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G.R. No. 138814

April 16, 2009

MAKATI STOCK EXCHANGE, INC., MA. VIVIAN YUCHENGCO, ADOLFO M. DUARTE, MYRON
C. PAPA, NORBERTO C. NAZARENO, GEORGE UY-TIOCO, ANTONIO A. LOPA, RAMON B.
ARNAIZ, LUIS J.L. VIRATA, and ANTONIO GARCIA, JR. Petitioners,
vs.
MIGUEL V. CAMPOS, substituted by JULIA ORTIGAS VDA. DE CAMPOS,1 Respondent.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 seeking the reversal of the Decision2 dated 11
February 1997 and Resolution dated 18 May 1999 of the Court of Appeals in CA-G.R. SP No. 38455.
The facts of the case are as follows:
SEC Case No. 02-94-4678 was instituted on 10 February 1994 by respondent Miguel V. Campos, who filed
with the Securities, Investigation and Clearing Department (SICD) of the Securities and Exchange Commission
(SEC), a Petition against herein petitioners Makati Stock Exchange, Inc. (MKSE) and MKSE directors, Ma.
Vivian Yuchengco, Adolfo M. Duarte, Myron C. Papa, Norberto C. Nazareno, George Uy-Tioco, Antonio A,
Lopa, Ramon B. Arnaiz, Luis J.L. Virata, and Antonio Garcia, Jr. Respondent, in said Petition, sought: (1) the
nullification of the Resolution dated 3 June 1993 of the MKSE Board of Directors, which allegedly deprived
him of his right to participate equally in the allocation of Initial Public Offerings (IPO) of corporations
registered with MKSE; (2) the delivery of the IPO shares he was allegedly deprived of, for which he would pay
IPO prices; and (3) the payment of P2 million as moral damages, P1 million as exemplary damages, and
P500,000.00 as attorneys fees and litigation expenses.
On 14 February 1994, the SICD issued an Order granting respondents prayer for the issuance of a Temporary
Restraining Order to enjoin petitioners from implementing or enforcing the 3 June 1993 Resolution of the
MKSE Board of Directors.
The SICD subsequently issued another Order on 10 March 1994 granting respondents application for a Writ of
Preliminary Injunction, to continuously enjoin, during the pendency of SEC Case No. 02-94-4678, the
implementation or enforcement of the MKSE Board Resolution in question. Petitioners assailed this SICD
Order dated 10 March 1994 in a Petition for Certiorari filed with the SEC en banc, docketed as SEC-EB No.
393.
On 11 March 1994, petitioners filed a Motion to Dismiss respondents Petition in SEC Case No. 02-94-4678,
based on the following grounds: (1) the Petition became moot due to the cancellation of the license of MKSE;
(2) the SICD had no jurisdiction over the Petition; and (3) the Petition failed to state a cause of action.

The SICD denied petitioners Motion to Dismiss in an Order dated 4 May 1994. Petitioners again challenged
the 4 May 1994 Order of SICD before the SEC en banc through another Petition for Certiorari, docketed as
SEC-EB No. 403.
In an Order dated 31 May 1995 in SEC-EB No. 393, the SEC en banc nullified the 10 March 1994 Order of
SICD in SEC Case No. 02-94-4678 granting a Writ of Preliminary Injunction in favor of respondent. Likewise,
in an Order dated 14 August 1995 in SEC-EB No. 403, the SEC en banc annulled the 4 May 1994 Order of
SICD in SEC Case No. 02-94-4678 denying petitioners Motion to Dismiss, and accordingly ordered the
dismissal of respondents Petition before the SICD.
Respondent filed a Petition for Certiorari with the Court of Appeals assailing the Orders of the SEC en banc
dated 31 May 1995 and 14 August 1995 in SEC-EB No. 393 and SEC-EB No. 403, respectively. Respondents
Petition before the appellate court was docketed as CA-G.R. SP No. 38455.
On 11 February 1997, the Court of Appeals promulgated its Decision in CA-G.R. SP No. 38455, granting
respondents Petition for Certiorari, thus:
WHEREFORE, the petition in so far as it prays for annulment of the Orders dated May 31, 1995 and August 14,
1995 in SEC-EB Case Nos. 393 and 403 is GRANTED. The said orders are hereby rendered null and void and
set aside.
Petitioners filed a Motion for Reconsideration of the foregoing Decision but it was denied by the Court of
Appeals in a Resolution dated 18 May 1999.
Hence, the present Petition for Review raising the following arguments:
I.
THE SEC EN BANC DID NOT COMMIT GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION WHEN IT DISMISSED THE PETITION FILED BY RESPONDENT
BECAUSE ON ITS FACE, IT FAILED TO STATE A CAUSE OF ACTION.
II.
THE GRANT OF THE IPO ALLOCATIONS IN FAVOR OF RESPONDENT WAS A MERE
ACCOMMODATION GIVEN TO HIM BY THE BOARD OF [DIRECTORS] OF THE MAKATI STOCK
EXCHANGE, INC.
III.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE SEC EN BANC COMMITTED GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT MADE
AN EXTENDED INQUIRY AND PROCEEDED TO MAKE A DETERMINATION AS TO THE TRUTH OF
RESPONDENTS ALLEGATIONS IN HIS PETITION AND USED AS BASIS THE EVIDENCE ADDUCED
DURING THE HEARING ON THE APPLICATION FOR THE WRIT OF PRELIMINARY INJUNCTION TO
DETERMINE THE EXISTENCE OR VALIDITY OF A STATED CAUSE OF ACTION.

IV.
IPO ALLOCATIONS GRANTED TO BROKERS ARE NOT TO BE BOUGHT BY THE BROKERS FOR
THEMSELVES BUT ARE TO BE DISTRIBUTED TO THE INVESTING PUBLIC. HENCE,
RESPONDENTS CLAIM FOR DAMAGES IS ILLUSORY AND HIS PETITION A NUISANCE SUIT.3
On 18 September 2001, counsel for respondent manifested to this Court that his client died on 7 May 2001. In a
Resolution dated 24 October 2001, the Court directed the substitution of respondent by his surviving spouse,
Julia Ortigas vda. de Campos.
Petitioners want this Court to affirm the dismissal by the SEC en banc of respondents Petition in SEC Case No.
02-94-4678 for failure to state a cause of action. On the other hand, respondent insists on the sufficiency of his
Petition and seeks the continuation of the proceedings before the SICD.
A cause of action is the act or omission by which a party violates a right of another.4 A complaint states a cause
of action where it contains three essential elements of a cause of action, namely: (1) the legal right of the
plaintiff, (2) the correlative obligation of the defendant, and (3) the act or omission of the defendant in violation
of said legal right. If these elements are absent, the complaint becomes vulnerable to dismissal on the ground of
failure to state a cause of action.
If a defendant moves to dismiss the complaint on the ground of lack of cause of action, he is regarded as having
hypothetically admitted all the averments thereof. The test of sufficiency of the facts found in a complaint as
constituting a cause of action is whether or not admitting the facts alleged, the court can render a valid judgment
upon the same in accordance with the prayer thereof. The hypothetical admission extends to the relevant and
material facts well pleaded in the complaint and inferences fairly deducible therefrom. Hence, if the allegations
in the complaint furnish sufficient basis by which the complaint can be maintained, the same should not be
dismissed regardless of the defense that may be assessed by the defendant.5
Given the foregoing, the issue of whether respondents Petition in SEC Case No. 02-94-4678 sufficiently states
a cause of action may be alternatively stated as whether, hypothetically admitting to be true the allegations in
respondents Petition in SEC Case No. 02-94-4678, the SICD may render a valid judgment in accordance with
the prayer of said Petition.
A reading of the exact text of respondents Petition in SEC Case No. 02-94-4678 is, therefore, unavoidable.
Pertinent portions of the said Petition reads:
7. In recognition of petitioners invaluable services, the general membership of respondent corporation [MKSE]
passed a resolution sometime in 1989 amending its Articles of Incorporation, to include the following provision
therein:
"ELEVENTH WHEREAS, Mr. Miguel Campos is the only surviving incorporator of the Makati Stock
Exchange, Inc. who has maintained his membership;
"WHEREAS, he has unselfishly served the Exchange in various capacities, as governor from 1977 to the
present and as President from 1972 to 1976 and again as President from 1988 to the present;

"WHEREAS, such dedicated service and leadership which has contributed to the advancement and well being
not only of the Exchange and its members but also to the Securities industry, needs to be recognized and
appreciated;
"WHEREAS, as such, the Board of Governors in its meeting held on February 09, 1989 has correspondingly
adopted a resolution recognizing his valuable service to the Exchange, reward the same, and preserve for
posterity such recognition by proposing a resolution to the membership body which would make him as
Chairman Emeritus for life and install in the Exchange premises a commemorative bronze plaque in his honor;
"NOW, THEREFORE, for and in consideration of the above premises, the position of the "Chairman Emeritus"
to be occupied by Mr. Miguel Campos during his lifetime and irregardless of his continued membership in the
Exchange with the Privilege to attend all membership meetings as well as the meetings of the Board of
Governors of the Exchange, is hereby created."
8. Hence, to this day, petitioner is not only an active member of the respondent corporation, but its Chairman
Emeritus as well.
9. Correspondingly, at all times material to this petition, as an active member and Chairman Emeritus of
respondent corporation, petitioner has always enjoyed the right given to all the other members to participate
equally in the Initial Public Offerings (IPOs for brevity) of corporations.
10. IPOs are shares of corporations offered for sale to the public, prior to the listing in the trading floor of the
countrys two stock exchanges. Normally, Twenty Five Percent (25%) of these shares are divided equally
between the two stock exchanges which in turn divide these equally among their members, who pay therefor at
the offering price.
11. However, on June 3, 1993, during a meeting of the Board of Directors of respondent-corporation, individual
respondents passed a resolution to stop giving petitioner the IPOs he is entitled to, based on the ground that
these shares were allegedly benefiting Gerardo O. Lanuza, Jr., who these individual respondents wanted to get
even with, for having filed cases before the Securities and Exchange (SEC) for their disqualification as member
of the Board of Directors of respondent corporation.
12. Hence, from June 3, 1993 up to the present time, petitioner has been deprived of his right to subscribe to the
IPOs of corporations listing in the stock market at their offering prices.
13. The collective act of the individual respondents in depriving petitioner of his right to a share in the IPOs for
the aforementioned reason, is unjust, dishonest and done in bad faith, causing petitioner substantial financial
damage.6
There is no question that the Petition in SEC Case No. 02-94-4678 asserts a right in favor of respondent,
particularly, respondents alleged right to subscribe to the IPOs of corporations listed in the stock market at their
offering prices; and stipulates the correlative obligation of petitioners to respect respondents right, specifically,
by continuing to allow respondent to subscribe to the IPOs of corporations listed in the stock market at their
offering prices.

However, the terms right and obligation in respondents Petition are not magic words that would automatically
lead to the conclusion that such Petition sufficiently states a cause of action. Right and obligation are legal terms
with specific legal meaning. A right is a claim or title to an interest in anything whatsoever that is enforceable
by law.7 An obligation is defined in the Civil Code as a juridical necessity to give, to do or not to do.8 For every
right enjoyed by any person, there is a corresponding obligation on the part of another person to respect such
right. Thus, Justice J.B.L. Reyes offers9 the definition given by Arias Ramos as a more complete definition:
An obligation is a juridical relation whereby a person (called the creditor) may demand from another (called the
debtor) the observance of a determinative conduct (the giving, doing or not doing), and in case of breach, may
demand satisfaction from the assets of the latter.
The Civil Code enumerates the sources of obligations:
Art. 1157. Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts.
Therefore, an obligation imposed on a person, and the corresponding right granted to another, must be rooted in
at least one of these five sources. The mere assertion of a right and claim of an obligation in an initiatory
pleading, whether a Complaint or Petition, without identifying the basis or source thereof, is merely a
conclusion of fact and law. A pleading should state the ultimate facts essential to the rights of action or defense
asserted, as distinguished from mere conclusions of fact or conclusions of law.10 Thus, a Complaint or Petition
filed by a person claiming a right to the Office of the President of this Republic, but without stating the source
of his purported right, cannot be said to have sufficiently stated a cause of action. Also, a person claiming to be
the owner of a parcel of land cannot merely state that he has a right to the ownership thereof, but must likewise
assert in the Complaint either a mode of acquisition of ownership or at least a certificate of title in his name.
In the case at bar, although the Petition in SEC Case No. 02-94-4678 does allege respondents right to subscribe
to the IPOs of corporations listed in the stock market at their offering prices, and petitioners obligation to
continue respecting and observing such right, the Petition utterly failed to lay down the source or basis of
respondents right and/or petitioners obligation.
Respondent merely quoted in his Petition the MKSE Board Resolution, passed sometime in 1989, granting him
the position of Chairman Emeritus of MKSE for life. However, there is nothing in the said Petition from which
the Court can deduce that respondent, by virtue of his position as Chairman Emeritus of MKSE, was granted by
law, contract, or any other legal source, the right to subscribe to the IPOs of corporations listed in the stock
market at their offering prices.

A meticulous review of the Petition reveals that the allocation of IPO shares was merely alleged to have been
done in accord with a practice normally observed by the members of the stock exchange, to wit:
IPOs are shares of corporations offered for sale to the public, prior to their listing in the trading floor of the
countrys two stock exchanges. Normally, Twenty-Five Percent (25%) of these shares are divided equally
between the two stock exchanges which in turn divide these equally among their members, who pay therefor at
the offering price.11 (Emphasis supplied)
A practice or custom is, as a general rule, not a source of a legally demandable or enforceable right.12 Indeed, in
labor cases, benefits which were voluntarily given by the employer, and which have ripened into company
practice, are considered as rights that cannot be diminished by the employer.13 Nevertheless, even in such cases,
the source of the employees right is not custom, but ultimately, the law, since Article 100 of the Labor Code
explicitly prohibits elimination or diminution of benefits.
There is no such law in this case that converts the practice of allocating IPO shares to MKSE members, for
subscription at their offering prices, into an enforceable or demandable right. Thus, even if it is hypothetically
admitted that normally, twenty five percent (25%) of the IPOs are divided equally between the two stock
exchanges -- which, in turn, divide their respective allocation equally among their members, including the
Chairman Emeritus, who pay for IPO shares at the offering price -- the Court cannot grant respondents prayer
for damages which allegedly resulted from the MKSE Board Resolution dated 3 June 1993 deviating from said
practice by no longer allocating any shares to respondent.1avvphi1
Accordingly, the instant Petition should be granted. The Petition in SEC Case No. 02-94-4678 should be
dismissed for failure to state a cause of action. It does not matter that the SEC en banc, in its Order dated 14
August 1995 in SEC-EB No. 403, overstepped its bounds by not limiting itself to the issue of whether
respondents Petition before the SICD sufficiently stated a cause of action. The SEC en banc may have been
mistaken in considering extraneous evidence in granting petitioners Motion to Dismiss, but its discussion
thereof are merely superfluous and obiter dictum. In the main, the SEC en banc did correctly dismiss the
Petition in SEC Case No. 02-94-4678 for its failure to state the basis for respondents alleged right, to wit:
Private respondent Campos has failed to establish the basis or authority for his alleged right to participate
equally in the IPO allocations of the Exchange. He cited paragraph 11 of the amended articles of incorporation
of the Exchange in support of his position but a careful reading of the said provision shows nothing therein that
would bear out his claim. The provision merely created the position of chairman emeritus of the Exchange but it
mentioned nothing about conferring upon the occupant thereof the right to receive IPO allocations.14
With the dismissal of respondents Petition in SEC Case No. 02-94-4678, there is no more need for this Court to
resolve the propriety of the issuance by SCID of a writ of preliminary injunction in said case.
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 11 February 1997 and
its Resolution dated 18 May 1999 in CA-G.R. SP No. 38455 are REVERSED and SET ASIDE. The Orders
dated 31 May 1995 and 14 August 1995 of the Securities and Exchange Commission en banc in SEC-EB Case
No. 393 and No. 403, respectively, are hereby reinstated. No pronouncement as to costs.
SO ORDERED.

#2
G.R. No. 83748 May 12, 1989
FLAVIO K MACASAET & ASSOCIATES, INC., petitioner,
vs.
COMMISSION ON AUDIT and PHILIPPINE TOURISM AUTHORITY, respondents.
F. Sumulong & Associates Law Offices for petitioner.

MELENCIO-HERRERA, J.:
In this Petition for Certiorari, pursuant to Section 7, Article IX of the 1987 Constitution, 1 petitioner, Flavio K.
Macasaet & Associates, Inc., prays that the ruling of public respondent Commission on Audit (COA) denying
its claim for completion of payment of professional fees be overturned. The facts follow. On 15 September 1977
respondent Philippine Tourism Authority (PTA) entered into a Contract for "Project Design and Management
Services for the development of the proposed Zamboanga Golf and Country Club, Calarian, Zamboanga City"
with petitioner company, but originally with Flavio K Macasaet alone (hereinafter referred to simply as the
"Contract").
Under the Contract, PTA obligated itself to pay petitioner a professional fee of seven (7%) of the actual
construction cost, as follows:
ARTICLE IV PROFESSIONAL FEE
In consideration for the professional services to be performed by Designer under Article I of this
Agreement, the Authority shall pay seven percent (7%) of the actual construction cost.
In addition, a Schedule of Payments was provided for while the construction was in progress and up to its final
completion, thus:
ARTICLE V SCHEDULE OF PAYMENTS
1. Upon the execution of the Agreement but not more than fifteen (15) days, a minimum payment
equivalent to 10 percent of the professional fee as provided in Art. IV computed upon a
reasonable estimated construction cost of the project.
2. Upon the completion of the schematic design services, but not more than 15 days after the
submission of the schematic design to the Authority, a sum equivalent to 15% of the professional
fee as stated in Art. IV computed upon the reasonable estimated construction cost of the project.

3. Upon completion of the design development services, but not more than 15 days after
submission of the design development to the authority, a sum equivalent to 20% of the
professional fee as stated in Art. IV, computed upon the reasonable estimated construction cost.
4. Upon completion of the contract document services but not more than 15 days after
submission of the contract document to the Authority, a sum equivalent to 25% of the
professional fee as stated in Art. IV, shall be paid computed on the same basis as above.
5. Upon completion of the work and acceptance thereof by the Authority, the balance of the
professional fee, computed on the final actual project cost shall be paid. (Emphasis supplied)
Pursuant to the foregoing Schedule, the PTA made periodic payments of the stipulated professional fees to
petitioner. And, upon completion of the project, PTA paid petitioners what it perceived to be the balance of the
latter's professional fees.
It turned out, however, that after the project was completed, PTA paid Supra Construction Company, the main
contractor, the additional sum of P3,148,198.26 representing the escalation cost of the contract price due to the
increase in the price of construction materials.
Upon learning of the price escalation, petitioner requested payment of P219,302.47 additional professional fee
representing seven (7%) percent of P3,148,198.26.
On 3 July 1985 PTA denied payment on the ground that "the subject price escalation referred to increased cost
of construction materials and did not entail additional work on the part of petitioner as to entitle it to additional
compensation under Article VI of the contract." 2
Reconsiderations sought by the petitioner, up to respondent COA, were to no avail. The latter expressed the
opinion that "to allow subject claim in the absence of a showing that extra or additional services had been
rendered by claimant would certainly result in overpayment to him to the prejudice of the Government" (1st
Indorsement, July 10, 1987, p. 3, Rollo, p. 42).
Hence this Petition, to which we gave due course.
The basic issue for resolution is petitioner's entitlement to additional professional fees, which, in turn, hinges on
whether or not the price escalation should be included in the "final actual project cost."
Public respondents, through the Solicitor General, maintain that petitioner had been paid its professional fee
upon completion of the project and that its claim for additional payment is without any legal and factual basis
for, after all, no additional architectural services were rendered other than the ones under the terms of the
Contract. On the other hand, petitioner anchors its claim to additional professional fees, not on any change in
services rendered, but on Article IV, and paragraph 5 of Article V, of the Contract, supra.
The very terminologies used in the Contract call for affirmative relief in petitioner's favor.
Under Article IV of said Contract, petitioner was to be entitled to seven (7%) of the "actual construction cost."
Under paragraphs 1, 2, 3, and 4, Article V, periodic payments were to be based on a "reasonable estimated

construction cost." ultimately, under paragraph 5, Article V, the balance of the professional fee was to be
computed on the basis of "the final actual project cost."
The use of the terms "actual construction cost", gradating into "final actual project cost" is not without
significance. The real intendment of the parties, as shown by paragraph 5, Article V, of their Contract was to
base the ultimate balance of petitioner's professional fees not on "actual construction cost" alone but on the
final actual project cost; not on "construction cost" alone but on "project cost." By so providing, the Contract
allowed for flexibility based on actuality and as a matter of equity for the contracting parties. For evidently, the
final actual project cost would not necessarily tally with the actual construction cost initially computed. The
"final actual project cost" covers the totality of all costs as actually and finally determined, and logically
includes the escalation cost of the contract price.
It matters not that the price escalation awarded to the construction company did not entail additional work for
petitioner. As a matter of fact, neither did it for the main contractor. The increased cost of materials was not the
doing of either contracting party.
That an escalation clause was not specifically provided for in the Contract is of no moment either for it may be
considered as already "built-in" and understood from the very terms "actual construction cost," and eventually
"final actual project cost."
Article VI of the Contract, supra, has no bearing on the present controversy either. It speaks of any major
change in the planning and engineering aspects necessitating the award and payment of additional
compensation. Admittedly, there was no additional work by petitioner, which required additional compensation.
Rather, petitioner's claim is for payment of the balance of its professional fees based on the "final actual project
cost" and not for additional compensation based on Article VI.
The terminologies in the contract being clear, leaving no doubt as to the intention of the contracting parties,
their literal meaning control (Article 1370, Civil Code). The price escalation cost must be deemed included in
the final actual project cost and petitioner held entitled to the payment of its additional professional fees.
Obligations arising from contract have the force of law between the contracting parties and should be complied
with in good faith (Article 11 59, Civil Code).
WHEREFORE, the ruling of respondent Commission on Audit is hereby SET ASIDE and respondent
Philippines Tourism Authority is hereby ordered to pay petitioner the additional amount of P219,302.47 to
complete the payment of its professional fee under their Contract for Project Design and Management Services.
SO ORDERED.

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G.R. No. 140047

July 13, 2004

PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, petitioner,

vs.
V.P. EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO;
SOLEDAD C. EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST
INTEGRATED BONDING AND INSURANCE COMPANY, INC., respondents.

DECISION

DAVIDE, JR., C.J.:

This case is an offshoot of a service contract entered into by a Filipino construction firm with the Iraqi
Government for the construction of the Institute of Physical Therapy-Medical Center, Phase II, in Baghdad,
Iraq, at a time when the Iran-Iraq war was ongoing.
In a complaint filed with the Regional Trial Court of Makati City, docketed as Civil Case No. 91-1906 and
assigned to Branch 58, petitioner Philippine Export and Foreign Loan Guarantee Corporation1 (hereinafter
Philguarantee) sought reimbursement from the respondents of the sum of money it paid to Al Ahli Bank of
Kuwait pursuant to a guarantee it issued for respondent V.P. Eusebio Construction, Inc. (VPECI).
The factual and procedural antecedents in this case are as follows:
On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and Construction,
Baghdad, Iraq, awarded the construction of the Institute of Physical TherapyMedical Rehabilitation Center,
Phase II, in Baghdad, Iraq, (hereinafter the Project) to Ajyal Trading and Contracting Company (hereinafter
Ajyal), a firm duly licensed with the Kuwait Chamber of Commerce for a total contract price of
ID5,416,089/046 (or about US$18,739,668).2
On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of respondent 3-Plex
International, Inc. (hereinafter 3-Plex), a local contractor engaged in construction business, entered into a joint
venture agreement with Ajyal wherein the former undertook the execution of the entire Project, while the latter
would be entitled to a commission of 4% of the contract price.3 Later, or on 8 April 1981, respondent 3-Plex, not
being accredited by or registered with the Philippine Overseas Construction Board (POCB), assigned and
transferred all its rights and interests under the joint venture agreement to VPECI, a construction and
engineering firm duly registered with the POCB.4 However, on 2 May 1981, 3-Plex and VPECI entered into an
agreement that the execution of the Project would be under their joint management.5
The SOB required the contractors to submit (1) a performance bond of ID271,808/610 representing 5% of the
total contract price and (2) an advance payment bond of ID541,608/901 representing 10% of the advance
payment to be released upon signing of the contract.6 To comply with these requirements, respondents 3-Plex
and VPECI applied for the issuance of a guarantee with petitioner Philguarantee, a government financial
institution empowered to issue guarantees for qualified Filipino contractors to secure the performance of
approved service contracts abroad.7
Petitioner Philguarantee approved respondents' application. Subsequently, letters of guarantee8 were issued by
Philguarantee to the Rafidain Bank of Baghdad covering 100% of the performance and advance payment bonds,
but they were not accepted by SOB. What SOB required was a letter-guarantee from Rafidain Bank, the
government bank of Iraq. Rafidain Bank then issued a performance bond in favor of SOB on the condition that
another foreign bank, not Philguarantee, would issue a counter-guarantee to cover its exposure. Al Ahli Bank of

Kuwait was, therefore, engaged to provide a counter-guarantee to Rafidain Bank, but it required a similar
counter-guarantee in its favor from the petitioner. Thus, three layers of guarantees had to be arranged.9
Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee issued in favor of Al Ahli Bank
of Kuwait Letter of Guarantee No. 81-194-F 10 (Performance Bond Guarantee) in the amount of ID271,808/610
and Letter of Guarantee No. 81-195-F11 (Advance Payment Guarantee) in the amount of ID541,608/901, both
for a term of eighteen months from 25 May 1981. These letters of guarantee were secured by (1) a Deed of
Undertaking12 executed by respondents VPECI, Spouses Vicente P. Eusebio and Soledad C. Eusebio, 3-Plex,
and Spouses Eduardo E. Santos and Iluminada Santos; and (2) a surety bond13 issued by respondent First
Integrated Bonding and Insurance Company, Inc. (FIBICI). The Surety Bond was later amended on 23 June
1981 to increase the amount of coverage from P6.4 million to P6.967 million and to change the bank in whose
favor the petitioner's guarantee was issued, from Rafidain Bank to Al Ahli Bank of Kuwait.14
On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service contract15 for the
construction of the Institute of Physical Therapy Medical Rehabilitation Center, Phase II, in Baghdad, Iraq,
wherein the joint venture contractor undertook to complete the Project within a period of 547 days or 18
months. Under the Contract, the Joint Venture would supply manpower and materials, and SOB would refund to
the former 25% of the project cost in Iraqi Dinar and the 75% in US dollars at the exchange rate of 1 Dinar to
3.37777 US Dollars.16
The construction, which was supposed to start on 2 June 1981, commenced only on the last week of August
1981. Because of this delay and the slow progress of the construction work due to some setbacks and
difficulties, the Project was not completed on 15 November 1982 as scheduled. But in October 1982, upon
foreseeing the impossibility of meeting the deadline and upon the request of Al Ahli Bank, the joint venture
contractor worked for the renewal or extension of the Performance Bond and Advance Payment Guarantee.
Petitioner's Letters of Guarantee Nos. 81-194-F (Performance Bond) and 81-195-F (Advance Payment Bond)
with expiry date of 25 November 1982 were then renewed or extended to 9 February 1983 and 9 March 1983,
respectively.17 The surety bond was also extended for another period of one year, from 12 May 1982 to 12 May
1983.18 The Performance Bond was further extended twelve times with validity of up to 8 December 1986,19
while the Advance Payment Guarantee was extended three times more up to 24 May 1984 when the latter was
cancelled after full refund or reimbursement by the joint venture contractor.20 The surety bond was likewise
extended to 8 May 1987.21
As of March 1986, the status of the Project was 51% accomplished, meaning the structures were already
finished. The remaining 47% consisted in electro-mechanical works and the 2%, sanitary works, which both
required importation of equipment and materials.22
On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner demanding full payment of its
performance bond counter-guarantee.
Upon receiving a copy of that telex message on 27 October 1986, respondent VPECI requested Iraq Trade and
Economic Development Minister Mohammad Fadhi Hussein to recall the telex call on the performance
guarantee for being a drastic action in contravention of its mutual agreement with the latter that (1) the
imposition of penalty would be held in abeyance until the completion of the project; and (2) the time extension
would be open, depending on the developments on the negotiations for a foreign loan to finance the completion
of the project.23 It also wrote SOB protesting the call for lack of factual or legal basis, since the failure to
complete the Project was due to (1) the Iraqi government's lack of foreign exchange with which to pay its
(VPECI's) accomplishments and (2) SOB's noncompliance for the past several years with the provision in the
contract that 75% of the billings would be paid in US dollars.24 Subsequently, or on 19 November 1986,
respondent VPECI advised the petitioner not to pay yet Al Ahli Bank because efforts were being exerted for the
amicable settlement of the Project.25

On 14 April 1987, the petitioner received another telex message from Al Ahli Bank stating that it had already
paid to Rafidain Bank the sum of US$876,564 under its letter of guarantee, and demanding reimbursement by
the petitioner of what it paid to the latter bank plus interest thereon and related expenses.26
Both petitioner Philguarantee and respondent VPECI sought the assistance of some government agencies of the
Philippines. On 10 August 1987, VPECI requested the Central Bank to hold in abeyance the payment by the
petitioner "to allow the diplomatic machinery to take its course, for otherwise, the Philippine government ,
through the Philguarantee and the Central Bank, would become instruments of the Iraqi Government in
consummating a clear act of injustice and inequity committed against a Filipino contractor."27
On 27 August 1987, the Central Bank authorized the remittance for its account of the amount of US$876,564
(equivalent to ID271, 808/610) to Al Ahli Bank representing full payment of the performance counter-guarantee
for VPECI's project in Iraq. 28
On 6 November 1987, Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli Bank, and
reiterated the joint and solidary obligation of the respondents to reimburse the petitioner for the advances made
on its counter-guarantee.29
The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21 January 1988.30 Then, on 6
May 1988, the petitioner paid to Al Ahli Bank of Kuwait US$59,129.83 representing interest and penalty
charges demanded by the latter bank.31
On 19 June 1991, the petitioner sent to the respondents separate letters demanding full payment of the amount
of P47,872,373.98 plus accruing interest, penalty charges, and 10% attorney's fees pursuant to their joint and
solidary obligations under the deed of undertaking and surety bond.32 When the respondents failed to pay, the
petitioner filed on 9 July 1991 a civil case for collection of a sum of money against the respondents before the
RTC of Makati City.
After due trial, the trial court ruled against Philguarantee and held that the latter had no valid cause of action
against the respondents. It opined that at the time the call was made on the guarantee which was executed for a
specific period, the guarantee had already lapsed or expired. There was no valid renewal or extension of the
guarantee for failure of the petitioner to secure respondents' express consent thereto. The trial court also found
that the joint venture contractor incurred no delay in the execution of the Project. Considering the Project
owner's violations of the contract which rendered impossible the joint venture contractor's performance of its
undertaking, no valid call on the guarantee could be made. Furthermore, the trial court held that no valid notice
was first made by the Project owner SOB to the joint venture contractor before the call on the guarantee.
Accordingly, it dismissed the complaint, as well as the counterclaims and cross-claim, and ordered the petitioner
to pay attorney's fees of P100,000 to respondents VPECI and Eusebio Spouses and P100,000 to 3-Plex and the
Santos Spouses, plus costs. 33
In its 14 June 1999 Decision,34 the Court of Appeals affirmed the trial court's decision, ratiocinating as follows:
First, appellant cannot deny the fact that it was fully aware of the status of project implementation as
well as the problems besetting the contractors, between 1982 to 1985, having sent some of its people to
Baghdad during that period. The successive renewals/extensions of the guarantees in fact, was prompted
by delays, not solely attributable to the contractors, and such extension understandably allowed by the
SOB (project owner) which had not anyway complied with its contractual commitment to tender 75% of
payment in US Dollars, and which still retained overdue amounts collectible by VPECI.

Second, appellant was very much aware of the violations committed by the SOB of its contractual
undertakings with VPECI, principally, the payment of foreign currency (US$) for 75% of the total
contract price, as well as of the complications and injustice that will result from its payment of the full
amount of the performance guarantee, as evident in PHILGUARANTEE's letter dated 13 May 1987 .

Third, appellant was fully aware that SOB was in fact still obligated to the Joint Venture and there was
still an amount collectible from and still being retained by the project owner, which amount can be setoff with the sum covered by the performance guarantee.

Fourth, well-apprised of the above conditions obtaining at the Project site and cognizant of the war
situation at the time in Iraq, appellant, though earlier has made representations with the SOB regarding a
possible amicable termination of the Project as suggested by VPECI, made a complete turn-around and
insisted on acting in favor of the unjustified "call" by the foreign banks.35
The petitioner then came to this Court via Rule 45 of the Rules of Court claiming that the Court of Appeals
erred in affirming the trial court's ruling that
I
RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY
EXECUTED IN FAVOR OF PETITIONER IN CONSIDERATION FOR THE ISSUANCE OF ITS
COUNTER-GUARANTEE AND THAT PETITIONER CANNOT PASS ON TO RESPONDENTS
WHAT IT HAD PAID UNDER THE SAID COUNTER-GUARANTEE.
II
PETITIONER CANNOT CLAIM SUBROGATION.
III
IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS LIABLE
UNDER THEIR DEED OF UNDERTAKING.36
The main issue in this case is whether the petitioner is entitled to reimbursement of what it paid under Letter of
Guarantee No. 81-194-F it issued to Al Ahli Bank of Kuwait based on the deed of undertaking and surety bond
from the respondents.
The petitioner asserts that since the guarantee it issued was absolute, unconditional, and irrevocable the nature
and extent of its liability are analogous to those of suretyship. Its liability accrued upon the failure of the
respondents to finish the construction of the Institute of Physical Therapy Buildings in Baghdad.
By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the
contract is called suretyship. 37

Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. In
both contracts, there is a promise to answer for the debt or default of another. However, in this jurisdiction, they
may be distinguished thus:
1. A surety is usually bound with his principal by the same instrument executed at the same time and on
the same consideration. On the other hand, the contract of guaranty is the guarantor's own separate
undertaking often supported by a consideration separate from that supporting the contract of the
principal; the original contract of his principal is not his contract.
2. A surety assumes liability as a regular party to the undertaking; while the liability of a guarantor is
conditional depending on the failure of the primary debtor to pay the obligation.
3. The obligation of a surety is primary, while that of a guarantor is secondary.
4. A surety is an original promissor and debtor from the beginning, while a guarantor is charged on his
own undertaking.
5. A surety is, ordinarily, held to know every default of his principal; whereas a guarantor is not bound to
take notice of the non-performance of his principal.
6. Usually, a surety will not be discharged either by the mere indulgence of the creditor to the principal
or by want of notice of the default of the principal, no matter how much he may be injured thereby. A
guarantor is often discharged by the mere indulgence of the creditor to the principal, and is usually not
liable unless notified of the default of the principal. 38
In determining petitioner's status, it is necessary to read Letter of Guarantee No. 81-194-F, which provides in
part as follows:
In consideration of your issuing the above performance guarantee/counter-guarantee, we hereby
unconditionally and irrevocably guarantee, under our Ref. No. LG-81-194 F to pay you on your first
written or telex demand Iraq Dinars Two Hundred Seventy One Thousand Eight Hundred Eight and fils
six hundred ten (ID271,808/610) representing 100% of the performance bond required of V.P. EUSEBIO
for the construction of the Physical Therapy Institute, Phase II, Baghdad, Iraq, plus interest and other
incidental expenses related thereto.
In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation unpaid but in no
case shall such amount exceed Iraq Dinars (ID) 271,808/610 plus interest and other incidental
expenses. (Emphasis supplied)39
Guided by the abovementioned distinctions between a surety and a guaranty, as well as the factual milieu of this
case, we find that the Court of Appeals and the trial court were correct in ruling that the petitioner is a guarantor
and not a surety. That the guarantee issued by the petitioner is unconditional and irrevocable does not make the
petitioner a surety. As a guaranty, it is still characterized by its subsidiary and conditional quality because it does
not take effect until the fulfillment of the condition, namely, that the principal obligor should fail in his
obligation at the time and in the form he bound himself.40 In other words, an unconditional guarantee is still
subject to the condition that the principal debtor should default in his obligation first before resort to the
guarantor could be had. A conditional guaranty, as opposed to an unconditional guaranty, is one which depends
upon some extraneous event, beyond the mere default of the principal, and generally upon notice of the
principal's default and reasonable diligence in exhausting proper remedies against the principal.41
It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of default by respondent
VPECI the petitioner shall pay, the obligation assumed by the petitioner was simply that of an unconditional

guaranty, not conditional guaranty. But as earlier ruled the fact that petitioner's guaranty is unconditional does
not make it a surety. Besides, surety is never presumed. A party should not be considered a surety where the
contract itself stipulates that he is acting only as a guarantor. It is only when the guarantor binds himself
solidarily with the principal debtor that the contract becomes one of suretyship.42
Having determined petitioner's liability as guarantor, the next question we have to grapple with is whether the
respondent contractor has defaulted in its obligations that would justify resort to the guaranty. This is a mixed
question of fact and law that is better addressed by the lower courts, since this Court is not a trier of facts.
It is a fundamental and settled rule that the findings of fact of the trial court and the Court of Appeals are
binding or conclusive upon this Court unless they are not supported by the evidence or unless strong and cogent
reasons dictate otherwise.43 The factual findings of the Court of Appeals are normally not reviewable by us
under Rule 45 of the Rules of Court except when they are at variance with those of the trial court. 44 The trial
court and the Court of Appeals were in unison that the respondent contractor cannot be considered to have
defaulted in its obligations because the cause of the delay was not primarily attributable to it.
A corollary issue is what law should be applied in determining whether the respondent contractor has defaulted
in the performance of its obligations under the service contract. The question of whether there is a breach of an
agreement, which includes default or mora,45 pertains to the essential or intrinsic validity of a contract. 46
No conflicts rule on essential validity of contracts is expressly provided for in our laws. The rule followed by
most legal systems, however, is that the intrinsic validity of a contract must be governed by the lex contractus or
"proper law of the contract." This is the law voluntarily agreed upon by the parties (the lex loci voluntatis) or the
law intended by them either expressly or implicitly (the lex loci intentionis). The law selected may be implied
from such factors as substantial connection with the transaction, or the nationality or domicile of the parties.47
Philippine courts would do well to adopt the first and most basic rule in most legal systems, namely, to allow
the parties to select the law applicable to their contract, subject to the limitation that it is not against the law,
morals, or public policy of the forum and that the chosen law must bear a substantive relationship to the
transaction. 48
It must be noted that the service contract between SOB and VPECI contains no express choice of the law that
would govern it. In the United States and Europe, the two rules that now seem to have emerged as "kings of the
hill" are (1) the parties may choose the governing law; and (2) in the absence of such a choice, the applicable
law is that of the State that "has the most significant relationship to the transaction and the parties."49 Another
authority proposed that all matters relating to the time, place, and manner of performance and valid excuses for
non-performance are determined by the law of the place of performance or lex loci solutionis, which is useful
because it is undoubtedly always connected to the contract in a significant way.50
In this case, the laws of Iraq bear substantial connection to the transaction, since one of the parties is the Iraqi
Government and the place of performance is in Iraq. Hence, the issue of whether respondent VPECI defaulted
in its obligations may be determined by the laws of Iraq. However, since that foreign law was not properly
pleaded or proved, the presumption of identity or similarity, otherwise known as the processual presumption,
comes into play. Where foreign law is not pleaded or, even if pleaded, is not proved, the presumption is that
foreign law is the same as ours.51
Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: "In reciprocal obligations, neither
party incurs in delay if the other party does not comply or is not ready to comply in a proper manner with what
is incumbent upon him."
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. 52 It is the non-fulfillment of an obligation with respect to time.53

It is undisputed that only 51.7% of the total work had been accomplished. The 48.3% unfinished portion
consisted in the purchase and installation of electro-mechanical equipment and materials, which were available
from foreign suppliers, thus requiring US Dollars for their importation. The monthly billings and payments
made by SOB54 reveal that the agreement between the parties was a periodic payment by the Project owner to
the contractor depending on the percentage of accomplishment within the period. 55 The payments were, in turn,
to be used by the contractor to finance the subsequent phase of the work. 56 However, as explained by VPECI in
its letter to the Department of Foreign Affairs (DFA), the payment by SOB purely in Dinars adversely affected
the completion of the project; thus:
4. Despite protests from the plaintiff, SOB continued paying the accomplishment billings of the
Contractor purely in Iraqi Dinars and which payment came only after some delays.
5. SOB is fully aware of the following:

5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need foreign currency (US$), to
finance the purchase of various equipment, materials, supplies, tools and to pay for the cost of project
management, supervision and skilled labor not available in Iraq and therefore have to be imported and or
obtained from the Philippines and other sources outside Iraq.
5.3 That the Ministry of Labor and Employment of the Philippines requires the remittance into the
Philippines of 70% of the salaries of Filipino workers working abroad in US Dollars;

5.5 That the Iraqi Dinar is not a freely convertible currency such that the same cannot be used to
purchase equipment, materials, supplies, etc. outside of Iraq;
5.6 That most of the materials specified by SOB in the CONTRACT are not available in Iraq and
therefore have to be imported;
5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui Dinars) out of Iraq and
hence, imported materials, equipment, etc., cannot be purchased or obtained using Iraqui Dinars as
medium of acquisition.

8. Following the approved construction program of the CONTRACT, upon completion of the civil
works portion of the installation of equipment for the building, should immediately follow, however, the
CONTRACT specified that these equipment which are to be installed and to form part of the PROJECT
have to be procured outside Iraq since these are not being locally manufactured. Copy f the relevant
portion of the Technical Specification is hereto attached as Annex "C" and made an integral part hereof;

10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist the Iraqi
government in completing the PROJECT, the Contractor without any obligation on its part to do so but
with the knowledge and consent of SOB and the Ministry of Housing & Construction of Iraq, offered to
arrange on behalf of SOB, a foreign currency loan, through the facilities of Circle International S.A., the

Contractor's Sub-contractor and SACE MEDIO CREDITO which will act as the guarantor for this
foreign currency loan.
Arrangements were first made with Banco di Roma. Negotiation started in June 1985. SOB is informed
of the developments of this negotiation, attached is a copy of the draft of the loan Agreement between
SOB as the Borrower and Agent. The Several Banks, as Lender, and counter-guaranteed by Istituto
Centrale Per II Credito A Medio Termine (Mediocredito) Sezione Speciale Per L'Assicurazione Del
Credito All'Exportazione (Sace). Negotiations went on and continued until it suddenly collapsed due to
the reported default by Iraq in the payment of its obligations with Italian government, copy of the news
clipping dated June 18, 1986 is hereto attached as Annex "D" to form an integral part hereof;
15. On September 15, 1986, Contractor received information from Circle International S.A. that because
of the news report that Iraq defaulted in its obligations with European banks, the approval by Banco di
Roma of the loan to SOB shall be deferred indefinitely, a copy of the letter of Circle International
together with the news clippings are hereto attached as Annexes "F" and "F-1", respectively.57
As found by both the Court of Appeals and the trial court, the delay or the non-completion of the Project was
caused by factors not imputable to the respondent contractor. It was rather due mainly to the persistent
violations by SOB of the terms and conditions of the contract, particularly its failure to pay 75% of the
accomplished work in US Dollars. Indeed, where one of the parties to a contract does not perform in a proper
manner the prestation which he is bound to perform under the contract, he is not entitled to demand the
performance of the other party. A party does not incur in delay if the other party fails to perform the obligation
incumbent upon him.
The petitioner, however, maintains that the payments by SOB of the monthly billings in purely Iraqi Dinars did
not render impossible the performance of the Project by VPECI. Such posture is quite contrary to its previous
representations. In his 26 March 1987 letter to the Office of the Middle Eastern and African Affairs (OMEAA),
DFA, Manila, petitioner's Executive Vice-President Jesus M. Taedo stated that while VPECI had taken every
possible measure to complete the Project, the war situation in Iraq, particularly the lack of foreign exchange,
was proving to be a great obstacle; thus:
VPECI has taken every possible measure for the completion of the project but the war situation in Iraq
particularly the lack of foreign exchange is proving to be a great obstacle. Our performance
counterguarantee was called last 26 October 1986 when the negotiations for a foreign currency loan with
the Italian government through Banco de Roma bogged down following news report that Iraq has
defaulted in its obligation with major European banks. Unless the situation in Iraq is improved as to
allay the bank's apprehension, there is no assurance that the project will ever be completed. 58
In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the
obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the
creditor requires the performance because it must appear that the tolerance or benevolence of the creditor must
have ended. 59
As stated earlier, SOB cannot yet demand complete performance from VPECI because it has not yet itself
performed its obligation in a proper manner, particularly the payment of the 75% of the cost of the Project in US
Dollars. The VPECI cannot yet be said to have incurred in delay. Even assuming that there was delay and that
the delay was attributable to VPECI, still the effects of that delay ceased upon the renunciation by the creditor,
SOB, which could be implied when the latter granted several extensions of time to the former. 60 Besides, no
demand has yet been made by SOB against the respondent contractor. Demand is generally necessary even if a
period has been fixed in the obligation. And default generally begins from the moment the creditor demands
judicially or extra-judicially the performance of the obligation. Without such demand, the effects of default will
not arise.61

Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it cannot be compelled to
pay the creditor SOB unless the property of the debtor VPECI has been exhausted and all legal remedies against
the said debtor have been resorted to by the creditor.62 It could also set up compensation as regards what the
creditor SOB may owe the principal debtor VPECI.63 In this case, however, the petitioner has clearly waived
these rights and remedies by making the payment of an obligation that was yet to be shown to be rightfully due
the creditor and demandable of the principal debtor.
As found by the Court of Appeals, the petitioner fully knew that the joint venture contractor had collectibles
from SOB which could be set off with the amount covered by the performance guarantee. In February 1987, the
OMEAA transmitted to the petitioner a copy of a telex dated 10 February 1987 of the Philippine Ambassador in
Baghdad, Iraq, informing it of the note verbale sent by the Iraqi Ministry of Foreign Affairs stating that the past
due obligations of the joint venture contractor from the petitioner would "be deducted from the dues of the two
contractors."64
Also, in the project situationer attached to the letter to the OMEAA dated 26 March 1987, the petitioner raised
as among the arguments to be presented in support of the cancellation of the counter-guarantee the fact that the
amount of ID281,414/066 retained by SOB from the Project was more than enough to cover the counterguarantee of ID271,808/610; thus:
6.1 Present the following arguments in cancelling the counterguarantee:
The Iraqi Government does not have the foreign exchange to fulfill its contractual obligations
of paying 75% of progress billings in US dollars.

It could also be argued that the amount of ID281,414/066 retained by SOB from the proposed
project is more than the amount of the outstanding counterguarantee.65
In a nutshell, since the petitioner was aware of the contractor's outstanding receivables from SOB, it should
have set up compensation as was proposed in its project situationer.
Moreover, the petitioner was very much aware of the predicament of the respondents. In fact, in its 13 May
1987 letter to the OMEAA, DFA, Manila, it stated:
VPECI also maintains that the delay in the completion of the project was mainly due to SOB's violation
of contract terms and as such, call on the guarantee has no basis.
While PHILGUARANTEE is prepared to honor its commitment under the guarantee,
PHILGUARANTEE does not want to be an instrument in any case of inequity committed against a
Filipino contractor. It is for this reason that we are constrained to seek your assistance not only in
ascertaining the veracity of Al Ahli Bank's claim that it has paid Rafidain Bank but possibly averting
such an event. As any payment effected by the banks will complicate matters, we cannot help underscore
the urgency of VPECI's bid for government intervention for the amicable termination of the contract and
release of the performance guarantee. 66
But surprisingly, though fully cognizant of SOB's violations of the service contract and VPECI's outstanding
receivables from SOB, as well as the situation obtaining in the Project site compounded by the Iran-Iraq war,
the petitioner opted to pay the second layer guarantor not only the full amount of the performance bond counterguarantee but also interests and penalty charges.

This brings us to the next question: May the petitioner as a guarantor secure reimbursement from the
respondents for what it has paid under Letter of Guarantee No. 81-194-F?
As a rule, a guarantor who pays for a debtor should be indemnified by the latter67 and would be legally
subrogated to the rights which the creditor has against the debtor.68 However, a person who makes payment
without the knowledge or against the will of the debtor has the right to recover only insofar as the payment has
been beneficial to the debtor.69 If the obligation was subject to defenses on the part of the debtor, the same
defenses which could have been set up against the creditor can be set up against the paying guarantor.70
From the findings of the Court of Appeals and the trial court, it is clear that the payment made by the petitioner
guarantor did not in any way benefit the principal debtor, given the project status and the conditions obtaining at
the Project site at that time. Moreover, the respondent contractor was found to have valid defenses against SOB,
which are fully supported by evidence and which have been meritoriously set up against the paying guarantor,
the petitioner in this case. And even if the deed of undertaking and the surety bond secured petitioner's guaranty,
the petitioner is precluded from enforcing the same by reason of the petitioner's undue payment on the guaranty.
Rights under the deed of undertaking and the surety bond do not arise because these contracts depend on the
validity of the enforcement of the guaranty.
The petitioner guarantor should have waited for the natural course of guaranty: the debtor VPECI should have,
in the first place, defaulted in its obligation and that the creditor SOB should have first made a demand from the
principal debtor. It is only when the debtor does not or cannot pay, in whole or in part, that the guarantor should
pay.71 When the petitioner guarantor in this case paid against the will of the debtor VPECI, the debtor VPECI
may set up against it defenses available against the creditor SOB at the time of payment. This is the hard lesson
that the petitioner must learn.
As the government arm in pursuing its objective of providing "the necessary support and assistance in order to
enable [Filipino exporters and contractors to operate viably under the prevailing economic and business
conditions,"72 the petitioner should have exercised prudence and caution under the circumstances. As aptly put
by the Court of Appeals, it would be the height of inequity to allow the petitioner to pass on its losses to the
Filipino contractor VPECI which had sternly warned against paying the Al Ahli Bank and constantly apprised it
of the developments in the Project implementation.
WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit, and the decision of
the Court of appeals in CA-G.R. CV No. 39302 is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

#4
[G.R. No. 117190. January 2, 1997]
JACINTO TANGUILIG doing business under the name and style J.M.T. ENGINEERING AND GENERAL
MERCHANDISING, petitioner, vs. COURT OF APPEALS and VICENTE HERCE JR., respondents.
DECISION
BELLOSILLO, J.:

This case involves the proper interpretation of the contract entered into between the parties.
Sometime in April 1987 petitioner Jacinto M. Tanguilig doing business under the name and style J. M. T.
Engineering and General Merchandising proposed to respondent Vicente Herce Jr. to construct a windmill
system for him. After some negotiations they agreed on the construction of the windmill for a consideration of
P60,000.00 with a one-year guaranty from the date of completion and acceptance by respondent Herce Jr. of the
project. Pursuant to the agreement respondent paid petitioner a down payment of P30,000.00 and an installment
payment of P15,000.00, leaving a balance of P15,000.00.
On 14 March 1988, due to the refusal and failure of respondent to pay the balance, petitioner filed a complaint
to collect the amount. In his Answer before the trial court respondent denied the claim saying that he had
already paid this amount to the San Pedro General Merchandising Inc. (SPGMI) which constructed the deep
well to which the windmill system was to be connected. According to respondent, since the deep well formed
part of the system the payment he tendered to SPGMI should be credited to his account by petitioner. Moreover,
assuming that he owed petitioner a balance of P15,000.00, this should be offset by the defects in the windmill
system which caused the structure to collapse after a strong wind hit their place.i[1]
Petitioner denied that the construction of a deep well was included in the agreement to build the windmill
system, for the contract price of P60,000.00 was solely for the windmill assembly and its installation, exclusive
of other incidental materials needed for the project. He also disowned any obligation to repair or reconstruct the
system and insisted that he delivered it in good and working condition to respondent who accepted the same
without protest. Besides, its collapse was attributable to a typhoon, a force majeure, which relieved him of any
liability.
In finding for plaintiff, the trial court held that the construction of the deep well was not part of the windmill
project as evidenced clearly by the letter proposals submitted by petitioner to respondent.ii[2] It noted that "[i]f
the intention of the parties is to include the construction of the deep well in the project, the same should be
stated in the proposals. In the absence of such an agreement, it could be safely concluded that the construction
of the deep well is not a part of the project undertaken by the plaintiff."iii[3] With respect to the repair of the
windmill, the trial court found that "there is no clear and convincing proof that the windmill system fell down
due to the defect of the construction."iv[4]
The Court of Appeals reversed the trial court. It ruled that the construction of the deep well was included in the
agreement of the parties because the term "deep well" was mentioned in both proposals. It also gave credence to
the testimony of respondent's witness Guillermo Pili, the proprietor of SPGMI which installed the deep well,
that petitioner Tanguilig told him that the cost of constructing the deep well would be deducted from the
contract price of P60,000.00. Upon these premises the appellate court concluded that respondent's payment of
P15,000.00 to SPGMI should be applied to his remaining balance with petitioner thus effectively extinguishing
his contractual obligation. However, it rejected petitioner's claim of force majeure and ordered the latter to
reconstruct the windmill in accordance with the stipulated one-year guaranty.
His motion for reconsideration having been denied by the Court of Appeals, petitioner now seeks relief from
this Court. He raises two issues: firstly, whether the agreement to construct the windmill system included the
installation of a deep well and, secondly, whether petitioner is under obligation to reconstruct the windmill after
it collapsed.
We reverse the appellate court on the first issue but sustain it on the second.
The preponderance of evidence supports the finding of the trial court that the installation of a deep well was not
included in the proposals of petitioner to construct a windmill system for respondent. There were in fact two (2)
proposals: one dated 19 May 1987 which pegged the contract price at P87,000.00 (Exh. "1"). This was rejected
by respondent. The other was submitted three days later, i.e., on 22 May 1987 which contained more

specifications but proposed a lower contract price of P60,000.00 (Exh. "A"). The latter proposal was accepted
by respondent and the construction immediately followed. The pertinent portions of the first letter-proposal
(Exh. "1") are reproduced hereunder In connection with your Windmill System and Installation, we would like to quote to you as follows:
One (1) Set - Windmill suitable for 2 inches diameter deepwell, 2 HP, capacity, 14 feet in diameter, with 20
pieces blade, Tower 40 feet high, including mechanism which is not advisable to operate during extra-intensity
wind. Excluding cylinder pump.
UNIT CONTRACT PRICE P87,000.00
The second letter-proposal (Exh. "A") provides as follows:
In connection with your Windmill system Supply of Labor Materials and Installation, operated water pump, we
would like to quote to you as follows One (1) set - Windmill assembly for 2 inches or 3 inches deep-well pump, 6 Stroke, 14 feet diameter, 1-lot blade
materials, 40 feet Tower complete with standard appurtenances up to Cylinder pump, shafting U.S. adjustable
International Metal.
One (1) lot - Angle bar, G. I. pipe, Reducer Coupling, Elbow Gate valve, cross Tee coupling.
One (1) lot - Float valve.
One (1) lot - Concreting materials foundation.
F. O. B. Laguna
Contract Price P60,000.00
Notably, nowhere in either proposal is the installation of a deep well mentioned, even remotely. Neither is there
an itemization or description of the materials to be used in constructing the deep well. There is absolutely no
mention in the two (2) documents that a deep well pump is a component of the proposed windmill system. The
contract prices fixed in both proposals cover only the features specifically described therein and no other. While
the words "deep well" and "deep well pump" are mentioned in both, these do not indicate that a deep well is part
of the windmill system. They merely describe the type of deep well pump for which the proposed windmill
would be suitable. As correctly pointed out by petitioner, the words "deep well" preceded by the prepositions
"for" and "suitable for" were meant only to convey the idea that the proposed windmill would be appropriate
for a deep well pump with a diameter of 2 to 3 inches. For if the real intent of petitioner was to include a deep
well in the agreement to construct a windmill, he would have used instead the conjunctions "and" or "with."
Since the terms of the instruments are clear and leave no doubt as to their meaning they should not be disturbed.
Moreover, it is a cardinal rule in the interpretation of contracts that the intention of the parties shall be accorded
primordial considerationv[5] and, in case of doubt, their contemporaneous and subsequent acts shall be
principally considered.vi[6] An examination of such contemporaneous and subsequent acts of respondent as well
as the attendant circumstances does not persuade us to uphold him.
Respondent insists that petitioner verbally agreed that the contract price of P60,000.00 covered the installation
of a deep well pump. He contends that since petitioner did not have the capacity to install the pump the latter
agreed to have a third party do the work the cost of which was to be deducted from the contract price. To prove

his point, he presented Guillermo Pili of SPGMI who declared that petitioner Tanguilig approached him with a
letter from respondent Herce Jr. asking him to build a deep well pump as "part of the price/contract which
Engineer (Herce) had with Mr. Tanguilig."vii[7]
We are disinclined to accept the version of respondent. The claim of Pili that Herce Jr. wrote him a letter is
unsubstantiated. The alleged letter was never presented in court by private respondent for reasons known only to
him. But granting that this written communication existed, it could not have simply contained a request for Pili
to install a deep well; it would have also mentioned the party who would pay for the undertaking. It strains
credulity that respondent would keep silent on this matter and leave it all to petitioner Tanguilig to verbally
convey to Pili that the deep well was part of the windmill construction and that its payment would come from
the contract price of P60,000.00.
We find it also unusual that Pili would readily consent to build a deep well the payment for which would come
supposedly from the windmill contract price on the mere representation of petitioner, whom he had never met
before, without a written commitment at least from the former. For if indeed the deep well were part of the
windmill project, the contract for its installation would have been strictly a matter between petitioner and Pili
himself with the former assuming the obligation to pay the price. That it was respondent Herce Jr. himself who
paid for the deep well by handing over to Pili the amount of P15,000.00 clearly indicates that the contract for
the deep well was not part of the windmill project but a separate agreement between respondent and Pili.
Besides, if the price of P60,000.00 included the deep well, the obligation of respondent was to pay the entire
amount to petitioner without prejudice to any action that Guillermo Pili or SPGMI may take, if any, against the
latter. Significantly, when asked why he tendered payment directly to Pili and not to petitioner, respondent
explained, rather lamely, that he did it "because he has (sic) the money, so (he) just paid the money in his
possession."viii[8]
Can respondent claim that Pili accepted his payment on behalf of petitioner? No. While the law is clear that
"payment shall be made to the person in whose favor the obligation has been constituted, or his successor in
interest, or any person authorized to receive it,".ix[9] It does not appear from the record that Pili and/or
SPGMI was so authorized.
Respondent cannot claim the benefit of the law concerning "payments made by a third person."x[10] The Civil
Code provisions do not apply in the instant case because no creditor-debtor relationship between petitioner and
Guillermo Pili and/or SPGMI has been established regarding the construction of the deep well. Specifically,
witness Pili did not testify that he entered into a contract with petitioner for the construction of respondent's
deep well. If SPGMI was really commissioned by petitioner to construct the deep well, an agreement
particularly to this effect should have been entered into.
The contemporaneous and subsequent acts of the parties concerned effectively belie respondent's assertions.
These circumstances only show that the construction of the well by SPGMI was for the sole account of
respondent and that petitioner merely supervised the installation of the well because the windmill was to be
connected to it. There is no legal nor factual basis by which this Court can impose upon petitioner an obligation
he did not expressly assume nor ratify.
The second issue is not a novel one. In a long line of casesxi[11] this Court has consistently held that in order for
a party to claim exemption from liability by reason of fortuitous event under Art. 1174 of the Civil Code the
event should be the sole and proximate cause of the loss or destruction of the object of the contract. In Nakpil
vs. Court of Appeals,xii[12] four (4) requisites must concur: (a) the cause of the breach of the obligation must be
independent of the will of the debtor; (b) the event must be either unforeseeable or unavoidable; (c) the event
must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and, (d) the
debtor must be free from any participation in or aggravation of the injury to the creditor.

