OBLICON 1-9-2018 I ACJUCO 1
COMMON
BREACH OF OBLIGATION
CONCEPT
G.R. No. 23769 September 16, 1925
SONG FO & COMPANY, plaintiff-appellee,
vs.
HAWAIIAN PHILIPPINE CO., defendant-appellant.
Hilado and Hilado, Ross, Lawrence and Selph and Antonio T.
Carrascoso, Jr., for appellant.
Arroyo, Gurrea and Muller for appellee.
MALCOLM, J.:
In the court of First Instance of Iloilo, Song Fo & Company,
plaintiff, presented a complaint with two causes of action for
breach of contract against the Hawaiian-Philippine Co.,
defendant, in which judgment was asked for P70,369.50, with
legal interest, and costs. In an amended answer and cross-
complaint, the defendant set up the special defense that since the
plaintiff had defaulted in the payment for the molasses delivered
to it by the defendant under the contract between the parties, the
latter was compelled to cancel and rescind the said contract. The
case was submitted for decision on a stipulation of facts and the
exhibits therein mentioned. The judgment of the trial court
condemned the defendant to pay to the plaintiff a total of
P35,317.93, with legal interest from the date of the presentation
of the complaint, and with costs.
From the judgment of the Court of First Instance the defendant
only has appealed. In this court it has made the following
assignment of errors: "I. The lower court erred in finding that
appellant had agreed to sell to the appellee 400,000, and not only
300,000, gallons of molasses. II. The lower court erred in finding
that the appellant rescinded without sufficient cause the contract
for the sale of molasses executed by it and the appellee. III. The
lower court erred in rendering judgment in favor of the appellee
and not in favor of the appellant in accordance with the prayer of
its answer and cross-complaint. IV. The lower court erred in
denying appellant's motion for a new trial." The specified errors
raise three questions which we will consider in the order
suggested by the appellant.
1. Did the defendant agree to sell to the plaintiff 400,000
gallons of molasses or 300,000 gallons of molasses? The trial
court found the former amount to be correct. The appellant
contends that the smaller amount was the basis of the agreement.
The contract of the parties is in writing. It is found principally in the
documents, Exhibits F and G. The First mentioned exhibit is a
letter addressed by the administrator of the Hawaiian-Philippine
Co. to Song Fo & Company on December 13, 1922. It reads:
SILAY, OCC. NEGROS, P.I.
December 13, 1922
Messrs. SONG FO AND CO.
Iloilo, Iloilo.
DEAR SIRS: Confirming our conversation we had today with your
Mr. Song Fo, who visited this Central, we wish to state as follows:
He agreed to the delivery of 300,000 gallons of molasses at the
same price as last year under the same condition, and the same
to start after the completion of our grinding season. He requested
if possible to let you have molasses during January, February and
March or in other words, while we are grinding, and we agreed
with him that we would to the best of our ability, altho we are
somewhat handicapped. But we believe we can let you have
25,000 gallons during each of the milling months, altho it interfere
with the shipping of our own and planters sugars to Iloilo. Mr.
Song Fo also asked if we could supply him with another 100,000
gallons of molasses, and we stated we believe that this is possible
and will do our best to let you have these extra 100,000 gallons
during the next year the same to be taken by you before
November 1st, 1923, along with the 300,000, making 400,000
gallons in all.
Regarding the payment for our molasses, Mr. Song Fo gave us to
understand that you would pay us at the end of each month for
molasses delivered to you.
Hoping that this is satisfactory and awaiting your answer
regarding this matter, we remain.
Yours very truly,
HAWAIIAN-PHILIPPINE COMPANY
BY R. C. PITCAIRN
Administrator.
Exhibit G is the answer of the manager of Song Fo & Company to
the Hawaiian-Philippine Co. on December 16, 1922. This letter
reads:
December 16th, 1922.
Messrs. HAWAIIAN-PHILIPPINE CO.,
Silay, Neg. Occ., P.I.
DEAR SIRS: We are in receipt of your favours dated the 9th and
the 13th inst. and understood all their contents.
In connection to yours of the 13th inst. we regret to hear that you
mentioned Mr. Song Fo the one who visited your Central, but it
was not for he was Mr. Song Heng, the representative and the
manager of Messrs. Song Fo & Co.
With reference to the contents of your letter dated the 13th inst.
we confirm all the arrangements you have stated and in order to
make the contract clear, we hereby quote below our old contract
as amended, as per our new arrangements.
(a) Price, at 2 cents per gallon delivered at the central.
(b) All handling charges and expenses at the central and at
the dock at Mambaguid for our account.
(c) For services of one locomotive and flat cars necessary
for our six tanks at the rate of P48 for the round trip dock to central
and central to dock. This service to be restricted to one trip for the
six tanks.
Yours very truly,
SONG FO & COMPANY
By __________________________
Manager.
We agree with appellant that the above quoted correspondence
is susceptible of but one interpretation. The Hawaiian-Philippine
Co. agreed to deliver to Song Fo & Company 300,000 gallons of
molasses. The Hawaiian-Philippine Co. also believed it possible
to accommodate Song Fo & Company by supplying the latter
company with an extra 100,000 gallons. But the language used
with reference to the additional 100,000 gallons was not a definite
promise. Still less did it constitute an obligation.
If Exhibit T relied upon by the trial court shows anything, it is
simply that the defendant did not consider itself obliged to deliver
to the plaintiff molasses in any amount. On the other hand, Exhibit
A, a letter written by the manager of Song Fo & Company on
October 17, 1922, expressly mentions an understanding between
the parties of a contract for P300,000 gallons of molasses.
We sustain appellant's point of view on the first question and rule
that the contract between the parties provided for the delivery by
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the Hawaiian-Philippine Co. to song Fo & Company of 300,000 were received by it on January 5, 1923, not later than January 31
gallons of molasses. of that year. Instead, payment was not made until February 20,
1923. All the rest of the molasses was paid for either on time or
2. Had the Hawaiian-Philippine Co. the right to rescind the ahead of time.
contract of sale made with Song Fo & Company? The trial judge
answers No, the appellant Yes. The terms of payment fixed by the parties are controlling. The time
of payment stipulated for in the contract should be treated as of
Turning to Exhibit F, we note this sentence: "Regarding the the essence of the contract. Theoretically, agreeable to certain
payment for our molasses, Mr. Song Fo (Mr. Song Heng) gave us conditions which could easily be imagined, the Hawaiian-
to understand that you would pay us at the end of each month for Philippine Co. would have had the right to rescind the contract
molasses delivered to you." In Exhibit G, we find Song Fo & because of the breach of Song Fo & Company. But actually, there
Company stating that they understand the contents of Exhibit F, is here present no outstanding fact which would legally sanction
and that they confirm all the arrangements you have stated, and the rescission of the contract by the Hawaiian-Philippine Co.
in order to make the contract clear, we hereby quote below our
old contract as amended, as per our new arrangements. (a) Price, The general rule is that rescission will not be permitted for a slight
at 2 cents per gallon delivered at the central." In connection with or casual breach of the contract, but only for such breaches as
the portion of the contract having reference to the payment for the are so substantial and fundamental as to defeat the object of the
molasses, the parties have agree on a table showing the date of parties in making the agreement. A delay in payment for a small
delivery of the molasses, the amount and date thereof, the date quantity of molasses for some twenty days is not such a violation
of receipt of account by plaintiff, and date of payment. The table of an essential condition of the contract was warrants rescission
mentioned is as follows: for non-performance. Not only this, but the Hawaiian-Philippine
Co. waived this condition when it arose by accepting payment of
the overdue accounts and continuing with the contract.
Date of
Thereafter, Song Fo & Company was not in default in payment so
Date of Account and date receipt of Date of
that the Hawaiian-Philippine co. had in reality no excuse for
delivery thereof account payment
writing its letter of April 2, 1923, cancelling the contract. (Warner,
by plaintiff
Barnes & Co. vs. Inza [1922], 43 Phil., 505.)
1922 1923 1923 We rule that the appellant had no legal right to rescind the contract
of sale because of the failure of Song Fo & Company to pay for
Dec. 18 P206.16 Dec. 26/22 Jan. 5 Feb. 20 the molasses within the time agreed upon by the parties. We
sustain the finding of the trial judge in this respect.
Dec. 29 206.16 Jan. 3/23 do Do
3. On the basis first, of a contract for 300,000 gallons of
1923 molasses, and second, of a contract imprudently breached by the
Hawaiian-Philippine Co., what is the measure of damages? We
Jan. 5 206.16 Jan. 9/23 Mar. 7 or Mar. 31 again turn to the facts as agreed upon by the parties.
8
The first cause of action of the plaintiff is based on the greater
Feb. 12 206.16 Mar. 12/23 do Do expense to which it was put in being compelled to secure
molasses from other sources. Three hundred thousand gallons of
Feb. 27 206.16 do do Do molasses was the total of the agreement, as we have seen. As
conceded by the plaintiff, 55,006 gallons of molasses were
Mar. 5 206.16 do do Do delivered by the defendant to the plaintiff before the breach. This
leaves 244,994 gallons of molasses undelivered which the
Mar. 16 206.16 Mar. 20/23 Apr. 2/23 Apr. 19 plaintiff had to purchase in the open market. As expressly
conceded by the plaintiff at page 25 of its brief, 100,000 gallons
Mar. 24 206.16 Mar. 31/23 do Do of molasses were secured from the Central North Negros Sugar
Co., Inc., at two centavos a gallon. As this is the same price
Mar. 29 206.16 do do Do specified in the contract between the plaintiff and the defendant,
the plaintiff accordingly suffered no material loss in having to
make this purchase. So 244,994 gallons minus the 100,000
Some doubt has risen as to when Song Fo & Company was gallons just mentioned leaves as a result 144,994 gallons. As to
expected to make payments for the molasses delivered. Exhibit F this amount, the plaintiff admits that it could have secured it and
speaks of payments "at the end of each month." Exhibit G is silent more from the Central Victorias Milling Company, at three and
on the point. Exhibit M, a letter of March 28, 1923, from Warner, one-half centavos per gallon. In other words, the plaintiff had to
Barnes & Co., Ltd., the agent of the Hawaiian-Philippine Co. to pay the Central Victorias Milling company one and one-half
Song Fo & Company, mentions "payment on presentation of bills centavos a gallon more for the molasses than it would have had
for each delivery." Exhibit O, another letter from Warner, Barnes to pay the Hawaiian-Philippine Co. Translated into pesos and
& Co., Ltd. to Song Fo & Company dated April 2, 1923, is of a centavos, this meant a loss to the plaintiff of approximately
similar tenor. Exhibit P, a communication sent direct by the P2,174.91. As the conditions existing at the central of the
Hawaiian-Philippine Co. to Song Fo & Company on April 2, 1923, Hawaiian-Philippine Co. may have been different than those
by which the Hawaiian-Philippine Co. gave notice of the found at the Central North Negros Sugar Co., Inc., and the Central
termination of the contract, gave as the reason for the rescission, Victorias Milling Company, and as not alone through the delay but
the breach by Song Fo & Company of this condition: "You will through expenses of transportation and incidental expenses, the
recall that under the arrangements made for taking our molasses, plaintiff may have been put to greater cost in making the purchase
you were to meet our accounts upon presentation and at each of the molasses in the open market, we would concede under the
delivery." Not far removed from this statement, is the allegation of first cause of action in round figures P3,000.
plaintiff in its complaint that "plaintiff agreed to pay defendant, at
the end of each month upon presentation accounts." The second cause of action relates to lost profits on account of
the breach of the contract. The only evidence in the record on this
Resolving such ambiguity as exists and having in mind ordinary question is the stipulation of counsel to the effect that had Mr.
business practice, a reasonable deduction is that Song Fo & Song Heng, the manager of Song Fo & Company, been called as
Company was to pay the Hawaiian-Philippine Co. upon a witness, he would have testified that the plaintiff would have
presentation of accounts at the end of each month. Under this realized a profit of P14,948.43, if the contract of December 13,
hypothesis, Song Fo & Company should have paid for the 1922, had been fulfilled by the defendant. Indisputably, this
molasses delivered in December, 1922, and for which accounts
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statement falls far short of presenting proof on which to make a

finding as to damages.

In the first place, the testimony which Mr. Song Heng would have
given undoubtedly would follow the same line of thought as found
in the decision of the trial court, which we have found to be
unsustainable. In the second place, had Mr. Song Heng taken the
witness-stand and made the statement attributed to him, it would
have been insufficient proof of the allegations of the complaint,
and the fact that it is a part of the stipulation by counsel does not
change this result. And lastly, the testimony of the witness Song
Heng, it we may dignify it as such, is a mere conclusion, not a
proven fact. As to what items up the more than P14,000 of alleged
lost profits, whether loss of sales or loss of customers, or what
not, we have no means of knowing.

We rule that the plaintiff is entitled to recover damages from the

defendant for breach of contract on the first cause of action in the
amount of P3,000 and on the second cause of action in no
amount. Appellant's assignments of error are accordingly found
to be well taken in part and not well taken in part.

Agreeable to the foregoing, the judgment appealed from shall be

modified and the plaintiff shall have and recover from the
defendant the sum of P3,000, with legal interest form October 2,
1923, until payment. Without special finding as to costs in either
instance, it is so ordered.

Avanceña, C.J., Johnson, Street, Villamor, Ostrand, Johns,

Romualdez and Villa-Real, JJ., concur.

G.R. No. L-42283 March 18, 1985
BUENAVENTURA ANGELES, ET AL., plaintiffs-appellees,
vs.
URSULA TORRES CALASANZ, ET AL., defendants-
appellants.
GUTIERREZ, JR., J.:
This is an appeal from the decision of the Court of First Instance
of Rizal, Seventh Judicial District, Branch X, declaring the
contract to sell as not having been validly cancelled and ordering
the defendants-appellants to execute a final deed of sale in favor
of the plaintiffs-appellees, to pay P500.00 attorney's fees and
costs.
The facts being undisputed, the Court of Appeals certified the
case to us since only pure questions of law have been raised for
appellate review.
On December 19, 1957, defendants-appellants Ursula Torres
Calasanz and Tomas Calasanz and plaintiffs-appellees
Buenaventura Angeles and Teofila Juani entered into a contract
to sell a piece of land located in Cainta, Rizal for the amount of
P3,920.00 plus 7% interest per annum.
The plaintiffs-appellees made a downpayment of P392.00 upon
the execution of the contract. They promised to pay the balance
in monthly installments of P 41.20 until fully paid, the installments
being due and payable on the 19th day of each month. The
plaintiffs-appellees paid the monthly installments until July 1966,
when their aggregate payment already amounted to P4,533.38.
On numerous occasions, the defendants-appellants accepted
and received delayed installment payments from the plaintiffs-
appellees.
On December 7, 1966, the defendants-appellants wrote the
plaintiffs-appellees a letter requesting the remittance of past due
accounts.
On January 28, 1967, the defendants-appellants cancelled the
said contract because the plaintiffs-appellees failed to meet
subsequent payments. The plaintiffs' letter with their plea for
reconsideration of the said cancellation was denied by the
defendants-appellants.
The plaintiffs-appellees filed Civil Case No. 8943 with the Court
of First Instance of Rizal, Seventh Judicial District, Branch X to
compel the defendants-appellants to execute in their favor the
final deed of sale alleging inter alia that after computing all
subsequent payments for the land in question, they found out that
they have already paid the total amount of P4,533.38 including
interests, realty taxes and incidental expenses for the registration
and transfer of the land.
The defendants-appellants alleged in their answer that the
complaint states no cause of action and that the plaintiffs-
appellees violated paragraph six (6) of the contract to sell when
they failed and refused to pay and/or offer to pay the monthly
installments corresponding to the month of August, 1966 for more
than five (5) months, thereby constraining the defendants-
appellants to cancel the said contract.
The lower court rendered judgment in favor of the plaintiffs-
appellees. The dispositive portion of the decision reads:
WHEREFORE, based on the foregoing considerations, the Court
hereby renders judgment in favor of the plaintiffs and against the
defendants declaring that the contract subject matter of the
instant case was NOT VALIDLY cancelled by the defendants.
Consequently, the defendants are ordered to execute a final Deed
of Sale in favor of the plaintiffs and to pay the sum of P500.00 by
way of attorney's fees. Costs against the defendants.
OBLICON 1-9-2018 I ACJUCO 4
A motion for reconsideration filed by the defendants-appellants
was denied.
As earlier stated, the then Court of Appeals certified the case to
us considering that the appeal involves pure questions of law.
The defendants-appellants assigned the following alleged errors
of the lower court:
First Assignment of Error
THE LOWER COURT ERRED IN NOT HOLDING THE
CONTRACT TO SELL (ANNEX "A" OF COMPLIANCE) AS
HAVING BEEN LEGALLY AND VALIDLY CANCELLED.
Second Assignment of Error
EVEN ASSUMING ARGUENDO THAT THE SAID CONTRACT
TO SELL HAS NOT BEEN LEGALLY AND VALIDLY
CANCELLED, THE LOWER COURT ERRED IN ORDERING
DEFENDANTS TO EXECUTE A FINAL DEED OF SALE IN
FAVOR OF THE PLAINTIFF.
Third Assignment of Error
THE LOWER COURT ERRED IN ORDERING DEFENDANTS
TO PAY PLAINTIFFS THE SUM OF P500.00 AS ATTORNEY'S
FEES.
The main issue to be resolved is whether or not the contract to
sell has been automatically and validly cancelled by the
defendants-appellants.
The defendants-appellants submit that the contract was validly
cancelled pursuant to paragraph six of the contract which
provides:
xxx xxx xxx
SIXTH.—In case the party of the SECOND PART fails to satisfy
any monthly installments, or any other payments herein agreed
upon, he is granted a month of grace within which to make the
retarded payment, together with the one corresponding to the said
month of grace; it is understood, however, that should the month
of grace herein granted to the party of the SECOND PART
expired; without the payments corresponding to both months
having been satisfied, an interest of 10% per annum will be
charged on the amounts he should have paid; it is understood
further, that should a period of 90 days elapse, to begin from the
expiration of the month of grace herein mentioned, and the party
of SECOND PART has not paid all the amounts he should have
paid with the corresponding interest up to that date, the party of
the FIRST PART has the right to declare this contract cancelled
and of no effect, and as consequence thereof, the party of the
FIRST PART may dispose of the parcel of land covered by this
contract in favor of other persons, as if this contract had never
been entered into. In case of such cancellation of the contract, all
the amounts paid in accordance with this agreement together with
all the improvements made on the premises, shall be considered
as rents paid for the use and occupation of the above mentioned
premises, and as payment for the damages suffered by failure of
the party of the SECOND PART to fulfill his part of the agreement;
and the party of the SECOND PART hereby renounces all his
right to demand or reclaim the return of the same and obliges
himself to peacefully vacate the premises and deliver the same to
the party of the FIRST PART. (Emphasis supplied by appellant)
xxx xxx xxx
The defendants-appellants argue that the plaintiffs-appellees
failed to pay the August, 1966 installment despite demands for
more than four (4) months. The defendants-appellants point to
Jocson v. Capitol Subdivision (G.R. No. L-6573, February 28,
1955) where this Court upheld the right of the subdivision owner
to automatically cancel a contract to sell on the strength of a

provision or stipulation similar to paragraph 6 of the contract in
this case. The defendants-appellants also argue that even in the
absence of the aforequoted provision, they had the right to cancel
the contract to sell under Article 1191 of the Civil Code of the
Philippines.
The plaintiffs-appellees on the other hand contend that the
Jocson ruling does not apply. They state that paragraph 6 of the
contract to sell is contrary to law insofar as it provides that in case
of specified breaches of its terms, the sellers have the right to
declare the contract cancelled and of no effect, because it granted
the sellers an absolute and automatic right of rescission.
Article 1191 of the Civil Code on the rescission of reciprocal
obligations provides:
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.
xxx xxx xxx
Article 1191 is explicit. In reciprocal obligations, either party the
right to rescind the contract upon the failure of the other to perform
the obligation assumed thereunder. Moreover, there is nothing in
the law that prohibits the parties from entering into an agreement
that violation of the terms of the contract would cause its
cancellation even without court intervention (Froilan v. Pan
Oriental Shipping, Co., et al., 12 SCRA 276)—
Well settled is, however, the rule that a judicial action for the
rescission of a contract is not necessary where the contract
provides that it may be revoked and cancelled for violation of any
of its terms and conditions' (Lopez v. Commissioner of Customs,
37 SCRA 327, and cases cited therein)
Resort to judicial action for rescission is obviously not
contemplated . . . The validity of the stipulation can not be
seriously disputed. It is in the nature of a facultative resolutory
condition which in many cases has been upheld by this Court.
(Ponce Enrile v. Court of Appeals, 29 SCRA 504).
The rule that it is not always necessary for the injured party to
resort to court for rescission of the contract when the contract
itself provides that it may be rescinded for violation of its terms
and conditions, was qualified by this Court in University of the
Philippines v. De los Angeles, (35 SCRA 102) where we explained
that:
Of course, it must be understood that the act of a party in treating
a contract as cancelled or resolved on account of infractions by
the other contracting party must be made known to the other and
is always provisional, being ever subject to scrutiny and review by
the proper court. If the other party denies that rescission is
justified, it is free to resort to judicial action in its own behalf, and
bring the matter to court. Then, should the court, after due
hearing, decide that the resolution of the contract was not
warranted, the responsible party will be sentenced to damages;
in the contrary case, the resolution will be affirmed, and the
consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated many
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. ... .
We see no conflict between this ruling and the previous
jurisprudence of this Court invoked by respondent declaring that
judicial action is necessary for the resolution of a reciprocal
OBLICON 1-9-2018 I ACJUCO 5
obligation; (Ocejo, Perez & Co. v. International Banking Corp., 37
Phil. 631; Republic v. Hospital de San Juan de Dios, et al., 84
Phil. 820) since in every case where the extrajudicial resolution is
contested only the final award of the court of competent
jurisdiction can conclusively settle whether the resolution was
proper or not. It is in this sense that judicial action will be
necessary, as without it, the extrajudicial resolution will remain
contestable and subject to judicial invalidation, unless attack
thereon should become barred by acquiescence, estoppel or
prescription.
The right to rescind the contract for non-performance of one of its
stipulations, therefore, is not absolute. In Universal Food Corp. v.
Court of Appeals (33 SCRA 1) the Court stated that—
The general rule is that rescission of a contract will not be
permitted for a slight or casual breach, but only for such
substantial and fundamental breach as would defeat the very
object of the parties in making the agreement. (Song Fo & Co. v.
Hawaiian-Philippine Co., 47 Phil. 821, 827) The question of
whether a breach of a contract is substantial depends upon the
attendant circumstances. (Corpus v. Hon. Alikpala, et al., L-23707
& L-23720, Jan. 17, 1968). ... .
The defendants-appellants state that the plaintiffs-appellees
violated Section two of the contract to sell which provides:
SECOND.—That in consideration of the agreement of sale of the
above described property, the party of the SECOND PART
obligates himself to pay to the party of the FIRST PART the Sum
of THREE THOUSAND NINE HUNDRED TWENTY ONLY
(P3,920.00), Philippine Currency, plus interest at the rate of 7%
per annum, as follows:
(a) The amount of THREE HUNDRED NINETY TWO only
(P392.00) when this contract is signed; and
(b) The sum of FORTY ONE AND 20/100 ONLY (P4l.20)
on or before the 19th day of each month, from this date until the
total payment of the price above stipulated, including interest.
because they failed to pay the August installment, despite
demand, for more than four (4) months.
The breach of the contract adverted to by the defendants-
appellants is so slight and casual when we consider that apart
from the initial downpayment of P392.00 the plaintiffs-appellees
had already paid the monthly installments for a period of almost
nine (9) years. In other words, in only a short time, the entire
obligation would have been paid. Furthermore, although the
principal obligation was only P 3,920.00 excluding the 7 percent
interests, the plaintiffs- appellees had already paid an aggregate
amount of P 4,533.38. To sanction the rescission made by the
defendants-appellants will work injustice to the plaintiffs-
appellees. (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA
829) It would unjustly enrich the defendants-appellants.
Article 1234 of the Civil Code which provides that:
If the obligation has been substantially performed in good faith,
the obligor may recover as though there had been a strict and
complete fulfillment, less damages suffered by the obligee.
also militates against the unilateral act of the defendants-
appellants in cancelling the contract.
We agree with the observation of the lower court to the effect that:
Although the primary object of selling subdivided lots is business,
yet, it cannot be denied that this subdivision is likewise purposely
done to afford those landless, low income group people of
realizing their dream of a little parcel of land which they can really
call their own.
The defendants-appellants cannot rely on paragraph 9 of the
contract which provides:

