1
G.R. No. L-10134 June 29, 1957
SABINA EXCONDE, plaintiff-appellant,
vs.
DELFIN CAPUNO and DANTE CAPUNO, defendants-appellees.
BAUTISTA ANGELO, J.:
Dante Capuno, son of Delfin Capuno, was accused of double homicide through reckless
imprudence for the death of Isidoro Caperina and Amado Ticzon on March 31, 1949 in the Court
of First Instance of Laguna (Criminal Case No. 15001). During the trial, Sabina Exconde, as
mother of the deceased Isidoro Caperina, reserved her right to bring a separate civil action for
damages against the accused. After trial, Dante Capuno was found guilty of the crime charged
and, on appeal, the Court Appeals affirmed the decision. Dante Capuno was only (15) years old
when he committed the crime.
In line with her reservation, Sabina Exconde filed the present action against Delfin Capuno and
his son Dante Capuno asking for damages in the aggregate amount of P2,959.00 for the death
of her son Isidoro Caperiña. Defendants set up the defense that if any one should be held liable
for the death of Isidoro Caperina, he is Dante Capuno and not his father Delfin because at the
time of the accident, the former was not under the control, supervision and custody, of the latter.
This defense was sustained by the lower court and, as a consequence it only convicted Dante
Capuno to pay the damages claimed in the complaint. From decision, plaintiff appealed to the
Court of Appeals but the case was certified to us on the ground that the appeal only involves
questions of law.
It appears that Dante Capuno was a member of the Boy Scouts Organization and a student of
the Bilintawak Elementary School situated in a barrio in the City of San Pablo and on March 31,
1949 he attended a parade in honor of Dr. Jose Rizal in said city upon instruction of the city
school's supervisor. From the school Dante, with other students, boarded a jeep and when the
same started to run, he took hold of the wheel and drove it while the driver sat on his left side.
They have not gone far when the jeep turned turtle and two of its passengers, Amado Ticzon
and Isidore Caperiña, died as a consequence. It further appears that Delfin Capuno, father of
Dante, was not with his son at the time of the accident, nor did he know that his son was going to
attend a parade. He only came to know it when his son told him after the accident that he
attended the parade upon instruction of his teacher.
The only issue involved in this appeal is whether defendant Delfin Capuno can be held civilly
liable, jointly and severally with his son Dante, for damages resulting from the death of Isidoro
Caperiña caused by the negligent act of minor Dante Capuno.
The case comes under Article 1903 of the Spanish Civil Code, paragraph 1 and 5, which
provides:
ART. 1903. The obligation impossed by the next preceding articles is enforceable not
only for personal acts and omissions, but also for those of persons for whom another
is responsible.
The father, and, in case of his death or incapacity, the mother, are liable for any
damages caused by the minor children who live with them.
xxx xxx xxx
Finally, teachers or directors of arts and trades are liable for any damages caused by
their pupils or apprentices while they are under their custody.
Plaintiff contends that defendant Delfin Capuno is liable for the damages in question jointly and
severally with his son Dante because at the time the latter committed the negligent act which
resulted in the death of the victim, he was a minor and was then living with his father, and
inasmuch as these facts are not disputed, the civil liability of the father is evident. And so, plaintiff
contends, the lower court erred in relieving the father from liability. We find merit in this claim. It
is true that under the law above quoted, "teachers or directors of arts and trades are liable for
any damages caused by their pupils or apprentices while they are under their custody", but this
provision only applies to an institution of arts and trades and not to any academic educational
institution (Padilla, Civil Law, 1953, Ed., Vol. IV, p. 841; See 12 Manresa, 4th Ed., p. 557). Here
Dante capuno was then a student of the Balintawak Elementary School and as part of his extra-
curricular activity, he attended the parade in honor of Dr. Jose Rizal upon instruction of the city
school's supervisor. And it was in connection with that parade that Dante boarded a jeep with
some companions and while driving it, the accident occurred. In the circumstances, it is clear
that neither the head of that school, nor the city school's supervisor, could be held liable for the
negligent act of Dante because he was not then a student of an institute of arts and trades as
provided by law. The civil liability which the law impose upon the father, and, in case of his death
or incapacity, the mother, for any damages that may be caused by the minor children who live
with them, is obvious. This is necessary consequence of the parental authority they exercise
over them which imposes upon the parents the "duty of supporting them, keeping them in their
company, educating them and instructing them in proportion to their means", while, on the other
hand, gives them the "right to correct and punish them in moderation" (Articles 154 and 155,
Spanish Civil Code). The only way by which they can relieve themselves of this liability is if they
prove that they exercised all the diligence of a good father of a family to prevent the
damage(Article 1903, last paragraph, Spanish Civil Code). This defendants failed to prove.
WHEREFORE, the decision appealed from is modified in the sense that defendants Delfin
Capuno and Dante Capuno shall pay to plaintiff, jointly and severally, the sum of P2,959.00 as
damages, and the costs of action.
G.R. No. L-14342 May 30, 1960
1

CIRIACO L. MERCADO, petitioner,
vs.
THE COURT OF APPEALS, MANUEL QUISUMBING, JR., ET AL., respondents.
LABRADOR, J.:
This is a petition to review a decision of the Court of Appeals, which condemned petitioner to pay
P2,000 as moral damages and P50 for medical expenses, for a physical injury caused by the
son of petitioner, Augusto Mercado, on a classmate, Manuel Quisumbing, Jr., both pupils of the
Lourdes Catholic School, Kanlaon, Quezon City. The case had originated in the Court of First
Instance of Manila, Hon. Bienvenido A. Tan, presiding, which dismissed the complaint filed by
Manuel Quisumbing, Jr. and his father against petitioner, father of the above-mentioned
Mercado. The facts found by the Court of Appeals are as follows:
Plaintiff-appellant Manuel Quisumbing, Jr. is the son of his co-plaintiff-appellants Ana
Pineda and Manuel L. Quisumbing, while Augusto Mercado is the son of defendant-
appellee Ciriaco L. Mercado, Manuel Quisumbing, Jr. and Augusto Mercado were
classmates in the Lourdes Catholic School on Kanlaon, Quezon City. A "pitogo",
which figures prominently in this case, may be described as an empty nutshell used
by children as a piggy bank. On February 22, 1956, Augusto Mercado and Manuel
Quisumbing, Jr. quarrelled over a "pitogo". As a result, Augusto wounded Manuel, Jr.
on the right cheek with a piece of razor.
xxx xxx xxx
The facts of record clearly show that it was Augusto Mercado who started the
aggression. Undeniably, the "pitogo" belonged to Augusto Mercado but he lent it to
Benedicto P. Lim and in turn Benedicto lent it to Renato Legaspi. Renato was not
aware that the "pitogo" belonged to Augusto, because right after Benedicto gave it to
him, Benedicto ran away to get a basket ball with which they could play. Manuel
Quisumbing, Jr. was likewise unaware that the "pitogo" belonged to Augusto. He
thought it was the "pitogo" of Benedicto P. Lim, so that when Augusto attempted to
get the "pitogo" from Renato, Manuel, Jr. told him not to do so because Renato was
better at putting the chain into the holes of the "pitogo". However, Augusto resented
Manuel, Jr.'s remark and he aggresively pushed the latter. The fight started then.
After Augusto gave successive blows to Manuel, Jr., and the latter was clutching his
stomach which bore the brunt of Augusto's anger, Augusto seeing that Manuel, Jr.
was in a helpless position, cut him on the right check with a piece of razor.
xxx xxx xxx
Although the doctor who treated Manuel Quisumbing, Jr., Antonio B. Past, testified for
plaintiffs-appellants, he did not declare as to the amount of fees he collected from
plaintiff-appellants for the treatment of Manuel, Jr. the child was not even hospitalized
2
for the wound. We believe that the sum of P50.00 is a fair approximation of the
medical expenses incurred by plaintiffs-appellants.
xxx xxx xxx
The damages specified in paragraphs C and D of the aforequoted portion of plaintiffs-
appellant's complaint come under the class of moral damages. The evidence of
record shows that the child suffered moral damages by reason of the wound inflicted
by Augusto Mercado. Though such kind of damages cannot be fully appreciated in
terms of money, we believe that the sum of P2,000.00 would fully compensate the
child.
As second cause of action, plaintiffs-appellants pray for P5,000.00 covering the moral
damages they allegedly suffered due to their son's being wounded; and the sum of
P3,000.00 as attorney's fees. The facts of record do not warrant the granting of moral
damages to plaintiffs-appellants Manuel Quisumbing and Ana Pineda. "In law mental
anguish is restricted, as a rule, to such mental pain or suffering as arises from an
injury or wrong to the person himself, as distinguished from that form of mental
suffering which is the accompaniment of sympathy or sorrow for another's suffering of
which arises from a contemplation of wrong committed on the person of another.
Pursuant to the rule stated, a husband or wife cannot recover for mental suffering
caused by his or her sympathy for the other's suffering. Nor can a parent recover for
mental distress and anxiety on account of physical injury sustained by a child or for
anxiety for the safety of his child placed in peril by the negligence of another." (15 Am.
Jur. 597). Plaintiffs-appellants are not entitled to attorney's fees, it not appearing that
defendant-appellee had wantonly disregarded their claim for damages.
In the first, second and third assignments of error, counsel for petitioner argues that since the
incident of the inflicting of the wound on respondent occurred in a Catholic School (during recess
time), through no fault of the father, petitioner herein, the teacher or head of the school should be
held responsible instead of the latter. This precise question was brought before this Court in
Exconde vs. Capuno and Capuno, 101 Phil., 843, but we held, through Mr. Justice Bautista:
We find merit in this claim. It is true that under the law above-quoted, "teachers or
directors of arts and trades are liable for any damage caused by their pupils or
apprentices while they are under their custody", but this provision only applies to an
institution of arts and trades and not to any academic educational institution (Padilla,
Civil Law, 1953 Ed., Vol. IV, p. 841; See 12 Manresa, 4th Ed., p. 557)
The last paragraph of Article 2180 of the Civil Code, upon which petitioner rests his claim that
the school where his son was studying should be made liable, is as follows:
ART. 2180. . . .
2
 3

Lastly, teachers or heads of establishments of arts and trades shall be liable for Quisumbing who, in turn, also pushed Mercado. It is, therefore, apparent that the proximate
damages caused by their pupils and students or apprentices, so long as they remain cause of the injury caused to Quisumbing was Quisumbing's own fault or negligence for having
in their custody. interfered with Mercado while trying to get the pitogo from another boy. (Art. 2179, Civil Code.)

It would be seem that the clause "so long as they remain in their custody," contemplates a After considering all the facts as found by the Court of Appeals, we find that none of the cases
situation where the pupil lives and boards with the teacher, such that the control, direction and mentioned in Article 2219 of the Civil Code, which authorizes the grant of moral damages, was
influence on the pupil supersedes those of the parents. In these circumstances the control or shown to have existed. Consequently, the grant of moral damages is not justified.
influence over the conduct and actions of the pupil would pass from the father and mother to the
teacher; and so would the responsibility for the torts of the pupil. Such a situation does not
appear in the case at bar; the pupils appear to go to school during school hours and go back to For the foregoing considerations, the decision appealed from is hereby reversed and the
their homes with their parents after school is over. The situation contemplated in the last petitioner is declared exempt or free from the payment of moral damages. The award of P50 for
paragraph of Article 2180 does not apply, nor does paragraph 2 of said article, which makes medical expenses, however, is hereby affirmed. Without costs.
father or mother responsible for the damages caused by their minor children. The claim of
petitioner that responsibility should pass to the school must, therefore, be held to be without
merit.

We next come to the claim of petitioner that the moral damages fixed at P2,000 are excessive.
We note that the wound caused to respondent was inflicted in the course of an ordinary or
common fight between boys in a grade school. The Court of Appeals fixed the medical expenses
incurred in treating and curing the wound at P50. Said court stated that the wound did not even
require hospitalization. Neither was Mercado found guilty of any offense nor the scar in
Quisumbing's face pronounced to have caused a deformity, unlike the case of Araneta, et al. vs.
Arreglado, et al., 104 Phil., 529; 55 Off. Gaz. (9) 1561. Petitioner's counsel argues that if death
call for P3,000 to P6,000, certainly the incised wound could cause mental pain and suffering to
the tune of P2,000.

In the decision of the Court of Appeals, said court pronounces that the child Quisumbing suffered
moral damages "by reason of the wound inflicted by Augusto Mercado." While moral damages
included physical suffering, which must have been caused to the wounded boy Quisumbing (Art.
2217, Civil Code), the decision of the court below does not declare that any of the cases
specified in Article 2219 of the Civil Code in which moral damages may be recovered, has
attended or occasioned the physical injury. The only possible circumstance in the case at bar in
which moral damages are recoverable would be if a criminal offense or a quasi-delict has been
committed.

It does not appear that a criminal action for physical injuries was ever presented. The offender,
Augusto Mercado, was nine years old and it does not appear that he had acted with discernment
when he inflicted the physical injuries on Manuel Quisumbing, Jr.

It is possible that the Court of Appeals may have considered Augusto Mercado responsible for or
guilty, of a quasi-delict causing physical injuries, within the meaning of paragraph 2 of Article
2219. Even if we assume that said court considered Mercado guilty of a quasi-delict when it
imposed the moral damages, yet the facts found by said court indicate that Augusto's
resentment, which motivated the assault, was occasioned by the fact that Manuel, Jr. had tried to
intervene in or interfere with the attempt of Mercado to get "his pitogo from Renato." This is, G.R. No. L-29025 October 4, 1971
according to the decision appealed from, the reason why Mercado was incensed and pushed

3

Spouses MOISES P. PALISOC and BRIGIDA P. PALISOC, plaintiffs-appellants,
vs.
ANTONIO C. BRILLANTES and TEODOSIO V. VALENTON, owner and President,
respectively, of a school of arts and trades, known under the name and style of "Manila
Technical Institute" (M.I.T.), VIRGILIO L. DAFFON and SANTIAGO M. QUIBULUE,
defendants-appellees.
TEEHANKEE, J.:
An appeal in forma pauperis on pure questions of law from a decision of the Court of First
Instance of Manila. .
Plaintiffs-appellants as parents of their sixteen-year old son, Dominador Palisoc, and a student in
automotive mechanics at the Manila Technical Institute, Quezon Boulevard, Manila, had filed on
May 19, 1966, the action below for damages arising from the death on March 10, 1966 of their
son at the hands of a fellow student, defendant Virgilio L. Daffon, at the laboratory room of the
said Institute. .
Defendants, per the trial court's decision, are: "(T)he defendant Antonio C. Brillantes, at the time
when the incident which gave rise to his action occurred was a member of the Board of Directors
of the institute;1 the defendant Teodosio Valenton, the president thereof; the defendant Santiago
M. Quibulue, instructor of the class to which the deceased belonged; and the defendant Virgilio
L. Daffon, a fellow student of the deceased. At the beginning the Manila Technical Institute was a
single proprietorship, but lately on August 2, 1962, it was duly incorporated."
The facts that led to the tragic death of plaintiffs' son were thus narrated by the trial court: "(T)he
deceased Dominador Palisoc and the defendant Virgilio L. Daffon were classmates, and on the
afternoon of March 10, 1966, between two and three o'clock, they, together with another
classmate Desiderio Cruz were in the laboratory room located on the ground floor. At that time
the classes were in recess. Desiderio Cruz and Virgilio L. Daffon were working on a machine
while Dominador Palisoc was merely looking on at them. Daffon made a remark to the effect that
Palisoc was acting like a foreman. Because of this remark Palisoc slapped slightly Daffon on the
face. Daffon, in retaliation, gave Palisoc a strong flat blow on the face, which was followed by
other fist blows on the stomach. Palisoc retreated apparently to avoid the fist blows, but Daffon
followed him and both exchanged blows until Palisoc stumbled on an engine block which caused
him to fall face downward. Palisoc became pale and fainted. First aid was administered to him
but he was not revived, so he was immediately taken to a hospital. He never regained
consciousness; finally he died. The foregoing is the substance of the testimony of Desiderio
Cruz, the lone witness to the incident."
The trial court expressly gave credence to this version of the incident, as testified to by the lone
eyewitness, Desiderio Cruz, a classmate of the protagonists, as that of a disinterested witness
who "has no motive or reason to testify one way or another in favor of any party" and rejected
the self-exculpatory version of defendant Daffon denying that he had inflicted any fist blows on
the deceased. .
4
With the postmortem findings of Dr. Angelo Singian of the Manila Police Department who
performed the autopsy re "Cause of death: shock due to traumatic fracture of theribs (6th and
7th, left, contusion of the pancreas and stomach with intra-gastric hemorrhage and slight
subarachnoid hemorrhage on the brain," and his testimony that these internal injuries of the
deceased were caused "probably by strong fist blows," the trial court found defendant Daffon
liable for the quasi delict under Article 2176 of the Civil Code.3 It held that "(T)he act, therefore,
of the accused Daffon in giving the deceased strong fistblows in the stomach which ruptured his
internal organs and caused his death falls within the purview of this article of the Code."4
The trial court, however, absolved from liability the three other defendants-officials of the Manila
Technical Institute, in this wise:
... Their liabilities are based on the provisions of Article 2180 of the New
Civil Code which reads:
Art. 2180. ... .
Lastly, teachers or heads of establishments of arts
and trades shall be liable for damages caused by
their pupils and students and apprentices, so long as
they remain in their custody.
In the opinion of the Court, this article of the Code is not applicable to the
case at bar, since this contemplates the situation where the control or
influence of the teachers and heads of school establishments over the
conduct and actions by the pupil supersedes those of the parents.
CIVIL LAW: DAMAGES ART 2180. NEW CIVIL
CODE CONSTRUED: — The clause "so long as they
remain in their custody" contained in Article 2180 of
the new civil code contemplated a situation where
the pupil lives and boards with the teacher, such that
the control or influence on the pupil supersedes
those of the parents. In those circumstances the
control or influence over the conduct and actions of
the pupil as well as the responsibilities for their sort
would pass from the father and mother to the
teachers. (Ciriaco L. Mercado, Petitioner vs. the
Court of Appeals, Manuel Quisumbing, Jr., et al.,
respondents, G.R. No. L-14862, May 30, 1960).5
There is no evidence that the accused Daffon lived and boarded with his
teacher or the other defendant officials of the school. These defendants
cannot therefore be made responsible for the tort of the defendant Daffon.
4

Judgment was therefore rendered by the trial court as follows:
1. Sentencing the defendant Virgilio L. Daffon to pay the plaintiffs as heirs
of the deceased Dominador Palisoc (a) P6,000.00 for the death of
Dominador Palisoc; (b) P3,375.00 for actual and compensatory expenses;
(c) P5,000.00 for moral damages; (d) P10,000.00 for loss of earning
power, considering that the deceased was only between sixteen and
seventeen years, and in good health when he died, and (e) P2,000.00 for
attorney's fee, plus the costs of this action. .
2. Absolving the other defendants. .
3. Dismissing the defendants' counterclaim for lack of merit.
Plaintiffs' appeal raises the principal legal question that under the factual findings of the trial
court, which are now beyond review, the trial court erred in absolving the defendants-school
officials instead of holding them jointly and severally liable as tortfeasors, with defendant Daffon,
for the damages awarded them as a result of their son's death. The Court finds the appeal, in the
main, to be meritorious. .
1. The lower court absolved defendants-school officials on the ground that the provisions of
Article 2180, Civil Code, which expressly hold "teachers or heads of establishments of arts and
trades ... liable for damages caused by their pupils and students and apprentices, so long as
they remain in their custody," are not applicable to to the case at bar, since "there is no evidence
that the accused Daffon [who inflicted the fatal fistblows]6 lived and boarded with his teacher or
the other defendants-officials of the school. These defendants cannot therefore be made
responsible for the tort of the defendant Daffon."
The lower court based its legal conclusion expressly on the Court's dictum in Mercado vs. Court
of Appeals,7 that "(I)t would seem that the clause "so long as they remain in their custody,"
contemplates a situation where the pupil lives and boards with the teacher, such that the control,
direction and influence on the pupil supersedes those of the parents. In these circumstances the
control or influence over the conduct and actions of the pupil would pass from the father and
mother to the teacher; and so would the responsibility for the torts of the pupil. Such a situation
does not appear in the case at bar; the pupils appear to go to school during school hours and go
back to their homes with their parents after school is over." This dictum had been made in
rejecting therein petitioner father's contention that his minor son's school, Lourdes Catholic
School at Kanlaon, Quezon City [which was not a party to the case] should be held responsible,
rather than him as father, for the moral damages of P2,000.00 adjudged against him for the
physical injury inflicted by his son on a classmate. [A cut on the right cheek with a piece of razor
which costs only P50.00 by way of medical expenses to treat and cure, since the wound left no
scar.] The moral damages award was after all set aside by the Court on the ground that none of
the specific cases provided in Article 2219, Civil Code, for awarding moral damages had been
established, petitioner's son being only nine years old and not having been shown to have "acted
with discernment" in inflicting the injuries on his classmate. .
5
The dictum in Mercado was based in turn on another dictum in the earlier case of Exconde vs.
Capuno,8 where the only issue involved as expressly stated in the decision, was whether the
therein defendant-father could be civilly liable for damages resulting from a death caused in a
motor vehicle accident driven unauthorizedly and negligently by his minor son, (which issue was
resolved adversely against the father). Nevertheless, the dictum in such earlier case that "It is
true that under the law abovequoted, teachers or directors of arts and trades are liable for any
damage caused by their pupils or apprentices while they are under their custody, but this
provision only applies to an institution of arts and trades and not to any academic educational
institution" was expressly cited and quoted in Mercado. .
2. The case at bar was instituted directly against the school officials and squarely raises the
issue of liability of teachers and heads of schools under Article 2180, Civil Code, for damages
caused by their pupils and students against fellow students on the school premises. Here, the
parents of the student at fault, defendant Daffon, are not involved, since Daffon was already of
age at the time of the tragic incident. There is no question, either, that the school involved is a
non-academic school,9 the Manila Technical Institute being admittedly a technical vocational and
industrial school. .
The Court holds that under the cited codal article, defendants head and teacher of the Manila
Technical Institute (defendants Valenton and Quibulue, respectively) are liable jointly and
severally for damages to plaintiffs-appellants for the death of the latter's minor son at the hands
of defendant Daffon at the school's laboratory room. No liability attaches to defendant Brillantes
as a mere member of the school's board of directors. The school itself cannot be held similarly
liable, since it has not been properly impleaded as party defendant. While plaintiffs sought to so
implead it, by impleading improperly defendant Brillantes, its former single proprietor, the lower
court found that it had been incorporated since August 2, 1962, and therefore the school itself,
as thus incorporated, should have been brought in as party defendant. Plaintiffs failed to do so,
notwithstanding that Brillantes and his co-defendants in their reply to plaintiffs' request for
admission had expressly manifested and made of record that "defendant Antonio C. Brillantes is
not the registered owner/head of the "Manila Technical Institute" which is now a corporation and
is not owned by any individual person."10
3. The rationale of such liability of school heads and teachers for the tortious acts of their pupils
and students, so long as they remain in their custody, is that they stand, to a certain extent, as to
their pupils and students, in loco parentis and are called upon to "exercise reasonable
supervision over the conduct of the child."11 This is expressly provided for in Articles 349, 350
and 352 of the Civil Code.12 In the law of torts, the governing principle is that the protective
custody of the school heads and teachers is mandatorily substituted for that of the parents, and
hence, it becomes their obligation as well as that of the school itself to provide proper
supervision of the students' activities during the whole time that they are at attendance in the
school, including recess time, as well as to take the necessary precautions to protect the
students in their custody from dangers and hazards that would reasonably be anticipated,
including injuries that some student themselves may inflict willfully or through negligence on their
fellow students. .
5
 6

4. As tersely summarized by Mr. Justice J.B.L. Reyes in his dissenting opinion in Exconde, "the
basis of the presumption of negligence of Art. 1903 [now 2180] is some culpa in vigilando that
the parents, teachers, etc. are supposed to have incurred in the exercise of their authority" 13
and "where the parent places the child under the effective authority of the teacher, the latter, and
not the parent, should be the one answerable for the torts committed while under his custody, for
the very reason that the parent is not supposed to interfere with the discipline of the school nor
with the authority and supervision of the teacher while the child is under instruction." The school
itself, likewise, has to respond for the fault or negligence of its school head and teachers under
the same cited article.14
5. The lower court therefore erred in law in absolving defendants-school officials on the ground
that they could be held liable under Article 2180, Civil Code, only if the student who inflicted the
fatal fistblows on his classmate and victim "lived and boarded with his teacher or the other
defendants officials of the school." As stated above, the phrase used in the cited article — "so
long as (the students) remain in their custody" means the protective and supervisory custody
that the school and its heads and teachers exercise over the pupils and students for as long as
they are at attendance in the school, including recess time. There is nothing in the law that
requires that for such liability to attach the pupil or student who commits the tortious act must live
and board in the school, as erroneously held by the lower court, and the dicta in Mercado (as
well as in Exconde) on which it relied, must now be deemed to have been set aside by the
present decision. .
8. Plaintiffs-appellees' other claims on appeal that the lower court should have awarded
exemplary damages and imposed legal interest on the total damages awarded, besides
increasing the award of attorney's fees all concern matters that are left by law to the discretion of
the trial court and the Court has not been shown any error or abuse in the exercise of such
discretion on the part of the trial court.16 Decisive here is the touchstone provision of Article
2231, Civil Code, that "In quasi-delicts, exemplary damages may be granted if the defendant
acted with gross negligence." No gross negligence on the part of defendants was found by the
trial court to warrant the imposition of exemplary damages, as well as of interest and increased
attorney's fees, and the Court has not been shown in this appeal any compelling reason to
disturb such finding. .
ACCORDINGLY, the judgment appealed from is modified so as to provide as follows: .
1. Sentencing the defendants Virgilio L. Daffon, TeodosioV. Valenton and Santiago M.
Quibulue jointly and severally to pay plaintiffs as heirs of the deceased Dominador
Palisoc (a) P12,000.00 for the death of Dominador Palisoc; (b) P3,375.00 for actual
and compensatory expenses; (c) P5,000.00 for moral, damages; (d) P10,000.00 for
loss of earning power and (e) P2,000.00 for attorney's fee, plus the costs of this action
in both instances; 2. absolving defendant Antonio C. Brillantes from the complaint;
and 3. dismissing defendants' counterclaims. .

6. Defendants Valenton and Quibulue as president and teacher-in-charge of the school must
therefore be held jointly and severally liable for the quasi-delict of their co-defendant Daffon in
the latter's having caused the death of his classmate, the deceased Dominador Palisoc. The
unfortunate death resulting from the fight between the protagonists-students could have been
avoided, had said defendants but complied with their duty of providing adequate supervision
over the activities of the students in the school premises to protect their students from harm,
whether at the hands of fellow students or other parties. At any rate, the law holds them liable
unless they relieve themselves of such liability, in compliance with the last paragraph of Article
2180, Civil Code, by "(proving) that they observed all the diligence of a good father of a family to
prevent damage." In the light of the factual findings of the lower court's decision, said defendants
failed to prove such exemption from liability. .

7. Plaintiffs-appellees' contention that the award of P6,000.00 as indemnity for the death of their
son should be increased to P12,000.00 as set by the Court in People vs. Pantoja,15 and
observed in all death indemnity cases thereafter is well taken. The Court, in Pantoja, after noting
the decline in the purchasing power of the Philippine peso, had expressed its "considered
opinion that the amount of award of compensatory damages for death caused by a crime or
quasi-delict should now be P12,000.00." The Court thereby adjusted the minimum amount of
"compensatory damages for death caused by a crime or quasi-delict" as per Article 2206, Civil
Code, from the old stated minimum of P3,000.00 to P12,000.00, which amount is to be awarded
"even though there may have been mitigating circumstances" pursuant to the express provisions
of said codal article. .

6

G.R. No. L-47745 April 15, 1988
JOSE S. AMADORA, LORETA A. AMADORA, JOSE A. AMADORA JR., NORMA A. YLAYA
PANTALEON A. AMADORA, JOSE A. AMADORA III, LUCY A. AMADORA, ROSALINDA A.
AMADORA, PERFECTO A. AMADORA, SERREC A. AMADORA, VICENTE A. AMADORA
and MARIA TISCALINA A. AMADORA, petitioners
vs.
HONORABLE COURT OF APPEALS, COLEGIO DE SAN JOSE-RECOLETOS, VICTOR
LLUCH SERGIO P. DLMASO JR., CELESTINO DICON, ANIANO ABELLANA, PABLITO
DAFFON thru his parents and natural guardians, MR. and MRS. NICANOR GUMBAN, and
ROLANDO VALENCIA, thru his guardian, A. FRANCISCO ALONSO, respondents.
CRUZ, J.:
Like any prospective graduate, Alfredo Amadora was looking forward to the commencement
exercises where he would ascend the stage and in the presence of his relatives and friends
receive his high school diploma. These ceremonies were scheduled on April 16, 1972. As it
turned out, though, fate would intervene and deny him that awaited experience. On April 13,
1972, while they were in the auditorium of their school, the Colegio de San Jose-Recoletos, a
classmate, Pablito Damon, fired a gun that mortally hit Alfredo, ending all his expectations and
his life as well. The victim was only seventeen years old. 1
Daffon was convicted of homicide thru reckless imprudence . 2 Additionally, the herein
petitioners, as the victim's parents, filed a civil action for damages under Article 2180 of the Civil
Code against the Colegio de San Jose-Recoletos, its rector the high school principal, the dean of
boys, and the physics teacher, together with Daffon and two other students, through their
respective parents. The complaint against the students was later dropped. After trial, the Court of
First Instance of Cebu held the remaining defendants liable to the plaintiffs in the sum of
P294,984.00, representing death compensation, loss of earning capacity, costs of litigation,
funeral expenses, moral damages, exemplary damages, and attorney's fees .3 On appeal to the
respondent court, however, the decision was reversed and all the defendants were completely
absolved .4
In its decision, which is now the subject of this petition for certiorari under Rule 45 of the Rules of
Court, the respondent court found that Article 2180 was not applicable as the Colegio de San
Jose-Recoletos was not a school of arts and trades but an academic institution of learning. It
also held that the students were not in the custody of the school at the time of the incident as the
semester had already ended, that there was no clear identification of the fatal gun and that in
any event the defendant, had exercised the necessary diligence in preventing the injury. 5
The basic undisputed facts are that Alfredo Amadora went to the San Jose-Recoletos on April
13, 1972, and while in its auditorium was shot to death by Pablito Daffon, a classmate. On the
implications and consequences of these facts, the parties sharply disagree.
7
The petitioners contend that their son was in the school to show his physics experiment as a
prerequisite to his graduation; hence, he was then under the custody of the private respondents.
The private respondents submit that Alfredo Amadora had gone to the school only for the
purpose of submitting his physics report and that he was no longer in their custody because the
semester had already ended.
There is also the question of the identity of the gun used which the petitioners consider important
because of an earlier incident which they claim underscores the negligence of the school and at
least one of the private respondents. It is not denied by the respondents that on April 7, 1972,
Sergio Damaso, Jr., the dean of boys, confiscated from Jose Gumban an unlicensed pistol but
later returned it to him without making a report to the principal or taking any further action .6 As
Gumban was one of the companions of Daffon when the latter fired the gun that killed Alfredo,
the petitioners contend that this was the same pistol that had been confiscated from Gumban
and that their son would not have been killed if it had not been returned by Damaso. The
respondents say, however, that there is no proof that the gun was the same firearm that killed
Alfredo.
Resolution of all these disagreements will depend on the interpretation of Article 2180 which, as
it happens, is invoked by both parties in support of their conflicting positions. The pertinent part
of this article reads as follows:
Lastly, teachers or heads of establishments of arts and trades shall be
liable for damages caused by their pupils and students or apprentices so
long as they remain in their custody.
Three cases have so far been decided by the Court in connection with the above-quoted
provision, to wit: Exconde v. Capuno 7 Mercado v. Court of Appeals, 8 and Palisoc v. Brillantes.
9 These will be briefly reviewed in this opinion for a better resolution of the case at bar.
In the Exconde Case, Dante Capuno, a student of the Balintawak Elementary School and a Boy
Scout, attended a Rizal Day parade on instructions of the city school supervisor. After the
parade, the boy boarded a jeep, took over its wheel and drove it so recklessly that it turned turtle,
resulting in the death of two of its passengers. Dante was found guilty of double homicide with
reckless imprudence. In the separate civil action flied against them, his father was held solidarily
liable with him in damages under Article 1903 (now Article 2180) of the Civil Code for the tort
committed by the 15-year old boy.
This decision, which was penned by Justice Bautista Angelo on June 29,1957, exculpated the
school in an obiter dictum (as it was not a party to the case) on the ground that it was riot a
school of arts and trades. Justice J.B.L. Reyes, with whom Justices Sabino Padilla and Alex
Reyes concurred, dissented, arguing that it was the school authorities who should be held liable
Liability under this rule, he said, was imposed on (1) teachers in general; and (2) heads of
schools of arts and trades in particular. The modifying clause "of establishments of arts and
trades" should apply only to "heads" and not "teachers."
7

Exconde was reiterated in the Mercado Case, and with an elaboration. A student cut a classmate
with a razor blade during recess time at the Lourdes Catholic School in Quezon City, and the
parents of the victim sued the culprits parents for damages. Through Justice Labrador, the Court
declared in another obiter (as the school itself had also not been sued that the school was not
liable because it was not an establishment of arts and trades. Moreover, the custody requirement
had not been proved as this "contemplates a situation where the student lives and boards with
the teacher, such that the control, direction and influences on the pupil supersede those of the
parents." Justice J.B.L. Reyes did not take part but the other members of the court concurred in
this decision promulgated on May 30, 1960.
In Palisoc vs. Brillantes, decided on October 4, 1971, a 16-year old student was killed by a
classmate with fist blows in the laboratory of the Manila Technical Institute. Although the
wrongdoer — who was already of age — was not boarding in the school, the head thereof and
the teacher in charge were held solidarily liable with him. The Court declared through Justice
Teehankee:
The phrase used in the cited article — "so long as (the students) remain in
their custody" — means the protective and supervisory custody that the
school and its heads and teachers exercise over the pupils and students
for as long as they are at attendance in the school, including recess time.
There is nothing in the law that requires that for such liability to attach, the
pupil or student who commits the tortious act must live and board in the
school, as erroneously held by the lower court, and the dicta in Mercado
(as well as in Exconde) on which it relied, must now be deemed to have
been set aside by the present decision.
This decision was concurred in by five other members, 10 including Justice J.B.L. Reyes, who
stressed, in answer to the dissenting opinion, that even students already of age were covered by
the provision since they were equally in the custody of the school and subject to its discipline.
Dissenting with three others,11 Justice Makalintal was for retaining the custody interpretation in
Mercado and submitted that the rule should apply only to torts committed by students not yet of
age as the school would be acting only in loco parentis.
In a footnote, Justice Teehankee said he agreed with Justice Reyes' dissent in the Exconde
Case but added that "since the school involved at bar is a non-academic school, the question as
to the applicability of the cited codal provision to academic institutions will have to await another
case wherein it may properly be raised."
This is the case.
Unlike in Exconde and Mercado, the Colegio de San Jose-Recoletos has been directly
impleaded and is sought to be held liable under Article 2180; and unlike in Palisoc, it is not a
school of arts and trades but an academic institution of learning. The parties herein have also
directly raised the question of whether or not Article 2180 covers even establishments which are
8
technically not schools of arts and trades, and, if so, when the offending student is supposed to
be "in its custody."
After an exhaustive examination of the problem, the Court has come to the conclusion that the
provision in question should apply to all schools, academic as well as non-academic. Where the
school is academic rather than technical or vocational in nature, responsibility for the tort
committed by the student will attach to the teacher in charge of such student, following the first
part of the provision. This is the general rule. In the case of establishments of arts and trades, it
is the head thereof, and only he, who shall be held liable as an exception to the general rule. In
other words, teachers in general shall be liable for the acts of their students except where the
school is technical in nature, in which case it is the head thereof who shall be answerable.
Following the canon of reddendo singula singulis "teachers" should apply to the words "pupils
and students" and "heads of establishments of arts and trades" to the word "apprentices."
The Court thus conforms to the dissenting opinion expressed by Justice J.B.L. Reyes in Exconde
where he said in part:
I can see no sound reason for limiting Art. 1903 of the Old Civil Code to
teachers of arts and trades and not to academic ones. What substantial
difference is there between them insofar as concerns the proper
supervision and vice over their pupils? It cannot be seriously contended
that an academic teacher is exempt from the duty of watching that his
pupils do not commit a tort to the detriment of third Persons, so long as
they are in a position to exercise authority and Supervision over the pupil.
In my opinion, in the phrase "teachers or heads of establishments of arts
and trades" used in Art. 1903 of the old Civil Code, the words "arts and
trades" does not qualify "teachers" but only "heads of establishments." The
phrase is only an updated version of the equivalent terms "preceptores y
artesanos" used in the Italian and French Civil Codes.
If, as conceded by all commentators, the basis of the presumption of
negligence of Art. 1903 in some culpa in vigilando that the parents,
teachers, etc. are supposed to have incurred in the exercise of their
authority, it would seem clear that where the parent places the child under
the effective authority of the teacher, the latter, and not the parent, should
be the one answerable for the torts committed while under his custody, for
the very reason/that the parent is not supposed to interfere with the
discipline of the school nor with the authority and supervision of the
teacher while the child is under instruction. And if there is no authority,
there can be no responsibility.
There is really no substantial distinction between the academic and the non-academic schools
insofar as torts committed by their students are concerned. The same vigilance is expected from
the teacher over the students under his control and supervision, whatever the nature of the
school where he is teaching. The suggestion in the Exconde and Mercado Cases is that the
provision would make the teacher or even the head of the school of arts and trades liable for an
8

injury caused by any student in its custody but if that same tort were committed in an academic
school, no liability would attach to the teacher or the school head. All other circumstances being
the same, the teacher or the head of the academic school would be absolved whereas the
teacher and the head of the non-academic school would be held liable, and simply because the
latter is a school of arts and trades.
The Court cannot see why different degrees of vigilance should be exercised by the school
authorities on the basis only of the nature of their respective schools. There does not seem to be
any plausible reason for relaxing that vigilance simply because the school is academic in nature
and for increasing such vigilance where the school is non-academic. Notably, the injury subject
of liability is caused by the student and not by the school itself nor is it a result of the operations
of the school or its equipment. The injury contemplated may be caused by any student
regardless of the school where he is registered. The teacher certainly should not be able to
excuse himself by simply showing that he is teaching in an academic school where, on the other
hand, the head would be held liable if the school were non-academic.
These questions, though, may be asked: If the teacher of the academic school is to be held
answerable for the torts committed by his students, why is it the head of the school only who is
held liable where the injury is caused in a school of arts and trades? And in the case of the
academic or non- technical school, why not apply the rule also to the head thereof instead of
imposing the liability only on the teacher?
The reason for the disparity can be traced to the fact that historically the head of the school of
arts and trades exercised a closer tutelage over his pupils than the head of the academic school.
The old schools of arts and trades were engaged in the training of artisans apprenticed to their
master who personally and directly instructed them on the technique and secrets of their craft.
The head of the school of arts and trades was such a master and so was personally involved in
the task of teaching his students, who usually even boarded with him and so came under his
constant control, supervision and influence. By contrast, the head of the academic school was
not as involved with his students and exercised only administrative duties over the teachers who
were the persons directly dealing with the students. The head of the academic school had then
(as now) only a vicarious relationship with the students. Consequently, while he could not be
directly faulted for the acts of the students, the head of the school of arts and trades, because of
his closer ties with them, could be so blamed.
It is conceded that the distinction no longer obtains at present in view of the expansion of the
schools of arts and trades, the consequent increase in their enrollment, and the corresponding
diminution of the direct and personal contract of their heads with the students. Article 2180,
however, remains unchanged. In its present state, the provision must be interpreted by the Court
according to its clear and original mandate until the legislature, taking into account the charges in
the situation subject to be regulated, sees fit to enact the necessary amendment.
The other matter to be resolved is the duration of the responsibility of the teacher or the head of
the school of arts and trades over the students. Is such responsibility co-extensive with the
period when the student is actually undergoing studies during the school term, as contended by
the respondents and impliedly admitted by the petitioners themselves?
9
From a reading of the provision under examination, it is clear that while the custody requirement,
to repeat Palisoc v. Brillantes, does not mean that the student must be boarding with the school
authorities, it does signify that the student should be within the control and under the influence of
the school authorities at the time of the occurrence of the injury. This does not necessarily mean
that such, custody be co-terminous with the semester, beginning with the start of classes and
ending upon the close thereof, and excluding the time before or after such period, such as the
period of registration, and in the case of graduating students, the period before the
commencement exercises. In the view of the Court, the student is in the custody of the school
authorities as long as he is under the control and influence of the school and within its premises,
whether the semester has not yet begun or has already ended.
It is too tenuous to argue that the student comes under the discipline of the school only upon the
start of classes notwithstanding that before that day he has already registered and thus placed
himself under its rules. Neither should such discipline be deemed ended upon the last day of
classes notwithstanding that there may still be certain requisites to be satisfied for completion of
the course, such as submission of reports, term papers, clearances and the like. During such
periods, the student is still subject to the disciplinary authority of the school and cannot consider
himself released altogether from observance of its rules.
As long as it can be shown that the student is in the school premises in pursuance of a legitimate
student objective, in the exercise of a legitimate student right, and even in the enjoyment of a
legitimate student right, and even in the enjoyment of a legitimate student privilege, the
responsibility of the school authorities over the student continues. Indeed, even if the student
should be doing nothing more than relaxing in the campus in the company of his classmates and
friends and enjoying the ambience and atmosphere of the school, he is still within the custody
and subject to the discipline of the school authorities under the provisions of Article 2180.
During all these occasions, it is obviously the teacher-in-charge who must answer for his
students' torts, in practically the same way that the parents are responsible for the child when he
is in their custody. The teacher-in-charge is the one designated by the dean, principal, or other
administrative superior to exercise supervision over the pupils in the specific classes or sections
to which they are assigned. It is not necessary that at the time of the injury, the teacher be
physically present and in a position to prevent it. Custody does not connote immediate and
actual physical control but refers more to the influence exerted on the child and the discipline
instilled in him as a result of such influence. Thus, for the injuries caused by the student, the
teacher and not the parent shag be held responsible if the tort was committed within the
premises of the school at any time when its authority could be validly exercised over him.
In any event, it should be noted that the liability imposed by this article is supposed to fall directly
on the teacher or the head of the school of arts and trades and not on the school itself. If at all,
the school, whatever its nature, may be held to answer for the acts of its teachers or even of the
head thereof under the general principle of respondeat superior, but then it may exculpate itself
from liability by proof that it had exercised the diligence of a bonus paterfamilias.
Such defense is, of course, also available to the teacher or the head of the school of arts and
trades directly held to answer for the tort committed by the student. As long as the defendant can
9

show that he had taken the necessary precautions to prevent the injury complained of, he can
exonerate himself from the liability imposed by Article 2180, which also states that:
The responsibility treated of in this article shall cease when the Persons
herein mentioned prove that they observed all the diligence of a good
father of a family to prevent damages.
In this connection, it should be observed that the teacher will be held liable not only when he is
acting in loco parentis for the law does not require that the offending student be of minority age.
Unlike the parent, who wig be liable only if his child is still a minor, the teacher is held
answerable by the law for the act of the student under him regardless of the student's age. Thus,
in the Palisoc Case, liability attached to the teacher and the head of the technical school
although the wrongdoer was already of age. In this sense, Article 2180 treats the parent more
favorably than the teacher.
The Court is not unmindful of the apprehensions expressed by Justice Makalintal in his
dissenting opinion in Palisoc that the school may be unduly exposed to liability under this article
in view of the increasing activism among the students that is likely to cause violence and
resulting injuries in the school premises. That is a valid fear, to be sure. Nevertheless, it should
be repeated that, under the present ruling, it is not the school that will be held directly liable.
Moreover, the defense of due diligence is available to it in case it is sought to be held
answerable as principal for the acts or omission of its head or the teacher in its employ.
The school can show that it exercised proper measures in selecting the head or its teachers and
the appropriate supervision over them in the custody and instruction of the pupils pursuant to its
rules and regulations for the maintenance of discipline among them. In almost all cases now, in
fact, these measures are effected through the assistance of an adequate security force to help
the teacher physically enforce those rules upon the students. Ms should bolster the claim of the
school that it has taken adequate steps to prevent any injury that may be committed by its
students.
A fortiori, the teacher himself may invoke this defense as it would otherwise be unfair to hold him
directly answerable for the damage caused by his students as long as they are in the school
premises and presumably under his influence. In this respect, the Court is disposed not to expect
from the teacher the same measure of responsibility imposed on the parent for their influence
over the child is not equal in degree. Obviously, the parent can expect more obedience from the
child because the latter's dependence on him is greater than on the teacher. It need not be
stressed that such dependence includes the child's support and sustenance whereas submission
to the teacher's influence, besides being coterminous with the period of custody is usually
enforced only because of the students' desire to pass the course. The parent can instill more las
discipline on the child than the teacher and so should be held to a greater accountability than the
teacher for the tort committed by the child.
And if it is also considered that under the article in question, the teacher or the head of the
school of arts and trades is responsible for the damage caused by the student or apprentice
10
even if he is already of age — and therefore less tractable than the minor — then there should all
the more be justification to require from the school authorities less accountability as long as they
can prove reasonable diligence in preventing the injury. After all, if the parent himself is no longer
liable for the student's acts because he has reached majority age and so is no longer under the
former's control, there is then all the more reason for leniency in assessing the teacher's
responsibility for the acts of the student.
Applying the foregoing considerations, the Court has arrived at the following conclusions:
1. At the time Alfredo Amadora was fatally shot, he was still in the custody of the authorities of
Colegio de San Jose-Recoletos notwithstanding that the fourth year classes had formally ended.
It was immaterial if he was in the school auditorium to finish his physics experiment or merely to
submit his physics report for what is important is that he was there for a legitimate purpose. As
previously observed, even the mere savoring of the company of his friends in the premises of the
school is a legitimate purpose that would have also brought him in the custody of the school
authorities.
2. The rector, the high school principal and the dean of boys cannot be held liable because none
of them was the teacher-in-charge as previously defined. Each of them was exercising only a
general authority over the student body and not the direct control and influence exerted by the
teacher placed in charge of particular classes or sections and thus immediately involved in its
discipline. The evidence of the parties does not disclose who the teacher-in-charge of the
offending student was. The mere fact that Alfredo Amadora had gone to school that day in
connection with his physics report did not necessarily make the physics teacher, respondent
Celestino Dicon, the teacher-in-charge of Alfredo's killer.
3. At any rate, assuming that he was the teacher-in-charge, there is no showing that Dicon was
negligent in enforcing discipline upon Daffon or that he had waived observance of the rules and
regulations of the school or condoned their non-observance. His absence when the tragedy
happened cannot be considered against him because he was not supposed or required to report
to school on that day. And while it is true that the offending student was still in the custody of the
teacher-in-charge even if the latter was physically absent when the tort was committed, it has not
been established that it was caused by his laxness in enforcing discipline upon the student. On
the contrary, the private respondents have proved that they had exercised due diligence, through
the enforcement of the school regulations, in maintaining that discipline.
4. In the absence of a teacher-in-charge, it is probably the dean of boys who should be held
liable especially in view of the unrefuted evidence that he had earlier confiscated an unlicensed
gun from one of the students and returned the same later to him without taking disciplinary action
or reporting the matter to higher authorities. While this was clearly negligence on his part, for
which he deserves sanctions from the school, it does not necessarily link him to the shooting of
Amador as it has not been shown that he confiscated and returned pistol was the gun that killed
the petitioners' son.
10
 11

5. Finally, as previously observed, the Colegio de San Jose-Recoletos cannot be held directly
liable under the article because only the teacher or the head of the school of arts and trades is
made responsible for the damage caused by the student or apprentice. Neither can it be held to
answer for the tort committed by any of the other private respondents for none of them has been
found to have been charged with the custody of the offending student or has been remiss in the
discharge of his duties in connection with such custody.

In sum, the Court finds under the facts as disclosed by the record and in the light of the
principles herein announced that none of the respondents is liable for the injury inflicted by
Pablito Damon on Alfredo Amadora that resulted in the latter's death at the auditorium of the
Colegio de San Jose-Recoletos on April 13, 1972. While we deeply sympathize with the
petitioners over the loss of their son under the tragic circumstances here related, we
nevertheless are unable to extend them the material relief they seek, as a balm to their grief,
under the law they have invoked.

WHEREFORE, the petition is DENIED, without any pronouncement as to costs. It is so ordered.

11

G.R. No. 84698 February 4, 1992
PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION, JUAN D. LIM, BENJAMIN P.
PAULINO, ANTONIO M. MAGTALAS, COL. PEDRO SACRO and LT. M. SORIANO,
petitioners,
vs.
COURT OF APPEALS, HON. REGINA ORDOÑEZ-BENITEZ, in her capacity as Presiding
Judge of Branch 47, Regional Trial Court, Manila, SEGUNDA R. BAUTISTA and ARSENIA
D. BAUTISTA, respondents.
PADILLA, J.:
A stabbing incident on 30 August 1985 which caused the death of Carlitos Bautista while on the
second-floor premises of the Philippine School of Business Administration (PSBA) prompted the
parents of the deceased to file suit in the Regional Trial Court of Manila (Branch 47) presided
over by Judge (now Court of Appeals justice) Regina Ordoñez-Benitez, for damages against the
said PSBA and its corporate officers. At the time of his death, Carlitos was enrolled in the third
year commerce course at the PSBA. It was established that his assailants were not members of
the school's academic community but were elements from outside the school.
Specifically, the suit impleaded the PSBA and the following school authorities: Juan D. Lim
(President), Benjamin P. Paulino (Vice-President), Antonio M. Magtalas (Treasurer/Cashier),
Col. Pedro Sacro (Chief of Security) and a Lt. M. Soriano (Assistant Chief of Security).
Substantially, the plaintiffs (now private respondents) sought to adjudge them liable for the
victim's untimely demise due to their alleged negligence, recklessness and lack of security
precautions, means and methods before, during and after the attack on the victim. During the
proceedings a quo, Lt. M. Soriano terminated his relationship with the other petitioners by
resigning from his position in the school.
Defendants a quo (now petitioners) sought to have the suit dismissed, alleging that since they
are presumably sued under Article 2180 of the Civil Code, the complaint states no cause of
action against them, as jurisprudence on the subject is to the effect that academic institutions,
such as the PSBA, are beyond the ambit of the rule in the afore-stated article.
The respondent trial court, however, overruled petitioners' contention and thru an order dated 8
December 1987, denied their motion to dismiss. A subsequent motion for reconsideration was
similarly dealt with by an order dated 25 January 1988. Petitioners then assailed the trial court's
disposition before the respondent appellate court which, in a decision * promulgated on 10 June
1988, affirmed the trial court's orders. On 22 August 1988, the respondent appellate court
resolved to deny the petitioners' motion for reconsideration. Hence, this petition.
At the outset, it is to be observed that the respondent appellate court primarily anchored its
decision on the law of quasi-delicts, as enunciated in Articles 2176 and 2180 of the Civil Code. 1
Pertinent portions of the appellate court's now assailed ruling state:
12
Article 2180 (formerly Article 1903) of the Civil Code is an adoption from
the old Spanish Civil Code. The comments of Manresa and learned
authorities on its meaning should give way to present day changes. The
law is not fixed and flexible (sic); it must be dynamic. In fact, the greatest
value and significance of law as a rule of conduct in (sic) its flexibility to
adopt to changing social conditions and its capacity to meet the new
challenges of progress.
Construed in the light of modern day educational system, Article 2180
cannot be construed in its narrow concept as held in the old case of
Exconde vs. Capuno 2 and Mercado vs. Court of Appeals; 3 hence, the
ruling in the Palisoc 4 case that it should apply to all kinds of educational
institutions, academic or vocational.
At any rate, the law holds the teachers and heads of the school staff liable
unless they relieve themselves of such liability pursuant to the last
paragraph of Article 2180 by "proving that they observed all the diligence to
prevent damage." This can only be done at a trial on the merits of the case.
5
While we agree with the respondent appellate court that the motion to dismiss the complaint was
correctly denied and the complaint should be tried on the merits, we do not however agree with
the premises of the appellate court's ruling.
Article 2180, in conjunction with Article 2176 of the Civil Code, establishes the rule of in loco
parentis. This Court discussed this doctrine in the afore-cited cases of Exconde, Mendoza,
Palisoc and, more recently, in Amadora vs. Court of Appeals. 6 In all such cases, it had been
stressed that the law (Article 2180) plainly provides that the damage should have been caused
or inflicted by pupils or students of he educational institution sought to be held liable for the acts
of its pupils or students while in its custody. However, this material situation does not exist in the
present case for, as earlier indicated, the assailants of Carlitos were not students of the PSBA,
for whose acts the school could be made liable.
However, does the appellate court's failure to consider such material facts mean the exculpation
of the petitioners from liability? It does not necessarily follow.
When an academic institution accepts students for enrollment, there is established a contract
between them, resulting in bilateral obligations which both parties are bound to comply with. 7
For its part, the school undertakes to provide the student with an education that would
presumably suffice to equip him with the necessary tools and skills to pursue higher education or
a profession. On the other hand, the student covenants to abide by the school's academic
requirements and observe its rules and regulations.
12

Institutions of learning must also meet the implicit or "built-in" obligation of providing their
students with an atmosphere that promotes or assists in attaining its primary undertaking of
imparting knowledge. Certainly, no student can absorb the intricacies of physics or higher
mathematics or explore the realm of the arts and other sciences when bullets are flying or
grenades exploding in the air or where there looms around the school premises a constant threat
to life and limb. Necessarily, the school must ensure that adequate steps are taken to maintain
peace and order within the campus premises and to prevent the breakdown thereof.
Because the circumstances of the present case evince a contractual relation between the PSBA
and Carlitos Bautista, the rules on quasi-delict do not really govern. 8 A perusal of Article 2176
shows that obligations arising from quasi-delicts or tort, also known as extra-contractual
obligations, arise only between parties not otherwise bound by contract, whether express or
implied. However, this impression has not prevented this Court from determining the existence of
a tort even when there obtains a contract. In Air France vs. Carrascoso (124 Phil. 722), the
private respondent was awarded damages for his unwarranted expulsion from a first-class seat
aboard the petitioner airline. It is noted, however, that the Court referred to the petitioner-airline's
liability as one arising from tort, not one arising from a contract of carriage. In effect, Air France is
authority for the view that liability from tort may exist even if there is a contract, for the act that
breaks the contract may be also a tort. (Austro-America S.S. Co. vs. Thomas, 248 Fed. 231).
This view was not all that revolutionary, for even as early as 1918, this Court was already of a
similar mind. In Cangco vs. Manila Railroad (38 Phil. 780), Mr. Justice Fisher elucidated thus:
The field of non-contractual obligation is much broader than that of
contractual obligation, comprising, as it does, the whole extent of juridical
human relations. These two fields, figuratively speaking, concentric; that is
to say, the mere fact that a person is bound to another by contract does
not relieve him from extra-contractual liability to such person. When such a
contractual relation exists the obligor may break the contract under such
conditions that the same act which constitutes a breach of the contract
would have constituted the source of an extra-contractual obligation had no
contract existed between the parties.
Immediately what comes to mind is the chapter of the Civil Code on Human Relations,
particularly Article 21, which provides:
Any person who wilfully causes loss or injury to another in a manner that is
contrary to morals, good custom or public policy shall compensate the
latter for the damage. (emphasis supplied).
Air France penalized the racist policy of the airline which emboldened the petitioner's employee
to forcibly oust the private respondent to cater to the comfort of a white man who allegedly "had
a better right to the seat." In Austro-American, supra, the public embarrassment caused to the
passenger was the justification for the Circuit Court of Appeals, (Second Circuit), to award
damages to the latter. From the foregoing, it can be concluded that should the act which
13
breaches a contract be done in bad faith and be violative of Article 21, then there is a cause to
view the act as constituting a quasi-delict.
In the circumstances obtaining in the case at bar, however, there is, as yet, no finding that the
contract between the school and Bautista had been breached thru the former's negligence in
providing proper security measures. This would be for the trial court to determine. And, even if
there be a finding of negligence, the same could give rise generally to a breach of contractual
obligation only. Using the test of Cangco, supra, the negligence of the school would not be
relevant absent a contract. In fact, that negligence becomes material only because of the
contractual relation between PSBA and Bautista. In other words, a contractual relation is a
condition sine qua non to the school's liability. The negligence of the school cannot exist
independently of the contract, unless the negligence occurs under the circumstances set out in
Article 21 of the Civil Code.
This Court is not unmindful of the attendant difficulties posed by the obligation of schools, above-
mentioned, for conceptually a school, like a common carrier, cannot be an insurer of its students
against all risks. This is specially true in the populous student communities of the so-called
"university belt" in Manila where there have been reported several incidents ranging from gang
wars to other forms of hooliganism. It would not be equitable to expect of schools to anticipate all
types of violent trespass upon their premises, for notwithstanding the security measures
installed, the same may still fail against an individual or group determined to carry out a
nefarious deed inside school premises and environs. Should this be the case, the school may
still avoid liability by proving that the breach of its contractual obligation to the students was not
due to its negligence, here statutorily defined to be the omission of that degree of diligence which
is required by the nature of the obligation and corresponding to the circumstances of persons,
time and place. 9
As the proceedings a quo have yet to commence on the substance of the private respondents'
complaint, the record is bereft of all the material facts. Obviously, at this stage, only the trial court
can make such a determination from the evidence still to unfold.
WHEREFORE, the foregoing premises considered, the petition is DENIED. The court of origin
(RTC, Manila, Br. 47) is hereby ordered to continue proceedings consistent with this ruling of the
Court. Costs against the petitioners. SO ORDERED.
G.R. No. 66207 May 18, 1992
MAXIMINO SOLIMAN, JR., represented by his judicial guardian VIRGINIA C. SOLIMAN,
petitioner,
13

vs.
HON. JUDGE RAMON TUAZON, Presiding Judge of Branch LXI, Regional Trial Court of
Region III, Angeles City, and the REPUBLIC CENTRAL COLLEGES, represented by its
President, respondents.
RESOLUTION
FELICIANO, J.:
On 22 March 1983, petitioner Soliman, Jr. filed a civil complaint for damages against private
respondent Republic Central Colleges ("Colleges"), the R.L. Security Agency Inc. and one
Jimmy B. Solomon, a security guard, as defendants. The complaint alleged that:
. . . on 13 August 1982, in the morning thereof, while the plaintiff was in the
campus ground and premises of the defendant, REPUBLIC CENTRAL
COLLEGES, as he was and is still a regular enrolled student of said school
taking his morning classes, the defendant, JIMMY B. SOLOMON, who was
on said date and hour in the premises of said school performing his duties
and obligations as a duly appointed security guard under the employment,
supervision and control of his employer-defendant R.L. SECURITY
AGENCY, INC., headed by Mr. Benjamin Serrano, without any
provocation, in a wanton, fraudulent, reckless, oppressive or malevolent
manner, with intent to kill, attack, assault, strike and shoot the plaintiff on
the abdomen with a .38 Caliber Revolver, a deadly weapon, which
ordinarily such wound sustained would have caused plaintiff's death were it
not for the timely medical assistance given to him. The plaintiff was treated
and confined at Angeles Medical Center, Angeles City, and, as per doctor's
opinion, the plaintiff may not be able to attend to his regular classes and
will be incapacitated in the performance of his usual work for a duration of
from three to four months before his wounds would be completely healed.
1
Private respondent Colleges filed a motion to dismiss, contending that the complaint stated no
cause of action against it. Private respondent argued that it is free from any liability for the
injuries sustained by petitioner student for the reason that private respondent school was not the
employer of the security guard charged, Jimmy Solomon, and hence was not responsible for any
wrongful act of Solomon. Private respondent school further argued that Article 2180, 7th
paragraph, of the Civil Code did not apply, since said paragraph holds teachers and heads of
establishment of arts and trades liable for damages caused by their pupils and students or
apprentices, while security guard Jimmy Solomon was not a pupil, student or apprentice of the
school.
In an order dated 29 November 1983, respondent Judge granted private respondent school's
motion to dismiss, holding that security guard Jimmy Solomon was not an employee of the
14
school which accordingly could not be held liable for his acts or omissions. Petitioner moved for
reconsideration, without success.
In this Petition for Certiorari and Prohibition, it is contended that respondent trial judge committed
a grave abuse of discretion when he refused to apply the provisions of Article 2180, as well as
those of Articles 349, 350 and 352, of the Civil Code and granted the school's motion to dismiss.
Under Article 2180 of the Civil Code, the obligation to respond for damage inflicted by one
against another by fault or negligence exists not only for one's own act or omission, but also for
acts or omissions of a person for whom one is by law responsible. Among the persons held
vicariously responsible for acts or omissions of another person are the following:
xxx xxx xxx
Employers shall be liable for the damages caused by their employees and
household helpers acting within the scope of their assigned tasks, even
though the former are not engaged in any business or industry.
xxx xxx xxx
Lastly, teachers or heads of establishments of arts and trades shall be
liable for damages caused by their pupils, their students or apprentices, so
long as they remain in their custody.
xxx xxx xxx
The first paragraph quoted above offers no basis for holding the Colleges liable for the alleged
wrongful acts of security guard Jimmy B. Solomon inflicted upon petitioner Soliman, Jr. Private
respondent school was not the employer of Jimmy Solomon. The employer of Jimmy Solomon
was the R.L. Security Agency Inc., while the school was the client or customer of the R.L.
Security Agency Inc. It is settled that where the security agency, as here, recruits, hires and
assigns the work of its watchmen or security guards, the agency is the employer of such guards
or watchmen. 2 Liability for illegal or harmful acts committed by the security guards attaches to
the employer agency, and not to the clients or customers of such agency. 3 As a general rule, a
client or customer of a security agency has no hand in selecting who among the pool of security
guards or watchmen employed by the agency shall be assigned to it; the duty to observe the
diligence of a good father of a family in the selection of the guards cannot, in the ordinary course
of events, be demanded from the client whose premises or property are protected by the security
guards. The fact that a client company may give instructions or directions to the security guards
assigned to it, does not, by itself, render the client responsible as an employer of the security
guards concerned and liable for their wrongful acts or omissions. Those instructions or directions
are ordinarily no more than requests commonly envisaged in the contract for services entered
into with the security agency. There being no employer-employee relationship between the
14

Colleges and Jimmy Solomon, petitioner student cannot impose vicarious liability upon the
Colleges for the acts of security guard Solomon.
Since there is no question that Jimmy Solomon was not a pupil or student or an apprentice of the
Colleges, he being in fact an employee of the R.L. Security Agency Inc., the other above-quoted
paragraph of Article 2180 of the Civil Code is similarly not available for imposing liability upon the
Republic Central Colleges for the acts or omissions of Jimmy Solomon.
The relevant portions of the other Articles of the Civil Code invoked by petitioner are as follows:
Art. 349. The following persons shall exercise substitute parental authority:
xxx xxx xxx
(2) Teachers and professors;
xxx xxx xxx
(4) Directors of trade establishments with regard to apprentices;
xxx xxx xxx
Art. 350. The persons named in the preceding article shall exercise
reasonable supervision over the conduct of the child.
xxx xxx xxx
Art. 352. The relations between teacher and pupil, professor and student
are fixed by government regulations and those of each school or institution.
In no case shall corporal punishment be countenanced. The teacher or
professor shall cultivate the best potentialities of the heart and mind of the
pupil or student.
In Palisoc v. Brillantes, 4 invoked by petitioner, the Court held the owner and president of a
school of arts and trades known as the "Manila Technical Institute," Quezon Blvd., Manila,
responsible in damages for the death of Dominador Palisoc, a student of Institute, which resulted
from fist blows delivered by Virgilio L. Daffon, another student of the Institute. It will be seen that
the facts of Palisoc v. Brillantes brought it expressly within the 7th paragraph of Article 2180,
quoted above; but those facts are entirely different from the facts existing in the instant case.
15
Persons exercising substitute parental authority are made responsible for damage inflicted upon
a third person by the child or person subject to such substitute parental authority. In the instant
case, as already noted, Jimmy Solomon who committed allegedly tortious acts resulting in injury
to petitioner, was not a pupil, student or apprentice of the Republic Central Colleges; the school
had no substitute parental authority over Solomon.
Clearly, within the confines of its limited logic, i.e., treating the petitioner's claim as one based
wholly and exclusively on Article 2180 of the Civil Code, the order of the respondent trial judge
was correct. Does it follow, however, that respondent Colleges could not be held liable upon any
other basis in law, for or in respect of the injury sustained by petitioner, so as to entitle
respondent school to dismissal of petitioner's complaint in respect of itself?
The very recent case of the Philippine School of Business Administration (PSBA) v. Court of
Appeals, 5 requires us to give a negative answer to that question.
In PSBA, the Court held that Article 2180 of the Civil Code was not applicable where a student
had been injured by one who was an outsider or by one over whom the school did not exercise
any custody or control or supervision. At the same time, however, the Court stressed that an
implied contract may be held to be established between a school which accepts students for
enrollment, on the one hand, and the students who are enrolled, on the other hand, which
contract results in obligations for both parties:
When an academic institution accepts students for enrollment, there is
established a contract between them, resulting in bilateral obligations
which parties are bound to comply with. For its part, the school undertakes
to provide the student with an education that would presumably suffice to
equip him with the necessary tools and skills to pursue higher education or
a profession. On the other hand, the student covenants to abide by the
school's academic requirements and observe its rules and regulations.
Institutions of learning must also meet the implicit or "built-in" obligation of
providing their students with an atmosphere that promotes or assists in
attaining its primary undertaking of imparting knowledge. Certainly, no
student can absorb the intricacies of physics or higher mathematics or
explore the realm of the arts and other sciences when bullets are flying or
grenades exploding in the air or where there looms around the school
premises a constant threat to life and limb. Necessarily, the school must
ensure that adequate steps are taken to maintain peace and order within
the campus premises and to prevent the breakdown thereof. 6
In that case, the Court was careful to point out that:
In the circumstances obtaining in the case at bar, however, there is, as yet,
no finding that the contract between the school and Bautista had been
15
 16

breached thru the former's negligence in providing proper security dated 29 November 1983. This case is REMANDED to the court a quo for further proceedings
measures. This would be for the trial court to determine. And, even if there consistent with this Resolution.
be a finding of negligence, the same could give rise generally to a breach
of contractual obligation only. Using the test of Cangco, supra, the
negligence of the school would not be relevant absent a contract. In fact,
that negligence becomes material only because of the contractual relation
between PSBA and Bautista. In other words, a contractual relation is a
condition sine qua non to the school's liability. The negligence of the
school cannot exist independently of the contract, unless the negligence
occurs under the circumstances set out in Article 21 of the Civil Code.

