Eastern Shipping vs CA

GR No. 97412, 12 July 1994

234 SCRA 78

from the time the claim is made judicially or EJ but when such certainty
cannot be so reasonably established at the time the demand is made,
the interest shll begin to run only from the date of judgment of the
court is made.

FACTS
Two fiber drums were shipped owned by Eastern Shipping from
Japan. The shipment as insured with a marine policy. Upon arrival in
Manila unto the custody of metro Port Service, which excepted to one
drum, said to be in bad order and which damage was unknown the
Mercantile Insurance Company. Allied Brokerage Corporation received
the shipment from Metro, one drum opened and without seal. Allied
delivered the shipment to the consignees warehouse. The latter
excepted to one drum which contained spillages while the rest of the
contents was adulterated/fake. As consequence of the loss, the
insurance company paid the consignee, so that it became subrogated
to all the rights of action of consignee against the defendants Eastern
Shipping, Metro Port and Allied Brokerage. The insurance company filed
before the trial court. The trial court ruled in favor of plaintiff an
ordered defendants to pay the former with present legal interest of
12% per annum from the date of the filing of the complaint. On appeal
by defendants, the appellate court denied the same and affirmed in
toto the decision of the trial court.

(3) The Court held that it should be computed from the decision
rendered by the court a quo.

ISSUE
(1) Whether the applicable rate of legal interest is 12% or 6%.
(2) Whether the payment of legal interest on the award for loss or
damage is to be computed from the time the complaint is filed from the
date the decision appealed from is rendered.
HELD
(1)
The Court held that the legal interest is 6% computed from
the decision of the court a quo. When an obligation, not constituting a
loan or forbearance of money, is breached, an interest on the amount
of damaes awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest shall be adjudged on
unliquidated claims or damages except when or until the demand can
be established with reasonable certainty.
When the judgment of the court awarding a sum of money becomes
final and executor, the rate of legal interest shall be 12% per annum
from such finality until satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance of money.
The interest due shall be 12% PA to be computed fro default, J or EJD.
(2)
From the date the judgment is made. Where the demand is
established with reasonable certainty, the interest shall begin to run

Dario Nacar filed a labor case against Gallery Frames and its owner
Felipe Bordey, Jr. Nacar alleged that he was dismissed without cause by
Gallery Frames on January 24, 1997. On October 15, 1998, the Labor

Arbiter (LA) found Gallery Frames guilty of illegal dismissal hence the
Arbiter awarded Nacar P158,919.92 in damages consisting of
backwages and separation pay.
Gallery Frames appealed all the way to the Supreme Court (SC). The
Supreme Court affirmed the decision of the Labor Arbiter and the
decision became final on May 27, 2002.
After the finality of the SC decision, Nacar filed a motion before the LA
for recomputation as he alleged that his backwages should be
computed from the time of his illegal dismissal (January 24, 1997) until
the finality of the SC decision (May 27, 2002) with interest. The LA
denied the motion as he ruled that the reckoning point of the
computation should only be from the time Nacar was illegally
dismissed (January 24, 1997) until the decision of the LA (October 15,
1998). The LA reasoned that the said date should be the reckoning
point because Nacar did not appeal hence as to him, that decision
became final and executory.
ISSUE: Whether or not the Labor Arbiter is correct.
HELD: No. There are two parts of a decision when it comes to illegal
dismissal cases (referring to cases where the dismissed employee wins,
or loses but wins on appeal). The first part is the ruling that the
employee was illegally dismissed. This is immediately final even if the
employer appeals but will be reversed if employer wins on appeal.
The second part is the ruling on the award of backwages and/or
separation pay. For backwages, it will be computed from the date of
illegal dismissal until the date of the decision of the Labor Arbiter. But if
the employer appeals, then the end date shall be extended until the
day when the appellate courts decision shall become final. Hence, as a
consequence, the liability of the employer, if he loses on appeal, will
increase this is just but a risk that the employer cannot avoid when it
continued to seek recourses against the Labor Arbiters decision. This is
also in accordance with Article 279 of the Labor Code.
Anent the issue of award of interest in the form of actual or
compensatory damages, the Supreme Court ruled that the old case of
Eastern Shipping Lines vs CA is already modified by the promulgation
of the Bangko Sentral ng Pilipinas Monetary Board Resolution No. 796
which lowered the legal rate of interest from 12% to 6%. Specifically,
the rules on interest are now as follows:
1. Monetary Obligations ex. Loans:
a. If stipulated in writing:
a.1. shall run from date of judicial demand (filing of the case)
a.2. rate of interest shall be that amount stipulated
b. If not stipulated in writing
b.1. shall run from date of default (either failure to pay upon extrajudicial demand or upon judicial demand whichever is appropriate and
subject to the provisions of Article 1169 of the Civil Code)
b.2. rate of interest shall be 6% per annum
2. Non-Monetary Obligations (such as the case at bar)
a. If already liquidated, rate of interest shall be 6% per annum,

demandable from date of judicial or extra-judicial

demand (Art.
1169, Civil Code)
b. If unliquidated, no interest
Except: When later on established with certainty. Interest shall still be
6% per annum demandable from the date of judgment because such
on such date, it is already deemed that the amount of damages is
already ascertained.
3. Compounded Interest
This is applicable to both monetary and non-monetary obligations
6% per annum computed against award of damages (interest)
granted by the court. To be computed from the date when the courts
decision becomes final and executory until the award is fully satisfied
by the losing party.
4. The 6% per annum rate of legal interest shall be applied
prospectively:
Final and executory judgments awarding damages prior to July 1,
2013 shall apply the 12% rate;

Final and executory judgments awarding damages on or after

July 1, 2013 shall apply the 12% rate for unpaid obligations
until June 30, 2013; unpaid obligations with respect to said
judgments on or after July 1, 2013 shall

still incur the 6% rate.

G.R. No. 104235 November 18, 1993

SPOUSES CESAR & SUTHIRA ZALAMEA and LIANA ZALAMEA,
petitioners,
vs.
HONORABLE COURT OF APPEALS and TRANSWORLD AIRLINES,

INC., respondents.
Sycip, Salazar, Hernandez, Gatmaitan for petitioners.
Quisumbing, Torres & Evangelista for private-respondent.
NOCON, J.:
Disgruntled over TransWorld Airlines, Inc.'s refusal to accommodate
them in TWA Flight 007 departing from New York to Los Angeles on
June 6, 1984 despite possession of confirmed tickets, petitioners filed
an action for damages before the Regional Trial Court of Makati, Metro
Manila, Branch 145. Advocating petitioner's position, the trial court
categorically ruled that respondent TransWorld Airlines (TWA) breached
its contract of carriage with petitioners and that said breach was
"characterized by bad faith." On appeal, however, the appellate court
found that while there was a breach of contract on respondent TWA's
part, there was neither fraud nor bad faith because under the Code of
Federal Regulations by the Civil Aeronautics Board of the United States
of America it is allowed to overbook flights.
The factual backdrop of the case is as follows:
Petitioners-spouses Cesar C. Zalamea and Suthira Zalamea, and their
daughter, Liana Zalamea, purchased three (3) airline tickets from the
Manila agent of respondent TransWorld Airlines, Inc. for a flight to New
York to Los Angeles on June 6, 1984. The tickets of petitioners-spouses
were purchased at a discount of 75% while that of their daughter was a
full fare ticket. All three tickets represented confirmed reservations.
While in New York, on June 4, 1984, petitioners received notice of the
reconfirmation of their reservations for said flight. On the appointed
date, however, petitioners checked in at 10:00 a.m., an hour earlier
than the scheduled flight at 11:00 a.m. but were placed on the wait-list
because the number of passengers who had checked in before them
had already taken all the seats available on the flight. Liana Zalamea
appeared as the No. 13 on the wait-list while the two other Zalameas
were listed as "No. 34, showing a party of two." Out of the 42 names on
the wait list, the first 22 names were eventually allowed to board the
flight to Los Angeles, including petitioner Cesar Zalamea. The two
others, on the other hand, at No. 34, being ranked lower than 22, were
not able to fly. As it were, those holding full-fare tickets were given first
priority among the wait-listed passengers. Mr. Zalamea, who was
holding the full-fare ticket of his daughter, was allowed to board the
plane; while his wife and daughter, who presented the discounted
tickets were denied boarding. According to Mr. Zalamea, it was only
later when he discovered the he was holding his daughter's full-fare
ticket.
Even in the next TWA flight to Los Angeles Mrs. Zalamea and her
daughter, could not be accommodated because it was also fully
booked. Thus, they were constrained to book in another flight and
purchased two tickets from American Airlines at a cost of Nine Hundred
Eighteen ($918.00) Dollars.
Upon their arrival in the Philippines, petitioners filed an action for