NINTH.-That whatever consideration of the party of the FIRST
PART may concede to the party of the SECOND PART, as not
exacting a strict compliance with the conditions of paragraph 6 of
this contract, as well as any other condonation that the party of
the FIRST PART may give to the party of the SECOND PART
with regards to the obligations of the latter, should not be
interpreted as a renunciation on the part of the party of the FIRST
PART of any right granted it by this contract, in case of default or
non-compliance by the party of the SECOND PART.
The defendants-appellants argue that paragraph nine clearly
allows the seller to waive the observance of paragraph 6 not
merely once, but for as many times as he wishes.
The defendants-appellants' contention is without merit. We agree
with the plaintiffs-appellees that when the defendants-appellants,
instead of availing of their alleged right to rescind, have accepted
and received delayed payments of installments, though the
plaintiffs-appellees have been in arrears beyond the grace period
mentioned in paragraph 6 of the contract, the defendants-
appellants have waived and are now estopped from exercising
their alleged right of rescission. In De Guzman v. Guieb (48 SCRA
68), we held that:
xxx xxx xxx
But defendants do not deny that in spite of the long arrearages,
neither they nor their predecessor, Teodoro de Guzman, even
took steps to cancel the option or to eject the appellees from the
home-lot in question. On the contrary, it is admitted that the
delayed payments were received without protest or qualification.
... Under these circumstances, We cannot but agree with the
lower court that at the time appellees exercised their option,
appellants had already forfeited their right to invoke the above-
quoted provision regarding the nullifying effect of the non-
payment of six months rentals by appellees by their having
accepted without qualification on July 21, 1964 the full payment
by appellees of all their arrearages.
The defendants-appellants contend in the second assignment of
error that the ledger of payments show a balance of P671,67 due
from the plaintiffs-appellees. They submit that while it is true that
the total monthly installments paid by the plaintiffs-appellees may
have exceeded P3,920.00, a substantial portion of the said
payments were applied to the interests since the contract
specifically provides for a 7% interest per annum on the remaining
balance. The defendants-appellants rely on paragraph 2 of the
contract which provides:
SECOND.—That in consideration of the agreement of sale of the
above described property, the party of the SECOND PART
obligates himself to pay to the party of the FIRST PART the Sum
of THREE THOUSAND NINE HUNDRED TWENTY ONLY (P
3,920.00), Philippine Currency, plus interest at the rate of 7% per
annum ... . (Emphasis supplied)
The plaintiffs-appellees on the other hand are firm in their
submission that since they have already paid the defendants-
appellants a total sum of P4,533.38, the defendants-appellants
must now be compelled to execute the final deed of sale pursuant
to paragraph 12 of the contract which provides:
TWELFTH.—That once the payment of the sum of P3,920.00, the
total price of the sale is completed, the party to the FIRST PART
will execute in favor of the party of the SECOND PART, the
necessary deed or deeds to transfer to the latter the title of the
parcel of land sold, free from all hens and encumbrances other
than those expressly provided in this contract; it is understood,
however, that au the expenses which may be incurred in the said
transfer of title shall be paid by the party of the SECOND PART,
as above stated.
Closely related to the second assignment of error is the
submission of the plaintiffs-appellees that the contract herein is a
contract of adhesion.
OBLICON 1-9-2018 I ACJUCO 6
We agree with the plaintiffs-appellees. The contract to sell
entered into by the parties has some characteristics of a contract
of adhesion. The defendants-appellants drafted and prepared the
contract. The plaintiffs-appellees, eager to acquire a lot upon
which they could build a home, affixed their signatures and
assented to the terms and conditions of the contract. They had no
opportunity to question nor change any of the terms of the
agreement. It was offered to them on a "take it or leave it" basis.
In Sweet Lines, Inc. v. Teves (83 SCRA 36 1), we held that:
xxx xxx xxx
... (W)hile generally, stipulations in a contract come about after
deliberate drafting by the parties thereto. . . . there are certain
contracts almost all the provisions of which have been drafted
only by one party, usually a corporation. Such contracts are called
contracts of adhesion, because the only participation of the party
is the signing of his signature or his "adhesion" thereto. Insurance
contracts, bills of lading, contracts of sale of lots on the installment
plan fall into this category. (Paras, Civil Code of the Philippines,
Seventh ed., Vol. 1, p. 80.) (Emphasis supplied)
While it is true that paragraph 2 of the contract obligated the
plaintiffs-appellees to pay the defendants-appellants the sum of
P3,920.00 plus 7% interest per annum, it is likewise true that
under paragraph 12 the seller is obligated to transfer the title to
the buyer upon payment of the P3,920.00 price sale.
The contract to sell, being a contract of adhesion, must be
construed against the party causing it. We agree with the
observation of the plaintiffs-appellees to the effect that "the terms
of a contract must be interpreted against the party who drafted the
same, especially where such interpretation will help effect justice
to buyers who, after having invested a big amount of money, are
now sought to be deprived of the same thru the prayed application
of a contract clever in its phraseology, condemnable in its
lopsidedness and injurious in its effect which, in essence, and in
its entirety is most unfair to the buyers."
Thus, since the principal obligation under the contract is only
P3,920.00 and the plaintiffs-appellees have already paid an
aggregate amount of P4,533.38, the courts should only order the
payment of the few remaining installments but not uphold the
cancellation of the contract. Upon payment of the balance of
P671.67 without any interest thereon, the defendants-appellants
must immediately execute the final deed of sale in favor of the
plaintiffs-appellees and execute the necessary transfer
documents as provided in paragraph 12 of the contract. The
attorney's fees are justified.
WHEREFORE, the instant petition is DENIED for lack of merit.
The decision appealed from is AFFIRMED with the modification
that the plaintiffs-appellees should pay the balance of SIX
HUNDRED SEVENTY ONE PESOS AND SIXTY-SEVEN
CENTAVOS (P671.67) without any interests. Costs against the
defendants-appellants.
SO ORDERED.

G.R. No. L-55665 February 8, 1989
DELTA MOTOR CORPORATION, petitioner,
vs.
EDUARDA SAMSON GENUINO, JACINTO S. GENUINO, Jr.,
VICTOR S. GENUINO, HECTOR S. GENUINO, EVELYN S.
GENUINO, and The COURT OF APPEALS, respondents.
Alcasid, Villanueva & Associates for petitioner.
Luna, Puruganan, Sison & Ongkiko for respondents.
CORTES, J.:
Petitioner, through this petition for review by certiorari, appeals
from the decision of respondent appellate court in CA-G.R. No.
59848-R entitled "Eduarda Samson Genuino, et al. v. Delta Motor
Corporation" promulgated on October 27, 1980.
The facts are as follows:
Petitioner Delta Motor Corporation (hereinafter referred to as
Delta) is a corporation duly organized and existing under
Philippine laws.
On the other hand, private respondents are the owners of an
iceplant and cold storage located at 1879 E. Rodriguez Sr.
Avenue, Quezon City doing business under the name "España
Extension Iceplant and Cold Storage."
In July 1972, two letter-quotations were submitted by Delta to
Hector Genuino offering to sell black iron pipes. T
The letter dated July 3, 1972 quoted Delta's selling price for 1,200
length of black iron pipes schedule 40, 2" x 20' including delivery
at P66,000.00 with the following terms of payment:
a. 20% of the net contract price or P13,200.00 will be due and
payable upon signing of the contract papers.
b. 20% of the net contract price or P13,200.00 will be due and
payable before commencement of delivery.
c. The balance of 60% of the net contract price or P39,600.00 with
8% financing charge per annum will be covered by a Promissory
Note bearing interest at the rate of 14% per annum and payable
in TWELVE (12) equal monthly installment (sic), the first of which
will become due thirty (30) days after the completion of delivery.
Additional 14% will be charged for all delayed payments. [Exh.
"A"; Exh. 1.]
The second letter-quotation dated July 18, 1972 provides for the
selling price of 150 lengths of black iron pipes schedule 40, 1 1/4"
x 20' including delivery at P5,400.00 with the following terms of
payment:
a. 50% of the net contract price or P 2,700.00 will be due and
payable upon signing of the contract papers.
b. 50% of the net contract price or P 2,700.00 will be due and
payable before commencement of delivery. [Exh. "C"; Exh. "2".]
Both letter-quotations also contain the following stipulations as to
delivery and price offer:
DELIVERY
Ex-stock subject to prior sales.
xxx xxx xxx
Our price offer indicated herein shall remain firm within a period
of thirty (30) days from the date hereof. Any order placed after
OBLICON 1-9-2018 I ACJUCO 7
said period will be subject to our review and confirmation. [Exh.
"A" and "C"; Exhs. "l" and "2".]
Hector Genuino was agreeable to the offers of Delta hence, he
manifested his conformity thereto by signing his name in the
space provided on July 17, 1972 and July 24, 1972 for the first
and second letter-quotations, respectively.
It is undisputed that private respondents made initial payments on
both contracts — for the first contract, P13,200.00 and, for the
second, P2,700.00 — for a total sum of P15,900.00 on July 28,
1972 (Exhs. "B" and "D"].
Likewise unquestionable are the following. the non-delivery of the
iron pipes by Delta; the non-payment of the subsequent
installments by the Genuinos; and the non-execution by the
Genuinos of the promissory note called for by the first contract.
The evidence presented in the trial court also showed that
sometime in July 1972 Delta offered to deliver the iron pipes but
the Genuinos did not accept the offer because the construction of
the ice plant building where the pipes were to be installed was not
yet finished.
Almost three years later, on April 15, 1975, Hector Genuino, in
behalf of España Extension Ice Plant and Cold Storage, asked
Delta to deliver the iron pipes within thirty (30) days from its
receipt of the request. At the same time private respondents
manifested their preparedness to pay the second installment on
both contracts upon notice of Delta's readiness to deliver.
Delta countered that the black iron pipes cannot be delivered on
the prices quoted as of July 1972. The company called the
attention of the Genuinos to the stipulation in their two (2)
contracts that the quoted prices were good only within thirty (30)
days from date of offer. Whereupon Delta sent new price
quotations to the Genuinos based on its current price of black iron
pipes, as follows:
P241,800.00 for 1,200 lengths of black iron pjpes schedule 40, 2"
x 20' [Exh. "G-1".]
P17,550.00 for 150 lengths of black iron pipes schedule 40, 1 1/4"
x 20' [Exh. "G-2".]
The Genuinos rejected the new quoted prices and instead filed a
complaint for specific performance with damages seeking to
compel Delta to deliver the pipes. Delta, in its answer prayed for
rescission of the contracts pursuant to Art. 1191 of the New Civil
Code. The case was docketed as Civil Case No. Q-20120 of the
then Court of First Instance of Rizal, Branch XVIII, Quezon City.
After trial the Court of First Instance ruled in favor of Delta,the
dispositive portion of its decision reading as follows:
WHEREFORE, premises considered, judgment is rendered:
1. Declaring the contracts, Annexes "A" and "C" of the complaint
rescinded;
2. Ordering defendant to refund to plaintiffs the sum of P15,900.00
delivered by the latter as downpayments on the aforesaid
contracts;
3. Ordering plaintiffs to pay defendant the sum of P10,000.00 as
attorney's fees; and,
4. To pay the costs of suit. [CFI Decision, pp. 13-14; Rollo, pp. 53-
54.]
On appeal, the Court of Appeals reversed and ordered private
respondents to make the payments specified in "Terms of
Payment — (b)" of the contracts and to execute the promissory
note required in the first contract and thereafter, Delta should
immediately commence delivery of the black iron pipes.* [CA
Decision, p. 20; Rollo, p. 75.]

The Court of Appeals cited two main reasons why it reversed the
trial court, namely:
1. As Delta was the one who prepared the contracts and
admittedly, it had knowledge of the fact that the black iron pipes
would be used by the Genuinos in their cold storage plant which
was then undergoing construction and therefore, would require
sometime before the Genuinos would require delivery, Delta
should have included in said contracts a deadline for delivery but
it did not. As a matter of fact neither did it insist on delivery when
the Genuinos refused to accept its offer of delivery. [CA Decision,
pp. 16-17; Rollo, pp. 71-72.]
2. Delta's refusal to make delivery in 1975 unless the
Genuinos pay a price very much higher than the prices it
previously quoted would mean an amendment of the contracts. It
would be too unfair for the plaintiffs if they will be made to bear
the increase in prices of the black iron pipes when they had
already paid quite an amount for said items and defendant had
made use of the advance payments. That would be unjust
enrichment on the part of the defendant at the expense of the
plaintiffs and is considered an abominable business practice. [CA
Decision, pp. 18-19; Rollo, pp. 73-74.]
Respondent court denied Delta's motion for reconsideration
hence this petition for review praying for the reversal of the Court
of Appeals decision and affirmance of that of the trial court.
Petitioner argues that its obligation to deliver the goods under
both contracts is subject to conditions required of private
respondents as vendees. These conditions are: payment of 20%
of the net contract price or P13,200.00 and execution of a
promissory note called for by the first contract; and payment of
50% of the net contract price or P2,700.00 under the second
contract. These, Delta posits, are suspensive conditions and only
upon their performance or compliance would its obligation to
deliver the pipes arise [Petition, pp. 9-12; Rollo, pp. 1720.] Thus,
when private respondents did not perform their obligations; when
they refused to accept petitioner's offer to deliver the goods; and,
when it took them three (3) long years before they demanded
delivery of the iron pipes that in the meantime, great and sudden
fluctuation in market prices have occurred; Delta is entitled to
rescind the two (2) contracts.
Delta relies on the following provision of law on rescission:
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.
In construing Art. 1191, the Supreme Court has stated that,
"[r]escission will be ordered only where the breach complained of
is substantial as to defeat the object of the parties in entering into
the agreement. It will not be granted where the breach is slight or
casual." [Phil. Amusement Enterprises, Inc. v. Natividad, G.R. No.
L-21876, September 29, 1967, 21 SCRA 284, 290.] Further, "[t]he
question of whether a breach of a contract is substantial depends
upon the attendant circumstances." [Universal Food Corporation
v. Court of Appeals, G. R. No. L-29155, May 13,1970,33 SCRA
1, 18].
In the case at bar, the conduct of Delta indicates that the
Genuinos' non-performance of its obligations was not a
OBLICON 1-9-2018 I ACJUCO 8
substantial breach, let alone a breach of contract, as would
warrant rescission.
Firstly, it is undisputed that a month after the execution of the two
(2) contracts, Delta's offer to deliver the black iron pipes was
rejected by the Genuinos who were "not ready to accept delivery
because the cold storage rooms have not been constructed yet.
Plaintiffs (private respondents herein) were short-funded, and did
not have the space to accommodate the pipes they ordered" [CFI
Decision, p. 9; Rollo, p. 49].
Given this answer to its offer, Delta did not do anything. As
testified by Crispin Villanueva, manager of the Technical Service
department of petitioner:
Q You stated that you sent a certain Evangelista to the
España Extension and Cold Storage to offer the delivery subject
matter of the contract and then you said that Mr. Evangelista
reported (sic) to you that plaintiff would not accept delivery, is that
correct, as a summary of your statement?
A A Yes, sir.
Q Now, what did you do in the premises (sic)?
A Yes, well, we take the word of Mr. Evangelista. We could not
deliver the said black iron pipes, because as per information the
Ice Plant is not yet finished.
Q Did you not report that fact to ... any other defendant-officials of
the Delta Motor Corporation?
A No.
Q And you did not do anything after that?
A Because taking the word of my Engineer we did not do anything.
[TSN, December 8, 1975, pp. 18-19.]
xxx xxx xxx
And secondly, three (3) years later when the Genuinos offered to
make payment Delta did not raise any argument but merely
demanded that the quoted prices be increased. Thus, in its
answer to private respondents' request for delivery of the pipes,
Delta countered:
Thank you for your letter dated April 15, 1975, requesting for
delivery of Black Iron pipes;.
We regret to say, however, that we cannot base our price on our
proposals dated July 3 and July 18, 1972 as per the following
paragraph quoted on said proposal:
Our price offer indicated herein shall remain firm within a period
of thirty (30) days from the date hereof. Any order placed after
said period will be subject to our review and confirmation.
We are, therefore, enclosing our re-quoted proposal based on our
current price. [Exh. "G".]
Moreover, the power to rescind under Art. 1191 is not absolute.
"[T]he 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." [University of
the Phils. v. De los Angeles, G. R. No. L-28602, September 29,
1970, 35 SCRA 102, 107; Emphasis supplied.]
In the instant case, Delta made no manifestation whatsoever that
it had opted to rescind its contracts with f-he Genuinos. It only
raised rescission as a defense when it was sued for specific
performance by private respondents.
Further, it would be highly inequitable for petitioner Delta to
rescind the two (2) contracts considering the fact that not only
 OBLICON 1-9-2018 I ACJUCO 9

does it have in its possession and ownership the black iron pipes,
but also the P15,900.00 down payments private respondents
have paid. And if petitioner Delta claims the right to rescission, at
the very least, it should have offered to return the P15,900.00
down payments [See Art. 1385, Civil Code and Hodges v.
Granada, 59 Phil. 429 (1934)].

It is for these same reasons that while there is merit in Delta's

claim that the sale is subject to suspensive conditions, the Court
finds that it has, nevertheless, waived performance of these
conditions and opted to go on with the contracts although at a
much higher price. Art. 1545 of the Civil Code provides:

Art. 1545. Where the obligation of either party to a contract of sale

is subject to any condition which is not performed, such party may
refuse to proceed with the contract or he may waived performance
of the condition. . . . [Emphasis supplied.]

Finally, Delta cannot ask for increased prices based on the price
offer stipulation in the contracts and in the increase in the cost of
goods. Reliance by Delta on the price offer stipulation is
misplaced. Said stipulation makes reference to Delta's price offer
as remaining firm for thirty (30) days and thereafter, will be subject
to its review and confirmation. The offers of Delta, however, were
accepted by the private respondents within the thirty (30)-day
period. And as stipulated in the two (2) letter-quotations,
acceptance of the offer gives rise to a contract between the
parties:

In the event that this proposal is acceptable to you, please

indicate your conformity by signing the space provided herein
below which also serves as a contract of this proposal. [Exhs. "A"
and "C"; Exhs. "1" and "2".]

And as further provided by the Civil Code:

Art. 1319. Consent is manifested by the meeting of the offer and

the acceptance upon the thing and the cause which are to
constitute the contract.

Art. 1475. The contract of sale is perfected at the moment there

is a meeting of minds upon thing which is the object of the contract
and upon the price.

Thus, the moment private respondents accepted the offer of

Delta, the contract of sale between them was perfected and
neither party could change the terms thereof.

Neither could petitioner Delta rely on the fluctuation in the market

price of goods to support its claim for rescission. As testified to by
petitioner's Vice-President of Marketing for the Electronics,
Airconditioning and Refrigeration division, Marcelino Caja, the
stipulation in the two (2) contracts as to delivery, ex-stock subject
to prior sales, means that "the goods have not been delivered and
that there are no prior commitments other than the sale covered
by the contracts.. . once the offer is accepted, the company has
no more option to change the price." [CFI Decision, p. 5; Rollo, p.
45; Emphasis supplied.] Thus, petitioner cannot claim for higher
prices for the black iron pipes due to the increase in the cost of
goods. Based on the foregoing, petitioner Delta and private
respondents Genuinos should comply with the original terms of
their contracts.

WHEREFORE, the decision of the Court of Appeals is hereby

AFFIRMED.

SO ORDERED.

G.R. No. 101762 July 6, 1993
VERMEN REALTY DEVELOPMENT CORPORATION,
petitioner,
vs.
THE COURT OF APPEALS and SENECA HARDWARE CO.,
INC., respondents.
Ramon P. Gutierrez for petitioner.
Adriano Velasco for private respondent.
BIDIN, J.:
Petitioner seeks a review of the decision of the Court of Appeals
in CA-G.R. CV No. 15730, which set aside the decision of the
Regional Trial Court of Quezon City, Branch 92 in Civil Case No.
Q-45232. The dispositive portion of the assailed decision reads
as follows:
WHEREFORE, the decision a quo is set aside. As prayed for by
plaintiff-appellant, the "Offsetting Agreement" (Exhibit "E" or "2")
is hereby rescinded. Room 601 of Phase I of the Vermen Pines
Condominium should be returned by plaintiff-appellant to
defendant-appellee upon payment by the latter of the sum of
P330,855.25 to the former, plus damages in the sum of P5,000.00
and P50.00 for the furnishings of Phase I of Condo (sic) Units
Nos. 601 and 602, and three (3) day rental of Room 402 during
the Holy Week of 1982, respectively. In addition, defendant-
appellee is hereby ordered to pay plaintiff-appellant, who was
compelled to litigate and hire the services of counsel to protect its
interests against defendant-appellee's violation of their Offsetting
Agreement, the sum of P10,000.00 as an award for attorney's fee
(sic) and other expenses of litigation. The claim for unrealized
profits in a sum equivalent to 10% to 20% percent or P522,000.00
not having been duly proved, is therefore DENIED. No costs.
(Rollo, p. 31)
On March 2, 1981, petitioner Vermen Realty and Development
Corporation, as First Party, and private respondent Seneca
Hardware Co., Inc., as Second Party, entered into a contract
denominated as "Offsetting Agreement". The said agreement
contained the following stipulations:
1. That the FIRST PARTY is the owner/developer of
VERMEN PINES CONDOMINIUM located at Bakakeng Road,
Baguio City;
2. That the SECOND PARTY is in business of construction
materials and other hardware items;
3. That the SECOND PARTY desires to buy from the
FIRST PARTY two (2) residential condominium units, studio type,
with a total floor area of 76.22 square meter (sic) more or less
worth TWO HUNDRED SEVENTY SIX THOUSAND
(P276,000.00) PESOS only;
4. That the FIRST PARTY desires to but from the
SECOND PARTY construction materials mostly steel bars,
electrical materials and other related items worth FIVE
HUNDRED FIFTY TWO THOUSAND (P552,000.00) PESOS
only;
5. That the FIRST PARTY shall pay the SECOND PARTY
TWO HUNDRED SEVENTY SIX THOUSAND (P276,000.00)
PESOS in cash upon delivery of said construction materials and
the other TWO HUNDRED SEVENTY SIX THOUSAND
(P276,000.00) PESOS shall be paid in the form of two (2)
residential condominium units, studio type, with a total floor area
of 76.22 square meter (sic) more or less also worth P276,000.00;
6. That, for every staggered delivery of construction
materials, fifty percent (50%) shall be paid by the FIRST PARTY
to the SECOND PARTY C.O.D. and, fifty percent (50%) shall be
OBLICON 1-9-2018 I ACJUCO 10
credited to the said condominium unit in favor of the SECOND
PARTY;
7. That the SECOND PARTY shall deliver to the FIRST
PARTY said construction materials under the agreed price and
conditions stated in the price quotation approved by both parties
and made an integral part of this document;
8. That the SECOND PARTY is obliged to start delivering
to the FIRST PARTY all items in the purchase order seven (7)
days from receipt of said purchase order until such time that the
whole amount of P552,000.00 is settled;
9. That the place of delivery shall be Vermen Pines
Condominium at Bakakeng Road, Baguio City;
10. That the freight cost of said materials shall be borne fifty
percent (50%) by the FIRST PARTY and fifty percent (50%) by
the SECOND PARTY;
11. That the FIRST PARTY pending completion of the
VERMEN PINES CONDOMINIUM PHASE II which is the subject
of this contract, shall deliver to the SECOND PARTY the
possession of residential condominium, Phase I, Unit Nos. 601
and 602, studio type with a total area of 76.22 square meters or
less, worth P276,000.00;
12. That after the completion of Vermen Pines
Condominium Phase II, the SECOND PARTY shall be given by
the FIRST PARTY the first option to transfer from Phase I to
Phase II under the same price, terms and conditions. (Rollo, pp.
26-28).
As found by the appellate court and admitted by both parties,
private respondent had paid petitioner the amount of
P110,151.75, and at the same time delivered construction
materials worth P219,727.00. Pending completion of Phase II of
the Vermen Pines Condominiums, petitioner delivered to private
respondent units 601 and 602 at Phase I of the Vermen Pines
Condominiums (Rollo, p. 28). In 1982, the petitioner repossessed
unit 602. As a consequence of the repossession, the officers of
the private respondent corporation had to rent another unit for
their use when they went to Baguio on April 8, 1982. On May 10,
1982, the officers of the private respondent corporation requested
for a clarification of the petitioner's action of preventing them and
their families from occupying condominium unit 602.
In its reply dated May 24, 1982, the petitioner corporation averred
that Room 602 was leased to another tenant because private
respondent corporation had not paid anything for purchase of the
condominium unit. Petitioner corporation demanded payment of
P27,848.25 representing the balance of the purchase price of
Room 601.
In 1983, the loan application for the construction of the Vermen
Pines Condominium Phase II was denied. Consequently,
construction of the condominium project stopped and has not
been resumed since then.
On June 21, 1985, private respondent filed a complaint with the
Regional Trial Court of Quezon City (Branch 92) for rescission of
the Offsetting Agreement with damages. In said complaint, private
respondent alleged that petitioner Vermen Realty Corporation
had stopped issuing purchase orders of construction materials
after April, 1982, without valid reason, thus resulting in the
stoppage of deliveries of construction materials on its (Seneca
Hardware) part, in violation of the Offsetting Agreement.
In its Answer filed on August 15, 1985, petitioner alleged that the
fault lay with private respondent (plaintiff therein): although
petitioner issued purchase orders, it was private respondent who
could not deliver the supplies ordered, alleging that they were out
of stock. (However, during a hearing on January 28, 1987, the
Treasurer of petitioner corporation, when asked where the
purchase orders were, alleged that she was going to produce the
same in court, but the same was never produced (Rollo, p. 30).

