is not so
substantial as to warrant the rescission of the contract to sell. The question of whether a breach of contract is substantial depends
upon the attendant circumstance. x x x28
Clearly, the RTC arrived at the above-quoted conclusion based on its mistaken premise that rescission is applicable to the case.
Hence, its determination of whether there was substantial breach. As may be recalled, however, the CA, in its assailed Decision,
found the contract between the parties as a contract to sell, specifically of a real property on installment basis, and as such
categorically declared rescission to be not the proper remedy. This is considering that in a contract to sell, payment of the price is
a positive suspensive condition, failure of which is not a breach of contract warranting rescission under Article 119129 of the Civil
Code but rather just an event that prevents the supposed seller from being bound to convey title to the supposed buyer.30 Also,
and as correctly ruled by the CA, Article 1191 cannot be applied to sales of real property on installment since they are governed by
the Maceda Law.31
There being no breach to speak of in case of non-payment of the purchase price in a contract to sell, as in this case, the RTCs
factual finding that Lourdes was willing and able to pay her obligation a conclusion arrived at in connection with the said courts
determination of whether the non-payment of the purchase price in accordance with the terms of the contract was a substantial
breach warranting rescission therefore loses significance. The spouses Bonrostros reliance on the said factual finding is thus
misplaced. They cannot invoke their readiness and willingness to pay their obligation on November 24, 1993 as an excuse from
being made liable for interest beyond the said date.
The spouses Bonrostro are liable for interest on the installments due from the date of default until fully paid.
The spouses Bonrostro assert that Lourdes letter of November 24, 1993 amounts to tender of payment of the remaining balance
amounting to P630,000.00. Accordingly, thenceforth, accrual of interest should be suspended.
Tender of payment "is the manifestation by the debtor of a desire to comply with or pay an obligation. If refused without just cause,
the tender of payment will discharge the debtor of the obligation to pay but only after a valid consignation of the sum due shall
have been made with the proper court."32 "Consignation is the deposit of the proper amount with a judicial authority in
accordance with rules prescribed by law, after the tender of payment has been refused or because of circumstances which render
direct payment to the creditor impossible or inadvisable."33
"Tender of payment, without more, produces no effect."34 "To have the effect of payment and the consequent extinguishment of
the obligation to pay, the law requires the companion acts of tender of payment and consignation."35
As to the effect of tender of payment on interest, noted civilist Arturo M. Tolentino explained as follows:
When a tender of payment is made in such a form that the creditor could have immediately realized payment if he had accepted
the tender, followed by a prompt attempt of the debtor to deposit the means of payment in court by way of consignation, the
accrual of interest on the obligation will be suspended from the date of such tender. But when the tender of payment is not
accompanied by the means of payment, and the debtor did not take any immediate step to make a consignation, then interest is
not suspended from the time of such tender. x x x x36 (Emphasis supplied)
Here, the subject letter merely states Lourdes willingness and readiness to pay but it was not accompanied by payment. She
claimed that she made numerous telephone calls to Atty. Carbon reminding the latter to collect her payment, but, neither said
lawyer nor Constancia came to collect the payment. After that, the spouses Bonrostro took no further steps to effect payment.
They did not resort to consignation of the payment with the proper court despite knowledge that under the contract, non-payment
of the installments on the agreed date would make them liable for interest thereon. The spouses Bonrostro erroneously assumed
that their notice to pay would excuse them from paying interest. Their claimed tender of payment did not produce any effect
whatsoever because it was not accompanied by actual payment or followed by consignation. Hence, it did not suspend the
running of interest. The spouses Bonrostro are therefore liable for interest on the subject installments from the date of default until
full payment of the sums of P300,000.00 and P330,000.00.
The spouses Bonrostro are likewise liable for interest on the amount paid by the spouses Luna to Bliss as amortization.
The spouses Bonrostro want to be relieved from paying interest on the amount of P214,492.62 which the spouses Luna paid to
Bliss as amortizations by asserting that they were prevented by the latter from fulfilling such obligation. They invoke Art. 1186 of
the Civil Code which provides that "the condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment."
However, the Court finds Art. 1186 inapplicable to this case. The said provision explicitly speaks of a situation where it is the
obligor who voluntarily prevents fulfillment of the condition. Here, Constancia is not the obligor but the obligee. Moreover, even if
this significant detail is to be ignored, the mere intention to prevent the happening of the condition or the mere placing of
ineffective obstacles to its compliance, without actually preventing fulfillment is not sufficient for the application of Art. 1186.37 Two
requisites must concur for its application, to wit: (1) intent to prevent fulfillment of the condition; and, (2) actual prevention of

compliance.38
In this case, while it is undisputed that Constancia indeed instructed Bliss on March 4, 1994 not to accept payment from anyone
but her, there is nothing on record to show that Bliss heeded the instruction of Constancia as to actually prevent the spouses
Bonrostro from making payments to Bliss. There is no showing that subsequent to the said letter, the spouses Bonrostro
attempted to make payment to and was refused by Bliss. Neither was there a witness presented to prove that Bliss indeed gave
effect to the instruction contained in Constancias letter. While Bliss Project Development Officer, Mr. Ariel Cordero, testified during
trial, nothing could be gathered from his testimony regarding this except for the fact that Bliss received the said letter.39 In view of
these, the spouses Luna could not be said to have placed an effective obstacle as to actually prevent the spouses Bonrostro from
making amortization payments to Bliss.
On the other hand, there are telling circumstances which militate against the spouses Bonrostros claimed keenness to comply
with their obligation to pay the monthly amortization. After the execution of the contract in January 1993, they immediately took
possession of the property but failed to make amortization payments. It was only after seven months or on November 18, 1993
that they made payments to Bliss in the amount of P46,303.44.40 Whether the same covers previous unpaid amortizations is also
not clear as the receipt does not indicate the same41 and per Statement of Account42 as of March 8, 1994 issued by Bliss, the
unpaid monthly amortizations for February to November 1993 in the total amount of P78,271.69 remained outstanding. There was
also no payment made of the amortizations due on December 4, 1993 and January 4, 199443 before the filing of the Complaint on
January 11, 1994.
On the part of the spouses Luna, it is understandable that they paid the amortizations due.1wphi1 The assumption of payment of
the monthly amortization to Bliss was made part of the obligations of the spouses Bonrostro under their contract with the spouses
Luna precisely to avoid the cancellation of the earlier contract entered into by Constancia with Bliss. But as the spouses Bonrostro
failed in this obligation, the spouses Luna were constrained to pay Bliss to avoid the adverse effect of such failure. This act of the
spouses Luna proved to be even more beneficial to the spouses Bonrostro as the cancellation of the Contract to Sell between
Constancia and Bliss would result in the cancellation of the subsequent Contract to Sell between Constancia and Lourdes. Also,
the spouses Bonrostro were relieved from paying the penalties that would have been imposed by Bliss if the monthly
amortizations covered by the said payment remained unpaid. The Statements of Account44 issued by Bliss clearly state that each
monthly amortization is due on or before the fourth day of every month and a penalty equivalent to 1/10th of 1% per day of delay
shall be imposed for all payments made after due date. That translates to 3% monthly or 36% per annum rate of interest, three
times higher than the 12% per annum rate of interest correctly imposed by the CA.
Hence, the resulting situation is that the spouses Luna are constrained to part with their money while the spouses Bonrostro,
despite being remiss in their obligation to pay the monthly amortization, are relieved from paying higher penalties at the expense
of the former. This is aside from the fact that the spouses Bonrostro are in continued possession of the subject property and are
enjoying the beneficial use thereof. Under the circumstances and considering that the spouses Bonrostro are obviously in delay in
complying with their obligation to pay the amortizations due from February 1993 to January 1995 for which the spouses Luna paid
P214,492.62,45 the CA correctly ordered the reimbursement to the latter of the said amount with interest. "Delay in the
performance of an obligation is looked upon with disfavor because, when a party to a contract incurs delay, the other party who
performs his part of the contract suffers damages thereby."46 As discussed, the spouses Luna obviously suffered damages
brought about by the failure of the spouses Bonrostro to comply with their obligation on time. "And, sans elaboration of the matter
at hand, damages take the form of interest x x x."47
Under Article 2209 of the Civil Code, "if the obligation consists in the payment of a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest x x x." There being no stipulation on interest in case of delay in the payment of
amortization, the CA thus correctly imposed interest at the legal rate which is now 12% per annum.
WHEREFORE, the Petition for Review on Certiorari is DENIED and the assailed Decision dated April 15, 2005 and the Resolution
dated April 17, 2006 of the Court of Appeals in CA-G.R. CV No. 56414 are AFFIRMED.
SO ORDERED.

G.R. No. 177050

July 01, 2013

CARLOS LIM, CONSOLACION LIM, EDMUNDO LIM,* CARLITO LIM, SHIRLEY LEODADIA DIZON,** AND ARLEEN LIM
FERNANDEZ, PETITIONERS,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, RESPONDENT.
DECISION
DEL CASTILLO, J.:
"While the law recognizes the right of a bank to foreclose a mortgage upon the mortgagors failure to pay his obligation, it is
imperative that such right be exercised according to its clear mandate. Each and every requirement of the law must be complied
with, lest, the valid exercise of the right would end."1
This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the February 22, 2007 Decision3 of the Court of
Appeals (CA) in CA-G.R. CV No. 59275.
Factual Antecedents
On November 24, 1969, petitioners Carlos, Consolacion, and Carlito, all surnamed Lim, obtained a loan of P40,000.00 (Lim
Account) from respondent Development Bank of the Philippines (DBP) to finance their cattle raising business.4 On the same day,
they executed a Promissory Note5 undertaking to pay the annual amortization with an interest rate of 9% per annum and penalty
charge of 11% per annum.

On December 30, 1970, petitioners Carlos, Consolacion, Carlito, and Edmundo, all surnamed Lim; Shirley Leodadia Dizon, Arleen
Lim Fernandez, Juan S. Chua,6 and Trinidad D. Chua7 obtained another loan from DBP8 in the amount of P960,000.00 (Diamond
L Ranch Account).9 They also executed a Promissory Note,10 promising to pay the loan annually from August 22, 1973 until
August 22, 1982 with an interest rate of 12% per annum and a penalty charge of 1/3% per month on the overdue amortization.
To secure the loans, petitioners executed a Mortgage11 in favor of DBP over real properties covered by the following titles
registered in the Registry of Deeds for the Province of South Cotabato:
(a) TCT No. T-6005 x x x in the name of Edmundo Lim;
(b) TCT No. T-6182 x x x in the name of Carlos Lim;
(c) TCT No. T-7013 x x x in the name of Carlos Lim;
(d) TCT No. T-7012 x x x in the name of Carlos Lim;
(e) TCT No. T-7014 x x x in the name of Edmundo Lim;
(f) TCT No. T-7016 x x x in the name of Carlito Lim;
(g) TCT No. T-28922 x x x in the name of Consolacion Lim;
(h) TCT No. T-29480 x x x in the name of Shirley Leodadia Dizon;
(i) TCT No. T-24654 x x x in the name of Trinidad D. Chua; and
(j) TCT No. T-25018 x x x in the name of Trinidad D. Chuas deceased husband Juan Chua.12
Due to violent confrontations between government troops and Muslim rebels in Mindanao from 1972 to 1977, petitioners were
forced to abandon their cattle ranch.13 As a result, their business collapsed and they failed to pay the loan amortizations.14
In 1978, petitioners made a partial payment in the amount of P902,800.00,15 leaving an outstanding loan balance of P610,498.30,
inclusive of charges and unpaid interest, as of September 30, 1978.16
In 1989, petitioners, represented by Edmundo Lim (Edmundo), requested from DBP Statements of Account for the "Lim Account"
and the "Diamond L Ranch Account."17 Quoted below are the computations in the Statements of Account, as of January 31, 1989
which were stamped with the words "Errors & Omissions Excepted/Subject to Audit:"
1wphi1
Diamond L Ranch Account:
Matured [Obligation]:
Principal

P 939,973.33

Regular Interest

561,037.14

Advances

34,589.45

Additional Interest

2,590,786.26

Penalty Charges

1,068,147.19

Total claims as of January 31, 1989

P 5,194,533.37

Lim Account:
Matured [Obligation]:
Principal

P 40,000.00

Regular Interest

5,046.97

Additional Interest

92,113.56

Penalty Charges

39,915.46

Total claims as of January 31, 1989

P 177,075.99

Claiming to have already paid P902,800.00, Edmundo requested for an amended statement of account.20
On May 4, 1990, Edmundo made a follow-up on the request for recomputation of the two accounts.21 On May 17, 1990, DBPs
General Santos Branch informed Edmundo that the Diamond L Ranch Account amounted to P2,542,285.60 as of May 31, 199022
and that the mortgaged properties located at San Isidro, Lagao, General Santos City, had been subjected to Operation Land
Transfer under the Comprehensive Agrarian Reform Program (CARP) of the government.23 Edmundo was also advised to
discuss with the Department of Agrarian Reform (DAR) and the Main Office of DBP24 the matter of the expropriated properties.
Edmundo asked DBP how the mortgaged properties were ceded by DAR to other persons without their knowledge.25 No reply
was made.26
On April 30, 1991, Edmundo again signified petitioners intention to settle the Diamond L Ranch Account.27 Again, no reply was
made.28
On February 21, 1992, Edmundo received a Notice of Foreclosure scheduled the following day.29 To stop the foreclosure, he was
advised by the banks Chief Legal Counsel to pay an interest covering a 60-days period or the amount of P60,000.00 to postpone
the foreclosure for 60 days.30 He was also advised to submit a written proposal for the settlement of the loan accounts.31

In a letter32 dated March 20, 1992, Edmundo proposed the settlement of the accounts through dacion en pago, with the balance
to be paid in equal quarterly payments over five years.
In a reply-letter33 dated May 29, 1992, DBP rejected the proposal and informed Edmundo that unless the accounts are fully
settled as soon as possible, the bank will pursue foreclosure proceedings.
DBP then sent Edmundo the Statements of Account34 as of June 15, 1992 which were stamped with the words "Errors &
Omissions Excepted/Subject to Audit" indicating the following amounts: (1) Diamond L Ranch: P7,210,990.27 and (2) Lim
Account: P187,494.40.
On June 11, 1992, Edmundo proposed to pay the principal and the regular interest of the loans in 36 equal monthly
installments.35
On July 3, 1992, DBP advised Edmundo to coordinate with Branch Head Bonifacio Tamayo, Jr. (Tamayo).36 Tamayo promised to
review the accounts.37
On September 21, 1992, Edmundo received another Notice from the Sheriff that the mortgaged properties would be auctioned on
November 22, 1992.38 Edmundo again paid P30,000.00 as additional interest to postpone the auction.39 But despite payment of
P30,000.00, the mortgaged properties were still auctioned with DBP emerging as the highest bidder in the amount of
P1,086,867.26.40 The auction sale, however, was later withdrawn by DBP for lack of jurisdiction.41
Thereafter, Tamayo informed Edmundo of the banks new guidelines for the settlement of outstanding loan accounts under Board
Resolution No. 0290-92.42 Based on these guidelines, petitioners outstanding loan obligation was computed at P3,500,000.00
plus.43 Tamayo then proposed that petitioners pay 10% downpayment and the remaining balance in 36 monthly installments.44
He also informed Edmundo that the bank would immediately prepare the Restructuring Agreement upon receipt of the
downpayment and that the conditions for the settlement have been "pre-cleared" with the banks Regional Credit Committee.45
Thus, Edmundo wrote a letter46 on October 30, 1992 manifesting petitioners assent to the proposal.
On November 20, 1992, Tamayo informed Edmundo that the proposal was accepted with some minor adjustments and that an
initial payment should be made by November 27, 1992.47
On December 15, 1992, Edmundo paid the downpayment of P362,271.7548 and was asked to wait for the draft Restructuring
Agreement.49
However, on March 16, 1993, Edmundo received a letter50 from Tamayo informing him that the Regional Credit Committee
rejected the proposed Restructuring Agreement; that it required downpayment of 50% of the total obligation; that the remaining
balance should be paid within one year; that the interest rate should be non prime or 18.5%, whichever is higher; and that the
proposal is effective only for 90 days from March 5, 1993 to June 2, 1993.51
Edmundo, in a letter52 dated May 28, 1993, asked for the restoration of their previous agreement.53 On June 5, 1993, the bank
replied,54 viz:
This has reference to your letter dated May 28, 1993, which has connection to your desire to restructure the Diamond L
Ranch/Carlos Lim Accounts.
We wish to clarify that what have been agreed between you and the Branch are not final until [the] same has been approved by
higher authorities of the Bank. We did [tell] you during our discussion that we will be recommending the restructuring of your
accounts with the terms and conditions as agreed. Unfortunately, our Regional Credit Committee did not agree to the terms and
conditions as recommended, hence, the subject of our letter to you on March 15, 1993.
Please be informed further, that the Branch cannot do otherwise but to comply with the conditions imposed by the Regional Credit
Committee. More so, the time frame given had already lapsed on June 2, 1993.
Unless we will receive a favorable action on your part soonest, the Branch will be constrained to do appropriate action to protect
the interest of the Bank."55
On July 28, 1993, Edmundo wrote a letter56 of appeal to the Regional Credit Committee.
In a letter57 dated August 16, 1993, Tamayo informed Edmundo that the previous Restructuring Agreement was reconsidered and
approved by the Regional Credit Committee subject to the following additional conditions, to wit:
1) Submission of Board Resolution and Secretarys Certificate designating you as authorized representative in behalf of Diamond
L Ranch;
2) Payment of March 15 and June 15, 1993 amortizations within 30 days from date hereof; and
3) Submission of SEC registration.
In this connection, please call immediately x x x our Legal Division to guide you for the early documentation of your approved
restructuring.
Likewise, please be reminded that upon failure on your part to sign and perfect the documents and comply [with] other conditions
within (30) days from date of receipt, your approved recommendation shall be deemed CANCELLED and your deposit of
P362,271.75 shall be applied to your account.
No compliance was made by Edmundo.58
On September 21, 1993, Edmundo received Notice that the mortgaged properties were scheduled to be auctioned on that day.59
To stop the auction sale, Edmundo asked for an extension until November 15, 199360 which was approved subject to additional
conditions:
Your request for extension is hereby granted with the conditions that:
1) This will be the last and final extension to be granted your accounts; and

2) That all amortizations due from March 1993 to November 1993 shall be paid including the additional interest computed at
straight 18.5% from date of your receipt of notice of approval, viz:
xxxx
Failure on your part to comply with these conditions, the Bank will undertake appropriate legal measures to protect its interest.
Please give this matter your preferential attention.61
On November 8, 1993, Edmundo sent Tamayo a telegram, which reads:
Acknowledge receipt of your Sept. 27 letter. I would like to finalize documentation of restructuring Diamond L Ranch and Carlos
Lim Accounts. However, we would need clarification on amortizations due on NTFI means [sic]. I will call x x x your Legal
Department at DBP Head Office by Nov. 11. Pls. advise who[m] I should contact. Thank you.62
Receiving no response, Edmundo scheduled a meeting with Tamayo in Manila.63 During their meeting, Tamayo told Edmundo
that he would send the draft of the Restructuring Agreement by courier on November 15, 1993 to the Main Office of DBP in
Makati, and that Diamond L Ranch need not submit the Board Resolution, the Secretarys Certificate, and the SEC Registration
since it is a single proprietorship.64
On November 24, 1993 and December 3, 1993, Edmundo sent telegrams to Tamayo asking for the draft of the Restructuring
Agreement.65
On November 29, 1993, the documents were forwarded to the Legal Services Department of DBP in Makati for the parties
signatures. At the same time, Edmundo was required to pay the amount of P1,300,672.75, plus a daily interest of P632.15 starting
November 16, 1993 up to the date of actual payment of the said amount.66
On December 19, 1993, Edmundo received the draft of the Restructuring Agreement.67
In a letter68 dated January 6, 1994, Tamayo informed Edmundo that the bank cancelled the Restructuring Agreement due to his
failure to comply with the conditions within a reasonable time.
On January 10, 1994, DBP sent Edmundo a Final Demand Letter asking that he pay the outstanding amount of P6,404,412.92, as
of November 16, 1993, exclusive of interest and penalty charges.69
Edmundo, in a letter70 dated January 18, 1994, explained that his lawyer was not able to review the agreement due to the
Christmas holidays. He also said that his lawyer was requesting clarification on the following points:
Can the existing obligations of the Mortgagors, if any, be specified in the Restructuring Agreement already?
Is there a statement showing all the accrued interest and advances that shall first be paid before the restructuring shall be
implemented?
Should Mr. Jun Sarenas Chua and his wife Mrs. Trinidad Chua be required to sign as Mortgagors considering that Mr. Chua is
deceased and the pasture lease which he used to hold has already expired?71
Edmundo also indicated that he was prepared to pay the first quarterly amortization on March 15, 1994 based on the total
obligations of P3,260,445.71, as of December 15, 1992, plus interest.72
On January 28, 1994, Edmundo received from the bank a telegram73 which reads:
We refer to your cattle ranch loan carried at our DBP General Santos City Branch.
Please coordinate immediately with our Branch Head not later than 29 January 1994, to forestall the impending foreclosure action
on your account.
Please give the matter your utmost attention.
The bank also answered Edmundos queries, viz:
In view of the extended leave of absence of AVP Bonifacio A. Tamayo, Jr. due to the untimely demise of his father, we regret [that]
he cannot personally respond to your letter of January 18, 1994. However, he gave us the instruction to answer your letter on
direct to the point basis as follows:
- Yes to Items No. 1 and 2,
- No longer needed on Item No. 3
AVP Tamayo would like us also to convey to you to hurry up with your move to settle the obligation, while the foreclosure action is
still pending with the legal division. He is afraid you might miss your last chance to settle the account of your parents.74
Edmundo then asked about the status of the Restructuring Agreement as well as the computation of the accrued interest and
advances75 but the bank could not provide any definite answer.76
On June 8, 1994, the Office of the Clerk of Court and Ex-Officio Provincial Sheriff of the RTC of General Santos City issued a
Notice77 resetting the public auction sale of the mortgaged properties on July 11, 1994. Said Notice was published for three
consecutive weeks in a newspaper of general circulation in General Santos City.78
On July 11, 1994, the Ex-Officio Sheriff conducted a public auction sale of the mortgaged properties for the satisfaction of
petitioners total obligations in the amount of P5,902,476.34. DBP was the highest bidder in the amount of P3,310,176.55.79
On July 13, 1994, the Ex-Officio Sheriff issued the Sheriffs Certificate of Extra-Judicial Sale in favor of DBP covering 11 parcels of
land.80
In a letter81 dated September 16, 1994, DBP informed Edmundo that their right of redemption over the foreclosed properties
would expire on July 28, 1995, to wit:

This is to inform you that your right of redemption over your former property/ies acquired by the Bank on July 13, 1994, thru ExtraJudicial Foreclosure under Act 3135 will lapse on July 28, 1995.
In view thereof, to entitle you of the maximum condonable amount (Penal Clause, AI on Interest, PC/Default Charges) allowed by
the Bank, we are urging you to exercise your right within six (6) months from the date of auction sale on or before January 12,
1995.
Further, failure on your part to exercise your redemption right by July 28, 1995 will constrain us to offer your former property/ies in
a public bidding.
Please give this matter your preferential attention. Thank you.82
On July 28, 1995, petitioners filed before the RTC of General Santos City, a Complaint83 against DBP for Annulment of
Foreclosure and Damages with Prayer for Issuance of a Writ of Preliminary Injunction and/or Temporary Restraining Order.
Petitioners alleged that DBPs acts and omissions prevented them from fulfilling their obligation; thus, they prayed that they be
discharged from their obligation and that the foreclosure of the mortgaged properties be declared void. They likewise prayed for
actual damages for loss of business opportunities, moral and exemplary damages, attorneys fees, and expenses of litigation.84
On same date, the RTC issued a Temporary Restraining Order85 directing DBP to cease and desist from consolidating the titles
over petitioners foreclosed properties and from disposing the same.
In an Order86 dated August 18, 1995, the RTC granted the Writ of Preliminary Injunction and directed petitioners to post a bond in
the amount of P3,000,000.00.
DBP filed its Answer,87 arguing that petitioners have no cause of action;88 that petitioners failed to pay their loan obligation;89
that as mandated by Presidential Decree No. 385, initial foreclosure proceedings were undertaken in 1977 but were aborted
because petitioners were able to obtain a restraining order;90 that on December 18, 1990, DBP revived its application for
foreclosure but it was again held in abeyance upon petitioners request;91 that DBP gave petitioners written and verbal demands
as well as sufficient time to settle their obligations;92 and that under Act 3135,93 DBP has the right to foreclose the properties.94
Ruling of the Regional Trial Court
On December 10, 1996, the RTC rendered a Decision,95 the dispositive portion of which reads:
WHEREFORE, in light of the foregoing, judgment is hereby rendered:
(1) Declaring that the [petitioners] have fully extinguished and discharged their obligation to the [respondent] Bank;
(2) Declaring the foreclosure of [petitioners] mortgaged properties, the sale of the properties under the foreclosure proceedings
and the resultant certificate of sale issued by the foreclosing Sheriff by reason of the foreclosure NULL and VOID;
(3) Ordering the return of the [properties] to [petitioners] free from mortgage liens;
(4) Ordering [respondent] bank to pay [petitioners], actual and compensatory damages of P170,325.80;
(5) Temperate damages of P50,000.00;
(c) Moral damages of P500,000.00;
(d) Exemplary damages of P500,000.00;
(e) Attorneys fees in the amount of P100,000.00; and
(f) Expenses of litigation in the amount of P20,000.00.
[Respondent] Banks counterclaims are hereby DISMISSED.
[Respondent] Bank is likewise ordered to pay the costs of suit.
SO ORDERED.96
Ruling of the Court of Appeals
On appeal, the CA reversed and set aside the RTC Decision. Thus:
WHEREFORE, in view of the foregoing, the instant appeal is hereby GRANTED. The assailed Decision dated 10 December 1996
is hereby REVERSED and SET ASIDE. A new judgment is hereby rendered. It shall now read as follows:
WHEREFORE, premises considered, judgment is hereby rendered:
Ordering the dismissal of the Complaint in Civil Case No. 5608;
Declaring the extrajudicial foreclosure of [petitioners] mortgaged properties as valid;
Ordering [petitioners] to pay the [respondent] the amount of Two Million Five Hundred Ninety Two Thousand Two Hundred Ninety
Nine [Pesos] and Seventy-Nine Centavos (P2,592,299.79) plus interest and penalties as stipulated in the Promissory Note
computed from 11 July 1994 until full payment; and
Ordering [petitioners] to pay the costs.
SO ORDERED.
SO ORDERED.97
Issues
Hence, the instant recourse by petitioners raising the following issues:

1. Whether x x x respondents own wanton, reckless and oppressive acts and omissions in discharging its reciprocal obligations to
petitioners effectively prevented the petitioners from paying their loan obligations in a proper and suitable manner;
2. Whether x x x as a result of respondents said acts and omissions, petitioners obligations should be deemed fully complied with
and extinguished in accordance with the principle of constructive fulfillment;
3. Whether x x x the return by the trial Court of the mortgaged properties to petitioners free from mortgage liens constitutes unjust
enrichment;
4. Whether x x x the low bid price made by the respondent for petitioners mortgaged properties during the foreclosure sale is so
gross, shocking to the conscience and inherently iniquitous as to constitute sufficient ground for setting aside the foreclosure sale;
5. Whether x x x the restructuring agreement reached and perfected between the petitioners and the respondent novated and
extinguished petitioners loan obligations to respondent under the Promissory Notes sued upon; and
6. Whether x x x the respondent should be held liable to pay petitioners actual and compensatory damages, temperate damages,
moral damages, exemplary damages, attorneys fees and expenses of litigation.98
Petitioners Arguments
Petitioners seek the reinstatement of the RTC Decision which declared their obligation fully extinguished and the foreclosure
proceedings of their mortgaged properties void.
Relying on the Principle of Constructive Fulfillment, petitioners insist that their obligation should be deemed fulfilled since DBP
prevented them from performing their obligation by charging excessive interest and penalties not stipulated in the Promissory
Notes, by failing to promptly provide them with the correct Statements of Account, and by cancelling the Restructuring Agreement
even if they already paid P362,271.75 as downpayment.99 They likewise deny any fault or delay on their part in finalizing the
Restructuring Agreement.100
In addition, petitioners insist that the foreclosure sale is void for lack of personal notice101 and the inadequacy of the bid price.102
They contend that at the time of the foreclosure, petitioners obligation was not yet due and demandable,103 and that the
restructuring agreement novated and extinguished petitioners loan obligation.104
Finally, petitioners claim that DBP acted in bad faith or in a wanton, reckless, or oppressive manner; hence, they are entitled to
actual, temperate, moral and exemplary damages, attorneys fees, and expenses of litigation.105
Respondents Arguments
DBP, on the other hand, denies acting in bad faith or in a wanton, reckless, or oppressive manner106 and in charging excessive
interest and penalties.107 According to it, the amounts in the Statements of Account vary because the computations were based
on different cut-off dates and different incentive schemes.108
DBP further argues that the foreclosure sale is valid because gross inadequacy of the bid price as a ground for the annulment of
the sale applies only to judicial foreclosure.109 It likewise maintains that the Promissory Notes and the Mortgage were not
novated by the proposed Restructuring Agreement.110
As to petitioners claim for damages, DBP contends it is without basis because it did not act in bad faith or in a wanton, reckless,
or oppressive manner.111
Our Ruling
The Petition is partly meritorious.
The obligation was not extinguished
or discharged.
The Promissory Notes subject of the instant case became due and demandable as early as 1972 and 1976. The only reason the
mortgaged properties were not foreclosed in 1977 was because of the restraining order from the court. In 1978, petitioners made
a partial payment of P902,800.00. No subsequent payments were made. It was only in 1989 that petitioners tried to negotiate the
settlement of their loan obligations. And although DBP could have foreclosed the mortgaged properties, it instead agreed to
restructure the loan. In fact, from 1989 to 1994, DBP gave several extensions for petitioners to settle their loans, but they never
did, thus, prompting DBP to cancel the Restructuring Agreement.
Petitioners, however, insist that DBPs cancellation of the Restructuring Agreement justifies the extinguishment of their loan
obligation under the Principle of Constructive Fulfillment found in Article 1186 of the Civil Code.
We do not agree.
As aptly pointed out by the CA, Article 1186 of the Civil Code, which states that "the condition shall be deemed fulfilled when the
obligor voluntarily prevents its fulfillment," does not apply in this case,112 viz:
Article 1186 enunciates the doctrine of constructive fulfillment of suspensive conditions, which applies when the following three (3)
requisites concur, viz: (1) The condition is suspensive; (2) The obligor actually prevents the fulfillment of the condition; and (3) He
acts voluntarily. Suspensive condition is one the happening of which gives rise to the obligation. It will be irrational for any Bank to
provide a suspensive condition in the Promissory Note or the Restructuring Agreement that will allow the debtor-promissor to be
freed from the duty to pay the loan without paying it.113
Besides, petitioners have no one to blame but themselves for the cancellation of the Restructuring Agreement. It is significant to
point out that when the Regional Credit Committee reconsidered petitioners proposal to restructure the loan, it imposed additional
conditions. In fact, when DBPs General Santos Branch forwarded the Restructuring Agreement to the Legal Services Department
of DBP in Makati, petitioners were required to pay the amount of P1,300,672.75, plus a daily interest of P632.15 starting
November 16, 1993 up to the date of actual payment of the said amount.114 This, petitioners failed to do. DBP therefore had
reason to cancel the Restructuring Agreement.

Moreover, since the Restructuring Agreement was cancelled, it could not have novated or extinguished petitioners loan obligation.
And in the absence of a perfected Restructuring Agreement, there was no impediment for DBP to exercise its right to foreclose the
mortgaged properties.115
The foreclosure sale is not valid.
But while DBP had a right to foreclose the mortgage, we are constrained to nullify the foreclosure sale due to the banks failure to
send a notice of foreclosure to petitioners.
We have consistently held that unless the parties stipulate, "personal notice to the mortgagor in extrajudicial foreclosure
proceedings is not necessary"116 because Section 3117 of Act 3135 only requires the posting of the notice of sale in three public
places and the publication of that notice in a newspaper of general circulation.
In this case, the parties stipulated in paragraph 11 of the Mortgage that:
11. All correspondence relative to this mortgage, including demand letters, summons, subpoenas, or notification of any judicial or
extra-judicial action shall be sent to the Mortgagor at xxx or at the address that may hereafter be given in writing by the Mortgagor
or the Mortgagee;118
However, no notice of the extrajudicial foreclosure was sent by DBP to petitioners about the foreclosure sale scheduled on July 11,
1994. The letters dated January 28, 1994 and March 11, 1994 advising petitioners to immediately pay their obligation to avoid the
impending foreclosure of their mortgaged properties are not the notices required in paragraph 11 of the Mortgage. The failure of
DBP to comply with their contractual agreement with petitioners, i.e., to send notice, is a breach sufficient to invalidate the
foreclosure sale.
In Metropolitan Bank and Trust Company v. Wong,119 we explained that:
x x x a contract is the law between the parties and, that absent any showing that its provisions are wholly or in part contrary to law,
morals, good customs, public order, or public policy, it shall be enforced to the letter by the courts. Section 3, Act No. 3135 reads:
Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the
municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall
also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality and
city.
The Act only requires (1) the posting of notices of sale in three public places, and (2) the publication of the same in a newspaper
of general circulation. Personal notice to the mortgagor is not necessary. Nevertheless, the parties to the mortgage contract are
not precluded from exacting additional requirements. In this case, petitioner and respondent in entering into a contract of real
estate mortgage, agreed inter alia:
all correspondence relative to this mortgage, including demand letters, summonses, subpoenas, or notifications of any judicial or
extra-judicial action shall be sent to the MORTGAGOR at 40-42 Aldeguer St. Iloilo City, or at the address that may hereafter be
given in writing by the MORTGAGOR to the MORTGAGEE.
Precisely, the purpose of the foregoing stipulation is to apprise respondent of any action which petitioner might take on the subject
property, thus according him the opportunity to safeguard his rights. When petitioner failed to send the notice of foreclosure sale to
respondent, he committed a contractual breach sufficient to render the foreclosure sale on November 23, 1981 null and void.120
(Emphasis supplied)
In view of foregoing, the CA erred in finding the foreclosure sale valid.
Penalties and interest rates should
be expressly stipulated in writing.
As to the imposition of additional interest and penalties not stipulated in the Promissory Notes, this should not be allowed. Article
1956 of the Civil Code specifically states that "no interest shall be due unless it has been expressly stipulated in writing." Thus, the
payment of interest and penalties in loans is allowed only if the parties agreed to it and reduced their agreement in writing.121
In this case, petitioners never agreed to pay additional interest and penalties. Hence, we agree with the RTC that these are illegal,
and thus, void. Quoted below are the findings of the RTC on the matter, to wit:
Moreover, in its various statements of account, [respondent] Bank charged [petitioners] for additional interests and penalties which
were not stipulated in the promissory notes.
In the Promissory Note, Exhibit "A," for the principal amount of P960,000.00, only the following interest and penalty charges were
stipulated:
(1) interest at the rate of twelve percent (12%) per annum;
(2) penalty charge of one-third percent (1/3%) per month on overdue amortization;
(3) attorneys fees equivalent to ten percent (10%) of the total indebtedness then unpaid; and
(4) advances and interest thereon at one percent (1%) per month.
[Respondent] bank, however, charged [petitioners] the following items as shown in its Statement of Account for the period as of 31
January 1989, Exhibit "D:"
(1) regular interest in the amount of P561,037.14;
(2) advances in the amount of P34,589.45;
(3) additional interest in the amount of P2,590,786.26; and

(4) penalty charges in the amount of P1,068,147.19.

The Court finds no basis under the Promissory Note, Exhibit "A," for charging the additional interest in the amount of
P2,590,786.26. Moreover, it is incomprehensible how the penalty charge of 1/3% per month on the overdue amortization could
amount to P1,086,147.19 while the regular interest, which was stipulated at the higher rate of 12% per annum, amounted to only
P561,037.14 or about half of the amount allegedly due as penalties.
In Exhibit "N," which is the statement of account x x x as of 15 June 1992, [respondent] bank charged plaintiffs the following items:
(1) regular interest in the amount of P561,037.14;
(2) advances in the amount of P106,893.93;
(3) additional interest on principal in the amount of P1,233,893.79;
(4) additional interest on regular interest in the amount of P859,966.83;
(5) additional interest on advances in the amount of P27,206.45;
(6) penalty charges on principal in the amount of P1,639,331.15;
(7) penalty charges on regular interest in the amount of P1,146,622.55;
(8) penalty charges on advances in the amount of P40,520.53.
Again, the Court finds no basis in the Promissory Note, Exhibit "A," for the imposition of additional interest on principal in the
amount of P1,233,893.79, additional interest on regular interest in the amount of P859,966.83, penalty charges on regular interest
in the amount of P1,146,622.55 and penalty charges on advances in the amount of P40,520.53.
In the Promissory Note, Exhibit "C," for the principal amount of P40,000.00, only the following charges were stipulated:
(1) interest at the rate of nine percent (9%) per annum;
(2) all unpaid amortization[s] shall bear interest at the rate of eleven percent (11%) per annum; and,
(3) attorneys fees equivalent to ten percent (10%) of the total indebtedness then unpaid.
In its statement of account x x x as of 31 January 1989, Exhibit "E," [respondent] bank charged [petitioners] with the following
items:
(1) regular interest in the amount of P5,046.97
(2) additional interest in the amount of P92,113.56; and
(3) penalty charges in the amount of P39,915.46.
There was nothing in the Promissory Note, Exhibit "C," which authorized the imposition of additional interest. Again, this Court
notes that the additional interest in the amount of P92,113.56 is even larger than the regular interest in the amount of P5,046.97.
Moreover, based on the Promissory Note, Exhibit "C," if the 11% interest on unpaid amortization is considered an "additional
interest," then there is no basis for [respondent] bank to add penalty charges as there is no other provision providing for this
charge. If, on the other hand, the 11% interest on unpaid amortization is considered the penalty charge, then there is no basis to
separately charge plaintiffs additional interest. The same provision cannot be used to charge plaintiffs both interest and penalties.
In Exhibit "O," which is the statement of account x x x as of 15 June 1992, [respondent] charged [petitioners] with the following:
(1) regular interest in the amount of P4,621.25;
(2) additional interest on principal in the amount of P65,303.33;
(3) additional interest on regular interest in the amount of P7,544.58;
(4) penalty charges on principal in the amount of P47,493.33;
(5) penalty charges on regular interest in the amount of P5,486.97;
(6) penalty charges on advances in the amount of P40,520.53.
[Respondent] bank failed to show the basis for charging additional interest on principal, additional interest on regular interest and
penalty charges on principal and penalty charges on regular interest under items (2), (3), (4) and (5) above.
Moreover, [respondent] bank charged [petitioners] twice under the same provisions in the promissory notes. It categorically
admitted that the additional interests and penalty charges separately being charged [petitioners] referred to the same provision of
the Promissory Notes, Exhibits "A" and "C." Thus, for the Lim Account in the amount of P40,000.00, [respondents] Mr. Ancheta
stated:
Q: In Exhibit 14, it is stated that for a principal amount of P40,000.00 you imposed an additional interest in the amount of
P65,303.33 in addition to the regular interest of P7,544.58, can you tell us looking [at] the mortgage contract and promissory note
what is your basis for charging that additional interest?
A: The same as that when I answered Exhibit No. 3, which shall cover amortization on the principal and interest at the abovementioned rate. All unpaid amortization[s] shall bear interest at the rate of eleven per centum (11%) per annum.
Q: You also imposed penalty which is on the principal in the amount of P40,000.00 in the amount of P47,493.33 in addition to
regular interest of P5,486.96. Can you point what portion of Exhibit 3 gives DBP the right to impose such penalty?
A: The same paragraph as stated.
Q: Can you please read the portion referring to penalty?

A: All unpaid amortization shall bear interest at the rate of 11% per annum.
Q: The additional interest is based on 11% per annum and the penalty is likewise based on the same rate?
A: Yes, it is combined (TSN, 28 May 1996, pp. 39-40.)With respect to the Diamond L. Ranch account in the amount of
P960,000.00, Mr. Ancheta testified as follows:
Q: Going back to Exhibit 14 Statement of Accounts. Out of the principal of P939,973.33 you imposed an additional interest of
P1,233,893.79 plus P859,966.83 plus P27,206.45. Can you tell us what is the basis of the imposition?
A: As earlier stated, it is only the Promissory Note as well as the Mortgage Contract.
Q: Please point to us where in the Promissory Note is the specific portion?
A: In Exhibit 1: "in case of failure to pay in full any amortization when due, a penalty charge of 1/3% per month on the overdue
amortization shall be paid."
Q: What is the rate?
A: 1/3% per month.
Q: So, the imposition of the additional interest and the penalty charge is based on the same provision?
A: Yes (TSN, 28 May 1996, pp. 41-42.)
A perusal of the promissory notes, however, failed to justify [respondent] banks computation of both interest and penalty under the
same provision in each of the promissory notes.
[Respondent] bank also admitted that the additional interests and penalties being charged [petitioners] were not based on the
stipulations in the Promissory Notes but were imposed unilaterally as a matter of its internal banking policies. (TSN, 19 March
1996, pp. 23-24.) This banking policy, however, has been declared null and void in Philippine National Bank vs. CA, 196 SCRA
536 (1991). The act of [respondent] bank in unilaterally changing the stipulated interest rate is violative of the principle of mutuality
of contracts under 1308 of the Civil Code and contravenes 1956 of the Civil Code. [Respondent] bank completely ignored
[petitioners] "right to assent to an important modification in their agreement and (negated) the element of mutuality in contracts."
(Philippine National Bank vs. CA, G.R. No. 109563, 9 July 1996; Philippine National Bank vs. CA, 238 SCRA 20 1994). As in the
PNB cases, [petitioners] herein never agreed in writing to pay the additional interest, or the penalties, as fixed by [respondent]
bank; hence [respondent] banks imposition of additional interest and penalties is null and void.122 (Emphasis supplied)
Consequently, this case should be remanded to the RTC for the proper determination of petitioners total loan obligation based on
the interest and penalties stipulated in the Promissory Notes.
DBP did not act in bad faith or in a
wanton, reckless, or oppressive manner.
Finally, as to petitioners claim for damages, we find the same devoid of merit.
DBP did not act in bad faith or in a wanton, reckless, or oppressive manner in cancelling the Restructuring Agreement. As we have
said, DBP had reason to cancel the Restructuring Agreement because petitioners failed to pay the amount required by it when it
reconsidered petitioners request to restructure the loan.
Likewise, DBPs failure to send a notice of the foreclosure sale to petitioners and its imposition of additional interest and penalties
do not constitute bad faith. There is no showing that these contractual breaches were done in bad faith or in a wanton, reckless, or
oppressive manner.1wphi1
In Philippine National Bank v. Spouses Rocamora,123 we said that:
Moral damages are not recoverable simply because a contract has been breached. They are recoverable only if the defendant
acted fraudulently or in bad faith or in wanton disregard of his contractual obligations. The breach must be wanton, reckless,
malicious or in bad faith, and oppressive or abusive. Likewise, a breach of contract may give rise to exemplary damages only if
the guilty party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.
We are not sufficiently convinced that PNB acted fraudulently, in bad faith, or in wanton disregard of its contractual obligations,
simply because it increased the interest rates and delayed the foreclosure of the mortgages. Bad faith cannot be imputed simply
because the defendant acted with bad judgment or with attendant negligence. Bad faith is more than these; it pertains to a
dishonest purpose, to some moral obliquity, or to the conscious doing of a wrong, a breach of a known duty attributable to a
motive, interest or ill will that partakes of the nature of fraud. Proof of actions of this character is undisputably lacking in this case.
Consequently, we do not find the spouses Rocamora entitled to an award of moral and exemplary damages. Under these
circumstances, neither should they recover attorneys fees and litigation expense. These awards are accordingly deleted.124
(Emphasis supplied)
WHEREFORE, the Petition is PARTLY GRANTED. The assailed February 22, 2007 Decision of the Court of Appeals in CA-G.R.
CV No. 59275 is hereby MODIFIED in accordance with this Decision. The case is hereby REMANDED to the Regional Trial Court
of General Santos City, Branch 22, for the proper determination of petitioners total loan obligations based on the interest and
penalties stipulated in the Promissory Notes dated November 24, 1969 and December 30, 1970. The foreclosure sale of the
mortgaged properties held on July 11, 1994 is DECLARED void ab initio for failure to comply with paragraph 11 of the Mortgage,
without prejudice to the conduct of another foreclosure sale based on the recomputed amount of the loan obligations, if necessary.
SO ORDERED.

G.R. No. 72313 December 29, 1989

RICARDO CRUZ, petitioner,

vs.
HON. INTERMEDIATE APPELLATE COURT and ROMAN LEGARDA SO, respondents.
G.R. No. 72326. December 29,1989.*
ROMAN LEGARDA SO, petitioner vs. RICARDO CRUZ, respondent.
Armando M. Pulgado for petitioner/respondent.
Ruben F. Balane Bautista for respondent/petitioner.

REGALADO, J.:
Before us are two separate petitions filed by Ricardo Cruz (G.R. No. 72313) and Roman Legarda So. (G.R. No. 72326) to review
on certiorari the decision of the Court of Appeals in AC-G.R. CV No. 03291 entitled "Ricardo Cruz vs. Roman Legarda So," dated
May 28, 1985, 1 the dispositive portion of which provides:
WHEREFORE, the decision appealed from is hereby MODIFIED as follows:
1. The lease contract is extended for a period of 57 months to be reckoned from March 31, 1982.
2. The compensatory damages and actual damages awarded to the petitioner are eliminated.
3. The writ of preliminary injunction is granted only for a period of the extension of the lease.
4. The counterclaim of the respondent is hereby dismissed.
No costs. 2
Called from the decision of respondent Court of Appeals are the following factual findings:
It is not disputed in the record that the Padre Rada market consisted of six parcels of land belonging to different person, one
parcel of which with an area of 651.80 square meters is owned by Roman Legarda So.
The petitioners evidence shows that the Padre Rada Market Operators Association, an unregistered partnership, constructed the
market with leasehold right from the owners of the lots (Exhs. L & L-1). The lease with respondent So was of an indefinite duration
at a monthly rent of P 3,500 (Exhs. E to E-14 & G).
Petitioner has been the manager of said association supervising the market, assigning market inspectors and collectors, and
collecting from stallholders and merchants (biyaheros) doing business in the market. He also takes charge of rental payments of
the market so that rental receipts issued by So were all made out in his name. (Exhibits 'E' to 'E-14'). Communications intended
for the association are also addressed by So to him. And when So demanded the liquidation of the alleged rental arrearages of the
association, a letter to this effect was sent to Cruz by the lawyer of So (Exhibit 'A'), and other letters by So himself (Exhibits 'B', 'G',
'G-l' and 'H').
On April 18, 1977 Cruz received a letter from respondent advising him to pay the rentals in arrears and to vacate the premises on
or before April 30, 1977 (Exh. B). The petitioner, nevertheless, continued operating the market and paid the monthly rental to
respondent for May 1977 without any protest.
Sometime in June, the petitioner was suddenly served a copy of a temporary restraining order issued by the then Court of First
Instance of Manila, Branch XXII in its Civil Case No. 109218, which was an action commenced against Cruz by So and one
Antonio Barredo, Jr. to prohibit his market operation and collection of rentals (t.s.n., March 1, 1983, p. 4).
It turned out that respondent So leased out a portion of the Padre Rada market to Antonio Barredo, Jr. for a period of five years.
So also entered into a lease agreement with Antonio Gonzales, Jr. and Milagros de Leon for a three year period ending March 31,
1982. 3
By virtue of said injunction proceeding commenced by So and Barredo, Ricardo Cruz was compelled to stop his market operations
and collection of market fees from June, 1977 to March, 1982 or a period of fifty-seven (57) months.
After the expiration of the lease contract between Roman So and Milagros de Leon, Ricardo Cruz immediately filed Civil Case No.
82-8098 in the Regional Trial Court of Manila 4 on March 31, 1982 to enjoin Roman So from leasing out the market to third
parties. Upon application of Ricardo Cruz, a writ of preliminary injunction was issued on May 4, 1982, enjoining Roman So from
leasing the market to third parties, renewing his contract with Antonio Gonzales, Jr. and/or Milagros de Leon and from collecting
rentals from stallholders thereat during the existence of the lease agreement with Cruz and his association.
On May 13, 1983, the trial court rendered a decision the dispositive portion of which decrees:
WHEREFORE, judgment is hereby rendered as follows:
1) Declaring petitioner as the lawful representative of the Padre Rada Market Association or as one of the members thereof;
2) Declaring the lease contract over the Padre Rada Market entered into by the petitioner's association with the respondent as
having lawfully expired on March 31, 1982;
3) Declaring petitioner as no longer without any right to continue occupying, possessing and enjoying the MARKET starting April 1,
1982, and ordering said petitioner to forthwith vacate the premises and surrender possession to the respondent;
4) Ordering the petitioner to make an accounting of all the collections and expenses made for the administration of the property
from April 1, 1982 until petitioner shall have surrendered possession thereof to respondent;
5) Ordering petitioner to pay a monthly rental of P 3,500.00 to the respondent up to March 31, 1982;
6) Ordering respondent in turn to make an immediate accounting of receipts from stallholders paid to him during the present

controversy without the knowledge of the petitioner, and to credit the petitioner for such collections. If the collections exceed P
3,500 monthly, the excess thereof shall be paid the petitioner;
7) The writ of preliminary injunction issued in this case is hereby lifted and set aside;
8) The claim for other damages by one party against the other, including respondent's counterclaim, are both dismissed. Petitioner
shall pay the costs of suit. 5
This decision was, however, reconsidered upon motion of Ricardo Cruz, as a consequence of which the court a quo rendered a
new decision on February 6, 1984, the decretal portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1. The Decision of May l3, 1983 reiterated insofar as it is not inconsistent with the following dispositions;
2. It is declared that the lease contract of the parties is still good and subsisting, and with an extended term of fifteen (15) years,
reckoned from the date this New Decision shall have become final, under the same terms and conditions of their agreement,
including the amount of rental which is P 3,500 per month, unless the parties mutually agree on other terms, conditions and
stipulations;
3. Making permanent the writ of preliminary injunction previously granted therein;
4. Ordering respondent to pay the petitioner the sum of P 285,000 (P 5,000 x 57 months) as compensatory and actual damages in
the form of losses suffered and/or loss of profit; and
5. Respondent's counterclaim is denied and dismiss Respondent is ordered to pay the costs. 6
On appeal, respondent court rendered the decision hereinbefore mentioned, hence, the instant petitions which were consolidated
by the resolution of this Court on October 6, 1986.
In G.R. No. 72313, Ricardo Cruz avers that respondent Court of Appeals erred in reducing the lease period fixed by the trial court,
and in eliminating the compensation award to him for losses arising from his unlawful dispossession of the Padre Rada Market.
On the other hand, Roman Legarda So alleges, in G.R. No. 72326, that respondent court erred: (1) in not declaring the lease to
have been validly terminated for non-payment of rentals; (2) in not holding that the lease, being on a month-to-month basis, could
be terminated at the end of every month; (3) in applying Article 1687 of the Civil Code to extend the lease of Cruz to December,
1986; and (4) in not ordering Cruz to pay rentals up to the time of actual relinquishment of the premises.
The main issue for resolution in this case is whether or not Roman Legarda So could validly terminate his contract of lease with
Ricardo Cruz and enter into a new contract with third persons. A corollary issue is whether Ricardo Cruz is entitled to have the
term of his lease fixed for another and longer period of time.
We hold that there was a valid termination of the lease contract executed between Ricardo Cruz and Roman Legarda So for
several reasons.
Firstly, the applicable provision of the Civil Code states:
Art. 1687. If the period for the lease has not been fixed, it is understood to be from year to year, if the rent agreed upon is annual;
from month to month, if it is monthly; from week to week, if the rent is weekly; and from day to day, if the rent is to be paid daily....
In the case at bar, there is no debate that Ricardo Cruz pays his rent monthly which thus makes his lease contract terminable at
the end of every month without need of any special notice to vacate. 7 Roman Legarda So may exercise his right to terminate the
contract at the end of any month even if any of the conditions of the contract had not been violated, 8 and such right cannot be
defeated by the lessee's timely payment of the rent or by his willingness to continue doing so. 9 Furthermore, the contract of lease
being on a month-to-month basis, Ricardo Cruz cannot validly claim that the lease is for an indefinite period. Article 1687
specifically provides that the term is month to month if the rent is paid monthly, hence it is a lease with a definite term. Such lease
contract expires at the end of every month unless there is an implied or tacit renewal thereof as when the lessee is allowed to
continue enjoying the leased premises for fifteen (15) days at the end of every month with the acquiescence of the lessor. Such
exception, however, cannot be invoked when notice to vacate is given to the lessee in which case the contract of lease expires at
the end of the month.
In the case at bar, Ricardo Cruz does not refute, and in fact he even admits, that a notice to vacate was issued to him on April 18,
1977 by Roman Legarda So informing him that their lease contract would expire on April 30, 1977. Although payment of rental
was made for the month of May, 1977 and accepted by Roman Legarda So, this does not by itself curtail the latter's right to
terminate the lease contract at the end of every succeeding month. Besides, the lessor is entitled to payment for the occupancy of
his premises even after the contract has expired.
Secondly, without explicitly admitting the breach, Cruz offers the flimsy and unsubstantiated excuse that there is a pre-existing
remittance arrangement between the parties over the settlement of his rental arrearages and erroneously postulates that, by virtue
of said arrangement, he cannot now be considered as in default. 10 For all intents and purposes, the fact remains that the failure
of Cruz to pay the rents when due constitutes a breach of the contract of lease which gives rise to So's right of rescission under
Article 1191 of the Civil Code which states:
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.
We are convinced that So acted well within his rights in terminating his contract with Cruz and in entering into a new one with third
persons, without need of resorting to judicial action. This finds support in our ruling in the case of University of the Philippines vs.
De los Angeles, etc., et al. 11 which involved the question of whether the injured party may consider the contract as rescinded

even before any judicial pronouncement has been made to that effect. This Court, in holding in the affirmative, ruled 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 deed the contract violated may 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. But the law definitely does not require that
the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate
during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should
exercise due diligence to minimize its own damages (Civil Code, Article 2203).
We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial
action is necessary for the resolution of a reciprocal obligation, 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. (Emphasis supplied)
Ricardo Cruz further maintains that the lease contract with Roman Legarda So is one with an indefinite period, no specific term
having been agreed upon by the parties, hence the court can legally fix a longer term. He invokes the second sentence of Article
1687 of the Civil Code which states that even though a monthly rental is paid, and no period for the lease has been set, the courts
may fix a longer term for the lease after the lessee has occupied the premises for over one year.
We reject such proposition.
As earlier stated, the contract of Ricardo Cruz, being on a month-to- month basis, is a lease with a definite period. Since the
contract of lease is for a definite term, the lessee cannot avail of the benefits under Article 1687 which applies only if there is no
definite term. And, even assuming arguendo that Article 1687 applies, Ricardo Cruz would still not be entitled to have the term
fixed for a longer period since his action was filed only after the contract had expired.
As held in Vda. de Prieto us. Santos, et al. 12
Under this provision, if the period of a lease contract has not been specified by the parties therein, it is understood to be from
month to month, if the rent agreed upon is monthly, as in the cases at bar. Consequently, the contract expires at the end of such
month, unless, prior thereto, the extension of said term has been sought by appropriate action and judgment is, eventually,
rendered therein granting said relief.
Defendants herein maintain that their lease contracts did not, and could not, come to an end until after the court has fixed its
lifetime and the term thus fixed has expired. This view, is, to our mind, untenable. To begin with, defendants assume that their
contracts are without term, prior to the judicial action authorized in said Article 1687, whereas the same provides that the duration
of lease contracts shall be yearly, monthly, weekly, or daily depending upon whether the rental agreed upon is annual, monthly,
weekly, or daily. In other words, said contracts have a term fixed by law, and are not indefinite in duration, before said judicial
intervention. Secondly, said Article 1687 merely gives the court discretion to extend the period of the lease. The court is not bound
to extend said term. It may legally refuse to do so, if the circumstances surrounding the case warrants such action. ... (Emphasis
reproduced)
Additionally, under the factual features of this case, there is nothing in the law which confers upon the lessee the preferential right
to occupy the premises over other prospective lessees when his lease contract has been terminated. To require otherwise will
unduly deprive the lessor of his ownership rights without due process of law.
Lastly, if Ricardo Cruz actually believed that he had every right to continue with the lease of the subject premises, we find no
plausible reason for his inscrutable silence on and apparent acquiescence to the lease contract executed by Roman Legarda So
with third persons in 1977. His inexplicable inaction when ordinary reason and prudence dictate that he should have done
something about it operates as an admission that his lease contract had been validly terminated.
While we are inclined, on equitable considerations, to allow the period of extension provided for the Court of Appeals, the grant
thereof has been rendered moot by the fact that Ricardo Cruz had recovered and has been in possession of the premises since
May 4, 1982 when a writ of preliminary injunction was issued by the trial court. In fact, it appears that he continues to do so up to
the present, which is clearly beyond the 57-month period fixed by the Court of Appeals, without paying the corresponding rentals
for his occupancy. Under the circumstances, the legal imperative is that Ricardo Cruz should pay Roman Legarda So a monthly
rent of P 3,500.00 starting May 4,1982 until Cruz surrenders possession of the leased premises to So. Correlatively, Ricardo Cruz
should immediately desist from operating the market and from collecting rentals from stallholders occupying the premises of
Roman Legarda So and to peaceably surrender the said premises to So or the latter's authorized representatives.
WHEREFORE, the judgment of the Court of Appeals is hereby MODIFIED as follows:
1. Ricardo Cruz is hereby ordered to forthwith desist from operating the market and from collecting rentals from stallholders
occupying the premises of Roman Legarda So;
2. Ricardo Cruz is further ordered to pay a monthly rental of P3,500.00 to Roman Legarda So from May 4,1982 until he fully
surrenders possession of the entire leased premises to Roman Legarda So.
3. The writ of preliminary injunction issued by the court a quo is hereby dissolved.
SO ORDERED.
G.R. No. 75096 October 23, 1990

SATURNINO SONGCUAN, petitioner,

vs.
Hon. INTERMEDIATE APPELLATE COURT, MARIANO ALVIAR BELEN ALVIAR and LUZ ALVIAR PINLAC respondents.
G.R. No. 80851 October 23, 1990
SATURNINO SONGCUAN, petitioner,
vs.
HON. GENARO C. GINES, in his capacity as Judge of the Regional Trial Court, Branch 26, San Fernando, La Union, ATTY.
ALFREDO A. TALAVERA, in his capacity as Clerk of Court, Regional Trial Court of San Fernando, La Union, MARIANO ALVIAR,
BELEN ALVIAR and LUZ ALVIAR PINLAC respondents.
Arcadio G. De la Cruz for petitioner.
Alfredo F. Tadiar for private respondents.

MEDIALDEA, J.:
Victoriano Alviar was the owner of two parcels of land located at San Fernando, La Union. On the land stands a building owned by
his son, Mariano, and his wife, Belen. On September 29, 1966, the Alviars sold these realties to Saturnino Songcuan for
P34,026.09. On October 10, 1966 Songcuan executed an instrument entitled "Deed of Repurchase of Two Parcels of Land and a
Residential-Commercial Building" (pp. 5-6, Records [Exhibit]) wherein he gave the Alviars, or any one of them or "their respective
heirs and assigns, the right and privilege to repurchase [the realties they had previously sold to him] ... at the price of
P34,026.09 ... for, during and within the period of 10 years counted from the date of execution of [the] instrument" provided that
the redemptioner also pays the cost of improvements.
Appearing at the dorsal portion of the instrument below the notarial subscription is an undated additional condition which reads, to
wit:
P.S. (Additional condition)
In the event the said Victoriano Alviar, Mariano S. Alviar and Belen F. Alviar or either of them, exercise or exercises the right to
repurchase the above described properties and they or either of them become the owner and possessor of the premises, they
shall or either of them be obliged to give me (Saturnino A. Songcuan) the right of lease and are or is obliged to execute a lease
contract with me for a period of twenty five (25) years from the time of exercising the right to repurchase the premises, at a
monthly rental of three hundred ninety pesos (P390.00), for the premises actually occupied by me (Saturnino Songcuan) at the
time of the execution of this instrument. (p. 6, Records [Exhibit])
The signatures of the Alviars appear at the bottom of the paragraph. At the time of the execution of the instrument, Songcuan,
though then already the owner of the realties, was admittedly actually occupying only one-third portion of the ground floor of the 3
storey building, apparently having leased the remaining portion to third persons.
Sometime in March, 1969 the mentioned building was razed by fire and Songcuan erected another at his own expense.
Subsequently, Songcuan had the realties registered in his name and was issued OCT No. 0-1029 sometime in 1969.
In 1974, the Alviars filed a complaint against Songcuan, docketed as Civil Case No. 2621, for "Redemption with Consignation" to
compel the defendant to effect the redemption to them of the subject realties. Victoriano Alviar having died at this time, he was
represented by his heirs. Songcuan refused to sell back to the Alviars the properties because the latter was tendering only the
price of P34,026.00 whereas Songcuan wanted reimbursement for the cost of the building he erected and also for the cost of the
registration of the realties. The Alviars, on the other hand, claimed that the transactions between them and Songcuan were one of
equitable mortgage and, therefore, Songcuan cannot compel them to pay for the cost of the building he had erected without their
permission.
In his Answer, Songcuan prays, in the alternative, that in the event the Alviars be allowed to repurchase the realties the latter be
also compelled to lease the properties to him pursuant to the "P.S. (Additional Condition)" embodied in the instrument dated
October 10, 1966 as above quoted.
On July 29, 1977, the then Court of First Instance of La Union rendered its decision decreeing the following:
IN VIEW OF THE FOREGOING, judgment is hereby rendered
(a) Declaring that the true and real agreement or contract of the parties Exhs. C, D, E & F for plaintiffs; (Exhs. 1, 2, 3 and 4 for the
defendant) on the two parcels of land with the commercial building is that of a deed of sale with right to repurchase and hereby
enjoins the parties to comply and abide by the terms of their contract;
(b) Declaring that plaintiffs' right to repurchase the property as admitted by the defendant for a period of 10 years from October 10,
1966 to October 10, 1976, as stipulated in their contracts, have been suspended by the filing of the complaint on November 22,
1974. Said redemption period is suspended during the pendency of this case. Plaintiffs-vendor-a-retro may exercise their right to
repurchase the properties within the remaining period of one (1) year, 10 months and 18 days from the finality of this decision
(Ong Chua v. CARR, 53 Phil. 975) or within the period of 30 days from finality of this decision as provided for under Art. 1606 of
the New Civil Code;
(c) The plaintiffs in exercising their right to repurchase the properties should pay the defendant the necessary and useful
improvement in putting up the building in the amount of P30,000.00, in addition to the repurchase price of P34,026.09, and the
additional expenses of P1,000.00 for the registration of the land under Act 496; otherwise, the defendant may retain possession of
the parcels of land and building until reimbursement is fully made;
(d) No damages, including attorney's fees and litigation expenses is awarded to both parties.

Without pronouncement as to costs. (P. 57, Record [Exhibits]

From this decision Songcuan appealed alleging among others that "[the [lower court] erred in refusing to make a finding as to the
appellants' right to lease the property for 25 years ... "
On July 15, 1980 the Court of Appeals, in CA-G.R. No. 62934, affirmed in toto the appealed decision. With respect to Songcuan's
alleged right to lease, the appellate court stated that the lower court had already upheld the validity of the deeds executed by the
parties and, therefore, "such pronouncement regarding appellant's right to lease the premises for 25 years is unnecessary. The
condition is already there in the contract itself which is the law between the parties."
This decision became final and executory on March 9, 1981, the petition for its review having been denied in our resolution, in
G.R. No. 55196 dated January 26, 1981.
The writ of execution was issued on April 1, 1981 but was returned unsatisfied because Songcuan refused to accept the
manager's check tendered to him claiming that it was not legal tender and for the further reason that the Alviars refused to execute
a lease contract in his favor as embodied in their October 10, 1966 contract. An alias writ of execution was issued on June 1, 1981
but also was not satisfied.
On July 7, 1981, Songcuan filed a complaint with the same Court of First Instance of La Union for Rescission of Right to
Repurchase which was docketed as Civil Case No. 3213 and which gave rise to this petition. Songcuan was of the opinion that
the Alviars' forfeited their right to repurchase the realties for having failed to redeem them within 30 days from the finality of the
decision in Civil Case No. 2621 contrary to the mandate of Article 1606 of the Civil Code.
On July 9, 1981, the trial court in Civil Case No. 2621 issued an order for its Clerk of Court to issue a Deed of Reconveyance in
behalf of Songcuan and in favor of the Alviars.
On July 11, 1981, Songcuan amended his complaint alleging that rescission lies for the further reason that the Alviars failed to
execute in his favor a lease contract citing Article 1191 of the Civil Code, and that if the Deed of Reconveyance had already been
executed by the Clerk of Court it be declared null since the Alviars had already forfeited their right to redeem the realties.
Songcuan's amended complaint further added an alternative prayer that in the event the court decides to compel him to reconvey
the properties, the Alviars be also compelled to lease the realties to him for 25 years according to the terms of their contract.
On July 17, 1981, the Clerk of Court of the Court of First Instance of La Union issued a Deed of Reconveyance transferring
ownership of the properties to the Alviars. Possession of the properties, however, was retained by Songcuan as the trial court
granted his prayer for a writ of preliminary injunction in Civil Case No. 3213 to enjoin the Alviars from taking possession of the
realties.
In their Answer, the Alviars alleged that their tender to Songcuan of a manager's check was a valid tender of payment and that
Songcuan is no longer entitled to lease the premises because the subject matter of the contract was burned in 1969 citing Article
1655 of the Civil Code.
On March 19, 1984, the trial court rendered its decision, the dispositive portion of which reads, to wit:
WHEREFORE judgment is hereby rendered as follows:
1. That defendants exercised (sic) their right of redemption within the specific period of one (1) year, ten (10) months and eighteen
(18) days from March 9, 1981 as provided for in the decision of Civil Case No. 2621;
2. That the Deed of Reconveyance executed by the Clerk of Court and Ex-Officio Provincial Sheriff dated July 17, 1981 is valid
and cannot be rescinded;
3. That plaintiff is the lessee of the defendant on the entire properties mentioned in the Deed of Reconveyance for a period of
twenty-five (25) years to be counted from July 17, 1981 at the monthly rental of THREE HUNDRED NINETY (P390.00) PESOS;
4. That the preliminary injunction restraining defendants or any of their representatives or agents or persons acting on their behalf
from committing acts of dispossession against plaintiff on the premises of this complaint is now made PERMANENT during the
existence of the lease contract, ...;
5. That defendants shall maintain the plaintiff in the peaceful and adequate enjoyment of the lease for the entire duration of the
lease;
6. That defendants shall pay plaintiff the amount of P50,000.00 by way of attorney's fees as damages with interest at the legal rate
of 12% per year until fully paid; and
7. That defendants pay costs of this suit.
SO ORDERED. (pp. 363-386, Records)
Both parties appealed, Songcuan pressing for rescission while the Alviars disclaiming any obligation to lease the premises to
Songcuan. The Alviars, in the alternative countered, that if Songcuan was entitled to lease the premises, the lease should cover
only 1/3 of the building.
On June 27, 1986 the Court of Appeals in AC G.R. CV No. 04325 rendered its decision (pp. 58-69, Rollo) modifying that of the trial
court's by limiting the area Songcuan is entitled to lease to only 1/3 of the building; declaring the Alviars entitled to a writ of
possession with regard the rest of the premises; deleting the award of attorney's fees and ordering the parties to each bear the
cost of litigation.
From this decision Songcuan appealed by certiorari to this Court (G.R. No. 75096). The principal issue here is the same as that
presented in the lower court and the Court of Appeals, which is, whether or not the Alviars had forfeited their right to repurchase,
or whether the right may be rescinded under the grounds advanced by Songcuan. After deliberating on the arguments raised, this
Court rules in the negative.
We do not find merit in Songcuan's argument that the Alviars had forfeited their right to repurchase the subject premises for having
failed to exercise it within thirty days from the finality of the decision in Civil Case No. 2621 citing the third paragraph of Article

1606 of the Civil Code which provides that a vendor-a-retro may still exercise his right to repurchase "within thirty days from the
time the final judgment was rendered in a civil action on the basis that the contract was a true sale with right to repurchase." The
judgment in Civil Case No. 2621 which had become final on March 9, 1981, had ordained that the running of the period within
which the Alviars could repurchase the premises had been suspended during the pendency of the case and they were given the
option either to repurchase the premises within 30-days from the finality of the judgment, as provided by the law, or within the
remaining period of one year, ten months and 18 days therefrom. It is axiomatic that a final judgment may no longer be amended
and to limit now to 30 days the period within which the Alviars may repurchase the premises would be an open violation of the
rule. A final judgment is the law between the parties to a case and controls their relation with respect to the controversy there
presented. We thus fully agree with the pronouncement of the appellate court on this matter that:
There is no merit in Songcuan's claim that the Alviars' failure to abide by Article 1606 of the New Civil Code foreclosed their right
to repurchase. Indeed, Art. 1606 provides that the vendors-a-retro may repurchase within 30 days from the finality of the judgment
... However, it is noted that the final decision in Case 2621, which became final on March 9, 1981, gave the Alviars two alternative
periods within which to exercise the right to repurchase either within 30 days as prescribed in Article 1606, or within 1 year, 10
months and 18 days from March 9, 1981, ... Accordingly, whichever of the alternative periods the Alviars may avail of, would still
constitute a valid exercise of their right. (pp. 64-65, Rollo)
Neither do We agree that the right of the Alviars to repurchase may be rescinded under Article 1191 of the Civil Code. Songcuan
asserts that the October 10, 1966 contract he entered into with the Alviars created a reciprocal obligation between them for him to
reconvey the subject premises and for the Alviars to lease the realties to him and the refusal of the latter to fulfill their obligation
giving him the right, under Article 1191, to rescind "the right of [the Alviars] to repurchase" the realties. The law provides in part:
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.
xxx xxx xxx
The cited law is not applicable in this case. Although the parties are each obligor and obligee of the other, their corresponding
obligation can hardly be called reciprocal. In reciprocal obligations the obligation of one is a resolutory condition of the obligation
of the other, the non-fulfillment of which entitles the other party to rescind the contract. In the case at bar, there are two separate
and distinct obligations, each independent of the other. The obligation of Songcuan to reconvey the property is not dependent on
the obligation of the Alviars to lease the premises to the former. The obligation of the Alviars is not an essential part of the
contract. This is evident in the wordings of the "P.S. (Additional Condition)" itself which states that "in the event [the Alviars]
exercised the right to repurchase ... and becomes the owner and possessor of the premises, they shall ... be obliged to give
[Songcuan] the right of lease and are ... obliged to execute a lease contract .... " In other words, the obligation of the Alviars to
lease to Songcuan the subject premises arises only after the latter had reconveyed the realties to them. We quote with approval
the following statements of the respondent appellate court:
For the stipulation imposes on them the obligation to execute the lease only at such time when the Alviars or any one among them
exercises the right and becomes the possessor of the properties in question ... Otherwise stated, the obligation to execute the
lease emerges only if the Alviars had already repurchased and obtained possession of the repurchased properties. (p. 66, Rollo)
Should the Alviars fail to lease the subject premises to Songcuan after reconveyance, then the latter's remedy is not for rescission
but for specific performance, which in fact he asked for in the alternative and was granted by the trial court and the Court of
Appeals.
Thus, the right of the Alviars to repurchase must be upheld notwithstanding the fact that such right had not been annotated at the
back of Songcuan's certificate of title. The purpose of annotation is only to serve notice to third persons and not to lend validity or
nullity to an instrument.
The next question to be resolved is how much area Songcuan is entitled to lease. The trial court, awarded Songcuan the whole
premises, based on the "P.S. (Additional Condition)" which speaks of "the premises actually occupied by [Songcuan]" and there
was no evidence presented by the Alviars on the area Songcuan was actually occupying. Further, the trial court said that the right
of Songcuan to lease the whole premises is strengthened by the fact that he became the registered owner of the realties and
hence, has complete dominion over the properties.
We rule, however, that the P.S. clause refers to the area Songcuan was actually occupying and not to what he constructively may
possess as the owner of the premises at the time of the execution of the October 10, 1966 contract. Further, as pointed out by
private respondents, there was no need to present any evidence as to the area Songcuan was actually occupying since at the pretrial conference in the trial court, Songcuan had admitted that he was occupying only one-third of the single story Alviar building.
Under the parties' agreement, Songcuan's lease was to start from the time the Alviars exercised their right to repurchase.
Songcuan should therefore be deemed to have become the Alviar's lessee on July 17, 1981 and should pay rent in the amount
agreed upon from said date.
As regards the deletion by the respondent court of the award to Songcuan of attorney's fees, We fully agree and quote its
pronouncement that:
We find no justification for the exorbitant award in Songcuan's favor of attorney's fees of P50,000.00 considered as damages.
Attorney's fees in concept of damages may be awarded only if the defendant acted in gross and evident bad faith in refusing
plaintiffs just and demandable claim. (Art. 2208, New Civil Code). In the case at bar, there is no showing that the Alviars acted in
bad faith in refusing Songcuan's claim to a 25-year lease of the entire premises. The stipulation to that effect merely refers to the
premises Songcuan was occupying at the execution of the deed on October 10, 1966, which admittedly, was only 1/3 of the
ground floor of the Alviar building, not the entire building. .... " (p. 68, Rollo)
With respect to G.R. No. 80851, which is a petition to enjoin the implementation of the writ of possession in favor of the Alviars,
there is no need to discuss the issues therein, as the same has become moot and academic, this Court having pronounced that
Songcuan is entitled to lease only one-third of the ground floor of the subject building, with the Alviars being entitled to a writ of
possession as to the rest.
ACCORDINGLY, the decision under review in G.R. No. 75096 is hereby AFFIRMED, and the petition in G.R. No. 80851 is

DISMISSED for having become moot and academic.

SO ORDERED.

G.R. Nos. 70310-11 June 1, 1993

MASSIVE CONSTRUCTION, INC., ENRIQUE P. SYQUIA, RAMON P. SYQUIA, JOSE MA. MENDIETA, JAIME SANTAMARIA,
and JESUS P. SYQUIA, petitioner,
vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT and JAIME C. UY, respondents.
Syquia Law Offices for petitioners.
R.A. V. Saguisag for private respondent.

BELLOSILLO, J.:
This is an appeal by certiorari under Rule 45, Revised Rules of Court, from the consolidated decision of the Court of Appeals in
AC-G. R. No. 64077-CV, entitled "Massive Construction Inc. v. Jaime C. Uy," and AC-G. R. No. 65234-CV, entitled "Jaime Uy v.
Enrique P. Syquia, et al."
In AC-G. R. NO. 64077-CV, the Court of Appeals reversed the decision of the Court of First Instance of Manila in Civil Code No.
87006, which ordered defendant Jaime C. Uy, (UY for brevity) to pay plaintiff (MASSIVE for brevity) a sum of money for unrealized
profits resulting from UY's violation of the Agreement dated December 16, 1971 (AGREEMENT for brevity), attorney's fees and
costs.
In AC-G. R. No. 65234-CV, the Court of Appeals reversed the decision of the Court of First Instance of Manila in Civil Case No.
87511, which declared the AGREEMENT as rescinded due to the breach thereof by both UY and defendants Enrique Syquia, et
al. (stockholders of MASSIVE).
The two cases arose from a common background.
MASSIVE was engaged in the construction business in the Greater Manila Area while UY was connected with Super Highway
Lumber and Construction Supply, Inc. (SUPER HIGHWAY for brevity), a business run by his wife and engaged in the business of
supplying construction materials.
In the latter part of 1971, MASSIVE suffered financial reverses, resulting in its corporate reorganization. Ramon P. Syquia, the
general manager of MASSIVE, asked his relatives to help bail out the company from its financial difficulties. Enrique P. Syquia,
Jose Ma. Mendieta, Jaime Sta. Maria, and Jesus P. Syquia were thus elected directors.
In the course of operation, MASSIVE became indebted to SUPER HIGHWAY for purchase of construction materials in an amount
exceeding P100,000.00. In order to settle this obligation, negotiations were started between the stockholders of MASSIVE on one
hand and UY on the other. After several meetings, the parties signed on 16 December 1972 their AGREEMENT, particularly
entered into by and among JAIME C. UY as First Party, RAMON P. SYQUIA as Second Party, and JOSE MA. MENDIETA, JAIME
STA. MARIA, ROMEO ALMARIO, JESUS P. SYQUIA and ENRIQUE P. SYQUIA jointly as Third Party, with Jose Ma. Mendieta
signing his CONFORME in behalf of MASSIVE, the pertinent terms of which follow:
1. That the SECOND PARTY and the THIRD PARTY are the complete stockholders and directors of MASSIVE CONSTRUCTION,
INC., a corporation duly organized and existing under the laws of the Philippines.
2. That the FIRST PARTY is desirous of buying the entire shares of stock of said corporation;
3. That the FIRST PARTY, SECOND PARTY and THIRD PARTY have agreed that the FIRST PARTY will purchase the entire
shares of stock of the corporation belonging to the SECOND PARTY for P250,000.00, under the following terms and conditions:
a) That the FIRST PARTY will pay to the SECOND PARTY and THIRD PARTY as earnest money, P20,000.00 upon the signing of
this Agreement, and which will constitute as down payment after which the FIRST PARTY complies with this Agreement, but which
will be forfeited in favor of the SECOND and THIRD PARTY in case of failure to comply with this Agreement;
b) That aside from the P20,000.00 earnest money, the FIRST PARTY will pay P30,000.00 on or before January 5, 1973 and the
balance of P200,000.00 shall be paid in monthly installments of P50,000.00 every 5th day of the month thereafter until the entire
amount of P250,000.00 is paid;
c) That the corporation has monies due it from its receivable and collections; and the corporation has also a pending obligation
with the FIRST PARTY; and all parties agree that from this date, 50% of the receivable collected and 30% of the collections
received by the corporation shall be applied to the balance of P230,000.00 owing from the FIRST PARTY to the SECOND PARTY
and THIRD PARTY; and these amounts, in turn, shall be paid by the FIRST PARTY to the corporation by the reduction and partial
payment of the obligation of the corporation to the FIRST PARTY;
d) That upon payment of the FIRST PARTY of P20,000.00 to the SECOND PARTY and THIRD PARTY, the SECOND PARTY and
THIRD PARTY will give P25,000.00 worth of shares to the FIRST PARTY, and said FIRST PARTY shall also be elected as director
of the Corporation; and upon succeeding payments made by the FIRST PARTY, shares of stock will be transferred to him until the
total of P100,000.00 worth of shares have been transferred to the name of the FIRST PARTY; and once the entire amount of
P250,000.00 is paid by the FIRST PARTY to the SECOND PARTY and THIRD PARTY, then the remaining balance of the shares
of stock shall be transferred to him immediately;
e) That until the FIRST PARTY has fully paid said amount of P250,000.00, the corporate structure and management at the present
time shall be maintained, and all the stockholders and directors shall continue with their present rights, privileges, and

prerogatives;
f) That upon payment by the FIRST PARTY to the SECOND PARTY and THIRD PARTY of the said amount of P250,000.00, all the
obligations of the corporation to the SECOND and THIRD PARTY, which are purely personal in nature, shall be considered fully
liquidated; but this shall not exceed P4,650.00 a month;
g) That said P250,000.00 shall be utilized in paying primarily to the SECOND and THIRD PARTY the monies they have advanced
and loaned to the corporation;
h) That immediately upon the singing of this agreement, the FIRST PARTY shall make available to the corporation such materials
and capital as the corporation may need for its projects as determined by the SECOND PARTY, but this shall be considered as an
obligation of the corporation to the FIRST PARTY.
4.) That as soon as the FIRST PARTY has paid P250,000.00 to the SECOND and THIRD PARTY, and the entire shares of the
corporation are transferred to him, it is agreed that the FIRST PARTY, in turn, will transfer half of these shares to the SECOND
PARTY; and the FIRST PARTY and SECOND PARTY shall manage and control the corporation in equal shares, in equal
proportion and with equal participation in the
profits. 1
At the signing of the AGREEMENT, the stockholders of MASSIVE informed UY that the company had several on-going
construction projects, including those of Queen's Row Subdivision, Republic Flour Mills, and B. F. Homes. On the same occasion,
Uy issued to Enrique P. Syquia a check postdated 22 December 1971 which bounced for lack of funds. UY, however, made good
the check by paying Syquia P20,000.00 in cash on 29 December 1971. 2
Out of the P20,000 paid by UY to Enrique P. Syquia, UY borrowed P2,000.00 payable on or before 5 July 1972. UY failed to pay
this amount, which compelled Syquia to file a collection suit against him in the City Court of Manila (Civil Case No. 209298). The
latter Court rendered judgment against UY, who appealed the decision to the Court of First Instance of Manila (Civil Case No.
87310).
Immediately after the signing of the AGREEMENT, UY was made a co-manager of MASSIVE, pursuant to the AGREEMENT.
Ramon P. Syquia also asked Uy for his promised contribution of materials and funds. Out of P100,000.00 worth of materials
needed for the projects, UY was able to deliver only P6,085.69. He gave as an excuse the non-payment by his relatives of the
dividends which he intended to invest in MASSIVE.
MASSIVE made three demands for payment of the damages caused by UY's failure to comply with his obligation under the
AGREEMENT: the first, addressed to UY dated 14 January 1972, 3 the second, addressed to UY's counsel dated 18 January
1972, 4 and the third, addressed to UY himself dated 18 January 1972. 5
In his answer to the letter dated 14 January 1972 of MASSIVE, 6 UY wrote that he had been relieved from payment of the
P30,000.00 required under paragraph 3(b) of the AGREEMENT because of the failure of the stockholders of MASSIVE to deliver
to him the company's share of stock worth P25,000.00 upon his payment to them of the sum of P20,000.00. 7
While Uy received the letters dated 17 and 18 January 1972, he did not reply to them.
Because of the lack of fresh capital and construction materials, MASSIVE aborted all its projects.
In Civil Case No. 87006, the trial court found that UY failed to make available to MASSIVE the construction materials and funds
needed for its projects; that the construction materials delivered by UY to MASSIVE valued at P6,085.69 were inadequate to carry
out its various projects; that UY's claim that he did not understand the import of the AGREEMENT was unbelievable; and, that it
was UY who reneged on his obligations under the AGREEMENT. 8
The trial court, after finding that it was UY who had violated the terms of the contract, particularly paragraph 3(h) thereof, held him
liable to pay MASSIVE P20,000.00 as damages for the Republic Flour Mills project, P80,000.00 for the Queen's Row Subdivision
project, and P10,000.00 as attorneys' fees. The trial court denied MASSIVE's claim for damages with respect to the B. F. Homes
project.
The trial court did not resolve the issue on the right of UY to rescind the contract, saying that this issue would have to be resolved
in Civil Case No. 87511.
In Civil Case No. 87511, the trial court found that Uy entered into the contract freely and even with the assistance and advice of
counsel; that there was no undue influence or fraud exerted on him by MASSIVE's stockholders as to justify the nullification of the
contract; and, that the said stockholders did not conceal from Uy the financial status of MASSIVE. 9
The trial court however did not award any damages after finding that all the parties had defaulted in the fulfillment of their
obligations but it could not determine who of the parties first violated the contract. 10
Uy appealed to the Court of Appeals from the decisions in both cases. The Court of Appeals, viewing the evidence in a different
light, found that the stockholders of MASSIVE were the ones who first violated the terms of the AGREEMENT when they failed to
assign to UY the P25,000.00 worth of the company's shares of stock and to elect him a director of the company upon his payment
of P20,000.00. 11
In both AC-G.R. No. 64977-CV and AC-G.R. No. 65234-CV, the Court of Appeals reversed the decisions of the Court of First
Instance. In addition, in AC-G.R. No. 65234-CV, the Court of Appeals ordered MASSIVE to refund to Uy the sum of P20,000.00
and to pay P6,085.69, representing the cost of materials delivered by UY to MASSIVE, P5,000.00 as attorney's fees and costs. In
AC-G.R. No. 65234-CV, the Court of Appeals made the stockholders of MASSIVE subsidiarily liable to pay UY the amounts
adjudged in AC-G.R. No. 64077-CV to be paid by MASSIVE. 12 The Court of Appeals, however, did not sustain UY's claim that his
consent to the contract was obtained by fraud. 13
The Court of Appeals sustained the trial court in its finding that MASSIVE was a proper party to ask for specific performance of the
contract. The appellate court noted that the contract was signed by all the directors-stockholders of MASSIVE and even had the
conformity of said company. 14

This Court can review the findings of facts of the Court of Appeals when the same are contrary to the findings of the trial court 15
and to the stipulation of facts of the parties. 16
Inasmuch as the AGREEMENT imposed reciprocal obligations, the question to resolve is who of the parties breached the contract
first. The starting point of the inquiry is the contract itself.
Under the AGREEMENT, UY, as First Party, agreed to buy all the outstanding shares of stock of MASSIVE and the stockholders of
MASSIVE, as Second and Third Parties, agreed to sell to him the said shares for P250,000.00, under the following terms:
1) Upon the signing of the contract, Uy, would pay Ramon P. Syquia and the other stockholders of Massive the sum of P20,000.00
as earnest money;
2) Immediately upon the signing of the contract, Uy would "make available to Massive such materials and capital as the company
may need for its projects as determined by Ramon P. Syquia. All the materials and capital given by Uy would be considered an
obligation of Massive;
3) On or before January 5, 1973, Uy would pay the stockholders of Massive the sum of P30,000.00;
4) Every 5th day of the month beginning February 5, 1973, Uy would pay the amount of P50,000.00 until the balance of
P200,000.00 was paid;
5) Upon the payment of the P20,000.00 to the stockholders of Massive the latter would give him P25,000.00 worth of shares and
would elect him a director of the company.
The party required to act first in compliance with the terms of the contract is no other than UY.
While UY issued a postdated check for P20,000.00 on 16 December 1972 in payment of the earnest money required under
paragraph 3 (a) of the AGREEMENT, the check bounced when it was deposited for collection. True, UY made good the check on
29 December 1971 but he had to borrow P2,000.00 out of his payment of P20,000.00. Having failed to pay this amount by 5 July
1972 as promised, UY was sued in the City Court of Manila for its collection. Effectively, UY was able to pay only P18,000.00 out
of the P20,000.00 he was supposed to pay as earnest money. This aspect of the case showed the financial difficulties besetting
UY and reflecting poorly on his ability to meet his financial commitments.
In addition to his obligation to pay the earnest money of P20,000.00 Uy was required under paragraph 3(h) of the AGREEMENT to
make available to MASSIVE immediately upon the signing of the contract, such "materials and capital as the corporation may
need for its projects as determined by" Ramon P. Syquia. Uy was able to deliver to MASSIVE materials valued at only P6,085.69
out of the P100,000.00 worth as required by the on-going projects.
The infusion of fresh capital was the lifeblood of the projects and the essence of his being brought in as an investor. Without his
capital contribution, the company could not possibly operate.
Lastly, UY failed to pay on or before 5 January 1972 the P30,000.00 required under paragraph 3(b) of the AGREEMENT. UY
cannot claim that he was relieved from the payment of the monthly installment of P50,000.00 beginning 5 January 1973. When the
parties agreed that the monthly installments should be paid out of the receivables and collections of MASSIVE (paragraph 3[c],
AGREEMENT), it was implied that there was actual cash received or collected.
The Court of Appeals held that UY was relieved of his obligation to pay the P30,000.00 after the stockholders of MASSIVE failed
to deliver the P20,000.00 worth of shares of stock of the company. The thinking of the Court of Appeals was that after UY had paid
the P20,000.00 earnest money, it became the seller's turn to assign the shares of stock to UY.
The Court of Appeals erred in concluding that the stockholders of MASSIVE were the first to default on their obligations because it
overlooked the fact that under paragraph 3(h) of the AGREEMENT, UY was also obligated "immediately upon the signing of the
contract" to contribute materials and funds needed for the on-going projects.
Uy was aware of these twin-obligations of his, so much so that his complaint in Civil Case No. 87511 against the stockholders of
MASSIVE was anchored on his alleged compliance with the provisions of paragraph 3(a) and (h) of the AGREEMENT. 17
The failure of the stockholders to deliver to UY the P25,000.00 worth of shares is not as substantial a breach as that accorded it
by the appellate court. As a matter of fact, Uy did not set up such default as a defense in his answer in Civil Case No. 87006,
leading one to conclude that such contention was a mere after-thought.
Under Art. 1191 of the Civil Code, the power to rescind or the right to resolve is not absolute and must be based on a serious
breach of an obligation as to defeat the object of the parties in making the agreement. 18 The non-delivery of the certificates of
stock to Uy and his non-election to the board of director were not serious breaches, particularly considering that he has not shown
the necessity or urgency for the transfer of the shares in his name or his election as director. Besides, the trial court is given the
discretion to allow a period within which a party in default may be permitted to perform the stipulation upon which the claim for
rescission of the contract is based, especially when the breach is not substantial. 19
WHEREFORE, the decision of the Court of Appeals is reversed and, in lieu thereof, the decision of the trial court in Civil Case No.
87006 is AFFIRMED in toto, and the decision in Civil Case No. 87511 is likewise AFFIRMED but only insofar as it dismissed the
monetary reliefs including attorney's fees sought by both parties.
SO ORDERED.

G.R. No. 101762 July 6, 1993

VERMEN REALTY DEVELOPMENT CORPORATION, petitioner,
vs.
THE COURT OF APPEALS and SENECA HARDWARE CO., INC., respondents.

Ramon P. Gutierrez for petitioner.

Adriano Velasco for private respondent.

