FIRST DIVISION

[G.R. No. 126083. July 12, 2006.]

ANTONIO R. CORTES (in his capacity as Administrator of the
estate of Claro S. Cortes), petitioner, vs. HON. COURT OF APPEALS
and VILLA ESPERANZA DEVELOPMENT CORPORATION,
respondents.

DECISION

YNARES-SANTIAGO, J :
p

The instant petition for review seeks the reversal of the June 13, 1996 Decision 1 of the
Court of Appeals in CA-G.R. CV No. 47856, setting aside the June 24, 1993 Decision 2
of the Regional Trial Court of Makati, Branch 138, which rescinded the contract of sale
entered into by petitioner Antonio Cortes (Cortes) and private respondent Villa Esperanza
Development Corporation (Corporation).
The antecedents show that for the purchase price of P3,700,000.00, the Corporation as
buyer, and Cortes as seller, entered into a contract of sale over the lots covered by
Transfer Certificate of Title (TCT) No. 31113-A, TCT No. 31913-A and TCT No. 32013A, located at Baclaran, Paraaque, Metro Manila. On various dates in 1983, the
Corporation advanced to Cortes the total sum of P1,213,000.00. Sometime in September
1983, the parties executed a deed of absolute sale containing the following terms: 3
1. Upon execution of this instrument, the Vendee shall pay unto the Vendor sum
of TWO MILLION AND TWO HUNDRED THOUSAND (P2,200,000.00)
PESOS, Philippine Currency, less all advances paid by the Vendee to the
Vendor in connection with the sale;
2. The balance of ONE MILLION AND FIVE HUNDRED THOUSAND
[P1,500,000.00] PESOS, Phil. Currency shall be payable within ONE (1) YEAR
from date of execution of this instrument, payment of which shall be secured by
an irrevocable standby letter of credit to be issued by any reputable local
banking institution acceptable to the Vendor.
xxx xxx xxx

4. All expense for the registration of this document with the Register of Deeds
concerned, including the transfer tax, shall be divided equally between the
Vendor and the Vendee. Payment of the capital gains shall be exclusively for
the account of the Vendor; 5% commission of Marcosa Sanchez to be deducted
upon signing of sale. 4

Said Deed was retained by Cortes for notarization.

On January 14, 1985, the Corporation filed the instant case 5 for specific performance
seeking to compel Cortes to deliver the TCTs and the original copy of the Deed of
Absolute Sale. According to the Corporation, despite its readiness and ability to pay the
purchase price, Cortes refused delivery of the sought documents. It thus prayed for the
award of damages, attorney's fees and litigation expenses arising from Cortes' refusal to
deliver the same documents.
CcTIDH

In his Answer with counterclaim, 6 Cortes claimed that the owner's duplicate copy of the
three TCTs were surrendered to the Corporation and it is the latter which refused to pay
in full the agreed down payment. He added that portion of the subject property is
occupied by his lessee who agreed to vacate the premises upon payment of disturbance
fee. However, due to the Corporation's failure to pay in full the sum of P2,200,000.00, he
in turn failed to fully pay the disturbance fee of the lessee who now refused to pay
monthly rentals. He thus prayed that the Corporation be ordered to pay the outstanding
balance plus interest and in the alternative, to cancel the sale and forfeit the
P1,213,000.00 partial down payment, with damages in either case.
On June 24, 1993, the trial court rendered a decision rescinding the sale and directed
Cortes to return to the Corporation the amount of P1,213,000.00, plus interest. It ruled
that pursuant to the contract of the parties, the Corporation should have fully paid the
amount of P2,200,000.00 upon the execution of the contract. It stressed that such is the
law between the parties because the Corporation failed to present evidence that there was
another agreement that modified the terms of payment as stated in the contract. And,
having failed to pay in full the amount of P2,200,000.00 despite Cortes' delivery of the
Deed of Absolute Sale and the TCTs, rescission of the contract is proper.
In its motion for reconsideration, the Corporation contended that the trial court failed to
consider their agreement that it would pay the balance of the down payment when Cortes
delivers the TCTs. The motion was, however, denied by the trial court holding that the
rescission should stand because the Corporation did not act on the offer of Cortes'
counsel to deliver the TCTs upon payment of the balance of the down payment. Thus:
The Court finds no merit in the [Corporation's] Motion for Reconsideration. As
stated in the decision sought to be reconsidered, [Cortes'] counsel at the pre-trial
of this case, proposed that if [the Corporation] completes the down payment
agreed upon and make arrangement for the payment of the balances of the

purchase price, [Cortes] would sign the Deed of Sale and turn over the
certificate of title to the [Corporation]. [The Corporation] did nothing to comply
with its undertaking under the agreement between the parties.
WHEREFORE, in view of the foregoing considerations, the Motion for
Reconsideration is hereby DENIED.
SO ORDERED. 7

On appeal, the Court of Appeals reversed the decision of the trial court and directed
Cortes to execute a Deed of Absolute Sale conveying the properties and to deliver the
same to the Corporation together with the TCTs, simultaneous with the Corporation's
payment of the balance of the purchase price of P2,487,000.00. It found that the parties
agreed that the Corporation will fully pay the balance of the down payment upon Cortes'
delivery of the three TCTs to the Corporation. The records show that no such delivery
was made, hence, the Corporation was not remiss in the performance of its obligation and
therefore justified in not paying the balance. The decretal portion thereof, provides:
WHEREFORE, premises considered, [the Corporation's] appeal is GRANTED.
The decision appealed from is hereby REVERSED and SET ASIDE and a new
judgment rendered ordering [Cortes] to execute a deed of absolute sale
conveying to [the Corporation] the parcels of land subject of and described in
the deed of absolute sale, Exhibit D. Simultaneously with the execution of the
deed of absolute sale and the delivery of the corresponding owner's duplicate
copies of TCT Nos. 31113-A, 31931-A and 32013-A of the Registry of Deeds
for the Province of Rizal, Metro Manila, District IV, [the Corporation] shall pay
[Cortes] the balance of the purchase price of P2,487,000.00. As agreed upon in
paragraph 4 of the Deed of Absolute Sale, Exhibit D, under terms and
conditions, "All expenses for the registration of this document (the deed of sale)
with the Register of Deeds concerned, including the transfer tax, shall be
divided equally between [Cortes and the Corporation]. Payment of the capital
gains shall be exclusively for the account of the Vendor; 5% commission of
Marcosa Sanchez to be deducted upon signing of sale." There is no
pronouncement as to costs.
TEcADS

SO ORDERED. 8

Cortes filed the instant petition praying that the decision of the trial court rescinding the
sale be reinstated.
There is no doubt that the contract of sale in question gave rise to a reciprocal obligation
of the parties. Reciprocal obligations are those which arise from the same cause, and
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.
9
Article 1191 of the Civil Code, 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.
xxx xxx xxx

As to when said failure or delay in performance arise, Article 1169 of the same Code
provides that
ART. 1169
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 fulfills his obligation, delay
by the other begins. (Emphasis supplied)

The issue therefore is whether there is delay in the performance of the parties' obligation
that would justify the rescission of the contract of sale. To resolve this issue, we must
first determine the true agreement of the parties.
The settled rule is that the decisive factor in evaluating an agreement is the intention of
the parties, as shown not necessarily by the terminology used in the contract but by their
conduct, words, actions and deeds prior to, during and immediately after executing the
agreement. As such, therefore, documentary and parol evidence may be submitted and
admitted to prove such intention. 10
In the case at bar, the stipulation in the Deed of Absolute Sale was that the Corporation
shall pay in full the P2,200,000.00 down payment upon execution of the contract.
However, as correctly noted by the Court of Appeals, the transcript of stenographic notes
reveal Cortes' admission that he agreed that the Corporation's full payment of the sum of
P2,200,000.00 would depend upon his delivery of the TCTs of the three lots. In fact, his
main defense in the Answer is that, he performed what is incumbent upon him by
delivering to the Corporation the TCTs and the carbon duplicate of the Deed of Absolute
Sale, but the latter refused to pay in full the down payment. 11 Pertinent portion of the
transcript, reads:
[Q] Now, why did you deliver these three titles to the plaintiff despite the fact
that it has not been paid in full the agreed down payment?

A Well, the broker told me that the down payment will be given if I surrender
the titles.
Q Do you mean to say that the plaintiff agreed to pay in full the down payment
of P2,200,000.00 provided you surrender or entrust to the plaintiff the
titles?

A Yes, sir. 12

What further confirmed the agreement to deliver the TCTs is the testimony of Cortes that
the title of the lots will be transferred in the name of the Corporation upon full payment
of the P2,200,000.00 down payment. Thus
ATTY. ANTARAN
Q Of course, you have it transferred in the name of the plaintiff, the title?

DcCHTa

A Upon full payment.

xxx xxx xxx
ATTY. SARTE
Q When you said upon full payment, are you referring to the agreed down
payment of P2,200,000.00?
A Yes, sir. 13

By agreeing to transfer title upon full payment of P2,200,000.00, Cortes' impliedly

agreed to deliver the TCTs to the Corporation in order to effect said transfer. Hence, the
phrase "execution of this instrument" 14 as appearing in the Deed of Absolute Sale, and
which event would give rise to the Corporation's obligation to pay in full the amount of
P2,200,000.00, can not be construed as referring solely to the signing of the deed. The
meaning of "execution" in the instant case is not limited to the signing of a contract but
includes as well the performance or implementation or accomplishment of the parties'
agreement. 15 With the transfer of titles as the corresponding reciprocal obligation of
payment, Cortes' obligation is not only to affix his signature in the Deed, but to set into
motion the process that would facilitate the transfer of title of the lots, i.e., to have the
Deed notarized and to surrender the original copy thereof to the Corporation together
with the TCTs.
Having established the true agreement of the parties, the Court must now determine
whether Cortes delivered the TCTs and the original Deed to the Corporation. The Court

of Appeals found that Cortes never surrendered said documents to the Corporation.
Cortes testified that he delivered the same to Manny Sanchez, the son of the broker, and
that Manny told him that her mother, Marcosa Sanchez, delivered the same to the
Corporation.
Q Do you have any proof to show that you have indeed surrendered these titles
to the plaintiff?
A Yes, sir.
Q I am showing to you a receipt dated October 29, 1983, what relation has this
receipt with that receipt that you have mentioned?
A That is the receipt of the real estate broker when she received the titles.
Q On top of the printed name is Manny Sanchez, there is a signature, do you
know who is that Manny Sanchez?
A That is the son of the broker.
xxx xxx xxx
Q May we know the full name of the real estate broker?
A Marcosa Sanchez
xxx xxx xxx
Q Do you know if the broker or Marcosa Sanchez indeed delivered the titles to
the plaintiff?
A That is what [s]he told me. She gave them to the plaintiff.
xxx xxx xxx. 16
ATTY. ANTARAN
Q Are you really sure that the title is in the hands of the plaintiff?
xxx xxx xxx
Q It is in the hands of the broker but there is no showing that it is in the hands of
the plaintiff?
A Yes, sir.

SDECAI

COURT
Q How do you know that it was delivered to the plaintiff by the son of the
broker?
A The broker told me that she delivered the title to the plaintiff.
ATTY. ANTARAN
Q Did she not show you any receipt that she delivered to [Mr.] Dragon 17 the
title without any receipt?
A I have not seen any receipt.
Q So, therefore, you are not sure whether the title has been delivered to the
plaintiff or not. It is only upon the allegation of the broker?
A Yes, sir. 18

However, Marcosa Sanchez's unrebutted testimony is that, she did not receive the TCTs.
She also denied knowledge of delivery thereof to her son, Manny, thus:
Q The defendant, Antonio Cortes testified during the hearing on March 11,
1986 that he allegedly gave you the title to the property in question, is it
true?
A I did not receive the title.
Q He likewise said that the title was delivered to your son, do you know about
that?
A I do not know anything about that. 19

What further strengthened the findings of the Court of Appeals that Cortes did not
surrender the subject documents was the offer of Cortes' counsel at the pre-trial to deliver
the TCTs and the Deed of Absolute Sale if the Corporation will pay the balance of the
down payment. Indeed, if the said documents were already in the hands of the
Corporation, there was no need for Cortes' counsel to make such offer.
Since Cortes did not perform his obligation to have the Deed notarized and to surrender
the same together with the TCTs, the trial court erred in concluding that he performed his
part in the contract of sale and that it is the Corporation alone that was remiss in the
performance of its obligation. Actually, both parties were in delay. Considering that their
obligation was reciprocal, performance thereof must be simultaneous. The mutual
inaction of Cortes and the Corporation therefore gave rise to a compensation morae or

default on the part of both parties because neither has completed their part in their
reciprocal obligation. 20 Cortes is yet to deliver the original copy of the notarized Deed
and the TCTs, while the Corporation is yet to pay in full the agreed down payment of
P2,200,000.00. This mutual delay of the parties cancels out the effects of default, 21 such
that it is as if no one is guilty of delay. 22
We find no merit in Cortes' contention that the failure of the Corporation to act on the
proposed settlement at the pre-trial must be construed against the latter. Cortes argued
that with his counsel's offer to surrender the original Deed and the TCTs, the Corporation
should have consigned the balance of the down payment. This argument would have been
correct if Cortes actually surrendered the Deed and the TCTs to the Corporation. With
such delivery, the Corporation would have been placed in default if it chose not to pay in
full the required down payment. Under Article 1169 of the Civil Code, from the moment
one of the parties fulfills his obligation, delay by the other begins. Since Cortes did not
perform his part, the provision of the contract requiring the Corporation to pay in full the
down payment never acquired obligatory force. Moreover, the Corporation could not be
faulted for not automatically heeding to the offer of Cortes. For one, its complaint has a
prayer for damages which it may not want to waive by agreeing to the offer of Cortes'
counsel. For another, the previous representation of Cortes that the TCTs were already
delivered to the Corporation when no such delivery was in fact made, is enough reason
for the Corporation to be more cautious in dealing with him.
DaCEIc

The Court of Appeals therefore correctly ordered the parties to perform their respective
obligation in the contract of sale, i.e., for Cortes to, among others, deliver the necessary
documents to the Corporation and for the latter to pay in full, not only the down payment,
but the entire purchase price. And since the Corporation did not question the Court of
Appeal's decision and even prayed for its affirmance, its payment should rightfully
consist not only of the amount of P987,000.00, representing the balance of the
P2,200,000.00 down payment, but the total amount of P2,487,000.00, the remaining
balance in the P3,700,000.00 purchase price.
WHEREFORE, the petition is DENIED and the June 13, 1996 Decision of the Court of
Appeals in CA-G.R. CV No. 47856, is AFFIRMED.
SO ORDERED.
Panganiban, C.J., Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ., concur.
|||

(Cortes v. Court of Appeals, G.R. No. 126083, [July 12, 2006], 527 PHIL 153-167)

SECOND DIVISION
[G.R. No. 142411. October 14, 2005.]
WINIFREDA URSAL, petitioner, vs. COURT OF APPEALS, THE
RURAL BANK OF LARENA (SIQUIJOR), INC. and SPOUSES
JESUS MONESET and CRISTITA MONESET, respondents.

DECISION

AUSTRIA-MARTINEZ, J :
p

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking the reversal of the Decision 1 of the Court of Appeals (CA) dated June 28, 1999
and the Resolution dated January 31, 2000 denying petitioner's motion for
reconsideration. 2
These are the facts:
The spouses Jesus and Cristita Moneset (Monesets) are the registered owners of a 333square meter land together with a house thereon situated at Sitio Laguna, Basak, Cebu
City covered by Transfer Certificate of Title No. 78374. 3 On January 9, 1985, they
executed a "Contract to Sell Lot & House" in favor of petitioner Winifreda Ursal (Ursal),
with the following terms and conditions:
xxx xxx xxx
That the VENDOR (Cristita R. Moneset) offers to SELL and the VENDEE
accepts to BUY at the agreed lump sum price of P130,000.00 payable on the
installment basis as follows:
1. That on the date of the signing of this agreement, the VENDEE will tender an
earnest money or downpayment of P50,000.00 to the VENDOR, and by these
presents, the latter hereby acknowledges receipt of said amount from the
former;
2. That the balance of the selling price of P80,000.00 shall be paid by the
VENDEE to the VENDOR in equal monthly installments of P3,000.00 starting
the month of February, 1985, until said balance of the selling price shall be fully
paid;

3. That if the VENDEE shall fail or in default to pay six (6) monthly
installments to the VENDOR the herein agreement is deemed cancelled,
terminated and/or rescinded and in such event, the VENDEE (sic) binds to
refund to the VENDOR (sic) the deposit of P50,000.00 and with the latter's (sic)
obligation to pay the former (sic) as a corresponding refund for cost of
improvements made in the premises by VENDEE;
4. That on the date of receipt of the downpayment of P50,000.00 by the
VENDOR, it is mutually agreed for VENDEE to occupy and take physical
possession of the premises as well as for the latter (VENDEE) to keep and hold
in possession the corresponding transfer certificate of title No. ______ of the
land in question which is the subject of this agreement;
5. That on the date of final payment by the VENDEE to the VENDOR, the latter
shall execute at her expense the corresponding document of DEED OF
ABSOLUTE SALE for the former as well as the payment of realty clearances,
BIR Capital Gain Tax, sales tax or transfer fees and attorney's fees; that, for the
issuance of title in VENDEE's name shall be the exclusive account of said
VENDEE. 4

Petitioner paid the down payment and took possession of the property. She
immediately built a concrete perimeter fence and an artesian well, and planted fruit
bearing trees and flowering plants thereon which all amounted to P50,000.00. After
paying six monthly installments, petitioner stopped paying due to the Monesets'
failure to deliver to her the transfer certificate of title of the property as per their
agreement; and because of the failure of the Monesets to turn over said title, petitioner
failed to have the contract of sale annotated thereon. 5
Unknown to petitioner, the Monesets executed on November 5, 1985 an absolute deed of
sale in favor of Dr. Rafael Canora, Jr. over the said property for P14,000.00. 6 On
September 15, 1986, the Monesets executed another sale, this time with pacto de retro
with Restituto Bundalo. 7 On the same day, Bundalo, as attorney-in-fact of the Monesets,
executed a real estate mortgage over said property with Rural Bank of Larena (hereafter
Bank) located in Siquijor for the amount of P100,000.00. 8 The special power of attorney
made by the Monesets in favor of Bundalo as well as the real estate mortgage was then
annotated on the title on September 16, 1986. 9 For the failure of the Monesets to pay the
loan, the Bank served a notice of extrajudicial foreclosure dated January 27, 1988 on
Bundalo. 10
On September 30, 1989, Ursal filed an action for declaration of non-effectivity of
mortgage and damages against the Monesets, Bundalo and the Bank. She claimed that the
defendants committed fraud and/or bad faith in mortgaging the property she earlier
bought from the Monesets with a bank located in another island, Siquijor; and the Bank

acted in bad faith since it granted the real estate mortgage in spite of its knowledge that
the property was in the possession of petitioner. 11
The Monesets answered that it was Ursal who stopped paying the agreed monthly
installments in breach of their agreement. 12 The Bank, on the other hand, averred that the
title of the property was in the name of "Cristita Radaza Moneset married to Jesus
Moneset" and did not show any legal infirmity. 13
Bundalo, meanwhile, was not served summons because he could no longer be found at
his given address. 14
Trial on the merits proceeded. Thereafter, the Regional Trial Court of Cebu City, Branch
24, rendered its decision finding that Ursal is more credible than the Monesets and that
the Monesets are liable for damages for fraud and breach of the contract to sell:
The evidence of [Ursal] show that she was the first to acquire a substantial
interest over the lot and house by virtue of the execution of the Contract to Sell
(Exh. "A"). After the execution of Exh. "A" plaintiff took possession of the
questioned lot and house . . . after she made a downpayment of P50,000.00. . . .
[S]he paid the installments for six (6) months without fail. [However] plaintiff
(stopped) paying the installment because defendant spouses failed to give her
the Transfer Certificate of Title over the lot and house despite repeated
demands. It is evident then that the first to violate the conditions of Exh. "A"
were the defendants Spouses Moneset. This is the reason why plaintiff was not
able to annotate Exh. "A" on the TCT. The evidence of plaintiff show that there
was no intention on her part to discontinue paying the installments. In a
reciprocal obligation, one cannot be compelled to do if the other party fails to do
his part (Art. 1169, New Civil Code).
AacSTE

xxx xxx xxx

The acts of defendant Spouses Moneset in selling again the lot and house in
question to Dr. Canora by executing a Deed of Absolute Sale; in selling the
same on pacto de retro to defendant Bundalo; and in mortgaging the same to
defendant Rural Bank of Larena are plainly and clearly fraudulent because they
were done while Exh. "A" was still existing and the transaction was done
without notice to the plaintiff. As provided in Art. 1170 of the New Civil Code,
those who are guilty of fraud in the performance of their obligation and those
who in any manner contravene the tenor thereof, are liable for damages.
xxx xxx xxx
Another ground for liability under this article is when there is fraud/deceit. In
the instant case, there was fraud/deceit on the part of the defendant spouses
Moneset when they executed the Deed of Sale to Dr. Canora; the Deed of Sale

with Pacto de Retro to Bundalo and the Special Power of Attorney for Bundalo
to execute for and in their behalf the Real Estate Mortgage with the Rural Bank
of Larena knowing fully well that the Contract to Sell house and lot, Exh. "A"
was still existing notwithstanding their violation to the provisions thereto. It is
therefore crystal clear that defendant spouses Moneset are liable for damages. 15

As to the real estate mortgage, the trial court held that the same was valid and the Bank
was not under any obligation to look beyond the title, although the present controversy
could have been avoided had the Bank been more astute in ascertaining the nature of
petitioner's possession of the property, thus:
The Real Estate Mortgage and the Foreclosure Proceedings cannot be
considered null and void in the sense that per se the formalities required by law
were complied with except for the fact that behind their execution there was
fraud, deceit and bad faith on the part of defendant spouses Moneset and
Bundalo.
The defendant Rural Bank of Larena for its part could have avoided this
situation if the bank appraiser who made the ocular inspection of the subject
house and lot went deeper and investigated further when he learned that the
owner is not the actual occupant. He was however told by Moneset that the
actual occupant was only a lessee. Banking on this information that the actual
occupant was only a lessee with no other right over and above such, the bank
approved a loan of P100,000.00 in favor of Moneset through Bundalo their
attorney-in-fact.
xxx xxx xxx
Likewise the Rural Bank of Larena had the right to rely on what appeared on the
certificate of title of the Monesets and it was under no obligation to look beyond
the certificate and investigate the title of the mortgagor appearing on the face of
the certificate.
The approval of the P100,000.00 loan from the Rural Bank of Larena was made
possible through the deception and bad faith of defendant spouses Moneset and
Bundalo but the pertinent documents were per se in order. The court is of the
honest belief that the case against the defendant bank be dismissed for lack of
merit. The court however believes that for reasons of equity the bank should
give the plaintiff Ursal the preferential right to redeem the subject house and lot.
16

The trial court then disposed of the case as follows:

Wherefore premises considered, judgment is hereby rendered in favor of the
defendant Rural Bank of Larena dismissing the complaint against it for lack of
merit and against the defendant spouses Moneset ordering them to:

1. reimburse to plaintiff Ursal the following:

a.) downpayment of P50,000.00

TESDcA

b.) monthly installments for six months at P3,000.00 per month

P18,000.00
c.) expenses improvements P61,676.52
2. pay to plaintiff the following:
a.) moral damages P30,000.00
b.) exemplary damages P20,000.00
c.) litigation expenses P5,000.00
d.) attorney's fees P10,000.00
e.) costs
3. order the defendant Rural Bank of Larena to give the plaintiff the
preferential right to redeem the subject house and lot.
SO ORDERED. 17

Both Ursal and the Monesets appealed the decision to the CA. Ursal alleged that the Bank
was guilty of bad faith for not investigating the presence of Ursal on the property in
question, while the Monesets claimed that the trial court erred in giving preferential right
to Ursal to redeem the property and in ordering them to pay damages. 18
The CA affirmed in toto the decision of the trial court. It held that the Bank did not have
prior knowledge of the contract to sell the house and lot and the Monesets acted
fraudulently thus they cannot be given preferential right to redeem the property and were
therefore correctly ordered to pay damages. 19
The Monesets filed a motion for reconsideration which was denied outright for having
been filed out of time. 20 Ursal's motion for reconsideration was denied by the CA on
January 31, 2000 for lack of merit. 21
Hence, the present petition raising the sole error:

"That with grave abuse of discretion amounting to excess of jurisdiction,

the Honorable Court of Appeals erred in rendering a decision and
Resolution NOT in accordance with law and the applicable rulings of the
Supreme Court." 22

Petitioner claims that: the Bank was duly informed through its appraiser that the house
and lot to be mortgaged by Monesets were in the possession of a lessee; the Bank should
have taken this as a cue to investigate further the Monesets' right over the same; the case
of Embrado vs. Court of Appeals (233 SCRA 335) held that where a purchaser neglects
to make the necessary inquiry and closes his eyes to facts which should put a reasonable
man on his guard to the possibility of the existence of a defect in his vendor's title, he
cannot claim that he is a purchaser in good faith; Sec. 50 of Act 496 provides that where
a party has knowledge of a prior existing interest which is unregistered at the time he
acquired the land, his knowledge of that prior unregistered interest has the effect of
registration as to him and the Torrens system cannot be used as a shield against fraud;
following Art. 2176 of the Civil Code, respondent Bank is obliged to pay for the damage
done. 23
Petitioner then prayed that the Deed of Real Estate Mortgage be declared as non-effective
and non-enforceable as far as petitioner is concerned; that she be declared as the absolute
owner of the house and lot in question; that the Monesets be ordered to execute a deed of
absolute sale covering the subject property; and that the Bank be ordered to direct the
collection or payment of the loan of P100,000.00 plus interest from the Monesets for they
were the ones who received and enjoyed the said loan. 24
On the other hand, respondent Bank in its Comment argues that: its interest in the
property was only that of mortgagee and not a purchaser thus its interest is limited only to
ascertaining that the mortgagor is the registered owner; the case cited is inapplicable at
bar since it involves the purchase of real property; Ursal was purportedly only a lessee of
the property, thus as mortgagor who is not entitled to possess the mortgaged property,
they no longer considered the lease in the processing and approval of the loan; Sec. 50 of
Act No. 496 is also inapplicable since the alleged prior existing interest was only that of a
lessee; in any case, it was the Monesets who lied to the Bank anent the real nature of the
encumbrance, thus, it is the Monesets who are guilty of fraud and not the Bank. 25
In her "Rejoinder," 26 petitioner argued that: under the law on mortgage, the mortgagor
must be the owner of the property he offers as security of his loan; the mortgagee like
herein Bank which neglects to verify the ownership of the property offered as security of
the loan runs the risk of his folly; the Bank's negligence is not excusable because an
adverse claim and notice of lis pendens were already annotated on the certificate of title
when the mortgage was constituted or when the deed of real estate mortgage was
annotated; it would be unfair to put the blame on petitioner who was innocent of the
transaction; the trial court found that the Bank even provided its appraiser the amount of

P15,000.00 to redeem the pacto de retro sale allegedly executed in favor of Dr. Canora;
this should have aroused the Bank's suspicion and prompted it to investigate further the
property; the trial court recognized the bad faith committed by the Monesets and ordered
them to pay the sum of P126,676.52 in damages but exonerated the Bank who is equally
guilty of bad faith; the Monesets cannot pay the damages as they have no money and
property thus if the decision of the trial court as affirmed by the CA is to be enforced,
they will only be holding an empty bag while the Bank which is equally guilty will go
free; what would be fair is to let the two respondents bear jointly and severally the
consequences of their transaction and let the innocent petitioner ultimately own the house
and lot in question. 27
The petitioner, in her Memorandum dated July 31, 2005, raised the issues of: "(1)
Whether or not the document captioned: 'Contract to Sell Lot and House' (Exh. 'A') is
valid and binding so much so that the herein Petitioner who is the Vendee is the lawful
and true owner of the lot and house in question; (2) Whether or not the herein
respondents spouses Jesus Moneset and Cristita Moneset who were the vendors and/or
mortgagors together with respondent Restituto Bundalo were conniving and acting in bad
faith; and (3) Whether or not respondent Rural Bank of Larena measured up to the strict
requirement of making a thorough investigation of the property offered as collateral
before granting a loan and be considered as innocent mortgagee and entitled to the
protection of the law." 28 Petitioner reiterated her arguments in support of the first and
third issues raised in the Memorandum while she merely adopted the CA findings in
support of the second issue, i.e., when the Monesets encumbered the Transfer Certificate
of Title (TCT) to Dr. Canora and thereafter to Bundalo, they committed bad faith or fraud
since the contract to sell with Ursal was still valid and subsisting. 29
Respondent Bank, in its Memorandum dated July 20, 2005, reiterated the arguments it
made in its Comment that: the case cited by petitioner requiring extra ordinary diligence
is inapplicable in this case since what is involved here is mortgage and not sale; as
mortgagee, its interest is limited only to determining whether the mortgagor is the
registered owner of the property whose certificate of title showed that there were no
existing encumbrances thereon; and even with unregistered encumbrances, the Bank has
priority by the registration of the loan documents. 30
No memorandum is filed by respondent Monesets.
The crux of petitioner's contention is that the Bank failed to look beyond the transfer
certificate of title of the property for which it must be held liable.
We agree. Banks cannot merely rely on certificates of title in ascertaining the status of
mortgaged properties; as their business is impressed with public interest, they are
expected to exercise more care and prudence in their dealings than private individuals. 31

Indeed, the rule that persons dealing with registered lands can rely solely on the
certificate of title does not apply to banks. 32
As enunciated in Cruz vs. Bancom: 33
Respondent . . . is not an ordinary mortgagee; it is a mortgagee-bank. As such,
unlike private individuals, it is expected to exercise greater care and prudence in
its dealings, including those involving registered lands. A banking institution is
expected to exercise due diligence before entering into a mortgage contract. The
ascertainment of the status or condition of a property offered to it as security for
a loan must be a standard and indispensable part of its operations. 34

Our agreement with petitioner on this point of law, notwithstanding, we are constrained
to refrain from granting the prayers of her petition, to wit: that the Deed of Real Estate
Mortgage be declared as non-effective and non-enforceable as far as petitioner is
concerned; that she be declared as the absolute owner of the house and lot in question;
that the Monesets be ordered to execute a deed of absolute sale covering the subject
property; and that the Bank be ordered to direct the collection or payment of the loan of
P100,000.00 plus interest from the Monesets for they were the ones who received and
enjoyed the said loan. 35
The reason is that, the contract between petitioner and the Monesets being one of
"Contract to Sell Lot and House," petitioner, under the circumstances, never acquired
ownership over the property and her rights were limited to demand for specific
performance from the Monesets, which at this juncture however is no longer feasible as
the property had already been sold to other persons.
CEIHcT

A contract to sell is 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. 36
In such contract, the prospective seller expressly reserves the transfer of title to the
prospective buyer, until the happening of an event, which in this case is the full payment
of the purchase price. What the seller agrees or obligates himself to do is to fulfill his
promise to sell the subject property when the entire amount of the purchase price is
delivered to him. Stated differently, 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. 37

It is different from contracts of sale, since ownership in contracts to sell is reserved by

the vendor and is not to pass to the vendee until full payment of the purchase price, while
in contracts of sale, title to the property passess to the vendee upon the delivery of the
thing sold. In contracts of sale the vendor loses ownership over the property and cannot
recover it unless and until the contract is resolved or rescinded, while in contracts to sell,
title is retained by the vendor until full payment of the price. 38 In contracts to sell, full
payment is a positive suspensive condition while in contracts of sale, non-payment is a
negative resolutory condition. 39
A contract to sell may further be distinguished from a conditional contract of sale, in
that, the fulfillment of the suspensive condition, which is the full payment of the purchase
price, will not automatically transfer ownership to the buyer although the property may
have been previously delivered to him. The prospective vendor still has to convey title to
the prospective buyer by entering into a contract of absolute sale. While in a conditional
contract of sale, the fulfillment of the suspensive condition renders the sale absolute and
affects the seller's title thereto such that if there was previous delivery of the property, the
seller's ownership or title to the property is automatically transferred to the buyer. 40
Indeed, in contracts to sell the obligation of the seller to sell becomes demandable only
upon the happening of the suspensive condition, that is, the full payment of the purchase
price by the buyer. 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. Prior to the
existence of the contract of sale, the seller is not obligated to transfer the ownership to
the buyer, even if there is a contract to sell between them. 41
In this case, the parties not only titled their contract as "Contract to Sell Lot and House"
but specified in their agreement that the vendor shall only execute a deed of absolute sale
on the date of the final payment by vendee. 42 Such provision signifies that the parties
truly intended their contract to be that of contract to sell. 43
Since the contract in this case is a contract to sell, the ownership of the property
remained with the Monesets even after petitioner has paid the down payment and took
possession of the property. In Flancia vs. Court of Appeals, 44 where the vendee in the
contract to sell also took possession of the property, this Court held that the subsequent
mortgage constituted by the owner over said property in favor of another person was
valid since the vendee retained absolute ownership over the property. 45 At most, the
vendee in the contract to sell was entitled only to damages. 46
Petitioner attributes her decision to stop paying installments to the failure of the Monesets
to comply with their agreement to deliver the transfer certificate of title after the down
payment of P50,000.00. On this point, the trial court was correct in holding that for such
failure, the Monesets are liable to pay damages pursuant to Art. 1169 of the Civil Code
on reciprocal obligations. 47

The vendors' breach of the contract, notwithstanding, ownership still remained with the
Monesets and petitioner cannot justify her failure to complete the payment.
In Pangilinan vs. Court of Appeals, 48 the vendees contended that their failure to pay the
balance of the total contract price was because the vendor reneged on its obligation to
improve the subdivision and its facilities. In said case, the Court held that the vendees
were barred by laches from asking for specific performance eight years from the date of
last installment. The Court held that:
. . . (the vendees) instead of being vigilant and diligent in asserting their rights
over the subject property had failed to assert their rights when the law requires
them to act. Laches or "stale demands" is based upon grounds of public policy
which requires, for the peace of society, the discouragement of stale claims and
unlike the statute of limitations, is not a mere question of time but is principally
a question of the inequity or unfairness of permitting a right or claim to be
enforced or asserted.
TIaEDC

The legal adage finds application in the case at bar. Tempus enim modus tollendi
obligations et actiones, quia tempus currit contra desides et sui juris
contemptores For time is a means of dissipating obligations and actions,
because time runs against the slothful and careless of their own rights." 49

In this case, petitioner instituted an action for "Declaration of Non-Effectivity of

Mortgage with Damages" four years from the date of her last installment and only as a
reaction to the foreclosure proceedings instituted by respondent Bank. After the Monesets
failed to deliver the TCT, petitioner merely stopped paying installments and did not
institute an action for specific performance, neither did she consign payment of the
remaining balance as proof of her willingness and readiness to comply with her part of
the obligation. As we held in San Lorenzo Development Corp. vs. Court of Appeals, 50
the perfected contract to sell imposed on the vendee the obligation to pay the balance of
the purchase price. There being an obligation to pay the price, the vendee should have
made the proper tender of payment and consignation of the price in court as required by
law. Consignation of the amounts due in court is essential in order to extinguish the
vendee's obligation to pay the balance of the purchase price. 51 Since there is no
indication in the records that petitioner even attempted to make the proper consignation
of the amounts due, the obligation on the part of the Monesets to transfer ownership
never acquired obligatory force.
In other words, petitioner did not acquire ownership over the subject property as she did
not pay in full the equal price of the contract to sell. Further, the Monesets' breach did not
entitle petitioner to any preferential treatment over the property especially when such
property has been sold to other persons.
As explained in Coronel vs. Court of Appeals: 52

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 sued for damages by the intending buyer. 53 (Emphasis
supplied)
TICDSc

In this case, the lower courts found that the property was sold to Dr. Canora and then to
Bundalo who in turn acted as attorney-in-fact for the Monesets in mortgaging the
property to respondent Bank. The trial court and the CA erred in giving petitioner the
preferential right to redeem the property as such would prejudice the rights of the
subsequent buyers who were not parties in the proceedings below. While the matter of
giving petitioner preferential right to redeem the property was not put in issue before us,
in the exercise of our discretionary power to correct manifest and palpable error, we
deem it proper to delete said portion of the decision for being erroneous. 54
Petitioner's rights were limited to asking for specific performance and damages from the
Monesets. Specific performance, however, is no longer feasible at this point as explained
above. This being the case, it follows that petitioner never had any cause of action against
respondent Bank. Having no cause of action against the bank and not being an owner of
the subject property, petitioner is not entitled to redeem the subject property.
Petitioner had lost her right to demand specific performance when the Monesets executed
a Deed of Absolute Sale in favor of Dr. Canora. Contrary to what she claims, petitioner
had no vested right over the property.
Indeed, it is the Monesets who first breached their obligation towards petitioner and are
guilty of fraud against her. It cannot be denied however that petitioner is also not without
fault. She sat on her rights and never consigned the full amount of the property. She
therefore cannot ask to be declared the owner of the property, this late, especially since
the same has already passed hands several times, neither can she question the mortgage
constituted on the property years after title has already passed to another person by virtue
of a deed of absolute sale.
At this point, let it be stated that the courts below and even this Court have no jurisdiction
to resolve the issue whether there was bad faith among the Monesets, Canora and
Bundalo. Canora was never impleaded. Bundalo has not been served with summons.
WHEREFORE, the petition is DENIED. The decision of the Regional Trial Court of
Cebu City, Branch 24, promulgated on February 5, 1993 and the decision of the Court of
Appeals dated June 28, 1999 are hereby AFFIRMED. However, in the higher interest of

substantial justice, the Court MODIFIES the same to the effect that the portion ordering
the Rural Bank of Larena (Siquijor), Inc. to give petitioner the preferential right to
redeem the house and lot covered by Transfer Certificate of Title No. 78374 is
DELETED for lack of legal basis.
ScaEIT

No costs.
SO ORDERED.
Puno, Tinga and Chico-Nazario, JJ., concur.
Callejo, Sr., J., took no part.
|||

(Ursal v. Court of Appeals, G.R. No. 142411, [October 14, 2005], 509 PHIL 628-649)

SECOND DIVISION
[G.R. No. 136371. November 11, 2005.]
PRUDENTIAL BANK, petitioner, vs. CHONNEY LIM, respondent.