The Court is not unmindful of the attendant difficulties posed by the

obligation of schools, above-mentioned, for conceptually a school, like a
common carrier, cannot be an insurer of its students against all risks. This
is specially true in the populous student communities of the so-called
"university belt" in Manila where there have been reported several
incidents ranging from gang wars to other forms of hooliganism. It would
not be equitable to expect of schools to anticipate all types of violent
trespass upon their premises, for notwithstanding the security measures
installed, the same may still fail against an individual or group determined
to carry out a nefarious deed inside school premises and environs. Should
this be the case, the school may still avoid liability by proving that the
breach of its contractual obligation to the students was not due to its
negligence, here statutorily defined to be the omission of that degree of
diligence which is required by the nature of obligation and corresponding to
the circumstances of person, time and place. 7

In the PSBA case, the trial court had denied the school's motion to dismiss the complaint against
it, and both the Court of Appeals and this Court affirmed the trial court's order. In the case at bar,
the court a quo granted the motion to dismiss filed by respondent Colleges, upon the assumption
that petitioner's cause of action was based, and could have been based, only on Article 2180 of
the Civil Code. As PSBA, however, states, acts which are tortious or allegedly tortious in
character may at the same time constitute breach of a contractual, or other legal, obligation.
Respondent trial judge was in serious error when he supposed that petitioner could have no
cause of action other than one based on Article 2180 of the Civil Code. Respondent trial judge
should not have granted the motion to dismiss but rather should have, in the interest of justice,
allowed petitioner to prove acts constituting breach of an obligation ex contractu or ex lege on
the part of respondent Colleges.

In line, therefore, with the most recent jurisprudence of this Court, and in order to avoid a
possible substantial miscarriage of justice, and putting aside technical considerations, we
consider that respondent trial judge committed serious error correctible by this Court in the
instant case.

ACCORDINGLY, the Court Resolved to GRANT DUE COURSE to the Petition, to TREAT the
comment of respondent Colleges as its answer, and to REVERSE and SET ASIDE the Order

16

G.R. No. 156109 November 18, 2004
KHRISTINE REA M. REGINO, Assisted and Represented by ARMANDO REGINO, petitioner,
vs.
PANGASINAN COLLEGES OF SCIENCE AND TECHNOLOGY, RACHELLE A. GAMUROT
and ELISSA BALADAD, respondents.
DECISION
PANGANIBAN, J.:
Upon enrolment, students and their school enter upon a reciprocal contract. The students agree
to abide by the standards of academic performance and codes of conduct, issued usually in the
form of manuals that are distributed to the enrollees at the start of the school term. Further, the
school informs them of the itemized fees they are expected to pay. Consequently, it cannot, after
the enrolment of a student, vary the terms of the contract. It cannot require fees other than those
it specified upon enrolment.
The Case
Before the Court is a Petition for Review under Rule 45,1 seeking to nullify the July 12, 20022
and the November 22, 20023 Orders of the Regional Trial Court (RTC) of Urdaneta City,
Pangasinan (Branch 48) in Civil Case No. U-7541. The decretal portion of the first assailed
Order reads:
"WHEREFORE, the Court GRANTS the instant motion to dismiss for lack of cause of
action."4
The second challenged Order denied petitioner's Motion for Reconsideration.
The Facts
Petitioner Khristine Rea M. Regino was a first year computer science student at Respondent
Pangasinan Colleges of Science and Technology (PCST). Reared in a poor family, Regino went
to college mainly through the financial support of her relatives. During the second semester of
school year 2001-2002, she enrolled in logic and statistics subjects under Respondents Rachelle
A. Gamurot and Elissa Baladad, respectively, as teachers.
In February 2002, PCST held a fund raising campaign dubbed the "Rave Party and Dance
Revolution," the proceeds of which were to go to the construction of the school's tennis and
volleyball courts. Each student was required to pay for two tickets at the price of P100 each. The
project was allegedly implemented by recompensing students who purchased tickets with
17
additional points in their test scores; those who refused to pay were denied the opportunity to
take the final examinations.
Financially strapped and prohibited by her religion from attending dance parties and
celebrations, Regino refused to pay for the tickets. On March 14 and March 15, 2002, the
scheduled dates of the final examinations in logic and statistics, her teachers -- Respondents
Rachelle A. Gamurot and Elissa Baladad -- allegedly disallowed her from taking the tests.
According to petitioner, Gamurot made her sit out her logic class while her classmates were
taking their examinations. The next day, Baladad, after announcing to the entire class that she
was not permitting petitioner and another student to take their statistics examinations for failing
to pay for their tickets, allegedly ejected them from the classroom. Petitioner's pleas ostensibly
went unheeded by Gamurot and Baladad, who unrelentingly defended their positions as
compliance with PCST's policy.
On April 25, 2002, petitioner filed, as a pauper litigant, a Complaint5 for damages against PCST,
Gamurot and Baladad. In her Complaint, she prayed for P500,000 as nominal damages;
P500,000 as moral damages; at least P1,000,000 as exemplary damages; P250,000 as actual
damages; plus the costs of litigation and attorney's fees.
On May 30, 2002, respondents filed a Motion to Dismiss6 on the ground of petitioner's failure to
exhaust administrative remedies. According to respondents, the question raised involved the
determination of the wisdom of an administrative policy of the PCST; hence, the case should
have been initiated before the proper administrative body, the Commission of Higher Education
(CHED).
In her Comment to respondents' Motion, petitioner argued that prior exhaustion of administrative
remedies was unnecessary, because her action was not administrative in nature, but one purely
for damages arising from respondents' breach of the laws on human relations. As such,
jurisdiction lay with the courts.
On July 12, 2002, the RTC dismissed the Complaint for lack of cause of action.
Ruling of the Regional Trial Court
In granting respondents' Motion to Dismiss, the trial court noted that the instant controversy
involved a higher institution of learning, two of its faculty members and one of its students. It
added that Section 54 of the Education Act of 1982 vested in the Commission on Higher
Education (CHED) the supervision and regulation of tertiary schools. Thus, it ruled that the
CHED, not the courts, had jurisdiction over the controversy.7
In its dispositive portion, the assailed Order dismissed the Complaint for "lack of cause of action"
without, however, explaining this ground.
17

Aggrieved, petitioner filed the present Petition on pure questions of law.8
Issues
In her Memorandum, petitioner raises the following issues for our consideration:
"Whether or not the principle of exhaustion of administrative remedies applies in a
civil action exclusively for damages based on violation of the human relation
provisions of the Civil Code, filed by a student against her former school.
"Whether or not there is a need for prior declaration of invalidity of a certain school
administrative policy by the Commission on Higher Education (CHED) before a former
student can successfully maintain an action exclusively for damages in regular courts.
"Whether or not the Commission on Higher Education (CHED) has exclusive original
jurisdiction over actions for damages based upon violation of the Civil Code
provisions on human relations filed by a student against the school."9
All of the foregoing point to one issue -- whether the doctrine of exhaustion of administrative
remedies is applicable. The Court, however, sees a second issue which, though not expressly
raised by petitioner, was impliedly contained in her Petition: whether the Complaint stated
sufficient cause(s) of action.
The Court's Ruling
The Petition is meritorious.
First Issue:
Exhaustion of Administrative Remedies
Respondents anchored their Motion to Dismiss on petitioner's alleged failure to exhaust
administrative remedies before resorting to the RTC. According to them, the determination of the
controversy hinge on the validity, the wisdom and the propriety of PCST's academic policy.
Thus, the Complaint should have been lodged in the CHED, the administrative body tasked
under Republic Act No. 7722 to implement the state policy to "protect, foster and promote the
right of all citizens to affordable quality education at all levels and to take appropriate steps to
ensure that education is accessible to all."10
18
Petitioner counters that the doctrine finds no relevance to the present case since she is praying
for damages, a remedy beyond the domain of the CHED and well within the jurisdiction of the
courts.11
Petitioner is correct. First, the doctrine of exhaustion of administrative remedies has no bearing
on the present case. In Factoran Jr. v. CA,12 the Court had occasion to elucidate on the
rationale behind this doctrine:
"The doctrine of exhaustion of administrative remedies is basic. Courts, for reasons of
law, comity, and convenience, should not entertain suits unless the available
administrative remedies have first been resorted to and the proper authorities have
been given the appropriate opportunity to act and correct their alleged errors, if any,
committed in the administrative forum. x x x.13 "
Petitioner is not asking for the reversal of the policies of PCST. Neither is she demanding it to
allow her to take her final examinations; she was already enrolled in another educational
institution. A reversal of the acts complained of would not adequately redress her grievances;
under the circumstances, the consequences of respondents' acts could no longer be undone or
rectified.
Second, exhaustion of administrative remedies is applicable when there is competence on the
part of the administrative body to act upon the matter complained of.14 Administrative agencies
are not courts; they are neither part of the judicial system, nor are they deemed judicial
tribunals.15 Specifically, the CHED does not have the power to award damages.16 Hence,
petitioner could not have commenced her case before the Commission.
Third, the exhaustion doctrine admits of exceptions, one of which arises when the issue is purely
legal and well within the jurisdiction of the trial court.17 Petitioner's action for damages inevitably
calls for the application and the interpretation of the Civil Code, a function that falls within the
jurisdiction of the courts.18
Second Issue:
Cause of Action
Sufficient Causes of Action Stated in the Allegations in the Complaint
As a rule, every complaint must sufficiently allege a cause of action; failure to do so warrants its
dismissal.19 A complaint is said to assert a sufficient cause of action if, admitting what appears
solely on its face to be correct, the plaintiff would be entitled to the relief prayed for. Assuming
the facts that are alleged to be true, the court should be able to render a valid judgment in
accordance with the prayer in the complaint.20
18

A motion to dismiss based on lack of cause of action hypothetically admits the truth of the
alleged facts. In their Motion to Dismiss, respondents did not dispute any of petitioner's
allegations, and they admitted that "x x x the crux of plaintiff's cause of action is the
determination of whether or not the assessment of P100 per ticket is excessive or
oppressive."21 They thereby premised their prayer for dismissal on the Complaint's alleged
failure to state a cause of action. Thus, a reexamination of the Complaint is in order.
The Complaint contains the following factual allegations:
"10. In the second week of February 2002, defendant Rachelle A. Gamurot, in
connivance with PCST, forced plaintiff and her classmates to buy or take two tickets
each, x x x;
"11. Plaintiff and many of her classmates objected to the forced distribution and
selling of tickets to them but the said defendant warned them that if they refused [to]
take or pay the price of the two tickets they would not be allowed at all to take the final
examinations;
"12. As if to add insult to injury, defendant Rachelle A. Gamurot bribed students with
additional fifty points or so in their test score in her subject just to unjustly influence
and compel them into taking the tickets;
"13. Despite the students' refusal, they were forced to take the tickets because [of]
defendant Rachelle A. Gamurot's coercion and act of intimidation, but still many of
them including the plaintiff did not attend the dance party imposed upon them by
defendants PCST and Rachelle A. Gamurot;
"14. Plaintiff was not able to pay the price of her own two tickets because aside form
the fact that she could not afford to pay them it is also against her religious practice as
a member of a certain religious congregation to be attending dance parties and
celebrations;
"15. On March 14, 2002, before defendant Rachelle A. Gamurot gave her class its
final examination in the subject 'Logic' she warned that students who had not paid the
tickets would not be allowed to participate in the examination, for which threat and
intimidation many students were eventually forced to make payments:
"16. Because plaintiff could not afford to pay, defendant Rachelle A. Gamurot
inhumanly made plaintiff sit out the class but the defendant did not allow her to take
her final examination in 'Logic;'
"17. On March 15, 2002 just before the giving of the final examination in the subject
'Statistics,' defendant Elissa Baladad, in connivance with defendants Rachelle A.
19
Gamurot and PCST, announced in the classroom that she was not allowing plaintiff
and another student to take the examination for their failure and refusal to pay the
price of the tickets, and thenceforth she ejected plaintiff and the other student from
the classroom;
"18. Plaintiff pleaded for a chance to take the examination but all defendants could
say was that the prohibition to give the examinations to non-paying students was an
administrative decision;
"19. Plaintiff has already paid her tuition fees and other obligations in the school;
"20. That the above-cited incident was not a first since PCST also did another forced
distribution of tickets to its students in the first semester of school year 2001-2002; x x
x " 22
The foregoing allegations show two causes of action; first, breach of contract; and second,
liability for tort.
Reciprocity of the
School-Student Contract
In Alcuaz v. PSBA,23 the Court characterized the relationship between the school and the
student as a contract, in which "a student, once admitted by the school is considered enrolled for
one semester."24 Two years later, in Non v. Dames II,25 the Court modified the "termination of
contract theory" in Alcuaz by holding that the contractual relationship between the school and the
student is not only semestral in duration, but for the entire period the latter are expected to
complete it."26 Except for the variance in the period during which the contractual relationship is
considered to subsist, both Alcuaz and Non were unanimous in characterizing the school-student
relationship as contractual in nature.
The school-student relationship is also reciprocal. Thus, it has consequences appurtenant to and
inherent in all contracts of such kind -- it gives rise to bilateral or reciprocal rights and obligations.
The school undertakes to provide students with education sufficient to enable them to pursue
higher education or a profession. On the other hand, the students agree to abide by the
academic requirements of the school and to observe its rules and regulations.27
The terms of the school-student contract are defined at the moment of its inception -- upon
enrolment of the student. Standards of academic performance and the code of behavior and
discipline are usually set forth in manuals distributed to new students at the start of every school
year. Further, schools inform prospective enrollees the amount of fees and the terms of
payment.
19

In practice, students are normally required to make a down payment upon enrollment, with the
balance to be paid before every preliminary, midterm and final examination. Their failure to pay
their financial obligation is regarded as a valid ground for the school to deny them the opportunity
to take these examinations.
The foregoing practice does not merely ensure compliance with financial obligations; it also
underlines the importance of major examinations. Failure to take a major examination is usually
fatal to the students' promotion to the next grade or to graduation. Examination results form a
significant basis for their final grades. These tests are usually a primary and an indispensable
requisite to their elevation to the next educational level and, ultimately, to their completion of a
course.
Education is not a measurable commodity. It is not possible to determine who is "better
educated" than another. Nevertheless, a student's grades are an accepted approximation of
what would otherwise be an intangible product of countless hours of study. The importance of
grades cannot be discounted in a setting where education is generally the gate pass to
employment opportunities and better life; such grades are often the means by which a
prospective employer measures whether a job applicant has acquired the necessary tools or
skills for a particular profession or trade.
Thus, students expect that upon their payment of tuition fees, satisfaction of the set academic
standards, completion of academic requirements and observance of school rules and
regulations, the school would reward them by recognizing their "completion" of the course
enrolled in.
The obligation on the part of the school has been established in Magtibay v. Garcia,28 Licup v.
University of San Carlos29 and Ateneo de Manila University v. Garcia,30 in which the Court held
that, barring any violation of the rules on the part of the students, an institution of higher learning
has a contractual obligation to afford its students a fair opportunity to complete the course they
seek to pursue.
We recognize the need of a school to fund its facilities and to meet astronomical operating costs;
this is a reality in running it. Crystal v. Cebu International School31 upheld the imposition by
respondent school of a "land purchase deposit" in the amount of P50,000 per student to be used
for the "purchase of a piece of land and for the construction of new buildings and other facilities x
x x which the school would transfer [to] and occupy after the expiration of its lease contract over
its present site."
The amount was refundable after the student graduated or left the school. After noting that the
imposition of the fee was made only after prior consultation and approval by the parents of the
students, the Court held that the school committed no actionable wrong in refusing to admit the
children of the petitioners therein for their failure to pay the "land purchase deposit" and the 2.5
percent monthly surcharge thereon.
20
In the present case, PCST imposed the assailed revenue-raising measure belatedly, in the
middle of the semester. It exacted the dance party fee as a condition for the students' taking the
final examinations, and ultimately for its recognition of their ability to finish a course. The fee,
however, was not part of the school-student contract entered into at the start of the school year.
Hence, it could not be unilaterally imposed to the prejudice of the enrollees.
Such contract is by no means an ordinary one. In Non, we stressed that the school-student
contract "is imbued with public interest, considering the high priority given by the Constitution to
education and the grant to the State of supervisory and regulatory powers over all educational
institutions."32 Sections 5 (1) and (3) of Article XIV of the 1987 Constitution provide:
"The State shall protect and promote the right of all citizens to quality education at all
levels and shall take appropriate steps to make such declaration accessible to all.
"Every student has a right to select a profession or course of study, subject to fair,
reasonable and equitable admission and academic requirements."
The same state policy resonates in Section 9(2) of BP 232, otherwise known as the Education
Act of 1982:
"Section 9. Rights of Students in School. – In addition to other rights, and subject to
the limitations prescribed by law and regulations, students and pupils in all schools
shall enjoy the following rights:
xxx xxx xxx
(2) The right to freely choose their field of study subject to existing curricula
and to continue their course therein up to graduation, except in cases of
academic deficiency, or violation of disciplinary regulations."
Liability for Tort
In her Complaint, petitioner also charged that private respondents "inhumanly punish students x
x x by reason only of their poverty, religious practice or lowly station in life, which inculcated
upon [petitioner] the feelings of guilt, disgrace and unworthiness;"33 as a result of such
punishment, she was allegedly unable to finish any of her subjects for the second semester of
that school year and had to lag behind in her studies by a full year. The acts of respondents
supposedly caused her extreme humiliation, mental agony and "demoralization of unimaginable
proportions" in violation of Articles 19, 21 and 26 of the Civil Code. These provisions of the law
state thus:
20

"Article 19. Every person must, in the exercise of his rights and in the performance of
his duties, act with justice, give everyone his due, and observe honesty and good
faith."
"Article 21. Any person who wilfully causes loss or injury to another in a manner that
is contrary to morals, good customs or public policy shall compensate the latter for the
damage."
"Article 26. Every person shall respect the dignity, personality, privacy and peace of
mind of his neighbors and other persons. The following and similar acts, though they
may not constitute a criminal offense, shall produce a cause of action for damages,
prevention and other relief:
(1) Prying into the privacy of another's residence;
(2) Meddling with or disturbing the private life or family relations of another;
(3) Intriguing to cause another to be alienated from his friends;
(4) Vexing or humiliating another on account of his beliefs, lowly station in
life, place of birth, physical defect, or other personal condition."
Generally, liability for tort arises only between parties not otherwise bound by a contract. An
academic institution, however, may be held liable for tort even if it has an existing contract with
its students, since the act that violated the contract may also be a tort. We ruled thus in PSBA
vs. CA,34 from which we quote:
"x x x A perusal of Article 2176 [of the Civil Code] shows that obligations arising from
quasi-delicts or tort, also known as extra-contractual obligations, arise only between
parties not otherwise bound by contract, whether express or implied. However, this
impression has not prevented this Court from determining the existence of a tort even
when there obtains a contract. In Air France v. Carrascoso (124 Phil. 722), the private
respondent was awarded damages for his unwarranted expulsion from a first-class
seat aboard the petitioner airline. It is noted, however, that the Court referred to the
petitioner-airline's liability as one arising from tort, not one arising form a contract of
carriage. In effect, Air France is authority for the view that liability from tort may exist
even if there is a contract, for the act that breaks the contract may be also a tort. x x x
This view was not all that revolutionary, for even as early as 1918, this Court was
already of a similar mind. In Cangco v. Manila Railroad (38 Phil. 780), Mr. Justice
Fisher elucidated thus: 'x x x. When such a contractual relation exists the obligor may
break the contract under such conditions that the same act which constitutes a breach
of the contract would have constituted the source of an extra-contractual obligation
had no contract existed between the parties.'
21
"Immediately what comes to mind is the chapter of the Civil Code on Human
Relations, particularly Article 21 x x x."35
Academic Freedom
In their Memorandum, respondents harp on their right to "academic freedom." We are not
impressed. According to present jurisprudence, academic freedom encompasses the
independence of an academic institution to determine for itself (1) who may teach, (2) what may
be taught, (3) how it shall teach, and (4) who may be admitted to study.36 In Garcia v. the
Faculty Admission Committee, Loyola School of Theology,37 the Court upheld the respondent
therein when it denied a female student's admission to theological studies in a seminary for
prospective priests. The Court defined the freedom of an academic institution thus: "to decide for
itself aims and objectives and how best to attain them x x x free from outside coercion or
interference save possibly when overriding public welfare calls for some restraint."38
In Tangonan v. Paño,39 the Court upheld, in the name of academic freedom, the right of the
school to refuse readmission of a nursing student who had been enrolled on probation, and who
had failed her nursing subjects. These instances notwithstanding, the Court has emphasized that
once a school has, in the name of academic freedom, set its standards, these should be
meticulously observed and should not be used to discriminate against certain students.40 After
accepting them upon enrollment, the school cannot renege on its contractual obligation on
grounds other than those made known to, and accepted by, students at the start of the school
year.
In sum, the Court holds that the Complaint alleges sufficient causes of action against
respondents, and that it should not have been summarily dismissed. Needless to say, the Court
is not holding respondents liable for the acts complained of. That will have to be ruled upon in
due course by the court a quo.
WHEREFORE, the Petition is hereby GRANTED, and the assailed Orders REVERSED. The trial
court is DIRECTED to reinstate the Complaint and, with all deliberate speed, to continue the
proceedings in Civil Case No. U-7541. No costs.
SO ORDERED.
21

G.R. No. 164012 June 8, 2007
FLORDELIZA MENDOZA, petitioner,
vs.
MUTYA SORIANO and Minor JULIE ANN SORIANO duly represented by her natural
mother and guardian ad litem MUTYA SORIANO, respondents.
DECISION
QUISUMBING, J.:
In this petition for review under Rule 45 of the Rules of Court, petitioner asks this Court to
reverse and set aside the Decision1 dated November 17, 2003 and the Resolution2 dated May
24, 2004 of the Court of Appeals in CA-G.R. CV No. 69037. The appellate court found petitioner,
as employer of Lomer Macasasa, liable for damages.
The facts are as follows:
At around 1:00 a.m., July 14, 1997, Sonny Soriano, while crossing Commonwealth Avenue near
Luzon Avenue in Quezon City, was hit by a speeding Tamaraw FX driven by Lomer Macasasa.
Soriano was thrown five meters away, while the vehicle only stopped some 25 meters from the
point of impact. Gerard Villaspin, one of Soriano’s companions, asked Macasasa to bring
Soriano to the hospital, but after checking out the scene of the incident, Macasasa returned to
the FX, only to flee. A school bus brought Soriano to East Avenue Medical Center where he later
died. Subsequently, the Quezon City Prosecutor recommended the filing of a criminal case for
reckless imprudence resulting to homicide against Macasasa.3
On August 20, 1997, respondents Mutya Soriano and Julie Ann Soriano, Soriano’s wife and
daughter, respectively, filed a complaint for damages against Macasasa and petitioner Flordeliza
Mendoza, the registered owner of the vehicle. The complaint was docketed as Civil Case No. C-
18038 in the Regional Trial Court of Caloocan City, Branch 121. Respondents prayed that
Macasasa and petitioner be ordered to pay them: ₱200,000 moral damages; ₱500,000 for lost
income; ₱22,250 for funeral services; ₱45,000 for burial lot; ₱15,150 for interment and lapida;
₱8,066 for hospitalization, other medical and transportation expenses; ₱28,540 for food and
drinks during the wake; ₱50,000 exemplary damages; ₱60,000 indemnity for Soriano’s death;
and ₱25,000 for attorney’s fees plus ₱500 per court appearance.4
In her answer, petitioner Mendoza maintained that she was not liable since as owner of the
vehicle, she had exercised the diligence of a good father of a family over her employee,
Macasasa.
Upon respondents’ motion, the complaint for damages against Macasasa was dismissed.
22
After trial, the trial court also dismissed the complaint against petitioner.5 It found Soriano
negligent for crossing Commonwealth Avenue by using a small gap in the island’s fencing rather
than the pedestrian overpass. The lower court also ruled that petitioner was not negligent in the
selection and supervision of Macasasa since complainants presented no evidence to support
their allegation of petitioner’s negligence.6
Respondents appealed. The Court of Appeals reversed the trial court. The dispositive portion of
the appellate court’s decision reads:
WHEREFORE, the judgment appealed from is REVERSED, and another one is hereby rendered
ordering [petitioner] Flordeliza Mendoza to pay [respondents] Mutya Soriano and Julie Ann
Soriano the following amounts:
1. Hospital and Burial Expenses ₱80,926.25
2. Loss of earning capacity ₱77,000.00
3. Moral Damages ₱20,000.00
4. Indemnity for the death of Sonny Soriano ₱50,000.00
Actual payment of the aforementioned amounts should, however, be reduced by twenty (20%)
per cent due to the presence of contributory negligence by the victim as provided for in Article
2179 of the Civil Code.
SO ORDERED.7
While the appellate court agreed that Soriano was negligent, it also found Macasasa negligent
for speeding, such that he was unable to avoid hitting the victim. It observed that Soriano’s own
negligence did not preclude recovery of damages from Macasasa’s negligence. It further held
that since petitioner failed to present evidence to the contrary, and conformably with Article
21808 of the Civil Code, the presumption of negligence of the employer in the selection and
supervision of employees stood.
Petitioner’s motion for reconsideration was denied by the appellate court in a Resolution9 dated
May 24, 2004.
Hence, this appeal where petitioner alleges that:
I.
22

THE TOTAL AMOUNT PRAYED FOR IN THE COMPLAINT IS NOT WITHIN THE
JURISDICTION OF THE REGIONAL TRIAL COURT.
II.
[COROLLARILY], THE AWARD OF DAMAGES IN FAVOR OF THE RESPONDENTS [HAS] NO
BASIS IN LAW.10
The issues are simple: (1) Did the Regional Trial Court have jurisdiction to try the case? and (2)
Was there sufficient legal basis to award damages?
Petitioner argues that the amount claimed by respondents is within the jurisdiction of the
Metropolitan Trial Court. She posits that to determine the jurisdictional amount, what should only
be considered are the following: ₱22,250 for funeral services; ₱45,000 for burial lot; ₱15,150 for
interment and lapida; ₱8,066 for hospitalization and transportation; ₱28,540 for food and drinks
during the wake; and ₱60,000 indemnity for Soriano’s death. She maintains that the sum of
these amounts, ₱179,006, is below the jurisdictional amount of the Regional Trial Court. She
states that under Section 19(8) of the Judiciary Reorganization Act of 1980, the following claims
of respondents must be excluded: ₱200,000 moral damages, ₱500,000 for lost income; ₱50,000
exemplary damages; ₱25,000 attorney’s fees plus ₱500 per court appearance. Petitioner thus
prays that the decision of the Court of Appeals be reversed, and the dismissal of the case by the
trial court be affirmed on the ground of lack of jurisdiction.
Section 19(8) of Batas Pambansa Blg. 129,11 as amended by Republic Act No. 7691, states the
pertinent law.
SEC. 19. Jurisdiction in civil cases.–Regional Trial Courts shall exercise exclusive original
jurisdiction:
xxxx
(8) In all other cases in which the demand, exclusive of interest, damages of whatever kind,
attorney's fees, litigation expenses, and costs or the value of the property in controversy exceeds
One hundred thousand pesos (₱100,000.00) or, in such other cases in Metro Manila, where the
demand, exclusive of the abovementioned items exceeds Two hundred thousand pesos
(₱200,000.00).
But relatedly, Administrative Circular No. 09-9412 expressly states:
xxxx
23
2. The exclusion of the term "damages of whatever kind" in determining the jurisdictional amount
under Section 19(8) and Section 33(1) of BP Blg. 129, as amended by RA No. 7691, applies to
cases where the damages are merely incidental to or a consequence of the main cause of
action. However, in cases where the claim for damages is the main cause of action, or one of the
causes of action, the amount of such claim shall be considered in determining the jurisdiction of
the court. (Underscoring supplied.)
Actions for damages based on quasi-delicts, as in this case, are primarily and effectively actions
for the recovery of a sum of money for the damages for tortious acts.13 In this case, respondents’
claim of ₱929,006 in damages and ₱25,000 attorney’s fees plus ₱500 per court appearance
represents the monetary equivalent for compensation of the alleged injury. These money claims
are the principal reliefs sought by respondents in their complaint for damages.14 Consequently
then, we hold that the Regional Trial Court of Caloocan City possessed and properly exercised
jurisdiction over the case.15
Petitioner further argues that since respondents caused the dismissal of the complaint against
Macasasa, there is no longer any basis to find her liable. She claims that "no iota of evidence"
was presented in this case to prove Macasasa’s negligence, and besides, respondents can
recover damages in the criminal case against him.
Respondents counter that as Macasasa’s employer, petitioner was presumed negligent in
selecting and supervising Macasasa after he was found negligent by the Court of Appeals.
The records show that Macasasa violated two traffic rules under the Land Transportation and
Traffic Code. First, he failed to maintain a safe speed to avoid endangering lives.16 Both the trial
and the appellate courts found Macasasa overspeeding.17 The records show also that Soriano
was thrown five meters away after he was hit.18 Moreover, the vehicle stopped only some 25
meters from the point of impact.19
Both circumstances support the conclusion that the FX vehicle driven by Macasasa was
overspeeding. Second, Macasasa, the vehicle driver, did not aid Soriano, the accident victim, in
violation of Section 55,20 Article V of the Land Transportation and Traffic Code. While Macasasa
at first agreed to bring Soriano to the hospital, he fled the scene in a hurry. Contrary to
petitioner’s claim, there is no showing of any factual basis that Macasasa fled for fear of the
people’s wrath. What remains undisputed is that he did not report the accident to a police officer,
nor did he summon a doctor. Under Article 218521 of the Civil Code, a person driving a motor
vehicle is presumed negligent if at the time of the mishap, he was violating traffic regulations.
While respondents could recover damages from Macasasa in a criminal case and petitioner
could become subsidiarily liable, still petitioner, as owner and employer, is directly and
separately civilly liable for her failure to exercise due diligence in supervising Macasasa.22 We
must emphasize that this damage suit is for the quasi-delict of petitioner, as owner and
employer, and not for the delict of Macasasa, as driver and employee.
23
 24

Under Article 2180 of the Civil Code, employers are liable for the damages caused by their
employees acting within the scope of their assigned tasks. The liability arises due to the
presumed negligence of the employers in supervising their employees unless they prove that
they observed all the diligence of a good father of a family to prevent the damage.

In this case, we hold petitioner primarily and solidarily liable for the damages caused by
Macasasa.23 Respondents could recover directly from petitioner24 since petitioner failed to prove
that she exercised the diligence of a good father of a family in supervising Macasasa.25 Indeed, it
is unfortunate that petitioner harbored the notion that the Regional Trial Court did not have
jurisdiction over the case and opted not to present her evidence on this point.

Lastly, we agree that the Court of Appeals did not err in ruling that Soriano was guilty of
contributory negligence for not using the pedestrian overpass while crossing Commonwealth
Avenue. We even note that the respondents now admit this point, and concede that the appellate
court had properly reduced by 20% the amount of damages it awarded. Hence, we affirm the
reduction26 of the amount earlier awarded, based on Article 2179 of the Civil Code which reads:

When the plaintiff's own negligence was the immediate and proximate cause of his injury, he
cannot recover damages. But if his negligence was only contributory, the immediate and
proximate cause of the injury being the defendant's lack of due care, the plaintiff may recover
damages, but the courts shall mitigate the damages to be awarded.

WHEREFORE, we DENY the petition for lack of merit and hereby AFFIRM the Decision dated
November 17, 2003 and the Resolution dated May 24, 2004 of the Court of Appeals in CA-G.R.
CV No. 69037.

Costs against petitioner.

SO ORDERED.

G.R. No. 126297 January 31, 2007

24
 25

PROFESSIONAL SERVICES, INC., Petitioner, On April 4, 1984, Natividad Agana was rushed to the Medical City General Hospital (Medical City
vs. Hospital) because of difficulty of bowel movement and bloody anal discharge. After a series of
NATIVIDAD and ENRIQUE AGANA, Respondents. medical examinations, Dr. Miguel Ampil, petitioner in G.R. No. 127590, diagnosed her to be
suffering from "cancer of the sigmoid."
x-----------------------x
On April 11, 1984, Dr. Ampil, assisted by the medical staff4 of the Medical City Hospital,
performed an anterior resection surgery on Natividad. He found that the malignancy in her
G.R. No. 126467 January 31, 2007 sigmoid area had spread on her left ovary, necessitating the removal of certain portions of it.
Thus, Dr. Ampil obtained the consent of Natividad’s husband, Enrique Agana, to permit Dr. Juan
NATIVIDAD (Substituted by her children MARCELINO AGANA III, ENRIQUE AGANA, JR., Fuentes, respondent in G.R. No. 126467, to perform hysterectomy on her.
EMMA AGANA ANDAYA, JESUS AGANA, and RAYMUND AGANA) and ENRIQUE AGANA,
Petitioners, After Dr. Fuentes had completed the hysterectomy, Dr. Ampil took over, completed the operation
vs. and closed the incision.
JUAN FUENTES, Respondent.

However, the operation appeared to be flawed. In the corresponding Record of Operation dated
x- - - - - - - - - - - - - - - - - - - -- - - - x April 11, 1984, the attending nurses entered these remarks:

G.R. No. 127590 January 31, 2007 "sponge count lacking 2

MIGUEL AMPIL, Petitioner, "announced to surgeon searched (sic) done but to no avail continue for closure."
vs.
NATIVIDAD AGANA and ENRIQUE AGANA, Respondents.
On April 24, 1984, Natividad was released from the hospital. Her hospital and medical bills,
including the doctors’ fees, amounted to P60,000.00.
DECISION

SANDOVAL-GUTIERREZ, J.:
Hospitals, having undertaken one of mankind’s most important and delicate endeavors, must
assume the grave responsibility of pursuing it with appropriate care. The care and service
dispensed through this high trust, however technical, complex and esoteric its character may be,
must meet standards of responsibility commensurate with the undertaking to preserve and
protect the health, and indeed, the very lives of those placed in the hospital’s keeping. 1
After a couple of days, Natividad complained of excruciating pain in her anal region. She
consulted both Dr. Ampil and Dr. Fuentes about it. They told her that the pain was the natural
consequence of the surgery. Dr. Ampil then recommended that she consult an oncologist to
examine the cancerous nodes which were not removed during the operation.
On May 9, 1984, Natividad, accompanied by her husband, went to the United States to seek
further treatment. After four months of consultations and laboratory examinations, Natividad was
told she was free of cancer. Hence, she was advised to return to the Philippines.

Assailed in these three consolidated petitions for review on certiorari is the Court of Appeals’
Decision2 dated September 6, 1996 in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198
affirming with modification the Decision3 dated March 17, 1993 of the Regional Trial Court
(RTC), Branch 96, Quezon City in Civil Case No. Q-43322 and nullifying its Order dated
September 21, 1993.
On August 31, 1984, Natividad flew back to the Philippines, still suffering from pains. Two weeks
thereafter, her daughter found a piece of gauze protruding from her vagina. Upon being informed
about it, Dr. Ampil proceeded to her house where he managed to extract by hand a piece of
gauze measuring 1.5 inches in width. He then assured her that the pains would soon vanish.

Dr. Ampil’s assurance did not come true. Instead, the pains intensified, prompting Natividad to
The facts, as culled from the records, are: seek treatment at the Polymedic General Hospital. While confined there, Dr. Ramon Gutierrez
detected the presence of another foreign object in her vagina -- a foul-smelling gauze measuring
1.5 inches in width which badly infected her vaginal vault. A recto-vaginal fistula had formed in
her reproductive organs which forced stool to excrete through the vagina. Another surgical

25

operation was needed to remedy the damage. Thus, in October 1984, Natividad underwent
another surgery.
On November 12, 1984, Natividad and her husband filed with the RTC, Branch 96, Quezon City
a complaint for damages against the Professional Services, Inc. (PSI), owner of the Medical City
Hospital, Dr. Ampil, and Dr. Fuentes, docketed as Civil Case No. Q-43322. They alleged that the
latter are liable for negligence for leaving two pieces of gauze inside Natividad’s body and
malpractice for concealing their acts of negligence.
Meanwhile, Enrique Agana also filed with the Professional Regulation Commission (PRC) an
administrative complaint for gross negligence and malpractice against Dr. Ampil and Dr.
Fuentes, docketed as Administrative Case No. 1690. The PRC Board of Medicine heard the
case only with respect to Dr. Fuentes because it failed to acquire jurisdiction over Dr. Ampil who
was then in the United States.
On February 16, 1986, pending the outcome of the above cases, Natividad died and was duly
substituted by her above-named children (the Aganas).
On March 17, 1993, the RTC rendered its Decision in favor of the Aganas, finding PSI, Dr. Ampil
and Dr. Fuentes liable for negligence and malpractice, the decretal part of which reads:
WHEREFORE, judgment is hereby rendered for the plaintiffs ordering the defendants
PROFESSIONAL SERVICES, INC., DR. MIGUEL AMPIL and DR. JUAN FUENTES to pay to
the plaintiffs, jointly and severally, except in respect of the award for exemplary damages and the
interest thereon which are the liabilities of defendants Dr. Ampil and Dr. Fuentes only, as follows:
1. As actual damages, the following amounts:
a. The equivalent in Philippine Currency of the total of US$19,900.00 at the
rate of P21.60-US$1.00, as reimbursement of actual expenses incurred in
the United States of America;
b. The sum of P4,800.00 as travel taxes of plaintiffs and their physician
daughter;
c. The total sum of P45,802.50, representing the cost of hospitalization at
Polymedic Hospital, medical fees, and cost of the saline solution;
2. As moral damages, the sum of P2,000,000.00;
3. As exemplary damages, the sum of P300,000.00;
26
4. As attorney’s fees, the sum of P250,000.00;
5. Legal interest on items 1 (a), (b), and (c); 2; and 3 hereinabove, from date of filing
of the complaint until full payment; and
6. Costs of suit.
SO ORDERED.
Aggrieved, PSI, Dr. Fuentes and Dr. Ampil interposed an appeal to the Court of Appeals,
docketed as CA-G.R. CV No. 42062.
Incidentally, on April 3, 1993, the Aganas filed with the RTC a motion for a partial execution of its
Decision, which was granted in an Order dated May 11, 1993. Thereafter, the sheriff levied upon
certain properties of Dr. Ampil and sold them for P451,275.00 and delivered the amount to the
Aganas.
Following their receipt of the money, the Aganas entered into an agreement with PSI and Dr.
Fuentes to indefinitely suspend any further execution of the RTC Decision. However, not long
thereafter, the Aganas again filed a motion for an alias writ of execution against the properties of
PSI and Dr. Fuentes. On September 21, 1993, the RTC granted the motion and issued the
corresponding writ, prompting Dr. Fuentes to file with the Court of Appeals a petition for certiorari
and prohibition, with prayer for preliminary injunction, docketed as CA-G.R. SP No. 32198.
During its pendency, the Court of Appeals issued a Resolution5 dated October 29, 1993 granting
Dr. Fuentes’ prayer for injunctive relief.
On January 24, 1994, CA-G.R. SP No. 32198 was consolidated with CA-G.R. CV No. 42062.
Meanwhile, on January 23, 1995, the PRC Board of Medicine rendered its Decision6 in
Administrative Case No. 1690 dismissing the case against Dr. Fuentes. The Board held that the
prosecution failed to show that Dr. Fuentes was the one who left the two pieces of gauze inside
Natividad’s body; and that he concealed such fact from Natividad.
On September 6, 1996, the Court of Appeals rendered its Decision jointly disposing of CA-G.R.
CV No. 42062 and CA-G.R. SP No. 32198, thus:
WHEREFORE, except for the modification that the case against defendant-appellant Dr. Juan
Fuentes is hereby DISMISSED, and with the pronouncement that defendant-appellant Dr. Miguel
Ampil is liable to reimburse defendant-appellant Professional Services, Inc., whatever amount
the latter will pay or had paid to the plaintiffs-appellees, the decision appealed from is hereby
AFFIRMED and the instant appeal DISMISSED.
26

Concomitant with the above, the petition for certiorari and prohibition filed by herein defendant-
appellant Dr. Juan Fuentes in CA-G.R. SP No. 32198 is hereby GRANTED and the challenged
order of the respondent judge dated September 21, 1993, as well as the alias writ of execution
issued pursuant thereto are hereby NULLIFIED and SET ASIDE. The bond posted by the
petitioner in connection with the writ of preliminary injunction issued by this Court on November
29, 1993 is hereby cancelled.
Costs against defendants-appellants Dr. Miguel Ampil and Professional Services, Inc.
SO ORDERED.
Only Dr. Ampil filed a motion for reconsideration, but it was denied in a Resolution7 dated
December 19, 1996.
Hence, the instant consolidated petitions.
In G.R. No. 126297, PSI alleged in its petition that the Court of Appeals erred in holding that: (1)
it is estopped from raising the defense that Dr. Ampil is not its employee; (2) it is solidarily liable
with Dr. Ampil; and (3) it is not entitled to its counterclaim against the Aganas. PSI contends that
Dr. Ampil is not its employee, but a mere consultant or independent contractor. As such, he
alone should answer for his negligence.
In G.R. No. 126467, the Aganas maintain that the Court of Appeals erred in finding that Dr.
Fuentes is not guilty of negligence or medical malpractice, invoking the doctrine of res ipsa
loquitur. They contend that the pieces of gauze are prima facie proofs that the operating
surgeons have been negligent.
Finally, in G.R. No. 127590, Dr. Ampil asserts that the Court of Appeals erred in finding him
liable for negligence and malpractice sans evidence that he left the two pieces of gauze in
Natividad’s vagina. He pointed to other probable causes, such as: (1) it was Dr. Fuentes who
used gauzes in performing the hysterectomy; (2) the attending nurses’ failure to properly count
the gauzes used during surgery; and (3) the medical intervention of the American doctors who
examined Natividad in the United States of America.
For our resolution are these three vital issues: first, whether the Court of Appeals erred in holding
Dr. Ampil liable for negligence and malpractice; second, whether the Court of Appeals erred in
absolving Dr. Fuentes of any liability; and third, whether PSI may be held solidarily liable for the
negligence of Dr. Ampil.
I - G.R. No. 127590
Whether the Court of Appeals Erred in Holding Dr. Ampil
27
Liable for Negligence and Malpractice.
Dr. Ampil, in an attempt to absolve himself, gears the Court’s attention to other possible causes
of Natividad’s detriment. He argues that the Court should not discount either of the following
possibilities: first, Dr. Fuentes left the gauzes in Natividad’s body after performing hysterectomy;
second, the attending nurses erred in counting the gauzes; and third, the American doctors were
the ones who placed the gauzes in Natividad’s body.
Dr. Ampil’s arguments are purely conjectural and without basis. Records show that he did not
present any evidence to prove that the American doctors were the ones who put or left the
gauzes in Natividad’s body. Neither did he submit evidence to rebut the correctness of the record
of operation, particularly the number of gauzes used. As to the alleged negligence of Dr.
Fuentes, we are mindful that Dr. Ampil examined his (Dr. Fuentes’) work and found it in order.
The glaring truth is that all the major circumstances, taken together, as specified by the Court of
Appeals, directly point to Dr. Ampil as the negligent party, thus:
First, it is not disputed that the surgeons used gauzes as sponges to control the
bleeding of the patient during the surgical operation.
Second, immediately after the operation, the nurses who assisted in the surgery
noted in their report that the ‘sponge count (was) lacking 2’; that such anomaly was
‘announced to surgeon’ and that a ‘search was done but to no avail’ prompting Dr.
Ampil to ‘continue for closure’ x x x.
Third, after the operation, two (2) gauzes were extracted from the same spot of the
body of Mrs. Agana where the surgery was performed.
An operation requiring the placing of sponges in the incision is not complete until the sponges
are properly removed, and it is settled that the leaving of sponges or other foreign substances in
the wound after the incision has been closed is at least prima facie negligence by the operating
surgeon.8 To put it simply, such act is considered so inconsistent with due care as to raise an
inference of negligence. There are even legions of authorities to the effect that such act is
negligence per se.9
Of course, the Court is not blind to the reality that there are times when danger to a patient’s life
precludes a surgeon from further searching missing sponges or foreign objects left in the body.
But this does not leave him free from any obligation. Even if it has been shown that a surgeon
was required by the urgent necessities of the case to leave a sponge in his patient’s abdomen,
because of the dangers attendant upon delay, still, it is his legal duty to so inform his patient
within a reasonable time thereafter by advising her of what he had been compelled to do. This is
in order that she might seek relief from the effects of the foreign object left in her body as her
condition might permit. The ruling in Smith v. Zeagler10 is explicit, thus:
27

The removal of all sponges used is part of a surgical operation, and when a physician or surgeon
fails to remove a sponge he has placed in his patient’s body that should be removed as part of
the operation, he thereby leaves his operation uncompleted and creates a new condition which
imposes upon him the legal duty of calling the new condition to his patient’s attention, and
endeavoring with the means he has at hand to minimize and avoid untoward results likely to
ensue therefrom.
Here, Dr. Ampil did not inform Natividad about the missing two pieces of gauze. Worse, he even
misled her that the pain she was experiencing was the ordinary consequence of her operation.
Had he been more candid, Natividad could have taken the immediate and appropriate medical
remedy to remove the gauzes from her body. To our mind, what was initially an act of negligence
by Dr. Ampil has ripened into a deliberate wrongful act of deceiving his patient.
This is a clear case of medical malpractice or more appropriately, medical negligence. To
successfully pursue this kind of case, a patient must only prove that a health care provider either
failed to do something which a reasonably prudent health care provider would have done, or that
he did something that a reasonably prudent provider would not have done; and that failure or
action caused injury to the patient.11 Simply put, the elements are duty, breach, injury and
proximate causation. Dr, Ampil, as the lead surgeon, had the duty to remove all foreign objects,
such as gauzes, from Natividad’s body before closure of the incision. When he failed to do so, it
was his duty to inform Natividad about it. Dr. Ampil breached both duties. Such breach caused
injury to Natividad, necessitating her further examination by American doctors and another
surgery. That Dr. Ampil’s negligence is the proximate cause12 of Natividad’s injury could be
traced from his act of closing the incision despite the information given by the attending nurses
that two pieces of gauze were still missing. That they were later on extracted from Natividad’s
vagina established the causal link between Dr. Ampil’s negligence and the injury. And what
further aggravated such injury was his deliberate concealment of the missing gauzes from the
knowledge of Natividad and her family.
II - G.R. No. 126467
Whether the Court of Appeals Erred in Absolving
Dr. Fuentes of any Liability
The Aganas assailed the dismissal by the trial court of the case against Dr. Fuentes on the
ground that it is contrary to the doctrine of res ipsa loquitur. According to them, the fact that the
two pieces of gauze were left inside Natividad’s body is a prima facie evidence of Dr. Fuentes’
negligence.
We are not convinced.
Literally, res ipsa loquitur means "the thing speaks for itself." It is the rule that the fact of the
occurrence of an injury, taken with the surrounding circumstances, may permit an inference or
28
raise a presumption of negligence, or make out a plaintiff’s prima facie case, and present a
question of fact for defendant to meet with an explanation.13 Stated differently, where the thing
which caused the injury, without the fault of the injured, is under the exclusive control of the
defendant and the injury is such that it should not have occurred if he, having such control used
proper care, it affords reasonable evidence, in the absence of explanation that the injury arose
from the defendant’s want of care, and the burden of proof is shifted to him to establish that he
has observed due care and diligence.14
From the foregoing statements of the rule, the requisites for the applicability of the doctrine of res
ipsa loquitur are: (1) the occurrence of an injury; (2) the thing which caused the injury was under
the control and management of the defendant; (3) the occurrence was such that in the ordinary
course of things, would not have happened if those who had control or management used proper
care; and (4) the absence of explanation by the defendant. Of the foregoing requisites, the most
instrumental is the "control and management of the thing which caused the injury."15
We find the element of "control and management of the thing which caused the injury" to be
wanting. Hence, the doctrine of res ipsa loquitur will not lie.
It was duly established that Dr. Ampil was the lead surgeon during the operation of Natividad. He
requested the assistance of Dr. Fuentes only to perform hysterectomy when he (Dr. Ampil) found
that the malignancy in her sigmoid area had spread to her left ovary. Dr. Fuentes performed the
surgery and thereafter reported and showed his work to Dr. Ampil. The latter examined it and
finding everything to be in order, allowed Dr. Fuentes to leave the operating room. Dr. Ampil then
resumed operating on Natividad. He was about to finish the procedure when the attending
nurses informed him that two pieces of gauze were missing. A "diligent search" was conducted,
but the misplaced gauzes were not found. Dr. Ampil then directed that the incision be closed.
During this entire period, Dr. Fuentes was no longer in the operating room and had, in fact, left
the hospital.
Under the "Captain of the Ship" rule, the operating surgeon is the person in complete charge of
the surgery room and all personnel connected with the operation. Their duty is to obey his
orders.16 As stated before, Dr. Ampil was the lead surgeon. In other words, he was the "Captain
of the Ship." That he discharged such role is evident from his following conduct: (1) calling Dr.
Fuentes to perform a hysterectomy; (2) examining the work of Dr. Fuentes and finding it in order;
(3) granting Dr. Fuentes’ permission to leave; and (4) ordering the closure of the incision. To our
mind, it was this act of ordering the closure of the incision notwithstanding that two pieces of
gauze remained unaccounted for, that caused injury to Natividad’s body. Clearly, the control and
management of the thing which caused the injury was in the hands of Dr. Ampil, not Dr. Fuentes.
In this jurisdiction, res ipsa loquitur is not a rule of substantive law, hence, does not per se create
or constitute an independent or separate ground of liability, being a mere evidentiary rule.17 In
other words, mere invocation and application of the doctrine does not dispense with the
requirement of proof of negligence. Here, the negligence was proven to have been committed by
Dr. Ampil and not by Dr. Fuentes.
28

III - G.R. No. 126297
Whether PSI Is Liable for the Negligence of Dr. Ampil
The third issue necessitates a glimpse at the historical development of hospitals and the
resulting theories concerning their liability for the negligence of physicians.
Until the mid-nineteenth century, hospitals were generally charitable institutions, providing
medical services to the lowest classes of society, without regard for a patient’s ability to pay. 18
Those who could afford medical treatment were usually treated at home by their doctors.19
However, the days of house calls and philanthropic health care are over. The modern health
care industry continues to distance itself from its charitable past and has experienced a
significant conversion from a not-for-profit health care to for-profit hospital businesses.
Consequently, significant changes in health law have accompanied the business-related
changes in the hospital industry. One important legal change is an increase in hospital liability for
medical malpractice. Many courts now allow claims for hospital vicarious liability under the
theories of respondeat superior, apparent authority, ostensible authority, or agency by estoppel.
20
In this jurisdiction, the statute governing liability for negligent acts is Article 2176 of the Civil
Code, which reads:
Art. 2176. Whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-
existing contractual relation between the parties, is called a quasi-delict and is governed by the
provisions of this Chapter.
A derivative of this provision is Article 2180, the rule governing vicarious liability under the
doctrine of respondeat superior, thus:
ART. 2180. The obligation imposed by Article 2176 is demandable not only for one’s own acts or
omissions, but also for those of persons for whom one is responsible.
x x x x x x
The owners and managers of an establishment or enterprise are likewise responsible for
damages caused by their employees in the service of the branches in which the latter are
employed or on the occasion of their functions.
Employers shall be liable for the damages caused by their employees and household helpers
acting within the scope of their assigned tasks even though the former are not engaged in any
business or industry.
29
x x x x x x
The responsibility treated of in this article shall cease when the persons herein mentioned prove
that they observed all the diligence of a good father of a family to prevent damage.
A prominent civilist commented that professionals engaged by an employer, such as physicians,
dentists, and pharmacists, are not "employees" under this article because the manner in which
they perform their work is not within the control of the latter (employer). In other words,
professionals are considered personally liable for the fault or negligence they commit in the
discharge of their duties, and their employer cannot be held liable for such fault or negligence. In
the context of the present case, "a hospital cannot be held liable for the fault or negligence of a
physician or surgeon in the treatment or operation of patients."21
The foregoing view is grounded on the traditional notion that the professional status and the very
nature of the physician’s calling preclude him from being classed as an agent or employee of a
hospital, whenever he acts in a professional capacity.22 It has been said that medical practice
strictly involves highly developed and specialized knowledge,23 such that physicians are
generally free to exercise their own skill and judgment in rendering medical services sans
interference.24 Hence, when a doctor practices medicine in a hospital setting, the hospital and its
employees are deemed to subserve him in his ministrations to the patient and his actions are of
his own responsibility.25
The case of Schloendorff v. Society of New York Hospital26 was then considered an authority for
this view. The "Schloendorff doctrine" regards a physician, even if employed by a hospital, as an
independent contractor because of the skill he exercises and the lack of control exerted over his
work. Under this doctrine, hospitals are exempt from the application of the respondeat superior
principle for fault or negligence committed by physicians in the discharge of their profession.
However, the efficacy of the foregoing doctrine has weakened with the significant developments
in medical care. Courts came to realize that modern hospitals are increasingly taking active role
in supplying and regulating medical care to patients. No longer were a hospital’s functions limited
to furnishing room, food, facilities for treatment and operation, and attendants for its patients.
Thus, in Bing v. Thunig,27 the New York Court of Appeals deviated from the Schloendorff
doctrine, noting that modern hospitals actually do far more than provide facilities for treatment.
Rather, they regularly employ, on a salaried basis, a large staff of physicians, interns, nurses,
administrative and manual workers. They charge patients for medical care and treatment, even
collecting for such services through legal action, if necessary. The court then concluded that
there is no reason to exempt hospitals from the universal rule of respondeat superior.
In our shores, the nature of the relationship between the hospital and the physicians is rendered
inconsequential in view of our categorical pronouncement in Ramos v. Court of Appeals28 that
for purposes of apportioning responsibility in medical negligence cases, an employer-employee
relationship in effect exists between hospitals and their attending and visiting physicians. This
Court held:
29