BIDIN, J.:
Petitioner seeks a review of the decision of the Court of Appeals in CA-G.R. CV No. 15730, which set aside the decision of the
Regional Trial Court of Quezon City, Branch 92 in Civil Case No. Q-45232. The dispositive portion of the assailed decision reads
as follows:
WHEREFORE, the decision a quo is set aside. As prayed for by plaintiff-appellant, the "Offsetting Agreement" (Exhibit "E" or "2")
is hereby rescinded. Room 601 of Phase I of the Vermen Pines Condominium should be returned by plaintiff-appellant to
defendant-appellee upon payment by the latter of the sum of P330,855.25 to the former, plus damages in the sum of P5,000.00
and P50.00 for the furnishings of Phase I of Condo (sic) Units Nos. 601 and 602, and three (3) day rental of Room 402 during the
Holy Week of 1982, respectively. In addition, defendant-appellee is hereby ordered to pay plaintiff-appellant, who was compelled
to litigate and hire the services of counsel to protect its interests against defendant-appellee's violation of their Offsetting
Agreement, the sum of P10,000.00 as an award for attorney's fee (sic) and other expenses of litigation. The claim for unrealized
profits in a sum equivalent to 10% to 20% percent or P522,000.00 not having been duly proved, is therefore DENIED. No costs.
(Rollo, p. 31)
On March 2, 1981, petitioner Vermen Realty and Development Corporation, as First Party, and private respondent Seneca
Hardware Co., Inc., as Second Party, entered into a contract denominated as "Offsetting Agreement". The said agreement
contained the following stipulations:
1. That the FIRST PARTY is the owner/developer of VERMEN PINES CONDOMINIUM located at Bakakeng Road, Baguio City;
2. That the SECOND PARTY is in business of construction materials and other hardware items;
3. That the SECOND PARTY desires to buy from the FIRST PARTY two (2) residential condominium units, studio type, with a total
floor area of 76.22 square meter (sic) more or less worth TWO HUNDRED SEVENTY SIX THOUSAND (P276,000.00) PESOS
only;
4. That the FIRST PARTY desires to but from the SECOND PARTY construction materials mostly steel bars, electrical materials
and other related items worth FIVE HUNDRED FIFTY TWO THOUSAND (P552,000.00) PESOS only;
5. That the FIRST PARTY shall pay the SECOND PARTY TWO HUNDRED SEVENTY SIX THOUSAND (P276,000.00) PESOS in
cash upon delivery of said construction materials and the other TWO HUNDRED SEVENTY SIX THOUSAND (P276,000.00)
PESOS shall be paid in the form of two (2) residential condominium units, studio type, with a total floor area of 76.22 square meter
(sic) more or less also worth P276,000.00;
6. That, for every staggered delivery of construction materials, fifty percent (50%) shall be paid by the FIRST PARTY to the
SECOND PARTY C.O.D. and, fifty percent (50%) shall be credited to the said condominium unit in favor of the SECOND PARTY;
7. That the SECOND PARTY shall deliver to the FIRST PARTY said construction materials under the agreed price and conditions
stated in the price quotation approved by both parties and made an integral part of this document;
8. That the SECOND PARTY is obliged to start delivering to the FIRST PARTY all items in the purchase order seven (7) days from
receipt of said purchase order until such time that the whole amount of P552,000.00 is settled;
9. That the place of delivery shall be Vermen Pines Condominium at Bakakeng Road, Baguio City;
10. That the freight cost of said materials shall be borne fifty percent (50%) by the FIRST PARTY and fifty percent (50%) by the
SECOND PARTY;
11. That the FIRST PARTY pending completion of the VERMEN PINES CONDOMINIUM PHASE II which is the subject of this
contract, shall deliver to the SECOND PARTY the possession of residential condominium, Phase I, Unit Nos. 601 and 602, studio
type with a total area of 76.22 square meters or less, worth P276,000.00;
12. That after the completion of Vermen Pines Condominium Phase II, the SECOND PARTY shall be given by the FIRST PARTY
the first option to transfer from Phase I to Phase II under the same price, terms and conditions. (Rollo, pp. 26-28).
As found by the appellate court and admitted by both parties, private respondent had paid petitioner the amount of P110,151.75,
and at the same time delivered construction materials worth P219,727.00. Pending completion of Phase II of the Vermen Pines
Condominiums, petitioner delivered to private respondent units 601 and 602 at Phase I of the Vermen Pines Condominiums
(Rollo, p. 28). In 1982, the petitioner repossessed unit 602. As a consequence of the repossession, the officers of the private
respondent corporation had to rent another unit for their use when they went to Baguio on April 8, 1982. On May 10, 1982, the
officers of the private respondent corporation requested for a clarification of the petitioner's action of preventing them and their
families from occupying condominium unit 602.
In its reply dated May 24, 1982, the petitioner corporation averred that Room 602 was leased to another tenant because private
respondent corporation had not paid anything for purchase of the condominium unit. Petitioner corporation demanded payment of
P27,848.25 representing the balance of the purchase price of Room 601.
In 1983, the loan application for the construction of the Vermen Pines Condominium Phase II was denied. Consequently,
construction of the condominium project stopped and has not been resumed since then.
On June 21, 1985, private respondent filed a complaint with the Regional Trial Court of Quezon City (Branch 92) for rescission of
the Offsetting Agreement with damages. In said complaint, private respondent alleged that petitioner Vermen Realty Corporation
had stopped issuing purchase orders of construction materials after April, 1982, without valid reason, thus resulting in the
stoppage of deliveries of construction materials on its (Seneca Hardware) part, in violation of the Offsetting Agreement.
In its Answer filed on August 15, 1985, petitioner alleged that the fault lay with private respondent (plaintiff therein): although

petitioner issued purchase orders, it was private respondent who could not deliver the supplies ordered, alleging that they were
out of stock. (However, during a hearing on January 28, 1987, the Treasurer of petitioner corporation, when asked where the
purchase orders were, alleged that she was going to produce the same in court, but the same was never produced (Rollo, p. 30).
Moreover, private respondent quoted higher prices for the construction materials which were available. Thus, petitioner had to
resort to its other suppliers. Anent the query as to why Unit 602 was leased to another tenant, petitioner averred that this was
done because private respondent had not paid anything for it.
As of December 16, 1986, private respondent had paid petitioner P110,151.75 in cash, made deliveries of construction materials
worth P219,727.00, leaving a balance of P27,848.25 representing the purchase price of unit 601 (Rollo, p. 28). The price of one
condominium unit was P138,000.00.
After conducting hearings, the trial court rendered a decision dismissing the complaint and ordering the plaintiff (private
respondent in this petition) to pay defendant (petitioner in this petition) on its counterclaim in the amount of P27,848.25
representing the balance due on the purchase price of condominium unit 601.
On appeal, respondent court reversed the trial court's decision as adverted to above.
Petitioner now comes before us with the following assignment of errors:
I
THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE BY THIS HONORABLE COURT, WHEN
IT SUPPLANTED CONTRARY TO THE EVIDENCE ON RECORD, THE TRIAL COURT'S CONCLUSIONS THAT PETITIONER
DID NOT VIOLATE THE "OFFSETTING AGREEMENT" IT ENTERED INTO WITH THE SENECA HARDWARE CO., INC. WITH
ITS TOTALLY BASELESS "PERCEPTION" THAT IT WAS PETITIONER WHICH DISCONTINUED TO ISSUE PURCHASE
ORDERS DUE TO THE STOPPAGE OF THE CONSTRUCTION OF PHASE II OF THE CONDOMINIUM PROJECT WHEN THE
LOAN ON THE SAID PROJECT WAS STOPPED.
II
THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE BY THIS HONORABLE COURT, WHEN
IT CONCLUDED THAT IT WAS PETITIONER WHICH BREACHED THE "OFFSETTING AGREEMENT" BECAUSE IT DID NOT
SEND PURCHASE ORDERS TO PRIVATE RESPONDENT AND DISCONTINUED THE CONSTRUCTION OF THE
CONDOMINIUM PROJECT DESPITE THE FACT THAT THE EXHIBITS ATTESTING TO THIS FACT WAS FORMALLY
OFFERED IN EVIDENCE IN COURT AND MENTIONED BY IT IN ITS DECISION.
III
THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE BY THIS HONORABLE COURT, WHEN
IT CONCLUDED THAT IT WAS PETITIONER WHICH BREACHED THE "OFFSETTING AGREEMENT" DESPITE THE
ADMISSION MADE BY PRIVATE RESPONDENT'S OWN WITNESS THAT PETITIONER HAD THE DISCRETION TO ORDER
OR NOT TO ORDER THE CONSTRUCTION MATERIAL (SIC) FROM THE FORMER. (Rollo, p. )
The issue presented before the Court is whether or not the circumstances of the case warrant rescission of the Offsetting
Agreement as prayed for by Private Respondent when he instituted the case before the trial court.
We rule in favor of private respondent. There is no controversy that the provisions of the Offsetting Agreement are reciprocal in
nature. Reciprocal obligations are those created or established at the same time, out of the same cause, and which results in a
mutual relationship of creditor and debtor between parties. In reciprocal obligations, the performance of one is conditioned on the
simultaneous fulfillment of the other obligation (Abaya vs. Standard Vacuum Oil Co., 101 Phil. 1262 [1957]). Under the agreement,
private respondent shall deliver to petitioner construction materials worth P552,000.00 under the conditions set forth in the
Offsetting Agreement. Petitioner's obligation under the agreement is three-fold: he shall pay private respondent P276,000.00 in
cash; he shall deliver possession of units 601 and 602, Phase I, Vermen Pines Condominiums (with total value of P276,000.00) to
private respondent; upon completion of Vermen Pines Condominiums Phase II, private respondent shall be given option to
transfer to similar units therein.
Article 1191 of the Civil Code provides the remedy of rescission in (more appropriately, the term is "resolution") in case of
reciprocal obligations, where one of the obligors fails to comply with that is incumbent upon him.
The general rule is that rescission of a contract will not be permitted for a slight or causal breach, but only for such substantial and
fundamental breach as would defeat the very object of the parties in executing the agreement. The question of whether a breach
of contract is substantial depends upon the attendant circumstances (Universal Food Corp. vs. Court of Appeals, 33 SCRA 1,
[1970]).
In the case at bar, petitioner argues that it was private respondent who failed to perform its obligation in the Offsetting Agreement.
It averred that contrary to the appellate court's ruling, the mere stoppage of the loan for the construction of Phase II of the Vermen
Pines Condominiums should not have had any effect on the fulfillment of the obligations set forth in the Offsetting Agreement.
Petitioner moreover stresses that contrary to private respondent's averments, purchase orders were sent, but there was failure to
deliver the materials ordered because they were allegedly out of stock. Petitioner points out that, as admitted by private
respondent's witness, petitioner had the discretion to order or not to order constructions materials, and that it was only after
petitioner approved the price, after making a canvass from other suppliers, that the latter would issue a purchase order. Petitioner
argues that this was the agreement, and therefore the law between the parties, hence, when no purchase orders were issued, no
provision of the agreement was violated.
Private respondent, on the other hand, points out that the subject of the Offsetting Agreement is Phase II of the Vermen Pines
Condominiums. It alleges that since construction of Phase II of the Vermen Pines Condominiums has failed to begin (Rollo, p.
104), it has reason to move for rescission of the Offsetting Agreement, as it cannot forever wait for the delivery of the
condominium units to it.
It is evident from the facts of the case that private respondent did not fail to fulfill its obligation in the Offsetting Agreement. The
discontinuance of delivery of construction materials to petitioner stemmed from the failure of petitioner to send purchase orders to

private respondent. The allegation that petitioner had been sending purchase orders to private respondent, which the latter could
not fill, cannot be given credence. Perhaps in the beginning, it would send purchase orders to private respondent (as evidenced
by the purchase orders presented in court), and the latter would deliver the construction materials ordered. However, according to
private respondent, after April, 1982, petitioner stopped sending purchase orders. Petitioner failed to refute this allegation. When
petitioner's witness, Treasurer of the petitioner corporation, was asked to produce the purchase orders in court, the latter promised
to do so, but this was never complied with.
On the other hand, petitioner would never able to fulfill its obligation in allowing private respondent to exercise the option to
transfer from Phase I to Phase II, as the construction of Phase II has ceased and the subject condominium units will never be
available.
The impossibility of fulfillment of the obligation on the part of petitioner necessitates resolution of the contract for indeed, the nonfulfillment of the obligation aforementioned constitutes substantial breach of the Offsetting Agreement. The possibility of exercising
the option of whether or not to transfer to condominium units in Phase II was one of the factors which were considered by private
respondent when it entered into the agreement. Since the construction of the Vermen Pines Condominium Phase II has stopped,
petitioner would be in no position to perform its obligation to give private respondent the option to transfer to Phase II. It would be
the height of injustice to make private respondent wait for something that may never come.
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioner.
SO ORDERED.

G.R. No. 107207 November 23, 1995

VIRGILIO R. ROMERO, petitioner,
vs.
HON. COURT OF APPEALS and ENRIQUETA CHUA VDA. DE ONGSIONG, respondents.

VITUG, J.:
The parties pose this question: May the vendor demand the rescission of a contract for the sale of a parcel of land for a cause
traceable to his own failure to have the squatters on the subject property evicted within the contractually-stipulated period?
Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of production, manufacture and exportation of perlite
filter aids, permalite insulation and processed perlite ore. In 1988, petitioner and his foreign partners decided to put up a central
warehouse in Metro Manila on a land area of approximately 2,000 square meters. The project was made known to several
freelance real estate brokers.
A day or so after the announcement, Alfonso Flores and his wife, accompanied by a broker, offered a parcel of land measuring
1,952 square meters. Located in Barangay San Dionisio, Paraaque, Metro Manila, the lot was covered by TCT No. 361402 in the
name of private respondent Enriqueta Chua vda. de Ongsiong. Petitioner visited the property and, except for the presence of
squatters in the area, he found the place suitable for a central warehouse.
Later, the Flores spouses called on petitioner with a proposal that should he advance the amount of P50,000.00 which could be
used in taking up an ejectment case against the squatters, private respondent would agree to sell the property for only P800.00
per square meter. Petitioner expressed his concurrence. On 09 June 1988, a contract, denominated "Deed of Conditional Sale,"
was executed between petitioner and private respondent. The simply-drawn contract read:
DEED OF CONDITIONAL SALE
KNOW ALL MEN BY THESE PRESENTS:
This Contract, made and executed in the Municipality of Makati, Philippines this 9th day of June, 1988 by and between:
ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age, widow, Filipino and residing at 105 Simoun St., Quezon City, Metro
Manila, hereinafter referred to as the VENDOR;
-andVIRGILIO R. ROMERO, married to Severina L. Lat, of Legal age, Filipino, and residing at 110 San Miguel St., Plainview Subd.,
Mandaluyong Metro Manila, hereinafter referred to as the VENDEE:
W I T N E S S E T H : That
WHEREAS, the VENDOR is the owner of One (1) parcel of land with a total area of ONE THOUSAND NINE HUNDRED FIFTY
TWO (1,952) SQUARE METERS, more or less, located in Barrio San Dionisio, Municipality of Paraaque, Province of Rizal,
covered by TCT No. 361402 issued by the Registry of Deeds of Pasig and more particularly described as follows:
xxx xxx xxx
WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land and the VENDOR has accepted the offer, subject to the
terms and conditions hereinafter stipulated:
NOW, THEREFORE, for and in consideration of the sum of ONE MILLION FIVE HUNDRED SIXTY ONE THOUSAND SIX
HUNDRED PESOS (P1,561,600.00) ONLY, Philippine Currency, payable by VENDEE to in to (sic) manner set forth, the VENDOR
agrees to sell to the VENDEE, their heirs, successors, administrators, executors, assign, all her rights, titles and interest in and to
the property mentioned in the FIRST WHEREAS CLAUSE, subject to the following terms and conditions:
1. That the sum of FIFTY THOUSAND PESOS (P50,000.00) ONLY Philippine Currency, is to be paid upon signing and execution

of this instrument.
2. The balance of the purchase price in the amount of ONE MILLION FIVE HUNDRED ELEVEN THOUSAND SIX HUNDRED
PESOS (P1,511,600.00) ONLY shall be paid 45 days after the removal of all squatters from the above described property.
3. Upon full payment of the overall purchase price as aforesaid, VENDOR without necessity of demand shall immediately sign,
execute, acknowledged (sic) and deliver the corresponding deed of absolute sale in favor of the VENDEE free from all liens and
encumbrances and all Real Estate taxes are all paid and updated.
It is hereby agreed, covenanted and stipulated by and between the parties hereto that if after 60 days from the date of the signing
of this contract the VENDOR shall not be able to remove the squatters from the property being purchased, the downpayment
made by the buyer shall be returned/reimbursed by the VENDOR to the VENDEE.
That in the event that the VENDEE shall not be able to pay the VENDOR the balance of the purchase price of ONE MILLION
FIVE HUNDRED ELEVEN THOUSAND SIX HUNDRED PESOS (P1,511,600.00) ONLY after 45 days from written notification to
the VENDEE of the removal of the squatters from the property being purchased, the FIFTY THOUSAND PESOS (P50,000.00)
previously paid as downpayment shall be forfeited in favor of the VENDOR.
Expenses for the registration such as registration fees, documentary stamp, transfer fee, assurances and such other fees and
expenses as may be necessary to transfer the title to the name of the VENDEE shall be for the account of the VENDEE while
capital gains tax shall be paid by the VENDOR.
IN WITNESS WHEREOF, the parties hereunto signed those (sic) presents in the City of Makati MM, Philippines on this 9th day of
June, 1988.
(Sgd.) (Sgd.)
VIRGILIO R. ROMERO ENRIQUETA CHUA VDA.
DE ONGSIONG
Vendee Vendor
SIGNED IN THE PRESENCE OF:
(Sgd.) (Sgd.)
Rowena C. Ongsiong Jack M. Cruz 1
Alfonso Flores, in behalf of private respondent, forthwith received and acknowledged a check for P50,000.00 2 from petitioner. 3
Pursuant to the agreement, private respondent filed a complaint for ejectment (Civil Case No. 7579) against Melchor Musa and 29
other squatter families with the Metropolitan Trial Court of Paraaque. A few months later, or on 21 February 1989, judgment was
rendered ordering the defendants to vacate the premises. The decision was handed down beyond the 60-day period (expiring 09
August 1988) stipulated in the contract. The writ of execution of the judgment was issued, still later, on 30 March 1989.
In a letter, dated 07 April 1989, private respondent sought to return the P50,000.00 she received from petitioner since, she said,
she could not "get rid of the squatters" on the lot. Atty. Sergio A.F. Apostol, counsel for petitioner, in his reply of 17 April 1989,
refused the tender and stated:.
Our client believes that with the exercise of reasonable diligence considering the favorable decision rendered by the Court and the
writ of execution issued pursuant thereto, it is now possible to eject the squatters from the premises of the subject property, for
which reason, he proposes that he shall take it upon himself to eject the squatters, provided, that expenses which shall be
incurred by reason thereof shall be chargeable to the purchase price of the land. 4
Meanwhile, the Presidential Commission for the Urban Poor ("PCUD"), through its Regional Director for Luzon, Farley O. Viloria,
asked the Metropolitan Trial Court of Paraaque for a grace period of 45 days from 21 April 1989 within which to relocate and
transfer the squatter families. Acting favorably on the request, the court suspended the enforcement of the writ of execution
accordingly.
On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of the 45-day grace period and his client's willingness
to "underwrite the expenses for the execution of the judgment and ejectment of the occupants." 5
In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private respondent, advised Atty. Apostol that the Deed of
Conditional Sale had been rendered null and void by virtue of his client's failure to evict the squatters from the premises within the
agreed 60-day period. He added that private respondent had "decided to retain the property." 6
On 23 June 1989, Atty. Apostol wrote back to explain:
The contract of sale between the parties was perfected from the very moment that there was a meeting of the minds of the parties
upon the subject lot and the price in the amount of P1,561,600.00. Moreover, the contract had already been partially fulfilled and
executed upon receipt of the downpayment of your client. Ms. Ongsiong is precluded from rejecting its binding effects relying upon
her inability to eject the squatters from the premises of subject property during the agreed period. Suffice it to state that, the
provision of the Deed of Conditional Sale do not grant her the option or prerogative to rescind the contract and to retain the
property should she fail to comply with the obligation she has assumed under the contract. In fact, a perusal of the terms and
conditions of the contract clearly shows that the right to rescind the contract and to demand the return/reimbursement of the
downpayment is granted to our client for his protection.
Instead, however, of availing himself of the power to rescind the contract and demand the return, reimbursement of the
downpayment, our client had opted to take it upon himself to eject the squatters from the premises. Precisely, we refer you to our
letters addressed to your client dated April 17, 1989 and June 8, 1989.
Moreover, it is basic under the law on contracts that the power to rescind is given to the injured party. Undoubtedly, under the
circumstances, our client is the injured party.

Furthermore, your client has not complied with her obligation under their contract in good faith. It is undeniable that Ms. Ongsiong
deliberately refused to exert efforts to eject the squatters from the premises of the subject property and her decision to retain the
property was brought about by the sudden increase in the value of realties in the surrounding areas.
Please consider this letter as a tender of payment to your client and a demand to execute the absolute Deed of Sale. 7
A few days later (or on 27 June 1989), private respondent, prompted by petitioner's continued refusal to accept the return of the
P50,000.00 advance payment, filed with the Regional Trial Court of Makati, Branch 133, Civil Case No. 89-4394 for rescission of
the deed of "conditional" sale, plus damages, and for the consignation of P50,000.00 cash.
Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued an alias writ of execution in Civil Case No. 7579 on motion of
private respondent but the squatters apparently still stayed on.
Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial Court of Makati 8 rendered decision holding that private
respondent had no right to rescind the contract since it was she who "violated her obligation to eject the squatters from the subject
property" and that petitioner, being the injured party, was the party who could, under Article 1191 of the Civil Code, rescind the
agreement. The court ruled that the provisions in the contract relating to (a) the return/reimbursement of the P50,000.00 if the
vendor were to fail in her obligation to free the property from squatters within the stipulated period or (b), upon the other hand, the
sum's forfeiture by the vendor if the vendee were to fail in paying the agreed purchase price, amounted to "penalty clauses". The
court added:
This Court is not convinced of the ground relied upon by the plaintiff in seeking the rescission, namely: (1) he (sic) is afraid of the
squatters; and (2) she has spent so much to eject them from the premises (p. 6, tsn, ses. Jan. 3, 1990). Militating against her
profession of good faith is plaintiffs conduct which is not in accord with the rules of fair play and justice. Notably, she caused the
issuance of an alias writ of execution on August 25, 1989 (Exh. 6) in the ejectment suit which was almost two months after she
filed the complaint before this Court on June 27, 1989. If she were really afraid of the squatters, then she should not have pursued
the issuance of an alias writ of execution. Besides, she did not even report to the police the alleged phone threats from the
squatters. To the mind of the Court, the so-called squatter factor is simply factuitous (sic). 9
The lower court, accordingly, dismissed the complaint and ordered, instead, private respondent to eject or cause the ejectment of
the squatters from the property and to execute the absolute deed of conveyance upon payment of the full purchase price by
petitioner.
Private respondent appealed to the Court of Appeals. On 29 May 1992, the appellate court rendered its decision. 10 It opined that
the contract entered into by the parties was subject to a resolutory condition, i.e., the ejectment of the squatters from the land, the
non-occurrence of which resulted in the failure of the object of the contract; that private respondent substantially complied with her
obligation to evict the squatters; that it was petitioner who was not ready to pay the purchase price and fulfill his part of the
contract, and that the provision requiring a mandatory return/reimbursement of the P50,000.00 in case private respondent would
fail to eject the squatters within the 60-day period was not a penal clause. Thus, it concluded.
WHEREFORE, the decision appealed from is REVERSED and SET ASIDE, and a new one entered declaring the contract of
conditional sale dated June 9, 1988 cancelled and ordering the defendant-appellee to accept the return of the downpayment in the
amount of P50,000.00 which was deposited in the court below. No pronouncement as to costs. 11
Failing to obtain a reconsideration, petitioner filed this petition for review on certiorari raising issues that, in fine, center on the
nature of the contract adverted to and the P50,000.00 remittance made by petitioner.
A perfected contract of sale may either be absolute or conditional 12 depending on whether the agreement is devoid of, or subject
to, any condition imposed on the passing of title of the thing to be conveyed or on the obligation of a party thereto. When
ownership is retained until the fulfillment of a positive condition the breach of the condition will simply prevent the duty to convey
title from acquiring an obligatory force. If the condition is imposed on an obligation of a party which is not complied with, the other
party may either refuse to proceed or waive said condition (Art. 1545, Civil Code). Where, of course, the condition is imposed
upon the perfection of the contract itself, the failure of such condition would prevent the juridical relation itself from coming into
existence. 13
In determining the real character of the contract, the title given to it by the parties is not as much significant as its substance. For
example, a deed of sale, although denominated as a deed of conditional sale, may be treated as absolute in nature, if title to the
property sold is not reserved in the vendor or if the vendor is not granted the right to unilaterally rescind the contract predicated
on the fulfillment or non-fulfillment, as the case may be, of the prescribed condition. 14
The term "condition" in the context of a perfected contract of sale pertains, in reality, to the compliance by one party of an
undertaking the fulfillment of which would beckon, in turn, the demandability of the reciprocal prestation of the other party. The
reciprocal obligations referred to would normally be, in the case of vendee, the payment of the agreed purchase price and, in the
case of the vendor, the fulfillment of certain express warranties (which, in the case at bench is the timely eviction of the squatters
on the property).
It would be futile to challenge the agreement here in question as not being a duly perfected contract. A sale is at once perfected
when a person (the seller) obligates himself, for a price certain, to deliver and to transfer ownership of a specified thing or right to
another (the buyer) over which the latter agrees. 15
The object of the sale, in the case before us, was specifically identified to be a 1,952-square meter lot in San Dionisio, Paraaque,
Rizal, covered by Transfer Certificate of Title No. 361402 of the Registry of Deeds for Pasig and therein technically described. The
purchase price was fixed at P1,561,600.00, of which P50,000.00 was to be paid upon the execution of the document of sale and
the balance of P1,511,600.00 payable "45 days after the removal of all squatters from the above described property."
From the moment the contract is perfected, the parties are bound not only to the fulfillment of what has been expressly stipulated
but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. Under the
agreement, private respondent is obligated to evict the squatters on the property. The ejectment of the squatters is a condition the
operative act of which sets into motion the period of compliance by petitioner of his own obligation, i.e., to pay the balance of the
purchase price. Private respondent's failure "to remove the squatters from the property" within the stipulated period gives

petitioner the right to either refuse to proceed with the agreement or waive that condition in consonance with Article 1545 of the
Civil Code. 16 This option clearly belongs to petitioner and not to private respondent.
We share the opinion of the appellate court that the undertaking required of private respondent does not constitute a "potestative
condition dependent solely on his will" that might, otherwise, be void in accordance with Article 1182 of the Civil Code 17 but a
"mixed" condition "dependent not on the will of the vendor alone but also of third persons like the squatters and government
agencies and personnel concerned." 18 We must hasten to add, however, that where the so-called "potestative condition" is
imposed not on the birth of the obligation but on its fulfillment, only the obligation is avoided, leaving unaffected the obligation
itself. 19
In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows the obligee to choose between proceeding
with the agreement or waiving the performance of the condition. It is this provision which is the pertinent rule in the case at bench.
Here, evidently, petitioner has waived the performance of the condition imposed on private respondent to free the property from
squatters. 20
In any case, private respondent's action for rescission is not warranted. She is not the injured party. 21 The right of resolution of a
party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party that violates the
reciprocity between them. 22 It is private respondent who has failed in her obligation under the contract. Petitioner did not breach
the agreement. He has agreed, in fact, to shoulder the expenses of the execution of the judgment in the ejectment case and to
make arrangements with the sheriff to effect such execution. In his letter of 23 June 1989, counsel for petitioner has tendered
payment and demanded forthwith the execution of the deed of absolute sale. Parenthetically, this offer to pay, having been made
prior to the demand for rescission, assuming for the sake of argument that such a demand is proper under Article 1592 23 of the
Civil Code, would likewise suffice to defeat private respondent's prerogative to rescind thereunder.
There is no need to still belabor the question of whether the P50,000.00 advance payment is reimbursable to petitioner or
forfeitable by private respondent, since, on the basis of our foregoing conclusions, the matter has ceased to be an issue. Suffice it
to say that petitioner having opted to proceed with the sale, neither may petitioner demand its reimbursement from private
respondent nor may private respondent subject it to forfeiture.
WHEREFORE, the questioned decision of the Court of Appeals is hereby REVERSED AND SET ASIDE, and another is entered
ordering petitioner to pay private respondent the balance of the purchase price and the latter to execute the deed of absolute sale
in favor of petitioner. No costs.
SO ORDERED.

G.R. No. 129760 December 29, 1998

RICARDO CHENG, petitioner,
vs.
RAMON B. GENATO and ERNESTO R. DA JOSE & SOCORRO DA JOSE, respondents.

MARTINEZ, J.:
This petition for review on certiorari seeks to annul and set aside the Decision of the Court of Appeals (CA) 1 dated July 7, 1997 in
CA-G.R. No. CV No. 44706 entitled "Ricardo Cheng, plaintiff-appellee vs. Ramon B. Genato, defendant-appellant, Ernesto R. Da
Jose & Socorro B. Da Jose, Intervenors-Appellants" which reversed the ruling of the Regional Trial Court, Branch 96 of Quezon
City dated January 18, 1994. The dispositive portion of the CA Decision reads:
WHEREFORE, based on the foregoing, appealed decision is hereby REVERSED and SET ASIDE and judgment is rendered
ordering;
1. The dismissal of the complaint;
2. The cancellation of the annotations of the defendant-appellant's Affidavit to Annul Contract to Sell and plaintiff-appellee's Notice
of Adverse Claim in the subject TCT's, namely, TCT No. T-76.196 (M) and TCT No. T-76.197 (M);
3. Payment by the intervenors-appellants of the remaining balance of the purchase price pursuant to their agreement with the
defendant-appellant to suspend encashment of the three post-dated checks issued since 1989.
4. Ordering the execution by the defendant-appellant Genato of the Deed of Absolute Sale over the subject two lots covered by
TCT No. T-76.196 (M) and TCT No. T-76.197 (M) in favor of intervenors-appellants Spouses Da Jose;
5. The return by defendant-appellant Genato of the P50,000.00 paid to him by the plaintiff-appellee Cheng, and
6. Payment by plaintiff-appellee Cheng of moral damages to herein intervenors-appellants Da Jose of P100,000.00, exemplary
damages of P50,000.00, attorney's fees of P50,000.00, and costs of suit; and to defendant-appellant, of P100,000.00 in
exemplary damages, P50,000.00 in attorney's fees. The amounts payable to the defendant-appellant may be compensated by
plaintiff appellee with the amount ordered under the immediately foregoing paragraph which defendant-appellant has to pay the
plaintiff-appellee.
SO ORDERED. 2
The antecedents of the case are as follows:
Respondent Ramon B. Genato (Genato) is the owner of two parcels of land located at Paradise Farms, San Jose del Monte,
Bulacan covered by TCT No. T-76.196 (M) 3 and TCT No. T-76.197 (M) 4 with an aggregate area of 35,821square meters, more
or less.

On September 6, 1989, respondent Genato entered into an agreement with respondent-spouses Ernesto R. Da Jose and Socorro
B. Da Jose (Da Jose spouses) over the above-mentioned two parcels of land. The agreement culminated in the execution of a
contract to sell for which the purchase price was P80.00 per square meter. The contract was in a public instrument and was duly
annotated at the back of the two certificates of title on the same day. Clauses 1and 3 thereof provide:
1. That the purchase price shall be EIGHTY (P80.00) PESOS, Philippine Currency per square meter, of which the amount of
FIFTY THOUSAND (P50,000.00) PESOS shall be paid by the VENDEE to the VENDOR as partial down payment at the time of
execution of this Contract to Sell.
xxx xxx xxx
3. That the VENDEE, Thirty (30) DAYS after the execution of this contract, and only after having satisfactorily verified and
confirmed the truth and authenticity of documents, and that no restrictions, limitations, and developments imposed on and/or
affecting the property subject of this contract shall be detrimental to his interest, the VENDEE shall pay to the VENDOR, NINE
HUNDRED FIFTY THOUSAND (P950,00.00) PESOS. Philippine Currency, representing the full payment of the agreed Down
Payment, after which complete possession of the property shall be given to the VENDEE to enable him to prepare the premises
and any development therein.
On October 4, 1989, the Da Jose spouses, not having finished verifying the titles mentioned in clause 3 as aforequoted, asked for
and was granted by respondent Genato an extension of another 30 days or until November 5, 1989. However, according to
Genato, the extension was granted on condition that a new set of documents is made seven (7) days from October 4, 1989. 6 This
was denied by the Da Jose spouses.
Pending the effectivity of the aforesaid extension period, and without due notice to the Da Jose spouses, Genato executed an
Affidavit to Annul the Contract to Sell, 7 on October 13, 1989. Moreover, no annotation of the said affidavit at the back of his titles
was made right away. The affidavit contained, inter alia, the following paragraphs;
xxx xxx xxx
That it was agreed between the parties that the agreed downpayment of P950,000.00 shall be paid thirty (30) days after the
execution of the Contract, that is on or before October 6, 1989;
The supposed VENDEES failed to pay the said full downpayment even up to this writing, a breach of contract;
That this affidavit is being executed to Annul the aforesaid Contract to Sell for the vendee having committed a breach of contract
for not having complied with the obligation as provided in the Contract to Sell; 8
On October 24, 1989, herein petitioner Ricardo Cheng (Cheng) went to Genato's residence and expressed interest in buying the
subject properties. On that occasion, Genato showed to Ricardo Cheng copies of his transfer certificates of title and the
annotations at the back thereof of his contract to sell with the Da Jose spouses. Genato also showed him the aforementioned
Affidavit to Annul the Contract to Sell which has not been annotated at the back of the titles.
Despite these, Cheng went ahead and issued a check for P50,000.00 upon the assurance by Genato that the previous contract
with the Da Jose spouses will be annulled for which Genato issued a handwritten receipt (Exh. "D"), written in this wise:
10/24/89
Received from Ricardo Cheng
the Sum of Fifty Thousand Only (P50.000-)
as partial for T-76196 (M)
T-76197 (M) area 35.821 Sq.m.
Paradise Farm, Gaya-Gaya, San Jose Del Monte
P70/m2 Bulacan
plus C. G. T. etc.
Check # 470393 (SGD.) Ramon B. Genato
10/24/89 9
On October 25, 1989, Genato deposited Cheng's check. On the same day, Cheng called up Genato reminding him to register the
affidavit to annul the contract to sell. 10
The following day, or on October 26, 1989, acting on Cheng's request, Genato caused the registration of the Affidavit to Annul the
Contract to Sell in the Registry of Deeds, Meycauayan, Bulacan as primary entry No. 262702. 11
While the Da Jose spouses were at the Office of the Registry of Deeds of Meycauayan, Bulacan on October 27, 1989, they met
Genato by coincidence. It was only then that the Da Jose spouses discovered about the affidavit to annul their contract. The latter
were shocked at the disclosure and protested against the rescission of their contract. After being reminded that he (Genato) had
given them (Da Jose spouses) an additional 30-day period to finish their verification of his titles, that the period was still in effect,
and that they were willing and able to pay the balance of the agreed down payment, later on in the day, Genato decided to
continue the Contract he had with them. The agreement to continue with their contract was formalized in a conforme letter dated
October 27, 1989.
Thereafter, Ramon Genato advised Ricardo Cheng of his decision to continue his contract with the Da Jose spouses and the
return of Cheng's P50,000.00 check. Consequently, on October 30, 1989, Cheng's lawyer sent a letter 12 to Genato demanding
compliance with their agreement to sell the property to him stating that the contract to sell between him and Genato was already
perfected and threatening legal action.
On November 2, 1989, Genato sent a letter 13 to Cheng (Exh. "6") enclosing a BPI Cashier's Check for P50,000.00 and

expressed regret for his inability to "consummate his transaction" with him. After having received the letter of Genato on
November 4, 1989, Cheng, however, returned the said check to the former via RCPI telegram 14 dated November 6, 1989,
reiterating that "our contract to sell your property had already been perfected."
Meanwhile, also on November 2, 1989, Cheng executed an affidavit of adverse claim 15 and had it annotated on the subject
TCT's.
On the same day, consistent with the decision of Genato and the Da Jose spouses to continue with their Contract to Sell of
September 6, 1989, the Da Jose spouses paid Genato the complete down payment of P950,000.00 and delivered to him three (3)
postdated checks (all dated May 6, 1990, the stipulated due date) in the total amount of P1,865,680.00 to cover full payment of
the balance of the agreed purchase price. However, due to the filing of the pendency of this case, the three (3) postdated checks
have not been encashed.
On December 8, 1989, Cheng instituted a complaint 16 for specific performance to compel Genato to execute a deed of sale to
him of the subject properties plus damages and prayer for preliminary attachment. In his complaint, Cheng averred that the
P50,000.00 check he gave was a partial payment to the total agreed purchase price of the subject properties and considered as
an earnest money for which Genato acceded. Thus, their contract was already perfected.
In Answer 17 thereto, Genato alleged that the agreement was only a simple receipt of an option-bid deposit, and never stated that
it was a partial payment, nor is it an earnest money and that it was subject to condition that the prior contract with the Da Jose
spouses be first cancelled.
The Da Jose spouses, in their Answer in Intervention, 18 asserted that they have a superior right to the property as first buyers.
They alleged that the unilateral cancellation of the Contract to Sell was without effect and void. They also cited Cheng's bad faith
as a buyer being duly informed by Genato of the existing annotated Contract to Sell on the titles.
After trial on the merits, the lower court ruled that the receipt issued by Genato to Cheng unerringly meant a sale and not just a
priority or an option to buy. It cannot be true that the transaction was subjected to some condition or reservation, like the priority in
favor of the Da Jose spouses as first buyer because, if it were otherwise, the receipt would have provided such material condition
or reservation, especially as it was Genato himself who had made the receipt in his own hand. It also opined that there was a valid
rescission of the Contract to Sell by virtue of the Affidavit to Annul the Contract to Sell. Time was of the essence in the execution of
the agreement between Genato and Cheng, under this circumstance demand, extrajudicial or judicial, is not necessary. It falls
under the exception to the rule provided in Article 1169 19 of the Civil Code. The right of Genato to unilaterally rescind the contract
is said to be under Article 1191 20 of the Civil Code. Additionally, after reference was made to the substance of the agreement
between Genato and the Da Jose spouses, the lower court also concluded that Cheng should be preferred over the intervenorsDa Jose spouses in the purchase of the subject properties. Thus, on January 18, 1994 the trial court rendered its decision the
decretal portion of which reads:
WHEREFORE, judgment is hereby rendered:
1. Declaring the contract to sell dated September 6, 1989 executed between defendant Ramon Genato, as vendor, and
intervenors Spouses Ernesto and Socorro Da Jose, as vendees, resolved and rescinded in accordance with Art. 1191, Civil Code,
by virtue of defendant's affidavit to annul contract to sell dated October 13, 1989 and as the consequence of intervenors' failure to
execute within seven (7) days from October 4, 1989 another contract to sell pursuant to their mutual agreement with defendant;
2. Ordering defendant to return to the intervenors the sum of P1,000,000.00, plus interest at the legal rate from November 2, 1989
until full payment;
3. Directing defendant to return to the intervenors the three (3) postdated checks immediately upon finality of this judgment;
4. Commanding defendant to execute with and in favor of the plaintiff Ricardo Cheng, as vendee, a deed of conveyance and sale
of the real properties described and covered in Transfer Certificates of Title No. T-76-196 (M) and T-76.197 (M) of the Registry of
Deeds of Bulacan, Meycauayan Branch, at the rate of P70.000/square meter, less the amount of P50,000.00 alreaddy paid to
defendant, which is considered as part of the purchase price, with the plaintiff being liable for payment of the capital gains taxes
and other expenses of the transfer pursuant to the agreement to sell dated October 24, 1989; and
5 Ordering defendant to pay the plaintiff and the intervenors as follows:
a/ P50,000.00, as nominal damages, to plaintiff;
b/ P50,000.00, as nominal damages, to intervenors;
c/ P20,000.00, as and for attorney's fees, to plaintiff;
d/ P20,000.00, as and for attorney's fees, to intervenors; and
e/ Cost of the suit.
xxx xxx xxx
Not satisfied with the aforesaid decision, herein respondents Ramon Genato and Da Jose spouses appealed to the court a quo
which reversed such judgment and ruled that the prior contract to sell in favor of the Da Jose spouses was not validly rescinded;
that the subsequent contract to sell between Genato and Cheng, embodied in the handwritten receipt, was without force and
effect due to the failure to rescind the prior contract; and that Cheng should pay damages to the respondents herein being found
to be in bad faith.
Hence this petition. 21
This petition for review, assails the Court of Appeals' Decision on the following grounds: (1) that the Da Jose spouses' Contract to
Sell has been validly rescinded or resolved; (2) that Ricardo Cheng's own contract with Genato was not just a contract to sell but
one of conditional contract of sale which gave him better rights, thus precluding the application of the rule on double sales under
Article 1544, Civil Code; and (3) that, in any case, it was error to hold him liable for damages.

The petition must be denied for failure to show that the Court of Appeals committed a reversible error which would warrant a
contrary ruling.
No reversible error can be ascribed to the ruling of the Court of Appeals that there was no valid and effective rescission or
resolution of the Da Jose spouses Contract to Sell, contrary to petitioner's contentions and the trial court's erroneous ruling.
In a Contract to Sell, the payment of the purchase price is a positive suspensive condition, the failure of which is not a breach,
casual or serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an obligatory force. 22 It
is one where the happening of the event gives rise to an obligation. Thus, for its non-fulfillment there will be no contract to speak
of, the obligor having failed to perform the suspensive condition which enforces a juridical relation. In fact with this circumstance,
there can be no rescission of an obligation that is still non-existent, the suspensive condition not having occurred as yet. 23
Emphasis should be made that the breach contemplated in Article 1191 of the New Civil Code is the obligor's failure to comply
with an obligation already extant, not a failure of a condition to render binding that obligation. 24
Obviously, the foregoing jurisprudence cannot be made to apply to the situation in the instant case because no default can be
ascribed to the Da Jose spouses since the 30-day extension period has not yet expired. The Da Jose spouses' contention that no
further condition was agreed when they were granted the 30-days extension period from October 7, 1989 in connection with
clause 3 of their contract to sell dated September 6, 1989 should be upheld for the following reason, to wit; firstly, If this were not
true, Genato could not have been persuaded to continue his contract with them and later on agree to accept the full settlement of
the purchase price knowing fully well that he himself imposed such sine qua non condition in order for the extension to be valid;
secondly, Genato could have immediately annotated his affidavit to annul the contract to sell on his title when it was executed on
October 13, 1989 and not only on October 26, 1989 after Cheng reminded him of the annotation; thirdly, Genato could have sent
at least a notice of such fact, there being no stipulation authorizing him for automatic rescission, so as to finally clear the
encumbrance on his titles and make it available to other would be buyers. It likewise settles the holding of the trial court that
Genato "needed money urgently."
Even assuming in gratia argumenti that the Da Jose spouses defaulted, as claimed by Genato, in their Contract to Sell, the
execution by Genato of the affidavit to annul the contract is not even called for. For with or without the aforesaid affidavit their nonpayment to complete the full downpayment of the purchase price ipso facto avoids their contract to sell, it being subjected to a
suspensive condition. When a contract is subject to a suspensive condition, its birth or effectivity can take place only if and when
the event which constitutes the condition happens or is fulfilled. 25 If the suspensive condition does not take place, the parties
would stand as if the conditional obligation had never
existed. 26
Nevertheless, this being so Genato is not relieved from the giving of a notice, verbal or written, to the Da Jose spouses for his
decision to rescind their contract. In many cases, 27 even though we upheld the validity of a stipulation in a contract to sell
authorizing automatic rescission for a violation of its terms and conditions, at least a written notice must be sent to the defaulter
informing him of the same. The act of a party in treating a contract as cancelled should be made known to the other. 28 For such
act is always provisional. It is always subject to scrutiny and review by the courts in case the alleged defaulter brings the matter to
the proper courts. In University of the Philippines vs. De Los Angeles, 29 this Court stressed and we quote:
In other words, the party who deems the contract violated may 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. But the law definitely does not require that
the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate
during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should
exercise due diligence to minimize its own damages (Civil Code, Article 2203).
This rule validates, both in equity and justice, contracts such as the one at bat, in order to avoid and prevent the defaulting party
from assuming the offer as still in effect due to the obligee's tolerance for such non-fulfillment. Resultantly, litigations of this sort
shall be prevented and the relations among would-be parties may be preserved. Thus, Ricardo Cheng's contention that the
Contract to Sell between Genato and the Da Jose spouses was rescinded or resolved due to Genato's unilateral rescission finds
no support in this case.
Anent the issue on the nature of the agreement between Cheng and Genato, the records of this case are replete with admissions
30 that Cheng believed it to be one of a Contract to Sell and not one of Conditional Contract of Sale which he, in a transparent
turn-around, now pleads in this Petition. This ambivalent stance of Cheng is even noted by the appellate court, thus:
At the outset, this Court notes that plaintiff-appellee was inconsistent in characterizing the contract he allegedly entered into. In his
complaint. 31 Cheng alleged that the P50,000.00 down payment was earnest money. And next, his testimony 32 was offered to
prove that the transaction between him and Genato on October 24, 1989 was actually a perfected contract to sell. 33
Settled is the rule that an issue which was not raised during the trial in the court below cannot be raised for the first time on
appeal. 34 Issues of fact and arguments not adequately brought to the attention of the trial court need not be and ordinarily will not
be considered by a reviewing court as they cannot be raised for the first time on appeal. 35 In fact, both courts below correctly
held that the receipt which was the result of their agreement, is a contract to sell. This was, in fact Cheng's contention in his
pleadings before said courts. This patent twist only operates against Cheng's posture which is indicative of the weakness of his
claim.
But even if we are to assume that the receipt, Exh. "D," is to be treated as a conditional contract of sale, it did not acquire any
obligatory force since it was subject to suspensive condition that the earlier contract to sell between Genato and the Da Jose
spouses should first be cancelled or rescinded a condition never met, as Genato, to his credit, upon realizing his error,
redeemed himself by respecting and maintaining his earlier contract with the Da Jose spouses. In fact, a careful reading of the
receipt, Exh. "D," alone would not even show that a conditional contract of sale has been entered by Genato and Cheng. When
the requisites of a valid contract of sale are lacking in said receipt, therefore the "sale" is neither valid or enfoceable. 36
To support his now new theory that the transaction was a conditional contract of sale, petitioner invokes the case of Coronel vs.
Court of Appeals 37 as the law that should govern their Petition. We do not agree. Apparently, the factual milieu in Coronel is not

on all fours with those in the case at bar.

In Coronel, this Court found that the petitioners therein clearly intended to transfer title to the buyer which petitioner themselves
admitted in their pleading. The agreement of the parties therein was definitively outlined in the "Receipt of Down Payment" both as
to property, the purchase price, the delivery of the seller of the property and the manner of the transfer of title subject to the
specific condition that upon the transfer in their names of the subject property the Coronels will execute the deed of absolute sale.
Whereas, in the instant case, even by a careful perusal of the receipt, Exh. "D," alone such kind of circumstances cannot be
ascertained without however resorting to the exceptions of the Rule on Parol Evidence.
To our mind, the trial court and the appellate court correctly held that the agreement between Genato and Cheng is a contract to
sell, which was, in fact, petitioner connection in his pleadings before the said courts. Consequently, both to mind, which read:
Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may
have first taken possession thereof in good faith, if it should be movable property.
Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the
Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good faith was first in possession; and in the
absence thereof, to the person who presents he oldest title, provided there is good faith.
However, a meticulous reading of the aforequoted provision shows that said law is not apropos to the instant case. This provision
connotes that the following circumstances must concur:
(a) The two (or more) sales transactions in issue must pertain to exactly the same subject matter, and must be valid sales
transactions.
(b) The two (or more) buyers at odds over the rightful ownership of the subject matter must each represent conflicting interests;
and
(c) The two (or more) buyers at odds over the rightful ownership of the subject matter must each have bought from the very same
seller.
These situations obviously are lacking in a contract to sell for neither a transfer of ownership nor a sales transaction has been
consummated. The contract to be binding upon the obligee or the vendor depends upon the fulfillment or non-fulfillment of an
event.
Notwithstanding this contrary finding with the appellate court, we are of the view that the governing principle of Article 1544, Civil
Code, should apply in this situation. Jurisprudence 38 teaches us that the governing principle is PRIMUS TEMPORE, PORTIOR
JURE (first in time, stronger in right). For not only was the contract between herein respondents first in time; it was also registered
long before petitioner's intrusion as a second buyer. This principle only applies when the special rules provided in the aforcited
article of the Civil Code do not apply or fit the specific circumstances mandated under said law or by jurisprudence interpreting the
article.
The rule exacted by Article 1544 of the Civil Code for the second buyer to be able to displace the first buyer are:
(1) that the second buyer must show that he acted in good faith (i.e. in ignorance of the first sale and of the first buyer's rights)
from the time of acquisition until title is transferred to him by registration or failing registration, by delivery of possession; 39
(2) the second buyer must show continuing good faith and innocence or lack of knowledge of the first sale until his contract ripens
into full ownership through prior registration as provided by law. 40
Thus, in the case at bar, the knowledge gained by the Da Jose spouses, as first buyers, of the new agreement between Cheng
and Genato will not defeat their rights as first buyers except where Cheng, as second buyer, registers or annotates his transaction
or agreement on the title of the subject properties in good faith ahead of the Da Jose spouses. Moreover, although the Da Jose
spouses, as first buyers, knew of the second transaction it will not bar them from availing of their rights granted by law, among
them, to register first their agreement as against the second buyer.
In contrast, knowledge gained by Cheng of the first transaction between the Da Jose spouses and Genato defeats his rights even
if he is first to register the second transaction, since such knowledge taints his prior registration with bad faith.
"Registration", as defined by Soler and Castillo, means any entry made in the books of the registry, including both registration in
its ordinary and strict sense, and cancellation, annotation, and even marginal notes. 41 In its strict acceptation, it is the entry made
in the registry which records solemnly and permanently the right of ownership and other real rights. 42 We have ruled 43 before
that when a Deed of Sale is inscribed in the registry of property on the original document itself, what was done with respect to said
entries or annotations and marginal notes amounted to a registration of the sale. In this light, we see no reason why we should not
give priority in right the annotation made by the Da Jose spouses with respect to their Contract to Sell dated September 6, 1989.
Moreover, registration alone in such cases without good faith is not sufficient. Good faith must concur with registration for such
prior right to be enforceable. In the instant case, the annotation made by the Da Jose spouses on the titles of Genato of their
"Contract To Sell" more than satisfies this requirement. Whereas in the case of Genato's agreement with Cheng such is
unavailing. For even before the receipt, Exh. "D," was issued to Cheng information of such pre-existing agreement has been
brought to his knowledge which did not deter him from pursuing his agreement with Genato. We give credence to the factual
finding of the appellate court that "Cheng himself admitted that it was he who sought Genato in order to inquire about the property
and offered to buy the same. 44 And since Cheng was fully aware, or could have been if he had chosen to inquire, of the rights of
the Da Jose spouses under the Contract to Sell duly annotated on the transfer certificates of titles of Genato, it now becomes
unnecessary to further elaborate in detail the fact that he is indeed in bad faith in entering into such agreement. As we have held
in Leung Yee vs. F.L. Strong Machinery Co.: 45
One who purchases real estate with knowledge of a defect . . . of title in his vendor cannot claim that he has acquired title thereto
in good faith as against . . . . an interest therein; and the same rule must be applied to one who has knowledge of facts which

should have put him upon such inquiry and investigation as might be necessary to acquaint him with the defects in the title of his
vendor. A purchaser cannot close his eyes to facts which should put a reasonable man upon his guard, and then claim that he
acted in good faith under the belief that there was no defect in the title of the vendor. His mere refusal to believe that such defect
exists, or his willful closing of his eyes to the possibility of the existence of a defect in his vendor's title, will not make him an
innocent purchaser for value, if it afterwards develops that the title was in fact defective, and it appears that he had such notice of
the defect as would have led to its discovery had he acted with that measure of precaution which may reasonably be required of a
prudent man in a like situation. Good faith, or lack of it, is in its last analysis a question of intention; but in ascertaining the
intention by which one is actuated on a given occasion, we are necessarily controlled by the evidence as to the conduct and
outward acts by which alone the inward motive may with safety, be determined. So it is that "the honesty of intention," "the honest
lawful intent," which constitutes good faith implies a "freedom from knowledge and circumstances which ought to put a person on
inquiry," and so it is that proof of such knowledge overcomes the presumption of good faith in which the courts always indulge in
the absence of the proof to the contrary. "Good faith, or the want of it, is not a visible, tangible fact that can be seen or touched,
but rather a state or condition of mind which can only be judge of by actual or fancied tokens or signs." (Wilder vs. Gilman, 55 Vt.
504, 505; Cf. Cardenas vs. Miller, 108 Cal., 250; Breaux-Renoudet, Cypress Lumber Co. vs. Shadel, 52 La. Ann., 2094-2098;
Pinkerton Bros. Co. vs. Bromely, 119 Mich., 8, 10, 17.) (Emphasis ours)
Damages were awarded by the appellate court on the basis of its finding that petitioner "was in bad faith when he filed the suit for
specific performance knowing fully well that his agreement with Genato did not push through. 46 Such bad faith, coupled with his
wrongful interference with the contractual relations between Genato and the Da Jose spouses, which culminated in his filing of the
present suit and thereby creating what the counsel for the respondents describes as "a prolonged and economically unhealthy
gridlock 47 on both the land itself and the respondents' rights provides ample basis for the damages awarded. Based on these
overwhelming evidence of bad faith on the part of herein petitioner Ricardo Cheng, we find that the award of damages made by
the appellate court is in order.
WHEREFORE, premises considered, the instant petition for review is DENIED and the assailed decision is hereby AFFIRMED EN
TOTO.
SO ORDERED.

G.R. No. 133491 October 13, 1999

ALEXANDER G. ASUNCION, petitioner,
vs.
EDUARDO B. EVANGELISTA and COURT OF APPEALS, respondents.
PUNO, J.:
This is a petition for review of the Decision of the respondent Court of Appeals 1 rescinding the Memorandum of Agreement of the
parties and assessing against the petitioner damages in the amount of P32,644,420.55.
These are the relevant facts.
Since 1970, private respondent has been operating a piggery on his landholdings in Barangay Loma de Gato, Marilao, Bulacan. 2
Until 1980, he operated the piggery under the trade name Embassy Farms as a single proprietorship. 3 In October 1981, private
respondent, his wife, Epifania C. Evangelista, and three (3) others, namely, Angel L. Santos, Jr., Amando C. Martin and Teofilo J.
Mesina, organized Embassy Farms, Inc. and registered it with the Securities and Exchange Commission. 4
Private respondent was the majority stockholder of the corporation, with ninety percent (90%) of the shares in his name. He also
served as its president and chief executive officer. Its principal office was established at the piggery facility that had been existing
on the landholdings of private respondent in Barangay Loma de Gato, Marilao, Bulacan, consisting of about 104,447 sq. m. 5
On September 9, 1980, private respondent borrowed five hundred thousand pesos (P500,000.00) from Paluwagan ng Bayan
Savings and Loan Association to use as working capital for Embassy Farms. He executed a real estate mortgage on three of his
properties in Barangay Loma de Gato, Marilao, Bulacan as security for the loan. 6
On November 4, 1981, private respondent mortgaged ten (10) titles more in favor of PAIC Savings and Mortgage Bank, formerly
First Summa Savings and Mortgage Bank, as security for a loan he obtained from it in the amount of one million seven hundred
twelve thousand pesos (P1,712,000.00). 7
On February 16, 1982, private respondent obtained another loan in the amount of eight hundred forty four thousand six hundred
twenty five and seventy eight centavos (P844,625.78) from Mercator Finance Corporation. The loan was secured by a real estate
mortgage 8 on five (5) other landholdings of private respondent, all situated in Bulacan.
Private respondent obtained these personal loans to provide himself working capital to run the farm and sustain its operations. His
aggregate debt exposure totaled three million fifty six thousand six hundred twenty five and seventy eight centavos
(P3,056,625.78).
Private respondent defaulted in his loan payments. Of the PAIC loan that should have been paid on an equal quarterly
amortization basis for three (3) years from October 31, 1981, eight (8) quarterly amortizations totaling one million five hundred one
thousand nine hundred eighty eight and eight centavos (P1,501,988.08) fell due by January 12, 1984. Against this overdue
amount, only two hundred eighty thousand seven hundred forty eight and fifty one centavos (P280,748.51) was remitted by private
respondent. 9
By June 1984, private respondent's aggregate debt had ballooned to almost six million pesos (P6,000,000.00) 10 in overdue
principal payments, interests, penalties and other financial charges.
On August 2, 1984, petitioner and private respondent executed a Memorandum of Agreement containing the following terms and
conditions:

MEMORANDUM OF AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Memorandum of Agreement made and executed this __ day of July, 1984, here in ______, Metro Manila, by and between
ALEXANDER G. ASUNCION, of legal age, Filipino, married to Perlita Asuncion, and resident of No. 7 A. Lake Street, San Juan,
Metro Manila, hereinafter referred to as AGA;
and
EDUARDO B. EVANGELISTA, of legal age, Filipino, married to Epifania C. Evangelista, and resident of No. 113 R. Terona Street,
BF Homes, Paranaque, Metro Manila, hereinafter referred to as EBE.
WITNESSETH:
WHEREAS, EBE is the registered and absolute owner of nineteen (19) parcels of agricultural lands with an aggregate area of
104,447 square meters more or less, all situated in LOMA DE GATO, Marilao, Bulacan, hereinbelow enumerated by the covering
certificates of title and the corresponding area as follows:
xxx xxx xxx
WHEREAS, EBE is likewise the controlling interest of 90% to 100% of the paid-in equity of EMBASSY FARMS, INC., which
corporation is the registered owner of a piggery, situated in the above enumerated real properties, with stocks, equipment and
facilities as shown in the inventory thereof as of July 4, 1984, hereto attached as Schedule "A" and made an integral part hereof;
WHEREAS, EBE has personal loans with the institutions herein below enumerated correspondingly with the amount of
indebtedness, inclusive of interest, up to June 30, 1984:
a) PAIC BANK P2,758,968.49
b) PALUWAGAN SAVINGS BANK
1. CB-IBRD P558,110.44
2. Comm'l loan P835,863.76 P1,393,974.20

c) MERCATOR FINANCE CORP. 1,846,012.96

TOTAL P5,998,955.65
WHEREAS, EBE has offered to AGA and the latter has accepted the transfer to him by EBE, of the whole of EBE's controlling
interest in EMBASSY FARMS, INC. as well as all of his above enumerated parcels of real property together with any and all
improvements thereon subject to the following terms and conditions:
NOW, THEREFORE, for and in consideration of the foregoing, the parties herein agree as follows:
1) That EBE hereby cedes, transfers and conveys unto AGA all of his above enumerated parcels of real property together with any
and all improvements thereon, and in connection with such transfer, hereby undertakes to execute, sign and deliver any and all
documents appropriate for the same, either in favor of AGA or his nominees;
2) That EBE hereby likewise cedes, transfers and conveys in a manner absolute and irrevocable any and all of his shares [of]
stocks in the aforesaid EMBASSY FARMS, INC., outstanding [in] his name in the books of incorporation, as well as any and all
rights, interests and participation in the said corporation by reason of such shares [of] stocks or otherwise, EBE shall, within a
reasonable time, from signing hereof, cause to be so transferred to AGA or his nominee such shares of stocks in said corporation
as are held on record by 3rd parties, until the total of such shares so transferred shall constitute 90% of the paid-in equity of said
corporation;
3) That upon signing hereof, AGA shall pay EBE the sum of P1,000,000.00 and the further amount of P500,000.00 within a period
of 90 days from and after such signing;
4) That AGA shall upon signing hereof, make available, as and for operating expenses of the farm or piggery the sum of
P300,000.00 to be followed by amount of P300,000.00 within 30 days from such signing and 60 days thereafter, the amount of
P150,000.00;
5) AGA shall assume all of the aforestated obligations of EBE with the institution aforementioned and in connection therewith, he
shall make available for payment to PALUWAGAN SAVINGS BANK, upon signing of this "MEMORANDUM OF AGREEMENT",
the amount of P100,000.00, representing 50% of the amount required by the said bank for the restructuring of the aforestated loan
of EBE therewith;
6) That also upon signing of these presents, AGA shall make available for payment to MERCATOR FINANCE CORPORATION the
amount of P100,000.00 representing 50% of the amount required by the latter for restructuring of the aforesaid obligation to it of
EBE;
7) That upon signing of this agreement, EBE shall make available for payment to PALUWAGAN SAVINGS BANK the amount of
P100,000.00 and the same amount to MERCATOR FINANCE CORPORATION corresponding to the other halves of the
aforestated amount called for by the said institution in the preceding paragraphs 5 and 6 hereof;
8) That upon signing hereof, EBE shall cause the turn-over to AGA of the effective control and management of the aforesaid
piggery, from EMBASSY FARMS, over which EBE hereby warrants to have effective control up to and until such turnover to AGA;
9) EBE hereby warrants not only free and marketable titles to the shares (of) stock of EMBASSY FARMS, INC. that he transfers

hereby but also effective control, amounting to ownership of the other shares of stock of such corporation which are outstanding in
the books of said corporation in the name of 3rd parties, which shares of stock he could always dispose of therefore [sic] any time
and in any manner he may deem proper;
10) EBE shall secure supplier's credit and feed ingredients, veterinary supplies, etc. up to P500,000.00 and over a period of three
(3) months in order to be able to augment the effective operation of the farm;
11) Within 90 days from signing of this agreement, AGA shall make available for the farm P250,000.00, payable to him within one
year from and after the grant of the same, with stated interest of 24% per annum, the proceeds of which to be utilized exclusively
for the operation of the farm;
12) That within a reasonable time from signing of this agreement, AGA shall organize and register a corporation (thereafter
referred to as new corporation) with authorized capital stock of exactly P10,000,000.00 with P1,000,000.00 worth of paid-in shares
of stock thereof, to be allocated or assigned to EBE [sic] said corporation shall, upon its registration take over all the rights and
liabilities of AGA hereunder saving the one stipulated in paragraph no. ___ hereof;
13) On or before November 1984, AGA shall pay EBE P144,941.88 plus interest at 24% per annum in payment
ingredients, mixed feeds and veterinary supplies mentioned in Schedule "A" which EBE makes available to aforesaid
shall likewise reimburse to EBE on or before January 1985, the amount of P200,000.00 with interest at 24%
representing advances of the latter to PALUWAGAN SAVINGS BANK and MERCATOR FINANCE CORPORATION
paragraph 7 above;

of the feed
piggery. He
per annum
pursuant to

14) That in connection with the aforesaid P1,000,000.00 worth of shares [of] stock in the new corporation, stipulated above to be
allocated or assigned to EBE, the parties hereby agree that within eighteen (18) months from and after such assignment or
allotment, AGA shall acquire, at par from EBE 50% thereof, with reservation to acquire the other 50% within a period of 30 months
after such allotment, with premium of 50% of par value, if the commitments or targets mentioned in paragraph 17 herein shall
have been met;
15) That for the operation of the farm or piggery, the parties hereby agree that EBE shall serve as President and Chief Executive
thereof, at a stated monthly salary P15,000.00; Alberto M. Ladores as General Manager at P10,000.00 a month, V. Gregorio as
Comptroller at P3,500.00 a month;
16) The parties herein likewise agree to pay, when able, compensation to the following the amounts correspondingly indicated.
Thus
a) V.S. Abadia Chairperson of the Board at P10,000.00
b) A.G. Asuncion
c) V.M. de Vera
d) E. LI. Umali
17) Being senior operating officers of the farm, EBE and A.M. Ladores, shall submit to AGA, their respective position charter plans
and programs for the farm for the next three (3) years, within 30 to 45 days after signing hereof, substantially in the form hereto
attached as Schedule "B";
18) That within the next three (3) months, an Agribusiness Management Company which includes a feedmilling operations shall
be established. The officers thereof shall be Alexander G. Asuncion as Chairman, Vicente M. de Vera as Vice-Chairman, Edgardo
LI. Umali as Treasurer, Eduardo B. Evangelista as President and General Manager, and Alberto M. Ladores as Executive VicePresident. This management company shall be contracted for providing the over-all management of EMBASSY FARMS.
EDUARDO B. EVANGELISTA and ALBERTO M. LADORES will have shares in the company and shall form the executive
management team of said company, for which they will be remunerated in terms of salary and profit sharing.1wphi1.nt
IN WITNESS WHEREOF, the parties have hereunto affixed their signatures this 2nd day of August, 1984.
(Sgd.) (Sgd.)
ALEXANDER G. ASUNCION EDUARDO B. EVANGELISTA
SIGNED IN THE PRESENCE OF:
(Sgd.) (Sgd.)
VIOLETA S. ABADIA ALBERTO M. LADORES
xxx xxx xxx 11
Upon the execution of the Memorandum of Agreement, petitioner paid private respondent one million pesos (P1,000,000.00) in
compliance with paragraph 3 thereof. Although this was unreceipted, private respondent admitted receiving the same when he
testified in open court. 12
In further compliance with paragraph 3, petitioner paid to private respondent the amount of five hundred thousand pesos
(P500,000.00) within a ninety-day (90) period in four (4) disbursements, to wit:
Date of Actual Recipient Amount
Payment Voucher No. of the Money Paid
Aug. 15, 3468 13 Victoria Gregorio P100,000.00
1984 (for private respondent)
Aug. 23, 3504 14 Victoria Gregorio P100,000.00

1984 (for private respondent)

Aug. 29, 3547 15 Victoria Gregorio P100,000.00
1984 (for private respondent)
Sept. 26, 3765 16 Private Respondent P200,000.00
1984
Total P500,000.00
In compliance with paragraph 4 of the Memorandum of Agreement, petitioner paid private respondent three hundred thousands
pesos
(P300,000.00), 17 upon its signing on August 2, 1984.
The second installment, in the like amount of three hundred thousand pesos (P300,000.00) which became due between August 2,
1984 and September 2, 1984, was supposed to be remitted by petitioner to private respondent for the purpose of financing the
operations of the piggery pursuant to the Memorandum. Instead, petitioner agreed to pay to PAIC Savings & Mortgage Bank the
following amounts, to wit:
Date of Actual Recipient Amount
Payment Voucher No. of the Money Paid
Aug. 8, 3224 18 PAIC Savings & P200,000.00 19
1984 Mortgage Bank
Aug. 27, 3310 20 PAIC Savings and P100,000.00 21
1984 Mortgage Bank
in order to facilitate the restructuring of private respondent's loans with said bank. It is significant to note that under the
Memorandum of Agreement, petitioner agreed to shoulder only the loan restructing fees required by Paluwagan ng Bayan Savings
and Loan Association Bank and Mercator Finance Corporation. 22 Nonetheless, petitioner made the above payment in view of the
letter of PAIC Savings & Mortgage Bank dated July 6, 1984 approving private respondent's request for the restructuring of his
loan.
A third installment in the amount of one hundred fifty thousand pesos (P150,000.00) which was due between September 2, 1984
and November 2, 1984 was paid by petitioner to private respondent in the following tranches:
Date of Actual Recipient Amount
Payment Voucher No. of the Money Paid
Sept. 19, DV No. 3707 23 Victoria Gregorio P20,000.00
1984 (for Embassy Farms)
Sept. 26, DV No. 3770 24 Private Respondent P30,000.00
1984
Oct. 16, DV No. 3878 25 Private Respondent P100,000.00
1984.
Aside from paying the aforesaid amount of three hundred thousand pesos (P300,000.00) to PAIC Savings & Mortgage Bank in
compliance with paragraph 5 of the Memorandum of Agreement requiring petitioner to assume the loan obligations of private
respondent, petitioner also paid four hundred thousand pesos (P400,000.00) in favor of Paluwagan ng Bayan Savings and Loan
Association for the restructuring of private respondent's 26 loan and one hundred thousand pesos (P100,000.00) 27 for the
restructuring of his loan with Mercator Finance Corporation.
In substantial compliance with paragraph 11 wherein petitioner was further obligated to provide credit in the amount of two
hundred fifty thousand pesos (P250,000.00) to be exclusively spent for the operations of the piggery but payable to him within one
(1) year from the grant thereof with stated interest of 24% per annum, petitioner made available two hundred thousand pesos
(P200,000.00). 28
Under paragraph 13, petitioner paid one hundred forty four thousand nine hundred forty one pesos and eighty eight centavos
(P144,941.88) for feed ingredients, mixed feeds and veterinary supplies included in the inventory turned over by private
respondent to petitioner. Petitioner made the payment in the following tranches:
Date of Disbursement/ Actual Recipient Amount
Payment Cash Voucher of the Money Paid
March 28, DV No. 4760 29 private respondent P37,000.00
1985
July 30, DV No. 266 30 private respondent P30,000.00
1985
Aug. 9, DV No. 337 31 R. Tamaliga P30,000.00

1985 (for private respondent)

Aug. 16, DV No. 379 32 R. Tamaliga P30,000.00
1985 (for private respondent)
Aug. 23, DV No. 411 33 R. Tamaliga P17,941.88
1985 (for private respondent)
TOTAL P144,941.88
Over and above all the foregoing amounts paid by petitioner to private respondent in accordance with his undertakings under the
Memorandum of Agreement, he also paid management bonuses to private respondent, Vicente M. de Vera and Edgardo LI.
Umali, in the amounts of fifty thousand pesos (P50,000.00), thirty thousand pesos (P30,000.00), and twenty thousand pesos
(P20,000.00), respectively. 34 The total amount thus paid by petitioner to private respondent and invested in Embassy Farms, Inc.
as of August 1985, or in a span of a year from the time that they executed the Memorandum of Agreement, was three million one
hundred ninety four thousand nine hundred forty one and eighty eight centavos (P3,194,941.88).
For his part, private respondent was obligated under the Memorandum of Agreement to "execute, sign and deliver any and all
documents" necessary for the transfer and conveyance of several parcels of land he owned but mortgaged with the banks and
financial institutions and to "cede, transfer and convey in a manner absolute and irrevocable any and all of his shares of stocks in
Embassy Farms, Inc." as well as "cause to be transferred to petitioner or his nominee such shares of stock until they constitute
90% of the paid-in equity of said corporation" 35. By December 1985, however, more than a year after the signing of the
Memorandum of Agreement, the landholdings of private respondent which were mortgaged to Paluwagan ng Bayan Savings and
Loan Association, PAIC Savings and Mortgage Bank and Mercator Finance Corporation still remained titled in his name. Neither
did he inform said mortgagees of the transfer of his lands. As to the shares of stock, it was incumbent upon private respondent to
endorse and deliver them to petitioner so he could also have them transferred in his name, but private respondent never did. He
refused to honor his obligations under the Memorandum of Agreement and even countered with a demand letter of his own. He
accused petitioner of having failed to restructure his loans with Paluwagan ng Bayan Savings and Loan Association, PAIC Savings
Mortgage Bank and Mercator Finance Corporation and blamed him for the foreclosure of his landholdings, including the piggery
site of Embassy Farms, Inc.
On April 10, 1986, petitioner filed in the Regional Trial Court a complaint for recission of the Memorandum of Agreement with a
prayer for damages. 36
On July 1, 1994, the trial court rendered judgment in favor of private respondent. It ruled:
The principal issue in this case is whether it is [petitioner] or [private respondent] who reneged on their obligations under the
Memorandum of Agreement.
Based upon the pleadings and the evidence, it is clear that [petitioner] failed to comply with his undertaking under paragraph 5 of
the Memorandum of Agreement to assume all of the obligations of [private respondent] with the PAIC Bank, the Paluwagan
Savings Bank and the Mercator Finance Corporation amounting in the aggregate to P5,998,955.65. In addition [petitioner] also
failed to comply with his obligations under paragraph 12 and 18 of the Agreement . . . .
xxx xxx xxx
The Memorandum of Agreement is essentially a contract of sale where [private respondent] agreed to sell his nineteen parcels of
land and his shares in Embassy Farms, in consideration, among others, of the assumption by [petitioner] of [private respondent's]
loans with three financial institutions. As a matter of law and practice, it is incumbent upon the vendee to first comply with his
obligations under the contract of sale before he can demand performance by the vendor. In a contract of sale, the vendor is not
required to deliver the thing sold until the price is paid . . . .
Consequently, since [petitioner], at the time of the commencement of the action, had admittedly not complied with his obligations
under the Agreement, he had no right to demand compliance on the part of [private respondent] with the latter's obligations or to
ask rescission with damages. If there is anybody who has the right to seek rescission and ask for damages, it is certainly [private
respondent] the injured party who in fact has opted for rescission. Accordingly, the Court holds that [private respondent] is
entitled to rescission of the Agreement.
xxx xxx xxx
Since it was [petitioner] who failed to perform his obligations as vendee under the Agreement and there is no showing that [private
respondent] refused or was not in a position to comply with is own undertakings, the latter is entitled to recover damages. The
evidence shows that [private respondent] actually formally demanded compliance by [petitioner] with his obligations in a letter
dated January 31, 1986. 37 [Emphasis ours.]
The dispositive portion of the foregoing decision reads as follows:
WHEREFORE, this Court hereby declares the Memorandum of Agreement dated 2 August 1984 rescinded and of no further force
and effect.
This Court likewise orders the payment by the plaintiff to the defendant of the following:
(1) P32,644,420.55 as actual or compensatory damages arising from the rescission of the Memorandum of Agreement with legal
rate of interest at 6% per annum until fully paid;
(2) P887,300.00 for the repayment of the loan granted by the defendant to the plaintiff, with interest at the stipulated rate of 36%
per annum until fully paid; and
(3) P100,000.00 as attorney's fees.
No pronouncement as to costs.

SO ORDERED. 38
On July 12, 1994, a copy of the decision of the trial court was sent by registered mail to petitioner's counsel of record, Atty. Romeo
Z. Comia.
However, unknown to petitioner, Atty. Comia died while the case was still pending in the trial court.
On August 25, 1994, private respondent filed in the trial court a Notice of Death of petitioner's counsel, with a request that a copy
of its decision be personally served on petitioner.
On August 31, 1994, the trial court issued an Order stating that the registry receipt evidencing the mailing of a copy of its decision
to petitioner did not bear any date. It nonetheless denied the motion of private respondent for personal service of a copy of its
decision on petitioner.
On September 12, 1994, private respondent filed by registered mail a Motion for Execution.
On September 28, 1994, the trial court granted said motion.
On October 3, 1994, private respondent filed an Ex Parte Motion for Appointment of Special Sheriff. Accordingly, Deputy Sheriff
Solminio de las Armas was appointed by the trial court.
On October 6, 1994, the trial court issued a writ of execution against petitioner.
October 20, 1994, petitioner filed in the trial court a Notice of Appeal, Substitution of Counsel, and an Urgent Motion to Recall the
Order of Execution and Quash the Writ of Execution.
On October 28, 1994, the trial court issued an Order suspending the execution of its decision.
On November 9, 1994, the trial court issued an Order stopping the execution proceedings and approving petitioner's appeal.
Both petitioner and private respondent repaired to the Court of Appeals. Petitioner prayed for the reversal of the decision of the
trial court while private respondent assailed the last two orders of the trial court dated October 28 and November 9, 1994.
On February 2, 1998, respondent Court of Appeals affirmed the decision of the trial court and ordered its immediate execution.
The orders dated October 28 and November 9, 1994 halting execution proceedings were nullified. The respondent Court of
Appeals held, first, as concerns the undated registry receipt:
The rule that if no date appears in the registry receipt there is no period within which to reckon the fifteen-day reglementary period
to appeal is however subject to waiver. The motion for a writ of execution and the corresponding order for the enforcement of the
writ of execution were duly served upon [petitioner] yet he failed to question the irregularity before filing a notice of appeal. 39
and second, as concerns the nature of the Memorandum of Agreement:
[Petitioner] contended that the MOA is actually a joint venture agreement.
xxx xxx xxx
The element that there be mutual right of control is wanting in the MOA entered into between [petitioner] and [private respondent].
Under Condition No. 9, [private respondent] shall transfer the effective control, amounting to ownership of the Embassy Farms,
Inc. to [petitioner]. The creation of a new company by [petitioner] under Conditions No. 12 and 15 wherein [private respondent]
was to be appointed as President and Chief Executive does not partake of the nature of joint venture by [petitioner] as the
absolute owner and [private respondent] who is to be remunerated only in terms of salaries and profit sharing, the later being a
usual fringe benefit in private associations.
Instead, the MOA is akin to a contract of sale as correctly held by the trial court . . ..
xxx xxx xxx 40
On February 2, 1998, petitioner filed a Motion for Reconsideration of the foregoing decision.
On March 17, 1998, private respondent filed an Opposition thereto with an Ex-parte Motion for Issuance of a Writ of Attachment.
On April 17, 1998, respondent Court of Appeals issued a Resolution 41 denying petitioner's Motion for Reconsideration and noting
private respondent's Ex-Parte Motion for Issuance of a Writ of Attachment.
Hence this petition raising the following issues:
1. WHETHER OR NOT THE JULY 1, 1994 DECISION OF THE REGIONAL TRIAL COURT WAS ALREADY FINAL AND
EXECUTORY WHEN ASUNCION FILED HIS NOTICE OF APPEAL.
2. WHETHER OR NOT THE MEMORANDUM OF AGREEMENT EXECUTED BETWEEN ASUNCION AND EVANGELISTA WAS
IN THE NATURE OF A CONTRACT OF SALE OR A JOINT VENTURE.
3. WHETHER IT WAS ASUNCION OR EVANGELISTA WHO FIRST RENEGED OR FAILED TO COMPLY WITH HIS
CORRESPONDING OBLIGATIONS UNDER THE MEMORANDUM OF AGREEMENT. 42
The petition is meritorious.
One. The respondent Court of Appeals erred in holding that the decision of the trial court dated July 1, 1994 had become final and
executory. It is established that petitioner was not aware of his counsel's death while the case was pending in the trial court. He
could not have known, therefore, that a copy of the trial court's decision was sent by registered mail to his counsel. Indeed, it was
private respondent who notified the trial court of the death of petitioner's counsel and who requested that a copy of the decision be
served personally to petitioner. His request was, however, denied.
While petitioner was furnished a copy of the decision by mail, the registry receipt evidencing its date of mailing did not bear a date.
There was, therefore, no date from which to reckon the reglementary period to appeal. That petitioner received a copy of the

motion and order for writ of execution should not be taken as a waiver of his right to appeal. Not only is petitioner a non-lawyer
who could not be expected to know the legal consequences of the motion and the order, but the case is of such merit that it
deserves a liberal interpretation of the rules in the interest of justice.
Two. The respondent Court of Appeals ruled that the Memorandum of Agreement was a contract of sale whereby private
respondent sold his piggery, Embassy Farms, Inc., with the land on which it stood and his shares of stock therein, in consideration
of the monetary equivalent of his aggregate debt obligations to be assumed and paid by petitioner. It found that petitioner failed to
assume private respondent's loans with Paluwagan ng Bayan Savings & Loan Association, PAIC Savings & Mortgage Bank and
Mercator Finance Corporation. Consequently, rescission of the Memorandum of Agreement was ordered and private respondent
was awarded more than thirty two million pesos (P32,000,000.00) in compensatory damages, which included the alleged
proceeds from the sale of hogs during the period of time that private respondent was replaced as president and chief executive
officer as well as the value of his landholdings which were foreclosed because of his failure to pay his debt obligations with the
said banks.
After a meticulous perusal of the voluminous records of this case, we hold that the respondent Court of Appeals grossly
misappreciated the facts and the applicable law. Under the Memorandum of Agreement, it was the obligation of private respondent
to cede and convey, in a manner absolute and irrevocable, his real properties and stockholdings in the farm in favor of petitioner in
exchange for, among others, the outright payment by petitioner of a lump sum, the continuous operation of the piggery at his the
expense and the assumption by petitioner of all the financial obligations of private respondent upon their restructuring. The
records show that while petitioner paid private respondent the stipulated lump sum and gave more money for the restructing of
private respondent's loans and for the continued operation of Embassy Farms, Inc., private respondent never executed a deed of
sale with assumption of mortgage over his landholdings, and although he endorsed in blank his certificates of stock, he never
delivered them to petitioner to effectuate their valid transfer.
Private respondent admitted in open court that he refused to comply with his twin obligations to execute the necessary documents
of conveyance for the mortgaged parcels of land and to deliver the certificates of stock in Embassy Farms in favor of petitioner. He
stated on the witness stand, thus:
ATTY. MECIAS:
Q Now, there is also a mention of nineteen (19) parcels of land as being owned by you as situated in Don Marigato, Marilao,
Bulacan and do you know where are the certificates of title over these parcels of land?
WITNESS:
A This certificate of title mentioned these are all in the possession of PAEC Bank and MERCATOR Finance Corporation.
ATTY. MECIAS:
Q Were there any titles given or delivered to Paluwagan Savings Bank?
A There was one (1), but when I was about to pay the loan they were returned to me.
Q In paragraph 1 of Exhibit "C" you undertook to cede, transfer and convey to Asuncion, the plaintiff the execution of said parcels
of property together with improvements in connection with such transfer you undertook to execute, sign and deliver the whole
document appropriate on the same in favor of the plaintiff Asuncion or his nominees. Did you actually execute and sign, deliver
that document as mentioned here?
A May I have an [sic] specific document. What kind of document?
Q Appropriate conveyance of sale?
A The only document I know which mention (sic) here is the memorandum of agreement which we sign together with the plaintiff.
ATTY. MECIAS:
Q I am referring to the document which you have to execute in favor of Alexander G. Asuncion to cede, transfer and convey those
property. Did you execute the document?
WITNESS:
A I did not.
Q What was your reason for not executing those documents?
A I did hold on to convey those documents particularly the stock certificate because I was waiting for the plaintiff Asuncion to
comply with his obligation to assume all my loan with the three (3) financial institutions. 43
It is specious for private respondent to justify his refusal to execute the deed of conveyance on the alleged petitioner's failure to
assume his loans with the three financial institutions. It is an established fact that petitioner made, in behalf of private respondent,
loan payments in the amount of four hundred thousand pesos (P400,000.00) to Paluwagan ng Bayan Savings and Loan
Association, one hundred thousand pesos (P100,000.00) to Mercator Finance Corporation and three hundred thousand pesos
(P300,000.00) to PAIC Savings & Mortgage Bank. These payments, which were made in addition to outright sums of money given
by petitioner to private respondent and to the farm for its operation, prove petitioner's willingness and readiness to assume private
respondent's obligations.
It is true that petitioner stopped making further loan payments to the banks, causing them to foreclose private respondent's
mortgaged properties. He could hardly, however, be faulted for stopping his further exposure, considering that private respondent
has reneged with his obligation to cede his lands and his shareholdings.
Private respondent is clearly obliged under the Memorandum of Agreement to execute the deed of conveyance with assumption of
mortgage in favor of petitioner. Had such deed been executed, the interests of both petitioner and private respondent would have
been simultaneously secured, the former, as regards his ownership rights over the subject lands sold to him, and the latter, as
regards the substitution, in his place, of petitioner as the new debtor in his loan obligations with Paluwagan ng Bayan Savings and

Loan Association, PAIC Savings and Mortgage Bank and Mercator Finance Corporation. Private respondent, however, failed and
refused, despite demands, to execute this legal document. It follows that petitioner could not be faulted when he desisted from
further paying private respondent's debts.
It strikes us as strange that the respondent court failed to appreciate these facts which were established by overwhelming
evidence. The very evidence of the private respondent showed that petitioner did make the payments for the restructuring of the
former's debts. In light of these payments, private respondent errs in insisting that petitioner cannot be said to have assumed his
loan obligations because petitioner never executed a formal assumption of mortgage. It is private respondent's obligation under
the Memorandum of Agreement to execute a deed of sale with assumption of mortgage, and he cannot insist that it was
petitioner's obligation to execute a formal assumption of mortgage independent of and distinct from the deed of sale. Under
private respondent's inequitous thesis, petitioner would have shelled out millions of pesos to pay his loans and save his lands from
foreclosure, only to leave him with nothing in exchange therefor.1wphi1.nt
Three. The impugned Decision rests on the conclusion that the parties' Memorandum of Agreement is a contract of sale where a
price certain is paid in exchange for a determinate thing that is sold and delivered. An examination of the Memorandum of
Agreement, however, will show that it constitutes not a mere isolated, simple, short-term business deal calling for the outright sale
and purchase of land and shares of stocks belonging to private respondent, but a set of chronological, reciprocal and conditional
obligations that both petitioner and private respondent must faithfully comply with to ensure the full enforcement of all its
stipulations.
The Memorandum of Agreement does not merely stipulate that petitioner has purchased private respondent's landholdings and
shares of stock in Embassy Farms, Inc. for the price equivalent to private respondent's total outstanding loans which petitioner
shall assume. The Memorandum of Agreement spells out a much more complicated, long-term business arrangement involving
the transfer of Embassy Farms, Inc. to petitioner, the restructuring of private respondent's loans, the financing by petitioner of the
continued operations of the piggery, the organization of a new corporation to replace Embassy Farms, Inc. as well as an
agribusiness management company, all at the expense of petitioner, and the payment of specified compensation packages to
certain officers of Embassy Farms, Inc. In fine, petitioner and private respondent entered into what the law regards as reciprocal
obligations. Of such specie of legal contracts, Tolentino says:
. . . Reciprocity arises from identity of cause, and necessarily the two obligations are created at the same time.
Reciprocal obligations, therefore, are those which arise from the same cause, and in which each party is a debtor and a creditor of
the other, such that the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously,
so that the performance of one is conditioned upon the simultaneous fulfillment of the other. 44
Art. 1191 of the Civil Code governs the situation where there is non-compliance by one party in case of reciprocal obligations. It
provides:
The power to rescind the 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 2388 and the Mortgage Law.
The effect of rescission is also provided in the Civil Code in Article 1385:
Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price
with its interest, consequently, it can be carried out only when he who demands rescission can return whatever he may be
obligated to restore.
Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third
persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the persons causing the loss.
Private respondent admitted in open court that petitioner paid him the initial sum of one million pesos (P1,000,000.00) upon the
signing of the Memorandum of Agreement as well as various sums of money as fees for the restructuring of his loans. Thereupon,
private respondent was obligated to execute a deed of sale with assumption of mortgage, both in compliance with the
Memorandum of Agreement and to ensure the legal efficacy of petitioner's promise to assume his loan obligations.
We find that private respondent failed to perform his substantial obligations under the Memorandum of Agreement. Hence,
petitioner sought the rescission of the Memorandum of Agreement and ceased infusing capital into the piggery business of private
respondent. Private respondent later justified his refusal to execute any deed of sale and deliver the certificates of stock by
accusing petitioner of having failed to assume his debts. We hold that private respondent's insistence that petitioner execute a
formal assumption of mortgage independent and separate from his own execution of a deed of sale is legally untenable,
considering that a recorded real estate mortgage is a lien inseparable from the property mortgaged and until discharged, if follows
the property. 45 In his testimony, private respondent stated that he would be committing economic suicide if he execute a deed of
sale because he would then be transferring his lands to petitioner without the latter first assuming his loan obligations. This
posturing is puerile. Even without a formal assumption of mortgage, the mortgage follows the property whoever the possessor
may be. It is an elementary principle in civil law that a real mortgage subsists notwithstanding changes of ownership and all
subsequent purchases of the property must respect the mortgage, whether the transfer to them be with or without the consent of
the mortgagee. 46
Four. Prescinding from these premises, we hold that the award of thirty two million six hundred forty-four thousand four hundred
twenty pesos and fifty five centavos (P32,644,420.55) in damages to private respondent is totally baseless. The trial court and the
respondent court computed the award in the following manner:

. . . [T]his Court finds that [private respondent] is entitled to the following actual damages:
I. LAND
Value of Land
Mortgaged to and
Foreclosed by Mercator P2,726,100.00
Less: Mortgage
as of 8/2/84 1,846,012.96 P880,087.04
Value of Land
Mortgaged to and
Foreclosed by PAIC 6,736,180.00
Less: Mortgage
as of 8/2/84 2,758,968.49 P3,977,211.04
II. STOCKS AND FACILITIES
Livestock P2,889,998.00
Feedmill
Machinery 70,000.00
Feed Ingredients 144,941.88
Less: Payments
made 103,941.88 41,000.00
Feed Mixer 2,128.00
Drugs Inventory 35,258.00
III. EARNINGS OF
EMBASSY FARMS 27,748,738.00

P35,644,420.55
From the aforesaid aggregate amount of P35,644,420.55 should be deducted the payments made by [petitioner] totaling
P3,000,000.00. Thus, the net effect is that [private respondent] is entitled to the amount of P32,644,420.55, with interest at the
legal rate of 6% until fully paid.
In addition, [private respondent] is entitled to be paid the amount of P500,000.00 which he granted as a loan to [petitioner] outside
of the Memorandum of Agreement. What is due to [private respondent] after deducting the payments made by [petitioner] and
adding the interest is as follows:
Loan of [private respondent]
to [petitioner] P500,000.00
Less: Payments made 270,000.00 P230,000.00
Add: Stipulated interest
(36% p.a. up to 1/31/93 540,000.00
Add: Stipulated interest
up to 6/30/94 117,300.00
657,300.00

P887,300.00
The circumstances of this case indicate that [petitioner] acted in a wanton, fraudulent, reckless or malevolent manner within the
purview of Article 2232 of the Civil Code. Despite the fact that [petitioner] had not performed his obligations as a vendee, he preempted [private respondent] by filing this action for rescission, ousted [private respondent] as a director of Embassy Farms, Inc.,
transferred the shares of [private respondent] to himself and his nominees, and assumed full control and management of
Embassy Farms, Inc. until he was enjoined by Court in an order issued by then Presiding Judge Zenaida Baltazar dated July 30,
1987. Considering the bad faith and malevolence shown by [petitioner] in his conduct towards [private respondent] in the
performance of his obligations under the Memorandum of Agreement, this Court, by way of example and correction for the public
good, holds that [private respondent] is entitled to exemplary damages in the amount of P500,000.00.
This Court likewise finds that [private respondent] is entitled to attorney's fees and expenses of litigation. Considering the
complexity and difficulty of this case and the protracted proceedings, this Court awards attorney's fees and expenses of litigation

in the amount of P350,000.00, 47 summarized in the following dispositive portion:

WHEREFORE, this Court hereby declares the Memorandum of Agreement dated 2 August 1984 rescinded and of no further force
and effect.
This Court likewise orders the payment by the plaintiff to the defendant of the following:
(1) P32,644,420.55 as actual or compensatory damages arising from the rescission of the Memorandum of Agreement with legal
rate of interest at 6% per annum until fully paid;
(2) P887,300.00 for the repayment of the loan granted by the defendant to the plaintiff, with interest at the stipulated rate of 36%
per annum until fully paid; and
(3) P100,000.00 as attorney's fees.
No pronouncement as to costs.
SO ORDERED. 48
We, therefore, strike down the foregoing award of actual or compensatory damages and attorney's fees.
Petitioner was further ordered to pay twenty seven million seven hundred forty-eight thousand seven hundred thirty eight pesos
(P27,718,738.00) representing earnings of Embassy Farms, Inc. as additional compensatory damages. The only piece of
evidence supporting the award is private respondent's Exh. "29" 49 which was signed as certified correct by no one else but
private respondent. It bore no reference to any receipt, voucher or any other document signed by petitioner or anyone in his
behalf, and it even states that it was Vicky Gregorio, not private respondent, who was present during the alleged sales of hogs at
the piggery. Exh. "29" was duly objected to and its contents vehemently denied by petitioner but to no avail. This Court cannot
countenance the grant of such an unjustified and unconscionable amount of damages on the basis of nothing but a self-serving
and hearsay document. As we have ruled in the case of Lufthansa German Airlines vs. CA, et al.: 50
Actual or compensatory damages cannot be presumed, but must be duly proved and proved with reasonable degree of certainty.
A court cannot rely on speculations, conjectures or guesswork as to the fact and the amount of damages, but must depend upon
competent proof that they have (been) suffered and on evidence of the actual amount thereof.
Neither may this Court allow the grant of damages corresponding to the value of the land foreclosed by private respondent's
creditors upon the latter's failure to make his loan payments. Private respondent, in his amended counterclaim, prayed for the
rescission of the Memorandum of Agreement. In case of rescission, while damages may be assessed in favor of the prejudiced
party, only those kinds of damages consistent with the remedy of rescission may be granted, keeping in mind that had the parties
opted for specific performance, other kinds of damages would have been called for which are absolutely distinct from those kinds
of damages accruing in the case of rescission. The vintage but still sound teaching of the case of Rios and Reyes v. Jacinto,
Palma y Hermanos, S.C., 51 a 1926 case, is apropos:
. . . [A]n obligation may be resolved if one of the obligors fails to comply with that which is incumbent upon him; and it is declared
that the person prejudiced may elect between exacting the fulfillment of the obligation (specific performance) and its resolution,
with compensation for damage and payment of interest in either case . . . . It will be noted that he is not entitled to pursue both of
these inconsistent remedies; and slight advertence to the logic of the situation will teach us that, in estimating the damages to be
awarded in case of rescission, those elements of damages only can be admitted that are compatible with the idea of rescission;
and of course in estimating the damages to be awarded in case the lessor elects for specific performance only those elements of
damages can be admitted which are compatible with the conception of specific performance. It follows that damages which would
only be consistent with the conception of specific performance cannot be awarded in an action where rescission is sought.
. . . Now it is an inseparable incident of resolution or rescission that the parties are bound to restore to each the thing which has
been the subject matter of the contract, precisely as in the situation where a decree of nullity is granted. In the common case of
the resolution of a contract of sale for failure of the purchaser to pay the stipulated price, the seller is entitled to be restored to the
possession of the thing sold, if it has already been delivered. But he cannot have both the thing sold and the price which was
agreed to be paid, for the resolution of the contract has the effect of destroying the obligation to pay the price. Similarly, in the
case of the resolution, or rescission of a contract of lease, the lessor is entitled be restored to the possession of the leased
premises, but he cannot have both the possession of the leased premises for the remainder of the term and the rent which the
other party had contracted to pay. The termination of the lease has the effect of destroying the obligation to pay rent for the future.
Compensatory damages consisting of the value of private respondent's foreclosed landholdings would have been proper in case
he resorted to remedy of specific performance, not rescission. Since his counterclaim prayed for the rescission of the
Memorandum of Agreement, it was grave error on the part of the respondent court to have enforced said agreement by ordering
petitioner to pay him the value of the landholdings.
This Court holds, in fine, that the Memorandum of Agreement entered into by petitioner and private respondent should indeed be
rescinded. As aforediscussed, the respondent appellate court erred in assessing damages against petitioner for his refusal to fully
pay private respondent's overdue loans. Such refusal was justified, considering that private respondent was the first to refuse to
deliver to petitioner the lands and certificates of stock that were the consideration for the almost six million pesos in debt that
petitioner was to assume and pay.
Five. Nevertheless, neither is petitioner entitled to recover the amount of P3,194,941.88 that he spent as lump sum payment, as
feeds and veterinary costs for the continued operation of the piggery and as loan restructuring fees. Mutual restitution is required
in rescission, but this presupposes that both parties may be restored in their original situation. 52 In this case, it cannot be
gainsaid that an essential part of the consideration of the amount of P3,194,941.88 paid by the petitioner was taking over the
effective management of Embassy Farms, Inc. Mutual restitution would require, thus, that petitioner restore private respondent in
the effective management of said corporation and that private respondent return said amount to petitioner. This, however, has
been rendered impossible by the foreclosure of the landholdings of private respondent and the shutdown of the piggery's
operations. Private respondent has lost in his venture, and while he is not blameless for his unfortunate fate, to still order him to
remit a considerable amount of money without receiving anything in return would certainly run counter to the essence of rescission
as a remedy in equity. 53

WHEREFORE, the instant petition for review is hereby GRANTED. The Decision of the Court of Appeals dated February 2, 1998
is REVERSED and SET ASIDE. The Memorandum of Agreement entered into by petitioner and private respondent on August 2,
1984 is hereby DECLARED RESCINDED. No damages. No costs.1wphi1.nt
SO ORDERED.

