Republic of the Philippines

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

MELENCIO-HERRERA, J.:
In this Petition for Certiorari, pursuant to Section 7, Article IX of the 1987 Constitution, 1 petitioner,
Flavio K. Macasaet & Associates, Inc., prays that the ruling of public respondent Commission on Audit
(COA) denying its claim for completion of payment of professional fees be overturned. The facts follow.
On 15 September 1977 respondent Philippine Tourism Authority (PTA) entered into a Contract for
"Project Design and Management Services for the development of the proposed Zamboanga Golf and
Country Club, Calarian, Zamboanga City" with petitioner company, but originally with Flavio K Macasaet
alone (hereinafter referred to simply as the "Contract").

Under the Contract, PTA obligated itself to pay petitioner a professional fee of seven (7%) of the
actual construction cost, as follows:
ARTICLE IV PROFESSIONAL FEE
In consideration for the professional services to be performed by Designer under
Article I of this Agreement, the Authority shall pay seven percent (7%) of the actual
construction cost.
In addition, a Schedule of Payments was provided for while the construction was in progress and up
to its final completion, thus:
ARTICLE V SCHEDULE OF PAYMENTS
1. Upon the execution of the Agreement but not more than fifteen (15) days, a
minimum payment equivalent to 10 percent of the professional fee as provided in Art.
IV computed upon a reasonable estimated construction cost of the project.
2. Upon the completion of the schematic design services, but not more than 15 days
after the submission of the schematic design to the Authority, a sum equivalent to
15% of the professional fee as stated in Art. IV computed upon the reasonable
estimated construction cost of the project.
3. Upon completion of the design development services, but not more than 15 days
after submission of the design development to the authority, a sum equivalent to 20%

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

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

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-24803 May 26, 1977
PEDRO ELCANO and PATRICIA ELCANO, in their capacity as Ascendants of Agapito Elcano,
deceased,plaintiffs-appellants,
vs.
REGINALD HILL, minor, and MARVIN HILL, as father and Natural Guardian of said
minor, defendants-appellees.
Cruz & Avecilla for appellants.
Marvin R. Hill & Associates for appellees.

BARREDO, J.:
Appeal from the order of the Court of First Instance of Quezon City dated January 29, 1965 in Civil
Case No. Q-8102, Pedro Elcano et al. vs. Reginald Hill et al. dismissing, upon motion to dismiss of
defendants, the complaint of plaintiffs for recovery of damages from defendant Reginald Hill, a
minor, married at the time of the occurrence, and his father, the defendant Marvin Hill, with whom he
was living and getting subsistence, for the killing by Reginald of the son of the plaintiffs, named
Agapito Elcano, of which, when criminally prosecuted, the said accused was acquitted on the ground
that his act was not criminal, because of "lack of intent to kill, coupled with mistake."
Actually, the motion to dismiss based on the following grounds:
1. The present action is not only against but a violation of section 1, Rule 107, which
is now Rule III, of the Revised Rules of Court;
2. The action is barred by a prior judgment which is now final and or in resadjudicata;
3. The complaint had no cause of action against defendant Marvin Hill, because he
was relieved as guardian of the other defendant through emancipation by marriage.
(P. 23, Record [p. 4, Record on Appeal.])
was first denied by the trial court. It was only upon motion for reconsideration of the defendants of
such denial, reiterating the above grounds that the following order was issued:
Considering the motion for reconsideration filed by the defendants on January 14,
1965 and after thoroughly examining the arguments therein contained, the Court
finds the same to be meritorious and well-founded.

WHEREFORE, the Order of this Court on December 8, 1964 is hereby reconsidered

by ordering the dismissal of the above entitled case.
SO ORDERED.
Quezon City, Philippines, January 29, 1965. (p. 40, Record [p. 21, Record on
Appeal.)
Hence, this appeal where plaintiffs-appellants, the spouses Elcano, are presenting for Our resolution
the following assignment of errors:
THE LOWER COURT ERRED IN DISMISSING THE CASE BY UPHOLDING THE
CLAIM OF DEFENDANTS THAT I
THE PRESENT ACTION IS NOT ONLY AGAINST BUT ALSO A VIOLATION OF
SECTION 1, RULE 107, NOW RULE 111, OF THE REVISED RULES OF COURT,
AND THAT SECTION 3(c) OF RULE 111, RULES OF COURT IS APPLICABLE;
II
THE ACTION IS BARRED BY A PRIOR JUDGMENT WHICH IS NOW FINAL OR
RES-ADJUDICTA;
III
THE PRINCIPLES OF QUASI-DELICTS, ARTICLES 2176 TO 2194 OF THE CIVIL
CODE, ARE INAPPLICABLE IN THE INSTANT CASE; and
IV
THAT THE COMPLAINT STATES NO CAUSE OF ACTION AGAINST DEFENDANT
MARVIN HILL BECAUSE HE WAS RELIEVED AS GUARDIAN OF THE OTHER
DEFENDANT THROUGH EMANCIPATION BY MARRIAGE. (page 4, Record.)
It appears that for the killing of the son, Agapito, of plaintiffs-appellants, defendant- appellee
Reginald Hill was prosecuted criminally in Criminal Case No. 5102 of the Court of First Instance of
Quezon City. After due trial, he was acquitted on the ground that his act was not criminal because of
"lack of intent to kill, coupled with mistake." Parenthetically, none of the parties has favored Us with a
copy of the decision of acquittal, presumably because appellants do not dispute that such indeed
was the basis stated in the court's decision. And so, when appellants filed their complaint against
appellees Reginald and his father, Atty. Marvin Hill, on account of the death of their son, the
appellees filed the motion to dismiss above-referred to.
As We view the foregoing background of this case, the two decisive issues presented for Our
resolution are:
1. Is the present civil action for damages barred by the acquittal of Reginald in the criminal case
wherein the action for civil liability, was not reversed?

2. May Article 2180 (2nd and last paragraphs) of the Civil Code he applied against Atty. Hill,
notwithstanding the undisputed fact that at the time of the occurrence complained of. Reginald,
though a minor, living with and getting subsistenee from his father, was already legally married?
The first issue presents no more problem than the need for a reiteration and further clarification of
the dual character, criminal and civil, of fault or negligence as a source of obligation which was firmly
established in this jurisdiction in Barredo vs. Garcia, 73 Phil. 607. In that case, this Court postulated,
on the basis of a scholarly dissertation by Justice Bocobo on the nature of culpa aquiliana in relation
to culpa criminal or delito and mereculpa or fault, with pertinent citation of decisions of the Supreme
Court of Spain, the works of recognized civilians, and earlier jurisprudence of our own, that the same
given act can result in civil liability not only under the Penal Code but also under the Civil Code.
Thus, the opinion holds:
The, above case is pertinent because it shows that the same act machinist. come
under both the Penal Code and the Civil Code. In that case, the action of the agent
killeth unjustified and fraudulent and therefore could have been the subject of a
criminal action. And yet, it was held to be also a proper subject of a civil action under
article 1902 of the Civil Code. It is also to be noted that it was the employer and not
the employee who was being sued. (pp. 615-616, 73 Phil.). 1
It will be noticed that the defendant in the above case could have been prosecuted in
a criminal case because his negligence causing the death of the child was
punishable by the Penal Code. Here is therefore a clear instance of the same act of
negligence being a proper subject matter either of a criminal action with its
consequent civil liability arising from a crime or of an entirely separate and
independent civil action for fault or negligence under article 1902 of the Civil Code.
Thus, in this jurisdiction, the separate individuality of a cuasi-delito or culpa aquiliana,
under the Civil Code has been fully and clearly recognized, even with regard to a
negligent act for which the wrongdoer could have been prosecuted and convicted in
a criminal case and for which, after such a conviction, he could have been sued for
this civil liability arising from his crime. (p. 617, 73 Phil.) 2
It is most significant that in the case just cited, this Court specifically applied article 1902
of the Civil Code. It is thus that although J. V. House could have been criminally
prosecuted for reckless or simple negligence and not only punished but also made civilly
liable because of his criminal negligence, nevertheless this Court awarded damages in
an independent civil action for fault or negligence under article 1902 of the Civil Code. (p.
618, 73 Phil.) 3

The legal provisions, authors, and cases already invoked should ordinarily be
sufficient to dispose of this case. But inasmuch as we are announcing doctrines that
have been little understood, in the past, it might not he inappropriate to indicate their
foundations.
Firstly, the Revised Penal Code in articles 365 punishes not only reckless but also
simple negligence. If we were to hold that articles 1902 to 1910 of the Civil Code
refer only to fault or negligence not punished by law, accordingly to the literal import
of article 1093 of the Civil Code, the legal institution of culpa aquiliana would have
very little scope and application in actual life. Death or injury to persons and damage
to property- through any degree of negligence - even the slightest - would have to be
Idemnified only through the principle of civil liability arising from a crime. In such a
state of affairs, what sphere would remain for cuasi-delito or culpa aquiliana? We are

loath to impute to the lawmaker any intention to bring about a situation so absurd and
anomalous. Nor are we, in the interpretation of the laws, disposed to uphold the letter
that killeth rather than the spirit that giveth life. We will not use the literal meaning of
the law to smother and render almost lifeless a principle of such ancient origin and
such full-grown development as culpa aquiliana or cuasi-delito, which is conserved
and made enduring in articles 1902 to 1910 of the Spanish Civil Code.
Secondary, to find the accused guilty in a criminal case, proof of guilt beyond
reasonable doubt is required, while in a civil case, preponderance of evidence is
sufficient to make the defendant pay in damages. There are numerous cases of
criminal negligence which can not be shown beyond reasonable doubt, but can be
proved by a preponderance of evidence. In such cases, the defendant can and
should be made responsible in a civil action under articles 1902 to 1910 of the Civil
Code. Otherwise. there would be many instances of unvindicated civil wrongs. "Ubi
jus Idemnified remedium." (p. 620,73 Phil.)
Fourthly, because of the broad sweep of the provisions of both the Penal Code and
the Civil Code on this subject, which has given rise to the overlapping or concurrence
of spheres already discussed, and for lack of understanding of the character and
efficacy of the action for culpa aquiliana, there has grown up a common practice to
seek damages only by virtue of the civil responsibility arising from a crime, forgetting
that there is another remedy, which is by invoking articles 1902-1910 of the Civil
Code. Although this habitual method is allowed by, our laws, it has nevertheless
rendered practically useless and nugatory the more expeditious and effective remedy
based on culpa aquiliana or culpa extra-contractual. In the present case, we are
asked to help perpetuate this usual course. But we believe it is high time we pointed
out to the harms done by such practice and to restore the principle of responsibility
for fault or negligence under articles 1902 et seq. of the Civil Code to its full rigor. It is
high time we caused the stream of quasi-delict or culpa aquiliana to flow on its own
natural channel, so that its waters may no longer be diverted into that of a crime
under the Penal Code. This will, it is believed, make for the better safeguarding or
private rights because it realtor, an ancient and additional remedy, and for the further
reason that an independent civil action, not depending on the issues, limitations and
results of a criminal prosecution, and entirely directed by the party wronged or his
counsel, is more likely to secure adequate and efficacious redress. (p. 621, 73 Phil.)
Contrary to an immediate impression one might get upon a reading of the foregoing excerpts from
the opinion in Garcia that the concurrence of the Penal Code and the Civil Code therein referred to
contemplate only acts of negligence and not intentional voluntary acts - deeper reflection would
reveal that the thrust of the pronouncements therein is not so limited, but that in fact it actually
extends to fault or culpa. This can be seen in the reference made therein to the Sentence of the
Supreme Court of Spain of February 14, 1919, supra, which involved a case of fraud or estafa, not a
negligent act. Indeed, Article 1093 of the Civil Code of Spain, in force here at the time of Garcia,
provided textually that obligations "which are derived from acts or omissions in which fault or
negligence, not punishable by law, intervene shall be the subject of Chapter II, Title XV of this book
(which refers to quasi-delicts.)" And it is precisely the underline qualification, "not punishable by law",
that Justice Bocobo emphasized could lead to an ultimo construction or interpretation of the letter of
the law that "killeth, rather than the spirit that giveth lift- hence, the ruling that "(W)e will not use the
literal meaning of the law to smother and render almost lifeless a principle of such ancient origin and
such full-grown development as culpa aquiliana orquasi-delito, which is conserved and made
enduring in articles 1902 to 1910 of the Spanish Civil Code." And so, because Justice Bacobo was
Chairman of the Code Commission that drafted the original text of the new Civil Code, it is to be
noted that the said Code, which was enacted after the Garcia doctrine, no longer uses the term, 11

not punishable by law," thereby making it clear that the concept of culpa aquiliana includes acts
which are criminal in character or in violation of the penal law, whether voluntary or matter. Thus, the
corresponding provisions to said Article 1093 in the new code, which is Article 1162, simply says,
"Obligations derived fromquasi-delicto shall be governed by the provisions of Chapter 2, Title XVII of
this Book, (on quasi-delicts) and by special laws." More precisely, a new provision, Article 2177 of
the new code provides:
ART. 2177. Responsibility for fault or negligence under the preceding article is
entirely separate and distinct from the civil liability arising from negligence under the
Penal Code. But the plaintiff cannot recover damages twice for the same act or
omission of the defendant.
According to the Code Commission: "The foregoing provision (Article 2177) through at first sight
startling, is not so novel or extraordinary when we consider the exact nature of criminal and civil
negligence. The former is a violation of the criminal law, while the latter is a "culpa aquiliana" or
quasi-delict, of ancient origin, having always had its own foundation and individuality, separate from
criminal negligence. Such distinction between criminal negligence and "culpa extracontractual" or
"cuasi-delito" has been sustained by decision of the Supreme Court of Spain and maintained as
clear, sound and perfectly tenable by Maura, an outstanding Spanish jurist. Therefore, under the
proposed Article 2177, acquittal from an accusation of criminal negligence, whether on reasonable
doubt or not, shall not be a bar to a subsequent civil action, not for civil liability arising from criminal
negligence, but for damages due to a quasi-delict or 'culpa aquiliana'. But said article forestalls a
double recovery.", (Report of the Code) Commission, p. 162.)
Although, again, this Article 2177 does seem to literally refer to only acts of negligence, the same
argument of Justice Bacobo about construction that upholds "the spirit that giveth lift- rather than that
which is literal that killeth the intent of the lawmaker should be observed in applying the same. And
considering that the preliminary chapter on human relations of the new Civil Code definitely
establishes the separability and independence of liability in a civil action for acts criminal in character
(under Articles 29 to 32) from the civil responsibility arising from crime fixed by Article 100 of the
Revised Penal Code, and, in a sense, the Rules of Court, under Sections 2 and 3 (c), Rule 111,
contemplate also the same separability, it is "more congruent with the spirit of law, equity and justice,
and more in harmony with modern progress"- to borrow the felicitous relevant language in Rakes vs.
Atlantic. Gulf and Pacific Co., 7 Phil. 359, to hold, as We do hold, that Article 2176, where it refers to
"fault or negligencia covers not only acts "not punishable by law" but also acts criminal in character,
whether intentional and voluntary or negligent. Consequently, a separate civil action lies against the
offender in a criminal act, whether or not he is criminally prosecuted and found guilty or acquitted,
provided that the offended party is not allowed, if he is actually charged also criminally, to recover
damages on both scores, and would be entitled in such eventuality only to the bigger award of the
two, assuming the awards made in the two cases vary. In other words, the extinction of civil liability
referred to in Par. (e) of Section 3, Rule 111, refers exclusively to civil liability founded on Article 100
of the Revised Penal Code, whereas the civil liability for the same act considered as a quasidelict only and not as a crime is not estinguished even by a declaration in the criminal case that the
criminal act charged has not happened or has not been committed by the accused. Briefly stated,
We here hold, in reiteration of Garcia, thatculpa aquiliana includes voluntary and negligent acts
which may be punishable by law.4
It results, therefore, that the acquittal of Reginal Hill in the criminal case has not extinguished his
liability for quasi-delict, hence that acquittal is not a bar to the instant action against him.

Coming now to the second issue about the effect of Reginald's emancipation by marriage on the
possible civil liability of Atty. Hill, his father, it is also Our considered opinion that the conclusion of
appellees that Atty. Hill is already free from responsibility cannot be upheld.
While it is true that parental authority is terminated upon emancipation of the child (Article 327, Civil
Code), and under Article 397, emancipation takes place "by the marriage of the minor (child)", it is,
however, also clear that pursuant to Article 399, emancipation by marriage of the minor is not really
full or absolute. Thus "(E)mancipation by marriage or by voluntary concession shall terminate
parental authority over the child's person. It shall enable the minor to administer his property as
though he were of age, but he cannot borrow money or alienate or encumber real property without
the consent of his father or mother, or guardian. He can sue and be sued in court only with the
assistance of his father, mother or guardian."
Now under Article 2180, "(T)he 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. The father and, in
case of his death or incapacity, the mother, are responsible. The father and, in case of his death or
incapacity, the mother, are responsible for the damages caused by the minor children who live in
their company." In the instant case, it is not controverted that Reginald, although married, was living
with his father and getting subsistence from him at the time of the occurrence in question. Factually,
therefore, Reginald was still subservient to and dependent on his father, a situation which is not
unusual.
It must be borne in mind that, according to Manresa, the reason behind the joint and solidary liability
of presuncion with their offending child under Article 2180 is that is the obligation of the parent to
supervise their minor children in order to prevent them from causing damage to third persons. 5 On
the other hand, the clear implication of Article 399, in providing that a minor emancipated by marriage
may not, nevertheless, sue or be sued without the assistance of the parents, is that such emancipation
does not carry with it freedom to enter into transactions or do any act that can give rise to judicial
litigation. (See Manresa, Id., Vol. II, pp. 766-767, 776.) And surely, killing someone else invites judicial
action. Otherwise stated, the marriage of a minor child does not relieve the parents of the duty to see to it
that the child, while still a minor, does not give answerable for the borrowings of money and alienation or
encumbering of real property which cannot be done by their minor married child without their consent.
(Art. 399; Manresa, supra.)

Accordingly, in Our considered view, Article 2180 applies to Atty. Hill notwithstanding the
emancipation by marriage of Reginald. However, inasmuch as it is evident that Reginald is now of
age, as a matter of equity, the liability of Atty. Hill has become milling, subsidiary to that of his son.
WHEREFORE, the order appealed from is reversed and the trial court is ordered to proceed in
accordance with the foregoing opinion. Costs against appellees.
Fernando (Chairman), Antonio, and Martin, JJ., concur.
Concepcion Jr., J, is on leave.
Martin, J, was designated to sit in the Second Division.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-12219

March 15, 1918

AMADO PICART, plaintiff-appellant,

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

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

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

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 34840

September 23, 1931

NARCISO GUTIERREZ, plaintiff-appellee,

vs.
BONIFACIO GUTIERREZ, MARIA V. DE GUTIERREZ, MANUEL GUTIERREZ, ABELARDO
VELASCO, and SATURNINO CORTEZ, defendants-appellants.
L.D. Lockwood for appellants Velasco and Cortez.
San Agustin and Roxas for other appellants.
Ramon Diokno for appellee.
MALCOLM, J.:
This is an action brought by the plaintiff in the Court of First Instance of Manila against the five
defendants, to recover damages in the amount of P10,000, for physical injuries suffered as a result
of an automobile accident. On judgment being rendered as prayed for by the plaintiff, both sets of
defendants appealed.
On February 2, 1930, a passenger truck and an automobile of private ownership collided while
attempting to pass each other on the Talon bridge on the Manila South Road in the municipality of
Las Pias, Province of Rizal. The truck was driven by the chauffeur Abelardo Velasco, and was
owned by Saturnino Cortez. The automobile was being operated by Bonifacio Gutierrez, a lad 18
years of age, and was owned by Bonifacio's father and mother, Mr. and Mrs. Manuel Gutierrez. At
the time of the collision, the father was not in the car, but the mother, together will several other
members of the Gutierrez family, seven in all, were accommodated therein. A passenger in the
autobus, by the name of Narciso Gutierrez, was en route from San Pablo, Laguna, to Manila. The
collision between the bus and the automobile resulted in Narciso Gutierrez suffering a fracture right
leg which required medical attendance for a considerable period of time, and which even at the date
of the trial appears not to have healed properly.
It is conceded that the collision was caused by negligence pure and simple. The difference between
the parties is that, while the plaintiff blames both sets of defendants, the owner of the passenger
truck blames the automobile, and the owner of the automobile, in turn, blames the truck. We have
given close attention to these highly debatable points, and having done so, a majority of the court
are of the opinion that the findings of the trial judge on all controversial questions of fact find
sufficient support in the record, and so should be maintained. With this general statement set down,
we turn to consider the respective legal obligations of the defendants.
In amplification of so much of the above pronouncement as concerns the Gutierrez family, it may be
explained that the youth Bonifacio was in incompetent chauffeur, that he was driving at an excessive
rate of speed, and that, on approaching the bridge and the truck, he lost his head and so contributed
by his negligence to the accident. The guaranty given by the father at the time the son was granted a
license to operate motor vehicles made the father responsible for the acts of his son. Based on
these facts, pursuant to the provisions of article 1903 of the Civil Code, the father alone and not the
minor or the mother, would be liable for the damages caused by the minor.

We are dealing with the civil law liability of parties for obligations which arise from fault or
negligence. At the same time, we believe that, as has been done in other cases, we can take
cognizance of the common law rule on the same subject. In the United States, it is uniformly held
that the head of a house, the owner of an automobile, who maintains it for the general use of his
family is liable for its negligent operation by one of his children, whom he designates or permits to
run it, where the car is occupied and being used at the time of the injury for the pleasure of other
members of the owner's family than the child driving it. The theory of the law is that the running of
the machine by a child to carry other members of the family is within the scope of the owner's
business, so that he is liable for the negligence of the child because of the relationship of master and
servant. (Huddy On Automobiles, 6th ed., sec. 660; Missell vs. Hayes [1914], 91 Atl., 322.) The
liability of Saturnino Cortez, the owner of the truck, and of his chauffeur Abelardo Velasco rests on a
different basis, namely, that of contract which, we think, has been sufficiently demonstrated by the
allegations of the complaint, not controverted, and the evidence. The reason for this conclusion
reaches to the findings of the trial court concerning the position of the truck on the bridge, the speed
in operating the machine, and the lack of care employed by the chauffeur. While these facts are not
as clearly evidenced as are those which convict the other defendant, we nevertheless hesitate to
disregard the points emphasized by the trial judge. In its broader aspects, the case is one of two
drivers approaching a narrow bridge from opposite directions, with neither being willing to slow up
and give the right of way to the other, with the inevitable result of a collision and an accident.
The defendants Velasco and Cortez further contend that there existed contributory negligence on
the part of the plaintiff, consisting principally of his keeping his foot outside the truck, which
occasioned his injury. In this connection, it is sufficient to state that, aside from the fact that the
defense of contributory negligence was not pleaded, the evidence bearing out this theory of the case
is contradictory in the extreme and leads us far afield into speculative matters.
The last subject for consideration relates to the amount of the award. The appellee suggests that the
amount could justly be raised to P16,517, but naturally is not serious in asking for this sum, since no
appeal was taken by him from the judgment. The other parties unite in challenging the award of
P10,000, as excessive. All facts considered, including actual expenditures and damages for the
injury to the leg of the plaintiff, which may cause him permanent lameness, in connection with other
adjudications of this court, lead us to conclude that a total sum for the plaintiff of P5,000 would be
fair and reasonable. The difficulty in approximating the damages by monetary compensation is well
elucidated by the divergence of opinion among the members of the court, three of whom have
inclined to the view that P3,000 would be amply sufficient, while a fourth member has argued that
P7,500 would be none too much.
In consonance with the foregoing rulings, the judgment appealed from will be modified, and the
plaintiff will have judgment in his favor against the defendants Manuel Gutierrez, Abelardo Velasco,
and Saturnino Cortez, jointly and severally, for the sum of P5,000, and the costs of both instances.
Avancea, C.J., Johnson, Street, Villamor, Ostrand, Romualdez, and Imperial, JJ., concur.

Global Resource for Outsourced Workers vs. Sps. Velasco

GR No 196883
August 22, 2012
Ponente: Perlas-Bernabe
Facts:
Petitioner GROW is a domestic corporation engaged in the placement of workers for
overseas employment
January 2008. Respondents Sps. Velasco were hired by MS Retail through GROW as circus
performer and circus performer assistant at MS Retails store in Kuwait
In the employment contract, Abraham and Nanette were entitled to $2,303 and $531
respectively with work schedule: 4 shows/day, 6 days/week, 48 hours/month
Also stipulated that MS Retail may determine hours of work assigned from time to time in
accordance with the general and particular requirements of the operation and that they
may be asked to carry out duties as the business may require.
When the spouses arrived in Kuwait, they were informed that the 48 hours/month was just
a typo and the correct number was 48 hours/week, to which they complied
August 26, 2008 Sps. Velasco went to Thailand on approved leaved. They sent an email to
MS Retail saying that they would not be able to return because of the political protests in
Thailand and that they would be back on September 10, 2008. However, contrary to their
representation, they returned to the Philippines on September 9, 2008.
On September 17, 2008, MS Retail sent an email warning that if they did not return, they
would be dismissed
Sps. Velasco ignored the email and they were then dismissed on September 23, 2008
Unknown to MS Retail, Sps. Velasco had already filed a case for constructive dismissal,
breach of contract, payment of contract and damages. They claimed that they were made to
work 48 hours per week without overtime pay and that they were assigned to work not
related to circus performers. Hence they were constructively dismissed
LA found them to have been constructively dismissed without cause but overtime pay
denied because it was just a typo error
NLRC dismissed complaint on the ground of abandonment
CA= Petitioners failed to follow twin notice rule although respondents were validly
terminated. Entitled to overtime pay
Issue: WON Sps. Velasco are entitled to overtime pay
Ruling:
Sps. Velasco are not entitled to overtime pay. Obligations arising from contract, like an
employment contract have the force of law between the contracted parties and should be
complied with in good faith. However, when the contract is vague like in the case at bar, the
Court has to determine the real intention. The respondents were informed of the error and
despite working for more than half a year where they could have complained, they did
nothing and without any protest. It was only at the LA that they raised this which indicates
that it was a mere afterthought. Also, an evaluation of the contract shows that it was the
true intention of the parties for 48 hours a week and not a month. Intent and not the text of
a contract prevails. To hold otherwise would defeat purpose of agreements
Although there was just cause for termination, petitioners are not absolved from liability.
They should also have followed procedural due process by giving two notices. One for
intention to dismiss and another for actual dismissal. There should have been a written

notice of the charge against them indicating the acts and omissions complained of and an
opportunity for the respondents to answer the charges against them. Due to the failure to
comply, petitioners are liable for nominal damages and attorneys fees.

Republic of the Philippines

Supreme Court
Manila
FIRST DIVISION

RAMONA RAMOS and THE

ESTATE OF LUIS T. RAMOS,
Petitioners,

G.R. No. 178218

Present:
CORONA, C.J.,
Chairperson,
LEONARDO-DE CASTRO,
DEL CASTILLO,
ABAD,* and
MENDOZA,* JJ.

- versus -

PHILIPPINE
NATIONAL
BANK, OPAL PORTFOLIO
INVESTMENTS
(SPV-AMC),
Promulgated:
INC. and GOLDEN DRAGON
STAR EQUITIES, INC.,
Respondents.
December 14, 2011
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

LEONARDO DE CASTRO, J.:

Assailed in this Petition for Review on Certiorari[1] under Rule 45 of the
Rules of Court are the Decision[2] dated November 8, 2006 and the
Resolution[3] dated May 28, 2007 of the Court of Appeals in CA-G.R. CV No.
64360.
From the records of the case, the following facts emerge:

The Real Estate Mortgage

In 1973, Luis Ramos obtained a credit line under an agricultural loan
account from the Philippine National Bank (PNB), Balayan Branch,
for P83,000.00.[4] To secure the loan, the parties executed a Real Estate
Mortgage[5] on October 23, 1973, the relevant provisions of which stated:
That for and in consideration of certain loans, overdrafts and other credit
accommodations obtained from the Mortgagee, which is hereby fixed
at P83,000.00 Philippine Currency and to secure the payment of the same and
those others that the Mortgagee may extend to the Mortgagor, including interest
and expenses, and other obligations owing by the Mortgagor to the Mortgagee,
whether direct or indirect principal or secondary, as appear in the accounts, books
and records of the Mortgagee, the Mortgagor does hereby transfer and convey by
way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land
which are described in the list inserted at the back of this document, or in a
supplementary list attached hereto, together with all the buildings and
improvements now existing or which may hereafter be erected or constructed
thereon and all easements, sugar quotas, agricultural or land indemnities, aids or
subsidies, including all other rights or benefits annexed to or inherent therein now
existing or which may hereafter exist, and also other assets acquired with the
proceeds of the loan hereby secured all of which the mortgagor declares that he is
the absolute owner free from all liens and encumbrances. In case the Mortgagor
executes subsequent promissory note or notes either as a renewal of the former
note, as an extension thereof, or as a new loan, or is given any other kind of
accommodations such as overdrafts, letters of credit, acceptances and bills of
exchange, releases of import shipments on Trust Receipts, etc., this mortgage
shall also stand as security for the payment of the said promissory note or notes
and/or accommodations without the necessity of executing a new contract and this
mortgage shall have the same force and effect as if the said promissory note or
notes and/or accommodations were existing on the date thereof. This mortgage
shall also stand as security for said obligations and any and all other obligations of
the Mortgagor to the Mortgagee of whatever kind and nature whether such
obligations have been contracted before, during or after the constitution of this
mortgage. However, if the Mortgagor shall pay to the Mortgagee, its successors
or assigns the obligations secured by this mortgage, together with interests, cost
and other expenses, on or before the date they are due, and shall keep and perform
all the covenants and agreements herein contained for the Mortgagor to keep and
perform, then this mortgage shall be null and void, otherwise, it shall remain in
[6]
full force and effect.

The properties included in the mortgage were the parcels of land covered
under Transfer Certificate of Title (TCT) Nos. 17217, (T-262) RT-644, 259, (T265) RT-646, (T-261) RT-643[7] of the Registry of Deeds of Batangas. From the
year 1973, Luis Ramos would renew the loan every year after paying the amounts
falling due therein.[8]
The Sugar Quedan Financing Loans
On March 31, 1989, Luis Ramos and PNB entered into a Credit Line
Agreement[9] in
the
amount
of P50,000,000.00
under
the
banks
sugar quedan financing program. The agreement pertinently provided thus:
For and in consideration of the Bank agreeing to extend to the Borrower a
Revolving Credit Line (the Line) in an amount not to exceed PESOS: FIFTY
MILLION ONLY (P50,000,000.00), under the Banks Sugar Quedan Financing
Program for Crop Year 88/89, the parties hereto hereby agree as follows:
SECTION 1. TERMS OF THE LINE
1.01 Amount and Purpose of the Line. The Line shall be available to the
Borrower in an aggregate amount not to exceed FIFTY MILLION
ONLY Pesos (P50,000,000.00). x x x Availments on the Line shall be used by
the Borrower exclusively for additional capital in sugar quedan financing.
1.02 Availability Period; Availments. (a) Subject to the terms and conditions
hereof, the Line shall be available to the Borrower in several availments
(individually an Availment and collectively the Availments) on any
Banking Day x x x during the period commencing on the Effectivity Date x x x
and terminating on the earliest of (i) August 31, 19__, or (ii) the date the Bank
revokes the Line, or (iii) the date the Borrower ceases to be entitled to avail of the
Line under the terms hereof.
xxxx
1.03 Promissory Notes. Availments on the Line shall be evidenced by
promissory notes (individually a Note and collectively the Notes) issued
by the Borrower in favor of the Bank in the form and substance acceptable to
the Bank. Each Note shall be (i) dated the date of Availment, (ii) in the principal
amount of such Availment, with interest thereon at the rate as provided in Section
1.04 hereof, and (iii) payable on the date occurring sixty (60) days from date of

the availment, but in no case later than August 31, 19__ (the Initial Repayment
Date).
xxxx
SECTION 3. SECURITY
3.01 Security Document. The full payment of any and all sums payable by the
Borrower hereunder and under the Notes, the Renewal Notes and the other
documents contemplated hereby and the performance of all obligations of the
Borrower hereunder and under the Notes, the Renewal Notes and such other
documents shall be secured by a pledge (the Pledge) on the Borrowers
quedans for crop year ____, as more particularly described in and subject to the
terms and conditions of that Contract of Pledge to be executed by the Borrower in
favor of the Bank, which Contract shall in any event be in form and substance
acceptable to the Bank (the Security Document).[10] (Emphases ours.)

Pursuant to the above agreement, Luis Ramos obtained an availment

of P7,800,000.00, which was evidenced by a promissory note dated April 3,
1989.[11] Accordingly, Luis Ramos executed a Contract of Pledge[12] in favor of
PNB on April 6, 1989. Pledged as security for the availment were two official
warehouse receipts (quedans) for refined sugar issued by Noahs Ark Sugar
Refinery (Noahs Ark), which bore the serial numbers NASR RS-18080 and
NASR RS-18081.[13] The said quedans were duly indorsed to PNB.
On June 6, 1989, Luis Ramos procured another availment
of P7,800,000.00 that was likewise contained in a promissory note[14] and for
which
he
executed
another
Contract
of
Pledge[15] on
the
aforementioned quedans on even date.
Thereafter, Luis Ramos was granted a renewal on the promissory notes
dated April 3, 1989 and June 6, 1989. Hence, he executed in favor of PNB the
promissory notes dated October 3, 1989 and October 9, 1989.[16]

Luis Ramos eventually failed to settle his sugar quedan financing loans
amounting to P15,600,000.00. On December 28, 1989, he issued an
Authorization[17] in favor of PNB, stating as follows:
AUTHORIZATION
KNOW ALL MEN BY THESE PRESENTS:
In consideration of my Sugar Quedan Financing line granted by Philippine
National Bank, Balayan Branch in the amount of P50.0 Million, as evidenced by
Credit Agreement datedMarch 31, 1989, the undersigned, as borrower,
authorizes the Philippine National Bank, Balayan Branch, or any of its duly
authorized officer, to dispose and sell all the Quedan Receipts (Warehouse
Receipts) pledged to said bank, after maturity date of the Sugar Quedan
Financing line.
The Sugar Quedan Receipts are hereunder specifically enumerated:
Official Warehouse Receipt (Quedan) Serial Nos.:
1) NASR RS 18081 Crop Year 1988-89 (16,129.03 50 kilo bags)
2) NASR RS 18080 Crop Year 1988-89 (16,393.44 50 kilo bags)

Incidentally, the above-mentioned sugar quedans became the subject of three

other cases between PNB and Noahs Ark, which cases have since reached this
Court.[18]
The Agricultural Crop Loan
Meanwhile, on August 7, 1989, the spouses Luis Ramos and Ramona Ramos
(spouses Ramos) also obtained an agricultural loan of P160,000.00 from
PNB. Said loan was evidenced by a promissory note[19] issued by the spouses on
even date. The said loan was secured by the real estate mortgage previously
executed by the parties on October 23, 1973.
On November 2, 1990, the spouses Ramos fully settled the agricultural loan
of P160,000.00.[20] They then demanded from PNB the release of the real estate
mortgage. PNB, however, refused to heed the spouses demand.[21]

On February 28, 1996, the spouses Ramos filed a complaint for Specific
Performance[22] against the PNB, Balayan Branch, which was docketed as Civil
Case No. 3241 in the Regional Trial Court (RTC) of Balayan, Batangas. The
spouses claimed that the actions of PNB impaired their rights in the properties
included in the real estate mortgage. They alleged that they lost business
opportunities since they could not raise enough capital, which they could have
acquired by mortgaging or disposing of the said properties. The spouses Ramos
prayed for the trial court to order PNB to release the real estate mortgage on their
properties and to return to the spouses the TCTs of the properties subject of the
mortgage.
In its Answer,[23] PNB countered that the spouses Ramos had no cause of
action against it since the latter knew that the real estate mortgage secured not only
theirP160,000.00 agricultural loan but also the other loans the spouses obtained
from the bank. Specifically, PNB alleged that the spouses sugar quedan financing
loan ofP15,600,000.00 remained unpaid as the quedans were dishonored by the
warehouseman Noahs Ark. PNB averred that it filed a civil action for specific
performance against Noahs Ark involving the quedans and the case was still
pending at that time. As PNB was still unable to collect on the quedans, it claimed
that the spouses Ramos loan obligations were yet to be fully satisfied. Thus, PNB
argued that it could not release the real estate mortgage in favor of the spouses.
On March 26, 1999, the RTC rendered a Decision[24] in favor of the spouses
Ramos, holding that:
A careful analysis of the evidence on record clearly shows that there is
merit to the [spouses Ramos] complaint that their obligation with [PNB] has long
been paid and satisfied.
As the records show, PNB admitted that [Luis Ramos] has already paid his
sugar crop loan in the amount of P160,000.00 x x x. The reason why it refused to
release the certificates of titles to the [spouses Ramos] was allegedly because the

said titles were also mortgaged to secure the other obligations of Luis Ramos,
particularly the sugar crop loan in the amount of P15.6 Million. However, even
assuming that its argument is correct that the said certificates of titles were also
security for the said sugar financing loan, the same is of no consequence since the
[spouses Ramos] have likewise fully paid the sugar loan when they effectively
transferred the sugar quedans to [PNB] by issuing a letter authority, authorizing it
to dispose and sell all the Quedan Receipts (Warehouse Receipts) of the [spouses
Ramos] which they pledged to the bank on December 29, 1989 x x x. [Luis
Ramos] executed the said letter of authority to the PNB when he could not
anymore afford to pay his loan which became due. There is no doubt that [PNB]
accepted the said quedans with the understanding that the same shall be treated as
payment of [spouses Ramos] obligation, considering that it did not hesitate to
proceed to demand from Noahs Ark Sugar Refinery, the delivery of the sugar
stocks to them as new owners thereof. It is, therefore, very clear that the
authorization issued by [Luis Ramos] in favor of [PNB], giving the latter the
right to dispose and sell the pledged warehouse receipts/quedans totally
terminated the contract of pledge between the [spouses Ramos] and
[PNB]. In effect there was a novation of their agreement and dation in
payment set in between the parties thereby extinguishing the loan obligation
of the [spouses Ramos], as provided in Article 1245 of the Civil Code.
Article 1245 of the Civil Code provides that dation in payment is a special
form of payment whereby property is alienated by the debtor to the creditor in
satisfaction of a debt in money. As stated differently by the noted
commentator Manresa, dacion en pago is the transfer of ownership of a thing by
the debtor to the creditor as an accepted equivalent of the performance of an
obligation. This was what precisely plaintiff Luis Ramos did in this case. He
alienated the ownership of the sugar quedans and the goods covered by said
quedans to [PNB] in satisfaction of his loan obligation with [PNB].
xxxx
WHEREFORE, the defendant Philippine National Bank, Balayan Branch
is hereby ORDERED to RELEASE the real estate mortgage on the properties of
the [spouses Ramos] and to return to them all the transfer certificates of titles
which were pledged as security for the agricultural loan which had long been paid
[25]
and satisfied and to pay the costs.
(Emphasis ours.)

PNB filed a Notice of Appeal[26] involving the above decision, which was
given due course by the RTC in an Order dated May 11, 1999. The records of the
case were then forwarded to the Court of Appeals where the case was docketed as
CA-G.R. CV No. 64360.

Before the appellate court, PNB contested the ruling of the RTC that the
spouses Ramos have already settled their sugar quedan financing loan with PNB
when they issued a letter of authority, which authorized PNB to sell
the quedan receipts of the spouses Ramos. PNB also contended that the real estate
mortgage executed by the spouses Ramos in its favor secured not only the spouses
Ramos agricultural crop loan in the amount of P160,000.00, but also their 1989
sugar quedan financing loan.[27]
On the other hand, the spouses Ramos averred that the authorization issued
by Luis Ramos in favor of PNB, authorizing the latter to dispose and sell the
pledged sugarquedans terminated the contract of pledge between the spouses
Ramos and PNB. There was in effect a novation of the contract of pledge and,
thereafter, dation in payment set in between the parties.[28] The spouses Ramos
also claimed that the condition in the parties real estate mortgage, which stated
that the mortgage shall also stand as security for said obligations and any and all
other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind
and nature, whether such obligations have been contracted before, during or after
the constitution of mortgage[,] was essentially a contract of adhesion and violated
the doctrine of mutuality of contract.[29]
On November 8, 2006, the Court of Appeals promulgated its assailed
decision, reversing the judgment of the RTC. The appellate court elucidated thus:
In the instant appeal, the trial court ruled that the issuance of [the]
authorization letter by [spouses Ramos] in favor of [PNB] terminated the contract
of pledge between the parties and in effect dation in payment sets-in.
We do not agree. First, the authorization letter did not provide that
ownership of the goods pledged would pass to [PNB] for failure of [spouses
Ramos] to pay the loan on time. This is contrary to the concept of Dacion en
pago as the delivery and transmission of ownership of a thing by the debtor to
the creditor as an accepted equivalent of the performance of the
obligation. Second, the authorization merely provided for the appointment of
[PNB] as attorney-in-fact with authority, among other things, to sell or otherwise

dispose of the said real rights, in case of default by [spouses Ramos], and to
apply the proceeds to the payment of the loan. This provision is a standard
condition in pledge contracts and is in conformity with Article 2087 of the Civil
Code, which authorizes the pledgee to foreclose the pledge and alienate the
pledged property for the payment of the principal obligation. Lastly, there was
no meeting of the minds between [spouses Ramos] and [PNB] that the loan would
be extinguished by dation in payment.
Article 1245 of the Civil Code provides that the law on sales shall govern
an agreement of dacion en pago. A contract of sale is perfected at the moment
there is a meeting of the minds of the parties thereto upon the thing which is the
object of the contract and upon the price. x x x.
xxxx
In this case, there was no meeting of the mind between the parties that
would lead us to conclude that dation in payment has set-in. The trial court based
its decision that there was dation in payment solely on the authorization letter,
which we do not agree. This is because the authorization letter merely authorizes
the Philippine National Bank, Balayan Branch, or any of its duly authorized
officer, to dispose and sell all the Quedan Receipts (Warehouse Receipts) pledge
to said bank, after maturity date of the Sugar Quedan Financing Loan.
Moreover, in case of doubt as to whether a transaction is a pledge or
dation in payment, the presumption is in favor of pledge, the latter being the
lesser transmission of rights and interest.
xxxx
WHEREFORE, the appeal is hereby GRANTED. ACCORDINGLY, the
Decision dated March 26, 1999 of the Regional Trial Court of Balayan, Batangas,
Branch 9, is hereby REVERSED and a new one is entered ordering [PNB] to hold
the release of all the transfer certificates of titles which were pledged as security
for the agricultural loan of [spouses Ramos].[30]

On November 30, 2006, the spouses Ramos filed a Motion for

Reconsideration[31] of the Court of Appeals decision. The spouses then asserted
that it was unclear whether the parties intended that the real estate mortgage would
also secure the sugar quedan financing loan, which was specifically secured by the
pledge on the quedans. They alleged that the sugar quedan financing loan, the
contract of pledge and the promissory notes did not even make any reference to the
real estate mortgage. PNB apparently violated its implied duty of good faith by

wrongfully retaining the spouses Ramos collateral and improperly invoking the
obscure terms of the real estate mortgage it prepared.
Subsequently, the spouses Ramos filed a Motion for Leave to File
Supplemental Argument.[32] They added that PNB could not have acquired a
security interest on the real estate mortgage for the purpose of the
sugar quedan financing loan because when the real estate mortgage was
constituted, the credit line from whence the sugar quedanfinancing loan was
sourced did not yet exist. The spouses Ramos also argued that PNB was in bad
faith in retaining the collateral of their real estate mortgage as it knew or should
have known that the said security was already void given that the agricultural crop
loan secured by the mortgage was already fully paid.
In the assailed Resolution dated May 28, 2007, the Court of Appeals denied
the spouses Ramos motion for reconsideration as it found no compelling reason to
reverse its Decision dated November 8, 2006.
On June 18, 2007, the counsel for the spouses Ramos notified the Court of
Appeals that Luis Ramos had passed away and that the latters wife, Ramona
Ramos, acted as the legal representative of Luis estate.
Thereafter, Ramona Ramos and the estate of Luis Ramos (petitioners) filed
the instant petition in a final bid to have the real estate mortgage declared null and
void as regards their sugar quedan financing loan, as well as to compel PNB to
return the TCTs of the properties included in the said mortgage.
On September 10, 2007, PNB filed a Motion for Substitution of
Party,[33] alleging that it has sold to Golden Dragon Star Equities, Inc. all of its
rights, titles and interests in and all obligations arising out of or in connection with
several cases, including the instant case. Afterwards, Golden Dragon Star Equities,

Inc. assigned to Opal Portfolio Investments (SPV-AMC) Inc. all of its rights and
obligations as a purchaser under the contract of sale with PNB. Thus, PNB prayed
that it be substituted by Opal Portfolio Investments (SPV-AMC) Inc. as party
respondent in the petition.
In the Resolution[34] dated October 10, 2007, the Court denied the above
motion of PNB and instead ordered that Opal Portfolio Investments (SPV-AMC)
Inc. and Golden Dragon Star Equities, Inc. be included as respondents in addition
to PNB. The said corporations were then required to file their comment on the
petition within ten days from notice.[35] On January 25, 2008, Opal Portfolio
Investments (SPV-AMC) Inc. and Golden Dragon Star Equities, Inc. manifested
that they were adopting as their own the comment filed by PNB.[36]
The Issues
Petitioners raise the following issues:
1.
IS THE MEANING OF THE GENERAL TERMS OF THE REAL ESTATE
MORTGAGE CLEAR AND LEAVE NO DOUBT THAT THERE IS NO NEED
TO DETERMINE WHETHER THE PARTIES INTENDED TO CREATE AND
PROVIDE SECURITY INTEREST ON THE REAL ESTATE COLLATERAL
OF BORROWER LUIS T. RAMOS FOR THE SUGAR QUEDAN FINANCING
LOAN GRANTED TO HIM BY LENDER PNB, IN ADDITION TO THE
AGRICULTURAL CROP LOAN THAT WAS UNDISPUTEDLY AGREED
UPON BY THEM TO BE COVERED BY THE COLLATERAL?
2.
SHOULD THE GENERAL TERMS OF THE REAL ESTATE MORTGAGE
EXECUTED BY BORROWER LUIS T. RAMOS IN FAVOR OF LENDER
PNB BE UNDERSTOOD TO INCLUDE IN ITS COVERAGE THE
BORROWERS SUGAR QUEDAN FINANCING LOAN THAT IS
DIFFERENT FROM HIS AGRICULTURAL CROP LOAN UNDISPUTEDLY
AGREED UPON BY THE PARTIES TO BE COVERED BY THE
COLLATERAL?

3.
SHOULD THE REAL ESTATE MORTGAGE EXECUTED IN 1973 BE
CONSIDERED VALID AND EXISTING SECURITY DEVICE AGREEMENT
FOR SUGAR QUEDAN FINANCING LOAN OBTAINED PURSUANT TO
CREDIT LINE AGREEMENT EXECUTED ONLY IN 1989?[37]

Petitioners principally argue that the scope and coverage of the real estate
mortgage excluded the sugar quedan financing loan. Petitioners assert that the
mortgage contained a blanket mortgage clause or a dragnet clause, which stated
that the mortgage would secure not only the loans already obtained but also any
other amount that Luis Ramos may loan from PNB. Petitioners posit that a dragnet
clause will cover and secure a subsequent loan only if said loan is made in reliance
on the original security containing the dragnet clause. Petitioners state that said
condition did not exist in the instant case, as the sugar quedan financing loan was
not obtained in reliance on the previously executed real estate mortgage. Such fact
was supposedly apparent from the documents pertaining to the
sugar quedan financing loans, i.e., the credit line agreement, the various
promissory notes and the contracts of pledge.
PNB responded that the issue of whether the parties intended for the real
estate mortgage to secure the sugar quedan financing loan was never raised in the
RTC or in the Court of Appeals. Therefore, the same cannot be raised for the first
time in the motion for reconsideration of the Court of Appeals decision and in the
instant petition. Likewise, PNB asserts that the spouses Ramos consented to the
terms of the real estate mortgage that the real properties subject thereof should be
used to secure future and subsequent loans of the mortgagor. Since the spouses
never contested the validity and enforceability of the real estate mortgage, the same
must be respected and should govern the relations of the parties therein.
PNB also avers that the Court of Appeals did not err in ruling that there was
no dacion en pago and/or novation under the circumstances prevailing in the

instant case. The Authorization issued by Luis Ramos in favor of PNB did not
terminate the contract of pledge between the parties as PNB was merely authorized
to dispose and sell the sugarquedans to be applied as payment to the
obligation. Hence, no transfer of ownership occurred. Article 2103 of the Civil
Code expressly states that unless the thing pledged is expropriated, the debtor
continues to be the owner thereof. PNB argued that when it accepted the
Authorization, it recognized that it was merely being authorized by Luis Ramos to
dispose of the quedans. Therefore, until the spouses Ramos fully settle their loans
from PNB, the latter believes that it has every right to retain possession of the
properties offered as collateral thereto.
After due consideration of the issues raised, we are compelled to deny the
petition.
To begin with, we note that, indeed, petitioners are presently raising issues
that were neither invoked nor discussed before the RTC and the main proceedings
before the Court of Appeals. The very issues laid down by petitioners for our
consideration were first brought up only in their motion for reconsideration of the
Court of Appeals Decision dated November 8, 2006.
In their complaint before the RTC and in their reply to PNBs appeal to the
Court of Appeals, petitioners relied on the theory that they have already settled all
of their loan obligations with PNB, including their sugar quedan financing loan,
such that they were entitled to the release of the real estate mortgage that secured
the said obligations. When the Court of Appeals rendered the assailed decision,
petitioners foisted a new argument in their motion for reconsideration that the
parties did not intend for the sugar quedanfinancing loan to be covered by the real
estate mortgage. Before this Court, petitioners are now reiterating and expounding
on their argument that their sugar quedan financing loan was beyond the ambit of

the previously executed real estate mortgage. We rule that such a change in
petitioners theory may not be allowed at such late a stage in the case.
The general rule is that issues raised for the first time on appeal and not
raised in the proceedings in the lower court are barred by estoppel. Points of law,
theories, issues, and arguments not brought to the attention of the trial court ought
not to be considered by a reviewing court, as these cannot be raised for the first
time on appeal. To consider the alleged facts and arguments raised belatedly
would amount to trampling on the basic principles of fair play, justice, and due
process.[38]
Jurisprudence, nonetheless, provides for certain exceptions to the above
rule. First, it is a settled rule that the issue of jurisdiction may be raised at any
time, even on appeal, provided that its application does not result in a mockery of
the tenets of fair play. Second, as held in Lianga Lumber Company v. Lianga
Timber Co., Inc.,[39] in the interest of justice and within the sound discretion of the
appellate court, a party may change his legal theory on appeal only when the
factual bases thereof would not require presentation of any further evidence by the
adverse party in order to enable it to properly meet the issue raised in the new
theory.
None of the above exceptions, however, applies to the instant case. As
regards the first exception, the issue of jurisdiction was never raised at any point in
this case. Anent the second exception, the Court finds that the application of the
same in the case would be improper, as further evidence is needed in order to
answer and/or refute the issue raised in petitioners new theory.
To recapitulate, petitioners are now claiming that the sugar quedan financing
loan it availed from PNB was not obtained in reliance on the real estate
mortgage. Petitioners even insist that the credit line agreement, the promissory

notes and the contracts of pledge entered into by the parties were silent as to the
applicability thereto of the real estate mortgage. Otherwise stated, petitioners are
harping on the intention of the parties vis--vis the security arrangement for the
credit line agreement and the availments thereof constituting the
sugar quedan financing loan. The impropriety of the petitioners posturing is
further confounded by the fact that the credit line agreement under PNBs
sugarquedan financing program and the availments thereto were entered into by
Luis Ramos and PNB as far back as the year 1989. Petitioners new theory, on the
other hand, was only raised much later on the spouses motion for reconsideration
of the Court of Appeals decision dated November 8, 2006, or after a period of
more or less seventeen years since the execution of the credit line agreement. The
Court, therefore, finds itself unable to give credit to the new theory proffered by
petitioners since to do so would gravely offend the rights of PNB to due process.
Even if the Court were willing to overlook petitioners procedural misstep
on appeal, their belatedly proffered theory still fails to convince us that the Court
of Appeals committed any reversible error in its resolution of the present case.
According to petitioners, their case requires an application of Article 1371 of
the Civil Code, which provides that in order to judge the intention of the
contracting parties, their contemporaneous and subsequent acts shall be principally
considered. To their mind, the mere fact that the 1989 credit line agreement, the
promissory notes and the contracts of pledge executed in relation to the
sugar quedan financing loan contained no reference to the real estate mortgage is
sufficient proof that the parties did not intend the real estate mortgage to secure the
sugar quedan financing loan, but only the agricultural crop loans. The Court finds
that it cannot uphold this proposition.
In Prisma Construction & Development Corporation v. Menchavez,[40] we
discussed the settled principles that:

Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith. When the terms of
a contract are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning of its stipulations governs. In such cases, courts have
no authority to alter the contract by construction or to make a new contract for the
parties; a court's duty is confined to the interpretation of the contract the parties
made for themselves without regard to its wisdom or folly, as the court cannot
supply material stipulations or read into the contract words the contract does not
contain. It is only when the contract is vague and ambiguous that courts are
permitted to resort to the interpretation of its terms to determine the parties'
intent.[41]

Here, it cannot be denied that the real estate mortgage executed by the
parties provided that it shall stand as security for any subsequent promissory note
or notes either as a renewal of the former note, as an extension thereof, or as a new
loan, or is given any other kind of accommodations such as overdrafts, letters of
credit, acceptances and bills of exchange, releases of import shipments on Trust
Receipts, etc. The same real estate mortgage likewise expressly covered any and
all other obligations of the Mortgagor to the Mortgagee of whatever kind and
nature whether such obligations have been contracted before, during or after
the constitution of this mortgage. Thus, from the clear and unambiguous terms
of the mortgage contract, the same has application even to future loans and
obligations of the mortgagor of any kind, not only agricultural crop loans.
Such a blanket clause or dragnet clause in mortgage contracts has long
been recognized in our jurisprudence. Thus, in another case, we held:
As a general rule, a mortgage liability is usually limited to the amount mentioned
in the contract. However, the amounts named as consideration in a contract of
mortgage do not limit the amount for which the mortgage may stand as security
if, from the four corners of the instrument, the intent to secure future and
other indebtedness can be gathered. This stipulation is valid and binding
between the parties and is known as the "blanket mortgage clause" (also known as
the "dragnet clause)."

In the present case, the mortgage contract indisputably provides that the
subject properties serve as security, not only for the payment of the subject loan,
but also for "such other loans or advances already obtained, or still to be
obtained." The cross-collateral stipulation in the mortgage contract between the
parties is thus simply a variety of a dragnet clause. After agreeing to such
stipulation, the petitioners cannot insist that the subject properties be
released from mortgage since the security covers not only the subject loan
but the two other loans as well.[42] (Emphases supplied.)

Moreover, petitioners reliance on Prudential Bank v. Alviar[43] is sorely

misplaced. In Prudential, the fact that another security was given for subsequent
loans did not remove such loans from the ambit of the dragnet clause in a previous
real estate mortgage contract. However, it was held in Prudential that the special
security for subsequent loans must first be exhausted before the creditor may
foreclose on the real estate mortgage. In other words, the creditor is allowed to
hold on to the previous security (the real estate mortgage) in case of deficiency
after resort to the special security given for the subsequent loans. Verily, even
under the Prudential ruling cited by petitioners, they are not entitled to the release
of the real estate mortgage and the titles to the properties mentioned therein.
Ultimately, we likewise find no reason to overturn the assailed ruling of the
Court of Appeals that the contract of pledge between petitioners and PNB was not
terminated by the Authorization letter issued by Luis Ramos in favor of PNB. The
status of PNB as a pledgee of the sugar quedans involved in this case had long
been confirmed by the Court in its Decision dated July 9, 1998 in Philippine
National Bank v. Sayo, Jr.[44] and the same is neither disputed in the instant
case. We reiterate our ruling in Sayo that:
The creditor, in a contract of real security, like pledge, cannot appropriate
without foreclosure the things given by way of pledge. Any stipulation to the
contrary, termed pactum commissorio, is null and void. The law requires
foreclosure in order to allow a transfer of title of the good given by way of
security from its pledgor, and before any such foreclosure, the pledgor, not the
pledgee, is the owner of the goods. x x x.[45]

A close reading of the Authorization executed by Luis Ramos reveals that it

was nothing more than a letter that gave PNB the authority to dispose of and sell
the sugarquedans after the maturity date thereof. As held by the Court of Appeals,
the said grant of authority on the part of PNB is a standard condition in a contract
of pledge, in accordance with the provisions of Article 2087 of the Civil Code
that it is also of the essence of these contracts that when the principal obligation
becomes due, the things in which the pledge or mortgage consists may be alienated
for the payment to the creditor. More importantly, Article 2115 of the Civil Code
expressly provides that the sale of the thing pledged shall extinguish the principal
obligation, whether or not the proceeds of the sale are equal to the amount of the
principal obligation, interest and expenses in a proper case. As we adverted to
in Sayo, it is the foreclosure of the thing pledged that results in the satisfaction of
the loan liabilities to the pledgee of the pledgors. Thus, prior to the actual
foreclosure of the thing pleged, the sugar quedan financing loan in this case is yet
to be settled.
As matters stand, with more reason that PNB cannot be compelled to release
the real estate mortgage and the titles involved therein since the issue of whether
the sugarquedan financing loan will be fully paid through the pledged sugar
receipts remains the subject of pending litigation.
WHEREFORE, the petition is DENIED. The Decision dated November 8,
2006 and the Resolution dated May 28, 2007 of the Court of Appeals in CA-G.R.
CV No. 64360 are hereby AFFIRMED. Costs against petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-6913

November 21, 1913

THE ROMAN CATHOLIC BISHOP OF JARO, plaintiff-appellee,

vs.
GREGORIO DE LA PEA, administrator of the estate of Father Agustin de la Pea, defendantappellant.
J. Lopez Vito, for appellant.
Arroyo and Horrilleno, for appellee.

MORELAND, J.:
This is an appeal by the defendant from a judgment of the Court of First Instance of Iloilo, awarding
to the plaintiff the sum of P6,641, with interest at the legal rate from the beginning of the action.
It is established in this case that the plaintiff is the trustee of a charitable bequest made for the
construction of a leper hospital and that father Agustin de la Pea was the duly authorized
representative of the plaintiff to receive the legacy. The defendant is the administrator of the estate
of Father De la Pea.
In the year 1898 the books Father De la Pea, as trustee, showed that he had on hand as such
trustee the sum of P6,641, collected by him for the charitable purposes aforesaid. In the same year
he deposited in his personal account P19,000 in the Hongkong and Shanghai Bank at Iloilo. Shortly
thereafter and during the war of the revolution, Father De la Pea was arrested by the military
authorities as a political prisoner, and while thus detained made an order on said bank in favor of the
United States Army officer under whose charge he then was for the sum thus deposited in said
bank. The arrest of Father De la Pea and the confiscation of the funds in the bank were the result
of the claim of the military authorities that he was an insurgent and that the funds thus deposited had
been collected by him for revolutionary purposes. The money was taken from the bank by the
military authorities by virtue of such order, was confiscated and turned over to the Government.
While there is considerable dispute in the case over the question whether the P6,641 of trust funds
was included in the P19,000 deposited as aforesaid, nevertheless, a careful examination of the case
leads us to the conclusion that said trust funds were a part of the funds deposited and which were
removed and confiscated by the military authorities of the United States.
That branch of the law known in England and America as the law of trusts had no exact counterpart
in the Roman law and has none under the Spanish law. In this jurisdiction, therefore, Father De la
Pea's liability is determined by those portions of the Civil Code which relate to obligations. (Book 4,
Title 1.)
Although the Civil Code states that "a person obliged to give something is also bound to preserve it
with the diligence pertaining to a good father of a family" (art. 1094), it also provides, following the

principle of the Roman law, major casus est, cui humana infirmitas resistere non potest, that "no one
shall be liable for events which could not be foreseen, or which having been foreseen were
inevitable, with the exception of the cases expressly mentioned in the law or those in which the
obligation so declares." (Art. 1105.)
By placing the money in the bank and mixing it with his personal funds De la Pea did not thereby
assume an obligation different from that under which he would have lain if such deposit had not
been made, nor did he thereby make himself liable to repay the money at all hazards. If the had
been forcibly taken from his pocket or from his house by the military forces of one of the combatants
during a state of war, it is clear that under the provisions of the Civil Code he would have been
exempt from responsibility. The fact that he placed the trust fund in the bank in his personal account
does not add to his responsibility. Such deposit did not make him a debtor who must respond at all
hazards.
We do not enter into a discussion for the purpose of determining whether he acted more or less
negligently by depositing the money in the bank than he would if he had left it in his home; or
whether he was more or less negligent by depositing the money in his personal account than he
would have been if he had deposited it in a separate account as trustee. We regard such discussion
as substantially fruitless, inasmuch as the precise question is not one of negligence. There was no
law prohibiting him from depositing it as he did and there was no law which changed his
responsibility be reason of the deposit. While it may be true that one who is under obligation to do or
give a thing is in duty bound, when he sees events approaching the results of which will be
dangerous to his trust, to take all reasonable means and measures to escape or, if unavoidable, to
temper the effects of those events, we do not feel constrained to hold that, in choosing between two
means equally legal, he is culpably negligent in selecting one whereas he would not have been if he
had selected the other.
The court, therefore, finds and declares that the money which is the subject matter of this action was
deposited by Father De la Pea in the Hongkong and Shanghai Banking Corporation of Iloilo; that
said money was forcibly taken from the bank by the armed forces of the United States during the war
of the insurrection; and that said Father De la Pea was not responsible for its loss.
The judgment is therefore reversed, and it is decreed that the plaintiff shall take nothing by his
complaint.
Arellano, C.J., Torres and Carson, JJ., concur.

SECOND DIVISION

[G.R. No. 119466. November 25, 1999]

SALVADOR ADORABLE and LIGAYA ADORABLE, petitioners,

vs. COURT OF APPEALS, HON. JOSE O. RAMOS, FRANCISCO
BARENG and SATURNINO BARENG, respondents.
DECISION
MENDOZA, J.:

This is a petition for review under Rule 45 of the decision [1] of the Court of
Appeals, dated January 6, 1995, sustaining the dismissal by Branch 24 of the Regional
Trial Court, Echague, Isabela, of the complaint filed by petitioners, spouses Salvador
and Ligaya Adorable, for lack of cause of action.
The facts are as follows:
Private respondent Saturnino Bareng was the registered owner of two parcels of
land, one identified as Lot No. 661-D-5-A, with an area of 20,000 sq. m., covered by
TCT No. T-162837, and the other known as Lot No. 661-E, with an area of 4.0628
hectares, covered by TCT No. T-60814, both of which are in San Fabian, Echague,
Isabela. Petitioners were lessees of a 200 sq.m. portion of Lot No. 661-D-5-A.
On April 29, 1985, Saturnino Bareng and his son, private respondent Francisco
Bareng, obtained a loan from petitioners amounting to twenty six thousand pesos
(P26,000), in consideration of which they promised to transfer the possession and
enjoyment of the fruits of Lot No. 661-E.
On August 3, 1986, Saturnino sold to his son Francisco 18,500 sq.m. of Lot No.
661-D-5-A. The conveyance was annotated on the back of TCT No. T-162873. In
turn, Francisco sold on August 27, 1986 to private respondent Jose Ramos 3,000 sq.m.
of the lot. The portion of land being rented to petitioners was included in the portion
sold to Jose Ramos. The deeds of sale evidencing the conveyances were not
registered in the office of the register of deeds.
As the Barengs failed to pay their loan, petitioners complained to Police Captain
Rodolfo Saet of the Integrated National Police (INP) of Echague through whose
mediation a Compromise Agreement was executed between Francisco Bareng and the
Adorables whereby the former acknowledged his indebtedness of P56,385.00 which
he promised to pay on or before July 15, 1987. When the maturity date arrived,

however, Francisco Bareng failed to pay. A demand letter was sent to Francisco
Bareng, but he refused to pay.
Petitioners, learning of the sale made by Francisco Bareng to Jose Ramos, then
filed a complaint with the Regional Trial Court, Branch 24, Echague, Isabela for the
annulment or rescission of the sale on the ground that the sale was fraudulently
prepared and executed.
During trial, petitioners presented as witness Jose Ramos. After his testimony, the
next hearing was set on August 4 and 5, 1990. On said hearing dates, however,
petitioners were absent. The trial court therefore ordered the presentation of evidence
for petitioners terminated and allowed private respondents to present their evidence ex
parte. On February 15, 1991, the trial court rendered judgment dismissing the
complaint for lack of cause of action, declaring the contract of sale between Francisco
Bareng and Jose Ramos valid and ordering Francisco Bareng to pay the amount he
owed petitioners.
On appeal, the Court of Appeals affirmed the decision of the Regional Trial
Court, with modification as to the amount of Francisco Barengs debt to petitioners.
Hence, this petition for review, raising the following issues: (1) whether the
Court of Appeals erred in dismissing the complaint for lack of cause of action; (2)
whether petitioners enjoyed legal preference to purchase the lots they lease; and (3)
whether the Court of Appeals erred in sustaining the lower courts order terminating
petitioners presentation of evidence and allowing private respondents to present their
evidence ex parte.
In sustaining the decision of the trial court dismissing the complaint for lack of
cause of action, the Court of Appeals premised its decision on Rule 3, 2 of the
former Rules of Court which provided:
Parties in interest. Every action must be prosecuted and defended in the name of
the real party in interest. All persons having an interest in the subject of the action
and in obtaining the relief demanded shall be joined as plaintiffs. All persons who
claim an interest in the controversy or who are necessary to a complete determination
or settlement of the questions involved therein shall be joined as defendants.
A real party in interest is one who would be benefited or injured by the judgment,
or who is entitled to the avails of the suit. Interest, within the meaning of this rule,
should be material, directly in issue and to be affected by the decree, as distinguished
from a mere incidental interest or in the question involved.[2] Otherwise put, an action
shall be prosecuted in the name of the party who, by the substantive law, has the right
sought to be enforced.[3]

Petitioners anchor their interest on their right as creditors of Francisco Bareng, as

well as on their claim of preference over the sale of the contested lot.[4] They contend
that the sale between Francisco Bareng and Jose Ramos prejudiced their interests over
the property as creditors of Francisco Bareng. Moreover, they claim that, under
Commonwealth Act No. 539, they have a preferential right, as tenants or lessees, to
purchase the land in question.
The petition has no merit.
First. We hold that, as creditors, petitioners do not have such material interest as
to allow them to sue for rescission of the contract of sale. At the outset, petitioners
right against private respondents is only a personal right to receive payment for the
loan; it is not a real right over the lot subject of the deed of sale.
A personal right is the power of one person to demand of another, as a definite
passive subject, the fulfillment of a prestation to give, to do, or not to do. On the other
hand, a real right is the power belonging to a person over a specific thing, without a
passive subject individually determined, against whom such right may be personally
exercised.[5] In this case, while petitioners have an interest in securing payment of the
loan they extended, their right to seek payment does not in any manner attach to a
particular portion of the patrimony of their debtor, Francisco Bareng.
Nor can we sustain petitioners claim that the sale was made in fraud of
creditors. Art. 1177 of the Civil Code provides:
The creditors, after having pursued the property in possession of the debtor to satisfy
their claims, may exercise all the rights and bring all the actions of the latter for the
same purpose, save those which are inherent in his person; they may also impugn the
actions which the debtor may have done to defraud them. (Emphasis added)
Thus, the following successive measures must be taken by a creditor before he
may bring an action for rescission of an allegedly fraudulent sale: (1) exhaust the
properties of the debtor through levying by attachment and execution upon all the
property of the debtor, except such as are exempt by law from execution; (2) exercise
all the rights and actions of the debtor, save those personal to him (accion
subrogatoria); and (3) seek rescission of the contracts executed by the debtor in fraud
of their rights (accion pauliana). Without availing of the first and second
remedies, i.e., exhausting the properties of the debtor or subrogating themselves in
Francisco Barengs transmissible rights and actions, petitioners simply undertook the
third measure and filed an action for annulment of the sale. This cannot be done.
Indeed, an action for rescission is a subsidiary remedy; it cannot be instituted
except when the party suffering damage has no other legal means to obtain reparation
for the same.[6] Thus, Art. 1380 of the Civil Code provides:

The following contracts are rescissible:

....
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due them;
Petitioners have not shown that they have no other means of enforcing their
credit. As the Court of Appeals pointed out in its decision:
In this case, plaintiffs-appellants had not even commenced an action against
defendants-appellees Bareng for the collection of the alleged indebtedness. Plaintiffsappellants had not even tried to exhaust the property of defendants-appellees
Bareng. Plaintiffs-appellants, in seeking for the rescission of the contracts of sale
entered into between defendants-appellees, failed to show and prove that defendantsappellees Bareng had no other property, either at the time of the sale or at the time this
action was filed, out of which they could have collected this (sic) debts.
Second. Nor do petitioners enjoy any preference to buy the questioned
property. In Aldecoa v. Hongkong and Shanghai Banking Corporation,[7] it was held
that in order that one who is not obligated in a contract either principally or
subsidiarily may maintain an action for nullifying the same, his complaint must show
the injury that would positively result to him from the contract in which he has not
intervened, with regard at least to one of the contracting parties.
Petitioners attempt to establish such legal injury through a claim of preference
created under C.A. No. 539, the pertinent provision of which provides:
SEC. 1. The President of the Philippines is authorized to acquire private lands or any
interest therein, through purchase or expropriation, and to subdivide the same into
home lots or small farms for resale at reasonable prices and under such conditions as
he may fix to their bona fide tenants or occupants or to private individuals who will
work the lands themselves and who are qualified to acquire and own lands in the
Philippines.
This statute was passed to implement Art. XIII, 4 of the 1935 Constitution which
provided that The Congress may authorize, upon payment of just compensation, the
expropriation of lands to be subdivided into small lots and conveyed at cost to
individuals. It is obvious that neither under this provision of the former Constitution
nor that of C.A. No. 539 can petitioners claim any right since the grant of preference
therein applies only to bona fide tenants, after the expropriation or purchase by the
government of the land they are occupying.[8] Petitioners are not tenants of the land in

question in this case. Nor has the land been acquired by the government for their
benefit.
Third. Finally, we hold that no error was committed by the Court of Appeals in
affirming the order of the trial court terminating the presentation of petitioners
evidence and allowing private respondents to proceed with theirs because of
petitioners failure to present further evidence at the scheduled dates of trial.
Petitioners contend that since their counsel holds office in Makati, the latters
failure to appear at the trial in Isabela at the scheduled date of hearing should have
been treated by the court with a sense of fairness.[9]
This is more a plea for compassion rather than explanation based on reason. We
cannot find grave abuse of discretion simply because a court decides to proceed with
the trial of a case rather than postpone the hearing to another day, because of the
absence of a party. That the absence of a party during trial constitutes waiver of his
right to present evidence and cross-examine the opponents witnesses is firmly
supported by jurisprudence.[10] To constitute grave abuse of discretion amounting to
lack or excess of jurisdiction, the refusal of the court to postpone the hearing must be
characterized by arbitrariness or capriciousness. Here, as correctly noted by the Court
of Appeals, petitioners counsel was duly notified through registered mail of the
scheduled trials.[11] His only excuse for his failure to appear at the scheduled hearings
is that he comes from Makati. This excuse might hold water if counsel was simply
late in arriving in the courtroom. But this was not the case. He did not appear at all.
WHEREFORE, the petition for review is DENIED, and the decision of the Court
of Appeals is AFFIRMED.
SO ORDERED.
Bellosillo, (Chairman), Quisumbing, Buena, and De Leon, Jr., JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 90926 July 6, 1990
ALEX G. LEE, petitioner,
vs.
HON. SALVADOR P. DE GUZMAN, JR., Regional Trial Court of Makati, Branch 142 and
MOTORCARS, INCORPORATED, respondents.
Doroteo A. Dadal for petitioner.
Benjamin S. Benito & Associates for private respondents.

PARAS, J.:
On November 8, 1983, a free-lance salesman of respondent Motorcars, Inc., (then Delta Motors
Corporation) named Arsenio Tumibay signed in behalf of Domingo Tupaz its Branch Manager in
Makati, a price quotation (Exhibit "A") and delivered to petitioner Alex B. Lee for the sale of one (1)
unit Toyota Corolla Liftback, 1983 model, with the quoted price of P149,700.00 plus miscellaneous
expenses of P10,033.00. On the same date, petitioner Lee as customer, signed the vehicle sales
order (Exhibit "C") The delivery of the subject vehicle was within the month of November, 1983.
In view of such order, petitioner Lee deposited the amount of P1,000.00 on November 10, 1983 as
required in the aforesaid price quotation, to which Tumibay wrote petitioner the information that the
Motorcars Inc., had acknowledged receipt of the delivery receipt for petitioner. Thereupon, on
December 15, 1983, petitioner's counsel, Atty. Doroteo A. Dadal, wrote Mr. Nicolas O. Carranceja,
Jr., Executive Vice-President of Motorcars, demanding for delivery of the said Toyota car. The
respondent car company replied on December 19, 1983, through its counsel Atty. Benjamin S.
Benito, that due to the sudden change of prices by the car manufacturer, they had decided to
exercise the option contained in the vehicle sales order, (Exhibits "C") which states:
Whenever deposits are made by customers for vehicles, parts and services ordered,
the sales for such vehicles, parts or services shall be at the option of Motorcars, Inc.,
and refund of the deposits shall be made upon request and without undue delay
should such option be exercised (p. 21, Rollo)
The respondent car company thus offered to refund petitioner's deposit of P1,000.00. Part of
the vehicle sales order also reads, viz:
This order is not valid unless signed and accepted by the dealer principal, President,
Executive Vice President or General Sales Manager of the dealership . . . (supra)
The trial court rendered judgment in favor of respondent car company ruling as follows:

Exhibit "A" is merely a quotation offered by defendant's sales representative. Exhibit

"C", the vehicle sales order, was not signed and accepted by defendant's President,
Executive Vice President, nor its General Sales Manager, hence, not valid because it
exercised the option in Exh. "1" beforestated due to sudden change of prices by the
car manufacturer (Exh. "2"). Exhibit "C" which contains; Exhibits "1" and "1-A",
having been signed by plaintiff binds him alone There was no perfected contract in
accordance with Article 1318, Civil Code. (p. 21, Rollo)
Petitioner was ordered to pay respondent P5,000 for damages and attorney's fees.
Expectedly dissatisfied with the aforesaid court's ruling, petitioner appealed to the Court of Appeals
which reversed the decision appealed from ruling that there was a perfected contract of sale, and
that there was the undisputed signature of one Mr. Domingo Tapas, the branch manager of
Motorcars. Thereupon, the Court of Appeals ordered respondent company to deliver to petitioner the
subject vehicle upon payment by the latter of the amount of P149,700.00 and the amount of
P8,833.00 for Miscellaneous Expenses and/or Incidental Charges. Thus, respondent appealed to
this Court, docketed as G.R. No. 77992.
In this Court's resolution dated August 31, 1987, through the Third Division, the decision appealed
from was affirmed, and the petition was denied. This Court ruled:
The issue of whether or not there was a perfected contract of sale appears to have
been correctly decided by the respondent court. This Court also finds no reason to
disturb the ruling of the respondent court on the factual issue of whether or not the
branch manager could bind the petitioner.
It appearing that the findings of fact of the respondent court are supported by
substantial evidence and there being no showing that its decision is not in accord
with law or jurisprudence, the COURT RESOLVED to DENY the petition. (p.
32, Rollo)
When the case was remanded to the trial Court, petitioner filed a Motion for Writ of Execution.
Instead of complying with the Order of the court, respondent company filed a motion to quash writ of
execution. Said motion was anchored on the premise that the obligation has become impossible to
comply on the ground that the Delta Motors Corporation has closed shop. Petitioner opposed the
quashal of the Writ of execution and consequently, the motion to quash was denied. An alias writ of
execution was filed by petitioner, but respondent company continued to defy the Order of the Court.
Petitioner filed a motion for contempt of court for the stance of the respondent company was
contumacious in nature. Respondent company filed an opposition thereto reiterating the grounds
relied on in the Motion to quash writ of execution. Respondent trial court issued the questioned
Order, dated August 10, 1989, which was adjudged favorably for the respondent company, which
order as alleged by the petition, was totally at war with the previous order granting the alias writ of
execution.
Hence, this petition for certiorari with mandamus.
Two issues are presented by both parties for Our consideration. They are:
1. Whether or not the decision rendered by the Court of Appeals and affirmed by the
Supreme Court is capable of performance and can by judiciously executed; and
2. Whether or not the corporation officers are liable for contempt.

The Court takes notice of the fact that as alleged in the Comment and Memorandum of respondent
company and contained in the questioned order, which is not disputed by the petitioner, that while
the Motion for Contempt was pending before the respondent trial court, petitioner indicated his
willingness to accept a second-hand car but failed to show its availability as the classified ads refer
to 1984 Models and could not be said that they are the same models as what appears in Exhibit "C",
the sales order. In addition, respondent car company even offered the amount of P20,000 as a
gesture to buy peace.
It is the contention of the petitioner that the obligation is not impossible for the 1983 Toyota cars are
still available in the market today. It is however the contention of respondent company that the
obligation is impossible for the car manufacturer had closed shop and no longer manufacturing 1983
models of Toyota much less deliver the car specified in Exhibit "C".
The question is, should respondent Motorcars be made liable to fulfill a seemingly impossible
obligation?
It is well-settled that when after a judgment has become final and executory, facts and
circumstances transpire which render its execution impossible or unjust, the interested party may
ask a competent court to stay its execution or prevent its enforcement. 1
We find that respondent Court did not act with grave abuse of discretion in denying the motion for
contempt.
Unfortunately it is not possible for Motorcars to comply with the writ of execution since admittedly,
the then Delta Motors who manufactured 1983 models of Toyota Liftback had already closed shop,
but be this as it may, there is no question that indeed there was a perfected contract of sale between
petitioner Lee and private respondent Motorcars pursuant to this Court's (through the Third Division)
resolution dated August 31, 1987.
The relief left for petitioner Lee is that found under Article 1170 of the Civil Code which provides:
"(T)hose who in the performance of their obligations are guilty of fraud, negligence or delay, and
those who in any manner contravene the tenor thereof, are liable for damages."
The reply letter of private respondent company dated December 19, 1983 which said that "due to the
sudden change of prices by the car manufacturer, they have decided to exercise the option . . ." did
not relieve Motorcars from the contract had entered into with petitioner Lee. There was therefore
delay in the delivery of the subject vehicle which entitles petitioner to be awarded damages. The
records show that the subject vehicle should have been delivered within the month of November,
1983. (Annex C, Records).
Considering the circumstances attendant to this case, a total amount of damages worth Fifty
Thousand Pesos (P50,000.00) would be reasonable, twenty thousand pesos (P20,000.00) of which
as temperate damages 2inclusive of attorney's fees and the remaining thirty thousand pesos
(P30,000.00) as exemplary damages. 3

PREMISES CONSIDERED, insofar as the denial of the motion for contempt by the lower court,
dated August 10, 1989 is concerned, the petition for certiorari with mandamus is hereby
DISMISSED, but the respondent is ordered to give to the petitioner the amount of damages adverted
to in the next preceding paragraph.
SO ORDERED.

Melencio-Herrera, Padilla, Sarmiento and Regalado, JJ., concur.

FIRST DIVISION

[G.R. No. 115129. February 12, 1997]

IGNACIO BARZAGA, petitioner, vs. COURT

ANGELITO ALVIAR, respondents.

OF

APPEALS

and

DECISION
BELLOSILLO, J.:

The Fates ordained that Christmas 1990 be bleak for Ignacio Barzaga and
his family. On the nineteenth of December Ignacio's wife succumbed to a
debilitating ailment after prolonged pain and suffering. Forewarned by her
attending physicians of her impending death, she expressed her wish to be
laid to rest before Christmas day to spare her family from keeping lonely vigil
over her remains while the whole of Christendom celebrate the Nativity of their
Redeemer.
Drained to the bone from the tragedy that befell his family yet preoccupied
with overseeing the wake for his departed wife, Ignacio Barzaga set out to
arrange for her interment on the twenty-fourth of December in
obedience semper fidelis to her dying wish. But her final entreaty,
unfortunately, could not be carried out. Dire events conspired to block his
plans that forthwith gave him and his family their gloomiest Christmas ever.
This is Barzaga's story. On 21 December 1990, at about three o`clock in
the afternoon, he went to the hardware store of respondent Angelito Alviar to
inquire about the availability of certain materials to be used in the construction
of a niche for his wife. He also asked if the materials could be delivered at
once. Marina Boncales, Alviar's storekeeper, replied that she had yet to verify
if the store had pending deliveries that afternoon because if there were then
all subsequent purchases would have to be delivered the following day. With
that reply petitioner left.
At seven o' clock the following morning, 22 December, Barzaga returned
to Alviar's hardware store to follow up his purchase of construction
materials. He told the store employees that the materials he was buying
would have to be delivered at the Memorial Cemetery in Dasmarias, Cavite,
by eight o'clock that morning since his hired workers were already at the burial
site and time was of the essence. Marina Boncales agreed to deliver the

items at the designated time, date and place. With this assurance, Barzaga
purchased the materials and paid in full the amount of P2,110.00. Thereafter
he joined his workers at the cemetery, which was only a kilometer away, to
await the delivery.
The construction materials did not arrive at eight o'clock as promised. At
nine o' clock, the delivery was still nowhere in sight. Barzaga returned to the
hardware store to inquire about the delay. Boncales assured him that
although the delivery truck was not yet around it had already left the garage
and that as soon as it arrived the materials would be brought over to the
cemetery in no time at all. That left petitioner no choice but to rejoin his
workers at the memorial park and wait for the materials.
By ten o'clock, there was still no delivery. This prompted petitioner to
return to the store to inquire about the materials. But he received the same
answer from respondent's employees who even cajoled him to go back to the
burial place as they would just follow with his construction materials.
After hours of waiting - which seemed interminable to him - Barzaga
became extremely upset. He decided to dismiss his laborers for the day. He
proceeded to the police station, which was just nearby, and lodged a
complaint against Alviar. He had his complaint entered in the police
blotter. When he returned again to the store he saw the delivery truck
already there but the materials he purchased were not yet ready for
loading. Distressed that Alviar's employees were not the least concerned,
despite his impassioned pleas, Barzaga decided to cancel his transaction with
the store and look for construction materials elsewhere.
In the afternoon of that day, petitioner was able to buy from another
store. But since darkness was already setting in and his workers had left, he
made up his mind to start his project the following morning, 23
December. But he knew that the niche would not be finish in time for the
scheduled burial the following day. His laborers had to take a break on
Christmas Day and they could only resume in the morning of the twentysixth. The niche was completed in the afternoon and Barzaga's wife was
finally laid to rest. However, it was two-and-a-half (2-1/2) days behind
schedule.
On 21 January 1991, tormented perhaps by his inability to fulfill his wife's
dying wish, Barzaga wrote private respondent Alviar demanding recompense
for the damage he suffered. Alviar did not respond. Consequently, petitioner
sued him before the Regional Trial Court.
[1]

Resisting petitioner's claim, private respondent contended that legal delay

could not be validly ascribed to him because no specific time of delivery was
agreed upon between them. He pointed out that the invoices evidencing the
sale did not contain any stipulation as to the exact time of delivery and that
assuming that the materials were not delivered within the period desired by
petitioner, the delivery truck suffered a flat tire on the way to the store to pick
up the materials. Besides, his men were ready to make the delivery by tenthirty in the morning of 22 December but petitioner refused to accept
them. According to Alviar, it was this obstinate refusal of petitioner to accept
delivery that caused the delay in the construction of the niche and the
consequent failure of the family to inter their loved one on the twenty-fourth of
December, and that, if at all, it was petitioner and no other who brought about
all his personal woes.
Upholding the proposition that respondent incurred in delay in the delivery
of the construction materials resulting in undue prejudice to petitioner, the trial
court ordered respondent Alviar to pay petitioner (a) P2,110.00 as refund for
the purchase price of the materials with interest per annum computed at the
legal rate from the date of the filing of the complaint, (b)P5,000.00 as
temperate damages, (c) P20,000.00 as moral damages, (d) P5,000.00 as
litigation expenses, and (e) P5,000.00 as attorney's fees.
On appeal, respondent Court of Appeals reversed the lower court and
ruled that there was no contractual commitment as to the exact time of
delivery since this was not indicated in the invoice receipts covering the sale.
[2]

The arrangement to deliver the materials merely implied that delivery

should be made within a reasonable time but that the conclusion that since
petitioner's workers were already at the graveyard the delivery had to be
made at that precise moment, is non-sequitur. The Court of Appeals also held
that assuming that there was delay, petitioner still had sufficient time to
construct the tomb and hold his wife's burial as she wished.
We sustain the trial court. An assiduous scrutiny of the record convinces
us that respondent Angelito Alviar was negligent and incurred in delay in the
performance of his contractual obligation. This sufficiently entitles petitioner
Ignacio Barzaga to be indemnified for the damage he suffered as a
consequence of delay or a contractual breach. The law expressly provides
that those who in the performance of their obligation are guilty of fraud,
negligence, or delay and those who in any manner contravene the tenor
thereof, are liable for damages.
[3]

Contrary to the appellate court's factual determination, there was a specific

time agreed upon for the delivery of the materials to the cemetery. Petitioner

went to private respondent's store on 21 December precisely to inquire if the

materials he intended to purchase could be delivered immediately. But he
was told by the storekeeper that if there were still deliveries to be made that
afternoon his order would be delivered the following day. With this in mind
Barzaga decided to buy the construction materials the following morning after
he was assured of immediate delivery according to his time frame. The
argument that the invoices never indicated a specific delivery time must fall in
the face of the positive verbal commitment of respondent's
storekeeper. Consequently it was no longer necessary to indicate in the
invoices the exact time the purchased items were to be brought to the
cemetery. In fact, storekeeper Boncales admitted that it was her custom not
to indicate the time of delivery whenever she prepared invoices.
[4]

Private respondent invokes fortuitous event as his handy excuse for that
"bit of delay" in the delivery of petitioner's purchases. He maintains that
Barzaga should have allowed his delivery men a little more time to bring the
construction materials over to the cemetery since a few hours more would not
really matter and considering that his truck had a flat tire. Besides, according
to him, Barzaga still had sufficient time to build the tomb for his wife.
This is a gratuitous assertion that borders on callousness. Private
respondent had no right to manipulate petitioner's timetable and substitute it
with his own. Petitioner had a deadline to meet. A few hours of delay was no
piddling matter to him who in his bereavement had yet to attend to other
pressing family concerns. Despite this, respondent's employees still made
light of his earnest importunings for an immediate delivery. As petitioner
bitterly declared in court " x x x they (respondent's employees) were making a
fool out of me."
[5]

We also find unacceptable respondent's justification that his truck had a

flat tire, for this event, if indeed it happened, was forseeable according to the
trial court, and as such should have been reasonably guarded against. The
nature of private respondent's business requires that he should be ready at all
times to meet contingencies of this kind. One piece of testimony by
respondent's witness Marina Boncales has caught our attention - that the
delivery truck arrived a little late than usual because it came from a delivery of
materials in Langcaan, Dasmarias, Cavite. Significantly, this information
was withheld by Boncales from petitioner when the latter was negotiating with
her for the purchase of construction materials. Consequently, it is not
unreasonable to suppose that had she told petitioner of this fact and that the
delivery of the materials would consequently be delayed, petitioner would not
have bought the materials from respondent's hardware store but elsewhere
which could meet his time requirement. The deliberate suppression of this
[6]

information by itself manifests a certain degree of bad faith on the part of

respondent's storekeeper.
The appellate court appears to have belittled petitioner's submission that
under the prevailing circumstances time was of the essence in the delivery of
the materials to the grave site. However, we find petitioner's assertion to be
anchored on solid ground. The niche had to be constructed at the very least
on the twenty-second of December considering that it would take about two
(2) days to finish the job if the interment was to take place on the twenty-fourth
of the month. Respondent's delay in the delivery of the construction materials
wasted so much time that construction of the tomb could start only on the
twenty-third. It could not be ready for the scheduled burial of petitioner's
wife. This undoubtedly prolonged the wake, in addition to the fact that work at
the cemetery had to be put off on Christmas day.
This case is clearly one of non-performance of a reciprocal obligation. In
their contract of purchase and sale, petitioner had already complied fully with
what was required of him as purchaser, i.e., the payment of the purchase
price of P2,110.00. It was incumbent upon respondent to immediately fulfill
his obligation to deliver the goods otherwise delay would attach.
[7]

We therefore sustain the award of moral damages. It cannot be denied

that petitioner and his family suffered wounded feelings, mental anguish and
serious anxiety while keeping watch on Christmas day over the remains of
their loved one who could not be laid to rest on the date she herself had
chosen. There is no gainsaying the inexpressible pain and sorrow Ignacio
Barzaga and his family bore at that moment caused no less by the ineptitude,
cavalier behavior and bad faith of respondent and his employees in the
performance of an obligation voluntarily entered into.
We also affirm the grant of exemplary damages. The lackadaisical and
feckless attitude of the employees of respondent over which he exercised
supervisory authority indicates gross negligence in the fulfillment of his
business obligations. Respondent Alviar and his employees should have
exercised fairness and good judgment in dealing with petitioner who was then
grieving over the loss of his wife. Instead of commiserating with him,
respondent and his employees contributed to petitioner's anguish by causing
him to bear the agony resulting from his inability to fulfill his wife's dying wish.
We delete however the award of temperate damages. Under Art. 2224 of
the Civil Code, temperate damages are more than nominal but less than
compensatory, and may be recovered when the court finds that some
pecuniary loss has been suffered but the amount cannot, from the nature of
the case, be proved with certainty. In this case, the trial court found that

plaintiff suffered damages in the form of wages for the hired workers for 22
December 1990 and expenses incurred during the extra two (2) days of the
wake. The record however does not show that petitioner presented proof of
the actual amount of expenses he incurred which seems to be the reason the
trial court awarded to him temperate damages instead. This is an erroneous
application of the concept of temperate damages. While petitioner may have
indeed suffered pecuniary losses, these by their very nature could be
established with certainty by means of payment receipts. As such, the claim
falls unequivocally within the realm of actual or compensatory
damages. Petitioner's failure to prove actual expenditure consequently
conduces to a failure of his claim. For in determining actual damages, the
court cannot rely on mere assertions, speculations, conjectures or guesswork
but must depend on competent proof and on the best evidence obtainable
regarding the actual amount of loss.
[8]

We affirm the award of attorney's fees and litigation expenses. Award of

damages, attorney's fees and litigation costs is left to the sound discretion of
the court, and if such discretion be well exercised, as in this case, it will not be
disturbed on appeal.
[9]

WHEREFORE, the decision of the Court of Appeals is REVERSED and

SET ASIDE except insofar as it GRANTED on a motion for reconsideration
the refund by private respondent of the amount of P2,110.00 paid by petitioner
for the construction materials. Consequently, except for the award
of P5,000.00 as temperate damages which we delete, the decision of the
Regional Trial Court granting petitioner (a) P2,110.00 as refund for the value
of materials with interest computed at the legal rate per annum from the date
of the filing of the case; (b)P20,000.00 as moral damages; (c) P10,000.00 as
exemplary damages; (d) P5,000.00 as litigation expenses; and (4) P5,000.00
as attorney's fees, is AFFIRMED. No costs.
SO ORDERED.
Padilla, (Chairman), Vitug, Kapunan, and Hermosisima, Jr., JJ., concur.