Moreover, private respondent quoted higher prices for the
construction materials which were available. Thus, petitioner had
to resort to its other suppliers. Anent the query as to why Unit 602
was leased to another tenant, petitioner averred that this was
done because private respondent had not paid anything for it.
As of December 16, 1986, private respondent had paid petitioner
P110,151.75 in cash, made deliveries of construction materials
worth P219,727.00, leaving a balance of P27,848.25 representing
the purchase price of unit 601 (Rollo, p. 28). The price of one
condominium unit was P138,000.00.
After conducting hearings, the trial court rendered a decision
dismissing the complaint and ordering the plaintiff (private
respondent in this petition) to pay defendant (petitioner in this
petition) on its counterclaim in the amount of P27,848.25
representing the balance due on the purchase price of
condominium unit 601.
On appeal, respondent court reversed the trial court's decision as
adverted to above.
Petitioner now comes before us with the following assignment of
errors:
I who failed to perform its obligation in the Offsetting Agreement. It
THE RESPONDENT COURT OF APPEALS ERRED, AND ITS
ERROR IS REVIEWABLE BY THIS HONORABLE COURT,
WHEN IT SUPPLANTED CONTRARY TO THE EVIDENCE ON
RECORD, THE TRIAL COURT'S CONCLUSIONS THAT
PETITIONER DID NOT VIOLATE THE "OFFSETTING
AGREEMENT" IT ENTERED INTO WITH THE SENECA
HARDWARE CO., INC. WITH ITS TOTALLY BASELESS
"PERCEPTION" THAT IT WAS PETITIONER WHICH
DISCONTINUED TO ISSUE PURCHASE ORDERS DUE TO
THE STOPPAGE OF THE CONSTRUCTION OF PHASE II OF
THE CONDOMINIUM PROJECT WHEN THE LOAN ON THE
SAID PROJECT WAS STOPPED.
II
THE RESPONDENT COURT OF APPEALS ERRED, AND ITS
ERROR IS REVIEWABLE BY THIS HONORABLE COURT,
WHEN IT CONCLUDED THAT IT WAS PETITIONER WHICH
BREACHED THE "OFFSETTING AGREEMENT" BECAUSE IT
DID NOT SEND PURCHASE ORDERS TO PRIVATE
RESPONDENT AND DISCONTINUED THE CONSTRUCTION
OF THE CONDOMINIUM PROJECT DESPITE THE FACT THAT
THE EXHIBITS ATTESTING TO THIS FACT WAS FORMALLY
OFFERED IN EVIDENCE IN COURT AND MENTIONED BY IT
IN ITS DECISION.
III
THE RESPONDENT COURT OF APPEALS ERRED, AND ITS
ERROR IS REVIEWABLE BY THIS HONORABLE COURT,
WHEN IT CONCLUDED THAT IT WAS PETITIONER WHICH
BREACHED THE "OFFSETTING AGREEMENT" DESPITE THE
ADMISSION MADE BY PRIVATE RESPONDENT'S OWN
WITNESS THAT PETITIONER HAD THE DISCRETION TO
ORDER OR NOT TO ORDER THE CONSTRUCTION
MATERIAL (SIC) FROM THE FORMER. (Rollo, p. )
The issue presented before the Court is whether or not the
circumstances of the case warrant rescission of the Offsetting
Agreement as prayed for by Private Respondent when he
instituted the case before the trial court.
We rule in favor of private respondent. There is no controversy
that the provisions of the Offsetting Agreement are reciprocal in
nature. Reciprocal obligations are those created or established at
the same time, out of the same cause, and which results in a
mutual relationship of creditor and debtor between parties. In
reciprocal obligations, the performance of one is conditioned on
the simultaneous fulfillment of the other obligation (Abaya vs.
OBLICON 1-9-2018 I ACJUCO 11
Standard Vacuum Oil Co., 101 Phil. 1262 [1957]). Under the
agreement, private respondent shall deliver to petitioner
construction materials worth P552,000.00 under the conditions
set forth in the Offsetting Agreement. Petitioner's obligation under
the agreement is three-fold: he shall pay private respondent
P276,000.00 in cash; he shall deliver possession of units 601 and
602, Phase I, Vermen Pines Condominiums (with total value of
P276,000.00) to private respondent; upon completion of Vermen
Pines Condominiums Phase II, private respondent shall be given
option to transfer to similar units therein.
Article 1191 of the Civil Code provides the remedy of rescission
in (more appropriately, the term is "resolution") in case of
reciprocal obligations, where one of the obligors fails to comply
with that is incumbent upon him.
The general rule is that rescission of a contract will not be
permitted for a slight or causal breach, but only for such
substantial and fundamental breach as would defeat the very
object of the parties in executing the agreement. The question of
whether a breach of contract is substantial depends upon the
attendant circumstances (Universal Food Corp. vs. Court of
Appeals, 33 SCRA 1, [1970]).
In the case at bar, petitioner argues that it was private respondent
averred that contrary to the appellate court's ruling, the mere
stoppage of the loan for the construction of Phase II of the Vermen
Pines Condominiums should not have had any effect on the
fulfillment of the obligations set forth in the Offsetting Agreement.
Petitioner moreover stresses that contrary to private respondent's
averments, purchase orders were sent, but there was failure to
deliver the materials ordered because they were allegedly out of
stock. Petitioner points out that, as admitted by private
respondent's witness, petitioner had the discretion to order or not
to order constructions materials, and that it was only after
petitioner approved the price, after making a canvass from other
suppliers, that the latter would issue a purchase order. Petitioner
argues that this was the agreement, and therefore the law
between the parties, hence, when no purchase orders were
issued, no provision of the agreement was violated.
Private respondent, on the other hand, points out that the subject
of the Offsetting Agreement is Phase II of the Vermen Pines
Condominiums. It alleges that since construction of Phase II of
the Vermen Pines Condominiums has failed to begin (Rollo, p.
104), it has reason to move for rescission of the Offsetting
Agreement, as it cannot forever wait for the delivery of the
condominium units to it.
It is evident from the facts of the case that private respondent did
not fail to fulfill its obligation in the Offsetting Agreement. The
discontinuance of delivery of construction materials to petitioner
stemmed from the failure of petitioner to send purchase orders to
private respondent. The allegation that petitioner had been
sending purchase orders to private respondent, which the latter
could not fill, cannot be given credence. Perhaps in the beginning,
it would send purchase orders to private respondent (as
evidenced by the purchase orders presented in court), and the
latter would deliver the construction materials ordered. However,
according to private respondent, after April, 1982, petitioner
stopped sending purchase orders. Petitioner failed to refute this
allegation. When petitioner's witness, Treasurer of the petitioner
corporation, was asked to produce the purchase orders in court,
the latter promised to do so, but this was never complied with.
On the other hand, petitioner would never able to fulfill its
obligation in allowing private respondent to exercise the option to
transfer from Phase I to Phase II, as the construction of Phase II
has ceased and the subject condominium units will never be
available.
The impossibility of fulfillment of the obligation on the part of
petitioner necessitates resolution of the contract for indeed, the
non-fulfillment of the obligation aforementioned constitutes
substantial breach of the Offsetting Agreement. The possibility of
 OBLICON 1-9-2018 I ACJUCO 12

exercising the option of whether or not to transfer to condominium

units in Phase II was one of the factors which were considered by
private respondent when it entered into the agreement. Since the
construction of the Vermen Pines Condominium Phase II has
stopped, petitioner would be in no position to perform its obligation
to give private respondent the option to transfer to Phase II. It
would be the height of injustice to make private respondent wait
for something that may never come.

WHEREFORE, the petition is DENIED for lack of merit. Costs

against petitioner.

SO ORDERED.

MODES OF BREACH
DELAY OR MORA
i. MORA SOLVENDI
G.R. No. 77648 August 7, 1989
CETUS DEVELOPMENT, INC., petitioner,
vs.
COURT OF APPEALS and ONG TENG, respondents.
G.R. No. 77647 August 7, 1989
CETUS DEVELOPMENT, INC., petitioner,
vs.
COURT OF APPEALS and EDERLINA NAVALTA,
respondents.
G.R. No. 77649 August 7, 1989
CETUS DEVELOPMENT, INC., petitioner,
vs.
COURT OF APPEALS and JOSE LIWANAG, respondents.
G.R. No. 77650 August 7, 1989
CETUS DEVELOPMENT, INC., petitioner,
vs.
COURT OF APPEALS and LEANDRO CANLAS, respondents.
G.R. No. 77651 August 7, 1989
CETUS DEVELOPMENT, INC., petitioner,
vs.
COURT OF APPEALS and VICTORIA SUDARIO respondents.
G.R. No.77652 August 7, 1989
CETUS DEVELOPMENT, INC., petitioner,
vs.
COURT OF APPEALS and FLORA NAGBUYA respondents.
MEDIALDEA, J.:
This is a petition for review on certiorari of the decision dated
January 30, 1987 of the Court of Appeals in CA-GR Nos. SP-
07945-50 entitled, "Cetus Development, Inc., Petitioner vs. Hon.
Conrado T. Limcaoco, Presiding Judge, Regional Trial Court of
Manila, Branch Ederlina Navalta, et. al., respondents.
The following facts appear in the records:
The private respondents, Ederlina Navalta, Ong Teng, Jose
Liwanag, Leandro Canlas, Victoria Sudario, and Flora Nagbuya
were the lessees of the premises located at No. 512 Quezon
Boulevard, Quiapo, Manila, originally owned by the Susana
Realty. These individual verbal leases were on a month-to month
basis at the following rates: Ederlina Navalta at the rate of P80.50;
Ong Teng at the rate of P96.10; Jose Liwanag at the rate of
P40.35; Leandro Canlas at the rate of P80.55; Victoria Sudario at
the rate of P50.45 and Flora Nagbuya at the rate of P80.55. The
payments of the rentals were paid by the lessees to a collector of
the Susana Realty who went to the premises monthly.
Sometime in March, 1984, the Susana Realty sold the leased
premises to the petitioner, Cetus Development, Inc., a corporation
duly organized and existing under the laws of the Philippines.
From April to June, 1984, the private respondents continued to
pay their monthly rentals to a collector sent by the petitioner. In
the succeeding months of July, August and September 1984, the
respondents failed to pay their monthly individual rentals as no
collector came.
OBLICON 1-9-2018 I ACJUCO 13
On October 9, 1984, the petitioner sent a letter to each of the
private respondents demanding that they vacate the subject
premises and to pay the back rentals for the months of July,
August and September, 1984, within fifteen (15) days from the
receipt thereof. Immediately upon the receipt of the said demand
letters on October 10, 1984, the private respondents paid their
respective arrearages in rent which were accepted by the
petitioner subject to the unilateral condition that the acceptance
was without prejudice to the filing of an ejectment suit.
Subsequent monthly rental payments were likewise accepted by
the petitioner under the same condition.
For failure of the private respondents to vacate the premises as
demanded in the letter dated October 9, 1984, the petitioner filed
with the Metropolitan Trial Court of Manila complaints for
ejectment against the manner, as follows: (1) 105972-CV, against
Ederlina Navalta (2) 105973-CV, against Jose Liwanag; (3)
105974-CV, against Flora Nagbuya; (4) 105975-CV, against
Leandro Canlas; (5) 105976-CV, against Victoria Sudario and (6)
105977-CV, against Ong Teng.
In their respective answers, the six (6) private respondents
interposed a common defense. They claimed that since the
occupancy of the premises they paid their monthly rental regularly
through a collector of the lessor; that their non-payment of the
rentals for the months of July, August and September, 1984, was
due to the failure of the petitioner (as the new owner) to send its
collector; that they were at a loss as to where they should pay
their rentals; that sometime later, one of the respondents called
the office of the petitioner to inquire as to where they would make
such payments and he was told that a collector would be sent to
receive the same; that no collector was ever sent by the petitioner;
and that instead they received a uniform demand letter dated
October 9, 1984.
The private respondents, thru counsel, later filed a motion for
consolidation of the six cases and as a result thereof, the said
cases were consolidated in the Metropolitan Trial Court of Manila,
Branch XII, presided over by Judge Eduardo S. Quintos, Jr. On
June 4, 1985, the trial court rendered its decision dismissing the
six cases, a pertinent portion of which reads, as follows:
The records of this case show that at the time of the filing of this
complaint, the rentals had all been paid. Hence, the plaintiff
cannot eject the defendants from the leased premises, because
at the time these cases were instituted, there are no rentals in
arrears.
The acceptance of the back rental by the plaintiff before the filing
of the complaint, as in these case, the alleged rental arrearages
were paid immediately after receipt of the demand letter, removes
its cause of action in an unlawful detainer case, even if the
acceptance was without prejudice.
x x x.
Furthermore, the court has observed that the account involved
which constitutes the rentals of the tenants are relatively small to
which the ejectment may not lie on grounds of equity and for
humanitarian reasons.
Defendants' counterclaim for litigation expenses has no legal and
factual basis for assessing the same against plaintiff.
WHEREFORE, judgment is hereby rendered dismissing these
cases, without pronouncement as to costs.
Defendants' counterclaim is likewise dismissed.
SO ORDERED. (pp. 32-33, Rollo, G.R. No. 77647)
Not satisfied with the decision of the Metropolitan Trial Court, the
petitioner appealed to the Regional Trial Court of Manila and the
same was assigned to Branch IX thereof presided over by Judge
Conrado T. Limcaoco (now Associate Justice of the Court of

Appeals).lâwphî1.ñèt In its decision dated November 19, 1985,
the Regional Trial Court dismissed the appeal for lack of merit.
In due time, a petition for review of the decision of the Regional
Trial Court was filed by the petitioner with the Court of Appeals.
Said petition was dismissed on January 30, 1987, for lack of merit.
Aggrieved by the decision of the Court of Appeals, petitioner now
comes to Us in this petition, assigning the following errors:
ASSIGNMENT OF ERRORS
I
RESPONDENT COURT OF APPEALS COMMITTED A GRAVE
ABUSE OF DISCRETION, AMOUNTING TO LACK OF
JURISDICTION, WHEN IT ERRED IN HOLDING THAT THE
CAUSE OF ACTION FOR UNLAWFUL DETAINER IN THESE
CASES DID NOT EXIST WHEN THE COMPLAINTS WERE
FILED BECAUSE PRIVATE RESPONDENTS TENDERED, AND
PETITIONER ACCEPTED, THE PAYMENT OF THE THREE (3)
MONTHS RENTAL IN ARREARS WITHIN THE FIFTEEN (15)
DAY PERIOD FROM PRIVATE RESPONDENTS' RECEIPT OF
PETITIONER'S DEMAND LETTERS TO VACATE THE
SUBJECT PREMISES AND TO PAY THE RENTALS IN
ARREARS.
II
RESPONDENT COURT OF APPEALS COMMITTED A
GRAVEABUSE OF DISCRETION, AMOUNTING TO LACK OF
JURISDICTION COMMITTED A GRAVE WHEN IT ERRED IN
AFFIRMING THE DISMISSAL OF THE COMPLAINTS IN THESE
CASES NOTWITHSTANDING THE EXISTENCE OF VALID
GROUNDS FOR THE JUDICIAL EJECTMENT OF PRIVATE
RESPONDENT.
III
RESPONDENT COURT OF APPEALS COMMITTED A GRAVE
ABUSE OF DISCRETION, AMOUNTING TO LACK OF
JURISDICTION, WHEN IT ERRED IN HOLDING THAT THESE
CASES ARE CLASSIC EXAMPLES TO CIRCUMVENT THE
RENT CONTROL LAW. (pp. 164-165, Rollo, G.R. No. 77647)
The Court of Appeals defined the basic issue in this case as
follows: whether or not there exists a cause of action when the
complaints for unlawful detainer were filed considering the fact
that upon demand by petitioner from private respondents for
payment of their back rentals, the latter immediately tendered
payment which was accepted by petitioner.
In holding that there was no cause of action, the respondent Court
relied on Section 2, Rule 70 of the Rules of Court, which provides:
Sec. 2. Landlord to proceed against tenant only after demand.
— No landlord or his legal representative or assign, shall be such
action against a tenant for failure to pay rent due or to comply with
the conditions of his lease, unless the tenant shall have failed to
pay such rent or comply with such conditions for a period of fifteen
(15) days or five (5) days in case of building, after demand
therefor, made upon qqqm personally, or by serving written notice
of such demand upon the person found on the premises, or by
posting such notice on the premises if no persons be found
thereon.
It interpreted the said provision as follows:
.....the right to bring an action of ejectment or unlawful detainer
must be counted from the time the defendants failed to pay rent
after the demand therefor. It is not the failure per se to pay rent as
agreed in the contract, but the failure to pay the rent after a
demand therefor is made, that entitles the lessor to bring an action
for unlawful detainer. In other words, the demand contemplated
by the above-quoted provision is not a demand to vacate, but a
demand made by the landlord upon his tenant for the latter to pay
OBLICON 1-9-2018 I ACJUCO 14
the rent due if the tenant fails to comply with the said demand with
the period provided, his possession becomes unlawful and the
landlord may then bring the action for ejectment. (p. 28, , G.R. No.
77647)
We hold that the demand required and contemplated in Section
2, aforequoted, is a jurisdictional requirement for the purpose of
bringing an unlawful detainer suit for failure to pay rent or comply
with the conditions of lease. It partakes of an extrajudicial remedy
that must be pursued before resorting for judicial action so much
so that when there is full compliance with the demand, there
arises no necessity for court action.
As to whether this demand is merely a demand to pay rent or
comply with the conditions of the lease or also a demand to
vacate, the answer can be gleaned from said Section 2. This
section presupposes the existence of a cause of action for
unlawful detainer as it speaks of "failure to pay rent due or comply
with the conditions of the lease." The existence of said cause of
action gives the lessor the right under Article 1659 of the New Civil
Code to ask for the rescission of the contract of lease and
indemnification for damages, or only the latter, allowing the
contract to remain in force. Accordingly, if the option chosen is for
specific performance, then the demand referred to is obviously to
pay rent or to comply with the conditions of the lease violated.
However, if rescission is the option chosen, the demand must be
for the lessee to pay rents or to comply with the conditions of the
lease and to vacate. Accordingly, the rule that has been followed
in our jurisprudence where rescission is clearly the option taken,
is that both demands to pay rent and to vacate are necessary to
make a lessee a deforciant in order that an ejectment suit may be
filed (Casilan et al. vs. Tomassi, L-16574, February 28,1964, 10
SCRA 261; Rickards vs. Gonzales, 109 Phil. 423, Dikit vs.
Icasiano, 89 Phil. 44).lâwphî1.ñèt
Thus, for the purpose of bringing an ejectment suit, two requisites
must concur, namely: (1) there must be failure to pay rent or
comply with the conditions of the lease and (2) there must be
demand both to pay or to comply and vacate within the periods
specified in Section 2, Rule 70, namely 15 days in case of lands
and 5 days in case of buildings. The first requisite refers to the
existence of the cause of action for unlawful detainer while the
second refers to the jurisdictional requirement of demand in order
that said cause of action may be pursued.
It is very clear that in the case at bar, no cause of action for
ejectment has accrued. There was no failure yet on the part of
private respondents to pay rents for three consecutive months. As
the terms of the individual verbal leases which were on a month-
to-month basis were not alleged and proved, the general rule on
necessity of demand applies, to wit: there is default in the
fulfillment of an obligation when the creditor demands payment at
the maturity of the obligation or at anytime thereafter. This is
explicit in Article 1169, New Civil Code which provides that
"(t)hose 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." Petitioner has not shown
that its case falls on any of the following exceptions where
demand is not required: (a) when the obligation or the law so
declares; (b) when from the nature and circumstances of the
obligation it can be inferred that time is of the essence of the
contract; and (c) when demand would be useless, as when the
obligor has rendered it beyond his power to perform.
The demand required in Article 1169 of the Civil Code may be in
any form, provided that it can be proved. The proof of this demand
lies upon the creditor. Without such demand, oral or written, the
effects of default do not arise. This demand is different from the
demand required under Section 2, Rule 70, which is merely a
jurisdictional requirement before an existing cause of action may
be pursued.
The facts on record fail to show proof that petitioner demanded
the payment of the rentals when the obligation matured. Coupled
with the fact that no collector was sent as previously done in the
past, the private respondents cannot be held guilty of mora
 OBLICON 1-9-2018 I ACJUCO 15

solvendi or delay in the payment of rentals. Thus, when petitioner

first demanded the payment of the 3-month arrearages and
private respondents lost no time in making tender and payment,
which petitioner accepted, no cause of action for ejectment
accrued. Hence, its demand to vacate was premature as it was
an exercise of a non-existing right to rescind.

In contradistinction, where the right of rescission exists, payment

of the arrearages in rental after the demand to pay and to vacate
under Section 2, Rule 70 does not extinguish the cause of action
for ejectment as the lessor is not only entitled to recover the
unpaid rents but also to eject the lessee.

Petitioner correctly argues that acceptance of tendered payment

does not constitute a waiver of the cause of action for ejectment
especially when accepted with the written condition that it was
"without prejudice to the filing of an ejectment suit". Indeed, it is
illogical or ridiculous not to accept the tender of payment of rentals
merely to preserve the right to file an action for unlawful detainer.
However, this line of argument presupposes that a cause of action
for ejectment has already accrued, which is not true in the instant
case.

Petitioner likewise claims that its failure to send a collector to

collect the rentals cannot be considered a valid defense for the
reason that sending a collector is not one of the obligations of the
lessor under Article 1654. While it is true that a lessor is not
obligated to send a collector, it has been duly established that it
has been customary for private respondents to pay the rentals
through a collector. Besides Article 1257, New Civil Code
provides that where no agreement has been designated for the
payment of the rentals, the place of payment is at the domicile of
the defendants. Hence, it could not be said that they were in
default in the payment of their rentals as the delay in paying the
same was not imputable to them. Rather, it was attributable to
petitioner's omission or neglect to collect.

Petitioner also argues that neither is its refused to accept the

rentals a defense for non-payment as Article 1256 provides that
"[i]f the creditor to whom the tender of payment has been made
refuses without just cause to accept it, the debtor shall be
released from responsibility by the consignation of the thing due."
It bears emphasis that in this case there was no unjustified refusal
on the part of petitioner or non-acceptance without reason that
would constitute mora accipiendi and warrant consignation. There
was simply lack of demand for payment of the rentals.

In sum, We hold that respondent Court of Appeals did not commit

grave abuse of discretion amounting to lack of jurisdiction in its
conclusion affirming the trial court's decision dismissing
petitioner's complaint for lack of cause of action. We do not agree,
however, with the reasons relied upon.

ACCORDINGLY, the petition for review on certiorari is hereby

DENIED for lack of merit and the decision dated January 30, 1987
of respondent Court of Appeals is hereby AFFIRMED.

SO ORDERED.
 OBLICON 1-9-2018 I ACJUCO 16

G.R. No. 108129 September 23, 1999

PCIB selling rate at the time of payment at least five (5) days prior
AEROSPACE CHEMICAL INDUSTRIES, INC., petitioner,
vs. to shipment date.
COURT OF APPEALS, PHILIPPINE PHOSPHATE
FERTILIZER, CORP., respondents. F. Shipping Conditions

QUISUMBING, J.: 1. Laycan : July

This petition for review assails the Decision 1 dated August 19, 2. Load port: Cotcot, Basay, Negros Or. and
1992, of the Court of Appeals, which set aside the judgment of the
Regional Trial Court of Pasig, Branch 151. The case stemmed Atlas Pier, Sangi, Cebu
from a complaint filed by the buyer (herein petitioner) against the
seller (private respondent) for alleged breach of contract. xxx xxx xxx
Although petitioner prevailed in the trial court, the appellate court
reversed and instead found petitioner guilty of delay and therefore 11. Other terms and Conditions: To be mutually agreed
liable for damages, as follows: upon.

WHEREFORE, the Decision of the court a quo is SET ASIDE and Very truly yours,
a new one rendered, dismissing the complaint with costs against
the plaintiff (herein petitioner) and, on the counterclaim, ordering Philippine Phosphate Fertilizer Corp.
the plaintiff Aerospace Chemical Industries, Inc. to pay the
defendant, Philippine Phosphate Fertilizer Corporation the sum of Signed: Herman J. Rustia
P324,516.63 representing the balance of the maintenance cost
and tank rental charges incurred by the defendant for the failure Sr. Manager, Materials & Logistics
of the plaintiff to haul the rest of the rest of the sulfuric acid on the
designated date. CONFORME:

Costs against plaintiff-appellee. 2 AEROSPACE INDUSTRIES, INC.

As gleaned from the records, the following are the antecedents: Signed: Mr. Melecio Hernandez

On June 27, 1986, petitioner Aerospace Industries, Inc. Manager

(Aerospace) purchased five hundred (500) metric tons of sulfuric
acid from private respondent Philippine Phosphate Fertilizer Initially set beginning July 1986, the agreement provided that the
Corporation (Philphos). The contract 3 was in letter-form as buyer shall pay its purchases in equivalent Philippine currency
follows: value, five days prior to the shipment date. Petitioner as buyer
committed to secure the means of transport to pick-up the
27 June 1986 purchases from private respondent's loadports. Per agreement,
one hundred metric tons (100 MT) of sulfuric acid should be taken
AEROSPACE INDUSTRIES INC. from Basay, Negros Oriental storage tank, while the remaining
four hundred metric tons (400 MT) should be retrieved from Sangi,
203 E. Fernandez St. Cebu.