G.R. No. 194846

June 19, 2013

*HOSPICIO D. ROSAROSO, ANTONIO D. ROSAROSO, MANUEL D. ROSAROSO, ALGERICA D. ROSAROSO, and CLEOFE
R. LABINDAO, Petitioners,
vs.
LUCILA LABORTE SORIA, SPOUSES HAM SOLUTAN and **LAILA SOLUTAN, and MERIDIAN REALTY CORPORATION,
Respondents.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the December 4, 2009 Decision1 of the
Court of Appeals (CA). in CA G.R. CV No. 00351, which reversed and set aside the July 30, 2004 Decision2 of the Regional Trial
Court, Branch 8, 7th Judicial Region, Cebu City (RTC), in Civil Case No. CEB-16957, an action for declaration of nullity of
documents.
The Facts
Spouses Luis Rosaroso (Luis) and Honorata Duazo (Honorata) acquired several real properties in Daan Bantayan, Cebu City,
including the subject properties. The couple had nine (9) children namely: Hospicio, Arturo, Florita, Lucila, Eduardo, Manuel,
Cleofe, Antonio, and Angelica. On April 25, 1952, Honorata died. Later on, Luis married Lourdes Pastor Rosaroso (Lourdes).
On January 16, 1995, a complaint for Declaration of Nullity of Documents with Damages was filed by Luis, as one of the plaintiffs,
against his daughter, Lucila R. Soria (Lucila); Lucilas daughter, Laila S. Solutan (Laila); and Meridian Realty Corporation
(Meridian). Due to Luis untimely death, however, an amended complaint was filed on January 6, 1996, with the spouse of Laila,
Ham Solutan (Ham); and Luis second wife, Lourdes, included as defendants.3
In the Amended Complaint, it was alleged by petitioners Hospicio D. Rosaroso, Antonio D. Rosaroso (Antonio), Angelica D.
Rosaroso (Angelica), and Cleofe R. Labindao (petitioners) that on November 4, 1991, Luis, with the full knowledge and consent of
his second wife, Lourdes, executed the Deed of Absolute Sale4 (First Sale) covering the properties with Transfer Certificate of
Title (TCT) No. 31852 (Lot No. 8); TCT. No. 11155 (Lot 19); TCT No. 10885 (Lot No. 22); TCT No. 10886 (Lot No. 23); and Lot
Nos. 5665 and 7967, all located at Daanbantayan, Cebu, in their favor.5
They also alleged that, despite the fact that the said properties had already been sold to them, respondent Laila, in conspiracy
with her mother, Lucila, obtained the Special Power of Attorney (SPA),6 dated April 3, 1993, from Luis (First SPA); that Luis was
then sick, infirm, blind, and of unsound mind; that Lucila and Laila accomplished this by affixing Luis thumb mark on the SPA
which purportedly authorized Laila to sell and convey, among others, Lot Nos. 8, 22 and 23, which had already been sold to them;
and that on the strength of another SPA7 by Luis, dated July 21, 1993 (Second SPA), respondents Laila and Ham mortgaged Lot
No. 19 to Vital Lending Investors, Inc. for and in consideration of the amount of P150,000.00 with the concurrence of Lourdes.8
Petitioners further averred that a second sale took place on August 23, 1994, when the respondents made Luis sign the Deed of
Absolute Sale9 conveying to Meridian three (3) parcels of residential land for P960,500.00 (Second Sale); that Meridian was in
bad faith when it did not make any inquiry as to who were the occupants and owners of said lots; and that if Meridian had only
investigated, it would have been informed as to the true status of the subject properties and would have desisted in pursuing their
acquisition.
Petitioners, thus, prayed that they be awarded moral damages, exemplary damages, attorneys fees, actual damages, and
litigation expenses and that the two SPAs and the deed of sale in favor of Meridian be declared null and void ab initio.10
On their part, respondents Lucila and Laila contested the First Sale in favor of petitioners. They submitted that even assuming that
it was valid, petitioners were estopped from questioning the Second Sale in favor of Meridian because they failed not only in
effecting the necessary transfer of the title, but also in annotating their interests on the titles of the questioned properties. With
respect to the assailed SPAs and the deed of absolute sale executed by Luis, they claimed that the documents were valid
because he was conscious and of sound mind and body when he executed them. In fact, it was Luis together with his wife who
received the check payment issued by Meridian where a big part of it was used to foot his hospital and medical expenses.11
Respondent Meridian, in its Answer with Compulsory Counterclaim, averred that Luis was fully aware of the conveyances he
made. In fact, Sophia Sanchez (Sanchez), Vice-President of the corporation, personally witnessed Luis affix his thumb mark on
the deed of sale in its favor. As to petitioners contention that Meridian acted in bad faith when it did not endeavor to make some
inquiries as to the status of the properties in question, it countered that before purchasing the properties, it checked the titles of
the said lots with the Register of Deeds of Cebu and discovered therein that the First Sale purportedly executed in favor of the
plaintiffs was not registered with the said Register of Deeds. Finally, it argued that the suit against it was filed in bad faith.12
On her part, Lourdes posited that her signature as well as that of Luis appearing on the deed of sale in favor of petitioners, was
obtained through fraud, deceit and trickery. She explained that they signed the prepared deed out of pity because petitioners told
them that it was necessary for a loan application. In fact, there was no consideration involved in the First Sale. With respect to the
Second Sale, she never encouraged the same and neither did she participate in it. It was purely her husbands own volition that
the Second Sale materialized. She, however, affirmed that she received Meridians payment on behalf of her husband who was
then bedridden.13
RTC Ruling

After the case was submitted for decision, the RTC ruled in favor of petitioners. It held that when Luis executed the second deed
of sale in favor of Meridian, he was no longer the owner of Lot Nos. 19, 22 and 23 as he had already sold them to his children by
his first marriage. In fact, the subject properties had already been delivered to the vendees who had been living there since birth
and so had been in actual possession of the said properties. The trial court stated that although the deed of sale was not
registered, this fact was not prejudicial to their interest. It was of the view that the actual registration of the deed of sale was not
necessary to render a contract valid and effective because where the vendor delivered the possession of the parcel of land to the
vendee and no superior rights of third persons had intervened, the efficacy of said deed was not destroyed. In other words, Luis
lost his right to dispose of the said properties to Meridian from the time he executed the first deed of sale in favor of petitioners.
The same held true with his alleged sale of Lot 8 to Lucila Soria.14 Specifically, the dispositive portion of the RTC decision reads:
IN VIEW OF THE FOREGOING, the Court finds that a preponderance of evidence exists in favor of the plaintiffs and against the
defendants. Judgment is hereby rendered:
a. Declaring that the Special Power of Attorney, Exhibit "K," for the plaintiffs and Exhibit "3" for the defendants null and void
including all transactions subsequent thereto and all proceedings arising therefrom;
b. Declaring the Deed of Sale marked as Exhibit "E" valid and binding;
c. Declaring the Deed of Absolute Sale of Three (3) Parcels of Residential Land marked as Exhibit "F" null and void from the
beginning;
d. Declaring the Deed of Sale, Exhibit "16" (Solutan) or Exhibit "FF," null and void from the beginning;
e. Declaring the vendees named in the Deed of Sale marked as Exhibit "E" to be the lawful, exclusive and absolute owners and
possessors of Lots Nos. 8, 19, 22, and 23;
f. Ordering the defendants to pay jointly and severally each plaintiff P50,000.00 as moral damages; and
g. Ordering the defendants to pay plaintiffs P50,000.00 as attorneys fees; and P20,000.00 as litigation expenses.
The crossclaim made by defendant Meridian Realty Corporation against defendants Soria and Solutan is ordered dismissed for
lack of sufficient evidentiary basis.
SO ORDERED."15
Ruling of the Court of Appeals
On appeal, the CA reversed and set aside the RTC decision. The CA ruled that the first deed of sale in favor of petitioners was
void because they failed to prove that they indeed tendered a consideration for the four (4) parcels of land. It relied on the
testimony of Lourdes that petitioners did not pay her husband. The price or consideration for the sale was simulated to make it
appear that payment had been tendered when in fact no payment was made at all.16
With respect to the validity of the Second Sale, the CA stated that it was valid because the documents were notarized and, as
such, they enjoyed the presumption of regularity. Although petitioners alleged that Luis was manipulated into signing the SPAs, the
CA opined that evidence was wanting in this regard. Dr. Arlene Letigio Pesquira, the attending physician of Luis, testified that while
the latter was physically infirmed, he was of sound mind when he executed the first SPA.17
With regard to petitioners assertion that the First SPA was revoked by Luis when he executed the affidavit, dated November 24,
1994, the CA ruled that the Second Sale remained valid. The Second Sale was transacted on August 23, 1994, before the First
SPA was revoked. In other words, when the Second Sale was consummated, the First SPA was still valid and subsisting. Thus,
"Meridian had all the reasons to rely on the said SPA during the time of its validity until the time of its actual filing with the Register
of Deeds considering that constructive notice of the revocation of the SPA only came into effect upon the filing of the Adverse
Claim and the aforementioned Letters addressed to the Register of Deeds on 17 December 1994 and 25 November 1994,
respectively, informing the Register of Deeds of the revocation of the first SPA."18 Moreover, the CA observed that the affidavit
revoking the first SPA was also revoked by Luis on December 12, 1994.19
Furthermore, although Luis revoked the First SPA, he did not revoke the Second SPA which authorized respondent Laila to sell,
convey and mortgage, among others, the property covered by TCT T-11155 (Lot No. 19). The CA opined that had it been the
intention of Luis to discredit the
Second Sale, he should have revoked not only the First SPA but also the Second SPA. The latter being valid, all transactions
emanating from it, particularly the mortgage of Lot 19, its subsequent redemption and its second sale, were valid.20 Thus, the CA
disposed in this wise:
WHEREFORE, the appeal is hereby GRANTED. The Decision dated 30 July 2004 is hereby REVERSED AND SET ASIDE, and in
its stead a new decision is hereby rendered:
1. DECLARING the Special Power of Attorney, dated 21 July 1993, as valid;
2. DECLARING the Special Power of Attorney, dated 03 April 1993, as valid up to the time of its revocation on 24 November 1994;
3. DECLARING the Deed of Absolute sale, dated 04 November 1991, as ineffective and without any force and effect;
4. DECLARING the Deed of Absolute Sale of Three (3) Parcels of Residential Land, dated 23 August 1994, valid and binding from
the very beginning;
5. DECLARING the Deed of Absolute Sale, dated 27 September 1994, also valid and binding from the very beginning;
6. ORDERING the substituted plaintiffs to pay jointly and severally the defendant-appellant Meridian Realty Corporation the sum
of Php100,000.00 as moral damages, Php100,000.00 as attorneys fee and Php100,000.00 as litigation expenses; and
7. ORDERING the substituted plaintiffs to pay jointly and severally the defendant-appellants Leila Solutan et al., the sum of
Php50,000.00 as moral damages.

SO ORDERED.21
Petitioners filed a motion for reconsideration, but it was denied in the CA Resolution,22 dated November 18, 2010. Consequently,
they filed the present petition with the following ASSIGNMENT OF ERRORS
I.
THE HONORABLE COURT OF APPEALS (19TH DIVISION) GRAVELY ERRED WHEN IT DECLARED AS VOID THE FIRST
SALE EXECUTED BY THE LATE LUIS ROSAROSO IN FAVOR OF HIS CHILDREN OF HIS FIRST MARRIAGE.
II.
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT SUSTAINING AND AFFIRMING THE RULING OF THE
TRIAL COURT DECLARING THE MERIDIAN REALTY CORPORATION A BUYER IN BAD FAITH, DESPITE THE TRIAL
COURTS FINDINGS THAT THE DEED OF SALE (First Sale), IS GENUINE AND HAD FULLY COMPLIED WITH ALL THE
LEGAL FORMALITIES.
III.
THE HONORABLE COURT OF APPEALS FURTHER ERRED IN NOT HOLDING THE SALE (DATED 27 SEPTEMBER 1994),
NULL AND VOID FROM THE VERY BEGINNING SINCE LUIS ROSAROSO ON NOVEMBER 4, 1991 WAS NO LONGER THE
OWNER OF LOTS 8, 19, 22 AND 23 AS HE HAD EARLIER DISPOSED SAID LOTS IN FAVOR OF THE CHILDREN OF HIS
(LUIS ROSAROSO) FIRST MARRIAGE.23
Petitioners argue that the second deed of sale was null and void because Luis could not have validly transferred the ownership of
the subject properties to Meridian, he being no longer the owner after selling them to his children. No less than Atty. William Boco,
the lawyer who notarized the first deed of sale, appeared and testified in court that the said deed was the one he notarized and
that Luis and his second wife, Lourdes, signed the same before him. He also identified the signatures of the subscribing
witnesses.24 Thus, they invoke the finding of the RTC which wrote:
In the case of Heirs of Joaquin Teves, Ricardo Teves versus Court of Appeals, et al., G.R. No. 109963, October 13, 1999, the
Supreme Court held that a public document executed [with] all the legal formalities is entitled to a presumption of truth as to the
recitals contained therein. In order to overthrow a certificate of a notary public to the effect that a grantor executed a certain
document and acknowledged the fact of its execution before him, mere preponderance of evidence will not suffice. Rather, the
evidence must (be) so clear, strong and convincing as to exclude all reasonable dispute as to the falsity of the certificate. When
the evidence is conflicting, the certificate will be upheld x x x .
A notarial document is by law entitled to full faith and credit upon its face. (Ramirez vs. Ner, 21 SCRA 207). As such it must be
sustained in full force and effect so long as he who impugns it shall not have presented strong, complete and conclusive proof of
its falsity or nullity on account of some flaw or defect provided against by law (Robinson vs. Villafuerte, 18 Phil. 171, 189-190).25
Furthermore, petitioners aver that it was erroneous for the CA to say that the records of the case were bereft of evidence that they
paid the price of the lots sold to them. In fact, a perusal of the records would reveal that during the cross-examination of Antonio
Rosaroso, when asked if there was a monetary consideration, he testified that they indeed paid their father and their payment
helped him sustain his daily needs.26
Petitioners also assert that Meridian was a buyer in bad faith because when its representative visited the site, she did not make
the necessary inquiries. The fact that there were already houses on the said lots should have put Meridian on its guard and, for
said reason, should have made inquiries as to who owned those houses and what their rights were over the same.27
Meridians assertion that the Second Sale was registered in the Register of Deeds was a falsity. The subject titles, namely: TCT
No. 11155 for Lot 19, TCT No. 10885 for Lot 22, and TCT No. 10886 for Lot 23 were free from any annotation of the alleged
sale.28
After an assiduous assessment of the records, the Court finds for the petitioners.
The First Deed Of Sale Was Valid
The fact that the first deed of sale was executed, conveying the subject properties in favor of petitioners, was never contested by
the respondents. What they vehemently insist, though, is that the said sale was simulated because the purported sale was made
without a valid consideration.
Under Section 3, Rule 131 of the Rules of Court, the following are disputable presumptions: (1) private transactions have been fair
and regular; (2) the ordinary course of business has been followed; and (3) there was sufficient consideration for a contract.29
These presumptions operate against an adversary who has not introduced proof to rebut them. They create the necessity of
presenting evidence to rebut the prima facie case they created, and which, if no proof to the contrary is presented and offered, will
prevail. The burden of proof remains where it is but, by the presumption, the one who has that burden is relieved for the time
being from introducing evidence in support of the averment, because the presumption stands in the place of evidence unless
rebutted.30
In this case, the respondents failed to trounce the said presumption. Aside from their bare allegation that the sale was made
without a consideration, they failed to supply clear and convincing evidence to back up this claim. It is elementary in procedural
law that bare allegations, unsubstantiated by evidence, are not equivalent to proof under the Rules of Court.31
The CA decision ran counter to this established rule regarding disputable presumption. It relied heavily on the account of Lourdes
who testified that the children of Luis approached him and convinced him to sign the deed of sale, explaining that it was necessary
for a loan application, but they did not pay the purchase price for the subject properties.32 This testimony, however, is self-serving
and would not amount to a clear and convincing evidence required by law to dispute the said presumption. As such, the
presumption that there was sufficient consideration will not be disturbed.
Granting that there was no delivery of the consideration, the seller would have no right to sell again what he no longer owned. His
remedy would be to rescind the sale for failure on the part of the buyer to perform his part of their obligation pursuant to Article

1191 of the New Civil Code. In the case of Clara M. Balatbat v. Court Of Appeals and Spouses Jose Repuyan and Aurora
Repuyan,33 it was written:
The failure of the buyer to make good the price does not, in law, cause the ownership to revest to the seller unless the bilateral
contract of sale is first rescinded or resolved pursuant to Article 1191 of the New Civil Code. Non-payment only creates a right to
demand the fulfillment of the obligation or to rescind the contract. [Emphases supplied]
Meridian is Not a
Buyer in Good Faith
Respondents Meridian and Lucila argue that, granting that the First Sale was valid, the properties belong to them as they acquired
these in good faith and had them first recorded in the Registry of Property, as they were unaware of the First Sale.34
Again, the Court is not persuaded.
The fact that Meridian had them first registered will not help its cause. In case of double sale, Article 1544 of the Civil Code
provides:
ART. 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who
may have first possession thereof in good faith, if it should be movable property.
Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the
Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good faith was first in possession; and, in the
absence thereof; to the person who presents the oldest title, provided there is good faith.
Otherwise stated, ownership of an immovable property which is the subject of a double sale shall be transferred: (1) to the person
acquiring it who in good faith first recorded it in the Registry of Property; (2) in default thereof, to the person who in good faith was
first in possession; and (3) in default thereof, to the person who presents the oldest title, provided there is good faith. The
requirement of the law then is two-fold: acquisition in good faith and registration in good faith. Good faith must concur with the
registration. If it would be shown that a buyer was in bad faith, the alleged registration they have made amounted to no registration
at all.
The principle of primus tempore, potior jure (first in time, stronger in right) gains greater significance in case of a double sale of
immovable property. When the thing sold twice is an immovable, the one who acquires it and first records it in the Registry of
Property, both made in good faith, shall be deemed the owner. Verily, the act of registration must be coupled with good faith that
is, the registrant must have no knowledge of the defect or lack of title of his vendor or must not have been aware of facts which
should have put him upon such inquiry and investigation as might be necessary to acquaint him with the defects in the title of his
vendor.)35 [Emphases and underlining supplied]
When a piece of land is in the actual possession of persons other than the seller, the buyer must be wary and should investigate
the rights of those in possession. Without making such inquiry, one cannot claim that he is a buyer in good faith. When a man
proposes to buy or deal with realty, his duty is to read the public manuscript, that is, to look and see who is there upon it and what
his rights are. A want of caution and diligence, which an honest man of ordinary prudence is accustomed to exercise in making
purchases, is in contemplation of law, a want of good faith. The buyer who has failed to know or discover that the land sold to him
is in adverse possession of another is a buyer in bad faith.36 In the case of Spouses Sarmiento v. Court of Appeals,37 it was
written:
Verily, every person dealing with registered land may safely rely on the correctness of the certificate of title issued therefor and the
law will in no way oblige him to go behind the certificate to determine the condition of the property. Thus, the general rule is that a
purchaser may be considered a purchaser in good faith when he has examined the latest certificate of title. An exception to this
rule is when there exist important facts that would create suspicion in an otherwise reasonable man to go beyond the present title
and to investigate those that preceded it. Thus, it has been said that a person who deliberately ignores a significant fact which
would create suspicion in an otherwise reasonable man is not an innocent purchaser for value. A purchaser cannot close his eyes
to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith under the belief that there
was no defect in the title of the vendor. As we have held:
The failure of appellees to take the ordinary precautions which a prudent man would have taken under the circumstances,
specially in buying a piece of land in the actual, visible and public possession of another person, other than the vendor, constitutes
gross negligence amounting to bad faith.
In this connection, it has been held that where, as in this case, the land sold is in the possession of a person other than the
vendor, the purchaser is required to go beyond the certificate of title to make inquiries concerning the rights of the actual
possessor. Failure to do so would make him a purchaser in bad faith. (Citations omitted).
One who purchases real property which is in the actual possession of another should, at least make some inquiry concerning the
right of those in possession. The actual possession by other than the vendor should, at least put the purchaser upon inquiry. He
can scarely, in the absence of such inquiry, be regarded as a bona fide purchaser as against such possessors. (Emphases
supplied)
Prescinding from the foregoing, the fact that private respondent RRC did not investigate the Sarmiento spouses' claim over the
subject land despite its knowledge that Pedro Ogsiner, as their overseer, was in actual possession thereof means that it was not
an innocent purchaser for value upon said land. Article 524 of the Civil Code directs that possession may be exercised in one's
name or in that of another. In herein case, Pedro Ogsiner had informed RRC that he was occupying the subject land on behalf of
the Sarmiento spouses. Being a corporation engaged in the business of buying and selling real estate, it was gross negligence on
its part to merely rely on Mr. Puzon's assurance that the occupants of the property were mere squatters considering the invaluable
information it acquired from Pedro Ogsiner and considering further that it had the means and the opportunity to investigate for
itself the accuracy of such information. [Emphases supplied]
In another case, it was held that if a vendee in a double sale registers the sale after he has acquired knowledge of a previous sale,

the registration constitutes a registration in bad faith and does not confer upon him any right. If the registration is done in bad faith,
it is as if there is no registration at all, and the buyer who has first taken possession of the property in good faith shall be
preferred.38
In the case at bench, the fact that the subject properties were already in the possession of persons other than Luis was never
disputed. Sanchez, representative and witness for Meridian, even testified as follows:
x x x; that she together with the two agents, defendant Laila Solutan and Corazon Lua, the president of Meridian Realty
Corporation, went immediately to site of the lots; that the agents brought with them the three titles of the lots and Laila Solutan
brought with her a special power of attorney executed by Luis B. Rosaroso in her favor but she went instead directly to Luis
Rosaroso to be sure; that the lots were pointed to them and she saw that there were houses on it but she did not have any interest
of the houses because her interest was on the lots; that Luis Rosaroso said that the houses belonged to him; that he owns the
property and that he will sell the same because he is very sickly and he wanted to buy medicines; that she requested someone to
check the records of the lots in the Register of Deeds; that one of the titles was mortgaged and she told them to redeem the
mortgage because the corporation will buy the property; that the registered owner of the lots was Luis Rosaroso; that in more or
less three months, the encumbrance was cancelled and she told the prospective sellers to prepare the deed of sale; that there
were no encumbrances or liens in the title; that when the deed of absolute sale was prepared it was signed by the vendor Luis
Rosaroso in their house in Opra x x x.39 (Underscoring supplied)
From the above testimony, it is clear that Meridian, through its agent, knew that the subject properties were in possession of
persons other than the seller. Instead of investigating the rights and interests of the persons occupying the said lots, however, it
chose to just believe that Luis still owned them. Simply, Meridian Realty failed to exercise the due diligence required by law of
purchasers in acquiring a piece of land in the possession of person or persons other than the seller.
In this regard, great weight is accorded to the findings of fact of the RTC. Basic is the rule that the trial court is in a better position
to examine real evidence as well as to observe the demeanor of witnesses who testify in the case.40
WHEREFORE, the petition is GRANTED. The December 4, 2009 Decision and the November 18, 201 0 Resolution of the Court of
Appeals, in CA-G.R. CV No. 00351, are REVERSED and SET ASIDE. The July 30, 2004 Decision of the Regional Trial Court,
Branch 8, 7th Judicial Region, Cebu City, in Civil Case No. CEB-16957, is hereby REINSTATED.
SO ORDERED.

G.R. No. 202079

June 10, 2013

FIL-ESTATE GOLF AND DEVELOPMENT, INC. and FILESTATE LAND, INC., Petitioners,
vs.
VERTEX SALES AND TRADING, INC., Respondent.
DECISION
BRION, J.:
Before the Court is the petition for review on certiorari1 under Rule 45 of the Rules of Court, filed by petitioners Fil-Estate Golf and
Development, Inc. (FEGDI) and Fil-Estate Land, Inc. (FELl), assailing the decision2 dated February 22, 2012 and the resolution3
dated May 31, 2012 of the Court of Appeals (CA) in CA-G.R. CV No. 89296. The assailed CA rulings reversed the decision dated
March 1, 2007 of the Regional Trial Court (RTC) of Pasig City, Branch 161, in Civil Case No. 68791.4
THE FACTS
FEGDI is a stock corporation whose primary business is the development of golf courses. FELI is also a stock corporation, but is
engaged in real estate development. FEGDI was the developer of the Forest Hills Golf and Country Club (Forest Hills) and, in
consideration for its financing support and construction efforts, was issued several shares of stock of Forest Hills.
Sometime in August 1997, FEGDI sold, on installment, to RS Asuncion Construction Corporation (RSACC) one Class "C"
Common Share of Forest Hills for P1,100,000.00. Prior to the full payment of the purchase price, RSACC sold, on February 11,
1999,5 the Class "C" Common Share to respondent Vertex Sales and Trading, Inc. (Vertex). RSACC advised FEGDI of the sale to
Vertex and FEGDI, in turn, instructed Forest Hills to recognize Vertex as a shareholder. For this reason, Vertex enjoyed
membership privileges in Forest Hills.
Despite Vertexs full payment, the share remained in the name of FEGDI. Seventeen (17) months after the sale (or on July 28,
2000), Vertex wrote FEDGI a letter demanding the issuance of a stock certificate in its name. FELI replied, initially requested
Vertex to first pay the necessary fees for the transfer. Although Vertex complied with the request, no certificate was issued. This
prompted Vertex to make a final demand on March 17, 2001. As the demand went unheeded, Vertex filed on January 7, 2002 a
Complaint for Rescission with Damages and Attachment against FEGDI, FELI and Forest Hills. It averred that the petitioners
defaulted in their obligation as sellers when they failed and refused to issue the stock certificate covering the subject share despite
repeated demands. On the basis of its rights under Article 1191 of the Civil Code, Vertex prayed for the rescission of the sale and
demanded the reimbursement of the amount it paid (or P1,100,000.00), plus interest. During the pendency of the rescission action
(or on January 23, 2002), a certificate of stock was issued in Vertexs name, but Vertex refused to accept it.
RULING OF THE RTC
The RTC dismissed the complaint for insufficiency of evidence. It ruled that delay in the issuance of stock certificates does not
warrant rescission of the contract as this constituted a mere casual or slight breach. It also observed that notwithstanding the
delay in the issuance of the stock certificate, the sale had already been consummated; the issuance of the stock certificate is just
a collateral matter to the sale and the stock certificate is not essential to "the creation of the relation of shareholder."6
RULING OF THE CA

Vertex appealed the dismissal of its complaint. In its decision, the CA reversed the RTC and rescinded the sale of the share. Citing
Section 63 of the Corporation Code, the CA held that there can be no valid transfer of shares where there is no delivery of the
stock certificate. It considered the prolonged issuance of the stock certificate a substantial breach that served as basis for Vertex
to rescind the sale. 7 The CA ordered the petitioners to return the amounts paid by Vertex by reason of the sale.
THE PARTIES ARGUMENTS
FEGDI and FELI filed the present petition for review on certiorari to assail the CA rulings. They contend that the CA erred when it
reversed the RTCs dismissal of Vertexs complaint, declaring that the delay in the issuance of a stock certificate constituted as
substantial breach that warranted a rescission.
FEGDI argued that the delay cannot be considered a substantial breach because Vertex was unequivocally recognized as a
shareholder of Forest Hills. In fact, Vertexs nominees became members of Forest Hills and fully enjoyed and utilized all its
facilities. It added that RSACC also used its shareholder rights and eventually sold its share to Vertex despite the absence of a
stock certificate. In light of these circumstances, delay in the issuance of a stock certificate cannot be considered a substantial
breach.
For its part, FELI stated that it is not a party to the contract sought to be rescinded. It argued that it was just recklessly dragged
into the action due to a mistake committed by FEGDIs staff on two instances. The first was when their counsel used the
letterhead of FELI instead of FEGDI in its reply-letter to Vertex; the second was when they used the receipt of FELI for receipt of
the documentary stamp tax paid by Vertex.
In its comment to the petition,8 Vertex alleged that the fulfillment of its obligation to pay the purchase price called into action the
petitioners reciprocal obligation to deliver the stock certificate. Since there was delay in the issuance of a certificate for more than
three years, then it should be considered a substantial breach warranting the rescission of the sale. Vertex further alleged that its
use and enjoyment of Forest Hills facilities cannot be considered delivery and transfer of ownership.
THE ISSUE
Given the parties arguments, the sole issue for the Court to resolve is whether the delay in the issuance of a stock certificate can
be considered a substantial breach as to warrant rescission of the contract of sale.
THE COURTS RULING
The petition lacks merit.
Physical delivery is necessary to
transfer ownership of stocks
The factual backdrop of this case is similar to that of Raquel-Santos v. Court of Appeals,9 where the Court held that in "a sale of
shares of stock, physical delivery of a stock certificate is one of the essential requisites for the transfer of ownership of the stocks
purchased."
In that case, Trans-Phil Marine Ent., Inc. (Trans-Phil) and Roland Garcia bought Piltel shares from Finvest Securities Co., Inc.
(Finvest Securities) in February 1997. Since Finvest Securities failed to deliver the stock certificates, Trans-Phil and Garcia filed
an action first for specific performance, which was later on amended to an action for rescission. The Court ruled that Finvest
Securities failure to deliver the shares of stock constituted substantial breach of their contract which gave rise to a right on the
part of Trans-Phil and Garcia to rescind the sale.
Section 63 of the Corporation Code provides:
SEC. 63. Certificate of stock and transfer of shares. The capital stock of stock corporations shall be divided into shares for which
certificates signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the
seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may
be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally
authorized to make the transfer.1wphi1 No transfer, however, shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number
of the certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.
In this case, Vertex fully paid the purchase price by February 11, 1999 but the stock certificate was only delivered on January 23,
2002 after Vertex filed an action for rescission against FEGDI.
Under these facts, considered in relation to the governing law, FEGDI clearly failed to deliver the stock certificates, representing
the shares of stock purchased by Vertex, within a reasonable time from the point the shares should have been delivered. This was
a substantial breach of their contract that entitles Vertex the right to rescind the sale under Article 1191 of the Civil Code. It is not
entirely correct to say that a sale had already been consummated as Vertex already enjoyed the rights a shareholder can
exercise. The enjoyment of these rights cannot suffice where the law, by its express terms, requires a specific form to transfer
ownership.
"Mutual restitution is required in cases involving rescission under Article 1191" of the Civil Code; such restitution is necessary to
bring back the parties to their original situation prior to the inception of the contract.10 Accordingly, the amount paid to FEGDI by
reason of the sale should be returned to Vertex. On the amount of damages, the CA is correct in not awarding damages since
Vertex failed to prove by sufficient evidence that it suffered actual damage due to the delay in the issuance of the certificate of
stock.
Regarding the involvement of FELI in this case, no privity of contract exists between Vertex and FELI. "As a general rule, a
contract is a meeting of minds between two persons.1wphi1 The Civil Code upholds the spirit over the form; thus, it deems an
agreement to exist, provided the essential requisites are present. A contract is upheld as long as there is proof of consent, subject
matter and cause. Moreover, it is generally obligatory in whatever form it may have been entered into. From the moment there is a

meeting of minds between the parties, [the contract] is perfected."11

In the sale of the Class "C" Common Share, the parties are only FEGDI, as seller, and Vertex, as buyer. As can be seen from the
records, FELl was only dragged into the action when its staff used the wrong letterhead in replying to Vertex and issued the wrong
receipt for the payment of transfer taxes. Thus FELl should be absolved from any liability.
WHEREFORE, we hereby DENY the petition. The decision dated February 22, 2012 and the resolution dated May 31, 2012 of the
Court of Appeals in CA-G.R. CV No. 89296 are AFFIRMED with the MODIFICATION that Fil-Estate Land, Inc. is ABSOLVED from
any liability.
SO ORDERED.

G.R. No. 172346

July 24, 2013

SPOUSES NAMEAL and LOURDES BONROSTRO, Petitioners,

vs.
SPOUSES JUAN and CONSTANCIA LUNA, Respondents.
DECISION
DEL CASTILLO, J.:
Questioned in this case is the Court of Appeals' (CA) disquisition on the matter of interest.
Petitioners spouses Nameal and Lourdes Bonrostro (spouses Bonrostro) assail through this Petition for Review on Certiorari1 the
April 15, 2005 Decision2 of the CA in CA-G.R. CV No. 56414 which affirmed with modifications the April 4, 1997 Decision3 of the
Regional Trial Court (RTC) of Quezon City, Branch 104 in Civil Case No. Q-94-18895. They likewise question the CA April17, 2006
Resolution4 denying their motion for partial reconsideration.
Factual Antecedents
In 1992, respondent Constancia Luna (Constancia), as buyer, entered into a Contract to Sell5 with Bliss Development Corporation
(Bliss) involving a house and lot identified as Lot 19, Block 26 of New Capitol Estates in Diliman, Quezon City. Barely a year after,
Constancia, this time as the seller, entered into another Contract to Sell6 with petitioner Lourdes Bonrostro (Lourdes) concerning
the same property under the following terms and conditions:
1. The stipulated price of P1,250,000.00 shall be paid by the VENDEE to the VENDOR in the following manner:
(a) P200,000.00 upon signing x x x the Contract To Sell,
(b) P300,000.00 payable on or before April 30, 1993,
(c) P330,000.00 payable on or before July 31, 1993,
(d) P417,000.00 payable to the New Capitol Estate, for 15 years at P6,867.12 a month,
2. x x x In the event the VENDEE fails to pay the second installment on time, the VENDEE will pay starting May 1, 1993 a 2%
interest on the P300,000.00 monthly. Likewise, in the event the VENDEE fails to pay the amount of P630,000.00 on the stipulated
time, this CONTRACT TO SELL shall likewise be deemed cancelled and rescinded and x x x 5% of the total contract price of
P1,250,000.00 shall be deemed forfeited in favor of the VENDOR. Unpaid monthly amortization shall likewise be deducted from
the initial down payment in favor of the VENDOR.7
Immediately after the execution of the said second contract, the spouses Bonrostro took possession of the property. However,
except for the P200,000.00 down payment, Lourdes failed to pay any of the stipulated subsequent amortization payments.
Ruling of the Regional Trial Court
On January 11, 1994, Constancia and her husband, respondent Juan Luna (spouses Luna), filed before the RTC a Complaint8 for
Rescission of Contract and Damages against the spouses Bonrostro praying for the rescission of the contract, delivery of
possession of the subject property, payment by the latter of their unpaid obligation, and awards of actual, moral and exemplary
damages, litigation expenses and attorneys fees.
In their Answer with Compulsory Counterclaim,9 the spouses Bonrostro averred that they were willing to pay their total balance of
P630,000.00 to the spouses Luna after they sought from them a 60-day extension to pay the same.10 However, during the time
that they were ready to pay the said amount in the last week of October 1993, Constancia and her lawyer, Atty. Arlene Carbon
(Atty. Carbon), did not show up at their rendezvous. On November 24, 1993, Lourdes sent Atty. Carbon a letter11 expressing her
desire to pay the balance, but received no response from the latter. Claiming that they are still willing to settle their obligation, the
spouses Bonrostro prayed that the court fix the period within which they can pay the spouses Luna.
The spouses Bonrostro likewise belied that they were not paying the monthly amortization to New Capitol Estates and asserted
that on November 18, 1993, they paid Bliss, the developer of New Capitol Estates, the amount of P46,303.44. Later during trial,
Lourdes testified that Constancia instructed Bliss not to accept amortization payments from anyone as evidenced by her March 4,
1993 letter12 to Bliss.
On April 4, 1997, the RTC rendered its Decision13 focusing on the sole issue of whether the spouses Bonrostros delay in their
payment of the installments constitutes a substantial breach of their obligation under the contract warranting rescission. The RTC
ruled that the delay could not be considered a substantial breach considering that Lourdes (1) requested for an extension within
which to pay; (2) was willing and ready to pay as early as the last week of October 1993 and even wrote Atty. Carbon about this
on November 24, 1993; (3) gave Constancia a down payment of P200,000.00; and, (4) made payment to Bliss.
The dispositive portion of the said Decision reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows:

1.) Declaring the Contract to Sell executed by the plaintiff Constancia and defendant Lourdes with respect to the house and lot
located at Blk. 26, Lot 19, New Capitol Estates, Diliman, Quezon City to be in force and effect. And that Lourdes Bonrostro must
remain in the possession of the premises.
2.) Ordering the defendants to pay plaintiffs within 60 days from receipt of this decision the sum of P300,000.00 plus an interest of
2% per month from April 1993 to November 1993.
3.) Ordering the defendants to pay plaintiffs within sixty (60) days from receipt of this decision the sum of P330,000.00 plus an
interest of 2% per month from July 1993 to November 1993.
4.) Ordering the defendants to reimburse plaintiffs the sum of P214,492.62 which plaintiffs paid to Bliss Development Corporation.
No pronouncement as to Cost.
SO ORDERED.14
As their Motion for Reconsideration15 was likewise denied in an Order16 dated July 15, 1997, the spouses Luna appealed to the
CA.17
Ruling of the Court of Appeals
In its Decision18 of April 15, 2005, the CA concluded that since the contract entered into by and between the parties is a Contract
to Sell, rescission is not the proper remedy. Moreover, the subject contract being specifically a contract to sell a real property on
installment basis, it is governed by Republic Act No. 655219 or the Maceda Law, Section 4 of which states:
Sec. 4. In case where less than two years of installment 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 cancellation or the demand for rescission of the contract by a notarial act.
(Emphases supplied)
The CA held that while the spouses Luna sent the spouses Bonrostro letters20 rescinding the contract for non-payment of the sum
of P630,000.00, the same could not be considered as valid and effective cancellation under the Maceda Law since they were
made within the 60-day grace period and were not notarized. The CA concluded that there being no cancellation effected in
accordance with the procedure prescribed by law, the contract therefore remains valid and subsisting.
The CA also affirmed the RTCs finding that Lourdes was ready to pay her obligation on November 24, 1993.
However, the CA modified the RTC Decision with respect to interest, viz:
Nevertheless, there is a need to modify the appealed decision insofar as (i) the interest imposed on the sum of P300,000.00 is
only for the period April 1993 to November 1993; (ii) the interest imposed on the sum of P330,000.00 is 2% per month and is only
for the period July 1993 to November 1993; (iii) it does not impose interest on the amount of P214,492.62 which was paid by
Constancia to BLISS in behalf of Lourdes x x x
The rule is that no interest shall be due unless it has been expressly stipulated in writing (Art. 1956, Civil Code). However, the
contract does not provide for interest in case of default in payment of the sum of P330,000.00 to Constancia and the monthly
amortizations to BLISS.
Considering that Lourdes had incurred x x x delay in the performance of her obligations, she should pay (i) interest at the rate of
2% per month on the sum of P300,000.00 from May 1, 1993 until fully paid and (ii) interest at the legal rate on the amounts of
P330,000.00 and P214,492.62 from the date of default (August 1, 1993 and April 4, 1997 date of the appealed decision,
respectively) until the same are fully paid x x x21
Hence, the dispositive portion of the said Decision:
WHEREFORE, the appealed decision is AFFIRMED with the MODIFICATIONS that paragraphs 2, 3, and 4 of its dispositive
portion shall now read:
2.) Ordering the defendants to pay plaintiffs the sum of P300,000.00 plus interest thereon at the rate of 2% per month from May 1,
1993 until fully paid;
3.) Ordering the defendants to pay plaintiffs the sum of P330,000.00 plus interest thereon at the legal rate from August 1, 1993
until fully paid; and
4.) Ordering the defendants to reimburse plaintiffs the sum of P214,492.62, which plaintiffs paid to Bliss Development Corporation,
plus interest thereon at the legal rate from filing of the complaint until fully reimbursed.
SO ORDERED.22
The spouses Luna no longer assailed the ruling. On the other hand, the spouses Bonrostro filed a Partial Motion for
Reconsideration23 questioning the above-mentioned modifications. The CA, however, denied for lack of merit the said motion in a
Resolution24 dated April 17, 2006.
Hence, this Petition for Review on Certiorari.
Issue
The basic issue in this case is whether the CA correctly modified the RTC Decision with respect to interests.
The Parties Arguments
As may be recalled, the RTC under paragraphs 2 and 3 of the dispositive portion of its Decision ordered the spouses Bonrostro to

pay the spouses Luna the sums of P300,000.00 plus interest of 2% per month from April 1993 to November 1993 and
P330,000.00 plus interest of 2% per month from July 1993 to November 1993, respectively. The CA modified these by reckoning
the payment of the 2% interest on the P300,000.00 from May 1, 1993 until fully paid and by imposing interest at the legal rate on
the P330,000.00 reckoned from August 1, 1993 until fully paid.
The spouses Bonrostro harp on the factual finding of the RTC, as affirmed by the CA, that Lourdes was willing and ready to pay
her obligation as evidenced by her November 24, 1993 letter to Atty. Carbon. They also assert that the sending of the said letter
constitutes a valid tender of payment on their part. Hence, they argue that they should not be assessed any interest subsequent to
the date of the said letter. Neither should they be ordered to pay interest on the amount of P214,492.62 which covers the
amortizations paid by the spouses Luna to Bliss. They point out that it was Constancia who prevented them from fulfilling their
obligation to pay the amortizations when she instructed Bliss not to accept payment from them.25
The spouses Luna, on the other hand, aver that the November 24, 1993 letter of Lourdes is not equivalent to tender of payment
since the mere sending of a letter expressing the intention to pay, without the accompanying payment, cannot be considered a
valid tender of payment. Also, if the spouses Bonrostro were really willing and ready to pay at that time and assuming that the
spouses Luna indeed refused to accept payment, the former should have resorted to consignation. Anent the payment of
amortization, the spouses Luna explain that under the parties Contract to Sell, Lourdes was to assume Constancias balance to
Bliss by paying the monthly amortization in order to avoid the cancellation of the earlier Contract to Sell entered into by
Constancia with Bliss.26 However, since Lourdes was remiss in paying the same, the spouses Luna were constrained to pay the
amortization. They thus assert that reimbursement to them of the said amount with interest is proper considering that by reason of
such payment, the spouses Bonrostro were spared from the interests and penalties which would have been imposed by Bliss if
the amortizations remained unpaid.
Our Ruling
The Petition lacks merit.
The spouses Bonrostros reliance on the RTCs factual finding that Lourdes was willing and ready to pay on November 24, 1993 is
misplaced.
As mentioned, the RTC in resolving the Complaint focused on the sole issue of whether the failure of spouses Bonrostro to pay
the installments of P300,000.00 on April 30, 1993 and P330,000.00 on July 31, 1993 is a substantial breach of their obligation
under the contract as to warrant the rescission of the same.27 The said court ratiocinated, viz:
After careful evaluation of the evidence testimonial and documentary, the Court believes that the defendants delay in the payment
of the two installments is not so substantial as to warrant rescission of contract. Although, the defendant failed to pay the two
installments in due time, she was able to communicate with the plaintiffs through letters requesting for an extension of two months
within which to pay the installments. In fact, on November 24, 1993 defendant informed Atty. Arlene Carbon that she was ready to
pay the installments and the money is ready for pick-up. However, plaintiff did not bother to get or pick-up the money without any
valid reason. It would be very prejudicial on the part of the defendant if the contract to sell be rescinded considering that she made
a downpayment of P200,000.00 and made partial amortization to the Bliss Development Corporation. In fact, the defendant
testified that she is willing and ready to pay the balance including the interest on November 24, 1993.
The Court is of the opinion that the delay in the payment of the balance of the purchase price of the house and lot is not so
substantial as to warrant the rescission of the contract to sell. The question of whether a breach of contract is substantial depends
upon the attendant circumstance. x x x28
Clearly, the RTC arrived at the above-quoted conclusion based on its mistaken premise that rescission is applicable to the case.
Hence, its determination of whether there was substantial breach. As may be recalled, however, the CA, in its assailed Decision,
found the contract between the parties as a contract to sell, specifically of a real property on installment basis, and as such
categorically declared rescission to be not the proper remedy. This is considering that in a contract to sell, payment of the price is
a positive suspensive condition, failure of which is not a breach of contract warranting rescission under Article 119129 of the Civil
Code but rather just an event that prevents the supposed seller from being bound to convey title to the supposed buyer.30 Also,
and as correctly ruled by the CA, Article 1191 cannot be applied to sales of real property on installment since they are governed by
the Maceda Law.31
There being no breach to speak of in case of non-payment of the purchase price in a contract to sell, as in this case, the RTCs
factual finding that Lourdes was willing and able to pay her obligation a conclusion arrived at in connection with the said courts
determination of whether the non-payment of the purchase price in accordance with the terms of the contract was a substantial
breach warranting rescission therefore loses significance. The spouses Bonrostros reliance on the said factual finding is thus
misplaced. They cannot invoke their readiness and willingness to pay their obligation on November 24, 1993 as an excuse from
being made liable for interest beyond the said date.
The spouses Bonrostro are liable for interest on the installments due from the date of default until fully paid.
The spouses Bonrostro assert that Lourdes letter of November 24, 1993 amounts to tender of payment of the remaining balance
amounting to P630,000.00. Accordingly, thenceforth, accrual of interest should be suspended.
Tender of payment "is the manifestation by the debtor of a desire to comply with or pay an obligation. If refused without just cause,
the tender of payment will discharge the debtor of the obligation to pay but only after a valid consignation of the sum due shall
have been made with the proper court."32 "Consignation is the deposit of the proper amount with a judicial authority in
accordance with rules prescribed by law, after the tender of payment has been refused or because of circumstances which render
direct payment to the creditor impossible or inadvisable."33
"Tender of payment, without more, produces no effect."34 "To have the effect of payment and the consequent extinguishment of
the obligation to pay, the law requires the companion acts of tender of payment and consignation."35
As to the effect of tender of payment on interest, noted civilist Arturo M. Tolentino explained as follows:
When a tender of payment is made in such a form that the creditor could have immediately realized payment if he had accepted
the tender, followed by a prompt attempt of the debtor to deposit the means of payment in court by way of consignation, the

accrual of interest on the obligation will be suspended from the date of such tender. But when the tender of payment is not
accompanied by the means of payment, and the debtor did not take any immediate step to make a consignation, then interest is
not suspended from the time of such tender. x x x x36 (Emphasis supplied)
Here, the subject letter merely states Lourdes willingness and readiness to pay but it was not accompanied by payment. She
claimed that she made numerous telephone calls to Atty. Carbon reminding the latter to collect her payment, but, neither said
lawyer nor Constancia came to collect the payment. After that, the spouses Bonrostro took no further steps to effect payment.
They did not resort to consignation of the payment with the proper court despite knowledge that under the contract, non-payment
of the installments on the agreed date would make them liable for interest thereon. The spouses Bonrostro erroneously assumed
that their notice to pay would excuse them from paying interest. Their claimed tender of payment did not produce any effect
whatsoever because it was not accompanied by actual payment or followed by consignation. Hence, it did not suspend the
running of interest. The spouses Bonrostro are therefore liable for interest on the subject installments from the date of default until
full payment of the sums of P300,000.00 and P330,000.00.
The spouses Bonrostro are likewise liable for interest on the amount paid by the spouses Luna to Bliss as amortization.
The spouses Bonrostro want to be relieved from paying interest on the amount of P214,492.62 which the spouses Luna paid to
Bliss as amortizations by asserting that they were prevented by the latter from fulfilling such obligation. They invoke Art. 1186 of
the Civil Code which provides that "the condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment."
However, the Court finds Art. 1186 inapplicable to this case. The said provision explicitly speaks of a situation where it is the
obligor who voluntarily prevents fulfillment of the condition. Here, Constancia is not the obligor but the obligee. Moreover, even if
this significant detail is to be ignored, the mere intention to prevent the happening of the condition or the mere placing of
ineffective obstacles to its compliance, without actually preventing fulfillment is not sufficient for the application of Art. 1186.37 Two
requisites must concur for its application, to wit: (1) intent to prevent fulfillment of the condition; and, (2) actual prevention of
compliance.38
In this case, while it is undisputed that Constancia indeed instructed Bliss on March 4, 1994 not to accept payment from anyone
but her, there is nothing on record to show that Bliss heeded the instruction of Constancia as to actually prevent the spouses
Bonrostro from making payments to Bliss. There is no showing that subsequent to the said letter, the spouses Bonrostro
attempted to make payment to and was refused by Bliss. Neither was there a witness presented to prove that Bliss indeed gave
effect to the instruction contained in Constancias letter. While Bliss Project Development Officer, Mr. Ariel Cordero, testified during
trial, nothing could be gathered from his testimony regarding this except for the fact that Bliss received the said letter.39 In view of
these, the spouses Luna could not be said to have placed an effective obstacle as to actually prevent the spouses Bonrostro from
making amortization payments to Bliss.
On the other hand, there are telling circumstances which militate against the spouses Bonrostros claimed keenness to comply
with their obligation to pay the monthly amortization. After the execution of the contract in January 1993, they immediately took
possession of the property but failed to make amortization payments. It was only after seven months or on November 18, 1993
that they made payments to Bliss in the amount of P46,303.44.40 Whether the same covers previous unpaid amortizations is also
not clear as the receipt does not indicate the same41 and per Statement of Account42 as of March 8, 1994 issued by Bliss, the
unpaid monthly amortizations for February to November 1993 in the total amount of P78,271.69 remained outstanding. There was
also no payment made of the amortizations due on December 4, 1993 and January 4, 199443 before the filing of the Complaint on
January 11, 1994.
On the part of the spouses Luna, it is understandable that they paid the amortizations due.1wphi1 The assumption of payment of
the monthly amortization to Bliss was made part of the obligations of the spouses Bonrostro under their contract with the spouses
Luna precisely to avoid the cancellation of the earlier contract entered into by Constancia with Bliss. But as the spouses Bonrostro
failed in this obligation, the spouses Luna were constrained to pay Bliss to avoid the adverse effect of such failure. This act of the
spouses Luna proved to be even more beneficial to the spouses Bonrostro as the cancellation of the Contract to Sell between
Constancia and Bliss would result in the cancellation of the subsequent Contract to Sell between Constancia and Lourdes. Also,
the spouses Bonrostro were relieved from paying the penalties that would have been imposed by Bliss if the monthly
amortizations covered by the said payment remained unpaid. The Statements of Account44 issued by Bliss clearly state that each
monthly amortization is due on or before the fourth day of every month and a penalty equivalent to 1/10th of 1% per day of delay
shall be imposed for all payments made after due date. That translates to 3% monthly or 36% per annum rate of interest, three
times higher than the 12% per annum rate of interest correctly imposed by the CA.
Hence, the resulting situation is that the spouses Luna are constrained to part with their money while the spouses Bonrostro,
despite being remiss in their obligation to pay the monthly amortization, are relieved from paying higher penalties at the expense
of the former. This is aside from the fact that the spouses Bonrostro are in continued possession of the subject property and are
enjoying the beneficial use thereof. Under the circumstances and considering that the spouses Bonrostro are obviously in delay in
complying with their obligation to pay the amortizations due from February 1993 to January 1995 for which the spouses Luna paid
P214,492.62,45 the CA correctly ordered the reimbursement to the latter of the said amount with interest. "Delay in the
performance of an obligation is looked upon with disfavor because, when a party to a contract incurs delay, the other party who
performs his part of the contract suffers damages thereby."46 As discussed, the spouses Luna obviously suffered damages
brought about by the failure of the spouses Bonrostro to comply with their obligation on time. "And, sans elaboration of the matter
at hand, damages take the form of interest x x x."47
Under Article 2209 of the Civil Code, "if the obligation consists in the payment of a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest x x x." There being no stipulation on interest in case of delay in the payment of
amortization, the CA thus correctly imposed interest at the legal rate which is now 12% per annum.
WHEREFORE, the Petition for Review on Certiorari is DENIED and the assailed Decision dated April 15, 2005 and the Resolution
dated April 17, 2006 of the Court of Appeals in CA-G.R. CV No. 56414 are AFFIRMED.
SO ORDERED.

G.R. No. 179594

September 11, 2013

MANUEL UY & SONS, INC., Petitioner,

vs.
VALBUECO, INCORPORATED, Respondent.
DECISION
PERALTA, J.:
This is a petition for review on certiorari1 of the Court of Appeals Decision2 dated December 11, 2006 in CA-G.R. CV No. 85877,
and its Resolution dated September 4, 2007, denying petitioners motion for reconsideration.
The Court of Appeals reversed and set aside the Decision3 of the Regional Trial Court (RTC) of Manila, Branch 1, dismissing the
Complaint for specific performance and damages. The Court of Appeals reinstated the Complaint and directed petitioner to
execute deeds of absolute sale in favor of respondent after payment of the purchase price of the subject lots.
The facts, as stated by the Court of Appeals, are as follows:
Petitioner Manuel Uy & Sons, Inc. is the registered owner of parcels of land located in Teresa, Rizal covered by Transfer
Certificate of Title(TCT) No. 59534, covering an area of about 6,119 square meters; TCT No.59445, covering an area of about
6,838 square meters; TCT No. 59446,covering an area of about 12,389 square meters; and TCT No. 59444,covering an area of
about 32,047 square meters.
On November 29, 1973, two Conditional Deeds of Sale were executed by petitioner, as vendor, in favor of respondent Valbueco,
Incorporated, as vendee. The first Conditional Deed of Sale4 covered TCT Nos. 59534, 59445 and 59446, and contained the
following terms and conditions:
That for and in consideration of the sum of ONE HUNDREDSIXTY-FOUR THOUSAND SEVEN HUNDRED FORTYNINE(Php164,749.00) PESOS, Philippine currency, the VENDOR hereby agrees to SELL, CEDE, TRANSFER and CONVEY unto
the VENDEE xx x the aforementioned properties, payable under the following terms and conditions:
1. The sum of FORTY-ONE THOUSAND ONE HUNDREDEIGHTY-SEVEN and 25/100 (Php 41,187.25) PESOS shall be paid
upon signing of this conditional deed of sale; and
2. The balance of ONE HUNDRED TWENTY-THREETHOUSAND FIVE HUNDRED SIXTY-ONE and 75/100 (Php123,561.75)
PESOS shall be paid within a period of one (1) year from November 15, 1973, with interest of 12% per annum based on the
balance, in the mode and manner specified below:
a) January 4, 1974 P16,474.90 plus interest
b) On or before May 15, 1974 P53,543.43 plus interest
c) On or before November 15, 1974 P53,543.32 plus interest
3. That the vendee shall be given a grace period of thirty (30)days from the due date of any installment with corresponding interest
to be added, but should the VENDEE fail to make such payment within the grace period this contract shall be deemed rescinded
and without force and effect after notice in writing by VENDOR to VENDEE.
4. That the VENDOR agrees to have the existing Mortgages on the properties subject of this sale released on or before May 20,
1974.
5. That the VENDOR agrees to have the above-described properties freed and cleared of all lessees, tenants, adverse occupants
or squatters within 100 days from the execution of this conditional deed of sale. In case of failure by the VENDOR to comply with
the undertaking provided in this paragraph and the VENDEE shall find it necessary to file a case or cases in court to eject the said
lessees, tenants, occupants and/or squatters from the land, subject of this sale, the VENDOR agrees to answer and pay for all the
expenses incurred and to be incurred in connection with said cases until the same are fully and finally terminated.
6. That the VENDOR and the VENDEE agree that during the existence of this Contract and without previous expressed written
permission from the other, they shall not sell, cede, assign, transfer or mortgage, or in any way encumber unto another person or
party any right, interest or equity that they may have in and to said parcels of land. x x x x
8. That it is understood that ownership of the properties herein conveyed shall not pass to the VENDEE until after payment of the
full purchase price; provided, however, that the VENDOR shall allow the annotation of this Conditional Deed of Sale at the back of
the titles of the above-described parcels of land in the corresponding Registry of Deeds x xx.
9. That upon full payment of the total purchase price, a Deed of Absolute Sale shall be executed in favor of the VENDEE and the
VENDOR agrees to pay the documentary stamps and the science stamp tax of the Deed of Sale; while the VENDEE agrees to
pay the registration and other expenses for the issuance of a new title.
10. That it is mutually agreed that in case of litigation, the venue of the case shall be in the courts of Manila, having competent
jurisdiction, any other venue being expressly waived.5
On the other hand, the second Conditional Deed of Sale6 covering Lot No. 59444 provides, thus:
1. The sum of FIFTY-TWO THOUSAND SEVENTY-SIXAND 37/100 (Php 52,076.37) PESOS, shall be paid upon signing of this
conditional deed of sale; and
2. The balance of ONE HUNDRED FIFTY-SIXTHOUSAND TWO HUNDRED TWENTY-NINE and 13/100 (Php156,229.13)
PESOS shall be paid within a period of one (1) year from November 15, 1973, with interest of 12% per annum based on the
balance, in the mode and manner specified below:
a) January 4, 1974 P20,830.55 plus interest

b) On or before May 15, 1974 P67,699.29 plus interest

c) On or before November 15, 1974, P67,699.29 plus interest
3. That the VENDEE shall be given a grace period of thirty (30) days from the due date of any installment with corresponding
interest to be added, but should the VENDEE fail to make such payment within the grace period, this contract shall be deemed
rescinded and without force and effect after notice in writing by VENDOR to VENDEE.
4. That the VENDOR agrees and acknowledges that any and all payments to be made by the VENDEE by reason of this presents
unless hereafter advised by VENDOR to the contrary, shall be made in favor of and to the Philippine Trust Company by way of
liquidation and payment of the existing mortgage on the property subject of this sale.
5. That after each payment adverted to above the VENDOR shall issue the corresponding receipt for the amount paid by the
VENDOR to the Philippine Trust Company.
6. That the VENDOR agrees to have the above-described property freed and cleared of all lessees, tenants, adverse occupants or
squatters within 100 days from the execution of this conditional deed of sale. In case of failure by the VENDOR to comply with this
undertaking provided in this paragraph and the VENDEE shall find it necessary to file a case or cases in court to eject the said
lessees, tenants, occupants and/or squatters from the land, subject of this sale, the VENDOR agrees to answer and pay for all the
expenses incurred and to be incurred in connection with said cases until the same are fully and finally terminated.
7. That the VENDOR and the VENDEE agree that during the existence of this Contract and without previous expressed written
permission from the other, they shall not sell, cede, assign, transfer or mortgage, or in any way encumber unto another person or
party any right, interest or equity that they may have in and to said parcel of land.
xxxx
9. That it is understood that ownership of the property herein conveyed shall not pass to the VENDEE until after payment of the
full purchase price, provided, however, that the VENDOR shall allow the annotation of the Conditional Deed of Sale at the back of
the Title of the above-described parcel of land in the corresponding Registry of Deeds; x xx.
10. That upon full payment of the total purchase price, a Deed of Absolute Sale shall be executed in favor of the VENDEE and the
VENDOR agrees to pay the documentary stamps and the science stamp tax of the Deed of Sale; while the VENDEE agrees to
pay the registration and other expenses for the issuance of a new title.
11. That it is mutually agreed that in case of litigation, the venue of the case shall be in the courts of Manila, having competent
jurisdiction, any other venue being expressly waived.7
Respondent was able to pay petitioner the amount of P275,055.558 as partial payment for the two properties corresponding to the
initial payments and the first installments of the said properties.
At the same time, petitioner complied with its obligation under the conditional deeds of sale, as follows: (1) the mortgage for TCT
No. 59446 was released on May 18, 1984, while the mortgages for TCT Nos. 59445and 59534 were released on July 19, 1974;
(2) the unlawful occupants of the lots covered by TCT Nos. 59444, 59534, 59445 and 59446 surrendered their possession and
use of the said lots in consideration of the amount of P6,000.00 in a document9 dated November 19, 1973, and they agreed to
demolish their shanties on or before December 7, 1973; and (3) the mortgage with Philippine Trust Company covering TCT No.
59444 was discharged10 in 1984.
However, respondent suspended further payment as it was not satisfied with the manner petitioner complied with its obligations
under the conditional deeds of sale. Consequently, on March 17, 1978, petitioner sent respondent a letter 11 informing respondent
of its intention to rescind the conditional deeds of sale and attaching therewith the original copy of the respective notarial
rescission.
On November 28, 1994, respondent filed a Complaint12 for specific performance and damages against petitioner with the RTC of
Antipolo City. However, on January 15, 1996, the case was dismissed without prejudice13 for lack of interest, as respondent's
counsel failed to attend the pre-trial conference.
Five years later, or on March 16, 2001, respondent again filed with the RTC of Manila, Branch 1 (trial court) a Complaint14 for
specific performance and damages, seeking to compel petitioner to accept the balance of the purchase price for the two
conditional deeds of sale and to execute the corresponding deeds of absolute sale. Respondent contended that its non-payment
of the installments was due to the following reasons:(1) Petitioner refused to receive the balance of the purchase price as the
properties were mortgaged and had to be redeemed first before a deed of absolute sale could be executed; (2) Petitioner assured
that the existing mortgages on the properties would be discharged on or before May 20,1974, or that petitioner did not inform it
(respondent) that the mortgages on the properties were already released; and (3) Petitioner failed to fully eject the unlawful
occupants in the area.
In its Answer,15 petitioner argued that the case should be dismissed, as it was barred by prior judgment. Moreover, petitioner
contended that it could not be compelled to execute any deed of absolute sale, because respondent failed to pay in full the
purchase price of the subject lots. Petitioner claimed that it gave respondent a notice of notarial rescission of both conditional
deeds of sale that would take effect 30 days from receipt thereof. The notice of notarial rescission was allegedly received by
respondent on March 17,1978. Petitioner asserted that since respondent failed to pay the full purchase price of the subject lots,
both conditional deeds of sale were rescinded as of April 16, 1978; hence, respondent had no cause of action against it.
In its Reply,16 respondent denied that it received the alleged notice of notarial rescission. Respondent also denied that the alleged
recipient (one Wenna Laurenciana)17 of the letter dated March 17, 1978, which was attached to the notice of notarial rescission,
was its employee. Respondent stated that assuming arguendo that the notice was sent to it, the address (6th Floor, SGC Bldg.,
Salcedo Street, Legaspi Village, Makati, Metro Manila) was not the given address of respondent. Respondent contended that its
address on the conditional deeds of sale and the receipts issued by it and petitioner showed that its principal business address
was the 7th Floor, Bank of P.I. Bldg, Ayala Avenue, Makati, Rizal.
On August 1, 2005, the trial court rendered a Decision,18 dismissing the complaint, as petitioner had exercised its right to rescind
the contracts. The dispositive portion of the Decision reads:

WHEREFORE, premises considered, the complaint is DISMISSED for lack of merit.

Claims and counterclaims for damages are also dismissed.19
The trial court stated that the issues before it were: (1) Did petitioner unlawfully evade its obligation to execute the final deed of
sale and to eject the squatters/occupants on the properties; (2) Is the case barred by prior judgment; and (3) Does respondent
have a cause of action against petitioner.
The trial court said that both conditional deeds of sale clearly provided that "ownership x x x shall not pass to the VENDEE until
after full payment of the purchase price." Respondent admitted that it has not yet fully paid the purchase price. The trial court held
that the conditions in the conditional deeds of sale being suspensive, that is, its fulfillment gives rise to the obligation, the reasons
for the inability of respondent to fulfill its own obligations is material, in order that the obligation of petitioner to execute the final
deeds of absolute sale will arise. The trial court stated that the evidence showed that petitioner had exercised its right to rescind
the contract by a written notice dated March 17, 1978 and notarial acts both dated March15, 1978. The trial court noted that
respondent denied having received the notice and disclaimed knowing the recipient, Wenna Laurenciana. However, on crossexamination, respondent's witness, Gaudencio Juan, who used to be respondent's Personnel Manager and Forester at the same
time, admitted knowing Laurenciana because she was the secretary of Mr. Valeriano Bueno, respondent's president at that time,
although Laurenciana was not employed by respondent, but she was employed by Mahogany Products Corporation, presumably
one of the 14 other companies being controlled by Mr. Bueno.20
The trial court held that the conditional deeds of sale were executed on November 29, 1973 and were already covered by
Republic Act (R.A.) No. 6552, otherwise known as the Realty Installment Buyer Act. Under Section 4 of the law, if the buyer fails to
pay the installments due at the expiration of the grace period, which is not less than 60 days from the date the installment became
due, the seller may cancel the contract after 30 days from receipt of the buyer of the notice of cancellation or the demand for
rescission of the contracts by notarial act. The trial court found no lawful ground to grant the relief prayed for and dismissed the
complaint for lack of merit.
Respondent appealed the decision of the trial court to the Court of Appeals, and made these assignments of error: (1) the trial
court erred in holding that petitioner did not unlawfully evade executing a final deed of sale, since respondent's failure to fulfill its
own obligation is material; (2) the trial court erred in holding that it is unbelievable and a self-contradiction that respondent was
informed of the mortgage only when it was paying the balance of the properties; and (3) the trial court erred in holding that as
early as November 19, 1973, petitioner had already taken necessary steps to evict the squatters/occupants through the
intercession of the agrarian reform officer.
On December 11, 2006, the Court of Appeals rendered a Decision, reversing and setting aside the Decision of the trial court. It
reinstated the complaint of respondent, and directed petitioner to execute deeds of absolute sale in favor of respondent after
payment of the balance of the purchase price of the subject lots. The dispositive portion of the Decision reads:
WHEREFORE, premises considered, the August 1, 2005Decision of the Regional Trial Court of Manila, Branch 1, in Civil Case
No. 01-100411, is hereby REVERSED and SET ASIDE.
A new one is hereby entered: REINSTATING the complaint and defendant-appellee MANUEL UY & SONS INC. is hereby
DIRECTED, pursuant to Sec. 4, R. A. No. 6552, otherwise known as the Maceda Law, to EXECUTE and DELIVER:
(1) Deeds of Absolute Sale in favor of VALBUECO, INC.; and
(2) Transfer Certificates of Title pertaining to Nos. 59534, 59445,59446 and 59444, in the name of plaintiff-appellant VALBUECO,
INC., after VALBUECO pays MANUEL UY & SONS, without additional interest, within thirty days from finality of this judgment, the
balance of the contract price.
If MANUEL UY & SONS refuses to deliver the Deeds of Absolute Sale and the co-owner's copy of the TCTs, the Register of Deeds
of Antipolo, Rizal is hereby DIRECTED to CANCEL the latest TCTs issued derived from TCT Nos. 59534, 59445, 59446 and
59444, and to
ISSUE new TCTS in the name of VALBUECO.
Only if VALBUECO fails in the payment directed above, then defendant-appellee MANUEL UY & SONS INC. has the opportunity
to serve a valid notice of notarial rescission.
SO ORDERED.21
The Court of Appeals held that the two conditional deeds of sale in this case are contracts to sell. It stated that the law applicable
to the said contracts to sell on installments is R.A. No. 6552, specifically Section 4thereof, as respondent paid less than two years
in installments. It held that upon repeated defaults in payment by respondent, petitioner had the right to cancel the said contracts,
but subject to the proper receipt of respondent of the notice of cancellation or the demand for the rescission of the contracts by
notarial act.
However, the Court of Appeals found that petitioner sent the notice of notarial rescission to the wrong address. The business
address of respondent, as used in all its transactions with petitioner, was the 7th Floor, Bank of the Philippine Islands Building,
Ayala Avenue, Makati City, but the notice of notarial rescission was sent to the wrong address at the 6th Floor, SGC Building,
Salcedo Street, Legaspi Village, Makati, Metro Manila. Petitioner served the notice to the address of Mahogany Products
Corporation. It was established that the person who received the notice, one Wenna Laurenciana, was an employee of Mahogany
Products Corporation and not an employee of respondent or Mr. Valeriano Bueno, the alleged president of Mahogany Products
Corporation and respondent company.22 The appellate court stated that this cannot be construed as to have been contructively
received by respondent as the two corporations are two separate entities with a distinct personality independent from each other.
Thus, the Court of Appeals held that the notarial rescission was in validly served. It stated that it is a general rule that when
service of notice is an issue, the person alleging that the notice was served must prove the fact of service by a preponderance of
evidence. In this case, the Court of Appeals held that there was no evidence that the notice of cancellation by notarial act was
actually received by respondent. Thus, for petitioner's failure to cancel the contract in accordance with the procedure provided by
law, the Court of Appeals held that the contracts to sell on installment were valid and subsisting, and respondent has the right to
offer to pay for the balance of the purchase price before actual cancellation.

Petitioner's motion for reconsideration was denied for lack of merit by the Court of Appeals in a Resolution23 dated September 4,
2007.
Petitioner filed this petition raising the following issues:
I
THE HONORABLE COURT OF APPEALS GRAVELY ERRED INREVERSING THE RTC DECISION AND REINSTATING
THECOMPLAINT WHEN ON ITS FACE IT HAS LONG BEENPRESCRIBED, AS IT WAS FILED AFTER 27 YEARS AND HAS
NOJURISDICTION (SIC).
II
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED ANDGRAVELY ABUSED ITS DISCRETION IN
COMPELLINGPETITIONER TO EXECUTE A FINAL DEED OF ABSOLUTE SALE EVEN IF RESPONDENT JUDICIALLY
ADMITTED ITS NON-PAYMENT OF THE BALANCE OF THE DEEDS OF CONDITIONALSALE DUE SINCE 1974.
III
THE HONORABLE COURT OF APPEALS GRAVELY ERRED INGRANTING THE RELIEFS PRAYED BY RESPONDENT IN
ITSCOMPLAINT FOR SPECIFIC PERFORMANCE WHEN IT WASRESPONDENT WHO BREACHED THE CONTRACT.
IV
THE HONORABLE COURT OF APPEALS COMMITTED GRAVEINJUSTICE WHEN IT PENALIZED PETITIONER FOR
EXERCISINGITS LEGAL RIGHT AND DID NOT COMMIT AN ACTIONABLEWRONG WHILE IT HEFTILY REWARDED
RESPONDENT, WHOBREACHED THE CONTRACT, AND ORDERED TO PAY WITHOUTINTEREST PHP 97,998.95, WHICH IS
DUE SINCE 1974 UNDER THECONTRACT, FOR FOUR (4) PARCELS OF LAND (57,393 SQUAREMETERS), NOW WORTH
HUNDRED MILLIONS.
V
THE HONORABLE COURT OF APPEALS GRAVELY ERRED INANNULING THE NOTARIAL RESCISSION WHEN THE
COMPLAINT IS ONLY FOR SPECIFIC PERFORMANCE AND WAS NOT AN ISSUE RAISED IN THE PLEADINGS OR DURING
THETRIAL.24
The main issue is whether respondent is entitled to the relief granted by the Court of Appeals. Petitioner contends that the Court of
Appeals erred in directing it to execute deeds of absolute sale over the subject lots even if respondent admitted non-payment of
the balance of the purchase price.
As found by the Court of Appeals, the two conditional deeds of sale entered into by the parties are contracts to sell, as they both
contained a stipulation that ownership of the properties shall not pass to the vendee until after full payment of the purchase price.
In a conditional sale, as in a contract to sell, ownership remains with the vendor and does not pass to the vendee until full
payment of the purchase price.25 The full payment of the purchase price partakes of a suspensive condition, and non-fulfillment of
the condition prevents the obligation to sell from arising.26 To differentiate, a deed of sale is absolute when there is no stipulation
in the contract that title to the property remains with the seller until full payment of the purchase price.
Ramos v. Heruela27 held that Articles 1191 and 1592 of the Civil Code28 are applicable to contracts of sale, while R.A. No. 6552
applies to contracts to sell.
The Court of Appeals correctly held that R.A. No. 6552, otherwise known as the Realty Installment Buyer Act, applies to the
subject contracts to sell. R.A. No. 6552 recognizes in conditional sales of all kinds of real estate (industrial, commercial,
residential) the right of the seller to cancel the contract upon non-payment of an installment by the buyer, which is simply an event
that prevents the obligation of the vendor to convey title from acquiring binding force.29
It also provides the right of the buyer on installments in case he defaults in the payment of succeeding installments30 as follows:
Section 3. In all transactions or contracts involving the sale or financing of real estate on installment payments, including
residential condominium apartments but excluding industrial lots, commercial buildings and sales to tenants under Republic Act
Numbered Thirty-eight hundred forty-four, as amended by Republic Act Numbered Sixty-three hundred eighty-nine, where the
buyer has paid at least two years of installments, the buyer is entitled to the following rights in case he defaults in the payment of
succeeding installments:
(a) To pay, without additional interest, the unpaid installments due within the total grace period earned by him which is hereby fixed
at the rate of one month grace period for every one year of installment payments made: Provided, That this right shall be
exercised by the buyer only once in every five years of the life of the contract and its extensions, if any.
(b) If the contract is canceled, the seller shall refund to the buyer the cash surrender value of the payments on the property
equivalent to fifty per cent of the total payments made, and, after five years of installments, an additional five per cent every year
but not to exceed ninety per cent of the total payments made: Provided, That the actual cancellation of the contract shall take
place after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a
notarial act and upon full payment of the cash surrender value to the buyer.
Down payments, deposits or options on the contract shall be included in the computation of the total number of installment
payments made. chanrobles a law library
Sec. 4. 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 cancellation or the demand for rescission of the contract by a notarial act.31
In this case, respondent has paid less than two years of installments; therefore, Section 4 of R.A. No. 6552 applies.

The Court of Appeals held that even if respondent defaulted in its full payment of the purchase price of the subject lots, the
conditional deeds of sale remain valid and subsisting, because there was no valid notice of notarial rescission to respondent, as
the notice was sent to the wrong address, that is, to Mahogany Products Corporation, and it was received by a person employed
by Mahogany Products Corporation and not the respondent. The Court of Appeals stated that the allegation that Mahogany
Products Corporation and respondent have the same President, one Valeriano Bueno, is irrelevant and has not been actually
proven or borne by evidence. The appellate court held that there was insufficient proof that respondent actually received the notice
of notarial rescission of the conditional deeds of sale; hence, the unilateral rescission of the conditional deeds of sale cannot be
given credence.
However, upon review of the records of this case, the Court finds that respondent had been served a notice of the notarial
rescission of the conditional deeds of sale when it was furnished with the petitioner's Answer, dated February 16, 1995, to its first
Complaint filed on November 28, 1994with the RTC of Antipolo City, which case was docketed as Civil Case No.94-3426, but the
complaint was later dismissed without prejudice on January15, 1996.32
It appears that after respondent filed its first Complaint for specific performance and damages with the RTC of Antipolo City on
November 28,1994, petitioner filed an Answer and attached thereto a copy of the written notice dated March 17, 1978 and copies
of the notarial acts of rescission dated March 15, 1978, and that respondent received a copy of the said Answer with the attached
notices of notarial rescission. However, to reiterate, the first Complaint was dismissed without prejudice.
Five years after the dismissal of the first Complaint, respondent again filed this case for specific performance and damages, this
time, with the RTC of Manila. Petitioner filed an Answer, and alleged, among others, that the case was barred by prior judgment,
since respondent filed a complaint on November 28, 1994 before the RTC of Antipolo City, Branch 73, against it (petitioner)
involving the same issues and that the case, docketed as Civil Case No. 94-3426, was dismissed on January 15, 1996 for lack of
interest. Respondent filed a Reply33 dated July 18, 2001, asserting that petitioner prayed for the dismissal of the first case filed on
November 28, 1994 (Civil Case No. 94-3426) on the ground of improper venue as the parties agreed in the deeds of conditional
sale that in case of litigation, the venue shall be in the courts of Manila. To prove its assertion, respondent attached to its Reply a
copy of petitioners Answer to the first Complaint in Civil Case No. 94-3426, which Answer included the written notice dated March
17, 1978 and two notarial acts of rescission, both dated March 15, 1978, of the two conditional deeds of sale. Hence, respondent
is deemed to have had notice of the notarial rescission of the two conditional deeds of sale when it received petitioners Answer to
its first complaint filed with the RTC of Antipolo, since petitioners Answer included notices of notarial rescission of the two
conditional deeds of sale. The first complaint was filed six years earlier before this complaint was filed. As stated earlier, the first
complaint was dismissed without prejudice, because respondents counsel failed to appear at the pre-trial. Since respondent
already received notices of the notarial rescission of the conditional deeds of sale, together with petitioners Answer to the first
Complaint five years before it filed this case, it can no longer deny having received notices of the notarial rescission in this case,
as respondent admitted the same when it attached the notices of notarial rescission to its Reply in this case. Consequently,
respondent is not entitled to the relief granted by the Court of Appeals.
Under R.A. No. 6552, the right of the buyer to refund accrues only when he has paid at least two years of installments.34 In this
case, respondent has paid less than two years of installments; hence, it is not entitled to a refund.35
Moreover, petitioner raises the issue of improper venue and lack of jurisdiction of the RTC of Manila over the case. It contends
that the complaint involved real properties in Antipolo City and cancellation of titles; hence, it was improperly filed in the RTC of
Manila.
Petitioner's contention lacks merit, as petitioner and respondent stipulated in both Conditional Deeds of Sale that they mutually
agreed that in case of litigation, the case shall be filed in the courts of Manila.36
Further, petitioner contends that the action has prescribed. Petitioner points out that the cause of action is based on a written
contract; hence, the complaint should have been brought within 10 years from the time the right of action accrues under Article
1144 of the Civil Code. Petitioner argues that it is evident on the face of the complaint and the two contracts of conditional sale
that the cause of action accrued in 1974; yet, the complaint for specific performance was filed after 27 years. Petitioner asserts
that the action has prescribed.
The contention is meritorious.
Section 1, Rule 9 of the 1997 Rules of Civil Procedure provides:
Section 1. Defense and objections not pleaded. - Defenses and objections not pleaded whether in a motion to dismiss or in the
answer are deemed waived. However, when it appears from the pleadings that the court has no jurisdiction over the subject
matter, that there is another action pending between the same parties for the same cause, or that the action is barred by a prior
judgment or by statute of limitations, the court shall dismiss the claim.37
In Gicano v. Gegato,38 the Court held:
x x x (T)rial courts have authority and discretion to dismiss an action on the ground of prescription when the parties' pleadings or
other facts on record show it to be indeed time-barred; (Francisco v. Robles, Feb, 15,1954; Sison v. Mc Quaid, 50 O.G. 97;
Bambao v. Lednicky, Jan. 28, 1961;Cordova v. Cordova, Jan. 14, 1958; Convets, Inc. v. NDC, Feb. 28, 1958;32 SCRA 529;
Sinaon v. Sorongan, 136 SCRA 408); and it may do so on the basis of a motion to dismiss (Sec. 1,f, Rule 16, Rules of Court), or
an answer which sets up such ground as an affirmative defense (Sec. 5, Rule16), or even if the ground is alleged after judgment
on the merits, as in a motion for reconsideration (Ferrer v. Ericta, 84 SCRA 705); or even if the defense has not been asserted at
all, as where no statement thereof is found in the pleadings (Garcia v. Mathis, 100 SCRA 250;PNB v. Pacific Commission House,
27 SCRA 766; Chua Lamco v.Dioso, et al., 97 Phil. 821);
or where a defendant has been declared in default (PNB v. Perez, 16 SCRA 270). What is essential only, to repeat, is that the
facts demonstrating the lapse of the prescriptive period, be otherwise sufficiently and satisfactorily apparent on the record; either
in the averments of the plaintiff's complaint, or otherwise established by the evidence.39
Moreover, Dino v. Court of Appeals40 held:
Even if the defense of prescription was raised for the first time on appeal in respondent's Supplemental Motion for
Reconsideration of the appellate court's decision, this does not militate against the due process right of the petitioners. On appeal,

there was no new issue of fact that arose in connection with the question of prescription, thus it cannot be said that petitioners
were not given the opportunity to present evidence in the trial court to meet a factual issue. Equally important, petitioners had the
opportunity to oppose the defense of prescription in their Opposition to the Supplemental Motion for Reconsideration filed in the
appellate court and in their Petition for Review in this Court.41
In this case, petitioner raised the defense of prescription for the first time before this Court, and respondent had the opportunity to
oppose the defense of prescription in its Comment to the petition. Hence, the Court can resolve the issue of prescription as both
parties were afforded the opportunity to ventilate their respective positions on the matter. The Complaint shows that the
Conditional Deeds of Sale were executed on November 29, 1973, and payments were due on both Conditional Deeds of Sale on
November 15, 1974. Article 114442 of the Civil Code provides that actions based upon a written contract must be brought within
ten years from the time the right of action accrues. Non-fulfillment of the obligation to pay on the last due date, that is, on
November 15, 1974, would give rise to an action by the vendor, which date of reckoning may also apply to any action by the
vendee to determine his right under R.A. No. 6552. The vendee, respondent herein, filed this case on March 16, 2001, which is
clearly beyond the 10-year prescriptive period; hence, the action has prescribed.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals, dated December 11, 2006, in CA-G.R. CV No.
85877 and its Resolution dated September 4, 2007 are REVERSED and SET ASIDE. The Decision of the Regional Trial Court of
Manila, Branch I, dated August 1, 2005 in Civil Case No. 01-100411, dismissing the case for lack of merit, is REINSTATED.
SO ORDERED.

G.R. No. 185798

January 13, 2014

FIL-ESTATE PROPERTIES, INC. AND FIL-ESTATE NETWORK INC., Petitioners,

vs.
SPOUSES CONRADO AND MARIA VICTORIA RONQUILLO, Respondents.
DECISION
PEREZ, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules .of Civil Procedure assailing the Decision1 of
the Court of Appeals in CA-G.R. SP No. 100450 which affirmed the Decision of the Office of the President in O.P. Case No. 06-F216.
As culled from the records, the facts are as follow:
Petitioner Fil-Estate Properties, Inc. is the owner and developer of the Central Park Place Tower while co-petitioner Fil-Estate
Network, Inc. is its authorized marketing agent. Respondent Spouses Conrado and Maria Victoria Ronquillo purchased from
petitioners an 82-square meter condominium unit at Central Park Place Tower in Mandaluyong City for a pre-selling contract price
of FIVE MILLION ONE HUNDRED SEVENTY-FOUR THOUSAND ONLY (P5,174,000.00). On 29 August 1997, respondents
executed and signed a Reservation Application Agreement wherein they deposited P200,000.00 as reservation fee. As agreed
upon, respondents paid the full downpayment of P1,552,200.00 and had been paying the P63,363.33 monthly amortizations until
September 1998.
Upon learning that construction works had stopped, respondents likewise stopped paying their monthly amortization. Claiming to
have paid a total of P2,198,949.96 to petitioners, respondents through two (2) successive letters, demanded a full refund of their
payment with interest. When their demands went unheeded, respondents were constrained to file a Complaint for Refund and
Damages before the Housing and Land Use Regulatory Board (HLURB). Respondents prayed for reimbursement/refund of
P2,198,949.96 representing the total amortization payments, P200,000.00 as and by way of moral damages, attorneys fees and
other litigation expenses.
On 21 October 2000, the HLURB issued an Order of Default against petitioners for failing to file their Answer within the
reglementary period despite service of summons.2
Petitioners filed a motion to lift order of default and attached their position paper attributing the delay in construction to the 1997
Asian financial crisis. Petitioners denied committing fraud or misrepresentation which could entitle respondents to an award of
moral damages.
On 13 June 2002, the HLURB, through Arbiter Atty. Joselito F. Melchor, rendered judgment ordering petitioners to jointly and
severally pay respondents the following amount:
a) The amount of TWO MILLION ONE HUNDRED NINETY-EIGHT THOUSAND NINE HUNDRED FORTY NINE PESOS & 96/100
(P2,198,949.96) with interest thereon at twelve percent (12%) per annum to be computed from the time of the complainants
demand for refund on October 08, 1998 until fully paid,
b) ONE HUNDRED THOUSAND PESOS (P100,000.00) as moral damages,
c) FIFTY THOUSAND PESOS (P50,000.00) as attorneys fees,
d) The costs of suit, and
e) An administrative fine of TEN THOUSAND PESOS (P10,000.00) payable to this Office fifteen (15) days upon receipt of this
decision, for violation of Section 20 in relation to Section 38 of PD 957.3
The Arbiter considered petitioners failure to develop the condominium project as a substantial breach of their obligation which
entitles respondents to seek for rescission with payment of damages. The Arbiter also stated that mere economic hardship is not
an excuse for contractual and legal delay.
Petitioners appealed the Arbiters Decision through a petition for review pursuant to Rule XII of the 1996 Rules of Procedure of

HLURB. On 17 February 2005, the Board of Commissioners of the HLURB denied4 the petition and affirmed the Arbiters
Decision. The HLURB reiterated that the depreciation of the peso as a result of the Asian financial crisis is not a fortuitous event
which will exempt petitioners from the performance of their contractual obligation.
Petitioners filed a motion for reconsideration but it was denied5 on 8 May 2006. Thereafter, petitioners filed a Notice of Appeal with
the Office of the President. On 18 April 2007, petitioners appeal was dismissed6 by the Office of the President for lack of merit.
Petitioners moved for a reconsideration but their motion was denied7 on 26 July 2007.
Petitioners sought relief from the Court of Appeals through a petition for review under Rule 43 containing the same arguments
they raised before the HLURB and the Office of the President:
I.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE HONORABLE HOUSING
AND LAND USE REGULATORY BOARD AND ORDERING PETITIONERS-APPELLANTS TO REFUND RESPONDENTSAPPELLEES THE SUM OF P2,198,949.96 WITH 12% INTEREST FROM 8 OCTOBER 1998 UNTIL FULLY PAID,
CONSIDERING THAT THE COMPLAINT STATES NO CAUSE OF ACTION AGAINST PETITIONERS-APPELLANTS.
II.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE OFFICE BELOW
ORDERING PETITIONERS-APPELLANTS TO PAY RESPONDENTS-APPELLEES THE SUM OF P100,000.00 AS MORAL
DAMAGES AND P50,000.00 AS ATTORNEYS FEES CONSIDERING THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS
THEREFOR.
III.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE HOUSING AND LAND USE
REGULATORY BOARD ORDERING PETITIONERS-APPELLANTS TO PAY P10,000.00 AS ADMINISTRATIVE FINE IN THE
ABSENCE OF ANY FACTUAL OR LEGAL BASIS TO SUPPORT SUCH FINDING.8
On 30 July 2008, the Court of Appeals denied the petition for review for lack of merit. The appellate court echoed the HLURB
Arbiters ruling that "a buyer for a condominium/subdivision unit/lot unit which has not been developed in accordance with the
approved condominium/subdivision plan within the time limit for complying with said developmental requirement may opt for
reimbursement under Section 20 in relation to Section 23 of Presidential Decree (P.D.) 957 x x x."9 The appellate court supported
the HLURB Arbiters conclusion, which was affirmed by the HLURB Board of Commission and the Office of the President, that
petitioners failure to develop the condominium project is tantamount to a substantial breach which warrants a refund of the total
amount paid, including interest. The appellate court pointed out that petitioners failed to prove that the Asian financial crisis
constitutes a fortuitous event which could excuse them from the performance of their contractual and statutory obligations. The
appellate court also affirmed the award of moral damages in light of petitioners unjustified refusal to satisfy respondents claim
and the legality of the administrative fine, as provided in Section 20 of Presidential Decree No. 957.
Petitioners sought reconsideration but it was denied in a Resolution10 dated 11 December 2008 by the Court of Appeals.
Aggrieved, petitioners filed the instant petition advancing substantially the same grounds for review:
A.
THE HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED IN TOTO THE DECISION OF THE OFFICE OF THE
PRESIDENT WHICH SUSTAINED RESCISSION AND REFUND IN FAVOR OF THE RESPONDENTS DESPITE LACK OF
CAUSE OF ACTION.
B.
GRANTING FOR THE SAKE OF ARGUMENT THAT THE PETITIONERS ARE LIABLE UNDER THE PREMISES, THE
HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED THE HUGE AMOUNT OF INTEREST OF TWELVE
PERCENT (12%).
C.
THE HONORABLE COURT OF APPEALS LIKEWISE ERRED WHEN IT AFFIRMED IN TOTO THE DECISION OF THE OFFICE
OF THE PRESIDENT INCLUDING THE PAYMENT OF P100,000.00 AS MORAL DAMAGES, P50,000.00 AS ATTORNEYS FEES
AND P10,000.00 AS ADMINISTRATIVE FINE IN THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS TO SUPPORT SUCH
CONCLUSIONS.11
Petitioners insist that the complaint states no cause of action because they allegedly have not committed any act of
misrepresentation amounting to bad faith which could entitle respondents to a refund. Petitioners claim that there was a mere
delay in the completion of the project and that they only resorted to "suspension and reformatting as a testament to their
commitment to their buyers." Petitioners attribute the delay to the 1997 Asian financial crisis that befell the real estate industry.
Invoking Article 1174 of the New Civil Code, petitioners maintain that they cannot be held liable for a fortuitous event.
Petitioners contest the payment of a huge amount of interest on account of suspension of development on a project. They liken
their situation to a bank which this Court, in Overseas Bank v. Court of Appeals,12 adjudged as not liable to pay interest on
deposits during the period that its operations are ordered suspended by the Monetary Board of the Central Bank.
Lastly, petitioners aver that they should not be ordered to pay moral damages because they never intended to cause delay, and
again blamed the Asian economic crisis as the direct, proximate and only cause of their failure to complete the project. Petitioners
submit that moral damages should not be awarded unless so stipulated except under the instances enumerated in Article 2208 of
the New Civil Code. Lastly, petitioners refuse to pay the administrative fine because the delay in the project was caused not by
their own deceptive intent to defraud their buyers, but due to unforeseen circumstances beyond their control.
Three issues are presented for our resolution: 1) whether or not the Asian financial crisis constitute a fortuitous event which would
justify delay by petitioners in the performance of their contractual obligation; 2) assuming that petitioners are liable, whether or not

12% interest was correctly imposed on the judgment award, and 3) whether the award of moral damages, attorneys fees and
administrative fine was proper.
It is apparent that these issues were repeatedly raised by petitioners in all the legal fora. The rulings were consistent that first, the
Asian financial crisis is not a fortuitous event that would excuse petitioners from performing their contractual obligation; second, as
a result of the breach committed by petitioners, respondents are entitled to rescind the contract and to be refunded the amount of
amortizations paid including interest and damages; and third, petitioners are likewise obligated to pay attorneys fees and the
administrative fine.
This petition did not present any justification for us to deviate from the rulings of the HLURB, the Office of the President and the
Court of Appeals.
Indeed, the non-performance of petitioners obligation entitles respondents to rescission under Article 1191 of the New Civil Code
which states:
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with
what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with payment of damages in either case.
He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.
More in point is Section 23 of Presidential Decree No. 957, the rule governing the sale of condominiums, which provides:
Section 23. Non-Forfeiture of Payments.1wphi1 No installment payment made by a buyer in a subdivision or condominium
project for the lot or unit he contracted to buy shall be forfeited in favor of the owner or developer when the buyer, after due notice
to the owner or developer, desists from further payment due to the failure of the owner or developer to develop the subdivision or
condominium project according to the approved plans and within the time limit for complying with the same. Such buyer may, at
his option, be reimbursed the total amount paid including amortization interests but excluding delinquency interests, with interest
thereon at the legal rate. (Emphasis supplied).
Conformably with these provisions of law, respondents are entitled to rescind the contract and demand reimbursement for the
payments they had made to petitioners.
Notably, the issues had already been settled by the Court in the case of Fil-Estate Properties, Inc. v. Spouses Go13 promulgated
on 17 August 2007, where the Court stated that the Asian financial crisis is not an instance of caso fortuito. Bearing the same
factual milieu as the instant case, G.R. No. 165164 involves the same company, Fil-Estate, albeit about a different condominium
property. The company likewise reneged on its obligation to respondents therein by failing to develop the condominium project
despite substantial payment of the contract price. Fil-Estate advanced the same argument that the 1997 Asian financial crisis is a
fortuitous event which justifies the delay of the construction project. First off, the Court classified the issue as a question of fact
which may not be raised in a petition for review considering that there was no variance in the factual findings of the HLURB, the
Office of the President and the Court of Appeals. Second, the Court cited the previous rulings of Asian Construction and
Development Corporation v. Philippine Commercial International Bank14 and Mondragon Leisure and Resorts Corporation v.
Court of Appeals15 holding that the 1997 Asian financial crisis did not constitute a valid justification to renege on obligations. The
Court expounded:
Also, we cannot generalize that the Asian financial crisis in 1997 was unforeseeable and beyond the control of a business
corporation. It is unfortunate that petitioner apparently met with considerable difficulty e.g. increase cost of materials and labor,
even before the scheduled commencement of its real estate project as early as 1995. However, a real estate enterprise engaged
in the pre-selling of condominium units is concededly a master in projections on commodities and currency movements and
business risks. The fluctuating movement of the Philippine peso in the foreign exchange market is an everyday occurrence, and
fluctuations in currency exchange rates happen everyday, thus, not an instance of caso fortuito.16
The aforementioned decision becomes a precedent to future cases in which the facts are substantially the same, as in this case.
The principle of stare decisis, which means adherence to judicial precedents, applies.
In said case, the Court ordered the refund of the total amortizations paid by respondents plus 6% legal interest computed from the
date of demand. The Court also awarded attorneys fees. We follow that ruling in the case before us.
The resulting modification of the award of legal interest is, also, in line with our recent ruling in Nacar v. Gallery Frames,17
embodying the amendment introduced by the Bangko Sentral ng Pilipinas Monetary Board in BSP-MB Circular No. 799 which
pegged the interest rate at 6% regardless of the source of obligation.
We likewise affirm the award of attorneys fees because respondents were forced to litigate for 14 years and incur expenses to
protect their rights and interest by reason of the unjustified act on the part of petitioners.18 The imposition of P10,000.00
administrative fine is correct pursuant to Section 38 of Presidential Decree No. 957 which reads:
Section 38. Administrative Fines. The Authority may prescribe and impose fines not exceeding ten thousand pesos for violations of
the provisions of this Decree or of any rule or regulation thereunder. Fines shall be payable to the Authority and enforceable
through writs of execution in accordance with the provisions of the Rules of Court.
Finally, we sustain the award of moral damages. In order that moral damages may be awarded in breach of contract cases, the
defendant must have acted in bad faith, must be found guilty of gross negligence amounting to bad faith, or must have acted in
wanton disregard of contractual obligations.19 The Arbiter found petitioners to have acted in bad faith when they breached their
contract, when they failed to address respondents grievances and when they adamantly refused to refund respondents' payment.
In fine, we find no reversible error on the merits in the impugned Court of Appeals' Decision and Resolution.
WHEREFORE, the petition is PARTLY GRANTED. The appealed Decision is AFFIRMED with the MODIFICATION that the legal
interest to be paid is SIX PERCENT (6%) on the amount due computed from the time of respondents' demand for refund on 8
October 1998.
SO ORDERED.