FIRST DIVISION

[G.R. No. 140047. July 13, 2004]

PHILIPPINE
EXPORT
AND
FOREIGN
LOAN
GUARANTEE
CORPORATION, petitioner, vs. V.P. EUSEBIO CONSTRUCTION,
INC.; 3-PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO;
SOLEDAD C. EUSEBIO; EDUARDO E. SANTOS; ILUMINADA
SANTOS; AND FIRST INTEGRATED BONDING AND INSURANCE
COMPANY, INC., respondents.
DECISION
DAVIDE, JR., C.J.:

This case is an offshoot of a service contract entered into by a Filipino

construction firm with the Iraqi Government for the construction of the Institute
of Physical Therapy-Medical Center, Phase II, in Baghdad, Iraq, at a time
when the Iran-Iraq war was ongoing.
In a complaint filed with the Regional Trial Court of Makati City, docketed
as Civil Case No. 91-1906 and assigned to Branch 58, petitioner Philippine
Export
and
Foreign
Loan
Guarantee
Corporation (hereinafter
Philguarantee) sought reimbursement from the respondents of the sum of
money it paid to Al Ahli Bank of Kuwait pursuant to a guarantee it issued for
respondent V.P. Eusebio Construction, Inc. (VPECI).
[1]

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

On 8 November 1980, the State Organization of Buildings (SOB), Ministry
of Housing and Construction, Baghdad, Iraq, awarded the construction of the
Institute of Physical TherapyMedical Rehabilitation Center, Phase II, in
Baghdad, Iraq, (hereinafter the Project) to Ajyal Trading and Contracting
Company (hereinafter Ajyal), a firm duly licensed with the Kuwait Chamber of
Commerce for a total contract price of ID5,416,089/046 (or about
US$18,739,668).
[2]

On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in

behalf of respondent 3-Plex International, Inc. (hereinafter 3-Plex), a local
contractor engaged in construction business, entered into a joint venture
agreement with Ajyal wherein the former undertook the execution of the entire

Project, while the latter would be entitled to a commission of 4% of the

contract price. Later, or on 8 April 1981, respondent 3-Plex, not being
accredited by or registered with the Philippine Overseas Construction Board
(POCB), assigned and transferred all its rights and interests under the joint
venture agreement to VPECI, a construction and engineering firm duly
registered with the POCB. However, on 2 May 1981, 3-Plex and VPECI
entered into an agreement that the execution of the Project would be under
their joint management.
[3]

[4]

[5]

The SOB required the contractors to submit (1) a performance bond of

ID271,808/610 representing 5% of the total contract price and (2) an advance
payment bond of ID541,608/901 representing 10% of the advance payment to
be released upon signing of the contract. To comply with these requirements,
respondents 3-Plex and VPECI applied for the issuance of a guarantee with
petitioner Philguarantee, a government financial institution empowered to
issue guarantees for qualified Filipino contractors to secure the performance
of approved service contracts abroad.
[6]

[7]

Petitioner
Philguarantee
approved
respondents
application. Subsequently, letters of guarantee were issued by Philguarantee
to the Rafidain Bank of Baghdad covering 100% of the performance and
advance payment bonds, but they were not accepted by SOB. What SOB
required was a letter-guarantee from Rafidain Bank, the government bank
of Iraq. Rafidain Bank then issued a performance bond in favor of SOB on the
condition that another foreign bank, not Philguarantee, would issue a counterguarantee to cover its exposure. Al Ahli Bank ofKuwait was, therefore,
engaged to provide a counter-guarantee to Rafidain Bank, but it required a
similar counter-guarantee in its favor from the petitioner. Thus, three layers of
guarantees had to be arranged.
[8]

[9]

Upon the application of respondents 3-Plex and VPECI, petitioner

Philguarantee issued in favor of Al Ahli Bank of Kuwait Letter of Guarantee
No. 81-194-F (Performance Bond Guarantee) in the amount of
ID271,808/610 and Letter of Guarantee No. 81-195-F (Advance Payment
Guarantee) in the amount of ID541,608/901, both for a term of eighteen
months from 25 May 1981. These letters of guarantee were secured by (1) a
Deed of Undertaking executed by respondents VPECI, Spouses Vicente P.
Eusebio and Soledad C. Eusebio, 3-Plex, and Spouses Eduardo E. Santos
and Iluminada Santos; and (2) a surety bond issued by respondent First
Integrated Bonding and Insurance Company, Inc. (FIBICI). The Surety Bond
was later amended on 23 June 1981 to increase the amount of coverage
from P6.4 million to P6.967 million and to change the bank in whose favor the
[10]

[11]

[12]

[13]

petitioners guarantee was issued, from Rafidain Bank to Al Ahli Bank

of Kuwait.
[14]

On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed
the service contract for the construction of the Institute of Physical Therapy
Medical Rehabilitation Center, Phase II, in Baghdad, Iraq, wherein the joint
venture contractor undertook to complete the Project within a period of 547
days or 18 months. Under the Contract, the Joint Venture would supply
manpower and materials, and SOB would refund to the former 25% of the
project cost in Iraqi Dinar and the 75% in US dollars at the exchange rate of 1
Dinar to 3.37777 US Dollars.
[15]

[16]

The construction, which was supposed to start on 2 June 1981,

commenced only on the last week of August 1981. Because of this delay and
the slow progress of the construction work due to some setbacks and
difficulties, the Project was not completed on 15 November 1982 as
scheduled. But in October 1982, upon foreseeing the impossibility of meeting
the deadline and upon the request of Al Ahli Bank, the joint venture contractor
worked for the renewal or extension of the Performance Bond and Advance
Payment Guarantee. Petitioners Letters of Guarantee Nos. 81-194-F
(Performance Bond) and 81-195-F (Advance Payment Bond) with expiry date
of 25 November 1982 were then renewed or extended to 9 February
1983and 9 March 1983, respectively. The surety bond was also extended for
another period of one year, from 12 May 1982 to 12 May 1983. The
Performance Bond was further extended twelve times with validity of up to 8
December 1986, while the Advance Payment Guarantee was extended three
times more up to 24 May 1984 when the latter was cancelled after full refund
or reimbursement by the joint venture contractor. The surety bond was
likewise extended to 8 May 1987.
[17]

[18]

[19]

[20]

[21]

As of March 1986, the status of the Project was 51% accomplished,

meaning the structures were already finished. The remaining 47% consisted
in electro-mechanical works and the 2%, sanitary works, which both required
importation of equipment and materials.
[22]

On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the

petitioner demanding full payment of its performance bond counter-guarantee.
Upon receiving a copy of that telex message on 27 October 1986,
respondent VPECI requested Iraq Trade and Economic Development Minister
Mohammad Fadhi Hussein to recall the telex call on the performance
guarantee for being a drastic action in contravention of its mutual agreement
with the latter that (1) the imposition of penalty would be held in abeyance
until the completion of the project; and (2) the time extension would be open,

depending on the developments on the negotiations for a foreign loan to

finance the completion of the project. It also wrote SOB protesting the call for
lack of factual or legal basis, since the failure to complete the Project was due
to (1) the Iraqi governments lack of foreign exchange with which to pay its
(VPECIs) accomplishments and (2) SOBs noncompliance for the past
several years with the provision in the contract that 75% of the billings would
be paid in US dollars. Subsequently, or on 19 November 1986, respondent
VPECI advised the petitioner not to pay yet Al Ahli Bank because efforts were
being exerted for the amicable settlement of the Project.
[23]

[24]

[25]

On 14 April 1987, the petitioner received another telex message from Al

Ahli Bank stating that it had already paid to Rafidain Bank the sum of
US$876,564 under its letter of guarantee, and demanding reimbursement by
the petitioner of what it paid to the latter bank plus interest thereon and related
expenses.
[26]

Both petitioner Philguarantee and respondent VPECI sought the

assistance of some government agencies of the Philippines. On 10 August
1987, VPECI requested the Central Bank to hold in abeyance the payment by
the petitioner to allow the diplomatic machinery to take its course, for
otherwise, the Philippine government , through the Philguarantee and the
Central Bank, would become instruments of the Iraqi Government in
consummating a clear act of injustice and inequity committed against a
Filipino contractor.
[27]

On 27 August 1987, the Central Bank authorized the remittance for its
account of the amount of US$876,564 (equivalent to ID271, 808/610) to Al
Ahli Bank representing full payment of the performance counter-guarantee for
VPECIs project in Iraq.
[28]

On 6 November 1987, Philguarantee informed VPECI that it would remit

US$876,564 to Al Ahli Bank, and reiterated the joint and solidary obligation of
the respondents to reimburse the petitioner for the advances made on its
counter-guarantee.
[29]

The petitioner thus paid the amount of US$876,564 to Al Ahli Bank

of Kuwait on 21 January 1988. Then, on 6 May 1988, the petitioner paid to Al
Ahli Bank of Kuwait US$59,129.83 representing interest and penalty charges
demanded by the latter bank.
[30]

[31]

On 19 June 1991, the petitioner sent to the respondents separate letters

demanding full payment of the amount of P47,872,373.98 plus accruing
interest, penalty charges, and 10% attorneys fees pursuant to their joint and
solidary obligations under the deed of undertaking and surety bond. When
[32]

the respondents failed to pay, the petitioner filed on 9 July 1991 a civil case
for collection of a sum of money against the respondents before the RTC of
Makati City.
After due trial, the trial court ruled against Philguarantee and held that the
latter had no valid cause of action against the respondents. It opined that at
the time the call was made on the guarantee which was executed for a
specific period, the guarantee had already lapsed or expired. There was no
valid renewal or extension of the guarantee for failure of the petitioner to
secure respondents express consent thereto. The trial court also found that
the joint venture contractor incurred no delay in the execution of the
Project. Considering the Project owners violations of the contract which
rendered impossible the joint venture contractors performance of its
undertaking, no valid call on the guarantee could be made. Furthermore, the
trial court held that no valid notice was first made by the Project owner
SOB to the joint venture contractor before the call on the
guarantee. Accordingly, it dismissed the complaint, as well as the
counterclaims and cross-claim, and ordered the petitioner to pay attorneys
fees of P100,000 to respondents VPECI and Eusebio Spouses and P100,000
to 3-Plex and the Santos Spouses, plus costs.
[33]

In its 14 June 1999 Decision, the Court of Appeals affirmed the trial
courts decision, ratiocinating as follows:
[34]

First, appellant cannot deny the fact that it was fully aware of the status of project
implementation as well as the problems besetting the contractors, between 1982 to
1985, having sent some of its people toBaghdad during that period. The successive
renewals/extensions of the guarantees in fact, was prompted by delays, not solely
attributable to the contractors, and such extension understandably allowed by the SOB
(project owner) which had not anyway complied with its contractual commitment to
tender 75% of payment in US Dollars, and which still retained overdue amounts
collectible by VPECI.

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

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

Fourth, well-apprised of the above conditions obtaining at the Project site and
cognizant of the war situation at the time in Iraq, appellant, though earlier has made
representations with the SOB regarding a possible amicable termination of the Project
as suggested by VPECI, made a complete turn-around and insisted on acting in favor
of the unjustified call by the foreign banks.
[35]

The petitioner then came to this Court via Rule 45 of the Rules of Court
claiming that the Court of Appeals erred in affirming the trial courts ruling that
I

RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING

THEY EXECUTED IN FAVOR OF PETITIONER IN CONSIDERATION FOR
THE ISSUANCE OF ITS COUNTER-GUARANTEE AND THAT PETITIONER
CANNOT PASS ON TO RESPONDENTS WHAT IT HAD PAID UNDER THE
SAID COUNTER-GUARANTEE.
II

PETITIONER CANNOT CLAIM SUBROGATION.

III

IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO

RESPONDENTS LIABLE UNDER THEIR DEED OF UNDERTAKING.

HOLD

[36]

The main issue in this case is whether the petitioner is entitled to

reimbursement of what it paid under Letter of Guarantee No. 81-194-F it
issued to Al Ahli Bank of Kuwait based on the deed of undertaking and surety
bond from the respondents.
The petitioner asserts that since the guarantee it issued was absolute,
unconditional, and irrevocable the nature and extent of its liability are
analogous to those of suretyship. Its liability accrued upon the failure of the
respondents to finish the construction of the Institute of Physical Therapy
Buildings in Baghdad.

By guaranty a person, called the guarantor, binds himself to the creditor to

fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the contract is
called suretyship.
[37]

Strictly speaking, guaranty and surety are nearly related, and many of the
principles are common to both. In both contracts, there is a promise to answer
for the debt or default of another. However, in this jurisdiction, they may be
distinguished thus:
1. A surety is usually bound with his principal by the same instrument executed at the
same time and on the same consideration. On the other hand, the contract of
guaranty is the guarantor's own separate undertaking often supported by a
consideration separate from that supporting the contract of the principal; the original
contract of his principal is not his contract.
2. A surety assumes liability as a regular party to the undertaking; while the liability of a
guarantor is conditional depending on the failure of the primary debtor to pay the
obligation.
3. The obligation of a surety is primary, while that of a guarantor is secondary.
4. A surety is an original promissor and debtor from the beginning, while a guarantor is
charged on his own undertaking.
5. A surety is, ordinarily, held to know every default of his principal; whereas a
guarantor is not bound to take notice of the non-performance of his principal.
6. Usually, a surety will not be discharged either by the mere indulgence of the creditor
to the principal or by want of notice of the default of the principal, no matter how
much he may be injured thereby. A guarantor is often discharged by the mere
indulgence of the creditor to the principal, and is usually not liable unless notified of
the default of the principal. [38]

In determining petitioners status, it is necessary to read Letter of

Guarantee No. 81-194-F, which provides in part as follows:
In consideration of your issuing the above performance guarantee/counter-guarantee,
we hereby unconditionally and irrevocably guarantee, under our Ref. No. LG-81-194
F to pay you on your first written or telex demand Iraq Dinars Two Hundred Seventy
One Thousand Eight Hundred Eight and fils six hundred ten (ID271,808/610)
representing 100% of the performance bond required of V.P. EUSEBIO for the
construction of the Physical Therapy Institute, Phase II, Baghdad, Iraq, plus interest
and other incidental expenses related thereto.
In the event of default by V.P. EUSEBIO, we shall pay you 100% of the
obligation unpaid but in no case shall such amount exceed Iraq Dinars (ID)
271,808/610 plus interest and other incidental expenses. (Emphasis supplied)
[39]

Guided by the abovementioned distinctions between a surety and a

guaranty, as well as the factual milieu of this case, we find that the Court of
Appeals and the trial court were correct in ruling that the petitioner is a
guarantor and not a surety. That the guarantee issued by the petitioner is
unconditional and irrevocable does not make the petitioner a surety. As a
guaranty, it is still characterized by its subsidiary and conditional quality
because it does not take effect until the fulfillment of the condition, namely,
that the principal obligor should fail in his obligation at the time and in the form
he bound himself. In other words, an unconditional guarantee is still subject
to the condition that the principal debtor should default in his obligation first
before resort to the guarantor could be had. A conditional guaranty, as
opposed to an unconditional guaranty, is one which depends upon some
extraneous event, beyond the mere default of the principal, and generally
upon notice of the principals default and reasonable diligence in exhausting
proper remedies against the principal.
[40]

[41]

It appearing that Letter of Guarantee No. 81-194-F merely stated that in

the event of default by respondent VPECI the petitioner shall pay, the
obligation assumed by the petitioner was simply that of an unconditional
guaranty, not conditional guaranty. But as earlier ruled the fact that
petitioners guaranty is unconditional does not make it a surety. Besides,
surety is never presumed. A party should not be considered a surety where
the contract itself stipulates that he is acting only as a guarantor. It is only
when the guarantor binds himself solidarily with the principal debtor that the
contract becomes one of suretyship.
[42]

Having determined petitioners liability as guarantor, the next question we

have to grapple with is whether the respondent contractor has defaulted in its
obligations that would justify resort to the guaranty. This is a mixed question
of fact and law that is better addressed by the lower courts, since this Court is
not a trier of facts.
It is a fundamental and settled rule that the findings of fact of the trial court
and the Court of Appeals are binding or conclusive upon this Court unless
they are not supported by the evidence or unless strong and cogent reasons
dictate otherwise. The factual findings of the Court of Appeals are normally
not reviewable by us under Rule 45 of the Rules of Court except when they
are at variance with those of the trial court. The trial court and the Court of
Appeals were in unison that the respondent contractor cannot be considered
to have defaulted in its obligations because the cause of the delay was not
primarily attributable to it.
[43]

[44]

A corollary issue is what law should be applied in determining whether the

respondent contractor has defaulted in the performance of its obligations
under the service contract. The question of whether there is a breach of an
agreement, which includes default or mora, pertains to the essential or
intrinsic validity of a contract.
[45]

[46]

No conflicts rule on essential validity of contracts is expressly provided for

in our laws. The rule followed by most legal systems, however, is that the
intrinsic validity of a contract must be governed by the lex
contractus or proper law of the contract. This is the law voluntarily agreed
upon by the parties (the lex loci voluntatis) or the law intended by them either
expressly or implicitly (the lex loci intentionis). The law selected may be
implied from such factors as substantial connection with the transaction, or the
nationality or domicile of the parties. Philippine courts would do well to adopt
the first and most basic rule in most legal systems, namely, to allow the
parties to select the law applicable to their contract, subject to the limitation
that it is not against the law, morals, or public policy of the forum and that the
chosen law must bear a substantive relationship to the transaction.
[47]

[48]

It must be noted that the service contract between SOB and VPECI
contains no express choice of the law that would govern it. In the United
States and Europe, the two rules that now seem to have emerged as kings of
the hill are (1) the parties may choose the governing law; and (2) in the
absence of such a choice, the applicable law is that of the State that has the
most significant relationship to the transaction and the parties. Another
authority proposed that all matters relating to the time, place, and manner of
performance and valid excuses for non-performance are determined by the
law of the place of performance or lex loci solutionis, which is useful because
it is undoubtedly always connected to the contract in a significant way.
[49]

[50]

In this case, the laws of Iraq bear substantial connection to the

transaction, since one of the parties is the Iraqi Government and the place of
performance is in Iraq. Hence, the issue of whether respondent VPECI
defaulted in its obligations may be determined by the laws of Iraq. However,
since that foreign law was not properly pleaded or proved, the presumption of
identity or similarity, otherwise known as the processual presumption, comes
into play. Where foreign law is not pleaded or, even if pleaded, is not proved,
the presumption is that foreign law is the same as ours.
[51]

Our law, specifically Article 1169, last paragraph, of the Civil Code,
provides: In reciprocal obligations, neither party incurs in delay if the other
party does not comply or is not ready to comply in a proper manner with what
is incumbent upon him.

Default or mora on the part of the debtor is the delay in the fulfillment of
the prestation by reason of a cause imputable to the former. It is the nonfulfillment of an obligation with respect to time.
[52]

[53]

It is undisputed that only 51.7% of the total work had been

accomplished. The 48.3% unfinished portion consisted in the purchase and
installation of electro-mechanical equipment and materials, which were
available from foreign suppliers, thus requiring US Dollars for their
importation. The monthly billings and payments made by SOB reveal that
the agreement between the parties was a periodic payment by the Project
owner to the contractor depending on the percentage of accomplishment
within the period. The payments were, in turn, to be used by the contractor
to finance the subsequent phase of the work. However, as explained by
VPECI in its letter to the Department of Foreign Affairs (DFA), the payment by
SOB purely in Dinars adversely affected the completion of the project; thus:
[54]

[55]

[56]

4. Despite protests from the plaintiff, SOB continued paying the accomplishment
billings of the Contractor purely in Iraqi Dinars and which payment came only after
some delays.
5. SOB is fully aware of the following:

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

5.5 That the Iraqi Dinar is not a freely convertible currency such that the same cannot
be used to purchase equipment, materials, supplies, etc. outside of Iraq;
5.6 That most of the materials specified by SOB in the CONTRACT are not available
in Iraq and therefore have to be imported;

5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui
Dinars) out of Iraq and hence, imported materials, equipment, etc., cannot be
purchased or obtained using Iraqui Dinars as medium of acquisition.

8. Following the approved construction program of the CONTRACT, upon

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

10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist
the Iraqi government in completing the PROJECT, the Contractor without any
obligation on its part to do so
but with the knowledge and consent of SOB and the
Ministry of Housing & Construction of Iraq, offered to arrange on behalf of SOB, a
foreign currency loan, through the facilities of Circle International S.A., the
Contractors Sub-contractor and SACE MEDIO CREDITO which will act as the
guarantor for this foreign currency loan.
Arrangements were first made with Banco di Roma. Negotiation started in June 1985.
SOB is informed of the developments of this negotiation, attached is a copy of the
draft of the loan Agreement between SOB as the Borrower and Agent. The Several
Banks, as Lender, and counter-guaranteed by Istituto Centrale Per II Credito A Medio
Termine (Mediocredito) Sezione Speciale Per LAssicurazione Del Credito
AllExportazione (Sace). Negotiations went on and continued until it suddenly
collapsed due to the reported default by Iraq in the payment of its obligations with
Italian government, copy of the news clipping dated June 18, 1986 is hereto attached
as Annex D to form an integral part hereof;
15. On September 15, 1986, Contractor received information from Circle
International S.A. that because of the news report that Iraq defaulted in its obligations
with European banks, the approval by Banco di Roma of the loan to SOB shall be
deferred indefinitely, a copy of the letter of Circle International together with the news
clippings are hereto attached as Annexes F and F-1, respectively.
[57]

As found by both the Court of Appeals and the trial court, the delay or the
non-completion of the Project was caused by factors not imputable to the

respondent contractor. It was rather due mainly to the persistent violations by

SOB of the terms and conditions of the contract, particularly its failure to pay
75% of the accomplished work in US Dollars. Indeed, where one of the
parties to a contract does not perform in a proper manner the prestation which
he is bound to perform under the contract, he is not entitled to demand the
performance of the other party. A party does not incur in delay if the other
party fails to perform the obligation incumbent upon him.
The petitioner, however, maintains that the payments by SOB of the
monthly billings in purely Iraqi Dinars did not render impossible the
performance of the Project by VPECI. Such posture is quite contrary to its
previous representations. In his 26 March 1987 letter to the Office of the
Middle Eastern and African Affairs (OMEAA), DFA, Manila, petitioners
Executive Vice-President Jesus M. Taedo stated that while VPECI had taken
every possible measure to complete the Project, the war situation in Iraq,
particularly the lack of foreign exchange, was proving to be a great obstacle;
thus:
VPECI has taken every possible measure for the completion of the project but the war
situation in Iraq particularly the lack of foreign exchange is proving to be a great
obstacle. Our performance counterguarantee was called last 26 October 1986 when
the negotiations for a foreign currency loan with the Italian government through
Banco de Roma bogged down following news report that Iraq has defaulted in its
obligation with major European banks. Unless the situation in Iraq is improved as to
allay the banks apprehension, there is no assurance that the project will ever be
completed.
[58]

In order that the debtor may be in default it is necessary that the following
requisites be present: (1) that the obligation be demandable and already
liquidated; (2) that the debtor delays performance; and (3) that the creditor
requires the performance because it must appear that the tolerance or
benevolence of the creditor must have ended.
[59]

As stated earlier, SOB cannot yet demand complete performance from

VPECI because it has not yet itself performed its obligation in a proper
manner, particularly the payment of the 75% of the cost of the Project in US
Dollars. The VPECI cannot yet be said to have incurred in delay. Even
assuming that there was delay and that the delay was attributable to VPECI,
still the effects of that delay ceased upon the renunciation by the creditor,
SOB, which could be implied when the latter granted several extensions of
time to the former. Besides, no demand has yet been made by SOB against
the respondent contractor. Demand is generally necessary even if a period
has been fixed in the obligation. And default generally begins from the
[60]

moment the creditor demands judicially or extra-judicially the performance of

the obligation. Without such demand, the effects of default will not arise.
[61]

Moreover, the petitioner as a guarantor is entitled to the benefit of

excussion, that is, it cannot be compelled to pay the creditor SOB unless the
property of the debtor VPECI has been exhausted and all legal remedies
against the said debtor have been resorted to by the creditor. It could also
set up compensation as regards what the creditor SOB may owe the principal
debtor VPECI. In this case, however, the petitioner has clearly waived these
rights and remedies by making the payment of an obligation that was yet to be
shown to be rightfully due the creditor and demandable of the principal debtor.
[62]

[63]

As found by the Court of Appeals, the petitioner fully knew that the joint
venture contractor had collectibles from SOB which could be set off with the
amount covered by the performance guarantee. In February 1987, the
OMEAA transmitted to the petitioner a copy of a telex dated 10 February 1987
of the Philippine Ambassador in Baghdad, Iraq, informing it of the note
verbale sent by the Iraqi Ministry of Foreign Affairs stating that the past due
obligations of the joint venture contractor from the petitioner would be
deducted from the dues of the two contractors.
[64]

Also, in the project situationer attached to the letter to the OMEAA dated
26 March 1987, the petitioner raised as among the arguments to be presented
in support of the cancellation of the counter-guarantee the fact that the
amount of ID281,414/066 retained by SOB from the Project was more than
enough to cover the counter-guarantee of ID271,808/610; thus:
6.1 Present the following arguments in cancelling the counterguarantee:

The Iraqi Government does not have the foreign exchange to fulfill its
contractual obligations of paying 75% of progress billings in US
dollars.

It could also be argued that the amount of ID281,414/066 retained by

SOB from the proposed project is more than the amount of the
outstanding counterguarantee.
[65]

In a nutshell, since the petitioner was aware of the contractors

outstanding receivables from SOB, it should have set up compensation as
was proposed in its project situationer.

Moreover, the petitioner was very much aware of the predicament of the
respondents. In fact, in its 13 May 1987 letter to the OMEAA, DFA, Manila, it
stated:
VPECI also maintains that the delay in the completion of the project was mainly due
to SOBs violation of contract terms and as such, call on the guarantee has no basis.
While PHILGUARANTEE is prepared to honor its commitment under the guarantee,
PHILGUARANTEE does not want to be an instrument in any case of inequity
committed against a Filipino contractor. It is for this reason that we are constrained to
seek your assistance not only in ascertaining the veracity of Al Ahli Banks claim that
it has paid Rafidain Bank but possibly averting such an event. As any payment
effected by the banks will complicate matters, we cannot help underscore the urgency
of VPECIs bid for government intervention for the amicable termination of the
contract and release of the performance guarantee.
[66]

But surprisingly, though fully cognizant of SOBs violations of the service

contract and VPECIs outstanding receivables from SOB, as well as the
situation obtaining in the Project site compounded by the Iran-Iraq war, the
petitioner opted to pay the second layer guarantor not only the full amount of
the performance bond counter-guarantee but also interests and penalty
charges.
This brings us to the next question: May the petitioner as a guarantor
secure reimbursement from the respondents for what it has paid under Letter
of Guarantee No. 81-194-F?
As a rule, a guarantor who pays for a debtor should be indemnified by the
latter and would be legally subrogated to the rights which the creditor has
against the debtor. However, a person who makes payment without the
knowledge or against the will of the debtor has the right to recover only insofar
as the payment has been beneficial to the debtor. If the obligation was
subject to defenses on the part of the debtor, the same defenses which could
have been set up against the creditor can be set up against the paying
guarantor.
[67]

[68]

[69]

[70]

From the findings of the Court of Appeals and the trial court, it is clear that
the payment made by the petitioner guarantor did not in any way benefit the
principal debtor, given the project status and the conditions obtaining at the
Project site at that time. Moreover, the respondent contractor was found to
have valid defenses against SOB, which are fully supported by evidence and
which have been meritoriously set up against the paying guarantor, the
petitioner in this case. And even if the deed of undertaking and the surety

bond secured petitioners guaranty, the petitioner is precluded from enforcing

the same by reason of the petitioners undue payment on the
guaranty. Rights under the deed of undertaking and the surety bond do not
arise because these contracts depend on the validity of the enforcement of
the guaranty.
The petitioner guarantor should have waited for the natural course of
guaranty: the debtor VPECI should have, in the first place, defaulted in its
obligation and that the creditor SOB should have first made a demand from
the principal debtor. It is only when the debtor does not or cannot pay, in
whole or in part, that the guarantor should pay. When the petitioner
guarantor in this case paid against the will of the debtor VPECI, the debtor
VPECI may set up against it defenses available against the creditor SOB at
the time of payment. This is the hard lesson that the petitioner must learn.
[71]

As the government arm in pursuing its objective of providing the

necessary support and assistance in order to enable [Filipino exporters and
contractors to operate viably under the prevailing economic and business
conditions, the petitioner should have exercised prudence and caution
under the circumstances. As aptly put by the Court of Appeals, it would be the
height of inequity to allow the petitioner to pass on its losses to the Filipino
contractor VPECI which had sternly warned against paying the Al Ahli Bank
and constantly apprised it of the developments in the Project implementation.
[72]

WHEREFORE, the petition for review on certiorari is hereby DENIED for

lack of merit, and the decision of the Court of appeals in CA-G.R. CV No.
39302 is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Panganiban, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

FIRST DIVISION

[G.R. No. 141968. February 12, 2001]

THE INTERNATIONAL CORPORATE BANK (now UNION BANK OF

THE PHILIPPINES), petitioner, vs. SPS. FRANCIS S. GUECO and
MA. LUZ E. GUECO,respondents.
DECISION
KAPUNAN, J.:

The respondents Gueco Spouses obtained a loan from petitioner International Corporate
Bank (now Union Bank of the Philippines) to purchase a car a Nissan Sentra 1600 4DR, 1989
Model. In consideration thereof, the Spouses executed promissory notes which were payable in
monthly installments and chattel mortgage over the car to serve as security for the notes.
The Spouses defaulted in payment of installments. Consequently, the Bank filed on August
7, 1995 a civil action docketed as Civil Case No. 658-95 for Sum of Money with Prayer for a
Writ of Replevin[1] before the Metropolitan Trial Court of Pasay City, Branch 45.[2] On August
25, 1995, Dr. Francis Gueco was served summons and was fetched by the sheriff and
representative of the bank for a meeting in the bank premises. Desi Tomas, the Banks Assistant
Vice President demanded payment of the amount of P184,000.00 which represents the unpaid
balance for the car loan. After some negotiations and computation, the amount was lowered
to P154,000.00, However, as a result of the non-payment of the reduced amount on that date,
the car was detained inside the banks compound.
On August 28, 1995, Dr. Gueco went to the bank and talked with its Administrative Support,
Auto Loans/Credit Card Collection Head, Jefferson Rivera. The negotiations resulted in the
further reduction of the outstanding loan to P150,000.00.
On August 29, 1995, Dr. Gueco delivered a managers check in the amount of P150,000.00
but the car was not released because of his refusal to sign the Joint Motion to Dismiss. It is the
contention of the Gueco spouses and their counsel that Dr. Gueco need not sign the motion for
joint dismissal considering that they had not yet filed their Answer. Petitioner, however, insisted
that the joint motion to dismiss is standard operating procedure in their bank to effect a
compromise and to preclude future filing of claims, counterclaims or suits for damages.
After several demand letters and meetings with bank representatives, the respondents Gueco
spouses initiated a civil action for damages before the Metropolitan Trial Court of Quezon City,
Branch 33. The Metropolitan Trial Court dismissed the complaint for lack of merit.[3]
On appeal to the Regional Trial Court, Branch 227 of Quezon City, the decision of the
Metropolitan Trial Court was reversed. In its decision, the RTC held that there was a meeting of
the minds between the parties as to the reduction of the amount of indebtedness and the release

of the car but said agreement did not include the signing of the joint motion to dismiss as a
condition sine qua non for the effectivity of the compromise. The court further ordered the bank:
1. to return immediately the subject car to the appellants in good working condition; Appellee
may deposit the Managers check the proceeds of which have long been under the control
of the issuing bank in favor of the appellee since its issuance, whereas the funds have long
been paid by appellants to secure said Managers Check, over which appellants have no
control;
2. to pay the appellants the sum of P50,000.00 as moral damages; P25,000.00 as exemplary
damages, and P25,000.00 as attorneys fees, and
3. to pay the cost of suit.

In other respect, the decision of the Metropolitan Trial Court Branch 33 is hereby
AFFIRMED.[4]
The case was elevated to the Court of Appeals, which on February 17, 2000, issued the
assailed decision, the decretal portion of which reads:

WHEREFORE, premises considered, the petition for review on certiorari is hereby

DENIED and the Decision of the Regional Trial Court of Quezon City, Branch 227, in
Civil Case No. Q-97-31176, for lack of any reversible error, is AFFIRMED in
toto. Costs against petitioner.
SO ORDERED.[5]
The Court of Appeals essentially relied on the respect accorded to the finality of the findings
of facts by the lower court and on the latter's finding of the existence of fraud which
constitutes the basis for the award of damages.
The petitioner comes to this Court by way of petition for review on certiorari under Rule 45
of the Rules of Court, raising the following assigned errors:
I

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO

AGREEMENT WITH RESPECT TO THE EXECUTION OF THE JOINT MOTION
TO DISMISS AS A CONDITION FOR THE COMPROMISE AGREEMENT.
II

THE COURT OF APPEALS ERRED IN GRANTING MORAL AND EXEMPLARY

DAMAGES AND ATTORNEYS FEES IN FAVOR OF THE RESPONDENTS.
III

THE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER

RETURN THE SUBJECT CAR TO THE RESPONDENTS, WITHOUT MAKING
ANY
PROVISION
FOR
THE
ISSUANCE
OF
THE
NEW
MANAGERS/CASHIERS CHECK BY THE RESPONDENTS IN FAVOR OF
THE PETITIONER IN LIEU OF THE ORIGINAL CASHIERS CHECK THAT
ALREADY BECAME STALE.[6]
As to the first issue, we find for the respondents. The issue as to what constitutes the terms
of the oral compromise or any subsequent novation is a question of fact that was resolved by the
Regional Trial Court and the Court of Appeals in favor of respondents. It is well settled that the
findings of fact of the lower court, especially when affirmed by the Court of Appeals, are binding
upon this Court.[7] While there are exceptions to this rule,[8] the present case does not fall under
any one of them, the petitioners claim to the contrary, notwithstanding.
Being an affirmative allegation, petitioner has the burden of evidence to prove his claim that
the oral compromise entered into by the parties on August 28, 1995 included the stipulation that
the parties would jointly file a motion to dismiss. This petitioner failed to do. Notably, even the
Metropolitan Trial Court, while ruling in favor of the petitioner and thereby dismissing the
complaint, did not make a factual finding that the compromise agreement included the condition
of the signing of a joint motion to dismiss.
The Court of Appeals made the factual findings in this wise:

In support of its claim, petitioner presented the testimony of Mr. Jefferson Rivera who
related that respondent Dr. Gueco was aware that the signing of the draft of the Joint
Motion to Dismiss was one of the conditions set by the bank for the acceptance of the
reduced amount of indebtedness and the release of the car. (TSN, October 23, 1996,
pp. 17-21, Rollo, pp. 18, 5). Respondents, however, maintained that no such
condition was ever discussed during their meeting of August 28, 1995 (Rollo, p. 32).
The trial court, whose factual findings are entitled to respect since it has the
opportunity to directly observe the witnesses and to determine by their demeanor on
the stand the probative value of their testimonies (People vs. Yadao, et al. 216 SCRA
1, 7 [1992]), failed to make a categorical finding on the issue. In dismissing the claim
of damages of the respondents, it merely observed that respondents are not entitled to
indemnity since it was their unjustified reluctance to sign of the Joint Motion to
Dismiss that delayed the release of the car. The trial court opined, thus:
As regards the third issue, plaintiffs claim for damages is unavailing. First, the
plaintiffs could have avoided the renting of another car and could have avoided this
litigation had he signed the Joint Motion to Dismiss. While it is true that herein
defendant can unilaterally dismiss the case for collection of sum of money with
replevin, it is equally true that there is nothing wrong for the plaintiff to affix his
signature in the Joint Motion to Dismiss, for after all, the dismissal of the case against

him is for his own good and benefit. In fact, the signing of the Joint Motion to
Dismiss gives the plaintiff three (3) advantages. First, he will recover his
car. Second, he will pay his obligation to the bank on its reduced amount of
P150,000.00 instead of its original claim of P184,985.09. And third, the case against
him will be dismissed. Plaintiffs, likewise, are not entitled to the award of moral
damages and exemplary damages as there is no showing that the defendant bank acted
fraudulently or in bad faith. (Rollo, p. 15)
The Court has noted, however, that the trial court, in its findings of facts, clearly
indicated that the agreement of the parties on August 28, 1995 was merely for the
lowering of the price, hence xxx On August 28, 1995, bank representative Jefferson Rivera and plaintiff
entered into an oral compromise agreement, whereby the original claim of the
bank of P184,985.09 was reduced to P150,000.00 and that upon payment of
which, plaintiff was informed that the subject motor vehicle would be
released to him. (Rollo, p. 12)
The lower court, on the other hand, expressly made a finding that petitioner failed to
include the aforesaid signing of the Joint Motion to Dismiss as part of the
agreement. In dismissing petitioners claim, the lower court declared, thus:
If it is true, as the appellees allege, that the signing of the joint motion was a
condition sine qua non for the reduction of the appellants obligation, it is only
reasonable and logical to assume that the joint motion should have been shown to Dr.
Gueco in the August 28, 1995 meeting. Why Dr. Gueco was not given a copy of the
joint motion that day of August 28, 1995, for his family or legal counsel to see to be
brought signed, together with the P150,000.00 in managers check form to be
submitted on the following day on August 29, 1995? (sic) [I]s a question whereby
the answer up to now eludes this Courts comprehension. The appellees would like
this Court to believe that Dr. Gueco was informed by Mr. Rivera of the bank
requirement of signing the joint motion on August 28, 1995 but he did not bother to
show a copy thereof to his family or legal counsel that day August 28, 1995. This part
of the theory of appellee is too complicated for any simple oral agreement. The idea
of a Joint Motion to Dismiss being signed as a condition to the pushing through a deal
surfaced only on August 29, 1995.
This Court is not convinced by the appellees posturing. Such claim rests on too
slender a frame, being inconsistent with human experience. Considering the effect of
the signing of the Joint Motion to Dismiss on the appellants substantive right, it is
more in accord with human experience to expect Dr. Gueco, upon being shown the
Joint Motion to Dismiss, to refuse to pay the Managers Check and for the bank to

refuse to accept the manager's check. The only logical explanation for this inaction is
that Dr. Gueco was not shown the Joint Motion to Dismiss in the meeting of August
28, 1995, bolstering his claim that its signing was never put into consideration in
reaching a compromise. xxx.[9]
We see no reason to reverse.
Anent the issue of award of damages, we find the claim of petitioner meritorious. In finding
the petitioner liable for damages, both the Regional Trial Court and the Court of Appeals ruled
that there was fraud on the part of the petitioner. The CA thus declared:
The lower court's finding of fraud which became the basis of the award of damages was
likewise sufficiently proven. Fraud under Article 1170 of the Civil Code of the Philippines, as
amended is the deliberate and intentional evasion of the normal fulfillment of obligation When
petitioner refused to release the car despite respondent's tender of payment in the form of a
manager's check, the former intentionally evaded its obligation and thereby became liable for
moral and exemplary damages, as well as attorneys fees.[10]
We disagree.
Fraud has been defined as the deliberate intention to cause damage or prejudice. It is the
voluntary execution of a wrongful act, or a willful omission, knowing and intending the effects
which naturally and necessarily arise from such act or omission; the fraud referred to in Article
1170 of the Civil Code is the deliberate and intentional evasion of the normal fulfillment of
obligation.[11] We fail to see how the act of the petitioner bank in requiring the respondent to sign
the joint motion to dismiss could constitute as fraud. True, petitioner may have been remiss in
informing Dr. Gueco that the signing of a joint motion to dismiss is a standard operating
procedure of petitioner bank. However, this can not in anyway have prejudiced Dr. Gueco. The
motion to dismiss was in fact also for the benefit of Dr. Gueco, as the case filed by petitioner
against it before the lower court would be dismissed with prejudice. The whole point of the
parties entering into the compromise agreement was in order that Dr. Gueco would pay his
outstanding account and in return petitioner would return the car and drop the case for money
and replevin before the Metropolitan Trial Court. The joint motion to dismiss was but a natural
consequence of the compromise agreement and simply stated that Dr. Gueco had fully settled his
obligation, hence, the dismissal of the case. Petitioner's act of requiring Dr. Gueco to sign the
joint motion to dismiss can not be said to be a deliberate attempt on the part of petitioner to
renege on the compromise agreement of the parties. It should, likewise, be noted that in cases of
breach of contract, moral damages may only be awarded when the breach was attended by fraud
or bad faith.[12] The law presumes good faith. Dr. Gueco failed to present an iota of evidence to
overcome this presumption. In fact, the act of petitioner bank in lowering the debt of Dr. Gueco
from P184,000.00 to P150,000.00 is indicative of its good faith and sincere desire to settle the
case. If respondent did suffer any damage, as a result of the withholding of his car by petitioner,
he has only himself to blame. Necessarily, the claim for exemplary damages must fail. In no
way, may the conduct of petitioner be characterized as wanton, fraudulent, reckless,
oppressive or malevolent.[13]
We, likewise, find for the petitioner with respect to the third assigned error. In the meeting
of August 29, 1995, respondent Dr. Gueco delivered a managers check representing the reduced

amount ofP150,000.00. Said check was given to Mr. Rivera, a representative of respondent
bank. However, since Dr. Gueco refused to sign the joint motion to dismiss, he was made to
execute a statement to the effect that he was withholding the payment of the
check.[14]Subsequently, in a letter addressed to Ms. Desi Tomas, vice president of the bank, dated
September 4, 1995, Dr. Gueco instructed the bank to disregard the hold order letter and
demanded the immediate release of his car,[15] to which the former replied that the condition of
signing the joint motion to dismiss must be satisfied and that they had kept the check which
could be claimed by Dr. Gueco anytime.[16] While there is controversy as to whether the
document evidencing the order to hold payment of the check was formally offered as evidence
by petitioners,[17] it appears from the pleadings that said check has not been encashed.
The decision of the Regional Trial Court, which was affirmed in toto by the Court of
Appeals, orders the petitioner:

1. to return immediately the subject car to the appellants in good working

condition. Appellee may deposit the Managers Check the proceeds of which have
long been under the control of the issuing bank in favor of the appellee since its
issuance, whereas the funds have long been paid by appellants to secure said
Managers Check over which appellants have no control.[18]
Respondents would make us hold that petitioner should return the car or its value and that
the latter, because of its own negligence, should suffer the loss occasioned by the fact that the
check had become stale.[19] It is their position that delivery of the managers check produced the
effect of payment[20] and, thus, petitioner was negligent in opting not to deposit or use said
check. Rudimentary sense of justice and fair play would not countenance respondents position.
A stale check is one which has not been presented for payment within a reasonable time
after its issue. It is valueless and, therefore, should not be paid. Under the negotiable
instruments law, an instrument not payable on demand must be presented for payment on the
day it falls due. When the instrument is payable on demand, presentment must be made within a
reasonable time after its issue. In the case of a bill of exchange, presentment is sufficient if made
within a reasonable time after the last negotiation thereof.[21]
A check must be presented for payment within a reasonable time after its issue,[22] and in
determining what is a reasonable time, regard is to be had to the nature of the instrument, the
usage of trade or business with respect to such instruments, and the facts of the particular
case.[23] The test is whether the payee employed such diligence as a prudent man exercises in his
own affairs.[24] This is because the nature and theory behind the use of a check points to its
immediate use and payability. In a case, a check payable on demand which was long overdue by
about two and a half (2-1/2) years was considered a stale check.[25] Failure of a payee to encash a
check for more than ten (10) years undoubtedly resulted in the check becoming stale.[26] Thus,
even a delay of one (1) week[27] or two (2) days,[28] under the specific circumstances of the cited
cases constituted unreasonable time as a matter of law.
In the case at bar, however, the check involved is not an ordinary bill of exchange but a
managers check. A managers check is one drawn by the banks manager upon the bank
itself. It is similar to a cashiers check both as to effect and use. A cashiers check is a check of
the banks cashier on his own or another check. In effect, it is a bill of exchange drawn by the

cashier of a bank upon the bank itself, and accepted in advance by the act of its issuance.[29] It is
really the banks own check and may be treated as a promissory note with the bank as a
maker.[30] The check becomes the primary obligation of the bank which issues it and constitutes
its written promise to pay upon demand. The mere issuance of it is considered an acceptance
thereof. If treated as promissory note, the drawer would be the maker and in which case the
holder need not prove presentment for payment or present the bill to the drawee for
acceptance.[31]
Even assuming that presentment is needed, failure to present for payment within a
reasonable time will result to the discharge of the drawer only to the extent of the loss caused by
the delay.[32] Failure to present on time, thus, does not totally wipe out all liability. In fact, the
legal situation amounts to an acknowledgment of liability in the sum stated in the check. In this
case, the Gueco spouses have not alleged, much less shown that they or the bank which issued
the managers check has suffered damage or loss caused by the delay or nonpresentment. Definitely, the original obligation to pay certainly has not been erased.
It has been held that, if the check had become stale, it becomes imperative that the
circumstances that caused its non-presentment be determined.[33] In the case at bar, there is no
doubt that the petitioner bank held on the check and refused to encash the same because of the
controversy surrounding the signing of the joint motion to dismiss. We see no bad faith or
negligence in this position taken by the Bank.
WHEREFORE, premises considered, the petition for review is given due course. The
decision of the Court of Appeals affirming the decision of the Regional Trial Court is
SET ASIDE. Respondents are further ordered to pay the original obligation amounting to
P150,000.00 to the petitioner upon surrender or cancellation of the managers check in the
latters possession, afterwhich, petitioner is to return the subject motor vehicle in good working
condition.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago, JJ., concur.

FIRST DIVISION

[G.R. No. 138569. September 11, 2003]

THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner,

vs. COURT OF APPEALS and L.C. DIAZ and COMPANY,
CPAs, respondents.
DECISION
CARPIO, J.:

The Case
Before us is a petition for review of the Decision of the Court of Appeals
dated 27 October 1998 and its Resolution dated 11 May 1999. The assailed
decision reversed the Decision of the Regional Trial Court of Manila, Branch
8, absolving petitioner Consolidated Bank and Trust Corporation, now known
as Solidbank Corporation (Solidbank), of any liability. The questioned
resolution of the appellate court denied the motion for reconsideration of
Solidbank but modified the decision by deleting the award of exemplary
damages, attorneys fees, expenses of litigation and cost of suit.
[1]

[2]

The Facts
Solidbank is a domestic banking corporation organized and existing under
Philippine laws. Private respondent L.C. Diaz and Company, CPAs (L.C.
Diaz), is a professional partnership engaged in the practice of accounting.
Sometime in March 1976, L.C. Diaz opened a savings account with
Solidbank, designated as Savings Account No. S/A 200-16872-6.
On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya
(Macaraya), filled up a savings (cash) deposit slip for P990 and a savings
(checks) deposit slip for P50. Macaraya instructed the messenger of L.C.
Diaz, Ismael Calapre (Calapre), to deposit the money with Solidbank.
Macaraya also gave Calapre the Solidbank passbook.

Calapre went to Solidbank and presented to Teller No. 6 the two deposit
slips and the passbook. The teller acknowledged receipt of the deposit by
returning to Calapre the duplicate copies of the two deposit slips. Teller No. 6
stamped the deposit slips with the words DUPLICATE and SAVING
TELLER 6 SOLIDBANK HEAD OFFICE. Since the transaction took time and
Calapre had to make another deposit for L.C. Diaz with Allied Bank, he left the
passbook with Solidbank. Calapre then went to Allied Bank. When Calapre
returned to Solidbank to retrieve the passbook, Teller No. 6 informed him that
somebody got the passbook. Calapre went back to L.C. Diaz and reported
the incident to Macaraya.
[3]

Macaraya immediately prepared a deposit slip in duplicate copies with a

check of P200,000. Macaraya, together with Calapre, went to Solidbank and
presented to Teller No. 6 the deposit slip and check. The teller stamped the
words DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD OFFICE
on the duplicate copy of the deposit slip. When Macaraya asked for the
passbook, Teller No. 6 told Macaraya that someone got the passbook but she
could not remember to whom she gave the passbook. When Macaraya asked
Teller No. 6 if Calapre got the passbook, Teller No. 6 answered that someone
shorter than Calapre got the passbook. Calapre was then standing beside
Macaraya.
Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for
the deposit of a check for P90,000 drawn on Philippine Banking Corporation
(PBC). This PBC check of L.C. Diaz was a check that it had long
closed. PBC subsequently dishonored the check because of insufficient
funds and because the signature in the check differed from PBCs specimen
signature. Failing to get back the passbook, Macaraya went back to her office
and reported the matter to the Personnel Manager of L.C. Diaz, Emmanuel
Alvarez.
[4]

The following day, 15 August 1991, L.C. Diaz through its Chief Executive
Officer, Luis C. Diaz (Diaz), called up Solidbank to stop any transaction
using the same passbook until L.C. Diaz could open a new account. On the
same day, Diaz formally wrote Solidbank to make the same request. It was
also on the same day that L.C. Diaz learned of the unauthorized withdrawal
the day before, 14 August 1991, of P300,000 from its savings account. The
withdrawal slip for the P300,000 bore the signatures of the authorized
signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The signatories,
however, denied signing the withdrawal slip. A certain Noel Tamayo received
the P300,000.
[5]

In an Information dated 5 September 1991, L.C. Diaz charged its

messenger, Emerano Ilagan (Ilagan) and one Roscon Verdazola with Estafa
through Falsification of Commercial Document. The Regional Trial Court of
Manila dismissed the criminal case after the City Prosecutor filed a Motion to
Dismiss on 4 August 1992.
[6]

On 24 August 1992, L.C. Diaz through its counsel demanded from

Solidbank the return of its money. Solidbank refused.
On 25 August 1992, L.C. Diaz filed a Complaint for Recovery of a Sum of
Money against Solidbank with the Regional Trial Court of Manila, Branch
8. After trial, the trial court rendered on 28 December 1994 a decision
absolving Solidbank and dismissing the complaint.
[7]

L.C. Diaz then appealed to the Court of Appeals. On 27 October 1998,

the Court of Appeals issued its Decision reversing the decision of the trial
court.
[8]

On 11 May 1999, the Court of Appeals issued its Resolution denying the
motion for reconsideration of Solidbank. The appellate court, however,
modified its decision by deleting the award of exemplary damages and
attorneys fees.
The Ruling of the Trial Court
In absolving Solidbank, the trial court applied the rules on savings account
written on the passbook. The rules state that possession of this book shall
raise the presumption of ownership and any payment or payments made by
the bank upon the production of the said book and entry therein of the
withdrawal shall have the same effect as if made to the depositor personally.
[9]

At the time of the withdrawal, a certain Noel Tamayo was not only in
possession of the passbook, he also presented a withdrawal slip with the
signatures of the authorized signatories of L.C. Diaz. The specimen
signatures of these persons were in the signature cards. The teller stamped
the withdrawal slip with the words Saving Teller No. 5. The teller then
passed on the withdrawal slip to Genere Manuel (Manuel) for
authentication. Manuel verified the signatures on the withdrawal slip. The
withdrawal slip was then given to another officer who compared the signatures
on the withdrawal slip with the specimen on the signature cards. The trial
court concluded that Solidbank acted with care and observed the rules on
savings account when it allowed the withdrawal of P300,000 from the savings
account of L.C. Diaz.

The trial court pointed out that the burden of proof now shifted to L.C. Diaz
to prove that the signatures on the withdrawal slip were forged. The trial court
admonished L.C. Diaz for not offering in evidence the National Bureau of
Investigation (NBI) report on the authenticity of the signatures on the
withdrawal slip for P300,000. The trial court believed that L.C. Diaz did not
offer this evidence because it is derogatory to its action.
Another provision of the rules on savings account states that the depositor
must keep the passbook under lock and key. When another person
presents the passbook for withdrawal prior to Solidbanks receipt of the notice
of loss of the passbook, that person is considered as the owner of the
passbook. The trial court ruled that the passbook presented during the
questioned transaction was now out of the lock and key and presumptively
ready for a business transaction.
[10]

[11]

Solidbank did not have any participation in the custody and care of the
passbook. The trial court believed that Solidbanks act of allowing the
withdrawal of P300,000 was not the direct and proximate cause of the loss.
The trial court held that L.C. Diazs negligence caused the unauthorized
withdrawal. Three facts establish L.C. Diazs negligence: (1) the possession
of the passbook by a person other than the depositor L.C. Diaz; (2) the
presentation of a signed withdrawal receipt by an unauthorized person; and
(3) the possession by an unauthorized person of a PBC check long closed
by L.C. Diaz, which check was deposited on the day of the fraudulent
withdrawal.
The trial court debunked L.C. Diazs contention that Solidbank did not
follow the precautionary procedures observed by the two parties whenever
L.C. Diaz withdrew significant amounts from its account. L.C. Diaz claimed
that a letter must accompany withdrawals of more than P20,000. The letter
must request Solidbank to allow the withdrawal and convert the amount to a
managers check. The bearer must also have a letter authorizing him to
withdraw the same amount. Another person driving a car must accompany
the bearer so that he would not walk from Solidbank to the office in making
the withdrawal. The trial court pointed out that L.C. Diaz disregarded these
precautions in its past withdrawal. On 16 July 1991, L.C. Diaz
withdrewP82,554 without any separate letter of authorization or any
communication with Solidbank that the money be converted into a managers
check.
The trial court further justified the dismissal of the complaint by holding
that the case was a last ditch effort of L.C. Diaz to recover P300,000 after the
dismissal of the criminal case against Ilagan.

The dispositive portion of the decision of the trial court reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the
complaint.
The Court further renders judgment in favor of defendant bank pursuant to its
counterclaim the amount of Thirty Thousand Pesos (P30,000.00) as attorneys fees.
With costs against plaintiff.
SO ORDERED.

[12]

The Ruling of the Court of Appeals

The Court of Appeals ruled that Solidbanks negligence was the proximate
cause of the unauthorized withdrawal of P300,000 from the savings account
of L.C. Diaz. The appellate court reached this conclusion after applying the
provision of the Civil Code on quasi-delict, to wit:
Article 2176. Whoever by act or omission causes damage to another, there being fault
or negligence, is obliged to pay for the damage done. Such fault or negligence, if
there is no pre-existing contractual relation between the parties, is called a quasi-delict
and is governed by the provisions of this chapter.
The appellate court held that the three elements of a quasi-delict are present
in this case, namely: (a) damages suffered by the plaintiff; (b) fault or
negligence of the defendant, or some other person for whose acts he must
respond; and (c) the connection of cause and effect between the fault or
negligence of the defendant and the damage incurred by the plaintiff.
The Court of Appeals pointed out that the teller of Solidbank who received
the withdrawal slip for P300,000 allowed the withdrawal without making the
necessary inquiry. The appellate court stated that the teller, who was not
presented by Solidbank during trial, should have called up the depositor
because the money to be withdrawn was a significant amount. Had the teller
called up L.C. Diaz, Solidbank would have known that the withdrawal was
unauthorized. The teller did not even verify the identity of the impostor who
made the withdrawal. Thus, the appellate court found Solidbank liable for its
negligence in the selection and supervision of its employees.
The appellate court ruled that while L.C. Diaz was also negligent in
entrusting its deposits to its messenger and its messenger in leaving the

passbook with the teller, Solidbank could not escape liability because of the
doctrine of last clear chance. Solidbank could have averted the injury
suffered by L.C. Diaz had it called up L.C. Diaz to verify the withdrawal.
The appellate court ruled that the degree of diligence required from
Solidbank is more than that of a good father of a family. The business and
functions of banks are affected with public interest. Banks are obligated to
treat the accounts of their depositors with meticulous care, always having in
mind the fiduciary nature of their relationship with their clients. The Court of
Appeals found Solidbank remiss in its duty, violating its fiduciary relationship
with L.C. Diaz.
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, premises considered, the decision appealed from is hereby
REVERSED and a new one entered.
1.

Ordering defendant-appellee Consolidated Bank and Trust Corporation

to pay plaintiff-appellant the sum of Three Hundred Thousand Pesos
(P300,000.00), with interest thereon at the rate of 12% per annum from
the date of filing of the complaint until paid, the sum of P20,000.00 as
exemplary damages, and P20,000.00 as attorneys fees and expenses of
litigation as well as the cost of suit; and

2.

Ordering the dismissal of defendant-appellees counterclaim in the

amount of P30,000.00 as attorneys fees.

SO ORDERED.

[13]

Acting on the motion for reconsideration of Solidbank, the appellate court

affirmed its decision but modified the award of damages. The appellate court
deleted the award of exemplary damages and attorneys fees. Invoking Article
2231 of the Civil Code, the appellate court ruled that exemplary damages
could be granted if the defendant acted with gross negligence. Since
Solidbank was guilty of simple negligence only, the award of exemplary
damages was not justified. Consequently, the award of attorneys fees was
also disallowed pursuant to Article 2208 of the Civil Code. The expenses of
litigation and cost of suit were also not imposed on Solidbank.
[14]

The dispositive portion of the Resolution reads as follows:

WHEREFORE, foregoing considered, our decision dated October 27, 1998 is

affirmed with modification by deleting the award of exemplary damages and
attorneys fees, expenses of litigation and cost of suit.
SO ORDERED.

[15]

Hence, this petition.

The Issues
Solidbank seeks the review of the decision and resolution of the Court of
Appeals on these grounds:
I.

THE COURT OF APPEALS ERRED IN HOLDING THAT

PETITIONER BANK SHOULD SUFFER THE LOSS BECAUSE ITS
TELLER
SHOULD
HAVE
FIRST
CALLED
PRIVATE
RESPONDENT BY TELEPHONE BEFORE IT ALLOWED THE
WITHDRAWAL OF P300,000.00 TO RESPONDENTS MESSENGER
EMERANO ILAGAN, SINCE THERE IS NO AGREEMENT
BETWEEN THE PARTIES IN THE OPERATION OF THE SAVINGS
ACCOUNT, NOR IS THERE ANY BANKING LAW, WHICH
MANDATES THAT A BANK TELLER SHOULD FIRST CALL UP
THE DEPOSITOR BEFORE ALLOWING A WITHDRAWAL OF A
BIG AMOUNT IN A SAVINGS ACCOUNT.

II.

THE COURT OF APPEALS ERRED IN APPLYING THE

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

III.

THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE

INSTANT CASE IS A LAST DITCH EFFORT OF PRIVATE
RESPONDENT TO RECOVER ITS P300,000.00 AFTER FAILING IN

ITS EFFORTS TO RECOVER THE SAME FROM ITS EMPLOYEE

EMERANO ILAGAN.
IV.

THE COURT OF APPEALS ERRED IN NOT MITIGATING THE

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

The Ruling of the Court

The petition is partly meritorious.
Solidbanks Fiduciary Duty under the Law
The rulings of the trial court and the Court of Appeals conflict on the
application of the law. The trial court pinned the liability on L.C. Diaz based
on the provisions of the rules on savings account, a recognition of the
contractual relationship between Solidbank and L.C. Diaz, the latter being a
depositor of the former. On the other hand, the Court of Appeals applied the
law on quasi-delict to determine who between the two parties was ultimately
negligent. The law on quasi-delict or culpa aquiliana is generally applicable
when there is no pre-existing contractual relationship between the parties.
We hold that Solidbank is liable for breach of contract due to negligence,
or culpa contractual.
The contract between the bank and its depositor is governed by the
provisions of the Civil Code on simple loan. Article 1980 of the Civil Code
expressly provides that x x x savings x x x deposits of money in banks and
similar institutions shall be governed by the provisions concerning simple
loan. There is a debtor-creditor relationship between the bank and its
depositor. The bank is the debtor and the depositor is the creditor. The
depositor lends the bank money and the bank agrees to pay the depositor on
demand. The savings deposit agreement between the bank and the depositor
is the contract that determines the rights and obligations of the parties.
[17]

The law imposes on banks high standards in view of the fiduciary nature of
banking. Section 2 of Republic Act No. 8791 (RA 8791), which took effect
on 13 June 2000, declares that the State recognizes the fiduciary nature of
[18]

banking that requires high standards of integrity and performance. This new
provision in the general banking law, introduced in 2000, is a statutory
affirmation of Supreme Court decisions, starting with the 1990 case of Simex
International v. Court of Appeals, holding that the bank is under obligation
to treat the accounts of its depositors with meticulous care, always having in
mind the fiduciary nature of their relationship.
[19]

[20]

[21]

This fiduciary relationship means that the banks obligation to observe

high standards of integrity and performance is deemed written into every
deposit agreement between a bank and its depositor. The fiduciary nature of
banking requires banks to assume a degree of diligence higher than that of a
good father of a family. Article 1172 of the Civil Code states that the degree
of diligence required of an obligor is that prescribed by law or contract, and
absent such stipulation then the diligence of a good father of a
family. Section 2 of RA 8791 prescribes the statutory diligence required from
banks that banks must observe high standards of integrity and
performance in servicing their depositors. Although RA 8791 took effect
almost nine years after the unauthorized withdrawal of the P300,000 from L.C.
Diazs savings account, jurisprudence at the time of the withdrawal already
imposed on banks the same high standard of diligence required under RA No.
8791.
[22]

[23]

However, the fiduciary nature of a bank-depositor relationship does not

convert the contract between the bank and its depositors from a simple loan to
a trust agreement, whether express or implied. Failure by the bank to pay the
depositor is failure to pay a simple loan, and not a breach of trust. The law
simply imposes on the bank a higher standard of integrity and performance
in complying with its obligations under the contract of simple loan, beyond
those required of non-bank debtors under a similar contract of simple loan.
[24]

The fiduciary nature of banking does not convert a simple loan into a trust
agreement because banks do not accept deposits to enrich depositors but to
earn money for themselves. The law allows banks to offer the lowest possible
interest rate to depositors while charging the highest possible interest rate on
their own borrowers. The interest spread or differential belongs to the bank
and not to the depositors who are not cestui que trust of banks. If depositors
are cestui que trust of banks, then the interest spread or income belongs to
the depositors, a situation that Congress certainly did not intend in enacting
Section 2 of RA 8791.
Solidbanks Breach of its Contractual Obligation

Article 1172 of the Civil Code provides that responsibility arising from
negligence in the performance of every kind of obligation is demandable. For
breach of the savings deposit agreement due to negligence, or culpa
contractual, the bank is liable to its depositor.
Calapre left the passbook with Solidbank because the transaction took
time and he had to go to Allied Bank for another transaction. The passbook
was still in the hands of the employees of Solidbank for the processing of the
deposit when Calapre left Solidbank. Solidbanks rules on savings account
require that the deposit book should be carefully guarded by the depositor
and kept under lock and key, if possible. When the passbook is in the
possession of Solidbanks tellers during withdrawals, the law imposes on
Solidbank and its tellers an even higher degree of diligence in safeguarding
the passbook.
Likewise, Solidbanks tellers must exercise a high degree of diligence in
insuring that they return the passbook only to the depositor or his authorized
representative. The tellers know, or should know, that the rules on savings
account provide that any person in possession of the passbook is
presumptively its owner. If the tellers give the passbook to the wrong person,
they would be clothing that person presumptive ownership of the passbook,
facilitating unauthorized withdrawals by that person. For failing to return the
passbook to Calapre, the authorized representative of L.C. Diaz, Solidbank
and Teller No. 6 presumptively failed to observe such high degree of diligence
in safeguarding the passbook, and in insuring its return to the party authorized
to receive the same.
In culpa contractual, once the plaintiff proves a breach of contract, there is
a presumption that the defendant was at fault or negligent. The burden is on
the defendant to prove that he was not at fault or negligent. In contrast,
in culpa aquiliana the plaintiff has the burden of proving that the defendant
was negligent. In the present case, L.C. Diaz has established that Solidbank
breached its contractual obligation to return the passbook only to the
authorized representative of L.C. Diaz. There is thus a presumption that
Solidbank was at fault and its teller was negligent in not returning the
passbook to Calapre. The burden was on Solidbank to prove that there was
no negligence on its part or its employees.
Solidbank failed to discharge its burden. Solidbank did not present to the
trial court Teller No. 6, the teller with whom Calapre left the passbook and who
was supposed to return the passbook to him. The record does not indicate
that Teller No. 6 verified the identity of the person who retrieved the
passbook. Solidbank also failed to adduce in evidence its standard procedure

in verifying the identity of the person retrieving the passbook, if there is such a
procedure, and that Teller No. 6 implemented this procedure in the present
case.
Solidbank is bound by the negligence of its employees under the principle
of respondeat superior or command responsibility. The defense of exercising
the required diligence in the selection and supervision of employees is not a
complete defense in culpa contractual, unlike in culpa aquiliana.
[25]

The bank must not only exercise high standards of integrity and
performance, it must also insure that its employees do likewise because this
is the only way to insure that the bank will comply with its fiduciary
duty. Solidbank failed to present the teller who had the duty to return to
Calapre the passbook, and thus failed to prove that this teller exercised the
high standards of integrity and performance required of Solidbanks
employees.
Proximate Cause of the Unauthorized Withdrawal
Another point of disagreement between the trial and appellate courts is the
proximate cause of the unauthorized withdrawal. The trial court believed that
L.C. Diazs negligence in not securing its passbook under lock and key was
the proximate cause that allowed the impostor to withdraw the P300,000. For
the appellate court, the proximate cause was the tellers negligence in
processing the withdrawal without first verifying with L.C. Diaz. We do not
agree with either court.
Proximate cause is that cause which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury and without
which the result would not have occurred. Proximate cause is determined by
the facts of each case upon mixed considerations of logic, common sense,
policy and precedent.
[26]

[27]

L.C. Diaz was not at fault that the passbook landed in the hands of the
impostor. Solidbank was in possession of the passbook while it was
processing the deposit. After completion of the transaction, Solidbank had the
contractual obligation to return the passbook only to Calapre, the authorized
representative of L.C. Diaz. Solidbank failed to fulfill its contractual obligation
because it gave the passbook to another person.
Solidbanks failure to return the passbook to Calapre made possible the
withdrawal of the P300,000 by the impostor who took possession of the
passbook. Under Solidbanks rules on savings account, mere possession of

the passbook raises the presumption of ownership. It was the negligent act of
Solidbanks Teller No. 6 that gave the impostor presumptive ownership of the
passbook. Had the passbook not fallen into the hands of the impostor, the
loss of P300,000 would not have happened. Thus, the proximate cause of the
unauthorized withdrawal was Solidbanks negligence in not returning the
passbook to Calapre.
We do not subscribe to the appellate courts theory that the proximate
cause of the unauthorized withdrawal was the tellers failure to call up L.C.
Diaz to verify the withdrawal. Solidbank did not have the duty to call up L.C.
Diaz to confirm the withdrawal. There is no arrangement between Solidbank
and L.C. Diaz to this effect. Even the agreement between Solidbank and L.C.
Diaz pertaining to measures that the parties must observe whenever
withdrawals of large amounts are made does not direct Solidbank to call up
L.C. Diaz.
There is no law mandating banks to call up their clients whenever their
representatives withdraw significant amounts from their accounts. L.C. Diaz
therefore had the burden to prove that it is the usual practice of Solidbank to
call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz
failed to do so.
Teller No. 5 who processed the withdrawal could not have been put on
guard to verify the withdrawal. Prior to the withdrawal of P300,000, the
impostor deposited with Teller No. 6 the P90,000 PBC check, which later
bounced. The impostor apparently deposited a large amount of money to
deflect suspicion from the withdrawal of a much bigger amount of money. The
appellate court thus erred when it imposed on Solidbank the duty to call up
L.C. Diaz to confirm the withdrawal when no law requires this from banks and
when the teller had no reason to be suspicious of the transaction.
Solidbank continues to foist the defense that Ilagan made the
withdrawal. Solidbank claims that since Ilagan was also a messenger of L.C.
Diaz, he was familiar with its teller so that there was no more need for the
teller to verify the withdrawal. Solidbank relies on the following statements in
the Booking and Information Sheet of Emerano Ilagan:
xxx Ilagan also had with him (before the withdrawal) a forged check of PBC and
indicated the amount of P90,000 which he deposited in favor of L.C. Diaz and
Company. After successfully withdrawing this large sum of money, accused Ilagan
gave alias Rey (Noel Tamayo) his share of the loot. Ilagan then hired a taxicab in the
amount of P1,000 to transport him (Ilagan) to his home province at Bauan,
Batangas. Ilagan extravagantly and lavishly spent his money but a big part of his loot

was wasted in cockfight and horse racing. Ilagan was apprehended and meekly
admitted his guilt. (Emphasis supplied.)
[28]

L.C. Diaz refutes Solidbanks contention by pointing out that the person
who withdrew the P300,000 was a certain Noel Tamayo. Both the trial and
appellate courts stated that this Noel Tamayo presented the passbook with
the withdrawal slip.
We uphold the finding of the trial and appellate courts that a certain Noel
Tamayo withdrew the P300,000. The Court is not a trier of facts. We find no
justifiable reason to reverse the factual finding of the trial court and the Court
of Appeals. The tellers who processed the deposit of the P90,000 check and
the withdrawal of the P300,000 were not presented during trial to substantiate
Solidbanks claim that Ilagan deposited the check and made the questioned
withdrawal. Moreover, the entry quoted by Solidbank does not categorically
state that Ilagan presented the withdrawal slip and the passbook.
Doctrine of Last Clear Chance
The doctrine of last clear chance states that where both parties are
negligent but the negligent act of one is appreciably later than that of the
other, or where it is impossible to determine whose fault or negligence caused
the loss, the one who had the last clear opportunity to avoid the loss but failed
to do so, is chargeable with the loss. Stated differently, the antecedent
negligence of the plaintiff does not preclude him from recovering damages
caused by the supervening negligence of the defendant, who had the last fair
chance to prevent the impending harm by the exercise of due diligence.
[29]

[30]

We do not apply the doctrine of last clear chance to the present

case. Solidbank is liable for breach of contract due to negligence in the
performance of its contractual obligation to L.C. Diaz. This is a case of culpa
contractual, where neither the contributory negligence of the plaintiff nor his
last clear chance to avoid the loss, would exonerate the defendant from
liability. Such contributory negligence or last clear chance by the plaintiff
merely serves to reduce the recovery of damages by the plaintiff but does not
exculpate the defendant from his breach of contract.
[31]

[32]

Mitigated Damages

Under Article 1172, liability (for culpa contractual) may be regulated by

the courts, according to the circumstances. This means that if the defendant
exercised the proper diligence in the selection and supervision of its
employee, or if the plaintiff was guilty of contributory negligence, then the
courts may reduce the award of damages. In this case, L.C. Diaz was guilty
of contributory negligence in allowing a withdrawal slip signed by its
authorized signatories to fall into the hands of an impostor. Thus, the liability
of Solidbank should be reduced.
In Philippine Bank of Commerce v. Court of Appeals, where the Court
held the depositor guilty of contributory negligence, we allocated the damages
between the depositor and the bank on a 40-60 ratio. Applying the same
ruling to this case, we hold that L.C. Diaz must shoulder 40% of the actual
damages awarded by the appellate court. Solidbank must pay the other 60%
of the actual damages.
[33]

WHEREFORE,
the
decision
of
the
Court
of
Appeals
is AFFIRMED with MODIFICATION. Petitioner Solidbank Corporation shall
pay private respondent L.C. Diaz and Company, CPAs only 60% of the actual
damages awarded by the Court of Appeals. The remaining 40% of the actual
damages shall be borne by private respondent L.C. Diaz and Company,
CPAs. Proportionate costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Vitug, and Ynares-Santiago, JJ., concur.
Azcuna, J., on official leave.

SECOND DIVISION

[G.R. No. 149734. November 19, 2004]

DR. DANIEL VAZQUEZ and MA. LUIZA M. VAZQUEZ, petitioners

vs. AYALA CORPORATION, respondent.
DECISION
TINGA, J.:

The rise in value of four lots in one of the countrys prime residential developments,
Ayala Alabang Village in Muntinlupa City, over a period of six (6) years only, represents
big money. The huge price difference lies at the heart of the present
controversy. Petitioners insist that the lots should be sold to them at 1984 prices while
respondent maintains that the prevailing market price in 1990 should be the selling
price.
Dr. Daniel Vazquez and Ma. Luisa Vazquez[1] filed this Petition for Review on
Certiorari[2] dated October 11, 2001 assailing the Decision[3] of the Court of Appeals
dated September 6, 2001 which reversed the Decision[4] of the Regional Trial Court
(RTC) and dismissed their complaint for specific performance and damages against
Ayala Corporation.
Despite their disparate rulings, the RTC and the appellate court agree on the
following antecedents:[5]

On April 23, 1981, spouses Daniel Vasquez and Ma. Luisa M. Vasquez (hereafter,
Vasquez spouses) entered into a Memorandum of Agreement (MOA) with Ayala
Corporation (hereafter, AYALA) with AYALA buying from the Vazquez spouses, all
of the latters shares of stock in Conduit Development, Inc. (hereafter, Conduit). The
main asset of Conduit was a 49.9 hectare property in Ayala Alabang, Muntinlupa,
which was then being developed by Conduit under a development plan where the land
was divided into Villages 1, 2 and 3 of the Don Vicente Village. The development
was then being undertaken for Conduit by G.P. Construction and Development Corp.
(hereafter, GP Construction).
Under the MOA, Ayala was to develop the entire property, less what was defined as
the Retained Area consisting of 18,736 square meters. This Retained Area was to
be retained by the Vazquez spouses. The area to be developed by Ayala was called the
Remaining Area. In this Remaining Area were 4 lots adjacent to the Retained
Area and Ayala agreed to offer these lots for sale to the Vazquez spouses at the

prevailing price at the time of purchase. The relevant provisions of the MOA on this
point are:
5.7. The BUYER hereby commits that it will develop the Remaining Property
into a first class residential subdivision of the same class as its New Alabang
Subdivision, and that it intends to complete the first phase under its amended
development plan within three (3) years from the date of this Agreement. x x x
5.15. The BUYER agrees to give the SELLERS a first option to purchase four
developed lots next to the Retained Area at the prevailing market price at the
time of the purchase.
The parties are agreed that the development plan referred to in paragraph 5.7 is
not Conduits development plan, but Ayalas amended development plan which
was still to be formulated as of the time of the MOA. While in the Conduit plan,
the 4 lots to be offered for sale to the Vasquez Spouses were in the first phase
thereof or Village 1, in the Ayala plan which was formulated a year later, it was
in the third phase, or Phase II-c.
Under the MOA, the Vasquez spouses made several express warranties, as follows:
3.1. The SELLERS shall deliver to the BUYER:
xxx

3.1.2. The true and complete list, certified by the Secretary and Treasurer of the
Company showing:
xxx

D. A list of all persons and/or entities with whom the Company has pending contracts,
if any.
xxx

3.1.5. Audited financial statements of the Company as at Closing date.

4. Conditions Precedent
All obligations of the BUYER under this Agreement are subject to fulfillment prior to
or at the Closing, of the following conditions:

4.1. The representations and warranties by the SELLERS contained in this

Agreement shall be true and correct at the time of Closing as though such
representations and warranties were made at such time; and
xxx

6. Representation and Warranties by the SELLERS

The SELLERS jointly and severally represent and warrant to the BUYER that at the
time of the execution of this Agreement and at the Closing:
xxx

6.2.3. There are no actions, suits or proceedings pending, or to the knowledge of the
SELLERS, threatened against or affecting the SELLERS with respect to the Shares or
the Property; and
7. Additional Warranties by the SELLERS
7.1. With respect to the Audited Financial Statements required to be submitted at
Closing in accordance with Par. 3.1.5 above, the SELLER jointly and severally
warrant to the BUYER that:
7.1.1 The said Audited Financial Statements shall show that on the day of Closing, the
Company shall own the Remaining Property, free from all liens and encumbrances
and that the Company shall have no obligation to any party except for billings
payable to GP Construction & Development Corporation and advances made by
Daniel Vazquez for which BUYER shall be responsible in accordance with Par. 2
of this Agreement.
7.1.2 Except to the extent reflected or reserved in the Audited Financial
Statements of the Company as of Closing, and those disclosed to BUYER, the
Company as of the date thereof, has no liabilities of any nature whether accrued,
absolute, contingent or otherwise, including, without limitation, tax liabilities due or
to become due and whether incurred in respect of or measured in respect of the
Companys income prior to Closing or arising out of transactions or state of facts
existing prior thereto.
7.2 SELLERS do not know or have no reasonable ground to know of any basis
for any assertion against the Company as at closing or any liability of any nature
and in any amount not fully reflected or reserved against such Audited Financial
Statements referred to above, and those disclosed to BUYER.

xxx xxx

xxx

7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the

Closing, the Company is not engaged in or a party to, or to the best of the
knowledge of the SELLERS, threatened with, any legal action or other
proceedings before any court or administrative body, nor do the SELLERS know
or have reasonable grounds to know of any basis for any such action or proceeding or
of any governmental investigation relative to the Company.
7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due
performance and observance by the Company of any term, covenant or condition
of any instrument or agreement to which the company is a party or by which it is
bound, and no condition exists which, with notice or lapse of time or both, will
constitute such default or breach.
After the execution of the MOA, Ayala caused the suspension of work on Village 1 of
the Don Vicente Project. Ayala then received a letter from one Maximo Del Rosario
of Lancer General Builder Corporation informing Ayala that he was claiming the
amount of P1,509,558.80 as the subcontractor of G.P. Construction...
G.P. Construction not being able to reach an amicable settlement with Lancer, on
March 22, 1982, Lancer sued G.P. Construction, Conduit and Ayala in the then Court
of First Instance of Manila in Civil Case No. 82-8598. G.P. Construction in turn filed
a cross-claim against Ayala. G.P. Construction and Lancer both tried to enjoin Ayala
from undertaking the development of the property. The suit was terminated only on
February 19, 1987, when it was dismissed with prejudice after Ayala paid both Lancer
and GP Construction the total of P4,686,113.39.
Taking the position that Ayala was obligated to sell the 4 lots adjacent to the
Retained Area within 3 years from the date of the MOA, the Vasquez spouses sent
several reminder letters of the approaching so-called deadline. However, no demand
after April 23, 1984, was ever made by the Vasquez spouses for Ayala to sell the 4
lots. On the contrary, one of the letters signed by their authorized agent, Engr.
Eduardo Turla, categorically stated that they expected development of Phase 1 to be
completed by February 19, 1990, three years from the settlement of the legal problems
with the previous contractor.
By early 1990 Ayala finished the development of the vicinity of the 4 lots to be
offered for sale. The four lots were then offered to be sold to the Vasquez spouses at
the prevailing price in 1990. This was rejected by the Vasquez spouses who wanted to
pay at 1984 prices, thereby leading to the suit below.

After trial, the court a quo rendered its decision, the dispositive portion of which
states:
THEREFORE, judgment is hereby rendered in favor of plaintiffs and against
defendant, ordering defendant to sell to plaintiffs the relevant lots described in the
Complaint in the Ayala Alabang Village at the price of P460.00 per square meter
amounting to P1,349,540.00; ordering defendant to reimburse to plaintiffs attorneys
fees in the sum of P200,000.00 and to pay the cost of the suit.
In its decision, the court a quo concluded that the Vasquez spouses were not obligated
to disclose the potential claims of GP Construction, Lancer and Del Rosario; Ayalas
accountants should have opened the records of Conduit to find out all claims; the
warranty against suit is with respect to the shares of the Property and the Lancer suit
does not affect the shares of stock sold to Ayala; Ayala was obligated to develop
within 3 years; to say that Ayala was under no obligation to follow a time frame was
to put the Vasquezes at Ayalas mercy; Ayala did not develop because of a slump in
the real estate market; the MOA was drafted and prepared by the AYALA who should
suffer its ambiguities; the option to purchase the 4 lots is valid because it was
supported by consideration as the option is incorporated in the MOA where the parties
had prestations to each other. [Emphasis supplied]
Ayala Corporation filed an appeal, alleging that the trial court erred in holding that
petitioners did not breach their warranties under the MOA [6] dated April 23, 1981; that it
was obliged to develop the land where the four (4) lots subject of the option to purchase
are located within three (3) years from the date of the MOA; that it was in delay; and
that the option to purchase was valid because it was incorporated in the MOA and the
consideration therefor was the commitment by Ayala Corporation to petitioners
embodied in the MOA.
As
previously
mentioned,
the
Court
of
Appeals
reversed
the
RTC Decision. According to the appellate court, Ayala Corporation was never informed
beforehand of the existence of the Lancer claim. In fact, Ayala Corporation got a copy
of the Lancer subcontract only on May 29, 1981 from G.P. Constructions lawyers. The
Court of Appeals thus held that petitioners violated their warranties under the MOA
when they failed to disclose Lancers claims. Hence, even conceding that Ayala
Corporation was obliged to develop and sell the four (4) lots in question within three (3)
years from the date of the MOA, the obligation was suspended during the pendency of
the case filed by Lancer.
Interpreting the MOAs paragraph 5.7 above-quoted, the appellate court held that
Ayala Corporation committed to develop the first phase of its own amended
development plan and not Conduits development plan. Nowhere does the MOA provide
that Ayala Corporation shall follow Conduits development plan nor is Ayala Corporation
prohibited from changing the sequence of the phases of the property it will develop.