San Juan, Metro Manila On August 6, 1986, private respondent sent an advisory letter 4
to petitioner to withdraw the sulfuric acid purchased at Basay
Attention:Mr. Melecio Hernandez because private respondent had been incurring incremental
expense of two thousand (P2,000.00) pesos for each day of delay
Manager in shipment.

Subject : Sulfuric Acid Shipment On October 3, 1986, petitioner paid five hundred fifty-three
thousand, two hundred eighty (P553,280.00) pesos for 500 MT of
Gentlemen: sulfuric acid.

This is to confirm our agreement to supply your Sulfuric Acid On November 19, 1986, petitioner chartered M/T Sultan
requirement under the following terms and conditions: Kayumanggi, owned by Ace Bulk Head Services. The vessel was
assigned to carry the agreed volumes of freight from designated
A. Commodity : Sulfuric Acid in Bulk loading areas. M/T Kayumanggi withdrew only 70.009 MT of
sulfuric acid from Basay because said vessel heavily tilted on its
B. Concentration : 98-99% H2SO4 port side. Consequently, the master of the ship stopped further
loading. Thereafter, the vessel underwent repairs.
C. Quantity : 500 MT-100 MT Ex-Basay
In a demand letter 5 dated December 12, 1986, private
400 MT Ex-Sangi respondent asked petitioner to retrieve the remaining sulfuric acid
in Basay tanks so that said tanks could be emptied on or before
D. Price : US$ 50.00/MT-FOB Cotcot, December 15, 1986. Private respondent said that it would charge
petitioner the storage and consequential costs for the Basay
Basay, Negros Or. tanks, including all other incremental expenses due to loading
delay, if petitioner failed to comply.
US$ 54.00/MT-FOB Sangi, Cebu
On December 18, 1986, M/T Sultan Kayumanggi docked at
E. Payment : Cash in Philippine currency Sangi, Cebu, but withdrew only 157.51 MT of sulfuric acid. Again,
the vessel tilted. Further loading was aborted. Two survey reports
payable to Philippine Phosphate conducted by the Societe Generale de Surveillance (SGS) Far
East Limited, dated December 17, 1986 and January 2, 1987,
Fertilizer Corp. (MAKATI) at attested to these occurrences.
 OBLICON 1-9-2018 I ACJUCO 17

Later, on a date not specified in the record, M/T Sultan Subject: Sulfuric Acid Ex-Isabel
Kayumanggi sank with a total of 227.51 MT of sulfuric acid on
board.1âwphi1.nêt Gentlemen:

Petitioner chartered another vessel, M/T Don Victor, with a
capacity of approximately 500 MT. 6 On January 26 and March
20, 1987, Melecio Hernandez, acting for the petitioner, addressed
letters to private respondent, concerning additional orders of
sulfuric acid to replace its sunken purchases, which letters are
hereunder excerpted:
January 26, 1987
Confirming earlier telcon with our Mr. G.B. Belen, we regret to
inform you that we cannot accommodate your request to lift
Sulfuric Acid ex-Isabel due to Pyrite limitation and delayed arrival
of imported Sulfuric Acid from Japan. 14
On July 25, 1988, petitioner's counsel wrote to private respondent
another demand letter for the delivery of the purchases remaining,
or suffer tedious legal action his client would commence.

xxx xxx xxx On May 4, 1989, petitioner filed a complaint for specific
performance and/or damages before the Regional Trial Court of
We recently charter another vessel M/T DON VICTOR who will Pasig, Branch 151. Private respondent filed its answer with
be authorized by us to lift the balance approximately 272.49 MT. counterclaim, stating that it was the petitioner who was remiss in
the performance of its obligation in arranging the shipping
We request your goodselves to grant us for another Purchase requirements of its purchases and, as a consequence, should pay
Order with quantity of 227.51 MT and we are willing to pay the damages as computed below:
additional order at the prevailing market price, provided the lifting
of the total 500 MT be centered/confined to only one safe berth Advanced Payment by Aerospace (Oct. 3, 1986)
which is Atlas Pier, Sangi, Cebu. 7 P553,280.00

March 20, 1987 Less Shipments

This refers to the remaining balance of the above product quantity 70.009 MT sulfuric acid P72,830.36
which were not loaded to the authorized cargo vessel, M/T Sultan
Kayumanggi at your load port — Sangi, Toledo City. 151.51 MT sulfuric acid 176,966.27 (249,796.63)

Please be advised that we will be getting the above product —————— ——————
quantity within the month of April 1987 and we are arranging for
a 500 MT Sulfuric Acid inclusive of which the remaining balance: Balance P303,483.37
272.49 MT an additional product quantity thereof of 227.51 MT. 8
Less Charges
Petitioner's letter 9 dated May 15, 1987, reiterated the same
request to private respondent. Basay Maintenance Expense

On January 25, 1988, petitioner's counsel, Atty. Pedro T. Santos, from Aug. 15 to Dec. 15, 1986
Jr., sent a demand letter 10 to private respondent for the delivery
of the 272.49 MT of sulfuric acid paid by his client, or the return of (P2,000.00/day x 122 days) P244,000.00
the purchase price of three hundred seven thousand five hundred
thirty (P307,530.00) pesos. Private respondent in reply, 11 on Sangi — Tank Rental
March 8, 1988, instructed petitioner to lift the remaining 30 MT of
sulfuric acid from Basay, or pay maintenance and storage from Aug. 15, 1986 to Aug. 15, 1987
expenses commencing August 1, 1986.
(P32,000.00/mo. x 12 mos.) 384,000.00 (628,000.00)
On July 6, 1988, petitioner wrote another letter, insisting on
picking up its purchases consisting of 272.49 MT and an —————— ——————
additional of 227.51 MT of sulfuric acid. According to petitioner it
had paid the chartered vessel for the full capacity of 500 MT, Receivable/Counterclaim (P324,516.63)
stating that:
===========
With regard to our balance of sulfuric acid — product at your shore
tank/plant for 272.49 metric ton that was left by M/T Sultana Trial ensued and after due proceedings, judgment was rendered
Kayumanggi due to her sinking, we request for an additional by the trial court in petitioner's favor, disposing as follows:
quantity of 227.51 metric ton of sulfuric acid, 98% concentration.
WHEREFORE, judgment is hereby rendered in favor of plaintiff
The additional quantity is requested in order to complete the and against defendant, directing the latter to pay the former the
shipment, as the chartered vessel schedule to lift the high grade following sums:
sulfuric acid product is contracted for her full capacity/load which
is 500 metric tons more or less. 1. P306,060.77 — representing the value of the
undelivered 272.49 metric tons of sulfuric acid plaintiff paid to
We are willing to pay the additional quantity — 227.51 metric tons defendant;
high grade sulfuric acid in the prevailing price of the said product.
12 2. P91,818.23 — representing unrealized profits, both
items with 12% interest per annum from May 4, 1989, when the
xxx xxx xxx complaint was filed until fully paid;

By telephone, petitioner requested private respondent's Shipping 3. P30,000.00 — as exemplary damages; and
Manager, Gil Belen, to get its additional order of 227.51 MT of
sulfuric acid at Isabel, Leyte. 13 Belen relayed the information to 4. P30,000.00 — as attorney's fees and litigation
his associate, Herman Rustia, the Senior Manager for Imports expenses, both last items also with 12% interest per annum from
and International Sales of private respondent. In a letter dated date hereof until fully paid.
July 22, 1988, Rustia replied:

Defendant's counterclaims are hereby dismissed for lack of merit.
Costs against defendant. 15
In finding for the petitioner, the trial court held that the petitioner
was absolved in its obligation to pick-up the remaining sulfuric
acid because its failure was due to force majeure. According to
the trial court, it was private respondent who committed a breach
of contract when it failed to accommodate the additional order of
the petitioner, to replace those that sank in the sea, thus:
To begin with, even if we assume that it is incumbent upon the
plaintiff to "lift" the sulfuric acid it ordered from defendant, the fact
that force majeure intervened when the vessel which was
previouly (sic) listing, but which the parties, including a
representative of the defendant, did not mind, sunk, has the effect
of absolving plaintiff from "lifting" the sulfuric acid at the
designated load port. But even assuming the plaintiff cannot be
held entirely blameless, the allegation that plaintiff agreed to a
payment of a 2,000-peso incremental expenses per day to
defendant for delayed "lifting has not been proven." . . .
Also, if it were true that plaintiff is indebted to defendant, why did
defendant accept a second additional order after the transaction
in litigation? Why also, did defendant not send plaintiff statements
of account until after 3 years?
All these convince the Court that indeed, defendant must return
what plaintiff has paid it for the goods which the latter did not
actually receive. 16
On appeal by private respondent, the Court of Appeals reversed
the decision of the trial court, as follows:
Based on the facts of this case as hereinabove set forth, it is clear
that the plaintiff had the obligation to withdraw the full amount of
500 MT of sulfuric acid from the defendant's loadport at Basay
and Sangi on or before August 15, 1986. As early as August 6,
1986 it had been accordingly warned by the defendant that any
delay in the hauling of the commodity would mean expenses on
the part of the defendant amounting to P2,000.00 a day. The
plaintiff sent its vessel, the "M/T Sultan Kayumanggi", only on
November 19, 1987. The vessel, however; was not capable of
loading the entire 500 MT and in fact, with its load of only 227.519
MT, it sank.
Contrary to the position of the trial court, the sinking of the "M/T
Sultan Kayumanggi" did not absolve the plaintiff from its obligation
to lift the rest of the 272.481 MT of sulfuric acid at the agreed time.
It was the plaintiff's duty to charter another vessel for the purpose.
It did contract for the services of a new vessel, the "M/T Don
Victor", but did not want to lift the balance of 272.481 MT only but
insisted that its additional order of 227.51 MT be also given by the
defendant to complete 500 MT. apparently so that the vessel may
be availed of in its full capacity.
xxx xxx xxx
We find no basis for the decision of the trial court to make the
defendant liable to the plaintiff not only for the cost of the sulfuric
acid, which the plaintiff itself failed to haul, but also for unrealized
profits as well as exemplary damages and attorney's fees. 17
Respondent Court of Appeals found the petitioner guilty of delay
and negligence in the performance of its obligation. It dismissed
the complaint of petitioner and ordered it to pay damages
representing the counterclaim of private respondent.
The motion for reconsideration filed by petitioner was denied by
respondent court in its Resolution dated December 21, 1992, for
lack of merit.
Petitioner now comes before us, assigning the following errors:
I.
OBLICON 1-9-2018 I ACJUCO 18
RESPONDENT COURT OF APPEALS ERRED IN NOT
HOLDING PRIVATE RESPONDENT TO HAVE COMMITTED A
BREACH OF CONTRACT WHEN IT IS NOT DISPUTED THAT
PETITIONER PAID IN FULL THE VALUE OF 500 MT OF
SULFURIC ACID TO PRIVATE RESPONDENT BUT THE
LATTER WAS ABLE TO DELIVER TO PETITIONER ONLY
227.51 M.T.
II.
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN
HOLDING PETITIONER LIABLE FOR DAMAGES TO PRIVATE
RESPONDENT ON THE BASIS OF A XEROX COPY OF AN
ALLEGED AGREEMENT TO HOLD PETITIONER LIABLE FOR
DAMAGES FOR THE DELAY WHEN PRIVATE RESPONDENT
FAILED TO PRODUCE THE ORIGINAL IN CONTRAVENTION
OF THE RULES ON EVIDENCE.
III.
RESPONDENT COURT OF APPEALS ERRED IN FAILING TO
CONSIDER THE UNDISPUTED FACTS THAT PETITIONER'S
PAYMENT FOR THE GOODS WAS RECEIVED BY PRIVATE
RESPONDENT WITHOUT ANY QUALIFICATION AND THAT
PRIVATE RESPONDENT ENTERED INTO ANOTHER
CONTRACT TO SUPPLY PETITIONER 227.519 MT OF
SULFURIC ACID IN ADDITION TO THE UNDELIVERED
BALANCE AS PROOF THAT ANY DELAY OF PETITIONER
WAS DEEMED WAIVED BY SAID ACTS OF RESPONDENT.
IV.
RESPONDENT COURT OF APPEALS ERRED IN NOT
CONSIDERING THE LAW THAT WHEN THE SALE INVOLVES
FUNGIBLE GOODS AS IN THIS CASE THE EXPENSES FOR
STORAGE AND MAINTENANCE ARE FOR THE ACCOUNT OF
THE SELLER (ARTICLE 1504 CIVIL CODE).
V.
RESPONDENT COURT OF APPEALS ERRED IN FAILING TO
RENDER JUDGMENT FOR PETITIONER AFFIRMING THE
DECISION OF THE TRIAL COURT.
From the assigned errors, we synthesize the pertinent issues
raised by the petitioner as follows:
1. Did the respondent court err in holding that the petitioner
committed breach of contract, considering that:
a) the petitioner allegedly paid the full value of its
purchases, yet received only a portion of said purchases?
b) petitioner and private respondent allegedly had also
agreed for the purchase and supply of an additional 227.519 MT
of sulfuric acid, hence prior delay, if any, had been waived?
2. Did the respondent court err in awarding damages to
private respondent?
3. Should expenses for the storage and preservation of the
purchased fungible goods, namely sulfuric acid, be on seller's
account pursuant to Article 1504 of the Civil Code?
To resolve these issues, petitioner urges us to review factual
findings of respondent court and its conclusion that the petitioner
was guilty of delay in the performance of its obligation. According
to petitioner, that conclusion is contrary to the factual evidence. It
adds that respondent court disregarded the rule that findings of
the trial court are given weight, with the highest degree of respect.
Claiming that respondent court's findings conflict with those of the
trial court, petitioner prays that the trial court's findings be upheld
over those of the appellate court.
Petitioner argues that it paid the purchase price of sulfuric acid,
five (5) days prior to the withdrawal thereof, or on October 3, 1986,

hence, it had complied with the primary condition set in the sales
contract. Petitioner claims its failure to pick-up the remaining
purchases on time was due to a storm, a force majeure, which
sank the vessel. It thus claims exemption from liability to pay
damages. Petitioner also contends that it was actually the private
respondent's shipping officer, who advised petitioner to buy the
additional 227.51 MT of sulfuric acid, so as to fully utilize the
capacity of the vessel it chartered. Petitioner insists that when its
ship was ready to pick-up the remaining balance of 272.49 MT of
sulfuric acid, private respondent could not comply with the
contract commitment due to "pyrite limitation."
While we agree with petitioner that when the findings of the Court
of Appeals are contrary to those of the trial court, 18 this Court
may review those findings, we find the appellate court's
conclusion that petitioner violated the subject contract amply
supported by preponderant evidence. Petitioner's claim was
predicated merely on the allegations of its employee, Melecio
Hernandez, that the storm or force majeure caused the
petitioner's delay and failure to lift the cargo of sulfuric acid at the
designated loadports. In contrast, the appellate court discounted
Hernandez' assertions. For on record, the storm was not the
proximate cause of petitioner's failure to transport its purchases
on time. The survey report submitted by a third party surveyor,
SGS Far East Limited, revealed that the vessel, which was
unstable, was incapable of carrying the full load of sulfuric acid.
Note that there was a premature termination of loading in Basay,
Negros Oriental. The vessel had to undergo several repairs
before continuing its voyage to pick-up the balance of cargo at
Sangi, Cebu. Despite repairs, the vessel still failed to carry the
whole lot of 500 MT of sulfuric acid due to ship defects like listing
to one side. Its unfortunate sinking was not due to force majeure.
It sunk because it was, based on SGS survey report, unstable and
unseaworthy.
Witness surveyor Eugenio Rabe's incident report, dated
December 13, 1986 in Basay, Negros Oriental, elucidated this
point:
Loading was started at 1500hrs. November 19. At 1600Hrs.
November 20, loading operation was temporarily stopped by the
vessel's master due to ships stability was heavily tilted to port
side, ship's had tried to transfer the loaded acid to stbdside but
failed to do so, due to their auxiliary pump on board does not work
out for acid.
xxx xxx xxx
Note. Attending surveyor arrived BMC Basay on November
22, due to delayed advice of said vessel Declared quantity loaded
onboard based on data's provided by PHILPHOS representative.
On November 26, two representative of shipping company arrived
Basay to assist the situation, at 1300Hrs repairing and/or welding
of tank number 5 started at 1000Hrs November 27, repairing
and/or welding was suspended due to the explosion of tank no. 5.
Explosion ripped about two feet of the double bottom tank.
November 27 up to date no progress of said vessel. 19
While at Sangi, Cebu, the vessel's condition (listing) did not
improve as the survey report therein noted:
Declared quantity loaded on board was based on shore tank
withdrawal due to ship's incomplete tank calibration table. Barge
displacement cannot be applied due to ship was listing to Stboard
side which has been loaded with rocks to control her stability. 20
These two vital pieces of information were totally ignored by trial
court. The appellate court correctly took these into account,
significantly. As to the weather condition in Basay, the appellate
court accepted surveyor Rabe's testimony, thus:
Q. Now, Mr. Witness, what was the weather condition then
at Basay, Negros Oriental during the loading operation of sulfuric
acid on board the Sultana Kayumanggi?
OBLICON 1-9-2018 I ACJUCO 19
A. Fair, sir. 21
Since the third party surveyor was neither petitioner's nor private
respondent's employee, his professional report should carry more
weight than that of Melecio Hernandez, an employee of petitioner.
Petitioner, as the buyer, was obligated under the contract to
undertake the shipping requirements of the cargo from the private
respondent's loadports to the petitioner's designated warehouse.
It was petitioner which chartered M/T Sultan Kayumanggi. The
vessel was petitioner's agent. When it failed to comply with the
necessary loading conditions of sulfuric acid, it was incumbent
upon petitioner to immediately replace M/T Sultan Kayumanggi
with another seaworthy vessel. However, despite repeated
demands, petitioner did not comply seasonably.
Additionally, petitioner claims that private respondent's employee,
Gil Belen, had recommended to petitioner to fully utilize the
vessel, hence petitioner's request for additional order to complete
the vessel's 500 MT capacity. This claim has no probative
pertinence nor solid basis. A party who asserts that a contract of
sale has been changed or modified has the burden of proving the
change or modification by clear and convincing evidence. 22
Repeated requests and additional orders were contained in
petitioner's letters to private respondent. In contrast, Belen's
alleged action was only verbal; it was not substantiated at all
during the trial. Note that, using the vessel to full capacity could
redound to petitioner's advantage, not the other party's. If
additional orders were at the instance of private respondent, the
same must be properly proved together with its relevance to the
question of delay. Settled is the principle in law that proof of verbal
agreements offered to vary the terms of written agreements is
inadmissible, under the parol evidence rule. 23 Belen's purported
recommendation could not be taken at face value and, obviously,
cannot excuse petitioner's default.
Respondent court found petitioner's default unjustified, and on
this conclusion we agree:
It is not true that the defendant was not in a position to deliver the
272.481 MT which was the balance of the original 500 MT
purchased by the plaintiff. The whole lot of 500 MT was ready for
lifting as early as August 15, 1986. What the defendant could not
sell to the plaintiff was the additional 227.51 MT which said
plaintiff was ordering, for the reason that the defendant was short
of the supply needed. The defendant, however, had no obligation
to agree to this additional order and may not be faulted for its
inability to meet the said additional requirements of the plaintiff.
And the defendant's incapacity to agree to the delivery of another
227.51 MT is not a legal justification for the plaintiffs refusal to lift
the remaining 272.481.
It is clear from the plaintiff's letters to the defendant that it wanted
to send the "M/T Don Victor" only if the defendant would confirm
that it was ready to deliver 500 MT. Because the defendant could
not sell another 227.51 MT to the plaintiff, the latter did not send
a new vessel to pick up the balance of the 500 MT originally
contracted for by the parties. This, inspite the representations
made by the defendant for the hauling thereof as scheduled and
its reminders that any expenses for the delay would be for the
account of the plaintiff. 24
We are therefore constrained to declare that the respondent court
did not err when it absolved private respondent from any breach
of contract.
Our next inquiry is whether damages have been properly awarded
against petitioner for its unjustified delay in the performance of its
obligation under the contract. Where there has been breach of
contract by the buyer, the seller has a right of action for damages.
Following this rule, a cause of action of the seller for damages
may arise where the buyer refuses to remove the goods, such that
buyer has to remove them. 25 Article 1170 of the Civil Code
provides:

Those who in the performance of their obligations are guilty of
fraud, negligence, or delay and those who in any manner
contravene the tenor thereof, are liable for damages.
Delay begins from the time the obligee judicially or extrajudicially
demands from the obligor the performance of the obligation. 26
Art. 1169 states:
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.
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 or extrajudicially. 27
In the present case, private respondent required petitioner to ship
out or lift the sulfuric acid as agreed, otherwise petitioner would
be charged for the consequential damages owing to any delay.
As stated in private respondent's letter to petitioner, dated
December 12, 1986:
Subject: M/T "KAYUMANGGI"
Gentlemen:
This is to reiterate our telephone advice and our letter HJR-8612-
031 dated 2 December 1986 regarding your sulfuric acid vessel,
M/T "KAYUMANGGI".
As we have, in various instances, advised you, our Basay wharf
will have to be vacated 15th December 1986 as we are expecting
the arrival of our chartered vessel purportedly to haul our
equipments and all other remaining assets in Basay. This
includes our sulfuric acid tanks. We regret, therefore, that if these
tanks are not emptied on or before the 15th of December, we
either have to charge you for the tanks waiting time at Basay and
its consequential costs (i.e. chartering of another vessel for its
second pick-up at Basay, handling, etc.) as well as all other
incremental costs on account of the protracted loading delay. 28
(Emphasis supplied)
Indeed the above demand, which was unheeded, justifies the
finding of delay. But when did such delay begin? The above letter
constitutes private respondent's extrajudicial demand for the
petitioner to fulfill its obligation, and its dateline is significant.
Given its date, however, we cannot sustain the finding of the
respondent court that petitioner's delay started on August 6, 1986.
The Court of Appeals had relied on private respondent's earlier
letter to petitioner of that date for computing the commencement
of delay. But as averred by petitioner, said letter of August 6th is
not a categorical demand. What it showed was a mere statement
of fact, that "[F]for your information any delay in Sulfuric Acid
withdrawal shall cost us incremental expenses of P2,000.00 per
day." Noteworthy, private respondent accepted the full payment
by petitioner for purchases on October 3, 1986, without
qualification, long after the August 6th letter. In contrast to the
August 6th letter, that of December 12th was a categorical
demand.
Records reveal that a tanker ship had to pick-up sulfuric acid in
Basay, then proceed to get the remaining stocks in Sangi, Cebu.
A period of three days appears to us reasonable for a vessel to
travel between Basay and Sangi. Logically, the computation of
damages arising from the shipping delay would then have to be
from December 15, 1986, given said reasonable period after the
December 12th letter. More important, private respondent was
forced to vacate Basay wharf only on December 15th. Its Basay
expenses incurred before December 15, 1986, were necessary
and regular business expenses for which the petitioner should not
be obliged to pay.
Note that private respondent extended its lease agreement for
Sangi, Cebu storage tank until August 31, 1987, solely for
OBLICON 1-9-2018 I ACJUCO 20
petitioner's sulfuric acid. It stands to reason that petitioner should
reimburse private respondent's rental expenses of P32,000
monthly, commencing December 15, 1986, up to August 31,
1987, the period of the extended lease. Note further that there is
nothing on record refuting the amount of expenses abovecited.
Private respondent presented in court two supporting documents:
first, the lease agreement pertaining to the equipment, and
second a letter dated June 15, 1987, sent by Atlas Fertilizer
Corporation to private respondent representing the rental charges
incurred. Private respondent is entitled to recover the payment for
these charges. It should be reimbursed the amount of two
hundred seventy two thousand
(P272,000.00) 29 pesos, corresponding to the total amount of
rentals from December 15, 1986 to August 31, 1987 of the Sangi,
Cebu storage tank.
Finally, we note also that petitioner tries to exempt itself from
paying rental expenses and other damages by arguing that
expenses for the preservation of fungible goods must be assumed
by the seller. Rental expenses of storing sulfuric acid should be
at private respondent's account until ownership is transferred,
according to petitioner. However, the general rule that before
delivery, the risk of loss is borne by the seller who is still the
owner, is not applicable in this case because petitioner had
incurred delay in the performance of its obligation. Article 1504 of
the Civil Code clearly states:
Unless otherwise agreed, the goods remain at the seller's risk
until the ownership therein is transferred to the buyer, but when
the ownership therein is transferred to the buyer the goods are at
the buyer's risk whether actual delivery has been made or not,
except that:
xxx xxx xxx
(2) Where actual delivery has been delayed through the
fault of either the buyer or seller the goods are at the risk of the
party at fault. (emphasis supplied)
On this score, we quote with approval the findings of the appellate
court, thus:
. . . The defendant [herein private respondent] was not remiss in
reminding the plaintiff that it would have to bear the said expenses
for failure to lift the commodity for an unreasonable length of time.
But even assuming that the plaintiff did not consent to be so
bound, the provisions of Civil Code come in to make it liable for
the damages sought by the defendant.
Art. 1170 of the Civil Code provides:
Those who in the performance of their obligations are guilty of
fraud, negligence, or delay and those who in any manner
contravene the tenor thereof, are liable for damages.
Certainly, the plaintiff [herein petitioner] was guilty of negligence
and delay in the performance of its obligation to lift the sulfuric
acid on August 15, 1986 and had contravened the tenor of its
letter-contract with the defendant. 30
As pointed out earlier, petitioner is guilty of delay, after private
respondent made the necessary extrajudicial demand by
requiring petitioner to lift the cargo at its designated loadports.
When petitioner failed to comply with its obligations under the
contract it became liable for its shortcomings. Petitioner is
indubitably liable for proven damages.
Considering, however, that petitioner made an advance payment
for the unlifted sulfuric acid in the amount of three hundred three
thousand, four hundred eighty three pesos and thirty seven
centavos (P303,483.37), it is proper to set-off this amount against
the rental expenses initially paid by private respondent. It is worth
noting that the adjustment and allowance of private respondent's
counterclaim or set-off in the present action, rather than by
another independent action, is encouraged by the law. Such
 OBLICON 1-9-2018 I ACJUCO 21

practice serves to avoid circuitry of action, multiplicity of suits,

inconvenience, expense, and unwarranted consumption of the
court's time. 31 The trend of judicial decisions is toward a liberal
extension of the right to avail of counterclaims or set-offs. 32 The
rules on counterclaims are designed to achieve the disposition of
a whole controversy involving the conflicting claims of interested
parties at one time and in one action, provided all parties can be
brought before the court and the matter decided without
prejudicing the right of any party. 33 Set-off in this case is proper
and reasonable. It involves deducting P272,000.00 (rentals) from
P303,483.37 (advance payment), which will leave the amount of
P31,483.37 refundable to petitioner.