G.R. No. 81158 May 22, 1992

OSCAR A. JACINTO and LIBRADA FRANCO-JACINTO, petitioners,
vs.
ROGELIO KAPARAZ, RAUL KAPARAZ and ROSE MARIET KAPARAZ, respondents.
Garcia, Iigo & Ledesma Law Office for petitioners.

DAVIDE, JR, J.:p

Petitioners urge this Court to review and set aside the decision of the respondent Court of Appeals of 30 July 1987 in C.A.-G.R.
CV No. 69357, 1 the dispositive portion of which reads:
WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE and judgment is hereby rendered as follows:
1. The Complaint/Amended Complaint is hereby dismissed.
2. The agreement between the parties dated March 11, 1966 (Exhibit "A"; also marked as Exhibit "1" ) is hereby declared
extinguished.
3. To prevent unjust enrichment at the expense of another, the defendants-appellants are hereby ordered to reimburse to the
plaintiffs-appellees the sum of P500.00 paid by the latter to the Development Bank of the Philippines for the defendantsappellants' P2,600.00 loan account.
No pronouncement as to costs.
SO ORDERED. 2
The undisputed antecedent facts are as follows:
On 11 March 1966, herein petitioners and private respondents entered into an agreement (hereinafter referred to as Agreement)
under which the private respondents agreed to sell and convey to petitioners a portion consisting of six hundred (600) square
meters of a lot located in Matiao, Mati, Davao Oriental and covered by Transfer Certificate of Title No. T-3694 for a total
consideration of P1,800.00 of downpayment of P800.00 was paid upon execution of the Agreement. The balance of P1,000.00
was to be paid by petitioners on installment at the rate of P100.00 a month to the Development Bank of the Philippines (DBP) to
be applied to private respondents' loan accounts. Paragraphs 5, 6, 7 and 8 of the Agreement read as follows:
That the PARTY OF THE FIRST PART is very much in need of cash to pay the loan to the DEVELOPMENT BANK OF THE
PHILIPPINES herein abovementioned which is very much in arrears and the PARTY OF THE SECOND PART is agreeable to
advance the sum of EIGHT HUNDRED (P800.00) PESOS as partial payment of the said loan to the Development Bank of the
Philippines provided that the PARTY OF THE FIRST PARTY (sic) shall sell, transfer, cede and convey absolutely to the party of
the SECOND PART an area of SIX HUNDRED (600) SQUARE METERS with a frontage of twenty (20) METERS along the
present national highway, at the corner of the aforementioned land bordering a proposed five-meter subdivision road adjacent to
the property of the PARTY OF THE SECOND PART;
That for and in consideration of the foregoing premises and of the sum of EIGHT HUNDRED (800.00) PESOS which the PARTY
OF THE FIRST PARTY (sic) hereby acknowledges to have received from the PARTY OF THE SECOND PART, THE PARTY OF
THE FIRST PART hereby agrees, promises and binds himself to sell, cede, transfer, and convey absolutely to the PARTY OF THE
SECOND PART SIX HUNDRED (600) SQUARE METERS portion of the property covered by TRANSFER CERTIFICATE OF
TITLE NO. T-3694 together with all the improvements thereon, which portion is situated along the national highway and shown as
the shaded area in the sketch at the back hereof; the total consideration of the sale of the said SIX HUNDRED (600) SQUARE
METERS shall be ONE THOUSAND EIGHT HUNDRED PESOS (P1,800.00), including the amount of EIGHT HUNDRED PESOS
(P800.00) advanced by the PARTY OF THE SECOND PART upon the execution of this document;
That the unpaid balance of the total consideration of the sale amounting to ONE THOUSAND (P1,000.00) PESOS shall be paid
by the PARTY OF THE SECOND PART directly to the DEVELOPMENT BANK OF THE PHILIPPINES, DAVAO BRANCH, in ten
(10) equal monthly installments of ONE HUNDRED (P100.00) PESOS each not later than the 15th day following the end of each
month beginning May 10, 1966;
That the PARTY OF THE SECOND PART has the right and privilege by virtue of this (sic) presents to take possession of the area
of SIX HUNDRED (600) SQUARE METERS subject of this agreement and to appropriate for himself all the improvements existing
thereon effective from the date of execution of this agreement; 3
Paragraph 9 thereof reads:
That the PARTY OF THE FIRST PART agrees and binds himself to acknowledge receipt of every and all monthly payments
remitted to the DEVELOPMENT BANK OF THE PHILIPPINES by the PARTY OF THE SECOND PART and further agrees and
binds himself to execute the final deed of absolute sale of the SIX HUNDRED (600) SQUARE METERS herein above referred to
in favor of the PARTY OF THE SECOND PART as soon as the settlement or partition of the estate of the deceased NARCISA R.
KAPARAZ shall have been consummated and effected, but not later than March 31, 1967; 4
Upon the execution of the agreement, petitioners paid the downpayment of P800.00 and were placed in possession of the portion
described therein. As to the P1,000.00 which was to be paid directly to the DBP, petitioners claim that they had even made an
excess payment of P100.00.
In view of the refusal of private respondents to execute the deed of sale, petitioners filed against them a complaint for specific
performance with the then Court of First Instance (now Regional Trial Court) of Davao Oriental. The complaint was docketed as
Civil Case No. 586 and was amended on 23 January 1979. In their Answer filed on 28 June 1977, later amended on 19 December

1979 as a consequence of the filing of the amended complaint, private respondents alleged that the sale did not materialize
because of the failure of petitioners to fulfill their promise to make timely payments on the stipulated price to the DBP; as a result
of such failure, they (private respondents) failed to secure the release of the mortgage on the property. They then prayed for the
dismissal of the case and a declaration that the agreement is null and void.
After due trial, the court below rendered on 19 November 1981 a decision in favor of the petitioners, the dispositive portion of
which reads as follows:
FOR ALL THE FOREGOING, judgment is hereby rendered in favor of the plaintiffs and against the defendants
(1) Declaring the plaintiffs to be the owners of the property consisting of six hundred (600) square meters, more or less,
denominated as Lot H-12, Psd-11-000576, which was formerly a portion of the property covered by Transfer Certificate of Title No.
T-3694, and now covered by Transfer Certificate of Title No. T-5824 in the name of defendant Rogelio Kaparaz;
(2) Ordering defendant Rogelio Kaparaz to reconvey this property to the plaintiffs herein;
(3) Ordering defendants to pay plaintiffs reasonable attorney's fees in the amount of P3,000.00 and to pay the costs.
SO ORDERED. 5
The facts as found by the trial court are as follows:
xxx xxx xxx
The adduced evidence will show that the parties herein above executed a certain agreement (Exh. "A" for the plaintiffs; Exhibit "1"
for the defendants) dated March 11, 1966, the pertinent portions of which are hereunder quoted, to wit:
xxx xxx xxx
From the foregoing provisions of the said agreement, the defendants herein have bound themselves to sell and convey a portion
of the property covered by Transfer Certificate of Title No. T-3694, consisting of SIX HUNDRED (600) SQUARE METERS, to the
plaintiffs for a consideration of P1,800.00, P800.00 of which had been received by the defendants upon the execution of the
document and the remaining balance of P1,000.00 shall be paid by the plaintiffs directly to the Development Bank of the
Philippines in "ten (10) equal monthly installments of ONE HUNDRED (P100.00) PESOS EACH not later than the 15th day
following the end of each month beginning May 10, 1966". The defendants, on the other hand, have also bound themselves to
execute the final deed of absolute sale of the portion above-mentioned in favor of the plaintiffs "as soon as the settlement or
partition of the estate of the deceased NARCISA R. KAPARAZ shall have been consummated and effected, but not later than
March 31, 1967."
It appears that plaintiffs had paid defendant Domingo Kaparaz the amount of P400.00 (Exh. "B"), the P200.00 which was paid by
plaintiffs to the development Bank of the Philippines for the account of the late Domingo Kaparaz and the P200.00 was given to
said defendant. Plaintiff Oscar Jacinto made another payment to the Development Bank of the Philippines for the account of
Domingo and Narcisa Kaparaz covered by Official Receipt No. 1113990, dated November 29, 1966, in the amount of P200.00
(Exh. "F"). Another payment was again made to the Development Bank of the Philippines for the same account by plaintiff Oscar
Jacinto covered by Official Receipt No. 1334193, dated December 5, 1968, in the amount of P300.00 (Exh. "C") and another
payment also was made on December 9, 1968 in the amount of P200.00 covered by Official Receipt No. 1334196 (Exh. ''H''). All
of these payments are certified by the Development Bank of the Philippines (Exh. "E") to have been made by plaintiff Oscar
Jacinto and applied to the accounts of Domingo and Narcisa Kaparaz. For the subdivision survey of the lot of six (600) square
meters involved in this case, plaintiffs contributed the amount of P80.00 (Exh. "J") and another amount of P350.00 was paid also
to Engr. Ladera (Exh. "I") plaintiffs, all in all, aside from the payments that they made to the Surveyor, have paid the Development
Bank of the Philippines for the account of the late Domingo Kaparaz in the total amount of P700.00 which in already in excess of
the price consideration of P1,800.00 after defendants had received the amount of P1,200.00. Plaintiff Oscar Jacinto explained that
the payment was in excess of P100.00 because the balance of P600.00 which was originally intended to be paid for the surveyor
was instead paid by him to the bank plus P100.00 to cover the accumulated interests. Thus (sic), making the total payments to the
Development Bank of the Philippines in the amount of P700.00.
On the other (hand), defendant Rogelio Kaparaz testified that plaintiffs did not comply with the terms of the agreement (Exh. "A")
by having failed to pay the ten (10) equal monthly installments. For failure of plaintiffs to pay the monthly installments, as agreed
(sic) in the agreement (Exh. "A" ), he decided to pay the Development Bank of the Philippines of (sic) their accounts. The partial
payment was made on July 3, 1967 in the amount of P3,000.00 covered by Official Receipt No. 1160314 (Exh. "2") and another
payment for the balance was made on August 15, 1967 in the amount of 73,124.11 covered by Official Receipt No. 1160831 (Exh.
"4").
It is likewise admitted that the estate of the late Narcisa R. Kaparaz had already been settled and that six hundred (600) square
meters portion of the lot covered by Transfer Certificate of Title No. T-3694, or Lot No. H-12, Psd-11-000576, has already been
adjudicated to defendant Rogelio Kaparaz and is now registered in his name under Transfer Certificate of Title No. T-5824. 6
Private respondents appealed from said decision to the Court of Appeals which docketed the case as C.A.-G.R. CV No. 69357. In
their Brief, they contended that the trial court erred in: (a) finding that petitioners had fully paid the consideration for the property
subject of the agreement, (b) ruling that the delay in the payments to the DBP is only a slight breach of the agreement, (c) holding
private respondents' failure to protest petitioners' delay of payment amounted to implied waiver to rescind the agreement, (d)
declaring that laches did not operate against petitioners considering that the prescriptive period has not even expired, (e) not
holding that the parties are in pari delicto, and (f) ordering Rogelio Kaparaz to reconvey the property in question to petitioners.
As earlier adverted to, in its decision of 30 July 1987, the respondent Court of Appeals reversed the decision of the trial court. The
respondent Court was of the opinion that: (a) The petitioners had not fully discharged their obligation under the agreement
considering that their last payments to DBP of P300.00 7 and P200.00 8 were "several months delayed beyond the date/s agreed
upon by the parties," and that the agricultural loan to which the amortizations of the unpaid balance of P1,000.00 of the purchase
price were to be applied had in fact been fully settled by the private respondents. The application of these payments by the DBP to
another account of the private respondents was of no moment because the agreement of the parties specifically referred to the
agricultural loan. (b) No evidence supports the .conclusion of the trial court that private respondents failed to protest the delay in

the payments. On the contrary, the evidence discloses that private respondents demanded from the petitioners the balance of the
obligation after the latter had defaulted; having received no response, private respondents themselves paid .the agricultural loan.
(c) The delay in the payments was not a slight breach. The dates of the payments were so essential that they were specifically
stipulated upon by the parties. The primary importance of timely payments sprang from the nature of the subject bank account
consisting of a loan secured by a real estate mortgage which demanded up-to-date amortization to prevent foreclosure. (d) While
the trial court was correct in holding that both parties defaulted in the performance of their respective obligations, petitioners were
the first to incur in delay. There is, therefore, greater justification to decree rescission. Moreover, even granting that there was no
evidence as to who violated the agreement first, then the contract is deemed extinguished pursuant to the second sentence of
Article 1192 of the Civil Code. This Article provides that:
In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the
courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each
shall bear his own damage.
Unable to accept the above verdict, petitioner commenced this petition wherein they allege that respondent Court erred in not
finding that: (a) petitioners had fully paid the consideration for the 600 square meters of Lot H; (b) private respondents' failure to
protest the delay of payments can be considered as estoppel on their part and an implied waiver of their right to rescind the sale;
(c) assuming that the last two payments to the DBP were not valid as they were applied to another account, there was at least
substantial performance by the petitioners of their obligation; (d) the breach on the part of petitioners was only slight or casual and
would not warrant rescission of the sale; (e) under the circumstances, it was necessary for the respondents to make a notarial
demand or obtain prior judicial approval to effect rescission of the sale; and finally, (e) the agreement was extinguished.
After the filing of the Comments by private respondents, the reply thereto by petitioners and the rejoinder to the latter by private
respondents, the Court gave due course to the petition and required the parties to submit simultaneously their respective
Memoranda, 9 which they subsequently complied with. 10
The petition is impressed with merit.
Vital to the resolution of the controversy is the determination of the true nature of the questioned agreement. Is it a contract of sale
or a contract to sell? The two are not, of course, the same. In the latter case, ownership is retained by the seller and is not to pass
until full payment of the price. Such payment is a positive suspensive condition the failure of which is not a broach, casual or
serious, but simply an event that prevents the obligation of the vendor to convey title from acquiring binding force. In such a
situation, to argue that there was only a casual breach is to proceed from the assumption that the contract is one of absolute sale,
where non-payment is a resolutory question. 11 Otherwise stated, as capsulized in Luzon Brokerage Co., Inc. vs. Maritime
Building Co., Inc., 12 "there can be no rescission or resolution of an obligation as yet non-existent, because the suspensive
condition did not happen." Expanding on this point, this Court, in said case, made the following disquisitions:
. . . The upshot of all these stipulations is that in seeking the ouster of Maritime for failure to pay the price as agreed upon, Myers
was not rescinding (or more properly, resolving) the contract, but precisely enforcing it according to its express terms. In its suit
Myers was not seeking restitution to it of the ownership of the thing sold (since it was never disposed of), such restoration being
the logical consequence of the fulfillment of a resolutory condition, express or implied (article 1190); neither was it seeking a
declaration that its obligation to sell was extinguished. What it sought was a judicial declaration that because the suspensive
condition (full and punctual payment) had not been fulfilled, its obligation to sell to Maritime never arose or never became effective
and, therefore, it (Myers) was entitled to repossess the property object of the contract, possession being a mere incident to its
right of ownership. It is elementary that, as stated by Castan,
b) Si la condicion suspensive Ilega a faltar, la obligacion se tiene por no existente, y el acreedor pierde todo derecho, incluso el de
utilizar las medidas conservativas. (3 Catan Derecho Civil, 7a Ed., p. 107). (Also Puig Pea, Der. Civ., T. IV (1), p. 113).
On the other hand, since in a contract of sale, the non-payment of the price is a resolutory condition, 13 the remedy of the seller
under Article 1191 of the Civil Code is to exact fulfillment or to rescind the contract. In respect, however, to the sale of immovable
property, this Article must be read together with Article 1592 of the same Code:
Art. 1592. In the sale of immovable property, even though it 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 a notarial act. After the demand,
the court may not grant him a new term.
This Article applies to instances where no stipulation for automatic rescission is made because it says "even though". 14
The agreement in the instant case has all the earmarks of a contract of sale. The possession of the portion sold was immediately
delivered to the petitioners. They were granted the right to enjoy all the improvements therein effective from the date of the
execution of the agreement. Private respondents unqualifiedly bound themselves to execute the final deed of sale "as soon as the
settlement or partition of the estate of the deceased Narcisa R. Kaparaz shall have been consummated and effected, but not later
than March 31, 1967" and only upon full payment of the unpaid portion of the purchase price. The private respondents did not
reserve unto themselves the ownership of the property until full payment of the unpaid balance of P1,000.00. Finally, there is no
stipulation giving the private respondents the right to unilaterally rescind the contract the moment the vendee fails to pay within a
fixed period. In reality, the agreement was an absolute sale which allowed the petitioners to pay the remaining balance of the
purchase price in installment. We agree with the submission of
petitioners 15 that Dignos vs. Court of Appeals 16 applies in this case. In said case, this Court stated:
Thus, it has been held 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).
As stated earlier, in a contract of sale, the remedy of an unpaid seller is either specific performance or rescission. The latter, with
respect to the sale of immovables, is specifically governed by Article 1592 of the Civil Code. 17 In the case at bar, there was non-

compliance with the requirements prescribed in these provisions. It is not controverted that private respondents had neither filed
an action for specific performance nor demanded the rescission of the agreement either judicially or by a notarial act before the
filing of the complaint in Civil Case No. 586. It is only in their Answer that they belatedly raised the defense of resolution of the
contract pursuant to Article 1191 by reason of petitioners' breach of their obligation.
Even if the general law on resolution, Article 1191 of the Civil Code, is to be applied, Our decision would still be for the petitioners.
The third paragraph of this Article reads:
xxx xxx xxx
The Court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
It is not denied that petitioners made two (2) payments in the sums of P200.00 and P300.00 at a time when what remained
unsettled under the agreement was only P400.00. There was then an excess payment of P100.00. These payments were made to
the DBP which applied them to an outstanding account of the private respondents. Private respondents neither complained of the
delay in these payments nor rejected their application to their account. They were, undoubtedly, benefited by the application
because it either satisfied their account or correspondingly reduced it. The claim that the account to which it was applied was not
the account stipulated in the agreement is without merit. In the first place, the agreement fails to disclose an express agreement
that the monthly amortizations on the P1,000.00 unpaid balance of the purchase price to be made to the DBP should be applied
exclusively to the agricultural loan indicated in the exordium of the agreement. The loan was mentioned only to lay the basis for
private respondents' need for the downpayment. In the second place, to allow private respondents to reject the payment of
P400.00, plus the excess of P100.00 after they benefited therefrom, would be unjust.
Then too, at no time before the filing of their Answer did private respondents declare their intention to rescind the agreement, or if
they did, communicate such intention to the petitioners. It was necessary for private respondents to have done so. As this Court
held in University of the Philippines vs. De los Angeles: 18
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 may 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. But the law definitely does not require that
the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the others' breach will have to passively sit and watch its damages accumulate
during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should
exercise due diligence to minimize its own damages (Civil Code, Article 2203).
Finally, the delay incurred by petitioners was but a casual or slight breach of the agreement, which did not defeat the object of the
parties in entering into the agreement. A mere casual breach does not justify rescission. 19 The prompt payment of the monthly
amortizations of the unpaid balance of P1,000.00 was not a condition precedent to the execution of the final deed of sale.
Besides, petitioners had already paid P1,400.00 of the total consideration of P1,800.00, or exactly 77.77% of the purchase price
within the period stipulated. Moreover, they had in fact overpaid the private respondents by P100.00.
Accordingly, We rule that rescission of the agreement was not available to private respondents.
We further rule that the respondent Court erred in declaring the agreement extinguished pursuant to the second sentence of
Article 1192 of the Civil Code. Having concluded, although erroneously, that petitioners were the first to breach the agreement, it
should have applied the first sentence thereof by equitably tempering petitioners' liability. The second sentence applies only to
cases where it cannot be determined which of the parties first violated the contract.
The foregoing disquisitions render unnecessary any discussion on the other issues raised by petitioners.
WHEREFORE, the petition is GRANTED. The challenged decision of the Court of Appeals is REVERSED and the judgment of the
lower court is hereby REINSTATED and AFFIRMED. Costs against private respondents.
SO ORDERED.

G.R. No. L-16570

March 9, 1922

SMITH, BELL & CO., LTD., plaintiff-appellant,

vs.
VICENTE SOTELO MATTI, defendant-appellant.
Ross and Lawrence and Ewald E. Selph for plaintiff-appellant.Ramon Sotelo for defendant-appellant.
ROMUALDEZ, J.:
In August, 1918, the plaintiff corporation and the defendant, Mr. Vicente Sotelo, entered into contracts whereby the former
obligated itself to sell, and the latter to purchase from it, two steel tanks, for the total price of twenty-one thousand pesos
(P21,000), the same to be shipped from New York and delivered at Manila "within three or four months;" two expellers at the price
of twenty five thousand pesos (P25,000) each, which were to be shipped from San Francisco in the month of September, 1918, or
as soon as possible; and two electric motors at the price of two thousand pesos (P2,000) each, as to the delivery of which
stipulation was made, couched in these words: "Approximate delivery within ninety days. This is not guaranteed."

The tanks arrived at Manila on the 27th of April, 1919: the expellers on the 26th of October, 1918; and the motors on the 27th of
February, 1919.
The plaintiff corporation notified the defendant, Mr. Sotelo, of the arrival of these goods, but Mr. Sotelo refused to receive them
and to pay the prices stipulated.
The plaintiff brought suit against the defendant, based on four separate causes of action, alleging, among other facts, that it
immediately notified the defendant of the arrival of the goods, and asked instructions from him as to the delivery thereof, and that
the defendant refused to receive any of them and to pay their price. The plaintiff, further, alleged that the expellers and the motors
were in good condition. (Amended complaint, pages 16-30, Bill of Exceptions.)
In their answer, the defendant, Mr. Sotelo, and the intervenor, the Manila Oil Refining and By-Products Co., Inc., denied the
plaintiff's allegations as to the shipment of these goods and their arrival at Manila, the notification to the defendant, Mr. Sotelo, the
latter's refusal to receive them and pay their price, and the good condition of the expellers and the motors, alleging as special
defense that Mr. Sotelo had made the contracts in question as manager of the intervenor, the Manila Oil Refining and By-Products
Co., Inc which fact was known to the plaintiff, and that "it was only in May, 1919, that it notified the intervenor that said tanks had
arrived, the motors and the expellers having arrived incomplete and long after the date stipulated." As a counterclaim or set-off,
they also allege that, as a consequence of the plaintiff's delay in making delivery of the goods, which the intervenor intended to
use in the manufacture of cocoanut oil, the intervenor suffered damages in the sums of one hundred sixteen thousand seven
hundred eighty-three pesos and ninety-one centavos (P116,783.91) for the nondelivery of the tanks, and twenty-one thousand two
hundred and fifty pesos (P21,250) on account of the expellers and the motors not having arrived in due time.
The case having been tried, the court below absolved the defendants from the complaint insofar as the tanks and the electric
motors were concerned, but rendered judgment against them, ordering them to "receive the aforesaid expellers and pay the
plaintiff the sum of fifty thousand pesos (P50,00), the price of the said goods, with legal interest thereon from July 26, 1919, and
costs."
Both parties appeal from this judgment, each assigning several errors in the findings of the lower court.
The principal point at issue in this case is whether or not, under the contracts entered into and the circumstances established in
the record, the plaintiff has fulfilled, in due time, its obligation to bring the goods in question to Manila. If it has, then it is entitled to
the relief prayed for; otherwise, it must be held guilty of delay and liable for the consequences thereof.
To solve this question, it is necessary to determine what period was fixed for the delivery of the goods.
As regards the tanks, the contracts A and B (pages 61 and 62 of the record) are similar, and in both of them we find this clause:
To be delivered within 3 or 4 months The promise or indication of shipment carries with it absolutely no obligation on our part
Government regulations, railroad embargoes, lack of vessel space, the exigencies of the requirement of the United States
Government, or a number of causes may act to entirely vitiate the indication of shipment as stated. In other words, the order is
accepted on the basis of shipment at Mill's convenience, time of shipment being merely an indication of what we hope to
accomplish.
In the contract Exhibit C (page 63 of the record), with reference to the expellers, the following stipulation appears:
The following articles, hereinbelow more particularly described, to be shipped at San Francisco within the month of September /
18, or as soon as possible. Two Anderson oil expellers . . . .
And in the contract relative to the motors (Exhibit D, page 64, rec.) the following appears:
Approximate delivery within ninety days. This is not guaranteed. This sale is subject to our being able to obtain Priority
Certificate, subject to the United States Government requirements and also subject to confirmation of manufactures.
In all these contracts, there is a final clause as follows:
The sellers are not responsible for delays caused by fires, riots on land or on the sea, strikes or other causes known as "Force
Majeure" entirely beyond the control of the sellers or their representatives.
Under these stipulations, it cannot be said that any definite date was fixed for the delivery of the goods. As to the tanks, the
agreement was that the delivery was to be made "within 3 or 4 months," but that period was subject to the contingencies referred
to in a subsequent clause. With regard to the expellers, the contract says "within the month of September, 1918," but to this is
added "or as soon as possible." And with reference to the motors, the contract contains this expression, "Approximate delivery
within ninety days," but right after this, it is noted that "this is not guaranteed."
The oral evidence falls short of fixing such period.
From the record it appears that these contracts were executed at the time of the world war when there existed rigid restrictions on
the export from the United States of articles like the machinery in question, and maritime, as well as railroad, transportation was
difficult, which fact was known to the parties; hence clauses were inserted in the contracts, regarding "Government regulations,
railroad embargoes, lack of vessel space, the exigencies of the requirements of the United States Government," in connection
with the tanks and "Priority Certificate, subject to the United State Government requirements," with respect to the motors. At the
time of the execution of the contracts, the parties were not unmindful of the contingency of the United States Government not
allowing the export of the goods, nor of the fact that the other foreseen circumstances therein stated might prevent it.
Considering these contracts in the light of the civil law, we cannot but conclude that the term which the parties attempted to fix is
so uncertain that one cannot tell just whether, as a matter of fact, those articles could be brought to Manila or not. If that is the
case, as we think it is, the obligations must be regarded as conditional.
Obligations for the performance of which a day certain has been fixed shall be demandable only when the day arrives.
A day certain is understood to be one which must necessarily arrive, even though its date be unknown.
If the uncertainty should consist in the arrival or non-arrival of the day, the obligation is conditional and shall be governed by the

rules of the next preceding section. (referring to pure and conditional obligations). (Art. 1125, Civ. Code.)
And as the export of the machinery in question was, as stated in the contract, contingent upon the sellers obtaining certificate of
priority and permission of the United States Government, subject to the rules and regulations, as well as to railroad embargoes,
then the delivery was subject to a condition the fulfillment of which depended not only upon the effort of the herein plaintiff, but
upon the will of third persons who could in no way be compelled to fulfill the condition. In cases like this, which are not expressly
provided for, but impliedly covered, by the Civil Code, the obligor will be deemed to have sufficiently performed his part of the
obligation, if he has done all that was in his power, even if the condition has not been fulfilled in reality.
In such cases, the decisions prior to the Civil Code have held that the obligee having done all that was in his power, was entitled
to enforce performance of the obligation. This performance, which is fictitious not real is not expressly authorized by the
Code, which limits itself only to declare valid those conditions and the obligation thereby affected; but it is neither disallowed, and
the Code being thus silent, the old view can be maintained as a doctrine. (Manresa's commentaries on the Civil Code [1907], vol.
8, page 132.)
The decisions referred to by Mr. Manresa are those rendered by the supreme court of Spain on November 19, 1896, and February
23, 1871.
In the former it is held:
First. That when the fulfillment of the conditions does not depend on the will of the obligor, but on that of a third person who can in
no way be compelled to carry it out, and it is found by the lower court that the obligor has done all in his power to comply with the
obligation, the judgment of the said court, ordering the other party to comply with his part of the contract, is not contrary to the law
of contracts, or to Law 1, Tit. I, Book 10, of the "Novsima Recopilacin," or Law 12, Tit. 11, of Partida 5, when in the said finding of
the lower court, no law or precedent is alleged to have been violated. (Jurisprudencia Civil published by the directors of the
Revista General de Legislacion y Jurisprudencia [1866], vol. 14, page 656.)
In the second decision, the following doctrine is laid down:
Second. That when the fulfillment of the condition does not depend on the will of the obligor, but on that of a third person, who can
in no way be compelled to carry it out, the obligor's part of the contract is complied withalf Belisario not having exercised his right
of repurchase reserved in the sale of Basilio Borja mentioned in paragraph (13) hereof, the affidavit of Basilio Borja for the
consolidacion de dominio was presented for record in the registry of deeds and recorded in the registry on the same date.
(32) The Maximo Belisario left a widow, the opponent Adelina Ferrer and three minor children, Vitaliana, Eugenio, and Aureno
Belisario as his only heirs.
(33) That in the execution and sales thereunder, in which C. H. McClure appears as the judgment creditor, he was represented by
the opponent Peter W. Addison, who prepared and had charge of publication of the notices of the various sales and that in none of
the sales was the notice published more than twice in a newspaper.
The claims of the opponent-appellant Addison have been very fully and ably argued by his counsel but may, we think, be disposed
of in comparatively few words. As will be seen from the foregoing statement of facts, he rest his title (1) on the sales under the
executions issued in cases Nos. 435, 450, 454, and 499 of the court of the justice of the peace of Dagupan with the priority of
inscription of the last two sales in the registry of deeds, and (2) on a purchase from the Director of Lands after the land in question
had been forfeited to the Government for non-payment of taxes under Act No. 1791.
The sheriff's sales under the execution mentioned are fatally defective for what of sufficient publication of the notice of sale.
Section 454 of the Code of civil Procedure reads in part as follows:
SEC. 454. Before the sale of property on execution, notice thereof must be given, as follows:
1. In case of perishable property, by posing written notice of the time and place of the sale in three public places of the
municipality or city where the sale is to take place, for such time as may be reasonable, considering the character and condition of
the property;
2. *

3. In cases of real property, by posting a similar notice particularly describing the property, for twenty days in three public places of
the municipality or city where the property is situated, and also where the property is to be sold, and publishing a copy thereof
once a week, for the same period, in some newspaper published or having general circulation in the province, if there be one. If
there are newspaper published in the province in both the Spanish and English languages, then a like publication for a like period
shall be made in one newspaper published in the Spanish language, and in one published in the English language: Provided,
however, That such publication in a newspaper will not be required when the assessed valuation of the property does not exceed
four hundred pesos;
4. *

Examining the record, we find that in cases Nos. 435 and 450 the sales took place on October 14, 1916; the notice first published
gave the date of the sale as October 15th, but upon discovering that October 15th was a Sunday, the date was changed to
October 14th. The correct notice was published twice in a local newspaper, the first publication was made on October 7th and the
second and last on October 14th, the date of the sale itself. The newspaper is a weekly periodical published every Saturday
afternoon.
In case No. 454 there were only two publications of the notice in a newspaper, the first publication being made only fourteen days
before the date of the sale. In case No. 499, there were also only two publications, the first of which was made thirteen days
before the sale. In the last case the sale was advertised for the hours of from 8:30 in the morning until 4:30 in the afternoon, in
violation of section 457 of the Code of Civil Procedure. In cases Nos. 435 and 450 the hours advertised were from 9:00 in the
morning until 4.30 in the afternoon. In all of the cases the notices of the sale were prepared by the judgment creditor or his agent,
who also took charged of the publication of such notices.
In the case of Campomanes vs. Bartolome and Germann & Co. (38 Phil., 808), this court held that if a sheriff sells without the

notice prescribe by the Code of Civil Procedure induced thereto by the judgment creditor and the purchaser at the sale is the
judgment creditor, the sale is absolutely void and not title passes. This must now be regarded as the settled doctrine in this
jurisdiction whatever the rule may be elsewhere.
It appears affirmatively from the evidence in the present case that there is a newspaper published in the province where the sale
in question took place and that the assessed valuation of the property disposed of at each sale exceeded P400. Comparing the
requirements of section 454, supra, with what was actually done, it is self-evident that notices of the sales mentioned were not
given as prescribed by the statute and taking into consideration that in connection with these sales the appellant Addison was
either the judgment creditor or else occupied a position analogous to that of a judgment creditor, the sales must be held invalid.
The conveyance or reconveyance of the land from the Director of Lands is equally invalid. The provisions of Act No. 1791
pertinent to the purchase or repurchase of land confiscated for non-payment of taxes are found in section 19 of the Act and read:
. . . In case such redemption be not made within the time above specified the Government of the Philippine Islands shall have an
absolute, indefeasible title to said real property. Upon the expiration of the said ninety days, if redemption be not made, the
provincial treasurer shall immediately notify the Director of Lands of the forfeiture and furnish him with a description of the
property, and said Director of Lands shall have full control and custody thereof to lease or sell the same or any portion thereof in
the same manner as other public lands are leased or sold: Provided, That the original owner, or his legal representative, shall
have the right to repurchase the entire amount of his said real property, at any time before a sale or contract of sale has been
made by the director of Lands to a third party, by paying therefore the whole sum due thereon at the time of ejectment together
with a penalty of ten per centum . . . .
The appellant Addison repurchased under the final proviso of the section quoted and was allowed to do so as the successor in
interest of the original owner under the execution sale above discussed. As we have seen, he acquired no rights under these
sales, was therefore not the successor of the original owner and could only have obtained a valid conveyance of such titles as the
Government might have by following the procedure prescribed by the Public Land Act for the sale of public lands. he is entitled to
reimbursement for the money paid for the redemption of the land, with interest, but has acquired no title through the redemption.
The question of the priority of the record of the sheriff's sales over that of the sale from Belisario to Borja is extensively argued in
the briefs, but from our point of view is of no importance; void sheriff's or execution sales cannot be validated through inscription in
the Mortgage Law registry.
The opposition of Adelina Ferrer must also be overruled. She maintained that the land in question was community property of the
marriage of Eulalio Belisario and Paula Ira: that upon the death of Paula Ira inealed from is modified, and the defendant Mr.
Vicente Sotelo Matti, sentenced to accept and receive from the plaintiff the tanks, the expellers and the motors in question, and to
pay the plaintiff the sum of ninety-six thousand pesos (P96,000), with legal interest thereon from July 17, 1919, the date of the
filing of the complaint, until fully paid, and the costs of both instances. So ordered.

G.R. No. L-45656 May 5, 1989

PACIFIC BANKING CORPORATION and CHESTER G. BABST, petitioners,
vs.
THE COURT OF APPEALS, JOSEPH C. HART and ELEANOR HART, respondents.
Flores, Ocampo, Dizon & Domingo for petitioners.
Quasha, Asperilla, Ancheta, Pena, Marcos & Nolasco for private respondents.

GUTIERREZ, JR., J.:

This is a petition for review of the decision of the Court of Appeals in CA-G.R. Nos. 52573 and 52574 directing petitioners to pay to
respondent Hart ONE HUNDRED THOUSAND (P 100,000.00) PESOS with legal interest from February 19, 1958 until fully paid,
plus FIFTEEN THOUSAND (P 15,000.00) PESOS attorneys fees, but subject to the right of reimbursement of petitioner Pacific
Banking Corporation (PBC) from petitioner Babst, whatever amounts PBC should pay on account of the judgment.
Briefly, the facts of the case are as follows:
On April 15, 1955, herein private respondents Joseph and Eleanor Hart discovered an area consisting of 480 hectares of tidewater
land in Tambac Gulf of Lingayen which had great potential for the cultivation of fish and saltmaking. They organized Insular Farms
Inc., applied for and, after eleven months, obtained a lease from the Department of Agriculture for a period of 25 years, renewable
for another 25 years.
Subsequently Joseph Hart approached businessman John Clarkin, then President of Pepsi-Cola Bottling Co. in Manila, for
financial assistance.
On July 15, 1956, Joseph Hart and Clarkin signed a Memorandum of Agreement pursuant to which: a) of 1,000 shares outstanding, Clarkin was issued 500 shares in his and his wife's name, one share to J. Lapid, Clarkin's secretary, and nine shares in
the name of the Harts were indorsed in blank and held by Clarkin so that he had 510 shares as against the Harts' 490; b) Hart was
appointed President and General Manager as a result of which he resigned as Acting Manager of the First National City Bank at
the Port Area, giving up salary of P 1,125.00 a month and related fringe benefits.
Due to financial difficulties, Insular Farms Inc. borrowed P 250,000.00 from Pacific Banking Corporation sometime in July of 1956.
On July 31, 1956 Insular Farms Inc. executed a Promissory Note of P 250,000.00 to the bank payable in five equal annual
installments, the first installment payable on or before July 1957. Said note provided that upon default in the payment of any
installment when due, all other installments shall become due and payable.
This loan was effected and the money released without any security except for the Continuing Guaranty executed on July 18,

1956, of John Clarkin, who owned seven and half percent of the capital stock of the bank, and his wife Helen.
Unfortunately, the business floundered and while attempts were made to take in other partners, these proved unsuccessful.
Nevertheless, petitioner Pacific Banking Corporation and its then Executive Vice President, petitioner Chester Babst, did not
demand payment for the initial July 1957 installment nor of the entire obligation, but instead opted for more collateral in addition to
the guaranty of Clarkin.
As the business further deteriorated and the situation became desperate, Hart agreed to Clarkin's proposal that all Insular Farms
shares of stocks be pledged to petitioner bank in lieu of additional collateral and to insure an extension of the period to pay the
July 1957 installment. Said pledge was executed on February 19, 1958.
Less than a month later, on March 3,1958, Pacific Farms Inc, was organized to engage in the same business as Insular Farms
Inc. The next day, or on March 4, 1958, Pacific Banking Corporation, through petitioner Chester Babst wrote Insular Farms Inc.
giving the latter 48 hours to pay its entire obligation.
On March 7, 1958, Hart received notice that the pledged shares of stocks of Insular Farms Inc. would be sold at public auction on
March 10, 1958 at 8:00 A.M. to satisfy Insular Farms' obligation.
On March 8, 1958, the private respondents commenced the case below by filing a complaint for reconveyance and damages with
prayer for writ of preliminary injunction before the Court of First Instance of Manila docketed as Civil Case No. 35524. On the
same date the Court granted the prayer for a writ of pre- preliminary injunction.
However, on March 19, 1958, the trial court, acting on the urgent petitions for dissolution of preliminary injunction filed by
petitioners PBC and Babst on March 11 and March 14,1958, respectively, lifted the writ of preliminary injunction.
The next day, or on March 20, 1958 respondents Hart received a notice from PBC signed by Babst that the shares of stocks of
Insular Farms will be sold at public auction on March 21,1958 at 8:00 A.M.
In the morning of March 21, 1958, PBC through its lawyer notary public sold the 1,000 shares of stocks of Insular Farms to Pacific
Farms for P 285,126.99. The latter then sold its shares of stocks to its own stockholders, who constituted themselves as
stockholders of Insular Farms and then resold back to Pacific Farms Inc. all of Insular Farms assets except for a certificate of
public convenience to operate an iceplant.
On September 28, 1959 Joseph Hart filed another case for I recovery of sum of money comprising his investments and earnings
against Insular Farms, Inc. before the Court of First Instance of Manila, docketed as Civil Case No. 41557.
The two cases below having been heard jointly, the court of origin through then Judge Serafin R. Cuevas rendered a decision on
August 3, 1972, the pertinent portions of which are as follows:
xxx xxx xxx
It is plaintiffs' contention that the sale by Pacific Banking Corporation of the shares of stock of plaintiffs to the Pacific Farms on
March 21, 1958 is void on the ground that when said shares were pledged to the bank it was done to cause an indefinite
extension of time to pay their obligation under the promissory note marked Exh. E. Plaintiffs observed that under said promissory
note marked Exh. E, no demand was made whatsoever by the bank for its payment. The bank merely asked for more collateral in
addition to Clarkin's continuing guarantee In other words, it is the view of the plaintiffs that the pledge of said shares of stock
upersed the terms and conditions of the promissory note marked Exh. E and that the same was only to insure an indefinite
extension on the part of the plaintiffs to pay their obligation under said promissory note.
Plaintiffs accuse defendants of conspiracy or a unity of purpose in divesting said plaintiffs of their shares of stock and relieving
Clarkin of his guarantee and obligation to Hart as well as to enable the bank to recover its loan with a big profit and Pacific Farms,
of which Papa was President, to take over Insular Farms.
Plaintiffs contend that the purchase by Pacific Farms of the shares of stock of Insular Farms is void, the former having been
organized like the latter for the purpose of engaging in agriculture (Section 190-1/7 of the Corporation Law); and that the transfer
of all the substantial assets of Insular Farms to Pacific Farms for the nominal cost of P10,000.00 is in violation of the Bulk Sales
Law, plaintiffs and other creditors of Insular Farms not having been notified of said sale and that said sale was not registered in
accordance with said law (Bulk Sales Law) which in effect is in fraud of creditors.
As a result of defendant's acts, plaintiffs contend that they lost their 490 shares, the return of their 10 shares from Clarkin and their
exclusive and irrevocable right to preference in the purchase of Clarkin's 50% in Insular Farms not to mention the mental anguish,
pain, suffering and embarrassment on their part for which they are entitled to at least P 100,000.00 moral damages. They also
claim that they have been deprived of their expected profits to be realized from the operations and development of Insular Farms;
the sum of P 112,500.00 representing salary and pecuniary benefits of Joseph C. Hart from the First National City Bank of New
York when he was required to resign by Clarkin, and finally, Joseph C. Hart and his wife being the beneficial owners of 499 shares
in Insular Farms that were pledged to the Pacific Banking Corporation which was sold for P 142,176.37 to satisfy the obligation of
Insular Farms, the latter became indebted to plaintiffs for said amount with interest from March 21, 1958, the date of the auction
sale.
On the other hand, defendant Pacific Banking Corporation contends that it merely exercised its legal right under the law when it
caused the foreclosure of the pledged (sic) executed by plaintiffs, together with defendant John P. Clarkin to secure a loan of P
250,000.00, said loan having become overdue. True the payment of a note my be extended by an oral agreement, but that
agreement to extend the time of payment in order to be valid must be for a definite time (Philippine Engineering Co. vs. Green, 48
Phil. 466,468). Such being the case, it is the opinion of the Court that plaintiffs contention that there was an indefinite extension of
time with respect to the payment of the loan in question appears to be untenable. It cannot be admitted that the terms and
conditions of the pledged (sic) superseded the terms and conditions of the promissory note.
With respect to the charge of conspiracy or unity of purpose on the part of all defendants to divest plaintiffs of the latter's shares of
stock, relieving Clarkin of his guaranty and obligation to Hart, to enable the bank to recover its loan and to enable Pacific Farms to
take over Insular Farms, suffice it to state that the charge of conspiracy has not been sufficiently established.
Considering plaintiffs' contention that the purchase by Pacific Farms of the shares of stock of Insular Farms and the transfer of all

of the substantial assets of Insular Farms to Pacific Farms are in violation of the Provisions of the Bulk Sales Law, the Court
cannot see its way in crediting plaintiffs' contention considering the prevailing jurisprudence on the mater (People vs. Wong Szu
Tung, 50 OG, pp. 48-57, 58-69, March 26,1954).
With respect, however, to the claim of plaintiff Joseph C. Hart for payment of salary as Director and General Manager of Insular
Farms for a period of almost one year at the rate of P 2,000.00 a month, the Court believes that said plaintiff is entitled to said
amount. On the basis of equity and there appearing sufficient proof that said plaintiff has served the corporation not only as
Director but as General Manager, the Court believes that he should be paid by the Insular Farms, Inc. the sum of P 25,333.30,
representing his salaries for the period March 1, 1957 to March 20,1958.
Again, with respect to the advances in the form of loans to the corporation made by plaintiff Joseph C. Hart, the Court is of the
opinion that he should be reimbursed and paid therefor, together with interest thereon from March 21, 1958, or the sum of P
86,366.91. This is so because said loans were ratified by the Board of Directors of Insular Farms, Inc. in a special meeting held on
July 22, 1957. There is no showing that the aforesaid special meeting was irregularly or improperly held.
The Court having maintained that the auction sale conducted by the Bank's Notary Public which resulted in the purchase by
Pacific Farms of the 1,000 shares of stock of Insular Farms, 490 of which were owned by plaintiffs, to be valid, the Court cannot
approve the claim of plaintiffs for the reconveyance to them of said 490 shares of stock of Insular Farms. If there is anybody to
answer for the pledging of said shares of stock to the bank, there is no one except the defendant John Clarkin who induced
plaintiff to do so. Again, it is noteworthy to note that Clarkin owned and controlled 501 shares of said outstanding shares of stock
and have not made any claim for the reconveyance of the same.
In view of the foregoing, judgment is hereby rendered in favor of plaintiffs and against defendant Insular Farms, Inc., sentencing
the latter to pay the former the sum of P 25,333.30, representing unpaid salaries to plaintiff Joseph C. Hart; the further sum of P
86,366.91 representing loans made by plaintiffs to Insular Farms, Inc. and attorney's fees equivalent to 10% of the amount due
plaintiffs.
With respect to the other claims of plaintiffs, the same are hereby denied in the same manner that all counter-claims filed against
said Plaintiff are dismissed. Likewise, Francisco T. Papa's cross-claim against defendant Pacific Farms, Inc. is, as it is hereby,
ordered dismissed for insufficiency of evidence. (pp. 462-467 of the Record on Appeal [p. 83, Rollo])
Dissatisfied with the foregoing decision, private respondents appealed the two consolidated cases to the Court of Appeals
contending that:
I
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFFS' CONTENTION TO THE EFFECT THAT THERE WAS AN
INDEFINITE EXTENSION OF TIME WITH RESPECT TO THE PAYMENT OF THE LOAN IN QUESTION "APPEARS TO BE
UNTENABLE
II
THE LOWER COURT ERRED IN HOLDING THAT THE SALE BY THE PACIFIC BANKING CORPORATION OF THE SHARES
OF STOCKS OF PLAINTIFFS WITH THE PACIFIC FARMS, INC. ON MARCH 21, 1958 IS VALID.
III
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFFS' CHARGE OF CONSPIRACY AGAINST THE DEFENDANTS
HAS NOT BEEN SUFFICIENTLY ESTABLISHED."
IV
THE LOWER COURT ERRED IN NOT HOLDING DEFENDANTS LIABLE FOR DAMAGES CAUSED TO THE PLAINTIFFS BY
THEIR INDIVIDUAL AND COLLECTIVE ACTS WHICH ARE CONTRARY TO THE PROVISIONS OF THE CIVIL CODE ON
HUMAN RELATIONS.
V
THE LOWER COURT WAS CORRECT IN HOLDING THAT "IF THERE IS ANYBODY TO ANSWER FOR THE PLEDGE OF SAID
SHARES OF STOCK TO THE BANK, THERE IS NO ONE EXCEPT DEFENDANT JOHN P. CLARKIN WHO INDUCED
PLAINTIFFS TO DO SO", BUT ERRED IN NOT FINDING DEFENDANT JOHN P. CLARKIN LIABLE AS PRAYED FOR IN
PLAINTIFFS' COMPLAINT." (pp. 9-10, Rollo)
On December 9, 1986, the Court of Appeals rendered its assailed decision, the dispositive portion of which follows:
IN VIEW WHEREOF, judgment modified, such that defendant Babst and defendant Pacific Banking are both condemned in their
primary capacity to pay unto Hart the sum of P l00,000.00 with legal interest from the date of the foreclosure sale on 19 February
1958 until fully paid, plus P 15,000.00 as attorney's fees, also to earn legal interest from the date of the filing of Civil Case Nos.
35524, until fully paid, plus the costs, but subject to reimbursement of Pacific Banking from Babst whatever Pacific Banking should
pay unto Hart on account of this judgment, the other defendants are absolved with no more pronouncement as to costs with
respect to them. (pp. 62-63, Rollo)
Hence this petition with petitioners contending that:
a. Respondent Court of Appeals committed a grave error in not applying in favor of the herein petitioner the clear unequivocal
ruling of this Honorable Court in the case of Philippine Engineering vs. Green, 48 Phil. 466, that "an agreement to extend the time
of payment in order to be valid must be for a definite time," which was relied upon by the trial court in overruling the private
respondents' claim that petitioners had granted them orally an indefinite extension of time to pay the loan.
b. Respondent Court of Appeals committed a grave error in finding that petitioner bank agreed to an indefinite extension of time to
pay the loan on the basis of the testimony of private respondent Hart contained in his deposition which was admitted in evidence
over the petitioners' objection; and that said finding is clearly violative of parol evidence rule.

c. Respondent Court of Appeals committed a grave error in ignoring the legal presumption of good faith established by Article 527
of the New Civil Code when it imputed bad faith to petitioner in foreclosing the pledge and in not considering the issue to have
been finally disposed of by the trial court in its resolution, dated March 19, 1958 dissolving the writ of preliminary injunction and
expressly allowing the foreclosure sale.
d. Respondent Court of Appeals committed a grave error in condemning petitioners to pay damages to private respondents
notwithstanding that petitioner bank merely exercised a right under the law in foreclosing the pledge.
e. Respondent Court of Appeals committed a grave error in holding petitioner Chester G. Babst personally liable to private
respondents under Articles 2180 and 2181 of the New civil Code.
f. Respondent Court of Appeals committed a grave error in sentencing petitioner Chester G. Babst to reimburse his co-petitioner
bank, whatever amounts the latter may be required to pay the private respondents on account of the judgment, notwithstanding
that said bank had not filed a cross-claim against him and there was absolutely no litigation between them. (pp. 14-15, Rollo)
We find for the respondents on the following grounds:
First, petitioners allege that the Court of Appeals erred in deviating from the principle and rule of stare decisis by not applying in
favor of petitioners the ruling in the case of Philippine Engineering v. Green (48 Phil. 466) that "an agreement to extend the time of
payment in order to be valid must be for a definite time" which was relied upon by the trial court in overruling the private
respondents' claim that the petitioners had granted them orally an indefinite extension of time to pay the loan.
A reading of the Philippine Engineering Co. case shows that the authority quoted from (i.e. 8 Corpus Juris 425-429) was not the
ground used by the Court in not giving credit to therein defendant's statement as to the purported agreement for an indefinite
extension of time for the payment of the note. The principle relied upon in that case was the dead man's statute. The Court stated
that the reason for not believing the purported agreement for extension of time to pay the note was that there was no sufficient
proof of the purported agreement because:
Here we have only the defendant's statement as to the purported agreement for an indefinite period of grace, with one now dead.
Such proof falls far short of satisfying the rules of evidence. (Phil. Engineering v. Green, 48 Phil. p. 468)
In the case at bar, the parties to the purported agreement, Hart and Babst, were still alive, and both testified in the trial court
regarding the purported extension. Their testimonies are in fact, quoted in the decision of the respondent Court of Appeals (pp. 4954, Rollo).
We also note, that the rule which states that there can be no valid extension of time by oral agreement unless the extension is for
a definite time, is not absolute but admits of qualifications and exceptions.
The general rule is that an agreement to extend the time of payment, in order to be valid, must be for a definite time, although it
seems that no precise date be fixed, it being sufficient that the time can be readily determined. (8 C.J. 425)
In case the period of extension is not precise, the provisions of Article 1197 of the Civil Code should apply. In this case, there was
an agreement to extend the payment of the loan, including the first installment thereon which was due on or before July 1957. As
the Court of Appeals stated:
...-and here, this court is rather well convinced that Hart had been given the assurance by the conduct of Babst, Executive Vice
President of Pacific Bank, that payment would not as yet be pressed, and under 1197 New Civil Code, the meaning must be that
there having been intended a period to pay modifying the fixed period in original promissory note, really, the cause of action of
Pacific Bank would have been to ask the Courts for the fixing of the term; (pp. 59-60, Rollo)
The pledge executed as collateral security on February 9, 1958 no longer contained the provision on an installment of P 50,000.00
due on or before July 1957. This can mean no other thing than that the time of payment of the said installment of P 50,000.00 was
extended.
It is settled that bills and notes may be varied by subsequent agreement. Thus, conditions may be introduced and arrangements
made changing the terms of payment (10 CJS 758). The agreement for extension of the parties is clearly indicated and may be
inferred from the acts and declarations of the parties, as testified to in court (pp. 49-52, Rollo).
The pledge constituted on February 19, 1958 on the shares of stocks of Insular Farms, Inc. was sufficient consideration for the
extension, considering that this pledge was the additional collateral required by Pacific Banking in addition to the continuing
guarantee of Clarkin.
Petitioners contend that the admission of Joseph Hart's testimony regarding the extension of time to pay, over the petitioners'
objections, was violative of the parol evidence rule. This argument is untenable in view of the fact that Hart's testimony regarding
the oral agreement for extension of time to pay was admitted in evidence without objection from petitioner Babst when the same
was first offered as evidence before the trial court. Without need therefore of a lengthy discussion of the background facts on this
issue, and even granting that said testimony violated the parol evidence rule, it was nevertheless properly admitted for failure of
petitioner to timely object to the same. Well settled is the rule that failure to object to parol evidence constitutes a waiver to the
admissibility of said parol evidence (see Talosig v. Vda. de Niebe, 43 SCRA 472).
Petitioners likewise argue that the Court of Appeals erred in ignoring the presumption of good faith provided in Art. 527 of the Civil
Code when it imputed bad faith to petitioners in foreclosing the pledge, They argue in support thereof that the extrajudicial
foreclosure was held only after it was sanctioned by the trial court; and that the main ground alleged by the private respondents
against the foreclosure was the alleged grant by Pacific Banking Corporation of an indefinite extension of time to pay the
obligation; that private respondents did not adduce any evidence to prove the grant of extension, for which reason the trial court
did not believe that there was such a grant, that in view thereof, the foreclosure which even the Court of Appeals considered as
valid, cannot be considered to have been done in bad faith.
The presumption of good faith of possession provided in Article 527, is only a presumption juris tantum Said presumption cannot
stand in the light of the evidence to the contrary in the record.
It was established that there was an agreement to extend indefinitely the payment of the installment of P50,000.00 in July 1957 as

provided in the promissory note. Consequently, Pacific Banking Corporation was precluded from enforcing the payment of the said
installment of July 1957, before the expiration of the indefinite period of extension, which period had to be fixed by the court as
provided in Art. 1197 of the Civil Code (10 CJS p. 7611, citing Drake vs. Pueblo Nat. Bank, 96 P. 999, 44 Colo. 49).
Even the pledge which modified the fixed period in the original promissory note, did not provide for dates of payment of
installments, nor of any fixed date of maturity of the whole amount of indebtedness. Accordingly, the date of maturity of the
indebtedness should be as may be determined by the proper court under Art. 1197 of the Civil Code. Hence, the disputed
foreclosure and the subsequent sale were premature.
The whole indebtedness was guaranteed by the continuing guaranty of Clarkin, who had a corresponding deposit with Pacific
Banking which guaranty and deposit, Babst and Charles Chua, president of Pacific Banking, had actual knowledge of.
The Court of Appeals noted that no demand for payment of the P50,000.00 was made right after it allegedly fell due. It was only
on March 4, 1958 or 13 days after the execution of the pledge instrument on February 19,1958 that PBC presented its demand for
payment to Insular Farms.
As found by the Court of Appeals, there was really no investigation of Insular Farms' ability to pay the loan after the pledge was
executed but before the demand for payment, considering that the latter was made barely two weeks after the execution of the
pledge.
The inconsistency of the petitioner's position vis-a-vis the evidence on record is apparent. According to Babst, the investigation
was made by Mr. Joseph Tupaz, who rendered his report (TSN, IX: 6-9, C Babst). The report, however, as found by the Court of
Appeals,, was dated August 28, 1957 way before the pledge was executed on February 19, 1958. Babst also Identified an
auditor's report by Sycip, Gorres and Velayo dated March 17, 1958. The first paragraph of the report states that the auditors went
to inspect Insular Farms pursuant to a request of Babst dated March 5, 1958 that is, as found by the Court of Appeals just one day
after Babst had through his letter of March 4,1958, threatened Insular Farms, Clarkin and Hart, with the remedies available to
Pacific Bank if the whole loan was not paid within 48 hours. This can also mean that the investigation by the auditing firm was a
well conceived subterfuge, when all the while, foreclosure was already intended against private respondents.
On account of the foregoing, the Court of Appeals concluded that the foreclosure was an act of bad faith:
5th-Foregoing cannot but convince this Court that the foreclosure was not an act of good faith on the part of the Pacific Banking
for it must be bound by the acts or representations, active or tacit of its agent or its Executive Vice-President Babst, ... (pp. 56-57,
Rollo)
Petitioners furthermore claim that the Court of Appeals erred in ordering them to pay damages to private respondents as they
were merely exercising a light under the law in foreclosing the pledge. They also argue that assuming that private respondent
suffered damages on account of the foreclosure, such damages would be aminimum absque injuria, the damage having been
caused by the lawful and proper exercise of the right to foreclosure, and an act of prudence on the part of Pacific Banking
Corporation to protect its own interests and those of its depositors.
In the light of the above discussion and our finding that the foreclosure sale was premature and done in bad faith, petitioners are
liable for damages arising from a quasi-delict. We see no compelling reason to set aside the findings of the respondent court on
this matter.
Finally, the petitioners claim that it was error for the respondent court to hold petitioner Chester G. Babst personally liable to
private respondents under Articles 2180 and 2181 of the Civil Code. Petitioners also contend that it was error to order Chester G.
Babst to reimburse Pacific Banking whatever Pacific Banking may be required to pay the private respondents, inasmuch as Pacific
Banking has not filed a cross claim against Chester G. Babst.
The Court of Appeals applied Article 2180 of the Civil Code, under which, "employers shall be liable for the damages caused by
their employees ... acting within the scope of their assigned tasks." Chester G. Babst, as admitted, was Executive Vice-President
of Pacific Banking Corporation and "acted only upon direction by the Board of Directors of the Pacific Banking Corporation." (p.
127, Rollo) The appellate court also applied Article 2181 of the same Code which provides that "whoever pays for the damages
caused by his dependents or employees may recover from the latter what he has paid or delivered in satisfaction of the claim."
(Art. 2181, Civil Code)
It must be noted, however, that as between Pacific Banking and Babst, the law merely gives the employer a right to
reimbursement from the employee for what is paid to the private respondent. Article 2181 does not make recovery from the
employee a mandatory requirement. A right to relief shall be recognized only when the party concerned asserts it through a proper
pleading filed in court. In this case, the employer, Pacific Banking Corporation did not manifest any claim against Babst by filing a
cross-claim before the trial court; thus, it cannot make its light automatically enforceable. Babst was made a party to the case
upon the complaint of the private respondents in his official capacity as Executive Vice President of the bank. In the absence of a
cross-claim against Babst, the court has no basis for enforcing a right against him to which his co-defendant may be entitled. We
leave the matter to the two petitioners' own internal arrangements or actions should the bank decide to charge its own officer.
WHEREFORE, the petition for review on certiorari is DISMISSED subject to a MODIFICATION with respect to the personal liability
of petitioner Chester G. Babst to Pacific Banking Corporation which is SET ASIDE.
SO ORDERED.

G.R. No. 146839

March 23, 2011

ROLANDO T. CATUNGAL, JOSE T. CATUNGAL, JR., CAROLYN T. CATUNGAL and ERLINDA CATUNGAL-WESSEL,
Petitioners,
vs.
ANGEL S. RODRIGUEZ, Respondent.

DECISION
LEONARDO-DE CASTRO, J.:
Before the Court is a Petition for Review on Certiorari, assailing the following issuances of the Court of Appeals in CA-G.R. CV
No. 40627 consolidated with CA-G.R. SP No. 27565: (a) the August 8, 2000 Decision,1 which affirmed the Decision2 dated May
30, 1992 of the Regional Trial Court (RTC), Branch 27 of Lapu-lapu City, Cebu in Civil Case No. 2365-L, and (b) the January 30,
2001 Resolution,3 denying herein petitioners motion for reconsideration of the August 8, 2000 Decision.
The relevant factual and procedural antecedents of this case are as follows:
This controversy arose from a Complaint for Damages and Injunction with Preliminary Injunction/Restraining Order4 filed on
December 10, 1990 by herein respondent Angel S. Rodriguez (Rodriguez), with the RTC, Branch 27, Lapu-lapu City, Cebu,
docketed as Civil Case No. 2365-L against the spouses Agapita and Jose Catungal (the spouses Catungal), the parents of
petitioners.
In the said Complaint, it was alleged that Agapita T. Catungal (Agapita) owned a parcel of land (Lot 10963) with an area of 65,246
square meters, covered by Original Certificate of Title (OCT) No. 1055 in her name situated in the Barrio of Talamban, Cebu City.
The said property was allegedly the exclusive paraphernal property of Agapita.
On April 23, 1990, Agapita, with the consent of her husband Jose, entered into a Contract to Sell6 with respondent Rodriguez.
Subsequently, the Contract to Sell was purportedly "upgraded" into a Conditional Deed of Sale7 dated July 26, 1990 between the
same parties. Both the Contract to Sell and the Conditional Deed of Sale were annotated on the title.
The provisions of the Conditional Deed of Sale pertinent to the present dispute are quoted below:
1. The VENDOR for and in consideration of the sum of TWENTY[-]FIVE MILLION PESOS (P25,000,000.00) payable as follows:
a. FIVE HUNDRED THOUSAND PESOS (P500,000.00) downpayment upon the signing of this agreement, receipt of which sum
is hereby acknowledged in full from the VENDEE.
b. The balance of TWENTY[-]FOUR MILLION FIVE HUNDRED THOUSAND PESOS (P24,500,000.00) shall be payable in five
separate checks, made to the order of JOSE Ch. CATUNGAL, the first check shall be for FOUR MILLION FIVE HUNDRED
THOUSAND PESOS (P4,500,000.00) and the remaining balance to be paid in four checks in the amounts of FIVE MILLION
PESOS (P5,000,000.00) each after the VENDEE have (sic) successfully negotiated, secured and provided a Road Right of Way
consisting of 12 meters in width cutting across Lot 10884 up to the national road, either by widening the existing Road Right of
Way or by securing a new Road Right of Way of 12 meters in width. If however said Road Right of Way could not be negotiated,
the VENDEE shall give notice to the VENDOR for them to reassess and solve the problem by taking other options and should the
situation ultimately prove futile, he shall take steps to rescind or cancel the herein Conditional Deed of Sale.
c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility of the VENDEE to secure and any or
all cost relative to the acquisition thereof shall be borne solely by the VENDEE. He shall, however, be accorded with enough time
necessary for the success of his endeavor, granting him a free hand in negotiating for the passage.
BY THESE PRESENTS, the VENDOR do hereby agree to sell by way of herein CONDITIONAL DEED OF SALE to VENDEE, his
heirs, successors and assigns, the real property described in the Original Certificate of Title No. 105 x x x.
xxxx
5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his option to rescind the herein
Conditional Deed of Sale, the VENDEE shall notify the VENDOR by way of a written notice relinquishing his rights over the
property. The VENDEE shall then be reimbursed by the VENDOR the sum of FIVE HUNDRED THOUSAND PESOS
(P500,000.00) representing the downpayment, interest free, payable but contingent upon the event that the VENDOR shall have
been able to sell the property to another party.8
In accordance with the Conditional Deed of Sale, Rodriguez purportedly secured the necessary surveys and plans and through his
efforts, the property was reclassified from agricultural land into residential land which he claimed substantially increased the
propertys value. He likewise alleged that he actively negotiated for the road right of way as stipulated in the contract.9
Rodriguez further claimed that on August 31, 1990 the spouses Catungal requested an advance of P5,000,000.00 on the
purchase price for personal reasons. Rodriquez allegedly refused on the ground that the amount was substantial and was not due
under the terms of their agreement. Shortly after his refusal to pay the advance, he purportedly learned that the Catungals were
offering the property for sale to third parties.10
Thereafter, Rodriguez received letters dated October 22, 1990,11 October 24, 199012 and October 29, 1990,13 all signed by Jose
Catungal who was a lawyer, essentially demanding that the former make up his mind about buying the land or exercising his
"option" to buy because the spouses Catungal allegedly received other offers and they needed money to pay for personal
obligations and for investing in other properties/business ventures. Should Rodriguez fail to exercise his option to buy the land, the
Catungals warned that they would consider the contract cancelled and that they were free to look for other buyers.
In a letter dated November 4, 1990,14 Rodriguez registered his objections to what he termed the Catungals unwarranted
demands in view of the terms of the Conditional Deed of Sale which allowed him sufficient time to negotiate a road right of way
and granted him, the vendee, the exclusive right to rescind the contract. Still, on November 15, 1990, Rodriguez purportedly
received a letter dated November 9, 199015 from Atty. Catungal, stating that the contract had been cancelled and terminated.
Contending that the Catungals unilateral rescission of the Conditional Deed of Sale was unjustified, arbitrary and unwarranted,
Rodriquez prayed in his Complaint, that:
1. Upon the filing of this complaint, a restraining order be issued enjoining defendants [the spouses Catungal], their employees,
agents, representatives or other persons acting in their behalf from offering the property subject of this case for sale to third
persons; from entertaining offers or proposals by third persons to purchase the said property; and, in general, from performing
acts in furtherance or implementation of defendants rescission of their Conditional Deed of Sale with plaintiff [Rodriguez].

2. After hearing, a writ of preliminary injunction be issued upon such reasonable bond as may be fixed by the court enjoining
defendants and other persons acting in their behalf from performing any of the acts mentioned in the next preceding paragraph.
3. After trial, a Decision be rendered:
a) Making the injunction permanent;
b) Condemning defendants to pay to plaintiff, jointly and solidarily:
Actual damages in the amount of P400,000.00 for their unlawful rescission of the Agreement and their performance of acts in
violation or disregard of the said Agreement;
Moral damages in the amount of P200,000.00;
Exemplary damages in the amount of P200,000.00; Expenses of litigation and attorneys fees in the amount of P100,000.00; and
Costs of suit.16
On December 12, 1990, the trial court issued a temporary restraining order and set the application for a writ of preliminary
injunction for hearing on December 21, 1990 with a directive to the spouses Catungal to show cause within five days from notice
why preliminary injunction should not be granted. The trial court likewise ordered that summons be served on them.17
Thereafter, the spouses Catungal filed their opposition18 to the issuance of a writ of preliminary injunction and later filed a motion
to dismiss19 on the ground of improper venue. According to the Catungals, the subject property was located in Cebu City and
thus, the complaint should have been filed in Cebu City, not Lapu-lapu City. Rodriguez opposed the motion to dismiss on the
ground that his action was a personal action as its subject was breach of a contract, the Conditional Deed of Sale, and not title to,
or possession of real property.20
In an Order dated January 17, 1991,21 the trial court denied the motion to dismiss and ruled that the complaint involved a
personal action, being merely for damages with a prayer for injunction.
Subsequently, on January 30, 1991, the trial court ordered the issuance of a writ of preliminary injunction upon posting by
Rodriguez of a bond in the amount of P100,000.00 to answer for damages that the defendants may sustain by reason of the
injunction.
On February 1, 1991, the spouses Catungal filed their Answer with Counterclaim22 alleging that they had the right to rescind the
contract in view of (1) Rodriguezs failure to negotiate the road right of way despite the lapse of several months since the signing
of the contract, and (2) his refusal to pay the additional amount of P5,000,000.00 asked by the Catungals, which to them indicated
his lack of funds to purchase the property. The Catungals likewise contended that Rodriguez did not have an exclusive right to
rescind the contract and that the contract, being reciprocal, meant both parties had the right to rescind.23 The spouses Catungal
further claimed that it was Rodriguez who was in breach of their agreement and guilty of bad faith which justified their rescission of
the contract.24 By way of counterclaim, the spouses Catungal prayed for actual and consequential damages in the form of
unearned interests from the balance (of the purchase price in the amount) of P24,500,000.00, moral and exemplary damages in
the amount of P2,000,000.00, attorneys fees in the amount of P200,000.00 and costs of suits and litigation expenses in the
amount of P10,000.00.25 The spouses Catungal prayed for the dismissal of the complaint and the grant of their counterclaim.
The Catungals amended their Answer twice,26 retaining their basic allegations but amplifying their charges of contractual breach
and bad faith on the part of Rodriguez and adding the argument that in view of Article 1191 of the Civil Code, the power to rescind
reciprocal obligations is granted by the law itself to both parties and does not need an express stipulation to grant the same to the
injured party. In the Second Amended Answer with Counterclaim, the spouses Catungal added a prayer for the trial court to order
the Register of Deeds to cancel the annotations of the two contracts at the back of their OCT.27
On October 24, 1991, Rodriguez filed an Amended Complaint,28 adding allegations to the effect that the Catungals were guilty of
several misrepresentations which purportedly induced Rodriguez to buy the property at the price of P25,000,000.00. Among
others, it was alleged that the spouses Catungal misrepresented that their Lot 10963 includes a flat portion of land which later
turned out to be a separate lot (Lot 10986) owned by Teodora Tudtud who sold the same to one Antonio Pablo. The Catungals
also allegedly misrepresented that the road right of way will only traverse two lots owned by Anatolia Tudtud and her daughter
Sally who were their relatives and who had already agreed to sell a portion of the said lots for the road right of way at a price of
P550.00 per square meter. However, because of the Catungals acts of offering the property to other buyers who offered to buy
the road lots for P2,500.00 per square meter, the adjacent lot owners were no longer willing to sell the road lots to Rodriguez at
P550.00 per square meter but were asking for a price of P3,500.00 per square meter. In other words, instead of assisting
Rodriguez in his efforts to negotiate the road right of way, the spouses Catungal allegedly intentionally and maliciously defeated
Rodriguezs negotiations for a road right of way in order to justify rescission of the said contract and enable them to offer the
property to other buyers.
Despite requesting the trial court for an extension of time to file an amended Answer,29 the Catungals did not file an amended
Answer and instead filed an Urgent Motion to Dismiss30 again invoking the ground of improper venue. In the meantime, for failure
to file an amended Answer within the period allowed, the trial court set the case for pre-trial on December 20, 1991.
During the pre-trial held on December 20, 1991, the trial court denied in open court the Catungals Urgent Motion to Dismiss for
violation of the rules and for being repetitious and having been previously denied.31 However, Atty. Catungal refused to enter into
pre-trial which prompted the trial court to declare the defendants in default and to set the presentation of the plaintiffs evidence on
February 14, 1992.32
On December 23, 1991, the Catungals filed a motion for reconsideration33 of the December 20, 1991 Order denying their Urgent
Motion to Dismiss but the trial court denied reconsideration in an Order dated February 3, 1992.34 Undeterred, the Catungals
subsequently filed a Motion to Lift and to Set Aside Order of Default35 but it was likewise denied for being in violation of the rules
and for being not meritorious.36 On February 28, 1992, the Catungals filed a Petition for Certiorari and Prohibition37 with the
Court of Appeals, questioning the denial of their motion to dismiss and the order of default. This was docketed as CA-G.R. SP No.
27565.
Meanwhile, Rodriguez proceeded to present his evidence before the trial court.

In a Decision dated May 30, 1992, the trial court ruled in favor of Rodriguez, finding that: (a) under the contract it was complainant
(Rodriguez) that had the option to rescind the sale; (b) Rodriguezs obligation to pay the balance of the purchase price arises only
upon successful negotiation of the road right of way; (c) he proved his diligent efforts to negotiate the road right of way; (d) the
spouses Catungal were guilty of misrepresentation which defeated Rodriguezs efforts to acquire the road right of way; and (e) the
Catungals rescission of the contract had no basis and was in bad faith. Thus, the trial court made the injunction permanent,
ordered the Catungals to reduce the purchase price by the amount of acquisition of Lot 10963 which they misrepresented was
part of the property sold but was in fact owned by a third party and ordered them to pay P100,000.00 as damages, P30,000.00 as
attorneys fees and costs.
The Catungals appealed the decision to the Court of Appeals, asserting the commission of the following errors by the trial court in
their appellants brief38 dated February 9, 1994:
I
THE COURT A QUO ERRED IN NOT DISMISSING OF (SIC) THE CASE ON THE GROUNDS OF IMPROPER VENUE AND
LACK OF JURISDICTION.
II
THE COURT A QUO ERRED IN CONSIDERING THE CASE AS A PERSONAL AND NOT A REAL ACTION.
III
GRANTING WITHOUT ADMITTING THAT VENUE WAS PROPERLY LAID AND THE CASE IS A PERSONAL ACTION, THE
COURT A QUO ERRED IN DECLARING THE DEFENDANTS IN DEFAULT DURING THE PRE-TRIAL WHEN AT THAT TIME
THE DEFENDANTS HAD ALREADY FILED THEIR ANSWER TO THE COMPLAINT.
IV
THE COURT A QUO ERRED IN CONSIDERING THE DEFENDANTS AS HAVING LOST THEIR LEGAL STANDING IN COURT
WHEN AT MOST THEY COULD ONLY BE CONSIDERED AS IN DEFAULT AND STILL ENTITLED TO NOTICES OF ALL
FURTHER PROCEEDINGS ESPECIALLY AFTER THEY HAD FILED THE MOTION TO LIFT THE ORDER OF DEFAULT.
V
THE COURT A QUO ERRED IN ISSUING THE WRIT [OF] PRELIMINARY INJUNCTION RESTRAINING THE EXERCISE OF
ACTS OF OWNERSHIP AND OTHER RIGHTS OVER REAL PROPERTY OUTSIDE OF THE COURTS TERRITORIAL
JURISDICTION AND INCLUDING PERSONS WHO WERE NOT BROUGHT UNDER ITS JURISDICTION, THUS THE NULLITY
OF THE WRIT.
VI
THE COURT A QUO ERRED IN NOT RESTRAINING ITSELF MOTU PROP[R]IO FROM CONTINUING WITH THE
PROCEEDINGS IN THE CASE AND IN RENDERING DECISION THEREIN IF ONLY FOR REASON OF COURTESY AND
FAIRNESS BEING MANDATED AS DISPENSER OF FAIR AND EQUAL JUSTICE TO ALL AND SUNDRY WITHOUT FEAR OR
FAVOR IT HAVING BEEN SERVED EARLIER WITH A COPY OF THE PETITION FOR CERTIORARI QUESTIONING ITS
VENUE AND JURISDICTION IN CA-G.R. NO. SP 27565 IN FACT NOTICES FOR THE FILING OF COMMENT THERETO HAD
ALREADY BEEN SENT OUT BY THE HONORABLE COURT OF APPEALS, SECOND DIVISION, AND THE COURT A QUO
WAS FURNISHED WITH COPY OF SAID NOTICE.
VII
THE COURT A QUO ERRED IN DECIDING THE CASE IN FAVOR OF THE PLAINTIFF AND AGAINST THE DEFENDANTS ON
THE BASIS OF EVIDENCE WHICH ARE IMAGINARY, FABRICATED, AND DEVOID OF TRUTH, TO BE STATED IN DETAIL IN
THE DISCUSSION OF THIS PARTICULAR ERROR, AND, THEREFORE, THE DECISION IS REVERSIBLE.39
On August 31, 1995, after being granted several extensions, Rodriguez filed his appellees brief,40 essentially arguing the
correctness of the trial courts Decision regarding the foregoing issues raised by the Catungals. Subsequently, the Catungals filed
a Reply Brief41 dated October 16, 1995.
From the filing of the appellants brief in 1994 up to the filing of the Reply Brief, the spouses Catungal were represented by
appellant Jose Catungal himself. However, a new counsel for the Catungals, Atty. Jesus N. Borromeo (Atty. Borromeo), entered
his appearance before the Court of Appeals on September 2, 1997.42 On the same date, Atty. Borromeo filed a Motion for Leave
of Court to File Citation of Authorities43 and a Citation of Authorities.44 This would be followed by Atty. Borromeos filing of an
Additional Citation of Authority and Second Additional Citation of Authority both on November 17, 1997.45
During the pendency of the case with the Court of Appeals, Agapita Catungal passed away and thus, her husband, Jose, filed on
February 17, 1999 a motion for Agapitas substitution by her surviving children.46
On August 8, 2000, the Court of Appeals rendered a Decision in the consolidated cases CA-G.R. CV No. 40627 and CA-G.R. SP
No. 27565,47 affirming the trial courts Decision.
In a Motion for Reconsideration dated August 21, 2000,48 counsel for the Catungals, Atty. Borromeo, argued for the first time that
paragraphs 1(b) and 549 of the Conditional Deed of Sale, whether taken separately or jointly, violated the principle of mutuality of
contracts under Article 1308 of the Civil Code and thus, said contract was void ab initio. He adverted to the cases mentioned in his
various citations of authorities to support his argument of nullity of the contract and his position that this issue may be raised for
the first time on appeal.
Meanwhile, a Second Motion for Substitution50 was filed by Atty. Borromeo in view of the death of Jose Catungal.
In a Resolution dated January 30, 2001, the Court of Appeals allowed the substitution of the deceased Agapita and Jose Catungal
by their surviving heirs and denied the motion for reconsideration for lack of merit
Hence, the heirs of Agapita and Jose Catungal filed on March 27, 2001 the present petition for review,51 which essentially argued

that the Court of Appeals erred in not finding that paragraphs 1(b) and/or 5 of the Conditional Deed of Sale, violated the principle
of mutuality of contracts under Article 1308 of the Civil Code. Thus, said contract was supposedly void ab initio and the Catungals
rescission thereof was superfluous.
In his Comment,52 Rodriguez highlighted that (a) petitioners were raising new matters that cannot be passed upon on appeal; (b)
the validity of the Conditional Deed of Sale was already admitted and petitioners cannot be allowed to change theories on appeal;
(c) the questioned paragraphs of the Conditional Deed of Sale were valid; and (d) petitioners were the ones who committed fraud
and breach of contract and were not entitled to relief for not having come to court with clean hands.
The Court gave due course to the Petition53 and the parties filed their respective Memoranda.
The issues to be resolved in the case at bar can be summed into two questions:
I. Are petitioners allowed to raise their theory of nullity of the Conditional Deed of Sale for the first time on appeal?
II. Do paragraphs 1(b) and 5 of the Conditional Deed of Sale violate the principle of mutuality of contracts under Article 1308 of the
Civil Code?
On petitioners change of theory
Petitioners claimed that the Court of Appeals should have reversed the trial courts Decision on the ground of the alleged nullity of
paragraphs 1(b) and 5 of the Conditional Deed of Sale notwithstanding that the same was not raised as an error in their
appellants brief. Citing Catholic Bishop of Balanga v. Court of Appeals,54 petitioners argued in the Petition that this case falls
under the following exceptions:
(3) Matters not assigned as errors on appeal but consideration of which is necessary in arriving at a just decision and complete
resolution of the case or to serve the interest of justice or to avoid dispensing piecemeal justice;
(4) Matters not specifically assigned as errors on appeal but raised in the trial court and are matters of record having some
bearing on the issue submitted which the parties failed to raise or which the lower court ignored;
(5) Matters not assigned as errors on appeal but closely related to an error assigned; and
(6) Matters not assigned as errors but upon which the determination of a question properly assigned is dependent.55
We are not persuaded.
This is not an instance where a party merely failed to assign an issue as an error in the brief nor failed to argue a material point on
appeal that was raised in the trial court and supported by the record. Neither is this a case where a party raised an error closely
related to, nor dependent on the resolution of, an error properly assigned in his brief. This is a situation where a party completely
changes his theory of the case on appeal and abandons his previous assignment of errors in his brief, which plainly should not be
allowed as anathema to due process.
Petitioners should be reminded that the object of pleadings is to draw the lines of battle between the litigants and to indicate fairly
the nature of the claims or defenses of both parties.56 In Philippine National Construction Corporation v. Court of Appeals,57 we
held that "[w]hen a party adopts a certain theory in the trial court, he will not be permitted to change his theory on appeal, for to
permit him to do so would not only be unfair to the other party but it would also be offensive to the basic rules of fair play, justice
and due process."58
We have also previously ruled that "courts of justice have no jurisdiction or power to decide a question not in issue. Thus, a
judgment that goes beyond the issues and purports to adjudicate something on which the court did not hear the parties, is not only
irregular but also extrajudicial and invalid. The rule rests on the fundamental tenets of fair play."59
During the proceedings before the trial court, the spouses Catungal never claimed that the provisions in the Conditional Deed of
Sale, stipulating that the payment of the balance of the purchase price was contingent upon the successful negotiation of a road
right of way (paragraph 1[b]) and granting Rodriguez the option to rescind (paragraph 5), were void for allegedly making the
fulfillment of the contract dependent solely on the will of Rodriguez.
On the contrary, with respect to paragraph 1(b), the Catungals did not aver in the Answer (and its amended versions) that the
payment of the purchase price was subject to the will of Rodriguez but rather they claimed that paragraph 1(b) in relation to 1(c)
only presupposed a reasonable time be given to Rodriguez to negotiate the road right of way. However, it was petitioners theory
that more than sufficient time had already been given Rodriguez to negotiate the road right of way. Consequently, Rodriguezs
refusal/failure to pay the balance of the purchase price, upon demand, was allegedly indicative of lack of funds and a breach of
the contract on the part of Rodriguez.
Anent paragraph 5 of the Conditional Deed of Sale, regarding Rodriguezs option to rescind, it was petitioners theory in the court
a quo that notwithstanding such provision, they retained the right to rescind the contract for Rodriguezs breach of the same under
Article 1191 of the Civil Code.
Verily, the first time petitioners raised their theory of the nullity of the Conditional Deed of Sale in view of the questioned provisions
was only in their Motion for Reconsideration of the Court of Appeals Decision, affirming the trial courts judgment. The previous
filing of various citations of authorities by Atty. Borromeo and the Court of Appeals resolutions noting such citations were of no
moment. The citations of authorities merely listed cases and their main rulings without even any mention of their relevance to the
present case or any prayer for the Court of Appeals to consider them.1wphi1 In sum, the Court of Appeals did not err in
disregarding the citations of authorities or in denying petitioners motion for reconsideration of the assailed August 8, 2000
Decision in view of the proscription against changing legal theories on appeal.
Ruling on the questioned provisions of the Conditional Deed of Sale
Even assuming for the sake of argument that this Court may overlook the procedural misstep of petitioners, we still cannot uphold
their belatedly proffered arguments.
At the outset, it should be noted that what the parties entered into is a Conditional Deed of Sale, whereby the spouses Catungal

agreed to sell and Rodriguez agreed to buy Lot 10963 conditioned on the payment of a certain price but the payment of the
purchase price was additionally made contingent on the successful negotiation of a road right of way. It is elementary that "[i]n
conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend
upon the happening of the event which constitutes the condition."60
Petitioners rely on Article 1308 of the Civil Code to support their conclusion regarding the claimed nullity of the aforementioned
provisions. Article 1308 states that "[t]he contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them."
Article 1182 of the Civil Code, in turn, provides:
Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void. If it
depends upon chance or upon the will of a third person, the obligation shall take effect in conformity with the provisions of this
Code.
In the past, this Court has distinguished between a condition imposed on the perfection of a contract and a condition imposed
merely on the performance of an obligation. While failure to comply with the first condition results in the failure of a contract, failure
to comply with the second merely gives the other party the option to either refuse to proceed with the sale or to waive the
condition.61 This principle is evident in Article 1545 of the Civil Code on sales, which provides in part:
Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition which is not performed, such party
may refuse to proceed with the contract or he may waive performance of the condition x x x.
Paragraph 1(b) of the Conditional Deed of Sale, stating that respondent shall pay the balance of the purchase price when he has
successfully negotiated and secured a road right of way, is not a condition on the perfection of the contract nor on the validity of
the entire contract or its compliance as contemplated in Article 1308. It is a condition imposed only on respondents obligation to
pay the remainder of the purchase price. In our view and applying Article 1182, such a condition is not purely potestative as
petitioners contend. It is not dependent on the sole will of the debtor but also on the will of third persons who own the adjacent
land and from whom the road right of way shall be negotiated. In a manner of speaking, such a condition is likewise dependent on
chance as there is no guarantee that respondent and the third party-landowners would come to an agreement regarding the road
right of way. This type of mixed condition is expressly allowed under Article 1182 of the Civil Code.
Analogous to the present case is Romero v. Court of Appeals,62 wherein the Court interpreted the legal effect of a condition in a
deed of sale that the balance of the purchase price would be paid by the vendee when the vendor has successfully ejected the
informal settlers occupying the property. In Romero, we found that such a condition did not affect the perfection of the contract but
only imposed a condition on the fulfillment of the obligation to pay the balance of the purchase price, to wit:
From the moment the contract is perfected, the parties are bound not only to the fulfillment of what has been expressly stipulated
but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. Under the
agreement, private respondent is obligated to evict the squatters on the property. The ejectment of the squatters is a condition the
operative act of which sets into motion the period of compliance by petitioner of his own obligation, i.e., to pay the balance of the
purchase price. Private respondent's failure "to remove the squatters from the property" within the stipulated period gives
petitioner the right to either refuse to proceed with the agreement or waive that condition in consonance with Article 1545 of the
Civil Code. This option clearly belongs to petitioner and not to private respondent.
We share the opinion of the appellate court that the undertaking required of private respondent does not constitute a "potestative
condition dependent solely on his will" that might, otherwise, be void in accordance with Article 1182 of the Civil Code but a
"mixed" condition "dependent not on the will of the vendor alone but also of third persons like the squatters and government
agencies and personnel concerned." We must hasten to add, however, that where the so-called "potestative condition" is imposed
not on the birth of the obligation but on its fulfillment, only the condition is avoided, leaving unaffected the obligation itself.63
(Emphases supplied.)
From the provisions of the Conditional Deed of Sale subject matter of this case, it was the vendee (Rodriguez) that had the
obligation to successfully negotiate and secure the road right of way. However, in the decision of the trial court, which was affirmed
by the Court of Appeals, it was found that respondent Rodriguez diligently exerted efforts to secure the road right of way but the
spouses Catungal, in bad faith, contributed to the collapse of the negotiations for said road right of way. To quote from the trial
courts decision:
It is therefore apparent that the vendees obligations (sic) to pay the balance of the purchase price arises only when the road-rightof-way to the property shall have been successfully negotiated, secured and provided. In other words, the obligation to pay the
balance is conditioned upon the acquisition of the road-right-of-way, in accordance with paragraph 2 of Article 1181 of the New
Civil Code. Accordingly, "an obligation dependent upon a suspensive condition cannot be demanded until after the condition takes
place because it is only after the fulfillment of the condition that the obligation arises." (Javier v[s] CA 183 SCRA) Exhibits H, D, P,
R, T, FF and JJ show that plaintiff [Rodriguez] indeed was diligent in his efforts to negotiate for a road-right-of-way to the property.
The written offers, proposals and follow-up of his proposals show that plaintiff [Rodriguez] went all out in his efforts to immediately
acquire an access road to the property, even going to the extent of offering P3,000.00 per square meter for the road lots (Exh. Q)
from the original P550.00 per sq. meter. This Court also notes that defendant (sic) [the Catungals] made misrepresentation in the
negotiation they have entered into with plaintiff [Rodriguez]. (Exhs. F and G) The misrepresentation of defendant (sic) [the
Catungals] as to the third lot (Lot 10986) to be part and parcel of the subject property [(]Lot 10963) contributed in defeating the
plaintiffs [Rodriguezs] effort in acquiring the road-right-of-way to the property. Defendants [the Catungals] cannot now invoke the
non-fulfillment of the condition in the contract as a ground for rescission when defendants [the Catungals] themselves are guilty of
preventing the fulfillment of such condition.
From the foregoing, this Court is of the considered view that rescission of the conditional deed of sale by the defendants is without
any legal or factual basis.64 x x x. (Emphases supplied.)
In all, we see no cogent reason to disturb the foregoing factual findings of the trial court.
Furthermore, it is evident from the language of paragraph 1(b) that the condition precedent (for respondents obligation to pay the
balance of the purchase price to arise) in itself partly involves an obligation to do, i.e., the undertaking of respondent to negotiate

and secure a road right of way at his own expense.65 It does not escape our notice as well, that far from disclaiming paragraph
1(b) as void, it was the Catungals contention before the trial court that said provision should be read in relation to paragraph 1(c)
which stated:
c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility of the VENDEE to secure and any or
all cost relative to the acquisition thereof shall be borne solely by the VENDEE. He shall, however, be accorded with enough time
necessary for the success of his endeavor, granting him a free hand in negotiating for the passage.66 (Emphasis supplied.)
The Catungals interpretation of the foregoing stipulation was that Rodriguezs obligation to negotiate and secure a road right of
way was one with a period and that period, i.e., "enough time" to negotiate, had already lapsed by the time they demanded the
payment of P5,000,000.00 from respondent. Even assuming arguendo that the Catungals were correct that the respondents
obligation to negotiate a road right of way was one with an uncertain period, their rescission of the Conditional Deed of Sale would
still be unwarranted. Based on their own theory, the Catungals had a remedy under Article 1197 of the Civil Code, which
mandates:
Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was
intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of the debtor.
In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the
parties. Once fixed by the courts, the period cannot be changed by them.
What the Catungals should have done was to first file an action in court to fix the period within which Rodriguez should accomplish
the successful negotiation of the road right of way pursuant to the above quoted provision. Thus, the Catungals demand for
Rodriguez to make an additional payment of P5,000,000.00 was premature and Rodriguezs failure to accede to such demand did
not justify the rescission of the contract.
With respect to petitioners argument that paragraph 5 of the Conditional Deed of Sale likewise rendered the said contract void, we
find no merit to this theory. Paragraph 5 provides:
5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his option to rescind the herein
Conditional Deed of Sale, the VENDEE shall notify the VENDOR by way of a written notice relinquishing his rights over the
property. The VENDEE shall then be reimbursed by the VENDOR the sum of FIVE HUNDRED THOUSAND PESOS
(P500,000.00) representing the downpayment, interest free, payable but contingent upon the event that the VENDOR shall have
been able to sell the property to another party.67
Petitioners posited that the above stipulation was the "deadliest" provision in the Conditional Deed of Sale for violating the
principle of mutuality of contracts since it purportedly rendered the contract subject to the will of respondent.
We do not agree.
It is petitioners strategy to insist that the Court examine the first sentence of paragraph 5 alone and resist a correlation of such
sentence with other provisions of the contract. Petitioners view, however, ignores a basic rule in the interpretation of contracts
that the contract should be taken as a whole.
Article 1374 of the Civil Code provides that "[t]he various stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken jointly." The same Code further sets down the rule that "[i]f some
stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate
to render it effectual."68
Similarly, under the Rules of Court it is prescribed that "[i]n the construction of an instrument where there are several provisions or
particulars, such a construction is, if possible, to be adopted as will give effect to all"69 and "for the proper construction of an
instrument, the circumstances under which it was made, including the situation of the subject thereof and of the parties to it, may
be shown, so that the judge may be placed in the position of those whose language he is to interpret."70
Bearing in mind the aforementioned interpretative rules, we find that the first sentence of paragraph 5 must be taken in relation
with the rest of paragraph 5 and with the other provisions of the Conditional Deed of Sale.
Reading paragraph 5 in its entirety will show that Rodriguezs option to rescind the contract is not absolute as it is subject to the
requirement that there should be written notice to the vendor and the vendor shall only return Rodriguezs downpayment of
P500,000.00, without interest, when the vendor shall have been able to sell the property to another party. That what is stipulated
to be returned is only the downpayment of P500,000.00 in the event that Rodriguez exercises his option to rescind is significant.
To recall, paragraph 1(b) of the contract clearly states that the installments on the balance of the purchase price shall only be paid
upon successful negotiation and procurement of a road right of way. It is clear from such provision that the existence of a road
right of way is a material consideration for Rodriguez to purchase the property. Thus, prior to him being able to procure the road
right of way, by express stipulation in the contract, he is not bound to make additional payments to the Catungals. It was further
stipulated in paragraph 1(b) that: "[i]f however said road right of way cannot be negotiated, the VENDEE shall give notice to the
VENDOR for them to reassess and solve the problem by taking other options and should the situation ultimately prove futile, he
[Rodriguez] shall take steps to rescind or [cancel] the herein Conditional Deed of Sale." The intention of the parties for providing
subsequently in paragraph 5 that Rodriguez has the option to rescind the sale is undeniably only limited to the contingency that
Rodriguez shall not be able to secure the road right of way. Indeed, if the parties intended to give Rodriguez the absolute option to
rescind the sale at any time, the contract would have provided for the return of all payments made by Rodriguez and not only the
downpayment. To our mind, the reason only the downpayment was stipulated to be returned is that the vendees option to rescind
can only be exercised in the event that no road right of way is secured and, thus, the vendee has not made any additional
payments, other than his downpayment.
In sum, Rodriguezs option to rescind the contract is not purely potestative but rather also subject to the same mixed condition as
his obligation to pay the balance of the purchase price i.e., the negotiation of a road right of way. In the event the condition is
fulfilled (or the negotiation is successful), Rodriguez must pay the balance of the purchase price. In the event the condition is not
fulfilled (or the negotiation fails), Rodriguez has the choice either (a) to not proceed with the sale and demand return of his

