SOCIAL SECURITY SYSTEM, vs.

MOONWALK

Before Us is a petition for review on certiorari of decision 1 of the then Intermediate Appellate Court
affirming in toto the decision of the former Court of First Instance of Rizal, Seventh Judicial District,
Branch XXIX, Pasay City.

The facts as found by the Appellate Court are as follows:

"On February 20, 1980, the Social Security System, SSS for brevity, filed a complaint in the Court of
First Instance of Rizal against Moonwalk Development & Housing Corporation, Moonwalk for short,
alleging that the former had committed an error in failing to compute the 12% interest due on
delayed payments on the loan of Moonwalk resulting in a chain of errors in the application of
payments made by Moonwalk and, in an unpaid balance on the principal loan agreement in the
amount of P7,053.77 and, also in not reflecting in its statement or account an unpaid balance on the
said penalties for delayed payments in the amount of P7,517,178.21 as of October 10, 1979.

Moonwalk answered denying SSS' claims and asserting that SSS had the opportunity to ascertain
the truth but failed to do so.

The trial court set the case for pre-trial at which pre-trial conference, the court issued an order giving
both parties thirty (30) days within which to submit a stipulation of facts.

The Order of October 6, 1980 dismissing the complaint followed the submission by the parties on
September 19, 1980 of the following stipulation of Facts:

"1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for an interim loan
in the amount of THIRTY MILLION PESOS (P30,000,000.00) for the purpose of developing and
constructing a housing project in the provinces of Rizal and Cavite;

"2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum of
P9,595,000.00 was released to defendant Moonwalk as of November 28, 1973;

"3. A third Amended Deed of First Mortgage was executed on December 18, 1973 Annex `D'
providing for restructuring of the payment of the released amount of P9,595,000.00.

"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter respectively, under
paragraph 5 of the aforesaid Third Amended Deed of First Mortgage substituted Associated
Construction and Surveys Corporation, Philippine Model Homes Development Corporation, Mariano
Z. Velarde and Eusebio T. Ramos, as solidary obligors;

"5. On July 23, 1974, after considering additional releases in the amount of P2,659,700.00, made to
defendant Moonwalk, defendant Moonwalk delivered to the plaintiff a promissory note for TWELVE
MILLION TWO HUNDRED FIFTY FOUR THOUSAND SEVEN HUNDRED PESOS (P12,254,700.00)
Annex `E', signed by Eusebio T. Ramos, and the said Rosita U. Alberto and Rosita U. Alberto;
"6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal of
P12,254,700.00 released to it. The last payment made by Moonwalk in the amount of
P15,004,905.74 were based on the Statement of Account, Annex "F" prepared by plaintiff SSS for
defendant;

"7. After settlement of the account stated in Annex 'F' plaintiff issued to defendant Moonwalk the
Release of Mortgage for Moonwalk's mortgaged properties in Cavite and Rizal, Annexes 'G' and 'H'
on October 9, 1979 and October 11, 1979 respectively.

"8. In letters to defendant Moonwalk, dated November 28, 1979 and followed up by another letter
dated December 17, 1979, plaintiff alleged that it committed an honest mistake in releasing
defendant.

"9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had completely paid
its obligations to SSS;

"10. The genuineness and due execution of the documents marked as Annex (sic) 'A' to 'O' inclusive,
of the Complaint and the letter dated December 21, 1979 of the defendant's counsel to the plaintiff
are admitted.

"Manila for Pasay City, September 2, 1980." 2

On October 6, 1990, the trial court issued an order dismissing the complaint on the ground that the
obligation was already extinguished by the payment by Moonwalk of its indebtedness to SSS and by
the latter's act of cancelling the real estate mortgages executed in its favor by defendant Moonwalk.
The Motion for Reconsideration filed by SSS with the trial court was likewise dismissed by the latter.

These orders were appealed to the Intermediate Appellate Court. Respondent Court reduced the
errors assigned by the SSS into this issue: ". . . are defendants-appellees, namely, Moonwalk
Development and Housing Corporation, Rosita U. Alberto, Rosita U. Alberto, JMA House, Inc. still
liable for the unpaid penalties as claimed by plaintiff-appellant or is their obligation extinguished?" 3
As We have stated earlier, the respondent Court held that Moonwalk's obligation was extinguished
and affirmed the trial court.

Hence, this Petition wherein SSS raises the following grounds for review:

"First, in concluding that the penalties due from Moonwalk are "deemed waived and/or barred," the
appellate court disregarded the basic tenet that waiver of a right must be express, made in a clear
and unequivocal manner. There is no evidence in the case at bar to show that SSS made a clear,
positive waiver of the penalties, made with full knowledge of the circumstances.

Second, it misconstrued the ruling that SSS funds are trust funds, and SSS, being a mere trustee,
cannot perform acts affecting the same, including condonation of penalties, that would diminish
property rights of the owners and beneficiaries thereof. (United Christian Missionary Society v. Social
Security Commission, 30 SCRA 982, 988 [1969]).
Third, it ignored the fact that penalty at the rate of 12% p.a. is not inequitable.

Fourth, it ignored the principle that equity will cancel a release on the ground of mistake of fact." 4

The same problem which confronted the respondent court is presented before Us: Is the penalty
demandable even after the extinguishment of the principal obligation?

The former Intermediate Appellate Court, through Justice Eduard P. Caguioa, held in the negative. It
reasoned, thus:

"2. As we have explained under No. 1, contrary to what the plaintiff-appellant states in its Brief, what
is sought to be recovered in this case is not the 12% interest on the loan but the 12% penalty for
failure to pay on time the amortization. What is sought to be enforced therefore is the penal clause of
the contract entered into between the parties.

Now, what is a penal clause. A penal clause has been defined as

"an accessory obligation which the parties attach to a principal obligation for the purpose of insuring
the performance thereof by imposing on the debtor a special presentation (generally consisting in
the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or inadequately
fulfilled" (3 Castan 8th Ed. p. 118).

Now an accessory obligation has been defined as that attached to a principal obligation in order to
complete the same or take its place in the case of breach (4 Puig Pea Part 1 p. 76). Note therefore
that an accessory obligation is dependent for its existence on the existence of a principal obligation.
A principal obligation may exist without an accessory obligation but an accessory obligation cannot
exist without a principal obligation. For example, the contract of mortgage is an accessory obligation
to enforce the performance of the main obligation of indebtedness. An indebtedness can exist
without the mortgage but a mortgage cannot exist without the indebtedness, which is the principal
obligation. In the present case, the principal obligation is the loan between the parties. The
accessory obligation of a penal clause is to enforce the main obligation of payment of the loan. If
therefore the principal obligation does not exist the penalty being accessory cannot exist.

Now then when is the penalty demandable? A penalty is demandable in case of non performance or
late performance of the main obligation. In other words in order that the penalty may arise there
must be a breach of the obligation either by total or partial non fulfillment or there is non fulfillment in
point of time which is called mora or delay. The debtor therefore violates the obligation in point of
time if there is mora or delay. Now, there is no mora or delay unless there is a demand. It is
noteworthy that in the present case during all the period when the principal obligation was still
subsisting, although there were late amortizations there was no demand made by the creditor,
plaintiff-appellant for the payment of the penalty. Therefore up to the time of the letter of plaintiff-
appellant there was no demand for the payment of the penalty, hence the debtor was no in mora in
the payment of the penalty.

However, on October 1, 1979, plaintiff-appellant issued its statement of account (Exhibit F) showing
the total obligation of Moonwalk as P15,004,905.74, and forthwith demanded payment from
defendant-appellee. Because of the demand for payment, Moonwalk made several payments on
September 29, October 9 and 19, 1979 respectively, all in all totalling P15,004,905.74 which was a
complete payment of its obligation as stated in Exhibit F. Because of this payment the obligation of
Moonwalk was considered extinguished, and pursuant to said extinguishment, the real estate
mortgages given by Moonwalk were released on October 9, 1979 and October 10, 1979 (Exhibits G
and H). For all purposes therefore the principal obligation of defendant-appellee was deemed
extinguished as well as the accessory obligation of real estate mortgage; and that is the reason for
the release of all the Real Estate Mortgages on October 9 and 10, 1979 respectively.

Now, besides the Real Estate Mortgages, the penal clause which is also an accessory obligation
must also be deemed extinguished considering that the principal obligation was considered
extinguished, and the penal clause being an accessory obligation. That being the case, the demand
for payment of the penal clause made by plaintiff-appellant in its demand letter dated November 28,
1979 and its follow up letter dated December 17, 1979 (which parenthetically are the only demands
for payment of the penalties) are therefore ineffective as there was nothing to demand. It would be
otherwise, if the demand for the payment of the penalty was made prior to the extinguishment of the
obligation because then the obligation of Moonwalk would consist of: 1) the principal obligation 2)
the interest of 12% on the principal obligation and 3) the penalty of 12% for late payment for after
demand, Moonwalk would be in mora and therefore liable for the penalty.

Let it be emphasized that at the time of the demand made in the letters of November 28, 1979 and
December 17, 1979 as far as the penalty is concerned, the defendant-appellee was not in default
since there was no mora prior to the demand. That being the case, therefore, the demand made
after the extinguishment of the principal obligation which carried with it the extinguishment of the
penal clause being merely an accessory obligation, was an exercise in futility.

3. At the time of the payment made of the full obligation on October 10, 1979 together with the 12%
interest by defendant-appellee Moonwalk, its obligation was extinguished. It being extinguished,
there was no more need for the penal clause. Now, it is to be noted that penalty at anytime can be
modified by the Court. Even substantial performance under Art. 1234 authorizes the Court to
consider it as complete performance minus damages. Now, Art, 1229 Civil Code of the Philippines
provides:

"ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or unconscionable."

If the penalty can be reduced after the principal obligation has been partly or irregularly complied
with by the debtor, which is nonetheless a breach of the obligation, with more reason the penal
clause is not demandable when full obligation has been complied with since in that case there is no
breach of the obligation. In the present case, there has been as yet no demand for payment of the
penalty at the time of the extinguishment of the obligation, hence there was likewise an
extinguishment of the penalty.

Let Us emphasize that the obligation of defendant-appellee was fully complied with by the debtor,
that is, the amount loaned together with the 12% interest has been fully paid by the appellee. That
being so, there is no basis for demanding the penal clause since the obligation has been
extinguished. Here there has been a waiver of the penal clause as it was not demanded before the
full obligation was fully paid and extinguished. Again, emphasis must be made on the fact that
plaintiff-appellant has not lost anything under the contract since in got back in full the amount loan
(sic) as well as the interest thereof. The same thing would have happened if the obligation was paid
on time, for then the penal clause, under the terms of the contract would not apply. Payment of the
penalty does not mean gain or loss of plaintiff-appellant since it is merely for the purpose of
enforcing the performance of the main obligation has been fully complied with and extinguished, the
penal clause has lost its raison d' entre." 5

We find no reason to depart from the appellate court's decision. We, however, advance the following
reasons for the denial of this petition.

Article 1226 of the Civil Code provides:

"Art. 1226. In obligations with a penal clause, he penalty shall substitute the indemnity for damages
and the payment of interests in case of noncompliance, if there is no stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in
the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this
Code." (Emphasis Ours.)

A penal clause is an accessory undertaking to assume greater liability in case of breach. 6 It has a
double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the
obligation by the threat of greater responsibility in the event of breach. 7 From the foregoing, it is
clear that a penal clause is intended to prevent the obligor from defaulting in the performance of his
obligation. Thus, if there should be default, the penalty may be enforced. One commentator of the
Civil Code wrote:

"Now when is the penalty deemed demandable in accordance with the provisions of the Civil Code?
We must make a distinction between a positive and a negative obligation. With regard to obligations
which are positive (to give and to do), the penalty is demandable when the debtor is in mora; hence,
the necessity of demand by the debtor unless the same is excused . . ." 8

When does delay arise? Under the Civil Code, delay begins from the time the obligee judicially or
extrajudicially demands from the obligor the performance of the obligation.

"Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation."

There are only three instances when demand is not necessary to render the obligor in default. These
are the following:

"(1) When the obligation or the law expressly so declares;

(2) When from the nature and the circumstances of the obligation it appears that the designation of
the time when the thing is to be delivered or the service is to be rendered was a controlling motive
for the establishment of the contract; or

(3) When the demand would be useless, as when the obligor has rendered it beyond his power to
perform." 9

This case does not fall within any of the established exceptions. Hence, despite the provision in the
promissory note that "(a)ll amortization payments shall be made every first five (5) days of the
calendar month until the principal and interest on the loan or any portion thereof actually released
has been fully paid," 10 petitioner is not excused from making a demand. It has been established
that at the time of payment of the full obligation, private respondent Moonwalk has long been
delinquent in meeting its monthly arrears and in paying the full amount of the loan itself as the
obligation matured sometime in January, 1977. But mere delinquency in payment does not
necessarily mean delay in the legal concept. To be in default ". . . is different from mere delay in the
grammatical sense, because it involves the beginning of a special condition or status which has its
own peculiar effects or results." 11 In order that the debtor may be in default it is necessary that the
following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that
the debtor delays performance; and (3) that the creditor requires the performance judicially and
extrajudicially. 12 Default generally begins from the moment the creditor demands the performance
of the obligation. 13

Nowhere in this case did it appear that SSS demanded from Moonwalk the payment of its monthly
amortizations. Neither did it show that petitioner demanded the payment of the stipulated penalty
upon the failure of Moonwalk to meet its monthly amortization. What the complaint itself showed was
that SSS tried to enforce the obligation sometime in September, 1977 by foreclosing the real estate
mortgages executed by Moonwalk in favor of SSS. But this foreclosure did not push through upon
Moonwalk's requests and promises to pay in full. The next demand for payment happened on
October 1, 1979 when SSS issued a Statement of Account to Moonwalk. And in accordance with
said statement, Moonwalk paid its loan in full. What is clear, therefore, is that Moonwalk was never in
default because SSS never compelled performance. Though it tried to foreclose the mortgages, SSS
itself desisted from doing so upon the entreaties of Moonwalk. If the Statement of Account could
properly be considered as demand for payment, the demand was complied with on time. Hence, no
delay occurred and there was, therefore, no occasion when the penalty became demandable and
enforceable. Since there was no default in the performance of the main obligation payment of the
loan SSS was never entitled to recover any penalty, not at the time it made the Statement of
Account and certainly, not after the extinguishment of the principal obligation because then, all the
more that SSS had no reason to ask for the penalties. Thus, there could never be any occasion for
waiver or even mistake in the application for payment because there was nothing for SSS to waive
as its right to enforce the penalty did not arise.

SSS, however, in buttressing its claim that it never waived the penalties, argued that the funds it held
were trust funds and as trustee, the petitioner could not perform acts affecting the funds that would
diminish property rights of the owners and beneficiaries thereof. To support its claim, SSS cited the
case of United Christian Missionary Society v. Social Security Commission. 14
We looked into the case and found out that it is not applicable to the present case as it dealt not with
the right of the SSS to collect penalties which were provided for in contracts which it entered into but
with its right to collect premiums and its duty to collect the penalty for delayed payment or non-
payment of premiums. The Supreme Court, in that case, stated:

"No discretion or alternative is granted respondent Commission in the enforcement of the law's
mandate that the employer who fails to comply with his legal obligation to remit the premiums to the
System within the prescribed period shall pay a penalty of three (3%) per month. The prescribed
penalty is evidently of a punitive character, provided by the legislature to assure that employers do
not take lightly the State's exercise of the police power in the implementation of the Republic's
declared policy "to develop, establish gradually and perfect a social security system which shall be
suitable to the needs of the people throughout the Philippines and (to) provide protection to
employers against the hazards of disability, sickness, old age and death . . ."

Thus, We agree with the decision of the respondent court on the matter which We quote, to wit:

"Note that the above case refers to the condonation of the penalty for the non remittance of the
premium which is provided for by Section 22(a) of the Social Security Act . . . In other words, what
was sought to be condoned was the penalty provided for by law for non remittance of premium for
coverage under the Social Security Act.

The case at bar does not refer to any penalty provided for by law nor does it refer to the non
remittance of premium. The case at bar refers to a contract of loan entered into between plaintiff and
defendant Moonwalk Development and Housing Corporation. Note, therefore, that no provision of
law is involved in this case, nor is there any penalty imposed by law nor a case about non-remittance
of premium required by law. The present case refers to a contract of loan payable in installments not
provided for by law but by agreement of the parties. Therefore, the ratio decidendi of the case of
United Christian Missionary Society vs. Social Security Commission which plaintiff-appellant relies is
not applicable in this case; clearly, the Social Security Commission, which is a creature of the Social
Security Act cannot condone a mandatory provision of law providing for the payment of premiums
and for penalties for non remittance. The life of the Social Security Act is in the premiums because
these are the funds from which the Social Security Act gets the money for its purposes and the non-
remittance of the premiums is penalized not by the Social Security Commission but by law.

xxx xxx xxx

It is admitted that when a government created corporation enters into a contract with private party
concerning a loan, it descends to the level of a private person. Hence, the rules on contract
applicable to private parties are applicable to it. The argument therefore that the Social Security
Commission cannot waive or condone the penalties which was applied in the United Christian
Missionary Society cannot apply in this case. First, because what was not paid were installments on
a loan but premiums required by law to be paid by the parties covered by the Social Security Act.
Secondly, what is sought to be condoned or waived are penalties not imposed by law for failure to
remit premiums required by law, but a penalty for non payment provided for by the agreement of the
parties in the contract between them . . ." 15
WHEREFORE, in view of the foregoing, the petition is DISMISSED and the decision of the
respondent court is AFFIRMED. LLpr

SO ORDERED.

G.R. No. 133107 March 25, 1999

RIZAL COMMERCIAL BANKING CORPORATION, petitioner,

vs.
COURT OF APPEALS and FELIPE LUSTRE, respondents.

KAPUNAN, J.:

A simple telephone call and an ounce of good faith on the part of petitioner could have prevented the
present controversy.

On March 10, 1993, private respondent Atty. Felipe Lustre purchased a Toyota Corolla from Toyota
Shaw, Inc. for which he made a down payment of P164,620.00, the balance of the purchase price to
be paid in 24 equal monthly installments. Private respondent thus issued 24 postdated checks for
the amount of P14,976.00 each. The first was dated April 10, 1991; subsequent checks were dated
every 10th day of each succeeding month.

To secure the balance, private respondent executed a promissory note 1 and a contract of chattel
mortgage 2 over the vehicle in favor of Toyota Shaw, Inc. The contract of chattel mortgage, in paragraph
11 thereof, provided for an acceleration clause stating that should the mortgagor default in the payment of
any installment, the whole amount remaining unpaid shall become due. In addition, the mortgagor shall
be liable for 25% of the principal due as liquidated damages.
On March 14, 1991, Toyota Shaw, Inc. assigned all its rights and interests in the chattel mortgage to
petitioner Rizal Commercial Banking Corporation (RCBC).

All the checks dated April 10, 1991 to January 10, 1993 were thereafter encashed and debited by
RCBC from private respondent's account, except for RCBC Check No. 279805 representing the
payment for August 10, 1991, which was unsigned. Previously, the amount represented by RCBC
Check No. 279805 was debited from private respondent's account but was later recalled and re-
credited, to him. Because of the recall, the last two checks, dated February 10, 1993 and March 10,
1993, were no longer presented for payment. This was purportedly in conformity with petitioner
bank's procedure that once a client's account was forwarded to its account representative, all
remaining checks outstanding as of the date the account was forwarded were no longer presented
for patent.

On the theory that respondent defaulted in his payments, the check representing the payment for
August 10, 1991 being unsigned, petitioner, in a letter dated January 21, 1993, demanded from
private respondent the payment of the balance of the debt, including liquidated damages. The latter
refused, prompting petitioner to file an action for replevin and damages before the Pasay City
Regional Trial Court (RTC). Private respondent, in his Answer, interposed a counterclaim for
damages.

After trial, the. RTC 3 rendered a decision disposing of the case as follows:

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

I. The complaint; for lack of cause of action, is hereby DISMISSED and plaintiff
RCBC is hereby ordered,

A. To accept the payment equivalent to the three

checks amounting to a total of P44,938.00, without
interest.

B. To release/cancel the mortgage on the car . . .

upon payment of the amount of P44,938.00, without
interest.

C. To pay the cost of suit.

II. On The Counterclaim.

A. Plaintiff RCBC to pay Atty. Lustre the amount of

P200,000.00 as moral damages.

B. RCBC to pay P100,000.00 as exemplary damages.

 C. RCBC to pay Atty. Obispo P50,000.00 as
Attorney's fees. Atty. Lustre is not entitled to any fee
for lawyering for himself.

All awards for damages are subject to payment of fees to be

assessed by the Clerk of Court, RTC, Pasay City.

SO ORDERED.

On appeal by petitioner, the Court of Appeals affirmed the decision of the RTC, thus:

We . . . concur with the trial court's ruling that the Chattel Mortgage contract being a
contract of adhesion that is, one wherein a party, usually a corporation, prepares
the stipulations in the contract, while the other party merely affixes his signature or
his "adhesion" thereto . . . is to be strictly construed against appellant bank which
prepared the form Contract . . . Hence . . . paragraph 11 of the Chattel Mortgage
contract [containing the acceleration clause] should be construed to cover only
deliberate and advertent failure on the part of the mortgagor to pay an amortization
as it became due in line with the consistent holding of the Supreme Court construing
obscurities and ambiguities in the restrictive sense against the drafter thereof . . . in
the light of Article 1377 of the Civil Code.

In the case at bench, plaintiff-appellant's imputation of default to defendant-appellee

rested solely on the fact that the 5th check issued by appellee . . . was recalled for
lack of signature. However, the check was recalled only after the amount covered
thereby had been deducted from defendant-appellee's account, as shown by the
testimony of plaintiff's own witness Francisco Bulatao who was in charge of the
preparation of the list and trial balances of bank customers . . . . The "default" was
therefore not a case of failure to pay, the check being sufficiently funded, and which
amount was in fact already debited [sic] from appellee's account by the appellant
bank which subsequently re-credited the amount to defendant-appelle's account for
lack of signature. All these actions RCBC did on its own without notifying defendant
until sixteen (16) months later when it wrote its demand letter dated January 21,
1993.

Clearly, appellant bank was remiss in the performance, of its functions for it could
have easily called the defendant's attention to the lack of signature on the check and
sent the check to or summoned, the latter to affix his signature. It is also to be noted
that the demand letter contains no explanation as to how defendant-appellee
incurred arrearages in the amount of P66,255.70, which is why defendant-appellee
made a protest notation thereon.

Notably, all the other checks issued by the appellee dated subsequent to August 10,
1991 and dated earlier than the demand letter, were duly encashed. This fact should
have already prompted the appellant bank to review its action relative to the
unsigned check. . . . 4
We take exception to the application by both the trial and appellate courts of Article 1377 of the Civil
Code, which states:

The interpretation of obscure words or stipulations in a contract shall

not favor the party who caused the obscurity.

It bears stressing that a contract of adhesion is just as binding as ordinary contracts. 5 It is true that
we have, on occasion, struck down such contracts as void when the weaker party is imposed upon in
dealing with the dominant bargaining party and is reduced to the alternative of taking it or leaving it,
completely deprived of the opportunity to bargain on equal footing. 6 Nevertheless, contracts of adhesion
are not invalid per se; 7 they are not entirely prohibited. 8 The one who adheres to the contract is in reality
free to reject it entirely; if he adheres, he gives his consent. 9

While ambiguities in a contract of adhesion are to be construed against the party that prepared the
same, 10 this rule applies only if the stipulations in such contract are obscure or ambiguous. If the terms
thereof are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its
stipulations shall control. 11 In the latter case, there would be no need for construction. 12

Here, the terms of paragraph 11 of the Chattel Mortgage Contract 13

are clear. Said paragraph states:

11. In case the MORTGAGOR fails to pay any of the installments, or to pay the
interest that may be due as provided in the said promissory note, the whole amount
remaining unpaid therein shall immediately become due and payable and the
mortgage on the property (ies) herein-above described may be foreclosed by the
MORTGAGEE, or the MORTGAGEE may take any other legal action to enforce
collection of the obligation hereby secured, and in either case the MORTGAGOR
further agrees to pay the MORTGAGEE an additional sum of 25% of the principal
due and unpaid, as liquidated damages, which said sum shall become part thereof.
The MORTGAGOR hereby waives reimbursement of the amount heretofore paid by
him/it to the MORTGAGEE.

The above terms leave no room for construction. All that is required is the application thereof.

Petitioner claims that private respondent's check representing the fifth installment was "not
encashed," 14 such that the installment for August 1991 was not paid. By virtue of paragraph 11 above,
petitioner submits that it "was justified in treating the entire balance of the obligation as due and
demandable." 15 Despite demand by petitioner, however, private respondent refused to pay the balance of
the debt. Petitioner, in sum imputes delay on the part of private respondent.

We do not subscribe to petitioner's theory.

Art. 170 of the Civil Code states that those who in the performance of their obligations are guilty of
delay are liable for damages. The delay in the performance of the obligation, however, must be
either malicious or negligent. 16Thus, assuming that private respondent was guilty of delay in the
payment of the value of unsigned check, private respondent cannot be held liable for damages. There is
no imputation, much less evidence, that private respondent acted with malice or negligence in failing to
sign the check. Indeed, we agree with the Court of Appeals finding that such omission was mere "in
advertence" on the part of private respondent. Toyota salesperson Jorge Geronimo testified that he even
verified whether private respondent had signed all the checks and in fact returned three or four unsigned
checks to him for signing:

Atty. Obispo:

After these receipts were issued, what else did you do about the
transaction?

A: During our transaction with Atty. Lustre, I found out when he issued
to me the 24 checks, I found out 3 to 4 checks are unsigned and I
asked him to signed these checks.

Atty. Obispo:

What did you do?

A: I asked him to sign the checks. After signing the checks, I reviewed
again all the documents, after I reviewed all the documents and found
out that all are completed and the down payments was completed,
we realed to him the car. 17

Even when the checks were delivered to petitioner, it did not object to the unsigned check. In
view of the lack of malice or negligence on the part of private respondent, petitioner's blind
and mechanical invocation of paragraph 11 of the contract of chattel mortgage was
unwarranted.

Petitioner's conduct, in the light of the circumstances of this case, can only be described as
mercenary. Petitioner had already debited the value of the unsigned check from private respondent's
account only to re-credit it much later to him. Thereafter, petitioner encashed checks subsequently
dated, then abruptly refused to encash the last two. More than a year after the date of the unsigned
check, petitioner, claiming delay and invoking paragraph 11, demanded from private respondent
payment of the value of said check and that of the last two checks, including liquidated damages. As
pointed out by the trial court, this whole controversy could have been avoided if only petitioner
bothered to call up private respondent and ask him to sign the check. Good faith not only in
compliance with its contractual obligations, 18 but also in observance of the standard in human relations,
for every person "to act with justice, give everyone his due, and observe honesty and good
faith." 19 behooved the bank to do so.