DECISION

TINGA, J :
p

This treats of the petition for review on certiorari of the Decision 1 of the Court of
Appeals, 2 dated 31 July 1998, which affirmed with slight modification the Decision 3 of
the Regional Trial Court (RTC), 4 granting the action filed by respondent for recovery of
sum of money and damages.
Chonney Lim (respondent), the owner of Rikes Boutique located at Session Road, Baguio
City, maintained two (2) accounts with Prudential Bank (the bank), namely: Savings
Account No. 11264 and Checking Account No. 1262. He availed of the bank's automatic
transfer system wherein the funds from his savings account could be transferred to his
checking account in case the balance of the latter account was insufficient to cover the
checks he issued.
On 14 March 1988, respondent deposited the amount of P34,000.00 with his savings
account. According to respondent, the following day, 15 March 1988, he deposited an
equal amount with the same savings account. The matter is the crux of contention
between the parties, as the bank has steadfastly denied having received the latter deposit
from respondent.
On 24 May 1988, respondent issued a check against his current account in favor of the
Paluwagan ng Bayan Savings Bank (Paluwagan) in the sum of P2,830.00 in payment of
his loan with the said bank. On 25 May 1988, respondent drew another check against his
checking account to the order of Teodulo Crisologo in the amount of P10,000.00 as
payment for a business transaction with the latter.
The bank, however, dishonored both checks, claiming that respondent did not have
sufficient funds in his account with the bank. Upon learning that the first check paid to
Paluwagan had been dishonored, respondent wrote a letter 5 to the bank on 27 May 1988,
asking it to recheck its records. On 30 May 1988, the bank's manager, Tolentino
Opiniano (Opiniano), sent a reply letter, 6 offering, as an excuse for the dishonor of said
check, the inadvertent earlier posting to respondent's account of a postdated check. 7

While Opiniano apologized for respondent's inconvenience, he made no commitment to

honor this first check. 8
When the second dishonored check came to respondent's knowledge, he immediately
wrote a letter 9 to the bank, protesting the dishonor of the check. Opiniano sent a reply 10
stating that as per records, a deposit slip dated 15 March 1988 for P34,000.00 was
received for deposit to Savings Account No. 11264 on 14 March 1988.
DCHaTc

Respondent denied having made only one deposit, insisting that he made two deposits of
P34,000.00 each, one on 14 March and the other on 15 March. As proof, respondent
presented the two separate deposit slips covering the transactions, the first bearing the
date 14 March 1988 while the second, the date 15 March 1988.
After the bank had conducted a thorough investigation, on 10 June 1988, Opiniano
informed respondent that two deposits were made on 14 March 1988, one for P34,000.00
and the other for P1,000.00; and that two other deposits were made on 15 March 1988:
P4,900.00 and P2,900.00. He maintained that although the deposit slip bearing the
amount of P34,000.00 is dated 15 March 1988, it was actually received the day before or
on 14 March 1988. Thus, the bank's position is that only one deposit of P34,000.00 was
made by respondent on 14 and 15 March 1988. 11
In view of the bank's adamant refusal to alter its stand, respondent filed a Complaint 12
before the RTC, Baguio City for the recovery of P34,000.00 representing his actual
deposit and P300.00 as penalty charge, plus damages.
On 27 August 1991, the RTC rendered its Decision holding that respondent made two
deposits of P34,000.00 apiece. Thus, the RTC ordered the bank to pay the following
amounts: P34,000, representing the unposted deposit, with legal interest; P600.00,
representing the service charges unjustifiably imposed on respondent, with legal interest;
P50,000.00 as moral damages; P25,000.00 as exemplary damages; and P10,000.00 as
attorney's fees, plus costs of suit.
On appeal, the Court of Appeals affirmed the decision of the trial court with modification
as to the award of moral damages, reducing it to P10,000.00. The testimony of the bank
teller, coupled with the fact that the two deposit slips listed different denominations of
money totaling P34,000.00 per deposit slip, led the appellate court to conclude that there
were indeed two deposits of P34,000.00 each, one made on 14 March and the other on 15
March 1988.
Before this Court, the bank argues in the main that the award of damages by the appellate
court is groundless that consequently, the assailed decision is not in accord with law and
jurisprudence. 13

As a rule, the findings of fact of the trial court when affirmed by the Court of Appeals are
final and conclusive on, and cannot be reviewed on appeal by, this Court as long as they
are borne out by the record or are based on substantial evidence. The Court is not a trier
of facts, its jurisdiction being limited to reviewing only errors of law that may have been
committed by the lower courts. 14
Essentially, as intimated earlier, the issue in the instant case boils down to whether
respondent made a deposit of P34,000.00 on 15 March 1988, apart from the deposit of an
equal amount the day before, a factual question which was resolved in the affirmative by
the RTC, which finding was categorically affirmed by the Court of Appeals. The factual
issue is beyond the province of this Court to review or disturb. It is not the function of the
Court to analyze or weigh all over again the evidence or premises supportive of such
factual determination. The Court has consistently held that the findings of the Court of
Appeals and other lower courts are, as a rule, accorded great weight, if not binding upon
it, save for the most compelling and cogent reasons. 15
We find no justification to deviate from the factual findings of the trial court and the
appellate court. The bank has utterly failed to convince us that the assailed findings are
devoid of basis or are not supported by substantial evidence.
As found by the RTC, respondent indeed made two deposits of P34,000.00 on 14 and 15
March 1988, viz:
On the pivotal issue of whether or not the plaintiff made only one (1) or two (2)
deposits of P34,000.00 the first on March 14 and the second on March 15,
1988 the Court holds that, from the evidence extant in the record, particularly
the admissions of teller Merlita Susan Caasi, the plaintiff has established his
claim of having made two (2) deposits of P34,000.00. Thus, Caasi admitted that
she impressed her rubber stamp, "Teller 2" and "duplicate" on both the Exhibits
"B" and "C" which are plaintiff's file copies of two separate and different
deposit slips for P34,000.00 each. Exhibit "B" is a deposit slip, dated March 14,
1988, for P34,000.00 consisting of 300 pieces of P100 bills and 80 pieces of
P50.00 bills; while Exhibit "C" is a deposit slip, dated March 15, 1988, also for
P34,000.00, but consisting of 340 pieces of P100 bills. It is only Exhibit "C"
that appears to have been recorded by the defendant bank (Exhibit "3"). Since
teller Caasi acknowledged to have stamped both deposit slips, logic and reason
dictates that she should be presumed to have received the amounts covered by
them unless she could satisfactorily demonstrate the contrary which she,
however, miserably failed to do. The fact that only one (1) deposit of
P34,000.00 is recorded in the teller's validating machine and blotter, as well as
in the ledger, passbook, bookkeeper's machine tape and blotter, can not help her
any for the crux precisely of plaintiff's complaint is defendant's negligence in
not recording his other deposit of P34,000.00. 16

The appellate court similarly observed:

On the basis of the evidence adduced by the parties, We are convinced that
indeed, appellee deposited P34,000.00 on March 14 and another P34,000.00 on
March 15, 1988. These two different transactions are evidenced by two deposit
slips marked as Exhibits "B" and "C". The fact that appellant received the
amount represented by each deposit slip can be inferred from the testimony of
Merlita Caasi, a bank teller:
ATTY. GAYO:
Q: And by stamping the duplicate copy of a depositor, in the case of Mr. Lim,
who is in a practice of always preparing a duplicate copy for his file,
your mere stamping of the duplicate would indicate that you received the
money deposited?
IEHTaA

A: Yes, your Honor."

which must be read in conjunction with her testimony on cross-examination,
thus:
ATTY. GAYO:
Q: I am showing you Exhibit "C" and tell the Honorable Court if that is the
duplicate of Exhibit "3" which you also stamped with the stamp of the
bank?
A: I am not sure if that is the real deposit slip made at the same day because
they have the practice to get another duplicate if their personal copy was
lost, your Honor. This is my stamp but I am not sure if this is the same.
INTERPRETER:
Witness referring to Exhibit "C".
ATTY. GAYO:
Q: But you are sure that this is your stamp as Teller No. 2 at that time?
A: It appears, it is.
Q: I am showing you now that which we reserved the last time, the original of
Exhibit "B", a copy an original copy of a deposit slip dated March 14,
1988, stamped with the stamp of the Bank Teller No. 2 and a duplicate.
Now, can you now state to the Court that this was your stamp of the
bank stamp?
A: That is my stamp.

Q: Even this word duplicate stamped also in this Exhibit "B", the original of
Exhibit 'B", is your stamp?
A: Yes, it is my stamp."
Appellee also presented in evidence the reverse side of the deposit slip dated
March 14, 1988 he described as follows:
"Q: On the front side of Exhibit "B", the amount of P34,000.00 cash appears. Is
this explained by any denomination of the same exhibit?

A: Yes, your Honor.

Q: You are referring to what part of the exhibit?
A: I am referring to Exhibit "B-1", Your Honor.
Q: So that the P34,000.00 you deposited consisted of 300 pieces of P100.00
bills in the total amount of P30,000.00; 80 pieces of P50.00 bills in the
total amount of P4,000.00?
A: Yes. Your Honor."
In the same manner, appellee also presented the other side of the deposit slip
dated March 15, 1988, thus:
"Q: On March 15, 1988, do you remember having again deposited another
amount of P34,000.00 to your account with the defendant bank?
A: Yes. Your Honor.
Q: Do you have a copy? Do you have evidence to show?
A: Yes. Your Honor. I have here my deposit slip on March 15, 1988, for the
amount of another P34,000.00.
Q: Is the denomination of the total deposit of P34,000.00 you made on March
15 shown in this deposit slip?
EISCaD

A: Yes, Your Honor. It is shown at the back of the deposit slip.

Q: As what?

A: At the back of the deposit slip, your Honor. It shows that the P100.00 bills I
deposited is 340 pieces, amounting to P34,000.00.
Q: Do you have a xerox copy of that?
A: Yes, Your Honor.
Atty. Gayo:
May we show both the original and the xerox copy. The xerox copy reflects the
front page and the reverse side of the deposit slip dated March 15, 1988.
May we ask for an observation.
Atty. Munoz:
The xerox copy of the deposit slip dated March 15, 1988 in the sum of
P34,000.00, together with the reverse side is a faithful reproduction of
the duplicate original presented.
Atty. Gayo:
May we respectfully pray that the front page of that deposit slip be marked as
Exhibit "C" and the reverse side as "Exhibit C-1". 17

An examination of the deposit slips dated 14 March and 15 March 1988 reveals that
while the slips each cover deposits in the amount of P34,000.00, they list down different
denominations however. Evidently, the slips were not prepared simultaneously or
concurrently. This fact militates against the bank's claim that one deposit slip is simply
the duplicate of the other. To sustain the bank's hypothesis, we would have to conclude
that respondent, with all deliberate design, prepared two deposit slips and purposely
wrote different denominations in them to mislead the bank that the two deposit slips were
separately executed on different occasions. There is no evidence to support such a bizarre
conclusion; thus, we are content to uphold the findings of the triers of fact on this point.
The bank insists that the court misappreciated the import of the letter of Opiniano dated
10 June 1988. As we have earlier intimated, appreciation of evidence is the domain of the
lower courts. The testimonies of the witnesses presented by the bank deserve scant
consideration in the face of the overwhelming documentary evidence of respondent, i.e.,
the duplicate originals of the deposit slips bearing the amount of P34,000.00 dated 14 and
15 March 1988, respectively. Indeed, the bank failed to rebut the inexorable probative
impact of the deposit slips.
Article 1172 of the Civil Code ordains that responsibility arising from negligence in the
performance of an obligation is demandable. The failure of the bank's employees to credit

the amount of P34,000.00 to respondent's savings account, resulting as it did in the

dishonor of respondent's checks, constitutes actionable negligence in law.
From another perspective, the negligence of the bank constitutes a breach of duty to its
client. It is worthy of note that the banking industry is impressed with public interest. As
such, it must observe a high degree of diligence and observe lofty standards of integrity
and performance. By the nature of its functions, a bank is under obligation to treat the
accounts of its depositors with meticulous care and always to have in mind the fiduciary
nature of its relationship with them. 18
With the attending factual milieu, the imposition of damages on the errant bank is in
order. Presaging this course of action is the ruling in Simex International v. Court of
Appeals, 19 where this Court rendered a telling discourse on the fiduciary responsibility
of depository banks, thus:
The banking system is an indispensable institution in the modern world and
plays a vital role in the economic life of every civilized nation. Whether as mere
passive entities for the safekeeping and saving of money or as active
instruments of business and commerce, banks have become an ubiquitous
presence among the people, who have come to regard them with respect and
even gratitude and, most of all, confidence. Thus, even the humble wage-earner
has not hesitated to entrust his life's savings to the bank of his choice, knowing
that they will be safe in its custody and will even earn some interest for him.
The ordinary person, with equal faith, usually maintains a modest checking
account for security and convenience in the settling of his monthly bills and the
payment of ordinary expenses. As for business entities like the petitioner, the
bank is a trusted and active associate that can help in the running of their affairs,
not only in the form of loans when needed but more often in the conduct of their
day-to-day transactions like the issuance or encashment of checks.
cDCaTH

In every case, the depositor expects the bank to treat his account with the utmost
fidelity, whether such account consists only of a few hundred pesos or of
millions. The bank must record every single transaction accurately, down to the
last centavo, and as promptly as possible. This has to be done if the account is to
reflect at any given time the amount of money the depositor can dispose of as he
sees fit, confident that the bank will deliver it as and to whomever he directs. A
blunder on the part of the bank, such as the dishonor of a check without good
reason, can cause the depositor not a little embarrassment if not also financial
loss and perhaps even civil and criminal litigation.

The action for damages hinges on the resolution of whether respondent has sufficient
funds in his account when the checks were dishonored. Both the trial and appellate courts
ruled that had the bank credited the P34,000.00 deposit made by respondent on 15 March
1988, the checks would not have been dishonored. Likewise, both courts found that moral
damages were in order.

The concept of moral damages include physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury. Although incapable of pecuniary computation, moral damages may be
recovered if they are the proximate result of the defendant's wrongful act or omission. 20
Needless to say, the bank's wrongful act caused injury to respondent. Credit is very
important to businessmen, and its loss or impairment needs to be recognized and
compensated. 21 This Court in Leopoldo Araneta v. Bank of America 22 highlights the
importance of good credit in the business community:
The financial credit of a businessman is a prized and valuable asset, it being a
significant part of the foundation of his business. Any adverse reflection thereon
constitutes some material loss to him. As stated in the case Atlanta National
Bank vs. Davis, supra, citing 2 Morse Banks, Sec. 458, "it can hardly be
possible that a customer's check can be wrongfully refused payment without
some impeachment of his credit, which must in fact be an actual injury, though
he cannot, from the nature of the case, furnish independent, distinct proof
thereof."

Under the circumstances of this case, we find that the award of moral damages is proper
but the amount must be reverted back to P50,000.00 as ordered by the RTC, said court
being in a better position to assess the amount of damages to be imposed on the negligent
bank.
Furthermore, we sustain the award of exemplary damages. Such damages are imposed by
way of example or correction for the public good, in addition to the moral, temperate,
liquidated or compensatory damages. 23 The business of a bank is affected with public
interest; thus, it makes a sworn profession of diligence and meticulousness in giving
irreproachable service. For this reason, the bank should guard against injury attributable
to negligence or bad faith on its part. The banking sector must at all times maintain a high
level of meticulousness. 24 In view of the bank's negligence to record the deposit, the
grant of exemplary damages is thus justified.
The bank raises another issue, that concerning the postdated check which it had
prematurely posted 25 and which it initially assumed, when it first wrote the respondent
on 30 May 1988, to be the cause of the dishonor of respondent's check payable to
Paluwagan. 26 The bank argues that the fact it prematurely honored such postdated check
did not give rise to damages. 27 This argument is irrelevant. The act or omission of the
bank that gives rise to damages in favor of respondent is not the premature posting of the
postdated check, but the fact that the bank did not credit respondent's second deposit of
P34,000.00. Besides, this is the first time that said issue was presented. As a rule, no issue
may be raised on appeal unless it has been brought before the lower tribunal for its
consideration. Higher courts are precluded from entertaining matters neither alleged in

the pleadings nor raised during the proceedings below, but ventilated for the first time
only in a motion for reconsideration or on appeal. 28
WHEREFORE, the petition is DENIED. The Decision of the RTC dated 27 August 1991
in Civil Case No. 1467-R is AFFIRMED IN FULL. Costs against petitioner.
CHIScD

SO ORDERED.
Puno, Austria-Martinez and Callejo, Sr., JJ., concur.
Chico-Nazario, J., is on leave.
|||

(Prudential Bank v. Lim, G.R. No. 136371, [November 11, 2005], 511 PHIL 100-115)

SECOND DIVISION
[G.R. No. 126780. February 17, 2005.]
YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA
PAYAM, petitioners, vs. THE COURT OF APPEALS and MAURICE
McLOUGHLIN, respondents.

DECISION

TINGA, J :
p

The primary question of interest before this Court is the only legal issue in the case: It is
whether a hotel may evade liability for the loss of items left with it for safekeeping by its
guests, by having these guests execute written waivers holding the establishment or its
employees free from blame for such loss in light of Article 2003 of the Civil Code which
voids such waivers.
Before this Court is a Rule 45 petition for review of the Decision 1 dated 19 October
1995 of the Court of Appeals which affirmed the Decision 2 dated 16 December 1991 of
the Regional Trial Court (RTC), Branch 13, of Manila, finding YHT Realty Corporation,
Brunhilda Mata-Tan (Tan), Erlinda Lainez (Lainez) and Anicia Payam (Payam) jointly
and solidarily liable for damages in an action filed by Maurice McLoughlin
(McLoughlin) for the loss of his American and Australian dollars deposited in the safety
deposit box of Tropicana Copacabana Apartment Hotel, owned and operated by YHT
Realty Corporation.
The factual backdrop of the case follow.

IHcSCA

Private respondent McLoughlin, an Australian businessman-philanthropist, used to stay

at Sheraton Hotel during his trips to the Philippines prior to 1984 when he met Tan. Tan
befriended McLoughlin by showing him around, introducing him to important people,
accompanying him in visiting impoverished street children and assisting him in buying
gifts for the children and in distributing the same to charitable institutions for poor
children. Tan convinced McLoughlin to transfer from Sheraton Hotel to Tropicana where
Lainez, Payam and Danilo Lopez were employed. Lopez served as manager of the hotel
while Lainez and Payam had custody of the keys for the safety deposit boxes of
Tropicana. Tan took care of McLoughlin's booking at the Tropicana where he started
staying during his trips to the Philippines from December 1984 to September 1987. 3

On 30 October 1987, McLoughlin arrived from Australia and registered with Tropicana.
He rented a safety deposit box as it was his practice to rent a safety deposit box every
time he registered at Tropicana in previous trips. As a tourist, McLoughlin was aware of
the procedure observed by Tropicana relative to its safety deposit boxes. The safety
deposit box could only be opened through the use of two keys, one of which is given to
the registered guest, and the other remaining in the possession of the management of the
hotel. When a registered guest wished to open his safety deposit box, he alone could
personally request the management who then would assign one of its employees to
accompany the guest and assist him in opening the safety deposit box with the two keys.
4

McLoughlin allegedly placed the following in his safety deposit box: Fifteen Thousand
US Dollars (US$15,000.00) which he placed in two envelopes, one envelope containing
Ten Thousand US Dollars (US$10,000.00) and the other envelope Five Thousand US
Dollars (US$5,000.00); Ten Thousand Australian Dollars (AUS$10,000.00) which he
also placed in another envelope; two (2) other envelopes containing letters and credit
cards; two (2) bankbooks; and a checkbook, arranged side by side inside the safety
deposit box. 5
On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin opened
his safety deposit box with his key and with the key of the management and took
therefrom the envelope containing Five Thousand US Dollars (US$5,000.00), the
envelope containing Ten Thousand Australian Dollars (AUS$10,000.00), his passports
and his credit cards. 6 McLoughlin left the other items in the box as he did not check out
of his room at the Tropicana during his short visit to Hongkong. When he arrived in
Hongkong, he opened the envelope which contained Five Thousand US Dollars
(US$5,000.00) and discovered upon counting that only Three Thousand US Dollars
(US$3,000.00) were enclosed therein. 7 Since he had no idea whether somebody else had
tampered with his safety deposit box, he thought that it was just a result of bad
accounting since he did not spend anything from that envelope. 8
After returning to Manila, he checked out of Tropicana on 18 December 1987 and left for
Australia. When he arrived in Australia, he discovered that the envelope with Ten
Thousand US Dollars (US$10,000.00) was short of Five Thousand US Dollars
(US$5,000). He also noticed that the jewelry which he bought in Hongkong and stored in
the safety deposit box upon his return to Tropicana was likewise missing, except for a
diamond bracelet. 9
When McLoughlin came back to the Philippines on 4 April 1988, he asked Lainez if
some money and/or jewelry which he had lost were found and returned to her or to the
management. However, Lainez told him that no one in the hotel found such things and
none were turned over to the management. He again registered at Tropicana and rented a
safety deposit box. He placed therein one (1) envelope containing Fifteen Thousand US

Dollars (US$15,000.00), another envelope containing Ten Thousand Australian Dollars

(AUS$10,000.00) and other envelopes containing his traveling papers/documents. On 16
April 1988, McLoughlin requested Lainez and Payam to open his safety deposit box. He
noticed that in the envelope containing Fifteen Thousand US Dollars (US$15,000.00),
Two Thousand US Dollars (US$2,000.00) were missing and in the envelope previously
containing Ten Thousand Australian Dollars (AUS$10,000.00), Four Thousand Five
Hundred Australian Dollars (AUS$4,500.00) were missing. 10
When McLoughlin discovered the loss, he immediately confronted Lainez and Payam
who admitted that Tan opened the safety deposit box with the key assigned to him. 11
McLoughlin went up to his room where Tan was staying and confronted her. Tan
admitted that she had stolen McLoughlin's key and was able to open the safety deposit
box with the assistance of Lopez, Payam and Lainez. 12 Lopez also told McLoughlin that
Tan stole the key assigned to McLoughlin while the latter was asleep. 13
McLoughlin requested the management for an investigation of the incident. Lopez got in
touch with Tan and arranged for a meeting with the police and McLoughlin. When the
police did not arrive, Lopez and Tan went to the room of McLoughlin at Tropicana and
thereat, Lopez wrote on a piece of paper a promissory note dated 21 April 1988. The
promissory note reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and
US$2,000.00 or its equivalent in Philippine currency on or before May 5, 1988.
14

Lopez requested Tan to sign the promissory note which the latter did and Lopez also
signed as a witness. Despite the execution of promissory note by Tan, McLoughlin
insisted that it must be the hotel who must assume responsibility for the loss he suffered.
However, Lopez refused to accept the responsibility relying on the conditions for renting
the safety deposit box entitled "Undertaking For the Use Of Safety Deposit Box," 15
specifically paragraphs (2) and (4) thereof, to wit:
2. To release and hold free and blameless TROPICANA APARTMENT
HOTEL from any liability arising from any loss in the contents and/or use of the
said deposit box for any cause whatsoever, including but not limited to the
presentation or use thereof by any other person should the key be lost;
xxx xxx xxx
4. To return the key and execute the RELEASE in favor of TROPICANA
APARTMENT HOTEL upon giving up the use of the box. 16

On 17 May 1988, McLoughlin went back to Australia and he consulted his lawyers as to
the validity of the abovementioned stipulations. They opined that the stipulations are void

for being violative of universal hotel practices and customs. His lawyers prepared a letter
dated 30 May 1988 which was signed by McLoughlin and sent to President Corazon
Aquino. 17 The Office of the President referred the letter to the Department of Justice
(DOJ) which forwarded the same to the Western Police District (WPD). 18
After receiving a copy of the indorsement in Australia, McLoughlin came to the
Philippines and registered again as a hotel guest of Tropicana. McLoughlin went to
Malacaang to follow up on his letter but he was instructed to go to the DOJ. The DOJ
directed him to proceed to the WPD for documentation. But McLoughlin went back to
Australia as he had an urgent business matter to attend to.
For several times, McLoughlin left for Australia to attend to his business and came back
to the Philippines to follow up on his letter to the President but he failed to obtain any
concrete assistance. 19
McLoughlin left again for Australia and upon his return to the Philippines on 25 August
1989 to pursue his claims against petitioners, the WPD conducted an investigation which
resulted in the preparation of an affidavit which was forwarded to the Manila City
Fiscal's Office. Said affidavit became the basis of preliminary investigation. However,
McLoughlin left again for Australia without receiving the notice of the hearing on 24
November 1989. Thus, the case at the Fiscal's Office was dismissed for failure to
prosecute. McLoughlin requested the reinstatement of the criminal charge for theft. In the
meantime, McLoughlin and his lawyers wrote letters of demand to those having
responsibility to pay the damage. Then he left again for Australia.
Upon his return on 22 October 1990, he registered at the Echelon Towers at Malate,
Manila. Meetings were held between McLoughlin and his lawyer which resulted to the
filing of a complaint for damages on 3 December 1990 against YHT Realty Corporation,
Lopez, Lainez, Payam and Tan (defendants) for the loss of McLoughlin's money which
was discovered on 16 April 1988. After filing the complaint, McLoughlin left again for
Australia to attend to an urgent business matter. Tan and Lopez, however, were not
served with summons, and trial proceeded with only Lainez, Payam and YHT Realty
Corporation as defendants.
jur2005cd

After defendants had filed their Pre-Trial Brief admitting that they had previously
allowed and assisted Tan to open the safety deposit box, McLoughlin filed an
Amended/Supplemental Complaint 20 dated 10 June 1991 which included another
incident of loss of money and jewelry in the safety deposit box rented by McLoughlin in
the same hotel which took place prior to 16 April 1988. 21 The trial court admitted the
Amended/Supplemental Complaint.
IcDESA

During the trial of the case, McLoughlin had been in and out of the country to attend to
urgent business in Australia, and while staying in the Philippines to attend the hearing, he
incurred expenses for hotel bills, airfare and other transportation expenses, long distance
calls to Australia, Meralco power expenses, and expenses for food and maintenance,
among others. 22
After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the dispositive
portion of which reads:
WHEREFORE, above premises considered, judgment is hereby rendered by this
Court in favor of plaintiff and against the defendants, to wit:
1. Ordering defendants, jointly and severally, to pay plaintiff the
sum of US$11,400.00 or its equivalent in Philippine
Currency of P342,000.00, more or less, and the sum of
AUS$4,500.00 or its equivalent in Philippine Currency of
P99,000.00, or a total of P441,000.00, more or less, with
12% interest from April 16, 1988 until said amount has
been paid to plaintiff (Item 1, Exhibit CC);
2. Ordering defendants, jointly and severally to pay plaintiff the
sum of P3,674,238.00 as actual and consequential damages
arising from the loss of his Australian and American dollars
and jewelries complained against and in prosecuting his
claim and rights administratively and judicially (Items II,
III, IV, V, VI, VII, VIII, and IX, Exh. "CC");
3. Ordering defendants, jointly and severally, to pay plaintiff the
sum of P500,000.00 as moral damages (Item X, Exh.
"CC");
4. Ordering defendants, jointly and severally, to pay plaintiff the
sum of P350,000.00 as exemplary damages (Item XI, Exh.
"CC");
5. And ordering defendants, jointly and severally, to pay litigation
expenses in the sum of P200,000.00 (Item XII, Exh. "CC");
6. Ordering defendants, jointly and severally, to pay plaintiff the
sum of P200,000.00 as attorney's fees, and a fee of
P3,000.00 for every appearance; and
7. Plus costs of suit.
SO ORDERED. 23

The trial court found that McLoughlin's allegations as to the fact of loss and as to the
amount of money he lost were sufficiently shown by his direct and straightforward
manner of testifying in court and found him to be credible and worthy of belief as it was
established that McLoughlin's money, kept in Tropicana's safety deposit box, was taken
by Tan without McLoughlin's consent. The taking was effected through the use of the
master key which was in the possession of the management. Payam and Lainez allowed
Tan to use the master key without authority from McLoughlin. The trial court added that
if McLoughlin had not lost his dollars, he would not have gone through the trouble and
personal inconvenience of seeking aid and assistance from the Office of the President,
DOJ, police authorities and the City Fiscal's Office in his desire to recover his losses
from the hotel management and Tan. 24
As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry worth
approximately One Thousand Two Hundred US Dollars (US$1,200.00) which allegedly
occurred during his stay at Tropicana previous to 4 April 1988, no claim was made by
McLoughlin for such losses in his complaint dated 21 November 1990 because he was
not sure how they were lost and who the responsible persons were. But considering the
admission of the defendants in their pre-trial brief that on three previous occasions they
allowed Tan to open the box, the trial court opined that it was logical and reasonable to
presume that his personal assets consisting of Seven Thousand US Dollars (US$7,000.00)
and jewelry were taken by Tan from the safety deposit box without McLoughlin's consent
through the cooperation of Payam and Lainez. 25
The trial court also found that defendants acted with gross negligence in the performance
and exercise of their duties and obligations as innkeepers and were therefore liable to
answer for the losses incurred by McLoughlin. 26
Moreover, the trial court ruled that paragraphs (2) and (4) of the "Undertaking For The
Use Of Safety Deposit Box" are not valid for being contrary to the express mandate of
Article 2003 of the New Civil Code and against public policy. 27 Thus, there being fraud
or wanton conduct on the part of defendants, they should be responsible for all damages
which may be attributed to the non-performance of their contractual obligations. 28
The Court of Appeals affirmed the disquisitions made by the lower court except as to the
amount of damages awarded. The decretal text of the appellate court's decision reads:
THE FOREGOING CONSIDERED, the appealed Decision is hereby
AFFIRMED but modified as follows:
The appellants are directed jointly and severally to pay the plaintiff/appellee the
following amounts:
1) P153,200.00 representing the peso equivalent of US$2,000.00 and
AUS$4,500.00;

2) P308,880.80, representing the peso value for the air fares from Sidney [sic] to
Manila and back for a total of eleven (11) trips;
3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana
Apartment Hotel;
4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon
Tower;
5) One-half of P179,863.20 or P89,931.60 for the taxi . . . transportation from
the residence to Sidney [sic] Airport and from MIA to the hotel here in
Manila, for the eleven (11) trips;
6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
7) One-half of P356,400.00 or P178,000.00 representing expenses for food and
maintenance;
8) P50,000.00 for moral damages;
9) P10,000.00 as exemplary damages; and
10) P200,000 representing attorney's fees.
With costs.
SO ORDERED. 29

Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court in this
appeal by certiorari.
cACEHI

Petitioners submit for resolution by this Court the following issues: (a) whether the
appellate court's conclusion on the alleged prior existence and subsequent loss of the
subject money and jewelry is supported by the evidence on record; (b) whether the
finding of gross negligence on the part of petitioners in the performance of their duties as
innkeepers is supported by the evidence on record; (c) whether the "Undertaking For The
Use of Safety Deposit Box" admittedly executed by private respondent is null and void;
and (d) whether the damages awarded to private respondent, as well as the amounts
thereof, are proper under the circumstances. 30
The petition is devoid of merit.
It is worthy of note that the thrust of Rule 45 is the resolution only of questions of law
and any peripheral factual question addressed to this Court is beyond the bounds of this
mode of review.

Petitioners point out that the evidence on record is insufficient to prove the fact of prior
existence of the dollars and the jewelry which had been lost while deposited in the safety
deposit boxes of Tropicana, the basis of the trial court and the appellate court being the
sole testimony of McLoughlin as to the contents thereof. Likewise, petitioners dispute the
finding of gross negligence on their part as not supported by the evidence on record.
We are not persuaded. We adhere to the findings of the trial court as affirmed by the
appellate court that the fact of loss was established by the credible testimony in open
court by McLoughlin. Such findings are factual and therefore beyond the ambit of the
present petition.
The trial court had the occasion to observe the demeanor of McLoughlin while testifying
which reflected the veracity of the facts testified to by him. On this score, we give full
credence to the appreciation of testimonial evidence by the trial court especially if what is
at issue is the credibility of the witness. The oft-repeated principle is that where the
credibility of a witness is an issue, the established rule is that great respect is accorded to
the evaluation of the credibility of witnesses by the trial court. 31 The trial court is in the
best position to assess the credibility of witnesses and their testimonies because of its
unique opportunity to observe the witnesses firsthand and note their demeanor, conduct
and attitude under grilling examination. 32
We are also not impressed by petitioners' argument that the finding of gross negligence
by the lower court as affirmed by the appellate court is not supported by evidence. The
evidence reveals that two keys are required to open the safety deposit boxes of Tropicana.
One key is assigned to the guest while the other remains in the possession of the
management. If the guest desires to open his safety deposit box, he must request the
management for the other key to open the same. In other words, the guest alone cannot
open the safety deposit box without the assistance of the management or its employees.
With more reason that access to the safety deposit box should be denied if the one
requesting for the opening of the safety deposit box is a stranger. Thus, in case of loss of
any item deposited in the safety deposit box, it is inevitable to conclude that the
management had at least a hand in the consummation of the taking, unless the reason for
the loss is force majeure.
Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had
custody of the master key of the management when the loss took place. In fact, they even
admitted that they assisted Tan on three separate occasions in opening McLoughlin's
safety deposit box. 33 This only proves that Tropicana had prior knowledge that a person
aside from the registered guest had access to the safety deposit box. Yet the management
failed to notify McLoughlin of the incident and waited for him to discover the taking
before it disclosed the matter to him. Therefore, Tropicana should be held responsible for
the damage suffered by McLoughlin by reason of the negligence of its employees.