"We now discuss the responsibility of the hospital in this particular incident. The unique practice
(among private hospitals) of filling up specialist staff with attending and visiting "consultants,"
who are allegedly not hospital employees, presents problems in apportioning responsibility for
negligence in medical malpractice cases. However, the difficulty is more apparent than real.
In the first place, hospitals exercise significant control in the hiring and firing of consultants and in
the conduct of their work within the hospital premises. Doctors who apply for ‘consultant’ slots,
visiting or attending, are required to submit proof of completion of residency, their educational
qualifications, generally, evidence of accreditation by the appropriate board (diplomate),
evidence of fellowship in most cases, and references. These requirements are carefully
scrutinized by members of the hospital administration or by a review committee set up by the
hospital who either accept or reject the application. x x x.
After a physician is accepted, either as a visiting or attending consultant, he is normally required
to attend clinico-pathological conferences, conduct bedside rounds for clerks, interns and
residents, moderate grand rounds and patient audits and perform other tasks and
responsibilities, for the privilege of being able to maintain a clinic in the hospital, and/or for the
privilege of admitting patients into the hospital. In addition to these, the physician’s performance
as a specialist is generally evaluated by a peer review committee on the basis of mortality and
morbidity statistics, and feedback from patients, nurses, interns and residents. A consultant
remiss in his duties, or a consultant who regularly falls short of the minimum standards
acceptable to the hospital or its peer review committee, is normally politely terminated.
In other words, private hospitals, hire, fire and exercise real control over their attending and
visiting ‘consultant’ staff. While ‘consultants’ are not, technically employees, x x x, the control
exercised, the hiring, and the right to terminate consultants all fulfill the important hallmarks of an
employer-employee relationship, with the exception of the payment of wages. In assessing
whether such a relationship in fact exists, the control test is determining. Accordingly, on the
basis of the foregoing, we rule that for the purpose of allocating responsibility in medical
negligence cases, an employer-employee relationship in effect exists between hospitals and
their attending and visiting physicians. "
But the Ramos pronouncement is not our only basis in sustaining PSI’s liability. Its liability is also
anchored upon the agency principle of apparent authority or agency by estoppel and the doctrine
of corporate negligence which have gained acceptance in the determination of a hospital’s
liability for negligent acts of health professionals. The present case serves as a perfect platform
to test the applicability of these doctrines, thus, enriching our jurisprudence.
Apparent authority, or what is sometimes referred to as the "holding
out" theory, or doctrine of ostensible agency or agency by estoppel,29 has its origin from the law
of agency. It imposes liability, not as the result of the reality of a contractual relationship, but
rather because of the actions of a principal or an employer in somehow misleading the public
into believing that the relationship or the authority exists.30 The concept is essentially one of
estoppel and has been explained in this manner:
30
"The principal is bound by the acts of his agent with the apparent authority which he knowingly
permits the agent to assume, or which he holds the agent out to the public as possessing. The
question in every case is whether the principal has by his voluntary act placed the agent in such
a situation that a person of ordinary prudence, conversant with business usages and the nature
of the particular business, is justified in presuming that such agent has authority to perform the
particular act in question.31
The applicability of apparent authority in the field of hospital liability was upheld long time ago in
Irving v. Doctor Hospital of Lake Worth, Inc.32 There, it was explicitly stated that "there does not
appear to be any rational basis for excluding the concept of apparent authority from the field of
hospital liability." Thus, in cases where it can be shown that a hospital, by its actions, has held
out a particular physician as its agent and/or employee and that a patient has accepted
treatment from that physician in the reasonable belief that it is being rendered in behalf of the
hospital, then the hospital will be liable for the physician’s negligence.
Our jurisdiction recognizes the concept of an agency by implication or estoppel. Article 1869 of
the Civil Code reads:
ART. 1869. Agency may be express, or implied from the acts of the principal, from his silence or
lack of action, or his failure to repudiate the agency, knowing that another person is acting on his
behalf without authority.
In this case, PSI publicly displays in the lobby of the Medical City Hospital the names and
specializations of the physicians associated or accredited by it, including those of Dr. Ampil and
Dr. Fuentes. We concur with the Court of Appeals’ conclusion that it "is now estopped from
passing all the blame to the physicians whose names it proudly paraded in the public directory
leading the public to believe that it vouched for their skill and competence." Indeed, PSI’s act is
tantamount to holding out to the public that Medical City Hospital, through its accredited
physicians, offers quality health care services. By accrediting Dr. Ampil and Dr. Fuentes and
publicly advertising their qualifications, the hospital created the impression that they were its
agents, authorized to perform medical or surgical services for its patients. As expected, these
patients, Natividad being one of them, accepted the services on the reasonable belief that such
were being rendered by the hospital or its employees, agents, or servants. The trial court
correctly pointed out:
x x x regardless of the education and status in life of the patient, he ought not be burdened with
the defense of absence of employer-employee relationship between the hospital and the
independent physician whose name and competence are certainly certified to the general public
by the hospital’s act of listing him and his specialty in its lobby directory, as in the case herein.
The high costs of today’s medical and health care should at least exact on the hospital greater, if
not broader, legal responsibility for the conduct of treatment and surgery within its facility by its
accredited physician or surgeon, regardless of whether he is independent or employed."33
The wisdom of the foregoing ratiocination is easy to discern. Corporate entities, like PSI, are
capable of acting only through other individuals, such as physicians. If these accredited
30

physicians do their job well, the hospital succeeds in its mission of offering quality medical
services and thus profits financially. Logically, where negligence mars the quality of its services,
the hospital should not be allowed to escape liability for the acts of its ostensible agents.
We now proceed to the doctrine of corporate negligence or corporate responsibility.
One allegation in the complaint in Civil Case No. Q-43332 for negligence and malpractice is that
PSI as owner, operator and manager of Medical City Hospital, "did not perform the necessary
supervision nor exercise diligent efforts in the supervision of Drs. Ampil and Fuentes and its
nursing staff, resident doctors, and medical interns who assisted Drs. Ampil and Fuentes in the
performance of their duties as surgeons."34 Premised on the doctrine of corporate negligence,
the trial court held that PSI is directly liable for such breach of duty.
We agree with the trial court.
Recent years have seen the doctrine of corporate negligence as the judicial answer to the
problem of allocating hospital’s liability for the negligent acts of health practitioners, absent facts
to support the application of respondeat superior or apparent authority. Its formulation proceeds
from the judiciary’s acknowledgment that in these modern times, the duty of providing quality
medical service is no longer the sole prerogative and responsibility of the physician. The modern
hospitals have changed structure. Hospitals now tend to organize a highly professional medical
staff whose competence and performance need to be monitored by the hospitals commensurate
with their inherent responsibility to provide quality medical care.35
The doctrine has its genesis in Darling v. Charleston Community Hospital. 36 There, the Supreme
Court of Illinois held that "the jury could have found a hospital negligent, inter alia, in failing to
have a sufficient number of trained nurses attending the patient; failing to require a consultation
with or examination by members of the hospital staff; and failing to review the treatment
rendered to the patient." On the basis of Darling, other jurisdictions held that a hospital’s
corporate negligence extends to permitting a physician known to be incompetent to practice at
the hospital.37 With the passage of time, more duties were expected from hospitals, among
them: (1) the use of reasonable care in the maintenance of safe and adequate facilities and
equipment; (2) the selection and retention of competent physicians; (3) the overseeing or
supervision of all persons who practice medicine within its walls; and (4) the formulation,
adoption and enforcement of adequate rules and policies that ensure quality care for its
patients.38 Thus, in Tucson Medical Center, Inc. v. Misevich,39 it was held that a hospital,
following the doctrine of corporate responsibility, has the duty to see that it meets the standards
of responsibilities for the care of patients. Such duty includes the proper supervision of the
members of its medical staff. And in Bost v. Riley,40 the court concluded that a patient who
enters a hospital does so with the reasonable expectation that it will attempt to cure him. The
hospital accordingly has the duty to make a reasonable effort to monitor and oversee the
treatment prescribed and administered by the physicians practicing in its premises.
In the present case, it was duly established that PSI operates the Medical City Hospital for the
purpose and under the concept of providing comprehensive medical services to the public.
31
Accordingly, it has the duty to exercise reasonable care to protect from harm all patients
admitted into its facility for medical treatment. Unfortunately, PSI failed to perform such duty. The
findings of the trial court are convincing, thus:
x x x PSI’s liability is traceable to its failure to conduct an investigation of the matter reported in
the nota bene of the count nurse. Such failure established PSI’s part in the dark conspiracy of
silence and concealment about the gauzes. Ethical considerations, if not also legal, dictated the
holding of an immediate inquiry into the events, if not for the benefit of the patient to whom the
duty is primarily owed, then in the interest of arriving at the truth. The Court cannot accept that
the medical and the healing professions, through their members like defendant surgeons, and
their institutions like PSI’s hospital facility, can callously turn their backs on and disregard even a
mere probability of mistake or negligence by refusing or failing to investigate a report of such
seriousness as the one in Natividad’s case.
It is worthy to note that Dr. Ampil and Dr. Fuentes operated on Natividad with the assistance of
the Medical City Hospital’s staff, composed of resident doctors, nurses, and interns. As such, it is
reasonable to conclude that PSI, as the operator of the hospital, has actual or constructive
knowledge of the procedures carried out, particularly the report of the attending nurses that the
two pieces of gauze were missing. In Fridena v. Evans,41 it was held that a corporation is bound
by the knowledge acquired by or notice given to its agents or officers within the scope of their
authority and in reference to a matter to which their authority extends. This means that the
knowledge of any of the staff of Medical City Hospital constitutes knowledge of PSI. Now, the
failure of PSI, despite the attending nurses’ report, to investigate and inform Natividad regarding
the missing gauzes amounts to callous negligence. Not only did PSI breach its duties to oversee
or supervise all persons who practice medicine within its walls, it also failed to take an active
step in fixing the negligence committed. This renders PSI, not only vicariously liable for the
negligence of Dr. Ampil under Article 2180 of the Civil Code, but also directly liable for its own
negligence under Article 2176. In Fridena, the Supreme Court of Arizona held:
x x x In recent years, however, the duty of care owed to the patient by the hospital has
expanded. The emerging trend is to hold the hospital responsible where the hospital has failed to
monitor and review medical services being provided within its walls. See Kahn Hospital
Malpractice Prevention, 27 De Paul . Rev. 23 (1977).
Among the cases indicative of the ‘emerging trend’ is Purcell v. Zimbelman, 18 Ariz. App. 75,500
P. 2d 335 (1972). In Purcell, the hospital argued that it could not be held liable for the
malpractice of a medical practitioner because he was an independent contractor within the
hospital. The Court of Appeals pointed out that the hospital had created a professional staff
whose competence and performance was to be monitored and reviewed by the governing body
of the hospital, and the court held that a hospital would be negligent where it had knowledge or
reason to believe that a doctor using the facilities was employing a method of treatment or care
which fell below the recognized standard of care.
Subsequent to the Purcell decision, the Arizona Court of Appeals held that a hospital has certain
inherent responsibilities regarding the quality of medical care furnished to patients within its walls
and it must meet the standards of responsibility commensurate with this undertaking. Beeck v.
31
 32

Tucson General Hospital, 18 Ariz. App. 165, 500 P. 2d 1153 (1972). This court has confirmed
the rulings of the Court of Appeals that a hospital has the duty of supervising the competence of
the doctors on its staff. x x x.

x x x x x x

In the amended complaint, the plaintiffs did plead that the operation was performed at the
hospital with its knowledge, aid, and assistance, and that the negligence of the defendants was
the proximate cause of the patient’s injuries. We find that such general allegations of negligence,
along with the evidence produced at the trial of this case, are sufficient to support the hospital’s
liability based on the theory of negligent supervision."

Anent the corollary issue of whether PSI is solidarily liable with Dr. Ampil for damages, let it be
emphasized that PSI, apart from a general denial of its responsibility, failed to adduce evidence
showing that it exercised the diligence of a good father of a family in the accreditation and
supervision of the latter. In neglecting to offer such proof, PSI failed to discharge its burden
under the last paragraph of Article 2180 cited earlier, and, therefore, must be adjudged solidarily
liable with Dr. Ampil. Moreover, as we have discussed, PSI is also directly liable to the Aganas.

One final word. Once a physician undertakes the treatment and care of a patient, the law
imposes on him certain obligations. In order to escape liability, he must possess that reasonable
degree of learning, skill and experience required by his profession. At the same time, he must
apply reasonable care and diligence in the exercise of his skill and the application of his
knowledge, and exert his best judgment.

WHEREFORE, we DENY all the petitions and AFFIRM the challenged Decision of the Court of
Appeals in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198.

Costs against petitioners PSI and Dr. Miguel Ampil.

SO ORDERED. G.R. No. 150843 March 14, 2003

CATHAY PACIFIC AIRWAYS, LTD., petitioner,

vs.
SPOUSES DANIEL VAZQUEZ and MARIA LUISA MADRIGAL VAZQUEZ, respondents.

DAVIDE, JR., C.J.:

Is an involuntary upgrading of an airline passenger’s accommodation from one class to a more

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

32

The facts in this case, as found by the Court of Appeals and adopted by petitioner Cathay Pacific
Airways, Ltd., (hereinafter Cathay) are as follows:
Cathay is a common carrier engaged in the business of transporting passengers and goods by
air. Among the many routes it services is the Manila-Hongkong-Manila course. As part of its
marketing strategy, Cathay accords its frequent flyers membership in its Marco Polo Club. The
members enjoy several privileges, such as priority for upgrading of booking without any extra
charge whenever an opportunity arises. Thus, a frequent flyer booked in the Business Class has
priority for upgrading to First Class if the Business Class Section is fully booked.
Respondents-spouses Dr. Daniel Earnshaw Vazquez and Maria Luisa Madrigal Vazquez are
frequent flyers of Cathay and are Gold Card members of its Marco Polo Club. On 24 September
1996, the Vazquezes, together with their maid and two friends Pacita Cruz and Josefina Vergel
de Dios, went to Hongkong for pleasure and business.
For their return flight to Manila on 28 September 1996, they were booked on Cathay’s Flight CX-
905, with departure time at 9:20 p.m. Two hours before their time of departure, the Vazquezes
and their companions checked in their luggage at Cathay’s check-in counter at Kai Tak Airport
and were given their respective boarding passes, to wit, Business Class boarding passes for the
Vazquezes and their two friends, and Economy Class for their maid. They then proceeded to the
Business Class passenger lounge.
When boarding time was announced, the Vazquezes and their two friends went to Departure
Gate No. 28, which was designated for Business Class passengers. Dr. Vazquez presented his
boarding pass to the ground stewardess, who in turn inserted it into an electronic machine
reader or computer at the gate. The ground stewardess was assisted by a ground attendant by
the name of Clara Lai Han Chiu. When Ms. Chiu glanced at the computer monitor, she saw a
message that there was a "seat change" from Business Class to First Class for the Vazquezes.
Ms. Chiu approached Dr. Vazquez and told him that the Vazquezes’ accommodations were
upgraded to First Class. Dr. Vazquez refused the upgrade, reasoning that it would not look nice
for them as hosts to travel in First Class and their guests, in the Business Class; and moreover,
they were going to discuss business matters during the flight. He also told Ms. Chiu that she
could have other passengers instead transferred to the First Class Section. Taken aback by the
refusal for upgrading, Ms. Chiu consulted her supervisor, who told her to handle the situation and
convince the Vazquezes to accept the upgrading. Ms. Chiu informed the latter that the Business
Class was fully booked, and that since they were Marco Polo Club members they had the priority
to be upgraded to the First Class. Dr. Vazquez continued to refuse, so Ms. Chiu told them that if
they would not avail themselves of the privilege, they would not be allowed to take the flight.
Eventually, after talking to his two friends, Dr. Vazquez gave in. He and Mrs. Vazquez then
proceeded to the First Class Cabin.
Upon their return to Manila, the Vazquezes, in a letter of 2 October 1996 addressed to Cathay’s
Country Manager, demanded that they be indemnified in the amount of P1million for the
"humiliation and embarrassment" caused by its employees. They also demanded "a written
33
apology from the management of Cathay, preferably a responsible person with a rank of no less
than the Country Manager, as well as the apology from Ms. Chiu" within fifteen days from receipt
of the letter.
In his reply of 14 October 1996, Mr. Larry Yuen, the assistant to Cathay’s Country Manager
Argus Guy Robson, informed the Vazquezes that Cathay would investigate the incident and get
back to them within a week’s time.
On 8 November 1996, after Cathay’s failure to give them any feedback within its self-imposed
deadline, the Vazquezes instituted before the Regional Trial Court of Makati City an action for
damages against Cathay, praying for the payment to each of them the amounts of P250,000 as
temperate damages; P500,000 as moral damages; P500,000 as exemplary or corrective
damages; and P250,000 as attorney’s fees.
In their complaint, the Vazquezes alleged that when they informed Ms. Chiu that they preferred
to stay in Business Class, Ms. Chiu "obstinately, uncompromisingly and in a loud, discourteous
and harsh voice threatened" that they could not board and leave with the flight unless they go to
First Class, since the Business Class was overbooked. Ms. Chiu’s loud and stringent shouting
annoyed, embarrassed, and humiliated them because the incident was witnessed by all the other
passengers waiting for boarding. They also claimed that they were unjustifiably delayed to board
the plane, and when they were finally permitted to get into the aircraft, the forward storage
compartment was already full. A flight stewardess instructed Dr. Vazquez to put his roll-on
luggage in the overhead storage compartment. Because he was not assisted by any of the crew
in putting up his luggage, his bilateral carpal tunnel syndrome was aggravated, causing him
extreme pain on his arm and wrist. The Vazquezes also averred that they "belong to the
uppermost and absolutely top elite of both Philippine Society and the Philippine financial
community, [and that] they were among the wealthiest persons in the Philippine[s]."
In its answer, Cathay alleged that it is a practice among commercial airlines to upgrade
passengers to the next better class of accommodation, whenever an opportunity arises, such as
when a certain section is fully booked. Priority in upgrading is given to its frequent flyers, who are
considered favored passengers like the Vazquezes. Thus, when the Business Class Section of
Flight CX-905 was fully booked, Cathay’s computer sorted out the names of favored passengers
for involuntary upgrading to First Class. When Ms. Chiu informed the Vazquezes that they were
upgraded to First Class, Dr. Vazquez refused. He then stood at the entrance of the boarding
apron, blocking the queue of passengers from boarding the plane, which inconvenienced other
passengers. He shouted that it was impossible for him and his wife to be upgraded without his
two friends who were traveling with them. Because of Dr. Vazquez’s outburst, Ms. Chiu thought
of upgrading the traveling companions of the Vazquezes. But when she checked the computer,
she learned that the Vazquezes’ companions did not have priority for upgrading. She then tried
to book the Vazquezes again to their original seats. However, since the Business Class Section
was already fully booked, she politely informed Dr. Vazquez of such fact and explained that the
upgrading was in recognition of their status as Cathay’s valued passengers. Finally, after talking
to their guests, the Vazquezes eventually decided to take the First Class accommodation.
33

Cathay also asserted that its employees at the Hong Kong airport acted in good faith in dealing
with the Vazquezes; none of them shouted, humiliated, embarrassed, or committed any act of
disrespect against them (the Vazquezes). Assuming that there was indeed a breach of
contractual obligation, Cathay acted in good faith, which negates any basis for their claim for
temperate, moral, and exemplary damages and attorney’s fees. Hence, it prayed for the
dismissal of the complaint and for payment of P100,000 for exemplary damages and P300,000
as attorney’s fees and litigation expenses.
During the trial, Dr. Vazquez testified to support the allegations in the complaint. His testimony
was corroborated by his two friends who were with him at the time of the incident, namely, Pacita
G. Cruz and Josefina Vergel de Dios.
For its part, Cathay presented documentary evidence and the testimonies of Mr. Yuen; Ms. Chiu;
Norma Barrientos, Comptroller of its retained counsel; and Mr. Robson. Yuen and Robson
testified on Cathay’s policy of upgrading the seat accommodation of its Marco Polo Club
members when an opportunity arises. The upgrading of the Vazquezes to First Class was done
in good faith; in fact, the First Class Section is definitely much better than the Business Class in
terms of comfort, quality of food, and service from the cabin crew. They also testified that
overbooking is a widely accepted practice in the airline industry and is in accordance with the
International Air Transport Association (IATA) regulations. Airlines overbook because a lot of
passengers do not show up for their flight. With respect to Flight CX-905, there was no overall
overbooking to a degree that a passenger was bumped off or downgraded. Yuen and Robson
also stated that the demand letter of the Vazquezes was immediately acted upon. Reports were
gathered from their office in Hong Kong and immediately forwarded to their counsel Atty.
Remollo for legal advice. However, Atty. Remollo begged off because his services were likewise
retained by the Vazquezes; nonetheless, he undertook to solve the problem in behalf of Cathay.
But nothing happened until Cathay received a copy of the complaint in this case. For her part,
Ms. Chiu denied that she shouted or used foul or impolite language against the Vazquezes. Ms.
Barrientos testified on the amount of attorney’s fees and other litigation expenses, such as those
for the taking of the depositions of Yuen and Chiu.
In its decision1 of 19 October 1998, the trial court found for the Vazquezes and decreed as
follows:
WHEREFORE, finding preponderance of evidence to sustain the instant complaint,
judgment is hereby rendered in favor of plaintiffs Vazquez spouses and against
defendant Cathay Pacific Airways, Ltd., ordering the latter to pay each plaintiff the
following:
a) Nominal damages in the amount of P100,000.00 for each plaintiff;
b) Moral damages in the amount of P2,000,000.00 for each plaintiff;
c) Exemplary damages in the amount of P5,000,000.00 for each plaintiff;
34
d) Attorney’s fees and expenses of litigation in the amount of
P1,000,000.00 for each plaintiff; and
e) Costs of suit.
SO ORDERED.
According to the trial court, Cathay offers various classes of seats from which passengers are
allowed to choose regardless of their reasons or motives, whether it be due to budgetary
constraints or whim. The choice imposes a clear obligation on Cathay to transport the
passengers in the class chosen by them. The carrier cannot, without exposing itself to liability,
force a passenger to involuntarily change his choice. The upgrading of the Vazquezes’
accommodation over and above their vehement objections was due to the overbooking of the
Business Class. It was a pretext to pack as many passengers as possible into the plane to
maximize Cathay’s revenues. Cathay’s actuations in this case displayed deceit, gross
negligence, and bad faith, which entitled the Vazquezes to awards for damages.
On appeal by the petitioners, the Court of Appeals, in its decision of 24 July 2001,2 deleted the
award for exemplary damages; and it reduced the awards for moral and nominal damages for
each of the Vazquezes to P250,000 and P50,000, respectively, and the attorney’s fees and
litigation expenses to P50,000 for both of them.
The Court of Appeals ratiocinated that by upgrading the Vazquezes to First Class, Cathay
novated the contract of carriage without the former’s consent. There was a breach of contract not
because Cathay overbooked the Business Class Section of Flight CX-905 but because the latter
pushed through with the upgrading despite the objections of the Vazquezes.
However, the Court of Appeals was not convinced that Ms. Chiu shouted at, or meant to be
discourteous to, Dr. Vazquez, although it might seemed that way to the latter, who was a
member of the elite in Philippine society and was not therefore used to being harangued by
anybody. Ms. Chiu was a Hong Kong Chinese whose fractured Chinese was difficult to
understand and whose manner of speaking might sound harsh or shrill to Filipinos because of
cultural differences. But the Court of Appeals did not find her to have acted with deliberate
malice, deceit, gross negligence, or bad faith. If at all, she was negligent in not offering the First
Class accommodations to other passengers. Neither can the flight stewardess in the First Class
Cabin be said to have been in bad faith when she failed to assist Dr. Vazquez in lifting his
baggage into the overhead storage bin. There is no proof that he asked for help and was refused
even after saying that he was suffering from "bilateral carpal tunnel syndrome." Anent the delay
of Yuen in responding to the demand letter of the Vazquezes, the Court of Appeals found it to
have been sufficiently explained.
The Vazquezes and Cathay separately filed motions for a reconsideration of the decision, both of
which were denied by the Court of Appeals.
34

Cathay seasonably filed with us this petition in this case. Cathay maintains that the award for
moral damages has no basis, since the Court of Appeals found that there was no "wanton,
fraudulent, reckless and oppressive" display of manners on the part of its personnel; and that the
breach of contract was not attended by fraud, malice, or bad faith. If any damage had been
suffered by the Vazquezes, it was damnum absque injuria, which is damage without injury,
damage or injury inflicted without injustice, loss or damage without violation of a legal right, or a
wrong done to a man for which the law provides no remedy. Cathay also invokes our decision in
United Airlines, Inc. v. Court of Appeals3 where we recognized that, in accordance with the Civil
Aeronautics Board’s Economic Regulation No. 7, as amended, an overbooking that does not
exceed ten percent cannot be considered deliberate and done in bad faith. We thus deleted in
that case the awards for moral and exemplary damages, as well as attorney’s fees, for lack of
proof of overbooking exceeding ten percent or of bad faith on the part of the airline carrier.
On the other hand, the Vazquezes assert that the Court of Appeals was correct in granting
awards for moral and nominal damages and attorney’s fees in view of the breach of contract
committed by Cathay for transferring them from the Business Class to First Class Section
without prior notice or consent and over their vigorous objection. They likewise argue that the
issuance of passenger tickets more than the seating capacity of each section of the plane is in
itself fraudulent, malicious and tainted with bad faith.
The key issues for our consideration are whether (1) by upgrading the seat accommodation of
the Vazquezes from Business Class to First Class Cathay breached its contract of carriage with
the Vazquezes; (2) the upgrading was tainted with fraud or bad faith; and (3) the Vazquezes are
entitled to damages.
We resolve the first issue in the affirmative.
A contract is a meeting of minds between two persons whereby one agrees to give something or
render some service to another for a consideration. There is no contract unless the following
requisites concur: (1) consent of the contracting parties; (2) an object certain which is the subject
of the contract; and (3) the cause of the obligation which is established.4 Undoubtedly, a contract
of carriage existed between Cathay and the Vazquezes. They voluntarily and freely gave their
consent to an agreement whose object was the transportation of the Vazquezes from Manila to
Hong Kong and back to Manila, with seats in the Business Class Section of the aircraft, and
whose cause or consideration was the fare paid by the Vazquezes to Cathay.
The only problem is the legal effect of the upgrading of the seat accommodation of the
Vazquezes. Did it constitute a breach of contract?
Breach of contract is defined as the "failure without legal reason to comply with the terms of a
contract."5 It is also defined as the "[f]ailure, without legal excuse, to perform any promise which
forms the whole or part of the contract."6
35
In previous cases, the breach of contract of carriage consisted in either the bumping off of a
passenger with confirmed reservation or the downgrading of a passenger’s seat accommodation
from one class to a lower class. In this case, what happened was the reverse. The contract
between the parties was for Cathay to transport the Vazquezes to Manila on a Business Class
accommodation in Flight CX-905. After checking-in their luggage at the Kai Tak Airport in Hong
Kong, the Vazquezes were given boarding cards indicating their seat assignments in the
Business Class Section. However, during the boarding time, when the Vazquezes presented
their boarding passes, they were informed that they had a seat change from Business Class to
First Class. It turned out that the Business Class was overbooked in that there were more
passengers than the number of seats. Thus, the seat assignments of the Vazquezes were given
to waitlisted passengers, and the Vazquezes, being members of the Marco Polo Club, were
upgraded from Business Class to First Class.
We note that in all their pleadings, the Vazquezes never denied that they were members of
Cathay’s Marco Polo Club. They knew that as members of the Club, they had priority for
upgrading of their seat accommodation at no extra cost when an opportunity arises. But, just like
other privileges, such priority could be waived. The Vazquezes should have been consulted first
whether they wanted to avail themselves of the privilege or would consent to a change of seat
accommodation before their seat assignments were given to other passengers. Normally, one
would appreciate and accept an upgrading, for it would mean a better accommodation. But,
whatever their reason was and however odd it might be, the Vazquezes had every right to
decline the upgrade and insist on the Business Class accommodation they had booked for and
which was designated in their boarding passes. They clearly waived their priority or preference
when they asked that other passengers be given the upgrade. It should not have been imposed
on them over their vehement objection. By insisting on the upgrade, Cathay breached its
contract of carriage with the Vazquezes.
We are not, however, convinced that the upgrading or the breach of contract was attended by
fraud or bad faith. Thus, we resolve the second issue in the negative.
Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are
serious accusations that can be so conveniently and casually invoked, and that is why they are
never presumed. They amount to mere slogans or mudslinging unless convincingly
substantiated by whoever is alleging them.
Fraud has been defined to include an inducement through insidious machination. Insidious
machination refers to a deceitful scheme or plot with an evil or devious purpose. Deceit exists
where the party, with intent to deceive, conceals or omits to state material facts and, by reason
of such omission or concealment, the other party was induced to give consent that would not
otherwise have been given.7
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or
some moral obliquity and conscious doing of a wrong, a breach of a known duty through some
motive or interest or ill will that partakes of the nature of fraud.8
35

We find no persuasive proof of fraud or bad faith in this case. The Vazquezes were not induced
to agree to the upgrading through insidious words or deceitful machination or through willful
concealment of material facts. Upon boarding, Ms. Chiu told the Vazquezes that their
accommodations were upgraded to First Class in view of their being Gold Card members of
Cathay’s Marco Polo Club. She was honest in telling them that their seats were already given to
other passengers and the Business Class Section was fully booked. Ms. Chiu might have failed
to consider the remedy of offering the First Class seats to other passengers. But, we find no bad
faith in her failure to do so, even if that amounted to an exercise of poor judgment.
Neither was the transfer of the Vazquezes effected for some evil or devious purpose. As testified
to by Mr. Robson, the First Class Section is better than the Business Class Section in terms of
comfort, quality of food, and service from the cabin crew; thus, the difference in fare between the
First Class and Business Class at that time was $250.9 Needless to state, an upgrading is for the
better condition and, definitely, for the benefit of the passenger.
We are not persuaded by the Vazquezes’ argument that the overbooking of the Business Class
Section constituted bad faith on the part of Cathay. Section 3 of the Economic Regulation No. 7
of the Civil Aeronautics Board, as amended, provides:
Sec 3. Scope. – This regulation shall apply to every Philippine and foreign air carrier
with respect to its operation of flights or portions of flights originating from or
terminating at, or serving a point within the territory of the Republic of the Philippines
insofar as it denies boarding to a passenger on a flight, or portion of a flight inside or
outside the Philippines, for which he holds confirmed reserved space. Furthermore,
this Regulation is designed to cover only honest mistakes on the part of the carriers
and excludes deliberate and willful acts of non-accommodation. Provided, however,
that overbooking not exceeding 10% of the seating capacity of the aircraft shall not be
considered as a deliberate and willful act of non-accommodation.
It is clear from this section that an overbooking that does not exceed ten percent is not
considered deliberate and therefore does not amount to bad faith.10 Here, while there was
admittedly an overbooking of the Business Class, there was no evidence of overbooking of the
plane beyond ten percent, and no passenger was ever bumped off or was refused to board the
aircraft.
Now we come to the third issue on damages.
The Court of Appeals awarded each of the Vazquezes moral damages in the amount of
P250,000. Article 2220 of the Civil Code provides:
Article 2220. Willful injury to property may be a legal ground for awarding moral
damages if the court should find that, under the circumstances, such damages are
justly due. The same rule applies to breaches of contract where the defendant acted
fraudulently or in bad faith.
36
Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, and similar injury. Although
incapable of pecuniary computation, moral damages may be recovered if they are the proximate
result of the defendant’s wrongful act or omission.11 Thus, case law establishes the following
requisites for the award of moral damages: (1) there must be an injury clearly sustained by the
claimant, whether physical, mental or psychological; (2) there must be a culpable act or omission
factually established; (3) the wrongful act or omission of the defendant is the proximate cause of
the injury sustained by the claimant; and (4) the award for damages is predicated on any of the
cases stated in Article 2219 of the Civil Code.12
Moral damages predicated upon a breach of contract of carriage may only be recoverable in
instances where the carrier is guilty of fraud or bad faith or where the mishap resulted in the
death of a passenger.13 Where in breaching the contract of carriage the airline is not shown to
have acted fraudulently or in bad faith, liability for damages is limited to the natural and probable
consequences of the breach of the obligation which the parties had foreseen or could have
reasonably foreseen. In such a case the liability does not include moral and exemplary
damages.14
In this case, we have ruled that the breach of contract of carriage, which consisted in the
involuntary upgrading of the Vazquezes’ seat accommodation, was not attended by fraud or bad
faith. The Court of Appeals’ award of moral damages has, therefore, no leg to stand on.
The deletion of the award for exemplary damages by the Court of Appeals is correct. It is a
requisite in the grant of exemplary damages that the act of the offender must be accompanied by
bad faith or done in wanton, fraudulent or malevolent manner.15 Such requisite is absent in this
case. Moreover, to be entitled thereto the claimant must first establish his right to moral,
temperate, or compensatory damages.16 Since the Vazquezes are not entitled to any of these
damages, the award for exemplary damages has no legal basis. And where the awards for moral
and exemplary damages are eliminated, so must the award for attorney’s fees.17
The most that can be adjudged in favor of the Vazquezes for Cathay’s breach of contract is an
award for nominal damages under Article 2221 of the Civil Code, which reads as follows:
Article 2221 of the Civil Code provides:
Article 2221. Nominal damages are adjudicated in order that a right of the plaintiff,
which has been violated or invaded by the defendant, may be vindicated or
recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered
by him.
Worth noting is the fact that in Cathay’s Memorandum filed with this Court, it prayed only for the
deletion of the award for moral damages. It deferred to the Court of Appeals’ discretion in
awarding nominal damages; thus:
36
 37

As far as the award of nominal damages is concerned, petitioner respectfully defers to WHEREFORE, the instant petition is hereby partly GRANTED. The Decision of the Court of
the Honorable Court of Appeals’ discretion. Aware as it is that somehow, due to the Appeals of 24 July 2001 in CA-G.R. CV No. 63339 is hereby MODIFIED, and as modified, the
resistance of respondents-spouses to the normally-appreciated gesture of petitioner awards for moral damages and attorney’s fees are set aside and deleted, and the award for
to upgrade their accommodations, petitioner may have disturbed the respondents- nominal damages is reduced to P5,000.
spouses’ wish to be with their companions (who traveled to Hong Kong with them) at
the Business Class on their flight to Manila. Petitioner regrets that in its desire to
provide the respondents-spouses with additional amenities for the one and one-half (1 No pronouncement on costs.
1/2) hour flight to Manila, unintended tension ensued.18
SO ORDERED.
Nonetheless, considering that the breach was intended to give more benefit and advantage to
the Vazquezes by upgrading their Business Class accommodation to First Class because of their
valued status as Marco Polo members, we reduce the award for nominal damages to P5,000.

Before writing finis to this decision, we find it well-worth to quote the apt observation of the Court
of Appeals regarding the awards adjudged by the trial court:

We are not amused but alarmed at the lower court’s unbelievable alacrity, bordering on the
scandalous, to award excessive amounts as damages. In their complaint, appellees asked for P1
million as moral damages but the lower court awarded P4 million; they asked for P500,000.00 as
exemplary damages but the lower court cavalierly awarded a whooping P10 million; they asked
for P250,000.00 as attorney’s fees but were awarded P2 million; they did not ask for nominal
damages but were awarded P200,000.00. It is as if the lower court went on a rampage, and why
it acted that way is beyond all tests of reason. In fact the excessiveness of the total award invites
the suspicion that it was the result of "prejudice or corruption on the part of the trial court."

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

The well-entrenched principle is that the grant of moral damages depends

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

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

Nonetheless, we agree with the injunction expressed by the Court of

Appeals that passengers must not prey on international airlines for damage
awards, like "trophies in a safari." After all neither the social standing nor G.R. No. 142305 December 10, 2003
prestige of the passenger should determine the extent to which he would
suffer because of a wrong done, since the dignity affronted in the individual
is a quality inherent in him and not conferred by these social indicators. 19 SINGAPORE AIRLINES LIMITED, petitioner,
vs.
ANDION FERNANDEZ, respondent.
We adopt as our own this observation of the Court of Appeals.

37

DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari assailing the Decision1 of the Court of Appeals which
affirmed in toto the decision2 of the Regional Trial Court of Pasig City, Branch 164 in Civil Case
No. 60985 filed by the respondent for damages.
The Case for the Respondent
Respondent Andion Fernandez is an acclaimed soprano here in the Philippines and abroad. At
the time of the incident, she was availing an educational grant from the Federal Republic of
Germany, pursuing a Master’s Degree in Music majoring in Voice.3
She was invited to sing before the King and Queen of Malaysia on February 3 and 4, 1991. For
this singing engagement, an airline passage ticket was purchased from petitioner Singapore
Airlines which would transport her to Manila from Frankfurt, Germany on January 28, 1991. From
Manila, she would proceed to Malaysia on the next day.4 It was necessary for the respondent to
pass by Manila in order to gather her wardrobe; and to rehearse and coordinate with her pianist
her repertoire for the aforesaid performance.
The petitioner issued the respondent a Singapore Airlines ticket for Flight No. SQ 27, leaving
Frankfurt, Germany on January 27, 1991 bound for Singapore with onward connections from
Singapore to Manila. Flight No. SQ 27 was scheduled to leave Frankfurt at 1:45 in the afternoon
of January 27, 1991, arriving at Singapore at 8:50 in the morning of January 28, 1991. The
connecting flight from Singapore to Manila, Flight No. SQ 72, was leaving Singapore at 11:00 in
the morning of January 28, 1991, arriving in Manila at 2:20 in the afternoon of the same day.5
On January 27, 1991, Flight No. SQ 27 left Frankfurt but arrived in Singapore two hours late or at
about 11:00 in the morning of January 28, 1991. By then, the aircraft bound for Manila had left as
scheduled, leaving the respondent and about 25 other passengers stranded in the Changi
Airport in Singapore.6
Upon disembarkation at Singapore, the respondent approached the transit counter who referred
her to the nightstop counter and told the lady employee thereat that it was important for her to
reach Manila on that day, January 28, 1991. The lady employee told her that there were no more
flights to Manila for that day and that respondent had no choice but to stay in Singapore. Upon
respondent’s persistence, she was told that she can actually fly to Hong Kong going to Manila
but since her ticket was non-transferable, she would have to pay for the ticket. The respondent
could not accept the offer because she had no money to pay for it.7 Her pleas for the respondent
to make arrangements to transport her to Manila were unheeded.8
38
The respondent then requested the lady employee to use their phone to make a call to Manila.
Over the employees’ reluctance, the respondent telephoned her mother to inform the latter that
she missed the connecting flight. The respondent was able to contact a family friend who picked
her up from the airport for her overnight stay in Singapore.9
The next day, after being brought back to the airport, the respondent proceeded to petitioner’s
counter which says: "Immediate Attention To Passengers with Immediate Booking." There were
four or five passengers in line. The respondent approached petitioner’s male employee at the
counter to make arrangements for immediate booking only to be told: "Can’t you see I am doing
something." She explained her predicament but the male employee uncaringly retorted: "It’s your
problem, not ours."10
The respondent never made it to Manila and was forced to take a direct flight from Singapore to
Malaysia on January 29, 1991, through the efforts of her mother and travel agency in Manila. Her
mother also had to travel to Malaysia bringing with her respondent’s wardrobe and personal
things needed for the performance that caused them to incur an expense of about P50,000.11
As a result of this incident, the respondent’s performance before the Royal Family of Malaysia
was below par. Because of the rude and unkind treatment she received from the petitioner’s
personnel in Singapore, the respondent was engulfed with fear, anxiety, humiliation and
embarrassment causing her to suffer mental fatigue and skin rashes. She was thereby
compelled to seek immediate medical attention upon her return to Manila for "acute urticaria."12
On June 15, 1993, the RTC rendered a decision with the following dispositive portion:
ACCORDINGLY and as prayed for, defendant Singapore Airlines is ordered to pay herein
plaintiff Andion H. Fernandez the sum of:
1. FIFTY THOUSAND (P50,000.00) PESOS as compensatory or actual damages;
2. TWO HUNDRED and FIFTY THOUSAND (P250,000.00) PESOS as moral
damages considering plaintiff’s professional standing in the field of culture at home
and abroad;
3. ONE HUNDRED THOUSAND (P100,000.00) PESOS as exemplary damages;
4. SEVENTY-FIVE THOUSAND (P75,000.00) PESOS as attorney’s fees; and
5. To pay the costs of suit.
SO ORDERED.13
38

The petitioner appealed the decision to the Court of Appeals.
On June 10, 1998, the CA promulgated the assailed decision finding no reversible error in the
appealed decision of the trial court.14
Forthwith, the petitioner filed the instant petition for review, raising the following errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING IN TOTO THE DECISION
OF THE TRIAL COURT THAT AWARDED DAMAGES TO RESPONDENT FOR THE ALLEGED
FAILURE OF THE PETITIONER TO EXERCISE EXTRAORDINARY DILIGENCE.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER
ACTED IN BAD FAITH.
III
THE HONORABLE COURT OF APPEALS ERRED IN DISMISSING THE PETITIONER’S
COUNTERCLAIMS.15
The petitioner assails the award of damages contending that it exercised the extraordinary
diligence required by law under the given circumstances. The delay of Flight No. SQ 27 from
Frankfurt to Singapore on January 28, 1991 for more than two hours was due to a fortuitous
event and beyond petitioner’s control. Inclement weather prevented the petitioner’s plane coming
from Copenhagen, Denmark to arrive in Frankfurt on time on January 27, 1991. The plane could
not take off from the airport as the place was shrouded with fog. This delay caused a "snowball
effect" whereby the other flights were consequently delayed. The plane carrying the respondent
arrived in Singapore two (2) hours behind schedule.16 The delay was even compounded when
the plane could not travel the normal route which was through the Middle East due to the raging
Gulf War at that time. It had to pass through the restricted Russian airspace which was more
congested.17
Under these circumstances, petitioner therefore alleged that it cannot be faulted for the delay in
arriving in Singapore on January 28, 1991 and causing the respondent to miss her connecting
flight to Manila.
The petitioner further contends that it could not also be held in bad faith because its personnel
did their best to look after the needs and interests of the passengers including the respondent.
Because the respondent and the other 25 passengers missed their connecting flight to Manila,
39
the petitioner automatically booked them to the flight the next day and gave them free hotel
accommodations for the night. It was respondent who did not take petitioner’s offer and opted to
stay with a family friend in Singapore.
The petitioner also alleges that the action of the respondent was baseless and it tarnished its
good name and image earned through the years for which, it was entitled to damages in the
amount of ₱1,000,000; exemplary damages of ₱500,000; and attorney’s fees also in the amount
of ₱500,000.18
The petition is barren of merit.
When an airline issues a ticket to a passenger, confirmed for a particular flight on a certain date,
a contract of carriage arises. The passenger then has every right to expect that he be
transported on that flight and on that date. If he does not, then the carrier opens itself to a suit for
a breach of contract of carriage.19
The contract of air carriage is a peculiar one. Imbued with public interest, the law requires
common carriers to carry the passengers safely as far as human care and foresight can provide,
using the utmost diligence of very cautious persons with due regard for all the circumstances.20
In an action for breach of contract of carriage, the aggrieved party does not have to prove that
the common carrier was at fault or was negligent. All that is necessary to prove is the existence
of the contract and the fact of its non-performance by the carrier.21
In the case at bar, it is undisputed that the respondent carried a confirmed ticket for the two-
legged trip from Frankfurt to Manila: 1) Frankfurt-Singapore; and 2) Singapore-Manila. In her
contract of carriage with the petitioner, the respondent certainly expected that she would fly to
Manila on Flight No. SQ 72 on January 28, 1991. Since the petitioner did not transport the
respondent as covenanted by it on said terms, the petitioner clearly breached its contract of
carriage with the respondent. The respondent had every right to sue the petitioner for this
breach. The defense that the delay was due to fortuitous events and beyond petitioner’s control
is unavailing. In PAL vs. CA,22 we held that:
.... Undisputably, PAL’s diversion of its flight due to inclement weather was a fortuitous event.
Nonetheless, such occurrence did not terminate PAL’s contract with its passengers. Being in the
business of air carriage and the sole one to operate in the country, PAL is deemed to be
equipped to deal with situations as in the case at bar. What we said in one case once again must
be stressed, i.e., the relation of carrier and passenger continues until the latter has been landed
at the port of destination and has left the carrier’s premises. Hence, PAL necessarily would still
have to exercise extraordinary diligence in safeguarding the comfort, convenience and safety of
its stranded passengers until they have reached their final destination...
...
39

"...If the cause of non-fulfillment of the contract is due to a fortuitous event, it has to be the sole
and only cause (Art. 1755 C.C., Art. 1733 C.C.). Since part of the failure to comply with the
obligation of common carrier to deliver its passengers safely to their destination lay in the
defendant’s failure to provide comfort and convenience to its stranded passengers using
extraordinary diligence, the cause of non-fulfillment is not solely and exclusively due to fortuitous
event, but due to something which defendant airline could have prevented, defendant becomes
liable to plaintiff."
Indeed, in the instant case, petitioner was not without recourse to enable it to fulfill its obligation
to transport the respondent safely as scheduled as far as human care and foresight can provide
to her destination. Tagged as a premiere airline as it claims to be and with the complexities of air
travel, it was certainly well-equipped to be able to foresee and deal with such situation. The
petitioner’s indifference and negligence by its absence and insensitivity was exposed by the trial
court, thus:
(a) Under Section 9.1 of its Traffic Manual (Exhibit 4) "…flights can be delayed to
await the uplift of connecting cargo and passengers arriving on a late in-bound
flight…" As adverted to by the trial court,…"Flight SQ-27/28 maybe delayed for about
half an hour to transfer plaintiff to her connecting flight. As pointed out above, delay is
normal in commercial air transportation" (RTC Decision, p. 22); or
(b) Petitioner airlines could have carried her on one of its flights bound for Hongkong
and arranged for a connecting flight from Hongkong to Manila all on the same date.
But then the airline personnel who informed her of such possibility told her that she
has to pay for that flight. Regrettably, respondent did not have sufficient funds to pay
for it. (TSN, 30 March 1992, pp.8-9; RTC Decision, pp. 22-23) Knowing the
predicament of the respondent, petitioner did not offer to shoulder the cost of the
ticket for that flight; or
(c) As noted by the trial court from the account of petitioner’s witness, Bob
Khkimyong, that "a passenger such as the plaintiff could have been accommodated in
another international airline such as Lufthansa to bring the plaintiff to Singapore early
enough from Frankfurt provided that there was prior communication from that station
to enable her to catch the connecting flight to Manila because of the urgency of her
business in Manila…(RTC Decision, p. 23)
The petitioner’s diligence in communicating to its passengers the consequences of the delay in
their flights was wanting. As elucidated by the trial court:
It maybe that delay in the take off and arrival of commercial aircraft could not be avoided and
may be caused by diverse factors such as those testified to by defendant’s pilot. However,
knowing fully well that even before the plaintiff boarded defendant’s Jumbo aircraft in Frankfurt
bound for Singapore, it has already incurred a delay of two hours. Nevertheless, defendant did
not take the trouble of informing plaintiff, among its other passengers of such a delay and that in
such a case, the usual practice of defendant airline will be that they have to stay overnight at
40
their connecting airport; and much less did it inquire from the plaintiff and the other 25
passengers bound for Manila whether they are amenable to stay overnight in Singapore and to
take the connecting flight to Manila the next day. Such information should have been given and
inquiries made in Frankfurt because even the defendant airline’s manual provides that in case of
urgency to reach his or her destination on the same date, the head office of defendant in
Singapore must be informed by telephone or telefax so as the latter may make certain
arrangements with other airlines in Frankfurt to bring such a passenger with urgent business to
Singapore in such a manner that the latter can catch up with her connecting flight such as S-
27/28 without spending the night in Singapore…23
The respondent was not remiss in conveying her apprehension about the delay of the flight when
she was still in Frankfurt. Upon the assurance of petitioner’s personnel in Frankfurt that she will
be transported to Manila on the same date, she had every right to expect that obligation fulfilled.
She testified, to wit:
Q: Now, since you were late, when the plane that arrived from Frankfurt was late, did you not
make arrangements so that your flight from Singapore to Manila would be adjusted?
A: I asked the lady at the ticket counter, the one who gave the boarding pass in Frankfurt and I
asked her, "Since my flight going to Singapore would be late, what would happen to my
Singapore-Manila flight?" and then she said, "Don’t worry, Singapore Airlines would be
responsible to bring you to Manila on the same date." And then they have informed the name of
the officer, or whatever, that our flight is going to be late.24
When a passenger contracts for a specific flight, he has a purpose in making that choice which
must be respected. This choice, once exercised, must not be impaired by a breach on the part of
the airline without the latter incurring any liability.25 For petitioner’s failure to bring the
respondent to her destination, as scheduled, we find the petitioner clearly liable for the breach of
its contract of carriage with the respondent.
We are convinced that the petitioner acted in bad faith.1âwphi1 Bad faith means a breach of
known duty through some motive of interest or ill will. Self-enrichment or fraternal interest, and
not personal ill will, may well have been the motive; but it is malice nevertheless.26 Bad faith
was imputed by the trial court when it found that the petitioner’s employees at the Singapore
airport did not accord the respondent the attention and treatment allegedly warranted under the
circumstances. The lady employee at the counter was unkind and of no help to her. The
respondent further alleged that without her threats of suing the company, she was not allowed to
use the company’s phone to make long distance calls to her mother in Manila. The male
employee at the counter where it says: "Immediate Attention to Passengers with Immediate
Booking" was rude to her when he curtly retorted that he was busy attending to other
passengers in line. The trial court concluded that this inattentiveness and rudeness of petitioner’s
personnel to respondent’s plight was gross enough amounting to bad faith. This is a finding that
is generally binding upon the Court which we find no reason to disturb.
40
 41

Article 2232 of the Civil Code provides that in a contractual or quasi-contractual relationship,
exemplary damages may be awarded only if the defendant had acted in a "wanton, fraudulent,
reckless, oppressive or malevolent manner." In this case, petitioner’s employees acted in a
wanton, oppressive or malevolent manner. The award of exemplary damages is, therefore,
warranted in this case.

WHEREFORE, the Petition is DENIED. The Decision of the Court of Appeals is AFFIRMED.

SO ORDERED.

G.R. No. 171545 December 19, 2007

41

EQUITABLE PCI BANK,* AIMEE YU and BEJAN LIONEL APAS, Petitioners,
vs.
NG SHEUNG NGOR** doing business under the name and style "KEN MARKETING," KEN
APPLIANCE DIVISION, INC. and BENJAMIN E. GO, Respondents.
DECISION
CORONA, J.:
This petition for review on certiorari1 seeks to set aside the decision2 of the Court of Appeals
(CA) in CA-G.R. SP No. 83112 and its resolution3 denying reconsideration.
On October 7, 2001, respondents Ng Sheung Ngor,4 Ken Appliance Division, Inc. and Benjamin
E. Go filed an action for annulment and/or reformation of documents and contracts 5 against
petitioner Equitable PCI Bank (Equitable) and its employees, Aimee Yu and Bejan Lionel Apas,
in the Regional Trial Court (RTC), Branch 16 of Cebu City.6 They claimed that Equitable induced
them to avail of its peso and dollar credit facilities by offering low interest rates7 so they accepted
Equitable's proposal and signed the bank's pre-printed promissory notes on various dates
beginning 1996. They, however, were unaware that the documents contained identical
escalation clauses granting Equitable authority to increase interest rates without their consent. 8
Equitable, in its answer, asserted that respondents knowingly accepted all the terms and
conditions contained in the promissory notes.9 In fact, they continuously availed of and benefited
from Equitable's credit facilities for five years.10
After trial, the RTC upheld the validity of the promissory notes. It found that, in 2001 alone,
Equitable restructured respondents' loans amounting to US$228,200 and ₱1,000,000.11 The trial
court, however, invalidated the escalation clause contained therein because it violated the
principle of mutuality of contracts.12 Nevertheless, it took judicial notice of the steep depreciation
of the peso during the intervening period13 and declared the existence of extraordinary
deflation.14 Consequently, the RTC ordered the use of the 1996 dollar exchange rate in
computing respondents' dollar-denominated loans.15 Lastly, because the business reputation of
respondents was (allegedly) severely damaged when Equitable froze their accounts,16 the trial
court awarded moral and exemplary damages to them.17
The dispositive portion of the February 5, 2004 RTC decision18 provided:
WHEREFORE, premises considered, judgment is hereby rendered:
A) Ordering [Equitable] to reinstate and return the amount of [respondents'] deposit
placed on hold status;
42
B) Ordering [Equitable] to pay [respondents] the sum of ₱12 [m]illion [p]esos as moral
damages;
C) Ordering [Equitable] to pay [respondents] the sum of ₱10 [m]illion [p]esos as
exemplary damages;
D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay [respondents],
jointly and severally, the sum of [t]wo [m]illion [p]esos as moral and exemplary
damages;
E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and severally, to pay
[respondents'] attorney's fees in the sum of ₱300,000; litigation expenses in the sum
of ₱50,000 and the cost of suit;
F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay [Equitable] the
unpaid principal obligation for the peso loan as well as the unpaid obligation for the
dollar denominated loan;
G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay [Equitable] interest
as follows:
1) 12% per annum for the peso loans;
2) 8% per annum for the dollar loans. The basis for the payment of the
dollar obligation is the conversion rate of P26.50 per dollar availed of at the
time of incurring of the obligation in accordance with Article 1250 of the
Civil Code of the Philippines;
H) Dismissing [Equitable's] counterclaim except the payment of the aforestated
unpaid principal loan obligations and interest.
SO ORDERED.19
Equitable and respondents filed their respective notices of appeal.20
In the March 1, 2004 order of the RTC, both notices were denied due course because Equitable
and respondents "failed to submit proof that they paid their respective appeal fees."21
WHEREFORE, premises considered, the appeal interposed by defendants from the Decision in
the above-entitled case is DENIED due course. As of February 27, 2004, the Decision dated
42

February 5, 2004, is considered final and executory in so far as [Equitable, Aimee Yu and
Bejan Lionel Apas] are concerned.22 (emphasis supplied)
Equitable moved for the reconsideration of the March 1, 2004 order of the RTC23 on the ground
that it did in fact pay the appeal fees. Respondents, on the other hand, prayed for the issuance
of a writ of execution.24
On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for
reconsideration for lack of merit25 and ordered the issuance of a writ of execution in favor of
respondents.26 According to the RTC, because respondents did not move for the reconsideration
of the previous order (denying due course to the parties’ notices of appeal),27 the February 5,
2004 decision became final and executory as to both parties and a writ of execution against
Equitable was in order.28
A writ of execution was thereafter issued29 and three real properties of Equitable were levied
upon.30
On March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1, 2004
order.31 It, however, withdrew that petition on March 30, 200432 and instead filed a petition for
certiorari with an application for an injunction in the CA to enjoin the implementation and
execution of the March 24, 2004 omnibus order.33
On June 16, 2004, the CA granted Equitable's application for injunction. A writ of preliminary
injunction was correspondingly issued.34
Notwithstanding the writ of injunction, the properties of Equitable previously levied upon were
sold in a public auction on July 1, 2004. Respondents were the highest bidders and certificates
of sale were issued to them.35
On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to cite the
sheriffs who conducted the sale in contempt for proceeding with the auction despite the
injunction order of the CA.36
On October 28, 2005, the CA dismissed the petition for certiorari.37 It found Equitable guilty of
forum shopping because the bank filed its petition for certiorari in the CA several hours before
withdrawing its petition for relief in the RTC.38 Moreover, Equitable failed to disclose, both in the
statement of material dates and certificate of non-forum shopping (attached to its petition for
certiorari in the CA), that it had a pending petition for relief in the RTC.39
Equitable moved for reconsideration40 but it was denied.41 Thus, this petition.
Equitable asserts that it was not guilty of forum shopping because the petition for relief was
withdrawn on the same day the petition for certiorari was filed.42 It likewise avers that its petition
43
for certiorari was meritorious because the RTC committed grave abuse of discretion in issuing
the March 24, 2004 omnibus order which was based on an erroneous assumption. The March 1,
2004 order denying its notice of appeal for non payment of appeal fees was erroneous because
it had in fact paid the required fees.43 Thus, the RTC, by issuing its March 24, 2004 omnibus
order, effectively prevented Equitable from appealing the patently wrong February 5, 2004
decision.44
This petition is meritorious.
Equitable Was Not Guilty Of Forum shopping
Forum shopping exists when two or more actions involving the same transactions, essential facts
and circumstances are filed and those actions raise identical issues, subject matter and causes
of action.45 The test is whether, in two or more pending cases, there is identity of parties, rights
or causes of actions and reliefs.46
Equitable's petition for relief in the RTC and its petition for certiorari in the CA did not have
identical causes of action. The petition for relief from the denial of its notice of appeal was based
on the RTC’s judgment or final order preventing it from taking an appeal by "fraud, accident,
mistake or excusable negligence."47 On the other hand, its petition for certiorari in the CA, a
special civil action, sought to correct the grave abuse of discretion amounting to lack of
jurisdiction committed by the RTC.48
In a petition for relief, the judgment or final order is rendered by a court with competent
jurisdiction. In a petition for certiorari, the order is rendered by a court without or in excess of its
jurisdiction.
Moreover, Equitable substantially complied with the rule on non-forum shopping when it moved
to withdraw its petition for relief in the RTC on the same day (in fact just four hours and forty
minutes after) it filed the petition for certiorari in the CA. Even if Equitable failed to disclose that it
had a pending petition for relief in the RTC, it rectified what was doubtlessly a careless oversight
by withdrawing the petition for relief just a few hours after it filed its petition for certiorari in the
CA ― a clear indication that it had no intention of maintaining the two actions at the same time.
The Trial Court Committed Grave Abuse of Discretion In Issuing Its March 1, 2004 and
March 24, 2004 Orders
Section 1, Rule 65 of the Rules of Court provides:
Section 1. Petition for Certiorari. When any tribunal, board or officer exercising judicial or
quasi-judicial function has acted without or in excess of its or his jurisdiction, or with
grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no
appeal, nor any plain, speedy or adequate remedy in the ordinary course of law, a person
43

aggrieved thereby may file a verified petition in the proper court, alleging the facts with certainty
and praying that judgment be rendered annulling or modifying the proceedings of such tribunal,
board or officer, and granting such incidental reliefs as law and justice may require.
The petition shall be accompanied by a certified true copy of the judgment, order or resolution
subject thereof, copies of all pleadings and documents relevant and pertinent thereto, and a
sworn certificate of non-forum shopping as provided in the third paragraph of Section 3, Rule 46.
There are two substantial requirements in a petition for certiorari. These are:
1. that the tribunal, board or officer exercising judicial or quasi-judicial functions acted
without or in excess of his or its jurisdiction or with grave abuse of discretion
amounting to lack or excess of jurisdiction; and
2. that there is no appeal or any plain, speedy and adequate remedy in the ordinary
course of law.
For a petition for certiorari premised on grave abuse of discretion to prosper, petitioner must
show that the public respondent patently and grossly abused his discretion and that abuse
amounted to an evasion of positive duty or a virtual refusal to perform a duty enjoined by law or
to act at all in contemplation of law, as where the power was exercised in an arbitrary and
despotic manner by reason of passion or hostility.49
The March 1, 2004 order denied due course to the notices of appeal of both Equitable and
respondents. However, it declared that the February 5, 2004 decision was final and executory
only with respect to Equitable.50 As expected, the March 24, 2004 omnibus order denied
Equitable's motion for reconsideration and granted respondents' motion for the issuance of a writ
of execution.51
The March 1, 2004 and March 24, 2004 orders of the RTC were obviously intended to prevent
Equitable, et al. from appealing the February 5, 2004 decision. Not only that. The execution of
the decision was undertaken with indecent haste, effectively obviating or defeating Equitable's
right to avail of possible legal remedies. No matter how we look at it, the RTC committed grave
abuse of discretion in rendering those orders.
With regard to whether Equitable had a plain, speedy and adequate remedy in the ordinary
course of law, we hold that there was none. The RTC denied due course to its notice of appeal in
the March 1, 2004 order. It affirmed that denial in the March 24, 2004 omnibus order. Hence,
there was no way Equitable could have possibly appealed the February 5, 2004 decision.52
Although Equitable filed a petition for relief from the March 24, 2004 order, that petition was not a
plain, speedy and adequate remedy in the ordinary course of law.53 A petition for relief under
44
Rule 38 is an equitable remedy allowed only in exceptional circumstances or where there is no
other available or adequate remedy.54
Thus, we grant Equitable's petition for certiorari and consequently give due course to its appeal.
Equitable Raised Pure Questions of Law in Its Petition For Review
The jurisdiction of this Court in Rule 45 petitions is limited to questions of law.55 There is a
question of law "when the doubt or controversy concerns the correct application of law or
jurisprudence to a certain set of facts; or when the issue does not call for the probative value of
the evidence presented, the truth or falsehood of facts being admitted."56
Equitable does not assail the factual findings of the trial court. Its arguments essentially focus on
the nullity of the RTC’s February 5, 2004 decision. Equitable points out that that decision was
patently erroneous, specially the exorbitant award of damages, as it was inconsistent with
existing law and jurisprudence.57
The Promissory Notes Were Valid
The RTC upheld the validity of the promissory notes despite respondents’ assertion that those
documents were contracts of adhesion.
A contract of adhesion is a contract whereby almost all of its provisions are drafted by one
party.58 The participation of the other party is limited to affixing his signature or his "adhesion" to
the contract.59 For this reason, contracts of adhesion are strictly construed against the party who
drafted it.60
It is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are, on
the contrary, as binding as ordinary contracts. A party is in reality free to accept or reject it. A
contract of adhesion becomes void only when the dominant party takes advantage of the
weakness of the other party, completely depriving the latter of the opportunity to bargain on
equal footing.61
That was not the case here. As the trial court noted, if the terms and conditions offered by
Equitable had been truly prejudicial to respondents, they would have walked out and negotiated
with another bank at the first available instance. But they did not. Instead, they continuously
availed of Equitable's credit facilities for five long years.
While the RTC categorically found that respondents had outstanding dollar- and peso-
denominated loans with Equitable, it, however, failed to ascertain the total amount due (principal,
interest and penalties, if any) as of July 9, 2001. The trial court did not explain how it arrived at
the amounts of US$228,200 and ₱1,000,000.62 In Metro Manila Transit Corporation v. D.M.
Consunji,63 we reiterated that this Court is not a trier of facts and it shall pass upon them only for
44

compelling reasons which unfortunately are not present in this case.64 Hence, we ordered the
partial remand of the case for the sole purpose of determining the amount of actual damages. 65
Escalation Clause Violated The Principle Of Mutuality Of Contracts
Escalation clauses are not void per se. However, one "which grants the creditor an unbridled
right to adjust the interest independently and upwardly, completely depriving the debtor of the
right to assent to an important modification in the agreement" is void. Clauses of that nature
violate the principle of mutuality of contracts.66 Article 130867 of the Civil Code holds that a
contract must bind both contracting parties; its validity or compliance cannot be left to the will of
one of them.68
For this reason, we have consistently held that a valid escalation clause provides:
1. that the rate of interest will only be increased if the applicable maximum rate of interest is
increased by law or by the Monetary Board; and
2. that the stipulated rate of interest will be reduced if the applicable maximum rate of interest is
reduced by law or by the Monetary Board (de-escalation clause).69
The RTC found that Equitable's promissory notes uniformly stated:
If subject promissory note is extended, the interest for subsequent extensions shall be at such
rate as shall be determined by the bank.70
Equitable dictated the interest rates if the term (or period for repayment) of the loan was
extended. Respondents had no choice but to accept them. This was a violation of Article 1308 of
the Civil Code. Furthermore, the assailed escalation clause did not contain the necessary
provisions for validity, that is, it neither provided that the rate of interest would be increased only
if allowed by law or the Monetary Board, nor allowed de-escalation. For these reasons, the
escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National
Bank71 we held that, because the escalation clause was annulled, the principal amount of the
loan was subject to the original or stipulated rate of interest. Upon maturity, the amount due was
subject to legal interest at the rate of 12% per annum.72
Consequently, respondents should pay Equitable the interest rates of 12.66% p.a. for their
dollar-denominated loans and 20% p.a. for their peso-denominated loans from January 10, 2001
to July 9, 2001. Thereafter, Equitable was entitled to legal interest of 12% p.a. on all amounts
due.
45
There Was No Extraordinary Deflation
Extraordinary inflation exists when there is an unusual decrease in the purchasing power of
currency (that is, beyond the common fluctuation in the value of currency) and such decrease
could not be reasonably foreseen or was manifestly beyond the contemplation of the parties at
the time of the obligation. Extraordinary deflation, on the other hand, involves an inverse
situation.73
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should
intervene, the value of the currency at the time of the establishment of the obligation shall be the
basis of payment, unless there is an agreement to the contrary.
For extraordinary inflation (or deflation) to affect an obligation, the following requisites must be
proven:
1. that there was an official declaration of extraordinary inflation or deflation from the
Bangko Sentral ng Pilipinas (BSP);74
2. that the obligation was contractual in nature;75 and
3. that the parties expressly agreed to consider the effects of the extraordinary
inflation or deflation.76
Despite the devaluation of the peso, the BSP never declared a situation of extraordinary inflation.
Moreover, although the obligation in this instance arose out of a contract, the parties did not
agree to recognize the effects of extraordinary inflation (or deflation).77 The RTC never
mentioned that there was a such stipulation either in the promissory note or loan agreement.
Therefore, respondents should pay their dollar-denominated loans at the exchange rate fixed by
the BSP on the date of maturity.78
The Award Of Moral And Exemplary Damages Lacked Basis
Moral damages are in the category of an award designed to compensate the claimant for actual
injury suffered, not to impose a penalty to the wrongdoer.79 To be entitled to moral damages, a
claimant must prove:
1. That he or she suffered besmirched reputation, or physical, mental or psychological
suffering sustained by the claimant;
45