Anent the question of delay, the Court of Appeals ruled that there was no delay as
petitioners never made a demand for Ayala Corporation to sell the subject lots to
them. According to the appellate court, what petitioners sent were mere reminder
letters the last of which was dated prior to April 23, 1984 when the obligation was not
yet demandable. At any rate, the Court of Appeals found that petitioners in fact waived
the three (3)-year period when they sent a letter through their agent, Engr. Eduardo
Turla, stating that they expect that the development of Phase I will be completed by 19
February 1990, three years from the settlement of the legal problems with the previous
contractor.[7]
The appellate court likewise ruled that paragraph 5.15 above-quoted is not an
option contract but a right of first refusal there being no separate consideration
therefor. Since petitioners refused Ayala Corporations offer to sell the subject lots at
the reduced 1990 price of P5,000.00 per square meter, they have effectively waived
their right to buy the same.
In the instant Petition, petitioners allege that the appellate court erred in ruling that
they violated their warranties under the MOA; that Ayala Corporation was not obliged to
develop the Remaining Property within three (3) years from the execution of the MOA;
that Ayala was not in delay; and that paragraph 5.15 of the MOA is a mere right of first
refusal. Additionally, petitioners insist that the Court should review the factual findings
of the Court of Appeals as they are in conflict with those of the trial court.
Ayala Corporation filed a Comment on the Petition[8] dated March 26, 2002,
contending that the petition raises questions of fact and seeks a review of evidence
which is within the domain of the Court of Appeals. Ayala Corporation maintains that the
subcontract between GP Construction, with whom Conduit contracted for the
development of the property under a Construction Contract dated October 10, 1980,
and Lancer was not disclosed by petitioners during the negotiations. Neither was the
liability for Lancers claim included in the Audited Financial Statements submitted by
petitioners after the signing of the MOA. These justify the conclusion that petitioners
breached their warranties under the afore-quoted paragraphs of the MOA. Since the
Lancer suit ended only in February 1989, the three (3)-year period within which Ayala
Corporation committed to develop the property should only be counted thence. Thus,
when it offered the subject lots to petitioners in 1990, Ayala Corporation was not yet in
delay.
In response to petitioners contention that there was no action or proceeding against
them at the time of the execution of the MOA on April 23, 1981, Ayala Corporation avers
that the facts and circumstances which gave rise to the Lancer claim were already
extant then. Petitioners warranted that their representations under the MOA shall be
true and correct at the time of Closing which shall take place within four (4) weeks
from the signing of the MOA.[9] Since the MOA was signed on April 23, 1981, Closing
was approximately the third week of May 1981. Hence, Lancers claims, articulated in a
letter which Ayala Corporation received on May 4, 1981, are among the liabilities
warranted against under paragraph 7.1.2 of the MOA.
Moreover, Ayala Corporation asserts that the warranties under the MOA are not just
against suits but against all kinds of liabilities not reflected in the Audited Financial

Statements. It cannot be faulted for relying on the express warranty that except for
billings payable to GP Construction and advances made by petitioner Daniel Vazquez in
the amount of P38,766.04, Conduit has no other liabilities. Hence, petitioners cannot
claim that Ayala Corporation should have examined and investigated the Audited
Financial Statements of Conduit and should now assume all its obligations and liabilities
including the Lancer suit and the cross-claim of GP Construction.
Furthermore, Ayala Corporation did not make a commitment to complete the
development of the first phase of the property within three (3) years from the execution
of the MOA. The provision refers to a mere declaration of intent to develop the first
phase of its (Ayala Corporations) own development plan and not Conduits. True to its
intention, Ayala Corporation did complete the development of the first phase (Phase IIA) of its amended development plan within three (3) years from the execution of the
MOA. However, it is not obliged to develop the third phase (Phase II-C) where the
subject lots are located within the same time frame because there is no contractual
stipulation in the MOA therefor. It is free to decide on its own the period for the
development of Phase II-C. If petitioners wanted to impose the same three (3)-year
timetable upon the third phase of the amended development plan, they should have
filed a suit to fix the time table in accordance with Article 1197 [10] of the Civil
Code. Having failed to do so, Ayala Corporation cannot be declared to have been in
delay.
Ayala Corporation further contends that no demand was made on it for the
performance of its alleged obligation. The letter dated October 4, 1983 sent when
petitioners were already aware of the Lancer suit did not demand the delivery of the
subject lots by April 23, 1984. Instead, it requested Ayala Corporation to keep
petitioners posted on the status of the case. Likewise, the letter dated March 4, 1984
was merely an inquiry as to the date when the development of Phase 1 will be
completed. More importantly, their letter dated June 27, 1988 through Engr. Eduardo
Turla expressed petitioners expectation that Phase 1 will be completed by February 19,
1990.
Lastly, Ayala Corporation maintains that paragraph 5.15 of the MOA is a right of first
refusal and not an option contract.
Petitioners filed their Reply[11] dated August 15, 2002 reiterating the arguments in
their Petition and contending further that they did not violate their warranties under the
MOA because the case was filed by Lancer only on April 1, 1982, eleven (11) months
and eight (8) days after the signing of the MOA on April 23, 1981. Ayala Corporation
admitted that it received Lancers claim before the Closing date. It therefore had all the
time to rescind the MOA. Not having done so, it can be concluded that Ayala
Corporation itself did not consider the matter a violation of petitioners warranty.
Moreover, petitioners submitted the Audited Financial Statements of Conduit and
allowed an acquisition audit to be conducted by Ayala Corporation. Thus, the latter
bought Conduit with open eyes.
Petitioners also maintain that they had no knowledge of the impending case against
Conduit at the time of the execution of the MOA. Further, the MOA makes Ayala

Corporation liable for the payment of all billings of GP Construction. Since Lancers
claim was actually a claim against GP Construction being its sub-contractor, it is Ayala
Corporation and not petitioners which is liable.
Likewise, petitioners aver that although Ayala Corporation may change the
sequence of its development plan, it is obliged under the MOA to develop the entire
area where the subject lots are located in three (3) years.
They also assert that demand was made on Ayala Corporation to comply with their
obligation under the MOA. Apart from their reminder letters dated January 24, February
18 and March 5, 1984, they also sent a letter dated March 4, 1984 which they claim is a
categorical demand for Ayala Corporation to comply with the provisions of the MOA.
The parties were required to submit their respective memoranda in
the Resolution[12] dated November 18, 2002. In compliance with this directive, petitioners
submitted theirMemorandum[13] dated February 14, 2003 on even date, while Ayala
Corporation filed its Memorandum[14] dated February 14, 2003 on February 17, 2003.
We shall first dispose of the procedural question raised by the instant petition.
It is well-settled that the jurisdiction of this Court in cases brought to it from the
Court of Appeals by way of petition for review under Rule 45 is limited to reviewing or
revising errors of law imputed to it, its findings of fact being conclusive on this Court as
a matter of general principle. However, since in the instant case there is a conflict
between the factual findings of the trial court and the appellate court, particularly as
regards the issues of breach of warranty, obligation to develop and incurrence of delay,
we have to consider the evidence on record and resolve such factual issues as an
exception to the general rule.[15] In any event, the submitted issue relating to the
categorization of the right to purchase granted to petitioners under the MOA is legal in
character.
The next issue that presents itself is whether petitioners breached their warranties
under the MOA when they failed to disclose the Lancer claim. The trial court declared
they did not; the appellate court found otherwise.
Ayala Corporation summarizes the clauses of the MOA which petitioners allegedly
breached when they failed to disclose the Lancer claim:

a) Clause 7.1.1. that Conduit shall not be obligated to anyone except to GP

Construction for P38,766.04, and for advances made by Daniel Vazquez;
b) Clause 7.1.2. that except as reflected in the audited financial statements Conduit
had no other liabilities whether accrued, absolute, contingent or otherwise;
c) Clause 7.2. that there is no basis for any assertion against Conduit of any liability
of any value not reflected or reserved in the financial statements, and those disclosed
to Ayala;

d) Clause 7.6.3. that Conduit is not threatened with any legal action or other
proceedings; and
e) Clause 7.6.4. that Conduit had not breached any term, condition, or covenant of
any instrument or agreement to which it is a party or by which it is bound.
[16]

The Court is convinced that petitioners did not violate the foregoing warranties.
The exchanges of communication between the parties indicate that petitioners
substantially apprised Ayala Corporation of the Lancer claim or the possibility thereof
during the period of negotiations for the sale of Conduit.
In a letter[17] dated March 5, 1984, petitioner Daniel Vazquez reminded Ayala
Corporations Mr. Adolfo Duarte (Mr. Duarte) that prior to the completion of the sale of
Conduit, Ayala Corporation asked for and was given information that GP Construction
sub-contracted, presumably to Lancer, a greater percentage of the project than it was
allowed. Petitioners gave this information to Ayala Corporation because the latter
intimated a desire to break the contract of Conduit with GP. Ayala Corporation did not
deny this. In fact, Mr. Duartes letter[18] dated March 6, 1984 indicates that Ayala
Corporation had knowledge of the Lancer subcontract prior to its acquisition of
Conduit. Ayala Corporation even admitted that it tried to explorelegal basis to
discontinue the contract of Conduit with GP but found this not feasible when
information surfaced about the tacit consent of Conduit to the sub-contracts of GP with
Lancer.
At the latest, Ayala Corporation came to know of the Lancer claim before the date of
Closing of the MOA. Lancers letter[19] dated April 30, 1981 informing Ayala Corporation
of its unsettled claim with GP Construction was received by Ayala Corporation on May
4, 1981, well before the Closing[20] which occurred four (4) weeks after the date of
signing of the MOA on April 23, 1981, or on May 23, 1981.
The full text of the pertinent clauses of the MOA quoted hereunder likewise indicate
that certain matters pertaining to the liabilities of Conduit were disclosed by petitioners
to Ayala Corporation although the specifics thereof were no longer included in the MOA:

7.1.1 The said Audited Financial Statements shall show that on the day of Closing, the
Company shall own the Remaining Property, free from all liens and encumbrances
and that the Company shall have no obligation to any party except for billings payable
to GP Construction & Development Corporation and advances made by Daniel
Vazquez for which BUYER shall be responsible in accordance with Paragraph 2 of
this Agreement.
7.1.2 Except to the extent reflected or reserved in the Audited Financial
Statements of the Company as of Closing, and those disclosed to BUYER, the
Company as of the date hereof, has no liabilities of any nature whether accrued,
absolute, contingent or otherwise, including, without limitation, tax liabilities due or

to become due and whether incurred in respect of or measured in respect of the

Companys income prior to Closing or arising out of transactions or state of facts
existing prior thereto.
7.2 SELLERS do not know or have no reasonable ground to know of any basis for
any assertion against the Company as at Closing of any liability of any nature and in
any amount not fully reflected or reserved against such Audited Financial Statements
referred to above, and those disclosed to BUYER.
xxx xxx

xxx

7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the

Closing, the Company is not engaged in or a party to, or to the best of the knowledge
of the SELLERS, threatened with, any legal action or other proceedings before any
court or administrative body, nor do the SELLERS know or have reasonable grounds
to know of any basis for any such action or proceeding or of any governmental
investigation relative to the Company.
7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due
performance and observance by the Company of any term, covenant or condition of
any instrument or agreement to which the Company is a party or by which it is bound,
and no condition exists which, with notice or lapse of time or both, will constitute
such default or breach. [Emphasis supplied]
[21]

Hence, petitioners warranty that Conduit is not engaged in, a party to, or threatened
with any legal action or proceeding is qualified by Ayala Corporations actual knowledge
of the Lancer claim which was disclosed to Ayala Corporation before the Closing.
At any rate, Ayala Corporation bound itself to pay all billings payable to GP
Construction and the advances made by petitioner Daniel Vazquez. Specifically, under
paragraph 2 of the MOA referred to in paragraph 7.1.1, Ayala Corporation undertook
responsibility for the payment of all billings of the contractor GP Construction &
Development Corporation after the first billing and any payments made by the company
and/or SELLERS shall be reimbursed by BUYER on closing which advances to date
is P1,159,012.87.[22]
The billings knowingly assumed by Ayala Corporation necessarily include the
Lancer claim for which GP Construction is liable. Proof of this is Ayala Corporations
letter[23] to GP Construction dated before Closing on May 4, 1981, informing the latter of
Ayala Corporations receipt of the Lancer claim embodied in the letter dated April 30,
1981, acknowledging that it is taking over the contractual responsibilities of Conduit,
and requesting copies of all sub-contracts affecting the Conduit property. The pertinent
excerpts of the letter read:

In this connection, we wish to inform you that this morning we received a letter from
Mr. Maximo D. Del Rosario, President of Lancer General Builders Corporation
apprising us of the existence of subcontracts that they have with your corporation.
They have also furnished us with a copy of their letter to you dated 30 April 1981.
Since we are taking over the contractual responsibilities of Conduit Development,
Inc., we believe that it is necessary, at this point in time, that you furnish us with
copies of all your subcontracts affecting the property of Conduit, not only with Lancer
General Builders Corporation, but all subcontracts with other parties as well
[24]

Quite tellingly, Ayala Corporation even attached to its Pre-Trial Brief[25] dated July 9,
1992 a copy of the letter[26] dated May 28, 1981 of GP Constructions counsel addressed
to Conduit furnishing the latter with copies of all sub-contract agreements entered into
by GP Construction. Since it was addressed to Conduit, it can be presumed that it was
the latter which gave Ayala Corporation a copy of the letter thereby disclosing to the
latter the existence of the Lancer sub-contract.
The ineluctable conclusion is that petitioners did not violate their warranties under
the MOA. The Lancer sub-contract and claim were substantially disclosed to Ayala
Corporation before the Closing date of the MOA. Ayala Corporation cannot disavow
knowledge of the claim.
Moreover, while in its correspondence with petitioners, Ayala Corporation did
mention the filing of the Lancer suit as an obstacle to its development of the property, it
never actually brought up nor sought redress for petitioners alleged breach of warranty
for failure to disclose the Lancer claim until it filed its Answer[27] dated February 17, 1992.
We now come to the correct interpretation of paragraph 5.7 of the MOA. Does this
paragraph express a commitment or a mere intent on the part of Ayala Corporation to
develop the property within three (3) years from date thereof? Paragraph 5.7 provides:

5.7. The BUYER hereby commits that it will develop the Remaining Property into a
first class residential subdivision of the same class as its New Alabang Subdivision,
and that it intends to complete the first phase under its amended development plan
within three (3) years from the date of this Agreement.
[28]

Notably, while the first phrase of the paragraph uses the word commits in
reference to the development of the Remaining Property into a first class residential
subdivision, the second phrase uses the word intends in relation to the development of
the first phase of the property within three (3) years from the date of the MOA. The
variance in wording is significant. While commit[29] connotes a pledge to do something,
intend[30] merely signifies a design or proposition.
Atty. Leopoldo Francisco, former Vice President of Ayala Corporations legal
division who assisted in drafting the MOA, testified:
COURT

You only ask what do you mean by that intent. Just answer on that point.
ATTY. BLANCO
Dont talk about standard.
WITNESS
A

Well, the word intent here, your Honor, was used to emphasize the tentative
character of the period of development because it will be noted that the sentence
refers to and I quote to complete the first phase under its amended development
plan within three (3) years from the date of this agreement, at the time of the
execution of this agreement, your Honor. That amended development plan was
not yet in existence because the buyer had manifested to the seller that the buyer
could amend the subdivision plan originally belonging to the seller to conform with
its own standard of development and second, your Honor, (interrupted)[31]

It is thus unmistakable that this paragraph merely expresses an intention on Ayala

Corporations part to complete the first phase under its amended development plan
within three (3) years from the execution of the MOA. Indeed, this paragraph is so
plainly worded that to misunderstand its import is deplorable.
More focal to the resolution of the instant case is paragraph 5.7s clear reference to
the first phase of Ayala Corporations amended development plan as the subject of the
three (3)-year intended timeframe for development. Even petitioner Daniel Vazquez
admitted on cross-examination that the paragraph refers not to Conduits but to Ayala
Corporations development plan which was yet to be formulated when the MOA was
executed:
Q:

Now, turning to Section 5.7 of this Memorandum of Agreement, it is stated as

follows: The Buyer hereby commits that to develop the remaining property into a
first class residential subdivision of the same class as New Alabang Subdivision,
and that they intend to complete the first phase under its amended development
plan within three years from the date of this agreement.
Now, my question to you, Dr. Vasquez is that there is no dispute that the amended
development plan here is the amended development plan of Ayala?

A:

Yes, sir.

Q: In other words, it is not Exhibit D-5 which is the original plan of Conduit?
A:

No, it is not.

Q:

This Exhibit D-5 was the plan that was being followed by GP Construction in
1981?

A:

Yes, sir.

Q:

And point of fact during your direct examination as of the date of the agreement,
this amended development plan was still to be formulated by Ayala?

A:

Yes, sir.[32]

As correctly held by the appellate court, this admission is crucial because while the
subject lots to be sold to petitioners were in the first phase of the Conduit development

plan, they were in the third or last phase of the Ayala Corporation development
plan. Hence, even assuming that paragraph 5.7 expresses a commitment on the part of
Ayala Corporation to develop the first phase of its amended development plan within
three (3) years from the execution of the MOA, there was no parallel commitment made
as to the timeframe for the development of the third phase where the subject lots are
located.
Lest it be forgotten, the point of this petition is the alleged failure of Ayala
Corporation to offer the subject lots for sale to petitioners within three (3) years from the
execution of the MOA. It is not that Ayala Corporation committed or intended to develop
the first phase of its amended development plan within three (3) years. Whether it did
or did not is actually beside the point since the subject lots are not located in the first
phase anyway.
We now come to the issue of default or delay in the fulfillment of the obligation.
Article 1169 of the Civil Code provides:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time
the obligee judicially or extrajudicially demands from them the fulfillment of their
obligation.
However, the demand by the creditor shall not be necessary in order that delay may
exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his
power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or
is not ready to comply in a proper manner with what is incumbent upon him. From the
moment one of the parties fulfills his obligation, delay by the other begins.
In order that the debtor may be in default it is necessary that the following requisites
be present: (1) that the obligation be demandable and already liquidated; (2) that the
debtor delays performance; and (3) that the creditor requires the performance judicially
or extrajudicially.[33]
Under Article 1193 of the Civil Code, obligations for whose fulfillment a day certain
has been fixed shall be demandable only when that day comes. However, no such day
certain was fixed in the MOA. Petitioners, therefore, cannot demand performance after
the three (3) year period fixed by the MOA for the development of the first phase of the

property since this is not the same period contemplated for the development of the
subject lots. Since the MOA does not specify a period for the development of the
subject lots, petitioners should have petitioned the court to fix the period in accordance
with Article 1197[34] of the Civil Code. As no such action was filed by petitioners, their
complaint for specific performance was premature, the obligation not being demandable
at that point. Accordingly, Ayala Corporation cannot likewise be said to have delayed
performance of the obligation.
Even assuming that the MOA imposes an obligation on Ayala Corporation to
develop the subject lots within three (3) years from date thereof, Ayala Corporation
could still not be held to have been in delay since no demand was made by petitioners
for the performance of its obligation.
As found by the appellate court, petitioners letters which dealt with the three (3)year timetable were all dated prior to April 23, 1984, the date when the period was
supposed to expire. In other words, the letters were sent before the obligation could
become legally demandable. Moreover, the letters were mere reminders and not
categorical demands to perform. More importantly, petitioners waived the three (3)-year
period as evidenced by their agent, Engr. Eduardo Turlas letter to the effect that
petitioners agreed that the three (3)-year period should be counted from the termination
of the case filed by Lancer. The letter reads in part:

I. Completion of Phase I
As per the memorandum of Agreement also dated April 23, 1981, it was undertaken
by your goodselves to complete the development of Phase I within three (3) years. Dr.
& Mrs. Vazquez were made to understand that you were unable to accomplish this
because of legal problems with the previous contractor. These legal problems were
resolved as of February 19, 1987, and Dr. & Mrs. Vazquez therefore expect that the
development of Phase I will be completed by February 19, 1990, three years from the
settlement of the legal problems with the previous contractor. The reason for this is, as
you know, that security-wise, Dr. & Mrs. Vazquez have been advised not to construct
their residence till the surrounding area (which is Phase I) is developed and occupied.
They have been anxious to build their residence for quite some time now, and would
like to receive assurance from your goodselves regarding this, in compliance with the
agreement.
II. Option on the adjoining lots
We have already written your goodselves regarding the intention of Dr. & Mrs.
Vazquez to exercise their option to purchase the two lots on each side (a total of 4
lots) adjacent to their Retained Area. They are concerned that although over a year
has elapsed since the settlement of the legal problems, you have not presented them
with the size, configuration, etc. of these lots. They would appreciate being provided
with these at your earliest convenience.
[35]

Manifestly, this letter expresses not only petitioners acknowledgement that the
delay in the development of Phase I was due to the legal problems with GP
Construction, but also their acquiescence to the completion of the development of
Phase I at the much later date of February 19, 1990. More importantly, by no stretch of
semantic interpretation can it be construed as a categorical demand on Ayala
Corporation to offer the subject lots for sale to petitioners as the letter merely articulates
petitioners desire to exercise their option to purchase the subject lots and concern over
the fact that they have not been provided with the specifications of these lots.
The letters of petitioners children, Juan Miguel and Victoria Vazquez, dated
January 23, 1984[36] and February 18, 1984[37] can also not be considered categorical
demands on Ayala Corporation to develop the first phase of the property within the
three (3)-year period much less to offer the subject lots for sale to petitioners. The letter
dated January 23, 1984 reads in part:

You will understand our interest in the completion of the roads to our property, since
we cannot develop it till you have constructed the same. Allow us to remind you of
our Memorandum of Agreement, as per which you committed to develop the roads to
our property as per the original plans of the company, and that
1.
The back portion should have been developed before the front portion which
has not been the case.
2.

The whole project front and back portions be completed by 1984.

[38]

The letter dated February 18, 1984 is similarly worded. It states:

In this regard, we would like to remind you of Articles 5.7 and 5.9 of our
Memorandum of Agreement which states respectively:
[39]

Even petitioner Daniel Vazquez letter[40] dated March 5, 1984 does not make out a
categorical demand for Ayala Corporation to offer the subject lots for sale on or before
April 23, 1984. The letter reads in part:

and that we expect from your goodselves compliance with our Memorandum of
Agreement, and a definite date as to when the road to our property and the
development of Phase I will be completed.
[41]

At best, petitioners letters can only be construed as mere reminders which cannot
be considered demands for performance because it must appear that the tolerance or
benevolence of the creditor must have ended.[42]
The petition finally asks us to determine whether paragraph 5.15 of the MOA can
properly be construed as an option contract or a right of first refusal. Paragraph 5.15
states:

5.15 The BUYER agrees to give the SELLERS first option to purchase four
developed lots next to the Retained Area at the prevailing market price at the time
of the purchase.
[43]

The Court has clearly distinguished between an option contract and a right of first
refusal. An option is a preparatory contract in which one party grants to another, for a
fixed period and at a determined price, the privilege to buy or sell, or to decide whether
or not to enter into a principal contract. It binds the party who has given the option not
to enter into the principal contract with any other person during the period designated,
and within that period, to enter into such contract with the one to whom the option was
granted, if the latter should decide to use the option. It is a separate and distinct
contract from that which the parties may enter into upon the consummation of the
option. It must be supported by consideration.[44]
In a right of first refusal, on the other hand, while the object might be made
determinate, the exercise of the right would be dependent not only on the grantors
eventual intention to enter into a binding juridical relation with another but also on terms,
including the price, that are yet to be firmed up.[45]
Applied to the instant case, paragraph 5.15 is obviously a mere right of first refusal
and not an option contract. Although the paragraph has a definite object, i.e., the sale
of subject lots, the period within which they will be offered for sale to petitioners and,
necessarily, the price for which the subject lots will be sold are not specified. The
phrase at the prevailing market price at the time of the purchase connotes that there is
no definite period within which Ayala Corporation is bound to reserve the subject lots for
petitioners to exercise their privilege to purchase. Neither is there a fixed or
determinable price at which the subject lots will be offered for sale. The price is
considered certain if it may be determined with reference to another thing certain or if
the determination thereof is left to the judgment of a specified person or persons.[46]
Further, paragraph 5.15 was inserted into the MOA to give petitioners the first crack
to buy the subject lots at the price which Ayala Corporation would be willing to accept
when it offers the subject lots for sale. It is not supported by an independent
consideration. As such it is not governed by Articles 1324 and 1479 of the Civil
Code, viz:

Art. 1324. When the offeror has allowed the offeree a certain period to accept, the
offer may be withdrawn at any time before acceptance by communicating such
withdrawal, except when the option is founded upon a consideration, as something
paid or promised.
Art. 1479. A promise to buy and sell a determinate thing for a price certain is
reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain
is binding upon the promissor if the promise is supported by a consideration distinct
from the price.
Consequently, the offer may be withdrawn anytime by communicating the withdrawal
to the other party.[47]
In this case, Ayala Corporation offered the subject lots for sale to petitioners at the
price of P6,500.00/square meter, the prevailing market price for the property when the
offer was made on June 18, 1990.[48] Insisting on paying for the lots at the prevailing
market price in 1984 of P460.00/square meter, petitioners rejected the offer. Ayala
Corporation reduced the price to P5,000.00/square meter but again, petitioners rejected
the offer and instead made a counter-offer in the amount of P2,000.00/square
meter.[49] Ayala Corporation rejected petitioners counter-offer. With this rejection,
petitioners lost their right to purchase the subject lots.
It cannot, therefore, be said that Ayala Corporation breached petitioners right of first
refusal and should be compelled by an action for specific performance to sell the
subject lots to petitioners at the prevailing market price in 1984.
WHEREFORE, the instant petition is DENIED. No pronouncement as to costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 159617

August 8, 2007

ROBERTO C. SICAM and AGENCIA de R.C. SICAM, INC., petitioners,

vs.
LULU V. JORGE and CESAR JORGE, respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari filed by Roberto C. Sicam, Jr. (petitioner Sicam)
and Agencia deR.C. Sicam, Inc. (petitioner corporation) seeking to annul the Decision 1 of the Court
of Appeals dated March 31, 2003, and its Resolution2 dated August 8, 2003, in CA G.R. CV No.
56633.
It appears that on different dates from September to October 1987, Lulu V. Jorge (respondent Lulu)
pawned several pieces of jewelry with Agencia de R. C. Sicam located at No. 17 Aguirre Ave., BF
Homes Paraaque, Metro Manila, to secure a loan in the total amount of P59,500.00.
On October 19, 1987, two armed men entered the pawnshop and took away whatever cash and
jewelry were found inside the pawnshop vault. The incident was entered in the police blotter of the
Southern Police District, Paraaque Police Station as follows:
Investigation shows that at above TDPO, while victims were inside the office, two (2) male
unidentified persons entered into the said office with guns drawn. Suspects(sic) (1) went
straight inside and poked his gun toward Romeo Sicam and thereby tied him with an electric
wire while suspects (sic) (2) poked his gun toward Divina Mata and Isabelita Rodriguez and
ordered them to lay (sic) face flat on the floor. Suspects asked forcibly the case and assorted
pawned jewelries items mentioned above.
Suspects after taking the money and jewelries fled on board a Marson Toyota unidentified
plate number.3
Petitioner Sicam sent respondent Lulu a letter dated October 19, 1987 informing her of the loss of
her jewelry due to the robbery incident in the pawnshop. On November 2, 1987, respondent Lulu
then wrote a letter4 to petitioner Sicam expressing disbelief stating that when the robbery happened,
all jewelry pawned were deposited with Far East Bank near the pawnshop since it had been the
practice that before they could withdraw, advance notice must be given to the pawnshop so it could
withdraw the jewelry from the bank. Respondent Lulu then requested petitioner Sicam to prepare the
pawned jewelry for withdrawal on November 6, 1987 but petitioner Sicam failed to return the jewelry.
On September 28, 1988, respondent Lulu joined by her husband, Cesar Jorge, filed a complaint
against petitioner Sicam with the Regional Trial Court of Makati seeking indemnification for the loss
of pawned jewelry and payment of actual, moral and exemplary damages as well as attorney's fees.
The case was docketed as Civil Case No. 88-2035.

Petitioner Sicam filed his Answer contending that he is not the real party-in-interest as the pawnshop
was incorporated on April 20, 1987 and known as Agencia de R.C. Sicam, Inc; that petitioner
corporation had exercised due care and diligence in the safekeeping of the articles pledged with it
and could not be made liable for an event that is fortuitous.
Respondents subsequently filed an Amended Complaint to include petitioner corporation.
Thereafter, petitioner Sicam filed a Motion to Dismiss as far as he is concerned considering that he
is not the real party-in-interest. Respondents opposed the same. The RTC denied the motion in an
Order dated November 8, 1989.5
After trial on the merits, the RTC rendered its Decision6 dated January 12, 1993, dismissing
respondents complaint as well as petitioners counterclaim. The RTC held that petitioner Sicam
could not be made personally liable for a claim arising out of a corporate transaction; that in the
Amended Complaint of respondents, they asserted that "plaintiff pawned assorted jewelries in
defendants' pawnshop"; and that as a consequence of the separate juridical personality of a
corporation, the corporate debt or credit is not the debt or credit of a stockholder.
The RTC further ruled that petitioner corporation could not be held liable for the loss of the pawned
jewelry since it had not been rebutted by respondents that the loss of the pledged pieces of jewelry
in the possession of the corporation was occasioned by armed robbery; that robbery is a fortuitous
event which exempts the victim from liability for the loss, citing the case of Austria v. Court of
Appeals;7 and that the parties transaction was that of a pledgor and pledgee and under Art. 1174 of
the Civil Code, the pawnshop as a pledgee is not responsible for those events which could not be
foreseen.
Respondents appealed the RTC Decision to the CA. In a Decision dated March 31, 2003, the CA
reversed the RTC, the dispositive portion of which reads as follows:
WHEREFORE, premises considered, the instant Appeal is GRANTED, and the Decision
dated January 12, 1993,of the Regional Trial Court of Makati, Branch 62, is hereby
REVERSED and SET ASIDE, ordering the appellees to pay appellants the actual value of
the lost jewelry amounting to P272,000.00, and attorney' fees of P27,200.00.8
In finding petitioner Sicam liable together with petitioner corporation, the CA applied the doctrine of
piercing the veil of corporate entity reasoning that respondents were misled into thinking that they
were dealing with the pawnshop owned by petitioner Sicam as all the pawnshop tickets issued to
them bear the words "Agencia de R.C. Sicam"; and that there was no indication on the pawnshop
tickets that it was the petitioner corporation that owned the pawnshop which explained why
respondents had to amend their complaint impleading petitioner corporation.
The CA further held that the corresponding diligence required of a pawnshop is that it should take
steps to secure and protect the pledged items and should take steps to insure itself against the loss
of articles which are entrusted to its custody as it derives earnings from the pawnshop trade which
petitioners failed to do; that Austriais not applicable to this case since the robbery incident happened
in 1961 when the criminality had not as yet reached the levels attained in the present day; that they
are at least guilty of contributory negligence and should be held liable for the loss of jewelries; and
that robberies and hold-ups are foreseeable risks in that those engaged in the pawnshop business
are expected to foresee.
The CA concluded that both petitioners should be jointly and severally held liable to respondents for
the loss of the pawned jewelry.

Petitioners motion for reconsideration was denied in a Resolution dated August 8, 2003.
Hence, the instant petition for review with the following assignment of errors:
THE COURT OF APPEALS ERRED AND WHEN IT DID, IT OPENED ITSELF TO
REVERSAL, WHEN IT ADOPTED UNCRITICALLY (IN FACT IT REPRODUCED AS ITS
OWN WITHOUT IN THE MEANTIME ACKNOWLEDGING IT) WHAT THE RESPONDENTS
ARGUED IN THEIR BRIEF, WHICH ARGUMENT WAS PALPABLY UNSUSTAINABLE.
THE COURT OF APPEALS ERRED, AND WHEN IT DID, IT OPENED ITSELF TO
REVERSAL BY THIS HONORABLE COURT, WHEN IT AGAIN ADOPTED UNCRITICALLY
(BUT WITHOUT ACKNOWLEDGING IT) THE SUBMISSIONS OF THE RESPONDENTS IN
THEIR BRIEF WITHOUT ADDING ANYTHING MORE THERETO DESPITE THE FACT
THAT THE SAID ARGUMENT OF THE RESPONDENTS COULD NOT HAVE BEEN
SUSTAINED IN VIEW OF UNREBUTTED EVIDENCE ON RECORD.9
Anent the first assigned error, petitioners point out that the CAs finding that petitioner Sicam is
personally liable for the loss of the pawned jewelries is "a virtual and uncritical reproduction of the
arguments set out on pp. 5-6 of the Appellants brief."10
Petitioners argue that the reproduced arguments of respondents in their Appellants Brief suffer from
infirmities, as follows:
(1) Respondents conclusively asserted in paragraph 2 of their Amended Complaint that
Agencia de R.C. Sicam, Inc. is the present owner of Agencia de R.C. Sicam Pawnshop, and
therefore, the CA cannot rule against said conclusive assertion of respondents;
(2) The issue resolved against petitioner Sicam was not among those raised and litigated in
the trial court; and
(3) By reason of the above infirmities, it was error for the CA to have pierced the corporate
veil since a corporation has a personality distinct and separate from its individual
stockholders or members.
Anent the second error, petitioners point out that the CA finding on their negligence is likewise an
unedited reproduction of respondents brief which had the following defects:
(1) There were unrebutted evidence on record that petitioners had observed the diligence
required of them, i.e, they wanted to open a vault with a nearby bank for purposes of
safekeeping the pawned articles but was discouraged by the Central Bank (CB) since CB
rules provide that they can only store the pawned articles in a vault inside the pawnshop
premises and no other place;
(2) Petitioners were adjudged negligent as they did not take insurance against the loss of the
pledged jelweries, but it is judicial notice that due to high incidence of crimes, insurance
companies refused to cover pawnshops and banks because of high probability of losses due
to robberies;
(3) In Hernandez v. Chairman, Commission on Audit (179 SCRA 39, 45-46), the victim of
robbery was exonerated from liability for the sum of money belonging to others and lost by
him to robbers.

Respondents filed their Comment and petitioners filed their Reply thereto. The parties subsequently
submitted their respective Memoranda.
We find no merit in the petition.
To begin with, although it is true that indeed the CA findings were exact reproductions of the
arguments raised in respondents (appellants) brief filed with the CA, we find the same to be not
fatally infirmed. Upon examination of the Decision, we find that it expressed clearly and distinctly the
facts and the law on which it is based as required by Section 8, Article VIII of the Constitution. The
discretion to decide a case one way or another is broad enough to justify the adoption of the
arguments put forth by one of the parties, as long as these are legally tenable and supported by law
and the facts on records.11
Our jurisdiction under Rule 45 of the Rules of Court is limited to the review of errors of law
committed by the appellate court. Generally, the findings of fact of the appellate court are deemed
conclusive and we are not duty-bound to analyze and calibrate all over again the evidence adduced
by the parties in the court a quo.12 This rule, however, is not without exceptions, such as where the
factual findings of the Court of Appeals and the trial court are conflicting or contradictory13 as is
obtaining in the instant case.
However, after a careful examination of the records, we find no justification to absolve petitioner
Sicam from liability.
The CA correctly pierced the veil of the corporate fiction and adjudged petitioner Sicam liable
together with petitioner corporation. The rule is that the veil of corporate fiction may be pierced when
made as a shield to perpetrate fraud and/or confuse legitimate issues. 14 The theory of corporate
entity was not meant to promote unfair objectives or otherwise to shield them.15
Notably, the evidence on record shows that at the time respondent Lulu pawned her jewelry, the
pawnshop was owned by petitioner Sicam himself. As correctly observed by the CA, in all the
pawnshop receipts issued to respondent Lulu in September 1987, all bear the words "Agencia de R.
C. Sicam," notwithstanding that the pawnshop was allegedly incorporated in April 1987. The receipts
issued after such alleged incorporation were still in the name of "Agencia de R. C. Sicam," thus
inevitably misleading, or at the very least, creating the wrong impression to respondents and the
public as well, that the pawnshop was owned solely by petitioner Sicam and not by a corporation.
Even petitioners counsel, Atty. Marcial T. Balgos, in his letter16 dated October 15, 1987 addressed to
the Central Bank, expressly referred to petitioner Sicam as the proprietor of the pawnshop
notwithstanding the alleged incorporation in April 1987.
We also find no merit in petitioners' argument that since respondents had alleged in their Amended
Complaint that petitioner corporation is the present owner of the pawnshop, the CA is bound to
decide the case on that basis.
Section 4 Rule 129 of the Rules of Court provides that an admission, verbal or written, made by a
party in the course of the proceedings in the same case, does not require proof. The admission may
be contradicted only by showing that it was made through palpable mistake or that no such
admission was made.
Thus, the general rule that a judicial admission is conclusive upon the party making it and does not
require proof, admits of two exceptions, to wit: (1) when it is shown that such admission was made
through palpable mistake, and (2) when it is shown that no such admission was in fact made. The

latter exception allows one to contradict an admission by denying that he made such an
admission.17
The Committee on the Revision of the Rules of Court explained the second exception in this wise:
x x x if a party invokes an "admission" by an adverse party, but cites the admission "out of
context," then the one making the "admission" may show that he made no "such" admission,
or that his admission was taken out of context.
x x x that the party can also show that he made no "such admission", i.e., not in the
sense in which the admission is made to appear.
That is the reason for the modifier "such" because if the rule simply states that the admission
may be contradicted by showing that "no admission was made," the rule would not really be
providing for a contradiction of the admission but just a denial.18 (Emphasis supplied).
While it is true that respondents alleged in their Amended Complaint that petitioner corporation is the
present owner of the pawnshop, they did so only because petitioner Sicam alleged in his Answer to
the original complaint filed against him that he was not the real party-in-interest as the pawnshop
was incorporated in April 1987. Moreover, a reading of the Amended Complaint in its entirety shows
that respondents referred to both petitioner Sicam and petitioner corporation where they
(respondents) pawned their assorted pieces of jewelry and ascribed to both the failure to observe
due diligence commensurate with the business which resulted in the loss of their pawned jewelry.
Markedly, respondents, in their Opposition to petitioners Motion to Dismiss Amended Complaint,
insofar as petitioner Sicam is concerned, averred as follows:
Roberto C. Sicam was named the defendant in the original complaint because the pawnshop
tickets involved in this case did not show that the R.C. Sicam Pawnshop was a corporation.
In paragraph 1 of his Answer, he admitted the allegations in paragraph 1 and 2 of the
Complaint. He merely added "that defendant is not now the real party in interest in this case."
It was defendant Sicam's omission to correct the pawnshop tickets used in the subject
transactions in this case which was the cause of the instant action. He cannot now ask for
the dismissal of the complaint against him simply on the mere allegation that his pawnshop
business is now incorporated. It is a matter of defense, the merit of which can only be
reached after consideration of the evidence to be presented in due course.19
Unmistakably, the alleged admission made in respondents' Amended Complaint was taken "out of
context" by petitioner Sicam to suit his own purpose. Ineluctably, the fact that petitioner Sicam
continued to issue pawnshop receipts under his name and not under the corporation's name
militates for the piercing of the corporate veil.
We likewise find no merit in petitioners' contention that the CA erred in piercing the veil of corporate
fiction of petitioner corporation, as it was not an issue raised and litigated before the RTC.
Petitioner Sicam had alleged in his Answer filed with the trial court that he was not the real party-ininterest because since April 20, 1987, the pawnshop business initiated by him was incorporated and
known as Agencia deR.C. Sicam. In the pre-trial brief filed by petitioner Sicam, he submitted that as
far as he was concerned, the basic issue was whether he is the real party in interest against whom
the complaint should be directed.20 In fact, he subsequently moved for the dismissal of the complaint

as to him but was not favorably acted upon by the trial court. Moreover, the issue was squarely
passed upon, although erroneously, by the trial court in its Decision in this manner:
x x x The defendant Roberto Sicam, Jr likewise denies liability as far as he is concerned for
the reason that he cannot be made personally liable for a claim arising from a corporate
transaction.
This Court sustains the contention of the defendant Roberto C. Sicam, Jr. The amended
complaint itself asserts that "plaintiff pawned assorted jewelries in defendant's pawnshop." It
has been held that " as a consequence of the separate juridical personality of a corporation,
the corporate debt or credit is not the debt or credit of the stockholder, nor is the
stockholder's debt or credit that of a corporation.21
Clearly, in view of the alleged incorporation of the pawnshop, the issue of whether petitioner Sicam
is personally liable is inextricably connected with the determination of the question whether the
doctrine of piercing the corporate veil should or should not apply to the case.
The next question is whether petitioners are liable for the loss of the pawned articles in their
possession.
Petitioners insist that they are not liable since robbery is a fortuitous event and they are not negligent
at all.
We are not persuaded.
Article 1174 of the Civil Code provides:
Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no person
shall be responsible for those events which could not be foreseen or which, though foreseen,
were inevitable.
Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is therefore,
not enough that the event should not have been foreseen or anticipated, as is commonly believed
but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the happening is
not impossibility to foresee the same. 22
To constitute a fortuitous event, the following elements must concur: (a) the cause of the unforeseen
and unexpected occurrence or of the failure of the debtor to comply with obligations must be
independent of human will; (b) it must be impossible to foresee the event that constitutes
the caso fortuito or, if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be
such as to render it impossible for the debtor to fulfill obligations in a normal manner; and, (d) the
obligor must be free from any participation in the aggravation of the injury or loss. 23
The burden of proving that the loss was due to a fortuitous event rests on him who invokes it.24 And,
in order for a fortuitous event to exempt one from liability, it is necessary that one has committed no
negligence or misconduct that may have occasioned the loss. 25
It has been held that an act of God cannot be invoked to protect a person who has failed to take
steps to forestall the possible adverse consequences of such a loss. One's negligence may have
concurred with an act of God in producing damage and injury to another; nonetheless, showing that

the immediate or proximate cause of the damage or injury was a fortuitous event would not exempt
one from liability. When the effect is found to be partly the result of a person's participation -whether by active intervention, neglect or failure to act -- the whole occurrence is humanized and
removed from the rules applicable to acts of God. 26
Petitioner Sicam had testified that there was a security guard in their pawnshop at the time of the
robbery. He likewise testified that when he started the pawnshop business in 1983, he thought of
opening a vault with the nearby bank for the purpose of safekeeping the valuables but was
discouraged by the Central Bank since pawned articles should only be stored in a vault inside the
pawnshop. The very measures which petitioners had allegedly adopted show that to them the
possibility of robbery was not only foreseeable, but actually foreseen and anticipated. Petitioner
Sicams testimony, in effect, contradicts petitioners defense of fortuitous event.
Moreover, petitioners failed to show that they were free from any negligence by which the loss of the
pawned jewelry may have been occasioned.
Robbery per se, just like carnapping, is not a fortuitous event. It does not foreclose the possibility of
negligence on the part of herein petitioners. In Co v. Court of Appeals,27 the Court held:
It is not a defense for a repair shop of motor vehicles to escape liability simply because the
damage or loss of a thing lawfully placed in its possession was due to carnapping.
Carnapping per se cannot be considered as a fortuitous event. The fact that a thing was
unlawfully and forcefully taken from another's rightful possession, as in cases of
carnapping, does not automatically give rise to a fortuitous event. To be considered
as such, carnapping entails more than the mere forceful taking of another's property.
It must be proved and established that the event was an act of God or was done solely
by third parties and that neither the claimant nor the person alleged to be negligent
has any participation. In accordance with the Rules of Evidence, the burden of proving
that the loss was due to a fortuitous event rests on him who invokes it which in this
case is the private respondent. However, other than the police report of the alleged
carnapping incident, no other evidence was presented by private respondent to the effect
that the incident was not due to its fault. A police report of an alleged crime, to which only
private respondent is privy, does not suffice to establish the carnapping. Neither does it
prove that there was no fault on the part of private respondent notwithstanding the parties'
agreement at the pre-trial that the car was carnapped. Carnapping does not foreclose the
possibility of fault or negligence on the part of private respondent.28
Just like in Co, petitioners merely presented the police report of the Paraaque Police Station on the
robbery committed based on the report of petitioners' employees which is not sufficient to establish
robbery. Such report also does not prove that petitioners were not at fault.
On the contrary, by the very evidence of petitioners, the CA did not err in finding that petitioners are
guilty of concurrent or contributory negligence as provided in Article 1170 of the Civil Code, to wit:
Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence,
or delay, and those who in any manner contravene the tenor thereof, are liable for
damages.29
Article 2123 of the Civil Code provides that with regard to pawnshops and other establishments
which are engaged in making loans secured by pledges, the special laws and regulations concerning
them shall be observed, and subsidiarily, the provisions on pledge, mortgage and antichresis.

The provision on pledge, particularly Article 2099 of the Civil Code, provides that the creditor shall
take care of the thing pledged with the diligence of a good father of a family. This means that
petitioners must take care of the pawns the way a prudent person would as to his own property.
In this connection, Article 1173 of the Civil Code further provides:
Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence
which is required by the nature of the obligation and corresponds with the circumstances of
the persons, of time and of the place. When negligence shows bad faith, the provisions of
Articles 1171 and 2201, paragraph 2 shall apply.
If the law or contract does not state the diligence which is to be observed in the performance,
that which is expected of a good father of a family shall be required.
We expounded in Cruz v. Gangan30 that negligence is the omission to do something which a
reasonable man, guided by those considerations which ordinarily regulate the conduct of human
affairs, would do; or the doing of something which a prudent and reasonable man would not do.31 It is
want of care required by the circumstances.
A review of the records clearly shows that petitioners failed to exercise reasonable care and caution
that an ordinarily prudent person would have used in the same situation. Petitioners were guilty of
negligence in the operation of their pawnshop business. Petitioner Sicam testified, thus:
Court:
Q. Do you have security guards in your pawnshop?
A. Yes, your honor.
Q. Then how come that the robbers were able to enter the premises when according to you
there was a security guard?
A. Sir, if these robbers can rob a bank, how much more a pawnshop.
Q. I am asking you how were the robbers able to enter despite the fact that there was a
security guard?
A. At the time of the incident which happened about 1:00 and 2:00 o'clock in the afternoon
and it happened on a Saturday and everything was quiet in the area BF Homes Paraaque
they pretended to pawn an article in the pawnshop, so one of my employees allowed him to
come in and it was only when it was announced that it was a hold up.
Q. Did you come to know how the vault was opened?
A. When the pawnshop is official (sic) open your honor the pawnshop is partly open. The
combination is off.
Q. No one open (sic) the vault for the robbers?
A. No one your honor it was open at the time of the robbery.

Q. It is clear now that at the time of the robbery the vault was open the reason why the
robbers were able to get all the items pawned to you inside the vault.
A. Yes sir.32
revealing that there were no security measures adopted by petitioners in the operation of the
pawnshop. Evidently, no sufficient precaution and vigilance were adopted by petitioners to protect
the pawnshop from unlawful intrusion. There was no clear showing that there was any security guard
at all. Or if there was one, that he had sufficient training in securing a pawnshop. Further, there is no
showing that the alleged security guard exercised all that was necessary to prevent any untoward
incident or to ensure that no suspicious individuals were allowed to enter the premises. In fact, it is
even doubtful that there was a security guard, since it is quite impossible that he would not have
noticed that the robbers were armed with caliber .45 pistols each, which were allegedly poked at the
employees.33 Significantly, the alleged security guard was not presented at all to corroborate
petitioner Sicam's claim; not one of petitioners' employees who were present during the robbery
incident testified in court.
Furthermore, petitioner Sicam's admission that the vault was open at the time of robbery is clearly a
proof of petitioners' failure to observe the care, precaution and vigilance that the circumstances justly
demanded. Petitioner Sicam testified that once the pawnshop was open, the combination was
already off. Considering petitioner Sicam's testimony that the robbery took place on a Saturday
afternoon and the area in BF Homes Paraaque at that time was quiet, there was more reason for
petitioners to have exercised reasonable foresight and diligence in protecting the pawned jewelries.
Instead of taking the precaution to protect them, they let open the vault, providing no difficulty for the
robbers to cart away the pawned articles.
We, however, do not agree with the CA when it found petitioners negligent for not taking steps to
insure themselves against loss of the pawned jewelries.
Under Section 17 of Central Bank Circular No. 374, Rules and Regulations for Pawnshops, which
took effect on July 13, 1973, and which was issued pursuant to Presidential Decree No. 114,
Pawnshop Regulation Act, it is provided that pawns pledged must be insured, to wit:
Sec. 17. Insurance of Office Building and Pawns- The place of business of a pawnshop and
the pawns pledged to it must be insured against fire and against burglary as well as for
the latter(sic), by an insurance company accredited by the Insurance Commissioner.
However, this Section was subsequently amended by CB Circular No. 764 which took effect on
October 1, 1980, to wit:
Sec. 17 Insurance of Office Building and Pawns The office building/premises and pawns of
a pawnshop must be insured against fire. (emphasis supplied).
where the requirement that insurance against burglary was deleted. Obviously, the Central Bank
considered it not feasible to require insurance of pawned articles against burglary.
The robbery in the pawnshop happened in 1987, and considering the above-quoted amendment,
there is no statutory duty imposed on petitioners to insure the pawned jewelry in which case it was
error for the CA to consider it as a factor in concluding that petitioners were negligent.

Nevertheless, the preponderance of evidence shows that petitioners failed to exercise the diligence
required of them under the Civil Code.
The diligence with which the law requires the individual at all times to govern his conduct varies with
the nature of the situation in which he is placed and the importance of the act which he is to
perform.34 Thus, the cases ofAustria v. Court of Appeals,35 Hernandez v. Chairman, Commission on
Audit36 and Cruz v. Gangan37 cited by petitioners in their pleadings, where the victims of robbery
were exonerated from liability, find no application to the present case.
In Austria, Maria Abad received from Guillermo Austria a pendant with diamonds to be sold on
commission basis, but which Abad failed to subsequently return because of a robbery committed
upon her in 1961. The incident became the subject of a criminal case filed against several persons.
Austria filed an action against Abad and her husband (Abads) for recovery of the pendant or its
value, but the Abads set up the defense that the robbery extinguished their obligation. The RTC
ruled in favor of Austria, as the Abads failed to prove robbery; or, if committed, that Maria Abad was
guilty of negligence. The CA, however, reversed the RTC decision holding that the fact of robbery
was duly established and declared the Abads not responsible for the loss of the jewelry on account
of a fortuitous event. We held that for the Abads to be relieved from the civil liability of returning the
pendant under Art. 1174 of the Civil Code, it would only be sufficient that the unforeseen event, the
robbery, took place without any concurrent fault on the debtors part, and this can be done by
preponderance of evidence; that to be free from liability for reason of fortuitous event, the debtor
must, in addition to the casus itself, be free of any concurrent or contributory fault or negligence.38
We found in Austria that under the circumstances prevailing at the time the Decision was
promulgated in 1971, the City of Manila and its suburbs had a high incidence of crimes against
persons and property that rendered travel after nightfall a matter to be sedulously avoided without
suitable precaution and protection; that the conduct of Maria Abad in returning alone to her house in
the evening carrying jewelry of considerable value would have been negligence per se and would
not exempt her from responsibility in the case of robbery. However we did not hold Abad liable for
negligence since, the robbery happened ten years previously; i.e., 1961, when criminality had not
reached the level of incidence obtaining in 1971.
In contrast, the robbery in this case took place in 1987 when robbery was already prevalent and
petitioners in fact had already foreseen it as they wanted to deposit the pawn with a nearby bank for
safekeeping. Moreover, unlike in Austria, where no negligence was committed, we found petitioners
negligent in securing their pawnshop as earlier discussed.
In Hernandez, Teodoro Hernandez was the OIC and special disbursing officer of the Ternate Beach
Project of the Philippine Tourism in Cavite. In the morning of July 1, 1983, a Friday, he went to
Manila to encash two checks covering the wages of the employees and the operating expenses of
the project. However for some reason, the processing of the check was delayed and was completed
at about 3 p.m. Nevertheless, he decided to encash the check because the project employees would
be waiting for their pay the following day; otherwise, the workers would have to wait until July 5, the
earliest time, when the main office would open. At that time, he had two choices: (1) return to
Ternate, Cavite that same afternoon and arrive early evening; or (2) take the money with him to his
house in Marilao, Bulacan, spend the night there, and leave for Ternate the following day. He chose
the second option, thinking it was the safer one. Thus, a little past 3 p.m., he took a passenger jeep
bound for Bulacan. While the jeep was on Epifanio de los Santos Avenue, the jeep was held up and
the money kept by Hernandez was taken, and the robbers jumped out of the jeep and ran.
Hernandez chased the robbers and caught up with one robber who was subsequently charged with
robbery and pleaded guilty. The other robber who held the stolen money escaped. The Commission
on Audit found Hernandez negligent because he had not brought the cash proceeds of the checks to

his office in Ternate, Cavite for safekeeping, which is the normal procedure in the handling of funds.
We held that Hernandez was not negligent in deciding to encash the check and bringing it home to
Marilao, Bulacan instead of Ternate, Cavite due to the lateness of the hour for the following reasons:
(1) he was moved by unselfish motive for his co-employees to collect their wages and salaries the
following day, a Saturday, a non-working, because to encash the check on July 5, the next working
day after July 1, would have caused discomfort to laborers who were dependent on their wages for
sustenance; and (2) that choosing Marilao as a safer destination, being nearer, and in view of the
comparative hazards in the trips to the two places, said decision seemed logical at that time. We
further held that the fact that two robbers attacked him in broad daylight in the jeep while it was on a
busy highway and in the presence of other passengers could not be said to be a result of his
imprudence and negligence.
Unlike in Hernandez where the robbery happened in a public utility, the robbery in this case took
place in the pawnshop which is under the control of petitioners. Petitioners had the means to screen
the persons who were allowed entrance to the premises and to protect itself from unlawful intrusion.
Petitioners had failed to exercise precautionary measures in ensuring that the robbers were
prevented from entering the pawnshop and for keeping the vault open for the day, which paved the
way for the robbers to easily cart away the pawned articles.
In Cruz, Dr. Filonila O. Cruz, Camanava District Director of Technological Education and Skills
Development Authority (TESDA), boarded the Light Rail Transit (LRT) from Sen. Puyat Avenue to
Monumento when her handbag was slashed and the contents were stolen by an unidentified person.
Among those stolen were her wallet and the government-issued cellular phone. She then reported
the incident to the police authorities; however, the thief was not located, and the cellphone was not
recovered. She also reported the loss to the Regional Director of TESDA, and she requested that
she be freed from accountability for the cellphone. The Resident Auditor denied her request on the
ground that she lacked the diligence required in the custody of government property and was
ordered to pay the purchase value in the total amount of P4,238.00. The COA found no sufficient
justification to grant the request for relief from accountability. We reversed the ruling and found that
riding the LRT cannot per se be denounced as a negligent act more so because Cruzs mode of
transit was influenced by time and money considerations; that she boarded the LRT to be able to
arrive in Caloocan in time for her 3 pm meeting; that any prudent and rational person under similar
circumstance can reasonably be expected to do the same; that possession of a cellphone should not
hinder one from boarding the LRT coach as Cruz did considering that whether she rode a jeep or
bus, the risk of theft would have also been present; that because of her relatively low position and
pay, she was not expected to have her own vehicle or to ride a taxicab; she did not have a
government assigned vehicle; that placing the cellphone in a bag away from covetous eyes and
holding on to that bag as she did is ordinarily sufficient care of a cellphone while traveling on board
the LRT; that the records did not show any specific act of negligence on her part and negligence can
never be presumed.
Unlike in the Cruz case, the robbery in this case happened in petitioners' pawnshop and they were
negligent in not exercising the precautions justly demanded of a pawnshop.
WHEREFORE, except for the insurance aspect, the Decision of the Court of Appeals dated March
31, 2003 and its Resolution dated August 8, 2003, are AFFIRMED.
Costs against petitioners.
SO ORDERED.
Ynares-Santiago, Chairperson, Chico-Nazario, Nachura, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 165955

August 10, 2007

FILINVEST LAND, INC., Petitioner,

vs.
FLOOD-AFFECTED HOMEOWNERS OF MERITVILLE ALLIANCE, Represented by GABRIEL
DELIM and VICTOR RAQUIPISO, Respondents.
DECISION
SANDOVAL-GUTIERREZ,J.:
For our resolution is the instant Petition for Review on Certiorari assailing the Decision1 dated July
29, 2004 and Resolution2 dated November 9, 2004 of the Court Appeals in CA-G.R. SP No. 77799.
The undisputed facts are:
Filinvest Land, Inc., petitioner, is a domestic corporation engaged in realty development business.
Among its real estate development ventures is Meritville Townhouse Subdivision (Meritville), the first
low-cost townhouse project in Pulang Lupa, Las Pias City. The project site is located near the
heavily-silted Naga River.
Respondents herein, who purchased their housing units from petitioner, are fifty-four (54) of the
residents of Meritville. Subsequently, the area around Meritville was developed. New subdivisions
were built with elevations higher than that of Meritville. This development turned Meritville into a
catch basin from rains during the wet season and from water coming from the Naga River every time
it overflows.
Due to perennial flood, respondents townhouses suffered severe damages. On various dates,
specifically on August 1, 1993, March 25, 1994, and August 11, 1994, respondents sent letters to
petitioner demanding that it address the problem.
Petitioner then installed in the area a pumping station with a capacity of 6,000 gallons per minute. It
also improved the drainage system. But these measures were not enough. Thus, the National Home
Mortgage Finance Corporation declared the affected townhouses "unacceptable collaterals."
On June 15, 1996, respondents filed with the Housing and Land Use Regulatory Board (HLURB) a
complaint against petitioner, docketed as HLRB Case No. REM-030796-9106. Respondents prayed
that petitioner be ordered to upgrade the elevation of the affected areas and repair the units from
Block 17 to 25. In the alternative, they asked petitioner to transfer them to its other flood-free
housing projects, allowing them to "sell-back" their affected units.
In its answer, petitioner countered, among others, that respondents took appropriate measures, such
as the installation of a pumping station and the improvement of the drainage, to prevent and control
the flooding of Meritville; and that these measures had been approved by the local government of
Las Pias City.

During the proceedings before the HLURB, the Arbiter conducted an ocular inspection of the area
and found that:
1. Flooding still recurs in the area with an average depth of approximately 1.25 meters,
particularly along Medal StreetMajority of the affected houses have damaged appliances,
furniture, wall partitioning, and panel doors.
2. It seems that the pump provided by the owner/developer located within Orchard Homes,
adjacent to Naga River, could not accommodate the volume of flood water. The said river
remains to be silted and undredged by the concerned party during the time of inspection.
3. The operation of the said pump was creating disturbing loud noise despite enclosed
housing provided by the owner/developer.
The Arbiter also found that petitioner failed to secure the conformity of the affected homeowners
before it installed its drainage system; and that it did not "observe honesty and good faith in solving
the issue at bar."
On February 19, 1997, the Arbiter issued a Decision, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Enjoining the respondent from collecting the amortization payment from the complainants
until such time that the flooding problem is rectified to the satisfaction of the complainants;
2. Ordering the respondent to upgrade the physical elevation of the affected streets and
alleys and elevate the units from Block 17 to 25, maintaining the material specification,
interior and exterior finishes, including the improvements, with the said respondent providing
for free temporary shelters with complete amenities.
In the alternative, to move the affected homeowners to other flood free areas of respondents
subdivision with units of similar area on a no money-out arrangement.
3. In the event the respondent would opt for a sell-back of the affected seventy-seven (77)
units, the respondent is directed to compensate the complainants for each unit based on the
present market value, plus expenses on improvements on the units, plus moral and
exemplary damages in the amount ofP25,000.00 for each complainant homeowner.
However, it is understood that to the extent that the complainants have not yet paid in full the
agreed consideration, the corresponding value thereof should be deducted from the
foregoing.
4. Directing the respondent to pay the amount of P20,000.00 as and by way of attorneys
fees.
IT IS SO ORDERED.
Upon appeal by petitioner, the HLURB Board of Commissioners rendered its Decision affirming the
Arbiters judgment with modification, thus:

WHEREFORE, the Decision of the Office below is MODIFIED with the deletion of directive No. 2
thereof. Furthermore, in order to determine the present market value of the affected lots as well as
the improvements thereon for purposes of sell back, a Board of Appraisers consisting of three
members, shall be constituted as follows:
a. Complainant and respondent shall each select its representative.
b. The parties will then pick as third member, a person mutually acceptable, to come from a
list of independent real estate appraisers.
c. The Board of Appraisers shall complete its task and shall submit its report to the Board
within 60 days.
d. The parties shall equally share the costs of the appraisers.
SO ORDERED.
Petitioner then interposed an appeal to the Office of the President.
In its Decision dated May 29, 2003, the Office of the President "adopted by reference" the appealed
judgment, thus:
WHEREFORE, premises considered, the appeal is hereby DISMISSED. The findings of fact and
conclusions of law contained in the Decision of the HLURB First Division modifying the decision of
the Arbiter are hereby adopted by reference.
SO ORDERED.
Forthwith, petitioner filed with the Court of Appeals a petition for review under Rule 43 of the 1997
Rules of Civil Procedure, as amended.
In its Decision dated July 29, 2004, the Court of Appeals affirmed the judgment of the Office of the
President.
Petitioner filed a motion for reconsideration, but it was denied in the November 9, 2004 Resolution of
the appellate court.
Hence, the instant petition.
The core issue before us is whether the flooding in the Meritville has been caused by petitioners
negligence.
Article 1170 of the Civil Code provides:
ART. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof, are liable for damages.
In Philippine National Construction Corporation v. Court of Appeals,3 we defined negligence as "the
omission to do something which a reasonable man, guided by those considerations which ordinarily
regulate the conduct of human affairs, would do, or the doing of something which a prudent and

reasonable man would do." It is the failure to observe that degree of care, precaution and vigilance
that the circumstances just demand, whereby that other person suffers injury.4 In Bank of the
Philippine Islands v. Casa Montessori Internationale,5 we reiterated the rule that negligence is never
presumed but must be proven by whoever alleges it. In determining whether or not a party acted
negligently, the constant test is: "Did the defendant in doing the negligent act use that reasonable
care and caution which an ordinarily prudent person would have used in the same situation? If not,
then he is guilty of negligence."6
In light of the foregoing principles, we hold that negligence cannot be attributed to petitioner.
First, it is not disputed that the Meritville is the first subdivision to be developed in the locality and
that subsequent developments elevated the surrounding areas to a level higher by more than one
meter than that of Meritville. Naturally, the water from these surrounding areas would flow to the
lower area which is Meritville. It has to be emphasized that prior to these developments, there was
no flooding in the subdivision.
Second, we recall the finding of the Housing and Land Use Arbiter that the Naga River has remained
heavily silted and undredged. Due to the heavy silting, the river could not take the volume of water
flowing into it, thus causing the flooding of the area.
Is petitioner liable for its failure to address the silting problem of the Naga River? We do not think so.
Article 502 of the Civil Code provides that rivers and their natural bed are of public dominion. As
Naga River is a public property, hence, it is the government which should address the problem.
Petitioner contends that under Republic Act No. 7924,7 it is the Metro Manila Development Authority
(MMDA) which should shoulder the responsibility, invoking Section 3, which partly reads:
SEC. 3. Scope of MMDA Services. Metro-wide services under the jurisdiction of the MMDA are
those services which have metro-wide impact and transcend local political boundaries or
entail huge expenditures such that it would not be viable for said services to be provided by
the individual local government units(LGUs) comprising Metropolitan Manila. These services
shall include:
(a) Development planning which includes the preparation of medium and long-term development
plans; the development, evaluation and packaging of projects; investments programming; and
coordination and monitoring of plan, program and project implementation.
xxx
(d) Flood control and sewerage management, which include the formulation and implementation
of policies, standards, programs and projects for an integrated flood control, drainage and sewerage
system.
xxx
SEC. 5, provides in part:
(a) Formulate, coordinate and regulate the implementation of medium and long-term plans
and programs for the delivery of metro-wide services, land use and physical development
within Metropolitan Manila, consistent with national development objectives and priorities.

(b) Prepare, coordinate and regulate the implementation of medium-term investment

programs for metro-wide services which shall indicate sources and uses of funds for priority
programs and projects, and which shall include the packaging of projects and presentation to
funding institutions; x x x
(g) Perform other related functions required to achieve the objectives of the MMDA, including
the undertaking of delivery of basic services to the local government units, when deemed
necessary subject to prior coordination with and consent of the local government unit
concerned.
In Metropolitan Manila Development Authority v. Bel-Air Village Association, Inc.,8 this Court,
speaking through then Associate Justice (now Chief Justice) Reynato S. Puno, defined "metro-wide
services" as those "services which have metro-wide impact and transcend local political boundaries
or entail huge expenditures such that it would not be viable for said services to be provided by the
individual local government units comprising Metro Manila." These basic "metro-wide services"
include: (1) development planning; (2) transport and traffic management; (3) solid waste disposal
and management; (4) flood control and sewerage management; (5) urban renewal, zoning and land
use planning, and shelter services; (6) health and sanitation, urban protection, and pollution control;
and (7) public safety. The "powers of the MMDA are limited to the following acts: formulation,
coordination, regulation, implementation, preparation, management, monitoring, setting of policies,
installation of a system, and administration." The Court then holds that the MMDA is a "development
authority." In other words, the MMDA is "an agency created for the purpose of laying down policies
and coordinating with the various national government agencies, peoples organizations, nongovernmental organizations, and the private sector for the efficient and expeditious delivery of basic
services" in the Metropolitan Manila area. In Metropolitan Manila Development Authority v.
Garin,9 these pronouncements were reiterated. Petitioner, therefore, cannot seek relief from the
MMDA as its services only involve laying down policies and coordination with other agencies relative
to its primary functions.
What is pertinent to respondents cause is Section 17 of the Local Government Code quoted as
follows:
SEC. 17. Basic Services and Facilities
(a) Local government units shall endeavor to be self-reliant and shall continue exercising the
powers and discharging the duties and functions currently vested upon them. They shall also
discharge the functions and responsibilities of national agencies and offices devolved to
them pursuant to this Code. Local government units shall likewise exercise such other
powers and discharge such other functions and responsibilities as are necessary,
appropriate, or incidental to efficient and effective provision of the basic services and
facilities enumerated herein.
(b) Such basic services and facilities include, but are not limited to the following:
For a Municipality:
xxx
(viii) Infrastructure facilities intended primarily to service the needs of the residents of the
municipality and which are funded out of the municipal funds including but not limited to municipal
roads and bridges; school buildings and other facilities for public elementary and secondary schools;
clinics, health centers and other health facilities necessary to carry out health services; communal

irrigation, small water impounding projects and other similar projects, fish ports; artesian wells,
spring development, rainwater collectors and water supply systems; seawalls, dikes, drainage and
sewerage; and flood control, traffic signals and road signs, and similar facilities.
xxx
4) For A City:
All the services and facilities of the municipality and province x x x
From the above provisions, it is the city government of Las Pias City which has the duty to control
the flood in Meritville Townhouse Subdivision.
WHEREFORE, we GRANT the petition. The assailed Decision and Resolution of the Court of
Appeals in CA-G.R. SP No. 77799 are REVERSED.
SO ORDERED.

THIRD DIVISION
PHILIPPINE NATIONAL RAILWAYS
and VIRGILIO J. BORJA,
Petitioners,

G.R. No. 157658

Present:

YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
COURT OF APPEALS (Second Division), CHICO-NAZARIO,
NACHURA, and
CORAZON C. AMORES, MA. EMILIE
REYES, JJ.
A. MOJICA, CECILE C. SISON, DINO
C. AMORES, LARISA C. AMORES,
ARMAND JINO C. AMORES and JOHN Promulgated:
C. AMORES,
October 15, 2007
Respondents.
- versus -

x------------------------------------------------------------------------------------x
DECISION
NACHURA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the
1997 Rules of Civil Procedure, as amended, seeking to annul and set aside the
Decision[1] of the Court of Appeals (CA) in CA-G.R. CV No. 54906 which
reversed the Decision[2] of the Regional Trial Court (RTC) of Manila, Branch 28,
in Civil Case No. 92-61987.
The factual antecedents are as follows:
In the early afternoon of April 27, 1992, Jose Amores (Amores) was
traversing the railroad tracks in Kahilum II Street, Pandacan, Manila. Before
crossing the railroad track, he stopped for a while then proceeded
accordingly.[3] Unfortunately, just as Amores was at the intersection, a Philippine
National Railways (PNR) train with locomotive number T-517 turned up and
collided with the car.[4]

At the time of the mishap, there was neither a signal nor a crossing bar at the
intersection to warn motorists of an approaching train. Aside from the railroad
track, the only visible warning sign at that time was the defective standard
signboard STOP, LOOK and LISTEN wherein the sign Listen was lacking
while that of Look was bent.[5] No whistle blow from the train was likewise
heard before it finally bumped the car of Amores.[6] After impact, the car was
dragged about ten (10) meters beyond the center of the crossing.[7] Amores died as
a consequence thereof.
On July 22, 1992, the heirs of Amores, consisting of his surviving wife and
six children, herein respondents, filed a Complaint for Damages[8] against
petitioners PNR and Virgilio J. Borja (Borja), PNRs locomotive driver at the time
of the incident, before the RTC of Manila. The case was raffled to Branch 28 and
was docketed as Civil Case No. 92-61987. In their complaint, respondents averred
that the trains speedometer was defective, and that the petitioners negligence was
the proximate cause of the mishap for their failure to take precautions to prevent
injury to persons and property despite the dense population in the vicinity. They
then prayed for actual and moral damages, as well as attorneys fees.[9]
In their Answer,[10] the petitioners denied the allegations, stating that the
train was railroad-worthy and without any defect. According to them, the
proximate cause of the death of Amores was his own carelessness and negligence,
and Amores wantonly disregarded traffic rules and regulations in crossing the
railroad tracks and trying to beat the approaching train. They admitted that there
was no crossing bar at the site of the accident because it was merely
a barangay road.[11] PNR stressed that it exercised the diligence of a good father of
a family in the selection and supervision of the locomotive driver and train
engineer, Borja, and that the latter likewise used extraordinary diligence and
caution to avoid the accident. Petitioners further asserted that respondents had the
last clear chance to avoid the accident but recklessly failed to do so.
After trial on the merits, on August 22, 1996, the RTC rendered judgment in
favor of the petitioners, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered dismissing the

complaint of the plaintiffs and the defendants counterclaim.
The costs shall be halved and paid equally by the parties.
The counsel for the defendants is hereby ordered to inform this
court who is the legal representative of the deceased defendant, Virgilio
Borja, within ten (10) days from receipt of a copy of this decision.
SO ORDERED.[12]

The RTC rationalized that the proximate cause of the collision was Amores
fatal misjudgment and the reckless course of action he took in crossing the railroad
track even after seeing or hearing the oncoming train.
On appeal, the CA reversed the RTC decision, as follows:
WHEREFORE, the assailed Decision of the Regional Trial Court
of Manila, Branch 28 is hereby REVERSED. The defendants PNR and
the estate of Virgilio J. Borja are jointly and severally liable to pay
plaintiffs the following:
1)

2)

The amount of P122,300.00 for the cost of damage to the car;

and,
The amount of P50,000 as moral damages.

For lack of official receipts for funeral expenses and specimen of

the last pay slip of the deceased, the claim for reimbursement of funeral
expenses and claim for payment of support is hereby DENIED for lack
of basis. Costs against Defendants.
SO ORDERED.[13]

In reversing the trial courts decision, the appellate court found the
petitioners negligent. The court based the petitioners negligence on the failure of
PNR to install a semaphore or at the very least, to post a flagman, considering that
the crossing is located in a thickly populated area. Moreover, the signboard Stop,

Look and Listen was found insufficient because of its defective condition as
described above. Lastly, no negligence could be attributed to Amores as he
exercised reasonable diligence in crossing the railroad track.
Aggrieved by this reversal, the petitioners filed the present petition for
review on certiorari, raising the following grounds:
I
THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF
DISCRETION IN RENDERING ITS DECISION REVERSING THE
DECISION OF THE REGIONAL TRIAL COURT OF MANILA
BRANCH 28, IN NOT TAKING INTO CONSIDERATION THE
PROVISION OF SECTION 42, R.A. 4136 OF THE LAND
TRANSPORTATION AND TRAFFIC CODE.
II
THE DECISION OF THE COURT OF APPEALS IS CONTRARY TO
THE EVIDENCE ON RECORD ADDUCED IN THE TRIAL ON THE
MERIT IN CIVIL CASE NO. 92-61987.[14]

The petitioners insist that Amores must have heard the trains whistle and
heeded the warning but, noting that the train was still a distance away and moving
slowly, he must have calculated that he could beat it to the other side of the track
before the train would arrive at the intersection. The petitioners likewise add that
the train was railroad-worthy and that its defective speedometer did not affect the
trains operation. Lastly, they insist that evidence showed sufficient warning signs
strategically installed at the crossing to alert both motorists and pedestrians.
Respondents, on the other hand, argue that the cause of the accident was
petitioners carelessness, imprudence and laxity in failing to provide a crossing bar
and keeper at the Kahilum II railway intersection. Considering that Kahilum II
Street is in the middle of a thickly populated squatters area, and many pedestrians
cross the railroad track, notwithstanding the fact that it is a public street and a main
thoroughfare utilized in going to Herran Street, the presence of adequate warning
signals would have prevented the untimely death of Amores. Another crucial point

raised by the respondents is the manner in which Borja applied the brakes of the
train only when the locomotive was already very near Amores car, as admitted by
witness Querimit. Finally, respondents claim that Borjas failure to blow the
locomotives horn, pursuant to the usual practice of doing the same 100 meters
before reaching the Kahilum II crossing point is an earmark of recklessness on the
part of the petitioners.
The petition must fail.
The only issue to be resolved in the present case is whether the appellate
court was correct in ascribing negligence on the part of the petitioners. It was
ascertained beyond quandary that the proximate cause of the collision is the
negligence and imprudence of the petitioner PNR and its locomotive driver, Borja,
in operating the passenger train.
As the action is predicated on negligence, the relevant provision is Article
2176 of the New Civil Code, which states that:
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 was no pre-existing contractual relation
between the parties, is called quasi-delict and is governed by the
provisions of this chapter.

We have thoroughly reviewed the records of the case and we find no cogent
reason to reverse the appellate courts decision. Negligence has been defined as
the failure to observe for the protection of the interests of another person that
degree of care, precaution, and vigilance which the circumstances justly demand,
whereby such other person suffers injury.[15] Using the aforementioned
philosophy, it may be reliably concluded that there is no hard and fast rule whereby
such degree of care and vigilance is calibrated; it is dependent upon the
circumstances in which a person finds himself. All that the law requires is that it is
perpetually compelling upon a person to use that care and diligence expected of
sensible men under comparable circumstances.[16]

We hold that the petitioners were negligent when the collision took place.
The transcript of stenographic notes reveals that the train was running at a fast
speed because notwithstanding the application of the ordinary and emergency
brakes, the train still dragged the car some distance away from the point of impact.
Evidence likewise unveils the inadequate precautions taken by petitioner PNR to
forewarn the public of the impending danger. Aside from not having any crossing
bar, no flagman or guard to man the intersection at all times was posted on the day
of the incident. A reliable signaling device in good condition, not just a dilapidated
Stop, Look and Listen signage because of many years of neglect, is needed to
give notice to the public. It is the responsibility of the railroad company to use
reasonable care to keep the signal devices in working order. Failure to do so would
be an indication of negligence.
As held in the case of Philippine National Railway v. Brunty,[17] it may
broadly be stated that railroad companies owe to the public a duty of exercising a
reasonable degree of care to avoid injury to persons and property at railroad
crossings, which duties pertain both to the operation of trains and to the
maintenance of the crossings. Moreover, every corporation constructing or
operating a railway shall make and construct at all points where such railway
crosses any public road, good, sufficient, and safe crossings, and erect at such
points, at sufficient elevation from such road as to admit a free passage of vehicles
of every kind, a sign with large and distinct letters placed thereon, to give notice of
the proximity of the railway, and warn persons of the necessity of looking out for
trains.[18] The failure of the PNR to put a cross bar, or signal light, flagman or
switchman, or semaphore is evidence of negligence and disregard of the safety of
the public, even if there is no law or ordinance requiring it, because public safety
demands that said device or equipment be installed.
The petitioners insist that a train has a right-of-way in a railroad crossing
under the existing laws. They derive their theory from Section 42 (d), Article III of
R.A. 4136, otherwise known as the Land Transportation and Traffic Code, which
states that:
The driver of a vehicle upon a highway shall bring to a full stop
such vehicle before traversing any through highway or railroad
crossing: Provided, That when it is apparent that no hazard exists, the

vehicle may be slowed down to five miles per hour instead of bringing it
to a full stop.

They claim that motorists are enjoined by law to stop, look and listen before
crossing railroad tracks and that a heavier responsibility rests upon the motorists in
avoiding accidents at level crossings.
It is true that one driving an automobile must use his faculties of seeing and
hearing when nearing a railroad crossing. However, the obligation to bring to a full
stop vehicles moving in public highways before traversing any through street
only accrues from the time the said through street or crossing is so designated
and sign-posted. From the records of the case, it can be inferred that Amores
exercised all the necessary precautions required of him as to avoid injury to
himself and to others. The witnesses testimonies showed that Amores slackened
his speed, made a full stop, and then proceeded to cross the tracks when he saw
that there was no impending danger to his life. Under these circumstances, we are
convinced that Amores did everything, with absolute care and caution, to avoid the
collision.
It is settled that every person or motorist crossing a railroad track should use
ordinary prudence and alertness to determine the proximity of a train before
attempting to cross. We are persuaded that the circumstances were beyond the
control of Amores for no person would sacrifice his precious life if he had the
slightest opportunity to evade the catastrophe. Besides, the authority in this
jurisdiction is that the failure of a railroad company to install a semaphore or at the
very least, to post a flagman or watchman to warn the public of the passing train
amounts to negligence.[19]
In view of the foregoing, We will now discuss the liability of petitioner
PNR. Article 2180[20] of the New Civil Code discusses the liability of the employer
once negligence or fault on the part of the employee has been established. The
employer is actually liable on the assumption of juris tantum that the
employer failed to exercise diligentissimi patris families in the selection and
supervision of its employees. The liability is primary and can only be negated by
showing due diligence in the selection and supervision of the employee, a factual
matter that has not been demonstrated.[21] Even the existence of hiring procedures

and supervisory employees cannot be incidentally invoked to overturn the

presumption of negligence on the part of the employer.[22]
WHEREFORE, the petition is DENIED. The Decision of the Court of
Appeals dated March 31, 2003 in CA-G.R. CV No. 54906 is hereby AFFIRMED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-47851 October 3, 1986
JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners,
vs.
THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and
the PHILIPPINE BAR ASSOCIATION, respondents.
G.R. No. L-47863 October 3, 1986
THE UNITED CONSTRUCTION CO., INC., petitioner,
vs.
COURT OF APPEALS, ET AL., respondents.
G.R. No. L-47896 October 3, 1986
PHILIPPINE BAR ASSOCIATION, ET AL., petitioners,
vs.
COURT OF APPEALS, ET AL., respondents.

PARAS, J.:
These are petitions for review on certiorari of the November 28, 1977 decision of the Court of
Appeals in CA-G.R. No. 51771-R modifying the decision of the Court of First Instance of
Manila, Branch V, in Civil Case No. 74958 dated September 21, 1971 as modified by the Order
of the lower court dated December 8, 1971. The Court of Appeals in modifying the decision of
the lower court included an award of an additional amount of P200,000.00 to the Philippine
Bar Association to be paid jointly and severally by the defendant United Construction Co. and
by the third-party defendants Juan F. Nakpil and Sons and Juan F. Nakpil.
The dispositive portion of the modified decision of the lower court reads:
WHEREFORE, judgment is hereby rendered:
(a) Ordering defendant United Construction Co., Inc. and third-party
defendants (except Roman Ozaeta) to pay the plaintiff, jointly and severally,
the sum of P989,335.68 with interest at the legal rate from November 29, 1968,
the date of the filing of the complaint until full payment;
(b) Dismissing the complaint with respect to defendant Juan J. Carlos;
(c) Dismissing the third-party complaint;

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

lack of merit;
(e) Ordering defendant United Construction Co., Inc. and third-party
defendants (except Roman Ozaeta) to pay the costs in equal shares.
SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169).
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the judgment appealed from is modified to include an award of
P200,000.00 in favor of plaintiff-appellant Philippine Bar Association, with
interest at the legal rate from November 29, 1968 until full payment to be paid
jointly and severally by defendant United Construction Co., Inc. and third party
defendants (except Roman Ozaeta). In all other respects, the judgment dated
September 21, 1971 as modified in the December 8, 1971 Order of the lower
court is hereby affirmed with COSTS to be paid by the defendant and third
party defendant (except Roman Ozaeta) in equal shares.
SO ORDERED.
Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan J.
Carlos in L-47863 seek the reversal of the decision of the Court of Appeals, among other
things, for exoneration from liability while petitioner Philippine Bar Association in L-47896
seeks the modification of aforesaid decision to obtain an award of P1,830,000.00 for the loss
of the PBA building plus four (4) times such amount as damages resulting in increased cost
of the building, P100,000.00 as exemplary damages; and P100,000.00 as attorney's fees.
These petitions arising from the same case filed in the Court of First Instance of Manila were
consolidated by this Court in the resolution of May 10, 1978 requiring the respective
respondents to comment. (Rollo, L-47851, p. 172).
The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp. 269348; pp. 520-521; Rollo, L-47851, p. 169) and affirmed by the Court of Appeals are as follows:
The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated under
the Corporation Law, decided to construct an office building on its 840 square meters lot
located at the comer of Aduana and Arzobispo Streets, Intramuros, Manila. The construction
was undertaken by the United Construction, Inc. on an "administration" basis, on the
suggestion of Juan J. Carlos, the president and general manager of said corporation. The
proposal was approved by plaintiff's board of directors and signed by its president Roman
Ozaeta, a third-party defendant in this case. The plans and specifications for the building
were prepared by the other third-party defendants Juan F. Nakpil & Sons. The building was
completed in June, 1966.
In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and its
environs and the building in question sustained major damage. The front columns of the
building buckled, causing the building to tilt forward dangerously. The tenants vacated the
building in view of its precarious condition. As a temporary remedial measure, the building
was shored up by United Construction, Inc. at the cost of P13,661.28.

On November 29, 1968, the plaintiff commenced this action for the recovery of damages
arising from the partial collapse of the building against United Construction, Inc. and its
President and General Manager Juan J. Carlos as defendants. Plaintiff alleges that the
collapse of the building was accused by defects in the construction, the failure of the
contractors to follow plans and specifications and violations by the defendants of the terms
of the contract.
Defendants in turn filed a third-party complaint against the architects who prepared the plans
and specifications, alleging in essence that the collapse of the building was due to the
defects in the said plans and specifications. Roman Ozaeta, the then president of the plaintiff
Bar Association was included as a third-party defendant for damages for having included
Juan J. Carlos, President of the United Construction Co., Inc. as party defendant.
On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and Juan F.
Nakpil presented a written stipulation which reads:
1. That in relation to defendants' answer with counterclaims and third- party
complaints and the third-party defendants Nakpil & Sons' answer thereto, the
plaintiff need not amend its complaint by including the said Juan F. Nakpil &
Sons and Juan F. Nakpil personally as parties defendant.
2. That in the event (unexpected by the undersigned) that the Court should find
after the trial that the above-named defendants Juan J. Carlos and United
Construction Co., Inc. are free from any blame and liability for the collapse of
the PBA Building, and should further find that the collapse of said building was
due to defects and/or inadequacy of the plans, designs, and specifications p
by the third-party defendants, or in the event that the Court may find Juan F.
Nakpil and Sons and/or Juan F. Nakpil contributorily negligent or in any way
jointly and solidarily liable with the defendants, judgment may be rendered in
whole or in part. as the case may be, against Juan F. Nakpil & Sons and/or
Juan F. Nakpil in favor of the plaintiff to all intents and purposes as if plaintiff's
complaint has been duly amended by including the said Juan F. Nakpil & Sons
and Juan F. Nakpil as parties defendant and by alleging causes of action
against them including, among others, the defects or inadequacy of the plans,
designs, and specifications prepared by them and/or failure in the performance
of their contract with plaintiff.
3. Both parties hereby jointly petition this Honorable Court to approve this
stipulation. (Record on Appeal, pp. 274-275; Rollo, L-47851,p.169).
Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which
among others, the parties agreed to refer the technical issues involved in the case to a
Commissioner. Mr. Andres O. Hizon, who was ultimately appointed by the trial court,
assumed his office as Commissioner, charged with the duty to try the following issues:
1. Whether the damage sustained by the PBA building during the August 2,
1968 earthquake had been caused, directly or indirectly, by:
(a) The inadequacies or defects in the plans and specifications prepared by
third-party defendants;

(b) The deviations, if any, made by the defendants from said plans and
specifications and how said deviations contributed to the damage sustained;
(c) The alleged failure of defendants to observe the requisite quality of
materials and workmanship in the construction of the building;
(d) The alleged failure to exercise the requisite degree of supervision expected
of the architect, the contractor and/or the owner of the building;
(e) An act of God or a fortuitous event; and
(f) Any other cause not herein above specified.
2. If the cause of the damage suffered by the building arose from a
combination of the above-enumerated factors, the degree or proportion in
which each individual factor contributed to the damage sustained;
3. Whether the building is now a total loss and should be completely
demolished or whether it may still be repaired and restored to a tenantable
condition. In the latter case, the determination of the cost of such restoration
or repair, and the value of any remaining construction, such as the foundation,
which may still be utilized or availed of (Record on Appeal, pp. 275-276; Rollo,
L-47851, p. 169).
Thus, the issues of this case were divided into technical issues and non-technical issues. As
aforestated the technical issues were referred to the Commissioner. The non-technical issues
were tried by the Court.
Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it may
topple down in case of a strong earthquake. The motions were opposed by the defendants
and the matter was referred to the Commissioner. Finally, on April 30, 1979 the building was
authorized to be demolished at the expense of the plaintiff, but not another earthquake of
high intensity on April 7, 1970 followed by other strong earthquakes on April 9, and 12, 1970,
caused further damage to the property. The actual demolition was undertaken by the buyer of
the damaged building. (Record on Appeal, pp. 278-280; Ibid.)
After the protracted hearings, the Commissioner eventually submitted his report on
September 25, 1970 with the findings that while the damage sustained by the PBA building
was caused directly by the August 2, 1968 earthquake whose magnitude was estimated at 7.3
they were also caused by the defects in the plans and specifications prepared by the thirdparty defendants' architects, deviations from said plans and specifications by the defendant
contractors and failure of the latter to observe the requisite workmanship in the construction
of the building and of the contractors, architects and even the owners to exercise the
requisite degree of supervision in the construction of subject building.
All the parties registered their objections to aforesaid findings which in turn were answered
by the Commissioner.
The trial court agreed with the findings of the Commissioner except as to the holding that the
owner is charged with full nine supervision of the construction. The Court sees no legal or
contractual basis for such conclusion. (Record on Appeal, pp. 309-328; Ibid).

Thus, on September 21, 1971, the lower court rendered the assailed decision which was
modified by the Intermediate Appellate Court on November 28, 1977.
All the parties herein appealed from the decision of the Intermediate Appellate Court. Hence,
these petitions.
On May 11, 1978, the United Architects of the Philippines, the Association of Civil Engineers,
and the Philippine Institute of Architects filed with the Court a motion to intervene as amicus
curiae. They proposed to present a position paper on the liability of architects when a
building collapses and to submit likewise a critical analysis with computations on the
divergent views on the design and plans as submitted by the experts procured by the parties.
The motion having been granted, the amicus curiaewere granted a period of 60 days within
which to submit their position.
After the parties had all filed their comments, We gave due course to the petitions in Our
Resolution of July 21, 1978.
The position papers of the amicus curiae (submitted on November 24, 1978) were duly noted.
The amicus curiae gave the opinion that the plans and specifications of the Nakpils were not
defective. But the Commissioner, when asked by Us to comment, reiterated his conclusion
that the defects in the plans and specifications indeed existed.
Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord. No.
4131) and the 1966 Asep Code, the Commissioner added that even if it can be proved that the
defects in theconstruction alone (and not in the plans and design) caused the damage to the
building, still the deficiency in the original design and jack of specific provisions against
torsion in the original plans and the overload on the ground floor columns (found by an the
experts including the original designer) certainly contributed to the damage which occurred.
(Ibid, p. 174).
In their respective briefs petitioners, among others, raised the following assignments of
errors: Philippine Bar Association claimed that the measure of damages should not be
limited to P1,100,000.00 as estimated cost of repairs or to the period of six (6) months for loss
of rentals while United Construction Co., Inc. and the Nakpils claimed that it was an act of
God that caused the failure of the building which should exempt them from responsibility and
not the defective construction, poor workmanship, deviations from plans and specifications
and other imperfections in the case of United Construction Co., Inc. or the deficiencies in the
design, plans and specifications prepared by petitioners in the case of the Nakpils. Both
UCCI and the Nakpils object to the payment of the additional amount of P200,000.00 imposed
by the Court of Appeals. UCCI also claimed that it should be reimbursed the expenses of
shoring the building in the amount of P13,661.28 while the Nakpils opposed the payment of
damages jointly and solidarity with UCCI.
The pivotal issue in this case is whether or not an act of God-an unusually strong
earthquake-which caused the failure of the building, exempts from liability, parties who are
otherwise liable because of their negligence.
The applicable law governing the rights and liabilities of the parties herein is Article 1723 of
the New Civil Code, which provides:

Art. 1723. The engineer or architect who drew up the plans and specifications
for a building is liable for damages if within fifteen years from the completion
of the structure the same should collapse by reason of a defect in those plans
and specifications, or due to the defects in the ground. The contractor is
likewise responsible for the damage if the edifice fags within the same period
on account of defects in the construction or the use of materials of inferior
quality furnished by him, or due to any violation of the terms of the contract. If
the engineer or architect supervises the construction, he shall be solidarily
liable with the contractor.
Acceptance of the building, after completion, does not imply waiver of any of
the causes of action by reason of any defect mentioned in the preceding
paragraph.
The action must be brought within ten years following the collapse of the
building.
On the other hand, the general rule is that no person shall be responsible for events which
could not be foreseen or which though foreseen, were inevitable (Article 1174, New Civil
Code).
An act of God has been defined as an accident, due directly and exclusively to natural causes
without human intervention, which by no amount of foresight, pains or care, reasonably to
have been expected, could have been prevented. (1 Corpus Juris 1174).
There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act of
God.
To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an
obligation due to an "act of God," the following must concur: (a) the cause of the breach of
the obligation must be independent of the will of the debtor; (b) the event must be either
unforseeable or unavoidable; (c) the event must be such as to render it impossible for the
debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any
participation in, or aggravation of the injury to the creditor. (Vasquez v. Court of Appeals, 138
SCRA 553; Estrada v. Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA 527;
Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).
Thus, if upon the happening of a fortuitous event or an act of God, there concurs a
corresponding fraud, negligence, delay or violation or contravention in any manner of the
tenor of the obligation as provided for in Article 1170 of the Civil Code, which results in loss
or damage, the obligor cannot escape liability.
The principle embodied in the act of God doctrine strictly requires that the act must be one
occasioned exclusively by the violence of nature and all human agencies are to be excluded
from creating or entering into the cause of the mischief. When the effect, the cause of which
is to be considered, is found to be in part the result of the participation of man, whether it be
from active intervention or neglect, or failure to act, the whole occurrence is thereby
humanized, as it were, and removed from the rules applicable to the acts of God. (1 Corpus
Juris, pp. 1174-1175).
Thus it has been held that when the negligence of a person concurs with an act of God in
producing a loss, such person is not exempt from liability by showing that the immediate

cause of the damage was the act of God. To be exempt from liability for loss because of an
act of God, he must be free from any previous negligence or misconduct by which that loss
or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129;
Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604;
Lasam v. Smith, 45 Phil. 657).
The negligence of the defendant and the third-party defendants petitioners was established
beyond dispute both in the lower court and in the Intermediate Appellate Court. Defendant
United Construction Co., Inc. was found to have made substantial deviations from the plans
and specifications. and to have failed to observe the requisite workmanship in the
construction as well as to exercise the requisite degree of supervision; while the third-party
defendants were found to have inadequacies or defects in the plans and specifications
prepared by them. As correctly assessed by both courts, the defects in the construction and
in the plans and specifications were the proximate causes that rendered the PBA building
unable to withstand the earthquake of August 2, 1968. For this reason the defendant and
third-party defendants cannot claim exemption from liability. (Decision, Court of Appeals, pp.
30-31).
It is well settled that the findings of facts of the Court of Appeals are conclusive on the
parties and on this court (cases cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs.
Sandiganbayan, January 17, 1985, 134 SCRA 105, 121), unless (1) the conclusion is a finding
grounded entirely on speculation, surmise and conjectures; (2) the inference made is
manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment is based on
misapprehension of facts; (5) the findings of fact are conflicting , (6) the Court of Appeals
went beyond the issues of the case and its findings are contrary to the admissions of both
appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co., February 8, 1967, 19 SCRA 289,
291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651); (7) the findings of facts of the
Court of Appeals are contrary to those of the trial court; (8) said findings of facts are
conclusions without citation of specific evidence on which they are based; (9) the facts set
forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the
respondents (Garcia vs. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals,
July 30, 1979, 92 SCRA 322, 366); (10) the finding of fact of the Court of Appeals is premised
on the supposed absence of evidence and is contradicted by evidence on record (Salazar vs.
Gutierrez, May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v.
Sandiganbayan, July 10, 1986).
It is evident that the case at bar does not fall under any of the exceptions above-mentioned.
On the contrary, the records show that the lower court spared no effort in arriving at the
correct appreciation of facts by the referral of technical issues to a Commissioner chosen by
the parties whose findings and conclusions remained convincingly unrebutted by the
intervenors/amicus curiae who were allowed to intervene in the Supreme Court.
In any event, the relevant and logical observations of the trial court as affirmed by the Court
of Appeals that "while it is not possible to state with certainty that the building would not
have collapsed were those defects not present, the fact remains that several buildings in the
same area withstood the earthquake to which the building of the plaintiff was similarly
subjected," cannot be ignored.
The next issue to be resolved is the amount of damages to be awarded to the PBA for the
partial collapse (and eventual complete collapse) of its building.