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

G.R. No. L-12611

August 7, 1918

FELIPE AGONCILLO, and his wife, MARCELA MARIO, plaintiff-appellees,

vs.
CRISANTO JAVIER, administrator of the estate of the late Anastasio Alano. FLORENCIO ALANO and JOSE ALANO, defendantsappellants.
Basilio Aromin for appellants.Felipe Agoncillo for appellees.
FISHER, J.:
On the twenty-seventh day of February, 1904, Anastasio Alano, Jose Alano, and Florencio Alano executed in favor of the plaintiff,
Da. Marcela Mario, a document of the following tenor:
We, the undersigned, Jose Alano and Florencio Alano (on our own behalf), and Anastasio Alano (on behalf of his children Leonila,
Anastasio and Leocadio), the former and the latter testamentary heirs of the Rev. Anastasio C. Cruz, deceased, hereby solemnly
promise under oath:
1. We will pay to Da. Marcela Mario within one year from this date together with interest thereon at the rate of 12 per cent per
annum, the sum of P2,730.50, Philippine currency, this being the present amount of indebtedness incurred in favor of that lady on
the 20th of April 1897, by our testator, the Rev. Anastasio C. Cruz;
2. To secure the payment of this debt we mortgage to the said Da. Marcela Mario the house and lot bequeathed to us by the
deceased, situated in this town, on calle Evangelista, formerly Asturias, recorded in the register of deeds on the twenty-second of
April, 1895, under number 730;

3. In case of insolvency on our part, we cede by virtue of these presents the said house and lot to Da. Marcela Mario, transferring
to her all our rights to the ownership and possession of the lot; and if the said property upon appraisal at the time of the maturity of
this obligation should not be of sufficient value to cover the total amount of this indebtedness, I, Anastasio Alano, also mortgage to
the said lady my four parcels of land situated in the barrio of San Isidro, to secure the balance, if any; the title deeds of said
property, as well as the title deeds of the said house and lot are this day delivered to Sr. Vicente Ilustre, general attorney-in-fact of
Da. Marcela Mario.
In witness whereof we have signed these presents in Batangas, this twenty-seventh day of February, 1904.
(Sgd.) JOSE ALANO.
(Sgd.) ANASTASIO ALANO.
(Sgd.) FLORENCIO ALANO.
No part of the interest or of the principal due upon this undertaking has been paid, except the sum of P200 paid in the year 1908
by the late Anastasio Alano.
In 1912, Anastasio Alano died intestate. At the instance of one of his creditors, proceedings upon the administration of his estate
were had in the Court of First Instance of Batangas. By order dated August 8, 1914, the court appointed an administrator and a
committee to hear claims. Notices were published, as required, in a newspaper of general circulation, to inform the creditors of the
time and place at which they might appear to present their claims against the estate of the deceased (Exhibit No. 1). The time
designated in the notice for the presentation of claims expired on March 24, 1915. It appears that no claims whatever were
presented to the committee, and it having been shown to the court, by the statement of the administrator, that the claim of the
creditor at whose instance the administration proceeding was commenced, had been settled by the heirs, the administrator was
discharged and the proceeding terminated by order dated November 8, 1915.
On April 27, 1916, at the instance of the plaintiff, Da. Marcela Mario, and upon the statement, made on her behalf, that she was a
creditor of the deceased and that her claim was secured by mortgage upon real estate belonging to the said deceased, the court
reopened the intestate proceeding, and appointed one Javier to be administrator of the estate. No request was made for a
renewal of the commission of the committee on claims. The appellants Jose and Florencio Alano objected to the appointment of
Javier, but their objection was overruled by the court.
On March 17, 1916, the plaintiffs filed the complaint in this action against Javier, as administrator of the estate of Anastasio Alano
and against Florencio Alano and Jose Alano personally. The action is based upon the execution of the document of February 27,
1904, above set forth, which is transcribed literally in the complaint. It is averred that defendants have paid no part of the
indebtedness therein acknowledged, with the exception of the P200 paid on account in 1908. It is further averred that on April 22,
1910, the debtors promised in writing that they would pay the debt in 1911, but that they had failed to do so. The prayer of the
complaint is that, unless defendants pay the debt for the recovery of which the action was brought, they be required to convey to
plaintiffs the house and lot described in paragraph two of the said document; that this property be appraised; and that if its value is
found to be less than the amount of the debt, with the accrued interest at the stipulated rate, judgment be rendered in favor of the
plaintiffs for the balance. No relief is requested with respect to the undertaking of Anastasio Alano expressed in the third
paragraph of the document in suit, as guarantor for the payment of the difference, if any, between the value of the said house and
lot and the total amount of the indebtedness.
The defendants answered denying generally the facts alleged in the complaint, and setting up, as special defenses that (1) any
cause of action which plaintiff might have had against the estate of Anastasio Alano has been barred by failure of the plaintiff to
present her claim to the committee on claims for allowance; (2) that the document upon which plaintiff relies does not constitute a
valid mortgage; and (3) that as to all of the defendants, the action is barred by the general statute of limitations.
The findings of the trial court upon the evidence were substantially as follows:
1. That the document set forth in paragraph two of plaintiffs' complaint was executed by the deceased, Anastasio Alano, and by
the defendants Javier and Jose Alano, as alleged;
2. That one year after the execution of the document, plaintiffs made a demand upon Anastasio Alano, deceased, and the other
two defendants herein, to comply with the terms of the agreement by the execution of the conveyance of the house and lot, but
that they requested an extension of time for the payment of the debt, which was granted them;
3. That on March 27, 1908, the defendants paid P200 on account of the debt.
Upon these findings the court below gave judgment for plaintiffs, and from that judgment the defendants have appealed to his
court upon the law and the facts.
The question raised by the appellants require us to analyze the document upon which this action is based, and to determine its
legal effect. Appellants contend that the contract evidenced by that instrument is merely a loan coupled with an ineffectual attempt
to create a mortgage to effect the payment of debt. The court below regarded it as a conveyance of the house and lot described in
the contract, which took effect upon the failure of the debtors to pay the debt.
The principal undertaking evidenced by the document is, obviously, the payment of money. The attempt to create a mortgage
upon the house and lot described in the second clause of the contract is, of course, invalid, as it is admitted that the so-called
mortgage was never recorded. Equally inefficacious, and for the same reasons, is the purported mortgage by Anastasio Alano of
his land in the barrio of San Isidro described in the third paragraph of the document. (Compaia General de Tabacos vs.
Jeanjaquet, 12 Phil. Rep., 195.)
The agreement to convey the house and lot at an appraised valuation in the event of failure to pay the debt in money a t its
maturity is, however, in our opinion, perfectly valid. It is simply an undertaking that if the debt is not paid in money, it will be paid in
another way. As we read the contract, the agreement is not open to the objection that the stipulation is a pacto comisorio. It is not
an attempt to permit the creditor to declare a forfeiture of the security upon the failure of the debtor to pay the debt at maturity. It is
simply provided that if the debt is not paid in money it shall be paid in another specific was by the transfer of property at a
valuation. Of course, such an agreement, unrecorded, creates no right in rem; but as between the parties it is perfectly valid, and

specific performance of its terms may be enforced, unless prevented by the creation of superior rights in favor of third persons.
The contract now under consideration is not susceptible of the interpretation that the title to the house and lot in question was to
be transferred to the creditor ipso facto upon the mere failure of the debtors to pay the debt at its maturity. The obligations
assumed by the debtors were alternative, and they had the right to elect which they would perform (Civil Code, art. 1132). The
conduct of the parties (Civil Code, art. 1782) shows that it was not their understanding that the right to discharge the obligation by
the payment of money was lost to the debtors by their failure to pay the debt at its maturity. The plaintiff accepted a partial
payment from Anastasio Alano in 1908, several years after the debt matured. The prayer of the complaint is that the defendants
be required to execute a conveyance of the house and lot, after its appraisal, "unless the defendants pay the plaintiff the debt
which is the subject of this action."
It is quite clear, therefore, that under the terms of the contract, as we read it, and as the parties themselves have interpreted it, the
liability of the defendants as to the conveyance of the house and lot is subsidiary and conditional, being dependent upon their
failure to pay the debt in money. It must follow, therefore, that if the action to recover the debt has prescribed, the action to compel
a conveyance of the house and lot is likewise barred, as the agreement to make such conveyance was not an independent
principal undertaking, but merely a subsidiary alternative pact relating to the method by which the debt might be paid.
The undertaking to pay the debt, acknowledged by the contract in suit, is indisputably conjoint (mancomunada). The concurrence
of two or more debtors does not in itself create a solidary liability. Obligations in solido arise only when it is expressly stipulated
that they shall have this character (Civil Code, art. 1137). That being so, the debt must be regarded as divided into as many equal
parts as there are debtors, each part constituting a debt distinct from the others. (Civil Code, art. 1138.) The result of this principle
is that the extinction of the debt of one of the various debtors does not necessarily affect the debts of the others.
It is contended on behalf of the administrator of the estate of Anastasio Alano that the failure of the plaintiff to present her claim for
allowance to the committee on claims is a bar to her action so far as this defendant is concerned. We are of the opinion that this
objection is well-taken. Section 695 of the Code of Civil Procedure expressly requires that a claim of this kind be presented for
allowance to the committee, and declares that the failure to do so operates to extinguish the claim. The operation of this statute
and the absolute nature of the bar which it interposes against the subsequent assertion of claims not presented in accordance
with its requirements have frequently been considered by this court, and the doctrines announced need not be here repeated.
(Estate of De Dios, 24 Phil. Rep., 573; Santos vs. Manarang, 27 Phil. Rep., 209). While it is true that under certain circumstances
and within the statutory limits (sec. 690 of the Code of Civil Procedure) the probate court may renew the commission of the
committee on claims, and permit the presentation of belated demands, in no case may a claim proper to be allowed by the
committee, such as is the one now under consideration, be enforced by an original action against the executor or administrator of
the state. Our opinion is, therefore, that the objection to the action interposed on behalf of the administrator of the estate of
Anastasio Alano was well-taken and that the court erred in rejecting it.
This conclusion makes it unnecessary to consider the effect of the payment made by Anastasio Alano in 1908 as regards the
interruption of the period of prescription with respect to him. In this connection, however, we feel constrained to remark that a
careful reading of the document makes it extremely doubtful whether Anastasio Alano was ever personally bound by its terms. It
will be noted that he purports to have signed it only as the representative of his children, Leonina, Anastasio, and Leocadio, who
are not parties to this suit.
With respect to the defendants Florencio and Jose Alano, their original liability admits of no dispute and the only question open for
consideration is that presented by their plea of prescription. The debt matured February 27, 1905, and as the complaint was not
filed within ten years from that date (Code of Civil Procedure, sec. 43), it is obvious that the plea of prescription is well-taken,
unless the running of the statute was interrupted.
While it appears that some verbal and written demands for payment were made upon these defendants, it has been recently
decided, upon mature consideration, that an extrajudicial demand is not sufficient, under the law as it now stands, to stop the
running of the statute. (Pelaez vs. Abreu, 26 Phil. Rep., 415). There must be either (1) a partial payment, (2) a written
acknowledgment or (3) a written promise to pay the debt. It is not contended that there has been any written acknowledgment or
promise on the part of the defendants Jose and Florencio Alano, or either of them plaintiff relies solely upon the payment made
in 1908 by Anastasio Alano. But there is not the slightest foundation in the evidence for the belief that the payment made by
Anastasio was for the benefit of Jose or Florencio or that it was authorized by either of them. Bearing in mind the express
declaration of article 1138 of the Civil Code that joint (mancomunada) obligations are, as regard each of the debtors, to be reputed
as separate debts with respect to each of the debtors, it follows of necessity that a payment or acknowledgment by one of such
joint debtors will not stop the running of the period of prescription as to the others. That such is the law may be demonstrated by
ample authority.
In his commentaries on article 1138 and 1139 of the Civil Code, Manresa says that one of the effects of the rule established by the
code that the debt is to be regarded as "divided into as many parts . . . as there are debtors" is that "the interruption of prescription
by the claim of a creditor addressed to a single debtor or by an acknowledgment made by one of the debtors in favor of one or
more of the creditors is not to be understood as prejudicial to or in favor of the other debtors or creditors." (Manresa,
Commentaries on the Civil Code, vol. 8, p. 182.)
The same doctrine is recognized in the Italian Civil Law, as stated by Giorgi in his work on Obligations as follows:
The obligation appears to be one, when as a matter of fact it is an aggregate of as many separate and independent obligations as
there are creditors and debtors. Each creditor cannot demand more than his part; each debtor cannot be required to pay more
than his share. Prescription, novation, merger, and any other cause of modification or extinction does not extinguish or modify the
obligation except with respect to the creditor or debtor affected, without extending its operation to any other part of the debt or of
the credit. The obligation is, in a word, pro rata, or in partes viriles. (Giorgi on Obligations, vol. 1, p. 83, Spanish translation.)
The same view is taken by the French law writers. In the article on obligations in Dalloz' Encyclopedia (Jurisprudence Generale)
vol. 33, p. 297, the author says:
The conjoint (pro rata) obligation is divided by operation of law among the non-solidary co-debtors. It is as though there were
many debts as there are persons bound. Hence it follows that if one of the debtors is insolvent the loss falls upon the creditor and
not upon the other debtors, and that if prescription is interrupted with respect to one of the debtors, it is not interrupted with

respect to the others.

In the State of Louisiana, whose Civil Code, like ours, is largely taken from the Code of Napoleon, the Supreme Court has
established the same doctrine on the subject of the interruption of prescription.
In the case of Buard vs. Lemee, Syndic (12 Robinson's Reports, 243), the Supreme Court of Louisiana said:
It results . . . that when the acknowledgment of a debt is made by a joint debtor, such acknowledgment does not interrupt the
prescription with regard to the others. Each is bound for his virile share of the debt; and, therefore, each is at liberty to act for
himself, and the effect of his acts cannot be extended to the benefit or prejudice of his co-debtors; so true is this that the law has
never intended that a suit brought against one of the several debtors should interrupt prescription with regard to all, unless they be
debtors in solido.
This doctrine was recognized and applied by the Supreme Court of Louisiana in the subsequent cases of Succession of Cornelius
Voorhies (21 La. Ann., 659) and Smith vs. Coon (22 La. Ann., 445).
There is no presumption that one conjoint ( pro-rata) debtor is authorized to perform any act having the effect of stopping the
running of the statute of limitations as to the others. When the act relied upon is performed by some person other than the debtor,
the burden rests upon the plaintiff to show that it was expressly authorized. (17 R.C.L., 911 and the cases there cited.) In this case
there is no such evidence. The statement in the letter of Da. Maria Lontok, to whom the P200 payment was made, is that it was a
payment made on account of "the debt of Anastasio Alano." (Plaintiffs' Exhibit D.) Da. Maria Lontok in her testimony does not
attempt to say that the payment was made for the account of any one but Anastasio Alano, from whom she received it. The
statement that Florencio Alano was with Anastasio at the time is not in itself sufficient to constitute proof that the payment was
made for his benefit. (Lichauco vs. Limjuco and Gonzalo, 19 Phil. Rep., 12.)
Plaintiff argues that the undertaking to convey the house and lot constitutes an indivisible obligation, and that even where the
promise is not in solidum, the concurrence of two or more debtors in an obligation whose performance is indivisible creates such a
relation between them that the interruption of prescription as to one of necessity interrupts it as to all. The distinction is one which
is well-established, although the authorities cited do not fully support plaintiffs' contentions, but in this particular case the question
is academic, for the undertaking is in the alternative to pay a sum of money an essentially divisible obligation or to convey
the house. As the alternative indivisible obligation is imposed only in the event that the debtors fail to pay the money, it is subject
to a suspensive condition, and the prescription of the obligation whose non-performance constitutes the condition effectively
prevents the condition from taking place.
We are, therefore, constrained to hold with defendants and to reverse the decision of the lower court. We do this most regretfully,
as the evidence in this case shows that plaintiff has been extremely lenient with defendants and has refrained from pressing her
claim against them when it fell due, and for a long period of years thereafter, purely out of consideration for them. The defense of
prescription interposed, particularly as regards Jose and Florencio Alano, is an indefensible from the standpoint of fair dealing and
honesty as it is unassailable from the standpoint of legal technicality. However, the law, as we see it, is clear and it is our duty to
enforce it.
The judgment of the lower court is reversed and the action is dismissed as to all the defendants. No costs will be allowed. So
ordered.

G.R. No. L-21196

February 6, 1924

ONG GUAN CAN, plaintiff-appellee,

vs.
THE CENTURY INSURANCE COMPANY, LTD., defendant-appellant.
Eiguren and Razon for appellant.Montinola, Montinola and Hontiveros for appellee.
JOHNSON, J.:
The only question presented by the appeal is whether or not the judgment by default rendered by the lower court should be set
aside and annulled. We think it should be, for the following reasons:
The action was commenced in the Court of First Instance of the City of Iloilo on the 15th day of May, 1923. Its purpose was to
recover an amount due on the policy of insurance issued by the defendant to the plaintiff. On the same day a copy of the
complaint was served upon the defendant, through its duly authorized representative in the City of Iloilo, Messrs. Andrew & Co.
The defendant filed its appearance with the clerk of the court on the 7th day of June, 1923. The notice of appearance, it is alleged
and not denied, was mailed at the City of Manila on the 2d day of June, 1923. On the 5th day of June, 1923, the attorneys for the
plaintiff presented a motion praying that a judgment by default be rendered against the defendant. Said motion was granted on the
same day, and a judgment by default was duly entered. On the 8th day of June, 1923, the defendant, through its attorneys, filed a
motion praying that the judge set aside said judgment by default and permit the defendant to answer. Said motion recited that the
said notice of appearance was mailed at the City of Manila on the 2nd day of June, 1923, and that the steamship Vizcaya,
carrying mails, including the letter containing the notice of appearance on the 2d day of June, did not arrive at Iloilo in the usual
course until after the time had expired for filing its appearance, or on the 7th day of June, 1923, due to the fact that said ship
encountered a storm at sea. The lower court denied said motion on the 11th day of June, 1923, to which order the defendant duly
expected, and later presented another motion to the same effect, alleging and asserting that it had a valid and meritorious defense
to the cause of action presented by the plaintiff. Later the second motion was also denied, to which the defendant also excepted.
Some further proceedings were had in the lower court concerning the judgment by default, which have no importance in the
consideration of the question presented.
From the judgment by default of the lower court the defendant appealed and now alleges that it committed an error in not granting
the motions to set aside said judgment and permit the defendant to answer. It is admitted that the plaintiff and defendant resided in
the same province. Under paragraph 2 of section 392 of Act No. 190 it became the duty of the defendant to appear within twenty
days from the service of the summons. The summons was served on the 15th day of May. The twenty days within which the

defendant was required to appear expired on the 5th day of June. No appearance was filed by the defendant until perhaps the 7th
day of June. It is admitted that the defendant mailed its appearance in the City of Manila on the 2d day of June, 1923. It is also a
fact that mail, in the ordinary course, will arrive at Iloilo from Manila in two days. The defendant mailed its appearance at a time
when in the ordinary course of events it would have reached the hand of the clerk of the court on or before the expiration of the
time within which it was obliged to make its appearance. The reason that the appearance did not reach its destination was due to
a fact over which the defendant had no control. The failure to make the appearance within the time prescribed by law was due to
no fault of the defendant. The defendant evidently made an honest effort to comply with the law. To render a judgment against it
under these circumstances would be to render a judgment against it without giving it an opportunity to be heard.
It has been frequently decided that, if pleadings or other papers essential to a case are entrusted to the mails in due season and
under proper precaution and are lost or miscarried, it will be ground for vacating a judgment by default. (Boyd vs. Williams and
Overbaugh, 70 N.J. Law, 185; Corning vs. Tripp, 1 Howard's Practice [N.Y.], 14; Williams vs. Richmond, etc. Railroad Co., 110 N.
C., 466; Chicago, etc. Railway Co. vs. Eastham, 30 L.R.A. [N.S.], 740; 23 Cyc., 943; 15 Ruling Case Law, 708.)
A delay of mail, such as occurred in the present case, in our opinion amounts to accident or surprise for which judgments by
default may be set aside, especially when the defendant shows by affidavit or otherwise that he has a valid and meritorious
defense. The time fixed for filing papers in a cause is generally directory and the court always has it in its power, in the exercise of
a proper discretion, to extend the time fixed by law whenever the ends of justice would seem to demand such an extension.
(Wood vs. Fobes and Farnham, 5 Cal., 62.)
Considering the causes which prevented the defendant from making its appearance within the time prescribed by subparagraph 2
of article 392 of Act No. 190 and considering its showing that, if permitted to answer, it has a meritorious defense, we are of the
opinion, and so decide, that the judgment by default rendered by the lower court should be and is hereby set aside, and it is
hereby ordered and decreed that the defendant's appearance be admitted and that it be given ten days in which to answer from
notice of this decision. And without any findings as to costs, it is so ordered.
G.R. No. 134100

September 29, 2000

PURITA ALIPIO, petitioner,

vs.
COURT OF APPEALS and ROMEO G. JARING, represented by his Attorney-In-Fact RAMON G. JARING, respondents.
DECISION
MENDOZA, J.:
The question for decision in this case is whether a creditor can sue the surviving spouse for the collection of a debt which is owed
by the conjugal partnership of gains, or whether such claim must be filed in proceedings for the settlement of the estate of the
decedent. The trial court and the Court of Appeals ruled in the affirmative. We reverse.
The facts are as follows:
Respondent Romeo Jaring1 was the lessee of a 14.5 hectare fishpond in Barito, Mabuco, Hermosa, Bataan. The lease was for a
period of five years ending on September 12, 1990. On June 19, 1987, he subleased the fishpond, for the remaining period of his
lease, to the spouses Placido and Purita Alipio and the spouses Bienvenido and Remedios Manuel. The stipulated amount of rent
was P485,600.00, payable in two installments of P300,000.00 and P185,600.00, with the second installment falling due on June
30, 1989. Each of the four sublessees signed the contract.
The first installment was duly paid, but of the second installment, the sublessees only satisfied a portion thereof, leaving an unpaid
balance of P50,600.00. Despite due demand, the sublessees failed to comply with their obligation, so that, on October 13, 1989,
private respondent sued the Alipio and Manuel spouses for the collection of the said amount before the Regional Trial Court,
Branch 5, Dinalupihan, Bataan. In the alternative, he prayed for the rescission of the sublease contract should the defendants fail
to pay the balance.
Petitioner Purita Alipio moved to dismiss the case on the ground that her husband, Placido Alipio, had passed away on December
1, 1988.2 She based her action on Rule 3, 21 of the 1964 Rules of Court which then provided that "when the action is for
recovery of money, debt or interest thereon, and the defendant dies before final judgment in the Court of First Instance, it shall be
dismissed to be prosecuted in the manner especially provided in these rules." This provision has been amended so that now Rule
3, 20 of the 1997 Rules of Civil Procedure provides:
When the action is for the recovery of money arising from contract, express or implied, and the defendant dies before entry of final
judgment in the court in which the action was pending at the time of such death, it shall not be dismissed but shall instead be
allowed to continue until entry of final judgment. A favorable judgment obtained by the plaintiff therein shall be enforced in the
manner especially provided in these Rules for prosecuting claims against the estate of a deceased person.
The trial court denied petitioner's motion on the ground that since petitioner was herself a party to the sublease contract, she could
be independently impleaded in the suit together with the Manuel spouses and that the death of her husband merely resulted in his
exclusion from the case.3 The Manuel spouses failed to file their answer. For this reason, they were declared in default.
On February 26, 1991, the lower court rendered judgment after trial, ordering petitioner and the Manuel spouses to pay private
respondent the unpaid balance of P50,600.00 plus attorney's fees in the amount of P10,000.00 and the costs of the suit.
Petitioner appealed to the Court of Appeals on the ground that the trial court erred in denying her motion to dismiss. In its
decision4 rendered on July 10, 1997, the appellate court dismissed her appeal. It held:
The rule that an action for recovery of money, debt or interest thereon must be dismissed when the defendant dies before final
judgment in the regional trial court, does not apply where there are other defendants against whom the action should be
maintained. This is the teaching of Climaco v. Siy Uy, wherein the Supreme Court held:
Upon the facts alleged in the complaint, it is clear that Climaco had a cause of action against the persons named as defendants

therein. It was, however, a cause of action for the recovery of damages, that is, a sum of money, and the corresponding action is,
unfortunately, one that does not survive upon the death of the defendant, in accordance with the provisions of Section 21, Rule 3
of the Rules of Court.
xxx

xxx

xxx

However, the deceased Siy Uy was not the only defendant, Manuel Co was also named defendant in the complaint. Obviously,
therefore, the order appealed from is erroneous insofar as it dismissed the case against Co. (Underlining added)
Moreover, it is noted that all the defendants, including the deceased, were signatories to the contract of sub-lease. The remaining
defendants cannot avoid the action by claiming that the death of one of the parties to the contract has totally extinguished their
obligation as held in Imperial Insurance, Inc. v. David:
We find no merit in this appeal. Under the law and well settled jurisprudence, when the obligation is a solidary one, the creditor
may bring his action in toto against any of the debtors obligated in solidum. Thus, if husband and wife bound themselves jointly
and severally, in case of his death, her liability is independent of and separate from her husband's; she may be sued for the whole
debt and it would be error to hold that the claim against her as well as the claim against her husband should be made in the
decedent's estate. (Agcaoili vs. Vda. de Agcaoili, 90 Phil. 97).5
Petitioner filed a motion for reconsideration, but it was denied on June 4, 1998.6 Hence this petition based on the following
assignment of errors:
A. THE RESPONDENT COURT COMMITTED REVERSIBLE ERROR IN APPLYING CLIMACO v. SIY UY, 19 SCRA 858, IN
SPITE OF THE FACT THAT THE PETITIONER WAS NOT SEEKING THE DISMISSAL OF THE CASE AGAINST REMAINING
DEFENDANTS BUT ONLY WITH RESPECT TO THE CLAIM FOR PAYMENT AGAINST HER AND HER HUSBAND WHICH
SHOULD BE PROSECUTED AS A MONEY CLAIM.
B. THE RESPONDENT COURT COMMITTED REVERSIBLE ERROR IN APPLYING IMPERIAL INSURANCE INC. v. DAVID, 133
SCRA 317, WHICH IS NOT APPLICABLE BECAUSE THE SPOUSES IN THIS CASE DID NOT BIND THEMSELVES JOINTLY
AND SEVERALLY IN FAVOR OF RESPONDENT JARING.7
The petition is meritorious. We hold that a creditor cannot sue the surviving spouse of a decedent in an ordinary proceeding for
the collection of a sum of money chargeable against the conjugal partnership and that the proper remedy is for him to file a claim
in the settlement of estate of the decedent.
First. Petitioner's husband died on December 1, 1988, more than ten months before private respondent filed the collection suit in
the trial court on October 13, 1989. This case thus falls outside of the ambit of Rule 3, 21 which deals with dismissals of
collection suits because of the death of the defendant during the pendency of the case and the subsequent procedure to be
undertaken by the plaintiff, i.e., the filing of claim in the proceeding for the settlement of the decedent's estate. As already noted,
Rule 3, 20 of the 1997 Rules of Civil Procedure now provides that the case will be allowed to continue until entry of final
judgment. A favorable judgment obtained by the plaintiff therein will then be enforced in the manner especially provided in the
Rules for prosecuting claims against the estate of a deceased person. The issue to be resolved is whether private respondent
can, in the first place, file this case against petitioner.
Petitioner and her late husband, together with the Manuel spouses, signed the sublease contract binding themselves to pay the
amount of stipulated rent. Under the law, the Alipios' obligation (and also that of the Manuels) is one which is chargeable against
their conjugal partnership. Under Art. 161(1) of the Civil Code, the conjugal partnership is liable for
All debts and obligations contracted by the husband for the benefit of the conjugal partnership, and those contracted by the wife,
also for the same purpose, in the cases where she may legally bind the partnership.8
When petitioner's husband died, their conjugal partnership was automatically dissolved9 and debts chargeable against it are to be
paid in the settlement of estate proceedings in accordance with Rule 73, 2 which states:
Where estate settled upon dissolution of marriage. When the marriage is dissolved by the death of the husband or wife, the
community property shall be inventoried, administered, and liquidated, and the debts thereof paid, in the testate or intestate
proceedings of the deceased spouse. If both spouses have died, the conjugal partnership shall be liquidated in the testate or
intestate proceedings of either.
As held in Calma v. Taedo,10 after the death of either of the spouses, no complaint for the collection of indebtedness chargeable
against the conjugal partnership can be brought against the surviving spouse. Instead, the claim must be made in the proceedings
for the liquidation and settlement of the conjugal property. The reason for this is that upon the death of one spouse, the powers of
administration of the surviving spouse ceases and is passed to the administrator appointed by the court having jurisdiction over
the settlement of estate proceedings.11 Indeed, the surviving spouse is not even a de facto administrator such that conveyances
made by him of any property belonging to the partnership prior to the liquidation of the mass of conjugal partnership property is
void.12
The ruling in Calma v. Taedo was reaffirmed in the recent case of Ventura v. Militante.13 In that case, the surviving wife was sued
in an amended complaint for a sum of money based on an obligation allegedly contracted by her and her late husband. The
defendant, who had earlier moved to dismiss the case, opposed the admission of the amended complaint on the ground that the
death of her husband terminated their conjugal partnership and that the plaintiff's claim, which was chargeable against the
partnership, should be made in the proceedings for the settlement of his estate. The trial court nevertheless admitted the
complaint and ruled, as the Court of Appeals did in this case, that since the defendant was also a party to the obligation, the death
of her husband did not preclude the plaintiff from filing an ordinary collection suit against her. On appeal, the Court reversed,
holding that
as correctly argued by petitioner, the conjugal partnership terminates upon the death of either spouse. . . . Where a complaint is
brought against the surviving spouse for the recovery of an indebtedness chargeable against said conjugal [partnership], any
judgment obtained thereby is void. The proper action should be in the form of a claim to be filed in the testate or intestate
proceedings of the deceased spouse.

In many cases as in the instant one, even after the death of one of the spouses, there is no liquidation of the conjugal partnership.
This does not mean, however, that the conjugal partnership continues. And private respondent cannot be said to have no remedy.
Under Sec. 6, Rule 78 of the Revised Rules of Court, he may apply in court for letters of administration in his capacity as a
principal creditor of the deceased . . . if after thirty (30) days from his death, petitioner failed to apply for administration or request
that administration be granted to some other person.14
The cases relied upon by the Court of Appeals in support of its ruling, namely, Climaco v. Siy Uy15 and Imperial Insurance, Inc. v.
David,16 are based on different sets of facts. In Climaco, the defendants, Carlos Siy Uy and Manuel Co, were sued for damages
for malicious prosecution. Thus, apart from the fact the claim was not against any conjugal partnership, it was one which does not
survive the death of defendant Uy, which merely resulted in the dismissal of the case as to him but not as to the remaining
defendant Manuel Co.
With regard to the case of Imperial, the spouses therein jointly and severally executed an indemnity agreement which became the
basis of a collection suit filed against the wife after her husband had died. For this reason, the Court ruled that since the spouses'
liability was solidary, the surviving spouse could be independently sued in an ordinary action for the enforcement of the entire
obligation.
It must be noted that for marriages governed by the rules of conjugal partnership of gains, an obligation entered into by the
husband and wife is chargeable against their conjugal partnership and it is the partnership which is primarily bound for its
repayment.17 Thus, when the spouses are sued for the enforcement of an obligation entered into by them, they are being
impleaded in their capacity as representatives of the conjugal partnership and not as independent debtors such that the concept of
joint or solidary liability, as between them, does not apply. But even assuming the contrary to be true, the nature of the obligation
involved in this case, as will be discussed later, is not solidary but rather merely joint, making Imperial still inapplicable to this
case.
From the foregoing, it is clear that private respondent cannot maintain the present suit against petitioner.1wphi1 Rather, his
remedy is to file a claim against the Alipios in the proceeding for the settlement of the estate of petitioner's husband or, if none has
been commenced, he can file a petition either for the issuance of letters of administration18 or for the allowance of will,19
depending on whether petitioner's husband died intestate or testate. Private respondent cannot short-circuit this procedure by
lumping his claim against the Alipios with those against the Manuels considering that, aside from petitioner's lack of authority to
represent their conjugal estate, the inventory of the Alipios' conjugal property is necessary before any claim chargeable against it
can be paid. Needless to say, such power exclusively pertains to the court having jurisdiction over the settlement of the decedent's
estate and not to any other court.
Second. The trial court ordered petitioner and the Manuel spouses to pay private respondent the unpaid balance of the agreed
rent in the amount of P50,600.00 without specifying whether the amount is to be paid by them jointly or solidarily. In connection
with this, Art. 1207 of the Civil Code provides:
The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one
of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestations. There
is a solidary liability only when the obligation expressly so estates, or when the law or the nature of the obligation requires
solidarity.
Indeed, if from the law or the nature or the wording of the obligation the contrary does not appear, an obligation is presumed to be
only joint, i.e., the debt is divided into as many equal shares as there are debtors, each debt being considered distinct from one
another.20
Private respondent does not cite any provision of law which provides that when there are two or more lessees, or in this case,
sublessees, the latter's obligation to pay the rent is solidary. To be sure, should the lessees or sublessees refuse to vacate the
leased property after the expiration of the lease period and despite due demands by the lessor, they can be held jointly and
severally liable to pay for the use of the property. The basis of their solidary liability is not the contract of lease or sublease but the
fact that they have become joint tortfeasors.21 In the case at bar, there is no allegation that the sublessees refused to vacate the
fishpond after the expiration of the term of the sublease. Indeed, the unpaid balance sought to be collected by private respondent
in his collection suit became due on June 30, 1989, long before the sublease expired on September 12, 1990.
Neither does petitioner contend that it is the nature of lease that when there are more than two lessees or sublessees their liability
is solidary. On the other hand, the pertinent portion of the contract involved in this case reads:22
2. That the total lease rental for the sub-leased fishpond for the entire period of three (3) years and two (2) months is FOUR
HUNDRED EIGHT-FIVE THOUSAND SIX HUNDRED (P485,600.00) PESOS, including all the improvements, prawns, milkfishes,
crabs and related species thereon as well all fishing equipment, paraphernalia and accessories. The said amount shall be paid to
the Sub-Lessor by the Sub-Lessees in the following manner, to wit:
A. Three hundred thousand (P300,000.00) Pesos upon signing this contract; and
B. One Hundred Eight-Five Thousand Six-Hundred (P185,6000.00) Pesos to be paid on June 30, 1989.
Clearly, the liability of the sublessees is merely joint. Since the obligation of the Manuel and Alipio spouses is chargeable against
their respective conjugal partnerships, the unpaid balance of P50,600.00 should be divided into two so that each couple is liable to
pay the amount of P25,300.00.
WHEREFORE, the petition is GRANTED. Bienvenido Manuel and Remedios Manuel are ordered to pay the amount of
P25,300.00, the attorney's fees in the amount of P10,000.00 and the costs of the suit. The complaint against petitioner is
dismissed without prejudice to the filing of a claim by private respondent in the proceedings for the settlement of estate of Placido
Alipio for the collection of the share of the Alipio spouses in the unpaid balance of the rent in the amount of P25,300.00.
SO ORDERED.
G.R. No. 109648

November 22, 2001

PH CREDIT CORPORATION, petitioner,

vs.
COURT OF APPEALS and CARLOS M. FARRALES, respondents.
PANGANIBAN, J.:
When there is a conflict between the dispositive portion or fallo of a decision and the opinion of the court contained in the text or
body of the judgment, the former prevails over the latter. An order of execution is based on the disposition, not on the body, of the
decision.
The Case
Before us is a Petition for Review under Rule 451 of the Rules of Court, assailing the October 28, 1992 Decision2 and the April 6,
1993 Resolution3 of the Court of Appeals (CA) in CA-GR SP Nos. 23324 and 25714. The dispositive portion of the said Decision
reads as follows:
"WHEREFORE, judgment is hereby rendered DISMISSING: a) CA-G.R. SP No 23324, for being moot and academic, and b) CAG.R. SP No. 25714, for lack of merit."4
The assailed Resolution denied petitioner's Motion for Reconsideration.
The Facts
The facts of the case are summarized by the Court of Appeals in this wise:
"These two cases have been consolidated because they involve the same parties and/or related questions of [f]act and/or law.
xxx

xxx

xxx

"I. CA-G.R. SP NO. 23324

"PH Credit Corp., filed a case against Pacific Lloyd Corp., Carlos Farrales, Thomas H. Van Sebille and Federico C. Lim, for [a]
sum of money. The case was docketed as Civil Case No. 83-17751 before the Regional Trial Court, Branch 51, Manila. After
service of summons upon the defendants, they failed to file their answer within the reglementary period, hence they were declared
in default. PH Credit Corp., was then allowed to present its evidence ex-parte.
"On January 31, 1984, a decision was rendered, the dispositive portion of which reads as follows:
"WHEREFORE, judgment is hereby rendered in favor of plaintiff PH Credit Corporation and against defendants Pacific Lloyd
Corporation, Thomas H. Van Sebille, Carlos M. Farrales, and Federico C. Lim, ordering the latter to pay the former, the following:
'A) The sum of P118,814.49 with interest of 18% per annum, starting December 20, 1982 until fully paid;
'B) Surcharge of 16% per annum from December 20, 1982;
'C) Penalty Charge of 2% per month from December 20, 1982, computed on interest and principal compounded;
'D) Attorney's fees in an amount equivalent to 25% of the total sum due; and
'E) Costs of suit.
'SO ORDERED.'
"After the aforesaid decision has become final and executory, a Writ of Execution was issued and consequently implemented by
the assigned Deputy Sheriff. Personal and real properties of defendant Carlos M. Farrales were levied and sold at public auction
wherein PH Credit Corp. was the highest bidder. The personal properties were sold on August 2, 1984 at P18,900.00 while the
real properties were sold on June 21, 1989 for P1,294,726.00.
"On July 27, 1990, a motion for the issuance of a writ of possession was filed and on October 12, 1990, the same was granted.
The writ of possession itself was issued on October 26, 1990. Said order and writ of possession are now the subject of this
petition.
"Petitioner claims that she, as a third-party claimant with the court below, filed an 'Urgent Motion for Reconsideration and/or to
Suspend the Order dated October 12, 1990', but without acting there[on], respondent Judge issued the writ of possession on
October 26, 1990. She claims that the actuations of respondent Judge was tainted with grave abuse of discretion.
"We deem it unnecessary to pass upon the issue raised in view of the supervening event which had rendered the same moot and
academic.@lawphil.net
"It appears that on January 31, 1991, respondent Judge issued an order considering the assailed Order dated October 12, 1990
as well as the writ of possession issued on October 26, 1990 as 'of no force and effect.'@lawphil.net
"The purpose of the petition is precisely to have the aforesaid order and writ of possession declared null and void, but the same
had already been declared 'of no force and effect' by the respondent Judge. It is a well-settled rule that courts will not determine a
moot question or abstract proposition nor express an opinion in a case in which no practical relief can be granted.
"II. CA-G.R. SP NO. 25714
"Petitioner claims that the respondent Judge's Order dated January 31, 1991 was tainted with grave abuse of discretion based on
the following grounds:
"1. Respondent Judge refused to consider as waived private respondent's objection that his obligation in the January 31, 1984
decision was merely joint and not solidary with the defendants therein. According to petitioner, private respondent assailed the
levy on execution twice in 1984 and once in 1985 but not once did the latter even mention therein that his obligation was joint for
failure of the dispositive portion of the decision to indicate that it was solidary. Thus, private respondent must be deemed to have
waived that objection, petitioner concludes.

"2. The redemption period after the auction sale of the properties had long lapsed so much [so] that the purchaser therein became
the absolute owner thereof. Thus, respondent Judge allegedly abused his discretion in setting aside the auction sale after the
redemption period had expired.
"3. Respondent Judge erred in applying the presumption of a joint obligation in the face of the conclusion of fact and law
contained in the decision showing that the obligation is solidary."5 (Citations omitted)@lawphil.net
Ruling of the Court of Appeals
The Court of Appeals affirmed the trial court's ruling declaring null and void (a) the auction sale of Respondent Ferrales' real
property and (b) the Writ of Possession issued in consequence thereof. It held that, pursuant to the January 31, 1984 Decision of
the trial court, the liability of Farrales was merely joint and not solidary. Consequently, there was no legal basis for levying and
selling Farrales' real and personal properties in order to satisfy the whole obligation.
Hence, this Petition.6
The Issues
In its Memorandum,7 petitioner submits the following issues for our consideration:
"I
Whether or not the Court of Appeals disregarded the basic policy of avoiding multiplicity of motions.
"II
Whether or not the Court of Appeals erred when it disregarded the body of the decision and concluded that the obligation was
merely a joint obligation due to the failure of the dispositive portion of the decision dated 31 January 1984 to state that the
obligation was joint and solidary.
"III
Whether or not the Court of Appeals disregarded the policy of upholding executions."8
The Courts Ruling
The Petition is devoid of merit.
First Issue:Omnibus Motion Rule
Petitioner contends that because private respondent did not question the joint and solidary nature of his liability in his (a) Motion to
Quash Levy Execution9 dated August 23, 1984, (b) Urgent Motion to Order Sheriff to Suspend Sale on Execution10 dated
December 3, 1984, and (c) Motion to Declare Certificate of Sale Null and Void11 dated January 9, 1985, he cannot now raise it as
an objection. Petitioner argues that the "Omnibus Motion Rule" bars private respondent's belated objection. We do not agree.
The Omnibus Motion Rule is found in Section 8 of Rule 15 of the Rules of Court, which we quote:
"Subject to the provisions of section 1 of Rule 9, a motion attacking a pleading, order, judgment, or proceeding shall include all
objections then available, and all objections not so included shall be deemed waived. (8a)"
As an aid to the proper understanding of this case, we should at the outset point out that the objections of private respondent
contained in his Omnibus Motion12 dated November 5, 1990 were directed at the proceedings and the orders issued after the
auction sale of his real property covered by TCT No. 82531. In his Omnibus Motion, he asked for the recall and quashal of the Writ
of Possession issued on October 26, 1990; the annulment of the June 21, 1989 auction sale of the said real property and the
recomputation of his liability to petitioner.
However, the three (3) Motions that petitioner referred to above were clearly directed against the execution of private respondent's
personal properties. A perusal of these Motions will show that at the time, his objections were directed at the acts of execution
against his personal properties.
In his Motion to Quash Levy Execution,13 private respondent pointed to the properties of herein moving defendant x x x located at
his residence at No. 17, Bunker Hill St., New Manila, Quezon City, per the Notice of Levy and Sale,"14 and asked for the quashal
and setting aside of such Notice. He was thus referring to the levy on his personal properties. By the same token, in his Urgent
Motion to Order Sheriff to Suspend Sale on Execution,15 he referred to a copy of a sheriff's notice of sale dated November 22,
1984,"16 which in turn alluded to the sale of his levied personal properties. Similarly, in his Motion to Declare Certificate of Sale
Null and Void,17 he once again assailed the sale at public auction of his personal properties. It is thus clear that up to that point,
he was questioning the levy and sale of his personal properties. He could not have known at the time that he would be made to
answer for the entire liability, which he and his co-respondents were adjudged to pay petitioner by reason of the trial court's
judgment of January 31, 1984.
After private respondent realized that he was being made to answer on the entire liability as a solidary debtor, he filed his
Omnibus Motion questioning the Writ of Possession and all incident orders and proceedings relevant thereto. This realization
dawned on him, because his real property was levied and sold despite the previous sale of his personal property. Only at this point
was he in a position to assert his objections to the auction sale of his real property and to put up the defense of joint liability
among all the respondents.
The Rules of Court requires that all available objections to a judgment or proceeding must be set up in an Omnibus Motion
assailing it; otherwise, they are deemed waived. In the case at bar, the objection of private respondent to his solidary liability
became available to him, only after his real property was sold at public auction. At the time his personal properties were levied and
sold, it was not evident to him that he was being held solely liable for the monetary judgment rendered against him and his corespondents. That was why his objections then did not include those he asserted when his solidary liability became evident.
Prior to his Omnibus Motion, he was not yet being made to pay for the entire obligation. Thus, his objection to his being made
solidarily liable with the other respondents was not yet available to him at the time he filed the Motions referred to by petitioner.

Not being available, these objections could not have been deemed waived when he filed his three earlier Motions, which pertained
to matters different from those covered by his Omnibus Motion;
True, the Omnibus Motion Rule requires the movant to raise all available exceptions in a single opportunity to avoid multiple
piecemeal objections.18 But to apply that statutory norm, the objections must have been available to the party at the time the
Motion was filed.
Second Issue:Basis of Private Respondent's Liability
Petitioner argues that the CA erred in disregarding the text of the January 31, 1984 Decision of the trial court. In concluding that
the obligation was merely joint, the CA was allegedly mistaken in relying on the failure of the dispositive portion of the Decision to
state that the obligation was solidary.
We are not impressed. A solidary obligation is one in which each of the debtors is liable for the entire obligation, and each of the
creditors is entitled to demand the satisfaction of the whole obligation from any or all of the debtors. On the other hand, a joint
obligation is one in which each debtors is liable only for a proportionate part of the debt, and the creditor is entitled to demand only
a proportionate part of the credit from each debtor.19 The well-entrenched rule is that solidary obligations cannot be inferred
lightly. They must be positively and clearly expressed.20 A liability is solidary "only when the obligation expressly so states, when
the law so provides or when the nature of the obligation so requires."21 Article 1207 of the Civil Code explains the nature of
solidary obligations in this wise.
"ARTICLE 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not
imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with
the prestations. There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity."
In the dispositive portion of the January 31, 1984 Decision of the trial court, the word solidary neither appears nor can it be
inferred therefrom. The fallo merely stated that the following respondents were liable: Pacific Lloyd Corporation, Thomas H. Van
Sebille, Carlos M. Farrales and Federico C. Lim. Under the circumstances, the liability is joint, as provided by the Civil Code,
which we quote:
"ARTICLE 1208. If from the law, or the nature or the wording of the obligations to which the preceding article refers[,] the contrary
does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors x
x x"22
We should stress that respondent's obligation is based on the judgment rendered by the trial court. The dispositive portion or the
fallo is its decisive resolution and is thus the subject of execution. The other parts of the decision may be resorted to in order to
determine the ratio decidendi for the disposition. Where there is a conflict between the dispositive part and the opinion of the court
contained in the text or body of the decision, the former must prevail over the latter on the theory that the dispositive portion is the
final order, while the opinion is merely a statement ordering nothing23 Hence the execution must conform with that which is
ordained or decreed in the dispositive portion of the decision.
Petitioner maintains that the Court of Appeals improper and incorrectly disregarded the body of the trial court's Decision, which
clearly stated as follows:
"To support the Promissory Note, a Continuing Suretyship Agreement was executed by the defendants, Federico C. Lim, Carlos
M. Farrales and Thomas H. Van Sebille, in favor of the plaintiff corporation, to the effect that if Pacific Lloyd Corporation cannot
pay the amount loaned by plaintiff to said corporation, then Federico C. Lim, Carlos M. Farrales and Thomas H. Van Sebille will
hold themselves jointly and severally together with defendant Pacific Lloyd Corporation to answer for the payment of said
obligation."24
As early as 1934 in Oriental Commercial Co. v. Abeto and Mabanag,25 this Court has already answered such argument in this
wise:
"It is of no consequence that, under the written contract of suretyship executed by the parties, the obligation contracted by the
sureties was joint and several in character. The final judgment, which superseded the action brought for the enforcement of said
contract, declared the obligation to be merely joint, and the same cannot be executed otherwise."26
The same reasoning was recently adopted by this Court in Industrial Management International Development Corp. v. NLRC,27
promulgated on May 11, 2000.
Doctrinally, the basis of execution is the January 31, 1984 Decision rendered by the trial court, not the "written contract of
suretyship" executed by the parties. As correctly observed by the trial judge:
"x x x [W]hat was stated in the body of the decision of January 31, 1984 [was] only part of the narration of facts made by the
Judge[,] and the dispositive portion is to prevail."28
The only exception when the body of a decision prevails over the fallo is when the inevitable conclusion from the former is that
there was a glaring error in the latter, in which case the body of the decision will prevail.29 In this instance, there was no clear
declaration in the body of the January 31, 1984 Decision to warrant a conclusion that there was an error in the fallo. Nowhere in
the former can we find a definite declaration of the trial court that, indeed, respondent's liability was solidary. If petitioner had
doubted this point, it should have filed a motion for reconsideration before the finality of the Decision of the trial court.
Third Issue:The Policy of Upholding Executions
Petitioner argues "that the issue of whether or not the judgment debt should be construed as joint or solidary can only affect the
determination of the existence or absence of an excess in the proceeds of the sale."30 He further maintains that private
respondent's interests are protected anyway even if all his properties are sold, because "any excess in the proceeds of the sale
over the judgment and accruing costs must be delivered to the judgment debtor."31
We cannot accept these arguments. What can be sold on execution is limited by the Rules of Court, as follows:

"When there is more property of the judgment obligor than is sufficient to satisfy the judgment and lawful fees, he (sheriff) must
sell only so much of the personal or real property as is sufficient to satisfy the judgment and lawful fees."32
A writ of execution is void when issued for a sum greater than that which is warranted by the judgment or for the original amount it
states despite partial payment thereof. The exact amount due cannot be left to the determination of the sheriff.33
Petitioner finally insists that it is "futile for private respondent to contest the sale in execution conducted in the case at bar because
of the general policy of the law to sustain execution sales."34
Simple logic dictates that a general policy to sustain execution sales does not guarantee that they will be upheld at every instance.
Petitioner itself quotes grounds for setting aside such sales: a resulting injury or prejudice, fraud, mistake or irregularity.35
Being made to pay for an obligation in its entirety when one's liability is merely for a portion is a sufficient ground to contest an
execution sale. It would be the height of inequity if we allow judgment obligors to shoulder entire monetary judgments when their
legal liabilities are limited only to their proportionate shares in the entire obligation.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED. No pronouncement as to costs.
SO ORDERED.

G.R. No. 183374

June 29, 2010

MARSMAN DRYSDALE LAND, INC., Petitioner,

vs.
PHILIPPINE GEOANALYTICS, INC. AND GOTESCO PROPERTIES, INC., Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 183376
GOTESCO PROPERTIES, INC., Petitioner,
vs.
MARSMAN DRYSDALE LAND, INC. AND PHILIPPINE GEOANALYTICS, INC., Respondents.
DECISION
CARPIO MORALES, J.:
On February 12, 1997, Marsman Drysdale Land, Inc. (Marsman Drysdale) and Gotesco Properties, Inc. (Gotesco) entered into a
Joint Venture Agreement (JVA) for the construction and development of an office building on a land owned by Marsman Drysdale
in Makati City.1
The JVA contained the following pertinent provisions:
SECTION 4. CAPITAL OF THE JV
It is the desire of the Parties herein to implement this Agreement by investing in the PROJECT on a FIFTY (50%) PERCENTFIFTY (50%) PERCENT basis.
4.1. Contribution of [Marsman Drysdale]-[Marsman Drysdale] shall contribute the Property.
The total appraised value of the Property is PESOS: FOUR HUNDRED TWENTY MILLION (P420,000,000.00).
For this purpose, [Marsman Drysdale] shall deliver the Property in a buildable condition within ninety (90) days from signing of this
Agreement barring any unforeseen circumstances over which [Marsman Drysdale] has no control. Buildable condition shall mean
that the old building/structure which stands on the Property is demolished and taken to ground level.
4.2. Contribution of [Gotesco]- [Gotesco] shall contribute the amount of PESOS: FOUR HUNDRED TWENTY MILLION
(P420,000,000.00) in cash which shall be payable as follows:
4.2.1. The amount of PESOS: FIFTY MILLION (P50,000,000.00) upon signing of this Agreement.
4.2.2. The balance of PESOS: THREE HUNDRED SEVENTY MILLION (P370,000,000.00) shall be paid based on progress
billings, relative to the development and construction of the Building, but shall in no case exceed ten (10) months from delivery of
the Property in a Buildable condition as defined in section 4.1.
A joint account shall be opened and maintained by both Parties for handling of said balance, among other Project concerns.
4.3. Funding and Financing
4.3.1 Construction funding for the Project shall be obtained from the cash contribution of [Gotesco].
4.3.2 Subsequent funding shall be obtained from the pre-selling of units in the Building or, when necessary, from loans from
various banks or financial institutions. [Gotesco] shall arrange the required funding from such banks or financial institutions, under
such terms and conditions which will provide financing rates favorable to the Parties.
4.3.3 [Marsman Drysdale] shall not be obligated to fund the Project as its contribution is limited to the Property.
4.3.4 If the cost of the Project exceeds the cash contribution of [Gotesco], the proceeds obtained from the pre-selling of units and
proceeds from loans, the Parties shall agree on other sources and terms of funding such excess as soon as practicable.
4.3.5 x x x x.

4.3.6 x x x x.
4.3.7 x x x x.
4.3.8 All funds advanced by a Party (or by third parties in substitution for advances from a Party) shall be repaid by the JV.
4.3.9 If any Party agrees to make an advance to the Project but fails to do so (in whole or in part) the other party may advance the
shortfall and the Party in default shall indemnify the Party making the substitute advance on demand for all of its losses, costs and
expenses incurred in so doing. (emphasis supplied; underscoring in the original)
Via Technical Services Contract (TSC) dated July 14, 1997,2 the joint venture engaged the services of Philippine Geoanalytics,
Inc. (PGI) to provide subsurface soil exploration, laboratory testing, seismic study and geotechnical engineering for the project.
PGI, was, however, able to drill only four of five boreholes needed to conduct its subsurface soil exploration and laboratory testing,
justifying its failure to drill the remaining borehole to the failure on the part of the joint venture partners to clear the area where the
drilling was to be made.3 PGI was able to complete its seismic study though.
PGI then billed the joint venture on November 24, 1997 for P284,553.50 representing the cost of partial subsurface soil
exploration; and on January 15, 1998 for P250,800 representing the cost of the completed seismic study.4
Despite repeated demands from PGI,5 the joint venture failed to pay its obligations.
Meanwhile, due to unfavorable economic conditions at the time, the joint venture was cut short and the planned building project
was eventually shelved.6
PGI subsequently filed on November 11, 1999 a complaint for collection of sum of money and damages at the Regional Trial Court
(RTC) of Quezon City against Marsman Drysdale and Gotesco.
In its Answer with Counterclaim and Cross-claim, Marsman Drysdale passed the responsibility of paying PGI to Gotesco which,
under the JVA, was solely liable for the monetary expenses of the project.7
Gotesco, on the other hand, countered that PGI has no cause of action against it as PGI had yet to complete the services
enumerated in the contract; and that Marsman Drysdale failed to clear the property of debris which prevented PGI from
completing its work.8
By Decision of June 2, 2004,9 Branch 226 of the Quezon City RTC rendered judgment in favor of PGI, disposing as follows:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of plaintiff [PGI].
The defendants [Gotesco] and [Marsman Drysdale] are ordered to pay plaintiff, jointly:
(1) the sum of P535,353.50 with legal interest from the date of this decision until fully paid;
(2) the sum of P200,000.00 as exemplary damages;
(3) the sum of P200,000.00 as and for attorneys fees; and
(4) costs of suit.
The cross-claim of defendant [Marsman Drysdale] against defendant [Gotesco] is hereby GRANTED as follows:
a) Defendant [Gotesco] is ordered to reimburse co-defendant [Marsman Drysdale] in the amount of P535,353.[50] in accordance
with the [JVA].
b) Defendant [Gotesco] is further ordered to pay co-defendant [Marsman Drysdale] the sum of P100,000.00 as and for attorneys
fees.
SO ORDERED. (underscoring in the original; emphasis supplied)
Marsman Drysdale moved for partial reconsideration, contending that it should not have been held jointly liable with Gotesco on
PGIs claim as well as on the awards of exemplary damages and attorneys fees. The motion was, by Resolution of October 28,
2005, denied.
Both Marsman Drysdale and Gotesco appealed to the Court of Appeals which, by Decision of January 28, 2008,10 affirmed with
modification the decision of the trial court. Thus the appellate court disposed:
WHEREFORE, premises considered, the instant appeal is PARTLY GRANTED. The assailed Decision dated June 2, 2004 and
the Resolution dated October 28, 2005 of the RTC of Quezon City, Branch 226, in Civil Case No. Q99-39248 are hereby
AFFIRMED with MODIFICATION deleting the award of exemplary damages in favor of [PGI] and the P100,000.00 attorneys fees
in favor of [Marsman Drysdale] and ordering defendant-appellant [Gotesco] to REIMBURSE [Marsman Drysdale] 50% of the
aggregate sum due [PGI], instead of the lump sum P535,353.00 awarded by the RTC. The rest of the Decision stands.
SO ORDERED. (capitalization and emphasis in the original; underscoring supplied)
In partly affirming the trial courts decision, the appellate court ratiocinated that notwithstanding the terms of the JVA, the joint
venture cannot avoid payment of PGIs claim since "[the JVA] could not affect third persons like [PGI] because of the basic civil
law principle of relativity of contracts which provides that contracts can only bind the parties who entered into it, and it cannot favor
or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof."11
Their motions for partial reconsideration having been denied,12 Marsman Drysdale and Gotesco filed separate petitions for review
with the Court which were docketed as G.R. Nos. 183374 and 183376, respectively. By Resolution of September 8, 2008, the
Court consolidated the petitions.
In G.R. No. 183374, Marsman Drysdale imputes error on the appellate court in
A. ADJUDGING [MARSMAN DRYSDALE] WITH JOINT LIABILITY AFTER CONCEDING THAT [GOTESCO] SHOULD
ULTIMATELY BE SOLELY LIABLE TO [PGI].

B. AWARDING ATTORNEYS FEES IN FAVOR OF [PGI]

C. IGNORING THE FACT THAT [PGI] DID NOT COMPLY WITH THE REQUIREMENT OF "SATISFACTORY PERFORMANCE"
OF ITS PRESTATION WHICH, PURSUANT TO THE TECHNICAL SERVICES CONTRACT, IS THE CONDITION SINE QUA NON
TO COMPENSATION.
D. DISREGARDING CLEAR EVIDENCE SHOWING [MARSMAN DRYSDALES] ENTITLEMENT TO AN AWARD OF
ATTORNEYS FEES.13
On the other hand, in G.R. No. 183376, Gotesco peddles that the appellate court committed error when it
ORDERED [GOTESCO] TO PAY P535,353.50 AS COST OF THE WORK PERFORMED BY [PGI] AND P100,000.00 [AS]
ATTORNEYS FEES [AND] TO REIMBURSE [MARSMAN DRYSDALE] 50% OF P535,353.50 AND PAY [MARSMAN
DRYSDALE] P100,000.00 AS ATTORNEYS FEES. 14
On the issue of whether PGI was indeed entitled to the payment of services it rendered, the Court sees no imperative to reexamine the congruent findings of the trial and appellate courts thereon. Undoubtedly, the exercise involves an examination of
facts which is normally beyond the ambit of the Courts functions under a petition for review, for it is well-settled that this Court is
not a trier of facts. While this judicial tenet admits of exceptions, such as when the findings of facts of the appellate court are
contrary to those of the trial courts, or when the judgment is based on a misapprehension of facts, or when the findings of facts
are contradicted by the evidence on record,15 these extenuating grounds find no application in the present petitions.
At all events, the Court is convinced that PGI had more than sufficiently established its claims against the joint venture. In fact,
Marsman Drysdale had long recognized PGIs contractual claims when it (PGI) received a Certificate of Payment16 from the joint
ventures project manager17 which was endorsed to Gotesco for processing and payment.18
The core issue to be resolved then is which between joint venturers Marsman Drysdale and Gotesco bears the liability to pay PGI
its unpaid claims.
To Marsman Drysdale, it is Gotesco since, under the JVA, construction funding for the project was to be obtained from Gotescos
cash contribution, as its (Marsman Drysdales) participation in the venture was limited to the land.
Gotesco maintains, however, that it has no liability to pay PGI since it was due to the fault of Marsman Drysdale that PGI was
unable to complete its undertaking.
The Court finds Marsman Drysdale and Gotesco jointly liable to PGI.
PGI executed a technical service contract with the joint venture and was never a party to the JVA. While the JVA clearly spelled
out, inter alia, the capital contributions of Marsman Drysdale (land) and Gotesco (cash) as well as the funding and financing
mechanism for the project, the same cannot be used to defeat the lawful claim of PGI against the two joint venturers-partners.
The TSC clearly listed the joint venturers Marsman Drysdale and Gotesco as the beneficial owner of the project,19 and all billing
invoices indicated the consortium therein as the client.
As the appellate court held, Articles 1207 and 1208 of the Civil Code, which respectively read:
Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that
each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the
prestations.1avvphi1 There is a solidary liability only when the obligation expressly so states, or when the law or nature of the
obligation requires solidarity.
Art. 1208. If from the law, or the nature or the wording of the obligations to which the preceding article refers the contrary does not
appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors, the credits
or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits. (emphasis
and underscoring supplied),
presume that the obligation owing to PGI is joint between Marsman Drysdale and Gotesco.
The only time that the JVA may be made to apply in the present petitions is when the liability of the joint venturers to each other
would set in.
A joint venture being a form of partnership, it is to be governed by the laws on partnership.20 Article 1797 of the Civil Code
provides:
Art. 1797. The losses and profits shall be distributed in conformity with the agreement. If only the share of each partner in the
profits has been agreed upon, the share of each in the losses shall be in the same proportion.
In the absence of stipulation, the share of each in the profits and losses shall be in proportion to what he may have contributed,
but the industrial partner shall not be liable for the losses. As for the profits, the industrial partner shall receive such share as may
be just and equitable under the circumstances. If besides his services he has contributed capital, he shall also receive a share in
the profits in proportion to his capital. (emphasis and underscoring supplied)
In the JVA, Marsman Drysdale and Gotesco agreed on a 50-50 ratio on the proceeds of the project.21 They did not provide for the
splitting of losses, however. Applying the above-quoted provision of Article 1797 then, the same ratio applies in splitting the
P535,353.50 obligation-loss of the joint venture.
The appellate courts decision must be modified, however. Marsman Drysdale and Gotesco being jointly liable, there is no need
for Gotesco to reimburse Marsman Drysdale for "50% of the aggregate sum due" to PGI.
Allowing Marsman Drysdale to recover from Gotesco what it paid to PGI would not only be contrary to the law on partnership on
division of losses but would partake of a clear case of unjust enrichment at Gotescos expense. The grant by the lower courts of
Marsman Drysdale cross-claim against Gotesco was thus erroneous.
Marsman Drysdales supplication for the award of attorneys fees in its favor must be denied. It cannot claim that it was compelled

to litigate or that the civil action or proceeding against it was clearly unfounded, for the JVA provided that, in the event a party
advances funds for the project, the joint venture shall repay the advancing party. 22
Marsman Drysdale was thus not precluded from advancing funds to pay for PGIs contracted services to abate any legal action
against the joint venture itself. It was in fact hardline insistence on Gotesco having sole responsibility to pay for the obligation,
despite the fact that PGIs services redounded to the benefit of the joint venture, that spawned the legal action against it and
Gotesco.
Finally, an interest of 12% per annum on the outstanding obligation must be imposed from the time of demand23 as the delay in
payment makes the obligation one of forbearance of money, conformably with this Courts ruling in Eastern Shipping Lines, Inc. v.
Court of Appeals.24 Marsman Drysdale and Gotesco should bear legal interest on their respective obligations.
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals are AFFIRMED with MODIFICATION in that the
order for Gotesco to reimburse Marsman Drysdale is DELETED, and interest of 12% per annum on the respective obligations of
Marsman Drysdale and Gotesco is imposed, computed from the last demand or on January 5, 1999 up to the finality of the
Decision.
If the adjudged amount and the interest remain unpaid thereafter, the interest rate shall be 12% per annum computed from the
time the judgment becomes final and executory until it is fully satisfied. The appealed decision is, in all other respects, affirmed.
Costs against petitioners Marsman Drysdale and Gotesco.
SO ORDERED.

G.R. No. 180257

February 23, 2011

EUSEBIO GONZALES, Petitioner,

vs.
PHILIPPINE COMMERCIAL AND INTERNATIONAL BANK, EDNA OCAMPO, and ROBERTO NOCEDA, Respondents.
DECISION
VELASCO, JR., J.:
The Case
This is an appeal via a Petition for Review on Certiorari under Rule 45 from the Decision1 dated October 22, 2007 of the Court of
Appeals (CA) in CA-G.R. CV No. 74466, which denied petitioners appeal from the December 10, 2001 Decision2 in Civil Case
No. 99-1324 of the Regional Trial Court (RTC), Branch 138 in Makati City. The RTC found justification for respondents dishonor of
petitioners check and found petitioner solidarily liable with the spouses Jose and Jocelyn Panlilio (spouses Panlilio) for the three
promissory notes they executed in favor of respondent Philippine Commercial and International Bank (PCIB).
The Facts
Petitioner Eusebio Gonzales (Gonzales) was a client of PCIB for a good 15 years before he filed the instant case. His account
with PCIB was handled by respondent Edna Ocampo (Ocampo) until she was replaced by respondent Roberto Noceda (Noceda).
In October 1992, PCIB granted a credit line to Gonzales through the execution of a Credit-On-Hand Loan Agreement3 (COHLA),
in which the aggregate amount of the accounts of Gonzales with PCIB served as collateral for and his availment limit under the
credit line. Gonzales drew from said credit line through the issuance of check. At the institution of the instant case, Gonzales had a
Foreign Currency Deposit (FCD) of USD 8,715.72 with PCIB.
On October 30, 1995, Gonzales and his wife obtained a loan for PhP 500,000. Subsequently, on December 26, 1995 and January
3, 1999, the spouses Panlilio and Gonzales obtained two additional loans from PCIB in the amounts of PhP 1,000,000 and PhP
300,000, respectively. These three loans amounting to PhP 1,800,000 were covered by three promissory notes.4 To secure the
loans, a real estate mortgage (REM) over a parcel of land covered by Transfer Certificate of Title (TCT) No. 38012 was executed
by Gonzales and the spouses Panlilio. Notably, the promissory notes specified, among others, the solidary liability of Gonzales
and the spouses Panlilio for the payment of the loans. However, it was the spouses Panlilio who received the loan proceeds of
PhP 1,800,000.
The monthly interest dues of the loans were paid by the spouses Panlilio through the automatic debiting of their account with
PCIB. But the spouses Panlilio, from the month of July 1998, defaulted in the payment of the periodic interest dues from their
PCIB account which apparently was not maintained with enough deposits. PCIB allegedly called the attention of Gonzales
regarding the July 1998 defaults and the subsequent accumulating periodic interest dues which were left still left unpaid.
In the meantime, Gonzales issued a check dated September 30, 1998 in favor of Rene Unson (Unson) for PhP 250,000 drawn
against the credit line (COHLA). However, on October 13, 1998, upon presentment for payment by Unson of said check, it was
dishonored by PCIB due to the termination by PCIB of the credit line under COHLA on October 7, 1998 for the unpaid periodic
interest dues from the loans of Gonzales and the spouses Panlilio. PCIB likewise froze the FCD account of Gonzales.
Consequently, Gonzales had a falling out with Unson due to the dishonor of the check. They had a heated argument in the
premises of the Philippine Columbian Association (PCA) where they are both members, which caused great embarrassment and
humiliation to Gonzales. Thereafter, on November 5, 1998, Unson sent a demand letter5 to Gonzales for the PhP 250,000. And on
December 3, 1998, the counsel of Unson sent a second demand letter6 to Gonzales with the threat of legal action. With his FCD
account that PCIB froze, Gonzales was forced to source out and pay the PhP 250,000 he owed to Unson in cash.
On January 28, 1999, Gonzales, through counsel, wrote PCIB insisting that the check he issued had been fully funded, and
demanded the return of the proceeds of his FCD as well as damages for the unjust dishonor of the check.7 PCIB replied on March
22, 1999 and stood its ground in freezing Gonzales accounts due to the outstanding dues of the loans.8 On May 26, 1999,
Gonzales reiterated his demand, reminding PCIB that it knew well that the actual borrowers were the spouses Panlilio and he

never benefited from the proceeds of the loans, which were serviced by the PCIB account of the spouses Panlilio.9
PCIBs refusal to heed his demands compelled Gonzales to file the instant case for damages with the RTC, on account of the
alleged unjust dishonor of the check issued in favor of Unson.
The Ruling of the RTC
After due trial, on December 10, 2001, the RTC rendered a Decision in favor of PCIB. The decretal portion reads:
WHEREFORE, judgment is rendered as follows
(a) on the first issue, plaintiff is liable to pay defendant Bank as principal under the promissory notes, Exhibits A, B and C;
(b) on the second issue, the Court finds that there is justification on part of the defendant Bank to dishonor the check, Exhibit H;
(c) on the third issue, plaintiff and defendants are not entitled to damages from each other.
No pronouncement as to costs.
SO ORDERED.10
The RTC found Gonzales solidarily liable with the spouses Panlilio on the three promissory notes relative to the outstanding REM
loan. The trial court found no fault in the termination by PCIB of the COHLA with Gonzales and in freezing the latters accounts to
answer for the past due PhP 1,800,000 loan. The trial court ruled that the dishonor of the check issued by Gonzales in favor of
Unson was proper considering that the credit line under the COHLA had already been terminated or revoked before the
presentment of the check.
Aggrieved, Gonzales appealed the RTC Decision before the CA.
The Ruling of the CA
On September 26, 2007, the appellate court rendered its Decision dismissing Gonzales appeal and affirming in toto the RTC
Decision. The fallo reads:
WHEREFORE, in view of the foregoing, the decision, dated December 10, 2001, in Civil Case No. 99-1324 is hereby AFFIRMED
in toto.
SO ORDERED.11
In dismissing Gonzales appeal, the CA, first, confirmed the RTCs findings that Gonzales was indeed solidarily liable with the
spouses Panlilio for the three promissory notes executed for the REM loan; second, it likewise found neither fault nor negligence
on the part of PCIB in dishonoring the check issued by Gonzales in favor of Unson, ratiocinating that PCIB was merely exercising
its rights under the contractual stipulations in the COHLA brought about by the outstanding past dues of the REM loan and
interests for which Gonzales was solidarily liable with the spouses Panlilio to pay under the promissory notes.
Thus, we have this petition.
The Issues
Gonzales, as before the CA, raises again the following assignment of errors:
I - IN NOT CONSIDERING THAT THE LIABILITY ARISING FROM PROMISSORY NOTES (EXHIBITS "A", "B" AND "C",
PETITIONER; EXHIBITS "1", "2" AND "3", RESPONDENT) PERTAINED TO BORROWER JOSE MA. PANLILIO AND NOT TO
APPELLANT AS RECOGNIZED AND ACKNOWLEDGE[D] BY RESPONDENT PHILIPPINE COMMERCIAL & INDUSTRIAL
BANK (RESPONDENT BANK).
II - IN FINDING THAT THE RESPONDENTS WERE NOT AT FAULT NOR GUILTY OF GROSS NEGLIGENCE IN DISHONORING
PETITIONERS CHECK DATED 30 SEPTEMBER 1998 IN THE AMOUNT OF P250,000.00 FOR THE REASON "ACCOUNT
CLOSED", INSTEAD OF MERELY "REFER TO DRAWER" GIVEN THE FACT THAT EVEN AFTER DISHONOR, RESPONDENT
SIGNED A CERTIFICATION DATED 7 DECEMBER 1998 THAT CREDIT ON HAND (COH) LOAN AGREEMENT WAS STILL
VALID WITH A COLLATERAL OF FOREIGN CURRENCY DEPOSIT (FCD) OF [USD] 48,715.72.
III - IN NOT AWARDING DAMAGES AGAINST RESPONDENTS DESPITE PRESENTATION OF CLEAR PROOF TO SUPPORT
ACTION FOR DAMAGES.12
The Courts Ruling
The core issues can be summarized, as follows: first, whether Gonzales is liable for the three promissory notes covering the PhP
1,800,000 loan he made with the spouses Panlilio where a REM over a parcel of land covered by TCT No. 38012 was constituted
as security; and second, whether PCIB properly dishonored the check of Gonzales drawn against the COHLA he had with the
bank.
The petition is partly meritorious.
First Issue: Solidarily Liability on Promissory Notes
A close perusal of the records shows that the courts a quo correctly found Gonzales solidarily liable with the spouses Panlilio for
the three promissory notes.
The promissory notes covering the PhP 1,800,000 loan show the following:
(1) Promissory Note BD-090-1766-95,13 dated October 30, 1995, for PhP 500,000 was signed by Gonzales and his wife, Jessica
Gonzales;
(2) Promissory Note BD-090-2122-95,14 dated December 26, 1995, for PhP 1,000,000 was signed by Gonzales and the spouses
Panlilio; and

(3) Promissory Note BD-090-011-96,15 dated January 3, 1996, for PhP 300,000 was signed by Gonzales and the spouses
Panlilio.
Clearly, Gonzales is liable for the loans covered by the above promissory notes. First, Gonzales admitted that he is an
accommodation party which PCIB did not dispute. In his testimony, Gonzales admitted that he merely accommodated the spouses
Panlilio at the suggestion of Ocampo, who was then handling his accounts, in order to facilitate the fast release of the loan.
Gonzales testified:
ATTY. DE JESUS:
Now in this case you filed against the bank you mentioned there was a loan also applied for by the Panlilios in the sum of P1.8
Million Pesos. Will you please tell this Court how this came about?
GONZALES:
Mr. Panlilio requested his account officer . . . . at that time it is a P42.0 Million loan and if he secures another P1.8 Million loan the
release will be longer because it has to pass to XO.
Q: After that what happened?
A: So as per suggestion since Mr. Panlilio is a good friend of mine and we co-owned the property I agreed initially to use my name
so that the loan can be utilized immediately by Mr. Panlilio.
Q: Who is actually the borrower of this P1.8 Million Pesos?
A: Well, in paper me and Mr. Panlilio.
Q: Who received the proceeds of said loan?
A: Mr. Panlilio.
Q: Do you have any proof that it was Mr. Panlilio who actually received the proceeds of this P1.8 Million Pesos loan?
A: A check was deposited in the account of Mr. Panlilio.16
xxxx
Q: By the way upon whose suggestion was the loan of Mr. Panlilio also placed under your name initially?
A: Well it was actually suggested by the account officer at that time Edna Ocampo.
Q: How about this Mr. Rodolfo Noceda?
A: As you look at the authorization aspect of the loan Mr. Noceda is the boss of Edna so he has been familiar with my account
ever since its inception.
Q: So these two officers Ocampo and Noceda knew that this was actually the account of Mr. Panlilio and not your account?
A: Yes, sir. In fact even if there is a change of account officer they are always informing me that the account will be debited to Mr.
Panlilios account.17
Moreover, the first note for PhP 500,000 was signed by Gonzales and his wife as borrowers, while the two subsequent notes
showed the spouses Panlilio sign as borrowers with Gonzales. It is, thus, evident that Gonzales signed, as borrower, the
promissory notes covering the PhP 1,800,000 loan despite not receiving any of the proceeds.
Second, the records of PCIB indeed bear out, and was admitted by Noceda, that the PhP 1,800,000 loan proceeds went to the
spouses Panlilio, thus:
ATTY. DE JESUS: [on Cross-Examination]
Is it not a fact that as far as the records of the bank [are] concerned the proceeds of the 1.8 million loan was received by Mr.
Panlilio?
NOCEDA:
Yes sir.18
The fact that the loans were undertaken by Gonzales when he signed as borrower or co-borrower for the benefit of the spouses
Panlilioas shown by the fact that the proceeds went to the spouses Panlilio who were servicing or paying the monthly duesis
beside the point. For signing as borrower and co-borrower on the promissory notes with the proceeds of the loans going to the
spouses Panlilio, Gonzales has extended an accommodation to said spouses.
Third, as an accommodation party, Gonzales is solidarily liable with the spouses Panlilio for the loans. In Ang v. Associated
Bank,19 quoting the definition of an accommodation party under Section 29 of the Negotiable Instruments Law, the Court cited
that an accommodation party is a person "who has signed the instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some other person."20 The Court further explained:
[A]n accommodation party is one who meets all the three requisites, viz: (1) he must be a party to the instrument, signing as
maker, drawer, acceptor, or indorser; (2) he must not receive value therefor; and (3) he must sign for the purpose of lending his
name or credit to some other person. An accommodation party lends his name to enable the accommodated party to obtain credit
or to raise money; he receives no part of the consideration for the instrument but assumes liability to the other party/ies thereto.
The accommodation party is liable on the instrument to a holder for value even though the holder, at the time of taking the
instrument, knew him or her to be merely an accommodation party, as if the contract was not for accommodation.
As petitioner acknowledged it to be, the relation between an accommodation party and the accommodated party is one of principal
and suretythe accommodation party being the surety. As such, he is deemed an original promisor and debtor from the

beginning; he is considered in law as the same party as the debtor in relation to whatever is adjudged touching the obligation of
the latter since their liabilities are interwoven as to be inseparable. Although a contract of suretyship is in essence accessory or
collateral to a valid principal obligation, the suretys liability to the creditor is immediate, primary and absolute; he is directly and
equally bound with the principal. As an equivalent of a regular party to the undertaking, a surety becomes liable to the debt and
duty of the principal obligor even without possessing a direct or personal interest in the obligations nor does he receive any benefit
therefrom.21
Thus, the knowledge, acquiescence, or even demand by Ocampo for an accommodation by Gonzales in order to extend the credit
or loan of PhP 1,800,000 to the spouses Panlilio does not exonerate Gonzales from liability on the three promissory notes.
Fourth, the solidary liability of Gonzales is clearly stipulated in the promissory notes which uniformly begin, "For value received,
the undersigned (the "BORROWER") jointly and severally promise to pay x x x." Solidary liability cannot be presumed but must be
established by law or contract.22 Article 1207 of the Civil Code pertinently states that "there is solidary liability only when the
obligation expressly so states, or when the obligation requires solidarity." This is true in the instant case where Gonzales, as
accommodation party, is immediately, equally, and absolutely bound with the spouses Panlilio on the promissory notes which
indubitably stipulated solidary liability for all the borrowers. Moreover, the three promissory notes serve as the contract between
the parties. Contracts have the force of law between the parties and must be complied with in good faith.23
Second Issue: Improper Dishonor of Check
Having ruled that Gonzales is solidarily liable for the three promissory notes, We shall now touch upon the question of whether it
was proper for PCIB to dishonor the check issued by Gonzales against the credit line under the COHLA.
We answer in the negative.
As a rule, an appeal by certiorari under Rule 45 of the Rules of Court is limited to review of errors of law.24 The factual findings of
the trial court, especially when affirmed by the appellate court, are generally binding on us unless there was a misapprehension of
facts or when the inference drawn from the facts was manifestly mistaken.25 The instant case falls within the exception.
The courts a quo found and held that there was a proper dishonor of the PhP 250,000 check issued by Gonzales against the
credit line, because the credit line was already closed prior to the presentment of the check by Unson; and the closing of the credit
line was likewise proper pursuant to the stipulations in the promissory notes on the banks right to set off or apply all moneys of the
debtor in PCIBs hand and the stipulations in the COHLA on the PCIBs right to terminate the credit line on grounds of default by
Gonzales.
Gonzales argues otherwise, pointing out that he was not informed about the default of the spouses Panlilio and that the
September 21, 1998 account statement of the credit line shows a balance of PhP 270,000 which was likewise borne out by the
December 7, 1998 PCIBs certification that he has USD 8,715.72 in his FCD account which is more than sufficient collateral to
guarantee the PhP 250,000 check, dated September 30, 1998, he issued against the credit line.
A careful scrutiny of the records shows that the courts a quo committed reversible error in not finding negligence by PCIB in the
dishonor of the PhP 250,000 check.
First. There was no proper notice to Gonzales of the default and delinquency of the PhP 1,800,000 loan. It must be borne in mind
that while solidarily liable with the spouses Panlilio on the PhP 1,800,000 loan covered by the three promissory notes, Gonzales is
only an accommodation party and as such only lent his name and credit to the spouses Panlilio. While not exonerating his solidary
liability, Gonzales has a right to be properly apprised of the default or delinquency of the loan precisely because he is a cosignatory of the promissory notes and of his solidary liability.
We note that it is indeed understandable for Gonzales to push the spouses Panlilio to pay the outstanding dues of the PhP
1,800,000 loan, since he was only an accommodation party and was not personally interested in the loan. Thus, a meeting was
set by Gonzales with the spouses Panlilio and the PCIB officers, Noceda and Ocampo, in the spouses Panlilios jewelry shop in
SM Megamall on October 5, 1998. Unfortunately, the meeting did not push through due to the heavy traffic Noceda and Ocampo
encountered.
Such knowledge of the default by Gonzales was, however, not enough to properly apprise Gonzales about the default and the
outstanding dues. Verily, it is not enough to be merely informed to pay over a hundred thousand without being formally apprised of
the exact aggregate amount and the corresponding dues pertaining to specific loans and the dates they became due.
Gonzales testified that he was not duly notified about the outstanding interest dues of the loan:
ATTY. DE JESUS:
Now when Mr. Panlilios was encountering problems with the bank did the defendant bank [advise] you of any problem with the
same account?
GONZALES:
They never [advised] me in writing.
Q: How did you come to know that there was a problem?
A: When my check bounced sir.26
On the other hand, the PCIB contends otherwise, as Corazon Nepomuceno testified:
ATTY. PADILLA:
Can you tell this Honorable Court what is it that you told Mr. Gonzales when you spoke to him at the celphone?
NEPOMUCENO:
I just told him to update the interest so that we would not have to cancel the COH Line and he could withdraw the money that was
in the deposit because technically, if an account is past due we are not allowed to let the client withdraw funds because they are

allowed to offset funds so, just to help him get his money, just to update the interest so that we could allow him to withdraw.
Q: Withdraw what?
A: His money on the COH, whatever deposit he has with us.
Q: Did you inform him that if he did not update the interest he would not be able to withdraw his money?
A: Yes sir, we will be forced to hold on to any assets that he has with us so thats why we suggested just to update the interest
because at the end of everything, he would be able to withdraw more funds than the interest that the money he would be needed
to update the interest.27
From the foregoing testimonies, between the denial of Gonzales and the assertion by PCIB that Gonzales was properly apprised,
we find for Gonzales. We find the testimonies of the former PCIB employees to be self-serving and tenuous at best, for there was
no proper written notice given by the bank. The record is bereft of any document showing that, indeed, Gonzales was formally
informed by PCIB about the past due periodic interests.
PCIB is well aware and did not dispute the fact that Gonzales is an accommodation party. It also acted in accordance with such
fact by releasing the proceeds of the loan to the spouses Panlilio and likewise only informed the spouses Panlilio of the interest
dues. The spouses Panlilio, through their account28 with PCIB, were paying the periodic interest dues and were the ones
periodically informed by the bank of the debiting of the amounts for the periodic interest payments. Gonzales never paid any of the
periodic interest dues. PCIBs Noceda admitted as much in his cross-examination:
ATTY. DE JESUS: [on Cross-Examination]
And there was no instance that Mr. Gonzales ever made even interest for this loan, is it not, its always Mr. Panlilio who was
paying the interest for this loan?
NOCEDA:
Yes sir.29
Indeed, no evidence was presented tending to show that Gonzales was periodically sent notices or notified of the various periodic
interest dues covering the three promissory notes. Neither do the records show that Gonzales was aware of amounts for the
periodic interests and the payment for them. Such were serviced by the spouses Panlilio.
Thus, PCIB ought to have notified Gonzales about the status of the default or delinquency of the interest dues that were not paid
starting July 1998. And such notification must be formal or in written form considering that the outstanding periodic interests
became due at various dates, i.e., on July 8, 17, and 28, 1998, and the various amounts have to be certain so that Gonzales is not
only properly apprised but is given the opportunity to pay them being solidarily liable for the loans covered by the promissory
notes.
It is the bank which computes these periodic interests and such dues must be put into writing and formally served to Gonzales if
he were asked to pay them, more so when the payments by the spouses Panlilio were charged through the account of the
spouses Panlilio where the interest dues were simply debited. Such arrangement did not cover Gonzales bank account with
PCIB, since he is only an accommodation party who has no personal interest in the PhP 1,800,000 loan. Without a clear and
determinate demand through a formal written notice for the exact periodic interest dues for the loans, Gonzales cannot be
expected to pay for them.
In business, more so for banks, the amounts demanded from the debtor or borrower have to be definite, clear, and without
ambiguity. It is not sufficient simply to be informed that one must pay over a hundred thousand aggregate outstanding interest
dues without clear and certain figures. Thus, We find PCIB negligent in not properly informing Gonzales, who is an
accommodation party, about the default and the exact outstanding periodic interest dues. Without being properly apprised,
Gonzales was not given the opportunity to properly act on them.
It was only through a letter30 sent by PCIB dated October 2, 1998 but incongruously showing the delinquencies of the PhP
1,800,000 loan at a much later date, i.e., as of October 31, 1998, when Gonzales was formally apprised by PCIB. In it, the interest
due was PhP 106,1616.71 and penalties for the unpaid interest due of PhP 64,766.66, or a total aggregate due of PhP
171,383.37. But it is not certain and the records do not show when the letter was sent and when Gonzales received it. What is
clear is that such letter was belatedly sent by PCIB and received by Gonzales after the fact that the latters FCD was already
frozen, his credit line under the COHLA was terminated or suspended, and his PhP 250,000 check in favor of Unson was
dishonored.
And way much later, or on May 4, 1999, was a demand letter from the counsel of PCIB sent to Gonzales demanding payment of
the PhP 1,800,000 loan. Obviously, these formal written notices sent to Gonzales were too late in the day for Gonzales to act
properly on the delinquency and he already suffered the humiliation and embarrassment from the dishonor of his check drawn
against the credit line.
To reiterate, a written notice on the default and deficiency of the PhP 1,800,000 loan covered by the three promissory notes was
required to apprise Gonzales, an accommodation party. PCIB is obliged to formally inform and apprise Gonzales of the defaults
and the outstanding obligations, more so when PCIB was invoking the solidary liability of Gonzales. This PCIB failed to do.
Second. PCIB was grossly negligent in not giving prior notice to Gonzales about its course of action to suspend, terminate, or
revoke the credit line, thereby violating the clear stipulation in the COHLA.
The COHLA, in its effectivity clause, clearly provides:
4. EFFECTIVITY The COH shall be effective for a period of one (1) year commencing from the receipt by the CLIENT of the
COH checkbook issued by the BANK, subject to automatic renewals for same periods unless terminated by the BANK upon prior
notice served on CLIENT.31 (Emphasis ours.)
It is undisputed that the bank unilaterally revoked, suspended, and terminated the COHLA without giving Gonzales prior notice as
required by the above stipulation in the COHLA. Noceda testified on cross-examination on the Offering Ticket32 recommending

the termination of the credit line, thus:

ATTY. DE JESUS: [on Cross-Examination]
This Exhibit 8, you have not furnished at anytime a copy to the plaintiff Mr. Gonzales is it not?
NOCEDA:
No sir but verbally it was relayed to him.
Q: But you have no proof that Mr. Gonzales came to know about this Exhibit 8?
A: It was relayed to him verbally.
Q: But there is no written proof?
A: No sir.
Q: And it is only now that you claim that it was verbally relayed to him, its only now when you testified in Court?
A: Before . . .
Q: To whom did you relay this information?
A: It was during the time that we were going to Megamall, it was relayed by Liza that he has to pay his obligations or else it will
adversely affect the status of the account.33
On the other hand, the testimony of Corazon Nepomuceno shows:
ATTY. DE JESUS: [on Cross-Examination]
Now we go to the other credit facility which is the credit on hand extended solely of course to Mr. Eusebio Gonzales who is the
plaintiff here, Mr. Panlilio is not included in this credit on hand facility. Did I gather from you as per your Exhibit 7 as of October 2,
1998 you were the one who recommended the cancellation of this credit on hand facility?
NEPOMUCENO:
It was recommended by the account officer and I supported it.
Q: And you approved it?
A: Yes sir.
Q: Did you inform Mr. Gonzales that you have already cancelled his credit on hand facility?
A: As far as I know, it is the account officer who will inform him.
Q: But you have no record that he was informed?
A: I dont recall and we have to look at the folder to determine if they were informed.
Q: If you will notice, this letter . . . what do you call this letter of yours?
A: That is our letter advising them or reminding them of their unpaid interest and that if he is able to update his interest he can
extend the promissory note or restructure the outstanding.
Q: Now, I call your attention madam witness, there is nothing in this letter to the clients advising them or Mr. Gonzales that his
credit on hand facility was already cancelled?
A: I dont know if there are other letters aside from this.
Q: So in this letter there is nothing to inform or to make Mr. Eusebio aware that his credit on hand facility was already cancelled?
A: No actually he can understand it from the last sentence. "If you will be able to update your outstanding interest, we can apply
the extention of your promissory note" so in other words we are saying that if you dont, you cannot extend the promissory note.
Q: You will notice that the subject matter of this October 2, 1998 letter is only the loan of 1.8 million is it not, as you can see from
the letter? Okay?
A: Ah . . .
Q: Okay. There is nothing there that will show that that also refers to the credit on hand facility which was being utilized by Mr.
Gonzales is it not?
A: But I dont know if there are other letters that are not presented to me now.34
The foregoing testimonies of PCIB officers clearly show that not only did PCIB fail to give prior notice to Gonzales about the
Offering Ticket for the process of termination, suspension, or revocation of the credit line under the COHLA, but PCIB likewise
failed to inform Gonzales of the fact that his credit line has been terminated. Thus, we find PCIB grossly negligent in the
termination, revocation, or suspension of the credit line under the COHLA. While PCIB invokes its right on the so-called "cross
default provisions," it may not with impunity ignore the rights of Gonzales under the COHLA.
Indeed, the business of banking is impressed with public interest and great reliance is made on the banks sworn profession of
diligence and meticulousness in giving irreproachable service. Like a common carrier whose business is imbued with public
interest, a bank should exercise extraordinary diligence to negate its liability to the depositors.35 In this instance, PCIB is sorely
remiss in the diligence required in treating with its client, Gonzales. It may not wantonly exercise its rights without respecting and
honoring the rights of its clients.