The management should have guarded against the occurrence of this incident considering
that Payam admitted in open court that she assisted Tan three times in opening the safety
deposit box of McLoughlin at around 6:30 A.M. to 7:30 A.M. while the latter was still
asleep. 34 In light of the circumstances surrounding this case, it is undeniable that
without the acquiescence of the employees of Tropicana to the opening of the safety
deposit box, the loss of McLoughlin's money could and should have been avoided.
The management contends, however, that McLoughlin, by his act, made its employees
believe that Tan was his spouse for she was always with him most of the time. The
evidence on record, however, is bereft of any showing that McLoughlin introduced Tan
to the management as his wife. Such an inference from the act of McLoughlin will not
exculpate the petitioners from liability in the absence of any showing that he made the
management believe that Tan was his wife or was duly authorized to have access to the
safety deposit box. Mere close companionship and intimacy are not enough to warrant
such conclusion considering that what is involved in the instant case is the very safety of
McLoughlin's deposit. If only petitioners exercised due diligence in taking care of
McLoughlin's safety deposit box, they should have confronted him as to his relationship
with Tan considering that the latter had been observed opening McLoughlin's safety
deposit box a number of times at the early hours of the morning. Tan's acts should have
prompted the management to investigate her relationship with McLoughlin. Then,
petitioners would have exercised due diligence required of them. Failure to do so
warrants the conclusion that the management had been remiss in complying with the
obligations imposed upon hotel-keepers under the law.
TEDHaA

Under Article 1170 of the New Civil Code, those who, in the performance of their
obligations, are guilty of negligence, are liable for damages. As to who shall bear the
burden of paying damages, Article 2180, paragraph (4) of the same Code provides that
the owners and managers of an establishment or enterprise are likewise responsible for
damages caused by their employees in the service of the branches in which the latter are
employed or on the occasion of their functions. Also, this Court has ruled that if an
employee is found negligent, it is presumed that the employer was negligent in selecting
and/or supervising him for it is hard for the victim to prove the negligence of such
employer. 35 Thus, given the fact that the loss of McLoughlin's money was
consummated through the negligence of Tropicana's employees in allowing Tan to open
the safety deposit box without the guest's consent, both the assisting employees and YHT
Realty Corporation itself, as owner and operator of Tropicana, should be held solidarily
liable pursuant to Article 2193. 36
The issue of whether the "Undertaking For The Use of Safety Deposit Box" executed by
McLoughlin is tainted with nullity presents a legal question appropriate for resolution in
this petition. Notably, both the trial court and the appellate court found the same to be

null and void. We find no reason to reverse their common conclusion. Article 2003 is
controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from responsibility by posting
notices to the effect that he is not liable for the articles brought by the guest.
Any stipulation between the hotel-keeper and the guest whereby the
responsibility of the former as set forth in Articles 1998 to 2001 37 is
suppressed or diminished shall be void.

Article 2003 was incorporated in the New Civil Code as an expression of public policy
precisely to apply to situations such as that presented in this case. The hotel business like
the common carrier's business is imbued with public interest. Catering to the public,
hotelkeepers are bound to provide not only lodging for hotel guests and security to their
persons and belongings. The twin duty constitutes the essence of the business. The law in
turn does not allow such duty to the public to be negated or diluted by any contrary
stipulation in so-called "undertakings" that ordinarily appear in prepared forms imposed
by hotel keepers on guests for their signature.
In an early case, 38 the Court of Appeals through its then Presiding Justice (later
Associate Justice of the Court) Jose P. Bengzon, ruled that to hold hotelkeepers or
innkeeper liable for the effects of their guests, it is not necessary that they be actually
delivered to the innkeepers or their employees. It is enough that such effects are within
the hotel or inn. 39 With greater reason should the liability of the hotelkeeper be enforced
when the missing items are taken without the guest's knowledge and consent from a
safety deposit box provided by the hotel itself, as in this case.
Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article 2003 of the
New Civil Code for they allow Tropicana to be released from liability arising from any
loss in the contents and/or use of the safety deposit box for any cause whatsoever. 40
Evidently, the undertaking was intended to bar any claim against Tropicana for any loss
of the contents of the safety deposit box whether or not negligence was incurred by
Tropicana or its employees. The New Civil Code is explicit that the responsibility of the
hotel-keeper shall extend to loss of, or injury to, the personal property of the guests even
if caused by servants or employees of the keepers of hotels or inns as well as by
strangers, except as it may proceed from any force majeure. 41 It is the loss through force
majeure that may spare the hotel-keeper from liability. In the case at bar, there is no
showing that the act of the thief or robber was done with the use of arms or through an
irresistible force to qualify the same as force majeure. 42
Petitioners likewise anchor their defense on Article 2002 43 which exempts the hotelkeeper from liability if the loss is due to the acts of his guest, his family, or visitors. Even
a cursory reading of the provision would lead us to reject petitioners' contention. The
justification they raise would render nugatory the public interest sought to be protected
by the provision. What if the negligence of the employer or its employees facilitated the

consummation of a crime committed by the registered guest's relatives or visitor? Should

the law exculpate the hotel from liability since the loss was due to the act of the visitor of
the registered guest of the hotel? Hence, this provision presupposes that the hotel-keeper
is not guilty of concurrent negligence or has not contributed in any degree to the
occurrence of the loss. A depositary is not responsible for the loss of goods by theft,
unless his actionable negligence contributes to the loss. 44
In the case at bar, the responsibility of securing the safety deposit box was shared not
only by the guest himself but also by the management since two keys are necessary to
open the safety deposit box. Without the assistance of hotel employees, the loss would
not have occurred. Thus, Tropicana was guilty of concurrent negligence in allowing Tan,
who was not the registered guest, to open the safety deposit box of McLoughlin, even
assuming that the latter was also guilty of negligence in allowing another person to use
his key. To rule otherwise would result in undermining the safety of the safety deposit
boxes in hotels for the management will be given imprimatur to allow any person, under
the pretense of being a family member or a visitor of the guest, to have access to the
safety deposit box without fear of any liability that will attach thereafter in case such
person turns out to be a complete stranger. This will allow the hotel to evade
responsibility for any liability incurred by its employees in conspiracy with the guest's
relatives and visitors.
DaECST

Petitioners contend that McLoughlin's case was mounted on the theory of contract, but
the trial court and the appellate court upheld the grant of the claims of the latter on the
basis of tort. 45 There is nothing anomalous in how the lower courts decided the
controversy for this Court has pronounced a jurisprudential rule that tort liability can
exist even if there are already contractual relations. The act that breaks the contract may
also be tort. 46
As to damages awarded to McLoughlin, we see no reason to modify the amounts
awarded by the appellate court for the same were based on facts and law. It is within the
province of lower courts to settle factual issues such as the proper amount of damages
awarded and such finding is binding upon this Court especially if sufficiently proven by
evidence and not unconscionable or excessive. Thus, the appellate court correctly
awarded McLoughlin Two Thousand US Dollars (US$2,000.00) and Four Thousand Five
Hundred Australian dollars (AUS$4,500.00) or their peso equivalent at the time of
payment, 47 being the amounts duly proven by evidence. 48 The alleged loss that took
place prior to 16 April 1988 was not considered since the amounts alleged to have been
taken were not sufficiently established by evidence. The appellate court also correctly
awarded the sum of P308,880.80, representing the peso value for the air fares from
Sydney to Manila and back for a total of eleven (11) trips; 49 one-half of P336,207.05 or
P168,103.52 representing payment to Tropicana; 50 one-half of P152,683.57 or
P76,341.785 representing payment to Echelon Tower; 51 one-half of P179,863.20 or
P89,931.60 for the taxi or transportation expenses from McLoughlin's residence to

Sydney Airport and from MIA to the hotel here in Manila, for the eleven (11) trips; 52
one-half of P7,801.94 or P3,900.97 representing Meralco power expenses; 53 one-half of
P356,400.00 or P178,000.00 representing expenses for food and maintenance. 54
The amount of P50,000.00 for moral damages is reasonable. Although trial courts are
given discretion to determine the amount of moral damages, the appellate court may
modify or change the amount awarded when it is palpably and scandalously excessive.
Moral damages are not intended to enrich a complainant at the expense of a defendant.
They are awarded only to enable the injured party to obtain means, diversion or
amusements that will serve to alleviate the moral suffering he has undergone, by reason
of defendants' culpable action. 55

The awards of P10,000.00 as exemplary damages and P200,000.00 representing

attorney's fees are likewise sustained.
WHEREFORE, foregoing premises considered, the Decision of the Court of Appeals
dated 19 October 1995 is hereby AFFIRMED. Petitioners are directed, jointly and
severally, to pay private respondent the following amounts:
(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of
payment;
(2) P308,880.80, representing the peso value for the air fares from Sydney to
Manila and back for a total of eleven (11) trips;
(3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana
Copacabana Apartment Hotel;
(4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon
Tower;
(5) One-half of P179,863.20 or P89,931.60 for the taxi or transportation expense
from McLoughlin's residence to Sydney Airport and from MIA to the
hotel here in Manila, for the eleven (11) trips;
(6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
(7) One-half of P356,400.00 or P178,200.00 representing expenses for food and
maintenance;
(8) P50,000.00 for moral damages;
(9) P10,000.00 as exemplary damages; and

(10) P200,000 representing attorney's fees.

With costs.
SO ORDERED.
Puno, Callejo, Sr. and Chico-Nazario, JJ., concur.
Austria-Martinez, J., took no part.
(YHT Realty Corp. v. Court of Appeals, G.R. No. 126780, [February 17, 2005], 492
PHIL 29-51)
|||

THIRD DIVISION
[G.R. No. 150255. April 22, 2005.]
SCHMITZ TRANSPORT & BROKERAGE CORPORATION,
petitioner, vs. TRANSPORT VENTURE, INC., INDUSTRIAL
INSURANCE COMPANY, LTD., and BLACK SEA SHIPPING
AND DODWELL now INCHCAPE SHIPPING SERVICES,
respondents.

DECISION

CARPIO MORALES, J :
p

On petition for review is the June 27, 2001 Decision 1 of the Court of Appeals, as well as
its Resolution 2 dated September 28, 2001 denying the motion for reconsideration, which
affirmed that of Branch 21 of the Regional Trial Court (RTC) of Manila in Civil Case
No. 92-63132 3 holding petitioner Schmitz Transport Brokerage Corporation (Schmitz
Transport), together with Black Sea Shipping Corporation (Black Sea), represented by its
ship agent Inchcape Shipping Inc. (Inchcape), and Transport Venture Inc. (TVI),
solidarily liable for the loss of 37 hot rolled steel sheets in coil that were washed
overboard a barge.
On September 25, 1991, SYTCO Pte Ltd. Singapore shipped from the port of Ilyichevsk,
Russia on board M/V "Alexander Saveliev" (a vessel of Russian registry and owned by
Black Sea) 545 hot rolled steel sheets in coil weighing 6,992,450 metric tons.
The cargoes, which were to be discharged at the port of Manila in favor of the consignee,
Little Giant Steel Pipe Corporation (Little Giant), 4 were insured against all risks with
Industrial Insurance Company Ltd. (Industrial Insurance) under Marine Policy No. M-913747-TIS. 5
The vessel arrived at the port of Manila on October 24, 1991 and the Philippine Ports
Authority (PPA) assigned it a place of berth at the outside breakwater at the Manila
South Harbor. 6
Schmitz Transport, whose services the consignee engaged to secure the requisite
clearances, to receive the cargoes from the shipside, and to deliver them to its (the
consignee's) warehouse at Cainta, Rizal, 7 in turn engaged the services of TVI to send a
barge and tugboat at shipside.

On October 26, 1991, around 4:30 p.m., TVI's tugboat "Lailani" towed the barge "Erika
V" to shipside. 8
By 7:00 p.m. also of October 26, 1991, the tugboat, after positioning the barge alongside
the vessel, left and returned to the port terminal. 9 At 9:00 p.m., arrastre operator Ocean
Terminal Services Inc. commenced to unload 37 of the 545 coils from the vessel unto the
barge.
By 12:30 a.m. of October 27, 1991 during which the weather condition had become
inclement due to an approaching storm, the unloading unto the barge of the 37 coils was
accomplished. 10 No tugboat pulled the barge back to the pier, however.
At around 5:30 a.m. of October 27, 1991, due to strong waves, 11 the crew of the barge
abandoned it and transferred to the vessel. The barge pitched and rolled with the waves
and eventually capsized, washing the 37 coils into the sea. 12 At 7:00 a.m., a tugboat
finally arrived to pull the already empty and damaged barge back to the pier. 13
Earnest efforts on the part of both the consignee Little Giant and Industrial Insurance to
recover the lost cargoes proved futile. 14
Little Giant thus filed a formal claim against Industrial Insurance which paid it the
amount of P5,246,113.11. Little Giant thereupon executed a subrogation receipt 15 in
favor of Industrial Insurance.
Industrial Insurance later filed a complaint against Schmitz Transport, TVI, and Black
Sea through its representative Inchcape (the defendants) before the RTC of Manila, for
the recovery of the amount it paid to Little Giant plus adjustment fees, attorney's fees,
and litigation expenses. 16
Industrial Insurance faulted the defendants for undertaking the unloading of the cargoes
while typhoon signal No. 1 was raised in Metro Manila. 17
By Decision of November 24, 1997, Branch 21 of the RTC held all the defendants
negligent for unloading the cargoes outside of the breakwater notwithstanding the storm
signal. 18 The dispositive portion of the decision reads:
WHEREFORE, premises considered, the Court renders judgment in favor of the
plaintiff, ordering the defendants to pay plaintiff jointly and severally the sum of
P5,246,113.11 with interest from the date the complaint was filed until fully
satisfied, as well as the sum of P5,000.00 representing the adjustment fee plus
the sum of 20% of the amount recoverable from the defendants as attorney's
fees plus the costs of suit. The counterclaims and cross claims of defendants are
hereby DISMISSED for lack of [m]erit. 19

To the trial court's decision, the defendants Schmitz Transport and TVI filed a joint
motion for reconsideration assailing the finding that they are common carriers and the
award of excessive attorney's fees of more than P1,000,000. And they argued that they
were not motivated by gross or evident bad faith and that the incident was caused by a
fortuitous event. 20
By resolution of February 4, 1998, the trial court denied the motion for reconsideration.
21
All the defendants appealed to the Court of Appeals which, by decision of June 27, 2001,
affirmed in toto the decision of the trial court, 22 it finding that all the defendants were
common carriers Black Sea and TVI for engaging in the transport of goods and
cargoes over the seas as a regular business and not as an isolated transaction, 23 and
Schmitz Transport for entering into a contract with Little Giant to transport the cargoes
from ship to port for a fee. 24
In holding all the defendants solidarily liable, the appellate court ruled that "each one was
essential such that without each other's contributory negligence the incident would not
have happened and so much so that the person principally liable cannot be distinguished
with sufficient accuracy." 25
In discrediting the defense of fortuitous event, the appellate court held that "although
defendants obviously had nothing to do with the force of nature, they however had
control of where to anchor the vessel, where discharge will take place and even when the
discharging will commence." 26
The defendants' respective motions for reconsideration having been denied by Resolution
27 of September 28, 2001, Schmitz Transport (hereinafter referred to as petitioner) filed
the present petition against TVI, Industrial Insurance and Black Sea.
AaSIET

Petitioner asserts that in chartering the barge and tugboat of TVI, it was acting for its
principal, consignee Little Giant, hence, the transportation contract was by and between
Little Giant and TVI. 28
By Resolution of January 23, 2002, herein respondents Industrial Insurance, Black Sea,
and TVI were required to file their respective Comments. 29
By its Comment, Black Sea argued that the cargoes were received by the consignee
through petitioner in good order, hence, it cannot be faulted, it having had no control and
supervision thereover. 30
For its part, TVI maintained that it acted as a passive party as it merely received the
cargoes and transferred them unto the barge upon the instruction of petitioner. 31

In issue then are:

(1) Whether the loss of the cargoes was due to a fortuitous event, independent of any act
of negligence on the part of petitioner Black Sea and TVI, and
(2) If there was negligence, whether liability for the loss may attach to Black Sea,
petitioner and TVI.
When a fortuitous event occurs, Article 1174 of the Civil Code absolves any party from
any and all liability arising therefrom:
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.

In order, to be considered a fortuitous event, however, (1) the cause of the unforeseen and
unexpected occurrence, or the failure of the debtor to comply with his obligation, must be
independent of human will; (2) it must be impossible to foresee the event which
constitute 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 any manner; and (4) the obligor must be free from any participation in the aggravation
of the injury resulting to the creditor. 32
[T]he principle embodied in the act of God doctrine strictly requires that the act
must be occasioned solely by the violence of nature. Human intervention is to
be excluded from creating or entering into the cause of the mischief. When the
effect is found to be in part the result of the participation of man, whether due to
his active intervention or neglect or failure to act, the whole occurrence is then
humanized and removed from the rules applicable to the acts of God. 33

The appellate court, in affirming the finding of the trial court that human intervention in
the form of contributory negligence by all the defendants resulted to the loss of the
cargoes, 34 held that unloading outside the breakwater, instead of inside the breakwater,
while a storm signal was up constitutes negligence. 35 It thus concluded that the
proximate cause of the loss was Black Sea's negligence in deciding to unload the cargoes
at an unsafe place and while a typhoon was approaching. 36
From a review of the records of the case, there is no indication that there was greater risk
in loading the cargoes outside the breakwater. As the defendants proffered, the weather
on October 26, 1991 remained normal with moderate sea condition such that port
operations continued and proceeded normally. 37

The weather data report, 38 furnished and verified by the Chief of the Climate Data
Section of PAG-ASA and marked as a common exhibit of the parties, states that while
typhoon signal No. 1 was hoisted over Metro Manila on October 23-31, 1991, the sea
condition at the port of Manila at 5:00 p.m. - 11:00 p.m. of October 26, 1991 was
moderate. It cannot, therefore, be said that the defendants were negligent in not unloading
the cargoes upon the barge on October 26, 1991 inside the breakwater.

That no tugboat towed back the barge to the pier after the cargoes were completely
loaded by 12:30 in the morning 39 is, however, a material fact which the appellate court
failed to properly consider and appreciate 40 the proximate cause of the loss of the
cargoes. Had the barge been towed back promptly to the pier, the deteriorating sea
conditions notwithstanding, the loss could have been avoided. But the barge was left
floating in open sea until big waves set in at 5:30 a.m., causing it to sink along with the
cargoes. 41 The loss thus falls outside the "act of God doctrine."
The proximate cause of the loss having been determined, who among the parties is/are
responsible therefor?
Contrary to petitioner's insistence, this Court, as did the appellate court, finds that
petitioner is a common carrier. For it undertook to transport the cargoes from the shipside
of "M/V Alexander Saveliev" to the consignee's warehouse at Cainta, Rizal. As the
appellate court put it, "as long as a person or corporation holds [itself] to the public for
the purpose of transporting goods as [a] business, [it] is already considered a common
carrier regardless if [it] owns the vehicle to be used or has to hire one." 42 That petitioner
is a common carrier, the testimony of its own Vice-President and General Manager Noel
Aro that part of the services it offers to its clients as a brokerage firm includes the
transportation of cargoes reflects so.
Atty. Jubay:
Will you please tell us what [are you] functions . . . as Executive VicePresident and General Manager of said Company?
Mr. Aro:
Well, I oversee the entire operation of the brokerage and transport business of
the company. I also handle the various division heads of the company
for operation matters, and all other related functions that the President
may assign to me from time to time, Sir.
Q: Now, in connection [with] your duties and functions as you mentioned, will
you please tell the Honorable Court if you came to know the company
by the name Little Giant Steel Pipe Corporation?

A: Yes, Sir. Actually, we are the brokerage firm of that Company.

Q: And since when have you been the brokerage firm of that company, if you
can recall?
A: Since 1990, Sir.
Q: Now, you said that you are the brokerage firm of this Company. What work
or duty did you perform in behalf of this company?
A: We handled the releases (sic) of their cargo[es] from the Bureau of Customs.
We [are] also in-charged of the delivery of the goods to their
warehouses. We also handled the clearances of their shipment at the
Bureau of Customs, Sir.
xxx xxx xxx
Q: Now, what precisely [was] your agreement with this Little Giant Steel Pipe
Corporation with regards to this shipment? What work did you do with
this shipment?
aHcDEC

A: We handled the unloading of the cargo[es] from vessel to lighter and then the
delivery of [the] cargo[es] from lighter to BASECO then to the truck and
to the warehouse, Sir.
Q: Now, in connection with this work which you are doing, Mr. Witness, you
are supposed to perform, what equipment do (sic) you require or did you
use in order to effect this unloading, transfer and delivery to the
warehouse?
A: Actually, we used the barges for the ship side operations, this unloading
[from] vessel to lighter, and on this we hired or we sub-contracted with
[T]ransport Ventures, Inc. which [was] in-charged (sic) of the barges.
Also, in BASECO compound we are leasing cranes to have the cargo
unloaded from the barge to trucks, [and] then we used trucks to deliver
[the cargoes] to the consignee's warehouse, Sir.
Q: And whose trucks do you use from BASECO compound to the consignee's
warehouse?
A: We utilized of (sic) our own trucks and we have some other contracted
trucks, Sir.
xxx xxx xxx
ATTY. JUBAY:

Will you please explain to us, to the Honorable Court why is it you have to
contract for the barges of Transport Ventures Incorporated in this
particular operation?
A: Firstly, we don't own any barges. That is why we hired the services of
another firm whom we know [al]ready for quite sometime, which is
Transport Ventures, Inc. (Emphasis supplied) 43

It is settled that under a given set of facts, a customs broker may be regarded as a
common carrier. Thus, this Court, in A.F. Sanchez Brokerage, Inc. v. The Honorable
Court of Appeals, 44 held:
The appellate court did not err in finding petitioner, a customs broker, to be also
a common carrier, as defined under Article 1732 of the Civil Code, to wit,
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.
xxx xxx xxx
Article 1732 does not distinguish between one whose principal business activity
is the carrying of goods and one who does such carrying only as an ancillary
activity. The contention, therefore, of petitioner that it is not a common carrier
but a customs broker whose principal function is to prepare the correct customs
declaration and proper shipping documents as required by law is bereft of merit.
It suffices that petitioner undertakes to deliver the goods for pecuniary
consideration. 45

And in Calvo v. UCPB General Insurance Co. Inc., 46 this Court held that as the
transportation of goods is an integral part of a customs broker, the customs broker is also
a common carrier. For to declare otherwise "would be to deprive those with whom [it]
contracts the protection which the law affords them notwithstanding the fact that the
obligation to carry goods for [its] customers, is part and parcel of petitioner's business."
47
As for petitioner's argument that being the agent of Little Giant, any negligence it
committed was deemed the negligence of its principal, it does not persuade.
True, petitioner was the broker-agent of Little Giant in securing the release of the
cargoes. In effecting the transportation of the cargoes from the shipside and into Little
Giant's warehouse, however, petitioner was discharging its own personal obligation under
a contact of carriage.

Petitioner, which did not have any barge or tugboat, engaged the services of TVI as
handler 48 to provide the barge and the tugboat. In their Service Contract, 49 while Little
Giant was named as the consignee, petitioner did not disclose that it was acting on
commission and was chartering the vessel for Little Giant. 50 Little Giant did not thus
automatically become a party to the Service Contract and was not, therefore, bound by
the terms and conditions therein.
Not being a party to the service contract, Little Giant cannot directly sue TVI based
thereon but it can maintain a cause of action for negligence. 51
In the case of TVI, while it acted as a private carrier for which it was under no duty to
observe extraordinary diligence, it was still required to observe ordinary diligence to
ensure the proper and careful handling, care and discharge of the carried goods.
Thus, Articles 1170 and 1173 of the Civil Code provide:
ART. 1170. Those who in the performance of their obligations are guilty of
fraud, negligence, or delay, and those who in any manner contravene the tenor
thereof, are liable for damages.
ART. 1173. The fault or negligence of the obligor consists in the omission of
that diligence which is required by the nature of the obligation and corresponds
with the circumstances of the persons, of the time and of the place. When
negligence shows bad faith, the provisions of articles 1171 and 2202, paragraph
2, shall apply.
If the law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be
required.

Was the reasonable care and caution which an ordinarily prudent person would have used
in the same situation exercised by TVI? 52
This Court holds not.
TVI's failure to promptly provide a tugboat did not only increase the risk that might have
been reasonably anticipated during the shipside operation, but was the proximate cause
of the loss. A man of ordinary prudence would not leave a heavily loaded barge floating
for a considerable number of hours, at such a precarious time, and in the open sea,
knowing that the barge does not have any power of its own and is totally defenseless
from the ravages of the sea. That it was nighttime and, therefore, the members of the
crew of a tugboat would be charging overtime pay did not excuse TVI from calling for
one such tugboat.

As for petitioner, for it to be relieved of liability, it should, following Article 1739 53 of

the Civil Code, prove that it exercised due diligence to prevent or minimize the loss,
before, during and after the occurrence of the storm in order that it may be exempted
from liability for the loss of the goods.
EHIcaT

While petitioner sent checkers 54 and a supervisor 55 on board the vessel to countercheck the operations of TVI, it failed to take all available and reasonable precautions to
avoid the loss. After noting that TVI failed to arrange for the prompt towage of the barge
despite the deteriorating sea conditions, it should have summoned the same or another
tugboat to extend help, but it did not.
This Court holds then that petitioner and TVI are solidarily liable 56 for the loss of the
cargoes. The following pronouncement of the Supreme Court is instructive:
The foundation of LRTA's liability is the contract of carriage and its obligation
to indemnify the victim arises from the breach of that contract by reason of its
failure to exercise the high diligence required of the common carrier. In the
discharge of its commitment to ensure the safety of passengers, a carrier may
choose to hire its own employees or avail itself of the services of an outsider or
an independent firm to undertake the task. In either case, the common carrier is
not relieved of its responsibilities under the contract of carriage.

Should Prudent be made likewise liable? If at all, that liability could only be for
tort under the provisions of Article 2176 and related provisions, in conjunction
with Article 2180 of the Civil Code. . . . [O]ne might ask further, how then must
the liability of the common carrier, on one hand, and an independent contractor,
on the other hand, be described? It would be solidary. A contractual obligation
can be breached by tort and when the same act or omission causes the injury,
one resulting in culpa contractual and the other in culpa aquiliana, Article 2194
of the Civil Code can well apply. In fine, a liability for tort may arise even
under a contract, where tort is that which breaches the contract. Stated
differently, when an act which constitutes a breach of contract would have itself
constituted the source of a quasi-delictual liability had no contract existed
between the parties, the contract can be said to have been breached by tort,
thereby allowing the rules on tort to apply. 57

As for Black Sea, its duty as a common carrier extended only from the time the goods
were surrendered or unconditionally placed in its possession and received for
transportation until they were delivered actually or constructively to consignee Little
Giant. 58
Parties to a contract of carriage may, however, agree upon a definition of delivery that
extends the services rendered by the carrier. In the case at bar, Bill of Lading No. 2

covering the shipment provides that delivery be made "to the port of discharge or so near
thereto as she may safely get, always afloat." 59 The delivery of the goods to the
consignee was not from "pier to pier" but from the shipside of "M/V Alexander Saveliev"
and into barges, for which reason the consignee contracted the services of petitioner.
Since Black Sea had constructively delivered the cargoes to Little Giant, through
petitioner, it had discharged its duty. 60
In fine, no liability may thus attach to Black Sea.
Respecting the award of attorney's fees in an amount over P1,000,000.00 to Industrial
Insurance, for lack of factual and legal basis, this Court sets it aside. While Industrial
Insurance was compelled to litigate its rights, such fact by itself does not justify the
award of attorney's fees under Article 2208 of the Civil Code. For no sufficient showing
of bad faith would be reflected in a party's persistence in a case other than an erroneous
conviction of the righteousness of his cause. 61 To award attorney's fees to a party just
because the judgment is rendered in its favor would be tantamount to imposing a
premium on one's right to litigate or seek judicial redress of legitimate grievances. 62
On the award of adjustment fees: The adjustment fees and expense of divers were
incurred by Industrial Insurance in its voluntary but unsuccessful efforts to locate and
retrieve the lost cargo. They do not constitute actual damages. 63
As for the court a quo's award of interest on the amount claimed, the same calls for
modification following the ruling in Eastern Shipping Lines, Inc. v. Court of Appeals 64
that when the demand cannot be reasonably established at the time the demand is made,
the interest shall begin to run not from the time the claim is made judicially or
extrajudicially but from the date the judgment of the court is made (at which the time the
quantification of damages may be deemed to have been reasonably ascertained). 65
WHEREFORE, judgment is hereby rendered ordering petitioner Schmitz Transport &
Brokerage Corporation, and Transport Venture Incorporation jointly and severally liable
for the amount of P5,246,113.11 with the MODIFICATION that interest at SIX
PERCENT per annum of the amount due should be computed from the promulgation on
November 24, 1997 of the decision of the trial court.
aSITDC

Costs against petitioner.

Panganiban, Sandoval-Gutierrez, Corona and Garcia, JJ., concur.
(Schmitz Transport & Brokerage Corp. v. Transport Venture Inc., G.R. No. 150255,
[April 22, 2005], 496 PHIL 437-456)
|||

SECOND DIVISION
[G.R. No. 158674. October 17, 2005.]
LAPRECIOSISIMA CAGUNGUN, REMEDIOS L. CAGUNGUN,
JESUS L. CAGUNGUN, VICENTE L. CAGUNGUN, JR.,
RICARDO L. CAGUNGUN, EDUARDO L. CAGUNGUN,
ROWENA L. CAGUNGUN, ALVIN L. CAGUNGUN and ALMA L.
CAGUNGUN, petitioners, vs. PLANTERS DEVELOPMENT BANK,
respondent.

DECISION

CHICO-NAZARIO, J :
p

Assailed in a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil
Procedure are the decision 1 of the Court of Appeals dated 25 March 2002 that modified
the decision of the Regional Trial Court (RTC) of Olongapo City, Branch 74, in Civil
Case No. 245-0-83, dated 26 June 1997, deleting the awards of moral and exemplary
damages and finding that the mortgaged loan was deemed paid and enjoining foreclosure,
as well as reducing the awards for litigation fees and expenses, and its Resolution 2 dated
06 June 2003 denying petitioners Lapreciosisima Cagungun, et al.'s motion for
reconsideration.
The antecedents are summarized by the Court of Appeals in its decision as follows:
On September 1, 1987, the spouses Vicente Cagungun and Lapreciosisima
Cagungun (or the Cagungun spouses) filed suit with the Regional Trial Court of
Olongapo City against the Country Development Bank (or COUNTRY), and
which was docketed as Civil Case No. 245-083 and assigned to Branch 74.
Vicente Cagungun has since died and was substituted as plaintiff on August 8,
1984 by their children. On the other hand COUNTRY has entered into a merger
and reflective of this the party defendant has been changed to Planters
Development Bank (or PLANTERS) on September 1, 1987.
COUNTRY had opened an extension office in Olongapo City, and among their
first customers were the Cagungun spouses who had diverse business interests
in the locality. They opened some accounts, and for two (2) of which they were
issued Savings Passbook No. 12241-16 in the name of Puring's Dry Goods and
Savings Passbook No. 38470-29 in the names of V/L Cagungun.

It was claimed by the Cagungun spouses and testified to by them and their
daughter-in-law Sarah Cagungun, that because of the exigencies of their
businesses that required daily deposits of the proceeds and of the trust that they
have reposed with COUNTRY and its personnel, they entrusted and left with
them their said savings pass books. At least once a day the Branch manager
Ruperto Reyes or a certain Bong and Ding would come to get their funds and
with the agreement that these would be rounded off and deposited to their
account while the odd remainder would be applied to their loan. The
arrangement apparently went well, until March 1981 when the Cagungun
spouses received a letter from COUNTRY telling them that their loan is past
due and payment was demanded . . . or else. This prompted them to investigate,
but this was tedious and difficult because of lack of cooperation and even
resistance from COUNTRY. But with the help of friends in high places the
Cagungun spouses were able to access and pry information that in the year 1979
on the dates of October 8, 18, 20 and 31 and November 15, and December 4 and
8, with the use of withdrawal slips a total of P220,000.00 was withdrawn from
their Savings Passbook No. 12241-16. These withdrawals were invalid for no
such withdrawal was authorized, made or received by the depositors, and the
signatures of Vicente Cagungun on the slips were forgeries. This was confirmed
by Arcadio Ramos, Chief of the Questioned Documents Division of the NBI
when these were subjected to examination.
The side of PLANTERS was explicated by its employees, Internal Auditor Lilia
Tactay, Branch Manager Lolita Mendoza and Cashier Bella Lumanog. It was
explained that the withdrawal of P20,000.00 made on October 8, 1979 from
Savings Account No. 12241-16 and the withdrawals of a total of P30,000.00
from several of the other accounts of the spouses, were placed on time deposits
on the same date by Vicente Cagungun in five (5) accounts held with their
children. The other said withdrawals from Savings Account No. 12241-16 were
made by Vicente Cagungun in exchange for Manager's Checks made in the
names of payees Santiago Lee, Rosita Saldana, Benito Yap and Joaquin
Aganda. 3

The lower court ruled, among other things, that the withdrawals from Savings Account
No. 12241-16 through seven (7) withdrawal slips 4 amounting to P220,000.00 were not
made by petitioners as the alleged signatures of Vicente Cagungun, Jr. appearing therein
were falsified as confirmed by the National Bureau of Investigation Handwriting Expert
Arcadio Ramos. It likewise considered petitioners to have paid their mortgage loan in the
amount of P58,297.16 in view of their instruction to respondent to apply their funds in
Savings Account No. 38470-29 thereto which were adequate for this purpose.
HAEIac

For not applying the savings of petitioners in Savings Account No. 38470-29 as payment
to their loan, thereby causing the threatened foreclosure of the real estate mortgage over
their house and lot, and for allowing the unauthorized withdrawals from Savings Account
No. 12241-16 through falsified withdrawal slips, the lower court held respondent liable to

pay moral damages. For ignoring the two (2) demand letters of petitioners, the demand
letter of petitioners' counsel and the representations made by Pampanga Gov. Estelito
Mendoza and Central Bank Governor Jaime Laya, and for the attempt to cover up the
misdeeds of its employees constituting malice and bad faith, respondent was also ordered
to pay exemplary damages as an example to others. On account of these acts, respondent
was also ordered to pay attorney's fees and the cost of suit.
In its decision 5 dated 26 June 1997, the lower court disposed of the case in this wise:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and
against the defendant as follows:
1.) Enjoining the defendant from foreclosing the mortgage of plaintiffs property
located at No. 88 Gordon Avenue, Pag-asa, Olongapo City;
2.) Ordering the defendant to pay plaintiffs the amount of P220,000.00 actual
damages representing the total amount withdrawn from their accounts plus
twelve (12%) per cent interest per annum from the date of the filing of the
complaint until it shall have been fully paid;
3.) Considering plaintiffs mortgaged account in the amount of P58,297.16 to
have been paid;
4.) Ordering the defendant to pay plaintiffs the amount of P300,000.00 moral
damages;
5.) Ordering the defendant to pay plaintiffs the amount of P300,000.00
exemplary damages; and
6.) Ordering defendant to pay plaintiffs the amount of P50,000.00 litigation
expense, P50,000.00 attorney's fee plus the cost of suit. 6

Aggrieved, respondent appealed to the Court of Appeals.