WHEREFORE, the petition is hereby DENIED. The assailed

decision of the Court of Appeals in CA G.R. CV No. 33802 is
AFFIRMED, with MODIFICATION that the amount of damages
awarded in favor of private respondent is REDUCED to Two
hundred seventy two thousand pesos (P272,000.00). It is also
ORDERED that said amount of damages be OFFSET against
petitioner's advance payment of Three hundred three thousand
four hundred eighty three pesos and thirty-seven centavos
(P303,483.37) representing the price of the 272.481 MT of sulfuric
acid not lifted. Lastly, it is ORDERED that the excess amount of
thirty one thousand, four hundred eighty three pesos and thirty
seven centavos (P31,483.37) be RETURNED soonest by private
respondent to herein petitioner.1âwphi1.nêt

Costs against the petitioner.

SO ORDERED.

G.R. No. 153004 November 5, 2004
SANTOS VENTURA HOCORMA FOUNDATION, INC.,
petitioner,
vs.
ERNESTO V. SANTOS and RIVERLAND, INC., respondents.
DECISION
QUISUMBING, J.:
Subject of the present petition for review on certiorari is the
Decision,1 dated January 30, 2002, as well as the April 12, 2002,
Resolution2 of the Court of Appeals in CA-G.R. CV No. 55122.
The appellate court reversed the Decision,3 dated October 4,
1996, of the Regional Trial Court of Makati City, Branch 148, in
Civil Case No. 95-811, and likewise denied petitioner's Motion for
Reconsideration.
The facts of this case are undisputed.
Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc.
(SVHFI) were the plaintiff and defendant, respectively, in several
civil cases filed in different courts in the Philippines. On October
26, 1990, the parties executed a Compromise Agreement4 which
amicably ended all their pending litigations. The pertinent portions
of the Agreement read as follows:
1. Defendant Foundation shall pay Plaintiff Santos P14.5 Million
in the following manner:
a. P1.5 Million immediately upon the execution of this agreement;
b. The balance of P13 Million shall be paid, whether in one lump
sum or in installments, at the discretion of the Foundation, within
a period of not more than two (2) years from the execution of this
agreement; provided, however, that in the event that the
Foundation does not pay the whole or any part of such balance,
the same shall be paid with the corresponding portion of the land
or real properties subject of the aforesaid cases and previously
covered by the notices of lis pendens, under such terms and
conditions as to area, valuation, and location mutually acceptable
to both parties; but in no case shall the payment of such balance
be later than two (2) years from the date of this agreement;
otherwise, payment of any unpaid portion shall only be in the form
of land aforesaid;
2. Immediately upon the execution of this agreement (and [the]
receipt of the P1.5 Million), plaintiff Santos shall cause the
dismissal with prejudice of Civil Cases Nos. 88-743, 1413OR, TC-
1024, 45366 and 18166 and voluntarily withdraw the appeals in
Civil Cases Nos. 4968 (C.A.-G.R. No. 26598) and 88-45366
(C.A.-G.R. No. 24304) respectively and for the immediate lifting
of the aforesaid various notices of lis pendens on the real
properties aforementioned (by signing herein attached
corresponding documents, for such lifting); provided, however,
that in the event that defendant Foundation shall sell or dispose
of any of the lands previously subject of lis pendens, the proceeds
of any such sale, or any part thereof as may be required, shall be
partially devoted to the payment of the Foundation's obligations
under this agreement as may still be subsisting and payable at
the time of any such sale or sales;
...
5. Failure of compliance of any of the foregoing terms and
conditions by either or both parties to this agreement shall ipso
facto and ipso jure automatically entitle the aggrieved party to a
writ of execution for the enforcement of this agreement.
[Emphasis supplied]5
In compliance with the Compromise Agreement, respondent
Santos moved for the dismissal of the aforesaid civil cases. He
also caused the lifting of the notices of lis pendens on the real
OBLICON 1-9-2018 I ACJUCO 22
properties involved. For its part, petitioner SVHFI, paid P1.5
million to respondent Santos, leaving a balance of P13 million.
Subsequently, petitioner SVHFI sold to Development Exchange
Livelihood Corporation two real properties, which were previously
subjects of lis pendens. Discovering the disposition made by the
petitioner, respondent Santos sent a letter to the petitioner
demanding the payment of the remaining P13 million, which was
ignored by the latter. Meanwhile, on September 30, 1991, the
Regional Trial Court of Makati City, Branch 62, issued a Decision6
approving the compromise agreement.
On October 28, 1992, respondent Santos sent another letter to
petitioner inquiring when it would pay the balance of P13 million.
There was no response from petitioner. Consequently,
respondent Santos applied with the Regional Trial Court of Makati
City, Branch 62, for the issuance of a writ of execution of its
compromise judgment dated September 30, 1991. The RTC
granted the writ. Thus, on March 10, 1993, the Sheriff levied on
the real properties of petitioner, which were formerly subjects of
the lis pendens. Petitioner, however, filed numerous motions to
block the enforcement of the said writ. The challenge of the
execution of the aforesaid compromise judgment even reached
the Supreme Court. All these efforts, however, were futile.
On November 22, 1994, petitioner's real properties located in
Mabalacat, Pampanga were auctioned. In the said auction,
Riverland, Inc. was the highest bidder for P12 million and it was
issued a Certificate of Sale covering the real properties subject of
the auction sale. Subsequently, another auction sale was held on
February 8, 1995, for the sale of real properties of petitioner in
Bacolod City. Again, Riverland, Inc. was the highest bidder. The
Certificates of Sale issued for both properties provided for the
right of redemption within one year from the date of registration of
the said properties.
On June 2, 1995, Santos and Riverland Inc. filed a Complaint for
Declaratory Relief and Damages7 alleging that there was delay
on the part of petitioner in paying the balance of P13 million. They
further alleged that under the Compromise Agreement, the
obligation became due on October 26, 1992, but payment of the
remaining P12 million was effected only on November 22, 1994.
Thus, respondents prayed that petitioner be ordered to pay legal
interest on the obligation, penalty, attorney's fees and costs of
litigation. Furthermore, they prayed that the aforesaid sales be
declared final and not subject to legal redemption.
In its Answer,8 petitioner countered that respondents have no
cause of action against it since it had fully paid its obligation to the
latter. It further claimed that the alleged delay in the payment of
the balance was due to its valid exercise of its rights to protect its
interests as provided under the Rules. Petitioner counterclaimed
for attorney's fees and exemplary damages.
On October 4, 1996, the trial court rendered a Decision9
dismissing herein respondents' complaint and ordering them to
pay attorney's fees and exemplary damages to petitioner.
Respondents then appealed to the Court of Appeals. The
appellate court reversed the ruling of the trial court:
WHEREFORE, finding merit in the appeal, the appealed Decision
is hereby REVERSED and judgment is hereby rendered ordering
appellee SVHFI to pay appellants Santos and Riverland, Inc.: (1)
legal interest on the principal amount of P13 million at the rate of
12% per annum from the date of demand on October 28, 1992 up
to the date of actual payment of the whole obligation; and (2)
P20,000 as attorney's fees and costs of suit.
SO ORDERED.
Hence this petition for review on certiorari where petitioner
assigns the following issues:
I

WHETHER OR NOT THE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR WHEN IT AWARDED LEGAL INTEREST
IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND
RIVERLAND, INC., NOTWITHSTANDING THE FACT THAT
NEITHER IN THE COMPROMISE AGREEMENT NOR IN THE
COMPROMISE JUDGEMENT OF HON. JUDGE DIOKNO
PROVIDES FOR PAYMENT OF INTEREST TO THE
RESPONDENT
II
WHETHER OF NOT THE COURT OF APPEALS ERRED IN
AWARDING LEGAL IN[T]EREST IN FAVOR OF THE
RESPONDENTS, MR. SANTOS AND RIVERLAND, INC.,
NOTWITHSTANDING THE FACT THAT THE OBLIGATION OF
THE PETITIONER TO RESPONDENT SANTOS TO PAY A SUM
OF MONEY HAD BEEN CONVERTED TO AN OBLIGATION TO
PAY IN KIND – DELIVERY OF REAL PROPERTIES OWNED BY
THE PETITIONER – WHICH HAD BEEN FULLY PERFORMED
III
WHETHER OR NOT RESPONDENTS ARE BARRED FROM
DEMANDING PAYMENT OF INTEREST BY REASON OF THE
WAIVER PROVISION IN THE COMPROMISE AGREEMENT,
WHICH BECAME THE LAW AMONG THE PARTIES10
The only issue to be resolved is whether the respondents are
entitled to legal interest.
Petitioner SVHFI alleges that where a compromise agreement or
compromise judgment does not provide for the payment of
interest, the legal interest by way of penalty on account of fault or
delay shall not be due and payable, considering that the obligation
or loan, on which the payment of legal interest could be based,
has been superseded by the compromise agreement.11
Furthermore, the petitioner argues that the respondents are
barred by res judicata from seeking legal interest on account of
the waiver clause in the duly approved compromise agreement.12
Article 4 of the compromise agreement provides:
Plaintiff Santos waives and renounces any and all other claims
that he and his family may have on the defendant Foundation
arising from and in connection with the aforesaid civil cases, and
defendant Foundation, on the other hand, also waives and
renounces any and all claims that it may have against plaintiff
Santos in connection with such cases.13 [Emphasis supplied.]
Lastly, petitioner alleges that since the compromise agreement
did not provide for a period within which the obligation will become
due and demandable, it is incumbent upon respondent Santos to
ask for judicial intervention for purposes of fixing the period. It is
only when a fixed period exists that the legal interests can be
computed.
Respondents profer that their right to damages is based on delay
in the payment of the obligation provided in the Compromise
Agreement. The Compromise Agreement provides that payment
must be made within the two-year period from its execution. This
was approved by the trial court and became the law governing
their contract. Respondents posit that petitioner's failure to comply
entitles them to damages, by way of interest.14
The petition lacks merit.
A compromise is a contract whereby the parties, by making
reciprocal concessions, avoid a litigation or put an end to one
already commenced.15 It is an agreement between two or more
persons, who, for preventing or putting an end to a lawsuit, adjust
their difficulties by mutual consent in the manner which they agree
on, and which everyone of them prefers in the hope of gaining,
balanced by the danger of losing.16
The general rule is that a compromise has upon the parties the
effect and authority of res judicata, with respect to the matter
definitely stated therein, or which by implication from its terms
OBLICON 1-9-2018 I ACJUCO 23
should be deemed to have been included therein.17 This holds
true even if the agreement has not been judicially approved.18
In the case at bar, the Compromise Agreement was entered into
by the parties on October 26, 1990.19 It was judicially approved
on September 30, 1991.20 Applying existing jurisprudence, the
compromise agreement as a consensual contract became
binding between the parties upon its execution and not upon its
court approval. From the time a compromise is validly entered
into, it becomes the source of the rights and obligations of the
parties thereto. The purpose of the compromise is precisely to
replace and terminate controverted claims.21
In accordance with the compromise agreement, the respondents
asked for the dismissal of the pending civil cases. The petitioner,
on the other hand, paid the initial P1.5 million upon the execution
of the agreement. This act of the petitioner showed that it
acknowledges that the agreement was immediately executory
and enforceable upon its execution.
As to the remaining P13 million, the terms and conditions of the
compromise agreement are clear and unambiguous. It provides:
...
b. The balance of P13 Million shall be paid, whether in one lump
sum or in installments, at the discretion of the Foundation, within
a period of not more than two (2) years from the execution of this
agreement…22 [Emphasis supplied.]
...
The two-year period must be counted from October 26, 1990, the
date of execution of the compromise agreement, and not on the
judicial approval of the compromise agreement on September 30,
1991. When respondents wrote a demand letter to petitioner on
October 28, 1992, the obligation was already due and
demandable. When the petitioner failed to pay its due obligation
after the demand was made, it incurred delay.
Article 1169 of the New Civil Code 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. [Emphasis supplied]
Delay as used in this article is synonymous to default or mora
which means delay in the fulfillment of obligations. It is the non-
fulfillment of the obligation with respect to time.23
In order for the debtor to 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 or extrajudicially.24
In the case at bar, the obligation was already due and
demandable after the lapse of the two-year period from the
execution of the contract. The two-year period ended on October
26, 1992. When the respondents gave a demand letter on
October 28, 1992, to the petitioner, the obligation was already due
and demandable. Furthermore, the obligation is liquidated
because the debtor knows precisely how much he is to pay and
when he is to pay it.
The second requisite is also present. Petitioner delayed in the
performance. It was able to fully settle its outstanding balance
only on February 8, 1995, which is more than two years after the
extra-judicial demand. Moreover, it filed several motions and
elevated adverse resolutions to the appellate court to hinder the
execution of a final and executory judgment, and further delay the
fulfillment of its obligation.
Third, the demand letter sent to the petitioner on October 28,
1992, was in accordance with an extra-judicial demand
contemplated by law.
 OBLICON 1-9-2018 I ACJUCO 24

Verily, the petitioner is liable for damages for the delay in the
performance of its obligation. This is provided for in Article 117025
of the New Civil Code.

When the debtor knows the amount and period when he is to pay,
interest as damages is generally allowed as a matter of right.26
The complaining party has been deprived of funds to which he is
entitled by virtue of their compromise agreement. The goal of
compensation requires that the complainant be compensated for
the loss of use of those funds. This compensation is in the form
of interest.27 In the absence of agreement, the legal rate of
interest shall prevail.28 The legal interest for loan as forbearance
of money is 12% per annum29 to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.30

WHEREFORE, the petition is DENIED for lack of merit. The

Decision dated January 30, 2002 of the Court of Appeals and its
April 12, 2002 Resolution in CA-G.R. CV No. 55122 are
AFFIRMED. Costs against petitioner.

SO ORDERED.

Davide, Jr. C.J. (Chairman), Ynares-Santiago and Carpio, JJ.,

concur.
Azcuna, J., on leave.

G.R. No. 149734 November 19, 2004
DR. DANIEL VAZQUEZ and MA. LUIZA M. VAZQUEZ,
petitioners,
vs.
AYALA CORPORATION, respondent.
DECISION
TINGA, J.:
The rise in value of four lots in one of the country's prime
residential developments, Ayala Alabang Village in Muntinlupa
City, over a period of six (6) years only, represents big money.
The huge price difference lies at the heart of the present
controversy. Petitioners insist that the lots should be sold to them
at 1984 prices while respondent maintains that the prevailing
market price in 1990 should be the selling price.
Dr. Daniel Vazquez and Ma. Luisa Vazquez1 filed this Petition for
Review on Certiorari2 dated October 11, 2001 assailing the
Decision3 of the Court of Appeals dated September 6, 2001 which
reversed the Decision4 of the Regional Trial Court (RTC) and
dismissed their complaint for specific performance and damages
against Ayala Corporation.
Despite their disparate rulings, the RTC and the appellate court
agree on the following antecedents:5
On April 23, 1981, spouses Daniel Vasquez and Ma. Luisa M.
Vasquez (hereafter, Vasquez spouses) entered into a
Memorandum of Agreement (MOA) with Ayala Corporation
(hereafter, AYALA) with AYALA buying from the Vazquez
spouses, all of the latter's shares of stock in Conduit
Development, Inc. (hereafter, Conduit). The main asset of
Conduit was a 49.9 hectare property in Ayala Alabang,
Muntinlupa, which was then being developed by Conduit under a
development plan where the land was divided into Villages 1, 2
and 3 of the "Don Vicente Village." The development was then
being undertaken for Conduit by G.P. Construction and
Development Corp. (hereafter, GP Construction).
Under the MOA, Ayala was to develop the entire property, less
what was defined as the "Retained Area" consisting of 18,736
square meters. This "Retained Area" was to be retained by the
Vazquez spouses. The area to be developed by Ayala was called
the "Remaining Area". In this "Remaining Area" were 4 lots
adjacent to the "Retained Area" and Ayala agreed to offer these
lots for sale to the Vazquez spouses at the prevailing price at the
time of purchase. The relevant provisions of the MOA on this point
are:
"5.7. The BUYER hereby commits that it will develop the
'Remaining Property' into a first class residential subdivision of the
same class as its New Alabang Subdivision, and that it intends to
complete the first phase under its amended development plan
within three (3) years from the date of this Agreement. x x x"
5.15. The BUYER agrees to give the SELLERS a first option to
purchase four developed lots next to the "Retained Area" at the
prevailing market price at the time of the purchase."
The parties are agreed that the development plan referred to in
paragraph 5.7 is not Conduit's development plan, but Ayala's
amended development plan which was still to be formulated as of
the time of the MOA. While in the Conduit plan, the 4 lots to be
offered for sale to the Vasquez Spouses were in the first phase
thereof or Village 1, in the Ayala plan which was formulated a year
later, it was in the third phase, or Phase II-c.
Under the MOA, the Vasquez spouses made several express
warranties, as follows:
"3.1. The SELLERS shall deliver to the BUYER:
xxx
OBLICON 1-9-2018 I ACJUCO 25
3.1.2. The true and complete list, certified by the Secretary and
Treasurer of the Company showing:
xxx
D. A list of all persons and/or entities with whom the Company
has pending contracts, if any.
xxx
3.1.5. Audited financial statements of the Company as at Closing
date.
4. Conditions Precedent
All obligations of the BUYER under this Agreement are subject to
fulfillment prior to or at the Closing, of the following conditions:
4.1. The representations and warranties by the SELLERS
contained in this Agreement shall be true and correct at the time
of Closing as though such representations and warranties were
made at such time; and
xxx
6. Representation and Warranties by the SELLERS
The SELLERS jointly and severally represent and warrant to the
BUYER that at the time of the execution of this Agreement and at
the Closing:
xxx
6.2.3. There are no actions, suits or proceedings pending, or to
the knowledge of the SELLERS, threatened against or affecting
the SELLERS with respect to the Shares or the Property; and
7. Additional Warranties by the SELLERS
7.1. With respect to the Audited Financial Statements required to
be submitted at Closing in accordance with Par. 3.1.5 above, the
SELLER jointly and severally warrant to the BUYER that:
7.1.1 The said Audited Financial Statements shall show that on
the day of Closing, the Company shall own the "Remaining
Property", free from all liens and encumbrances and that the
Company shall have no obligation to any party except for billings
payable to GP Construction & Development Corporation and
advances made by Daniel Vazquez for which BUYER shall be
responsible in accordance with Par. 2 of this Agreement.
7.1.2 Except to the extent reflected or reserved in the Audited
Financial Statements of the Company as of Closing, and those
disclosed to BUYER, the Company as of the date thereof, has no
liabilities of any nature whether accrued, absolute, contingent or
otherwise, including, without limitation, tax liabilities due or to
become due and whether incurred in respect of or measured in
respect of the Company's income prior to Closing or arising out of
transactions or state of facts existing prior thereto.
7.2 SELLERS do not know or have no reasonable ground to know
of any basis for any assertion against the Company as at closing
or any liability of any nature and in any amount not fully reflected
or reserved against such Audited Financial Statements referred
to above, and those disclosed to BUYER.
xxx xxx xxx
7.6.3 Except as otherwise disclosed to the BUYER in writing on
or before the Closing, the Company is not engaged in or a party
to, or to the best of the knowledge of the SELLERS, threatened
with, any legal action or other proceedings before any court or
administrative body, nor do the SELLERS know or have
reasonable grounds to know of any basis for any such action or

proceeding or of any governmental investigation relative to the
Company.
7.6.4 To the knowledge of the SELLERS, no default or breach
exists in the due performance and observance by the Company
of any term, covenant or condition of any instrument or agreement
to which the company is a party or by which it is bound, and no
condition exists which, with notice or lapse of time or both, will
constitute such default or breach."
After the execution of the MOA, Ayala caused the suspension of
work on Village 1 of the Don Vicente Project. Ayala then received
a letter from one Maximo Del Rosario of Lancer General Builder
Corporation informing Ayala that he was claiming the amount of
P1,509,558.80 as the subcontractor of G.P. Construction...
G.P. Construction not being able to reach an amicable settlement
with Lancer, on March 22, 1982, Lancer sued G.P. Construction,
Conduit and Ayala in the then Court of First Instance of Manila in
Civil Case No. 82-8598. G.P. Construction in turn filed a cross-
claim against Ayala. G.P. Construction and Lancer both tried to
enjoin Ayala from undertaking the development of the property.
The suit was terminated only on February 19, 1987, when it was
dismissed with prejudice after Ayala paid both Lancer and GP
Construction the total of P4,686,113.39.
Taking the position that Ayala was obligated to sell the 4 lots
adjacent to the "Retained Area" within 3 years from the date of
the MOA, the Vasquez spouses sent several "reminder" letters of
the approaching so-called deadline. However, no demand after
April 23, 1984, was ever made by the Vasquez spouses for Ayala
to sell the 4 lots. On the contrary, one of the letters signed by their
authorized agent, Engr. Eduardo Turla, categorically stated that
they expected "development of Phase 1 to be completed by
February 19, 1990, three years from the settlement of the legal
problems with the previous contractor."
By early 1990 Ayala finished the development of the vicinity of the
4 lots to be offered for sale. The four lots were then offered to be
sold to the Vasquez spouses at the prevailing price in 1990. This
was rejected by the Vasquez spouses who wanted to pay at 1984
prices, thereby leading to the suit below.
After trial, the court a quo rendered its decision, the dispositive
portion of which states:
"THEREFORE, judgment is hereby rendered in favor of plaintiffs
and against defendant, ordering defendant to sell to plaintiffs the
relevant lots described in the Complaint in the Ayala Alabang
Village at the price of P460.00 per square meter amounting to
P1,349,540.00; ordering defendant to reimburse to plaintiffs
attorney's fees in the sum of P200,000.00 and to pay the cost of
the suit."
In its decision, the court a quo concluded that the Vasquez
spouses were not obligated to disclose the potential claims of GP
Construction, Lancer and Del Rosario; Ayala's accountants
should have opened the records of Conduit to find out all claims;
the warranty against suit is with respect to "the shares of the
Property" and the Lancer suit does not affect the shares of stock
sold to Ayala; Ayala was obligated to develop within 3 years; to
say that Ayala was under no obligation to follow a time frame was
to put the Vasquezes at Ayala's mercy; Ayala did not develop
because of a slump in the real estate market; the MOA was
drafted and prepared by the AYALA who should suffer its
ambiguities; the option to purchase the 4 lots is valid because it
was supported by consideration as the option is incorporated in
the MOA where the parties had prestations to each other.
[Emphasis supplied]
Ayala Corporation filed an appeal, alleging that the trial court
erred in holding that petitioners did not breach their warranties
under the MOA6 dated April 23, 1981; that it was obliged to
develop the land where the four (4) lots subject of the option to
purchase are located within three (3) years from the date of the
MOA; that it was in delay; and that the option to purchase was
OBLICON 1-9-2018 I ACJUCO 26
valid because it was incorporated in the MOA and the
consideration therefor was the commitment by Ayala Corporation
to petitioners embodied in the MOA.
As previously mentioned, the Court of Appeals reversed the RTC
Decision. According to the appellate court, Ayala Corporation was
never informed beforehand of the existence of the Lancer claim.
In fact, Ayala Corporation got a copy of the Lancer subcontract
only on May 29, 1981 from G.P. Construction's lawyers. The
Court of Appeals thus held that petitioners violated their
warranties under the MOA when they failed to disclose Lancer's
claims. Hence, even conceding that Ayala Corporation was
obliged to develop and sell the four (4) lots in question within three
(3) years from the date of the MOA, the obligation was suspended
during the pendency of the case filed by Lancer.
Interpreting the MOA's paragraph 5.7 above-quoted, the
appellate court held that Ayala Corporation committed to develop
the first phase of its own amended development plan and not
Conduit's development plan. Nowhere does the MOA provide that
Ayala Corporation shall follow Conduit's development plan nor is
Ayala Corporation prohibited from changing the sequence of the
phases of the property it will develop.
Anent the question of delay, the Court of Appeals ruled that there
was no delay as petitioners never made a demand for Ayala
Corporation to sell the subject lots to them. According to the
appellate court, what petitioners sent were mere reminder letters
the last of which was dated prior to April 23, 1984 when the
obligation was not yet demandable. At any rate, the Court of
Appeals found that petitioners in fact waived the three (3)-year
period when they sent a letter through their agent, Engr. Eduardo
Turla, stating that they "expect that the development of Phase I
will be completed by 19 February 1990, three years from the
settlement of the legal problems with the previous contractor."7
The appellate court likewise ruled that paragraph 5.15 above-
quoted is not an option contract but a right of first refusal there
being no separate consideration therefor. Since petitioners
refused Ayala Corporation's offer to sell the subject lots at the
reduced 1990 price of P5,000.00 per square meter, they have
effectively waived their right to buy the same.
In the instant Petition, petitioners allege that the appellate court
erred in ruling that they violated their warranties under the MOA;
that Ayala Corporation was not obliged to develop the "Remaining
Property" within three (3) years from the execution of the MOA;
that Ayala was not in delay; and that paragraph 5.15 of the MOA
is a mere right of first refusal. Additionally, petitioners insist that
the Court should review the factual findings of the Court of
Appeals as they are in conflict with those of the trial court.
Ayala Corporation filed a Comment on the Petition8 dated March
26, 2002, contending that the petition raises questions of fact and
seeks a review of evidence which is within the domain of the Court
of Appeals. Ayala Corporation maintains that the subcontract
between GP Construction, with whom Conduit contracted for the
development of the property under a Construction Contract dated
October 10, 1980, and Lancer was not disclosed by petitioners
during the negotiations. Neither was the liability for Lancer's claim
included in the Audited Financial Statements submitted by
petitioners after the signing of the MOA. These justify the
conclusion that petitioners breached their warranties under the
afore-quoted paragraphs of the MOA. Since the Lancer suit
ended only in February 1989, the three (3)-year period within
which Ayala Corporation committed to develop the property
should only be counted thence. Thus, when it offered the subject
lots to petitioners in 1990, Ayala Corporation was not yet in delay.
In response to petitioners' contention that there was no action or
proceeding against them at the time of the execution of the MOA
on April 23, 1981, Ayala Corporation avers that the facts and
circumstances which gave rise to the Lancer claim were already
extant then. Petitioners warranted that their representations under
the MOA shall be true and correct at the time of "Closing" which
shall take place within four (4) weeks from the signing of the