Art. 19 of the New Civil Code clearly provides that "[e]very 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." This is the basis of the principle of abuse of
right which, in turn, is based upon the maxim suum jus summa injuria (the abuse of right is the greatest possible wrong).36
In order for Art. 19 to be actionable, the following elements must be present: "(1) the existence of a legal right or duty, (2) which is
exercised in bad faith, and (3) for the sole intent of prejudicing or injuring another."37 We find that such elements are present in
the instant case. The effectivity clause of the COHLA is crystal clear that termination of the COH should be done only upon prior
notice served on the CLIENT. This is the legal duty of PCIBto inform Gonzales of the termination. However, as shown by the
above testimonies, PCIB failed to give prior notice to Gonzales.
Malice or bad faith is at the core of Art. 19. Malice or bad faith "implies a conscious and intentional design to do a wrongful act for
a dishonest purpose or moral obliquity."38 In the instant case, PCIB was able to send a letter advising Gonzales of the unpaid
interest on the loans39 but failed to mention anything about the termination of the COHLA. More significantly, no letter was ever
sent to him about the termination of the COHLA. The failure to give prior notice on the part of PCIB is already prima facie evidence
of bad faith.40 Therefore, it is abundantly clear that this case falls squarely within the purview of the principle of abuse of rights as
embodied in Art. 19.
Third. There is no dispute on the right of PCIB to suspend, terminate, or revoke the COHLA under the "cross default provisions" of
both the promissory notes and the COHLA. However, these cross default provisions do not confer absolute unilateral right to
PCIB, as they are qualified by the other stipulations in the contracts or specific circumstances, like in the instant case of an
accommodation party.
The promissory notes uniformly provide:
The lender is hereby authorized, at its option and without notice, to set off or apply to the payment of this Note any and all moneys
which may be in its hands on deposit or otherwise belonging to the Borrower. The Borrower irrevocably appoint/s the Lender,
effective upon the nonpayment of this Note on demand/at maturity or upon the happening of any of the events of default, but
without any obligation on the Lenders part should it choose not to perform this mandate, as the attorney-in-fact of the Borrower, to
sell and dispose of any property of the Borrower, which may be in the Lenders possession by public or private sale, and to apply
the proceeds thereof to the payment of this Note; the Borrower, however, shall remain liable for any deficiency.41 (Emphasis
ours.)
The above provisos are indeed qualified with the specific circumstance of an accommodation party who, as such, has not been
servicing the payment of the dues of the loans, and must first be properly apprised in writing of the outstanding dues in order to
answer for his solidary obligation.
The same is true for the COHLA, which in its default clause provides:
16. DEFAULT The CLIENT shall be considered in default under the COH if any of the following events shall occur:
1. x x x
2. Violation of the terms and conditions of this Agreement or any contract of the CLIENT with the BANK or any bank, persons,
corporations or entities for the payment of borrowed money, or any other event of default in such contracts.42
The above pertinent default clause must be read in conjunction with the effectivity clause (No. 4 of the COHLA, quoted above),
which expressly provides for the right of client to prior notice. The rationale is simple: in cases where the bank has the right to
terminate, revoke, or suspend the credit line, the client must be notified of such intent in order for the latter to act accordingly
whether to correct any ground giving rise to the right of the bank to terminate the credit line and to dishonor any check issued or to
act in accord with such termination, i.e., not to issue any check drawn from the credit line or to replace any checks that had been
issued. This, the bankwith gross negligencefailed to accord Gonzales, a valued client for more than 15 years.
Fourth. We find the testimony43 of Ocampo incredible on the point that the principal borrower of the PhP 1,800,000 loan covered
by the three promissory notes is Gonzales for which the bank officers had special instructions to grant and that it was through the
instructions of Gonzales that the payment of the periodic interest dues were debited from the account of the spouses Panlilio.
For one, while the first promissory note dated October 30, 1995 indeed shows Gonzales as the principal borrower, the other
promissory notes dated December 26, 1995 and January 3, 1996 evidently show that it was Jose Panlilio who was the principal
borrower with Gonzales as co-borrower. For another, Ocampo cannot feign ignorance on the arrangement of the payments by the
spouses Panlilio through the debiting of their bank account. It is incredulous that the payment arrangement is merely at the behest
of Gonzales and at a mere verbal directive to do so. The fact that the spouses Panlilio not only received the proceeds of the loan
but were servicing the periodic interest dues reinforces the fact that Gonzales was only an accommodation party.
Thus, due to PCIBs negligence in not giving Gonzalesan accommodation partyproper notice relative to the delinquencies in
the PhP 1,800,000 loan covered by the three promissory notes, the unjust termination, revocation, or suspension of the credit line
under the COHLA from PCIBs gross negligence in not honoring its obligation to give prior notice to Gonzales about such
termination and in not informing Gonzales of the fact of such termination, treating Gonzales account as closed and dishonoring
his PhP 250,000 check, was certainly a reckless act by PCIB. This resulted in the actual injury of PhP 250,000 to Gonzales whose
FCD account was frozen and had to look elsewhere for money to pay Unson.
With banks, the degree of diligence required is more than that of a good father of the family considering that the business of
banking is imbued with public interest due to the nature of their function. The law imposes on banks a high degree of obligation to
treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of banking.44 Had Gonzales
been properly notified of the delinquencies of the PhP 1,800,000 loan and the process of terminating his credit line under the
COHLA, he could have acted accordingly and the dishonor of the check would have been avoided.
Third Issue: Award of Damages
The banking system has become an indispensable institution in the modern world and plays a vital role in the economic life of
every civilized societybanks have attained a ubiquitous presence among the people, who have come to regard them with
respect and even gratitude and most of all, confidence, and it is for this reason, banks should guard against injury attributable to

negligence or bad faith on its part.45

In the instant case, Gonzales suffered from the negligence and bad faith of PCIB. From the testimonies of Gonzales witnesses,
particularly those of Dominador Santos46 and Freddy Gomez,47 the embarrassment and humiliation Gonzales has to endure not
only before his former close friend Unson but more from the members and families of his friends and associates in the PCA, which
he continues to experience considering the confrontation he had with Unson and the consequent loss of standing and credibility
among them from the fact of the apparent bouncing check he issued. Credit is very important to businessmen and its loss or
impairment needs to be recognized and compensated.48
The termination of the COHLA by PCIB without prior notice and the subsequent dishonor of the check issued by Gonzales
constitute acts of contra bonus mores. Art. 21 of the Civil Code refers to such acts when it says, "Any person who willfully causes
loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for
damage."
Accordingly, this Court finds that such acts warrant the payment of indemnity in the form of nominal damages.1avvphi1 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 x x x."49 We further explained the nature of nominal damages in Almeda v. Cario:
x x x Its award is thus not for the purpose of indemnification for a loss but for the recognition and vindication of a right. Indeed,
nominal damages are damages in name only and not in fact. When granted by the courts, they are not treated as an equivalent of
a wrong inflicted but simply a recognition of the existence of a technical injury. A violation of the plaintiffs right, even if only
technical, is sufficient to support an award of nominal damages. Conversely, so long as there is a showing of a violation of the
right of the plaintiff, an award of nominal damages is proper.50 (Emphasis Ours.)
In the present case, Gonzales had the right to be informed of the accrued interest and most especially, for the suspension of his
COHLA. For failure to do so, the bank is liable to pay nominal damages. The amount of such damages is addressed to the sound
discretion of the court, taking into account the relevant circumstances.51 In this case, the Court finds that the grant of PhP 50,000
as nominal damages is proper.
Moreover, as We held in MERALCO v. CA,52 failure to give prior notice when required, such as in the instant case, constitutes a
breach of contract and is a clear violation of Art. 21 of the Code. In cases such as this, Art. 2219 of the Code provides that moral
damages may be recovered in acts referred to in its Art. 21. Further, Art. 2220 of the Code provides that "[w]illful 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." Similarly, "every
person who, contrary to law, willfully or negligently causes damage to another, shall indemnify the latter for the same."53
Evidently, Gonzales is entitled to recover moral damages.
Even in the absence of malice or bad faith, a depositor still has the right to recover reasonable moral damages, if the depositor
suffered mental anguish, serious anxiety, embarrassment, and humiliation.54 Although incapable of pecuniary estimation, moral
damages are certainly recoverable if they are the proximate result of the defendants wrongful act or omission. The factual
antecedents bolstered by undisputed testimonies likewise show the mental anguish and anxiety Gonzales had to endure with the
threat of Unson to file a suit. Gonzales had to pay Unson PhP 250,000, while his FCD account in PCIB was frozen, prompting
Gonzales to demand from PCIB and to file the instant suit.
The award of moral damages is aimed at a restoration within the limits of the possible, of the spiritual status quo anteit must
always reasonably approximate the extent of injury and be proportional to the wrong committed.55 Thus, an award of PhP 50,000
is reasonable moral damages for the unjust dishonor of the PhP 250,000 which was the proximate cause of the consequent
humiliation, embarrassment, anxiety, and mental anguish suffered by Gonzales from his loss of credibility among his friends,
colleagues and peers.
Furthermore, the initial carelessness of the banks omission in not properly informing Gonzales of the outstanding interest dues
aggravated by its gross neglect in omitting to give prior notice as stipulated under the COHLA and in not giving actual notice of the
termination of the credit linejustifies the grant of exemplary damages of PhP 10,000. Such an award is imposed by way of
example or correction for the public good.
Finally, an award for attorneys fees is likewise called for from PCIBs negligence which compelled Gonzales to litigate to protect
his interest. In accordance with Art. 2208(1) of the Code, attorneys fees may be recovered when exemplary damages are
awarded. We find that the amount of PhP 50,000 as attorneys fees is reasonable.
WHEREFORE, this petition is PARTLY GRANTED. Accordingly, the CA Decision dated October 22, 2007 in CA-G.R. CV No.
74466 is hereby REVERSED and SET ASIDE. The Philippine Commercial and International Bank (now Banco De Oro) is
ORDERED to pay Eusebio Gonzales PhP 50,000 as nominal damages, PhP 50,000 as moral damages, PhP 10,000 as
exemplary damages, and PhP 50,000 as attorneys fees.
No pronouncement as to costs.
SO ORDERED.

G.R. No. 126490 March 31, 1998

ESTRELLA PALMARES, petitioner,
vs.
COURT OF APPEALS and M.B. LENDING CORPORATION, respondents.

REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable with the principal debtor

in case the latter defaults in the payment of the loan, is such undertaking of the former deemed to be that of a surety as an insurer
of the debt, or of a guarantor who warrants the solvency of the debtor?
Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation extended a loan to the
spouses Osmea and Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or
before May 12, 1990, with compounded interest at the rate of 6% per annum to be computed every 30 days from the date thereof.
1 On four occasions after the execution of the promissory note and even after the loan matured, petitioner and the Azarraga
spouses were able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made after the last
payment on September 26, 1991. 2
Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent corporation filed a complaint 3
against petitioner Palmares as the lone party-defendant, to the exclusion of the principal debtors, allegedly by reason of the
insolvency of the latter.
In her Amended Answer with Counterclaim, 4 petitioner alleged that sometime in August 1990, immediately after the loan matured,
she offered to settle the obligation with respondent corporation but the latter informed her that they would try to collect from the
spouses Azarraga and that she need not worry about it; that there has already been a partial payment in the amount of
P17,010.00; that the interest of 6% per month compounded at the same rate per month, as well as the penalty charges of 3% per
month, are usurious and unconscionable; and that while she agrees to be liable on the note but only upon default of the principal
debtor, respondent corporation acted in bad faith in suing her alone without including the Azarragas when they were the only ones
who benefited from the proceeds of the loan.
During the pre-trial conference, the parties submitted the following issues for the resolution of the trial court: (1) what the rate of
interest, penalty and damages should be; (2) whether the liability of the defendant (herein petitioner) is primary or subsidiary; and
(3) whether the defendant Estrella Palmares is only a guarantor with a subsidiary liability and not a co-maker with primary liability.
5
Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and the memoranda to be submitted by
them. On November 26, 1992, the Regional Trial Court of Iloilo City, Branch 23, rendered judgment dismissing the complaint
without prejudice to the filing of a separate action for a sum of money against the spouses Osmea and Merlyn Azarraga who are
primarily liable on the instrument. 6 This was based on the findings of the court a quo that the filing of the complaint against herein
petitioner Estrella Palmares, to the exclusion of the Azarraga spouses, amounted to a discharge of a prior party; that the offer
made by petitioner to pay the obligation is considered a valid tender of payment sufficient to discharge a person's secondary
liability on the instrument; as co-maker, is only secondarily liable on the instrument; and that the promissory note is a contract of
adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered judgment declaring herein petitioner
Palmares liable to pay respondent corporation:
1. The sum of P13,700.00 representing the outstanding balance still due and owing with interest at six percent (6%) per month
computed from the date the loan was contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of the outstanding balance;
3. Attorney's fees at 25% of the total amount due per stipulations;
4. Plus costs of suit. 7
Contrary to the findings of the trial court, respondent appellate court declared that petitioner Palmares is a surety since she bound
herself to be jointly and severally or solidarily liable with the principal debtors, the Azarraga spouses, when she signed as a comaker. As such, petitioner is primarily liable on the note and hence may be sued by the creditor corporation for the entire
obligation. It also adverted to the fact that petitioner admitted her liability in her Answer although she claims that the Azarraga
spouses should have been impleaded. Respondent court ordered the imposition of the stipulated 6% interest and 3% penalty
charges on the ground that the Usury Law is no longer enforceable pursuant to Central Bank Circular No. 905. Finally, it
rationalized that even if the promissory note were to be considered as a contract of adhesion, the same is not entirely prohibited
because the one who adheres to the contract is free to reject it entirely; if he adheres, he gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore solidarily liable to pay the promissory note.
1. The terms of the promissory note are vague. Its conflicting provisions do not establish Palmares' solidary liability.
2. The promissory note contains provisions which establish the co-maker's liability as that of a guarantor.
3. There is no sufficient basis for concluding that Palmares' liability is solidary.
4. The promissory note is a contract of adhesion and should be construed against M. B. Lending Corporation.
5. Palmares cannot be compelled to pay the loan at this point.
B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in strictly imposing the interests and penalty charges on
the outstanding balance of the promissory note.
The foregoing contentions of petitioner are denied and contradicted in their material points by respondent corporation. They are
further refuted by accepted doctrines in the American jurisdiction after which we patterned our statutory law on surety and
guaranty. This case then affords us the opportunity to make an extended exposition on the ramifications of these two specialized
contracts, for such guidance as may be taken therefrom in similar local controversies in the future.
The basis of petitioner Palmares' liability under the promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the contents of this Promissory Note

for Short-Term Loan:

That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above principal maker of this
note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above loan from me in case the
principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note subject to the same conditions above-contained. 8
Petitioner contends that the provisions of the second and third paragraph are conflicting in that while the second paragraph seems
to define her liability as that of a surety which is joint and solidary with the principal maker, on the other hand, under the third
paragraph her liability is actually that of a mere guarantor because she bound herself to fulfill the obligation only in case the
principal debtor should fail to do so, which is the essence of a contract of guaranty. More simply stated, although the second
paragraph says that she is liable as a surety, the third paragraph defines the nature of her liability as that of a guarantor. According
to petitioner, these are two conflicting provisions in the promissory note and the rule is that clauses in the contract should be
interpreted in relation to one another and not by parts. In other words, the second paragraph should not be taken in isolation, but
should be read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers that she could be held liable only as a
guarantor for several reasons. First, the words "jointly and severally or solidarily liable" used in the second paragraph are technical
and legal terms which are not fully appreciated by an ordinary layman like herein petitioner, a 65-year old housewife who is likely
to enter into such transactions without fully realizing the nature and extent of her liability. On the contrary, the wordings used in the
third paragraph are easier to comprehend. Second, the law looks upon the contract of suretyship with a jealous eye and the rule is
that the obligation of the surety cannot be extended by implication beyond specified limits, taking into consideration the peculiar
nature of a surety agreement which holds the surety liable despite the absence of any direct consideration received from either the
principal obligor or the creditor. Third, the promissory note is a contract of adhesion since it was prepared by respondent M.B.
Lending Corporation. The note was brought to petitioner partially filled up, the contents thereof were never explained to her, and
her only participation was to sign thereon. Thus, any apparent ambiguity in the contract should be strictly construed against
private respondent pursuant to Art. 1377 of the Civil Code. 9
Petitioner accordingly concludes that her liability should be deemed restricted by the clause in the third paragraph of the
promissory note to be that of a guarantor.
Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because the principal debtors cannot be
considered in default in the absence of a judicial or extrajudicial demand. It is true that the complaint alleges the fact of demand,
but the purported demand letters were never attached to the pleadings filed by private respondent before the trial court. And, while
petitioner may have admitted in her Amended Answer that she received a demand letter from respondent corporation sometime in
1990, the same did not effectively put her or the principal debtors in default for the simple reason that the latter subsequently
made a partial payment on the loan in September, 1991, a fact which was never controverted by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of P2,745,483.39 in favor of private respondent
when, in truth and in fact, the outstanding balance of the loan is only P13,700.00. Where the interest charged on the loan is
exorbitant, iniquitous or unconscionable, and the obligation has been partially complied with, the court may equitably reduce the
penalty 10 on grounds of substantial justice. More importantly, respondent corporation never refuted petitioner's allegation that
immediately after the loan matured, she informed said respondent of her desire to settle the obligation. The court should,
therefore, mitigate the damages to be paid since petitioner has shown a sincere desire for a compromise. 11
After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the petition for lack of merit, but to
except therefrom the issue anent the propriety of the monetary award adjudged to herein respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that the promissory note executed between the parties is a
contract of adhesion, it has been the consistent holding of the Court that contracts of adhesion are not invalid per se and that on
numerous occasions the binding effects thereof have been upheld. The peculiar nature of such contracts necessitate a close
scrutiny of the factual milieu to which the provisions are intended to apply. Hence, just as consistently and unhesitatingly, but
without categorically invalidating such contracts, the Court has construed obscurities and ambiguities in the restrictive provisions
of contracts of adhesion strictly albeit not unreasonably against the drafter thereof when justified in light of the operative facts and
surrounding circumstances. 12 The factual scenario obtaining in the case before us warrants a liberal application of the rule in
favor of respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in
case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt upon the intention
of the contracting parties, the literal meaning of its stipulation shall control. 13 In the case at bar, petitioner expressly bound herself
to be jointly and severally or solidarily liable with the principal maker of the note. The terms of the contract are clear, explicit and
unequivocal that petitioner's liability is that of a surety.
Her pretension that the terms "jointly and severally or solidarily liable" contained in the second paragraph of her contract are
technical and legal terms which could not be easily understood by an ordinary layman like her is diametrically opposed to her
manifestation in the contract that she "fully understood the contents" of the promissory note and that she is "fully aware" of her
solidary liability with the principal maker. Petitioner admits that she voluntarily affixed her signature thereto; ergo, she cannot now
be heard to claim otherwise. Any reference to the existence of fraud is unavailing. Fraud must be established by clear and
convincing evidence, mere preponderance of evidence not even being adequate. Petitioner's attempt to prove fraud must,
therefore, fail as it was evidenced only by her own uncorroborated and, expectedly, self-serving allegations. 14
Having entered into the contract with full knowledge of its terms and conditions, petitioner is estopped to assert that she did so
under a misapprehension or in ignorance of their legal effect, or as to the legal effect of the undertaking. 15 The rule that

ignorance of the contents of an instrument does not ordinarily affect the liability of one who signs it also applies to contracts of
suretyship. And the mistake of a surety as to the legal effect of her obligation is ordinarily no reason for relieving her of liability. 16
Petitioner would like to make capital of the fact that although she obligated herself to be jointly and severally liable with the
principal maker, her liability is deemed restricted by the provisions of the third paragraph of her contract wherein she agreed "that
M.B. Lending Corporation may demand payment of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga
defaults in the payment of the note," which makes her contract one of guaranty and not suretyship. The purported discordance is
more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. 17 A suretyship is an
undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay. 18 Stated differently, a surety
promises to pay the principal's debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding against
the principal, may proceed against the guarantor if the principal is unable to pay. 19 A surety binds himself to perform if the
principal does not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that the principal will
pay, but simply that he is able to do so. 20 In other words, a surety undertakes directly for the payment and is so responsible at
once if the principal debtor makes default, while a guarantor contracts to pay if, by the use of due diligence, the debt cannot be
made out of the principal debtor. 21
Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically remove it from the ambit of a
contract of suretyship. The second and third paragraphs of the aforequoted portion of the promissory note do not contain any
other condition for the enforcement of respondent corporation's right against petitioner. It has not been shown, either in the
contract or the pleadings, that respondent corporation agreed to proceed against herein petitioner only if and when the defaulting
principal has become insolvent. A contract of suretyship, to repeat, is that wherein one lends his credit by joining in the principal
debtor's obligation, so as to render himself directly and primarily responsible with him, and without reference to the solvency of the
principal. 22
In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the rule on strictissimi juris, which holds that
when the meaning of a contract of indemnity or guaranty has once been judicially determined under the rule of reasonable
construction applicable to all written contracts, then the liability of the surety, under his contract, as thus interpreted and construed,
is not to be extended beyond its strict meaning. 23 The rule, however, will apply only after it has been definitely ascertained that
the contract is one of suretyship and not a contract of guaranty. It cannot be used as an aid in determining whether a party's
undertaking is that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation contained in the third paragraph of the
controverted suretyship contract merely elucidated on and made more specific the obligation of petitioner as generally defined in
the second paragraph thereof. Resultantly, the theory advanced by petitioner, that she is merely a guarantor because her liability
attaches only upon default of the principal debtor, must necessarily fail for being incongruent with the judicial pronouncements
adverted to above.
It is a well-entrenched rule that in order to judge the intention of the contracting parties, their contemporaneous and subsequent
acts shall also be principally considered. 24 Several attendant factors in that genre lend support to our finding that petitioner is a
surety. For one, when petitioner was informed about the failure of the principal debtor to pay the loan, she immediately offered to
settle the account with respondent corporation. Obviously, in her mind, she knew that she was directly and primarily liable upon
default of her principal. For another, and this is most revealing, petitioner presented the receipts of the payments already made,
from the time of initial payment up to the last, which were all issued in her name and of the Azarraga spouses. 25 This can only be
construed to mean that the payments made by the principal debtors were considered by respondent corporation as creditable
directly upon the account and inuring to the benefit of petitioner. The concomitant and simultaneous compliance of petitioner's
obligation with that of her principals only goes to show that, from the very start, petitioner considered herself equally bound by the
contract of the principal makers.
In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the principal, 26 and as such is
deemed an original promisor and debtor from the beginning. 27 This is because in suretyship there is but one contract, and the
surety is bound by the same agreement which binds the principal. 28 In essence, the contract of a surety starts with the
agreement, 29 which is precisely the situation obtaining in this case before the Court.
It will further be observed that petitioner's undertaking as co-maker immediately follows the terms and conditions stipulated
between respondent corporation, as creditor, and the principal obligors. A surety is usually bound with his principal by the same
instrument, executed at the same time and upon the same consideration; he is an original debtor, and his liability is immediate and
direct. 30 Thus, it has been held that where a written agreement on the same sheet of paper with and immediately following the
principal contract between the buyer and seller is executed simultaneously therewith, providing that the signers of the agreement
agreed to the terms of the principal contract, the signers were "sureties" jointly liable with the buyer. 31 A surety usually enters into
the same obligation as that of his principal, and the signatures of both usually appear upon the same instrument, and the same
consideration usually supports the obligation for both the principal and the surety. 32
There is no merit in petitioner's contention that the complaint was prematurely filed because the principal debtors cannot as yet be
considered in default, there having been no judicial or extrajudicial demand made by respondent corporation. Petitioner has
agreed that respondent corporation may demand payment of the loan from her in case the principal maker defaults, subject to the
same conditions expressed in the promissory note. Significantly, paragraph (G) of the note states that "should I fail to pay in
accordance with the above schedule of payment, I hereby waive my right to notice and demand." Hence, demand by the creditor
is no longer necessary in order that delay may exist since the contract itself already expressly so declares. 33 As a surety,
petitioner is equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since the commencement of
the suit is a sufficient demand. 34 On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right,
to be given notice of the principal's default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of
the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of
discharging the surety. The surety is bound to take notice of the principal's default and to perform the obligation. He cannot
complain that the creditor has not notified

him in the absence of a special agreement to that effect in the contract of suretyship. 35
The alleged failure of respondent corporation to prove the fact of demand on the principal debtors, by not attaching copies thereof
to its pleadings, is likewise immaterial. In the absence of a statutory or contractual requirement, it is not necessary that payment or
performance of his obligation be first demanded of the principal, especially where demand would have been useless; nor is it a
requisite, before proceeding against the sureties, that the principal be called on to account. 36 The underlying principle therefor is
that a suretyship is a direct contract to pay the debt of another. A surety is liable as much as his principal is liable, and absolutely
liable as soon as default is made, without any demand upon the principal whatsoever or any notice of default. 37 As an original
promisor and debtor from the beginning, he is held ordinarily to know every default of his principal. 38
Petitioner questions the propriety of the filing of a complaint solely against her to the exclusion of the principal debtors who
allegedly were the only ones who benefited from the proceeds of the loan. What petitioner is trying to imply is that the creditor,
herein respondent corporation, should have proceeded first against the principal before suing on her obligation as surety. We
disagree.
A creditor's right to proceed against the surety exists independently of his right to proceed against the principal. 39 Under Article
1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously.
The rule, therefore, is that if the obligation is joint and several, the creditor has the right to proceed even against the surety alone.
40 Since, generally, it is not necessary for the creditor to proceed against a principal in order to hold the surety liable, where, by
the terms of the contract, the obligation of the surety is the same that of the principal, then soon as the principal is in default, the
surety is likewise in default, and may be sued immediately and before any proceedings are had against the principal. 41 Perforce,
in accordance with the rule that, in the absence of statute or agreement otherwise, a surety is primarily liable, and with the rule
that his proper remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by
statute and in the absence of any agreement limiting the application of the security, require the creditor or obligee, before
proceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where both principal and
surety are equally bound. 42
We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not release her
from liability. Where a creditor refrains from proceeding against the principal, the surety is not exonerated. In other words, mere
want of diligence or forbearance does not affect the creditor's rights vis-a-vis the surety, unless the surety requires him by
appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not discharge the surety whether
given at the principal's request or without it, and whether it is yielded by the creditor through sympathy or from an inclination to
favor the principal, or is only the result of passiveness. The neglect of the creditor to sue the principal at the time the debt falls due
does not discharge the surety, even if such delay continues until the principal becomes insolvent. 43 And, in the absence of proof
of resultant injury, a surety is not discharged by the creditor's mere statement that the creditor will not look to the surety, 44 or that
he need not trouble himself. 45 The consequences of the delay, such as the subsequent insolvency of the principal, 46 or the fact
that the remedies against the principal may be lost by lapse of time, are immaterial. 47
The raison d'tre for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time. 48 At
any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay
the debt himself and become subrogated to all the rights and remedies of the creditor. 49
It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without change in the time
when the debt might be demanded, does not constitute an extension of the time of payment, which would release the surety. 50 In
order to constitute an extension discharging the surety, it should appear that the extension was for a definite period, pursuant to
an enforceable agreement between the principal and the creditor, and that it was made without the consent of the surety or with a
reservation of rights with respect to him. The contract must be one which precludes the creditor from, or at least hinders him in,
enforcing the principal contract within the period during which he could otherwise have enforced it, and which precludes the surety
from paying the debt. 51
None of these elements are present in the instant case. Verily, the mere fact that respondent corporation gave the principal
debtors an extended period of time within which to comply with their obligation did not effectively absolve here in petitioner from
the consequences of her undertaking. Besides, the burden is on the surety, herein petitioner, to show that she has been
discharged by some act of the creditor, 52 herein respondent corporation, failing in which we cannot grant the relief prayed for.
As a final issue, petitioner claims that assuming that her liability is solidary, the interests and penalty charges on the outstanding
balance of the loan cannot be imposed for being illegal and unconscionable. Petitioner additionally theorizes that respondent
corporation intentionally delayed the collection of the loan in order that the interests and penalty charges would accumulate. The
statement, likewise traversed by said respondent, is misleading.
In an affidavit 53 executed by petitioner, which was attached to her petition, she stated, among others, that:
8. During the latter part of 1990, I was surprised to learn that Merlyn Azarraga's loan has been released and that she has not paid
the same upon its maturity. I received a telephone call from Mr. Augusto Banusing of MB Lending informing me of this fact and of
my liability arising from the promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and Osmea Azarraga. At the same time, I offered to pay MB Lending
the outstanding balance of the principal obligation should he fail to collect from Merlyn and Osmea Azarraga. Mr. Banusing
advised me not to worry because he will try to collect first from Merlyn and Osmea Azarraga.
10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing who reminded that the loan of Merlyn and
Osmea Azarraga, together with interest and penalties thereon, has not been paid. Since I had no available funds at that time, I
offered to pay MB Lending by delivering to them a parcel of land which I own. Mr. Banusing's secretary, however, refused my offer
for the reason that they are not interested in real estate.
11. In March 1992, I received a copy of the summons and of the complaint filed against me by MB Lending before the RTC-Iloilo.
After learning that a complaint was filed against me, I instructed Sheila Gatia to go to MB Lending and reiterate my first offer to
pay the outstanding balance of the principal obligation of Merlyn Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus, counsel of MB Lending.

13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay the outstanding balance of the principal
obligation loan (sic) of Merlyn and Osmea Azarraga is acceptable. Later, Atty. Venus informed Ms. Gatia that my offer is not
acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed sufficient and substantial in order to effectively discharge her
from liability. There are a number of circumstances which conjointly inveigh against her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately demanding payment from petitioner. It was petitioner who initially
requested that the creditor try to collect from her principal first, and she offered to pay only in case the creditor fails to collect. The
delay, if any, was occasioned by the fact that respondent corporation merely acquiesced to the request of petitioner. At any rate,
there was here no actual offer of payment to speak of but only a commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by offering a parcel of land which she owned. Respondent corporation
was acting well within its rights when it refused to accept the offer. The debtor of a thing cannot compel the creditor to receive a
different one, although the latter may be of the same value, or more valuable than that which is due. 54 The obligee is entitled to
demand fulfillment of the obligation or performance as stipulated. A change of the object of the obligation would constitute
novation requiring the express consent of the parties. 55
3. After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding balance of the obligation in the
amount of P30,000.00 but the same was likewise rejected. Again, respondent corporation cannot be blamed for refusing the
amount being offered because it fell way below the amount it had computed, based on the stipulated interests and penalty
charges, as owing and due from herein petitioner. A debt shall not be understood to have been paid unless the thing or service in
which the obligation consists has been completely delivered or rendered, as the case may be. 56 In other words, the prestation
must be fulfilled completely. A person entering into a contract has a right to insist on its performance in all particulars. 57
Petitioner cannot compel respondent corporation to accept the amount she is willing to pay because the moment the latter accepts
the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, then the obligation
shall be deemed fully complied with. 58 Precisely, this is what respondent corporation wanted to avoid when it continually refused
to settle with petitioner at less than what was actually due under their contract.
This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and attorney's fees equivalent to 25%
of the total amount due are highly inequitable and unreasonable.
It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had already been paid even before
the filing of the present case. Article 1229 of the Civil Code provides that the court shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the debtor. And, even if there has been no performance, the
penalty may also be reduced if it is iniquitous or leonine.
In a case previously decided by this Court which likewise involved private respondent M.B. Lending Corporation, and which is
substantially on all fours with the one at bar, we decided to eliminate altogether the penalty interest for being excessive and
unwarranted under the following rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the penalty interest of three
percent (3 %) per month on total amount due but unpaid should be equitably reduced. The purpose for which the penalty interest
is intended that is, to punish the obligor will have been sufficiently served by the effects of compounded interest. Under the
exceptional circumstances in the case at bar, e.g., the original amount loaned was only P15,000.00; partial payment of P8,600.00
was made on due date; and the heavy (albeit still lawful) regular compensatory interest, the penalty interest stipulated in the
parties' promissory note is iniquitous and unconscionable and may be equitably reduced further by eliminating such penalty
interest altogether. 59
Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court has previously ruled that even with an agreement thereon between
the parties, the court may nevertheless reduce such attorney's fees fixed in the contract when the amount thereof appears to be
unconscionable or unreasonable. 60 To that end, it is not even necessary to show, as in other contracts, that it is contrary to
morals or public policy. 61 The grant of attorney's fees equivalent to 25% of the total amount due is, in our opinion, unreasonable
and immoderate, considering the minimal unpaid amount involved and the extent of the work involved in this simple action for
collection of a sum of money. We, therefore, hold that the amount of P10,000.00 as and for attorney's fee would be sufficient in
this case. 62
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the penalty interest of 3%
per month is hereby deleted and the award of attorney's fees is reduced to P10,000.00.
SO ORDERED.

G.R. No. 115838

July 18, 2002

CONSTANTE AMOR DE CASTRO and CORAZON AMOR DE CASTRO, petitioners,

vs.
COURT OF APPEALS and FRANCISCO ARTIGO, respondents.
CARPIO, J.:
The Case
Before us is a Petition for Review on Certiorari1 seeking to annul the Decision of the Court of Appeals2 dated May 4, 1994 in CAG.R. CV No. 37996, which affirmed in toto the decision3 of the Regional Trial Court of Quezon City, Branch 80, in Civil Case No.
Q-89-2631. The trial court disposed as follows:

"WHEREFORE, the Court finds defendants Constante and Corazon Amor de Castro jointly and solidarily liable to plaintiff the sum
of:
a) P303,606.24 representing unpaid commission;
b) P25,000.00 for and by way of moral damages;
c) P45,000.00 for and by way of attorney's fees;
d) To pay the cost of this suit.
Quezon City, Metro Manila, December 20, 1991."
The Antecedent Facts
On May 29, 1989, private respondent Francisco Artigo ("Artigo" for brevity) sued petitioners Constante A. De Castro ("Constante"
for brevity) and Corazon A. De Castro ("Corazon" for brevity) to collect the unpaid balance of his broker's commission from the De
Castros.4 The Court of Appeals summarized the facts in this wise:
"x x x. Appellants5 were co-owners of four (4) lots located at EDSA corner New York and Denver Streets in Cubao, Quezon City.
In a letter dated January 24, 1984 (Exhibit "A-1, p. 144, Records), appellee6 was authorized by appellants to act as real estate
broker in the sale of these properties for the amount of P23,000,000.00, five percent (5%) of which will be given to the agent as
commission. It was appellee who first found Times Transit Corporation, represented by its president Mr. Rondaris, as prospective
buyer which desired to buy two (2) lots only, specifically lots 14 and 15. Eventually, sometime in May of 1985, the sale of lots 14
and 15 was consummated. Appellee received from appellants P48,893.76 as commission.
It was then that the rift between the contending parties soon emerged. Appellee apparently felt short changed because according
to him, his total commission should be P352,500.00 which is five percent (5%) of the agreed price of P7,050,000.00 paid by Times
Transit Corporation to appellants for the two (2) lots, and that it was he who introduced the buyer to appellants and unceasingly
facilitated the negotiation which ultimately led to the consummation of the sale. Hence, he sued below to collect the balance of
P303,606.24 after having received P48,893.76 in advance.1wphi1.nt
On the other hand, appellants completely traverse appellee's claims and essentially argue that appellee is selfishly asking for
more than what he truly deserved as commission to the prejudice of other agents who were more instrumental in the
consummation of the sale. Although appellants readily concede that it was appellee who first introduced Times Transit Corp. to
them, appellee was not designated by them as their exclusive real estate agent but that in fact there were more or less eighteen
(18) others whose collective efforts in the long run dwarfed those of appellee's, considering that the first negotiation for the sale
where appellee took active participation failed and it was these other agents who successfully brokered in the second negotiation.
But despite this and out of appellants' "pure liberality, beneficence and magnanimity", appellee nevertheless was given the largest
cut in the commission (P48,893.76), although on the principle of quantum meruit he would have certainly been entitled to less. So
appellee should not have been heard to complain of getting only a pittance when he actually got the lion's share of the
commission and worse, he should not have been allowed to get the entire commission. Furthermore, the purchase price for the
two lots was only P3.6 million as appearing in the deed of sale and not P7.05 million as alleged by appellee. Thus, even assuming
that appellee is entitled to the entire commission, he would only be getting 5% of the P3.6 million, or P180,000.00."
Ruling of the Court of Appeals
The Court of Appeals affirmed in toto the decision of the trial court.
First. The Court of Appeals found that Constante authorized Artigo to act as agent in the sale of two lots in Cubao, Quezon City.
The handwritten authorization letter signed by Constante clearly established a contract of agency between Constante and Artigo.
Thus, Artigo sought prospective buyers and found Times Transit Corporation ("Times Transit" for brevity). Artigo facilitated the
negotiations which eventually led to the sale of the two lots. Therefore, the Court of Appeals decided that Artigo is entitled to the
5% commission on the purchase price as provided in the contract of agency.
Second. The Court of Appeals ruled that Artigo's complaint is not dismissible for failure to implead as indispensable parties the
other co-owners of the two lots. The Court of Appeals explained that it is not necessary to implead the other co-owners since the
action is exclusively based on a contract of agency between Artigo and Constante.
Third. The Court of Appeals likewise declared that the trial court did not err in admitting parol evidence to prove the true amount
paid by Times Transit to the De Castros for the two lots. The Court of Appeals ruled that evidence aliunde could be presented to
prove that the actual purchase price was P7.05 million and not P3.6 million as appearing in the deed of sale. Evidence aliunde is
admissible considering that Artigo is not a party, but a mere witness in the deed of sale between the De Castros and Times
Transit. The Court of Appeals explained that, "the rule that oral evidence is inadmissible to vary the terms of written instruments is
generally applied only in suits between parties to the instrument and strangers to the contract are not bound by it." Besides, Artigo
was not suing under the deed of sale, but solely under the contract of agency. Thus, the Court of Appeals upheld the trial court's
finding that the purchase price was P7.05 million and not P3.6 million.
Hence, the instant petition.
The Issues
According to petitioners, the Court of Appeals erred in I. NOT ORDERING THE DISMISSAL OF THE COMPLAINT FOR FAILURE TO IMPLEAD INDISPENSABLE PARTIES-ININTEREST;
II. NOT ORDERING THE DISMISSAL OF THE COMPLAINT ON THE GROUND THAT ARTIGO'S CLAIM HAS BEEN
EXTINGUISHED BY FULL PAYMENT, WAIVER, OR ABANDONMENT;
III. CONSIDERING INCOMPETENT EVIDENCE;
IV. GIVING CREDENCE TO PATENTLY PERJURED TESTIMONY;

V. SANCTIONING AN AWARD OF MORAL DAMAGES AND ATTORNEY'S FEES;

VI. NOT AWARDING THE DE CASTRO'S MORAL AND EXEMPLARY DAMAGES, AND ATTORNEY'S FEES.
The Court's Ruling
The petition is bereft of merit.
First Issue: whether the complaint merits dismissal for failure to implead other co-owners as indispensable parties
The De Castros argue that Artigo's complaint should have been dismissed for failure to implead all the co-owners of the two lots.
The De Castros claim that Artigo always knew that the two lots were co-owned by Constante and Corazon with their other siblings
Jose and Carmela whom Constante merely represented. The De Castros contend that failure to implead such indispensable
parties is fatal to the complaint since Artigo, as agent of all the four co-owners, would be paid with funds co-owned by the four coowners.
The De Castros' contentions are devoid of legal basis.
An indispensable party is one whose interest will be affected by the court's action in the litigation, and without whom no final
determination of the case can be had.7 The joinder of indispensable parties is mandatory and courts cannot proceed without their
presence.8 Whenever it appears to the court in the course of a proceeding that an indispensable party has not been joined, it is
the duty of the court to stop the trial and order the inclusion of such party.9
However, the rule on mandatory joinder of indispensable parties is not applicable to the instant case.
There is no dispute that Constante appointed Artigo in a handwritten note dated January 24, 1984 to sell the properties of the De
Castros for P23 million at a 5 percent commission. The authority was on a first come, first serve basis. The authority reads in full:
"24 Jan. 84
To Whom It May Concern:
This is to state that Mr. Francisco Artigo is authorized as our real estate broker in connection with the sale of our property located
at Edsa Corner New York & Denver, Cubao, Quezon City.
Asking price P 23,000,000.00 with 5% commission as agent's fee.
C.C. de Castro
owner & representing
co-owners
This authority is on a first-come
First serve basis CAC"
Constante signed the note as owner and as representative of the other co-owners. Under this note, a contract of agency was
clearly constituted between Constante and Artigo. Whether Constante appointed Artigo as agent, in Constante's individual or
representative capacity, or both, the De Castros cannot seek the dismissal of the case for failure to implead the other co-owners
as indispensable parties. The De Castros admit that the other co-owners are solidarily liable under the contract of agency,10 citing
Article 1915 of the Civil Code, which reads:
Art. 1915. If two or more persons have appointed an agent for a common transaction or undertaking, they shall be solidarily liable
to the agent for all the consequences of the agency.
The solidary liability of the four co-owners, however, militates against the De Castros' theory that the other co-owners should be
impleaded as indispensable parties. A noted commentator explained Article 1915 thus
"The rule in this article applies even when the appointments were made by the principals in separate acts, provided that they are
for the same transaction. The solidarity arises from the common interest of the principals, and not from the act of constituting the
agency. By virtue of this solidarity, the agent can recover from any principal the whole compensation and indemnity owing to him
by the others. The parties, however, may, by express agreement, negate this solidary responsibility. The solidarity does not
disappear by the mere partition effected by the principals after the accomplishment of the agency.
If the undertaking is one in which several are interested, but only some create the agency, only the latter are solidarily liable,
without prejudice to the effects of negotiorum gestio with respect to the others. And if the power granted includes various
transactions some of which are common and others are not, only those interested in each transaction shall be liable for it."11
When the law expressly provides for solidarity of the obligation, as in the liability of co-principals in a contract of agency, each
obligor may be compelled to pay the entire obligation.12 The agent may recover the whole compensation from any one of the coprincipals, as in this case.
Indeed, Article 1216 of the Civil Code provides that a creditor may sue any of the solidary debtors. This article reads:
Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand
made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the
debt has not been fully collected.
Thus, the Court has ruled in Operators Incorporated vs. American Biscuit Co., Inc.13 that
"x x x solidarity does not make a solidary obligor an indispensable party in a suit filed by the creditor. Article 1216 of the Civil Code
says that the creditor `may proceed against anyone of the solidary debtors or some or all of them simultaneously'." (Emphasis
supplied)
Second Issue: whether Artigo's claim has been extinguished by full payment, waiver or abandonment

The De Castros claim that Artigo was fully paid on June 14, 1985, that is, Artigo was given "his proportionate share and no longer
entitled to any balance." According to them, Artigo was just one of the agents involved in the sale and entitled to a "proportionate
share" in the commission. They assert that Artigo did absolutely nothing during the second negotiation but to sign as a witness in
the deed of sale. He did not even prepare the documents for the transaction as an active real estate broker usually does.
The De Castros' arguments are flimsy.
A contract of agency which is not contrary to law, public order, public policy, morals or good custom is a valid contract, and
constitutes the law between the parties.14 The contract of agency entered into by Constante with Artigo is the law between them
and both are bound to comply with its terms and conditions in good faith.
The mere fact that "other agents" intervened in the consummation of the sale and were paid their respective commissions cannot
vary the terms of the contract of agency granting Artigo a 5 percent commission based on the selling price. These "other agents"
turned out to be employees of Times Transit, the buyer Artigo introduced to the De Castros. This prompted the trial court to
observe:
"The alleged `second group' of agents came into the picture only during the so-called `second negotiation' and it is amusing to
note that these (sic) second group, prominent among whom are Atty. Del Castillo and Ms. Prudencio, happened to be employees
of Times Transit, the buyer of the properties. And their efforts were limited to convincing Constante to 'part away' with the
properties because the redemption period of the foreclosed properties is around the corner, so to speak. (tsn. June 6, 1991).
xxx
To accept Constante's version of the story is to open the floodgates of fraud and deceit. A seller could always pretend rejection of
the offer and wait for sometime for others to renew it who are much willing to accept a commission far less than the original
broker. The immorality in the instant case easily presents itself if one has to consider that the alleged `second group' are the
employees of the buyer, Times Transit and they have not bettered the offer secured by Mr. Artigo for P7 million.
It is to be noted also that while Constante was too particular about the unrenewed real estate broker's license of Mr. Artigo, he did
not bother at all to inquire as to the licenses of Prudencio and Castillo. (tsn, April 11, 1991, pp. 39-40)."15 (Emphasis supplied)
In any event, we find that the 5 percent real estate broker's commission is reasonable and within the standard practice in the real
estate industry for transactions of this nature.
The De Castros also contend that Artigo's inaction as well as failure to protest estops him from recovering more than what was
actually paid him. The De Castros cite Article 1235 of the Civil Code which reads:
Art. 1235. When the obligee accepts the performance, knowing its incompleteness and irregularity, and without expressing any
protest or objection, the obligation is deemed fully complied with.
The De Castros' reliance on Article 1235 of the Civil Code is misplaced. Artigo's acceptance of partial payment of his commission
neither amounts to a waiver of the balance nor puts him in estoppel. This is the import of Article 1235 which was explained in this
wise:
"The word accept, as used in Article 1235 of the Civil Code, means to take as satisfactory or sufficient, or agree to an incomplete
or irregular performance. Hence, the mere receipt of a partial payment is not equivalent to the required acceptance of
performance as would extinguish the whole obligation."16 (Emphasis supplied)
There is thus a clear distinction between acceptance and mere receipt. In this case, it is evident that Artigo merely received the
partial payment without waiving the balance. Thus, there is no estoppel to speak of.
The De Castros further argue that laches should apply because Artigo did not file his complaint in court until May 29, 1989, or
almost four years later. Hence, Artigo's claim for the balance of his commission is barred by laches.
Laches means the failure or neglect, for an unreasonable and unexplained length of time, to do that which by exercising due
diligence could or should have been done earlier. It is negligence or omission to assert a right within a reasonable time, warranting
a presumption that the party entitled to assert it either has abandoned it or declined to assert it.17
Artigo disputes the claim that he neglected to assert his rights. He was appointed as agent on January 24, 1984. The two lots
were finally sold in June 1985. As found by the trial court, Artigo demanded in April and July of 1985 the payment of his
commission by Constante on the basis of the selling price of P7.05 million but there was no response from Constante.18 After it
became clear that his demands for payment have fallen on deaf ears, Artigo decided to sue on May 29, 1989.
Actions upon a written contract, such as a contract of agency, must be brought within ten years from the time the right of action
accrues.19 The right of action accrues from the moment the breach of right or duty occurs. From this moment, the creditor can
institute the action even as the ten-year prescriptive period begins to run.20
The De Castros admit that Artigo's claim was filed within the ten-year prescriptive period. The De Castros, however, still maintain
that Artigo's cause of action is barred by laches. Laches does not apply because only four years had lapsed from the time of the
sale in June 1985. Artigo made a demand in July 1985 and filed the action in court on May 29, 1989, well within the ten-year
prescriptive period. This does not constitute an unreasonable delay in asserting one's right. The Court has ruled, "a delay within
the prescriptive period is sanctioned by law and is not considered to be a delay that would bar relief."21 In explaining that laches
applies only in the absence of a statutory prescriptive period, the Court has stated "Laches is recourse in equity. Equity, however, is applied only in the absence, never in contravention, of statutory law. Thus,
laches, cannot, as a rule, be used to abate a collection suit filed within the prescriptive period mandated by the Civil Code."22
Clearly, the De Castros' defense of laches finds no support in law, equity or jurisprudence.
Third issue: whether the determination of the purchase price was made in violation of the Rules on Evidence
The De Castros want the Court to re-examine the probative value of the evidence adduced in the trial court to determine whether
the actual selling price of the two lots was P7.05 million and not P3.6 million. The De Castros contend that it is erroneous to base

the 5 percent commission on a purchase price of P7.05 million as ordered by the trial court and the appellate court. The De
Castros insist that the purchase price is P3.6 million as expressly stated in the deed of sale, the due execution and authenticity of
which was admitted during the trial.
The De Castros believe that the trial and appellate courts committed a mistake in considering incompetent evidence and
disregarding the best evidence and parole evidence rules. They claim that the Court of Appeals erroneously affirmed sub silentio
the trial court's reliance on the various correspondences between Constante and Times Transit which were mere photocopies that
do not satisfy the best evidence rule. Further, these letters covered only the first negotiations between Constante and Times
Transit which failed; hence, these are immaterial in determining the final purchase price.
The De Castros further argue that if there was an undervaluation, Artigo who signed as witness benefited therefrom, and being
equally guilty, should be left where he presently stands. They likewise claim that the Court of Appeals erred in relying on evidence
which were not offered for the purpose considered by the trial court. Specifically, Exhibits "B", "C", "D" and "E" were not offered to
prove that the purchase price was P7.05 Million. Finally, they argue that the courts a quo erred in giving credence to the perjured
testimony of Artigo. They want the entire testimony of Artigo rejected as a falsehood because he was lying when he claimed at the
outset that he was a licensed real estate broker when he was not.
Whether the actual purchase price was P7.05 Million as found by the trial court and affirmed by the Court of Appeals, or P3.6
Million as claimed by the De Castros, is a question of fact and not of law. Inevitably, this calls for an inquiry into the facts and
evidence on record. This we can not do.
It is not the function of this Court to re-examine the evidence submitted by the parties, or analyze or weigh the evidence again.23
This Court is not the proper venue to consider a factual issue as it is not a trier of facts. In petitions for review on certiorari as a
mode of appeal under Rule 45, a petitioner can only raise questions of law. Our pronouncement in the case of Cormero vs. Court
of Appeals24 bears reiteration:
"At the outset, it is evident from the errors assigned that the petition is anchored on a plea to review the factual conclusion
reached by the respondent court. Such task however is foreclosed by the rule that in petitions for certiorari as a mode of appeal,
like this one, only questions of law distinctly set forth may be raised. These questions have been defined as those that do not call
for any examination of the probative value of the evidence presented by the parties. (Uniland Resources vs. Development Bank of
the Philippines, 200 SCRA 751 [1991] citing Goduco vs. Court of appeals, et al., 119 Phil. 531; Hernandez vs. Court of Appeals,
149 SCRA 67). And when this court is asked to go over the proof presented by the parties, and analyze, assess and weigh them
to ascertain if the trial court and the appellate court were correct in according superior credit to this or that piece of evidence and
eventually, to the totality of the evidence of one party or the other, the court cannot and will not do the same. (Elayda vs. Court of
Appeals, 199 SCRA 349 [1991]). Thus, in the absence of any showing that the findings complained of are totally devoid of support
in the record, or that they are so glaringly erroneous as to constitute serious abuse of discretion, such findings must stand, for this
court is not expected or required to examine or contrast the oral and documentary evidence submitted by the parties. (Morales vs.
Court of Appeals, 197 SCRA 391 [1991] citing Santa Ana vs. Hernandez, 18 SCRA 973 [1966])."
We find no reason to depart from this principle. The trial and appellate courts are in a much better position to evaluate properly the
evidence. Hence, we find no other recourse but to affirm their finding on the actual purchase price.1wphi1.nt
Fourth Issue: whether award of moral damages and attorney's fees is proper
The De Castros claim that Artigo failed to prove that he is entitled to moral damages and attorney's fees. The De Castros,
however, cite no concrete reason except to say that they are the ones entitled to damages since the case was filed to harass and
extort money from them.
Law and jurisprudence support the award of moral damages and attorney's fees in favor of Artigo. The award of damages and
attorney's fees is left to the sound discretion of the court, and if such discretion is well exercised, as in this case, it will not be
disturbed on appeal.25 Moral damages may be awarded when in a breach of contract the defendant acted in bad faith, or in
wanton disregard of his contractual obligation.26 On the other hand, attorney's fees are awarded in instances where "the
defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly valid, just and demandable claim."27
There is no reason to disturb the trial court's finding that "the defendants' lack of good faith and unkind treatment of the plaintiff in
refusing to give his due commission deserve censure." This warrants the award of P25,000.00 in moral damages and P 45,000.00
in attorney's fees. The amounts are, in our view, fair and reasonable. Having found a buyer for the two lots, Artigo had already
performed his part of the bargain under the contract of agency. The De Castros should have exercised fairness and good
judgment in dealing with Artigo by fulfilling their own part of the bargain - paying Artigo his 5 percent broker's commission based
on the actual purchase price of the two lots.
WHEREFORE, the petition is denied for lack of merit. The Decision of the Court of Appeals dated May 4, 1994 in CA-G.R. CV No.
37996 is AFFIRMED in toto.
SO ORDERED.

[G.R. No. 90693. September 3, 1992.]

SPARTAN SECURITY & DETECTIVE AGENCY, INC., Petitioner, v. HON. NATIONAL LABOR RELATIONS COMMISSION,
AQUILINO BARONA, JR., Respondents.
[G.R. No. 93961. September 3, 1992.]
SPARTAN SECURITY & DETECTIVE AGENCY, INC., Petitioner, v. NATIONAL LABOR RELATIONS COMMISSION, HOME
BANKERS SAVINGS & TRUST COMPANY AND NOE SEMILLANO, Respondents.
Pareto B. Patacsil for Petitioner.
Luis Sementilla, Jr. for private respondent Barona.

DECISION

CRUZ, J.:

The main issue for resolution is who shall be responsible for the payment to security guards of the salary differentials resulting
from the increases in minimum wages mandated by Wage Orders Nos. 5 and 6. The security agency and the principal-client point
to each other, but the security guards point to both of them.chanrobles lawlibrary : rednad
Private respondents Aquilino Barona, Jr. and Noe Semillano were employed as security guards by Spartan Security & Detective
Agency, Inc. They were detailed to Home Savings Bank & Trust Company, * with Barona posted at its Balintawak branch and
Semillano at its Sta. Cruz branch.
Barona and Semillano took official leaves of absence on April, 1987, and August 13, 1987, respectively. Upon reporting back for
work, they were not returned to their original posts or given any assignment. They then filed separate complaints against Spartan
and the Bank for illegal dismissal with claims for illegal deductions, underpayment, overtime pay. legal and holiday pay and rest
day pay.
On July 29, 1988, Labor Arbiter Felipe T. Garduque II disposed of Baronas complaint thus:chanrob1es virtual 1aw library
ACCORDINGLY, Respondent Spartan Security Detective Agency as hereby ordered to reinstate herein complainant Aquilino
Barona. Jr. within ten (10) days from receipt hereof to his former position or any substantially equivalent assignment without loss
of seniority right and privileges with three (3) months back wages.
Further, both Respondents agency and Home Savings Bank (Balintawak Branch, Q.C.) are hereby held solidarily liable to pay
herein complainant within the same period the sum of P30,749.00 with ten percent (10%) attorneys fees representing underpayment of salary/living allowance and other benefits, as computed by the latter and based on the adjusted Padpao rates for
security guards under Wage Order No. 6. primer No. 2, Workers Rights Series, Institute of Manpower Studies, 1985.
As regards the cash bond, the same should remain with the respondent agency until complainant resigns or is separated from the
service.
All other claims are hereby denied for lack of merit and by reason of prescription.chanrobles law library
Both Spartan and the Bank appealed to the NLRC, which on December 29, 1988, affirmed the aforesaid decision. 1 However, it
ordered Spartan to assign Barona to other available posts because reinstatement to his former position was no longer feasible
owing to the termination of the contract of service between Spartan and the Bank.
Upon denial of its motion for reconsideration, Spartan came to this Court on November 9, 1989, in a petition for review on
certiorari. This was docketed as G.R. No. 90693.
The Bank, on the other hand, settled half of the award by paying P20,000.00 to Barona on February 6, 1990.
Meanwhile, Labor Arbiter Benigno C. Villarente, Jr. had rendered a decision dated August 22, 1988, disposing of Semillanos case
as follows:chanrob1es virtual 1aw library
WHEREFORE, all the foregoing premises considered, judgment is hereby rendered declaring that complainant Noe Semillano
was illegally dismissed and ordering respondent Spartan Security and Detective Agency, Inc. to:chanrob1es virtual 1aw library
(a) Reinstate complainant as security guard without loss of seniority rights at the adjusted rate under the law;
(b) Refund to him the amount of P880.00 as shown by the evidence as having been illegally deducted P820 only as admitted by
respondent; and.
jointly and severally with co-respondent Home Savings Bank and Trust Co., to:chanrob1es virtual 1aw library
(c) Pay complainant his full back wages and other benefits under existing laws effective his dismissal on September 1, 1987 until
actual reinstatement, or the tentative amount of P26,217.91 as of August 20, 1988 and determined by the Computation and
Examination Unit of this Office;
(d) Pay him the salary differential and overtime pay for the four-hour excess of eight hours daily duties as security guard from
August 1985 (four days - Exhs. "C" and "D") until April 30, 1987 (Exh. "C") in the amount P11,433.18 and for the two hour excess
from May 1, 1987 to August 15, 1987 (Exh. "C") in the amount of P4,467.84 or a total differential of P15,901; and
(e) Pay the attorneys fees equivalent to 10% of all the above monetary awards.
The claim for moral damages is hereby dismissed for lack of merit.
On appeal, this decision was affirmed by the respondent Commission on September 29, 1989. 2 However, it required payment of
Semillanos back wages from the date of his license renewal up to his actual reinstatement and held Spartan solely liable therefor
inasmuch as the Bank had no participation in Semillanos dismissal.
On February 6, 1990, the Bank paid P7,950.50, or half of the awarded claim of P15,901.00, to Semillano. He in turn signed a
Waiver, Quitclaim and Release in its favor without prejudice to his right to pursue the balance against Spartan. This waiver was
approved by the NLRC in its resolution of May 29, 1990, denying Spartans motion for reconsideration.
On July 6, 1990, Spartan filed a petition for review on certiorari, docketed as G.R. No. 93961. Upon its motion, this petition was
consolidated with G.R. No. 90693.

On August 27, 1990, Labor Arbiter Villarente ordered the execution of the judgment subject of case G.R. No. 93961. Upon
Spartans motion, we issued a temporary restraining order on October 1, 1990, enjoining the enforcement of the writ of
execution.chanrobles.com.ph : virtual law library
In these two consolidated petitions, Spartan asks us to hold the Bank solely liable for the differential pay of the two employees. It
invokes Section 9 of Wage Order No. 6, which provides:chanrob1es virtual 1aw library
In case of contracts for construction projects and for security, janitorial and similar services, the increase in the minimum wage
and allowance rates of the workers shall be borne by the principal or client of the construction/service contractor and the contract
shall be deemed amended accordingly. . . .
In point is the case of Eagle Security Agency, Inc. v. NLRC, 3 where this Court held:chanrob1es virtual 1aw library
The Wage Orders are explicit that payment of the increases are "to be borne" by the principal or client. "To be borne", however,
does not mean that the principal, PTSI in this case, would directly pay the security guards the wage and allowance increases
because there is no privity of contract between them. The security guards contractual relationship is with their immediate
employer, EAGLE. AE an employer, EAGLE is tasked, among others, with the payment of their wages [See Article VII Sec. 3 of
the Contract for Security Services, Supra and Bautista v. Inciong, G.R. No. 52824. March 16, 1988, 158 SCRA 665].
On the other hand, there existed a contractual agreement between PTSI and EAGLE wherein the former availed of the security
services provided by the latter. In return, the security agency collects from its client payment for its security services. This payment
covers the wages for the security guards and also expenses for their supervision and training. the guards bonds, firearms with
ammunitions. uniforms and other equipments, accessories, tools, materials and supplies necessary for the maintenance of a
security force.
Premises considered, the security guards immediate recourse for the payment of the increases is with their direct employer,
EAGLE. However, in order for the security agency to comply with the new wage and allowance rates it has to pay the security
guards, the Wage Orders made specific provision to amend existing contracts for security services by allowing the adjustment of
the consideration paid by the principal to the security agency concerned, What the Wage Orders require, therefore, is the
amendment of the contract as to the consideration to cover the service contractors payment of the increases mandated. In the
end, therefore, ultimate liability for the payment of the increases rests with the principal.
The above ruling was affirmed in the case of Rabago v. NLRC, 4 decided only last year.
In the instant cases, it is not disputed that Barona and Semillano were employees of Spartan. As such, they were entitled to the
wage increases required under Wage Orders Nos. 5 and 6 from their employer, Spartan. In turn, Spartan could ask the Bank,
where they were posted, to make the necessary adjustment in their security contract to cover the said increases.
The two employees were not privy to the contract of service between Spartan and the Bank. Nevertheless, they could go after
Spartan and/or the Bank for their wage differentials under the rule on solidary liability established by Articles 106, 107 and 109 of
the Labor Code providing as follows:chanrob1es virtual 1aw library
ART. 106. Contractor or subcontractor. Whenever an employer enters into a contract with another person for the performance
of the formers work, the employees of the contractor and of the latters subcontractor, if any, shall be paid in accordance with the
provisions of this Code.
In the event that the contractor or subcontractor fails to pay the wages of his employees in accordance with this Code, the
employer shall be jointly and severally liable with his contractor or subcontractor to such employees to the extent of the work
performed under the contract, in the same manner and extent that he is liable to employees directly employed by him.chanrobles
virtualawlibrary chanrobles.com:chanrobles.com.ph
x

ART. 107. Indirect employer. The provisions of the immediately preceding Article shall likewise apply to any person, partnership,
association or corporation which, not being an employer, contracts with an independent contractor for the performance of any
work, task, job or project.
x

ART. 109. Solidary liability. The provisions of existing laws to the contrary notwithstanding, every employer or indirect employer
shall be held responsible with his contractor or subcontractor for any violation of any provision of this Code. For purposes of
determining the extent of their civil liability under this Chapter, they shall be considered as direct employers.
As we explained in Eagle, this joint and several liability of the contractor and the principal is mandated by the Labor Code to
ensure observance of its provisions, including Article 99 on the minimum wage. The contractor is made liable by virtue of his
status as direct employer. The principal, on the other hand, is made the indirect employer of the contractors employees to secure
payment of their wages should the contractor be unable to pay them. This arrangement is in conformity with the constitutional
mandate for the protection of the working class pursuant to the social justice policy.
It is worth stressing that while Spartan and the Bank are jointly and severally answerable for the underpayment, Spartan has the
right of reimbursement from the Bank under Article 1217 of the Civil Code, reading as follows:chanrob1es virtual 1aw library
Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor
may choose which offer to accept.
He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the
payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded . . .
As already stated, the Bank had already paid half of the differential wages of Barona and Semillano. Under the above-discussed
law and jurisprudence, it is still liable to them for the other half.
We come now to the counter-petition of private respondent Barona.

Barona prays that the award of three months back wages be modified and increased to three years because he was dismissed on
April 25, 1987, and payment of his claims has been unduly delayed by Spartan. He is also asking for moral and exemplary
damages and other available relief.
The finding of illegal dismissal warrants not only reinstatement of the dismissed employee but also the payment to him of three
years back wages, conformably to existing policy. The award in his favor must therefore be accordingly adjusted.
Baronas claim for moral and exemplary damages must be rejected. Moral damages are recoverable only where the dismissal of
the employee was attended by bad faith or fraud, or constituted an act oppressive to labor, or was done in a manner contrary to
morals, good customs or public policy. 5 Exemplary damages may be awarded only if the dismissal was effected in a wanton,
oppressive or malevolent manner. 6 Those circumstances have not been established in this case.chanrobles law library : red
WHEREFORE, the petitions are DISMISSED and the challenged resolutions of the NLRC are AFFIRMED as above modified. The
temporary restraining order issued on October 1, 1990 is hereby LIFTED. Costs against the petitioner.
SO ORDERED.

G.R. No. 112139

January 31, 2000

LAPANDAY AGRICULTURAL DEVELOPMENT CORPORATION, petitioner,

vs.
THE HONORABLE COURT OF APPEALS (Former Eighth Division) and COMMANDO SECURITY SERVICE AGENCY, INC.,
respondents.
GONZAGA-REYES, J.:
Before us is a Petition for Review on Certiorari of the decision1 of the Court of Appeals2 in CA-G.R. CV No. 33893 entitled
COMMANDO SECURITY SERVICE AGENCY, INCORPORATED vs. LAPANDAY AGRICULTURAL DEVELOPMENT
CORPORATION which affirmed the decision3 of the Regional Trial Court, 11th Judicial Region, Branch 9, Davao City in Civil Case
No. 19203-88.
The pertinent facts as found by the Court of Appeals are as follows:
The evidence shows that in June 1986, plaintiff Commando Security Service Agency, Inc., and defendant Lapanday Agricultural
Development Corporation entered into a Guard Service Contract. Plaintiff provided security guards in defendant's banana
plantation. The contract called for the payment to a guard of P754.28 on a daily 8-hour basis and an additional P565.72 for a four
hour overtime while the shift-in-charge was to be paid P811.40 on a daily 8-hour basis and P808.60 for the 4-hour overtime.
Wage Orders increasing the minimum wage in 1983 were complied with by the defendant. On June 16, 1984, Wage Order No. 5
was promulgated directing an increase of P3.00 per day on the minimum wage of workers in the private sector and a P5.00
increase on the ECOLA. This was followed on November 1, 1984 by Wage Order No. 6 which further increased said minimum
wage by P3.00 on the ECOLA. Both Wage Orders contain the following provision:
"In the case of contract for construction projects and for security, janitorial and similar services, the increase in the minimum wage
and allowances rates of the workers shall be borne by the principal or client of the construction/service contractor and the
contracts shall be deemed amended accordingly, subject to the provisions of Sec. 3 (b) of this order" (Sec. 6 and Sec. 9, Wage
Orders No. 5 and 6, respectively).
Plaintiff demanded that its Guard Service Contract with defendant be upgraded in compliance with Wage Order Nos. 5 and 6.
Defendant refused. Their Contract expired on June 6, 1986 without the rate adjustment called for Wage Order Nos. 5 and 6 being
implemented. By the time of the filing of plaintiff's Complaint, the rate adjustment payable by defendant amounted to P462,346.25.
Defendant opposed the Complaint by raising the following defenses: (1) the rate adjustment is the obligation of the plaintiff as
employer of the security guards; (2) assuming its liability, the sum it should pay is less in amount; and (3) the Wage Orders violate
the impairment clause of the Constitution.
The trial court decided in favor of the plaintiff. It held:
xxx

xxx

xxx

However, in order for the security agency to pay the security guards, the Wage Orders made specific provisions to amend existing
contracts for security services by allowing the adjustment of the consideration paid by the principal to the security agency
concerned. (Eagle Security Agency, Inc. vs. NLRC, Phil. Tuberculosis Society, Inc. vs. NLRC, et al., May 18, 1989).1wphi1.nt
The Wage Orders require the amendment of the contract as to the consideration to cover the service contractor's payment of the
increases mandated. However, in the case at bar, the contract for security services had earlier been terminated without the
corresponding amendment. Plaintiff now demands adjustment in the contract price as the same was deemed amended by Wage
Order Nos. 5 and 6.
Before the plaintiff could pay the minimum wage as mandated by law, adjustments must be paid by the principal to the security
agency concerned.
Given these circumstances, if PTS pays the security guards, it cannot claim reimbursements from Eagle. But if its Eagle that pays
them, the latter can claim reimbursement from PTS in lieu of an adjustment, considering that the contract had expired and had not
been renewed. (Eagle Security Agency vs. NLRC and Phil. Tuberculosis Society, Inc. vs. NLRC, et al., 18 May 1989).
"As to the issue that Wage Orders Nos. 5 and 6 constitute impairments of contracts in violation of constitutional guarantees, the
High Court ruled" The Supreme Court has rejected the impairment of contract argument in sustaining the validity and
constitutionality of labor and social legislation like the Blue Sunday Law, compulsory coverage of private sector employees in the
Social Security System, and the abolition of share tenancy enacted pursuant to the police power of the state (Eagle Security
Agency, Inc. vs. National Labor Relation Commission and Phil. Tuberculosis Society, Inc. vs. NLRC, et al., May 18, 1989).

Petitioner's motion for reconsideration was denied;4 hence this petition where petitioner cites the following grounds to support the
instant petition for review:
1. THE WAGE INCREASES PROVIDED FOR IN THE WAGE ORDERS WERE DUE TO THE GUARDS AND NOT THE
SECURITY AGENCY;
2. A SECURITY AGENCY WHO DID NOT PAY WAGE INCREASE TO ITS GUARDS IT HAD ALREADY TERMINATED AND
WITHOUT THEIR AUTHORIZATION CANNOT INSTITUTE AN ACTION TO RECOVER SAID WAGE INCREASE FOR ITS
BENEFIT;
3. IN THE ABSENCE OF BAD FAITH AND WITHOUT THE TRIAL COURT CORRECTLY ESTABLISHING THE BASIS FOR
ATTORNEY'S FEES, THE SAME MAY NOT BE AWARDED.
4. THE NATIONAL LABOR RELATIONS (SIC) IS THE PROPER FORUM THAT HAS THE JURISDICTION TO RESOLVE THE
ISSUE OF WHETHER OR NOT THE PETITIONER IS LIABLE TO PAY THE PRIVATE RESPONDENT THE WAGE AND
ALLOWANCE INCREASES MANDATED UNDER WAGE ORDER NOS. 5 AND 6.5
Reiterating its position below, petitioner asserts that private respondent has no factual and legal basis to collect the benefits under
subject Wage Order Nos. 5 and 6 intended for the security guards without the authorization of the security guards concerned.
Inasmuch as the services of the forty-two (42) security guards were already terminated at the time the complaint was filed on
August 15, 1988, private respondent's complaint partakes of the nature of an action for recovery of what was supposedly due the
guards under said Wage Orders, amounts that they claim were never paid by private respondent and therefore not collectible by
the latter from the petitioner. Petitioner also assails the award of attorney's fees in the amount of P115,585.31 or 25% of the total
adjustment claim of P462,341.25 for lack of basis and for being unconscionable.
Moreover, petitioner submits that it is the National Labor Relations Commission (NLRC) and not the civil courts that has
jurisdiction to resolve the issue involved in this case for it refers to the enforcement of wage adjustment and other benefits due to
private respondent's security guards mandated under Wage Order Nos. 5 and 6. Considering that the RTC has no jurisdiction, its
decision is without force and effect.6
On the other hand, private respondent contends that the basis of its action against petitioner-appellant is the enforcement of the
Guard Service Contract entered into by them, which is deemed amended by Section 6 of Wage Order No. 5 and Section 9 of
Wage Order No. 6; that pursuant to their amended Guard Service Contract, the increases/adjustments in wages and ECOLA are
due to private respondent and not to the security guards who are not parties to the said contract. It is therefore immaterial whether
or not private respondent paid its security guards their wages as adjusted by said Wage Orders and that since the forty-two (42)
security guards are not parties to the Guard Service Contract, there is no need for them to authorize the filing of, or be joined in,
this suit.
As regards the award to private respondent of the amount of P115,585.31 as attorney's fees, private respondent maintains that
there is enough evidence and/or basis for the grant thereof, considering that the adamant attitude of the petitioner (in
implementing the questioned Wage Orders) compelled the herein private respondent, to litigate in court. Furthermore, since the
legal fee payable by private respondent to its counsel is essentially on contingent basis, the amount of P115,583.31 granted by
the trial court which is 25% of the total claim is not unconscionable.
As regards the jurisdiction of the RTC, private respondent alleges that the suit filed before the trial court is for the purpose of
securing the upgrading of the Guard Service Contract entered into by herein petitioner and private respondent in June 1983. The
enforcement of this written contract does not fall under the jurisdiction of the NLRC because the money claims involved therein did
not arise from employer-employee relations between the parties and is intrinsically a civil dispute. Thus, jurisdiction lies with the
regular courts. Private respondent further contends that petitioner is estopped or barred from raising the question of jurisdiction for
the first time before the Supreme Court after having voluntarily submitted to the jurisdiction of the regular courts below and having
lost its case therein.7
We resolve to grant the petition.
We resolve first the issue of jurisdiction. We agree with the respondent that the RTC has jurisdiction over the subject matter of the
present case. It is well settled in law and jurisprudence that where no employer-employee relationship exists between the parties
and no issue is involved which may be resolved by reference to the Labor Code, other labor statutes or any collective bargaining
agreement, it is the Regional Trial Court that has jurisdiction.8 In its complaint, private respondent is not seeking any relief under
the Labor Code but seeks payment of a sum of money and damages on account of petitioner's alleged breach of its obligation
under their Guard Service Contract. The action is within the realm of civil law hence jurisdiction over the case belongs to the
regular courts.9 While the resolution of the issue involves the application of labor laws, reference to the labor code was only for
the determination of the solidary liability of the petitioner to the respondent where no employer-employee relation exists. Article
217 of the Labor Code as amended vests upon the labor arbiters exclusive original jurisdiction only over the following:
1. Unfair labor practices;
2. Termination disputes;
3. If accompanied with a claim for reinstatement, those cases that workers may file involving wages, rates of pay, hours of work
and other terms and conditions of employment;
4. Claims for actual, moral exemplary and other form of damages arising from employer-employee relations;
5. Cases arising from any violation of Article 264 of this Code, including questions involving legality of strikes and lockouts; and
6. Except claims for Employees Compensation, Social Security, Medicare and maternity benefits, all other claims, arising from
employer-employee relations, including those of persons in domestic or household service, involving an amount exceeding five
thousand pesos (P5,000.00) regardless of whether accompanied with a claim for reinstatement.
In all these cases, an employer-employee relationship is an indispensable jurisdictional requisite;10 and there is none in this case.
On the merits, the core issue involved in the present petition is whether or not petitioner is liable to the private respondent for the

wage adjustments provided under Wage Order Nos. 5 and 6 and for attorney's fees.
Private respondent admits that there is no employer-employee relationship between it and the petitioner. The private respondent is
an independent/job contractor11 who assigned security guards at the petitioner's premises for a stipulated amount per guard per
month. The Contract of Security Services expressly stipulated that the security guards are employees of the Agency and not of the
petitioner.12 Articles 106 and 107 of the Labor Code provides the rule governing the payment of wages of employees in the event
that the contractor fails to pay such wages as follows:
Art. 106. Contractor or sub contractor. Whenever an employer enters into a contract with another person for the performance of
the former's work, the employees of the contractor and of the latter's subcontractor, if any, shall be paid in accordance with the
provisions of this Code.
In the event that the contractor or subcontractor fails to pay the wages of his employees in accordance with this Code, the
employer shall be jointly and severally liable with his contractor or subcontractor to such employees to the extent of the work
performed under the contract, in the same manner and extent that he is liable to employees directly employed by him.
xxx

xxx

xxx

Art. 107. Indirect employer. The provisions of the immediately preceding Article shall likewise apply to any person, partnership,
association or corporation which, not being an employer, contracts with an independent contractor for the performance of any
work, task, job or project.
It will be seen from the above provisions that the principal (petitioner) and the contractor (respondent) are jointly and severally
liable to the employees for their wages. This Court held in Eagle Security, Inc. vs. NLRC 13 and Spartan Security and Detective
Agency, Inc. vs. NLRC 14 that the joint and several liability of the contractor and the principal is mandated by the Labor Code to
assure compliance with the provisions therein including the minimum wage. The contractor is made liable by virtue of his status as
direct employer. The principal, on the other hand, is made the indirect employer of the contractor's employees to secure payment
of their wages should the contractor be unable to pay them.15 Even in the absence of an employer-employee relationship, the law
itself establishes one between the principal and the employees of the agency for a limited purpose i.e. in order to ensure that the
employees are paid the wages due them. In the above-mentioned cases, the solidary liability of the principal and contractor was
held to apply to the aforementioned Wage Order Nos. 5 and 6.16 In ruling that under the Wage Orders, existing security guard
services contracts are amended to allow adjustment of the consideration in order to cover payment of mandated increases, and
that the principal is ultimately liable for the said increases, this Court stated:
The Wage Orders are explicit that payment of the increases are "to be borne" by the principal or client. "To be borne", however,
does not mean that the principal, PTSI in this case, would directly pay the security guards the wage and allowance increases
because there is no privity of contract between them. The security guards' contractual relationship is with their immediate
employer, EAGLE. As an employer, EAGLE is tasked, among others, with the payment of their wages [See Article VII Sec. 3 of the
Contract for Security Services, supra and Bautista vs. Inciong, G.R. No. 52824, March 16, 1988, 158 SCRA 665].
On the other hand, there existed a contractual agreement between PTSI and EAGLE wherein the former availed of the security
services provided by the latter. In return, the security agency collects from its client payment for its security services. This payment
covers the wages for the security guards and also expenses for their supervision and training, the guards bonds, firearms with
ammunitions, uniforms and other equipments, accessories, tools, materials and supplies necessary for the maintenance of a
security force.
Premises considered, the security guards' immediate recourse for the payment of the increases is with their direct employer,
EAGLE. However, in order for the security agency to comply with the new wage and allowance rates it has to pay the security
guards, the Wage Orders made specific provision to amend existing contracts for security services by allowing the adjustment of
the consideration paid by the principal to the security agency concerned. What the Wage Orders require, therefore, is the
amendment of the contracts as to the consideration to cover the service contractors' payment of the increases mandated. In the
end, therefore, ultimate liability for the payment of the increases rests with the principal.
In view of the foregoing, the security guards should claim the amount of the increases from EAGLE. Under the Labor Code, in
case the agency fails to pay them the amounts claimed, PTSI should be held solidarily liable with EAGLE [Articles 106, 107 and
109]. Should EAGLE pay, it can claim an adjustment from PTSI for an increase in consideration to cover the increases payable to
the security guards.17
It is clear also from the foregoing that it is only when contractor pays the increases mandated that it can claim an adjustment from
the principal to cover the increases payable to the security guards. The conclusion that the right of the contractor (as principal
debtor) to recover from the principal as solidary co-debtor) arises only if he has paid the amounts for which both of them are jointly
and severally liable is in line with Article 1217 of the Civil Code which provides:
Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay,
the creditor may choose which offer to accept.
He who made payment may claim from his codebtors only the share which corresponds to each, with interest for the payment
already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded. . . .
Pursuant to the above provision, the right of reimbursement from a co-debtor is recognized in favor of the one who paid.
It will be seen that the liability of the petitioner to reimburse the respondent only arises if and when respondent actually pays its
employees the increases granted by Wage Order Nos. 5 and 6. Payment, which means not only the delivery of money but also the
performance, in any other manner, of the obligation,18 is the operative fact which will entitle either of the solidary debtors to seek
reimbursement for the share which corresponds to each of the debtors.
The records show that judgment was rendered by Labor Arbiter Newton R. Sancho holding both petitioner and private respondent
jointly and solidarily liable to the security guards in a Decision19 dated October 17, 1986 (NLRC Case No. 2849-MC-XI-86).20
However, it is not disputed that the private respondent has not actually paid the security guards the wage increases granted under
the Wage Orders in question. Neither is it alleged that there is an extant claim for such wage adjustments from the security guards
concerned, whose services have already been terminated by the contractor. Accordingly, private respondent has no cause of

action against petitioner to recover the wage increases. Needless to stress, the increases in wages are intended for the benefit of
the laborers and the contractor may not assert a claim against the principal for salary wage adjustments that it has not actually
paid. Otherwise, as correctly put by the respondent, the contractor would be unduly enriching itself by recovering wage increases,
for its own benefit.
Finally, considering that the private respondent has no cause of action against the petitioner, private respondent is not entitled to
attorney's fees.1wphi1.nt
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated May 24, 1993 is REVERSED and SET
ASIDE. The complaint of private respondent COMMANDO SECURITY SERVICE AGENCY, INC. is hereby DISMISSED.
SO ORDERED.

G.R. No. 180045

November 17, 2010

GOVERNMENT SERVICE INSURANCE SYSTEM, Petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION (NLRC), DIONISIO BANLASAN, ALFREDO T. TAFALLA, TELESFORO D.
RUBIA, ROGELIO A. ALVAREZ, DOMINADOR A. ESCOBAL, and ROSAURO PANIS, Respondents.
DECISION
NACHURA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court, seeking to reverse and set aside the Decision1 and
the Resolution2 of the Court of Appeals (CA) dated September 7, 2006 and September 27, 2007, respectively, in CA-G.R. SP No.
50450.
The facts of the case are as follows:
Respondents Dionisio Banlasan, Alfredo T. Tafalla, Telesforo D. Rubia, Rogelio A. Alvarez, Dominador A. Escobal, and Rosauro
Panis were employed as security guards by DNL Security Agency (DNL Security). By virtue of the service contract entered into by
DNL Security and petitioner Government Service Insurance System on May 1, 1978, respondents were assigned to petitioners
Tacloban City office, each receiving a monthly income of P1,400.00. Sometime in July 1989, petitioner voluntarily increased
respondents monthly salary to P3,000.00.3
In February 1993, DNL Security informed respondents that its service contract with petitioner was terminated. This
notwithstanding, DNL Security instructed respondents to continue reporting for work to petitioner. Respondents worked as
instructed until April 20, 1993, but without receiving their wages; after which, they were terminated from employment.4
On June 15, 1995, respondents filed with the National Labor Relations Commission (NLRC), Regional Arbitration Branch No. VIII,
Tacloban City, a complaint against DNL Security and petitioner for illegal dismissal, separation pay, salary differential, 13th month
pay, and payment of unpaid salary.
On September 30, 1997, Labor Arbiter (LA) Benjamin S. Guimoc rendered a decision5 against DNL Security and petitioner, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in this manner[,] to wit:
1. Finding no illegal dismissal of complainants;
2. Ordering respondent DNL Security Agency only to pay complainants the amount of P176,130.00 representing separation pay;
the amount of P42,666.40 representing wages of complainants from February 1993 to April 20, 1993;
3. Ordering as joint and solidary liability by the respondents DNL Security Agency and GSIS the amount of P48,385.87
representing salary differential[;] the amount of P55,564.92 as 13th month pay; all in the aggregate sum of THREE HUNDRED
TWENTY-TWO THOUSAND SEVEN HUNDRED FORTY-SEVEN & 19/100 (P322,747.19) to be paid by both or either of the said
respondent within ten (10) days from receipt of this decision and to be deposited with the cashier of this office for proper
disposition.
SO ORDERED.6
The LA found that respondents were not illegally terminated from employment because the employment of security guards is
dependent on the service contract between the security agency and its client. However, considering that respondents had been
out of work for a long period, and consonant with the principle of social justice, the LA awarded respondents with separation pay
equivalent to one (1) month salary for every year of service, to be paid by DNL Security. Because DNL Security instructed
respondents to continue working for petitioner from February 1993 to April 20, 1993, DNL Security was also made to pay
respondents wages for the period. The LA further granted respondents claim of salary differential, as they were paid wages below
the minimum wage, as well as 13th month pay. For these monetary awards, petitioner was made solidarily liable with DNL
Security, as the indirect employer of respondents.7
DNL Security filed a motion for reconsideration, while petitioner appealed to the NLRC.8
In a resolution9 dated December 9, 1997, the NLRC treated DNL Securitys motion for reconsideration as an appeal, but
dismissed the same, as it was not legally perfected. It likewise dismissed petitioners appeal, having been filed beyond the
reglementary period.
Undaunted, petitioner filed a petition for certiorari under Rule 65 of the Rules of Court before the CA. On September 7, 2006, the
CA rendered the assailed Decision10 affirming the NLRC ruling. Petitioners motion for reconsideration was denied by the CA on
September 27, 2007.

Hence, the present petition raising the following errors:

The Court of Appeals committed a reversible error in finding that the public respondent NLRC did not commit grave abuse of
discretion amounting to lack or excess of jurisdiction in dismissing the appeal of the petitioner GSIS, considering that:
1. The Court of Appeals disregarded the facts and circumstances evidencing the timeliness of the petitioner GSIS appeal before
the NLRC and sacrificed substantial justice in the altar of dubious technicalities; and
2. The Court of Appeals misapplied the law and mistakenly affirmed the public respondent NLRCs decision that the petitioner
GSIS is jointly and severally liable with DNL Security Agency for payment of the unsubstantiated amounts of Salary Differentials
and the 13th Month Pay to the private respondent security guards.11
Petitioner insists that its appeal before the NLRC was filed on time, having been filed through registered mail on October 27, 1997,
as evidenced by Registry Receipt No. 34581 countersigned by the postmaster. It adds that, even assuming that the appeal was
indeed filed one day late, the NLRC should not have strictly applied the Rules in order to effect substantial justice. Petitioner also
claims that although the body of the LA decision made DNL Security solely liable for respondents wages from February 1993 to
April 20, 1993, and for their separation pay, the dispositive portion thereof made petitioner solidarily liable for said awards.
Petitioner further questions the award of monetary benefits for lack of evidence to substantiate said claims. Lastly, petitioner
argues that the enforcement of the decision is impossible, considering that petitioners charter unequivocally exempts it from
execution.12
We partly grant the petition.
The resolution of the petition before us involves the appreciation and determination of factual matters, mainly on the issue of
whether petitioners appeal was seasonably filed before the NLRC.
Timeliness of an appeal is a factual issue. It requires a review or evaluation of the evidence which would show when the appeal
was actually mailed to and received by the NLRC.13 In this case, to prove that it mailed the notice of appeal and appeal
memorandum on October 27, 1997, instead of October 28, 1997, as shown by the stamped date on the envelope, petitioner
presented Registry Receipt No. 34581 bearing the earlier date.
Under Section 3, Rule 13 of the Rules of Court, where the filing of pleadings, appearances, motions, notices, orders, judgments,
and all other papers with the court/tribunal is made by registered mail, the date of mailing, as shown by the post office stamp on
the envelope or the registry receipt, shall be considered as the date of filing.14
Thus, the date of filing is determinable from two sources: from the post office stamp on the envelope or from the registry receipt,
either of which may suffice to prove the timeliness of the filing of the pleadings. If the date stamped on one is earlier than the
other, the former may be accepted as the date of filing. This presupposes, however, that the envelope or registry receipt and the
dates appearing thereon are duly authenticated before the tribunal where they are presented.15
In any case, even if the appeal was filed one day late, the same should have been entertained by the NLRC. Indeed, the appeal
must be perfected within the statutory or reglementary period. This is not only mandatory, but also jurisdictional. Failure to perfect
the appeal on time renders the assailed decision final and executory and deprives the appellate court or body of the legal authority
to alter the final judgment, much less entertain the appeal. However, this Court has, time and again, ruled that, in exceptional
cases, a belated appeal may be given due course if greater injustice will be visited upon the party should the appeal be denied.
The Court has allowed this extraordinary measure even at the expense of sacrificing order and efficiency if only to serve the
greater principles of substantial justice and equity.16
Technicality should not be allowed to stand in the way of equitably and completely resolving the rights and obligations of the
parties. We have consistently held that technical rules are not binding in labor cases and are not to be applied strictly if the result
would be detrimental to the working man.17
The Court notes, however, that while the CA affirmed the dismissal by the NLRC of petitioners appeal for being filed out of time, it
nonetheless delved into the merits of the case. This notwithstanding, we do not entirely agree with the appellate courts conclusion
affirming in toto the LA decision.
In this case, the LAs discussion of the issues appears to be in conflict with his final conclusion. This would have required a
measure of clarification. But instead of looking into the errors allegedly committed by the LA, the NLRC dismissed the appeal on a
mere technicality. The CA likewise failed to correct the apparent mistake in the LA decision. Thus, we are constrained to review
the merits of the case.
We need not discuss DNL Securitys responsibility as respondents direct employer because DNL Securitys failure to interpose an
appeal from the LA decision has resulted in the finality of the LA decision. The only issue that we should resolve is the matter of
petitioners liability as indirect employer.
The fact that there is no actual and direct employer-employee relationship between petitioner and respondents does not absolve
the former from liability for the latters monetary claims. When petitioner contracted DNL Securitys services, petitioner became an
indirect employer of respondents, pursuant to Article 107 of the Labor Code, which reads:
ART. 107. Indirect employer. The provisions of the immediately preceding Article shall likewise apply to any person, partnership,
association or corporation which, not being an employer, contracts with an independent contractor for the performance of any
work, task, job or project.
After DNL Security failed to pay respondents the correct wages and other monetary benefits, petitioner, as principal, became
jointly and severally liable, as provided in Articles 106 and 109 of the Labor Code, which state:
ART. 106. Contractor or subcontractor. Whenever an employer enters into a contract with another person for the performance of
the formers work, the employees of the contractor and of the latters subcontractor, if any, shall be paid in accordance with the
provisions of this Code.
In the event that the contractor or subcontractor fails to pay the wages of his employees in accordance with this Code, the
employer shall be jointly and severally liable with his contractor or subcontractor to such employees to the extent of the work

performed under the contract, in the same manner and extent that he is liable to employees directly employed by him. x x x.
xxxx
ART. 109. Solidary liability. The provisions of existing laws to the contrary notwithstanding, every employer or indirect employer
shall be held responsible with his contractor or subcontractor for any violation of any provision of this Code. For purposes of
determining the extent of their civil liability under this Chapter, they shall be considered as direct employers.
This statutory scheme is designed to give the workers ample protection, consonant with labor and social justice provisions of the
1987 Constitution.18
This Courts pronouncement in Rosewood Processing, Inc. v. NLRC19 is noteworthy:
The joint and several liability of the employer or principal was enacted to ensure compliance with the provisions of the Code,
principally those on statutory minimum wage. The contractor or subcontractor is made liable by virtue of his or her status as a
direct employer, and the principal as the indirect employer of the contractors employees. This liability facilitates, if not guarantees,
payment of the workers compensation, thus, giving the workers ample protection as mandated by the 1987 Constitution. This is
not unduly burdensome to the employer. Should the indirect employer be constrained to pay the workers, it can recover whatever
amount it had paid in accordance with the terms of the service contract between itself and the contractor.20
Petitioners liability covers the payment of respondents salary differential and 13th month pay during the time they worked for
petitioner. In addition, petitioner is solidarily liable with DNL Security for respondents unpaid wages from February 1993 until April
20, 1993. While it is true that respondents continued working for petitioner after the expiration of their contract, based on the
instruction of DNL Security, petitioner did not object to such assignment and allowed respondents to render service. Thus,
petitioner impliedly approved the extension of respondents services. Accordingly, petitioner is bound by the provisions of the
Labor Code on indirect employment. Petitioner cannot be allowed to deny its obligation to respondents after it had benefited from
their services. So long as the work, task, job, or project has been performed for petitioners benefit or on its behalf, the liability
accrues for such services.21 The principal is made liable to its indirect employees because, after all, it can protect itself from
irresponsible contractors by withholding payment of such sums that are due the employees and by paying the employees directly,
or by requiring a bond from the contractor or subcontractor for this purpose.22
Petitioners liability, however, cannot extend to the payment of separation pay. An order to pay separation pay is invested with a
punitive character, such that an indirect employer should not be made liable without a finding that it had conspired in the illegal
dismissal of the employees.23
It should be understood, though, that the solidary liability of petitioner does not preclude the application of Article 1217 of the Civil
Code on the right of reimbursement from its co-debtor, viz.:24
Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay,
the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the
payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded.
When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the obligation, such
share shall be borne by all his co-debtors, in proportion to the debt of each.1avvphi1
Lastly, we do not agree with petitioner that the enforcement of the decision is impossible because its charter unequivocally
exempts it from execution. As held in Government Service Insurance System v. Regional Trial Court of Pasig City, Branch 71,25
citing Rubia v. GSIS: 26
The processual exemption of the GSIS funds and properties under Section 39 of the GSIS Charter, in our view, should be read
consistently with its avowed principal purpose: to maintain actuarial solvency of the GSIS in the protection of assets which are to
be used to finance the retirement, disability and life insurance benefits of its members. Clearly, the exemption should be limited to
the purposes and objects covered. Any interpretation that would give it an expansive construction to exempt all GSIS assets from
legal processes absolutely would be unwarranted.
Furthermore, the declared policy of the State in Section 39 of the GSIS Charter granting GSIS an exemption from tax, lien,
attachment, levy, execution, and other legal processes should be read together with the grant of power to the GSIS to invest its
"excess funds" under Section 36 of the same Act. Under Section 36, the GSIS is granted the ancillary power to invest in business
and other ventures for the benefit of the employees, by using its excess funds for investment purposes. In the exercise of such
function and power, the GSIS is allowed to assume a character similar to a private corporation. Thus, it may sue and be sued, as
also, explicitly granted by its charter x x x.27
To be sure, petitioners charter should not be used to evade its liabilities to its employees, even to its indirect employees, as
mandated by the Labor Code.
WHEREFORE, premises considered, the Court of Appeals Decision and Resolution dated September 7, 2006 and September 27,
2007, respectively, in CA-G.R. SP No. 50450, are AFFIRMED with MODIFICATION. Petitioner Government Service Insurance
System is declared solidarily liable with DNL Security to PAY respondents their wage differentials, thirteenth month pay, and
unpaid wages from February 1993 to April 20, 1993, but is EXONERATED from the payment of respondents separation pay.
SO ORDERED.

G.R. No. 187116

October 18, 2010

ASSET BUILDERS CORPORATION, Petitioner,

vs.
STRONGHOLD INSURANCE COMPANY, INCORPORATED, Respondent.