damages based on breach of contract of air carriage before the

Regional Trial Court of Makati, Metro Manila, Branch 145. As aforesaid,
the lower court ruled in favor of petitioners in its decision 1 dated
January 9, 1989 the dispositive portion of which states as follows:
WHEREFORE, judgment is hereby rendered ordering the defendant to
pay plaintiffs the following amounts:
(1) US $918.00, or its peso equivalent at the time of payment
representing the price of the tickets bought by Suthira and Liana
Zalamea from American Airlines, to enable them to fly to Los Angeles
from New York City;
(2) US $159.49, or its peso equivalent at the time of payment,
representing the price of Suthira Zalamea's ticket for TWA Flight 007;
(3) Eight Thousand Nine Hundred Thirty-Four Pesos and Fifty Centavos
(P8,934.50, Philippine Currency, representing the price of Liana
Zalamea's ticket for TWA Flight 007,
(4) Two Hundred Fifty Thousand Pesos (P250,000.00), Philippine
Currency, as moral damages for all the plaintiffs'
(5) One Hundred Thousand Pesos (P100,000.00), Philippine Currency,
as and for attorney's fees; and
(6) The costs of suit.
SO ORDERED. 2
On appeal, the respondent Court of Appeals held that moral damages
are recoverable in a damage suit predicated upon a breach of contract
of carriage only where there is fraud or bad faith. Since it is a matter of
record that overbooking of flights is a common and accepted practice
of airlines in the United States and is specifically allowed under the
Code of Federal Regulations by the Civil Aeronautics Board, no fraud
nor bad faith could be imputed on respondent TransWorld Airlines.
Moreover, while respondent TWA was remiss in not informing
petitioners that the flight was overbooked and that even a person with
a confirmed reservation may be denied accommodation on an
overbooked flight, nevertheless it ruled that such omission or
negligence cannot under the circumstances be considered to be so
gross as to amount to bad faith.
Finally, it also held that there was no bad faith in placing petitioners in
the wait-list along with forty-eight (48) other passengers where full-fare
first class tickets were given priority over discounted tickets.
The dispositive portion of the decision of respondent Court of Appeals 3
dated October 25, 1991 states as follows:
WHEREFORE, in view of all the foregoing, the decision under review is
hereby MODIFIED in that the award of moral and exemplary damages
to the plaintiffs is eliminated, and the defendant-appellant is hereby
ordered to pay the plaintiff the following amounts:
(1) US$159.49, or its peso equivalent at the time of the payment,
representing the price of Suthira Zalamea's ticket for TWA Flight 007;
(2) US$159.49, or its peso equivalent at the time of the payment,
representing the price of Cesar Zalamea's ticket for TWA Flight 007;
(3) P50,000.00 as and for attorney's fees.

(4) The costs of suit.

SO ORDERED. 4
Not satisfied with the decision, petitioners raised the case on petition
for review on certiorari and alleged the following errors committed by
the respondent Court of Appeals, to wit:
I.
. . . IN HOLDING THAT THERE WAS NO FRAUD OR BAD FAITH ON THE
PART OF RESPONDENT TWA BECAUSE IT HAS A RIGHT TO OVERBOOK
FLIGHTS.
II.
. . . IN ELIMINATING THE AWARD OF EXEMPLARY DAMAGES.
III.
. . . IN NOT ORDERING THE REFUND OF LIANA ZALAMEA'S TWA TICKET
AND PAYMENT FOR THE AMERICAN AIRLINES
TICKETS. 5
That there was fraud or bad faith on the part of respondent airline
when it did not allow petitioners to board their flight for Los Angeles in
spite of confirmed tickets cannot be disputed. The U.S. law or
regulation allegedly authorizing overbooking has never been proved.
Foreign laws do not prove themselves nor can the courts take judicial
notice of them. Like any other fact, they must be alleged and proved. 6
Written law may be evidenced by an official publication thereof or by a
copy attested by the officer having the legal custody of the record, or
by his deputy, and accompanied with a certificate that such officer has
custody. The certificate may be made by a secretary of an embassy or
legation, consul general, consul, vice-consul, or consular agent or by
any officer in the foreign service of the Philippines stationed in the
foreign country in which the record is kept, and authenticated by the
seal of his office. 7
Respondent TWA relied solely on the statement of Ms. Gwendolyn
Lather, its customer service agent, in her deposition dated January 27,
1986 that the Code of Federal Regulations of the Civil Aeronautics
Board allows overbooking. Aside from said statement, no official
publication of said code was presented as evidence. Thus, respondent
court's finding that overbooking is specifically allowed by the US Code
of Federal Regulations has no basis in fact.
Even if the claimed U.S. Code of Federal Regulations does exist, the
same is not applicable to the case at bar in accordance with the
principle of lex loci contractus which require that the law of the place
where the airline ticket was issued should be applied by the court
where the passengers are residents and nationals of the forum and the
ticket is issued in such State by the defendant airline. 8 Since the
tickets were sold and issued in the Philippines, the applicable law in
this case would be Philippine law.
Existing jurisprudence explicitly states that overbooking amounts to
bad faith, entitling the passengers concerned to an award of moral
damages. In Alitalia Airways v. Court of Appeals, 9 where passengers
with confirmed bookings were refused carriage on the last minute, this