The Court of Appeals affirmed the finding of the trial court based on the report of the
Commissioner that the total amount required to repair the PBA building and to restore it to
tenantable condition was P900,000.00 inasmuch as it was not initially a total loss. However,
while the trial court awarded the PBA said amount as damages, plus unrealized rental income
for one-half year, the Court of Appeals modified the amount by awarding in favor of PBA an
additional sum of P200,000.00 representing the damage suffered by the PBA building as a
result of another earthquake that occurred on April 7, 1970 (L-47896, Vol. I, p. 92).
The PBA in its brief insists that the proper award should be P1,830,000.00 representing the
total value of the building (L-47896, PBA's No. 1 Assignment of Error, p. 19), while both the
NAKPILS and UNITED question the additional award of P200,000.00 in favor of the PBA (L47851, NAKPIL's Brief as Petitioner, p. 6, UNITED's Brief as Petitioner, p. 25). The PBA further
urges that the unrealized rental income awarded to it should not be limited to a period of onehalf year but should be computed on a continuing basis at the rate of P178,671.76 a year until
the judgment for the principal amount shall have been satisfied L- 47896, PBA's No. 11
Assignment of Errors, p. 19).
The collapse of the PBA building as a result of the August 2, 1968 earthquake was only partial
and it is undisputed that the building could then still be repaired and restored to its
tenantable condition. The PBA, however, in view of its lack of needed funding, was unable,
thru no fault of its own, to have the building repaired. UNITED, on the other hand, spent
P13,661.28 to shore up the building after the August 2, 1968 earthquake (L-47896, CA
Decision, p. 46). Because of the earthquake on April 7, 1970, the trial court after the needed
consultations, authorized the total demolition of the building (L-47896, Vol. 1, pp. 53-54).
There should be no question that the NAKPILS and UNITED are liable for the damage
resulting from the partial and eventual collapse of the PBA building as a result of the
earthquakes.
We quote with approval the following from the erudite decision penned by Justice Hugo E.
Gutierrez (now an Associate Justice of the Supreme Court) while still an Associate Justice of
the Court of Appeals:
There is no question that an earthquake and other forces of nature such as
cyclones, drought, floods, lightning, and perils of the sea are acts of God. It
does not necessarily follow, however, that specific losses and suffering
resulting from the occurrence of these natural force are also acts of God. We
are not convinced on the basis of the evidence on record that from the
thousands of structures in Manila, God singled out the blameless PBA building
in Intramuros and around six or seven other buildings in various parts of the
city for collapse or severe damage and that God alone was responsible for the
damages and losses thus suffered.
The record is replete with evidence of defects and deficiencies in the designs
and plans, defective construction, poor workmanship, deviation from plans
and specifications and other imperfections. These deficiencies are attributable
to negligent men and not to a perfect God.
The act-of-God arguments of the defendants- appellants and third party
defendants-appellants presented in their briefs are premised on legal
generalizations or speculations and on theological fatalism both of which
ignore the plain facts. The lengthy discussion of United on ordinary

earthquakes and unusually strong earthquakes and on ordinary fortuitous

events and extraordinary fortuitous events leads to its argument that the
August 2, 1968 earthquake was of such an overwhelming and destructive
character that by its own force and independent of the particular negligence
alleged, the injury would have been produced. If we follow this line of
speculative reasoning, we will be forced to conclude that under such a
situation scores of buildings in the vicinity and in other parts of Manila would
have toppled down. Following the same line of reasoning, Nakpil and Sons
alleges that the designs were adequate in accordance with pre-August 2, 1968
knowledge and appear inadequate only in the light of engineering information
acquired after the earthquake. If this were so, hundreds of ancient buildings
which survived the earthquake better than the two-year old PBA building must
have been designed and constructed by architects and contractors whose
knowledge and foresight were unexplainably auspicious and prophetic.
Fortunately, the facts on record allow a more down to earth explanation of the
collapse. The failure of the PBA building, as a unique and distinct construction
with no reference or comparison to other buildings, to weather the severe
earthquake forces was traced to design deficiencies and defective
construction, factors which are neither mysterious nor esoteric. The
theological allusion of appellant United that God acts in mysterious ways His
wonders to perform impresses us to be inappropriate. The evidence reveals
defects and deficiencies in design and construction. There is no mystery about
these acts of negligence. The collapse of the PBA building was no wonder
performed by God. It was a result of the imperfections in the work of the
architects and the people in the construction company. More relevant to our
mind is the lesson from the parable of the wise man in the Sermon on the
Mount "which built his house upon a rock; and the rain descended and the
floods came and the winds blew and beat upon that house; and it fen not; for it
was founded upon a rock" and of the "foolish upon the sand. And the rain
descended and man which built his house the floods came, and the winds
blew, and beat upon that house; and it fell and great was the fall of it. (St.
Matthew 7: 24-27)." The requirement that a building should withstand rains,
floods, winds, earthquakes, and natural forces is precisely the reason why we
have professional experts like architects, and engineers. Designs and
constructions vary under varying circumstances and conditions but the
requirement to design and build well does not change.
The findings of the lower Court on the cause of the collapse are more rational
and accurate. Instead of laying the blame solely on the motions and forces
generated by the earthquake, it also examined the ability of the PBA building,
as designed and constructed, to withstand and successfully weather those
forces.
The evidence sufficiently supports a conclusion that the negligence and fault
of both United and Nakpil and Sons, not a mysterious act of an inscrutable
God, were responsible for the damages. The Report of the Commissioner,
Plaintiff's Objections to the Report, Third Party Defendants' Objections to the
Report, Defendants' Objections to the Report, Commissioner's Answer to the
various Objections, Plaintiffs' Reply to the Commissioner's Answer,
Defendants' Reply to the Commissioner's Answer, Counter-Reply to
Defendants' Reply, and Third-Party Defendants' Reply to the Commissioner's
Report not to mention the exhibits and the testimonies show that the main
arguments raised on appeal were already raised during the trial and fully

considered by the lower Court. A reiteration of these same arguments on

appeal fails to convince us that we should reverse or disturb the lower Court's
factual findings and its conclusions drawn from the facts, among them:
The Commissioner also found merit in the allegations of the defendants as to
the physical evidence before and after the earthquake showing the inadequacy
of design, to wit:
Physical evidence before the earthquake providing (sic) inadequacy of design;
1. inadequate design was the cause of the failure of the building.
2. Sun-baffles on the two sides and in front of the building;
a. Increase the inertia forces that move the building laterally toward the Manila
Fire Department.
b. Create another stiffness imbalance.
3. The embedded 4" diameter cast iron down spout on all exterior columns
reduces the cross-sectional area of each of the columns and the strength
thereof.
4. Two front corners, A7 and D7 columns were very much less reinforced.
Physical Evidence After the Earthquake, Proving Inadequacy of design;
1. Column A7 suffered the severest fracture and maximum sagging. Also D7.
2. There are more damages in the front part of the building than towards the
rear, not only in columns but also in slabs.
3. Building leaned and sagged more on the front part of the building.
4. Floors showed maximum sagging on the sides and toward the front corner
parts of the building.
5. There was a lateral displacement of the building of about 8", Maximum
sagging occurs at the column A7 where the floor is lower by 80 cm. than the
highest slab level.
6. Slab at the corner column D7 sagged by 38 cm.
The Commissioner concluded that there were deficiencies or defects in the
design, plans and specifications of the PBA building which involved
appreciable risks with respect to the accidental forces which may result from
earthquake shocks. He conceded, however, that the fact that those
deficiencies or defects may have arisen from an obsolete or not too
conservative code or even a code that does not require a design for
earthquake forces mitigates in a large measure the responsibility or liability of
the architect and engineer designer.

The Third-party defendants, who are the most concerned with this portion of
the Commissioner's report, voiced opposition to the same on the grounds that
(a) the finding is based on a basic erroneous conception as to the design
concept of the building, to wit, that the design is essentially that of a heavy
rectangular box on stilts with shear wan at one end; (b) the finding that there
were defects and a deficiency in the design of the building would at best be
based on an approximation and, therefore, rightly belonged to the realm of
speculation, rather than of certainty and could very possibly be outright error;
(c) the Commissioner has failed to back up or support his finding with
extensive, complex and highly specialized computations and analyzes which
he himself emphasizes are necessary in the determination of such a highly
technical question; and (d) the Commissioner has analyzed the design of the
PBA building not in the light of existing and available earthquake engineering
knowledge at the time of the preparation of the design, but in the light of recent
and current standards.
The Commissioner answered the said objections alleging that third-party
defendants' objections were based on estimates or exhibits not presented
during the hearing that the resort to engineering references posterior to the
date of the preparation of the plans was induced by the third-party defendants
themselves who submitted computations of the third-party defendants are
erroneous.
The issue presently considered is admittedly a technical one of the highest
degree. It involves questions not within the ordinary competence of the bench
and the bar to resolve by themselves. Counsel for the third-party defendants
has aptly remarked that "engineering, although dealing in mathematics, is not
an exact science and that the present knowledge as to the nature of
earthquakes and the behaviour of forces generated by them still leaves much
to be desired; so much so "that the experts of the different parties, who are all
engineers, cannot agree on what equation to use, as to what earthquake coefficients are, on the codes to be used and even as to the type of structure that
the PBA building (is) was (p. 29, Memo, of third- party defendants before the
Commissioner).
The difficulty expected by the Court if tills technical matter were to be tried and
inquired into by the Court itself, coupled with the intrinsic nature of the
questions involved therein, constituted the reason for the reference of the said
issues to a Commissioner whose qualifications and experience have eminently
qualified him for the task, and whose competence had not been questioned by
the parties until he submitted his report. Within the pardonable limit of the
Court's ability to comprehend the meaning of the Commissioner's report on
this issue, and the objections voiced to the same, the Court sees no
compelling reasons to disturb the findings of the Commissioner that there
were defects and deficiencies in the design, plans and specifications prepared
by third-party defendants, and that said defects and deficiencies involved
appreciable risks with respect to the accidental forces which may result from
earthquake shocks.
(2) (a) The deviations, if any, made by the defendants from the plans and
specifications, and how said deviations contributed to the damage sustained
by the building.

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

materials and workmanship in the construction of the building.
These two issues, being interrelated with each other, will be discussed
together.
The findings of the Commissioner on these issues were as follows:
We now turn to the construction of the PBA Building and the alleged
deficiencies or defects in the construction and violations or deviations from
the plans and specifications. All these may be summarized as follows:
a. Summary of alleged defects as reported by Engineer Mario M. Bundalian.
(1) Wrongful and defective placing of reinforcing bars.
(2) Absence of effective and desirable integration of the 3 bars in the cluster.
(3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires
no larger than 1 inch.
(4) Reinforcement assembly is not concentric with the column, eccentricity
being 3" off when on one face the main bars are only 1 1/2' from the surface.
(5) Prevalence of honeycombs,
(6) Contraband construction joints,
(7) Absence, or omission, or over spacing of spiral hoops,
(8) Deliberate severance of spirals into semi-circles in noted on Col. A-5,
ground floor,
(9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground
floor,
(10) Undergraduate concrete is evident,
(11) Big cavity in core of Column 2A-4, second floor,
(12) Columns buckled at different planes. Columns buckled worst where there
are no spirals or where spirals are cut. Columns suffered worst displacement
where the eccentricity of the columnar reinforcement assembly is more acute.
b. Summary of alleged defects as reported by Engr. Antonio Avecilla.
Columns are first (or ground) floor, unless otherwise stated.
(1) Column D4 Spacing of spiral is changed from 2" to 5" on centers,

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

(3) Column D6 Spacing of spiral over 4 l/2,
(4) Column D7 Lack of lateral ties,
(5) Column C7 Absence of spiral to a height of 20" from the ground level,
Spirals are at 2" from the exterior column face and 6" from the inner column
face,
(6) Column B6 Lack of spiral on 2 feet below the floor beams,
(7) Column B5 Lack of spirals at a distance of 26' below the beam,
(8) Column B7 Spirals not tied to vertical reinforcing bars, Spirals are
uneven 2" to 4",
(9) Column A3 Lack of lateral ties,
(10) Column A4 Spirals cut off and welded to two separate clustered vertical
bars,
(11) Column A4 (second floor Column is completely hollow to a height of 30"
(12) Column A5 Spirals were cut from the floor level to the bottom of the
spandrel beam to a height of 6 feet,
(13) Column A6 No spirals up to a height of 30' above the ground floor level,
(14) Column A7 Lack of lateralties or spirals,
c. Summary of alleged defects as reported by the experts of the Third-Party
defendants.
Ground floor columns.
(1) Column A4 Spirals are cut,
(2) Column A5 Spirals are cut,
(3) Column A6 At lower 18" spirals are absent,
(4) Column A7 Ties are too far apart,
(5) Column B5 At upper fourth of column spirals are either absent or
improperly spliced,
(6) Column B6 At upper 2 feet spirals are absent,

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

spliced.
(8) Column C7 Spirals are absent at lowest 18"
(9) Column D5 At lowest 2 feet spirals are absent,
(10) Column D6 Spirals are too far apart and apparently improperly spliced,
(11) Column D7 Lateral ties are too far apart, spaced 16" on centers.
There is merit in many of these allegations. The explanations given by the
engineering experts for the defendants are either contrary to general principles
of engineering design for reinforced concrete or not applicable to the
requirements for ductility and strength of reinforced concrete in earthquakeresistant design and construction.
We shall first classify and consider defects which may have appreciable
bearing or relation to' the earthquake-resistant property of the building.
As heretofore mentioned, details which insure ductility at or near the
connections between columns and girders are desirable in earthquake
resistant design and construction. The omission of spirals and ties or hoops at
the bottom and/or tops of columns contributed greatly to the loss of
earthquake-resistant strength. The plans and specifications required that these
spirals and ties be carried from the floor level to the bottom reinforcement of
the deeper beam (p. 1, Specifications, p. 970, Reference 11). There were several
clear evidences where this was not done especially in some of the ground floor
columns which failed.
There were also unmistakable evidences that the spacings of the spirals and
ties in the columns were in many cases greater than those called for in the
plans and specifications resulting again in loss of earthquake-resistant
strength. The assertion of the engineering experts for the defendants that the
improper spacings and the cutting of the spirals did not result in loss of
strength in the column cannot be maintained and is certainly contrary to the
general principles of column design and construction. And even granting that
there be no loss in strength at the yield point (an assumption which is very
doubtful) the cutting or improper spacings of spirals will certainly result in the
loss of the plastic range or ductility in the column and it is precisely this
plastic range or ductility which is desirable and needed for earthquakeresistant strength.
There is no excuse for the cavity or hollow portion in the column A4, second
floor, and although this column did not fail, this is certainly an evidence on the
part of the contractor of poor construction.
The effect of eccentricities in the columns which were measured at about 2 1/2
inches maximum may be approximated in relation to column loads and column
and beam moments. The main effect of eccentricity is to change the beam or
girder span. The effect on the measured eccentricity of 2 inches, therefore, is
to increase or diminish the column load by a maximum of about 1% and to

increase or diminish the column or beam movements by about a maximum of

2%. While these can certainly be absorbed within the factor of safety, they
nevertheless diminish said factor of safety.
The cutting of the spirals in column A5, ground floor is the subject of great
contention between the parties and deserves special consideration.
The proper placing of the main reinforcements and spirals in column A5,
ground floor, is the responsibility of the general contractor which is the UCCI.
The burden of proof, therefore, that this cutting was done by others is upon the
defendants. Other than a strong allegation and assertion that it is the plumber
or his men who may have done the cutting (and this was flatly denied by the
plumber) no conclusive proof was presented. The engineering experts for the
defendants asserted that they could have no motivation for cutting the bar
because they can simply replace the spirals by wrapping around a new set of
spirals. This is not quite correct. There is evidence to show that the pouring of
concrete for columns was sometimes done through the beam and girder
reinforcements which were already in place as in the case of column A4
second floor. If the reinforcement for the girder and column is to subsequently
wrap around the spirals, this would not do for the elasticity of steel would
prevent the making of tight column spirals and loose or improper spirals would
result. The proper way is to produce correct spirals down from the top of the
main column bars, a procedure which can not be done if either the beam or
girder reinforcement is already in place. The engineering experts for the
defendants strongly assert and apparently believe that the cutting of the
spirals did not materially diminish the strength of the column. This belief
together with the difficulty of slipping the spirals on the top of the column once
the beam reinforcement is in place may be a sufficient motivation for the
cutting of the spirals themselves. The defendants, therefore, should be held
responsible for the consequences arising from the loss of strength or ductility
in column A5 which may have contributed to the damages sustained by the
building.
The lack of proper length of splicing of spirals was also proven in the visible
spirals of the columns where spalling of the concrete cover had taken place.
This lack of proper splicing contributed in a small measure to the loss of
strength.
The effects of all the other proven and visible defects although nor can
certainly be accumulated so that they can contribute to an appreciable loss in
earthquake-resistant strength. The engineering experts for the defendants
submitted an estimate on some of these defects in the amount of a few
percent. If accumulated, therefore, including the effect of eccentricity in the
column the loss in strength due to these minor defects may run to as much as
ten percent.
To recapitulate: the omission or lack of spirals and ties at the bottom and/or at
the top of some of the ground floor columns contributed greatly to the collapse
of the PBA building since it is at these points where the greater part of the
failure occurred. The liability for the cutting of the spirals in column A5, ground
floor, in the considered opinion of the Commissioner rests on the shoulders of

the defendants and the loss of strength in this column contributed to the
damage which occurred.
It is reasonable to conclude, therefore, that the proven defects, deficiencies
and violations of the plans and specifications of the PBA building contributed
to the damages which resulted during the earthquake of August 2, 1968 and
the vice of these defects and deficiencies is that they not only increase but
also aggravate the weakness mentioned in the design of the structure. In other
words, these defects and deficiencies not only tend to add but also to multiply
the effects of the shortcomings in the design of the building. We may say,
therefore, that the defects and deficiencies in the construction contributed
greatly to the damage which occurred.
Since the execution and supervision of the construction work in the hands of
the contractor is direct and positive, the presence of existence of all the major
defects and deficiencies noted and proven manifests an element of negligence
which may amount to imprudence in the construction work. (pp. 42-49,
Commissioners Report).
As the parties most directly concerned with this portion of the Commissioner's report, the
defendants voiced their objections to the same on the grounds that the Commissioner should
have specified the defects found by him to be "meritorious"; that the Commissioner failed to
indicate the number of cases where the spirals and ties were not carried from the floor level
to the bottom reinforcement of the deeper beam, or where the spacing of the spirals and ties
in the columns were greater than that called for in the specifications; that the hollow in
column A4, second floor, the eccentricities in the columns, the lack of proper length of
splicing of spirals, and the cut in the spirals in column A5, ground floor, did not aggravate or
contribute to the damage suffered by the building; that the defects in the construction were
within the tolerable margin of safety; and that the cutting of the spirals in column A5, ground
floor, was done by the plumber or his men, and not by the defendants.
Answering the said objections, the Commissioner stated that, since many of the defects were
minor only the totality of the defects was considered. As regards the objection as to failure to
state the number of cases where the spirals and ties were not carried from the floor level to
the bottom reinforcement, the Commissioner specified groundfloor columns B-6 and C-5 the
first one without spirals for 03 inches at the top, and in the latter, there were no spirals for 10
inches at the bottom. The Commissioner likewise specified the first storey columns where
the spacings were greater than that called for in the specifications to be columns B-5, B-6, C7, C-6, C-5, D-5 and B-7. The objection to the failure of the Commissioner to specify the
number of columns where there was lack of proper length of splicing of spirals, the
Commissioner mentioned groundfloor columns B-6 and B-5 where all the splices were less
than 1-1/2 turns and were not welded, resulting in some loss of strength which could be
critical near the ends of the columns. He answered the supposition of the defendants that the
spirals and the ties must have been looted, by calling attention to the fact that the missing
spirals and ties were only in two out of the 25 columns, which rendered said supposition to
be improbable.
The Commissioner conceded that the hollow in column A-4, second floor, did not aggravate
or contribute to the damage, but averred that it is "evidence of poor construction." On the
claim that the eccentricity could be absorbed within the factor of safety, the Commissioner
answered that, while the same may be true, it also contributed to or aggravated the damage
suffered by the building.

The objection regarding the cutting of the spirals in Column A-5, groundfloor, was answered
by the Commissioner by reiterating the observation in his report that irrespective of who did
the cutting of the spirals, the defendants should be held liable for the same as the general
contractor of the building. The Commissioner further stated that the loss of strength of the
cut spirals and inelastic deflections of the supposed lattice work defeated the purpose of the
spiral containment in the column and resulted in the loss of strength, as evidenced by the
actual failure of this column.
Again, the Court concurs in the findings of the Commissioner on these issues and fails to
find any sufficient cause to disregard or modify the same. As found by the Commissioner, the
"deviations made by the defendants from the plans and specifications caused indirectly the
damage sustained and that those deviations not only added but also aggravated the damage
caused by the defects in the plans and specifications prepared by third-party defendants.
(Rollo, Vol. I, pp. 128-142)
The afore-mentioned facts clearly indicate the wanton negligence of both the defendant and
the third-party defendants in effecting the plans, designs, specifications, and construction of
the PBA building and We hold such negligence as equivalent to bad faith in the performance
of their respective tasks.
Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379, 4380)
which may be in point in this case reads:
One who negligently creates a dangerous condition cannot escape liability for the natural and
probable consequences thereof, although the act of a third person, or an act of God for which
he is not responsible, intervenes to precipitate the loss.
As already discussed, the destruction was not purely an act of God. Truth to tell hundreds of
ancient buildings in the vicinity were hardly affected by the earthquake. Only one thing spells
out the fatal difference; gross negligence and evident bad faith, without which the damage
would not have occurred.
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special
and environmental circumstances of this case, We deem it reasonable to render a decision
imposing, as We do hereby impose, upon the defendant and the third-party defendants (with
the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra, p. 10) indemnity in
favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all
damages (with the exception of attorney's fees) occasioned by the loss of the building
(including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND
(P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality
of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum
shall be imposed upon afore-mentioned amounts from finality until paid. Solidary costs
against the defendant and third-party defendants (except Roman Ozaeta).
SO ORDERED.
Feria (Chairman), Fernan, Alampay and Cruz, JJ., concur.

THIRD DIVISION

[G.R. No. 138123. March 12, 2002]

MINDEX RESOURCES DEVELOPMENT, petitioner,

MORILLO, respondent.

vs. EPHRAIM

DECISION
PANGANIBAN, J.:

Attorneys fees cannot be granted simply because one was compelled to sue to
protect and enforce ones right. The grant must be proven by facts; it cannot depend
on mere speculation or conjecture -- its basis must be stated in the text of the decision.
The Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing
the March 26, 1999 Decision[1] of the Court of Appeals (CA) in CA-GR CV No.
46967. The dispositive portion of the challenged Decision reads as follows:
WHEREFORE, the appealed decision is AFFIRMED with MODIFICATION that
the legal interest to be paid on the rentals of P76,000.00 and costs of repair in the
amount of P132,750.00 is six (6%) percent per annum from June 22, 1994, the date of
the decision of the court a quo to the date of its finality. Thereafter, if the amounts
adjudged remain unpaid, the interest rate shall be twelve (12%) percentper
annum from the date of finality of the decision until fully paid.[2]
The Facts
The factual antecedents of the case are summarized by the CA in this wise:
On February 1991, a verbal agreement was entered into between Ephraim Morillo
and Mindex Resources Corporation (MINDEX for brevity) for the lease of the
formers 6 x 6 ten-wheeler cargo truck for use in MINDEXs mining operations in
Binaybay, Bigaan, San Teodoro, Oriental Mindoro, at the stipulated rental of P300.00

per hour for a minimum of eight hours a day or a total of P2,400.00 daily. MINDEX
had been paying the rentals until April 10, 1991.
Unknown to Morillo, on April 11, 1991, the truck was burned by unidentified
persons while it was parked unattended at Sitio Aras, Bigaan, San Teodoro, Oriental
Mindoro, due to mechanical trouble. The findings of the Mindoro Oriental Integrated
National Police in their investigation report read:
3. On 121005H April 1991, Mr Alexander Roxas, project coordinator of MINDEX
MINING CORP. reported to this office that on the morning of 12 April 1991 while he
was supposed to report for his Work at their office at Sitio Tibonbon, Bigaan, San
Teodoro, Oriental Mindoro, he x x x noticed that their hired 6 x 6 Ten wheeler Cargo
Truck temporarily parked at Sitio Aras, Bigaan, San Teodoro, Oriental Mindoro for
aplha Engine Trouble was burned on the night of April 11, 1991 by still unidentified
person.
x x x

xxx

xxx

5. x x x Based also on the facts gathered and incident scene searched it was also
found out that said 6 x 6 Ten Wheeler Cargo Truck was burned by means of using
coconut leaves and as a result of which said 6 x 6 was totally burned excluding the
engine which was partially damaged by still undetermined amount.
Upon learning of the burning incident, Morillo offered to sell the truck to MINDEX
but the latter refused. Instead, it replaced the vehicles burned tires and had it towed to
a shop for repair and overhauling.
On April 15, 1991, Morillo sent a letter to Mr. Arni Isberg, the Finance Manager of
MINDEX, thru Mr. Ramoncito Gozar, Project Manager, proposing the following:
x x x

xxx

xxx

I have written to let you know that I am entrusting to you the said vehicle in the
amount of P275,000.00 which is its cost price. I will not charge your company for the
encumbrance of P76,800+ since you used it as my friendly gesture on account of the
unforeseen adversity.
In view of the tragic happening, I am asking you to pay us, in a way which will not
be hard for you to settle to pay us in four installment monthly as follows:
First payment
Second payment -

April 25/91
May 15/91

P[1]50,000.00
50,000.00

Third payme(n)t June 15/91

50,000.00
Fourth payme(n)t July 15/91
25,000.00
TOTAL
P275,000.00
I promise to relinquish all the necessary documents upon full payment of said
account.
x x x

xxx

xxx

Through Mr. Gozar, MINDEX responded by a handwritten letter to his cousin

Malou (wife of Ephraim Morillo), expressing their reservations on the above demands
due to their tight financial situation. However, he made the following counter offers:
a) Pay the rental of the 6 x 6 truck (actual) in the amount of P76,000.00.
b) Repair and overhaul the truck on our own expenses and;
c) Return it to you on (A1) good running condition after repair.
Morillo replied on April 18, 1991, (1) that he will relinquish to MINDEX the
damaged truck; (2) that he is amenable to receive the rental in the amount
of P76,000.00; and (3) that MINDEX will pay fifty thousand pesos (P50,000.00)
monthly until the balance of P275,000.00 is fully paid. It is noteworthy that except for
his acceptance of the proffered P76,000.00 unpaid rentals, Morillos stand has
virtually not been changed as he merely lowered the first payment on the P275,000.00
valuation of the truck from P150,000.00 to P50,000.00.
The parties had since remained intransigent and so on August 1991, Morillo pulled
out the truck from the repair shop of MINDEX and had it repaired elsewhere for
which he spent the total amount ofP132,750.00.[3] (Citations omitted)
Ruling of the Trial Court
After evaluating the evidence adduced by both parties, the Regional Trial Court
(RTC) found petitioner responsible for the destruction or loss of the leased 6 x 6 truck
and ordered it to pay respondent (1)P76,000 as balance of the unpaid rental for the 6 x
6 truck with interest of 12 percent from June 22, 1994 (the rendition of the judgment)
up to the payment of the amount; (2) P132,750 representing the costs of repair and
overhaul of the said truck, with interest rate of 12 percent until fully paid; and
(3) P20,000 as attorneys fees for compelling respondent to secure the services of
counsel in filing his Complaint.

Ruling of the Court of Appeals

The appellate court sustained the RTCs finding that petitioner was not without
fault for the loss and destruction of the truck and, thus, liable therefor. The CA said:
The burning of the subject truck was impossible to foresee, but not impossible to
avoid. MINDEX could have prevented the incident by immediately towing the truck
to a motor shop for the needed repair or by having it guarded day and night. Instead,
the appellant just left the vehicle where its transfer case broke down. The place was
about twelve (12) kilometers away from the camp site of the appellant corporation and
was sparsely populated. It was guarded only during daytime. It stayed in that place for
two (2) weeks until it was burned on April 11, 1991 while its transfer case was being
repaired elsewhere. It was only after it had been burned that the appellant had it towed
to a repair shop.
The appellant [respondent] was thus not free from fault for the burning of the truck.
It miserably failed to overcome the presumption of negligence against it. Neither did it
rescind the lease over the truck upon its burning. On the contrary, it offered to
pay P76,000.00 as rentals. It did not also complete the needed repair. Hence, the
appellee was forced to pull out the truck and had it repaired at his own expense. Since
under the law, the lessee shall return the thing leased, upon the termination of the
lease, just as he receive it, the appellant stands liable for the expenses incurred for the
repair in the aggregate amount of P132,750.00.[4]
Nevertheless, the appellate court modified the Decision of the trial court. The 12
percent interest rate on the P76,000 rentals and the P132,750 repair costs, imposed by
the RTC, was changed by the CA to 6 percent per annum from June 22, 1994 to the
date of finality of the said Decision; and 12 percent per annum thereafter, if the
amounts adjudged would remain unpaid from such date of finality until the rentals and
the repair costs were fully paid. It affirmed the award of attorneys fees.
Hence, this Petition.[5]
Issues
In its Memorandum, petitioner raises the following issues for the Courts
consideration:
4.1. Whether or not the Court of Appeals gravely erred in finding that petitioner
failed to overcome the presumption of negligence against it considering that the facts

show, as admitted by the respondent, that the burning of the truck was a fortuitous
event.
4.2. Whether or not the Court of Appeals gravely erred in affirming the decision of
the trial court finding petitioner liable to pay unpaid rentals and cost of repairs.
4.3. Whether or not the Court of Appeals also erred in affirming the decision of the
trial court finding petitioner liable to pay attorneys fees.[6]
This Courts Ruling
The Petition is partly meritorious; the award of attorneys fees should be deleted.
First Issue:
Petitioners Negligence
Petitioner claims that the burning of the truck was a fortuitous event, for which it
should not be held liable pursuant to Article 1174 [7] of the Civil Code. Moreover, the
letter of respondent dated April 15, 1991, stating that the burning of the truck was an
unforeseen adversity, was an admission that should exculpate the former from
liability.
We are not convinced. Both the RTC and the CA found petitioner negligent and
thus liable for the loss or destruction of the leased truck. True, both parties may have
suffered from the burning of the truck; however, as found by both lower courts, the
negligence of petitioner makes it responsible for the loss. Well-settled is the rule that
factual findings of the trial court, particularly when affirmed by the Court of Appeals,
are binding on the Supreme Court. Contrary to its allegations, petitioner has not
adequately shown that the RTC and the CA overlooked or disregarded significant
facts and circumstances that, when considered, would alter the outcome of the
disposition.[8] Article 1667 of the Civil Code[9] holds lessees responsible for the
deterioration or loss of the thing leased, unless they prove that it took place without
their fault.
Fortuitous Event
In order for a fortuitous event to exempt one from liability, it is necessary that one
has committed no negligence or misconduct that may have occasioned the loss. [10] An

act of God cannot be invoked to protect a person who has failed to take steps to
forestall the possible adverse consequences of such a loss. Ones negligence may have
concurred with an act of God in producing damage and injury to another; nonetheless,
showing that the immediate or proximate cause of the damage or injury was a
fortuitous event would not exempt one from liability. When the effect is found to be
partly the result of a persons participation -- whether by active intervention, neglect
or failure to act -- the whole occurrence is humanized and removed from the rules
applicable to acts of God.[11]
This often-invoked doctrine of fortuitous event or caso fortuito has become a
convenient and easy defense to exculpate an obligor from liability. To constitute a
fortuitous event, the following elements must concur: (a) the cause of the unforeseen
and unexpected occurrence or of the failure of the debtor to comply with obligations
must be independent of human will; (b) it must be impossible to foresee the event that
constitutes the caso fortuito or, if it can be foreseen, it must be impossible to avoid;
(c) the occurrence must be such as to render it impossible for the debtor to fulfill
obligations in a normal manner; and (d) the obligor must be free from any
participation in the aggravation of the injury or loss.[12]
Article 1174 of the Civil Code states that no person shall be responsible for a
fortuitous event that could not be foreseen or, though foreseen, was inevitable. In
other words, there must be an exclusion of human intervention from the cause of
injury or loss.[13]
A review of the records clearly shows that petitioner failed to exercise reasonable
care and caution that an ordinarily prudent person would have used in the same
situation. Witness Alexander Roxas testified how petitioner fell short of ordinary
diligence in safeguarding the leased truck against the accident, which could have been
avoided in the first place. Pertinent portions of his testimony are reproduced
hereunder:
ATTY. ACERON
Q Now, this Barangay Aras where the 6 x 6 truck had transmission trouble, how far is it from the
camp site of the defendant corporation?
ALEXANDER ROXAS
A Twelve (12) kilometers, more or less, sir.
Q Is this Barangay Aras populated?
A Not so many, sir.
Q The place where the 6 x 6 truck had transmission trouble, how far is the nearest house from it?
A Perhaps three hundred meters, sir.
Q And how many houses are within the three hundred meter radius from the place where the truck had
engine trouble?

A Ten, more or less, in scattered.

Q You said that after hauling several sand to be used in the camp site the 6 x 6 truck had transmission
trouble, what did the company do after the truck had that engine trouble?
A For at least two weeks the truck was installed in the place where the said truck had engine trouble.
Q Meaning in Barangay Aras?
A Yes, sir.
Q Was there any guard in that place by the company during the time that the truck was in that place?
A Yes, sir, during daytime but at nighttime, there was no guard.
Q What happened to that 6 x 6 truck?
A In the month of March, 1991, the company dismissed thirteen (13) to seventeen (17) employees and
these employees came from Barangays Aras, Botolan, Calsapa, Camatis and Tibonbon and on
Aril 11, 1991, the 6 x 6 truck was burned.
Q How did you come to know that the 6 x 6 truck was burned on April 11, 1991?
A I together with my daughter, I met the service of the company near the ORMECO and I was
informed by the Project Engineer that the 6 x 6 truck was burned, so, we returned to San Teodoro
and have the incident blottered at the police station.
Q Aside from that, what other action did you undertake in connection with the burning of the 6 x 6
truck?
A When we were at the police station, the Project Manager of the company arrived and from the police
station we proceeded to the place where the 6 x 6 truck was burned and the Project Manager took
pictures of the 6 x 6 truck.
Q Now, did you come to know who was responsible or who were responsible for the burning of the 6
x 6 truck?
A The responsible is the Mindex Resources Development Corporation, and as far as I know, the
persons who actually burned the said 6 x 6 truck were the dismissed employees of the Mindex
Resources Development Corporation.
Q These dismissed employees of the corporation, why were they employed by the corporation?
A Because we have to make a road going to the mining site and in the process of opening the road
these dismissed employees happened to be the owners of the land where the road will pass, so, we
paid the land. The corporation likewise gave jobs to the owners of the land.[14]

As can be gleaned from the foregoing testimony, petitioner failed to employ

reasonable foresight, diligence and care that would have exempted it from liability
resulting from the burning of the truck. Negligence, as commonly understood, is that
conduct that naturally or reasonably creates undue risk or harm to others. It may be a
failure to observe that degree of care, precaution or vigilance that the circumstances
justly demand;[15] or to do any other act that would be done by a prudent and
reasonable person, who is guided by considerations that ordinarily regulate the
conduct of human affairs.[16]

Second Issue:
Unpaid Rentals and Cost of Repairs
Petitioner proceeds to argue that it should be deemed to have already paid the
unpaid rentals in the amount of P76,000.00, and that it should not be made to pay
the P132,750 repair and overhaul costs. Nothing in the records, not even in the
documentary evidence it presented, would show that it already paid the aforesaid
amounts. In fact, it seeks to avoid payment of the rental by alleging that respondent
already condoned it in his letter dated April 15, 1991. However, a perusal of the letter
would show that his offer not to charge petitioner for the P76,000 rental was premised
on the condition that it would buy the truck.[17]
Moreover, the RTC based the P76,000 rental and the costs of repair and overhaul
on Exhibit B, wherein Chito Gozar, the Project Manager of Mindex Resources
Development Corporation, proposed through a letter dated April 17, 1991, the
following: (1) to pay the P76,000 rental, (2) to repair the truck at the expense of
petitioner, and (3) to return the truck in good running condition after the repair.
Likewise, the nonpayment of the said amount was corroborated by Roxas thus:
Q During that time when the 6 x 6 truck was already burned and when you went to the Petron
Gasoline Station to inform plaintiff about the burning, was the plaintiff paid any amount for the
rental of the 6 x 6 truck?
A :Before the burning of the 6 x 6 truck, the plaintiff Morillo was already paid partially and there was
a balance of P76,000.00.[18]

The P132,750 repair and overhaul costs was correctly granted by the lower courts.
Article 1667 of the Civil Code holds the lessee responsible for the deterioration or loss
of the thing leased. In addition, Article 1665 of the same Code provides that the
lessee shall return the thing leased, upon the termination of the lease, just as he
received it, save what has been lost or impaired by the lapse of time, or by ordinary
wear and tear, or from an inevitable cause.
Courts begin with the assumption that compensatory damages are for pecuniary
losses that result from an act or omission of the defendant. Having been found to be
negligent in safeguarding the leased truck, petitioner must shoulder its repair and
overhaul costs to make it serviceable again. Such expenses are duly supported by
receipts; thus, the award of P132,750 is definitely in order.
Third Issue:
Attorneys Fees

We find the award of attorneys fees to be improper. The reason which the RTC
gave -- because petitioner had compelled respondent to file an action against it -- falls
short of our requirement in Scott Consultants and Resource Development v.
CA,[19] from which we quote:
It is settled that the award of attorneys fees is the exception rather than the rule and
counsels fees are not to be awarded every time a party wins suit. The power of the
court to award attorneys fees under Article 2208 of the Civil Code demands factual,
legal, and equitable justification; its basis cannot be left to speculation or conjecture.
Where granted, the court must explicitly state in the body of the decision, and not only
in the dispositive portion thereof, the legal reason for the award of attorneys fees.
Moreover, a recent case[20] ruled that in the absence of stipulation, a winning
party may be awarded attorneys fees only in case plaintiffs action or defendants
stand is so untenable as to amount to gross and evident bad faith.
Indeed, respondent was compelled to file this suit to vindicate his rights.
However, such fact by itself will not justify an award of attorneys fees, when there is
no sufficient showing of petitioners bad faith in refusing to pay the said rentals as
well as the repair and overhaul costs.[21]
WHEREFORE, the Petition is DENIED, but the assailed CA Decision
is MODIFIED by DELETING the award of attorneys fees. Costs against petitioner.
SO ORDERED.
Melo, (Chairman), Vitug, Sandoval-Gutierrez, and Carpio, JJ., concur.

THIRD DIVISION

[G.R. No. 119121. August 14, 1998]

NATIONAL POWER CORPORATION, petitioner, vs. COURT OF

APPEALS,
Fifteenth
Division
and
PHESCO
INCORPORATED, respondents.
DECISION
ROMERO, J.:

On July 22, 1979, a convoy of four (4) dump trucks owned by the National Power
Corporation (NPC) left Marawi city bound for Iligan city. Unfortunately, enroute to its
destination, one of the trucks with plate no. RFT-9-6-673 driven by a certain Gavino
Ilumba figured in a head-on-collision with a Toyota Tamaraw. The incident resulted in
the death of three (3) persons riding in the Toyota Tamaraw, as well as physical injuries
to seventeen other passengers.
On June 10, 1980, the heirs of the victims filed a complaint for damages against
National Power Corporation (NPC) and PHESCO Incorporated (PHESCO) before the
then Court of First Instance of Lanao del Norte, Marawi City. When defendant
PHESCO filed its answer to the complaint it contended that it was not the owner of the
dump truck which collided with the Toyota Tamaraw but NPC. Moreover, it asserted
that it was merely a contractor of NPC with the main duty of supplying workers and
technicians for the latters projects. On the other hand, NPC denied any liability and
countered that the driver of the dump truck was the employee of PHESCO.
After trial on the merits, the trial court rendered a decision dated July 25, 1988
absolving NPC of any liability. The dispositive portion reads:

Consequently, in view of the foregoing consideration, judgment is hereby

rendered ordering PHESCO, Inc. and Gavino Ilumba upon receipt hereof:
1. To pay jointly and severally the plaintiffs thru the Dansalan College the
sum of P954,154.55 representing the actual or compensatory damages
incurred by the plaintiffs; and
2. To pay the sum of P50,000.00 representing Attorneys fees.
SO ORDERED.

Dissatisfied, PHESCO appealed to the Court of Appeals, which on November 10,

1994 reversed the trial courts judgment. We quote the pertinent portion of the decision:

A labor only contractor is considered merely as an agent of the employer

(Deferia vs. National Labor Relations Commission, 194 SCRA 525). A finding
that a contractor is a labor only contractor is equivalent to a finding that there
is an employer-employee relationship between the owner of the project and
the employees of the labor only contractor (Industrial Timer Corporation vs.
National Labor Relations Commission, 202 SCRA 465). So, even if Phesco
hired driver Gavino Ilumba, as Phesco is admittedly a labor only contractor of
Napocor, the statute itself establishes an employer-employee relationship
between the employer (Napocor) and the employee (driver Ilumba) of the
labor only contractor (Phesco). (Ecal vs. National Labor Relations
Commission, 195 SCRA 224).
Consequently, we hold Phesco not liable for the tort of driver Gavino Ilumba,
as there was no employment relationship between Phesco and driver Gavino
Ilumba. Under Article 2180 of the Civil Code, to hold the employer liable for
torts committed by his employees within the scope of their assigned task,
there must exist an employer-employee relationship. (Martin vs. Court of
Appeals, 205 SCRA 591).
WHEREFORE, we REVERSE the appealed decision. In lieu thereof, the
Court renders judgment sentencing defendant National Power Corporation to
pay plaintiffs the sum of P174,889.20 plus P20,000.00 as attorneys fees and
costs.
SO ORDERED.
Chagrined by the sudden turnaround, NPC filed a motion for reconsideration of said
decision which was, however, denied on February 9, 1995.[1] Hence, this petition.
The principal query to be resolved is, as between NPC and PHESCO, who is the
employer of Ilumba, driver of the dumptruck which figured in the accident and which
should, therefore, would be liable for damages to the victims. Specifically, NPC assigns
the sole error that:
THE COURT OF APPEALS DECISION FINDING THAT PETITIONER NPC AS THE
EMPLOYER OF THE DRIVER GAVINO ILUMBA, AND CONSEQUENTLY,
SENTENCING IT TO PAY THE ACTUAL AND COMPENSATORY DAMAGES
SUSTAINED BY COMPLAINANTS, IS NOT IN ACCORD WITH THE LAW OR WITH
THE APPLICABLE RULINGS OF THIS HONORABLE COURT.[2]

As earlier stated, NPC denies that the driver of the dump truck was its employee. It
alleges that it did not have the power of selection and dismissal nor the power of control
over Ilumba.[3] PHESCO, meanwhile, argues that it merely acted as a recruiter of the
necessary workers for and in behalf of NPC.[4]
Before we decide who is the employer of Ilumba, it is evidently necessary to
ascertain the contractual relationship between NPC and PHESCO. Was the
relationship one of employer and job (independent) contractor or one of employer and
labor only contractor?
Job (independent) contracting is present if the following conditions are met: (a) the
contractor carries on an independent business and undertakes the contract work on his
own account under his own responsibility according to his own manner and method,
free from the control and direction of his employer or principal in all matters connected
with the performance of the work except to the result thereof; and (b) the contractor has
substantial capital or investments in the form of tools, equipment, machineries, work
premises and other materials which are necessary in the conduct of his
business.[5] Absent these requisites, what exists is a labor only contract under which
the person acting as contractor is considered merely as an agent or intermediary of the
principal who is responsible to the workers in the same manner and to the same extent
as if they had been directly employed by him.[6] Taking into consideration the above
distinction and the provisions of the Memorandum of Understanding entered into by
PHESCO and NPC, we are convinced that PHESCO was engaged in labor only
contracting.
It must be noted that under the Memorandum, NPC had mandate to approve the
critical path network and rate of expenditure to be undertaken by PHESCO. [7] Likewise,
the manning schedule and pay scale of the workers hired by PHESCO were subject to
confirmation by NPC.[8] Then too, it cannot be ignored that if PHESCO enters into any
sub-contract or lease, again NPCs concurrence is needed. [9] Another consideration is
that even in the procurement of tools and equipment that will be used by PHESCO,
NPCs favorable recommendation is still necessary before these tools and equipment
can be purchased.[10] Notably, it is NPC that will provide the money or funding that will
be used by PHESCO to undertake the project. [11]Furthermore, it must be emphasized
that the project being undertaken by PHESCO, i.e., construction of power energy
facilities, is related to NPCs principal business of power generation. In sum, NPCs
control over PHESCO in matters concerning the performance of the latters work is
evident. It is enough that NPC has the right to wield such power to be considered as
the employer.[12]
Under this factual milieu, there is no doubt that PHESCO was engaged in laboronly contracting vis--vis NPC and as such, it is considered merely an agent of the
latter. In labor-only contracting, an employer-employee relationship between the
principal employer and the employees of the labor-only contractor is
created. Accordingly, the principal employer is responsible to the employees of the
labor-only contractor as if such employees had been directly employed by the principal
employer.[13] Since PHESCO is only a labor-only contractor, the workers it supplied to
NPC, including the driver of the ill-fated truck, should be considered as employees of

NPC.[14] After all, it is axiomatic that any person (the principal employer) who enters into
an agreement with a job contractor, either for the performance of a specified work or for
the supply of manpower, assumes responsibility over the employees of the latter. [15]
However, NPC maintains that even assuming that a labor only contract exists
between it and PHESCO, its liability will not extend to third persons who are injured due
to the tortious acts of the employee of the labor-only contractor.[16] Stated otherwise, its
liability shall only be limited to violations of the Labor Code and not quasi-delicts.
To bolster its position, NPC cites Section 9(b), Rule VII, Book III of the Omnibus
Rules Implementing the Labor Code which reads:

(b)
Labor only contracting as defined herein is hereby prohibited and
the person acting as contractor shall be considered merely as an agent or
intermediary of the employer who shall be responsible to the workers in the
same manner and extent as if the latter were directly employed by him.
In other words, NPC posits the theory that its liability is limited only to compliance
with the substantive labor provisions on working conditions, rest periods, and wages
and shall not extend to liabilities suffered by third parties, viz.:

Consequently, the responsibilities of the employer contemplated in a labor

only contract, should, consistent with the terms expressed in the rule, be
restricted to the workers. The same can not be expanded to cover liabilities
for damages to third persons resulting from the employees tortious acts under
Article 2180 of the Civil Code.[17]
The reliance is misplaced. It bears stressing that the action was premised on the
recovery of damages as a result of quasi-delict against both NPC and PHESCO, hence,
it is the Civil Code and not the Labor Code which is the applicable law in resolving this
case.
To be sure, the pronouncement of this Court in Filamer Christian Institute v.
IAC,[18] is most instructive:

The present case does not deal with a labor dispute on conditions of
employment between an alleged employee and an alleged employer. It
invokes a claim brought by one for damages for injury caused by the patently
negligent acts of a person, against both doer-employee and his
employer. Hence, the reliance on the implementing rule on labor to disregard
the primary liability of an employer under Article 2180 of the Civil Code is
misplaced. An implementing rule on labor cannot be used by an employer as
a shield to avoid liability under the substantive provisions of the Civil Code.
Corollarily from the above doctrine, the ruling in Cuison v. Norton & Harrison
Co.,[19] finds applicability in the instant case, viz.:

It is well to repeat that under the civil law an employer is only liable for the
negligence of his employees in the discharge of their respective duties. The
defense of independent contractor would be a valid one in the Philippines just
as it would be in the United States. Here Ora was a contractor, but it does not
necessarily follow that he was an independent contractor. The reason for this
distinction is that the employer retained the power of directing and controlling
the work. The chauffeur and the two persons on the truck were the
employees of Ora, the contractor, but Ora, the contractor, was an employee of
Norton & Harrison Co., charged with the duty of directing the loading and
transportation of the lumber. And it was the negligence in loading the lumber
and the use of minors on the truck which caused the death of the unfortunate
boy. On the facts and the law, Ora was not an independent contractor, but
was the servant of the defendant, and for his negligence defendant was
responsible.
Given the above considerations, it is apparent that Article 2180 of the Civil Code
and not the Labor Code will determine the liability of NPC in a civil suit for damages
instituted by an injured person for any negligent act of the employees of the labor only
contractor. This is consistent with the ruling that a finding that a contractor was a laboronly contractor is equivalent to a finding that an employer-employee relationship
existed between the owner (principal contractor) and the labor-only contractor,
including the latters workers.[20]
With respect to the liability of NPC as the direct employer, Article 2180 of the Civil
Code explicitly provides:

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.
In this regard, NPCs liability is direct, primary and solidary with PHESCO and the
driver.[21] Of course, NPC, if the judgment for damages is satisfied by it, shall have
recourse against PHESCO and the driver who committed the negligence which gave
rise to the action.[22]
Finally, NPC, even if it truly believed that it was not the employer of the driver, could
still have disclaimed any liability had it raised the defense of due diligence in the
selection or supervision of PHESCO and Ilumba.[23] However, for some reason or
another, NPC did not invoke said defense. Hence, by opting not to present any
evidence that it exercised due diligence in the supervision of the activities of PHESCO
and Ilumba, NPC has foreclosed its right to interpose the same on appeal in conformity
with the rule that points of law, theories, issues of facts and arguments not raised in the
proceedings below cannot be ventilated for the first time on appeal. [24] Consequently, its
liability stands.

WHEREFORE, in view of the foregoing, the assailed decision of the Court of

Appeals dated November 10, 1994 and its accompanying resolution dated February 9,
1995 are AFFIRMED without prejudice to the right of NPC to demand from PHESCO
and Ilumba reimbursement of the damages it would be adjudged to pay to
complainants. No costs.
SO ORDERED.
Narvasa, CJ., (Chairman), Kapunan and Purisima JJ. concur.

THIRD DIVISION
[G.R. No. 150255. April 22, 2005]
SCHMITZ TRANSPORT & BROKERAGE CORPORATION, petitioner, vs. TRANSPORT VENTURE, INC.,
INDUSTRIAL INSURANCE COMPANY, LTD., and BLACK SEA SHIPPING AND DODWELL now INCHCAPE
SHIPPING SERVICES, respondents.
DECISION
CARPIO-MORALES, J.:
On petition for review is the June 27, 2001 Decision[1] of the Court of Appeals, as well as its
Resolution[2] dated September 28, 2001 denying the motion for reconsideration, which affirmed that
of Branch 21 of the Regional Trial Court (RTC) of Manila in Civil Case No. 92-63132[3] holding petitioner
Schmitz Transport Brokerage Corporation (Schmitz Transport), together with Black Sea Shipping
Corporation (Black Sea), represented by its ship agent Inchcape Shipping Inc. (Inchcape), and
Transport Venture (TVI), solidarily liable for the loss of 37 hot rolled steel sheets in coil that were
washed overboard a barge.
On September 25, 1991, SYTCO Pte Ltd. Singapore shipped from the port of Ilyichevsk, Russia on
board M/V Alexander Saveliev (a vessel of Russian registry and owned by Black Sea) 545 hot rolled
steel sheets in coil weighing 6,992,450 metric tons.
The cargoes, which were to be discharged at the port of Manila in favor of the consignee, Little Giant
Steel Pipe Corporation (Little Giant),[4] were insured against all risks with Industrial Insurance
Company Ltd. (Industrial Insurance) under Marine Policy No. M-91-3747-TIS.[5]
The vessel arrived at the port of Manila on October 24, 1991 and the Philippine Ports Authority (PPA)
assigned it a place of berth at the outside breakwater at the Manila South Harbor.[6]
Schmitz Transport, whose services the consignee engaged to secure the requisite clearances, to
receive the cargoes from the shipside, and to deliver them to its (the consignees) warehouse at
Cainta, Rizal,[7] in turn engaged the services of TVI to send a barge and tugboat at shipside.
On October 26, 1991, around 4:30 p.m., TVIs tugboat Lailani towed the barge Erika V to
shipside.[8]
By 7:00 p.m. also of October 26, 1991, the tugboat, after positioning the barge alongside the vessel,
left and returned to the port terminal.[9] At 9:00 p.m., arrastre operator Ocean Terminal Services Inc.
commenced to unload 37 of the 545 coils from the vessel unto the barge.
By 12:30 a.m. of October 27, 1991 during which the weather condition had become inclement due to
an approaching storm, the unloading unto the barge of the 37 coils was accomplished. [10] No tugboat
pulled the barge back to the pier, however.
At around 5:30 a.m. of October 27, 1991, due to strong waves,[11] the crew of the barge abandoned it
and transferred to the vessel. The barge pitched and rolled with the waves and eventually capsized,
washing the 37 coils into the sea.[12] At 7:00 a.m., a tugboat finally arrived to pull the already empty
and damaged barge back to the pier.[13]

Earnest efforts on the part of both the consignee Little Giant and Industrial Insurance to recover the
lost cargoes proved futile.[14]
Little Giant thus filed a formal claim against Industrial Insurance which paid it the amount
of P5,246,113.11. Little Giant thereupon executed a subrogation receipt[15] in favor of Industrial
Insurance.
Industrial Insurance later filed a complaint against Schmitz Transport, TVI, and Black Sea through its
representative Inchcape (the defendants) before the RTC of Manila, for the recovery of the amount it
paid to Little Giant plus adjustment fees, attorneys fees, and litigation expenses.[16]
Industrial Insurance faulted the defendants for undertaking the unloading of the cargoes while
typhoon signal No. 1 was raised in Metro Manila.[17]
By Decision of November 24, 1997, Branch 21 of the RTC held all the defendants negligent for
unloading the cargoes outside of the breakwater notwithstanding the storm signal.[18] The dispositive
portion of the decision reads:
WHEREFORE, premises considered, the Court renders judgment in favor of the plaintiff, ordering the
defendants to pay plaintiff jointly and severally the sum of P5,246,113.11 with interest from the date
the complaint was filed until fully satisfied, as well as the sum of P5,000.00 representing the
adjustment fee plus the sum of 20% of the amount recoverable from the defendants as attorneys
fees plus the costs of suit. The counterclaims and cross claims of defendants are hereby DISMISSED
for lack of [m]erit.[19]
To the trial courts decision, the defendants Schmitz Transport and TVI filed a joint motion for
reconsideration assailing the finding that they are common carriers and the award of excessive
attorneys fees of more than P1,000,000. And they argued that they were not motivated by gross or
evident bad faith and that the incident was caused by a fortuitous event. [20]
By resolution of February 4, 1998, the trial court denied the motion for reconsideration. [21]
All the defendants appealed to the Court of Appeals which, by decision of June 27, 2001, affirmed in
toto the decision of the trial court, [22] it finding that all the defendants were common carriers Black
Sea and TVI for engaging in the transport of goods and cargoes over the seas as a regular business and
not as an isolated transaction,[23] and Schmitz Transport for entering into a contract with Little Giant
to transport the cargoes from ship to port for a fee.[24]
In holding all the defendants solidarily liable, the appellate court ruled that each one was essential
such that without each others contributory negligence the incident would not have happened and so
much so that the person principally liable cannot be distinguished with sufficient accuracy. [25]
In discrediting the defense of fortuitous event, the appellate court held that although defendants
obviously had nothing to do with the force of nature, they however had control of where to anchor
the vessel, where discharge will take place and even when the discharging will commence. [26]
The defendants respective motions for reconsideration having been denied by Resolution[27] of
September 28, 2001, Schmitz Transport (hereinafter referred to as petitioner) filed the present
petition against TVI, Industrial Insurance and Black Sea.

Petitioner asserts that in chartering the barge and tugboat of TVI, it was acting for its principal,
consignee Little Giant, hence, the transportation contract was by and between Little Giant and TVI.[28]
By Resolution of January 23, 2002, herein respondents Industrial Insurance, Black Sea, and TVI were
required to file their respective Comments.[29]
By its Comment, Black Sea argued that the cargoes were received by the consignee through petitioner
in good order, hence, it cannot be faulted, it having had no control and supervision thereover.[30]
For its part, TVI maintained that it acted as a passive party as it merely received the cargoes and
transferred them unto the barge upon the instruction of petitioner.[31]
In issue then are:
(1) Whether the loss of the cargoes was due to a fortuitous event, independent of any act of
negligence on the part of petitioner Black Sea and TVI, and
(2) If there was negligence, whether liability for the loss may attach to Black Sea, petitioner and TVI.
When a fortuitous event occurs, Article 1174 of the Civil Code absolves any party from any and all
liability arising therefrom:
ART. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be
responsible for those events which could not be foreseen, or which though foreseen, were inevitable.
In order, to be considered a fortuitous event, however, (1) the cause of the unforeseen and
unexpected occurrence, or the failure of the debtor to comply with his obligation, must be
independent of human will; (2) it must be impossible to foresee the event which constitute the caso
fortuito, or if it can be foreseen it must be impossible to avoid; (3) the occurrence must be such as to
render it impossible for the debtor to fulfill his obligation in any manner; and (4) the obligor must be
free from any participation in the aggravation of the injury resulting to the creditor. [32]
[T]he principle embodied in the act of God doctrine strictly requires that the act must be occasioned
solely by the violence of nature. Human intervention is to be excluded from creating or entering into
the cause of the mischief. When the effect is found to be in part the result of the participation of
man, whether due to his active intervention or neglect or failure to act, the whole occurrence is then
humanized and removed from the rules applicable to the acts of God.[33]
The appellate court, in affirming the finding of the trial court that human intervention in the form of
contributory negligence by all the defendants resulted to the loss of the cargoes,[34] held that
unloading outside the breakwater, instead of inside the breakwater, while a storm signal was up
constitutes negligence.[35] It thus concluded that the proximate cause of the loss was Black Seas
negligence in deciding to unload the cargoes at an unsafe place and while a typhoon was
approaching.[36]
From a review of the records of the case, there is no indication that there was greater risk in loading
the cargoes outside the breakwater. As the defendants proffered, the weather on October 26, 1991
remained normal with moderate sea condition such that port operations continued and proceeded
normally.[37]

The weather data report,[38] furnished and verified by the Chief of the Climate Data Section of PAGASA and marked as a common exhibit of the parties, states that while typhoon signal No. 1 was
hoisted over Metro Manila on October 23-31, 1991, the sea condition at the port of Manila at 5:00
p.m. - 11:00 p.m. of October 26, 1991 was moderate. It cannot, therefore, be said that the defendants
were negligent in not unloading the cargoes upon the barge on October 26, 1991 inside the
breakwater.
That no tugboat towed back the barge to the pier after the cargoes were completely loaded by 12:30
in the morning[39] is, however, a material fact which the appellate court failed to properly consider
and appreciate[40] the proximate cause of the loss of the cargoes. Had the barge been towed back
promptly to the pier, the deteriorating sea conditions notwithstanding, the loss could have been
avoided. But the barge was left floating in open sea until big waves set in at 5:30 a.m., causing it to
sink along with the cargoes.[41] The loss thus falls outside the act of God doctrine.
The proximate cause of the loss having been determined, who among the parties is/are responsible
therefor?
Contrary to petitioners insistence, this Court, as did the appellate court, finds that petitioner is a
common carrier. For it undertook to transport the cargoes from the shipside of M/V Alexander
Saveliev to the consignees warehouse at Cainta, Rizal. As the appellate court put it, as long as a
person or corporation holds [itself] to the public for the purpose of transporting goods as [a] business,
[it] is already considered a common carrier regardless if [it] owns the vehicle to be used or has to hire
one.[42] That petitioner is a common carrier, the testimony of its own Vice-President and General
Manager Noel Aro that part of the services it offers to its clients as a brokerage firm includes the
transportation of cargoes reflects so.
Atty. Jubay: Will you please tell us what [are you] functions x x x as Executive Vice-President and
General Manager of said Company?
Mr. Aro: Well, I oversee the entire operation of the brokerage and transport business of the
company. I also handle the various division heads of the company for operation matters, and all other
related functions that the President may assign to me from time to time, Sir.
Q: Now, in connection [with] your duties and functions as you mentioned, will you please tell the
Honorable Court if you came to know the company by the name Little Giant Steel Pipe Corporation?
A: Yes, Sir. Actually, we are the brokerage firm of that Company.
Q: And since when have you been the brokerage firm of that company, if you can recall?
A: Since 1990, Sir.
Q: Now, you said that you are the brokerage firm of this Company. What work or duty did you
perform in behalf of this company?
A: We handled the releases (sic) of their cargo[es] from the Bureau of Customs. We [are] also incharged of the delivery of the goods to their warehouses. We also handled the clearances of their
shipment at the Bureau of Customs, Sir.
xxx

Q: Now, what precisely [was] your agreement with this Little Giant Steel Pipe Corporation with
regards to this shipment? What work did you do with this shipment?
A: We handled the unloading of the cargo[es] from vessel to lighter and then the delivery of [the]
cargo[es] from lighter to BASECO then to the truck and to the warehouse, Sir.
Q: Now, in connection with this work which you are doing, Mr. Witness, you are supposed to perform,
what equipment do (sic) you require or did you use in order to effect this unloading, transfer and
delivery to the warehouse?
A: Actually, we used the barges for the ship side operations, this unloading [from] vessel to lighter,
and on this we hired or we sub-contracted with [T]ransport Ventures, Inc. which [was] in-charged (sic)
of the barges. Also, in BASECO compound we are leasing cranes to have the cargo unloaded from the
barge to trucks, *and+ then we used trucks to deliver *the cargoes+ to the consignees warehouse, Sir.
Q: And whose trucks do you use from BASECO compound to the consignees warehouse?
A: We utilized of (sic) our own trucks and we have some other contracted trucks, Sir.
xxx
ATTY. JUBAY: Will you please explain to us, to the Honorable Court why is it you have to contract for
the barges of Transport Ventures Incorporated in this particular operation?
A: Firstly, we dont own any barges. That is why we hired the services of another firm whom we know
[al]ready for quite sometime, which is Transport Ventures, Inc. (Emphasis supplied)[43]
It is settled that under a given set of facts, a customs broker may be regarded as a common
carrier. Thus, this Court, in A.F. Sanchez Brokerage, Inc. v. The Honorable Court of Appeals,[44] held:
The appellate court did not err in finding petitioner, a customs broker, to be also a common carrier, as
defined under Article 1732 of the Civil Code, to wit,
Art. 1732. Common carriers are persons, corporations, firms or associations engaged in the business
of carrying or transporting passengers or goods or both, by land, water, or air, for compensation,
offering their services to the public.
xxx
Article 1732 does not distinguish between one whose principal business activity is the carrying of
goods and one who does such carrying only as an ancillary activity. The contention, therefore, of
petitioner that it is not a common carrier but a customs broker whose principal function is to prepare
the correct customs declaration and proper shipping documents as required by law is bereft of
merit. It suffices that petitioner undertakes to deliver the goods for pecuniary consideration. [45]
And in Calvo v. UCPB General Insurance Co. Inc.,[46] this Court held that as the transportation of goods
is an integral part of a customs broker, the customs broker is also a common carrier. For to declare
otherwise would be to deprive those with whom *it+ contracts the protection which the law affords
them notwithstanding the fact that the obligation to carry goods for [its] customers, is part and parcel
of petitioners business.[47]

As for petitioners argument that being the agent of Little Giant, any negligence it committed was
deemed the negligence of its principal, it does not persuade.
True, petitioner was the broker-agent of Little Giant in securing the release of the cargoes. In
effecting the transportation of the cargoes from the shipside and into Little Giants warehouse,
however, petitioner was discharging its own personal obligation under a contact of carriage.
Petitioner, which did not have any barge or tugboat, engaged the services of TVI as handler [48] to
provide the barge and the tugboat. In their Service Contract,[49] while Little Giant was named as the
consignee, petitioner did not disclose that it was acting on commission and was chartering the vessel
for Little Giant.[50] Little Giant did not thus automatically become a party to the Service Contract and
was not, therefore, bound by the terms and conditions therein.
Not being a party to the service contract, Little Giant cannot directly sue TVI based thereon but it can
maintain a cause of action for negligence.[51]
In the case of TVI, while it acted as a private carrier for which it was under no duty to observe
extraordinary diligence, it was still required to observe ordinary diligence to ensure the proper and
careful handling, care and discharge of the carried goods.
Thus, Articles 1170 and 1173 of the Civil Code provide:
ART. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay,
and those who in any manner contravene the tenor thereof, are liable for damages.
ART. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is
required by the nature of the obligation and corresponds with the circumstances of the persons, of
the time and of the place. When negligence shows bad faith, the provisions of articles 1171 and 2202,
paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be observed in the performance, that
which is expected of a good father of a family shall be required.
Was the reasonable care and caution which an ordinarily prudent person would have used in the
same situation exercised by TVI?[52]
This Court holds not.
TVIs failure to promptly provide a tugboat did not only increase the risk that might have been
reasonably anticipated during the shipside operation, but was the proximate cause of the loss. A man
of ordinary prudence would not leave a heavily loaded barge floating for a considerable number of
hours, at such a precarious time, and in the open sea, knowing that the barge does not have any
power of its own and is totally defenseless from the ravages of the sea. That it was nighttime and,
therefore, the members of the crew of a tugboat would be charging overtime pay did not excuse TVI
from calling for one such tugboat.
As for petitioner, for it to be relieved of liability, it should, following Article 1739 [53] of the Civil Code,
prove that it exercised due diligence to prevent or minimize the loss, before, during and after the
occurrence of the storm in order that it may be exempted from liability for the loss of the goods.

While petitioner sent checkers[54] and a supervisor[55] on board the vessel to counter-check the
operations of TVI, it failed to take all available and reasonable precautions to avoid the loss. After
noting that TVI failed to arrange for the prompt towage of the barge despite the deteriorating sea
conditions, it should have summoned the same or another tugboat to extend help, but it did not.
This Court holds then that petitioner and TVI are solidarily liable[56] for the loss of the cargoes. The
following pronouncement of the Supreme Court is instructive:
The foundation of LRTAs liability is the contract of carriage and its obligation to indemnify the victim
arises from the breach of that contract by reason of its failure to exercise the high diligence required
of the common carrier. In the discharge of its commitment to ensure the safety of passengers, a
carrier may choose to hire its own employees or avail itself of the services of an outsider or an
independent firm to undertake the task. In either case, the common carrier is not relieved of its
responsibilities under the contract of carriage.
Should Prudent be made likewise liable? If at all, that liability could only be for tort under the
provisions of Article 2176 and related provisions, in conjunction with Article 2180 of the Civil Code. x x
x[O]ne might ask further, how then must the liability of the common carrier, on one hand, and an
independent contractor, on the other hand, be described? It would be solidary. A contractual
obligation can be breached by tort and when the same act or omission causes the injury, one resulting
in culpa contractual and the other in culpa aquiliana, Article 2194 of the Civil Code can well apply. In
fine, a liability for tort may arise even under a contract, where tort is that which breaches the
contract. Stated differently, when an act which constitutes a breach of contract would have itself
constituted the source of a quasi-delictual liability had no contract existed between the parties, the
contract can be said to have been breached by tort, thereby allowing the rules on tort to apply. [57]
As for Black Sea, its duty as a common carrier extended only from the time the goods were
surrendered or unconditionally placed in its possession and received for transportation until they
were delivered actually or constructively to consignee Little Giant.[58]
Parties to a contract of carriage may, however, agree upon a definition of delivery that extends the
services rendered by the carrier. In the case at bar, Bill of Lading No. 2 covering the shipment
provides that delivery be made to the port of discharge or so near thereto as she may safely get,
always afloat.[59] The delivery of the goods to the consignee was not from pier to pier but from the
shipside of M/V Alexander Saveliev and into barges, for which reason the consignee contracted the
services of petitioner. Since Black Sea had constructively delivered the cargoes to Little Giant, through
petitioner, it had discharged its duty.[60]
In fine, no liability may thus attach to Black Sea.
Respecting the award of attorneys fees in an amount over P1,000,000.00 to Industrial Insurance, for
lack of factual and legal basis, this Court sets it aside. While Industrial Insurance was compelled to
litigate its rights, such fact by itself does not justify the award of attorneys fees under Article 2208 of
the Civil Code. For no sufficient showing of bad faith would be reflected in a partys persistence in a
case other than an erroneous conviction of the righteousness of his cause. [61] To award attorneys fees
to a party just because the judgment is rendered in its favor would be tantamount to imposing a
premium on ones right to litigate or seek judicial redress of legitimate grievances.[62]

On the award of adjustment fees: The adjustment fees and expense of divers were incurred by
Industrial Insurance in its voluntary but unsuccessful efforts to locate and retrieve the lost
cargo. They do not constitute actual damages.[63]
As for the court a quos award of interest on the amount claimed, the same calls for modification
following the ruling in Eastern Shipping Lines, Inc. v. Court of Appeals[64] that when the demand
cannot be reasonably established at the time the demand is made, the interest shall begin to run not
from the time the claim is made judicially or extrajudicially but from the date the judgment of the
court is made (at which the time the quantification of damages may be deemed to have been
reasonably ascertained).[65]
WHEREFORE, judgment is hereby rendered ordering petitioner Schmitz Transport & Brokerage
Corporation, and Transport Venture Incorporation jointly and severally liable for the amount
ofP5,246,113.11 with the MODIFICATION that interest at SIX PERCENT per annum of the amount due
should be computed from the promulgation on November 24, 1997 of the decision of the trial court.
Costs against petitioner.
SO ORDERED.
Panganiban, (Chairman), Sandoval-Gutierrez, Corona, and Garcia, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 147324

May 25, 2004

PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, petitioner,

vs.
GLOBE TELECOM, INC. (formerly Globe Mckay Cable and Radio Corporation), respondents.
x-----------------------------x
GLOBE TELECOM, INC., petitioner,
vs.
PHILIPPINE COMMUNICATION SATELLITE CORPORATION, respondent.
DECISION
TINGA, J.:
Before the Court are two Petitions for Review assailing the Decision of the Court of Appeals, dated
27 February 2001, in CA-G.R. CV No. 63619.1
The facts of the case are undisputed.
For several years prior to 1991, Globe Mckay Cable and Radio Corporation, now Globe Telecom,
Inc. (Globe), had been engaged in the coordination of the provision of various communication
facilities for the military bases of the United States of America (US) in Clark Air Base, Angeles,
Pampanga and Subic Naval Base in Cubi Point, Zambales. The said communication facilities were
installed and configured for the exclusive use of the US Defense Communications Agency (USDCA),
and for security reasons, were operated only by its personnel or those of American companies
contracted by it to operate said facilities. The USDCA contracted with said American companies, and
the latter, in turn, contracted with Globe for the use of the communication facilities. Globe, on the
other hand, contracted with local service providers such as the Philippine Communications Satellite
Corporation (Philcomsat) for the provision of the communication facilities.
On 07 May 1991, Philcomsat and Globe entered into an Agreement whereby Philcomsat obligated
itself to establish, operate and provide an IBS Standard B earth station (earth station) within Cubi
Point for the exclusive use of the USDCA.2 The term of the contract was for 60 months, or five (5)
years.3 In turn, Globe promised to pay Philcomsat monthly rentals for each leased circuit involved.4
At the time of the execution of the Agreement, both parties knew that the Military Bases Agreement
between the Republic of the Philippines and the US (RP-US Military Bases Agreement), which was
the basis for the occupancy of the Clark Air Base and Subic Naval Base in Cubi Point, was to expire
in 1991. Under Section 25, Article XVIII of the 1987 Constitution, foreign military bases, troops or
facilities, which include those located at the US Naval Facility in Cubi Point, shall not be allowed in
the Philippines unless a new treaty is duly concurred in by the Senate and ratified by a majority of
the votes cast by the people in a national referendum when the Congress so requires, and such new
treaty is recognized as such by the US Government.

Subsequently, Philcomsat installed and established the earth station at Cubi Point and the USDCA
made use of the same.
On 16 September 1991, the Senate passed and adopted Senate Resolution No. 141, expressing its
decision not to concur in the ratification of the Treaty of Friendship, Cooperation and Security and its
Supplementary Agreements that was supposed to extend the term of the use by the US of Subic
Naval Base, among others.5 The last two paragraphs of the Resolution state:
FINDING that the Treaty constitutes a defective framework for the continuing relationship
between the two countries in the spirit of friendship, cooperation and sovereign equality:
Now, therefore, be it Resolved by the Senate, as it is hereby resolved, To express its
decision not to concur in the ratification of the Treaty of Friendship, Cooperation and Security
and its Supplementary Agreements, at the same time reaffirming its desire to continue
friendly relations with the government and people of the United States of America.6
On 31 December 1991, the Philippine Government sent a Note Verbale to the US Government
through the US Embassy, notifying it of the Philippines termination of the RP-US Military Bases
Agreement. The Note Verbalestated that since the RP-US Military Bases Agreement, as amended,
shall terminate on 31 December 1992, the withdrawal of all US military forces from Subic Naval
Base should be completed by said date.
In a letter dated 06 August 1992, Globe notified Philcomsat of its intention to discontinue the use of
the earth station effective 08 November 1992 in view of the withdrawal of US military personnel from
Subic Naval Base after the termination of the RP-US Military Bases Agreement. Globe invoked as
basis for the letter of termination Section 8 (Default) of the Agreement, which provides:
Neither party shall be held liable or deemed to be in default for any failure to perform its
obligation under this Agreement if such failure results directly or indirectly from force majeure
or fortuitous event. Either party is thus precluded from performing its obligation until such
force majeure or fortuitous event shall terminate. For the purpose of this paragraph, force
majeure shall mean circumstances beyond the control of the party involved including, but not
limited to, any law, order, regulation, direction or request of the Government of the
Philippines, strikes or other labor difficulties, insurrection riots, national emergencies, war,
acts of public enemies, fire, floods, typhoons or other catastrophies or acts of God.
Philcomsat sent a reply letter dated 10 August 1992 to Globe, stating that "we expect [Globe] to
know its commitment to pay the stipulated rentals for the remaining terms of the Agreement even
after [Globe] shall have discontinue[d] the use of the earth station after November 08,
1992."7 Philcomsat referred to Section 7 of the Agreement, stating as follows:
7. DISCONTINUANCE OF SERVICE
Should [Globe] decide to discontinue with the use of the earth station after it has been put
into operation, a written notice shall be served to PHILCOMSAT at least sixty (60) days prior
to the expected date of termination. Notwithstanding the non-use of the earth station, [Globe]
shall continue to pay PHILCOMSAT for the rental of the actual number of T1 circuits in use,
but in no case shall be less than the first two (2) T1 circuits, for the remaining life of the
agreement. However, should PHILCOMSAT make use or sell the earth station subject to this
agreement, the obligation of [Globe] to pay the rental for the remaining life of the agreement
shall be at such monthly rate as may be agreed upon by the parties.8

After the US military forces left Subic Naval Base, Philcomsat sent Globe a letter dated 24
November 1993 demanding payment of its outstanding obligations under the Agreement amounting
to US$4,910,136.00 plus interest and attorneys fees. However, Globe refused to heed Philcomsats
demand.
On 27 January 1995, Philcomsat filed with the Regional Trial Court of Makati a Complaint against
Globe, praying that the latter be ordered to pay liquidated damages under the Agreement, with legal
interest, exemplary damages, attorneys fees and costs of suit. The case was raffled to Branch 59 of
said court.
Globe filed an Answer to the Complaint, insisting that it was constrained to end the Agreement due
to the termination of the RP-US Military Bases Agreement and the non-ratification by the Senate of
the Treaty of Friendship and Cooperation, which events constituted force majeure under the
Agreement. Globe explained that the occurrence of said events exempted it from paying rentals for
the remaining period of the Agreement.
On 05 January 1999, the trial court rendered its Decision, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Ordering the defendant to pay the plaintiff the amount of Ninety Two Thousand
Two Hundred Thirty Eight US Dollars (US$92,238.00) or its equivalent in Philippine
Currency (computed at the exchange rate prevailing at the time of compliance or
payment) representing rentals for the month of December 1992 with interest thereon
at the legal rate of twelve percent (12%) per annum starting December 1992 until the
amount is fully paid;
2. Ordering the defendant to pay the plaintiff the amount of Three Hundred Thousand
(P300,000.00) Pesos as and for attorneys fees;
3. Ordering the DISMISSAL of defendants counterclaim for lack of merit; and
4. With costs against the defendant.
SO ORDERED.9
Both parties appealed the trial courts Decision to the Court of Appeals.
Philcomsat claimed that the trial court erred in ruling that: (1) the non-ratification by the Senate of the
Treaty of Friendship, Cooperation and Security and its Supplementary Agreements constitutes force
majeure which exempts Globe from complying with its obligations under the Agreement; (2) Globe is
not liable to pay the rentals for the remainder of the term of the Agreement; and (3) Globe is not
liable to Philcomsat for exemplary damages.
Globe, on the other hand, contended that the RTC erred in holding it liable for payment of rent of the
earth station for December 1992 and of attorneys fees. It explained that it terminated Philcomsats
services on 08 November 1992; hence, it had no reason to pay for rentals beyond that date.
On 27 February 2001, the Court of Appeals promulgated its Decision dismissing Philcomsats appeal
for lack of merit and affirming the trial courts finding that certain events constituting force

majeure under Section 8 the Agreement occurred and justified the non-payment by Globe of rentals
for the remainder of the term of the Agreement.
The appellate court ruled that the non-ratification by the Senate of the Treaty of Friendship,
Cooperation and Security, and its Supplementary Agreements, and the termination by the Philippine
Government of the RP-US Military Bases Agreement effective 31 December 1991 as stated in the
Philippine Governments Note Verbale to the US Government, are acts, directions, or requests of the
Government of the Philippines which constitute force majeure. In addition, there were circumstances
beyond the control of the parties, such as the issuance of a formal order by Cdr. Walter Corliss of
the US Navy, the issuance of the letter notification from ATT and the complete withdrawal of all US
military forces and personnel from Cubi Point, which prevented further use of the earth station under
the Agreement.
However, the Court of Appeals ruled that although Globe sought to terminate Philcomsats services
by 08 November 1992, it is still liable to pay rentals for the December 1992, amounting to
US$92,238.00 plus interest, considering that the US military forces and personnel completely
withdrew from Cubi Point only on 31 December 1992.10
Both parties filed their respective Petitions for Review assailing the Decision of the Court of Appeals.
In G.R. No. 147324,11 petitioner Philcomsat raises the following assignments of error:
A. THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING A DEFINITION
OF FORCE MAJEUREDIFFERENT FROM WHAT ITS LEGAL DEFINITION FOUND IN
ARTICLE 1174 OF THE CIVIL CODE, PROVIDES, SO AS TO EXEMPT GLOBE TELECOM
FROM COMPLYING WITH ITS OBLIGATIONS UNDER THE SUBJECT AGREEMENT.
B. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM
IS NOT LIABLE TO PHILCOMSAT FOR RENTALS FOR THE REMAINING TERM OF THE
AGREEMENT, DESPITE THE CLEAR TENOR OF SECTION 7 OF THE AGREEMENT.
C. THE HONORABLE OCURT OF APPEALS ERRED IN DELETING THE TRIAL COURTS
AWARD OF ATTORNEYS FEES IN FAVOR OF PHILCOMSAT.
D. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM
IS NOT LIABLE TO PHILCOMSAT FOR EXEMPLARY DAMAGES.12
Philcomsat argues that the termination of the RP-US Military Bases Agreement cannot be
considered a fortuitous event because the happening thereof was foreseeable. Although the
Agreement was freely entered into by both parties, Section 8 should be deemed ineffective because
it is contrary to Article 1174 of the Civil Code. Philcomsat posits the view that the validity of the
parties definition of force majeure in Section 8 of the Agreement as "circumstances beyond the
control of the party involved including, but not limited to, any law, order, regulation, direction or
request of the Government of the Philippines, strikes or other labor difficulties, insurrection riots,
national emergencies, war, acts of public enemies, fire, floods, typhoons or other catastrophies or
acts of God," should be deemed subject to Article 1174 which defines fortuitous events as events
which could not be foreseen, or which, though foreseen, were inevitable.13
Philcomsat further claims that the Court of Appeals erred in holding that Globe is not liable to pay for
the rental of the earth station for the entire term of the Agreement because it runs counter to what
was plainly stipulated by the parties in Section 7 thereof. Moreover, said ruling is inconsistent with
the appellate courts pronouncement that Globe is liable to pay rentals for December 1992 even

though it terminated Philcomsats services effective 08 November 1992, because the US military and
personnel completely withdrew from Cubi Point only in December 1992. Philcomsat points out that it
was Globe which proposed the five-year term of the Agreement, and that the other provisions of the
Agreement, such as Section 4.114 thereof, evince the intent of Globe to be bound to pay rentals for
the entire five-year term.15
Philcomsat also maintains that contrary to the appellate courts findings, it is entitled to attorneys
fees and exemplary damages.16
In its Comment to Philcomsats Petition, Globe asserts that Section 8 of the Agreement is not
contrary to Article 1174 of the Civil Code because said provision does not prohibit parties to a
contract from providing for other instances when they would be exempt from fulfilling their
contractual obligations. Globe also claims that the termination of the RP-US Military Bases
Agreement constitutes force majeure and exempts it from complying with its obligations under the
Agreement.17 On the issue of the propriety of awarding attorneys fees and exemplary damages to
Philcomsat, Globe maintains that Philcomsat is not entitled thereto because in refusing to pay
rentals for the remainder of the term of the Agreement, Globe only acted in accordance with its
rights.18
In G.R. No. 147334,19 Globe, the petitioner therein, contends that the Court of Appeals erred in
finding it liable for the amount of US$92,238.00, representing rentals for December 1992, since
Philcomsats services were actually terminated on 08 November 1992.20
In its Comment, Philcomsat claims that Globes petition should be dismissed as it raises a factual
issue which is not cognizable by the Court in a petition for review on certiorari.21
On 15 August 2001, the Court issued a Resolution giving due course to Philcomsats Petition in G.R.
No.
147324 and required the parties to submit their respective memoranda.22
Similarly, on 20 August 2001, the Court issued a Resolution giving due course to the Petition filed by
Globe inG.R. No. 147334 and required both parties to submit their memoranda.23
Philcomsat and Globe thereafter filed their respective Consolidated Memoranda in the two
cases, reiterating their arguments in their respective petitions.
The Court is tasked to resolve the following issues: (1) whether the termination of the RP-US Military
Bases Agreement, the non-ratification of the Treaty of Friendship, Cooperation and Security, and the
consequent withdrawal of US military forces and personnel from Cubi Point constitute force
majeure which would exempt Globe from complying with its obligation to pay rentals under its
Agreement with Philcomsat; (2) whether Globe is liable to pay rentals under the Agreement for the
month of December 1992; and (3) whether Philcomsat is entitled to attorneys fees and exemplary
damages.
No reversible error was committed by the Court of Appeals in issuing the assailed Decision; hence
the petitions are denied.
There is no merit is Philcomsats argument that Section 8 of the Agreement cannot be given effect
because the enumeration of events constituting force majeure therein unduly expands the concept of
a fortuitous event under Article 1174 of the Civil Code and is therefore invalid.

In support of its position, Philcomsat contends that under Article 1174 of the Civil Code, an event
must be unforeseen in order to exempt a party to a contract from complying with its obligations
therein. It insists that since the expiration of the RP-US Military Bases Agreement, the nonratification of the Treaty of Friendship, Cooperation and Security and the withdrawal of US military
forces and personnel from Cubi Point were not unforeseeable, but were possibilities known to it and
Globe at the time they entered into the Agreement, such events cannot exempt Globe from
performing its obligation of paying rentals for the entire five-year term thereof.
However, Article 1174, which exempts an obligor from liability on account of fortuitous events
or force majeure, refers not only to events that are unforeseeable, but also to those which are
foreseeable, but inevitable:
Art. 1174. Except in cases specified by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no person
shall be responsible for those events which, could not be foreseen, or which, though
foreseen were inevitable.
A fortuitous event under Article 1174 may either be an "act of God," or natural occurrences such as
floods or typhoons,24 or an "act of man," such as riots, strikes or wars.25
Philcomsat and Globe agreed in Section 8 of the Agreement that the following events shall be
deemed events constituting force majeure:
1. Any law, order, regulation, direction or request of the Philippine Government;
2. Strikes or other labor difficulties;
3. Insurrection;
4. Riots;
5. National emergencies;
6. War;
7. Acts of public enemies;
8. Fire, floods, typhoons or other catastrophies or acts of God;
9. Other circumstances beyond the control of the parties.
Clearly, the foregoing are either unforeseeable, or foreseeable but beyond the control of the parties.
There is nothing in the enumeration that runs contrary to, or expands, the concept of a fortuitous
event under Article 1174.
Furthermore, under Article 130626 of the Civil Code, parties to a contract may establish such
stipulations, clauses, terms and conditions as they may deem fit, as long as the same do not run
counter to the law, morals, good customs, public order or public policy.27
Article 1159 of the Civil Code also provides that "[o]bligations arising from contracts have the force of
law between the contracting parties and should be complied with in good faith."28 Courts cannot

stipulate for the parties nor amend their agreement where the same does not contravene law,
morals, good customs, public order or public policy, for to do so would be to alter the real intent of
the parties, and would run contrary to the function of the courts to give force and effect thereto.29
Not being contrary to law, morals, good customs, public order, or public policy, Section 8 of the
Agreement which Philcomsat and Globe freely agreed upon has the force of law between them.30
In order that Globe may be exempt from non-compliance with its obligation to pay rentals under
Section 8, the concurrence of the following elements must be established: (1) the event must be
independent of the human will; (2) the occurrence must render it impossible for the debtor to fulfill
the obligation in a normal manner; and (3) the obligor must be free of participation in, or aggravation
of, the injury to the creditor.31
The Court agrees with the Court of Appeals and the trial court that the abovementioned requisites
are present in the instant case. Philcomsat and Globe had no control over the non-renewal of the
term of the RP-US Military Bases Agreement when the same expired in 1991, because the
prerogative to ratify the treaty extending the life thereof belonged to the Senate. Neither did the
parties have control over the subsequent withdrawal of the US military forces and personnel from
Cubi Point in December 1992:
Obviously the non-ratification by the Senate of the RP-US Military Bases Agreement (and its
Supplemental Agreements) under its Resolution No. 141. (Exhibit "2") on September 16,
1991 is beyond the control of the parties. This resolution was followed by the sending on
December 31, 1991 o[f] a "Note Verbale" (Exhibit "3") by the Philippine Government to the
US Government notifying the latter of the formers termination of the RP-US Military Bases
Agreement (as amended) on 31 December 1992 and that accordingly, the withdrawal of all
U.S. military forces from Subic Naval Base should be completed by said date. Subsequently,
defendant [Globe] received a formal order from Cdr. Walter F. Corliss II Commander USN
dated July 31, 1992 and a notification from ATT dated July 29, 1992 to terminate the
provision of T1s services (via an IBS Standard B Earth Station) effective November 08,
1992. Plaintiff [Philcomsat] was furnished with copies of the said order and letter by the
defendant on August 06, 1992.
Resolution No. 141 of the Philippine Senate and the Note Verbale of the Philippine
Government to the US Government are acts, direction or request of the Government of the
Philippines and circumstances beyond the control of the defendant. The formal order from
Cdr. Walter Corliss of the USN, the letter notification from ATT and the complete withdrawal
of all the military forces and personnel from Cubi Point in the year-end 1992 are also acts
and circumstances beyond the control of the defendant.
Considering the foregoing, the Court finds and so holds that the afore-narrated
circumstances constitute "force majeure or fortuitous event(s) as defined under paragraph 8
of the Agreement.

From the foregoing, the Court finds that the defendant is exempted from paying the rentals
for the facility for the remaining term of the contract.
As a consequence of the termination of the RP-US Military Bases Agreement (as amended)
the continued stay of all US Military forces and personnel from Subic Naval Base would no
longer be allowed, hence, plaintiff would no longer be in any position to render the service it

was obligated under the Agreement. To put it blantly (sic), since the US military forces and
personnel left or withdrew from Cubi Point in the year end December 1992, there was no
longer any necessity for the plaintiff to continue maintaining the IBS facility. 32 (Emphasis in
the original.)
The aforementioned events made impossible the continuation of the Agreement until the end of its
five-year term without fault on the part of either party. The Court of Appeals was thus correct in ruling
that the happening of such fortuitous events rendered Globe exempt from payment of rentals for the
remainder of the term of the Agreement.
Moreover, it would be unjust to require Globe to continue paying rentals even though Philcomsat
cannot be compelled to perform its corresponding obligation under the Agreement. As noted by the
appellate court:
We also point out the sheer inequity of PHILCOMSATs position. PHILCOMSAT would like to
charge GLOBE rentals for the balance of the lease term without there being any
corresponding telecommunications service subject of the lease. It will be grossly unfair and
iniquitous to hold GLOBE liable for lease charges for a service that was not and could not
have been rendered due to an act of the government which was clearly beyond GLOBEs
control. The binding effect of a contract on both parties is based on the principle that the
obligations arising from contracts have the force of law between the contracting parties, and
there must be mutuality between them based essentially on their equality under which it is
repugnant to have one party bound by the contract while leaving the other party free
therefrom (Allied Banking Corporation v. Court of Appeals, 284 SCRA 357).33
With respect to the issue of whether Globe is liable for payment of rentals for the month of
December 1992, the Court likewise affirms the appellate courts ruling that Globe should pay the
same.
Although Globe alleged that it terminated the Agreement with Philcomsat effective 08 November
1992 pursuant to the formal order issued by Cdr. Corliss of the US Navy, the date when they actually
ceased using the earth station subject of the Agreement was not established during the
trial.34 However, the trial court found that the US military forces and personnel completely withdrew
from Cubi Point only on 31 December 1992.35 Thus, until that date, the USDCA had control over the
earth station and had the option of using the same. Furthermore, Philcomsat could not have
removed or rendered ineffective said communication facility until after 31 December 1992 because
Cubi Point was accessible only to US naval personnel up to that time. Hence, the Court of Appeals
did not err when it affirmed the trial courts ruling that Globe is liable for payment of rentals until
December 1992.
Neither did the appellate court commit any error in holding that Philcomsat is not entitled to
attorneys fees and exemplary damages.
The award of attorneys fees is the exception rather than the rule, and must be supported by factual,
legal and equitable justifications.36 In previously decided cases, the Court awarded attorneys fees
where a party acted in gross and evident bad faith in refusing to satisfy the other partys claims and
compelled the former to litigate to protect his rights;37 when the action filed is clearly unfounded,38 or
where moral or exemplary damages are awarded.39 However, in cases where both parties have
legitimate claims against each other and no party actually prevailed, such as in the present case
where the claims of both parties were sustained in part, an award of attorneys fees would not be
warranted.40

Exemplary damages may be awarded in cases involving contracts or quasi-contracts, if the erring
party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.41 In the present
case, it was not shown that Globe acted wantonly or oppressively in not heeding Philcomsats
demands for payment of rentals. It was established during the trial of the case before the trial court
that Globe had valid grounds for refusing to comply with its contractual obligations after 1992.
WHEREFORE, the Petitions are DENIED for lack of merit. The assailed Decision of the Court of
Appeals in CA-G.R. CV No. 63619 is AFFIRMED.
SO ORDERED.
Puno*, Quisumbing, Austria-Martinez, and Callejo, Sr., JJ., concur.

SECOND DIVISION
FIL-ESTATE
INC.,

PROPERTIES,

G.R. No. 165164

Petitioner,
Present:

- versus -

QUISUMBING, J., Chairperson,

CARPIO,
CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.

Promulgated:
SPOUSES GONZALO
and CONSUELO GO,
Respondents.
August 17, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

RESOLUTION
QUISUMBING, J.:

For review on certiorari are the Decision[1] dated June 9, 2004 of the Court
of Appeals in CA-G.R. SP No. 79624, and its Resolution[2] dated August 3, 2004,
denying the motion for reconsideration.
The basic facts in this case are undisputed.
On December 29, 1995, petitioner Fil-Estate Properties, Inc. (Fil-Estate) entered
into a contract to sell a condominium unit to respondent spouses Gonzalo and Consuelo
Go at Eight Sto. Domingo Place, a condominium project of petitioner located
on Sto. Domingo Avenue, Quezon City. The spouses paid a total of P3,439,000.07 of
the full contract price set atP3,620,000.00.
Because petitioner failed to develop the condominium project, on August 4,
1999, the spouses demanded the refund of the amount they paid, plus
interest. When petitioner did not refund the spouses, the latter filed a complaint

against petitioner for reimbursement of P3,620,000 representing the lump sum

price of the condominium unit, plus interest,P100,000 attorneys fees, and
expenses of litigation before the Housing and Land Use Regulatory Board
(HLURB).
In answer, petitioner claimed that respondents had no cause of action since
the delay in the construction of the condominium was caused by the financial crisis
that hit the Asian region, a fortuitous event over which petitioner had no control.
On July 18, 2000, the HLURB Regional Director approved the decision of
the Housing and Land Use Arbiter in favor of the spouses Go. The HLURB
ratiocinated that the Asian financial crisis that resulted in the depreciation of the
peso is not a fortuitous event as any fluctuation in the value of the peso is a daily
occurrence which is foreseeable and its deleterious effects avoided by economic
measures. The HLURB went on to say that when petitioner discontinued the
development of its condominium project, it failed to fulfill its contractual
obligations to the spouses. And following Article 1475[3] of the Civil Code, upon
perfection of the contract, the parties, here the spouses Go, may demand
performance. And under Article 1191[4] of the same code, should one of the
parties, in this instance Fil-Estate, fail to comply with the obligation, the aggrieved
party may choose between fulfillment or rescission of the obligation, with damages
in either case. Inasmuch as Fil-Estate could no longer fulfill its obligation, the
spouses Go may ask for rescission of the contract with damages. The dispositive
portion of the decision reads:
WHEREFORE, the foregoing considered, judgment is hereby
rendered as follows:
1. Ordering the respondent, Fil-Estate Properties, Inc., to refund to
the complainants, P3,439,000.07 (the amount proved) plus 12%
interest thereon reckoned from 09 August 1999 (the date the
respondent received the demand letter) until the same is fully
paid.
2. Ordering
the
respondent
to
pay
to
the
complainants P25,000.00 attorneys fees as and by way of
damages.