The Court of Appeals agreed that money was withdrawn from the deposits of petitioners
without their authority or knowledge, and that this was done by one or some of the
personnel of respondent. However, it held that petitioners are not free from the obligation
to pay the admitted loan (P58,297.16) for though the same was not paid for failure of
respondent to comply with the instruction to apply the remainder of the sums deposited to
their loan, it remained admittedly an unpaid obligation. It removed the awards for moral
and exemplary damages and reduced the awards for attorney's fees and litigation
expenses.
The Court of Appeals promulgated its decision on 25 March 2002, the dispositive portion
of which reads:

WHEREFORE, the appealed decision is AFFIRMED, but with these

MODIFICATIONS (a) the dispositions in Par. 1 and Par. 3 of the fallo deeming
the mortgaged loan paid and enjoining foreclosure, are DELETED; (b) the
disposition in Par. 4 and Par. 5 of the fallo awarding moral and exemplary
damages, are DELETED; and (c) the awards of litigation fees and expenses are
REDUCED to a combined P30,000.00. 7

The motion for reconsideration filed by petitioners was denied in a resolution dated 06
June 2003. 8
Petitioners are now before us assailing the Decision and Resolution of the Court of
Appeals when the latter:
(A) DELETED THE PORTION OF THE RTC DECISION DECLARING THE
MORTGAGED LOAN PAID AND ENJOINING FORECLOSURE;
(B) DELETED THE AWARD OF MORAL AND EXEMPLARY DAMAGES;
AND
SAHaTc

(C) REDUCED THE LITIGATION FEES AND EXPENSES. 9

Respondent filed a Comment 10 on 04 September 2003 to which petitioners filed their

Reply 11 dated 06 February 2004.
On 06 December 2004, the Court gave due course to the petition and required the parties
to submit their respective memoranda within thirty (30) days from notice. 12 Both parties
complied. 13
We first discuss the deletion made by the Court of Appeals of the awards of moral
damages and exemplary damages.
Petitioners maintain that the Court of Appeals erred in removing the award of moral
damages considering that it is settled jurisprudence that the same should be awarded
when the injured party suffers mental anguish and serious anxiety. They contend that the
Court of Appeals failed to appreciate the torment they suffered from the time they noticed
their deposits were not properly recorded until the receipt of respondent's letter
threatening the foreclosure of their residential house and lot for a loan of P58,000.00.
They narrated that respondent bank refused to give them copies of the ledgers of their
deposits as well as copies of the withdrawal slips. Despite the intercession of Pampanga
Governor Estelito Mendoza and Central Bank Governor Jaime Laya, respondent did not
give them copies of the ledgers and withdrawal slips. It was only after the Chief of the
Criminal Investigation Service (CIS) of the Philippine Constabulary sent two of his
investigators, whom they authorized to look into the records of their deposits, that they
received copies thereof. They discovered therein that the sum of P220,000.00 was

withdrawn from their accounts by respondent bank through its employees by falsifying
the signatures of Vicente Cagungun, Jr. in seven withdrawal slips. Despite the forgeries,
they refused to acknowledge its liability. Thus, on 07 September 1983, in order to protect
their rights, petitioners were forced to file the instant case with prayer for issuance of a
temporary restraining order and/or writ of preliminary injunction to enjoin the foreclosure
of their property. Petitioners insist that respondent, in allowing withdrawals in their
savings account without their authority or knowledge, is guilty of gross negligence to
which it is liable for moral damages.

On the other hand, respondent maintains that the Court of Appeals was correct in deleting
the award of moral damages.
Respondent argues that it should not be faulted if petitioners had to experience
inconveniences in acquiring copies of ledgers of their deposits as well as copies of the
withdrawal slips since certain banking procedures must be observed. It likewise faults
petitioners for not strictly observing security rules of financial institutions in the care and
custody of their passbooks, as well as in the standard operating procedure for deposits
and withdrawals which led to the alleged improper recording of deposits and the alleged
losses they incurred. It stresses that passbooks should be securely kept by the owner but,
in the case of petitioners, they openly entrusted their passbooks to other people leaving
them totally unable to monitor their transactions. It added that there was absence of any
actual injury on the part of the petitioners. It asserts that it neither acted in bad faith nor
took advantage of petitioners' deposit for its use and benefit. It claims that petitioners
failed to establish fraud on the part of respondent bank as to make it liable for the alleged
improper recording of deposits. It claims that petitioners failed to present in court the
persons (Bong or Ding) to whom they entrusted their money for deposit and to prove that
Ruperto Reyes, then Officer-In-Charge (O-I-C) of the Extension Office of Country
Development Bank, defrauded them by facilitating withdrawals for the benefit of the
bank. No proof was adduced to show that they verified if the persons to whom they
delegated to make the deposits faithfully performed the tasks in accordance with their
intentions. Respondent insists that it is the negligence of petitioners, not fraud on its part,
which was the reason that petitioners' deposits were not applied in accordance with their
intentions resulting to the (threatened) foreclosure of their mortgaged property.
From the foregoing reasons advanced by respondent bank, it is apparent that it is trying to
pass all the blame on petitioners for the unauthorized withdrawals amounting to
P220,000.00 and the non-applications of deposits to their loan.
EAcCHI

This cannot be. The fact that petitioners left the custody of their passbooks to respondent,
through its employee O-I-C Ruperto Reyes, and that they entrusted to Bong or Ding their
deposits will not excuse respondent from being liable. Petitioners did these things
because they trusted and depended on respondent to take care of their accounts with it. If

respondent bank was really strict in enforcing the banking rule that the passbook must be
kept by the depositor, why did it not do so? For its failure, any anomaly or damage that
might result therefrom should be borne by it.
We, likewise, find untenable respondent's contention that petitioners should have
presented O-I-C Ruperto Reyes, Bong or Ding as witnesses to clear the air. On the
contrary, it should have been respondent's duty to present these persons they being their
employees. It should have presented these people, especially O-I-C Ruperto Reyes, who
had custody of the passbooks, to explain why unauthorized withdrawals were made and
why the instruction to apply petitioners' deposit to their loan was not complied with.
The bank was indeed grossly negligent when it allowed the sum of P220,000.00 to be
withdrawn through falsified withdrawal slips without petitioners' authority and
knowledge and its failure to comply with petitioners' instruction to apply their deposits on
their loan. In so doing, respondent bank breached the trust that petitioners reposed on it.
We agree in the findings of the two courts below that the unauthorized transactions were
committed by one or some of the employees of respondent bank for which it should be
liable. The evidence showed that respondent did not exercise the degree of diligence it
ought to have exercised in dealing with its clients diligence higher than that of a good
father of a family. If only respondent exercised such diligence, no anomaly or irregularity
would have happened.
TEcAHI

In the case of Philippine National Bank v. Pike, 14 we discussed the degree of diligence
imposed on banks as follows:
With banks, the degree of diligence required, contrary to the position of
petitioner PNB, is more than that of a good father of a family considering that
the business of banking is imbued with public interest due to the nature of their
functions. The stability of banks largely depends on the confidence of the
people in the honesty and efficiency of banks. Thus, 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. Section 2 of
Republic Act No. 8791, which took effect on 13 June 2000, makes a categorical
declaration that the State recognizes the "fiduciary nature of banking that
requires high standards of integrity and performance."
Though passed long after the unauthorized withdrawals in this case, the
aforequoted provision is a statutory affirmation of Supreme Court decisions
already in esse at the time of such withdrawals. We elucidated in the 1990 case
of Simex International, Inc. v. Court of Appeals that "the bank is under
obligation to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their relationship."

Likewise, in the case of The Consolidated Bank and Trust Corporation v. Court
of Appeals, we clarified that said fiduciary relationship means that the bank's
obligation to observe "highest standards of integrity and performance" is
deemed written into every deposit agreement between a bank and its depositor.
The fiduciary nature of banking requires banks to assume a degree of diligence
higher than that of a good father of a family. Article 1172 of the New Civil
Code states that the degree of diligence required of an obligor is that prescribed
by law or contract, and absent such stipulation then the diligence of a family. In
every case, the depositor expects the bank to treat his account with utmost
fidelity, whether such accounts consists only of a few hundred pesos or of
millions of pesos.

Settled is the rule that gross negligence of a bank in the handling of its client's deposit
amounts to bad faith that calls for an award of moral damages. Moral damages are meant
to compensate the claimant for any physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and
similar injuries unjustly caused. 15
In the case at bar, the failure of the bank to prevent seven unauthorized withdrawals from
the deposits of petitioners and its non-compliance with petitioners' instructions regarding
the loan payments constitute gross negligence which justifies the award of moral
damages. As employer, respondent is liable for the negligence or misdeed of its
employees which caused petitioners to have sleepless nights thinking about the
threatened foreclosure of their house and lot. In addition, the way respondent gave
petitioners a hard time in securing copies of their withdrawal slips and ledgers of their
deposits is an indication of bad faith. Respondent could have easily cooperated with
petitioners by immediately furnishing the latter with documents they wanted. This was
not to be. Written communications from petitioners' lawyers and from the Central Bank
Governor were not sufficient in order that respondent will provide petitioners with the
documents they needed. It was only after two agents of the CIS of the Philippine
Constabulary went to the bank that respondent was obliged to give petitioners what they
were asking for.
AICHaS

In culpa contractualor breach of contract, as in the case 16 before us, moral damages are
recoverable only if the defendant has acted fraudulently or in bad faith, 17 or is found
guilty of gross negligence amounting to bad faith, or in wanton disregard of his
contractual obligations. 18
In fine, the requisites on award of moral damages would require, firstly, evidence of
besmirched reputation or physical, mental or psychological suffering sustained by the
claimant; secondly, a culpable act or omission factually established; thirdly, proof that the
wrongful act or omission of the defendant is the proximate cause of the damages
sustained by the claimant; and fourthly, that the case is predicated on any of the instances

expressed or envisioned by Article 2219 19 and Article 2220 of the Civil Code. 20 All
these elements are present in the instant case.
There is no hard-and-fast rule in the determination of what would be a fair amount of
moral damages since each case must be governed by its own peculiar facts. The yardstick
should be that it is not palpably and scandalously excessive. 21 We find the sum of
P300,000.00 awarded by the lower courts excessive. In our view, the award of
P100,000.00 as moral damages is reasonable and is in accord with our rulings in similar
cases involving banks' negligence with regard to the accounts of their depositors. 22
Anent the removal by the Court of Appeals of the award of exemplary damages, we find
the same to be not in order.
The law allows the grant of exemplary damages to set an example for the public good. 23
The banking system has become an indispensable institution in the modern world and
plays a vital role in the economic life of every civilized society. Whether as mere passive
entities for the safe-keeping and saving of money or as active instruments of business and
commerce, banks have attained a ubiquitous presence among the people, who have come
to regard them with respect and even gratitude and most of all, confidence. 24 For this
reason, banks should guard against injury attributable to negligence or bad faith on its
part. 25 The award of exemplary damages is warranted by the failure of respondent bank
to prevent the unauthorized withdrawals from petitioners' deposits and its failure to
properly apply the latter's deposits to their loan. We, however, find the P300,000.00
awarded by the lower court to be excessive and should accordingly be reduced to
P50,000.00.

On the matter of attorney's fees and expenses of litigation, it is settled that the reasons or
grounds for the award thereof must be set forth in the decision of the court. 26 An award
of attorney's fees, being an exception from the policy of not putting a premium or a
penalty on the right to litigate, has since been limited to the grounds specified by law. 27
Article 2208 28 of the Civil Code enumerates the instances where attorney's fees and
expenses of litigation can be recovered.
In the case at bar, the RTC clearly stated in its decision that petitioners are entitled to
attorney's fees and litigation expenses because they were compelled to litigate in order to
protect their interest. We agree. Moreover, there being an award for exemplary damages,
it follows that there should be an award of attorney's fees and litigation expenses.
However, the awards of P50,000.00 for attorney's fees and P50,000.00 for litigation
expenses by the RTC are too much, while the award of P30,000.00 of the Court of
Appeals for both is too small. In as much as this case has been pending for more than
twenty (20) years, the award of P25,000.00 for each will be sufficient.

Petitioners claim that the Court of Appeals erred in deleting the portions of the RTC
decision declaring their mortgage loan paid and enjoining foreclosure. They insist that
they were able to prove that the amounts of P30,000.00 and P118,000.00 were
respectively withdrawn from their accounts (SA No. 38470-29 and No. 12241-16) and
that same were not applied as payment for their loan. They maintain that by adding
together said amounts, the sum thereof is sufficient to pay their loan and to consider the
real estate mortgage as discharged.
EHITaS

Looking at the complaint filed by petitioners, there is no allegation that said amounts
were withdrawn from their accounts and that same were not applied as payments for their
loan. Petitioners likewise did not ask in their prayer that said amounts be returned to them
or that they be used to off-set their indebtedness to respondent. Moreover, when
petitioners tried to prove this allegation, counsel for respondent objected 29 and attempted
to have the testimony thereon stricken off the record on the ground of allegata et probata.
30

Under Section 5, Rule 10 of the Revised Rules of Court, 31 if evidence is objected to at

the trial on the ground that it is not within the issues made by the pleadings, the Court
may allow the pleadings to be amended freely when the presentation of the merits of the
action will be subserved thereby and the admission of such evidence would not prejudice
the objecting party in maintaining his action or defense upon the merit. Said section
reads:
Sec. 5. Amendment to conform to or authorize presentation of evidence.
When issues not raised by the pleadings are tried by express or implied consent
of the parties, they shall be treated in all respects, as if they had been raised in
the pleadings. Such amendment of the pleadings as may be necessary to cause
them to conform to the evidence and to raise these issues may be made upon
motion of any party at any time, even after judgment but failure to amend does
not affect the result of the trial of these issues. If evidence is objected to at the
trial on the ground that it is not within the issues made by the pleadings, the
court may allow the pleadings to be amended and shall do so freely when
presentation of the merits of the action will be subserved thereby and the
objecting party fails to satisfy the court that the admission of such evidence
would prejudice him in maintaining his action or defense upon the merits. The
court may grant a continuance to enable the objecting party to meet such
evidence.

It is thus clear that when there is an objection on the evidence presented because it is not
within the issues made by the pleadings, an amendment must be made before accepting
such evidence. If no amendment is made, the evidence objected to cannot be considered.
In the case before us, the trial court, there being an objection on the evidence being
presented by respondent, failed to order the amendment of the complaint. Thus, we are
constrained not to consider evidence regarding the P30,000.00 and P118,000.00 allegedly

withdrawn from their accounts. With this ruling, it follows that the outstanding loan of
petitioners in the amount of P58,297.16 remains unpaid.
As regards respondent's right to exercise its right to foreclosure of the real estate
mortgage on petitioners' property, we rule that respondent cannot exercise such right
under the circumstances obtaining. It will be the height of inequity if we allow such a
thing. The evidence is clear that the sum of P220,000.00 was withdrawn from petitioners'
deposits without their knowledge and authority. This amount is more than sufficient to
pay for the loan had it not been illegally withdrawn. Neither should petitioners be held
liable for any interest on the remaining balance of the loan considering that they could
have easily settled their obligation with respondent if they were not embroiled in the
anomaly caused by respondent's employees. Finally, payment for the remaining balance
of the loan amounting to P58,297.16 should be deducted from the actual damages
awarded by the court.
WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The 25
March 2002 decision of the Court of Appeals modifying the decision of the Regional
Trial Court of Olongapo City is AFFIRMED with MODIFICATIONS. As modified,
respondent Planters Development Bank is ordered to pay petitioners the following: (1)
P220,000.00 as actual damages representing the total amount withdrawn from petitioners'
accounts plus interest of 6% per annum to be computed from the date of the filing of the
complaint which interest rate shall become 12% per annum from the time of finality of
this judgment until actual payment; (2) P100,000.00 as moral damages; (3) P50,000.00 as
exemplary damages; and (4) P25,000.00 as attorney's fees and P25,000.00 for litigation
expenses. Respondent is enjoined from foreclosing the real estate mortgage on
petitioners' property located at No. 88 Gordon Avenue, Pag-asa, Olongapo City. Payment
for the outstanding loan of petitioners in the amount of P58,297.16 shall be deducted
from the damages awarded by the Court.
SO ORDERED.
Puno, Callejo, Sr. and Tinga, JJ., concur.
Austria-Martinez, J., took no part.
(Cagungun v. Planters Development Bank, G.R. No. 158674, [October 17, 2005], 510
PHIL 51-69)
|||

THIRD DIVISION
[G.R. No. 164349. January 31, 2006.]
RADIO COMMUNICATIONS OF THE PHILIPPINES, INC.
(RCPI), petitioner, vs. ALFONSO VERCHEZ, GRACE VERCHEZINFANTE, MARDONIO INFANTE, ZENAIDA VERCHEZCATIBOG, AND FORTUNATO CATIBOG, respondents.

DECISION

CARPIO MORALES, J :
p

On January 21, 1991, Editha Hebron Verchez (Editha) was confined at the Sorsogon
Provincial Hospital due to an ailment. On even date, her daughter Grace Verchez-Infante
(Grace) immediately hied to the Sorsogon Branch of the Radio Communications of the
Philippines, Inc. (RCPI) whose services she engaged to send a telegram to her sister
Zenaida Verchez-Catibog (Zenaida) who was residing at 18 Legal St., GSIS Village,
Quezon City 1 reading: "Send check money Mommy hospital." For RCPI's services,
Grace paid P10.50 2 for which she was issued a receipt. 3
As three days after RCPI was engaged to send the telegram to Zenaida no response was
received from her, Grace sent a letter to Zenaida, this time thru JRS Delivery Service,
reprimanding her for not sending any financial aid.
Immediately after she received Grace's letter, Zenaida, along with her husband Fortunato
Catibog, left on January 26, 1991 for Sorsogon. On her arrival at Sorsogon, she
disclaimed having received any telegram.
In the meantime, Zenaida and her husband, together with her mother Editha left for
Quezon City on January 28, 1991 and brought Editha to the Veterans Memorial Hospital
in Quezon City where she was confined from January 30, 1991 to March 21, 1991.
The telegram was finally delivered to Zenaida 25 days later or on February 15, 1991. 4
On inquiry from RCPI why it took that long to deliver it, a messenger of RCPI replied
that he had nothing to do with the delivery thereof as it was another messenger who
previously was assigned to deliver the same but the address could not be located, hence,
the telegram was resent on February 2, 1991, and the second messenger finally found the
address on February 15, 1991.

Editha's husband Alfonso Verchez (Verchez), by letter of March 5, 1991, 5 demanded an

explanation from the manager of the Service Quality Control Department of the RCPI,
Mrs. Lorna D. Fabian, who replied, by letter of March 13, 1991, 6 as follows:
Our investigation on this matter disclosed that subject telegram was duly
processed in accordance with our standard operating procedure. However,
delivery was not immediately effected due to the occurrence of circumstances
which were beyond the control and foresight of RCPI. Among others, during the
transmission process, the radio link connecting the points of communication
involved encountered radio noise and interferences such that subject telegram
did not initially registered (sic) in the receiving teleprinter machine.
Our internal message monitoring led to the discovery of the above. Thus, a
repeat transmission was made and subsequent delivery was effected.
(Underscoring supplied)
DHCcST

Verchez's lawyer thereupon wrote RCPI's manager Fabian, by letter of July 23, 1991, 7
requesting for a conference on a specified date and time, but no representative of RCPI
showed up at said date and time.
On April 17, 1992, Editha died.
On September 8, 1993, Verchez, along with his daughters Grace and Zenaida and their
respective spouses, filed a complaint against RCPI before the Regional Trial Court (RTC)
of Sorsogon for damages. In their complaint, the plaintiffs alleged that, inter alia, the
delay in delivering the telegram contributed to the early demise of the late Editha to their
damage and prejudice, 8 for which they prayed for the award of moral and exemplary
damages 9 and attorney's fees. 10
After its motion to dismiss the complaint for improper venue 11 was denied 12 by Branch
5 of the RTC of Sorsogon, RCPI filed its answer, alleging that except with respect to
Grace, 13 the other plaintiffs had no privity of contract with it; any delay in the sending
of the telegram was due to force majeure, "specifically, but not limited to, radio noise and
interferences which adversely affected the transmission and/or reception of the
telegraphic message"; 14 the clause in the Telegram Transmission Form signed by Grace
absolved it from liability for any damage arising from the transmission other than the
refund of telegram tolls; 15 it observed due diligence in the selection and supervision of
its employees; and at all events, any cause of action had been barred by laches. 16
The trial court, observing that "although the delayed delivery of the questioned telegram
was not apparently the proximate cause of the death of Editha," ruled out the presence of
force majeure. Respecting the clause in the telegram relied upon by RCPI, the trial court
held that it partakes of the nature of a contract of adhesion.

Finding that the nature of RCPI's business obligated it to dispatch the telegram to the
addressee at the earliest possible time but that it did not in view of the negligence of its
employees to repair its radio transmitter and the concomitant delay in delivering the
telegram on time, the trial court, upon the following provisions of the Civil Code, to wit:
Article 2176 Whoever by act or omission causes damage to another, there
being at fault or negligence, is obliged to pay for the damage done. Such fault or
negligence if there is no pre-existing contractual relation between the parties, is
called quasi-delict and is governed by the provisions of this Chapter.
Article 1173 defines the fault of (sic) negligence of the obligor as the "omission
of the diligence which is required by the nature of the obligation and
corresponds with the circumstances of the person, of the time, or the place."
In the instant case, the obligation of the defendant to deliver the telegram to the
addressee is of an urgent nature. Its essence is the early delivery of the telegram
to the concerned person. Yet, due to the negligence of its employees, the
defendant failed to discharge of its obligation on time making it liable for
damages under Article 2176.
The negligence on the part of the employees gives rise to the presumption of
negligence on the part of the employer. 17 (Underscoring supplied),

rendered judgment against RCPI. Accordingly, it disposed:

WHEREFORE, in the light of the foregoing premises, judgment is hereby
rendered in favor of the plaintiffs and against the defendant, to wit:
Ordering the defendant to pay the plaintiffs the following amount:
1. The amount of One Hundred Thousand (P100,000.00) Pesos as moral
damages;
STaHIC

2. The amount of Twenty Thousand (P20,000.00) Pesos as attorney's fees; and

3. To pay the costs.
SO ORDERED. 18

On appeal, the Court of Appeals, by Decision of February 27, 2004, 19 affirmed the trial
court's decision.
Hence, RCPI's present petition for review on certiorari, it raising the following
questions: (1) "Is the award of moral damages proper even if the trial court found that
there was no direct connection between the injury and the alleged negligent acts?" 20 and

(2) "Are the stipulations in the 'Telegram Transmission Form,' in the nature "contracts of
adhesion" (sic)? 21
RCPI insists that respondents failed to prove any causal connection between its delay in
transmitting the telegram and Editha's death. 22
RCPI's stand fails. It bears noting that its liability is anchored on culpa contractual or
breach of contract with regard to Grace, and on tort with regard to her co-plaintiffsherein-co-respondents.
Article 1170 of the Civil Code provides:
Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof,
are liable for damages. (Underscoring supplied)

Passing on this codal provision, this Court explained:

In culpa contractual . . . the mere proof of the existence of the contract and the
failure of its compliance justify, prima facie, a corresponding right of relief. The
law, recognizing the obligatory force of contracts, will not permit a party to be
set free from liability for any kind of misperformance of the contractual
undertaking or a contravention of the tenor thereof. A breach upon the contract
confers upon the injured party a valid cause for recovering that which may have
been lost or suffered. The remedy serves to preserve the interests of the
promissee that may include his "expectation interest," which is his interest in
having the benefit of his bargain by being put in as good a position as he would
have been in had the contract been performed, or his "reliance interest," which
is his interest in being reimbursed for loss caused by reliance on the contract by
being put in as good a position as he would have been in had the contract not
been made; or his "restitution interest," which is his interest in having
restored to him any benefit that he has conferred on the other party. Indeed,
agreements can accomplish little, either for their makers or for society, unless
they are made the basis for action. The effect of every infraction is to create a
new duty, that is, to make recompense to the one who has been injured by the
failure of another to observe his contractual obligation unless he can show
extenuating circumstances, like proof of his exercise of due diligence . . . or of
the attendance of fortuitous event, to excuse him from his ensuing liability. 23
(Emphasis and underscoring supplied)

In the case at bar, RCPI bound itself to deliver the telegram within the shortest possible
time. It took 25 days, however, for RCPI to deliver it.
RCPI invokes force majeure, specifically, the alleged radio noise and interferences which
adversely affected the transmission and/or reception of the telegraphic message.

Additionally, its messenger claimed he could not locate the address of Zenaida and it was
only on the third attempt that he was able to deliver the telegram.

For the defense of force majeure to prosper,

. . . it is necessary that one has committed no negligence or misconduct that may
have occasioned the loss. An act of God cannot be invoked to protect a person
who has failed to take steps to forestall the possible adverse consequences of
such a loss. One's negligence may have concurred with an act of God in
producing damage and injury to another; nonetheless, showing that the
immediate or proximate cause of the damage or injury was a fortuitous event
would not exempt one from liability. When the effect is found to be partly the
result of a person's participation whether by active intervention, neglect
or failure to act the whole occurrence is humanized and removed from
the rules applicable to acts of God.
xxx xxx xxx
Article 1174 of the Civil Code states that no person shall be responsible
for a fortuitous event that could not be foreseen or, though foreseen, was
inevitable. In other words, there must be an exclusion of human
intervention from the cause of injury or loss. 24 (Emphasis and
underscoring supplied)

Assuming arguendo that fortuitous circumstances prevented RCPI from delivering the
telegram at the soonest possible time, it should have at least informed Grace of the nontransmission and the non-delivery so that she could have taken steps to remedy the
situation. But it did not. There lies the fault or negligence.
ECaHSI

In an earlier case also involving RCPI, this Court held:

Considering the public utility of RCPI's business and its contractual obligation
to transmit messages, it should exercise due diligence to ascertain that messages
are delivered to the persons at the given address and should provide a system
whereby in cases of undelivered messages the sender is given notice of nondelivery. Messages sent by cable or wireless means are usually more
importantand urgent than those which can wait for the mail. 25
xxx xxx xxx
People depend on telecommunications companies in times of deep
emotional stress or pressing financial needs. Knowing that messages about
the illnesses or deaths of loved ones, births or marriages in a family, important

business transactions, and notices of conferences or meetings as in this case, are

coursed through the petitioner and similar corporations, it is incumbent upon
them to exercise a greater amount of care and concern than that shown in this
case. Every reasonable effort to inform senders of the non-delivery of messages
should be undertaken. 26
(Emphasis and underscoring supplied)

RCPI argues, however, against the presence of urgency in the delivery of the telegram, as
well as the basis for the award of moral damages, thus: 27
The request to send check as written in the telegraphic text negates the
existence of urgency that private respondents' allegations that 'time was of the
essence' imports. A check drawn against a Manila Bank and transmitted to
Sorsogon, Sorsogon will have to be deposited in a bank in Sorsogon and pass
thru a minimum clearing period of 5 days before it may be encashed or
withdrawn. If the transmittal of the requested check to Sorsogon took 1 day
private respondents could therefore still wait for 6 days before the same may be
withdrawn. Requesting a check that would take 6 days before it could be
withdrawn therefore contradicts plaintiff's claim of urgency or need. 28
At any rate, any sense of urgency of the situation was met when Grace Verchez
was able to communicate to Manila via a letter that she sent to the same
addressee in Manila thru JRS. 29
xxx xxx xxx
As far as the respondent court's award for moral damages is concerned, the
same has no basis whatsoever since private respondent Alfonso Verchez did not
accompany his late wife when the latter went to Manila by bus. He stayed
behind in Sorsogon for almost 1 week before he proceeded to Manila. 30
When pressed on cross-examination, private respondent Alfonso Verchez could
not give any plausible reason as to the reason why he did not accompany his
ailing wife to Manila. 31
xxx xxx xxx
It is also important to consider in resolving private respondents' claim for moral
damages that private respondent Grace Verchez did not accompany her ailing
mother to Manila. 32
xxx xxx xxx
It is the common reaction of a husband to be at his ailing wife's side as much as
possible. The fact that private respondent Alfonso Verchez stayed behind in

Sorsogon for almost 1 week convincingly demonstrates that he himself knew

that his wife was not in critical condition. 33
(Emphasis and underscoring supplied)

RCPI's arguments fail. For it is its breach of contract upon which its liability is, it bears
repeating, anchored. Since RCPI breached its contract, the presumption is that it was at
fault or negligent. It, however, failed to rebut this presumption.
For breach of contract then, RCPI is liable to Grace for damages.
And for quasi-delict, RCPI is liable to Grace's co-respondents following Article 2176 of
the Civil Code which provides:
Whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done. Such fault or negligence, if
there is no pre-existing contractual relation between the parties, is called a
quasi-delict and is governed by the provisions of this Chapter. (Underscoring
supplied)

RCPI's liability as an employer could of course be avoided if it could prove that it

observed the diligence of a good father of a family to prevent damage. Article 2180 of the
Civil Code so provides:
The obligation imposed by Article 2176 is demandable not only for one's own
acts or omissions, but also for those of persons for whom one is responsible.
xxx xxx xxx
The owners and managers of an establishment or enterprise are likewise
responsible for damages caused by their employees in the service of the
branches in which the latter are employed or on the occasion of their functions.
Employers shall be liable for the damages caused by their employees and
household helpers acting within the scope of their assigned tasks, even though
the former are not engaged in any business or industry.
xxx xxx xxx
The responsibility treated of in this article shall cease when the persons herein
mentioned prove that they observed all the diligence of a good father of a family
to prevent damage. (Underscoring supplied)
SCHTac

RCPI failed, however, to prove that it observed all the diligence of a good father of a
family to prevent damage.

Respecting the assailed award of moral damages, a determination of the presence of the
following requisites to justify the award is in order:
. . . firstly, evidence of besmirched reputation or physical, mental or
psychological suffering sustained by the claimant; secondly, a culpable act or
omission factually established; thirdly, proof that the wrongful act or omission
of the defendant is the proximate cause of damages sustained by the claimant;
and fourthly, that the case is predicated on any of the instances expressed or
envisioned by Article 2219 and Article 2220 of the Civil Code. 34

Respecting the first requisite, evidence of suffering by the plaintiffs-herein respondents

was correctly appreciated by the CA in this wise:
The failure of RCPI to deliver the telegram containing the message of appellees
on time, disturbed their filial tranquillity. Family members blamed each other
for failing to respond swiftly to an emergency that involved the life of the late
Mrs. Verchez, who suffered from diabetes. 35

As reflected in the foregoing discussions, the second and third requisites are present.
On the fourth requisite, Article 2220 of the Civil Code provides:
Willful injury to property may be a legal ground for awarding moral damages if
the court should find that, under the circumstances, such damages are justly due.
The same rule applies to breaches of contract where the defendant acted
fraudulently or in bad faith. (Emphasis and underscoring supplied)

After RCPI's first attempt to deliver the telegram failed, it did not inform Grace of the
non-delivery thereof and waited for 12 days before trying to deliver it again, knowing
as it should know that time is of the essence in the delivery of telegrams. When its
second long-delayed attempt to deliver the telegram again failed, it, again, waited for
another 12 days before making a third attempt. Such nonchalance in performing its urgent
obligation indicates gross negligence amounting to bad faith. The fourth requisite is thus
also present.
In applying the above-quoted Article 2220, this Court has awarded moral damages in
cases of breach of contract where the defendant was guilty of gross negligence amounting
to bad faith, or in wanton disregard of his contractual obligation. 36
As for RCPI's tort-based liability, Article 2219 of the Civil Code provides:
Moral damages may be recovered in the following and analogous cases:
xxx xxx xxx

(10) Acts and actions referred to in Articles 21, 26 , 27, 28, 29, 30, 32, 34, and
35. (Emphasis supplied)

Article 26 of the Civil Code, in turn, provides:

Every person shall respect the dignity, personality, privacy and peace of mind
of his neighbors and other persons. The following and similar acts, though they
may not constitute a criminal offense, shall produce a cause of action for
damages, prevention, and other relief:
xxx xxx xxx
(2) Meddling with or disturbing the private life or family relations of another.
(Emphasis supplied)
cIETHa

RCPI's negligence in not promptly performing its obligation undoubtedly disturbed the
peace of mind not only of Grace but also her co-respondents. As observed by the
appellate court, it disrupted the "filial tranquillity" among them as they blamed each other
"for failing to respond swiftly to an emergency." The tortious acts and/or omissions
complained of in this case are, therefore, analogous to acts mentioned under Article 26 of
the Civil Code, which are among the instances of quasi-delict when courts may award
moral damages under Article 2219 of the Civil Code.

In fine, the award to the plaintiffs-herein respondents of moral damages is in order, as is

the award of attorney's fees, respondents having been compelled to litigate to protect their
rights.
Clutching at straws, RCPI insists that the limited liability clause in the "Telegram
Transmission Form" is not a contract of adhesion. Thus it argues:
Neither can the Telegram Transmission Form be considered a contract of
adhesion as held by the respondent court. The said stipulations were all written
in bold letters right in front of the Telegram Transmission Form. As a matter of
fact they were beside the space where the telegram senders write their
telegraphic messages. It would have been different if the stipulations were
written at the back for surely there is no way the sender will easily notice them.
The fact that the stipulations were located in a particular space where they can
easily be seen, is sufficient notice to any sender (like Grace Verchez-Infante)
where she could manifest her disapproval, leave the RCPI station and avail of
the services of the other telegram operators. 37 (Underscoring supplied)

RCPI misunderstands the nature of a contract of adhesion. Neither the readability of the
stipulations nor their physical location in the contract determines whether it is one of
adhesion.
A contract of adhesion is defined as one in which one of the parties imposes a
ready-made form of contract, which the other party may accept or reject, but
which the latter cannot modify. One party prepares the stipulation in the
contract, while the other party merely affixes his signature or his "adhesion"
thereto, giving no room for negotiation and depriving the latter of the
opportunity to bargain on equal footing. 38 (Emphasis and underscoring
supplied)

While a contract of adhesion is not necessarily void and unenforceable, since it is

construed strictly against the party who drafted it or gave rise to any ambiguity therein, it
is stricken down as void and unenforceable or subversive of public policy when the
weaker party is imposed upon in dealing with the dominant bargaining party and is
reduced to the alternative of taking it or leaving it, completely deprived of the
opportunity to bargain on equal footing. 39
This Court holds that the Court of Appeals' finding that the parties' contract is one of
adhesion which is void is, given the facts and circumstances of the case, thus well-taken.
WHEREFORE, the petition is DENIED, and the challenged decision of the Court of
Appeals is AFFIRMED.
HATICc

Costs against petitioner.

SO ORDERED.
Quisumbing, Carpio and Tinga, JJ., concur.
(Radio Communications of the Philippines, Inc. v. Verchez, G.R. No. 164349, [January
31, 2006], 516 PHIL 725-742)
|||

SECOND DIVISION
[G.R. No. 152202. July 28, 2006.]
CRISOSTOMO ALCARAZ, petitioner, vs. COURT OF APPEALS
and EQUITABLE CREDIT CARD NETWORK, INC., respondents.