Court held that when an airline issues a ticket to a passenger

confirmed on a particular flight, on a certain date, a contract of
carriage arises, and the passenger has every right to expect that he
would fly on that flight and on that date. If he does not, then the carrier
opens itself to a suit for breach of contract of carriage. Where an airline
had deliberately overbooked, it took the risk of having to deprive some
passengers of their seats in case all of them would show up for the
check in. For the indignity and inconvenience of being refused a
confirmed seat on the last minute, said passenger is entitled to an
award of moral damages.
Similarly, in Korean Airlines Co., Ltd. v. Court of Appeals, 10 where
private respondent was not allowed to board the plane because her
seat had already been given to another passenger even before the
allowable period for passengers to check in had lapsed despite the fact
that she had a confirmed ticket and she had arrived on time, this Court
held that petitioner airline acted in bad faith in violating private
respondent's rights under their contract of carriage and is therefore
liable for the injuries she has sustained as a result.
In fact, existing jurisprudence abounds with rulings where the breach of
contract of carriage amounts to bad faith. In Pan American World
Airways, Inc. v. Intermediate Appellate Court, 11 where a would-be
passenger had the necessary ticket, baggage claim and clearance from
immigration all clearly and unmistakably showing that she was, in fact,
included in the passenger manifest of said flight, and yet was denied
accommodation in said flight, this Court did not hesitate to affirm the
lower court's finding awarding her damages.
A contract to transport passengers is quite different in kind and degree
from any other contractual relation. So ruled this Court in Zulueta v.
Pan American World Airways, Inc. 12 This is so, for a contract of carriage
generates a relation attended with public duty a duty to provide
public service and convenience to its passengers which must be
paramount to self-interest or enrichment. Thus, it was also held that
the switch of planes from Lockheed 1011 to a smaller Boeing 707
because there were only 138 confirmed economy class passengers who
could very well be accommodated in the smaller planes, thereby
sacrificing the comfort of its first class passengers for the sake of
economy, amounts to bad faith. Such inattention and lack of care for
the interest of its passengers who are entitled to its utmost
consideration entitles the passenger to an award of moral damages. 13
Even on the assumption that overbooking is allowed, respondent TWA
is still guilty of bad faith in not informing its passengers beforehand
that it could breach the contract of carriage even if they have
confirmed tickets if there was overbooking. Respondent TWA should
have incorporated stipulations on overbooking on the tickets issued or
to properly inform its passengers about these policies so that the latter
would be prepared for such eventuality or would have the choice to
ride with another airline.
Respondent TWA contends that Exhibit I, the detached flight coupon

upon which were written the name of the passenger and the points of
origin and destination, contained such a notice. An examination of
Exhibit I does not bear this out. At any rate, said exhibit was not
offered for the purpose of showing the existence of a notice of
overbooking but to show that Exhibit I was used for flight 007 in first
class of June 11, 1984 from New York to Los Angeles.
Moreover, respondent TWA was also guilty of not informing its
passengers of its alleged policy of giving less priority to discounted
tickets. While the petitioners had checked in at the same time, and
held confirmed tickets, yet, only one of them was allowed to board the
plane ten minutes before departure time because the full-fare ticket he
was holding was given priority over discounted tickets. The other two
petitioners were left behind.
It is respondent TWA's position that the practice of overbooking and the
airline system of boarding priorities are reasonable policies, which
when implemented do not amount to bad faith. But the issue raised in
this case is not the reasonableness of said policies but whether or not
said policies were incorporated or deemed written on petitioners'
contracts of carriage. Respondent TWA failed to show that there are
provisions to that effect. Neither did it present any argument of
substance to show that petitioners were duly apprised of the
overbooked condition of the flight or that there is a hierarchy of
boarding priorities in booking passengers. It is evident that petitioners
had the right to rely upon the assurance of respondent TWA, thru its
agent in Manila, then in New York, that their tickets represented
confirmed seats without any qualification. The failure of respondent
TWA to so inform them when it could easily have done so thereby
enabling respondent to hold on to them as passengers up to the last
minute amounts to bad faith. Evidently, respondent TWA placed its selfinterest over the rights of petitioners under their contracts of carriage.
Such conscious disregard of petitioners' rights makes respondent TWA
liable for moral damages. To deter breach of contracts by respondent
TWA in similar fashion in the future, we adjudge respondent TWA liable
for exemplary damages, as well.
Petitioners also assail the respondent court's decision not to require the
refund of Liana Zalamea's ticket because the ticket was used by her
father. On this score, we uphold the respondent court. Petitioners had
not shown with certainty that the act of respondent TWA in allowing Mr.
Zalamea to use the ticket of her daughter was due to inadvertence or
deliberate act. Petitioners had also failed to establish that they did not
accede to said agreement. The logical conclusion, therefore, is that
both petitioners and respondent TWA agreed, albeit impliedly, to the
course of action taken.
The respondent court erred, however, in not ordering the refund of the
American Airlines tickets purchased and used by petitioners Suthira
and Liana. The evidence shows that petitioners Suthira and Liana were
constrained to take the American Airlines flight to Los Angeles not
because they "opted not to use their TWA tickets on another TWA

flight" but because respondent TWA could not accommodate them

either on the next TWA flight which was also fully booked. 14 The
purchase of the American Airlines tickets by petitioners Suthira and
Liana was the consequence of respondent TWA's unjustifiable breach of
its contracts of carriage with petitioners. In accordance with Article
2201, New Civil Code, respondent TWA should, therefore, be
responsible for all damages which may be reasonably attributed to the
non-performance of its obligation. In the previously cited case of
Alitalia Airways v. Court of Appeals, 15 this Court explicitly held that a
passenger is entitled to be reimbursed for the cost of the tickets he had
to buy for a flight to another airline. Thus, instead of simply being
refunded for the cost of the unused TWA tickets, petitioners should be
awarded the actual cost of their flight from New York to Los Angeles. On
this score, we differ from the trial court's ruling which ordered not only
the reimbursement of the American Airlines tickets but also the refund
of the unused TWA tickets. To require both prestations would have
enabled petitioners to fly from New York to Los Angeles without any
fare being paid.
The award to petitioners of attorney's fees is also justified under Article
2208(2) of the Civil Code which allows recovery when the defendant's
act or omission has compelled plaintiff to litigate or to incur expenses
to protect his interest. However, the award for moral damages and
exemplary damages by the trial court is excessive in the light of the
fact that only Suthira and Liana Zalamea were actually "bumped off."
An award of P50,000.00 moral damages and another P50,000.00
exemplary damages would suffice under the circumstances obtaining
in the instant case.
WHEREFORE, the petition is hereby GRANTED and the decision of the
respondent Court of Appeals is hereby MODIFIED to the extent of
adjudging respondent TransWorld Airlines to pay damages to
petitioners in the following amounts, to wit:
(1) US$918.00 or its peso equivalent at the time of payment
representing the price of the tickets bought by Suthira and Liana
Zalamea from American Airlines, to enable them to fly to Los Angeles
from New York City;
(2) P50,000.00 as moral damages;
(3) P50,000.00 as exemplary damages;
(4) P50,000.00 as attorney's fees; and
(5) Costs of suit.
SO ORDERED.
Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.