2. That the defendant committed a wrongful act or omission;
3. That the wrongful act or omission was the proximate cause of the damages the
claimant sustained;
4. The case is predicated on any of the instances expressed or envisioned by Article
221980 and 222081 . 82
In culpa contractual or breach of contract, moral damages are recoverable only if the defendant
acted fraudulently or in bad faith or in wanton disregard of his contractual obligations.83 The
breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive. 84
The RTC found that respondents did not pay Equitable the interest due on February 9, 2001 (or
any month thereafter prior to the maturity of the loan)85 or the amount due (principal plus
interest) due on July 9, 2001.86 Consequently, Equitable applied respondents' deposits to their
loans upon maturity.
The relationship between a bank and its depositor is that of creditor and debtor. 87 For this
reason, a bank has the right to set-off the deposits in its hands for the payment of a depositor's
indebtedness.88
Respondents indeed defaulted on their obligation. For this reason, Equitable had the option to
exercise its legal right to set-off or compensation. However, the RTC mistakenly (or, as it now
appears, deliberately) concluded that Equitable acted "fraudulently or in bad faith or in wanton
disregard" of its contractual obligations despite the absence of proof. The undeniable fact was
that, whatever damage respondents sustained was purely the consequence of their failure to
pay their loans. There was therefore absolutely no basis for the award of moral damages to
them.
Neither was there reason to award exemplary damages. Since respondents were not entitled to
moral damages, neither should they be awarded exemplary damages.89 And if respondents were
not entitled to moral and exemplary damages, neither could they be awarded attorney's fees and
litigation expenses.90
ACCORDINGLY, the petition is hereby GRANTED.
The October 28, 2005 decision and February 3, 2006 resolution of the Court of Appeals in CA-
G.R. SP No. 83112 are hereby REVERSED and SET ASIDE.
The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City in Civil
Case No. CEB-26983 is hereby ANNULLED for being rendered with grave abuse of discretion
amounting to lack or excess of jurisdiction. All proceedings undertaken pursuant thereto are
likewise declared null and void.
46
The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No.
CEB-26983 is hereby SET ASIDE. The appeal of petitioners Equitable PCI Bank, Aimee Yu and
Bejan Lionel Apas is therefore given due course.1avvphi1
The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City in Civil Case
No. CEB-26983 is accordingly SET ASIDE. New judgment is hereby entered:
1. ordering respondents Ng Sheung Ngor, doing business under the name and style
of "Ken Marketing," Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner
Equitable PCI Bank the principal amount of their dollar- and peso-denominated loans;
2. ordering respondents Ng Sheung Ngor, doing business under the name and style
of "Ken Marketing," Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner
Equitable PCI Bank interest at:
a) 12.66% p.a. with respect to their dollar-denominated loans from January
10, 2001 to July 9, 2001;
b) 20% p.a. with respect to their peso-denominated loans from January 10,
2001 to July 9, 2001;91
c) pursuant to our ruling in Eastern Shipping Lines v. Court of Appeals,92
the total amount due on July 9, 2001 shall earn legal interest at 12% p.a.
from the time petitioner Equitable PCI Bank demanded payment, whether
judicially or extra-judicially; and
d) after this Decision becomes final and executory, the applicable rate shall
be 12% p.a. until full satisfaction;
3. all other claims and counterclaims are dismissed.
As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall compute the exact
amounts due on the respective dollar-denominated and peso-denominated loans, as of July 9,
2001, of respondents Ng Sheung Ngor, doing business under the name and style of "Ken
Marketing," Ken Appliance Division and Benjamin E. Go.
SO ORDERED.
G.R. No. 175490 September 17, 2009
46
 47

ILEANA DR. MACALINAO, Petitioner, 8/27/2003 123,375.65 1,050.20 4,009.71 128,435.56

vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent. 9/28/2003 128,435.56 1,435.51 4,174.16 134,045.23
10/28/2003
DECISION
11/28/2003

VELASCO, JR., J.: 12/28/2003

1/27/2004 141,518.34 8,491.10 4,599.34 154,608.78
The Case

Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit and BPI
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to Mastercard, the charges or balance thereof remaining unpaid after the payment due date
reverse and set aside the June 30, 2006 Decision1 of the Court of Appeals (CA) and its indicated on the monthly Statement of Accounts shall bear interest at the rate of 3% per month
November 21, 2006 Resolution2 denying petitioner’s motion for reconsideration. and an additional penalty fee equivalent to another 3% per month. Particularly:

The Facts 8. PAYMENT OF CHARGES – BCC shall furnish the Cardholder a monthly Statement of
Account (SOA) and the Cardholder agrees that all charges made through the use of the CARD
Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard, one of the credit shall be paid by the Cardholder as stated in the SOA on or before the last day for payment,
card facilities of respondent Bank of the Philippine Islands (BPI).3 Petitioner Macalinao made which is twenty (20) days from the date of the said SOA, and such payment due date may be
some purchases through the use of the said credit card and defaulted in paying for said changed to an earlier date if the Cardholder’s account is considered overdue and/or with
purchases. She subsequently received a letter dated January 5, 2004 from respondent BPI, balances in excess of the approved credit limit, or to such other date as may be deemed proper
demanding payment of the amount of one hundred forty-one thousand five hundred eighteen by the CARD issuer with notice to the Cardholder on the same monthly SOA. If the last day fall
pesos and thirty-four centavos (PhP 141,518.34), as follows: on a Saturday, Sunday or a holiday, the last day for the payment automatically becomes the last
working day prior to said payment date. However, notwithstanding the absence or lack of proof
of service of the SOA of the Cardholder, the latter shall pay any and all charges made through
Statement Previous Purchases Penalty Finance the use of the CARD within thirty (30) days from date or dates thereof. Failure of the Cardholder
Balance Due to pay the charges made through the CARD within the payment period as stated in the SOA or
Date Balance (Payments) Interest Charges
within thirty (30) days from actual date or dates of purchase whichever occur earlier, shall render
10/27/2002 94,843.70 559.72 3,061.99 98,456.41 him in default without the necessity of demand from BCC, which the Cardholder expressly
waives. The charges or balance thereof remaining unpaid after the payment due date indicated
11/27/2002 98,465.41 (15,000) 0 2,885.61 86,351.02 on the monthly Statement of Accounts shall bear interest at the rate of 3% per month for BPI
12/31/2002 86,351.02 30,308.80 259.05 2,806.41 119,752.28 Express Credit, BPI Gold Mastercard and an additional penalty fee equivalent to another 3% of
the amount due for every month or a fraction of a month’s delay. PROVIDED that if there occurs
1/27/2003 119,752.28 618.23 3,891.07 124,234.58 any change on the prevailing market rates, BCC shall have the option to adjust the rate of
interest and/or penalty fee due on the outstanding obligation with prior notice to the cardholder.
2/27/2003 124,234.58 990.93 4,037.62 129,263.13 The Cardholder hereby authorizes BCC to correspondingly increase the rate of such interest [in]
the event of changes in the prevailing market rates, and to charge additional service fees as may
3/27/2003 129,263.13 (18,000.00) 298.72 3,616.05 115,177.90
be deemed necessary in order to maintain its service to the Cardholder. A CARD with
4/27/2003 115,177.90 644.26 3,743.28 119,565.44 outstanding balance unpaid after thirty (30) days from original billing statement date shall
automatically be suspended, and those with accounts unpaid after ninety (90) days from said
5/27/2003 119,565.44 (10,000.00) 402.95 3,571.71 113,540.10 original billing/statement date shall automatically be cancel (sic), without prejudice to BCC’s right
to suspend or cancel any card anytime and for whatever reason. In case of default in his
8,362.50
6/29/2003 113,540.10 323.57 3,607.32 118,833.49 obligation as provided herein, Cardholder shall surrender his/her card to BCC and in addition to
(7,000.00)
the interest and penalty charges aforementioned , pay the following liquidated damages and/or
7/27/2003 118,833.49 608.07 3,862.09 123,375.65 fees (a) a collection fee of 25% of the amount due if the account is referred to a collection
agency or attorney; (b) service fee for every dishonored check issued by the cardholder in

47

payment of his account without prejudice, however, to BCC’s right of considering Cardholder’s
account, and (c) a final fee equivalent to 25% of the unpaid balance, exclusive of litigation
expenses and judicial cost, if the payment of the account is enforced though court action. Venue
of all civil suits to enforce this Agreement or any other suit directly or indirectly arising from the
relationship between the parties as established herein, whether arising from crimes, negligence
or breach thereof, shall be in the process of courts of the City of Makati or in other courts at the
option of BCC.4 (Emphasis supplied.)1avvphi1
For failure of petitioner Macalinao to settle her obligations, respondent BPI filed with the
Metropolitan Trial Court (MeTC) of Makati City a complaint for a sum of money against her and
her husband, Danilo SJ. Macalinao. This was raffled to Branch 66 of the MeTC and was
docketed as Civil Case No. 84462 entitled Bank of the Philippine Islands vs. Spouses Ileana Dr.
Macalinao and Danilo SJ. Macalinao.5
In said complaint, respondent BPI prayed for the payment of the amount of one hundred fifty-four
thousand six hundred eight pesos and seventy-eight centavos (PhP 154,608.78) plus 3.25%
finance charges and late payment charges equivalent to 6% of the amount due from February
29, 2004 and an amount equivalent to 25% of the total amount due as attorney’s fees, and of the
cost of suit.6
After the summons and a copy of the complaint were served upon petitioner Macalinao and her
husband, they failed to file their Answer.7 Thus, respondent BPI moved that judgment be
rendered in accordance with Section 6 of the Rule on Summary Procedure.8 This was granted in
an Order dated June 16, 2004.9 Thereafter, respondent BPI submitted its documentary
evidence.101avvphi1
In its Decision dated August 2, 2004, the MeTC ruled in favor of respondent BPI and ordered
petitioner Macalinao and her husband to pay the amount of PhP 141,518.34 plus interest and
penalty charges of 2% per month, to wit:
WHEREFORE, finding merit in the allegations of the complaint supported by documentary
evidence, judgment is hereby rendered in favor of the plaintiff, Bank of the Philippine Islands and
against defendant-spouses Ileana DR Macalinao and Danilo SJ Macalinao by ordering the latter
to pay the former jointly and severally the following:
1. The amount of PESOS: ONE HUNDRED FORTY ONE THOUSAND FIVE
HUNDRED EIGHTEEN AND 34/100 (P141,518.34) plus interest and penalty charges
of 2% per month from January 05, 2004 until fully paid;
2. P10,000.00 as and by way of attorney’s fees; and
3. Cost of suit.
48
SO ORDERED.11
Only petitioner Macalinao and her husband appealed to the Regional Trial Court (RTC) of Makati
City, their recourse docketed as Civil Case No. 04-1153. In its Decision dated October 14, 2004,
the RTC affirmed in toto the decision of the MeTC and held:
In any event, the sum of P141,518.34 adjudged by the trial court appeared to be the result of a
recomputation at the reduced rate of 2% per month. Note that the total amount sought by the
plaintiff-appellee was P154,608.75 exclusive of finance charge of 3.25% per month and late
payment charge of 6% per month.
WHEREFORE, the appealed decision is hereby affirmed in toto.
No pronouncement as to costs.
SO ORDERED.12
Unconvinced, petitioner Macalinao filed a petition for review with the CA, which was docketed as
CA-G.R. SP No. 92031. The CA affirmed with modification the Decision of the RTC:
WHEREFORE, the appealed decision is AFFIRMED but MODIFIED with respect to the total
amount due and interest rate. Accordingly, petitioners are jointly and severally ordered to pay
respondent Bank of the Philippine Islands the following:
1. The amount of One Hundred Twenty Six Thousand Seven Hundred Six Pesos and
Seventy Centavos plus interest and penalty charges of 3% per month from January 5,
2004 until fully paid;
2. P10,000.00 as and by way of attorney’s fees; and
3. Cost of Suit.
SO ORDERED.13
Although sued jointly with her husband, petitioner Macalinao was the only one who filed the
petition before the CA since her husband already passed away on October 18, 2005.14
In its assailed decision, the CA held that the amount of PhP 141,518.34 (the amount sought to
be satisfied in the demand letter of respondent BPI) is clearly not the result of the re-computation
at the reduced interest rate as previous higher interest rates were already incorporated in the
said amount. Thus, the said amount should not be made as basis in computing the total
48

obligation of petitioner Macalinao. Further, the CA also emphasized that respondent BPI should
not compound the interest in the instant case absent a stipulation to that effect. The CA also
held, however, that the MeTC erred in modifying the amount of interest rate from 3% monthly to
only 2% considering that petitioner Macalinao freely availed herself of the credit card facility
offered by respondent BPI to the general public. It explained that contracts of adhesion are not
invalid per se and are not entirely prohibited.
Petitioner Macalinao’s motion for reconsideration was denied by the CA in its Resolution dated
November 21, 2006. Hence, petitioner Macalinao is now before this Court with the following
assigned errors:
I.
THE REDUCTION OF INTEREST RATE, FROM 9.25% TO 2%, SHOULD BE UPHELD SINCE
THE STIPULATED RATE OF INTEREST WAS UNCONSCIONABLE AND INIQUITOUS, AND
THUS ILLEGAL.
II.
THE COURT OF APPEALS ARBITRARILY MODIFIED THE REDUCED RATE OF INTEREST
FROM 2% TO 3%, CONTRARY TO THE TENOR OF ITS OWN DECISION.
III.
THE COURT A QUO, INSTEAD OF PROCEEDING WITH A RECOMPUTATION, SHOULD
HAVE DISMISSED THE CASE FOR FAILURE OF RESPONDENT BPI TO PROVE THE
CORRECT AMOUNT OF PETITIONER’S OBLIGATION, OR IN THE ALTERNATIVE,
REMANDED THE CASE TO THE LOWER COURT FOR RESPONDENT BPI TO PRESENT
PROOF OF THE CORRECT AMOUNT THEREOF.
Our Ruling
The petition is partly meritorious.
The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum Should Be
Reduced to 2% Per Month or 24% Per Annum
In its Complaint, respondent BPI originally imposed the interest and penalty charges at the rate
of 9.25% per month or 111% per annum. This was declared as unconscionable by the lower
courts for being clearly excessive, and was thus reduced to 2% per month or 24% per annum.
On appeal, the CA modified the rate of interest and penalty charge and increased them to 3%
per month or 36% per annum based on the Terms and Conditions Governing the Issuance and
49
Use of the BPI Credit Card, which governs the transaction between petitioner Macalinao and
respondent BPI.
In the instant petition, Macalinao claims that the interest rate and penalty charge of 3% per
month imposed by the CA is iniquitous as the same translates to 36% per annum or thrice the
legal rate of interest.15 On the other hand, respondent BPI asserts that said interest rate and
penalty charge are reasonable as the same are based on the Terms and Conditions Governing
the Issuance and Use of the BPI Credit Card.16
We find for petitioner. We are of the opinion that the interest rate and penalty charge of 3% per
month should be equitably reduced to 2% per month or 24% per annum.
Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card,
there was a stipulation on the 3% interest rate. Nevertheless, it should be noted that this is not
the first time that this Court has considered the interest rate of 36% per annum as excessive and
unconscionable. We held in Chua vs. Timan:17
The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans must be
equitably reduced to 1% per month or 12% per annum. We need not unsettle the principle we
had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are
excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being
contrary to morals, if not against the law. While C.B. Circular No. 905-82, which took effect on
January 1, 1983, effectively removed the ceiling on interest rates for both secured and
unsecured loans, regardless of maturity, nothing in the said circular could possibly be read as
granting carte blanche authority to lenders to raise interest rates to levels which would either
enslave their borrowers or lead to a hemorrhaging of their assets. (Emphasis supplied.)
Since the stipulation on the interest rate is void, it is as if there was no express contract thereon.
Hence, courts may reduce the interest rate as reason and equity demand.18
The same is true with respect to the penalty charge. Notably, under the Terms and Conditions
Governing the Issuance and Use of the BPI Credit Card, it was also stated therein that
respondent BPI shall impose an additional penalty charge of 3% per month. Pertinently, Article
1229 of the Civil Code states:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the
penalty may also be reduced by the courts if it is iniquitous or unconscionable.
In exercising this power to determine what is iniquitous and unconscionable, courts must
consider the circumstances of each case since what may be iniquitous and unconscionable in
one may be totally just and equitable in another.19
49
 50

In the instant case, the records would reveal that petitioner Macalinao made partial payments to
respondent BPI, as indicated in her Billing Statements.20 Further, the stipulated penalty charge of
3% per month or 36% per annum, in addition to regular interests, is indeed iniquitous and
unconscionable.
Thus, under the circumstances, the Court finds it equitable to reduce the interest rate pegged by
the CA at 1.5% monthly to 1% monthly and penalty charge fixed by the CA at 1.5% monthly to
1% monthly or a total of 2% per month or 24% per annum in line with the prevailing
jurisprudence and in accordance with Art. 1229 of the Civil Code.
There Is No Basis for the Dismissal of the Case,
Significantly, the CA correctly used the beginning balance of PhP 94,843.70 as basis for the re-
computation of the interest considering that this was the first amount which appeared on the
Statement of Account of petitioner Macalinao. There is no other amount on which the re-
computation could be based, as can be gathered from the evidence on record. Furthermore,
barring a showing that the factual findings complained of are totally devoid of support in the
record or that they are so glaringly erroneous as to constitute serious abuse of discretion, such
findings must stand, for this Court is not expected or required to examine or contrast the
evidence submitted by the parties.22
In view of the ruling that only 1% monthly interest and 1% penalty charge can be applied to the
beginning balance of PhP 94,843.70, this Court finds the following computation more
appropriate:

Much Less a Remand of the Same for Further Reception of Evidence

Penalty Total Amount
Statement Previous Purchases Interest
Balance Charge Due for the
Petitioner Macalinao claims that the basis of the re-computation of the CA, that is, the amount of Date Balance (Payments) (1%)
(1%) Month
PhP 94,843.70 stated on the October 27, 2002 Statement of Account, was not the amount of the
principal obligation. Thus, this allegedly necessitates a re-examination of the evidence presented 10/27/2002 94,843.70 94,843.70 948.44 948.44 96,740.58
by the parties. For this reason, petitioner Macalinao further contends that the dismissal of the
11/27/2002 94,843.70 (15,000) 79,843.70 798.44 798.44 81,440.58
case or its remand to the lower court would be a more appropriate disposition of the case.
12/31/2002 79,843.70 30,308.80 110,152.50 1,101.53 1,101.53 112,355.56
Such contention is untenable. Based on the records, the summons and a copy of the complaint 1/27/2003 110,152.50 110,152.50 1,101.53 1,101.53 112,355.56
were served upon petitioner Macalinao and her husband on May 4, 2004. Nevertheless, they
failed to file their Answer despite such service. Thus, respondent BPI moved that judgment be 2/27/2003 110,152.50 110,152.50 1,101.53 1,101.53 112,355.56
rendered accordingly.21 Consequently, a decision was rendered by the MeTC on the basis of the
evidence submitted by respondent BPI. This is in consonance with Sec. 6 of the Revised Rule on 3/27/2003 110,152.50 (18,000.00) 92,152.50 921.53 921.53 93,995.56
Summary Procedure, which states: 4/27/2003 92,152.50 92,152.50 921.53 921.53 93,995.56
5/27/2003 92,152.50 (10,000.00) 82,152.50 821.53 821.53 83,795.56
Sec. 6. Effect of failure to answer. — Should the defendant fail to answer the complaint within
the period above provided, the court, motu proprio, or on motion of the plaintiff, shall render 8,362.50
judgment as may be warranted by the facts alleged in the complaint and limited to what is prayed 6/29/2003 82,152.50 83,515.00 835.15 835.15 85,185.30
(7,000.00)
for therein: Provided, however, that the court may in its discretion reduce the amount of
damages and attorney’s fees claimed for being excessive or otherwise unconscionable. This is 7/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
without prejudice to the applicability of Section 3(c), Rule 10 of the Rules of Court, if there are
8/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
two or more defendants. (As amended by the 1997 Rules of Civil Procedure; emphasis
supplied.) 9/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
10/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
Considering the foregoing rule, respondent BPI should not be made to suffer for petitioner
Macalinao’s failure to file an answer and concomitantly, to allow the latter to submit additional 11/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
evidence by dismissing or remanding the case for further reception of evidence. Significantly,
petitioner Macalinao herself admitted the existence of her obligation to respondent BPI, albeit 12/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
with reservation as to the principal amount. Thus, a dismissal of the case would cause great 1/27/2004 83,515.00 83,515.00 835.15 835.15 85,185.30
injustice to respondent BPI. Similarly, a remand of the case for further reception of evidence
would unduly prolong the proceedings of the instant case and render inutile the proceedings TOTAL 83,515.00 14,397.26 14,397.26 112,309.52
conducted before the lower courts.

50
 51

WHEREFORE, the petition is PARTLY GRANTED. The CA Decision dated June 30, 2006 in
CA-G.R. SP No. 92031 is hereby MODIFIED with respect to the total amount due, interest rate,
and penalty charge. Accordingly, petitioner Macalinao is ordered to pay respondent BPI the
following:

(1) The amount of one hundred twelve thousand three hundred nine pesos and fifty-
two centavos (PhP 112,309.52) plus interest and penalty charges of 2% per month
from January 5, 2004 until fully paid;

(2) PhP 10,000 as and by way of attorney’s fees; and

(3) Cost of suit.

SO ORDERED.

51

G.R. No. 159709 June 27, 2012
HEIRS OF SERVANDO FRANCO, Petitioners,
vs.
SPOUSES VERONICA AND DANILO GONZALES, Respondents.
DECISION
BERSAMIN, J.:
There is novation when there is an irreconcilable incompatibility between the old and the new
obligations. There is no novation in case of only slight modifications; hence, the old obligation
prevails.
The petitioners challenge the decision promulgated on March 19, 2003,1 whereby the Court of
Appeals (CA) upheld the issuance of a writ of execution by the Regional Trial Court (RTC),
Branch 16, in Malolos, Bulacan.
Antecedents
The Court adopts the following summary of the antecedents rendered by the Court in Medel v.
Court of Appeals,2 the case from which this case originated, to wit:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia)
obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the
money lending business under the name "Gonzales Credit Enterprises", in the amount of
₱50,000.00, payable in two months. Veronica gave only the amount of ₱47,000.00, to the
borrowers, as she retained ₱3,000.00, as advance interest for one month at 6% per month.
Servado and Leticia executed a promissory note for ₱50,000.00, to evidence the loan, payable
on January 7, 1986.
On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the
amount of ₱90,000.00, payable in two months, at 6% interest per month. They executed a
promissory note to evidence the loan, maturing on January 19, 1986. They received only
₱84,000.00, out of the proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amount
of ₱300,000.00, maturing in one month, secured by a real estate mortgage over a property
belonging to Leticia Makalintal Yaptinchay, who issued a special power of attorney in favor of
Leticia Medel, authorizing her to execute the mortgage. Servando and Leticia executed a
52
promissory note in favor of Veronica to pay the sum of ₱300,000.00, after a month, or on July
11, 1986. However, only the sum of ₱275,000.00, was given to them out of the proceeds of the
loan.
Like the previous loans, Servando and Medel failed to pay the third loan on maturity.
On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated
all their previous unpaid loans totaling ₱440,000.00, and sought from Veronica another loan in
the amount of ₱60,000.00, bringing their indebtedness to a total of ₱500,000.00, payable on
August 23, 1986. They executed a promissory note, reading as follows:
"Baliwag, Bulacan July 23, 1986
"Maturity Date August 23, 1986
"₱500,000.00
"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of VERONICA
R. GONZALES doing business in the business style of GONZALES CREDIT ENTERPRISES,
Filipino, of legal age, married to Danilo G. Gonzales, Jr., of Baliwag Bulacan, the sum of PESOS
........ FIVE HUNDRED THOUSAND ..... (P500,000.00) Philippine Currency with interest thereon
at the rate of 5.5 PER CENT per month plus 2% service charge per annum from date hereof until
fully paid according to the amortization schedule contained herein. (Underscoring supplied)
"Payment will be made in full at the maturity date.
"Should I/WE fail to pay any amortization or portion hereof when due, all the other installments
together with all interest accrued shall immediately be due and payable and I/WE hereby agree
to pay an additional amount equivalent to one per cent (1%) per month of the amount due and
demandable as penalty charges in the form of liquidated damages until fully paid; and the further
sum of TWENTY FIVE PER CENT (25%) thereof in full, without deductions as Attorney's Fee
whether actually incurred or not, of the total amount due and demandable, exclusive of costs and
judicial or extra judicial expenses. (Underscoring supplied)
"I, WE further agree that in the event the present rate of interest on loan is increased by law or
the Central Bank of the Philippines, the holder shall have the option to apply and collect the
increased interest charges without notice although the original interest have already been
collected wholly or partially unless the contrary is required by law.
"It is also a special condition of this contract that the parties herein agree that the amount of
peso-obligation under this agreement is based on the present value of peso, and if there be any
change in the value thereof, due to extraordinary inflation or deflation, or any other cause or
52

reason, then the peso-obligation herein contracted shall be adjusted in accordance with the
value of the peso then prevailing at the time of the complete fulfillment of obligation.
"Demand and notice of dishonor waived. Holder may accept partial payments and grant
renewals of this note or extension of payments, reserving rights against each and all indorsers
and all parties to this note.
"IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive all
his/their rights under the provisions of Section 12, Rule 39, of the Revised Rules of Court."
On maturity of the loan, the borrowers failed to pay the indebtedness of ₱500,000.00, plus
interests and penalties, evidenced by the above-quoted promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed
with the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for
collection of the full amount of the loan including interests and other charges.
In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando
alleged that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr.
Rafael Medel who borrowed from the plaintiffs the sum of ₱500,000.00, and actually received the
amount and benefited therefrom; that the loan was secured by a real estate mortgage executed
in favor of the plaintiffs, and that he (Servando Franco) signed the promissory note only as a
witness.
In their separate answer filed on April 10,1990, defendants Leticia and Rafael Medel alleged that
the loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the
plaintiffs over a parcel of real estate situated in San Juan, Batangas; that the interest rate is
excessive at 5.5% per month with additional service charge of 2% per annum, and penalty
charge of 1% per month; that the stipulation for attorney's fees of 25% of the amount due is
unconscionable, illegal and excessive, and that substantial payments made were applied to
interest, penalties and other charges.
After due trial, the lower court declared that the due execution and genuineness of the four
promissory notes had been duly proved, and ruled that although the Usury Law had been
repealed, the interest charged by the plaintiffs on the loans was unconscionable and "revolting to
the conscience". Hence, the trial court applied "the provision of the New [Civil] Code" that the
"legal rate of interest for loan or forbearance of money, goods or credit is 12% per annum."
Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of
which reads as follows:
"WHEREFORE, premises considered, judgment is hereby rendered, as follows:
53
"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay
plaintiffs the amount of ₱47,000.00 plus 12% interest per annum from November 7, 1985 and
1% per month as penalty, until the entire amount is paid in full.
"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and
severally the amount of ₱84,000.00 with 12% interest per annum and 1% per cent per month as
penalty from November 19,1985 until the whole amount is fully paid;
"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of ₱285,000.00
plus 12% interest per annum and 1% per month as penalty from July 11, 1986, until the whole
amount is fully paid;
"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of ₱50,000.00 as
attorney's fees;
"5. All counterclaims are hereby dismissed.
"With costs against the defendants."
In due time, both plaintiffs and defendants appealed to the Court of Appeals.
In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the
unpaid loans of the defendants, is the law that governs the parties. They further argued that
Circular No. 416 of the Central Bank prescribing the rate of interest for loans or forbearance of
money, goods or credit at 12% per annum, applies only in the absence of a stipulation on
interest rate, but not when the parties agreed thereon.
The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law
having become ‘legally inexistent’ with the promulgation by the Central Bank in 1982 of Circular
No. 905, the lender and borrower could agree on any interest that may be charged on the loan".
The Court of Appeals further held that "the imposition of ‘an additional amount equivalent to 1%
per month of the amount due and demandable as penalty charges in the form of liquidated
damages until fully paid’ was allowed by law".
Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision reversing that of
the Regional Trial Court, disposing as follows:
"WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby
ordered to pay the plaintiffs the sum of ₱500,000.00, plus 5.5% per month interest and 2%
service charge per annum effective July 23, 1986, plus 1% per month of the total amount due
and demandable as penalty charges effective August 24, 1986, until the entire amount is fully
paid.
53

"The award to the plaintiffs of ₱50,000.00 as attorney's fees is affirmed. And so is the imposition
of costs against the defendants.
"SO ORDERED."
On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision.
By resolution dated November 25, 1997, the Court of Appeals denied the motion.3
On review, the Court in Medel v. Court of Appeals struck down as void the stipulation on the
interest for being iniquitous or unconscionable, and revived the judgment of the RTC rendered
on December 9, 1991, viz:
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of
Appeals promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead,
we render judgment REVIVING and AFFIRMING the decision dated December 9, 1991, of the
Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90,
involving the same parties.
No pronouncement as to costs in this instance.
SO ORDERED.4
Upon the finality of the decision in Medel v. Court of Appeals, the respondents moved for
execution.5 Servando Franco opposed,6 claiming that he and the respondents had agreed to fix
the entire obligation at ₱775,000.00.7 According to Servando, their agreement, which was
allegedly embodied in a receipt dated February 5, 1992,8 whereby he made an initial payment of
₱400,000.00 and promised to pay the balance of ₱375,000.00 on February 29, 1992,
superseded the July 23, 1986 promissory note.
The RTC granted the motion for execution over Servando’s opposition, thus:
There is no doubt that the decision dated December 9, 1991 had already been affirmed and had
already become final and executory. Thus, in accordance with Sec. 1 of Rule 39 of the 1997
Rules of Civil Procedure, execution shall issue as a matter of right. It has likewise been ruled that
a judgment which has acquired finality becomes immutable and unalterable and hence may no
longer be modified at any respect except only to correct clerical errors or mistakes (Korean
Airlines Co. Ltd. vs. C.A., 247 SCRA 599). In this respect, the decision deserves to be respected.
The argument about the modification of the contract or non-participation of defendant Servando
Franco in the proceedings on appeal on the alleged belief that the payment he made had already
absolved him from liability is of no moment. Primarily, the decision was for him and Leticia Medel
to pay the plaintiffs jointly and severally the amounts stated in the Decision. In other words, the
54
liability of the defendants thereunder is solidary. Based on this aspect alone, the new defense
raised by defendant Franco is unavailing.
WHEREFORE, in the light of all the foregoing, the Court hereby grants the Motion for Execution
of Judgment.
Accordingly, let a writ of execution be issued for implementation by the Deputy Sheriff of this
Court.
SO ORDERED.9
On March 8, 2001, the RTC issued the writ of execution.10
Servando moved for reconsideration,11 but the RTC denied his motion.12
On March 19, 2003, the CA affirmed the RTC through its assailed decision, ruling that the
execution was proper because of Servando’s failure to comply with the terms of the compromise
agreement, stating:13
Petitioner cannot deny the fact that there was no full compliance with the tenor of the
compromise agreement. Private respondents on their part did not disregard the payments made
by the petitioner. They even offered that whatever payments made by petitioner, it can be
deducted from the principal obligation including interest. However, private respondents posit that
the payments made cannot alter, modify or revoke the decision of the Supreme Court in the
instant case.
In the case of Prudence Realty and Development Corporation vs. Court of Appeals, the Supreme
Court ruled that:
"When the terms of the compromise judgment is violated, the aggrieved party must move for its
execution, not its invalidation."
It is clear from the aforementioned jurisprudence that even if there is a compromise agreement
and the terms have been violated, the aggrieved party, such as the private respondents, has the
right to move for the issuance of a writ of execution of the final judgment subject of the
compromise agreement.
Moreover, under the circumstances of this case, petitioner does not stand to suffer any harm or
prejudice for the simple reason that what has been asked by private respondents to be the
subject of a writ of execution is only the balance of petitioner’s obligation after deducting the
payments made on the basis of the compromise agreement.
54

WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE and
consequently DISMISSED for lack of merit.
SO ORDERED.
His motion for reconsideration having been denied,14 Servando appealed. He was eventually
substituted by his heirs, now the petitioners herein, on account of his intervening death. The
substitution was pursuant to the resolution dated June 15, 2005.15
Issue
The petitioners submit that the CA erred in ruling that:
I
THE 9 DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL
COURT OF MALOLOS, BULACAN WAS NOT NOVATED BY THE COMPROMISE
AGREEMENT BETWEEN THE PARTIES ON 5 FEBRUARY 1992.
II
THE LIABILITY OF THE PETITIONER TO RESPONDENTS SHOULD BE BASED
ON THE DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL
COURT OF MALOLOS, BULACAN AND NOT ON THE COMPROMISE
AGREEMENT EXECUTED IN 1992.
The petitioners insist that the RTC could not validly enforce a judgment based on a promissory
note that had been already novated; that the promissory note had been impliedly novated when
the principal obligation of ₱500,000.00 had been fixed at ₱750,000.00, and the maturity date had
been extended from August 23, 1986 to February 29, 1992.
In contrast, the respondents aver that the petitioners seek to alter, modify or revoke the final and
executory decision of the Court; that novation did not take place because there was no complete
incompatibility between the promissory note and the memorandum receipt; that Servando’s
previous payment would be deducted from the total liability of the debtors based on the RTC’s
decision.
Issue
Was there a novation of the August 23, 1986 promissory note when respondent Veronica
Gonzales issued the February 5, 1992 receipt?
55
Ruling
The petition lacks merits.
I
Novation did not transpire because no
irreconcilable incompatibility existed
between the promissory note and the receipt
To buttress their claim of novation, the petitioners rely on the receipt issued on February 5, 1992
by respondent Veronica whereby Servando’s obligation was fixed at ₱750,000.00. They insist
that even the maturity date was extended until February 29, 1992. Such changes, they assert,
were incompatible with those of the original agreement under the promissory note.
The petitioners’ assertion is wrong.
A novation arises when there is a substitution of an obligation by a subsequent one that
extinguishes the first, either by changing the object or the principal conditions, or by substituting
the person of the debtor, or by subrogating a third person in the rights of the creditor.16 For a
valid novation to take place, there must be, therefore: (a) a previous valid obligation; (b) an
agreement of the parties to make a new contract; (c) an extinguishment of the old contract; and
(d) a valid new contract.17 In short, the new obligation extinguishes the prior agreement only
when the substitution is unequivocally declared, or the old and the new obligations are
incompatible on every point. A compromise of a final judgment operates as a novation of the
judgment obligation upon compliance with either of these two conditions.18
The receipt dated February 5, 1992, excerpted below, did not create a new obligation
incompatible with the old one under the promissory note, viz:
February 5, 1992
Received from SERVANDO FRANCO BPI Manager’s Check No. 001700 in the amount of
₱400,00.00 as partial payment of loan. Balance of ₱375,000.00 to be paid on or before
FEBRUARY 29, 1992. In case of default an interest will be charged as stipulated in the
promissory note subject of this case.
(Sgd)
V. Gonzalez19
To be clear, novation is not presumed. This means that the parties to a contract should expressly
agree to abrogate the old contract in favor of a new one. In the absence of the express
55
 56

agreement, the old and the new obligations must be incompatible on every point.20 According to not obtain herein, proving precisely that Servando remained a solidary debtor against whom the
California Bus Lines, Inc. v. State Investment House, Inc.:21 entire or part of the obligation might be enforced.

The extinguishment of the old obligation by the new one is a necessary element of novation Lastly, the extension of the maturity date did not constitute a novation of the previous agreement.
which may be effected either expressly or impliedly.1âwphi1 The term "expressly" means that It is settled that an extension of the term or period of the maturity date does not result in
the contracting parties incontrovertibly disclose that their object in executing the new contract is novation.31
to extinguish the old one. Upon the other hand, no specific form is required for an implied
novation, and all that is prescribed by law would be an incompatibility between the two contracts.
While there is really no hard and fast rule to determine what might constitute to be a sufficient II
change that can bring about novation, the touchstone for contrariety, however, would be an
irreconcilable incompatibility between the old and the new obligations. Total liability to be reduced by ₱400,000.00

There is incompatibility when the two obligations cannot stand together, each one having its
independent existence. If the two obligations cannot stand together, the latter obligation novates
the first.22 Changes that breed incompatibility must be essential in nature and not merely
accidental. The incompatibility must affect any of the essential elements of the obligation, such
as its object, cause or principal conditions thereof; otherwise, the change is merely modificatory
in nature and insufficient to extinguish the original obligation.23
The petitioners argue that Servando’s remaining liability amounted to only ₱375,000.00, the
balance indicated in the February 5, 1992 receipt. Accordingly, the balance was not yet due
because the respondents did not yet make a demand for payment.
The petitioners cannot be upheld.

In light of the foregoing, the issuance of the receipt created no new obligation. Instead, the The balance of ₱375,000.00 was premised on the taking place of a novation. However, as found
respondents only thereby recognized the original obligation by stating in the receipt that the now, novation did not take place. Accordingly, Servando’s obligation, being solidary, remained to
₱400,000.00 was "partial payment of loan" and by referring to "the promissory note subject of be that decreed in the December 9, 1991 decision of the RTC, inclusive of interests, less the
the case in imposing the interest." The loan mentioned in the receipt was still the same loan amount of ₱400,000.00 that was meanwhile paid by him.
involving the ₱500,000.00 extended to Servando. Advertence to the interest stipulated in the
promissory note indicated that the contract still subsisted, not replaced and extinguished, as the
WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals promulgated on March
petitioners claim.
19, 2003; ORDERS the Regional Trial Court, Branch 16, in Malolos, Bulacan to proceed with the
execution based on its decision rendered on December 9, 1991, deducting the amount of
The receipt dated February 5, 1992 was only the proof of Servando’s payment of his obligation ₱400,000.00 already paid by the late Servando Franco; and DIRECTS the petitioners to pay the
as confirmed by the decision of the RTC. It did not establish the novation of his agreement with costs of suit.
the respondents. Indeed, the Court has ruled that an obligation to pay a sum of money is not
novated by an instrument that expressly recognizes the old, or changes only the terms of
SO ORDERED.
payment, or adds other obligations not incompatible with the old ones, or the new contract
merely supplements the old one.24 A new contract that is a mere reiteration, acknowledgment or
ratification of the old contract with slight modifications or alterations as to the cause or object or
principal conditions can stand together with the former one, and there can be no incompatibility
between them.25 Moreover, a creditor’s acceptance of payment after demand does not operate
as a modification of the original contract.26

Worth noting is that Servando’s liability was joint and solidary with his co-debtors. In a solidary
obligation, the creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously.27 The choice to determine against whom the collection is enforced
belongs to the creditor until the obligation is fully satisfied.28 Thus, the obligation was being
enforced against Servando, who, in order to escape liability, should have presented evidence to
prove that his obligation had already been cancelled by the new obligation or that another debtor
had assumed his place. In case of change in the person of the debtor, the substitution must be
clear and express,29 and made with the consent of the creditor.30 Yet, these circumstances did

56

G.R. No. 128690 January 21, 1999
ABS-CBN BROADCASTING CORPORATION, petitioner,
vs.
HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP, VIVA
PRODUCTION, INC., and VICENTE DEL ROSARIO, respondents.
DAVIDE, JR., CJ.:
In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp. (hereafter ABS-
CBN) seeks to reverse and set aside the decision 1 of 31 October 1996 and the resolution 2 of
10 March 1997 of the Court of Appeals in CA-G.R. CV No. 44125. The former affirmed with
modification the decision 3 of 28 April 1993 of the Regional Trial Court (RTC) of Quezon City,
Branch 80, in Civil Case No. Q-92-12309. The latter denied the motion to reconsider the decision
of 31 October 1996.
The antecedents, as found by the RTC and adopted by the Court of Appeals, are as follows:
In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement (Exh. "A")
whereby Viva gave ABS-CBN an exclusive right to exhibit some Viva films. Sometime
in December 1991, in accordance with paragraph 2.4 [sic] of said agreement stating
that —.
1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) Viva films
for TV telecast under such terms as may be agreed upon by the parties hereto,
provided, however, that such right shall be exercised by ABS-CBN from the actual
offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-president
Charo Santos-Concio, a list of three(3) film packages (36 title) from which ABS-CBN
may exercise its right of first refusal under the afore-said agreement (Exhs. "1" par, 2,
"2," "2-A'' and "2-B"-Viva). ABS-CBN, however through Mrs. Concio, "can tick off only
ten (10) titles" (from the list) "we can purchase" (Exh. "3" - Viva) and therefore did not
accept said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs. Concio are
not the subject of the case at bar except the film ''Maging Sino Ka Man."
For further enlightenment, this rejection letter dated January 06, 1992 (Exh "3" - Viva)
is hereby quoted:
6 January 1992
Dear Vic,
57
This is not a very formal business letter I am writing to you as I would like to express
my difficulty in recommending the purchase of the three film packages you are
offering ABS-CBN.
From among the three packages I can only tick off 10 titles we can purchase. Please
see attached. I hope you will understand my position. Most of the action pictures in
the list do not have big action stars in the cast. They are not for primetime. In line with
this I wish to mention that I have not scheduled for telecast several action pictures in
out very first contract because of the cheap production value of these movies as well
as the lack of big action stars. As a film producer, I am sure you understand what I am
trying to say as Viva produces only big action pictures.
In fact, I would like to request two (2) additional runs for these movies as I can only
schedule them in our non-primetime slots. We have to cover the amount that was
paid for these movies because as you very well know that non-primetime advertising
rates are very low. These are the unaired titles in the first contract.
1. Kontra Persa [sic].
2. Raider Platoon.
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog
6. Lady Commando
7. Batang Matadero
8. Rebelyon
I hope you will consider this request of mine.
The other dramatic films have been offered to us before and have been rejected
because of the ruling of MTRCB to have them aired at 9:00 p.m. due to their very
adult themes.
As for the 10 titles I have choosen [sic] from the 3 packages please consider including
all the other Viva movies produced last year. I have quite an attractive offer to make.
57

Thanking you and with my warmest regards.
(Signed)
Charo Santos-Concio
On February 27, 1992, defendant Del Rosario approached ABS-CBN's Ms. Concio,
with a list consisting of 52 original movie titles (i.e. not yet aired on television)
including the 14 titles subject of the present case, as well as 104 re-runs (previously
aired on television) from which ABS-CBN may choose another 52 titles, as a total of
156 titles, proposing to sell to ABS-CBN airing rights over this package of 52 originals
and 52 re-runs for P60,000,000.00 of which P30,000,000.00 will be in cash and
P30,000,000.00 worth of television spots (Exh. "4" to "4-C" Viva; "9" -Viva).
On April 2, 1992, defendant Del Rosario and ABS-CBN general manager, Eugenio
Lopez III, met at the Tamarind Grill Restaurant in Quezon City to discuss the package
proposal of Viva. What transpired in that lunch meeting is the subject of conflicting
versions. Mr. Lopez testified that he and Mr. Del Rosario allegedly agreed that ABS-
CRN was granted exclusive film rights to fourteen (14) films for a total consideration
of P36 million; that he allegedly put this agreement as to the price and number of films
in a "napkin'' and signed it and gave it to Mr. Del Rosario (Exh. D; TSN, pp. 24-26, 77-
78, June 8, 1992). On the other hand, Del Rosario denied having made any
agreement with Lopez regarding the 14 Viva films; denied the existence of a napkin in
which Lopez wrote something; and insisted that what he and Lopez discussed at the
lunch meeting was Viva's film package offer of 104 films (52 originals and 52 re-runs)
for a total price of P60 million. Mr. Lopez promising [sic]to make a counter proposal
which came in the form of a proposal contract Annex "C" of the complaint (Exh. "1"·-
Viva; Exh. "C" - ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-president
for Finance discussed the terms and conditions of Viva's offer to sell the 104 films,
after the rejection of the same package by ABS-CBN.
On April 07, 1992, defendant Del Rosario received through his secretary, a
handwritten note from Ms. Concio, (Exh. "5" - Viva), which reads: "Here's the draft of
the contract. I hope you find everything in order," to which was attached a draft
exhibition agreement (Exh. "C''- ABS-CBN; Exh. "9" - Viva, p. 3) a counter-proposal
covering 53 films, 52 of which came from the list sent by defendant Del Rosario and
one film was added by Ms. Concio, for a consideration of P35 million. Exhibit "C"
provides that ABS-CBN is granted films right to 53 films and contains a right of first
refusal to "1992 Viva Films." The said counter proposal was however rejected by
Viva's Board of Directors [in the] evening of the same day, April 7, 1992, as Viva
would not sell anything less than the package of 104 films for P60 million pesos (Exh.
"9" - Viva), and such rejection was relayed to Ms. Concio.
58
On April 29, 1992, after the rejection of ABS-CBN and following several negotiations
and meetings defendant Del Rosario and Viva's President Teresita Cruz, in
consideration of P60 million, signed a letter of agreement dated April 24, 1992.
granting RBS the exclusive right to air 104 Viva-produced and/or acquired films (Exh.
"7-A" - RBS; Exh. "4" - RBS) including the fourteen (14) films subject of the present
case. 4
On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance with a
prayer for a writ of preliminary injunction and/or temporary restraining order against private
respondents Republic Broadcasting Corporation 5 (hereafter RBS ), Viva Production (hereafter
VIVA), and Vicente Del Rosario. The complaint was docketed as Civil Case No. Q-92-12309.
On 27 May 1992, RTC issued a temporary restraining order 6 enjoining private respondents from
proceeding with the airing, broadcasting, and televising of the fourteen VIVA films subject of the
controversy, starting with the film Maging Sino Ka Man, which was scheduled to be shown on
private respondents RBS' channel 7 at seven o'clock in the evening of said date.
On 17 June 1992, after appropriate proceedings, the RTC issued an
order 7 directing the issuance of a writ of preliminary injunction upon ABS-CBN's posting of P35
million bond. ABS-CBN moved for the reduction of the bond, 8 while private respondents moved
for reconsideration of the order and offered to put up a counterbound. 9
In the meantime, private respondents filed separate answers with counterclaim. 10 RBS also set
up a cross-claim against VIVA..
On 3 August 1992, the RTC issued an order 11 dissolving the writ of preliminary injunction upon
the posting by RBS of a P30 million counterbond to answer for whatever damages ABS-CBN
might suffer by virtue of such dissolution. However, it reduced petitioner's injunction bond to P15
million as a condition precedent for the reinstatement of the writ of preliminary injunction should
private respondents be unable to post a counterbond.
At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of the court, agreed to explore
the possibility of an amicable settlement. In the meantime, RBS prayed for and was granted
reasonable time within which to put up a P30 million counterbond in the event that no settlement
would be reached.
As the parties failed to enter into an amicable settlement RBS posted on 1 October 1992 a
counterbond, which the RTC approved in its Order of 15 October 1992.13
On 19 October 1992, ABS-CBN filed a motion for reconsideration 14 of the 3 August and 15
October 1992 Orders, which RBS opposed. 15
On 29 October 1992, the RTC conducted a pre-trial. 16
58

Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of Appeals a
petition17 challenging the RTC's Orders of 3 August and 15 October 1992 and praying for the
issuance of a writ of preliminary injunction to enjoin the RTC from enforcing said orders. The
case was docketed as CA-G.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary restraining order18 to enjoin the
airing, broadcasting, and televising of any or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a decision 19 dismissing the petition
in CA -G.R. No. 29300 for being premature. ABS-CBN challenged the dismissal in a petition for
review filed with this Court on 19 January 1993, which was docketed as G.R. No. 108363.
In the meantime the RTC received the evidence for the parties in Civil Case No. Q-192-1209.
Thereafter, on 28 April 1993, it rendered a decision 20 in favor of RBS and VIVA and against
ABS-CBN disposing as follows:
WHEREFORE, under cool reflection and prescinding from the foregoing, judgments is
rendered in favor of defendants and against the plaintiff.
(1) The complaint is hereby dismissed;
(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the following:
a) P107,727.00, the amount of premium paid by RBS to the
surety which issued defendant RBS's bond to lift the injunction;
b) P191,843.00 for the amount of print advertisement for
"Maging Sino Ka Man" in various newspapers;
c) Attorney's fees in the amount of P1 million;
d) P5 million as and by way of moral damages;
e) P5 million as and by way of exemplary damages;
(3) For defendant VIVA, plaintiff ABS-CBN is ordered to pay P212,000.00
by way of reasonable attorney's fees.
(4) The cross-claim of defendant RBS against defendant VIVA is
dismissed.
59
(5) Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the price and terms of the offer. The
alleged agreement between Lopez III and Del Rosario was subject to the approval of the VIVA
Board of Directors, and said agreement was disapproved during the meeting of the Board on 7
April 1992. Hence, there was no basis for ABS-CBN's demand that VIVA signed the 1992 Film
Exhibition Agreement. Furthermore, the right of first refusal under the 1990 Film Exhibition
Agreement had previously been exercised per Ms. Concio's letter to Del Rosario ticking off ten
titles acceptable to them, which would have made the 1992 agreement an entirely new contract.
On 21 June 1993, this Court denied21 ABS-CBN's petition for review in G.R. No. 108363, as no
reversible error was committed by the Court of Appeals in its challenged decision and the case
had "become moot and academic in view of the dismissal of the main action by the court a quo
in its decision" of 28 April 1993.
Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals claiming that there
was a perfected contract between ABS-CBN and VIVA granting ABS-CBN the exclusive right to
exhibit the subject films. Private respondents VIVA and Del Rosario also appealed seeking moral
and exemplary damages and additional attorney's fees.
In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the contract
between ABS-CBN and VIVA had not been perfected, absent the approval by the VIVA Board of
Directors of whatever Del Rosario, it's agent, might have agreed with Lopez III. The appellate
court did not even believe ABS-CBN's evidence that Lopez III actually wrote down such an
agreement on a "napkin," as the same was never produced in court. It likewise rejected ABS-
CBN's insistence on its right of first refusal and ratiocinated as follows:
As regards the matter of right of first refusal, it may be true that a Film Exhibition
Agreement was entered into between Appellant ABS-CBN and appellant VIVA under
Exhibit "A" in 1990, and that parag. 1.4 thereof provides:
1.4 ABS-CBN shall have the right of first refusal to the next twenty-four
(24) VIVA films for TV telecast under such terms as may be agreed upon
by the parties hereto, provided, however, that such right shall be exercised
by ABS-CBN within a period of fifteen (15) days from the actual offer in
writing (Records, p. 14).
[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still
be subject to such terms as may be agreed upon by the parties thereto, and that the
said right shall be exercised by ABS-CBN within fifteen (15) days from the actual offer
in writing.
59
 60

Said parag. 1.4 of the agreement Exhibit "A" on the right of first refusal did not fix the NOTWITHSTANDING PREPONDERANCE OF EVIDENCE ADDUCED BY
price of the film right to the twenty-four (24) films, nor did it specify the terms thereof. PETITIONER TO THE CONTRARY.
The same are still left to be agreed upon by the parties.
II
In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records, p. 89) stated that
it can only tick off ten (10) films, and the draft contract Exhibit "C" accepted only
fourteen (14) films, while parag. 1.4 of Exhibit "A'' speaks of the next twenty-four (24) . . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN
films. FAVOR OF PRIVATE RESPONDENT RBS.