DECISION

PUNO, J :
p

Assailed before this Court in a Petition for Review on Certiorari is the decision of the
Court of Appeals in CA-G.R. CV No. 65911, entitled "Equitable Credit Card Network,
Inc. v. Crisostomo Alcaraz," affirming the decision of Branch 147 of the Regional Trial
Court of Makati City. The case stemmed from an action for the collection of sum of
money.
The facts of this case are undisputed.
Private respondent, Equitable Credit Card Network, Inc. (Equitable), is a company
engaged in the business of extending credit accommodations/facilities through the use of
the credit cards issued to its clientele. Through these credit cards, cash advances may be
availed from automated teller machines or ATMs, and goods or services may be
purchased on credit from accredited merchant shops. 1
In May 1995, private respondent Equitable issued a credit card, Equitable Visa Gold
International Card with card number 4921-0100-0743-2013 and account base number
4921-0100-0743-2005 with peso and dollar accounts/facilities, to petitioner Crisostomo
Alcaraz. The petitioner through the use of the said credit card secured cash advances and
purchased goods and services on credit with private respondent Equitable's affiliated
merchant establishments. 2 Thus, the petitioner accumulated unpaid credit with private
respondent and despite the receipt of several demand letters, failed to pay his outstanding
obligations. 3
In its complaint before the lower court, private respondent Equitable sought the payment
of the accumulated outstanding balance including interest of 2.5% per month as well as a
monthly late penalty/surcharge of 1.5% for the peso account, and 1.5% monthly interest
and 1% late penalty/surcharge per month for the dollar account until full payment thereof
as provided in the "Terms and Conditions Governing the Issuance and Use of Equitable
Visa Card" (hereinafter referred to as the Terms and Conditions). The private respondent

also prayed for liquidated damages of 25% of the total amount of both accounts and
attorney's fees at the same rate allegedly also in accordance with the Terms and
Conditions. 4 Private respondent Equitable claims petitioner Alcaraz has an accumulated
outstanding balance of US$8,970.54 in his dollar account as of February 18, 1999, and
P192,500.00 on his peso account as of February 28, 1999 inclusive of interest and
surcharges. 5
The petitioner admitted he had made use of the credit card issued in his name by private
respondent Equitable, but contested the amount of his liability. Petitioner alleged that he
was issued the credit card as an "honorary member." As such, he was not required to
submit any application or sign any document prior to the issuance of the card and he was
entitled to pay on an installment basis without any interest. He denied signing the
document Terms and Conditions Governing the Issuance and Use of Equitable Visa Card.
Petitioner Alcaraz further alleged that prior to the filing of the complaint, he formally
requested for a reconciliation of his accounts with the private respondent but the same has
remained unanswered until the present day. Thus, the case filed against him was
premature.
HAaECD

After several postponements of the pretrial conference, the trial court declared petitioner
Alcaraz as in default upon motion of private respondent Equitable and allowed the latter
to present its evidence ex parte. 6 After the private respondent's presentation of evidence
which included the testimony of its sole witness, one of its collection officers, and the
submission of documents, the court ruled in favor of private respondent Equitable. It,
however, rejected private respondent Equitable's claim for liquidated and exemplary
damages. 7 Petitioner Alcaraz filed a Motion for New Trial which was denied. 8 The
petitioner elevated the case to the appellate court.
The Court of Appeals partially affirmed the decision of the trial court. It modified the
trial court's judgment by ordering petitioner Alcaraz to pay private respondent Equitable
"the principal amount of P81,000.00, on his peso account, and the amount of
US$4,397.34 or its peso equivalent, on his dollar account" with 12% annual interest from
June 25, 1996 until full payment thereof. The appellate court likewise reduced the
amount of attorney's fees to P20,000.00. 9
Undaunted, petitioner comes to this Court via a petition for review on certiorari raising
the following issues: (1) whether the trial court violated the petitioner's right to due
process when the private respondent was allowed to present its evidence ex parte; and (2)
whether the monetary award ordered by the Court of Appeals is in accord with the
evidence, and applicable law and jurisprudence.
The petition is without merit.

Petitioner Alcaraz laments that the trial court did not postpone and reschedule the pretrial
conference on February 23, 1999 despite the manifestation of petitioner's wife that
petitioner Alcaraz suffered a stroke which rendered him paralyzed while Atty. Ben
Ibuyan, the petitioner's counsel, suffered from a "lingering gall bladder ailment." Instead,
upon motion of private respondent Equitable, the trial court declared the petitioner as in
default and allowed the private respondent to present its evidence ex-parte. 10 Petitioner
Alcaraz also charge the trial court with arbitrariness and of depriving him of the right to
have the case against him heard before an impartial judge or tribunal. In support of his
allegations, he maintains that, aside from brushing aside the clearly meritorious reasons
for his and his counsel's absence on the February 23, 1999 pretrial conference, the trial
court judge and its personnel have shown their bias against him in several occasions such
as the alleged difficulty his counsel encountered in filing a Motion for New Trial. 11
With regard to the first issue, it is well-settled that this Court is not a trier of facts. This
Court accords due respect to the findings of the trial court and the appellate court save in
clearly exceptional cases. 12 This case, however, does not fall within those exceptions.
The trial court clearly has the discretion on whether to grant or deny a motion to postpone
and/or reschedule the pretrial conference in accordance with the circumstances then
obtaining in the case. 13 This must be so as it is the trial court which was able to witness
firsthand the events as they unfolded in the trial of a case. Postponements, while
permissible, must not be countenanced except for clearly meritorious grounds and in light
of the attendant circumstances. 14 The trial court's discretion on this matter, however, is
not unbridled. The trial courts are well advised to reasonably and wisely exercise such
discretion. This Court will not hesitate to strike down clearly arbitrary acts or orders of
the lower court. This, however, is not the situation in this case. While it is true that
private respondent Equitable and inclement weather have on occasion caused the
postponement of the pretrial conference, the repeated resetting of the pretrial conference
was primarily due to the petitioner.
IcTEaC

As to the reasons proffered by the petitioner's wife at the February 23, 1999 pretrial
conference, we agree with the findings of the trial court and the Court of Appeals. Under
the Rules of Court, both the parties and their counsels are mandated to appear in the
pretrial conference. 15 If the parties opt not to be present, their counsel must be armed
with a special power of attorney specifically for the purpose. This must be so as the
pretrial conference is primarily for the purpose of exploring the possibility of a
compromise, or on the failure thereof, for the parties to make certain admissions and
stipulations in order to facilitate a more efficient proceeding at the trial proper. 16 In the
case at bar, both petitioner Alcaraz and his counsel did not appear at the scheduled
pretrial. Instead, it was the petitioner's wife alone who made the verbal manifestation on
behalf of her husband and his counsel while presenting an unverified medical certificate
on the latter's behalf. As correctly observed by the Court of Appeals, the records are
bereft of any medical certificate, verified or unverified, in the name of petitioner Alcaraz
to establish the cause of his absence at the pretrial conference. 17 Even assuming

arguendo that petitioner Alcaraz and Atty. Ibuyan's absence on the February 23, 1999
pretrial conference is due to justifiable causes, the petitioner is represented by a law firm
and not by Atty. Ibuyan alone. As such, any of the latter's partners or associates could
have appeared before the court and participate in the pretrial or at least make the proper
motion for postponement if necessary.
A charge of arbitrariness and bias against the trial court, in this case against the judge as
well as all the court personnel, is a serious charge that must be substantiated. Bare
allegations of partiality will not suffice. It must be shown that the trial court committed
acts or engaged in conduct clearly indicative of bias or pre-judgment against a party. The
petitioner failed to do so in this case. The disallowance of a motion for postponement is
not sufficient to show arbitrariness and partiality of the trial court. As this Court ruled in
the case of Gochan v. Gochan, 18 to wit:
. . . . A motion for continuance or postponement is not a matter of right, but
a request addressed to the sound discretion of the court. Parties asking for
postponement have absolutely no right to assume that their motions would be
granted. Thus, they must be prepared on the day of the hearing.
Given this rule, the question of the correctness of the denial of respondents'
requests for postponements was addressed to the sound discretion of Judge
Dicdican. His action thereon cannot be disturbed by appellate courts in the
absence of any clear and manifest abuse of discretion resulting in a denial
of substantial justice. Since there was no such finding with regard to the
disallowance of the requests for postponement, the CA [Court of Appeals]
cannot overturn the decision of the judge. Much less can it assume his bias
and partiality based merely on the denial of the requests for postponement.

19

With regard to the second issue, the petitioner never disputed his use of the credit card
issued to him by the private respondent. While he maintains that there is a "great
disparity" between the amount of credit he availed of and what was actually being
collected from him by the private respondent, nowhere in the records of this case,
however, did petitioner Alcaraz contest any specific purchase or cash advance charged to
the credit card, whether the peso or the dollar account. While the petitioner did request
the private respondent in writing for a computation of his outstanding balance, the
petitioner likewise in the very same letter offered to pay his outstanding obligations in
twelve (12) equal monthly installments. 20 Private respondent Equitable responded by
proposing that the amount due as stated in the statement of accounts sent to the petitioner
instead be paid in six (6) equal monthly installments. 21 Petitioner Alcaraz likewise made
partial payments before and after he made the proposed payment scheme to the private
respondent. Clearly, what the petitioner contests is the application of the interests,

penalties and other charges as provided for in the Terms and Conditions when he never
signed nor conformed to the said document. Petitioner Alcaraz likewise claims that the
contested provisions are not applicable to him because he was considered an honorary
member who is entitled to pay for his credit purchases and cash advances on an
installment basis free of any interest. The petitioner asserts that the "honorary" status
given to him was evidenced by the fact that private respondent Equitable issued the credit
card in his name without the necessity of any application or document submitted and
signed by him prior to such issuance. 22
Private respondent Equitable, on the other hand, avers that while petitioner Alcaraz did
not file or sign an application for the credit card, this did not exempt him from the
provisions of the Terms and Conditions. Petitioner's claim of honorary membership
which allegedly entitles him to pay his obligations on an interest-free installment basis is
fallacious and groundless. 23 Private respondent Equitable contends that the waiver of
the filing of an application simply means that petitioner Alcaraz has been pre-screened.
Such a status is conferred on a person by virtue of his good credit standing or upon
recommendation of a reputable client or officer of private respondent Equitable. It is
private respondent Equitable's assertion that by signing the credit card and subsequently
using the same, the petitioner has agreed to the Terms and Conditions and any
amendment thereto as stated in the back of the credit card itself. 24 Except from his bare
assertions that the non-filing of application entitles him to pay for his credit card
obligations free of interest on an installment basis, the petitioner was not able to show
that it was in fact the agreement between him and the private respondent or that the same
is the policy and/or practice of the latter.
cSEaDA

The evidence sustains the claim of private respondent Equitable that petitioner Alcaraz is
what is known as a pre-screened client. When a client is classified as pre-screened, the
usual screening procedures of prospective cardholders, such as the filing of an application
form and submission of other relevant documents prior to the issuance of a credit card,
are dispensed with and the credit card is issued outright. Upon receipt of the card, the prescreened client has the option of accepting or rejecting the credit card. In the case at bar,
petitioner Alcaraz signified his acceptance of the credit card by signing and subsequently
using the same. This, however, without more, does not confer "honorary membership"
status to the petitioner.
We come now to the application of the provisions of the Terms and Conditions,
particularly the interest rates, penalties and surcharges, to petitioner Alcaraz. It is the
petitioner's contention that since he never signed an application form or any other
document containing the Terms and Conditions, the same should not be applied to him as
it violates one of the most essential and basic tenets of contract law which is consent. It is
petitioner Alcaraz's position that he is not bound by the Terms and Conditions as he never
signed it.

Private respondent Equitable, on the other hand, claims that at the back of the credit card
itself the following is stated:
By signing or using this card, the holder agrees to be bound by Equitable Bank's
Credit Card Agreement, all future amendments thereto. . . . 25

The private respondent maintains that the above stipulation is a standard clause printed at
the back of each credit card that it issued and that the Agreement mentioned therein refers
to the Terms and Conditions which governs the use of the credit card as contained in
private respondent Equitable's standard application form. 26 Thus, by signing the back of
the credit card, petitioner Alcaraz has explicitly consented to the Terms and Conditions
including the applicable interests, service fees, attorney's fees and liquidated damages in
the event of nonpayment within the period stated in the statements of account regularly
sent every month to the petitioner.
It is a basic rule of evidence that a party has the burden of proving his own affirmative
allegations. 27 In the instant case, private respondent Equitable has the burden of proving
the material allegations of its complaint with the requisite quantum of evidence. One such
material allegation is the applicability of the provisions of the Terms and Conditions to
petitioner Alcaraz. In support thereof private respondent Equitable presented a copy of
the Terms and Conditions as contained in its standard application form 28 and a copy of
its "Visa Card" issued to another client in order to show the alleged standard stipulation
printed at the back of the card. 29 The standard application form presented to the court
does not bear the signature of the petitioner. In fact, as admitted by private respondent
Equitable, petitioner Alcaraz, as a pre-screened client, did not submit or sign any
application form or document prior to the issuance of the credit card. Neither is there any
evidence on record that the petitioner was shown a copy of the Terms and Conditions
before or after the issuance of the credit card in his name, much less that he has given his
consent thereto. As correctly pointed out by the Court of Appeals, the petitioner should
not be condemned to pay the interests and charges provided in the Terms and Conditions
on the mere claim of the private respondent without any proof of the former's conformity
and acceptance of the stipulations contained therein. 30 Even if we are to accept the
private respondent's averment that the stipulation quoted earlier is printed at the back of
each and every credit card issued by private respondent Equitable, such stipulation is not
sufficient to bind the petitioner to the Terms and Conditions without a clear showing that
the petitioner was aware of and consented to the provisions of this document. This, the
private respondent failed to do.
It is, however, undeniable that petitioner Alcaraz accumulated unpaid obligations both in
his peso and dollar accounts through the use of the credit card issued to him by private
respondent Equitable. As such, petitioner Alcaraz is liable for the payment thereof. Since
the provisions of the Terms and Conditions are inapplicable to petitioner Alcaraz, the
legal interest on obligations consisting of loan or forbearance of money shall apply. As

this Court ruled in the landmark case of Eastern Shipping Lines, Inc. v. Court of
Appeals, 31 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. 32
xxx xxx xxx
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

In the present case, the records reveal that the principal amount of the obligation on the
peso account of the subject credit card as of March 17, 1996 is P81,000.00, 34 while the
dollar account of the same credit card has an unpaid balance of $4,397.34 exclusive of
any interests, penalties and other charges as of March 3, 1996. 35 The extrajudicial
demand for payment for the dollar account was made on June 25, 1996 by virtue of a
letter sent to and duly received by the petitioner. The June 25, 1996 demand letter was,
however, silent on the unpaid balance on the peso account. The records likewise reveal
that it was only on October 5, 1996 that private respondent Equitable may be deemed to
have extrajudicially demanded payment of the outstanding obligation of petitioner
Alcaraz on his peso account. Hence, it is only from the aforesaid dates that the legal rate
of interest shall apply on the dollar and peso accounts, respectively, until full payment
thereof.
DaEcTC

IN VIEW WHEREOF, the petition is DISMISSED and the February 11, 2002 decision of
the Court of Appeals is AFFIRMED with MODIFICATIONS and the petitioner is
ordered to pay the following:
1. on the peso account of Equitable Visa Gold International Card with card
number 4921-0100-0743-2013 and account base number 4921-0100-0743-2005,
the principal amount of P81,000.00 with interests thereon at the rate of 12% per
annum from October 5, 1996 until full payment thereof;

2. on the dollar account of Equitable Visa Gold International Card with card
number 4921-0100-0743-2013 and account base number 4921-0100-0743-2005,

the principal amount of $4,397.34 with interests thereon at the rate of 12% per
annum from June 25, 1996 until the said amount is paid in full; and
3. the amount of P20,000.00 as and by way of attorney's fees.

No costs.
SO ORDERED.
Sandoval-Gutierrez, Corona, Azcuna and Garcia, JJ., concur.
|||

(Alcaraz v. Court of Appeals, G.R. No. 152202, [July 28, 2006], 529 PHIL 77-90)

FIRST DIVISION
[G.R. No. 154469. December 6, 2006.]
METROPOLITAN BANK AND TRUST COMPANY, petitioner, vs.
RENATO D. CABILZO, respondent.

DECISION

CHICO-NAZARIO, J :
p

Before this Court is a Petition for Review on Certiorari, filed by petitioner Metropolitan
Bank and Trust Company (Metrobank) seeking to reverse and set aside the Decision 1 of
the Court of Appeals dated 8 March 2002 and its Resolution dated 26 July 2002 affirming
the Decision of the Regional Trial Court (RTC) of Manila, Branch 13 dated 4 September
1998. The dispositive portion of the Court of Appeals Decision reads:
WHEREFORE, the assailed decision dated September 4, 1998 is AFFIRMED
with modifications (sic) that the awards for exemplary damages and attorney's
fees are hereby deleted.

Petitioner Metrobank is a banking institution duly organized and existing as such under
Philippine laws. 2
Respondent Renato D. Cabilzo (Cabilzo) was one of Metrobank's clients who maintained
a current account with Metrobank Pasong Tamo Branch. 3
On 12 November 1994, Cabilzo issued a Metrobank Check No. 985988, payable to
"CASH" and postdated on 24 November 1994 in the amount of One Thousand Pesos
(P1,000.00). The check was drawn against Cabilzo's Account with Metrobank Pasong
Tamo Branch under Current Account No. 618044873-3 and was paid by Cabilzo to a
certain Mr. Marquez, as his sales commission. 4
Subsequently, the check was presented to Westmont Bank for payment. Westmont Bank,
in turn, indorsed the check to Metrobank for appropriate clearing. After the entries
thereon were examined, including the availability of funds and the authenticity of the
signature of the drawer, Metrobank cleared the check for encashment in accordance with
the Philippine Clearing House Corporation (PCHC) Rules.
On 16 November 1994, Cabilzo's representative was at Metrobank Pasong Tamo Branch
to make some transaction when he was asked by a bank personnel if Cabilzo had issued a

check in the amount of P91,000.00 to which the former replied in the negative. On the
afternoon of the same date, Cabilzo himself called Metrobank to reiterate that he did not
issue a check in the amount of P91,000.00 and requested that the questioned check be
returned to him for verification, to which Metrobank complied. 5
Upon receipt of the check, Cabilzo discovered that Metrobank Check No. 985988 which
he issued on 12 November 1994 in the amount of P1,000.00 was altered to P91,000.00
and the date 24 November 1994 was changed to 14 November 1994. 6
Hence, Cabilzo demanded that Metrobank re-credit the amount of P91,000.00 to his
account. Metrobank, however, refused reasoning that it has to refer the matter first to its
Legal Division for appropriate action. Repeated verbal demands followed but Metrobank
still failed to re-credit the amount of P91,000.00 to Cabilzo's account. 7
On 30 June 1995, Cabilzo, thru counsel, finally sent a letter-demand 8 to Metrobank for
the payment of P90,000.00, after deducting the original value of the check in the amount
of P1,000.00. Such written demand notwithstanding, Metrobank still failed or refused to
comply with its obligation.
IcaHCS

Consequently, Cabilzo instituted a civil action for damages against Metrobank before the
RTC of Manila, Branch 13. In his Complaint docketed as Civil Case No. 95-75651,
Renato D. Cabilzo v. Metropolitan Bank and Trust Company, Cabilzo prayed that in
addition to his claim for reimbursement, actual and moral damages plus costs of the suit
be awarded in his favor. 9
For its part, Metrobank countered that upon the receipt of the said check through the
PCHC on 14 November 1994, it examined the genuineness and the authenticity of the
drawer's signature appearing thereon and the technical entries on the check including the
amount in figures and in words to determine if there were alterations, erasures,
superimpositions or intercalations thereon, but none was noted. After verifying the
authenticity and propriety of the aforesaid entries, including the indorsement of the
collecting bank located at the dorsal side of the check which stated that, "all prior
indorsements and lack of indorsement guaranteed," Metrobank cleared the check. 10
Anent thereto, Metrobank claimed that as a collecting bank and the last indorser,
Westmont Bank should be held liable for the value of the check. Westmont Bank
indorsed the check as the an unqualified indorser, by virtue of which it assumed the
liability of a general indorser, and thus, among others, warranted that the instrument is
genuine and in all respect what it purports to be.
In addition, Metrobank, in turn, claimed that Cabilzo was partly responsible in leaving
spaces on the check, which, made the fraudulent insertion of the amount and figures
thereon, possible. On account of his negligence in the preparation and issuance of the

check, which according to Metrobank, was the proximate cause of the loss, Cabilzo
cannot thereafter claim indemnity by virtue of the doctrine of equitable estoppel.
Thus, Metrobank demanded from Cabilzo, for payment in the amount of P100,000.00
which represents the cost of litigation and attorney's fees, for allegedly bringing a
frivolous and baseless suit. 11
On 19 April 1996, Metrobank filed a Third-Party Complaint 12 against Westmont Bank
on account of its unqualified indorsement stamped at the dorsal side of the check which
the former relied upon in clearing what turned out to be a materially altered check.
Subsequently, a Motion to Dismiss 13 the Third-Party Complaint was then filed by
Westmont bank because another case involving the same cause of action was pending
before a different court. The said case arose from an action for reimbursement filed by
Metrobank before the Arbitration Committee of the PCHC against Westmont Bank, and
now the subject of a Petition for Review before the RTC of Manila, Branch 19.
In an Order 14 dated 4 February 1997, the trial court granted the Motion to Dismiss the
Third-Party Complaint on the ground of litis pendentia.
On 4 September 1998, the RTC rendered a Decision 15 in favor of Cabilzo and thereby
ordered Metrobank to pay the sum of P90,000.00, the amount of the check. In stressing
the fiduciary nature of the relationship between the bank and its clients and the
negligence of the drawee bank in failing to detect an apparent alteration on the check, the
trial court ordered for the payment of exemplary damages, attorney's fees and cost of
litigation. The dispositive portion of the Decision reads:
WHEREFORE, judgment is rendered ordering defendant Metropolitan Bank
and Trust Company to pay plaintiff Renato Cabilzo the sum of P90,000 with
legal interest of 6 percent per annum from November 16, 1994 until payment is
made plus P20,000 attorney's fees, exemplary damages of P50,000, and costs of
the suit. 16

Aggrieved, Metrobank appealed the adverse decision to the Court of Appeals reiterating
its previous argument that as the last indorser, Westmont Bank shall bear the loss
occasioned by the fraudulent alteration of the check. Elaborating, Metrobank maintained
that by reason of its unqualified indorsement, Westmont Bank warranted that the check in
question is genuine, valid and subsisting and that upon presentment the check shall be
accepted according to its tenor.
EDACSa

Even more, Metrobank argued that in clearing the check, it was not remiss in the
performance of its duty as the drawee bank, but rather, it exercised the highest degree of
diligence in accordance with the generally accepted banking practice. It further insisted

that the entries in the check were regular and authentic and alteration could not be
determined even upon close examination.
In a Decision 17 dated 8 March 2002, the Court of Appeals affirmed with modification
the Decision of the court a quo, similarly finding Metrobank liable for the amount of the
check, without prejudice, however, to the outcome of the case between Metrobank and
Westmont Bank which was pending before another tribunal. The decretal portion of the
Decision reads:
WHEREFORE, the assailed decision dated September 4, 1998 is AFFIRMED
with the modifications (sic) that the awards for exemplary damages and
attorney's fees are hereby deleted. 18

Similarly ill-fated was Metrobank's Motion for Reconsideration which was also denied
by the appellate court in its Resolution 19 issued on 26 July 2002, for lack of merit.
Metrobank now poses before this Court this sole issue:
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
HOLDING METROBANK, AS DRAWEE BANK, LIABLE FOR THE
ALTERATIONS ON THE SUBJECT CHECK BEARING THE AUTHENTIC
SIGNATURE OF THE DRAWER THEREOF.

We resolve to deny the petition.

An alteration is said to be material if it changes the effect of the instrument. It means that
an unauthorized change in an instrument that purports to modify in any respect the
obligation of a party or an unauthorized addition of words or numbers or other change to
an incomplete instrument relating to the obligation of a party. 20 In other words, a
material alteration is one which changes the items which are required to be stated under
Section 1 of the Negotiable Instruments Law.
Section 1 of the Negotiable Instruments Law provides:
Section 1. Form of negotiable instruments. An instrument to be negotiable
must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain
in money;
(c) Must be payable on demand or at a fixed determinable future time;
(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or

otherwise indicated therein with reasonable certainty.

Also pertinent is the following provision in the Negotiable Instrument Law which states:
Section 125. What constitutes material alteration. Any alteration which
changes:

(a) The date;

(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relation of the parties;

aIHCSA

(e) The medium or currency in which payment is to be made;

Or which adds a place of payment where no place of payment is specified, or
any other change or addition which alters the effect of the instrument in any
respect is a material alteration.

In the case at bar, the check was altered so that the amount was increased from P1,000.00
to P91,000.00 and the date was changed from 24 November 1994 to 14 November 1994.
Apparently, since the entries altered were among those enumerated under Section 1 and
125, namely, the sum of money payable and the date of the check, the instant controversy
therefore squarely falls within the purview of material alteration.
Now, having laid the premise that the present petition is a case of material alteration, it is
now necessary for us to determine the effect of a materially altered instrument, as well as
the rights and obligations of the parties thereunder. The following provision of the
Negotiable Instrument Law will shed us some light in threshing out this issue:
Section 124. Alteration of instrument; effect of. Where a negotiable
instrument is materially altered without the assent of all parties liable thereon, it
is avoided, except as against a party who has himself made, authorized, and
assented to the alteration and subsequent indorsers.
But when the instrument has been materially altered and is in the hands of a
holder in due course not a party to the alteration, he may enforce the payment
thereof according to its original tenor. (Emphasis ours.)

Indubitably, Cabilzo was not the one who made nor authorized the alteration. Neither did
he assent to the alteration by his express or implied acts. There is no showing that he
failed to exercise such reasonable degree of diligence required of a prudent man which
could have otherwise prevented the loss. As correctly ruled by the appellate court,
Cabilzo was never remiss in the preparation and issuance of the check, and there were no
indicia of evidence that would prove otherwise. Indeed, Cabilzo placed asterisks before
and after the amount in words and figures in order to forewarn the subsequent holders
that nothing follows before and after the amount indicated other than the one specified
between the asterisks.
The degree of diligence required of a reasonable man in the exercise of his tasks and the
performance of his duties has been faithfully complied with by Cabilzo. In fact, he was
wary enough that he filled with asterisks the spaces between and after the amounts, not
only those stated in words, but also those in numerical figures, in order to prevent any
fraudulent insertion, but unfortunately, the check was still successfully altered, indorsed
by the collecting bank, and cleared by the drawee bank, and encashed by the perpetrator
of the fraud, to the damage and prejudice of Cabilzo.
Verily, Metrobank cannot lightly impute that Cabilzo was negligent and is therefore
prevented from asserting his rights under the doctrine of equitable estoppel when the
facts on record are bare of evidence to support such conclusion. The doctrine of equitable
estoppel states that when one of the two innocent persons, each guiltless of any
intentional or moral wrong, must suffer a loss, it must be borne by the one whose
erroneous conduct, either by omission or commission, was the cause of injury. 21
Metrobank's reliance on this dictum, is misplaced. For one, Metrobank's representation
that it is an innocent party is flimsy and evidently, misleading. At the same time,
Metrobank cannot asseverate that Cabilzo was negligent and this negligence was the
proximate cause 22 of the loss in the absence of even a scintilla proof to buttress such
claim. Negligence is not presumed but must be proven by the one who alleges it. 23
Undoubtedly, Cabilzo was an innocent party in this instant controversy. He was just an
ordinary businessman who, in order to facilitate his business transactions, entrusted his
money with a bank, not knowing that the latter would yield a substantial amount of his
deposit to fraud, for which Cabilzo can never be faulted.
CTHaSD

We never fail to stress the remarkable significance of a banking institution to commercial

transactions, in particular, and to the country's economy in general. The banking system
is an indispensable institution in the modern world and plays a vital role in the economic
life of every civilized nation. Whether as mere passive entities for the safekeeping and
saving of money or as active instruments of business and commerce, banks have become
an ubiquitous presence among the people, who have come to regard them with respect
and even gratitude and, most of all, confidence. 24

Thus, even the humble wage-earner does not hesitate to entrust his life's savings to the
bank of his choice, knowing that they will be safe in its custody and will even earn some
interest for him. The ordinary person, with equal faith, usually maintains a modest
checking account for security and convenience in the settling of his monthly bills and the
payment of ordinary expenses. As for a businessman like the respondent, the bank is a
trusted and active associate that can help in the running of his affairs, not only in the form
of loans when needed but more often in the conduct of their day-to-day transactions like
the issuance or encashment of checks. 25
In every case, the depositor expects the bank to treat his account with the utmost fidelity,
whether such account consists only of a few hundred pesos or of millions. The bank must
record every single transaction accurately, down to the last centavo, and as promptly as
possible. This has to be done if the account is to reflect at any given time the amount of
money the depositor can dispose of as he sees fit, confident that the bank will deliver it as
and to whomever he directs. 26
The point is that as a business affected with public interest and because of the nature of
its functions, the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship. The
appropriate degree of diligence required of a bank must be a high degree of diligence, if
not the utmost diligence. 27
In the present case, it is obvious that Metrobank was remiss in that duty and violated that
relationship. As observed by the Court of Appeals, there are material alterations on the
check that are visible to the naked eye. Thus:
. . . The number "1" in the date is clearly imposed on a white figure in the shape
of the number "2". The appellant's employees who examined the said check
should have likewise been put on guard as to why at the end of the amount in
words, i.e., after the word "ONLY", there are 4 asterisks, while at the beginning
of the line or before said phrase, there is none, even as 4 asterisks have been
placed before and after the word "CASH" in the space for payee. In addition, the
4 asterisks before the words "ONE THOUSAND PESOS ONLY" have
noticeably been erased with typing correction paper, leaving white marks, over
which the word "NINETY" was superimposed. The same can be said of the
numeral "9" in the amount "91,000", which is superimposed over a whitish
mark, obviously an erasure, in lieu of the asterisk which was deleted to insert
the said figure. The appellant's employees should have again noticed why only 2
asterisks were placed before the amount in figures, while 3 asterisks were
placed after such amount. The word "NINETY" is also typed differently and
with a lighter ink, when compared with the words "ONE THOUSAND PESOS
ONLY." The letters of the word "NINETY" are likewise a little bigger when
compared with the letters of the words "ONE THOUSAND PESOS ONLY". 28

Surprisingly, however, Metrobank failed to detect the above alterations which could not
escape the attention of even an ordinary person. This negligence was exacerbated by the
fact that, as found by the trial court, the check in question was examined by the cash
custodian whose functions do not include the examinations of checks indorsed for
payment against drawer's accounts. 29 Obviously, the employee allowed by Metrobank to
examine the check was not verse and competent to handle such duty. These factual
findings of the trial court is conclusive upon this court especially when such findings was
affirmed the appellate court. 30
Apropos thereto, we need to reiterate that by the very nature of their work the degree of
responsibility, care and trustworthiness expected of their employees and officials is far
better than those of ordinary clerks and employees. Banks are expected to exercise the
highest degree of diligence in the selection and supervision of their employees. 31
In addition, the bank on which the check is drawn, known as the drawee bank, is under
strict liability to pay to the order of the payee in accordance with the drawer's instructions
as reflected on the face and by the terms of the check. Payment made under materially
altered instrument is not payment done in accordance with the instruction of the drawer.
When the drawee bank pays a materially altered check, it violates the terms of the check,
as well as its duty to charge its client's account only for bona fide disbursements he had
made. Since the drawee bank, in the instant case, did not pay according to the original
tenor of the instrument, as directed by the drawer, then it has no right to claim
reimbursement from the drawer, much less, the right to deduct the erroneous payment it
made from the drawer's account which it was expected to treat with utmost fidelity.
Metrobank vigorously asserts that the entries in the check were carefully examined: The
date of the instrument, the amount in words and figures, as well as the drawer's signature,
which after verification, were found to be proper and authentic and was thus cleared. We
are not persuaded. Metrobank's negligence consisted in the omission of that degree of
diligence required of a bank owing to the fiduciary nature of its relationship with its
client. Article 1173 of the Civil Code provides:

The fault or negligence of the obligor consists in the omission of that diligence
which is required by the nature of the obligation and corresponds with the
circumstances of the persons, of the time and of the place. . . . .

Beyond question, Metrobank failed to comply with the degree required by the nature of
its business as provided by law and jurisprudence. If indeed it was not remiss in its
obligation, then it would be inconceivable for it not to detect an evident alteration
considering its vast knowledge and technical expertise in the intricacies of the banking
business. This Court is not completely unaware of banks' practices of employing devices

and techniques in order to detect forgeries, insertions, intercalations, superimpositions

and alterations in checks and other negotiable instruments so as to safeguard their
authenticity and negotiability. Metrobank cannot now feign ignorance nor claim
diligence; neither can it point its finger at the collecting bank, in order to evade liability.
IcaEDC

Metrobank argues that Westmont Bank, as the collecting bank and the last indorser, shall
bear the loss. Without ruling on the matter between the drawee bank and the collecting
bank, which is already under the jurisdiction of another tribunal, we find that Metrobank
cannot rely on such indorsement, in clearing the questioned check. The corollary liability
of such indorsement, if any, is separate and independent from the liability of Metrobank
to Cabilzo.
The reliance made by Metrobank on Westmont Bank's indorsement is clearly
inconsistent, if not totally offensive to the dictum that being impressed with public
interest, banks should exercise the highest degree of diligence, if not utmost diligence in
dealing with the accounts of its own clients. It owes the highest degree fidelity to its
clients and should not therefore lightly rely on the judgment of other banks on occasions
where its clients money were involve, no matter how small or substantial the amount at
stake.
Metrobank's contention that it relied on the strength of collecting bank's indorsement may
be merely a lame excuse to evade liability, or may be indeed an actual banking practice.
In either case, such act constitutes a deplorable banking practice and could not be allowed
by this Court bearing in mind that the confidence of public in general is of paramount
importance in banking business.
What is even more deplorable is that, having been informed of the alteration, Metrobank
did not immediately re-credit the amount that was erroneously debited from Cabilzo's
account but permitted a full blown litigation to push through, to the prejudice of its client.
Anyway, Metrobank is not left with no recourse for it can still run after the one who
made the alteration or with the collecting bank, which it had already done. It bears
repeating that the records are bare of evidence to prove that Cabilzo was negligent. We
find no justifiable reason therefore why Metrobank did not immediately reimburse his
account. Such ineptness comes within the concept of wanton manner contemplated under
the Civil Code which warrants the imposition of exemplary damages, "by way of
example or correction for the public good," in the words of the law. It is expected that
this ruling will serve as a stern warning in order to deter the repetition of similar acts of
negligence, lest the confidence of the public in the banking system be further eroded. 32
WHEREFORE, premises considered, the instant Petition is DENIED. The Decision dated
8 March 2002 and the Resolution dated 26 July 2002 of the Court of Appeals are
AFFIRMED with modification that exemplary damages in the amount of P50,000.00 be
awarded. Costs against the petitioner.

SO ORDERED.
Panganiban, C.J., Ynares-Santiago, Austria-Martinez and Callejo, Sr., JJ., concur.
(Metropolitan Bank and Trust Company v. Cabilzo, G.R. No. 154469, [December 6,
2006], 539 PHIL 316-334)
|||

THIRD DIVISION
[G.R. No. 162895. August 16, 2006.]
MA. ELIZABETH KING AND MARY ANN KING, petitioners, vs.
MEGAWORLD PROPERTIES AND HOLDINGS, INC., respondent.