Failing thus, petitioner is liable for damages caused to private respondent. 20 These include moral
damages for the mental anguish, serious anxiety, besmirched reputation, wounded feelings and social
humiliation suffered by the latter. 21The trial court found that private respondent was:

[a] client who has shared transactions for over twenty years with a bank . . ..The
shabby treatment given the defendant is unpardonable since he was put to shame
and embarrassment after the case was filed in Court. He is a lawyer in his own right,
married to another member of the bar. He sired children who are all professionals in
 their chosen field. He is known to the community of golfers with whom he gravitates.
Surely the filing of the case made defendant feel so bad and bothered.

To deter others from emulating petitioner's callous example, we affirm the award of exemplary
damages. 22 As exemplary damages are warranted, so are attorney's fees. 23

We, however, find excessive the amount of damages awarded by the trial court in favor of private
respondent with respect to his counterclaims and, accordingly, reduce the same as follows:

(a) Moral damages from P200,000.00 to P100,000.00

(b) Exemplary damages from P100,000.00 to P75,000.00

(c) Attorney's fees from P50,000.00 to P 30,000.00

WHEREFORE, subject to these modifications, the decision of the Court of Appeals is AFFIRMED.

SO ORDERED.
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 twenty-sixth. 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. [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. [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.[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. [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."
[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. Significantly, this information was
[6]

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. In[7]

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. [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. [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.

G.R. No. 174269 May 8, 2009

POLO S. PANTALEON, Petitioner,
vs.
AMERICAN EXPRESS INTERNATIONAL, INC., Respondent.

DECISION

TINGA, J.:

The petitioner, lawyer Polo Pantaleon, his wife Julialinda, daughter Anna Regina and son Adrian
Roberto, joined an escorted tour of Western Europe organized by Trafalgar Tours of Europe, Ltd., in
October of 1991. The tour group arrived in Amsterdam in the afternoon of 25 October 1991, the
second to the last day of the tour. As the group had arrived late in the city, they failed to engage in
any sight-seeing. Instead, it was agreed upon that they would start early the next day to see the
entire city before ending the tour.

The following day, the last day of the tour, the group arrived at the Coster Diamond House in
Amsterdam around 10 minutes before 9:00 a.m. The group had agreed that the visit to Coster
should end by 9:30 a.m. to allow enough time to take in a guided city tour of Amsterdam. The group
was ushered into Coster shortly before 9:00 a.m., and listened to a lecture on the art of diamond
polishing that lasted for around ten minutes.1 Afterwards, the group was led to the stores showroom
to allow them to select items for purchase. Mrs. Pantaleon had already planned to purchase even
before the tour began a 2.5 karat diamond brilliant cut, and she found a diamond close enough in
approximation that she decided to buy.2 Mrs. Pantaleon also selected for purchase a pendant and a
chain,3 all of which totaled U.S. $13,826.00.

To pay for these purchases, Pantaleon presented his American Express credit card together with his
passport to the Coster sales clerk. This occurred at around 9:15 a.m., or 15 minutes before the tour
group was slated to depart from the store. The sales clerk took the cards imprint, and asked
Pantaleon to sign the charge slip. The charge purchase was then referred electronically to
respondents Amsterdam office at 9:20 a.m.

Ten minutes later, the store clerk informed Pantaleon that his AmexCard had not yet been approved.
His son, who had already boarded the tour bus, soon returned to Coster and informed the other
members of the Pantaleon family that the entire tour group was waiting for them. As it was already
9:40 a.m., and he was already worried about further inconveniencing the tour group, Pantaleon
asked the store clerk to cancel the sale. The store manager though asked plaintiff to wait a few more
minutes. After 15 minutes, the store manager informed Pantaleon that respondent had demanded
bank references. Pantaleon supplied the names of his depositary banks, then instructed his
daughter to return to the bus and apologize to the tour group for the delay.

At around 10:00 a.m, or around 45 minutes after Pantaleon had presented his AmexCard, and 30
minutes after the tour group was supposed to have left the store, Coster decided to release the
items even without respondents approval of the purchase. The spouses Pantaleon returned to the
bus. It is alleged that their offers of apology were met by their tourmates with stony silence. 4 The tour
groups visible irritation was aggravated when the tour guide announced that the city tour of
Amsterdam was to be canceled due to lack of remaining time, as they had to catch a 3:00 p.m. ferry
at Calais, Belgium to London.5 Mrs. Pantaleon ended up weeping, while her husband had to take a
tranquilizer to calm his nerves.

It later emerged that Pantaleons purchase was first transmitted for approval to respondents
Amsterdam office at 9:20 a.m., Amsterdam time, then referred to respondents Manila office at 9:33
a.m, then finally approved at 10:19 a.m., Amsterdam time. 6 The Approval Code was transmitted to
respondents Amsterdam office at 10:38 a.m., several minutes after petitioner had already left
Coster, and 78 minutes from the time the purchases were electronically transmitted by the jewelry
store to respondents Amsterdam office.

After the star-crossed tour had ended, the Pantaleon family proceeded to the United States before
returning to Manila on 12 November 1992. While in the United States, Pantaleon continued to use
his AmEx card, several times without hassle or delay, but with two other incidents similar to the
Amsterdam brouhaha. On 30 October 1991, Pantaleon purchased golf equipment amounting to US
$1,475.00 using his AmEx card, but he cancelled his credit card purchase and borrowed money
instead from a friend, after more than 30 minutes had transpired without the purchase having been
approved. On 3 November 1991, Pantaleon used the card to purchase childrens shoes worth
$87.00 at a store in Boston, and it took 20 minutes before this transaction was approved by
respondent.

On 4 March 1992, after coming back to Manila, Pantaleon sent a letter 7 through counsel to the
respondent, demanding an apology for the "inconvenience, humiliation and embarrassment he and
his family thereby suffered" for respondents refusal to provide credit authorization for the
aforementioned purchases.8 In response, respondent sent a letter dated 24 March 1992, 9 stating
among others that the delay in authorizing the purchase from Coster was attributable to the
circumstance that the charged purchase of US $13,826.00 "was out of the usual charge purchase
pattern established."10 Since respondent refused to accede to Pantaleons demand for an apology,
the aggrieved cardholder instituted an action for damages with the Regional Trial Court (RTC) of
Makati City, Branch 145.11 Pantaleon prayed that he be awarded P2,000,000.00, as moral
damages; P500,000.00, as exemplary damages; P100,000.00, as attorneys fees; and P50,000.00
as litigation expenses.12

On 5 August 1996, the Makati City RTC rendered a decision13 in favor of Pantaleon, awarding
him P500,000.00 as moral damages, P300,000.00 as exemplary damages, P100,000.00 as
attorneys fees, and P85,233.01 as expenses of litigation. Respondent filed a Notice of Appeal, while
Pantaleon moved for partial reconsideration, praying that the trial court award the increased amount
of moral and exemplary damages he had prayed for.14The RTC denied Pantaleons motion for partial
reconsideration, and thereafter gave due course to respondents Notice of Appeal. 15

On 18 August 2006, the Court of Appeals rendered a decision16 reversing the award of damages in
favor of Pantaleon, holding that respondent had not breached its obligations to petitioner. Hence, this
petition.

The key question is whether respondent, in connection with the aforementioned transactions, had
committed a breach of its obligations to Pantaleon. In addition, Pantaleon submits that even
assuming that respondent had not been in breach of its obligations, it still remained liable for
damages under Article 21 of the Civil Code.

The RTC had concluded, based on the testimonial representations of Pantaleon and respondents
credit authorizer, Edgardo Jaurigue, that the normal approval time for purchases was "a matter of
seconds." Based on that standard, respondent had been in clear delay with respect to the three
subject transactions. As it appears, the Court of Appeals conceded that there had been delay on the
part of respondent in approving the purchases. However, it made two critical conclusions in favor of
respondent. First, the appellate court ruled that the delay was not attended by bad faith, malice, or
gross negligence. Second, it ruled that respondent "had exercised diligent efforts to effect the
approval" of the purchases, which were "not in accordance with the charge pattern" petitioner had
established for himself, as exemplified by the fact that at Coster, he was "making his very first single
charge purchase of US$13,826," and "the record of [petitioner]s past spending with [respondent] at
the time does not favorably support his ability to pay for such purchase." 17

On the premise that there was an obligation on the part of respondent "to approve or disapprove with
dispatch the charge purchase," petitioner argues that the failure to timely approve or disapprove the
purchase constituted mora solvendi on the part of respondent in the performance of its obligation.
For its part, respondent characterizes the depiction by petitioner of its obligation to him as "to
approve purchases instantaneously or in a matter of seconds."

Petitioner correctly cites that under mora solvendi, the three requisites for a finding of default are that
the obligation is demandable and liquidated; the debtor delays performance; and the creditor
judicially or extrajudicially requires the debtors performance.18 Petitioner asserts that the Court of
Appeals had wrongly applied the principle of mora accipiendi, which relates to delay on the part of
the obligee in accepting the performance of the obligation by the obligor. The requisites of mora
accipiendi are: an offer of performance by the debtor who has the required capacity; the offer must
be to comply with the prestation as it should be performed; and the creditor refuses the performance
without just cause.19 The error of the appellate court, argues petitioner, is in relying on the invocation
by respondent of "just cause" for the delay, since while just cause is determinative of mora
accipiendi, it is not so with the case of mora solvendi.

We can see the possible source of confusion as to which type of mora to appreciate. Generally, the
relationship between a credit card provider and its card holders is that of creditor-debtor,20 with the
card company as the creditor extending loans and credit to the card holder, who as debtor is obliged
to repay the creditor. This relationship already takes exception to the general rule that as between a
bank and its depositors, the bank is deemed as the debtor while the depositor is considered as the
creditor.21 Petitioner is asking us, not baselessly, to again shift perspectives and again see the credit
card company as the debtor/obligor, insofar as it has the obligation to the customer as
creditor/obligee to act promptly on its purchases on credit.

Ultimately, petitioners perspective appears more sensible than if we were to still regard respondent
as the creditor in the context of this cause of action. If there was delay on the part of respondent in
its normal role as creditor to the cardholder, such delay would not have been in the acceptance of
the performance of the debtors obligation (i.e., the repayment of the debt), but it would be delay in
the extension of the credit in the first place. Such delay would not fall under mora accipiendi, which
contemplates that the obligation of the debtor, such as the actual purchases on credit, has already
been constituted. Herein, the establishment of the debt itself (purchases on credit of the jewelry) had
not yet been perfected, as it remained pending the approval or consent of the respondent credit card
company.

Still, in order for us to appreciate that respondent was in mora solvendi, we will have to first
recognize that there was indeed an obligation on the part of respondent to act on petitioners
purchases with "timely dispatch," or for the purposes of this case, within a period significantly less
than the one hour it apparently took before the purchase at Coster was finally approved.

The findings of the trial court, to our mind, amply established that the tardiness on the part of
respondent in acting on petitioners purchase at Coster did constitute culpable delay on its part in
complying with its obligation to act promptly on its customers purchase request, whether such action
be favorable or unfavorable. We quote the trial court, thus:

As to the first issue, both parties have testified that normal approval time for purchases was a matter
of seconds.

Plaintiff testified that his personal experience with the use of the card was that except for the three
charge purchases subject of this case, approvals of his charge purchases were always obtained in a
matter of seconds.

Defendants credit authorizer Edgardo Jaurique likewise testified:

Q. You also testified that on normal occasions, the normal approval time for charges would
be 3 to 4 seconds?

A. Yes, Maam.

Both parties likewise presented evidence that the processing and approval of plaintiffs charge
purchase at the Coster Diamond House was way beyond the normal approval time of a "matter of
seconds".

Plaintiff testified that he presented his AmexCard to the sales clerk at Coster, at 9:15 a.m. and by the
time he had to leave the store at 10:05 a.m., no approval had yet been received. In fact, the Credit
Authorization System (CAS) record of defendant at Phoenix Amex shows that defendants
Amsterdam office received the request to approve plaintiffs charge purchase at 9:20 a.m.,
Amsterdam time or 01:20, Phoenix time, and that the defendant relayed its approval to Coster at
10:38 a.m., Amsterdam time, or 2:38, Phoenix time, or a total time lapse of one hour and [18]
minutes. And even then, the approval was conditional as it directed in computerese [sic] "Positive
Identification of Card holder necessary further charges require bank information due to high
exposure. By Jack Manila."

The delay in the processing is apparent to be undue as shown from the frantic successive queries of
Amexco Amsterdam which reads: "US$13,826. Cardmember buying jewels. ID seen. Advise how
long will this take?" They were sent at 01:33, 01:37, 01:40, 01:45, 01:52 and 02:08, all times
Phoenix. Manila Amexco could be unaware of the need for speed in resolving the charge purchase
referred to it, yet it sat on its hand, unconcerned.

xxx

To repeat, the Credit Authorization System (CAS) record on the Amsterdam transaction shows how
Amexco Netherlands viewed the delay as unusually frustrating. In sequence expressed in Phoenix
time from 01:20 when the charge purchased was referred for authorization, defendants own record
shows:

01:22 the authorization is referred to Manila Amexco

01:32 Netherlands gives information that the identification of the cardmember has been
presented and he is buying jewelries worth US $13,826.

01:33 Netherlands asks "How long will this take?"

02:08 Netherlands is still asking "How long will this take?"

The Court is convinced that defendants delay constitute[s] breach of its contractual obligation to act
on his use of the card abroad "with special handling." 22 (Citations omitted)

xxx

Notwithstanding the popular notion that credit card purchases are approved "within seconds," there
really is no strict, legally determinative point of demarcation on how long must it take for a credit card
company to approve or disapprove a customers purchase, much less one specifically contracted
upon by the parties. Yet this is one of those instances when "youd know it when youd see it," and
one hour appears to be an awfully long, patently unreasonable length of time to approve or
disapprove a credit card purchase. It is long enough time for the customer to walk to a bank a
kilometer away, withdraw money over the counter, and return to the store.

Notably, petitioner frames the obligation of respondent as "to approve or disapprove" the purchase
"in timely dispatch," and not "to approve the purchase instantaneously or within seconds." Certainly,
had respondent disapproved petitioners purchase "within seconds" or within a timely manner, this
particular action would have never seen the light of day. Petitioner and his family would have
returned to the bus without delay internally humiliated perhaps over the rejection of his card yet
spared the shame of being held accountable by newly-made friends for making them miss the
chance to tour the city of Amsterdam.

We do not wish do dispute that respondent has the right, if not the obligation, to verify whether the
credit it is extending upon on a particular purchase was indeed contracted by the cardholder, and
that the cardholder is within his means to make such transaction. The culpable failure of respondent
herein is not the failure to timely approve petitioners purchase, but the more elemental failure to
timely act on the same, whether favorably or unfavorably. Even assuming that respondents credit
authorizers did not have sufficient basis on hand to make a judgment, we see no reason why
respondent could not have promptly informed petitioner the reason for the delay, and duly advised
him that resolving the same could take some time. In that way, petitioner would have had informed
basis on whether or not to pursue the transaction at Coster, given the attending circumstances.
Instead, petitioner was left uncomfortably dangling in the chilly autumn winds in a foreign land and
soon forced to confront the wrath of foreign folk.

Moral damages avail in cases of breach of contract where the defendant acted fraudulently or in bad
faith, and the court should find that under the circumstances, such damages are due. The findings of
the trial court are ample in establishing the bad faith and unjustified neglect of respondent,
attributable in particular to the "dilly-dallying" of respondents Manila credit authorizer, Edgardo
Jaurique.23 Wrote the trial court:

While it is true that the Cardmembership Agreement, which defendant prepared, is silent as to the
amount of time it should take defendant to grant authorization for a charge purchase, defendant
acknowledged that the normal time for approval should only be three to four seconds. Specially so
with cards used abroad which requires "special handling", meaning with priority. Otherwise, the
object of credit or charge cards would be lost; it would be so inconvenient to use that buyers and
consumers would be better off carrying bundles of currency or travellers checks, which can be
delivered and accepted quickly. Such right was not accorded to plaintiff in the instances complained
off for reasons known only to defendant at that time. This, to the Courts mind, amounts to a wanton
and deliberate refusal to comply with its contractual obligations, or at least abuse of its rights, under
the contract.24

xxx

The delay committed by defendant was clearly attended by unjustified neglect and bad faith, since it
alleges to have consumed more than one hour to simply go over plaintiffs past credit history with
defendant, his payment record and his credit and bank references, when all such data are already
stored and readily available from its computer. This Court also takes note of the fact that there is
nothing in plaintiffs billing history that would warrant the imprudent suspension of action by
defendant in processing the purchase. Defendants witness Jaurique admits:

Q. But did you discover that he did not have any outstanding account?

A. Nothing in arrears at that time.

Q. You were well aware of this fact on this very date?

A. Yes, sir.

Mr. Jaurique further testified that there were no "delinquencies" in plaintiffs account. 25

It should be emphasized that the reason why petitioner is entitled to damages is not simply because
respondent incurred delay, but because the delay, for which culpability lies under Article 1170, led to
the particular injuries under Article 2217 of the Civil Code for which moral damages are
remunerative.26 Moral damages do not avail to soothe the plaints of the simply impatient, so this
decision should not be cause for relief for those who time the length of their credit card transactions
with a stopwatch. The somewhat unusual attending circumstances to the purchase at Coster that
there was a deadline for the completion of that purchase by petitioner before any delay would
redound to the injury of his several traveling companions gave rise to the moral shock, mental
anguish, serious anxiety, wounded feelings and social humiliation sustained by the petitioner, as
concluded by the RTC.27Those circumstances are fairly unusual, and should not give rise to a
general entitlement for damages under a more mundane set of facts.

We sustain the amount of moral damages awarded to petitioner by the RTC. There is no hard-and-
fast rule in determining what would be a fair and reasonable amount of moral damages, since each
case must be governed by its own peculiar facts, however, it must be commensurate to the loss or
injury suffered.28 Petitioners original prayer for P5,000,000.00 for moral damages is excessive under
the circumstances, and the amount awarded by the trial court of P500,000.00 in moral damages
more seemly. 1avvphi1

Likewise, we deem exemplary damages available under the circumstances, and the amount
of P300,000.00 appropriate. There is similarly no cause though to disturb the determined award
of P100,000.00 as attorneys fees, and P85,233.01 as expenses of litigation.

WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals is
REVERSED and SET ASIDE. The Decision of the Regional Trial Court of Makati, Branch 145 in Civil
Case No. 92-1665 is hereby REINSTATED. Costs against respondent.

SO ORDERED.

LORENZO SHIPPING CORP., petitioner, vs. BJ MARTHEL

INTERNATIONAL, INC., respondent.

DECISION

CHICO-NAZARIO, J.:

This is a petition for review seeking to set aside the Decision [1] of the Court
of Appeals in CA-G.R. CV No. 54334 and its Resolution denying petitioners
motion for reconsideration.

The factual antecedents of this case are as follows:

 Petitioner Lorenzo Shipping Corporation is a domestic corporation
engaged in coastwise shipping. It used to own the cargo vessel M/V
Dadiangas Express.

Upon the other hand, respondent BJ Marthel International, Inc. is a

business entity engaged in trading, marketing, and selling of various industrial
commodities. It is also an importer and distributor of different brands of
engines and spare parts.

From 1987 up to the institution of this case, respondent supplied petitioner

with spare parts for the latters marine engines. Sometime in 1989, petitioner
asked respondent for a quotation for various machine parts. Acceding to this
request, respondent furnished petitioner with a formal quotation,[2] thus:

May 31, 1989

MINQ-6093

LORENZO SHIPPING LINES

Pier 8, North Harbor

Manila

SUBJECT: PARTS FOR ENGINE MODEL

MITSUBISHI 6UET 52/60

Dear Mr. Go:

We are pleased to submit our offer for your above subject requirements.

Description Qty. Unit Price Total Price

Nozzle Tip 6 pcs. P 5,520.00 33,120.00

Plunger & Barrel 6 pcs. 27,630.00 165,780.00

Cylinder Head 2 pcs. 1,035,000.00 2,070,000.00

 Cylinder Liner 1 set 477,000.00

TOTAL PRICE FOB P2,745,900.00

MANILA ___________

DELIVERY: Within 2 months after receipt of firm order.

TERMS: 25% upon delivery, balance payable in 5 bi-monthly equal

Installment[s] not to exceed 90 days.

We trust you find our above offer acceptable and look forward to your most valued
order.

Very truly yours,

(SGD) HENRY PAJARILLO

Sales Manager

Petitioner thereafter issued to respondent Purchase Order No. 13839,

[3]
dated 02 November 1989, for the procurement of one set of cylinder liner,
valued at P477,000, to be used for M/V Dadiangas Express. The purchase
order was co-signed by Jose Go, Jr., petitioners vice-president, and Henry
Pajarillo. Quoted hereunder is the pertinent portion of the purchase order:

Name of Description Qty. Amount

CYL. LINER M/E 1 SET P477,000.00

NOTHING FOLLOW

INV. #

TERM OF PAYMENT: 25% DOWN PAYMENT

5 BI-MONTHLY INSTALLMENT[S]
 Instead of paying the 25% down payment for the first cylinder liner,
petitioner issued in favor of respondent ten postdated checks[4] to be drawn
against the formers account with Allied Banking Corporation. The checks
were supposed to represent the full payment of the aforementioned cylinder
liner.

Subsequently, petitioner issued Purchase Order No. 14011,[5] dated 15

January 1990, for yet another unit of cylinder liner. This purchase order stated
the term of payment to be 25% upon delivery, balance payable in 5 bi-monthly
equal installment[s].[6] Like the purchase order of 02 November 1989, the
second purchase order did not state the date of the cylinder liners delivery.

On 26 January 1990, respondent deposited petitioners check that was

postdated 18 January 1990, however, the same was dishonored by the
drawee bank due to insufficiency of funds. The remaining nine postdated
checks were eventually returned by respondent to petitioner.

The parties presented disparate accounts of what happened to the check

which was previously dishonored. Petitioner claimed that it replaced said
check with a good one, the proceeds of which were applied to its other
obligation to respondent. For its part, respondent insisted that it returned said
postdated check to petitioner.

Respondent thereafter placed the order for the two cylinder liners with its
principal in Japan, Daiei Sangyo Co. Ltd., by opening a letter of credit on 23
February 1990 under its own name with the First Interstate Bank of Tokyo.

On 20 April 1990, Pajarillo delivered the two cylinder liners at petitioners

warehouse in North Harbor, Manila. The sales invoices[7] evidencing the
delivery of the cylinder liners both contain the notation subject to verification
under which the signature of Eric Go, petitioners warehouseman, appeared.

Respondent thereafter sent a Statement of Account dated 15 November

1990[8] to petitioner. While the other items listed in said statement of account
were fully paid by petitioner, the two cylinder liners delivered to petitioner on
20 April 1990 remained unsettled. Consequently, Mr. Alejandro Kanaan, Jr.,
respondents vice-president, sent a demand letter dated 02 January 1991 [9] to
petitioner requiring the latter to pay the value of the cylinder liners subjects of
this case. Instead of heeding the demand of respondent for the full payment
of the value of the cylinder liners, petitioner sent the former a letter dated 12
March 1991[10] offering to pay only P150,000 for the cylinder liners. In said
letter, petitioner claimed that as the cylinder liners were delivered late and due
to the scrapping of the M/V Dadiangas Express, it (petitioner) would have to
sell the cylinder liners in Singapore and pay the balance from the proceeds of
said sale.

Shortly thereafter, another demand letter dated 27 March 1991[11] was

furnished petitioner by respondents counsel requiring the former to settle its
obligation to respondent together with accrued interest and attorneys fees.

Due to the failure of the parties to settle the matter, respondent filed an
action for sum of money and damages before the Regional Trial Court (RTC)
of Makati City. In its complaint,[12] respondent (plaintiff below) alleged that
despite its repeated oral and written demands, petitioner obstinately refused
to settle its obligations. Respondent prayed that petitioner be ordered to pay
for the value of the cylinder liners plus accrued interest of P111,300 as of May
1991 and additional interest of 14% per annum to be reckoned from June
1991 until the full payment of the principal; attorneys fees; costs of suits;
exemplary damages; actual damages; and compensatory damages.

On 25 July 1991, and prior to the filing of a responsive pleading,

respondent filed an amended complaint with preliminary attachment pursuant
to Sections 2 and 3, Rule 57 of the then Rules of Court. [13]Aside from the
prayer for the issuance of writ of preliminary attachment, the amendments
also pertained to the issuance by petitioner of the postdated checks and the
amounts of damages claimed.

In an Order dated 25 July 1991,[14] the court a quo granted respondents

prayer for the issuance of a preliminary attachment. On 09 August 1991,
petitioner filed an Urgent Ex-Parte Motion to Discharge Writ of
Attachment[15] attaching thereto a counter-bond as required by the Rules of
Court. On even date, the trial court issued an Order [16] lifting the levy on
petitioners properties and the garnishment of its bank accounts.
 Petitioner afterwards filed its Answer[17] alleging therein that time was of
the essence in the delivery of the cylinder liners and that the delivery on 20
April 1990 of said items was late as respondent committed to deliver said
items within two (2) months after receipt of firm order [18] from petitioner.
Petitioner likewise sought counterclaims for moral damages, exemplary
damages, attorneys fees plus appearance fees, and expenses of litigation.

Subsequently, respondent filed a Second Amended Complaint with

Preliminary Attachment dated 25 October 1991.[19] The amendment introduced
dealt solely with the number of postdated checks issued by petitioner as full
payment for the first cylinder liner it ordered from respondent. Whereas in the
first amended complaint, only nine postdated checks were involved, in its
second amended complaint, respondent claimed that petitioner actually
issued ten postdated checks. Despite the opposition by petitioner, the trial
court admitted respondents Second Amended Complaint with Preliminary
Attachment.[20]

Prior to the commencement of trial, petitioner filed a Motion (For Leave To

Sell Cylinder Liners)[21] alleging therein that [w]ith the passage of time and with
no definite end in sight to the present litigation, the cylinder liners run the risk
of obsolescence and deterioration[22] to the prejudice of the parties to this
case. Thus, petitioner prayed that it be allowed to sell the cylinder liners at the
best possible price and to place the proceeds of said sale in escrow. This
motion, unopposed by respondent, was granted by the trial court through the
Order of 17 March 1991.[23]

After trial, the court a quo dismissed the action, the decretal portion of the
Decision stating:

WHEREFORE, the complaint is hereby dismissed, with costs against the plaintiff,
which is ordered to pay P50,000.00 to the defendant as and by way of attorneys fees.
[24]

The trial court held respondent bound to the quotation it submitted to

petitioner particularly with respect to the terms of payment and delivery of the
cylinder liners. It also declared that respondent had agreed to the cancellation
of the contract of sale when it returned the postdated checks issued by
petitioner. Respondents counterclaims for moral, exemplary, and
compensatory damages were dismissed for insufficiency of evidence.