DECISION
MENDOZA, J.:
This petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure assails the February 27, 2009 Decision1
of the Regional Trial Court, Pasig City, Branch 71 (RTC), in Civil Case No. 71034, ordering defendant Lucky Star to pay petitioner
Asset Builders Corporation the sum of P575,000.00 with damages, but absolving respondent Stronghold Insurance Company,
Incorporated (Stronghold) of any liability on its Surety Bond and Performance Bond.
THE FACTS
On April 28, 2006, Asset Builders Corporation (ABC) entered into an agreement with Lucky Star Drilling & Construction
Corporation (Lucky Star) as part of the completion of its project to construct the ACG Commercial Complex on "NHA Avenue
corner Olalia Street, Barangay Dela Paz, Antipolo City."2 As can be gleaned from the "Purchase Order,"3 Lucky Star was to
supply labor, materials, tools, and equipment including technical supervision to drill one (1) exploratory production well on the
project site. The total contract price for the said project was P1,150,000.00. The salient terms and conditions of said agreement
are as follows:
i. Lump sum price--------PHP1,150,000.00;
ii. 50% downpayment---upon submission of surety bond in an equivalent amount and performance bond equivalent to 30 % of
contract amount;
iii. Completion date-----60 calendar days;
iv. Penalty----2/10 of 1% of total contract amount for every day of delay;
v. Terms---50% down payment to be released after submission of bonds;
vi. RetentionSubject to 10% retention to be released after the project is accepted by the owner;
To guarantee faithful compliance with their agreement, Lucky Star engaged respondent Stronghold which issued two (2) bonds in
favor of petitioner. The first, SURETY BOND G(16) No. 141558, dated May 9, 2006, covers the sum of P575,000.004 or the
required downpayment for the drilling work. The full text of the surety bond is herein quoted:
KNOW ALL MEN BY THESE PRESENTS:
That we, LUCKY STAR DRILLING & CONSTRUCTION CORP., 168 ACACIA St., Octagon Industrial Estate Subd., Pasig City as
principal, and STRONGHOLD INSURANCE COMPANY, INC., a corporation duly organized and existing under and by virtue of
laws of the Philippines, as surety, are held and firmly bound unto ASSET BUILDERS CORPORATION to the sum of Pesos FIVE
HUNDRED SEVENTY FIVE THOUSAND ONLY (P575,000.00) Philippine Currency, for the payment of which, well and truly to be
made, we bind ourselves, our heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these
presents.
THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS:
To fully and faithfully guarantee the repayment to be done through deductions from periodic billings of the advance payment made
or to be made by the Obligee to the Principal in connection with the supply of labor, materials, tools and equipment including
technical supervision to drill one (1) exploratory production well located at NIA Ave. cor. Olalia St., Brgy. dela Paz, Antipolo City.
This bond is callable on demand.
The liability of the surety company upon determination under this bond shall in no case exceed the penal sum of PESOS: FIVE
HUNDRED SEVENTY FIVE THOUSAND (P575,000.00) only, Philippine Currency.
WHEREAS, the Obligee requires said principal to give a good and sufficient bond in the above stated sum to secure the full and
faithful performance on his part of said undertakings.
NOW, THEREFORE, if the above bounden principal shall in all respects duly and fully observe and perform all and singular the
aforesaid [co]-venants, conditions and agreements to the true intent and meaning thereof, then this obligation shall be null and
void, otherwise to remain in full force and effect.
Liability of surety on this bond will expire on May 09, 2007 and said bond will be cancelled five DAYS after its expiration, unless
surety is notified of and existing obligations hereunder.
x x x5
With respect to the second contract, PERFORMANCE BOND G(13) No. 115388, dated May 09, 2006, it covers the sum of
P345,000.00.6 Thus:
KNOW ALL MEN BY THESE PRESENTS:
That we, LUCKY STAR DRILLING & CONSTRUCTION of 168 Acacia St., Octagon Indl., contractor, of Estate, Sub., Pasig City
Philippines, as principal and the STRONGHOLD INSURANCE COMPANY, INC. a corporation duly organized and existing under
and by virtue of the laws of the Philippines, with head office at Makati, as Surety, are held and firmly bound unto the ASSET
BUILDERS CORPORATION and to any individual, firm, partnership, corporation or association supplying the principal with labor
or materials in the penal sum of THREE HUNDRED FORTY FIVE THOUSAND ONLY (P345,000.00), Philippine Currency, for the
payment of which sum, well and truly to be made, we bind ourselves, our heirs, executors, administrators, successors and
assigns, jointly and severally, firmly by these presents.
The CONDITIONS OF THIS OBLIGATION are as follows;
WHEREAS the above bounden principal on the ___ day of __________, 19__ entered into a contract with the ASSET BUILDERS
CORPORATION represented by _________________, to fully and faithfully.
Comply with the supply of labor, materials, tools and equipment including technical supervision to drill one (1) exploratory

production well located at NIA Ave. cor. Olalia St., Brgy. Dela Paz, Antipolo City. This bond is callable on demand.
WHEREAS, the liability of the Surety Company under this bond shall in no case exceed the sum of PESOS THREE HUNDRED
FORTY FIVE THOUSAND ONLY (P345,000.00) Philippine Currency, inclusive of interest, attorneys fee, and other damages, and
shall not be liable for any advances of the obligee to the principal.
WHEREAS, said contract requires the said principal to give a good and sufficient bond in the above-stated sum to secure the full
and faithfull performance on its part of said contract, and the satisfaction of obligations for materials used and labor employed
upon the work;
NOW THEREFORE, if the principal shall perform well and truly and fulfill all the undertakings, covenants, terms, conditions, and
agreements of said contract during the original term of said contract and any extension thereof that may be granted by the
obligee, with notice to the surety and during the life of any guaranty required under the contract, and shall also perform well and
truly and fulfill all the undertakings, covenants, terms, conditions, and agreements of any and all duly authorized modifications of
said contract that may hereinafter be made, without notice to the surety except when such modifications increase the contract
price; and such principal contractor or his or its sub-contractors shall promptly make payment to any individual, firm, partnership,
corporation or association supplying the principal of its sub-contractors with labor and materials in the prosecution of the work
provided for in the said contract, then, this obligation shall be null and void; otherwise it shall remain in full force and effect. Any
extension of the period of time which may be granted by the obligee to the contractor shall be considered as given, and any
modifications of said contract shall be considered as authorized, with the express consent of the Surety.
The right of any individual, firm, partnership, corporation or association supplying the contractor with labor or materials for the
prosecution of the work hereinbefore stated, to institute action on the penal bond, pursuant to the provision of Act No. 3688, is
hereby acknowledge and confirmed. x x x
On May 20, 2006, ABC paid Lucky Star P575,000.00 (with 2% withholding tax) as advance payment, representing 50% of the
contract price.7 Lucky Star, thereafter, commenced the drilling work. By July 18, 2006, just a few days before the agreed
completion date of 60 calendar days, Lucky Star managed to accomplish only ten (10) % of the drilling work. On the same date,
petitioner sent a demand letter to Lucky Star for the immediate completion of the drilling work8 with a threat to cancel the
agreement and forfeit the bonds should it still fail to complete said project within the agreed period.
On August 3, 2006, ABC sent a Notice of Rescission of Contract with Demand for Damages to Lucky Star.9 Pertinent portions of
said notice read:
Pursuant to paragraph 1 of the Terms and Conditions of the service contract, notice is hereby made on you of the rescission of the
contract and accordingly demand is hereby made on you, within seven (7) days from receipt hereof:
(1) to refund the down payment of PHP563,500.00, plus legal interest thereon;
(2) to pay liquidated damages equivalent to 2/10 of 1% of the contract price for every day of delay, or a total of PHP138,000.00;
(3) to pay the amount guaranteed by your performance bond in the amount of PHP345,000.00;
(4) to pay PHP150,000.00 in other consequential damages;
(5) to pay exemplary damages in the amount of PHP150,000.00;
(6) to vacate the project site, together with all your men and equipment.
Should you refuse to comply with our demand within the above period, we shall be constrained to sue you in court, in which event
we shall demand payment of attorneys fees in the amount of at least PHP100,000.0.
On August 16, 2006, ABC sent a Notice of Claim for payment to Stronghold to make good its obligation under its bonds.10
Despite notice, ABC did not receive any reply either from Lucky Star or Stronghold, prompting it to file its Complaint for Rescission
with Damages against both before the RTC11 on November 21, 2006.
In its "Answer (with Complusory Counterclaim and Cross-Claim)," dated January 24, 2007, Stronghold denied any liability arguing
that ABC had not shown any proof that it made an advance payment of 50% of the contract price of the project. It further averred
that ABCs rescission of its contract with Lucky Star virtually revoked the claims against the two bonds and absolved them from
further liability.12
Lucky Star, on the other hand, failed to file a responsive pleading within the prescribed period and, thus, was declared in default
by the RTC in its Order dated August 24, 2007.13
On February 27, 2009, the RTC rendered the assailed decision ordering Lucky Star to pay ABC but absolving Stronghold from
liability.14 Relevant parts of the decision, including the decretal portion, read:
On the liability of defendant Stronghold Insurance, the Court rules on the negative.
The surety bond and performance bond executed by defendants Lucky Star and Stronghold Insurance are in the nature of
accessory contracts which depend for its existence upon another contract. Thus, when the agreement (Exhibit A) between the
plaintiff and defendant Asset Builders was rescinded, the surety and performance bond were automatically cancelled.
WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff and against defendant Lucky Star
Drilling & Construction, ordering the latter as follows:
1. to pay plaintiff in the amount of PHP575,000.00 as actual damages plus legal interest from the filing of the complaint;
2. to pay plaintiff in the amount of PHP100,000.00 as liquidated damages;
3. to pay plaintiff in the amount of PHP50,000.00 as exemplary damages;
4. to pay plaintiff in the amount of PHP 50,000.00 as attorneys fees;

5. to pay the costs of the suit.

Defendant Stronghold Insurance Company, Inc.s compulsory counterclaim and cross-claim are dismissed.15
Hence, this petition.
Petitioner ABC prays for the reversal of the challenged decision based on the following
GROUNDS
A. The Lower Court seriously erred and unjustly ACTED ARBITRARILY with manifest bias and grave abuse of discretion,
CONTRARY to applicable laws and established jurisprudence in declaring the "automatic CANCELLATION" of respondent
Strongholds Surety Bond and Performance Bond, because:
(a) Despite rescission, there exists a continuing VALID PRINCIPAL OBLIGATION guaranteed by Respondents Bonds, arising out
of the Contractors DEFAULT and Non-performance.
(b) Upon breach by its Principal/contractor, the LIABILITIES of Respondents bonds had already ACCRUED, automatically
attached, and had become already DIRECT, PRIMARY and ABSOLUTE, even before Petitioners legitimate exercise of its option
under Art. 1191 of the New Civil Code.
(c) Rescission does NOT AFFECT the liabilities of the Respondent Stronghold as its LIABILITIES on its subject bonds have
already become INTERWOVEN and INSEPARABLE with the liabilities of its Principal, the Contractor Lucky Star.
B. With the Lower Courts completely erroneous ruling on the liabilities of Respondents bonds, the Lower Court equally ERRED
with manifest bias and grave abuse, in its FAILURE to comply with the "duty of court" to make a finding of "unreasonable denial or
withholding" by Respondent Stronghold or Petitioners claims and impose upon the Respondent the penalties provided for under
Section 241 and 244 of the Insurance Code.16
Essentially, the primary issue is whether or not respondent insurance company, as surety, can be held liable under its bonds.
The Court rules in the affirmative.
Respondent, along with its principal, Lucky Star, bound itself to the petitioner when it executed in its favor surety and performance
bonds. The contents of the said contracts clearly establish that the parties entered into a surety agreement as defined under
Article 2047 of the New Civil Code. Thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in
case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship. [Emphasis supplied]
As provided in Article 2047, the surety undertakes to be bound solidarily with the principal obligor. That undertaking makes a
surety agreement an ancillary contract as it presupposes the existence of a principal contract. Although the contract of a surety is
in essence secondary only to a valid principal obligation, the surety becomes liable for the debt or duty of another although it
possesses no direct or personal interest over the obligations nor does it receive any benefit therefrom.17 Let it be stressed that
notwithstanding the fact that the surety contract is secondary to the principal obligation, the surety assumes liability as a regular
party to the undertaking.18
Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation,19 reiterating the ruling in Garcia v. Court of Appeals,20
expounds on the nature of the suretys liability:
X x x. The suretys obligation is not an original and direct one for the performance of his own act, but merely accessory or
collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only
to a valid principal obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in
other words, he is directly and equally bound with the principal.
Suretyship, in essence, contains two types of relationship the principal relationship between the obligee (petitioner) and the
obligor (Lucky Star), and the accessory surety relationship between the principal (Lucky Star) and the surety (respondent). In this
arrangement, the obligee accepts the suretys solidary undertaking to pay if the obligor does not pay. Such acceptance, however,
does not change in any material way the obligees relationship with the principal obligor. Neither does it make the surety an active
party to the principal obligee-obligor relationship. Thus, the acceptance does not give the surety the right to intervene in the
principal contract. The suretys role arises only upon the obligors default, at which time, it can be directly held liable by the obligee
for payment as a solidary obligor.211avvphi1
In the case at bench, when Lucky Star failed to finish the drilling work within the agreed time frame despite petitioners demand for
completion, it was already in delay. Due to this default, Lucky Stars liability attached and, as a necessary consequence,
respondents liability under the surety agreement arose.
Undeniably, when Lucky Star reneged on its undertaking with the petitioner and further failed to return the P575,000.00
downpayment that was already advanced to it, respondent, as surety, became solidarily bound with Lucky Star for the repayment
of the said amount to petitioner. The clause, "this bond is callable on demand," strongly speaks of respondents primary and direct
responsibility to the petitioner.1avvphil
Accordingly, after liability has attached to the principal, the obligee or, in this case, the petitioner, can exercise the right to proceed
against Lucky Star or respondent or both. Article 1216 of the New Civil Code states:
The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made
against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt
has not been fully collected.
Contrary to the trial courts ruling, respondent insurance company was not automatically released from any liability when petitioner
resorted to the rescission of the principal contract for failure of the other party to perform its undertaking. Precisely, the liability of

the surety arising from the surety contracts comes to life upon the solidary obligors default. It should be emphasized that
petitioner had to choose rescission in order to prevent further loss that may arise from the delay of the progress of the project.
Without a doubt, Lucky Stars unsatisfactory progress in the drilling work and its failure to complete it in due time amount to nonperformance of its obligation.
In fine, respondent should be answerable to petitioner on account of Lucky Stars non-performance of its obligation as guaranteed
by the performance bond.
Finally, Article 121722 of the New Civil Code acknowledges the right of reimbursement from a co-debtor (the principal co-debtor, in
case of suretyship) in favor of the one who paid (the surety). Thus, respondent is entitled to reimbursement from Lucky Star for the
amount it may be required to pay petitioner arising from its bonds.
WHEREFORE, the February 27, 2009 Decision of the Regional Trial Court, Pasig City, Branch 71, is AFFIRMED with
MODIFICATION. Respondent Stronghold Insurance is hereby declared jointly and severally liable with Lucky Star for the payment
of P575,000.00 and the payment of P345,000.00 on the basis of its performance bond.
SO ORDERED.

G.R. No. 73345. April 7, 1993.

SOCIAL SECURITY SYSTEM, petitioner,
vs.
MOONWALK DEVELOPMENT & HOUSING CORPORATION, ROSITA U. ALBERTO, ROSITA U. ALBERTO, JMA HOUSE, INC.,
MILAGROS SANCHEZ SANTIAGO, in her capacity as Register of Deeds for the Province of Cavite, ARTURO SOLITO, in his
capacity as Register of Deeds for Metro Manila District IV, Makati, Metro Manila and the INTERMEDIATE APPELLATE COURT,
respondents.
The Solicitor General for petitioner.
K.V. Faylona & Associates for private respondents.
DECISION
CAMPOS, JR., J p:
Before Us is a petition for review on certiorari of decision 1 of the then Intermediate Appellate Court affirming in toto the decision
of the former Court of First Instance of Rizal, Seventh Judicial District, Branch XXIX, Pasay City.
The facts as found by the Appellate Court are as follows:
"On February 20, 1980, the Social Security System, SSS for brevity, filed a complaint in the Court of First Instance of Rizal against
Moonwalk Development & Housing Corporation, Moonwalk for short, alleging that the former had committed an error in failing to
compute the 12% interest due on delayed payments on the loan of Moonwalk resulting in a chain of errors in the application of
payments made by Moonwalk and, in an unpaid balance on the principal loan agreement in the amount of P7,053.77 and, also in
not reflecting in its statement or account an unpaid balance on the said penalties for delayed payments in the amount of
P7,517,178.21 as of October 10, 1979.
Moonwalk answered denying SSS' claims and asserting that SSS had the opportunity to ascertain the truth but failed to do so.
The trial court set the case for pre-trial at which pre-trial conference, the court issued an order giving both parties thirty (30) days
within which to submit a stipulation of facts.
The Order of October 6, 1980 dismissing the complaint followed the submission by the parties on September 19, 1980 of the
following stipulation of Facts:
"1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for an interim loan in the amount of THIRTY
MILLION PESOS (P30,000,000.00) for the purpose of developing and constructing a housing project in the provinces of Rizal and
Cavite;
"2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum of P9,595,000.00 was released to defendant
Moonwalk as of November 28, 1973;
"3. A third Amended Deed of First Mortgage was executed on December 18, 1973 Annex `D' providing for restructuring of the
payment of the released amount of P9,595,000.00.
"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter respectively, under paragraph 5 of the aforesaid
Third Amended Deed of First Mortgage substituted Associated Construction and Surveys Corporation, Philippine Model Homes
Development Corporation, Mariano Z. Velarde and Eusebio T. Ramos, as solidary obligors;
"5. On July 23, 1974, after considering additional releases in the amount of P2,659,700.00, made to defendant Moonwalk,
defendant Moonwalk delivered to the plaintiff a promissory note for TWELVE MILLION TWO HUNDRED FIFTY FOUR
THOUSAND SEVEN HUNDRED PESOS (P12,254,700.00) Annex `E', signed by Eusebio T. Ramos, and the said Rosita U.
Alberto and Rosita U. Alberto;
"6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal of P12,254,700.00 released to it. The last
payment made by Moonwalk in the amount of P15,004,905.74 were based on the Statement of Account, Annex "F" prepared by
plaintiff SSS for defendant;
"7. After settlement of the account stated in Annex 'F' plaintiff issued to defendant Moonwalk the Release of Mortgage for
Moonwalk's mortgaged properties in Cavite and Rizal, Annexes 'G' and 'H' on October 9, 1979 and October 11, 1979 respectively.

"8. In letters to defendant Moonwalk, dated November 28, 1979 and followed up by another letter dated December 17, 1979,
plaintiff alleged that it committed an honest mistake in releasing defendant.
"9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had completely paid its obligations to SSS;
"10. The genuineness and due execution of the documents marked as Annex (sic) 'A' to 'O' inclusive, of the Complaint and the
letter dated December 21, 1979 of the defendant's counsel to the plaintiff are admitted.
"Manila for Pasay City, September 2, 1980." 2
On October 6, 1990, the trial court issued an order dismissing the complaint on the ground that the obligation was already
extinguished by the payment by Moonwalk of its indebtedness to SSS and by the latter's act of cancelling the real estate
mortgages executed in its favor by defendant Moonwalk. The Motion for Reconsideration filed by SSS with the trial court was
likewise dismissed by the latter.
These orders were appealed to the Intermediate Appellate Court. Respondent Court reduced the errors assigned by the SSS into
this issue: ". . . are defendants-appellees, namely, Moonwalk Development and Housing Corporation, Rosita U. Alberto, Rosita U.
Alberto, JMA House, Inc. still liable for the unpaid penalties as claimed by plaintiff-appellant or is their obligation extinguished?" 3
As We have stated earlier, the respondent Court held that Moonwalk's obligation was extinguished and affirmed the trial court.
Hence, this Petition wherein SSS raises the following grounds for review:
"First, in concluding that the penalties due from Moonwalk are "deemed waived and/or barred," the appellate court disregarded the
basic tenet that waiver of a right must be express, made in a clear and unequivocal manner. There is no evidence in the case at
bar to show that SSS made a clear, positive waiver of the penalties, made with full knowledge of the circumstances.
Second, it misconstrued the ruling that SSS funds are trust funds, and SSS, being a mere trustee, cannot perform acts affecting
the same, including condonation of penalties, that would diminish property rights of the owners and beneficiaries thereof. (United
Christian Missionary Society v. Social Security Commission, 30 SCRA 982, 988 [1969]).
Third, it ignored the fact that penalty at the rate of 12% p.a. is not inequitable.
Fourth, it ignored the principle that equity will cancel a release on the ground of mistake of fact." 4
The same problem which confronted the respondent court is presented before Us: Is the penalty demandable even after the
extinguishment of the principal obligation?
The former Intermediate Appellate Court, through Justice Eduard P. Caguioa, held in the negative. It reasoned, thus:
"2. As we have explained under No. 1, contrary to what the plaintiff-appellant states in its Brief, what is sought to be recovered in
this case is not the 12% interest on the loan but the 12% penalty for failure to pay on time the amortization. What is sought to be
enforced therefore is the penal clause of the contract entered into between the parties.
Now, what is a penal clause. A penal clause has been defined as
"an accessory obligation which the parties attach to a principal obligation for the purpose of insuring the performance thereof by
imposing on the debtor a special presentation (generally consisting in the payment of a sum of money) in case the obligation is not
fulfilled or is irregularly or inadequately fulfilled" (3 Castan 8th Ed. p. 118).
Now an accessory obligation has been defined as that attached to a principal obligation in order to complete the same or take its
place in the case of breach (4 Puig Pea Part 1 p. 76). Note therefore that an accessory obligation is dependent for its existence
on the existence of a principal obligation. A principal obligation may exist without an accessory obligation but an accessory
obligation cannot exist without a principal obligation. For example, the contract of mortgage is an accessory obligation to enforce
the performance of the main obligation of indebtedness. An indebtedness can exist without the mortgage but a mortgage cannot
exist without the indebtedness, which is the principal obligation. In the present case, the principal obligation is the loan between
the parties. The accessory obligation of a penal clause is to enforce the main obligation of payment of the loan. If therefore the
principal obligation does not exist the penalty being accessory cannot exist.
Now then when is the penalty demandable? A penalty is demandable in case of non performance or late performance of the main
obligation. In other words in order that the penalty may arise there must be a breach of the obligation either by total or partial non
fulfillment or there is non fulfillment in point of time which is called mora or delay. The debtor therefore violates the obligation in
point of time if there is mora or delay. Now, there is no mora or delay unless there is a demand. It is noteworthy that in the present
case during all the period when the principal obligation was still subsisting, although there were late amortizations there was no
demand made by the creditor, plaintiff-appellant for the payment of the penalty. Therefore up to the time of the letter of plaintiffappellant there was no demand for the payment of the penalty, hence the debtor was no in mora in the payment of the penalty.
However, on October 1, 1979, plaintiff-appellant issued its statement of account (Exhibit F) showing the total obligation of
Moonwalk as P15,004,905.74, and forthwith demanded payment from defendant-appellee. Because of the demand for payment,
Moonwalk made several payments on September 29, October 9 and 19, 1979 respectively, all in all totalling P15,004,905.74
which was a complete payment of its obligation as stated in Exhibit F. Because of this payment the obligation of Moonwalk was
considered extinguished, and pursuant to said extinguishment, the real estate mortgages given by Moonwalk were released on
October 9, 1979 and October 10, 1979 (Exhibits G and H). For all purposes therefore the principal obligation of defendantappellee was deemed extinguished as well as the accessory obligation of real estate mortgage; and that is the reason for the
release of all the Real Estate Mortgages on October 9 and 10, 1979 respectively.
Now, besides the Real Estate Mortgages, the penal clause which is also an accessory obligation must also be deemed
extinguished considering that the principal obligation was considered extinguished, and the penal clause being an accessory
obligation. That being the case, the demand for payment of the penal clause made by plaintiff-appellant in its demand letter dated
November 28, 1979 and its follow up letter dated December 17, 1979 (which parenthetically are the only demands for payment of
the penalties) are therefore ineffective as there was nothing to demand. It would be otherwise, if the demand for the payment of
the penalty was made prior to the extinguishment of the obligation because then the obligation of Moonwalk would consist of: 1)
the principal obligation 2) the interest of 12% on the principal obligation and 3) the penalty of 12% for late payment for after

demand, Moonwalk would be in mora and therefore liable for the penalty.
Let it be emphasized that at the time of the demand made in the letters of November 28, 1979 and December 17, 1979 as far as
the penalty is concerned, the defendant-appellee was not in default since there was no mora prior to the demand. That being the
case, therefore, the demand made after the extinguishment of the principal obligation which carried with it the extinguishment of
the penal clause being merely an accessory obligation, was an exercise in futility.
3. At the time of the payment made of the full obligation on October 10, 1979 together with the 12% interest by defendant-appellee
Moonwalk, its obligation was extinguished. It being extinguished, there was no more need for the penal clause. Now, it is to be
noted that penalty at anytime can be modified by the Court. Even substantial performance under Art. 1234 authorizes the Court to
consider it as complete performance minus damages. Now, Art, 1229 Civil Code of the Philippines provides:
"ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with
by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable."
If the penalty can be reduced after the principal obligation has been partly or irregularly complied with by the debtor, which is
nonetheless a breach of the obligation, with more reason the penal clause is not demandable when full obligation has been
complied with since in that case there is no breach of the obligation. In the present case, there has been as yet no demand for
payment of the penalty at the time of the extinguishment of the obligation, hence there was likewise an extinguishment of the
penalty.
Let Us emphasize that the obligation of defendant-appellee was fully complied with by the debtor, that is, the amount loaned
together with the 12% interest has been fully paid by the appellee. That being so, there is no basis for demanding the penal clause
since the obligation has been extinguished. Here there has been a waiver of the penal clause as it was not demanded before the
full obligation was fully paid and extinguished. Again, emphasis must be made on the fact that plaintiff-appellant has not lost
anything under the contract since in got back in full the amount loan (sic) as well as the interest thereof. The same thing would
have happened if the obligation was paid on time, for then the penal clause, under the terms of the contract would not apply.
Payment of the penalty does not mean gain or loss of plaintiff-appellant since it is merely for the purpose of enforcing the
performance of the main obligation has been fully complied with and extinguished, the penal clause has lost its raison d' entre." 5
We find no reason to depart from the appellate court's decision. We, however, advance the following reasons for the denial of this
petition.
Article 1226 of the Civil Code provides:
"Art. 1226. In obligations with a penal clause, he penalty shall substitute the indemnity for damages and the payment of interests
in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to
pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code." (Emphasis Ours.)
A penal clause is an accessory undertaking to assume greater liability in case of breach. 6 It has a double function: (1) to provide
for liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the event
of breach. 7 From the foregoing, it is clear that a penal clause is intended to prevent the obligor from defaulting in the performance
of his obligation. Thus, if there should be default, the penalty may be enforced. One commentator of the Civil Code wrote:
"Now when is the penalty deemed demandable in accordance with the provisions of the Civil Code? We must make a distinction
between a positive and a negative obligation. With regard to obligations which are positive (to give and to do), the penalty is
demandable when the debtor is in mora; hence, the necessity of demand by the debtor unless the same is excused . . ." 8
When does delay arise? Under the Civil Code, delay begins from the time the obligee judicially or extrajudicially demands from the
obligor the performance of the obligation.
"Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands
from them the fulfillment of their obligation."
There are only three instances when demand is not necessary to render the obligor in default. These are the following:
"(1) When the obligation or the law expressly so declares;
(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to
be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or
(3) When the demand would be useless, as when the obligor has rendered it beyond his power to perform." 9
This case does not fall within any of the established exceptions. Hence, despite the provision in the promissory note that "(a)ll
amortization payments shall be made every first five (5) days of the calendar month until the principal and interest on the loan or
any portion thereof actually released has been fully paid," 10 petitioner is not excused from making a demand. It has been
established that at the time of payment of the full obligation, private respondent Moonwalk has long been delinquent in meeting its
monthly arrears and in paying the full amount of the loan itself as the obligation matured sometime in January, 1977. But mere
delinquency in payment does not necessarily mean delay in the legal concept. To be in default ". . . is different from mere delay in
the grammatical sense, because it involves the beginning of a special condition or status which has its own peculiar effects or
results." 11 In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the obligation
be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance
judicially and extrajudicially. 12 Default generally begins from the moment the creditor demands the performance of the obligation.
13
Nowhere in this case did it appear that SSS demanded from Moonwalk the payment of its monthly amortizations. Neither did it
show that petitioner demanded the payment of the stipulated penalty upon the failure of Moonwalk to meet its monthly
amortization. What the complaint itself showed was that SSS tried to enforce the obligation sometime in September, 1977 by
foreclosing the real estate mortgages executed by Moonwalk in favor of SSS. But this foreclosure did not push through upon

Moonwalk's requests and promises to pay in full. The next demand for payment happened on October 1, 1979 when SSS issued a
Statement of Account to Moonwalk. And in accordance with said statement, Moonwalk paid its loan in full. What is clear, therefore,
is that Moonwalk was never in default because SSS never compelled performance. Though it tried to foreclose the mortgages,
SSS itself desisted from doing so upon the entreaties of Moonwalk. If the Statement of Account could properly be considered as
demand for payment, the demand was complied with on time. Hence, no delay occurred and there was, therefore, no occasion
when the penalty became demandable and enforceable. Since there was no default in the performance of the main obligation
payment of the loan SSS was never entitled to recover any penalty, not at the time it made the Statement of Account and
certainly, not after the extinguishment of the principal obligation because then, all the more that SSS had no reason to ask for the
penalties. Thus, there could never be any occasion for waiver or even mistake in the application for payment because there was
nothing for SSS to waive as its right to enforce the penalty did not arise.
SSS, however, in buttressing its claim that it never waived the penalties, argued that the funds it held were trust funds and as
trustee, the petitioner could not perform acts affecting the funds that would diminish property rights of the owners and beneficiaries
thereof. To support its claim, SSS cited the case of United Christian Missionary Society v. Social Security Commission. 14
We looked into the case and found out that it is not applicable to the present case as it dealt not with the right of the SSS to collect
penalties which were provided for in contracts which it entered into but with its right to collect premiums and its duty to collect the
penalty for delayed payment or non-payment of premiums. The Supreme Court, in that case, stated:
"No discretion or alternative is granted respondent Commission in the enforcement of the law's mandate that the employer who
fails to comply with his legal obligation to remit the premiums to the System within the prescribed period shall pay a penalty of
three (3%) per month. The prescribed penalty is evidently of a punitive character, provided by the legislature to assure that
employers do not take lightly the State's exercise of the police power in the implementation of the Republic's declared policy "to
develop, establish gradually and perfect a social security system which shall be suitable to the needs of the people throughout the
Philippines and (to) provide protection to employers against the hazards of disability, sickness, old age and death . . ."
Thus, We agree with the decision of the respondent court on the matter which We quote, to wit:
"Note that the above case refers to the condonation of the penalty for the non remittance of the premium which is provided for by
Section 22(a) of the Social Security Act . . . In other words, what was sought to be condoned was the penalty provided for by law
for non remittance of premium for coverage under the Social Security Act.
The case at bar does not refer to any penalty provided for by law nor does it refer to the non remittance of premium. The case at
bar refers to a contract of loan entered into between plaintiff and defendant Moonwalk Development and Housing Corporation.
Note, therefore, that no provision of law is involved in this case, nor is there any penalty imposed by law nor a case about nonremittance of premium required by law. The present case refers to a contract of loan payable in installments not provided for by
law but by agreement of the parties. Therefore, the ratio decidendi of the case of United Christian Missionary Society vs. Social
Security Commission which plaintiff-appellant relies is not applicable in this case; clearly, the Social Security Commission, which is
a creature of the Social Security Act cannot condone a mandatory provision of law providing for the payment of premiums and for
penalties for non remittance. The life of the Social Security Act is in the premiums because these are the funds from which the
Social Security Act gets the money for its purposes and the non-remittance of the premiums is penalized not by the Social
Security Commission but by law.
xxx xxx xxx
It is admitted that when a government created corporation enters into a contract with private party concerning a loan, it descends
to the level of a private person. Hence, the rules on contract applicable to private parties are applicable to it. The argument
therefore that the Social Security Commission cannot waive or condone the penalties which was applied in the United Christian
Missionary Society cannot apply in this case. First, because what was not paid were installments on a loan but premiums required
by law to be paid by the parties covered by the Social Security Act. Secondly, what is sought to be condoned or waived are
penalties not imposed by law for failure to remit premiums required by law, but a penalty for non payment provided for by the
agreement of the parties in the contract between them . . ." 15
WHEREFORE, in view of the foregoing, the petition is DISMISSED and the decision of the respondent court is AFFIRMED. LLpr
SO ORDERED.

G.R. No. 116285

October 19, 2001

ANTONIO TAN, petitioner,

vs.
COURT OF APPEALS and the CULTURAL CENTER OF THE PHILIPPINES, respondents.
DE LEON, JR., J.:
Before us is a petition for review of the Decision1 dated August 31, 1993 and Resolution2 dated July 13, 1994 of the Court of
Appeals affirming the Decision3 dated May 8, 1991 of the Regional Trial Court (RTC) of Manila, Branch 27.
The facts are as follows:
On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the principal amount of Two Million
Pesos (P2,000,000.00), or in the total principal amount of Four Million Pesos (P4,000,000.00) from respondent Cultural Center of
the Philippines (CCP, for brevity) evidenced by two (2) promissory notes with maturity dates on May 14, 1979 and July 6, 1979,
respectively. Petitioner defaulted but after a few partial payments he had the loans restructured by respondent CCP, and petitioner
accordingly executed a promissory note (Exhibit "A") on August 31, 1979 in the amount of Three Million Four Hundred Eleven
Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) payable in five (5) installments. Petitioner
Tan failed to pay any installment on the said restructured loan of Three Million Four Hundred Eleven Thousand Four Hundred
Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32), the last installment falling due on December 31, 1980. In a letter

dated January 26, 1982, petitioner requested and proposed to respondent CCP a mode of paying the restructured loan, i.e., (a)
twenty percent (20%) of the principal amount of the loan upon the respondent giving its conformity to his proposal; and (b) the
balance on the principal obligation payable in thirty-six (36) equal monthly installments until fully paid. On October 20, 1983,
petitioner again sent a letter to respondent CCP requesting for a moratorium on his loan obligation until the following year
allegedly due to a substantial deduction in the volume of his business and on account of the peso devaluation. No favorable
response was made to said letters. Instead, respondent CCP, through counsel, wrote a letter dated May 30, 1984 to the petitioner
demanding full payment, within ten (10) days from receipt of said letter, of the petitioners restructured loan which as of April 30,
1984 amounted to Six Million Eighty-Eight Thousand Seven Hundred Thirty-Five Pesos and Three Centavos (P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum of money, docketed as Civil
Case No. 84-26363, against the petitioner after the latter failed to settle his said restructured loan obligation. The petitioner
interposed the defense that he merely accommodated a friend, Wilson Lucmen, who allegedly asked for his help to obtain a loan
from respondent CCP. Petitioner claimed that he has not been able to locate Wilson Lucmen. While the case was pending in the
trial court, the petitioner filed a Manifestation wherein he proposed to settle his indebtedness to respondent CCP by proposing to
make a down payment of One Hundred Forty Thousand Pesos (P140,000.00) and to issue twelve (12) checks every beginning of
the year to cover installment payments for one year, and every year thereafter until the balance is fully paid. However, respondent
CCP did not agree to the petitioners proposals and so the trial of the case ensued.
On May 8, 1991, the trial court rendered a decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, ordering defendant to pay plaintiff, the
amount of P7,996,314.67, representing defendants outstanding account as of August 28, 1986, with the corresponding stipulated
interest and charges thereof, until fully paid, plus attorneys fees in an amount equivalent to 25% of said outstanding account, plus
P50,000.00, as exemplary damages, plus costs.
Defendants counterclaims are ordered dismissed, for lack of merit.
SO ORDERED.4
The trial court gave five (5) reasons in ruling in favor of respondent CCP. First, it gave little weight to the petitioners contention
that the loan was merely for the accommodation of Wilson Lucmen for the reason that the defense propounded was not credible in
itself. Second, assuming, arguendo, that the petitioner did not personally benefit from the said loan, he should have filed a third
party complaint against Wilson Lucmen, the alleged accommodated party but he did not. Third, for three (3) times the petitioner
offered to settle his loan obligation with respondent CCP. Fourth, petitioner may not avoid his liability to pay his obligation under
the promissory note (Exh. "A") which he must comply with in good faith pursuant to Article 1159 of the New Civil Code. Fifth,
petitioner is estopped from denying his liability or loan obligation to the private respondent.
The petitioner appealed the decision of the trial court to the Court of Appeals insofar as it charged interest, surcharges, attorneys
fees and exemplary damages against the petitioner. In his appeal, the petitioner asked for the reduction of the penalties and
charges on his loan obligation. He abandoned his alleged defense in the trial court that he merely accommodated his friend,
Wilson Lucmen, in obtaining the loan, and instead admitted the validity of the same. On August 31, 1993, the appellate court
rendered a decision, the dispositive portion of which reads:
WHEREFORE, with the foregoing modification, the judgment appealed from is hereby AFFIRMED.
SO ORDERED.5
In affirming the decision of the trial court imposing surcharges and interest, the appellate court held that:
We are unable to accept appellants (petitioners) claim for modification on the basis of alleged partial or irregular performance,
there being none. Appellants offer or tender of payment cannot be deemed as a partial or irregular performance of the contract,
not a single centavo appears to have been paid by the defendant.
However, the appellate court modified the decision of the trial court by deleting the award for exemplary damages and reducing
the amount of awarded attorneys fees to five percent (5%), by ratiocinating as follows:
Given the circumstances of the case, plus the fact that plaintiff was represented by a government lawyer, We believe the award of
25% as attorneys fees and P500,000.00 as exemplary damages is out of proportion to the actual damage caused by the nonperformance of the contract and is excessive, unconscionable and iniquitous.
In a Resolution dated July 13, 1994, the appellate court denied the petitioners motion for reconsideration of the said decision.
Hence, this petition anchored on the following assigned errors:
I
THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS IMPRIMATUR TO THE DECISION OF THE
TRIAL COURT WHICH COMPOUNDED INTEREST ON SURCHARGES.
II
THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING IMPOSITION OF INTEREST FOR THE PERIOD OF
TIME THAT PRIVATE RESPONDENT HAS FAILED TO ASSIST PETITIONER IN APPLYING FOR RELIEF OF LIABILITY
THROUGH THE COMMISSION ON AUDIT AND THE OFFICE OF THE PRESIDENT.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF ATTORNEYS FEES AND IN REDUCING
PENALTIES.
Significantly, the petitioner does not question his liability for his restructured loan under the promissory note marked Exhibit "A".
The first question to be resolved in the case at bar is whether there are contractual and legal bases for the imposition of the
penalty, interest on the penalty and attorneys fees.

The petitioner imputes error on the part of the appellate court in not totally eliminating the award of attorneys fees and in not
reducing the penalties considering that the petitioner, contrary to the appellate courts findings, has allegedly made partial
payments on the loan. And if penalty is to be awarded, the petitioner is asking for the non-imposition of interest on the surcharges
inasmuch as the compounding of interest on surcharges is not provided in the promissory note marked Exhibit "A". The petitioner
takes exception to the computation of the private respondent whereby the interest, surcharge and the principal were added
together and that on the total sum interest was imposed. Petitioner also claims that there is no basis in law for the charging of
interest on the surcharges for the reason that the New Civil Code is devoid of any provision allowing the imposition of interest on
surcharges.
We find no merit in the petitioners contention. Article 1226 of the New Civil Code provides that:
In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of
non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the
penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.
In the case at bar, the promissory note (Exhibit "A") expressly provides for the imposition of both interest and penalties in case of
default on the part of the petitioner in the payment of the subject restructured loan. The pertinent6 portion of the promissory note
(Exhibit "A") imposing interest and penalties provides that:
For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER OF THE PHILIPPINES at its office in
Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN THOUSAND FOUR HUNDRED + PESOS (P3,411,421.32)
Philippine Currency, xxx.
xxx

xxx

xxx

With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until paid. PLUS THREE PERCENT (3%)
SERVICE CHARGE.
In case of non-payment of this note at maturity/on demand or upon default of payment of any portion of it when due, I/We jointly
and severally agree to pay additional penalty charges at the rate of TWO per cent (2%) per month on the total amount due until
paid, payable and computed monthly. Default of payment of this note or any portion thereof when due shall render all other
installments and all existing promissory notes made by us in favor of the CULTURAL CENTER OF THE PHILIPPINES
immediately due and demandable. (Underscoring supplied)
xxx

xxx

xxx

The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan constitutes the monetary interest on
the note and is allowed under Article 1956 of the New Civil Code.7 On the other hand, the stipulated two percent (2%) per month
penalty is in the form of penalty charge which is separate and distinct from the monetary interest on the principal of the loan.
Penalty on delinquent loans may take different forms. In Government Service Insurance System v. Court of Appeals,8 this Court
has ruled that the New Civil Code permits an agreement upon a penalty apart from the monetary interest. If the parties stipulate
this kind of agreement, the penalty does not include the monetary interest, and as such the two are different and distinct from
each other and may be demanded separately. Quoting Equitable Banking Corp. v. Liwanag,9 the GSIS case went on to state that
such a stipulation about payment of an additional interest rate partakes of the nature of a penalty clause which is sanctioned by
law, more particularly under Article 2209 of the New Civil Code which provides that:
If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being
no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest,
which is six per cent per annum.
The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by the petitioner.
There is no doubt that the petitioner is liable for both the stipulated monetary interest and the stipulated penalty charge. The
penalty charge is also called penalty or compensatory interest. Having clarified the same, the next issue to be resolved is whether
interest may accrue on the penalty or compensatory interest without violating the provisions of Article 1959 of the New Civil Code,
which provides that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties
may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest.
According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge for the reason that the law
only allows imposition of interest on monetary interest but not the charging of interest on penalty. He claims that since there is no
law that allows imposition of interest on penalties, the penalties should not earn interest. But as we have already explained,
penalty clauses can be in the form of penalty or compensatory interest. Thus, the compounding of the penalty or compensatory
interest is sanctioned by and allowed pursuant to the above-quoted provision of Article 1959 of the New Civil Code considering
that:
First, there is an express stipulation in the promissory note (Exhibit "A") permitting the compounding of interest. The fifth
paragraph of the said promissory note provides that: "Any interest which may be due if not paid shall be added to the total amount
when due and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by law."10 Therefore,
any penalty interest not paid, when due, shall earn the legal interest of twelve percent (12%) per annum,11 in the absence of
express stipulation on the specific rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that "Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point." In the instant case, interest likewise began to run on the penalty
interest upon the filing of the complaint in court by respondent CCP on August 29, 1984. Hence, the courts a quo did not err in
ruling that the petitioner is bound to pay the interest on the total amount of the principal, the monetary interest and the penalty
interest.
The petitioner seeks the elimination of the compounded interest imposed on the total amount based allegedly on the case of

National Power Corporation v. National Merchandising Corporation,12 wherein we ruled that the imposition of interest on the
damages from the filing of the complaint is unjust where the litigation was prolonged for twenty-five (25) years through no fault of
the defendant. However, the ruling in the said National Power Corporation (NPC) case is not applicable to the case at bar
inasmuch as our ruling on the issue of interest in that NPC case was based on equitable considerations and on the fact that the
said case lasted for twenty-five (25) years "through no fault of the defendant." In the case at bar, however, equity cannot be
considered inasmuch as there is a contractual stipulation in the promissory note whereby the petitioner expressly agreed to the
compounding of interest in case of failure on his part to pay the loan at maturity. Inasmuch as the said stipulation on the
compounding of interest has the force of law between the parties and does not appear to be inequitable or unjust, the said written
stipulation should be respected.
The private respondents Statement of Account (marked Exhibits "C" to "C-2")13 shows the following breakdown of the petitioners
indebtedness as of August 28, 1986:
Principal

P2,838,454.68

Interest

P 576,167.89

Surcharge

P4,581,692.10
P7,996,314.67

The said statement of account also shows that the above amounts stated therein are net of the partial payments amounting to a
total of Four Hundred Fifty-Two Thousand Five Hundred Sixty-One Pesos and Forty-Three Centavos (P452,561.43) which were
made during the period from May 13, 1983 to September 30, 1983.14 The petitioner now seeks the reduction of the penalty due to
the said partial payments. The principal amount of the promissory note (Exhibit "A") was Three Million Four Hundred Eleven
Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) when the loan was restructured on August
31, 1979. As of August 28, 1986, the principal amount of the said restructured loan has been reduced to Two Million Eight
Hundred Thirty-Eight Thousand Four Hundred Fifty-Four Pesos and Sixty-Eight Centavos (P2,838,454.68). Thus, petitioner
contends that reduction of the penalty is justifiable pursuant to Article 1229 of the New Civil Code which provides that: "The judge
shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if
there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable." Petitioner
insists that the penalty should be reduced to ten percent (10%) of the unpaid debt in accordance with Bachrach Motor Company v.
Espiritu.15
There appears to be a justification for a reduction of the penalty charge but not necessarily to ten percent (10%) of the unpaid
balance of the loan as suggested by petitioner. Inasmuch as petitioner has made partial payments which showed his good faith, a
reduction of the penalty charge from two percent (2%) per month on the total amount due, compounded monthly, until paid can
indeed be justified under the said provision of Article 1229 of the New Civil Code.
In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on the total amount due to be
unconscionable inasmuch as the same appeared to have been compounded monthly.
Considering petitioners several partial payments and the fact he is liable under the note for the two percent (2%) penalty charge
per month on the total amount due, compounded monthly, for twenty-one (21) years since his default in 1980, we find it fair and
equitable to reduce the penalty charge to a straight twelve percent (12%) per annum on the total amount due starting August 28,
1986, the date of the last Statement of Account (Exhibits "C" to "C-2"). We also took into consideration the offers of the petitioner
to enter into a compromise for the settlement of his debt by presenting proposed payment schemes to respondent CCP. The said
offers at compromise also showed his good faith despite difficulty in complying with his loan obligation due to his financial
problems. However, we are not unmindful of the respondents long overdue deprivation of the use of its money collectible from the
petitioner.
The petitioner also imputes error on the part of the appellate court for not declaring the suspension of the running of the interest
during that period when the respondent allegedly failed to assist the petitioner in applying for relief from liability. In this connection,
the petitioner referred to the private respondents letter16 dated September 28, 1988 addressed to petitioner which partially reads:
Dear Mr. Tan:
xxx

xxx

xxx

With reference to your appeal for condonation of interest and surcharge, we wish to inform you that the center will assist you in
applying for relief of liability through the Commission on Audit and Office of the President xxx.
While your application is being processed and awaiting approval, the center will be accepting your proposed payment scheme
with the downpayment of P160,000.00 and monthly remittances of P60,000.00 xxx.
xxx

xxx

xxx

The petitioner alleges that his obligation to pay the interest and surcharge should have been suspended because the obligation to
pay such interest and surcharge has become conditional, that is dependent on a future and uncertain event which consists of
whether the petitioners request for condonation of interest and surcharge would be recommended by the Commission on Audit
and the Office of the President to the House of Representatives for approval as required under Section 36 of Presidential Decree
No. 1445. Since the condition has not happened allegedly due to the private respondents reneging on its promise, his liability to
pay the interest and surcharge on the loan has not arisen. This is the petitioners contention.
It is our view, however, that the running of the interest and surcharge was not suspended by the private respondents promise to
assist the petitioners in applying for relief therefrom through the Commission on Audit and the Office of the President.
First, the letter dated September 28, 1988 alleged to have been sent by the respondent CCP to the petitioner is not part of the
formally offered documentary evidence of either party in the trial court. That letter cannot be considered evidence pursuant to Rule
132, Section 34 of the Rules of Court which provides that: "The court shall consider no evidence which has not been formally
offered xxx." Besides, the said letter does not contain any categorical agreement on the part of respondent CCP that the payment
of the interest and surcharge on the loan is deemed suspended while his appeal for condonation of the interest and surcharge

was being processed.

Second, the private respondent correctly asserted that it was the primary responsibility of petitioner to inform the Commission on
Audit and the Office of the President of his application for condonation of interest and surcharge. It was incumbent upon the
petitioner to bring his administrative appeal for condonation of interest and penalty charges to the attention of the said government
offices.
On the issue of attorneys fees, the appellate court ruled correctly and justly in reducing the trial courts award of twenty-five
percent (25%) attorneys fees to five percent (5%) of the total amount due.
WHEREFORE, the assailed Decision of the Court of Appeals is hereby AFFIRMED with MODIFICATION in that the penalty
charge of two percent (2%) per month on the total amount due, compounded monthly, is hereby reduced to a straight twelve
percent (12%) per annum starting from August 28, 1986. With costs against the petitioner.
SO ORDERED.

G.R. No. 116285

October 19, 2001

ANTONIO TAN, petitioner,

vs.
COURT OF APPEALS and the CULTURAL CENTER OF THE PHILIPPINES, respondents.
DE LEON, JR., J.:
Before us is a petition for review of the Decision1 dated August 31, 1993 and Resolution2 dated July 13, 1994 of the Court of
Appeals affirming the Decision3 dated May 8, 1991 of the Regional Trial Court (RTC) of Manila, Branch 27.
The facts are as follows:
On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the principal amount of Two Million
Pesos (P2,000,000.00), or in the total principal amount of Four Million Pesos (P4,000,000.00) from respondent Cultural Center of
the Philippines (CCP, for brevity) evidenced by two (2) promissory notes with maturity dates on May 14, 1979 and July 6, 1979,
respectively. Petitioner defaulted but after a few partial payments he had the loans restructured by respondent CCP, and petitioner
accordingly executed a promissory note (Exhibit "A") on August 31, 1979 in the amount of Three Million Four Hundred Eleven
Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) payable in five (5) installments. Petitioner
Tan failed to pay any installment on the said restructured loan of Three Million Four Hundred Eleven Thousand Four Hundred
Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32), the last installment falling due on December 31, 1980. In a letter
dated January 26, 1982, petitioner requested and proposed to respondent CCP a mode of paying the restructured loan, i.e., (a)
twenty percent (20%) of the principal amount of the loan upon the respondent giving its conformity to his proposal; and (b) the
balance on the principal obligation payable in thirty-six (36) equal monthly installments until fully paid. On October 20, 1983,
petitioner again sent a letter to respondent CCP requesting for a moratorium on his loan obligation until the following year
allegedly due to a substantial deduction in the volume of his business and on account of the peso devaluation. No favorable
response was made to said letters. Instead, respondent CCP, through counsel, wrote a letter dated May 30, 1984 to the petitioner
demanding full payment, within ten (10) days from receipt of said letter, of the petitioners restructured loan which as of April 30,
1984 amounted to Six Million Eighty-Eight Thousand Seven Hundred Thirty-Five Pesos and Three Centavos (P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum of money, docketed as Civil
Case No. 84-26363, against the petitioner after the latter failed to settle his said restructured loan obligation. The petitioner
interposed the defense that he merely accommodated a friend, Wilson Lucmen, who allegedly asked for his help to obtain a loan
from respondent CCP. Petitioner claimed that he has not been able to locate Wilson Lucmen. While the case was pending in the
trial court, the petitioner filed a Manifestation wherein he proposed to settle his indebtedness to respondent CCP by proposing to
make a down payment of One Hundred Forty Thousand Pesos (P140,000.00) and to issue twelve (12) checks every beginning of
the year to cover installment payments for one year, and every year thereafter until the balance is fully paid. However, respondent
CCP did not agree to the petitioners proposals and so the trial of the case ensued.
On May 8, 1991, the trial court rendered a decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, ordering defendant to pay plaintiff, the
amount of P7,996,314.67, representing defendants outstanding account as of August 28, 1986, with the corresponding stipulated
interest and charges thereof, until fully paid, plus attorneys fees in an amount equivalent to 25% of said outstanding account, plus
P50,000.00, as exemplary damages, plus costs.
Defendants counterclaims are ordered dismissed, for lack of merit.
SO ORDERED.4
The trial court gave five (5) reasons in ruling in favor of respondent CCP. First, it gave little weight to the petitioners contention
that the loan was merely for the accommodation of Wilson Lucmen for the reason that the defense propounded was not credible in
itself. Second, assuming, arguendo, that the petitioner did not personally benefit from the said loan, he should have filed a third
party complaint against Wilson Lucmen, the alleged accommodated party but he did not. Third, for three (3) times the petitioner
offered to settle his loan obligation with respondent CCP. Fourth, petitioner may not avoid his liability to pay his obligation under
the promissory note (Exh. "A") which he must comply with in good faith pursuant to Article 1159 of the New Civil Code. Fifth,
petitioner is estopped from denying his liability or loan obligation to the private respondent.
The petitioner appealed the decision of the trial court to the Court of Appeals insofar as it charged interest, surcharges, attorneys
fees and exemplary damages against the petitioner. In his appeal, the petitioner asked for the reduction of the penalties and
charges on his loan obligation. He abandoned his alleged defense in the trial court that he merely accommodated his friend,
Wilson Lucmen, in obtaining the loan, and instead admitted the validity of the same. On August 31, 1993, the appellate court

rendered a decision, the dispositive portion of which reads:

WHEREFORE, with the foregoing modification, the judgment appealed from is hereby AFFIRMED.
SO ORDERED.5
In affirming the decision of the trial court imposing surcharges and interest, the appellate court held that:
We are unable to accept appellants (petitioners) claim for modification on the basis of alleged partial or irregular performance,
there being none. Appellants offer or tender of payment cannot be deemed as a partial or irregular performance of the contract,
not a single centavo appears to have been paid by the defendant.
However, the appellate court modified the decision of the trial court by deleting the award for exemplary damages and reducing
the amount of awarded attorneys fees to five percent (5%), by ratiocinating as follows:
Given the circumstances of the case, plus the fact that plaintiff was represented by a government lawyer, We believe the award of
25% as attorneys fees and P500,000.00 as exemplary damages is out of proportion to the actual damage caused by the nonperformance of the contract and is excessive, unconscionable and iniquitous.
In a Resolution dated July 13, 1994, the appellate court denied the petitioners motion for reconsideration of the said decision.
Hence, this petition anchored on the following assigned errors:
I
THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS IMPRIMATUR TO THE DECISION OF THE
TRIAL COURT WHICH COMPOUNDED INTEREST ON SURCHARGES.
II
THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING IMPOSITION OF INTEREST FOR THE PERIOD OF
TIME THAT PRIVATE RESPONDENT HAS FAILED TO ASSIST PETITIONER IN APPLYING FOR RELIEF OF LIABILITY
THROUGH THE COMMISSION ON AUDIT AND THE OFFICE OF THE PRESIDENT.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF ATTORNEYS FEES AND IN REDUCING
PENALTIES.
Significantly, the petitioner does not question his liability for his restructured loan under the promissory note marked Exhibit "A".
The first question to be resolved in the case at bar is whether there are contractual and legal bases for the imposition of the
penalty, interest on the penalty and attorneys fees.
The petitioner imputes error on the part of the appellate court in not totally eliminating the award of attorneys fees and in not
reducing the penalties considering that the petitioner, contrary to the appellate courts findings, has allegedly made partial
payments on the loan. And if penalty is to be awarded, the petitioner is asking for the non-imposition of interest on the surcharges
inasmuch as the compounding of interest on surcharges is not provided in the promissory note marked Exhibit "A". The petitioner
takes exception to the computation of the private respondent whereby the interest, surcharge and the principal were added
together and that on the total sum interest was imposed. Petitioner also claims that there is no basis in law for the charging of
interest on the surcharges for the reason that the New Civil Code is devoid of any provision allowing the imposition of interest on
surcharges.
We find no merit in the petitioners contention. Article 1226 of the New Civil Code provides that:
In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of
non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the
penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.
In the case at bar, the promissory note (Exhibit "A") expressly provides for the imposition of both interest and penalties in case of
default on the part of the petitioner in the payment of the subject restructured loan. The pertinent6 portion of the promissory note
(Exhibit "A") imposing interest and penalties provides that:
For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER OF THE PHILIPPINES at its office in
Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN THOUSAND FOUR HUNDRED + PESOS (P3,411,421.32)
Philippine Currency, xxx.
xxx

xxx

xxx

With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until paid. PLUS THREE PERCENT (3%)
SERVICE CHARGE.
In case of non-payment of this note at maturity/on demand or upon default of payment of any portion of it when due, I/We jointly
and severally agree to pay additional penalty charges at the rate of TWO per cent (2%) per month on the total amount due until
paid, payable and computed monthly. Default of payment of this note or any portion thereof when due shall render all other
installments and all existing promissory notes made by us in favor of the CULTURAL CENTER OF THE PHILIPPINES
immediately due and demandable. (Underscoring supplied)
xxx

xxx

xxx

The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan constitutes the monetary interest on
the note and is allowed under Article 1956 of the New Civil Code.7 On the other hand, the stipulated two percent (2%) per month
penalty is in the form of penalty charge which is separate and distinct from the monetary interest on the principal of the loan.

Penalty on delinquent loans may take different forms. In Government Service Insurance System v. Court of Appeals,8 this Court
has ruled that the New Civil Code permits an agreement upon a penalty apart from the monetary interest. If the parties stipulate
this kind of agreement, the penalty does not include the monetary interest, and as such the two are different and distinct from
each other and may be demanded separately. Quoting Equitable Banking Corp. v. Liwanag,9 the GSIS case went on to state that
such a stipulation about payment of an additional interest rate partakes of the nature of a penalty clause which is sanctioned by
law, more particularly under Article 2209 of the New Civil Code which provides that:
If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being
no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest,
which is six per cent per annum.
The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by the petitioner.
There is no doubt that the petitioner is liable for both the stipulated monetary interest and the stipulated penalty charge. The
penalty charge is also called penalty or compensatory interest. Having clarified the same, the next issue to be resolved is whether
interest may accrue on the penalty or compensatory interest without violating the provisions of Article 1959 of the New Civil Code,
which provides that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties
may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest.
According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge for the reason that the law
only allows imposition of interest on monetary interest but not the charging of interest on penalty. He claims that since there is no
law that allows imposition of interest on penalties, the penalties should not earn interest. But as we have already explained,
penalty clauses can be in the form of penalty or compensatory interest. Thus, the compounding of the penalty or compensatory
interest is sanctioned by and allowed pursuant to the above-quoted provision of Article 1959 of the New Civil Code considering
that:
First, there is an express stipulation in the promissory note (Exhibit "A") permitting the compounding of interest. The fifth
paragraph of the said promissory note provides that: "Any interest which may be due if not paid shall be added to the total amount
when due and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by law."10 Therefore,
any penalty interest not paid, when due, shall earn the legal interest of twelve percent (12%) per annum,11 in the absence of
express stipulation on the specific rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that "Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point." In the instant case, interest likewise began to run on the penalty
interest upon the filing of the complaint in court by respondent CCP on August 29, 1984. Hence, the courts a quo did not err in
ruling that the petitioner is bound to pay the interest on the total amount of the principal, the monetary interest and the penalty
interest.
The petitioner seeks the elimination of the compounded interest imposed on the total amount based allegedly on the case of
National Power Corporation v. National Merchandising Corporation,12 wherein we ruled that the imposition of interest on the
damages from the filing of the complaint is unjust where the litigation was prolonged for twenty-five (25) years through no fault of
the defendant. However, the ruling in the said National Power Corporation (NPC) case is not applicable to the case at bar
inasmuch as our ruling on the issue of interest in that NPC case was based on equitable considerations and on the fact that the
said case lasted for twenty-five (25) years "through no fault of the defendant." In the case at bar, however, equity cannot be
considered inasmuch as there is a contractual stipulation in the promissory note whereby the petitioner expressly agreed to the
compounding of interest in case of failure on his part to pay the loan at maturity. Inasmuch as the said stipulation on the
compounding of interest has the force of law between the parties and does not appear to be inequitable or unjust, the said written
stipulation should be respected.
The private respondents Statement of Account (marked Exhibits "C" to "C-2")13 shows the following breakdown of the petitioners
indebtedness as of August 28, 1986:
Principal

P2,838,454.68

Interest

P 576,167.89

Surcharge

P4,581,692.10
P7,996,314.67

The said statement of account also shows that the above amounts stated therein are net of the partial payments amounting to a
total of Four Hundred Fifty-Two Thousand Five Hundred Sixty-One Pesos and Forty-Three Centavos (P452,561.43) which were
made during the period from May 13, 1983 to September 30, 1983.14 The petitioner now seeks the reduction of the penalty due to
the said partial payments. The principal amount of the promissory note (Exhibit "A") was Three Million Four Hundred Eleven
Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) when the loan was restructured on August
31, 1979. As of August 28, 1986, the principal amount of the said restructured loan has been reduced to Two Million Eight
Hundred Thirty-Eight Thousand Four Hundred Fifty-Four Pesos and Sixty-Eight Centavos (P2,838,454.68). Thus, petitioner
contends that reduction of the penalty is justifiable pursuant to Article 1229 of the New Civil Code which provides that: "The judge
shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if
there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable." Petitioner
insists that the penalty should be reduced to ten percent (10%) of the unpaid debt in accordance with Bachrach Motor Company v.
Espiritu.15
There appears to be a justification for a reduction of the penalty charge but not necessarily to ten percent (10%) of the unpaid
balance of the loan as suggested by petitioner. Inasmuch as petitioner has made partial payments which showed his good faith, a
reduction of the penalty charge from two percent (2%) per month on the total amount due, compounded monthly, until paid can
indeed be justified under the said provision of Article 1229 of the New Civil Code.
In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on the total amount due to be
unconscionable inasmuch as the same appeared to have been compounded monthly.

Considering petitioners several partial payments and the fact he is liable under the note for the two percent (2%) penalty charge
per month on the total amount due, compounded monthly, for twenty-one (21) years since his default in 1980, we find it fair and
equitable to reduce the penalty charge to a straight twelve percent (12%) per annum on the total amount due starting August 28,
1986, the date of the last Statement of Account (Exhibits "C" to "C-2"). We also took into consideration the offers of the petitioner
to enter into a compromise for the settlement of his debt by presenting proposed payment schemes to respondent CCP. The said
offers at compromise also showed his good faith despite difficulty in complying with his loan obligation due to his financial
problems. However, we are not unmindful of the respondents long overdue deprivation of the use of its money collectible from the
petitioner.
The petitioner also imputes error on the part of the appellate court for not declaring the suspension of the running of the interest
during that period when the respondent allegedly failed to assist the petitioner in applying for relief from liability. In this connection,
the petitioner referred to the private respondents letter16 dated September 28, 1988 addressed to petitioner which partially reads:
Dear Mr. Tan:
xxx

xxx

xxx

With reference to your appeal for condonation of interest and surcharge, we wish to inform you that the center will assist you in
applying for relief of liability through the Commission on Audit and Office of the President xxx.
While your application is being processed and awaiting approval, the center will be accepting your proposed payment scheme
with the downpayment of P160,000.00 and monthly remittances of P60,000.00 xxx.
xxx

xxx

xxx

The petitioner alleges that his obligation to pay the interest and surcharge should have been suspended because the obligation to
pay such interest and surcharge has become conditional, that is dependent on a future and uncertain event which consists of
whether the petitioners request for condonation of interest and surcharge would be recommended by the Commission on Audit
and the Office of the President to the House of Representatives for approval as required under Section 36 of Presidential Decree
No. 1445. Since the condition has not happened allegedly due to the private respondents reneging on its promise, his liability to
pay the interest and surcharge on the loan has not arisen. This is the petitioners contention.
It is our view, however, that the running of the interest and surcharge was not suspended by the private respondents promise to
assist the petitioners in applying for relief therefrom through the Commission on Audit and the Office of the President.
First, the letter dated September 28, 1988 alleged to have been sent by the respondent CCP to the petitioner is not part of the
formally offered documentary evidence of either party in the trial court. That letter cannot be considered evidence pursuant to Rule
132, Section 34 of the Rules of Court which provides that: "The court shall consider no evidence which has not been formally
offered xxx." Besides, the said letter does not contain any categorical agreement on the part of respondent CCP that the payment
of the interest and surcharge on the loan is deemed suspended while his appeal for condonation of the interest and surcharge
was being processed.
Second, the private respondent correctly asserted that it was the primary responsibility of petitioner to inform the Commission on
Audit and the Office of the President of his application for condonation of interest and surcharge. It was incumbent upon the
petitioner to bring his administrative appeal for condonation of interest and penalty charges to the attention of the said government
offices.
On the issue of attorneys fees, the appellate court ruled correctly and justly in reducing the trial courts award of twenty-five
percent (25%) attorneys fees to five percent (5%) of the total amount due.
WHEREFORE, the assailed Decision of the Court of Appeals is hereby AFFIRMED with MODIFICATION in that the penalty
charge of two percent (2%) per month on the total amount due, compounded monthly, is hereby reduced to a straight twelve
percent (12%) per annum starting from August 28, 1986. With costs against the petitioner.
SO ORDERED.

G.R. No. 85161 September 9, 1991

COUNTRY BANKERS INSURANCE CORPORATION and ENRIQUE SY, petitioners,
vs.
COURT OF APPEALS and OSCAR VENTANILLA ENTERPRISES CORPORATION, respondents.
Esteban C. Manuel for petitioners.
Augusta Gatmaytan for OVEC.

MEDIALDEA, J.:p
Petitioners seek a review on certiorari of the decision of the Court of Appeals in CA-G.R. CV No. 09504 "Enrique Sy and Country
Bankers Insurance Corporation v. Oscar Ventanilla Enterprises Corporation" affirming in toto the decision of the Regional Trial
Court, Cabanatuan City, Branch XXV, to wit:
WHEREFORE, the complaint of the plaintiff Enrique F. Sy is dismissed, and on the counterclaim of the defendant O. Ventanilla
Enterprises Corporation, judgment is hereby rendered:
1. Declaring as lawful, the cancellation and termination of the Lease Agreement (Exh. A) and the defendant's re-entry and
repossession of the Avenue, Broadway and Capitol theaters under lease on February 11, 1980;
2. Declaring as lawful, the forfeiture clause under paragraph 12 of the Id Lease Agreement, and confirming the forfeiture of the

plaintiffs remaining cash deposit of P290,000.00 in favor of the defendant thereunder, as of February 11, 1980;
3. Ordering the plaintiff to pay the defendant the sum of P289,534.78, representing arrears in rentals, unremitted amounts for
amusement tax delinquency and accrued interest thereon, with further interest on said amounts at the rate of 12% per annum (per
lease agreement) from December 1, 1980 until the same is fully paid;
4. Ordering the plaintiff to pay the defendant the amount of P100,000.00, representing the P10,000.00 portion of the monthly lease
rental which were not deducted from the cash deposit of the plaintiff from February to November, 1980, after the forfeiture of the
said cash deposit on February 11, 1980, with interest thereon at the rate of 12% per annum on each of the said monthly amounts
of P10,000.00 from the time the same became due until it is paid;
5. Ordering the plaintiff to pay the defendant through the injunction bond, the sum of P100,000.00, representing the P10,000.00
monthly increase in rentals which the defendant failed to realize from February to November 1980 result from the injunction, with
legal interest thereon from the finality of this decision until fully paid;
6. Ordering the plaintiff to pay to the defendant the sum equivalent to ten per centum (10%) of the above-mentioned amounts of
P289,534.78, P100,000.00 and P100,000.00, as and for attorney's fees; and
7. Ordering the plaintiff to pay the costs. (pp. 94-95, Rollo)
The antecedent facts of the case are as follows:
Respondent Oscar Ventanilla Enterprises Corporation (OVEC), as lessor, and the petitioner Enrique F. Sy, as lessee, entered into
a lease agreement over the Avenue, Broadway and Capitol Theaters and the land on which they are situated in Cabanatuan City,
including their air-conditioning systems, projectors and accessories needed for showing the films or motion pictures. The term of
the lease was for six (6) years commencing from June 13, 1977 and ending June 12,1983. After more than two (2) years of
operation of the Avenue, Broadway and Capitol Theaters, the lessor OVEC made demands for the repossession of the said
leased properties in view of the Sy's arrears in monthly rentals and non-payment of amusement taxes. On August 8,1979, OVEC
and Sy had a conference and by reason of Sy's request for reconsideration of OVECs demand for repossession of the three (3)
theaters, the former was allowed to continue operating the leased premises upon his conformity to certain conditions imposed by
the latter in a supplemental agreement dated August 13, 1979.
In pursuance of their latter agreement, Sy's arrears in rental in the amount of P125,455.76 (as of July 31, 1979) was reduced to
P71,028.91 as of December 31, 1979. However, the accrued amusement tax liability of the three (3) theaters to the City
Government of Cabanatuan City had accumulated to P84,000.00 despite the fact that Sy had been deducting the amount of
P4,000.00 from his monthly rental with the obligation to remit the said deductions to the city government. Hence, letters of demand
dated January 7, 1980 and February 3, 1980 were sent to Sy demanding payment of the arrears in rentals and amusement tax
delinquency. The latter demand was with warning that OVEC will re-enter and repossess the Avenue, Broadway and Capital
Theaters on February 11, 1980 in pursuance of the pertinent provisions of their lease contract of June 11, 1977 and their
supplemental letter-agreement of August 13, 1979. But notwithstanding the said demands and warnings SY failed to pay the
above-mentioned amounts in full Consequently, OVEC padlocked the gates of the three theaters under lease and took possession
thereof in the morning of February 11, 1980 by posting its men around the premises of the Id movie houses and preventing the
lessee's employees from entering the same.
Sy, through his counsel, filed the present action for reformation of the lease agreement, damages and injunction late in the
afternoon of the same day. And by virtue of a restraining order dated February 12, 1980 followed by an order directing the
issuance of a writ of preliminary injunction issued in said case, Sy regained possession and operation of the Avenue, Broadway
and Capital theaters.
As first cause of action, Sy alleged that the amount of deposit P600,000.00 as agreed upon, P300,000.00 of which was to be
paid on June 13, 1977 and the balance on December 13, 1977 was too big; and that OVEC had assured him that said forfeiture
will not come to pass. By way of second cause of action, Sy sought to recover from OVEC the sums of P100,000.00 which Sy
allegedly spent in making "major repairs" on Broadway Theater and the application of which to Sy's due rentals; (2) P48,000.00
covering the cost of electrical current allegedly used by OVEC in its alleged "illegal connection" to Capitol Theater and (3)
P31,000.00 also for the cost of electrical current allegedly used by OVEC for its alleged "illegal connection" to Broadway Theater
and for damages suffered by Sy as a result of such connection. Under the third cause of action, it is alleged in the complaint that
on February 11, 1980, OVEC had the three theaters padlocked with the use of force, and that as a result, Sy suffered damages at
the rate of P5,000.00 a day, in view of his failure to go thru the contracts he had entered into with movie and booking companies
for the showing of movies at ABC. As fourth cause of action, Sy prayed for the issuance of a restraining order/preliminary
injunction to enjoin OVEC and all persons employed by it from entering and taking possession of the three theaters, conditioned
upon Sy's filing of a P500,000.00 bond supplied by Country Bankers Insurance Corporation (CBISCO).
OVEC on the other hand, alleged in its answer by way of counterclaims, that by reason of Sy's violation of the terms of the subject
lease agreement, OVEC became authorized to enter and possess the three theaters in question and to terminate said agreement
and the balance of the deposits given by Sy to OVEC had thus become forfeited; that OVEC would be losing P50,000.00 for every
month that the possession and operation of said three theaters remain with Sy and that OVEC incurred P500,000.00 for attorney's
service.
The trial court arrived at the conclusions that Sy is not entitled to the reformation of the lease agreement; that the repossession of
the leased premises by OVEC after the cancellation and termination of the lease was in accordance with the stipulation of the
parties in the said agreement and the law applicable thereto and that the consequent forfeiture of Sy's cash deposit in favor of
OVEC was clearly agreed upon by them in the lease agreement. The trial court further concluded that Sy was not entitled to the
writ of preliminary injunction issued in his favor after the commencement of the action and that the injunction bond filed by Sy is
liable for whatever damages OVEC may have suffered by reason of the injunction.
On the counterclaim of OVEC the trial court found that the said lessor was deprived of the possession and enjoyment of the
leased premises and also suffered damages as a result of the filing of the case by Sy and his violation of the terms and conditions
of the lease agreement. Hence, it held that OVEC is entitled to recover the said damages in addition to the arrears in rentals and
amusement tax delinquency of Sy and the accrued interest thereon. From the evidence presented, it found that as of the end of
November, 1980, when OVEC finally regained the possession of the three (3) theaters under lease, Sy's unpaid rentals and

amusement tax liability amounted to P289,534.78. In addition, it held that Sy was under obligation to pay P10,000.00 every month
from February to November, 1980 or the total amount of P100,000.00 with interest on each amount of P10,000.00 from the time
the same became due. This P10,000.00 portion of the monthly lease rental was supposed to come from the remaining cash
deposit of Sy but with the consequent forfeiture of the remaining cash deposit of P290,000.00, there was no more cash deposit
from which said amount could be deducted. Further, it adjudged Sy to pay attorney's fees equivalent to 10% of the amounts
above-mentioned.
Finally, the trial court held Sy through the injunction bond liable to pay the sum of P10,000.00 every month from February to
November, 1980. The amount represents the supposed increase in rental from P50,000.00 to P60,000.00 in view of the offer of
one RTG Productions, Inc. to lease the three theaters involved for P60,000.00 a month.
From this decision of the trial court, Sy and (CBISCO) appealed the decision in toto while OVEC appealed insofar as the decision
failed to hold the injunction bond liable for an damages awarded by the trial court.
The respondent Court of Appeals found no ambiguity in the provisions of the lease agreement. It held that the provisions are fair
and reasonable and therefore, should be respected and enforced as the law between the parties. It held that the cancellation or
termination of the agreement prior to its expiration period is justified as it was brought about by Sy's own default in his compliance
with the terms of the agreement and not "motivated by fraud or greed." It also affirmed the award to OVEC of the amount of
P100,000.00 chargeable against the injunction bond posted by CBISCO which was soundly and amply justified by the trial court.
The respondent Court likewise found no merit in OVECS appeal and held that the trial court did not err in not charging and holding
the injunction bond posted by Sy liable for all the awards as the undertaking of CBISCO under the bond referred only to damages
which OVEC may suffer as a result of the injunction.
From this decision, CBISCO and Sy filed this instant petition on the following grounds:
A
PRIVATE RESPONDENT SHOULD NOT BE ALLOWED TO UNJUSTLY ENRICH OR BE BENEFITTED AT THE EXPENSE OF
THE PETITIONERS.
B
RESPONDENT COURT OF APPEALS CO D SERIOUS ERROR OF LAW AND GRAVE ABUSE OF DISCRETION IN NOT
SETTING OFF THE P100,000.00 SUPPOSED DAMAGE RESULTING FROM THE INJUNCTION AGAINST THE P290,000.00
REMAINING CASH DEPOSIT OF PETITIONER ENRIQUE SY.
C
RESPONDENT COURT OF APPEALS FURTHER COMMITTED SERIOUS ERROR OF LAW AND GRAVE ABUSE OF
DISCRETION IN NOT DISMISSING PRIVATE RESPONDENTS COUNTER-CLAIM FOR FAILURE TO PAY THE NECESSARY
DOCKET FEE. (p. 10, Rollo)
We find no merit in petitioners' argument that the forfeiture clause stipulated in the lease agreement would unjustly enrich the
respondent OVEC at the expense of Sy and CBISCO contrary to law, morals, good customs, public order or public policy. A
provision which calls for the forfeiture of the remaining deposit still in the possession of the lessor, without prejudice to any other
obligation still owing, in the event of the termination or cancellation of the agreement by reason of the lessee's violation of any of
the terms and conditions of the agreement is a penal clause that may be validly entered into. A penal clause is an accessory
obligation which the parties attach to a principal obligation for the purpose of insuring the performance thereof by imposing on the
debtor a special presentation (generally consisting in the payment of a sum of money) in case the obligation is not fulfilled or is
irregularly or inadequately fulfilled. (Eduardo P. Caguioa, Comments and Cases on Civil Law, Vol. IV, First Edition, pp. 199-200) As
a general rule, in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of
interests in case of non-compliance. This is specifically provided for in Article 1226, par. 1, New Civil Code. In such case, proof of
actual damages suffered by the creditor is not necessary in order that the penalty may be demanded (Article 1228, New Civil
Code). However, there are exceptions to the rule that the penalty shall substitute the indemnity for damages and the payment of
interests in case of non-compliance with the principal obligation. They are first, when there is a stipulation to the contrary; second,
when the obligor is sued for refusal to pay the agreed penalty; and third, when the obligor is guilty of fraud (Article 1226, par. 1,
New Civil Code). It is evident that in all said cases, the purpose of the penalty is to punish the obligor. Therefore, the obligee can
recover from the obligor not only the penalty but also the damages resulting from the non-fulfillment or defective performance of
the principal obligation.
In the case at bar, inasmuch as the forfeiture clause provides that the deposit shall be deemed forfeited, without prejudice to any
other obligation still owing by the lessee to the lessor, the penalty cannot substitute for the P100,000.00 supposed damage
resulting from the issuance of the injunction against the P290,000.00 remaining cash deposit. This supposed damage suffered by
OVEC was the alleged P10,000.00 a month increase in rental from P50,000.00 to P60,000,00), which OVEC failed to realize for
ten months from February to November, 1980 in the total sum of P100,000.00. This opportunity cost which was duly proven before
the trial court, was correctly made chargeable by the said court against the injunction bond posted by CBISCO. The undertaking
assumed by CBISCO under subject injunction refers to "all such damages as such party may sustain by reason of the injunction if
the Court should finally decide that the Plaintiff was/were not entitled thereto." (Rollo, p. 101) Thus, the respondent Court correctly
sustained the trial court in holding that the bond shall and may answer only for damages which OVEC may suffer as a result of the
injunction. The arrears in rental, the unmeritted amounts of the amusement tax delinquency, the amount of P100,000.00
(P10,000.00 portions of each monthly rental which were not deducted from plaintiffs cash deposit from February to November,
1980 after the forfeiture of said cash deposit on February 11, 1980) and attorney's fees which were all charged against Sy were
correctly considered by the respondent Court as damages which OVEC sustained not as a result of the injunction.
There is likewise no merit to the claim of petitioners that respondent Court committed serious error of law and grave abuse of
discretion in not dismissing private respondent's counterclaim for failure to pay the necessary docket fee, which is an issue raised
for the first time in this petition. Petitioners rely on the rule in Manchester Development Corporation v. Court of Appeals, G.R. No.
75919, May 7, 1987, 149 SCRA 562 to the effect that all the proceedings held in connection with a case where the correct docket
fees are not paid should be peremptorily be considered null and void because, for all legal purposes, the trial court never acquired

jurisdiction over the case. It should be remembered however, that in Davao Light and Power Co., Inc. v. Dinopol, G.R. 75195,
August 19, 1988, 164 SCRA 748, this Court took note of the fact that the assailed order of the trial court was issued prior to the
resolution in the Manchester case and held that its strict application to the case at bar would therefore be unduly harsh. Thus, We
allowed the amendment of the complaint by specifying the amount of damages within a non-extendible period of five (5) days from
notice and the re-assessment of the filing fees. Then, in Sun Insurance Office, Ltd. v. Asuncion, G.R. 79937-38, February 3, 1989,
170 SCRA 274, We held that where the filing of the initiatory pleading is not accompanied by payment of the docket fee, the court
may allow payment of the fee within a reasonable time but in no case beyond the applicable prescriptive or reglemen tary period.
Nevertheless, OVEC's counterclaims are compulsory so no docket fees are required as the following circumstances are present:
(a) they arise out of or are necessarily connected with the transaction or occurrence that is subject matter of the opposing party's
claim; (b) they do not require for their adjudication the presence of third parties of whom the court cannot acquire jurisdiction; and
(c) the court has jurisdiction to entertain the claim (see Javier v. Intermediate Appellate Court, G.R. 75379, March 31, 1989, 171
SCRA 605). Whether the respective claims asserted by the parties arise out of the same contract or transaction within the
limitation on counterclaims imposed by the statutes depends on a consideration of all the facts brought forth by the parties and on
a determination of whether there is some legal or equitable relationship between the ground of recovery alleged in the
counterclaim and the matters alleged as the cause of action by the plaintiff (80 C.J.S. 48). As the counterclaims of OVEC arise
from or are necessarily connected with the facts alleged in the complaint for reformation of instrument of Sy, it is clear that said
counterclaims are compulsory.
ACCORDINGLY, finding no merit in the grounds relied upon by petitioners in their petition, the same is hereby DENIED and the
decision dated June 15, 1988 and the resolution dated September 21, 1988, both of the respondent Court of Appeals are
AFFIRMED.
SO ORDERED.

G.R. No. 199650

June 26, 2013

J PLUS ASIA DEVELOPMENT CORPORATION, Petitioner,

vs.
UTILITY ASSURANCE CORPORATION, Respondent.
DECISION
VILLARAMA, JR., J.:
Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing
the Decision1 dated January 27,2011 and Resolution2 dated December 8, 2011 of the Court of Appeals (CA) in CA-G.R. SP No.
112808.
The Facts
On December 24, 2007, petitioner J Plus Asia Development Corporation represented by its Chairman, Joo Han Lee, and Martin E.
Mabunay, doing business under the name and style of Seven Shades of Blue Trading and Services, entered into a Construction
Agreement3 whereby the latter undertook to build the former's 72-room condominium/hotel (Condotel Building 25) located at the
Fairways & Bluewaters Golf & Resort in Boracay Island, Malay, Aklan. The project, costing P42,000,000.00, was to be completed
within one year or 365 days reckoned from the first calendar day after signing of the Notice of Award and Notice to Proceed and
receipt of down payment (20% of contract price). The P8,400,000.00 down payment was fully paid on January 14, 2008.4
Payment of the balance of the contract price will be based on actual work finished within 15 days from receipt of the monthly
progress billings. Per the agreed work schedule, the completion date of the project was December 2008.5 Mabuhay also
submitted the required Performance Bond6 issued by respondent Utility Assurance Corporation (UTASSCO) in the amount
equivalent to 20% down payment or P8.4 million.
Mabunay commenced work at the project site on January 7, 2008. Petitioner paid up to the 7th monthly progress billing sent by
Mabunay. As of September 16, 2008, petitioner had paid the total amount of P15,979,472.03 inclusive of the 20% down payment.
However, as of said date, Mabunay had accomplished only 27.5% of the project.7
In the Joint Construction Evaluation Result and Status Report8 signed by Mabunay assisted by Arch. Elwin Olavario, and Joo Han
Lee assisted by Roy V. Movido, the following findings were accepted as true, accurate and correct:
III STATUS OF PROJECT AS OF 14 NOVEMBER 2008
1) After conducting a joint inspection and evaluation of the project to determine the actual percentage of accomplishment, the
contracting parties, assisted by their respective technical groups, SSB assisted by Arch. Elwin Olavario and JPLUS assisted by
Engrs. Joey Rojas and Shiela Botardo, concluded and agreed that as of 14 November 2008, the project is only Thirty One point
Thirty Nine Percent (31.39%) complete.
2) Furthermore, the value of construction materials allocated for the completion of the project and currently on site has been
determined and agreed to be ONE MILLION FORTY NINE THOUSAND THREE HUNDRED SIXTY FOUR PESOS AND FORTY
FIVE CENTAVOS (P1,049,364.45)
3) The additional accomplishment of SSB, reflected in its reconciled and consolidated 8th and 9th billings, is Three point Eighty
Five Percent (3.85%) with a gross value of P1,563,553.34 amount creditable to SSB after deducting the withholding tax is
P1,538,424.84
4) The unrecouped amount of the down payment is P2,379,441.53 after deducting the cost of materials on site and the net billable
amount reflected in the reconciled and consolidated 8th and 9th billings. The uncompleted portion of the project is 68.61% with an
estimated value per construction agreement signed is P27,880,419.52.9 (Emphasis supplied.)
On November 19, 2008, petitioner terminated the contract and sent demand letters to Mabunay and respondent surety. As its

demands went unheeded, petitioner filed a Request for Arbitration10 before the Construction Industry Arbitration Commission
(CIAC). Petitioner prayed that Mabunay and respondent be ordered to pay the sums of P8,980,575.89 as liquidated damages and
P2,379,441.53 corresponding to the unrecouped down payment or overpayment petitioner made to Mabunay.11
In his Answer,12 Mabunay claimed that the delay was caused by retrofitting and other revision works ordered by Joo Han Lee. He
asserted that he actually had until April 30, 2009 to finish the project since the 365 days period of completion started only on May
2, 2008 after clearing the retrofitted old structure. Hence, the termination of the contract by petitioner was premature and the filing
of the complaint against him was baseless, malicious and in bad faith.
Respondent, on the other hand, filed a motion to dismiss on the ground that petitioner has no cause of action and the complaint
states no cause of action against it. The CIAC denied the motion to dismiss. Respondents motion for reconsideration was likewise
denied.13
In its Answer Ex Abundante Ad Cautelam With Compulsory Counterclaims and Cross-claims,14 respondent argued that the
performance bond merely guaranteed the 20% down payment and not the entire obligation of Mabunay under the Construction
Agreement. Since the value of the projects accomplishment already exceeded the said amount, respondents obligation under the
performance bond had been fully extinguished. As to the claim for alleged overpayment to Mabunay, respondent contended that it
should not be credited against the 20% down payment which was already exhausted and such application by petitioner is
tantamount to reviving an obligation that had been legally extinguished by payment. Respondent also set up a cross-claim against
Mabunay who executed in its favor an Indemnity Agreement whereby Mabunay undertook to indemnify respondent for whatever
amounts it may be adjudged liable to pay petitioner under the surety bond.
Both petitioner and respondent submitted their respective documentary and testimonial evidence. Mabunay failed to appear in the
scheduled hearings and to present his evidence despite due notice to his counsel of record. The CIAC thus declared that
Mabunay is deemed to have waived his right to present evidence.15
On February 2, 2010, the CIAC rendered its Decision16 and made the following award:
Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby adjudges, orders and directs:
1. Respondents Mabunay and Utassco to jointly and severally pay claimant the following:
a) P4,469,969.90, as liquidated damages, plus legal interest thereon at the rate of 6% per annum computed from the date of this
decision up to the time this decision becomes final, and 12% per annum computed from the date this decision becomes final until
fully paid, and
b) P2,379,441.53 as unrecouped down payment plus interest thereon at the rate of 6% per annum computed from the date of this
decision up to the time this decision becomes final, and 12% per annum computed from the date this decision becomes final until
fully paid.
It being understood that respondent Utasscos liability shall in no case exceed P8.4 million.
2. Respondent Mabunay to pay to claimant the amount of P98,435.89, which is respondent Mabunays share in the arbitration
cost claimant had advanced, with legal interest thereon from January 8, 2010 until fully paid.
3. Respondent Mabunay to indemnify respondent Utassco of the amounts respondent Utassco will have paid to claimant under
this decision, plus interest thereon at the rate of 12% per annum computed from the date he is notified of such payment made by
respondent Utassco to claimant until fully paid, and to pay Utassco P100,000.00 as attorneys fees.
SO ORDERED.17
Dissatisfied, respondent filed in the CA a petition for review under Rule 43 of the 1997 Rules of Civil Procedure, as amended.
In the assailed decision, the CA agreed with the CIAC that the specific condition in the Performance Bond did not clearly state the
limitation of the suretys liability. Pursuant to Article 137718 of the Civil Code, the CA said that the provision should be construed in
favor of petitioner considering that the obscurely phrased provision was drawn up by respondent and Mabunay. Further, the
appellate court stated that respondent could not possibly guarantee the down payment because it is not Mabunay who owed the
down payment to petitioner but the other way around. Consequently, the completion by Mabunay of 31.39% of the construction
would not lead to the extinguishment of respondents liability. The P8.4 million was a limit on the amount of respondents liability
and not a limitation as to the obligation or undertaking it guaranteed.
However, the CA reversed the CIACs ruling that Mabunay had incurred delay which entitled petitioner to the stipulated liquidated
damages and unrecouped down payment. Citing Aerospace Chemical Industries, Inc. v. Court of Appeals,19 the appellate court
said that not all requisites in order to consider the obligor or debtor in default were present in this case. It held that it is only from
December 24, 2008 (completion date) that we should reckon default because the Construction Agreement provided only for delay
in the completion of the project and not delay on a monthly basis using the work schedule approved by petitioner as the reference
point. Hence, petitioners termination of the contract was premature since the delay in this case was merely speculative; the
obligation was not yet demandable.
The dispositive portion of the CA Decision reads:
WHEREFORE, premises considered, the instant petition for review is GRANTED. The assailed Decision dated 13 January 2010
rendered by the CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is hereby REVERSED and SET ASIDE. Accordingly, the Writ of
Execution dated 24 November 2010 issued by the same tribunal is hereby ANNULLED and SET ASIDE.
SO ORDERED.20
Petitioner moved for reconsideration of the CA decision while respondent filed a motion for partial reconsideration. Both motions
were denied.
The Issues
Before this Court petitioner seeks to reverse the CA insofar as it denied petitioners claims under the Performance Bond and to

reinstate in its entirety the February 2, 2010 CIAC Decision. Specifically, petitioner alleged that
A. THE COURT OF APPEALS SERIOUSLY ERRED IN NOT HOLDING THAT THE ALTERNATIVE DISPUTE RESOLUTION ACT
AND THE SPECIAL RULES ON ALTERNATIVE DISPUTE RESOLUTION HAVE STRIPPED THE COURT OF APPEALS OF
JURISDICTION TO REVIEW ARBITRAL AWARDS.
B. THE COURT OF APPEALS SERIOUSLY ERRED IN REVERSING THE ARBITRAL AWARD ON AN ISSUE THAT WAS NOT
RAISED IN THE ANSWER. NOT IDENTIFIED IN THE TERMS OF REFERENCE, NOT ASSIGNED AS ANERROR, AND NOT
ARGUED IN ANY OF THE PLEADINGS FILED BEFORE THE COURT.
C. THE COURT OF APPEALS SERIOUSLY ERRED IN RELYING ON THE CASE OF AEROSPACE CHEMICAL INDUSTRIES,
INC. v. COURT OF APPEALS, 315 SCRA 94, WHICH HAS NOTHING TO DO WITH CONSTRUCTION AGREEMENTS.21
Our Ruling
On the procedural issues raised, we find no merit in petitioners contention that with the institutionalization of alternative dispute
resolution under Republic Act (R.A.) No. 9285,22 otherwise known as the Alternative Dispute Resolution Act of 2004, the CA was
divested of jurisdiction to review the decisions or awards of the CIAC. Petitioner erroneously relied on the provision in said law
allowing any party to a domestic arbitration to file in the Regional Trial Court (RTC) a petition either to confirm, correct or vacate a
domestic arbitral award.
We hold that R.A. No. 9285 did not confer on regional trial courts jurisdiction to review awards or decisions of the CIAC in
construction disputes. On the contrary, Section 40 thereof expressly declares that confirmation by the RTC is not required, thus:
SEC. 40. Confirmation of Award. The confirmation of a domestic arbitral award shall be governed by Section 23 of R.A. 876.
A domestic arbitral award when confirmed shall be enforced in the same manner as final and executory decisions of the Regional
Trial Court.
The confirmation of a domestic award shall be made by the regional trial court in accordance with the Rules of Procedure to be
promulgated by the Supreme Court.
A CIAC arbitral award need not be confirmed by the regional trial court to be executory as provided under E.O. No. 1008.
(Emphasis supplied.)
Executive Order (EO) No. 1008 vests upon the CIAC original and exclusive jurisdiction over disputes arising from, or connected
with, contracts entered into by parties involved in construction in the Philippines, whether the dispute arises before or after the
completion of the contract, or after the abandonment or breach thereof. By express provision of Section 19 thereof, the arbitral
award of the CIAC is final and unappealable, except on questions of law, which are appealable to the Supreme Court. With the
amendments introduced by R.A. No. 7902 and promulgation of the 1997 Rules of Civil Procedure, as amended, the CIAC was
included in the enumeration of quasijudicial agencies whose decisions or awards may be appealed to the CA in a petition for
review under Rule 43. Such review of the CIAC award may involve either questions of fact, of law, or of fact and law.23
Petitioner misread the provisions of A.M. No. 07-11-08-SC (Special ADR Rules) promulgated by this Court and which took effect
on October 30, 2009. Since R.A. No. 9285 explicitly excluded CIAC awards from domestic arbitration awards that need to be
confirmed to be executory, said awards are therefore not covered by Rule 11 of the Special ADR Rules,24 as they continue to be
governed by EO No. 1008, as amended and the rules of procedure of the CIAC. The CIAC Revised Rules of Procedure Governing
Construction Arbitration25 provide for the manner and mode of appeal from CIAC decisions or awards in Section 18 thereof, which
reads:
SECTION 18.2 Petition for review. A petition for review from a final award may be taken by any of the parties within fifteen (15)
days from receipt thereof in accordance with the provisions of Rule 43 of the Rules of Court.
As to the alleged error committed by the CA in deciding the case upon an issue not raised or litigated before the CIAC, this
assertion has no basis. Whether or not Mabunay had incurred delay in the performance of his obligations under the Construction
Agreement was the very first issue stipulated in the Terms of Reference26 (TOR), which is distinct from the issue of the extent of
respondents liability under the Performance Bond.
Indeed, resolution of the issue of delay was crucial upon which depends petitioners right to the liquidated damages pursuant to
the Construction Agreement. Contrary to the CIACs findings, the CA opined that delay should be reckoned only after the lapse of
the one-year contract period, and consequently Mabunays liability for liquidated damages arises only upon the happening of such
condition.
We reverse the CA.
Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause imputable to the
former. It is the non-fulfillment of an obligation with respect to time.27
Article 1169 of the Civil Code provides:
ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation.
xxxx
It is a general rule that one who contracts to complete certain work within a certain time is liable for the damage for not completing
it within such time, unless the delay is excused or waived.28
The Construction Agreement provides in Article 10 thereof the following conditions as to completion time for the project
1. The CONTRACTOR shall complete the works called for under this Agreement within ONE (1) YEAR or 365 Days reckoned from
the 1st calendar day after signing of the Notice of Award and Notice to Proceed and receipt of down payment.
2. In this regard the CONTRACTOR shall submit a detailed work schedule for approval by OWNER within Seven (7) days after

signing of this Agreement and full payment of 20% of the agreed contract price. Said detailed work schedule shall follow the
general schedule of activities and shall serve as basis for the evaluation of the progress of work by CONTRACTOR.29
In this jurisdiction, the following requisites must be present in order that the debtor may be in default: (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.30
In holding that Mabunay has not at all incurred delay, the CA pointed out that the obligation to perform or complete the project was
not yet demandable as of November 19, 2008 when petitioner terminated the contract, because the agreed completion date was
still more than one month away (December 24, 2008). Since the parties contemplated delay in the completion of the entire project,
the CA concluded that the failure of the contractor to catch up with schedule of work activities did not constitute delay giving rise to
the contractors liability for damages.
We cannot sustain the appellate courts interpretation as it is inconsistent with the terms of the Construction Agreement. Article
1374 of the Civil Code requires that the various stipulations of a contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken jointly. Here, the work schedule approved by petitioner was intended, not
only to serve as its basis for the payment of monthly progress billings, but also for evaluation of the progress of work by the
contractor. Article 13.01 (g) (iii) of the Construction Agreement provides that the contractor shall be deemed in default if, among
others, it had delayed without justifiable cause the completion of the project "by more than thirty (30) calendar days based on
official work schedule duly approved by the OWNER."31
Records showed that as early as April 2008, or within four months after Mabunay commenced work activities, the project was
already behind schedule for reasons not attributable to petitioner. In the succeeding months, Mabunay was still unable to catch up
with his accomplishment even as petitioner constantly advised him of the delays, as can be gleaned from the following notices of
delay sent by petitioners engineer and construction manager, Engr. Sheila N. Botardo:
April 30, 2008
Seven Shades of Blue
Boracay Island
Malay, Aklan
1wphi1
Attention

: Mr. Martin Mabunay

General Manager
: Engr. Reynaldo Gapasin

Project

: Villa Beatriz

Subject

: Notice of Delay

Dear Mr. Mabunay:

This is to formalize our discussion with your Engineers during our meeting last April 23, 2008 regarding the delay in the
implementation of major activities based on your submitted construction schedule. Substantial delay was noted in concreting
works that affects your roof framing that should have been 40% completed as of this date. This delay will create major impact on
your over-all schedule as the finishing works will all be dependent on the enclosure of the building.
In this regard, we recommend that you prepare a catch-up schedule and expedite the delivery of critical materials on site. We
would highly appreciate if you could attend our next regular meeting so we could immediately address this matter. Thank you.
Very truly yours,
Engr. Sheila N. Botardo
Construction Manager LMI/FEPI32
October 15, 2008
xxxx
Dear Mr. Mabunay,
We have noticed continuous absence of all the Engineers that you have assigned on-site to administer and supervise your
contracted work. For the past two (2) weeks, your company does not have a Technical Representative manning the jobsite
considering the critical activities that are in progress and the delays in schedule that you have already incurred. In this regard, we
would highly recommend the immediate replacement of your Project Engineer within the week.
We would highly appreciate your usual attention on this matter.
x x x x33
November 5, 2008
xxxx
Dear Mr. Mabunay,
This is in reference to your discussion during the meeting with Mr. Joohan Lee last October 30, 2008 regarding the construction of
the Field Office and Stock Room for Materials intended for Villa Beatriz use only. We understand that you have committed to
complete it November 5, 2008 but as of this date there is no improvement or any ongoing construction activity on the said field

office and stockroom.