Petitioner failed to show that the collapse of the windmill was due solely to a fortuitous event. Interestingly, the
evidence does not disclose that there was actually a typhoon on the day the windmill collapsed. Petitioner
merely stated that there was a "strong wind." But a strong wind in this case cannot be fortuitous - unforeseeable
nor unavoidable. On the contrary, a strong wind should be present in places where windmills are constructed,
otherwise the windmills will not turn.
The appellate court correctly observed that "given the newly-constructed windmill system, the same would not
have collapsed had there been no inherent defect in it which could only be attributable to the appellee."xiii[13] It
emphasized that respondent had in his favor the presumption that "things have happened according to the
ordinary course of nature and the ordinary habits of life."xiv[14] This presumption has not been rebutted by
petitioner.
Finally, petitioner's argument that private respondent was already in default in the payment of his outstanding
balance of P15,000.00 and hence should bear his own loss, is untenable. In reciprocal obligations, neither party
incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is
incumbent upon him.xv[15] When the windmill failed to function properly it became incumbent upon petitioner
to institute the proper repairs in accordance with the guaranty stated in the contract. Thus, respondent cannot be
said to have incurred in delay; instead, it is petitioner who should bear the expenses for the reconstruction of the
windmill. Article 1167 of the Civil Code is explicit on this point that if a person obliged to do something fails to
do it, the same shall be executed at his cost.
WHEREFORE, the appealed decision is MODIFIED. Respondent VICENTE HERCE JR. is directed to pay
petitioner JACINTO M. TANGUILIG the balance of P15,000.00 with interest at the legal rate from the date of
the filing of the complaint. In return, petitioner is ordered to "reconstruct subject defective windmill system, in
accordance with the one-year guaranty"xvi[16]and to complete the same within three (3) months from the finality
of this decision.
SO ORDERED.

#5
[G.R. No. 115129. February 12, 1997]
IGNACIO BARZAGA, petitioner, vs. COURT OF APPEALS and ANGELITO ALVIAR, respondents.
DECISION
BELLOSILLO, J.:
The Fates ordained that Christmas 1990 be bleak for Ignacio Barzaga and his family. On the nineteenth of
December Ignacio's wife succumbed to a debilitating ailment after prolonged pain and suffering. Forewarned by
her attending physicians of her impending death, she expressed her wish to be laid to rest before Christmas day
to spare her family from keeping lonely vigil over her remains while the whole of Christendom celebrate the
Nativity of their Redeemer.
Drained to the bone from the tragedy that befell his family yet preoccupied with overseeing the wake for his
departed wife, Ignacio Barzaga set out to arrange for her interment on the twenty-fourth of December in

obedience semper fidelis to her dying wish. But her final entreaty, unfortunately, could not be carried out. Dire
events conspired to block his plans that forthwith gave him and his family their gloomiest Christmas ever.
This is Barzaga's story. On 21 December 1990, at about three o`clock in the afternoon, he went to the hardware
store of respondent Angelito Alviar to inquire about the availability of certain materials to be used in the
construction of a niche for his wife. He also asked if the materials could be delivered at once. Marina Boncales,
Alviar's storekeeper, replied that she had yet to verify if the store had pending deliveries that afternoon because
if there were then all subsequent purchases would have to be delivered the following day. With that reply
petitioner left.
At seven o' clock the following morning, 22 December, Barzaga returned to Alviar's hardware store to follow up
his purchase of construction materials. He told the store employees that the materials he was buying would have
to be delivered at the Memorial Cemetery in Dasmarias, Cavite, by eight o'clock that morning since his hired
workers were already at the burial site and time was of the essence. Marina Boncales agreed to deliver the items
at the designated time, date and place. With this assurance, Barzaga purchased the materials and paid in full the
amount of P2,110.00. Thereafter he joined his workers at the cemetery, which was only a kilometer away, to
await the delivery.
The construction materials did not arrive at eight o'clock as promised. At nine o' clock, the delivery was still
nowhere in sight. Barzaga returned to the hardware store to inquire about the delay. Boncales assured him that
although the delivery truck was not yet around it had already left the garage and that as soon as it arrived the
materials would be brought over to the cemetery in no time at all. That left petitioner no choice but to rejoin his
workers at the memorial park and wait for the materials.
By ten o'clock, there was still no delivery. This prompted petitioner to return to the store to inquire about the
materials. But he received the same answer from respondent's employees who even cajoled him to go back to
the burial place as they would just follow with his construction materials.
After hours of waiting - which seemed interminable to him - Barzaga became extremely upset. He decided to
dismiss his laborers for the day. He proceeded to the police station, which was just nearby, and lodged a
complaint against Alviar. He had his complaint entered in the police blotter. When he returned again to the store
he saw the delivery truck already there but the materials he purchased were not yet ready for loading. Distressed
that Alviar's employees were not the least concerned, despite his impassioned pleas, Barzaga decided to cancel
his transaction with the store and look for construction materials elsewhere.
In the afternoon of that day, petitioner was able to buy from another store. But since darkness was already
setting in and his workers had left, he made up his mind to start his project the following morning, 23
December. But he knew that the niche would not be finish in time for the scheduled burial the following day.
His laborers had to take a break on Christmas Day and they could only resume in the morning of the twentysixth. The niche was completed in the afternoon and Barzaga's wife was finally laid to rest. However, it was
two-and-a-half (2-1/2) days behind schedule.
On 21 January 1991, tormented perhaps by his inability to fulfill his wife's dying wish, Barzaga wrote private
respondent Alviar demanding recompense for the damage he suffered. Alviar did not respond. Consequently,
petitioner sued him before the Regional Trial Court.xvii[1]
Resisting petitioner's claim, private respondent contended that legal delay could not be validly ascribed to him
because no specific time of delivery was agreed upon between them. He pointed out that the invoices
evidencing the sale did not contain any stipulation as to the exact time of delivery and that assuming that the
materials were not delivered within the period desired by petitioner, the delivery truck suffered a flat tire on the
way to the store to pick up the materials. Besides, his men were ready to make the delivery by ten-thirty in the
morning of 22 December but petitioner refused to accept them. According to Alviar, it was this obstinate refusal

of petitioner to accept delivery that caused the delay in the construction of the niche and the consequent failure
of the family to inter their loved one on the twenty-fourth of December, and that, if at all, it was petitioner and
no other who brought about all his personal woes.
Upholding the proposition that respondent incurred in delay in the delivery of the construction materials
resulting in undue prejudice to petitioner, the trial court ordered respondent Alviar to pay petitioner (a)
P2,110.00 as refund for the purchase price of the materials with interest per annum computed at the legal rate
from the date of the filing of the complaint, (b) P5,000.00 as temperate damages, (c) P20,000.00 as moral
damages, (d) P5,000.00 as litigation expenses, and (e) P5,000.00 as attorney's fees.
On appeal, respondent Court of Appeals reversed the lower court and ruled that there was no contractual
commitment as to the exact time of delivery since this was not indicated in the invoice receipts covering the
sale.xviii[2]
The arrangement to deliver the materials merely implied that delivery should be made within a reasonable time
but that the conclusion that since petitioner's workers were already at the graveyard the delivery had to be made
at that precise moment, is non-sequitur. The Court of Appeals also held that assuming that there was delay,
petitioner still had sufficient time to construct the tomb and hold his wife's burial as she wished.
We sustain the trial court. An assiduous scrutiny of the record convinces us that respondent Angelito Alviar was
negligent and incurred in delay in the performance of his contractual obligation. This sufficiently entitles
petitioner Ignacio Barzaga to be indemnified for the damage he suffered as a consequence of delay or a
contractual breach. The law expressly provides that those who in the performance of their obligation are guilty
of fraud, negligence, or delay and those who in any manner contravene the tenor thereof, are liable for
damages.xix[3]
Contrary to the appellate court's factual determination, there was a specific time agreed upon for the delivery of
the materials to the cemetery. Petitioner went to private respondent's store on 21 December precisely to inquire
if the materials he intended to purchase could be delivered immediately. But he was told by the storekeeper that
if there were still deliveries to be made that afternoon his order would be delivered the following day. With this
in mind Barzaga decided to buy the construction materials the following morning after he was assured of
immediate delivery according to his time frame. The argument that the invoices never indicated a specific
delivery time must fall in the face of the positive verbal commitment of respondent's storekeeper. Consequently
it was no longer necessary to indicate in the invoices the exact time the purchased items were to be brought to
the cemetery. In fact, storekeeper Boncales admitted that it was her custom not to indicate the time of delivery
whenever she prepared invoices.xx[4]
Private respondent invokes fortuitous event as his handy excuse for that "bit of delay" in the delivery of
petitioner's purchases. He maintains that Barzaga should have allowed his delivery men a little more time to
bring the construction materials over to the cemetery since a few hours more would not really matter and
considering that his truck had a flat tire. Besides, according to him, Barzaga still had sufficient time to build the
tomb for his wife.
This is a gratuitous assertion that borders on callousness. Private respondent had no right to manipulate
petitioner's timetable and substitute it with his own. Petitioner had a deadline to meet. A few hours of delay was
no piddling matter to him who in his bereavement had yet to attend to other pressing family concerns. Despite
this, respondent's employees still made light of his earnest importunings for an immediate delivery. As
petitioner bitterly declared in court " x x x they (respondent's employees) were making a fool out of me."xxi[5]
We also find unacceptable respondent's justification that his truck had a flat tire, for this event, if indeed it
happened, was forseeable according to the trial court, and as such should have been reasonably guarded against.
The nature of private respondent's business requires that he should be ready at all times to meet contingencies of

this kind. One piece of testimony by respondent's witness Marina Boncales has caught our attention - that the
delivery truck arrived a little late than usual because it came from a delivery of materials in Langcaan,
Dasmarias, Cavite.xxii[6] Significantly, this information was withheld by Boncales from petitioner when the
latter was negotiating with her for the purchase of construction materials. Consequently, it is not unreasonable
to suppose that had she told petitioner of this fact and that the delivery of the materials would consequently be
delayed, petitioner would not have bought the materials from respondent's hardware store but elsewhere which
could meet his time requirement. The deliberate suppression of this information by itself manifests a certain
degree of bad faith on the part of respondent's storekeeper.
The appellate court appears to have belittled petitioner's submission that under the prevailing circumstances
time was of the essence in the delivery of the materials to the grave site. However, we find petitioner's assertion
to be anchored on solid ground. The niche had to be constructed at the very least on the twenty-second of
December considering that it would take about two (2) days to finish the job if the interment was to take place
on the twenty-fourth of the month. Respondent's delay in the delivery of the construction materials wasted so
much time that construction of the tomb could start only on the twenty-third. It could not be ready for the
scheduled burial of petitioner's wife. This undoubtedly prolonged the wake, in addition to the fact that work at
the cemetery had to be put off on Christmas day.
This case is clearly one of non-performance of a reciprocal obligation.xxiii[7] In their contract of purchase and
sale, petitioner had already complied fully with what was required of him as purchaser, i.e., the payment of the
purchase price of P2,110.00. It was incumbent upon respondent to immediately fulfill his obligation to deliver
the goods otherwise delay would attach.
We therefore sustain the award of moral damages. It cannot be denied that petitioner and his family suffered
wounded feelings, mental anguish and serious anxiety while keeping watch on Christmas day over the remains
of their loved one who could not be laid to rest on the date she herself had chosen. There is no gainsaying the
inexpressible pain and sorrow Ignacio Barzaga and his family bore at that moment caused no less by the
ineptitude, cavalier behavior and bad faith of respondent and his employees in the performance of an obligation
voluntarily entered into.
We also affirm the grant of exemplary damages. The lackadaisical and feckless attitude of the employees of
respondent over which he exercised supervisory authority indicates gross negligence in the fulfillment of his
business obligations. Respondent Alviar and his employees should have exercised fairness and good judgment
in dealing with petitioner who was then grieving over the loss of his wife. Instead of commiserating with him,
respondent and his employees contributed to petitioner's anguish by causing him to bear the agony resulting
from his inability to fulfill his wife's dying wish.
We delete however the award of temperate damages. Under Art. 2224 of the Civil Code, temperate damages are
more than nominal but less than compensatory, and may be recovered when the court finds that some pecuniary
loss has been suffered but the amount cannot, from the nature of the case, be proved with certainty. In this case,
the trial court found that plaintiff suffered damages in the form of wages for the hired workers for 22 December
1990 and expenses incurred during the extra two (2) days of the wake. The record however does not show that
petitioner presented proof of the actual amount of expenses he incurred which seems to be the reason the trial
court awarded to him temperate damages instead. This is an erroneous application of the concept of temperate
damages. While petitioner may have indeed suffered pecuniary losses, these by their very nature could be
established with certainty by means of payment receipts. As such, the claim falls unequivocally within the realm
of actual or compensatory damages. Petitioner's failure to prove actual expenditure consequently conduces to a
failure of his claim. For in determining actual damages, the court cannot rely on mere assertions, speculations,
conjectures or guesswork but must depend on competent proof and on the best evidence obtainable regarding
the actual amount of loss.xxiv[8]

We affirm the award of attorney's fees and litigation expenses. Award of damages, attorney's fees and litigation
costs is left to the sound discretion of the court, and if such discretion be well exercised, as in this case, it will
not be disturbed on appeal.xxv[9]
WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE except insofar as it
GRANTED on a motion for reconsideration the refund by private respondent of the amount of P2,110.00 paid
by petitioner for the construction materials. Consequently, except for the award of P5,000.00 as temperate
damages which we delete, the decision of the Regional Trial Court granting petitioner (a) P2,110.00 as refund
for the value of materials with interest computed at the legal rate per annum from the date of the filing of the
case; (b) P20,000.00 as moral damages; (c) P10,000.00 as exemplary damages; (d) P5,000.00 as litigation
expenses; and (4) P5,000.00 as attorney's fees, is AFFIRMED. No costs.
SO ORDERED.

#6
G.R. No. L-47379 May 16, 1988
NATIONAL POWER CORPORATION, petitioner,
vs.
HONORABLE COURT OF APPEALS and ENGINEERING CONSTRUCTION, INC., respondents.
G.R. No. L-47481 May 16, 1988
ENGINEERING CONSTRUCTION, INC., petitioner,
vs.
COUTRT OF APPEALS and NATIONAL POWER CORPORATION, respondents.
Raymundo A. Armovit for private respondent in L-47379.
The Solicitor General for petitioner.

GUTIERREZ, JR., J.:

These consolidated petitions seek to set aside the decision of the respondent Court of Appeals which adjudged
the National Power Corporation liable for damages against Engineering Construction, Inc. The appellate court,
however, reduced the amount of damages awarded by the trial court. Hence, both parties filed their respective
petitions: the National Power Corporation (NPC) in G.R. No. 47379, questioning the decision of the Court of
Appeals for holding it liable for damages and the Engineering Construction, Inc. (ECI) in G.R. No. 47481,
questioning the same decision for reducing the consequential damages and attorney's fees and for eliminating
the exemplary damages.

The facts are succinctly summarized by the respondent Court of Appeals, as follows:
On August 4, 1964, plaintiff Engineering Construction, Inc., being a successful bidder, executed
a contract in Manila with the National Waterworks and Sewerage Authority (NAWASA),
whereby the former undertook to furnish all tools, labor, equipment, and materials (not furnished
by Owner), and to construct the proposed 2nd lpo-Bicti Tunnel, Intake and Outlet Structures, and
Appurtenant Structures, and Appurtenant Features, at Norzagaray, Bulacan, and to complete said
works within eight hundred (800) calendar days from the date the Contractor receives the formal
notice to proceed (Exh. A).
The project involved two (2) major phases: the first phase comprising, the tunnel work covering
a distance of seven (7) kilometers, passing through the mountain, from the Ipo river, a part of
Norzagaray, Bulacan, where the Ipo Dam of the defendant National Power Corporation is
located, to Bicti; the other phase consisting of the outworks at both ends of the tunnel.
By September 1967, the plaintiff corporation already had completed the first major phase of the
work, namely, the tunnel excavation work. Some portions of the outworks at the Bicti site were
still under construction. As soon as the plaintiff corporation had finished the tunnel excavation
work at the Bicti site, all the equipment no longer needed there were transferred to the Ipo site
where some projects were yet to be completed.
The record shows that on November 4,1967, typhoon 'Welming' hit Central Luzon, passing
through defendant's Angat Hydro-electric Project and Dam at lpo, Norzagaray, Bulacan. Strong
winds struck the project area, and heavy rains intermittently fell. Due to the heavy downpour, the
water in the reservoir of the Angat Dam was rising perilously at the rate of sixty (60) centimeters
per hour. To prevent an overflow of water from the dam, since the water level had reached the
danger height of 212 meters above sea level, the defendant corporation caused the opening of the
spillway gates." (pp. 45-46, L-47379, Rollo)
The appellate court sustained the findings of the trial court that the evidence preponlderantly established the fact
that due to the negligent manner with which the spillway gates of the Angat Dam were opened, an extraordinary
large volume of water rushed out of the gates, and hit the installations and construction works of ECI at the lpo
site with terrific impact, as a result of which the latter's stockpile of materials and supplies, camp facilities and
permanent structures and accessories either washed away, lost or destroyed.
The appellate court further found that:
It cannot be pretended that there was no negligence or that the appellant exercised extraordinary
care in the opening of the spillway gates of the Angat Dam. Maintainers of the dam knew very
well that it was far more safe to open them gradually. But the spillway gates were opened only
when typhoon Welming was already at its height, in a vain effort to race against time and prevent
the overflow of water from the dam as it 'was rising dangerously at the rate of sixty centimeters
per hour. 'Action could have been taken as early as November 3, 1967, when the water in the
reservoir was still low. At that time, the gates of the dam could have been opened in a regulated
manner. Let it be stressed that the appellant knew of the coming of the typhoon four days before
it actually hit the project area. (p. 53, L-47379, Rollo)

As to the award of damages, the appellate court held:

We come now to the award of damages. The appellee submitted a list of estimated losses and
damages to the tunnel project (Ipo side) caused by the instant flooding of the Angat River (Exh.
J-1). The damages were itemized in four categories, to wit: Camp Facilities P55,700.00;
Equipment, Parts and Plant P375,659.51; Materials P107,175.80; and Permanent Structures
and accessories P137,250.00, with an aggregate total amount of P675,785.31. The list is
supported by several vouchers which were all submitted as Exhibits K to M-38 a, N to O, P to U2 and V to X- 60-a (Vide: Folders Nos. 1 to 4). The appellant did not submit proofs to traverse
the aforementioned documentary evidence. We hold that the lower court did not commit any
error in awarding P 675,785.31 as actual or compensatory damages.
However, We cannot sustain the award of P333,200.00 as consequential damages. This amount is
broken down as follows: P213,200.00 as and for the rentals of a crane to temporarily replace the
one "destroyed beyond repair," and P120,000.00 as one month bonus which the appellee failed to
realize in accordance with the contract which the appellee had with NAWASA. Said rental of the
crane allegedly covered the period of one year at the rate of P40.00 an hour for 16 hours a day.
The evidence, however, shows that the appellee bought a crane also a crawler type, on November
10, 1967, six (6) days after the incident in question (Exh N) And according to the lower court,
which finding was never assailed, the appellee resumed its normal construction work on the IpoBicti Project after a stoppage of only one month. There is no evidence when the appellee
received the crane from the seller, Asian Enterprise Limited. But there was an agreement that the
shipment of the goods would be effected within 60 days from the opening of the letter of credit
(Exh. N).<re||an1w> It appearing that the contract of sale was consummated, We must
conclude or at least assume that the crane was delivered to the appellee within 60 days as
stipulated. The appellee then could have availed of the services of another crane for a period of
only one month (after a work stoppage of one month) at the rate of P 40.00 an hour for 16 hours
a day or a total of P 19,200.00 as rental.
But the value of the new crane cannot be included as part of actual damages because the old was
reactivated after it was repaired. The cost of the repair was P 77,000.00 as shown in item No. 1
under the Equipment, Parts and Plants category (Exh. J-1), which amount of repair was already
included in the actual or compensatory damages. (pp. 54-56, L-47379, Rollo)
The appellate court likewise rejected the award of unrealized bonus from NAWASA in the amount of
P120,000.00 (computed at P4,000.00 a day in case construction is finished before the specified time, i.e., within
800 calendar days), considering that the incident occurred after more than three (3) years or one thousand one
hundred seventy (1,170) days. The court also eliminated the award of exemplary damages as there was no gross
negligence on the part of NPC and reduced the amount of attorney's fees from P50,000.00 to P30,000.00.
In these consolidated petitions, NPC assails the appellate court's decision as being erroneous on the ground that
the destruction and loss of the ECI's equipment and facilities were due to force majeure. It argues that the rapid
rise of the water level in the reservoir of its Angat Dam due to heavy rains brought about by the typhoon was an
extraordinary occurrence that could not have been foreseen, and thus, the subsequent release of water through
the spillway gates and its resultant effect, if any, on ECI's equipment and facilities may rightly be attributed to
force majeure.

On the other hand, ECI assails the reduction of the consequential damages from P333,200.00 to P19,000.00 on
the grounds that the appellate court had no basis in concluding that ECI acquired a new Crawler-type crane and
therefore, it only can claim rentals for the temporary use of the leased crane for a period of one month; and that
the award of P4,000.00 a day or P120,000.00 a month bonus is justified since the period limitation on ECI's
contract with NAWASA had dual effects, i.e., bonus for earlier completion and liquidated damages for delayed
performance; and in either case at the rate of P4,000.00 daily. Thus, since NPC's negligence compelled work
stoppage for a period of one month, the said award of P120,000.00 is justified. ECI further assailes the
reduction of attorney's fees and the total elimination of exemplary damages.
Both petitions are without merit.
It is clear from the appellate court's decision that based on its findings of fact and that of the trial court's,
petitioner NPC was undoubtedly negligent because it opened the spillway gates of the Angat Dam only at the
height of typhoon "Welming" when it knew very well that it was safer to have opened the same gradually and
earlier, as it was also undeniable that NPC knew of the coming typhoon at least four days before it actually
struck. And even though the typhoon was an act of God or what we may call force majeure, NPC cannot escape
liability because its negligence was the proximate cause of the loss and damage. As we have ruled in Juan F.
Nakpil & Sons v. Court of Appeals, (144 SCRA 596, 606-607):
Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding
fraud, negligence, delay or violation or contravention in any manner of the tenor of the
obligation as provided for in Article 1170 of the Civil Code, which results in loss or damage, the
obligor cannot escape liability.
The principle embodied in the act of God doctrine strictly requires that the act must be one
occasioned exclusively by the violence of nature and human agencies are to be excluded from
creating or entering into the cause of the mischief. When the effect, the cause of which is to be
considered, is found to be in part the result of the participation of man, whether it be from active
intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it was,
and removed from the rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).
Thus, it has been held that when the negligence of a person concurs with an act of God in
producing a loss, such person is not exempt from liability by showing that the immediate cause
of the damage was the act of God. To be exempt from liability for loss because of an act of God,
he must be free from any previous negligence or misconduct by which the loss or damage may
have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan 49
O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45
Phil. 657).
Furthermore, the question of whether or not there was negligence on the part of NPC is a question of fact which
properly falls within the jurisdiction of the Court of Appeals and will not be disturbed by this Court unless the
same is clearly unfounded. Thus, in Tolentino v. Court of appeals, (150 SCRA 26, 36) we ruled:
Moreover, the findings of fact of the Court of Appeals are generally final and conclusive upon
the Supreme Court (Leonardo v. Court of Appeals, 120 SCRA 890 [1983]. In fact it is settled that
the Supreme Court is not supposed to weigh evidence but only to determine its substantially

(Nuez v. Sandiganbayan, 100 SCRA 433 [1982] and will generally not disturb said findings of
fact when supported by substantial evidence (Aytona v. Court of Appeals, 113 SCRA 575 [1985];
Collector of Customs of Manila v. Intermediate Appellate Court, 137 SCRA 3 [1985]. On the
other hand substantial evidence is defined as such relevant evidence as a reasonable mind might
accept as adequate to support a conclusion (Philippine Metal Products, Inc. v. Court of Industrial
Relations, 90 SCRA 135 [1979]; Police Commission v. Lood, 127 SCRA 757 [1984]; Canete v.
WCC, 136 SCRA 302 [1985])
Therefore, the respondent Court of Appeals did not err in holding the NPC liable for damages.
Likewise, it did not err in reducing the consequential damages from P333,200.00 to P19,000.00. As shown by
the records, while there was no categorical statement or admission on the part of ECI that it bought a new crane
to replace the damaged one, a sales contract was presented to the effect that the new crane would be delivered to
it by Asian Enterprises within 60 days from the opening of the letter of credit at the cost of P106,336.75. The
offer was made by Asian Enterprises a few days after the flood. As compared to the amount of P106,336.75 for
a brand new crane and paying the alleged amount of P4,000.00 a day as rental for the use of a temporary crane,
which use petitioner ECI alleged to have lasted for a period of one year, thus, totalling P120,000.00, plus the
fact that there was already a sales contract between it and Asian Enterprises, there is no reason why ECI should
opt to rent a temporary crane for a period of one year. The appellate court also found that the damaged crane
was subsequently repaired and reactivated and the cost of repair was P77,000.00. Therefore, it included the said
amount in the award of of compensatory damages, but not the value of the new crane. We do not find anything
erroneous in the decision of the appellate court that the consequential damages should represent only the service
of the temporary crane for one month. A contrary ruling would result in the unjust enrichment of ECI.
The P120,000.00 bonus was also properly eliminated as the same was granted by the trial court on the premise
that it represented ECI's lost opportunity "to earn the one month bonus from NAWASA ... ." As stated earlier,
the loss or damage to ECI's equipment and facilities occurred long after the stipulated deadline to finish the
construction. No bonus, therefore, could have been possibly earned by ECI at that point in time. The supposed
liquidated damages for failure to finish the project within the stipulated period or the opposite of the claim for
bonus is not clearly presented in the records of these petitions. It is not shown that NAWASA imposed them.
As to the question of exemplary damages, we sustain the appellate court in eliminating the same since it found
that there was no bad faith on the part of NPC and that neither can the latter's negligence be considered gross. In
Dee Hua Liong Electrical Equipment Corp. v. Reyes, (145 SCRA 713, 719) we ruled:
Neither may private respondent recover exemplary damages since he is not entitled to moral or
compensatory damages, and again because the petitioner is not shown to have acted in a wanton,
fraudulent, reckless or oppressive manner (Art. 2234, Civil Code; Yutuk v. Manila Electric Co., 2
SCRA 377; Francisco v. Government Service Insurance System, 7 SCRA 577; Gutierrez v.
Villegas, 8 SCRA 527; Air France v. Carrascoso, 18 SCRA 155; Pan Pacific (Phil.) v. Phil.
Advertising Corp., 23 SCRA 977; Marchan v. Mendoza, 24 SCRA 888).
We also affirm the reduction of attorney's fees from P50,000.00 to P30,000.00. There are no compelling reasons
why we should set aside the appellate court's finding that the latter amount suffices for the services rendered by
ECI's counsel.

WHEREFORE, the petitions in G.R. No. 47379 and G.R. No. 47481 are both DISMISSED for LACK OF
MERIT. The decision appealed from is AFFIRMED.
SO ORDERED.

#7
G.R. No. L-12219

March 15, 1918

AMADO PICART, plaintiff-appellant,

vs.
FRANK SMITH, JR., defendant-appellee.
Alejo Mabanag for appellant.
G. E. Campbell for appellee.
STREET, J.:
In this action the plaintiff, Amado Picart, seeks to recover of the defendant, Frank Smith, jr., the sum of
P31,000, as damages alleged to have been caused by an automobile driven by the defendant. From a judgment
of the Court of First Instance of the Province of La Union absolving the defendant from liability the plaintiff has
appealed.
The occurrence which gave rise to the institution of this action took place on December 12, 1912, on the
Carlatan Bridge, at San Fernando, La Union. It appears that upon the occasion in question the plaintiff was
riding on his pony over said bridge. Before he had gotten half way across, the defendant approached from the
opposite direction in an automobile, going at the rate of about ten or twelve miles per hour. As the defendant
neared the bridge he saw a horseman on it and blew his horn to give warning of his approach. He continued his
course and after he had taken the bridge he gave two more successive blasts, as it appeared to him that the man
on horseback before him was not observing the rule of the road.
The plaintiff, it appears, saw the automobile coming and heard the warning signals. However, being perturbed
by the novelty of the apparition or the rapidity of the approach, he pulled the pony closely up against the railing
on the right side of the bridge instead of going to the left. He says that the reason he did this was that he thought
he did not have sufficient time to get over to the other side. The bridge is shown to have a length of about 75
meters and a width of 4.80 meters. As the automobile approached, the defendant guided it toward his left, that
being the proper side of the road for the machine. In so doing the defendant assumed that the horseman would
move to the other side. The pony had not as yet exhibited fright, and the rider had made no sign for the
automobile to stop. Seeing that the pony was apparently quiet, the defendant, instead of veering to the right
while yet some distance away or slowing down, continued to approach directly toward the horse without
diminution of speed. When he had gotten quite near, there being then no possibility of the horse getting across
to the other side, the defendant quickly turned his car sufficiently to the right to escape hitting the horse
alongside of the railing where it as then standing; but in so doing the automobile passed in such close proximity
to the animal that it became frightened and turned its body across the bridge with its head toward the railing. In
so doing, it as struck on the hock of the left hind leg by the flange of the car and the limb was broken. The horse

fell and its rider was thrown off with some violence. From the evidence adduced in the case we believe that
when the accident occurred the free space where the pony stood between the automobile and the railing of the
bridge was probably less than one and one half meters. As a result of its injuries the horse died. The plaintiff
received contusions which caused temporary unconsciousness and required medical attention for several days.
The question presented for decision is whether or not the defendant in maneuvering his car in the manner above
described was guilty of negligence such as gives rise to a civil obligation to repair the damage done; and we are
of the opinion that he is so liable. As the defendant started across the bridge, he had the right to assume that the
horse and the rider would pass over to the proper side; but as he moved toward the center of the bridge it was
demonstrated to his eyes that this would not be done; and he must in a moment have perceived that it was too
late for the horse to cross with safety in front of the moving vehicle. In the nature of things this change of
situation occurred while the automobile was yet some distance away; and from this moment it was not longer
within the power of the plaintiff to escape being run down by going to a place of greater safety. The control of
the situation had then passed entirely to the defendant; and it was his duty either to bring his car to an
immediate stop or, seeing that there were no other persons on the bridge, to take the other side and pass
sufficiently far away from the horse to avoid the danger of collision. Instead of doing this, the defendant ran
straight on until he was almost upon the horse. He was, we think, deceived into doing this by the fact that the
horse had not yet exhibited fright. But in view of the known nature of horses, there was an appreciable risk that,
if the animal in question was unacquainted with automobiles, he might get exited and jump under the conditions
which here confronted him. When the defendant exposed the horse and rider to this danger he was, in our
opinion, negligent in the eye of the law.
The test by which to determine the existence of negligence in a particular case may be stated as follows: Did the
defendant in doing the alleged negligent act use that person would have used in the same situation? If not, then
he is guilty of negligence. The law here in effect adopts the standard supposed to be supplied by the imaginary
conduct of the discreet paterfamilias of the Roman law. The existence of negligence in a given case is not
determined by reference to the personal judgment of the actor in the situation before him. The law considers
what would be reckless, blameworthy, or negligent in the man of ordinary intelligence and prudence and
determines liability by that.
The question as to what would constitute the conduct of a prudent man in a given situation must of course be
always determined in the light of human experience and in view of the facts involved in the particular case.
Abstract speculations cannot here be of much value but this much can be profitably said: Reasonable men
govern their conduct by the circumstances which are before them or known to them. They are not, and are not
supposed to be, omniscient of the future. Hence they can be expected to take care only when there is something
before them to suggest or warn of danger. Could a prudent man, in the case under consideration, foresee harm as
a result of the course actually pursued? If so, it was the duty of the actor to take precautions to guard against
that harm. Reasonable foresight of harm, followed by ignoring of the suggestion born of this prevision, is
always necessary before negligence can be held to exist. Stated in these terms, the proper criterion for
determining the existence of negligence in a given case is this: Conduct is said to be negligent when a prudent
man in the position of the tortfeasor would have foreseen that an effect harmful to another was sufficiently
probable to warrant his foregoing conduct or guarding against its consequences.
Applying this test to the conduct of the defendant in the present case we think that negligence is clearly
established. A prudent man, placed in the position of the defendant, would in our opinion, have recognized that
the course which he was pursuing was fraught with risk, and would therefore have foreseen harm to the horse
and the rider as reasonable consequence of that course. Under these circumstances the law imposed on the
defendant the duty to guard against the threatened harm.
It goes without saying that the plaintiff himself was not free from fault, for he was guilty of antecedent
negligence in planting himself on the wrong side of the road. But as we have already stated, the defendant was
also negligent; and in such case the problem always is to discover which agent is immediately and directly

responsible. It will be noted that the negligent acts of the two parties were not contemporaneous, since the
negligence of the defendant succeeded the negligence of the plaintiff by an appreciable interval. Under these
circumstances the law is that the person who has the last fair chance to avoid the impending harm and fails to do
so is chargeable with the consequences, without reference to the prior negligence of the other party.
The decision in the case of Rkes vs. Atlantic, Gulf and Pacific Co. (7 Phil. Rep., 359) should perhaps be
mentioned in this connection. This Court there held that while contributory negligence on the part of the person
injured did not constitute a bar to recovery, it could be received in evidence to reduce the damages which would
otherwise have been assessed wholly against the other party. The defendant company had there employed the
plaintiff, as a laborer, to assist in transporting iron rails from a barge in Manila harbor to the company's yards
located not far away. The rails were conveyed upon cars which were hauled along a narrow track. At certain
spot near the water's edge the track gave way by reason of the combined effect of the weight of the car and the
insecurity of the road bed. The car was in consequence upset; the rails slid off; and the plaintiff's leg was caught
and broken. It appeared in evidence that the accident was due to the effects of the typhoon which had dislodged
one of the supports of the track. The court found that the defendant company was negligent in having failed to
repair the bed of the track and also that the plaintiff was, at the moment of the accident, guilty of contributory
negligence in walking at the side of the car instead of being in front or behind. It was held that while the
defendant was liable to the plaintiff by reason of its negligence in having failed to keep the track in proper
repair nevertheless the amount of the damages should be reduced on account of the contributory negligence in
the plaintiff. As will be seen the defendant's negligence in that case consisted in an omission only. The liability
of the company arose from its responsibility for the dangerous condition of its track. In a case like the one now
before us, where the defendant was actually present and operating the automobile which caused the damage, we
do not feel constrained to attempt to weigh the negligence of the respective parties in order to apportion the
damage according to the degree of their relative fault. It is enough to say that the negligence of the defendant
was in this case the immediate and determining cause of the accident and that the antecedent negligence of the
plaintiff was a more remote factor in the case.
A point of minor importance in the case is indicated in the special defense pleaded in the defendant's answer, to
the effect that the subject matter of the action had been previously adjudicated in the court of a justice of the
peace. In this connection it appears that soon after the accident in question occurred, the plaintiff caused
criminal proceedings to be instituted before a justice of the peace charging the defendant with the infliction of
serious injuries (lesiones graves). At the preliminary investigation the defendant was discharged by the
magistrate and the proceedings were dismissed. Conceding that the acquittal of the defendant at the trial upon
the merits in a criminal prosecution for the offense mentioned would be res adjudicata upon the question of his
civil liability arising from negligence -- a point upon which it is unnecessary to express an opinion -- the action
of the justice of the peace in dismissing the criminal proceeding upon the preliminary hearing can have no
effect. (See U. S. vs. Banzuela and Banzuela, 31 Phil. Rep., 564.)
From what has been said it results that the judgment of the lower court must be reversed, and judgment is her
rendered that the plaintiff recover of the defendant the sum of two hundred pesos (P200), with costs of other
instances. The sum here awarded is estimated to include the value of the horse, medical expenses of the
plaintiff, the loss or damage occasioned to articles of his apparel, and lawful interest on the whole to the date of
this recovery. The other damages claimed by the plaintiff are remote or otherwise of such character as not to be
recoverable. So ordered.
Arellano, C.J., Torres, Carson, Araullo, Avancea, and Fisher, JJ., concur.
Johnson, J., reserves his vote.

Separate Opinions

MALCOLM, J., concurring:

After mature deliberation, I have finally decided to concur with the judgment in this case. I do so because of my
understanding of the "last clear chance" rule of the law of negligence as particularly applied to automobile
accidents. This rule cannot be invoked where the negligence of the plaintiff is concurrent with that of the
defendant. Again, if a traveler when he reaches the point of collision is in a situation to extricate himself and
avoid injury, his negligence at that point will prevent a recovery. But Justice Street finds as a fact that the
negligent act of the interval of time, and that at the moment the plaintiff had no opportunity to avoid the
accident. Consequently, the "last clear chance" rule is applicable. In other words, when a traveler has reached a
point where he cannot extricate himself and vigilance on his part will not avert the injury, his negligence in
reaching that position becomes the condition and not the proximate cause of the injury and will not preclude a
recovery. (Note especially Aiken vs. Metcalf [1917], 102 Atl., 330.)

#8
G.R. No. 179337

April 30, 2008

JOSEPH SALUDAGA, petitioner,

vs.
FAR EASTERN UNIVERSITY and EDILBERTO C. DE JESUS in his capacity as President of FEU,
respondents.
DECISION
YNARES-SANTIAGO, J.:
This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the June 29, 2007 Decision2
of the Court of Appeals in CA-G.R. CV No. 87050, nullifying and setting aside the November 10, 2004
Decision3 of the Regional Trial Court of Manila, Branch 2, in Civil Case No. 98-89483 and dismissing the
complaint filed by petitioner; as well as its August 23, 2007 Resolution4 denying the Motion for
Reconsideration.5
The antecedent facts are as follows:
Petitioner Joseph Saludaga was a sophomore law student of respondent Far Eastern University (FEU) when he
was shot by Alejandro Rosete (Rosete), one of the security guards on duty at the school premises on August 18,
1996. Petitioner was rushed to FEU-Dr. Nicanor Reyes Medical Foundation (FEU-NRMF) due to the wound he
sustained.6 Meanwhile, Rosete was brought to the police station where he explained that the shooting was
accidental. He was eventually released considering that no formal complaint was filed against him.
Petitioner thereafter filed a complaint for damages against respondents on the ground that they breached their
obligation to provide students with a safe and secure environment and an atmosphere conducive to learning.
Respondents, in turn, filed a Third-Party Complaint7 against Galaxy Development and Management

Corporation (Galaxy), the agency contracted by respondent FEU to provide security services within its premises
and Mariano D. Imperial (Imperial), Galaxy's President, to indemnify them for whatever would be adjudged in
favor of petitioner, if any; and to pay attorney's fees and cost of the suit. On the other hand, Galaxy and Imperial
filed a Fourth-Party Complaint against AFP General Insurance.8
On November 10, 2004, the trial court rendered a decision in favor of petitioner, the dispositive portion of
which reads:
WHEREFORE, from the foregoing, judgment is hereby rendered ordering:
1. FEU and Edilberto de Jesus, in his capacity as president of FEU to pay jointly and severally
Joseph Saludaga the amount of P35,298.25 for actual damages with 12% interest per annum
from the filing of the complaint until fully paid; moral damages of P300,000.00, exemplary
damages of P500,000.00, attorney's fees of P100,000.00 and cost of the suit;
2. Galaxy Management and Development Corp. and its president, Col. Mariano Imperial to
indemnify jointly and severally 3rd party plaintiffs (FEU and Edilberto de Jesus in his capacity
as President of FEU) for the above-mentioned amounts;
3. And the 4th party complaint is dismissed for lack of cause of action. No pronouncement as to
costs.
SO ORDERED.9
Respondents appealed to the Court of Appeals which rendered the assailed Decision, the decretal portion of
which provides, viz:
WHEREFORE, the appeal is hereby GRANTED. The Decision dated November 10, 2004 is hereby
REVERSED and SET ASIDE. The complaint filed by Joseph Saludaga against appellant Far Eastern
University and its President in Civil Case No. 98-89483 is DISMISSED.
SO ORDERED.10
Petitioner filed a Motion for Reconsideration which was denied; hence, the instant petition based on the
following grounds:
THE COURT OF APPEALS SERIOUSLY ERRED IN MANNER CONTRARY TO LAW AND
JURISPRUDENCE IN RULING THAT:
5.1. THE SHOOTING INCIDENT IS A FORTUITOUS EVENT;
5.2. RESPONDENTS ARE NOT LIABLE FOR DAMAGES FOR THE INJURY RESULTING FROM
A GUNSHOT WOUND SUFFERED BY THE PETITIONER FROM THE HANDS OF NO LESS
THAN THEIR OWN SECURITY GUARD IN VIOLATION OF THEIR BUILT-IN CONTRACTUAL
OBLIGATION TO PETITIONER, BEING THEIR LAW STUDENT AT THAT TIME, TO PROVIDE
HIM WITH A SAFE AND SECURE EDUCATIONAL ENVIRONMENT;

5.3. SECURITY GAURD, ALEJANDRO ROSETE, WHO SHOT PETITIONER WHILE HE WAS
WALKING ON HIS WAY TO THE LAW LIBRARY OF RESPONDENT FEU IS NOT THEIR
EMPLOYEE BY VIRTUE OF THE CONTRACT FOR SECURITY SERVICES BETWEEN GALAXY
AND FEU NOTWITHSTANDING THE FACT THAT PETITIONER, NOT BEING A PARTY TO IT,
IS NOT BOUND BY THE SAME UNDER THE PRINCIPLE OF RELATIVITY OF CONTRACTS;
and
5.4. RESPONDENT EXERCISED DUE DILIGENCE IN SELECTING GALAXY AS THE AGENCY
WHICH WOULD PROVIDE SECURITY SERVICES WITHIN THE PREMISES OF RESPONDENT
FEU.11
Petitioner is suing respondents for damages based on the alleged breach of student-school contract for a safe
learning environment. The pertinent portions of petitioner's Complaint read:
6.0. At the time of plaintiff's confinement, the defendants or any of their representative did not bother to
visit and inquire about his condition. This abject indifference on the part of the defendants continued
even after plaintiff was discharged from the hospital when not even a word of consolation was heard
from them. Plaintiff waited for more than one (1) year for the defendants to perform their moral
obligation but the wait was fruitless. This indifference and total lack of concern of defendants served to
exacerbate plaintiff's miserable condition.
xxxx
11.0. Defendants are responsible for ensuring the safety of its students while the latter are within the
University premises. And that should anything untoward happens to any of its students while they are
within the University's premises shall be the responsibility of the defendants. In this case, defendants,
despite being legally and morally bound, miserably failed to protect plaintiff from injury and thereafter,
to mitigate and compensate plaintiff for said injury;
12.0. When plaintiff enrolled with defendant FEU, a contract was entered into between them. Under this
contract, defendants are supposed to ensure that adequate steps are taken to provide an atmosphere
conducive to study and ensure the safety of the plaintiff while inside defendant FEU's premises. In the
instant case, the latter breached this contract when defendant allowed harm to befall upon the plaintiff
when he was shot at by, of all people, their security guard who was tasked to maintain peace inside the
campus.12
In Philippine School of Business Administration v. Court of Appeals,13 we held that:
When an academic institution accepts students for enrollment, there is established a contract between
them, resulting in bilateral obligations which both parties are bound to comply with. For its part, the
school undertakes to provide the student with an education that would presumably suffice to equip him
with the necessary tools and skills to pursue higher education or a profession. On the other hand, the
student covenants to abide by the school's academic requirements and observe its rules and regulations.
Institutions of learning must also meet the implicit or "built-in" obligation of providing their students
with an atmosphere that promotes or assists in attaining its primary undertaking of imparting knowledge.

Certainly, no student can absorb the intricacies of physics or higher mathematics or explore the realm of
the arts and other sciences when bullets are flying or grenades exploding in the air or where there looms
around the school premises a constant threat to life and limb. Necessarily, the school must ensure that
adequate steps are taken to maintain peace and order within the campus premises and to prevent the
breakdown thereof.14
It is undisputed that petitioner was enrolled as a sophomore law student in respondent FEU. As such, there was
created a contractual obligation between the two parties. On petitioner's part, he was obliged to comply with the
rules and regulations of the school. On the other hand, respondent FEU, as a learning institution is mandated to
impart knowledge and equip its students with the necessary skills to pursue higher education or a profession. At
the same time, it is obliged to ensure and take adequate steps to maintain peace and order within the campus.
It is settled that 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.15 In the instant case, we find that, when
petitioner was shot inside the campus by no less the security guard who was hired to maintain peace and secure
the premises, there is a prima facie showing that respondents failed to comply with its obligation to provide a
safe and secure environment to its students.
In order to avoid liability, however, respondents aver that the shooting incident was a fortuitous event because
they could not have reasonably foreseen nor avoided the accident caused by Rosete as he was not their
employee;16 and that they complied with their obligation to ensure a safe learning environment for their students
by having exercised due diligence in selecting the security services of Galaxy.
After a thorough review of the records, we find that respondents failed to discharge the burden of proving that
they exercised due diligence in providing a safe learning environment for their students. They failed to prove
that they ensured that the guards assigned in the campus met the requirements stipulated in the Security Service
Agreement. Indeed, certain documents about Galaxy were presented during trial; however, no evidence as to the
qualifications of Rosete as a security guard for the university was offered.
Respondents also failed to show that they undertook steps to ascertain and confirm that the security guards
assigned to them actually possess the qualifications required in the Security Service Agreement. It was not
proven that they examined the clearances, psychiatric test results, 201 files, and other vital documents
enumerated in its contract with Galaxy. Total reliance on the security agency about these matters or failure to
check the papers stating the qualifications of the guards is negligence on the part of respondents. A learning
institution should not be allowed to completely relinquish or abdicate security matters in its premises to the
security agency it hired. To do so would result to contracting away its inherent obligation to ensure a safe
learning environment for its students.
Consequently, respondents' defense of force majeure must fail. In order for force majeure to be considered,
respondents must show that no negligence or misconduct was committed 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.17

Article 1170 of the Civil Code provides that those who are negligent in the performance of their obligations are
liable for damages. Accordingly, for breach of contract due to negligence in providing a safe learning
environment, respondent FEU is liable to petitioner for damages. It is essential in the award of damages that the
claimant must have satisfactorily proven during the trial the existence of the factual basis of the damages and its
causal connection to defendant's acts.18
In the instant case, it was established that petitioner spent P35,298.25 for his hospitalization and other medical
expenses.19 While the trial court correctly imposed interest on said amount, however, the case at bar involves an
obligation arising from a contract and not a loan or forbearance of money. As such, the proper rate of legal
interest is six percent (6%) per annum of the amount demanded. Such interest shall continue to run from the
filing of the complaint until the finality of this Decision.20 After this Decision becomes final and executory, the
applicable rate shall be twelve percent (12%) per annum until its satisfaction.
The other expenses being claimed by petitioner, such as transportation expenses and those incurred in hiring a
personal assistant while recuperating were however not duly supported by receipts.21 In the absence thereof, no
actual damages may be awarded. Nonetheless, temperate damages under Art. 2224 of the Civil Code may be
recovered where it has been shown that the claimant suffered some pecuniary loss but the amount thereof
cannot be proved with certainty. Hence, the amount of P20,000.00 as temperate damages is awarded to
petitioner.
As regards the award of moral damages, 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 circumstances.22 The
testimony of petitioner about his physical suffering, mental anguish, fright, serious anxiety, and moral shock
resulting from the shooting incident23 justify the award of moral damages. However, moral damages are in the
category of an award designed to compensate the claimant for actual injury suffered and not to impose a penalty
on the wrongdoer. The award is not meant to enrich the complainant at the expense of the defendant, but to
enable the injured party to obtain means, diversion, or amusements that will serve to obviate the moral suffering
he has undergone. It is aimed at the restoration, within the limits of the possible, of the spiritual status quo ante,
and should be proportionate to the suffering inflicted. Trial courts must then guard against the award of
exorbitant damages; they should exercise balanced restrained and measured objectivity to avoid suspicion that it
was due to passion, prejudice, or corruption on the part of the trial court.24 We deem it just and reasonable under
the circumstances to award petitioner moral damages in the amount of P100,000.00.
Likewise, attorney's fees and litigation expenses in the amount of P50,000.00 as part of damages is reasonable
in view of Article 2208 of the Civil Code.25 However, the award of exemplary damages is deleted considering
the absence of proof that respondents acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
We note that the trial court held respondent De Jesus solidarily liable with respondent FEU. In Powton
Conglomerate, Inc. v. Agcolicol,26 we held that:
[A] corporation is invested by law with a personality separate and distinct from those of the persons
composing it, such that, save for certain exceptions, corporate officers who entered into contracts in
behalf of the corporation cannot be held personally liable for the liabilities of the latter. Personal liability
of a corporate director, trustee or officer along (although not necessarily) with the corporation may so
validly attach, as a rule, only when - (1) he assents to a patently unlawful act of the corporation, or when
he is guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest

resulting in damages to the corporation, its stockholders or other persons; (2) he consents to the issuance
of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto; (3) he agrees to hold himself personally and solidarily liable with
the corporation; or (4) he is made by a specific provision of law personally answerable for his corporate
action.27
None of the foregoing exceptions was established in the instant case; hence, respondent De Jesus should not be
held solidarily liable with respondent FEU.
Incidentally, although the main cause of action in the instant case is the breach of the school-student contract,
petitioner, in the alternative, also holds respondents vicariously liable under Article 2180 of the Civil Code,
which provides:
Art. 2180. 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.
xxxx
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.
xxxx
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.
We agree with the findings of the Court of Appeals that respondents cannot be held liable for damages under
Art. 2180 of the Civil Code because respondents are not the employers of Rosete. The latter was employed by
Galaxy. The instructions issued by respondents' Security Consultant to Galaxy and its security guards are
ordinarily no more than requests commonly envisaged in the contract for services entered into by a principal
and a security agency. They cannot be construed as the element of control as to treat respondents as the
employers of Rosete.28
As held in Mercury Drug Corporation v. Libunao:29
In Soliman, Jr. v. Tuazon,30 we held that where the security agency recruits, hires and assigns the works
of its watchmen or security guards to a client, the employer of such guards or watchmen is such agency,
and not the client, since the latter has no hand in selecting the security guards. Thus, the duty to observe
the diligence of a good father of a family cannot be demanded from the said client:
[I]t is settled in our jurisdiction that where the security agency, as here, recruits, hires and
assigns the work of its watchmen or security guards, the agency is the employer of such guards
or watchmen. Liability for illegal or harmful acts committed by the security guards attaches to
the employer agency, and not to the clients or customers of such agency. As a general rule, a
client or customer of a security agency has no hand in selecting who among the pool of security

guards or watchmen employed by the agency shall be assigned to it; the duty to observe the
diligence of a good father of a family in the selection of the guards cannot, in the ordinary course
of events, be demanded from the client whose premises or property are protected by the security
guards.
xxxx
The fact that a client company may give instructions or directions to the security guards assigned to it,
does not, by itself, render the client responsible as an employer of the security guards concerned and
liable for their wrongful acts or omissions.31
We now come to respondents' Third Party Claim against Galaxy. In Firestone Tire and Rubber Company of the
Philippines v. Tempengko,32 we held that:
The third-party complaint is, therefore, a procedural device whereby a 'third party' who is neither a party
nor privy to the act or deed complained of by the plaintiff, may be brought into the case with leave of
court, by the defendant, who acts as third-party plaintiff to enforce against such third-party defendant a
right for contribution, indemnity, subrogation or any other relief, in respect of the plaintiff's claim. The
third-party complaint is actually independent of and separate and distinct from the plaintiff's complaint.
Were it not for this provision of the Rules of Court, it would have to be filed independently and
separately from the original complaint by the defendant against the third-party. But the Rules permit
defendant to bring in a third-party defendant or so to speak, to litigate his separate cause of action in
respect of plaintiff's claim against a third-party in the original and principal case with the object of
avoiding circuitry of action and unnecessary proliferation of law suits and of disposing expeditiously in
one litigation the entire subject matter arising from one particular set of facts.33
Respondents and Galaxy were able to litigate their respective claims and defenses in the course of the trial of
petitioner's complaint. Evidence duly supports the findings of the trial court that Galaxy is negligent not only in
the selection of its employees but also in their supervision. Indeed, no administrative sanction was imposed
against Rosete despite the shooting incident; moreover, he was even allowed to go on leave of absence which
led eventually to his disappearance.34 Galaxy also failed to monitor petitioner's condition or extend the
necessary assistance, other than the P5,000.00 initially given to petitioner. Galaxy and Imperial failed to make
good their pledge to reimburse petitioner's medical expenses.
For these acts of negligence and for having supplied respondent FEU with an unqualified security guard, which
resulted to the latter's breach of obligation to petitioner, it is proper to hold Galaxy liable to respondent FEU for
such damages equivalent to the above-mentioned amounts awarded to petitioner.
Unlike respondent De Jesus, we deem Imperial to be solidarily liable with Galaxy for being grossly negligent in
directing the affairs of the security agency. It was Imperial who assured petitioner that his medical expenses will
be shouldered by Galaxy but said representations were not fulfilled because they presumed that petitioner and
his family were no longer interested in filing a formal complaint against them.35
WHEREFORE, the petition is GRANTED. The June 29, 2007 Decision of the Court of Appeals in CA-G.R.
CV No. 87050 nullifying the Decision of the trial court and dismissing the complaint as well as the August 23,
2007 Resolution denying the Motion for Reconsideration are REVERSED and SET ASIDE. The Decision of

the Regional Trial Court of Manila, Branch 2, in Civil Case No. 98-89483 finding respondent FEU liable for
damages for breach of its obligation to provide students with a safe and secure learning atmosphere, is
AFFIRMED with the following MODIFICATIONS:
a. respondent Far Eastern University (FEU) is ORDERED to pay petitioner actual damages in the amount of
P35,298.25, plus 6% interest per annum from the filing of the complaint until the finality of this Decision. After
this decision becomes final and executory, the applicable rate shall be twelve percent (12%) per annum until its
satisfaction;
b. respondent FEU is also ORDERED to pay petitioner temperate damages in the amount of P20,000.00; moral
damages in the amount of P100,000.00; and attorney's fees and litigation expenses in the amount of P50,000.00;
c. the award of exemplary damages is DELETED.
The Complaint against respondent Edilberto C. De Jesus is DISMISSED. The counterclaims of respondents are
likewise DISMISSED.
Galaxy Development and Management Corporation (Galaxy) and its president, Mariano D. Imperial are
ORDERED to jointly and severally pay respondent FEU damages equivalent to the above-mentioned amounts
awarded to petitioner.
SO ORDERED.