The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A. 2-B; Records, III
pp. 86-88; Decision, p. 11, Records, p. 1150), when the first list of VIVA films was
sent by Mr. Del Rosario to ABS-CBN. The Vice President of ABS-CBN, Ms. Charo . . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF
Santos-Concio, sent a letter dated January 6, 1992 (Exhibit 3, Records, p. 89) where PRIVATE RESPONDENT RBS.
ABS-CBN exercised its right of refusal by rejecting the offer of VIVA.. As aptly
observed by the trial court, with the said letter of Mrs. Concio of January 6, 1992,
ABS-CBN had lost its right of first refusal. And even if We reckon the fifteen (15) day IV
period from February 27, 1992 (Exhibit 4 to 4-C) when another list was sent to ABS-
CBN after the letter of Mrs. Concio, still the fifteen (15) day period within which ABS-
. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.
CBN shall exercise its right of first refusal has already expired.22

ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four titles
Accordingly, respondent court sustained the award of actual damages consisting in the cost of
under the 1990 Film Exhibition Agreement, as it had chosen only ten titles from the first list. It
print advertisements and the premium payments for the counterbond, there being adequate
insists that we give credence to Lopez's testimony that he and Del Rosario met at the Tamarind
proof of the pecuniary loss which RBS had suffered as a result of the filing of the complaint by
Grill Restaurant, discussed the terms and conditions of the second list (the 1992 Film Exhibition
ABS-CBN. As to the award of moral damages, the Court of Appeals found reasonable basis
Agreement) and upon agreement thereon, wrote the same on a paper napkin. It also asserts that
therefor, holding that RBS's reputation was debased by the filing of the complaint in Civil Case
the contract has already been effective, as the elements thereof, namely, consent, object, and
No. Q-92-12309 and by the non-showing of the film "Maging Sino Ka Man." Respondent court
consideration were established. It then concludes that the Court of Appeals' pronouncements
also held that exemplary damages were correctly imposed by way of example or correction for
were not supported by law and jurisprudence, as per our decision of 1 December 1995 in
the public good in view of the filing of the complaint despite petitioner's knowledge that the
Limketkai Sons Milling, Inc. v. Court of Appeals, 23 which cited Toyota Shaw, Inc. v. Court of
contract with VIVA had not been perfected, It also upheld the award of attorney's fees, reasoning
Appeals, 24 Ang Yu Asuncion v. Court of Appeals, 25 and Villonco Realty Company v.
that with ABS-CBN's act of instituting Civil Case No, Q-92-1209, RBS was "unnecessarily forced
Bormaheco. Inc.26
to litigate." The appellate court, however, reduced the awards of moral damages to P2 million,
exemplary damages to P2 million, and attorney's fees to P500, 000.00.
Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS spent for
the premium on the counterbond of its own volition in order to negate the injunction issued by the
On the other hand, respondent Court of Appeals denied VIVA and Del Rosario's appeal because
trial court after the parties had ventilated their respective positions during the hearings for the
it was "RBS and not VIVA which was actually prejudiced when the complaint was filed by ABS-
purpose. The filing of the counterbond was an option available to RBS, but it can hardly be
CBN."
argued that ABS-CBN compelled RBS to incur such expense. Besides, RBS had another
available option, i.e., move for the dissolution or the injunction; or if it was determined to put up a
Its motion for reconsideration having been denied, ABS-CBN filed the petition in this case, counterbond, it could have presented a cash bond. Furthermore under Article 2203 of the Civil
contending that the Court of Appeals gravely erred in Code, the party suffering loss or injury is also required to exercise the diligence of a good father
of a family to minimize the damages resulting from the act or omission. As regards the cost of
print advertisements, RBS had not convincingly established that this was a loss attributable to
I the non showing "Maging Sino Ka Man"; on the contrary, it was brought out during trial that with
or without the case or the injunction, RBS would have spent such an amount to generate interest
. . . RULING THAT THERE WAS NO PERFECTED CONTRACT in the film.
BETWEEN PETITIONER AND PRIVATE RESPONDENT VIVA

60

ABS-CBN further contends that there was no clear basis for the awards of moral and exemplary
damages. The controversy involving ABS-CBN and RBS did not in any way originate from
business transaction between them. The claims for such damages did not arise from any
contractual dealings or from specific acts committed by ABS-CBN against RBS that may be
characterized as wanton, fraudulent, or reckless; they arose by virtue only of the filing of the
complaint, An award of moral and exemplary damages is not warranted where the record is
bereft of any proof that a party acted maliciously or in bad faith in filing an action. 27 In any case,
free resort to courts for redress of wrongs is a matter of public policy. The law recognizes the
right of every one to sue for that which he honestly believes to be his right without fear of
standing trial for damages where by lack of sufficient evidence, legal technicalities, or a different
interpretation of the laws on the matter, the case would lose ground. 28 One who makes use of
his own legal right does no injury. 29 If damage results front the filing of the complaint, it is
damnum absque injuria. 30 Besides, moral damages are generally not awarded in favor of a
juridical person, unless it enjoys a good reputation that was debased by the offending party
resulting in social humiliation.31
As regards the award of attorney's fees, ABS-CBN maintains that the same had no factual, legal,
or equitable justification. In sustaining the trial court's award, the Court of Appeals acted in clear
disregard of the doctrines laid down in Buan v. Camaganacan 32 that the text of the decision
should state the reason why attorney's fees are being awarded; otherwise, the award should be
disallowed. Besides, no bad faith has been imputed on, much less proved as having been
committed by, ABS-CBN. It has been held that "where no sufficient showing of bad faith would
be reflected in a party' s persistence in a case other than an erroneous conviction of the
righteousness of his cause, attorney's fees shall not be recovered as cost." 33
On the other hand, RBS asserts that there was no perfected contract between ABS-CBN and
VIVA absent any meeting of minds between them regarding the object and consideration of the
alleged contract. It affirms that the ABS-CBN's claim of a right of first refusal was correctly
rejected by the trial court. RBS insist the premium it had paid for the counterbond constituted a
pecuniary loss upon which it may recover. It was obliged to put up the counterbound due to the
injunction procured by ABS-CBN. Since the trial court found that ABS-CBN had no cause of
action or valid claim against RBS and, therefore not entitled to the writ of injunction, RBS could
recover from ABS-CBN the premium paid on the counterbond. Contrary to the claim of ABS-
CBN, the cash bond would prove to be more expensive, as the loss would be equivalent to the
cost of money RBS would forego in case the P30 million came from its funds or was borrowed
from banks.
RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled showing
of the film "Maging Sino Ka Man" because the print advertisements were put out to announce the
showing on a particular day and hour on Channel 7, i.e., in its entirety at one time, not a series to
be shown on a periodic basis. Hence, the print advertisement were good and relevant for the
particular date showing, and since the film could not be shown on that particular date and hour
because of the injunction, the expenses for the advertisements had gone to waste.
As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case and
secured injunctions purely for the purpose of harassing and prejudicing RBS. Pursuant then to
61
Article 19 and 21 of the Civil Code, ABS-CBN must be held liable for such damages. Citing
Tolentino,34 damages may be awarded in cases of abuse of rights even if the act done is not
illicit and there is abuse of rights were plaintiff institutes and action purely for the purpose of
harassing or prejudicing the defendant.
In support of its stand that a juridical entity can recover moral and exemplary damages, private
respondents RBS cited People v. Manero,35 where it was stated that such entity may recover
moral and exemplary damages if it has a good reputation that is debased resulting in social
humiliation. it then ratiocinates; thus:
There can be no doubt that RBS' reputation has been debased by ABS-CBN's acts in
this case. When RBS was not able to fulfill its commitment to the viewing public to show
the film "Maging Sino Ka Man" on the scheduled dates and times (and on two occasions
that RBS advertised), it suffered serious embarrassment and social humiliation. When
the showing was canceled, late viewers called up RBS' offices and subjected RBS to
verbal abuse ("Announce kayo nang announce, hindi ninyo naman ilalabas," "nanloloko
yata kayo") (Exh. 3-RBS, par. 3). This alone was not something RBS brought upon itself.
it was exactly what ABS-CBN had planned to happen.
The amount of moral and exemplary damages cannot be said to be excessive. Two
reasons justify the amount of the award.
The first is that the humiliation suffered by RBS is national extent. RBS operations as a
broadcasting company is [sic] nationwide. Its clientele, like that of ABS-CBN, consists of
those who own and watch television. It is not an exaggeration to state, and it is a matter
of judicial notice that almost every other person in the country watches television. The
humiliation suffered by RBS is multiplied by the number of televiewers who had
anticipated the showing of the film "Maging Sino Ka Man" on May 28 and November 3,
1992 but did not see it owing to the cancellation. Added to this are the advertisers who
had placed commercial spots for the telecast and to whom RBS had a commitment in
consideration of the placement to show the film in the dates and times specified.
The second is that it is a competitor that caused RBS to suffer the humiliation. The
humiliation and injury are far greater in degree when caused by an entity whose ultimate
business objective is to lure customers (viewers in this case) away from the competition.
36
For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial court and
the Court of Appeals do not support ABS-CBN's claim that there was a perfected contract. Such
factual findings can no longer be disturbed in this petition for review under Rule 45, as only
questions of law can be raised, not questions of fact. On the issue of damages and attorneys
fees, they adopted the arguments of RBS.
61

The key issues for our consideration are (1) whether there was a perfected contract between
VIVA and ABS-CBN, and (2) whether RBS is entitled to damages and attorney's fees. It may be
noted that the award of attorney's fees of P212,000 in favor of VIVA is not assigned as another
error.
I.
The first issue should be resolved against ABS-CBN. A contract is a meeting of minds between
two persons whereby one binds himself to give something or to render some service to another
37 for a consideration. there is no contract unless the following requisites concur: (1) consent of
the contracting parties; (2) object certain which is the subject of the contract; and (3) cause of the
obligation, which is established.38 A contract undergoes three stages:
(a) preparation, conception, or generation, which is the period of negotiation and
bargaining, ending at the moment of agreement of the parties;
(b) perfection or birth of the contract, which is the moment when the parties come to
agree on the terms of the contract; and
(c) consummation or death, which is the fulfillment or performance of the terms agreed
upon in the contract. 39
Contracts that are consensual in nature are perfected upon mere meeting of the minds, Once
there is concurrence between the offer and the acceptance upon the subject matter,
consideration, and terms of payment a contract is produced. The offer must be certain. To
convert the offer into a contract, the acceptance must be absolute and must not qualify the terms
of the offer; it must be plain, unequivocal, unconditional, and without variance of any sort from
the proposal. A qualified acceptance, or one that involves a new proposal, constitutes a counter-
offer and is a rejection of the original offer. Consequently, when something is desired which is
not exactly what is proposed in the offer, such acceptance is not sufficient to generate consent
because any modification or variation from the terms of the offer annuls the offer.40
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill on 2 April
1992 to discuss the package of films, said package of 104 VIVA films was VIVA's offer to ABS-
CBN to enter into a new Film Exhibition Agreement. But ABS-CBN, sent, through Ms. Concio, a
counter-proposal in the form of a draft contract proposing exhibition of 53 films for a
consideration of P35 million. This counter-proposal could be nothing less than the counter-offer
of Mr. Lopez during his conference with Del Rosario at Tamarind Grill Restaurant. Clearly, there
was no acceptance of VIVA's offer, for it was met by a counter-offer which substantially varied
the terms of the offer.
ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of
Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is misplaced. In these cases, it
was held that an acceptance may contain a request for certain changes in the terms of the offer
62
and yet be a binding acceptance as long as "it is clear that the meaning of the acceptance is
positively and unequivocally to accept the offer, whether such request is granted or not." This
ruling was, however, reversed in the resolution of 29 March 1996, 43 which ruled that the
acceptance of all offer must be unqualified and absolute, i.e., it "must be identical in all respects
with that of the offer so as to produce consent or meeting of the minds."
On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised counter-
offer were not material but merely clarificatory of what had previously been agreed upon. It cited
the statement in Stuart v. Franklin Life Insurance Co.44 that "a vendor's change in a phrase of
the offer to purchase, which change does not essentially change the terms of the offer, does not
amount to a rejection of the offer and the tender of a counter-offer." 45 However, when any of
the elements of the contract is modified upon acceptance, such alteration amounts to a counter-
offer.
In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence, they
underwent a period of bargaining. ABS-CBN then formalized its counter-proposals or counter-
offer in a draft contract, VIVA through its Board of Directors, rejected such counter-offer, Even if
it be conceded arguendo that Del Rosario had accepted the counter-offer, the acceptance did
not bind VIVA, as there was no proof whatsoever that Del Rosario had the specific authority to
do so.
Under Corporation Code,46 unless otherwise provided by said Code, corporate powers, such as
the power; to enter into contracts; are exercised by the Board of Directors. However, the Board
may delegate such powers to either an executive committee or officials or contracted managers.
The delegation, except for the executive committee, must be for specific purposes, 47
Delegation to officers makes the latter agents of the corporation; accordingly, the general rules of
agency as to the bindings effects of their acts would
apply. 48 For such officers to be deemed fully clothed by the corporation to exercise a power of
the Board, the latter must specially authorize them to do so. That Del Rosario did not have the
authority to accept ABS-CBN's counter-offer was best evidenced by his submission of the draft
contract to VIVA's Board of Directors for the latter's approval. In any event, there was between
Del Rosario and Lopez III no meeting of minds. The following findings of the trial court are
instructive:
A number of considerations militate against ABS-CBN's claim that a contract was
perfected at that lunch meeting on April 02, 1992 at the Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill referred to
the price and the number of films, which he wrote on a napkin. However, Exhibit "C"
contains numerous provisions which, were not discussed at the Tamarind Grill, if Lopez
testimony was to be believed nor could they have been physically written on a napkin.
There was even doubt as to whether it was a paper napkin or a cloth napkin. In short
what were written in Exhibit "C'' were not discussed, and therefore could not have been
agreed upon, by the parties. How then could this court compel the parties to sign Exhibit
"C" when the provisions thereof were not previously agreed upon?
62

SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of the
contract was 14 films. The complaint in fact prays for delivery of 14 films. But Exhibit "C"
mentions 53 films as its subject matter. Which is which If Exhibits "C" reflected the true
intent of the parties, then ABS-CBN's claim for 14 films in its complaint is false or if what
it alleged in the complaint is true, then Exhibit "C" did not reflect what was agreed upon
by the parties. This underscores the fact that there was no meeting of the minds as to
the subject matter of the contracts, so as to preclude perfection thereof. For settled is the
rule that there can be no contract where there is no object which is its subject matter
(Art. 1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh. "D") states:
We were able to reach an agreement. VIVA gave us the exclusive license
to show these fourteen (14) films, and we agreed to pay Viva the amount
of P16,050,000.00 as well as grant Viva commercial slots worth
P19,950,000.00. We had already earmarked this P16, 050,000.00.
which gives a total consideration of P36 million (P19,950,000.00 plus P16,050,000.00.
equals P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q. What was written in this napkin?
A. The total price, the breakdown the known Viva movies, the 7
blockbuster movies and the other 7 Viva movies because the price was
broken down accordingly. The none [sic] Viva and the seven other Viva
movies and the sharing between the cash portion and the concerned spot
portion in the total amount of P35 million pesos.
Now, which is which? P36 million or P35 million? This weakens ABS-CBN's claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted Exhibit "C" to
Mr. Del Rosario with a handwritten note, describing said Exhibit "C" as a "draft." (Exh.
"5" - Viva; tsn pp. 23-24 June 08, 1992). The said draft has a well defined meaning.
Since Exhibit "C" is only a draft, or a tentative, provisional or preparatory writing
prepared for discussion, the terms and conditions thereof could not have been
previously agreed upon by ABS-CBN and Viva Exhibit "C'' could not therefore legally
bind Viva, not having agreed thereto. In fact, Ms. Concio admitted that the terms and
conditions embodied in Exhibit "C" were prepared by ABS-CBN's lawyers and there was
no discussion on said terms and conditions. . . .
63
As the parties had not yet discussed the proposed terms and conditions in Exhibit "C,"
and there was no evidence whatsoever that Viva agreed to the terms and conditions
thereof, said document cannot be a binding contract. The fact that Viva refused to sign
Exhibit "C" reveals only two [sic] well that it did not agree on its terms and conditions,
and this court has no authority to compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at the
Tamarind Grill was only provisional, in the sense that it was subject to approval by the
Board of Directors of Viva. He testified:
Q. Now, Mr. Witness, and after that Tamarind meeting ... the second
meeting wherein you claimed that you have the meeting of the minds
between you and Mr. Vic del Rosario, what happened?
A. Vic Del Rosario was supposed to call us up and tell us specifically the
result of the discussion with the Board of Directors.
Q. And you are referring to the so-called agreement which you wrote in
[sic] a piece of paper?
A. Yes, sir.
Q. So, he was going to forward that to the board of Directors for approval?
A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)
Q. Did Mr. Del Rosario tell you that he will submit it to his Board for
approval?
A. Yes, sir. (Tsn, p. 69, June 8, 1992).
The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del Rosario
had no authority to bind Viva to a contract with ABS-CBN until and unless its Board of
Directors approved it. The complaint, in fact, alleges that Mr. Del Rosario "is the
Executive Producer of defendant Viva" which "is a corporation." (par. 2, complaint). As a
mere agent of Viva, Del Rosario could not bind Viva unless what he did is ratified by its
Board of Directors. (Vicente vs. Geraldez, 52 SCRA 210; Arnold vs. Willets and
Paterson, 44 Phil. 634). As a mere agent, recognized as such by plaintiff, Del Rosario
could not be held liable jointly and severally with Viva and his inclusion as party
defendant has no legal basis. (Salonga vs. Warner Barner [sic] , COLTA , 88 Phil. 125;
Salmon vs. Tan, 36 Phil. 556).
63

The testimony of Mr. Lopez and the allegations in the complaint are clear admissions
that what was supposed to have been agreed upon at the Tamarind Grill between Mr.
Lopez and Del Rosario was not a binding agreement. It is as it should be because
corporate power to enter into a contract is lodged in the Board of Directors. (Sec. 23,
Corporation Code). Without such board approval by the Viva board, whatever agreement
Lopez and Del Rosario arrived at could not ripen into a valid contract binding upon Viva
(Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA 763). The evidence adduced
shows that the Board of Directors of Viva rejected Exhibit "C" and insisted that the film
package for 140 films be maintained (Exh. "7-1" - Viva ). 49
The contention that ABS-CBN had yet to fully exercise its right of first refusal over twenty-four
films under the 1990 Film Exhibition Agreement and that the meeting between Lopez and Del
Rosario was a continuation of said previous contract is untenable. As observed by the trial court,
ABS-CBN right of first refusal had already been exercised when Ms. Concio wrote to VIVA
ticking off ten films, Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months after this letter was sent,
was for an entirely different package. Ms. Concio herself admitted on cross-examination
to having used or exercised the right of first refusal. She stated that the list was not
acceptable and was indeed not accepted by ABS-CBN, (TSN, June 8, 1992, pp. 8-10).
Even Mr. Lopez himself admitted that the right of the first refusal may have been already
exercised by Ms. Concio (as she had). (TSN, June 8, 1992, pp. 71-75). Del Rosario
himself knew and understand [sic] that ABS-CBN has lost its rights of the first refusal
when his list of 36 titles were rejected (Tsn, June 9, 1992, pp. 10-11) 50
II
However, we find for ABS-CBN on the issue of damages. We shall first take up actual damages.
Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on actual or compensatory
damages. Except as provided by law or by stipulation, one is entitled to compensation for actual
damages only for such pecuniary loss suffered by him as he has duly proved. 51 The
indemnification shall comprehend not only the value of the loss suffered, but also that of the
profits that the obligee failed to obtain. 52 In contracts and quasi-contracts the damages which
may be awarded are dependent on whether the obligor acted with good faith or otherwise, It
case of good faith, the damages recoverable are those which are the natural and probable
consequences of the breach of the obligation and which the parties have foreseen or could have
reasonably foreseen at the time of the constitution of the obligation. If the obligor acted with
fraud, bad faith, malice, or wanton attitude, he shall be responsible for all damages which may
be reasonably attributed to the non-performance of the obligation. 53 In crimes and quasi-delicts,
the defendant shall be liable for all damages which are the natural and probable consequences
of the act or omission complained of, whether or not such damages has been foreseen or could
have reasonably been foreseen by the defendant.54
Actual damages may likewise be recovered for loss or impairment of earning capacity in cases of
temporary or permanent personal injury, or for injury to the plaintiff's business standing or
commercial credit.55
64
The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or quasi-
delict. It arose from the fact of filing of the complaint despite ABS-CBN's alleged knowledge of
lack of cause of action. Thus paragraph 12 of RBS's Answer with Counterclaim and Cross-claim
under the heading COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully well that it has no cause of action RBS.
As a result thereof, RBS suffered actual damages in the amount of P6,621,195.32. 56
Needless to state the award of actual damages cannot be comprehended under the above law
on actual damages. RBS could only probably take refuge under Articles 19, 20, and 21 of the
Civil Code, which read as follows:
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.
Art. 20. Every person who, contrary to law, wilfully or negligently causes damage to
another, shall indemnify the latter for tile same.
Art. 21. Any person who wilfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for the
damage.
It may further be observed that in cases where a writ of preliminary injunction is issued, the
damages which the defendant may suffer by reason of the writ are recoverable from the
injunctive bond. 57 In this case, ABS-CBN had not yet filed the required bond; as a matter of
fact, it asked for reduction of the bond and even went to the Court of Appeals to challenge the
order on the matter, Clearly then, it was not necessary for RBS to file a counterbond. Hence,
ABS-CBN cannot be held responsible for the premium RBS paid for the counterbond.
Neither could ABS-CBN be liable for the print advertisements for "Maging Sino Ka Man" for lack
of sufficient legal basis. The RTC issued a temporary restraining order and later, a writ of
preliminary injunction on the basis of its determination that there existed sufficient ground for the
issuance thereof. Notably, the RTC did not dissolve the injunction on the ground of lack of legal
and factual basis, but because of the plea of RBS that it be allowed to put up a counterbond.
As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's fees may
be recovered as actual or compensatory damages under any of the circumstances provided for
in Article 2208 of the Civil Code. 58
The general rule is that attorney's fees cannot be recovered as part of damages because of the
policy that no premium should be placed on the right to litigate.59 They are not to be awarded
every time a party wins a suit. The power of the court to award attorney's fees under Article 2208
demands factual, legal, and equitable justification.60 Even when claimant is compelled to litigate
64
 65

with third persons or to incur expenses to protect his rights, still attorney's fees may not be
awarded where no sufficient showing of bad faith could be reflected in a party's persistence in a
case other than erroneous conviction of the righteousness of his cause. 61
As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code.
Article 2217 thereof defines what are included in moral damages, while Article 2219 enumerates
the cases where they may be recovered, Article 2220 provides that moral damages may be
recovered in breaches of contract where the defendant acted fraudulently or in bad faith. RBS's
claim for moral damages could possibly fall only under item (10) of Article 2219, thereof which
reads:
The elements of abuse of right under Article 19 are the following: (1) the existence of a legal right
or duty, (2) which is exercised in bad faith, and (3) for the sole intent of prejudicing or injuring
another. Article 20 speaks of the general sanction for all other provisions of law which do not
especially provide for their own sanction; while Article 21 deals with acts contra bonus mores,
and has the following elements; (1) there is an act which is legal, (2) but which is contrary to
morals, good custom, public order, or public policy, and (3) and it is done with intent to injure. 72
Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad faith
implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral
obliquity. 73 Such must be substantiated by evidence. 74

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35. There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was honestly
convinced of the merits of its cause after it had undergone serious negotiations culminating in its
formal submission of a draft contract. Settled is the rule that the adverse result of an action does
Moral damages are in the category of an award designed to compensate the claimant for actual not per se make the action wrongful and subject the actor to damages, for the law could not have
injury suffered. and not to impose a penalty on the wrongdoer.62 The award is not meant to meant to impose a penalty on the right to litigate. If damages result from a person's exercise of a
enrich the complainant at the expense of the defendant, but to enable the injured party to obtain right, it is damnum absque injuria.75
means, diversion, or amusements that will serve to obviate then moral suffering he has
undergone. It is aimed at the restoration, within the limits of the possible, of the spiritual status
quo ante, and should be proportionate to the suffering inflicted.63 Trial courts must then guard WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of
against the award of exorbitant damages; they should exercise balanced restrained and Appeals in CA-G.R. CV No, 44125 is hereby REVERSED except as to unappealed award of
measured objectivity to avoid suspicion that it was due to passion, prejudice, or corruption on the attorney's fees in favor of VIVA Productions, Inc.1âwphi1.nêt
part of the trial court. 64
No pronouncement as to costs.
The award of moral damages cannot be granted in favor of a corporation because, being an
artificial person and having existence only in legal contemplation, it has no feelings, no emotions,
no senses, It cannot, therefore, experience physical suffering and mental anguish, which call be SO ORDERED.
experienced only by one having a nervous system. 65 The statement in People v. Manero 66
and Mambulao Lumber Co. v. PNB 67 that a corporation may recover moral damages if it "has a
good reputation that is debased, resulting in social humiliation" is an obiter dictum. On this score
alone the award for damages must be set aside, since RBS is a corporation.

The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of the Civil
Code. These are imposed by way of example or correction for the public good, in addition to
moral, temperate, liquidated or compensatory damages. 68 They are recoverable in criminal
cases as part of the civil liability when the crime was committed with one or more aggravating
circumstances; 69 in quasi-contracts, if the defendant acted with gross negligence; 70 and in
contracts and quasi-contracts, if the defendant acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner.71

It may be reiterated that the claim of RBS against ABS-CBN is not based on contract, quasi-
contract, delict, or quasi-delict, Hence, the claims for moral and exemplary damages can only be
based on Articles 19, 20, and 21 of the Civil Code.

65

G.R. No. 194366 October 10, 2012
NAPOLEON D. NERI, ALICIA D. NERI-MONDEJAR, VISMINDA D. NERI-CHAMBERS, ROSA
D. NERI-MILLAN, DOUGLAS D. NERI, EUTROPIA D. ILLUT-COCKINOS AND VICTORIA D.
ILLUT-PIALA, Petitioners,
vs.
HEIRS OF HADJI YUSOP UY AND JULPHA* IBRAHIM UY, Respondents.
DECISION
PERLAS-BERNABE, J.:
In this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, petitioners
Napoleon D. Neri (Napoleon), Alicia D. Neri-Mondejar (Alicia), Visminda D. Neri-Chambers
(Visminda), Rosa D. Neri-Millan (Rosa), Douglas D. Neri (Douglas), Eutropia D. Illut-Cockinos
(Eutropia), and Victoria D. Illut-Piala (Victoria) seek to reverse and set aside the April 27, 2010
Decision2 and October 18, 2010 Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No.
01031-MIN which annulled the October 25, 2004 Decision4 of the Regional Trial Court (RTC) of
Panabo City, Davao del Norte and instead, entered a new one dismissing petitioners’ complaint
for annulment of sale, damages and attorney’s feesagainst herein respondents heirs of spouses
Hadji Yusop Uy and Julpha Ibrahim Uy (heirs of Uy).
The Facts
During her lifetime, Anunciacion Neri (Anunciacion) had seven children, two (2) from her first
marriage with Gonzalo Illut (Gonzalo), namely: Eutropia and Victoria, and five (5) from her
second marriage with Enrique Neri (Enrique), namely: Napoleon, Alicia, Visminda, Douglas and
Rosa. Throughout the marriage of spouses Enrique and Anunciacion, they acquired several
homestead properties with a total area of 296,555 square meters located in Samal, Davao del
Norte, embraced by Original Certificate of Title (OCT) Nos. (P-7998) P-21285 , (P-14608) P-
51536 and P-20551 (P-8348)7 issued on February 15, 1957, August 27, 1962 and July 7, 1967,
respectively.
On September 21, 1977, Anunciacion died intestate. Her husband, Enrique, in his personal
capacity and as natural guardian of his minor children Rosa and Douglas, together with
Napoleon, Alicia, and Vismindaexecuted an Extra-Judicial Settlement of the Estate with Absolute
Deed of Sale8 on July 7, 1979, adjudicating among themselves the said homestead properties,
and thereafter, conveying themto the late spouses Hadji Yusop Uy and Julpha Ibrahim Uy
(spouses Uy)for a consideration of ₱ 80,000.00.
On June 11, 1996, the children of Enrique filed a complaint for annulment of saleof the said
homestead properties against spouses Uy (later substituted by their heirs)before the RTC,
docketed as Civil Case No.96-28, assailing the validity of the sale for having been sold within the
prohibited period. Thecomplaint was later amended to include Eutropia and Victoriaas additional
66
plaintiffs for having been excluded and deprived of their legitimes as childrenof Anunciacion from
her first marriage.
In their amended answer with counterclaim, the heirs of Uy countered that the sale took place
beyond the 5-year prohibitory period from the issuance of the homestead patents. They also
denied knowledge of Eutropia and Victoria’s exclusionfrom the extrajudicial settlement and sale
of the subject properties, and interposed further the defenses of prescription and laches.
The RTC Ruling
On October 25, 2004, the RTC rendered a decision ordering, among others, the annulment of
the Extra-Judicial Settlement of the Estate with Absolute Deed of Sale. It ruled that while the sale
occurred beyond the 5-year prohibitory period, the sale is still void because Eutropia and Victoria
were deprived of their hereditary rights and that Enrique had no judicial authority to sell the
shares of his minor children, Rosa and Douglas.
Consequently, it rejected the defenses of laches and prescription raised by spouses Uy, who
claimed possession of the subject properties for 17 years, holding that co-ownership rights are
imprescriptible.
The CA Ruling
On appeal, the CAreversed and set aside the ruling of the RTC in its April 27, 2010 Decision and
dismissed the complaint of the petitioners. It held that, while Eutropia and Victoria had no
knowledge of the extrajudicial settlement and sale of the subject properties and as such, were
not bound by it, the CA found it unconscionable to permit the annulment of the sale considering
spouses Uy’s possession thereof for 17 years, and thatEutropia and Victoriabelatedlyfiled their
actionin 1997, ormore than two years fromknowledge of their exclusion as heirs in 1994 when
their stepfather died. It, however, did not preclude the excluded heirs from recovering their
legitimes from their co-heirs.
Similarly, the CA declared the extrajudicial settlement and the subsequent saleas valid and
binding with respect to Enrique and hischildren, holding that as co-owners, they have the right to
dispose of their respective shares as they consider necessary or fit.While recognizing Rosa and
Douglas to be minors at that time, they were deemed to have ratified the sale whenthey failed to
question it upon reaching the age of majority.Italso found laches to have set in because of their
inaction for a long period of time.
The Issues
In this petition, petitioners imputeto the CA the following errors:
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I. WHEN IT UPHELDTHE VALIDITY OF THE "EXTRA JUDICIAL SETTLEMENT OF THE
ESTATE WITH ABSOLUTE DEED OF SALE" AS FAR AS THE SHARES OF EUTROPIA AND
VICTORIA WERE CONCERNED, THEREBY DEPRIVING THEM OF THEIR INHERITANCE;
II. WHEN IT DID NOT NULLIFY OR ANNUL THE "EXTRA JUDICIAL SETTLEMENT OF THE
ESTATE WITH ABSOLUTE DEED OF SALE" WITH RESPECT TO THE SHARESOF ROSA
AND DOUGLAS, THEREBY DEPRIVING THEM OF THEIR INHERITANCE; and
Douglas 1/16
Hence, in the execution of the Extra-Judicial Settlement of the Estate with Absolute Deed of Sale
in favor of spouses Uy, all the heirs of Anunciacionshould have participated. Considering that
Eutropia and Victoria were admittedly excluded and that then minors Rosa and Douglas were not
properly represented therein, the settlement was not valid and binding uponthem and
consequently, a total nullity.

III. WHEN IT FOUND THAT LACHES OR PRESCRIPTION HAS SET IN.

Section 1, Rule 74 of the Rules of Court provides:

The Ruling of the Court

SECTION 1. Extrajudicial settlement by agreement between heirs. – x x x

The petitionis meritorious.

It bears to stress that all the petitioners herein are indisputably legitimate children of Anunciacion
from her first and second marriages with Gonzalo and Enrique, respectively, and consequently,
are entitled to inherit from her in equal shares, pursuant to Articles 979 and 980 of the Civil Code
which read:
ART. 979. Legitimate children and their descendants succeed the parents and other ascendants,
without distinction as to sex or age, and even if they should come from different marriages.
xxx
ART. 980. The children of the deceased shall always inherit from him in their own right, dividing
the inheritance in equal shares.
The fact of the extrajudicial settlement or administration shall be published in a newspaper of
general circulation in the manner provided in the next succeeding section; but no extrajudicial
settlement shall be binding upon any person who has not participated therein or had no notice
thereof. (Underscoring added)
The effect of excluding the heirs in the settlement of estate was further elucidated in Segura v.
Segura,10 thus:
It is clear that Section 1 of Rule 74 does not apply to the partition in question which was null and
void as far as the plaintiffs were concerned. The rule covers only valid partitions. The partition in
the present case was invalid because it excluded six of the nine heirs who were entitled to equal
shares in the partitioned property. Under the rule "no extrajudicial settlement shall be binding
upon any person who has not participated therein or had no notice thereof." As the partition was
a total nullity and did not affect the excluded heirs, it was not correct for the trial court to hold that
their right to challenge the partition had prescribed after two years from its execution…

As such, upon the death of Anunciacion on September 21, 1977, her children and Enrique However, while the settlement of the estate is null and void, the subsequent sale of the subject
acquired their respective inheritances,9 entitling them to their pro indiviso shares in her whole propertiesmade by Enrique and his children, Napoleon, Alicia and Visminda, in favor of the
estate, as follows: respondents isvalid but only with respect to their proportionate shares therein.It cannot be denied
that these heirs have acquired their respective shares in the properties of Anunciacion from the
moment of her death11 and that, as owners thereof, they can very well sell their undivided share
Enrique 9/16 (1/2 of the conjugal assets + 1/16) in the estate.12
Eutropia 1/16
Victoria 1/16 With respect to Rosa and Douglas who were minors at the time of the execution of the
settlement and sale, their natural guardian and father, Enrique, represented them in the
Napoleon 1/16
transaction. However, on the basis of the laws prevailing at that time, Enrique was merely
Alicia 1/16 clothed with powers of administration and bereft of any authority to dispose of their 2/16 shares
in the estate of their mother, Anunciacion.
Visminda 1/16
Rosa 1/16
Articles 320 and 326 of the Civil Code, the laws in force at the time of the execution of the
settlement and sale, provide:

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ART. 320. The father, or in his absence the mother, is the legal administrator of the property
pertaining to the child under parental authority. If the property is worth more than two thousand
pesos, the father or mother shall give a bond subject to the approval of the Court of First
Instance.
ART. 326. When the property of the child is worth more than two thousand pesos, the father or
mother shall be considered a guardian of the child’s property, subject to the duties and
obligations of guardians under the Rules of Court.
Corollarily, Section 7, Rule 93 of the Rules of Court also provides:
SEC. 7. Parents as Guardians. – When the property of the child under parental authority is worth
two thousand pesos or less, the father or the mother, without the necessity of court appointment,
shall be his legal guardian. When the property of the child is worth more than two thousand
pesos, the father or the mother shall be considered guardian of the child’s property, with the
duties and obligations of guardians under these Rules, and shall file the petition required by
Section 2 hereof. For good reasons, the court may, however, appoint another suitable persons.
Administration includes all acts for the preservation of the property and the receipt of fruits
according to the natural purpose of the thing. Any act of disposition or alienation, or any
reduction in the substance of the patrimony of child, exceeds the limits of administration.13 Thus,
a father or mother, as the natural guardian of the minor under parental authority, does not have
the power to dispose or encumber the property of the latter. Such power is granted by law only to
a judicial guardian of the ward’s property and even then only with courts’ prior approval secured
in accordance with the proceedings set forth by the Rules of Court.14
Consequently, the disputed sale entered into by Enrique in behalf of his minor children without
the proper judicial authority, unless ratified by them upon reaching the age of majority,15 is
unenforceable in accordance with Articles 1317 and 1403(1) of the Civil Code which provide:
ART. 1317. No one may contract in the name of another without being authorized by the latter or
unless he has by law a right to represent him.
A contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified,
expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked
by the other contracting party.
ART. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into the name of another person by one who has been given no authority or
legal representation, or who has acted beyond his powers;
68
xxx
Ratification means that one under no disability voluntarily adopts and gives sanction to some
unauthorized act or defective proceeding, which without his sanction would not be binding on
him. It is this voluntary choice, knowingly made, which amounts to a ratification of what was
theretofore unauthorized, and becomes the authorized act of the party so making the
ratification.16 Once ratified, expressly or impliedly such as when the person knowingly received
benefits from it, the contract is cleansed from all its defects from the moment it was
constituted,17 as it has a retroactive effect.
Records, however, show that Rosa had ratified the extrajudicial settlement of the estate with
absolute deed of sale. In Napoleon and Rosa’s Manifestation18 before the RTC dated July 11,
1997,they stated:
"Concerning the sale of our parcel of land executed by our father, Enrique Neri concurred in and
conformed to by us and our other two sisters and brother (the other plaintiffs), in favor of Hadji
Yusop Uy and his spouse Hadja Julpa Uy on July 7, 1979, we both confirmed that the same was
voluntary and freely made by all of us and therefore the sale was absolutely valid and
enforceable as far as we all plaintiffs in this case are concerned;" (Underscoring supplied)
In their June 30, 1997 Joint-Affidavit,19 Napoleon and Rosa also alleged:
"That we are surprised that our names are included in this case since we do not have any
intention to file a case against Hadji Yusop Uy and Julpha Ibrahim Uy and their family and we
respect and acknowledge the validity of the Extra-Judicial Settlement of the Estate with Absolute
Deed of Sale dated July 7, 1979;" (Underscoring supplied)
Clearly, the foregoing statements constitutedratification of the settlement of the estate and the
subsequent sale, thus, purging all the defects existing at the time of its execution and legitimizing
the conveyance of Rosa’s 1/16 share in the estate of Anunciacion to spouses Uy. The same,
however, is not true with respect to Douglas for lack of evidence showing ratification.
Considering, thus, that the extrajudicial settlement with sale is invalid and therefore, not binding
on Eutropia, Victoria and Douglas, only the shares ofEnrique, Napoleon, Alicia, Visminda and
Rosa in the homestead properties have effectivelybeen disposed in favor of spouses Uy. "A
person can only sell what he owns, or is authorized to sell and the buyer can as a consequence
acquire no more than what the sellercan legally transfer."20 On this score, Article 493 of the Civil
Codeis relevant, which provides:
Each co-owner shall have the full ownership of his part and of the fruits and benefits pertaining
thereto, and he may therefore alienate, assign or mortgage it, and even substitute another
person in its enjoyment, except when personal rights are involved. But the effect of the alienation
or the mortgage, with respect to the co-owners, shall be limited to the portion which may be
allotted to him in the division upon the termination of the co-ownership.
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 69

Consequently, spouses Uy or their substituted heirs became pro indiviso co-owners of the
homestead properties with Eutropia, Victoria and Douglas, who retained title to their respective
1/16 shares. They were deemed to be holding the 3/16 shares of Eutropia, Victoria and Douglas
under an implied constructive trust for the latter’s benefit, conformably with Article 1456 of the
Civil Code which states:"if property is acquired through mistake or fraud, the person obtaining it
is, by force of law, considered a trustee of an implied trust for the benefit of the person from
whom the property comes." As such, it is only fair, just and equitable that the amount paid for
their shares equivalent to ₱ 5,000.0021 each or a total of ₱ 15,000.00 be returned to spouses Uy
with legal interest.
4. Ordering the estate of the late Enrique Neri, as well as Napoleon Neri, Alicia D.
Neri-Mondejar, Visminda D. Neri-Chambers and Rosa D. Neri-Millan to return to the
respondents jointly and solidarily the amount paid corresponding to the 3/16 shares of
Eutropia, Victoria and Douglas in the total amount of ₱ 15,000.00, with legal interest
at 6% per annum computed from the time of payment until finality of this decision and
12% per annum thereafter until fully paid.
No pronouncement as to costs.

On the issue of prescription, the Court agrees with petitioners that the present action has not SO ORDERED.
prescribed in so far as it seeks to annul the extrajudicial settlement of the estate. Contrary to the
ruling of the CA, the prescriptive period of 2 years provided in Section 1 Rule 74 of the Rules of

Court reckoned from the execution of the extrajudicial settlement finds no application to
petitioners Eutropia, Victoria and Douglas, who were deprived of their lawful participation in the
subject estate. Besides, an "action or defense for the declaration of the inexistence of a contract
does not prescribe" in accordance with Article 1410 of the Civil Code.

However, the action to recover property held in trust prescribes after 10 years from the time the
cause of action accrues,22 which is from the time of actual notice in case of unregistered
deed.23 In this case, Eutropia, Victoria and Douglas claimed to have knowledge of the
extrajudicial settlement with sale after the death of their father, Enrique, in 1994 which spouses
Uy failed to refute. Hence, the complaint filed in 1997 was well within the prescriptive period of
10 years.

WHEREFORE, the instant petition is GRANTED. The April 27, 2010 Decision and October 18,
2010 Resolution of the Court of Appeals are REVERSED and SET ASIDE and a new judgment
is entered:

1. Declaring the Extra-Judicial Settlement of the Estate of Anunciacion Neri NULL

and VOID;

2. Declaring the Absolute Deed of Sale in favor of the late spouses Hadji Yusop Uy
and Julpha Ibrahim Uy as regards the 13/16 total shares of the late Enrique Neri,
Napoleon Neri, Alicia D. Neri-Mondejar, Visminda D. Neri-Chambers and Rosa D.
Neri-Millan VALID;

3. Declaring Eutropia D. Illut-Cockinos, Victoria D. Illut-Piala and Douglas D. Neri as

the LAWFUL OWNERS of the 3/16 portions of the subject homestead properties,
covered by Original Certificate of Title Nos. (P-7998) P-2128, (P-14608) P-5153 and G.R. No. 155001 May 5, 2003
P-20551 (P-8348); and

DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA,

MANUEL ANTONIO B. BOÑE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V.

69

DOMALAON, CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO,
BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION - NATIONAL LABOR UNION
(MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL
AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS
and SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of
Transportation and Communications, respondents,
MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS
CORPORATION, MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT
SERVICES CORPORATION, MIASCOR CATERING SERVICES CORPORATION, MIASCOR
AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR LOGISTICS CORPORATION,
petitioners-in-intervention,
x---------------------------------------------------------x
G.R. No. 155547 May 5, 2003
SALACNIB F. BATERINA, CLAVEL A. MARTINEZ and CONSTANTINO G. JARAULA,
petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL
AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS,
DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS, SECRETARY LEANDRO M.
MENDOZA, in his capacity as Head of the Department of Transportation and
Communications, and SECRETARY SIMEON A. DATUMANONG, in his capacity as Head of
the Department of Public Works and Highways, respondents,
JACINTO V. PARAS, RAFAEL P. NANTES, EDUARDO C. ZIALCITA, WILLY BUYSON
VILLARAMA, PROSPERO C. NOGRALES, PROSPERO A. PICHAY, JR., HARLIN CAST
ABAYON, and BENASING O. MACARANBON, respondents-intervenors,
x---------------------------------------------------------x
G.R. No. 155661 May 5, 2003
CEFERINO C. LOPEZ, RAMON M. SALES, ALFREDO B. VALENCIA, MA. TERESA V.
GAERLAN, LEONARDO DE LA ROSA, DINA C. DE LEON, VIRGIE CATAMIN RONALD
SCHLOBOM, ANGELITO SANTOS, MA. LUISA M. PALCON and SAMAHANG
MANGGAGAWA SA PALIPARAN NG PILIPINAS (SMPP), petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL
AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS,
SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of
Transportation and Communications, respondents.
70
PUNO, J.:
Petitioners and petitioners-in-intervention filed the instant petitions for prohibition under Rule 65
of the Revised Rules of Court seeking to prohibit the Manila International Airport Authority
(MIAA) and the Department of Transportation and Communications (DOTC) and its Secretary
from implementing the following agreements executed by the Philippine Government through the
DOTC and the MIAA and the Philippine International Air Terminals Co., Inc. (PIATCO): (1) the
Concession Agreement signed on July 12, 1997, (2) the Amended and Restated Concession
Agreement dated November 26, 1999, (3) the First Supplement to the Amended and Restated
Concession Agreement dated August 27, 1999, (4) the Second Supplement to the Amended and
Restated Concession Agreement dated September 4, 2000, and (5) the Third Supplement to the
Amended and Restated Concession Agreement dated June 22, 2001 (collectively, the PIATCO
Contracts).
The facts are as follows:
In August 1989, the DOTC engaged the services of Aeroport de Paris (ADP) to conduct a
comprehensive study of the Ninoy Aquino International Airport (NAIA) and determine whether
the present airport can cope with the traffic development up to the year 2010. The study
consisted of two parts: first, traffic forecasts, capacity of existing facilities, NAIA future
requirements, proposed master plans and development plans; and second, presentation of the
preliminary design of the passenger terminal building. The ADP submitted a Draft Final Report to
the DOTC in December 1989.
Some time in 1993, six business leaders consisting of John Gokongwei, Andrew Gotianun,
Henry Sy, Sr., Lucio Tan, George Ty and Alfonso Yuchengco met with then President Fidel V.
Ramos to explore the possibility of investing in the construction and operation of a new
international airport terminal. To signify their commitment to pursue the project, they formed the
Asia's Emerging Dragon Corp. (AEDC) which was registered with the Securities and Exchange
Commission (SEC) on September 15, 1993.
On October 5, 1994, AEDC submitted an unsolicited proposal to the Government through the
DOTC/MIAA for the development of NAIA International Passenger Terminal III (NAIA IPT III)
under a build-operate-and-transfer arrangement pursuant to RA 6957 as amended by RA 7718
(BOT Law).1
On December 2, 1994, the DOTC issued Dept. Order No. 94-832 constituting the
Prequalification Bids and Awards Committee (PBAC) for the implementation of the NAIA IPT III
project.
On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the proposal of AEDC to the
National Economic and Development Authority (NEDA). A revised proposal, however, was
forwarded by the DOTC to NEDA on December 13, 1995. On January 5, 1996, the NEDA
Investment Coordinating Council (NEDA ICC) – Technical Board favorably endorsed the project
70

to the ICC – Cabinet Committee which approved the same, subject to certain conditions, on
January 19, 1996. On February 13, 1996, the NEDA passed Board Resolution No. 2 which
approved the NAIA IPT III project.
On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two daily newspapers of an
invitation for competitive or comparative proposals on AEDC's unsolicited proposal, in
accordance with Sec. 4-A of RA 6957, as amended. The alternative bidders were required to
submit three (3) sealed envelopes on or before 5:00 p.m. of September 20, 1996. The first
envelope should contain the Prequalification Documents, the second envelope the Technical
Proposal, and the third envelope the Financial Proposal of the proponent.
On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the availment of the Bid
Documents and the submission of the comparative bid proposals. Interested firms were
permitted to obtain the Request for Proposal Documents beginning June 28, 1996, upon
submission of a written application and payment of a non-refundable fee of P50,000.00
(US$2,000).
The Bid Documents issued by the PBAC provided among others that the proponent must have
adequate capability to sustain the financing requirement for the detailed engineering, design,
construction, operation, and maintenance phases of the project. The proponent would be
evaluated based on its ability to provide a minimum amount of equity to the project, and its
capacity to secure external financing for the project.
On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all bidders to a pre-bid
conference on July 29, 1996.
On August 16, 1996, the PBAC issued PBAC Bulletin No. 3 amending the Bid Documents. The
following amendments were made on the Bid Documents:
a. Aside from the fixed Annual Guaranteed Payment, the proponent shall include in its
financial proposal an additional percentage of gross revenue share of the
Government, as follows:
i. First 5 years 5.0%
ii. Next 10 years 7.5%
iii. Next 10 years 10.0%
b. The amount of the fixed Annual Guaranteed Payment shall be subject of the price
challenge. Proponent may offer an Annual Guaranteed Payment which need not be of
equal amount, but payment of which shall start upon site possession.
71
c. The project proponent must have adequate capability to sustain the financing
requirement for the detailed engineering, design, construction, and/or operation and
maintenance phases of the project as the case may be. For purposes of pre-
qualification, this capability shall be measured in terms of:
i. Proof of the availability of the project proponent and/or the consortium to
provide the minimum amount of equity for the project; and
ii. a letter testimonial from reputable banks attesting that the project
proponent and/or the members of the consortium are banking with them,
that the project proponent and/or the members are of good financial
standing, and have adequate resources.
d. The basis for the prequalification shall be the proponent's compliance with the
minimum technical and financial requirements provided in the Bid Documents and the
IRR of the BOT Law. The minimum amount of equity shall be 30% of the Project Cost.
e. Amendments to the draft Concession Agreement shall be issued from time to time.
Said amendments shall only cover items that would not materially affect the
preparation of the proponent's proposal.
On August 29, 1996, the Second Pre-Bid Conference was held where certain clarifications were
made. Upon the request of prospective bidder People's Air Cargo & Warehousing Co., Inc
(Paircargo), the PBAC warranted that based on Sec. 11.6, Rule 11 of the Implementing Rules
and Regulations of the BOT Law, only the proposed Annual Guaranteed Payment submitted by
the challengers would be revealed to AEDC, and that the challengers' technical and financial
proposals would remain confidential. The PBAC also clarified that the list of revenue sources
contained in Annex 4.2a of the Bid Documents was merely indicative and that other revenue
sources may be included by the proponent, subject to approval by DOTC/MIAA. Furthermore,
the PBAC clarified that only those fees and charges denominated as Public Utility Fees would be
subject to regulation, and those charges which would be actually deemed Public Utility Fees
could still be revised, depending on the outcome of PBAC's query on the matter with the
Department of Justice.
In September 1996, the PBAC issued Bid Bulletin No. 5, entitled "Answers to the Queries of
PAIRCARGO as Per Letter Dated September 3 and 10, 1996." Paircargo's queries and the
PBAC's responses were as follows:
1. It is difficult for Paircargo and Associates to meet the required minimum equity
requirement as prescribed in Section 8.3.4 of the Bid Documents considering that the
capitalization of each member company is so structured to meet the requirements and
needs of their current respective business undertaking/activities. In order to comply
with this equity requirement, Paircargo is requesting PBAC to just allow each member
of (sic) corporation of the Joint Venture to just execute an agreement that embodies a
71

commitment to infuse the required capital in case the project is awarded to the Joint
Venture instead of increasing each corporation's current authorized capital stock just
for prequalification purposes.
In prequalification, the agency is interested in one's financial capability at the time of
prequalification, not future or potential capability.
A commitment to put up equity once awarded the project is not enough to establish
that "present" financial capability. However, total financial capability of all member
companies of the Consortium, to be established by submitting the respective
companies' audited financial statements, shall be acceptable.
2. At present, Paircargo is negotiating with banks and other institutions for the
extension of a Performance Security to the joint venture in the event that the
Concessions Agreement (sic) is awarded to them. However, Paircargo is being
required to submit a copy of the draft concession as one of the documentary
requirements. Therefore, Paircargo is requesting that they'd (sic) be furnished copy of
the approved negotiated agreement between the PBAC and the AEDC at the soonest
possible time.
A copy of the draft Concession Agreement is included in the Bid Documents. Any
material changes would be made known to prospective challengers through bid
bulletins. However, a final version will be issued before the award of contract.
The PBAC also stated that it would require AEDC to sign Supplement C of the Bid Documents
(Acceptance of Criteria and Waiver of Rights to Enjoin Project) and to submit the same with the
required Bid Security.
On September 20, 1996, the consortium composed of People's Air Cargo and Warehousing Co.,
Inc. (Paircargo), Phil. Air and Grounds Services, Inc. (PAGS) and Security Bank Corp. (Security
Bank) (collectively, Paircargo Consortium) submitted their competitive proposal to the PBAC. On
September 23, 1996, the PBAC opened the first envelope containing the prequalification
documents of the Paircargo Consortium. On the following day, September 24, 1996, the PBAC
prequalified the Paircargo Consortium.
On September 26, 1996, AEDC informed the PBAC in writing of its reservations as regards the
Paircargo Consortium, which include:
a. The lack of corporate approvals and financial capability of PAIRCARGO;
b. The lack of corporate approvals and financial capability of PAGS;
72
c. The prohibition imposed by RA 337, as amended (the General Banking Act) on the
amount that Security Bank could legally invest in the project;
d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint Venture, for
prequalification purposes; and
e. The appointment of Lufthansa as the facility operator, in view of the Philippine
requirement in the operation of a public utility.
The PBAC gave its reply on October 2, 1996, informing AEDC that it had considered the issues
raised by the latter, and that based on the documents submitted by Paircargo and the
established prequalification criteria, the PBAC had found that the challenger, Paircargo, had
prequalified to undertake the project. The Secretary of the DOTC approved the finding of the
PBAC.
The PBAC then proceeded with the opening of the second envelope of the Paircargo Consortium
which contained its Technical Proposal.
On October 3, 1996, AEDC reiterated its objections, particularly with respect to Paircargo's
financial capability, in view of the restrictions imposed by Section 21-B of the General Banking
Act and Sections 1380 and 1381 of the Manual Regulations for Banks and Other Financial
Intermediaries. On October 7, 1996, AEDC again manifested its objections and requested that it
be furnished with excerpts of the PBAC meeting and the accompanying technical evaluation
report where each of the issues they raised were addressed.
On October 16, 1996, the PBAC opened the third envelope submitted by AEDC and the
Paircargo Consortium containing their respective financial proposals. Both proponents offered to
build the NAIA Passenger Terminal III for at least $350 million at no cost to the government and
to pay the government: 5% share in gross revenues for the first five years of operation, 7.5%
share in gross revenues for the next ten years of operation, and 10% share in gross revenues for
the last ten years of operation, in accordance with the Bid Documents. However, in addition to
the foregoing, AEDC offered to pay the government a total of P135 million as guaranteed
payment for 27 years while Paircargo Consortium offered to pay the government a total of
P17.75 billion for the same period.
Thus, the PBAC formally informed AEDC that it had accepted the price proposal submitted by
the Paircargo Consortium, and gave AEDC 30 working days or until November 28, 1996 within
which to match the said bid, otherwise, the project would be awarded to Paircargo.
As AEDC failed to match the proposal within the 30-day period, then DOTC Secretary Amado
Lagdameo, on December 11, 1996, issued a notice to Paircargo Consortium regarding AEDC's
failure to match the proposal.
72

On February 27, 1997, Paircargo Consortium incorporated into Philippine International Airport
Terminals Co., Inc. (PIATCO).
AEDC subsequently protested the alleged undue preference given to PIATCO and reiterated its
objections as regards the prequalification of PIATCO.
On April 11, 1997, the DOTC submitted the concession agreement for the second-pass approval
of the NEDA-ICC.
On April 16, 1997, AEDC filed with the Regional Trial Court of Pasig a Petition for Declaration of
Nullity of the Proceedings, Mandamus and Injunction against the Secretary of the DOTC, the
Chairman of the PBAC, the voting members of the PBAC and Pantaleon D. Alvarez, in his
capacity as Chairman of the PBAC Technical Committee.
On April 17, 1997, the NEDA-ICC conducted an ad referendum to facilitate the approval, on a
no-objection basis, of the BOT agreement between the DOTC and PIATCO. As the ad
referendum gathered only four (4) of the required six (6) signatures, the NEDA merely noted the
agreement.
On July 9, 1997, the DOTC issued the notice of award for the project to PIATCO.
On July 12, 1997, the Government, through then DOTC Secretary Arturo T. Enrile, and PIATCO,
through its President, Henry T. Go, signed the "Concession Agreement for the Build-Operate-
and-Transfer Arrangement of the Ninoy Aquino International Airport Passenger Terminal III"
(1997 Concession Agreement). The Government granted PIATCO the franchise to operate and
maintain the said terminal during the concession period and to collect the fees, rentals and other
charges in accordance with the rates or schedules stipulated in the 1997 Concession
Agreement. The Agreement provided that the concession period shall be for twenty-five (25)
years commencing from the in-service date, and may be renewed at the option of the
Government for a period not exceeding twenty-five (25) years. At the end of the concession
period, PIATCO shall transfer the development facility to MIAA.
On November 26, 1998, the Government and PIATCO signed an Amended and Restated
Concession Agreement (ARCA). Among the provisions of the 1997 Concession Agreement that
were amended by the ARCA were: Sec. 1.11 pertaining to the definition of "certificate of
completion"; Sec. 2.05 pertaining to the Special Obligations of GRP; Sec. 3.02 (a) dealing with
the exclusivity of the franchise given to the Concessionaire; Sec. 4.04 concerning the
assignment by Concessionaire of its interest in the Development Facility; Sec. 5.08 (c) dealing
with the proceeds of Concessionaire's insurance; Sec. 5.10 with respect to the temporary take-
over of operations by GRP; Sec. 5.16 pertaining to the taxes, duties and other imposts that may
be levied on the Concessionaire; Sec. 6.03 as regards the periodic adjustment of public utility
fees and charges; the entire Article VIII concerning the provisions on the termination of the
contract; and Sec. 10.02 providing for the venue of the arbitration proceedings in case a dispute
or controversy arises between the parties to the agreement.
73
Subsequently, the Government and PIATCO signed three Supplements to the ARCA. The First
Supplement was signed on August 27, 1999; the Second Supplement on September 4, 2000;
and the Third Supplement on June 22, 2001 (collectively, Supplements).
The First Supplement to the ARCA amended Sec. 1.36 of the ARCA defining "Revenues" or
"Gross Revenues"; Sec. 2.05 (d) of the ARCA referring to the obligation of MIAA to provide
sufficient funds for the upkeep, maintenance, repair and/or replacement of all airport facilities
and equipment which are owned or operated by MIAA; and further providing additional special
obligations on the part of GRP aside from those already enumerated in Sec. 2.05 of the ARCA.
The First Supplement also provided a stipulation as regards the construction of a surface road to
connect NAIA Terminal II and Terminal III in lieu of the proposed access tunnel crossing Runway
13/31; the swapping of obligations between GRP and PIATCO regarding the improvement of
Sales Road; and the changes in the timetable. It also amended Sec. 6.01 (c) of the ARCA
pertaining to the Disposition of Terminal Fees; Sec. 6.02 of the ARCA by inserting an
introductory paragraph; and Sec. 6.02 (a) (iii) of the ARCA referring to the Payments of
Percentage Share in Gross Revenues.
The Second Supplement to the ARCA contained provisions concerning the clearing, removal,
demolition or disposal of subterranean structures uncovered or discovered at the site of the
construction of the terminal by the Concessionaire. It defined the scope of works; it provided for
the procedure for the demolition of the said structures and the consideration for the same which
the GRP shall pay PIATCO; it provided for time extensions, incremental and consequential costs
and losses consequent to the existence of such structures; and it provided for some additional
obligations on the part of PIATCO as regards the said structures.
Finally, the Third Supplement provided for the obligations of the Concessionaire as regards the
construction of the surface road connecting Terminals II and III.
Meanwhile, the MIAA which is charged with the maintenance and operation of the NAIA
Terminals I and II, had existing concession contracts with various service providers to offer
international airline airport services, such as in-flight catering, passenger handling, ramp and
ground support, aircraft maintenance and provisions, cargo handling and warehousing, and other
services, to several international airlines at the NAIA. Some of these service providers are the
Miascor Group, DNATA-Wings Aviation Systems Corp., and the MacroAsia Group. Miascor,
DNATA and MacroAsia, together with Philippine Airlines (PAL), are the dominant players in the
industry with an aggregate market share of 70%.
On September 17, 2002, the workers of the international airline service providers, claiming that
they stand to lose their employment upon the implementation of the questioned agreements,
filed before this Court a petition for prohibition to enjoin the enforcement of said agreements.2
On October 15, 2002, the service providers, joining the cause of the petitioning workers, filed a
motion for intervention and a petition-in-intervention.
73

On October 24, 2002, Congressmen Salacnib Baterina, Clavel Martinez and Constantino Jaraula
filed a similar petition with this Court.3
On November 6, 2002, several employees of the MIAA likewise filed a petition assailing the
legality of the various agreements.4
On December 11, 2002. another group of Congressmen, Hon. Jacinto V. Paras, Rafael P.
Nantes, Eduardo C. Zialcita, Willie B. Villarama, Prospero C. Nograles, Prospero A. Pichay, Jr.,
Harlin Cast Abayon and Benasing O. Macaranbon, moved to intervene in the case as
Respondents-Intervenors. They filed their Comment-In-Intervention defending the validity of the
assailed agreements and praying for the dismissal of the petitions.
During the pendency of the case before this Court, President Gloria Macapagal Arroyo, on
November 29, 2002, in her speech at the 2002 Golden Shell Export Awards at Malacañang
Palace, stated that she will not "honor (PIATCO) contracts which the Executive Branch's legal
offices have concluded (as) null and void."5
Respondent PIATCO filed its Comments to the present petitions on November 7 and 27, 2002.
The Office of the Solicitor General and the Office of the Government Corporate Counsel filed
their respective Comments in behalf of the public respondents.
On December 10, 2002, the Court heard the case on oral argument. After the oral argument, the
Court then resolved in open court to require the parties to file simultaneously their respective
Memoranda in amplification of the issues heard in the oral arguments within 30 days and to
explore the possibility of arbitration or mediation as provided in the challenged contracts.
In their consolidated Memorandum, the Office of the Solicitor General and the Office of the
Government Corporate Counsel prayed that the present petitions be given due course and that
judgment be rendered declaring the 1997 Concession Agreement, the ARCA and the
Supplements thereto void for being contrary to the Constitution, the BOT Law and its
Implementing Rules and Regulations.
On March 6, 2003, respondent PIATCO informed the Court that on March 4, 2003 PIATCO
commenced arbitration proceedings before the International Chamber of Commerce,
International Court of Arbitration (ICC) by filing a Request for Arbitration with the Secretariat of
the ICC against the Government of the Republic of the Philippines acting through the DOTC and
MIAA.
In the present cases, the Court is again faced with the task of resolving complicated issues made
difficult by their intersecting legal and economic implications. The Court is aware of the far
reaching fall out effects of the ruling which it makes today. For more than a century and
whenever the exigencies of the times demand it, this Court has never shirked from its solemn
duty to dispense justice and resolve "actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not there has been grave abuse of
74
discretion amounting to lack or excess of jurisdiction."6 To be sure, this Court will not begin to do
otherwise today.
We shall first dispose of the procedural issues raised by respondent PIATCO which they allege
will bar the resolution of the instant controversy.
Petitioners' Legal Standing to File
the present Petitions
a. G.R. Nos. 155001 and 155661
In G.R. No. 155001 individual petitioners are employees of various service providers7 having
separate concession contracts with MIAA and continuing service agreements with various
international airlines to provide in-flight catering, passenger handling, ramp and ground support,
aircraft maintenance and provisions, cargo handling and warehousing and other services. Also
included as petitioners are labor unions MIASCOR Workers Union-National Labor Union and
Philippine Airlines Employees Association. These petitioners filed the instant action for
prohibition as taxpayers and as parties whose rights and interests stand to be violated by the
implementation of the PIATCO Contracts.
Petitioners-Intervenors in the same case are all corporations organized and existing under
Philippine laws engaged in the business of providing in-flight catering, passenger handling, ramp
and ground support, aircraft maintenance and provisions, cargo handling and warehousing and
other services to several international airlines at the Ninoy Aquino International Airport.
Petitioners-Intervenors allege that as tax-paying international airline and airport-related service
operators, each one of them stands to be irreparably injured by the implementation of the
PIATCO Contracts. Each of the petitioners-intervenors have separate and subsisting concession
agreements with MIAA and with various international airlines which they allege are being
interfered with and violated by respondent PIATCO.
In G.R. No. 155661, petitioners constitute employees of MIAA and Samahang Manggagawa sa
Paliparan ng Pilipinas - a legitimate labor union and accredited as the sole and exclusive
bargaining agent of all the employees in MIAA. Petitioners anchor their petition for prohibition on
the nullity of the contracts entered into by the Government and PIATCO regarding the build-
operate-and-transfer of the NAIA IPT III. They filed the petition as taxpayers and persons who
have a legitimate interest to protect in the implementation of the PIATCO Contracts.
Petitioners in both cases raise the argument that the PIATCO Contracts contain stipulations
which directly contravene numerous provisions of the Constitution, specific provisions of the BOT
Law and its Implementing Rules and Regulations, and public policy. Petitioners contend that the
DOTC and the MIAA, by entering into said contracts, have committed grave abuse of discretion
amounting to lack or excess of jurisdiction which can be remedied only by a writ of prohibition,
there being no plain, speedy or adequate remedy in the ordinary course of law.
74