Respondent moved for the reconsideration of the trial courts Decision but
the motion was denied for lack of merit.[25]

Aggrieved by the findings of the trial court, respondent filed an appeal with
the Court of Appeals[26] which reversed and set aside the Decision of the
court a quo. The appellate court brushed aside petitioners claim that time was
of the essence in the contract of sale between the parties herein considering
the fact that a significant period of time had lapsed between respondents offer
and the issuance by petitioner of its purchase orders. The dispositive portion
of the Decision of the appellate court states:

WHEREFORE, the decision of the lower court is REVERSED and SET ASIDE. The
appellee is hereby ORDERED to pay the appellant the amount of P954,000.00, and
accrued interest computed at 14% per annum reckoned from May, 1991. [27]

The Court of Appeals also held that respondent could not have incurred
delay in the delivery of cylinder liners as no demand, judicial or extrajudicial,
was made by respondent upon petitioner in contravention of the express
provision of Article 1169 of the Civil Code which provides:

Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.

Likewise, the appellate court concluded that there was no evidence of the
alleged cancellation of orders by petitioner and that the delivery of the cylinder
liners on 20 April 1990 was reasonable under the circumstances.

On 22 May 2000, petitioner filed a motion for reconsideration of the

Decision of the Court of Appeals but this was denied through the resolution of
06 October 2000.[28] Hence, this petition for review which basically raises the
issues of whether or not respondent incurred delay in performing its obligation
under the contract of sale and whether or not said contract was validly
rescinded by petitioner.
 That a contract of sale was entered into by the parties is not disputed.
Petitioner, however, maintains that its obligation to pay fully the purchase price
was extinguished because the adverted contract was validly terminated due to
respondents failure to deliver the cylinder liners within the two-month period
stated in the formal quotation dated 31 May 1989.

The threshold question, then, is: Was there late delivery of the subjects of
the contract of sale to justify petitioner to disregard the terms of the contract
considering that time was of the essence thereof?

In determining whether time is of the essence in a contract, the ultimate

criterion is the actual or apparent intention of the parties and before time may
be so regarded by a court, there must be a sufficient manifestation, either in
the contract itself or the surrounding circumstances of that intention.
[29]
Petitioner insists that although its purchase orders did not specify the dates
when the cylinder liners were supposed to be delivered, nevertheless,
respondent should abide by the term of delivery appearing on the quotation it
submitted to petitioner.[30] Petitioner theorizes that the quotation embodied the
offer from respondent while the purchase order represented its (petitioners)
acceptance of the proposed terms of the contract of sale. [31] Thus, petitioner is
of the view that these two documents cannot be taken separately as if there
were two distinct contracts.[32] We do not agree.

It is a cardinal rule in interpretation of contracts that if the terms thereof are

clear and leave no doubt as to the intention of the contracting parties, the
literal meaning shall control.[33] However, in order to ascertain the intention of
the parties, their contemporaneous and subsequent acts should be
considered.[34] While this Court recognizes the principle that contracts are
respected as the law between the contracting parties, this principle is
tempered by the rule that the intention of the parties is primordial [35] and once
the intention of the parties has been ascertained, that element is deemed as
an integral part of the contract as though it has been originally expressed in
unequivocal terms.[36]

In the present case, we cannot subscribe to the position of petitioner that

the documents, by themselves, embody the terms of the sale of the cylinder
liners. One can easily glean the significant differences in the terms as stated
in the formal quotation and Purchase Order No. 13839 with regard to the due
date of the down payment for the first cylinder liner and the date of its delivery
as well as Purchase Order No. 14011 with respect to the date of delivery of
the second cylinder liner. While the quotation provided by respondent
evidently stated that the cylinder liners were supposed to be delivered within
two months from receipt of the firm order of petitioner and that the 25% down
payment was due upon the cylinder liners delivery, the purchase orders
prepared by petitioner clearly omitted these significant items. The petitioners
Purchase Order No. 13839 made no mention at all of the due dates of delivery
of the first cylinder liner and of the payment of 25% down payment. Its
Purchase Order No. 14011 likewise did not indicate the due date of delivery of
the second cylinder liner.

In the case of Bugatti v. Court of Appeals,[37] we reiterated the principle that

[a] contract undergoes three distinct stages preparation or negotiation, its
perfection, and finally, its consummation. Negotiation begins from the time the
prospective contracting parties manifest their interest in the contract and ends
at the moment of agreement of the parties. The perfection or birth of the
contract takes place when the parties agree upon the essential elements of
the contract. The last stage is the consummation of the contract wherein the
parties fulfill or perform the terms agreed upon in the contract, culminating in
the extinguishment thereof.

In the instant case, the formal quotation provided by respondent

represented the negotiation phase of the subject contract of sale between the
parties. As of that time, the parties had not yet reached an agreement as
regards the terms and conditions of the contract of sale of the cylinder liners.
Petitioner could very well have ignored the offer or tendered a counter-offer to
respondent while the latter could have, under the pertinent provision of the
Civil Code,[38] withdrawn or modified the same. The parties were at liberty to
discuss the provisions of the contract of sale prior to its perfection. In this
connection, we turn to the testimonies of Pajarillo and Kanaan, Jr., that the
terms of the offer were, indeed, renegotiated prior to the issuance of Purchase
Order No. 13839.

During the hearing of the case on 28 January 1993, Pajarillo testified as

follows:
Q: You testified Mr. Witness, that you submitted a quotation with defendant Lorenzo
Shipping Corporation dated rather marked as Exhibit A stating the terms of
payment and delivery of the cylinder liner, did you not?

A: Yes sir.

Q: I am showing to you the quotation which is marked as Exhibit A there appears in

the quotation that the delivery of the cylinder liner will be made in two months time
from the time you received the confirmation of the order. Is that correct?

A: Yes sir.

Q: Now, after you made the formal quotation which is Exhibit A how long a time did
the defendant make a confirmation of the order?

A: After six months.

Q: And this is contained in the purchase order given to you by Lorenzo Shipping
Corporation?

A: Yes sir.

Q: Now, in the purchase order dated November 2, 1989 there appears only the date
the terms of payment which you required of them of 25% down payment, now, it is
stated in the purchase order the date of delivery, will you explain to the court why
the date of delivery of the cylinder liner was not mentioned in the purchase order
which is the contract between you and Lorenzo Shipping Corporation?

A: When Lorenzo Shipping Corporation inquired from us for that cylinder liner, we
have inquired [with] our supplier in Japan to give us the price and delivery of that
item. When we received that quotation from our supplier it is stated there that they
can deliver within two months but we have to get our confirmed order within June.

Q: But were you able to confirm the order from your Japanese supplier on June of
that year?

A: No sir.

Q: Why? Will you tell the court why you were not able to confirm your order with your
Japanese supplier?

A: Because Lorenzo Shipping Corporation did not give us the purchase order for that
cylinder liner.

Q: And it was only on November 2, 1989 when they gave you the purchase order?
 A: Yes sir.

Q: So upon receipt of the purchase order from Lorenzo Shipping Lines in 1989 did
you confirm the order with your Japanese supplier after receiving the purchase
order dated November 2, 1989?

A: Only when Lorenzo Shipping Corporation will give us the down payment of 25%.[39]

For his part, during the cross-examination conducted by counsel for

petitioner, Kanaan, Jr., testified in the following manner:

WITNESS: This term said 25% upon delivery. Subsequently, in the final contract, what
was agreed upon by both parties was 25% down payment.

Q: When?

A: Upon confirmation of the order.

...

Q: And when was the down payment supposed to be paid?

A: It was not stated when we were supposed to receive that. Normally, we expect to
receive at the earliest possible time. Again, that would depend on the customers.
Even after receipt of the purchase order which was what happened here, they re-
negotiated the terms and sometimes we do accept that.

Q: Was there a re-negotiation of this term?

A: This offer, yes. We offered a final requirement of 25% down payment upon
delivery.

Q: What was the re-negotiated term?

A: 25% down payment

Q: To be paid when?

A: Supposed to be paid upon order.[40]

The above declarations remain unassailed. Other than its bare assertion
that the subject contracts of sale did not undergo further renegotiation,
petitioner failed to proffer sufficient evidence to refute the above testimonies of
Pajarillo and Kanaan, Jr.
 Notably, petitioner was the one who caused the preparation of Purchase
Orders No. 13839 and No. 14011 yet it utterly failed to adduce any justification
as to why said documents contained terms which are at variance with those
stated in the quotation provided by respondent. The only plausible reason for
such failure on the part of petitioner is that the parties had, in fact,
renegotiated the proposed terms of the contract of sale. Moreover, as the
obscurity in the terms of the contract between respondent and petitioner was
caused by the latter when it omitted the date of delivery of the cylinder liners
in the purchase orders and varied the term with respect to the due date of the
down payment,[41] said obscurity must be resolved against it.[42]

Relative to the above discussion, we find the case of Smith, Bell & Co.,
Ltd. v. Matti,[43] instructive. There, we held that

When the time of delivery is not fixed or is stated in general and indefinite terms, time
is not of the essence of the contract. . . .

In such cases, the delivery must be made within a reasonable time.

The law implies, however, that if no time is fixed, delivery shall be made within a
reasonable time, in the absence of anything to show that an immediate delivery
intended. . . .

We also find significant the fact that while petitioner alleges that the
cylinder liners were to be used for dry dock repair and maintenance of its M/V
Dadiangas Express between the later part of December 1989 to early January
1990, the record is bereft of any indication that respondent was aware of such
fact. The failure of petitioner to notify respondent of said date is fatal to its
claim that time was of the essence in the subject contracts of sale.

In addition, we quote, with approval, the keen observation of the Court of

Appeals:

. . . It must be noted that in the purchase orders issued by the appellee, dated
November 2, 1989 and January 15, 1990, no specific date of delivery was indicated
therein. If time was really of the essence as claimed by the appellee, they should have
stated the same in the said purchase orders, and not merely relied on the quotation
issued by the appellant considering the lapse of time between the quotation issued by
the appellant and the purchase orders of the appellee.

In the instant case, the appellee should have provided for an allowance of time and
made the purchase order earlier if indeed the said cylinder liner was necessary for the
repair of the vessel scheduled on the first week of January, 1990. In fact, the appellee
should have cancelled the first purchase order when the cylinder liner was not
delivered on the date it now says was necessary. Instead it issued another purchase
order for the second set of cylinder liner. This fact negates appellees claim that time
was indeed of the essence in the consummation of the contract of sale between the
parties.[44]

Finally, the ten postdated checks issued in November 1989 by petitioner

and received by the respondent as full payment of the purchase price of the
first cylinder liner supposed to be delivered on 02 January 1990 fail to
impress. It is not an indication of failure to honor a commitment on the part of
the respondent. The earliest maturity date of the checks was 18 January
1990. As delivery of said checks could produce the effect of payment only
when they have been cashed,[45] respondents obligation to deliver the first
cylinder liner could not have arisen as early as 02 January 1990 as claimed by
petitioner since by that time, petitioner had yet to fulfill its undertaking to fully
pay for the value of the first cylinder liner. As explained by respondent, it
proceeded with the placement of the order for the cylinder liners with its
principal in Japan solely on the basis of its previously harmonious business
relationship with petitioner.

As an aside, let it be underscored that [e]ven where time is of the essence,

a breach of the contract in that respect by one of the parties may be waived
by the other partys subsequently treating the contract as still in force.
[46]
Petitioners receipt of the cylinder liners when they were delivered to its
warehouse on 20 April 1990 clearly indicates that it considered the contract of
sale to be still subsisting up to that time. Indeed, had the contract of sale
been cancelled already as claimed by petitioner, it no longer had any business
receiving the cylinder liners even if said receipt was subject to verification. By
accepting the cylinder liners when these were delivered to its warehouse,
petitioner indisputably waived the claimed delay in the delivery of said items.
 We, therefore, hold that in the subject contracts, time was not of the
essence. The delivery of the cylinder liners on 20 April 1990 was made within
a reasonable period of time considering that respondent had to place the
order for the cylinder liners with its principal in Japan and that the latter was,
at that time, beset by heavy volume of work.[47]

There having been no failure on the part of the respondent to perform its
obligation, the power to rescind the contract is unavailing to the petitioner.
Article 1191 of the New Civil Code runs as follows:

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 law explicitly gives either party the right to rescind the contract only
upon the failure of the other to perform the obligation assumed thereunder.
[48]
The right, however, is not an unbridled one. This Court in the case
of University of the Philippines v. De los Angeles,[49] speaking through the
eminent civilist Justice J.B.L. Reyes, exhorts:

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 denied 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. (Emphasis supplied)

In other words, the party who deems the contract violated may consider it
resolved or rescinded, and act accordingly, without previous court action, but
it proceeds at its own risk. For it is only the final judgment of the
corresponding court that will conclusively and finally settle whether the action
taken was or was not correct in law. But the law definitely does not require
that the contracting party who believes itself injured must first file suit and wait
for a judgment before taking extrajudicial steps to protect its interest.
Otherwise, the party injured by the others breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until the final
judgment of rescission is rendered when the law itself requires that he should
exercise due diligence to minimize its own damages.[50]

Here, there is no showing that petitioner notified respondent of its intention

to rescind the contract of sale between them. Quite the contrary, respondents
act of proceeding with the opening of an irrevocable letter of credit on 23
February 1990 belies petitioners claim that it notified respondent of the
cancellation of the contract of sale. Truly, no prudent businessman would
pursue such action knowing that the contract of sale, for which the letter of
credit was opened, was already rescinded by the other party.

WHEREFORE, premises considered, the instant Petition for Review

on Certiorari is DENIED. The Decision of the Court of Appeals, dated 28 April
2000, and its Resolution, dated 06 October 2000, are hereby AFFIRMED. No
costs.

SO ORDERED.
Solar harvest v davaocorrugated carlon corp

DECISION

NACHURA, J.:
Petitioner seeks a review of the Court of Appeals (CA) Decision [1] dated September
21, 2006 and Resolution[2] dated February 23, 2007, which denied petitioners
motion for reconsideration. The assailed Decision denied petitioners claim for
reimbursement for the amount it paid to respondent for the manufacture of
corrugated carton boxes.

The case arose from the following antecedents:

In the first quarter of 1998, petitioner, Solar Harvest, Inc., entered into an
agreement with respondent, Davao Corrugated Carton Corporation, for the
purchase of corrugated carton boxes, specifically designed for petitioners business
of exporting fresh bananas, at US$1.10 each. The agreement was not reduced into
writing. To get the production underway, petitioner deposited, on March 31, 1998,
US$40,150.00 in respondents US Dollar Savings Account with Westmont Bank, as
full payment for the ordered boxes.

Despite such payment, petitioner did not receive any boxes from respondent. On
January 3, 2001, petitioner wrote a demand letter for reimbursement of the amount
paid.[3] On February 19, 2001, respondent replied that the boxes had been
completed as early as April 3, 1998 and that petitioner failed to pick them up from
the formers warehouse 30 days from completion, as agreed upon. Respondent
mentioned that petitioner even placed an additional order of 24,000 boxes, out of
which, 14,000 had been manufactured without any advanced payment from
petitioner. Respondent then demanded petitioner to remove the boxes from the
factory and to pay the balance of US$15,400.00 for the additional boxes
and P132,000.00 as storage fee.
On August 17, 2001, petitioner filed a Complaint for sum of money and damages
against respondent. The Complaint averred that the parties agreed that the boxes
will be delivered within 30 days from payment but respondent failed to
manufacture and deliver the boxes within such time. It further alleged
 6. That repeated follow-up was made by the plaintiff for the immediate
production of the ordered boxes, but every time, defendant [would] only
show samples of boxes and ma[k]e repeated promises to deliver the said
ordered boxes.
7. That because of the failure of the defendant to deliver the ordered
boxes, plaintiff ha[d] to cancel the same and demand payment and/or
refund from the defendant but the latter refused to pay and/or refund the
US$40,150.00 payment made by the former for the ordered boxes. [4]
In its Answer with Counterclaim,[5] respondent insisted that, as early as April 3,
1998, it had already completed production of the 36,500 boxes, contrary to
petitioners allegation. According to respondent, petitioner, in fact, made an
additional order of 24,000 boxes, out of which, 14,000 had been completed without
waiting for petitioners payment. Respondent stated that petitioner was to pick up
the boxes at the factory as agreed upon, but petitioner failed to do so. Respondent
averred that, on October 8, 1998, petitioners representative, Bobby Que (Que),
went to the factory and saw that the boxes were ready for pick up. On February 20,
1999, Que visited the factory again and supposedly advised respondent to sell the
boxes as rejects to recoup the cost of the unpaid 14,000 boxes, because petitioners
transaction to ship bananas to China did not materialize. Respondent claimed that
the boxes were occupying warehouse space and that petitioner should be made to
pay storage fee at P60.00 per square meter for every month from April 1998. As
counterclaim, respondent prayed that judgment be rendered ordering petitioner to
pay $15,400.00, plus interest, moral and exemplary damages, attorneys fees, and
costs of the suit.
In reply, petitioner denied that it made a second order of 24,000 boxes and that
respondent already completed the initial order of 36,500
boxes and 14,000 boxes out of the second order. It maintained that

respondent only manufactured a sample of the ordered boxes and that respondent
could not have produced 14,000 boxes without the required pre-payments.[6]
During trial, petitioner presented Que as its sole witness. Que testified that he
ordered the boxes from respondent and deposited the money in respondents
account.[7] He specifically stated that, when he visited respondents factory, he saw
that the boxes had no print of petitioners logo. [8] A few months later, he followed-
up the order and was told that the company had full production, and thus, was
promised that production of the order would be rushed. He told respondent that it
should indeed rush production because the need for the boxes was urgent.
Thereafter, he asked his partner, Alfred Ong, to cancel the order because it was
already late for them to meet their commitment to ship the bananas to China.[9] On
cross-examination, Que further testified that China Zero Food, the Chinese
company that ordered the bananas, was sending a ship to Davao to get the bananas,
but since there were no cartons, the ship could not proceed. He said that, at that
time, bananas from Tagum Agricultural Development Corporation (TADECO)
were already there. He denied that petitioner made an additional order of 24,000
boxes. He explained that it took three years to refer the matter to counsel because
respondent promised to pay.[10]

For respondent, Bienvenido Estanislao (Estanislao) testified that he met Que

in Davao in October 1998 to inspect the boxes and that the latter got samples of
them. In February 2000, they inspected the boxes again and Que got more
samples. Estanislao said that petitioner did not pick up the boxes because the ship
did not arrive.[11] Jaime Tan (Tan), president of respondent, also testified that his
company finished production of the 36,500 boxes on April 3, 1998 and that
petitioner made a second order of 24,000 boxes. He said that the agreement was for
respondent to produce the boxes and for petitioner to pick them up from the
warehouse.[12] He also said that the reason why petitioner did not pick up the boxes
was that the ship that was to carry the bananas did not arrive. [13] According to him,
during the last visit of Que and Estanislao, he asked them to withdraw the boxes
immediately because they were occupying a big space in his plant, but they,
instead, told him to sell the cartons as rejects. He was able to sell 5,000 boxes
at P20.00 each for a total of P100,000.00. They then told him to apply the said
amount to the unpaid balance.
In its March 2, 2004 Decision, the Regional Trial Court (RTC) ruled that
respondent did not commit any breach of faith that would justify rescission of the
contract and the consequent reimbursement of the amount paid by petitioner. The
RTC said that respondent was able to produce the ordered boxes but petitioner
failed to obtain possession thereof because its ship did not arrive. It thus dismissed
the complaint and respondents counterclaims, disposing as follows:

WHEREFORE, premises considered, judgment is hereby rendered in

favor of defendant and against the plaintiff and, accordingly, plaintiffs
 complaint is hereby ordered DISMISSED without pronouncement as to
cost. Defendants counterclaims are similarly dismissed for lack of merit.
SO ORDERED.[14]

Petitioner filed a notice of appeal with the CA.

On September 21, 2006, the CA denied the appeal for lack of merit. [15] The
appellate court held that petitioner failed to discharge its burden of proving what it
claimed to be the parties agreement with respect to the delivery of the boxes.
According to the CA, it was unthinkable that, over a period of more than two
years, petitioner did not even demand for the delivery of the boxes. The CA added
that even assuming that the agreement was for respondent to deliver the boxes,
respondent would not be liable for breach of contract as petitioner had not yet
demanded from it the delivery of the boxes.[16]
Petitioner moved for reconsideration,[17] but the motion was denied by the CA in its
Resolution of February 23, 2007.[18]
In this petition, petitioner insists that respondent did not completely manufacture
the boxes and that it was respondent which was obliged to deliver the boxes to
TADECO.
We find no reversible error in the assailed Decision that would justify the grant of
this petition.
Petitioners claim for reimbursement is actually one for rescission (or resolution) of
contract under Article 1191 of the Civil Code, which reads:
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.
 The right to rescind a contract arises once the other party defaults in the
performance of his obligation. In determining when default occurs, Art. 1191
should be taken in conjunction with Art. 1169 of the same law, which provides:

Art. 1169. Those obliged to deliver or to do something incur in delay

from the time the obligee judicially or extrajudicially demands from
them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that
delay may exist:

(1) When the obligation or the law expressly so declares; or

(2) When from the nature and the circumstances of the

obligation it appears that the designation of the time when the
thing is to be delivered or the service is to be rendered was a
controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has

rendered it beyond his power to perform.
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.

In reciprocal obligations, as in a contract of sale, the general rule is that the

fulfillment of the parties respective obligations should be simultaneous. Hence, no
demand is generally necessary because, once a party fulfills his obligation and the
other party does not fulfill his, the latter automatically incurs in delay. But when
different dates for performance of the obligations are fixed, the default for each
obligation must be determined by the rules given in the first paragraph of the
present article,[19] that is, the other party would incur in delay only from the
moment the other party demands fulfillment of the formers obligation. Thus, even
in reciprocal obligations, if the period for the fulfillment of the obligation is fixed,
demand upon the obligee is still necessary before the obligor can be considered in
default and before a cause of action for rescission will accrue.
Evident from the records and even from the allegations in the complaint was the
lack of demand by petitioner upon respondent to fulfill its obligation to
manufacture and deliver the boxes. The Complaint only alleged that petitioner
made a follow-up upon respondent, which, however, would not qualify as a
demand for the fulfillment of the obligation. Petitioners witness also testified that
they made a follow-up of the boxes, but not a demand. Note is taken of the fact
that, with respect to their claim for reimbursement, the Complaint alleged and the
witness testified that a demand letter was sent to respondent. Without a previous
demand for the fulfillment of the obligation, petitioner would not have a cause of
action for rescission against respondent as the latter would not yet be considered in
breach of its contractual obligation.
Even assuming that a demand had been previously made before filing the present
case, petitioners claim for reimbursement would still fail, as the circumstances
would show that respondent was not guilty of breach of contract.
The existence of a breach of contract is a factual matter not usually reviewed in a
petition for review under Rule 45.[20] The Court, in petitions for review, limits its
inquiry only to questions of law. After all, it is not a trier of facts, and findings of
fact made by the trial court, especially when reiterated by the CA, must be given
great respect if not considered as final. [21] In dealing with this petition, we will not
veer away from this doctrine and will thus sustain the factual findings of the CA,
which we find to be adequately supported by the evidence on record.

As correctly observed by the CA, aside from the pictures of the finished boxes and
the production report thereof, there is ample showing that the boxes had already
been manufactured by respondent. There is the testimony of Estanislao who
accompanied Que to the factory, attesting that, during their first visit to the
company, they saw the pile of petitioners boxes and Que took samples
thereof. Que, petitioners witness, himself confirmed this incident. He testified that
Tan pointed the boxes to him and that he got a sample and saw that it was
blank. Ques absolute assertion that the boxes were not manufactured is, therefore,
implausible and suspicious.

In fact, we note that respondents counsel manifested in court, during trial, that his
client was willing to shoulder expenses for a representative of the court to visit the
plant and see the boxes.[22]Had it been true that the boxes were not yet completed,
respondent would not have been so bold as to challenge the court to conduct an
ocular inspection of their warehouse. Even in its Comment to this petition,
respondent prays that petitioner be ordered to remove the boxes from its factory
site,[23] which could only mean that the boxes are, up to the present, still in
respondents premises.

We also believe that the agreement between the parties was for petitioner to pick
up the boxes from respondents warehouse, contrary to petitioners allegation. Thus,
it was due to petitioners fault that the boxes were not delivered to TADECO.

Petitioner had the burden to prove that the agreement was, in fact, for respondent
to deliver the boxes within 30 days from payment, as alleged in the Complaint. Its
sole witness, Que, was not even competent to testify on the terms of the agreement
and, therefore, we cannot give much credence to his testimony. It appeared from
the testimony of Que that he did not personally place the order with Tan, thus:

Q. No, my question is, you went to Davao City and placed your order
there?
A. I made a phone call.

Q. You made a phone call to Mr. Tan?

A. The first time, the first call to Mr. Alf[re]d Ong. Alfred Ong has a
contact with Mr. Tan.

Q. So, your first statement that you were the one who placed the order is
not true?
A. Thats true. The Solar Harvest made a contact with Mr. Tan and I
deposited the money in the bank.

Q. You said a while ago [t]hat you were the one who called Mr. Tan and
placed the order for 36,500 boxes, isnt it?
A. First time it was Mr. Alfred Ong.

Q. It was Mr. Ong who placed the order[,] not you?

A. Yes, sir.[24]

Q. Is it not a fact that the cartons were ordered through Mr. Bienvenido
Estanislao?
A. Yes, sir.[25]

Moreover, assuming that respondent was obliged to deliver the boxes, it

could not have complied with such obligation. Que, insisting that the boxes had not
been manufactured, admitted that he did not give respondent the authority to
deliver the boxes to TADECO:

Q. Did you give authority to Mr. Tan to deliver these boxes to

TADECO?
A. No, sir. As I have said, before the delivery, we must have to check the
carton, the quantity and quality. But I have not seen a single
carton.

Q. Are you trying to impress upon the [c]ourt that it is only after the
boxes are completed, will you give authority to Mr. Tan to deliver
the boxes to TADECO[?]
A. Sir, because when I checked the plant, I have not seen any carton. I
asked Mr. Tan to rush the carton but not[26]

Q. Did you give any authority for Mr. Tan to deliver these boxes to
TADECO?
A. Because I have not seen any of my carton.

Q. You dont have any authority yet given to Mr. Tan?

A. None, your Honor.[27]

Surely, without such authority, TADECO would not have allowed respondent to
deposit the boxes within its premises.

In sum, the Court finds that petitioner failed to establish a cause of action for
rescission, the evidence having shown that respondent did not commit any breach
of its contractual obligation. As previously stated, the subject boxes are still within
respondents premises. To put a rest to this dispute, we therefore relieve respondent
from the burden of having to keep the boxes within its premises and, consequently,
give it the right to dispose of them, after petitioner is given a period of time within
which to remove them from the premises.