We are expecting deliveries of Owner Supplied Materials very soon, therefore, this stockroom is badly needed. We will highly
appreciate if this matter will be given your immediate attention.
Thank you.
x x x x34
November 6, 2008
xxxx
Dear Mr. Mabunay,
We would like to call your attention regarding the decrease in your manpower assigned on site. We have observed that for the
past three (3) weeks instead of increasing your manpower to catch up with the delay it was reduced to only 8 workers today from
an average of 35 workers in the previous months.
Please note that based on your submitted revised schedule you are already delayed by approximately 57% and this will worsen
should you not address this matter properly.
We are looking forward for [sic] your cooperation and continuous commitment in delivering this project as per contract agreement.
x x x x35
Subsequently, a joint inspection and evaluation was conducted with the assistance of the architects and engineers of petitioner
and Mabunay and it was found that as of November 14, 2008, the project was only 31.39% complete and that the uncompleted
portion was 68.61% with an estimated value per Construction Agreement as P27,880,419.52. Instead of doubling his efforts as the
scheduled completion date approached, Mabunay did nothing to remedy the delays and even reduced the deployment of workers
at the project site. Neither did Mabunay, at anytime, ask for an extension to complete the project. Thus, on November 19, 2008,
petitioner advised Mabunay of its decision to terminate the contract on account of the tremendous delay the latter incurred. This
was followed by the claim against the Performance Bond upon the respondent on December 18, 2008.
Petitioners claim against the Performance Bond included the liquidated damages provided in the Construction Agreement, as
follows:
ARTICLE 12 LIQUIDATED DAMAGES:
12.01 Time is of the essence in this Agreement. Should the CONTRACTOR fail to complete the PROJECT within the period
stipulated herein or within the period of extension granted by the OWNER, plus One (1) Week grace period, without any justifiable
reason, the CONTRACTOR hereby agrees
a. The CONTRACTOR shall pay the OWNER liquidated damages equivalent to One Tenth of One Percent (1/10 of 1%) of the
Contract Amount for each day of delay after any and all extensions and the One (1) week Grace Period until completed by the
CONTRACTOR.
b. The CONTRACTOR, even after paying for the liquidated damages due to unexecuted works and/or delays shall not relieve it of
the obligation to complete and finish the construction.
Any sum which maybe payable to the OWNER for such loss may be deducted from the amounts retained under Article 9 or
retained by the OWNER when the works called for under this Agreement have been finished and completed.
Liquidated Damage[s] payable to the OWNER shall be automatically deducted from the contractors collectibles without prior
consent and concurrence by the CONTRACTOR.
12.02 To give full force and effect to the foregoing, the CONTRACTOR hereby, without necessity of any further act and deed,
authorizes the OWNER to deduct any amount that may be due under Item (a) above, from any and all money or amounts due or
which will become due to the CONTRACTOR by virtue of this Agreement and/or to collect such amounts from the Performance
Bond filed by the CONTRACTOR in this Agreement.36 (Emphasis supplied.)
Liability for liquidated damages is governed by Articles 2226 to 2228 of the Civil Code, which provide:
ART. 2226. Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof.
ART. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous
or unconscionable.
ART. 2228. When the breach of the contract committed by the defendant is not the one contemplated by the parties in agreeing
upon the liquidated damages, the law shall determine the measure of damages, and not the stipulation.
A stipulation for liquidated damages is attached to an obligation in order to ensure performance and has a double function: (1) to
provide for liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater responsibility in
the event of breach.37 The amount agreed upon answers for damages suffered by the owner due to delays in the completion of
the project.38 As a precondition to such award, however, there must be proof of the fact of delay in the performance of the
obligation.39
Concededly, Article 12.01 of the Construction Agreement mentioned only the failure of the contractor to complete the project within
the stipulated period or the extension granted by the owner. However, this will not defeat petitioners claim for damages nor
respondents liability under the Performance Bond. Mabunay was clearly in default considering the dismal percentage of his
accomplishment (32.38%) of the work he contracted on account of delays in executing the scheduled work activities and repeated
failure to provide sufficient manpower to expedite construction works. The events of default and remedies of the Owner are set
forth in Article 13, which reads:
ARTICLE 13 DEFAULT OF CONTRACTOR:

13.01 Any of the following shall constitute an Event of Default on the part of the CONTRACTOR.
xxxx
g. In case the CONTRACTOR has done any of the following:
(i.) has abandoned the Project
(ii.) without reasonable cause, has failed to commence the construction or has suspended the progress of the Project for twentyeight days
(iii.) without justifiable cause, has delayed the completion of the Project by more than thirty (30) calendar days based on official
work schedule duly approved by the OWNER
(iv.) despite previous written warning by the OWNER, is not executing the construction works in accordance with the Agreement or
is persistently or flagrantly neglecting to carry out its obligations under the Agreement.
(v.) has, to the detriment of good workmanship or in defiance of the Owners instructions to the contrary, sublet any part of the
Agreement.
13.02 If the CONTRACTOR has committed any of the above reasons cited in Item 13.01, the OWNER may after giving fourteen
(14) calendar days notice in writing to the CONTRACTOR, enter upon the site and expel the CONTRACTOR therefrom without
voiding this Agreement, or releasing the CONTRACTOR from any of its obligations, and liabilities under this Agreement. Also
without diminishing or affecting the rights and powers conferred on the OWNER by this Agreement and the OWNER may himself
complete the work or may employ any other contractor to complete the work. If the OWNER shall enter and expel the
CONTRACTOR under this clause, the OWNER shall be entitled to confiscate the performance bond of the CONTRACTOR to
compensate for all kinds of damages the OWNER may suffer. All expenses incurred to finish the Project shall be charged to the
CONTRACTOR and/or his bond. Further, the OWNER shall not be liable to pay the CONTRACTOR until the cost of execution,
damages for the delay in the completion, if any, and all; other expenses incurred by the OWNER have been ascertained which
amount shall be deducted from any money due to the CONTRACTOR on account of this Agreement. The CONTRACTOR will not
be compensated for any loss of profit, loss of goodwill, loss of use of any equipment or property, loss of business opportunity,
additional financing cost or overhead or opportunity losses related to the unaccomplished portions of the work.40 (Emphasis
supplied.)
As already demonstrated, the contractors default in this case pertains to his failure to substantially perform the work on account of
tremendous delays in executing the scheduled work activities. Where a party to a building construction contract fails to comply
with the duty imposed by the terms of the contract, a breach results for which an action may be maintained to recover the
damages sustained thereby, and of course, a breach occurs where the contractor inexcusably fails to perform substantially in
accordance with the terms of the contract.41
The plain and unambiguous terms of the Construction Agreement authorize petitioner to confiscate the Performance Bond to
answer for all kinds of damages it may suffer as a result of the contractors failure to complete the building. Having elected to
terminate the contract and expel the contractor from the project site under Article 13 of the said Agreement, petitioner is clearly
entitled to the proceeds of the bond as indemnification for damages it sustained due to the breach committed by Mabunay. Such
stipulation allowing the confiscation of the contractors performance bond partakes of the nature of a penalty clause. A penalty
clause, expressly recognized by law, is an accessory undertaking to assume greater liability on the part of the obligor in case of
breach of an obligation. It functions to strengthen the coercive force of obligation and to provide, in effect, for what could be the
liquidated damages resulting from such a breach. The obligor would then be bound to pay the stipulated indemnity without the
necessity of proof on the existence and on the measure of damages caused by the breach. It is well-settled that so long as such
stipulation does not contravene law, morals, or public order, it is strictly binding upon the obligor.42
Respondent, however, insists that it is not liable for the breach committed by Mabunay because by the terms of the surety bond it
issued, its liability is limited to the performance by said contractor to the extent equivalent to 20% of the down payment. It stresses
that with the 32.38% completion of the project by Mabunay, its liability was extinguished because the value of such
accomplishment already exceeded the sum equivalent to 20% down payment (P8.4 million).
The appellate court correctly rejected this theory of respondent when it ruled that the Performance Bond guaranteed the full and
faithful compliance of Mabunays obligations under the Construction Agreement, and that nowhere in law or jurisprudence does it
state that the obligation or undertaking by a surety may be apportioned.
The pertinent portions of the Performance Bond provide:
The conditions of this obligation are as follows:
Whereas the JPLUS ASIA, requires the principal SEVEN SHADES OF BLUE CONSTRUCTION AND DEVELOPMENT, INC. to
post a bond of the abovestated sum to guarantee 20% down payment for the construction of Building 25 (Villa Beatriz) 72-Room
Condotel, The Lodgings inside Fairways and Bluewater, Boracay Island, Malay, Aklan.
Whereas, said contract required said Principal to give a good and sufficient bond in the above-stated sum to secure the full and
faithful performance on his part of said contract.
It is a special provision of this undertaking that the liability of the surety under this bond shall in no case exceed the sum of
P8,400,000.00 Philippine Currency.
Now, Therefore, if the Principal shall well and truly perform and fulfill all the undertakings, covenants, terms, conditions and
agreements stipulated in said contract, then this obligation shall be null and void; otherwise to remain in full force and effect.43
(Emphasis supplied.)
While the above condition or specific guarantee is unclear, the rest of the recitals in the bond unequivocally declare that it secures
the full and faithful performance of Mabunays obligations under the Construction Agreement with petitioner. By its nature, a
performance bond guarantees that the contractor will perform the contract, and usually provides that if the contractor defaults and
fails to complete the contract, the surety can itself complete the contract or pay damages up to the limit of the bond.44 Moreover,

the rule is that if the language of the bond is ambiguous or uncertain, it will be construed most strongly against a compensated
surety and in favor of the obligees or beneficiaries under the bond, in this case petitioner as the Project Owner, for whose benefit it
was ostensibly executed.45
The imposition of interest on the claims of petitioner is likewise in order. As we held in Commonwealth Insurance Corporation v.
Court of Appeals46
Petitioner argues that it should not be made to pay interest because its issuance of the surety bonds was made on the condition
that its liability shall in no case exceed the amount of the said bonds.
We are not persuaded. Petitioners argument is misplaced.
Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union Gurantee Co. and reiterated in Plaridel Surety &
Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., and more recently, in Republic vs. Court of Appeals and R & B Surety and
Insurance Company, Inc., we have sustained the principle that if a surety upon demand fails to pay, he can be held liable for
interest, even if in thus paying, its liability becomes more than the principal obligation. The increased liability is not because of the
contract but because of the default and the necessity of judicial collection.
Petitioners liability under the suretyship contract is different from its liability under the law.1wphi1 There is no question that as a
surety, petitioner should not be made to pay more than its assumed obligation under the surety bonds. However, it is clear from
the above-cited jurisprudence that petitioners liability for the payment of interest is not by reason of the suretyship agreement
itself but because of the delay in the payment of its obligation under the said agreement.47 (Emphasis supplied; citations omitted.)
WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated January 27, 2011 and Resolution dated
December 8, 2011 of the Court of Appeals in CA-G.R. SP No. 112808 are hereby REVERSED and SET ASIDE.
The Award made in the Decision dated February 2, 2010 of the Construction Industry Arbitration Commission Is hereby
REINSTATED with the following MODIFICATIONS:
"Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby adjudges, orders and directs:
1) Respondent Utassco to pay to petitioner J Plus Asia Development Corporation the full amount of the Performance Bond,
P8,400,000.00, pursuant to Art. 13 of the Construction Agreement dated December 24, 2007, with interest at the rate of 6% per
annum computed from the date of the filing of the complaint until the finality of this decision, and 12% per annum computed from
the date this decision becomes final until fully paid; and
2) Respondent Mabunay to indemnify respondent Utassco of the amounts respondent Utassco will have paid to claimant under
this decision, plus interest thereon at the rate of 12% per annum computed from the date he is notified of such payment made by
respondent Utassco to claimant until fully paid, and to pay Utassco P100,000.00 as attorney's fees.
SO ORDERED.

G.R. No. 85161 September 9, 1991

COUNTRY BANKERS INSURANCE CORPORATION and ENRIQUE SY, petitioners,
vs.
COURT OF APPEALS and OSCAR VENTANILLA ENTERPRISES CORPORATION, respondents.
Esteban C. Manuel for petitioners.
Augusta Gatmaytan for OVEC.

MEDIALDEA, J.:p
Petitioners seek a review on certiorari of the decision of the Court of Appeals in CA-G.R. CV No. 09504 "Enrique Sy and Country
Bankers Insurance Corporation v. Oscar Ventanilla Enterprises Corporation" affirming in toto the decision of the Regional Trial
Court, Cabanatuan City, Branch XXV, to wit:
WHEREFORE, the complaint of the plaintiff Enrique F. Sy is dismissed, and on the counterclaim of the defendant O. Ventanilla
Enterprises Corporation, judgment is hereby rendered:
1. Declaring as lawful, the cancellation and termination of the Lease Agreement (Exh. A) and the defendant's re-entry and
repossession of the Avenue, Broadway and Capitol theaters under lease on February 11, 1980;
2. Declaring as lawful, the forfeiture clause under paragraph 12 of the Id Lease Agreement, and confirming the forfeiture of the
plaintiffs remaining cash deposit of P290,000.00 in favor of the defendant thereunder, as of February 11, 1980;
3. Ordering the plaintiff to pay the defendant the sum of P289,534.78, representing arrears in rentals, unremitted amounts for
amusement tax delinquency and accrued interest thereon, with further interest on said amounts at the rate of 12% per annum (per
lease agreement) from December 1, 1980 until the same is fully paid;
4. Ordering the plaintiff to pay the defendant the amount of P100,000.00, representing the P10,000.00 portion of the monthly lease
rental which were not deducted from the cash deposit of the plaintiff from February to November, 1980, after the forfeiture of the
said cash deposit on February 11, 1980, with interest thereon at the rate of 12% per annum on each of the said monthly amounts
of P10,000.00 from the time the same became due until it is paid;
5. Ordering the plaintiff to pay the defendant through the injunction bond, the sum of P100,000.00, representing the P10,000.00
monthly increase in rentals which the defendant failed to realize from February to November 1980 result from the injunction, with
legal interest thereon from the finality of this decision until fully paid;

6. Ordering the plaintiff to pay to the defendant the sum equivalent to ten per centum (10%) of the above-mentioned amounts of
P289,534.78, P100,000.00 and P100,000.00, as and for attorney's fees; and
7. Ordering the plaintiff to pay the costs. (pp. 94-95, Rollo)
The antecedent facts of the case are as follows:
Respondent Oscar Ventanilla Enterprises Corporation (OVEC), as lessor, and the petitioner Enrique F. Sy, as lessee, entered into
a lease agreement over the Avenue, Broadway and Capitol Theaters and the land on which they are situated in Cabanatuan City,
including their air-conditioning systems, projectors and accessories needed for showing the films or motion pictures. The term of
the lease was for six (6) years commencing from June 13, 1977 and ending June 12,1983. After more than two (2) years of
operation of the Avenue, Broadway and Capitol Theaters, the lessor OVEC made demands for the repossession of the said
leased properties in view of the Sy's arrears in monthly rentals and non-payment of amusement taxes. On August 8,1979, OVEC
and Sy had a conference and by reason of Sy's request for reconsideration of OVECs demand for repossession of the three (3)
theaters, the former was allowed to continue operating the leased premises upon his conformity to certain conditions imposed by
the latter in a supplemental agreement dated August 13, 1979.
In pursuance of their latter agreement, Sy's arrears in rental in the amount of P125,455.76 (as of July 31, 1979) was reduced to
P71,028.91 as of December 31, 1979. However, the accrued amusement tax liability of the three (3) theaters to the City
Government of Cabanatuan City had accumulated to P84,000.00 despite the fact that Sy had been deducting the amount of
P4,000.00 from his monthly rental with the obligation to remit the said deductions to the city government. Hence, letters of demand
dated January 7, 1980 and February 3, 1980 were sent to Sy demanding payment of the arrears in rentals and amusement tax
delinquency. The latter demand was with warning that OVEC will re-enter and repossess the Avenue, Broadway and Capital
Theaters on February 11, 1980 in pursuance of the pertinent provisions of their lease contract of June 11, 1977 and their
supplemental letter-agreement of August 13, 1979. But notwithstanding the said demands and warnings SY failed to pay the
above-mentioned amounts in full Consequently, OVEC padlocked the gates of the three theaters under lease and took possession
thereof in the morning of February 11, 1980 by posting its men around the premises of the Id movie houses and preventing the
lessee's employees from entering the same.
Sy, through his counsel, filed the present action for reformation of the lease agreement, damages and injunction late in the
afternoon of the same day. And by virtue of a restraining order dated February 12, 1980 followed by an order directing the
issuance of a writ of preliminary injunction issued in said case, Sy regained possession and operation of the Avenue, Broadway
and Capital theaters.
As first cause of action, Sy alleged that the amount of deposit P600,000.00 as agreed upon, P300,000.00 of which was to be
paid on June 13, 1977 and the balance on December 13, 1977 was too big; and that OVEC had assured him that said forfeiture
will not come to pass. By way of second cause of action, Sy sought to recover from OVEC the sums of P100,000.00 which Sy
allegedly spent in making "major repairs" on Broadway Theater and the application of which to Sy's due rentals; (2) P48,000.00
covering the cost of electrical current allegedly used by OVEC in its alleged "illegal connection" to Capitol Theater and (3)
P31,000.00 also for the cost of electrical current allegedly used by OVEC for its alleged "illegal connection" to Broadway Theater
and for damages suffered by Sy as a result of such connection. Under the third cause of action, it is alleged in the complaint that
on February 11, 1980, OVEC had the three theaters padlocked with the use of force, and that as a result, Sy suffered damages at
the rate of P5,000.00 a day, in view of his failure to go thru the contracts he had entered into with movie and booking companies
for the showing of movies at ABC. As fourth cause of action, Sy prayed for the issuance of a restraining order/preliminary
injunction to enjoin OVEC and all persons employed by it from entering and taking possession of the three theaters, conditioned
upon Sy's filing of a P500,000.00 bond supplied by Country Bankers Insurance Corporation (CBISCO).
OVEC on the other hand, alleged in its answer by way of counterclaims, that by reason of Sy's violation of the terms of the subject
lease agreement, OVEC became authorized to enter and possess the three theaters in question and to terminate said agreement
and the balance of the deposits given by Sy to OVEC had thus become forfeited; that OVEC would be losing P50,000.00 for every
month that the possession and operation of said three theaters remain with Sy and that OVEC incurred P500,000.00 for attorney's
service.
The trial court arrived at the conclusions that Sy is not entitled to the reformation of the lease agreement; that the repossession of
the leased premises by OVEC after the cancellation and termination of the lease was in accordance with the stipulation of the
parties in the said agreement and the law applicable thereto and that the consequent forfeiture of Sy's cash deposit in favor of
OVEC was clearly agreed upon by them in the lease agreement. The trial court further concluded that Sy was not entitled to the
writ of preliminary injunction issued in his favor after the commencement of the action and that the injunction bond filed by Sy is
liable for whatever damages OVEC may have suffered by reason of the injunction.
On the counterclaim of OVEC the trial court found that the said lessor was deprived of the possession and enjoyment of the
leased premises and also suffered damages as a result of the filing of the case by Sy and his violation of the terms and conditions
of the lease agreement. Hence, it held that OVEC is entitled to recover the said damages in addition to the arrears in rentals and
amusement tax delinquency of Sy and the accrued interest thereon. From the evidence presented, it found that as of the end of
November, 1980, when OVEC finally regained the possession of the three (3) theaters under lease, Sy's unpaid rentals and
amusement tax liability amounted to P289,534.78. In addition, it held that Sy was under obligation to pay P10,000.00 every month
from February to November, 1980 or the total amount of P100,000.00 with interest on each amount of P10,000.00 from the time
the same became due. This P10,000.00 portion of the monthly lease rental was supposed to come from the remaining cash
deposit of Sy but with the consequent forfeiture of the remaining cash deposit of P290,000.00, there was no more cash deposit
from which said amount could be deducted. Further, it adjudged Sy to pay attorney's fees equivalent to 10% of the amounts
above-mentioned.
Finally, the trial court held Sy through the injunction bond liable to pay the sum of P10,000.00 every month from February to
November, 1980. The amount represents the supposed increase in rental from P50,000.00 to P60,000.00 in view of the offer of
one RTG Productions, Inc. to lease the three theaters involved for P60,000.00 a month.
From this decision of the trial court, Sy and (CBISCO) appealed the decision in toto while OVEC appealed insofar as the decision
failed to hold the injunction bond liable for an damages awarded by the trial court.

The respondent Court of Appeals found no ambiguity in the provisions of the lease agreement. It held that the provisions are fair
and reasonable and therefore, should be respected and enforced as the law between the parties. It held that the cancellation or
termination of the agreement prior to its expiration period is justified as it was brought about by Sy's own default in his compliance
with the terms of the agreement and not "motivated by fraud or greed." It also affirmed the award to OVEC of the amount of
P100,000.00 chargeable against the injunction bond posted by CBISCO which was soundly and amply justified by the trial court.
The respondent Court likewise found no merit in OVECS appeal and held that the trial court did not err in not charging and holding
the injunction bond posted by Sy liable for all the awards as the undertaking of CBISCO under the bond referred only to damages
which OVEC may suffer as a result of the injunction.
From this decision, CBISCO and Sy filed this instant petition on the following grounds:
A
PRIVATE RESPONDENT SHOULD NOT BE ALLOWED TO UNJUSTLY ENRICH OR BE BENEFITTED AT THE EXPENSE OF
THE PETITIONERS.
B
RESPONDENT COURT OF APPEALS CO D SERIOUS ERROR OF LAW AND GRAVE ABUSE OF DISCRETION IN NOT
SETTING OFF THE P100,000.00 SUPPOSED DAMAGE RESULTING FROM THE INJUNCTION AGAINST THE P290,000.00
REMAINING CASH DEPOSIT OF PETITIONER ENRIQUE SY.
C
RESPONDENT COURT OF APPEALS FURTHER COMMITTED SERIOUS ERROR OF LAW AND GRAVE ABUSE OF
DISCRETION IN NOT DISMISSING PRIVATE RESPONDENTS COUNTER-CLAIM FOR FAILURE TO PAY THE NECESSARY
DOCKET FEE. (p. 10, Rollo)
We find no merit in petitioners' argument that the forfeiture clause stipulated in the lease agreement would unjustly enrich the
respondent OVEC at the expense of Sy and CBISCO contrary to law, morals, good customs, public order or public policy. A
provision which calls for the forfeiture of the remaining deposit still in the possession of the lessor, without prejudice to any other
obligation still owing, in the event of the termination or cancellation of the agreement by reason of the lessee's violation of any of
the terms and conditions of the agreement is a penal clause that may be validly entered into. A penal clause is an accessory
obligation which the parties attach to a principal obligation for the purpose of insuring the performance thereof by imposing on the
debtor a special presentation (generally consisting in the payment of a sum of money) in case the obligation is not fulfilled or is
irregularly or inadequately fulfilled. (Eduardo P. Caguioa, Comments and Cases on Civil Law, Vol. IV, First Edition, pp. 199-200) As
a general rule, in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of
interests in case of non-compliance. This is specifically provided for in Article 1226, par. 1, New Civil Code. In such case, proof of
actual damages suffered by the creditor is not necessary in order that the penalty may be demanded (Article 1228, New Civil
Code). However, there are exceptions to the rule that the penalty shall substitute the indemnity for damages and the payment of
interests in case of non-compliance with the principal obligation. They are first, when there is a stipulation to the contrary; second,
when the obligor is sued for refusal to pay the agreed penalty; and third, when the obligor is guilty of fraud (Article 1226, par. 1,
New Civil Code). It is evident that in all said cases, the purpose of the penalty is to punish the obligor. Therefore, the obligee can
recover from the obligor not only the penalty but also the damages resulting from the non-fulfillment or defective performance of
the principal obligation.
In the case at bar, inasmuch as the forfeiture clause provides that the deposit shall be deemed forfeited, without prejudice to any
other obligation still owing by the lessee to the lessor, the penalty cannot substitute for the P100,000.00 supposed damage
resulting from the issuance of the injunction against the P290,000.00 remaining cash deposit. This supposed damage suffered by
OVEC was the alleged P10,000.00 a month increase in rental from P50,000.00 to P60,000,00), which OVEC failed to realize for
ten months from February to November, 1980 in the total sum of P100,000.00. This opportunity cost which was duly proven before
the trial court, was correctly made chargeable by the said court against the injunction bond posted by CBISCO. The undertaking
assumed by CBISCO under subject injunction refers to "all such damages as such party may sustain by reason of the injunction if
the Court should finally decide that the Plaintiff was/were not entitled thereto." (Rollo, p. 101) Thus, the respondent Court correctly
sustained the trial court in holding that the bond shall and may answer only for damages which OVEC may suffer as a result of the
injunction. The arrears in rental, the unmeritted amounts of the amusement tax delinquency, the amount of P100,000.00
(P10,000.00 portions of each monthly rental which were not deducted from plaintiffs cash deposit from February to November,
1980 after the forfeiture of said cash deposit on February 11, 1980) and attorney's fees which were all charged against Sy were
correctly considered by the respondent Court as damages which OVEC sustained not as a result of the injunction.
There is likewise no merit to the claim of petitioners that respondent Court committed serious error of law and grave abuse of
discretion in not dismissing private respondent's counterclaim for failure to pay the necessary docket fee, which is an issue raised
for the first time in this petition. Petitioners rely on the rule in Manchester Development Corporation v. Court of Appeals, G.R. No.
75919, May 7, 1987, 149 SCRA 562 to the effect that all the proceedings held in connection with a case where the correct docket
fees are not paid should be peremptorily be considered null and void because, for all legal purposes, the trial court never acquired
jurisdiction over the case. It should be remembered however, that in Davao Light and Power Co., Inc. v. Dinopol, G.R. 75195,
August 19, 1988, 164 SCRA 748, this Court took note of the fact that the assailed order of the trial court was issued prior to the
resolution in the Manchester case and held that its strict application to the case at bar would therefore be unduly harsh. Thus, We
allowed the amendment of the complaint by specifying the amount of damages within a non-extendible period of five (5) days from
notice and the re-assessment of the filing fees. Then, in Sun Insurance Office, Ltd. v. Asuncion, G.R. 79937-38, February 3, 1989,
170 SCRA 274, We held that where the filing of the initiatory pleading is not accompanied by payment of the docket fee, the court
may allow payment of the fee within a reasonable time but in no case beyond the applicable prescriptive or reglemen tary period.
Nevertheless, OVEC's counterclaims are compulsory so no docket fees are required as the following circumstances are present:
(a) they arise out of or are necessarily connected with the transaction or occurrence that is subject matter of the opposing party's
claim; (b) they do not require for their adjudication the presence of third parties of whom the court cannot acquire jurisdiction; and
(c) the court has jurisdiction to entertain the claim (see Javier v. Intermediate Appellate Court, G.R. 75379, March 31, 1989, 171
SCRA 605). Whether the respective claims asserted by the parties arise out of the same contract or transaction within the

limitation on counterclaims imposed by the statutes depends on a consideration of all the facts brought forth by the parties and on
a determination of whether there is some legal or equitable relationship between the ground of recovery alleged in the
counterclaim and the matters alleged as the cause of action by the plaintiff (80 C.J.S. 48). As the counterclaims of OVEC arise
from or are necessarily connected with the facts alleged in the complaint for reformation of instrument of Sy, it is clear that said
counterclaims are compulsory.
ACCORDINGLY, finding no merit in the grounds relied upon by petitioners in their petition, the same is hereby DENIED and the
decision dated June 15, 1988 and the resolution dated September 21, 1988, both of the respondent Court of Appeals are
AFFIRMED.
SO ORDERED.

G.R. No. 137557

October 30, 2000

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
HON. COURT OF APPEALS and SPOUSES NILO and ESPERANZA DE LA PEA, respondents.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari of the decision,1 dated August 7, 1998, and resolution,2 dated February 11, 1999, of the
Court of Appeals affirming with modification the decision of the Regional Trial Court, Branch 172, Valenzuela, enjoining petitioner
from rescinding the contract it had executed covering the sale of a parcel of land and ordering respondent spouses, as vendees,
to pay petitioner the amount of P54,200.00.
The facts are undisputed:
Petitioner Development Bank of the Philippines is the owner of a parcel of land in Bulacan (now Lawang Bato, Valenzuela, Metro
Manila)3 as evidenced by TCT No. 13351(202029). On August 8, 1983, it sold the land to respondent spouses Nilo and
Esperanza De La Pea under a Deed of Conditional Sale for P207,000.00.4 The Deed of Conditional Sale stipulated:
That the down payment shall be P41,400.00 and the balance of P165,600.00 to be paid in six (6) years on the semi-annual
amortization plan at 18% interest per annum. The first amortization of P23,126.14 shall be due and payable six (6) months from
the date of execution of the Deed of Conditional Sale and all subsequent amortizations shall be due and payable every six (6)
months thereafter;
After the execution of the contract, the spouses De La Pea constructed a house on the said lot and began living there. They also
introduced other improvements therein by planting fruit trees and building a small garage.5 Pursuant to their contract with the
DBP, respondent spouses De La Pea made the following payments:
OR. NO.

DATE

AMOUNT

261122

June 22, 1983

P 36,000.00

355399

August 4, 1983

5,400.00

828029

March 22, 1984

6,000.00

862947

June 4, 1984

21,000.00

1230133

November 15, 1984

3,000.00

1365914

Feb. 8, 1985

6,000.00

1545272

March 11, 1985

6,000.00

1549511

April 8, 1985

6,000.00

1549641

May 3, 1985

6,000.00

1714171

July 9, 1985

11,400.00

1893683

November 29, 1985

11,400.00

2257661

July 3, 1986

10,000.00

2349229

September 3, 1986

15,000.00

2529065

November 4, 1986

16,000.00

2830513

August 18, 1987

21,000.00

3342166

October 12, 1988

10,000.00

3367039

December 9, 1988

10,000.00

3367193

January 10, 1989

10,000.00

3367500

February 10, 1989

10,000.00

3461778

March 9, 1989

18,000.00

3532008

April 10, 1989

18,800.00

3617235

August 28, 1989

P33,000.00

TOTAL

P289,600.006

After making the above payments, Esperanza De La Pea went to petitioner DBP and asked for the execution of a Deed of
Absolute Sale and for the issuance of the title to the property.7 On January 5, 1989, however, respondent spouses De La Pea
were informed by DBP through a letter that there was still a balance of P221,86.85, broken down as follows, owing from them:
Principal

P150,765.35

Regular Interest

57,121.13

Additional Interest

9,799.01

Penalty Charges

4,182.36

TOTAL

221,867.858

In another letter, dated July 11, 1989, DBP demanded from respondent spouses the payment of this amount, which had increased
to P225,855.86 as of June 30, 1989, otherwise, it would rescind the sale.9 In reply, respondent spouses, in a letter dated August
11, 1989, proposed a settlement of the amount through semi-annual payments over a period of five years.10
As the parties failed to reach an agreement, respondent spouses filed a complaint against petitioner on January 30, 1990 for
specific performance and damages with injunction before the Regional Trial Court, Valenzuela, Metro Manila.11 The case was
assigned to Branch 172 of the court. The complaint was later amended to include a prayer for the issuance of a temporary
restraining order to enjoin the defendant from rescinding the sale and selling the land to interested buyers.12
On March 30, 1993, the trial court rendered a decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered,
1. Dismissing the complaint, as plaintiffs have still to pay the defendant the sum of P54,200.00 as interest to be able to sue for
specific performance;
2. The writ of preliminary injunction is hereby declared permanent;
3. Defendant to pay plaintiffs attorneys fees in the amount of P30,000.00; and
4. Defendant to pay the costs of suit.
SO ORDERED.13
Petitioner filed an appeal with the Court of Appeals which rendered a decision, dated August 8, 1997, affirming with modification
the ruling of the trial court. The dispositive portion of its decision reads:
WHEREFORE, with the MODIFICATION that the grant of attorneys fees is deleted, the appealed Decision is AFFIRMED.14
In its resolution, dated February 11, 1999, the Court of Appeals likewise denied petitioners motion for reconsideration.15
Hence, this petition. Petitioner now contends:
1. BOTH THE TRIAL COURT AND THE COURT OF APPEALS GAVE A MANIFESTLY MISTAKEN AND ABSURD
CONSTRUCTION OF THE DEED OF CONDITIONAL SALE CONTRACT (ANNEX "E").
2. THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND COMMITTED REVERSIBLE ERROR WHEN IT AFFIRMED
THE TRIAL COURTS ISSUANCE OF THE INJUNCTION AGAINST PETITIONER DBP PERMANENT.16
First. The Court of Appeals held:
A careful reading of the aforequoted provisions reveals that while the period of payment (six years) and the amount of the first
amortization (P23,126.14) are stipulated, the amount that the vendees should pay semi-annually is not specified. Since the Deed
of Conditional Sale executed by the parties is a contract of adhesion, i.e., a ready-made contract to which appellees merely affixed
their assent or "adhesion", as the court a quo correctly found, a restrictive construction of the obscure provision regarding the
amount of semi-annual amortizations should be made against the drafter DBP (PAL vs. Court of Appeals, 255 SCRA 48, BPI
Credit vs. Court of Appeals, 204 SCRA 611; Maersk Lines vs. Court of Appeals, 222 SCRA 108; Angeles vs. Calasaz, 135 SCRA
323). It is not disputed that appellant Bank was the party responsible for the preparation of the Deed of Conditional Sale. Any
ambiguity in the contract whose terms are susceptible of different interpretations must be read against appellant as the party
which drafted the contract (Nacu vs. Court of Appeals, 231 SCRA 237). Thus the contract of the parties must be interpreted, in so
far as the manner and amounts of amortization is concerned, to be at the option of the vendees, subject only to the condition that
the latter should pay the balance of the purchase price within a period of six years.17
The questioned provision states:
That the down payment shall be P41,400.00 and the balance of P165,600.00 to be paid in six (6) years on the semi-annual
amortization plan at 18% interest per annum. The first amortization of P23,126.14 shall be due and payable six (6) months from
the date of execution of the Deed of Conditional Sale and all subsequent amortizations shall be due and payable every six (6)
months thereafter;18
Contrary to the ruling of the Court of Appeals that the above stipulation fails to specify the monthly amortization, we find no ground
for construing any ambiguity against the DBP as the party responsible therefor. As stipulated in the Deed of Conditional Sale, the
first amortization was in the amount of P23,126.14 to be paid six months from the date of the execution of the contract.
Subsequent amortizations were due and payable every six months thereafter. Such stipulation cannot be construed other than
that the subsequent amortizations should be in the same amount as the first, to be paid every six months thereafter. There being

no other basis for the payment of the subsequent amortizations, the reasonable conclusion one can reach is that subsequent
payments shall be made in the same amount as the first payment.
With regard to the remaining monetary obligation of the private respondents, the question is whether respondent spouses could
be held liable for the interests and penalty charges considering that they had already paid the full amount of the principal
obligation and petitioner DBP did not object to the late payments made by them.
The contract provided that "[t]he first amortization of P23,236.14 shall be due and payable six (6) months from the date of
execution of the Deed of Conditional Sale and all subsequent amortizations shall be due and payable every six (6) months
thereafter." As the contract was executed on August 8, 1983,19 the first amortization became due on February 8, 1994 while the
next one fell due on August 8 of that year. The subsequent amortizations were to be paid every six months thereafter, i.e., on
February 8 and August 8 of the following years. Respondent spouses failed to comply with the schedule of payment of
amortizations, their payments having been actually made as follows:
OR. NO.
DATE

AMOUNT

261122

June 22, 1983

P 36,000.00

355399

August 4, 1983

5,400.00

828029

March 22, 1984

6,000.00

862947

June 4, 1984

21,000.00

1230133

November 15, 1984

3,000.00

1365914

Feb. 8, 1985

6,000.00

1545272

March 11, 1985

6,000.00

1549511

April 8, 1985

6,000.00

1549641

May 3, 1985

6,000.00

1714171

July 9, 1985

11,400.00

1893683

November 29, 1985

11,400.00

2257661

July 3, 1986

10,000.00

2349229

September 3, 1986

15,000.00

2529065

November 4, 1986

16,000.00

2830513

August 18, 1987

21,000.00

3342166

October 12, 1988

10,000.00

3367039

December 9, 1988

10,000.00

3367193

January 10, 1989

10,000.00

3367500

February 10, 1989

10,000.00

3461778

March 9, 1989

18,000.00

3532008

April 10, 1989

18,800.00

3617235

August 28, 1989

P 33,000.00

TOTAL

P 289,600.0020

As private respondents failed to pay on time, they incurred additional interests and penalty charges which were applied to the
payments they already made, pursuant to their contract which provides in pertinent parts as follows:
8. That the sale shall be subject to penalty charges and additional interest as follows:
a) On sale accounts with amortizations (principal past due and/or regular interest) or portion thereof in arrears for thirty (30) days
or less:
i. Additional interest at the basic sale interest per annum computed on total amortizations past due, irrespective of age.
ii. No penalty charge.
b) On sale accounts with amortizations or portion thereof in arrears for more than thirty (30) days:
i. Additional interest as provided above, plus
ii. Penalty charge of 8% per annum.21
The payments made by respondent spouses were applied to their obligation, including interests, in the following manner:22
DATE

OR NUM-BER
TOTAL

PRINCIPAL REGULAR INTEREST

ADDITIO-NAL
PENALTY
INTEREST
CHARGES
ADVANCES/INT. ON ADV.

6-22-83

261122

P36,000.00 P36,000.00 )Down-

8-04-83

355399

5,400.00

5,400.00 ) Payment

3-22-84

828029

6,000.00

P5,443.75 P490.35

6-04-84

862947

21,000.00 10,409.95 9,460.25

645 .22

286.82

11-15-84

230123

3,000.00

1,665.66

1,018.71

315.63

2-08-85

365914

6,000.00

4,837.37

804.84

357.79

3-11-85

1545272

6,000.00

5,006.03

891.28

102.69

4-08-85

1549510

6,000.00

5,103.08

697.54

199.38

5-03-85

1549641

6,000.00

5,324.97

524.97

150.06

7-09-85

1714171

11,400.00

5,514.20

1,133.31

323.94

11-29-85

1893683

11,000.00

6,352.80

3,757.49

889.91

7-03-86

2257661

10,000.00

7,693.45

2,306.55

9-03-86

2349229

15,000.00

9,640.76

4,519.05

840.19

11-04-6

2529065

16,000.00

11,120.74

3,813.72

1,065.54

8-18-87

2830513

21,000.00

5,664.24

5,335.76

10-13-88

3342166

10,000.00

12-09-88

3367039

10,000.00

4,937.64

5,062.36

1-10-89

3367193

10,000.00

8,766.53

1,233.47

2-10-89

3367500

10,000.00

8,805.08

1,194.92

3-10-89

3461778

18,000.00

16,920.72 1,079.28

4-10-89

3532008

18,800.00

5,786.19

8-28-89

3617235

33,000.00

12,880.57 14,122.69 5,996.74

4,428.85

P65.90
P197.76

10,000.00

11,646.64

1,367.17

P289,600.00P56,238.50 P88,136.37 P106,853.47P38,173.90 P197.76

Hence, as of June 30, 1989, over and above their payments in the total amount of P289,600.00, respondent spouses still owed
DBP the amount of P225,855.86.23 By August 15, 1990, this amount ballooned to P260,945.85, broken down as follows:24
Amount of Loan P 207,000.00
UNMATURED OBLIGATION
Principal Matured (8-8-89)
MATURED OBLIGATION
Principal P 150,761.50
Advances 0.00
Regular Interest 57,113.73
AI on PPD & RI 37,086.71
RI on Advances 0.00
Penalty Charge 15,983.91
---------------Sub Total 260,945.85
TOTAL OBLIGATION 260,945.85
======
Daily Interest on UP P 0.00
Daily Interest on PDO P 150.97
The Court of Appeals ruled:
It is to be noted that appellant did not question the tender of payment by the appellees-vendees in different amounts and on
different dates as aforestated. It did not call attention to the amortizations paid by vendees as being wrong or improper. Appellant
in fact unqualifiedly accepted the payments. This is tantamount to a waiver on its part to demand for the "correct amount of the
amortization, applying the ruling of the Supreme Court in Ocampo vs. Court of Appeals (233 SCRA 551) that the vendors
unqualified acceptance of payments after the expiration of the period precludes the vendor from raising the issue of late payments
and constitutes a waiver of the period. It was only after the appellees asked the appellant to execute the final Deed of Sale that
the bank started to demand for payment under its interpretation of the Deed of Conditional Sale threatening rescission thereof,
otherwise. As the unqualified acceptance of the payments constituted a waiver of the "correctness" of the amortizations, the same
likewise constituted a waiver of the ground to rescind under Art. 1592 of the Civil Code (Ocampo vs. CA, supra).

On the remaining monetary obligation of plaintiffs, we quote with favor and hereby adopt the following computation of the trial
court:
"However, considering the terms of the Deed of Conditional Sale that plaintiffs must pay 18% per annum for the balance of
P165,600.00, that amount of interest is the only amount due from plaintiffs covering a period of six years, or a total of
P178,200.00. As plaintiffs had paid already a total of P289,600.00, the amount of P165,000.00 must be deducted therefrom which
results to an overpayment of P124,000.00 on the principal. With this amount of P124,000.00 all what plaintiffs must pay will only
be the amount of P54,200.00 as interest due on the principal amount of P165,000.00."25
The reliance on Ocampo v. Court of Appeals26 is misplaced insofar as respondent court used the ruling in said case to justify its
position that petitioner waived "the correct amount of amortization" to be paid by private respondents. The case of Ocampo did not
involve interests to be paid by the buyer to the seller in case of late payments. That case involved a judicial rescission made by
the seller because of the first buyers late payments. In that case, the seller executed a contract of sale in favor of the first buyer,
stipulating therein that payments should be made in six months. The buyer failed to pay the consideration in full within the period
agreed upon. However, the seller accepted a partial payment of the balance even if made after the expiration of the period. The
buyer had her adverse claim annotated on the title of the seller. Later, the seller sold the land to a second buyer who was able to
secure a title in his name. This Court ruled in that case that the seller was precluded from raising the issue of late payments
because his unqualified acceptance of payments after the expiration of the six-month period was a waiver of the period. The Court
did not rule in that case that acceptance of late payments was a waiver on the "correct amount of amortization" due to the seller.
No mention in fact was made by the Court in Ocampo of the interests to be paid by the buyer.
On the other hand, in this case, the interest and penalty charges to be paid by private respondents in case of delay in payments
were expressly stipulated in the Conditional Contract of Sale. Under the Civil Code, parties to a contract can make stipulations
therein provided they are not contrary to law, morals, good customs, public order or public policy.27 There being no question as to
the validity of the Conditional Contract of Sale, the DBP correctly applied the provision on interests and penalty charges when
private respondents failed to pay on the dates agreed upon. No further notice to private respondents had to be given to them.
The Court of Appeals likewise erred in disregarding paragraph 8 of the contract on interests and penalty charges and concluding
that the unpaid balance of private respondents was merely in the amount of P54,200.00. In determining the amount of
P54,200.00, both the trial court and respondent Court of Appeals erroneously took into account only the 18% annual interest on
the remaining balance of P165,000.00:
In computing the liability of private respondents, the trial court determined what constitutes 18% of the principal amount of
P165,600.00 and then multiplied such amount by six, the number of years the loan is to be paid, the product of which was
P178,200.00. From the payments made by private respondents in the amount of P289,600.00, the remaining balance of
P165,600.00 was deducted, which resulted in the overpayment of P124,000. This supposed overpayment of P124,000.00 was
then deducted from the amount of interest, as determined by the trial court, which is P178,200.00, resulting in the difference of
P54,200.00. This final amount of P54,200.00, decided by the trial court and affirmed by the Court of Appeals, was the final
remaining balance of private respondents. However, the computation is erroneous. Following the method adopted by the trial
court, the product of 18% of the principal amount of P165,600.00 (P29,808.00) multiplied by six is P178,848.00. Hence, from the
amount of P178,848.00 must be subtracted the supposed overpayment of P124,000.00, resulting in the difference of
P54,848.00.28
Article 1374 of the Civil Code provides that "the various stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken jointly." In the same vein, Rule 130, 11 of the Rules on
Evidence states that "In the construction of an instrument where there are several provisions or particulars, such a construction is,
if possible, to be adopted as will give effect to all." Accordingly, the annual interest of 18% must be construed together with
paragraph 8 of the Deed of Conditional Sale imposing additional interests and penalty in case of arrears in making payments.
Hence, upon failure of private respondents to pay their amortizations on the prescribed dates, they incurred interests and penalty
charges at the stipulated rates. Private respondents cannot be allowed to renege on their obligation on the ground that what they
had paid was in excess of the principal obligation in the amount of P207,000.00. Nor can private respondents demand fulfillment
of petitioners obligation to execute a final deed of sale and deliver the title to the land in their favor when they have not yet fully
paid their principal obligation with the accrued interests thereto. "[N]either the law nor the courts will extricate a party from an
unwise or undesirable contract he or she entered into with all the required formalities and with full awareness of its
consequences."29
Be that as it may, we find the interests to be excessive. It is noteworthy that the interests paid by private respondents, which
amounted to P233,361.50,30 including therein the regular interest, additional interest, penalty charges, and interest on advances,
is more than the principal obligation in the amount of P207,000.00, which private respondents owed. Moreover, the additional
interest of 18% alone amounted to P106,853.45,31 which is almost half of what was already paid by private respondents.
Article 1229 of the Civil Code states that "Even if there has been no performance, the penalty may also be reduced by the courts if
it is iniquitous or unconscionable." In Barons Marketing Corp. v. Court of Appeals,32 the Court reduced the 25% penalty charge to
cover the attorneys fees and collection fees, which was in addition to the 12% annual interest, to 10% for being manifestly
exorbitant. Likewise, in Palmares v. Court of Appeals,33 the Court eliminated altogether the payment of the penalty charge of 3%
per month for being excessive and unwarranted under the circumstances. It ruled in that case:
Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the penalty interest of three
percent (3%) per month on total amount due but unpaid should be equitably reduced. The purpose for which the penalty interest is
intended - that is, to punish the obligor - will have been sufficiently served by the effects of compounded interest. Under the
exceptional circumstances in the case at bar, e.g., the original amount loaned was only P15,000.00; partial payment of P8,600.00
was made on due date; and the heavy (albeit still lawful) regular compensatory interest, the penalty interest stipulated in the
parties promissory note is iniquitous and unconscionable and may be equitably reduced further by eliminating such penalty
interest altogether.34
In the instant case, private respondents made regular payments to petitioner DBP in compliance with their principal obligation.
They failed only to pay on the dates stipulated in the contract. This indicates the absence of bad faith on the part of private
respondents and their willingness to comply with the terms of the contract. Moreover, of their principal obligation in the amount of
P207,000.00, private respondents have already paid P289,600.00 in favor of petitioner. These circumstances convince us of the

necessity to equitably reduce the interest due to petitioner and we do so by reducing to 10% the additional interest of 18% per
annum computed on total amortizations past due. The penalty charge of 8% per annum is sufficient to cover whatever else
damages petitioner may have incurred due to private respondents delay in paying the amortizations, such as attorneys fees and
litigation expenses.
Second. Petitioner contends that private respondents have not established a clear legal right so as to be entitled to an injunction
because they are still liable to pay additional interests in accordance with the contract executed between them.35 The contention
has no merit.
In its order, dated March 8, 1990, the trial court issued a writ of preliminary injunction to prevent petitioner from rescinding the
contract with private respondents and selling the land to other interested persons. The trial court stated:
After studying the respective positions of both parties, the Court believes that plaintiffs are entitled to the writ of preliminary
injunction prayed for under Section 3 Rule 58 of the Revised Rules of Court. This is because the Court wants to thresh out the
issue of whether or not the Deed of Conditional Sale which plaintiffs contend is embodied in a contract of adhesion was really
made for the disadvantage, damage and prejudice of plaintiffs; the issue of whether or not despite the payment of P289,6000.00
by plaintiffs over and above the stipulated consideration for the lot in the amount of P207,000.00, still entitles DBP to rescind the
said Deed of Conditional Sale and sell it to other persons. These two issues and other issues which it believes will come up as the
case proceeds, need be resolved first, before DBP is allowed to proceed with its intended rescission of the Contract and sale of
the lot to other persons, otherwise, in the event plaintiffs contention stand would be found meritorious and tenable, the judgment
in their favor would become moot and academic which would ultimately cause irreparable damage to them.
WHEREFORE, in view of the foregoing, let the Writ of Preliminary Injunction prayed for issue, provided plaintiffs post an injunction
bond in the amount of P200,000.00 conditional that it shall be liable together with the principals, spouses Nilo Dela Pea and
Esperanza Dela Pea, to defendant, in the event it shall be found out that plaintiffs are not entitled to the writ of preliminary
injunction prayed for.36
In its decision, dated March 30, 1993, the trial court declared permanent the writ of preliminary injunction issued in favor of private
respondents.37 Its ruling was subsequently affirmed by the Court of Appeals.38
Two requisites are necessary if a preliminary injunction is to issue, namely: (1) the existence of a right to be protected and (2) the
facts against which the injunction is to be directed are violative of said right.39
As to the question whether private respondents have a right to be protected, we hold that they do. Injunction may be resorted to
for the preservation or protection of the rights of the complainant and for no other purpose during the pendency of the principal
action.40 In the case at bar, private respondents applied for an injunction in order to prevent petitioner DBP from rescinding the
sale and selling the land to other interested buyers. They are entitled to such writ because petitioner DBP had no right to rescind
the sale and deprive them of any right of possession over the property.
In the first place, there was no substantial breach in the performance of private respondents obligation. Article 1191 of the Civil
Code provides that "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. . . ." Rescission of a contract will not be permitted for a slight or casual breach, but only such substantial and
fundamental breach as would defeat the very object of the parties in making the agreement.41 Private respondents made regular
payments to petitioner DBP. Their fault consisted only of their failure to pay the installments on the dates stipulated in the contract,
for which they were charged additional interests and penalty charges. In the second place, private respondents stopped their
payments to the DBP only after they had paid P289,600.00 because of their belief that they had already complied with their
obligation to petitioner. Lastly, notwithstanding private respondents delay in paying the amortizations, petitioner DBP unqualifiedly
accepted the payments made by them. Hence, petitioner lost its right to rescind the sale on the basis of such late payments. In an
analogous case, we held:
In the instant case, the sellers gave the buyers until May 1979 to pay the balance of the purchase price. After the latter failed to
pay installments due, the former made no judicial demand for rescission of the contract nor did they execute any notarial act
demanding the same, as required under Article 1592. Consequently, the buyers could lawfully make payments even after the May
1979 deadline, as in fact they paid several installments, an act which cannot but be construed as a waiver of the right to rescind.
When the sellers, instead of availing of their right to rescind, accepted and received delayed payments of installments beyond the
period stipulated, and the buyers were in arrears, the sellers in effect waived and are now estopped from exercising said right to
rescind.42
Private respondents, therefore, had the right to prevent the former from rescinding the sale and selling the property in question.
The first requisite had been met.
As to the second requisite, it was expressly stipulated in the contract that should rescission take place, private respondents, as the
vendees, shall waive whatever right they may have acquired over the property and that all sums of money paid by them shall be
considered and treated as rentals for the use of the property. In addition, private respondents shall vacate the property, waiving
whatever expenses they may have incurred in the property in the form of improvement or under any concept, without any right of
reimbursement.43 Clearly, the act sought to be enjoined by the injunction was violative of the rights that private respondents have
acquired over the property. What they stood to lose in case petitioner decides to rescind the sale is material and substantial. Not
only would they forfeit all the payments they have made in favor of petitioner, they would also lose their right of possession over
the property.
There was indeed an urgent and permanent necessity for the issuance of the writ to protect private respondents rights over the
property.
As held in one case:44
The controlling reason for the existence of the judicial power to issue the writ is that the court may thereby prevent a threatened or
continuous irremediable injury to some of the parties before their claims can be thoroughly investigated and advisedly adjudicated.
It is to be resorted only when there is a pressing necessity to avoid injurious consequences which cannot be remedied under any

standard of compensation.
Had no injunction been issued petitioner would have rescinded the sale and sold the property to other parties, and private
respondents would have lost what they have paid to petitioner and any right they may have acquired over the property even
without the benefit of a trial. The complaint of respondent spouses would have been rendered moot and academic as the property
would be in possession of an innocent purchaser for value and private respondents would be powerless to recover the same.
Such a situation cannot be countenanced. Hence, we hold that both the trial court and the Court of Appeals correctly issued the
writ of preliminary injunction against petitioner.
WHEREFORE, the decision of the Court of Appeals is hereby AFFIRMED with the MODIFICATION that the additional interest is
reduced to 10% per annum computed on total amortizations past due, irrespective of age.
SO ORDERED.

[G.R. No. 141434. September 23, 2003]

ANTONIO LO, petitioner, vs. THE HON. COURT OF APPEALS AND NATIONAL ONIONS GROWERS COOPERATIVE
MARKETING ASSOCIATION, INC., respondents.
DECISION
CORONA, J.:
Assailed in the instant petition for review on certiorari under Rule 45 of the Rules of Court is the May 26, 1998 decision[if !
supportFootnotes][1][endif] of the Court of Appeals modifying the decision of the Regional Trial Court of Malabon, Branch 74:
WHEREFORE, the assailed decision is hereby AFFIRMED with the MODIFICATION that the penalty imposed for each day of
delay in surrendering the leased property is reduced from P5,000.00 to P1,000.00 per day of delay.[if !supportFootnotes][2][endif]
At the core of the present controversy are two parcels of land measuring a total of 2,147 square meters, with an office building
constructed thereon, located at Bo. Potrero, Malabon, Metro Manila and covered by TCT Nos. M-13166 and M-13167.
Petitioner acquired the subject parcels of land in an auction sale on November 9, 1995 for P20,170,000 from the Land Bank of the
Philippines (Land Bank).
Private respondent National Onion Growers Cooperative Marketing Association, Inc., an agricultural cooperative, was the
occupant of the disputed parcels of land under a subsisting contract of lease with Land Bank. The lease was valid until December
31, 1995.
Upon the expiration of the lease contract, petitioner demanded that private respondent vacate the leased premises and surrender
its possession to him. Private respondent refused on the ground that it was, at the time, contesting petitioners acquisition of the
parcels of land in question in an action for annulment of sale, redemption and damages.
On February 23, 1996, petitioner filed an action for ejectment before the Metropolitan Trial Court of Malabon, Branch 55. He
asked, inter alia, for the imposition of the contractually stipulated penalty of P5,000 per day of delay in surrendering the
possession of the property to him. On September 3, 1996, the trial court decided the case in favor of petitioner:
WHEREFORE, premises considered, the Court considers the allegations of the complaint to be true and duly substantiated except
as to the amount of damages and attorneys fees, which are reduced accordingly, a decision is hereby rendered in favor of the
plaintiffs and against the defendant, ordering the latter and all persons claiming rights under it:
1)

To vacate the leased premises immediately and turn over the same peacefully to the plaintiffs;

2)
To pay plaintiff Antonio Lo the sum of P5,000.00 for every day of delay from the time defendant is supposed to have
vacated the premises;
3)
To pay the sum of P36,000.00 a month from January 1996 until it finally vacates the premises as payment for reasonable
compensation for the use and occupancy thereof;
4)

To pay the sum of P20,000.00 by way of reasonable attorneys fees; and

5)

To pay the costs of suit.[if !supportFootnotes][3][endif]

On appeal to the Regional Trial Court of Malabon, Branch 74, the MTC decision was affirmed in toto on August 29, 1997.[if !
supportFootnotes][4][endif] Private respondents subsequent motion for reconsideration of the RTC decision was denied on
November 26, 1997.
From the adverse decision of the trial court, private respondent elevated the case to the Court of Appeals via a petition for review.
On May 26, 1999, the Court of Appeals rendered its assailed decision affirming the decision of the trial court, with the modification
that the penalty imposed upon private respondent for the delay in turning over the leased property to petitioner was reduced from
P 5,000 to P 1000 per day.
Unsatisfied with the decision of the Court of Appeals, petitioner filed the instant petition for review, raising the sole issue of the
alleged lack of authority of the Court of Appeals to reduce the penalty awarded by the trial court, the same having been stipulated
by the parties in their Contract of Lease.
The petition has no merit.
Generally, courts are not at liberty to ignore the freedom of the parties to agree on such terms and conditions as they see fit as
long as they are not contrary to law, morals, good customs, public order or public policy. Nevertheless, courts may equitably
reduce a stipulated penalty in the contract if it is iniquitous or unconscionable, or if the principal obligation has been partly or
irregularly complied with.[if !supportFootnotes][5][endif]

This power of the courts is explicitly sanctioned by Article 1229 of the Civil Code which provides:
Article 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied
with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.
The question of whether a penalty is reasonable or iniquitous is addressed to the sound discretion of the court and depends on
several factors, including, but not limited to, the following: the type, extent and purpose of the penalty, the nature of the obligation,
the mode of breach and its consequences, the supervening realities, the standing and relationship of the parties.[if !
supportFootnotes][6][endif]
In this case, the stipulated penalty was reduced by the appellate court for being unconscionable and iniquitous. As provided in the
Contract of Lease, private respondent was obligated to pay a monthly rent of P30,000. On the other hand, the stipulated penalty
was pegged at P5,000 for each day of delay or P150,000 per month, an amount five times the monthly rent. This penalty was not
only exorbitant but also unconscionable, taking into account that private respondents delay in surrendering the leased premises
was because of a well-founded belief that its right of preemption to purchase the subject premises had been violated. Considering
further that private respondent was an agricultural cooperative, collectively owned by farmers with limited resources, ordering it to
pay a penalty of P150,000 per month on top of the monthly rent of P30,000 would seriously deplete its income and drive it to
bankruptcy. In Rizal Commercial Banking Corp. vs. Court of Appeals,[if !supportFootnotes][7][endif] the Court tempered the
penalty charges after taking into account the debtors pitiful financial condition.
Accordingly, we rule that the Court of Appeals did not commit any reversible error in the exercise of its discretion when it reduced
the award of penalty damages from P5,000 to P1,000 for each day of delay.
WHEREFORE, petition is hereby DENIED. The decision of the Court of Appeals reducing the amount of penalty damages against
private respondent is AFFIRMED.
SO ORDERED.

G.R. No. 147349

February 13, 2004

MANILA INTERNATIONAL AIRPORT AUTHORITY (MIAA), petitioner

vs.
ALA INDUSTRIES CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
Foreseeable difficulties that occur during the Christmas season and cause a delay do not constitute a fortuitous event. The
difficulties in processing claims during that period are not "acts of God" that would excuse noncompliance with judicially approved
obligations.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the February 28, 2001 Decision2 of the Court of
Appeals (CA) in CA-GR CV No. 59518. The dispositive part of the Decision reads:
"WHEREFORE, the appealed final order is hereby REVERSED. The Court a quo is ordered to issue a Writ of Execution directing
the branch sheriff to enforce [Respondent] ALA Industries unpaid claim against [Petitioner] Manila International Airport Authority
(MIAA) in the total amount of P7,171,835.53."3
The Facts
The facts of the case are narrated by the CA as follows:
"[Petitioner] MIAA conducted a public bidding for a contract involving the structural repair and waterproofing of the International
Passenger Terminal (IPT) and International Container Terminal (ICT) buildings of the Ninoy Aquino International Airport (NAIA).
Out of eleven bidders, [Respondent] ALA submitted the second lowest and most advantageous bid. The contract was awarded to
[respondent] in the amount of P32,000,000.00 when it agreed to reduce the price from P36,000.00.4 On June 28, 1993, the
contract was executed providing, inter alia, the following terms:
ARTICLE I
SCOPE OF WORK
1.1 The CONTRACTOR shall furnish all materials, labor, tools, plans, equipment and other services and [perform] all operations
necessary to complete the structural repair and waterproofing of IPT and ICT buildings, all in accordance with the plans and
specifications and subject to the terms and conditions of the Bid Documents. The CONTRACTOR shall likewise be responsible for
the removal, hauling, disposal of materials used in the work area including cleaning thereof during and after completion of the
work.
1.2 The CONTRACTOR guarantees and warrants the availability, quality and genuineness of all the materials it will supply, deliver
and use in the construction.
1.3 The CONTRACTOR warrants further that all works stipulated in the Contract shall be done in good and acceptable condition
and to make good at the CONTRACTORs expense any imperfections or defects which the MIAA or its representative may
discover during the progress of the work within one (1) year from and after acceptance in writing of the said work by the MIAA, as
provided in the General Conditions and Specifications.
xxx

xxx

xxx

ARTICLE IV
CONTRACT PRICE/MANNER OF PAYMENT
4.1 In consideration of the full, satisfactory and faithful performance by the CONTRACTOR of all its undertakings and obligations
defined in and provided for under this agreement, the MIAA agrees to pay the CONTRACTOR the total amount of PESOS:
THIRTY TWO MILLION [AND] 00/100 (P32,000,000.00) Philippine Currency, payable as follows:
4.1.1 Initial payment shall be made upon submission of work accomplishment of not less than 15%;
4.1.2 Subsequent payments shall be for work accomplished as measured, verified and approved by MIAA. Such progress billings
shall indicate actual work accomplishments and shall be subject to the approval of MIAA, which approval shall not be
unreasonably withheld.
4.1.3 Progress billings shall be paid by the MIAA periodically but not more than once a month within 30 calendar days from receipt
hereof.
"The contract contains escalation clauses and price adjustments. [Respondent] made the necessary repairs and waterproofing.
After submission of its progress billings to [petitioner], [respondent] received partial payments. Progress billing No. 6 remained
unpaid despite repeated demands by [respondent].
"On June 30, 1994, [petitioner] unilaterally rescinded the contract on the ground that [respondent] failed to complete the project
within the agreed completion date. On September 16, 1994, [petitioner] advised [respondent] of a committee formed to determine
the extent of the work done which was given until September 30, 1994 to submit its findings. Just the same, [respondent] was not
fully paid.
"On October 20, 1994, [respondent] objected to the rescission made by [petitioner] and reiterated its claims. As of the filing of the
complaint for sum of money and damages on July 18, 1995, [respondent] was seeking to recover from [petitioner] P10,376,017.00
as the latters outstanding obligation and P1,642,112.84 due from the first to [the] fifth progress billings.
"With the filing of [respondents] sur-rejoinder to [petitioners] rejoinder, the trial Court directed the parties to proceed to arbitration
on July 16, 1996. The Court a quos ruling is based on Article XXVII of the contract that provides for arbitration.
"Both parties executed a compromise agreement, assisted by their counsels, and jointly filed in court a motion for judgment based
on compromise agreement.
RTC Disposition
"On November 4, 1997, the Court a quo rendered judgment approving the compromise agreement. The pertinent portions of the
compromise read as follows:
1. As full and complete payment of its claims against [petitioner] arising from their waterproofing contract subject of this case,
[respondent] accepts [petitioner]s offer of payment in the amount of FIVE MILLION NINE HUNDRED FORTY SIX THOUSAND
TWO HUNDRED NINETY FOUR AND 31/100 (P5,946,294.31).
2. [Petitioner] shall pay [respondent] said amount of FIVE MILLION NINE HUNDRED FORTY SIX THOUSAND TWO HUNDRED
NINETY FOUR AND 31/100 (P5,946,294.31) within a period of thirty (30) days from receipt of a copy of the Order of the Court
approving this Compromise Agreement.
3. Failure of the [petitioner] to pay said amount to [respondent] within the period above stipulated shall entitle the [respondent] to
a writ of execution from this Honorable Court to enforce all its claims5 pleaded in the Complaint.
4. In consideration of the Implementation of this Compromise Agreement, [respondent] agrees to waive all its claims against the
[petitioner] as pleaded in the Complaint, and [petitioner] also agrees to waive all its claims, rights and interests pleaded in the
answer, and all such other claims that it has or may have in connection with, related to or arising from the Waterproofing Contract
subject of this case with [respondent].
Finding the aforesaid COMPROMISE AGREEMENT not to be contrary to law, moral[s], good customs, public order, and public
policy, the Court hereby approves the same and renders judgment in conformity with the terms and conditions of the said
COMPROMISE AGREEMENT, enjoining the parties to comply with the provisions thereof strictly and in good faith without
pronouncement as to costs.
SO ORDERED.
"For [petitioners] failure to pay within the period above stipulated, [respondent] filed a motion for execution to enforce its claim in
the total amount of P13,118,129.84. [Petitioner] filed a comment and attributed the delays to its being a government agency. In its
effort to render [respondents] motion for execution moot and academic, [petitioner] paid [respondent] P5,946,294.31 on February
2, 1998.
"On February 16, 1998, the trial court denied [respondents] motion for execution. It also denied the motion for reconsideration,
ruling as follows:
The delay in complying with the Compromise Agreement having been satisfactorily explained by the Office of the Government
Counsel, the Motion for Reconsideration of the order denying [respondents] Motion for Execution is denied.
"SO ORDERED."6
Ruling of the Court of Appeals
Reversing the trial court, the CA ordered it to issue a writ of execution to enforce respondents claim to the extent of petitioners
remaining balance. The appellate court ratiocinated that a judgment rendered in accordance with a compromise agreement was
immediately executory, and that a delay of almost two months was not substantial compliance therewith.
Hence this Petition.7

Issues
Petitioner raises the following issues for our consideration:
"I.
Whether or not the slight delay of petitioner in complying with its obligation under the Compromise Agreement is a valid ground for
the enforcement of private respondents claim under the Complaint.
"II.
Whether or not the delay of petitioner in complying with its obligation under the Compromise Agreement is justified under the
principle that no person shall be responsible for those events which could not be foreseen, or which though foreseen, were
inevitable.
"III.
Whether or not private respondent is estopped from enforcing its claim under the Complaint considering that it already enjoyed the
benefits of the Compromise Agreement."8
The foregoing may be summed up in one issue: Whether there was a fortuitous event that excused petitioner from complying with
the terms and conditions of the judicially approved Compromise Agreement.
The Courts Ruling
The Petition has no merit.
Sole Issue:
Delay in Payment by Reason of a Fortuitous Event
A compromise agreement is a contract whereby the parties make reciprocal concessions to resolve their differences,9 thus
avoiding litigation10 or putting an end to one that has already commenced.11 Generally favored in law,12 such agreement is a
bilateral act or transaction that is binding on the contracting parties and is expressly acknowledged by the Civil Code as a juridical
agreement between them.13 Provided it is not contrary to law, morals, good customs, public order or public policy,14 it is
immediately executory.15
Judicial Compromise
Final and Executory
In a long line of cases, we have consistently held that "x x x a compromise once approved by final orders of the court has the
force of res judicata16 between the parties and should not be disturbed except for vices of consent or forgery. Hence, a decision
on a compromise agreement is final and executory x x x."17 Such agreement has the force of law18 and is conclusive between
the parties.19 It transcends its identity as a mere contract binding only upon the parties thereto, as it becomes a judgment that is
subject to execution in accordance with the Rules.20 Judges therefore have the ministerial and mandatory duty to implement and
enforce it.21
To be valid, a compromise agreement is merely required by law, first, to be based on real claims; second, to be actually agreed
upon in good faith.22 Both conditions are present in this case. The claims of the parties are valid, and the agreement done without
any fraud or vice of consent.
Without a doubt, each of the parties herein entered into Compromise Agreement freely and voluntarily. When they carefully
negotiated the terms and provisions thereof, they were adequately assisted by their respective counsels -- petitioner, no less than
by the Office of the Government Corporate Counsel (OGCC).23 Each party agreed to something that neither might have actually
wanted, except for the peace that would be brought by the avoidance of a protracted litigation. Hence, the Agreement must govern
their relations.
The Christmas Season
Not a Fortuitous Event
The failure to pay on the date stipulated was clearly a violation of the Agreement. Within thirty days from receipt of the judicial
Order approving it -- on December 20, 1997 -- payment should have been made, but was not. Thus, nonfulfillment of the terms of
the compromise justified execution.24 It is the height of absurdity for petitioner to attribute to a fortuitous event its delayed
payment. Petitioners explanation is clearly "a gratuitous assertion that borders on callousness."25 The Christmas season cannot
be cited as an act of God that would excuse a delay in the processing of claims by a government entity that is subject to routine
accounting and auditing rules.
A fortuitous event is one that cannot be foreseen or, though foreseen, is inevitable.26 It has the following characteristics:
"x x x (a) [T]he cause of the unforeseen and unexpected occurrence, or the failure of the debtor to comply with his obligations,
must be independent of human will; (b) 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; (c) the occurrence must be such as to render it impossible for the debtor to fulfill his
obligation in a normal manner; and (d) the obligor must be free from any participation in the aggravation of the injury resulting to
the creditor."27
None of these elements appears in this case.
First, processing claims against the government and subjecting these to the usual accounting and auditing procedures are
certainly not only foreseeable and expectable, but also dependent upon the human will. Liquidation and payment resulting
therefrom can be deliberately delayed or speeded up.
Second, the Christmas season is not a caso fortuito, but a regularly occurring event. It is in fact foreseeable, and its occurrence
has absolutely nothing to do with the processing of claims.

Further, in order to claim exemption from liability by reason of a fortuitous event, such event should be the sole and proximate
cause of the injury to or the loss or destruction of the object of the contract28 or compromise, which was the payment to be made
by petitioner. Certainly, this payment was not lost or destroyed, but merely delayed, thus causing injury to respondent. Granting
arguendo such loss or destruction, the Christmas season could not have been the sole and proximate cause thereof.
Third, the occurrence of the Christmas season did not at all render impossible the normal fulfillment of the obligation of petitioner;
otherwise, few claims would ever be paid during this period. It ought to have taken appropriate measures to ensure that a delay
would be avoided. When it entered into the Agreement, it knew fully well that the 30-day period for it to pay its obligation would
end during the Christmas season. Thus, it cannot now be allowed to renege on its commitment.
Fourth, petitioner cannot argue that it is free from any participation in the delay. It should have laid out on the compromise table
the problems that would be caused by a deadline falling during the Christmas season. Furthermore, it should have explained to
respondent that government accounts would be examined carefully and thoroughly to the last detail, in strict compliance29 with
accounting and auditing rules issued by and pursuant to the constitutional mandate of the Commission on Audit.30
Indeed, the liquidation of government obligations involves a long process beginning with the preparation of disbursement
vouchers; followed by the processing of requests for allotment as supported by vouchers, job orders and requisitions; and ending
with the issuance of the corresponding checks.31 Without first securing the necessary certification as to the availability of funds
and allotment against which expenditures may be properly charged,32 no funds shall be disbursed; and no expenditures
chargeable against any authorized allotments shall be incurred or authorized by agency heads.
Moreover, it is important to note that under government accounting principles, "no contract involving the expenditure of public
funds shall be made until there is an appropriation therefor, the unexpended balance of which, free of other obligations, is
sufficient to cover the proposed expenditure."33 In the present case, there was already an antecedent appropriation for the
contract when petitioner entered into it. Obviously, prior planning had not taken into account the liquidation process in the conduct
of the compromise.
The sheer neglect shown by petitioner in failing to consider these matters aggravated the resulting injury suffered by respondent.
The former cannot be allowed to hide now behind its government cloak.
Fortuitous Event
Negated by Negligence
The act-of-God doctrine requires all human agencies to be excluded from creating the cause of the mischief.34 Such doctrine
cannot be invoked to protect a person who has failed to take steps to forestall the possible adverse consequences of loss35 or
injury. Since the delay in payment in the present case was partly a result of human participation -- whether from active intervention
or neglect -- the whole occurrence was humanized and was therefore outside the ambit of a caso fortuito.
Furthermore, none of the requisites we have earlier mentioned are present in this case, a fact that clearly prevents petitioner from
being excused from liability.36 Under the rules of evidence, the burden of proving that a loss is due to a caso fortuito rests upon
the party invoking it.37 This responsibility, it failed to discharge.
Verily, an assiduous scrutiny of the records convinces us that it was negligent,38 and that it thereby incurred a delay in the
performance of its contractual obligation under the judicial compromise. It thus created an undue risk or injury to respondent by
failing to exercise that reasonable degree of care, precaution or vigilance that the circumstances justly demanded,39 and that an
ordinarily prudent person would have done.40
Court Without Power to Alter a Judicial Compromise
"The principle of autonomy of contracts must be respected."41 The Compromise Agreement was a contract perfected by mere
consent;42 hence, it should have been respected. Item 3 thereof provided that failure of petitioner to pay within the stipulated
period would entitle respondent to a writ of execution to enforce all the claims that had been pleaded by the latter in the
Complaint. This provision must be upheld, because the Agreement supplanted the Complaint itself. Although judicial approval was
not required for the perfection of that Agreement once it was granted, it could not and must not be disturbed except for vices of
consent or forgery.43
No such infirmity can be found in the subject Compromise Agreement. Its terms are clear and leave no doubt as to their intention.
Thus, the literal meaning of its stipulations must control.44 It "must be strictly interpreted and x x x understood as including only
matters specifically determined therein or which, by necessary inference from its wording, must be deemed included."45
The lower court was without power to relieve petitioner from an obligation it had voluntarily assumed, simply because the
Agreement later turned out to be unwise, disastrous or foolish.46 It had no authority to impose upon the parties a judgment
different from or against the terms and conditions of their Compromise Agreement.47 It could not alter a contract by construction
or make a new one for the parties; "its duty is confined to the interpretation of the one which they have made for themselves
without regard to its wisdom or folly as the court cannot supply material stipulations or read into the contract words which it does
not contain."48 It could not even set aside its judgment without declaring in an incidental hearing that the Agreement was vitiated
by any of the grounds enumerated in Article 2038 of the Civil Code.49 Above all, neither the Agreement nor the courts approval of
it was ever questioned or assailed by the parties.
Basic is the rule that if a party fails or refuses to abide by a compromise agreement, the other may either enforce it or regard it as
rescinded and insist upon the original demand.50 For failure of petitioner to abide by the judicial compromise, respondent chose to
enforce it. The latters course of action was in accordance with the very stipulations in the Agreement that the lower court could
not change.51
Respondent is thus entitled to a writ of execution for the total amount contained in the Compromise Agreement. The Court cannot
reduce it. The partial payment made by petitioner does not at all contravene Article 1229 of the Civil Code,52 which is applicable
only to contracts that are the subjects of litigation, not to final and executory judgments.53
Estoppel Inapplicable
Petitioners attempt to put respondent in estoppel must be struck down. "In estoppel, a person, who by his act or conduct has

induced another to act in a particular manner, is barred from adopting an inconsistent position, attitude or course of conduct that
thereby causes loss or injury to another."54 No such inconsistency is present here. From the very start, respondent was already
asking the courts to enforce all its claims, pursuant to the Agreement. It has not shown any act or conduct that would leads us to
believe that by accepting petitioners partial payment, it has dropped all claims to which it is entitled.
Certainly, an obligation may be extinguished by payment,55 but this rule applies when the creditor "receives and acknowledges
full payment"56 from the debtor. Respondent has neither acknowledged full payment nor led petitioner to believe that it has. Lack
of reservation or protest does not ipso facto constitute a waiver of claims. Because estoppel should be applied with caution, the
action that gives rise to it must be deliberate and unequivocal.57
In the present case, respondent continued to pursue the execution of its total demand of P13,118,129.84, even after receiving
P5,946,294.31 from petitioner. This continued pursuit signified the formers intent not to waive its total claim. Hence, it cannot be
considered estopped from enforcing such claim.
The appellate court was correct in strictly following the Agreement by deducting the amount received by respondent from the
latters total claim. Besides, "questions raised on appeal must be within the issues framed by the parties and, consequently, issues
not raised in the trial court cannot be raised for the first time on appeal."58 Any assertion of equity must finally be struck down
"when dilatory schemes exist."59
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. 149004

April 14, 2004

RESTITUTA M. IMPERIAL, petitioner,

vs.
ALEX A. JAUCIAN, respondent.
DECISION
PANGANIBAN, J.:
Iniquitous and unconscionable stipulations on interest rates, penalties and attorneys fees are contrary to morals. Consequently,
courts are granted authority to reduce them equitably. If reasonably exercised, such authority shall not be disturbed by appellate
courts.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the July 19, 2000 Decision2 and the June 14,
2001 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 43635. The decretal portion of the Decision is as follows:
"WHEREFORE, premises considered, the appealed Decision of the Regional Trial Court, 5th Judicial Region, Branch 21, Naga
City, dated August 31, 1993, in Civil Case No. 89-1911 for Sum of Money, is hereby AFFIRMED in toto."4
The assailed Resolution denied petitioners Motion for Reconsideration.
The dispositive portion of the August 31, 1993 Decision, promulgated by the Regional Trial Court (RTC) of Naga City (Branch 21)
and affirmed by the CA, reads as follows:
"Wherefore, Judgment is hereby rendered declaring Section I, Central Bank Circular No. 905, series of 1982 to be of no force and
legal effect, it having been promulgated by the Monetary Board of the Central Bank of the Philippines with grave abuse of
discretion amounting to excess of jurisdiction; declaring that the rate of interest, penalty, and charges for attorneys fees agreed
upon between the parties are unconscionable, iniquitous, and in violation of Act No. 2655, otherwise known as the Usury Law, as
amended; and ordering Defendant to pay Plaintiff the amount of FOUR HUNDRED SEVENTY-EIGHT THOUSAND, ONE
HUNDRED NINETY-FOUR and 54/100 (P478,194.54) PESOS, Philippine currency, with regular and compensatory interests
thereon at the rate of twenty-eight (28%) per centum per annum, computed from August 31, 1993 until full payment of the said
amount, and in addition, an amount equivalent to ten (10%) per centum of the total amount due and payable, for attorneys fees,
without pronouncement as to costs."5
The Facts
The CA summarized the facts of the case in this wise:
"The present controversy arose from a case for collection of money, filed by Alex A. Jaucian against Restituta Imperial, on October
26, 1989. The complaint alleges, inter alia, that defendant obtained from plaintiff six (6) separate loans for which the former
executed in favor of the latter six (6) separate promissory notes and issued several checks as guarantee for payment. When the
said loans became overdue and unpaid, especially when the defendants checks were dishonored, plaintiff made repeated oral
and written demands for payment.
"Specifically, the six (6) separate loans obtained by defendant from plaintiff on various dates are as follows:
(a) November 13, 1987

P 50,000.00

(b) December 28, 1987

40,000.00

(c) January 6, 1988

30,000.00

(d) January 11, 1988

50,000.00

(e) January 12, 1988

50,000.00

(f) January 13, 1988

100,000.00

P320,000.00
"The loans were covered by six (6) separate promissory notes executed by defendant. The face value of each promissory notes is
bigger [than] the amount released to defendant because said face value already include[d] the interest from date of note to date of
maturity. Said promissory notes, which indicate the interest of 16% per month, date of issue, due date, the corresponding
guarantee checks issued by defendant, penalties and attorneys fees, are the following:
1. Exhibit D for loan of P40,000.00 on December 28, 1987, with face value of P65,000.00;
2. Exhibit E for loan of P50,000.00 on January 11, 1988, with face value of P82,000.00;
3. Exhibit F for loan of P50,000.00 on January 12, 1988, with face value of P82,000.00;
4. Exhibit G for loan of P100,000.00 on January 13, 1988, with face value of P164,000.00;
5. Exhibit H This particular promissory note covers the second renewal of the original loan of P50,000.00 on November 13,
1987, which was renewed for the first time on March 16, 1988 after certain payments, and which was renewed finally for the
second time on January 4, 1988 also after certain payments, with a face value of P56,240.00;
6. Exhibit I This particular promissory note covers the second renewal of the original loan of P30,000.00 on January 6, 1988,
which was renewed for the first time on June 4, 1988 after certain payments, and which was finally renewed for the second time
on August 6, 1988, also after certain payments, with [a] face value of P12,760.00;
"The particulars about the postdated checks, i.e., number, amount, date, etc., are indicated in each of the promissory notes. Thus,
for Exhibit D, four (4) PB checks were issued; for Exhibit E four (4) checks; for Exhibit F four (4) checks; for Exhibit G four (4)
checks; for Exhibit H one (1) check; for Exhibit I one (1) check;
"The arrangement between plaintiff and defendant regarding these guarantee checks was that each time a check matures the
defendant would exchange it with cash.
"Although, admittedly, defendant made several payments, the same were not enough and she always defaulted whenever her
loans mature[d]. As of August 16, 1991, the total unpaid amount, including accrued interest, penalties and attorneys fees, [was]
P2,807,784.20.
"On the other hand, defendant claims that she was extended loans by the plaintiff on several occasions, i.e., from November 13,
1987 to January 13, 1988, in the total sum of P320,000.00 at the rate of sixteen percent (16%) per month. The notes mature[d]
every four (4) months with unearned interest compounding every four (4) months if the loan [was] not fully paid. The loan releases
[were] as follows:
(a) November 13, 1987

P 50,000.00

(b) December 28, 1987

40,000.00

(c) January 6, 1988

30,000.00

(d) January 11, 1988

50,000.00

(e) January 12, 1988

50,000.00

(f) January 13, 1988

100,000.00

P320,000.00
"The loan on November 13, 1987 and January 6, 1988 ha[d] been fully paid including the usurious interests of 16% per month,
this is the reason why these were not included in the complaint.
"Defendant alleges that all the above amounts were released respectively by checks drawn by the plaintiff, and the latter must
produce these checks as these were returned to him being the drawer if only to serve the truth. The above amount are the real
amount released to the defendant but the plaintiff by masterful machinations made it appear that the total amount released was
P462,600.00. Because in his computation he made it appear that the true amounts released was not the original amount, since it
include[d] the unconscionable interest for four months.
"Further, defendant claims that as of January 25, 1989, the total payments made by defendants [were] as follows:
a. Paid releases on November 13, 1987 of P50,000.00 and
January 6, 1988 of P30,000.00 these two items were not
included in the complaint affirming the fact that these
P 80,000.00
were paid
b. Exhibit 26 Receipt

231,000.00

c. Exhibit 8-25 Receipt

65,300.00

d. Exhibit 27 Receipt

65,000.00

P441,780.00
Less:
Excess Payment

320,000.00

P121,780.00
"Defendant contends that from all perspectives the above excess payment of P121,780.00 is more than the interest that could be
legally charged, and in fact as of January 25, 1989, the total releases have been fully paid.
"On 31 August 1993, the trial court rendered the assailed decision."6
Ruling of the Court of Appeals
On appeal, the CA held that without judicial inquiry, it was improper for the RTC to rule on the constitutionality of Section 1, Central
Bank Circular No. 905, Series of 1982. Nonetheless, the appellate court affirmed the judgment of the trial court, holding that the
latters clear and detailed computation of petitioners outstanding obligation to respondent was convincing and satisfactory.
Hence, this Petition.7
The Issues
Petitioner raises the following arguments for our consideration:
"1. That the petitioner has fully paid her obligations even before filing of this case.
"2. That the charging of interest of twenty-eight (28%) per centum per annum without any writing is illegal.
"3. That charging of excessive attorneys fees is hemorrhagic.
"4. Charging of excessive penalties per month is in the guise of hidden interest.
"5. The non-inclusion of the husband of the petitioner at the time the case was filed should have dismissed this case."8
The Courts Ruling
The Petition has no merit.
First Issue:
Computation of Outstanding Obligation
Arguing that she had already fully paid the loan before the filing of the case, petitioner alleges that the two lower courts
misappreciated the facts when they ruled that she still had an outstanding balance of P208,430.
This issue involves a question of fact. Such question exists when a doubt or difference arises as to the truth or the falsehood of
alleged facts; and when there is need for a calibration of the evidence, considering mainly the credibility of witnesses and the
existence and the relevancy of specific surrounding circumstances, their relation to each other and to the whole, and the
probabilities of the situation.9
It is a well-entrenched rule that pure questions of fact may not be the subject of an appeal by certiorari under Rule 45 of the Rules
of Court, as this remedy is generally confined to questions of law.10 The jurisdiction of this Court over cases brought to it is limited
to the review and rectification of errors of law allegedly committed by the lower court. As a rule, the latters factual findings, when
adopted and affirmed by the CA, are final and conclusive and may not be reviewed on appeal.11
Generally, this Court is not required to analyze and weigh all over again the evidence already considered in the proceedings
below.12 In the present case, we find no compelling reason to overturn the factual findings of the RTC -- that the total amount of
the loans extended to petitioner was P320,000, and that she paid a total of only P116,540 on twenty-nine dates. These findings
are supported by a preponderance of evidence. Moreover, the amount of the outstanding obligation has been meticulously
computed by the trial court and affirmed by the CA. Petitioner has not given us sufficient reason why her cause falls under any of
the exceptions to this rule on the finality of factual findings.
Second Issue:
Rate of Interest
The trial court, as affirmed by the CA, reduced the interest rate from 16 percent to 1.167 percent per month or 14 percent per
annum; and the stipulated penalty charge, from 5 percent to 1.167 percent per month or 14 percent per annum.
Petitioner alleges that absent any written stipulation between the parties, the lower courts should have imposed the rate of 12
percent per annum only.
The records show that there was a written agreement between the parties for the payment of interest on the subject loans at the
rate of 16 percent per month. As decreed by the lower courts, this rate must be equitably reduced for being iniquitous,
unconscionable and exorbitant. "While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the
said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead
to a hemorrhaging of their assets."13
In Medel v. CA,14 the Court found the stipulated interest rate of 5.5 percent per month, or 66 percent per annum, unconscionable.
In the present case, the rate is even more iniquitous and unconscionable, as it amounts to 192 percent per annum. When the
agreed rate is iniquitous or unconscionable, it is considered "contrary to morals, if not against the law. [Such] stipulation is void."15
Since the stipulation on the interest rate is void, it is as if there were no express contract thereon.16 Hence, courts may reduce the
interest rate as reason and equity demand. We find no justification to reverse or modify the rate imposed by the two lower courts.
Third and Fourth Issue:
Penalties and Attorneys Fees
Article 1229 of the Civil Code states thus:
"The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the

debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable."
In exercising this power to determine what is iniquitous and unconscionable, courts must consider the circumstances of each
case.17 What may be iniquitous and unconscionable in one may be totally just and equitable in another. In the present case,
iniquitous and unconscionable was the parties stipulated penalty charge of 5 percent per month or 60 percent per annum, in
addition to regular interests and attorneys fees. Also, there was partial performance by petitioner when she remitted P116,540 as
partial payment of her principal obligation of P320,000. Under the circumstances, the trial court was justified in reducing the
stipulated penalty charge to the more equitable rate of 14 percent per annum.
The Promissory Note carried a stipulation for attorneys fees of 25 percent of the principal amount and accrued interests. Strictly
speaking, this covenant on attorneys fees is different from that mentioned in and regulated by the Rules of Court.18 "Rather, the
attorneys fees here are in the nature of liquidated damages and the stipulation therefor is aptly called a penal clause."19 So long
as the stipulation does not contravene the law, morals, public order or public policy, it is binding upon the obligor. It is the litigant,
not the counsel, who is the judgment creditor entitled to enforce the judgment by execution.
Nevertheless, it appears that petitioners failure to comply fully with her obligation was not motivated by ill will or malice. The
twenty-nine partial payments she made were a manifestation of her good faith. Again, Article 1229 of the Civil Code specifically
empowers the judge to reduce the civil penalty equitably, when the principal obligation has been partly or irregularly complied with.
Upon this premise, we hold that the RTCs reduction of attorneys fees -- from 25 percent to 10 percent of the total amount due
and payable -- is reasonable.
Fifth Issue:
Non-Inclusion of Petitioners Husband
Petitioner contends that the case against her should have been dismissed, because her husband was not included in the
proceedings before the RTC.
We are not persuaded. The husbands non-joinder does not warrant dismissal, as it is merely a formal requirement that may be
cured by amendment.20 Since petitioner alleges that her husband has already passed away, such an amendment has thus
become moot.
WHEREFORE, the Petition is DENIED. Costs against petitioner.
SO ORDERED.