In particular, petitioners assail the provisions in the 1997 Concession Agreement and the ARCA
which grant PIATCO the exclusive right to operate a commercial international passenger
terminal within the Island of Luzon, except those international airports already existing at the time
of the execution of the agreement. The contracts further provide that upon the commencement of
operations at the NAIA IPT III, the Government shall cause the closure of Ninoy Aquino
International Airport Passenger Terminals I and II as international passenger terminals. With
respect to existing concession agreements between MIAA and international airport service
providers regarding certain services or operations, the 1997 Concession Agreement and the
ARCA uniformly provide that such services or operations will not be carried over to the NAIA IPT
III and PIATCO is under no obligation to permit such carry over except through a separate
agreement duly entered into with PIATCO.8
With respect to the petitioning service providers and their employees, upon the commencement
of operations of the NAIA IPT III, they allege that they will be effectively barred from providing
international airline airport services at the NAIA Terminals I and II as all international airlines and
passengers will be diverted to the NAIA IPT III. The petitioning service providers will thus be
compelled to contract with PIATCO alone for such services, with no assurance that subsisting
contracts with MIAA and other international airlines will be respected. Petitioning service
providers stress that despite the very competitive market, the substantial capital investments
required and the high rate of fees, they entered into their respective contracts with the MIAA with
the understanding that the said contracts will be in force for the stipulated period, and thereafter,
renewed so as to allow each of the petitioning service providers to recoup their investments and
obtain a reasonable return thereon.
Petitioning employees of various service providers at the NAIA Terminals I and II and of MIAA on
the other hand allege that with the closure of the NAIA Terminals I and II as international
passenger terminals under the PIATCO Contracts, they stand to lose employment.
The question on legal standing is whether such parties have "alleged such a personal stake in
the outcome of the controversy as to assure that concrete adverseness which sharpens the
presentation of issues upon which the court so largely depends for illumination of difficult
constitutional questions."9 Accordingly, it has been held that the interest of a person assailing the
constitutionality of a statute must be direct and personal. He must be able to show, not only that
the law or any government act is invalid, but also that he sustained or is in imminent danger of
sustaining some direct injury as a result of its enforcement, and not merely that he suffers
thereby in some indefinite way. It must appear that the person complaining has been or is about
to be denied some right or privilege to which he is lawfully entitled or that he is about to be
subjected to some burdens or penalties by reason of the statute or act complained of.10
We hold that petitioners have the requisite standing. In the above-mentioned cases, petitioners
have a direct and substantial interest to protect by reason of the implementation of the PIATCO
Contracts. They stand to lose their source of livelihood, a property right which is zealously
protected by the Constitution. Moreover, subsisting concession agreements between MIAA and
petitioners-intervenors and service contracts between international airlines and petitioners-
intervenors stand to be nullified or terminated by the operation of the NAIA IPT III under the
PIATCO Contracts. The financial prejudice brought about by the PIATCO Contracts on
75
petitioners and petitioners-intervenors in these cases are legitimate interests sufficient to confer
on them the requisite standing to file the instant petitions.
b. G.R. No. 155547
In G.R. No. 155547, petitioners filed the petition for prohibition as members of the House of
Representatives, citizens and taxpayers. They allege that as members of the House of
Representatives, they are especially interested in the PIATCO Contracts, because the contracts
compel the Government and/or the House of Representatives to appropriate funds necessary to
comply with the provisions therein.11 They cite provisions of the PIATCO Contracts which require
disbursement of unappropriated amounts in compliance with the contractual obligations of the
Government. They allege that the Government obligations in the PIATCO Contracts which
compel government expenditure without appropriation is a curtailment of their prerogatives as
legislators, contrary to the mandate of the Constitution that "[n]o money shall be paid out of the
treasury except in pursuance of an appropriation made by law."12
Standing is a peculiar concept in constitutional law because in some cases, suits are not brought
by parties who have been personally injured by the operation of a law or any other government
act but by concerned citizens, taxpayers or voters who actually sue in the public interest.
Although we are not unmindful of the cases of Imus Electric Co. v. Municipality of Imus13 and
Gonzales v. Raquiza14 wherein this Court held that appropriation must be made only on
amounts immediately demandable, public interest demands that we take a more liberal view
in determining whether the petitioners suing as legislators, taxpayers and citizens have
locus standi to file the instant petition. In Kilosbayan, Inc. v. Guingona,15 this Court held
"[i]n line with the liberal policy of this Court on locus standi, ordinary taxpayers, members of
Congress, and even association of planters, and non-profit civic organizations were allowed to
initiate and prosecute actions before this Court to question the constitutionality or validity of laws,
acts, decisions, rulings, or orders of various government agencies or instrumentalities."16
Further, "insofar as taxpayers' suits are concerned . . . (this Court) is not devoid of discretion
as to whether or not it should be entertained."17 As such ". . . even if, strictly speaking, they [the
petitioners] are not covered by the definition, it is still within the wide discretion of the Court to
waive the requirement and so remove the impediment to its addressing and resolving the serious
constitutional questions raised."18 In view of the serious legal questions involved and their impact
on public interest, we resolve to grant standing to the petitioners.
Other Procedural Matters
Respondent PIATCO further alleges that this Court is without jurisdiction to review the instant
cases as factual issues are involved which this Court is ill-equipped to resolve. Moreover,
PIATCO alleges that submission of this controversy to this Court at the first instance is a
violation of the rule on hierarchy of courts. They contend that trial courts have concurrent
jurisdiction with this Court with respect to a special civil action for prohibition and hence,
following the rule on hierarchy of courts, resort must first be had before the trial courts.
75

After a thorough study and careful evaluation of the issues involved, this Court is of the view that
the crux of the instant controversy involves significant legal questions. The facts necessary to
resolve these legal questions are well established and, hence, need not be determined by a trial
court.
The rule on hierarchy of courts will not also prevent this Court from assuming jurisdiction over
the cases at bar. The said rule may be relaxed when the redress desired cannot be obtained in
the appropriate courts or where exceptional and compelling circumstances justify availment of a
remedy within and calling for the exercise of this Court's primary jurisdiction.19
It is easy to discern that exceptional circumstances exist in the cases at bar that call for the
relaxation of the rule. Both petitioners and respondents agree that these cases are of
transcendental importance as they involve the construction and operation of the country's
premier international airport. Moreover, the crucial issues submitted for resolution are of first
impression and they entail the proper legal interpretation of key provisions of the Constitution,
the BOT Law and its Implementing Rules and Regulations. Thus, considering the nature of the
controversy before the Court, procedural bars may be lowered to give way for the speedy
disposition of the instant cases.
Legal Effect of the Commencement
of Arbitration Proceedings by
PIATCO
There is one more procedural obstacle which must be overcome. The Court is aware that
arbitration proceedings pursuant to Section 10.02 of the ARCA have been filed at the instance of
respondent PIATCO. Again, we hold that the arbitration step taken by PIATCO will not oust this
Court of its jurisdiction over the cases at bar.
In Del Monte Corporation-USA v. Court of Appeals,20 even after finding that the arbitration clause
in the Distributorship Agreement in question is valid and the dispute between the parties is
arbitrable, this Court affirmed the trial court's decision denying petitioner's Motion to Suspend
Proceedings pursuant to the arbitration clause under the contract. In so ruling, this Court held
that as contracts produce legal effect between the parties, their assigns and heirs, only the
parties to the Distributorship Agreement are bound by its terms, including the arbitration clause
stipulated therein. This Court ruled that arbitration proceedings could be called for but only with
respect to the parties to the contract in question. Considering that there are parties to the case
who are neither parties to the Distributorship Agreement nor heirs or assigns of the parties
thereto, this Court, citing its previous ruling in Salas, Jr. v. Laperal Realty Corporation, 21 held that
to tolerate the splitting of proceedings by allowing arbitration as to some of the parties on the one
hand and trial for the others on the other hand would, in effect, result in multiplicity of suits,
duplicitous procedure and unnecessary delay.22 Thus, we ruled that the interest of justice
76
would best be served if the trial court hears and adjudicates the case in a single and complete
proceeding.
It is established that petitioners in the present cases who have presented legitimate interests
in the resolution of the controversy are not parties to the PIATCO Contracts. Accordingly, they
cannot be bound by the arbitration clause provided for in the ARCA and hence, cannot be
compelled to submit to arbitration proceedings. A speedy and decisive resolution of all the
critical issues in the present controversy, including those raised by petitioners, cannot be
made before an arbitral tribunal. The object of arbitration is precisely to allow an expeditious
determination of a dispute. This objective would not be met if this Court were to allow the parties
to settle the cases by arbitration as there are certain issues involving non-parties to the PIATCO
Contracts which the arbitral tribunal will not be equipped to resolve.
Now, to the merits of the instant controversy.
I
Is PIATCO a qualified bidder?
Public respondents argue that the Paircargo Consortium, PIATCO's predecessor, was not a duly
pre-qualified bidder on the unsolicited proposal submitted by AEDC as the Paircargo Consortium
failed to meet the financial capability required under the BOT Law and the Bid Documents. They
allege that in computing the ability of the Paircargo Consortium to meet the minimum equity
requirements for the project, the entire net worth of Security Bank, a member of the
consortium, should not be considered.
PIATCO relies, on the other hand, on the strength of the Memorandum dated October 14, 1996
issued by the DOTC Undersecretary Primitivo C. Cal stating that the Paircargo Consortium is
found to have a combined net worth of P3,900,000,000.00, sufficient to meet the equity
requirements of the project. The said Memorandum was in response to a letter from Mr. Antonio
Henson of AEDC to President Fidel V. Ramos questioning the financial capability of the
Paircargo Consortium on the ground that it does not have the financial resources to put up the
required minimum equity of P2,700,000,000.00. This contention is based on the restriction under
R.A. No. 337, as amended or the General Banking Act that a commercial bank cannot invest in
any single enterprise in an amount more than 15% of its net worth. In the said Memorandum,
Undersecretary Cal opined:
The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5, require that
financial capability will be evaluated based on total financial capability of all the
member companies of the [Paircargo] Consortium. In this connection, the Challenger
was found to have a combined net worth of P3,926,421,242.00 that could support a
project costing approximately P13 Billion.
76

It is not a requirement that the net worth must be "unrestricted." To impose that as a
requirement now will be nothing less than unfair.
The financial statement or the net worth is not the sole basis in establishing financial
capability. As stated in Bid Bulletin No. 3, financial capability may also be established
by testimonial letters issued by reputable banks. The Challenger has complied with
this requirement.
To recap, net worth reflected in the Financial Statement should not be taken as the
amount of the money to be used to answer the required thirty percent (30%) equity of
the challenger but rather to be used in establishing if there is enough basis to believe
that the challenger can comply with the required 30% equity. In fact, proof of sufficient
equity is required as one of the conditions for award of contract (Section 12.1 IRR of
the BOT Law) but not for pre-qualification (Section 5.4 of the same document).23
Under the BOT Law, in case of a build-operate-and-transfer arrangement, the
contract shall be awarded to the bidder "who, having satisfied the minimum
financial, technical, organizational and legal standards" required by the law, has
submitted the lowest bid and most favorable terms of the project.24 Further, the 1994
Implementing Rules and Regulations of the BOT Law provide:
Section 5.4 Pre-qualification Requirements.
xxx xxx xxx
c. Financial Capability: The project proponent must have adequate capability to
sustain the financing requirements for the detailed engineering design, construction
and/or operation and maintenance phases of the project, as the case may be. For
purposes of pre-qualification, this capability shall be measured in terms of (i) proof of
the ability of the project proponent and/or the consortium to provide a minimum
amount of equity to the project, and (ii) a letter testimonial from reputable banks
attesting that the project proponent and/or members of the consortium are
banking with them, that they are in good financial standing, and that they have
adequate resources. The government agency/LGU concerned shall determine on a
project-to-project basis and before pre-qualification, the minimum amount of equity
needed. (emphasis supplied)
Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3 dated August 16, 1996
amending the financial capability requirements for pre-qualification of the project proponent as
follows:
6. Basis of Pre-qualification
77
The basis for the pre-qualification shall be on the compliance of the proponent to the
minimum technical and financial requirements provided in the Bid Documents and in
the IRR of the BOT Law, R.A. No. 6957, as amended by R.A. 7718.
The minimum amount of equity to which the proponent's financial capability will be
based shall be thirty percent (30%) of the project cost instead of the twenty
percent (20%) specified in Section 3.6.4 of the Bid Documents. This is to correlate
with the required debt-to-equity ratio of 70:30 in Section 2.01a of the draft concession
agreement. The debt portion of the project financing should not exceed 70% of the
actual project cost.
Accordingly, based on the above provisions of law, the Paircargo Consortium or any challenger
to the unsolicited proposal of AEDC has to show that it possesses the requisite financial
capability to undertake the project in the minimum amount of 30% of the project cost
through (i) proof of the ability to provide a minimum amount of equity to the project, and (ii) a
letter testimonial from reputable banks attesting that the project proponent or members of the
consortium are banking with them, that they are in good financial standing, and that they have
adequate resources.
As the minimum project cost was estimated to be US$350,000,000.00 or roughly
P9,183,650,000.00,25 the Paircargo Consortium had to show to the satisfaction of the PBAC that
it had the ability to provide the minimum equity for the project in the amount of at least
P2,755,095,000.00.
Paircargo's Audited Financial Statements as of 1993 and 1994 indicated that it had a net worth
of P2,783,592.00 and P3,123,515.00 respectively.26 PAGS' Audited Financial Statements as of
1995 indicate that it has approximately P26,735,700.00 to invest as its equity for the project. 27
Security Bank's Audited Financial Statements as of 1995 show that it has a net worth equivalent
to its capital funds in the amount of P3,523,504,377.00.28
We agree with public respondents that with respect to Security Bank, the entire amount of its
net worth could not be invested in a single undertaking or enterprise, whether allied or non-allied
in accordance with the provisions of R.A. No. 337, as amended or the General Banking Act:
Sec. 21-B. The provisions in this or in any other Act to the contrary notwithstanding,
the Monetary Board, whenever it shall deem appropriate and necessary to further
national development objectives or support national priority projects, may authorize a
commercial bank, a bank authorized to provide commercial banking services,
as well as a government-owned and controlled bank, to operate under an
expanded commercial banking authority and by virtue thereof exercise, in
addition to powers authorized for commercial banks, the powers of an
Investment House as provided in Presidential Decree No. 129, invest in the
equity of a non-allied undertaking, or own a majority or all of the equity in a
financial intermediary other than a commercial bank or a bank authorized to provide
commercial banking services: Provided, That (a) the total investment in equities shall
77

not exceed fifty percent (50%) of the net worth of the bank; (b) the equity
investment in any one enterprise whether allied or non-allied shall not exceed
fifteen percent (15%) of the net worth of the bank; (c) the equity investment of the
bank, or of its wholly or majority-owned subsidiary, in a single non-allied undertaking
shall not exceed thirty-five percent (35%) of the total equity in the enterprise nor shall
it exceed thirty-five percent (35%) of the voting stock in that enterprise; and (d) the
equity investment in other banks shall be deducted from the investing bank's net
worth for purposes of computing the prescribed ratio of net worth to risk assets.
xxx xxx xxx
Further, the 1993 Manual of Regulations for Banks provides:
SECTION X383. Other Limitations and Restrictions. — The following limitations and
restrictions shall also apply regarding equity investments of banks.
a. In any single enterprise. — The equity investments of banks in any single
enterprise shall not exceed at any time fifteen percent (15%) of the net worth of the
investing bank as defined in Sec. X106 and Subsec. X121.5.
Thus, the maximum amount that Security Bank could validly invest in the Paircargo Consortium
is only P528,525,656.55, representing 15% of its entire net worth. The total net worth therefore
of the Paircargo Consortium, after considering the maximum amounts that may be validly
invested by each of its members is P558,384,871.55 or only 6.08% of the project cost,29 an
amount substantially less than the prescribed minimum equity investment required for the project
in the amount of P2,755,095,000.00 or 30% of the project cost.
The purpose of pre-qualification in any public bidding is to determine, at the earliest opportunity,
the ability of the bidder to undertake the project. Thus, with respect to the bidder's financial
capacity at the pre-qualification stage, the law requires the government agency to examine and
determine the ability of the bidder to fund the entire cost of the project by considering the
maximum amounts that each bidder may invest in the project at the time of pre-
qualification.
The PBAC has determined that any prospective bidder for the construction, operation and
maintenance of the NAIA IPT III project should prove that it has the ability to provide equity in the
minimum amount of 30% of the project cost, in accordance with the 70:30 debt-to-equity ratio
prescribed in the Bid Documents. Thus, in the case of Paircargo Consortium, the PBAC should
determine the maximum amounts that each member of the consortium may commit for the
construction, operation and maintenance of the NAIA IPT III project at the time of pre-
qualification. With respect to Security Bank, the maximum amount which may be invested by it
would only be 15% of its net worth in view of the restrictions imposed by the General Banking
Act. Disregarding the investment ceilings provided by applicable law would not result in a proper
evaluation of whether or not a bidder is pre-qualified to undertake the project as for all intents
78
and purposes, such ceiling or legal restriction determines the true maximum amount which a
bidder may invest in the project.
Further, the determination of whether or not a bidder is pre-qualified to undertake the project
requires an evaluation of the financial capacity of the said bidder at the time the bid is
submitted based on the required documents presented by the bidder. The PBAC should not be
allowed to speculate on the future financial ability of the bidder to undertake the project on the
basis of documents submitted. This would open doors to abuse and defeat the very purpose of a
public bidding. This is especially true in the case at bar which involves the investment of billions
of pesos by the project proponent. The relevant government authority is duty-bound to ensure
that the awardee of the contract possesses the minimum required financial capability to complete
the project. To allow the PBAC to estimate the bidder's future financial capability would not
secure the viability and integrity of the project. A restrictive and conservative application of the
rules and procedures of public bidding is necessary not only to protect the impartiality and
regularity of the proceedings but also to ensure the financial and technical reliability of the
project. It has been held that:
The basic rule in public bidding is that bids should be evaluated based on the required
documents submitted before and not after the opening of bids. Otherwise, the
foundation of a fair and competitive public bidding would be defeated. Strict
observance of the rules, regulations, and guidelines of the bidding process is
the only safeguard to a fair, honest and competitive public bidding.30
Thus, if the maximum amount of equity that a bidder may invest in the project at the time the
bids are submitted falls short of the minimum amounts required to be put up by the bidder, said
bidder should be properly disqualified. Considering that at the pre-qualification stage, the
maximum amounts which the Paircargo Consortium may invest in the project fell short of the
minimum amounts prescribed by the PBAC, we hold that Paircargo Consortium was not a
qualified bidder. Thus the award of the contract by the PBAC to the Paircargo Consortium, a
disqualified bidder, is null and void.
While it would be proper at this juncture to end the resolution of the instant controversy, as the
legal effects of the disqualification of respondent PIATCO's predecessor would come into play
and necessarily result in the nullity of all the subsequent contracts entered by it in pursuance of
the project, the Court feels that it is necessary to discuss in full the pressing issues of the present
controversy for a complete resolution thereof.
II
Is the 1997 Concession Agreement valid?
Petitioners and public respondents contend that the 1997 Concession Agreement is invalid as it
contains provisions that substantially depart from the draft Concession Agreement included in
the Bid Documents. They maintain that a substantial departure from the draft Concession
78

Agreement is a violation of public policy and renders the 1997 Concession Agreement null and
void.
PIATCO maintains, however, that the Concession Agreement attached to the Bid Documents is
intended to be a draft, i.e., subject to change, alteration or modification, and that this intention
was clear to all participants, including AEDC, and DOTC/MIAA. It argued further that said
intention is expressed in Part C (6) of Bid Bulletin No. 3 issued by the PBAC which states:
6. Amendments to the Draft Concessions Agreement
Amendments to the Draft Concessions Agreement shall be issued from time to time.
Said amendments shall only cover items that would not materially affect the
preparation of the proponent's proposal.
By its very nature, public bidding aims to protect the public interest by giving the public the best
possible advantages through open competition. Thus:
Competition must be legitimate, fair and honest. In the field of government contract
law, competition requires, not only `bidding upon a common standard, a common
basis, upon the same thing, the same subject matter, the same undertaking,' but also
that it be legitimate, fair and honest; and not designed to injure or defraud the
government.31
An essential element of a publicly bidded contract is that all bidders must be on equal footing.
Not simply in terms of application of the procedural rules and regulations imposed by the
relevant government agency, but more importantly, on the contract bidded upon. Each bidder
must be able to bid on the same thing. The rationale is obvious. If the winning bidder is allowed
to later include or modify certain provisions in the contract awarded such that the contract is
altered in any material respect, then the essence of fair competition in the public bidding is
destroyed. A public bidding would indeed be a farce if after the contract is awarded, the winning
bidder may modify the contract and include provisions which are favorable to it that were not
previously made available to the other bidders. Thus:
It is inherent in public biddings that there shall be a fair competition among the
bidders. The specifications in such biddings provide the common ground or basis for
the bidders. The specifications should, accordingly, operate equally or indiscriminately
upon all bidders.32
The same rule was restated by Chief Justice Stuart of the Supreme Court of Minnesota:
The law is well settled that where, as in this case, municipal authorities can only let a
contract for public work to the lowest responsible bidder, the proposals and
specifications therefore must be so framed as to permit free and full competition. Nor
79
can they enter into a contract with the best bidder containing substantial
provisions beneficial to him, not included or contemplated in the terms and
specifications upon which the bids were invited.33
In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to support its argument that the draft
concession agreement is subject to amendment, the pertinent portion of which was quoted
above, the PBAC also clarified that "[s]aid amendments shall only cover items that would
not materially affect the preparation of the proponent's proposal."
While we concede that a winning bidder is not precluded from modifying or amending certain
provisions of the contract bidded upon, such changes must not constitute substantial or
material amendments that would alter the basic parameters of the contract and would
constitute a denial to the other bidders of the opportunity to bid on the same terms.
Hence, the determination of whether or not a modification or amendment of a contract bidded out
constitutes a substantial amendment rests on whether the contract, when taken as a whole,
would contain substantially different terms and conditions that would have the effect of altering
the technical and/or financial proposals previously submitted by other bidders. The alterations
and modifications in the contract executed between the government and the winning bidder must
be such as to render such executed contract to be an entirely different contract from the one
that was bidded upon.
In the case of Caltex (Philippines), Inc. v. Delgado Brothers, Inc.,34 this Court quoted with
approval the ruling of the trial court that an amendment to a contract awarded through public
bidding, when such subsequent amendment was made without a new public bidding, is null and
void:
The Court agrees with the contention of counsel for the plaintiffs that the due
execution of a contract after public bidding is a limitation upon the right of the
contracting parties to alter or amend it without another public bidding, for otherwise
what would a public bidding be good for if after the execution of a contract after
public bidding, the contracting parties may alter or amend the contract, or even
cancel it, at their will? Public biddings are held for the protection of the public, and
to give the public the best possible advantages by means of open competition
between the bidders. He who bids or offers the best terms is awarded the contract
subject of the bid, and it is obvious that such protection and best possible advantages
to the public will disappear if the parties to a contract executed after public bidding
may alter or amend it without another previous public bidding.35
Hence, the question that comes to fore is this: is the 1997 Concession Agreement the same
agreement that was offered for public bidding, i.e., the draft Concession Agreement attached to
the Bid Documents? A close comparison of the draft Concession Agreement attached to the Bid
Documents and the 1997 Concession Agreement reveals that the documents differ in at least
two material respects:
a. Modification on the Public
79

Utility Revenues and Non-Public
Utility Revenues that may be
collected by PIATCO
The fees that may be imposed and collected by PIATCO under the draft Concession Agreement
and the 1997 Concession Agreement may be classified into three distinct categories: (1) fees
which are subject to periodic adjustment of once every two years in accordance with a
prescribed parametric formula and adjustments are made effective only upon written approval by
MIAA; (2) fees other than those included in the first category which maybe adjusted by PIATCO
whenever it deems necessary without need for consent of DOTC/MIAA; and (3) new fees and
charges that may be imposed by PIATCO which have not been previously imposed or collected
at the Ninoy Aquino International Airport Passenger Terminal I, pursuant to Administrative Order
No. 1, Series of 1993, as amended. The glaring distinctions between the draft Concession
Agreement and the 1997 Concession Agreement lie in the types of fees included in each
category and the extent of the supervision and regulation which MIAA is allowed to exercise in
relation thereto.
For fees under the first category, i.e., those which are subject to periodic adjustment in
accordance with a prescribed parametric formula and effective only upon written approval by
MIAA, the draft Concession Agreement includes the following:36
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) groundhandling fees;
(4) rentals and airline offices;
(5) check-in counter rentals; and
(6) porterage fees.
Under the 1997 Concession Agreement, fees which are subject to adjustment and effective
upon MIAA approval are classified as "Public Utility Revenues" and include:37
(1) aircraft parking fees;
(2) aircraft tacking fees;
80
(3) check-in counter fees; and
(4) Terminal Fees.
The implication of the reduced number of fees that are subject to MIAA approval is best
appreciated in relation to fees included in the second category identified above. Under the 1997
Concession Agreement, fees which PIATCO may adjust whenever it deems necessary without
need for consent of DOTC/MIAA are "Non-Public Utility Revenues" and is defined as "all other
income not classified as Public Utility Revenues derived from operations of the Terminal and the
Terminal Complex."38 Thus, under the 1997 Concession Agreement, ground handling fees,
rentals from airline offices and porterage fees are no longer subject to MIAA regulation.
Further, under Section 6.03 of the draft Concession Agreement, MIAA reserves the right to
regulate (1) lobby and vehicular parking fees and (2) other new fees and charges that may be
imposed by PIATCO. Such regulation may be made by periodic adjustment and is effective only
upon written approval of MIAA. The full text of said provision is quoted below:
Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments in the aircraft
parking fees, aircraft tacking fees, groundhandling fees, rentals and airline offices,
check-in-counter rentals and porterage fees shall be allowed only once every two
years and in accordance with the Parametric Formula attached hereto as Annex F.
Provided that adjustments shall be made effective only after the written express
approval of the MIAA. Provided, further, that such approval of the MIAA, shall be
contingent only on the conformity of the adjustments with the above said parametric
formula. The first adjustment shall be made prior to the In-Service Date of the
Terminal.
The MIAA reserves the right to regulate under the foregoing terms and
conditions the lobby and vehicular parking fees and other new fees and
charges as contemplated in paragraph 2 of Section 6.01 if in its judgment the
users of the airport shall be deprived of a free option for the services they
cover.39
On the other hand, the equivalent provision under the 1997 Concession Agreement reads:
Section 6.03 Periodic Adjustment in Fees and Charges.
xxx xxx xxx
(c) Concessionaire shall at all times be judicious in fixing fees and charges
constituting Non-Public Utility Revenues in order to ensure that End Users are not
unreasonably deprived of services. While the vehicular parking fee, porterage fee
and greeter/well wisher fee constitute Non-Public Utility Revenues of
80

Concessionaire, GRP may intervene and require Concessionaire to explain and
justify the fee it may set from time to time, if in the reasonable opinion of GRP the
said fees have become exorbitant resulting in the unreasonable deprivation of End
Users of such services.40
Thus, under the 1997 Concession Agreement, with respect to (1) vehicular parking fee, (2)
porterage fee and (3) greeter/well wisher fee, all that MIAA can do is to require PIATCO to
explain and justify the fees set by PIATCO. In the draft Concession Agreement, vehicular
parking fee is subject to MIAA regulation and approval under the second paragraph of Section
6.03 thereof while porterage fee is covered by the first paragraph of the same provision. There is
an obvious relaxation of the extent of control and regulation by MIAA with respect to the
particular fees that may be charged by PIATCO.
Moreover, with respect to the third category of fees that may be imposed and collected by
PIATCO, i.e., new fees and charges that may be imposed by PIATCO which have not been
previously imposed or collected at the Ninoy Aquino International Airport Passenger Terminal I,
under Section 6.03 of the draft Concession Agreement MIAA has reserved the right to regulate
the same under the same conditions that MIAA may regulate fees under the first category, i.e.,
periodic adjustment of once every two years in accordance with a prescribed parametric formula
and effective only upon written approval by MIAA. However, under the 1997 Concession
Agreement, adjustment of fees under the third category is not subject to MIAA regulation.
With respect to terminal fees that may be charged by PIATCO,41 as shown earlier, this was
included within the category of "Public Utility Revenues" under the 1997 Concession Agreement.
This classification is significant because under the 1997 Concession Agreement, "Public Utility
Revenues" are subject to an "Interim Adjustment" of fees upon the occurrence of certain
extraordinary events specified in the agreement.42 However, under the draft Concession
Agreement, terminal fees are not included in the types of fees that may be subject to "Interim
Adjustment."43
Finally, under the 1997 Concession Agreement, "Public Utility Revenues," except terminal
fees, are denominated in US Dollars44 while payments to the Government are in Philippine
Pesos. In the draft Concession Agreement, no such stipulation was included. By stipulating
that "Public Utility Revenues" will be paid to PIATCO in US Dollars while payments by PIATCO
to the Government are in Philippine currency under the 1997 Concession Agreement, PIATCO is
able to enjoy the benefits of depreciations of the Philippine Peso, while being effectively
insulated from the detrimental effects of exchange rate fluctuations.
When taken as a whole, the changes under the 1997 Concession Agreement with respect to
reduction in the types of fees that are subject to MIAA regulation and the relaxation of such
regulation with respect to other fees are significant amendments that substantially distinguish the
draft Concession Agreement from the 1997 Concession Agreement. The 1997 Concession
Agreement, in this respect, clearly gives PIATCO more favorable terms than what was
available to other bidders at the time the contract was bidded out. It is not very difficult to
see that the changes in the 1997 Concession Agreement translate to direct and concrete
financial advantages for PIATCO which were not available at the time the contract was offered
81
for bidding. It cannot be denied that under the 1997 Concession Agreement only "Public Utility
Revenues" are subject to MIAA regulation. Adjustments of all other fees imposed and collected
by PIATCO are entirely within its control. Moreover, with respect to terminal fees, under the 1997
Concession Agreement, the same is further subject to "Interim Adjustments" not previously
stipulated in the draft Concession Agreement. Finally, the change in the currency stipulated for
"Public Utility Revenues" under the 1997 Concession Agreement, except terminal fees, gives
PIATCO an added benefit which was not available at the time of bidding.
b. Assumption by the
Government of the liabilities of
PIATCO in the event of the latter's
default thereof
Under the draft Concession Agreement, default by PIATCO of any of its obligations to
creditors who have provided, loaned or advanced funds for the NAIA IPT III project does not
result in the assumption by the Government of these liabilities. In fact, nowhere in the said
contract does default of PIATCO's loans figure in the agreement. Such default does not directly
result in any concomitant right or obligation in favor of the Government.
However, the 1997 Concession Agreement provides:
Section 4.04 Assignment.
xxx xxx xxx
(b) In the event Concessionaire should default in the payment of an Attendant
Liability, and the default has resulted in the acceleration of the payment due date of
the Attendant Liability prior to its stated date of maturity, the Unpaid Creditors and
Concessionaire shall immediately inform GRP in writing of such default. GRP shall,
within one hundred eighty (180) Days from receipt of the joint written notice of the
Unpaid Creditors and Concessionaire, either (i) take over the Development Facility
and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified, to
be substituted as concessionaire and operator of the Development Facility in
accordance with the terms and conditions hereof, or designate a qualified operator
acceptable to GRP to operate the Development Facility, likewise under the terms and
conditions of this Agreement; Provided that if at the end of the 180-day period GRP
shall not have served the Unpaid Creditors and Concessionaire written notice of its
choice, GRP shall be deemed to have elected to take over the Development Facility
with the concomitant assumption of Attendant Liabilities.
81

(c) If GRP should, by written notice, allow the Unpaid Creditors to be substituted as
concessionaire, the latter shall form and organize a concession company qualified to
take over the operation of the Development Facility. If the concession company
should elect to designate an operator for the Development Facility, the concession
company shall in good faith identify and designate a qualified operator acceptable to
GRP within one hundred eighty (180) days from receipt of GRP's written notice. If the
concession company, acting in good faith and with due diligence, is unable to
designate a qualified operator within the aforesaid period, then GRP shall at the end
of the 180-day period take over the Development Facility and assume Attendant
Liabilities.
The term "Attendant Liabilities" under the 1997 Concession Agreement is defined as:
Attendant Liabilities refer to all amounts recorded and from time to time outstanding in
the books of the Concessionaire as owing to Unpaid Creditors who have
provided, loaned or advanced funds actually used for the Project, including all
interests, penalties, associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses, and further including amounts owed by
Concessionaire to its suppliers, contractors and sub-contractors.
Under the above quoted portions of Section 4.04 in relation to the definition of "Attendant
Liabilities," default by PIATCO of its loans used to finance the NAIA IPT III project triggers
the occurrence of certain events that leads to the assumption by the Government of the
liability for the loans. Only in one instance may the Government escape the assumption of
PIATCO's liabilities, i.e., when the Government so elects and allows a qualified operator to take
over as Concessionaire. However, this circumstance is dependent on the existence and
availability of a qualified operator who is willing to take over the rights and obligations of
PIATCO under the contract, a circumstance that is not entirely within the control of the
Government.
Without going into the validity of this provision at this juncture, suffice it to state that Section 4.04
of the 1997 Concession Agreement may be considered a form of security for the loans PIATCO
has obtained to finance the project, an option that was not made available in the draft
Concession Agreement. Section 4.04 is an important amendment to the 1997 Concession
Agreement because it grants PIATCO a financial advantage or benefit which was not
previously made available during the bidding process. This financial advantage is a
significant modification that translates to better terms and conditions for PIATCO.
PIATCO, however, argues that the parties to the bidding procedure acknowledge that the draft
Concession Agreement is subject to amendment because the Bid Documents permit financing or
borrowing. They claim that it was the lenders who proposed the amendments to the draft
Concession Agreement which resulted in the 1997 Concession Agreement.
We agree that it is not inconsistent with the rationale and purpose of the BOT Law to allow the
project proponent or the winning bidder to obtain financing for the project, especially in this case
82
which involves the construction, operation and maintenance of the NAIA IPT III. Expectedly,
compliance by the project proponent of its undertakings therein would involve a substantial
amount of investment. It is therefore inevitable for the awardee of the contract to seek alternate
sources of funds to support the project. Be that as it may, this Court maintains that amendments
to the contract bidded upon should always conform to the general policy on public bidding if such
procedure is to be faithful to its real nature and purpose. By its very nature and characteristic,
competitive public bidding aims to protect the public interest by giving the public the best
possible advantages through open competition.45 It has been held that the three principles in
public bidding are (1) the offer to the public; (2) opportunity for competition; and (3) a basis for
the exact comparison of bids. A regulation of the matter which excludes any of these factors
destroys the distinctive character of the system and thwarts the purpose of its adoption.46 These
are the basic parameters which every awardee of a contract bidded out must conform to,
requirements of financing and borrowing notwithstanding. Thus, upon a concrete showing that,
as in this case, the contract signed by the government and the contract-awardee is an entirely
different contract from the contract bidded, courts should not hesitate to strike down said contract
in its entirety for violation of public policy on public bidding. A strict adherence on the principles,
rules and regulations on public bidding must be sustained if only to preserve the integrity and the
faith of the general public on the procedure.
Public bidding is a standard practice for procuring government contracts for public service and
for furnishing supplies and other materials. It aims to secure for the government the lowest
possible price under the most favorable terms and conditions, to curtail favoritism in the award of
government contracts and avoid suspicion of anomalies and it places all bidders in equal
footing.47 Any government action which permits any substantial variance between the
conditions under which the bids are invited and the contract executed after the award
thereof is a grave abuse of discretion amounting to lack or excess of jurisdiction which
warrants proper judicial action.
In view of the above discussion, the fact that the foregoing substantial amendments were made
on the 1997 Concession Agreement renders the same null and void for being contrary to
public policy. These amendments convert the 1997 Concession Agreement to an entirely
different agreement from the contract bidded out or the draft Concession Agreement. It is not
difficult to see that the amendments on (1) the types of fees or charges that are subject to MIAA
regulation or control and the extent thereof and (2) the assumption by the Government, under
certain conditions, of the liabilities of PIATCO directly translates concrete financial
advantages to PIATCO that were previously not available during the bidding process.
These amendments cannot be taken as merely supplements to or implementing provisions of
those already existing in the draft Concession Agreement. The amendments discussed above
present new terms and conditions which provide financial benefit to PIATCO which may have
altered the technical and financial parameters of other bidders had they known that such terms
were available.
III
Direct Government Guarantee
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Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of the 1997 Concession Agreement
provides:
Section 4.04 Assignment
xxx xxx xxx
(b) In the event Concessionaire should default in the payment of an Attendant
Liability, and the default resulted in the acceleration of the payment due date of the
Attendant Liability prior to its stated date of maturity, the Unpaid Creditors and
Concessionaire shall immediately inform GRP in writing of such default. GRP shall
within one hundred eighty (180) days from receipt of the joint written notice of the
Unpaid Creditors and Concessionaire, either (i) take over the Development Facility
and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified
to be substituted as concessionaire and operator of the Development facility in
accordance with the terms and conditions hereof, or designate a qualified operator
acceptable to GRP to operate the Development Facility, likewise under the terms and
conditions of this Agreement; Provided, that if at the end of the 180-day period GRP
shall not have served the Unpaid Creditors and Concessionaire written notice of its
choice, GRP shall be deemed to have elected to take over the Development
Facility with the concomitant assumption of Attendant Liabilities.
(c) If GRP, by written notice, allow the Unpaid Creditors to be substituted as
concessionaire, the latter shall form and organize a concession company qualified to
takeover the operation of the Development Facility. If the concession company should
elect to designate an operator for the Development Facility, the concession company
shall in good faith identify and designate a qualified operator acceptable to GRP
within one hundred eighty (180) days from receipt of GRP's written notice. If the
concession company, acting in good faith and with due diligence, is unable to
designate a qualified operator within the aforesaid period, then GRP shall at the end
of the 180-day period take over the Development Facility and assume Attendant
Liabilities.
….
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts recorded and from time to time
outstanding in the books of the Concessionaire as owing to Unpaid Creditors
who have provided, loaned or advanced funds actually used for the Project, including
all interests, penalties, associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses, and further including amounts owed by
Concessionaire to its suppliers, contractors and sub-contractors.48
83
It is clear from the above-quoted provisions that Government, in the event that PIATCO
defaults in its loan obligations, is obligated to pay "all amounts recorded and from time to
time outstanding from the books" of PIATCO which the latter owes to its creditors.49 These
amounts include "all interests, penalties, associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses."50 This obligation of the Government to pay
PIATCO's creditors upon PIATCO's default would arise if the Government opts to take over NAIA
IPT III. It should be noted, however, that even if the Government chooses the second option,
which is to allow PIATCO's unpaid creditors operate NAIA IPT III, the Government is still at a risk
of being liable to PIATCO's creditors should the latter be unable to designate a qualified operator
within the prescribed period.51 In effect, whatever option the Government chooses to take in
the event of PIATCO's failure to fulfill its loan obligations, the Government is still at a risk
of assuming PIATCO's outstanding loans. This is due to the fact that the Government would
only be free from assuming PIATCO's debts if the unpaid creditors would be able to designate a
qualified operator within the period provided for in the contract. Thus, the Government's
assumption of liability is virtually out of its control. The Government under the
circumstances provided for in the 1997 Concession Agreement is at the mercy of the existence,
availability and willingness of a qualified operator. The above contractual provisions constitute a
direct government guarantee which is prohibited by law.
One of the main impetus for the enactment of the BOT Law is the lack of government funds to
construct the infrastructure and development projects necessary for economic growth and
development. This is why private sector resources are being tapped in order to finance these
projects. The BOT law allows the private sector to participate, and is in fact encouraged to do so
by way of incentives, such as minimizing the unstable flow of returns,52 provided that the
government would not have to unnecessarily expend scarcely available funds for the project
itself. As such, direct guarantee, subsidy and equity by the government in these projects are
strictly prohibited.53 This is but logical for if the government would in the end still be at a
risk of paying the debts incurred by the private entity in the BOT projects, then the
purpose of the law is subverted.
Section 2(n) of the BOT Law defines direct guarantee as follows:
(n) Direct government guarantee — An agreement whereby the government or any of
its agencies or local government units assume responsibility for the repayment of
debt directly incurred by the project proponent in implementing the project in
case of a loan default.
Clearly by providing that the Government "assumes" the attendant liabilities, which consists of
PIATCO's unpaid debts, the 1997 Concession Agreement provided for a direct government
guarantee for the debts incurred by PIATCO in the implementation of the NAIA IPT III project. It
is of no moment that the relevant sections are subsumed under the title of "assignment". The
provisions providing for direct government guarantee which is prohibited by law is clear from the
terms thereof.
The fact that the ARCA superseded the 1997 Concession Agreement did not cure this fatal
defect. Article IV, Section 4.04(c), in relation to Article I, Section 1.06, of the ARCA provides:
83

Section 4.04 Security
xxx xxx xxx
(c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in good faith
and enter into direct agreement with the Senior Lenders, or with an agent of such
Senior Lenders (which agreement shall be subject to the approval of the Bangko
Sentral ng Pilipinas), in such form as may be reasonably acceptable to both GRP and
Senior Lenders, with regard, inter alia, to the following parameters:
xxx xxx xxx
(iv) If the Concessionaire [PIATCO] is in default under a payment
obligation owed to the Senior Lenders, and as a result thereof the
Senior Lenders have become entitled to accelerate the Senior Loans, the
Senior Lenders shall have the right to notify GRP of the same, and without
prejudice to any other rights of the Senior Lenders or any Senior Lenders'
agent may have (including without limitation under security interests
granted in favor of the Senior Lenders), to either in good faith identify and
designate a nominee which is qualified under sub-clause (viii)(y) below to
operate the Development Facility [NAIA Terminal 3] or transfer the
Concessionaire's [PIATCO] rights and obligations under this Agreement to
a transferee which is qualified under sub-clause (viii) below;
xxx xxx xxx
(vi) if the Senior Lenders, acting in good faith and using reasonable efforts,
are unable to designate a nominee or effect a transfer in terms and
conditions satisfactory to the Senior Lenders within one hundred eighty
(180) days after giving GRP notice as referred to respectively in (iv) or (v)
above, then GRP and the Senior Lenders shall endeavor in good faith to
enter into any other arrangement relating to the Development Facility
[NAIA Terminal 3] (other than a turnover of the Development Facility [NAIA
Terminal 3] to GRP) within the following one hundred eighty (180) days. If
no agreement relating to the Development Facility [NAIA Terminal 3] is
arrived at by GRP and the Senior Lenders within the said 180-day period,
then at the end thereof the Development Facility [NAIA Terminal 3] shall
be transferred by the Concessionaire [PIATCO] to GRP or its
designee and GRP shall make a termination payment to
Concessionaire [PIATCO] equal to the Appraised Value (as
hereinafter defined) of the Development Facility [NAIA Terminal 3] or
the sum of the Attendant Liabilities, if greater. Notwithstanding Section
8.01(c) hereof, this Agreement shall be deemed terminated upon the
transfer of the Development Facility [NAIA Terminal 3] to GRP pursuant
hereto;
84
xxx xxx xxx
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts in each case supported by verifiable
evidence from time to time owed or which may become owing by Concessionaire
[PIATCO] to Senior Lenders or any other persons or entities who have provided,
loaned, or advanced funds or provided financial facilities to Concessionaire
[PIATCO] for the Project [NAIA Terminal 3], including, without limitation, all
principal, interest, associated fees, charges, reimbursements, and other related
expenses (including the fees, charges and expenses of any agents or trustees of
such persons or entities), whether payable at maturity, by acceleration or otherwise,
and further including amounts owed by Concessionaire [PIATCO] to its professional
consultants and advisers, suppliers, contractors and sub-contractors.54
It is clear from the foregoing contractual provisions that in the event that PIATCO fails to fulfill its
loan obligations to its Senior Lenders, the Government is obligated to directly negotiate and
enter into an agreement relating to NAIA IPT III with the Senior Lenders, should the latter fail to
appoint a qualified nominee or transferee who will take the place of PIATCO. If the Senior
Lenders and the Government are unable to enter into an agreement after the prescribed period,
the Government must then pay PIATCO, upon transfer of NAIA IPT III to the Government,
termination payment equal to the appraised value of the project or the value of the attendant
liabilities whichever is greater. Attendant liabilities as defined in the ARCA includes all
amounts owed or thereafter may be owed by PIATCO not only to the Senior Lenders with whom
PIATCO has defaulted in its loan obligations but to all other persons who may have loaned,
advanced funds or provided any other type of financial facilities to PIATCO for NAIA IPT III. The
amount of PIATCO's debt that the Government would have to pay as a result of PIATCO's
default in its loan obligations -- in case no qualified nominee or transferee is appointed by the
Senior Lenders and no other agreement relating to NAIA IPT III has been reached between the
Government and the Senior Lenders -- includes, but is not limited to, "all principal, interest,
associated fees, charges, reimbursements, and other related expenses . . . whether payable at
maturity, by acceleration or otherwise."55
It is clear from the foregoing that the ARCA provides for a direct guarantee by the
government to pay PIATCO's loans not only to its Senior Lenders but all other entities
who provided PIATCO funds or services upon PIATCO's default in its loan obligation with
its Senior Lenders. The fact that the Government's obligation to pay PIATCO's lenders for the
latter's obligation would only arise after the Senior Lenders fail to appoint a qualified nominee or
transferee does not detract from the fact that, should the conditions as stated in the contract
occur, the ARCA still obligates the Government to pay any and all amounts owed by PIATCO to
its lenders in connection with NAIA IPT III. Worse, the conditions that would make the
Government liable for PIATCO's debts is triggered by PIATCO's own default of its loan
obligations to its Senior Lenders to which loan contracts the Government was never a party to.
The Government was not even given an option as to what course of action it should take in case
PIATCO defaulted in the payment of its senior loans. The Government, upon PIATCO's default,
would be merely notified by the Senior Lenders of the same and it is the Senior Lenders who are
84

authorized to appoint a qualified nominee or transferee. Should the Senior Lenders fail to make
such an appointment, the Government is then automatically obligated to "directly deal and
negotiate" with the Senior Lenders regarding NAIA IPT III. The only way the Government would
not be liable for PIATCO's debt is for a qualified nominee or transferee to be appointed in place
of PIATCO to continue the construction, operation and maintenance of NAIA IPT III. This "pre-
condition", however, will not take the contract out of the ambit of a direct guarantee by the
government as the existence, availability and willingness of a qualified nominee or transferee is
totally out of the government's control. As such the Government is virtually at the mercy of
PIATCO (that it would not default on its loan obligations to its Senior Lenders), the Senior
Lenders (that they would appoint a qualified nominee or transferee or agree to some other
arrangement with the Government) and the existence of a qualified nominee or transferee who is
able and willing to take the place of PIATCO in NAIA IPT III.
The proscription against government guarantee in any form is one of the policy
considerations behind the BOT Law. Clearly, in the present case, the ARCA obligates the
Government to pay for all loans, advances and obligations arising out of financial facilities
extended to PIATCO for the implementation of the NAIA IPT III project should PIATCO default in
its loan obligations to its Senior Lenders and the latter fails to appoint a qualified nominee or
transferee. This in effect would make the Government liable for PIATCO's loans should the
conditions as set forth in the ARCA arise. This is a form of direct government guarantee.
The BOT Law and its implementing rules provide that in order for an unsolicited proposal for a
BOT project may be accepted, the following conditions must first be met: (1) the project involves
a new concept in technology and/or is not part of the list of priority projects, (2) no direct
government guarantee, subsidy or equity is required, and (3) the government agency or
local government unit has invited by publication other interested parties to a public bidding and
conducted the same.56 The failure to meet any of the above conditions will result in the denial of
the proposal. It is further provided that the presence of direct government guarantee, subsidy or
equity will "necessarily disqualify a proposal from being treated and accepted as an unsolicited
proposal."57 The BOT Law clearly and strictly prohibits direct government guarantee, subsidy
and equity in unsolicited proposals that the mere inclusion of a provision to that effect is fatal and
is sufficient to deny the proposal. It stands to reason therefore that if a proposal can be denied
by reason of the existence of direct government guarantee, then its inclusion in the contract
executed after the said proposal has been accepted is likewise sufficient to invalidate the
contract itself. A prohibited provision, the inclusion of which would result in the denial of a
proposal cannot, and should not, be allowed to later on be inserted in the contract resulting from
the said proposal. The basic rules of justice and fair play alone militate against such an
occurrence and must not, therefore, be countenanced particularly in this instance where the
government is exposed to the risk of shouldering hundreds of million of dollars in debt.
This Court has long and consistently adhered to the legal maxim that those that cannot be done
directly cannot be done indirectly.58 To declare the PIATCO contracts valid despite the clear
statutory prohibition against a direct government guarantee would not only make a
mockery of what the BOT Law seeks to prevent -- which is to expose the government to
the risk of incurring a monetary obligation resulting from a contract of loan between the
project proponent and its lenders and to which the Government is not a party to -- but
would also render the BOT Law useless for what it seeks to achieve –- to make use of the
85
resources of the private sector in the "financing, operation and maintenance of
infrastructure and development projects"59 which are necessary for national growth and
development but which the government, unfortunately, could ill-afford to finance at this
point in time.
IV
Temporary takeover of business affected with public interest
Article XII, Section 17 of the 1987 Constitution provides:
Section 17. In times of national emergency, when the public interest so requires, the
State may, during the emergency and under reasonable terms prescribed by it,
temporarily take over or direct the operation of any privately owned public utility or
business affected with public interest.
The above provision pertains to the right of the State in times of national emergency, and in the
exercise of its police power, to temporarily take over the operation of any business affected with
public interest. In the 1986 Constitutional Commission, the term "national emergency" was
defined to include threat from external aggression, calamities or national disasters, but not
strikes "unless it is of such proportion that would paralyze government service."60 The duration of
the emergency itself is the determining factor as to how long the temporary takeover by the
government would last.61 The temporary takeover by the government extends only to the
operation of the business and not to the ownership thereof. As such the government is not
required to compensate the private entity-owner of the said business as there is no
transfer of ownership, whether permanent or temporary. The private entity-owner affected by
the temporary takeover cannot, likewise, claim just compensation for the use of the said
business and its properties as the temporary takeover by the government is in exercise of its
police power and not of its power of eminent domain.
Article V, Section 5.10 (c) of the 1997 Concession Agreement provides:
Section 5.10 Temporary Take-over of operations by GRP.
….
(c) In the event the development Facility or any part thereof and/or the operations of
Concessionaire or any part thereof, become the subject matter of or be included in
any notice, notification, or declaration concerning or relating to acquisition, seizure or
appropriation by GRP in times of war or national emergency, GRP shall, by written
notice to Concessionaire, immediately take over the operations of the Terminal and/or
the Terminal Complex. During such take over by GRP, the Concession Period shall
be suspended; provided, that upon termination of war, hostilities or national
85

emergency, the operations shall be returned to Concessionaire, at which time, the
Concession period shall commence to run again. Concessionaire shall be entitled
to reasonable compensation for the duration of the temporary take over by
GRP, which compensation shall take into account the reasonable cost for the
use of the Terminal and/or Terminal Complex, (which is in the amount at least
equal to the debt service requirements of Concessionaire, if the temporary take
over should occur at the time when Concessionaire is still servicing debts owed to
project lenders), any loss or damage to the Development Facility, and other
consequential damages. If the parties cannot agree on the reasonable compensation
of Concessionaire, or on the liability of GRP as aforesaid, the matter shall be resolved
in accordance with Section 10.01 [Arbitration]. Any amount determined to be payable
by GRP to Concessionaire shall be offset from the amount next payable by
Concessionaire to GRP.62
PIATCO cannot, by mere contractual stipulation, contravene the Constitutional provision
on temporary government takeover and obligate the government to pay "reasonable cost
for the use of the Terminal and/or Terminal Complex."63 Article XII, section 17 of the 1987
Constitution envisions a situation wherein the exigencies of the times necessitate the
government to "temporarily take over or direct the operation of any privately owned public utility
or business affected with public interest." It is the welfare and interest of the public which is the
paramount consideration in determining whether or not to temporarily take over a particular
business. Clearly, the State in effecting the temporary takeover is exercising its police power.
Police power is the "most essential, insistent, and illimitable of powers."64 Its exercise therefore
must not be unreasonably hampered nor its exercise be a source of obligation by the
government in the absence of damage due to arbitrariness of its exercise.65 Thus, requiring the
government to pay reasonable compensation for the reasonable use of the property pursuant to
the operation of the business contravenes the Constitution.
V operate the NAIA complex, as well as DOTC, the department to which MIAA is attached.74
Regulation of Monopolies
A monopoly is "a privilege or peculiar advantage vested in one or more persons or companies,
consisting in the exclusive right (or power) to carry on a particular business or trade,
manufacture a particular article, or control the sale of a particular commodity."66 The 1987
Constitution strictly regulates monopolies, whether private or public, and even provides for
their prohibition if public interest so requires. Article XII, Section 19 of the 1987 Constitution
states:
Sec. 19. The state shall regulate or prohibit monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition shall be allowed.
Clearly, monopolies are not per se prohibited by the Constitution but may be permitted to exist to
aid the government in carrying on an enterprise or to aid in the performance of various services
and functions in the interest of the public.67 Nonetheless, a determination must first be made
86
as to whether public interest requires a monopoly. As monopolies are subject to abuses that can
inflict severe prejudice to the public, they are subject to a higher level of State regulation than an
ordinary business undertaking.
In the cases at bar, PIATCO, under the 1997 Concession Agreement and the ARCA, is granted
the "exclusive right to operate a commercial international passenger terminal within the Island
of Luzon" at the NAIA IPT III.68 This is with the exception of already existing international airports
in Luzon such as those located in the Subic Bay Freeport Special Economic Zone ("SBFSEZ"),
Clark Special Economic Zone ("CSEZ") and in Laoag City.69 As such, upon commencement of
PIATCO's operation of NAIA IPT III, Terminals 1 and 2 of NAIA would cease to function as
international passenger terminals. This, however, does not prevent MIAA to use Terminals 1 and
2 as domestic passenger terminals or in any other manner as it may deem appropriate except
those activities that would compete with NAIA IPT III in the latter's operation as an international
passenger terminal.70 The right granted to PIATCO to exclusively operate NAIA IPT III would
be for a period of twenty-five (25) years from the In-Service Date71 and renewable for another
twenty-five (25) years at the option of the government.72 Both the 1997 Concession
Agreement and the ARCA further provide that, in view of the exclusive right granted to
PIATCO, the concession contracts of the service providers currently servicing Terminals
1 and 2 would no longer be renewed and those concession contracts whose expiration
are subsequent to the In-Service Date would cease to be effective on the said date.73
The operation of an international passenger airport terminal is no doubt an undertaking imbued
with public interest. In entering into a Build–Operate-and-Transfer contract for the construction,
operation and maintenance of NAIA IPT III, the government has determined that public interest
would be served better if private sector resources were used in its construction and an exclusive
right to operate be granted to the private entity undertaking the said project, in this case
PIATCO. Nonetheless, the privilege given to PIATCO is subject to reasonable regulation and
supervision by the Government through the MIAA, which is the government agency authorized to
This is in accord with the Constitutional mandate that a monopoly which is not prohibited must be
regulated.75 While it is the declared policy of the BOT Law to encourage private sector
participation by "providing a climate of minimum government regulations,"76 the same does not
mean that Government must completely surrender its sovereign power to protect public interest
in the operation of a public utility as a monopoly. The operation of said public utility can not be
done in an arbitrary manner to the detriment of the public which it seeks to serve. The right
granted to the public utility may be exclusive but the exercise of the right cannot run riot. Thus,
while PIATCO may be authorized to exclusively operate NAIA IPT III as an international
passenger terminal, the Government, through the MIAA, has the right and the duty to ensure that
it is done in accord with public interest. PIATCO's right to operate NAIA IPT III cannot also
violate the rights of third parties.
Section 3.01(e) of the 1997 Concession Agreement and the ARCA provide:
3.01 Concession Period
86
 87

xxx xxx xxx
(e) GRP confirms that certain concession agreements relative to certain services
and operations currently being undertaken at the Ninoy Aquino International Airport
passenger Terminal I have a validity period extending beyond the In-Service
Date. GRP through DOTC/MIAA, confirms that these services and operations shall
not be carried over to the Terminal and the Concessionaire is under no legal
obligation to permit such carry-over except through a separate agreement duly
entered into with Concessionaire. In the event Concessionaire becomes involved in
any litigation initiated by any such concessionaire or operator, GRP undertakes and
hereby holds Concessionaire free and harmless on full indemnity basis from and
against any loss and/or any liability resulting from any such litigation, including the
cost of litigation and the reasonable fees paid or payable to Concessionaire's counsel
of choice, all such amounts shall be fully deductible by way of an offset from any
amount which the Concessionaire is bound to pay GRP under this Agreement.
In sum, this Court rules that in view of the absence of the requisite financial capacity of the
Paircargo Consortium, predecessor of respondent PIATCO, the award by the PBAC of the
contract for the construction, operation and maintenance of the NAIA IPT III is null and void.
Further, considering that the 1997 Concession Agreement contains material and substantial
amendments, which amendments had the effect of converting the 1997 Concession Agreement
into an entirely different agreement from the contract bidded upon, the 1997 Concession
Agreement is similarly null and void for being contrary to public policy. The provisions under
Sections 4.04(b) and (c) in relation to Section 1.06 of the 1997 Concession Agreement and
Section 4.04(c) in relation to Section 1.06 of the ARCA, which constitute a direct government
guarantee expressly prohibited by, among others, the BOT Law and its Implementing Rules and
Regulations are also null and void. The Supplements, being accessory contracts to the ARCA,
are likewise null and void.
WHEREFORE, the 1997 Concession Agreement, the Amended and Restated Concession
Agreement and the Supplements thereto are set aside for being null and void.

During the oral arguments on December 10, 2002, the counsel for the petitioners-in- SO ORDERED.
intervention for G.R. No. 155001 stated that there are two service providers whose
contracts are still existing and whose validity extends beyond the In-Service Date.
One contract remains valid until 2008 and the other until 2010.77 Davide, Jr., C.J., Bellosillo, Ynares-Santiago, Sandoval-Gutierrez, Austria-Martinez, Corona, and
Carpio-Morales, JJ., concur.
Vitug, J., see separate (dissenting) opinion.
We hold that while the service providers presently operating at NAIA Terminal 1 do not have an Panganiban, J., please see separate opinion.
absolute right for the renewal or the extension of their respective contracts, those contracts Quisumbing, J., no jurisdiction, please see separate opinion of J. Vitug in which he concurs.
whose duration extends beyond NAIA IPT III's In-Service-Date should not be unduly prejudiced. Carpio, J., no part.
These contracts must be respected not just by the parties thereto but also by third parties. Callejo, Sr., J., also concur in the separate opinion of J. Panganiban.
PIATCO cannot, by law and certainly not by contract, render a valid and binding contract Azcuna, J., joins the separate opinion of J. Vitug.
nugatory. PIATCO, by the mere expedient of claiming an exclusive right to operate, cannot
require the Government to break its contractual obligations to the service providers. In contrast
to the arrastre and stevedoring service providers in the case of Anglo-Fil Trading Corporation
v. Lazaro78 whose contracts consist of temporary hold-over permits, the affected service
providers in the cases at bar, have a valid and binding contract with the Government, through
MIAA, whose period of effectivity, as well as the other terms and conditions thereof, cannot be
violated.

In fine, the efficient functioning of NAIA IPT III is imbued with public interest. The provisions of
the 1997 Concession Agreement and the ARCA did not strip government, thru the MIAA, of its
right to supervise the operation of the whole NAIA complex, including NAIA IPT III. As the
primary government agency tasked with the job,79 it is MIAA's responsibility to ensure that
whoever by contract is given the right to operate NAIA IPT III will do so within the bounds of the
law and with due regard to the rights of third parties and above all, the interest of the public.