WHEREFORE, premises considered, the petition is DENIED. The Court of

Appeals Decision dated September 21, 2006 and Resolution dated February 23,
2007 are AFFIRMED. In addition, petitioner is given a period
of 30 days from notice within which to cause the removal of the 36,500
boxes from respondents warehouse. After the lapse of said period and petitioner
fails to effect such removal, respondent shall have the right to dispose of the boxes
in any manner it may deem fit.

SO ORDERED.

CATHAY PACIFIC AIRWAYS, LTD., petitioner, vs. SPOUSES DANIEL

VAZQUEZ and MARIA LUISA MADRIGAL
VAZQUEZ, respondents.
 DECISION

DAVIDE, JR., C.J.:

Is an involuntary upgrading of an airline passengers accommodation from

one class to a more superior class at no extra cost a breach of contract of
carriage that would entitle the passenger to an award of damages? This is a
novel question that has to be resolved in this case.

The facts in this case, as found by the Court of Appeals and adopted by
petitioner Cathay Pacific Airways, Ltd., (hereinafter Cathay) are as follows:

Cathay is a common carrier engaged in the business of transporting

passengers and goods by air. Among the many routes it services is the
Manila-Hongkong-Manila course. As part of its marketing strategy, Cathay
accords its frequent flyers membership in its Marco Polo Club. The members
enjoy several privileges, such as priority for upgrading of booking without any
extra charge whenever an opportunity arises. Thus, a frequent flyer booked in
the Business Class has priority for upgrading to First Class if the Business
Class Section is fully booked.

Respondents-spouses Dr. Daniel Earnshaw Vazquez and Maria Luisa

Madrigal Vazquez are frequent flyers of Cathay and are Gold Card members
of its Marco Polo Club. On 24 September 1996, the Vazquezes, together with
their maid and two friends Pacita Cruz and Josefina Vergel de Dios, went to
Hongkong for pleasure and business.

For their return flight to Manila on 28 September 1996, they were booked
on Cathays Flight CX-905, with departure time at 9:20 p.m. Two hours before
their time of departure, the Vazquezes and their companions checked in their
luggage at Cathays check-in counter at Kai Tak Airport and were given their
respective boarding passes, to wit, Business Class boarding passes for the
Vazquezes and their two friends, and Economy Class for their maid. They
then proceeded to the Business Class passenger lounge.

When boarding time was announced, the Vazquezes and their two friends
went to Departure Gate No. 28, which was designated for Business Class
passengers. Dr. Vazquez presented his boarding pass to the ground
stewardess, who in turn inserted it into an electronic machine reader or
computer at the gate. The ground stewardess was assisted by a ground
attendant by the name of Clara Lai Han Chiu.When Ms. Chiu glanced at the
computer monitor, she saw a message that there was a seat change from
Business Class to First Class for the Vazquezes.

Ms. Chiu approached Dr. Vazquez and told him that the Vazquezes
accommodations were upgraded to First Class. Dr. Vazquez refused the
upgrade, reasoning that it would not look nice for them as hosts to travel in
First Class and their guests, in the Business Class; and moreover, they were
going to discuss business matters during the flight. He also told Ms. Chiu that
she could have other passengers instead transferred to the First Class
Section. Taken aback by the refusal for upgrading, Ms. Chiu consulted her
supervisor, who told her to handle the situation and convince the Vazquezes
to accept the upgrading.Ms. Chiu informed the latter that the Business Class
was fully booked, and that since they were Marco Polo Club members they
had the priority to be upgraded to the First Class. Dr. Vazquez continued to
refuse, so Ms. Chiu told them that if they would not avail themselves of the
privilege, they would not be allowed to take the flight. Eventually, after talking
to his two friends, Dr. Vazquez gave in. He and Mrs. Vazquez then proceeded
to the First Class Cabin.

Upon their return to Manila, the Vazquezes, in a letter of 2 October 1996

addressed to Cathays Country Manager, demanded that they be indemnified
in the amount of P1million for the humiliation and embarrassment caused by
its employees. They also demanded a written apology from the management
of Cathay, preferably a responsible person with a rank of no less than the
Country Manager, as well as the apology from Ms. Chiu within fifteen days
from receipt of the letter.

In his reply of 14 October 1996, Mr. Larry Yuen, the assistant to Cathays
Country Manager Argus Guy Robson, informed the Vazquezes that Cathay
would investigate the incident and get back to them within a weeks time.

On 8 November 1996, after Cathays failure to give them any feedback

within its self-imposed deadline, the Vazquezes instituted before the Regional
Trial Court of Makati City an action for damages against Cathay, praying for
the payment to each of them the amounts of P250,000 as temperate
damages; P500,000 as moral damages; P500,000 as exemplary or corrective
damages; and P250,000 as attorneys fees.

In their complaint, the Vazquezes alleged that when they informed Ms.
Chiu that they preferred to stay in Business Class, Ms. Chiu obstinately,
uncompromisingly and in a loud, discourteous and harsh voice threatened that
they could not board and leave with the flight unless they go to First Class,
since the Business Class was overbooked. Ms. Chius loud and stringent
shouting annoyed, embarrassed, and humiliated them because the incident
was witnessed by all the other passengers waiting for boarding. They also
claimed that they were unjustifiably delayed to board the plane, and when
they were finally permitted to get into the aircraft, the forward storage
compartment was already full. A flight stewardess instructed Dr. Vazquez to
put his roll-on luggage in the overhead storage compartment. Because he was
not assisted by any of the crew in putting up his luggage, his bilateral carpal
tunnel syndrome was aggravated, causing him extreme pain on his arm and
wrist. The Vazquezes also averred that they belong to the uppermost and
absolutely top elite of both Philippine Society and the Philippine financial
community, [and that] they were among the wealthiest persons in the
Philippine[s].

In its answer, Cathay alleged that it is a practice among commercial

airlines to upgrade passengers to the next better class of accommodation,
whenever an opportunity arises, such as when a certain section is fully
booked. Priority in upgrading is given to its frequent flyers, who are
considered favored passengers like the Vazquezes. Thus, when the Business
Class Section of Flight CX-905 was fully booked, Cathays computer sorted
out the names of favored passengers for involuntary upgrading to First Class.
When Ms. Chiu informed the Vazquezes that they were upgraded to First
Class, Dr. Vazquez refused. He then stood at the entrance of the boarding
apron, blocking the queue of passengers from boarding the plane, which
inconvenienced other passengers. He shouted that it was impossible for him
and his wife to be upgraded without his two friends who were traveling with
them. Because of Dr. Vazquezs outburst, Ms. Chiu thought of upgrading the
traveling companions of the Vazquezes. But when she checked the computer,
she learned that the Vazquezes companions did not have priority for
upgrading. She then tried to book the Vazquezes again to their original seats.
However, since the Business Class Section was already fully booked, she
politely informed Dr. Vazquez of such fact and explained that the upgrading
was in recognition of their status as Cathays valued passengers. Finally, after
talking to their guests, the Vazquezes eventually decided to take the First
Class accommodation.

Cathay also asserted that its employees at the Hong Kong airport acted in
good faith in dealing with the Vazquezes; none of them shouted, humiliated,
embarrassed, or committed any act of disrespect against them (the
Vazquezes). Assuming that there was indeed a breach of contractual
obligation, Cathay acted in good faith, which negates any basis for their claim
for temperate, moral, and exemplary damages and attorneys fees. Hence, it
prayed for the dismissal of the complaint and for payment of P100,000 for
exemplary damages and P300,000 as attorneys fees and litigation expenses.

During the trial, Dr. Vazquez testified to support the allegations in the
complaint. His testimony was corroborated by his two friends who were with
him at the time of the incident, namely, Pacita G. Cruz and Josefina Vergel de
Dios.

For its part, Cathay presented documentary evidence and the testimonies
of Mr. Yuen; Ms. Chiu; Norma Barrientos, Comptroller of its retained counsel;
and Mr. Robson. Yuen and Robson testified on Cathays policy of upgrading
the seat accommodation of its Marco Polo Club members when an
opportunity arises. The upgrading of the Vazquezes to First Class was done in
good faith; in fact, the First Class Section is definitely much better than the
Business Class in terms of comfort, quality of food, and service from the cabin
crew. They also testified that overbooking is a widely accepted practice in the
airline industry and is in accordance with the International Air Transport
Association (IATA) regulations. Airlines overbook because a lot of passengers
do not show up for their flight. With respect to Flight CX-905, there was no
overall overbooking to a degree that a passenger was bumped off or
downgraded. Yuen and Robson also stated that the demand letter of the
Vazquezes was immediately acted upon. Reports were gathered from their
office in Hong Kong and immediately forwarded to their counsel Atty. Remollo
for legal advice. However, Atty. Remollo begged off because his services were
likewise retained by the Vazquezes; nonetheless, he undertook to solve the
problem in behalf of Cathay. But nothing happened until Cathay received a
copy of the complaint in this case. For her part, Ms. Chiu denied that she
shouted or used foul or impolite language against the Vazquezes. Ms.
Barrientos testified on the amount of attorneys fees and other litigation
expenses, such as those for the taking of the depositions of Yuen and Chiu.

In its decision of 19 October 1998, the trial court found for the Vazquezes
[1]

and decreed as follows:

WHEREFORE, finding preponderance of evidence to sustain the instant complaint,

judgment is hereby rendered in favor of plaintiffs Vazquez spouses and against
defendant Cathay Pacific Airways, Ltd., ordering the latter to pay each plaintiff the
following:

a) Nominal damages in the amount of P100,000.00 for each plaintiff;

b) Moral damages in the amount of P2,000,000.00 for each plaintiff;

c) Exemplary damages in the amount of P5,000,000.00 for each plaintiff;

d) Attorneys fees and expenses of litigation in the amount

of P1,000,000.00 for each plaintiff; and

e) Costs of suit.

SO ORDERED.

According to the trial court, Cathay offers various classes of seats from
which passengers are allowed to choose regardless of their reasons or
motives, whether it be due to budgetary constraints or whim.The choice
imposes a clear obligation on Cathay to transport the passengers in the class
chosen by them. The carrier cannot, without exposing itself to liability, force a
passenger to involuntarily change his choice. The upgrading of the Vazquezes
accommodation over and above their vehement objections was due to the
overbooking of the Business Class. It was a pretext to pack as many
passengers as possible into the plane to maximize Cathays
revenues. Cathays actuations in this case displayed deceit, gross negligence,
and bad faith, which entitled the Vazquezes to awards for damages.

On appeal by the petitioners, the Court of Appeals, in its decision of 24

July 2001, deleted the award for exemplary damages; and it reduced the
[2]

awards for moral and nominal damages for each of the Vazquezes
to P250,000 and P50,000, respectively, and the attorneys fees and litigation
expenses to P50,000 for both of them.

The Court of Appeals ratiocinated that by upgrading the Vazquezes to First

Class, Cathay novated the contract of carriage without the formers consent.
There was a breach of contract not because Cathay overbooked the Business
Class Section of Flight CX-905 but because the latter pushed through with the
upgrading despite the objections of the Vazquezes.

However, the Court of Appeals was not convinced that Ms. Chiu shouted
at, or meant to be discourteous to, Dr. Vazquez, although it might seemed that
way to the latter, who was a member of the elite in Philippine society and was
not therefore used to being harangued by anybody. Ms. Chiu was a Hong
Kong Chinese whose fractured Chinese was difficult to understand and whose
manner of speaking might sound harsh or shrill to Filipinos because of cultural
differences. But the Court of Appeals did not find her to have acted with
deliberate malice, deceit, gross negligence, or bad faith. If at all, she was
negligent in not offering the First Class accommodations to other
passengers. Neither can the flight stewardess in the First Class Cabin be said
to have been in bad faith when she failed to assist Dr. Vazquez in lifting his
baggage into the overhead storage bin. There is no proof that he asked for
help and was refused even after saying that he was suffering from bilateral
carpal tunnel syndrome. Anent the delay of Yuen in responding to the demand
letter of the Vazquezes, the Court of Appeals found it to have been sufficiently
explained.

The Vazquezes and Cathay separately filed motions for a reconsideration

of the decision, both of which were denied by the Court of Appeals.

Cathay seasonably filed with us this petition in this case. Cathay maintains
that the award for moral damages has no basis, since the Court of Appeals
found that there was no wanton, fraudulent, reckless and oppressive display
of manners on the part of its personnel; and that the breach of contract was
not attended by fraud, malice, or bad faith. If any damage had been suffered
by the Vazquezes, it was damnum absque injuria, which is damage without
injury, damage or injury inflicted without injustice, loss or damage without
violation of a legal right, or a wrong done to a man for which the law provides
no remedy. Cathay also invokes our decision in United Airlines, Inc. v. Court of
Appeals where we recognized that, in accordance with the Civil Aeronautics
[3]

Boards Economic Regulation No. 7, as amended, an overbooking that does

not exceed ten percent cannot be considered deliberate and done in bad faith.
We thus deleted in that case the awards for moral and exemplary damages,
as well as attorneys fees, for lack of proof of overbooking exceeding ten
percent or of bad faith on the part of the airline carrier.

On the other hand, the Vazquezes assert that the Court of Appeals was
correct in granting awards for moral and nominal damages and attorneys fees
in view of the breach of contract committed by Cathay for transferring them
from the Business Class to First Class Section without prior notice or consent
and over their vigorous objection. They likewise argue that the issuance of
passenger tickets more than the seating capacity of each section of the plane
is in itself fraudulent, malicious and tainted with bad faith.

The key issues for our consideration are whether (1) by upgrading the seat
accommodation of the Vazquezes from Business Class to First Class Cathay
breached its contract of carriage with the Vazquezes; (2) the upgrading was
tainted with fraud or bad faith; and (3) the Vazquezes are entitled to damages.

We resolve the first issue in the affirmative.

A contract is a meeting of minds between two persons whereby one

agrees to give something or render some service to another for a
consideration. There is no contract unless the following requisites concur: (1)
consent of the contracting parties; (2) an object certain which is the subject of
the contract; and (3) the cause of the obligation which is established.
Undoubtedly, a contract of carriage existed between Cathay and the
[4]

Vazquezes. They voluntarily and freely gave their consent to an agreement

whose object was the transportation of the Vazquezes from Manila to Hong
Kong and back to Manila, with seats in the Business Class Section of the
aircraft, and whose cause or consideration was the fare paid by the
Vazquezes to Cathay.

The only problem is the legal effect of the upgrading of the seat
accommodation of the Vazquezes. Did it constitute a breach of contract?

Breach of contract is defined as the failure without legal reason to comply

with the terms of a contract. It is also defined as the [f]ailure, without legal
[5]

excuse, to perform any promise which forms the whole or part of the contract. [6]

In previous cases, the breach of contract of carriage consisted in either the

bumping off of a passenger with confirmed reservation or the downgrading of
a passengers seat accommodation from one class to a lower class. In this
case, what happened was the reverse. The contract between the parties was
for Cathay to transport the Vazquezes to Manila on a Business Class
accommodation in Flight CX-905.After checking-in their luggage at the Kai Tak
Airport in Hong Kong, the Vazquezes were given boarding cards indicating
their seat assignments in the Business Class Section. However, during the
boarding time, when the Vazquezes presented their boarding passes, they
were informed that they had a seat change from Business Class to First
Class. It turned out that the Business Class was overbooked in that there
were more passengers than the number of seats. Thus, the seat assignments
of the Vazquezes were given to waitlisted passengers, and the Vazquezes,
being members of the Marco Polo Club, were upgraded from Business Class
to First Class.

We note that in all their pleadings, the Vazquezes never denied that they
were members of Cathays Marco Polo Club. They knew that as members of
the Club, they had priority for upgrading of their seat accommodation at no
extra cost when an opportunity arises. But, just like other privileges, such
priority could be waived. The Vazquezes should have been consulted first
whether they wanted to avail themselves of the privilege or would consent to a
change of seat accommodation before their seat assignments were given to
other passengers. Normally, one would appreciate and accept an upgrading,
for it would mean a better accommodation. But, whatever their reason was
and however odd it might be, the Vazquezes had every right to decline the
upgrade and insist on the Business Class accommodation they had booked
for and which was designated in their boarding passes. They clearly waived
their priority or preference when they asked that other passengers be given
the upgrade. It should not have been imposed on them over their vehement
objection. By insisting on the upgrade, Cathay breached its contract of
carriage with the Vazquezes.

We are not, however, convinced that the upgrading or the breach of

contract was attended by fraud or bad faith. Thus, we resolve the second
issue in the negative.

Bad faith and fraud are allegations of fact that demand clear and
convincing proof. They are serious accusations that can be so conveniently
and casually invoked, and that is why they are never presumed. They amount
to mere slogans or mudslinging unless convincingly substantiated by whoever
is alleging them.

Fraud has been defined to include an inducement through insidious

machination. Insidious machination refers to a deceitful scheme or plot with an
evil or devious purpose. Deceit exists where the party, with intent to deceive,
conceals or omits to state material facts and, by reason of such omission or
concealment, the other party was induced to give consent that would not
otherwise have been given. [7]

Bad faith does not simply connote bad judgment or negligence; it imports
a dishonest purpose or some moral obliquity and conscious doing of a wrong,
a breach of a known duty through some motive or interest or ill will that
partakes of the nature of fraud. [8]

We find no persuasive proof of fraud or bad faith in this case. The

Vazquezes were not induced to agree to the upgrading through insidious
words or deceitful machination or through willful concealment of material facts.
Upon boarding, Ms. Chiu told the Vazquezes that their accommodations were
upgraded to First Class in view of their being Gold Card members of Cathays
Marco Polo Club. She was honest in telling them that their seats were already
given to other passengers and the Business Class Section was fully
booked. Ms. Chiu might have failed to consider the remedy of offering the First
Class seats to other passengers. But, we find no bad faith in her failure to do
so, even if that amounted to an exercise of poor judgment.

Neither was the transfer of the Vazquezes effected for some evil or
devious purpose. As testified to by Mr. Robson, the First Class Section is
better than the Business Class Section in terms of comfort, quality of food,
and service from the cabin crew; thus, the difference in fare between the First
Class and Business Class at that time was $250. Needless to state, an
[9]

upgrading is for the better condition and, definitely, for the benefit of the
passenger.

We are not persuaded by the Vazquezes argument that the overbooking of

the Business Class Section constituted bad faith on the part of Cathay.
Section 3 of the Economic Regulation No. 7 of the Civil Aeronautics Board, as
amended, provides:

Sec 3. Scope. This regulation shall apply to every Philippine and foreign air carrier
with respect to its operation of flights or portions of flights originating from or
terminating at, or serving a point within the territory of the Republic of the Philippines
insofar as it denies boarding to a passenger on a flight, or portion of a flight inside or
outside the Philippines, for which he holds confirmed reserved space. Furthermore,
this Regulation is designed to cover only honest mistakes on the part of the carriers
and excludes deliberate and willful acts of non-accommodation. Provided, however,
that overbooking not exceeding 10% of the seating capacity of the aircraft shall not be
considered as a deliberate and willful act of non-accommodation.

It is clear from this section that an overbooking that does not exceed ten
percent is not considered deliberate and therefore does not amount to bad
faith. Here, while there was admittedly an overbooking of the Business
[10]

Class, there was no evidence of overbooking of the plane beyond ten percent,
and no passenger was ever bumped off or was refused to board the aircraft.

Now we come to the third issue on damages.

The Court of Appeals awarded each of the Vazquezes moral damages in

the amount of P250,000. Article 2220 of the Civil Code provides:
Article 2220. Willful injury to property may be a legal ground for awarding moral
damages if the court should find that, under the circumstances, such damages are
justly due. The same rule applies to breaches of contract where the defendant acted
fraudulently or in bad faith.

Moral damages include physical suffering, mental anguish, fright, serious

anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury. Although incapable of pecuniary computation,
moral damages may be recovered if they are the proximate result of the
defendants wrongful act or omission. Thus, case law establishes the
[11]

following requisites for the award of moral damages: (1) there must be an
injury clearly sustained by the claimant, whether physical, mental or
psychological; (2) there must be a culpable act or omission factually
established; (3) the wrongful act or omission of the defendant is the proximate
cause of the injury sustained by the claimant; and (4) the award for damages
is predicated on any of the cases stated in Article 2219 of the Civil Code. [12]

Moral damages predicated upon a breach of contract of carriage may only

be recoverable in instances where the carrier is guilty of fraud or bad faith or
where the mishap resulted in the death of a passenger. Where in breaching
[13]

the contract of carriage the airline is not shown to have acted fraudulently or in
bad faith, liability for damages is limited to the natural and probable
consequences of the breach of the obligation which the parties had foreseen
or could have reasonably foreseen. In such a case the liability does not
include moral and exemplary damages. [14]

In this case, we have ruled that the breach of contract of carriage, which
consisted in the involuntary upgrading of the Vazquezes seat accommodation,
was not attended by fraud or bad faith. The Court of Appeals award of moral
damages has, therefore, no leg to stand on.

The deletion of the award for exemplary damages by the Court of Appeals
is correct. It is a requisite in the grant of exemplary damages that the act of
the offender must be accompanied by bad faith or done in wanton, fraudulent
or malevolent manner. Such requisite is absent in this case. Moreover, to be
[15]

entitled thereto the claimant must first establish his right to moral, temperate,
or compensatory damages. Since the Vazquezes are not entitled to any of
[16]
these damages, the award for exemplary damages has no legal basis. And
where the awards for moral and exemplary damages are eliminated, so must
the award for attorneys fees. [17]

The most that can be adjudged in favor of the Vazquezes for Cathays
breach of contract is an award for nominal damages under Article 2221 of the
Civil Code, which reads as follows:

Article 2221 of the Civil Code provides:

Article 2221. Nominal damages are adjudicated in order that a right of the plaintiff,
which has been violated or invaded by the defendant, may be vindicated or
recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered
by him.

Worth noting is the fact that in Cathays Memorandum filed with this Court,
it prayed only for the deletion of the award for moral damages. It deferred to
the Court of Appeals discretion in awarding nominal damages; thus:

As far as the award of nominal damages is concerned, petitioner respectfully defers to

the Honorable Court of Appeals discretion. Aware as it is that somehow, due to the
resistance of respondents-spouses to the normally-appreciated gesture of petitioner to
upgrade their accommodations, petitioner may have disturbed the respondents-
spouses wish to be with their companions (who traveled to Hong Kong with them) at
the Business Class on their flight to Manila. Petitioner regrets that in its desire to
provide the respondents-spouses with additional amenities for the one and one-half (1
1/2) hour flight to Manila, unintended tension ensued.[18]

Nonetheless, considering that the breach was intended to give more benefit
and advantage to the Vazquezes by upgrading their Business Class
accommodation to First Class because of their valued status as Marco Polo
members, we reduce the award for nominal damages to P5,000.

Before writing finis to this decision, we find it well-worth to quote the apt
observation of the Court of Appeals regarding the awards adjudged by the trial
court:
 We are not amused but alarmed at the lower courts unbelievable alacrity, bordering
on the scandalous, to award excessive amounts as damages. In their complaint,
appellees asked for P1 million as moral damages but the lower court awarded P4
million; they asked for P500,000.00 as exemplary damages but the lower court
cavalierly awarded a whooping P10 million; they asked for P250,000.00 as attorneys
fees but were awarded P2 million; they did not ask for nominal damages but were
awarded P200,000.00. It is as if the lower court went on a rampage, and why it acted
that way is beyond all tests of reason. In fact the excessiveness of the total award
invites the suspicion that it was the result of prejudice or corruption on the part of the
trial court.

The presiding judge of the lower court is enjoined to hearken to the Supreme Courts
admonition in Singson vs. CA (282 SCRA 149 [1997]), where it said:

The well-entrenched principle is that the grant of moral damages depends upon the
discretion of the court based on the circumstances of each case. This discretion is
limited by the principle that the amount awarded should not be palpably and
scandalously excessive as to indicate that it was the result of prejudice or corruption
on the part of the trial court.

and in Alitalia Airways vs. CA (187 SCRA 763 [1990], where it was held:

Nonetheless, we agree with the injunction expressed by the Court of Appeals that
passengers must not prey on international airlines for damage awards, like trophies in
a safari. After all neither the social standing nor prestige of the passenger should
determine the extent to which he would suffer because of a wrong done, since the
dignity affronted in the individual is a quality inherent in him and not conferred by
these social indicators.[19]

We adopt as our own this observation of the Court of Appeals.

WHEREFORE, the instant petition is hereby partly GRANTED. The

Decision of the Court of Appeals of 24 July 2001 in CA-G.R. CV No. 63339 is
hereby MODIFIED, and as modified, the awards for moral damages and
attorneys fees are set aside and deleted, and the award for nominal damages
is reduced to P5,000.

No pronouncement on costs.
 SO ORDERED.

MANILA ELECTRIC COMPANY, Petitioner,

vs.
MATILDE MACABAGDAL RAMOY, BIENVENIDO RAMOY, ROMANA RAMOY-RAMOS,
ROSEMARIE RAMOY, OFELIA DURIAN and CYRENE PANADO, Respondents.

DECISION

AUSTRIA-MARTINEZ, J.:
This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court, praying that
the Decision1of the Court of Appeals (CA) dated December 16, 2002, ordering petitioner Manila
Electric Company (MERALCO) to pay Leoncio Ramoy2 moral and exemplary damages and
attorney's fees, and the CA Resolution3 dated July 1, 2003, denying petitioner's motion for
reconsideration, be reversed and set aside.

The Regional Trial Court (RTC) of Quezon City, Branch 81, accurately summarized the facts as
culled from the records, thus:

The evidence on record has established that in the year 1987 the National Power Corporation (NPC)
filed with the MTC Quezon City a case for ejectment against several persons allegedly illegally
occupying its properties in Baesa, Quezon City. Among the defendants in the ejectment case was
Leoncio Ramoy, one of the plaintiffs in the case at bar. On April 28, 1989 after the defendants failed
to file an answer in spite of summons duly served, the MTC Branch 36, Quezon City rendered
judgment for the plaintiff [MERALCO] and "ordering the defendants to demolish or remove the
building and structures they built on the land of the plaintiff and to vacate the premises." In the case
of Leoncio Ramoy, the Court found that he was occupying a portion of Lot No. 72-B-2-B with the
exact location of his apartments indicated and encircled in the location map as No. 7. A copy of the
decision was furnished Leoncio Ramoy (Exhibits 2, 2-A, 2-B, 2-C, pp. 128-131, Record; TSN, July 2,
1993, p. 5).