MOA.9 Since the MOA was signed on April 23, 1981, "Closing"
was approximately the third week of May 1981. Hence, Lancer's
claims, articulated in a letter which Ayala Corporation received on
May 4, 1981, are among the liabilities warranted against under
paragraph 7.1.2 of the MOA.
Moreover, Ayala Corporation asserts that the warranties under
the MOA are not just against suits but against all kinds of liabilities
not reflected in the Audited Financial Statements. It cannot be
faulted for relying on the express warranty that except for billings
payable to GP Construction and advances made by petitioner
Daniel Vazquez in the amount of P38,766.04, Conduit has no
other liabilities. Hence, petitioners cannot claim that Ayala
Corporation should have examined and investigated the Audited
Financial Statements of Conduit and should now assume all its
obligations and liabilities including the Lancer suit and the cross-
claim of GP Construction.
Furthermore, Ayala Corporation did not make a commitment to
complete the development of the first phase of the property within
three (3) years from the execution of the MOA. The provision
refers to a mere declaration of intent to develop the first phase of
its (Ayala Corporation's) own development plan and not
Conduit's. True to its intention, Ayala Corporation did complete
the development of the first phase (Phase II-A) of its amended
development plan within three (3) years from the execution of the
MOA. However, it is not obliged to develop the third phase (Phase
II-C) where the subject lots are located within the same time frame
because there is no contractual stipulation in the MOA therefor. It
is free to decide on its own the period for the development of
Phase II-C. If petitioners wanted to impose the same three (3)-
year timetable upon the third phase of the amended development
plan, they should have filed a suit to fix the time table in
accordance with Article 119710 of the Civil Code. Having failed to
do so, Ayala Corporation cannot be declared to have been in
delay.
Ayala Corporation further contends that no demand was made on
it for the performance of its alleged obligation. The letter dated
October 4, 1983 sent when petitioners were already aware of the
Lancer suit did not demand the delivery of the subject lots by April
23, 1984. Instead, it requested Ayala Corporation to keep
petitioners posted on the status of the case. Likewise, the letter
dated March 4, 1984 was merely an inquiry as to the date when
the development of Phase 1 will be completed. More importantly,
their letter dated June 27, 1988 through Engr. Eduardo Turla
expressed petitioners' expectation that Phase 1 will be completed
by February 19, 1990.
Lastly, Ayala Corporation maintains that paragraph 5.15 of the
MOA is a right of first refusal and not an option contract.
Petitioners filed their Reply11 dated August 15, 2002 reiterating
the arguments in their Petition and contending further that they
did not violate their warranties under the MOA because the case
was filed by Lancer only on April 1, 1982, eleven (11) months and
eight (8) days after the signing of the MOA on April 23, 1981.
Ayala Corporation admitted that it received Lancer's claim before
the "Closing" date. It therefore had all the time to rescind the
MOA. Not having done so, it can be concluded that Ayala
Corporation itself did not consider the matter a violation of
petitioners' warranty.
Moreover, petitioners submitted the Audited Financial Statements
of Conduit and allowed an acquisition audit to be conducted by
Ayala Corporation. Thus, the latter bought Conduit with "open
eyes."
Petitioners also maintain that they had no knowledge of the
impending case against Conduit at the time of the execution of
the MOA. Further, the MOA makes Ayala Corporation liable for
the payment of all billings of GP Construction. Since Lancer's
claim was actually a claim against GP Construction being its sub-
contractor, it is Ayala Corporation and not petitioners which is
liable.
OBLICON 1-9-2018 I ACJUCO 27
Likewise, petitioners aver that although Ayala Corporation may
change the sequence of its development plan, it is obliged under
the MOA to develop the entire area where the subject lots are
located in three (3) years.
They also assert that demand was made on Ayala Corporation to
comply with their obligation under the MOA. Apart from their
reminder letters dated January 24, February 18 and March 5,
1984, they also sent a letter dated March 4, 1984 which they claim
is a categorical demand for Ayala Corporation to comply with the
provisions of the MOA.
The parties were required to submit their respective memoranda
in the Resolution12 dated November 18, 2002. In compliance with
this directive, petitioners submitted their Memorandum13 dated
February 14, 2003 on even date, while Ayala Corporation filed its
Memorandum14 dated February 14, 2003 on February 17, 2003.
We shall first dispose of the procedural question raised by the
instant petition.
It is well-settled that the jurisdiction of this Court in cases brought
to it from the Court of Appeals by way of petition for review under
Rule 45 is limited to reviewing or revising errors of law imputed to
it, its findings of fact being conclusive on this Court as a matter of
general principle. However, since in the instant case there is a
conflict between the factual findings of the trial court and the
appellate court, particularly as regards the issues of breach of
warranty, obligation to develop and incurrence of delay, we have
to consider the evidence on record and resolve such factual
issues as an exception to the general rule.15 In any event, the
submitted issue relating to the categorization of the right to
purchase granted to petitioners under the MOA is legal in
character.
The next issue that presents itself is whether petitioners breached
their warranties under the MOA when they failed to disclose the
Lancer claim. The trial court declared they did not; the appellate
court found otherwise.
Ayala Corporation summarizes the clauses of the MOA which
petitioners allegedly breached when they failed to disclose the
Lancer claim:
a) Clause 7.1.1. – that Conduit shall not be obligated to anyone
except to GP Construction for P38,766.04, and for advances
made by Daniel Vazquez;
b) Clause 7.1.2. – that except as reflected in the audited financial
statements Conduit had no other liabilities whether accrued,
absolute, contingent or otherwise;
c) Clause 7.2. – that there is no basis for any assertion against
Conduit of any liability of any value not reflected or reserved in the
financial statements, and those disclosed to Ayala;
d) Clause 7.6.3. – that Conduit is not threatened with any legal
action or other proceedings; and
e) Clause 7.6.4. – that Conduit had not breached any term,
condition, or covenant of any instrument or agreement to which it
is a party or by which it is bound.16
The Court is convinced that petitioners did not violate the
foregoing warranties.
The exchanges of communication between the parties indicate
that petitioners substantially apprised Ayala Corporation of the
Lancer claim or the possibility thereof during the period of
negotiations for the sale of Conduit.
In a letter17 dated March 5, 1984, petitioner Daniel Vazquez
reminded Ayala Corporation's Mr. Adolfo Duarte (Mr. Duarte) that
prior to the completion of the sale of Conduit, Ayala Corporation
asked for and was given information that GP Construction sub-
contracted, presumably to Lancer, a greater percentage of the

project than it was allowed. Petitioners gave this information to
Ayala Corporation because the latter intimated a desire to "break
the contract of Conduit with GP." Ayala Corporation did not deny
this. In fact, Mr. Duarte's letter18 dated March 6, 1984 indicates
that Ayala Corporation had knowledge of the Lancer subcontract
prior to its acquisition of Conduit. Ayala Corporation even
admitted that it "tried to explore…legal basis to discontinue the
contract of Conduit with GP" but found this "not feasible when
information surfaced about the tacit consent of Conduit to the sub-
contracts of GP with Lancer."
At the latest, Ayala Corporation came to know of the Lancer claim
before the date of Closing of the MOA. Lancer's letter19 dated
April 30, 1981 informing Ayala Corporation of its unsettled claim
with GP Construction was received by Ayala Corporation on May
4, 1981, well before the "Closing"20 which occurred four (4)
weeks after the date of signing of the MOA on April 23, 1981, or
on May 23, 1981.
The full text of the pertinent clauses of the MOA quoted hereunder
likewise indicate that certain matters pertaining to the liabilities of
Conduit were disclosed by petitioners to Ayala Corporation
although the specifics thereof were no longer included in the
MOA:
7.1.1 The said Audited Financial Statements shall show that on
the day of Closing, the Company shall own the "Remaining
Property", free from all liens and encumbrances and that the
Company shall have no obligation to any party except for billings
payable to GP Construction & Development Corporation and
advances made by Daniel Vazquez for which BUYER shall be
responsible in accordance with Paragraph 2 of this Agreement.
7.1.2 Except to the extent reflected or reserved in the Audited
Financial Statements of the Company as of Closing, and those
disclosed to BUYER, the Company as of the date hereof, has no
liabilities of any nature whether accrued, absolute, contingent or
otherwise, including, without limitation, tax liabilities due or to
become due and whether incurred in respect of or measured in
respect of the Company's income prior to Closing or arising out of
transactions or state of facts existing prior thereto.
7.2 SELLERS do not know or have no reasonable ground to know
of any basis for any assertion against the Company as at Closing
of any liability of any nature and in any amount not fully reflected
or reserved against such Audited Financial Statements referred
to above, and those disclosed to BUYER.
xxx xxx xxx
7.6.3 Except as otherwise disclosed to the BUYER in writing on
or before the Closing, the Company is not engaged in or a party
to, or to the best of the knowledge of the SELLERS, threatened
with, any legal action or other proceedings before any court or
administrative body, nor do the SELLERS know or have
reasonable grounds to know of any basis for any such action or
proceeding or of any governmental investigation relative to the
Company.
7.6.4 To the knowledge of the SELLERS, no default or breach
exists in the due performance and observance by the Company
of any term, covenant or condition of any instrument or agreement
to which the Company is a party or by which it is bound, and no
condition exists which, with notice or lapse of time or both, will
constitute such default or breach."21 [Emphasis supplied]
Hence, petitioners' warranty that Conduit is not engaged in, a
party to, or threatened with any legal action or proceeding is
qualified by Ayala Corporation's actual knowledge of the Lancer
claim which was disclosed to Ayala Corporation before the
"Closing."
At any rate, Ayala Corporation bound itself to pay all billings
payable to GP Construction and the advances made by petitioner
Daniel Vazquez. Specifically, under paragraph 2 of the MOA
referred to in paragraph 7.1.1, Ayala Corporation undertook
OBLICON 1-9-2018 I ACJUCO 28
responsibility "for the payment of all billings of the contractor GP
Construction & Development Corporation after the first billing and
any payments made by the company and/or SELLERS shall be
reimbursed by BUYER on closing which advances to date is
P1,159,012.87."22
The billings knowingly assumed by Ayala Corporation necessarily
include the Lancer claim for which GP Construction is liable. Proof
of this is Ayala Corporation's letter23 to GP Construction dated
before "Closing" on May 4, 1981, informing the latter of Ayala
Corporation's receipt of the Lancer claim embodied in the letter
dated April 30, 1981, acknowledging that it is taking over the
contractual responsibilities of Conduit, and requesting copies of
all sub-contracts affecting the Conduit property. The pertinent
excerpts of the letter read:
…
In this connection, we wish to inform you that this morning we
received a letter from Mr. Maximo D. Del Rosario, President of
Lancer General Builders Corporation apprising us of the
existence of subcontracts that they have with your corporation.
They have also furnished us with a copy of their letter to you dated
30 April 1981.
Since we are taking over the contractual responsibilities of
Conduit Development, Inc., we believe that it is necessary, at this
point in time, that you furnish us with copies of all your
subcontracts affecting the property of Conduit, not only with
Lancer General Builders Corporation, but all subcontracts with
other parties as well…24
Quite tellingly, Ayala Corporation even attached to its Pre-Trial
Brief25 dated July 9, 1992 a copy of the letter26 dated May 28,
1981 of GP Construction's counsel addressed to Conduit
furnishing the latter with copies of all sub-contract agreements
entered into by GP Construction. Since it was addressed to
Conduit, it can be presumed that it was the latter which gave
Ayala Corporation a copy of the letter thereby disclosing to the
latter the existence of the Lancer sub-contract.
The ineluctable conclusion is that petitioners did not violate their
warranties under the MOA. The Lancer sub-contract and claim
were substantially disclosed to Ayala Corporation before the
"Closing" date of the MOA. Ayala Corporation cannot disavow
knowledge of the claim.
Moreover, while in its correspondence with petitioners, Ayala
Corporation did mention the filing of the Lancer suit as an obstacle
to its development of the property, it never actually brought up nor
sought redress for petitioners' alleged breach of warranty for
failure to disclose the Lancer claim until it filed its Answer27 dated
February 17, 1992.
We now come to the correct interpretation of paragraph 5.7 of the
MOA. Does this paragraph express a commitment or a mere
intent on the part of Ayala Corporation to develop the property
within three (3) years from date thereof? Paragraph 5.7 provides:
5.7. The BUYER hereby commits that it will develop the
'Remaining Property' into a first class residential subdivision of the
same class as its New Alabang Subdivision, and that it intends to
complete the first phase under its amended development plan
within three (3) years from the date of this Agreement….28
Notably, while the first phrase of the paragraph uses the word
"commits" in reference to the development of the "Remaining
Property" into a first class residential subdivision, the second
phrase uses the word "intends" in relation to the development of
the first phase of the property within three (3) years from the date
of the MOA. The variance in wording is significant. While
"commit"29 connotes a pledge to do something, "intend"30
merely signifies a design or proposition.

Atty. Leopoldo Francisco, former Vice President of Ayala
Corporation's legal division who assisted in drafting the MOA,
testified:
COURT
You only ask what do you mean by that intent. Just answer on
that point.
ATTY. BLANCO
Don't talk about standard.
WITNESS
A Well, the word intent here, your Honor, was used to emphasize
the tentative character of the period of development because it
will be noted that the sentence refers to and I quote "to complete
the first phase under its amended development plan within three
(3) years from the date of this agreement, at the time of the
execution of this agreement, your Honor." That amended
development plan was not yet in existence because the buyer had
manifested to the seller that the buyer could amend the
subdivision plan originally belonging to the seller to conform with
its own standard of development and second, your Honor,
(interrupted)31
It is thus unmistakable that this paragraph merely expresses an
intention on Ayala Corporation's part to complete the first phase
under its amended development plan within three (3) years from
the execution of the MOA. Indeed, this paragraph is so plainly
worded that to misunderstand its import is deplorable.
More focal to the resolution of the instant case is paragraph 5.7's
clear reference to the first phase of Ayala Corporation's amended
development plan as the subject of the three (3)-year intended
timeframe for development. Even petitioner Daniel Vazquez
admitted on cross-examination that the paragraph refers not to
Conduit's but to Ayala Corporation's development plan which was
yet to be formulated when the MOA was executed:
Q: Now, turning to Section 5.7 of this Memorandum of Agreement,
it is stated as follows: "The Buyer hereby commits that to develop
the remaining property into a first class residential subdivision of
the same class as New Alabang Subdivision, and that they intend
to complete the first phase under its amended development plan
within three years from the date of this agreement."
Now, my question to you, Dr. Vasquez is that there is no dispute
that the amended development plan here is the amended
development plan of Ayala?
A: Yes, sir.
Q: In other words, it is not Exhibit "D-5" which is the original plan
of Conduit?
A: No, it is not.
Q: This Exhibit "D-5" was the plan that was being followed by GP
Construction in 1981?
A: Yes, sir.
Q: And point of fact during your direct examination as of the date
of the agreement, this amended development plan was still to be
formulated by Ayala?
A: Yes, sir.32
As correctly held by the appellate court, this admission is crucial
because while the subject lots to be sold to petitioners were in the
first phase of the Conduit development plan, they were in the third
or last phase of the Ayala Corporation development plan. Hence,
even assuming that paragraph 5.7 expresses a commitment on
the part of Ayala Corporation to develop the first phase of its
OBLICON 1-9-2018 I ACJUCO 29
amended development plan within three (3) years from the
execution of the MOA, there was no parallel commitment made
as to the timeframe for the development of the third phase where
the subject lots are located.
Lest it be forgotten, the point of this petition is the alleged failure
of Ayala Corporation to offer the subject lots for sale to petitioners
within three (3) years from the execution of the MOA. It is not that
Ayala Corporation committed or intended to develop the first
phase of its amended development plan within three (3) years.
Whether it did or did not is actually beside the point since the
subject lots are not located in the first phase anyway.
We now come to the issue of default or delay in the fulfillment of
the obligation.
Article 1169 of the Civil Code provides:
Art. 1169. Those obliged to deliver or to do something incur in
delay from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation.
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 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 or extrajudicially.33
Under Article 1193 of the Civil Code, obligations for whose
fulfillment a day certain has been fixed shall be demandable only
when that day comes. However, no such day certain was fixed in
the MOA. Petitioners, therefore, cannot demand performance
after the three (3) year period fixed by the MOA for the
development of the first phase of the property since this is not the
same period contemplated for the development of the subject lots.
Since the MOA does not specify a period for the development of
the subject lots, petitioners should have petitioned the court to fix
the period in accordance with Article 119734 of the Civil Code. As
no such action was filed by petitioners, their complaint for specific
performance was premature, the obligation not being
demandable at that point. Accordingly, Ayala Corporation cannot
likewise be said to have delayed performance of the obligation.
Even assuming that the MOA imposes an obligation on Ayala
Corporation to develop the subject lots within three (3) years from
date thereof, Ayala Corporation could still not be held to have
been in delay since no demand was made by petitioners for the
performance of its obligation.
As found by the appellate court, petitioners' letters which dealt
with the three (3)-year timetable were all dated prior to April 23,
1984, the date when the period was supposed to expire. In other
words, the letters were sent before the obligation could become
legally demandable. Moreover, the letters were mere reminders
and not categorical demands to perform. More importantly,
petitioners waived the three (3)-year period as evidenced by their
agent, Engr. Eduardo Turla's letter to the effect that petitioners

agreed that the three (3)-year period should be counted from the
termination of the case filed by Lancer. The letter reads in part:
I. Completion of Phase I
As per the memorandum of Agreement also dated April 23, 1981,
it was undertaken by your goodselves to complete the
development of Phase I within three (3) years. Dr. & Mrs. Vazquez
were made to understand that you were unable to accomplish this
because of legal problems with the previous contractor. These
legal problems were resolved as of February 19, 1987, and Dr. &
Mrs. Vazquez therefore expect that the development of Phase I
will be completed by February 19, 1990, three years from the
settlement of the legal problems with the previous contractor. The
reason for this is, as you know, that security-wise, Dr. & Mrs.
Vazquez have been advised not to construct their residence till
the surrounding area (which is Phase I) is developed and
occupied. They have been anxious to build their residence for
quite some time now, and would like to receive assurance from
your goodselves regarding this, in compliance with the
agreement.
II. Option on the adjoining lots
We have already written your goodselves regarding the intention
of Dr. & Mrs. Vazquez to exercise their option to purchase the two
lots on each side (a total of 4 lots) adjacent to their "Retained
Area". They are concerned that although over a year has elapsed
since the settlement of the legal problems, you have not
presented them with the size, configuration, etc. of these lots.
They would appreciate being provided with these at your earliest
convenience.35
Manifestly, this letter expresses not only petitioners'
acknowledgement that the delay in the development of Phase I
was due to the legal problems with GP Construction, but also their
acquiescence to the completion of the development of Phase I at
the much later date of February 19, 1990. More importantly, by no
stretch of semantic interpretation can it be construed as a
categorical demand on Ayala Corporation to offer the subject lots
for sale to petitioners as the letter merely articulates petitioners'
desire to exercise their option to purchase the subject lots and
concern over the fact that they have not been provided with the
specifications of these lots.
The letters of petitioners' children, Juan Miguel and Victoria
Vazquez, dated January 23, 198436 and February 18, 198437
can also not be considered categorical demands on Ayala
Corporation to develop the first phase of the property within the
three (3)-year period much less to offer the subject lots for sale to
petitioners. The letter dated January 23, 1984 reads in part:
You will understand our interest in the completion of the roads to
our property, since we cannot develop it till you have constructed
the same. Allow us to remind you of our Memorandum of
Agreement, as per which you committed to develop the roads to
our property "as per the original plans of the company", and that
1. The back portion should have been developed before the front
portion – which has not been the case.
2. The whole project – front and back portions be completed by
1984.38
The letter dated February 18, 1984 is similarly worded. It states:
In this regard, we would like to remind you of Articles 5.7 and 5.9
of our Memorandum of Agreement which states respectively:…39
Even petitioner Daniel Vazquez' letter40 dated March 5, 1984
does not make out a categorical demand for Ayala Corporation to
offer the subject lots for sale on or before April 23, 1984. The letter
reads in part:
…and that we expect from your goodselves compliance with our
Memorandum of Agreement, and a definite date as to when the
OBLICON 1-9-2018 I ACJUCO 30
road to our property and the development of Phase I will be
completed.41
At best, petitioners' letters can only be construed as mere
reminders which cannot be considered demands for performance
because it must appear that the tolerance or benevolence of the
creditor must have ended.42
The petition finally asks us to determine whether paragraph 5.15
of the MOA can properly be construed as an option contract or a
right of first refusal. Paragraph 5.15 states:
5.15 The BUYER agrees to give the SELLERS first option to
purchase four developed lots next to the "Retained Area" at the
prevailing market price at the time of the purchase.43
The Court has clearly distinguished between an option contract
and a right of first refusal. An option is a preparatory contract in
which one party grants to another, for a fixed period and at a
determined price, the privilege to buy or sell, or to decide whether
or not to enter into a principal contract. It binds the party who has
given the option not to enter into the principal contract with any
other person during the period designated, and within that period,
to enter into such contract with the one to whom the option was
granted, if the latter should decide to use the option. It is a
separate and distinct contract from that which the parties may
enter into upon the consummation of the option. It must be
supported by consideration.44
In a right of first refusal, on the other hand, while the object might
be made determinate, the exercise of the right would be
dependent not only on the grantor's eventual intention to enter
into a binding juridical relation with another but also on terms,
including the price, that are yet to be firmed up.45
Applied to the instant case, paragraph 5.15 is obviously a mere
right of first refusal and not an option contract. Although the
paragraph has a definite object, i.e., the sale of subject lots, the
period within which they will be offered for sale to petitioners and,
necessarily, the price for which the subject lots will be sold are not
specified. The phrase "at the prevailing market price at the time
of the purchase" connotes that there is no definite period within
which Ayala Corporation is bound to reserve the subject lots for
petitioners to exercise their privilege to purchase. Neither is there
a fixed or determinable price at which the subject lots will be
offered for sale. The price is considered certain if it may be
determined with reference to another thing certain or if the
determination thereof is left to the judgment of a specified person
or persons.46
Further, paragraph 5.15 was inserted into the MOA to give
petitioners the first crack to buy the subject lots at the price which
Ayala Corporation would be willing to accept when it offers the
subject lots for sale. It is not supported by an independent
consideration. As such it is not governed by Articles 1324 and
1479 of the Civil Code, viz:
Art. 1324. When the offeror has allowed the offeree a certain
period to accept, the offer may be withdrawn at any time before
acceptance by communicating such withdrawal, except when the
option is founded upon a consideration, as something paid or
promised.
Art. 1479. A promise to buy and sell a determinate thing for a price
certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate
thing for a price certain is binding upon the promissor if the
promise is supported by a consideration distinct from the price.
Consequently, the "offer" may be withdrawn anytime by
communicating the withdrawal to the other party.47
In this case, Ayala Corporation offered the subject lots for sale to
petitioners at the price of P6,500.00/square meter, the prevailing
market price for the property when the offer was made on June
 OBLICON 1-9-2018 I ACJUCO 31

18, 1990.48 Insisting on paying for the lots at the prevailing

market price in 1984 of P460.00/square meter, petitioners
rejected the offer. Ayala Corporation reduced the price to
P5,000.00/square meter but again, petitioners rejected the offer
and instead made a counter-offer in the amount of
P2,000.00/square meter.49 Ayala Corporation rejected
petitioners' counter-offer. With this rejection, petitioners lost their
right to purchase the subject lots.