#9
[G.R. No. 138569. September 11, 2003]
THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner, vs. COURT OF APPEALS and L.C.
DIAZ and COMPANY, CPAs, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review of the Decision1[1] of the Court of Appeals dated 27 October 1998 and its
Resolution dated 11 May 1999. The assailed decision reversed the Decision2[2] of the Regional Trial Court of
Manila, Branch 8, absolving petitioner Consolidated Bank and Trust Corporation, now known as Solidbank
1
2

Corporation (Solidbank), of any liability. The questioned resolution of the appellate court denied the motion for
reconsideration of Solidbank but modified the decision by deleting the award of exemplary damages, attorneys
fees, expenses of litigation and cost of suit.
The Facts
Solidbank is a domestic banking corporation organized and existing under Philippine laws. Private respondent
L.C. Diaz and Company, CPAs (L.C. Diaz), is a professional partnership engaged in the practice of accounting.
Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank, designated as Savings Account
No. S/A 200-16872-6.
On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya (Macaraya), filled up a savings (cash)
deposit slip for P990 and a savings (checks) deposit slip for P50. Macaraya instructed the messenger of L.C.
Diaz, Ismael Calapre (Calapre), to deposit the money with Solidbank. Macaraya also gave Calapre the
Solidbank passbook.
Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the passbook. The teller
acknowledged receipt of the deposit by returning to Calapre the duplicate copies of the two deposit slips. Teller
No. 6 stamped the deposit slips with the words DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD
OFFICE. Since the transaction took time and Calapre had to make another deposit for L.C. Diaz with Allied
Bank, he left the passbook with Solidbank. Calapre then went to Allied Bank. When Calapre returned to
Solidbank to retrieve the passbook, Teller No. 6 informed him that somebody got the passbook.3[3] Calapre
went back to L.C. Diaz and reported the incident to Macaraya.
Macaraya immediately prepared a deposit slip in duplicate copies with a check of P200,000. Macaraya, together
with Calapre, went to Solidbank and presented to Teller No. 6 the deposit slip and check. The teller stamped the
words DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD OFFICE on the duplicate copy of the
deposit slip. When Macaraya asked for the passbook, Teller No. 6 told Macaraya that someone got the passbook
but she could not remember to whom she gave the passbook. When Macaraya asked Teller No. 6 if Calapre got
the passbook, Teller No. 6 answered that someone shorter than Calapre got the passbook. Calapre was then
standing beside Macaraya.
Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of a check for P90,000
drawn on Philippine Banking Corporation (PBC). This PBC check of L.C. Diaz was a check that it had long
closed.4[4] PBC subsequently dishonored the check because of insufficient funds and because the signature in
the check differed from PBCs specimen signature. Failing to get back the passbook, Macaraya went back to her
office and reported the matter to the Personnel Manager of L.C. Diaz, Emmanuel Alvarez.
The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer, Luis C. Diaz (Diaz), called
up Solidbank to stop any transaction using the same passbook until L.C. Diaz could open a new account.5[5] On
the same day, Diaz formally wrote Solidbank to make the same request. It was also on the same day that L.C.
Diaz learned of the unauthorized withdrawal the day before, 14 August 1991, of P300,000 from its savings
account. The withdrawal slip for the P300,000 bore the signatures of the authorized signatories of L.C. Diaz,
3
4
5

namely Diaz and Rustico L. Murillo. The signatories, however, denied signing the withdrawal slip. A certain
Noel Tamayo received the P300,000.
In an Information6[6] dated 5 September 1991, L.C. Diaz charged its messenger, Emerano Ilagan (Ilagan) and
one Roscon Verdazola with Estafa through Falsification of Commercial Document. The Regional Trial Court of
Manila dismissed the criminal case after the City Prosecutor filed a Motion to Dismiss on 4 August 1992.
On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the return of its money. Solidbank
refused.
On 25 August 1992, L.C. Diaz filed a Complaint7[7] for Recovery of a Sum of Money against Solidbank with
the Regional Trial Court of Manila, Branch 8. After trial, the trial court rendered on 28 December 1994 a
decision absolving Solidbank and dismissing the complaint.
L.C. Diaz then appealed8[8] to the Court of Appeals. On 27 October 1998, the Court of Appeals issued its
Decision reversing the decision of the trial court.
On 11 May 1999, the Court of Appeals issued its Resolution denying the motion for reconsideration of
Solidbank. The appellate court, however, modified its decision by deleting the award of exemplary damages and
attorneys fees.
The Ruling of the Trial Court
In absolving Solidbank, the trial court applied the rules on savings account written on the passbook. The rules
state that possession of this book shall raise the presumption of ownership and any payment or payments made
by the bank upon the production of the said book and entry therein of the withdrawal shall have the same effect
as if made to the depositor personally.9[9]
At the time of the withdrawal, a certain Noel Tamayo was not only in possession of the passbook, he also
presented a withdrawal slip with the signatures of the authorized signatories of L.C. Diaz. The specimen
signatures of these persons were in the signature cards. The teller stamped the withdrawal slip with the words
Saving Teller No. 5. The teller then passed on the withdrawal slip to Genere Manuel (Manuel) for
authentication. Manuel verified the signatures on the withdrawal slip. The withdrawal slip was then given to
another officer who compared the signatures on the withdrawal slip with the specimen on the signature cards.
The trial court concluded that Solidbank acted with care and observed the rules on savings account when it
allowed the withdrawal of P300,000 from the savings account of L.C. Diaz.
The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove that the signatures on the
withdrawal slip were forged. The trial court admonished L.C. Diaz for not offering in evidence the National
Bureau of Investigation (NBI) report on the authenticity of the signatures on the withdrawal slip for P300,000.
The trial court believed that L.C. Diaz did not offer this evidence because it is derogatory to its action.
6
7
8
9

Another provision of the rules on savings account states that the depositor must keep the passbook under lock
and key.10[10] When another person presents the passbook for withdrawal prior to Solidbanks receipt of the
notice of loss of the passbook, that person is considered as the owner of the passbook. The trial court ruled that
the passbook presented during the questioned transaction was now out of the lock and key and presumptively
ready for a business transaction.11[11]
Solidbank did not have any participation in the custody and care of the passbook. The trial court believed that
Solidbanks act of allowing the withdrawal of P300,000 was not the direct and proximate cause of the loss. The
trial court held that L.C. Diazs negligence caused the unauthorized withdrawal. Three facts establish L.C. Diazs
negligence: (1) the possession of the passbook by a person other than the depositor L.C. Diaz; (2) the
presentation of a signed withdrawal receipt by an unauthorized person; and (3) the possession by an
unauthorized person of a PBC check long closed by L.C. Diaz, which check was deposited on the day of the
fraudulent withdrawal.
The trial court debunked L.C. Diazs contention that Solidbank did not follow the precautionary procedures
observed by the two parties whenever L.C. Diaz withdrew significant amounts from its account. L.C. Diaz
claimed that a letter must accompany withdrawals of more than P20,000. The letter must request Solidbank to
allow the withdrawal and convert the amount to a managers check. The bearer must also have a letter
authorizing him to withdraw the same amount. Another person driving a car must accompany the bearer so that
he would not walk from Solidbank to the office in making the withdrawal. The trial court pointed out that L.C.
Diaz disregarded these precautions in its past withdrawal. On 16 July 1991, L.C. Diaz withdrew P82,554
without any separate letter of authorization or any communication with Solidbank that the money be converted
into a managers check.
The trial court further justified the dismissal of the complaint by holding that the case was a last ditch effort of
L.C. Diaz to recover P300,000 after the dismissal of the criminal case against Ilagan.
The dispositive portion of the decision of the trial court reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the complaint.
The Court further renders judgment in favor of defendant bank pursuant to its counterclaim the amount of
Thirty Thousand Pesos (P30,000.00) as attorneys fees.
With costs against plaintiff.
SO ORDERED.12[12]
The Ruling of the Court of Appeals
The Court of Appeals ruled that Solidbanks negligence was the proximate cause of the unauthorized withdrawal
of P300,000 from the savings account of L.C. Diaz. The appellate court reached this conclusion after applying
the provision of the Civil Code on quasi-delict, to wit:

10
11
12

Article 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged
to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the
parties, is called a quasi-delict and is governed by the provisions of this chapter.
The appellate court held that the three elements of a quasi-delict are present in this case, namely: (a) damages
suffered by the plaintiff; (b) fault or negligence of the defendant, or some other person for whose acts he must
respond; and (c) the connection of cause and effect between the fault or negligence of the defendant and the
damage incurred by the plaintiff.
The Court of Appeals pointed out that the teller of Solidbank who received the withdrawal slip for P300,000
allowed the withdrawal without making the necessary inquiry. The appellate court stated that the teller, who was
not presented by Solidbank during trial, should have called up the depositor because the money to be withdrawn
was a significant amount. Had the teller called up L.C. Diaz, Solidbank would have known that the withdrawal
was unauthorized. The teller did not even verify the identity of the impostor who made the withdrawal. Thus,
the appellate court found Solidbank liable for its negligence in the selection and supervision of its employees.
The appellate court ruled that while L.C. Diaz was also negligent in entrusting its deposits to its messenger and
its messenger in leaving the passbook with the teller, Solidbank could not escape liability because of the
doctrine of last clear chance. Solidbank could have averted the injury suffered by L.C. Diaz had it called up
L.C. Diaz to verify the withdrawal.
The appellate court ruled that the degree of diligence required from Solidbank is more than that of a good father
of a family. The business and functions of banks are affected with public interest. Banks are obligated to treat
the accounts of their depositors with meticulous care, always having in mind the fiduciary nature of their
relationship with their clients. The Court of Appeals found Solidbank remiss in its duty, violating its fiduciary
relationship with L.C. Diaz.
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, premises considered, the decision appealed from is hereby REVERSED and a new one entered.
1.Ordering defendant-appellee Consolidated Bank and Trust Corporation to pay plaintiff-appellant the
sum of Three Hundred Thousand Pesos (P300,000.00), with interest thereon at the rate of 12%
per annum from the date of filing of the complaint until paid, the sum of P20,000.00 as
exemplary damages, and P20,000.00 as attorneys fees and expenses of litigation as well as the
cost of suit; and
2.

Ordering the dismissal of defendant-appellees counterclaim in the amount of P30,000.00 as

attorneys fees.

SO ORDERED.13[13]
Acting on the motion for reconsideration of Solidbank, the appellate court affirmed its decision but modified the
award of damages. The appellate court deleted the award of exemplary damages and attorneys fees. Invoking
Article 223114[14] of the Civil Code, the appellate court ruled that exemplary damages could be granted if the
defendant acted with gross negligence. Since Solidbank was guilty of simple negligence only, the award of
exemplary damages was not justified. Consequently, the award of attorneys fees was also disallowed pursuant
13
14

to Article 2208 of the Civil Code. The expenses of litigation and cost of suit were also not imposed on
Solidbank.
The dispositive portion of the Resolution reads as follows:
WHEREFORE, foregoing considered, our decision dated October 27, 1998 is affirmed with modification by
deleting the award of exemplary damages and attorneys fees, expenses of litigation and cost of suit.
SO ORDERED.15[15]
Hence, this petition.
The Issues
Solidbank seeks the review of the decision and resolution of the Court of Appeals on these grounds:
I.THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER BANK SHOULD
SUFFER THE LOSS BECAUSE ITS TELLER SHOULD HAVE FIRST CALLED PRIVATE
RESPONDENT BY TELEPHONE BEFORE IT ALLOWED THE WITHDRAWAL OF
P300,000.00 TO RESPONDENTS MESSENGER EMERANO ILAGAN, SINCE THERE IS
NO AGREEMENT BETWEEN THE PARTIES IN THE OPERATION OF THE SAVINGS
ACCOUNT, NOR IS THERE ANY BANKING LAW, WHICH MANDATES THAT A BANK
TELLER SHOULD FIRST CALL UP THE DEPOSITOR BEFORE ALLOWING A
WITHDRAWAL OF A BIG AMOUNT IN A SAVINGS ACCOUNT.
II.

THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST CLEAR

CHANCE AND IN HOLDING THAT PETITIONER BANKS TELLER HAD THE LAST
OPPORTUNITY TO WITHHOLD THE WITHDRAWAL WHEN IT IS UNDISPUTED THAT
THE TWO SIGNATURES OF RESPONDENT ON THE WITHDRAWAL SLIP ARE
GENUINE AND PRIVATE RESPONDENTS PASSBOOK WAS DULY PRESENTED, AND
CONTRARIWISE RESPONDENT WAS NEGLIGENT IN THE SELECTION AND
SUPERVISION OF ITS MESSENGER EMERANO ILAGAN, AND IN THE SAFEKEEPING
OF ITS CHECKS AND OTHER FINANCIAL DOCUMENTS.

III.

THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT CASE IS A
LAST DITCH EFFORT OF PRIVATE RESPONDENT TO RECOVER ITS P300,000.00
AFTER FAILING IN ITS EFFORTS TO RECOVER THE SAME FROM ITS EMPLOYEE
EMERANO ILAGAN.

IV.

THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES AWARDED

AGAINST PETITIONER UNDER ARTICLE 2197 OF THE CIVIL CODE,
NOTWITHSTANDING ITS FINDING THAT PETITIONER BANKS NEGLIGENCE WAS
ONLY CONTRIBUTORY.16[16]

The Ruling of the Court

The petition is partly meritorious.
15
16

Solidbanks Fiduciary Duty under the Law

The rulings of the trial court and the Court of Appeals conflict on the application of the law. The trial court
pinned the liability on L.C. Diaz based on the provisions of the rules on savings account, a recognition of the
contractual relationship between Solidbank and L.C. Diaz, the latter being a depositor of the former. On the
other hand, the Court of Appeals applied the law on quasi-delict to determine who between the two parties was
ultimately negligent. The law on quasi-delict or culpa aquiliana is generally applicable when there is no preexisting contractual relationship between the parties.
We hold that Solidbank is liable for breach of contract due to negligence, or culpa contractual.
The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple
loan.17[17] Article 1980 of the Civil Code expressly provides that x x x savings x x x deposits of money in
banks and similar institutions shall be governed by the provisions concerning simple loan. There is a debtorcreditor relationship between the bank and its depositor. The bank is the debtor and the depositor is the creditor.
The depositor lends the bank money and the bank agrees to pay the depositor on demand. The savings deposit
agreement between the bank and the depositor is the contract that determines the rights and obligations of the
parties.
The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic Act
No. 8791 (RA 8791),18[18] which took effect on 13 June 2000, declares that the State recognizes the fiduciary
nature of banking that requires high standards of integrity and performance.19[19] This new provision in the
general banking law, introduced in 2000, is a statutory affirmation of Supreme Court decisions, starting with the
1990 case of Simex International v. Court of Appeals,20[20] holding 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.21[21]
This fiduciary relationship means that the banks obligation to observe high 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 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 good father of a family.22[22] Section 2 of RA
8791 prescribes the statutory diligence required from banks that banks must observe high standards of integrity
and performance in servicing their depositors. Although RA 8791 took effect almost nine years after the
unauthorized withdrawal of the P300,000 from L.C. Diazs savings account, jurisprudence23[23] at the time of
the withdrawal already imposed on banks the same high standard of diligence required under RA No. 8791.
17
18
19
20
21
22

However, the fiduciary nature of a bank-depositor relationship does not convert the contract between the bank
and its depositors from a simple loan to a trust agreement, whether express or implied. Failure by the bank to
pay the depositor is failure to pay a simple loan, and not a breach of trust.24[24] The law simply imposes on the
bank a higher standard of integrity and performance in complying with its obligations under the contract of
simple loan, beyond those required of non-bank debtors under a similar contract of simple loan.
The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks do not
accept deposits to enrich depositors but to earn money for themselves. The law allows banks to offer the lowest
possible interest rate to depositors while charging the highest possible interest rate on their own borrowers. The
interest spread or differential belongs to the bank and not to the depositors who are not cestui que trust of banks.
If depositors are cestui que trust of banks, then the interest spread or income belongs to the depositors, a
situation that Congress certainly did not intend in enacting Section 2 of RA 8791.
Solidbanks Breach of its Contractual Obligation
Article 1172 of the Civil Code provides that responsibility arising from negligence in the performance of every
kind of obligation is demandable. For breach of the savings deposit agreement due to negligence, or culpa
contractual, the bank is liable to its depositor.
Calapre left the passbook with Solidbank because the transaction took time and he had to go to Allied Bank for
another transaction. The passbook was still in the hands of the employees of Solidbank for the processing of the
deposit when Calapre left Solidbank. Solidbanks rules on savings account require that the deposit book should
be carefully guarded by the depositor and kept under lock and key, if possible. When the passbook is in the
possession of Solidbanks tellers during withdrawals, the law imposes on Solidbank and its tellers an even higher
degree of diligence in safeguarding the passbook.
Likewise, Solidbanks tellers must exercise a high degree of diligence in insuring that they return the passbook
only to the depositor or his authorized representative. The tellers know, or should know, that the rules on
savings account provide that any person in possession of the passbook is presumptively its owner. If the tellers
give the passbook to the wrong person, they would be clothing that person presumptive ownership of the
passbook, facilitating unauthorized withdrawals by that person. For failing to return the passbook to Calapre,
the authorized representative of L.C. Diaz, Solidbank and Teller No. 6 presumptively failed to observe such
high degree of diligence in safeguarding the passbook, and in insuring its return to the party authorized to
receive the same.
In culpa contractual, once the plaintiff proves a breach of contract, there is a presumption that the defendant
was at fault or negligent. The burden is on the defendant to prove that he was not at fault or negligent. In
contrast, in culpa aquiliana the plaintiff has the burden of proving that the defendant was negligent. In the
present case, L.C. Diaz has established that Solidbank breached its contractual obligation to return the passbook
only to the authorized representative of L.C. Diaz. There is thus a presumption that Solidbank was at fault and
its teller was negligent in not returning the passbook to Calapre. The burden was on Solidbank to prove that
there was no negligence on its part or its employees.
Solidbank failed to discharge its burden. Solidbank did not present to the trial court Teller No. 6, the teller with
whom Calapre left the passbook and who was supposed to return the passbook to him. The record does not
indicate that Teller No. 6 verified the identity of the person who retrieved the passbook. Solidbank also failed to
23
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adduce in evidence its standard procedure in verifying the identity of the person retrieving the passbook, if there
is such a procedure, and that Teller No. 6 implemented this procedure in the present case.
Solidbank is bound by the negligence of its employees under the principle of respondeat superior or command
responsibility. The defense of exercising the required diligence in the selection and supervision of employees is
not a complete defense in culpa contractual, unlike in culpa aquiliana.25[25]
The bank must not only exercise high standards of integrity and performance, it must also insure that its
employees do likewise because this is the only way to insure that the bank will comply with its fiduciary duty.
Solidbank failed to present the teller who had the duty to return to Calapre the passbook, and thus failed to
prove that this teller exercised the high standards of integrity and performance required of Solidbanks
employees.
Proximate Cause of the Unauthorized Withdrawal
Another point of disagreement between the trial and appellate courts is the proximate cause of the unauthorized
withdrawal. The trial court believed that L.C. Diazs negligence in not securing its passbook under lock and key
was the proximate cause that allowed the impostor to withdraw the P300,000. For the appellate court, the
proximate cause was the tellers negligence in processing the withdrawal without first verifying with L.C. Diaz.
We do not agree with either court.
Proximate cause is that cause which, in natural and continuous sequence, unbroken by any efficient intervening
cause, produces the injury and without which the result would not have occurred.26[26] Proximate cause is
determined by the facts of each case upon mixed considerations of logic, common sense, policy and precedent.27
[27]
L.C. Diaz was not at fault that the passbook landed in the hands of the impostor. Solidbank was in possession of
the passbook while it was processing the deposit. After completion of the transaction, Solidbank had the
contractual obligation to return the passbook only to Calapre, the authorized representative of L.C. Diaz.
Solidbank failed to fulfill its contractual obligation because it gave the passbook to another person.
Solidbanks failure to return the passbook to Calapre made possible the withdrawal of the P300,000 by the
impostor who took possession of the passbook. Under Solidbanks rules on savings account, mere possession of
the passbook raises the presumption of ownership. It was the negligent act of Solidbanks Teller No. 6 that gave
the impostor presumptive ownership of the passbook. Had the passbook not fallen into the hands of the
impostor, the loss of P300,000 would not have happened. Thus, the proximate cause of the unauthorized
withdrawal was Solidbanks negligence in not returning the passbook to Calapre.
We do not subscribe to the appellate courts theory that the proximate cause of the unauthorized withdrawal was
the tellers failure to call up L.C. Diaz to verify the withdrawal. Solidbank did not have the duty to call up L.C.
Diaz to confirm the withdrawal. There is no arrangement between Solidbank and L.C. Diaz to this effect. Even
the agreement between Solidbank and L.C. Diaz pertaining to measures that the parties must observe whenever
withdrawals of large amounts are made does not direct Solidbank to call up L.C. Diaz.

25
26
27

There is no law mandating banks to call up their clients whenever their representatives withdraw significant
amounts from their accounts. L.C. Diaz therefore had the burden to prove that it is the usual practice of
Solidbank to call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz failed to do so.
Teller No. 5 who processed the withdrawal could not have been put on guard to verify the withdrawal. Prior to
the withdrawal of P300,000, the impostor deposited with Teller No. 6 the P90,000 PBC check, which later
bounced. The impostor apparently deposited a large amount of money to deflect suspicion from the withdrawal
of a much bigger amount of money. The appellate court thus erred when it imposed on Solidbank the duty to
call up L.C. Diaz to confirm the withdrawal when no law requires this from banks and when the teller had no
reason to be suspicious of the transaction.
Solidbank continues to foist the defense that Ilagan made the withdrawal. Solidbank claims that since Ilagan
was also a messenger of L.C. Diaz, he was familiar with its teller so that there was no more need for the teller to
verify the withdrawal. Solidbank relies on the following statements in the Booking and Information Sheet of
Emerano Ilagan:
xxx Ilagan also had with him (before the withdrawal) a forged check of PBC and indicated the amount of
P90,000 which he deposited in favor of L.C. Diaz and Company. After successfully withdrawing this large sum
of money, accused Ilagan gave alias Rey (Noel Tamayo) his share of the loot. Ilagan then hired a taxicab in the
amount of P1,000 to transport him (Ilagan) to his home province at Bauan, Batangas. Ilagan extravagantly and
lavishly spent his money but a big part of his loot was wasted in cockfight and horse racing. Ilagan was
apprehended and meekly admitted his guilt.28[28] (Emphasis supplied.)
L.C. Diaz refutes Solidbanks contention by pointing out that the person who withdrew the P300,000 was a
certain Noel Tamayo. Both the trial and appellate courts stated that this Noel Tamayo presented the passbook
with the withdrawal slip.
We uphold the finding of the trial and appellate courts that a certain Noel Tamayo withdrew the P300,000. The
Court is not a trier of facts. We find no justifiable reason to reverse the factual finding of the trial court and the
Court of Appeals. The tellers who processed the deposit of the P90,000 check and the withdrawal of the
P300,000 were not presented during trial to substantiate Solidbanks claim that Ilagan deposited the check and
made the questioned withdrawal. Moreover, the entry quoted by Solidbank does not categorically state that
Ilagan presented the withdrawal slip and the passbook.
Doctrine of Last Clear Chance
The doctrine of last clear chance states that where both parties are negligent but the negligent act of one is
appreciably later than that of the other, or where it is impossible to determine whose fault or negligence caused
the loss, the one who had the last clear opportunity to avoid the loss but failed to do so, is chargeable with the
loss.29[29] Stated differently, the antecedent negligence of the plaintiff does not preclude him from recovering
damages caused by the supervening negligence of the defendant, who had the last fair chance to prevent the
impending harm by the exercise of due diligence.30[30]

28
29
30

We do not apply the doctrine of last clear chance to the present case. Solidbank is liable for breach of contract
due to negligence in the performance of its contractual obligation to L.C. Diaz. This is a case of culpa
contractual, where neither the contributory negligence of the plaintiff nor his last clear chance to avoid the loss,
would exonerate the defendant from liability.31[31] Such contributory negligence or last clear chance by the
plaintiff merely serves to reduce the recovery of damages by the plaintiff but does not exculpate the defendant
from his breach of contract.32[32]
Mitigated Damages
Under Article 1172, liability (for culpa contractual) may be regulated by the courts, according to the
circumstances. This means that if the defendant exercised the proper diligence in the selection and supervision
of its employee, or if the plaintiff was guilty of contributory negligence, then the courts may reduce the award
of damages. In this case, L.C. Diaz was guilty of contributory negligence in allowing a withdrawal slip signed
by its authorized signatories to fall into the hands of an impostor. Thus, the liability of Solidbank should be
reduced.
In Philippine Bank of Commerce v. Court of Appeals,33[33] where the Court held the depositor guilty of
contributory negligence, we allocated the damages between the depositor and the bank on a 40-60 ratio.
Applying the same ruling to this case, we hold that L.C. Diaz must shoulder 40% of the actual damages
awarded by the appellate court. Solidbank must pay the other 60% of the actual damages.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with MODIFICATION. Petitioner
Solidbank Corporation shall pay private respondent L.C. Diaz and Company, CPAs only 60% of the actual
damages awarded by the Court of Appeals. The remaining 40% of the actual damages shall be borne by private
respondent L.C. Diaz and Company, CPAs. Proportionate costs.
SO ORDERED.

#10
[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

31
32
33

CARPIO-MORALES, J.:

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 Cou
(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 I
(Inchcape), and Transport Venture (TVI), solidarily liable for the loss of 37 hot rolled steel sheets in coil that were washe
overboard a barge.

On September 25, 1991, SYTCO Pte Ltd. Singapore shipped from the port of Ilyichevsk, Russia on board M/V Alexand
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 Insuranc
under Marine Policy No. M-91-3747-TIS.[5]

The vessel arrived at the port of Manila on October 24, 1991 and the Philippine Ports Authority (PPA) assigned it a place
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
shipside, and to deliver them to its (the consignees) 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., TVIs 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 t
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 sto
the unloading unto the barge of the 37 coils was accomplished.[10] No tugboat pulled the barge back to the pier, howeve

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
vessel. The barge pitched and rolled with the waves and eventually capsized, washing the 37 coils into the sea.[12] At 7:
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 Gian
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 adjustme
fees, attorneys 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 recoverabl
from the defendants as attorneys 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 courts decision, the defendants Schmitz Transport and TVI filed a joint motion for reconsideration assailing t
finding that they are common carriers and the award of excessive attorneys fees of more than P1,000,000. And they argu
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
trial court, [22] it finding that all the defendants were common carriers Black Sea and TVI for engaging in the transport
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
others 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
with the force of nature, they however had control of where to anchor the vessel, where discharge will take place and eve
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.
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 the
respective Comments.[29]

By its Comment, Black Sea argued that the cargoes were received by the consignee through petitioner in good order, hen
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 th
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
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 fores
the event which constitute the caso fortuito, or if it can be foreseen it must be impossible to avoid; (3) the occurrence mu
be such as to render it impossible for the debtor to fulfill his obligation in any manner; and (4) the obligor must be free f
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 violen
of nature. Human intervention is to be excluded from creating or entering into the cause of the mischief. When the effect
found to be in part the result of the participation of man, whether due to his active intervention or neglect or failure to ac
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 neglige
by all the defendants resulted to the loss of the cargoes,[34] held that unloading outside the breakwater, instead of inside
breakwater, while a storm signal was up constitutes negligence.[35] It thus concluded that the proximate cause of the los
was Black Seas negligence in deciding to unload the cargoes at an unsafe place and while a typhoon was approaching.[3

From a review of the records of the case, there is no indication that there was greater risk in loading the cargoes outside
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 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 in
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] i
however, a material fact which the appellate court failed to properly consider and appreciate[40] the proximate cause of
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
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 petitioners 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 consignees 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 us
or has to hire one.[42] That petitioner is a common carrier, the testimony of its own Vice-President and General Manage
Noel Aro that part of the services it offers to its clients as a brokerage firm includes the transportation of cargoes reflects
Atty. Jubay: Will you please tell us what [are you] functions x x x as Executive Vice-President 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 han
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 Co
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 beha
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 o
Customs, Sir.
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?

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
hired or we sub-contracted with [T]ransport Ventures, Inc. which [was] in-charged (sic) of the barges. Also,

BASECO compound we are leasing cranes to have the cargo unloaded from the barge to trucks, [and] then
used trucks to deliver [the cargoes] to the consignees warehouse, Sir.
Q: And whose trucks do you use from BASECO compound to the consignees warehouse?
A: We utilized of (sic) our own trucks and we have some other contracted trucks, Sir.
xxx

ATTY. JUBAY: Will you please explain to us, to the Honorable Court why is it you have to contract for the barg
of Transport Ventures Incorporated in this particular operation?

A: Firstly, we dont own any barges. That is why we hired the services of another firm whom we know [al]ready
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
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 Arti
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

Article 1732 does not distinguish between one whose principal business activity is the carrying of goods and one who do
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.[

And in Calvo v. UCPB General Insurance Co. Inc.,[46] this Court held that as the transportation of goods is an integral p
of a customs broker, the customs broker is also a common carrier. For to declare otherwise would be to deprive those wi
whom [it] contracts the protection which the law affords them notwithstanding the fact that the obligation to carry goods
[its] customers, is part and parcel of petitioners business.[47]

As for petitioners argument that being the agent of Little Giant, any negligence it committed was deemed the negligence
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
the cargoes from the shipside and into Little Giants 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
tugboat. In their Service Contract,[49] while Little Giant was named as the consignee, petitioner did not disclose that it w
acting on commission and was chartering the vessel for Little Giant.[50] Little Giant did not thus automatically become
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 o
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, i
was still required to observe ordinary diligence to ensure the proper and careful handling, care and discharge of the carri
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 natu
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
TVI?[52]
This Court holds not.

TVIs failure to promptly provide a tugboat did not only increase the risk that might have been reasonably anticipated du
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 th
barge does not have any power of its own and is totally defenseless from the ravages of the sea. That it was nighttime an
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 tha
may be exempted from liability for the loss of the goods.

While petitioner sent checkers[54] and a supervisor[55] on board the vessel to counter-check the operations of TVI, it fa
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 ex
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 LRTAs 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 disch
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
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. x x x [O]ne might ask further, how then must
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 resul
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 exis
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 unconditiona
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 t
carrier. In the case at bar, Bill of Lading No. 2 covering the shipment provides that delivery be made to the port of discha
or so near thereto as she may safely get, always afloat.[59] The delivery of the goods to the consignee was not from pier
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 attorneys fees in an amount over P1,000,000.00 to Industrial Insurance, for lack of factual and l
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 attorneys fees under Article 2208 of the Civil Code. For no sufficient showing of bad faith would be
reflected in a partys persistence in a case other than an erroneous conviction of the righteousness of his cause.[61] To aw
attorneys fees to a party just because the judgment is rendered in its favor would be tantamount to imposing a premium o
ones 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 quos 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
demand is made, the interest shall begin to run not from the time the claim is made judicially or extrajudicially but from
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
interest at SIX PERCENT per annum of the amount due should be computed from the promulgation on November 24, 1
of the decision of the trial court.

Costs against petitioner.

SO ORDERED.

#11
G.R. NO. 146224

January 26, 2007

VIRGINIA REAL, Petitioner,

vs.
SISENANDO H. BELO, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Revised Rules of Court assailing the
Resolution1 dated June 16, 2000 of the Court of Appeals (CA) which dismissed outright the petition for review
of Virginia Real (petitioner) in CA-G.R. SP No. 58799, and the CA Resolution2 dated November 27, 2000
which denied her Motion for Reconsideration.
The facts of the case:
Petitioner owned and operated the Wasabe Fastfood stall located at the Food Center of the Philippine Women's
University (PWU) along Taft Avenue, Malate, Manila. Sisenando H. Belo (respondent) owned and operated the
BS Masters fastfood stall, also located at the Food Center of PWU.
Around 7:00 o'clock in the morning of January 25, 1996, a fire broke out at petitioner's Wasabe Fastfood stall.
The fire spread and gutted other fastfood stalls in the area, including respondent's stall. An investigation on the
cause of the fire by Fire Investigator SFO1 Arnel C. Pinca (Pinca) revealed that the fire broke out due to the
leaking fumes coming from the Liquefied Petroleum Gas (LPG) stove and tank installed at petitioner's stall. For
the loss of his fastfood stall due to the fire, respondent demanded compensation from petitioner. However,
petitioner refused to accede to respondent's demand.
Hence, respondent filed a complaint for damages against petitioner before the Metropolitan Trial Court, Branch
24, Manila (MeTC), docketed as Civil Case No. 152822.3 Respondent alleged that petitioner failed to exercise
due diligence in the upkeep and maintenance of her cooking equipments, as well as the selection and
supervision of her employees; that petitioner's negligence was the proximate cause of the fire that gutted the
fastfood stalls.4
In her Answer dated September 23, 1996, petitioner denied liability on the grounds that the fire was a fortuitous
event and that she exercised due diligence in the selection and supervision of her employees.5

After trial, the MeTC rendered its Decision6 dated April 5, 1999 in favor of the respondent, the dispositive
portion of which reads:
WHEREFORE, in light of the foregoing, judgment is hereby rendered in favor of the plaintiff and against the
defendant ordering the latter:
1) To pay the plaintiff the sum of P50,000.00 representing temperate or moderate damages; and
2) To pay the plaintiff the sum of P25,000.00 as and for attorney's fees and litigation expenses.
The counterclaim filed by the defendant is hereby DENIED FOR LACK OF MERIT.
SO ORDERED.7
The MeTC held that the investigation conducted by the appropriate authority revealed that the fire broke out
due to the leaking fumes coming from the LPG stove and tank installed at petitioner's fastfood stall; that factual
circumstances did not show any sign of interference by any force of nature to infer that the fire occurred due to
fortuitous event; that the petitioner failed to exercise due diligence, precaution, and vigilance in the conduct of
her business, particularly, in maintaining the safety of her cooking equipment as well as in the selection and
supervision of her employees; that even if petitioner passes the fault to her employees, Article 2180 of the Civil
Code finds application; that in the absence of supporting evidence, the amount of actual damages and unrealized
profits prayed for by respondent cannot be granted; that, nonetheless, respondent is entitled to temperate
damages since respondent sustained pecuniary loss, though its true value cannot, from the very nature of the
case, be proved with certainty.
Dissatisfied, petitioner filed an appeal with the Regional Trial Court, Branch 43, Manila (RTC), docketed as
Civil Case No. 99-94606, insisting that the fire was a fortuitous event. On November 26, 1999, the RTC
affirmed the Decision of the MeTC but increased the amount of temperate damages awarded to the respondent
from P50,000.00 to P80,000.00.8
Petitioner filed a Motion for Reconsideration contending that the increase in the award of temperate damages is
unreasonable since she also incurred losses from the fire.
In its Order dated April 12, 2000, the RTC denied petitioner's Motion for Reconsideration holding that it cannot
disregard evidence showing that the fire originated from petitioner's fastfood stall; that the increased amount of
temperate damages awarded to respondent is not a full compensation but only a fair approximate of what he lost
due to the negligence of petitioner's workers.9
Petitioner then filed a Petition for Review with the CA, docketed as CA-G.R. SP No. 58799.10 On June 16,
2000, the CA issued a Resolution dismissing the petition for being "procedurally flawed/deficient."11 The CA
held that the attached RTC Decision was not certified as a true copy by the Clerk of Court; that a certified true
copy of the MeTC Decision was not attached; that material portions of the record, such as the position papers of
the parties and affidavits of witnesses, as would support the material allegations of the petition were also not
attached.12

On July 14, 2000, petitioner filed her Motion for Reconsideration,13 attaching photocopies of the Decisions of
the RTC and MeTC as certified correct by the Clerk of Court.14
On November 27, 2000, the CA issued its Resolution denying petitioner's Motion for Reconsideration.15
Hence, the present petition raising the following issues:
1. Whether the submitted certified true copy of the appealed decision of the Regional Trial Court as
authenticated by a court employee other than the Clerk of Court who was not around at that time said
copy was secured constitutes compliance with the Rules?
2. Whether the submission of a certified true copy of the Metropolitan Trial Court's judgment is still an
indispensable requirement in filing a petition for review before the Court of Appeals despite the fact that
said judgment was already modified by the above decision of the Regional Trial Court and it is the latter
decision that is the proper subject of the petition for review?
3. Whether the submission of copies of the respective position papers of the contending parties is still an
indispensable requirement in filing a petition for review before the Court of Appeals despite the fact that
the contents thereof are already quoted in the body of the verified petition and in the subject judgment of
the Metropolitan Trial Court?
4. Whether the herein petitioner could be held liable for damages as a result of the fire that razed not
only her own food kiosk but also the adjacent foodstalls at the Food Center premises of the Philippine
Women's University, including that of the respondent?
5. Whether the Regional Trial Court could increase the amount of damages awarded by the Metropolitan
Trial Court in favor of the respondent who has not even filed an appeal therefrom?16
Petitioner submits that rules of procedure should not be applied in a very harsh, inflexible and technically
unreasonable sense.
While admitting that the RTC Decision and Order were not certified by the Clerk of Court himself, petitioner
insists that they were certified as authentic copies by Administrative Officer IV Gregorio B. Paraon of the RTC.
As to the MeTC Decision, petitioner contends that the submission of a certified true copy thereof is not an
indispensable requirement because that judgment is not the subject of the petition for review.
In any case, petitioner submits that she had substantially complied with the requirements of the rule when she
attached with her Motion for Reconsideration the copies of the Decisions of the RTC and MeTC as certified
correct by the Clerk of Court.
Anent the non-submission of the position papers of the parties, petitioner maintains that the contents of said
position papers were lengthily quoted verbatim in the petition and in the attached copy of the MeTC Decision.
On the submission of affidavits of witnesses, petitioner contends that it was not necessary because the case
before the MeTC was not covered by summary proceedings.

On the merits of her petition before the CA, petitioner avers that she should not be held liable for a fire which
was a fortuitous event since the fire could not be foreseen and the spread of the fire to the adjacent fastfood
stalls was inevitable.
Lastly, she argues that the RTC cannot increase the amount of temperate damages since the respondent did not
appeal from the judgment of the MeTC.
Respondent opted not to file a Comment, manifesting that the petition contains no new arguments which would
require a comment since the arguments are but a rehash of those raised and decided by the lower courts.17
The Court gave due course to the petition and required both parties to submit their respective memoranda.18 In
compliance therewith, petitioner submitted her Memorandum.19 On the other hand, respondent filed a
Manifestation stating that since no new issues have been raised by the petitioner in her petition and in order not
to be redundant, he adopts as his memorandum the memoranda he filed in the MeTC and the RTC.20
In his Memoranda before the MeTC and RTC, respondent emphasized the evidence he presented to establish his
cause of action against petitioner, principally the testimony of Fire Investigator SFO1 Arnel G. Pinca stating
that the fire originated from the LPG stove and tank in petitioner's fastfood stall.
The requirements as to form and content of a petition for review of a decision of the RTC are laid down in
Section 2 of Rule 42 of the Revised Rules of Court, thus:
Sec. 2. Form and contents. - The petition shall be filed in seven (7) legible copies, with the original copy
intended for the court being indicated as such by the petitioner, and shall (a) state the full names of the parties to
the case, without impleading the lower courts or judges thereof either as petitioners or respondents; (b) indicate
the specific material dates showing that it was filed on time; (c) set forth concisely a statement of the matters
involved, the issues raised, the specification of errors of fact or law, or both, allegedly committed by the
Regional Trial Court, and the reasons or arguments relied upon for the allowance of the appeal; (d) be
accompanied by clearly legible duplicate originals or true copies of the judgments or final orders of both lower
courts, certified correct by the clerk of court of the Regional Trial Court, the requisite number of plain copies
thereof and of the pleadings and other material portions of the record as would support the allegations of the
petition. (Emphasis supplied)
xxxx
Under Section 3 of the same Rule, failure to comply with the above requirements "shall be sufficient ground for
the dismissal thereof."
However, Section 6, Rule 1 of the Revised Rules of Court also provides that rules shall be liberally construed in
order to promote their objective of securing a just, speedy and inexpensive disposition of every action and
proceeding. Indeed, rules of procedure should be used to promote, not frustrate justice.21
In the present case, petitioner's submission of copies of the RTC Decision and Order certified as correct by the
Administrative Officer IV of the RTC is insufficient compliance with the requirements of the rule. Petitioner
failed to show that the Clerk of Court was officially on leave and the Administrative Officer was officially

designated as officer-in-charge. The rule is explicit in its mandate that the legible duplicate originals or true
copies of the judgments or final orders of both lower courts must be certified correct by the Clerk of Court.
Nonetheless, a strict application of the rule in this case is not called for. This Court has ruled against the
dismissal of appeals based solely on technicalities in several cases, especially when the appellant had
substantially complied with the formal requirements.22 There is ample jurisprudence holding that the subsequent
and substantial compliance of a party may call for the relaxation of the rules of procedure.23 When the CA
dismisses a petition outright and the petitioner files a motion for the reconsideration of such dismissal,
appending thereto the requisite pleadings, documents or order/resolution, this would constitute substantial
compliance with the Revised Rules of Court.24
Thus, in the present case, there was substantial compliance when petitioner attached in her Motion for
Reconsideration a photocopy of the Decision of the RTC as certified correct by the Clerk of Court of the RTC.
In like manner, there was substantial compliance when petitioner attached, in her Motion for Reconsideration, a
photocopy of the Decision of the MeTC as certified correct by the Clerk of Court of the RTC.
On the necessity of attaching position papers and affidavits of witnesses, Section 2 of Rule 42 of the Revised
Rules of Court requires attachments if these would support the allegations of the petition.25 In the present case,
there was no compelling need to attach the position papers of the parties since the Decisions of the MeTC and
RTC already stated their respective arguments. As to the affidavits, the Court notes that they were presented by
the respondent as part of the testimony of his witness Fire Investigator Pinca and therefore would not support
the allegations of the petitioner.
Truly, in dismissing the petition for review, the CA had committed grave abuse of discretion amounting to lack
of jurisdiction in putting a premium on technicalities at the expense of a just resolution of the case.
The Court's pronouncement in Republic of the Philippines v. Court of Appeals26 is worth echoing: "cases should
be determined on the merits, after full opportunity to all parties for ventilation of their causes and defenses,
rather than on technicality or some procedural imperfections. In that way, the ends of justice would be better
served."27 Thus, what should guide judicial action is that a party litigant is given the fullest opportunity to
establish the merits of his action or defense rather than for him to lose life, honor or property on mere
technicalities.28
The next most logical step would then be for the Court to simply set aside the challenged resolutions, remand
the case to the CA and direct the latter to resolve on the merits of the petition in CA-G.R. SP No. 58799. But,
that would further delay the case. Considering the issues raised which can be resolved on the basis of the
pleadings and documents filed, and the fact that petitioner herself has asked the Court to decide her petition on
the merits, the Court deems it more practical and in the greater interest of justice not to remand the case to the
CA but, instead, to resolve the controversy once and for all.29
The Court shall now address the issue of whether the fire was a fortuitous event.
Jurisprudence defines the elements of a "fortuitous event" as follows: (a) the cause of the unforeseen and
unexpected occurrence must be independent of human will; (b) it must be impossible to foresee the event which
constitutes the caso fortuito, or if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be

such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the obligor
must be free from any participation in the aggravation of the injury resulting to the creditor. 30
Article 1174 of the Civil Code provides that no person shall be responsible for a fortuitous event which could
not be foreseen, or which, though foreseen, was inevitable. In other words, there must be an entire exclusion of
human agency from the cause of injury or loss.31
It is established by evidence that the fire originated from leaking fumes from the LPG stove and tank installed at
petitioner's fastfood stall and her employees failed to prevent the fire from spreading and destroying the other
fastfood stalls, including respondent's fastfood stall. Such circumstances do not support petitioner's theory of
fortuitous event.
Petitioner's bare allegation is far from sufficient proof for the Court to rule in her favor. It is basic in the rule of
evidence that bare allegations, unsubstantiated by evidence, are not equivalent to proof.32 In short, mere
allegations are not evidence.33
The Civil Code provides:
Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to
pay for the damage done. x x x
Art. 2180. 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.
xxxx
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.
xxxx
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.
Whenever an employee's negligence causes damage or injury to another, there instantly arises a presumption
juris tantum that the employer failed to exercise diligentissimi patris families in the selection (culpa in
eligiendo) or supervision (culpa in vigilando) of its employees.34 To avoid liability for a quasi-delict committed
by his employee, an employer must overcome the presumption by presenting convincing proof that he exercised
the care and diligence of a good father of a family in the selection and supervision of his employee.35
In this case, petitioner not only failed to show that she submitted proof that the LPG stove and tank in her
fastfood stall were maintained in good condition and periodically checked for defects but she also failed to
submit proof that she exercised the diligence of a good father of a family in the selection and supervision of her

employees. For failing to prove care and diligence in the maintenance of her cooking equipment and in the
selection and supervision of her employees, the necessary inference was that petitioner had been negligent.36
As to the award of temperate damages, the increase in the amount thereof by the RTC is improper. The RTC
could no longer examine the amounts awarded by the MeTC since respondent did not appeal from the Decision
of the MeTC.37 It is well-settled that a party who does not appeal from the decision may not obtain any
affirmative relief from the appellate court other than what he has obtained from the lower court, if any, whose
decision is brought up on appeal.38 While there are exceptions to this rule, such as if they involve (1) errors
affecting the lower court's jurisdiction over the subject matter, (2) plain errors not specified, and (3) clerical
errors,39 none apply here.
WHEREFORE, the petition is GRANTED. The assailed Resolutions dated June 16, 2000 and November 27,
2000 of the Court of Appeals are REVERSED and SET ASIDE. The Decision dated November 26, 1999 of the
Regional Trial Court, Branch 43, Manila is AFFIRMED with MODIFICATION that the temperate damages
awarded is reduced from P80,000.00 to P50,000.00 as awarded by the Metropolitan Trial Court, Branch 24,
Manila in its Decision dated April 5, 1999.
No costs.
SO ORDERED.

#12
G.R. No. 147324

May 25, 2004

PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, petitioner,

vs.
GLOBE TELECOM, INC. (formerly Globe Mckay Cable and Radio Corporation), respondents.
x-----------------------------x
GLOBE TELECOM, INC., petitioner,
vs.
PHILIPPINE COMMUNICATION SATELLITE CORPORATION, respondent.
DECISION
TINGA, J.:
Before the Court are two Petitions for Review assailing the Decision of the Court of Appeals, dated 27 February
2001, in CA-G.R. CV No. 63619.1

The facts of the case are undisputed.

For several years prior to 1991, Globe Mckay Cable and Radio Corporation, now Globe Telecom, Inc. (Globe),
had been engaged in the coordination of the provision of various communication facilities for the military bases
of the United States of America (US) in Clark Air Base, Angeles, Pampanga and Subic Naval Base in Cubi
Point, Zambales. The said communication facilities were installed and configured for the exclusive use of the
US Defense Communications Agency (USDCA), and for security reasons, were operated only by its personnel
or those of American companies contracted by it to operate said facilities. The USDCA contracted with said
American companies, and the latter, in turn, contracted with Globe for the use of the communication facilities.
Globe, on the other hand, contracted with local service providers such as the Philippine Communications
Satellite Corporation (Philcomsat) for the provision of the communication facilities.
On 07 May 1991, Philcomsat and Globe entered into an Agreement whereby Philcomsat obligated itself to
establish, operate and provide an IBS Standard B earth station (earth station) within Cubi Point for the exclusive
use of the USDCA.2 The term of the contract was for 60 months, or five (5) years.3 In turn, Globe promised to
pay Philcomsat monthly rentals for each leased circuit involved.4
At the time of the execution of the Agreement, both parties knew that the Military Bases Agreement between
the Republic of the Philippines and the US (RP-US Military Bases Agreement), which was the basis for the
occupancy of the Clark Air Base and Subic Naval Base in Cubi Point, was to expire in 1991. Under Section 25,
Article XVIII of the 1987 Constitution, foreign military bases, troops or facilities, which include those located
at the US Naval Facility in Cubi Point, shall not be allowed in the Philippines unless a new treaty is duly
concurred in by the Senate and ratified by a majority of the votes cast by the people in a national referendum
when the Congress so requires, and such new treaty is recognized as such by the US Government.
Subsequently, Philcomsat installed and established the earth station at Cubi Point and the USDCA made use of
the same.
On 16 September 1991, the Senate passed and adopted Senate Resolution No. 141, expressing its decision not to
concur in the ratification of the Treaty of Friendship, Cooperation and Security and its Supplementary
Agreements that was supposed to extend the term of the use by the US of Subic Naval Base, among others.5 The
last two paragraphs of the Resolution state:
FINDING that the Treaty constitutes a defective framework for the continuing relationship between the
two countries in the spirit of friendship, cooperation and sovereign equality: Now, therefore, be it
Resolved by the Senate, as it is hereby resolved, To express its decision not to concur in the ratification
of the Treaty of Friendship, Cooperation and Security and its Supplementary Agreements, at the same
time reaffirming its desire to continue friendly relations with the government and people of the United
States of America.6
On 31 December 1991, the Philippine Government sent a Note Verbale to the US Government through the US
Embassy, notifying it of the Philippines termination of the RP-US Military Bases Agreement. The Note Verbale
stated that since the RP-US Military Bases Agreement, as amended, shall terminate on 31 December 1992, the
withdrawal of all US military forces from Subic Naval Base should be completed by said date.