On June 20, 1990 NPC wrote Meralco requesting for the "immediate disconnection of electric power
supply to all residential and commercial establishments beneath the NPC transmission lines along
Baesa, Quezon City (Exh. 7, p. 143, Record). Attached to the letter was a list of establishments
affected which included plaintiffs Leoncio and Matilde Ramoy (Exh. 9), as well as a copy of the court
decision (Exh. 2). After deliberating on NPC's letter, Meralco decided to comply with NPC's request
(Exhibits 6, 6-A, 6-A-1, 6-B) and thereupon issued notices of disconnection to all establishments
affected including plaintiffs Leoncio Ramoy (Exhs. 3, 3-A to 3-C), Matilde Ramoy/Matilde
Macabagdal (Exhibits 3-D to 3-E), Rosemarie Ramoy (Exh. 3-F), Ofelia Durian (Exh. 3-G), Jose
Valiza (Exh. 3-H) and Cyrene S. Panado (Exh. 3-I).

In a letter dated August 17, 1990 Meralco requested NPC for a joint survey to determine all the
establishments which are considered under NPC property in view of the fact that "the houses in the
area are very close to each other" (Exh. 12). Shortly thereafter, a joint survey was conducted and the
NPC personnel pointed out the electric meters to be disconnected (Exh. 13; TSN, October 8, 1993,
p. 7; TSN, July 1994, p. 8).

In due time, the electric service connection of the plaintiffs [herein respondents] was disconnected
(Exhibits D to G, with submarkings, pp. 86-87, Record).

Plaintiff Leoncio Ramoy testified that he and his wife are the registered owners of a parcel of land
covered by TCT No. 326346, a portion of which was occupied by plaintiffs Rosemarie Ramoy, Ofelia
Durian, Jose Valiza and Cyrene S. Panado as lessees. When the Meralco employees were
disconnecting plaintiffs' power connection, plaintiff Leoncio Ramoy objected by informing the
Meralco foreman that his property was outside the NPC property and pointing out the monuments
showing the boundaries of his property. However, he was threatened and told not to interfere by the
armed men who accompanied the Meralco employees. After the electric power in Ramoy's
apartment was cut off, the plaintiffs-lessees left the premises.

During the ocular inspection ordered by the Court and attended by the parties, it was found out that
the residence of plaintiffs-spouses Leoncio and Matilde Ramoy was indeed outside the NPC
property. This was confirmed by defendant's witness R.P. Monsale III on cross-examination (TSN,
October 13, 1993, pp. 10 and 11). Monsale also admitted that he did not inform his supervisor about
this fact nor did he recommend re-connection of plaintiffs' power supply (Ibid., p. 14).

The record also shows that at the request of NPC, defendant Meralco re-connected the electric
service of four customers previously disconnected none of whom was any of the plaintiffs (Exh. 14). 4

The RTC decided in favor of MERALCO by dismissing herein respondents' claim for moral damages,
exemplary damages and attorney's fees. However, the RTC ordered MERALCO to restore the
electric power supply of respondents.

Respondents then appealed to the CA. In its Decision dated December 16, 2002, the CA faulted
MERALCO for not requiring from National Power Corporation (NPC) a writ of execution or demolition
and in not coordinating with the court sheriff or other proper officer before complying with the NPC's
request. Thus, the CA held MERALCO liable for moral and exemplary damages and attorney's fees.
MERALCO's motion for reconsideration of the Decision was denied per Resolution dated July 1,
2003.

Hence, herein petition for review on certiorari on the following grounds:

THE COURT OF APPEALS GRAVELY ERRED WHEN IT FOUND MERALCO NEGLIGENT WHEN
IT DISCONNECTED THE SUBJECT ELECTRIC SERVICE OF RESPONDENTS.

II

THE COURT OF APPEALS GRAVELY ERRED WHEN IT AWARDED MORAL AND EXEMPLARY
DAMAGES AND ATTORNEY'S FEES AGAINST MERALCO UNDER THE CIRCUMSTANCES THAT
THE LATTER ACTED IN GOOD FAITH IN THE DISCONNECTION OF THE ELECTRIC SERVICES
OF THE RESPONDENTS. 5

The petition is partly meritorious.

MERALCO admits6 that respondents are its customers under a Service Contract whereby it is
obliged to supply respondents with electricity. Nevertheless, upon request of the NPC, MERALCO
disconnected its power supply to respondents on the ground that they were illegally occupying the
NPC's right of way. Under the Service Contract, "[a] customer of electric service must show his right
or proper interest over the property in order that he will be provided with and assured a continuous
electric service."7 MERALCO argues that since there is a Decision of the Metropolitan Trial Court
(MTC) of Quezon City ruling that herein respondents were among the illegal occupants of the NPC's
right of way, MERALCO was justified in cutting off service to respondents.

Clearly, respondents' cause of action against MERALCO is anchored on culpa contractual or breach
of contract for the latter's discontinuance of its service to respondents under Article 1170 of the Civil
Code which provides:

Article 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.

In Radio Communications of the Philippines, Inc. v. Verchez,8 the Court expounded on the nature
of culpa contractual, thus:

"In culpa contractual x x x the mere proof of the existence of the contract and the failure of its
compliance justify, prima facie, a corresponding right of relief. The law, recognizing the
obligatory force of contracts, will not permit a party to be set free from liability for any kind of
misperformance of the contractual undertaking or a contravention of the tenor thereof. A breach
upon the contract confers upon the injured party a valid cause for recovering that which may have
been lost or suffered. The remedy serves to preserve the interests of the promissee that may include
his "expectation interest," which is his interest in having the benefit of his bargain by being put in as
good a position as he would have been in had the contract been performed, or his "reliance interest,"
which is his interest in being reimbursed for loss caused by reliance on the contract by being put in
as good a position as he would have been in had the contract not been made; or his "restitution
interest," which is his interest in having restored to him any benefit that he has conferred on the
other party. Indeed, agreements can accomplish little, either for their makers or for society, unless
they are made the basis for action. The effect of every infraction is to create a new duty, that is, to
make recompense to the one who has been injured by the failure of another to observe his
contractual obligation unless he can show extenuating circumstances, like proof of his exercise of
due diligence x x x or of the attendance of fortuitous event, to excuse him from his ensuing
liability.9 (Emphasis supplied)

Article 1173 also provides that the fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and corresponds with the circumstances of
the persons, of the time and of the place. The Court emphasized in Ridjo Tape & Chemical
Corporation v. Court of Appeals10 that "as a public utility, MERALCO has the obligation to discharge
its functions with utmost care and diligence."11

The Court agrees with the CA that under the factual milieu of the present case, MERALCO failed to
exercise the utmost degree of care and diligence required of it. To repeat, it was not enough for
MERALCO to merely rely on the Decision of the MTC without ascertaining whether it had become
final and executory. Verily, only upon finality of said Decision can it be said with conclusiveness that
respondents have no right or proper interest over the subject property, thus, are not entitled to the
services of MERALCO.

Although MERALCO insists that the MTC Decision is final and executory, it never showed any
documentary evidence to support this allegation. Moreover, if it were true that the decision was final
and executory, the most prudent thing for MERALCO to have done was to coordinate with the proper
court officials in determining which structures are covered by said court order. Likewise, there is no
evidence on record to show that this was done by MERALCO.

The utmost care and diligence required of MERALCO necessitates such great degree of prudence
on its part, and failure to exercise the diligence required means that MERALCO was at fault and
negligent in the performance of its obligation. In Ridjo Tape,12 the Court explained:

[B]eing a public utility vested with vital public interest, MERALCO is impressed with certain
obligations towards its customers and any omission on its part to perform such duties would be
prejudicial to its interest. For in the final analysis, the bottom line is that those who do not exercise
such prudence in the discharge of their duties shall be made to bear the consequences of such
oversight.13

This being so, MERALCO is liable for damages under Article 1170 of the Civil Code.

The next question is: Are respondents entitled to moral and exemplary damages and attorney's
fees?

Article 2220 of the Civil Code provides:

Article 2220. Willful injury to property may be a legal ground for awarding moral damages if the court
should find that, under the circumstances, such damages are justly due. The same rule applies to
breaches of contract where the defendant acted fraudulently or in bad faith.

In the present case, MERALCO wilfully caused injury to Leoncio Ramoy by withholding from him and
his tenants the supply of electricity to which they were entitled under the Service Contract. This is
contrary to public policy because, as discussed above, MERALCO, being a vital public utility, is
expected to exercise utmost care and diligence in the performance of its obligation. It was incumbent
upon MERALCO to do everything within its power to ensure that the improvements built by
respondents are within the NPCs right of way before disconnecting their power supply. The Court
emphasized in Samar II Electric Cooperative, Inc. v. Quijano14 that:

Electricity is a basic necessity the generation and distribution of which is imbued with public interest,
and its provider is a public utility subject to strict regulation by the State in the exercise of police
power. Failure to comply with these regulations will give rise to the presumption of bad faith
or abuse of right.15(Emphasis supplied)

Thus, by analogy, MERALCO's failure to exercise utmost care and diligence in the performance of its
obligation to Leoncio Ramoy, its customer, is tantamount to bad faith. Leoncio Ramoy testified that
he suffered wounded feelings because of MERALCO's actions.16 Furthermore, due to the lack of
power supply, the lessees of his four apartments on subject lot left the premises. 17 Clearly, therefore,
Leoncio Ramoy is entitled to moral damages in the amount awarded by the CA.

Leoncio Ramoy, the lone witness for respondents, was the only one who testified regarding the
effects on him of MERALCO's electric service disconnection. His co-respondents Matilde Ramoy,
Rosemarie Ramoy, Ofelia Durian and Cyrene Panado did not present any evidence of damages they
suffered.

It is a hornbook principle that damages may be awarded only if proven. In Mahinay v. Velasquez,
Jr.,18 the Court held thus:

In order that moral damages may be awarded, there must be pleading and proof of moral
suffering, mental anguish, fright and the like. While respondent alleged in his complaint that he
suffered mental anguish, serious anxiety, wounded feelings and moral shock, he failed to prove them
during the trial. Indeed, respondent should have taken the witness stand and should have
testified on the mental anguish, serious anxiety, wounded feelings and other emotional and mental
suffering he purportedly suffered to sustain his claim for moral damages. Mere allegations do not
suffice; they must be substantiated by clear and convincing proof. No other person could have
proven such damages except the respondent himself as they were extremely personal to him.

In Keirulf vs. Court of Appeals, we held:

"While no proof of pecuniary loss is necessary in order that moral damages may be awarded, the
amount of indemnity being left to the discretion of the court, it is nevertheless essential that the
claimant should satisfactorily show the existence of the factual basis of damages and its causal
connection to defendants acts. This is so because moral damages, though incapable of pecuniary
estimation, 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. In Francisco vs. GSIS, the Court held
that there must be clear testimony on the anguish and other forms of mental suffering. Thus, if
the plaintiff fails to take the witness stand and testify as to his/her social humiliation, wounded
feelings and anxiety, moral damages cannot be awarded. In Cocoland Development Corporation vs.
National Labor Relations Commission, the Court held that "additional facts must be pleaded and
proven to warrant the grant of moral damages under the Civil Code, these being, x x x social
humiliation, wounded feelings, grave anxiety, etc. that resulted therefrom."

x x x The award of moral damages must be anchored to a clear showing that respondent actually
experienced mental anguish, besmirched reputation, sleepless nights, wounded feelings or similar
injury. There was no better witness to this experience than respondent himself. Since respondent
failed to testify on the witness stand, the trial court did not have any factual basis to award
moral damages to him.19 (Emphasis supplied)

Thus, only respondent Leoncio Ramoy, who testified as to his wounded feelings, may be awarded
moral damages.20

With regard to exemplary damages, Article 2232 of the Civil Code provides that in contracts and
quasi-contracts, the court may award exemplary damages if the defendant, in this case MERALCO,
acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner, while Article 2233 of the
same Code provides that such damages cannot be recovered as a matter of right and the
adjudication of the same is within the discretion of the court.
1avvphi1
The Court finds that MERALCO fell short of exercising the due diligence required, but its actions
cannot be considered wanton, fraudulent, reckless, oppressive or malevolent. Records show that
MERALCO did take some measures, i.e., coordinating with NPC officials and conducting a joint
survey of the subject area, to verify which electric meters should be disconnected although these
measures are not sufficient, considering the degree of diligence required of it. Thus, in this case,
exemplary damages should not be awarded.

Since the Court does not deem it proper to award exemplary damages in this case, then the CA's
award for attorney's fees should likewise be deleted, as Article 2208 of the Civil Code states that in
the absence of stipulation, attorney's fees cannot be recovered except in cases provided for in
said Article, to wit:

Article 2208. In the absence of stipulation, attorneys fees and expenses of litigation, other than
judicial costs, cannot be recovered, except:

(1) When exemplary damages are awarded;

(2) When the defendants act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest;

(3) In criminal cases of malicious prosecution against the plaintiff;

(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;

(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiffs plainly valid, just and demandable claim;

(6) In actions for legal support;

(7) In actions for the recovery of wages of household helpers, laborers and skilled workers;

(8) In actions for indemnity under workmens compensation and employers liability laws;

(9) In a separate civil action to recover civil liability arising from a crime;

(10) When at least double judicial costs are awarded;

(11) In any other case where the court deems it just and equitable that attorneys fees and
expenses of litigation should be recovered.

In all cases, the attorneys fees and expenses of litigation must be reasonable.

None of the grounds for recovery of attorney's fees are present.

WHEREFORE, the petition is PARTLY GRANTED. The Decision of the Court of Appeals
is AFFIRMED with MODIFICATION. The award for exemplary damages and attorney's fees
is DELETED.

No costs.

SO ORDERED.

G.R. No. 95641 September 22, 1994

SANTOS B. AREOLA and LYDIA D. AREOLA, petitioners-appellants,

vs.
COURT OF APPEALS and PRUDENTIAL GUARANTEE AND ASSURANCE, INC., respondents-
appellees.

Gutierrez, Cortes & Gonzales for petitioners.

Bengzon, Bengzon, Baraan & Fernandez Law Offices for private respondent.

ROMERO, J.:

On June 29, 1985, seven months after the issuance of petitioner Santos Areola's Personal Accident
Insurance Policy No. PA-20015, respondent insurance company unilaterally cancelled the same
since company records revealed that petitioner-insured failed to pay his premiums.

On August 3, 1985, respondent insurance company offered to reinstate same policy it had previously
cancelled and even proposed to extend its lifetime to December 17, 1985, upon a finding that the
cancellation was erroneous and that the premiums were paid in full by petitioner-insured but were
not remitted by Teofilo M. Malapit, respondent insurance company's branch manager.
These, in brief, are the material facts that gave rise to the action for damages due to breach of
contract instituted by petitioner-insured before
Branch 40 RTC, Dagupan City against respondent insurance company.

There are two issues for resolution in this case:

(1) Did the erroneous act of cancelling subject insurance policy entitle petitioner-insured to payment
of damages?

(2) Did the subsequent act of reinstating the wrongfully cancelled insurance policy by respondent
insurance company, in an effort to rectify such error, obliterate whatever liability for damages it may
have to bear, thus absolving it therefrom?

From the factual findings of the trial court, it appears that petitioner-insured, Santos Areola, a lawyer
from Dagupan City, bought, through
the Baguio City branch of Prudential Guarantee and Assurance, Inc. (hereinafter referred to as
Prudential), a personal accident insurance policy covering the one-year period between noon of
November 28, 1984 and noon of November 28, 1985. 1 Under the terms of the statement of account
issued by respondent insurance company, petitioner-insured was supposed to pay the total amount of
P1,609.65 which included the premium of P1,470.00, documentary stamp of P110.25 and 2% premium
tax of P29.40. 2 At the lower left-hand corner of the statement of account, the following is legibly printed:

This Statement of Account must not be considered a receipt. Official Receipt will be
issued to you upon payment of this account.

If payment is made to our representative, demand for a Provisional Receipt and if our
Official Receipts is (sic) not received by you within 7 days please notify us.

If payment is made to our office, demand for an OFFICIAL RECEIPT.

On December 17, 1984, respondent insurance company issued collector's provisional receipt No.
9300 to petitioner-insured for the amount of P1,609.65 3 On the lower portion of the receipt the
following is written in capital letters:

Note: This collector's provisional receipt will be confirmed by our official receipt. If our
official receipt is not received by you within 7 days, please notify us. 4

On June 29, 1985, respondent insurance company, through its Baguio City manager, Teofilo M.
Malapit, sent petitioner-insured Endorsement
No. BG-002/85 which "cancelled flat" Policy No. PA BG-20015 "for non-payment of premium
effective as of inception dated." 5 The same endorsement also credited "a return premium of P1,609.65
plus documentary stamps and premium tax" to the account of the insured.

Shocked by the cancellation of the policy, petitioner-insured confronted Carlito Ang, agent of
respondent insurance company, and demanded the issuance of an official receipt. Ang told
petitioner-insured that the cancellation of the policy was a mistake but he would personally see to its
rectification. However, petitioner-insured failed to receive any official receipt from Prudential.

Hence, on July 15, 1985, petitioner-insured sent respondent insurance company a letter demanding
that he be insured under the same terms and conditions as those contained in Policy No. PA-BG-
20015 commencing upon its receipt of his letter, or that the current commercial rate of increase on
the payment he had made under provisional receipt No. 9300 be returned within five days. 6 Areola
also warned that should his demands be unsatisfied, he would sue for damages.

On July 17, 1985, he received a letter from production manager Malapit informing him that the
"partial payment" of P1,000.00 he had made on the policy had been "exhausted pursuant to the
provisions of the Short Period Rate Scale" printed at the back of the policy. Malapit warned Areola
that should be fail to pay the balance, the company's liability would cease to operate. 7

In reply to the petitioner-insured's letter of July 15, 1985, respondent insurance company, through its
Assistant Vice-President Mariano M. Ampil III, wrote Areola a letter dated July 25, 1985 stating that
the company was verifying whether the payment had in fact been issued therefor. Ampil emphasized
that the official receipt should have been issued seven days from the issuance of the provisional
receipt but because no official receipt had been issued in Areola's name, there was reason to believe
that no payment had been made. Apologizing for the inconvenience, Ampil expressed the company's
concern by agreeing "to hold you cover (sic) under the terms of the referenced policy until such time
that this matter is cleared." 8

On August 3, 1985, Ampil wrote Areola another letter confirming that the amount of P1,609.65
covered by provisional receipt No. 9300 was in fact received by Prudential on December 17, 1984.
Hence, Ampil informed
Areola that Prudential was "amenable to extending PGA-PA-BG-20015 up to December 17, 1985 or
one year from the date when payment was received." Apologizing again for the inconvenience
caused Areola, Ampil exhorted him to indicate his conformity to the proposal by signing on the space
provided for in the letter. 9

The letter was personally delivered by Carlito Ang to Areola on

August 13, 1985 10 but unfortunately, Areola and his wife, Lydia, as early as August 6, 1985 had filed a
complaint for breach of contract with damages before the lower court.

In its Answer, respondent insurance company admitted that the cancellation of petitioner-insured's
policy was due to the failure of Malapit to turn over the premiums collected, for which reason no
official receipt was issued to him. However, it argued that, by acknowledging the inconvenience
caused on petitioner-insured and after taking steps to rectify its omission by reinstating the cancelled
policy prior to the filing of the complaint, respondent insurance company had complied with its
obligation under the contract. Hence, it concluded that petitioner-insured no longer has a cause of
action against it. It insists that it cannot be held liable for damages arising from breach of contract,
having demonstrated fully well its fulfillment of its obligation.

The trial court, on June 30, 1987, rendered a judgment in favor of petitioner-insured, ordering
respondent insurance company to pay the former the following:
 a) P1,703.65 as actual damages;

b) P200,000.00 as moral damages; and

c) P50,000.00 as exemplary damages;

2. To pay to the plaintiff, as and for attorney's fees the amount of P10,000.00; and

3. To pay the costs.

In its decision, the court below declared that respondent insurance company acted in bad faith in
unilaterally cancelling subject insurance policy, having done so only after seven months from the
time that it had taken force and effect and despite the fact of full payment of premiums and other
charges on the issued insurance policy. Cancellation from the date of the policy's inception,
explained the lower court, meant that the protection sought by petitioner-insured from the risks
insured against was never extended by respondent insurance company. Had the insured met an
accident at the time, the insurance company would certainly have disclaimed any liability because
technically, the petitioner could not have been considered insured. Consequently, the trial court held
that there was breach of contract on the part of respondent insurance company, entitling petitioner-
insured to an award of the damages prayed for.

This ruling was challenged on appeal by respondent insurance company, denying bad faith on its
part in unilaterally cancelling subject insurance policy.

After consideration of the appeal, the appellate court issued a reversal of the decision of the trial
court, convinced that the latter had erred in finding respondent insurance company in bad faith for
the cancellation of petitioner-insured's policy. According to the Court of Appeals, respondent
insurance company was not motivated by negligence, malice or bad faith in cancelling subject policy.
Rather, the cancellation of the insurance policy was based on what the existing records showed, i.e.,
absence of an official receipt issued to petitioner-insured confirming payment of premiums. Bad faith,
said the Court of Appeals, is some motive of self-interest or ill-will; a furtive design of ulterior
purpose, proof of which must be established convincingly. On the contrary, it further observed, the
following acts indicate that respondent insurance company did not act precipitately or willfully to
inflict a wrong on petitioner-insured:
(a) the investigation conducted by Alfredo Bustamante to verify if petitioner-insured had indeed paid
the premium; (b) the letter of August 3, 1985 confirming that the premium had been paid on
December 17, 1984; (c) the reinstatement of the policy with a proposal to extend its effective period
to December 17, 1985; and (d) respondent insurance company's apologies for the "inconvenience"
caused upon petitioner-insured. The appellate court added that respondent insurance company even
relieved Malapit, its Baguio City manager, of his job by forcing him to resign.

Petitioner-insured moved for the reconsideration of the said decision which the Court of Appeals
denied. Hence, this petition for review on certiorari anchored on these arguments:

I
 Respondent Court of Appeals is guilty of grave abuse of discretion and committed a
serious and reversible error in not holding Respondent Prudential liable for the
cancellation of the insurance contract which was admittedly caused by the fraudulent
acts and bad faith of its own officers.

II

Respondent Court of Appeals committed serious and reversible error and abused its
discretion in ruling that the defenses of good faith and honest mistake can co-exist
with the admitted fraudulent acts and evident bad faith.

III

Respondent Court of Appeals committed a reversible error in not finding that even
without considering the fraudulent acts of its own officer in misappropriating the
premium payment, the act itself in cancelling the insurance policy was done with bad
faith and/or gross negligence and wanton attitude amounting to bad faith, because
among others, it was
Mr. Malapit the person who committed the fraud who sent and signed the
notice of cancellation.

IV

Respondent Court of Appeals has decided a question of substance contrary to law

and applicable decision of the Supreme Court when it refused to award damages in
favor of herein Petitioner-Appellants.

It is petitioner-insured's submission that the fraudulent act of Malapit, manager of respondent

insurance company's branch office in Baguio, in misappropriating his premium payments is the
proximate cause of the cancellation of the insurance policy. Petitioner-insured theorized that
Malapit's act of signing and even sending the notice of cancellation himself, notwithstanding his
personal knowledge of petitioner-insured's full payment of premiums, further reinforces the allegation
of bad faith. Such fraudulent act committed by Malapit, argued petitioner-insured, is attributable to
respondent insurance company, an artificial corporate being which can act only through its officers or
employees. Malapit's actuation, concludes petitioner-insured, is therefore not separate and distinct
from that of respondent-insurance company, contrary to the view held by the Court of Appeals. It
must, therefore, bear the consequences of the erroneous cancellation of subject insurance policy
caused by the non-remittance by its own employee of the premiums paid. Subsequent
reinstatement, according to petitioner-insured, could not possibly absolve respondent insurance
company from liability, there being an obvious breach of contract. After all, reasoned out petitioner-
insured, damage had already been inflicted on him and no amount of rectification could remedy the
same.

Respondent insurance company, on the other hand, argues that where reinstatement, the equitable
relief sought by petitioner-insured was granted at an opportune moment, i.e. prior to the filing of the
complaint, petitioner-insured is left without a cause of action on which to predicate his claim for
damages. Reinstatement, it further explained, effectively restored petitioner-insured to all his rights
under the policy. Hence, whatever cause of action there might have been against it, no longer exists
and the consequent award of damages ordered by the lower court in unsustainable.

We uphold petitioner-insured's submission. Malapit's fraudulent act of misappropriating the

premiums paid by petitioner-insured is beyond doubt directly imputable to respondent insurance
company. A corporation, such as respondent insurance company, acts solely thru its employees. The
latters' acts are considered as its own for which it can be held to account. 11 The facts are clear as to
the relationship between private respondent insurance company and Malapit. As admitted by private
respondent insurance company in its answer, 12 Malapit was the manager of its Baguio branch. It is
beyond doubt that he represented its interest and acted in its behalf. His act of receiving the premiums
collected is well within the province of his authority. Thus, his receipt of said premiums is receipt by
private respondent insurance company who, by provision of law, particularly under Article 1910 of the Civil
Code, is bound by the acts of its agent.

Article 1910 thus reads:

Art. 1910. The principal must comply with all the obligations which the agent may
have contracted within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is not
bound except when he ratifies it expressly or tacitly.

Malapit's failure to remit the premiums he received cannot constitute a defense for private
respondent insurance company; no exoneration from liability could result therefrom. The fact that
private respondent insurance company was itself defrauded due to the anomalies that took place in
its Baguio branch office, such as the non-accrual of said premiums to its account, does not free the
same from its obligation to petitioner Areola. As held in Prudential Bank v. Court of Appeals 13 citing
the ruling in McIntosh v. Dakota Trust Co.: 14

A bank is liable for wrongful acts of its officers done in the interests of the bank or in
the course of dealings of the officers in their representative capacity but not for acts
outside the scope of their authority. A bank holding out its officers and agent as
worthy of confidence will not be permitted to profit by the frauds they may thus be
enabled to perpetrate in the apparent scope of their employment; nor will it be
permitted to shirk its responsibility for such frauds, even though no benefit may
accrue to the bank therefrom. Accordingly, a banking corporation is liable to innocent
third persons where the representation is made in the course of its business by an
agent acting within the general scope of his authority even though, in the particular
case, the agent is secretly abusing his authority and attempting to perpetrate a fraud
upon his principal or some other person, for his own ultimate benefit.