It cannot, therefore, be said that Ayala Corporation breached

petitioners' right of first refusal and should be compelled by an
action for specific performance to sell the subject lots to
petitioners at the prevailing market price in 1984.

WHEREFORE, the instant petition is DENIED. No

pronouncement as to costs.

SO ORDERED.

ii. MORA ACCIPIENDI
G.R. No. L-10394 December 13, 1958
CLAUDINA VDA. DE VILLARUEL, ET AL., plaintiffs-appellees,
vs.
MANILA MOTOR CO., INC. and ARTURO COLMENARES,
defendants-appellants.
Hilado and Hilado for appellees.
Ozaeta, Gibbs and Ozaeta for appellant company.
Jose L. Gamboa and Napoleon Garcia for appellant Arturo
Colmenares.
REYES, J. B. L., J.:
Manila Motor Co., Inc., and Arturo Colmenares interpose this
appeal against the decision of the Court of First Instance of
Negros Occidental, in its Civil Case No. 648, ordering the
defendant Manila Motor Co., Inc. to pay to the plaintiffs Villaruel
the sum of (a) P11,900 with legal rest from May 18, 1953, on
which date, the court below declared invalid the continued
operation of the Debt Moratorium, under the first cause of action;
(b) P38,395 with legal interest from the date of filing of the original
complaint on April 26, 1947, on the second cause of action; and
against both the Manila Motor Co., Inc. and its co-defendant,
Arturo Colmenares, the sum of P30,000 to be paid, jointly and
severally, with respect to the third cause of action.
On May 31, 1940, the plaintiffs Villaruel and the defendant Manila
Motor Co., Inc. entered into a contract (Exhibit "A") whereby, the
former agreed to convey by way of lease to the latter the following
described premises;
(a) Five hundred (500) square meters of floor space of a
building of strong materials for automobile showroom, offices, and
store room for automobile spare parts;
(b) Another building of strong materials for automobile
repair shop; and
(c) A 5-bedroom house of strong materials for residence of
the Bacolod Branch Manager of the defendant company.
The term of the lease was five (5) years, to commence from the
time that the building were delivered and placed at the disposal of
the lessee company, ready for immediate occupancy. The
contract was renewable for an additional period of five (5) years.
The Manila Motor Company, in consideration of the above
covenants, agreed to pay to the lessors, or their duly authorized
representative, a monthly rental of Three Hundred (P300) pesos
payable in advance before the fifth day of each month, and for the
residential house of its branch manager, a monthly rental not to
exceed Fifty (P50) pesos "payable separately by the Manager".
The leased premises were placed in the possession of the lessee
on the 31st day of October, 1940, from which date, the period of
the lease started to run under their agreement.
This situation, the Manila Motor Co., Inc. and its branch manager
enjoying the premises, and the lessors receiving the
corresponding rentals as stipulated, continued until the invasion
of 1941; and shortly after the Japanese military occupation of the
Provincial Capital of Bacolod the enemy forces held and used the
properties leased as part of their quarters from June 1, 1942 to
March 29, 1945, ousting the lessee therefrom. No payment of
rentals were made at any time during the said period.
Immediately upon the liberation of the said city in 1945, the
American Forces occupied the same buildings that were vacated
by the Japanese, including those leased by the plaintiffs, until
October 31, 1945. Monthly rentals were paid by the said
occupants to the owners during the time that they were in
OBLICON 1-9-2018 I ACJUCO 32
possession, as the same rate that the defendant company used
to pay.
Thereafter, when the United States Army finally gave up the
occupancy the premises, the Manila Motor Co., Inc., through their
branch manager, Rafael B. Grey, decided to exercise their option
to renew the contract for the additional period of five (5) years,
and the parties, agreed that the seven months occupancy by the
U. S. Army would not be counted as part of the new 5-year term.
Simultaneously with such renewal, the company sublet the same
buildings, except that used for the residence of the branch
manager, to the other defendant, Arturo Colmenares.
However, before resuming the collection of rentals, Dr. Alfredo
Villaruel, who was entrusted with the same, consulted Atty. Luis
Hilado on whether they (the lessors) had the right to collect, from
the defendant company, rentals corresponding to the time during
which the Japanese military forces had control over the leased
premises. Upon being advised that they had such a right, Dr.
Villaruel demanded payment thereof, but the defendant company
refused to pay. As a result, Dr. Villaruel gave notice seeking the
rescission of the contract of lease and the payment of rentals from
June 1, 1942 to March 31, 1945 totalling P11,900. This was also
rejected by the defendant company in its letter to Villaruel, dated
July 27, 1946.
Sometime on that same month of July, Rafael B. Grey offered to
pay to Dr. Villaruel the sum of P350, for which, tenderer requested
a receipt that would state that it was in full payment for the said
month. The latter expressed willingness to accept the tendered
amount provided, however, that his acceptance should be
understood to be without prejudice to their demand for the
rescission of the contract, and for increased rentals until their
buildings were returned to them. Later, Dr. Villaruel indicated his
willingness to limit the condition of his acceptance to be that
"neither the lessee nor the lessors admit the contention of the
other by the mere fact of payment". As no accord could still be
reached between the parties as to the context of the receipt, no
payment was thereafter tendered until the end of November,
1946. On December 4, 1946 (the day after the defendant
company notified Dr. Villaruel by telegram, that it cancelled the
power of attorney given to Grey, and that it now authorized Arturo
Colmenares, instead, to pay the rent of P350 each month), the
Manila Motor Co., Inc. remitted to Dr. Villaruel by letter, the sum
of P350.00. For this payment, the latter issued a receipt stating
that it was "without prejudice" to their demand for rents in arrears
and for the rescission of the contract of lease.
After it had become evident that the parties could not settle their
case amicably, the lessors commenced this action on April 26,
1947 with the Court of First Instance of Negros Occidental against
the appellants herein. During the pendency of the case, a fire
originating from the projection room of the City Theatre, into which
Arturo Colmenares, (the sublessee) had converted the former
repair shop of the Manila Motor Co. Inc., completely razed the
building, engulfing also the main building where Colmenares had
opened a soda fountain and refreshment parlor, and made
partitions for store spaces which he rented to other persons.
Because of the aforesaid occurrence, plaintiffs demanded
reimbursement from the defendants, but having been refused,
they filed a supplemental complaint to include as their third cause
of action, the recovery of the value of the burned buildings.
Defendants filed their amended answer and also moved for the
dismissal of the plaintiffs' first and second causes of action
invoking the Debt Moratorium that was then in force. The
dismissal was granted by the trial court on February 5, 1951, but
hearing was set as regards the third cause of action.
On August 11, 1952, the defendant company filed a motion for
summary judgment dismissing the plaintiffs, third cause of action,
to which plaintiffs registered objection coupled with a petition for
reconsideration of the order of the court dismissing the first and
second causes of action. Pending the resolution of this incident,
plaintiffs, on October 2, 1953, called the court's attention to the

decision in the case of Rutter vs. Esteban (93 Phil., 68; 49 Off.
Gaz. [5] 1807) invalidating the continued effectivity of the
Moratorium Law (R. A. 342). On November 25, 1953, the trial
court denied the defendant company's motion for summary
judgment and set aside its previous order dismissing the first and
second causes of action. The case was accordingly heard and
thereafter, judgment was rendered in plaintiffs' favor in the terms
set in the opening paragraph of this decision. Thereafter, the
defendants regularly appealed to this Court.
The defendants-appellants raise a number of procedural points.
The first of these relates to their contention that the supplemental
complaint which included a third cause of action, should not have
been admitted, as it brought about a change in the original theory
of the case and that it raised new issues not theretofore
considered. This argument cannot be sustained under the
circumstances. This action was inceptionally instituted for the
rescission of the contract of lease and for the recovery of unpaid
rentals before and after liberation. When the leased buildings
were destroyed, the plaintiffs-lessors demanded from the
defendants-lessees, instead, the value of the burned premises,
basing their right to do so on defendants' alleged default in the
payment of post-liberation rentals (which was also their basis in
formerly seeking for rescission). This cannot be considered as
already altering the theory of the case which is merely a change
in the relief prayed for, brought about by circumstances occurring
during the pendency of the action, and is not improper. (Southern
Pacific Co. vs. Conway, 115 F. 2d 746; Suburban Improvement
Company vs. Scott Lumber Co., 87 A.L.R. 555, 59 F. 2d 711). The
filing of the supplements complaint can well be justified also under
section 2, Rule 17 of the Rules of Court (on amendments) "to the
end that the real matter in dispute and all matters in the action in
dispute between the parties may, as far as possible be completely
determined in a single proceedings". It is to be noted furthermore,
that the admission or rejection of this kind of pleadings is within
the sound discretion of the court that will not be disturbed on
appeal in the absence of abuse thereof (see Sec. 5, Rule 17,
Rules of Court), especially so, as in this case, where no
substantial procedural prejudice is caused to the adverse party.
It is urged that the dismissal of the first and second causes of
action on February 5, 1951 had the effect of a dismissal "with
prejudice" as the court did not make any qualification in its
dismissal order. Appellants, apparently, lost sight of the fact that
the dismissal was premised on the existence of the "Debt
Moratorium" which suspended the enforcement of the obligation
up to a certain time. The reference thereto by the lower court
amounted to a dismissal "without prejudice", since in effect it ruled
that the plaintiffs could not, at the time they sought it, enforce their
right of action against the defendants, but plaintiffs must wait until
the moratorium was lifted. In this way, the court qualified its
dismissal.
Taking up the case on its merits, it is readily seen that the key to
the entire dispute is the question whether the defendant-appellant
Manila Motor Co., Inc. should be held liable for the rentals of the
premises leased corresponding to the lapse of time that they were
occupied as quarters or barracks by the invading Japanese army,
and whether said appellant was placed in default by its refusal to
comply with the demand to pay such rents. For if the Motor
Company was not so liable, then it never was in default nor was
it chargeable for the accidental lose of the buildings, nor for any
damages except the rental at the contract rate from its
reoccupation of the premises leased until the same were
accidentally destroyed by fire on March 2, 1948.
The appellees contended, and the court below has held, that the
ouster of the least company by the Japanese occupation forces
from 1942 until liberation, while operating to deprive the lessee of
the enjoyment of the thing leased, was, nevertheless, a mere act
of trespass ("perturbacion de mero hecho") that, under the
Spanish Civil Code of 1889 (in force here until 1950), did not
exempt the lessee from the duty to pay rent. We find that
contention and ruling erroneous and untenable.
The pertinent articles of the Civil Code of Spain of 1889 provide:
OBLICON 1-9-2018 I ACJUCO 33
ART. 1554. It shall be the duty of the lessor;
1. To deliver to the lessee the thing which is the subject
matter of the contract;
2. To make thereon, during the lease, all repairs necessary
in order to keep it in serviceable condition for the purpose for
which it was intended;
3. To maintain the lessee in the peaceful enjoyment of the
lease during the entire term of the contract.
ART. 1560. The lessor shall not be liable for any act of
mere disturbance of a third person of the use of the leased
property; but the lessee shall have a direct action against the
trespasser.
It the third person, be it the Government or a private individual,
has acted in reliance upon a right, such action shall not be
deemed a mere act of disturbance. (Emphasis supplied)
Under the first paragraph of article 1560 the lessor does not
answer for a mere act of trespass ( perturbacion de mero hecho)
as distinguished from trespass under color of title ( perturbacion
de derecho). As to what would constitute a mere act of trespass,
this Court in the case of Goldstein vs. Roces (34 Phil. 562), made
this pronouncement:
Si el hecho perturbador no va acompañado ni precedido de nada
que revele una intencion propiamente juridica en el que lo realiza,
de tal suerte que el arrendatario solo pueda apreciar el hecho
material desnudo de toda forma o motivacion de derecho,
entendemos que se trata de una perturbacion de mero hecho.
Upon the basis of the distinction thus established between the
perturbacion de hecho and the perturbacion de derecho, it is
demonstrable that the ouster of the appellant by the Japanese
occupying forces belongs to the second class of disturbances, de
derecho. For under the generally accepted principles of
international law (and it must be remembered that those principles
are made by our Constitution a part of the law of our nation 1) a
belligerent occupant (like the Japanese in 1942-1945) may
legitimately billet or quarter its troops in privately owned land and
buildings for the duration of its military operations, or as military
necessity should demand. The well known writer Oppenheim,
discoursing on the laws of war on land, says upon this topic;
Immovable private enemy property may under no circumstances
or conditions be appropriated by an invading belligerent. Should
he confiscate and sell private land or buildings, the buyer would
acquire no right whatever to the property. Article 46 of the Hague
Regulations expressly enacts that "private property may not be
confiscated." But confiscation differs from the temporary use of
private land and building for all kinds of purposes demanded by
the necessities of war. What has been said above with regard to
utilization of public buildings applied equally to private buildings.
If necessary, they maybe converted into hospital barracks, and
stables without compensation for the proprietors, and they may
also be converted into fortifications. A humane belligerent will not
drive the wretched inhabitants into the street if he can help it. But
under the pressure of necessity he may be obliged to do this, and
he is certainly not prohibited from doing it. (Emphasis supplied)
(Oppenheim & Lauterpach, International Law, Vol. II, p. 312, 1944
Ed.)
The view thus expressed is concurred in by other writers. Hyde
(International Law, Vol. 3, p. 1893, 2nd Rev. Ed.) quotes the U. S.
War Department 1940 Rules of Land Warfare (Rule No. 324) to
the effect that —
The measure of permissible devastation is found in the strict
necessities of war. As an end in itself, as a separate measure of
war, devastation is not sanctioned by the law of war. There must
be some reasonably close connection between the destruction of
property and the overcoming of the enemy's army. Thus the rule

requiring respect for private property is not violated through
damage resulting from operations, movements, or combats of the
army; that is, real estate may be utilized for marches, camp sites,
construction of trenches, etc. Buildings may be used for shelter
for troops, the sick and wounded, for animals, for reconnaissance,
cover defense, etc. Fence, woods, crops, buildings, etc., may be
demolished, cut down, and removed to clear a field of fire, to
construct bridges, to furnish fuel if imperatively needed for the
army. (Emphasis supplied)
Reference may also be made to Rule 336:
What may be requisitioned. — Practically everything may be
requisitioned under this article (art. LII of the regulations above
quoted) that is necessary for the maintenance of the army and not
of direct military use, such as fuel, food, forage, clothing, tobacco,
printing presses, type, leather, cloth, etc. Billeting of troops for
quarters and subsistence is also authorized. (Emphasis supplied)
And Forest and Tucker state:
The billegerent occupant may destroy or appropriate public
property which may have a hostile purpose, as forts, arms,
armories, etc. The occupying force may enjoy the income from
the public sources. Strictly private property should be inviolable,
except so far as the necessity of war requires contrary action.
(Forest and Tucker, International Law, 9th Ed., p. 277) (Emphasis
supplied)
The distinction between confiscation and temporary sequestration
of private property by a belligerent occupant was also passed
upon by this Court in Haw Pia vs. China Banking Corporation, 80
Phil. 604, wherein the right of Japan to sequester or take
temporary control over enemy private property in the interest of
its military effort was expressly recognized.
We are thus forced to conclude that in evicting the lessee, Manila
Motor Co., Inc. from the leased buildings and occupying the same
as quarters for troops, the Japanese authorities acted pursuant to
a right recognized by international and domestic law. Its act of
dispossession, therefore, did not constitute perturbacion de
hecho but a perturbacion de derecho for which the lessors
Villaruel (and not the appellants lessees) were liable (Art. 1560,
supra) and for the consequences of which said lessors must
respond, since the result of the disturbance was the deprivation
of the lessee of the peaceful use and enjoyment of the property
leased. Wherefore, the latter's corresponding obligation to pay
rentals ceased during such deprivation.
The Supreme Court of Spain, in its Sentencia of 6 December
1944, squarely declared the resolutory effect of the military
sequestration of properties under lease upon the lessee's
obligation to pay rent (Jurisprudencia Civil, Segunda Serie, Tomo
8, pp. 583, 608):.
Considerando que para resolver acerca de la procedencia del
presente recurso es preciso partir de las bases de hecho
sentadas en la sentencia recurrida, y no impugnadas al amparo
del numero 7. del articulo 1.692 de la Ley de Enjuiciamiento civil,
es decir, de que hallandose vigente el contrato de arrendamiento
celebrado entre actor y demandada, en fecha que no se precisa,
entre los dias del 18 al 31 de julio de 1936, los locales objeto de
dicho contrato de arrendamiento, y en los que no funcionaba de
tiempo anterior la industria para cuyo ejercicio se arrendaron,
fueron requisados por el Ejercito Nacional, con motivo de la
guerra civil, para que se instalara en los mismos la Junta de
Donativos al Ejercito del Sur, aun cundo en dicha incautacion,
que se hizo a la propiedad de la finca, no se observaron las
formalidades legales, a causa de las circunstancias
extraordinarias por que a la sazon atravesaba Sevilla, hecho que
no consta se hiciera saber por los arrendatarios demandados al
actor, pero que fue notorio en aquella capital, donde residia el
actor, que de el debio tener conocimiento. Se estima igualmente
por la Sala que el hecho de que la industria no funcionara en el
local no tuvo influencia alguna sobre su incautacion por el
Ejercito.
OBLICON 1-9-2018 I ACJUCO 34
Considerando que sobre tales bases de hecho es de desestimar
el primer motivo del recurso: violacion de los articulos 1.254,
1.278 y 1.091 del Codigo civil, que sancionan, en terminos
generales, la eficacia de los contratos, puesto que en el presente
caso de los que se trata en definitiva es de determinar si por virtud
de fuerza mayor, la requisa a que se hace referencia, ajena, por
lo tanto, a culpa, asi del arrendatario como del arrendador, se vio
aquel privado del posible disfrute de la finca arrendada, y de si
por virtud de esta circunstancia esta o no exento de la obligacion
de abonar la renta pactada durante el tiempo que subsistio la
incautacion; y es indudable la afirmativa en cuanto al primer
extremo, puesto que la sentencia recurrida establece que el
hecho de que no funcionase la industria y estuvieran los locales
cerrados no actuo como causa de la requisa de estos por el
Ejercito.
Considerando que la sentencia recurrida, en cuanto no da lugar
al pago de las rentas correspondientes al tiempo que duro la
incautacion, lejos de infringir, por aplicacion indebida, el art. 1.568
del Codigo civil, se ajusta la orientacion marcada en el mismo,
puesto que este precepto legal dispone que el arrendatario tiene
accion contra el tercero perturbador de mero hecho en la
posesion de la finca arrendada, pero no contra la Administracion
o contra los que obran en virtud de un derecho que les
corresponde; y aqui la perturbacion que experimento el
arrendador en su posesion, como consecuencia de la requisa, no
puede calificarse como de mero hecho, conforme al citado
articulo, puesto que la finca fue requisada por la autoridad militar
para fines de guerra, de donde se sigue que el arrendatario tenia
que soportar la privacion de su tenencia material a traves del
arrendador, con quien ha de entenderse la requisa de la cosa
arrendada.
In addition, the text of Art. 1560, in its first paragraph ( jam quot.)
assumes that in case of mere disturbance ( perturbacion de mero
hecho) "the lessee shall have a direct action against the
trespasser." This assumption evidently does not contemplate the
case of dispossession of the lessee by a military occupant, as
pointed out by Mr. Chief Justice Paras in his dissenting opinion in
Reyes vs. Caltex (Phil.) Inc., 84 Phil. 669; for the reason that the
lessee could not have a direct action against the military
occupant. It would be most unrealistic to expect that the
occupation courts, place under the authority of the occupying
belligerent, should entertain at the time a suit for forcible entry
against the Japanese army. The plaintiffs, their lawyers, and in all
probability, the Judge and court personnel, would face "severest
penalties" for such defiance of the invader.
The present case is distinguishable from Lo Ching vs. Archbishop
of Manila (81 Phil., 601) in that the act of the Japanese military
involved in the latter case clearly went beyond the limits set by the
Hague Conventions, in seizing the property and delivering it to
another private party; and from Reyes vs. Caltex (Phil.) Inc., 84
Phil. 654, in that the rights of the military occupant under
international law were not raised or put in issue in said case; and
moreover, the lessee there, by failing to rescind the lease upon
seizure of the premises by the Japanese military, despite the
stipulated power to do so, resumed business and decided to hold
unto the long term lease for the balance of its 20-year period,
starting from December 23, 1940. In the case before us, the
occupation of the leased property by the Japanese army covered
the major portion of the five-year contractual period, without any
option to rescind by the lessee.
The lessor's position is not improved by regarding the military
seizure of the property under lease as a case of force majeure or
fortuitous event. Ordinarily, a party may not be held responsible
therefor, despite the fact that it prevented compliance of its
obligations. But lease being a contract that calls for prestations
that are both reciprocal and repetitive (tractum successivum), the
obligations of either party are not discharged at any given
moment, but must be fulfilled all throughout the term of the
contract. As a result, any substantial failure by one party to fulfill
its commitments at any time during the contract period gives rise
to a failure of consideration (causa) for the obligations of the other