In a letter dated 06 August 1992, Globe notified Philcomsat of its intention to discontinue the use of the earth
station effective 08 November 1992 in view of the withdrawal of US military personnel from Subic Naval Base
after the termination of the RP-US Military Bases Agreement. Globe invoked as basis for the letter of
termination Section 8 (Default) of the Agreement, which provides:
Neither party shall be held liable or deemed to be in default for any failure to perform its obligation
under this Agreement if such failure results directly or indirectly from force majeure or fortuitous event.
Either party is thus precluded from performing its obligation until such force majeure or fortuitous event
shall terminate. For the purpose of this paragraph, force majeure shall mean circumstances beyond the
control of the party involved including, but not limited to, any law, order, regulation, direction or request
of the Government of the Philippines, strikes or other labor difficulties, insurrection riots, national
emergencies, war, acts of public enemies, fire, floods, typhoons or other catastrophies or acts of God.
Philcomsat sent a reply letter dated 10 August 1992 to Globe, stating that "we expect [Globe] to know its
commitment to pay the stipulated rentals for the remaining terms of the Agreement even after [Globe] shall
have discontinue[d] the use of the earth station after November 08, 1992."7 Philcomsat referred to Section 7 of
the Agreement, stating as follows:
7. DISCONTINUANCE OF SERVICE
Should [Globe] decide to discontinue with the use of the earth station after it has been put into operation,
a written notice shall be served to PHILCOMSAT at least sixty (60) days prior to the expected date of
termination. Notwithstanding the non-use of the earth station, [Globe] shall continue to pay
PHILCOMSAT for the rental of the actual number of T1 circuits in use, but in no case shall be less than
the first two (2) T1 circuits, for the remaining life of the agreement. However, should PHILCOMSAT
make use or sell the earth station subject to this agreement, the obligation of [Globe] to pay the rental for
the remaining life of the agreement shall be at such monthly rate as may be agreed upon by the parties.8
After the US military forces left Subic Naval Base, Philcomsat sent Globe a letter dated 24 November 1993
demanding payment of its outstanding obligations under the Agreement amounting to US$4,910,136.00 plus
interest and attorneys fees. However, Globe refused to heed Philcomsats demand.
On 27 January 1995, Philcomsat filed with the Regional Trial Court of Makati a Complaint against Globe,
praying that the latter be ordered to pay liquidated damages under the Agreement, with legal interest, exemplary
damages, attorneys fees and costs of suit. The case was raffled to Branch 59 of said court.
Globe filed an Answer to the Complaint, insisting that it was constrained to end the Agreement due to the
termination of the RP-US Military Bases Agreement and the non-ratification by the Senate of the Treaty of
Friendship and Cooperation, which events constituted force majeure under the Agreement. Globe explained that
the occurrence of said events exempted it from paying rentals for the remaining period of the Agreement.
On 05 January 1999, the trial court rendered its Decision, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Ordering the defendant to pay the plaintiff the amount of Ninety Two Thousand Two Hundred
Thirty Eight US Dollars (US$92,238.00) or its equivalent in Philippine Currency (computed at
the exchange rate prevailing at the time of compliance or payment) representing rentals for the
month of December 1992 with interest thereon at the legal rate of twelve percent (12%) per
annum starting December 1992 until the amount is fully paid;
2. Ordering the defendant to pay the plaintiff the amount of Three Hundred Thousand
(P300,000.00) Pesos as and for attorneys fees;
3. Ordering the DISMISSAL of defendants counterclaim for lack of merit; and
4. With costs against the defendant.
SO ORDERED.9
Both parties appealed the trial courts Decision to the Court of Appeals.
Philcomsat claimed that the trial court erred in ruling that: (1) the non-ratification by the Senate of the Treaty of
Friendship, Cooperation and Security and its Supplementary Agreements constitutes force majeure which
exempts Globe from complying with its obligations under the Agreement; (2) Globe is not liable to pay the
rentals for the remainder of the term of the Agreement; and (3) Globe is not liable to Philcomsat for exemplary
damages.
Globe, on the other hand, contended that the RTC erred in holding it liable for payment of rent of the earth
station for December 1992 and of attorneys fees. It explained that it terminated Philcomsats services on 08
November 1992; hence, it had no reason to pay for rentals beyond that date.
On 27 February 2001, the Court of Appeals promulgated its Decision dismissing Philcomsats appeal for lack of
merit and affirming the trial courts finding that certain events constituting force majeure under Section 8 the
Agreement occurred and justified the non-payment by Globe of rentals for the remainder of the term of the
Agreement.
The appellate court ruled that the non-ratification by the Senate of the Treaty of Friendship, Cooperation and
Security, and its Supplementary Agreements, and the termination by the Philippine Government of the RP-US
Military Bases Agreement effective 31 December 1991 as stated in the Philippine Governments Note Verbale to
the US Government, are acts, directions, or requests of the Government of the Philippines which constitute
force majeure. In addition, there were circumstances beyond the control of the parties, such as the issuance of a
formal order by Cdr. Walter Corliss of the US Navy, the issuance of the letter notification from ATT and the
complete withdrawal of all US military forces and personnel from Cubi Point, which prevented further use of
the earth station under the Agreement.
However, the Court of Appeals ruled that although Globe sought to terminate Philcomsats services by 08
November 1992, it is still liable to pay rentals for the December 1992, amounting to US$92,238.00 plus interest,
considering that the US military forces and personnel completely withdrew from Cubi Point only on 31
December 1992.10

Both parties filed their respective Petitions for Review assailing the Decision of the Court of Appeals.
In G.R. No. 147324,11 petitioner Philcomsat raises the following assignments of error:
A. THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING A DEFINITION OF FORCE
MAJEURE DIFFERENT FROM WHAT ITS LEGAL DEFINITION FOUND IN ARTICLE 1174 OF
THE CIVIL CODE, PROVIDES, SO AS TO EXEMPT GLOBE TELECOM FROM COMPLYING
WITH ITS OBLIGATIONS UNDER THE SUBJECT AGREEMENT.
B. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS
NOT LIABLE TO PHILCOMSAT FOR RENTALS FOR THE REMAINING TERM OF THE
AGREEMENT, DESPITE THE CLEAR TENOR OF SECTION 7 OF THE AGREEMENT.
C. THE HONORABLE OCURT OF APPEALS ERRED IN DELETING THE TRIAL COURTS
AWARD OF ATTORNEYS FEES IN FAVOR OF PHILCOMSAT.
D. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS
NOT LIABLE TO PHILCOMSAT FOR EXEMPLARY DAMAGES.12
Philcomsat argues that the termination of the RP-US Military Bases Agreement cannot be considered a
fortuitous event because the happening thereof was foreseeable. Although the Agreement was freely entered
into by both parties, Section 8 should be deemed ineffective because it is contrary to Article 1174 of the Civil
Code. Philcomsat posits the view that the validity of the parties definition of force majeure in Section 8 of the
Agreement as "circumstances beyond the control of the party involved including, but not limited to, any law,
order, regulation, direction or request of the Government of the Philippines, strikes or other labor difficulties,
insurrection riots, national emergencies, war, acts of public enemies, fire, floods, typhoons or other
catastrophies or acts of God," should be deemed subject to Article 1174 which defines fortuitous events as
events which could not be foreseen, or which, though foreseen, were inevitable.13
Philcomsat further claims that the Court of Appeals erred in holding that Globe is not liable to pay for the rental
of the earth station for the entire term of the Agreement because it runs counter to what was plainly stipulated
by the parties in Section 7 thereof. Moreover, said ruling is inconsistent with the appellate courts
pronouncement that Globe is liable to pay rentals for December 1992 even though it terminated Philcomsats
services effective 08 November 1992, because the US military and personnel completely withdrew from Cubi
Point only in December 1992. Philcomsat points out that it was Globe which proposed the five-year term of the
Agreement, and that the other provisions of the Agreement, such as Section 4.114 thereof, evince the intent of
Globe to be bound to pay rentals for the entire five-year term.15
Philcomsat also maintains that contrary to the appellate courts findings, it is entitled to attorneys fees and
exemplary damages.16
In its Comment to Philcomsats Petition, Globe asserts that Section 8 of the Agreement is not contrary to Article
1174 of the Civil Code because said provision does not prohibit parties to a contract from providing for other
instances when they would be exempt from fulfilling their contractual obligations. Globe also claims that the
termination of the RP-US Military Bases Agreement constitutes force majeure and exempts it from complying
with its obligations under the Agreement.17 On the issue of the propriety of awarding attorneys fees and

exemplary damages to Philcomsat, Globe maintains that Philcomsat is not entitled thereto because in refusing to
pay rentals for the remainder of the term of the Agreement, Globe only acted in accordance with its rights.18
In G.R. No. 147334,19 Globe, the petitioner therein, contends that the Court of Appeals erred in finding it liable
for the amount of US$92,238.00, representing rentals for December 1992, since Philcomsats services were
actually terminated on 08 November 1992.20
In its Comment, Philcomsat claims that Globes petition should be dismissed as it raises a factual issue which is
not cognizable by the Court in a petition for review on certiorari.21
On 15 August 2001, the Court issued a Resolution giving due course to Philcomsats Petition in G.R. No.
147324 and required the parties to submit their respective memoranda.22
Similarly, on 20 August 2001, the Court issued a Resolution giving due course to the Petition filed by Globe in
G.R. No. 147334 and required both parties to submit their memoranda.23
Philcomsat and Globe thereafter filed their respective Consolidated Memoranda in the two cases, reiterating
their arguments in their respective petitions.
The Court is tasked to resolve the following issues: (1) whether the termination of the RP-US Military Bases
Agreement, the non-ratification of the Treaty of Friendship, Cooperation and Security, and the consequent
withdrawal of US military forces and personnel from Cubi Point constitute force majeure which would exempt
Globe from complying with its obligation to pay rentals under its Agreement with Philcomsat; (2) whether
Globe is liable to pay rentals under the Agreement for the month of December 1992; and (3) whether
Philcomsat is entitled to attorneys fees and exemplary damages.
No reversible error was committed by the Court of Appeals in issuing the assailed Decision; hence the petitions
are denied.
There is no merit is Philcomsats argument that Section 8 of the Agreement cannot be given effect because the
enumeration of events constituting force majeure therein unduly expands the concept of a fortuitous event under
Article 1174 of the Civil Code and is therefore invalid.
In support of its position, Philcomsat contends that under Article 1174 of the Civil Code, an event must be
unforeseen in order to exempt a party to a contract from complying with its obligations therein. It insists that
since the expiration of the RP-US Military Bases Agreement, the non-ratification of the Treaty of Friendship,
Cooperation and Security and the withdrawal of US military forces and personnel from Cubi Point were not
unforeseeable, but were possibilities known to it and Globe at the time they entered into the Agreement, such
events cannot exempt Globe from performing its obligation of paying rentals for the entire five-year term
thereof.
However, Article 1174, which exempts an obligor from liability on account of fortuitous events or force
majeure, refers not only to events that are unforeseeable, but also to those which are foreseeable, but
inevitable:

Art. 1174. Except in cases specified by the law, or when it is otherwise declared by stipulation, or when
the nature of the obligation requires the assumption of risk, no person shall be responsible for those
events which, could not be foreseen, or which, though foreseen were inevitable.
A fortuitous event under Article 1174 may either be an "act of God," or natural occurrences such as floods or
typhoons,24 or an "act of man," such as riots, strikes or wars.25
Philcomsat and Globe agreed in Section 8 of the Agreement that the following events shall be deemed events
constituting force majeure:
1. Any law, order, regulation, direction or request of the Philippine Government;
2. Strikes or other labor difficulties;
3. Insurrection;
4. Riots;
5. National emergencies;
6. War;
7. Acts of public enemies;
8. Fire, floods, typhoons or other catastrophies or acts of God;
9. Other circumstances beyond the control of the parties.
Clearly, the foregoing are either unforeseeable, or foreseeable but beyond the control of the parties. There is
nothing in the enumeration that runs contrary to, or expands, the concept of a fortuitous event under Article
1174.
Furthermore, under Article 130626 of the Civil Code, parties to a contract may establish such stipulations,
clauses, terms and conditions as they may deem fit, as long as the same do not run counter to the law, morals,
good customs, public order or public policy.27
Article 1159 of the Civil Code also provides that "[o]bligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith."28 Courts cannot stipulate for the
parties nor amend their agreement where the same does not contravene law, morals, good customs, public order
or public policy, for to do so would be to alter the real intent of the parties, and would run contrary to the
function of the courts to give force and effect thereto.29
Not being contrary to law, morals, good customs, public order, or public policy, Section 8 of the Agreement
which Philcomsat and Globe freely agreed upon has the force of law between them.30
In order that Globe may be exempt from non-compliance with its obligation to pay rentals under Section 8, the
concurrence of the following elements must be established: (1) the event must be independent of the human

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

From the foregoing, the Court finds that the defendant is exempted from paying the rentals for the
facility for the remaining term of the contract.
As a consequence of the termination of the RP-US Military Bases Agreement (as amended) the
continued stay of all US Military forces and personnel from Subic Naval Base would no longer be
allowed, hence, plaintiff would no longer be in any position to render the service it was obligated under
the Agreement. To put it blantly (sic), since the US military forces and personnel left or withdrew from
Cubi Point in the year end December 1992, there was no longer any necessity for the plaintiff to
continue maintaining the IBS facility. 32 (Emphasis in the original.)
The aforementioned events made impossible the continuation of the Agreement until the end of its five-year
term without fault on the part of either party. The Court of Appeals was thus correct in ruling that the happening
of such fortuitous events rendered Globe exempt from payment of rentals for the remainder of the term of the
Agreement.

Moreover, it would be unjust to require Globe to continue paying rentals even though Philcomsat cannot be
compelled to perform its corresponding obligation under the Agreement. As noted by the appellate court:
We also point out the sheer inequity of PHILCOMSATs position. PHILCOMSAT would like to charge
GLOBE rentals for the balance of the lease term without there being any corresponding
telecommunications service subject of the lease. It will be grossly unfair and iniquitous to hold GLOBE
liable for lease charges for a service that was not and could not have been rendered due to an act of the
government which was clearly beyond GLOBEs control. The binding effect of a contract on both
parties is based on the principle that the obligations arising from contracts have the force of law between
the contracting parties, and there must be mutuality between them based essentially on their equality
under which it is repugnant to have one party bound by the contract while leaving the other party free
therefrom (Allied Banking Corporation v. Court of Appeals, 284 SCRA 357).33
With respect to the issue of whether Globe is liable for payment of rentals for the month of December 1992, the
Court likewise affirms the appellate courts ruling that Globe should pay the same.
Although Globe alleged that it terminated the Agreement with Philcomsat effective 08 November 1992 pursuant
to the formal order issued by Cdr. Corliss of the US Navy, the date when they actually ceased using the earth
station subject of the Agreement was not established during the trial.34 However, the trial court found that the
US military forces and personnel completely withdrew from Cubi Point only on 31 December 1992.35 Thus,
until that date, the USDCA had control over the earth station and had the option of using the same. Furthermore,
Philcomsat could not have removed or rendered ineffective said communication facility until after 31 December
1992 because Cubi Point was accessible only to US naval personnel up to that time. Hence, the Court of
Appeals did not err when it affirmed the trial courts ruling that Globe is liable for payment of rentals until
December 1992.
Neither did the appellate court commit any error in holding that Philcomsat is not entitled to attorneys fees and
exemplary damages.
The award of attorneys fees is the exception rather than the rule, and must be supported by factual, legal and
equitable justifications.36 In previously decided cases, the Court awarded attorneys fees where a party acted in
gross and evident bad faith in refusing to satisfy the other partys claims and compelled the former to litigate to
protect his rights;37 when the action filed is clearly unfounded,38 or where moral or exemplary damages are
awarded.39 However, in cases where both parties have legitimate claims against each other and no party actually
prevailed, such as in the present case where the claims of both parties were sustained in part, an award of
attorneys fees would not be warranted.40
Exemplary damages may be awarded in cases involving contracts or quasi-contracts, if the erring party acted in
a wanton, fraudulent, reckless, oppressive or malevolent manner.41 In the present case, it was not shown that
Globe acted wantonly or oppressively in not heeding Philcomsats demands for payment of rentals. It was
established during the trial of the case before the trial court that Globe had valid grounds for refusing to comply
with its contractual obligations after 1992.
WHEREFORE, the Petitions are DENIED for lack of merit. The assailed Decision of the Court of Appeals in
CA-G.R. CV No. 63619 is AFFIRMED.

SO ORDERED.

#13
G.R. No. 196251

July 9, 2014

OLIVAREZ REALTY CORPORATION and DR. PABLO R. OLIVAREZ, Petitioner,

vs.
BENJAMIN CASTILLO, Respondent.
DECISION
LEONEN, J.:
Trial may be dispensed with and a summary judgment rendered if the case can be resolved judiciously by plain
resort to the pleadings, affidavits, depositions, and other papers filed by the parties.
This is a petition for review on certiorari1 of the Court of Appeals' decision2 dated July 20, 2010 and
resolution3 dated March 18, 2011 in CAG.R. CV No. 91244.
The facts as established from the pleadings of the parties are as follows:
Benjamin Castillo was the registered owner of a 346,918-squaremeter parcel of land located in Laurel,
Batangas, covered by Transfer Certificate of Title No. T-19972.4 The Philippine Tourism Authority allegedly
claimed ownership of the sameparcel of land based on Transfer Certificate of Title No. T-18493.5 On April 5,
2000, Castillo and Olivarez Realty Corporation, represented by Dr. Pablo R. Olivarez, entered into a contract of
conditional sale6 over the property. Under the deed of conditional sale, Castillo agreed to sell his property to
Olivarez Realty Corporation for P19,080,490.00. Olivarez Realty Corporation agreed toa down payment of
P5,000,000.00, to be paid according to the following schedule:
DATE

AMOUNT

April 8, 2000

500,000.00

May 8, 2000

500,000.00

May 16, 2000

500,000.00

June 8, 2000

1,000,000.00

July 8, 2000

500,000.00

August 8, 2000

500,000.00

September 8, 2000

500,000.00

October 8, 2000

500,000.00

November 8, 2000

500,000.00

As to the balance of P14,080,490.00, Olivarez Realty Corporation agreed to pay in 30 equal monthly
installments every eighth day of the month beginning in the month that the parties would receive a decision
voiding the Philippine Tourism Authoritys title to the property.8 Under the deed of conditional sale, Olivarez
RealtyCorporation shall file the action against the Philippine Tourism Authority "with the full assistance of
[Castillo]."9 Paragraph C of the deed of conditional sale provides:
C. [Olivarez Realty Corporation] assumes the responsibility of taking necessary legal action thru Court to have
the claim/title TCT T-18493 of Philippine Tourism Authority over the above-described property be nullified and
voided; with the full assistance of [Castillo][.]10
Should the action against the Philippine Tourism Authority be denied, Castillo agreed to reimburse all the
amounts paid by Olivarez Realty Corporation. Paragraph D of the deed of conditional sale provides:
D. In the event that the Court denie[s] the petition against the Philippine Tourism Authority, all sums received
by [Castillo] shall be reimbursed to [Olivarez Realty Corporation] without interest[.]11
As to the "legitimate tenants" occupying the property, Olivarez Realty Corporation undertook to pay them
"disturbance compensation," while Castillo undertook to clear the land of the tenants within six months from the
signing of the deed of conditional sale. Should Castillo fail to clear the land within six months, Olivarez Realty
Corporation may suspend its monthly down payment until the tenants vacate the property. Paragraphs E and F
of the deed of conditional sale provide: E. That [Olivarez Realty Corporation] shall pay the disturbance
compensation to legitimate agricultural tenants and fishermen occupants which in no case shall exceed ONE
MILLION FIVE HUNDRED THOUSAND (P1,500,000.00) PESOS. Said amountshall not form part of the
purchase price. In excess of this amount, all claims shall be for the account of [Castillo];
F. That [Castillo] shall clear the land of [the] legitimate tenants within a period of six (6) months upon signing
of this Contract, and in case [Castillo] fails, [Olivarez Realty Corporation] shall have the right to suspend the
monthly down payment until such time that the tenants [move] out of the land[.]12
The parties agreed thatOlivarez Realty Corporation may immediately occupy the property upon signing of the
deed of conditional sale. Should the contract be cancelled, Olivarez RealtyCorporation agreed to return the
propertys possession to Castillo and forfeit all the improvements it may have introduced on the property.
Paragraph I of the deed of conditional sale states:
I. Immediately upon signing thisContract, [Olivarez Realty Corporation] shall be entitled to occupy, possess and
develop the subject property. In case this Contract is canceled [sic], any improvement introduced by [the
corporation] on the property shall be forfeited in favor of [Castillo][.]13
On September 2, 2004, Castillo filed a complaint14 against Olivarez Realty Corporation and Dr. Olivarez with
the Regional Trial Court of Tanauan City, Batangas.
Castillo alleged that Dr. Olivarez convinced him into selling his property to Olivarez Realty Corporation on the
representation that the corporation shall be responsible in clearing the property of the tenants and in paying
them disturbance compensation. He further alleged that Dr. Olivarez solely prepared the deed of conditional
sale and that he was made to sign the contract with its terms "not adequately explained [to him] in Tagalog."15
After the parties had signed the deed of conditional sale, Olivarez Realty Corporation immediately took
possession of the property. However, the corporation only paid 2,500,000.00 ofthe purchase price. Contrary to
the agreement, the corporation did not file any action against the Philippine Tourism Authority to void the
latters title to the property. The corporation neither cleared the land of the tenants nor paid them disturbance
compensation. Despite demand, Olivarez Realty Corporation refused to fully pay the purchase price.16

Arguing that Olivarez Realty Corporation committed substantial breach of the contract of conditional sale and
that the deed of conditional sale was a contract of adhesion, Castillo prayed for rescission of contract under
Article 1191 of the Civil Code of the Philippines. He further prayed that Olivarez Realty Corporation and Dr.
Olivarez be made solidarily liable for moral damages, exemplary damages, attorneys fees, and costs of suit.17
In their answer,18 Olivarez Realty Corporation and Dr. Olivarez admitted that the corporation only paid
P2,500,000.00 ofthe purchase price. In their defense, defendants alleged that Castillo failed to "fully assist"19
the corporation in filing an action against the Philippine Tourism Authority. Neither did Castillo clear the
property of the tenants within six months from the signing of the deed of conditional sale. Thus, according to
defendants, the corporation had "all the legal right to withhold the subsequent payments to [fully pay] the
purchase price."20
Olivarez Realty Corporation and Dr. Olivarez prayedthat Castillos complaint be dismissed. By way of
compulsory counterclaim, they prayed for P100,000.00 litigation expenses and P50,000.00 attorneys fees.21
Castillo replied to the counterclaim,22 arguing that Olivarez Realty Corporation and Dr. Olivarez had no right
to litigation expenses and attorneys fees. According to Castillo, the deed of conditional sale clearly states that
the corporation "assume[d] the responsibility of taking necessary legal action"23 against the Philippine Tourism
Authority, yet the corporation did not file any case. Also, the corporation did not pay the tenants disturbance
compensation. For the corporations failure to fully pay the purchase price, Castillo claimed that hehad "all the
right to pray for the rescission of the [contract],"24 and he "should not be held liable . . . for any alleged
damages by way of litigation expenses and attorneys fees."25
On January 10, 2005, Castillo filed a request for admission,26 requesting Dr. Olivarez to admit under oath the
genuineness of the deed of conditional sale and Transfer Certificate of Title No. T-19972. He likewise requested
Dr. Olivarez to admit the truth of the following factual allegations:
1. That Dr. Olivarez is the president of Olivarez Realty Corporation;
2. That Dr. Olivarez offered to purchase the parcel of land from Castillo and that he undertook to clear
the property of the tenants and file the court action to void the Philippine Tourism Authoritys title to the
property;
3. That Dr. Olivarez caused the preparation of the deed of conditional sale;
4. That Dr. Olivarez signed the deed of conditional sale for and on behalf of Olivarez Realty
Corporation;
5. That Dr. Olivarez and the corporation did not file any action against the Philippine Tourism Authority;
6. That Dr. Olivarez and the corporation did not pay the tenants disturbance compensation and failed to
clear the property of the tenants; and
7. That Dr. Olivarez and the corporation only paid P2,500,000.00 of the agreed purchase price.27
On January 25, 2005, Dr. Olivarez and Olivarez Realty Corporation filed their objections to the request for
admission,28 stating that they "reiterate[d] the allegations [and denials] in their [answer]."29
The trial court conducted pre-trial conference on December 17, 2005.

On March 8, 2006, Castillo filed a motion for summary judgment and/or judgment on the pleadings.30 He
argued that Olivarez Realty Corporation and Dr. Olivarez "substantially admitted the material allegations of
[his] complaint,"31 specifically:
1. That the corporation failed to fully pay the purchase price for his property;32
2. That the corporation failed to file an action to void the Philippine Tourism Authoritys title to his
property;33 and
3. That the corporation failed to clear the property of the tenants and pay them disturbance
compensation.34
Should judgment on the pleadings beimproper, Castillo argued that summary judgment may still be rendered
asthere is no genuine issue as to any material fact.35 He cited Philippine National Bank v. Noahs Ark Sugar
Refinery36 as authority.
Castillo attached to his motion for summary judgment and/or judgment on the pleadings his affidavit37 and the
affidavit of a Marissa Magsino38 attesting to the truth of the material allegations of his complaint.
Olivarez Realty Corporation and Dr. Olivarez opposed39 the motion for summary judgment and/or judgment on
the pleadings, arguing that the motion was "devoid of merit."40 They reiterated their claim that the corporation
withheld further payments of the purchase price because "there ha[d] been no favorable decision voiding the
title of the Philippine Tourism Authority."41 They added that Castillo sold the property to another person and
that the sale was allegedly litigated in Quezon City.42
Considering that a title adverse to that of Castillos existed, Olivarez Realty Corporation and Dr. Olivarez
argued that the case should proceed to trial and Castillo be required to prove that his title to the property is "not
spurious or fake and that he had not sold his property to another person."43
In reply to the opposition to the motion for summary judgment and/or judgment on the pleadings,44 Castillo
maintained that Olivarez Realty Corporation was responsible for the filing of an action against the Philippine
Tourism Authority. Thus, the corporation could not fault Castillo for not suing the PhilippineTourism
Authority.45 The corporation illegally withheld payments of the purchase price.
As to the claim that the case should proceed to trial because a title adverse to his title existed, Castillo argued
that the Philippine Tourism Authoritys title covered another lot, not his property.46
During the hearing on August 3, 2006, Olivarez Realty Corporation and Dr. Olivarez prayed that they be given
30 days to file a supplemental memorandum on Castillos motion for summary judgment and/or judgment on
the pleadings.47
The trial court granted the motion. Itgave Castillo 20 days to reply to the memorandum and the corporation and
Dr. Olivarez 15 days to respond to Castillos reply.48
In their supplemental memorandum,49 Olivarez Realty Corporation and Dr. Olivarez argued that there was "an
obvious ambiguity"50 as to which should occur first the payment of disturbance compensation to the tenants
or the clearing of the property of the tenants.51 This ambiguity, according to defendants, is a genuine issue and
"oughtto be threshed out in a full blown trial."52
Olivarez Realty Corporation and Dr. Olivarez added that Castillo prayed for irreconcilable reliefs of reformation
of instrument and rescission of contract.53 Thus, Castillos complaint should be dismissed.

Castillo replied54 to the memorandum, arguing that there was no genuine issue requiring trial of the case.
According to Castillo, "common sense dictates . . . that the legitimate tenants of the [property] shall not vacate
the premises without being paid any disturbance compensation . . ."55 Thus, the payment of disturbance
compensation should occur first before clearing the property of the tenants.
With respect to the other issuesraised in the supplemental memorandum, specifically, that Castillo sold the
property to another person, he argued that these issues should not be entertained for not having been presented
during pre-trial.56
In their comment on the reply memorandum,57 Olivarez Realty Corporation and Dr. Olivarez reiterated their
arguments that certain provisions of the deed of conditional sale were ambiguous and that the complaint prayed
for irreconcilable reliefs.58
As to the additional issues raised in the supplemental memorandum, defendants argued that issues not raised
and evidence not identified and premarked during pre-trial may still be raised and presented during trial for
good cause shown. Olivarez Realty Corporation and Dr. Olivarez prayed that Castillos complaint be dismissed
for lack of merit.59
Ruling of the trial court
The trial court found that Olivarez Realty Corporation and Dr. Olivarezs answer "substantially [admitted the
material allegations of Castillos] complaint and [did] not . . . raise any genuine issue [as to any material
fact]."60
Defendants admitted that Castillo owned the parcel of land covered by Transfer Certificate of Title No. T-19972.
They likewise admitted the genuineness of the deed of conditional sale and that the corporation only paid
P2,500,000.00 of the agreed purchase price.61
According to the trial court, the corporation was responsible for suing the Philippine Tourism Authority and for
paying the tenants disturbance compensation. Since defendant corporation neither filed any case nor paid the
tenants disturbance compensation, the trial court ruled that defendant corporation had no right to withhold
payments from Castillo.62
As to the alleged ambiguity of paragraphs E and F of the deed of conditional sale, the trial court ruled that
Castillo and his witness, Marissa Magsino, "clearly established"63 in their affidavits that the deed of conditional
sale was a contract of adhesion. The true agreement between the parties was that the corporation would both
clear the land of the tenants and pay them disturbance compensation.
With these findings, the trial court ruled that Olivarez Realty Corporation breached the contract ofconditional
sale.1wphi1 In its decision64 dated April 23, 2007, the trial court ordered the deed of conditional sale
rescinded and the P2,500,000.00 forfeited in favor of Castillo "as damages under Article 1191 of the Civil
Code."65
The trial court declared Olivarez Realty Corporation and Dr. Olivarez solidarily liable to Castillo for 500,000.00
as moral damages, P50,000.00 as exemplary damages, and P50,000.00 as costs of suit.66
Ruling of the Court of Appeals
Olivarez Realty Corporation and Dr. Olivarez appealed to the Court of Appeals.67

In its decision68 dated July 20, 2010, the Court of Appeals affirmed in totothe trial courts decision. According
to the appellate court, the trial court "did not err in its finding that there is no genuine controversy as to the facts
involved [in this case]."69 The trial court, therefore, correctly rendered summary judgment.70
As to the trial courts award of damages, the appellatecourt ruled that a court may award damages through
summary judgment "if the parties contract categorically [stipulates] the respective obligations of the parties in
case of default."71 As found by the trial court,paragraph I of the deed of conditional sale categorically states
that "in case [the deed of conditional sale] is cancelled, any improvementintroduced by [Olivarez Realty
Corporation] on the property shall be forfeited infavor of [Castillo]."72 Considering that Olivarez Realty
Corporation illegally retained possession of the property, Castillo forewent rentto the property and "lost
business opportunities."73 The P2,500,000.00 down payment, according to the appellate court, shouldbe
forfeited in favor of Castillo. Moral and exemplary damages and costs ofsuit were properly awarded.
On August 11, 2010, Olivarez RealtyCorporation and Dr. Olivarez filed their motion for reconsideration,74
arguing that the trial court exceeded its authority in forfeiting the P2,500,000.00 down payment and awarding
P500,000.00 in moral damages to Castillo. They argued that Castillo only prayed for a total of P500,000.00 as
actual and moral damages in his complaint.75 Appellants prayed that the Court of Appeals "take a second hard
look"76 at the case and reconsider its decision.
In the resolution77 dated March 18, 2011, the Court of Appeals denied the motion for reconsideration.
Proceedings before this court
Olivarez Realty Corporation and Dr. Olivarez filed their petition for review on certiorari78 with this court.
Petitionersargue that the trial court and the Court of Appeals erred in awarding damages to Castillo. Under
Section 3, Rule 35 of the 1997 Rules ofCivil Procedure, summary judgment may be rendered except as to the
amountof damages. Thus, the Court of Appeals "violated the procedural steps in rendering summary
judgment."79
Petitioners reiterate that there are genuine issues ofmaterial fact to be resolved in this case. Thus, a full-blown
trial is required, and the trial court prematurely decided the case through summary judgment. They cite Torres v.
Olivarez Realty Corporation and Dr. Pablo Olivarez,80 a case decided by the Ninth Division of the Court of
Appeals.
In Torres, Rosario Torres was the registeredowner of a parcel of land covered by Transfer Certificate of Title
No. T-19971. Under a deed of conditional sale, she sold her property to OlivarezRealty Corporation for
P17,345,900.00. When the corporation failed to fully pay the purchase price, she sued for rescission of
contractwith damages. In their answer, the corporation and Dr. Olivarez argued thatthey discontinued payment
because Rosario Torres failed to clear the land of the tenants.
Similar to Castillo, Torres filed a motion for summary judgment, which the trial court granted. On appeal, the
Court of Appeals set aside the trial courts summary judgment and remanded the case to the trial court for
further proceedings.81 The Court of Appeals ruled that the material allegations of the complaint "were directly
disputed by [the corporation and Dr. Olivarez] in their answer"82 when they argued that they refused to pay
because Torres failed to clear the land of the tenants.
With the Court of Appeals decision in Torres,Olivarez Realty Corporation and Dr. Olivarez argue that this case
should likewise be remanded to the trial court for further proceedings under the equipoise rule.
Petitioners maintain that Castillo availed himself of the irreconcilable reliefs of reformation of instrument and
rescission of contract.83 Thus, the trial court should have dismissed the case outright.

Petitioners likewise argue that the trial court had no jurisdiction to decide the case as Castillo failed topay the
correct docket fees.84 Petitioners argue that Castillo should have paid docket fees based on the propertys fair
market value since Castillos complaint is a real action.85
In his comment,86 Castillo maintains that there are no genuine issues as to any material fact inthis case. The
trial court, therefore, correctly rendered summary judgment.
As to petitioners claim that the trial court had no jurisdiction to decide the case, Castillo argues that he prayed
for rescission of contract in his complaint. This action is incapable of pecuniary estimation, and the Clerk of
Court properly computed the docket fees based on this prayer.87 Olivarez Realty Corporation and Dr. Olivarez
replied,88 reiterating their arguments in the petition for review on certiorari.
The issues for our resolution are the following:
I. Whether the trial court erred in rendering summary judgment;
II. Whether proper docket fees were paid in this case.
The petition lacks merit.
I
The trial court correctly rendered
summary judgment, as there were no
genuine issues of material fact in this case
Trial "is the judicial examination and determination of the issues between the parties to the action."89 During
trial, parties "present their respective evidence of their claims and defenses."90 Parties to an action have the
right "to a plenary trial of the case"91 to ensure that they were given a right to fully present evidence on their
respective claims.
There are instances, however, whentrial may be dispensed with. Under Rule 35 of the 1997 Rules of Civil
Procedure, a trial court may dispense with trial and proceed to decide a case if from the pleadings, affidavits,
depositions, and other papers on file, there is no genuine issue as to any material fact. In such a case, the
judgment issued is called a summary judgment.
A motion for summary judgment is filed either by the claimant or the defending party.92 The trial court then
hears the motion for summary judgment. If indeed there are no genuine issues of material fact, the trial court
shall issue summary judgment. Section 3, Rule 35 of the 1997 Rules of Civil Procedure provides:
SEC. 3. Motion and proceedings thereon. The motion shall be served at least ten (10) days beforethe time
specified for the hearing. The adverse party may serve opposing affidavits, depositions, or admission at least
three (3) days before the hearing. After the hearing, the judgment sought shall be rendered forthwith ifthe
pleadings, supporting affidavits, depositions, and admissions on file, showthat, except as to the amount of
damages, there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as
a matter of law.
An issue of material fact exists if the answer or responsive pleading filed specifically denies the material
allegations of fact set forth in the complaint or pleading. If the issue offact "requires the presentation of
evidence, it is a genuine issue of fact."93 However, if the issue "could be resolved judiciously by plain resort"94

to the pleadings, affidavits, depositions, and other paperson file, the issue of fact raised is sham, and the trial
court may resolve the action through summary judgment.
A summary judgment is usually distinguished from a judgment on the pleadings. Under Rule 34 of the 1997
Rules of Civil Procedure, trial may likewise be dispensed with and a case decided through judgment on the
pleadings if the answer filed fails to tender an issue or otherwise admits the material allegations of the
claimants pleading.95
Judgment on the pleadings is proper when the answer filed fails to tender any issue, or otherwise admitsthe
material allegations in the complaint.96 On the other hand, in a summary judgment, the answer filed tenders
issues as specific denials and affirmative defenses are pleaded, but the issues raised are sham, fictitious, or
otherwise not genuine.97
In this case, Olivarez Realty Corporation admitted that it did not fully pay the purchase price as agreed upon
inthe deed of conditional sale. As to why it withheld payments from Castillo, it set up the following affirmative
defenses: First, Castillo did not filea case to void the Philippine Tourism Authoritys title to the property;
second,Castillo did not clear the land of the tenants; third, Castillo allegedly sold the property to a third person,
and the subsequent sale is currently being litigated beforea Quezon City court.
Considering that Olivarez RealtyCorporation and Dr. Olivarezs answer tendered an issue, Castillo properly
availed himself of a motion for summary judgment.
However, the issues tendered by Olivarez Realty Corporation and Dr. Olivarezs answer are not genuine issues
of material fact. These are issues that can be resolved judiciously by plain resort to the pleadings, affidavits,
depositions, and other papers on file; otherwise, these issues are sham, fictitious, or patently unsubstantial.
Petitioner corporation refused to fully pay the purchase price because no court case was filed to void the
Philippine Tourism Authoritys title on the property. However, paragraph C of the deed of conditional sale is
clear that petitioner Olivarez Realty Corporation is responsible for initiating court action against the Philippine
Tourism Authority:
C. [Olivarez Realty Corporation] assumes the responsibility of taking necessary legal action thru Court to have
the claim/title TCT T-18493 of Philippine Tourism Authority over the above-described property be nullified and
voided; with the full assistance of [Castillo].98
Castillos alleged failureto "fully assist"99 the corporation in filing the case is not a defense. As the trial court
said, "how can [Castillo] assist [the corporation] when [the latter] did not file the action [in the first place?]"100
Neither can Olivarez Realty Corporation argue that it refused to fully pay the purchase price due to the
Philippine Tourism Authoritys adverse claim on the property. The corporation knew of this adverse claim when
it entered into a contract of conditional sale. It even obligated itself under paragraph C of the deed of
conditional sale to sue the Philippine Tourism Authority. This defense, therefore, is sham.
Contrary to petitioners claim, there is no "obvious ambiguity"101 as to which should occur first the payment
of the disturbance compensation or the clearing of the land within six months from the signing of the deed of
conditional sale. The obligations must be performed simultaneously. In this case, the parties should have
coordinated to ensure that tenants on the property were paid disturbance compensation and were made to vacate
the property six months after the signingof the deed of conditional sale.
On one hand, pure obligations, or obligations whose performance do not depend upon a future or
uncertainevent, or upon a past event unknown to the parties, are demandable at once.102 On the other hand,
obligations with a resolutory period also take effect at once but terminate upon arrival of the day certain.103

Olivarez Realty Corporations obligation to pay disturbance compensation is a pure obligation. The
performance of the obligation to pay disturbance compensation did not depend on any condition. Moreover, the
deed of conditional sale did not give the corporation a period to perform the obligation. As such, the obligation
to pay disturbance compensation was demandable at once. Olivarez RealtyCorporation should have paid the
tenants disturbance compensation upon execution of the deed of conditional sale.
With respect to Castillos obligation to clear the land of the tenants within six months from the signing of the
contract, his obligation was an obligation with a resolutory period. The obligation to clear the land of the tenants
took effect at once, specifically, upon the parties signing of the deed of conditional sale. Castillo had until
October 2, 2000, six months from April 5, 2000 when the parties signed the deed of conditional sale, to clear the
land of the tenants.
Olivarez Realty Corporation, therefore, had no right to withhold payments of the purchase price. As the trial
court ruled, Olivarez Realty Corporation "can only claim non-compliance [of the obligation to clear the land of
the tenants in] October 2000."104 It said:
. . . it is clear that defendant [Olivarez Realty Corporation] should have paid the installments on the P5 million
downpayment up to October 8, 2000, or a total of P4,500,000.00. That is the agreement because the only time
that defendant [corporation] can claim non-compliance of the condition is after October, 2000 and so it has the
clear obligation topay up to the October 2000 the agreed installments. Since it paid only 2,500,000.00, then a
violation of the contract has already been committed. . . .105
The claim that Castillo sold the property to another is fictitious and was made in bad faith to prevent the trial
court from rendering summary judgment. Petitioners did not elaborate on this defense and insisted on revealing
the identity of the buyer only during trial.106 Even in their petition for review on certiorari, petitioners never
disclosed the name of this alleged buyer. Thus, as the trial court ruled, this defense did not tender a genuine
issue of fact, with the defense "bereft of details."107
Castillos alleged prayer for the irreconcilable reliefs of rescission of contract and reformation of instrument is
not a ground to dismiss his complaint. A plaintiff may allege two or more claims in the complaint alternatively
or hypothetically, either in one cause of action or in separate causes of action per Section 2, Rule 8 of the 1997
Rules of Civil Procedure.108 It is the filing of two separatecases for each of the causes of action that is
prohibited since the subsequently filed case may be dismissed under Section 4, Rule 2 of the 1997 Rules of
Civil Procedure109 on splitting causes of action.
As demonstrated, there are no genuineissues of material fact in this case. These are issues that can be resolved
judiciously by plain resort to the pleadings, affidavits, depositions, and other papers on file. As the trial court
found, Olivarez Realty Corporation illegally withheld payments of the purchase price. The trial court did not err
in rendering summary judgment.
II
Castillo is entitled to cancel the contract
of conditional sale
Since Olivarez Realty Corporation illegally withheld payments of the purchase price, Castillo is entitled to
cancel his contract with petitioner corporation. However, we properly characterize the parties contract as a
contract to sell, not a contract of conditional sale.
In both contracts to sell and contracts of conditional sale, title to the property remains with the seller until the
buyer fully pays the purchase price.110 Both contracts are subject to the positive suspensive condition of the
buyers full payment of the purchase price.111

In a contract of conditional sale, the buyer automatically acquires title to the property upon full payment of the
purchase price.112 This transfer of title is "by operation of law without any further act having to be performed
by the seller."113 In a contract to sell, transfer of title to the prospective buyer is not automatic.114 "The
prospective seller [must] convey title to the property [through] a deed of conditional sale."115
The distinction is important to determine the applicable laws and remedies in case a party does not fulfill his or
her obligations under the contract. In contracts of conditional sale, our laws on sales under the Civil Code of the
Philippines apply. On the other hand, contracts to sell are not governed by our law on sales116 but by the Civil
Code provisions on conditional obligations.
Specifically, Article 1191 of the Civil Code on the right to rescind reciprocal obligations does not apply to
contracts to sell.117 As this court explained in Ong v. Court of Appeals,118 failure to fully pay the purchase
price in contracts to sell is not the breach of contract under Article 1191.119 Failure to fully pay the purchase
price is "merely an event which prevents the [sellers] obligation to convey title from acquiring binding
force."120 This is because "there can be no rescission of an obligation that is still nonexistent, the suspensive
condition not having [happened]."121
In this case, Castillo reserved his title to the property and undertook to execute a deed of absolute sale upon
Olivarez Realty Corporations full payment of the purchase price.122 Since Castillo still has to execute a deed
of absolute sale to Olivarez RealtyCorporation upon full payment of the purchase price, the transfer of title is
notautomatic. The contract in this case is a contract to sell.
As this case involves a contract tosell, Article 1191 of the Civil Code of the Philippines does not apply. The
contract to sell is instead cancelled, and the parties shall stand as if the obligation to sell never existed.123
Olivarez Realty Corporation shall return the possession of the property to Castillo. Any improvement that
Olivarez Realty Corporation may have introduced on the property shall be forfeited in favor of Castillo per
paragraph I of the deed of conditional sale:
I. Immediately upon signing thisContract, [Olivarez Realty Corporation] shall be entitled to occupy, possess and
develop the subject property. In case this Contract is cancelled, any improvement introduced by [Olivarez
Realty Corporation] on the property shall be forfeited in favor of [Castillo.]124
As for prospective sellers, thiscourt generally orders the reimbursement of the installments paidfor the property
when setting aside contracts to sell.125 This is true especially ifthe propertys possession has not been delivered
to the prospective buyer prior to the transfer of title.
In this case, however, Castillo delivered the possession of the property to Olivarez Realty Corporation prior to
the transfer of title. We cannot order the reimbursement of the installments paid.
In Gomez v. Court of Appeals,126 the City of Manila and Luisa Gomez entered into a contract to sell over a
parcel of land. The city delivered the propertys possession to Gomez. She fully paid the purchase price for the
property but violated the terms of the contract to sell by renting out the property to other persons. This court set
aside the contract to sell for her violation of the terms of the contract to sell. It ordered the installments paid
forfeited in favor of the City of Manila "as reasonable compensation for [Gomezs] use of the [property]"127 for
eight years.
In this case, Olivarez Realty Corporation failed to fully pay the purchase price for the property. It only paid
P2,500,000.00 out of the P19,080,490.00 agreed purchase price. Worse, petitioner corporation has been in
possession of Castillos property for 14 years since May 5, 2000 and has not paid for its use of the property.

Similar to the ruling in Gomez, we order the P2,500,000.00 forfeited in favor of Castillo as reasonable
compensation for Olivarez Realty Corporations use of the property.
III
Olivarez Realty Corporation is liable for
moral and exemplary damages and
attorneys fees
We note that the trial court erred in rendering summary judgment on the amount of damages. Under Section 3,
Rule 35 of the 1997 Rules of Civil Procedure, summary judgment may be rendered, except as to the amount of
damages.
In this case, the trial court erred in forfeiting the P2,500,000.00 in favor of Castillo as damages under Article
1191 of the Civil Code of the Philippines. As discussed, there is nobreach of contract under Article 1191 in this
case.
The trial court likewise erred inrendering summary judgment on the amount of moral and exemplary damages
and attorneys fees.
Nonetheless, we hold that Castillois entitled to moral damages, exemplary damages, and attorneys fees.
Moral damages may be awarded in case the claimant experienced physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar
injury.128
As for exemplary damages, they are awarded in addition to moral damages by way of example or correction for
the public good.129 Specifically in contracts, exemplary damages may be awarded if the defendant acted in a
wanton, fraudulent,reckless, oppressive, or malevolent manner.130
Under the deed of conditional sale, Olivarez Realty Corporation may only suspend the monthly down payment
in case Castillo fails to clear the land of the tenants six months from the signing of the instrument. Yet, even
before the sixth month arrived, Olivarez Realty Corporation withheld payments for Castillos property. It
evenused as a defense the fact that no case was filed against the PhilippineTourism Authority when, under the
deed of conditional sale, Olivarez Realty Corporation was clearly responsible for initiating action against the
Philippine Tourism Authority. These are oppressive and malevolent acts, and we find Castillo entitled to
P500,000.00 moral damages and P50,000.00 exemplary damages:
Plaintiff Castillo is entitled to moral damages because of the evident bad faith exhibited by defendants in
dealing with him regarding the sale of his lot to defendant [Olivarez Realty Corporation]. He suffered much
prejudice due to the failure of defendants to pay him the balance of purchase price which he expected touse for
his needs which caused him wounded feelings, sorrow, mental anxiety and sleepless nights for which
defendants should pay P500,000.00 as moral damages more than six (6) years had elapsed and defendants
illegally and unfairly failed and refused to pay their legal obligations to plaintiff, unjustly taking advantage of a
poor uneducated man like plaintiff causing much sorrow and financial difficulties. Moral damages in favor of
plaintiff is clearly justified . . . [Castillo] is also entitled to P50,000.00 as exemplary damages to serve as a
deterrent to other parties to a contract to religiously comply with their prestations under the contract.131
We likewise agree that Castillo is entitled to attorneys fees in addition to the exemplary damages.132
Considering that Olivarez Realty Corporation refused to satisfy Castillosplainly valid, just, and demandable
claim,133 the award of P50,000.00 as attorneys fees is in order. However, we find that Dr. Pablo R.Olivarez is
not solidarily liable with Olivarez Realty Corporation for the amount of damages.

Under Article 1207 of the Civil Code of the Philippines, there is solidary liability only when the obligation
states it or when the law or the nature of the obligation requires solidarity.134 In case of corporations, they are
solely liable for their obligations.135 The directors or trustees and officers are not liable with the corporation
even if it is through their acts that the corporation incurred the obligation. This is because a corporation is
separate and distinct from the persons comprising it.136
As an exception to the rule, directors or trustees and corporate officers may be solidarily liable with the
corporation for corporate obligations if they acted "in bad faith or with gross negligence in directing the
corporate affairs."137
In this case, we find that Castillo failed to prove with preponderant evidence that it was through Dr. Olivarezs
bad faith or gross negligence that Olivarez Realty Corporation failed to fully pay the purchase price for the
property. Dr. Olivarezs alleged act of making Castillo sign the deed of conditional sale without explaining to
the latter the deeds terms in Tagalog is not reason to hold Dr. Olivarez solidarily liable with the corporation.
Castillo had a choice not to sign the deed of conditional sale. He could have asked that the deed of conditional
sale be written in Tagalog. Thus, Olivarez Realty Corporation issolely liable for the moral and exemplary
damages and attorneys fees to Castillo.
IV
The trial court acquired jurisdiction over
Castillos action as he paid the correct
docket fees
Olivarez Realty Corporation and Dr. Olivarez claimed that the trial court had no jurisdiction to take cognizance
of the case. In the reply/motion to dismiss the complaint138 they filed with the Court of Appeals, petitioners
argued that Castillo failed to pay the correct amount of docket fees. Stating that this action is a real action,
petitioners argued that the docket fee Castillo paid should have been based on the fair market value of the
property. In this case, Castillo only paid 4,297.00, which is insufficient "if the real nature of the action was
admitted and the fair market value of the property was disclosed and made the basis of the amount of docket
fees to be paid to the court."139 Thus, according to petitioners, the case should be dismissed for lack of
jurisdiction.
Castillo countered that his action for rescission is an action incapable of pecuniary estimation. Thus, the Clerk
of Court of the Regional Trial Court of Tanauan City did not err in assessing the docket fees based on his prayer.
We rule for Castillo. In De Leon v. Court of Appeals,140 this court held that an action for rescission of contract
of sale of real property is an action incapable of pecuniary estimation. In De Leon, the action involved a real
property. Nevertheless, this court held that "it is the nature of the action as one for rescission of contract which
is controlling."141 Consequently, the docket fees to be paid shall be for actions incapableof pecuniary
estimation, regardless if the claimant may eventually recover the real property. This court said:
. . . the Court in Bautista v.Lim, held that an action for rescission of contract is one which cannot be estimated
and therefore the docket fee for its filing should be the flat amount of P200.00 as then fixed in the former Rule
141, 141, 5(10). Said this Court:
We hold that Judge Dalisay did not err in considering Civil Case No. V-144 as basically one for rescission or
annulment of contract which is not susceptible of pecuniary estimation (1 Moran's Comments on the Rules of
Court, 1970 Ed, p. 55; Lapitan vs. Scandia, Inc., L-24668, July 31, 1968, 24 SCRA 479, 781-483).
Consequently, the fee for docketing it is P200, an amount already paid by plaintiff, now respondent Matilda
Lim.1wphi1 (She should pay also the two pesos legal research fund fee, if she has not paid it, as required in
Section 4 of Republic Act No. 3870, the charter of the U.P. Law Center).

Thus, although eventually the result may be the recovery of land, it is the nature of the action as one for
rescission of contract which is controlling. The Court of Appeals correctly applied these cases to the present
one. As it said:
We would like to add the observations that since the action of petitioners [private respondents] against private
respondents [petitioners] is solely for annulment or rescission which is not susceptible of pecuniary estimation,
the action should not be confused and equated with the "value of the property" subject of the transaction; that by
the very nature of the case, the allegations, and specific prayer in the complaint, sans any prayer for recovery of
money and/or value of the transaction, or for actual or compensatory damages, the assessment and collection of
the legal fees should not be intertwined with the merits of the case and/or what may be its end result; and that to
sustain private respondents' [petitioners'] position on what the respondent court may decide after all, then the
assessment should be deferred and finally assessed only after the court had finally decided the case, which
cannot be done because the rules require that filing fees should be based on what is alleged and prayed for in the
face of the complaint and paid upon the filing of the complaint.142
Although we discussed that there isno rescission of contract to speak of in contracts of conditional sale, we hold
that an action to cancel a contract to sell, similar to an action for rescission of contract of sale, is an action
incapable of pecuniary estimation. Like any action incapable of pecuniary estimation, an action to cancel a
contract to sell "demands an inquiry into other factors"143 aside from the amount of money to be awarded to
the claimant. Specifically in this case, the trial court principally determined whether Olivarez Realty
Corporation failed to pay installments of the propertys purchase price as the parties agreed upon in the deed of
conditional sale. The principal natureof Castillos action, therefore, is incapable of pecuniary estimation.
All told, there is no issue that the parties in this case entered into a contract to sell a parcel of land and that
Olivarez Realty Corporation failed to fully pay the installments agreed upon.Consequently, Castillo is entitled to
cancel the contract to sell.
WHEREFORE, the petition for review on certiorari is DENIED. The Court of Appeals decision dated July 20,
2010 and in CA-G.R. CV No. 91244 is AFFIRMEDwith MODIFICATION.
The deed of conditional sale dated April 5, 2000 is declared CANCELLED. Petitioner Olivarez Realty
Corporation shall RETURN to respondent Benjamin Castillo the possession of the property covered by Transfer
Certificate of Title No. T-19972 together with all the improvements that petitioner corporation introduced on the
property. The amount of P2,500,000.00 is FORFEITED in favor of respondent Benjamin Castillo as reasonable
compensation for the use of petitioner Olivarez Realty Corporation of the property.
Petitioner Olivarez Realty Corporation shall PAY respondent Benjamin Castillo P500,000.00 as moral damages,
P50,000.00 as exemplary damages, and P50,000.00 as attorney's fees with interest at 6% per annum from the
time this decision becomes final and executory until petitioner
corporation fully pays the amount of damages.144
SO ORDERED.

#14
G.R. No. 178610

November 17, 2010

HONGKONG AND SHANGHAI BANKING CORP., LTD. STAFF RETIREMENT PLAN, Retirement
Trust Fund, Inc.) Petitioner,
vs.
SPOUSES BIENVENIDO AND EDITHA BROQUEZA, Respondents.
DECISION
CARPIO, J.:
G.R. No. 178610 is a petition for review1 assailing the Decision2 promulgated on 30 March 2006 by the Court
of Appeals (CA) in CA-G.R. SP No. 62685. The appellate court granted the petition filed by Fe Gerong
(Gerong) and Spouses Bienvenido and Editha Broqueza (spouses Broqueza) and dismissed the consolidated
complaints filed by Hongkong and Shanghai Banking Corporation, Ltd. - Staff Retirement Plan (HSBCL-SRP)
for recovery of sum of money. The appellate court reversed and set aside the Decision3 of Branch 139 of the
Regional Trial Court of Makati City (RTC) in Civil Case No. 00-787 dated 11 December 2000, as well as its
Order4 dated 5 September 2000. The RTCs decision affirmed the Decision5 dated 28 December 1999 of Branch
61 of the Metropolitan Trial Court (MeTC) of Makati City in Civil Case No. 52400 for Recovery of a Sum of
Money.
The Facts
The appellate court narrated the facts as follows:
Petitioners Gerong and [Editha] Broqueza (defendants below) are employees of Hongkong and Shanghai
Banking Corporation (HSBC). They are also members of respondent Hongkong Shanghai Banking Corporation,
Ltd. Staff Retirement Plan (HSBCL-SRP, plaintiff below). The HSBCL-SRP is a retirement plan established by
HSBC through its Board of Trustees for the benefit of the employees.
On October 1, 1990, petitioner [Editha] Broqueza obtained a car loan in the amount of Php175,000.00. On
December 12, 1991, she again applied and was granted an appliance loan in the amount of Php24,000.00. On
the other hand, petitioner Gerong applied and was granted an emergency loan in the amount of Php35,780.00 on
June 2, 1993. These loans are paid through automatic salary deduction.
Meanwhile [in 1993], a labor dispute arose between HSBC and its employees. Majority of HSBCs employees
were terminated, among whom are petitioners Editha Broqueza and Fe Gerong. The employees then filed an
illegal dismissal case before the National Labor Relations Commission (NLRC) against HSBC. The legality or
illegality of such termination is now pending before this appellate Court in CA G.R. CV No. 56797, entitled
Hongkong Shanghai Banking Corp. Employees Union, et al. vs. National Labor Relations Commission, et al.
Because of their dismissal, petitioners were not able to pay the monthly amortizations of their respective loans.
Thus, respondent HSBCL-SRP considered the accounts of petitioners delinquent. Demands to pay the
respective obligations were made upon petitioners, but they failed to pay.6
HSBCL-SRP, acting through its Board of Trustees and represented by Alejandro L. Custodio, filed Civil Case
No. 52400 against the spouses Broqueza on 31 July 1996. On 19 September 1996, HSBCL-SRP filed Civil Case
No. 52911 against Gerong. Both suits were civil actions for recovery and collection of sums of money.