All other claims and counterclaims are dismissed.

IT IS SO ORDERED.[5]

The Board of Commissioners of the HLURB denied petitioners petition for

review and consequent motion for reconsideration.[6] The Office of the President
dismissed petitioners appeal and denied its motion for reconsideration.[7]
On appeal, asserting that both the HLURB and the Office of the President
committed reversible errors, Fil-Estate asked the Court of Appeals to set aside the
orders it is appealing.
The Court of Appeals affirmed the actions taken by the HLURB and the
Office of the President and declared that the Asian financial crisis could not be
considered a fortuitous event and that respondents right is provided for in Section
23[8] of Presidential Decree (P.D.) No. 957, otherwise known as The Subdivision
and Condominium Buyers Protective Decree. The appellate court also noted that
there was yet no crisis in 1995 and 1996 when the project should have been started,
and petitioner cannot blame the 1997 crisis for failure of the project, nor for even
not starting it, because the project should have been completed by 1997.
The appellate court denied petitioners motion for reconsideration.
Hence, this petition raising two issues for our resolution as follows:
I.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
THAT THE ASIAN FINANCIAL CRISIS IS NOT A FORTUITOUS
EVENT THAT WOULD EXCUSE THE DELIVERY BY
PETITIONER OF THE SUBJECT CONDOMINIUM UNIT TO
RESPONDENTS.
II.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
PETITIONER LIABLE FOR THE PAYMENT OF ATTORNEYS
FEES.[9]

On the first issue, did the Court of Appeals err in ruling that the Asian
financial crisis was not a fortuitous event?
Petitioner, citing Article 1174[10] of the Civil Code, argues that the Asian
financial crisis was a fortuitous event being unforeseen or inevitable. Petitioner
likewise citesServando v. Philippine Steam Navigation Co.,[11] to bolster its
case. Petitioner explains that the extreme economic exigency and extraordinary
currency fluctuations could not have been reasonably foreseen and were beyond
the contemplation of both parties when they entered the contract. Petitioner further
asserts that the resultant economic collapse of the real estate industry was
unforeseen by the whole Asia and if it was indeed foreseeable, then all those
engaged in the real estate business should have foreseen the impending
fiasco. Petitioner adds that it had not committed any fraud; that it had all the
required government permits; and that it had not abandoned the project but only
suspended the work. It also admits its obligation to complete the project. It says
that it had in fact asked the HLURB for extension to complete it.[12]
In their Comment, respondents submit that the instant petition be rejected
outright for the reason that petitioner has not raised any question of law in the
instant petition. The questions of whether or not the Asian financial crisis is a
fortuitous event, and whether or not attorneys fees should be granted, are
questions of facts which the Court of Appeals recognized as such.
Respondent spouses reiterate that contrary to what petitioner avers, the delay
in the construction of the building was not attributable to the Asian financial crisis
which happened in 1997[13] because petitioner did not even start the project in 1995
when it should have done, so that it could have finished it in 1997, as stipulated in
the contract.
Preliminarily, respondents bring to the attention of this Court the strange
discrepancy in the dates of notarization of the Certification of Non-Forum
Shopping and the Affidavit of Service both notarized on September 24, 2004,
while the Secretarys Certification was notarized a day earlier on September 23,
2004. However, we shall not delve into technicalities, but we shall proceed with
the resolution of the issues raised on the merits.

Indeed, the question of whether or not an event is fortuitous is a question of

fact. As a general rule, questions of fact may not be raised in a petition for review
for as long as there is no variance between the findings of the lower court and the
appellate court, as in this case where the HLURB, the Office of the President, and
the Court of Appeals were agreed on the fact.
Worthy of note, in a previous case, Asian Construction and Development
Corporation v. Philippine Commercial International Bank,[14] the Court had said
that the 1997 financial crisis that ensued in Asia did not constitute a valid
justification to renege on obligations. We emphatically stressed the same view
in Mondragon Leisure and Resorts Corporation v. Court of Appeals,[15] that the
Asian financial crisis in 1997 is not among the fortuitous events contemplated
under Article 1174 of the Civil Code.
Also, we cannot generalize that the Asian financial crisis in 1997 was
unforeseeable and beyond the control of a business corporation. It is unfortunate
that petitioner apparently met with considerable difficulty e.g. increase cost of
materials and labor, even before the scheduled commencement of its real estate
project as early as 1995. However, a real estate enterprise engaged in the preselling of condominium units is concededly a master in projections on
commodities and currency movements and business risks. The fluctuating
movement of the Philippine peso in the foreign exchange market is an everyday
occurrence, and fluctuations in currency exchange rates happen everyday, thus, not
an instance of caso fortuito.
Are respondents entitled to reimbursement of the amount paid, plus interest
and attorneys fees?
Yes. Section 23 of P.D. No. 957 is clear on this point.
It will be noted that respondents sent a demand letter dated August 4,
1999 to Fil-Estate asking for the return of the total amount paid including
amortization interests and legal interest due thereon. [16] The latter did not
respond favorably, and so the spouses filed a complaint demanding the
reimbursement of P3,620,000 representing the lump sum price of the condominium
unit with interest at the legal rate, and P100,000 attorneys fees. But the

respondents actually sought the refund of P3,620,000.00, the lump sum cost of the
condominium, more than their actual payment of P3,439,000.07. We are thus
constrained to award only P3,439,000.07, representing the sum of their actual
payments plus amortization interests and interest at legal rate which is 6% per
annum from the date of demand on August 4, 1999. We are not unaware that the
appellate court pegged the interest rate at 12% on the basis of Resolution No. R421, Series of 1988 of the HLURB. But, conformably with our ruling in Eastern
Shipping Lines, Inc. v. Court of Appeals,[17] the award of 12% interest on the
amount of refund must be reduced to 6%.
Moreover, we are constrained to modify the Court of Appeals grant of
attorneys fees from P25,000 to P100,000 as just and equitable since respondents
were compelled to secure the services of counsel over eight years to protect their
interest due to petitioners delay in the performance of their clear obligation.
WHEREFORE, the petition is DENIED for lack of merit. Petitioner is
hereby ordered (1) to reimburse respondents P3,439,000.07 at 6% interest
starting August 4, 1999until full payment, and (2) to pay respondents P100,000.00
attorneys fees. Costs against petitioner.
SO ORDERED.

THIRD DIVISION

HEIRS OF ZOILO ESPIRITU

AND PRIMITIVA ESPIRITU,
Petitioners,

G.R. No. 169617

Present:

- versus -

YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
CHICO-NAZARIO, and
NACHURA, JJ.

SPOUSES MAXIMO LANDRITO

AND
PAZ
LANDRITO,
Represented
by
ZOILO
Promulgated:
LANDRITO, as their Attorney-inFact,
Respondents.
April 4, 2007
x--------------------------------------------------x

DECISION

CHICO-NAZARIO, J.:

This is a petition for Review on Certiorari under Rule 45 of the Rules of

Court assailing the Decision of the Court of Appeals,[1] dated 31 August 2005,
reversing the Decision rendered by the trial court on 13 December 1995. The
Court of Appeals, in its assailed Decision, fixed the interest rate of the loan
between
the
parties
at
12%
per
annum,
and
ordered
the
Spouses Zoilo and Primitiva Espiritu (Spouses Espiritu) to reconvey the subject
property to the Spouses Landrito conditioned upon the payment of the loan.

Petitioners DULCE, BENLINDA, EDWIN, CYNTHIA, AND MIRIAM

ANDREA, all surnamed ESPIRITU, are the only children and legal heirs of the
Spouses Zoilo andPrimitiva Espiritu, who both died during the pendency of the
case before the Honorable Court of Appeals.[2]
Respondents Spouses Maximo and Paz Landrito (Spouses Landrito) are
herein represented by their son and attorney-in-fact, Zoilo Landrito.[3]
On 5
September
1986,
Spouses Landrito loaned
from
the
Spouses Espiritu the amount of P350,000.00 payable in three months. To secure
the loan, the Spouses Landritoexecuted a real estate mortgage over a five hundred
forty (540) square meter lot located in Alabang, Muntinlupa, covered by Transfer
Certificate of Title No. S-48948, in favor of the Spouses Espiritu. From
the P350,000.00 that the Landritos were supposed to receive, P17,500.00 was
deducted as interest for the first month which was equivalent to five percent of the
principal debt, and P7,500.00 was further deducted as service fee. Thus, they
actually received a net amount of P325,000.00. The agreement, however, provided
that the principal indebtedness earns interest at the legal rate.[4]
After three months, when the debt became due and demandable, the
Spouses Landrito were unable to pay the principal, and had not been able to make
any interest payments other than the amount initially deducted from the proceeds
of the loan. On 29 December 1986, the loan agreement was extended to 4 January
1987 through an Amendment of Real Estate Mortgage. The loan was restructured
in such a way that the unpaid interest became part of the principal, thus increasing
the principal to P385,000. The new loan agreement adopted all other terms and
conditions contained in first agreement.[5]
Due to the continued inability of the Spouses Landritos to settle their
obligations with the Spouses Espiritu, the loan agreement was renewed three more
times. In all these subsequent renewals, the same terms and conditions found in
the first agreement were retained. On 29 July 1987, the principal was increased
to P507,000.00 inclusive of running interest. On 11 March 1988, it was increased
to P647,000.00. And on 21 October 1988, the principal was increased
to P874,125.00.[6] At the hearing before the trial court,Zoilo Espiritu testified that
the increase in the principal in each amendment of the loan agreement did not

correspond to the amount delivered to the Spouses Landrito. Rather, the increase
in the principal had been due to unpaid interest and other charges.[7]
The
debt
remained
unpaid. As
a
consequence,
the
Spouses Espiritu foreclosed the mortgaged property on 31 October 1990. During
the auction sale, the property was sold to the Spouses Espiritu as the lone
bidder. On 9 January 1991, the Sheriffs Certificate of Sale was annotated on the
title of the mortgaged property, giving the Spouses Landritountil 8 January 1992 to
redeem the property. [8]
The Spouses Landrito failed to redeem the subject property although they
alleged that they negotiated for the redemption of the property as early as 30
October 1991. While the negotiated price for the land started at P1,595,392.79, it
was
allegedly
increased
by
the
Spouses Espiritu from
time
to
time. Spouses Landrito allegedly tendered two managers checks and some cash,
totaling P1,800,000.00 to the Spouses Espiritu on 13 January 1992, but the latter
refused to accept the same. They also alleged that the SpousesEspiritu increased
the amount demanded to P2.5 Million and gave them until July 1992 to pay the
said amount. However, upon inquiry, they found out that on 24 June 1992, the
Spouses Espiritu had already executed an Affidavit of Consolidation of Ownership
and registered the mortgaged property in their name, and that the Register of Deeds
of Makatihad already issued Transfer Certificate of Title No. 179802 in the name
of the Spouses Espiritu. On 9 October 1992, the Spouses Landrito, represented by
their son ZoiloLandrito, filed an action for annulment or reconveyance of title,
with damages against the Spouses Espiritu before Branch 146 of the Regional Trial
Court of Makati.[9] Among the allegations in their Complaint, they stated that the
Spouses Espiritu, as creditors and mortgagees, imposed interest rates that are
shocking to ones moral senses.[10]
The trial court dismissed the complaint and upheld the validity of the
foreclosure sale. The trial court ordered in its Decision, dated 13 December
1995:[11]
WHEREFORE, all the foregoing premises considered, the herein
complaint is hereby dismissed forthwith.

Without pronouncements to costs.

The Spouses Landrito appealed to the Court of Appeals pursuant to Rule 41

of the 1997 Rules of Court. In its Decision dated 31 August 2005, the Court of
Appeals reversed the trial courts decision, decreeing that the five percent (5%)
interest imposed by the Spouses Espiritu on the first month and the varying interest
rates imposed for the succeeding months contravened the provisions of the Real
Estate Mortgage contract which provided that interest at the legal rate, i.e., 12%
per annum, would be imposed. It also ruled that although the Usury Law had been
rendered ineffective by Central Bank Circular No. 905, which, in effect, removed
the ceiling rates prescribed for interests, thus, allowing parties to freely stipulate
thereon, the courts may render void any stipulation of interest rates which are
found iniquitous or unconscionable. As a result, the Court of Appeals set the
interest rate of the loan at the legal rate, or 12% per annum.[12]
Furthermore, the Court of Appeals held that the action for reconveyance,
filed by the Spouses Landrito, is still a proper remedy. Even if the
Spouses Landrito failed to redeem the property within the one-year redemption
period provided by law, the action for reconveyance remained as a remedy
available to a landowner whose property was wrongfully registered in anothers
name since the subject property has not yet passed to an innocent purchaser for
value.[13]
In the decretal portion of its Decision, the Court of Appeals ruled[14]:
WHEREFORE, the instant appeal is hereby GRANTED. The
assailed Decision dated December 13, 1995 of the Regional Trial Court
of Makati, Branch 146 in Civil Case No. 92-2920 is
hereby REVERSED and SET ASIDE, and a new one is hereby entered
as follows: (1) The legal rate of 12% per annum is hereby FIXED to be
applied as the interest of the loan; and (2) Conditioned upon the payment
of
the
loan,
defendantsappellees spouses Zoilo and Primitiva Espiritu are
hereby
ordered
to reconvey Transfer Certificate of Title No. S-48948 to appellant
spouses Maximo and Paz Landrito.

The case is REMANDED to the Trial Court for the above

determination.

Hence, the present petition. The following issues were raised:[15]

I
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING
AND SETTING ASIDE THE DECISION OF THE TRIAL COURT
AND ORDERING HEREIN PETITIONERS TO RECONVEY
TRANSFER CERTIFICATE OF TITLE NO. 18918 TO HEREIN
RESPONDENTS, WITHOUT ANY FACTUAL OR LEGAL BASIS
THEREFOR.
II
THE HONORABLE COURT OF APPEALS ERRED IN FINDING
THAT HEREIN PETITIONERS UNILATERALLY IMPOSED ON
HEREIN RESPONDENTS THE ALLEGEDLY UNREASONABLE
INTERESTS ON THE MORTGAGE LOANS.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT
CONSIDERING THAT HEREIN RESPONDENTS ATTORNEY-INFACT IS NOT ARMED WITH AUTHORITY TO FILE AND
PROSECUTE THIS CASE.

The petition is without merit.

The Real Estate Mortgage executed between the parties specified that the
principal indebtedness shall earn interest at the legal rate. The agreement
contained no other provision on interest or any fees or charges incident to the
debt. In at least three contracts, all designated as Amendment of Real Estate
Mortgage, the interest rate imposed was, likewise, unspecified. During his
testimony, Zoilo Espiritu admitted that the increase in the principal in each of the
Amendments of the Real Estate Mortgage consists of interest and charges. The
Spouses Espiritu alleged that the parties had agreed on the interest and charges
imposed in connection with the loan, hereunder enumerated:

1. P17,500.00 was the interest charged for the first month

and P7,500.00 was imposed as service fee.
2. P35,000.00 interest and charges, or the difference between
the P350,000.00 principal in the Real Estate Mortgage dated 5
September 1986 and the P385,000.00 principal in the Amendment of the
Real Estate Mortgage dated 29 December 1986.
3. P132,000.00 interest and charges, or the difference between
the P385,000.00 principal in the Amendment of the Real Estate
Mortgage dated 29 December 1986 and the P507,000.00 principal in the
Amendment of the Real Estate Mortgage dated 29 July 1987.
4. P140,000.00 interest and charges, or the difference between
the P507,000.00 principal in the Amendment of the Real Estate
Mortgage dated 29 July 1987 and the P647,000.00 principal in the
Amendment of the Real Estate Mortgage dated 11 March 1988.
5. P227,125.00 interest and charges, or the difference between
the P647,000.00 principal in the Amendment of the Real Estate
Mortgage dated 11 March 1988 and the P874,125 principal in the
Amendment of the Real Estate Mortgage dated 21 October 1988.

The total interest and charges amounting to P559,125.00 on the original

principal of P350,000 was accumulated over only two years and one month. These
charges are not found in any written agreement between the parties. The records
fail to show any computation on how much interest was charged and what other
fees were imposed. Not only did lack of transparency characterize the
aforementioned agreements, the interest rates and the service charge imposed, at an
average of 6.39% per month, are excessive.
In enacting Republic Act No. 3765, known as the Truth in Lending Act,
the State seeks to protect its citizens from a lack of awareness of the true cost of
credit by assuring the full disclosure of such costs. Section 4, in connection with
Section 3(3)[16] of the said law, gives a detailed enumeration of the specific
information required to be disclosed, among which are the interest and other
charges incident to the extension of credit. Section 6[17] of the same law imposes
on anyone who willfully violates these provisions, sanctions which include civil
liability, and a fine and/or imprisonment.

Although any action seeking to impose either civil or criminal liability had
already prescribed, this Court frowns upon the underhanded manner in which the
SpousesEspiritu imposed interest and charges, in connection with the loan. This is
aggravated by the fact that one of the creditors, Zoilo Espiritu, a lawyer, is hardly
in a position to plead ignorance of the requirements of the law in connection with
the transparency of credit transactions. In addition, the Civil Code clearly
provides that:
Article 1956. No interest shall be due unless it has been stipulated in
writing.

The omission of the Spouses Espiritu in specifying in the contract the

interest rate which was actually imposed, in contravention of the law, manifested
bad faith.
In several cases, this Court has been known to declare null and void
stipulations on interest and charges that were found excessive, iniquitous, and
unconscionable. In the case of Medel v. Court of Appeals,[18] the Court declared an
interest rate of 5.5% per month on a P500,000.00 loan to be excessive, iniquitous,
unconscionable and exorbitant. Even if the parties themselves agreed on the
interest rate and stipulated the same in a written agreement, it nevertheless declared
such stipulation as void and ordered the imposition of a 12% yearly interest
rate. In Spouses Solangon v. Salazar,[19] 6% monthly interest on a P60,000.00 loan
was likewise equitably reduced to a 1% monthly interest or 12% per
annum. In Ruiz v. Court of Appeals,[20] the Court found a 3% monthly interest
imposed on four separate loans with a total of P1,050,000.00 to be excessive and
reduced the interest to a 1% monthly interest or 12% per annum.
In declaring void the stipulations authorizing excessive interest and charges,
the Court declared that although the Usury Law was suspended by Central Bank
Circular No. 905, s. 1982, effective on 1 January 1983, and consequently parties
are given a wide latitude to agree on any interest rate, nothing in the said Circular
grants lenders carte blancheauthority to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorrhaging of their assets.[21]

Stipulation authorizing iniquitous or unconscionable interests are contrary to

morals, if not against the law. Under Article 1409 of the Civil Code, these
contracts are inexistent and void from the beginning. They cannot be ratified nor
the right to set up their illegality as a defense be waived.[22] The nullity of the
stipulation on the usurious interest does not, however, affect the lenders right to
recover the principal of the loan.[23] Nor would it affect the terms of the real estate
mortgage. The right to foreclose the mortgage remains with the creditors, and said
right can be exercised upon the failure of the debtors to pay the debt due. The debt
due is to be considered without the stipulation of the excessive interest. A legal
interest of 12% per annum will be added in place of the excessive interest formerly
imposed.
While the terms of the Real Estate Mortgage remain effective, the
foreclosure proceedings held on 31 Ocotber 1990 cannot be given effect. In the
Notice of SheriffsSale[24] dated 5 October 1990, and in the Certificate of
Sale[25] dated 31 October 1990, the amount designated as mortgage indebtedness
amounted to P874,125.00. Likewise, in the demand letter[26] dated 12 December
1989, Zoilo Espiritu demanded
from
the
Spouses Landrito the
amount
of P874,125.00 for the unpaid loan. Since the debt due is limited to the principal
of P350,000.00 with 12% per annum as legal interest, the previous demand for
payment of the amount of P874,125.00 cannot be considered as a valid demand for
payment. For an obligation to become due, there must be a valid demand.[27] Nor
can the foreclosure proceedings be considered valid since the total amount of the
indebtedness during the foreclosure proceedings was pegged at P874,125.00 which
included interest and which this Court now nullifies for being excessive, iniquitous
and exorbitant. If the foreclosure proceedings were considered valid, this would
result in an inequitable situation wherein the Spouses Landrito will have their land
foreclosed for failure to pay an over-inflated loan only a small part of which they
were obligated to pay.
Moreover, it is evident from the facts of the case that despite considerable
effort on their part, the Spouses Landrito failed to redeem the mortgaged property
because they were unable to raise the total amount, which was grossly inflated by
the excessive interest imposed. Their attempt to redeem the mortgaged property at
the inflated amount ofP1,595,392.79, as early as 30 October 1991, is reflected in a
letter, which creditor-mortgagee Zoilo Landrito acknowledged to have received by

affixing his signature herein.[28]They also attached in their Complaint copies of two
checks in the amounts of P770,000.00 and P995,087.00, both dated 13 January
1992, which were allegedly refused by the Spouses Espiritu.[29] Lastly, the
Spouses Espiritu even attached in their exhibits a copy of a handwritten letter,
dated 27 January 1994, written by Paz Landrito, addressed to the Spouses Espiritu,
wherein the former offered to pay the latter the sum of P2,000,000.00.[30] In all
these instances, the Spouses Landrito had tried, but failed, to pay an amount way
over the indebtedness they were supposed to pay i.e., P350,000.00 and 12%
interest per annum. Thus, it is only proper that the Spouses Landrito be given the
opportunity to repay the real amount of their indebtedness.
Since the Spouses Landrito, the debtors in this case, were not given an
opportunity to settle their debt, at the correct amount and without the iniquitous
interest imposed, no foreclosure proceedings may be instituted. A judgment
ordering a foreclosure sale is conditioned upon a finding on the correct amount of
the unpaid obligation and the failure of the debtor to pay the said amount.[31] In
this case, it has not yet been shown that the Spouses Landrito had already failed to
pay the correct amount of the debt and, therefore, a foreclosure sale cannot be
conducted in order to answer for the unpaid debt. The foreclosure sale conducted
upon their failure to pay P874,125 in 1990 should be nullified since the amount
demanded as the outstanding loan was overstated; consequently it has not been
shown that the mortgagors the Spouses Landrito, have failed to pay their
outstanding obligation. Moreover, if the proceeds of the sale together with its
reasonable rates of interest were applied to the obligation, only a small part of its
original loans would actually remain outstanding, but because of the
unconscionable interest rates, the larger part corresponded to said excessive and
iniquitous interest.
As a result, the subsequent registration of the foreclosure sale cannot transfer
any rights over the mortgaged property to the Spouses Espiritu. The registration of
the foreclosure sale, herein declared invalid, cannot vest title over the mortgaged
property. The Torrens system does not create or vest title where one does not have
a rightful claim over a real property. It only confirms and records title already
existing and vested. It does not permit one to enrich oneself at the expense of
another.[32] Thus, the decree of registration, even after the lapse of one (1) year,
cannot attain the status of indefeasibility.

Significantly, the records show that the property mortgaged was purchased
by the Spouses Espiritu and had not been transferred to an innocent purchaser for
value. This means that an action for reconveyance may still be availed of in this
case.[33]
Registration of property by one person in his or her name, whether by
mistake or fraud, the real owner being another person, impresses upon the title so
acquired the character of a constructive trust for the real owner, which would
justify an action for reconveyance.[34] This is based on Article 1465 of the Civil
Code which states that:
Art. 1465. If property acquired through mistakes or fraud, the person
obtaining it is, by force of law, considered a trustee of an implied trust
for benefit of the person from whom the property comes.

The action for reconveyance does not prescribe until after a period of ten
years from the date of the registration of the certificate of sale since the action
would be based on implied trust.[35] Thus, the action for reconveyance filed on 31
October 1992, more than one year after the Sheriffs Certificate of Sale was
registered on 9 January 1991, was filed within the prescription period.
It should, however, be reiterated that the provisions of the Real Estate
Mortgage are not annulled and the principal obligation stands. In addition, the
interest is not completely removed; rather, it is set by this Court at 12% per annum.
Should the Spouses Landrito fail to pay the principal, with its recomputed interest
which runs from the time the loan agreement was entered into on 5 September
1986 until the present, there is nothing in this Decision which prevents the
Spouses Espiritu from foreclosing the mortgaged property.
The last issue raised by the petitioners is whether or not Zoilo Landrito was
authorized to file the action for reconveyance filed before the trial court or even to
file the appeal from the judgment of the trial court, by virtue of the Special Power
of Attorney dated 30 September 1992. They further noted that the trial court and
the Court of Appeals failed to rule on this issue.[36]

The Special Power of Attorney[37] dated 30 September 1992 was executed

by Maximo Landrito, Jr., with the conformity of Paz Landrito, in connection with
the mortgaged property. It authorized Zoilo Landrito:
2. To make, sign, execute and deliver corresponding pertinent
contracts, documents, agreements and other writings of whatever nature
or kind and to sue or file legal action in any court of the Philippines,
to collect, ask demands, encash checks, and recover any and all sum of
monies, proceeds, interest and other due accruing, owning, payable or
belonging to me as such owner of the afore-mentioned property.
(Emphasis provided.)

Zoilo Landritos authority to file the case is clearly set forth in the Special
Power of Attorney. Furthermore, the records of the case unequivocally show
that Zoilo Landritofiled the reconveyance case with the full authority of his
mother, Paz Landrito, who attended the hearings of the case, filed in her behalf,
without making any protest.[38] She even testified in the same case on 30 August
1995. From the acts of Paz Landrito, there is no doubt that she had authorized her
son to file the action for reconveyance, in her behalf, before the trial court.
IN VIEW OF THE FOREGOING, the instant Petition is DENIED. This
Court AFFIRMS the assailed Decision of the Court of Appeals, promulgated on
31 August 2005, fixing the interest rate of the loan between the parties at 12% per
annum, and ordering the Spouses Espiritu to reconvey the subject property to the
Spouses Landritoconditioned upon the payment of the loan together with herein
fixed rate of interest. Costs against the petitioners.
SO ORDERED.

THIRD DIVISION

HONORIO C. BULOS,
JR.,
Petiti
oner,

G.R. No. 164159

Present:
YNARESSANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO, and
NACHURA, JJ.

- versus -

Promulgated:
July 17, 2007

KOJI YASUMA,
Respo

ndent.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION

CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari[1] under Rule 45 of the 1997
Revised Rules of Civil Procedure seeking to set aside and to declare null and void
(1) the Decision,[2] dated 5 January 2004, of the Court of Appeals in CA-G.R. CV
No. 54969, which affirmed the Decision,[3] dated 30 August 1996, of the Makati
City Regional Trial Court (RTC), Branch 148, in Civil Case No. 90-1053; and (2)
the Resolution[4] of the Court of Appeals, dated 11 June 2004, which denied the
petitioners Motion for Reconsideration.
Herein petitioner Honorio C. Bulos (petitioner) was one of the defendants in
a Complaint for collection of sum of money plus damages with prayer for a writ of
preliminary attachment, docketed as Civil Case No. 90-1053, entitled, Koji

Yasuma v. Ramon R. Lim, Honorio C. Bulos and Bede S. Tabalingcos, filed with
the RTC by herein respondent Koji Yasuma, a Japanese national.
The controversy in the present case arose from the following antecedents:
Petitioner, together with Dr. Ramon R. Lim (Dr. Lim) and Atty. Bede S.
Tabalingcos (Atty. Tabalingcos), obtained a loan from Koji Yasuma (respondent)
in the amount ofP2,500,000.00, as evidenced by a promissory note,[5] dated 11
October 1988, signed solely by Dr. Lim per agreement among the petitioner, Dr.
Lim and Atty. Tabalingcos.[6] The said promissory note provides for the following
conditions: (1) payment of interest at the rate of 4% for a period of three months or
until 10 January 1989; (2) in case of a roll over for failure of the borrowers to
pay on the agreed period, the extension will be considered running monthly under
the same terms and rate of interest until the principal amount has been fully paid;
and (3) should the said promissory note be brought to court for collection, the
borrowers agree to pay an additional amount equivalent to 10% of the principal
amount plus attorneys fee, which in no case shall be less than P10,000.00. As a
security for the said loan, both petitioner and Dr. Lim executed Real Estate
Mortgages[7] over their respective properties.
On 16 December 1988, petitioner and Dr. Lim executed a Deed of
Assumption,[8] to the effect that petitioner assumed the loan obligation of Dr. Lim
due respondent with the condition that Dr. Lim shall first secure the respondents
consent to and approval of the said Deed of Assumption. However, the conformity
of respondent to the said Deed of Assumption was not obtained by Dr. Lim. When
the loan obligation became due and demandable on 10 January 1989, respondent
demanded payment from the petitioner, Dr. Lim and Atty. Tabalingcos, but they
failed and refused to pay the same. Respondent then made a demand in writing
and through telephone calls to Atty. Tabalingcos. Atty. Tabalingcos just told
respondent that he would talk first to the petitioner and Dr. Lim and he will then
inform the respondent of their response, but Atty. Tabalingcos never called back.
After painstaking efforts to collect the loan from the petitioner, Dr. Lim and
Atty. Tabalingcos, respondent requested Atty. Tabalingcos, who happened to be
his legal adviser at that time, to foreclose the Real Estate Mortgages executed by
the petitioner and Dr. Lim over their respective properties. Atty. Tabalingcos

failed to do so. Instead, he made a proposal to respondent that the petitioner had
certain properties in Paraaque City which he was willing to sell to the respondent
to cover the obligation of the petitioner, Dr. Lim and Atty. Tabalingcos. Out of
respondents desperation to collect the loan that he had extended to the petitioner,
Dr. Lim and Atty. Tabalingcos, respondent agreed to the aforesaid proposal. Thus,
on 24 February 1989, a Deed of Sale,[9] over certain parcels of land located in
Paraaque City and covered by Transfer Certificates of Title (TCTs) No. 467734
and 332355 in the name of petitioner, was executed in favor of the respondent for a
total consideration of P1,630,750.00, paid via a dacion en pago arrangement.
After the execution of the Deed of Sale, all the parties agreed that there was
still a balance of P2,240,000.00 owed to the respondent. In a
Certification[10] dated 27 February 1989, which the petitioner and Dr. Lim
considered as another Deed of Assumption, petitioner assumed the P1,500,000.00
obligation of Dr. Lim. The consideration for the said assumption of obligation is
the transfer[11] of the shares of stocks of the Rural Bank of Paraaque to the
respondent to offset the obligation. Petitioner thus offered the said shares of stocks
to the respondent. Atty. Tabalingcos, for his part and in his capacity as Chairman
of the Board of the said bank, issued a certification[12] to the effect that the
respondent holds P1,250,000.00 worth of shares of stocks, equivalent to 20%
shareholdings in the Rural Bank of Paraaque. However, during that time, the
Rural Bank of Paraaque must first increase its authorized capital stock subject to
the approval of the Securities and Exchange Commission (SEC) because the
original shares had already been fully subscribed and fully paid. Because of this
and of the information provided by his then counsel, the late Atty. Bayani M.
Timario, Jr. (Atty. Timario, Jr.), that a foreigner cannot be a stockholder of a rural
bank, the respondent absolutely refused to accept the shares of stocks and
demanded instead an outright payment of the loan obligation. As the shares of
stocks were already assigned to the respondent via a certification issued by Atty.
Tabalingcos, the latter then issued a check[13] in the amount of P2,240,000.00 to the
order of the respondent, dated 25 December 1989, to buy the said shares in behalf
of an interested buyer. When the respondent presented the check to the bank, it
was dishonored for having been drawn against insufficient funds.
Subsequently, the respondent sent a demand letter[14] to each of the
borrowers -- the petitioner, Dr. Lim and Atty. Tabalingcos -- for the full payment

of their outstanding obligation; but, to no avail. This prompted the respondent to

file with the RTC a Complaint for Sum of Money with Damages and with Prayer
for a Writ of Preliminary Attachment against the petitioner, Dr. Lim and Atty.
Tabalingcos. On 23 April 1990, the trial court issued an Order[15] granting the writ
of preliminary attachment applied for by the respondent upon his filing of a bond
fixed at P2,240,000.00. By virtue of the said writ, several lots of the petitioner,
and the house and lot of Dr. Lim located in Quezon City, were attached. Petitioner
filed a Motion to Dissolve Writ of Attachment which was granted by the trial court
in its Order dated 7 October 1992[16] conditioned upon petitioners posting of a
counter-bond in the amount of P2,240,000.00. Petitioner moved for the reduction
of his counter-bond to P770,000.00 considering that the respondent made an
admission that the petitioner partially paid the loan obligation in the amount
of P1,630,750.00. The said motion was granted by the court a quo in its Order
dated 1 August 1995.[17]
On 30 August 1996, the trial court rendered a Decision in favor of the
respondent and against the petitioner, Dr. Lim and Atty. Tabalingcos, the decretal
portion of which reads as follows:
WHEREFORE, premises considered, and finding that [herein
respondent] has fully established not only by preponderance of evidence
by competent proof of his entitlement to his claims in the [C]omplaint,
judgment is hereby rendered in favor of [respondent] and against [herein
petitioner, together with Dr. Lim and Atty. Tabalingcos]. Ordering [the
petitioner, Dr. Lim and Atty. Tabalingcos] to jointly and severally pay
the [respondent] the following:
(1) The amount of P2,240,000.00 plus interest of 21% per annum
as of April, 1990, the time of the filing of the [C]omplaint;
(2) The sum equivalent to 20% of P2,240,000.00 plus P500.00
per appearance in the case, for and as attorneys fees.
(3) Costs of the suit.
The cross-claim filed by [Atty. Tabalingcos] against the
[petitioner] is hereby DISMISSED for reasons stated above.
Costs against [petitioner, Dr. Lim and Atty. Tabalingcos].[18]

Aggrieved by the aforesaid Decision of the trial court, the petitioner, Dr.
Lim and Atty. Tabalingcos appealed to the Court of Appeals. However, Atty.
Tabalingcos did not file his appellants brief. On 5 January 2004, the Court of
Appeals rendered a Decision affirming in toto the Decision of the trial court. The
petitioner moved for its reconsideration, but it was denied in a Resolution dated 11
June 2004 issued by the appellate court.
Hence, this petition by petitioner. However, Dr. Lim and Atty. Tabalingcos
did not appeal before this Court.
Petitioner submits the following issues for this Courts resolution:
I. Whether or not the obligation of petitioner to pay respondent has
already (sic) fully extinguished.
II. Whether or not the offer to purchase shares of stock of Rural Bank of
Paraaque amounting to P1,250,000.00 extinguished petitioner Bulos
obligation to pay the balance of the loan with (sic) respondent.
III. Whether or not petitioner Bulos is entitled to claim for damages.
IV. Whether or not [the] imposition of 21% interest on P2,240,000.00 and
20% of the said amount as attorneys fees has no legal and factual basis
(sic).

Petitioner argues that despite the partial payment made by him in the
amount P1,630,750.00, and in spite of the respondents unequivocal admission of
the same, still, the respondent did not deduct the said amount from the total amount
of the obligation due him. Instead, the respondent continuously claimed the
amount of P2,240,000.00 as of 25 December 1989, plus interest at the rate of 4%
per month from 25 December 1989 when he filed his Complaint on 7 April 1990.
The petitioner likewise avers that his obligation to pay the balance of the
loan to the respondent had already been extinguished when he offered to the
respondent the shares of stocks of the Rural Bank of Paraaque amounting
to P1,250,000.00. Respondents assertion that he did not accept the offer of the

shares of stocks because of his nationality deserves scant consideration as in fact,

he had religiously followed up with petitioner and Atty. Tabalingcos the issuance
of the certificate for the said shares of stocks.
Petitioner further alleges that he is entitled to claim damages for he had been
subjected to ridicule, mental anguish, besmirched reputation, and extreme anxiety
as a result of the respondents unfounded and malicious suit. Petitioner lost
business opportunities as a consequence of the attachment made on his real
properties in Tarlac; thus, respondent should be made liable for the payment of
damages for all that he had suffered. As to the imposition of 21% interest on
the P2,240,000.00 outstanding loan obligation and 20% of the said amount as
attorneys fees, petitioner asserts that the same has no legal and factual bases. The
imposition of the said interest is highly excessive and exorbitant in light of
the dacion en pago arrangement and the assignment of shares of stocks of the
Rural Bank of Paraaque.
It is well-settled that the findings of fact of the trial court, especially when
affirmed by the Court of Appeals, are accorded the highest degree of respect, and
generally will not be disturbed on appeal. Such findings are binding and
conclusive to the Court. Furthermore, it is not the Courts function under Rule 45
of the 1997 Revised Rules of Civil Procedure to review, examine and evaluate or
weigh the probative value of the evidence presented. The jurisdiction of the Court
in a Petition for Review under Rule 45 is limited to reviewing only errors of
law.[19] Unless the case falls under the recognized exceptions,[20] the rule shall not
be disturbed.
The following findings of fact, properly supported by evidence, made by
both the trial court and the appellate court can no longer be modified and are
binding on this Court: (1) the original loan obtained by the petitioner, together with
Dr. Lim and Atty. Tabalingcos, from the respondent amounted to P2,500,000.00
with 4% interest for three months, or from 11 October 1988 up to 10 January 1989,
and in case of extension of the loan, the interest of 5% per month will be imposed;
(2) the obligation of the petitioner, Dr. Lim and Atty. Tabalingcos was joint and
solidary as evidenced by the following acts:

(a) the promissory note was solely signed by Dr. Lim per agreement
among the parties;
(b) the act of Dr. Lim in executing a Deed of Real Estate Mortgage
in favor of respondent to cover the amount of the promissory note;
(c) the act of the petitioner in executing a second Deed of Real Estate
Mortgage as additional security to the loan; and
(d) the act of Atty. Tabalingcos in issuing a check in the amount
of P2, 240,000.00 to cover the balance of the obligation;

(3) petitioner failed to pay the loan by 10 January 1989; thus, from 11 October
1988 up to February 1989, the loan obligation, including interest, reached a total
amount ofP2,700,000.00; (4) petitioner made a partial payment via a dacion en
pago, amounting to P1,630,750.00, which was deducted from the total loan
obligation of P2,700,000.00 leaving a balance of P1,069,000.00 as of 24 February
1989; (5) by March 1989, the balance of the loan began earning a 5% interest per
month after all the parties agreed to an increase in the interest rate during the
extended period; (6) taking into consideration the outstanding loan balance
of P1,069,000.00, plus interest, and minus a discount granted by respondent, the
amount still due respondent was determined by the parties to be P2,240,000.00;
and (7) to pay the remaining indebtedness, Atty. Tabalingcos issued a check
covering the amount but it was dishonored, therefore, the indebtedness remains
at P2,240,000.00.
When the existence of a debt is fully established by the evidence contained
in the record, the burden of proving that it has been extinguished by payment
devolves upon the debtor who offers such defense. The debtor has the burden of
showing with legal certainty that the obligation has been discharged by
payment.[21] In the present case, the petitioner failed to prove that indeed, his
liability to pay the remaining balance of his obligation with the respondent had
been extinguished by his offer to transfer to respondent his shares of stocks in the
Rural Bank of Paraaque.

The defense of the petitioner that the offer he made to respondent of his
shares of stocks in Rural Bank of Paraaque amounting to P1,250,000.00 had
already extinguished his obligation to pay the balance of the loan stands on hollow
ground.
Section 4, Republic Act No. 7353, otherwise known as The Rural Banks
Act of 1992, provides:
Section. 4. x x x. With the exception of shareholdings of
corporations organized primarily to hold equities in rural banks as
provided for under Section 12-C of Republic Act No. 337, as amended,
and of Filipino-controlled domestic banks, the capital stock of any
rural bank shall be fully owned and held directly or indirectly by
citizens of the Philippines or corporations, associations or cooperatives
qualified under Philippine laws to own and hold such capital stock: x x
x. (Emphasis supplied.)

Given the foregoing provision of law, this Court agrees with the Court of Appeals
that the respondent, being a foreigner, is not qualified to own capital stock in the
Rural Bank of Paraaque. This renders the assignment of shares of stocks in the
Rural Bank of Paraaque in favor of respondent void. As previously stated, the
assignment of the shares of stocks in the rural bank was not accepted by the
respondent precisely because of the prohibition stated under Republic Act No.
7353, which was explained[22] to him by his counsel, the late Atty. Timario, Jr.
Moreover, petitioner mentioned in his testimony before the trial court that all
the shares of stocks of the Rural Bank of Paraaque had already been fully
subscribed and, for shares to be made available, additional capital should be
infused and the SEC should approved the additional shares for subscription. Here
we quote that part of the petitioners testimony:
Q:

Now, you have stated a while ago Mr. Witness, that the balance
be paid by shares of stocks and as a matter of fact the [respondent]
has accepted that preposition, what happened if any, afterwards?

A:

In my case, I transferred 330 something shares of stocks in the

name of [the respondent] and I believe [Atty.] Tabalingcos have
done the same.

Q:

Did you find out for yourselves what happened afterwards if any?

A:

However we have transferred in their name however there are

technicalities in the issuance, Central Bank technicalities.

Q:
A:

Q:
A:

What are these Central Bank technicalities?

Issuance of shares of stocks certificate, during that period we
have to increase our authorized capital stock with the [SEC]
because the original one were already fully subscribed and
fully paid. [Emphasis supplied].
Then what happened?
The only way for us, for the bank to issue additional shares of
stocks certificate is to wait for the approval of the increase of
capitalization from the [SEC] so that these assigned shares to
[Atty.] Tabalingcos can be lodge.

Q:

What did you do if any afterwards?

A:

We informed the [respondent] about that.

x x x x.
Q:
A:

What was his reply if any?

He started complaining and said, just return to me my money
that is how it all started.[23]

From the aforesaid testimony of the petitioner, it is highly impossible for

respondent to have acquired by assignment any shares of stocks in the Rural Bank
of Paraaque. Thus, the obligation of the petitioner to pay the balance of the loan
remains subsisting.

In the face of all of the above, this Court nevertheless sustains the assertion
of the petitioner that the imposition of 21% interest on the outstanding loan
obligation ofP2,240,000.00 has no legal and factual bases.
According to the promissory note executed by Dr. Lim, and agreed to by all
the parties, in case of the borrowers failure to pay the loan obligation within the
stipulated period, the extended period shall be considered running monthly under
the same terms and rate of interest, which is 4% per month, until the principal has
been fully paid. Thus, the remaining balance of P2,240,000.00 is still subject to
the interest rate of 4% per month[24] or 48% per annum. To our mind such rate of
interest is highly unconscionable and inordinate.
In the case of Ruiz v. Court of Appeals,[25] citing the cases of Medel v. Court
of Appeals,[26] Garcia v. Court of Appeals,[27] Spouses Bautista v. Pilar
Development Corporation[28] and the recent case of Spouses Solangon v.
Salazar,[29] this Court considered the 3% interest per month or 36% interest per
annum as excessive and unconscionable. Thereby, the Court, in the said case,
equitably reduced the rate of interest to 1% interest per month or 12% interest per
annum. The Court also held that while the Usury Law has been suspended by
Central Bank Circular No. 905, s. 1982, effective on 1 January 1983, and parties to
a loan agreement have been given wide latitude to agree on any interest rate, still
stipulated interest rates are illegal if they are unconscionable. Nothing in the said
circular grants lenders carte blanche authority to raise interest rates to levels which
will either enslave their borrowers or lead to a hemorrhaging of their
assets.[30] Surely, it is more consonant with justice that the rate of interest in the
present case, which is 4% per month or 48% per annum, be reduced equitably. We
find, that the reduction of the interest rate by the trial court, pegged at 21% per
annum, was not proper.
In Eastern Shipping Lines, Inc. v. Court of Appeals,[31] the Court formulated
the following rules of thumb to guide the lower courts in the imposition of the
proper interest on the amounts due, to wit:
I.

x x x x.

II.

With regard particularly to an award of interest in the

concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance
of money, the interest due should be that which may
have beenstipulated in writing. Furthermore, the
interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions
of Article 1169 of the Civil Code.
2. x x x x.
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.[32] [Emphasis supplied].

The agreed interest rate of 4% per month or 48% per annum is

unconscionable and must be mitigated. Following established jurisprudence, the
legal interest rate of 12% should apply, computed from the date of judicial
demand, that is, 7 April 1990. The aforequoted paragraph 3 of the guidelines is
also appropriate herein, and a 12% interest per annum is imposed on petitioners
monetary liability to respondent from the date of the finality of this Decision until
it is fully paid.
As regards the argument of the petitioner that the award of attorneys fees
equivalent to 20% of P2,240,000.00 is excessive, this Court finds the same
specious. The lower courts found that by reason of the acts of the petitioner and
his cohorts, the respondent had to secure the services of counsel in order to
preserve and protect his rights. If not for the refusal of the petitioner to settle his

obligation, the respondent would not have incurred expenses in filing a case which
dragged on for more than a decade in order to recover the loan which he extended
to the petitioner, Dr. Lim and Atty. Tabalingcos. Hence, the award of 20%
of P2,240,000.00 as attorneys fees is only reasonable. Conspicuously, there
appears to be a variation as to the percentage of attorneys fees awarded in the
dispositive portion and in the body of the RTC decision. In the dispositive portion
of the RTC decision, the attorneys fees awarded was 20% of P2,240,000.00; while
in the body of the same decision, the rate referred to 10% of P2,240,000.00.[33]
The general rule is that, where there is conflict between the dispositive
portion or the fallo and the body of a decision, the fallo controls. This rule rests on
the theory that the fallo is the final order while the opinion in the body is merely a
statement ordering nothing. However, where the inevitable conclusion from the
body of the decision is so clear as to show that there was a mistake in the
dispositive portion, the body of the decision prevails.[34] In his complaint before
the RTC, the respondent prayed for 20% ofP2,240,000.00 as attorneys fees. In the
body of the RTC decision, the trial court awarded outright respondents prayer for
attorneys fees without any discussion that it found the 20% respondent prayed for
as excessive and that it was reducing the percentage of the attorneys fees to
10%. This court is more inclined to believe that the 10% attorneys fees in the
body of the RTC decision is merely a typographical error. Consequently, the
general rule applies to this case, and the 20% attorneys fees ordered paid by
the fallo of the RTC decision controls.
WHEREFORE, premises considered, the instant Petition is PARTIALLY
GRANTED. The Decision and Resolution of the Court of Appeals dated 5
January 2004 and 11 June 2004, respectively, in CA-G.R. CV No. 54969, which
affirmed the Decision, dated 30 August 1996, of the Makati City RTC, Branch
148, in Civil Case No. 90-1053, are hereby AFFIRMED with
the MODIFICATION that an interest rate of 12% per annum shall be applied to
the balance of the loan amounting to P2,240,000.00, computed from the date of
judicial demand, i.e., 7 April 1990; and of 12% interest per annum on the amount
due from the date of the finality of this Decision until fully paid. Costs against the
petitioner.
SO ORDERED.

THIRD DIVISION

QUERUBIN L.
RIZALINDA
GUZMAN,

ALBA
D.

and
DE

G.R. No. 188233

Present:

Petitioners,
CARPIO MORALES, Chairperson,
BRION,
BERSAMIN,
ABAD,* and
VILLARAMA, JR., JJ

- versus -

ROBERT L. YUPANGCO,
Respondent.

Promulgated:

June 29, 2010

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
CARPIO MORALES, J.
Querubin L. Alba and Rizalinda D. De Guzman (petitioners) filed separate
complaints for illegal dismissal and payment of retirement benefits against Y.L.
Land Corporation and Ultra Motors Corporation, respectively. Robert L. Yupangco
(respondent) was impleaded in his capacity as President of both corporations. The
complaints were consolidated before Labor Arbiter Patricio L. Libo-on.
By Decision of October 25, 1999, the Labor Arbiter rendered judgment in
favor of petitioners, disposing as follows:
WHEREFORE, premises considered, judgment is hereby
rendered ordering the respondents as follows:
QUERUBIN L. ALBA
1. To immediately reinstate complainant to his former position with full
backwages computed in the amount of Three Hundred Eighty Thousand

(P380,000.00) Pesos [from March 25, 1999 up to the date of this

decision);
2. And if complainant opts not to be reinstated, in which case, in lieu of
reinstatement respondent [sic] is ordered to pay complainant separation
pay equivalent to one-half (1/2) month salary for every year of service;
3. To pay complainant his earned commission in the amount of Five
Hundred Thousand (P500,000.00) Pesos.
RIZALINDA D. DE GUZMAN
1. To pay her retirement pay equivalent to seventy-five (75%) percent
of her basic monthly salary, or in the amount of Six Hundred Thousand
(P600,000.00) Pesos;
2. Pay her unpaid commission of Four Hundred Forty Eight Thousand
Six Hundred Eighty One and 52/100 (P448,681.52) Pesos; and
3. Pay the balance of her unused vacation and sick leave benefits in the
amount of Eighty One Thousand Eight Hundred Forty Two and 33/100
(P81,842.33) [P50,000.00/26 days = P1,923.9769 x 155.5 = P299,038.45
P217,196.12 = P81,842.33]
All other claims are denied for lack of merit.
SO ORDERED.[1] (emphasis and underscoring in the original)

For failure to put up a supersedeas bond, the National Labor Relations

Commission (NLRC) denied respondents appeal, by Resolution of December 29,
1999. Entry of judgment was thereafter recorded on August 10, 2000 certifying
that the Resolution had become final and executory on June 24, 2000.
On September 27, 2000, upon petitioners motion, the Labor Arbiter issued a
Writ of Execution. The writ was returned unsatisfied, however, prompting
petitioners to file a motion for the issuance of an alias writ.

No opposition having been filed, the Labor Arbiter issued an alias writ of
execution on September 11, 2001 which was implemented by NLRC Sheriff
Stephen B. Andres by distraining respondents club share (Certificate No. 1931) at
the Manila Golf and Country Club, Inc.
On December 14, 2001, one Regina Victoria de Ocampo filed an Affidavit
of Third Party Claim which was, by Order dated February 23, 2006, dismissed
with prejudice.
The Labor Arbiter subsequently issued a 2nd alias writ of execution on May
15, 2006. Respondent, by motion, challenged the impending sale of his club share,
arguing,inter alia, that he should not be held solidarily liable with his corespondent corporations for the judgment obligation. One Alejandro B. Hontiveros
also filed a third party claim. The Labor Arbiter denied respondents motion and
Hontiveros claim by Order of February 22, 2007.
Petitioners thereafter filed a motion for the issuance of a 3 rd alias writ of
execution which was granted by Order of June 5, 2007. This time, respondent
moved for the quashal of said alias writ, alleging that it was issued beyond the
five-year prescriptive period under the NLRC Rules of Procedure. And he again
questioned the enforcement of the judgment obligation on his personal property,
inviting attention to the dispositive portion of the final and executory decision of
the Labor Arbiter which did not state his liability as joint and solidary with the
corporate obligors.
Respondent nevertheless deposited Bank of Philippine Islands Managers
Check No. 0918 in the amount of P730,235.13 representing his liability equivalent
to one-third of the monetary obligation.
By Order of September 5, 2007, the Labor Arbiter denied respondents
motion to quash the 3rd alias writ. Brushing aside respondents contention that his
liability is merely joint, the Labor Arbiter ruled:
Such issue regarding the personal liability of the officers of a
corporation for the payment of wages and money claims to its
employees, as in the instant case, has long been resolved by the Supreme

Court in a long list of cases [A.C. Ransom Labor Union-CLU vs. NLRC
(142 SCRA 269) and reiterated in the cases of Chua vs. NLRC (182
SCRA 353), Gudez vs. NLRC (183 SCRA 644)]. In the aforementioned
cases,
the
Supreme
Court
has
expressly
held
that the irresponsible officer of the corporation (e.g. President) is liable
for the corporations obligations to its workers. Thus, respondent
Yupangco, being the president of the respondent YL Land and Ultra
Motors Corp., is properly jointly and severally liable with the defendant
corporations for the labor claims of Complainants Alba and De
Guzman.[2] x x x (emphasis and underscoring supplied)

On respondents appeal, the NLRC, by Resolution of February 27, 2008,

affirmed the Labor Arbiters Order of September 5, 2007 and denied respondents
Motion for Reconsideration by Resolution of May 30, 2008.
On respondents petition for prohibition, the Court of Appeals, by Decision
of February 20, 2009,[3] set aside the assailed issuances of the NLRC, it holding
that the execution of judgment against respondent beyond his 1/3 share of the
monetary obligation is tainted with grave abuse of discretion, the October 25, 1999
Decision of the Labor Arbiter being silent as to his and his co-obligorcorporations solidary liability. Thus the appellate court enjoined the Labor
Arbiter and NLRC from proceeding with the enforcement of the alias writ in so far
as it allowed execution of the judgment against respondent beyond his one third
(1/3) share in the monetary obligation.
Petitioners motion for reconsideration having been denied by Resolution of
June 5, 2009,[4] they filed the present petition for review on certiorari, contending
that respondent had waived any possible defense as to his liability for belatedly
raising the same seven years after the finality of the Labor Arbiters October 25,
1999 Decision.
As reflected above, the Labor Arbiter held that respondents liability is
solidary.
There is solidary liability when the obligation expressly so states, when the
law so provides, or when the nature of the obligation so requires. MAM Realty

Development Corporation v. NLRC,[5] on solidary liability of corporate officers in

labor disputes, enlightens:
x x x A corporation being a juridical entity, may act only through
its directors, officers and employees. Obligations incurred by them,
acting as such corporate agents are not theirs but the direct
accountabilities of the corporation they represent. True solidary
liabilities may at times be incurred but only when exceptional
circumstances warrant such as, generally, in the following cases:
1. When directors and trustees or, in appropriate cases, the
officers of a corporation:
(a) vote for or assent to patently unlawful acts of the
corporation;
(b) act in bad faith or with gross negligence in directing
the corporate affairs;
xxxx
In labor cases, for instance, the Court has held corporate directors
and officers solidarily liable with the corporation for the termination of
employment of employees done with maliceor in bad faith.[6] (italics in
the original; emphasis and underscoring supplied)

From the October 25, 1999 Decision of the Labor Arbiter, there is no finding
or indication that petitioners dismissal was effected with malice or bad
faith. Respondents liability could thus only be joint, not solidary.
By declaring that respondents liability is solidary, the Labor Arbiter
modified the already final and executory October 25, 1999 Decision. That is
impermissible, even if the modification is meant to correct erroneous conclusions
of fact and law, whether it be made by the court that rendered it or by the highest
court in the land.[7] The only recognized exceptions are the corrections of clerical
errors or the making of so-called nunc pro tunc entries[8] which cause no prejudice
to any party and in cases where the judgment is void.[9] Said exceptions are not
present in the present case.

Since the alias writ of execution did not conform, is different from and thus
went beyond or varied the tenor of the judgment which gave it life, it is a
nullity.[10] To maintain otherwise would be to ignore the constitutional provision
against depriving a person of his property without due process of law.[11]
Petitioners attribution of laches to respondent does not thus lie, the Labor
Arbiters modification of the final and executory judgment being a nullity.
WHEREFORE, the petition is DENIED.
SO ORDERED.

SECOND DIVISION

[G.R. No. 112214. June 18, 1998]

SECURITY BANK & TRUST COMPANY, petitioner, vs. COURT OF

APPEALS, CRISPULO IKE ARBOLEDA, and AMADOR
LIBONGCO, respondents.
DECISION
MENDOZA, J.:

This is an appeal from the decision of the Court of Appeals [1] in CA-G.R. No. 33716,
affirming the ruling of the Regional Trial Court, Branch 58, of Makati, Metro Manila.
The facts are as follows:
Petitioner filed an action against private respondents for the recovery of a sum of
money with damages and preliminary attachment. It alleged that sometime in 1983, A.T.
Diaz Realty, through Anita Diaz, bought from Ricardo Lorenzo his undivided share in a
parcel of land which he owned in common with Servando Solomon. In connection with
this transaction, Diaz issued a check for P60,000.00 in the name of Ricardo Lorenzos
agent, private respondent Crispulo Arboleda. The check, dated November 7, 1983, was
to be drawn against the current account of A.T. Diaz Realty in the Marikina branch of
the Security Bank and Trust Co. (SBTC). According to Diaz, the money was part of the
purchase price of the land. It was to be used to pay the capital gains tax on the
transaction and to reimburse Solomon for payments he had made for delinquent real
estate taxes on the land. In return, Solomon would deliver to Diaz the title to the land.
On November 8, 1983, Solomon informed Diaz that, as he had not yet been
reimbursed by private respondent, he could not deliver to Diaz the title to the land. Diaz
decided to reimburse Solomon and to pay the capital gains tax herself. Consequently,
she issued two more checks, one for P20,000.00, in the name of Solomon for the
reimbursement, and another one for P40,000.00, payable to bearer, for the payment of
the tax. Thereafter, on the same date, she ordered petitioner to stop payment on the
check. Diaz allegedly advised private respondent of the order and requested the return
of the check to her.
Instead of returning the check to Diaz, however, private respondent encashed it on
November 24, 1983. For their part, employees of petitioner bank failed to notice that
the check was the subject of a stop payment order and allowed private respondent to
encash it. (It appears that the drawer, A.T. Diaz Realty, had two accounts with
petitioner, a savings account and a current account. It had an agreement with petitioner
for automatic transfer which made it possible for the drawer to draw a check against its
current account and have it supported by funds from the savings account, if funds from

the current account were insufficient to cover the amount of the check. The stop
payment order issued by A.T. Diaz Realty was posted in the current account ledger.
However, when the check was presented for encashment, bank personnel consulted
not the current account ledger in which the stop payment order was posted but the
savings account ledger, to see if the funds therein deposited were sufficient to cover
the amount of the check. Since no stop payment order was posted in that ledger, the
check was encashed.)
The error was discovered only the next day, November 25, 1983. Petitioner
recredited the amount (P60,000.00) of the check to A.T. Diaz Realtys account.
Bank officials went to see respondent Arboleda to ask for the return of the amount
of P60,000.00. But they were told the money had been turned over to Amador
Libongco. When asked by bank officials, Libongco did not deny receipt of the money,
but said he would return it provided Diaz showed him the receipt for payment of the
capital gains tax.
As Diaz failed to show receipts, Arboleda and Libongco refused to return the
money. Petitioner, therefore, filed the instant suit.
In their answer, Arboleda and Libongco denied any obligation to return the money,
alleging that it was due them, the P45,000.00 as payment for the balance of the
purchase price, and the P15,000.00 as payment for Arboledas commission as agent.
Arboleda also denied having been notified of the stop payment order, while Libongco
denied having received the money.[2]Libongco died on January 19, 1989[3] and,
accordingly, the case against him was dismissed.[4]
On May 21, 1990, the trial court rendered its decision, dismissing petitioners
complaint. It ruled that private respondent and Libongco had no obligation to return
the P60,000.00 to Diaz. First, because private respondent was entitled to P15,000.00 as
his commission. Second, because Diaz could not demand reimbursement for the
amount she paid for capital gains tax without receipts to show for the payment. The trial
court found that no tax had actually been paid as the sale of the land was antedated
May 21, 1976 to avoid payment of the capital gains tax. Consequently, it was held,
petitioner should not have recredited A.T. Diaz Realty with the P60,000.00.
The reason given for the stop payment order was transaction
incomplete. However, according to the trial court, since the sale of the land had been
completed on November 22, 1983, when the sale to A.T. Diaz Realty was annotated on
the title while the check was encashed on November 24, 1983, the transaction had
already been completed at the time the check was encashed. The reason given for the
stop payment order, i.e., that transaction incomplete was, thus, a gross
misrepresentation.[5]
The trial court ruled that petitioner incurred no liability even if it encashed the check
despite a stop payment order, because of a note in the stop payment order form:

[T]he depositor agrees . . . not to hold the bank liable on account of

payment contrary to the request . . . if the same occurs through
inadvertence, accident or oversight. . . .[6]
Petitioner appealed to the Court of Appeals which, as earlier stated, affirmed the
decision of the trial court. Hence, this petition. Petitioner contends:
1. The Court of Appeals erred in upholding the decision of the lower court dismissing
the complaint and in not ordering respondent Arboleda to return the value of the
subject check to petitioner.
2. The Court of Appeals erred in affirming the decision of the lower court not ordering
respondent Arboleda to pay petitioner interest on the value of the subject check, and
exemplary damages, attorneys fees and cost of suit.[7]

The petition must fail.

Petitioner contends that whatever claim respondent has against Anita Diaz is
immaterial to this case. It is argued that private respondent has an obligation to return
the money he received based on Art. 2154 of the Civil Code, which provides:

If something is received when there is no right to demand it, and it was

unduly delivered through mistake, the obligation to return it arises.
This contention has no merit. There was no contractual relation created between
petitioner and private respondent as a result of the payment by the former of the amount
of the check. Petitioner simply paid the check for and in behalf of Anita Diaz. Therefore,
the question whether private respondent Crispulo Arboleda has a right to keep the
proceeds of the check is very relevant to this action brought to recover the amount. As
private respondent points out:

It is Anita Diaz to whom respondent sold their property. It is Anita Diaz

who issued the subject check in payment of the balance of the purchase
price, and earmarked for the payment of the capital gains tax and agents
commission for the sale of the property. If the check was dishonored upon
presentment for payment, respondent cannot sue petitioner but only the
drawer (Anita Diaz) for lack of privity. The funds from which the check
shall be paid belong to Anita Diaz and merely deposited with the petitioner
bank. The stop payment order was issued by Anita Diaz for alleged
incomplete transaction which is a misrepresentation.[8]
Whether petitioner is liable to Anita Diaz for cashing the check after it had been
ordered not to pay is a matter between them. By restoring the amount it had paid to the
account of A.T. Diaz Realty, petitioner merely stepped into the shoes of the
drawer. Consequently, its present action is subject to the defenses which private
respondent Arboleda might raise had this action been instituted by Anita Diaz.

What appears to have happened in this case is that there was an agreement that if
Anita Diaz, the drawer of the check, paid the capital gains tax, she would be reimbursed
the amount she had paid to Arboleda. Claiming that she had paid the capital gains tax,
Diaz issued a stop payment order to petitioner and asked for the return of the check she
had issued to Arboleda. As she could not show any receipt for payment, however,
Arboleda refused to return the check. Arboleda instead cashed the check and refused
to pay its proceeds.
Not only was there no receipt presented in this case to prove payment of the tax by
Anita Diaz. There are circumstances which render Anita Diaz claim that she has paid
the tax doubtful: (1) the Deputy Registrar of Deeds of Marikina testified that they did not
have any record showing payment of the capital gains tax; [9] (2) the check for
the P40,000.00, which Anita Diaz claimed she had issued in payment of the tax, was
payable to cash,[10] and thus, it could not be determined to whom the proceeds of such
check were paid; and (3) Jose Angeles, to whom the check was allegedly given by Anita
Diaz, was not presented in court.
Petitioner contends that defenses against Anita Diaz should not be considered in
this case because she has not been impleaded as a party. It appears, however, that
petitioner was ordered by the trial court to implead Diaz but it did not do so on the
ground that it was going to present her as a witness.
Indeed, even if petitioner is considered to have paid Anita Diaz in behalf of
Arboleda, its right to recover from Arboleda would be only to the extent that the payment
benefitted Arboleda, because the payment (recrediting) was made without the consent
of Arboleda. Since Arboleda denies owing any obligation to Diaz, petitioner cannot ask
for reimbursement. Thus, Art. 1236 of the Civil Code states:

The creditor is not bound to accept payment or performance by a third

person who has no interest in the fulfillment of the obligation, unless there
is a stipulation to the contrary. Whoever pays for another may demand
from the debtor what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover only insofar as
the payment has been beneficial to the debtor.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
Regalado (Chairman), Melo, Puno and Martinez, JJ., concur

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 23769

September 16, 1925

SONG FO & COMPANY, plaintiff-appellee,

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

DEAR SIRS: Confirming our conversation we had today with your Mr. Song Fo, who visited
this Central, we wish to state as follows:
He agreed to the delivery of 300,000 gallons of molasses at the same price as last year
under the same condition, and the same to start after the completion of our grinding season.
He requested if possible to let you have molasses during January, February and March or in
other words, while we are grinding, and we agreed with him that we would to the best of our
ability, altho we are somewhat handicapped. But we believe we can let you have 25,000
gallons during each of the milling months, altho it interfere with the shipping of our own and
planters sugars to Iloilo. Mr. Song Fo also asked if we could supply him with another 100,000
gallons of molasses, and we stated we believe that this is possible and will do our best to let
you have these extra 100,000 gallons during the next year the same to be taken by you
before November 1st, 1923, along with the 300,000, making 400,000 gallons in all.
Regarding the payment for our molasses, Mr. Song Fo gave us to understand that you would
pay us at the end of each month for molasses delivered to you.
Hoping that this is satisfactory and awaiting your answer regarding this matter, we remain.
Yours very truly,
HAWAIIAN-PHILIPPINE COMPANY
BY R. C. PITCAIRN
Administrator.
Exhibit G is the answer of the manager of Song Fo & Company to the Hawaiian-Philippine Co. on
December 16, 1922. This letter reads:
December 16th, 1922.
Messrs. HAWAIIAN-PHILIPPINE CO.,
Silay, Neg. Occ., P.I.
DEAR SIRS: We are in receipt of your favours dated the 9th and the 13th inst. and
understood all their contents.
In connection to yours of the 13th inst. we regret to hear that you mentioned Mr. Song Fo the
one who visited your Central, but it was not for he was Mr. Song Heng, the representative
and the manager of Messrs. Song Fo & Co.
With reference to the contents of your letter dated the 13th inst. we confirm all the
arrangements you have stated and in order to make the contract clear, we hereby quote
below our old contract as amended, as per our new arrangements.
(a) Price, at 2 cents per gallon delivered at the central.
(b) All handling charges and expenses at the central and at the dock at Mambaguid for our
account.

(c) For services of one locomotive and flat cars necessary for our six tanks at the rate of P48
for the round trip dock to central and central to dock. This service to be restricted to one trip
for the six tanks.
Yours very truly,
SONG FO & COMPANY
By __________________________
Manager.
We agree with appellant that the above quoted correspondence is susceptible of but one
interpretation. The Hawaiian-Philippine Co. agreed to deliver to Song Fo & Company 300,000
gallons of molasses. The Hawaiian-Philippine Co. also believed it possible to accommodate Song Fo
& Company by supplying the latter company with an extra 100,000 gallons. But the language used
with reference to the additional 100,000 gallons was not a definite promise. Still less did it constitute
an obligation.
If Exhibit T relied upon by the trial court shows anything, it is simply that the defendant did not
consider itself obliged to deliver to the plaintiff molasses in any amount. On the other hand, Exhibit
A, a letter written by the manager of Song Fo & Company on October 17, 1922, expressly mentions
an understanding between the parties of a contract for P300,000 gallons of molasses.
We sustain appellant's point of view on the first question and rule that the contract between the
parties provided for the delivery by the Hawaiian-Philippine Co. to song Fo & Company of 300,000
gallons of molasses.
2. Had the Hawaiian-Philippine Co. the right to rescind the contract of sale made with Song Fo &
Company? The trial judge answers No, the appellant Yes.
Turning to Exhibit F, we note this sentence: "Regarding the payment for our molasses, Mr. Song Fo
(Mr. Song Heng) gave us to understand that you would pay us at the end of each month for
molasses delivered to you." In Exhibit G, we find Song Fo & Company stating that they understand
the contents of Exhibit F, and that they confirm all the arrangements you have stated, and in order to
make the contract clear, we hereby quote below our old contract as amended, as per our new
arrangements. (a) Price, at 2 cents per gallon delivered at the central." In connection with the portion
of the contract having reference to the payment for the molasses, the parties have agree on a table
showing the date of delivery of the molasses, the amount and date thereof, the date of receipt of
account by plaintiff, and date of payment. The table mentioned is as follows:

Date of
delivery

Account and date thereof

Date of
receipt of
account by
plaintiff

Date of
payment

1923

1923

1922
Dec. 18

P206.16

Dec. 26/22

Jan. 5

Feb. 20

Dec. 29

206.16

Jan. 3/23

do

Do

1923

Jan. 5

206.16

Jan. 9/23

Mar. 7 or 8

Mar. 31

Feb. 12

206.16

Mar. 12/23

do

Do

Feb. 27

206.16

do

do

Do

Mar. 5

206.16

do

do

Do

Mar. 16

206.16

Mar. 20/23

Apr. 2/23

Apr. 19

Mar. 24

206.16

Mar. 31/23

do

Do

Mar. 29

206.16

do

do

Do

Some doubt has risen as to when Song Fo & Company was expected to make payments for the
molasses delivered. Exhibit F speaks of payments "at the end of each month." Exhibit G is silent on
the point. Exhibit M, a letter of March 28, 1923, from Warner, Barnes & Co., Ltd., the agent of the
Hawaiian-Philippine Co. to Song Fo & Company, mentions "payment on presentation of bills for each
delivery." Exhibit O, another letter from Warner, Barnes & Co., Ltd. to Song Fo & Company dated
April 2, 1923, is of a similar tenor. Exhibit P, a communication sent direct by the Hawaiian-Philippine
Co. to Song Fo & Company on April 2, 1923, by which the Hawaiian-Philippine Co. gave notice of
the termination of the contract, gave as the reason for the rescission, the breach by Song Fo &
Company of this condition: "You will recall that under the arrangements made for taking our
molasses, you were to meet our accounts upon presentation and at each delivery." Not far removed
from this statement, is the allegation of plaintiff in its complaint that "plaintiff agreed to pay
defendant, at the end of each month upon presentation accounts."
Resolving such ambiguity as exists and having in mind ordinary business practice, a reasonable
deduction is that Song Fo & Company was to pay the Hawaiian-Philippine Co. upon presentation of
accounts at the end of each month. Under this hypothesis, Song Fo & Company should have paid
for the molasses delivered in December, 1922, and for which accounts were received by it on
January 5, 1923, not later than January 31 of that year. Instead, payment was not made until
February 20, 1923. All the rest of the molasses was paid for either on time or ahead of time.
The terms of payment fixed by the parties are controlling. The time of payment stipulated for in the
contract should be treated as of the essence of the contract. Theoretically, agreeable to certain
conditions which could easily be imagined, the Hawaiian-Philippine Co. would have had the right to
rescind the contract because of the breach of Song Fo & Company. But actually, there is here
present no outstanding fact which would legally sanction the rescission of the contract by the
Hawaiian-Philippine Co.
The general rule is that rescission will not be permitted for a slight or casual breach of the contract,
but only for such breaches as are so substantial and fundamental as to defeat the object of the
parties in making the agreement. A delay in payment for a small quantity of molasses for some
twenty days is not such a violation of an essential condition of the contract was warrants rescission
for non-performance. Not only this, but the Hawaiian-Philippine Co. waived this condition when it
arose by accepting payment of the overdue accounts and continuing with the contract. Thereafter,
Song Fo & Company was not in default in payment so that the Hawaiian-Philippine co. had in reality
no excuse for writing its letter of April 2, 1923, cancelling the contract. (Warner, Barnes & Co. vs.
Inza [1922], 43 Phil., 505.)

We rule that the appellant had no legal right to rescind the contract of sale because of the failure of
Song Fo & Company to pay for the molasses within the time agreed upon by the parties. We sustain
the finding of the trial judge in this respect.
3. On the basis first, of a contract for 300,000 gallons of molasses, and second, of a contract
imprudently breached by the Hawaiian-Philippine Co., what is the measure of damages? We again
turn to the facts as agreed upon by the parties.
The first cause of action of the plaintiff is based on the greater expense to which it was put in being
compelled to secure molasses from other sources. Three hundred thousand gallons of molasses
was the total of the agreement, as we have seen. As conceded by the plaintiff, 55,006 gallons of
molasses were delivered by the defendant to the plaintiff before the breach. This leaves 244,994
gallons of molasses undelivered which the plaintiff had to purchase in the open market. As expressly
conceded by the plaintiff at page 25 of its brief, 100,000 gallons of molasses were secured from the
Central North Negros Sugar Co., Inc., at two centavos a gallon. As this is the same price specified in
the contract between the plaintiff and the defendant, the plaintiff accordingly suffered no material
loss in having to make this purchase. So 244,994 gallons minus the 100,000 gallons just mentioned
leaves as a result 144,994 gallons. As to this amount, the plaintiff admits that it could have secured it
and more from the Central Victorias Milling Company, at three and one-half centavos per gallon. In
other words, the plaintiff had to pay the Central Victorias Milling company one and one-half centavos
a gallon more for the molasses than it would have had to pay the Hawaiian-Philippine Co. Translated
into pesos and centavos, this meant a loss to the plaintiff of approximately P2,174.91. As the
conditions existing at the central of the Hawaiian-Philippine Co. may have been different than those
found at the Central North Negros Sugar Co., Inc., and the Central Victorias Milling Company, and
as not alone through the delay but through expenses of transportation and incidental expenses, the
plaintiff may have been put to greater cost in making the purchase of the molasses in the open
market, we would concede under the first cause of action in round figures P3,000.
The second cause of action relates to lost profits on account of the breach of the contract. The only
evidence in the record on this question is the stipulation of counsel to the effect that had Mr. Song
Heng, the manager of Song Fo & Company, been called as a witness, he would have testified that
the plaintiff would have realized a profit of P14,948.43, if the contract of December 13, 1922, had
been fulfilled by the defendant. Indisputably, this statement falls far short of presenting proof on
which to make a finding as to damages.
In the first place, the testimony which Mr. Song Heng would have given undoubtedly would follow the
same line of thought as found in the decision of the trial court, which we have found to be
unsustainable. In the second place, had Mr. Song Heng taken the witness-stand and made the
statement attributed to him, it would have been insufficient proof of the allegations of the complaint,
and the fact that it is a part of the stipulation by counsel does not change this result. And lastly, the
testimony of the witness Song Heng, it we may dignify it as such, is a mere conclusion, not a proven
fact. As to what items up the more than P14,000 of alleged lost profits, whether loss of sales or loss
of customers, or what not, we have no means of knowing.
We rule that the plaintiff is entitled to recover damages from the defendant for breach of contract on
the first cause of action in the amount of P3,000 and on the second cause of action in no amount.
Appellant's assignments of error are accordingly found to be well taken in part and not well taken in
part.
Agreeable to the foregoing, the judgment appealed from shall be modified and the plaintiff shall have
and recover from the defendant the sum of P3,000, with legal interest form October 2, 1923, until
payment. Without special finding as to costs in either instance, it is so ordered.

Avancea, C.J., Johnson, Street, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.

THIRD DIVISION

[G.R. No. 141634. February 5, 2001]

Heirs of Spouses REMEDIOS R. SANDEJAS and ELIODORO P.

SANDEJAS SR. -- ROBERTO R. SANDEJAS, ANTONIO R.
SANDEJAS, CRISTINA SANDEJAS MORELAND, BENJAMIN R.
SANDEJAS, REMEDIOS R. SANDEJAS; and heirs of SIXTO S.
SANDEJAS II, RAMON R. SANDEJAS, TERESITA R. SANDEJAS,
and ELIODORO R. SANDEJAS JR., all represented by ROBERTO R.
SANDEJAS, petitioners, vs. ALEX A. LINA, respondent.
DECISION
PANGANIBAN, J.:

A contract of sale is not invalidated by the fact that it is subject to probate court
approval. The transaction remains binding on the seller-heir, but not on the other
heirs who have not given their consent to it. In settling the estate of the deceased, a
probate court has jurisdiction over matters incidental and collateral to the exercise of
its recognized powers. Such matters include selling, mortgaging or otherwise
encumbering realty belonging to the estate. Rule 89, Section 8 of the Rules of Court,
deals with the conveyance of real property contracted by the decedent while still
alive. In contrast with Sections 2 and 4 of the same Rule, the said provision does not
limit to the executor or administrator the right to file the application for authority to
sell, mortgage or otherwise encumber realty under administration. The standing to
pursue such course of action before the probate court inures to any person who stands
to be benefited or injured by the judgment or to be entitled to the avails of the suit.
The Case

Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to
reverse and set aside the Decision[1] dated April 16, 1999 and the Resolution[2] dated
January 12, 2000, both promulgated by the Court of Appeals in CA-GR CV No.
49491. The dispositive portion of the assailed Decision reads as follows:[3]
WHEREFORE, for all the foregoing, [w]e hereby MODIFY the [O]rder of the lower
court dated January 13, 1995, approving the Receipt of Earnest Money With Promise

to Buy and Sell dated June 7, 1982, only to the three-fifth (3/5) portion of the disputed
lots covering the share of [A]dministrator Eliodoro Sandejas, Sr. [in] the
property. The intervenor is hereby directed to pay appellant the balance of the
purchase price of the three-fifth (3/5) portion of the property within thirty (30) days
from receipt of this [O]rder and x x x the administrator [is directed] to execute the
necessary and proper deeds of conveyance in favor of appellee within thirty (30) days
thereafter.
The assailed Resolution denied reconsideration of the foregoing disposition.
The Facts

The facts of the case, as narrated by the Court of Appeals (CA), are as follows:[4]
On February 17, 1981, Eliodoro Sandejas, Sr. filed a petition (Record, SP. Proc. No.
R-83-15601, pp. 8-10) in the lower court praying that letters of administration be
issued in his favor for the settlement of the estate of his wife, REMEDIOS R.
SANDEJAS, who died on April 17, 1955. On July 1, 1981, Letters of Administration
[were issued by the lower court appointing Eliodoro Sandejas, Sr. as administrator of
the estate of the late Remedios Sandejas (Record, SP. Proc. No. R-83-15601, p.
16). Likewise on the same date, Eliodoro Sandejas, Sr. took his oath as administrator
(Record, SP. Proc. No. R-83-15601, p. 17). x x x.
On November 19, 1981, the 4th floor of Manila City Hall was burned and among the
records burned were the records of Branch XI of the Court of First Instance of
Manila. As a result, [A]dministrator Eliodoro Sandejas, Sr. filed a [M]otion for
[R]econstitution of the records of the case on February 9, 1983 (Record, SP. Proc. No.
R-83-15601, pp. 1-5). On February 16, 1983, the lower court in its [O]rder granted
the said motion (Record, SP. Proc. No. R-83-15601, pp. 28-29).
On April 19, 1983, an Omnibus Pleading for motion to intervene and petition-inintervention was filed by [M]ovant Alex A. Lina alleging among others that on June
7, 1982, movant and [A]dministrator Eliodoro P. Sandejas, in his capacity as seller,
bound and obligated himself, his heirs, administrators, and assigns, to sell forever and
absolutely and in their entirety the following parcels of land which formed part of the
estate of the late Remedios R. Sandejas, to wit:
1.
A parcel of land (Lot No. 22 Block No. 45 of the subdivision plan Psd-21121,
being a portion of Block 45 described on plan Psd-19508, G.L.R.O. Rec. No. 2029),
situated in the Municipality of Makati, province of Rizal, containing an area of TWO

HUNDRED SEVENTY (270) SQUARE METERS, more or less, with TCT No.
13465;
2.
A parcel of land (Lot No. 21 Block No. 45 of the subdivision plan Psd-21141,
being a portion of Block 45 described on plan Psd-19508 G.L.R.O. Rec. No. 2029),
situated in the Municipality of Makati, Province of Rizal, containing an area of TWO
HUNDRED SEVENTY (270) SQUARE METERS, more or less, with TCT No.
13464;
3.
A parcel of land (Lot No. 5 Block No. 45 of the subdivision plan Psd-21141,
being a portion of Block 45 described on plan Psd-19508 G.L.R.O. Rec. No. 2029),
situated in the Municipality of Makati, Province of Rizal, containing an area of TWO
HUNDRED EIGHT (208) SQUARE METERS, more or less, with TCT No. 13468;
4.
A parcel of land (Lot No. 6, Block No. 45 of the subdivision plan Psd-21141,
being a portion of Block 45 described on plan Psd-19508 G.L.R.O. Rec. No. 2029),
situated in the Municipality of Makati, Province of Rizal, containing an area of TWO
HUNDRED EIGHT (208) SQUARE METERS, more or less, with TCT No. 13468;
The [R]eceipt of the [E]arnest [M]oney with [P]romise to [S]ell and to [B]uy is
hereunder quoted, to wit:
Received today from MR. ALEX A. LINA the sum of ONE HUNDRED
THOUSAND (P100,000.00) PESOS, Philippine Currency, per Metropolitan Bank &
Trust Company Chec[k] No. 319913 dated today for P100,000.00, x x x as
additional earnest money for the following:
xxx

xxx

xxx

all registered with the Registry of Deeds of the [P]rovince of Rizal (Makati Branch
Office) in the name of SELLER ELIODORO SANDEJAS, Filipino Citizen, of legal
age, married to Remedios Reyes de Sandejas; and which undersigned, as SELLER,
binds and obligates himself, his heirs, administrators and assigns, to sell forever and
absolutely in their entirety (all of the four (4) parcels of land above described, which
are contiguous to each other as to form one big lot) to said Mr. Alex A. Lina, who has
agreed to buy all of them, also binding on his heirs, administrators and assigns, for the
consideration of ONE MILLION (P1,000,000.00) PESOS, Philippine Currency, upon
such reasonable terms of payment as may be agreed upon by them. The parties have,
however, agreed on the following terms and conditions:
1. The P100,000.00 herein received is in addition to the P70,000.00 earnest money
already received by SELLER from BUYER, all of which shall form part of, and shall

be deducted from, the purchase price of P1,000,000.00, once the deed of absolute
[sale] shall be executed;
2. As a consideration separate and distinct from the price, undersigned SELLER
also acknowledges receipt from Mr. Alex A. Lina of the sum of ONE THOUSAND
(P1,000.00) PESOS, Philippine Currency, per Metropolitan Bank & Trust Company
Check No. 319912 dated today and payable to SELLER for P1,000.00;
3. Considering that Mrs. Remedios Reyes de Sandejas is already deceased and as
there is a pending intestate proceedings for the settlement of her estate (Spec. Proc.
No. 138393, Manila CFI, Branch XI), wherein SELLER was appointed as
administrator of said Estate, and as SELLER, in his capacity as administrator of said
Estate, has informed BUYER that he (SELLER) already filed a [M]otion with the
Court for authority to sell the above parcels of land to herein BUYER, but which has
been delayed due to the burning of the records of said Spec. Pro. No. 138398, which
records are presently under reconstitution, the parties shall have at least ninety (90)
days from receipt of the Order authorizing SELLER, in his capacity as administrator,
to sell all THE ABOVE DESCRIBED PARCELS OF LAND TO HEREIN BUYER
(but extendible for another period of ninety (90) days upon the request of either of the
parties upon the other), within which to execute the deed of absolute sale covering all
above parcels of land;
4. In the event the deed of absolute sale shall not proceed or not be executed for
causes either due to SELLERS fault, or for causes of which the BUYER is innocent,
SELLER binds himself to personally return to Mr. Alex A. Lina the entire ONE
HUNDRED SEVENTY THOUSAND ([P]170,000.00) PESOS in earnest money
received from said Mr. Lina by SELLER, plus fourteen (14%) percentum interest per
annum, all of which shall be considered as liens of said parcels of land, or at least on
the share therein of herein SELLER;
5. Whether indicated or not, all of above terms and conditions shall be binding on
the heirs, administrators, and assigns of both the SELLER (undersigned MR.
ELIODORO P. SANDEJAS, SR.) and BUYER (MR. ALEX A. LINA). (Record, SP.
Proc. No. R-83-15601, pp. 52-54)
On July 17, 1984, the lower court issued an [O]rder granting the intervention of Alex
A. Lina (Record, SP. Proc. No. R-83-15601, p. 167).
On January 7, 1985, the counsel for [A]dministrator Eliodoro P. Sandejas filed a
[M]anifestation alleging among others that the administrator, Mr. Eliodoro P.
Sandejas, died sometime in November 1984 in Canada and said counsel is still
waiting for official word on the fact of the death of the administrator. He also alleged,

among others that the matter of the claim of Intervenor Alex A. Lina becomes a
money claim to be filed in the estate of the late Mr. Eliodoro P. Sandejas (Record, SP.
Proc. No. R-83-15601, p. 220). On February 15, 1985, the lower court issued an
[O]rder directing, among others, that the counsel for the four (4) heirs and other heirs
of Teresita R. Sandejas to move for the appointment of [a] new administrator within
fifteen (15) days from receipt of this [O]rder (Record, SP. Proc. No. R-83-15601, p.
227). In the same manner, on November 4, 1985, the lower court again issued an
order, the content of which reads:
On October 2, 1985, all the heirs, Sixto, Roberto, Antonio, Benjamin all surnamed
Sandejas were ordered to move for the appointment of [a] new administrator. On
October 16, 1985, the same heirs were given a period of fifteen (15) days from said
date within which to move for the appointment of the new administrator. Compliance
was set for October 30, 1985, no appearance for the aforenamed heirs. The
aforenamed heirs are hereby ordered to show cause within fifteen (15) days from
receipt of this Order why this Petition for Settlement of Estate should not be dismissed
for lack of interest and failure to comply with a lawful order of this Court.
SO ORDERED. (Record, SP. Proc. No. R-83-15601, p. 273)
On November 22, 1985, Alex A. Lina as petitioner filed with the Regional Trial
Court of Manila an Omnibus Pleading for (1) petition for letters of administration
[and] (2) to consolidate instant case with SP. Proc. No. R-83-15601 RTC-Branch XIManila, docketed therein as SP. Proc. No. 85-33707 entitled IN RE: INTESTATE
ESTATE OF ELIODORO P. SANDEJAS, SR., ALEX A. LINA PETITIONER, [for
letters of administration] (Record, SP. Proc. No. 85-33707, pp. 1-7). On November
29, 1985, Branch XXXVI of the Regional Trial Court of Manila issued an [O]rder
consolidating SP. Proc. No. 85-33707, with SP. Proc. No. R-83-15601 (Record, SP.
Proc. No.85-33707, p. 13). Likewise, on December 13, 1985, the Regional Trial
Court of Manila, Branch XI, issued an [O]rder stating that this Court has no objection
to the consolidation of Special Proceedings No. 85-331707, now pending before
Branch XXXVI of this Court, with the present proceedings now pending before this
Branch (Record, SP. Proc. No. R-83-15601, p. 279).
On January 15, 1986, Intervenor Alex A. Lina filed [a] Motion for his appointment
as a new administrator of the Intestate Estate of Remedios R. Sandejas on the
following reasons:
5.01. FIRST, as of this date, [i]ntervenor has not received any motion on the part of
the heirs Sixto, Antonio, Roberto and Benjamin, all surnamed Sandejas, for the
appointment of a new [a]dministrator in place of their father, Mr. Eliodoro P.
Sandejas, Sr.;

5.02. SECOND, since Sp. Proc. 85-33707, wherein the [p]etitioner is herein
Intervenor Alex A. Lina and the instant Sp. PROC. R-83-15601, in effect are already
consolidated, then the appointment of Mr. Alex Lina as [a]dministrator of the Intestate
Estate of Remedios R. Sandejas in instant Sp. Proc. R-83-15601, would be beneficial
to the heirs and also to the Intervenor;
5.03. THIRD, of course, Mr. Alex A. Lina would be willing to give way at anytime
to any [a]dministrator who may be proposed by the heirs of the deceased Remedios R.
Sandejas, so long as such [a]dministrator is qualified. (Record, SP. Proc. No. R-8315601, pp. 281-283)
On May 15, 1986, the lower court issued an order granting the [M]otion of Alex A.
Lina as the new [a]dministrator of the Intestate Estate of Remedios R. Sandejas in this
proceedings. (Record, SP. Proc. No. R-83-15601, pp. 288-290)
On August 28, 1986, heirs Sixto, Roberto, Antonio and Benjamin, all surnamed
Sandejas, and heirs [sic] filed a [M]otion for [R]econsideration and the appointment
of another administrator Mr. Sixto Sandejas, in lieu of [I]ntervenor Alex A. Lina
stating among others that it [was] only lately that Mr. Sixto Sandejas, a son and heir,
expressed his willingness to act as a new administrator of the intestate estate of his
mother, Remedios R. Sandejas (Record, SP. Proc. No. 85-33707, pp. 29-31). On
October 2, 1986, Intervenor Alex A. Lina filed his [M]anifestation and [C]ounter
[M]otion alleging that he ha[d] no objection to the appointment of Sixto Sandejas as
[a]dministrator of the [i]ntestate [e]state of his mother Remedios R. Sandejas (Sp.
Proc. No. 85-15601), provided that Sixto Sandejas be also appointed as administrator
of the [i]ntestate [e]state of his father, Eliodoro P. Sandejas, Sr. (Spec. Proc. No. 8533707), which two (2) cases have been consolidated (Record, SP. Proc. No. 85-33707,
pp. 34-36). On March 30, 1987, the lower court granted the said [M]otion and
substituted Alex Lina with Sixto Sandejas as petitioner in the said [P]etitions (Record,
SP. Proc. No. 85-33707, p.52). After the payment of the administrators bond
(Record, SP. Proc. No. 83-15601, pp. 348-349) and approval thereof by the court
(Record, SP. Proc. No. 83-15601, p. 361), Administrator Sixto Sandejas on January
16, 1989 took his oath as administrator of the estate of the deceased Remedios R.
Sandejas and Eliodoro P. Sandejas (Record, SP. Proc. No. 83-15601, p. 367) and was
likewise issued Letters of Administration on the same day (Record, SP. Proc. No. 8315601, p. 366).
On November 29, 1993, Intervenor filed [an] Omnibus Motion (a) to approve the
deed of conditional sale executed between Plaintiff-in-Intervention Alex A. Lina and
Elidioro [sic] Sandejas, Sr. on June 7, 1982; (b) to compel the heirs of Remedios
Sandejas and Eliodoro Sandejas, Sr. thru their administrator, to execute a deed of
absolute sale in favor of [I]ntervenor Alex A. Lina pursuant to said conditional deed

of sale (Record, SP. Proc. No. 83-15601, pp. 554-561) to which the administrator filed
a [M]otion to [D]ismiss and/or [O]pposition to said omnibus motion on December 13,
1993 (Record, SP. Proc. No. 83-15601, pp. 591-603).
On January 13, 1995, the lower court rendered the questioned order granting
intervenors [M]otion for the [A]pproval of the Receipt of Earnest Money with
promise to buy between Plaintiff-in-Intervention Alex A. Lina and Eliodoro Sandejas,
Sr. dated June 7, 1982 (Record, SP. Proc. No. 83-15601, pp. 652-654). x x x.
The Order of the intestate court[5] disposed as follows:
WHEREFORE, [i]ntervenors motion for the approval of the Receipt Of Earnest
Money With Promise To Sell And To Buy dated June 7, 1982, is granted. The
[i]ntervenor is directed to pay the balance of the purchase price amounting to
P729,000.00 within thirty (30) days from receipt of this Order and the Administrator
is directed to execute within thirty (30) days thereafter the necessary and proper deeds
of conveyancing.[6]
Ruling of the Court of Appeals

Overturning the RTC ruling, the CA held that the contract between Eliodoro
Sandejas Sr. and respondent was merely a contract to sell, not a perfected contract of
sale. It ruled that the ownership of the four lots was to remain in the intestate estate of
Remedios Sandejas until the approval of the sale was obtained from the settlement
court. That approval was a positive suspensive condition, the nonfulfillment of which
was not tantamount to a breach. It was simply an event that prevented the obligation
from maturing or becoming effective. If the condition did not happen, the obligation
would not arise or come into existence.
The CA held that Section 1, Rule 89[7] of the Rules of Court was inapplicable,
because the lack of written notice to the other heirs showed the lack of consent of
those heirs other than Eliodoro Sandejas Sr. For this reason, bad faith was imputed to
him, for no one is allowed to enjoy a claim arising from ones own
wrongdoing. Thus, Eliodoro Sr. was bound, as a matter of justice and good faith, to
comply with his contractual commitments as an owner and heir. When he entered
into the agreement with respondent, he bound his conjugal and successional shares in
the property.
Hence, this Petition.[8]
Issues

In their Memorandum, petitioners submit the following issues for our resolution:
a)
Whether or not Eliodoro P. Sandejas Sr. is legally obligated to convey title
to the property referred to in the subject document which was found to be in the nature
of a contract to sell where the suspensive condition set forth therein [i.e.] court
approval, was not complied with;
b)
Whether or not Eliodoro P. Sandejas Sr. was guilty of bad faith despite the
conclusion of the Court of Appeals that the respondent [bore] the burden of proving
that a motion for authority to sell ha[d] been filed in court;
c)
Whether or not the undivided shares of Eliodoro P. Sandejas Sr. in the
subject property is three-fifth (3/5) and the administrator of the latter should execute
deeds of conveyance therefor within thirty days from receipt of the balance of the
purchase price from the respondent; and
d)
Whether or not the respondents petition-in-intervention was converted to a
money claim and whether the [trial court] acting as a probate court could approve the
sale and compel the petitioners to execute [a] deed of conveyance even for the share
alone of Eliodoro P. Sandejas Sr.[9]
In brief, the Petition poses the main issue of whether the CA erred in modifying
the trial courts Decision and in obligating petitioners to sell 3/5 of the disputed
properties to respondent, even if the suspensive condition had not been fulfilled. It
also raises the following collateral issues: (1) the settlement courts jurisdiction; (2)
respondent-intervenors standing to file an application for the approval of the sale of
realty in the settlement case, (3) the decedents bad faith, and (4) the computation of
the decedents share in the realty under administration.
This Courts Ruling

The Petition is partially meritorious.