DECISION

QUISUMBING, J :
p

This is a petition for review on certiorari of the Decision 1 dated January 27, 2004 and
the Resolution 2 dated March 24, 2004 of the Court of Appeals in CA-G.R. SP No.
80560. The Court of Appeals upheld the Decision 3 dated August 1, 2003 of the Office of
the President in O.P. Case No. 99-J-8861 which affirmed the Housing and Land Use
Regulatory Board (HLURB) Arbiter's decision denying petitioners' prayer for moral
damages and the revocation of respondent's certificate and license to sell.
Petitioners purchased one unit of the Sherwood Heights Townhouse from respondent. 4
A year after, cracks and leaks appeared in the perimeter fence of the unit. On the request
of petitioners, respondent's engineers repaired the fence. Four months after, the same
cracks and leaks reappeared. The petitioners requested that the affected area of the fence
be demolished, and a stronger foundation with better construction materials be built.
Because of respondent's failure to repair the fence, rainwater seeped through the wall and
the floor. Various insects also proliferated. This prompted petitioners to institute a
complaint before the HLURB Expanded National Capital Region Field Office. They
alleged violation of warranty and prayed for the revocation of petitioner's certificate and
license to sell, moral and exemplary damages, and execution of the necessary repairs. 5
The HLURB Arbiter found that the cracks and leaks were caused by the soft soil
movement of the adjacent property. Further, the Arbiter also found that the additional
load from the converted lanai area, which was altered without the consent of respondent
as required in the deed of restrictions, 6 aggravated the cracks. He also found that said
cracks and leaks were superficial and did not affect the structural integrity of the main
structure. 7
Since respondent had already completed the soil stabilization measure of the adjoining lot
even before the termination of the case, 8 the Arbiter merely directed respondent to repair
the cracks and leaks, and pay petitioners P20,000.00 as attorney's fees. 9 He did not
award moral damages since petitioners failed to prove fraud and bad faith. 10

Petitioners went to the Board of Commissioners reiterating the same appeal before the
Expanded National Capital Region Field Office. After the case was submitted for
decision, they amended their prayer and asked for payment of actual damages and the
refund of all payments made in the purchase of the unit. They also moved for the
presentation of supplemental evidence, in the form of VHS tape, without furnishing
respondent a copy of the tape. The Board granted the motion but did not give respondent
an opportunity to examine and authenticate the contents of the tape.
On August 24, 1999, the Board of Commissioners of the HLURB annulled the Arbiter's
decision and ordered respondent to refund 1.9 million pesos with interest, and to pay
P120,000.00 as moral and exemplary damages and attorney's fees. 11 On appeal, the
Office of the President ruled that the cracks and leaks appearing in the perimeter fence
did not affect the structural integrity of the townhouse, and that there was no proof of
fraud or bad faith on the part of the respondents. It set aside the Board's decision and
affirmed the Arbiter. 12 Petitioners sought reconsideration but it was denied. 13
When petitioners appealed, the appellate court denied the petition and the subsequent
motion for reconsideration based on its finding that the townhouse and its foundation
were structurally sound.
Petitioners now come before us raising the following issues:
I
WHETHER OR NOT THE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR IN TOTALLY DISREGARDING THE FINDING OF
FACTS BY THE BOARD OF COMMISSIONERS OF THE HOUSING AND
LAND USE REGULATORY BOARD.
II
WHETHER OR NOT THE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR IN NOT APPLYING ARTICLE 1173 OF THE CIVIL
CODE. 14

Simply stated, the issues for our resolution are the following: (1) Did the cracks and leaks
in the perimeter fence affect the structural integrity of the unit to justify the refund of
petitioners' payments for the unit? (2) Are petitioners entitled to moral and exemplary
damages?
IETCAS

Petitioners aver that respondent breached the warranty of the townhouse when it used
substandard materials. They maintain that the cracks and leaks, which were caused by the
soft soil movement of the adjacent lot, could have been prevented if the respondent
executed the soil stabilization of the adjacent lot prior to the construction of the

townhouse and the perimeter fence. Petitioners insist that respondent should be held
liable for moral and exemplary damages because of its negligence.
For its part, respondent does not contest that the cracks and leaks in the perimeter fence
were caused by the soft soil movement of the adjacent lot. Nonetheless, it maintains that
the townhouse unit has its own independent foundation separate and distinct from the
perimeter fence and is not affected by the loosening of the soil of the adjacent lot. It also
maintains that the cracks did not affect the structural integrity of the main house. It
declares that it had already completed the soil stabilization measure for the perimeter
fence, and is willing to do the necessary repairs. In sum, it should not be made to refund
the purchase price.
Respondent further claims it is not liable for moral and exemplary damages. Petitioners
have not shown that respondent intended to do wrong, cause damage, employ fraud, or
act in bad faith. It points out that petitioners did not present any expert witness nor a
structural engineer to support their claim.
Prefatorily, we reiterate the well-settled rule that, when supported by substantial evidence
and absent any clear showing of abuse, arbitrariness or capriciousness, findings of fact of
administrative agencies, especially when affirmed by the Court of Appeals, are binding
and conclusive upon this Court. 15 After study of the evidence on record, we find no
reason to depart from this rule.
Under the original plan, the perimeter fence was not part of the townhouse. It was
attached to the main unit when the lanai area was converted into an indoor dining room.
This renovation was without prior consent of the respondent as required in the deed of
restrictions appended to the deed of sale. Hence, in determining the townhouse's
structural soundness, only the original structure should be the point of reference.
There is nothing on record to show that the original structure was unstable. One who
alleges a fact has the burden of proving it. 16 Aside from the pictures and videos of the
cracked perimeter fence, petitioners did not present any other evidence. These pictures
and videos are insufficient to show that the townhouse's foundation was structurally
defective. The cracks could be merely superficial. Other than that, the presumption is that
there was no irregularity regarding the approval of the building plan. Moreover,
respondent presented an affidavit of a structural engineer attesting that the cracks and
leaks on the perimeter fence do not affect the structural integrity of the townhouse.
Absent any showing that the townhouse structure was unstable and unsafe for habitation,
petitioners are not entitled to a refund.
For moral and exemplary damages to be awarded, the party must prove bad faith.
Otherwise, the presumption of good faith must be upheld. 17 In this case, the petitioners

failed to prove their allegation of bad faith. Hence, we cannot award moral and
exemplary damages.
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 27,
2004 and Resolution dated March 24, 2004 of the Court of Appeals in CA-G.R. SP No.
80560 are hereby AFFIRMED.
Costs against petitioners.

THCASc

SO ORDERED.
Carpio, Carpio Morales, Tinga and Velasco, Jr., JJ., concur.
(King v. Megaworld Properties and Holdings, Inc., G.R. No. 162895, [August 16, 2006],
530 PHIL 537-543)
|||

THIRD DIVISION
[G.R. No. 166662. June 27, 2008.]
AUTOCORP GROUP and PETER Y. RODRIGUEZ, petitioners, vs.
INTRA STRATA ASSURANCE CORPORATION and BUREAU OF
CUSTOMS, respondents.

DECISION

CHICO-NAZARIO, J :
p

This is a Petition for Review on Certiorari from the Decision 1 of the Court of Appeals
dated 30 June 2004 in CA-G.R. CV No. 62564 which affirmed with modification the
Decision 2 of the Regional Trial Court (RTC) of Makati City, Branch 150 in Civil Case
No. 95-1584 dated 16 September 1998.
DEICHc

The factual and procedural antecedents of this case are as follows:

On 19 August 1990, petitioner Autocorp Group, represented by its President, petitioner
Peter Y. Rodriguez, secured an ordinary re-export bond, Instrata Bond No. 5770, from
private respondent Intra Strata Assurance Corporation (ISAC) in favor of public respondent
Bureau of Customs (BOC), in the amount of P327,040.00, to guarantee the re-export of
one unit of Hyundai Excel 4-door 1.5 LS and/or to pay the taxes and duties thereon.
On 21 December 1990, petitioners obtained another ordinary re-export bond, Instrata Bond
No. 7154, from ISAC in favor of the BOC, in the amount of P447,671.00, which was
eventually increased to P707,609.00 per Bond Endorsement No. BE-0912/91 dated 10
January 1991, to guarantee the re-export of one unit of Hyundai Sonata 2.4 GLS and/or to
pay the taxes and duties thereon.
Petitioners executed and signed two Indemnity Agreements with identical stipulations in
favor of ISAC, agreeing to act as surety of the subject bonds. Petitioner Rodriguez signed
the Indemnity Agreements both as President of the Autocorp Group and in his personal
capacity. Petitioners thus agreed to the following provisions:
aITECD

INDEMNITY: The undersigned agree at all times to jointly and severally

indemnify the COMPANY and keep it indemnified and hold and save it harmless
from and against any and all damages, losses, costs, stamps, taxes, penalties,
charges and expenses of whatsoever kind and nature including counsel or
attorney's fee which the COMPANY shall or may at any time sustain or incur in

consequence of having become surety upon the bond herein above referred to or
any extension, renewal, substitution or alteration thereof, made at the instance of
the undersigned or any of them, or any other bond executed on behalf of the
undersigned or any of them, and to pay; reimburse and make good to the
COMPANY, its successors and assigns, alls sums and amounts of money which
it or its representatives shall pay or cause to be paid, or become liable to pay on
accounts of the undersigned or any of them, of whatsoever kind and nature,
including 25% of the amount involved in the litigation or other matters growing
out of or connected therewith, for and as attorney's fees, but in no case less than
P300.00 and which shall be payable whether or not the case be extrajudicially
settled, it being understood that demand made upon anyone of the undersigned
herein is admitted as demand made on all of the signatories hereof. It is hereby
further agreed that in case of any extension or renewal of the bond, we equally
bind ourselves to the COMPANY under the same terms and conditions as therein
provided without the necessity of executing another indemnity agreement for the
purpose and that we may be granted under this indemnity agreement.
MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH AND
ACCRUAL OF ACTION: Notwithstanding of (sic) the next preceding
paragraph where the obligation involves a liquidated amount for the payment of
which the COMPANY has become legally liable under the terms of the obligation
and its suretyship undertaking, or by the demand of the obligee or otherwise and
the latter has merely allowed the COMPANY's aforesaid liability irrespective of
whether or not payment has actually been made by the COMPANY, the
COMPANY for the protection of its interest may forthwith proceed against the
undersigned or either of them by court action or otherwise to enforce payment,
even prior to making payment to the obligee which may hereafter be done by the
COMPANY.
TEHIaA

INTEREST IN CASE OF DELAY: In the event of delay in payment of the

said sum or sums by the undersigned they will pay interest at the rate of 12% per
annum or same, which interest, if not paid, will be liquidated and accumulated to
the capital quarterly, and shall earn the same interest as the capital; all this without
prejudice to the COMPANY's right to demand judicially or extrajudicially the
full payment of its claims.
INCONTESTABILITY OF PAYMENT MADE BY THE COMPANY: Any
payment or disbursement made by the COMPANY on account of the abovementioned Bond, its renewals, extensions or substitutions, replacement or
novation in the belief either that the COMPANY was obligated to make such
payment or that said payment was necessary in order to avoid greater losses or
obligations for which the COMPANY might be liable by virtue of the terms of
the above-mentioned Bond, its renewal, extensions or substitutions, shall be final
and will not be disputed by the undersigned, who bind themselves to jointly and
severally indemnify the COMPANY of any such payments, as stated in the
preceding clauses:

WAIVER OF VENUE OF ACTION: We hereby agree that any question

which may arise between the COMPANY and the undersigned by reason of this
document and which has to be submitted for decision to a court of justice shall be
brought before the court of competent jurisdiction in Makati, Rizal, waiving for
this purpose any other venue.
WAIVER: The undersigned hereby waive all the rights[,] privileges and
benefits that they have or may have under Articles 2077, 2078, 2079, 2080 and
2081, of the Civil Code of the Philippines.
The undersigned, by this instrument, grant a special power of attorney in favor of
all or any of the other undersigned so that any of the undersigned may represent
all the others in all transactions related to this Bond, its renewals, extensions, or
any other agreements in connection with this Counter-Guaranty, without the
necessity of the knowledge or consent of the others who hereby promise to accept
as valid each and every act done or executed by any of the attorney's-in-fact by
virtue of the special power of attorney.
IaTSED

OUR LIABILITY HEREUNDER: It shall not be necessary for the

COMPANY to bring suit against the principal upon his default or to exhaust the
property of the principal, but the liability hereunder of the undersigned
indemnitors shall be jointly and severally, a primary one, the same as that of the
principal, and shall be exigible immediately upon the occurrence of such default.
CANCELLATION OF BOND BY THE COMPANY: The COMPANY may
at any time cancel the above-mentioned Bond, its renewals, extensions or
substitutions, subject to any liability which might have accrued prior to the date
of cancellation refunding the proportionate amount of the premium unearned on
the date of cancellation.
RENEWALS, ALTERATIONS AND SUBSTITUTIONS: The undersigned
hereby empower and authorize the COMPANY to grant or consent to the granting
of any extension, continuation, increase, modification, change, alteration and/or
renewal of the original bond herein referred to, and to execute or consent to the
execution of any substitution for said Bond with the same or different, conditions
and parties, and the undersigned hereby hold themselves jointly and severally
liable to the COMPANY for the original Bond herein above-mentioned or for any
extension, continuation, increase, modification, change, alteration, renewal or
substitution thereof without the necessary of any new indemnity agreement being
executed until the full amount including principal, interest, premiums, costs, and
other expenses due to the COMPANY thereunder is fully paid up.
SEVERABILITY OF PROVISIONS: It is hereby agreed that should any
provision or provisions of this agreement be declared by competent public
authority to be invalid or otherwise unenforceable, all remaining provisions
herein contained shall remain in full force and effect.

NOTIFICATION: The undersigned hereby accept due notice of that the

COMPANY has accepted this guaranty, executed by the undersigned in favor of
the COMPANY. 3
AcSEHT

In sum, ISAC issued the subject bonds to guarantee compliance by petitioners with their
undertaking with the BOC to re-export the imported vehicles within the given period and
pay the taxes and/or duties due thereon. In turn, petitioners agreed, as surety, to indemnify
ISAC for the liability the latter may incur on the said bonds.
Petitioner Autocorp Group failed to re-export the items guaranteed by the bonds and/or
liquidate the entries or cancel the bonds, and pay the taxes and duties pertaining to the said
items despite repeated demands made by the BOC, as well as by ISAC. By reason thereof,
the BOC considered the two bonds, with a total face value of P1,034,649.00, forfeited.
Failing to secure from petitioners the payment of the face value of the two bonds, despite
several demands sent to each of them as surety under the Indemnity Agreements, ISAC
filed with the RTC on 24 October 1995 an action against petitioners to recover the sum of
P1,034,649.00, plus 25% thereof or P258,662.25 as attorney's fees. ISAC impleaded the
BOC "as a necessary party plaintiff in order that the reward of money or judgment shall be
adjudged unto the said necessary plaintiff." 4 The case was docketed as Civil Case No. 951584.
Petitioners filed a Motion to Dismiss on 11 December 1995 on the grounds that (1) the
Complaint states no cause of action; and (2) the BOC is an improper party.
The RTC, in an Order 5 dated 27 February 1996, denied petitioners' Motion to Dismiss.
Petitioners thus filed their Answer to the Complaint, claiming that they sought permission
from the BOC for an extension of time to re-export the items covered by the bonds; that
the BOC has yet to issue an assessment for petitioners' alleged default; and that the claim
of ISAC for payment is premature as the subject bonds are not yet due and demandable.

During the pre-trial conference, petitioners admitted the genuineness and due execution of
Instrata Bonds No. 5770 and No. 7154, but specifically denied those of the corresponding
Indemnity Agreements. The parties agreed to limit the issue to "whether or not these bonds
are now due and demandable".
On 16 September 1998, the RTC rendered its Decision ordering petitioners to pay ISAC
and/or the BOC the face value of the subject bonds in the total amount of P1,034,649.00,
and to pay ISAC P258,662.25 as attorney's fees, thus:
caIDSH

WHEREFORE, judgment is hereby rendered in favor of the [herein private

respondent ISAC] and as against the [herein petitioners] who are ordered to pay

the [private respondent] Intra Strata Assurance Corporation and/or the Bureau of
Customs the amount of P1,034,649.00 which is the equivalent amount of the
subject bonds as well as to pay the plaintiff corporation the sum of P258,662.25
as and for attorney's fees. 6

Petitioners' Motion for Reconsideration was denied by the RTC in a Resolution dated 15
January 1999. 7
Petitioners appealed to the Court of Appeals. On 30 June 2004, the Court of Appeals
rendered its Decision affirming the RTC Decision, only modifying the amount of the
attorney's fees awarded:
WHEREFORE, the appealed 16 September 1998 Decision is MODIFIED to
reduce the award of attorney's fees to One Hundred Three Thousand Four
Hundred Sixty Four Pesos & Ninety Centavos (P103,464.90). The rest is affirmed
in toto. Costs against [herein petitioners]. 8

In a Resolution dated 5 January 2005, the Court of Appeals refused to reconsider its
Decision.
Petitioners thus filed the instant Petition for Review on Certiorari, assigning the following
errors allegedly committed by the Court of Appeals:
I. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
RENDERING JUDGMENT AGAINST PETITIONERS BASED ON A
PREMATURE ACTION AND/OR RULING IN FAVOR OF
RESPONDENTS WHO HAVE NO CAUSE OF ACTION AGAINST
PETITIONERS.
II. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
AFFIRMING THE DECISION OF BRANCH 150, REGIONAL TRIAL
COURT OF MAKATI CITY BASED ON MISAPPREHENSION OF
FACTS, UNSUPPORTED BY EVIDENCE ON RECORD &
CONTRARY TO LAW.
III. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT
GIVING MERIT TO THE ISSUE RAISED BY PETITIONERS THAT
THE BUREAU OF CUSTOMS IS IMPROPERLY IMPLEADED BY
INTRA STRATA.
SEHaTC

IV. THE HONORABLE COURT OF APPEALS GRAVELY ERRED [IN]

AFFIRMING THE PORTION OF THE DECISION HOLDING
PETITIONER PETER Y. RODRIGUEZ AS JOINTLY LIABLE WHEN
AMENDMENTS WERE INTRODUCED, WITHOUT HIS CONSENT
AND APPROVAL. 9

The present Petition is without merit.

Absence
subject bonds

of

actual

forfeiture

of

the

Petitioners contend that their obligation to ISAC is not yet due and demandable. They
cannot be made liable by ISAC in the absence of an actual forfeiture of the subject bonds
by the BOC and/or an explicit pronouncement by the same bureau that ISAC is already
liable on the said bonds. In this case, there is yet no actual forfeiture of the bonds, but
merely a recommendation of forfeiture, for no writ of execution has been issued against
such bonds. 10 Hence, Civil Case No. 95-1584 was prematurely filed by ISAC. Petitioners
further argue that:
Secondly, it bears emphasis that as borne by the records, not only is there no writ
of forfeiture against Surety Bond No. 7154, there is likewise no evidence adduced
on record to prove that respondent Intra Strata has made legal demand against
Surety Bond No. 5770 neither is there a showing that respondent BOC initiated a
demand or issued notice for its forfeiture and/or confiscation. 11

The Court of Appeals, in its assailed Decision, already directly addressed petitioners'
arguments by ruling that an actual forfeiture of the subject bonds is not necessary for
petitioners to be liable thereon to ISAC as surety under the Indemnity Agreements.
AcHaTE

According to the relevant provision of the Indemnity Agreements executed between

petitioner and ISAC, which reads:
[W]here the obligation involves a liquidated amount for the payment of which
[ISAC] has become legally liable under the terms of the obligation and its
suretyship undertaking or by the demand of the [BOC] or otherwise and the latter
has merely allowed the [ISAC's] aforesaid liability, irrespective of whether or not
payment has actually been made by the [ISAC], the [ISAC] for the protection of
its interest may forthwith proceed against [petitioners Autocorp Group and
Rodriguez] or either of them by court action or otherwise to enforce payment,
even prior to making payment to the [BOC] which may hereafter be done by
[ISAC][,] 12

petitioners' obligation to indemnify ISAC became due and demandable the moment
the bonds issued by ISAC became answerable for petitioners' non-compliance with its
undertaking with the BOC. Stated differently, petitioners became liable to indemnify
ISAC at the same time the bonds issued by ISAC were placed at the risk of forfeiture
by the BOC for non-compliance by petitioners with its undertaking.
The subject bonds, Instrata Bonds No. 5770 and No. 7154, became due and demandable
upon the failure of petitioner Autocorp Group to comply with a condition set forth in its

undertaking with the BOC, specifically to re-export the imported vehicles within the period
of six months from their date of entry. Since it issued the subject bonds, ISAC then also
became liable to the BOC. At this point, the Indemnity Agreements already give ISAC the
right to proceed against petitioners via court action or otherwise.
CHATEa

The Indemnity Agreements, therefore, give ISAC the right to recover from petitioners the
face value of the subject bonds plus attorney's fees at the time ISAC becomes liable on the
said bonds to the BOC, regardless of whether the BOC had actually forfeited the bonds,
demanded payment thereof and/or received such payment. It must be pointed out that the
Indemnity Agreements explicitly provide that petitioners shall be liable to indemnify ISAC
"whether or not payment has actually been made by the [ISAC]" and ISAC may proceed
against petitioners by court action or otherwise "even prior to making payment to the
[BOC] which may hereafter be done by [ISAC]".
Even when the BOC already admitted that it not only made a demand upon ISAC for the
payment of the bond but even filed a complaint against ISAC for such payment, 13 such
demand and complaint are not necessary to hold petitioners liable to ISAC for the amount
of such bonds. Petitioners' attempts to prove that there was no actual forfeiture of the
subject bonds are completely irrelevant to the case at bar.
It is worthy to note that petitioners did not impugn the validity of the stipulation in the
Indemnity Agreements allowing ISAC to proceed against petitioners the moment the
subject bonds become due and demandable, even prior to actual forfeiture or payment
thereof. Even if they did so, the Court would be constrained to uphold the validity of such
a stipulation for it is but a slightly expanded contractual expression of Article 2071 of the
Civil Code which provides, inter alia, that the guarantor may proceed against the principal
debtor the moment the debt becomes due and demandable. Article 2071 of the Civil Code
provides:
Art. 2071. The guarantor, even before having paid, may proceed against the
principal debtor:
(1) When he is sued for the payment;

CAScIH

(2) In case of insolvency of the principal debtor;

(3) When the debtor has bound himself to relieve him from the guaranty within a
specified period, and this period has expired;
(4) When the debt has become demandable, by reason of the expiration of
the period for payment;

(5) After the lapse of ten years, when the principal obligation has no fixed period
for its maturity, unless it be of such nature that it cannot be extinguished except
within a period longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor intends to
abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.
In all these cases, the action of the guarantor is to obtain release from the guaranty,
or to demand a security that shall protect him from any proceedings by the
creditor and from the danger of insolvency of the debtor. (Emphases ours).
TcEDHa

Petitioners also invoke the alleged lack of demand on the part of ISAC on petitioners as
regards Instrata Bond No. 5770 before it instituted Civil Case No. 95-1584. Even if proven
true, such a fact does not carry much weight considering that demand, whether judicial or
extrajudicial, is not required before an obligation becomes due and demandable. A demand
is only necessary in order to put an obligor in a due and demandable obligation in delay,
14 which in turn is for the purpose of making the obligor liable for interests or damages for
the period of delay. 15 Thus, unless stipulated otherwise, an extrajudicial demand is not
required before a judicial demand, i.e., filing a civil case for collection, can be resorted to.
Inclusion
of
as a party to the case

the

Bureau

of

Customs

ISAC included the BOC "as a necessary party plaintiff in order that the reward of money
or judgment shall be adjudged unto the said necessary plaintiff." 16
Petitioners assail this inclusion of the BOC as a party in Civil Case No. 95-1584 on the
ground that it was not properly represented by the Solicitor General. Petitioners also
contend that the inclusion of the BOC as a party in Civil Case No. 95-1584 "is highly
improper and should not be countenanced as the net result would be tantamount to
collusion between Intra Strata and the Bureau of Customs which would deny and deprive
petitioners their personal defenses against the BOC." 17
In its assailed Decision, the Court of Appeals did not find merit in petitioners' arguments
on the matter, holding that when the BOC forfeited the subject bonds issued by ISAC,
subrogation took place so that whatever right the BOC had against petitioners were
eventually transferred to ISAC. As ISAC merely steps into the shoes of the BOC, whatever
defenses petitioners may have against the BOC would still be available against ISAC.
TcDAHS

The Court likewise cannot sustain petitioners' position.

The misjoinder of parties does not warrant the dismissal of the action. Section 11, Rule 3
of the Rules of Court explicitly states:
SEC. 11. Misjoinder and non-joinder of parties. Neither misjoinder nor nonjoinder of parties is ground for dismissal of an action. Parties may be dropped
or added by order of the court on motion of any party or on its own initiative at
any stage of the action and on such terms as are just. Any claim against a
misjoined party may be severed and proceeded with separately.

Consequently, the purported misjoinder of the BOC as a party cannot result in the
dismissal of Civil Case No. 95-1584. If indeed the BOC was improperly impleaded as
a party in Civil Case No. 95-1584, at most, it may be dropped by order of the court,
on motion of any party or on its own initiative, at any stage of the action and on such
terms as are just.
Should the BOC then be dropped as a party to Civil Case No. 95-1584?
ISAC alleged in its Complaint 18 that the BOC is being joined as a necessary party in Civil
Case No. 95-1584.
A necessary party is defined in Section 8, Rule 3 of the Rules of Court as follows:
SEC. 8. Necessary party. A necessary party is one who is not indispensable
but who ought to be joined as a party if complete relief is to be accorded as to
those already parties, or for a complete determination or settlement of the claim
subject of the action.
CITDES

The subject matter of Civil Case No. 95-1584 is the liability of Autocorp Group to the
BOC, which ISAC is also bound to pay as the guarantor who issued the bonds therefor.
Clearly, there would be no complete settlement of the subject matter of the case at bar
the liability of Autocorp Group to the BOC should Autocorp Group be merely ordered
to pay its obligations with the BOC to ISAC. BOC is, therefore, a necessary party in the
case at bar, and should not be dropped as a party to the present case.
It can only be conceded that there was an irregularity in the manner the BOC was joined
as a necessary party in Civil Case No. 95-1584. As the BOC, through the Solicitor General,
was not the one who initiated Civil Case No. 95-1584, and neither was its consent obtained
for the filing of the same, it may be considered an unwilling co-plaintiff of ISAC in said
action. The proper way to implead the BOC as a necessary party to Civil Case No. 95-1584
should have been in accordance with Section 10, Rule 3 of the Rules of Court, viz.:
SEC. 10. Unwilling co-plaintiff. If the consent of any party who should be
joined as plaintiff can not be obtained, he may be made a defendant and the reason
therefor shall be stated in the complaint.

Nonetheless, the irregularity in the inclusion of the BOC as a party to Civil Case No.
95-1584 would not in any way affect the disposition thereof. As the Court already
found that the BOC is a necessary party to Civil Case No. 95-1584, it would be a
graver injustice to drop it as a party.
Petitioners' argument that the inclusion of the BOC as a party to this case would deprive
them of their personal defenses against the BOC is utterly baseless.
First, as ruled by the Court of Appeals, petitioners' defenses against the BOC are
completely available against ISAC, since the right of the latter to seek indemnity from
petitioner depends on the right of the BOC to proceed against the bonds.
The Court, however, deems it essential to qualify that ISAC's right to seek indemnity from
petitioners does not constitute subrogation under the Civil Code, considering that there has
been no payment yet by ISAC to the BOC. There are indeed cases in the aforementioned
Article 2071 of the Civil Code wherein the guarantor or surety, even before having paid,
may proceed against the principal debtor, but in all these cases, Article 2071 of the Civil
Code merely grants the guarantor or surety an action "to obtain release from the guaranty,
or to demand a security that shall protect him from any proceedings by the creditor and
from the danger of insolvency of the debtor". The benefit of subrogation, an extinctive
subjective novation by a change of creditor, which "transfers to the person subrogated, the
credit and all the rights thereto appertaining, either against the debtor or against third
persons", 19 is granted by the Article 2067 of the Civil Code only to the "guarantor (or
surety) who pays". 20
HTcDEa

ISAC cannot be said to have stepped into the shoes of the BOC, because the BOC still
retains said rights until it is paid. ISAC's right to file Civil Case No. 95-1584 is based on
the express provision of the Indemnity Agreements making petitioners liable to ISAC at
the very moment ISAC's bonds become due and demandable for the liability of Autocorp
Group to the BOC, without need for actual payment by ISAC to the BOC. But it is still
correct to say that all the defenses available to petitioners against the BOC can likewise be
invoked against ISAC because the latter's contractual right to proceed against petitioners
only arises when the Autocorp Group becomes liable to the BOC for non-compliance with
its undertakings. Indeed, the arguments and evidence petitioners can present against the
BOC to prove that Autocorp Group's liability to the BOC is not yet due and demandable
would also establish that petitioners' liability to ISAC under the Indemnity Agreements has
not yet arisen.
Second, making the BOC a necessary party to Civil Case No. 95-1584 actually allows
petitioners to simultaneously invoke its defenses against both the BOC and ISAC. Instead
of depriving petitioners of their personal defenses against the BOC, Civil Case No. 951584 actually gave them the opportunity to kill two birds with one stone: to disprove its
liability to the BOC and, thus, negate its liability to ISAC.

Liability of petitioner Rodriguez

Petitioner Rodriguez posits that he is merely a guarantor, and that his liability arises only
when the person with whom he guarantees the credit, Autocorp Group in this case, fails to
pay the obligation. Petitioner Rodriguez invokes Article 2079 of the Civil Code on
Extinguishment of Guaranty, which states:
Art. 2079. An extension granted to the debtor by the creditor without the consent
of the guarantor extinguishes the guaranty. The mere failure on the part of the
creditor to demand payment after the debt has become due does not of itself
constitute any extension of time referred to herein.

Petitioner Rodriguez argues that there was an amendment as to the effectivity of the
bonds, and this constitutes a modification of the agreement without his consent,
thereby exonerating him from any liability.
We must take note at this point that petitioners have not presented any evidence of this
alleged amendment as to the effectivity of the bonds. 21 Be that as it may, even if there
was indeed such an amendment, such would not cause the exoneration of petitioner
Rodriguez from liability on the bonds.
The Court of Appeals, in its assailed Decision, held that the use of the term guarantee in a
contract does not ipso facto mean that the contract is one of guaranty. It thus ruled that both
petitioners assumed liability as a regular party and obligated themselves as original
promissors, i.e., sureties, as shown in the following provisions of the Indemnity
Agreement:
EHTSCD

INDEMNITY: The undersigned [Autocorp Group and Rodriguez] agree at

all times to jointly and severally indemnify the COMPANY [ISAC] and keep
it indemnified and hold and save it harmless from and against any and all
damages, losses, costs, stamps, taxes, penalties, charges and expenses of
whatsoever kind and nature including counsel or attorney's fee which the
COMPANY [ISAC] shall or may at any time sustain or incur in consequence of
having become surety upon the bond herein above referred to . . .
xxx xxx xxx
OUR LIABILITY HEREUNDER: It shall not be necessary for the
COMPANY [ISAC] to bring suit against the principal [Autocorp Group] upon
his default or to exhaust the property of the principal [Autocorp Group], but the
liability hereunder of the undersigned indemnitors [Rodriguez] shall be
jointly and severally, a primary one, the same as that of the principal
[Autocorp Group], and shall be exigible immediately upon the occurrence of
such default. (Emphases supplied).

The Court of Appeals concluded that since petitioner Rodriguez was a surety, Article 2079
of the Civil Code does not apply. The appellate court further noted that both petitioners
authorized ISAC to consent to the granting of an extension of the subject bonds.
The Court of Appeals committed a slight error on this point. The provisions of the Civil
Code on Guarantee, other than the benefit of excussion, are applicable and available to the
surety. 22 The Court finds no reason why the provisions of Article 2079 would not apply
to a surety.
This, however, would not cause a reversal of the Decision of the Court of Appeals. The
Court of Appeals was correct that even granting arguendo that there was a modification as
to the effectivity of the bonds, petitioners would still not be absolved from liability since
they had authorized ISAC to consent to the granting of any extension, modification,
alteration and/or renewal of the subject bonds, as expressly set out in the Indemnity
Agreements:
RENEWALS, ALTERATIONS AND SUBSTITUTIONS: The undersigned
[Autocorp Group and Rodriguez] hereby empower and authorize the
COMPANY [ISAC] to grant or consent to the granting of any extension,
continuation, increase, modification, change, alteration and/or renewal of
the original bond herein referred to, and to execute or consent to the execution
of any substitution for said Bond with the same or different, conditions and
parties, and the undersigned [Autocorp Group and Rodriguez] hereby hold
themselves jointly and severally liable to the COMPANY [ISAC] for the
original Bond herein above-mentioned or for any extension, continuation,
increase, modification, change, alteration, renewal or substitution thereof
without the necessary of any new indemnity agreement being executed until
the full amount including principal, interest, premiums, costs, and other expenses
due to the COMPANY [ISAC] thereunder is fully paid up. 23 (Emphases
supplied).
IcDCaT

The foregoing provision in the Indemnity Agreements clearly authorized ISAC to consent
to the granting of any extension, modification, alteration and/or renewal of the subject
bonds.
There is nothing illegal in such a provision. In Philippine American General Insurance
Co., Inc. v. Mutuc, 24 the Court held that an agreement whereby the sureties bound
themselves to be liable in case of an extension or renewal of the bond, without the necessity
of executing another indemnity agreement for the purpose and without the necessity of
being notified of such extension or renewal, is valid; and that there is nothing in it that
militates against the law, good customs, good morals, public order or public policy.

WHEREFORE, the instant Petition for Review on Certiorari is DENIED. The Decision of
the Court of Appeals dated 30 June 2004 in CA-G.R. CV No. 62564 which affirmed with
modification the Decision of the Regional Trial Court of Makati City, in Civil Case No.
95-1584 dated 16 September 1998 is AFFIRMED in toto. Costs against petitioners.
DEHaTC

SO ORDERED.
Ynares-Santiago, Austria-Martinez, Nachura and Reyes, JJ., concur.
(Autocorp Group v. Intra Strata Assurance Corp., G.R. No. 166662, [June 27, 2008],
578 PHIL 804-826)
|||

FIRST DIVISION
[G.R. No. 199650. June 26, 2013.]
J PLUS ASIA DEVELOPMENT CORPORATION, petitioner, vs.
UTILITY ASSURANCE CORPORATION, respondent.

DECISION

VILLARAMA, JR., J :
p

Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of
Civil Procedure, as amended, assailing the Decision 1 dated January 27, 2011 and
Resolution 2 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 Agreement 3
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 Mabunay also submitted the required Performance Bond 6 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 Report 8 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:
ETaSDc

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 Arbitration 10 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.
DTcASE

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. Respondent's motion for reconsideration was likewise denied. 13
In its Answer Ex Abundante Ad Cautelam With Compulsory Counterclaims and Crossclaims, 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 project's accomplishment already exceeded the said amount,
respondent's 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 Decision 16 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 Utassco's liability shall in

no case exceed P8.4 million.
ASTDCH

2. Respondent Mabunay to pay to claimant the amount of P98,435.89, which is

respondent [Mabunay's] 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 attorney's 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 surety's liability. Pursuant to
Article 1377 18 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 respondent's
liability. The P8.4 million was a limit on the amount of respondent's liability and not a
limitation as to the obligation or undertaking it guaranteed.
However, the CA reversed the CIAC's 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, petitioner's 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 petitioner's
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 AN ERROR, 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 petitioner's 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. Corifirmation 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.)
aAHSEC

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 quasi-judicial 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
Arbitration 25 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 Reference 26 (TOR), which is distinct
from the issue of the extent of respondent's liability under the Performance Bond.
Indeed, resolution of the issue of delay was crucial upon which depends petitioner's right
to the liquidated damages pursuant to the Construction Agreement. Contrary to the CIAC's
findings, the CA opined that delay should be reckoned only after the lapse of the one-year
contract period, and consequently Mabunay's liability for liquidated damages arises only
upon the happening of such condition.
ESDcIA

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.
xxx xxx xxx

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
contractor's liability for damages.
We cannot sustain the appellate court's 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 petitioner's engineer and construction
manager, Engr. Sheila N. Botardo:
April 30, 2008
Seven Shades of Blue
Boracay Island
Malay, Aklan
Attention

: Mr. Martin Mabunay

General Manager

Thru

: Engr. Reynaldo Gapasin

Project

: Villa Beatriz

Subject

: Notice of Delay

Dear Mr. Mabunay:

cIEHAC

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/FEPI 32
October 15, 2008
xxx xxx xxx
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.
xxx xxx xxx 33
November 5, 2008
xxx xxx xxx
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.
SIaHDA

Thank you.
xxx xxx xxx 34
November 6, 2008
xxx xxx xxx
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.
xxx xxx xxx 35

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.