VI

CONCLUSION

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SEPARATE OPINIONS
VITUG, J.:
This Court is bereft of jurisdiction to hear the petitions at bar. The Constitution provides that the
Supreme Court shall exercise original jurisdiction over, among other actual controversies,
petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus.1 The cases in
question, although denominated to be petitions for prohibition, actually pray for the nullification of
the PIATCO contracts and to restrain respondents from implementing said agreements for being
illegal and unconstitutional.
Section 2, Rule 65 of the Rules of Court states:
"When the proceedings of any tribunal, corporation, board, officer or person, whether
exercising judicial, quasi-judicial or ministerial functions, are without or in excess of its
or his jurisdiction, or with grave abuse of discretion amounting to lack or excess of
jurisdiction, and there is no appeal or any other plain, speedy and adequate remedy in
the ordinary course of law, a person aggrieved thereby may file a verified petition in
the proper court, alleging the facts with certainty and praying that judgment be
rendered commanding the respondent to desist from further proceedings in the action
or matter specified therein, or otherwise granting such incidental reliefs as law and
justice may require."
The rule is explicit. A petition for prohibition may be filed against a tribunal, corporation, board,
officer or person, exercising judicial, quasi-judicial or ministerial functions. What the petitions
seek from respondents do not involve judicial, quasi-judicial or ministerial functions. In
prohibition, only legal issues affecting the jurisdiction of the tribunal, board or officer involved
may be resolved on the basis of undisputed facts.2 The parties allege, respectively, contentious
evidentiary facts. It would be difficult, if not anomalous, to decide the jurisdictional issue on the
basis of the contradictory factual submissions made by the parties.3 As the Court has so often
exhorted, it is not a trier of facts.
88
The petitions, in effect, are in the nature of actions for declaratory relief under Rule 63 of the
Rules of Court. The Rules provide that any person interested under a contract may, before
breach or violation thereof, bring an action in the appropriate Regional Trial Court to determine
any question of construction or validity arising, and for a declaration of his rights or duties
thereunder.4 The Supreme Court assumes no jurisdiction over petitions for declaratory relief
which are cognizable by regional trial courts.5
As I have so expressed in Tolentino vs. Secretary of Finance,6 reiterated in Santiago vs.
Guingona, Jr.7 , the Supreme Court should not be thought of as having been tasked with the
awesome responsibility of overseeing the entire bureaucracy. Pervasive and limitless, such as it
may seem to be under the 1987 Constitution, judicial power still succumbs to the paramount
doctrine of separation of powers. The Court may not at good liberty intrude, in the guise of
sovereign imprimatur, into every affair of government. What significance can still then remain of
the time-honored and widely acclaimed principle of separation of powers if, at every turn, the
Court allows itself to pass upon at will the disposition of a co-equal, independent and coordinate
branch in our system of government. I dread to think of the so varied uncertainties that such an
undue interference can lead to.
Accordingly, I vote for the dismissal of the petition.
Quisumbing, and Azcuna, JJ., concur.
PANGANIBAN, J.:
The five contracts for the construction and the operation of Ninoy Aquino International Airport
(NAIA) Terminal III, the subject of the consolidated Petitions before the Court, are replete with
outright violations of law, public policy and the Constitution. The only proper thing to do is
declare them all null and void ab initio and let the chips fall where they may. Fiat iustitia ruat
coelum.
The facts leading to this controversy are already well presented in the ponencia. I shall not
burden the readers with a retelling thereof. Instead, I will cut to the chase and directly address
the two sets of gut issues:
1. The first issue is procedural: Does the Supreme Court have original jurisdiction to hear and
decide the Petitions? Corollarily, do petitioners have locus standi and should this Court decide
the cases without any mandatory referral to arbitration?
2. The second one is substantive in character: Did the subject contracts violate the Constitution,
the laws, and public policy to such an extent as to render all of them void and inexistent?
88

My answer to all the above questions is a firm "Yes."
The Procedural Issue:
Jurisdiction, Standing and Arbitration
Definitely and surely, the issues involved in these Petitions are clearly of transcendental
importance and of national interest. The subject contracts pertain to the construction and the
operation of the country's premiere international airport terminal - an ultramodern world-class
public utility that will play a major role in the country's economic development and serve to
project a positive image of our country abroad. The five build-operate-&-transfer (BOT) contracts,
while entailing the investment of billions of pesos in capital and the availment of several hundred
millions of dollars in loans, contain provisions that tend to establish a monopoly, require the
disbursements of public funds sans appropriations, and provide government guarantees in
violation of statutory prohibitions, as well as other provisions equally offensive to law, public
policy and the Constitution. Public interest will inevitably be affected thereby.
Thus, objections to these Petitions, grounded upon (a) the hierarchy of courts, (b) the need for
arbitration prior to court action, and (c) the alleged lack of sufficient personality, standing or
interest, being in the main procedural matters, must now be set aside, as they have been in past
cases. This Court must be permitted to perform its constitutional duty of determining whether the
other agencies of government have acted within the limits of the Constitution and the laws, or if
they have gravely abused the discretion entrusted to them.1
Hierarchy of Courts
The Court has, in the past, held that questions relating to gargantuan government contracts
ought to be settled without delay.2 This holding applies with greater force to the instant cases.
Respondent Piatco is partly correct in averring that petitioners can obtain relief from the regional
trial courts via an action to annul the contracts.
Nevertheless, the unavoidable consequence of having to await the rendition and the finality of
any such judgment would be a prolonged state of uncertainty that would be prejudicial to the
nation, the parties and the general public. And, in light of the feared loss of jobs of the petitioning
workers, consequent to the inevitable pretermination of contracts of the petitioning service
providers that will follow upon the heels of the impending opening of NAIA Terminal III, the need
for relief is patently urgent, and therefore, direct resort to this Court through the special civil
action of prohibition is thus justified.3
Contrary to Piatco's argument that the resolution of the issues raised in the Petitions will require
delving into factual questions,4 I submit that their disposition ultimately turns on questions of
law.5 Further, many of the significant and relevant factual questions can be easily addressed by
an examination of the documents submitted by the parties. In any event, the Petitions raise some
novel questions involving the application of the amended BOT Law, which this Court has seen fit
to tackle.
89
Arbitration
Should the dispute be referred to arbitration prior to judicial recourse? Respondent Piatco claims
that Section 10.02 of the Amended and Restated Concession Agreement (ARCA) provides for
arbitration under the auspices of the International Chamber of Commerce to settle any dispute or
controversy or claim arising in connection with the Concession Agreement, its amendments and
supplements. The government disagrees, however, insisting that there can be no arbitration
based on Section 10.02 of the ARCA, since all the Piatco contracts are void ab initio. Therefore,
all contractual provisions, including Section 10.02 of the ARCA, are likewise void, inexistent and
inoperative. To support its stand, the government cites Chavez v. Presidential Commission on
Good Government:6 "The void agreement will not be rendered operative by the parties' alleged
performance (partial or full) of their respective prestations. A contract that violates the
Constitution and the law is null and void ab initio and vests no rights and creates no obligations.
It produces no legal effect at all."
As will be discussed at length later, the Piatco contracts are indeed void in their entirety; thus, a
resort to the aforesaid provision on arbitration is unavailing. Besides, petitioners and petitioners-
in-intervention have pointed out that, even granting arguendo that the arbitration clause
remained a valid provision, it still cannot bind them inasmuch as they are not parties to the
Piatco contracts. And in the final analysis, it is unarguable that the arbitration process provided
for under Section 10.02 of the ARCA, to be undertaken by a panel of three (3) arbitrators
appointed in accordance with the Rules of Arbitration of the International Chamber of
Commerce, will not be able to address, determine and definitively resolve the constitutional and
legal questions that have been raised in the Petitions before us.
Locus Standi
Given this Court's previous decisions in cases of similar import, no one will seriously doubt that,
being taxpayers and members of the House of Representatives, Petitioners Baterina et al. have
locus standi to bring the Petition in GR No. 155547. In Albano v. Reyes,7 this Court held that the
petitioner therein, suing as a citizen, taxpayer and member of the House of Representatives, was
sufficiently clothed with standing to bring the suit questioning the validity of the assailed contract.
The Court cited the fact that public interest was involved, in view of the important role of the
Manila International Container Terminal (MICT) in the country's economic development and the
magnitude of the financial consideration. This, notwithstanding the fact that expenditure of public
funds was not required under the assailed contract.
In the cases presently under consideration, petitioners' personal and substantial interest in the
controversy is shown by the fact that certain provisions in the Piatco contracts create obligations
on the part of government (through the DOTC and the MIAA) to disburse public funds without
prior congressional appropriations.
Petitioners thus correctly assert that the injury to them has a twofold aspect: (1) they are
adversely affected as taxpayers on account of the illegal disbursement of public funds; and (2)
they are prejudiced qua legislators, since the contractual provisions requiring the government to
89

incur expenditures without appropriations also operate as limitations upon the exclusive power
and prerogative of Congress over the public purse. As members of the House of
Representatives, they are actually deprived of discretion insofar as the inclusion of those items
of expenditure in the budget is concerned. To prevent such encroachment upon the legislative
privilege and obviate injury to the institution of which they are members, petitioners-legislators
have locus standi to bring suit.
Messrs. Agan et al. and Lopez et al., are likewise taxpayers and thus possessed of standing to
challenge the illegal disbursement of public funds. Messrs. Agan et al., in particular, are
employees (or representatives of employees) of various service providers that have (1) existing
concession agreements with the MIAA to provide airport services necessary to the operation of
the NAIA and (2) service agreements to furnish essential support services to the international
airlines operating at the NAIA.
On the other hand, Messrs. Lopez et al. are employees of the MIAA. These petitioners (Messrs.
Agan et al. and Messrs. Lopez et al.) are confronted with the prospect of being laid off from their
jobs and losing their means of livelihood when their employer-companies are forced to shut
down or otherwise retrench and cut back on manpower. Such development would result from the
imminent implementation of certain provisions in the contracts that tend toward the creation of a
monopoly in favor of Piatco, its subsidiaries and related companies.
Petitioners-in-intervention are service providers in the business of furnishing airport-related
services to international airlines and passengers in the NAIA and are therefore competitors of
Piatco as far as that line of business is concerned. On account of provisions in the Piatco
contracts, petitioners-in-intervention have to enter into a written contract with Piatco so as not to
be shut out of NAIA Terminal III and barred from doing business there. Since there is no
provision to ensure or safeguard free and fair competition, they are literally at its mercy. They
claim injury on account of their deprivation of property (business) and of the liberty to contract,
without due process of law.
And even if petitioners and petitioners-in-intervention were not sufficiently clothed with legal
standing, I have at the outset already established that, given its impact on the public and on
national interest, this controversy is laden with transcendental importance and constitutional
significance. Hence, I do not hesitate to adopt the same position as was enunciated in
Kilosbayan v. Guingona Jr.8 that "in cases of transcendental importance, the Court may relax the
standing requirements and allow a suit to prosper even when there is no direct injury to the party
claiming the right of judicial review."9
The Substantive Issue:
Violations of the Constitution and the Laws
From the Outset, the Bidding Process Was Flawed and Tainted
90
After studying the documents submitted and arguments advanced by the parties, I have no doubt
that, right at the outset, Piatco was not qualified to participate in the bidding process for the
Terminal III project, but was nevertheless permitted to do so. It even won the bidding and was
helped along by what appears to be a series of collusive and corrosive acts.
The build-operate-and-transfer (BOT) project for the NAIA Passenger Terminal III comes under
the category of an "unsolicited proposal," which is the subject of Section 4-A of the BOT Law.10
The unsolicited proposal was originally submitted by the Asia's Emerging Dragon Corporation
(AEDC) to the Department of Transportation and Communications (DOTC) and the Manila
International Airport Authority (MIAA), which reviewed and approved the proposal.
The draft of the concession agreement as negotiated between AEDC and DOTC/MIAA was
endorsed to the National Economic Development Authority (NEDA-ICC), which in turn reviewed
it on the basis of its scope, economic viability, financial indicators and risks; and thereafter
approved it for bidding.
The DOTC/MIAA then prepared the Bid Documents, incorporating therein the negotiated Draft
Concession Agreement, and published invitations for public bidding, i.e., for the submission of
comparative or competitive proposals. Piatco's predecessor-in-interest, the Paircargo
Consortium, was the only company that submitted a competitive bid or price challenge.
At this point, I must emphasize that the law requires the award of a BOT project to the bidder
that has satisfied the minimum requirements; and met the technical, financial, organizational and
legal standards provided in the BOT Law. Section 5 of this statute states:
"Sec. 5. Public bidding of projects. - . . .
"In the case of a build-operate-and-transfer arrangement, the contract shall be
awarded to the bidder who, having satisfied the minimum financial, technical,
organizational and legal standards required by this Act, has submitted the lowest
bid and most favorable terms for the project, based on the present value of its
proposed tolls, fees, rentals and charges over a fixed term for the facility to be
constructed, rehabilitated, operated and maintained according to the prescribed
minimum design and performance standards, plans and specifications. . . ."
(Emphasis supplied.)
The same provision requires that the price challenge via public bidding "must be conducted
under a two-envelope/two-stage system: the first envelope to contain the technical proposal and
the second envelope to contain the financial proposal." Moreover, the 1994 Implementing Rules
and Regulations (IRR) provide that only those bidders that have passed the prequalification
stage are permitted to have their two envelopes reviewed.
In other words, prospective bidders must prequalify by submitting their prequalification
documents for evaluation; and only the pre-qualified bidders would be entitled to have their bids
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opened, evaluated and appreciated. On the other hand, disqualified bidders are to be informed
of the reason for their disqualification. This procedure was confirmed and reiterated in the Bid
Documents, which I quote thus: "Prequalified proponents will be considered eligible to move to
second stage technical proposal evaluation. The second and third envelopes of pre-disqualified
proponents will be returned."11
Aside from complying with the legal and technical requirements (track record or experience of
the firm and its key personnel), a project proponent desiring to prequalify must also demonstrate
its financial capacity to undertake the project. To establish such capability, a proponent must
prove that it is able to raise the minimum amount of equity required for the project and to procure
the loans or financing needed for it. Section 5.4(c) of the 1994 IRR provides:
"Sec. 5.4. Prequalification Requirements. - To pre-qualify, a project proponent must
comply with the following requirements:
xxx xxx xxx
"c. Financial Capability. The project proponent must have adequate capability to
sustain the financing requirements for the detailed engineering design, construction,
and/or operation and maintenance phases of the project, as the case may be. For
purposes of prequalification, this capability shall be measured in terms of: (i) proof of
the ability of the project proponent and/or the consortium to provide a minimum
amount of equity to the project, and (ii) a letter testimonial from reputable banks
attesting that the project proponent and/or members of the consortium are banking
with them, that they are in good financial standing, and that they have adequate
resources. The government Agency/LGU concerned shall determine on a project-to-
project basis, and before prequalification, the minimum amount of equity needed. . . .
." (Italics supplied)
Since the minimum amount of equity for the project was set at 30 percent12 of the minimum
project cost of US$350 million, the minimum amount of equity required of any proponent stood at
US$105 million. Converted to pesos at the exchange rate then of P26.239 to US$1.00 (as
quoted by the Bangko Sentral ng Pilipinas), the peso equivalent of the minimum equity was
P2,755,095,000.
However, the combined equity or net worth of the Paircargo consortium stood at only
P558,384,871.55.13 This amount was only slightly over 6 percent of the minimum project cost
and very much short of the required minimum equity, which was equivalent to 30 percent of the
project cost. Such deficiency should have immediately caused the disqualification of the
Paircargo consortium. This matter was brought to the attention of the Prequalification and
Bidding Committee (PBAC).
Notwithstanding the glaring deficiency, DOTC Undersecretary Primitivo C. Cal, concurrent chair
of the PBAC, declared in a Memorandum dated 14 October 1996 that "the Challenger (Paircargo
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consortium) was found to have a combined net worth of P3,926,421,242.00 that could support a
project costing approximately P13 billion." To justify his conclusion, he asserted: "It is not a
requirement that the networth must be `unrestricted'. To impose this as a requirement now will
be nothing less than unfair."
He further opined, "(T)he networth reflected in the Financial Statement should not be taken as
the amount of money to be used to answer the required thirty (30%) percent equity of the
challenger but rather to be used in establishing if there is enough basis to believe that the
challenger can comply with the required 30% equity. In fact, proof of sufficient equity is required
as one of the conditions for award of contract (Sec. 12.1 of IRR of the BOT Law) but not for
prequalification (Sec. 5.4 of same document)."
On the basis of the foregoing dubious declaration, the Paircargo consortium was deemed
prequalified and thus permitted to proceed to the other stages of the bidding process.
By virtue of the prequalified status conferred upon the Paircargo, Undersecretary Cal's findings
in effect relieved the consortium of the need to comply with the financial capability requirement
imposed by the BOT Law and IRR. This position is unmistakably and squarely at odds with the
Supreme Court's consistent doctrine emphasizing the strict application of pertinent rules,
regulations and guidelines for the public bidding process, in order to place each bidder - actual or
potential - on the same footing. Thus, it is unarguably irregular and contrary to the very concept
of public bidding to permit a variance between the conditions under which bids are invited and
those under which proposals are submitted and approved.
Republic v. Capulong,14 teaches that if one bidder is relieved from having to conform to the
conditions that impose some duty upon it, that bidder is not contracting in fair competition with
those bidders that propose to be bound by all conditions. The essence of public bidding is, after
all, an opportunity for fair competition and a basis for the precise comparison of bids. 15 Thus,
each bidder must bid under the same conditions; and be subject to the same guidelines,
requirements and limitations. The desired result is to be able to determine the best offer or
lowest bid, all things being equal.
Inasmuch as the Paircargo consortium did not possess the minimum equity equivalent to 30
percent of the minimum project cost, it should not have been prequalified or allowed to
participate further in the bidding. The Prequalification and Bidding Committee (PBAC) should
therefore not have opened the two envelopes of the consortium containing its technical and
financial proposals; required AEDC to match the consortium's bid; 16 or awarded the
Concession Agreement to the consortium's successor-in-interest, Piatco.
As there was effectively no public bidding to speak of, the entire bidding process having been
flawed and tainted from the very outset, therefore, the award of the concession to Paircargo's
successor Piatco was void, and the Concession Agreement executed with the latter was likewise
void ab initio. For this reason, Piatco cannot and should not be allowed to benefit from that
Agreement.17
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AEDC Was Deprived of the Right to Match PIATCO's Price Challenge
In DOTC PBAC Bid Bulletin No. 4 (par. 3), Undersecretary Cal declared that, for purposes of
matching the price challenge of Piatco, AEDC as originator of the unsolicited proposal would be
permitted access only to the schedule of proposed Annual Guaranteed Payments submitted by
Piatco, and not to the latter's financial and technical proposals that constituted the basis for the
price challenge in the first place. This was supposedly in keeping with Section 11.6 of the 1994
IRR, which provides that proprietary information is to be respected, protected and treated with
utmost confidentiality, and is therefore not to form part of the bidding/tender and related
documents.
This pronouncement, I believe, was a grievous misapplication of the mentioned provision. The
"proprietary information" referred to in Section 11.6 of the IRR pertains only to the proprietary
information of the originator of an unsolicited proposal, and not to those belonging to a
challenger. The reason for the protection accorded proprietary information at all is the fact that,
according to Section 4-A of the BOT Law as amended, a proposal qualifies as an "unsolicited
proposal" when it pertains to a project that involves "a new concept or technology", and/or a
project that is not on the government's list of priority projects.
To be considered as utilizing a new concept or technology, a project must involve the possession
of exclusive rights (worldwide or regional) over a process; or possession of intellectual property
rights over a design, methodology or engineering concept.18 Patently, the intent of the BOT Law
is to encourage individuals and groups to come up with creative innovations, fresh ideas and
new technology. Hence, the significance and necessity of protecting proprietary information in
connection with unsolicited proposals. And to make the encouragement real, the law also
extends to such individuals and groups what amounts to a "right of first refusal" to undertake the
project they conceptualized, involving the use of new technology or concepts, through the
mechanism of matching a price challenge.
A competing bid is never just any figure conjured from out of the blue; it is arrived at after
studying economic, financial, technical and other, factors; it is likewise based on certain
assumptions as to the nature of the business, the market potentials, the probable demand for the
product or service, the future behavior of cost items, political and other risks, and so on. It is thus
self-evident that in order to be able to intelligently match a bid or price challenge, a bidder must
be given access to the assumptions and the calculations that went into crafting the competing
bid.
In this instance, the financial and technical proposals of Piatco would have provided AEDC with
the necessary information to enable it to make a reasonably informed matching bid. To put it
more simply, a bidder unable to access the competitor's assumptions will never figure out how
the competing bid came about; requiring him to "counter-propose" is like having him shoot at a
target in the dark while blindfolded.
By withholding from AEDC the challenger's financial and technical proposals containing the
critical information it needed, Undersecretary Cal actually and effectively deprived AEDC of the
92
ability to match the price challenge. One could say that AEDC did not have the benefit of a "level
playing field." It seems to me, though, that AEDC was actually shut out of the game altogether.
At the end of the day, the bottom line is that the validity and the propriety of the award to Piatco
had been irreparably impaired.
Delayed Issuance of the Notice of Award Violated the BOT Law and the IRR
Section 9.5 of the IRR requires that the Notice of Award must indicate the time frame within
which the winner of the bidding (and therefore the prospective awardee) shall submit the
prescribed performance security, proof of commitment of equity contributions, and indications of
sources of financing (loans); and, in the case of joint ventures, an agreement showing that the
members are jointly and severally responsible for the obligations of the project proponent under
the contract.
The purpose of having a definite and firm timetable for the submission of the aforementioned
requirements is not only to prevent delays in the project implementation, but also to expose and
weed out unqualified proponents, who might have unceremoniously slipped through the earlier
prequalification process, by compelling them to put their money where their mouths are, so to
speak.
Nevertheless, this provision can be easily circumvented by merely postponing the actual
issuance of the Notice of Award, in order to give the favored proponent sufficient time to comply
with the requirements. Hence, to avert or minimize the manipulation of the post-bidding process,
the IRR not only set out the precise sequence of events occurring between the completion of the
evaluation of the technical bids and the issuance of the Notice of Award, but also specified the
timetables for each such event. Definite allowable extensions of time were provided for, as were
the consequences of a failure to meet a particular deadline.
In particular, Section 9.1 of the 1994 IRR prescribed that within 30 calendar days from the time
the second-stage evaluation shall have been completed, the Committee must come to a decision
whether or not to award the contract and, within 7 days therefrom, the Notice of Award must be
approved by the head of agency or local government unit (LGU) concerned, and its issuance
must follow within another 7 days thereafter.
Section 9.2 of the IRR set the procedure applicable to projects involving substantial government
undertakings as follows: Within 7 days after the decision to award is made, the draft contract
shall be submitted to the ICC for clearance on a no-objection basis. If the draft contract includes
government undertakings already previously approved, then the submission shall be for
information only.
However, should there be additional or new provisions different from the original government
undertakings, the draft shall have to be reviewed and approved. The ICC has 15 working days to
act thereon, and unless otherwise specified, its failure to act on the contract within the specified
92

time frame signifies that the agency or LGU may proceed with the award. The head of agency or
LGU shall approve the Notice of Award within seven days of the clearance by the ICC on a no-
objection basis, and the Notice itself has to be issued within seven days thereafter.
The highly regulated time-frames within which the agents of government were to act evinced the
intent to impose upon them the duty to act expeditiously throughout the process, to the end that
the project be prosecuted and implemented without delay. This regulated scenario was likewise
intended to discourage collusion and substantially reduce the opportunity for agents of
government to abuse their discretion in the course of the award process.
Despite the clear timetables set out in the IRR, several lengthy and still-unexplained delays
occurred in the award process, as can be observed from the presentation made by the counsel
for public respondents,19 quoted hereinbelow:
"11 Dec. 1996 - The Paircargo Joint Venture was informed by the PBAC that AEDC
failed to match and that negotiations preparatory to Notice of Award should be
commenced. This was the decision to award that should have commenced the
running of the 7-day period to approve the Notice of Award, as per Section 9.1 of the
IRR, or to submit the draft contract to the ICC for approval conformably with Section
9.2.
"01 April 1997 - The PBAC resolved that a copy of the final draft of the Concession
Agreement be submitted to the NEDA for clearance on a no-objection basis. This
resolution came more than 3 months too late as it should have been made on the
20th of December 1996 at the latest.
"16 April 1997 - The PBAC resolved that the period of signing the Concession
Agreement be extended by 15 days.
"18 April 1997 - NEDA approved the Concession Agreement. Again this is more than
3 months too late as the NEDA's decision should have been released on the 16th of
January 1997 or fifteen days after it should have been submitted to it for review.
"09 July 1997 - The Notice of Award was issued to PIATCO. Following the provisions
of the IRR, the Notice of Award should have been issued fourteen days after NEDA's
approval, or the 28th of January 1997. In any case, even if it were to be assumed that
the release of NEDA's approval on the 18th of April was timely, the Notice of Award
should have been issued on the 9th of May 1997. In both cases, therefore, the
release of the Notice of Award occurred in a decidedly less than timely fashion."
This chronology of events bespeaks an unmistakable disregard, if not disdain, by the persons in
charge of the award process for the time limitations prescribed by the IRR. Their attitude flies in
the face of this Court's solemn pronouncement in Republic v. Capulong,20 that "strict observance
93
of the rules, regulations and guidelines of the bidding process is the only safeguard to a fair,
honest and competitive public bidding."
From the foregoing, the only conclusion that can possibly be drawn is that the BOT law and its
IRR were repeatedly violated with unmitigated impunity - and by agents of government, no less!
On account of such violation, the award of the contract to Piatco, which undoubtedly gained time
and benefited from the delays, must be deemed null and void from the beginning.
Further Amendments Resulted in a Substantially Different Contract, Awarded Without
Public Bidding
But the violations and desecrations did not stop there. After the PBAC made its decision on
December 11, 1996 to award the contract to Piatco, the latter negotiated changes to the Contract
bidded out and ended up with what amounts to a substantially new contract without any public
bidding. This Contract was subsequently further amended four more times through negotiation
and without any bidding. Thus, the contract actually executed between Piatco and DOTC/MIAA
on July 12, 1997 (the Concession Agreement or "CA") differed from the contract bidded out (the
draft concession agreement or "DCA") in the following very significant respects:
1. The CA inserted stipulations creating a monopoly in favor of Piatco in the business
of providing airport-related services for international airlines and passengers.21
2. The CA provided that government is to answer for Piatco's unpaid loans and debts
(lumped under the term Attendant Liabilities) in the event Piatco fails to pay its senior
lenders.22
3. The CA provided that in case of termination of the contract due to the fault of
government, government shall pay all expenses that Piatco incurred for the project
plus the appraised value of the Terminal.23
4. The CA imposed new and special obligations on government, including delivery of
clean possession of the site for the terminal; acquisition of additional land at the
government's expense for construction of road networks required by Piatco's
approved plans and specifications; and assistance to Piatco in securing site utilities,
as well as all necessary permits, licenses and authorizations.24
5. Where Section 3.02 of the DCA requires government to refrain from competing with
the contractor with respect to the operation of NAIA Terminal III, Section 3.02(b) of
the CA excludes and prohibits everyone, including government, from directly or
indirectly competing with Piatco, with respect to the operation of, as well as
operations in, NAIA Terminal III. Operations in is sufficiently broad to encompass all
retail and other commercial business enterprises operating within Terminal III,
inclusive of the businesses of providing various airport-related services to
international airlines, within the scope of the prohibition.
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6. Under Section 6.01 of the DCA, the following fees are subject to the written
approval of MIAA: lease/rental charges, concession privilege fees for passenger
services, food services, transportation utility concessions, groundhandling, catering
and miscellaneous concession fees, porterage fees, greeter/well-wisher fees, carpark
fees, advertising fees, VIP facilities fees and others. Moreover, adjustments to the
groundhandling fees, rentals and porterage fees are permitted only once every two
years and in accordance with a parametric formula, per DCA Section 6.03. However,
the CA as executed with Piatco provides in Section 6.06 that all the aforesaid fees,
rentals and charges may be adjusted without MIAA's approval or intervention. Neither
are the adjustments to these fees and charges subject to or limited by any parametric
formula.25
7. Section 1.29 of the DCA provides that the terminal fees, aircraft tacking fees,
aircraft parking fees, check-in counter fees and other fees are to be quoted and paid
in Philippine pesos. But per Section 1.33 of the CA, all the aforesaid fees save the
terminal fee are denominated in US Dollars.
8. Under Section 8.07 of the DCA, the term attendant liabilities refers to liabilities
pertinent to NAIA Terminal III, such as payment of lease rentals and performance of
other obligations under the Land Lease Agreement; the obligations under the Tenant
Agreements; and payment of all taxes, fees, charges and assessments of whatever
kind that may be imposed on NAIA Terminal III or parts thereof. But in Section 1.06 of
the CA, Attendant Liabilities refers to unpaid debts of Piatco: "All amounts recorded
and from time to time outstanding in the books of (Piatco) as owing to Unpaid
Creditors who have provided, loaned or advanced funds actually used for the Project,
including all interests, penalties, associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses, and further including amounts owed by
[Piatco] to its suppliers, contractors and subcontractors."
9. Per Sections 8.04 and 8.06 of the DCA, government may, on account of the
contractors breach, rescind the contract and select one of four options: (a) take over
the terminal and assume all its attendant liabilities; (b) allow the contractor's creditors
to assign the Project to another entity acceptable to DOTC/MIAA; (c) pay the
contractor rent for the facilities and equipment the DOTC may utilize; or (d) purchase
the terminal at a price established by independent appraisers. Depending on the
option selected, government may take immediate possession and control of the
terminal and its operations. Government will be obligated to compensate the
contractor for the "equivalent or proportionate contract costs actually disbursed," but
only where government is the one in breach of the contract. But under Section 8.06(a)
of the CA, whether on account of Piatco's breach of contract or its inability to pay its
creditors, government is obliged to either (a) take over Terminal III and assume all of
Piatco's debts or (b) permit the qualified unpaid creditors to be substituted in place of
Piatco or to designate a new operator. And in the event of government's breach of
contract, Piatco may compel it to purchase the terminal at fair market value, per
Section 8.06(b) of the CA.
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10. Under the DCA, any delay by Piatco in the payment of the amounts due the
government constitutes breach of contract. However, under the CA, such delay does
not necessarily constitute breach of contract, since Piatco is permitted to suspend
payments to the government in order to first satisfy the claims of its secured creditors,
per Section 8.04(d) of the CA.
It goes without saying that the amendment of the Contract bidded out (the DCA or draft
concession agreement) - in such substantial manner, without any public bidding, and after the
bidding process had been concluded on December 11, 1996 - is violative of public policy on
public biddings, as well as the spirit and intent of the BOT Law. The whole point of going through
the public bidding exercise was completely lost. Its very rationale was totally subverted by
permitting Piatco to amend the contract for which public bidding had already been concluded.
Competitive bidding aims to obtain the best deal possible by fostering transparency and
preventing favoritism, collusion and fraud in the awarding of contracts. That is the reason why
procedural rules pertaining to public bidding demand strict observance.26
In a relatively early case, Caltex v. Delgado Brothers,27 this Court made it clear that substantive
amendments to a contract for which a public bidding has already been finished should only be
awarded after another public bidding:
"The due execution of a contract after public bidding is a limitation upon the right of
the contracting parties to alter or amend it without another public bidding, for
otherwise what would a public bidding be good for if after the execution of a contract
after public bidding, the contracting parties may alter or amend the contract, or even
cancel it, at their will? Public biddings are held for the protection of the public, and to
give the public the best possible advantages by means of open competition between
the bidders. He who bids or offers the best terms is awarded the contract subject of
the bid, and it is obvious that such protection and best possible advantages to the
public will disappear if the parties to a contract executed after public bidding may alter
or amend it without another previous public bidding."28
The aforementioned case dealt with the unauthorized amendment of a contract executed after
public bidding; in the situation before us, the amendments were made also after the bidding, but
prior to execution. Be that as it may, the same rationale underlying Caltex applies to the present
situation with equal force. Allowing the winning bidder to renegotiate the contract for which the
bidding process has ended is tantamount to permitting it to put in anything it wants. Here, the
winning bidder (Piatco) did not even bother to wait until after actual execution of the contract
before rushing to amend it. Perhaps it believed that if the changes were made to a contract
already won through bidding (DCA) instead of waiting until it is executed, the amendments would
not be noticed or discovered by the public.
In a later case, Mata v. San Diego,29 this Court reiterated its ruling as follows:
"It is true that modification of government contracts, after the same had been awarded
after a public bidding, is not allowed because such modification serves to nullify the
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effects of the bidding and whatever advantages the Government had secured thereby
and may also result in manifest injustice to the other bidders. This prohibition,
however, refers to a change in vital and essential particulars of the agreement which
results in a substantially new contract."
Piatco's counter-argument may be summed up thus: There was nothing in the 1994 IRR that
prohibited further negotiations and eventual amendments to the DCA even after the bidding had
been concluded. In fact, PBAC Bid Bulletin No. 3 states: "[A]mendments to the Draft Concession
Agreement shall be issued from time to time. Said amendments will only cover items that would
not materially affect the preparation of the proponent's proposal."
I submit that accepting such warped argument will result in perverting the policy underlying
public bidding. The BOT Law cannot be said to allow the negotiation of contractual stipulations
resulting in a substantially new contract after the bidding process and price challenge had been
concluded. In fact, the BOT Law, in recognition of the time, money and effort invested in an
unsolicited proposal, accords its originator the privilege of matching the challenger's bid.
Section 4-A of the BOT Law specifically refers to a "lower price proposal" by a competing bidder;
and to the right of the original proponent "to match the price" of the challenger. Thus, only the
price proposals are in play. The terms, conditions and stipulations in the contract for which public
bidding has been concluded are understood to remain intact and not be subject to further
negotiation. Otherwise, the very essence of public bidding will be destroyed - there will be no
basis for an exact comparison between bids.
Moreover, Piatco misinterpreted the meaning behind PBAC Bid Bulletin No. 3. The phrase
amendments . . . from time to time refers only to those amendments to the draft concession
agreement issued by the PBAC prior to the submission of the price challenge; it certainly does
not include or permit amendments negotiated for and introduced after the bidding process, has
been terminated.
Piatco's Concession Agreement Was Further Amended, (ARCA) Again Without Public
Bidding
Not satisfied with the Concession Agreement, Piatco - once more without bothering with public
bidding - negotiated with government for still more substantial changes. The result was the
Amended and Restated Concession Agreement (ARCA) executed on November 26, 1998. The
following changes were introduced:
1. The definition of Attendant Liabilities was further amended with the result that the
unpaid loans of Piatco, for which government may be required to answer, are no
longer limited to only those loans recorded in Piatco's books or loans whose proceeds
were actually used in the Terminal III project.30
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2. Although the contract may be terminated due to breach by Piatco, it will not be
liable to pay the government any Liquidated Damages if a new operator is designated
to take over the operation of the terminal.31
3. The Liquidated Damages which government becomes liable for in case of its
breach of contract were substantially increased.32
4. Government's right to appoint a comptroller for Piatco in case the latter encounters
liquidity problems was deleted.33
5. Government is made liable for Incremental and Consequential Costs and Losses in
case it fails to comply or cause any third party under its direct or indirect control to
comply with the special obligations imposed on government.34
6. The insurance policies obtained by Piatco covering the terminal are now required to
be assigned to the Senior Lenders as security for the loans; previously, their proceeds
were to be used to repair and rehabilitate the facility in case of damage.35
7. Government bound itself to set the initial rate of the terminal fee, to be charged
when Terminal III begins operations, at an amount higher than US$20.36
8. Government waived its defense of the illegality of the contract and even agreed to
be liable to pay damages to Piatco in the event the contract was declared illegal.37
9. Even though government may be entitled to terminate the ARCA on account of
breach by Piatco, government is still liable to pay Piatco the appraised value of
Terminal III or the Attendant Liabilities, if the termination occurs before the In-Service
Date.38 This condition contravenes the BOT Law provision on termination
compensation.
10. Government is obligated to take the administrative action required for Piatco's
imposition, collection and application of all Public Utility Revenues.39 No such
obligation existed previously.
11. Government is now also obligated to perform and cause other persons and
entities under its direct or indirect control to perform all acts necessary to perfect the
security interests to be created in favor of Piatco's Senior Lenders.40 No such
obligation existed previously.
12. DOTC/MIAA's right of intervention in instances where Piatco's Non-Public Utility
Revenues become exorbitant or excessive has been removed.41
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13. The illegality and unenforceability of the ARCA or any of its material provisions
was made an event of default on the part of government only, thus constituting a
ground for Piatco to terminate the ARCA.42
14. Amounts due from and payable by government under the contract were made
payable on demand - net of taxes, levies, imposts, duties, charges or fees of any kind
except as required by law.43
15. The Parametric Formula in the contract, which is utilized to compute for
adjustments/increases to the public utility revenues (i.e., aircraft parking and tacking
fees, check-in counter fee and terminal fee), was revised to permit Piatco to input its
more costly short-term borrowing rates instead of the longer-terms rates in the
computations for adjustments, with the end result that the changes will redound to its
greater financial benefit.
16. The Certificate of Completion simply deleted the successful performance-testing
of the terminal facility in accordance with defined performance standards as a pre-
condition for government's acceptance of the terminal facility.44
In sum, the foregoing revisions and amendments as embodied in the ARCA constitute very
material alterations of the terms and conditions of the CA, and give further manifestly undue
advantage to Piatco at the expense of government. Piatco claims that the changes to the CA
were necessitated by the demands of its foreign lenders. However, no proof whatsoever has
been adduced to buttress this claim.
In any event, it is quite patent that the sum total of the aforementioned changes resulted in
drastically weakening the position of government to a degree that seems quite excessive, even
from the standpoint of a businessperson who regularly transacts with banks and foreign lenders,
is familiar with their mind-set, and understands what motivates them. On the other hand,
whatever it was that impelled government officials concerned to accede to those grossly
disadvantageous changes, I can only hazard a guess.
There is no question in my mind that the ARCA was unauthorized and illegal for lack of public
bidding and for being patently disadvantageous to government.
The Three Supplements Imposed New Obligations on Government, Also Without Prior
Public Bidding
After Piatco had managed to breach the protective rampart of public bidding, it recklessly went
on a rampage of further assaults on the ARCA.
The First Supplement Is as Void as the ARCA
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In the First Supplement ("FS") executed on August 27, 1999, the following changes were made
to the ARCA:
1. The amounts payable by Piatco to government were reduced by allowing additional
exceptions to the Gross Revenues in which government is supposed to participate. 45
2. Made part of the properties which government is obliged to construct and/or
maintain and keep in good repair are (a) the access road connecting Terminals II and
III - the construction of this access road is the obligation of Piatco, in lieu of its
obligation to construct an Access Tunnel connecting Terminals II and III; and (b) the
taxilane and taxiway - these are likewise part of Piatco's obligations, since they are
part and parcel of the project as described in Clause 1.3 of the Bid Documents .46
3. The MIAA is obligated to provide funding for the maintenance and repair of the
airports and facilities owned or operated by it and by third persons under its control. It
will also be liable to Piatco for the latter's losses, expenses and damages as well as
liability to third persons, in case MIAA fails to perform such obligations. In addition,
MIAA will also be liable for the incremental and consequential costs of the remedial
work done by Piatco on account of the former's default.47
4. The FS also imposed on government ten (10) "Additional Special Obligations,"
including the following:
(a) Working for the removal of the general aviation traffic from the NAIA
airport complex48
(b) Providing through MIAA the land required by Piatco for the taxilane and
one taxiway at no cost to Piatco49
(c) Implementing the government's existing storm drainage master plan50
(d) Coordinating with DPWH the financing, the implementation and the
completion of the following works before the In-Service Date: three left-
turning overpasses (EDSA to Tramo St., Tramo to Andrews Ave., and
Manlunas Road to Sales Ave.);51 and a road upgrade and improvement
program involving widening, repair and resurfacing of Sales Road,
Andrews Avenue and Manlunas Road; improvement of Nichols
Interchange; and removal of squatters along Andrews Avenue.52
(e) Dealing directly with BCDA and the Phil. Air Force in acquiring
additional land or right of way for the road upgrade and improvement
program.53
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5. Government is required to work for the immediate reversion to MIAA of the Nayong
Pilipino National Park.54
6. Government's share in the terminal fees collected was revised from a flat rate of
P180 to 36 percent thereof; together with government's percentage share in the gross
revenues of Piatco, the amount will be remitted to government in pesos instead of US
dollars.55 This amendment enables Piatco to benefit from the further erosion of the
peso-dollar exchange rate, while preventing government from building up its foreign
exchange reserves.
7. All payments from Piatco to government are now to be invoiced to MIAA, and
payments are to accrue to the latter's exclusive benefit.56 This move appears to be in
support of the funds MIAA advanced to DPWH.
I must emphasize that the First Supplement is void in two respects. First, it is merely an
amendment to the ARCA, upon which it is wholly dependent; therefore, since the ARCA is void,
inexistent and not capable of being ratified or amended, it follows that the FS too is void,
inexistent and inoperative. Second, even assuming arguendo that the ARCA is somehow
remotely valid, nonetheless the FS, in imposing significant new obligations upon government,
altered the fundamental terms and stipulations of the ARCA, thus necessitating a public bidding
all over again. That the FS was entered into sans public bidding renders it utterly void and
inoperative.
The Second Supplement Is Similarly Void and Inexistent
The Second Supplement ("SS") was executed between the government and Piatco on
September 4, 2000. It calls for Piatco, acting not as concessionaire of NAIA Terminal III but as a
public works contractor, to undertake - in the government's stead - the clearing, removal,
demolition and disposal of improvements, subterranean obstructions and waste materials at the
project site.57
The scope of the works, the procedures involved, and the obligations of the contractor are
provided for in Parts II and III of the SS. Section 4.1 sets out the compensation to be paid, listing
specific rates per cubic meter of materials for each phase of the work - excavation, leveling,
removal and disposal, backfilling and dewatering. The amounts collectible by Piatco are to be
offset against the Annual Guaranteed Payments it must pay government.
Though denominated as Second Supplement, it was nothing less than an entirely new public
works contract. Yet it, too, did not undergo any public bidding, for which reason it is also void and
inoperative.
Not surprisingly, Piatco had to subcontract the works to a certain Wintrack Builders, a firm
reputedly owned by a former high-ranking DOTC official. But that is another story altogether.
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The Third Supplement Is Likewise Void and Inexistent
The Third Supplement ("TS"), executed between the government and Piatco on June 22, 2001,
passed on to the government certain obligations of Piatco as Terminal III concessionaire, with
respect to the surface road connecting Terminals II and III.
By way of background, at the inception of and forming part of the NAIA Terminal III project was
the proposed construction of an access tunnel crossing Runway 13/31, which. would connect
Terminal III to Terminal II. The Bid Documents in Section 4.1.2.3[B][i] declared that the said
access tunnel was subject to further negotiation; but for purposes of the bidding, the proponent
should submit a bid for it as well. Therefore, the tunnel was supposed to be part and parcel of
the Terminal III project.
However, in Section 5 of the First Supplement, the parties declared that the access tunnel was
not economically viable at that time. In lieu thereof, the parties agreed that a surface access road
(now called the T2-T3 Road) was to be constructed by Piatco to connect the two terminals. Since
it was plainly in substitution of the tunnel, the surface road construction should likewise be
considered part and parcel of the same project, and therefore part of Piatco's obligation as well.
While the access tunnel was estimated to cost about P800 million, the surface road would have
a price tag in the vicinity of about P100 million, thus producing significant savings for Piatco.
Yet, the Third Supplement, while confirming that Piatco would construct the T2-T3 Road,
nevertheless shifted to government some of the obligations pertaining to the former, as follows:
1. Government is now obliged to remove at its own expense all tenants, squatters,
improvements and/or waste materials on the site where the T2-T3 road is to be
constructed.58 There was no similar obligation on the part of government insofar as
the access tunnel was concerned.
2. Should government fail to carry out its obligation as above described, Piatco may
undertake it on government's behalf, subject to the terms and conditions (including
compensation payments) contained in the Second Supplement.59
3. MIAA will answer for the operation, maintenance and repair of the T2-T3 Road.60
The TS depends upon and is intended to supplement the ARCA as well as the First Supplement,
both of which are void and inexistent and not capable of being ratified or amended. It follows that
the TS is likewise void, inexistent and inoperative. And even if, hypothetically speaking, both
ARCA and FS are valid, still, the Third Supplement - imposing as it does significant new
obligations upon government - would in effect alter the terms and stipulations of the ARCA in
material respects, thus necessitating another public bidding. Since the TS was not subjected to
public bidding, it is consequently utterly void as well. At any rate, the TS created new monetary
obligations on the part of government, for which there were no prior appropriations. Hence it
follows that the same is void ab initio.
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In patiently tracing the progress of the Piatco contracts from their inception up to the present, I
noted that the whole process was riddled with significant lapses, if not outright irregularity and
wholesale violations of law and public policy. The rationale of beginning at the beginning, so to
speak, will become evident when the question of what to do with the five Piatco contracts is
discussed later on.
In the meantime, I shall take up specific, provisions or changes in the contracts and highlight the
more prominent objectionable features.
Government Directly Guarantees Piatco Debts
Certainly the most discussed provision in the parties' arguments is the one creating an
unauthorized, direct government guarantee of Piatco's obligations in favor of the lenders.
Section 4-A of the BOT Law as amended states that unsolicited proposals, such as the NAIA
Terminal III Project, may be accepted by government provided inter alia that no direct
government guarantee, subsidy or equity is required. In short, such guarantee is prohibited in
unsolicited proposals. Section 2(n) of the same legislation defines direct government guarantee
as "an agreement whereby the government or any of its agencies or local government units (will)
assume responsibility for the repayment of debt directly incurred by the project proponent in
implementing the project in case of a loan default."
Both the CA and the ARCA have provisions that undeniably create such prohibited government
guarantee. Section 4.04 (c)(iv) to (vi) of the ARCA, which is similar to Section 4.04 of the CA,
provides thus:
"(iv) that if Concessionaire is in default under a payment obligation owed to the Senior
Lenders, and as a result thereof the Senior Lenders have become entitled to
accelerate the Senior Loans, the Senior Lenders shall have the right to notify GRP of
the same . . .;
(v) . . . the Senior Lenders may after written notification to GRP, transfer the
Concessionaire's rights and obligations to a transferee . . .;
(vi) if the Senior Lenders . . . are unable to . . . effect a transfer . . ., then GRP and the
Senior Lenders shall endeavor . . . to enter into any other arrangement relating to the
Development Facility . . . If no agreement relating to the Development Facility is
arrived at by GRP and the Senior Lenders within the said 180-day period, then at the
end thereof the Development Facility shall be transferred by the Concessionaire to
GRP or its designee and GRP shall make a termination payment to Concessionaire
equal to the Appraised Value (as hereinafter defined) of the Development Facility or
the sum of the Attendant Liabilities, if greater. . . ."
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In turn, the term Attendant Liabilities is defined in Section 1.06 of the ARCA as follows:
"Attendant Liabilities refer to all amounts in each case supported by verifiable
evidence from time to time owed or which may become, owing by Concessionaire to
Senior Lenders or any other persons or entities who have provided, loaned or
advanced funds or provided financial facilities to Concessionaire for the Project,
including, without limitation, all principal, interest, associated fees, charges,
reimbursements, and other related expenses (including the fees, charges and
expenses of any agents or trustees of such persons or entities), whether payable at
maturity, by acceleration or otherwise, and further including amounts owed by
Concessionaire to its professional consultants and advisers, suppliers, contractors
and sub-contractors."
Government's agreement to pay becomes effective in the event of a default by Piatco on any of
its loan obligations to the Senior Lenders, and the amount to be paid by government is the
greater of either the Appraised Value of Terminal III or the aggregate amount of the moneys
owed by Piatco - whether to the Senior Lenders or to other entities, including its suppliers,
contractors and subcontractors. In effect, therefore, this agreement already constitutes the
prohibited assumption by government of responsibility for repayment of Piatco's debts in case of
a loan default. In fine, a direct government guarantee.
It matters not that there is a roundabout procedure prescribed by Section 4.04(c)(iv), (v) and (vi)
that would require, first, an attempt (albeit unsuccessful) by the Senior Lenders to transfer
Piatco's rights to a transferee of their choice; and, second, an effort (equally unsuccessful) to
"enter into any other arrangement" with the government regarding the Terminal III facility, before
government is required to make good on its guarantee. What is abundantly clear is the fact that,
in the devious labyrinthine process detailed in the aforesaid section, it is entirely within the
Senior Lenders' power, prerogative and control - exercisable via a mere refusal or inability to
agree upon "a transferee" or "any other arrangement" regarding the terminal facility - to push the
process forward to the ultimate contractual cul-de-sac, wherein government will be compelled to
abjectly surrender and make good on its guarantee of payment.
Piatco also argues that there is no proviso requiring government to pay the Senior Lenders in the
event of Piatco's default. This is literally true, in the sense that Section 4.04(c)(vi) of ARCA
speaks of government making the termination payment to Piatco, not to the lenders. However, it
is almost a certainty that the Senior Lenders will already have made Piatco sign over to them,
ahead of time, its right to receive such payments from government; and/or they may already
have had themselves appointed its attorneys-in-fact for the purpose of collecting and receiving
such payments.
Nevertheless, as petitioners-in-intervention pointed out in their Memorandum,61 the termination
payment is to be made to Piatco, not to the lenders; and there is no provision anywhere in the
contract documents to prevent it from diverting the proceeds to its own benefit and/or to ensure
that it will necessarily use the same to pay off the Senior Lenders and other creditors, in order to
avert the foreclosure of the mortgage and other liens on the terminal facility. Such deficiency
puts the interests of government at great risk. Indeed, if the unthinkable were to happen,
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government would be paying several hundreds of millions of dollars, but the mortgage liens on
the facility may still be foreclosed by the Senior Lenders just the same.
Consequently, the Piatco contracts are also objectionable for grievously failing to adequately
protect government's interests. More accurately, the contracts would consistently weaken and do
away with protection of government interests. As such, they are therefore grossly lopsided in
favor of Piatco and/or its Senior Lenders.
While on this subject, it is well to recall the earlier discussion regarding a particularly noticeable
alteration of the concept of "Attendant Liabilities." In Section 1.06 of the CA defining the term, the
Piatco debts to be assumed/paid by government were qualified by the phrases recorded and
from time to time outstanding in the books of the Concessionaire and actually used for the
project. These phrases were eliminated from the ARCA's definition of Attendant Liabilities.
Since no explanation has been forthcoming from Piatco as to the possible justification for such a
drastic change, the only conclusion, possible is that it intends to have all of its debts covered by
the guarantee, regardless of whether or not they are disclosed in its books. This has particular
reference to those borrowings which were obtained in violation of the loan covenants requiring
Piatco to maintain a minimum 70:30 debt-to-equity ratio, and even if the loan proceeds were not
actually used for the project itself.
This point brings us back to the guarantee itself. In Section 4.04(c)(vi) of ARCA, the amount
which government has guaranteed to pay as termination payment is the greater of either (i) the
Appraised Value of the terminal facility or (ii) the aggregate of the Attendant Liabilities. Given that
the Attendant Liabilities may include practically any Piatco debt under the sun, it is highly
conceivable that their sum may greatly exceed the appraised value of the facility, and
government may end up paying very much more than the real worth of Terminal III. (So why did
government have to bother with public bidding anyway?)
In the final analysis, Section 4.04(c)(iv) to (vi) of the ARCA is diametrically at odds with the spirit
and the intent of the BOT Law. The law meant to mobilize private resources (the private sector)
to take on the burden and the risks of financing the construction, operation and maintenance of
relevant infrastructure and development projects for the simple reason that government is not in
a position to do so. By the same token, government guarantee was prohibited, since it would
merely defeat the purpose and raison d'être of a build-operate-and-transfer project to be
undertaken by the private sector.
To the extent that the project proponent is able to obtain loans to fund the project, those risks are
shared between the project proponent on the one hand, and its banks and other lenders on the
other. But where the proponent or its lenders manage to cajol or coerce the government into
extending a guarantee of payment of the loan obligations, the risks assumed by the lenders are
passed right back to government. I cannot understand why, in the instant case, government
cheerfully assented to re-assuming the risks of the project when it gave the prohibited guarantee
and thus simply negated the very purpose of the BOT Law and the protection it gives the
government.
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Contract Termination Provisions in the Piatco Contracts Are Void
The BOT Law as amended provides for contract termination as follows:
"Sec. 7. Contract Termination. - In the event that a project is revoked, cancelled or
terminated by the government through no fault of the project proponent or by mutual
agreement, the Government shall compensate the said project proponent for its
actual expenses incurred in the project plus a reasonable rate of return thereon not
exceeding that stated in the contract as of the date of such revocation, cancellation or
termination: Provided, That the interest of the Government in this instances [sic] shall
be duly insured with the Government Service Insurance System or any other
insurance entity duly accredited by the Office of the Insurance Commissioner:
Provided, finally, That the cost of the insurance coverage shall be included in the
terms and conditions of the bidding referred to above.
"In the event that the government defaults on certain major obligations in the contract
and such failure is not remediable or if remediable shall remain unremedied for an
unreasonable length of time, the project proponent/contractor may, by prior notice to
the concerned national government agency or local government unit specifying the
turn-over date, terminate the contract. The project proponent/contractor shall be
reasonably compensated by the Government for equivalent or proportionate contract
cost as defined in the contract."
The foregoing statutory provision in effect provides for the following limited instances when
termination compensation may be allowed:
1. Termination by the government through no fault of the project proponent
2. Termination upon the parties' mutual agreement
3. Termination by the proponent due to government's default on certain major
contractual obligations
To emphasize, the law does not permit compensation for the project proponent when contract
termination is due to the proponent's own fault or breach of contract.
This principle was clearly violated in the Piatco Contracts. The ARCA stipulates that government
is to pay termination compensation to Piatco even when termination is initiated by government
for the following causes:
"(i) Failure of Concessionaire to finish the Works in all material respects in
accordance with the Tender Design and the Timetable;
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(ii) Commission by Concessionaire of a material breach of this Agreement . . .;
(iii) . . . a change in control of Concessionaire arising from the sale, assignment,
transfer or other disposition of capital stock which results in an ownership structure
violative of statutory or constitutional limitations;
(iv) A pattern of continuing or repeated non-compliance, willful violation, or non-
performance of other terms and conditions hereof which is hereby deemed a material
breach of this Agreement . . ."62
As if that were not bad enough, the ARCA also inserted into Section 8.01 the phrase "Subject to
Section 4.04." The effect of this insertion is that in those instances where government may
terminate the contract on account of Piatco's breach, and it is nevertheless required under the
ARCA to make termination compensation to Piatco even though unauthorized by law, such
compensation is to be equivalent to the payment amount guaranteed by government - either a)
the Appraised Value of the terminal facility or (b) the aggregate of the Attendant Liabilities,
whichever amount is greater!
Clearly, this condition is not in line with Section 7 of the BOT Law. That provision permits a
project proponent to recover the actual expenses it incurred in the prosecution of the project plus
a reasonable rate of return not in excess of that provided in the contract; or to be compensated
for the equivalent or proportionate contract cost as defined in the contract, in case the
government is in default on certain major contractual obligations.
Furthermore, in those instances where such termination compensation is authorized by the
BOT Law, it is indispensable that the interest of government be duly insured. Section 5.08 the
ARCA mandates insurance coverage for the terminal facility; but all insurance policies are to be
assigned, and all proceeds are payable, to the Senior Lenders. In brief, the interest being
secured by such coverage is that of the Senior Lenders, not that of government. This can hardly
be considered compliance with law.
In essence, the ARCA provisions on termination compensation result in another unauthorized
government guarantee, this time in favor of Piatco.
A Prohibited Direct Government Subsidy, Which at the Same Time Is an Assault on the
National Honor
Still another contractual provision offensive to law and public policy is Section 8.01(d) of the
ARCA, which is a "bolder and badder" version of Section 8.04(d) of the CA.
It will be recalled that Section 4-A of the BOT Law as amended prohibits not only direct
government guarantees, but likewise a direct government subsidy for unsolicited proposals.
Section 13.2. b. iii. of the 1999 IRR defines a direct government subsidy as encompassing "an
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agreement whereby the Government . . . will . . . postpone any payments due from the
proponent."
Despite the statutory ban, Section 8.01 (d) of the ARCA provides thus:
"(d) The provisions of Section 8.01(a) notwithstanding, and for the purpose of
preventing a disruption of the operations in the Terminal and/or Terminal Complex, in
the event that at any time Concessionaire is of the reasonable opinion that it shall be
unable to meet a payment obligation owed to the Senior Lenders, Concessionaire
shall give prompt notice to GRP, through DOTC/MIAA and to the Senior Lenders. In
such circumstances, the Senior Lenders (or the Senior Lenders' Representative) may
ensure that after making provision for administrative expenses and depreciation, the
cash resources of Concessionaire shall first be used and applied to meet all payment
obligations owed to the Senior Lenders. Any excess cash, after meeting such
payment obligations, shall be earmarked for the payment of all sums payable by
Concessionaire to GRP under this Agreement. If by reason of the foregoing GRP
should be unable to collect in full all payments due to GRP under this Agreement,
then the unpaid balance shall be payable within a 90-day grace period counted from
the relevant due date, with interest per annum at the rate equal to the average 91-day
Treasury Bill Rate as of the auction date immediately preceding the relevant due date.
If payment is not effected by Concessionaire within the grace period, then a spread of
five (5%) percent over the applicable 91-day Treasury Bill Rate shall be added on the
unpaid amount commencing on the expiry of the grace period up to the day of full
payment. When the temporary illiquidity of Concessionaire shall have been corrected
and the cash position of Concessionaire should indicate its ability to meet its maturing
obligations, then the provisions set forth under this Section 8.01(d) shall cease to
apply. The foregoing remedial measures shall be applicable only while there remains
unpaid and outstanding amounts owed to the Senior Lenders." (Emphasis supplied)
By any manner of interpretation or application, Section 8.01(d) of the ARCA clearly mandates the
indefinite postponement of payment of all of Piatco's obligations to the government, in order to
ensure that Piatco's obligations to the Senior Lenders are paid in full first. That is nothing more
or less than the direct government subsidy prohibited by the BOT Law and the IRR. The fact that
Piatco will pay interest on the unpaid amounts owed to government does not change the
situation or render the prohibited subsidy any less unacceptable.
But beyond the clear violations of law, there are larger issues involved in the ARCA. Earlier, I
mentioned that Section 8.01(d) of the ARCA completely eliminated the proviso in Section 8.04(d)
of the CA which gave government the right to appoint a financial controller to manage the cash
position of Piatco during situations of financial distress. Not only has government been deprived
of any means of monitoring and managing the situation; worse, as can be seen from Section
8.01(d) above-quoted, the Senior Lenders have effectively locked in on the right to exercise
financial controllership over Piatco and to allocate its cash resources to the payment of all
amounts owed to the Senior Lenders before allowing any payment to be made to government.
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In brief, this particular provision of the ARCA has placed in the hands of foreign lenders the
power and the authority to determine how much (if at all) and when the Philippine government
(as grantor of the franchise) may be allowed to receive from Piatco. In that situation, government
will be at the mercy of the foreign lenders. This is a situation completely contrary to the rationale
of the BOT Law and to public policy.
The aforesaid provision rouses mixed emotions - shame and disgust at the parties'
(especially the government officials') docile submission and abject servitude and
surrender to the imperious and excessive demands of the foreign lenders, on the one
hand; and vehement outrage at the affront to the sovereignty of the Republic and to the
national honor, on the other. It is indeed time to put an end to such an unbearable,
dishonorable situation.
The Piatco Contracts Unarguably Violate Constitutional Injunctions
I will now discuss the manner in which the Piatco Contracts offended the Constitution.
The Exclusive Right Granted to Piatco to Operate a Public Utility Is Prohibited by the Constitution
While Section 2.02 of the ARCA spoke of granting to Piatco "a franchise to operate and maintain
the Terminal Complex," Section 3.02(a) of the same ARCA granted to Piatco, for the entire term
of the concession agreement, "the exclusive right to operate a commercial international
passenger terminal within the Island of Luzon" with the exception of those three terminals
already existing63 at the time of execution of the ARCA.
Section 11 of Article XII of the Constitution prohibits the grant of a "franchise, certificate, or any
other form of authorization for the operation of a public utility" that is "exclusive in character."
In its Opinion No. 078, Series of 1995, the Department of justice held that "the NAIA Terminal III
which . . . is a 'terminal for public use' is a public utility." Consequently, the constitutional
prohibition against the exclusivity of a franchise applies to the franchise for the operation of NAIA
Terminal III as well.
What was granted to Piatco was not merely a franchise, but an "exclusive right" to operate an
international passenger terminal within the "Island of Luzon." What this grant effectively means is
that the government is now estopped from exercising its inherent power to award any other
person another franchise or a right to operate such a public utility, in the event public interest in
Luzon requires it. This restriction is highly detrimental to government and to the public interest.
Former Secretary of Justice Hernando B. Perez expressed this point well in his Memorandum for
the President dated 21 May 2002:
"Section 3.02 on 'Exclusivity'
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"This provision gives to PIATCO (the Concessionaire) the exclusive right to operate a
commercial international airport within the Island of Luzon with the exception of those
already existing at the time of the execution of the Agreement, such as the airports at
Subic, Clark and Laoag City. In the case of the Clark International Airport, however,
the provision restricts its operation beyond its design capacity of 850,000 passengers
per annum and the operation of new terminal facilities therein until after the new NAIA
Terminal III shall have consistently reached or exceeded its design capacity of ten
(10) million passenger capacity per year for three (3) consecutive years during the
concession period.
"This is an onerous and disadvantageous provision. It effectively grants PIATCO a
monopoly in Luzon and ties the hands of government in the matter of developing new
airports which may be found expedient and necessary in carrying out any future plan
for an inter-modal transportation system in Luzon.
"Additionally, it imposes an unreasonable restriction on the operation of the Clark
International Airport which could adversely affect the operation and development of
the Clark Special Economic Zone to the economic prejudice of the local
constituencies that are being benefited by its operation." (Emphasis supplied)
While it cannot be gainsaid that an enterprise that is a public utility may happen to constitute a
monopoly on account of the very nature of its business and the absence of competition, such a
situation does not however constitute justification to violate the constitutional prohibition and
grant an exclusive franchise or exclusive right to operate a public utility.
Piatco's contention that the Constitution does not actually prohibit monopolies is beside the
point. As correctly argued,64 the existence of a monopoly by a public utility is a situation created
by circumstances that do not encourage competition. This situation is different from the grant of
a franchise to operate a public utility, a privilege granted by government. Of course, the grant of
a franchise may result in a monopoly. But making such franchise exclusive is what is expressly
proscribed by the Constitution.
Actually, the aforementioned Section 3.02 of the ARCA more than just guaranteed exclusivity; it
also guaranteed that the government will not improve or expand the facilities at Clark - and in
fact is required to put a cap on the latter's operations - until after Terminal III shall have been
operated at or beyond its peak capacity for three consecutive years.65 As counsel for public
respondents pointed out, in the real world where the rate of influx of international passengers
can fluctuate substantially from year to year, it may take many years before Terminal III sees
three consecutive years' operations at peak capacity. The Diosdado Macapagal International
Airport may thus end up stagnating for a long time. Indeed, in order to ensure greater profits for
Piatco, the economic progress of a region has had to be sacrificed.
The Piatco Contracts Violate the Time Limitation on Franchises
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Section 11 of Article XII of the Constitution also provides that "no franchise, certificate or any
other form of authorization for the operation of a public utility shall be . . . for a longer period than
fifty years." After all, a franchise held for an unreasonably long time would likely give rise to the
same evils as a monopoly.
The Piatco Contracts have come up with an innovative way to circumvent the prohibition and
obtain an extension. This fact can be gleaned from Section 8.03(b) of the ARCA, which I quote
thus:
"Sec. 8.03. Termination Procedure and Consequences of Termination. -
a) x x x xxx xxx
b) In the event the Agreement is terminated pursuant to Section 8.01 (b)
hereof, Concessionaire shall be entitled to collect the Liquidated Damages
specified in Annex 'G'. The full payment by GRP to Concessionaire of the
Liquidated Damages shall be a condition precedent to the transfer by
Concessionaire to GRP of the Development Facility. Prior to the full
payment of the Liquidated Damages, Concessionaire shall to the extent
practicable continue to operate the Terminal and the Terminal Complex
and shall be entitled to retain and withhold all payments to GRP for the
purpose of offsetting the same against the Liquidated Damages. Upon full
payment of the Liquidated Damages, Concessionaire shall immediately
transfer the Development Facility to GRP on 'as-is-where-is' basis."
The aforesaid easy payment scheme is less beneficial than it first appears. Although it enables
government to avoid having to make outright payment of an obligation that will likely run into
billions of pesos, this easy payment plan will nevertheless cost government considerable loss of
income, which it would earn if it were to operate Terminal III by itself. Inasmuch as payments to
the concessionaire (Piatco) will be on "installment basis," interest charges on the remaining
unpaid balance would undoubtedly cause the total outstanding balance to swell. Piatco would
thus be entitled to remain in the driver's seat and keep operating the terminal for an indefinite
length of time.
The Contracts Create Two Monopolies for Piatco
By way of background, two monopolies were actually created by the Piatco contracts. The first
and more obvious one refers to the business of operating an international passenger terminal in
Luzon, the business end of which involves providing international airlines with parking space for
their aircraft, and airline passengers with the use of departure and arrival areas, check-in
counters, information systems, conveyor systems, security equipment and paraphernalia,
immigrations and customs processing areas; and amenities such as comfort rooms, restaurants
and shops.
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In furtherance of the first monopoly, the Piatco Contracts stipulate that the NAIA Terminal III will
be the only facility to be operated as an international passenger terminal;66 that NAIA Terminals I
and II will no longer be operated as such;67 and that no one (including the government) will be
allowed to compete with Piatco in the operation of an international passenger terminal in the
NAIA Complex.68 Given that, at this time, the government and Piatco are the only ones engaged
in the business of operating an international passenger terminal, I am not acutely concerned with
this particular monopolistic situation.
There was however another monopoly within the NAIA created by the subject contracts for
Piatco - in the business of providing international airlines with the following: groundhandling, in-
flight catering, cargo handling, and aircraft repair and maintenance services. These are lines of
business activity in which are engaged many service providers (including the petitioners-in-
intervention), who will be adversely affected upon full implementation of the Piatco Contracts,
particularly Sections 3.01(d)69 and (e)70 of both the ARCA and the CA.
On the one hand, Section 3.02(a) of the ARCA makes Terminal III the only international
passenger terminal at the NAIA, and therefore the only place within the NAIA Complex where the
business of providing airport-related services to international airlines may be conducted. On the
other hand, Section 3.01(d) of the ARCA requires government, through the MIAA, not to allow
service providers with expired MIAA contracts to renew or extend their contracts to render
airport-related services to airlines. Meanwhile, Section 3.01(e) of the ARCA requires
government, through the DOTC and MIAA, not to allow service providers - those with subsisting
concession agreements for services and operations being conducted at Terminal I - to carry over
their concession agreements, services and operations to Terminal III, unless they first enter into
a separate agreement with Piatco.
The aforementioned provisions vest in Piatco effective and exclusive control over which service
provider may and may not operate at Terminal III and render the airport-related services needed
by international airlines. It thereby possesses the power to exclude competition. By necessary
implication, it also has effective control over the fees and charges that will be imposed and
collected by these service providers.
This intention is exceedingly clear in the declaration by Piatco that it is "completely within its
rights to exclude any party that it has not contracted with from NAIA Terminal III."71
Worse, there is nothing whatsoever in the Piatco Contracts that can serve to restrict, control or
regulate the concessionaire's discretion and power to reject any service provider and/or impose
any term or condition it may see fit in any contract it enters into with a service provider. In brief,
there is no safeguard whatsoever to ensure free and fair competition in the service-provider
sector.
In the meantime, and not surprisingly, Piatco is first in line, ready to exploit the unique business
opportunity. It announced72 that it has accredited three groundhandlers for Terminal III. Aside
from the Philippine Airlines, the other accredited entities are the Philippine Airport and Ground
Services Globeground, Inc. ("PAGSGlobeground") and the Orbit Air Systems, Inc. ("Orbit").
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PAGSGlobeground is a wholly-owned subsidiary of the Philippine Airport and Ground Services,
Inc. or PAGS,73 while Orbit is a wholly-owned subsidiary of Friendship Holdings, Inc.,74 which is
in turn owned 80 percent by PAGS.75 PAGS is a service provider owned 60 percent by the
Cheng Family;76 it is a stockholder of 35 percent of Piatco77 and is the latter's designated
contractor-operator for NAIA Terminal III.78
Such entry into and domination of the airport-related services sector appear to be very much in
line with the following provisions contained in the First Addendum to the Piatco Shareholders
Agreement,79 executed on July 6, 1999, which appear to constitute a sort of master plan to
create a monopoly and combinations in restraint of trade:
"11. The Shareholders shall ensure:
a. x x x xxx x x x.;
b. That (Phil. Airport and Ground Services, Inc.) PAGS and/or its designated Affiliates
shall, at all times during the Concession Period, be exclusively authorized by
(PIATCO) to engage in the provision of ground-handling, catering and fueling services
within the Terminal Complex.
c. That PAIRCARGO and/or its designated Affiliate shall, during the Concession
Period, be the only entities authorized to construct and operate a warehouse for all
cargo handling and related services within the Site."
Precisely, proscribed by our Constitution are the monopoly and the restraint of trade being
fostered by the Piatco Contracts through the erection of barriers to the entry of other service
providers into Terminal III. In Tatad v. Secretary of the Department of Energy,80 the Court ruled:
". . . [S]ection 19 of Article XII of the Constitution . . . mandates: 'The State shall
regulate or prohibit monopolies when the public interest so requires. No combinations
in restraint of trade or unfair competition shall be allowed.'
"A monopoly is a privilege or peculiar advantage vested in one or more persons or
companies, consisting in the exclusive right or power to carry on a particular business
or trade, manufacture a particular article, or control the sale or the whole supply of a
particular commodity. It is a form of market structure in which one or only a few firms
dominate the total sales of a product or service. On the other hand, a combination in
restraint of trade is an agreement or understanding between two or more persons, in
the form of a contract, trust, pool, holding company, or other form of association, for
the purpose of unduly restricting competition, monopolizing trade and commerce in a
certain commodity, controlling its production, distribution and price, or otherwise
interfering with freedom of trade without statutory authority. Combination in restraint of
trade refers to the means while monopoly refers to the end.
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"x x x xxx xxx
"Section 19, Article XII of our Constitution is anti-trust in history and in spirit. It
espouses competition. The desirability of competition is the reason for the prohibition
against restraint of trade, the reason for the interdiction of unfair competition, and the
reason for regulation of unmitigated monopolies. Competition is thus the underlying
principle of [S]ection 19, Article XII of our Constitution, . . ."81
Gokongwei Jr. v. Securities and Exchange Commission82 elucidates the criteria to be employed:
"A 'monopoly' embraces any combination the tendency of which is to prevent competition in the
broad and general sense, or to control prices to the detriment of the public. In short, it is the
concentration of business in the hands of a few. The material consideration in determining its
existence is not that prices are raised and competition actually excluded, but that power exists to
raise prices or exclude competition when desired."83 (Emphasis supplied)
The Contracts Encourage Monopolistic Pricing, Too
Aside from creating a monopoly, the Piatco contracts also give the concessionaire virtually
limitless power over the charging of fees, rentals and so forth. What little "oversight function" the
government might be able and minded to exercise is less than sufficient to protect the public
interest, as can be gleaned from the following provisions:
"Sec. 6.06. Adjustment of Non-Public Utility Fees and Charges
"For fees, rentals and charges constituting Non-Public Utility Revenues,
Concessionaire may make any adjustments it deems appropriate without need for the
consent of GRP or any government agency subject to Sec. 6.03(c)."
Section 6.03(c) in turn provides:
"(c) Concessionaire shall at all times be judicious in fixing fees and charges
constituting Non-Public Utility Revenues in order to ensure that End Users are not
unreasonably deprived of services. While the vehicular parking fee, porterage fee and
greeter/wellwisher fee constitute Non-Public Utility Revenues of Concessionaire, GRP
may require Concessionaire to explain and justify the fee it may set from time to time,
if in the reasonable opinion of GRP the said fees have become exorbitant resulting in
the unreasonable deprivation of End Users of such services."
It will be noted that the above-quoted provision has no teeth, so the concessionaire can defy the
government without fear of any sanction. Moreover, Section 6.06 - taken together with Section
6.03(c) of the ARCA - falls short of the standard set by the BOT Law as amended, which
expressly requires in Section 2(b) that the project proponent is "allowed to charge facility users
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appropriate tolls, fees, rentals and charges not exceeding those proposed in its bid or as
negotiated and incorporated in the contract x x x."
The Piatco Contracts Violate Constitutional Prohibitions Against
Impairment of Contracts and Deprivation of Property Without Due Process
Earlier, I discussed how Section 3.01(e)84 of both the CA and the ARCA requires government,
through DOTC/MIAA, not to permit the carry-over to Terminal III of the services and operations
of certain service providers currently operating at Terminal I with subsisting contracts.
By the In-Service Date, Terminal III shall be the only facility to be operated as an international
passenger terminal at the NAIA;85 thus, Terminals I and II shall no longer operate as such,86 and
no one shall be allowed to compete with Piatco in the operation of an international passenger
terminal in the NAIA.87 The bottom line is that, as of the In-Service Date, Terminal III will be the
only terminal where the business of providing airport-related services to international airlines and
passengers may be conducted at all.
Consequently, government through the DOTC/MIAA will be compelled to cease honoring
existing contracts with service providers after the In-Service Date, as they cannot be allowed to
operate in Terminal III.
In short, the CA and the ARCA obligate and constrain government to break its existing contracts
with these service providers.
Notably, government is not in a position to require Piatco to accommodate the displaced service
providers, and it would be unrealistic to think that these service providers can perform their
service contracts in some other international airport outside Luzon. Obviously, then, these
displaced service providers are - to borrow a quaint expression - up the river without a paddle. In
plainer terms, they will have lost their businesses entirely, in the blink of an eye.
What we have here is a set of contractual provisions that impair the obligation of contracts and
contravene the constitutional prohibition against deprivation of property without due process of
law.88
Moreover, since the displaced service providers, being unable to operate, will be forced to close
shop, their respective employees - among them Messrs. Agan and Lopez et al. - have very grave
cause for concern, as they will find themselves out of employment and bereft of their means of
livelihood. This situation comprises still another violation of the constitution prohibition against
deprivation of property without due process.
True, doing business at the NAIA may be viewed more as a privilege than as a right.
Nonetheless, where that privilege has been availed of by the petitioners-in-intervention service
providers for years on end, a situation arises, similar to that in American Inter-fashion v. GTEB.89
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We held therein that a privilege enjoyed for seven years "evolved into some form of property
right which should not be removed x x x arbitrarily and without due process." Said
pronouncement is particularly relevant and applicable to the situation at bar because the
livelihood of the employees of petitioners-intervenors are at stake.
The Piatco Contracts Violate Constitutional Prohibition
Against Deprivation of Liberty Without Due Process
The Piatco Contracts by locking out existing service providers from entry into Terminal III and
restricting entry of future service providers, thereby infringed upon the freedom - guaranteed to
and heretofore enjoyed by international airlines - to contract with local service providers of their
choice, and vice versa.
Both the service providers and their client airlines will be deprived of the right to liberty, which
includes the right to enter into all contracts,90 and/or the right to make a contract in relation to
one's business.91
By Creating New Financial Obligations for Government,
Supplements to the ARCA Violate the Constitutional
Ban on Disbursement of Public Funds Without Valid Appropriation
Clearly prohibited by the Constitution is the disbursement of public funds out of the treasury,
except in pursuance of an appropriation made by law.92 The immediate effect of this
constitutional ban is that all the various agencies of government are constrained to limit their
expenditures to the amounts appropriated by law for each fiscal year; and to carefully count their
cash before taking on contractual commitments. Giving flesh and form to the injunction of the
fundamental law, Sections 46 and 47 of Executive Order 292, otherwise known as the
Administrative Code of 1987, provide as follows:
"Sec. 46. Appropriation Before Entering into Contract. - (1) No contract involving the
expenditure of public funds shall be entered into unless there is an appropriation
therefor, the unexpended balance of which, free of other obligations, is sufficient to
cover the proposed expenditure; and . .
"Sec. 47. Certificate Showing Appropriation to Meet Contract. - Except in the case of
a contract for personal service, for supplies for current consumption or to be carried in
stock not exceeding the estimated consumption for three (3) months, or banking
transactions of government-owned or controlled banks, no contract involving the
expenditure of public funds by any government agency shall be entered into or
authorized unless the proper accounting official of the agency concerned shall have
certified to the officer entering into the obligation that funds have been duly
appropriated for the purpose and that the amount necessary to cover the proposed
contract for the current calendar year is available for expenditure on account thereof,
subject to verification by the auditor concerned. The certificate signed by the proper
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accounting official and the auditor who verified it, shall be attached to and become an
integral part of the proposed contract, and the sum so certified shall not thereafter be
available for expenditure for any other purpose until the obligation of the government
agency concerned under the contract is fully extinguished."
Referring to the aforequoted provisions, this Court has held that "(I)t is quite evident from the
tenor of the language of the law that the existence of appropriations and the availability of funds
are indispensable pre-requisites to or conditions sine qua non for the execution of government
contracts. The obvious intent is to impose such conditions as a priori requisites to the validity of
the proposed contract."93
Notwithstanding the constitutional ban, statutory mandates and Jurisprudential precedents, the
three Supplements to the ARCA, which were not approved by NEDA, imposed on government
the additional burden of spending public moneys without prior appropriation.
In the First Supplement ("FS") dated August 27, 1999, the following requirements were imposed
on the government:
• To construct, maintain and keep in good repair and operating condition all airport
support services, facilities, equipment and infrastructure owned and/or operated by
MIAA, which are not part of the Project or which are located outside the Site, even
though constructed by Concessionaire - including the access road connecting
Terminals II and III and the taxilane, taxiways and runways
• To obligate the MIAA to provide funding for the upkeep, maintenance and repair of
the airports and facilities owned or operated by it and by third persons under its
control in order to ensure compliance with international standards; and holding MIAA
liable to Piatco for the latter's losses, expenses and damages as well as for the
latter's liability to third persons, in case MIAA fails to perform such obligations; in
addition, MIAA will also be liable for the incremental and consequential costs of the
remedial work done by Piatco on account of the former's default.
• Section 4 of the FS imposed on government ten (10) "Additional Special
Obligations," including the following:
o Providing thru MIAA the land required by Piatco for the taxilane and one
taxiway, at no cost to Piatco
o Implementing the government's existing storm drainage master plan
o Coordinating with DPWH the financing, implementation and completion of
the following works before the In-Service Date: three left-turning
overpasses (Edsa to Tramo St., Tramo to Andrews Ave., and Manlunas
Road to Sales Ave.) and a road upgrade and improvement program
involving widening, repair and resurfacing of Sales Road, Andrews Avenue
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and Manlunas Road; improvement of Nichols Interchange; and removal of
squatters along Andrews Avenue
o Dealing directly with BCDA and the Philippine Air Force in acquiring
additional land or right of way for the road upgrade and improvement
program
o Requiring government to work for the immediate reversion to MIAA of the
Nayong Pilipino National Park, in order to permit the building of the second
west parallel taxiway
• Section 5 of the FS also provides that in lieu of the access tunnel, a surface access
road (T2-T3) will be constructed. This provision requires government to expend funds
to purchase additional land from Nayong Pilipino and to clear the same in order to be
able to deliver clean possession of the site to Piatco, as required in Section 5(c) of the
FS.
On the other hand, the Third Supplement ("TS") obligates the government to deliver, within 120
days from date thereof, clean possession of the land on which the T2-T3 Road is to be
constructed.
The foregoing contractual stipulations undeniably impose on government the expenditures of
public funds not included in any congressional appropriation or authorized by any other statute.
Piatco however attempts to take these stipulations out of the ambit of Sections 46 and 47 of the
Administrative Code by characterizing them as stipulations for compliance on a "best-efforts
basis" only.
To determine whether the additional obligations under the Supplements may really be
undertaken on a best-efforts basis only, the nature of each of these obligations must be
examined in the context of its relevance and significance to the Terminal III Project, as well as of
any adverse impact that may result if such obligation is not performed or undertaken on time. In
short, the criteria for determining whether the best-efforts basis will apply is whether the
obligations are critical to the success of the Project and, accordingly, whether failure to perform
them (or to perform them on time) could result in a material breach of the contract.
Viewed in this light, the "Additional Special Obligations" set out in Section 4 of the FS take on a
different aspect. In particular, each of the following may all be deemed to play a major role in the
successful and timely prosecution of the Terminal III Project: the obtention of land required by
PIATCO for the taxilane and taxiway; the implementation of government's existing storm
drainage master plan; and coordination with DPWH for the completion of the three left-turning
overpasses before the In-Service Date, as well as acquisition and delivery of additional land for
the construction of the T2-T3 access road.
Conversely, failure to deliver on any of these obligations may conceivably result in substantial
prejudice to the concessionaire, to such an extent as to constitute a material breach of the Piatco
Contracts. Whereupon, the concessionaire may outrightly terminate the Contracts pursuant to
Section 8.01(b)(i) and (ii) of the ARCA and seek payment of Liquidated Damages in accordance
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with Section 8.02(a) of the ARCA; or the concessionaire may instead require government to pay
the Incremental and Consequential Losses under Section 1.23 of the ARCA.94 The logical
conclusion then is that the obligations in the Supplements are not to be performed on a best-
efforts basis only, but are unarguably mandatory in character.
Regarding MIAA's obligation to coordinate with the DPWH for the complete implementation of
the road upgrading and improvement program for Sales, Andrews and Manlunas Roads (which
provide access to the Terminal III site) prior to the In-Service Date, it is essential to take note of
the fact that there was a pressing need to complete the program before the opening of Terminal
III.95 For that reason, the MIAA was compelled to enter into a memorandum of agreement with
the DPWH in order to ensure the timely completion of the road widening and improvement
program. MIAA agreed to advance the total amount of P410.11 million to DPWH for the works,
while the latter was committed to do the following:
"2.2.8. Reimburse all advance payments to MIAA including but not limited to interest,
fees, plus other costs of money within the periods CY2004 and CY2006 with payment
of no less than One Hundred Million Pesos (PhP100M) every year.
"2.2.9. Perform all acts necessary to include in its CY2004 to CY2006 budget
allocation the repayments for the advances made by MIAA, to ensure that the
advances are fully repaid by CY2006. For this purpose, DPWH shall include the
amounts to be appropriated for reimbursement to MIAA in the "Not Needing
Clearance" column of their Agency Budget Matrix (ABM) submitted to the Department
of Budget and Management."
It can be easily inferred, then, that DPWH did not set aside enough funds to be able to complete
the upgrading program for the crucially situated access roads prior to the targeted opening date
of Terminal III; and that, had MIAA not agreed to lend the P410 Million, DPWH would not have
been able to complete the program on time. As a consequence, government would have been in
breach of a material obligation. Hence, this particular undertaking of government may likewise
not be construed as being for best-efforts compliance only.
They also Infringe on the Legislative Prerogative and Power Over the Public Purse
But the particularly sad thing about this transaction between MIAA and DPWH is the fact that
both agencies were maneuvered into (or allowed themselves to be maneuvered into) an
agreement that would ensure delivery of upgraded roads for Piatco's benefit, using funds not
allocated for that purpose. The agreement would then be presented to Congress as a done deal.
Congress would thus be obliged to uphold the agreement and support it with the necessary
allocations and appropriations for three years, in order to enable DPWH to deliver on its
committed repayments to MIAA. The net result is an infringement on the legislative power over
the public purse and a diminution of Congress' control over expenditures of public funds - a
development that would not have come about, were it not for the Supplements. Very clever but
very illegal!
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EPILOGUE
What Do We Do Now?
In the final analysis, there remains but one ultimate question, which I raised during the Oral
Argument on December 10, 2002: What do we do with the Piatco Contracts and Terminal
III?96 (Feeding directly into the resolution of the decisive question is the other nagging issue:
Why should we bother with determining the legality and validity of these contracts, when the
Terminal itself has already been built and is practically complete?)
Prescinding from all the foregoing disquisition, I find that all the Piatco contracts, without
exception, are void ab initio, and therefore inoperative. Even the very process by which the
contracts came into being - the bidding and the award - has been riddled with irregularities
galore and blatant violations of law and public policy, far too many to ignore. There is thus no
conceivable way, as proposed by some, of saving one (the original Concession Agreement)
while junking all the rest.
Neither is it possible to argue for the retention of the Draft Concession Agreement (referred to in
the various pleadings as the Contract Bidded Out) as the contract that should be kept in force
and effect to govern the situation, inasmuch as it was never executed by the parties. What Piatco
and the government executed was the Concession Agreement which is entirely different from the
Draft Concession Agreement.
Ultimately, though, it would be tantamount to an outrageous, grievous and unforgivable
mutilation of public policy and an insult to ourselves if we opt to keep in place a contract - any
contract - for to do so would assume that we agree to having Piatco continue as the
concessionaire for Terminal III.
Despite all the insidious contraventions of the Constitution, law and public policy Piatco
perpetrated, keeping Piatco on as concessionaire and even rewarding it by allowing it to operate
and profit from Terminal III - instead of imposing upon it the stiffest sanctions permissible under
the laws - is unconscionable.
It is no exaggeration to say that Piatco may not really mind which contract we decide to keep in
place. For all it may care, we can do just as well without one, if we only let it continue and
operate the facility. After all, the real money will come not from building the Terminal, but from
actually operating it for fifty or more years and charging whatever it feels like, without any
competition at all. This scenario must not be allowed to happen.
If the Piatco contracts are junked altogether as I think they should be, should not AEDC
automatically be considered the winning bidder and therefore allowed to operate the facility? My
answer is a stone-cold 'No'. AEDC never won the bidding, never signed any contract, and never
built any facility. Why should it be allowed to automatically step in and benefit from the greed of
another?
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 107