The Metropolitan Trial Courts Ruling

On 28 December 1999, the MeTC promulgated its Decision7 in favor of HSBCL-SRP. The MeTC ruled that the
nature of HSBCL-SRPs demands for payment is civil and has no connection to the ongoing labor dispute.
Gerong and Editha Broquezas termination from employment resulted in the loss of continued benefits under
their retirement plans. Thus, the loans secured by their future retirement benefits to which they are no longer
entitled are reduced to unsecured and pure civil obligations. As unsecured and pure obligations, the loans are
immediately demandable.
The dispositive portion of the MeTCs decision reads:
WHEREFORE, premises considered and in view of the foregoing, the Court finds that the plaintiff was able to
prove by a preponderance of evidence the existence and immediate demandability of the defendants loan
obligations as judgment is hereby rendered in favor of the plaintiff and against the defendants in both cases,
ordering the latter:
1. In Civil Case No. 52400, to pay the amount of Php116,740.00 at six percent interest per annum from
the time of demand and in Civil Case No. 52911, to pay the amount of Php25,344.12 at six percent per
annum from the time of the filing of these cases, until the amount is fully paid;
2. To pay the amount of Php20,000.00 each as reasonable attorneys fees;
3. Cost of suit.
SO ORDERED.8
Gerong and the spouses Broqueza filed a joint appeal of the MeTCs decision before the RTC. Gerongs case
was docketed Civil Case No. 00-786, while the spouses Broquezas case was docketed as Civil Case No. 00787.
The Regional Trial Courts Ruling
The RTC initially denied the joint appeal because of the belated filing of Gerong and the spouses Broquezas
memorandum. The RTC later reconsidered the order of denial and resolved the issues in the interest of justice.
On 11 December 2000, the RTC affirmed the MeTCs decision in toto.9
The RTC ruled that Gerong and Editha Broquezas termination from employment disqualified them from
availing of benefits under their retirement plans. As a consequence, there is no longer any security for the loans.
HSBCL-SRP has a legal right to demand immediate settlement of the unpaid balance because of Gerong and
Editha Broquezas continued default in payment and their failure to provide new security for their loans.
Moreover, the absence of a period within which to pay the loan allows HSBCL-SRP to demand immediate
payment. The loan obligations are considered pure obligations, the fulfillment of which are demandable at once.
Gerong and the spouses Broqueza then filed a Petition for Review under Rule 42 before the CA.
The Ruling of the Court of Appeals

On 30 March 2006, the CA rendered its Decision10 which reversed the 11 December 2000 Decision of the RTC.
The CA ruled that the HSBCL-SRPs complaints for recovery of sum of money against Gerong and the spouses
Broqueza are premature as the loan obligations have not yet matured. Thus, no cause of action accrued in favor
of HSBCL-SRP. The dispositive portion of the appellate courts Decision reads as follows:
WHEREFORE, the assailed Decision of the RTC is REVERSED and SET ASIDE. A new one is hereby
rendered DISMISSING the consolidated complaints for recovery of sum of money.
SO ORDERED.11
HSBCL-SRP filed a motion for reconsideration which the CA denied for lack of merit in its Resolution12
promulgated on 19 June 2007.
On 6 August 2007, HSBCL-SRP filed a manifestation withdrawing the petition against Gerong because she
already settled her obligations. In a Resolution13 of this Court dated 10 September 2007, this Court treated the
manifestation as a motion to withdraw the petition against Gerong, granted the motion, and considered the case
against Gerong closed and terminated.
Issues
HSBCL-SRP enumerated the following grounds to support its Petition:
I. The Court of Appeals has decided a question of substance in a way not in accord with law and
applicable decisions of this Honorable Court; and
II. The Court of Appeals has departed from the accepted and usual course of judicial proceedings in
reversing the decision of the Regional Trial Court and the Metropolitan Trial Court.14
The Courts Ruling
The petition is meritorious. We agree with the rulings of the MeTC and the RTC.
The Promissory Notes uniformly provide:
PROMISSORY NOTE
P_____ Makati, M.M. ____ 19__
FOR VALUE RECEIVED, I/WE _____ jointly and severally promise to pay to THE HSBC RETIREMENT
PLAN (hereinafter called the "PLAN") at its office in the Municipality of Makati, Metro Manila, on or before
until fully paid the sum of PESOS ___ (P___) Philippine Currency without discount, with interest from date
hereof at the rate of Six per cent (6%) per annum, payable monthly.
I/WE agree that the PLAN may, upon written notice, increase the interest rate stipulated in this note at any time
depending on prevailing conditions.

I/WE hereby expressly consent to any extensions or renewals hereof for a portion or whole of the principal
without notice to the other(s), and in such a case our liability shall remain joint and several.1avvphi1
In case collection is made by or through an attorney, I/WE jointly and severally agree to pay ten percent (10%)
of the amount due on this note (but in no case less than P200.00) as and for attorneys fees in addition to
expenses and costs of suit.
In case of judicial execution, I/WE hereby jointly and severally waive our rights under the provisions of Rule
39, Section 12 of the Rules of Court.15
In ruling for HSBCL-SRP, we apply the first paragraph of Article 1179 of the Civil Code:
Art. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a
past event unknown to the parties, is demandable at once.
x x x. (Emphasis supplied.)
We affirm the findings of the MeTC and the RTC that there is no date of payment indicated in the Promissory
Notes. The RTC is correct in ruling that since the Promissory Notes do not contain a period, HSBCL-SRP has
the right to demand immediate payment. Article 1179 of the Civil Code applies. The spouses Broquezas
obligation to pay HSBCL-SRP is a pure obligation. The fact that HSBCL-SRP was content with the prior
monthly check-off from Editha Broquezas salary is of no moment. Once Editha Broqueza defaulted in her
monthly payment, HSBCL-SRP made a demand to enforce a pure obligation.
In their Answer, the spouses Broqueza admitted that prior to Editha Broquezas dismissal from HSBC in
December 1993, she "religiously paid the loan amortizations, which HSBC collected through payroll checkoff."16 A definite amount is paid to HSBCL-SRP on a specific date. Editha Broqueza authorized HSBCL-SRP to
make deductions from her payroll until her loans are fully paid. Editha Broqueza, however, defaulted in her
monthly loan payment due to her dismissal. Despite the spouses Broquezas protestations, the payroll deduction
is merely a convenient mode of payment and not the sole source of payment for the loans. HSBCL-SRP never
agreed that the loans will be paid only through salary deductions. Neither did HSBCL-SRP agree that if Editha
Broqueza ceases to be an employee of HSBC, her obligation to pay the loans will be suspended. HSBCL-SRP
can immediately demand payment of the loans at anytime because the obligation to pay has no period.
Moreover, the spouses Broqueza have already incurred in default in paying the monthly installments.
Finally, the enforcement of a loan agreement involves "debtor-creditor relations founded on contract and does
not in any way concern employee relations. As such it should be enforced through a separate civil action in the
regular courts and not before the Labor Arbiter."17
WHEREFORE, we GRANT the petition. The Decision of the Court of Appeals in CA-G.R. SP No. 62685
promulgated on 30 March 2006 is REVERSED and SET ASIDE. The decision of Branch 139 of the Regional
Trial Court of Makati City in Civil Case No. 00-787, as well as the decision of Branch 61 of the Metropolitan
Trial Court of Makati City in Civil Case No. 52400 against the spouses Bienvenido and Editha Broqueza, are
AFFIRMED. Costs against respondents.
SO ORDERED.

#15
G.R. No. 117009 October 11, 1995
SECURITY BANK & TRUST COMPANY and ROSITO C. MANHIT, petitioners,
vs.
COURT OF APPEALS and YSMAEL C. FERRER, respondents.

PADILLA, J.:
In this petition for review under Rule 45 of the Rules of Court, petitioners seek a review and reversal of the
decision * of respondent Court of Appeals in CA-G.R. CV No. 40450, entitled "Ysmael C. Ferrer v. Security
Bank and Trust Company, et. al." dated 31 August 1994, which affirmed the decision ** of the Regional Trial
Court, Branch 63, Makati in Civil Case No. 42712, a complaint for breach of contract with damages.
Private respondent Ysmael C. Ferrer was contracted by herein petitioners Security Bank and Trust Company
(SBTC) and Rosito C. Manhit to construct the building of SBTC in Davao City for the price of P1,760,000.00.
The contract dated 4 February 1980 provided that Ferrer would finish the construction in two hundred (200)
working days. Respondent Ferrer was able to complete the construction of the building on 15 August 1980
(within the contracted period) but he was compelled by a drastic increase in the cost of construction materials to
incur expenses of about P300,000.00 on top of the original cost. The additional expenses were made known to
petitioner SBTC thru its Vice-President Fely Sebastian and Supervising Architect Rudy de la Rama as early as
March 1980. Respondent Ferrer made timely demands for payment of the increased cost. Said demands were
supported by receipts, invoices, payrolls and other documents proving the additional expenses.
In March 1981, SBTC thru Assistant Vice-President Susan Guanio and a representative of an architectural firm
consulted by SBTC, verified Ferrer's claims for additional cost. A recommendation was then made to settle
Ferrer's claim but only for P200,000.00. SBTC, instead of paying the recommended additional amount, denied
ever authorizing payment of any amount beyond the original contract price. SBTC likewise denied any liability
for the additional cost based on Article IX of the building contract which states:
If at any time prior to the completion of the work to be performed hereunder, increase in prices
of construction materials and/or labor shall supervene through no fault on the part of the
contractor whatsoever or any act of the government and its instrumentalities which directly or
indirectly affects the increase of the cost of the project, OWNER shall equitably make the
appropriate adjustment on mutual agreement of both parties.
Ysmael C. Ferrer then filed a complaint for breach of contract with damages. The trial court ruled for Ferrer and
ordered defendants SBTC and Rosito C. Manhit to pay:

a) P259,417.23 for the increase in price of labor and materials plus 12% interest thereon per
annum from 15 August 1980 until fully paid;
b) P24,000.00 as actual damages;
c) P20,000.00 as moral damages;
d) P20,000.00 as exemplary damages;
e) attorney's fees equivalent to 25% of the principal amount due; and
f) costs of suit.
On appeal, the Court of Appeals affirmed the trial court decision.
In the present petition for review, petitioners assign the following errors to the appellate court:
. . . IN HOLDING THAT PLAINTIFF-APPELLEE HAS, BY PREPONDERANCE OF
EVIDENCE SUFFICIENTLY PROVEN HIS CLAIM AGAINST THE DEFENDANTSAPPELLANTS.
. . . IN INTERPRETING AN OTHERWISE CLEAR AND UNAMBIGUOUS PROVISION OF
THE CONSTRUCTION CONTRACT.
. . . IN DISREGARDING THE EXPRESS PROVISION OF THE CONSTRUCTION
CONTRACT, THE LOWER COURT VIOLATED DEFENDANTS-APPELLANTS'
CONSTITUTIONAL GUARANTY OF NON IMPAIRMENT OF THE OBLIGATION OF
CONTRACT. 1
Petitioners argue that under the aforequoted Article IX of the building contract, any increase in the price of labor
and/or materials resulting in an increase in construction cost above the stipulated contract price will not
automatically make petitioners liable to pay for such increased cost, as any payment above the stipulated
contract price has been made subject to the condition that the "appropriate adjustment" will be made "upon
mutual agreement of both parties". It is contended that since there was no mutual agreement between the
parties, petitioners' obligation to pay amounts above the original contract price never materialized.
Respondent Ysmael C. Ferrer, through counsel, on the other hand, opposed the arguments raised by petitioners.
It is of note however that the pleadings filed with this Court by counsel for Ferrer hardly refute the arguments
raised by petitioners, as the contents of said pleadings are mostly quoted portions of the decision of the Court of
Appeals, devoid of adequate discussion of the merits of respondent's case. The Court, to be sure, expects more
diligence and legal know-how from lawyers than what has been exhibited by counsel for respondent in the
present case. Under these circumstances, the Court had to review the entire records of this case to evaluate the
merits of the issues raised by the contending parties.
Article 22 of the Civil Code which embodies the maxim, Nemo ex alterius incommodo debet lecupletari (no
man ought to be made rich out of another's injury) states:

Art. 22. Every person who through an act of performance by another, or any other means,
acquires or comes into possession of something at the expense of the latter without just or legal
ground, shall return the same to him.
The above-quoted article is part of the chapter of the Civil Code on Human Relations, the provisions of which
were formulated as "basic principles to be observed for the rightful relationship between human beings and for
the stability of the social order, . . . designed to indicate certain norms that spring from the fountain of good
conscience, . . . guides for human conduct [that] should run as golden threads through society to the end that law
may approach its supreme ideal which is the sway and dominance of justice." 2
In the present case, petitioners' arguments to support absence of liability for the cost of construction beyond the
original contract price are not persuasive.
Under the previously quoted Article IX of the construction contract, petitioners would make the appropriate
adjustment to the contract price in case the cost of the project increases through no fault of the contractor
(private respondent). Private respondent informed petitioners of the drastic increase in construction cost as early
as March 1980.
Petitioners in turn had the increased cost evaluated and audited. When private respondent demanded payment of
P259,417.23, petitioner bank's Vice-President Rosito C. Manhit and the bank's architectural consultant were
directed by the bank to verify and compute private respondent's claims of increased cost. A recommendation
was then made to settle private respondent's claim for P200,000.00. Despite this recommendation and several
demands from private respondent, SBTC failed to make payment. It denied authorizing anyone to make a
settlement of private respondent's claim and likewise denied any liability, contending that the absence of a
mutual agreement made private respondent's demand premature and baseless.
Petitioners' arguments are specious.
It is not denied that private respondent incurred additional expenses in constructing petitioner bank's building
due to a drastic and unexpected increase in construction cost. In fact, petitioner bank admitted liability for
increased cost when a recommendation was made to settle private respondent's claim for P200,000.00. Private
respondent's claim for the increased amount was adequately proven during the trial by receipts, invoices and
other supporting documents.
Under Article 1182 of the Civil Code, a conditional obligation shall be void if its fulfillment depends upon the
sole will of the debtor. In the present case, the mutual agreement, the absence of which petitioner bank relies
upon to support its non-liability for the increased construction cost, is in effect a condition dependent on
petitioner bank's sole will, since private respondent would naturally and logically give consent to such an
agreement which would allow him recovery of the increased cost.
Further, it cannot be denied that petitioner bank derived benefits when private respondent completed the
construction even at an increased cost.
Hence, to allow petitioner bank to acquire the constructed building at a price far below its actual construction
cost would undoubtedly constitute unjust enrichment for the bank to the prejudice of private respondent. Such
unjust enrichment, as previously discussed, is not allowed by law.

Finally, with respect to the award of attorney's fees to respondent, the Court has previously held that, "even with
the presence of an agreement between the parties, the court may nevertheless reduce attorney's fees though
fixed in the contract when the amount thereof appears to be unconscionable or unreasonable." 3 As previously
noted, the diligence and legal know-how exhibited by counsel for private respondent hardly justify an award of
25% of the principal amount due, which would be at least P60,000.00. Besides, the issues in this case are far
from complex and intricate. The award of attorney's fees is thus reduced to P10,000.00.
WHEREFORE, with the above modification in respect of the amount of attorney's fees, the appealed decision of
the Court of Appeals in CA G.R. CV No. 40450 is AFFIRMED.
SO ORDERED.

#16
[G.R. No. 146839, March 23 : 2011]
ROLANDO T. CATUNGAL, JOSE T. CATUNGAL, JR., CAROLYN T. CATUNGAL AND ERLINDA
CATUNGAL-WESSEL, PETITIONERS, VS. ANGEL S. RODRIGUEZ, RESPONDENT.
DECISION
LEONARDO-DE CASTRO, J.:
Before the Court is a Petition for Review on Certiorari, assailing the following issuances of the Court of
Appeals in CA-G.R. CV No. 40627 consolidated with CA-G.R. SP No. 27565: (a) the August 8, 2000 Decision,
[1]
which affirmed the Decision[2] dated May 30, 1992 of the Regional Trial Court (RTC), Branch 27 of Lapulapu City, Cebu in Civil Case No. 2365-L, and (b) the January 30, 2001 Resolution,[3] denying herein petitioners'
motion for reconsideration of the August 8, 2000 Decision.
The relevant factual and procedural antecedents of this case are as follows:
This controversy arose from a Complaint for Damages and Injunction with Preliminary Injunction/Restraining
Order[4] filed on December 10, 1990 by herein respondent Angel S. Rodriguez (Rodriguez), with the RTC,
Branch 27, Lapu-lapu City, Cebu, docketed as Civil Case No. 2365-L against the spouses Agapita and Jose
Catungal (the spouses Catungal), the parents of petitioners.
In the said Complaint, it was alleged that Agapita T. Catungal (Agapita) owned a parcel of land (Lot 10963)
with an area of 65,246 square meters, covered by Original Certificate of Title (OCT) No. 105[5] in her name
situated in the Barrio of Talamban, Cebu City. The said property was allegedly the exclusive paraphernal
property of Agapita.
On April 23, 1990, Agapita, with the consent of her husband Jose, entered into a Contract to Sell[6] with
respondent Rodriguez. Subsequently, the Contract to Sell was purportedly "upgraded" into a Conditional Deed
of Sale dated July 26, 1990 between the same parties. Both the Contract to Sell and the Conditional Deed of
Sale were annotated on the title.
The provisions of the Conditional Deed of Sale pertinent to the present dispute are quoted below:

1. The VENDOR for and in consideration of the sum of TWENTY[-]FIVE MILLION PESOS
(25,000,000.00) payable as follows:
a. FIVE HUNDRED THOUSAND PESOS (P500,000.00) downpayment upon the signing of this agreement,
receipt of which sum is hereby acknowledged in full from the VENDEE.
b. The balance of TWENTY[-]FOUR MILLION FIVE HUNDRED THOUSAND PESO'S (P24,500,000.00)
shall be payable in five separate checks, made to the order of JOSE Ch. CATUNGAL, the first check shall be
for FOUR MILLION FIVE HUNDRED THOUSAND PESOS (P4,500,000.00) and the remaining balance to be
paid in four checks in the amounts of FIVE MILLION PESOS (P5,000,000.00) each after the VENDEE have
(sic)' successfully negotiated, secured and provided a Road Right of Way consisting of 12 meters in width
cutting across Lot 10884 up to the national road, either by widening the existing Road Right of Way or by
securing a new Road Right of Way of 12 meters in width. If however said Road Right of Way could not be
negotiated, the VENDEE shall give notice to the VENDOR for them to reassess and solve the problem by
taking other options and should the situation ultimately prove futile, he shall take steps to rescind or cancel the
herein Conditional Deed of Sale.
c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility of the VENDEE
to secure and any or all cost relative to the acquisition thereof shall be borne solely by the VENDEE. He shall,
however, be accorded with enough time necessary for the success of his endeavor, granting him a free hand in
negotiating for the passage.
BY THESE PRESENTS, the VENDOR do hereby agree to sell by way of herein CONDITIONAL DEED OF
SALE to VENDEE, his heirs, successors and assigns, the real property described in the Original Certificate of
Title No. 105 x x x.
xxxx
5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his option to
rescind the herein Conditional Deed of Sale, the VENDEE shall notify the VENDOR by way of a written notice
relinquishing his rights over the property. The VENDEE shall then be reimbursed by the VENDOR the sum of
FIVE HUNDRED THOUSAND PESOS (P500,000.00) representing the downpayment, interest free, payable
but contingent upon the event that the VENDOR shall have been able to sell the property to another party.[8]
In accordance with the Conditional Deed of Sale, Rodriguez purportedly secured the necessary surveys and
plans and through his efforts, the properly was reclassified from agricultural land into residential land which he
claimed substantially increased the property's value. He likewise alleged that he actively negotiated for the road
right of way as stipulated in the contract.[9]
Rodriguez further claimed that on August 31, 1990 the spouses Catungal requested an advance of
P5,000,000.00 on the purchase price for personal reasons. Rodriquez allegedly refused on the ground that the
amount was substantial and was not due under the terms of their agreement. Shortly after his refusal to pay the
advance, he purportedly learned that the Catungals were offering the property for sale to third parties.[10]
Thereafter, Rodriguez received letters dated October 22, 1990,[11] October 24, 1990[12] and October 29, 1990,[13]
all signed by Jose Catungal who was a lawyer, essentially demanding that the former make up his mind about
buying the land or exercising his "option" to buy because the spouses Catungal allegedly received other offers
and they needed money to pay for personal obligations and for investing in other properties/business ventures.
Should Rodriguez fail to exercise his option to buy the land, the Catungals warned that they would consider the
contract cancelled and that they were free to look for other buyers.
In a letter dated November 4, 1990,[14] Rodriguez registered his objections to what he termed the Catungals'

unwarranted demands in view of the terms of the Conditional Deed of Sale which allowed him sufficient time to
negotiate a road right of way and granted him, the vendee, the exclusive right to rescind the contract. Still, on
November 15, 1990, Rodriguez purportedly received a letter dated November 9, 1990[15] from Atty. Catungal,
stating that the contract had been cancelled and terminated.
Contending that the Catungals' unilateral rescission of the Conditional Deed of Sale was unjustified, arbitrary
and unwarranted, Rodriquez prayed in his Complaint, that:
1. Upon the filing of this complaint, a restraining order be issued enjoining defendants [the spouses Catungal],
their employees, agents, representatives or other persons acting in their behalf from offering the property subject
of this case for sale to third persons; from entertaining offers or proposals by third persons to purchase the said
property; and, in general, from performing acts in furtherance or implementation of defendants' rescission of
their Conditional Deed of Sale with plaintiff [Rodriguez].
2. After hearing, a writ of preliminary injunction be issued upon such reasonable bond as may be fixed by the
court enjoining defendants and other persons acting in their behalf from performing any of the acts mentioned
in the next preceding paragraph.
3. After trial, a Decision be rendered:
a) Making the injunction permanent;
b) Condemning defendants to pay to plaintiff, jointly and solidarily:
Actual damages in the amount of P400,000.00 for their unlawful rescission of the Agreement and their
performance of acts in violation or disregard of the said Agreement;
Moral damages in the amount of P200,000.00;
Exemplary damages in the amount of P200,000.00; Expenses of litigation and attorney's fees in the amount of
P100,000.00; and Costs of suit.[16]
On December 12, 1990, the trial court issued a temporary restraining order and set the application for a writ of
preliminary injunction for hearing on December 21, 1990 with a directive to the spouses Catungal to show
cause within five days from notice why preliminary injunction should not be granted. The trial court likewise
ordered that summons be served on them.[17]
Thereafter, the spouses Catungal filed their opposition[18] to the issuance of a writ of preliminary injunction and
later filed a motion to dismiss[19] on the ground of improper venue. According to the Catungals, the subject
property was located in Cebu City and thus, the complaint should have been filed in Cebu City, not Lapu-lapu
City. Rodriguez opposed the motion to dismiss on the ground that his action was a personal action as its subject
was breach of a contract, the Conditional Deed of Sale, and not title to, or possession of real property.[20]
In an Order dated January 17, 1991,[21] the trial court denied the motion to dismiss and ruled that the complaint
involved a personal action, being merely for damages with a prayer for injunction.
Subsequently, on January 30, 1991, the trial court ordered the issuance of a writ of preliminary injunction upon
posting by Rodriguez of a bond in the amount of P100,000.00 to answer for damages that the defendants may
sustain by reason of the injunction.
On February 1, 1991, the spouses Catungal filed their Answer with Counterclaim[22] alleging that they had the
right to rescind the contract in view of (1) Rodriguez's failure to negotiate the road right of way despite the lapse

of several months since the signing of the contract, and (2) his refusal to pay the additional amount of
P5,000,000.00 asked by the Catungals, which to them indicated his lack of funds to purchase the property. The
Catungals likewise contended that Rodriguez did not have an exclusive right to rescind the contract and that the
contract, being reciprocal, meant both parties had the right to rescind.[23] The spouses Catungal further claimed
that it was Rodriguez who was in breach of their agreement and guilty of bad faith which justified their
rescission of the contract.[24] By way of counterclaim, the spouses Catungal prayed for actual and consequential
damages in the form of unearned interests from the balance (of the purchase price in the amount) of
P24,500,000.00, moral and exemplary damages in the amount of P2,000,000.00, attorney's fees in the amount of
P200,000.00 and costs of suits and litigation expenses in the amount of P10,000.00.[25] The spouses Catungal
prayed for the dismissal of the complaint and the grant of their counterclaim.
The Catungals amended their Answer twice,[26] retaining their basic allegations but amplifying their charges of
contractual breach and bad faith on the part of Rodriguez and adding the argument that in view of Article 1191
of the Civil Code, the power to rescind reciprocal obligations is granted by the law itself to both parties and
does not need an express stipulation to grant the same to the injured party. In the Second Amended Answer with
Counterclaim, the spouses Catungal added a prayer for the trial court to order the Register of Deeds to cancel
the annotations of the two contracts at the back of their OCT.
On October 24, 1991, Rodriguez filed an Amended Complaint,[28] adding allegations to the effect that the
Catungals were guilty of several misrepresentations which purportedly induced Rodriguez to buy the property at
the price of P25,000,000.00. Among others, it was alleged that the spouses Catungal misrepresented that their
Lot 10963 includes a flat portion of land which later turned out to be a separate lot (Lot 10986) owned by
Teodora Tudtud who sold the same to one Antonio Pablo. The Catungals also allegedly misrepresented that the
road right of way will only traverse two lots owned by Anatolia Tudtud and her daughter Sally who were their
relatives and who had already agreed to sell a portion of the said lots for the road right of way at a price of
P550.00 per square meter. However, because of the Catungals' acts of offering the property to other buyers who
offered to buy the road lots for P2,500.00 per square meter, the adjacent lot owners were no longer willing to
sell the road lots to Rodriguez at P550.00 per square meter but were asking for a price of P3,500.00 per square
meter. In other words, instead of assisting Rodriguez in his efforts to negotiate the road right of way, the spouses
Catungal allegedly intentionally and maliciously defeated Rodriguez's negotiations for a road right of way in
order to justify rescission of the said contract and enable them to offer the property to other buyers.
Despite requesting the trial court for an extension of time to file an amended Answer,[29] the Catungals did not
file an amended Answer and instead filed an Urgent Motion to Dismiss[30] again invoking the ground of
improper venue. In the meantime, for failure to file an amended Answer within the period allowed, the trial
court set the case for pre-trial on December 20, 1991.
During the pre-trial held on December 20, 1991, the trial court denied in open court the Catungals' Urgent
Motion to Dismiss for violation of the rules and for being repetitious and having been previously denied.
However, Atty. Catungal refused to enter into pre-trial which prompted the trial court to declare the defendants
in default and to set the presentation of the plaintiffs evidence on February 14, 1992;[32]
On December 23, 1991, the Catungals filed a motion for reconsideration[33] of the December 20, 1991 Order
denying their Urgent Motion to Dismiss but the trial court denied reconsideration in an Order dated February 3,
1992.[34] Undeterred, the Catungals subsequently filed a Motion to Lift and to Set Aside Order of Default[35] but
it was likewise denied for being in violation of the rules and for being not meritorious.[36] On February 28, 1992,
the Catungals filed a Petition for Certiorari and Prohibition[37] with the Court of Appeals, questioning the denial
of their motion to dismiss and the order of default. This was docketed as CA-G.R. SP No. 27565.
Meanwhile, Rodriguez proceeded to present his evidence before the trial court.
In a Decision dated May 30, 1992, the trial court ruled in favor of Rodriguez, finding that: (a) under the contract

it was complainant (Rodriguez) that had the option to rescind the sale; (b) Rodriguez's obligation to pay the
balance of the purchase price arises only upon successful negotiation of the road right of way; (c) he proved his
diligent efforts to negotiate the road right of way; (d) the spouses Catungal were guilty of misrepresentation
which defeated Rodriguez's efforts to acquire the road right of way; and (e) the Catungals' rescission of the
contract had no basis and was in bad faith. Thus, the trial court made the injunction permanent, ordered the
Catungals to reduce the purchase price by the amount of acquisition of Lot 10963 which they misrepresented
was part of the property sold but was in fact owned by a third party and ordered them to pay P100,000.00 as
damages, P30,000.00 as attorney's fees and costs.
The Catungals appealed the decision to the Court of Appeals, asserting the commission of the following errors
by the trial court in their appellants' brief8 dated February 9, 1994:
I
THE COURT A QUO ERRED IN NOT DISMISSING OF (SIC) THE CASE ON THE GROUNDS OF
IMPROPER VENUE AND LACK OF JURISDICTION.
II
THE COURT A QUO ERRED IN CONSIDERING THE CASE AS A PERSONAL AND NOT A REAL
ACTION.
III
GRANTING WITHOUT ADMITTING THAT VENUE WAS PROPERLY LAID AND THE CASE IS A
PERSONAL ACTION, THE COURT A QUO ERRED IN DECLARING THE DEFENDANTS IN DEFAULT
DURING THE PRE-TRIAL WHEN AT THAT TIME THE DEFENDANTS HAD ALREADY FILED THEIR
ANSWER TO THE COMPLAINT.
IV
THE COURT A QUO ERRED IN CONSIDERING THE DEFENDANTS AS HAVING LOST THEIR LEGAL
STANDING IN COURT WHEN AT MOST THEY COULD ONLY BE CONSIDERED AS IN DEFAULT AND
STILL ENTITLED TO NOTICES OF ALL FURTHER PROCEEDINGS ESPECIALLY AFTER THEY HAD
FILED THE MOTION TO LIFT THE ORDER OF DEFAULT.
V
THE COURT A QUO ERRED IN ISSUING THE WRIT [OF] PRELIMINARY INJUNCTION
RESTRAINING THE EXERCISE OF ACTS OF OWNERSHIP AND OTHER RIGHTS OVER REAL
PROPERTY OUTSIDE OF THE COURT'S TERRITORIAL JURISDICTION AND INCLUDING PERSONS
WHO WERE NOT BROUGHT UNDER ITS JURISDICTION, THUS THE NULLITY OF THE WRIT.
VI
THE COURT A QUO ERRED IN NOT RESTRAINING ITSELF MOTU PROP[R]IO FROM CONTINUING
WITH THE PROCEEDINGS IN THE CASE AND IN RENDERING DECISION THEREIN IF ONLY FOR
REASON OF COURTESY AND FAIRNESS BEING MANDATED AS DISPENSER OF FAIR AND EQUAL
JUSTICE TO ALL AND SUNDRY WITHOUT FEAR OR FAVOR IT HAVING BEEN SERVED EARLIER
WITH A COPY OF THE PETITION FOR CERTIORARI QUESTIONING ITS VENUE AND JURISDICTION
IN CA-G.R. NO. SP 27565 IN FACT NOTICES FOR THE FILING OF COMMENT THERETO HAD

ALREADY BEEN SENT OUT BY THE HONORABLE COURT OF APPEALS, SECOND DIVISION, AND
THE COURT A QUO WAS FURNISHED WITH COPY OF SAID NOTICE.
VII
THE COURT A QUO ERRED IN DECIDING THE CASE IN FAVOR OF THE PLAINTIFF AND AGAINST
THE DEFENDANTS ON THE BASIS OF EVIDENCE WHICH ARE IMAGINARY, FABRICATED, AND
DEVOID OF TRUTH, TO BE STATED IN DETAIL IN THE DISCUSSION OF THIS PARTICULAR
ERROR, AND, THEREFORE, THE DECISION IS REVERSIBLE.[39]
On August 31, 1995, after being granted several extensions, Rodriguez filed his appellee's brief,[40] essentially
arguing the correctness of the trial court's Decision regarding the foregoing issues raised by the Catungals.
Subsequently, the Catungals filed a Reply Brief[41] dated October 16, 1995.
From the filing of the appellants' brief in 1994 up to the filing of the Reply Brief, the spouses Catungal were
represented by appellant Jose Catungal himself. However, a new counsel for the Catungals, Atty. Jesus N.
Borromeo (Atty. Borromeo), entered his appearance before the Court of Appeals on September 2, 1997.[42] On
the same date, Atty. Borromeo filed a Motion for Leave of Court to File Citation of Authorities[43] and a Citation
of Authorities.[44] This would be followed by Atty. Borromeo's filing of an Additional Citation of Authority and
Second Additional Citation of Authority both on November 17, 1997.[45]
During the pendency of the case with the Court of Appeals, Agapita Catungal passed away and thus, her
husband, Jose, filed on February 17, 1999 a motion for Agapita's substitution by her surviving children[46]
On August 8, 2000, the Court of Appeals rendered a Decision in the consolidated cases CA-G.R. CV No. 40627
and CA-G.R. SP No. 27565,[47] affirming the trial court's Decision.
In a Motion for Reconsideration dated August 21, 2000,[48] counsel for the Catungals, Atty. Borromeo, argued
for the first time that paragraphs 1(b) and 5[49] of the Conditional Deed of Sale, whether taken separately or
jointly, violated the principle of mutuality of contracts under Article 1308 of the Civil Code and thus, said
contract was void ab initio. He adverted to the cases mentioned in his various citations of authorities to support
his argument of nullity of the contract and his position that this issue may be raised for the first time on appeal.
Meanwhile, a Second Motion for Substitution[50] was filed by Atty. Borromeo in view of the death of Jose
Catungal.
In a Resolution dated January 30, 2001, the Court of Appeals allowed the substitution of the deceased Agapita
and Jose Catungal by their surviving heirs and denied the motion for reconsideration for lack of merit
Hence, the heirs of Agapita and Jose Catungal filed on March 2001 the present petition for review,[51] which
essentially argued that the Court of Appeals erred in not finding that paragraphs 1(b) and/or 5 of the Conditional
Deed of Sale, violated the principle of mutuality of contracts under Article 1308 of the Civil Code. Thus, said
contract was supposedly void ab initio and the Catungals' rescission thereof was superfluous.
In his Comment,[52] Rodriguez highlighted that (a) petitioners were raising new matters that cannot be passed
upon on appeal; (b) the validity of the Conditional Deed of Sale was already admitted and petitioners cannot be
allowed to change theories on appeal; (c) the questioned paragraphs of the Conditional Deed of Sale were valid;
and (d) petitioners were the ones who committed fraud and breach of contract and were not entitled to relief for
not having come to court with clean hands.
The Court gave due course to the Petition[53] and the parties filed their respective Memoranda.

The issues to be resolved in, the case at bar can be summed into two questions:
I.

Are petitioners allowed to raise their theory of nullity of the Conditional Deed of Sale for the first time
on appeal?

II.

Do paragraphs 1(b) and 5 of the Conditional Deed of Sale violate the principle of mutuality of contracts
under Article 1308 of the Civil Code?

On petitioners' change of theory

Petitioners claimed that the Court of Appeals should have reversed the trial courts' Decision on the ground of
the alleged nullity of paragraphs 1(b) and 5 of the Conditional Deed of Sale notwithstanding that the same was
not raised as an error in their appellants' brief. Citing Catholic Bishop of Balanga v. Court of Appeals,[54]
petitioners argued in the Petition that this case falls under the following exceptions:
(3) Matters not assigned as errors on appeal but consideration of which is necessary in arriving at a just decision
and complete resolution of the case or to serve the interest of justice or to avoid dispensing piecemeal justice;
(4) Matters not specifically assigned as errors on appeal but raised in the trial court and are matters of record
having some bearing on the issue submitted which the parties failed to raise or which the lower court ignored;
(5) Matters not assigned as errors on appeal but closely related to an error assigned; and
(6) Matters not assigned as errors but upon which the determination of a question properly assigned is
dependent.
We are not persuaded.
This is not an instance where a party merely failed to assign an issue as an error in the brief nor failed to argue a
material point on appeal that was raised in the trial court and supported by the record. Neither is this a case
where a party raised an error closely related to, nor dependent on the resolution of, an error properly assigned in
his brief. This is a situation where a party completely changes his theory of the case on appeal and abandons his
previous assignment of errors in his brief, which plainly should not be allowed as anathema to due process.
Petitioners should be reminded that the object of pleadings is to draw the lines of battle between the litigants
and to indicate fairly the nature of the claims or defenses of both parties.[56] In Philippine National Construction
Corporation v. Court of Appeals,[57] we held that "[w]hen a party adopts a certain theory in the trial court, he
will not be permitted to change his theory on appeal, for to permit him to do so would not only be unfair to the
other party but it would also be offensive' to the basic rules of fair play, justice and due process."
We have also previously ruled that "courts of justice have no jurisdiction or power to decide a question not in
issue. Thus, a judgment that goes beyond the issues and purports to adjudicate something on which the court did
not hear the parties, is not only irregular but also extrajudicial and invalid. The rule rests on the fundamental
tenets of fair play."[59]
During the proceedings before the trial court, the spouses Catungal never claimed that the provisions in the
Conditional Deed of Sale, stipulating that the payment of the balance of the purchase price was contingent upon
the successful negotiation of a road right of way (paragraph 1[b]) and granting Rodriguez the option to rescind
(paragraph 5), were void for allegedly making the fulfillment of the contract dependent solely on the will of
Rodriguez.

On the contrary, with respect to paragraph 1(b), the Catungals did not aver in the Answer (and its amended
versions) that the payment of the purchase price was subject to the will of Rodriguez but rather they claimed
that paragraph 1(b) in relation to 1(c) only presupposed a reasonable time be given to Rodriguez to negotiate the
road right of way. However, it was petitioners' theory that more than sufficient time had already been given
Rodriguez to negotiate the road right of way. Consequently, Rodriguez's refusal/failure to pay the balance of the
purchase price, upon demand, was allegedly indicative of lack of funds and a breach of the contract on the part
of Rodriguez.
Anent paragraph 5 of the Conditional Deed of Sale, regarding Rodriguez's option to rescind, it was petitioners'
theory in the court a quo that notwithstanding such provision, they retained the right to rescind the contract for
Rodriguez's breach of the same under Article 1191 of the Civil Code.
Verily, the first time petitioners raised their theory of the nullity of the Conditional Deed of Sale in view of the
questioned provisions was only in their Motion for Reconsideration of the Court of Appeals' Decision, affirming
the trial court's judgment. The previous filing of various citations of authorities by Atty. Borromeo and the
Court of Appeals' resolutions noting such citations were of no moment. The citations of authorities merely listed
cases and their main rulings without even any mention of their relevance to the present case or any prayer for
the Court of Appeals to consider them. In sum, the Court of Appeals did not err in disregarding the citations of
authorities or in denying petitioners' motion for reconsideration of the assailed August 8, 2000 Decision in view
of the proscription against changing legal theories on appeal.
Ruling on the questioned provisions of the
Conditional Deed of Sale
Even assuming for the sake of argument that this Court may overlook the procedural misstep of petitioners, we
still cannot uphold their belatedly proffered arguments.
At the outset, it should be noted that what the parties entered into is a Conditional Deed of Sale, whereby the
spouses Catungal agreed to sell and Rodriguez agreed to buy Lot 10963 conditioned on the payment of a certain
price but the payment of the purchase price was additionally made contingent on the successful negotiation of a
road right of way. It is elementary that "[i]n conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of the event which
constitutes the condition."[60]
Petitioners rely on Article 1308 of the Civil Code to support their conclusion regarding the claimed nullity of
the aforementioned provisions. Article 1308 states that "[t]he contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them."
Article 1182 of the Civil Code, in turn, provides:
Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional
obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall take
effect in conformity with the provisions of this Code.
In the past, this Court has distinguished between a condition imposed on the perfection of a contract and a
condition imposed merely on the performance of an obligation. While failure to comply with the first condition
results in the failure of a contract, failure to comply with the second merely gives the other party the option to
either refuse to proceed with the sale or to waive the condition.[61] This principle is evident in Article 1545 of the
Civil Code on sales, which provides in part:

Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition which is not
performed, such party may refuse to proceed with the contract or he may waive performance of the condition x
x x.
Paragraph 1(b) of the Conditional Deed of Sale, stating that respondent shall pay the balance of the purchase
price when he has successfully negotiated and secured a road right of way, is not a condition on the perfection
of the contract nor on the validity of the entire contract or its compliance as contemplated in Article 1308. It is a
condition imposed only on respondent's obligation to pay the remainder of the purchase price. In our view and
applying Article 1182, such a condition is not purely potestative as petitioners contend. It is not dependent on
the sole will of the debtor but also on the will of third persons who own the adjacent land and from whom the
road right of way shall be negotiated. In a manner of speaking, such a condition is likewise dependent on
chance as there is no guarantee that respondent and the third party-landowners would come to an agreement
regarding the road right of way. This type of mixed condition is expressly allowed under Article 1182 of the
Civil Code.
Analogous to the present case is Romero v. Court of Appeals,[62] wherein the Court interpreted the legal effect of
a condition in a deed of sale that the balance of the purchase price would be paid by the vendee when the vendor
has successfully ejected the informal settlers occupying the property. In Romero, we found that such a condition
did not affect the perfection of the contract but only imposed a condition on the fulfillment of the obligation to
pay the balance of the purchase price, to wit:
From the moment the contract is perfected, the parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with
good faith, usage and law. Under the agreement, private respondent is obligated to evict the squatters on the
property. The ejectment of the squatters is a condition the operative act of which sets into motion the
period of compliance by petitioner of his own obligation, i.e., to pay the balance of the purchase price.
Private respondent's failure "to remove the squatters from the property" within the stipulated period
gives petitioner the right to either refuse to proceed! with the agreement or waive that condition in
consonance with Article 1545 of the Civil Code. This option clearly belongs to petitioner and not to private
respondent.
We share the opinion of the appellate court that the undertaking required of private respondent does not
constitute a "potestative condition dependent solely on his will" that might, otherwise, be void in
accordance with Article 1182 of the Civil Code but a "mixed" condition "dependent not on the will of the
vendor alone but also of third persons like the squatters and government agencies and personnel
concerned." We must hasten to add, however, that where the so-called "potestative condition" is imposed not
on the birth of the obligation but on its fulfillment, only the condition is avoided, leaving unaffected the
obligation itself.[63] (Emphases supplied.)
From the provisions of the Conditional Deed of Sale subject matter of this case, it was the vendee (Rodriguez)
that had the obligation to successfully negotiate and secure the road right of way. However, in the decision of
the trial court, which was affirmed by the Court of Appeals, it was found that respondent Rodriguez diligently
exerted efforts to secure the road right of way but the spouses Catungal, in bad faith, contributed to the collapse
of the negotiations for said road right of way. To quote from the trial court's decision:
It is therefore apparent that the vendee's obligations (sic) to pay the balance of the purchase price arises only
when the road-right-of-way to the property shall have been successfully negotiated, secured and provided. In
other words, the obligation to pay the balance is conditioned upon the acquisition of the road-right-of-way, in
accordance with paragraph 2 of Article 1181 of the New Civil Code. Accordingly, "an obligation dependent
upon a suspensive condition cannot be demanded until after the condition takes place because it is only after the
fulfillment of the condition that the obligation arises." (Javier v[s] CA 183 SCRA) Exhibits H, D, P, R, T, FF
and JJ show that plaintiff [Rodriguez] indeed was diligent in his efforts to negotiate for a road-right-of-

way to the property. The written offers, proposals and follow-up of his proposals show that plaintiff [Rodriguez]
went all out in his efforts to immediately acquire an access road to the property, even going to the extent of
offering P3,000.00 per square meter for the road lots (Exh. Q) from the original P550.00 per sq. meter. This
Court also notes that defendant (sic) [the Catungals] made misrepresentation in the negotiation they have
entered into with plaintiff [Rodriguez]. (Exhs. F and G) The misrepresentation of defendant (sic) [the
Catungals] as to the third lot (Lot 10986) to be part and parcel of the subject property [(]Lot 10963)
contributed in defeating the plaintiffs [Rodriguez's] effort in acquiring the road-right-of-way to the
property. Defendants [the Catungals] cannot now invoke the non-fulfillment of the condition in the
contract as a ground for rescission when defendants [the Catungals] themselves are guilty of preventing
the fulfillment of such condition.
From the foregoing, this Court is of the considered view that rescission of the conditional deed of sale by the
defendants is without any legal or factual basis.[64] x x x. (Emphases supplied.)
In all, we see no cogent reason to disturb the foregoing factual findings of the trial court.
Furthermore, it is evident from the language of paragraph 1(b) that the condition precedent (for respondent's
obligation to pay the balance of the purchase price to arise) in itself partly involves an obligation to do, i.e., the
undertaking of respondent to negotiate and secure a road right of way at his own expense.[65] It does not escape
our notice as well, that far from disclaiming paragraph 1(b) as void, it was the Catungals' contention before the
trial court that said provision should be read in relation to paragraph 1(c) which stated:
c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility of the VENDEE
to secure and any or all cost relative to the acquisition thereof shall be borne solely by the VENDEE. He shall,
however, be accorded with enough time necessary for the success of his endeavor; granting him a free hand
in negotiating for the passage.[66] (Emphasis supplied.)
The Catungals' interpretation of the foregoing stipulation was that Rodriguez's obligation to negotiate and
secure a road right of way was one with a period and that period, i.e., "enough time" to negotiate, had already
lapsed by the time they demanded the payment of P5,000,000.00 from respondent. Even assuming arguendo
that the Catungals were correct that the respondent's obligation to negotiate a road right of way was one with an
uncertain period, their rescission of the Conditional Deed of Sale would still be unwarranted. Based on their
own theory, the Catungals had a remedy under Article 1197 of the Civil Code, which mandates:
Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred
that a period was intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of the debtor.
In every case, the courts shall determine such period as may under the circumstances have been probably
contemplated by the parties. Once fixed by the courts, the period cannot be changed by them.
What the Catungals should have done was to first file an action in court to fix the period within which
Rodriguez should accomplish the successful negotiation of the road fight of way pursuant to the above quoted
provision. Thus, the Catungals' demand for Rodriguez to make an additional payment of P5,000,000.00 was
premature and Rodriguez's failure to accede to such demand did not justify the rescission of the contract.
With respect to petitioners' argument that paragraph 5 of the Conditional Deed of Sale likewise rendered the
said contract void, we find no merit to this theory. Paragraph 5 provides:
5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his option to
rescind the herein Conditional Deed of Sale, the VENDEE shall notify the VENDOR by way of a written notice

relinquishing his rights over the property. The VENDEE shall then be reimbursed by the VENDOR the sum of
FIVE HUNDRED THOUSAND PESOS (500,000,00) representing the downpayment, interest free, payable
but contingent upon the event that the VENDOR shall have been able to sell the property to another party.[67]
Petitioners posited that the above stipulation was the "deadliest" provision in the Conditional Deed of Sale for
violating the principle of mutuality of contracts since it purportedly rendered the contract subject to the will of
respondent.
We do not agree.
It is petitioners' strategy to insist that the Court examine the first sentence of paragraph 5 alone and, resist a
correlation of such sentence with other provisions of the contract. Petitioners' view, however, ignores a basic
rule in the interpretation of contracts - that the contract should be taken as a whole.
Article 1374 of the Civil Code provides that "[t]he various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result from all of them taken jointly." The same
Code further sets down the rule that "[i]f some stipulation of any contract should admit of several meanings, it
shall be understood as bearing that import which is most adequate to render it effectual."[68]
Similarly, under the Rules of Court it is prescribed that "[i]n the construction of an instrument where there are
several provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all"[69]
and "for the proper construction of an instrument, the circumstances under which it was made, including the
situation of the subject thereof and of the parties to it, may be shown, so that the judge may be placed in the
position of those whose language he is to interpret."[70]
Bearing in mind the aforementioned interpretative rules, we find that the first sentence of paragraph 5 must be
taken in relation with the rest of paragraph 5 and with the other provisions of the Conditional Deed of Sale.
Reading paragraph 5 in its entirety will show that Rodriguez's option to rescind the contract is not absolute as it
is subject to the requirement that there should be written notice to the vendor and the vendor shall only return
Rodriguez's downpayment of P500,000.00, without interest, when the vendor shall have been able to sell the
property to another party. That what is stipulated to be returned is oniy the downpayment of P500,000.00 in the
event that Rodriguez exercises his option to rescind is significant. To recall, paragraph 1(b) of the contract
clearly states that the installments on the balance of the purchase price shall only be paid upon successful
negotiation and procurement of a road right of way. It is clear from such provision that the existence of a road
right of way is a material consideration for Rodriguez to purchase the property. Thus, prior to him being able to
procure the road right of way, by express stipulation in the contract, he is not bound to make additional
payments to the Catungals. It was further stipulated in paragraph 1(b) that: "[i]f however said road right of way
cannot be negotiated, the VENDEE shall give notice to the VENDOR for them to reassess and solve the
problem by taking other options and should the situation ultimately prove futile, he [Rodriguez] shall take
steps to rescind or [cancel] the herein Conditional Deed of Sale." The intention of the parties for providing
subsequently in paragraph 5 that Rodriguez has the option to rescind the sale is undeniably only limited to the
contingency that Rodriguez shall not be able to secure the road right of way. Indeed, if the parties intended to
give Rodriguez the absolute option to rescind the sale at any time, the contract would have provided for the
return of all payments made by Rodriguez and not only the downpayment. To our mind, the reason only the
downpayment was stipulated to be returned is that the vendee's option to rescind can only be exercised in the
event that no road right of way is secured and, thus, the vendee has not made any additional payments, other
than his downpayment.
In sum, Rodriguez's option to rescind the contract is not purely potestative but rather also subject to the same
mixed condition as his obligation to pay the balance of the purchase price - i.e., the negotiation of a road right
of way. In the event the condition is fulfilled (or the negotiation is successful), Rodriguez must pay the balance

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

Conditional Deed of Sale or (b) waive the road right of way and pay the balance of the deducted purchase price
as determined in the RTC Decision dated May 30, 1992.
No pronouncement as to costs.
SO ORDERED.

#17
G.R. No. 174012

November 14, 2008

MACTAN-CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner,

vs.
BENJAMIN TUDTUD, BIENVENIDO TUDTUD, DAVID TUDTUD, JUSTINIANO BORGA, JOSE
BORGA, and FE DEL ROSARIO, represented by LYDIA ADLAWAN, Attorney-in-fact, respondents.
DECISION
CARPIO MORALES, J.:
The predecessors-in-interest of respondents Benjamin Tudtud et al. were the owners of a parcel of land in Cebu
City, identified as Lot No. 988 of the Banilad Estate and covered by Transfer Certificate of Title (TCT) No.
27692.
In 1949, the National Airports Corporation (NAC), a public corporation of the Republic of the Philippines,
embarked on a program to expand the Cebu Lahug Airport. For this purpose, it sought to acquire, by negotiated
sale or expropriation, several lots adjoining the then existing airport.
By virtue of a judgment rendered by the third branch of the Court of First Instance in Civil Case No. R-1881,
the NAC acquired Lot No. 988, among other lots. TCT No. 26792 covering Lot No. 988 was thus cancelled and
TCT No. 27919 was issued in its stead in the name of the Republic of the Philippines. No structures related to
the operation of the Cebu Lahug Airport were constructed on Lot No. 988.
Lot No. 988 was later transferred to the Air Transport Office (ATO), and still later to petitioner Mactan Cebu
International Airport Authority (MCIAA) in 1990 via Republic Act No. 6958.
When the Mactan International Airport at Lapu Lapu City was opened for commercial flights, the Cebu Lahug
Airport was closed and abandoned and a significant area thereof was purchased by the Cebu Property Ventures,
Inc. for development as a commercial complex.
By letter of October 7, 1996 to the general manager of the MCIAA, Lydia Adlawan, acting as attorney-in-fact of
the original owners of Lot No. 988, demanded to repurchase the lot at the same price paid at the time of the
taking, without interest, no structures or improvements having been erected thereon and the Cebu Lahug Airport
having been closed and abandoned, hence, the purpose for which the lot was acquired no longer existed.1

As the demand remained unheeded, respondents, represented by their attorney-in-fact Lydia Adlawan, filed a
Complaint2 before the Regional Trial Court (RTC) of Cebu City, docketed as Civil Case No. CEB-19464, for
reconveyance and damages with application for preliminary injunction/restraining order against the MCIAA.
Respondents anchored their complaint on the assurance they claimed was made by the NAC that the original
owners and/or their successors-in-interest would be entitled to repurchase the lot when and in the event that it
was no longer used for airport purposes.3
In its Answer with Counterclaim,4 the MCIAA countered that, inter alia, the decision in Civil Case No. R-1881
did not lay any condition that the lots subject of expropriation would revert to their owners in case the
expansion of the Cebu Lahug Airport would not materialize.5
To prove their claim, respondents presented witnesses who testified that the NAC promised their predecessorsin-interest-original owners of Lot No. 988 that it would be returned to them should the expansion of the Cebu
Lahug Airport not materialize.6 And respondents invoked this Court's ruling in MCIAA v. Court of Appeals7
involving another lot acquired by the NAC for the expansion of the Cebu Lahug Airport. In that case, although
the deed of sale between the therein respondent Melba Limbaco's predecessor-in-interest and NAC did not
contain a provision for the repurchase of the therein subject lot should the purpose for its acquisition ceased to
exist, this Court allowed Melba Limbaco to recover the lot based on parole evidence that the NAC promised the
right of repurchase to her predecessor-in-interest.8
The MCIAA disputed the applicability to the present case of the immediately-cited MCIAA ruling, the NAC
having acquired Lot No. 988 not by a deed of sale but by virtue of a final judicial decree of expropriation which
cannot be modified by parole evidence.9
After trial, Branch 20 of the Cebu City RTC rendered judgment in favor of respondents, disposing as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiffs as against
defendant ordering the latter to reconvey the entire subject real property covered by T.C.T. No. 27919
within 15 days from receipt of this decision.
SO ORDERED.10 (Underscoring supplied)
On appeal,11 the Court of Appeals, by Decision of May 8, 200612 affirmed the RTC decision. Its Motion for
Reconsideration13 having been denied,14 the MCIAA filed the present petition,15 faulting the appellate court in
"disregarding" the following considerations:
I.
THE JUDGMENT OF EXPROPRIATION IN CIVIL CASE NO. R-1881 WAS ABSOLUTE AND
UNCONDITIONAL.
II.
RESPONDENTS' CLAIM OF ALLEGED VERBAL ASSURANCES FROM THE GOVERNMENT
VIOLATES THE STATUTE OF FRAUDS.
III.
THE BEST EVIDENCE SHOWING THE UNCONDITIONAL ACQUISITION OF LOT 988 IS THE
CERTIFICATE OF TITLE.16 (Underscoring supplied)

In insisting that the judgment in Civil Case No. R-1881 was absolute and unconditional, the MCIAA cites Fery
v. Municipality of Cabanatuan17 which held that:
x x x If x x x the decree of expropriation gives to the entity a fee simple title, then, of course, the land
becomes the absolute property of the expropriator, whether it be the State, a province, or municipality,
and in that case the non-user does not have the effect of defeating the title acquired by the expropriation
proceedings.
When land has been acquired for public use in fee simple, unconditionally, either by the exercise of
eminent domain or by purchase, the former owner retains no rights in the land, and the public use may
be abandoned, or the land may be devoted to a different use, without any impairment of the estate or title
acquired, or any reversion to the former owner.18 (Italics in the original; underscoring supplied)
MCIAA in fact offers the text of the trial court's decision in R-1881, inviting attention to the dispositive portion
thereof, to prove that the judgment of expropriation entered in favor of the government is absolute and
unconditional, and that there is nothing in the decision that would show that the government made any
assurance or stipulation whatsoever to reconvey the subject lot in case the expansion of the Lahug airport would
not materialize.19
But also in Fery, this Court, passing on the question of whether a private land which is expropriated for a
particular public use, but which particular public use is abandoned, may be returned to its former owner, held:
The answer to that question depends upon the character of the title acquired by the expropriator x x x. If,
for example, land is expropriated for a particular purpose, with the condition that when that purpose is
ended or abandoned the property shall return to its former owner, then, of course, when the purpose is
terminated or abandoned, the former owner reacquires the property so expropriated. If, for example, land
is expropriated for a public street and the expropriation is granted upon conditions that the city can only
use it for a public street, then, of course, when the city abandons its use as a public street, it returns to
the former owner, unless there is some statutory provision to the contrary.20 (Underscoring supplied)
That nothing in the trial court's decision in Civil Case No. R-1881 indicates a condition attached to the
expropriation of the subject lot, this Court, in Heirs of Timoteo Moreno v. MCIAA21 involving the rights of
another former owner of lots also involved in Civil Case No. R-1881, noting the following portion of the body
of the said trial court's decision:
As for the public purpose of the expropriation proceeding, it cannot now be doubted. Although the
Mactan Airport is being constructed, it does not take away the actual usefulness and importance of the
Lahug Airport: it is handling the air traffic both civilian and military. From it aircrafts fly to Mindanao
and Visayas and pass through it on their return flights to the North and Manila. Then, no evidence was
adduced to show how soon is the Mactan Airport to be placed in operation and whether the Lahug
Airport will be closed immediately thereafter. It is for the other departments of the Government to
determine said matters. The Court cannot substitute its judgment for those of the said departments and
agencies. In the absence of such a showing, the Court will presume that the Lahug Airport will continue
to be in operation,22
held:
While the trial court in Civil Case No. R-1881 could have simply acknowledged the presence of public
purpose for the exercise of eminent domain regardless of the survival of Lahug Airport, the trial court in
its Decision chose not to do so but instead prefixed its finding of public purpose upon its understanding
that "Lahug Airport will continue to be in operation." Verily, these meaningful statements in the body of
the Decision warrant the conclusion that the expropriated properties would remain to be so until it was

confirmed that Lahug Airport was no longer "in operation". This inference further implies two (2)
things: (a) after the Lahug Airport ceased its undertaking as such and the expropriated lots were not
being used for any airport expansion project, the rights vis--vis the expropriated Lots Nos. 916 and 920
as between the State and their former owners, petitioners herein, must be equitably adjusted; and, (b)
the foregoing unmistakable declarations in the body of the Decision should merge with and
become an intrinsic part of the fallo thereof which under the premises is clearly inadequate since
the dispositive portion is not in accord with the findings as contained in the body thereof.23
On the Heirs of Moreno's motion for reconsideration, this Court affirmed its decision, emphasizing that "the
fallo of the decision in Civil Case No. R-1881 must be read in reference to the other portions of the decision in
which it forms a part[,]"24 and that "[a] reading of the Court's judgment must not be confined to the dispositive
portion alone; rather, it should be meaningfully construed in unanimity with the ratio decidendi thereof to grasp
the true intent and meaning of a decision."25
The MCIAA goes on, however, to cite MCIAA v. Court of Appeals and Chiongbian26 wherein this Court rejected
testimonial evidence of an assurance of a right to repurchase property acquired by the NAC under the judgment
in still the same Civil Case No. R-1881. The MCIAA's reliance on this case is misplaced. As this Court noted in
Heirs of Timoteo Moreno v. MCIAA,27 the respondent Chiongbian put forth inadmissible and inconclusive
evidence, Chiongbian's testimony as well as that of her witness as to the existence of the agreement being
hearsay.28
In contrast, in the case at bar, respondents' witness respondent Justiniano Borga himself, who represented his
mother-one of the original owners of subject lot during the negotiations between the NAC and the landowners,
declared that the original owners did not oppose the expropriation of the lot upon the assurance of the NAC that
they would reacquire it if it is no longer needed by the airport.29
Another witness for respondent, Eugenio Amores, an employee of the NAC, declared that in the course of some
meetings with the landowners when he accompanied the NAC legal team and was requested to jot down what
transpired thereat, he personally heard the NAC officials give the assurance claimed by respondents.30
The MCIAA nevertheless urges this Court to reject respondents' testimonial evidence, citing Article 1403 (2)(e)
of the Civil Code which places agreements for the sale of real property or an interest therein within the coverage
of the Statute of Frauds.
The Statute of Frauds applies, however, only to executory contracts.31 It does not apply to contracts which have
been completely or partially performed,32 the rationale thereof being as follows:
x x x In executory contracts there is a wide field for fraud because unless they be in writing there is no
palpable evidence of the intention of the contracting parties. The statute has precisely been enacted to
prevent fraud. However, if a contract has been totally or partially performed, the exclusion of parol
evidence would promote fraud or bad faith, for it would enable the defendant to keep the benefits
already delivered by him from the transaction in litigation, and, at the same time, evade the obligations,
responsibilities or liabilities assumed or contracted by him thereby.33 (Underscoring supplied)
A word on MCIAA's argument that MCIAA v. Court of Appeals, supra, does not apply to the present case. As
reflected in the earlier-quoted ruling in Fery, the mode of acquisition for public purpose of a land - whether by
expropriation or by contract - is not material in determining whether the acquisition is with or without
condition.
In fine, the decision in favor of respondents must be affirmed. The rights and duties between the MCIAA and
respondents are governed by Article 1190 of the Civil Code34 which provides:

When the conditions have for their purpose the extinguishment of an obligation to give, the parties, upon
the fulfillment of said conditions, shall return to each other what they have received.
In case of the loss, deterioration, or improvement of the thing, the provisions which, with respect to the
debtor, are laid down in the preceding article [Article 1189] shall be applied to the party who is bound to
return.
xxxx
While the MCIAA is obliged to reconvey Lot No. 988 to respondents, respondents must return to the MCIAA
what they received as just compensation for the expropriation of Lot No. 988, plus legal interest to be computed
from default,35 which in this case runs from the time the MCIAA complies with its obligation to the
respondents.36
Respondents must likewise pay the MCIAA the necessary expenses it may have incurred in sustaining Lot No.
988 and the monetary value of its services in managing it to the extent that respondents were benefited thereby.
Following Article 118737 of the Civil Code, the MCIAA may keep whatever income or fruits it may have
obtained from Lot No. 988, and respondents need not account for the interests that the amounts they received as
just compensation may have earned in the meantime.
In accordance with the earlier-quoted Article 1190 of the Civil Code vis--vis Article 1189 which provides that
"[i]f a thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor x x
x," respondents, as creditors, do not have to settle as part of the process of restitution the appreciation in value
of Lot 988 which is a natural consequence of nature and time.
WHEREFORE, the petition is, in light of the foregoing disquisition, DENIED. The May 8, 2006 Decision of
the Court of Appeals affirming that of Branch 20 of the Cebu City Regional Trial Court is AFFIRMED with
MODIFICATION as follows:
1. Respondents are ORDERED to return to the MCIAA the just compensation they received for the
expropriation of Lot No. 988 plus legal interest in the case of default, to be computed from the time the
MCIAA complies with its obligation to reconvey Lot No. 988 to them;
2. Respondents are ORDERED to pay the MCIAA the necessary expenses it incurred in sustaining Lot
No. 988 and the monetary value of its services to the extent that respondents were benefited thereby;
3. The MCIAA is ENTITLED to keep whatever fruits and income it may have obtained from Lot No.
988; and
4. Respondents are also ENTITLED to keep whatever interests the amounts they received as just
compensation may have earned in the meantime, as well as the appreciation in value of Lot No. 988
which is a natural consequence of nature and time;
In light of the foregoing modifications, the case is REMANDED to Branch 20 the Regional Trial Court of Cebu
City only for the purpose of receiving evidence on the amounts that respondents will have to pay to the MCIAA
in accordance with this Court's decision.
SO ORDERED.