Petitioner's 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.
AcDHCS

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.
12.02To 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 petitioner's claim for damages nor respondent's
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:
IDTHcA

ARTICLE 13 DEFAULT OF CONTRACTOR:

13.01 Any of the following shall constitute an Event of Default on the [part]
of the CONTRACTOR.
xxx xxx xxx
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 twenty-eight 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
Owner's 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 contractor's 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 contractor's 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 contractor's 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 Mabunay's 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.
CaESTA

The pertinent portions of the Performance Bond provide:

The conditions cf 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.)
AIHaCc

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 Mabunay's
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 Appeals. 46
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. Petitioner's argument is misplaced.
Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and
Union Guarantee 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.
Petitioner's liability under the suretyship contract is different from its liability
under the law. 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 petitioner's 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 CAG.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:
HDTSCc

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."

With the above modifications, the Writ of Execution dated November 24, 2010 issued by
the CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is hereby REINSTATED and
UPHELD.
No pronouncement as to costs.
SO ORDERED.
Sereno, C.J., Leonardo-de Castro, Bersamin and Reyes, JJ., concur.
(J Plus Asia Development Corp. v. Utility Assurance Corp., G.R. No. 199650, [June 26,
2013])
|||

SPECIAL SECOND DIVISION

[G.R. No. 174269. August 25, 2010.]
POLO S. PANTALEON, petitioner, vs. AMERICAN EXPRESS
INTERNATIONAL, INC., respondent.

RESOLUTION

BRION, * J :
p

We resolve the motion for reconsideration filed by respondent American

Express International, Inc. (AMEX) dated June 8, 2009, 1 seeking to reverse our
Decision dated May 8, 2009 where we ruled that AMEX was guilty of culpable delay
in fulfilling its obligation to its cardholder petitioner Polo Pantaleon. Based on this
conclusion, we held AMEX liable for moral and exemplary damages, as well as
attorney's fees and costs of litigation. 2
FACTUAL ANTECEDENTS
The established antecedents of the case are narrated below.
AMEX is a resident foreign corporation engaged in the business of providing
credit services through the operation of a charge card system. Pantaleon has been an
AMEX cardholder since 1980. 3
In October 1991, Pantaleon, together with his wife (Julialinda), daughter
(Regina), and son (Adrian Roberto), went on a guided European tour. On October 25,
1991, the tour group arrived in Amsterdam. Due to their late arrival, they postponed the
tour of the city for the following day. 4
The next day, the group began their sightseeing at around 8:50 a.m. with a trip
to the Coster Diamond House (Coster). To have enough time for take a guided city tour
of Amsterdam before their departure scheduled on that day, the tour group planned
to leave Coster by 9:30 a.m. at the latest.
While at Coster, Mrs. Pantaleon decided to purchase some diamond pieces worth
a total of US$13,826.00. Pantaleon presented his American Express credit card to the
sales clerk to pay for this purchase. He did this at around 9:15 a.m. The sales clerk
swiped the credit card and asked Pantaleon to sign the charge slip, which was then
electronically referred to AMEX's Amsterdam office at 9:20 a.m. 5
TSaEcH

At around 9:40 a.m., Coster had not received approval from AMEX for the
purchase so Pantaleon asked the store clerk to cancel the sale. The store manager,
however, convinced Pantaleon to wait a few more minutes. Subsequently, the store

manager informed Pantaleon that AMEX was asking for bank references; Pantaleon
responded by giving the names of his Philippine depository banks.
At around 10 a.m., or 45 minutes after Pantaleon presented his credit card,
AMEX still had not approved the purchase. Since the city tour could not begin until the
Pantaleons were onboard the tour bus, Coster decided to release at around 10:05 a.m.
the purchased items to Pantaleon even without AMEX's approval.
When the Pantaleons finally returned to the tour bus, they found their travel
companions visibly irritated. This irritation intensified when the tour guide announced
that they would have to cancel the tour because of lack of time as they all had to be in
Calais, Belgium by 3 p.m. to catch the ferry to London. 6
From the records, it appears that after Pantaleon's purchase was transmitted for
approval to AMEX's Amsterdam office at 9:20 a.m.; was referred to AMEX's Manila
office at 9:33 a.m.; and was approved by the Manila office at 10:19 a.m. At 10:38 a.m.,
AMEX's Manila office finally transmitted the Approval Code to AMEX's Amsterdam
office. In all, it took AMEX a total of 78 minutes to approve Pantaleon's purchase
and to transmit the approval to the jewelry store. 7
After the trip to Europe, the Pantaleon family proceeded to the United States.
Again, Pantaleon experienced delay in securing approval for purchases using his
American Express credit card on two separate occasions. He experienced the first delay
when he wanted to purchase golf equipment in the amount of US$1,475.00 at the
Richard Metz Golf Studio in New York on October 30, 1991. Another delay occurred
when he wanted to purchase children's shoes worth US$87.00 at the Quiency Market
in Boston on November 3, 1991.
Upon return to Manila, Pantaleon sent AMEX a letter demanding an apology for
the humiliation and inconvenience he and his family experienced due to the delays in
obtaining approval for his credit card purchases. AMEX responded by explaining that
the delay in Amsterdam was due to the amount involved the charged purchase of
US$13,826.00 deviated from Pantaleon's established charge purchase pattern.
Dissatisfied with this explanation, Pantaleon filed an action for damages against the
credit card company with the Makati City Regional Trial Court (RTC).
On August 5, 1996, the RTC found AMEX guilty of delay, and awarded
Pantaleon P500,000.00 as moral damages, P300,000.00 as exemplary damages,
P100,000.00 as attorney's fees, and P85,233.01 as litigation expenses.
On appeal, the CA reversed the awards. 8 While the CA recognized that delay
in the nature of mora accipiendi or creditor's default attended AMEX's approval of
Pantaleon's purchases, it disagreed with the RTC's finding that AMEX had breached its
contract, noting that the delay was not attended by bad faith, malice or gross negligence.
The appellate court found that AMEX exercised diligent efforts to effect the approval
of Pantaleon's purchases; the purchase at Coster posed particularly a problem because
it was at variance with Pantaleon's established charge pattern. As there was no proof

that AMEX breached its contract, or that it acted in a wanton, fraudulent or malevolent
manner, the appellate court ruled that AMEX could not be held liable for any form of
damages.
SaDICE

Pantaleon questioned this decision via a petition for review on certiorari with
this Court.
In our May 8, 2009 decision, we reversed the appellate court's decision and held
that AMEX was guilty of mora solvendi, or debtor's default. AMEX, as debtor, had an
obligation as the credit provider to act on Pantaleon's purchase requests, whether to
approve or disapprove them, with "timely dispatch." Based on the evidence on record,
we found that AMEX failed to timely act on Pantaleon's purchases.
Based on the testimony of AMEX's credit authorizer Edgardo Jaurique, the
approval time for credit card charges would be three to four seconds under regular
circumstances. In Pantaleon's case, it took AMEX 78 minutes to approve the
Amsterdam purchase. We attributed this delay to AMEX's Manila credit authorizer,
Edgardo Jaurique, who had to go over Pantaleon's past credit history, his payment
record and his credit and bank references before he approved the purchase. Finding this
delay unwarranted, we reinstated the RTC decision and awarded Pantaleon moral and
exemplary damages, as well as attorney's fees and costs of litigation.
THE MOTION FOR RECONSIDERATION
In its motion for reconsideration, AMEX argues that this Court erred when it
found AMEX guilty of culpable delay in complying with its obligation to act with
timely dispatch on Pantaleon's purchases. While AMEX admits that it normally takes
seconds to approve charge purchases, it emphasizes that Pantaleon experienced delay
in Amsterdam because his transaction was not a normal one. To recall, Pantaleon sought
to charge in a single transaction jewelry items purchased from Coster in the total
amount of US$13,826.00 or P383,746.16. While the total amount of Pantaleon's
previous purchases using his AMEX credit card did exceed US$13,826.00, AMEX
points out that these purchases were made in a span of more than 10 years, not in a
single transaction.
Because this was the biggest single transaction that Pantaleon ever made using
his AMEX credit card, AMEX argues that the transaction necessarily required the credit
authorizer to carefully review Pantaleon's credit history and bank references. AMEX
maintains that it did this not only to ensure Pantaleon's protection (to minimize the
possibility that a third party was fraudulently using his credit card), but also to protect
itself from the risk that Pantaleon might not be able to pay for his purchases on credit.
This careful review, according to AMEX, is also in keeping with the extraordinary
degree of diligence required of banks in handling its transactions. AMEX concluded
that in these lights, the thorough review of Pantaleon's credit record was motivated by
legitimate concerns and could not be evidence of any ill will, fraud, or negligence by
AMEX.

AMEX further points out that the proximate cause of Pantaleon's humiliation
and embarrassment was his own decision to proceed with the purchase despite his
awareness that the tour group was waiting for him and his wife. Pantaleon could have
prevented the humiliation had he cancelled the sale when he noticed that the credit
approval for the Coster purchase was unusually delayed.
In his Comment dated February 24, 2010, Pantaleon maintains that AMEX was
guilty of mora solvendi, or delay on the part of the debtor, in complying with its
obligation to him. Based on jurisprudence, a just cause for delay does not relieve the
debtor in delay from the consequences of delay; thus, even if AMEX had a justifiable
reason for the delay, this reason would not relieve it from the liability arising from its
failure to timely act on Pantaleon's purchase.
HESAIT

In response to AMEX's assertion that the delay was in keeping with its duty to
perform its obligation with extraordinary diligence, Pantaleon claims that this duty
includes the timely or prompt performance of its obligation.
As to AMEX's contention that moral or exemplary damages cannot be awarded
absent a finding of malice, Pantaleon argues that evil motive or design is not always
necessary to support a finding of bad faith; gross negligence or wanton disregard of
contractual obligations is sufficient basis for the award of moral and exemplary
damages.
OUR RULING
We GRANT the motion for reconsideration.
Brief historical background
A credit card is defined as "any card, plate, coupon book, or other credit device
existing for the purpose of obtaining money, goods, property, labor or services or
anything of value on credit." 9 It traces its roots to the charge card first introduced by
the Diners Club in New York City in 1950. 10 American Express followed suit by
introducing its own charge card to the American market in 1958. 11
In the Philippines, the now defunct Pacific Bank was responsible for bringing
the first credit card into the country in the 1970s. 12 However, it was only in the early
2000s that credit card use gained wide acceptance in the country, as evidenced by the
surge in the number of credit card holders then. 13
Nature of Credit Card Transactions
To better understand the dynamics involved in credit card transactions, we turn
to the United States case of Harris Trust & Savings Bank v. McCray 14 which explains:
The bank credit card system involves a tripartite relationship between the issuer
bank, the cardholder, and merchants participating in the system. The issuer bank
establishes an account on behalf of the person to whom the card is issued, and the

two parties enter into an agreement which governs their relationship. This
agreement provides that the bank will pay for cardholder's account the amount of
merchandise or services purchased through the use of the credit card and will also
make cash loans available to the cardholder. It also states that the cardholder shall
be liable to the bank for advances and payments made by the bank and that the
cardholder's obligation to pay the bank shall not be affected or impaired by any
dispute, claim, or demand by the cardholder with respect to any merchandise or
service purchased.
The merchants participating in the system agree to honor the bank's credit cards.
The bank irrevocably agrees to honor and pay the sales slips presented by the
merchant if the merchant performs his undertakings such as checking the list of
revoked cards before accepting the card. . . . .
EcATDH

These slips are forwarded to the member bank which originally issued the card.
The cardholder receives a statement from the bank periodically and may then
decide whether to make payment to the bank in full within a specified period, free
of interest, or to defer payment and ultimately incur an interest charge.

We adopted a similar view in CIR v. American Express International, Inc.

(Philippine branch), 15 where we also recognized that credit card issuers are not limited
to banks. We said:
Under RA 8484, the credit card that is issued by banks in general, or by nonbanks in particular, refers to "any card . . . or other credit device existing for the
purpose of obtaining . . . goods . . . or services . . . on credit;" and is being used
"usually on a revolving basis." This means that the consumer-credit arrangement
that exists between the issuer and the holder of the credit card enables the latter
to procure goods or services "on a continuing basis as long as the outstanding
balance does not exceed a specified limit." The card holder is, therefore, given
"the power to obtain present control of goods or service on a promise to pay for
them in the future."
Business establishments may extend credit sales through the use of the credit card
facilities of a non-bank credit card company to avoid the risk of uncollectible
accounts from their customers. Under this system, the establishments do not
deposit in their bank accounts the credit card drafts that arise from the credit sales.
Instead, they merely record their receivables from the credit card company and
periodically send the drafts evidencing those receivables to the latter.
The credit card company, in turn, sends checks as payment to these business
establishments, but it does not redeem the drafts at full price. The agreement
between them usually provides for discounts to be taken by the company upon its
redemption of the drafts. At the end of each month, it then bills its credit card
holders for their respective drafts redeemed during the previous month. If the
holders fail to pay the amounts owed, the company sustains the loss.

Simply put, every credit card transaction involves three contracts, namely: (a)
the sales contract between the credit card holder and the merchant or the business
establishment which accepted the credit card; (b) the loan agreement between the
credit card issuer and the credit card holder; and lastly, (c) the promise to pay between
the credit card issuer and the merchant or business establishment. 16
Credit
relationship

card

issuer

cardholder

When a credit card company gives the holder the privilege of charging items at
establishments associated with the issuer, 17 a necessary question in a legal analysis is
when does this relationship begin? There are two diverging views on the matter. In
City Stores Co. v. Henderson, 18 another U.S. decision, held that:
The issuance of a credit card is but an offer to extend a line of open account credit.
It is unilateral and supported by no consideration. The offer may be withdrawn at
any time, without prior notice, for any reason or, indeed, for no reason at all, and
its withdrawal breaches no duty for there is no duty to continue it and
violates no rights.
DcTAIH

Thus, under this view, each credit card transaction is considered a separate offer and
acceptance.
Novack v. Cities Service Oil Co. 19 echoed this view, with the court ruling that
the mere issuance of a credit card did not create a contractual relationship with the
cardholder.
On the other end of the spectrum is Gray v. American Express Company 20
which recognized the card membership agreement itself as a binding contract between
the credit card issuer and the card holder. Unlike in the Novack and the City Stores
cases, however, the cardholder in Gray paid an annual fee for the privilege of being an
American Express cardholder.
In our jurisdiction, we generally adhere to the Gray ruling, recognizing the
relationship between the credit card issuer and the credit card holder as a contractual
one that is governed by the terms and conditions found in the card membership
agreement. 21 This contract provides the rights and liabilities of a credit card company
to its cardholders and vice versa.
We note that a card membership agreement is a contract of adhesion as its terms
are prepared solely by the credit card issuer, with the cardholder merely affixing his
signature signifying his adhesion to these terms. 22 This circumstance, however, does
not render the agreement void; we have uniformly held that contracts of adhesion are
"as binding as ordinary contracts, the reason being that the party who adheres to the
contract is free to reject it entirely." 23 The only effect is that the terms of the contract
are construed strictly against the party who drafted it. 24
On AMEX's obligations to Pantaleon

We begin by identifying the two privileges that Pantaleon assumes he is entitled

to with the issuance of his AMEX credit card, and on which he anchors his claims. First,
Pantaleon presumes that since his credit card has no pre-set spending limit, AMEX has
the obligation to approve all his charge requests. Conversely, even if AMEX has no
such obligation, at the very least it is obliged to act on his charge requests within a
specific period of time.
i.Use of credit card a mere offer to enter into loan agreements
Although we recognize the existence of a relationship between the credit card
issuer and the credit card holder upon the acceptance by the cardholder of the terms of
the card membership agreement (customarily signified by the act of the cardholder in
signing the back of the credit card), we have to distinguish this contractual
relationship from the creditor-debtor relationship which only arises after the
credit card issuer has approved the cardholder's purchase request. The first relates
merely to an agreement providing for credit facility to the cardholder. The latter
involves the actual credit on loan agreement involving three contracts, namely: the sales
contract between the credit card holder and the merchant or the business establishment
which accepted the credit card; the loan agreement between the credit card issuer and
the credit card holder; and the promise to pay between the credit card issuer and the
merchant or business establishment.
HDIaET

From the loan agreement perspective, the contractual relationship begins to exist
only upon the meeting of the offer 25 and acceptance of the parties involved. In more
concrete terms, when cardholders use their credit cards to pay for their purchases, they
merely offer to enter into loan agreements with the credit card company. Only after the
latter approves the purchase requests that the parties enter into binding loan contracts,
in keeping with Article 1319 of the Civil Code, which provides:
Article 1319. Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract. The
offer must be certain and the acceptance absolute. A qualified acceptance
constitutes a counter-offer.

This view finds support in the reservation found in the card membership
agreement itself, particularly paragraph 10, which clearly states that AMEX "reserve[s]
the right to deny authorization for any requested Charge." By so providing, AMEX
made its position clear that it has no obligation to approve any and all charge requests
made by its card holders.
ii.AMEX not guilty of culpable delay
Since AMEX has no obligation to approve the purchase requests of its credit
cardholders, Pantaleon cannot claim that AMEX defaulted in its obligation. Article
1169 of the Civil Code, which provides the requisites to hold a debtor guilty of culpable
delay, states:

Article 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. . . . .

The three requisites for a finding of default are: (a) that the obligation is
demandable and liquidated; (b) the debtor delays performance; and (c) the creditor
judicially or extrajudicially requires the debtor's performance. 26
Based on the above, the first requisite is no longer met because AMEX, by the
express terms of the credit card agreement, is not obligated to approve Pantaleon's
purchase request. Without a demandable obligation, there can be no finding of default.
Apart from the lack of any demandable obligation, we also find that Pantaleon
failed to make the demand required by Article 1169 of the Civil Code.
As previously established, the use of a credit card to pay for a purchase is only
an offer to the credit card company to enter a loan agreement with the credit card holder.
Before the credit card issuer accepts this offer, no obligation relating to the loan
agreement exists between them. On the other hand, a demand is defined as the
"assertion of a legal right; . . . an asking with authority, claiming or challenging as due."
27 A demand presupposes the existence of an obligation between the parties.
CHDaAE

Thus, every time that Pantaleon used his AMEX credit card to pay for his
purchases, what the stores transmitted to AMEX were his offers to execute loan
contracts. These obviously could not be classified as the demand required by law to
make the debtor in default, given that no obligation could arise on the part of AMEX
until after AMEX transmitted its acceptance of Pantaleon's offers. Pantaleon's act of
"insisting on and waiting for the charge purchases to be approved by AMEX" 28 is not
the demand contemplated by Article 1169 of the Civil Code.
For failing to comply with the requisites of Article 1169, Pantaleon's charge that
AMEX is guilty of culpable delay in approving his purchase requests must fail.
iii.On AMEX's obligation to act on the offer within a specific period of time
Even assuming that AMEX had the right to review his credit card history before
it approved his purchase requests, Pantaleon insists that AMEX had an obligation to act
on his purchase requests, either to approve or deny, in "a matter of seconds" or "in
timely dispatch." Pantaleon impresses upon us the existence of this obligation by
emphasizing two points: (a) his card has no pre-set spending limit; and (b) in his twelve
years of using his AMEX card, AMEX had always approved his charges in a matter of
seconds.
Pantaleon's assertions fail to convince us.
We originally held that AMEX was in culpable delay when it acted on the Coster
transaction, as well as the two other transactions in the United States which took AMEX
approximately 15 to 20 minutes to approve. This conclusion appears valid and
reasonable at first glance, comparing the time it took to finally get the Coster purchase

approved (a total of 78 minutes), to AMEX's "normal" approval time of three to four

seconds (based on the testimony of Edgardo Jaurigue, as well as Pantaleon's previous
experience). We come to a different result, however, after a closer look at the factual
and legal circumstances of the case.
AMEX's credit authorizer, Edgardo Jaurigue, explained that having no pre-set
spending limit in a credit card simply means that the charges made by the cardholder
are approved based on his ability to pay, as demonstrated by his past spending, payment
patterns, and personal resources. 29 Nevertheless, every time Pantaleon charges a
purchase on his credit card, the credit card company still has to determine
whether it will allow this charge, based on his past credit history. This right to
review a card holder's credit history, although not specifically set out in the card
membership agreement, is a necessary implication of AMEX's right to deny
authorization for any requested charge.
As for Pantaleon's previous experiences with AMEX (i.e., that in the past 12
years, AMEX has always approved his charge requests in three or four seconds), this
record does not establish that Pantaleon had a legally enforceable obligation to expect
AMEX to act on his charge requests within a matter of seconds. For one, Pantaleon
failed to present any evidence to support his assertion that AMEX acted on purchase
requests in a matter of three or four seconds as an established practice. More
importantly, even if Pantaleon did prove that AMEX, as a matter of practice or custom,
acted on its customers' purchase requests in a matter of seconds, this would still not be
enough to establish a legally demandable right; as a general rule, a practice or custom
is not a source of a legally demandable or enforceable right. 30
ICAcHE

We next examine the credit card membership agreement, the contract that
primarily governs the relationship between AMEX and Pantaleon. Significantly, there
is no provision in this agreement that obligates AMEX to act on all cardholder
purchase requests within a specifically defined period of time. Thus, regardless of
whether the obligation is worded was to "act in a matter of seconds" or to "act in timely
dispatch," the fact remains that no obligation exists on the part of AMEX to act within
a specific period of time. Even Pantaleon admits in his testimony that he could not recall
any provision in the Agreement that guaranteed AMEX's approval of his charge
requests within a matter of minutes. 31
Nor can Pantaleon look to the law or government issuances as the source of
AMEX's alleged obligation to act upon his credit card purchases within a matter of
seconds. As the following survey of Philippine law on credit card transactions
demonstrates, the State does not require credit card companies to act upon its
cardholders' purchase requests within a specific period of time.
Republic Act No. 8484 (RA 8484), or the Access Devices Regulation Act of
1998, approved on February 11, 1998, is the controlling legislation that regulates the
issuance and use of access devices, 32 including credit cards. The more salient portions
of this law include the imposition of the obligation on a credit card company to disclose

certain important financial information 33 to credit card applicants, as well as a

definition of the acts that constitute access device fraud.
As financial institutions engaged in the business of providing credit, credit card
companies fall under the supervisory powers of the Bangko Sentral ng Pilipinas (BSP).
34 BSP Circular No. 398 dated August 21, 2003 embodies the BSP's policy when it
comes to credit cards
The Bangko Sentral ng Pilipinas (BSP) shall foster the development of consumer
credit through innovative products such as credit cards under conditions of fair
and sound consumer credit practices. The BSP likewise encourages competition
and transparency to ensure more efficient delivery of services and fair dealings
with customers. (Emphasis supplied)

Based on this Circular, ". . . [b]efore issuing credit cards, banks and/or their
subsidiary credit card companies must exercise proper diligence by ascertaining that
applicants possess good credit standing and are financially capable of fulfilling their
credit commitments." 35 As the above-quoted policy expressly states, the general intent
is to foster "fair and sound consumer credit practices."
Other than BSP Circular No. 398, a related circular is BSP Circular No. 454,
issued on September 24, 2004, but this circular merely enumerates the unfair collection
practices of credit card companies a matter not relevant to the issue at hand.
DaCTcA

In light of the foregoing, we find and so hold that AMEX is neither contractually
bound nor legally obligated to act on its cardholders' purchase requests within any
specific period of time, much less a period of a "matter of seconds" that Pantaleon uses
as his standard. The standard therefore is implicit and, as in all contracts, must be based
on fairness and reasonableness, read in relation to the Civil Code provisions on human
relations, as will be discussed below.
AMEX acted with good faith
Thus far, we have already established that: (a) AMEX had neither a contractual
nor a legal obligation to act upon Pantaleon's purchases within a specific period of time;
and (b) AMEX has a right to review a cardholder's credit card history. Our recognition
of these entitlements, however, does not give AMEX an unlimited right to put off
action on cardholders' purchase requests for indefinite periods of time. In acting
on cardholders' purchase requests, AMEX must take care not to abuse its rights and
cause injury to its clients and/or third persons. We cite in this regard Article 19, in
conjunction with Article 21, of the Civil Code, which provide:
Article 19. Every person must, in the exercise of his rights and in the performance
of his duties, act with justice, give everyone his due and observe honesty and
good faith.

Article 21. Any person who willfully causes loss or injury to another in a manner
that is contrary to morals, good customs or public policy shall compensate the
latter for the damage.

Article 19 pervades the entire legal system and ensures that a person suffering
damage in the course of another's exercise of right or performance of duty, should find
himself without relief. 36 It sets the standard for the conduct of all persons, whether
artificial or natural, and requires that everyone, in the exercise of rights and the
performance of obligations, must: (a) act with justice, (b) give everyone his due, and
(c) observe honesty and good faith. It is not because a person invokes his rights that he
can do anything, even to the prejudice and disadvantage of another. 37
While Article 19 enumerates the standards of conduct, Article 21 provides the
remedy for the person injured by the willful act, an action for damages. We explained
how these two provisions correlate with each other in GF Equity, Inc. v. Valenzona: 38
[Article 19], known to contain what is commonly referred to as the principle of
abuse of rights, sets certain standards which must be observed not only in the
exercise of one's rights but also in the performance of one's duties. These
standards are the following: to act with justice; to give everyone his due; and to
observe honesty and good faith. The law, therefore, recognizes a primordial
limitation on all rights; that in their exercise, the norms of human conduct set
forth in Article 19 must be observed. A right, though by itself legal because
recognized or granted by law as such, may nevertheless become the source
of some illegality. When a right is exercised in a manner which does not
conform with the norms enshrined in Article 19 and results in damage to
another, a legal wrong is thereby committed for which the wrongdoer must
be held responsible. But while Article 19 lays down a rule of conduct for the
government of human relations and for the maintenance of social order, it does
not provide a remedy for its violation. Generally, an action for damages under
either Article 20 or Article 21 would be proper.
CTDAaE

In the context of a credit card relationship, although there is neither a contractual

stipulation nor a specific law requiring the credit card issuer to act on the credit card
holder's offer within a definite period of time, these principles provide the standard by
which to judge AMEX's actions.
According to Pantaleon, even if AMEX did have a right to review his charge
purchases, it abused this right when it unreasonably delayed the processing of the
Coster charge purchase, as well as his purchase requests at the Richard Metz' Golf
Studio and Kids' Unlimited Store; AMEX should have known that its failure to act
immediately on charge referrals would entail inconvenience and result in humiliation,
embarrassment, anxiety and distress to its cardholders who would be required to wait
before closing their transactions. 39

It is an elementary rule in our jurisdiction that good faith is presumed and that
the burden of proving bad faith rests upon the party alleging it. 40 Although it took
AMEX some time before it approved Pantaleon's three charge requests, we find no
evidence to suggest that it acted with deliberate intent to cause Pantaleon any loss or
injury, or acted in a manner that was contrary to morals, good customs or public policy.
We give credence to AMEX's claim that its review procedure was done to ensure
Pantaleon's own protection as a cardholder and to prevent the possibility that the credit
card was being fraudulently used by a third person.
Pantaleon countered that this review procedure is primarily intended to protect
AMEX's interests, to make sure that the cardholder making the purchase has enough
means to pay for the credit extended. Even if this were the case, however, we do not
find any taint of bad faith in such motive. It is but natural for AMEX to want to ensure
that it will extend credit only to people who will have sufficient means to pay for their
purchases. AMEX, after all, is running a business, not a charity, and it would simply be
ludicrous to suggest that it would not want to earn profit for its services. Thus, so long
as AMEX exercises its rights, performs its obligations, and generally acts with good
faith, with no intent to cause harm, even if it may occasionally inconvenience others, it
cannot be held liable for damages.
We also cannot turn a blind eye to the circumstances surrounding the Coster
transaction which, in our opinion, justified the wait. In Edgardo Jaurigue's own words:
Q 21: With reference to the transaction at the Coster Diamond House covered by
Exhibit H, also Exhibit 4 for the defendant, the approval came at 2:19 a.m.
after the request was relayed at 1:33 a.m., can you explain why the
approval came after about 46 minutes, more or less?
A21: Because we have to make certain considerations and evaluations of
[Pantaleon's] past spending pattern with [AMEX] at that time before
approving plaintiff's request because [Pantaleon] was at that time making
his very first single charge purchase of US$13,826 [this is below the
US$16,112.58 actually billed and paid for by the plaintiff because the
difference was already automatically approved by [AMEX] office in
Netherland[s] and the record of [Pantaleon's] past spending with
[AMEX] at that time does not favorably support his ability to pay for
such purchase. In fact, if the foregoing internal policy of [AMEX] had
been strictly followed, the transaction would not have been approved at
all considering that the past spending pattern of the plaintiff with [AMEX]
at that time does not support his ability to pay for such purchase. 41
AHCcET

xxx xxx xxx

Q: Why did it take so long?

A: It took time to review the account on credit, so, if there is any delinquencies
[sic] of the cardmember. There are factors on deciding the charge itself
which are standard measures in approving the authorization. Now in the
case of Mr. Pantaleon although his account is single charge purchase of
US$13,826. [sic] this is below the US$16,000, plus actually billed . . . we
would have already declined the charge outright and asked him his bank
account to support his charge. But due to the length of his membership as
cardholder we had to make a decision on hand. 42

As Edgardo Jaurigue clarified, the reason why Pantaleon had to wait for AMEX's
approval was because he had to go over Pantaleon's credit card history for the past
twelve months. 43 It would certainly be unjust for us to penalize AMEX for merely
exercising its right to review Pantaleon's credit history meticulously.
Finally, we said in Garciano v. Court of Appeals that "the right to recover [moral
damages] under Article 21 is based on equity, and he who comes to court to demand
equity, must come with clean hands. Article 21 should be construed as granting the
right to recover damages to injured persons who are not themselves at fault." 44 As
will be discussed below, Pantaleon is not a blameless party in all this.
Pantaleon's
cause for his injury

action

was

the

proximate

Pantaleon mainly anchors his claim for moral and exemplary damages on the
embarrassment and humiliation that he felt when the European tour group had to wait
for him and his wife for approximately 35 minutes, and eventually had to cancel the
Amsterdam city tour. After thoroughly reviewing the records of this case, we have come
to the conclusion that Pantaleon is the proximate cause for this embarrassment and
humiliation.
As borne by the records, Pantaleon knew even before entering Coster that the
tour group would have to leave the store by 9:30 a.m. to have enough time to take the
city tour of Amsterdam before they left the country. After 9:30 a.m., Pantaleon's son,
who had boarded the bus ahead of his family, returned to the store to inform his family
that they were the only ones not on the bus and that the entire tour group was waiting
for them. Significantly, Pantaleon tried to cancel the sale at 9:40 a.m. because he
did not want to cause any inconvenience to the tour group. However, when Coster's
sale manager asked him to wait a few more minutes for the credit card approval, he
agreed, despite the knowledge that he had already caused a 10-minute delay and that
the city tour could not start without him.
In Nikko Hotel Manila Garden v. Reyes, 45 we ruled that a person who
knowingly and voluntarily exposes himself to danger cannot claim damages for the
resulting injury:
DaAETS

The doctrine of volenti non fit injuria ("to which a person assents is not esteemed
in law as injury") refers to self-inflicted injury or to the consent to injury which

precludes the recovery of damages by one who has knowingly and voluntarily
exposed himself to danger, even if he is not negligent in doing so.

This doctrine, in our view, is wholly applicable to this case. Pantaleon himself
testified that the most basic rule when travelling in a tour group is that you must never
be a cause of any delay because the schedule is very strict. 46 When Pantaleon made
up his mind to push through with his purchase, he must have known that the group
would become annoyed and irritated with him. This was the natural, foreseeable
consequence of his decision to make them all wait.
We do not discount the fact that Pantaleon and his family did feel humiliated and
embarrassed when they had to wait for AMEX to approve the Coster purchase in
Amsterdam. We have to acknowledge, however, that Pantaleon was not a helpless
victim in this scenario at any time, he could have cancelled the sale so that the group
could go on with the city tour. But he did not.
More importantly, AMEX did not violate any legal duty to Pantaleon under the
circumstances under the principle of damnum absque injuria, or damages without legal
wrong, loss without injury. 47 As we held in BPI Express Card v. CA: 48
DECSIT

We do not dispute the findings of the lower court that private respondent suffered
damages as a result of the cancellation of his credit card. However, there is a
material distinction between damages and injury. Injury is the illegal invasion of
a legal right; damage is the loss, hurt, or harm which results from the injury; and
damages are the recompense or compensation awarded for the damage suffered.
Thus, there can be damage without injury in those instances in which the loss
or harm was not the result of a violation of a legal duty. In such cases, the
consequences must be borne by the injured person alone, the law affords no
remedy for damages resulting from an act which does not amount to a legal injury
or wrong. These situations are often called damnum absque injuria.
In other words, in order that a plaintiff may maintain an action for the injuries of
which he complains, he must establish that such injuries resulted from a breach
of duty which the defendant owed to the plaintiff a concurrence of injury to
the plaintiff and legal responsibility by the person causing it. The underlying
basis for the award of tort damages is the premise that an individual was
injured in contemplation of law. Thus, there must first be a breach of some duty
and the imposition of liability for that breach before damages may be awarded;
and the breach of such duty should be the proximate cause of the injury.

Pantaleon is not entitled to damages

Because AMEX neither breached its contract with Pantaleon, nor acted with
culpable delay or the willful intent to cause harm, we find the award of moral damages
to Pantaleon unwarranted.

Similarly, we find no basis to award exemplary damages. In contracts,

exemplary damages can only be awarded if a defendant acted "in a wanton, fraudulent,
reckless, oppressive or malevolent manner." 49 The plaintiff must also show that he is
entitled to moral, temperate, or compensatory damages before the court may consider
the question of whether or not exemplary damages should be awarded. 50
As previously discussed, it took AMEX some time to approve Pantaleon's
purchase requests because it had legitimate concerns on the amount being charged; no
malicious intent was ever established here. In the absence of any other damages, the
award of exemplary damages clearly lacks legal basis.
Neither do we find any basis for the award of attorney's fees and costs of
litigation. No premium should be placed on the right to litigate and not every winning
party is entitled to an automatic grant of attorney's fees. 51 To be entitled to attorney's
fees and litigation costs, a party must show that he falls under one of the instances
enumerated in Article 2208 of the Civil Code. 52 This, Pantaleon failed to do. Since we
eliminated the award of moral and exemplary damages, so must we delete the award
for attorney's fees and litigation expenses.
Lastly, although we affirm the result of the CA decision, we do so for the reasons
stated in this Resolution and not for those found in the CA decision.
HTcDEa

WHEREFORE, premises considered, we SET ASIDE our May 8, 2009

Decision and GRANT the present motion for reconsideration. The Court of Appeals
Decision dated August 18, 2006 is hereby AFFIRMED. No costs.
SO ORDERED.
Carpio Morales, Velasco, Jr., Leonardo-de Castro and Bersamin, JJ., concur.
(Pantaleon v. American Express International, Inc., G.R. No. 174269 (Resolution),
[August 25, 2010], 643 PHIL 488-519)
|||

THIRD DIVISION
[G.R. No. 190601. February 7, 2011.]
SPOUSES LUIGI M. GUANIO and ANNA HERNANDEZGUANIO, petitioners, vs. MAKATI SHANGRI-LA HOTEL and
RESORT, INC., also doing business under the name of SHANGRILA HOTEL MANILA, respondent.