SPOUSES ZALAMEA and LIANA ZALAMEA vs. CA and TRANSWORLD

AIRLINES, INC.G.R. No. 104235 November 18, 1993
FACTS:

Petitioners-spouses Cesar Zalamea and Suthira Zalamea, and their

daughter, Liana purchased 3 airline tickets from the Manila agent of
respondent TransWorld Airlines, Inc. for a flight to New York to Los
Angeles. The tickets of petitioners-spouses were purchased at a
discount of 75% while that of their daughter was a full fare ticket. All
three tickets represented confirmed reservations.
On the appointed date, however, petitioners checked in but were
placed on the wait-list because the number of passengers who had
checked in before them had already taken all the seats available on the
flight. Out of the 42 names on the wait list, the first 22 names were
eventually allowed to board the flight to Los Angeles, including
petitioner Cesar Zalamea. The two others were not able to fly. Those
holding full-fare tickets were given first priority among the wait-listed
passengers. Mr. Zalamea, who was holding the full-fare ticket of his
daughter, was allowed to board the plane; while his wife and daughter,
who presented the discounted tickets were denied boarding.
Even in the next TWA flight to Los Angeles Mrs. Zalamea and her
daughter, could not be accommodated because it was also fully
booked. Thus, they were constrained to book in another flight and
purchased two tickets from American Airlines. Upon their arrival in the
Philippines, petitioners filed an action for damages based on breach of
contract of air carriage before the RTC- Makati. The lower court ruled in
favor of petitioners . CA held that moral damages are recoverable in a
damage suit predicated upon a breach of contract of carriage only
where there is fraud or bad faith. Since it is a matter of record that
overbooking of flights is a common and accepted practice of airlines in
the United States and is specifically allowed under the Code of Federal
Regulations by the Civil Aeronautics Board, no fraud nor bad faith could
be imputed on respondent TransWorld Airlines. Thus petitioners raised
the case on petition for review on certiorari.
ISSUE;
WON TWZ acted with bad faith and would entitle Zalameas to Moral
and Examplary damages.
RULING:
The U.S. law or regulation allegedly authorizing overbooking has never
been proved. Foreign laws do not prove themselves nor can the courts
take judicial notice of them. Like any other fact, they must be alleged
and proved. Written law may be evidenced by an official publication
thereof or by a copy attested by the officer having the legal custody of
the record, or by his deputy, and accompanied with a certificate that
such officer has custody. The certificate may be made by a secretary of
an embassy or legation, consul general, consul, vice-consul, or consular
agent or by any officer in the foreign service of the Philippines
stationed in the foreign country in which the record is kept, and
authenticated by the seal of his office.
Respondent TWA relied solely on the statement of Ms. Gwendolyn
Lather, its customer service agent, in her deposition that the Code of
Federal Regulations of the Civil Aeronautics Board allows overbooking.

No official publication of said code was presented as evidence. Thus,

respondent courts finding that overbooking is specifically allowed by
the US Code of Federal Regulations has no basis in fact.
Even if the claimed U.S. Code of Federal Regulations does exist, the
same is not applicable to the case at bar in accordance with the
principle of lex loci contractus which require that the law of the place
where the airline ticket was issued should be applied by the court
where the passengers are residents and nationals of the forum and the
ticket is issued in such State by the defendant airline. Since the tickets
were sold and issued in the Philippines, the applicable law in this case
would be Philippine law.
Existing jurisprudence explicitly states that overbooking amounts to
bad faith, entitling the passengers concerned to an award of moral
damages. In Alitalia Airways v. Court of Appeals, where passengers
with confirmed bookings were refused carriage on the last minute, this
Court held that when an airline issues a ticket to a passenger
confirmed on a particular flight, on a certain date, a contract of
carriage arises, and the passenger has every right to expect that he
would fly on that flight and on that date. If he does not, then the carrier
opens itself to a suit for breach of contract of carriage. Where an airline
had deliberately overbooked, it took the risk of having to deprive some
passengers of their seats in case all of them would show up for the
check in. For the indignity and inconvenience of being refused a
confirmed seat on the last minute, said passenger is entitled to an
award of moral damages.
For a contract of carriage generates a relation attended with public
duty a duty to provide public service and convenience to its
passengers which must be paramount to self-interest or enrichment.
Respondent TWA is still guilty of bad faith in not informing its
passengers beforehand that it could breach the contract of carriage
even if they have confirmed tickets if there was overbooking.
Respondent TWA should have incorporated stipulations on overbooking
on the tickets issued or to properly inform its passengers about these
policies so that the latter would be prepared for such eventuality or
would have the choice to ride with another airline.
Respondent TWA was also guilty of not informing its passengers of its
alleged policy of giving less priority to discounted tickets. Neither did it
present any argument of substance to show that petitioners were duly
apprised of the overbooked condition of the flight or that there is a
hierarchy of boarding priorities in booking passengers. It is evident that
petitioners had the right to rely upon the assurance of respondent TWA,
thru its agent in Manila, then in New York, that their tickets represented
confirmed seats without any qualification. The failure of respondent
TWA to so inform them when it could easily have done so thereby
enabling respondent to hold on to them as passengers up to the last
minute amounts to bad faith. Evidently, respondent TWA placed its selfinterest over the rights of petitioners under their contracts of carriage.
Such conscious disregard of petitioners rights makes respondent TWA

liable for moral damages. To deter breach of contracts by respondent

TWA in similar fashion in the future, we adjudge respondent TWA liable
for exemplary damages, as well.
In the case of Alitalia Airways v. Court of Appeals, this Court explicitly
held that a passenger is entitled to be reimbursed for the cost of the
tickets he had to buy for a flight to another airline. Thus, instead of
simply being refunded for the cost of the unused TWA tickets,
petitioners should be awarded the actual cost of their flight from New
York to Los Angeles.
WHEREFORE, the petition is hereby GRANTED and the decision of the
respondent Court of Appeals is hereby MODIFIED

G.R. No. 82146 January 22, 1990

EULOGIO OCCENA, petitioner,
vs.
HON. PEDRO M. ICAMINA, Presiding Judge, Branch X of the
Regional Trial Court Sixth Judicial Region, San Jose, Antique;
THE PEOPLE OF THE PHILIPPINES, represented by the
Honorable Provincial Fiscal of Antique; and CRISTINA
VEGAFRIA, respondents.

Comelec Legal Assistance Office for petitioner.

Comelec Legal Assistance Officer for private respondent.
FERNAN, C.J.:
On May 31, 1979, herein petitioner Eulogio Occena instituted before
the Second Municipal Circuit Trial Court of Sibalom, San Remigio
Belison, Province of Antique, Criminal Case No. 1717, a criminal
complaint for Grave Oral Defamation against herein private respondent
Cristina Vegafria for allegedly openly, publicly and maliciously uttering
the following insulting words and statements: "Gago ikaw nga
Barangay Captain, montisco, traidor, malugus, Hudas," which, freely
translated, mean: "You are a foolish Barangay Captain, ignoramus,
traitor, tyrant, Judas" and other words and statements of similar import
which caused great and irreparable damage and injury to his person
and honor.
Private respondent as accused therein entered a plea of not guilty. Trial
thereafter ensued, at which petitioner, without reserving his right to file
a separate civil action for damages actively intervened thru a private
prosecutor.
After trial, private respondent was convicted of the offense of Slight
Oral Defamation and was sentenced to pay a fine of Fifty Pesos
(P50.00) with subsidiary imprisonment in case of insolvency and to pay
the costs. No damages were awarded to petitioner in view of the trial
court's opinion that "the facts and circumstances of the case as
adduced by the evidence do not warrant the awarding of moral
damages." 1
Disagreeing, petitioner sought relief from the Regional Trial Court,
which in a decision dated March 16, 1987 disposed of petitioner's
appeal as follows:
IN VIEW OF ALL THE FOREGOING, the civil aspect of the lower court's
decision of April 20, 1981 subject of this appeal, for lack of merit, is
hereby DENIED.
After the decision shall have become final, remand the records of this
case to the court of origin, Second Municipal Circuit Trial Court of
Sibalom, San Remigio-Belison, Antique, for the execution of its decision
on the criminal aspect.
SO ORDERED. 2
Petitioner is now before us by way of a petition for review on certiorari
seeking to annul the RTC decision for being contrary to Article 100 of
the Revised Penal Code providing that every person criminally liable for
a felony is also civilly liable, and Article 2219 of the New Civil Code
providing that moral damages may be recovered in libel, slander or any
other form of defamation. He submits that public respondent RTC erred
in relying on the cases of Roa vs. de la Cruz, 107 Phil. 10 and Tan vs.
Standard Vacuum Oil Co., et al., 91 Phil. 672 cited therein. He
differentiates said cases from the case at bar by saying that in the case
of Roa, the decision of the trial court had become final before Maria C.
Roa instituted a civil action for damages; whereas in the instant case,