#18
HEIRS OF RAMON C. GAITE, CYNTHIA
GOROSTIZA GAITE and RHOGEN
BUILDERS,

G.R. No. 177685

Petitioners,

Present:

CARPIO MORALES, J.,

- versus -

Chairperson,
NACHURA,
BRION,
VILLARAMA, JR., and
SERENO, JJ.

THE PLAZA, INC. and FGU INSURANCE

CORPORATION,

Promulgated:

Respondents.
January 26, 2011
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

VILLARAMA, JR., J.:

This is a petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as amended, which
seeks to reverse and set aside the Decision34[1] dated June 27, 2006 and Resolution35[2] dated April 20, 2007 of
the Court of Appeals (CA) in CA-G.R. CV No. 58790. The CA affirmed with modification the Decision 36[3]
dated July 3, 1997 of the Regional Trial Court (RTC) of Makati City, Branch 63, in Civil Case Nos. 1328
(43083) and 40755.
The facts are as follows:
On July 16, 1980, The Plaza, Inc. (The Plaza), a corporation engaged in the restaurant business, through its
President, Jose C. Reyes, entered into a contract37[4] with Rhogen Builders (Rhogen), represented by Ramon C.
Gaite, for the construction of a restaurant building in Greenbelt, Makati, Metro Manila for the price of
P7,600,000.00. On July 18, 1980, to secure Rhogens compliance with its obligation under the contract, Gaite and
FGU Insurance Corporation (FGU) executed a surety bond in the amount of P1,155,000.00 in favor of The Plaza.
On July 28, 1980, The Plaza paid P1,155,000.00 less withholding taxes as down payment to Gaite. Thereafter,
Rhogen commenced construction of the restaurant building.
In a letter dated September 10, 1980, Engineer Angelito Z. Gonzales, the Acting Building Official of the
Municipality of Makati, ordered Gaite to cease and desist from continuing with the construction of the building
for violation of Sections 301 and 302 of the National Building Code (P.D. 1096) and its implementing rules and
regulations.38[5] The letter was referred to The Plazas Project Manager, Architect Roberto L. Tayzon.
On September 15, 1980, Engr. Gonzales informed Gaite that the building permit for the construction of
the restaurant was revoked for non-compliance with the provisions of the National Building Code and for the
additional temporary construction without permit.39[6] The Memorandum Report of Building Inspector Victor
Gregory enumerated the following violations of Rhogen in the construction of the building:

34
35
36
37
38
39

1) No permit for Temporary Structure.

2) No notice of concrete pouring.
3) Some workers have no safety devices.
4) The Secretary and Construction Foreman refused to [receive] the Letter of Stoppage dated
September 10, 1980.
5) Mr. Ramon Gaite [is] questioning the authority of the Building Officials Inspector.
6) Construction plans use[d] on the job site is not in accordance to the approved plan.40[7]
On September 19, 1980, the Project Manager (Tayzon) in his Construction Memo #23 reported on his
evaluation of Progress Billing #1 submitted by Rhogen. Tayzon stated that actual jobsite assessment showed
that the finished works fall short of Rhogens claimed percentage of accomplishment and Rhogen was entitled to
only P32,684.16 and not P260,649.91 being demanded by Rhogen. Further, he recommended that said amount
payable to Rhogen be withheld pending compliance with Construction Memo #18, resolution of cases regarding
unauthorized withdrawal of materials from jobsite and stoppage of work by the Municipal Engineers Office of
Makati.41[8]
On October 7, 1980, Gaite wrote Mr. Jose C. Reyes, President of The Plaza regarding his
actions/observations on the stoppage order issued. On the permit for temporary structure, Gaite said the plans
were being readied for submission to the Engineering Department of the Municipality of Makati and the
application was being resent to Reyes for his appropriate action. As to the notice for concrete pouring, Gaite
said that their construction set-up provides for a Project Manager to whom the Pouring Request is first
submitted and whose job is to clear to whoever parties are involved (this could still be worked out with the
Building Inspector). Regarding the safety devices for workers, Gaite averred that he had given strict rules on
this but in the course of construction some workers have personal preferences. On the refusal of the secretary
and construction foreman to receive the stoppage order dated September 10, 1980, Gaite took responsibility but
insisted it was not a violation of the National Building Code. Likewise, questioning the authority of the
Building Inspector is not a violation of the Code although Gaite denied he ever did so. Lastly, on the
construction plans used in the jobsite not being in accordance with the approved plan, Gaite said he had sent
Engr. Cristino V. Laurel on October 3, 1980 to Reyes office and make a copy of the only approved plan which

40
41

was in the care of Reyes, but the latter did not give it to Engr. Laurel. Gaite thus thought that Reyes would
handle the matter by himself.42[9]
On the same day, Gaite notified Reyes that he is suspending all construction works until Reyes and the
Project Manager cooperate to resolve the issue he had raised to address the problem. 43[10] This was followed by
another letter dated November 18, 1980 in which Gaite expressed his sentiments on their aborted project and
reiterated that they can still resolve the matter with cooperation from the side of The Plaza. 44[11] In his replyletter dated November 24, 1980, Reyes asserted that The Plaza is not the one to initiate a solution to the
situation, especially after The Plaza already paid the agreed down payment of P1,155,000.00, which
compensation so far exceeds the work completed by Rhogen before the municipal authorities stopped the
construction for several violations. Reyes made it clear they have no obligation to help Rhogen get out of the
situation arising from non-performance of its own contractual undertakings, and that The Plaza has its rights and
remedies to protect its interest.45[12]
Subsequently, the correspondence between Gaite and Reyes involved the custody of remaining bags of
cement in the jobsite, in the course of which Gaite was charged with estafa for ordering the removal of said
items. Gaite complained that Reyes continued to be uncooperative in refusing to meet with him to resolve the
delay. Gaite further answered the estafa charge by saying that he only acted to protect the interest of the owner
(prevent spoilage/hardening of cement) and that Reyes did not reply to his request for exchange.46[13]
On January 9, 1981, Gaite informed The Plaza that he is terminating their contract based on the
Contractors Right to Stop Work or Terminate Contracts as provided for in the General Conditions of the
Contract. In his letter, Gaite accused Reyes of not cooperating with Rhogen in solving the problem concerning
the revocation of the building permits, which he described as a minor problem. Additionally, Gaite demanded

42
43
44
45
46

the payment of P63,058.50 from The Plaza representing the work that has already been completed by Rhogen. 47
[14]
On January 13, 1981, The Plaza, through Reyes, countered that it will hold Gaite and Rhogen fully
responsible for failure to comply with the terms of the contract and to deliver the finished structure on the
stipulated date. Reyes argued that the down payment made by The Plaza was more than enough to cover
Rhogens expenses.48[15]
In a subsequent letter dated January 20, 1981, Reyes adverted to Rhogens undertaking to complete the
construction within 180 calendar days from July 16, 1980 or up to January 12, 1981, and to pay the agreed
payment of liquidated damages for every month of delay, chargeable against the performance bond posted by
FGU. Reyes invoked Section 121 of the Articles of General Conditions granting the owner the right to terminate
the contract if the contractor fails to execute the work properly and to make good such deficiencies and
deducting the cost from the payment due to the contractor. Reyes also informed Gaite that The Plaza will
continue the completion of the structure utilizing the services of a competent contractor but will charge Rhogen
for liquidated damages as stipulated in Article VIII of the Contract. After proper evaluation of the works
completed by Rhogen, The Plaza shall then resume the construction and charge Rhogen for all the costs and
expenses incurred in excess of the contract price. In the meantime that The Plaza is still evaluating the extent
and condition of the works performed by Rhogen to determine whether these are done in accordance with the
approved plans, Reyes demanded from Gaite the reimbursement of the balance of their initial payment of
P1,155,000.00 from the value of the works correctly completed by Rhogen, or if none, to reimburse the entire
down payment plus expenses of removal and replacement. Rhogen was also asked to turn over the jobsite
premises as soon as possible.49[16] The Plaza sent copy of said letter to FGU but the latter replied that it has no
liability under the circumstances and hence it could not act favorably on its claim against the bond.50[17]
On March 3, 1981, The Plaza notified Gaite that it could no longer credit any payment to Rhogen for the
work it had completed because the evaluation of the extent, condition, and cost of work done revealed that in
addition to the violations committed during the construction of the building, the structure was not in accordance
with plans approved by the government and accepted by Ayala. Hence, The Plaza demanded the reimbursement
47
48
49
50

of the down payment, the cost of uprooting or removal of the defective structures, the value of owner-furnished
materials, and payment of liquidated damages.51[18]
On March 26, 1981, The Plaza filed Civil Case No. 40755 for breach of contract, sum of money and
damages against Gaite and FGU in the Court of First Instance (CFI) of Rizal. 52[19] The Plaza later amended its
complaint to include Cynthia G. Gaite and Rhogen. 53[20] The Plaza likewise filed Civil Case No. 1328 (43083)
against Ramon C. Gaite, Cynthia G. Gaite and/or Rhogen Builders also in the CFI of Rizal for nullification of
the project development contract executed prior to the General Construction Contract subject of Civil Case No.
40755, which was allegedly in violation of the provisions of R.A. No. 545 (Architectural Law of the
Philippines).54[21] After the reorganization of the Judiciary in 1983, the cases were transferred to the RTC of
Makati and eventually consolidated.
On July 3, 1997, Branch 63 of the RTC Makati rendered its decision granting the claims of The Plaza
against Rhogen, the Gaites and FGU, and the cross-claim of FGU against Rhogen and the Gaites. The trial court
ruled that the Project Manager was justified in recommending that The Plaza withhold payment on the progress
billings submitted by Rhogen based on his evaluation that The Plaza is liable to pay only P32,684.16 and not
P260,649.91. The other valid grounds for the withholding of payment were the pending estafa case against
Gaite, non-compliance by Rhogen with Construction Memorandum No. 18 and the non-lifting of the stoppage
order.55[22]
Regarding the non-lifting of the stoppage order, which the trial court said was based on simple
infractions, the same was held to be solely attributable to Rhogens willful inaction. Instead of readily rectifying
the violations, Rhogen continued with the construction works thereby causing more damage. The trial court
pointed out that Rhogen is not only expected to be aware of standard requirements and pertinent regulations on
construction work, but also expressly bound itself under the General Construction Contract to comply with all
the laws, city and municipal ordinances and all government regulations. Having failed to complete the project

51
52
53
54
55

within the stipulated period and comply with its obligations, Rhogen was thus declared guilty of breaching the
Construction Contract and is liable for damages under Articles 1170 and 1167 of the Civil Code.56[23]
The dispositive portion of the trial courts decision reads:
WHEREFORE, in Civil Case No. 40755, defendants Ramon Gaite, Cynthia Gaite and Rhogen
Builders are jointly and severally ordered to pay plaintiff:
1.

the amount of P525,422.73 as actual damages representing owner-furnished

materials with legal interest from the time of filing of the complaint until full
payment;

2.

the amount of P14,504.66 as actual damages representing expenses for uprooting

with interest from the time of filing the complaint until full payment;

3.

the amount of P1,155,000.00 as actual damages representing the downpayment with

legal interest from the time of filing the complaint until full payment;

4.

the amount of P150,000.00 for moral damages;

5.

the amount of P100,000.00 for exemplary damages;

6.

the amount of P500,000.00 as liquidated damages;

7.

the amount of P100,000.00 as reasonable attorneys fees; and,

8.

the cost of suit.

Under the surety bond, defendants Rhogen and FGU are jointly and severally ordered to
pay plaintiff the amount of P1,155,000.00 with legal interest from the time of filing the
complaint until full payment. In the event [that] FGU pays the said amount, third-party
defendants are jointly and severally ordered to pay the same amount to FGU plus P50,000.00 as
reasonable attorneys fees, the latter having been forced to litigate, and the cost of suit.
Civil Case No. 1328 is hereby ordered dismissed with no pronouncement as to cost.
SO ORDERED.57[24]
Dissatisfied, Ramon and Cynthia Gaite, Rhogen and FGU appealed to the CA. 58[25] In view of the death
of Ramon C. Gaite on April 21, 1999, the CA issued a Resolution dated July 12, 2000 granting the substitution

56
57
58

of the former by his heirs Cynthia G. Gaite, Rhoel Santiago G. Gaite, Genevieve G. Gaite and Roman Juan G.
Gaite.59[26]
In their appeal, the heirs of Ramon C. Gaite, Cynthia G. Gaite and Rhogen assigned the following errors,
to wit:
I.

THE TRIAL COURT ERRED IN DECLARING THAT THE GROUNDS RELIED

UPON BY DEFENDANT-APPELLANT RHOGEN BUILDERS IN TERMINATING
THE CONTRACT ARE UNTENABLE;

II.

THE TRIAL COURT ERRED IN DECLARING THAT THE NON-LIFTING OF THE

STOPPAGE ORDER OF THE THEN MUNICIPAL GOVERNMENT OF MAKATI WAS
SOLELY ATTRIBUTABLE TO DEFENDANT-APPELLANT RHOGENS WILLFUL
INACTION;

III.

THE TRIAL COURT ERRED IN FAILING TO CONSIDER THAT IT WAS THE

WILLFUL INACTION OF PLAINTIFF-APPELLEE WHICH MADE IT IMPOSSIBLE
FOR DEFENDANTAPPELLANT RHOGEN TO PERFORM ITS OBLIGATIONS
UNDER THE CONTRACT;

IV.

THE TRIAL COURT ERRED IN AWARDING ACTUAL DAMAGES AS WELL AS

MORAL, EXEMPLARY, AND LIQUIDATED DAMAGES AND ATTORNEYS FEES
SINCE THERE WERE NO FACTUAL AND LEGAL BASES THEREFOR; AND

V.

THE TRIAL COURT ERRED IN FAILING TO AWARD ACTUAL, MORAL AND

EXEMPLARY DAMAGES AND ATTORNEYS FEES IN FAVOR OF DEFENDANTSAPPELLANTS.60[27]

For its part, FGU interposed the following assignment of errors:

59
60

I.

THE REGIONAL TRIAL COURT ERRED IN NOT RULING THAT DEFENDANTAPPELLANT RAMON GAITE VALIDLY TERMINATED THE CONTRACT
BETWEEN HIM AND PLAINTIFF-APPELLEE.

II.

THE REGIONAL TRIAL COURT ERRED IN HOLDING DEFENDANTAPPELLANT RAMON GAITE RESPONSIBLE FOR THE STOPPAGE OF THE
CONSTRUCTION.

III.

THE REGIONAL TRIAL COURT ERRED IN ORDERING DEFENDANTAPPELLANT RAMON GAITE TO PAY THE AMOUNT OF P525,422.73 FOR THE
OWNER FURNISHED MATERIALS.

IV.

THE REGIONAL TRIAL COURT ERRED IN ORDERING DEFENDANTAPPELLANT RAMON GAITE TO PAY PLAINTIFF-APPELLEE THE AMOUNT OF

P14,504.66 AS ALLEGED EXPENSES FOR UPROOTING THE WORK HE

PERFORMED.
V.

THE REGIONAL TRIAL COURT ERRED IN ORDERING DEFENDANTAPPELLANT RAMON GAITE TO REFUND THE DOWN PAYMENT OF
P1,155,000.00 PLAINTIFF-APPELLEE PAID HIM.

VI.

THE REGIONAL TRIAL COURT ERRED IN AWARDING MORAL DAMAGES TO

PLAINTIFF-APPELLEE.

VII.

THE REGIONAL TRIAL COURT ERRED IN AWARDING EXEMPLARY DAMAGES

TO PLAINTIFF-APPELLEE.

VIII. THE REGIONAL TRIAL [COURT] ERRED IN AWARDING LIQUIDATED DAMAGES

TO PLAINTIFF-APPELLEE.
IX.

THE REGIONAL TRIAL COURT ERRED IN AWARDING ATTORNEYS FEES TO

PLAINTIFF-APPELLEE.

X.

THE REGIONAL TRIAL COURT ERRED IN HOLDING DEFENDANTAPPELLANT FGU INSURANCE CORPORATION LIABLE TO PLAINTIFFAPPELLEE.61[28]

On June 27, 2006, the CA affirmed the Decision of the trial court but modified the award of damages as
follows:
WHEREFORE, the Decision dated July 3, 1997 rendered by the Regional Trial Court of
Makati City, Branch 63 in Civil Case Nos. 40755 and 1328 is AFFIRMED with the
modification that: (a) the award for actual damages representing the owner-furnished materials
and the expenses for uprooting are deleted, and in lieu thereof, the amount of P300,000.00 as
temperate damages is awarded; and (b) the awards for moral, exemplary, liquidated and attorneys
fees are likewise deleted.
SO ORDERED.62[29]
According to the CA, The Plaza cannot now be demanded to comply with its obligation under the
contract since Rhogen has already failed to comply with its own contractual obligation. Thus, The Plaza had
every reason not to pay the progress billing as a result of Rhogens inability to perform its obligations under the
contract. Further, the stoppage and revocation orders were issued on account of Rhogens own violations
involving the construction as found by the local building official. Clearly, Rhogen cannot blame The Plaza for
its own failure to comply with its contractual obligations. The CA stressed that Rhogen obliged itself to comply
with all the laws, city and municipal ordinances and all government regulations insofar as they are binding upon
61
62

or affect the parties [to the contract] , the work or those engaged thereon. 63[30] As such, it was responsible for
the lifting of the stoppage and revocation orders. As to Rhogens act of challenging the validity of the stoppage
and revocation orders, the CA held that it cannot be done in the present case because under Section 307 of the
National Building Code, appeal to the Secretary of the Department of Public Works and Highways (DPWH)
whose decision is subject to review by the Office of the President -- is available as remedy for Rhogen.64[31]
However, the CA modified the award of damages holding that the claim for actual damages of
P525,422.73 representing the damaged owner-furnished materials was not supported by any evidence. Instead,
the CA granted temperate damages in the amount of P300,000.00. As to moral damages, no specific finding for
the factual basis of said award was made by the trial court, and hence it should be deleted. Likewise, liquidated
damages is not proper considering that this is not a case of delay but non-completion of the project. The Plaza
similarly failed to establish that Rhogen and Gaite acted with malice or bad faith; consequently, the award of
exemplary damages must be deleted. Finally, there being no bad faith on the part of the defendants, the award of
attorneys fees cannot be sustained.65[32]
The motion for reconsideration of the aforesaid Decision was denied in the Resolution dated April 20,
2007 for lack of merit. Hence, this appeal.
Before us, petitioners submit the following issues:
I.
Whether or not the Court of Appeals acted without or in excess of jurisdiction, or with grave
abuse of discretion amounting to lack of or excess of jurisdiction, when it found that Petitioner
Rhogen had no factual or legal basis to terminate the General Construction Contract.
II.
Whether or not the Court of Appeals acted without or in excess of jurisdiction, or with grave
abuse of discretion amounting to lack of or excess of jurisdiction, when, as a consequence of its
finding that Petitioners did not have valid grounds to terminate the Construction Contract, it
directed Petitioners to return the downpayment paid by The Plaza, with legal interest.
III.

63
64
65

Whether or not the Court of Appeals acted without or in excess of jurisdiction, or with grave
abuse of discretion amounting to lack of or excess of jurisdiction, when, in addition thereto, it
awarded temperate damages to The Plaza.
IV.
Whether or not the Court of Appeals acted without or in excess of jurisdiction, or with grave
abuse of discretion amounting to lack of or excess of jurisdiction, when it failed to award
damages in favor of Petitioners.66[33]
Petitioners contend that the CA gravely erred in not holding that there were valid and legal grounds for Rhogen
to terminate the contract pursuant to Article 1191 of the Civil Code and Article 123 of the General Conditions of
the Construction Contract. Petitioners claim that Rhogen sent Progress Billing No. 1 dated September 10, 1980
and demanded payment from The Plaza in the net amount of P473,554.06 for the work it had accomplished
from July 28, 1980 until September 7, 1980. The Plaza, however, failed to pay the said amount. According to
petitioners, Article 123 of the General Conditions of the Construction Contract gives The Plaza seven days from
notice within which to pay the Progress Billing; otherwise, Rhogen may terminate the contract. Petitioners also
invoke Article 1191 of the Civil Code, which states that the power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is incumbent upon him.
We deny the petition.
Reciprocal obligations are those which arise from the same cause, and in which each party is a debtor
and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They
are to be performed simultaneously such that the performance of one is conditioned upon the simultaneous
fulfillment of the other. Respondent The Plaza predicated its action on Article 1191 67[34] of the Civil Code,
which provides for the remedy of rescission or more properly resolution, a principal action based on breach of
faith by the other party who violates the reciprocity between them. The breach contemplated in the provision is
the obligors failure to comply with an existing obligation. Thus, the power to rescind is given only to the injured
party. The injured party is the party who has faithfully fulfilled his obligation or is ready and willing to perform
his obligation.68[35]

66
67
68

The construction contract between Rhogen and The Plaza provides for reciprocal obligations whereby the latters
obligation to pay the contract price or progress billing is conditioned on the formers performance of its
undertaking to complete the works within the stipulated period and in accordance with approved plans and other
specifications by the owner. Pursuant to its contractual obligation, The Plaza furnished materials and paid the
agreed down payment. It also exercised the option of furnishing and delivering construction materials at the
jobsite pursuant to Article III of the Construction Contract. However, just two months after commencement of
the project, construction works were ordered stopped by the local building official and the building permit
subsequently revoked on account of several violations of the National Building Code and other regulations of
the municipal authorities.
Petitioners reiterate their position that the stoppage order was unlawful, citing the fact that when the new
contractor (ACK Construction, Inc.) took over the project, the local government of Makati allowed the
construction of the building using the old building permit; moreover, the basement depth of only two meters
was retained, with no further excavation made. They cite the testimony of the late Ramon Gaite before the trial
court that at the time, he had incurred the ire of then Mayor of Makati because his (Gaite) brother was the
Mayors political opponent; hence, they sought to file whatever charge they could against him in order to call the
attention of his brother. This political harassment defense was raised by petitioners in their Amended Answer.
Gaites testimony was intended to explain the circumstances leading to his decision to terminate the construction
contract and not to question the revocation of the building permit. As the available remedy was already
foreclosed, it was thus error for the CA to suggest that Rhogen should have appealed the stoppage and
revocations orders issued by the municipal authorities to the DPWH and then to the OP.69[36]
Article 123 of the Articles of General Conditions states the grounds for the termination of the work or contract
by the Contractor:
123. CONTRACTORS RIGHT TO STOP WORK OR TERMINATE
CONTRACT
If work should be stopped under order of any court, or other public authority, for period of
three (3) months through no act or fault of Contractor or of anyone employed by him, or
if Owners Representative should fail to issue any certificate of payment within seven (7)
days after its maturity and presentation of any sum certified by Owners Representative or
awarded arbitrator, then contractor, may, stop work or terminate Contract, recover from
Owner payment for work executed, loss sustained upon any plant or materials, reasonable
profit, damages.70[37] (Emphasis supplied.)
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70

Petitioners may not justify Rhogens termination of the contract upon grounds of non-payment of
progress billing and uncooperative attitude of respondent The Plaza and its employees in rectifying the
violations which were the basis for issuance of the stoppage order. Having breached the contractual obligation it
had expressly assumed, i.e., to comply with all laws, rules and regulations of the local authorities, Rhogen was
already at fault. Respondent The Plaza, on the other hand, was justified in withholding payment on Rhogens
first progress billing, on account of the stoppage order and additionally due to disappearance of owner-furnished
materials at the jobsite. In failing to have the stoppage and revocation orders lifted or recalled, Rhogen should
take full responsibility in accordance with its contractual undertaking, thus:
In the performance of the works, services, and obligations subject of this Contract, the
CONTRACTOR binds itself to observe all pertinent and applicable laws, rules and regulations
promulgated by duly constituted authorities and to be personally, fully and solely liable for any
and all violations of the same.71[38] (Emphasis supplied.)
Significantly, Rhogen did not mention in its communications to Reyes that Gaite was merely a victim of
abuse by a local official and this was the primary reason for the problems besetting the project. On the contrary,
the site appraisal inspection conducted on February 12 and 13, 1981 in the presence of representatives from The
Plaza, Rhogen, FGU and Municipal Engineer Victor Gregory, disclosed that in addition to the violations
committed by Rhogen which resulted in the issuance of the stoppage order, Rhogen built the structure not in
accordance with government approved plans and/or without securing the approval of the Municipal Engineer
before making the changes thereon.72[39]
Such non-observance of laws and regulations of the local authorities affecting the construction project
constitutes a substantial violation of the Construction Contract which entitles The Plaza to terminate the same,
without obligation to make further payment to Rhogen until the work is finished or subject to refund of payment
exceeding the expenses of completing the works. This is evident from a reading of Article 122 which states:
122.OWNERS RIGHT TO TERMINATE CONTRACT
A. If Contractor should be adjudged bankrupt, or if he should make general assignment
for benefit of his creditors, or if receiver should be appointed on account of his
insolvency, or if he should persistently or repeatedly refuse or should fail, except in
cases for which extension of time is provided, to supply enough properly skilled
workmen or proper materials, or if he should fail to make prompt payment to SubContractors or for materials of labor, or persistently disregard laws, ordinances, or
instructions of Owners Representative or otherwise be guilty of substantial violation
of any provision of [the] Contract, then Owner, upon certification by Owners
Representative that sufficient cause exists to justify such action, may, without
71
72

prejudice to any right or remedy, after giving Contractor seven days written notice,
terminate contract with Contractor, take possession of premises, materials, tools,
appliances, thereon, finish work by whatever method he may deem expedient. In
such cases, Contractor shall not be entitled to receive any further payment until
work is finished.
B. If unpaid balance of Contract sum shall exceed expense of finishing work including
compensation for additional managerial and administrative services, such excess, paid
to Contractor. Refund the difference to Owner if such expense shall exceed unpaid
balance.73[40] (Emphasis supplied.)
Upon the facts duly established, the CA therefore did not err in holding that Rhogen committed a serious
breach of its contract with The Plaza, which justified the latter in terminating the contract. Petitioners are thus
liable for damages for having breached their contract with respondent The Plaza. Article 1170 of the Civil Code
provides that 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.
Petitioners assail the order for the return of down payment, asserting that the principle of quantum
meruit demands that Rhogen as contractor be paid for the work already accomplished.
We disagree.
Under the principle of quantum meruit, a contractor is allowed to recover the reasonable value of the
thing or services rendered despite the lack of a written contract, in order to avoid unjust enrichment. Quantum
meruit means that in an action for work and labor, payment shall be made in such amount as the plaintiff
reasonably deserves. To deny payment for a building almost completed and already occupied would be to
permit unjust enrichment at the expense of the contractor.74[41]
Rhogen failed to finish even a substantial portion of the works due to the stoppage order issued just two
months from the start of construction. Despite the down payment received from The Plaza, Rhogen, upon
evaluation of the Project Manager, was able to complete a meager percentage much lower than that claimed by
it under the first progress billing between July and September 1980. Moreover, after it relinquished the project
in January 1981, the site inspection appraisal jointly conducted by the Project Manager, Building Inspector
Engr. Gregory and representatives from FGU and Rhogen, Rhogen was found to have executed the works not in
accordance with the approved plans or failed to seek prior approval of the Municipal Engineer. Article 1167 of
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the Civil Code is explicit on this point that if a person obliged to do something fails to do it, the same shall be
executed at his cost.
Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at
his cost.
This same rule shall be observed if he does it in contravention of the tenor of the
obligation. Furthermore, it may be decreed that what has been poorly done be undone.
In addition, Article 122 of the Articles of General Conditions provides that the contractor shall not be entitled to
receive further payment until the work is finished. As the works completed by Rhogen were not in accordance
with approved plans, it should have been executed at its cost had it not relinquished the project in January 1981.
The CA thus did not err in sustaining the trial courts order for the return of the down payment given by The
Plaza to Rhogen.
As to temperate damages, Article 2224 of the Civil Code provides that temperate or moderate damages,
which are more than nominal but less than compensatory damages, may be recovered when the court finds that
some pecuniary loss has been suffered but its amount cannot, from the nature of the case, be proved with
certainty. The rationale behind temperate damages is precisely that from the nature of the case, definite proof of
pecuniary loss cannot be offered. When the court is convinced that there has been such loss, the judge is
empowered to calculate moderate damages, rather than let the complainant suffer without redress from the
defendants wrongful act.75[42] Petitioners contention that such award is improper because The Plaza could have
presented receipts to support the claim for actual damages, must fail considering that Rhogen never denied the
delivery of the owner-furnished materials which were under its custody at the jobsite during the work stoppage
and before it terminated the contract. Since Rhogen failed to account either for those items which it had caused
to be withdrawn from the premises, or those considered damaged or lost due spoilage, or disappeared for
whatever reason there was no way of determining the exact quantity and cost of those materials. Hence, The
Plaza was correctly allowed to recover temperate damages.
Upon the foregoing, we find petitioners claim for actual, moral and exemplary damages and attorneys fees
lacking in legal basis and undeserving of further discussion.
WHEREFORE, the petition is DENIED. The Decision dated June 27, 2006 and the Resolution dated
April 20, 2007 of the Court of Appeals in CA-G.R. CV No. 58790 are AFFIRMED.
With costs against petitioners.
75

SO ORDERED.

#19
G.R. No. 23769

September 16, 1925

SONG FO & COMPANY, plaintiff-appellee,

vs.
HAWAIIAN PHILIPPINE CO., defendant-appellant.
Hilado and Hilado, Ross, Lawrence and Selph and Antonio T. Carrascoso, Jr., for appellant.
Arroyo, Gurrea and Muller for appellee.
MALCOLM, J.:
In the court of First Instance of Iloilo, Song Fo & Company, plaintiff, presented a complaint with two causes of
action for breach of contract against the Hawaiian-Philippine Co., defendant, in which judgment was asked for
P70,369.50, with legal interest, and costs. In an amended answer and cross-complaint, the defendant set up the
special defense that since the plaintiff had defaulted in the payment for the molasses delivered to it by the
defendant under the contract between the parties, the latter was compelled to cancel and rescind the said
contract. The case was submitted for decision on a stipulation of facts and the exhibits therein mentioned. The
judgment of the trial court condemned the defendant to pay to the plaintiff a total of P35,317.93, with legal
interest from the date of the presentation of the complaint, and with costs.
From the judgment of the Court of First Instance the defendant only has appealed. In this court it has made the
following assignment of errors: "I. The lower court erred in finding that appellant had agreed to sell to the
appellee 400,000, and not only 300,000, gallons of molasses. II. The lower court erred in finding that the
appellant rescinded without sufficient cause the contract for the sale of molasses executed by it and the appellee.
III. The lower court erred in rendering judgment in favor of the appellee and not in favor of the appellant in
accordance with the prayer of its answer and cross-complaint. IV. The lower court erred in denying appellant's
motion for a new trial." The specified errors raise three questions which we will consider in the order suggested
by the appellant.
1. Did the defendant agree to sell to the plaintiff 400,000 gallons of molasses or 300,000 gallons of
molasses? The trial court found the former amount to be correct. The appellant contends that the smaller
amount was the basis of the agreement.
The contract of the parties is in writing. It is found principally in the documents, Exhibits F and G. The
First mentioned exhibit is a letter addressed by the administrator of the Hawaiian-Philippine Co. to Song
Fo & Company on December 13, 1922. It reads:

SILAY, OCC. NEGROS, P.I.

December 13, 1922

Messrs. SONG FO AND CO.

Iloilo, Iloilo.
DEAR SIRS: Confirming our conversation we had today with your Mr. Song Fo, who visited this
Central, we wish to state as follows:
He agreed to the delivery of 300,000 gallons of molasses at the same price as last year under the same
condition, and the same to start after the completion of our grinding season. He requested if possible to
let you have molasses during January, February and March or in other words, while we are grinding, and
we agreed with him that we would to the best of our ability, altho we are somewhat handicapped. But we
believe we can let you have 25,000 gallons during each of the milling months, altho it interfere with the
shipping of our own and planters sugars to Iloilo. Mr. Song Fo also asked if we could supply him with
another 100,000 gallons of molasses, and we stated we believe that this is possible and will do our best
to let you have these extra 100,000 gallons during the next year the same to be taken by you before
November 1st, 1923, along with the 300,000, making 400,000 gallons in all.
Regarding the payment for our molasses, Mr. Song Fo gave us to understand that you would pay us at
the end of each month for molasses delivered to you.
Hoping that this is satisfactory and awaiting your answer regarding this matter, we remain.
Yours very truly,

HAWAIIAN-PHILIPPINE COMPANY
BY R. C. PITCAIRN
Administrator.

Exhibit G is the answer of the manager of Song Fo & Company to the Hawaiian-Philippine Co. on December
16, 1922. This letter reads:

December 16th, 1922.

Messrs. HAWAIIAN-PHILIPPINE CO.,

Silay, Neg. Occ., P.I.
DEAR SIRS: We are in receipt of your favours dated the 9th and the 13th inst. and understood all their
contents.
In connection to yours of the 13th inst. we regret to hear that you mentioned Mr. Song Fo the one who
visited your Central, but it was not for he was Mr. Song Heng, the representative and the manager of
Messrs. Song Fo & Co.

With reference to the contents of your letter dated the 13th inst. we confirm all the arrangements you
have stated and in order to make the contract clear, we hereby quote below our old contract as amended,
as per our new arrangements.
(a) Price, at 2 cents per gallon delivered at the central.
(b) All handling charges and expenses at the central and at the dock at Mambaguid for our account.
(c) For services of one locomotive and flat cars necessary for our six tanks at the rate of P48 for the
round trip dock to central and central to dock. This service to be restricted to one trip for the six tanks.
Yours very truly,

SONG FO & COMPANY

By __________________________
Manager.

We agree with appellant that the above quoted correspondence is susceptible of but one interpretation. The
Hawaiian-Philippine Co. agreed to deliver to Song Fo & Company 300,000 gallons of molasses. The HawaiianPhilippine Co. also believed it possible to accommodate Song Fo & Company by supplying the latter company
with an extra 100,000 gallons. But the language used with reference to the additional 100,000 gallons was not a
definite promise. Still less did it constitute an obligation.
If Exhibit T relied upon by the trial court shows anything, it is simply that the defendant did not consider itself
obliged to deliver to the plaintiff molasses in any amount. On the other hand, Exhibit A, a letter written by the
manager of Song Fo & Company on October 17, 1922, expressly mentions an understanding between the
parties of a contract for P300,000 gallons of molasses.
We sustain appellant's point of view on the first question and rule that the contract between the parties provided
for the delivery by the Hawaiian-Philippine Co. to song Fo & Company of 300,000 gallons of molasses.
2. Had the Hawaiian-Philippine Co. the right to rescind the contract of sale made with Song Fo & Company?
The trial judge answers No, the appellant Yes.
Turning to Exhibit F, we note this sentence: "Regarding the payment for our molasses, Mr. Song Fo (Mr. Song
Heng) gave us to understand that you would pay us at the end of each month for molasses delivered to you." In
Exhibit G, we find Song Fo & Company stating that they understand the contents of Exhibit F, and that they
confirm all the arrangements you have stated, and in order to make the contract clear, we hereby quote below
our old contract as amended, as per our new arrangements. (a) Price, at 2 cents per gallon delivered at the
central." In connection with the portion of the contract having reference to the payment for the molasses, the
parties have agree on a table showing the date of delivery of the molasses, the amount and date thereof, the date
of receipt of account by plaintiff, and date of payment. The table mentioned is as follows:

Date of
delivery

Account and date thereof

Date of
receipt of
account by

Date of
payment

plaintiff

1922

1923

1923

Dec. 18

P206.16

Dec. 26/22

Jan. 5

Feb. 20

Dec. 29

206.16

Jan. 3/23

do

Do

Jan. 5

206.16

Jan. 9/23

Mar. 7 or 8

Mar. 31

Feb. 12

206.16

Mar. 12/23

do

Do

Feb. 27

206.16

do

do

Do

Mar. 5

206.16

do

do

Do

Mar. 16

206.16

Mar. 20/23

Apr. 2/23

Apr. 19

Mar. 24

206.16

Mar. 31/23

do

Do

Mar. 29

206.16

do

do

Do

1923

Some doubt has risen as to when Song Fo & Company was expected to make payments for the molasses
delivered. Exhibit F speaks of payments "at the end of each month." Exhibit G is silent on the point. Exhibit M,
a letter of March 28, 1923, from Warner, Barnes & Co., Ltd., the agent of the Hawaiian-Philippine Co. to Song
Fo & Company, mentions "payment on presentation of bills for each delivery." Exhibit O, another letter from
Warner, Barnes & Co., Ltd. to Song Fo & Company dated April 2, 1923, is of a similar tenor. Exhibit P, a

communication sent direct by the Hawaiian-Philippine Co. to Song Fo & Company on April 2, 1923, by which
the Hawaiian-Philippine Co. gave notice of the termination of the contract, gave as the reason for the rescission,
the breach by Song Fo & Company of this condition: "You will recall that under the arrangements made for
taking our molasses, you were to meet our accounts upon presentation and at each delivery." Not far removed
from this statement, is the allegation of plaintiff in its complaint that "plaintiff agreed to pay defendant, at the
end of each month upon presentation accounts."
Resolving such ambiguity as exists and having in mind ordinary business practice, a reasonable deduction is
that Song Fo & Company was to pay the Hawaiian-Philippine Co. upon presentation of accounts at the end of
each month. Under this hypothesis, Song Fo & Company should have paid for the molasses delivered in
December, 1922, and for which accounts were received by it on January 5, 1923, not later than January 31 of
that year. Instead, payment was not made until February 20, 1923. All the rest of the molasses was paid for
either on time or ahead of time.
The terms of payment fixed by the parties are controlling. The time of payment stipulated for in the contract
should be treated as of the essence of the contract. Theoretically, agreeable to certain conditions which could
easily be imagined, the Hawaiian-Philippine Co. would have had the right to rescind the contract because of the
breach of Song Fo & Company. But actually, there is here present no outstanding fact which would legally
sanction the rescission of the contract by the Hawaiian-Philippine Co.
The general rule is that rescission will not be permitted for a slight or casual breach of the contract, but only for
such breaches as are so substantial and fundamental as to defeat the object of the parties in making the
agreement. A delay in payment for a small quantity of molasses for some twenty days is not such a violation of
an essential condition of the contract was warrants rescission for non-performance. Not only this, but the
Hawaiian-Philippine Co. waived this condition when it arose by accepting payment of the overdue accounts and
continuing with the contract. Thereafter, Song Fo & Company was not in default in payment so that the
Hawaiian-Philippine co. had in reality no excuse for writing its letter of April 2, 1923, cancelling the contract.
(Warner, Barnes & Co. vs. Inza [1922], 43 Phil., 505.)
We rule that the appellant had no legal right to rescind the contract of sale because of the failure of Song Fo &
Company to pay for the molasses within the time agreed upon by the parties. We sustain the finding of the trial
judge in this respect.
3. On the basis first, of a contract for 300,000 gallons of molasses, and second, of a contract imprudently
breached by the Hawaiian-Philippine Co., what is the measure of damages? We again turn to the facts as agreed
upon by the parties.
The first cause of action of the plaintiff is based on the greater expense to which it was put in being compelled
to secure molasses from other sources. Three hundred thousand gallons of molasses was the total of the
agreement, as we have seen. As conceded by the plaintiff, 55,006 gallons of molasses were delivered by the
defendant to the plaintiff before the breach. This leaves 244,994 gallons of molasses undelivered which the
plaintiff had to purchase in the open market. As expressly conceded by the plaintiff at page 25 of its brief,
100,000 gallons of molasses were secured from the Central North Negros Sugar Co., Inc., at two centavos a
gallon. As this is the same price specified in the contract between the plaintiff and the defendant, the plaintiff
accordingly suffered no material loss in having to make this purchase. So 244,994 gallons minus the 100,000
gallons just mentioned leaves as a result 144,994 gallons. As to this amount, the plaintiff admits that it could
have secured it and more from the Central Victorias Milling Company, at three and one-half centavos per
gallon. In other words, the plaintiff had to pay the Central Victorias Milling company one and one-half centavos
a gallon more for the molasses than it would have had to pay the Hawaiian-Philippine Co. Translated into pesos
and centavos, this meant a loss to the plaintiff of approximately P2,174.91. As the conditions existing at the
central of the Hawaiian-Philippine Co. may have been different than those found at the Central North Negros
Sugar Co., Inc., and the Central Victorias Milling Company, and as not alone through the delay but through

expenses of transportation and incidental expenses, the plaintiff may have been put to greater cost in making the
purchase of the molasses in the open market, we would concede under the first cause of action in round figures
P3,000.
The second cause of action relates to lost profits on account of the breach of the contract. The only evidence in
the record on this question is the stipulation of counsel to the effect that had Mr. Song Heng, the manager of
Song Fo & Company, been called as a witness, he would have testified that the plaintiff would have realized a
profit of P14,948.43, if the contract of December 13, 1922, had been fulfilled by the defendant. Indisputably,
this statement falls far short of presenting proof on which to make a finding as to damages.
In the first place, the testimony which Mr. Song Heng would have given undoubtedly would follow the same
line of thought as found in the decision of the trial court, which we have found to be unsustainable. In the
second place, had Mr. Song Heng taken the witness-stand and made the statement attributed to him, it would
have been insufficient proof of the allegations of the complaint, and the fact that it is a part of the stipulation by
counsel does not change this result. And lastly, the testimony of the witness Song Heng, it we may dignify it as
such, is a mere conclusion, not a proven fact. As to what items up the more than P14,000 of alleged lost profits,
whether loss of sales or loss of customers, or what not, we have no means of knowing.
We rule that the plaintiff is entitled to recover damages from the defendant for breach of contract on the first
cause of action in the amount of P3,000 and on the second cause of action in no amount. Appellant's
assignments of error are accordingly found to be well taken in part and not well taken in part.
Agreeable to the foregoing, the judgment appealed from shall be modified and the plaintiff shall have and
recover from the defendant the sum of P3,000, with legal interest form October 2, 1923, until payment. Without
special finding as to costs in either instance, it is so ordered.

#20
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.:
The instant petition for review seeks the reversal of the June 13, 1996 Decision1 of the Court of Appeals in CAG.R. CV No. 47856, setting aside the June 24, 1993 Decision2 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. 32013-A, 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.
xxxx
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 case5 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.
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.
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.
xxxx
As to when said failure or delay in performance arise, Article 1169 of the same Code provides that
ART. 1169

xxxx
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?
A Upon full payment.
xxxx
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.
xxxx
Q May we know the full name of the real estate broker?
A Marcosa Sanchez
xxxx
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.
x x x x.16
ATTY. ANTARAN
Q Are you really sure that the title is in the hands of the plaintiff?
xxxx
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.

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.] Dragon17 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.
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.

#21
G.R. No. L-32811 March 31, 1980
FELIPE C. ROQUE, petitioner,
vs.
NICANOR LAPUZ and THE COURT OF APPEALS, respondents.
Taada, Sanchez, Taada, Taada for petitioner.
N.M. Lapuz for respondent.

GUERRERO, J.:
Appeal by certiorari from the Resolution of the respondent court 1 dated October 12, 1970 in CA-G.R. No. L33998-R entitled "Felipe C. Roque, plaintiff-appellee, versus Nicanor Lapuz, defendant-appellant" amending its
original decision of April 23, 1970 which affirmed the decision of the Court of First Instance of Rizal (Quezon
City Branch) in Civil Case No. Q-4922 in favor of petitioner, and the Resolution of the respondent court
denying petitioner's motion for reconsideration.
The facts of this case are as recited in the decision of the Trial Court which was adopted and affirmed by the
Court of Appeals:
Sometime in 1964, prior to the approval by the National Planning Commission of the
consolidation and subdivision plan of plaintiff's property known as the Rockville Subdivision,
situated in Balintawak, Quezon City, plaintiff and defendant entered into an agreement of sale

covering Lots 1, 2 and 9, Block 1, of said property, with an aggregate area of 1,200 square
meters, payable in 120 equal monthly installments at the rate of P16.00, P15.00 per square meter,
respectively. In accordance with said agreement, defendant paid to plaintiff the sum of P150.00
as deposit and the further sum of P740.56 to complete the payment of four monthly installments
covering the months of July, August, September, and October, 1954. (Exhs. A and B). When the
document Exhibit "A" was executed on June 25, 1954, the plan covering plaintiff's property was
merely tentative, and the plaintiff referred to the proposed lots appearing in the tentative plan.
After the approval of the subdivision plan by the Bureau of Lands on January 24, 1955,
defendant requested plaintiff that he be allowed to abandon and substitute Lots 1, 2 and 9, the
subject matter of their previous agreement, with Lots 4 and 12, Block 2 of the approved
subdivision plan, of the Rockville Subdivision, with a total area of 725 square meters, which are
corner lots, to which request plaintiff graciously acceded.
The evidence discloses that defendant proposed to plaintiff modification of their previous
contract to sell because he found it quite difficult to pay the monthly installments on the three
lots, and besides the two lots he had chosen were better lots, being corner lots. In addition, it was
agreed that the purchase price of these two lots would be at the uniform rate of P17.00 per square
(meter) payable in 120 equal monthly installments, with interest at 8% annually on the balance
unpaid. Pursuant to this new agreement, defendant occupied and possessed Lots 4 and 12, Block
2 of the approved subdivision plan, and enclosed them, including the portion where his house
now stands, with barbed wires and adobe walls.
However, aside from the deposit of P150.00 and the amount of P740.56 which were paid under
their previous agreement, defendant failed to make any further payment on account of the agreed
monthly installments for the two lots in dispute, under the new contract to sell. Plaintiff
demanded upon defendant not only to pay the stipulated monthly installments in arrears, but also
to make up-to-date his payments, but defendant, instead of complying with the demands, kept on
asking for extensions, promising at first that he would pay not only the installments in arrears but
also make up-to-date his payment, but later on refused altogether to comply with plaintiff's
demands.
Defendant was likewise requested by the plaintiff to sign the corresponding contract to sell in
accordance with his previous commitment. Again, defendant promised that he would sign the
required contract to sell when he shall have made up-to-date the stipulated monthly installments
on the lots in question, but subsequently backed out of his promise and refused to sign any
contract in noncompliance with what he had represented on several occasions. And plaintiff
relied on the good faith of defendant to make good his promise because defendant is a
professional and had been rather good to him (plaintiff).
On or about November 3, 1957, in a formal letter, plaintiff demanded upon defendant to vacate
the lots in question and to pay the reasonable rentals thereon at the rate of P60.00 per month
from August, 1955. (Exh. "B"). Notwithstanding the receipt of said letter, defendant did not
deem it wise nor proper to answer the same.
In reference to the mode of payment, the Honorable Court of Appeals found
Both parties are agreed that the period within which to pay the lots in question is ten years. They
however, disagree on the mode of payment. While the appellant claims that he could pay the
purchase price at any time within a period of ten years with a gradual proportionate discount on
the price, the appellee maintains that the appellant was bound to pay monthly installments.