Main Issue:
Obligation With a Suspensive Condition

Petitioners argue that the CA erred in ordering the conveyance of the disputed 3/5
of the parcels of land, despite the nonfulfillment of the suspensive condition -- court
approval of the sale -- as contained in the Receipt of Earnest Money with Promise to

Sell and to Buy (also referred to as the Receipt). Instead, they assert that because
this condition had not been satisfied, their obligation to deliver the disputed parcels of
land was converted into a money claim.
We disagree. Petitioners admit that the agreement between the deceased Eliodoro
Sandejas Sr. and respondent was a contract to sell. Not exactly. In a contract to sell,
the payment of the purchase price is a positive suspensive condition. The vendors
obligation to convey the title does not become effective in case of failure to pay. [10]
On the other hand, the agreement between Eliodoro Sr. and respondent is subject
to a suspensive condition -- the procurement of a court approval, not full
payment. There was no reservation of ownership in the agreement. In accordance
with paragraph 1 of the Receipt, petitioners were supposed to deed the disputed lots
over to respondent. This they could do upon the courts approval, even before full
payment. Hence, their contract was a conditional sale, rather than a contract to sell as
determined by the CA.
When a contract is subject to a suspensive condition, its birth or effectivity can
take place only if and when the condition happens or is fulfilled. [11] Thus, the intestate
courts grant of the Motion for Approval of the sale filed by respondent resulted in
petitioners obligation to execute the Deed of Sale of the disputed lots in his
favor. The condition having been satisfied, the contract was perfected. Henceforth,
the parties were bound to fulfill what they had expressly agreed upon.
Court approval is required in any disposition of the decedents estate per Rule 89
of the Rules of Court. Reference to judicial approval, however, cannot adversely
affect the substantive rights of heirs to dispose of their own pro indiviso shares in the
co-heirship or co-ownership.[12] In other words, they can sell their rights, interests or
participation in the property under administration. A stipulation requiring court
approval does not affect the validity and the effectivity of the sale as regards the
selling heirs. It merely implies that the property may be taken out of custodia
legis, but only with the courts permission.[13] It would seem that the suspensive
condition in the present conditional sale was imposed only for this reason.
Thus, we are not persuaded by petitioners argument that the obligation was
converted into a mere monetary claim. Paragraph 4 of the Receipt, which petitioners
rely on, refers to a situation wherein the sale has not materialized. In such a case, the
seller is bound to return to the buyer the earnest money paid plus interest at fourteen
percent per annum. But the sale was approved by the intestate court; hence,
the proviso does not apply.
Because petitioners did not consent to the sale of their ideal shares in the disputed
lots, the CA correctly limited the scope of the Receipt to the pro-indiviso share of

Eliodoro Sr. Thus, it correctly modified the intestate courts ruling by excluding their
shares from the ambit of the transaction.
First Collateral Issue:
Jurisdiction of Settlement Court

Petitioners also fault the CA Decision by arguing, inter alia, (a) jurisdiction over
ordinary civil action seeking not merely to enforce a sale but to compel performance
of a contract falls upon a civil court, not upon an intestate court; and (b) that Section 8
of Rule 89 allows the executor or administrator, and no one else, to file an application
for approval of a sale of the property under administration.
Citing Gil v. Cancio[14] and Acebedo v. Abesamis,[15] petitioners contend that the
CA erred in clothing the settlement court with the jurisdiction to approve the sale and
to compel petitioners to execute the Deed of Sale. They allege factual differences
between these cases and the instant case, as follows: in Gil, the sale of the realty in
administration was a clear and an unequivocal agreement for the support of the widow
and the adopted child of the decedent; and in Acebedo, a clear sale had been made,
and all the heirs consented to the disposition of their shares in the realty in
administration.
We are not persuaded. We hold that Section 8 of Rule 89 allows this action to
proceed. The factual differences alleged by petitioners have no bearing on the
intestate courts jurisdiction over the approval of the subject conditional sale. Probate
jurisdiction covers all matters relating to the settlement of estates (Rules 74 & 86-91)
and the probate of wills (Rules 75-77) of deceased persons, including the appointment
and the removal of administrators and executors (Rules 78-85). It also extends to
matters incidental and collateral to the exercise of a probate courts recognized powers
such as selling, mortgaging or otherwise encumbering realty belonging to the
estate. Indeed, the rules on this point are intended to settle the estate in a speedy
manner, so that the benefits that may flow from such settlement may be immediately
enjoyed by the heirs and the beneficiaries.[16]
In the present case, the Motion for Approval was meant to settle the decedents
obligation to respondent; hence, that obligation clearly falls under the jurisdiction of
the settlement court. To require respondent to file a separate action -- on whether
petitioners should convey the title to Eliodoro Sr.s share of the disputed realty -- will
unnecessarily prolong the settlement of the intestate estates of the deceased spouses.
The suspensive condition did not reduce the conditional sale between Eliodoro Sr.
and respondent to one that was not a definite, clear and absolute document of sale,
as contended by petitioners. Upon the occurrence of the condition, the conditional

sale became a reciprocally demandable obligation that is binding upon the

parties.[17] That Acebedo also involved a conditional sale of real property[18] proves that
the existence of the suspensive condition did not remove that property from the
jurisdiction of the intestate court.
Second Collateral Issue: Intervenors Standing

Petitioners contend that under said Rule 89, only the executor or administrator is
authorized to apply for the approval of a sale of realty under administration. Hence,
the settlement court allegedly erred in entertaining and granting respondents Motion
for Approval.
We read no such limitation. Section 8, Rule 89 of the Rules of Court, provides:
SEC. 8. When court may authorize conveyance of realty which deceased contracted
to convey. Notice. Effect of deed.Where the deceased was in his lifetime under
contract, binding in law, to deed real property, or an interest therein, the court having
jurisdiction of the estate may, on application for that purpose, authorize the executor
or administrator to convey such property according to such contract, or with such
modifications as are agreed upon by the parties and approved by the court; and if the
contract is to convey real property to the executor or administrator, the clerk of the
court shall execute the deed. x x x.
This provision should be differentiated from Sections 2 and 4 of the same Rule,
specifically requiring only the executor or administrator to file the application for
authority to sell, mortgage or otherwise encumber real estate for the purpose of paying
debts, expenses and legacies (Section 2);[19] or for authority to sell real or personal
estate beneficial to the heirs, devisees or legatees and other interested persons,
although such authority is not necessary to pay debts, legacies or expenses of
administration (Section 4).[20] Section 8 mentions only an application to authorize the
conveyance of realty under a contract that the deceased entered into while still
alive. While this Rule does not specify who should file the application, it stands to
reason that the proper party must be one who is to be benefited or injured by the
judgment, or one who is to be entitled to the avails of the suit.[21]
Third Collateral Issue: Bad Faith

Petitioners assert that Eliodoro Sr. was not in bad faith, because (a) he informed
respondent of the need to secure court approval prior to the sale of the lots, and (2) he
did not promise that he could obtain the approval.
We agree. Eliodoro Sr. did not misrepresent these lots to respondent as his own
properties to which he alone had a title in fee simple. The fact that he failed to obtain
the approval of the conditional sale did not automatically imply bad faith on his
part. The CA held him in bad faith only for the purpose of binding him to the
conditional sale. This was unnecessary because his being bound to it is, as already
shown, beyond cavil.
Fourth Collateral Issue: Computation of Eliodoros Share

Petitioners aver that the CAs computation of Eliodoro Sr.s share in the disputed
parcels of land was erroneous because, as the conjugal partner of Remedios, he owned
one half of these lots plus a further one tenth of the remaining half, in his capacity as a
one of her legal heirs. Hence, Eliodoros share should be 11/20 of the entire
property. Respondent poses no objection to this computation.[22]
On the other hand, the CA held that, at the very least, the conditional sale should
cover the one half (1/2) pro indiviso conjugal share of Eliodoro plus his one tenth
(1/10) hereditary share as one of the ten legal heirs of the decedent, or a total of three
fifths (3/5) of the lots in administration.[23]
Petitioners computation is correct. The CA computed Eliodoros share as an heir
based on one tenth of the entire disputed property. It should be based only on the
remaining half, after deducting the conjugal share.[24]
The proper determination of the seller-heirs shares requires further
explanation. Succession laws and jurisprudence require that when a marriage is
dissolved by the death of the husband or the wife, the decedents entire estate under
the concept of conjugal properties of gains -- must be divided equally, with one half
going to the surviving spouse and the other half to the heirs of the deceased. [25] After
the settlement of the debts and obligations, the remaining half of the estate is then
distributed to the legal heirs, legatees and devices. We assume, however, that this
preliminary determination of the decedents estate has already been taken into account
by the parties, since the only issue raised in this case is whether Eliodoros share is
11/20 or 3/5 of the disputed lots.
WHEREFORE, the Petition is hereby PARTIALLY GRANTED. The appealed
Decision and Resolution are AFFIRMED with the MODIFICATION that respondent
is entitled to only a pro-indiviso share equivalent to 11/20 of the disputed lots.

SO ORDERED.
Melo, (Chairman), Vitug, Gonzaga-Reyes, and Sandoval-Gutierrez, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 126083

July 12, 2006

ANTONIO R. CORTES (in his capacity as Administrator of the estate of Claro S.

Cortes), petitioner,
vs.
HON. COURT OF APPEALS and VILLA ESPERANZA DEVELOPMENT
CORPORATION, respondents.
DECISION
YNARES-SANTIAGO, J.:
The instant petition for review seeks the reversal of the June 13, 1996 Decision1 of the Court of
Appeals in CA-G.R. CV No. 47856, setting aside the June 24, 1993 Decision2 of the Regional Trial
Court of Makati, Branch 138, which rescinded the contract of sale entered into by petitioner Antonio
Cortes (Cortes) and private respondent Villa Esperanza Development Corporation (Corporation).
The antecedents show that for the purchase price of P3,700,000.00, the Corporation as buyer, and
Cortes as seller, entered into a contract of sale over the lots covered by Transfer Certificate of Title
(TCT) No. 31113-A, TCT No. 31913-A and TCT No. 32013-A, located at Baclaran, Paraaque,
Metro Manila. On various dates in 1983, the Corporation advanced to Cortes the total sum of
P1,213,000.00. Sometime in September 1983, the parties executed a deed of absolute sale
containing the following terms:3
1. Upon execution of this instrument, the Vendee shall pay unto the Vendor sum of TWO
MILLION AND TWO HUNDRED THOUSAND (P2,200,000.00) PESOS, Philippine Currency,
less all advances paid by the Vendee to the Vendor in connection with the sale;
2. The balance of ONE MILLION AND FIVE HUNDRED THOUSAND [P1,500,000.00]
PESOS, Phil. Currency shall be payable within ONE (1) YEAR from date of execution of this
instrument, payment of which shall be secured by an irrevocable standby letter of credit to be
issued by any reputable local banking institution acceptable to the Vendor.
xxxx
4. All expense for the registration of this document with the Register of Deeds concerned,
including the transfer tax, shall be divided equally between the Vendor and the Vendee.
Payment of the capital gains shall be exclusively for the account of the Vendor; 5%
commission of Marcosa Sanchez to be deducted upon signing of sale.4
Said Deed was retained by Cortes for notarization.
On January 14, 1985, the Corporation filed the instant case5 for specific performance seeking to
compel Cortes to deliver the TCTs and the original copy of the Deed of Absolute Sale. According to
the Corporation, despite its readiness and ability to pay the purchase price, Cortes refused delivery

of the sought documents. It thus prayed for the award of damages, attorney's fees and litigation
expenses arising from Cortes' refusal to deliver the same documents.
In his Answer with counterclaim,6 Cortes claimed that the owner's duplicate copy of the three TCTs
were surrendered to the Corporation and it is the latter which refused to pay in full the agreed down
payment. He added that portion of the subject property is occupied by his lessee who agreed to
vacate the premises upon payment of disturbance fee. However, due to the Corporation's failure to
pay in full the sum of P2,200,000.00, he in turn failed to fully pay the disturbance fee of the lessee
who now refused to pay monthly rentals. He thus prayed that the Corporation be ordered to pay the
outstanding balance plus interest and in the alternative, to cancel the sale and forfeit the
P1,213,000.00 partial down payment, with damages in either case.
On June 24, 1993, the trial court rendered a decision rescinding the sale and directed Cortes to
return to the Corporation the amount of P1,213,000.00, plus interest. It ruled that pursuant to the
contract of the parties, the Corporation should have fully paid the amount of P2,200,000.00 upon the
execution of the contract. It stressed that such is the law between the parties because the
Corporation failed to present evidence that there was another agreement that modified the terms of
payment as stated in the contract. And, having failed to pay in full the amount of P2,200,000.00
despite Cortes' delivery of the Deed of Absolute Sale and the TCTs, rescission of the contract is
proper.
In its motion for reconsideration, the Corporation contended that the trial court failed to consider their
agreement that it would pay the balance of the down payment when Cortes delivers the TCTs. The
motion was, however, denied by the trial court holding that the rescission should stand because the
Corporation did not act on the offer of Cortes' counsel to deliver the TCTs upon payment of the
balance of the down payment. Thus:
The Court finds no merit in the [Corporation's] Motion for Reconsideration. As stated in the
decision sought to be reconsidered, [Cortes'] counsel at the pre-trial of this case, proposed
that if [the Corporation] completes the down payment agreed upon and make arrangement
for the payment of the balances of the purchase price, [Cortes] would sign the Deed of Sale
and turn over the certificate of title to the [Corporation]. [The Corporation] did nothing to
comply with its undertaking under the agreement between the parties.
WHEREFORE, in view of the foregoing considerations, the Motion for Reconsideration is
hereby DENIED.
SO ORDERED.7
On appeal, the Court of Appeals reversed the decision of the trial court and directed Cortes to
execute a Deed of Absolute Sale conveying the properties and to deliver the same to the
Corporation together with the TCTs, simultaneous with the Corporation's payment of the balance of
the purchase price of P2,487,000.00. It found that the parties agreed that the Corporation will fully
pay the balance of the down payment upon Cortes' delivery of the three TCTs to the Corporation.
The records show that no such delivery was made, hence, the Corporation was not remiss in the
performance of its obligation and therefore justified in not paying the balance. The decretal portion
thereof, provides:
WHEREFORE, premises considered, [the Corporation's] appeal is GRANTED. The decision
appealed from is hereby REVERSED and SET ASIDE and a new judgment rendered
ordering [Cortes] to execute a deed of absolute sale conveying to [the Corporation] the
parcels of land subject of and described in the deed of absolute sale, Exhibit D.

Simultaneously with the execution of the deed of absolute sale and the delivery of the
corresponding owner's duplicate copies of TCT Nos. 31113-A, 31931-A and 32013-A of the
Registry of Deeds for the Province of Rizal, Metro Manila, District IV, [the Corporation] shall
pay [Cortes] the balance of the purchase price of P2,487,000.00. As agreed upon in
paragraph 4 of the Deed of Absolute Sale, Exhibit D, under terms and conditions, "All
expenses for the registration of this document (the deed of sale) with the Register of Deeds
concerned, including the transfer tax, shall be divided equally between [Cortes and the
Corporation]. Payment of the capital gains shall be exclusively for the account of the Vendor;
5% commission of Marcosa Sanchez to be deducted upon signing of sale." There is no
pronouncement as to costs.
SO ORDERED.8
Cortes filed the instant petition praying that the decision of the trial court rescinding the sale be
reinstated.
There is no doubt that the contract of sale in question gave rise to a reciprocal obligation of the
parties. Reciprocal obligations are those which arise from the same cause, and which each party is a
debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of
the other. They are to be performed simultaneously, so that the performance of one is conditioned
upon the simultaneous fulfillment of the other.9
Article 1191 of the Civil Code, states:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
xxxx
As to when said failure or delay in performance arise, Article 1169 of the same Code provides that
ART. 1169
xxxx
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. From the moment
one of the parties fulfills his obligation, delay by the other begins. (Emphasis supplied)
The issue therefore is whether there is delay in the performance of the parties' obligation that would
justify the rescission of the contract of sale. To resolve this issue, we must first determine the true
agreement of the parties.
The settled rule is that the decisive factor in evaluating an agreement is the intention of the parties,
as shown not necessarily by the terminology used in the contract but by their conduct, words,
actions and deeds prior to, during and immediately after executing the agreement. As such,
therefore, documentary and parol evidence may be submitted and admitted to prove such intention.10
In the case at bar, the stipulation in the Deed of Absolute Sale was that the Corporation shall pay in
full the P2,200,000.00 down payment upon execution of the contract. However, as correctly noted by
the Court of Appeals, the transcript of stenographic notes reveal Cortes' admission that he agreed

that the Corporation's full payment of the sum of P2,200,000.00 would depend upon his delivery of
the TCTs of the three lots. In fact, his main defense in the Answer is that, he performed what is
incumbent upon him by delivering to the Corporation the TCTs and the carbon duplicate of the Deed
of Absolute Sale, but the latter refused to pay in full the down payment.11 Pertinent portion of the
transcript, reads:
[Q] Now, why did you deliver these three titles to the plaintiff despite the fact that it has not
been paid in full the agreed down payment?
A Well, the broker told me that the down payment will be given if I surrender the titles.
Q Do you mean to say that the plaintiff agreed to pay in full the down payment of
P2,200,000.00 provided you surrender or entrust to the plaintiff the titles?
A Yes, sir.12
What further confirmed the agreement to deliver the TCTs is the testimony of Cortes that the title of
the lots will be transferred in the name of the Corporation upon full payment of the P2,200,000.00
down payment. Thus
ATTY. ANTARAN
Q Of course, you have it transferred in the name of the plaintiff, the title?
A Upon full payment.
xxxx
ATTY. SARTE
Q When you said upon full payment, are you referring to the agreed down payment of
P2,200,000.00?
A Yes, sir.13
By agreeing to transfer title upon full payment of P2,200,000.00, Cortes' impliedly agreed to deliver
the TCTs to the Corporation in order to effect said transfer. Hence, the phrase "execution of this
instrument" 14 as appearing in the Deed of Absolute Sale, and which event would give rise to the
Corporation's obligation to pay in full the amount of P2,200,000.00, can not be construed as referring
solely to the signing of the deed. The meaning of "execution" in the instant case is not limited to the
signing of a contract but includes as well the performance or implementation or accomplishment of
the parties' agreement.15 With the transfer of titles as the corresponding reciprocal obligation of
payment, Cortes' obligation is not only to affix his signature in the Deed, but to set into motion the
process that would facilitate the transfer of title of the lots, i.e., to have the Deed notarized and to
surrender the original copy thereof to the Corporation together with the TCTs.
Having established the true agreement of the parties, the Court must now determine whether Cortes
delivered the TCTs and the original Deed to the Corporation. The Court of Appeals found that Cortes
never surrendered said documents to the Corporation. Cortes testified that he delivered the same to
Manny Sanchez, the son of the broker, and that Manny told him that her mother, Marcosa Sanchez,
delivered the same to the Corporation.

Q Do you have any proof to show that you have indeed surrendered these titles to the
plaintiff?
A Yes, sir.
Q I am showing to you a receipt dated October 29, 1983, what relation has this receipt with
that receipt that you have mentioned?
A That is the receipt of the real estate broker when she received the titles.
Q On top of the printed name is Manny Sanchez, there is a signature, do you know who is
that Manny Sanchez?
A That is the son of the broker.
xxxx
Q May we know the full name of the real estate broker?
A Marcosa Sanchez
xxxx
Q Do you know if the broker or Marcosa Sanchez indeed delivered the titles to the plaintiff?
A That is what [s]he told me. She gave them to the plaintiff.
x x x x.16
ATTY. ANTARAN
Q Are you really sure that the title is in the hands of the plaintiff?
xxxx
Q It is in the hands of the broker but there is no showing that it is in the hands of the plaintiff?
A Yes, sir.
COURT
Q How do you know that it was delivered to the plaintiff by the son of the broker?
A The broker told me that she delivered the title to the plaintiff.
ATTY. ANTARAN
Q Did she not show you any receipt that she delivered to [Mr.] Dragon17 the title without any
receipt?

A I have not seen any receipt.

Q So, therefore, you are not sure whether the title has been delivered to the plaintiff or not. It
is only upon the allegation of the broker?
A Yes, sir.18
However, Marcosa Sanchez's unrebutted testimony is that, she did not receive the TCTs. She also
denied knowledge of delivery thereof to her son, Manny, thus:
Q The defendant, Antonio Cortes testified during the hearing on March 11, 1986 that he
allegedly gave you the title to the property in question, is it true?
A I did not receive the title.
Q He likewise said that the title was delivered to your son, do you know about that?
A I do not know anything about that.19
What further strengthened the findings of the Court of Appeals that Cortes did not surrender the
subject documents was the offer of Cortes' counsel at the pre-trial to deliver the TCTs and the Deed
of Absolute Sale if the Corporation will pay the balance of the down payment. Indeed, if the said
documents were already in the hands of the Corporation, there was no need for Cortes' counsel to
make such offer.
Since Cortes did not perform his obligation to have the Deed notarized and to surrender the same
together with the TCTs, the trial court erred in concluding that he performed his part in the contract
of sale and that it is the Corporation alone that was remiss in the performance of its obligation.
Actually, both parties were in delay. Considering that their obligation was reciprocal, performance
thereof must be simultaneous. The mutual inaction of Cortes and the Corporation therefore gave rise
to a compensation morae or default on the part of both parties because neither has completed their
part in their reciprocal obligation.20 Cortes is yet to deliver the original copy of the notarized Deed
and the TCTs, while the Corporation is yet to pay in full the agreed down payment of P2,200,000.00.
This mutual delay of the parties cancels out the effects of default,21 such that it is as if no one is
guilty of delay.22
We find no merit in Cortes' contention that the failure of the Corporation to act on the proposed
settlement at the pre-trial must be construed against the latter. Cortes argued that with his counsel's
offer to surrender the original Deed and the TCTs, the Corporation should have consigned the
balance of the down payment. This argument would have been correct if Cortes actually surrendered
the Deed and the TCTs to the Corporation. With such delivery, the Corporation would have been
placed in default if it chose not to pay in full the required down payment. Under Article 1169 of the
Civil Code, from the moment one of the parties fulfills his obligation, delay by the other begins. Since
Cortes did not perform his part, the provision of the contract requiring the Corporation to pay in full
the down payment never acquired obligatory force. Moreover, the Corporation could not be faulted
for not automatically heeding to the offer of Cortes. For one, its complaint has a prayer for damages
which it may not want to waive by agreeing to the offer of Cortes' counsel. For another, the previous
representation of Cortes that the TCTs were already delivered to the Corporation when no such
delivery was in fact made, is enough reason for the Corporation to be more cautious in dealing with
him.

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

Republic of the Philippines

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

GUERRERO, J.:
Appeal by certiorari from the Resolution of the respondent court 1 dated October 12, 1970 in CA-G.R.
No. L-33998-R entitled "Felipe C. Roque, plaintiff-appellee, versus Nicanor Lapuz, defendantappellant" amending its original decision of April 23, 1970 which affirmed the decision of the Court of First
Instance of Rizal (Quezon City Branch) in Civil Case No. Q-4922 in favor of petitioner, and the Resolution
of the respondent court denying petitioner's motion for reconsideration.

The facts of this case are as recited in the decision of the Trial Court which was adopted and
affirmed by the Court of Appeals:
Sometime in 1964, prior to the approval by the National Planning Commission of the
consolidation and subdivision plan of plaintiff's property known as the Rockville
Subdivision, situated in Balintawak, Quezon City, plaintiff and defendant entered into
an agreement of sale covering Lots 1, 2 and 9, Block 1, of said property, with an
aggregate area of 1,200 square meters, payable in 120 equal monthly installments at
the rate of P16.00, P15.00 per square meter, respectively. In accordance with said
agreement, defendant paid to plaintiff the sum of P150.00 as deposit and the further
sum of P740.56 to complete the payment of four monthly installments covering the
months of July, August, September, and October, 1954. (Exhs. A and B). When the
document Exhibit "A" was executed on June 25, 1954, the plan covering plaintiff's
property was merely tentative, and the plaintiff referred to the proposed lots
appearing in the tentative plan.
After the approval of the subdivision plan by the Bureau of Lands on January 24,
1955, defendant requested plaintiff that he be allowed to abandon and substitute
Lots 1, 2 and 9, the subject matter of their previous agreement, with Lots 4 and 12,
Block 2 of the approved subdivision plan, of the Rockville Subdivision, with a total
area of 725 square meters, which are corner lots, to which request plaintiff graciously
acceded.
The evidence discloses that defendant proposed to plaintiff modification of their
previous contract to sell because he found it quite difficult to pay the monthly

installments on the three lots, and besides the two lots he had chosen were better
lots, being corner lots. In addition, it was agreed that the purchase price of these two
lots would be at the uniform rate of P17.00 per square (meter) payable in 120 equal
monthly installments, with interest at 8% annually on the balance unpaid. Pursuant to
this new agreement, defendant occupied and possessed Lots 4 and 12, Block 2 of
the approved subdivision plan, and enclosed them, including the portion where his
house now stands, with barbed wires and adobe walls.
However, aside from the deposit of P150.00 and the amount of P740.56 which were
paid under their previous agreement, defendant failed to make any further payment
on account of the agreed monthly installments for the two lots in dispute, under the
new contract to sell. Plaintiff demanded upon defendant not only to pay the stipulated
monthly installments in arrears, but also to make up-to-date his payments, but
defendant, instead of complying with the demands, kept on asking for extensions,
promising at first that he would pay not only the installments in arrears but also make
up-to-date his payment, but later on refused altogether to comply with plaintiff's
demands.
Defendant was likewise requested by the plaintiff to sign the corresponding contract
to sell in accordance with his previous commitment. Again, defendant promised that
he would sign the required contract to sell when he shall have made up-to-date the
stipulated monthly installments on the lots in question, but subsequently backed out
of his promise and refused to sign any contract in noncompliance with what he had
represented on several occasions. And plaintiff relied on the good faith of defendant
to make good his promise because defendant is a professional and had been rather
good to him (plaintiff).
On or about November 3, 1957, in a formal letter, plaintiff demanded upon defendant
to vacate the lots in question and to pay the reasonable rentals thereon at the rate of
P60.00 per month from August, 1955. (Exh. "B"). Notwithstanding the receipt of said
letter, defendant did not deem it wise nor proper to answer the same.
In reference to the mode of payment, the Honorable Court of Appeals found
Both parties are agreed that the period within which to pay the lots in question is ten
years. They however, disagree on the mode of payment. While the appellant claims
that he could pay the purchase price at any time within a period of ten years with a
gradual proportionate discount on the price, the appellee maintains that the appellant
was bound to pay monthly installments.
On this point, the trial court correctly held that
It is further argued by defendant that under the agreement to sell in question, he has
the right or option to pay the purchase price at anytime within a period of ten years
from 1954, he being entitled, at the same time, to a graduated reduction of the price.
The Court is constrained to reject this version not only because it is contradicted by
the weight of evidence but also because it is not consistent with what is reasonable,
plausible and credible. It is highly improbable to expect plaintiff, or any real estate
subdivision owner for that matter, to agree to a sale of his land which would be
payable anytime in ten years at the exclusive option of the purchaser. There is no
showing that defendant is a friend, a relative, or someone to whom plaintiff had to be
grateful, as would justify an assumption that he would have agreed to extend to

defendant such an extra- ordinary concession. Furthermore, the context of the

document, Exhibit "B", not to mention the other evidences on records is indicative
that the real intention of the parties is for the payment of the purchase price of the lot
in question on an equal monthly installment basis for a period of ten years (Exhibits
"A", "II", "J" and "K").
On January 22, 1960, petitioner Felipe C, Roque (plaintiff below) filed the complaint against
defendant Nicanor Lapuz (private respondent herein) with the Court of First Instance of Rizal,
Quezon City Branch, for rescission and cancellation of the agreement of sale between them
involving the two lots in question and prayed that judgment be rendered ordering the rescission and
cancellation of the agreement of sale, the defendant to vacate the two parcels of land and remove
his house therefrom and to pay to the plaintiff the reasonable rental thereof at the rate of P60.00 a
month from August 1955 until such time as he shall have vacated the premises, and to pay the sum
of P2,000.00 as attorney's fees, costs of the suit and award such other relief or remedy as may be
deemed just and equitable in the premises.
Defendant filed a Motion to Dismiss on the ground that the complaint states no cause of action,
which motion was denied by the court. Thereafter, defendant filed his Answer alleging that he bought
three lots from the plaintiff containing an aggregate area of 1,200 sq. meters and previously known
as Lots 1, 2 and 9 of Block 1 of Rockville Subdivision at P16.00, P15.00 and P15.00, respectively,
payable at any time within ten years. Defendant admits having occupied the lots in question.
As affirmative and special defenses, defendant alleges that the complaint states no cause of action;
that the present action for rescission has prescribed; that no demand for payment of the balance
was ever made; and that the action being based on reciprocal obligations, before one party may
compel performance, he must first comply what is incumbent upon him.
As counterclaim, defendant alleges that because of the acts of the plaintiff, he lost two lots
containing an area of 800 sq. meters and as a consequence, he suffered moral damages in the
amount of P200.000.00; that due to the filing of the present action, he suffered moral damages
amounting to P100,000.00 and incurred expenses for attorney's fees in the sum of P5,000.00.
Plaintiff filed his Answer to the Counterclaim and denied the material averments thereof.
After due hearing, the trial court rendered judgment, the dispositive portion of which reads:
WHEREFORE, the Court renders judgment in favor of plain. plaintiff and against the
defendant, as follows:
(a) Declaring the agreement of sale between plaintiff and defendant involving the lots
in question (Lots 4 and 12, Block 2 of the approved subdivision plan of the Rockville
Subdivision) rescinded, resolved and cancelled;
(b) Ordering defendant to vacate the said lots and to remove his house therefrom
and also to pay plaintiff the reasonable rental thereof at the rate of P60.00 per month
from August, 1955 until he shall have actually vacated the premises; and
(c) Condemning defendant to pay plaintiff the sum of P2,000.00 as attorney's fees,
as well as the costs of the suit. (Record on Appeal, p. 118)

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

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

I. The Honorable Court of Appeals erred in applying paragraph 3, Article 1191 of the
Civil Code which refers to reciprocal obligations in general and, pursuant thereto, in
granting respondent Lapuz a period of ninety (90) days from entry of judgment within
which to pay the balance of the purchase price.
II. The Honorable Court of Appeals erred in not holding that Article 1592 of the same
Code, which specifically covers sales of immovable property and which constitutes
an exception to the third paragraph of Article 1191 of said Code, is applicable to the
present case.
III. The Honorable Court of Appeals erred in not holding that respondent Lapuz
cannot avail of the provisions of Article 1191, paragraph 3 of the Civil Code aforesaid
because he did not raise in his answer or in any of the pleadings he filed in the trial
court the question of whether or not he is entitled, by reason of a just cause, to a
fixing of a new period.
IV. Assuming arguendo that the agreement entered into by and between petitioner
and respondent Lapuz was a mere promise to sell or contract to sell, under which
title to the lots in question did not pass from petitioner to respondent, still the
Honorable Court of Appeals erred in not holding that aforesaid respondent is not
entitled to a new period within which to pay petitioner the balance of P11,434.44
interest due on the purchase price of P12.325.00 of the lots.
V. Assuming arguendo that paragraph 3, Article 1191 of the Civil Code is applicable
and may be availed of by respondent, the Honorable Court of Appeals nonetheless
erred in not declaring that aid respondent has not shown the existence of a just
cause which would authorize said Court to fix a new period within which to pay the
balance aforesaid.
VI. The Honorable Court of Appeals erred in reconsidering its original decision
promulgated on April 23, 1970 which affirmed the decision of the trial court.
The above errors may, however, be synthesized into one issue and that is, whether private
respondent is entitled to the Benefits of the third paragraph of Article 1191, New Civil Code, for the
fixing of period within which he should comply with what is incumbent upon him, and that is to pay
the balance of P11,434,44 with interest thereon at the rate of 8% 1et annum from August 17, 1955
until fully paid since private respondent had paid only P150.00 as deposit and 4 months intallments
amounting to P740.46, or a total of P890.46, the total price of the two lots agreed upon being
P12,325.00.
For his part, petitioner maintains that respondent is not entitled to the Benefits of paragraph 3, Article
1191, NCC and that instead, Article 1592 of the New Civil Code which specifically covers sales of
immovable property and which constitute an exception to the third paragraph of Art. 1191 of aid
Code, is the applicable law to the case at bar.
In resolving petitioner's assignment of errors, it is well that We lay clown the oda provisions and
pertinent rulings of the Supreme Court bearing on the crucial issue of whether Art. 1191, paragraph
3 of the New Civil Code applies to the case at Bar as held by the appellate court and supported by
the private respondent, or Art. 1592 of the same Code which petitioner strongly argues in view of the
peculiar facts and circumstances attending this case. Article 1191, New Civil Code, provides:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one
at the obligors should not comply with hat is incumbent upon him
The injured partner may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
Article 1592 also provides:
Art. 1592. In the sale of immovable property, even though it may have been
stipulated that upon failure to pay the price at the time agreed upon the rescission of
the contract shall of right take place, the vendee may pay, even after the expiration of
the period, as long as no demand for rescission of the contract has been made upon
him either judicially or by a notarial act. After the demand, the court may not grant
him a new term.
The controlling and latest jurisprudence is established and settled in the celebrated case of Luzon
Brokerage Co., Inc. vs. Maritime Building Co., Inc. and Myers Building Co., G.R. No. L-25885,
January 31, 1972, 43 SCRA 93, originally decided in 1972, reiterated in the Resolution on Motion to
Reconsider dated August 18, 1972, 46 SCRA 381 and emphatically repeated in the Resolution on
Second Motion for Reconsideration promulgated November 16, 1978, 86 SCRA 309, which once
more denied Maritimes Second Motion for Reconsideration of October 7, 1972. In the original
decision, the Supreme Court speaking thru Justice J.B.L. Reyes said:
Under the circumstances, the action of Maritime in suspending payments to Myers
Corporation was a breach of contract tainted with fraud or malice (dolo), as
distinguished from mere negligence (culpa), "dolo" being succinctly defined as a
"conscious and intention design to evade the normal fulfillment of existing
obligations" (Capistrano, Civil Code of the Philippines, Vol. 3, page 38), and therefore
incompatible with good faith (Castan, Derecho Civil, 7th Ed., Vol. 3, page 129; Diaz
Pairo, Teoria de Obligaciones, Vol. 1, page 116).
Maritime having acted in bad faith, it was not entitled to ask the court to give it further
time to make payment and thereby erase the default or breach that it had deliberately
incurred. Thus the lower court committed no error in refusing to extend the periods
for payment. To do otherwise would be to sanction a deliberate and reiterated
infringement of the contractual obligations incurred by Maritime, an attitude
repugnant to the stability and obligatory force of contracts.
The decision reiterated the rule pointed out by the Supreme Court in Manuel vs. Rodriguez, 109 Phil.
1, p. 10, that:
In contracts to sell, where ownership is retained by the seller and is not to pass until
the fun payment of the price, such payment, as we said is a positive suspensive
condition, the failure of which is not a breach, casual or serious, but simply an event
that prevented the obligation of the vendor to convey title from acquiring binding i

force in accordance with Article 1117 of the Old Civil Code. To argue that there was
only a casual breach is to proceed from the assumption that the contract is one of
absolute sale, where non-payment is a resolutory condition, which is not the case."
Continuing, the Supreme Court declared:
... appellant overlooks that its contract with appellee Myers s not the ordinary sale
envisaged by Article 1592, transferring ownership simultaneously with the delivery of
the real property sold, but one in which the vendor retained ownership of the
immovable object of the sale, merely undertaking to convey it provided the buyer
strictly complied with the terms of the contract (see paragraph [d], ante page 5). In
suing to recover possession of the building from Maritime appellee Myers is not after
the resolution or setting aside of the contract and the restoration of the parties to the
status quo ante as contemplated by Article 1592, but precisely enforcing the
Provisions of the agreement that it is no longer obligated to part with the ownership
or possession of the property because Maritime failed to comply with the specific
condition precedent, which is to pay the installments as they fell due.
The distinction between contracts of sale and contracts to sell with reserved title has
been recognized by this Court in repeated decisions upholding the power of
promisors under contracts to sell in case of failure of the other party to complete
payment, to extrajudicially terminate the operation of the contract, refuse conveyance
and retain the sums or installments already received, where such rights are
expressly provided for, as in the case at bar.
In the Resolution denying the first Motion for Reconsideration, 46 SCRA 381, the Court again
speaking thru Justice J.B.L. Reyes, reiterated the rule that in a contract to sell, the full payment of
the price through the punctual performance of the monthly payments is a condition precedent to the
execution of the final sale 4nd to the transfer of the property from the owner to the proposed buyer;
so that there will be no actual sale until and unless full payment is made.
The Court further ruled that in seeking to oust Maritime for failure to pay the price as agreed upon,
Myers was not rescinding (or more properly, resolving) the contract but precisely enforcing it
according to its expressed terms. In its suit, Myers was not seeking restitution to it of the ownership
of the thing sold (since it was never disposed of), such restoration being the logical consequence of
the fulfillment of a resolutory condition, expressed or implied (Art. 1190); neither was it seeking a
declaration that its obligation to sell was extinguished. What is sought was a judicial declaration that
because the suspensive condition (full and punctual payment) had not been fulfilled, its obligation to
sell to Maritime never arose or never became effective and, therefore, it (Myers) was entitled to
repossess the property object of the contract, possession being a mere incident to its right of
ownership.
The decision also stressed that "there can be no rescission or resolution of an obligation as yet nonexistent, because the suspensive condition did not happen. Article 1592 of the New Civil Code (Art.
1504 of Old Civil Code) requiring demand by suit or notarial act in case the vendor of realty wants to
rescind does not apply to a contract to sell or promise to sell, where title remains with the vendor
until fulfillment to a positive condition, such as full payment of the price." (Manuel vs, Rodriguez, 109
Phil. 9)
Maritime's Second Motion for Reconsideration was denied in the Resolution of the Court dated
November 16, 1978, 86 SCRA 305, where the governing law and precedents were briefly
summarized in the strong and emphatic language of Justice Teehankee, thus:

(a) The contract between the parties was a contract to sell or conditional sale with
title expressly reserved in the vendor Myers Building Co., Inc. Myers until the
suspensive condition of full and punctual payment of the full price shall have been
met on pain of automatic cancellation of the contract upon failure to pay any of the
monthly installments when due and retention of the sums theretofore paid as rentals.
When the vendee, appellant Maritime, willfully and in bad faith failed since March,
1961 to pay the P5,000. monthly installments notwithstanding that it was
punctually collecting P10,000. monthly rentals from the lessee Luzon Brokerage
Co., Myers was entitled, as it did in law and fact, to enforce the terms of the contract
to sell and to declare the same terminated and cancelled.
(b) Article 1592 (formerly Article 1504) of the new Civil Code is not applicable to such
contracts to self or conditional sales and no error was committed by the trial court in
refusing to extend the periods for payment.
(c) As stressed in the Court's decision, "it is irrelevant whether appellant Maritime's
infringement of its contract was casual or serious" for as pointed out in Manuel vs.
Rodriguez, '(I)n contracts to self. whether ownership is retained by the seller and is
not to pass until the full payment of the price, such payment, as we said, is a positive
suspensive condition, the failure of which is not a breach, casual or serious, but
simply an event that prevented the obligation of the vendor to convey title from
acquiring binding force ...
(d) It should be noted, however, that Maritimes breach was far from casual but a
most serious breach of contract ...
(e) Even if the contract were considered an unconditional sale so that Article 1592 of
the Civil Code could be deemed applicable, Myers' answer to the complaint for
interpleaded in the court below constituted a judicial demand for rescission of the
contract and by the very provision of the cited codal article, 'after the demand, the
court may not grant him a new term for payment; and
(f) Assumming further that Article 1191 of the new Civil Code governing rescission of
reciprocal obligations could be applied (although Article 1592 of the same Code is
controlling since it deals specifically with sales of real property), said article provides
that '(T)he court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period' and there exists to "just cause" as shown above for
the fixing of a further period. ...
Under the first and second assignments of error which petitioner jointly discusses, he argues that the
agreement entered into between him and the respondent is a perfected contract of purchase and
sale within the meaning of Article 1475 of the New Civil Code which provides that "the contract of
sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the
contract and upon the price. From that moment, the parties may reciprocally demand performance,
subject to the provisions of the law governing the form of contract."
Petitioner contends that "(n)othing in the decision of the courts below would show that ownership of
the property remained with plaintiff for so long as the installments have not been fully paid. Which
yields the conclusion that, by the delivery of the lots to defendant, ownership likewise was
transferred to the latter." (Brief for the Petitioner, p. 15) And he concludes that the sale was
consummated by the delivery of the two lots, the subject thereof, by him to the respondent.

Under the findings of facts by the appellate court, it appears that the two lots subject of the
agreement between the parties herein were delivered by the petitioner to the private respondent who
took possession thereof and occupied the same and thereafter built his house thereon, enclosing the
lots with adobe stone walls and barbed wires. But the property being registered under the Land
Registration Act, it is the act of registration of the Deed of Sale which could legally effect the transfer
of title of ownership to the transferee, pursuant to Section 50 of Act 496. (Manuel vs. Rodriguez, et
al., 109 Phil. 1; Buzon vs. Lichauco, 13 Phil. 354; Tuazon vs. Raymundo, 28 Phil. 635: Worcestor vs.
Ocampo, 34 Phil. 646). Hence, We hold that the contract between the petitioner and the respondent
was a contract to sell where the ownership or title is retained by the seller and is not to pass until the
full payment of the price, such payment being a positive suspensive condition and failure of which is
not a breach, casual or serious, but simply an event that prevented the obligation of the vendor to
convey title from acquiring binding force.
In the case at bar, there is no writing or document evidencing the agreement originally entered into
between petitioner and private respondent except the receipt showing the initial deposit of P150.00
as shown in Exh. "A" and the payment of the 4- months installment made by respondent
corresponding to July, 1954 to October, 1954 in the sum of P740.56 as shown in Exh. "B". Neither is
there any writing or document evidencing the modified agreement when the 3 lots were changed to
Lots 4 and 12 with a reduced area of 725 sq. meters, which are corner lots. This absence of a formal
deed of conveyance is a very strong indication that the parties did not intend immediate transfer of
ownership and title, but only a transfer after full payment of the price. Parenthetically, We must say
that the standard printed contracts for the sale of the lots in the Rockville Subdivision on a monthly
installment basis showing the terms and conditions thereof are immaterial to the case at bar since
they have not been signed by either of the parties to this case.
Upon the law and jurisprudence hereinabove cited and considering the nature of the transaction or
agreement between petitioner and respondent which We affirm and sustain to be a contract to sell,
the following resolutions of petitioner's assignment of errors necessarily arise, and so We hold that:
1. The first and second assignments of errors are without merit.
The overwhelming weight of authority culminating in the Luzon Brokerage vs. Maritime cases has
laid down the rule that Article 1592 of the New Civil Code does not apply to a contract to sell where
title remains with the vendor until full payment of the price as in the case at bar. This is the ruling
in Caridad Estates vs. Santero, 71 Phil. 120; Aldea vs. Inquimboy 86 Phil. 1601; Jocon vs. Capitol
Subdivision, Inc., L-6573, Feb. 28, 1955; Miranda vs. Caridad Estates, L-2077 and Aspuria vs.
Caridad Estates, L-2121 Oct. 3, 1950, all reiterated in Manuel vs. Rodriguez, et al. 109 Phil. 1, L13435, July 27, 1960. We agree with the respondent Court of Appeals that Art, 1191 of the New Civil
Code is the applicable provision where the obligee, like petitioner herein, elects to rescind or cancel
his obligation to deliver the ownership of the two lots in question for failure of the respondent to pay
in fun the purchase price on the basis of 120 monthly equal installments, promptly and punctually for
a period of 10 years.
2. We hold that respondent as obligor is not entitled to the benefits of paragraph 3 of Art. 1191, NCC
Having been in default, he is not entitled to the new period of 90 days from entry of judgment within
which to pay petitioner the balance of P11,434.44 with interest due on the purchase price of
P12,325.00 for the two lots.
Respondent a paid P150.00 as deposit under Exh. "A" and P740.56 for the 4-months installments
corresponding to the months of July to October, 1954. The judgment of the lower court and the Court
of Appeals held that respondent was under the obligation to pay the purchase price of the lots m
question on an equal monthly installment basis for a period of ten years, or 120 equal monthly

installments. Beginning November, 1954, respondent began to default in complying with his
obligation and continued to do so for the remaining 116 monthly interest. His refusal to pay further
installments on the purchase price, his insistence that he had the option to pay the purchase price
any time in ten years inspire of the clearness and certainty of his agreement with the petitioner as
evidenced further by the receipt, Exh. "B", his dilatory tactic of refusing to sign the necessary
contract of sale on the pretext that he will sign later when he shall have updated his monthly
payments in arrears but which he never attempted to update, and his failure to deposit or make
available any amount since the execution of Exh "B" on June 28, 1954 up to the present or a period
of 26 years, are all unreasonable and unjustified which altogether manifest clear bad faith and
malice on the part of respondent puzzle making inapplicable and unwarranted the benefits of
paragraph 3, Art. 1191, N.C.C. To allow and grant respondent an additional period for him to pay the
balance of the purchase price, which balance is about 92% of the agreed price, would be tantamount
to excusing his bad faith and sanctioning the deliberate infringement of a contractual obligation that
is repugnant and contrary to the stability, security and obligatory force of contracts. Moreover,
respondent's failure to pay the succeeding 116 monthly installments after paying only 4 monthly
installments is a substantial and material breach on his part, not merely casual, which takes the case
out of the application of the benefits of pa paragraph 3, Art. 1191, N.C.C.
At any rate, the fact that respondent failed to comply with the suspensive condition which is the full
payment of the price through the punctual performance of the monthly payments rendered
petitioner's obligation to sell ineffective and, therefore, petitioner was entitled to repossess the
property object of the contract, possession being a mere incident to his right of ownership (Luzon
Brokerage Co., Inc. vs. Maritime Building Co., Inc., et al. 46 SCRA 381).
3. We further rule that there exists no just cause authorizing the fixing of a new period within which
private respondent may pay the balance of the purchase price. The equitable grounds or
considerations which are the basis of the respondent court in the fixing of an additional period
because respondent had constructed valuable improvements on the land, that he has built his house
on the property worth P45,000.00 and placed adobe stone walls with barbed wires around, do not
warrant the fixing of an additional period. We cannot sanction this claim for equity of the respondent
for to grant the same would place the vendor at the mercy of the vendee who can easily construct
substantial improvements on the land but beyond the capacity of the vendor to reimburse in case he
elects to rescind the contract by reason of the vendee's default or deliberate refusal to pay or
continue paying the purchase price of the land. Under this design, strategem or scheme, the vendee
can cleverly and easily "improve out" the vendor of his land.
More than that, respondent has not been honest, fair and reciprocal with the petitioner, hence it
would not be fair and reasonable to the petitioner to apply a solution that affords greater reciprocity
of rights which the appealed decision tried to effect between the parties. As matters stand,
respondent has been enjoying the possession and occupancy of the land without paying the other
116 monthly installments as they fall due. The scales of justice are already tipped in respondent,s
favor under the amended decision of the respondent court. It is only right that We strive and search
for the application of the law whereby every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and observe honesty and good
faith (Art. 19, New Civil Code)
In the case at bar, respondent has not acted in good faith. With malice and deliberate intent, he has
twisted the clear import of his agreement with the petitioner in order to suit his ends and delay the
fulfillment of his obligation to pay the land he had enjoyed for the last 26 years, more than twice the
period of ten years that he obliged himself to complete payment of the price.

4. Respondent's contention that petitioner has not complied with his obligation to put up the
necessary facilities in the Rockville Subdivision is not sufficient nor does it constitute good reason to
justify the grant of an additional period of 90 days from entry of judgment within which respondent
may pay the balance of the purchase price agreed upon. The Judgment of the appellate court
concedes that petitioner's failure to comply with his obligation to put up the necessary facilities in the
subdivision will not deter him from asking for the rescission of the agreement since his obligation is
not correlative with respondent's obligation to buy the property. Since this is so conceded, then the
right of the petitioner to rescind the agreement upon the happening or in the event that respondent
fails or defaults in any of the monthly installments would be rendered nugatory and ineffective. The
right of rescission would then depend upon an extraneous consideration which the law does not
contemplate.
Besides, at the rate the two lots were sold to respondent with a combined area of 725 sq. meters at
the uniform price of P17.00 per sq. meter making a total price of P12,325.00, it is highly doubtful if
not improbable that aside from his obligation to deliver title and transfer ownership to the respondent
as a reciprocal obligation to that of the respondent in paying the price in full and promptly as the
installments fall due, petitioner would have assumed the additional obligation "to provide the
subdivision with streets ... provide said streets with street pavements concrete curbs and gutters,
fillings as required by regulations, adequate drainage facilities, tree plantings, adequate water
facilities" as required under Ordinance No. 2969 of Quezon City approved on May 11, 1956 (Answer
of Defendant, Record on Appeal, pp. 35-36) which was two years after the agreement in question
was entered intoJune, 1y54.
The fact remains, however, that respondent has not protested to the petitioner nor to the authorities
concerned the alleged failure of petitioner to put up and provide such facilities in the subdivision
because he knew too well that he has paid only the aggregate sum of P890.56 which represents
more or less 7% of the agreed price of P12,325.00 and that he has not paid the real estate taxes
assessed by the government on his house erected on the property under litigation. Neither has
respondent made any allegation in his Answer and in all his pleadings before the court up to the
promulgation of the Resolution dated October 12, 1970 by the Court of Appeals, to the effect that he
was entitled to a new period within which to comply with his obligation, hence the Court could not
proceed to do so unless the Answer is first amended. (Gregorio Araneta, Inc. vs. Philippine Sugar
Estates Development Co., Ltd., G.R. No. L-22558, May 31, 1967, 20 SCRA 330, 335). It is quite
clear that it is already too late in the day for respondent to claim an additional period within which to
comply with his obligation.
Precedents there are in Philippine jurisprudence where the Supreme Court granted the buyer of real
property additional period within which to complete payment of the purchase price on grounds of
equity and justice as in (1) J.M. Tuazon Co., Inc. vs. Javier, 31 SCRA 829 where the vendee
religiously satisfied the monthly installments for eight years and paid a total of P4,134.08 including
interests on the principal obligation of only P3,691.20, the price of the land; after default, the vendee
was willing to pay all arrears, in fact offered the same to the vendor; the court granted an additional
period of 60 days -from receipt of judgment for the vendee to make all installment in arrears plus
interest; (2) in Legarda Hermanos vs. Saldaa, 55 SCRA 324, the Court ruled that where one
purchase, from a subdivision owner two lots and has paid more than the value of one lot, the former
is entitled to a certificate of title to one lot in case of default.
On the other hand there are also cases where rescission was not granted and no new or additional
period was authorized. Thus, in Caridad Estates vs. Santero, 71 Phil. 114, the vendee paid, totalling
P7,590.00 or about 25% of the purchase price of P30,000.00 for the three lots involved and when
the vendor demanded revocation upon the vendee's default two years after, the vendee offered to
pay the arears in check which the vendor refused; and the Court sustained the revocation and
ordered the vendee ousted from the possession of the land. In Ayala y Cia vs. Arcache, 98 Phil. 273,

the total price of the land was P457,404.00 payable in installments; the buyer initially paid
P100,000.00 or about 25% of the agreed price; the Court ordered rescission in view of the
substantial breach and granted no extension to the vendee to comply with his obligation.
The doctrinal rulings that "a slight or casual breach of contract is not a ground for rescission. It must
be so substantial and fundamental to defeat the object of the parties" (Gregorio Araneta Inc. vs.
Tuazon de Paterno, L-2886, August 22, 1962; Villanueva vs. Yulo, L-12985, Dec. 29,1959); that
"where time is not of the essence of t agreement, a slight delay on the part of one party in the
performance of his obligation is not a sufficient ground for the rescission of the agreement"( Biando
vs. Embestro L-11919, July 27, 1959; cases cited in Notes appended to Universal Foods
Corporation vs. Court of Appeals, 33 SCRA 1), convince and persuade Us that in the case at bar
where the breach, delay or default was committed as early as in the payment of the fifth monthly
installment for November, 1954, that such failure continued and persisted the next month and every
month thereafter in 1955, 1956, 1957 and year after year to the end of the ten-year period in 1964
(10 years is respondent's contention) and even to this time, now more than twice as long a time as
the original period without respondent adding, or even offering to add a single centavo to the sum he
had originally paid in 1954 which represents a mere 7% of the total price agreed upon, equity and
justice may not be invoked and applied. One who seeks equity and justice must come to court with
clean hands, which can hardly be said of the private respondent.
One final point, on the supposed substantial improvements erected on the land, respondent's house.
To grant the period to the respondent because of the substantial value of his house is to make the
land an accessory to the house. This is unjust and unconscionable since it is a rule in Our Law that
buildings and constructions are regarded as mere accessories to the land which is the principal,
following the Roman maxim "omne quod solo inadeficatur solo cedit" (Everything that is built on the
soil yields to the soil).
Pursuant to Art. 1191, New Civil Code, petitioner is entitled to rescission with payment of damages
which the trial court and the appellate court, in the latter's original decision, granted in the form of
rental at the rate of P60.00 per month from August, 1955 until respondent shall have actually
vacated the premises, plus P2,000.00 as attorney's fees. We affirm the same to be fair and
reasonable. We also sustain the right of the petitioner to the possession of the land, ordering thereby
respondent to vacate the same and remove his house therefrom.
WHEREFORE, IN VIEW OF THE FOREGOING, the Resolution appealed from dated October 12,
1970 is hereby REVERSED. The decision of the respondent court dated April 23, 1970 is hereby
REINSTATED and AFFIRMED, with costs against private respondent.
SO ORDERED.
Teehankee, Makasiar, Fernandez, De Castro and Melencio-Herrera, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-55665 February 8, 1989
DELTA MOTOR CORPORATION, petitioner,
vs.
EDUARDA SAMSON GENUINO, JACINTO S. GENUINO, Jr., VICTOR S. GENUINO, HECTOR S.
GENUINO, EVELYN S. GENUINO, and The COURT OF APPEALS, respondents.
Alcasid, Villanueva & Associates for petitioner.
Luna, Puruganan, Sison & Ongkiko for respondents.

CORTES, J.:
Petitioner, through this petition for review by certiorari, appeals from the decision of respondent
appellate court in CA-G.R. No. 59848-R entitled "Eduarda Samson Genuino, et al. v. Delta Motor
Corporation" promulgated on October 27, 1980.
The facts are as follows:
Petitioner Delta Motor Corporation (hereinafter referred to as Delta) is a corporation duly organized
and existing under Philippine laws.
On the other hand, private respondents are the owners of an iceplant and cold storage located at
1879 E. Rodriguez Sr. Avenue, Quezon City doing business under the name "Espaa Extension
Iceplant and Cold Storage."
In July 1972, two letter-quotations were submitted by Delta to Hector Genuino offering to sell black
iron pipes. T
The letter dated July 3, 1972 quoted Delta's selling price for 1,200 length of black iron pipes
schedule 40, 2" x 20' including delivery at P66,000.00 with the following terms of payment:
a. 20% of the net contract price or P13,200.00 will be due and payable upon signing
of the contract papers.
b. 20% of the net contract price or P13,200.00 will be due and payable before
commencement of delivery.
c. The balance of 60% of the net contract price or P39,600.00 with 8% financing
charge per annum will be covered by a Promissory Note bearing interest at the rate
of 14% per annum and payable in TWELVE (12) equal monthly installment (sic), the
first of which will become due thirty (30) days after the completion of delivery.
Additional 14% will be charged for all delayed payments. [Exh. "A"; Exh. 1.]

The second letter-quotation dated July 18, 1972 provides for the selling price of 150 lengths of black
iron pipes schedule 40, 1 1/4" x 20' including delivery at P5,400.00 with the following terms of
payment:
a. 50% of the net contract price or P 2,700.00 will be due and payable upon signing
of the contract papers.
b. 50% of the net contract price or P 2,700.00 will be due and payable before
commencement of delivery. [Exh. "C"; Exh. "2".]
Both letter-quotations also contain the following stipulations as to delivery and price offer:
DELIVERY
Ex-stock subject to prior sales.
xxx xxx xxx
Our price offer indicated herein shall remain firm within a period of thirty (30) days
from the date hereof. Any order placed after said period will be subject to our review
and confirmation. [Exh. "A" and "C"; Exhs. "l" and "2".]
Hector Genuino was agreeable to the offers of Delta hence, he manifested his conformity thereto by
signing his name in the space provided on July 17, 1972 and July 24, 1972 for the first and second
letter-quotations, respectively.
It is undisputed that private respondents made initial payments on both contracts for the first
contract, P13,200.00 and, for the second, P2,700.00 for a total sum of P15,900.00 on July 28,
1972 (Exhs. "B" and "D"].
Likewise unquestionable are the following. the non-delivery of the iron pipes by Delta; the nonpayment of the subsequent installments by the Genuinos; and the non-execution by the Genuinos of
the promissory note called for by the first contract.
The evidence presented in the trial court also showed that sometime in July 1972 Delta offered to
deliver the iron pipes but the Genuinos did not accept the offer because the construction of the ice
plant building where the pipes were to be installed was not yet finished.
Almost three years later, on April 15, 1975, Hector Genuino, in behalf of Espaa Extension Ice Plant
and Cold Storage, asked Delta to deliver the iron pipes within thirty (30) days from its receipt of the
request. At the same time private respondents manifested their preparedness to pay the second
installment on both contracts upon notice of Delta's readiness to deliver.
Delta countered that the black iron pipes cannot be delivered on the prices quoted as of July 1972.
The company called the attention of the Genuinos to the stipulation in their two (2) contracts that the
quoted prices were good only within thirty (30) days from date of offer. Whereupon Delta sent new
price quotations to the Genuinos based on its current price of black iron pipes, as follows:
P241,800.00 for 1,200 lengths of black iron pjpes schedule 40, 2" x 20' [Exh. "G-1".]
P17,550.00 for 150 lengths of black iron pipes schedule 40, 1 1/4" x 20' [Exh. "G-2".]

The Genuinos rejected the new quoted prices and instead filed a complaint for specific performance
with damages seeking to compel Delta to deliver the pipes. Delta, in its answer prayed for rescission
of the contracts pursuant to Art. 1191 of the New Civil Code. The case was docketed as Civil Case
No. Q-20120 of the then Court of First Instance of Rizal, Branch XVIII, Quezon City.
After trial the Court of First Instance ruled in favor of Delta,the dispositive portion of its decision
reading as follows:
WHEREFORE, premises considered, judgment is rendered:
1. Declaring the contracts, Annexes "A" and "C" of the complaint rescinded;
2. Ordering defendant to refund to plaintiffs the sum of P15,900.00 delivered by the
latter as downpayments on the aforesaid contracts;
3. Ordering plaintiffs to pay defendant the sum of P10,000.00 as attorney's fees; and,
4. To pay the costs of suit. [CFI Decision, pp. 13-14; Rollo, pp. 53-54.]
On appeal, the Court of Appeals reversed and ordered private respondents to make the payments
specified in "Terms of Payment (b)" of the contracts and to execute the promissory note required
in the first contract and thereafter, Delta should immediately commence delivery of the black iron
pipes.* [CA Decision, p. 20; Rollo, p. 75.]
The Court of Appeals cited two main reasons why it reversed the trial court, namely:
1. As Delta was the one who prepared the contracts and admittedly, it had
knowledge of the fact that the black iron pipes would be used by the Genuinos in
their cold storage plant which was then undergoing construction and therefore, would
require sometime before the Genuinos would require delivery, Delta should have
included in said contracts a deadline for delivery but it did not. As a matter of fact
neither did it insist on delivery when the Genuinos refused to accept its offer of
delivery. [CA Decision, pp. 16-17; Rollo, pp. 71-72.]
2. Delta's refusal to make delivery in 1975 unless the Genuinos pay a price very
much higher than the prices it previously quoted would mean an amendment of the
contracts. It would be too unfair for the plaintiffs if they will be made to bear the
increase in prices of the black iron pipes when they had already paid quite an
amount for said items and defendant had made use of the advance payments. That
would be unjust enrichment on the part of the defendant at the expense of the
plaintiffs and is considered an abominable business practice. [CA Decision, pp. 1819; Rollo, pp. 73-74.]
Respondent court denied Delta's motion for reconsideration hence this petition for review praying for
the reversal of the Court of Appeals decision and affirmance of that of the trial court.
Petitioner argues that its obligation to deliver the goods under both contracts is subject to conditions
required of private respondents as vendees. These conditions are: payment of 20% of the net
contract price or P13,200.00 and execution of a promissory note called for by the first contract; and
payment of 50% of the net contract price or P2,700.00 under the second contract. These, Delta
posits, are suspensive conditions and only upon their performance or compliance would its

obligation to deliver the pipes arise [Petition, pp. 9-12; Rollo, pp. 1720.] Thus, when private
respondents did not perform their obligations; when they refused to accept petitioner's offer to deliver
the goods; and, when it took them three (3) long years before they demanded delivery of the iron
pipes that in the meantime, great and sudden fluctuation in market prices have occurred; Delta is
entitled to rescind the two (2) contracts.
Delta relies on the following provision of law on rescission:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one
of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
In construing Art. 1191, the Supreme Court has stated that, "[r]escission will be ordered only where
the breach complained of is substantial as to defeat the object of the parties in entering into the
agreement. It will not be granted where the breach is slight or casual." [Phil. Amusement
Enterprises, Inc. v. Natividad, G.R. No. L-21876, September 29, 1967, 21 SCRA 284, 290.] Further,
"[t]he question of whether a breach of a contract is substantial depends upon the attendant
circumstances." [Universal Food Corporation v. Court of Appeals, G. R. No. L-29155, May
13,1970,33 SCRA 1, 18].
In the case at bar, the conduct of Delta indicates that the Genuinos' non-performance of its
obligations was not a substantial breach, let alone a breach of contract, as would warrant rescission.
Firstly, it is undisputed that a month after the execution of the two (2) contracts, Delta's offer to
deliver the black iron pipes was rejected by the Genuinos who were "not ready to accept delivery
because the cold storage rooms have not been constructed yet. Plaintiffs (private respondents
herein) were short-funded, and did not have the space to accommodate the pipes they ordered" [CFI
Decision, p. 9; Rollo, p. 49].
Given this answer to its offer, Delta did not do anything. As testified by Crispin Villanueva, manager
of the Technical Service department of petitioner:
Q You stated that you sent a certain Evangelista to the Espaa
Extension and Cold Storage to offer the delivery subject matter of the
contract and then you said that Mr. Evangelista reported (sic) to you
that plaintiff would not accept delivery, is that correct, as a summary
of your statement?
A A Yes, sir.
Q Now, what did you do in the premises (sic)?

A Yes, well, we take the word of Mr. Evangelista. We could not

deliver the said black iron pipes, because as per information the Ice
Plant is not yet finished.
Q Did you not report that fact to ... any other defendant-officials of the
Delta Motor Corporation?
A No.
Q And you did not do anything after that?
A Because taking the word of my Engineer we did not do anything.
[TSN, December 8, 1975, pp. 18-19.]
xxx xxx xxx
And secondly, three (3) years later when the Genuinos offered to make payment Delta did not raise
any argument but merely demanded that the quoted prices be increased. Thus, in its answer to
private respondents' request for delivery of the pipes, Delta countered:
Thank you for your letter dated April 15, 1975, requesting for delivery of Black Iron
pipes;.
We regret to say, however, that we cannot base our price on our proposals dated
July 3 and July 18, 1972 as per the following paragraph quoted on said proposal:
Our price offer indicated herein shall remain firm within a period of
thirty (30) days from the date hereof. Any order placed after said
period will be subject to our review and confirmation.
We are, therefore, enclosing our re-quoted proposal based on our current price.
[Exh. "G".]
Moreover, the power to rescind under Art. 1191 is not absolute. "[T]he act of a party in treating a
contract as cancelled or resolved on account of infractions by the other contracting party must be
made known to the otherand is always provisional, being ever subject to scrutiny and review by the
proper court." [University of the Phils. v. De los Angeles, G. R. No. L-28602, September 29, 1970, 35
SCRA 102, 107; Emphasis supplied.]
In the instant case, Delta made no manifestation whatsoever that it had opted to rescind its contracts
with f-he Genuinos. It only raised rescission as a defense when it was sued for specific performance
by private respondents.
Further, it would be highly inequitable for petitioner Delta to rescind the two (2) contracts considering
the fact that not only does it have in its possession and ownership the black iron pipes, but also the
P15,900.00 down payments private respondents have paid. And if petitioner Delta claims the right to
rescission, at the very least, it should have offered to return the P15,900.00 down payments [See
Art. 1385, Civil Code and Hodges v. Granada, 59 Phil. 429 (1934)].
It is for these same reasons that while there is merit in Delta's claim that the sale is subject to
suspensive conditions, the Court finds that it has, nevertheless, waived performance of these

conditions and opted to go on with the contracts although at a much higher price. Art. 1545 of the
Civil Code provides:
Art. 1545. Where the obligation of either party to a contract of sale is subject to any
condition which is not performed, such party may refuse to proceed with the contract
or he may waived performance of the condition. . . . [Emphasis supplied.]
Finally, Delta cannot ask for increased prices based on the price offer stipulation in the contracts and
in the increase in the cost of goods. Reliance by Delta on the price offer stipulation is misplaced.
Said stipulation makes reference to Delta's price offer as remaining firm for thirty (30) days and
thereafter, will be subject to its review and confirmation. The offers of Delta, however, were accepted
by the private respondents within the thirty (30)-day period. And as stipulated in the two (2) letterquotations, acceptance of the offer gives rise to a contract between the parties:
In the event that this proposal is acceptable to you, please indicate your conformity
by signing the space provided herein below which also serves as a contract of this
proposal. [Exhs. "A" and "C"; Exhs. "1" and "2".]
And as further provided by the Civil Code:
Art. 1319. Consent is manifested by the meeting of the offer and the acceptance
upon the thing and the cause which are to constitute the contract.
Art. 1475. The contract of sale is perfected at the moment there is a meeting of
minds upon thing which is the object of the contract and upon the price.
Thus, the moment private respondents accepted the offer of Delta, the contract of sale between
them was perfected and neither party could change the terms thereof.
Neither could petitioner Delta rely on the fluctuation in the market price of goods to support its claim
for rescission. As testified to by petitioner's Vice-President of Marketing for the Electronics,
Airconditioning and Refrigeration division, Marcelino Caja, the stipulation in the two (2) contracts as
to delivery, ex-stock subject to prior sales,means that "the goods have not been delivered and
that there are no prior commitments other than the sale covered by the contracts.. . once the offer is
accepted, the company has no more option to change the price." [CFI Decision, p. 5; Rollo, p. 45;
Emphasis supplied.] Thus, petitioner cannot claim for higher prices for the black iron pipes due to the
increase in the cost of goods. Based on the foregoing, petitioner Delta and private respondents
Genuinos should comply with the original terms of their contracts.
WHEREFORE, the decision of the Court of Appeals is hereby AFFIRMED.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.

SECOND DIVISION

[G.R. No. 127206. September 12, 2003]

PERLA PALMA GIL, VICENTE HIZON, JR., and ANGEL PALMA

GIL, petitioners, vs. HON. COURT OF APPEALS, HEIRS OF
EMILIO MATULAC, CONSTANCIO MAGLANA, AGAPITO
PACETES & The REGISTER OF DEEDS OF DAVAO
CITY, respondents.
DECISION
CALLEJO, SR., J.:

For review on appeal by certiorari are the Decision of the Court of

Appeals in CA-G.R. CV. No. 43188 promulgated on March 19, 1996, and its
Resolution dated October 17, 1996, denying the petitioners Motion for
Reconsideration of the said decision.
[1]

[2]

The appealed decision affirmed in toto the judgment of the Regional Trial
Court, Davao City, Branch 16, in Civil Case No. 15,356 which dismissed the
complaint of the herein petitioners.
The Antecedents
Concepcion Palma Gil, and her sister, Nieves Palma Gil, married to Angel
Villarica, were the co-owners of a parcel of commercial land with an area of
829 square meters, identified as Lot No. 59-C, covered by Transfer Certificate
of Title (TCT) No. 432 located in Davao City. The spouses Angel and Nieves
Villarica had constructed a two-storey commercial building on the property. On
October 13, 1953, Concepcion filed a complaint against her sister Nieves with
the then Court of First Instance of Davao City, docketed as Civil Case No.
1160 for specific performance, to compel the defendant to cede and deliver to
her an undivided portion of the said property with an area of 256.2 square
meters. After due proceedings, the court rendered judgment on April 7, 1954
in favor of Concepcion, ordering the defendant to deliver to the plaintiff an
undivided portion of the said property with an area of 256.2 square meters:

A la vista de los datos expuestos, el Juzgado dicta sentencia condenando a la

demanda, Nieves Palma Gil de Villarica, cumpla con los terminos del documento
(Exh. A) ordenando a aquella que otogue los documentos necesarios traspasando a
favor de la demandante (CONCEPCION PALMA GIL), 256 metros cuadrados con 20
centimetros del Lote No. 56-C descrito mas particularmente en el Certificado de
Titulo No. 432.
[3]

Nieves appealed to the Court of Appeals which affirmed the assailed

decision. In due course, the decision became final and executory. On motion
of the plaintiff (Concepcion), the court issued a writ of execution. Nieves,
however, refused to execute the requisite deed in favor of her sister. On April
27, 1956, the court issued an order authorizing ex-officio Sheriff Eriberto
Unson to execute the requisite deed of transfer to the plaintiff over an
undivided portion of the property with a total area of 256.2 square meters.
Instead of doing so, the sheriff had the property subdivided into four lots
namely, Lot 59-C-1, with an area of 218 square meters; Lot 59-C-2, with an
area of 38 square meters; Lot 59-C-3, with an area of 14 square meters; and
Lot 59-C-4, with an area of 560 square meters, all covered by a subdivision
plan.
The
sheriff
thereafter
executed
a
Deed
of
Transfer
to Concepcion over Lot 59-C-1 and Lot 59-C-2 with a total area of 256.2
square meters.
On October 24, 1956, Concepcion executed a deed of absolute sale
over Lot 59-C-1 in favor of Iluminada Pacetes. In the said deed, the area
of Lot 59-C-1 appeared as 256 square meters although under the
subdivision plan, the area of the property was only 218 square meters. The
vendee obliged herself to pay the said amount, to wit:
1. The purchase price of P21,600.00 shall be paid as follows: P7,500.00 to be paid
upon the signing of this instrument; and the balance of P14,100.00 to be paid upon the
delivery of the corresponding Certificate of Title in the name of the VENDEE.
[4]

Under the deed of absolute sale, the parties further agreed as follows:
2. That the VENDOR shall, within the period of ONE HUNDRED TWENTY
(120) DAYS, from the signing of this agreement, undertake and work for the issuance
of the corresponding Certificate of Title of the said Lot No. 59-C-1 in her favor with
the proper government office or offices, to the end that the same can be duly
transferred in the name of the herein VENDEE, by virtue thereof.
3. That pending the full and complete payment of the purchase price to the
VENDOR, the VENDEE shall collect and receive any and all rentals and such other

income from the land above-described for her own account and benefit, this right of
the VENDEE to begin from December 1, 1956.
[5]

In the meantime, Nieves filed a motion in Civil Case No. 1160 to compel
the sheriff to report on his compliance with the courts Order dated April 27,
1956. The motion was denied. A motion for reconsideration of the denial met
the same fate. Nieves appealed to the Court of Appeals, which appeal was
docketed as CA-G.R. No. 22438-R.
In a parallel development, Concepcion filed a complaint for unlawful
detainer against the spouses Angel and Nieves Villarica with the Municipal
Trial Court docketed as Civil Case No. 2246. On October 4, 1956, the court
rendered judgment in favor of the plaintiff and against the defendants, the
decretal portion of which reads as follows:
From the foregoing, it is indeed evident and clear that the herein defendants have been
unlawfully withholding possession of the land from the plaintiff, and hereby finds in
favor of the plaintiff, and against the defendants, ordering the latter to vacate the
premises described in the complaint, removing whatever improvements they have
constructed thereon. The defendants are further judged to pay the plaintiff the amount
of ONE HUNDRED FIFTY PESOS (P150.00) a month from the time of the filing of
this complaint until the lot is finally vacated in concept of rentals, deprived of the
plaintiff due to the unlawful possession of the defendants, and to pay the costs of this
suit.
[6]

The decision became final and executory but the plaintiff did not file any
motion for a writ of execution.
The spouses Angel and Nieves Villarica filed a complaint on October 24,
1956 against the sheriff and Concepcion with the Court of First Instance of
Davao City, docketed as Civil Case No. 2151 for the nullification of the deed
of transfer executed by the sheriff.
[7]

On December 21, 1956, Iluminada Pacetes filed a motion to intervene in

Civil Case No. 2151, as vendee of the property subject of the case, which was
granted by the court. She then filed a motion to dismiss the complaint. The
court granted the motion. Nieves appealed to the Court of Appeals which
appeal was docketed as CA-G.R. No. 22008-R. Nieves appeals in Civil
Cases Nos. 1160 and 2151 were certified by the CA to this Court, docketed as
G.R. No. L-15799 and G.R. No. L-15801.
On the basis of the deed of transfer executed by Sheriff Iriberto A. Unson,
the Register of Deeds issued TCT No. 7450 over Lot 59-C-1 and 59-C-2
on July 17, 1957 in the name ofConcepcion, with a total area of 256.2 square

meters. However, the latter failed to transfer title to the property to and under
the name of Iluminada Pacetes. Consequently, the latter did not remit the
balance of the purchase price of the property to Concepcion.
In the interim, the spouses Angel and Nieves Villarica executed a real
estate mortgage over Lot 59-C-4 in favor of Prudential Bank as security for a
loan. On August 4, 1959,Concepcion died intestate and was survived by
Nieves Villarica and her nephews and nieces. Iluminada filed a motion in Civil
Case No. 1160 for her substitution as party-plaintiff in lieu of the
deceased Concepcion. On August 2, 1961, the court issued an order granting
the motion.
On August 31, 1961, this Court rendered judgment in G.R. Nos. L-15799
and L-15801 setting aside the deed of transfer executed by the sheriff in favor
of Concepcion Palma Gil, and remanding the records to the trial court for
further proceedings. In compliance with the Decision of this Court in G.R. No.
L-15801, the trial court conducted further proceedings in Civil Case No. 1160
and discovered that the defendant had mortgaged Lot 59-C-4 to the
Prudential Bank. Consequently, the court issued an order on February 17,
1964, declaring that the defendant had waived the benefits of the Decision of
the Court on August 31, 1961 in G.R. No. L-15801; thus, the conveyance of
the property made by Concepcion in favor of Iluminada onOctober 24,
1956 must stand. Nieves filed a motion for the reconsideration of the said
order but the court denied the same in an Order dated February 29, 1964.
Nieves appealed the order to the CA which dismissed the appeal for her
failure to file a record on appeal. Nieves filed a petition for review with this
Court docketed as G.R. No. L-28363.
[8]

More than five years having elapsed without the decision in Civil Case No.
2246 being enforced, Iluminada filed a complaint docketed as Civil Case No.
4413 in the Court of First Instance of Davao City, for the revival and execution
of the decision of the Municipal Trial Court in Civil Case No. 2246 (the
unlawful detainer case). The plaintiff therein averred that, asConcepcions
successor-in-interest, she acquired the right of action to enforce the decision
in Civil Case No. 2246. The defendants, on the other hand, averred
that Iluminada had not yet paid the balance of the purchase price of Lot 59-C1; hence, she had not acquired title over the lot and the right to evict the
defendant. The deed of absolute sale executed by Concepcionin favor of the
plaintiff was an executory, not an executed deed. On January 26, 1965, the
court rendered judgment in favor of the defendants and dismissed the
complaint. The decretal portion reads:

IN VIEW OF THE FOREGOING, the Court believes that the plaintiff herein has not
been properly and legally subrogated to the rights and action of deceased Concepcion
Palma Gil and, hence, for these reasons the Court dismisses this case without
pronouncement as to costs.
The counterclaim is also hereby ordered dismissed.

[9]

On March 16, 1966, Iluminada Pacetes and Agapito Pacetes executed a

deed of absolute sale over Lot 59-C-1 and Lot 59-C-2 in favor of Constancio
B. Maglana for P110,000.00, covered by TCT No. 7450. The spousesvendors undertook to secure title over the lots under the name of the vendee
within ninety days.
[10]

On May 15, 1974, this Court denied the petition for certiorari filed by
Nieves in G.R. No. L-28363. The Court, in part, ruled:
[11]

But while the issue at bar exclusively involves the timeliness of the appeal of the
petitioners to the Court of Appeals, this Court has nonetheless examined and analyzed
the substantive aspects of this case and is satisfied that the ORDERS of the trial court
complained of are morally just.
Accordingly, the instant appeal is dismissed and the resolution of the Court of
Appeals dated July 31, 1967 and its resolution dated October 18, 1967 are affirmed.
[12]

The decision of the Court became final and executory.

On May 5, 1975, the spouses Agapito and Iluminada Pacetes filed a
complaint against Nieves in the Court of First Instance of Davao City,
docketed as Civil Case No. 8836 for the recovery of possession of Lot 59-C-1
and Lot 59-C-2. The Pacetes spouses claimed that Lot 59-C-2 was included in
TCT No. 7450 under the name of Concepcion. The spouses prayed that
judgment be rendered in their favor after due proceedings thus:
PRAYER
PREMISES CONSIDERED, it is most respectfully prayed that:
1.
a.

During the pendency of this case, Defendant be ordered:

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

b.
2.

To demolish her aforesaid building of strong materials and vacate the

premises of Lot 59-C-1 and Lot 59-C-2.
After hearing, Defendant be ordered to:

a.

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

b.

Pay Plaintiffs moral and exemplary damages in such amount as the

Honorable Court may fix considering the facts and the law;

c.

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

trial, and

d.

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

3.

OTHER RELIEFS consonant with justice and equity are prayed for.

[13]

On May 10, 1977, Nieves Villarica executed a lease agreement with

Virginia Jorge and Anita Vergara over Lots 59-C-1 and 59-C-2. The lessees
took actual possession of the leased property.
In their Answer to the complaint in Civil Case No. 8836, the defendants
averred, by way of defense, that the complaint was barred by the decision of
the CFI in Civil Case No. 4413, which ruled that the Deed of Absolute Sale
executed by Concepcion in favor of Iluminada was merely an executory, but
not an executed contract. After the plaintiffs had rested their case, the
defendants filed a motion to dismiss (demurrer to evidence). On October 29,
1975, the court issued an order dismissing the complaint on the ground that
the action was barred by the decision of the court in Civil Case No.
4413. Thus, Virginia Jorge and Anita Vergara continued to be in physical
possession of the property.
[14]

In the meantime, on August 8, 1977, Iluminada consigned with the court in

Civil Case No. 1160 the amount of P11,983.00 only as payment of the
purchase price of the property. Iluminada was issued receipts for the
amount. As successor-in-interest of Concepcion, she likewise filed a motion
for execution in Civil Case No. 1160 for the eviction of the defendant Nieves
Villarica and all those acting for and in her behalf. The court issued an order
on August 19, 1977 granting the motion. The defendants filed a motion for
[15]

reconsideration of the order claiming that Iluminada was not a party to the
case which the court denied on September 2, 1977. The defendant filed
another motion for reconsideration which was likewise denied onSeptember
16, 1977. The defendant filed a petition for certiorari with the Court of
Appeals docketed as CA-G.R. No. 62957-R, which petition was dismissed
on August 26, 1980. The CA ruled that Iluminada Pacetes was the real partyin-interest as the vendee of the property. The defendant filed a petition with
this Court docketed as G.R. No. L-56399.
In the meantime, Iluminada filed a petition with the RTC docketed as
Miscellaneous Case No. 4715 for the issuance of an owners duplicate of TCT
No. 7450. On March 22, 1978, the court granted the petition and ordered the
Register of Deeds to issue an owners duplicate of the said title under the
name of Concepcion Gil. Iluminada presented the said order and the deed of
absolute sale executed by Concepcion in her favor. On May 9, 1978, the
Register of Deeds issued TCT No. 61514 over Lot 59-C-1, with an area of 218
square meters, in the name of Iluminada Pacetes.
[16]

On April 21, 1980, TCT No. 73412 was issued by the Register of Deeds of
Davao City in favor of Constancio Maglana over Lot 59-C-1 only. The next
day, Constancio Maglana executed a deed of sale not only over Lot 59-C-1
but also Lot 59-C-2, in favor of Emilio Matulac for the purchase price
of P150,000.00. On the basis of the said deed, the Register of Deeds issued
TCT No. 80631 to and under the name of Emilio Matulac over the two lots.
[17]

[18]

In the meantime, Angel Villarica had died on April 20, 1974. On July 7,
1981, his heirs, including his widow Nieves, executed an Extra-Judicial
Settlement of Estate of Deceased in which the latter waived, ceded and
transferred to her children Teresita Magpantay, Antero P.G. Villarica, Zenaida
V. Alovera, Emperatriz V. Garcia, Napoleon P.G. Villarica and Rupendo P.G.
Villarica her rights and interests over the property covered by TCT No. 7450.
[19]

On January 13, 1982, this Court affirmed the resolution of the Court of
Appeals, in CA-G.R. No. 62975-R and dismissed the petition for certiorari in
G.R. No. L-56399, thus, paving the way for the execution of the decision of
the trial court in Civil Case No. 1160, per its Order dated August 19, 1977.
Emilio Matulac filed a motion for the issuance of a writ of execution. The Court
granted the motion on February 18, 1982. Nieves filed a motion for the
reconsideration of the order which the court denied in its Order dated March
17, 1982. Virginia Jorge and Anita Vergara, the lessees, filed a motion for
reconsideration but the court denied the motion. Nonetheless, the lessees
were allowed to stay in the property until April 9, 1982. However, the lessees
refused to vacate the property after said date.

On April 10, 1982, Emilio Matulac filed a motion in Civil Case No. 1160 for
the issuance of a writ of execution and an order of demolition. On April 20,
1982, the trial court issued an order granting the motion for a writ of execution
on April 30, 1982. The court also issued a special order for the demolition of
the buildings on the property. The buildings on the property, including the
properties owned by Virginia Jorge and Anita Vergara, were demolished
on June 14, 1982. Emilio Matulac thereafter commenced the construction of a
building thereon. The defendant Nieves Villarica, in the meantime, filed a
motion in Civil Case No. 1160 to annul the proceedings, including the writ of
execution issued by the court, and the issuance of a restraining order.
For their part, Virginia Jorge and Anita Vergara filed a petition
for certiorari with this Court docketed as G.R. No. L-60690 for the nullification
of the aforesaid orders and the writ of demolition issued by the trial court in
Civil Case No. 1160.
Three of the surviving heirs of Concepcion Gil, namely, Perla Palma Gil,
Vicente Hizon, Jr. and Angel Palma Gil, through their first cousin, Atty. Vicente
Villarica, one of Nieves Villaricas children, filed on June 17, 1982, a complaint
against Emilio Matulac, Constancio Maglana, Agapito Pacetes, and the
Register of Deeds, with the Court of First Instance, docketed as Civil Case
No. 15,356 for the cancellation of the deed of sale executed by Concepcion in
favor of Iliminada Pacetes; the deed of sale executed by the latter in favor of
Constancio Maglana; the deed of sale executed by the latter in favor of Emilio
Matulac, as well as TCT Nos. 61514, 73412 and 80631 under the respective
names of the vendees.
The plaintiffs alleged, inter alia, that the deed of absolute sale executed by
Concepcion in favor of Iluminada over Lots 59-C-1 and 59-C-2 was a contract
to sell, an executory contract, as declared by the Court of First Instance in
Civil Cases Nos. 4413 and 8836, and not an executed contract; the defendant
spouses Agapito and Iluminada Pacetes failed to pay the balance of the
purchase price of the property during the lifetime of Concepcion; hence, what
was embodied in the said deed was not fulfilled by the vendee. Consequently,
the sale is null and void.
The plaintiffs prayed for the issuance of a temporary restraining order and
a writ of preliminary injunction to enjoin the defendant Emilio Matulac from
continuing with the construction of a building on the property. The plaintiffs
likewise prayed that after due proceedings, judgment be rendered in their
favor and against the defendants, thus:
WHEREFORE, in view of the aforecited reasons it is most respectfully prayed that:

1)
An order be rendered immediately enjoining defendant Matulac
from doing further work in the construction of the building and enjoining
him from entering the premises and the land subject of this complaint and
after trial making the injunction above-mentioned permanent, ordering
the removal of any structure and other construction within the plaintiffs
above-described property and thereafter, upon said defendants failure to
do so authorizing plaintiffs to order said removal at defendants expense.
2)

Judgment be rendered ordering:

a. Defendant Register of Deeds to cancel TCT No. T-61514, T-73412 and

T-80631 and issued (sic) a new Transfer Certificate of Title in the name
of the above-mentioned heirs of the late Concepcion Palma Gil nullifying
the deeds of sale, Annexes B, C, and D hereof;
b. Defendants Pacetes, Maglana and Matulac jointly and solidarily liable
to plaintiffs for moral and exemplary damages as may be granted by this
Honorable Court and the amount of P25,000.00 as attorneys fees; and
c. Litigation expenses and other reliefs as may be justified under this
case.
[20]

In his answer to the complaint, defendant Emilio Matulac interposed the

following special and affirmative defenses: (a) he is the lawful owner of the
property; (b) the action is barred by the Decision of this Court in G.R. No. L56399; (c) the plaintiffs are estopped from assailing the sale to him of the
property; and (d) he is a purchaser in good faith.
On November 29, 1982, the court issued an order in Civil Case No. 1160,
denying the motion for the nullification of the proceedings and for a writ of
preliminary injunction. Nieves filed a motion for reconsideration of the order.
On February 18, 1983, the court issued an order denying the motion. Nieves
filed a petition with the Court of Appeals for the nullification of the same.
In the meantime, Emilio Matulac died intestate and was substituted by his
heirs Sonia Matulac, Josephine Matulac and Gregorio Matulac. A petition
was filed with the RTC of Davao City for the settlement of his estate docketed
as SP-No. 2747. The Court appointed Sonia Matulac as administratrix of the
estate.
[21]

The CA rendered a decision granting the petition and ordering the trial
court to conduct further proceedings to implement the August 19, 1977 Order.