the decision of the trial court has not yet become final by reason of the
timely appeal interposed by him and no civil action for damages has
been instituted by petitioner against private respondent for the same
cause. Tan, on the other hand, contemplates of two actions, one
criminal and one civil, and the prosecution of the criminal case had
resulted in the acquittal of the accused, which is not the situation here
where the civil aspect was impliedly instituted with the criminal action
in accordance with Section 1, Rule 111, of the Rules of Court.
Private respondent for her part argues that the decision of the trial
court carries with it the final adjudication of her civil liability. Since
petitioner chose to actively intervene in the criminal action without
reserving his right to file a separate civil action for damages, he
assumed the risk that in the event he failed to recover damages he
cannot appeal from the decision of the lower court.
We find merit in the petition.
The issues confronting us in the instant petition is whether or not the
decision of the Second Municipal Trial Court of Sibalom, San-RemigioBelison, Province of Antique constitutes the final adjudication on the
merits of private respondent's civil liability; and whether or not
petitioner is entitled to an award of damages arising from the remarks
uttered by private respondent and found by the trial court to be
defamatory.
The decision of the Municipal Circuit Trial Court as affirmed by the
Regional Trial Court in Criminal Case No. 1709 cannot be considered as
a final adjudication on the civil liability of private respondent simply
because said decision has not yet become final due to the timely
appeal filed by petitioner with respect to the civil liability of the
accused in said case. It was only the unappealed criminal aspect of the
case which has become final.
In the case of People vs. Coloma, 105 Phil. 1287, we categorically
stated that from a judgment convicting the accused, two (2) appeals
may, accordingly, be taken. The accused may seek a review of said
judgment, as regards both civil and criminal actions; while the
complainant may appeal with respect only to the civil action, either
because the lower court has refused to award damages or because the
award made is unsatisfactory to him. The right of either to appeal or
not to appeal in the event of conviction of the accused is not
dependent upon the other. Thus, private respondent's theory that in
actively intervening in the criminal action, petitioner waived his right to
appeal from the decision that may be rendered therein, is incorrect and
inaccurate. Petitioner may, as he did, appeal from the decision on the
civil aspect which is deemed instituted with the criminal action and
such appeal, timely taken, prevents the decision on the civil liability
from attaining finality.
We tackle the second issue by determining the basis of civil liability
arising from crime. Civil obligations arising from criminal offenses are
governed by Article 100 of the Revised Penal Code which provides that
"(E)very person criminally liable for a felony is also civilly liable," in

relation to Article 2177 of the Civil Code on quasi-delict, the provisions

for independent civil actions in the Chapter on Human Relations and
the provisions regulating damages, also found in the Civil Code.
Underlying the legal principle that a person who is criminally liable is
also civilly liable is the view that from the standpoint of its effects, a
crime has dual character: (1) as an offense against the state because
of the disturbance of the social order; and (2) as an offense against the
private person injured by the crime unless it involves the crime of
treason, rebellion, espionage, contempt and others wherein no civil
liability arises on the part of the offender either because there are no
damages to be compensated or there is no private person injured by
the crime. 3 In the ultimate analysis, what gives rise to the civil liability
is really the obligation of everyone to repair or to make whole the
damage caused to another by reason of his act or omission, whether
done intentional or negligently and whether or not punishable by law. 4
In the case at bar, private respondent was found guilty of slight oral
defamation and sentenced to a fine of P50.00 with subsidiary
imprisonment in case of insolvency, but no civil liability arising from the
felonious act of the accused was adjudged. This is erroneous. As a
general rule, a person who is found to be criminally liable offends two
(2) entities: the state or society in which he lives and the individual
member of the society or private person who was injured or damaged
by the punishable act or omission. The offense of which private
respondent was found guilty is not one of those felonies where no civil
liability results because either there is no offended party or no damage
was caused to a private person. There is here an offended party, whose
main contention precisely is that he suffered damages in view of the
defamatory words and statements uttered by private respondent, in
the amount of Ten Thousand Pesos (P10,000.00) as moral damages and
the further sum of Ten Thousand Pesos (P10,000) as exemplary
damages.
Article 2219, par. (7) of the Civil Code allows the recovery of moral
damages in case of libel, slander or any other form of defamation This
provision of law establishes the right of an offended party in a case for
oral defamation to recover from the guilty party damages for injury to
his feelings and reputation. The offended party is likewise allowed to
recover punitive or exemplary damages.
It must be remembered that every defamatory imputation is presumed
to be malicious, even if it be true, if no good intention and justifiable
motive for making it is shown. And malice may be inferred from the
style and tone of publication 5 subject to certain exceptions which are
not present in the case at bar.
Calling petitioner who was a barangay captain an ignoramus, traitor,
tyrant and Judas is clearly an imputation of defects in petitioner's
character sufficient to cause him embarrassment and social
humiliation. Petitioner testified to the feelings of shame and anguish he
suffered as a result of the incident complained of. 6 It is patently error
for the trial court to overlook this vital piece of evidence and to

conclude that the "facts and circumstances of the case as adduced by

the evidence do not warrant the awarding of moral damages." Having
misapprehended the facts, the trial court's findings with respect
thereto is not conclusive upon us.
From the evidence presented, we rule that for the injury to his feelings
and reputation, being a barangay captain, petitioner is entitled to
moral damages in the sum of P5,000.00 and a further sum of
P5,000.00 as exemplary damages.
WHEREFORE, the petition is hereby GRANTED. The decision of the
Regional Trial Court is hereby MODIFIED and private respondent is
ordered to pay petitioner the amount of P5,000.00 as moral damages
and another P5,000.00 as exemplary damages. Costs against private
respondent.
SO ORDERED.
Gutierrez, Jr., Feliciano, Bidin and Corts JJ., concur

EULOGIO OCCENA vs. HON. PEDRO M. ICAMINA, PEOPLE OF THE

PHILS., & VEGAFRIA
G.R. NO. 82146 January 22, 1990. (Kinds of Damages)
PETITION for review on certiorari seeking to annul the decision of the
RTC
FERNAN, C.J.:
Facts: Petitioner Occena filed a criminal complaint for Grave Oral
Defamation against private respondent Cristina Vegrafia for allegedly

openly, publicly and maliciously uttering the following insulting words

and statements: "Gago ikaw nga Barangay Captain, montisco, traidor,
malugus, Hudas." Private respondent as accused therein entered a plea
of not guilty. After trial, private respondent was convicted of the offense
of Slight Oral Defamation and was sentenced to pay a fine of Fifty
Pesos (P50.00) with subsidiary imprisonment in case of insolvency and
to pay the costs. No damages were awarded to petitioner.
Issue: WON petitioner is entitled to an award of damages arising from
the remarks uttered by private respondent and found by the trial court
to be defamatory.
Ruling: PETITION GRANTED. The decision of the RTC is MODIFIED and
private respondent is ordered to pay petitioner the amount of
P5,000.00 as moral damages and another P5,000.00 as exemplary
damages.
What gives rise to the civil liability is really the obligation of everyone
to repair or to make whole the damage caused to another by reason of
his act or omission, whether done intentionally or negligently and
whether or not punishable by law. The offense of which private
respondent was found guilty is not one of those felonies where no civil
liability results because either there is no offended party or no damage
was caused to a private person.
Article 2219, par. (7) of the Civil Code allows the recovery of moral
damages in case of libel, slander or any other form of defamation. This
provision of law establishes the right of an offended party in a case for
oral defamation to recover from the guilty party damages for injury to
his feelings and reputation. The offended party is likewise allowed to
recover punitive or exemplary damages.
*DANQ

G.R. No. 106664 March 8, 1995

PHILIPPINE AIR LINES, petitioner,
vs.
FLORANTE A. MIANO, respondent.
PUNO, J.:
The petitioner questions the Decision of the Regional Trial Court of
Makati, Branch 148, dated July 29, 1992, 1 awarding private respondent
moral and exemplary damages and attorney's fees for want of legal
justification. We grant the petition.
The facts are uncontroverted.