Consequently, respondent insurance company is liable by way of damages for the fraudulent acts
committed by Malapit that gave occasion to the erroneous cancellation of subject insurance policy.
Its earlier act of reinstating the insurance policy can not obliterate the injury inflicted on petitioner-
insured. Respondent company should be reminded that a contract of insurance creates reciprocal
obligations for both insurer and insured. Reciprocal obligations are those which arise from the same
cause and in which each party is both a debtor and a creditor of the other, such that the obligation of
one is dependent upon the obligation of the other. 15

Under the circumstances of instant case, the relationship as creditor and debtor between the parties
arose from a common cause: i.e., by reason of their agreement to enter into a contract of insurance
under whose terms, respondent insurance company promised to extend protection to petitioner-
insured against the risk insured for a consideration in the form of premiums to be paid by the latter.
Under the law governing reciprocal obligations, particularly the second paragraph of Article
1191, 16 the injured party, petitioner-insured in this case, is given a choice between fulfillment or rescission
of the obligation in case one of the obligors, such as respondent insurance company, fails to comply with
what is incumbent upon him. However, said article entitles the injured party to payment of damages,
regardless of whether he demands fulfillment or rescission of the obligation. Untenable then is
reinstatement insurance company's argument, namely, that reinstatement being equivalent to fulfillment of
its obligation, divests petitioner-insured of a rightful claim for payment of damages. Such a claim finds no
support in our laws on obligations and contracts.

The nature of damages to be awarded, however, would be in the form of nominal

damages 17 contrary to that granted by the court below. Although the erroneous cancellation of the
insurance policy constituted a breach of contract, private respondent insurance company, within a
reasonable time took steps to rectify the wrong committed by reinstating the insurance policy of petitioner.
Moreover, no actual or substantial damage or injury was inflicted on petitioner Areola at the time the
insurance policy was cancelled. Nominal damages are "recoverable where a legal right is technically
violated and must be vindicated against an invasion that has produced no actual present loss of any kind,
or where there has been a breach of contract and no substantial injury or actual damages whatsoever
have been or can be shown. 18

WHEREFORE, the petition for review on certiorari is hereby GRANTED and the decision of the
Court of Appeals in CA-G.R. No. 16902 on May 31, 1990, REVERSED. The decision of Branch 40,
RTC Dagupan City, in Civil Case No. D-7972 rendered on June 30, 1987 is hereby REINSTATED
subject to the following modifications: (a) that nominal damages amounting to P30,000.00 be
awarded petitioner in lieu of the damages adjudicated by court a quo; and (b) that in the satisfaction
of the damages awarded therein, respondent insurance company is ORDERED to pay the legal rate
of interest computed from date of filing of complaint until final payment thereof.

SO ORDERED.
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.[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. It noted that "[i]f the
[2]

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." With respect to the
[3]

repair of the windmill, the trial court found that "there is no clear and
convincing proof that the windmill system fell down due to the defect of the
construction."[4]

The Court of Appeals reversed the trial court. It ruled that the construction
of the deep well was included in the agreement of the parties because the
term "deep well" was mentioned in both proposals. It also gave credence to
the testimony of respondent's witness Guillermo Pili, the proprietor of SPGMI
which installed the deep well, that petitioner Tanguilig told him that the cost of
constructing the deep well would be deducted from the contract price
of P60,000.00. Upon these premises the appellate court concluded that
respondent's payment of P15,000.00 to SPGMI should be applied to his
remaining balance with petitioner thus effectively extinguishing his contractual
obligation. However, it rejected petitioner's claim of force majeure and ordered
the latter to reconstruct the windmill in accordance with the stipulated one-
year guaranty.
 His motion for reconsideration having been denied by the Court of
Appeals, petitioner now seeks relief from this Court. He raises two
issues: firstly, whether the agreement to construct the windmill system
included the installation of a deep well and, secondly, whether petitioner is
under obligation to reconstruct the windmill after it collapsed.

We reverse the appellate court on the first issue but sustain it on the
second.

The preponderance of evidence supports the finding of the trial court that
the installation of a deep well was not included in the proposals of petitioner to
construct a windmill system for respondent. There were in fact two (2)
proposals: one dated 19 May 1987 which pegged the contract price
at P87,000.00 (Exh. "1"). This was rejected by respondent. The other was
submitted three days later, i.e., on 22 May 1987 which contained more
specifications but proposed a lower contract price of P60,000.00 (Exh.
"A"). The latter proposal was accepted by respondent and the construction
immediately followed. The pertinent portions of the first letter-proposal (Exh.
"1") are reproduced hereunder -

In connection with your Windmill System and Installation, we would like to quote to
you as follows:

One (1) Set - Windmill suitable for 2 inches diameter deepwell, 2 HP, capacity, 14 feet
in diameter, with 20 pieces blade, Tower 40 feet high, including mechanism which is
not advisable to operate during extra-intensity wind.Excluding cylinder pump.

UNIT CONTRACT PRICE P87,000.00

The second letter-proposal (Exh. "A") provides as follows:

In connection with your Windmill system Supply of Labor Materials and Installation,
operated water pump, we would like to quote to you as follows -

One (1) set - Windmill assembly for 2 inches or 3 inches deep-well pump, 6 Stroke,
14 feet diameter, 1-lot blade materials, 40 feet Tower complete with standard
appurtenances up to Cylinder pump, shafting U.S. adjustable International Metal.
One (1) lot - Angle bar, G. I. pipe, Reducer Coupling, Elbow Gate valve, cross Tee
coupling.

One (1) lot - Float valve.

One (1) lot - Concreting materials foundation.

F. O. B. Laguna

Contract Price P60,000.00

Notably, nowhere in either proposal is the installation of a deep well

mentioned, even remotely. Neither is there an itemization or description of the
materials to be used in constructing the deep well. There is absolutely no
mention in the two (2) documents that a deep well pump is a component of
the proposed windmill system. The contract prices fixed in both proposals
cover only the features specifically described therein and no other. While the
words "deep well" and "deep well pump" are mentioned in both, these do not
indicate that a deep well is part of the windmill system. They merely describe
the type of deep well pump for which the proposed windmill would be
suitable. As correctly pointed out by petitioner, the words "deep
well" preceded by the prepositions "for" and "suitable for" were meant only to
convey the idea that the proposed windmill would be appropriate for a deep
well pump with a diameter of 2 to 3 inches. For if the real intent of petitioner
was to include a deep well in the agreement to construct a windmill, he would
have used instead the conjunctions "and" or "with." Since the terms of the
instruments are clear and leave no doubt as to their meaning they should not
be disturbed.

Moreover, it is a cardinal rule in the interpretation of contracts

that the intention of the parties shall be accorded primordial
consideration and, in case of doubt, their contemporaneous and subsequent
[5]

acts shall be principally considered. An examination of such

[6]

contemporaneous and subsequent acts of respondent as well as the

attendant circumstances does not persuade us to uphold him.
 Respondent insists that petitioner verbally agreed that the contract price
of P60,000.00 covered the installation of a deep well pump. He contends that
since petitioner did not have the capacity to install the pump the latter agreed
to have a third party do the work the cost of which was to be deducted from
the contract price. To prove his point, he presented Guillermo Pili of SPGMI
who declared that petitioner Tanguilig approached him with a letter from
respondent Herce Jr. asking him to build a deep well pump as "part of the
price/contract which Engineer (Herce) had with Mr. Tanguilig." [7]

We are disinclined to accept the version of respondent. The claim of Pili

that Herce Jr. wrote him a letter is unsubstantiated. The alleged letter was
never presented in court by private respondent for reasons known only to
him. But granting that this written communication existed, it could not
have simply contained a request for Pili to install a deep well; it would have
also mentioned the party who would pay for the undertaking. It strains
credulity that respondent would keep silent on this matter and leave it all to
petitioner Tanguilig to verbally convey to Pili that the deep well was part of the
windmill construction and that its payment would come from the contract price
of P60,000.00.

We find it also unusual that Pili would readily consent to build a deep well
the payment for which would come supposedly from the windmill contract
price on the mere representation of petitioner, whom he had never met before,
without a written commitment at least from the former. For if indeed the deep
well were part of the windmill project, the contract for its installation would
have been strictly a matter between petitioner and Pili himself with the former
assuming the obligation to pay the price. That it was respondent Herce Jr.
himself who paid for the deep well by handing over to Pili the amount
of P15,000.00 clearly indicates that the contract for the deep well was not part
of the windmill project but a separate agreement between respondent and
Pili. Besides, if the price of P60,000.00 included the deep well, the obligation
of respondent was to pay the entire amount to petitioner without prejudice to
any action that Guillermo Pili or SPGMI may take, if any, against the
latter. Significantly, when asked why he tendered payment directly to Pili and
not to petitioner, respondent explained, rather lamely, that he did it "because
he has (sic) the money, so (he) just paid the money in his possession." [8]
 Can respondent claim that Pili accepted his payment on behalf of
petitioner? No. While the law is clear that "payment shall be made to the
person in whose favor the obligation has been constituted, or his successor
in interest, or any person authorized to receive it,". It does not appear from
[9]

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." The Civil Code provisions do not apply in the
[10]

instant case because no creditor-debtor relationship between petitioner and

Guillermo Pili and/or SPGMI has been established regarding the construction
of the deep well. Specifically, witness Pili did not testify that he entered into a
contract with petitioner for the construction of respondent's deep well. If
SPGMI was really commissioned by petitioner to construct the deep well, an
agreement particularly to this effect should have been entered into.

The contemporaneous and subsequent acts of the parties concerned

effectively belie respondent's assertions. These circumstances only show that
the construction of the well by SPGMI was for the sole account of respondent
and that petitioner merely supervised the installation of the well because the
windmill was to be connected to it. There is no legal nor factual basis by which
this Court can impose upon petitioner an obligation he did not expressly
assume nor ratify.

The second issue is not a novel one. In a long line of cases this Court
[11]

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, four (4) requisites must
[12]

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." It [13]

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." This presumption has not been rebutted by petitioner.
[14]

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. When the windmill failed to
[15]

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" and to
[16]

complete the same within three (3) months from the finality of this decision.

SO ORDERED.
G.R. No. L-47851 October 3, 1986

JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners,

vs.
THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and
the PHILIPPINE BAR ASSOCIATION, respondents.

G.R. No. L-47863 October 3, 1986

THE UNITED CONSTRUCTION CO., INC., petitioner,

vs.
COURT OF APPEALS, ET AL., respondents.

G.R. No. L-47896 October 3, 1986

PHILIPPINE BAR ASSOCIATION, ET AL., petitioners,

vs.
COURT OF APPEALS, ET AL., respondents.

PARAS, J.:

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

The dispositive portion of the modified decision of the lower court reads:

WHEREFORE, judgment is hereby rendered:

(a) Ordering defendant United Construction Co., Inc. and third-party

defendants (except Roman Ozaeta) to pay the plaintiff, jointly and severally, the
sum of P989,335.68 with interest at the legal rate from November 29, 1968, the
date of the filing of the complaint until full payment;
 (b) Dismissing the complaint with respect to defendant Juan J. Carlos;

(c) Dismissing the third-party complaint;

(d) Dismissing the defendant's and third-party defendants' counterclaims for

lack of merit;

(e) Ordering defendant United Construction Co., Inc. and third-party

defendants (except Roman Ozaeta) to pay the costs in equal shares.

SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169).

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the judgment appealed from is modified to include an award of

P200,000.00 in favor of plaintiff-appellant Philippine Bar Association, with
interest at the legal rate from November 29, 1968 until full payment to be paid
jointly and severally by defendant United Construction Co., Inc. and third party
defendants (except Roman Ozaeta). In all other respects, the judgment dated
September 21, 1971 as modified in the December 8, 1971 Order of the lower
court is hereby affirmed with COSTS to be paid by the defendant and third
party defendant (except Roman Ozaeta) in equal shares.

SO ORDERED.

Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan J.
Carlos in L-47863 seek the reversal of the decision of the Court of Appeals, among other
things, for exoneration from liability while petitioner Philippine Bar Association in L-47896
seeks the modification of aforesaid decision to obtain an award of P1,830,000.00 for the loss
of the PBA building plus four (4) times such amount as damages resulting in increased cost
of the building, P100,000.00 as exemplary damages; and P100,000.00 as attorney's fees.

These petitions arising from the same case filed in the Court of First Instance of Manila were
consolidated by this Court in the resolution of May 10, 1978 requiring the respective
respondents to comment. (Rollo, L-47851, p. 172).

The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp. 269-
348; pp. 520-521; Rollo, L-47851, p. 169) and affirmed by the Court of Appeals are as follows:

The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated under

the Corporation Law, decided to construct an office building on its 840 square meters lot
located at the comer of Aduana and Arzobispo Streets, Intramuros, Manila. The construction
was undertaken by the United Construction, Inc. on an "administration" basis, on the
suggestion of Juan J. Carlos, the president and general manager of said corporation. The
proposal was approved by plaintiff's board of directors and signed by its president Roman
Ozaeta, a third-party defendant in this case. The plans and specifications for the building
were prepared by the other third-party defendants Juan F. Nakpil & Sons. The building was
completed in June, 1966.

In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and its
environs and the building in question sustained major damage. The front columns of the
building buckled, causing the building to tilt forward dangerously. The tenants vacated the
building in view of its precarious condition. As a temporary remedial measure, the building
was shored up by United Construction, Inc. at the cost of P13,661.28.

On November 29, 1968, the plaintiff commenced this action for the recovery of damages
arising from the partial collapse of the building against United Construction, Inc. and its
President and General Manager Juan J. Carlos as defendants. Plaintiff alleges that the
collapse of the building was accused by defects in the construction, the failure of the
contractors to follow plans and specifications and violations by the defendants of the terms
of the contract.

Defendants in turn filed a third-party complaint against the architects who prepared the plans
and specifications, alleging in essence that the collapse of the building was due to the
defects in the said plans and specifications. Roman Ozaeta, the then president of the plaintiff
Bar Association was included as a third-party defendant for damages for having included
Juan J. Carlos, President of the United Construction Co., Inc. as party defendant.

On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and Juan F.
Nakpil presented a written stipulation which reads:

1. That in relation to defendants' answer with counterclaims and third- party

complaints and the third-party defendants Nakpil & Sons' answer thereto, the
plaintiff need not amend its complaint by including the said Juan F. Nakpil &
Sons and Juan F. Nakpil personally as parties defendant.

2. That in the event (unexpected by the undersigned) that the Court should find
after the trial that the above-named defendants Juan J. Carlos and United
Construction Co., Inc. are free from any blame and liability for the collapse of
the PBA Building, and should further find that the collapse of said building was
due to defects and/or inadequacy of the plans, designs, and specifications p
by the third-party defendants, or in the event that the Court may find Juan F.
Nakpil and Sons and/or Juan F. Nakpil contributorily negligent or in any way
jointly and solidarily liable with the defendants, judgment may be rendered in
whole or in part. as the case may be, against Juan F. Nakpil & Sons and/or
Juan F. Nakpil in favor of the plaintiff to all intents and purposes as if plaintiff's
complaint has been duly amended by including the said Juan F. Nakpil & Sons
and Juan F. Nakpil as parties defendant and by alleging causes of action
against them including, among others, the defects or inadequacy of the plans,
designs, and specifications prepared by them and/or failure in the performance
of their contract with plaintiff.
 3. Both parties hereby jointly petition this Honorable Court to approve this
stipulation. (Record on Appeal, pp. 274-275; Rollo, L-47851,p.169).

Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which
among others, the parties agreed to refer the technical issues involved in the case to a
Commissioner. Mr. Andres O. Hizon, who was ultimately appointed by the trial court,
assumed his office as Commissioner, charged with the duty to try the following issues:

1. Whether the damage sustained by the PBA building during the August 2,
1968 earthquake had been caused, directly or indirectly, by:

(a) The inadequacies or defects in the plans and specifications prepared by

third-party defendants;

(b) The deviations, if any, made by the defendants from said plans and
specifications and how said deviations contributed to the damage sustained;

(c) The alleged failure of defendants to observe the requisite quality of

materials and workmanship in the construction of the building;

(d) The alleged failure to exercise the requisite degree of supervision expected
of the architect, the contractor and/or the owner of the building;

(e) An act of God or a fortuitous event; and

(f) Any other cause not herein above specified.

2. If the cause of the damage suffered by the building arose from a

combination of the above-enumerated factors, the degree or proportion in
which each individual factor contributed to the damage sustained;

3. Whether the building is now a total loss and should be completely

demolished or whether it may still be repaired and restored to a tenantable
condition. In the latter case, the determination of the cost of such restoration
or repair, and the value of any remaining construction, such as the foundation,
which may still be utilized or availed of (Record on Appeal, pp. 275-276; Rollo,
L-47851, p. 169).

Thus, the issues of this case were divided into technical issues and non-technical issues. As
aforestated the technical issues were referred to the Commissioner. The non-technical issues
were tried by the Court.

Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it may
topple down in case of a strong earthquake. The motions were opposed by the defendants
and the matter was referred to the Commissioner. Finally, on April 30, 1979 the building was
authorized to be demolished at the expense of the plaintiff, but not another earthquake of
high intensity on April 7, 1970 followed by other strong earthquakes on April 9, and 12, 1970,
caused further damage to the property. The actual demolition was undertaken by the buyer of
the damaged building. (Record on Appeal, pp. 278-280; Ibid.)

After the protracted hearings, the Commissioner eventually submitted his report on
September 25, 1970 with the findings that while the damage sustained by the PBA building
was caused directly by the August 2, 1968 earthquake whose magnitude was estimated at 7.3
they were also caused by the defects in the plans and specifications prepared by the third-
party defendants' architects, deviations from said plans and specifications by the defendant
contractors and failure of the latter to observe the requisite workmanship in the construction
of the building and of the contractors, architects and even the owners to exercise the
requisite degree of supervision in the construction of subject building.

All the parties registered their objections to aforesaid findings which in turn were answered
by the Commissioner.

The trial court agreed with the findings of the Commissioner except as to the holding that the
owner is charged with full nine supervision of the construction. The Court sees no legal or
contractual basis for such conclusion. (Record on Appeal, pp. 309-328; Ibid).

Thus, on September 21, 1971, the lower court rendered the assailed decision which was
modified by the Intermediate Appellate Court on November 28, 1977.

All the parties herein appealed from the decision of the Intermediate Appellate Court. Hence,
these petitions.

On May 11, 1978, the United Architects of the Philippines, the Association of Civil Engineers,
and the Philippine Institute of Architects filed with the Court a motion to intervene as amicus
curiae. They proposed to present a position paper on the liability of architects when a
building collapses and to submit likewise a critical analysis with computations on the
divergent views on the design and plans as submitted by the experts procured by the parties.
The motion having been granted, the amicus curiae were granted a period of 60 days within
which to submit their position.

After the parties had all filed their comments, We gave due course to the petitions in Our
Resolution of July 21, 1978.

The position papers of the amicus curiae (submitted on November 24, 1978) were duly noted.

The amicus curiae gave the opinion that the plans and specifications of the Nakpils were not
defective. But the Commissioner, when asked by Us to comment, reiterated his conclusion
that the defects in the plans and specifications indeed existed.

Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord. No.
4131) and the 1966 Asep Code, the Commissioner added that even if it can be proved that the
defects in the construction alone (and not in the plans and design) caused the damage to the
building, still the deficiency in the original design and jack of specific provisions against
torsion in the original plans and the overload on the ground floor columns (found by an the
experts including the original designer) certainly contributed to the damage which occurred.
(Ibid, p. 174).

In their respective briefs petitioners, among others, raised the following assignments of
errors: Philippine Bar Association claimed that the measure of damages should not be
limited to P1,100,000.00 as estimated cost of repairs or to the period of six (6) months for loss
of rentals while United Construction Co., Inc. and the Nakpils claimed that it was an act of
God that caused the failure of the building which should exempt them from responsibility and
not the defective construction, poor workmanship, deviations from plans and specifications
and other imperfections in the case of United Construction Co., Inc. or the deficiencies in the
design, plans and specifications prepared by petitioners in the case of the Nakpils. Both
UCCI and the Nakpils object to the payment of the additional amount of P200,000.00 imposed
by the Court of Appeals. UCCI also claimed that it should be reimbursed the expenses of
shoring the building in the amount of P13,661.28 while the Nakpils opposed the payment of
damages jointly and solidarity with UCCI.

The pivotal issue in this case is whether or not an act of God-an unusually strong
earthquake-which caused the failure of the building, exempts from liability, parties who are
otherwise liable because of their negligence.

The applicable law governing the rights and liabilities of the parties herein is Article 1723 of
the New Civil Code, which provides:

Art. 1723. The engineer or architect who drew up the plans and specifications
for a building is liable for damages if within fifteen years from the completion
of the structure the same should collapse by reason of a defect in those plans
and specifications, or due to the defects in the ground. The contractor is
likewise responsible for the damage if the edifice fags within the same period
on account of defects in the construction or the use of materials of inferior
quality furnished by him, or due to any violation of the terms of the contract. If
the engineer or architect supervises the construction, he shall be solidarily
liable with the contractor.

Acceptance of the building, after completion, does not imply waiver of any of
the causes of action by reason of any defect mentioned in the preceding
paragraph.

The action must be brought within ten years following the collapse of the
building.

On the other hand, the general rule is that no person shall be responsible for events which
could not be foreseen or which though foreseen, were inevitable (Article 1174, New Civil
Code).
An act of God has been defined as an accident, due directly and exclusively to natural causes
without human intervention, which by no amount of foresight, pains or care, reasonably to
have been expected, could have been prevented. (1 Corpus Juris 1174).

There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act of
God.

To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an
obligation due to an "act of God," the following must concur: (a) the cause of the breach of
the obligation must be independent of the will of the debtor; (b) the event must be either
unforseeable or unavoidable; (c) the event must be such as to render it impossible for the
debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any
participation in, or aggravation of the injury to the creditor. (Vasquez v. Court of Appeals, 138
SCRA 553; Estrada v. Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA 527;
Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).

Thus, if upon the happening of a fortuitous event or an act of God, there concurs a
corresponding fraud, negligence, delay or violation or contravention in any manner of the
tenor of the obligation as provided for in Article 1170 of the Civil Code, which results in loss
or damage, the obligor cannot escape liability.

The principle embodied in the act of God doctrine strictly requires that the act must be one
occasioned exclusively by the violence of nature and all human agencies are to be excluded
from creating or entering into the cause of the mischief. When the effect, the cause of which
is to be considered, is found to be in part the result of the participation of man, whether it be
from active intervention or neglect, or failure to act, the whole occurrence is thereby
humanized, as it were, and removed from the rules applicable to the acts of God. (1 Corpus
Juris, pp. 1174-1175).

Thus it has been held that when the negligence of a person concurs with an act of God in
producing a loss, such person is not exempt from liability by showing that the immediate
cause of the damage was the act of God. To be exempt from liability for loss because of an
act of God, he must be free from any previous negligence or misconduct by which that loss
or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129;
Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604;
Lasam v. Smith, 45 Phil. 657).

The negligence of the defendant and the third-party defendants petitioners was established
beyond dispute both in the lower court and in the Intermediate Appellate Court. Defendant
United Construction Co., Inc. was found to have made substantial deviations from the plans
and specifications. and to have failed to observe the requisite workmanship in the
construction as well as to exercise the requisite degree of supervision; while the third-party
defendants were found to have inadequacies or defects in the plans and specifications
prepared by them. As correctly assessed by both courts, the defects in the construction and
in the plans and specifications were the proximate causes that rendered the PBA building
unable to withstand the earthquake of August 2, 1968. For this reason the defendant and
third-party defendants cannot claim exemption from liability. (Decision, Court of Appeals, pp.
30-31).

It is well settled that the findings of facts of the Court of Appeals are conclusive on the
parties and on this court (cases cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs.
Sandiganbayan, January 17, 1985, 134 SCRA 105, 121), unless (1) the conclusion is a finding
grounded entirely on speculation, surmise and conjectures; (2) the inference made is
manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment is based on
misapprehension of facts; (5) the findings of fact are conflicting , (6) the Court of Appeals
went beyond the issues of the case and its findings are contrary to the admissions of both
appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co., February 8, 1967, 19 SCRA 289,
291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651); (7) the findings of facts of the
Court of Appeals are contrary to those of the trial court; (8) said findings of facts are
conclusions without citation of specific evidence on which they are based; (9) the facts set
forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the
respondents (Garcia vs. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals,
July 30, 1979, 92 SCRA 322, 366); (10) the finding of fact of the Court of Appeals is premised
on the supposed absence of evidence and is contradicted by evidence on record (Salazar vs.
Gutierrez, May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v.
Sandiganbayan, July 10, 1986).

It is evident that the case at bar does not fall under any of the exceptions above-mentioned.
On the contrary, the records show that the lower court spared no effort in arriving at the
correct appreciation of facts by the referral of technical issues to a Commissioner chosen by
the parties whose findings and conclusions remained convincingly unrebutted by the
intervenors/amicus curiae who were allowed to intervene in the Supreme Court.

In any event, the relevant and logical observations of the trial court as affirmed by the Court
of Appeals that "while it is not possible to state with certainty that the building would not
have collapsed were those defects not present, the fact remains that several buildings in the
same area withstood the earthquake to which the building of the plaintiff was similarly
subjected," cannot be ignored.

The next issue to be resolved is the amount of damages to be awarded to the PBA for the
partial collapse (and eventual complete collapse) of its building.

The Court of Appeals affirmed the finding of the trial court based on the report of the
Commissioner that the total amount required to repair the PBA building and to restore it to
tenantable condition was P900,000.00 inasmuch as it was not initially a total loss. However,
while the trial court awarded the PBA said amount as damages, plus unrealized rental income
for one-half year, the Court of Appeals modified the amount by awarding in favor of PBA an
additional sum of P200,000.00 representing the damage suffered by the PBA building as a
result of another earthquake that occurred on April 7, 1970 (L-47896, Vol. I, p. 92).

The PBA in its brief insists that the proper award should be P1,830,000.00 representing the
total value of the building (L-47896, PBA's No. 1 Assignment of Error, p. 19), while both the
NAKPILS and UNITED question the additional award of P200,000.00 in favor of the PBA (L-
47851, NAKPIL's Brief as Petitioner, p. 6, UNITED's Brief as Petitioner, p. 25). The PBA further
urges that the unrealized rental income awarded to it should not be limited to a period of one-
half year but should be computed on a continuing basis at the rate of P178,671.76 a year until
the judgment for the principal amount shall have been satisfied L- 47896, PBA's No. 11
Assignment of Errors, p. 19).

The collapse of the PBA building as a result of the August 2, 1968 earthquake was only partial
and it is undisputed that the building could then still be repaired and restored to its
tenantable condition. The PBA, however, in view of its lack of needed funding, was unable,
thru no fault of its own, to have the building repaired. UNITED, on the other hand, spent
P13,661.28 to shore up the building after the August 2, 1968 earthquake (L-47896, CA
Decision, p. 46). Because of the earthquake on April 7, 1970, the trial court after the needed
consultations, authorized the total demolition of the building (L-47896, Vol. 1, pp. 53-54).

There should be no question that the NAKPILS and UNITED are liable for the damage
resulting from the partial and eventual collapse of the PBA building as a result of the
earthquakes.