Sonia Matulac filed a petition for review on certiorari with this Court docketed
as G.R. No. 85538 for the nullification of the decision of the CA.
On November 24, 1989, this Court rendered a Decision dismissing the
petition in G.R. No. L-60690. This Court said:
When We dismissed on September 16, 1974, the petition for certiorari filed by
defendants questioning the orders, dated December 7, 1961 and December 17, 1964,
in effect We had confirmed the sale by plaintiff in Civil case No. 1160, Concepcion
Palma Gil, of Lot 59-C-1 and 59-C-2 to Illuminada Pacetes and affirmed the ruling of
the trial court that defendants had waived the benefit of Our Resolution rendered on
August 31, 1961.
[22]

Meanwhile, one of the plaintiffs, Perla Palma Gil in Civil Case No. 15,356,
was appointed by the court as administratrix of the estate
of Concepcion on December 29, 1989, and filed in the said case a motion to
intervene as plaintiff in her capacity as administratrix in behalf of all the heirs
of Concepcion. The heirs of Emilio Matulac opposed the motion considering
that they, and not the estate of Concepcion, owned the subject property; thus
the claim of the plaintiff should be filed in SP-No. 2747. On April 7, 1990, the
said motion was denied by the trial court. The said court declared:
[23]

[24]

[25]

Being already a plaintiff together with the other plaintiffs in thise (sic) case, said
intervention by plaintiff Perla Palma Gil is not absolutely necessary and imperative. It
would only delay the early disposition of the case if allowed.
On January 8, 1990, this Court dismissed the petition in G.R. No. 85538.
The petitioners filed a motion for reconsideration and on July 2, 1992, this
Court granted the motion and reversed the decision of the CA. This Court
ruled in the said case as follows:
When Concepcion Palma Gil, plaintiff in Civil Case No. 1160 sold the land in
question to Iluminada Pacetes on October 24, 1956, the latter became the new owner
of the property. By virtue of the order of substitution issued by the court, said new
owner (Pacetes) became a formal party---the party plaintiff. As the new party
plaintiff, Pacetes had the right to move for the issuance of a writ of execution, which
was correctly granted by the trial court in the questioned Order dated August 19,
1977.
The subsequent transfers of the property from Pacetes to Maglana, and then from
Maglana to herein movant Matulac, was acquired pendente lite. The latter (Matulac)
as the latest owner of the property, was, as aptly put by the trial court, subrogated to

all the rights and obligations of Pacetes. He is thus the party who now has a
substantial interest in the property. Matulac is a real party-in- interest subrogated to all
the rights of Iluminada Pacetes, including the right to the issuance of a writ of
execution in his name. Hence, the questioned orders of the lower court
dated November 29, 1982 and February 18, 1983 as well as the Writ of Possession
issued pursuant to the aforementioned orders are valid. They do not in any way run
counter to the order of the lower court dated August 19, 1977, which granted the
motion for execution filed by Pacetes, who, as earlier pointed out, was succeeded in
all his rights and interests, by herein petitioner, Matulac.
Although the dispositive portion of the judgment rendered in Civil Case No. 1160 did
not award the parties their respective shares in the property, the power of the court to
issue the order of execution cannot be limited to what is stated in the dispositive
portion of the judgment. As held in Paylago vs. Nicolas (189 SCRA 728 [1990]), the
body of the decision must be consulted in case of ambiguity in the dispositive
portion. Hence, in Jorge vs. Consolacion (supra), we ruled that the execution of the
judgment cannot be limited to its dispositive portion, considering the continued failure
of the defendant Nieves Palma Gil-Villarica, to comply with what was required of her
in the judgment. Respondents deprived petitioner Concepcion Palma Gil and her
successors-in-interest of their legal right to possess the land. (Underscoring supplied)
[26]

On June 11, 1993, the trial court rendered judgment in Civil Case No.
15,356 in favor of the defendants. The trial court ruled that this Court had
affirmed, in G.R. No. 85538 and G.R. No. L-60690, the sales of the property
from Concepcion Palma Gil to Iluminada Pacetes, then to Constancio
Maglana and to Emilio Matulac; hence, the trial court was barred by the
rulings of this Court. The plaintiffs appealed to the CA with the following
assignment of errors:
I.

The trial court erred in not holding that Iluminada Pacetes had no right
to sell or transfer the two (2) parcels of land to Constancio Maglana;

II.

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

III.
IV.

That the trial court erred in dismissing the complaint;

That the trial court erred in not ordering the cancellation of transfer
Certificate of Title No. T-80631 in the name of Emilio Matulac and the
issuance of a new title in the name of Concepcion Palma Gil;

V.

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

In the meantime, on June 29, 1994, the estate of Emilio Matulac executed
a deed of sale of real estate in which the estate sold Lots 59-C-1 and 59-C-2
and the building thereon to the Prudential Education Plan, Inc.
for P7,000,000.00. On March 19, 1996, the CA rendered a decision affirming
the decision assailed therein and dismissing the appeal. The CA ruled that the
deed of absolute sale executed by Concepcion in favor of Iluminada Pacetes
was a deed of absolute sale over Lots 59-C-1 and 59-C-2, under which the
ownership over the property subject thereof was transferred to the vendee.
Moreover, the validity of the sales of the subject lots by Concepcion to
Iluminada, by the latter to Constancio Maglana, and by the latter to Emilio
Matulac, had been confirmed by this Court in G.R. No. L-60690 and G.R. No.
85538. Although Iluminada paid the balance of the purchase price of the
property only on August 8, 1977, the payment was still timely, in light of
Article 1592 of the New Civil Code. Besides, the property had already been
sold to the respondents Constancio Maglana and Emilio Matulac.
[28]

The appellants, now petitioners in this case, assert that private

respondents Agapito and Iluminada Pacetes failed to pay the balance of the
purchase price in the amount ofP14,100.00. They did consign and deposit the
amount of P11,983.00, but only on August 8, 1977, twenty one years from the
execution of the Deed of Absolute Sale in favor of the said spouses, without
the latter instituting an action for the cancellation of their
obligation. According to the petitioners, the consignation made by Iluminada
Pacetes of the amount did not produce any legal effect. Furthermore, private
respondents Constancio Maglana and Emilio Matulac were not purchasers in
good faith because at the time they purchased the respective properties, the
two-storey building constructed by the spouses Angel and Nieves Villarica on
the said property was still existing. Hence, the decision of the CA should be
reversed and set aside.
In their Comment on the petition, private respondents Constancio Maglana
and Agapito Pacetes averred that the action of the petitioners in the court a
quo was barred by the Decision of this Court in G.R. No. L-60690
on November 24, 1989.
THE RULING OF THE COURT
The petition is denied due course.

We note that the petitioners failed to implead all the compulsory heirs of
the deceased Concepcion Gil in their complaint. When she died intestate,
Concepcion Gil, a spinster, was survived by her sister Nieves, and her
nephews and nieces, three of whom are the petitioners herein.
Upon Concepcions demise, all her rights and interests over her
properties, and the rights and obligations under the Deed of Absolute Sale
executed in favor of Iluminada Pacetes, were transmitted to her sister, and her
nephews and nieces by way of succession, a mode of acquiring the
property, rights and obligation of the decedent to the extent of the value of the
inheritance of the heirs. The heirs stepped into the shoes of the decedent
upon the latters death.
[29]

[30]

In their complaint, the petitioners alleged that:

7. That upon the death of the late Concepcion Palma Gil, her heirs namely: A.
Children of the deceased Pilar Palma Gil Rodriguez; B. Children of the deceased
Asuncion Palma Gil Hizon one of whom is plaintiff Vicente Hizon, Jr.; C. Nieves
Palma Gil Villarica; D. David Palma Gil one of whom is plaintiff Angel Palma Gil; E.
Perla Palma Gil; and F. Children of the deceased Jose Palma Gil, ipso facto became
co-owners of the said subject property by operation of law;
[31]

When she testified, petitioner Palma Gil stated that:

ATTY. GALLARDO:
With the Courts permission.
Q

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

Yes, sir.

Now, aside from these 3 plaintiffs who are supposed to be the heirs of the late
Concepcion Palma Gil, there are also other heirs who were not included as
plaintiffs in this case?

Yes, because that time when they demolished the building and I accompanied
Atty. Villarica at the site where they had the demolition, we found out that during
the confrontation that we have to hurry and file the case right away. So we were
not able to contact all the heirs and I have contacted . . .since 3 of us were there
during the demolition, so we decided that I will be one, and Angel Palma Gil was
also there and also Vicente Hizon Jr. whom I contacted at the Apo View Hotel and
I contacted also Julian Rodriguez, another cousin thru telephone and he told us to
go ahead and file the case. We cannot get all the heirs. We cannot gather all of
them and we will have a hard time asking them to sign, so we just filed the case.

You are telling the court that the other heirs were not included because they were
not available to sign the complaint?

They were not there during the demolition.

When was the case filed?

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

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

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

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

Since June 16, 1982 up to the present the other heirs did not do anything to be
included in the complaint?

ATTY. QUITAIN:
The best evidence would be the motion for intervention and it would seem that
compaero is contending that there is a need to include all heirs. Under the civil
law on property even one co-owner may file a case.[32]

Although the petitioners sought leave from the trial court to amend their
complaint to implead the intestate estate of the deceased Concepcion Gil
through her administratrix Perla Palma Gil, as party plaintiff, the trial court
denied the petitioners plea. The petitioners manifested to the trial court that
they would assign the denial of their plea as one of the assigned errors in
case of appeal to the CA. They failed to do so. The petitioners were duty
bound to implead all their cousins as parties-plaintiffs; otherwise, the trial court
could not validly grant relief as to the present parties and as to those who
were not impleaded.
[33]

Being indispensable parties, the absence of the surviving sister, nephews

and nieces of the decedent in the complaint as parties-plaintiffs, and in this
case, as parties-petitioners, renders all subsequent actions of the trial court
null and void for want of authority to act, not only as to the absent parties, but
even as to those present. Hence, the petition at bar should be dismissed.
[34]

Even if we were to brush aside this procedural lapse and delve into the
merits of the case, a denial in due course is inevitable.
Article 1191 in tandem with Article 1592 of the New Civil Code are
central to the issues at bar. Under the last paragraph of Article 1169 of the
New Civil Code, in reciprocal obligations, neither party incurs in delay if the
other does not comply or is not ready to comply in a proper manner with what
is incumbent upon him. From the moment one of the parties fulfills his
obligation, delay in the other begins. Thus, reciprocal obligations are to be
performed simultaneously so that the performance of one is conditioned upon
the simultaneous fulfillment of the other. The right of rescission of a party to
[35]

[36]

[37]

an obligation under Article 1191 of the New Civil Code is predicated on a

breach of faith by the other party that violates the reciprocity between them.
[38]

That the deed of absolute sale executed by Concepcion Gil in favor of

Iluminada Pacetes is an executory contract and not an executed contract is a
settled matter. In a perfected contract of sale of realty, the right to rescind the
said contract depends upon the fulfillment or non-fulfillment of the prescribed
condition. We ruled that the condition pertains in reality to the compliance by
one party of an undertaking the fulfillment of which would give rise to the
demandability of the reciprocal obligation pertaining to the other party. The
reciprocal obligation envisaged would normally be, in the case of the vendee,
the payment by the vendee of the agreed purchase price and in the case of
the vendor, the fulfillment of certain express warranties.
[39]

[40]

In another case, we ruled that the non-payment of the purchase price of

property constitutes a very good reason to rescind a sale for it violates the
very essence of the contract of sale. In Central Bank of the Philippines v.
Bichara, we held that the non-payment of the purchase price of property is a
resolutory condition for which the remedy is either rescission or specific
performance under Article 1191 of the New Civil Code. This is true for
reciprocal obligations where the obligation is a resolutory condition of the
other. The vendee is entitled to retain the purchase price or a part of the
purchase price of realty if the vendor fails to perform any essential obligation
of the contract. Such right is premised on the general principles of reciprocal
obligations.
[41]

[42]

[43]

In this case, Concepcion Gil sold Lot 59-C-1 to Iluminada Pacetes

for P21,600.00 payable as follows:
1. The purchase price of P21,600.00 shall be paid as follows: P7,500.00, to be paid
upon the signing of this instrument; and the balance of P14,100.00, to be paid upon
the delivery of the corresponding Certificate of Title in the name of the VENDEE.
Concepcion Gil obliged herself to transfer title over the property to and
under the name of the vendee within 120 days from the execution of the deed.
2. That the VENDOR shall, within the period of ONE HUNDRED TWENTY (120)
DAYS, from the signing of this agreement, undertake and work for the issuance of the
corresponding Certificate of Title of the said Lot No. 59-C-1 in her favor with the
proper government office or offices, to the end that the same can be duly transferred
in the name of the herein VENDEE, by virtue thereof.

3. That pending the full and complete payment of the purchase price to the VENDOR,
the VENDEE shall collect and receive any and all rentals and such other income from
the land above-described for her own account and benefit, this right of the VENDEE
to begin from December 1, 1956.
That it is further stipulated that this contract shall be binding upon the heirs, executors
and administrators of the respective parties hereof.
And I, CONCEPCION PALMA GIL, with all the personal circumstances abovestated, hereby confirm all the terms and conditions stipulated in this instrument.

[44]

The vendee paid the downpayment of P7,500.00. By the terms of the

contract, the obligation of the vendee to pay the balance of the purchase price
ensued only upon the issuance of the certificate of title by the Register of
Deeds over the property sold to and under the name of the vendee, and the
delivery thereof by the vendor Concepcion Gil to the latter. Concepcionfailed
to secure a certificate of title over the property. When she died intestate
on August 4, 1959, her obligation to deliver the said title to the vendee
devolved upon her heirs, including the petitioners. The said heirs, including
the petitioners failed to do so, despite the lapse of eighteen years
since Concepcions death.
Iluminada was not yet obliged on August 8, 1977 to pay the balance of the
purchase price of the property, but as a sign of good faith, she nevertheless
consigned the amount ofP11,983.00, part of the balance of the purchase price
of P14,000.00, with the court in Civil Case No. 1160. The court accepted the
consignation and she was issued receipts therefor. Still, the heirs of
Concepcion Gil, including the petitioners, failed to deliver the said title to the
vendee. Iluminada was compelled to file, at her expense, a petition with the
RTC docketed as Miscellaneous Case No. 4715 for the issuance of an
owners duplicate of TCT No. 7450 covering the property sold which was
granted by the court on March 22, 1978. It was only on May 9, 1978 that
Iluminada managed to secure TCT No. 61514 over the property under her
name. Upon the failure of the heirs to comply with the decedents prestation,
Iluminada Pacetes was impelled to resort to legal means to protect her rights
and interests.
The petitioners, as successors-in-interest of the vendor, are not the injured
parties entitled to a rescission of the deed of absolute sale. It was
Concepcions heirs, including the petitioners, who were obliged to deliver to
the vendee a certificate of title over the property under the latters name, free
from all liens and encumbrances within 120 days from the execution of the

deed of absolute sale on October 24, 1956, but had failed to comply with the
obligation.
The consignation by the vendee of the purchase price of the property is
sufficient to defeat the right of the petitioners to demand for a rescission of the
said deed of absolute sale.
[45]

It bears stressing that when the vendee consigned part of the purchase
price with the Court and secured title over the property in her name, the heirs
of Concepcion, including the petitioners, had not yet sent any notarial demand
for the rescission of the deed of absolute sale to the vendee, or filed any
action for the rescission of the said deed with the appropriate court.
Although the vendee consigned with the Court only the amount
of P11,983.00, P2,017.00 short of the purchase price of P14,000.00, it cannot
be claimed that Concepcion was an unpaid seller because under the deed of
sale, she was still obligated to transfer the property in the name of the vendee,
which she failed to do so. According to Article 1167 of the New Civil Code:
Art. 1167. If a person obliged to do something fails to do it, the same shall be
executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor of the
obligation. Furthermore, it may be decreed that what has been poorly done be undone.
(1098)
The vendee (Iluminada) had to obtain the owners duplicate of TCT No.
7450 and thereafter secure its transfer in her name. Pursuant to Article 1167,
the expenses incurred by the vendee should be charged against the amount
of P2,617.00 due to the heirs of Concepcion Gil as the vendors successorsin-interest.
In sum, the decision of the CA affirming the decision of the RTC
dismissing the complaint of the petitioners is affirmed.
IN LIGHT OF ALL THE FOREGOING, the petition for review
is DENIED for lack of merit.
SO ORDERED.
Bellosillo, (Chairman), Quisumbing, and Tinga, JJ., concur.
Austria-Martinez, J., no part, concurred in CA decision.

SECOND DIVISION

[G.R. No. 135528. July 14, 2004]

SPOUSES
ORLANDO
A.
RAYOS
and
MERCEDES
T.
RAYOS, petitioners, vs. THE COURT OF APPEALS and
SPOUSES ROGELIO and VENUS MIRANDA, respondents.
DECISION
CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision[1] of the Court of Appeals[2] in
CA-G.R. CV No. 46727 which affirmed the Decision[3] of the Regional Trial Court of
Makati, Branch 62, in Civil Case No. 15639 for specific performance and damages, and
Civil Case No. 15984 for sum of money and damages.
The two (2) cases stemmed from the following antecedent facts:
On December 24, 1985, petitioner Orlando A. Rayos, a practicing lawyer, and his
wife, petitioner Mercedes T. Rayos, secured a short-term loan from the Philippine
Savings Bank (PSB) payable within a period of one (1) year in quarterly installments
of P29,190.28, the first quarterly payment to start on March 24, 1986. The loan was
evidenced by a promissory note which the petitioners executed on December 24,
1985.[4] To secure the payment of the loan, the petitioners-spouses executed, on the
same date, a Real Estate Mortgage over their property covered by Transfer Certificate
of Title (TCT) No. 100156 located in Las Pias, Metro Manila.[5]
On December 26, 1985, the petitioners, as vendors, and the respondents, Spouses
Miranda, as vendees, executed a Deed of Sale with Assumption of Mortgage over the
subject property for the price of P214,000.00. However, on January 29, 1986, the
petitioners-spouses, likewise, executed a Contract to Sell the said property in favor of
the respondents forP250,000.00 with the following condition:

3. That upon full payment of the consideration hereof, the SELLER shall execute a
Deed of Absolute Sale in favor of the BUYER that the payment of capital gains tax
shall be for the account of the SELLER and that documentary stamps, transfer tax,
registration expenses for the transfer of title including the notarization and preparation
of this Contract and subsequent documents if any are to be executed, real estate taxes
from January 1, 1986 and other miscellaneous expenses shall be for the account of the
BUYER; the SELLER hereby represents that all association dues has been paid but
that subsequent to the execution of this Contract the payment of the same shall
devolve upon the BUYER.
[6]

The petitioners obliged themselves to execute a deed of absolute sale over the
property in favor of the respondents upon the full payment of the purchase price thereof.
Respondent Rogelio Miranda filed an application dated May 4, 1986 with the PSB to
secure the approval of his assumption of the petitioners obligation on the loan, and
appended thereto a General Information sheet.[7] Respondent Rogelio Miranda stated
therein that he was the Acting Municipal Treasurer of Las Pias and had an unpaid
account with the Manila Banking Corporation in the amount of P18,777.31. The PSB
disapproved his application. Nevertheless, respondent Rogelio Miranda paid the first
quarterly installment on the petitioners loan on March 21, 1986 in the amount
of P29,190.28. The said amount was paid for the account of the
petitioners. Respondent Rogelio Miranda, likewise, paid the second quarterly
installment in the amount of P29,459.00 on June 23, 1986, also for the account of the
petitioners.[8]
In the meantime, respondent Rogelio Miranda secured the services of petitioner
Orlando Rayos as his counsel in a suit he filed against the Manila Banking Corporation,
relative to a loan from the bank in the amount of P100,000.00. Both parties agreed to
the payment of attorneys fees, as follows:

Our agreement is as follows:

1. You will pay me P700.00 as filing fee and other miscellaneous
expenses which I personally received from you this morning;
2. Award to you of any amount in terms of moral, exemplary or actual
and other forms of damages shall accrue to you in the amount of 70%
thereof;
3. 30% of the award to you in the concept of No. 2 hereof shall pertain to
me as my contingent fee;
4. All attorneys fees that the court shall award to me or by the
management of TMBC if they agree to extrajudicially settle shall
pertain exclusively to me;
5. Execution of judgment expenses shall be for your account;
6. Should the case be appealed, my contingent fee shall increase by 10%
if the appeal is to the Intermediate Appellate Court on questions of
facts and law, and if appealed from there to the Supreme Court, then
another 10% shall accrue to me.
[9]

On May 14, 1986, petitioner Orlando Rayos filed respondent Rogelio Mirandas
complaint against the bank with the Regional Trial Court of Makati, docketed as Civil

Case No. 13670.[10]In the meantime, the latter paid the third quarterly installment on the
PSB loan account amounting to P29,215.66, for which the bank issued a receipt for the
account of the petitioners.
The parties executed a Compromise Agreement in Civil Case No. 13670 in which
they agreed that each party shall pay for the respective fees of their respective
counsels.[11] The trial court rendered judgment on October 23, 1986 based on the said
compromise agreement.[12] Petitioner Orlando Rayos demanded the payment of
attorneys fees in the amount ofP5,631.93, but respondent Rogelio Miranda refused to
pay.
On November 12, 1986, petitioner Orlando Rayos wrote to respondent Rogelio
Miranda and enclosed a copy of his motion in Civil Case No. 13670 for the annotation of
his attorneys lien at the dorsal portion of the latters title used as security for the loan
with the Manila Banking Corporation.[13] The respondent opposed the motion, claiming
that the petitioner agreed to render professional services on a contingent basis.[14]
Petitioner Orlando Rayos again wrote respondent Rogelio Miranda on November
30, 1986, reminding the latter of the last quarterly payment of his loan with the PSB. He
also advised the respondent to thereafter request the bank for the cancellation of the
mortgage on his property and to receive the owners duplicate of his title over the
same. Petitioner Orlando Rayos also wrote that their dispute over his attorneys fees in
Civil Case No. 13670 should be treated differently.[15]
Petitioner Orlando Rayos then received a Letter dated November 27, 1986 from the
PSB, reminding him that his loan with the bank would mature on December 24, 1986,
and that it expected him to pay his loan on or before the said date. [16] Fearing that the
respondents would not be able to pay the amount due, petitioner Orlando Rayos
paid P27,981.41[17] to the bank on December 12, 1986, leaving the balance
of P1,048.04. In a Letter dated December 18, 1986, the petitioner advised the PSB not
to turn over to the respondents the owners duplicate of the title over the subject
property, even if the latter paid the last quarterly installment on the loan, as they had not
assumed the payment of the same.[18]
On December 24, 1986, respondent Rogelio Miranda arrived at the PSB to pay the
last installment on the petitioners loan in the amount of P29,223.67. He informed the
bank that the petitioners had executed a deed of sale with assumption of mortgage in
their favor, and that he was paying the balance of the loan, conformably to said
deed. On the other hand, the bank informed the respondent that it was not bound by
said deed, and showed petitioner Orlando Rayos Letter dated December 18,
1986. The respondent was also informed that the petitioners had earlier paid the
amount of P27,981.41 on the loan. The bank refused respondent Rogelio Mirandas
offer to pay the loan, and confirmed its refusal in a Letter dated December 24, 1986. [19]
On even date, respondent Rogelio Miranda wrote the PSB, tendering the amount
of P29,223.67 and enclosed Interbank Check No. 01193344 payable to
PSB.[20] Thereafter, on December 29, 1986, the petitioners paid the balance of their loan
with the bank in the amount of P1,081.39 and were issued a receipt therefor.[21] On

January 2, 1987, the PSB wrote respondent Rogelio Miranda that it was returning his
check.[22]
On January 2, 1987, respondent Rogelio Miranda filed a complaint against the
petitioners and the PSB for damages with a prayer for a writ of preliminary attachment
with the RTC of Makati. The case was docketed as Civil Case No. 15639 and raffled to
Branch 61 of the court. The respondent alleged inter alia that the petitioners and the
PSB conspired to prevent him from paying the last quarterly payment of the petitioners
loan with the bank, despite the existence of the deed of sale with assumption of
mortgage executed by him and the petitioners, and in refusing to turn over the owners
duplicate of TCT No. 100156, thereby preventing the transfer of the title to the property
in his name. Respondent Rogelio Miranda prayed that:

WHEREFORE, it is respectfully prayed that judgment be rendered in favor of

plaintiff and against defendants, ordering the latter, jointly and severally, as follows:
(a)

To pay to plaintiff the sum of P267,197.33, with legal interest from date
of demand, as actual or compensatory damages representing the
unreturned price of the land;

(b)

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

(c)

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

(d)

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

way of example or correction for the public good;

(e)

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

(f)

To pay for the costs of suit; and

(g)

That a Writ of Attachment be issued against the properties of defendant

Rayos spouses as security for the satisfaction of any judgment that may
be recovered.

PLAINTIFF FURTHER PRAYS for such other remedies and relief as are just or
equitable in the premises.
[23]

The trial court granted the respondents plea for a writ of preliminary attachment on
a bond of P260,000.00. After posting the requisite bond, the respondent also filed a
criminal complaint against petitioner Orlando Rayos for estafa with the Office of the
Provincial Prosecutor of Makati, docketed as I.S. No. 87-150. He, likewise, filed a
complaint for disbarment in this Court against petitioner Orlando Rayos, docketed as
Administrative Case No. 2974. Unaware of the said complaint, the petitioner wrote the
respondent on January 3, 1986 that as soon as his payment to the PSB of P29,223.67

was refunded, the owners duplicate of the title would be released to him. [24] On January
5, 1986, petitioner Orlando Rayos wrote respondent Rogelio Miranda, reiterating that he
would release the title in exchange for his cash settlement of P29,421.41.[25] The
respondent failed to respond.
In the meantime, the PSB executed on January 8, 1987 a Release of Real Estate
Mortgage in favor of the petitioners,[26] and released the owners duplicate of title of TCT
No. 100156.[27] On January 17, 1987, petitioner Orlando Rayos wrote respondent
Rogelio Miranda, reiterating his stance in his Letters of January 3 and 5, 1987.
In the meantime, the petitioners received the complaint in Civil Case No. 15639 and
filed their Answer with Counterclaim in which they alleged that:

14. That plaintiff has no cause of action against defendants Rayos, the latter are
willing to deliver the title sought by plaintiff under the terms set out in their letters
dated January 3, 5, 17, and 20, hereto marked as Annexes 1, 1-A, 1-B and 1C;
[28]

Petitioner Orlando Rayos filed a complaint on February 1, 1987 against respondent

Rogelio Miranda with the Regional Trial Court of Makati, docketed as Civil Case No.
15984 for Specific Performance with Damages for the collection of the amount
of P29,223.67 which he had paid to the PSB on December 12 and 19, 1986, and his
attorneys fees in Civil Case No. 13670. The trial court consolidated the cases in
Branch 62 of the RTC.
Respondent Rogelio Miranda filed an Amended Complaint in Civil Case No. 15639
for specific performance with damages, impleading the officers of the PSB as partiesdefendants. He alleged that of the purchase price of the property of P214,000.00, he
had paid the entirety thereof to the petitioners, and that petitioner Orlando Rayos acted
unethically in trying to collect P5,631.93 from him as his attorneys fees in Civil Case
No. 13670, and in having such claim annotated at the dorsal portion of his title over the
property he mortgaged to the Manila Banking Corporation.
Respondent Rogelio Miranda prayed that, after due proceedings, judgment be
rendered in his favor, thus:

WHEREFORE, it is respectfully prayed that judgment be rendered in favor of

plaintiff and against defendants, as follows:
(a) Ordering defendants spouses Orlando A. Rayos and Mercedes T. Rayos to deliver
forthwith to plaintiff the Owners Duplicate of Transfer Certificate of Title No.
100156, Registry of Deeds for Pasay City;
(b) Ordering defendants, jointly and severally, to pay to plaintiff the sum
of P1,000,000.00 as moral damages;

(c) Ordering defendants, jointly and severally, to pay to plaintiff the sum
of P867,197.33 as exemplary damages by way of example or correction for the public
good;
(d) Ordering defendants, jointly and severally, to pay to plaintiff the sum
of P100,000.00 for and as attorneys fees;
(e) Ordering defendants, jointly, to pay the costs of suit; and
(f) Ordering the issuance of a Writ of Attachment against the properties of defendants
Rayos spouses as security for the satisfaction of any judgment that may be recovered.
PLAINTIFF further prays for such other remedies and relief as are just or equitable in
the premises.
[29]

In the meantime, petitioner Orlando Rayos filed an Amended Complaint in Civil

Case No. 15984 impleading his wife and that of respondent Rogelio Miranda as parties
to the case. On March 4, 1987, the trial court issued an Order granting the petitioners
motion in Civil Case No. 15639 for the discharge of the attachment on their
property.[30] The court also denied the respondents motion for reconsideration of the
Order of the court. The respondents, thereafter, filed a petition for review with the Court
of Appeals for the nullification of the said Order.
On July 9, 1987, the public prosecutor dismissed the charge of estafa against
petitioner Orlando Rayos.[31] The respondents appealed the resolution to the Department
of Justice.
On May 26, 1987, the PSB and its officers filed their Answer in Civil Case No.
15639, and alleged the following by way of special and/or affirmative defenses, thus:

27. The application for the plaintiff to assume the mortgage loan of the defendants
Spouses Rayos was not approved, and it was NOT even recommended by the
Marketing Group of defendant PSBank for approval by its Top Management, because
the credit standing of the plaintiff was found out to be not good;
28. The acceptance of the payments made by the plaintiff for three (3) amortizations
on the loan of defendants Spouses Rayos was merely allowed upon the insistence of
the plaintiff, which payments were duly and accordingly receipted, and said
acceptance was in accordance with the terms of the Real Estate Mortgage executed by
the defendants Spouses Rayos in favor of the defendant PSBank and is also allowed
by law;
[32]

The parties in Civil Case No. 15639 agreed to submit the case for the trial courts
decision on the basis of their pleadings and their respective affidavits. In a Resolution

dated July 26, 1988, then Undersecretary of Justice Silvestre Bello III affirmed the
Public Prosecutors resolution in I.S. No. 87-150.[33]
On January 30, 1989, the petitioners sold the property to Spouses Mario and
Enriqueta Ercia for P144,000.00. The said spouses were not impleaded as partiesdefendants in Civil Case No. 15639. On May 18, 1989, the petitioners filed an amended
complaint in Civil Case No. 15984, appending thereto a copy of the Contract to Sell in
favor of the respondents. The trial court admitted the said complaint.
On November 15, 1989, this Court rendered its Decision dismissing the complaint
for disbarment against Rayos.[34]
On January 29, 1993, the trial court rendered judgment, the dispositive portion of
which reads:

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

I. (a) In Civil Case No. 15639, this Court orders plaintiff Rogelio Miranda to refund
to spouses Orlando and Mercedes T. Rayos the total sum of P29,069.45, Rayos paid to
PS Bank as the last amortization and as release of mortgage fee, without any interest;
and upon receipt of the sum of P29,069.45 from Rogelio Miranda, Spouses Orlando
and Mercedes T. Rayos shall deliver to Rogelio Miranda Transfer Certificate of Title
No. 100156 of the Registry of Deeds of Pasay City; and, deliver to Rogelio Miranda
the possession of the parcel of land described in the said title;
(b) Dismissing the complaint for damages of Plaintiff Rogelio Miranda against
Spouses Orlando and Remedios (sic) T. Rayos, Philippine Savings Bank, Jose
Araullo, Cesar I. Valenzuela, Dionisio Hernandez, Nestor E. Valenzuela, Raul T.
Totanes, and Belinda Lim, for insufficiency of evidence; while the counterclaims of
PS Bank, Jose Araullo, Cesar Valenzuela, Dionisio Hernandez, Nestor E. Valenzuela,
Raul Totanes, and Belinda Lim, are likewise dismissed for insufficiency of evidence.
(c) The counterclaims of Spouses Orlando and Mercedes T. Rayos will be treated in
Civil Case No. 15984;
II. In Civil Case No. 15984, this Court orders Defendant Rogelio Miranda to pay to
Plaintiff Orlando Rayos the sum of P4,133.19 at 12% interest per annum, from the
date of the filing of the complaint on Feb. 11, 1987 until fully paid.
No costs in both cases.
SO ORDERED.

[35]

The petitioners appealed the decision to the Court of Appeals contending that:

I. THE COURT A QUO COMMITTED A GRAVE ERROR IN NOT FINDING THAT

ROGELIO A. MIRANDA COMMITTED A BREACH OF CONTRACT IN NOT
PAYING THE FULL CONTINGENT FEE OF 30% IN WRITING IN THE
MANILABANK CASE AND BECAUSE OF THAT BREACH, HE CANNOT NOW
DEMAND SPECIFIC PERFORMANCE AND THE COURTA QUO SHOULD HAVE
LEFT THE PARTIES AS THEY ARE;
II. THE COURT A QUO SIMILARLY COMMITTED AN ERROR IN NOT FINDING
THAT THE DECISION IN SEVA VS. ALFREDO BERWIN & CO. & MEDEL IS
APPLICABLE FOUR SQUARE WHEREBY HE WHO BREACHES HIS CONTRACT
IS NOT ENTITLED TO SPECIFIC PERFORMANCE;[36]

On July 27, 1998, the Court of Appeals rendered judgment affirming with
modification the decision of the RTC, thus:

WHEREFORE, premises considered, the appealed decision of the Regional Trial

Court of Makati City, is hereby AFFIRMED, with the modification abovestated.
[37]

The petitioners filed the instant petition, and ascribed the following errors on the
appellate court:
I. THE COURT OF APPEALS (CA) COMMITTED AN ERROR IN NOT FINDING
THAT THE PRIVATE RESPONDENT MIRANDA COMMITTED THE FIRST
BREACH FOR FAILURE TO ASSUME THE LOAN THUS HE FAILED TO
SURROGATE (sic) HIMSELF TO PSB.
II. THE CA COMMITTED AN ERROR IN FINDING THAT PETITIONERS PREEMPTED PRIVATE RESPONDENT MIRANDA IN DEPOSITING THE LAST
AMORTIZATION WHEN MIRANDA HAD NO LEGAL STANDING WITH PSB DUE
TO THE LATTERS NON-APPROVAL OF THE ASSUMPTION OF THE LOAN.
III. THE CA COMMITTED AN ERROR IN FINDING BOTH PARTIES GUILTY OF
FIRST VIOLATING THE OBLIGATIONS INCUMBENT UPON THEM EVEN
INFERRING THAT PETITIONERS COMMITTED THE BREACH FIRST BUT
LATER CONCLUDING THAT THE BREACH WAS COMMITTED BY BOTH
PARTIES. IT DID NOT MAKE A CORRECT ASSESSMENT OF WHO ACTUALLY
COMMITTED THE FIRST BREACH.
IV. THE CA COMMITTED AN ERROR IN NOT ALLOWING THE OFFSET IF ITS
DECISION STOOD OF THE AMOUNT OF P4,133.19 PLUS 12% INT. P.A. FROM
THE FILING OF THE COMPLAINT (CV 15984), THUS, ENTIRELY
DISREGARDING THE DECISION OF THE TRIAL COURT IN SAID CASE
ALLOWING ONLY THE DECISION IN CV 15639.
V. THE CA COMMITTED AN ERROR IN NOT APPLYING THE DECSION (sic) LAID
DOWN IN SEVA VS. ALFRED BERWIN & CO. AND MEDEL THAT A PERSON
HIMSELF AT FAULT CANNOT ENFORCE SPECIFIC PERFORMANCE.[38]

The petitioners assert that the Court of Appeals erred in not finding that the
respondents first committed a breach of their contract to sell upon their failure to pay the
amount due for the last quarterly installment of their loan from the PSB. The petitioners
fault the Court of Appeals for not relying on the resolution of Undersecretary Silvestre
Bello III affirming the dismissal of the criminal complaint for estafa in I.S. No. 87-150, as

cited by this Court in its decision in Miranda v. Rayos,[39] where it was also held that
petitioner Orlando Rayos paid the last quarterly installment because he thought that the
respondents would not be able to pay the same. The petitioners argue that they had no
other alternative but to pay the last quarterly installment due on their loan with the PSB,
considering that they received a demand letter from the bank on November 28, 1986,
coupled by its denial of the respondents request to assume the payment of the
loan. They insist that they did not block the respondents payment of the balance of the
loan with the bank. The petitioners contend that even if the parties committed a breach
of their respective obligations under the contract to sell, it behooved the Court of
Appeals to apply Article 1192 of the Civil Code in the instant case, which reads:

The power to rescind obligation is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
The petition has no merit.
The assailed ruling of the Court of Appeals reads:

After due study, the Court finds that there was no basis in fact and law for the
appellants to usurp the payment of the last amortization on the mortgage upon the
parcel of land it had conveyed to the Mirandas. Even if the appellants wanted to keep
their good credit standing, they should not have preempted Miranda in paying the
final amortization. There is no sufficient showing that Miranda was in danger of
defaulting on the said payment. In fact, it appears that he approached the bank to
tender payment, but he was refused by the bank, because he was beaten to the draw,
so to speak, by the appellants. Appellants were able to do so because, for some
reasons, the Mirandas assumption of the mortgage has not been approved by the
bank. In doing so, the appellants had unilaterally cancelled the deed of sale with
assumption of mortgage, without the consent of the Mirandas. This conduct by the
appellants is, to say the least, injudicious as under Article 1308 of the Civil Code,
contracts must bind both contracting parties and their validity or compliance cannot be
left to the will of one of them.

Just as nobody can be forced to enter into a contract, in the same manner, once a
contract is entered into, no party can renounce it unilaterally or without the consent of
the other. It is a general principle of law that no one may be permitted to change his
mind or disavow and go back upon his own acts, or to proceed contrary thereto, to the
prejudice of the other party. In a regime of law and order, repudiation of an
agreement validly entered into cannot be made without any ground or reason in law or
in fact for such repudiation.
In the same way that the Rayos spouses must respect their contract with the Mirandas
for the sale of real property and assumption of mortgage, Rogelio Miranda has to
recognize his obligations under his agreement to pay contingent attorneys fees to
Orlando Rayos.
[40]

The Court of Appeals erred in so ruling.

The findings and disquisitions of the Court of Appeals cannot prevail over our
findings in Miranda v. Rayos,[41] a case which involves the same parties, and where we
held that the petitioners cannot be faulted for paying the amortization due for the last
quarterly installment on their loan with the PSB:

It is difficult to imagine that complainant would be so nave as to be totally unaware

of the provisions of the original contract between the PSB and the spouses Rayos. He
is a degree holder (A.B. Pre-Law and B.S.C.) and Acting Municipal Treasurer of Las
Pias. In short, he is not an ordinary layman. As a buyer with a knowledge of law, it
was unnatural for him to read the provisions of the real estate mortgage wherein it is
provided, among others, that the sale of the property covered by the mortgage does
not in any manner relieve the mortgagor of his obligation but that on the contrary,
both the vendor and the vendee, or the party in whose favor the alienation or
encumbrance is made shall be, jointly and severally, liable for said mortgage
obligations. There is every reason to believe that it was pursuant to the said provision
in the real estate mortgage that complainant tried to assume the loan obligation of the
Rayoses by filling up and submitted the loan application (page 30, records) sent by
Orland Rayos. By signing the loan application and the general information sheet
(page 31, records) in connection with said application, complainant showed that he
knew that there was a need to formally apply to the bank in order for him to assume
the mortgage.
We find respondent spouses version that when complainants application to assume
the mortgage loan was disapproved he begged that he be allowed to pay the quarterly
amortization credible, owing to the fact that complainant made the payments for the
account of the Rayoses. Hence, complainant knew that since his application to the
PSB was not approved, there was no substitution of parties and so he had to pay for
the account of respondent spouses as shown by the receipts issued by the PSB.

As for the charge that Rayos paid the last installment to block complainant from
getting the title and transferring the same to his name, respondents version is more
satisfactory and convincing. Respondent Orland Rayos paid the last amortization
when it became apparent that complainant would not be able to give the payment on
the due date as he was still trying to sell his Lancer car. Even if complainant was able
to pay the last installment of the mortgage loan, the title would not be released to him
as he knew very well that his application to assume the mortgage was disapproved and
he had no personality as far as PSB was concerned.
[42]

Contrary to the ruling of the Court of Appeals, the petitioners did not unilaterally
cancel their contract to sell with the respondents when they paid the total amount
of P29,062.80 to the PSB in December 1986.[43] In fact, the petitioners wrote the
respondents on January 3, 5 and 17, 1987, that they were ready to execute the deed of
absolute sale and turn over the owners duplicate of TCT No. 100156 upon the
respondents remittance of the amount of P29,223.67. The petitioners reiterated the
same stance in their Answer with Counterclaim in Civil Case No. 15639. The petitioners
cannot, likewise, be faulted for refusing to execute a deed of absolute sale over the
property in favor of the respondents, and in refusing to turn over the owners duplicate
of TCT No. 100156 unless the respondents refunded the said amount. The
respondents were obliged under the contract to sell to pay the said amount to the PSB
as part of the purchase price of the property. On the other hand, it cannot be argued by
the petitioners that the respondents committed a breach of their obligation when they
refused to refund the said amount.
It bears stressing that the petitioners and the respondents executed two interrelated
contracts, viz: the Deed of Sale with Assumption of Mortgage dated December 26,
1985, and the Contract to Sell dated January 29, 1986. To determine the intention of
the parties, the two contracts must be read and interpreted together. [44] Under the two
contracts, the petitioners bound and obliged themselves to execute a deed of absolute
sale over the property and transfer title thereon to the respondents after the payment of
the full purchase price of the property, inclusive of the quarterly installments due on the
petitioners loan with the PSB:

3. That upon full payment of the consideration hereof, the SELLER shall execute a
Deed of Absolute Sale in favor of the BUYER that the payment of capital gains tax
shall be for the account of the SELLER and that documentary stamps, transfer tax,
registration expenses for the transfer of title including the notarization and preparation
of this Contract and subsequent documents if any are to be executed, real estate taxes
from January 1, 1986 and other miscellaneous expenses shall be for the account of the
BUYER; the SELLER hereby represents that all association dues has been paid but
that subsequent to the execution of this Contract the payment of the same shall
devolve upon the BUYER.
[45]

Construing the contracts together, it is evident that the parties executed a contract
to sell and not a contract of sale. The petitioners retained ownership without further

remedies by the respondents[46] until the payment of the purchase price of the property in
full. Such payment is a positive suspensive condition, failure of which is not really a
breach, serious or otherwise, but an event that prevents the obligation of the petitioners
to convey title from arising, in accordance with Article 1184 of the Civil
Code.[47] In Lacanilao v. Court of Appeals,[48] we held that:

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

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 129760 December 29, 1998

RICARDO CHENG, petitioner,
vs.
RAMON B. GENATO and ERNESTO R. DA JOSE & SOCORRO DA JOSE, respondents.

MARTINEZ, J.:
This petition for review on certiorari seeks to annul and set aside the Decision of the Court of
Appeals (CA) 1 dated July 7, 1997 in CA-G.R. No. CV No. 44706 entitled "Ricardo Cheng, plaintiffappellee vs. Ramon B. Genato, defendant-appellant, Ernesto R. Da Jose & Socorro B. Da Jose,
Intervenors-Appellants" which reversed the ruling of the Regional Trial Court, Branch 96 of Quezon City
dated January 18, 1994. The dispositive portion of the CA Decision reads:

WHEREFORE, based on the foregoing, appealed decision is hereby REVERSED

and SET ASIDE and judgment is rendered ordering;
1. The dismissal of the complaint;
2. The cancellation of the annotations of the defendant-appellant's Affidavit to Annul
Contract to Sell and plaintiff-appellee's Notice of Adverse Claim in the subject TCT's,
namely, TCT No. T-76.196 (M) and TCT No. T-76.197 (M);
3. Payment by the intervenors-appellants of the remaining balance of the purchase
price pursuant to their agreement with the defendant-appellant to suspend
encashment of the three post-dated checks issued since 1989.
4. Ordering the execution by the defendant-appellant Genato of the Deed of Absolute
Sale over the subject two lots covered by TCT No. T-76.196 (M) and TCT No. T76.197 (M) in favor of intervenors-appellants Spouses Da Jose;
5. The return by defendant-appellant Genato of the P50,000.00 paid to him by the
plaintiff-appellee Cheng, and
6. Payment by plaintiff-appellee Cheng of moral damages to herein intervenorsappellants Da Jose of P100,000.00, exemplary damages of P50,000.00, attorney's
fees of P50,000.00, and costs of suit; and to defendant-appellant, of P100,000.00 in
exemplary damages, P50,000.00 in attorney's fees. The amounts payable to the
defendant-appellant may be compensated by plaintiff appellee with the amount
ordered under the immediately foregoing paragraph which defendant-appellant has
to pay the plaintiff-appellee.

SO ORDERED. 2
The antecedents of the case are as follows:
Respondent Ramon B. Genato (Genato) is the owner of two parcels of land located at Paradise
Farms, San Jose del Monte, Bulacan covered by TCT No. T-76.196 (M) 3 and TCT No. T-76.197
(M) 4 with an aggregate area of 35,821square meters, more or less.

On September 6, 1989, respondent Genato entered into an agreement with respondent-spouses

Ernesto R. Da Jose and Socorro B. Da Jose (Da Jose spouses) over the above-mentioned two
parcels of land. The agreement culminated in the execution of a contract to sell for which the
purchase price was P80.00 per square meter. The contract was in a public instrument and was duly
annotated at the back of the two certificates of title on the same day. Clauses 1and 3 thereof
provide:
1. That the purchase price shall be EIGHTY (P80.00) PESOS, Philippine Currency
per square meter, of which the amount of FIFTY THOUSAND (P50,000.00) PESOS
shall be paid by the VENDEE to the VENDOR as partial down payment at the time of
execution of this Contract to Sell.
xxx xxx xxx
3. That the VENDEE, Thirty (30) DAYS after the execution of this contract, and only
after having satisfactorily verified and confirmed the truth and authenticity of
documents, and that no restrictions, limitations, and developments imposed on
and/or affecting the property subject of this contract shall be detrimental to his
interest, the VENDEE shall pay to the VENDOR, NINE HUNDRED FIFTY
THOUSAND (P950,00.00) PESOS. Philippine Currency, representing the full
payment of the agreed Down Payment, after which complete possession of the
property shall be given to the VENDEE to enable him to prepare the premises and
any development therein.
On October 4, 1989, the Da Jose spouses, not having finished verifying the titles mentioned in
clause 3 as aforequoted, asked for and was granted by respondent Genato an extension of another
30 days or until November 5, 1989. However, according to Genato, the extension was granted on
condition that a new set of documents is made seven (7) days from October 4, 1989. 6 This was
denied by the Da Jose spouses.

Pending the effectivity of the aforesaid extension period, and without due notice to the Da Jose
spouses, Genato executed an Affidavit to Annul the Contract to Sell, 7 on October 13, 1989. Moreover,
no annotation of the said affidavit at the back of his titles was made right away. The affidavit
contained, inter alia, the following paragraphs;

xxx xxx xxx

That it was agreed between the parties that the agreed downpayment of
P950,000.00 shall be paid thirty (30) days after the execution of the Contract, that is
on or before October 6, 1989;
The supposed VENDEES failed to pay the said full downpayment even up to this
writing, a breach of contract;

That this affidavit is being executed to Annul the aforesaid Contract to Sell for the
vendee having committed a breach of contract for not having complied with the
obligation as provided in the Contract to Sell; 8
On October 24, 1989, herein petitioner Ricardo Cheng (Cheng) went to Genato's residence and
expressed interest in buying the subject properties. On that occasion, Genato showed to Ricardo
Cheng copies of his transfer certificates of title and the annotations at the back thereof of his
contract to sell with the Da Jose spouses. Genato also showed him the aforementioned Affidavit to
Annul the Contract to Sell which has not been annotated at the back of the titles.
Despite these, Cheng went ahead and issued a check for P50,000.00 upon the assurance by
Genato that the previous contract with the Da Jose spouses will be annulled for which Genato
issued a handwritten receipt (Exh. "D"), written in this wise:
10/24/89
Received from Ricardo Cheng
the Sum of Fifty Thousand Only (P50.000-)
as partial for T-76196 (M)
T-76197 (M) area 35.821 Sq.m.
Paradise Farm, Gaya-Gaya, San Jose Del Monte
P70/m2 Bulacan
plus C. G. T. etc.
Check # 470393 (SGD.) Ramon B. Genato
10/24/89 9
On October 25, 1989, Genato deposited Cheng's check. On the same day, Cheng called up Genato
reminding him to register the affidavit to annul the contract to sell. 10
The following day, or on October 26, 1989, acting on Cheng's request, Genato caused the
registration of the Affidavit to Annul the Contract to Sell in the Registry of Deeds, Meycauayan,
Bulacan as primary entry No. 262702. 11
While the Da Jose spouses were at the Office of the Registry of Deeds of Meycauayan, Bulacan on
October 27, 1989, they met Genato by coincidence. It was only then that the Da Jose spouses
discovered about the affidavit to annul their contract. The latter were shocked at the disclosure and
protested against the rescission of their contract. After being reminded that he (Genato) had given
them (Da Jose spouses) an additional 30-day period to finish their verification of his titles, that the
period was still in effect, and that they were willing and able to pay the balance of the agreed down
payment, later on in the day, Genato decided to continue the Contract he had with them. The
agreement to continue with their contract was formalized in a conforme letter dated October 27,
1989.

Thereafter, Ramon Genato advised Ricardo Cheng of his decision to continue his contract with the
Da Jose spouses and the return of Cheng's P50,000.00 check. Consequently, on October 30, 1989,
Cheng's lawyer sent a letter 12 to Genato demanding compliance with their agreement to sell the
property to him stating that the contract to sell between him and Genato was already perfected and
threatening legal action.

On November 2, 1989, Genato sent a letter 13 to Cheng (Exh. "6") enclosing a BPI Cashier's Check for
P50,000.00 and expressed regret for his inability to "consummate his transaction" with him. After having
received the letter of Genato on November 4, 1989, Cheng, however, returned the said check to the
former via RCPI telegram 14 dated November 6, 1989, reiterating that "our contract to sell your property
had already been perfected."

Meanwhile, also on November 2, 1989, Cheng executed an affidavit of adverse claim

15

and had it

annotated on the subject TCT's.

On the same day, consistent with the decision of Genato and the Da Jose spouses to continue with
their Contract to Sell of September 6, 1989, the Da Jose spouses paid Genato the complete down
payment of P950,000.00 and delivered to him three (3) postdated checks (all dated May 6, 1990, the
stipulated due date) in the total amount of P1,865,680.00 to cover full payment of the balance of the
agreed purchase price. However, due to the filing of the pendency of this case, the three (3)
postdated checks have not been encashed.
On December 8, 1989, Cheng instituted a complaint 16 for specific performance to compel Genato to
execute a deed of sale to him of the subject properties plus damages and prayer for preliminary
attachment. In his complaint, Cheng averred that the P50,000.00 check he gave was a partial payment to
the total agreed purchase price of the subject properties and considered as an earnest money for which
Genato acceded. Thus, their contract was already perfected.

In Answer 17 thereto, Genato alleged that the agreement was only a simple receipt of an option-bid
deposit, and never stated that it was a partial payment, nor is it an earnest money and that it was subject
to condition that the prior contract with the Da Jose spouses be first cancelled.

The Da Jose spouses, in their Answer in Intervention, 18 asserted that they have a superior right to the
property as first buyers. They alleged that the unilateral cancellation of the Contract to Sell was without
effect and void. They also cited Cheng's bad faith as a buyer being duly informed by Genato of the
existing annotated Contract to Sell on the titles.

After trial on the merits, the lower court ruled that the receipt issued by Genato to Cheng unerringly
meant a sale and not just a priority or an option to buy. It cannot be true that the transaction was
subjected to some condition or reservation, like the priority in favor of the Da Jose spouses as first
buyer because, if it were otherwise, the receipt would have provided such material condition or
reservation, especially as it was Genato himself who had made the receipt in his own hand. It also
opined that there was a valid rescission of the Contract to Sell by virtue of the Affidavit to Annul the
Contract to Sell. Time was of the essence in the execution of the agreement between Genato and
Cheng, under this circumstance demand, extrajudicial or judicial, is not necessary. It falls under the
exception to the rule provided in Article 1169 19 of the Civil Code. The right of Genato to unilaterally
rescind the contract is said to be under Article 1191 20 of the Civil Code. Additionally, after reference was
made to the substance of the agreement between Genato and the Da Jose spouses, the lower court also
concluded that Cheng should be preferred over the intervenors-Da Jose spouses in the purchase of the
subject properties. Thus, on January 18, 1994 the trial court rendered its decision the decretal portion of
which reads:

WHEREFORE, judgment is hereby rendered:

1. Declaring the contract to sell dated September 6, 1989 executed between

defendant Ramon Genato, as vendor, and intervenors Spouses Ernesto and Socorro
Da Jose, as vendees, resolved and rescinded in accordance with Art. 1191, Civil
Code, by virtue of defendant's affidavit to annul contract to sell dated October 13,
1989 and as the consequence of intervenors' failure to execute within seven (7) days
from October 4, 1989 another contract to sell pursuant to their mutual agreement
with defendant;
2. Ordering defendant to return to the intervenors the sum of P1,000,000.00, plus
interest at the legal rate from November 2, 1989 until full payment;
3. Directing defendant to return to the intervenors the three (3) postdated checks
immediately upon finality of this judgment;
4. Commanding defendant to execute with and in favor of the plaintiff Ricardo Cheng,
as vendee, a deed of conveyance and sale of the real properties described and
covered in Transfer Certificates of Title No. T-76-196 (M) and T-76.197 (M) of the
Registry of Deeds of Bulacan, Meycauayan Branch, at the rate of P70.000/square
meter, less the amount of P50,000.00 alreaddy paid to defendant, which is
considered as part of the purchase price, with the plaintiff being liable for payment of
the capital gains taxes and other expenses of the transfer pursuant to the agreement
to sell dated October 24, 1989; and
5 Ordering defendant to pay the plaintiff and the intervenors as follows:
a/ P50,000.00, as nominal damages, to plaintiff;
b/ P50,000.00, as nominal damages, to intervenors;
c/ P20,000.00, as and for attorney's fees, to plaintiff;
d/ P20,000.00, as and for attorney's fees, to
intervenors; and
e/ Cost of the suit.
xxx xxx xxx
Not satisfied with the aforesaid decision, herein respondents Ramon Genato and Da Jose spouses
appealed to the court a quo which reversed such judgment and ruled that the prior contract to sell in
favor of the Da Jose spouses was not validly rescinded; that the subsequent contract to sell between
Genato and Cheng, embodied in the handwritten receipt, was without force and effect due to the
failure to rescind the prior contract; and that Cheng should pay damages to the respondents herein
being found to be in bad faith.
Hence this petition. 21
This petition for review, assails the Court of Appeals' Decision on the following grounds: (1) that the
Da Jose spouses' Contract to Sell has been validly rescinded or resolved; (2) that Ricardo Cheng's
own contract with Genato was not just a contract to sell but one of conditional contract of sale which

gave him better rights, thus precluding the application of the rule on double sales under Article 1544,
Civil Code; and (3) that, in any case, it was error to hold him liable for damages.
The petition must be denied for failure to show that the Court of Appeals committed a reversible
error which would warrant a contrary ruling.
No reversible error can be ascribed to the ruling of the Court of Appeals that there was no valid and
effective rescission or resolution of the Da Jose spouses Contract to Sell, contrary to petitioner's
contentions and the trial court's erroneous ruling.
In a Contract to Sell, the payment of the purchase price is a positive suspensive condition, the failure
of which is not a breach, casual or serious, but a situation that prevents the obligation of the vendor
to convey title from acquiring an obligatory force. 22 It is one where the happening of the event gives
rise to an obligation. Thus, for its non-fulfillment there will be no contract to speak of, the obligor having
failed to perform the suspensive condition which enforces a juridical relation. In fact with this
circumstance, there can be no rescission of an obligation that is still non-existent, the suspensive
condition not having occurred as yet. 23 Emphasis should be made that the breach contemplated in Article
1191 of the New Civil Code is the obligor's failure to comply with an obligation already extant, not a failure
of a condition to render binding that obligation. 24

Obviously, the foregoing jurisprudence cannot be made to apply to the situation in the instant case
because no default can be ascribed to the Da Jose spouses since the 30-day extension period has
not yet expired. The Da Jose spouses' contention that no further condition was agreed when they
were granted the 30-days extension period from October 7, 1989 in connection with clause 3 of their
contract to sell dated September 6, 1989 should be upheld for the following reason, to wit; firstly, If
this were not true, Genato could not have been persuaded to continue his contract with them and
later on agree to accept the full settlement of the purchase price knowing fully well that he himself
imposed such sine qua non condition in order for the extension to be valid; secondly, Genato could
have immediately annotated his affidavit to annul the contract to sell on his title when it was
executed on October 13, 1989 and not only on October 26, 1989 after Cheng reminded him of the
annotation; thirdly, Genato could have sent at least a notice of such fact, there being no stipulation
authorizing him for automatic rescission, so as to finally clear the encumbrance on his titles and
make it available to other would be buyers. It likewise settles the holding of the trial court that
Genato "needed money urgently."
Even assuming in gratia argumenti that the Da Jose spouses defaulted, as claimed by Genato, in
their Contract to Sell, the execution by Genato of the affidavit to annul the contract is not even called
for. For with or without the aforesaid affidavit their non-payment to complete the full downpayment of
the purchase price ipso facto avoids their contract to sell, it being subjected to a suspensive
condition. When a contract is subject to a suspensive condition, its birth or effectivity can take place
only if and when the event which constitutes the condition happens or is fulfilled. 25 If the suspensive
condition does not take place, the parties would stand as if the conditional obligation had never
existed. 26

Nevertheless, this being so Genato is not relieved from the giving of a notice, verbal or written, to the
Da Jose spouses for his decision to rescind their contract. In many cases, 27 even though we upheld
the validity of a stipulation in a contract to sell authorizing automatic rescission for a violation of its terms
and conditions, at least a written notice must be sent to the defaulter informing him of the same. The act
of a party in treating a contract as cancelled should be made known to the other. 28 For such act is always
provisional. It is always subject to scrutiny and review by the courts in case the alleged defaulter brings
the matter to the proper courts. In University of the Philippines vs. De Los Angeles, 29 this Court stressed
and we quote:

In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its
own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in law.
But the law definitely does not require that the contracting party who believes itself
injured must first file suit and wait for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to
passively sit and watch its damages accumulate during the pendency of the suit until
the final judgment of rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages (Civil Code, Article
2203).
This rule validates, both in equity and justice, contracts such as the one at bat, in order to avoid and
prevent the defaulting party from assuming the offer as still in effect due to the obligee's tolerance for
such non-fulfillment. Resultantly, litigations of this sort shall be prevented and the relations among
would-be parties may be preserved. Thus, Ricardo Cheng's contention that the Contract to Sell
between Genato and the Da Jose spouses was rescinded or resolved due to Genato's unilateral
rescission finds no support in this case.
Anent the issue on the nature of the agreement between Cheng and Genato, the records of this
case are replete with admissions 30 that Cheng believed it to be one of a Contract to Sell and not one of
Conditional Contract of Sale which he, in a transparent turn-around, now pleads in this Petition. This
ambivalent stance of Cheng is even noted by the appellate court, thus:

At the outset, this Court notes that plaintiff-appellee was inconsistent in

characterizing the contract he allegedly entered into. In his complaint. 31 Cheng
alleged that the P50,000.00 down payment was earnest money. And next, his
testimony 32 was offered to prove that the transaction between him and Genato on
October 24, 1989 was actually a perfected contract to sell. 33

Settled is the rule that an issue which was not raised during the trial in the court below cannot be
raised for the first time on appeal. 34 Issues of fact and arguments not adequately brought to the
attention of the trial court need not be and ordinarily will not be considered by a reviewing court as they
cannot be raised for the first time on appeal. 35 In fact, both courts below correctly held that the receipt
which was the result of their agreement, is a contract to sell. This was, in fact Cheng's contention in his
pleadings before said courts. This patent twist only operates against Cheng's posture which is indicative
of the weakness of his claim.

But even if we are to assume that the receipt, Exh. "D," is to be treated as a conditional contract of
sale, it did not acquire any obligatory force since it was subject to suspensive condition that the
earlier contract to sell between Genato and the Da Jose spouses should first be cancelled or
rescinded a condition never met, as Genato, to his credit, upon realizing his error, redeemed
himself by respecting and maintaining his earlier contract with the Da Jose spouses. In fact, a careful
reading of the receipt, Exh. "D," alone would not even show that a conditional contract of sale has
been entered by Genato and Cheng. When the requisites of a valid contract of sale are lacking in
said receipt, therefore the "sale" is neither valid or enfoceable. 36
To support his now new theory that the transaction was a conditional contract of sale, petitioner
invokes the case of Coronel vs. Court of Appeals 37 as the law that should govern their Petition. We do
not agree. Apparently, the factual milieu in Coronel is not on all fours with those in the case at bar.

In Coronel, this Court found that the petitioners therein clearly intended to transfer title to the buyer
which petitioner themselves admitted in their pleading. The agreement of the parties therein was

definitively outlined in the "Receipt of Down Payment" both as to property, the purchase price, the
delivery of the seller of the property and the manner of the transfer of title subject to the specific
condition that upon the transfer in their names of the subject property the Coronels will execute the
deed of absolute sale.
Whereas, in the instant case, even by a careful perusal of the receipt, Exh. "D," alone such kind of
circumstances cannot be ascertained without however resorting to the exceptions of the Rule on
Parol Evidence.
To our mind, the trial court and the appellate court correctly held that the agreement between
Genato and Cheng is a contract to sell, which was, in fact, petitioner connection in his pleadings
before the said courts. Consequently, both to mind, which read:
Art. 1544. If the same thing should have been sold to different vendees, the
ownership shall be transferred to the person who may have first taken possession
thereof in good faith, if it should be movable property.
Should it be immovable property, the ownership shall belong to the person acquiring
it who in good faith first recorded it in the Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good
faith was first in possession; and in the absence thereof, to the person who presents
he oldest title, provided there is good faith.
However, a meticulous reading of the aforequoted provision shows that said law is not apropos to
the instant case. This provision connotes that the following circumstances must concur:
(a) The two (or more) sales transactions in issue must pertain to exactly the same
subject matter, and must be valid sales transactions.
(b) The two (or more) buyers at odds over the rightful ownership of the subject matter
must each represent conflicting interests; and
(c) The two (or more) buyers at odds over the rightful ownership of the subject matter
must each have bought from the very same seller.
These situations obviously are lacking in a contract to sell for neither a transfer of ownership nor a
sales transaction has been consummated. The contract to be binding upon the obligee or the vendor
depends upon the fulfillment or non-fulfillment of an event.
Notwithstanding this contrary finding with the appellate court, we are of the view that the governing
principle of Article 1544, Civil Code, should apply in this situation. Jurisprudence 38 teaches us that the
governing principle is PRIMUS TEMPORE, PORTIOR JURE (first in time, stronger in right). For not only
was the contract between herein respondents first in time; it was also registered long before petitioner's
intrusion as a second buyer. This principle only applies when the special rules provided in the aforcited
article of the Civil Code do not apply or fit the specific circumstances mandated under said law or by
jurisprudence interpreting the article.

The rule exacted by Article 1544 of the Civil Code for the second buyer to be able to displace the
first buyer are:

(1) that the second buyer must show that he acted in good faith (i.e. in ignorance of the first sale and
of the first buyer's rights) from the time of acquisition until title is transferred to him by registration or
failing registration, by delivery of possession; 39
(2) the second buyer must show continuing good faith and innocence or lack of knowledge of the
first sale until his contract ripens into full ownership through prior registration as provided by law. 40
Thus, in the case at bar, the knowledge gained by the Da Jose spouses, as first buyers, of the new
agreement between Cheng and Genato will not defeat their rights as first buyers except where
Cheng, as second buyer, registers or annotates his transaction or agreement on the title of the
subject properties in good faith ahead of the Da Jose spouses. Moreover, although the Da Jose
spouses, as first buyers, knew of the second transaction it will not bar them from availing of their
rights granted by law, among them, to register first their agreement as against the second buyer.
In contrast, knowledge gained by Cheng of the first transaction between the Da Jose spouses and
Genato defeats his rights even if he is first to register the second transaction, since such knowledge
taints his prior registration with bad faith.
"Registration", as defined by Soler and Castillo, means any entry made in the books of the registry,
including both registration in its ordinary and strict sense, and cancellation, annotation, and even
marginal notes. 41 In its strict acceptation, it is the entry made in the registry which records solemnly and
permanently the right of ownership and other real rights. 42 We have ruled 43 before that when a Deed of
Sale is inscribed in the registry of property on the original document itself, what was done with respect to
said entries or annotations and marginal notes amounted to a registration of the sale. In this light, we see
no reason why we should not give priority in right the annotation made by the Da Jose spouses with
respect to their Contract to Sell dated September 6, 1989.

Moreover, registration alone in such cases without good faith is not sufficient. Good faith must
concur with registration for such prior right to be enforceable. In the instant case, the annotation
made by the Da Jose spouses on the titles of Genato of their "Contract To Sell" more than satisfies
this requirement. Whereas in the case of Genato's agreement with Cheng such is unavailing. For
even before the receipt, Exh. "D," was issued to Cheng information of such pre-existing agreement
has been brought to his knowledge which did not deter him from pursuing his agreement with
Genato. We give credence to the factual finding of the appellate court that "Cheng himself admitted
that it was he who sought Genato in order to inquire about the property and offered to buy the
same. 44 And since Cheng was fully aware, or could have been if he had chosen to inquire, of the rights of
the Da Jose spouses under the Contract to Sell duly annotated on the transfer certificates of titles of
Genato, it now becomes unnecessary to further elaborate in detail the fact that he is indeed in bad faith in
entering into such agreement. As we have held in Leung Yee vs. F.L. Strong Machinery Co.: 45

One who purchases real estate with knowledge of a defect . . . of title in his vendor
cannot claim that he has acquired title thereto in good faith as against . . . . an
interest therein; and the same rule must be applied to one who has knowledge of
facts which should have put him upon such inquiry and investigation as might be
necessary to acquaint him with the defects in the title of his vendor. A purchaser
cannot close his eyes to facts which should put a reasonable man upon his guard,
and then claim that he acted in good faith under the belief that there was no defect in
the title of the vendor. His mere refusal to believe that such defect exists, or his willful
closing of his eyes to the possibility of the existence of a defect in his vendor's title,
will not make him an innocent purchaser for value, if it afterwards develops that the
title was in fact defective, and it appears that he had such notice of the defect as
would have led to its discovery had he acted with that measure of precaution which
may reasonably be required of a prudent man in a like situation. Good faith, or lack of

it, is in its last analysis a question of intention; but in ascertaining the intention by
which one is actuated on a given occasion, we are necessarily controlled by the
evidence as to the conduct and outward acts by which alone the inward motive may
with safety, be determined. So it is that "the honesty of intention," "the honest lawful
intent," which constitutes good faith implies a "freedom from knowledge and
circumstances which ought to put a person on inquiry," and so it is that proof of such
knowledge overcomes the presumption of good faith in which the courts always
indulge in the absence of the proof to the contrary. "Good faith, or the want of it, is
not a visible, tangible fact that can be seen or touched, but rather a state or condition
of mind which can only be judge of by actual or fancied tokens or signs." (Wilder vs.
Gilman, 55 Vt. 504, 505; Cf. Cardenas vs. Miller, 108 Cal., 250; Breaux-Renoudet,
Cypress Lumber Co. vs. Shadel, 52 La. Ann., 2094-2098; Pinkerton Bros. Co. vs.
Bromely, 119 Mich., 8, 10, 17.) (Emphasis ours)
Damages were awarded by the appellate court on the basis of its finding that petitioner "was in bad
faith when he filed the suit for specific performance knowing fully well that his agreement with
Genato did not push through. 46Such bad faith, coupled with his wrongful interference with the
contractual relations between Genato and the Da Jose spouses, which culminated in his filing of the
present suit and thereby creating what the counsel for the respondents describes as "a prolonged and
economically unhealthy gridlock 47 on both the land itself and the respondents' rights provides ample basis
for the damages awarded. Based on these overwhelming evidence of bad faith on the part of herein
petitioner Ricardo Cheng, we find that the award of damages made by the appellate court is in order.

WHEREFORE, premises considered, the instant petition for review is DENIED and the assailed
decision is hereby AFFIRMED EN TOTO.
SO ORDERED.
Belosillo, Puno and Mendoza, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-48194 March 15, 1990
JOSE M. JAVIER and ESTRELLA F. JAVIER, petitioners,
vs.
COURT OF APPEALS and LEONARDO TIRO, respondents.
Eddie Tamondong for petitioners.
Lope Adriano and Emmanuel Pelaez, Jr. for private respondent.

REGALADO, J.:
Petitioners pray for the reversal of the decision of respondent Court of Appeals in CA-G.R. No.
52296-R, dated March 6, 1978, 1 the dispositive portion whereof decrees:
WHEREFORE, the judgment appealed from is hereby set aside and another one
entered ordering the defendants-appellees, jointly and solidarily, to pay plaintiffappellant the sum of P79,338.15 with legal interest thereon from the filing of the
complaint, plus attorney's fees in the amount of P8,000.00. Costs against
defendants-appellees. 2
As found by respondent court or disclosed by the records, 3 this case was generated by the following
antecedent facts.

Private respondent is a holder of an ordinary timber license issued by the Bureau of Forestry
covering 2,535 hectares in the town of Medina, Misamis Oriental. On February 15, 1966 he executed
a "Deed of Assignment" 4 in favor of herein petitioners the material parts of which read as follows:
xxx xxx xxx
I, LEONARDO A. TIRO, of legal age, married and a resident of Medina, Misamis
Oriental, for and in consideration of the sum of ONE HUNDRED TWENTY
THOUSAND PESOS (P120,000.00), Philippine Currency, do by these presents,
ASSIGN, TRANSFER AND CONVEY, absolutely and forever unto JOSE M. JAVIER
and ESTRELLA F. JAVIER, spouses, of legal age and a resident (sic) of 2897 F.B.
Harrison, Pasay City, my shares of stocks in the TIMBERWEALTH CORPORATION
in the total amount of P120,000.00, payment of which shall be made in the following
manner:
1. Twenty thousand (P20,000.00) Pesos upon signing of this contract;

2. The balance of P100,000.00 shall be paid P10,000.00 every

shipment of export logs actually produced from the forest concession
of Timberwealth Corporation.
That I hereby agree to sign and endorse the stock certificate in favor of Mr. & Mrs.
Jose M. Javier, as soon as stock certificates are issued.
xxx xxx xxx
At the time the said deed of assignment was executed, private respondent had a pending
application, dated October 21, 1965, for an additional forest concession covering an area of 2,000
hectares southwest of and adjoining the area of the concession subject of the deed of assignment.
Hence, on February 28, 1966, private respondent and petitioners entered into another
"Agreement" 5 with the following stipulations:
xxx xxx xxx
1. That LEONARDO TIRO hereby agrees and binds himself to transfer, cede and
convey whatever rights he may acquire, absolutely and forever, to TIMBERWEALTH
CORPORATION, a corporation duly organized and existing under the laws of the
Philippines, over a forest concession which is now pending application and approval
as additional area to his existing licensed area under O.T. License No. 391-103166,
situated at Medina, Misamis Oriental;
2. That for and in consideration of the aforementioned transfer of rights over said
additional area to TIMBERWEALTH CORPORATION, ESTRELLA F. JAVIER and
JOSE M. JAVIER, both directors and stockholders of said corporation, do hereby
undertake to pay LEONARDO TIRO, as soon as said additional area is approved
and transferred to TIMBERWEALTH CORPORATION the sum of THIRTY
THOUSAND PESOS (P30,000.00), which amount of money shall form part of their
paid up capital stock in TIMBERWEALTH CORPORATION;
3. That this Agreement is subject to the approval of the members of the Board of
Directors of the TIMBERWEALTH CORPORATION.
xxx xxx xxx
On November 18, 1966, the Acting Director of Forestry wrote private respondent that his forest
concession was renewed up to May 12, 1967 under O.T.L. No. 391-51267, but since the concession
consisted of only 2,535 hectares, he was therein informed that:
In pursuance of the Presidential directive of May 13, 1966, you are hereby given until
May 12, 1967 to form an organization such as a cooperative, partnership or
corporation with other adjoining licensees so as to have a total holding area of not
less than 20,000 hectares of contiguous and compact territory and an aggregate
allowable annual cut of not less than 25,000 cubic meters, otherwise, your license
will not be further renewed. 6
Consequently, petitioners, now acting as timber license holders by virtue of the deed of assignment
executed by private respondent in their favor, entered into a Forest Consolidation Agreement 7 on
April 10, 1967 with other ordinary timber license holders in Misamis Oriental, namely, Vicente L. De Lara,
Jr., Salustiano R. Oca and Sanggaya Logging Company. Under this consolidation agreement, they all

agreed to pool together and merge their respective forest concessions into a working unit, as envisioned
by the aforementioned directives. This consolidation agreement was approved by the Director of Forestry
on May 10, 1967. 8 The working unit was subsequently incorporated as the North Mindanao Timber
Corporation, with the petitioners and the other signatories of the aforesaid Forest Consolidation
Agreement as incorporators. 9

On July 16, 1968, for failure of petitioners to pay the balance due under the two deeds of
assignment, private respondent filed an action against petitioners, based on the said contracts, for
the payment of the amount of P83,138.15 with interest at 6% per annum from April 10, 1967 until full
payment, plus P12,000.00 for attorney's fees and costs.
On September 23, 1968, petitioners filed their answer admitting the due execution of the contracts
but interposing the special defense of nullity thereof since private respondent failed to comply with
his contractual obligations and, further, that the conditions for the enforceability of the obligations of
the parties failed to materialize. As a counterclaim, petitioners sought the return of P55,586.00 which
private respondent had received from them pursuant to an alleged management agreement, plus
attorney's fees and costs.
On October 7, 1968, private respondent filed his reply refuting the defense of nullity of the contracts
in this wise:
What were actually transferred and assigned to the defendants were plaintiff's rights
and interest in a logging concession described in the deed of assignment, attached
to the complaint and marked as Annex A, and agreement Annex E; that the "shares
of stocks" referred to in paragraph II of the complaint are terms used therein merely
to designate or identify those rights and interests in said logging concession. The
defendants actually made use of or enjoyed not the "shares of stocks" but the
logging concession itself; that since the proposed Timberwealth Corporation was
owned solely and entirely by defendants, the personalities of the former and the latter
are one and the same. Besides, before the logging concession of the plaintiff or the
latter's rights and interests therein were assigned or transferred to defendants, they
never became the property or assets of the Timberwealth Corporation which is at
most only an association of persons composed of the defendants. 10
and contending that the counterclaim of petitioners in the amount of P55,586.39 is actually only a
part of the sum of P69,661.85 paid by the latter to the former in partial satisfaction of the latter's
claim. 11
After trial, the lower court rendered judgment dismissing private respondent's complaint and ordering
him to pay petitioners the sum of P33,161.85 with legal interest at six percent per annum from the
date of the filing of the answer until complete payment. 12
As earlier stated, an appeal was interposed by private respondent to the Court of Appeals which
reversed the decision of the court of a quo.
On March 28, 1978, petitioners filed a motion in respondent court for extension of time to file a
motion for reconsideration, for the reason that they needed to change counsel. 13 Respondent court,
in its resolution dated March 31, 1978, gave petitioners fifteen (15) days from March 28, 1978 within
which to file said motion for reconsideration, provided that the subject motion for extension was filed on
time. 14 On April 11, 1978, petitioners filed their motion for reconsideration in the Court of Appeals. 15 On
April 21, 1978, private respondent filed a consolidated opposition to said motion for reconsideration on
the ground that the decision of respondent court had become final on March 27, 1978, hence the motion

for extension filed on March 28, 1978 was filed out of time and there was no more period to extend.
However, this was not acted upon by the Court of Appeals for the reason that on April 20, 1978, prior to
its receipt of said opposition, a resolution was issued denying petitioners' motion for reconsideration, thus:

The motion for reconsideration filed on April 11, 1978 by counsel for defendantsappellees is denied. They did not file any brief in this case. As a matter of fact this
case was submitted for decision without appellees' brief. In their said motion, they
merely tried to refute the rationale of the Court in deciding to reverse the appealed
judgment. 16
Petitioners then sought relief in this Court in the present petition for review on certiorari. Private
respondent filed his comment, reiterating his stand that the decision of the Court of Appeals under
review is already final and executory.
Petitioners countered in their reply that their petition for review presents substantive and
fundamental questions of law that fully merit judicial determination, instead of being suppressed on
technical and insubstantial reasons. Moreover, the aforesaid one (1) day delay in the filing of their
motion for extension is excusable, considering that petitioners had to change their former counsel
who failed to file their brief in the appellate court, which substitution of counsel took place at a time
when there were many successive intervening holidays.
On July 26, 1978, we resolved to give due course to the petition.
The one (1) day delay in the filing of the said motion for extension can justifiably be excused,
considering that aside from the change of counsel, the last day for filing the said motion fell on a
holiday following another holiday, hence, under such circumstances, an outright dismissal of the
petition would be too harsh. Litigations should, as much as possible, be decided on their merits and
not on technicalities. In a number of cases, this Court, in the exercise of equity jurisdiction, has
relaxed the stringent application of technical rules in order to resolve the case on its merits. 17 Rules
of procedure are intended to promote, not to defeat, substantial justice and, therefore, they should not be
applied in a very rigid and technical sense.

We now proceed to the resolution of this case on the merits.

The assignment of errors of petitioners hinges on the central issue of whether the deed of
assignment dated February 15, 1966 and the agreement of February 28, 1966 are null and void, the
former for total absence of consideration and the latter for non-fulfillment of the conditions stated
therein.
Petitioners contend that the deed of assignment conveyed to them the shares of stocks of private
respondent in Timberwealth Corporation, as stated in the deed itself. Since said corporation never
came into existence, no share of stocks was ever transferred to them, hence the said deed is null
and void for lack of cause or consideration.
We do not agree. As found by the Court of Appeals, the true cause or consideration of said deed
was the transfer of the forest concession of private respondent to petitioners for P120,000.00. This
finding is supported by the following considerations, viz:
1. Both parties, at the time of the execution of the deed of assignment knew that the Timberwealth
Corporation stated therein was non-existent. 18

2. In their subsequent agreement, private respondent conveyed to petitioners his inchoate right over
a forest concession covering an additional area for his existing forest concession, which area he had
applied for, and his application was then pending in the Bureau of Forestry for approval.
3. Petitioners, after the execution of the deed of assignment, assumed the operation of the logging
concessions of private respondent. 19
4. The statement of advances to respondent prepared by petitioners stated: "P55,186.39 advances
to L.A. Tiro be applied to succeeding shipments. Based on the agreement, we pay P10,000.00 every
after (sic) shipment. We had only 2 shipments" 20
5. Petitioners entered into a Forest Consolidation Agreement with other holders of forest
concessions on the strength of the questioned deed of assignment. 21
The aforesaid contemporaneous and subsequent acts of petitioners and private respondent reveal
that the cause stated in the questioned deed of assignment is false. It is settled that the previous and
simultaneous and subsequent acts of the parties are properly cognizable indica of their true
intention. 22 Where the parties to a contract have given it a practical construction by their conduct as by
acts in partial performance, such construction may be considered by the court in construing the contract,
determining its meaning and ascertaining the mutual intention of the parties at the time of
contracting. 23 The parties' practical construction of their contract has been characterized as a clue or
index to, or as evidence of, their intention or meaning and as an important, significant, convincing,
persuasive, or influential factor in determining the proper construction of the agreement. 24

The deed of assignment of February 15, 1966 is a relatively simulated contract which states a false
cause or consideration, or one where the parties conceal their true agreement. 25 A contract with a
false consideration is not null and void per se. 26 Under Article 1346 of the Civil Code, a relatively
simulated contract, when it does not prejudice a third person and is not intended for any purpose contrary
to law, morals, good customs, public order or public policy binds the parties to their real agreement.

The Court of Appeals, therefore, did not err in holding petitioners liable under the said deed and in
ruling that
. . . In view of the analysis of the first and second assignment of errors, the
defendants-appellees are liable to the plaintiff-appellant for the sale and transfer in
their favor of the latter's forest concessions. Under the terms of the contract, the
parties agreed on a consideration of P120,000.00. P20,000.00 of which was paid,
upon the signing of the contract and the balance of P100,000.00 to be paid at the
rate of P10,000.00 for every shipment of export logs actually produced from the
forest concessions of the appellant sold to the appellees. Since plaintiff-appellant's
forest concessions were consolidated or merged with those of the other timber
license holders by appellees' voluntary act under the Forest Consolidation
Agreement (Exhibit D), approved by the Bureau of Forestry (Exhibit D-3), then the
unpaid balance of P49,338.15 (the amount of P70,661.85 having been received by
the plaintiff-appellant from the defendants-appellees) became due and
demandable. 27
As to the alleged nullity of the agreement dated February 28, 1966, we agree with petitioners that
they cannot be held liable thereon. The efficacy of said deed of assignment is subject to the
condition that the application of private respondent for an additional area for forest concession be
approved by the Bureau of Forestry. Since private respondent did not obtain that approval, said
deed produces no effect. When a contract is subject to a suspensive condition, its birth or effectivity

can take place only if and when the event which constitutes the condition happens or is fulfilled.

28

If
the suspensive condition does not take place, the parties would stand as if the conditional obligation had
never existed. 29

The said agreement is a bilateral contract which gave rise to reciprocal obligations, that is, the
obligation of private respondent to transfer his rights in the forest concession over the additional area
and, on the other hand, the obligation of petitioners to pay P30,000.00. The demandability of the
obligation of one party depends upon the fulfillment of the obligation of the other. In this case, the
failure of private respondent to comply with his obligation negates his right to demand performance
from petitioners. Delivery and payment in a contract of sale, are so interrelated and intertwined with
each other that without delivery of the goods there is no corresponding obligation to pay. The two
complement each other. 30
Moreover, under the second paragraph of Article 1461 of the Civil Code, the efficacy of the sale of a
mere hope or expectancy is deemed subject to the condition that the thing will come into existence.
In this case, since private respondent never acquired any right over the additional area for failure to
secure the approval of the Bureau of Forestry, the agreement executed therefor, which had for its
object the transfer of said right to petitioners, never became effective or enforceable.
WHEREFORE, the decision of respondent Court of Appeals is hereby MODIFIED. The agreement of
the parties dated February 28, 1966 is declared without force and effect and the amount of
P30,000.00 is hereby ordered to be deducted from the sum awarded by respondent court to private
respondent. In all other respects, said decision of respondent court is affirmed.
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Sarmiento JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 171312

February 4, 2008

SPS. LINO FRANCISCO & GUIA FRANCISCO, petitioners,

vs.
DEAC CONSTRUCTION, INC. and GEOMAR A. DADULA, respondents.
DECISION
TINGA, J.:
The Spouses Lino and Guia Francisco (Spouses Francisco) assail the Decision1 of the Court of
Appeals dated 28 July 2005, rendered in favor of respondents DEAC Construction, Inc. (DEAC) and
Geomar Dadula (Dadula), upholding the latter's monetary claims against the Spouses Francisco.
The appellate court's decision reversed and set aside the Decision2 of the Regional Trial Court of
Manila, Branch 28, dated 2 February 1998 which ordered the partial rescission of the 13 September
1994 Construction Contract between the parties and awarded moral and exemplary damages and
attorney's fees to the Spouses Francisco.
The findings of fact of the trial court and the Court of Appeals are in conflict on the question of
whether the Spouses Francisco authorized the deviations on the building plan, particularly with
regard to the closing of the open space and the reduction of the setback from the property line. They
are, however, in agreement as to the following antecedents quoted from the appellate court's
decision:
Plaintiffs-appellees Lino Francisco and Guia Francisco obtained the services of defendantappellant DEAC Construction, Inc. (DEAC) to construct a 3-storey residential building with
mezzanine and roof deck on their lot located at 118 Pampanga Street, Gagalangin, Tondo,
Manila for a contract price of P3,500,000.00. As agreed upon, a downpayment
of P2,000,000.00 should be paid upon signing of the contract of construction, and the
remaining balance of P1,500,000.00 was to be paid in two equal installments: the first
installment of P750,000.00 should be paid upon completion of the foundation structure and
the ground floor, which amount would be used primarily for the construction of the second
floor to the roof deck while the final amount of P750,000.00 should be paid upon completion
of the second floor up to the roof deck structure to defray the expenses necessary for
finishing and completion of the building. To undertake the said project, DEAC engaged the
services of a sub-contractor, Vigor Construction and Development Corporation, but allegedly
without the plaintiffs-appellees' knowledge and consent.
On September 12, 1994, even prior to the execution of the contract, the plaintiffs-appellees
had paid the downpayment of P2,000,000.00. The amount of P200,000.00 was again paid to
DEAC on February 27, 1995 followed by the payment of P550,000.00 on April 2, 1995.
Plaintiff-appellant Guia Francisco likewise paid the amount of P80,000.00 on June 5, 1995
for the requested "additional works" on the project.
The construction of the residential building commenced in October 1994 although DEAC,
upon which the obligation pertained, had not yet obtained the necessary building permit for

the proposed construction. It was on this basis that the owner Lino Francisco was charged
with violation of Section 301, Chapter 3 (Illegal Construction) of [P.D. No.] 1096 otherwise
known as the National Building Code of the Philippines with the Metropolitan Trial Court of
Manila, Branch 12.
On March 7, 1995, the Office of the Building Official of the City of Manila finally issued the
requisite Building Permit. Thus, the complaint against owner Lino Francisco was accordingly
dismissed. As admitted by DEAC, the release of the said permit was withheld because of the
erroneous designation of the location of the lot in one of the building plans. Thus, DEAC had
to make the necessary adjustment. However, before the Office of the Building Official finally
approved the amended building plan, it made some necessary corrections therein. And to
facilitate the said approval and the subsequent release of the building permit, the signatures
of plaintiff-appellee Guia Francisco in the said amended and corrected building plans were
forged by DEAC's representative.
But aside from [the] lack of building permit, the building inspector also observed, after
periodic inspections of the construction site, that the contractor deviated, on some
specifications, from the approved plans. Thus, on April 7, 1995, the Office of the Building
Official of Manila issued another Notice of Violation against owner Lino Francisco, while at
the same time calling the attention of the contractor, on account of the following deviations
and violations, to wit:
1. The 1.00 mt. setback from the property line instead of 1.45 mts. as per approved
plan was not followed in violation [of] Sec. 306, Chapter 3 [PD 1096, otherwise
known as the National Building Code (NBC)];
2. The [excessive] projection of 0.50 mt. from 3rd floor level to [roof] deck in violation
[of] Sec. 306, Chapter 3 of the NBC (PD 1096);
3. The required open patio was covered in pursuant (sic) to Sec. 306[,] Chapter 3 [of
PD 1096];
4. Provision of window opening along the right-side firewall in pursuant (sic) to Sec.
1007 Chapter 10 of [PD 1096];
5. Stockpiling of [construction materials] along the street/sidewalk area in violation
[of] Sec. 5[,] Rule VI of the IRR;
6. Please provide minimum safety and protection in pursuant (sic) 2.3, 2.4, and 2.5 of
Rule XX of the IRR.
The said notice was received on April 11, 1995 by Engr. Mike Marquez of DEAC
Construction, Inc. The plaintiffs-appellees, however, denied having received any notice from
the Office of the Building Official of Manila regarding the on-going construction.
In a letter dated July 1, 1995, the plaintiffs-appellees, through their counsel, suddenly
complained of several infractions emanating from the construction of the project allegedly
committed by DEAC, to wit:
a. Implementation of the project was started immediately after signing of the contract
on 15 September 1994 without any building permit and approved plans.

b. Building permit was released only on (sic) March 1995 together with the approved
plans with necessary corrections made by the Office of the Building Official. You did
not inform the owners about the corrections. The signatures of Mrs. Guia Francisco
appearing on the building plans were forgeries.
c. [The] Approved [C]onstruction [P]lans were not strictly followed during the actual
implementation of the project. Open space/patio which is 20% of lot area (based on
National Building Code) for inside lot was deleted.
d. No written formal approval from the owners for the alteration of plans.
e. Poor workmanship.
i. Marble slabs installed were not approved by the owner.
ii. Beam below the 1st landing at the ground floor is too low.
iii. Ground floor Finish floor line is below the ordinary flood level in the area.
The contractor has been repeatedly instructed to raise the ground floor finish
elevation but insisted on their decision.
f. Poor supervision of the construction works.
The plaintiffs-appellees demanded that DEAC must comply with the approved plan,
construction contract, National Building Code, and the Revised Penal Code, otherwise, they
would be compelled to invoke legal remedies. In the meantime that the necessary works and
construction were demanded to be undertaken, the last and final installment was withheld.
DEAC responded, also through a letter prepared by its counsel, that it had faithfully complied
with its obligation under the contract, thus, to demand for further compliance would be
improper. It said that if somebody had breached the contract, it was the plaintiffs-appellees,
because the last installment of P750,000.00 which was supposed to have been paid after the
second floor and the roof deck structure was completed, which allegedly had long been
accomplished, was not yet paid. To settle their differences, DEAC had given the plaintiffsappellees the option to either pay the full amount of P750,000.00, so that the finishing stage
of the project would be completed, or just pay the worth of the work already done, which was
assessed at P250,000.00.
On July 21, 1995, a Work Stoppage Order was issued against the plaintiff-appellee Lino
Francisco pursuant to the previous April 7, 1995 Notice of Violations. Having learned of such
order, the plaintiffs-appellees allegedly immediately proceeded to the Office of the Building
Official of Manila to explain that DEAC was the one responsible for such violations, and that
the deviations of the approved plan being imputed against Lino Francisco were unilateral
acts of DEAC. They also filed a complaint for "Non-Compliance of the Building Plan, Illegal
Construction, abandonment and other violations of the Building Code" against DEAC with
the said Office. The said complaint was endorsed to the City Prosecutor of Manila which
culminated in the filing of a criminal case against Geomar A. Dadula and DEAC project
engineer Leoncio C. Alambra for deviation and violation of specification plan.
The plaintiffs-appellees also filed this civil case for Rescission of Contract and Damages on
September 21, 1995 with the Regional Trial Court of Manila, Branch 28, against DEAC and
its President Geomar A. Dadula.