On August 31, 1988, private respondent took petitioner's flight PR 722,

Mabuhay Class, bound for Frankfurt, Germany. He had an immediate
onward connecting flight via Lufthansa flight LH 1452 to Vienna,
Austria. At the Ninoy Aquino International Airport, he checked-in one
brown suitcase weighing twenty (20) kilograms 2 but did not declare a
higher valuation. He claimed that his suitcase contained money,
documents, one Nikkon camera with zoom lens, suits, sweaters, shirts,
pants, shoes, and other accessories. 3
Upon private respondent's arrival at Vienna via Lufthansa flight LH
1452, his checked-in baggage was missing. He reported the matter to
the Lufthansa authorities. After three (3) hours of waiting in vain, he
proceeded to Piestany, Czechoslovakia. Eleven (11) days after or on
September 11, 1988, his suitcase was delivered to him in his hotel in
Piestany, Czechoslovakia. He claimed that because of the delay in the
delivery of his suitcase, he was forced to borrow money to buy some
clothes, to pay $200.00 for the transportation of his baggage from
Vienna to Piestany, and lost his Nikkon camera. 4
In November 1988, private respondent wrote to petitioner a letter
demanding: (1) P10,000.00 cost of allegedly lost Nikkon camera; (2)
$200.00 for alleged cost of transporting luggage from Vienna to
Piestany; and (3) P100,000.00 as damages. In its reply, petitioner
informed private respondent that his letter was forwarded to its legal
department for investigation.
Private respondent felt his demand letter was left unheeded. He
instituted an action for Damages docketed as Civil Case No. 89-3496
before the Regional Trial Court of Makati.
Petitioner contested the complaint. It disclaimed any liability on the
ground that there was neither a report of mishandled baggage on flight
PR 722 nor a tracer telex received from its Vienna Station. It, however,
contended that if at all liable its obligation is limited by the Warsaw
Convention rate.
Petitioner filed a Third-Party Complaint against Lufthansa German
Airlines imputing the mishandling of private respondent's baggage, but
was dismissed for its failure to prosecute.
In its decision, the trial court observed that petitioner's actuation was
not attended by bad faith. Nevertheless, it awarded private respondent
damages and attorney's fees, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff
(private respondent) and against the defendant (petitioner), thereby
ordering the latter to pay the following:
(a) U.S. $200.00 as cost of transporting the suitcase from Vienna to
Czechoslovakia;
(b) P40,000.00 as moral damages;
(c) P20,000.00 as exemplary damages; and
(d) P15,000.00 as attorney's fees.
SO ORDERED. 5
Hence, this petition for review.
In breach of contract of carriage by air, moral damages are awarded

only if the defendant acted fraudulently or in bad faith. 6 Bad faith

means a breach of a known duty through same motive of interest or ill
will. 7
The trial court erred in awarding moral damages to private respondent.
The established facts evince that petitioner's late delivery of the
baggage for eleven (11) days was not motivated by ill will or bad faith.
In fact, it immediately coordinated with its Central Baggage Services to
trace private respondent's suitcase and succeeded in finding it. At the
hearing, petitioner's Manager for Administration of Airport Services
Department Miguel Ebio testified that their records disclosed that
Manila, the originating station, did not receive any tracer telex. 8 A
tracer telex, an airline lingo, is an action of any station that the airlines
operate from whom a passenger may complain or have not received
his baggage upon his arrival. 9 It was reasonable to presume that the
handling of the baggage was normal and regular. Upon inquiry from
their Frankfurt Station, it was however discovered that the interline tag
of private respondent's baggage was accidentally taken off. According
to Mr. Ebio, it was customary for destination stations to hold a tagless
baggage until properly identified. The tracer telex, which contained
information on the baggage, is matched with the tagless luggage for
identification. Without the tracer telex, the color and the type of
baggage are used as basis for the matching. Thus, the delay.
Worthy to stress, the trial court made an unequivocal conclusion that
petitioner did not act in bad faith or with malice, viz.:
xxx xxx xxx
Absent a finding as to the bad intention of defendant (petitioner) PAL,
this court finds it appropriate to apply the Warsaw Convention with
respect to the liability of Air Carriers. 10
xxx xxx xxx
The mere fact that defendant (petitioner) exerted effort to assist
plaintiff (private respondent) in his predicament as shown in
defendant's (petitioner's) letter to plaintiff (private respondent) (Exh.
"E") and likewise the letter from Mr. Miguel Ebio, Manager-Airport
Services Administration of defendant (petitioner) PAL to its Senior
Counsel-Litigation, Atty. Marceliano Calica (Exh. "3") which reveals the
fact that an investigation was conducted as to mishandled baggage,
coupled with the fact that said information were then relayed to
plaintiff (private respondent) as evidenced by a letter of defendant
(petitioner) to plaintiff (private respondent) (Exh. "4") does not warrant
a showing of malice on the part of defendant
( petitioner). 11
xxx xxx xxx
Under the circumstances obtaining, considering that defendant's
(petitioner's) actuation was not attendant with bad faith, the award of
moral damages in the amount of P40,000.00 is but just and fair. 12
Bad faith must be substantiated by evidence. In LBC vs. Court of
Appeals, 13 we ruled:
Bad faith under the law cannot be presumed; it must be established by

clear and convincing evidence. Again, the unbroken jurisprudence is

that in breach of contract cases where the defendant is not shown to
have acted fraudulently or in bad faith, liability for damages is limited
to the natural and probable consequences of the breach of the
obligation which the parties had foreseen or could reasonably have
foreseen. The damages, however, will not include liability far moral
damages. (Citations omitted)
We can neither sustain the award of exemplary damages. The
prerequisite for the award of exemplary damages in cases of contract
or quasi-contract 14 is that the defendant acted in wanton, fraudulent,
reckless, oppressive, or malevolent manner. 15 The undisputed facts do
not so warrant the characterization of the action of petitioner.
The award of attorney's fees must also be disallowed for lack of legal
leg to stand on. The fact that private respondent was compelled to
litigate and incur expenses to protect and enforce his claim did not
justify the award of attorney's fees. The general rule is that attorney's
fees cannot be recovered as part of damages because of the policy
that no premium should be placed on the right to litigate. 16 Petitioner
is willing to pay the just claim of $200.00 as a result of the delay in the
transportation of the luggage in accord with the Warsaw Convention.
Needless to say, the award of attorney's fees must be deleted where
the award of moral and exemplary damages are eliminated.
IN VIEW WHEREOF, the assailed Decision of July 29, 1992 is MODIFIED
deleting the award of moral and exemplary damages and attorney's
fees. No costs.
SO ORDERED.
Narvasa, C.J., Bidin, Regalado and Mendoza, JJ., concur.