Should government pay at all for reasonable expenses incurred in the construction of the
Terminal? Indeed it should, otherwise it will be unjustly enriching itself at the expense of Piatco
and, in particular, its funders, contractors and investors - both local and foreign. After all, there is
no question that the State needs and will make use of Terminal III, it being part and parcel of the
critical infrastructure and transportation-related programs of government.

In Melchor v. Commission on Audit,97 this Court held that even if the contract therein was void,
the principle of payment by quantum meruit was found applicable, and the contractor was
allowed to recover the reasonable value of the thing or services rendered (regardless of any
agreement as to the supposed value), in order to avoid unjust enrichment on the part of
government. The principle of quantum meruit was likewise applied in Eslao v. Commission on
Audit,98 because to deny payment for a building almost completed and already occupied would
be to permit government to unjustly enrich itself at the expense of the contractor. The same
principle was applied in Republic v. Court of Appeals.99

G.R. No. 146364 June 3, 2004

One possible practical solution would be for government - in view of the nullity of the Piatco
contracts and of the fact that Terminal III has already been built and is almost finished - to bid out
the operation of the facility under the same or analogous principles as build-operate-and-transfer COLITO T. PAJUYO, petitioner,
projects. To be imposed, however, is the condition that the winning bidder must pay the builder vs.
of the facility a price fixed by government based on quantum meruit; on the real, reasonable - not COURT OF APPEALS and EDDIE GUEVARRA, respondents.
inflated - value of the built facility.
DECISION
How the payment or series of payments to the builder, funders, investors and contractors will be
staggered and scheduled, will have to be built into the bids, along with the annual guaranteed
payments to government. In this manner, this whole sordid mess could result in something truly CARPIO, J.:
beneficial for all, especially for the Filipino people.
The Case
WHEREFORE, I vote to grant the Petitions and to declare the subject contracts NULL and VOID.
Before us is a petition for review1 of the 21 June 2000 Decision2 and 14 December 2000
Resolution of the Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside the
11 November 1996 decision3 of the Regional Trial Court of Quezon City, Branch 81,4 affirming
the 15 December 1995 decision5 of the Metropolitan Trial Court of Quezon City, Branch 31.6

The Antecedents

In June 1979, petitioner Colito T. Pajuyo ("Pajuyo") paid ₱400 to a certain Pedro Perez for the
rights over a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a
house made of light materials on the lot. Pajuyo and his family lived in the house from 1979 to 7
December 1985.

On 8 December 1985, Pajuyo and private respondent Eddie Guevarra ("Guevarra") executed a
Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house
for free provided Guevarra would maintain the cleanliness and orderliness of the house.
Guevarra promised that he would voluntarily vacate the premises on Pajuyo’s demand.

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In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that
Guevarra vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon
City, Branch 31 ("MTC").
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the lot
where the house stands because the lot is within the 150 hectares set aside by Proclamation No.
137 for socialized housing. Guevarra pointed out that from December 1985 to September 1994,
Pajuyo did not show up or communicate with him. Guevarra insisted that neither he nor Pajuyo
has valid title to the lot.
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive portion
of the MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff
and against defendant, ordering the latter to:
A) vacate the house and lot occupied by the defendant or any other person
or persons claiming any right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (₱300.00)
monthly as reasonable compensation for the use of the premises starting
from the last demand;
C) pay plaintiff the sum of ₱3,000.00 as and by way of attorney’s fees; and
D) pay the cost of suit.
SO ORDERED.7
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 ("RTC").
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the RTC
decision reads:
WHEREFORE, premises considered, the Court finds no reversible error in the
decision appealed from, being in accord with the law and evidence presented, and the
same is hereby affirmed en toto.
SO ORDERED.8
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Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14
December 1996 to file his appeal with the Court of Appeals. Instead of filing his appeal with the
Court of Appeals, Guevarra filed with the Supreme Court a "Motion for Extension of Time to File
Appeal by Certiorari Based on Rule 42" ("motion for extension"). Guevarra theorized that his
appeal raised pure questions of law. The Receiving Clerk of the Supreme Court received the
motion for extension on 13 December 1996 or one day before the right to appeal expired.
On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution9 referring the
motion for extension to the Court of Appeals which has concurrent jurisdiction over the case. The
case presented no special and important matter for the Supreme Court to take cognizance of at
the first instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a Resolution10
granting the motion for extension conditioned on the timeliness of the filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevara’s petition
for review. On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The
dispositive portion of the decision reads:
WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil
Case No. Q-96-26943 is REVERSED and SET ASIDE; and it is hereby declared that
the ejectment case filed against defendant-appellant is without factual and legal basis.
SO ORDERED.11
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of
Appeals should have dismissed outright Guevarra’s petition for review because it was filed out of
time. Moreover, it was Guevarra’s counsel and not Guevarra who signed the certification against
forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyo’s motion for
reconsideration. The dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No
costs.
SO ORDERED.12
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The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house
and not the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house
only by tolerance. Thus, Guevarra’s refusal to vacate the house on Pajuyo’s demand made
Guevarra’s continued possession of the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord and tenant relationship between
Pajuyo and Guevarra. The terms of the Kasunduan bound Guevarra to return possession of the
house on demand.
The RTC rejected Guevarra’s claim of a better right under Proclamation No. 137, the Revised
National Government Center Housing Project Code of Policies and other pertinent laws. In an
ejectment suit, the RTC has no power to decide Guevarra’s rights under these laws. The RTC
declared that in an ejectment case, the only issue for resolution is material or physical
possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra
illegally occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no right
or title over the lot because it is public land. The assignment of rights between Perez and Pajuyo,
and the Kasunduan between Pajuyo and Guevarra, did not have any legal effect. Pajuyo and
Guevarra are in pari delicto or in equal fault. The court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings, which held that the Kasunduan
between Pajuyo and Guevarra created a legal tie akin to that of a landlord and tenant
relationship. The Court of Appeals ruled that the Kasunduan is not a lease contract but a
commodatum because the agreement is not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate court
held that Guevarra has a better right over the property under Proclamation No. 137. President
Corazon C. Aquino ("President Aquino") issued Proclamation No. 137 on 7 September 1987. At
that time, Guevarra was in physical possession of the property. Under Article VI of the Code of
Policies Beneficiary Selection and Disposition of Homelots and Structures in the National
Housing Project ("the Code"), the actual occupant or caretaker of the lot shall have first priority
as beneficiary of the project. The Court of Appeals concluded that Guevarra is first in the
hierarchy of priority.
109
In denying Pajuyo’s motion for reconsideration, the appellate court debunked Pajuyo’s claim that
Guevarra filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarra’s motion for extension filed before the Supreme
Court was stamped "13 December 1996 at 4:09 PM" by the Supreme Court’s Receiving Clerk.
The Court of Appeals concluded that the motion for extension bore a date, contrary to Pajuyo’s
claim that the motion for extension was undated. Guevarra filed the motion for extension on time
on 13 December 1996 since he filed the motion one day before the expiration of the
reglementary period on 14 December 1996. Thus, the motion for extension properly complied
with the condition imposed by the Court of Appeals in its 28 January 1997 Resolution. The Court
of Appeals explained that the thirty-day extension to file the petition for review was deemed
granted because of such compliance.
The Court of Appeals rejected Pajuyo’s argument that the appellate court should have dismissed
the petition for review because it was Guevarra’s counsel and not Guevarra who signed the
certification against forum-shopping. The Court of Appeals pointed out that Pajuyo did not raise
this issue in his Comment. The Court of Appeals held that Pajuyo could not now seek the
dismissal of the case after he had extensively argued on the merits of the case. This technicality,
the appellate court opined, was clearly an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND
DISCRETION TANTAMOUNT TO LACK OF JURISDICTION:
1) in GRANTING, instead of denying, Private Respondent’s Motion for an
Extension of thirty days to file petition for review at the time when there
was no more period to extend as the decision of the Regional Trial Court
had already become final and executory.
2) in giving due course, instead of dismissing, private respondent’s Petition
for Review even though the certification against forum-shopping was
signed only by counsel instead of by petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by the parties was
in fact a commodatum, instead of a Contract of Lease as found by the
Metropolitan Trial Court and in holding that "the ejectment case filed
against defendant-appellant is without legal and factual basis".
4) in reversing and setting aside the Decision of the Regional Trial Court in
Civil Case No. Q-96-26943 and in holding that the parties are in pari delicto
109

being both squatters, therefore, illegal occupants of the contested parcel of
land.
5) in deciding the unlawful detainer case based on the so-called Code of
Policies of the National Government Center Housing Project instead of
deciding the same under the Kasunduan voluntarily executed by the
parties, the terms and conditions of which are the laws between
themselves.13
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless. However, we find merit in the substantive
issues Pajuyo is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright Guevarra’s petition for
review because the RTC decision had already become final and executory when the appellate
court acted on Guevarra’s motion for extension to file the petition. Pajuyo points out that
Guevarra had only one day before the expiry of his period to appeal the RTC decision. Instead of
filing the petition for review with the Court of Appeals, Guevarra filed with this Court an undated
motion for extension of 30 days to file a petition for review. This Court merely referred the motion
to the Court of Appeals. Pajuyo believes that the filing of the motion for extension with this Court
did not toll the running of the period to perfect the appeal. Hence, when the Court of Appeals
received the motion, the period to appeal had already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their appellate jurisdiction are appealable
to the Court of Appeals by petition for review in cases involving questions of fact or mixed
questions of fact and law.14 Decisions of the regional trial courts involving pure questions of law
are appealable directly to this Court by petition for review.15 These modes of appeal are now
embodied in Section 2, Rule 41 of the 1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of law. Guevarra
thus filed his motion for extension to file petition for review before this Court on 14 December
1996. On 3 January 1997, Guevarra then filed his petition for review with this Court. A perusal of
Guevarra’s petition for review gives the impression that the issues he raised were pure questions
of law. There is a question of law when the doubt or difference is on what the law is on a certain
state of facts.16 There is a question of fact when the doubt or difference is on the truth or falsity
of the facts alleged.17
110
In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarra’s
petition for review raised these questions: (1) Do ejectment cases pertain only to possession of a
structure, and not the lot on which the structure stands? (2) Does a suit by a squatter against a
fellow squatter constitute a valid case for ejectment? (3) Should a Presidential Proclamation
governing the lot on which a squatter’s structure stands be considered in an ejectment suit filed
by the owner of the structure?
These questions call for the evaluation of the rights of the parties under the law on ejectment and
the Presidential Proclamation. At first glance, the questions Guevarra raised appeared purely
legal. However, some factual questions still have to be resolved because they have a bearing on
the legal questions raised in the petition for review. These factual matters refer to the metes and
bounds of the disputed property and the application of Guevarra as beneficiary of Proclamation
No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition for review. In
Lacsamana v. Second Special Cases Division of the Intermediate Appellate Court,18 we
declared that the Court of Appeals could grant extension of time in appeals by petition for review.
In Liboro v. Court of Appeals,19 we clarified that the prohibition against granting an extension
of time applies only in a case where ordinary appeal is perfected by a mere notice of appeal. The
prohibition does not apply in a petition for review where the pleading needs verification. A
petition for review, unlike an ordinary appeal, requires preparation and research to present a
persuasive position.20 The drafting of the petition for review entails more time and effort than
filing a notice of appeal.21 Hence, the Court of Appeals may allow an extension of time to file a
petition for review.
In the more recent case of Commissioner of Internal Revenue v. Court of Appeals,22 we held
that Liboro’s clarification of Lacsamana is consistent with the Revised Internal Rules of the
Court of Appeals and Supreme Court Circular No. 1-91. They all allow an extension of time for
filing petitions for review with the Court of Appeals. The extension, however, should be limited to
only fifteen days save in exceptionally meritorious cases where the Court of Appeals may grant a
longer period.
A judgment becomes "final and executory" by operation of law. Finality of judgment becomes a
fact on the lapse of the reglementary period to appeal if no appeal is perfected.23 The RTC
decision could not have gained finality because the Court of Appeals granted the 30-day
extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved Guevarra’s
motion for extension. The Court of Appeals gave due course to the motion for extension because
it complied with the condition set by the appellate court in its resolution dated 28 January 1997.
The resolution stated that the Court of Appeals would only give due course to the motion for
extension if filed on time. The motion for extension met this condition.
The material dates to consider in determining the timeliness of the filing of the motion for
extension are (1) the date of receipt of the judgment or final order or resolution subject of the
110

petition, and (2) the date of filing of the motion for extension.24 It is the date of the filing of the
motion or pleading, and not the date of execution, that determines the timeliness of the filing of
that motion or pleading. Thus, even if the motion for extension bears no date, the date of filing
stamped on it is the reckoning point for determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed
his motion for extension before this Court on 13 December 1996, the date stamped by this
Court’s Receiving Clerk on the motion for extension. Clearly, Guevarra filed the motion for
extension exactly one day before the lapse of the reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarra’s appeal on technical
grounds, Pajuyo did not ask the appellate court to deny the motion for extension and dismiss the
petition for review at the earliest opportunity. Instead, Pajuyo vigorously discussed the merits of
the case. It was only when the Court of Appeals ruled in Guevarra’s favor that Pajuyo raised the
procedural issues against Guevarra’s petition for review.
A party who, after voluntarily submitting a dispute for resolution, receives an adverse decision on
the merits, is estopped from attacking the jurisdiction of the court. 25 Estoppel sets in not because
the judgment of the court is a valid and conclusive adjudication, but because the practice of
attacking the court’s jurisdiction after voluntarily submitting to it is against public policy. 26
In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarra’s failure to
sign the certification against forum shopping. Instead, Pajuyo harped on Guevarra’s counsel
signing the verification, claiming that the counsel’s verification is insufficient since it is based only
on "mere information."
A party’s failure to sign the certification against forum shopping is different from the party’s failure
to sign personally the verification. The certificate of non-forum shopping must be signed by the
party, and not by counsel.27 The certification of counsel renders the petition defective.28
On the other hand, the requirement on verification of a pleading is a formal and not a
jurisdictional requisite.29 It is intended simply to secure an assurance that what are alleged in the
pleading are true and correct and not the product of the imagination or a matter of speculation,
and that the pleading is filed in good faith.30 The party need not sign the verification. A party’s
representative, lawyer or any person who personally knows the truth of the facts alleged in the
pleading may sign the verification.31
We agree with the Court of Appeals that the issue on the certificate against forum shopping was
merely an afterthought. Pajuyo did not call the Court of Appeals’ attention to this defect at the
early stage of the proceedings. Pajuyo raised this procedural issue too late in the proceedings.
Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to
Resolve the Issue of Possession
111
Settled is the rule that the defendant’s claim of ownership of the disputed property will not divest
the inferior court of its jurisdiction over the ejectment case.32 Even if the pleadings raise the issue
of ownership, the court may pass on such issue to determine only the question of possession,
especially if the ownership is inseparably linked with the possession.33 The adjudication on the
issue of ownership is only provisional and will not bar an action between the same parties
involving title to the land.34 This doctrine is a necessary consequence of the nature of the two
summary actions of ejectment, forcible entry and unlawful detainer, where the only issue for
adjudication is the physical or material possession over the real property.35
In this case, what Guevarra raised before the courts was that he and Pajuyo are not the owners
of the contested property and that they are mere squatters. Will the defense that the parties to
the ejectment case are not the owners of the disputed lot allow the courts to renounce their
jurisdiction over the case? The Court of Appeals believed so and held that it would just leave the
parties where they are since they are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an action for recovery
of possession. The parties cannot present evidence to prove ownership or right to legal
possession except to prove the nature of the possession when necessary to resolve the issue of
physical possession.36 The same is true when the defendant asserts the absence of title over the
property. The absence of title over the contested lot is not a ground for the courts to withhold
relief from the parties in an ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who is entitled to the
physical possession of the premises, that is, to the possession de facto and not to the
possession de jure.37 It does not even matter if a party’s title to the property is questionable,38 or
when both parties intruded into public land and their applications to own the land have yet to be
approved by the proper government agency.39 Regardless of the actual condition of the title to
the property, the party in peaceable quiet possession shall not be thrown out by a strong hand,
violence or terror.40 Neither is the unlawful withholding of property allowed. Courts will always
uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even against the
owner himself.41 Whatever may be the character of his possession, if he has in his favor prior
possession in time, he has the security that entitles him to remain on the property until a person
with a better right lawfully ejects him.42 To repeat, the only issue that the court has to settle in an
ejectment suit is the right to physical possession.
In Pitargue v. Sorilla,43 the government owned the land in dispute. The government did not
authorize either the plaintiff or the defendant in the case of forcible entry case to occupy the land.
The plaintiff had prior possession and had already introduced improvements on the public land.
The plaintiff had a pending application for the land with the Bureau of Lands when the defendant
ousted him from possession. The plaintiff filed the action of forcible entry against the defendant.
The government was not a party in the case of forcible entry.
111

The defendant questioned the jurisdiction of the courts to settle the issue of possession because
while the application of the plaintiff was still pending, title remained with the government, and the
Bureau of Public Lands had jurisdiction over the case. We disagreed with the defendant. We
ruled that courts have jurisdiction to entertain ejectment suits even before the resolution of the
application. The plaintiff, by priority of his application and of his entry, acquired prior physical
possession over the public land applied for as against other private claimants. That prior physical
possession enjoys legal protection against other private claimants because only a court can take
away such physical possession in an ejectment case.
While the Court did not brand the plaintiff and the defendant in Pitargue44 as squatters, strictly
speaking, their entry into the disputed land was illegal. Both the plaintiff and defendant entered
the public land without the owner’s permission. Title to the land remained with the government
because it had not awarded to anyone ownership of the contested public land. Both the plaintiff
and the defendant were in effect squatting on government property. Yet, we upheld the courts’
jurisdiction to resolve the issue of possession even if the plaintiff and the defendant in the
ejectment case did not have any title over the contested land.
Courts must not abdicate their jurisdiction to resolve the issue of physical possession because of
the public need to preserve the basic policy behind the summary actions of forcible entry and
unlawful detainer. The underlying philosophy behind ejectment suits is to prevent breach of the
peace and criminal disorder and to compel the party out of possession to respect and resort to
the law alone to obtain what he claims is his.45 The party deprived of possession must not take
the law into his own hands.46 Ejectment proceedings are summary in nature so the authorities
can settle speedily actions to recover possession because of the overriding need to quell social
disturbances.47
We further explained in Pitargue the greater interest that is at stake in actions for recovery of
possession. We made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take
cognizance of possessory actions involving these public lands before final award is
made by the Lands Department, and before title is given any of the conflicting
claimants? It is one of utmost importance, as there are public lands everywhere and
there are thousands of settlers, especially in newly opened regions. It also involves a
matter of policy, as it requires the determination of the respective authorities and
functions of two coordinate branches of the Government in connection with public
land conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the old,
which was in force in this country before the American occupation, or in the new, we
have a possessory action, the aim and purpose of which is the recovery of the
physical possession of real property, irrespective of the question as to who has the
title thereto. Under the Spanish Civil Code we had the accion interdictal, a summary
proceeding which could be brought within one year from dispossession (Roman
Catholic Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291); and as early as October 1,
1901, upon the enactment of the Code of Civil Procedure (Act No. 190 of the
112
Philippine Commission) we implanted the common law action of forcible entry (section
80 of Act No. 190), the object of which has been stated by this Court to be "to
prevent breaches of the peace and criminal disorder which would ensue from
the withdrawal of the remedy, and the reasonable hope such withdrawal would
create that some advantage must accrue to those persons who, believing
themselves entitled to the possession of property, resort to force to gain
possession rather than to some appropriate action in the court to assert their
claims." (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So before the
enactment of the first Public Land Act (Act No. 926) the action of forcible entry was
already available in the courts of the country. So the question to be resolved is, Did
the Legislature intend, when it vested the power and authority to alienate and dispose
of the public lands in the Lands Department, to exclude the courts from entertaining
the possessory action of forcible entry between rival claimants or occupants of any
land before award thereof to any of the parties? Did Congress intend that the lands
applied for, or all public lands for that matter, be removed from the jurisdiction of the
judicial Branch of the Government, so that any troubles arising therefrom, or any
breaches of the peace or disorders caused by rival claimants, could be inquired into
only by the Lands Department to the exclusion of the courts? The answer to this
question seems to us evident. The Lands Department does not have the means to
police public lands; neither does it have the means to prevent disorders arising
therefrom, or contain breaches of the peace among settlers; or to pass promptly upon
conflicts of possession. Then its power is clearly limited to disposition and
alienation, and while it may decide conflicts of possession in order to make
proper award, the settlement of conflicts of possession which is recognized in
the court herein has another ultimate purpose, i.e., the protection of actual
possessors and occupants with a view to the prevention of breaches of the
peace. The power to dispose and alienate could not have been intended to
include the power to prevent or settle disorders or breaches of the peace
among rival settlers or claimants prior to the final award. As to this, therefore, the
corresponding branches of the Government must continue to exercise power and
jurisdiction within the limits of their respective functions. The vesting of the Lands
Department with authority to administer, dispose, and alienate public lands,
therefore, must not be understood as depriving the other branches of the
Government of the exercise of the respective functions or powers thereon, such
as the authority to stop disorders and quell breaches of the peace by the police,
the authority on the part of the courts to take jurisdiction over possessory
actions arising therefrom not involving, directly or indirectly, alienation and
disposition.
Our attention has been called to a principle enunciated in American courts to the
effect that courts have no jurisdiction to determine the rights of claimants to public
lands, and that until the disposition of the land has passed from the control of the
Federal Government, the courts will not interfere with the administration of matters
concerning the same. (50 C. J. 1093-1094.) We have no quarrel with this principle.
The determination of the respective rights of rival claimants to public lands is different
from the determination of who has the actual physical possession or occupation with
a view to protecting the same and preventing disorder and breaches of the peace. A
judgment of the court ordering restitution of the possession of a parcel of land to the
112

actual occupant, who has been deprived thereof by another through the use of force
or in any other illegal manner, can never be "prejudicial interference" with the
disposition or alienation of public lands. On the other hand, if courts were deprived
of jurisdiction of cases involving conflicts of possession, that threat of judicial
action against breaches of the peace committed on public lands would be
eliminated, and a state of lawlessness would probably be produced between
applicants, occupants or squatters, where force or might, not right or justice,
would rule.
It must be borne in mind that the action that would be used to solve conflicts of
possession between rivals or conflicting applicants or claimants would be no other
than that of forcible entry. This action, both in England and the United States and in
our jurisdiction, is a summary and expeditious remedy whereby one in peaceful and
quiet possession may recover the possession of which he has been deprived by a
stronger hand, by violence or terror; its ultimate object being to prevent breach of the
peace and criminal disorder. (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312,
314.) The basis of the remedy is mere possession as a fact, of physical possession,
not a legal possession. (Mediran vs. Villanueva, 37 Phil. 752.) The title or right to
possession is never in issue in an action of forcible entry; as a matter of fact,
evidence thereof is expressly banned, except to prove the nature of the possession.
(Second 4, Rule 72, Rules of Court.) With this nature of the action in mind, by no
stretch of the imagination can conclusion be arrived at that the use of the remedy in
the courts of justice would constitute an interference with the alienation, disposition,
and control of public lands. To limit ourselves to the case at bar can it be pretended at
all that its result would in any way interfere with the manner of the alienation or
disposition of the land contested? On the contrary, it would facilitate adjudication, for
the question of priority of possession having been decided in a final manner by the
courts, said question need no longer waste the time of the land officers making the
adjudication or award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code48 embody the principle of pari delicto. We explained the
principle of pari delicto in these words:
The rule of pari delicto is expressed in the maxims ‘ex dolo malo non eritur actio’ and
‘in pari delicto potior est conditio defedentis.’ The law will not aid either party to an
illegal agreement. It leaves the parties where it finds them.49
The application of the pari delicto principle is not absolute, as there are exceptions to its
application. One of these exceptions is where the application of the pari delicto rule would violate
well-established public policy.50
113
In Drilon v. Gaurana,51 we reiterated the basic policy behind the summary actions of forcible
entry and unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is that,
regardless of the actual condition of the title to the property, the party in peaceable
quiet possession shall not be turned out by strong hand, violence or terror. In
affording this remedy of restitution the object of the statute is to prevent breaches of
the peace and criminal disorder which would ensue from the withdrawal of the
remedy, and the reasonable hope such withdrawal would create that some advantage
must accrue to those persons who, believing themselves entitled to the possession of
property, resort to force to gain possession rather than to some appropriate action in
the courts to assert their claims. This is the philosophy at the foundation of all these
actions of forcible entry and detainer which are designed to compel the party out of
possession to respect and resort to the law alone to obtain what he claims is his.52
Clearly, the application of the principle of pari delicto to a case of ejectment between squatters is
fraught with danger. To shut out relief to squatters on the ground of pari delicto would openly
invite mayhem and lawlessness. A squatter would oust another squatter from possession of the
lot that the latter had illegally occupied, emboldened by the knowledge that the courts would
leave them where they are. Nothing would then stand in the way of the ousted squatter from re-
claiming his prior possession at all cost.
Petty warfare over possession of properties is precisely what ejectment cases or actions for
recovery of possession seek to prevent.53 Even the owner who has title over the disputed
property cannot take the law into his own hands to regain possession of his property. The owner
must go to court.
Courts must resolve the issue of possession even if the parties to the ejectment suit are
squatters. The determination of priority and superiority of possession is a serious and urgent
matter that cannot be left to the squatters to decide. To do so would make squatters receive
better treatment under the law. The law restrains property owners from taking the law into their
own hands. However, the principle of pari delicto as applied by the Court of Appeals would give
squatters free rein to dispossess fellow squatters or violently retake possession of properties
usurped from them. Courts should not leave squatters to their own devices in cases involving
recovery of possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple case of ejectment. The Court of
Appeals refused to rule on the issue of physical possession. Nevertheless, the appellate court
held that the pivotal issue in this case is who between Pajuyo and Guevarra has the "priority
right as beneficiary of the contested land under Proclamation No. 137."54 According to the Court
of Appeals, Guevarra enjoys preferential right under Proclamation No. 137 because Article VI of
the Code declares that the actual occupant or caretaker is the one qualified to apply for
socialized housing.
113

The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of a relocation site
under Proclamation No. 137. Proclamation No. 137 laid down the metes and bounds of the land
that it declared open for disposition to bona fide residents.
The records do not show that the contested lot is within the land specified by Proclamation No.
137. Guevarra had the burden to prove that the disputed lot is within the coverage of
Proclamation No. 137. He failed to do so.
Second. The Court of Appeals should not have given credence to Guevarra’s unsubstantiated
claim that he is the beneficiary of Proclamation No. 137. Guevarra merely alleged that in the
survey the project administrator conducted, he and not Pajuyo appeared as the actual occupant
of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137. Pajuyo
allowed Guevarra to occupy the disputed property in 1985. President Aquino signed
Proclamation No. 137 into law on 11 March 1986. Pajuyo made his earliest demand for Guevarra
to vacate the property in September 1994.
During the time that Guevarra temporarily held the property up to the time that Proclamation No.
137 allegedly segregated the disputed lot, Guevarra never applied as beneficiary of
Proclamation No. 137. Even when Guevarra already knew that Pajuyo was reclaiming
possession of the property, Guevarra did not take any step to comply with the requirements of
Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137 and
Guevarra has a pending application over the lot, courts should still assume jurisdiction and
resolve the issue of possession. However, the jurisdiction of the courts would be limited to the
issue of physical possession only.
In Pitargue,55 we ruled that courts have jurisdiction over possessory actions involving public land
to determine the issue of physical possession. The determination of the respective rights of rival
claimants to public land is, however, distinct from the determination of who has the actual
physical possession or who has a better right of physical possession. 56 The administrative
disposition and alienation of public lands should be threshed out in the proper government
agency.57
The Court of Appeals’ determination of Pajuyo and Guevarra’s rights under Proclamation No.
137 was premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the law.
Courts should not preempt the decision of the administrative agency mandated by law to
determine the qualifications of applicants for the acquisition of public lands. Instead, courts
should expeditiously resolve the issue of physical possession in ejectment cases to prevent
disorder and breaches of peace.58
114
Pajuyo is Entitled to Physical Possession of the Disputed Property
Guevarra does not dispute Pajuyo’s prior possession of the lot and ownership of the house built
on it. Guevarra expressly admitted the existence and due execution of the Kasunduan. The
Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay
nagbibigay pahintulot kay G. Eddie Guevarra, na pansamantalang manirahan sa nasabing
bahay at lote ng "walang bayad." Kaugnay nito, kailangang panatilihin nila ang kalinisan at
kaayusan ng bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, sila’y kusang aalis ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of rent,
but Guevarra was under obligation to maintain the premises in good condition. Guevarra
promised to vacate the premises on Pajuyo’s demand but Guevarra broke his promise and
refused to heed Pajuyo’s demand to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the withholding by
a person from another of the possession of real property to which the latter is entitled after the
expiration or termination of the former’s right to hold possession under a contract, express or
implied.59
Where the plaintiff allows the defendant to use his property by tolerance without any contract, the
defendant is necessarily bound by an implied promise that he will vacate on demand, failing
which, an action for unlawful detainer will lie.60 The defendant’s refusal to comply with the
demand makes his continued possession of the property unlawful.61 The status of the defendant
in such a case is similar to that of a lessee or tenant whose term of lease has expired but whose
occupancy continues by tolerance of the owner.62
This principle should apply with greater force in cases where a contract embodies the permission
or tolerance to use the property. The Kasunduan expressly articulated Pajuyo’s forbearance.
Pajuyo did not require Guevarra to pay any rent but only to maintain the house and lot in good
condition. Guevarra expressly vowed in the Kasunduan that he would vacate the property on
demand. Guevarra’s refusal to comply with Pajuyo’s demand to vacate made Guevarra’s
continued possession of the property unlawful.
We do not subscribe to the Court of Appeals’ theory that the Kasunduan is one of commodatum.
In a contract of commodatum, one of the parties delivers to another something not consumable
so that the latter may use the same for a certain time and return it.63 An essential feature of
commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing
belonging to another is for a certain period.64 Thus, the bailor cannot demand the return of the
114

thing loaned until after expiration of the period stipulated, or after accomplishment of the use for
which the commodatum is constituted.65 If the bailor should have urgent need of the thing, he
may demand its return for temporary use.66 If the use of the thing is merely tolerated by the
bailor, he can demand the return of the thing at will, in which case the contractual relation is
called a precarium.67 Under the Civil Code, precarium is a kind of commodatum.68
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not
essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him
to maintain the property in good condition. The imposition of this obligation makes the
Kasunduan a contract different from a commodatum. The effects of the Kasunduan are also
different from that of a commodatum. Case law on ejectment has treated relationship based on
tolerance as one that is akin to a landlord-tenant relationship where the withdrawal of permission
would result in the termination of the lease.69 The tenant’s withholding of the property would then
be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum,
Guevarra as bailee would still have the duty to turn over possession of the property to Pajuyo,
the bailor. The obligation to deliver or to return the thing received attaches to contracts for
safekeeping, or contracts of commission, administration and commodatum. 70 These contracts
certainly involve the obligation to deliver or return the thing received.71
Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a
squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the land they
illegally occupy. Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between squatters. Guevarra freely
entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had
benefited from it. The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has
a right to physical possession of the contested property. The Kasunduan is the undeniable
evidence of Guevarra’s recognition of Pajuyo’s better right of physical possession. Guevarra is
clearly a possessor in bad faith. The absence of a contract would not yield a different result, as
there would still be an implied promise to vacate.
Guevarra contends that there is "a pernicious evil that is sought to be avoided, and that is
allowing an absentee squatter who (sic) makes (sic) a profit out of his illegal act."72 Guevarra
bases his argument on the preferential right given to the actual occupant or caretaker under
Proclamation No. 137 on socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the
property without paying any rent. There is also no proof that Pajuyo is a professional squatter
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who rents out usurped properties to other squatters. Moreover, it is for the proper government
agency to decide who between Pajuyo and Guevarra qualifies for socialized housing. The only
issue that we are addressing is physical possession.
Prior possession is not always a condition sine qua non in ejectment.73 This is one of the
distinctions between forcible entry and unlawful detainer.74 In forcible entry, the plaintiff is
deprived of physical possession of his land or building by means of force, intimidation, threat,
strategy or stealth. Thus, he must allege and prove prior possession.75 But in unlawful detainer,
the defendant unlawfully withholds possession after the expiration or termination of his right to
possess under any contract, express or implied. In such a case, prior physical possession is not
required.76
Pajuyo’s withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarra’s
transient right to possess the property ended as well. Moreover, it was Pajuyo who was in actual
possession of the property because Guevarra had to seek Pajuyo’s permission to temporarily
hold the property and Guevarra had to follow the conditions set by Pajuyo in the Kasunduan.
Control over the property still rested with Pajuyo and this is evidence of actual possession.
Pajuyo’s absence did not affect his actual possession of the disputed property. Possession in the
eyes of the law does not mean that a man has to have his feet on every square meter of the
ground before he is deemed in possession.77 One may acquire possession not only by physical
occupation, but also by the fact that a thing is subject to the action of one’s will.78 Actual or
physical occupation is not always necessary.79
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we declared that "squatters and intruders
who clandestinely enter into titled government property cannot, by such act, acquire any legal
right to said property."80 We made this declaration because the person who had title or who had
the right to legal possession over the disputed property was a party in the ejectment suit and that
party instituted the case against squatters or usurpers.
In this case, the owner of the land, which is the government, is not a party to the ejectment case.
This case is between squatters. Had the government participated in this case, the courts could
have evicted the contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the property is not impleaded in this case, we
cannot evict on our own the parties. Such a ruling would discourage squatters from seeking the
aid of the courts in settling the issue of physical possession. Stripping both the plaintiff and the
defendant of possession just because they are squatters would have the same dangerous
implications as the application of the principle of pari delicto. Squatters would then rather settle
the issue of physical possession among themselves than seek relief from the courts if the plaintiff
and defendant in the ejectment case would both stand to lose possession of the disputed
property. This would subvert the policy underlying actions for recovery of possession.
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Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain on
the property until a person who has title or a better right lawfully ejects him. Guevarra is certainly
not that person. The ruling in this case, however, does not preclude Pajuyo and Guevarra from
introducing evidence and presenting arguments before the proper administrative agency to
establish any right to which they may be entitled under the law.81

In no way should our ruling in this case be interpreted to condone squatting. The ruling on the
issue of physical possession does not affect title to the property nor constitute a binding and
conclusive adjudication on the merits on the issue of ownership.82 The owner can still go to court
to recover lawfully the property from the person who holds the property without legal title. Our
ruling here does not diminish the power of government agencies, including local governments, to
condemn, abate, remove or demolish illegal or unauthorized structures in accordance with
existing laws.

Attorney’s Fees and Rentals

The MTC and RTC failed to justify the award of ₱3,000 attorney’s fees to Pajuyo. Attorney’s fees
as part of damages are awarded only in the instances enumerated in Article 2208 of the Civil
Code.83 Thus, the award of attorney’s fees is the exception rather than the rule.84 Attorney’s fees
are not awarded every time a party prevails in a suit because of the policy that no premium
should be placed on the right to litigate.85 We therefore delete the attorney’s fees awarded to
Pajuyo.

We sustain the ₱300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra
did not dispute this factual finding of the two courts. We find the amount reasonable
compensation to Pajuyo. The ₱300 monthly rental is counted from the last demand to vacate,
which was on 16 February 1995.

WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution dated
14 December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE. The
Decision dated 11 November 1996 of the Regional Trial Court of Quezon City, Branch 81 in Civil
Case No. Q-96-26943, affirming the Decision dated 15 December 1995 of the Metropolitan Trial
Court of Quezon City, Branch 31 in Civil Case No. 12432, is REINSTATED with
MODIFICATION. The award of attorney’s fees is deleted. No costs.

SO ORDERED.

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