On this point, the trial court correctly held that

It is further argued by defendant that under the agreement to sell in question, he has the right or
option to pay the purchase price at anytime within a period of ten years from 1954, he being
entitled, at the same time, to a graduated reduction of the price. The Court is constrained to reject
this version not only because it is contradicted by the weight of evidence but also because it is
not consistent with what is reasonable, plausible and credible. It is highly improbable to expect
plaintiff, or any real estate subdivision owner for that matter, to agree to a sale of his land which
would be payable anytime in ten years at the exclusive option of the purchaser. There is no
showing that defendant is a friend, a relative, or someone to whom plaintiff had to be grateful, as
would justify an assumption that he would have agreed to extend to defendant such an extraordinary concession. Furthermore, the context of the document, Exhibit "B", not to mention the
other evidences on records is indicative that the real intention of the parties is for the payment of
the purchase price of the lot in question on an equal monthly installment basis for a period of ten
years (Exhibits "A", "II", "J" and "K").
On January 22, 1960, petitioner Felipe C, Roque (plaintiff below) filed the complaint against defendant Nicanor
Lapuz (private respondent herein) with the Court of First Instance of Rizal, Quezon City Branch, for rescission
and cancellation of the agreement of sale between them involving the two lots in question and prayed that
judgment be rendered ordering the rescission and cancellation of the agreement of sale, the defendant to vacate
the two parcels of land and remove his house therefrom and to pay to the plaintiff the reasonable rental thereof
at the rate of P60.00 a month from August 1955 until such time as he shall have vacated the premises, and to
pay the sum of P2,000.00 as attorney's fees, costs of the suit and award such other relief or remedy as may be
deemed just and equitable in the premises.
Defendant filed a Motion to Dismiss on the ground that the complaint states no cause of action, which motion
was denied by the court. Thereafter, defendant filed his Answer alleging that he bought three lots from the
plaintiff containing an aggregate area of 1,200 sq. meters and previously known as Lots 1, 2 and 9 of Block 1 of
Rockville Subdivision at P16.00, P15.00 and P15.00, respectively, payable at any time within ten years.
Defendant admits having occupied the lots in question.
As affirmative and special defenses, defendant alleges that the complaint states no cause of action; that the
present action for rescission has prescribed; that no demand for payment of the balance was ever made; and that
the action being based on reciprocal obligations, before one party may compel performance, he must first
comply what is incumbent upon him.
As counterclaim, defendant alleges that because of the acts of the plaintiff, he lost two lots containing an area of
800 sq. meters and as a consequence, he suffered moral damages in the amount of P200.000.00; that due to the
filing of the present action, he suffered moral damages amounting to P100,000.00 and incurred expenses for
attorney's fees in the sum of P5,000.00.
Plaintiff filed his Answer to the Counterclaim and denied the material averments thereof.
After due hearing, the trial court rendered judgment, the dispositive portion of which reads:
WHEREFORE, the Court renders judgment in favor of plain. plaintiff and against the defendant,
as follows:
(a) Declaring the agreement of sale between plaintiff and defendant involving the lots in question
(Lots 4 and 12, Block 2 of the approved subdivision plan of the Rockville Subdivision)
rescinded, resolved and cancelled;

(b) Ordering defendant to vacate the said lots and to remove his house therefrom and also to pay
plaintiff the reasonable rental thereof at the rate of P60.00 per month from August, 1955 until he
shall have actually vacated the premises; and
(c) Condemning defendant to pay plaintiff the sum of P2,000.00 as attorney's fees, as well as the
costs of the suit. (Record on Appeal, p. 118)
(a) Declaring the agreement of sale between plaintiff and defendant involving the lots in question
(Lots 4 and 12, Block 2 of the approved subdivision plan of the Rockville Subdivision)
rescinded, resolved and cancelled;
(b) Ordering defendant to vacate the said lots and to remove his house therefrom and also to pay
plaintiff the reasonable rental thereof at the rate of P60.00 per month from August, 1955 until he
shall have actually vacated premises; and
(c) Condemning defendant to pay plaintiff the sum of P2,000.00 as attorney's fees, as well as the
costs of the suit. (Record on Appeal. p. 118)
Not satisfied with the decision of the trial court, defendant appealed to the Court of Appeals. The latter court,
finding the judgment appealed from being in accordance with law and evidence, affirmed the same.
In its decision, the appellate court, after holding that the findings of fact of the trial court are fully supported by
the evidence, found and held that the real intention of the parties is for the payment of the purchase price of the
lots in question on an equal monthly installment basis for the period of ten years; that there was modification of
the original agreement when defendant actually occupied Lots Nos. 4 and 12 of Block 2 which were corner lots
that commanded a better price instead of the original Lots Nos. 1, 2 and 9, Block I of the Rockville Subdivision;
that appellant's bare assertion that the agreement is not rescindable because the appellee did not comply with his
obligation to put up the requisite facilities in the subdivision was insufficient to overcome the presumption that
the law has been obeyed by the appellee; that the present action has not prescribed since Article 1191 of the
New Civil Code authorizing rescission in reciprocal obligations upon noncompliance by one of the obligors is
the applicable provision in relation to Article 1149 of the New Civil Code; and that the present action was filed
within five years from the time the right of action accrued.
Defendant filed a Motion for Reconsideration of the appellate court's decision on the following grounds:
First Neither the pleadings nor the evidence, testimonial, documentary or circumstantial,
justify the conclusion as to the existence of an alleged subsequent agreement novatory of the
original contract admittedly entered into between the parties:
Second There is nothing so unusual or extraordinary, as would render improbable the fixing of
ten ears as the period within which payment of the stipulated price was to be payable by
appellant;
Third Appellee has no right, under the circumstances on the case at bar, to demand and be
entitled to the rescission of the contract had with appellant;
Fourth Assuming that any action for rescission is availability to appellee, the same, contrary
to the findings of the decision herein, has prescribed;
Fifth Assumming further that appellee's action for rescission, if any, has not yet prescribed,
the same is at least barred by laches;

Sixth Assuming furthermore that a cause of action for rescission exists, appellant should
nevertheless be entitled to tile fixing of a period within which to comply with his obligation; and
Seventh At all events, the affirmance of the judgment for the payment of rentals on the
premises from August, 1955 and he taxing of attorney's fees against appellant are not warranted
b the circumstances at bar. (Rollo, pp. 87-88)
Acting on the Motion for Reconsideration, the Court of Appeals sustained the sixth ground raised by the
appellant, that assuming that a cause of action for rescission exists, he should nevertheless be entitled to the
fixing of a period within which to comply with his obligation. The Court of Appeals, therefore, amended its
original decision in the following wise and manner:
WHEREFORE, our decision dated April 23, 1970 is hereby amended in the sense that the
defendant Nicanor Lapuz is hereby granted a period of ninety (90) days from entry hereof within
which to pay the balance of the purchase price in the amount of P11,434,44 with interest thereon
at the rate of 8% per annum from August 17, 1955 until fully paid. In the event that the defendant
fails to comply with his obligation as above stated within the period fixed herein, our original
judgment stands.
Petitioner Roque, as plaintiff-appellee below, filed a Motion for Reconsideration; the Court of Appeals denied
it. He now comes and appeals to this Court on a writ of certiorari.
The respondent Court of Appeals rationalizes its amending decision by considering that the house presently
erected on the land subject of the contract is worth P45,000.00, which improvements introduced by defendant
on the lots subject of the contract are very substantial, and thus being the case, "as a matter of justice and equity,
considering that the removal of defendant's house would amount to a virtual forfeiture of the value of the house,
the defendant should be granted a period within which to fulfill his obligations under the agreement." Cited as
authorities are the cases of Kapisanan Banahaw vs. Dejarme and Alvero, 55 Phil. 338, 344, where it is held that
the discretionary power of the court to allow a period within which a person in default may be permitted to
perform the stipulation upon which the claim for resolution of the contract is based should be exercised without
hesitation in a case where a virtual forfeiture of valuable rights is sought to be enforced as an act of mere
reprisal for a refusal of the debtor to submit to a usurious charge, and the case of Puerto vs. Go Ye Pin, 47 O.G.
264, holding that to oust the defendant from the lots without giving him a chance to recover what his father and
he himself had spent may amount to a virtual forfeiture of valuable rights.
As further reasons for allowing a period within which defendant could fulfill his obligation, the respondent
court held that there exists good reasons therefor, having in mind that which affords greater reciprocity of rights
(Ramos vs. Blas, 51 O.G. 1920); that after appellant had testified that plaintiff failed to comply with his part of
the contract to put up the requisite facilities in the subdivision, plaintiff did not introduce any evidence to rebut
defendant's testimony but simply relied. upon the presumption that the law has been obeyed, thus said
presumption had been successfully rebutted as Exhibit "5-D" shows that the road therein shown is not paved
The Court, however, concedes that plaintiff's failure to comply with his obligation to put up the necessary
facilities in the subdivision will not deter him from asking fr the rescission of the agreement since this
obligation is not correlative with defendant's obligation to buy the property.
Petitioner assails the decision of the Court of Appeals for the following alleged errors:
I. The Honorable Court of Appeals erred in applying paragraph 3, Article 1191 of the Civil Code
which refers to reciprocal obligations in general and, pursuant thereto, in granting respondent
Lapuz a period of ninety (90) days from entry of judgment within which to pay the balance of the
purchase price.

II. The Honorable Court of Appeals erred in not holding that Article 1592 of the same Code,
which specifically covers sales of immovable property and which constitutes an exception to the
third paragraph of Article 1191 of said Code, is applicable to the present case.
III. The Honorable Court of Appeals erred in not holding that respondent Lapuz cannot avail of
the provisions of Article 1191, paragraph 3 of the Civil Code aforesaid because he did not raise
in his answer or in any of the pleadings he filed in the trial court the question of whether or not
he is entitled, by reason of a just cause, to a fixing of a new period.
IV. Assuming arguendo that the agreement entered into by and between petitioner and respondent
Lapuz was a mere promise to sell or contract to sell, under which title to the lots in question did
not pass from petitioner to respondent, still the Honorable Court of Appeals erred in not holding
that aforesaid respondent is not entitled to a new period within which to pay petitioner the
balance of P11,434.44 interest due on the purchase price of P12.325.00 of the lots.
V. Assuming arguendo that paragraph 3, Article 1191 of the Civil Code is applicable and may be
availed of by respondent, the Honorable Court of Appeals nonetheless erred in not declaring that
aid respondent has not shown the existence of a just cause which would authorize said Court to
fix a new period within which to pay the balance aforesaid.
VI. The Honorable Court of Appeals erred in reconsidering its original decision promulgated on
April 23, 1970 which affirmed the decision of the trial court.
The above errors may, however, be synthesized into one issue and that is, whether private respondent is entitled
to the Benefits of the third paragraph of Article 1191, New Civil Code, for the fixing of period within which he
should comply with what is incumbent upon him, and that is to pay the balance of P11,434,44 with interest
thereon at the rate of 8% 1et annum from August 17, 1955 until fully paid since private respondent had paid
only P150.00 as deposit and 4 months intallments amounting to P740.46, or a total of P890.46, the total price of
the two lots agreed upon being P12,325.00.
For his part, petitioner maintains that respondent is not entitled to the Benefits of paragraph 3, Article 1191,
NCC and that instead, Article 1592 of the New Civil Code which specifically covers sales of immovable
property and which constitute an exception to the third paragraph of Art. 1191 of aid Code, is the applicable law
to the case at bar.
In resolving petitioner's assignment of errors, it is well that We lay clown the oda provisions and pertinent
rulings of the Supreme Court bearing on the crucial issue of whether Art. 1191, paragraph 3 of the New Civil
Code applies to the case at Bar as held by the appellate court and supported by the private respondent, or Art.
1592 of the same Code which petitioner strongly argues in view of the peculiar facts and circumstances
attending this case. Article 1191, New Civil Code, provides:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one at the
obligors should not comply with hat is incumbent upon him
The injured partner may choose between the fulfillment and the rescission of the obligation, with
the payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
a period.

This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
Article 1592 also provides:
Art. 1592. In the sale of immovable property, even though it may have been stipulated that upon
failure to pay the price at the time agreed upon the rescission of the contract shall of right take
place, the vendee may pay, even after the expiration of the period, as long as no demand for
rescission of the contract has been made upon him either judicially or by a notarial act. After the
demand, the court may not grant him a new term.
The controlling and latest jurisprudence is established and settled in the celebrated case of Luzon Brokerage
Co., Inc. vs. Maritime Building Co., Inc. and Myers Building Co., G.R. No. L-25885, January 31, 1972, 43
SCRA 93, originally decided in 1972, reiterated in the Resolution on Motion to Reconsider dated August 18,
1972, 46 SCRA 381 and emphatically repeated in the Resolution on Second Motion for Reconsideration
promulgated November 16, 1978, 86 SCRA 309, which once more denied Maritimes Second Motion for
Reconsideration of October 7, 1972. In the original decision, the Supreme Court speaking thru Justice J.B.L.
Reyes said:
Under the circumstances, the action of Maritime in suspending payments to Myers Corporation
was a breach of contract tainted with fraud or malice (dolo), as distinguished from mere
negligence (culpa), "dolo" being succinctly defined as a "conscious and intention design to evade
the normal fulfillment of existing obligations" (Capistrano, Civil Code of the Philippines, Vol. 3,
page 38), and therefore incompatible with good faith (Castan, Derecho Civil, 7th Ed., Vol. 3,
page 129; Diaz Pairo, Teoria de Obligaciones, Vol. 1, page 116).
Maritime having acted in bad faith, it was not entitled to ask the court to give it further time to
make payment and thereby erase the default or breach that it had deliberately incurred. Thus the
lower court committed no error in refusing to extend the periods for payment. To do otherwise
would be to sanction a deliberate and reiterated infringement of the contractual obligations
incurred by Maritime, an attitude repugnant to the stability and obligatory force of contracts.
The decision reiterated the rule pointed out by the Supreme Court in Manuel vs. Rodriguez, 109 Phil. 1, p. 10,
that:
In contracts to sell, where ownership is retained by the seller and is not to pass until the fun
payment of the price, such payment, as we said is a positive suspensive condition, the failure of
which is not a breach, casual or serious, but simply an event that prevented the obligation of the
vendor to convey title from acquiring binding i force in accordance with Article 1117 of the Old
Civil Code. To argue that there was only a casual breach is to proceed from the assumption that
the contract is one of absolute sale, where non-payment is a resolutory condition, which is not
the case." Continuing, the Supreme Court declared:
... appellant overlooks that its contract with appellee Myers s not the ordinary sale envisaged by
Article 1592, transferring ownership simultaneously with the delivery of the real property sold,
but one in which the vendor retained ownership of the immovable object of the sale, merely
undertaking to convey it provided the buyer strictly complied with the terms of the contract (see
paragraph [d], ante page 5). In suing to recover possession of the building from Maritime
appellee Myers is not after the resolution or setting aside of the contract and the restoration of the
parties to the status quo ante as contemplated by Article 1592, but precisely enforcing the
Provisions of the agreement that it is no longer obligated to part with the ownership or

possession of the property because Maritime failed to comply with the specific condition
precedent, which is to pay the installments as they fell due.
The distinction between contracts of sale and contracts to sell with reserved title has been
recognized by this Court in repeated decisions upholding the power of promisors under contracts
to sell in case of failure of the other party to complete payment, to extrajudicially terminate the
operation of the contract, refuse conveyance and retain the sums or installments already received,
where such rights are expressly provided for, as in the case at bar.
In the Resolution denying the first Motion for Reconsideration, 46 SCRA 381, the Court again speaking thru
Justice J.B.L. Reyes, reiterated the rule that in a contract to sell, the full payment of the price through the
punctual performance of the monthly payments is a condition precedent to the execution of the final sale 4nd to
the transfer of the property from the owner to the proposed buyer; so that there will be no actual sale until and
unless full payment is made.
The Court further ruled that in seeking to oust Maritime for failure to pay the price as agreed upon, Myers was
not rescinding (or more properly, resolving) the contract but precisely enforcing it according to its expressed
terms. In its suit, Myers was not seeking restitution to it of the ownership of the thing sold (since it was never
disposed of), such restoration being the logical consequence of the fulfillment of a resolutory condition,
expressed or implied (Art. 1190); neither was it seeking a declaration that its obligation to sell was extinguished.
What is sought was a judicial declaration that because the suspensive condition (full and punctual payment) had
not been fulfilled, its obligation to sell to Maritime never arose or never became effective and, therefore, it
(Myers) was entitled to repossess the property object of the contract, possession being a mere incident to its
right of ownership.
The decision also stressed that "there can be no rescission or resolution of an obligation as yet non-existent,
because the suspensive condition did not happen. Article 1592 of the New Civil Code (Art. 1504 of Old Civil
Code) requiring demand by suit or notarial act in case the vendor of realty wants to rescind does not apply to a
contract to sell or promise to sell, where title remains with the vendor until fulfillment to a positive condition,
such as full payment of the price." (Manuel vs, Rodriguez, 109 Phil. 9)
Maritime's Second Motion for Reconsideration was denied in the Resolution of the Court dated November 16,
1978, 86 SCRA 305, where the governing law and precedents were briefly summarized in the strong and
emphatic language of Justice Teehankee, thus:
(a) The contract between the parties was a contract to sell or conditional sale with title expressly
reserved in the vendor Myers Building Co., Inc. Myers until the suspensive condition of full and
punctual payment of the full price shall have been met on pain of automatic cancellation of the
contract upon failure to pay any of the monthly installments when due and retention of the sums
theretofore paid as rentals. When the vendee, appellant Maritime, willfully and in bad faith failed
since March, 1961 to pay the P5,000. monthly installments notwithstanding that it was
punctually collecting P10,000. monthly rentals from the lessee Luzon Brokerage Co., Myers
was entitled, as it did in law and fact, to enforce the terms of the contract to sell and to declare
the same terminated and cancelled.
(b) Article 1592 (formerly Article 1504) of the new Civil Code is not applicable to such contracts
to self or conditional sales and no error was committed by the trial court in refusing to extend the
periods for payment.
(c) As stressed in the Court's decision, "it is irrelevant whether appellant Maritime's infringement
of its contract was casual or serious" for as pointed out in Manuel vs. Rodriguez, '(I)n contracts
to self. whether ownership is retained by the seller and is not to pass until the full payment of the

price, such payment, as we said, is a positive suspensive condition, the failure of which is not a
breach, casual or serious, but simply an event that prevented the obligation of the vendor to
convey title from acquiring binding force ...
(d) It should be noted, however, that Maritimes breach was far from casual but a most serious
breach of contract ...
(e) Even if the contract were considered an unconditional sale so that Article 1592 of the Civil
Code could be deemed applicable, Myers' answer to the complaint for interpleaded in the court
below constituted a judicial demand for rescission of the contract and by the very provision of
the cited codal article, 'after the demand, the court may not grant him a new term for payment;
and
(f) Assumming further that Article 1191 of the new Civil Code governing rescission of reciprocal
obligations could be applied (although Article 1592 of the same Code is controlling since it deals
specifically with sales of real property), said article provides that '(T)he court shall decree the
rescission claimed, unless there be just cause authorizing the fixing of a period' and there exists
to "just cause" as shown above for the fixing of a further period. ...
Under the first and second assignments of error which petitioner jointly discusses, he argues that the agreement
entered into between him and the respondent is a perfected contract of purchase and sale within the meaning of
Article 1475 of the New Civil Code which provides that "the contract of sale is perfected at the moment there is
a meeting of minds upon the thing which is the object of the contract and upon the price. From that moment, the
parties may reciprocally demand performance, subject to the provisions of the law governing the form of
contract."
Petitioner contends that "(n)othing in the decision of the courts below would show that ownership of the
property remained with plaintiff for so long as the installments have not been fully paid. Which yields the
conclusion that, by the delivery of the lots to defendant, ownership likewise was transferred to the latter." (Brief
for the Petitioner, p. 15) And he concludes that the sale was consummated by the delivery of the two lots, the
subject thereof, by him to the respondent.
Under the findings of facts by the appellate court, it appears that the two lots subject of the agreement between
the parties herein were delivered by the petitioner to the private respondent who took possession thereof and
occupied the same and thereafter built his house thereon, enclosing the lots with adobe stone walls and barbed
wires. But the property being registered under the Land Registration Act, it is the act of registration of the Deed
of Sale which could legally effect the transfer of title of ownership to the transferee, pursuant to Section 50 of
Act 496. (Manuel vs. Rodriguez, et al., 109 Phil. 1; Buzon vs. Lichauco, 13 Phil. 354; Tuazon vs. Raymundo,
28 Phil. 635: Worcestor vs. Ocampo, 34 Phil. 646). Hence, We hold that the contract between the petitioner and
the respondent was a contract to sell where the ownership or title is retained by the seller and is not to pass until
the full payment of the price, such payment being a positive suspensive condition and failure of which is not a
breach, casual or serious, but simply an event that prevented the obligation of the vendor to convey title from
acquiring binding force.
In the case at bar, there is no writing or document evidencing the agreement originally entered into between
petitioner and private respondent except the receipt showing the initial deposit of P150.00 as shown in Exh. "A"
and the payment of the 4- months installment made by respondent corresponding to July, 1954 to October, 1954
in the sum of P740.56 as shown in Exh. "B". Neither is there any writing or document evidencing the modified
agreement when the 3 lots were changed to Lots 4 and 12 with a reduced area of 725 sq. meters, which are
corner lots. This absence of a formal deed of conveyance is a very strong indication that the parties did not
intend immediate transfer of ownership and title, but only a transfer after full payment of the price.
Parenthetically, We must say that the standard printed contracts for the sale of the lots in the Rockville

Subdivision on a monthly installment basis showing the terms and conditions thereof are immaterial to the case
at bar since they have not been signed by either of the parties to this case.
Upon the law and jurisprudence hereinabove cited and considering the nature of the transaction or agreement
between petitioner and respondent which We affirm and sustain to be a contract to sell, the following resolutions
of petitioner's assignment of errors necessarily arise, and so We hold that:
1. The first and second assignments of errors are without merit.
The overwhelming weight of authority culminating in the Luzon Brokerage vs. Maritime cases has laid down
the rule that Article 1592 of the New Civil Code does not apply to a contract to sell where title remains with the
vendor until full payment of the price as in the case at bar. This is the ruling in Caridad Estates vs. Santero, 71
Phil. 120; Aldea vs. Inquimboy 86 Phil. 1601; Jocon vs. Capitol Subdivision, Inc., L-6573, Feb. 28, 1955;
Miranda vs. Caridad Estates, L-2077 and Aspuria vs. Caridad Estates, L-2121 Oct. 3, 1950, all reiterated in
Manuel vs. Rodriguez, et al. 109 Phil. 1, L-13435, July 27, 1960. We agree with the respondent Court of
Appeals that Art, 1191 of the New Civil Code is the applicable provision where the obligee, like petitioner
herein, elects to rescind or cancel his obligation to deliver the ownership of the two lots in question for failure
of the respondent to pay in fun the purchase price on the basis of 120 monthly equal installments, promptly and
punctually for a period of 10 years.
2. We hold that respondent as obligor is not entitled to the benefits of paragraph 3 of Art. 1191, NCC Having
been in default, he is not entitled to the new period of 90 days from entry of judgment within which to pay
petitioner the balance of P11,434.44 with interest due on the purchase price of P12,325.00 for the two lots.
Respondent a paid P150.00 as deposit under Exh. "A" and P740.56 for the 4-months installments corresponding
to the months of July to October, 1954. The judgment of the lower court and the Court of Appeals held that
respondent was under the obligation to pay the purchase price of the lots m question on an equal monthly
installment basis for a period of ten years, or 120 equal monthly installments. Beginning November, 1954,
respondent began to default in complying with his obligation and continued to do so for the remaining 116
monthly interest. His refusal to pay further installments on the purchase price, his insistence that he had the
option to pay the purchase price any time in ten years inspire of the clearness and certainty of his agreement
with the petitioner as evidenced further by the receipt, Exh. "B", his dilatory tactic of refusing to sign the
necessary contract of sale on the pretext that he will sign later when he shall have updated his monthly
payments in arrears but which he never attempted to update, and his failure to deposit or make available any
amount since the execution of Exh "B" on June 28, 1954 up to the present or a period of 26 years, are all
unreasonable and unjustified which altogether manifest clear bad faith and malice on the part of respondent
puzzle making inapplicable and unwarranted the benefits of paragraph 3, Art. 1191, N.C.C. To allow and grant
respondent an additional period for him to pay the balance of the purchase price, which balance is about 92% of
the agreed price, would be tantamount to excusing his bad faith and sanctioning the deliberate infringement of a
contractual obligation that is repugnant and contrary to the stability, security and obligatory force of contracts.
Moreover, respondent's failure to pay the succeeding 116 monthly installments after paying only 4 monthly
installments is a substantial and material breach on his part, not merely casual, which takes the case out of the
application of the benefits of pa paragraph 3, Art. 1191, N.C.C.
At any rate, the fact that respondent failed to comply with the suspensive condition which is the full payment of
the price through the punctual performance of the monthly payments rendered petitioner's obligation to sell
ineffective and, therefore, petitioner was entitled to repossess the property object of the contract, possession
being a mere incident to his right of ownership (Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., et
al. 46 SCRA 381).
3. We further rule that there exists no just cause authorizing the fixing of a new period within which private
respondent may pay the balance of the purchase price. The equitable grounds or considerations which are the

basis of the respondent court in the fixing of an additional period because respondent had constructed valuable
improvements on the land, that he has built his house on the property worth P45,000.00 and placed adobe stone
walls with barbed wires around, do not warrant the fixing of an additional period. We cannot sanction this claim
for equity of the respondent for to grant the same would place the vendor at the mercy of the vendee who can
easily construct substantial improvements on the land but beyond the capacity of the vendor to reimburse in
case he elects to rescind the contract by reason of the vendee's default or deliberate refusal to pay or continue
paying the purchase price of the land. Under this design, strategem or scheme, the vendee can cleverly and
easily "improve out" the vendor of his land.
More than that, respondent has not been honest, fair and reciprocal with the petitioner, hence it would not be fair
and reasonable to the petitioner to apply a solution that affords greater reciprocity of rights which the appealed
decision tried to effect between the parties. As matters stand, respondent has been enjoying the possession and
occupancy of the land without paying the other 116 monthly installments as they fall due. The scales of justice
are already tipped in respondent,s favor under the amended decision of the respondent court. It is only right that
We strive and search for the application of the law whereby every person must, in the exercise of his rights and
in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith
(Art. 19, New Civil Code)
In the case at bar, respondent has not acted in good faith. With malice and deliberate intent, he has twisted the
clear import of his agreement with the petitioner in order to suit his ends and delay the fulfillment of his
obligation to pay the land he had enjoyed for the last 26 years, more than twice the period of ten years that he
obliged himself to complete payment of the price.
4. Respondent's contention that petitioner has not complied with his obligation to put up the necessary facilities
in the Rockville Subdivision is not sufficient nor does it constitute good reason to justify the grant of an
additional period of 90 days from entry of judgment within which respondent may pay the balance of the
purchase price agreed upon. The Judgment of the appellate court concedes that petitioner's failure to comply
with his obligation to put up the necessary facilities in the subdivision will not deter him from asking for the
rescission of the agreement since his obligation is not correlative with respondent's obligation to buy the
property. Since this is so conceded, then the right of the petitioner to rescind the agreement upon the happening
or in the event that respondent fails or defaults in any of the monthly installments would be rendered nugatory
and ineffective. The right of rescission would then depend upon an extraneous consideration which the law does
not contemplate.
Besides, at the rate the two lots were sold to respondent with a combined area of 725 sq. meters at the uniform
price of P17.00 per sq. meter making a total price of P12,325.00, it is highly doubtful if not improbable that
aside from his obligation to deliver title and transfer ownership to the respondent as a reciprocal obligation to
that of the respondent in paying the price in full and promptly as the installments fall due, petitioner would have
assumed the additional obligation "to provide the subdivision with streets ... provide said streets with street
pavements concrete curbs and gutters, fillings as required by regulations, adequate drainage facilities, tree
plantings, adequate water facilities" as required under Ordinance No. 2969 of Quezon City approved on May
11, 1956 (Answer of Defendant, Record on Appeal, pp. 35-36) which was two years after the agreement in
question was entered into June, 1y54.
The fact remains, however, that respondent has not protested to the petitioner nor to the authorities concerned
the alleged failure of petitioner to put up and provide such facilities in the subdivision because he knew too well
that he has paid only the aggregate sum of P890.56 which represents more or less 7% of the agreed price of
P12,325.00 and that he has not paid the real estate taxes assessed by the government on his house erected on the
property under litigation. Neither has respondent made any allegation in his Answer and in all his pleadings
before the court up to the promulgation of the Resolution dated October 12, 1970 by the Court of Appeals, to
the effect that he was entitled to a new period within which to comply with his obligation, hence the Court could
not proceed to do so unless the Answer is first amended. (Gregorio Araneta, Inc. vs. Philippine Sugar Estates

Development Co., Ltd., G.R. No. L-22558, May 31, 1967, 20 SCRA 330, 335). It is quite clear that it is already
too late in the day for respondent to claim an additional period within which to comply with his obligation.
Precedents there are in Philippine jurisprudence where the Supreme Court granted the buyer of real property
additional period within which to complete payment of the purchase price on grounds of equity and justice as in
(1) J.M. Tuazon Co., Inc. vs. Javier, 31 SCRA 829 where the vendee religiously satisfied the monthly
installments for eight years and paid a total of P4,134.08 including interests on the principal obligation of only
P3,691.20, the price of the land; after default, the vendee was willing to pay all arrears, in fact offered the same
to the vendor; the court granted an additional period of 60 days -from receipt of judgment for the vendee to
make all installment in arrears plus interest; (2) in Legarda Hermanos vs. Saldaa, 55 SCRA 324, the Court
ruled that where one purchase, from a subdivision owner two lots and has paid more than the value of one lot,
the former is entitled to a certificate of title to one lot in case of default.
On the other hand there are also cases where rescission was not granted and no new or additional period was
authorized. Thus, in Caridad Estates vs. Santero, 71 Phil. 114, the vendee paid, totalling P7,590.00 or about
25% of the purchase price of P30,000.00 for the three lots involved and when the vendor demanded revocation
upon the vendee's default two years after, the vendee offered to pay the arears in check which the vendor
refused; and the Court sustained the revocation and ordered the vendee ousted from the possession of the land.
In Ayala y Cia vs. Arcache, 98 Phil. 273, the total price of the land was P457,404.00 payable in installments; the
buyer initially paid P100,000.00 or about 25% of the agreed price; the Court ordered rescission in view of the
substantial breach and granted no extension to the vendee to comply with his obligation.
The doctrinal rulings that "a slight or casual breach of contract is not a ground for rescission. It must be so
substantial and fundamental to defeat the object of the parties" (Gregorio Araneta Inc. vs. Tuazon de Paterno, L2886, August 22, 1962; Villanueva vs. Yulo, L-12985, Dec. 29,1959); that "where time is not of the essence of t
agreement, a slight delay on the part of one party in the performance of his obligation is not a sufficient ground
for the rescission of the agreement"( Biando vs. Embestro L-11919, July 27, 1959; cases cited in Notes
appended to Universal Foods Corporation vs. Court of Appeals, 33 SCRA 1), convince and persuade Us that in
the case at bar where the breach, delay or default was committed as early as in the payment of the fifth monthly
installment for November, 1954, that such failure continued and persisted the next month and every month
thereafter in 1955, 1956, 1957 and year after year to the end of the ten-year period in 1964 (10 years is
respondent's contention) and even to this time, now more than twice as long a time as the original period
without respondent adding, or even offering to add a single centavo to the sum he had originally paid in 1954
which represents a mere 7% of the total price agreed upon, equity and justice may not be invoked and applied.
One who seeks equity and justice must come to court with clean hands, which can hardly be said of the private
respondent.
One final point, on the supposed substantial improvements erected on the land, respondent's house. To grant the
period to the respondent because of the substantial value of his house is to make the land an accessory to the
house. This is unjust and unconscionable since it is a rule in Our Law that buildings and constructions are
regarded as mere accessories to the land which is the principal, following the Roman maxim "omne quod solo
inadeficatur solo cedit" (Everything that is built on the soil yields to the soil).
Pursuant to Art. 1191, New Civil Code, petitioner is entitled to rescission with payment of damages which the
trial court and the appellate court, in the latter's original decision, granted in the form of rental at the rate of
P60.00 per month from August, 1955 until respondent shall have actually vacated the premises, plus P2,000.00
as attorney's fees. We affirm the same to be fair and reasonable. We also sustain the right of the petitioner to the
possession of the land, ordering thereby respondent to vacate the same and remove his house therefrom.
WHEREFORE, IN VIEW OF THE FOREGOING, the Resolution appealed from dated October 12, 1970 is
hereby REVERSED. The decision of the respondent court dated April 23, 1970 is hereby REINSTATED and
AFFIRMED, with costs against private respondent.

SO ORDERED.

#22
[G.R. No. 127206. September 12, 2003]
PERLA PALMA GIL, VICENTE HIZON, JR., and ANGEL PALMA GIL, petitioners, vs. HON. COURT OF
APPEALS, HEIRS OF EMILIO MATULAC, CONSTANCIO MAGLANA, AGAPITO PACETES & The
REGISTER OF DEEDS OF DAVAO CITY, respondents.
DECISION
CALLEJO, SR., J.:
For review on appeal by certiorari are the Decision76[1] of the Court of Appeals in CA-G.R. CV. No. 43188
promulgated on March 19, 1996, and its Resolution77[2] dated October 17, 1996, denying the petitioners Motion
for Reconsideration of the said decision.
The appealed decision affirmed in toto the judgment of the Regional Trial Court, Davao City, Branch 16, in
Civil Case No. 15,356 which dismissed the complaint of the herein petitioners.
The Antecedents
Concepcion Palma Gil, and her sister, Nieves Palma Gil, married to Angel Villarica, were the co-owners of a
parcel of commercial land with an area of 829 square meters, identified as Lot No. 59-C, covered by Transfer
Certificate of Title (TCT) No. 432 located in Davao City. The spouses Angel and Nieves Villarica had
constructed a two-storey commercial building on the property. On October 13, 1953, Concepcion filed a
complaint against her sister Nieves with the then Court of First Instance of Davao City, docketed as Civil Case
No. 1160 for specific performance, to compel the defendant to cede and deliver to her an undivided portion of
the said property with an area of 256.2 square meters. After due proceedings, the court rendered judgment on
April 7, 1954 in favor of Concepcion, ordering the defendant to deliver to the plaintiff an undivided portion of
the said property with an area of 256.2 square meters:
A la vista de los datos expuestos, el Juzgado dicta sentencia condenando a la demanda, Nieves Palma Gil de
Villarica, cumpla con los terminos del documento (Exh. A) ordenando a aquella que otogue los documentos
necesarios traspasando a favor de la demandante (CONCEPCION PALMA GIL), 256 metros cuadrados con 20
centimetros del Lote No. 56-C descrito mas particularmente en el Certificado de Titulo No. 432.78[3]

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Nieves appealed to the Court of Appeals which affirmed the assailed decision. In due course, the decision
became final and executory. On motion of the plaintiff (Concepcion), the court issued a writ of execution.
Nieves, however, refused to execute the requisite deed in favor of her sister. On April 27, 1956, the court issued
an order authorizing ex-officio Sheriff Eriberto Unson to execute the requisite deed of transfer to the plaintiff
over an undivided portion of the property with a total area of 256.2 square meters. Instead of doing so, the
sheriff had the property subdivided into four lots namely, Lot 59-C-1, with an area of 218 square meters; Lot
59-C-2, with an area of 38 square meters; Lot 59-C-3, with an area of 14 square meters; and Lot 59-C-4, with an
area of 560 square meters, all covered by a subdivision plan. The sheriff thereafter executed a Deed of Transfer
to Concepcion over Lot 59-C-1 and Lot 59-C-2 with a total area of 256.2 square meters.
On October 24, 1956, Concepcion executed a deed of absolute sale over Lot 59-C-1 in favor of Iluminada
Pacetes. In the said deed, the area of Lot 59-C-1 appeared as 256 square meters although under the subdivision
plan, the area of the property was only 218 square meters. The vendee obliged herself to pay the said amount, to
wit:
1. The purchase price of P21,600.00 shall be paid as follows: P7,500.00 to be paid upon the signing of this
instrument; and the balance of P14,100.00 to be paid upon the delivery of the corresponding Certificate of Title
in the name of the VENDEE.79[4]
Under the deed of absolute sale, the parties further agreed as follows:
2. That the VENDOR shall, within the period of ONE HUNDRED TWENTY (120) DAYS, from the signing of
this agreement, undertake and work for the issuance of the corresponding Certificate of Title of the said Lot No.
59-C-1 in her favor with the proper government office or offices, to the end that the same can be duly
transferred in the name of the herein VENDEE, by virtue thereof.
3. That pending the full and complete payment of the purchase price to the VENDOR, the VENDEE shall
collect and receive any and all rentals and such other income from the land above-described for her own
account and benefit, this right of the VENDEE to begin from December 1, 1956.80[5]
In the meantime, Nieves filed a motion in Civil Case No. 1160 to compel the sheriff to report on his compliance
with the courts Order dated April 27, 1956. The motion was denied. A motion for reconsideration of the denial
met the same fate. Nieves appealed to the Court of Appeals, which appeal was docketed as CA-G.R. No. 22438R.
In a parallel development, Concepcion filed a complaint for unlawful detainer against the spouses Angel and
Nieves Villarica with the Municipal Trial Court docketed as Civil Case No. 2246. On October 4, 1956, the court
rendered judgment in favor of the plaintiff and against the defendants, the decretal portion of which reads as
follows:
From the foregoing, it is indeed evident and clear that the herein defendants have been unlawfully withholding
possession of the land from the plaintiff, and hereby finds in favor of the plaintiff, and against the defendants,
ordering the latter to vacate the premises described in the complaint, removing whatever improvements they
have constructed thereon. The defendants are further judged to pay the plaintiff the amount of ONE HUNDRED
FIFTY PESOS (P150.00) a month from the time of the filing of this complaint until the lot is finally vacated in

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concept of rentals, deprived of the plaintiff due to the unlawful possession of the defendants, and to pay the
costs of this suit.81[6]
The decision became final and executory but the plaintiff did not file any motion for a writ of execution.
The spouses Angel and Nieves Villarica filed a complaint on October 24, 1956 against the sheriff and
Concepcion with the Court of First Instance of Davao City, docketed as Civil Case No. 2151 for the
nullification of the deed of transfer executed by the sheriff.82[7]
On December 21, 1956, Iluminada Pacetes filed a motion to intervene in Civil Case No. 2151, as vendee of the
property subject of the case, which was granted by the court. She then filed a motion to dismiss the complaint.
The court granted the motion. Nieves appealed to the Court of Appeals which appeal was docketed as CA-G.R.
No. 22008-R. Nieves appeals in Civil Cases Nos. 1160 and 2151 were certified by the CA to this Court,
docketed as G.R. No. L-15799 and G.R. No. L-15801.
On the basis of the deed of transfer executed by Sheriff Iriberto A. Unson, the Register of Deeds issued TCT
No. 7450 over Lot 59-C-1 and 59-C-2 on July 17, 1957 in the name of Concepcion, with a total area of 256.2
square meters. However, the latter failed to transfer title to the property to and under the name of Iluminada
Pacetes. Consequently, the latter did not remit the balance of the purchase price of the property to Concepcion.
In the interim, the spouses Angel and Nieves Villarica executed a real estate mortgage over Lot 59-C-4 in favor
of Prudential Bank as security for a loan. On August 4, 1959, Concepcion died intestate and was survived by
Nieves Villarica and her nephews and nieces. Iluminada filed a motion in Civil Case No. 1160 for her
substitution as party-plaintiff in lieu of the deceased Concepcion. On August 2, 1961, the court issued an order
granting the motion.
On August 31, 1961, this Court rendered judgment in G.R. Nos. L-15799 and L-15801 setting aside the deed of
transfer executed by the sheriff in favor of Concepcion Palma Gil, and remanding the records to the trial court
for further proceedings.83[8] In compliance with the Decision of this Court in G.R. No. L-15801, the trial court
conducted further proceedings in Civil Case No. 1160 and discovered that the defendant had mortgaged Lot 59C-4 to the Prudential Bank. Consequently, the court issued an order on February 17, 1964, declaring that the
defendant had waived the benefits of the Decision of the Court on August 31, 1961 in G.R. No. L-15801; thus,
the conveyance of the property made by Concepcion in favor of Iluminada on October 24, 1956 must stand.
Nieves filed a motion for the reconsideration of the said order but the court denied the same in an Order dated
February 29, 1964. Nieves appealed the order to the CA which dismissed the appeal for her failure to file a
record on appeal. Nieves filed a petition for review with this Court docketed as G.R. No. L-28363.
More than five years having elapsed without the decision in Civil Case No. 2246 being enforced, Iluminada
filed a complaint docketed as Civil Case No. 4413 in the Court of First Instance of Davao City, for the revival
and execution of the decision of the Municipal Trial Court in Civil Case No. 2246 (the unlawful detainer case).
The plaintiff therein averred that, as Concepcions successor-in-interest, she acquired the right of action to
enforce the decision in Civil Case No. 2246. The defendants, on the other hand, averred that Iluminada had not
yet paid the balance of the purchase price of Lot 59-C-1; hence, she had not acquired title over the lot and the
right to evict the defendant. The deed of absolute sale executed by Concepcion in favor of the plaintiff was an
81
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executory, not an executed deed. On January 26, 1965, the court rendered judgment in favor of the defendants
and dismissed the complaint. The decretal portion reads:
IN VIEW OF THE FOREGOING, the Court believes that the plaintiff herein has not been properly and legally
subrogated to the rights and action of deceased Concepcion Palma Gil and, hence, for these reasons the Court
dismisses this case without pronouncement as to costs.
The counterclaim is also hereby ordered dismissed.84[9]
On March 16, 1966, Iluminada Pacetes and Agapito Pacetes executed a deed of absolute sale over Lot 59-C-1
and Lot 59-C-2 in favor of Constancio B. Maglana for P110,000.00, covered by TCT No. 7450.85[10] The
spouses-vendors undertook to secure title over the lots under the name of the vendee within ninety days.
On May 15, 1974, this Court denied the petition for certiorari filed by Nieves in G.R. No. L-28363.86[11] The
Court, in part, ruled:
But while the issue at bar exclusively involves the timeliness of the appeal of the petitioners to the Court of
Appeals, this Court has nonetheless examined and analyzed the substantive aspects of this case and is satisfied
that the ORDERS of the trial court complained of are morally just.
Accordingly, the instant appeal is dismissed and the resolution of the Court of Appeals dated July 31, 1967 and
its resolution dated October 18, 1967 are affirmed.87[12]
The decision of the Court became final and executory.
On May 5, 1975, the spouses Agapito and Iluminada Pacetes filed a complaint against Nieves in the Court of
First Instance of Davao City, docketed as Civil Case No. 8836 for the recovery of possession of Lot 59-C-1 and
Lot 59-C-2. The Pacetes spouses claimed that Lot 59-C-2 was included in TCT No. 7450 under the name of
Concepcion. The spouses prayed that judgment be rendered in their favor after due proceedings thus:
PRAYER
PREMISES CONSIDERED, it is most respectfully prayed that:
1.During the pendency of this case, Defendant be ordered:

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87

a.

To refrain from collecting rentals from the tenants or occupants of the building erected in said
Lot 59-C-1; in that the tenants be directed to pay their rental to the plaintiff;

b.

To demolish her aforesaid building of strong materials and vacate the premises of Lot 59-C-1 and
Lot 59-C-2.

2.

After hearing, Defendant be ordered to:

a.

Pay the Plaintiffs the amount consisting of compensation for the use of the land they have been
depribed (sic) of to receive and enjoy since October 24, 1956 due to the unwarranted and illegal
occupation of the said lots by defendant;

b.

Pay Plaintiffs moral and exemplary damages in such amount as the Honorable Court may fix
considering the facts and the law;

c.

Pay Plaintiffs such expenses of litigation as may be proven during the trial, and

d.

Pay Plaintiffs expenses for services of counsel they had to incurr (sic) in this complaint.

3.

OTHER RELIEFS consonant with justice and equity are prayed for.88[13]

On May 10, 1977, Nieves Villarica executed a lease agreement with Virginia Jorge and Anita Vergara over Lots
59-C-1 and 59-C-2. The lessees took actual possession of the leased property.
In their Answer to the complaint in Civil Case No. 8836, the defendants averred, by way of defense, that the
complaint was barred by the decision of the CFI in Civil Case No. 4413, which ruled that the Deed of Absolute
Sale executed by Concepcion in favor of Iluminada was merely an executory, but not an executed contract.
After the plaintiffs had rested their case, the defendants filed a motion to dismiss (demurrer to evidence). On
October 29, 1975, the court issued an order dismissing the complaint on the ground that the action was barred
by the decision of the court in Civil Case No. 4413.89[14] Thus, Virginia Jorge and Anita Vergara continued to
be in physical possession of the property.
In the meantime, on August 8, 1977, Iluminada consigned with the court in Civil Case No. 1160 the amount of
P11,983.00 only as payment of the purchase price of the property. Iluminada was issued receipts for the
amount.90[15] As successor-in-interest of Concepcion, she likewise filed a motion for execution in Civil Case
No. 1160 for the eviction of the defendant Nieves Villarica and all those acting for and in her behalf. The court
issued an order on August 19, 1977 granting the motion. The defendants filed a motion for reconsideration of
the order claiming that Iluminada was not a party to the case which the court denied on September 2, 1977. The
defendant filed another motion for reconsideration which was likewise denied on September 16, 1977. The
defendant filed a petition for certiorari with the Court of Appeals docketed as CA-G.R. No. 62957-R, which
petition was dismissed on August 26, 1980. The CA ruled that Iluminada Pacetes was the real party-in-interest
as the vendee of the property. The defendant filed a petition with this Court docketed as G.R. No. L-56399.
In the meantime, Iluminada filed a petition with the RTC docketed as Miscellaneous Case No. 4715 for the
issuance of an owners duplicate of TCT No. 7450. On March 22, 1978, the court granted the petition and
ordered the Register of Deeds to issue an owners duplicate of the said title under the name of Concepcion Gil.
Iluminada presented the said order and the deed of absolute sale executed by Concepcion in her favor. On May
9, 1978, the Register of Deeds issued TCT No. 61514 over Lot 59-C-1, with an area of 218 square meters, in the
name of Iluminada Pacetes.91[16]

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On April 21, 1980, TCT No. 73412 was issued by the Register of Deeds of Davao City in favor of Constancio
Maglana over Lot 59-C-1 only.92[17] The next day, Constancio Maglana executed a deed of sale not only over
Lot 59-C-1 but also Lot 59-C-2, in favor of Emilio Matulac for the purchase price of P150,000.00.93[18] On the
basis of the said deed, the Register of Deeds issued TCT No. 80631 to and under the name of Emilio Matulac
over the two lots.
In the meantime, Angel Villarica had died on April 20, 1974. On July 7, 1981, his heirs, including his widow
Nieves, executed an Extra-Judicial Settlement of Estate of Deceased in which the latter waived, ceded and
transferred to her children Teresita Magpantay, Antero P.G. Villarica, Zenaida V. Alovera, Emperatriz V. Garcia,
Napoleon P.G. Villarica and Rupendo P.G. Villarica her rights and interests over the property covered by TCT
No. 7450.94[19]
On January 13, 1982, this Court affirmed the resolution of the Court of Appeals, in CA-G.R. No. 62975-R and
dismissed the petition for certiorari in G.R. No. L-56399, thus, paving the way for the execution of the decision
of the trial court in Civil Case No. 1160, per its Order dated August 19, 1977. Emilio Matulac filed a motion for
the issuance of a writ of execution. The Court granted the motion on February 18, 1982. Nieves filed a motion
for the reconsideration of the order which the court denied in its Order dated March 17, 1982. Virginia Jorge
and Anita Vergara, the lessees, filed a motion for reconsideration but the court denied the motion. Nonetheless,
the lessees were allowed to stay in the property until April 9, 1982. However, the lessees refused to vacate the
property after said date.
On April 10, 1982, Emilio Matulac filed a motion in Civil Case No. 1160 for the issuance of a writ of execution
and an order of demolition. On April 20, 1982, the trial court issued an order granting the motion for a writ of
execution on April 30, 1982. The court also issued a special order for the demolition of the buildings on the
property. The buildings on the property, including the properties owned by Virginia Jorge and Anita Vergara,
were demolished on June 14, 1982. Emilio Matulac thereafter commenced the construction of a building
thereon. The defendant Nieves Villarica, in the meantime, filed a motion in Civil Case No. 1160 to annul the
proceedings, including the writ of execution issued by the court, and the issuance of a restraining order.
For their part, Virginia Jorge and Anita Vergara filed a petition for certiorari with this Court docketed as G.R.
No. L-60690 for the nullification of the aforesaid orders and the writ of demolition issued by the trial court in
Civil Case No. 1160.
Three of the surviving heirs of Concepcion Gil, namely, Perla Palma Gil, Vicente Hizon, Jr. and Angel Palma
Gil, through their first cousin, Atty. Vicente Villarica, one of Nieves Villaricas children, filed on June 17, 1982,
a complaint against Emilio Matulac, Constancio Maglana, Agapito Pacetes, and the Register of Deeds, with the
Court of First Instance, docketed as Civil Case No. 15,356 for the cancellation of the deed of sale executed by
Concepcion in favor of Iliminada Pacetes; the deed of sale executed by the latter in favor of Constancio
Maglana; the deed of sale executed by the latter in favor of Emilio Matulac, as well as TCT Nos. 61514, 73412
and 80631 under the respective names of the vendees.

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The plaintiffs alleged, inter alia, that the deed of absolute sale executed by Concepcion in favor of Iluminada
over Lots 59-C-1 and 59-C-2 was a contract to sell, an executory contract, as declared by the Court of First
Instance in Civil Cases Nos. 4413 and 8836, and not an executed contract; the defendant spouses Agapito and
Iluminada Pacetes failed to pay the balance of the purchase price of the property during the lifetime of
Concepcion; hence, what was embodied in the said deed was not fulfilled by the vendee. Consequently, the sale
is null and void.
The plaintiffs prayed for the issuance of a temporary restraining order and a writ of preliminary injunction to
enjoin the defendant Emilio Matulac from continuing with the construction of a building on the property. The
plaintiffs likewise prayed that after due proceedings, judgment be rendered in their favor and against the
defendants, thus:
WHEREFORE, in view of the aforecited reasons it is most respectfully prayed that:
1)An order be rendered immediately enjoining defendant Matulac from doing further work in the
construction of the building and enjoining him from entering the premises and the land subject of
this complaint and after trial making the injunction above-mentioned permanent, ordering the
removal of any structure and other construction within the plaintiffs above-described property and
thereafter, upon said defendants failure to do so authorizing plaintiffs to order said removal at
defendants expense.
2)

Judgment be rendered ordering:

a. Defendant Register of Deeds to cancel TCT No. T-61514, T-73412 and T-80631 and issued (sic)
a new Transfer Certificate of Title in the name of the above-mentioned heirs of the late
Concepcion Palma Gil nullifying the deeds of sale, Annexes B, C, and D hereof;
b. Defendants Pacetes, Maglana and Matulac jointly and solidarily liable to plaintiffs for moral
and exemplary damages as may be granted by this Honorable Court and the amount of
P25,000.00 as attorneys fees; and
c. Litigation expenses and other reliefs as may be justified under this case.95[20]
In his answer to the complaint, defendant Emilio Matulac interposed the following special and affirmative
defenses: (a) he is the lawful owner of the property; (b) the action is barred by the Decision of this Court in G.R.
No. L-56399; (c) the plaintiffs are estopped from assailing the sale to him of the property; and (d) he is a
purchaser in good faith.
On November 29, 1982, the court issued an order in Civil Case No. 1160, denying the motion for the
nullification of the proceedings and for a writ of preliminary injunction. Nieves filed a motion for
reconsideration of the order. On February 18, 1983, the court issued an order denying the motion. Nieves filed a
petition with the Court of Appeals for the nullification of the same.
In the meantime, Emilio Matulac died intestate and was substituted by his heirs Sonia Matulac, Josephine
Matulac and Gregorio Matulac.96[21] A petition was filed with the RTC of Davao City for the settlement of his
estate docketed as SP-No. 2747. The Court appointed Sonia Matulac as administratrix of the estate.
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The CA rendered a decision granting the petition and ordering the trial court to conduct further proceedings to
implement the August 19, 1977 Order. Sonia Matulac filed a petition for review on certiorari with this Court
docketed as G.R. No. 85538 for the nullification of the decision of the CA.
On November 24, 1989, this Court rendered a Decision dismissing the petition in G.R. No. L-60690. This Court
said:
When We dismissed on September 16, 1974, the petition for certiorari filed by defendants questioning the
orders, dated December 7, 1961 and December 17, 1964, in effect We had confirmed the sale by plaintiff in
Civil case No. 1160, Concepcion Palma Gil, of Lot 59-C-1 and 59-C-2 to Illuminada Pacetes and affirmed the
ruling of the trial court that defendants had waived the benefit of Our Resolution rendered on August 31, 1961.97
[22]
Meanwhile, one of the plaintiffs, Perla Palma Gil in Civil Case No. 15,356, was appointed by the court as
administratrix of the estate of Concepcion on December 29, 1989,98[23] and filed in the said case a motion to
intervene as plaintiff in her capacity as administratrix in behalf of all the heirs of Concepcion.99[24] The heirs of
Emilio Matulac opposed the motion considering that they, and not the estate of Concepcion, owned the subject
property; thus the claim of the plaintiff should be filed in SP-No. 2747. On April 7, 1990, the said motion was
denied by the trial court.100[25] The said court declared:
Being already a plaintiff together with the other plaintiffs in thise (sic) case, said intervention by plaintiff Perla
Palma Gil is not absolutely necessary and imperative. It would only delay the early disposition of the case if
allowed.
On January 8, 1990, this Court dismissed the petition in G.R. No. 85538. The petitioners filed a motion for
reconsideration and on July 2, 1992, this Court granted the motion and reversed the decision of the CA. This
Court ruled in the said case as follows:
When Concepcion Palma Gil, plaintiff in Civil Case No. 1160 sold the land in question to Iluminada Pacetes on
October 24, 1956, the latter became the new owner of the property. By virtue of the order of substitution issued
by the court, said new owner (Pacetes) became a formal party---the party plaintiff. As the new party plaintiff,
Pacetes had the right to move for the issuance of a writ of execution, which was correctly granted by the trial
court in the questioned Order dated August 19, 1977.
The subsequent transfers of the property from Pacetes to Maglana, and then from Maglana to herein movant
Matulac, was acquired pendente lite. The latter (Matulac) as the latest owner of the property, was, as aptly put
by the trial court, subrogated to all the rights and obligations of Pacetes. He is thus the party who now has a
substantial interest in the property. Matulac is a real party-in- interest subrogated to all the rights of Iluminada
Pacetes, including the right to the issuance of a writ of execution in his name. Hence, the questioned orders of
the lower court dated November 29, 1982 and February 18, 1983 as well as the Writ of Possession issued
pursuant to the aforementioned orders are valid. They do not in any way run counter to the order of the lower
97
98
99
100

court dated August 19, 1977, which granted the motion for execution filed by Pacetes, who, as earlier pointed
out, was succeeded in all his rights and interests, by herein petitioner, Matulac.
Although the dispositive portion of the judgment rendered in Civil Case No. 1160 did not award the parties their
respective shares in the property, the power of the court to issue the order of execution cannot be limited to what
is stated in the dispositive portion of the judgment. As held in Paylago vs. Nicolas (189 SCRA 728 [1990]), the
body of the decision must be consulted in case of ambiguity in the dispositive portion. Hence, in Jorge vs.
Consolacion (supra), we ruled that the execution of the judgment cannot be limited to its dispositive portion,
considering the continued failure of the defendant Nieves Palma Gil-Villarica, to comply with what was
required of her in the judgment. Respondents deprived petitioner Concepcion Palma Gil and her successors-ininterest of their legal right to possess the land.101[26] (Underscoring supplied)
On June 11, 1993, the trial court rendered judgment in Civil Case No. 15,356 in favor of the defendants. The
trial court ruled that this Court had affirmed, in G.R. No. 85538 and G.R. No. L-60690, the sales of the property
from Concepcion Palma Gil to Iluminada Pacetes, then to Constancio Maglana and to Emilio Matulac; hence,
the trial court was barred by the rulings of this Court. The plaintiffs appealed to the CA with the following
assignment of errors:
I.The trial court erred in not holding that Iluminada Pacetes had no right to sell or transfer the two (2)
parcels of land to Constancio Maglana;
II.

That the trial court erred in not declaring the sale of the properties in question from Iluminada
Pacetes to Constancio Maglana, thence, from Constancio Maglana to Emilio Matulac NULL and
VOID;

III.

That the trial court erred in dismissing the complaint;

IV.

That the trial court erred in not ordering the cancellation of transfer Certificate of Title No. T80631 in the name of Emilio Matulac and the issuance of a new title in the name of Concepcion
Palma Gil;

V.