party and excuses the latter from the correlative performance,
because the causa in lease must exist not only at the perfection
but throughout the term of the contract. No lessee would agree to
pay rent for premises he could not enjoy. As expressed by Marcel
Planiol (quoted in 4 Castan, Derecho Civil, 7th Edition, p. 264) —
Como la obligacion del arrendador es sucesiva y se renueva
todos los dias, la subsistencia del arrendamiento se hace
imposible cuando, por cualquier razon, el arrendador no puede
ya procurar al arrendatario el disfrute de la cosa.
This effect of the failure of reciprocity appears whether the failure
is due to fault or to fortuitous event; the only difference being that
in case of fault, the other party is entitled to rescind the contract
in toto, and collect damages, while in casual non-performance it
becomes entitled only to a suspension pro tanto of its own
commitments. This rule is recognized in par. 2 of Art. 1558,
authorizing the lessee to demand reduction of the rent in case of
repairs depriving him of the possession of part of the property;
and in Art. 1575, enabling the lessee of rural property to demand
reduction of the rent if more than one-half of the fruits are lost by
extraordinary fortuitous event. Of course, where it becomes
immediately apparent that the loss of possession or enjoyment
will be permanent, as in the case of accidental destruction of a
leased building, the lease contract terminates.
Applying these principles, the Sentencia of December 1944,
already adverted to, ruled as follows:
Considerando que privado el arrendador, por tal hecho, del
disfrute de esta, es manifiesta la imposibilidad en que se vio de
cumplir la tercera de las obligaciones que el impone el articulo
1.554 del Codigo Civil, obligacion (la de mantener al arrendatario
en el disfrute de la cosa arrendada) que ha de entenderse
reciproca de la de pago de renta pactada, que impone al
arrendatario el numero primero del art. 1.555 de dicho Cuerpo
legal, y por ello no puede ser exigida.
Considerando que, aunque no sean estrictamente aplicables al
caso los articulos 1.124, 1.556 y 1.568, que se citan como
infringidos por el recurrente, suponiendo que a ellos ha entendido
referirse la Audiencia (lo que impediria, en todo caso, la
estimacion del recurso por este motivo, ya que dichos articulos
no se citan en la sentencia de instancia), es evidente que ellos
proclaman la reciprocidad de las obligaciones entre arrendatario
y arrendador, y en este sentido, tratandose de un incumplimiento
inculpable decontrato, pueden servir, como tambien el 1.558, en
cuanto preven la reduccion de rentas o posible restriccion del
contrato cuando el arrendatario se ve privado, por obras
realizadas en la finca arrendada, del disfrute de este, de
fundamento, con los demas preceptos invocados, a una
extencion de renta mientras subsiste la imposibilidad de utilizar la
cosa arrendada, sobre todo cuando los articulos 157 y 158 del
Reglamento de Requisas de 13 de enero de 1921 estatuyen
claramente que las requisas de edificio se hacen a la propiedad,
y es el propietario el que puede pedir indemnization, uno de cuyos
elementos es el precio del alquiler que le sea satisfecho por el
inmueble incautado.
We are aware that the rule in the common law is otherwise, due
to its regarding a lease as a conveyance to the lessee of a
temporary estate or title to the leased property so that loss of
possession due to war or other fortuitous event leaves the tenant
liable for the rent in the absence of stipulation. The fundamental
difference between the common law and the civil law concepts
has been outlined by the United States in Viterbo vs. Friedlander,
30 L. Ed. (U.S.) pp. 776, 778, in this wise:
But as to the nature and effect of a lease for years, at a certain
rent which the lessee agrees to pay, and containing no express
covenant on the part of the lessor, the two systems differ
materially. The common law regards such a lease as the grant of
an estate for years, which the lessee takes a title in, and is bound
to pay the stipulated rent for, notwithstanding any injury by flood,
fire or external violence, at least unless the injury is such a
destruction of the land as to amount to an eviction; and by that
OBLICON 1-9-2018 I ACJUCO 35
law the lessor is under no implied covenant to repair, or even that
the premises shall be fit for the purpose for which they are leased.
Fowler vs. Bott, 6 Mass. 63; 3 Kent, Com. 465, 466; Broom, Legal
Maxims, 3d ed. 213, 214; Doupe vs. Genin, 45 N. Y. 119;
Kingbury vs. Westfall, 61 N. Y. 356. Naumberg vs. Young, 15
Vroom, 331; Bowe vs. Hunking, 135 Mass. 380; Manchester
Warehouse Co. vs. Carr, L.R. 5 C.P.D. 507.
The civil law, on the other hand, regards a lease for years as a
mere transfer of the use and enjoyment of the property; and holds
the landlord bound, without any express covenant, to keep it in
repair and otherwise fit for use and enjoyment for the purpose for
which it is leased, even when the need of repair or the unfitness
is caused by an inevitable accident, and if he does not do so, the
tenant may have the lease annulled, or the rent abated. Dig. 19,
2, 9, 2; 19, 2, 15, 1, 2; 19, 2, 25, 2; 19, 2, 39; 2 Gomez, Variae
Resolutiones c. 3, secs. 1-3, 18, 19: Gregorio Lopez in 5 Partidas,
tit. 8, 11. 8, 22; Domat, Droit Civil, pt. 1, lib. 1, tit. 4, sec. 1, no. 1;
sec. 3 nos. 1, 3, 6, Pothier, Contract de Louage, nos. 3, 6, 11, 22,
53, 103, 106, 139-155.
It is accordingly laid down in the Pandects, on the authority of
Julian, "If anyone has let an estate, that, even if anything happens
by vis major, he must make it good, he must stand by his
contract," si quis fundum locaverit, ut, etiamsi quid vi majore
accidisset, hoc ei praestaretur, pacto standum esse; Dig. 19, 2, 9,
2; and on the authority of Ulpian, that "A lease does not change
the ownership," non solet locatio dominiun mutare; Dig. 19, 2, 39;
and that the lessee has a right of action, if he cannot enjoy the
thing which he has hired, si re quam conduxit frui non liceat,
whether because his possession, either of the whole or of part of
the field, is not made good, or a house, or stable or sheepfold, is
not repaired; and the landlord ought to warrant the tenant,
dominum colono praestare debere, against every irresistible
force, omnim vim cui resisti non potest, such as floods, flocks of
birds, or any like cause, or invasion of enemies; and if the whole
crop should be destroyed by a heavy rainfall, or the olives should
be spoiled by blight, or by extraordinary heat of the sun, solis
fervore non assueto, it would be the loss of the landlord, damnum
domini futurum; and so if the field falls in by an earthquake, for
there must be made good to the tenant a field that he can enjoy,
oportere enim agrum praestari conductori, ut frui possit; but if any
loss arises from defects in the thing itself, si qua tamen vitia ex
ipsa re oriantur, as if wine turns sour, or standing corn is spoiled
by worms or weeds, or if nothing extraordinary happens, si vero
nihil extra consuetudinem acciderit, it is the loss of the tenant,
damnum coloni esse. Dig. 19, 2; 15, 1, 2. (Emphasis supplied)
In short, the law applies to leases the rule enunciated by the
Canonists and the Bartolist School of Post glossatorse, that
"contractus qui tractum successivum habent et dependentiam de
futuro, sub conditione rebus sic stantibus intelliguntur," they are
understood entered subject to the condition that things will remain
as they are, without material change.
It is also worthy of note that the lessors, through Dr. Javier
Villaruel, agreed after liberation to a renewal of the contract of
lease for another five years (from June 1, 1946 to May 31 of 1951)
without making any reservation regarding the alleged liability of
the lessee company for the rentals corresponding to the period of
occupancy of the premises by the Japanese army, and without
insisting that the non-payment of such rental was a breach of the
contract of lease. This passivity of the lessors strongly supports
the claim of the lessees that the rentals in question were verbally
waived. The proffered explanation is that the lessors could not
refuse to renew the lease, because the privilege of renewal had
been granted to the lessees in the original contract. Such excuse
is untenable: if the lessors deemed that the contract had been
breached by the lessee's non-payment of the occupation rents
how could they admit the lessee's right to renew a contract that
the lessee itself had violated?
But this is not all. The lessors accepted payment of current rentals
from October 1945 to June 1946. It was only in July 1946 that they
insisted upon collecting also the 1942-1945 rents, and refused to
accept further payments tendered by the lessee unless their right
 OBLICON 1-9-2018 I ACJUCO 36

to collect the occupation rental was recognized or reserved. After
refusing the rents from July to November 1946, unless the lessee
recognized their right to occupation rentals, the appellees
(lessors) demanded rescission of the contract and a rental of
P1,740 monthly in lieu of the stipulated P350 per month. (Exhibit
"C").
This attitude of the lessors was doubly wrongful: first, because as
already shown, the dispossession by the Japanese army
exempted the lessee from his obligation to pay rent for the period
of its ouster; and second, because even if the lessee had been
liable for that rent, its collection in 1946 was barred by the
moratorium order, Executive Order No. 32, that remained in force
until replaced by Rep. Act 342 in 1948. To apply the current
rentals to the occupation obligations would amount to enforcing
them contrary to the moratorium decreed by the government.
risk of loss that lay upon them. (3 Castan, Der. Civ., 8th Ed., p.
145; 4 Puig Peña, Der. Civ., part. 1, p. 234; Diaz Pairo, Teoria
Gen. de las Obligaciones [3rd Ed.], Vol. 1, pp. 192-193).
In view of the foregoing, we hold:lawphil.net
(a) That the dispossession of the lessee from the premises
by the Japanese army of occupation was not an act of mere
trespass ( perturbacion de mero hecho) but one de derecho
chargeable to the lessors;
(b) That such dispossession, though not due to fault of
lessors or lessee, nevertheless resulted in the exemption of the
lessee from its obligation to pay rent during the period that it was
deprived of the possession and enjoyment of the premises
leased;

Clearly, then, the lessor' insistence upon collecting the occupation
rentals for 1942-1945 was unwarranted in law. Hence, their
refusal to accept the current rentals without qualification placed
them in default (mora creditoris or accipiendi) with the result that
thereafter, they had to bear all supervening risks of accidental
injury or destruction of the leased premises. While not expressly
declared by the Code of 1889, this result is clearly inferable from
the nature and effects of mora, and from Articles 1185, 1452 [par.
3] and 1589).
ART. 1185. When the obligation to deliver a certain and
determinate thing arises from the commission of a crime or
misdemeanor the obligor shall not be exempted from the payment
of its value, whatever the cause of its loss may have been, unless,
having offered the thing to the person entitled to receive it, the
latter should have refused without reason to accept it.
Art. 1452. ....
If fungible things should be sold for a price fixed with relation to
weight, number, or measure, they shall not be at the purchaser's
risk until they have been weighed, counted, or measured, unless
the purchaser should be in default.
ART. 1589. If the person who contracted to do the work
bound himself to furnish the materials, he shall bear the loss in
case of the destruction of the work before it is delivered, unless
its acceptance has been delayed by the default of the other party.
While there is a presumption that the loss of the thing leased is
due to the fault of the lessee (Civil Code of 1889, Art. 1563), it is
noteworthy that the lessor have not invoked that presumption
either here or in the court below. On the contrary, the parties and
the trial court have all proceeded and discussed the issues taking
for granted that the destruction of the leased buildings was purely
fortuitous. We see no reason for departing from that assumption
and further prolonging this litigation..
(c) That the insistence of the lessors to collect such rentals
was unwarranted;
(d) That the lessors were not justified in refusing to accept
the tender of current rentals unless the lessee should recognize
their right to the rents corresponding to the period that the lessee
was not in possession;
(e) That by their improper refusal to accept the current rents
tendered by the lessee, the lessors incurred in default (mora) and
they must shoulder the subsequent accidental loss of the
premises leased;
(f) That the mora of the lessors was not cured by the failure
of the lessee to make the consignation of the rejected payments,
but the lessee remained obligated to pay the amounts tendered
and not consigned by it in court.
Consequently, it was reversible error to sentence the appellants
to pay P2,165 a month as reasonable value of the occupation of
the premises from July 1946, and the value of the destroyed
buildings amounting to P30,000.
Wherefore, the decision appealed from is modified in the sense
that the appellant Manila Motor Company should pay to the
appellees Villaruel only the rents for the leased premises
corresponding to the period from July up to November 1946, at
the rate of P350 a month, or a total of P1,750. Costs against
appellees in both instances. So ordered.
Paras, C. J., Bengzon, Padilla, Montemayor, Bautista Angelo,
Labrador, Concepcion and Endencia, JJ., concur.

That the lessee and sublessee did not consign or deposit in court
the rentals tendered to and improperly rejected by the lessors, did
not render the debtor liable for default (mora solvendi) nor
answerable for fortuitous events because, as explained by the
Supreme Court of Spain in its Sentencia of 5 June 1944 —

Al exigir el art. 1176 del Codigo Civil la consignacion para liberar

al deudor no quiere decir que necesariamente haya de
practicarse, y no baste el ofrecimiento de pago que de aquella no
fuere seguido, a efectos de exclusion de las consecuencias de la
mora solvendi. (8 Manresa, Comentarios, 5th Ed., Vol. 1, p. 136).

In other words, the only effect of the failure to consign the rentals
in court was that the obligation to pay them subsisted (P.N.B. vs.
Relativo, 92 Phil., 203) and the lessee remained liable for the
amount of the unpaid contract rent, corresponding to the period
from July to November, 1946; it being undisputed that, from
December 1946 up to March 2, 1948, when the commercial
buildings were burned, the defendants-appellants have paid the
contract rentals at the rate of P350 per month. But the failure to
consign did not eradicate the default (mora) of the lessors nor the

G.R. No. 126486 February 9, 1998
BARONS MARKETING CORP., petitioner,
vs.
COURT OF APPEALS and PHELPS DODGE PHILS., INC.
respondents.
KAPUNAN, J.:
The instant petition raises two issues: (1) whether or not private
respondent is guilty of abuse of right; and (2) whether or not
private respondent is entitled to interest and attorney's fees.
The facts are undisputed:
On August 31, 1973, plaintiff [Phelps Dodge, Philippines, Inc.
private respondent herein] appointed defendant [petitioner
Barons Marketing, Corporation] as one of its dealers of electrical
wires and cables effective September 1, 1973 (Exh. A). As such
dealer, defendant was given by plaintiff 60 days credit for its
purchases of plaintiff's electrical products. This credit term was to
be reckoned from the date of delivery by plaintiff of its products to
defendant (Exh. 1).
During the period covering December 1986 to August 17, 1987,
defendant purchased, on credit, from plaintiff various electrical
wires and cables in the total amount of P4,102,438.30 (Exh. B to
K). These wires and cables were in turn sold, pursuant to previous
arrangements, by defendant to MERALCO, the former being the
accredited supplier of the electrical requirements of the latter.
Under the sales invoices issued by plaintiff to defendant for the
subject purchases, it is stipulated that interest at 12% on the
amount due for attorney's fees and collection (Exh. BB).1 On
September 7, 1987, defendant paid plaintiff the amount of
P300,000.00 out of its total purchases as above-stated (Exh. S),
thereby leaving an unpaid account on the aforesaid deliveries of
P3,802,478.20. On several occasions, plaintiff wrote defendant
demanding payment of its outstanding obligations due plaintiff
(Exhs. L, M, N, and P). In response, defendant wrote plaintiff on
October 5, 1987 requesting the latter if it could pay its outstanding
account in monthly installments of P500,000.00 plus 1% interest
per month commencing on October 15, 1987 until full payment
(Exh. O and O-4). Plaintiff, however, rejected defendant's offer
and accordingly reiterated its demand for the full payment of
defendant's account (Exh. P).2
On 29 October 1987, private respondent Phelps Dodge Phils.,
Inc. filed a complaint before the Pasig Regional Trial Court against
petitioner Barons Marketing Corporation for the recovery of
P3,802,478.20 representing the value of the wires and cables the
former had delivered to the latter, including interest. Phelps
Dodge likewise prayed that it be awarded attorney's fees at the
rate of 25% of the amount demanded, exemplary damages
amounting to at least P100,000.00, the expenses of litigation and
the costs of suit.
Petitioner, in its answer, admitted purchasing the wires and
cables from private respondent but disputed the amount claimed
by the latter. Petitioner likewise interposed a counterclaim against
private respondent, alleging that it suffered injury to its reputation
due to Phelps Dodge's acts. Such acts were purportedly
calculated to humiliate petitioner and constituted an abuse of
rights.
After hearing, the trial court on 17 June 1991 rendered its
decision, the dispositive portion of which reads:
WHEREFORE, from all the foregoing considerations, the Court
finds Phelps Dodge Phils., Inc. to have preponderantly proven its
case and hereby orders Barons Marketing, Inc. to pay Phelps
Dodge the following:
1. P3,108,000.00 constituting the unpaid balance of
defendant's purchases from plaintiff and interest thereon at 12%
per annum computed from the respective expiration of the 60 day
OBLICON 1-9-2018 I ACJUCO 37
credit term, vis-a-vis the various sales invoices and/or delivery
receipts;
2. 25% of the preceding obligation for and as attorney's
fees;
3. P10,000.00 as exemplary damages;
4. Costs of suit.3
Both parties appealed to respondent court. Private respondent
claimed that the trial court should have awarded it the sum of
P3,802,478.20, the amount which appeared in the body of the
complaint and proven during the trial rather than P3,1081000.00
The latter amount appears in petitioner's prayer supposedly as a
result of a typographical error.
On the other hand, petitioner reiterated its claims for damages as
a result of "creditor's abuse." It also alleged that private
respondent failed to prove its cause of action against it.
On 25 June 1996, the Court of Appeals rendered a decision
modifying the decision of the trial court, thus:
WHEREFORE, from all the foregoing considerations, the Court
finds Phelps Dodge Phils., Inc. to have preponderantly proven its
case and hereby orders Barons Marketing, Inc. to pay Phelps
Dodge the following:
1. P3,802,478.20 constituting the unpaid balance of
defendant's purchases from plaintiff and interest thereon at 12%
per annum computed from the respective expiration of the 60 day
credit term, vis-a-vis the various sales invoices and/or delivery
receipts; and
2. 5% of the preceding obligation for and as attorney's
fees.
No costs.4
Petitioner Barons Marketing is now before this Court alleging that
respondent court erred when it held (1) private respondent Phelps
Dodge not guilty of "creditor's abuse," and (2) petitioner liable to
private respondent for interest and attorney's fees.
I
Petitioner does not deny private respondent's rights to institute an
action for collection and to claim full payment. Indeed, petitioner's
right to file an action for collection is beyond cavil.5 Likewise,
private respondent's right to reject petitioner's offer to pay in
installments is guaranteed by Article 1248 of the Civil Code which
states:
Art. 1248. Unless there is an express stipulation to that
effect, the creditor cannot be compelled partially to receive the
prestations in which the obligation consists. Neither may the
debtor be required to make partial payments.
However, when the debt is in part liquidated and in part
unliquidated, the creditor may demand and the debtor may effect
the payment of the former without waiting for the liquidation of the
latter.
Under this provision, the prestation, i.e., the object of the
obligation, must be performed in one act, not in parts.
Tolentino concedes that the right has its limitations:
Partial Prestations. — Since the creditor cannot be compelled to
accept partial performance, unless otherwise stipulated, the
creditor who refuses to accept partial prestations does not incur
in delay or mora accipiendi, except when there is abuse of right
or if good faith requires acceptance.6

Indeed, the law, as set forth in Article 19 of the Civil Code,
prescribes a "primordial limitation on all rights" by setting certain
standards that must be observed in the exercise thereof.7 Thus:
Art. 19. Every person must, in the exercise of his rights and in
the performance of his duties, act with justice, give everyone his
due, and observe honesty and good faith.
Petitioner now invokes Article 19 and Article 218 of the Civil Code,
claiming that private respondent abused its rights when it rejected
petitioner's offer of settlement and subsequently filed the action
for collection considering:
. . . that the relationship between the parties started in 1973
spanning more than 13 years before the complaint was filed, that
the petitioner had been a good and reliable dealer enjoying a good
credit standing during the period before it became delinquent in
1987, that the relationship between the parties had been a fruitful
one especially for the private respondent, that the petitioner
exerted its outmost efforts to settle its obligations and avoid a suit,
that the petitioner did not evade in the payment of its obligation to
the private respondent, and that the petitioner was just asking a
small concession that it be allowed to liquidate its obligation to
eight (8) monthly installments of P500,000.00 plus 1% interest per
month on the balance which proposal was supported by post-
dated checks.9
Expounding on its theory, petitioner states:
In the ordinary course of events, a suit for collection of a sum of
money filed in court is done for the primary purpose of collecting
a debt or obligation. If there is an offer by the debtor to pay its
debt or obligation supported by post-dated checks and with
provision for interests, the normal response of a creditor would be
to accept the offer of compromise and not file the suit for
collection. It is of common knowledge that proceedings in our
courts would normally take years before an action is finally settled.
It is always wiser and more prudent to accept an offer of payment
in installment rather than file an action in court to compel the
debtor to settle his obligation in full in a single payment.
xxx xxx xxx
. . . Why then did private respondent elect to file a suit for
collection rather than accept petitioner's offer of settlement,
supported by post-dated checks, by paying monthly installments
of P500,000.00 plus 1% per month commencing on October 15,
1987 until full payment? The answer is obvious. The action of
private respondent in filling a suit for collection was an abuse of
right and exercised for the sole purpose of prejudicing and injuring
the petitioner.10
Petitioner prays that the Court order private respondent to pay
petitioner moral and exemplary damages, attorney's fees, as well
as the costs of suit. It likewise asks that it be allowed to liquidate
its obligation to private respondent, without interests, in eight
equal monthly installments.
Petitioner's theory is untenable.
Both parties agree that to constitute an abuse of rights under
Article 19 the defendant must act with bad faith or intent to
prejudice the plaintiff. They cite the following comments of
Tolentino as their authority:
Test of Abuse of Right. — Modern jurisprudence does not permit
acts which, although not unlawful, are anti-social. There is
undoubtedly an abuse of right when it is exercised for the only
purpose of prejudicing or injuring another. When the objective of
the actor is illegitimate, the illicit act cannot be concealed under
the guise of exercising a right. The principle does not permit acts
which, without utility or legitimate purpose cause damage to
another, because they violate the concept of social solidarity
which considers law as rational and just. Hence, every abnormal
exercise of a right, contrary to its socio-economic purpose, is an
abuse that will give rise to liability. The exercise of a right must be
OBLICON 1-9-2018 I ACJUCO 38
in accordance with the purpose for which it was established, and
must not be excessive or unduly harsh; there must be no intention
to injure another. Ultimately, however, and in practice, courts, in
the sound exercise of their discretion, will have to determine all
the facts and circumstances when the exercise of a right is unjust,
or when there has been an abuse of right.11
The question, therefore, is whether private respondent intended
to prejudice or injure petitioner when it rejected petitioner's offer
and filed the action for collection.
We hold in the negative. It is an elementary rule in this jurisdiction
that good faith is presumed and that the burden of proving bad
faith rests upon the party alleging the same.12 In the case at bar,
petitioner has failed to prove bad faith on the part of private
respondent. Petitioner's allegation that private respondent was
motivated by a desire to terminate its agency relationship with
petitioner so that private respondent itself may deal directly with
Meralco is simply not supported by the evidence. At most, such
supposition is merely speculative.
Moreover, we find that private respondent was driven by very
legitimate reasons for rejecting petitioner's offer and instituting the
action for collection before the trial court. As pointed out by private
respondent, the corporation had its own "cash position to protect
in order for it to pay its own obligations." This is not such "a lame
and poor rationalization" as petitioner purports it to be. For if
private respondent were to be required to accept petitioner's offer,
there would be no reason for the latter to reject similar offers from
its other debtors. Clearly, this would be inimical to the interests of
any enterprise, especially a profit-oriented one like private
respondent. It is plain to see that what we have here is a mere
exercise of rights, not an abuse thereof Under these
circumstances, we do not deem private respondent to have acted
in a manner contrary to morals, good customs or public policy as
to violate the provisions of Article 21 of the Civil Code.
Consequently, petitioner's prayer for moral and exemplary
damages must thus be rejected. Petitioner's claim for moral
damages is anchored on Article 2219 (10) of the Civil Code which
states:
Art. 2219. Moral damages may be recovered in the
following and analogous cases:
xxx xxx xxx
(10) Acts and actions referred to in articles 21, 26, 27, 28,
29, 30, 32, 34, and 35.
xxx xxx xxx
Having ruled that private respondent's acts did not transgress the
provisions of Article 21, petitioner cannot be entitled to moral
damages or, for that matter, exemplary damages. While the
amount of exemplary damages need not be proved, petitioner
must show that he is entitled to moral, temperate or compensatory
damages before the court may consider the question of whether
or not exemplary damages should be awarded.13 As we have
observed above; petitioner has failed to discharge this burden.
It may not be amiss to state that petitioner's contract with private
respondent has the force of law between them.14 Petitioner is
thus bound to fulfill what has been expressly stipulated therein.15
In the absence of any abuse of right, private respondent cannot
be allowed to perform its obligation under such contract in parts.
Otherwise, private respondent's right under Article 1248 will be
negated, the sanctity of its contract with petitioner defiled. The
principle of autonomy of contracts16 must be respected.
II
Under said contract, petitioner is liable to private respondent for
the unpaid balance of its purchases from private respondent plus
12% interest. Private respondent's sales invoices expressly
provide that:
 OBLICON 1-9-2018 I ACJUCO 39

. . . Interest at 12% per annum will be charged on all overdue

account plus 25% on said amount for attorney's fees and
collection. . . .17

It may also be noted that the above stipulation, insofar as it

provides for the payment of "25% on said amount for attorney's
fees and collection (sic)," constitutes what is known as a penal
clause.18 Petitioner is thus obliged to pay such penalty in addition
to the 12% annual interest, there being an express stipulation to
that effect.

Petitioner nevertheless urges this Court to reduce the attorney's

fees for being "grossly excessive," "considering the nature of the
case which is a mere action for collection of a sum of money." It
may be pointed out however that the above penalty is supposed
to answer not only for attorney's fees but for collection fees as
well. Moreover:

. . . the attorneys' fees here provided is not, strictly speaking, the

attorneys' fees recoverable as between attorney and client
spoken of and regulated by the Rules of Court. Rather, the
attorneys' fees here are in the nature of liquidated damages and
the stipulation therefor is aptly called a penal clause. It has been
said that so long as such stipulation does not contravene law,
morals, or public order, it is strictly binding upon defendant. The
attorneys' fees so provided are awarded in favor of the litigant, not
his counsel. It is the litigant, not counsel, who is the judgment
creditor entitled to enforce the judgment by execution. 19

Nonetheless, courts are empowered to reduce such penalty if the

same is "iniquitous or unconscionable." Article 1229 of the Civil
Code states thus:

Art. 1229. The judge shall equitably reduce the penalty

when the principal obligation has been partly or been irregularly
complied with by the debtor. Even if there has no performance,
the penalty may also be reduced by the courts if it is iniquitous or
unconscionable. (Emphasis supplied.)

The sentiments of the law are echoed in Article 2227 of the same
Code:

Art. 2227. Liquidated damages, whether intended as an

indemnity or a penalty, shall be equitably reduced if they are
iniquitous or unconscionable.

It is true that we have upheld the reasonableness of penalties in

the form of attorney's fees consisting of twenty-five percent (25%)
of the principal debt plus interest.20 In the case at bar, however,
the interest alone runs to some four and a half million pesos
(P4.5M), even exceeding the principal debt amounting to almost
four million pesos (P4.0M). Twenty five percent (25%) of the
principal and interest amounts to roughly two million pesos (P2M).
In real terms, therefore, the attorney's fees and collection fees are
manifestly exorbitant. Accordingly, we reduce the same to ten
percent (10%) of the principal.

Private respondent, however, argues that petitioner failed to

question the award of attorney's fees on appeal before
respondent court and raised the issue only in its motion for
reconsideration. Consequently, petitioner should be deemed to
have waived its right to question such award.

Private respondent's attempts to dissuade us from reducing the

penalty are futile. The Court is clothed with ample authority to
review matters, even if they are not assigned as errors in their
appeal, if it finds that their consideration is necessary in arriving
at a just decision of the case.21

WHEREFORE, the decision of the Court of Appeals is hereby

MODIFIED in that the attorney's and collection fees are reduced
to ten percent (10%) of the principal but is AFFIRMED in all other
respects.

SO ORDERED.