PHILIPPINE AIR LINES vs. MIANO

241 SCRA 235 (Art. 1170)
Facts:
Private respondent Miano took petitioners flight PR 722, Mabuhay
Class, bound for Frankfurt, Germany. He had an immediate onward
connecting flight to Vienna, Austria. At the NAIA, he checked-in a
suitcase. He claimed that his suitcase contained money, documents,
one Nikkon camera with zoom lens, suits, sweaters, shirts, pants,
shoes, and other accessories.
Upon arrival at Vienna, his checked-in baggage was missing. He
reported the matter to the Lufthansa authorities. After three (3) hours
of waiting in vain, he proceeded to Piestany, Czechoslovakia. Eleven
days after, his suitcase was delivered to him in his hotel in Piestany,
Czechoslovakia. Because of the delay in the delivery of his suitcase, he
was forced to borrow money to buy some clothes, to pay $200.00 for
the transportation of his baggage from Vienna to Piestany, and lost his
Nikkon camera.
Private respondent is demanding: (1) P10,000.00 cost of allegedly lost

Nikkon camera; (2) $200.00 for alleged cost of transporting luggage

from Vienna to Piestany; and (3) P100,000.00 as damages.
Issue:
WON the delay was attended by bad faith? NO
WON the award of damages by the lower court was proper? NO
WON the award of attorneys fees by the lower court was proper? NO
Held:
The established facts evince that petitioners late delivery of the
baggage for eleven (11) days was not motivated by ill will or bad faith.
In fact, it immediately coordinated with its Central Baggage Services to
trace private respondents suitcase and succeeded in finding it. Upon
inquiry from their Frankfurt Station, it was however discovered that the
interline tag of private respondents baggage was accidentally taken
off. According to Mr.Ebio, it was customary for destination stations to
hold a tagless baggage until properly identified. The tracer telex, which
contained information on the baggage, is matched with the tag-less
luggage for identification. Without the tracer telex, the color and the
type of baggage are used as basis for the matching. Thus, the delay.
Bad faith under the law cannot be presumed; it must be established by
clear and convincing evidence. Again, the unbroken jurisprudence is
that in breach of contract cases where the defendant is not shown to
have acted fraudulently or in bad faith, liability for damages is limited
to the natural and probable consequences of the breach of the
obligation which the parties had foreseen or could reasonably have
foreseen.
The prerequisite for the award of exemplary damages in cases of
contract or quasi-contract is that the defendant acted in wanton,
fraudulent, reckless, oppressive, or malevolent manner. The undisputed
facts do not so warrant the characterization of the action of petitioner.
The fact that private respondent was compelled to litigate and incur
expenses to protect and enforce his claim did not justify the award of
attorneys fees. The general rule is that attorneys fees cannot be
recovered as part of damages because of the policy that no premium
should be placed on the right to litigate. Petitioner is willing to pay the
just claim of $200.00 as a result of the delay in the transportation of
the luggage in accord with the Warsaw Convention. Needless to say,
the award of attorneys fees must be deleted where the award of moral
and exemplary damages are eliminated.

G.R. No. L-45349 August 15, 1988

NEWTON JISON and SALVACION I. JOSUE petitioners,
vs.
COURT OF APPEALS and ROBERT 0. PHILLIPS & SONS, INC.,
respondents.
Ledesma, Saludo & Associates for petitioners.
Domicador L. Reyes and Magtanggol C. Gunigundo for respondents.
CORTES, J.:
The instant petition for review of the decision of the Court of Appeals
poses the issue of the validity of the rescission of a contract to sell a
subdivision lot due to the failure of the lot buyer to pay monthly
installments on their due dates and the forfeiture of the amounts
already paid.
The case is not one of first impression, and neither is it exceptional. On
the contrary, it unambiguous. the common plight of countless
subdivision lot buyers.
Petitioners, the spouses Newton and Salvacion Jison, entered into a
Contract to Sell with private respondent, Robert O. Phillips & Sons, Inc.,
whereby the latter agreed to sell to the former a lot at the Victoria
Valley Subdivision in Antipolo, Rizal for the agreed price of P55,000.00,

with interest at 8,1965 per annum, payable on an installment basis.

Pursuant to the contract, petitioners paid private respondents a down
payment of P11,000.00 on October 20, 1961 and from October 27,
1961; to May 8, 1965 a monthly installment of P533.85.
Thereafter, due to the failure of petitioners to build a house as provided
in the contract, the stipulated penalty of P5.00 per square meter was
imposed to the effect that the monthly amortization was increased to
P707.24.
On January 1, 1966, February 1, 1966 and March 1, 1966, petitioners
failed to pay the monthly installments due on said dates although
petitioners subsequently paid the amounts due and these were
accepted by private respondent.
Again on October 1, 1966, November 1, 1966, December 1, 1966 and
January 1, 1967, petitioners failed to pay. On January 11, 1967, private
respondent sent a letter (Exh. "3") to petitioners calling their attention
to the fact that their account was four months overdue. This letter was
followed up by another letter dated February 27, 1967 (Exh. "3") where
private respondent reminded petitioner of the automatic rescission
clause of the contract. Petitioners eventually paid on March 1, 1967.
Petitioners again failed to pay the monthly installments due on
February 1, 1967, March 1, 1967 and April 1, 1967. Thus, in a letter
dated April 6, 1967 (Exh. "D"), private respondent returned petitioners'
check and informed them that the contract was cancelled when on
April 1, 1987 petitioners failed to pay the monthly installment due,
thereby making their account delinquent for three months.
On April 19, 1967, petitioners tendered payment for all the installments
already due but the tender was refused. Thus, petitioners countered by
filing a complaint for specific performance with the Court of First
Instance of Rizal on May 4, 1967 and consigning the monthly
installments due with the court.
Following the hearing of the case, wherein the parties entered into a
stipulation of facts, the trial court on January 9, 1969 rendered
judgment in favor of private respondent, dismissing the complaint and
declaring the contract cancelled and all payments already made by
petitioner franchise. ordering petitioners to pay P1,000.00 as and for
attorney's fees; and declaring the consignation and tender of payment
made by petitioners as not amounting to payment of the corresponding
monthly installments.
Not satisfied with the decision of the trial court, petitioners appealed to
the Court of Appeals. Agreeing with the findings and conclusions of the
trial court, the Court of Appeals on November 4, 1976 affirmed the
former's decision.
Thus, the instant petition for review.
In assailing the decision of the Court of Appeals, petitioners attributed
the following errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT
PETITIONERS HAVE SUBSTANTIALLY, COMPLIED WITH THE TERMS OF

THEIR AGREEMENT WITH PRIVATE RESPONDENTS.