We quote with approval the following from the erudite decision penned by Justice Hugo E.
Gutierrez (now an Associate Justice of the Supreme Court) while still an Associate Justice of
the Court of Appeals:

There is no question that an earthquake and other forces of nature such as

cyclones, drought, floods, lightning, and perils of the sea are acts of God. It
does not necessarily follow, however, that specific losses and suffering
resulting from the occurrence of these natural force are also acts of God. We
are not convinced on the basis of the evidence on record that from the
thousands of structures in Manila, God singled out the blameless PBA building
in Intramuros and around six or seven other buildings in various parts of the
city for collapse or severe damage and that God alone was responsible for the
damages and losses thus suffered.

The record is replete with evidence of defects and deficiencies in the designs
and plans, defective construction, poor workmanship, deviation from plans
and specifications and other imperfections. These deficiencies are attributable
to negligent men and not to a perfect God.

The act-of-God arguments of the defendants- appellants and third party

defendants-appellants presented in their briefs are premised on legal
generalizations or speculations and on theological fatalism both of which
ignore the plain facts. The lengthy discussion of United on ordinary
earthquakes and unusually strong earthquakes and on ordinary fortuitous
events and extraordinary fortuitous events leads to its argument that the
August 2, 1968 earthquake was of such an overwhelming and destructive
character that by its own force and independent of the particular negligence
alleged, the injury would have been produced. If we follow this line of
speculative reasoning, we will be forced to conclude that under such a
situation scores of buildings in the vicinity and in other parts of Manila would
have toppled down. Following the same line of reasoning, Nakpil and Sons
alleges that the designs were adequate in accordance with pre-August 2, 1968
knowledge and appear inadequate only in the light of engineering information
acquired after the earthquake. If this were so, hundreds of ancient buildings
which survived the earthquake better than the two-year old PBA building must
have been designed and constructed by architects and contractors whose
knowledge and foresight were unexplainably auspicious and prophetic.
Fortunately, the facts on record allow a more down to earth explanation of the
collapse. The failure of the PBA building, as a unique and distinct construction
with no reference or comparison to other buildings, to weather the severe
earthquake forces was traced to design deficiencies and defective
construction, factors which are neither mysterious nor esoteric. The
theological allusion of appellant United that God acts in mysterious ways His
wonders to perform impresses us to be inappropriate. The evidence reveals
defects and deficiencies in design and construction. There is no mystery about
these acts of negligence. The collapse of the PBA building was no wonder
performed by God. It was a result of the imperfections in the work of the
architects and the people in the construction company. More relevant to our
mind is the lesson from the parable of the wise man in the Sermon on the
Mount "which built his house upon a rock; and the rain descended and the
floods came and the winds blew and beat upon that house; and it fen not; for it
was founded upon a rock" and of the "foolish upon the sand. And the rain
descended and man which built his house the floods came, and the winds
blew, and beat upon that house; and it fell and great was the fall of it. (St.
Matthew 7: 24-27)." The requirement that a building should withstand rains,
floods, winds, earthquakes, and natural forces is precisely the reason why we
have professional experts like architects, and engineers. Designs and
constructions vary under varying circumstances and conditions but the
requirement to design and build well does not change.

The findings of the lower Court on the cause of the collapse are more rational
and accurate. Instead of laying the blame solely on the motions and forces
generated by the earthquake, it also examined the ability of the PBA building,
as designed and constructed, to withstand and successfully weather those
forces.

The evidence sufficiently supports a conclusion that the negligence and fault
of both United and Nakpil and Sons, not a mysterious act of an inscrutable
God, were responsible for the damages. The Report of the Commissioner,
Plaintiff's Objections to the Report, Third Party Defendants' Objections to the
Report, Defendants' Objections to the Report, Commissioner's Answer to the
various Objections, Plaintiffs' Reply to the Commissioner's Answer,
Defendants' Reply to the Commissioner's Answer, Counter-Reply to
Defendants' Reply, and Third-Party Defendants' Reply to the Commissioner's
Report not to mention the exhibits and the testimonies show that the main
arguments raised on appeal were already raised during the trial and fully
considered by the lower Court. A reiteration of these same arguments on
appeal fails to convince us that we should reverse or disturb the lower Court's
factual findings and its conclusions drawn from the facts, among them:

The Commissioner also found merit in the allegations of the defendants as to

the physical evidence before and after the earthquake showing the inadequacy
of design, to wit:

Physical evidence before the earthquake providing (sic) inadequacy of design;

1. inadequate design was the cause of the failure of the building.

2. Sun-baffles on the two sides and in front of the building;

a. Increase the inertia forces that move the building laterally toward the Manila
Fire Department.

b. Create another stiffness imbalance.

3. The embedded 4" diameter cast iron down spout on all exterior columns
reduces the cross-sectional area of each of the columns and the strength
thereof.

4. Two front corners, A7 and D7 columns were very much less reinforced.

Physical Evidence After the Earthquake, Proving Inadequacy of design;

1. Column A7 suffered the severest fracture and maximum sagging. Also D7.

2. There are more damages in the front part of the building than towards the
rear, not only in columns but also in slabs.

3. Building leaned and sagged more on the front part of the building.

4. Floors showed maximum sagging on the sides and toward the front corner
parts of the building.

5. There was a lateral displacement of the building of about 8", Maximum

sagging occurs at the column A7 where the floor is lower by 80 cm. than the
highest slab level.

6. Slab at the corner column D7 sagged by 38 cm.

The Commissioner concluded that there were deficiencies or defects in the
design, plans and specifications of the PBA building which involved
appreciable risks with respect to the accidental forces which may result from
earthquake shocks. He conceded, however, that the fact that those deficiencies
or defects may have arisen from an obsolete or not too conservative code or
even a code that does not require a design for earthquake forces mitigates in a
large measure the responsibility or liability of the architect and engineer
designer.

The Third-party defendants, who are the most concerned with this portion of
the Commissioner's report, voiced opposition to the same on the grounds that
(a) the finding is based on a basic erroneous conception as to the design
concept of the building, to wit, that the design is essentially that of a heavy
rectangular box on stilts with shear wan at one end; (b) the finding that there
were defects and a deficiency in the design of the building would at best be
based on an approximation and, therefore, rightly belonged to the realm of
speculation, rather than of certainty and could very possibly be outright error;
(c) the Commissioner has failed to back up or support his finding with
extensive, complex and highly specialized computations and analyzes which
he himself emphasizes are necessary in the determination of such a highly
technical question; and (d) the Commissioner has analyzed the design of the
PBA building not in the light of existing and available earthquake engineering
knowledge at the time of the preparation of the design, but in the light of recent
and current standards.

The Commissioner answered the said objections alleging that third-party

defendants' objections were based on estimates or exhibits not presented
during the hearing that the resort to engineering references posterior to the
date of the preparation of the plans was induced by the third-party defendants
themselves who submitted computations of the third-party defendants are
erroneous.

The issue presently considered is admittedly a technical one of the highest

degree. It involves questions not within the ordinary competence of the bench
and the bar to resolve by themselves. Counsel for the third-party defendants
has aptly remarked that "engineering, although dealing in mathematics, is not
an exact science and that the present knowledge as to the nature of
earthquakes and the behaviour of forces generated by them still leaves much
to be desired; so much so "that the experts of the different parties, who are all
engineers, cannot agree on what equation to use, as to what earthquake co-
efficients are, on the codes to be used and even as to the type of structure that
the PBA building (is) was (p. 29, Memo, of third- party defendants before the
Commissioner).

The difficulty expected by the Court if tills technical matter were to be tried and
inquired into by the Court itself, coupled with the intrinsic nature of the
questions involved therein, constituted the reason for the reference of the said
issues to a Commissioner whose qualifications and experience have eminently
qualified him for the task, and whose competence had not been questioned by
the parties until he submitted his report. Within the pardonable limit of the
Court's ability to comprehend the meaning of the Commissioner's report on
this issue, and the objections voiced to the same, the Court sees no
compelling reasons to disturb the findings of the Commissioner that there
were defects and deficiencies in the design, plans and specifications prepared
by third-party defendants, and that said defects and deficiencies involved
appreciable risks with respect to the accidental forces which may result from
earthquake shocks.

(2) (a) The deviations, if any, made by the defendants from the plans and
specifications, and how said deviations contributed to the damage sustained
by the building.

(b) The alleged failure of defendants to observe the requisite quality of

materials and workmanship in the construction of the building.

These two issues, being interrelated with each other, will be discussed
together.

The findings of the Commissioner on these issues were as follows:

We now turn to the construction of the PBA Building and the alleged
deficiencies or defects in the construction and violations or deviations from
the plans and specifications. All these may be summarized as follows:

a. Summary of alleged defects as reported by Engineer Mario M. Bundalian.

(1) Wrongful and defective placing of reinforcing bars.

(2) Absence of effective and desirable integration of the 3 bars in the cluster.

(3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires
no larger than 1 inch.

(4) Reinforcement assembly is not concentric with the column, eccentricity

being 3" off when on one face the main bars are only 1 1/2' from the surface.

(5) Prevalence of honeycombs,

(6) Contraband construction joints,

(7) Absence, or omission, or over spacing of spiral hoops,

(8) Deliberate severance of spirals into semi-circles in noted on Col. A-5,
ground floor,

(9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground
floor,

(10) Undergraduate concrete is evident,

(11) Big cavity in core of Column 2A-4, second floor,

(12) Columns buckled at different planes. Columns buckled worst where there
are no spirals or where spirals are cut. Columns suffered worst displacement
where the eccentricity of the columnar reinforcement assembly is more acute.

b. Summary of alleged defects as reported by Engr. Antonio Avecilla.

Columns are first (or ground) floor, unless otherwise stated.

(1) Column D4 Spacing of spiral is changed from 2" to 5" on centers,

(2) Column D5 No spiral up to a height of 22" from the ground floor,

(3) Column D6 Spacing of spiral over 4 l/2,

(4) Column D7 Lack of lateral ties,

(5) Column C7 Absence of spiral to a height of 20" from the ground level,
Spirals are at 2" from the exterior column face and 6" from the inner column
face,

(6) Column B6 Lack of spiral on 2 feet below the floor beams,

(7) Column B5 Lack of spirals at a distance of 26' below the beam,

(8) Column B7 Spirals not tied to vertical reinforcing bars, Spirals are
uneven 2" to 4",

(9) Column A3 Lack of lateral ties,

(10) Column A4 Spirals cut off and welded to two separate clustered vertical
bars,

(11) Column A4 (second floor Column is completely hollow to a height of 30"

(12) Column A5 Spirals were cut from the floor level to the bottom of the
spandrel beam to a height of 6 feet,
(13) Column A6 No spirals up to a height of 30' above the ground floor level,

(14) Column A7 Lack of lateralties or spirals,

c. Summary of alleged defects as reported by the experts of the Third-Party

defendants.

Ground floor columns.

(1) Column A4 Spirals are cut,

(2) Column A5 Spirals are cut,

(3) Column A6 At lower 18" spirals are absent,

(4) Column A7 Ties are too far apart,

(5) Column B5 At upper fourth of column spirals are either absent or

improperly spliced,

(6) Column B6 At upper 2 feet spirals are absent,

(7) Column B7 At upper fourth of column spirals missing or improperly

spliced.

(8) Column C7 Spirals are absent at lowest 18"

(9) Column D5 At lowest 2 feet spirals are absent,

(10) Column D6 Spirals are too far apart and apparently improperly spliced,

(11) Column D7 Lateral ties are too far apart, spaced 16" on centers.

There is merit in many of these allegations. The explanations given by the

engineering experts for the defendants are either contrary to general principles
of engineering design for reinforced concrete or not applicable to the
requirements for ductility and strength of reinforced concrete in earthquake-
resistant design and construction.

We shall first classify and consider defects which may have appreciable
bearing or relation to' the earthquake-resistant property of the building.

As heretofore mentioned, details which insure ductility at or near the

connections between columns and girders are desirable in earthquake
resistant design and construction. The omission of spirals and ties or hoops at
the bottom and/or tops of columns contributed greatly to the loss of
earthquake-resistant strength. The plans and specifications required that these
spirals and ties be carried from the floor level to the bottom reinforcement of
the deeper beam (p. 1, Specifications, p. 970, Reference 11). There were several
clear evidences where this was not done especially in some of the ground floor
columns which failed.

There were also unmistakable evidences that the spacings of the spirals and
ties in the columns were in many cases greater than those called for in the
plans and specifications resulting again in loss of earthquake-resistant
strength. The assertion of the engineering experts for the defendants that the
improper spacings and the cutting of the spirals did not result in loss of
strength in the column cannot be maintained and is certainly contrary to the
general principles of column design and construction. And even granting that
there be no loss in strength at the yield point (an assumption which is very
doubtful) the cutting or improper spacings of spirals will certainly result in the
loss of the plastic range or ductility in the column and it is precisely this
plastic range or ductility which is desirable and needed for earthquake-
resistant strength.

There is no excuse for the cavity or hollow portion in the column A4, second
floor, and although this column did not fail, this is certainly an evidence on the
part of the contractor of poor construction.

The effect of eccentricities in the columns which were measured at about 2 1/2
inches maximum may be approximated in relation to column loads and column
and beam moments. The main effect of eccentricity is to change the beam or
girder span. The effect on the measured eccentricity of 2 inches, therefore, is
to increase or diminish the column load by a maximum of about 1% and to
increase or diminish the column or beam movements by about a maximum of
2%. While these can certainly be absorbed within the factor of safety, they
nevertheless diminish said factor of safety.

The cutting of the spirals in column A5, ground floor is the subject of great
contention between the parties and deserves special consideration.

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

The lack of proper length of splicing of spirals was also proven in the visible
spirals of the columns where spalling of the concrete cover had taken place.
This lack of proper splicing contributed in a small measure to the loss of
strength.

The effects of all the other proven and visible defects although nor can
certainly be accumulated so that they can contribute to an appreciable loss in
earthquake-resistant strength. The engineering experts for the defendants
submitted an estimate on some of these defects in the amount of a few
percent. If accumulated, therefore, including the effect of eccentricity in the
column the loss in strength due to these minor defects may run to as much as
ten percent.

To recapitulate: the omission or lack of spirals and ties at the bottom and/or at
the top of some of the ground floor columns contributed greatly to the collapse
of the PBA building since it is at these points where the greater part of the
failure occurred. The liability for the cutting of the spirals in column A5, ground
floor, in the considered opinion of the Commissioner rests on the shoulders of
the defendants and the loss of strength in this column contributed to the
damage which occurred.

It is reasonable to conclude, therefore, that the proven defects, deficiencies

and violations of the plans and specifications of the PBA building contributed
to the damages which resulted during the earthquake of August 2, 1968 and
the vice of these defects and deficiencies is that they not only increase but
also aggravate the weakness mentioned in the design of the structure. In other
words, these defects and deficiencies not only tend to add but also to multiply
the effects of the shortcomings in the design of the building. We may say,
therefore, that the defects and deficiencies in the construction contributed
greatly to the damage which occurred.
 Since the execution and supervision of the construction work in the hands of
the contractor is direct and positive, the presence of existence of all the major
defects and deficiencies noted and proven manifests an element of negligence
which may amount to imprudence in the construction work. (pp. 42-49,
Commissioners Report).

As the parties most directly concerned with this portion of the Commissioner's report, the
defendants voiced their objections to the same on the grounds that the Commissioner
should have specified the defects found by him to be "meritorious"; that the Commissioner
failed to indicate the number of cases where the spirals and ties were not carried from the
floor level to the bottom reinforcement of the deeper beam, or where the spacing of the
spirals and ties in the columns were greater than that called for in the specifications; that the
hollow in column A4, second floor, the eccentricities in the columns, the lack of proper length
of splicing of spirals, and the cut in the spirals in column A5, ground floor, did not aggravate
or contribute to the damage suffered by the building; that the defects in the construction
were within the tolerable margin of safety; and that the cutting of the spirals in column A5,
ground floor, was done by the plumber or his men, and not by the defendants.

Answering the said objections, the Commissioner stated that, since many of the defects were
minor only the totality of the defects was considered. As regards the objection as to failure to
state the number of cases where the spirals and ties were not carried from the floor level to
the bottom reinforcement, the Commissioner specified groundfloor columns B-6 and C-5 the
first one without spirals for 03 inches at the top, and in the latter, there were no spirals for 10
inches at the bottom. The Commissioner likewise specified the first storey columns where
the spacings were greater than that called for in the specifications to be columns B-5, B-6, C-
7, C-6, C-5, D-5 and B-7. The objection to the failure of the Commissioner to specify the
number of columns where there was lack of proper length of splicing of spirals, the
Commissioner mentioned groundfloor columns B-6 and B-5 where all the splices were less
than 1-1/2 turns and were not welded, resulting in some loss of strength which could be
critical near the ends of the columns. He answered the supposition of the defendants that the
spirals and the ties must have been looted, by calling attention to the fact that the missing
spirals and ties were only in two out of the 25 columns, which rendered said supposition to
be improbable.

The Commissioner conceded that the hollow in column A-4, second floor, did not aggravate
or contribute to the damage, but averred that it is "evidence of poor construction." On the
claim that the eccentricity could be absorbed within the factor of safety, the Commissioner
answered that, while the same may be true, it also contributed to or aggravated the damage
suffered by the building.

The objection regarding the cutting of the spirals in Column A-5, groundfloor, was answered
by the Commissioner by reiterating the observation in his report that irrespective of who did
the cutting of the spirals, the defendants should be held liable for the same as the general
contractor of the building. The Commissioner further stated that the loss of strength of the
cut spirals and inelastic deflections of the supposed lattice work defeated the purpose of the
spiral containment in the column and resulted in the loss of strength, as evidenced by the
actual failure of this column.

Again, the Court concurs in the findings of the Commissioner on these issues and fails to
find any sufficient cause to disregard or modify the same. As found by the Commissioner, the
"deviations made by the defendants from the plans and specifications caused indirectly the
damage sustained and that those deviations not only added but also aggravated the damage
caused by the defects in the plans and specifications prepared by third-party defendants.
(Rollo, Vol. I, pp. 128-142)

The afore-mentioned facts clearly indicate the wanton negligence of both the defendant and
the third-party defendants in effecting the plans, designs, specifications, and construction of
the PBA building and We hold such negligence as equivalent to bad faith in the performance
of their respective tasks.

Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379, 4380) which
may be in point in this case reads:

One who negligently creates a dangerous condition cannot escape liability for the natural
and probable consequences thereof, although the act of a third person, or an act of God for
which he is not responsible, intervenes to precipitate the loss.

As already discussed, the destruction was not purely an act of God. Truth to tell hundreds of
ancient buildings in the vicinity were hardly affected by the earthquake. Only one thing spells
out the fatal difference; gross negligence and evident bad faith, without which the damage
would not have occurred.

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special
and environmental circumstances of this case, We deem it reasonable to render a decision
imposing, as We do hereby impose, upon the defendant and the third-party defendants (with
the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra, p. 10) indemnity in
favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all
damages (with the exception of attorney's fees) occasioned by the loss of the building
(including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND
(P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality
of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum
shall be imposed upon afore-mentioned amounts from finality until paid. Solidary costs
against the defendant and third-party defendants (except Roman Ozaeta).

SO ORDERED.
G.R. No. L-21749 September 29, 1967

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
LUZON STEVEDORING CORPORATION, defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.

H. San Luis and L.V. Simbulan for defendant-appellant.

REYES, J.B.L., J.:

The present case comes by direct appeal from a decision of the Court of First Instance of Manila
(Case No. 44572) adjudging the defendant-appellant, Luzon Stevedoring Corporation, liable in
damages to the plaintiff-appellee Republic of the Philippines.

In the early afternoon of August 17, 1960, barge L-1892, owned by the Luzon Stevedoring
Corporation was being towed down the Pasig river by tugboats "Bangus" and "Barbero" 1 also
belonging to the same corporation, when the barge rammed against one of the wooden piles of the
Nagtahan bailey bridge, smashing the posts and causing the bridge to list. The river, at the time, was
swollen and the current swift, on account of the heavy downpour of Manila and the surrounding
provinces on August 15 and 16, 1960.

Sued by the Republic of the Philippines for actual and consequential damage caused by its
employees, amounting to P200,000 (Civil Case No. 44562, CFI of Manila), defendant Luzon
Stevedoring Corporation disclaimed liability therefor, on the grounds that it had exercised due
diligence in the selection and supervision of its employees; that the damages to the bridge were
caused by force majeure; that plaintiff has no capacity to sue; and that the Nagtahan bailey bridge is
an obstruction to navigation.

After due trial, the court rendered judgment on June 11, 1963, holding the defendant liable for the
damage caused by its employees and ordering it to pay to plaintiff the actual cost of the repair of the
Nagtahan bailey bridge which amounted to P192,561.72, with legal interest thereon from the date of
the filing of the complaint.
Defendant appealed directly to this Court assigning the following errors allegedly committed by the
court a quo, to wit:

I The lower court erred in not holding that the herein defendant-appellant had exercised
the diligence required of it in the selection and supervision of its personnel to prevent
damage or injury to others. 1awphl.nt

II The lower court erred in not holding that the ramming of the Nagtahan bailey bridge by
barge L-1892 was caused by force majeure.

III The lower court erred in not holding that the Nagtahan bailey bridge is an obstruction, if
not a menace, to navigation in the Pasig river.

IV The lower court erred in not blaming the damage sustained by the Nagtahan bailey
bridge to the improper placement of the dolphins.

V The lower court erred in granting plaintiff's motion to adduce further evidence in chief
after it has rested its case.

VI The lower court erred in finding the plaintiff entitled to the amount of P192,561.72 for
damages which is clearly exorbitant and without any factual basis.

However, it must be recalled that the established rule in this jurisdiction is that when a party appeals
directly to the Supreme Court, and submits his case there for decision, he is deemed to have waived
the right to dispute any finding of fact made by the trial Court. The only questions that may be raised
are those of law (Savellano vs. Diaz, L-17441, July 31, 1963; Aballe vs. Santiago, L-16307, April 30,
1963; G.S.I.S. vs. Cloribel, L-22236, June 22, 1965). A converso, a party who resorts to the Court of
Appeals, and submits his case for decision there, is barred from contending later that his claim was
beyond the jurisdiction of the aforesaid Court. The reason is that a contrary rule would encourage
the undesirable practice of appellants' submitting their cases for decision to either court in
expectation of favorable judgment, but with intent of attacking its jurisdiction should the decision be
unfavorable (Tyson Tan, et al. vs. Filipinas Compaia de Seguros) et al., L-10096, Res. on Motion to
Reconsider, March 23, 1966). Consequently, we are limited in this appeal to the issues of law raised
in the appellant's brief.

Taking the aforesaid rules into account, it can be seen that the only reviewable issues in this appeal
are reduced to two:

1) Whether or not the collision of appellant's barge with the supports or piers of the Nagtahan
bridge was in law caused by fortuitous event or force majeure, and

2) Whether or not it was error for the Court to have permitted the plaintiff-appellee to
introduce additional evidence of damages after said party had rested its case.

As to the first question, considering that the Nagtahan bridge was an immovable and stationary
object and uncontrovertedly provided with adequate openings for the passage of water craft,
including barges like of appellant's, it is undeniable that the unusual event that the barge, exclusively
controlled by appellant, rammed the bridge supports raises a presumption of negligence on the part
of appellant or its employees manning the barge or the tugs that towed it. For in the ordinary course
of events, such a thing does not happen if proper care is used. In Anglo American Jurisprudence, the
inference arises by what is known as the "res ipsa loquitur" rule (Scott vs. London Docks Co., 2 H &
C 596; San Juan Light & Transit Co. vs. Requena, 224 U.S. 89, 56 L. Ed., 680; Whitwell vs. Wolf,
127 Minn. 529, 149 N.W. 299; Bryne vs. Great Atlantic & Pacific Tea Co., 269 Mass. 130; 168 N.E.
540; Gribsby vs. Smith, 146 S.W. 2d 719).

The appellant strongly stresses the precautions taken by it on the day in question: that it assigned
two of its most powerful tugboats to tow down river its barge L-1892; that it assigned to the task the
more competent and experienced among its patrons, had the towlines, engines and equipment
double-checked and inspected; that it instructed its patrons to take extra precautions; and concludes
that it had done all it was called to do, and that the accident, therefore, should be held due to force
majeure or fortuitous event.

These very precautions, however, completely destroy the appellant's defense. For caso
fortuito or force majeure (which in law are identical in so far as they exempt an obligor from
liability)2 by definition, are extraordinary events not foreseeable or avoidable, "events that could
not be foreseen, or which, though foreseen, were inevitable" (Art. 1174, Civ. Code of the
Philippines). It is, therefore, not enough that the event should not have been foreseen or anticipated,
as is commonly believed, but it must be one impossible to foresee or to avoid. The mere difficulty to
foresee the happening is not impossibility to foresee the same: "un hecho no constituye caso fortuito
por la sola circunstancia de que su existencia haga mas dificil o mas onerosa la accion diligente del
presento ofensor" (Peirano Facio, Responsibilidad Extra-contractual, p. 465; Mazeaud Trait de la
Responsibilite Civil, Vol. 2, sec. 1569). The very measures adopted by appellant prove that the
possibility of danger was not only foreseeable, but actually foreseen, and was not caso fortuito.

Otherwise stated, the appellant, Luzon Stevedoring Corporation, knowing and appreciating the perils
posed by the swollen stream and its swift current, voluntarily entered into a situation involving
obvious danger; it therefore assured the risk, and can not shed responsibility merely because the
precautions it adopted turned out to be insufficient. Hence, the lower Court committed no error in
holding it negligent in not suspending operations and in holding it liable for the damages caused.

It avails the appellant naught to argue that the dolphins, like the bridge, were improperly located.
Even if true, these circumstances would merely emphasize the need of even higher degree of care
on appellant's part in the situation involved in the present case. The appellant, whose barges and
tugs travel up and down the river everyday, could not safely ignore the danger posed by these
allegedly improper constructions that had been erected, and in place, for years.

On the second point: appellant charges the lower court with having abused its discretion in the
admission of plaintiff's additional evidence after the latter had rested its case. There is an insinuation
that the delay was deliberate to enable the manipulation of evidence to prejudice defendant-
appellant.
We find no merit in the contention. Whether or not further evidence will be allowed after a party
offering the evidence has rested his case, lies within the sound discretion of the trial Judge, and this
discretion will not be reviewed except in clear case of abuse. 3

In the present case, no abuse of that discretion is shown. What was allowed to be introduced, after
plaintiff had rested its evidence in chief, were vouchers and papers to support an item of P1,558.00
allegedly spent for the reinforcement of the panel of the bailey bridge, and which item already
appeared in Exhibit GG. Appellant, in fact, has no reason to charge the trial court of being unfair,
because it was also able to secure, upon written motion, a similar order dated November 24, 1962,
allowing reception of additional evidence for the said defendant-appellant. 4

WHEREFORE, finding no error in the decision of the lower Court appealed from, the same is hereby
affirmed. Costs against the defendant-appellant.

FAR EAST BANK AND TRUST COMPANY, petitioner, vs. COURT OF

APPEALS and SMP, INC., respondents.