That the trial court erred in not holding the appellees liable for damages to the appellants.102[27]

In the meantime, on June 29, 1994, the estate of Emilio Matulac executed a deed of sale of real estate in which
the estate sold Lots 59-C-1 and 59-C-2 and the building thereon to the Prudential Education Plan, Inc. for
P7,000,000.00.103[28] On March 19, 1996, the CA rendered a decision affirming the decision assailed therein
and dismissing the appeal. The CA ruled that the deed of absolute sale executed by Concepcion in favor of
Iluminada Pacetes was a deed of absolute sale over Lots 59-C-1 and 59-C-2, under which the ownership over
the property subject thereof was transferred to the vendee. Moreover, the validity of the sales of the subject lots
by Concepcion to Iluminada, by the latter to Constancio Maglana, and by the latter to Emilio Matulac, had been
confirmed by this Court in G.R. No. L-60690 and G.R. No. 85538. Although Iluminada paid the balance of the
purchase price of the property only on August 8, 1977, the payment was still timely, in light of Article 1592 of
the New Civil Code. Besides, the property had already been sold to the respondents Constancio Maglana and
Emilio Matulac.
101
102
103

The appellants, now petitioners in this case, assert that private respondents Agapito and Iluminada Pacetes
failed to pay the balance of the purchase price in the amount of P14,100.00. They did consign and deposit the
amount of P11,983.00, but only on August 8, 1977, twenty one years from the execution of the Deed of
Absolute Sale in favor of the said spouses, without the latter instituting an action for the cancellation of their
obligation. According to the petitioners, the consignation made by Iluminada Pacetes of the amount did not
produce any legal effect. Furthermore, private respondents Constancio Maglana and Emilio Matulac were not
purchasers in good faith because at the time they purchased the respective properties, the two-storey building
constructed by the spouses Angel and Nieves Villarica on the said property was still existing. Hence, the
decision of the CA should be reversed and set aside.
In their Comment on the petition, private respondents Constancio Maglana and Agapito Pacetes averred that the
action of the petitioners in the court a quo was barred by the Decision of this Court in G.R. No. L-60690 on
November 24, 1989.
THE RULING OF THE COURT
The petition is denied due course.
We note that the petitioners failed to implead all the compulsory heirs of the deceased Concepcion Gil in their
complaint. When she died intestate, Concepcion Gil, a spinster, was survived by her sister Nieves, and her
nephews and nieces, three of whom are the petitioners herein.
Upon Concepcions demise, all her rights and interests over her properties, and the rights and obligations under
the Deed of Absolute Sale executed in favor of Iluminada Pacetes, were transmitted to her sister, and her
nephews and nieces104[29] by way of succession, a mode of acquiring the property, rights and obligation of the
decedent to the extent of the value of the inheritance of the heirs. The heirs stepped into the shoes of the
decedent upon the latters death.105[30]
In their complaint, the petitioners alleged that:
7. That upon the death of the late Concepcion Palma Gil, her heirs namely: A. Children of the deceased Pilar
Palma Gil Rodriguez; B. Children of the deceased Asuncion Palma Gil Hizon one of whom is plaintiff Vicente
Hizon, Jr.; C. Nieves Palma Gil Villarica; D. David Palma Gil one of whom is plaintiff Angel Palma Gil; E.
Perla Palma Gil; and F. Children of the deceased Jose Palma Gil, ipso facto became co-owners of the said
subject property by operation of law;106[31]
When she testified, petitioner Palma Gil stated that:
ATTY. GALLARDO:
With the Courts permission.
Q

104
105
106

You said that you are one of the 3 plaintiffs in this case?

Yes, sir.

Q
Now, aside from these 3 plaintiffs who are supposed to be the heirs of the late Concepcion Palma Gil,
there are also other heirs who were not included as plaintiffs in this case?
A
Yes, because that time when they demolished the building and I accompanied Atty. Villarica at the site
where they had the demolition, we found out that during the confrontation that we have to hurry and file the
case right away. So we were not able to contact all the heirs and I have contacted . . .since 3 of us were there
during the demolition, so we decided that I will be one, and Angel Palma Gil was also there and also Vicente
Hizon Jr. whom I contacted at the Apo View Hotel and I contacted also Julian Rodriguez, another cousin thru
telephone and he told us to go ahead and file the case. We cannot get all the heirs. We cannot gather all of them
and we will have a hard time asking them to sign, so we just filed the case.
Q
You are telling the court that the other heirs were not included because they were not available to sign
the complaint?
A

They were not there during the demolition.

When was the case filed?

June 14, the demolition was on June 14, 1982.

ATTY. QUITAIN:
The best evidence would be the complaint, Your Honor.
ATTY. GALLARDO:
Q

It appears in the complaint that it was filed sometime on June 16, 1982?

We had it on June 14 the demolition, and we filed it right away because we were in a hurry.

Q
Since June 16, 1982 up to the present the other heirs did not do anything to be included in the
complaint?
ATTY. QUITAIN:
The best evidence would be the motion for intervention and it would seem that compaero is contending
that there is a need to include all heirs. Under the civil law on property even one co-owner may file a case.107
[32]
Although the petitioners sought leave from the trial court to amend their complaint to implead the intestate
estate of the deceased Concepcion Gil through her administratrix Perla Palma Gil, as party plaintiff, the trial
court denied the petitioners plea. The petitioners manifested to the trial court that they would assign the denial
of their plea as one of the assigned errors in case of appeal to the CA. They failed to do so. The petitioners were
duty bound to implead all their cousins as parties-plaintiffs; otherwise, the trial court could not validly grant
relief as to the present parties and as to those who were not impleaded.108[33]
107
108

Being indispensable parties, the absence of the surviving sister, nephews and nieces of the decedent in the
complaint as parties-plaintiffs, and in this case, as parties-petitioners, renders all subsequent actions of the trial
court null and void for want of authority to act, not only as to the absent parties, but even as to those present.
Hence, the petition at bar should be dismissed.109[34]
Even if we were to brush aside this procedural lapse and delve into the merits of the case, a denial in due course
is inevitable.
Article 1191110[35] in tandem with Article 1592111[36] of the New Civil Code are central to the issues at bar.
Under the last paragraph of Article 1169 of the New Civil Code, in reciprocal obligations, neither party incurs in
delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon
him. From the moment one of the parties fulfills his obligation, delay in the other begins. Thus, reciprocal
obligations are to be performed simultaneously so that the performance of one is conditioned upon the
simultaneous fulfillment of the other.112[37] The right of rescission of a party to an obligation under Article 1191
of the New Civil Code is predicated on a breach of faith by the other party that violates the reciprocity between
them.113[38]
That the deed of absolute sale executed by Concepcion Gil in favor of Iluminada Pacetes is an executory
contract and not an executed contract is a settled matter. In a perfected contract of sale of realty, the right to
rescind the said contract depends upon the fulfillment or non-fulfillment of the prescribed condition. We ruled
that the condition pertains in reality to the compliance by one party of an undertaking the fulfillment of which
would give rise to the demandability of the reciprocal obligation pertaining to the other party.114[39] The
reciprocal obligation envisaged would normally be, in the case of the vendee, the payment by the vendee of the
agreed purchase price and in the case of the vendor, the fulfillment of certain express warranties.115[40]
In another case, we ruled that the non-payment of the purchase price of property constitutes a very good reason
to rescind a sale for it violates the very essence of the contract of sale. In Central Bank of the Philippines v.
Bichara,116[41] we held that the non-payment of the purchase price of property is a resolutory condition for
which the remedy is either rescission or specific performance under Article 1191 of the New Civil Code. This is
true for reciprocal obligations where the obligation is a resolutory condition of the other.117[42] The vendee is
entitled to retain the purchase price or a part of the purchase price of realty if the vendor fails to perform any
109
110
111
112
113
114
115
116

essential obligation of the contract. Such right is premised on the general principles of reciprocal obligations.118
[43]
In this case, Concepcion Gil sold Lot 59-C-1 to Iluminada Pacetes for P21,600.00 payable as follows:
1. The purchase price of P21,600.00 shall be paid as follows: P7,500.00, to be paid upon the signing of this
instrument; and the balance of P14,100.00, to be paid upon the delivery of the corresponding Certificate of Title
in the name of the VENDEE.
Concepcion Gil obliged herself to transfer title over the property to and under the name of the vendee within
120 days from the execution of the deed.
2. That the VENDOR shall, within the period of ONE HUNDRED TWENTY (120) DAYS, from the signing of
this agreement, undertake and work for the issuance of the corresponding Certificate of Title of the said Lot No.
59-C-1 in her favor with the proper government office or offices, to the end that the same can be duly
transferred in the name of the herein VENDEE, by virtue thereof.
3. That pending the full and complete payment of the purchase price to the VENDOR, the VENDEE shall
collect and receive any and all rentals and such other income from the land above-described for her own
account and benefit, this right of the VENDEE to begin from December 1, 1956.
That it is further stipulated that this contract shall be binding upon the heirs, executors and administrators of the
respective parties hereof.
And I, CONCEPCION PALMA GIL, with all the personal circumstances above-stated, hereby confirm all the
terms and conditions stipulated in this instrument.119[44]
The vendee paid the downpayment of P7,500.00. By the terms of the contract, the obligation of the vendee to
pay the balance of the purchase price ensued only upon the issuance of the certificate of title by the Register of
Deeds over the property sold to and under the name of the vendee, and the delivery thereof by the vendor
Concepcion Gil to the latter. Concepcion failed to secure a certificate of title over the property. When she died
intestate on August 4, 1959, her obligation to deliver the said title to the vendee devolved upon her heirs,
including the petitioners. The said heirs, including the petitioners failed to do so, despite the lapse of eighteen
years since Concepcions death.
Iluminada was not yet obliged on August 8, 1977 to pay the balance of the purchase price of the property, but as
a sign of good faith, she nevertheless consigned the amount of P11,983.00, part of the balance of the purchase
price of P14,000.00, with the court in Civil Case No. 1160. The court accepted the consignation and she was
issued receipts therefor. Still, the heirs of Concepcion Gil, including the petitioners, failed to deliver the said
title to the vendee. Iluminada was compelled to file, at her expense, a petition with the RTC docketed as
Miscellaneous Case No. 4715 for the issuance of an owners duplicate of TCT No. 7450 covering the property
sold which was granted by the court on March 22, 1978. It was only on May 9, 1978 that Iluminada managed to
secure TCT No. 61514 over the property under her name. Upon the failure of the heirs to comply with the
decedents prestation, Iluminada Pacetes was impelled to resort to legal means to protect her rights and interests.
117
118
119

The petitioners, as successors-in-interest of the vendor, are not the injured parties entitled to a rescission of the
deed of absolute sale. It was Concepcions heirs, including the petitioners, who were obliged to deliver to the
vendee a certificate of title over the property under the latters name, free from all liens and encumbrances
within 120 days from the execution of the deed of absolute sale on October 24, 1956, but had failed to comply
with the obligation.
The consignation by the vendee of the purchase price of the property is sufficient to defeat the right of the
petitioners to demand for a rescission of the said deed of absolute sale.120[45]
It bears stressing that when the vendee consigned part of the purchase price with the Court and secured title
over the property in her name, the heirs of Concepcion, including the petitioners, had not yet sent any notarial
demand for the rescission of the deed of absolute sale to the vendee, or filed any action for the rescission of the
said deed with the appropriate court.
Although the vendee consigned with the Court only the amount of P11,983.00, P2,017.00 short of the purchase
price of P14,000.00, it cannot be claimed that Concepcion was an unpaid seller because under the deed of sale,
she was still obligated to transfer the property in the name of the vendee, which she failed to do so. According
to Article 1167 of the New Civil Code:
Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it
may be decreed that what has been poorly done be undone. (1098)
The vendee (Iluminada) had to obtain the owners duplicate of TCT No. 7450 and thereafter secure its transfer in
her name. Pursuant to Article 1167, the expenses incurred by the vendee should be charged against the amount
of P2,617.00 due to the heirs of Concepcion Gil as the vendors successors-in-interest.
In sum, the decision of the CA affirming the decision of the RTC dismissing the complaint of the petitioners is
affirmed.
IN LIGHT OF ALL THE FOREGOING, the petition for review is DENIED for lack of merit.
SO ORDERED.

#23
[G.R. No. 135528. July 14, 2004]
SPOUSES ORLANDO A. RAYOS and MERCEDES T. RAYOS, petitioners, vs. THE COURT OF APPEALS
and SPOUSES ROGELIO and VENUS MIRANDA, respondents.
DECISION
120

CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision121[1] of the Court of Appeals122[2] in CA-G.R. CV No.
46727 which affirmed the Decision123[3] of the Regional Trial Court of Makati, Branch 62, in Civil Case No.
15639 for specific performance and damages, and Civil Case No. 15984 for sum of money and damages.
The two (2) cases stemmed from the following antecedent facts:
On December 24, 1985, petitioner Orlando A. Rayos, a practicing lawyer, and his wife, petitioner Mercedes T.
Rayos, secured a short-term loan from the Philippine Savings Bank (PSB) payable within a period of one (1)
year in quarterly installments of P29,190.28, the first quarterly payment to start on March 24, 1986. The loan
was evidenced by a promissory note which the petitioners executed on December 24, 1985.124[4] To secure the
payment of the loan, the petitioners-spouses executed, on the same date, a Real Estate Mortgage over their
property covered by Transfer Certificate of Title (TCT) No. 100156 located in Las Pias, Metro Manila.125[5]
On December 26, 1985, the petitioners, as vendors, and the respondents, Spouses Miranda, as vendees, executed
a Deed of Sale with Assumption of Mortgage over the subject property for the price of P214,000.00. However,
on January 29, 1986, the petitioners-spouses, likewise, executed a Contract to Sell the said property in favor of
the respondents for P250,000.00 with the following condition:
3. That upon full payment of the consideration hereof, the SELLER shall execute a Deed of Absolute Sale in
favor of the BUYER that the payment of capital gains tax shall be for the account of the SELLER and that
documentary stamps, transfer tax, registration expenses for the transfer of title including the notarization and
preparation of this Contract and subsequent documents if any are to be executed, real estate taxes from January
1, 1986 and other miscellaneous expenses shall be for the account of the BUYER; the SELLER hereby
represents that all association dues has been paid but that subsequent to the execution of this Contract the
payment of the same shall devolve upon the BUYER.126[6]
The petitioners obliged themselves to execute a deed of absolute sale over the property in favor of the
respondents upon the full payment of the purchase price thereof.
Respondent Rogelio Miranda filed an application dated May 4, 1986 with the PSB to secure the approval of his
assumption of the petitioners obligation on the loan, and appended thereto a General Information sheet.127[7]
Respondent Rogelio Miranda stated therein that he was the Acting Municipal Treasurer of Las Pias and had an
121
122
123
124
125
126
127

unpaid account with the Manila Banking Corporation in the amount of P18,777.31. The PSB disapproved his
application. Nevertheless, respondent Rogelio Miranda paid the first quarterly installment on the petitioners
loan on March 21, 1986 in the amount of P29,190.28. The said amount was paid for the account of the
petitioners. Respondent Rogelio Miranda, likewise, paid the second quarterly installment in the amount of
P29,459.00 on June 23, 1986, also for the account of the petitioners.128[8]
In the meantime, respondent Rogelio Miranda secured the services of petitioner Orlando Rayos as his counsel in
a suit he filed against the Manila Banking Corporation, relative to a loan from the bank in the amount of
P100,000.00. Both parties agreed to the payment of attorneys fees, as follows:
Our agreement is as follows:
1.

You will pay me P700.00 as filing fee and other miscellaneous expenses which I personally
received from you this morning;

2.

Award to you of any amount in terms of moral, exemplary or actual and other forms of
damages shall accrue to you in the amount of 70% thereof;

3.

30% of the award to you in the concept of No. 2 hereof shall pertain to me as my contingent
fee;

4.

All attorneys fees that the court shall award to me or by the management of TMBC if they
agree to extrajudicially settle shall pertain exclusively to me;

5.
6.

Execution of judgment expenses shall be for your account;

Should the case be appealed, my contingent fee shall increase by 10% if the appeal is to the
Intermediate Appellate Court on questions of facts and law, and if appealed from there to the
Supreme Court, then another 10% shall accrue to me.129[9]

On May 14, 1986, petitioner Orlando Rayos filed respondent Rogelio Mirandas complaint against the bank with
the Regional Trial Court of Makati, docketed as Civil Case No. 13670.130[10] In the meantime, the latter paid
the third quarterly installment on the PSB loan account amounting to P29,215.66, for which the bank issued a
receipt for the account of the petitioners.
The parties executed a Compromise Agreement in Civil Case No. 13670 in which they agreed that each party
shall pay for the respective fees of their respective counsels.131[11] The trial court rendered judgment on October
23, 1986 based on the said compromise agreement.132[12] Petitioner Orlando Rayos demanded the payment of
attorneys fees in the amount of P5,631.93, but respondent Rogelio Miranda refused to pay.
128
129
130
131
132

On November 12, 1986, petitioner Orlando Rayos wrote to respondent Rogelio Miranda and enclosed a copy of
his motion in Civil Case No. 13670 for the annotation of his attorneys lien at the dorsal portion of the latters
title used as security for the loan with the Manila Banking Corporation.133[13] The respondent opposed the
motion, claiming that the petitioner agreed to render professional services on a contingent basis.134[14]
Petitioner Orlando Rayos again wrote respondent Rogelio Miranda on November 30, 1986, reminding the latter
of the last quarterly payment of his loan with the PSB. He also advised the respondent to thereafter request the
bank for the cancellation of the mortgage on his property and to receive the owners duplicate of his title over the
same. Petitioner Orlando Rayos also wrote that their dispute over his attorneys fees in Civil Case No. 13670
should be treated differently.135[15]
Petitioner Orlando Rayos then received a Letter dated November 27, 1986 from the PSB, reminding him that
his loan with the bank would mature on December 24, 1986, and that it expected him to pay his loan on or
before the said date.136[16] Fearing that the respondents would not be able to pay the amount due, petitioner
Orlando Rayos paid P27,981.41137[17] to the bank on December 12, 1986, leaving the balance of P1,048.04. In
a Letter dated December 18, 1986, the petitioner advised the PSB not to turn over to the respondents the owners
duplicate of the title over the subject property, even if the latter paid the last quarterly installment on the loan, as
they had not assumed the payment of the same.138[18]
On December 24, 1986, respondent Rogelio Miranda arrived at the PSB to pay the last installment on the
petitioners loan in the amount of P29,223.67. He informed the bank that the petitioners had executed a deed of
sale with assumption of mortgage in their favor, and that he was paying the balance of the loan, conformably to
said deed. On the other hand, the bank informed the respondent that it was not bound by said deed, and showed
petitioner Orlando Rayos Letter dated December 18, 1986. The respondent was also informed that the
petitioners had earlier paid the amount of P27,981.41 on the loan. The bank refused respondent Rogelio
Mirandas offer to pay the loan, and confirmed its refusal in a Letter dated December 24, 1986.139[19]
On even date, respondent Rogelio Miranda wrote the PSB, tendering the amount of P29,223.67 and enclosed
Interbank Check No. 01193344 payable to PSB.140[20] Thereafter, on December 29, 1986, the petitioners paid
the balance of their loan with the bank in the amount of P1,081.39 and were issued a receipt therefor.141[21] On
January 2, 1987, the PSB wrote respondent Rogelio Miranda that it was returning his check.142[22]
133
134
135
136
137
138
139
140

On January 2, 1987, respondent Rogelio Miranda filed a complaint against the petitioners and the PSB for
damages with a prayer for a writ of preliminary attachment with the RTC of Makati. The case was docketed as
Civil Case No. 15639 and raffled to Branch 61 of the court. The respondent alleged inter alia that the petitioners
and the PSB conspired to prevent him from paying the last quarterly payment of the petitioners loan with the
bank, despite the existence of the deed of sale with assumption of mortgage executed by him and the petitioners,
and in refusing to turn over the owners duplicate of TCT No. 100156, thereby preventing the transfer of the title
to the property in his name. Respondent Rogelio Miranda prayed that:
WHEREFORE, it is respectfully prayed that judgment be rendered in favor of plaintiff and against defendants,
ordering the latter, jointly and severally, as follows:
(a)To pay to plaintiff the sum of P267,197.33, with legal interest from date of demand, as actual or
compensatory damages representing the unreturned price of the land;
(b)

To pay to plaintiff the sum of P500,000.00 as consequential damages;

(c)

To pay to plaintiff the sum of P1,000,000.00 as moral damages;

(d)

To pay to plaintiff the sum of P100,000.00 as exemplary damages by way of example or

correction for the public good;

(e)

To pay to plaintiff the sum of P100,000.00 for and as attorneys fees;

(f)

To pay for the costs of suit; and

(g)

That a Writ of Attachment be issued against the properties of defendant Rayos spouses as
security for the satisfaction of any judgment that may be recovered.

PLAINTIFF FURTHER PRAYS for such other remedies and relief as are just or equitable in the premises.143
[23]
The trial court granted the respondents plea for a writ of preliminary attachment on a bond of P260,000.00.
After posting the requisite bond, the respondent also filed a criminal complaint against petitioner Orlando Rayos
for estafa with the Office of the Provincial Prosecutor of Makati, docketed as I.S. No. 87-150. He, likewise,
filed a complaint for disbarment in this Court against petitioner Orlando Rayos, docketed as Administrative
Case No. 2974. Unaware of the said complaint, the petitioner wrote the respondent on January 3, 1986 that as
soon as his payment to the PSB of P29,223.67 was refunded, the owners duplicate of the title would be released
to him.144[24] On January 5, 1986, petitioner Orlando Rayos wrote respondent Rogelio Miranda, reiterating that
he would release the title in exchange for his cash settlement of P29,421.41.145[25] The respondent failed to
respond.
141
142
143
144
145

In the meantime, the PSB executed on January 8, 1987 a Release of Real Estate Mortgage in favor of the
petitioners,146[26] and released the owners duplicate of title of TCT No. 100156.147[27] On January 17, 1987,
petitioner Orlando Rayos wrote respondent Rogelio Miranda, reiterating his stance in his Letters of January 3
and 5, 1987.
In the meantime, the petitioners received the complaint in Civil Case No. 15639 and filed their Answer with
Counterclaim in which they alleged that:
14. That plaintiff has no cause of action against defendants Rayos, the latter are willing to deliver the title
sought by plaintiff under the terms set out in their letters dated January 3, 5, 17, and 20, hereto marked as
Annexes 1, 1-A, 1-B and 1-C;148[28]
Petitioner Orlando Rayos filed a complaint on February 1, 1987 against respondent Rogelio Miranda with the
Regional Trial Court of Makati, docketed as Civil Case No. 15984 for Specific Performance with Damages for
the collection of the amount of P29,223.67 which he had paid to the PSB on December 12 and 19, 1986, and his
attorneys fees in Civil Case No. 13670. The trial court consolidated the cases in Branch 62 of the RTC.
Respondent Rogelio Miranda filed an Amended Complaint in Civil Case No. 15639 for specific performance
with damages, impleading the officers of the PSB as parties-defendants. He alleged that of the purchase price of
the property of P214,000.00, he had paid the entirety thereof to the petitioners, and that petitioner Orlando
Rayos acted unethically in trying to collect P5,631.93 from him as his attorneys fees in Civil Case No. 13670,
and in having such claim annotated at the dorsal portion of his title over the property he mortgaged to the
Manila Banking Corporation.
Respondent Rogelio Miranda prayed that, after due proceedings, judgment be rendered in his favor, thus:
WHEREFORE, it is respectfully prayed that judgment be rendered in favor of plaintiff and against defendants,
as follows:
(a) Ordering defendants spouses Orlando A. Rayos and Mercedes T. Rayos to deliver forthwith to plaintiff the
Owners Duplicate of Transfer Certificate of Title No. 100156, Registry of Deeds for Pasay City;
(b) Ordering defendants, jointly and severally, to pay to plaintiff the sum of P1,000,000.00 as moral damages;
(c) Ordering defendants, jointly and severally, to pay to plaintiff the sum of P867,197.33 as exemplary damages
by way of example or correction for the public good;
(d) Ordering defendants, jointly and severally, to pay to plaintiff the sum of P100,000.00 for and as attorneys
fees;
(e) Ordering defendants, jointly, to pay the costs of suit; and
(f) Ordering the issuance of a Writ of Attachment against the properties of defendants Rayos spouses as security
for the satisfaction of any judgment that may be recovered.
146
147
148

PLAINTIFF further prays for such other remedies and relief as are just or equitable in the premises.149[29]
In the meantime, petitioner Orlando Rayos filed an Amended Complaint in Civil Case No. 15984 impleading
his wife and that of respondent Rogelio Miranda as parties to the case. On March 4, 1987, the trial court issued
an Order granting the petitioners motion in Civil Case No. 15639 for the discharge of the attachment on their
property.150[30] The court also denied the respondents motion for reconsideration of the Order of the court. The
respondents, thereafter, filed a petition for review with the Court of Appeals for the nullification of the said
Order.
On July 9, 1987, the public prosecutor dismissed the charge of estafa against petitioner Orlando Rayos.151[31]
The respondents appealed the resolution to the Department of Justice.
On May 26, 1987, the PSB and its officers filed their Answer in Civil Case No. 15639, and alleged the
following by way of special and/or affirmative defenses, thus:
27. The application for the plaintiff to assume the mortgage loan of the defendants Spouses Rayos was not
approved, and it was NOT even recommended by the Marketing Group of defendant PSBank for approval by its
Top Management, because the credit standing of the plaintiff was found out to be not good;
28. The acceptance of the payments made by the plaintiff for three (3) amortizations on the loan of defendants
Spouses Rayos was merely allowed upon the insistence of the plaintiff, which payments were duly and
accordingly receipted, and said acceptance was in accordance with the terms of the Real Estate Mortgage
executed by the defendants Spouses Rayos in favor of the defendant PSBank and is also allowed by law;152[32]
The parties in Civil Case No. 15639 agreed to submit the case for the trial courts decision on the basis of their
pleadings and their respective affidavits. In a Resolution dated July 26, 1988, then Undersecretary of Justice
Silvestre Bello III affirmed the Public Prosecutors resolution in I.S. No. 87-150.153[33]
On January 30, 1989, the petitioners sold the property to Spouses Mario and Enriqueta Ercia for P144,000.00.
The said spouses were not impleaded as parties-defendants in Civil Case No. 15639. On May 18, 1989, the
petitioners filed an amended complaint in Civil Case No. 15984, appending thereto a copy of the Contract to
Sell in favor of the respondents. The trial court admitted the said complaint.
On November 15, 1989, this Court rendered its Decision dismissing the complaint for disbarment against
Rayos.154[34]
On January 29, 1993, the trial court rendered judgment, the dispositive portion of which reads:
149
150
151
152
153
154

WHEREFORE, premises considered, judgment is hereby rendered, as follows:

I. (a) In Civil Case No. 15639, this Court orders plaintiff Rogelio Miranda to refund to spouses Orlando and
Mercedes T. Rayos the total sum of P29,069.45, Rayos paid to PS Bank as the last amortization and as release
of mortgage fee, without any interest; and upon receipt of the sum of P29,069.45 from Rogelio Miranda,
Spouses Orlando and Mercedes T. Rayos shall deliver to Rogelio Miranda Transfer Certificate of Title No.
100156 of the Registry of Deeds of Pasay City; and, deliver to Rogelio Miranda the possession of the parcel of
land described in the said title;
(b) Dismissing the complaint for damages of Plaintiff Rogelio Miranda against Spouses Orlando and Remedios
(sic) T. Rayos, Philippine Savings Bank, Jose Araullo, Cesar I. Valenzuela, Dionisio Hernandez, Nestor E.
Valenzuela, Raul T. Totanes, and Belinda Lim, for insufficiency of evidence; while the counterclaims of PS
Bank, Jose Araullo, Cesar Valenzuela, Dionisio Hernandez, Nestor E. Valenzuela, Raul Totanes, and Belinda
Lim, are likewise dismissed for insufficiency of evidence.
(c) The counterclaims of Spouses Orlando and Mercedes T. Rayos will be treated in Civil Case No. 15984;
II. In Civil Case No. 15984, this Court orders Defendant Rogelio Miranda to pay to Plaintiff Orlando Rayos the
sum of P4,133.19 at 12% interest per annum, from the date of the filing of the complaint on Feb. 11, 1987 until
fully paid.
No costs in both cases.
SO ORDERED.155[35]
The petitioners appealed the decision to the Court of Appeals contending that:
I.THE COURT A QUO COMMITTED A GRAVE ERROR IN NOT FINDING THAT ROGELIO A.
MIRANDA COMMITTED A BREACH OF CONTRACT IN NOT PAYING THE FULL CONTINGENT FEE
OF 30% IN WRITING IN THE MANILABANK CASE AND BECAUSE OF THAT BREACH, HE CANNOT
NOW DEMAND SPECIFIC PERFORMANCE AND THE COURT A QUO SHOULD HAVE LEFT THE
PARTIES AS THEY ARE;
II.
THE COURT A QUO SIMILARLY COMMITTED AN ERROR IN NOT FINDING THAT THE
DECISION IN SEVA VS. ALFREDO BERWIN & CO. & MEDEL IS APPLICABLE FOUR SQUARE
WHEREBY HE WHO BREACHES HIS CONTRACT IS NOT ENTITLED TO SPECIFIC
PERFORMANCE;156[36]
On July 27, 1998, the Court of Appeals rendered judgment affirming with modification the decision of the RTC,
thus:
WHEREFORE, premises considered, the appealed decision of the Regional Trial Court of Makati City, is
hereby AFFIRMED, with the modification abovestated.157[37]

155
156
157

The petitioners filed the instant petition, and ascribed the following errors on the appellate court:
I.THE COURT OF APPEALS (CA) COMMITTED AN ERROR IN NOT FINDING THAT THE PRIVATE
RESPONDENT MIRANDA COMMITTED THE FIRST BREACH FOR FAILURE TO ASSUME THE LOAN
THUS HE FAILED TO SURROGATE (sic) HIMSELF TO PSB.
II.
THE CA COMMITTED AN ERROR IN FINDING THAT PETITIONERS PRE-EMPTED PRIVATE
RESPONDENT MIRANDA IN DEPOSITING THE LAST AMORTIZATION WHEN MIRANDA HAD NO
LEGAL STANDING WITH PSB DUE TO THE LATTERS NON-APPROVAL OF THE ASSUMPTION OF
THE LOAN.
III.
THE CA COMMITTED AN ERROR IN FINDING BOTH PARTIES GUILTY OF FIRST VIOLATING
THE OBLIGATIONS INCUMBENT UPON THEM EVEN INFERRING THAT PETITIONERS
COMMITTED THE BREACH FIRST BUT LATER CONCLUDING THAT THE BREACH WAS
COMMITTED BY BOTH PARTIES. IT DID NOT MAKE A CORRECT ASSESSMENT OF WHO
ACTUALLY COMMITTED THE FIRST BREACH.
IV.
THE CA COMMITTED AN ERROR IN NOT ALLOWING THE OFFSET IF ITS DECISION STOOD
OF THE AMOUNT OF P4,133.19 PLUS 12% INT. P.A. FROM THE FILING OF THE COMPLAINT (CV
15984), THUS, ENTIRELY DISREGARDING THE DECISION OF THE TRIAL COURT IN SAID CASE
ALLOWING ONLY THE DECISION IN CV 15639.
V.
THE CA COMMITTED AN ERROR IN NOT APPLYING THE DECSION (sic) LAID DOWN IN
SEVA VS. ALFRED BERWIN & CO. AND MEDEL THAT A PERSON HIMSELF AT FAULT CANNOT
ENFORCE SPECIFIC PERFORMANCE.158[38]
The petitioners assert that the Court of Appeals erred in not finding that the respondents first committed a
breach of their contract to sell upon their failure to pay the amount due for the last quarterly installment of their
loan from the PSB. The petitioners fault the Court of Appeals for not relying on the resolution of Undersecretary
Silvestre Bello III affirming the dismissal of the criminal complaint for estafa in I.S. No. 87-150, as cited by
this Court in its decision in Miranda v. Rayos,159[39] where it was also held that petitioner Orlando Rayos paid
the last quarterly installment because he thought that the respondents would not be able to pay the same. The
petitioners argue that they had no other alternative but to pay the last quarterly installment due on their loan
with the PSB, considering that they received a demand letter from the bank on November 28, 1986, coupled by
its denial of the respondents request to assume the payment of the loan. They insist that they did not block the
respondents payment of the balance of the loan with the bank. The petitioners contend that even if the parties
committed a breach of their respective obligations under the contract to sell, it behooved the Court of Appeals to
apply Article 1192 of the Civil Code in the instant case, which reads:
The power to rescind obligation is implied in reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
158
159

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.
The petition has no merit.
The assailed ruling of the Court of Appeals reads:
After due study, the Court finds that there was no basis in fact and law for the appellants to usurp the payment
of the last amortization on the mortgage upon the parcel of land it had conveyed to the Mirandas. Even if the
appellants wanted to keep their good credit standing, they should not have preempted Miranda in paying the
final amortization. There is no sufficient showing that Miranda was in danger of defaulting on the said payment.
In fact, it appears that he approached the bank to tender payment, but he was refused by the bank, because he
was beaten to the draw, so to speak, by the appellants. Appellants were able to do so because, for some reasons,
the Mirandas assumption of the mortgage has not been approved by the bank. In doing so, the appellants had
unilaterally cancelled the deed of sale with assumption of mortgage, without the consent of the Mirandas. This
conduct by the appellants is, to say the least, injudicious as under Article 1308 of the Civil Code, contracts must
bind both contracting parties and their validity or compliance cannot be left to the will of one of them.
Just as nobody can be forced to enter into a contract, in the same manner, once a contract is entered into, no
party can renounce it unilaterally or without the consent of the other. It is a general principle of law that no one
may be permitted to change his mind or disavow and go back upon his own acts, or to proceed contrary thereto,
to the prejudice of the other party. In a regime of law and order, repudiation of an agreement validly entered into
cannot be made without any ground or reason in law or in fact for such repudiation.
In the same way that the Rayos spouses must respect their contract with the Mirandas for the sale of real
property and assumption of mortgage, Rogelio Miranda has to recognize his obligations under his agreement to
pay contingent attorneys fees to Orlando Rayos.160[40]
The Court of Appeals erred in so ruling.
The findings and disquisitions of the Court of Appeals cannot prevail over our findings in Miranda v. Rayos,161
[41] a case which involves the same parties, and where we held that the petitioners cannot be faulted for paying
the amortization due for the last quarterly installment on their loan with the PSB:
It is difficult to imagine that complainant would be so nave as to be totally unaware of the provisions of the
original contract between the PSB and the spouses Rayos. He is a degree holder (A.B. Pre-Law and B.S.C.) and
Acting Municipal Treasurer of Las Pias. In short, he is not an ordinary layman. As a buyer with a knowledge of
law, it was unnatural for him to read the provisions of the real estate mortgage wherein it is provided, among
others, that the sale of the property covered by the mortgage does not in any manner relieve the mortgagor of
his obligation but that on the contrary, both the vendor and the vendee, or the party in whose favor the alienation
or encumbrance is made shall be, jointly and severally, liable for said mortgage obligations. There is every
reason to believe that it was pursuant to the said provision in the real estate mortgage that complainant tried to
assume the loan obligation of the Rayoses by filling up and submitted the loan application (page 30, records)
sent by Orland Rayos. By signing the loan application and the general information sheet (page 31, records) in
connection with said application, complainant showed that he knew that there was a need to formally apply to
the bank in order for him to assume the mortgage.
160
161

We find respondent spouses version that when complainants application to assume the mortgage loan was
disapproved he begged that he be allowed to pay the quarterly amortization credible, owing to the fact that
complainant made the payments for the account of the Rayoses. Hence, complainant knew that since his
application to the PSB was not approved, there was no substitution of parties and so he had to pay for the
account of respondent spouses as shown by the receipts issued by the PSB.
As for the charge that Rayos paid the last installment to block complainant from getting the title and transferring
the same to his name, respondents version is more satisfactory and convincing. Respondent Orland Rayos paid
the last amortization when it became apparent that complainant would not be able to give the payment on the
due date as he was still trying to sell his Lancer car. Even if complainant was able to pay the last installment of
the mortgage loan, the title would not be released to him as he knew very well that his application to assume the
mortgage was disapproved and he had no personality as far as PSB was concerned.162[42]
Contrary to the ruling of the Court of Appeals, the petitioners did not unilaterally cancel their contract to sell
with the respondents when they paid the total amount of P29,062.80 to the PSB in December 1986.163[43] In
fact, the petitioners wrote the respondents on January 3, 5 and 17, 1987, that they were ready to execute the
deed of absolute sale and turn over the owners duplicate of TCT No. 100156 upon the respondents remittance of
the amount of P29,223.67. The petitioners reiterated the same stance in their Answer with Counterclaim in Civil
Case No. 15639. The petitioners cannot, likewise, be faulted for refusing to execute a deed of absolute sale over
the property in favor of the respondents, and in refusing to turn over the owners duplicate of TCT No. 100156
unless the respondents refunded the said amount. The respondents were obliged under the contract to sell to pay
the said amount to the PSB as part of the purchase price of the property. On the other hand, it cannot be argued
by the petitioners that the respondents committed a breach of their obligation when they refused to refund the
said amount.
It bears stressing that the petitioners and the respondents executed two interrelated contracts, viz: the Deed of
Sale with Assumption of Mortgage dated December 26, 1985, and the Contract to Sell dated January 29, 1986.
To determine the intention of the parties, the two contracts must be read and interpreted together.164[44] Under
the two contracts, the petitioners bound and obliged themselves to execute a deed of absolute sale over the
property and transfer title thereon to the respondents after the payment of the full purchase price of the property,
inclusive of the quarterly installments due on the petitioners loan with the PSB:
3. That upon full payment of the consideration hereof, the SELLER shall execute a Deed of Absolute Sale in
favor of the BUYER that the payment of capital gains tax shall be for the account of the SELLER and that
documentary stamps, transfer tax, registration expenses for the transfer of title including the notarization and
preparation of this Contract and subsequent documents if any are to be executed, real estate taxes from January
1, 1986 and other miscellaneous expenses shall be for the account of the BUYER; the SELLER hereby
represents that all association dues has been paid but that subsequent to the execution of this Contract the
payment of the same shall devolve upon the BUYER.165[45]
Construing the contracts together, it is evident that the parties executed a contract to sell and not a contract of
sale. The petitioners retained ownership without further remedies by the respondents166[46] until the payment of
the purchase price of the property in full. Such payment is a positive suspensive condition, failure of which is
162
163
164
165

not really a breach, serious or otherwise, but an event that prevents the obligation of the petitioners to convey
title from arising, in accordance with Article 1184 of the Civil Code.167[47] In Lacanilao v. Court of Appeals,168
[48] we held that:
It is well established that where the seller promised to execute a deed of absolute sale upon completion of
payment of the purchase price by the buyer, the agreement is a contract to sell. In contracts to sell, where
ownership is retained by the seller until payment of the price in full, such payment is a positive suspensive
condition, failure of which is not really a breach but an event that prevents the obligation of the vendor to
convey title in accordance with Article 1184 of the Civil Code.
The non-fulfillment by the respondent of his obligation to pay, which is a suspensive condition to the obligation
of the petitioners to sell and deliver the title to the property, rendered the contract to sell ineffective and without
force and effect.169[49] The parties stand as if the conditional obligation had never existed. Article 1191 of the
New Civil Code will not apply because it presupposes an obligation already extant.170[50] There can be no
rescission of an obligation that is still non-existing, the suspensive condition not having happened.171[51]
However, the respondents may reinstate the contract to sell by paying the P29,223.67, and the petitioners may
agree thereto and accept the respondents late payment.172[52] In this case, the petitioners had decided before
and after the respondents filed this complaint in Civil Case No. 15639 to accept the payment of P29,223.67, to
execute the deed of absolute sale over the property and cause the transfer of the title of the subject property to
the respondents. The petitioners even filed its amended complaint in Civil Case No. 15984 for the collection of
the said amount. The Court of Appeals cannot, thus, be faulted for affirming the decision of the trial court and
ordering the petitioners to convey the property to the respondents upon the latters payment of the amount of
P29,223.67, provided that the property has not been sold to a third-party who acted in good faith.
IN VIEW OF ALL THE FOREGOING, the petition is DENIED DUE COURSE. The Decision of the Court
of Appeals in CA-G.R. CV No. 46727 is AFFIRMED, except as to the factual finding that the petitioners
usurped the payment of the last amortization on the mortgage upon the parcel of land. Costs against the
petitioners.
SO ORDERED.

166
167
168
169
170
171
172

#24
G.R. No. 190080

June 11, 2014

GOLDEN VALLEY EXPLORATION, INC., Petitioner,

vs.
PINKIAN MINING COMPANY and COPPER VALLEY, INC., Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated July 23, 2009 and the Resolution3
dated October 23, 2009 of the Court of Appeals (CA) in CA-G.R. CV. No. 90682 which reversed the Decision4
dated August 18, 2006 of the Regional Trial Court of Makati City, Branch 145 (RTC) in Civil Case No. 01-324
and, consequently, affirmed the validity of the rescission of the Operating Agreement between petitioner Golden
Valley Exploration, Inc. (GVEI) and respondent Pinkian Mining Company (PMC) covering various mining
claims in Kayapa, Nueva Vizcaya, as well as the Memorandum of Agreement between PMC and respondent
Copper Valley, Inc. (CVI).
The Facts
PMC is the owner of 81 mining claims located in Kayapa, Nueva Vizcaya, 15 of which were covered by Mining
Lease Contract (MLC) No. MRD-56,5 while the remaining 66 had pending applications for lease.6 On October
30, 1987, PMC entered into an Operating Agreement7 (OA) with GVEI, granting the latter "full, exclusive and
irrevocable possession, use, occupancy , and control over the [mining claims], and every matter pertaining to
the examination, exploration, development and mining of the [mining claims] and the processing and marketing
of the products x x x ,"8 for a period of 25 years.9
In a Letter10 dated June 8, 1999, PMC extra-judicially rescinded the OA upon GVEIs violation of Section
5.01,11 Article V thereof. Cited as further justification for its action were reasons such as: (a) violation of
Section 2.03, Article II of the OA, or the failure of GVEI to advance the actual cost for the perfection of the
mining claims or for the acquisition of mining rights, cost of lease applications, lease surveys and legal
expenses incidental thereto; (b) GVEIs non-reimbursement of the expenses incurred by PMC General Manager
Benjamin Saguid in connection with the visit of a financier to the mineral property in 1996; (c) its nonremittance of the US$300,000.00 received from Excelsior Resources, Ltd.; (d) its nondisclosure of contracts
entered into with other mining companies with respect to the mining claims; (e) its being a mere
"promoter/broker" of PMCs mining claims instead of being the operator thereof; and (f) its nonperformance of
the necessary works on the mining claims.12
GVEI contested PMCs extra-judicial rescission of the OA through a Letter dated December 7, 1999, averring
therein that its obligation to pay royalties to PMC arises only when the mining claims are placed in commercial
production which condition has not yet taken place. It also reminded PMC of its prior payment of the amount of
P185,000.00 as future royalties in exchange for PMCs express waiver of any breach or default on the part of
GVEI.13
PMC no longer responded to GVEIs letter. Instead, it entered into a Memorandum of Agreement dated May 2,
2000 (MOA) with CVI, whereby the latter was granted the right to "enter, possess, occupy and control the
mining claims" and "to explore and develop the mining claims, mine or extract the ores, mill, process and

beneficiate and/or dispose the mineral products in any method or process," among others, for a period of 25
years.14
Due to the foregoing, GVEI filed a Complaint15 for Specific Performance, Annulment of Contract and
Damages against PMC and CVI before the RTC, docketed as Civil Case No. 01-324.
The RTC Ruling
On August 18, 2006, the RTC rendered a Decision16 in favor of GVEI, holding that since the mining claims
have not been placed in commercial production, there is no demandable obligation yet for GVEI to pay royalties
to PMC. It further declared that no fault or negligence may be attributed to GVEI for the delay in the
commercial production of the mining claims because the non-issuance of the requisite Mineral Production
Sharing Agreement (MPSA) and other government permits, licenses, and consent were all affected by factors
beyond GVEIs control.17 The RTC, thus, declared the rescission of the OA void and the execution of the MOA
between PMC and CVI without force and effect. In this relation, it ordered PMC to comply with the terms and
conditions of the OA until the expiration of its period.18
At odds with the RTCs ruling, PMC elevated the case on appeal to the CA.
The CA Ruling
In a Decision19 dated July 23, 2009, the CA reversed the RTC ruling, finding that while the OA gives PMC the
right to rescind only on the ground of (GVEIs) failure to pay the stipulated royalties, Article 1191 of the Civil
Code allows PMC the right to rescind the agreement based on a breach of any of its provisions.20 It further held
that the inaction of GVEI for a period of more than seven (7) years to operate the areas that were already
covered by a perfected mining lease contract and to acquire the necessary permits and licenses amounted to a
substantial breach of the OA, the very purpose of which was the mining and commercial distribution of
derivative products that may be recovered from the mining property.21 For the foregoing reasons, the CA
upheld the validity of PMCs rescission of the OA and its subsequent execution of the MOA with CVI.22
Dissatisfied with the CAs ruling, GVEI filed a motion for reconsideration which was, however, denied by the
CA in a Resolution23 dated October 23, 2009, hence, this petition.
The Issue Before the Court
The central issue for the Courts resolution is whether or not there was a valid rescission of the OA.
The Courts Ruling
The Court resolves the issue in the affirmative.
In reciprocal obligations, either party may rescind the contract upon the others substantial breach of the
obligation/s he had assumed thereunder. The basis therefor is Article 1191 of the Civil Code which states as
follows:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with Articles 1385 and 1388 and the Mortgage Law.
More accurately referred to as resolution, the right of rescission under Article 1191 is predicated on a breach of
faith that violates the reciprocity between parties to the contract.24 This retaliatory remedy is given to the
contracting party who suffers the injurious breach on the premise that it is "unjust that a party be held bound to
fulfill his promises when the other violates his."25
As a general rule, the power to rescind an obligation must be invoked judicially and cannot be exercised solely
on a partys own judgment that the other has committed a breach of the obligation.26 This is so because
rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and
fundamental violations as would defeat the very object of the parties in making the agreement.27 As a wellestablished exception, however, an injured party need not resort to court action in order to rescind a contract
when the contract itself provides that it may be revoked or cancelled upon violation of its terms and
conditions.28 As elucidated in Froilan v. Pan Oriental Shipping Co.,29 "there is x x x nothing in the law that
prohibits the parties from entering into agreement that violation of the terms of the contract would cause
cancellation thereof, even without court intervention."30 Similarly, in Dela Rama Steamship Co., Inc. v. Tan,31
it was held that judicial permission to rescind an obligation is not necessary if a contract contains a special
provision granting the power of cancellation to a party.32
With this in mind, the Court therefore affirms the correctness of the CAs Decision upholding PMCs unilateral
rescission of the OA due to GVEIs non-payment of royalties considering the parties express stipulation in the
OA that said agreement may be cancelled on such ground. This is found in Section 8.01, Article VIII33 in
relation to Section 5.01, Article V34 of the OA which provides:
ARTICLE VIII
CANCELLATION/TERMINATION OF AGREEMENT
8.01 This Agreement may be cancelled or terminated prior to the expiration of the period, original or renewal
mentioned in the next preceding Section only in either of the following ways:
a. By written advance notice of sixty (60) days from OPERATOR to PINKIAN with or without cause by
registered mail or personal delivery of the notice to PINKIAN.
b. By written notice from PINKIAN by registered or personal deliver of the notice to OPERATOR based
on the failure to OPERATOR to make any payments determined to be due PINKIAN under Section 5.01
hereof after written demand for payment has been made on OPERATOR: Provided that OPERATOR
shall have a grace period of ninety (90) days from receipt of such written demand within which to make
the said payments to PINKIAN.
ARTICLE V
ROYALTIES
5.01 Should the PROPERTIES be placed in commercial production the PINKIAN shall be entitled to a Royalty
computed as follows:
(a) For gold 3.0 percent of net realizable value of gold
(b) For copper and others 2.0 percent of net realizable value

"Net REALIZABLE Value" is gross value less the sum of the following:
(1) marketing expenses including freight and insurance;
(2) all smelter charges and deductions;
(3) royalty payments to the government;
(4) ad valorem and export taxes, if any, paid to the government.
The aforesaid royalties shall be paid to PINKIAN within five (5) days after receipt of the smelter or refinery
returns. (Emphases and underscoring supplied)
By expressly stipulating in the OA that GVEIs non-payment of royalties would give PMC sufficient cause to
cancel or rescind the OA, the parties clearly had considered such violation to be a substantial breach of their
agreement. Thus, in view of the above-stated jurisprudence on the matter, PMCs extra-judicial rescission of the
OA based on the said ground was valid.
In this relation, the Court finds it apt to clarify that the following defenses raised by GVEI in its petition would
not impel a different conclusion:
First, GVEI cannot excuse its non-payment of royalties on the argument that no commercial mining was yet in
place. This is precisely because the obligation to develop the mining areas and put them in commercial
operation also belonged to GVEI as it expressly undertook "to explore, develop, and equip the Claims to mine
and beneficiate the ore thereof by any method or process"35 and "to enter into contract, agreement,
assignments, conveyances and understandings of any kind whatsoever with reference to the exploration,
development, equipping and operation of the Claims, and the mining and beneficiation of the ore derived
therefrom, and marketing the resulting marketable products."36
Records reveal that when the OA was signed on October 30, 1987, 15 mining claims were already covered by a
perfected mining lease contract, i.e., MLC No. MRD-56, granting to the holder thereof "the right to extract all
mineral deposits found on or underneath the surface of his mining claims x x x; to remove, process and
otherwise utilize the mineral deposits for his own benefit."37 This meant that GVEI could have immediately
extracted mineral deposits from the covered mineral land and carried out commercial mining operations from
the very start. However, despite earlier demands made by PMC, no meaningful steps were taken by GVEI
towards the commercial production of the 15 perfected mining claims and the beneficial exploration of those
remaining. Consequently, seven years into the life of the OA, no royalties were paid to PMC. Compounding its
breach, GVEI not only failed to pay royalties to PMC but also did not carry out its obligation to conduct
operations on and/or commercialize the mining claims already covered by MLC No. MRD-56. Truth be told,
GVEIs non-performance of the latter obligation under the OA actually made the payment of royalties to PMC
virtually impossible. Hence, GVEI cannot blame anyone but itself for its breach of the OA, which, in turn, gave
PMC the right to unilaterally rescind the same.
Second, neither can GVEI successfully oppose PMCs rescission of the OA on the argument that the ground to
rescind the OA was only limited to its non-payment of royalties precisely because said ground was actually
among the reasons for PMCs rescission thereof. Considering the stipulations above-cited, the ground for nonpayment of royalties was in itself sufficient for PMC to extra-judicially rescind the OA.
In any event, even discounting the ground of non-payment of royalties, PMC still had the right to rescind the
OA based on the other grounds it had invoked therefor, namely, (a) violation of Section 2.03, Article II of the
OA, or the failure of GVEI to advance the actual cost for the perfection of the mining claims or for the
acquisition of mining rights, cost of lease applications, lease surveys and legal expenses incidental thereto, (b)

GVEIs non-reimbursement of the expenses incurred by PMC General Manager Benjamin Saguid in connection
with the visit of a financier to the mineral property in 1996, (c) its non-remittance of the US$300,000.00
received from Excelsior Resources, Ltd., (d) its non-disclosure of contracts entered into with other mining
companies with respect to the mining claims, (e) its being a mere "promoter/broker" of PMCs mining claims
instead of being the operator thereof, and (f) its non-performance of the necessary works on the mining claims,
albeit the said grounds should have been invoked judicially since the court would still need to determine if the
same would constitute substantial breach and not merely a slight or casual breach of the contract. While Section
8.01, Article VIII of the OA as above-cited appears to expressly restrict the availability of an extra-judicial
rescission only to the grounds stated thereunder, the Court finds that the said stipulation does not negate PMCs
implied statutory right to judicially rescind the contract for other unspecified acts that may actually amount to a
substantial breach of the contract. This is based on Article 1191 of the Civil Code (also above-cited) which
pertinently provides that the "power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him" and that "[t]he court shall decree the rescission
claimed, unless there be just cause authorizing the fixing of a period."
While it remains apparent that PMC had not judicially invoked the other grounds to rescind in this case, the
only recognizable effect, however, is with respect to the reckoning point as to when the contract would be
formally regarded as rescinded. Where parties agree to a stipulation allowing extra-judicial rescission, no
judicial decree is necessary for rescission to take place; the extra-judicial rescission immediately releases the
party from its obligation under the contract, subject only to court reversal if found improper.1wphi1 On the
other hand, without a stipulation allowing extra-judicial rescission, it is the judicial decree that rescinds, and not
the will of the rescinding party. This may be gathered from previous Court rulings on the matter.
For instance, in Ocejo, Perez & Co. v. International Banking Corporation,38 where the seller, without having
reserved title to the thing sold, sought to re-possess the subject matter of the sale through an action for replevin
after the buyer failed to pay its purchase price, the Court ruled that the action of replevin (which operates on the
assumption that the plaintiff is the owner of the thing subject of the suit) "will not lie upon the theory that the
rescission has already taken place and that the seller has recovered title to the thing sold." It held that the title
which had already passed by delivery to the buyer is not ipso facto re-vested in the seller upon the latters own
determination to rescind the sale because it is the judgment of the court that produces the rescission.
On the other hand, in De Luna v. Abrigo39 (De Luna), the Court upheld the validity of a stipulation providing
for the automatic reversion of donated property to the donor upon non-compliance of certain conditions therefor
as the same was akin to an agreement granting a party the right to extra-judicially rescind the contract in case of
breach. The Court ruled, in effect, that a subsequent court judgment does not rescind the contract but merely
declares the fact that the same has been rescinded, viz.:
[J]udicial intervention is necessary not for purposes of obtaining a judicial declaration rescinding a contract
already deemed rescinded by virtue of an agreement providing for rescission even without judicial intervention,
but in order to determine whether or not the rescission was proper.40 (Emphases and underscoring supplied)
A similar agreement in Roman Catholic Archbishop of Manila v. CA41 allowing the ipso facto reversion of the
donated property upon noncompliance with the conditions was likewise upheld, with the Court reiterating De
Luna and declaring in unmistakable terms that:42
Where [the propriety of the automatic rescission] is sustained, the decision of the court will be merely
declaratory of the revocation, but it is not in itself the revocatory act. (Emphasis and underscoring supplied)
This notwithstanding, jurisprudence still indicates that an extra-judicial rescission based on grounds not
specified in the contract would not preclude a party to treat the same as rescinded. The rescinding party,
however, by such course of action, subjects himself to the risk of being held liable for damages when the extra-

judicial rescission is questioned by the opposing party in court. This was made clear in the case of U.P. v. De
Los Angeles,43 wherein the Court held as follows:
Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account
of infractions by the other contracting party must be made known to the other and is always provisional, being
ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is
free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due
hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to
damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the
party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or rescinded, and act
accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the
corresponding court that will conclusively and finally settle whether the action taken was or was not correct in
law. x x x.44 (Emphases and underscoring supplied)
The pronouncement, which was also reiterated in the case of Angeles v. Calasanz,45 sought to explain various
rulings that continued to require judicial confirmation even in cases when the rescinding party has a proven
contractual right to extra-judicially rescind the contract. The observation then was mainly on the practical effect
of a stipulation allowing extra-judicial rescission being merely "to transfer to the defaulter the initiative on
instituting suit, instead of the rescinder."46
Proceeding from the foregoing, the Court has determined that the other grounds raised by PMC in its Letter
dated June 8, 1999 to GVEI (the existence of which had not been convincingly disputed herein) amounts to the
latter's substantial breach of the OA. To the Court's mind, said infractions, when taken together, ultimately
resulted in GVEI's failure to faithfully perform its primordial obligation under the OA to explore and develop
PMC's mining claims as well as to put the same into commercial operation. Accordingly, PMC's rescission of
the OA on the foregoing grounds, in addition to the ground of non-payment of royalties, is equally valid.
Finally, the Court cannot lend credence to GVEI's contention that when PMC entered into an agreement with
CVI covering the mining claims, it was committing a violation of the terms and conditions of the OA. As
above-explained, the invocation of a stipulation allowing extra-judicial rescission effectively puts an end to the
contract and, thus, releases the parties from the obligations thereunder, notwithstanding the lack of a judicial
decree for the purpose. In the case at bar, PMC, through its Letter dated June 8, 1999 to GVEI, invoked Section
8.01, Article VIII in relation to Section 5.01, Article V of the OA which allows it to extra-judicially rescind the
contract for GVEI's non-payment of royalties. Thus, at that point in time, PMC had effectively rescinded the OA
and was then considered to have been released from its legal effects. Accordingly, there stood no legal
impediment so as to hinder PMC from entering into a contract with CVI covering the same mining claims
subject of this case.
In fine, the Court denies the instant petition and affirms the assailed CA Decision and Resolution.
WHEREFORE, the petition is DENIED. The Decision dated July 23, 2009 and the Resolution dated October
23, 2009 of the Court of Appeals in CA-G.R. CV. No. 90682 are hereby AFFIRMED.
SO ORDERED.

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