DECISION

CARPIO MORALES, J :
p

For their wedding reception on July 28, 2001, spouses Luigi M. Guanio and
Anna Hernandez-Guanio (petitioners) booked at the Shangri-la Hotel Makati (the
hotel).
ISEHTa

Prior to the event, Makati Shangri-La Hotel & Resort, Inc. (respondent)
scheduled an initial food tasting. Petitioners claim that they requested the hotel to
prepare for seven persons the two of them, their respective parents, and the wedding
coordinator. At the scheduled food tasting, however, respondent prepared for only six.
Petitioners initially chose a set menu which included black cod, king prawns and
angel hair pasta with wild mushroom sauce for the main course which cost P1,000.00
per person. They were, however, given an option in which salmon, instead of king
prawns, would be in the menu at P950.00 per person. They in fact partook of the salmon.
Three days before the event, a final food tasting took place. Petitioners aver that
the salmon served was half the size of what they were served during the initial food
tasting; and when queried about it, the hotel quoted a much higher price (P1,200.00)
for the size that was initially served to them. The parties eventually agreed on a final
price P1,150 per person.
A day before the event or on July 27, 2001, the parties finalized and forged their
contract. 1
Petitioners claim that during the reception, respondent's representatives,
Catering Director Bea Marquez and Sales Manager Tessa Alvarez, did not show up
despite their assurance that they would; their guests complained of the delay in the
service of the dinner; certain items listed in the published menu were unavailable; the
hotel's waiters were rude and unapologetic when confronted about the delay; and
despite Alvarez's promise that there would be no charge for the extension of the

reception beyond 12:00 midnight, they were billed and paid P8,000 per hour for the
three-hour extension of the event up to 4:00 A.M. the next day.
Petitioners further claim that they brought wine and liquor in accordance with
their open bar arrangement, but these were not served to the guests who were forced to
pay for their drinks.
Petitioners thus sent a letter-complaint to the Makati Shangri-la Hotel and
Resort, Inc. (respondent) and received an apologetic reply from Krister Svensson, the
hotel's Executive Assistant Manager in charge of Food and Beverage. They
nevertheless filed a complaint for breach of contract and damages before the Regional
Trial Court (RTC) of Makati City.
EICSTa

In its Answer, respondent claimed that petitioners requested a combination of

king prawns and salmon, hence, the price was increased to P1,200.00 per person, but
discounted at P1,150.00; that contrary to petitioners' claim, Marquez and Alvarez were
present during the event, albeit they were not permanently stationed thereat as there
were three other hotel functions; that while there was a delay in the service of the meals,
the same was occasioned by the sudden increase of guests to 470 from the guaranteed
expected minimum number of guests of 350 to a maximum of 380, as stated in the
Banquet Event Order (BEO); 2 and that Isaac Albacea, Banquet Service Director, in
fact relayed the delay in the service of the meals to petitioner Luigi's father, Gil Guanio.
Respecting the belated service of meals to some guests, respondent attributed it
to the insistence of petitioners' wedding coordinator that certain guests be served first.
On Svensson's letter, respondent, denying it as an admission of liability, claimed
that it was meant to maintain goodwill to its customers.
By Decision of August 17, 2006, Branch 148 of the Makati RTC rendered
judgment in favor of petitioners, disposing as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiffs and against the defendant ordering the defendants to pay the plaintiff
the following:
1) The amount of P350,000.00 by way of actual damages;
2) The amount of P250,000.00 for and as moral damages;
3) The amount of P100,000.00 as exemplary damages;
4) The amount of P100,000.00 for and as attorney's fees.
With costs against the defendant.
SO ORDERED. 3

In finding for petitioners, the trial court relied heavily on the letter of Svensson
which is partly quoted below:
Upon receiving your comments on our service rendered during your reception
here with us, we are in fact, very distressed. Right from minor issues pappadums
served in the soup instead of the creutons, lack of valet parkers, hard rolls being
too hard till a major one slow service, rude and arrogant waiters, we have
disappointed you in all means.
Indeed, we feel as strongly as you do that the services you received were
unacceptable and definitely not up to our standards. We understand that it is our
job to provide excellent service and in this instance, we have fallen short of your
expectations. We ask you please to accept our profound apologies for causing
such discomfort and annoyance. 4 (underscoring supplied)

The trial court observed that from "the tenor of the letter . . . the defendant[herein respondent] admits that the services the plaintiff[-herein petitioners] received
were unacceptable and definitely not up to their standards." 5
IcHDCS

On appeal, the Court of Appeals, by Decision of July 27, 2009, 6 reversed the
trial court's decision, it holding that the proximate cause of petitioners' injury was an
unexpected increase in their guests:
. . . Hence, the alleged damage or injury brought about by the confusion,
inconvenience and disarray during the wedding reception may not be attributed
to defendant-appellant Shangri-la.
We find that the said proximate cause, which is entirely attributable to plaintiffsappellants, set the chain of events which resulted in the alleged inconveniences,
to the plaintiffs-appellants. Given the circumstances that obtained, only the Sps.
Guanio may bear whatever consequential damages that they may have allegedly
suffered. 7 (underscoring supplied)

Petitioners' motion for reconsideration having been denied by Resolution of

November 18, 2009, the present petition for review was filed.
The Court finds that since petitioners' complaint arose from a contract, the
doctrine of proximate cause finds no application to it:
The doctrine of proximate cause is applicable only in actions for quasi-delicts,
not in actions involving breach of contract. . . . The doctrine is a device for
imputing liability to a person where there is no relation between him and another
party. In such a case, the obligation is created by law itself. But, where there is a
pre-existing contractual relation between the parties, it is the parties themselves
who create the obligation, and the function of the law is merely to regulate the
relation thus created. 8 (emphasis and underscoring supplied)

What applies in the present case is Article 1170 of the Civil Code which reads:
Art. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence or delay, and those who in any manner contravene the tenor thereof,
are liable for damages.

RCPI v. Verchez, et al. 9 enlightens:

In culpa contractual . . . the mere proof of the existence of the contract and the
failure of its compliance justify, prima facie, a corresponding right of relief. The
law, recognizing the obligatory force of contracts, will not permit a party to be
set free from liability for any kind of misperformance of the contractual
undertaking or a contravention of the tenor thereof. A breach upon the contract
confers upon the injured party a valid cause for recovering that which may have
been lost or suffered. The remedy serves to preserve the interests of the promissee
that may include his "expectation interest," which is his interest in having the
benefit of his bargain by being put in as good a position as he would have been
in had the contract been performed, or his "reliance interest," which is his
interest in being reimbursed for loss caused by reliance on the contract by being
put in as good a position as he would have been in had the contract not been made;
or his "restitution interest," which is his interest in having restored to him any
benefit that he has conferred on the other party. Indeed, agreements can
accomplish little, either for their makers or for society, unless they are made the
basis for action. The effect of every infraction is to create a new duty, that is, to
make RECOMPENSE to the one who has been injured by the failure of another
to observe his contractual obligation unless he can show extenuating
circumstances, like proof of his exercise of due diligence . . . or of the
attendance of fortuitous event, to excuse him from his ensuing liability.
(emphasis and underscoring in the original; capitalization supplied)

The pertinent provisions of the Banquet and Meeting Services Contract between
the parties read:
4.3 The ENGAGER shall be billed in accordance with the prescribed rate for the
minimum guaranteed number of persons contracted for, regardless of under
attendance or non-appearance of the expected number of guests, except where the
ENGAGER cancels the Function in accordance with its Letter of Confirmation
with the HOTEL. Should the attendance exceed the minimum guaranteed
attendance, the ENGAGER shall also be billed at the actual rate per cover in
excess of the minimum guaranteed attendance.
ATHCac

xxx xxx xxx

4.5. The ENGAGER must inform the HOTEL at least forty eight (48) hours
before the scheduled date and time of the Function of any change in the minimum
guaranteed covers. In the absence of such notice, paragraph 4.3 shall apply in the

event of under attendance. In case the actual number of attendees exceed the
minimum guaranteed number
by ten percent (10%), the HOTEL shall not in any way be held liable for any
damage or inconvenience which may be caused thereby. The ENGAGER
shall also undertake to advise the guests of the situation and take positive
steps to remedy the same. 10 (emphasis, italics and underscoring supplied)

Breach of contract is defined as the failure without legal reason to comply with
the terms of a contract. It is also defined as the [f]ailure, without legal excuse, to
perform any promise which forms the whole or part of the contract. 11
The appellate court, and even the trial court, observed that petitioners were
remiss in their obligation to inform respondent of the change in the expected number of
guests. The observation is reflected in the records of the case. Petitioners' failure to
discharge such obligation thus excused, as the above-quoted paragraph 4.5 of the
parties' contract provide, respondent from liability for "any damage or inconvenience"
occasioned thereby.
As for petitioners' claim that respondent departed from its verbal agreement with
petitioners, the same fails, given that the written contract which the parties entered into
the day before the event, being the law between them.
Respecting the letter of Svensson on which the trial court heavily relied as
admission of respondent's liability but which the appellate court brushed aside, the
Court finds the appellate court's stance in order. It is not uncommon in the hotel industry
to receive comments, criticisms or feedback on the service it delivers. It is also
customary for hotel management to try to smooth ruffled feathers to preserve goodwill
among its clientele.
Kalalo v. Luz holds: 12
Statements which are not estoppels nor judicial admissions have no quality of
conclusiveness, and an opponent whose admissions have been offered against
him may offer any evidence which serves as an explanation for his former
assertion of what he now denies as a fact.

Respondent's Catering Director, Bea Marquez, explained the hotel's procedure

on receiving and processing complaints, viz.:
ATTY. CALMA:
Q You mentioned that the letter indicates an acknowledgement of the concern
and that there was-the first letter there was an acknowledgment of the
concern and an apology, not necessarily indicating that such or admitting
fault?

A Yes.
Q Is this the letter that you are referring to?
If I may, Your Honor, that was the letter dated August 4, 2001, previously marked
as plaintiff's exhibits, Your Honor. What is the procedure of the hotel with
respect to customer concern?
A Upon receipt of the concern from the guest or client, we acknowledge receipt
of such concern, and as part of procedure in service industry particularly
Makati Shangri-la we apologize for whatever inconvenience but at the
same time saying, that of course, we would go through certain
investigation and get back to them for the feedback with whatever concern
they may have.
Q Your Honor, I just like at this point mark the exhibits, Your Honor, the letter
dated August 4, 2001 identified by the witness, Your Honor, to be marked
as Exhibit 14 and the signature of Mr. Krister Svensson be marked as
Exhibit 14-A. 13
aEDCAH

xxx xxx xxx

Q In your opinion, you just mentioned that there is a procedure that the hotel
follows with respect to the complaint, in your opinion was this procedure
followed in this particular concern?
A Yes, ma'am.
Q What makes you say that this procedure was followed?
A As I mentioned earlier, we proved that we did acknowledge the concern of the
client in this case and we did emphatize from the client and apologized,
and at the same time got back to them in whatever investigation we have.
Q You said that you apologized, what did you apologize for?
A Well, first of all it is a standard that we apologize, right? Being in the service
industry, it is a practice that we apologize if there is any inconvenience,
so the purpose for apologizing is mainly to show empathy and to ensure
the client that we are hearing them out and that we will do a better
investigation and it is not in any way that we are admitting any fault. 14
(underscoring supplied)

To the Court, the foregoing explanation of the hotel's Banquet Director

overcomes any presumption of admission of breach which Svensson's letter might have
conveyed.

The exculpatory clause notwithstanding, the Court notes that respondent could
have managed the "situation" better, it being held in high esteem in the hotel and service
industry. Given respondent's vast experience, it is safe to presume that this is not its
first encounter with booked events exceeding the guaranteed cover. It is not audacious
to expect that certain measures have been placed in case this predicament crops up.
That regardless of these measures, respondent still received complaints as in the present
case, does not amuse.
Respondent admitted that three hotel functions coincided with petitioners'
reception. To the Court, the delay in service might have been avoided or minimized if
respondent exercised prescience in scheduling events. No less than quality service
should be delivered especially in events which possibility of repetition is close to nil.
Petitioners are not expected to get married twice in their lifetimes.
In the present petition, under considerations of equity, the Court deems it just to
award the amount of P50,000.00 by way of nominal damages to petitioners, for the
discomfiture that they were subjected to during to the event. 15 The Court recognizes
that every person is entitled to respect of his dignity, personality, privacy and peace of
mind. 16 Respondent's lack of prudence is an affront to this right.
WHEREFORE, the Court of Appeals Decision dated July 27, 2009 is
PARTIALLY REVERSED. Respondent is, in light of the foregoing discussion,
ORDERED to pay the amount of P50,000.00 to petitioners by way of nominal damages.
THacES

SO ORDERED.
Brion, Bersamin, Villarama, Jr. and Sereno, JJ., concur.
(Spouses Guanio v. Makati Shangri-la Hotel and Resort, Inc., G.R. No. 190601,
[February 7, 2011], 656 PHIL 608-619)
|||

SECOND DIVISION
[G.R. No. 171626. August 6, 2014.]
OLONGAPO CITY, petitioner, vs. SUBIC WATER AND
SEWERAGE CO., INC., respondent.

DECISION

BRION, J :
p

We resolve in this petition for certiorari 1 under Rule 65 the challenge to the July 6, 2005
decision 2 and the January 3, 2006 resolution 3 (assailed CA rulings) of the Court of
Appeals (CA) in CA-G.R. SP No. 80947.
These assailed CA rulings annulled and set aside: a) the July 29, 2003 order 4 of the
Regional Trial Court of Olongapo, Br. 75 (RTC Olongapo), which directed the issuance of
a writ of execution in Civil Case No. 582-0-90, against respondent Subic Water and
Sewerage Co., Inc. (Subic Water); b) the July 31, 2003 writ of execution 5 subsequently
issued by the same court; and c) the October 7, 2003 order 6 of RTC Olongapo, denying
Subic Water's special appearance with motion to reconsider order dated July 29, 2003 and
to quash writ of execution dated July 31, 2003. 7
Factual Antecedents
On May 25, 1973, Presidential Decree No. 198 8 (PD 198) took effect. This law authorized
the creation of local water districts which may acquire, install, maintain and operate water
supply and distribution systems for domestic, industrial, municipal and agricultural uses. 9
Pursuant to PD 198, petitioner Olongapo City (petitioner) passed Resolution No. 161,
which transferred all its existing water facilities and assets under the Olongapo City Public
Utilities Department Waterworks Division, to the jurisdiction and ownership of the
Olongapo City Water District (OCWD). 10
PD 198, as amended, 11 allows local water districts (LWDs) which have acquired an
existing water system of a local government unit (LGU) to enter into a contract to pay the
concerned LGU. In lieu of the LGU's share in the acquired water utility plant, it shall be
paid by the LWD an amount not exceeding three percent (3%) of the LWD's gross receipts
from water sales in any year. 12

On October 24, 1990, petitioner filed a complaint for sum of money and damages against
OCWD. Among others, petitioner alleged that OCWD failed to pay its electricity bills to
petitioner and remit its payment under the contract to pay, pursuant to OCWD's acquisition
of petitioner's water system. In its complaint, petitioner prayed for the following reliefs:
"WHEREOF, it is respectfully prayed of this Honorable Court that after due
hearing and notice, judgment be rendered in favor of plaintiff ordering the
defendant to:
(a) pay the amount of P26,798,223.70 plus legal interests from the filing of the
Complaint to actual full payment;
(b) pay the amount of its in lieu share representing three percent of the defendant's
gross receipts from water sales starting 1981 up to present;
(c) pay the amount of 81,000,000 as moral damages; and
(d) pay the cost of suit and other litigation expenses." 13

In its answer, 14 OCWD posed a counterclaim against petitioner for unpaid water bills
amounting to P3,080,357.00. 15
In the interim, OCWD entered into a Joint Venture Agreement 16 (JVA) with Subic Bay
Metropolitan Authority (SBMA), Biwater International Limited (Biwater), and D.M.
Consunji, Inc. (DMCI) on November 24, 1996. Pursuant to this agreement, Subic Water
a new corporate entity was incorporated, with the following equity participation from
its shareholders:
SBMA
OCWD
Biwater
DMCI

19.99% or 20%
9.99% or 10%
29.99% or 30%
39.99% or 40% 17

On November 24, 1996, Subic Water was granted the franchise to operate and to carry on
the business of providing water and sewerage services in the Subic Bay Free Port Zone, as
well as in Olongapo City. 18 Hence, Subic Water took over OCWD's water operations in
Olongapo City. 19
IDCScA

To finally settle their money claims against each other, petitioner and OCWD entered into
a compromise agreement 20 on June 4, 1997. In this agreement, petitioner and OCWD
offset their respective claims and counterclaims. OCWD also undertook to pay to petitioner

its net obligation amounting to P135,909,467.09, to be amortized for a period of not

exceeding twenty-five (25) years at twenty-four percent (24%) per annum. 21
The compromise agreement also contained a provision regarding the parties' request that
Subic Water, Philippines, which took over the operations of the defendant Olongapo City
Water District be made the co-maker for OCWD's obligations. Mr. Noli Aldip, then
chairman of Subic Water, acted as its representative and signed the agreement on behalf of
Subic Water.
Subsequently, the parties submitted the compromise agreement to RTC Olongapo for
approval. In its decision dated June 13, 1997, 22 the trial court approved the compromise
agreement and adopted it as its judgment in Civil Case No. 580-0-90.
Pursuant to the compromise agreement and in payment of OCWD's obligations to
petitioner, petitioner and OCWD executed a Deed of Assignment on November 24, 1997.
23 OCWD assigned all of its rights in the JVA in favor of the petitioner, including but not
limited to the assignment of its shares, lease payments, regulatory assistance fees and other
receivables arising out of or related to the Joint Venture Agreement and the Lease
Agreement. 24 On December 15, 1998, OCWD was judicially dissolved. 25
On May 7, 1999, to enforce the compromise agreement, the petitioner filed a motion for
the issuance of a writ of execution 26 with the trial court. In its July 23, 1999 order, 27 the
trial court granted the motion, but did not issue the corresponding writ of execution.
Almost four years later, on May 30, 2003, the petitioner, through its new counsel, filed a
notice of appearance with urgent motion/manifestation 28 and prayed again for the
issuance of a writ of execution against OCWD. A certain Atty. Segundo Mangohig,
claiming to be OCWD's former counsel, filed a manifestation alleging that OCWD had
already been dissolved and that Subic Water is now the former OCWD. 29
Because of this assertion, Subic Water also filed a manifestation informing the trial court
that as borne out by the articles of incorporation and general information sheet of Subic
Water . . . defendant OCWD is not Subic Water. 30 The manifestation also indicated that
OCWD was only a ten percent (10%) shareholder of Subic Water; and that its 10% share
was already in the process of being transferred to petitioner pursuant to the Deed of
Assignment dated November 24, 1997. 31
The trial court granted the motion for execution and directed its issuance against OCWD
and/or Subic Water. Because of this unfavorable order, Subic Water filed a special
appearance with motion to: (1) reconsider order dated July 29, 2003; and (2) quash writ of
execution dated July 31, 2003. 32

The trial court denied Subic Water's special appearance, motion for reconsideration, and
its motion to quash. Subic Water then filed a petition for certiorari 33 with the CA,
imputing grave abuse of discretion amounting to lack or excess of jurisdiction to RTC
Olongapo for issuing its July 29, 2003 and October 7, 2003 orders as well as the writ of
execution dated July 31, 2003.
The CA's Ruling
In its decision dated July 6, 2005, 34 the CA granted Subic Water's petition for certiorari
and reversed the trial court's rulings.
The CA found that the writ of execution dated July 31, 2003 35 did not comply with
Section 6, Rule 39 of the Rules of Court,to wit:
Section 6. Execution by motion or by independent action. A final and
executory judgment or order may be executed on motion within five (5) years
from the date of its entry. After the lapse of such time, and before it is
barred by the statute of limitations, a judgment may be enforced by action.
The revived judgment may also be enforced by motion within five (5) years
from the date of its entry and thereafter by action before it is barred by the
statute of limitations. (6a) [emphasis ours]

A judgment on a compromise agreement is immediately executory and is considered to

have been entered on the date it was approved by the trial court. 36 Since the compromise
agreement was approved and adopted by the trial court on June 13, 1997, this should be
the reckoning date for the counting of the period for the filing of a valid motion for issuance
of a writ of execution. Petitioner thus had until June 13, 2002, to file its motion.
The CA further remarked that while it was true that a motion for execution was filed by
petitioner on May 7, 1999, and the same was granted by the trial court in its July 23, 1999
order, 37 no writ of execution was actually issued.
As the CA looked at the case, petitioner, instead of following up with the trial court the
issuance of the writ of execution, did not do anything to secure its prompt issuance. It
waited another four years to file a second motion for execution on May 30, 2003. 38 By
this time, the allowed period for the filing of a motion for the issuance of the writ had
already lapsed. Hence, the trial court's July 29, 2003 order granting the issuance of the writ
was null and void for having been issued by a court without jurisdiction.
The CA denied petitioner's subsequent motion for reconsideration. Petitioner is now
before us on a petition for certiorari under Rule 65.
The Petition

The petitioner acknowledged the rule that the execution of a judgment could no longer be
made by mere motion after the prescribed five-year period had already lapsed. However,
it argued that the delay for the issuance of the writ of execution was caused by OCWD and
Subic Water. The petitioner submitted that this Court had allowed execution by mere
motion even after the lapse of the five-year period, when the delay was caused or
occasioned by the actions of the judgment debtor. 39
Also, the petitioner asserted that although Subic Water was not a party in the case, it
could still be subjected to a writ of execution, since it was identified as OCWD's comaker and successor-in-interest in the compromise agreement. 40
Lastly, the petitioner contended that the compromise agreement was signed by Mr. Noli
R. Aldip, then Subic Water's chairman, signifying Subic Water's consent to the
agreement.
The Court's Ruling
We DISMISS the petition for being the wrong remedy and, in any case, for lack of merit;
what we have before us is a final judgment that we can no longer touch unless there is
grave abuse of discretion.
A. Procedural Law Aspect
Certiorari is not a substitute for a
lost appeal.
At the outset, we emphasize that the present petition, brought under Rule 65, merits outright
dismissal for having availed an improper remedy.
The instant petition should have been brought under Rule 45 in a petition for review on
certiorari. Section 1 of this Rule mandates:
Section 1. Filing of petition with Supreme Court. A party desiring to appeal
by certiorari from a judgment or final order or resolution of the Court of
Appeals, the Sandiganbayan, the Regional Trial Court or other courts whenever
authorized by law, may file with the Supreme Court a verified petition for
review on certiorari. The petition shall raise only questions of law which must
be distinctly set forth. (1a, 2a) [emphasis supplied]

Supplementing Rule 45 are Sections 3 41 and 4 42 of Rule 56 which govern the applicable
procedure in the Supreme Court.
cIHCST

Appeals from judgments or final orders or resolutions of the CA should be made through
a verified petition for review on certiorari under Rule 45. 43 In this case, petitioner
questioned the July 6, 2005 decision 44 and the January 3, 2006 resolution 45 of the CA

which declared as null and void the writ of execution issued by the trial court. Since the
CA's pronouncement completely disposed of the case and the issues raised by the
parties, it was the proper subject of a Rule 45 petition. It was already a final order that
resolved the subject matter in its entirety, leaving nothing else to be done.
A petition for certiorari under Rule 65 is appropriate only if there is no appeal, or any
plain, speedy, and adequate remedy in the ordinary course of law available to the aggrieved
party. As we have distinctly explained in the case of Pasiona v. Court of Appeals: 46
The aggrieved party is proscribed from assailing a decision or final order of the
CA via Rule 65 because such recourse is proper only if the party has no plain,
speedy and adequate remedy in the course of law. In this case, petitioner had
an adequate remedy, namely, a petition for review on certiorari under Rule
45 of the Rules of Court. A petition for review on certiorari, not a special
civil action for certiorari was, therefore, the correct remedy.

xxx xxx xxx

Settled is the rule that where appeal is available to the aggrieved party, the
special civil action for certiorari will not be entertained remedies of
appeal and certiorari are mutually exclusive, not alternative or successive.
Hence, certiorari is not and cannot be a substitute for a lost appeal,
especially if one's own negligence or error in one's choice of remedy occasioned
such loss or lapse. 47 [emphasis ours]

The petitioner received the CA's assailed resolution denying its motion for reconsideration
on January 9, 2006. Following Rule 45, Section 2 of the Rules of Court,48 the petitioner
had until January 24, 2006 to file its petition for review. It could have even filed a motion
for a 30-day extension of time, a motion that this Court grants for justifiable reasons. 49 But
all of these, it failed to do. Thus, the assailed CA rulings became final and executory and
could no longer be the subject of an appeal.
Apparently, to revive its lost appeal, petitioner filed the present petition for certiorari that
under Rule 65 may be filed within sixty days from the promulgation of the assailed
CA resolution (on January 3, 2006). A Rule 65 petition for certiorari, however, cannot be
a substitute for a lost appeal. With the lapse of the prescribed period for appeal without an
action from the petitioner, the present petition for certiorari a mere replacement must
be dismissed.
But even without the procedural infirmity, the present recourse to us has no basis on the
merits and must be denied.

Execution by motion is only

available within the five-year
period from entry of judgment.
Under Rule 39, Section 6, 50 a judgment creditor has two modes in enforcing the court's
judgment. Execution may be either through motion or an independent action.
These two modes of execution are available depending on the timing when the judgment
creditor invoked its right to enforce the court's judgment. Execution by motion is only
available if the enforcement of the judgment was sought within five (5) years from the
date of its entry. On the other hand, execution by independent action is mandatory if the
five-year prescriptive period for execution by motion had already elapsed. 51 However,
for execution by independent action to prosper the Rules impose another limitation
the action must be filed before it is barred by the statute of limitations which, under the
Civil Code,is ten (10) years from the finality of the judgment. 52
On May 7, 1999, within the five-year period from the trial court's judgment, petitioner filed
its motion for the issuance of a writ of execution. However, despite the grant of the motion,
the court did not issue an actual writ. It was only on May 30, 2003 that petitioner filed a
second motion to ask again for the writ's issuance. By this time, the allowed five-year
period for execution by motion had already lapsed.
As will be discussed below, since the second motion was filed beyond the five-year
prescriptive period set by the Rules, then the writ of execution issued by the trial court on
July 31, 2003 was null and void for having been issued by a court already ousted of its
jurisdiction.
In Arambulo v. Court of First Instance of Laguna, 53 we explained the rule that the
jurisdiction of a court to issue a writ of execution by motion is only effective within the
five-year period from the entry of judgment. Outside this five-year period, any writ of
execution issued pursuant to a motion filed by the judgment creditor, is null and void. If
no writ of execution was issued by the court within the five-year period, even a motion
filed within such prescriptive period would not suffice. A writ issued by the court after the
lapse of the five-year period is already null and void. 54 The judgment creditor's only
recourse then is to file an independent action, which must also be within the prescriptive
period set by law for the enforcement of judgments.
This Court subsequently reiterated its Arambulo ruling in Ramos v. Garciano, 55 where
we said:
There seems to be no serious dispute that the 4th alias writ of execution was
issued eight (8) days after the lapse of the five (5) year period from the date of
the entry of judgment in Civil Case No. 367. As a general rule, after the lapse

of such period a judgment may be enforced only by ordinary action, not by

mere motion (Section 6, Rule 39, Rules of Court).
xxx xxx xxx
The limitation that a judgment be enforced by execution within five years,
otherwise it loses efficacy, goes to the very jurisdiction of the Court. A writ
issued after such period is void, and the failure to object thereto does not
validate it, for the reason that jurisdiction of courts is solely conferred by law
and not by express or implied will of the parties. 56 [emphasis supplied]

To clearly restate these rulings, for execution by motion to be valid, the judgment creditor
must ensure the accomplishment of two acts within the five-year prescriptive period. These
are: a) the filing of the motion for the issuance of the writ of execution; and b) the
court's actual issuance of the writ. In the instances when the Court allowed execution by
motion even after the lapse of five years, we only recognized one exception, i.e., when the
delay is caused or occasioned by actions of the judgment debtor and/or is incurred for his
benefit or advantage. 57 However, petitioner failed to show or cite circumstances showing
how OCWD or Subic Water caused it to belatedly file its second motion for execution.
Strictly speaking, the issuance of the writ should have been a ministerial duty on the part
of the trial court after it gave its July 23, 1999 order, approving the first motion and
directing the issuance of such writ. The petitioner could have easily compelled the court to
actually issue the writ by filing a manifestation on the existence of the July 23, 1999 order.
However, petitioner idly sat and waited for the five-year period to lapse before it filed its
second motion. Having slept on its rights, petitioner had no one to blame but itself.
A writ of execution cannot affect a
non-party to a case.
Strangers to a case are not bound by the judgment rendered in it. Thus, a writ of execution
can only be issued against a party and not against one who did not have his day in court.
58

Subic Water never participated in the proceedings in Civil Case No. 580-0-90, where
OCWD and petitioner were the contending parties. Subic Water only came into the picture
when one Atty. Segundo Mangohig, claiming to be OCWD's former counsel, manifested
before the trial court that OCWD had already been judicially dissolved and that Subic
Water assumed OCWD's personality.
EAIaHD

In the present case, the compromise agreement, although signed by Mr. Noli Aldip, did not
carry the express conformity of Subic Water. Mr. Aldip was never given any authorization
to conform to or bind Subic Water in the compromise agreement. Also, the agreement

merely labeled Subic Water as a co-maker. It did not contain any provision where Subic
Water acknowledged its solidary liability with OCWD.
Lastly, Subic Water did not voluntarily submit to the court's jurisdiction. In fact, the motion
it filed was only made as a special appearance, precisely to avoid the court's acquisition of
jurisdiction over its person. Without any participation in the proceedings below, it cannot
be made liable on the writ of execution issued by the court a quo.
B. Substantive Law Aspect
Solidary liability must be expressly stated.
The petitioner also argued that Subic Water could be held solidarily liable under the writ
of execution since it was identified as OCWD's co-maker in the compromise agreement.
The petitioner's basis for this is the following provision of the agreement:
4. Both parties also request that Subic Water, Philippines which took over the
operations of the defendant Olongapo City Water District be made as comaker for the obligation herein above-cited. 59 [emphasis supplied]

As the rule stands, Solidary liability is not presumed. This stems from Art. 1207 of the
Civil Code,which provides:
Art. 1207. . . There is a solidary liability only when the obligation expressly
so states, or when the law or the nature of the obligation requires solidarity.
[emphasis supplied]

In Palmares v. Court of Appeals, 60 the Court did not hesitate to rule that although a party
to a promissory note was only labeled as a co-maker, his liability was that of a surety, since
the instrument expressly provided for his joint and several liability with the principal.
In the present case, the joint and several liability of Subic Water and OCWD was nowhere
clear in the agreement. The agreement simply and plainly stated that petitioner and OCWD
were only requesting Subic Water to be a co-maker, in view of its assumption of OCWD's
water operations. No evidence was presented to show that such request was ever approved
by Subic Water's board of directors.
Under these circumstances, petitioner cannot proceed after Subic Water for OCWD's
unpaid obligations. The law explicitly states that solidary liability is not presumed and
must be expressly provided for. Not being a surety, Subic Water is not an insurer of
OCWD's obligations under the compromise agreement. At best, Subic Water was merely
a guarantor against whom petitioner can claim, provided it was first shown that: a)
petitioner had already proceeded after the properties of OCWD, the principal debtor; b)
and despite this, the obligation under the compromise agreement, remains to be not fully

satisfied. 61 But as will be discussed next, Subic Water could not also be recognized as a
guarantor of OCWD's obligations.
An officer's actions can only bind
the corporation if he had been
authorized to do so.
An examination of the compromise agreement reveals that it was not accompanied by any
document showing a grant of authority to Mr. Noli Aldip to sign on behalf of Subic Water.
Subic Water is a corporation. A corporation, as a juridical entity, primarily acts through its
board of directors, which exercises its corporate powers. In this capacity, the general rule
is that, in the absence of authority from the board of directors, no person, not even its
officers, can validly bind a corporation. 62 Section 23 of the Corporation Code provides:
Section 23. The board of directors or trustees. Unless otherwise provided in
this Code, the corporate powers of all corporations formed under this Code
shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to be
elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1) year
until their successors are elected and qualified. (28a) [emphasis supplied]

In People's Aircargo and Warehousing Co., Inc. v. Court of Appeals, 63 we held that under
Section 23 of the Corporation Code, the power and responsibility to decide whether a
corporation can enter into a binding contract is lodged with the board of directors,
subject to the articles of incorporation, by-laws, or relevant provisions of law. As we have
clearly explained in another case:
A corporate officer or agent may represent and bind the corporation in
transactions with third persons to the extent that [the] authority to do so
has been conferred upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the usual course of the
particular business, are incidental to, or may be implied from, the powers
intentionally conferred, powers added by custom and usage, as usually
pertaining to the particular officer or agent, and such apparent powers as the
corporation has caused persons dealing with the officer or agent to believe that
it has conferred. 64 [emphasis ours]

Mr. Noli Aldip signed the compromise agreement purely in his own capacity. Moreover,
the compromise agreement did not expressly provide that Subic Water consented to
become OCWD's co-maker. As worded, the compromise agreement merely provided that
both parties [also] requestSubic Water, Philippines, which took over the operations of
Olongapo City Water District be made as co-maker [for the obligations above-cited].
This request was never forwarded to Subic Water's board of directors. Even if due

notification had been made (which does not appear in the records), Subic Water's board
does not appear to have given any approval to such request. No document such as the
minutes of Subic Water's board of directors' meeting or a secretary's certificate, purporting
to be an authorization to Mr. Aldip to conform to the compromise agreement, was ever
presented. In effect, Mr. Aldip's act of signing the compromise agreement was outside of
his authority to undertake.
Since Mr. Aldip was never authorized and there was no showing that Subic Water's articles
of incorporation or by-laws granted him such authority, then the compromise agreement
he signed cannot bind Subic Water. Subic Water cannot likewise be made a surety or even
a guarantor for OCWD's obligations. OCWD's debts under the compromise agreement are
its own corporate obligations to petitioner.
OCWD
and
separate and different entities.

Subic

Water

are

two

Petitioner practically suggests that since Subic Water took over OCWD's water operations
in Olongapo City, it also acquired OCWD's juridical personality, making the two entities
one and the same.
This is an interpretation that we cannot make or adopt under the facts and the evidence of
this case. Subic Water clearly demonstrated that it was a separate corporate entity from
OCWD.
OCWD is just a ten percent (10%) shareholder of Subic Water. As a mere shareholder,
OCWD's juridical personality cannot be equated nor confused with that of Subic Water. It
is basic in corporation law that a corporation is a juridical entity vested with a legal
personality separate and distinct from those acting for and in its behalf and, in general,
from the people comprising it. 65
SHTcDE

Under this corporate reality, Subic Water cannot be held liable for OCWD's corporate
obligations in the same manner that OCWD cannot be held liable for the obligations
incurred by Subic Water as a separate entity. The corporate veil should not and cannot be
pierced unless it is clearly established that the separate and distinct personality of the
corporation was used to justify a wrong, protect fraud, or perpetrate a deception. 66
In Concept Builders, Inc. v. NLRC, 67 the Court enumerated the possible probative factors
of identity which could justify the application of the doctrine of piercing the corporate veil.
These are:
(1) Stock ownership by one or common ownership of both corporations;
(2) Identity of directors and officers;

(3) The manner of keeping corporate books and records; and

(4) Methods of conducting the business. 68

The burden of proving the presence of any of these probative factors lies with the one
alleging it. Unfortunately, petitioner simply claimed that Subic Water took over OCWD's
water operations in Olongapo City. Apart from this allegation, petitioner failed to
demonstrate any link to justify the construction that Subic Water and OCWD are one and
the same.
Under this evidentiary situation, our duty is to respect the separate and distinct personalities
of these two juridical entities.
We thus deny the present petition. The writ of execution issued by RTC Olongapo, Br. 75,
in favor of Olongapo City, is hereby confirmed to be null and void. Accordingly,
respondent Subic Water cannot be made liable under this writ.
WHEREFORE, premises considered, we hereby DISMISS the petition. The Court of
Appeals' decision dated July 6, 2005 and resolution dated January 3, 2006, annulling and
setting aside the orders of the Regional Trial Court of Olongapo, Branch 75 dated July 29,
2003 and October 7, 2003, and the writ of execution dated July 31, 2003, are hereby
AFFIRMED. Costs against the City of Olongapo.
SO ORDERED.
Carpio, Del Castillo, Perez and Perlas-Bernabe, JJ., concur.
(Olongapo City v. Subic Water and Sewerage Co., Inc., G.R. No. 171626, [August 6,
2014])
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