DECISION

BELLOSILLO, J.:

FAR EAST BANK AND TRUST COMPANY filed a Complaint against

Clothespak Manufacturing Phils., Inc. (hereafter CLOTHESPAK) for recovery
of sums of money before the Regional Trial Court of Pasig City.[1]

On 14 March 1995 the trial court issued a Writ of Preliminary Attachment

by virtue of which the Sheriff levied on the personal properties found in the
premises of CLOTHESPAK. On 28 March 1995 respondent SMP, Inc.
(hereafter SMP) filed an Affidavit of Third-Party Claim asserting ownership
over 4,000 bags of General Purpose (GPS) polystyrene products included
among the attached properties. On 6 April 1995 petitioner posted a Sheriff's
Indemnity Bond issued by Siddcor Insurance Corporation (hereafter
SIDDCOR).
 On 21 May 1996 the trial court ruled that the third-party claim can be best
and fully ventilated in a vindicatory action under Sec. 17, Rule 39, of
the Rules of Court.[2] On 13 January and 7 March 1997 it denied
reconsideration.[3] Thereafter, a Decision was rendered in favor of petitioner
and a Writ of Execution was accordingly issued upon the judgment becoming
final and executory. Petitioner acquired the attached goods as highest bidder
in the public auction.

Meanwhile, on 26 February 1997 respondent SMP filed a Complaint for

damages against petitioner, the Sheriff and SIDDCOR before the Regional
Trial Court of Quezon City, docketed as Civil Case No. Q-97-30372, pertinent
portions of which read -

5. Plaintiff is engaged in the manufacture, production, formulation, tolling,

distribution, trading, selling, import and export of polystyrene products and such other
businesses related to or connected with polystyrene products.

6. On January 19, 1995, Maria Teresa Michaela Ong, one of the Sales Executives of
plaintiff, personally undertook the acceptance and servicing of a purchase order of
CLOTHESPAK MANUFACTURING PHILS., INC. (CLOTHESPAK for brevity) for
4,000 bags or sacks of General Purpose (GPS) polystyrene products to be made by
CLOTHESPAK into "plastic hangers" x x x x

7. Pursuant to such Purchase Order, the ordered products (4,000 bags) were delivered
on January 23, 24, 25, and 27, 1995 to the plant of CLOTHESPAK located at
Bo. Panungyanan, General Trias, Cavite City, for which Delivery Receipts were
issued x x x x

8. The total selling price of the above delivered products amounted to U.S. $118,500,
as evidenced by Sales Invoices Nos. 5509, 5510, and 5511 x x x x

9. As "payment" for the goods ordered and duly delivered, CLOTHESPAK issued
postdated checks in favor of plaintiff SMP, INC. and delivered the same to Maria
Teresa Michaela Ong upon delivery of the ordered goods x x x x As agreed upon, the
ownership over the goods delivered was explicitly retained by SMP until all the
above-enumerated postdated checks shall have cleared and honored as good by the
bank, with the understanding that SMP can get back the goods delivered at any time in
case the check(s) are dishonored and returned by the bank for any reason, as contained
in the Provisional Receipt issued by SMP to CLOTHESPAK upon receipt by SMP of
the above postdated checks x x x x

10. When the above checks were deposited by SMP on their maturity dates, the
drawee bank dishonored and returned them for the reason "Account Closed" x x x x

14. Deputy Sheriff Alejandro Loquinario of RTC-Pasig City x x x made an actual

levy/attachment on the properties found on the premises of CLOTHESPAK at
Panungyanan, Gen. Trias, Cavite on various dates in March 1995 before several
witnesses including the representative of FEBTC. Among the properties
levied/attached were "plastic resins" and "plastic hangers," as evidenced by the Notice
of Levy/Attachment issued and submitted by Deputy Sheriff Loquinario for March 14,
1995 (plastic resins), March 15, 1995 (plastic resins) and March 16, 1995 (plastic
hangers) x x x x

The LISTS OF INVENTORY attached to the Notice of Levy/Attachment did not fully
describe with specificity the materials or goods attached; most of the sacks were
described merely as "RAW MATERIALS' and 'GRINDED;' a few were labeled
"DOW" which indicates a foreign brand and therefore probably imported. This would
seem to indicate that FEBTC directed the Sheriff to attach any and all goods found in
the premises of CLOTHESPAK without regard as to whether they are those "goods
intended to be attached," and most likely in order to make it difficult to trace, verify or
check, the Sheriff just listed the goods without detailed description or
identification. Since FEBTC was desperate in recovering whatever it can
recover from its credit exposure to CLOTHESPAK, even goods clearly not owned by
FEBTC by virtue of its alleged Trust Receipts just had to be attached for any reason.

Yet, it is clear from the allegations made in FEBTC's Complaint (Annex "G") that it
was only after goods imported by CLOTHESPAK and allegedly paid for through
LC/TR. Hence, FEBTC should have attached only those plastic products that were
imported and not those that are locally produced like those of SMP.

15. Yet, the main bulk of the plastic goods/materials attached by the sheriff belonged
to the plaintiff as can easily be seen from the pictures of the sacks of goods attached
which show clearly the labels "TOPRENE" (a brand name) and "SMP
INCORPORATED" and Paseo de Blas, Valenzuela, Philippines", all of which indicate
that the goods/materials are owned by plaintiff and locally made. The pictures were
taken in the place where the sheriff brought the goods for safe-keeping, i.e, at the
Tacoma Warehouse, Port Area, Manila x x x x [4]

On 8 April 1997 SIDDCOR filed a Motion to Dismiss the Complaint on the

assertion that no action was filed by respondent SMP against the Sheriff
within 120 days from the filing of the bond as provided in Sec. 17, Rule 39, of
the Rules of Court. On 10 April 1997 petitioner and the Sheriff filed a
Manifestation and Motion for a Bill of Particulars and Production of
Documents. Movants averred that CLOTHESPAK was an indispensable party;
that the Complaint did not state a cause of action; and, that certain allegations
therein should be particularized.

On 15 July 1997 the trial court granted the Motion of SIDDCOR. It found
that indeed the case was filed beyond the 120-day period, relieving SIDDCOR
from any liability. On the other hand, it denied the Motion of petitioner and the
Sheriff. It expressed the view that CLOTHESPAK was not responsible for the
attachment and necessarily could not be made defendant in the present case;
that the allegations in the Complaint were sufficient bases for them to properly
formulate their defenses; and, that the matters they sought to be particularized
were evidentiary in character and should therefore be threshed out during the
trial proper.

On 12 August 1997 petitioner filed another Motion this time seeking the
dismissal of the Complaint anchored on these grounds: (a) the Complaint
stated no cause of action; and, (b) the cause of action, if any, was barred by
prior judgment since the third-party claim of respondent SMP was denied in
Civil Case No. 65006.

On 24 October 1997 the trial court denied petitioner's Motion explaining

that the Complaint alleged ultimate facts constituting a cause of action and
that from the denial of respondent SMP's third- party claim, SMP could file a
separate action to vindicate its claim to the properties. [5] On 25 November
1997 reconsideration was denied.[6]

Through a Petition for Certiorari and Mandamus petitioner assailed the 24

October and 25 November 1997 Orders of the trial court before the Court of
Appeals. On 31 July 1998 the Petition was dismissed. The appellate court
concurred in the finding of the trial court that the Complaint stated a cause of
action and held that neither certiorari nor mandamus was a proper remedy.
[7]
On 16 September 1998 reconsideration was denied.[8]

Petitioner asserts that the Complaint of respondent SMP does not state a
cause of action because on the basis of the allegations therein, subject goods
were already owned by CLOTHESPAK at the time of attachment. Petitioner
also claims that respondent SMP raised a new theory in Civil Case No. Q-97-
30372, i.e., that respondent SMP retained ownership of the goods based on a
provisional receipt wherein its collector acknowledged having received
postdated checks drawn by CLOTHESPAK and wherein the same collector
placed a handwritten statement thereon that "materials belong to SMP until
your checks clear." Petitioner argues that the statement is a unilateral
condition inserted by a mere collector after delivery of the goods which cannot
supersede the covering Sales Invoices prepared before delivery and signed
by CLOTHESPAK stating that the sale was on credit "60 PDC." [9] Petitioner
thus maintains that the trial court acted with grave abuse of discretion
tantamount to lack or excess of jurisdiction when it did not dismiss the
Complaint and respondent Court of Appeals committed serious error by
sustaining the trial court.

There is no merit in the petition. A cause of action is an act or omission of

one party in violation of the legal right of the other. Its essential elements
are: (a) the existence of a legal right in the plaintiff; (b) a correlative legal duty
in the defendant; and, (c) an act or omission of the defendant in violation of
plaintiff's right with consequential injury or damage to the plaintiff for which he
may maintain an action for the recovery of damages or other appropriate
relief.[10] Readily discernible from the face of respondent SMP's Complaint is
that there is a statement of causes of action. Assuming the facts to be true, (a)
respondent SMP still owns subject goods on account of an agreement with
CLOTHESPAK contained in a provisional receipt that "SMP can get back the
goods delivered at any time in case the check(s) are dishonored and returned
by the bank for any reason;" (b) petitioner has a correlative duty to respect
such ownership; and, (c) the act of petitioner in including the goods among the
attached properties violated the right of respondent SMP and entitled it to
recover damages or other appropriate relief. On the basis of those allegations,
the trial court can render a valid judgment.

It appears that petitioner outrightly regards as untrue the claim of

respondent SMP that it retained ownership of subject goods; in effect,
petitioner contradicts the allegations in the Complaint. This is improper. In a
motion to dismiss a complaint based on lack of cause of action, the question
submitted to the court for determination is the sufficiency of the allegations in
the complaint to constitute a cause of action and not whether those
allegations of fact are true, for such motion must hypothetically admit the truth
of the facts alleged in the complaint.[11] Otherwise stated, the test of the
sufficiency of the facts alleged in the complaint is whether, admitting the facts
alleged, the court could render a valid judgment upon the same in accordance
with the prayer of the complaint.[12] An inquiry regarding the veracity of
respondent SMP's allegations is not proper in resolving the Motion to
Dismiss. As to whether respondent SMP is still the owner of subject goods is
an issue necessitating a full-blown trial on the merits.

An order denying a motion to dismiss is interlocutory and cannot be the

subject of the extraordinary petition for certiorari or mandamus. The remedy of
the aggrieved party is to file an answer and to interpose as defenses the
objections raised in his motion to dismiss, proceed to trial, and in case of an
adverse decision, to elevate the entire case by appeal in due course.
[13]
However, the rule is not ironclad.Under certain situations, recourse
to certiorari or mandamus is considered appropriate, i.e., (a) when the trial
court issued the order without or in excess of jurisdiction; [14] (b) where there is
patent grave abuse of discretion by the trial court;[15] or, (c) appeal would not
prove to be a speedy and adequate remedy as when an appeal would not
promptly relieve a defendant from the injurious effects of the patently mistaken
order maintaining the plaintiff's baseless action and compelling the defendant
needlessly to go through a protracted trial and clogging the court dockets by
another futile case.[16] At any rate, we find that the Petition
for Certiorari and Mandamus filed by petitioner before the Court of Appeals is
not the available remedy. The trial court did not issue the assailed Orders with
grave abuse of discretion, or without or in excess of jurisdiction. The Orders
did not produce any injurious effect on petitioner. Rather, the trial court issued
the Orders based on a correct appreciation of the evidence which made them
withstand appellate scrutiny twice.

WHEREFORE, the petition is DENIED. The Decision of the Court of

Appeals of 31 July 1998 sustaining the Orders of the Regional Trial Court-
Br.92, Quezon City, which denied petitioner Far East Bank and Trust
Company's Motion to Dismiss respondent SMP, Inc.'s Complaint, and its
Resolution of 16 September 1998 denying reconsideration
are AFFIRMED. Costs against petitioner.

SO ORDERED.

JOSEPH SALUDAGA, G.R. No. 179337

Petitioner,
Present:
Ynares-Santiago, J. (Chairperson),
- versus - Austria-Martinez,
Chico-Nazario,
Nachura, and
Reyes, JJ.
FAR EASTERN UNIVERSITY and
EDILBERTO C. DE JESUS in his Promulgated:
capacity as President of FEU,
Respondents. April 30, 2008

x ---------------------------------------------------------------------------------------- x

DECISION

YNARES-SANTIAGO, J.:

This Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court
assails the June 29, 2007 Decision[2] of the Court of Appeals in CA-G.R. CV No.
87050, nullifying and setting aside the November 10, 2004 Decision [3] 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
Resolution[4] 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 Complaint [7] 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),
Galaxys President, to indemnify them for whatever would be adjudged in favor of
petitioner, if any; and to pay attorneys 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, attorneys 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
petitioners Complaint read:

6.0. At the time of plaintiffs 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 plaintiffs 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 Universitys 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 FEUs 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 petitioners 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. Ones 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 persons 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 defendants 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 incident [23] 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, attorneys 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 ones 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
plaintiffs claim. The third-party complaint is actually independent of and separate
and distinct from the plaintiffs 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 plaintiffs 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 petitioners 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 petitioners 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 petitioners medical
expenses.

For these acts of negligence and for having supplied respondent FEU with
an unqualified security guard, which resulted to the latters 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 attorneys 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.
FIL-ESTATE PROPERTIES, INC. AND FIL-ESTATE NETWORK INC., Petitioners,
vs.
SPOUSES CONRADO AND MARIA VICTORIA RONQUILLO, Respondents.

DECISION

PEREZ, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules .of Civil
Procedure assailing the Decision of the Court of Appeals in CA-G.R. SP No. 100450 which affirmed
1

the Decision of the Office of the President in O.P. Case No. 06-F-216.

As culled from the records, the facts are as follow:

Petitioner Fil-Estate Properties, Inc. is the owner and developer of the Central Park Place Tower
while co-petitioner Fil-Estate Network, Inc. is its authorized marketing agent. Respondent Spouses
Conrado and Maria Victoria Ronquillo purchased from petitioners an 82-square meter condominium
unit at Central Park Place Tower in Mandaluyong City for a pre-selling contract price of FIVE
MILLION ONE HUNDRED SEVENTY-FOUR THOUSAND ONLY (P5,174,000.00). On 29 August
1997, respondents executed and signed a Reservation Application Agreement wherein they
deposited P200,000.00 as reservation fee. As agreed upon, respondents paid the full downpayment
of P1,552,200.00 and had been paying the P63,363.33 monthly amortizations until September 1998.

Upon learning that construction works had stopped, respondents likewise stopped paying their
monthly amortization. Claiming to have paid a total of P2,198,949.96 to petitioners, respondents
through two (2) successive letters, demanded a full refund of their payment with interest. When their
demands went unheeded, respondents were constrained to file a Complaint for Refund and
Damages before the Housing and Land Use Regulatory Board (HLURB). Respondents prayed for
reimbursement/refund of P2,198,949.96 representing the total amortization payments, P200,000.00
as and by way of moral damages, attorneys fees and other litigation expenses.

On 21 October 2000, the HLURB issued an Order of Default against petitioners for failing to file their
Answer within the reglementary period despite service of summons. 2
Petitioners filed a motion to lift order of default and attached their position paper attributing the delay
in construction to the 1997 Asian financial crisis. Petitioners denied committing fraud or
misrepresentation which could entitle respondents to an award of moral damages.

On 13 June 2002, the HLURB, through Arbiter Atty. Joselito F. Melchor, rendered judgment ordering
petitioners to jointly and severally pay respondents the following amount:

a) The amount of TWO MILLION ONE HUNDRED NINETY-EIGHT THOUSAND NINE

HUNDRED FORTY NINE PESOS & 96/100 (P2,198,949.96) with interest thereon at twelve
percent (12%) per annum to be computed from the time of the complainants demand for
refund on October 08, 1998 until fully paid,

b) ONE HUNDRED THOUSAND PESOS (P100,000.00) as moral damages,

c) FIFTY THOUSAND PESOS (P50,000.00) as attorneys fees,

d) The costs of suit, and

e) An administrative fine of TEN THOUSAND PESOS (P10,000.00) payable to this Office

fifteen (15) days upon receipt of this decision, for violation of Section 20 in relation to Section
38 of PD 957. 3

The Arbiter considered petitioners failure to develop the condominium project as a substantial
breach of their obligation which entitles respondents to seek for rescission with payment of
damages. The Arbiter also stated that mere economic hardship is not an excuse for contractual and
legal delay.

Petitioners appealed the Arbiters Decision through a petition for review pursuant to Rule XII of the
1996 Rules of Procedure of HLURB. On 17 February 2005, the Board of Commissioners of the
HLURB denied the petition and affirmed the Arbiters Decision. The HLURB reiterated that the
4

depreciation of the peso as a result of the Asian financial crisis is not a fortuitous event which will
exempt petitioners from the performance of their contractual obligation.

Petitioners filed a motion for reconsideration but it was denied on 8 May 2006. Thereafter,
5

petitioners filed a Notice of Appeal with the Office of the President. On 18 April 2007, petitioners
appeal was dismissed by the Office of the President for lack of merit. Petitioners moved for a
6

reconsideration but their motion was denied on 26 July 2007.

7

Petitioners sought relief from the Court of Appeals through a petition for review under Rule 43
containing the same arguments they raised before the HLURB and the Office of the President:

I.

THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE
HONORABLE HOUSING AND LAND USE REGULATORY BOARD AND ORDERING
PETITIONERS-APPELLANTS TO REFUND RESPONDENTS-APPELLEES THE SUM
OF P2,198,949.96 WITH 12% INTEREST FROM 8 OCTOBER 1998 UNTIL FULLY PAID,
CONSIDERING THAT THE COMPLAINT STATES NO CAUSE OF ACTION AGAINST
PETITIONERS-APPELLANTS.

II.

THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE
OFFICE BELOW ORDERING PETITIONERS-APPELLANTS TO PAY RESPONDENTS-
APPELLEES THE SUM OF P100,000.00 AS MORAL DAMAGES AND P50,000.00 AS ATTORNEYS
FEES CONSIDERING THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS THEREFOR.

III.

THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE
HOUSING AND LAND USE REGULATORY BOARD ORDERING PETITIONERS-APPELLANTS TO
PAY P10,000.00 AS ADMINISTRATIVE FINE IN THE ABSENCE OF ANY FACTUAL OR LEGAL
BASIS TO SUPPORT SUCH FINDING. 8

On 30 July 2008, the Court of Appeals denied the petition for review for lack of merit. The appellate
court echoed the HLURB Arbiters ruling that "a buyer for a condominium/subdivision unit/lot unit
which has not been developed in accordance with the approved condominium/subdivision plan
within the time limit for complying with said developmental requirement may opt for reimbursement
under Section 20 in relation to Section 23 of Presidential Decree (P.D.) 957 x x x." The appellate
9

court supported the HLURB Arbiters conclusion, which was affirmed by the HLURB Board of
Commission and the Office of the President, that petitioners failure to develop the condominium
project is tantamount to a substantial breach which warrants a refund of the total amount paid,
including interest. The appellate court pointed out that petitioners failed to prove that the Asian
financial crisis constitutes a fortuitous event which could excuse them from the performance of their
contractual and statutory obligations. The appellate court also affirmed the award of moral damages
in light of petitioners unjustified refusal to satisfy respondents claim and the legality of the
administrative fine, as provided in Section 20 of Presidential Decree No. 957.

Petitioners sought reconsideration but it was denied in a Resolution dated 11 December 2008 by
10

the Court of Appeals.

Aggrieved, petitioners filed the instant petition advancing substantially the same grounds for review:

A.

THE HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED IN TOTO THE DECISION
OF THE OFFICE OF THE PRESIDENT WHICH SUSTAINED RESCISSION AND REFUND IN
FAVOR OF THE RESPONDENTS DESPITE LACK OF CAUSE OF ACTION.

B.
GRANTING FOR THE SAKE OF ARGUMENT THAT THE PETITIONERS ARE LIABLE UNDER THE
PREMISES, THE HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED THE HUGE
AMOUNT OF INTEREST OF TWELVE PERCENT (12%).

C.

THE HONORABLE COURT OF APPEALS LIKEWISE ERRED WHEN IT AFFIRMED IN TOTO THE
DECISION OF THE OFFICE OF THE PRESIDENT INCLUDING THE PAYMENT OF P100,000.00
AS MORAL DAMAGES, P50,000.00 AS ATTORNEYS FEES AND P10,000.00 AS
ADMINISTRATIVE FINE IN THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS TO SUPPORT
SUCH CONCLUSIONS. 11

Petitioners insist that the complaint states no cause of action because they allegedly have not
committed any act of misrepresentation amounting to bad faith which could entitle respondents to a
refund. Petitioners claim that there was a mere delay in the completion of the project and that they
only resorted to "suspension and reformatting as a testament to their commitment to their buyers."
Petitioners attribute the delay to the 1997 Asian financial crisis that befell the real estate industry.
Invoking Article 1174 of the New Civil Code, petitioners maintain that they cannot be held liable for a
fortuitous event.

Petitioners contest the payment of a huge amount of interest on account of suspension of

development on a project. They liken their situation to a bank which this Court, in Overseas Bank v.
Court of Appeals, adjudged as not liable to pay interest on deposits during the period that its
12

operations are ordered suspended by the Monetary Board of the Central Bank.

Lastly, petitioners aver that they should not be ordered to pay moral damages because they never
intended to cause delay, and again blamed the Asian economic crisis as the direct, proximate and
only cause of their failure to complete the project. Petitioners submit that moral damages should not
be awarded unless so stipulated except under the instances enumerated in Article 2208 of the New
Civil Code. Lastly, petitioners refuse to pay the administrative fine because the delay in the project
was caused not by their own deceptive intent to defraud their buyers, but due to unforeseen
circumstances beyond their control.

Three issues are presented for our resolution: 1) whether or not the Asian financial crisis constitute a
fortuitous event which would justify delay by petitioners in the performance of their contractual
obligation; 2) assuming that petitioners are liable, whether or not 12% interest was correctly imposed
on the judgment award, and 3) whether the award of moral damages, attorneys fees and
administrative fine was proper.

It is apparent that these issues were repeatedly raised by petitioners in all the legal fora. The rulings
were consistent that first, the Asian financial crisis is not a fortuitous event that would excuse
petitioners from performing their contractual obligation; second, as a result of the breach committed
by petitioners, respondents are entitled to rescind the contract and to be refunded the amount of
amortizations paid including interest and damages; and third, petitioners are likewise obligated to
pay attorneys fees and the administrative fine.
This petition did not present any justification for us to deviate from the rulings of the HLURB, the
Office of the President and the Court of Appeals.

Indeed, the non-performance of petitioners obligation entitles respondents to rescission under Article
1191 of the New Civil Code which states:

Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with
payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.

More in point is Section 23 of Presidential Decree No. 957, the rule governing the sale of
condominiums, which provides:

Section 23. Non-Forfeiture of Payments. No installment payment made by a buyer in a subdivision

1wphi1

or condominium project for the lot or unit he contracted to buy shall be forfeited in favor of the owner
or developer when the buyer, after due notice to the owner or developer, desists from further
payment due to the failure of the owner or developer to develop the subdivision or condominium
project according to the approved plans and within the time limit for complying with the same. Such
buyer may, at his option, be reimbursed the total amount paid including amortization interests but
excluding delinquency interests, with interest thereon at the legal rate. (Emphasis supplied).

Conformably with these provisions of law, respondents are entitled to rescind the contract and
demand reimbursement for the payments they had made to petitioners.

Notably, the issues had already been settled by the Court in the case of Fil-Estate Properties, Inc. v.
Spouses Go promulgated on 17 August 2007, where the Court stated that the Asian financial crisis
13

is not an instance of caso fortuito. Bearing the same factual milieu as the instant case, G.R. No.
165164 involves the same company, Fil-Estate, albeit about a different condominium property. The
company likewise reneged on its obligation to respondents therein by failing to develop the
condominium project despite substantial payment of the contract price. Fil-Estate advanced the
same argument that the 1997 Asian financial crisis is a fortuitous event which justifies the delay of
the construction project. First off, the Court classified the issue as a question of fact which may not
be raised in a petition for review considering that there was no variance in the factual findings of the
HLURB, the Office of the President and the Court of Appeals. Second, the Court cited the previous
rulings of Asian Construction and Development Corporation v. Philippine Commercial International
Bank and Mondragon Leisure and Resorts Corporation v. Court of Appeals holding that the 1997
14 15

Asian financial crisis did not constitute a valid justification to renege on obligations. The Court
expounded:

Also, we cannot generalize that the Asian financial crisis in 1997 was unforeseeable and beyond the
control of a business corporation. It is unfortunate that petitioner apparently met with considerable
difficulty e.g. increase cost of materials and labor, even before the scheduled commencement of its
real estate project as early as 1995. However, a real estate enterprise engaged in the pre-selling of
condominium units is concededly a master in projections on commodities and currency movements
and business risks. The fluctuating movement of the Philippine peso in the foreign exchange market
is an everyday occurrence, and fluctuations in currency exchange rates happen everyday, thus, not
an instance of caso fortuito.16

The aforementioned decision becomes a precedent to future cases in which the facts are
substantially the same, as in this case. The principle of stare decisis, which means adherence to
judicial precedents, applies.

In said case, the Court ordered the refund of the total amortizations paid by respondents plus 6%
legal interest computed from the date of demand. The Court also awarded attorneys fees. We follow
that ruling in the case before us.

The resulting modification of the award of legal interest is, also, in line with our recent ruling in Nacar
v. Gallery Frames, embodying the amendment introduced by the Bangko Sentral ng Pilipinas
17

Monetary Board in BSP-MB Circular No. 799 which pegged the interest rate at 6% regardless of the
source of obligation.

We likewise affirm the award of attorneys fees because respondents were forced to litigate for 14
years and incur expenses to protect their rights and interest by reason of the unjustified act on the
part of petitioners. The imposition of P10,000.00 administrative fine is correct pursuant to Section
18

38 of Presidential Decree No. 957 which reads:

Section 38. Administrative Fines. The Authority may prescribe and impose fines not exceeding ten
thousand pesos for violations of the provisions of this Decree or of any rule or regulation thereunder.
Fines shall be payable to the Authority and enforceable through writs of execution in accordance
with the provisions of the Rules of Court.

Finally, we sustain the award of moral damages. In order that moral damages may be awarded in
breach of contract cases, the defendant must have acted in bad faith, must be found guilty of gross
negligence amounting to bad faith, or must have acted in wanton disregard of contractual
obligations. The Arbiter found petitioners to have acted in bad faith when they breached their
19

contract, when they failed to address respondents grievances and when they adamantly refused to
refund respondents' payment.

In fine, we find no reversible error on the merits in the impugned Court of Appeals' Decision and
Resolution.

WHEREFORE, the petition is PARTLY GRANTED. The appealed Decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due
computed from the time of respondents' demand for refund on 8 October 1998.

SO ORDERED.