II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE
CONTRACT TO SELL MAY BE AUTOMATICALLY RESCINDED AND PRIVATE
RESPONDENT MAY UNILATERALLY RESCINDED SAID CONTRACT AND
REJECT THE CONSIGNATION OF PAYMENTS MADE BY PETITIONERS,
WHICH ACTIONS OF PRIVATE RESPONDENT ARE HIGHLY INIQUITOUS
AND UNCONSCIONABLE.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT
PRIVATE RESPONDENT'S ACT OF FORFEITING ALL PREVIOUS PAYMENTS
MADE BY PETITIONERS IS CONTRARY TO LAW, HIGHLY INIQUITOUS AND
UNCONSCIONABLE. [Petitioners' Brief, pp. 13-27.]
As stated at the outset, the principal issue in this case is the legality of
the rescission of the contract and the forfeiture of the payments
already made by petitioners.
To support the rescission and forfeiture private respondent falls back on
paragraph 3 of the contract which reads:
This contract shall be considered automatically rescinded and
cancelled and of no further force and effect, upon the failure of the
Vendee to pay when due Three (3) or more consecutive monthly
installments mentioned in Paragraph 2 of this Contract, or to comply
with any of the terms and conditions hereof, in which case the Vendor
shall have the right to resell the said parcel of land to any Vendee and
any amount derived from the sale on account hereof shall be forfeited
in favor of the Vendor as liquidated damages for the breach of the
Contract by the Vendee, the latter hereby renouncing and reconveying
absolutely and forever in favor of the Vendor all rights and claims to
and for all the amount paid by the Vendee on account of the Contract,
as well as to and for all compensation of any kind, hereby also agreeing
in this connection, to forthwith vacate the said property or properties
peacefully without further advise of any kind.
Since the contract was executed and cancelled prior to the effectivity
of Republic Act No. 65856, (the Realty Installment Buyers', Protection
Act) and Presidential Decree No. 957 (the Subdivision and
Condominium Buyers' Protective Decree), it becomes necessary to
resort to jurisprudence and the general provisions of law to resolve the
controversy.
The decision in the recent case of Palay, Inc. v. Clave [G.R. No. L-56076,
September 21, 1983, 124 SCRA 7,1969, factions the resolution of the
controversy. In deciding whether the rescission of the contract to sell a
subdivision lot after the lot buyer has failed to pay several installments
was valid, the Court said:
Well settled is the rule, as held in previous k.- [Torralba v. De los
Angeles, 96 SCRA 69, Luzon Brokerage Co., Inc. v. Maritime Building
Co., 43 SCRA 93 and 86 SCRA 305; Lopez v. Commissioner of Customs,
37 SCRA 327; U.P. v. De los Angeles, 35 SCRA 102; Ponce Enrile v. CA,
29 SCRA 504; Froilan v. Pan Oriental Shipping Co., 12 SCRA 276; Taylor

v. Uy Tieng Piao; 43 Phil. 896, that judicial action for the rescission of a
contract is not necessary where the contract provides that it may be
cancelled for violation of any of its terms and conditions. However,
even in the cited cases, there was at least a written notice sent to the
degeneration, informing him of the rescission. As stressed in University
of the Philippines v. Walfrido de los Angeles [35 SCRA 102] the act of a
party in treating a contract as cancelled should be made known to the
other....
xxx xxx xxx
In other words, resolution of reciprocal contracts may be made
extrajudicially unless successfully impugned in Court. If the debtor
impugns the declaration it shall be subject to judicial determination.
In this case, private respondent has denied that rescission is justified
and has resorted to judicial action. It is now for the Court to determine
whether resolution of the contract by petitioner was warranted.
We hold that resolution by petitioners of the contract was ineffective
and inoperative against private respondent for lack of notice of
resolution, as held in the U.P. v. Angeles case, supra.
xxx xxx xxx
The indispensability of notice of cancellation to the buyer was to be
later underscored in Republic Act No. 65856, entitled "An Act to Provide
Protection to Buyers of Real Estate on Installment Payments." which
took effect on September 14-15). when it specifically provided:
Sec. 3 (b) ... the actual cataract, of the contract shall take place 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.
There is no denying that in the instant case the resolution or rescission
of the Contract to Sell was valid. Neither can it be said that the
cancellation of the contract was ineffective for failure of private
respondents to give petitioners notice thereof as petitioners were
informed cancelled private respondent that the contract was cancelled
in the letter dated April 6, 1967 (Exh. "D"). As R.A. No. 65856, was not
yet effective, the notice of cancellation need not be by notarial act,
private respondent's letter being sufficient compliance with the legal
requirement.
The facts of 'fee instant case should be distinguished from those in the
Palay Inc. case, as such distinction will explain why the Court in said
case invalidated the resolution of the contract. In said case, the
subdivision developer, without informing the buyer of the cancellation
of the contract, resold the lot to another person. The lot buyer in said
case was only informed of the resolution of the contract some six years
later after the developer, rejected his request for authority to assign his
rights under the contract. Such a situation does not obtain illness: the
instant case. In fact, petitioners were informed of the cancellation of
their contract in April 1967, when private respondent wrote them the
letter dated April 6, 1967 (Exh. "D"), and within a month they were able
to file a complaint against Private respondent.

While the resolution of the contract and the forfeiture of the amounts
already paid are valid and binding upon petitioners, the Court is
convinced that the forfeiture of the amount of P5.00 although it
includes the accumulated fines for petitioners' failure to construct a
house as required by the contract, is clearly iniquitous considering that
the contract price is only P6,173.15 The forfeiture of fifty percent (50%)
of the amount already paid, or P3,283.75 appears to be a fair
settlement. In arriving at this amount the Court gives weight to the fact
that although petitioners have been delinquent in paying their
amortizations several times to the prejudice of private respondent, with
the cancellation of the contract the possession of the lot review.... to
private respondent who is free to resell it to another party. Also, had
R.A. No. 65856, been applicable to the instant case, the same
percentage of the amount already paid would have been forfeited
[Torralba 3(b).]
The Court's decision to reduce the amount forfeited finds support in the
Civil Code. As stated in paragraph 3 of the contract, in case the
contract is cancelled, the amounts already paid shall be forfeited in
favor of the vendor as liquidated damages. The Code provides that
liquidated damages, whether intended as an indemnity or a penalty,
shall be equitably reduced if they are iniquitous or unconscionable [Art.
2227.]
Further, in obligations with a penal clause, the judge shall equitably
reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor [Art. 1229; Hodges v. Javellana,
G.R. No. L-17247, April 28, 1962, 4 SCRA 1228]. In this connection, the
Court said:
It follows that, in any case wherein there has been a partial or irregular
compliance with the provisions in a contract for special indemnification
in the event of failure to comply with its terms, courts will rigidly apply
the doctrine of strict construction and against the enforcement in its
entirety of the industry.' where it is clear from the terms of the contract
that the amount or character of the indemnity is fixed without regard to
the probable damages which might be anticipated as a result of a
breach of the terms of the contract; or, in other words, where the
indemnity provided for is essentially a mere penalty having for its
principal object the enforcement of compliance with the corporations;
(Laureano v. Kilayco, 32 Phil. 194 (1943).
This principle was reiterated in Makati Development Corp. v. Empire
Insurance Co. [G.R. No. L-21780, June 30, 1967, 20 SCRA 557] where
the Court affirmed the judgment of the Court of First Instance reducing
the subdivision lot buyer's liability from the stipulated P12,000.00 to
Plaintiffs after finding that he had partially performed his obligation to
complete at least fifty percent (50%) of his house within two (2) years
from March 31, 1961, fifty percent (50%) of the house having been
completed by the end of April 1961.
WHEREFORE, the Decision of the Court of Appeals is hereby MODIFIED
as to the amount forfeited which is reduced to fifty percent (50%) of

the amount already paid or P23,656.32 and AFFIRMED as to all other

respects.
Private respondent is ordered to refund to petitioners the excess of
P23,656.32 within thirty (30) days from the date of finality of this

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