After due proceedings, the defendants-appellants were found to have breached their
contractual obligation with the plaintiffs-appellees. Among their violations were: (1) the
construction of the building without the necessary building permit, which violated Section 3,
Article IV of the Construction Contract; and (2) the deviation or revision of the approved
building plan in the actual construction. On the other hand, the trial court said that the refusal
of the plaintiffs-appellees to pay the final installment of P750,000.00 was only justified
because of the defendants-appellants' violations of the contract. Thus, on account of such
violations, rescission of the contract was warranted. However, since the subject building was
already 70% to 75% completed, only partial rescission was ordered. Pursuant thereto, DEAC
was ordered to refund the sum of P205,000.00 to the plaintiffs-appellees after considering
the following computations:
Contract price

- P3.5 Million

% of work completed

- 75%

Contract Price x % of work completed

- P3.5 Million x 75%

= P2,625,000.[00]

Actual Payment

- 2,830,000.00

Less cost of work completed

- 2,625,000.00

Difference

- 205,000.00

In addition, damages was awarded based on par. 2, Article 1191 of the New Civil Code
which provides for the award of damages in case of rescission of contract. Geomar Dadula,
being the President of DEAC, was likewise held solidarily liable with the latter.3
Ruling that the Spouses Francisco were the ones who initiated and requested the deviations, the
appellate court held that respondents fully complied with their obligation under the contract and
ordered the Spouses Francisco to pay the balance of the contract price. It also ordered them to pay
moral damages, attorney's fees and costs of suit.
Before this Court, the Spouses Francisco question the appellate court's finding that they were the
ones who requested the deviations in the building plan, particularly with regard to the closing of the
open space and the reduction of the setback from the property line. They maintain that they did not
waive their right to demand rescission as a result of the disputed deviations and because of the fact
that DEAC commenced construction without first securing a building permit as was incumbent upon
it under their contract. In fact, apart from the present case, the Spouses Francisco filed a criminal
suit against respondent Dadula taking him to task for these violations, of which the latter was found
guilty.
Respondents, in their Comment4 dated 8 June 2006, assert that the deviations in the building plan
were done upon the request of the Spouses Francisco. Respondent Dadula had even warned them
that building the structure close to the property line could violate the required setback. They also
claim that the belated issuance of the building permit was due to neglect in the supervision of a
subordinate and does not indicate any bad faith on their part.5 At any rate, the fact that this issue
was raised only after several months had passed from the time construction started allegedly
suggests waiver on the part of the Spouses Francisco.
A Reply,6 dated 30 September 2006 was filed by the Spouses Francisco reiterating their argument
that respondent Dadula's conviction in the criminal case should be taken into account in the present
case.

As earlier adverted to, the trial court held that respondents deviated from the specifications and
terms of the contract, particularly with regard to the open space closing and the setback reduction,
without securing the approval of the Spouses Francisco. On the other hand, the appellate court held
that the Spouses Francisco were the ones who initiated and requested the deviations. The conflict in
these findings warrants a departure from the general rule that this Court shall not entertain petitions
for review which substantially raisequestions of fact.7 The conflict accounts for the divergence of the
decisions of the courts below.8
The records reveal that respondents admitted having failed to secure a building permit before
construction of the residential building subject of this case commenced. This blunder exposed
petitioner Lino Francisco to criminal prosecution as, in fact, an Information9 dated 5 December 1995
was filed against him with the Metropolitan Trial Court of Manila, Branch 12, for violation of Section
301, Chapter 3 (Illegal Construction) of the National Building Code of the Philippines.10 It appears
that this Information was preceded by several Notices of Illegal Construction sent by the Office of the
Building Official of Manila supposedly addressed to petitioner Lino Francisco, but which the latter
would not have gotten wind of had he not inquired with the said office about certain documents
relative to the construction.
Respondents DEAC and Dadula, to whom the obligation of securing the building permit pertained,
should obviously have ensured compliance with the requirements set forth by law. At the very least,
good faith and fair dealing ordain that they inform the Spouses Francisco that the building permit had
not yet been issued especially that they had already received a substantial amount of money from
the latter and had already started the construction of the building.11
Parenthetically, the Spouses Francisco disclose that the Metropolitan Trial Court of Manila, Branch
23, found respondent Dadula guilty of violating the National Building Code for his failure to follow the
required setback from the property line; the excessive projection of the roof deck of the structure; the
deviation in the covering of the required patio; the illegal stockpiling of construction materials; the
lack of safety standards in the construction; and his failure to secure a building permit for the
construction.12 This conviction was consistently affirmed by the Regional Trial Court,13 the Court of
Appeals14 and ultimately this Court.15 The RTC even noted that "defendants admitted that there were
deviations from the plans and that they forged the signature of Mrs. Guia Francisco to ensure early
approval of the permit."16
The foregoing matters are essential to the propriety of the trial court's ruling that partial rescission is
warranted in view of the failure of respondents to comply with what was incumbent upon them under
the construction contract and the consequent prejudice and damage caused to petitioners by
respondents' actions. Of equal importance, of course, is the correctness of its finding that the
deviations from the building plan were not authorized by the Spouses Francisco.
Our own review of the records reveals that the open space was closed by respondents without the
approval of the Spouses Francisco and in violation of the National Building Code. During the 27 May
1995 meeting between the parties in which they were called to thresh out their differences,
respondents stated that the open space indicated on the plan was omitted in the actual construction
"in order to give extra space for the building,"17 and not because the Spouses Francisco requested
such closure, if such was really the case. Respondents also mentioned that the contractor forged
petitioner Guia Francisco's signature "in the City Hall in order to process the early approval of plans.
Also, alterations were done in the City Hall."18
Curiously, the Court of Appeals relied on the same exhibit in arriving at its conclusion that the
Spouses Francisco authorized, even requested, the changes in the building plan. Apparently, the
appellate court interpreted the agreement between the parties regarding the extension of the second

floor balcony as the Spouses Francisco's approval of the closure of the open space and reduction in
the required setback from the property line. As pointed out by petitioners, however, the extension of
the second floor balcony was entirely distinct from the closure of the open space and reduction of
the setback from the property line.
Respondents' mistake in identifying the exact location of the property which led to the delay in the
issuance of a building permit and forgery of petitioner Guia Francisco's signature on the building plan
exhibits a proclivity for error and taking the easy way out. This aspect does not sit well with the
Court. The Spouses Francisco should be allowed to rescind the contract to the extent that this is
possible under the circumstances.
Article 1191 of the Civil Code provides that the power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is incumbent upon him. The rescission
referred to in this article, more appropriately referred to as resolution, is not predicated on injury to
economic interests on the part of the party plaintiff, but of breach of faith by the defendant which is
violative of the reciprocity between the parties.19The right to rescind may be waived, expressly or
impliedly.
The Spouses Francisco, in their 1 July 1995 letter to respondents, complained, among others, about
the belated release of the building permit, the unauthorized corrections in the building plan, the
forgery of petitioner Guia Francisco's signature on the building plan, and the deletion of the open
space/patio in the actual construction of the project. The filing of a criminal case against respondent
Dadula and the subsequent filing of this civil case for rescission and damages within a reasonable
time after the Spouses Francisco had learned that construction of their building commenced without
the necessary building permit and discovered that there were deviations from the building plan
demonstrate the vigilance with which they guarded their rights. The appellate court's conclusion that
the Spouses Francisco should be deemed to have waived their right to seek rescission is clearly
unfounded.
Finally, given the fact that the construction in this case is already 75% complete, the trial court was
correct in ordering partial rescission only of the undelivered or unfinished portion of the
construction.20 Equitable considerations justify rescission of the portion of the obligation which had
not been delivered.
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals, dated 28 July 2005
and its Resolution, dated 31 January 2006 are REVERSED and SET ASIDE. The Decision of the
Regional Trial Court of Manila, Branch 28 in Civil Case No. 95-75430 is hereby REINSTATED.
SO ORDERED.
Quisumbing,Chairperson Carpio, Carpio-Morales, Velasco, Jr., JJ., concur.

SECOND DIVISION

[G.R. No. 144934. January 15, 2004]

ADELFA S. RIVERA, CYNTHIA S. RIVERA, and JOSE S.

RIVERA, petitioners, vs. FIDELA DEL ROSARIO (deceased and
substituted by her co-respondents), and her children, OSCAR,
ROSITA, VIOLETA, ENRIQUE JR., CARLOS, JUANITO and
ELOISA, all surnamed DEL ROSARIO,respondents.
DECISION
QUISUMBING, J.:

Before us is a petition for review on certiorari of the Court of Appeals

decision , dated November 29, 1999, in CA-G.R. CV No. 60552, which
affirmed the judgment of the Regional Trial Court (RTC) of Malolos, Bulacan,
Branch 17, in Civil Case No. 151-M-93. The RTC granted respondents
complaint for nullity of contract of sale and annulment of the transfer
certificates of title issued in favor of petitioners.
[1]

[2]

The facts, as found by the Court of Appeals, are as follows:

Respondents Fidela (now deceased), Oscar, Rosita, Violeta, Enrique Jr.,
Carlos, Juanito and Eloisa, all surnamed Del Rosario, were the registered
owners of Lot No. 1083-C, a parcel of land situated at Lolomboy,
Bulacan. This lot spanned an area of 15,029 square meters and was covered
by TCT No. T-50.668 (M) registered in the Registry of Deeds of Bulacan.
On May 16, 1983, Oscar, Rosita, Violeta, Enrique Jr., Juanito, and Eloisa,
executed a Special Power of Attorney in favor of their mother and corespondent, Fidela, authorizing her to sell, lease, mortgage, transfer and
convey their rights over Lot No. 1083-C. Subsequently, Fidela
borrowed P250,000 from Mariano Rivera in the early part of 1987. To secure
the loan, she and Mariano Rivera agreed to execute a deed of real estate
mortgage and an agreement to sell the land. Consequently, on March 9,
1987, Mariano went to his lawyer, Atty. Efren Barangan, to have three
documents
drafted:
the
Deed
of
Real
Estate
Mortgage ,
a Kasunduan (Agreement to Sell) , and a Deed of Absolute Sale.
[3]

[4]

[5]

[6]

[7]

The Kasunduan provided that the children of Mariano Rivera, herein

petitioners Adelfa, Cynthia and Jose, would purchase Lot No. 1083-C for a
consideration of P2,141,622.50. This purchase price was to be paid in three
installments: P250,000 upon the signing of the Kasunduan, P750,000 on
August 31, 1987, and P1,141,622.50 on December 31, 1987. It also provided
that the Deed of Absolute Sale would be executed only after the second
installment is paid and a postdated check for the last installment is deposited
with Fidela. As previously stated, however, Mariano had already caused the
drafting of the Deed of Absolute Sale. But unlike the Kasunduan, the said
deed stipulated a purchase price of only P601,160, and covered a certain Lot
No. 1083-A in addition to Lot No. 1083-C. This deed, as well as
the Kasunduan and the Deed of Real Estate Mortgage , was signed by
Marianos children, petitioners Adelfa, Cynthia and Jose, as buyers and
mortgagees, on March 9, 1987.
[8]

[9]

[10]

[11]

[12]

The following day, Mariano Rivera returned to the office of Atty. Barangan,
bringing with him the signed documents. He also brought with him Fidela and
her son Oscar del Rosario, so that the latter two may sign the mortgage and
the Kasunduan there.
Although Fidela intended to sign only the Kasunduan and the Real Estate
Mortgage, she inadvertently affixed her signature on all the three documents
in the office of Atty. Barangan on the said day, March 10, 1987. Mariano then
gave Fidela the amount of P250,000. On October 30, 1987, he also gave
Fidela a check for P200,000. In the ensuing months, also, Mariano gave
Oscar del Rosario several amounts totaling P67,800 upon the latters demand
for the payment of the balance despite Oscars lack of authority to receive
payments under theKasunduan. While Mariano was making payments to
Oscar, Fidela entrusted the owners copy of TCT No. T-50.668 (M) to Mariano
to guarantee compliance with the Kasunduan.
[13]

When Mariano unreasonably refused to return the TCT, one of the

respondents, Carlos del Rosario, caused the annotation on TCT No. T-50.668
(M) of an Affidavit of Loss of the owners duplicate copy of the title on
September 7, 1992. This annotation was offset, however, when Mariano
registered the Deed of Absolute Sale on October 13, 1992, and afterwards
caused the annotation of an Affidavit of Recovery of Title on October 14,
1992. Thus, TCT No. T-50.668 (M) was cancelled, and in its place was
issued TCT No. 158443 (M) in the name of petitioners Adelfa, Cynthia and
Jose Rivera.
[14]

[15]

Meanwhile, the Riveras, representing themselves to be the new owners of

Lot No. 1083-C, were also negotiating with the tenant, Feliciano Nieto, to rid

the land of the latters tenurial right. When Nieto refused to relinquish his
tenurial right over 9,000 sq. m. of the land, the Riveras offered to give 4,500
sq. m. in exchange for the surrender. Nieto could not resist and he
accepted. Subdivision Plan No. Psd-031404-052505 was then made on
August 12, 1992. Later, it was inscribed on TCT No. 158443 (M), and Lot No.
1083-C was divided into Lots 1083 C-1 and 1083 C-2.
[16]

To document their agreement with Feliciano Nieto, the Riveras executed

a Kasulatan sa Pagtatakwil ng Karapatan sa Pagmamay-ari ng Bahagi ng
Isang Lagay na Lupa (Written Abdication of Rights over a Portion of a Parcel
of Land) on November 16, 1992. Four days later, they registered the
document with the Registry of Deeds. Two titles were then issued: TCT No.
T-161784 (M) in the name of Nieto, for 4,500 sq. m. of land, and TCT No. T161785 (M) in the name of petitioners Adelfa, Cynthia and Jose Rivera, over
the remaining 10,529 sq. m. of land.
[17]

[18]

On February 18, 1993, respondents filed a complaint in the Regional

Trial Court of Malolos, asking that the Kasunduan be rescinded for failure of
the Riveras to comply with its conditions, with damages. They also sought the
annulment of the Deed of Absolute Sale on the ground of fraud, the
cancellation of TCT No. T-161784 (M) and TCT No. T-161785 (M), and the
reconveyance to them of the entire property with TCT No. T-50.668 (M)
restored.
[19]

[20]

Respondents claimed that Fidela never intended to enter into a deed of

sale at the time of its execution and that she signed the said deed on the
mistaken
belief
that
she
was
merely
signing
copies
of
the Kasunduan. According to respondents, the position where Fidelas name
was typed and where she was supposed to sign her name in
the Kasunduan was roughly in the same location where it was typed in the
Deed of Absolute Sale. They argued that given Fidelas advanced age (she
was then around 72 at the time) and the fact that the documents were
stacked one on top of the other at the time of signing, Fidela could have easily
and mistakenly presumed that she was merely signing additional copies of
the Kasunduan. They also alleged that petitioners acquired possession of
the TCT through fraud and machination.
[21]

[22]

In their defense, petitioners denied the allegations and averred that the
Deed of Absolute Sale was validly entered into by both parties. According to
petitioners, Fidela del Rosario mortgaged Lot No. 1083-C to their predecessor
in interest, Mariano Rivera, on March 9, 1987. But on the following day Fidela
decided to sell the lot to petitioners for P2,161,622.50. When Mariano agreed
(on the condition that Lot No. 1083-C will be delivered free from all liens and

encumbrances), the Kasunduan was consequently drawn up and

signed. After that, however, Fidela informed Mariano of the existence of
Feliciano Nietos tenancy right over the lot to the extent of 9,000 sq. m. When
Mariano continued to want the land, albeit on a much lower price of
only P601,160, as he had still to deal with Feliciano Nieto, the parties drafted
the Deed of Absolute Sale on March 10, 1987, to supersede the Kasunduan.
Petitioners likewise argued that respondents cause of action had been
barred by laches or estoppel since more than four years has lapsed from the
time the parties executed the Deed of Absolute Sale on March 10, 1987, to
the time respondents instituted their complaint on February 18, 1993.
Petitioners also filed a counterclaim asking for moral and exemplary
damages and the payment of attorneys fees and costs of suit.
After trial, the RTC ruled in favor of respondents:
WHEREFORE, in the light of all the foregoing, judgment is hereby rendered:
1.

Declaring the Deed of Absolute Sale dated March 10, 1987 as null and
void;

2.

Annulling TCT No. T-158443 (M) and TCT No. T-161785 (M) both in
the names of Adelfa, Cynthia and Jose, all surnamed Rivera;

3.

Declaring the plaintiffs to be the legitimate owners of the land covered

by TCT No. T-161785 (M) and ordering defendant Adelfa, Cynthia, and
Jose, all surnamed Rivera, to reconvey the same to the plaintiffs;

4.

Ordering the Register of Deeds of Bulacan to cancel TCT No. T161785 (M) and to issue in its place a new certificate of title in the name
of the plaintiffs as their names appear in TCT No. T-50.668;

5.

Declaring TCT No. T-161784 (M) in the name of Feliciano Nieto as

valid;

6.

Ordering the defendant Riveras to pay the plaintiffs solidarily the

following amounts:
a)
b)

P191,246.98 as balance for the 4,500 square-meter portion given

to defendant Feliciano Nieto
P200,000.00 as moral damages

7.
8.

c)

P50,000.00 as exemplary damages

d)

P50,000.00 as attorneys fees

e)

costs of the suit.

Dismissing the counterclaim of the defendant Riveras;

Dismissing the counterclaim and the crossclaim of defendant Feliciano

Nieto.

SO ORDERED.

[23]

The trial court ruled that Fidelas signature in the Deed of Absolute Sale
was genuine, but found that Fidela never intended to sign the said
deed. Noting the peculiar differences between the Kasunduan and the Deed
of Absolute Sale, the trial court concluded that the Riveras were guilty of fraud
in securing the execution of the deed and its registration in the Registry of
Deeds. This notwithstanding, the trial court sustained the validity of TCT No.
T-161784 (M) in the name of Feliciano Nieto since there was no fraud proven
on Nietos part. The trial court found him to have relied in good faith on the
representations of ownership of Mariano Rivera. Thus, Nietos rights,
according to the trial court, were akin to those of an innocent purchaser for
value.
[24]

[25]

On the foregoing, the trial court rescinded the Kasunduan but ruled that
the P450,000 paid by petitioners be retained by respondents as payment for
the 4,500 sq. m. portion of Lot No. 1083-C that petitioners gave to Nieto. The
trial court likewise ordered petitioners to pay P191,246.98 as balance for the
price of the land given to Nieto, P200,000 as moral damages,P50,000 as
exemplary damages, P50,000 as attorneys fees, and the costs of suit.
[26]

[27]

On appeal to the Court of Appeals, the trial courts judgment was modified
as follows:
WHEREFORE, the judgment appealed from is hereby AFFIRMED with the
MODIFICATION that the Deed of Absolute Sale dated March 10, 1987 is declared
null and void only insofar as Lot No. 1083-C is concerned, but valid insofar as it
conveyed Lot No. 1083-A, that TCT No. 158443 (M) is valid insofar as Lot No. 1083A is concerned and should not be annulled, and increasing the amount to be paid by
the defendants-appellants to the plaintiffs-appellees for the 4,500 square meters of
land given to Feliciano Nieto to P323,617.50.

Costs against the defendants-appellants.

SO ORDERED.

[28]

Petitioners motion for reconsideration was denied. Hence, this petition.

While this petition was pending, respondent Fidela del Rosario died. She
was substituted by her children, herein respondents.
In this petition, petitioners rely on the following grounds:
I

THE HONORABLE COURT OF APPEALS COMMITTED A SERIOUS, GRAVE

AND REVERSIBLE ERROR IN AWARDING LOT 1083-A IN FAVOR OF THE
PETITIONERS AND FELICIANO NIETO WHICH IS ADMITTEDLY A PART
AND PORTION OF THE EXISTING NORTH LUZON EXPRESSWAY AND AS
SUCH ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION, OR WITH
GRAVE ABUSE OF JUDICIAL DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION.
II

RESPONDENTS FAILED TO PAY THE CORRECT DOCKET, FILING AND

OTHER LAWFUL FEES WITH THE OFFICE OF THE CLERK OF COURT OF
THE COURT A QUO (RTC, MALOLOS, BULACAN) AT THE TIME OF THE
FILING OF THE ORIGINAL COMPLAINT IN 1993 PURSUANT TO THE
SIOL DOCTRINE.
[29]

III

[THE] TRIAL COURT AWARDED RELIEFS NOT SPECIFICALLY PRAYED

FOR IN THE AMENDED COMPLAINT WITHOUT REQUIRING THE
PAYMENT OF THE CORRECT DOCKET, FILING AND OTHER LAWFUL
FEES.
IV

THE COURT A QUO HAS NO JURISDICTION OVER THE RESPONDENTS

CAUSE OF ACTION AND OVER THE RES CONSIDERING THAT FELICIANO
NIETO IS AN AGRICULTURAL TENANT OF THE RICELAND IN QUESTION.
V

RESPONDENTS[] MAIN CAUSE OF ACTION [IS] FOR RESCISSION OF

CONTRACT WHICH IS SUBSIDIARY IN NATURE[,] AND ANNULMENT OF
SALE[,] BOTH OF WHICH HAVE ALREADY PRESCRIBED UNDER ARTICLES
1389 AND 1391 OF THE CIVIL CODE.
[30]

Petitioners assignment of errors may be reduced into three issues: (1) Did
the trial court acquire jurisdiction over the case, despite an alleged deficiency
in the amount of filing fees paid by respondents and despite the fact that an
agricultural tenant is involved in the case? (2) Did the Court of Appeals
correctly rule that the Deed of Absolute Sale is valid insofar as Lot 1083-A is
concerned? (3) Is the respondents cause of action barred by prescription?
On the first issue, petitioners contend that jurisdiction was not validly
acquired because the filing fees respondents paid was only P1,554.45 when
the relief sought was reconveyance of land that was worth P2,141,622.50
under the Kasunduan. They contend that respondents should have paid filing
fees amounting to P12,183.70. In support of their argument, petitioners
invoke the doctrine in Sun Insurance Office, Ltd., (SIOL) v. Asuncion and
attach a certification from the Clerk of Court of the RTC of Quezon City.
[31]

[32]

Respondents counter that it is beyond dispute that they paid the correct
amount of docket fees when they filed the complaint. If the assessment was
inadequate, they could not be faulted because the clerk of court made no
notice of demand or reassessment, respondents argue. Respondents also
add that since petitioners failed to contest the alleged underpayment of docket
fees in the lower court, they cannot raise the same on appeal.
[33]

We rule in favor of respondents. Jurisdiction was validly acquired over the

complaint. In Sun Insurance Office, Ltd., (SIOL) v. Asuncion, this Court
ruled that the filing of the complaint or appropriate initiatory pleading and the
payment of the prescribed docket fee vest a trial court with jurisdiction over
the subject matter or nature of the action. If the amount of docket fees paid is
insufficient considering the amount of the claim, the clerk of court of the lower
court involved or his duly authorized deputy has the responsibility of making a
deficiency assessment. The party filing the case will be required to pay the
deficiency, but jurisdiction is not automatically lost.
[34]

Here it is beyond dispute that respondents paid the full amount of docket
fees as assessed by the Clerk of Court of the Regional Trial Court of Malolos,
Bulacan, Branch 17, where they filed the complaint. If petitioners believed
that the assessment was incorrect, they should have questioned it before the
trial court. Instead, petitioners belatedly question the alleged underpayment
of docket fees through this petition, attempting to support their position with

the opinion and certification of the Clerk of Court of another judicial

region. Needless to state, such certification has no bearing on the instant
case.
Petitioners also contend that the trial court does not have jurisdiction over
the case because it involves an agricultural tenant. They insist that by virtue
of Presidential Decree Nos. 316 and 1038, it is the Department of Agrarian
Reform Adjudication Board (DARAB) that has jurisdiction.
[35]

[36]

Petitioners contention lacks merit. The DARAB has exclusive original

jurisdiction over cases involving the rights and obligations of persons engaged
in the management, cultivation and use of all agricultural lands covered by the
Comprehensive Agrarian Reform Law. However, the cause of action in this
case is primarily against the petitioners, as indispensable parties, for
rescission of the Kasunduan and nullification of the Deed of Sale and the
TCTs issued because of them. Feliciano Nieto was impleaded merely as a
necessary party, stemming from whatever rights he may have acquired by
virtue of the agreement between him and the Riveras and the corresponding
TCT issued. Hence, it is the regular judicial courts that have jurisdiction over
the case.
[37]

On the second issue, contrary to the ruling of the Court of Appeals that the
Deed of Absolute Sale is void only insofar as it covers Lot No. 1083-C, we find
that the said deed is void in its entirety. Noteworthy is that during the oral
arguments before the Court of Appeals, both petitioners and respondents
admitted that Lot No. 1083-A had been expropriated by the government long
before the Deed of Absolute Sale was entered into. Whats more, this case
involves only Lot No. 1083-C. It never involved Lot 1083-A. Thus, the Court
of Appeals had no jurisdiction to adjudicate on Lot 1083-A, as it was never
touched upon in the pleadings or made the subject of evidence at trial.
[38]

[39]

As to the third issue, petitioners cite Articles 1383, 1389 and 1391 of
the New Civil Code. They submit that the complaint for rescission of
the Kasunduan should have been dismissed, for respondents failure to prove
that there was no other legal means available to obtain reparation other than
to file a case for rescission, as required by Article 1383. Moreover, petitioners
contend that even assuming respondents had satisfied this requirement,
prescription had already set in, the complaint having been filed in 1992 or five
years after the execution of the Deed of Absolute Sale in March 10, 1987.
[40]

[41]

[42]

Respondents counter that Article 1383 of the New Civil Code applies only
to rescissible contracts enumerated under Article 1381 of the same Code,
while the cause of action in this case is for rescission of a reciprocal
obligation, to which Article 1191 of the Code applies. They assert that their
[43]

cause of action had not prescribed because the four-year prescriptive period
is counted from the date of discovery of the fraud, which, in this case, was
only in 1992.
Rescission of reciprocal obligations under Article 1191 of the New Civil
Code should be distinguished from rescission of contracts under Article 1383
of the same Code. Both presuppose contracts validly entered into as well as
subsisting, and both require mutual restitution when proper, nevertheless they
are not entirely identical.
[44]

In countless times there has been confusion between rescission under

Articles 1381 and 1191 of the Civil Code. Through this case we again
emphasize that rescission of reciprocal obligations under Article 1191 is
different from rescissible contracts under Chapter 6 of the law on contracts
under the Civil Code. While Article 1191 uses the term rescission, the
original term used in Article 1124 of the old Civil Code, from which Article
1191 was based, was resolution. Resolution is a principal action that is
based on breach of a party, while rescission under Article 1383 is a subsidiary
action limited to cases of rescission for lesion under Article 1381 of the New
Civil Code, which expressly enumerates the following rescissible contracts:
[45]

[46]

[47]

ART. 1381. The following contracts are rescissible:

(1)

Those which are entered into by guardians whenever the wards whom
they represent suffer lesion by more than one-fourth of the value of the
things which are the object thereof;

(2)

Those agreed upon in representation of absentees, if the latter suffer the

lesion stated in the preceding number;

(3)

Those undertaken in fraud of creditors when the latter cannot in any

other manner collect the claims due them;

(4)

Those which refer to things under litigation if they have been entered
into by the defendant without the knowledge and approval of the
litigants or of competent judicial authority;

(5)

All other contracts specially declared by law to be subject to rescission.

Obviously, the Kasunduan does not fall under any of those situations
mentioned in Article 1381. Consequently, Article 1383 is inapplicable. Hence,
we rule in favor of the respondents.

May the contract entered into between the parties, however, be rescinded
based on Article 1191?
A careful reading of the Kasunduan reveals that it is in the nature of a
contract to sell, as distinguished from a contract of sale. In a contract of sale,
the title to the property passes to the vendee upon the delivery of the thing
sold; while in a contract to sell, ownership is, by agreement, reserved in the
vendor and is not to pass to the vendee until full payment of the purchase
price. In a contract to sell, the payment of the purchase price is a positive
suspensive condition, the failure of which is not a breach, casual or serious,
but a situation that prevents the obligation of the vendor to convey title from
acquiring an obligatory force.
[48]

[49]

[50]

Respondents in this case bound themselves to deliver a deed of absolute

sale and clean title covering Lot No. 1083-C after petitioners have made the
second installment. This promise to sell was subject to the fulfillment of the
suspensive condition that petitioners pay P750,000 on August 31, 1987, and
deposit
a
postdated
check
for
the
third
installment
of P1,141,622.50. Petitioners, however, failed to complete payment of the
second installment. The non-fulfillment of the condition rendered the contract
to sell ineffective and without force and effect. It must be stressed that the
breach contemplated in Article 1191 of the New Civil Code is the obligors
failure to comply with an obligation already extant, not a failure of a condition
to render binding that obligation. Failure to pay, in this instance, is not even a
breach but an event that prevents the vendors obligation to convey title from
acquiring binding force. Hence, the agreement of the parties in the instant
case may be set aside, but not because of a breach on the part of petitioners
for failure to complete payment of the second installment. Rather, their failure
to do so prevented the obligation of respondents to convey title from acquiring
an obligatory force.
[51]

[52]

[53]

[54]

Coming now to the matter of prescription. Contrary to petitioners

assertion, we find that prescription has not yet set in. Article 1391 states that
the action for annulment of void contracts shall be brought within four
years. This period shall begin from the time the fraud or mistake is
discovered. Here, the fraud was discovered in 1992 and the complaint filed in
1993. Thus, the case is well within the prescriptive period.
On the matter of damages, the Court of Appeals awarded
respondents P323,617.50 as actual damages for the loss of the land that was
given to Nieto, P200,000 as moral damages,P50,000 as exemplary
damages, P50,000 as attorneys fees and the costs of suit. Modifications are
in order, however.

Moral damages may be recovered in cases where one willfully causes

injury to property, or in cases of breach of contract where the other party acts
fraudulently or in bad faith. Exemplary damages are imposed by way of
example or correction for the public good, when the party to a contract acts
in a wanton, fraudulent, oppressive or malevolent manner. Attorneys fees
are allowed when exemplary damages are awarded and when the party to a
suit is compelled to incur expenses to protect his interest.
[55]

[56]

[57]

[58]

While it has been sufficiently proven that the respondents are entitled to
damages, the actual amounts awarded by the lower court must be reduced
because damages are not intended for a litigants enrichment, at the expense
of the petitioners. The purpose for the award of damages other than actual
damages would be served, in this case, by reducing the amounts awarded.
[59]

Respondents were amply compensated through the award of actual

damages, which should be sustained. The other damages awarded
total P300,000, or almost equivalent to the amount of actual
damages. Practically this will double the amount of actual damages awarded
to respondents. To avoid breaching the doctrine on enrichment, award for
damages other than actual should be reduced. Thus, the amount of moral
damages should be set at only P30,000, and the award of exemplary
damages at only P20,000. The award of attorneys fees should also be
reduced to P20,000, which under the circumstances of this case appears
justified and reasonable.
WHEREFORE, the assailed decision of the Court of Appeals is
MODIFIED. The Deed of Absolute Sale in question is declared NULL and
VOID
in
its
entirety.
Petitioners
are
ORDERED
to
pay
respondents P323,617.50 as actual damages, P30,000.00 as moral
damages, P20,000.00 as exemplary damages and P20,000.00 as attorneys
fees. No pronouncement as to costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.

SECOND DIVISION
[G.R. No. 124874. March 17, 2000]

ALBERT R. PADILLA, petitioner, vs. SPOUSES FLORESCO PAREDES

and ADELINA PAREDES, and THE HONORABLE COURT OF
APPEALS, respondents.Supreme
DECISION
QUISUMBING, J.:
For resolution is a petition for review on certiorari, seeking reversal of the decision of the
Court of Appeals in CA G.R. CV No. 33089, which set aside the decision of the
Regional Trial Court in Civil Case No. 4357 and confirmed the rescission of the contract
between petitioner and private respondents.
From the records, we glean the following antecedent facts:
On October 20, 1988, petitioner Albert R. Padilla and private respondents Floresco and
Adelina Paredes entered into a contract to sell[1] involving a parcel of land in San Juan,
La Union. At that time, the land was untitled although private respondents were paying
taxes thereon. Under the contract, petitioner undertook to secure title to the property in
private respondents' names. Of the P312,840.00 purchase price, petitioner was to pay a
downpayment of P50,000.00 upon signing of the contract, and the balance was to be
paid within ten days from the issuance of a court order directing issuance of a decree of
registration for the property.
On December 27, 1989, the court ordered the issuance of a decree of land registration
for the subject property. The property was titled in the name of private respondent
Adelina Paredes. Private respondents then demanded payment of the balance of the
purchase price, per the second paragraph of the contract to sell, [2] which reads as
follows: J lexj
"VENDEE agrees to pay the balance of the purchase price of subject
property in the amount of TWO HUNDRED SIXTY TWO THOUSAND
EIGHT HUNDRED FORTY (P262,840.00) PESOS, within ten (10) days
counted from issuance of the Order of the Court for the issuance of a
decree pursuant to an application for registration and confirmation of title
of said subject property, of which the VENDEE is under obligation to
secure the title of subject property at his own expense."
Petitioner made several payments to private respondents, some even before the court
issued an order for the issuance of a decree of registration. [3] Still, petitioner failed to pay
the full purchase price even after the expiration of the period set. In a letter dated
February 14, 1990,[4] private respondents, through counsel, demanded payment of the

remaining balance, with interest and attorney's fees, within five days from receipt of the
letter. Otherwise, private respondents stated they would consider the contract
rescinded.
On February 28, 1990, petitioner made a payment of P100,000.00 to private
respondents,[5] still insufficient to cover the full purchase price. Shortly thereafter, in a
letter dated April 17, 1990,[6] private respondents offered to sell to petitioner one-half of
the property for all the payments the latter had made, instead of rescinding the contract.
If petitioner did not agree with the proposal, private respondents said they would take
steps to enforce the automatic rescission of the contract.
Petitioner did not accept private respondents' proposal. Instead, in a letter dated May 2,
1990,[7] he offered to pay the balance in full for the entire property, plus interest and
attorney's fees. Private respondents refused the offer.
On May 14, 1990, petitioner instituted an action for specific performance against private
respondents, alleging that he had already substantially complied with his obligation
under the contract to sell. He claimed that the several partial payments he had earlier
made, upon private respondents' request, had impliedly modified the contract. He also
averred that he had already spent P190,000.00 in obtaining title to the property,
subdividing it, and improving its right-of-way.[8]Lexj uris
For their part, private respondents claimed before the lower court that petitioner
maliciously delayed payment of the balance of the purchase price, despite repeated
demand and despite his knowledge of private respondents' need therefor. [9] According to
private respondents, their acceptance of partial payments did not at all modify the terms
of their agreement, such that the failure of petitioner to fully pay at the time stipulated
was a violation of the contract.[10] Private respondents claimed that this violation led to
the rescission of the contract, of which petitioner was formally informed. [11]
After trial, the lower court ruled in favor of petitioner, saying that even if petitioner indeed
breached the contract to sell, it was only a casual and slight breach that did not warrant
rescission of the contract. The trial court pointed out that private respondents
themselves breached the contract when they requested and accepted installment
payments from petitioner, even before the land registration court ordered issuance of a
decree of registration for the property.[12] According to the trial court, this constituted
modification of the contract, though not reduced into writing as required by the contract
itself. The payments, however, were evidenced by receipts duly signed by private
respondents. Acceptance of delayed payments estopped private respondents from
exercising their right of rescission, if any existed.[13]
The Court of Appeals, however, reversed the ruling of the trial court and confirmed
private respondents' rescission of the contract to sell. According to the Court of Appeals,
the issue of whether or not the breach of contract committed is slight or casual is
irrelevant in the case of a contract to sell, where title remains in the vendor if the vendee

fails to "comply with the condition precedent of making payment at the time specified in
the contract."[14]Juri smis
The Court of Appeals rejected petitioner's claim that there had been a novation of the
contract when he tendered partial payments for the property even before payment was
due. The Court of Appeals noted that the contract itself provides that no terms and
conditions therein shall be modified unless such modification is in writing and duly
signed by the parties. The modification alleged by petitioner is not in writing, much less
signed by the parties.[15] Moreover, the Court of Appeals ruled that private respondents
made a timely objection to petitioner's partial payments when they offered to sell to
petitioner only one-half of the property for such partial payments.[16]
The Court of Appeals ruled that private respondents are entitled to rescission under
Article 1191 of the Civil Code, but with the obligation to return to petitioner the payments
the latter had made, including expenses incurred in securing title to the property and in
subdividing and improving its right of way. Whatever damages private respondents had
suffered should be deemed duly compensated by the benefits they derived from the
payments made by petitioner.[17]
Hence, this petition, wherein petitioner assigns the following errors allegedly committed
by the Court of Appeals:
1. ...IN HOLDING THAT: "THE APPELLANTS ARE ENTITLED TO
RESCISSION UNDER ARTICLE 1191 OF THE CIVIL CODE." Jjj uris
2. IN CONFIRMING THE UNILATERAL RESCISSION OF THE
CONTRACT TO SELL BY THE PRIVATE RESPONDENTS.
3. WHEN IT INTERPRETED AND APPLIED LIBERALLY IN FAVOR OF
THE PRIVATE RESPONDENTS AND STRICTLY AGAINST THE HEREIN
PETITIONERS, THE PROVISIONS OF ARTICLE 1191 AND OTHER
PROVISIONS OF THE CIVIL CODE.[18]
Petitioner contends that private respondents are not entitled to rescission, because
rescission cannot be availed of when the breach of contract is only slight or casual, and
not so substantial and fundamental as to defeat the object of the parties in making the
contract. Petitioner points out that he made partial payments even before they were due
- in fact, even before the land registration court issued an order for the issuance of a
decree of registration for the property - since private respondents requested it. Private
respondents' acceptance of the payments amounted to a modification of the contract,
though unwritten. Petitioner believed in good faith that private respondents would honor
an alleged verbal agreement that the latter would not strictly enforce the period for the
payment of the remaining balance. lex

Petitioner additionally argues that private respondents were also guilty of breach of
contract since they failed to deliver the three-meter wide additional lot for a right-of-way,
as agreed upon in their contract.
For their part, private respondents reiterate that, as ruled by the Court of Appeals, the
issue of whether or not the breach is slight or casual is irrelevant in a contract to sell.
They contend that in such a contract, the non-payment of the purchase price is not a
breach but simply an event that prevents the vendor from complying with his obligation
to transfer title to the property to the vendee. Moreover, they point out that the degree of
breach was never raised as an issue during the pre-trial conference nor at the trial of
this case.
Private respondents also aver that petitioner cannot avail of an action for specific
performance since he is not an injured party as contemplated in Article 1191 of the Civil
Code.
Private respondents admit having requested cash advances from petitioner due to dire
financial need. Such need, they point out, is the same reason why time is of the
essence in the payment of the balance of the purchase price. They claim that petitioner
offered to pay the balance only after more than three months had lapsed from the date
his obligation to pay became due.
Private respondents argue that their acceptance of advance payments does not amount
to a novation of the contract since, as provided in the contract itself, modification of the
contract would only be binding if written and signed by the parties, which is not the case
here. Acceptance of advance payments is a mere act of tolerance, which under the
contract would not be considered as a modification of the terms and conditions
thereof. francis
The core issue in this case is whether the respondent Court of Appeals erred in
reversing and setting aside the judgment of the trial court, by holding that private
respondents are entitled to rescind their "contract to sell" the land to petitioner.
To begin with, petitioner is alleging that the contract entered into between the parties is
a contract of sale, in which case rescission will not generally be allowed where the
breach is only slight or casual. Petitioner insists that the title "Contract to Sell" does not
reflect the true intention of the parties, which is to enter into a contract of sale.
We note, however, that petitioner only made this claim as to the nature of the contract in
his reply to the comment of private respondents to his petition for review. In his
complaint in the RTC and in his petition for review, petitioner refers to the subject
contract as a contract to sell. The nature of the contract was never in issue in the
proceedings in the courts below. Moreover, petitioner does not deny private
respondents' allegation that it was he and his counsel who prepared the contract. Thus,
the ambiguity, if an exists, must be resolved strictly against him as the one who caused
the same.[19]

At any rate, the contract between the parties in our view is indeed a contract to sell, as
clearly inferrable from the following provisions thereof:
"xxxmarie
That the VENDORS hereby agree and bind themselves not to allienate
(sic) encumber, or in any manner modify the right of title to said property.
xxx
That the VENDORS agree to pay real estate taxes of said subject property
until the same will have been transferred to the VENDEE.
That on payment of the full purchase price of the above-mentioned
property the VENDORS will execute and deliver a deed conveying to the
VENDEE the title in fee simple of said property free from all lien and
encumbrances..."(Underscoring supplied.)[20]
These provisions signify that title to the property remains in the vendors until the vendee
should have fully paid the purchase price, which is a typical characteristic of a contract
to sell.
Now, admittedly, petitioner failed to comply with his obligation to pay the full purchase
price within the stipulated period. Under the contract, petitioner was to pay the balance
of the purchase price within 10 days from the date of the court order for the issuance of
the decree of registration for the property. Private respondents claim, and petitioner
admits, that there was delay in the fulfillment of petitioner's obligation. The order of the
court was dated December 27, 1989. By April 1990, or four months thereafter, petitioner
still had not fully paid the purchase price, clearly in violation of the contract. novero
Petitioners offer to pay is clearly not the payment contemplated in the contract. While
he might have tendered payment through a check, this is not considered payment until
the check is encashed.[21] Besides, a mere tender of payment is not sufficient.
Consignation is essential to extinguish petitioner's obligation to pay the purchase
price.[22]
We sustain the decision of the Court of Appeals, to the effect that private respondents
may validly cancel the contract to sell their land to petitioner. However, the reason for
this is not that private respondents have the power to rescind such contract, but
because their obligation thereunder did not arise.
Article 1191 of the Civil Code, on rescission, is inapplicable in the present case. This is
apparent from the text of the article itself: Jksm

"Art. 1191. The power to rescind obligations is implied in reciprocal ones,

in case one of the obligors should not comply with what is incumbent upon
him.
The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with articles 1385 and 1388
and the Mortgage Law."
Article 1191 speaks of obligations already existing, which may be rescinded in case one
of the obligors fails to comply with what is incumbent upon him. However, in the present
case, there is still no obligation to convey title of the land on the part of private
respondents. There can be no rescission of an obligation that is non-existent,
considering that the suspensive condition therefor has not yet happened.[23]
In Rillo v. Court of Appeals,[24] we ruled:
"The respondent court did not err when it did not apply Articles 1191 and
1592 of the Civil Code on rescission to the case at bar. The contract
between the parties is not an absolute conveyance of real property but a
contract to sell. In a contract to sell real property on installments, the full
payment of the purchase price is a positive suspensive condition, the
failure of which is not considered a breach, casual or serious, but simply
an event which prevented the obligation of the vendor to convey title from
acquiring any obligatory force. The transfer of ownership and title would
occur after full payment of the purchase price."[25]Juri-smis
We reiterated this rule in Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (1997).
Moreover, we held in Odyssey:
"The breach contemplated in Article 1191 of the Code is the obligors
failure to comply with an obligation already extant, not a failure of a
condition to render binding that obligation."[26]
Under the parties contract, the property will be transferred to petitioner only upon the
latter's "complete compliance of his obligation provided in [the] contract." Because of
petitioners failure to fully pay the purchase price, the obligation of private respondents
to convey title to the property did not arise.[27] Thus, private respondents are under no

obligation, and may not be compelled, to convey title to petitioner and receive the full
purchase price.
Petitioner's reliance on Article 1592 of the Civil Code is misplaced. It provides:
"Art. 1592. In the sale of immovable property, even though it may have
been stipulated that upon failure to pay the price at the time agreed upon
the rescission of the contract shall of right take place, the vendee may
pay, even after the expiration of the period, as long as no demand for
rescission of the contract has been made upon him either judicially or by a
notarial act. After the demand, the court may not grant him a new term." Jjjuris

Clearly, what this provision contemplates is an absolute sale and not a contract to sell
as in the present case.
Private respondents acceptance of several partial payments did not modify the parties'
contract as to exempt petitioner from complying with his obligation to pay within the
stipulated period. The contract itself provided:
"No terms and conditions shall be considered modified, changed, altered,
or waived by any verbal agreement by and between the parties hereto or
by an act of tolerance on the parties unless such modification, change,
alteration or waiver appears in writing duly signed by the parties hereto." [28]
Acceptance of the partial payments is, at best, an act of tolerance on the part of private
respondents that could not modify the contract, absent any written agreement to that
effect signed by the parties.
The Court of Appeals is correct in ordering the return to petitioner of the amounts
received from him by private respondents, on the principle that no one may unjustly
enrich himself at the expense of another.
WHEREFORE, the petition is DENIED, for lack of merit. Costs against petitioner. Lex-juris
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. L-28602 September 29, 1970

UNIVERSITY OF THE PHILIPPINES, petitioner,
vs.
WALFRIDO DE LOS ANGELES, in his capacity as JUDGE of the COURT OF FIRST INSTANCE
IN QUEZON CITY, et al., respondents.
Office of the Solicitor General Antonio P. Barredo, Solicitor Augusto M. Amores and Special Counsel
Perfecto V. Fernandez for petitioner.
Norberto J. Quisumbing for private respondents.

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

Three (3) orders of the Court of First Instance of Rizal (Quezon City), issued in its Civil Case No.
9435, are sought to be annulled in this petition for certiorari and prohibition, filed by herein petitioner
University of the Philippines (or UP) against the above-named respondent judge and the Associated
Lumber Manufacturing Company, Inc. (or ALUMCO). The first order, dated 25 February 1966,
enjoined UP from awarding logging rights over its timber concession (or Land Grant), situated at the
Lubayat areas in the provinces of Laguna and Quezon; the second order, dated 14 January 1967,
adjudged UP in contempt of court, and directed Sta. Clara Lumber Company, Inc. to refrain from
exercising logging rights or conducting logging operations on the concession; and the third order,
dated 12 December 1967, denied reconsideration of the order of contempt.
As prayed for in the petition, a writ of preliminary injunction against the enforcement or
implementation of the three (3) questioned orders was issued by this Court, per its resolution on 9
February 1968.
The petition alleged the following:
That the above-mentioned Land Grant was segregated from the public domain and given as an
endowment to UP, an institution of higher learning, to be operated and developed for the purpose of
raising additional income for its support, pursuant to Act 3608;
That on or about 2 November 1960, UP and ALUMCO entered into a logging agreement under
which the latter was granted exclusive authority, for a period starting from the date of the agreement
to 31 December 1965, extendible for a further period of five (5) years by mutual agreement, to cut,
collect and remove timber from the Land Grant, in consideration of payment to UP of royalties, forest
fees, etc.; that ALUMCO cut and removed timber therefrom but, as of 8 December 1964, it had
incurred an unpaid account of P219,362.94, which, despite repeated demands, it had failed to pay;
that after it had received notice that UP would rescind or terminate the logging agreement, ALUMCO

executed an instrument, entitled "Acknowledgment of Debt and Proposed Manner of Payments,"

dated 9 December 1964, which was approved by the president of UP, and which stipulated the
following:
3. In the event that the payments called for in Nos. 1 and 2 of this paragraph are not
sufficient to liquidate the foregoing indebtedness of the DEBTOR in favor of the
CREDITOR, the balance outstanding after the said payments have been applied
shall be paid by the DEBTOR in full no later than June 30, 1965;
xxx xxx xxx
5. In the event that the DEBTOR fails to comply with any of its promises or
undertakings in this document, the DEBTOR agrees without reservation that the
CREDITOR shall have the right and the power to consider the Logging Agreement
dated December 2, 1960 as rescinded without the necessity of any judicial suit, and
the CREDITOR shall be entitled as a matter of right to Fifty Thousand Pesos
(P50,000.00) by way of and for liquidated damages;
ALUMCO continued its logging operations, but again incurred an unpaid account, for the period from
9 December 1964 to 15 July 1965, in the amount of P61,133.74, in addition to the indebtedness that
it had previously acknowledged.
That on 19 July 1965, petitioner UP informed respondent ALUMCO that it had, as of that date,
considered as rescinded and of no further legal effect the logging agreement that they had entered
in 1960; and on 7 September 1965, UP filed a complaint against ALUMCO, which was docketed as
Civil Case No. 9435 of the Court of First Instance of Rizal (Quezon City), for the collection or
payment of the herein before stated sums of money and alleging the facts hereinbefore specified,
together with other allegations; it prayed for and obtained an order, dated 30 September 1965, for
preliminary attachment and preliminary injunction restraining ALUMCO from continuing its logging
operations in the Land Grant.
That before the issuance of the aforesaid preliminary injunction UP had taken steps to have another
concessionaire take over the logging operation, by advertising an invitation to bid; that bidding was
conducted, and the concession was awarded to Sta. Clara Lumber Company, Inc.; the logging
contract was signed on 16 February 1966.
That, meantime, ALUMCO had filed several motions to discharge the writs of attachment and
preliminary injunction but were denied by the court;
That on 12 November 1965, ALUMCO filed a petition to enjoin petitioner University from conducting
the bidding; on 27 November 1965, it filed a second petition for preliminary injunction; and, on 25
February 1966, respondent judge issued the first of the questioned orders, enjoining UP from
awarding logging rights over the concession to any other party.
That UP received the order of 25 February 1966 after it had concluded its contract with Sta. Clara
Lumber Company, Inc., and said company had started logging operations.
That, on motion dated 12 April 1966 by ALUMCO and one Jose Rico, the court, in an order dated 14
January 1967, declared petitioner UP in contempt of court and, in the same order, directed Sta.
Clara Lumber Company, Inc., to refrain from exercising logging rights or conducting logging
operations in the concession.

The UP moved for reconsideration of the aforesaid order, but the motion was denied on 12
December 1967.
Except that it denied knowledge of the purpose of the Land Grant, which purpose, anyway, is
embodied in Act 3608 and, therefore, conclusively known, respondent ALUMCO did not deny the
foregoing allegations in the petition. In its answer, respondent corrected itself by stating that the
period of the logging agreement is five (5) years - not seven (7) years, as it had alleged in its second
amended answer to the complaint in Civil Case No. 9435. It reiterated, however, its defenses in the
court below, which maybe boiled down to: blaming its former general manager, Cesar Guy, in not
turning over management of ALUMCO, thereby rendering it unable to pay the sum of P219,382.94;
that it failed to pursue the manner of payments, as stipulated in the "Acknowledgment of Debt and
Proposed Manner of Payments" because the logs that it had cut turned out to be rotten and could
not be sold to Sta. Clara Lumber Company, Inc., under its contract "to buy and sell" with said firm,
and which contract was referred and annexed to the "Acknowledgment of Debt and Proposed
Manner of Payments"; that UP's unilateral rescission of the logging contract, without a court order,
was invalid; that petitioner's supervisor refused to allow respondent to cut new logs unless the logs
previously cut during the management of Cesar Guy be first sold; that respondent was permitted to
cut logs in the middle of June 1965 but petitioner's supervisor stopped all logging operations on 15
July 1965; that it had made several offers to petitioner for respondent to resume logging operations
but respondent received no reply.
The basic issue in this case is whether petitioner U.P. can treat its contract with ALUMCO rescinded,
and may disregard the same before any judicial pronouncement to that effect. Respondent ALUMCO
contended, and the lower court, in issuing the injunction order of 25 February 1966, apparently
sustained it (although the order expresses no specific findings in this regard), that it is only after a
final court decree declaring the contract rescinded for violation of its terms that U.P. could disregard
ALUMCO's rights under the contract and treat the agreement as breached and of no force or effect.
We find that position untenable.
In the first place, UP and ALUMCO had expressly stipulated in the "Acknowledgment of Debt and
Proposed Manner of Payments" that, upon default by the debtor ALUMCO, the creditor (UP) has
"the right and the power to consider, the Logging Agreement dated 2 December 1960 as rescinded
without the necessity of any judicial suit." As to such special stipulation, and in connection with
Article 1191 of the Civil Code, this Court stated in Froilan vs. Pan Oriental Shipping Co., et al., L11897, 31 October 1964, 12 SCRA 276:
there is nothing in the law that prohibits the parties from entering into agreement that
violation of the terms of the contract would cause cancellation thereof, even without
court intervention. In other words, it is not always necessary for the injured party to
resort to court for rescission of the contract.
Of course, it must be understood that the act of party in treating a contract as cancelled or resolved
on account of infractions by the other contracting party must be made known to the other and is
always provisional, being ever subject to scrutiny and review by the proper court. If the other party
denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the
matter to court. Then, should the court, after due hearing, decide that the resolution of the contract
was not warranted, the responsible party will be sentenced to damages; in the contrary case, the
resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final

judgment of the corresponding court that will conclusively and finally settle whether the action taken
was or was not correct in law. But the law definitely does not require that the contracting party who
believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until the final judgment of rescission
is rendered when the law itself requires that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203).
We see no conflict between this ruling and the previous jurisprudence of this Court invoked by
respondent declaring that judicial action is necessary for the resolution of a reciprocal
obligation, 1 since in every case where the extrajudicial resolution is contested only the final award of the
court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this
sense that judicial action will be necessary, as without it, the extrajudicial resolution will remain
contestable and subject to judicial invalidation, unless attack thereon should become barred by
acquiescence, estoppel or prescription.

Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach
of contract may render nugatory the general rule requiring judicial action (v. Footnote, Padilla, Civil
Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or
error by the rescinder the other party is not barred from questioning in court such abuse or error, the
practical effect of the stipulation being merely to transfer to the defaulter the initiative of instituting
suit, instead of the rescinder.
In fact, even without express provision conferring the power of cancellation upon one contracting
party, the Supreme Court of Spain, in construing the effect of Article 1124 of the Spanish Civil Code
(of which Article 1191 of our own Civil; Code is practically a reproduction), has repeatedly held that,
a resolution of reciprocal or synallagmatic contracts may be made extrajudicially unless successfully
impugned in court.
El articulo 1124 del Codigo Civil establece la facultad de resolver las obligaciones
reciprocas para el caso de que uno de los obligados no cumpliese lo que le
incumbe, facultad que, segun jurisprudencia de este Tribunal, surge
immediatamente despuesque la otra parte incumplio su deber, sin necesidad de una
declaracion previa de los Tribunales. (Sent. of the Tr. Sup. of Spain, of 10 April 1929;
106 Jur. Civ. 897).
Segun reiterada doctrina de esta Sala, el Art. 1124 regula la resolucioncomo una
"facultad" atribuida a la parte perjudicada por el incumplimiento del contrato, la cual
tiene derecho do opcion entre exigir el cumplimientoo la resolucion de lo
convenido, que puede ejercitarse, ya en la via judicial, ya fuera de ella, por
declaracion del acreedor, a reserva, claro es, que si la declaracion de resolucion
hecha por una de las partes se impugna por la otra, queda aquella sometida el
examen y sancion de los Tribunale, que habran de declarar, en definitiva, bien hecha
la resolucion o por el contrario, no ajustada a Derecho. (Sent. TS of Spain, 16
November 1956; Jurisp. Aranzadi, 3, 447).
La resolucion de los contratos sinalagmaticos, fundada en el incumplimiento por una
de las partes de su respectiva prestacion, puedetener lugar con eficacia" 1. o Por la
declaracion de voluntad de la otra hecha extraprocesalmente, si no es impugnada en juicio luego con exito. y 2. 0 Por
la demanda de la perjudicada, cuando no opta por el cumplimientocon la indemnizacion de danos y perjuicios
realmente causados, siempre quese acredite, ademas, una actitud o conducta persistente y rebelde de laadversa o la
satisfaccion de lo pactado, a un hecho obstativo que de un modoabsoluto, definitivo o irreformable lo impida, segun el
art. 1.124, interpretado por la jurisprudencia de esta Sala, contenida en las Ss. de 12 mayo 1955 y 16 Nov. 1956, entre

otras, inspiradas por el principio del Derecho intermedio, recogido del Canonico, por el cual fragenti fidem, fides non
est servanda. (Ss. de 4 Nov. 1958 y 22 Jun. 1959.) (Emphasis supplied).

In the light of the foregoing principles, and considering that the complaint of petitioner University
made out aprima facie case of breach of contract and defaults in payment by respondent ALUMCO,
to the extent that the court below issued a writ of preliminary injunction stopping ALUMCO's logging
operations, and repeatedly denied its motions to lift the injunction; that it is not denied that the
respondent company had profited from its operations previous to the agreement of 5 December
1964 ("Acknowledgment of Debt and Proposed Manner of Payment"); that the excuses offered in the
second amended answer, such as the misconduct of its former manager Cesar Guy, and the rotten
condition of the logs in private respondent's pond, which said respondent was in a better position to
know when it executed the acknowledgment of indebtedness, do not constitute on their face
sufficient excuse for non-payment; and considering that whatever prejudice may be suffered by
respondent ALUMCO is susceptibility of compensation in damages, it becomes plain that the acts of
the court a quo in enjoining petitioner's measures to protect its interest without first receiving
evidence on the issues tendered by the parties, and in subsequently refusing to dissolve the
injunction, were in grave abuse of discretion, correctible by certiorari, since appeal was not available
or adequate. Such injunction, therefore, must be set aside.
For the reason that the order finding the petitioner UP in contempt of court has open appealed to the
Court of Appeals, and the case is pending therein, this Court abstains from making any
pronouncement thereon.
WHEREFORE, the writ of certiorari applied for is granted, and the order of the respondent court of
25 February 1966, granting the Associated Lumber Company's petition for injunction, is hereby set
aside. Let the records be remanded for further proceedings conformably to this opinion.
Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo, Villamor and Makasiar, JJ.,
concur.
Reyes, J.B.L., Actg. C.J., is on leave.

SECOND DIVISION
SPOUSES DOMINGO AND LOURDES
PAGUYO,
P e t i t i o n e r s,

G.R. No. 130982

Present:
PUNO,
Chairman,
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.

- versus -

Promulgated:
PIERRE ASTORGA and ST. ANDREW
REALTY, INC.,
R e s p o n d e n t s.

September 16, 2005

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

DECISION
CHICO-NAZARIO, J.:
. . . Men may do foolish things, make ridiculous
contracts, use miserable judgment, and lose money by them
indeed, all they have in the world; but not for that alone can
the law intervene and restore. There must be, in addition, a
violation of the law, the commission of what the law knows as
an actionable wrong, before the courts are authorized to lay
hold of the situation and remedy it.[1]

The case at bar demonstrates a long drawn-out litigation between parties

who already entered into a valid contract that has subsisted for almost twenty (20)
years but one of them later balks from being bound by it, alleging fraud, gross
inadequacy of consideration, mistake, and undue influence.

This is a petition for review on certiorari where petitioner Spouses Domingo

and Lourdes Paguyo seek the reversal of the Decision[2] and the Resolution,[3] dated
30 April 1997 and 12 September 1997, respectively, of the Court of Appeals in
CA-G.R. CV No. 47034, affirming in toto the Decision[4] dated 21 April 1994 of
the Regional Trial Court (RTC), Branch 142 of Makati City.
The Antecedents

The undisputed facts, per summary of the Court of Appeals, follow.

Herein petitioners, Spouses Domingo Paguyo and Lourdes Paguyo, were the
owners of a small five-storey building known as the Paguyo Building located at
Makati Avenue, corner Valdez Street, Makati City. With one (1) unit per floor, the
building has an average area of 100 square meters per floor and is constructed on a
land belonging to the Armas family.[5]

This lot on which the Paguyo Building stands was the subject of Civil Case
No. 5715 entitled, Armas, et al., v. Paguyo, et al., wherein the RTC of Makati City,
Branch 57, rendered a decision on 20 January 1988 approving a Compromise
Agreement made between the Armases and the petitioners. The compromise
agreement provided that in consideration of the total sum of One Million Seven
Hundred Thousand Pesos (P1,700,000.00), the Armases committed to execute in

favor of petitioners a deed of sale and/or conveyance assigning and transferring

unto said petitioners all their rights and interests over the parcel of land containing
an area of 299 square meters.[6]
In order for the petitioners to complete their title and ownership over the lot
in question, there was an urgent need to make complete payment to the Armases,
which at that time stood at P917,470.00 considering that petitioners had previously
made partial payments to the Armases.

On 29 November 1988, in order to raise the much needed amount, petitioner

Lourdes Paguyo entered into an agreement captioned as Receipt of Earnest
Money with respondent Pierre Astorga, for the sale of the formers property
consisting of the lot which was to be purchased from the Armases, together with
the improvements thereon, particularly, the existing building known as the Paguyo
Building, under the following terms and conditions as stated in the document, to
wit:
RECEIVED from MR. PIERRE M. ASTORGA the sum of FIFTY
THOUSAND (P50,000.00) PESOS (U.C.P.B. Managers Check No.
013085 dated November 29, 1988) as earnest money for the sale of our
property consisting of a parcel of land designated as Lot 12 located at
Makati Avenue, Makati, Metro Manila, covered by and described in T.C.T.
No. 154806 together with the improvements thereon particularly the
existing building known as the Paguyo Bldg. under the following terms and
conditions:
1. The earnest money (Exh. D) shall be good for fifteen (15) days
from date of this document during which period the owner is bound to sell
the property to the buyer;
2. Should the buyer decide not to buy the subject property within
the earnest/option period, the seller has the right to forfeit Fifteen Thousand
(P15,000.00) pesos, and return the difference to the buyer;

3.
The
agreed
total
purchase
price
MILLION (P7,000,000.00) PESOS Philippine Currency;

is SEVEN

4. Within fifteen (15) days from execution of this document, the

buyer shall pay Fifty (50%) percent of the total purchase price less the
aforesaid earnest money, upon payment of which the following documents
shall be executed or caused to be executed as the case may be, namely:
a. Deed of Absolute Sale of the Paguyo Bldg., in favor of the
buyer.
b. Deed of Absolute Sale to be executed by the Armases who
still appear as the registered owners of the lot in favor of the
buyer.
c. Deed of Real Estate Mortgage of the same subject lot and
Bldg. to secure the 50% balance of the total purchase price
to be executed by the buyer in favor of the herein seller.
5. The Deed of Real Estate Mortgage shall contain the following
provisions, namely:
a. payment of the 50% balance of the purchase price shall be payable
within fifteen (15) days from actual vacating of the Armases from
the subject lot.
b. During the period commencing from the execution of the documents
mentioned under paragraph 4 (which should be done
simultaneously) the buyer is entitled to one-half (1/2) of the rental
due and actually received from the tenants of the Paguyo Bldg. plus
the use of the penthouse while the seller shall retain possession and
use of the basement free of rent until the balance of the purchase
price is fully paid in accordance with the herein terms and
conditions. The one-half (1/2) of the tenants deposits shall be
credited in favor of the buyer.[7]

However, contrary to their express representation with respect to the subject

lot, petitioners failed to comply with their obligation to acquire the lot from the
Armas family despite the full financial support of respondents. Nevertheless, the

parties maintained their business relationship under the terms and conditions of the
above-mentioned Receipt of Earnest Money.[8]
On 12 December 1988, petitioners asked for and were given by respondents
an additional P50,000.00 to meet the formers urgent need for money in connection
with their construction business. Due also to the urgent necessity of obtaining
money to finance their construction business, petitioner Lourdes Paguyo, who was
also the attorney-in-fact of her husband, proposed to the respondents the separate
sale of the building in question while she continued to work on the acquisition of
the lot from the Armas family, assuring the respondents that she would succeed in
doing so.[9]
Aware of the risk of buying an improvement on the lot of a third party who
appeared ambivalent on whether to dispose their property in favor of the
respondents, respondents took a big business gamble and, relying on the assurance
of petitioners that they would eventually acquire the lot and transfer the same to
respondents in accordance with their undertaking in the Receipt of Earnest Money,
respondents agreed to petitioner Lourdes Paguyos proposal to buy the building
first. Thus, on 5 January 1989, the parties executed the four documents in question
namely, the Deed of Absolute Sale of the Paguyo Building, the Mutual
Undertaking, the Deed of Real Estate Mortgage, and the Deed of Assignment of
Rights and Interest.[10] Simultaneously with the signing of the four documents,
respondents paid petitioners the additional amount of P500,000.00.[11] Thereafter,
the respondents renamed the Paguyo Building into GINZA Bldg. and registered the
same in the name of respondent St. Andrew Realty, Inc. at the Makati Assessors
Office after paying accrued real estate taxes in the total amount
of P169,174.95. Since 1990, respondents paid the real estate taxes on subject
building as registered owners thereof. Further, respondents obtained fire insurance
and applied for the conversion of Paguyo Building into a condominium. All of
these acts of ownership exercised by respondents over the building were with the
express knowledge and consent of the petitioners.[12]

Pursuant to their agreement contained in the aforecited documents,

particularly in the Mutual Undertaking,[13] respondent company filed an ejectment
case and obtained a favorable decision against petitioners in the Metropolitan Trial
Court (MeTC) of Makati in Civil Case No. 40050. The case reached this Court
which affirmed the decision of the MeTC in favor of respondent company. This
decision had already been executed and the respondent company is now in
possession of the building. Accordingly, respondents continued to exercise acts of
full ownership, possession and use over the building.[14]
On 06 October 1989, petitioners filed a Complaint for the rescission of
the Receipt of Earnest Money[15] with the undertaking to return the sum
of P763,890.50. They also sought the rescission of the Deed of Real Estate
Mortgage,[16] the Mutual Undertaking, the Deed of Absolute Sale of
Building,[17] and the Deed of Assignment of Rights and Interest.[18]
In their complaint, petitioners alleged that respondents Astorga and St.
Andrew Realty, Inc., led them to believe that they would advance the P917,470.00,
which was needed by petitioners to complete payment with the Armases, with the
understanding that said amount would simply be deducted from the P7 Million
total consideration due them for the sale of the lot and the building as agreed upon
in their Receipt of Earnest Money. The same, however, did not materialize
because instead of making available the check for the said amount, respondents did
not produce the amount and even ordered the stop payment of the same before it
could be deposited in court.[19]
Respondents, in their Answer, however, interjected that as gleaned from
the Receipt of Earnest Money, the Mutual Undertaking, the Deed of
Assignment of Rights and Interest, their original intention was to purchase the
Paguyo Building and the lot on which it stands simultaneously. Respondents
interposed that at the time the decision on the compromise agreement between
petitioners and Armases was rendered, petitioners were badly in need of money
because they were financing their construction business and, with the balance

payable to the Armases, the former were in a huff to produce an amount sufficient
to cover both transactions. Thus, petitioners prevailed upon respondents to
purchase the Paguyo Building first with the lot to follow after petitioners have
successfully acquired it from the Armas family.
Respondents, likewise, stated in their Answer that sometime in July of 1989,
petitioners asked respondent corporation to execute a check in the amount
of P917,470.00[20]for the final execution of the Deed of Conveyance of the lot,
saying that they were finally able to negotiate the purchase of the lot owned by the
Armases. To settle the transaction, respondent corporation again complied. After
investigation, however, respondents learned that petitioners were not in the
position to deliver the land, all the rights and interest thereof having allegedly been
transferred already to spouses Rodolfo and Aurora Bacani. They were able to
confirm this after obtaining a copy of a letter dated 22 September 1989 of
petitioners counsel (same counsel representing them presently) to the Register of
Deeds of Makati a month prior to the filing of the instant case. The letter stated:
Ms. Mila Flores
Register of Deeds
Makati, Metro Manila
Dear Ms. Flores:
We represent the spouses Rodolfo and Aurora Bacani, who happen
to be the assignees of all the rights and interests that the couple Domingo
and Lourdes Paguyo have over that parcel of land located along Makati
Avenue, the particulars and description of which are indicated on TCT No.
154806 which, for reasons we perceive to be not legitimate, was cancelled.
...
(SGD.) HECTOR B. ALMEYDA
For the Firm[21]
(Emphasis supplied.)

Respondents further explained in their Answer that because of this

development, they were constrained to order stop payment of the P917,470.00
check, which was duly communicated to petitioners in a letter dated 14 July 1989,
to wit:
I am very sorry to inform you that I have to stop payment on
Philtrust Check No. 006759 because I was just reliably informed that you
are no longer in a position to deliver the lot subject of our
agreement. While the financier had already advanced half million pesos
which was already placed in my account, I discouraged her from putting
another million pesos to cover my check with you. I therefore find myself
with no alternative but to order stop payment on my check to protect my
rights and interests.[22]

The Ruling of the Trial Court

After trial, the RTC ruled in favor of respondents in a Decision[23] dated 21

April 1994, the dispositive portion of which reads:
Judgment is hereby rendered dismissing the complaint for lack of
cause of action, the petition for preliminary injunction is hereby denied,
judgment is rendered in favor of the defendants and ordering the plaintiff
spouses Domingo and Lourdes Paguyo to pay the defendants Pierre Astorga
and St. Andrew Realty, Inc. on their counterclaim.
1.
2.
3.

P400,000.00 for moral damages;

P200,000.00 as exemplary damages;
P100,00.00 for attorneys fees and litigation expenses
and pay the cost of suit.[24]

The Ruling of the Court of Appeals

On appeal, the Court of Appeals promulgated its Decision[25] dated 30 April

1997 in CA-G.R. CV No. 47034 affirming the decision of the trial court, the
dispositive portion of which reads as follows:
WHEREFORE, We find the lower courts decision in full accord
with the facts and the law. Judgment is hereby rendered affirming the
[26]
assailed decision dated April 21, 1994 in toto.

Aggrieved by the ruling, petitioners elevated the matter to us via the instant
petition, contending that the Court of Appeals erred:
1.
IN CONCLUDING THAT THE SUPPOSED ACTS OF
OWNERSHIP AND POSSESSION OF RESPONDENTS PRECLUDE
PETITIONERS FROM SEEKING RESCISSION AND DECLARATION
OF NULLITY OF DOCUMENTS SIGNED AND EXECUTED UNDER
MISTAKEN PREMISES THAT WERE NOT ALL TRUE AND
ACCURATE;
2.
IN FAILING TO FIND THAT FRAUD, MISTAKE AND UNDUE
INFLUENCE HAD BEEN EXERTED ON PETITIONER LOURDES
PAGUYO TO MAKE HER A PARTY TO THE ASSAILED
DOCUMENTS;
3.
IN READING THE DOCUMENTS INVOLVED WITHOUT
REGARD TO THE CONTEMPORANEOUS ACTS OF THE PARTIES
PRIOR, DURING AND IMMEDIATELY AFTER THE SIGNING
PROCESS;
4.

IN AFFIRMING THE DISMISSAL OF THE COMPLAINT; AND

5.
IN AWARDING DAMAGES AND ATTORNEYS FEES IN
FAVOR OF THE RESPONDENTS.[27]

The questions the Court is now tasked to answer are: (1) Did the Court of
Appeals err in upholding the trial courts decision denying petitioners complaint

for rescission? (2) Was the award of damages and attorneys fees to respondents
proper?
On the first issue, petitioners claim that the 05 January 1989 documents,
particularly the Deed of Absolute Sale of Building, Mutual Undertaking, Real
Estate Mortgage, and Assignment of Rights and Interests read together with the 29
November 1988 Receipt of Earnest Money, were all designed, per the respondents
representations, to secure their exposure in the total sum of P763,890.50 which
constituted their outlay in the projected purchase of the Paguyo lot and building.

Respondents dispute petitioners' line of reasoning. They say that the Deed
of Absolute Sale over the building was absolute and unconditional.

Our Ruling
Petitioners contentions lack merit.

The right to rescind a contract involving reciprocal obligations is provided

for in Article 1191 of the Civil Code. Article 1191 states: M
The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon
him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in either case. He
may also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.
The court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third

persons who have acquired the thing, in accordance with Articles 1385 and
1388 and the Mortgage Law.

The law speaks of the right of the "injured party" to choose between
rescission or fulfillment of the obligation, with the payment of damages in either
case.[28]

Here, petitioners claim to be the injured party and consequently seek the
rescission of the Deed of Absolute Sale of the Building and the other documents in
question. Petitioners aver that they are entitled to cancel the Deed of Sale
altogether in view of fraud, gross inadequacy of price, mistake, and undue
influence.
To boost their claim that the Deed of Absolute Sale was intended merely to
document the cash outlays of respondents, petitioners say that the P600,000.00
consideration as contained in the Deed of Absolute Sale of the 5-storey Paguyo
building is a far cry from the P3 Million valuation attached to it by respondent
Astorga himself and the buildings fair market value of P2,848,000.00 assessed by
the Cuervo Appraisers, Inc.

We find no such inadequacy of consideration in the case at bar. For one, on

top of the P600,000.00 which petitioners received, respondents had to shoulder
the accrued real estate taxes of P169,174.95. For another, respondent Pierre
Astorga explained that said price was what St. Andrew Realty, Inc., believed as
value for their money inasmuch as the building stands on the lot owned by another
and there were separate owners of the land, who appear reluctant to sell it. For a

third, said amount was arrived at considering the depreciated value of the building
and in view of the economic and political uncertainties in the country at that time,
marked by a series of coup detat, which caused real estate prices to
plummet. Respondent Astorga was explicit on this score
ATTY. JOSE
Q:
There was statement here by Mrs. Paguyo that this document
entitled the deed of absolute sale of a building marked Exhibit 9 was not
expressive of the intention of the parties meaning to say that she did not
intend to sell the said building and one of the reasons she tried to raise was
the fact that the building was only sold for P500,000.00, what can you say
to that?
A:
Well, the P500,000.00 amount that she would want to impress to be
an inadequate amount is what we in St. Andrews end believed as value for
money for the reason that the building stands on the lot she does not
own and there were separate owners and apparent conflict between
them even the seeming impossibility of getting the lot
Q:
By the way, before the plaintiffs decided to dispose the building or
sell the building by virtue of this deed of sale marked Exhibit 98 was
your company ever interested in acquiring the said building?
A:
The building alone, no. In fact, on December 21 when we had the
problem as to acquiring the lot, we did not part with any payment to Mrs.
Paguyo demonstrating that we had really and truly intended a simultaneous
buy of the building and the lot to acquire the property simultaneously the
building and as well as the lot.
Q:
Now, you mentioned that you are a realtor, I will ask you the same
question, which Atty. Almeyda asked me when I was on the witness stand,
as a realtor will you please tell the court what would be your appraisal of
the value of the building?

ATTY. COLOMA
Objection, your Honor. May we know if the witness is going to
express an opinion or is he testifying now as an expert realtor?

COURT
As an opinion but it would not bind the Court.

WITNESS
I can explain to you.

ATTY. JOSE
Yes, please explain.
WITNESS
A:
Okay, appraisal can take many forms if its appraised value based on
the construction cost it could be different from appraising per se the
building. That is now existing in that address also appraisal will depend on
where the building is and there is only one owner of the building and the
lot. As the case here is, the building in a manner of speaking stands on thin
air. That is so including depreciation and timing that we were doing in this
transaction which was 1989, my appraisal will be in the range of a Million
may be.
Q:
You made mentioned the word timing in 1989, why did you
mention that?
A:
Well, 89 was not the best real estate year. In fact, we have a boom
in 1988 but prices were already deep during this year such that it is in 1988
when it could have been another price. But this transaction happened or
entered into in 1989, there were no interested buyers during that time, sir.
Q:

Why?

A:
Coup de etat was one, and many other issue on hand that causes
value to take deep.
Q:
You mentioned that word depreciation, will you please explain to us
what that depreciation has got to do with that building?
A:
In appraisal terms the building is in an economic line in every year
of which a certain value is allocated as depreciation for wear and tear for
breakdowns and all that is depreciation. This is deductible from the amount
of the building (sic).
Q:
Before you went into this agreement with the plaintiff Paguyo have
you inspected the building?

A:

Yes, sir. Thoroughly, sir.

Q:
Will you please explain to the court the size of the building and the
description of the building?
A:
That building is five (5) storey it has only one (1) unit per floor, sir.
There is a narrow stairway that leads up to the penthouse. It is, I would
say, in an advance deteriorating stage, it needed some renovations here and
there.[29] (Emphasis supplied.)

Moreover, Articles 1355 and 1470 of the Civil Code state:

Art. 1355. Except in cases specified by law, lesion or inadequacy of
cause shall not invalidate a contract, unless there has been fraud, mistake
or undue influence. (Emphasis supplied)
Art. 1470. Gross inadequacy of price does not affect a contract of
sale, except as may indicate a defect in the consent, or that the parties really
intended a donation or some other act or contract. (Emphasis supplied)

Petitioners herein failed to prove any of the instances mentioned in Articles

1355 and 1470 of the Civil Code, which would invalidate, or even affect, the Deed
of Sale of the Building and the related documents. Indeed, there is no requirement
that the price be equal to the exact value of the subject matter of sale.[30]
In Sps. Buenaventura v. Court of Appeals,[31] the Court was unequivocal:
Courts cannot follow one every step of his life and extricate him
from bad bargains, protect him from unwise investments, relieve him from
one-sided contracts, or annul the effects of foolish acts. Courts cannot
constitute themselves guardians of persons who are not legally
incompetent. Courts operate not because one person has been defeated or

overcome by another, but because he has been defeated or

overcome illegally. Men may do foolish things, make ridiculous contracts,
use miserable judgment, and lose money by them indeed, all they have in
the world; but not for that alone can the law intervene and restore. There
must be, in addition, a violation of the law, the commission of what the law
knows as an actionable wrong, before the courts are authorized to lay hold
of the situation and remedy it. (Emphases in the original)

What is more, petitioners would wish to convince this Court that petitioner
Lourdes Paguyo was nave enough to accept at face value the assurance of
respondent Astorga that the Deed of Sale was merely to document respondents
cash outlay.
Far from being the nave and easy to fleece lady that she wants this Court to
perceive her to be, evidence on record reveals that petitioner Lourdes Paguyo is in
reality an astute businesswoman, having insured that legal minds would be
available at her disposal at the time she entered into the transactions she now
impugns. As she herself admitted in her testimony before the trial court, during
her receipt of the earnest money and during the transactions subject of the instant
case, her lawyers, one Atty. Lalin and a certain Atty. Cario, assisted her. She
testified as follows:
ATTY. JOSE
Wait, wait, your Honor. I have one question. Now, madam witness,
you mentioned that you were accompanied by a certain Atty. Molina when
you executed the receipt of the earnest money with me. Now, during the
transaction of this subject matter, you will also recall that at times you were
represented in dealing with me as counsel for defendant corporation by
Atty. Lalin and Atty. Carino?
A

Yes, sir.[32]

Neither does the fact that the subject contracts have been prepared by
respondents ipso facto entail that their validity and legality be strictly interpreted
against them. Petitioner Lourdes Paguyos insinuation that she was disadvantaged
will not hold. True, Article 24 of the New Civil Code provides that (i)n all
contractual, property or other relations, when one of the parties is at a disadvantage
on account of his moral dependence, ignorance, indigence, mental weakness,
tender age or other handicap, the courts must be vigilant for his
protection.[33] Thus, the validity and/or enforceability of the impugned contracts
will have to be determined by the peculiar circumstances obtaining in each case
and the situation of the parties concerned.

Here, petitioner Lourdes Paguyo, being not only cultured but a person with
great business acumen as well, cannot claim to be the weaker or disadvantaged
party in the subject contract so as to call for a strict interpretation against
respondents. More importantly, the parties herein went through a series of
negotiations before the documents were signed and executed.[34]

Further, we find the stipulations in the subject documents plain and

unambiguous. For instance, the Deed of Sale provides in no uncertain termsWHEREAS, the VENDOR is the true and absolute owner, free from
any lien or encumbrance, of a concrete building presently known as the
Paguyo Building, constructed on Lot 12, Blk. 4 (described in T.C.T No.
154806-Makati) located at No. 7856 Makati Ave. corner Valdez St.,
Makati, Metro Manila, covered by and described in Tax Declaration No.
93762 for the year 1984, and more particularly described as follows:

WHEREAS, the VENDOR is desirous of selling and the VENDEE

is willing to buy the aforedescribed building;
NOW THEREFORE, for and in consideration of the foregoing
premises and of the sum of SIX HUNDRED THOUSAND (P600,000.00)
PESOS, Philippine currency, the receipt of which is hereby acknowledged,
the VENDOR hereby cedes, transfers, and conveys, by way of absolute
sale, unto and in favor of the VENDEE, his successors and assigns, the
aforementioned building with all the improvements therein.
The Municipal Assessor of Makati is therefore hereby authorized to
register this sale in the new Tax Declaration in the name of the VENDEE.
IN WITNESS WHEREOF, the VENDOR hereby affixed his
signature by his wife and attorney-in-fact, LOURDES S. PAGUYO, this
5th day of January, 1989, in Pasay City.[35]

Inasmuch as the stipulations in the aforesaid contract and in the other

contracts being questioned leave no room for interpretation, there was no cause for
applying Article 24 of the New Civil Code.

In sum, in the case at bar, petitioners pray for rescission of the Deed of Sale
of the building and offer to repay the purchase price after their liquidity position
would have improved and after respondents would have refurbished the building,
updated the real property taxes, and turned the building into a profitable business
venture. This Court, however, will not allow itself to be an instrument to the
dissolution of contract validly entered into. A party should not, after its
opportunity to enjoy the benefits of an agreement, be allowed to later disown the
arrangement when the terms thereof ultimately would prove to operate against its
hopeful expectations.[36]

On the matter of damages, the Court of Appeals affirmed the trial courts
award of damages and attorneys fees to respondents, namely P400,000 as moral
damages,P200,000 as exemplary damages, P100,000 as attorneys fees and the
costs of suit.
We have held that moral damages may be recovered in cases where one
willfully causes injury to property, or in cases of breach of contract where the other
party acts fraudulently or in bad faith.[37] There is no hard and fast rule in the
determination of what would be a fair amount of moral damages, since each case
must be governed by its own peculiar circumstances.[38] Exemplary damages, on
the other hand, are imposed by way of example or correction for the public
good, when the party to a contract acts in a wanton, fraudulent, oppressive or
malevolent manner.[39] Attorneys fees are allowed when exemplary damages are
awarded and when the party to a suit is compelled to incur expenses to protect his
interest.[40]
While it has been sufficiently proven that the respondents are entitled to
damages, the actual amounts awarded by the lower court must be reduced because
damages are not intended for a litigants enrichment, at the expense of the
petitioners.[41] Judicial discretion granted to the courts in the assessment of
damages must always be exercised with balanced restraint and measured
objectivity.[42]
Thus, the amount of moral damages should be set at only P30,000.00, and
the award of exemplary damages at only P20,000.00. The award of attorneys fees
should also be reduced to P20,000.00 which, under the circumstances of this case,
appears justified and reasonable.
All told, we find no reason to reverse the assailed decision of respondent
court. The factual findings of the appellate court are conclusive on the parties and
carry greater weight when they coincide with the factual findings of the trial

court.[43] This Court will not weigh the evidence anew lest there is a showing that
the findings of the lower court are totally devoid of support or are clearly
erroneous so as to constitute serious abuse of discretion. In the instant case, the
trial court found that the documents, which petitioners seek to rescind, were
entered into as a result of an arms-length transaction. These are factual findings
that are now conclusive upon us.[44]
WHEREFORE, the Decision and the Resolution dated 30 April 1997 and 12
September 1997, respectively, of the Court of Appeals in CA-G.R. CV No.
47034, are hereby AFFIRMED with MODIFICATION as to the
amount of damages and attorneys fees recoverable, as follows: (1) moral
damages is reduced to P30,000.00, (2) exemplary damages is reduced
to P20,000.00, and (3) attorneys fees is reduced to P20,000.00. Costs against
petitioners.
SO ORDERED.

THIRD DIVISION

[G.R. No. 154852. October 21, 2004]

MULTINATIONAL VILLAGE HOMEOWNERS ASSOCIATION, INC. and

DANILO F. CUNETA, petitioners, vs. ARA SECURITY &
SURVEILLANCE AGENCY, INC., Represented by THERESA C.
MAMAED, President and General Manager, respondent.
DECISION
PANGANIBAN, J.:

Basic is the rule that a contract constitutes the law between the
parties. The mere grant to one party of the right to terminate the agreement
because of the nonpayment of an obligation established therein does not ipso
facto give the other party the same right to end the contract on the ground
of allegedly unsatisfactory service. Concededly, parties may validly stipulate
the unilateral rescission of a contract.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,
challenging the October 11, 2001 Decision[2] and the August 12, 2002
Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 62431. The
assailed Decision disposed as follows:
IN VIEW OF ALL THE FOREGOING, the judgment appealed from is hereby
AFFIRMED with MODIFICATION to read as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
[respondent] and as against the [petitioners], ordering the latter to pay the
[respondent] jointly and severally the following amounts:
1. P591,250.00, as actual damages;
2. P30,000.00, as attorneys fees; and
3. Costs of the suit.[4]

The assailed Resolution denied petitioners Motion for Reconsideration.

The Facts
The antecedents are summarized by the appellate court as follows:
In the Complaint filed below, it is alleged that Ara Security and Surveillance, Inc.
[(Ara)] was hired by Multinational Village Homeowners Association, Inc.
[(Multinational)] to provide security services at the Multinational Village,
Paraaque, Metro Manila. Their agreement was embodied in a document, entitled
Contract of Guards Services dated May 30, 1994. The contract was to take effect for
a period of one (1) year from May 25, 1994 up to May 25, 1995 on a monthly fee of
One Hundred Seven Thousand Five Hundred (P107,500.00) Pesos, payable every
15th and end of the month without need of demand. Under the same contract, Ara will
provide Multinational with thirty (30) guards.
Not long after, on August 29, 1994, Danilo F. Cuneta, President of Multinational,
wrote Ara a letter terminating the aforesaid contract effective 1900 hours of August
31, 1994, having found the guards services to be unsatisfactory, for repeated
violations of the Security Guards Code of Ethics and Conduct, and total disregard of
the General Order causing loss of confidence in the ability of the security guards to
comply with the terms of the contract. Ara replied requesting Multinational to
reconsider its position, which fell on deaf ears. Thus, on September 13, 1994, Ara
commenced the present suit for injunction with preliminary injunction, preliminary
mandatory injunction and temporary restraining order with damages.
On September 15, 1994, a temporary restraining order was issued enjoining
Multinational, their agents and all persons acting in their behalf from enforcing the
letter dated August 29, 1994 and [from] replacing the guards with another
agency. The injunctive relief was then set for hearing.
Summons having been served properly, Multinational submitted an Answer together
with an opposition to the injunction claiming that it has the right to pre-terminate the
contract under paragraph 5 thereof stating:
5. MODE OF PAYMENT:
For and in consideration of the above services and during the effectivity of this
Contract, the CLIENT shall pay the SECURITY COMPANY the sum indicated in the
hereto attached cost analysis per month which consideration shall be paid every
15th and end of the month without need of demand.
The CLIENT hereby agrees that it shall pay interest on accounts covered by billings
received by the CLIENT and unpaid for thirty (30) days or more at the rate of 24 per

cent per annum. This shall be without prejedice (sic) to the right of the SECURITY
COMPANY to terminate this contract immediately, for failure of CLIENT to pay the
aforestated consideration in accordance with its terms without notice.
The SECURITY COMPANY shall be entitled to an automatic adjustment of its
stipulated contract price in (sic) event that the minimum wage increase[s] (sic) or in
favor of the guards are promulgated by law, executive order, decree or wage order
subsequent to the execution of this contract. Said adjustments shall be equivalent to
the amount of increase in the minimum wage of the amount benefits promulgated or
both as the case may be.
Billing shall be every fifteen (15) days. After three (3) months of satisfactory
performance, the parties may negotiate for the extension of this contract and
other matters that might be advantageous to both parties.
Meantime, after hearing the trial court denied the prayer for the issuance
of a writ of preliminary injunction on February 16, 1995.
Finally, on December 14, 1998, the court a quo rendered its decision.[5]
Ruling in favor of Ara, the trial court ordered Multinational to pay the
following:
1. P701,137.50 as actual damages
2. P200,000.00 as exemplary damages
3. P50,000.00 as attorneys fees
4. P20,000.00 as and for costs of suit and expenses of litigation

Unsatisfied, petitioners appealed to the CA.

Ruling of the Court of Appeals
The CA held that petitioners had breached their Contract when they preterminated it on the basis of paragraph 5 thereof. According to the appellate
court, the said provision did not provide for a pre-termination option, but was
a mere superfluity with no clear meaning.
Furthermore, the CA ruled that petitioners had no good and valid ground
to pre-terminate the Contract, because the documentary evidence[6] they had
presented was hearsay and of no probative value.[7]
Consequently, the appellate court affirmed the lower courts findings, but
reduced the award of actual damages to P591,250 representing payment for

services rendered for five and a half months at P107,500 per month. It also
deleted the award of exemplary damages, saying that respondent had failed
to present evidence justifying the grant thereof.[8]
Hence, this Petition.[9]
The Issues
In their Memorandum, petitioners raise the following issues for our
consideration:
1. Whether or not the lower erred in finding respondents position as the more
acceptable interpretation of the contract in question that the contract cannot be
terminated even after three months of unsatisfactory performance.
2. Whether or not the lower court erred in ruling that petitioners failed to establish
that the termination of the contract was for legal cause.
3. Whether or not the lower court erred in declaring that [petitioners] committed
breach of contract.[10]
The issue is simply whether the pre-termination of the Contract was valid.
The Courts Ruling
The Petition has no merit.
Main Issue:
Interpretation of Paragraph 5
The last portion of paragraph 5 of the Contract of Guard Services between
petitioners and respondent provides:
Billing shall be every fifteen (15) days. After three (3) months of satisfactory
performance, the parties may negotiate for the extension of this contract and other
matters that might be advantageous to both parties.[11] (Italics supplied)
Petitioners argue that the above stipulation in the Contract of Guard
Services is a resolutory condition. They allege that under this paragraph, the
Contract can no longer be enforced after the three-month period if the guards
performance is unsatisfactory.[12]

They further theorize that since respondent was given the option to end
the Contract upon their failure to pay in accordance with the specified terms,
they are likewise entitled to the option of terminating the agreement on the
basis of allegedly unsatisfactory performance.[13] They add that it would be
unjust to compel respondent to continue with this Contract despite the security
guards ineptitude, which poses a danger to the lives and properties of the
home owners.[14]
Petitioners contentions are not convincing. A reading of paragraph 5
yields the simple and natural meaning that the parties may extend the
Contracts life upon mutual agreement. The appellate court was correct in
holding that the provision was a mere superfluity. The parties need not
provide that they may extend the Contract should they mutually agree,
because they may do so with or without this benign provision. Although
paragraph 5 mentions extensions, it is ominously and significantly silent on
the matter of pre-termination.
True, parties may validly provide for resolutory conditions and unilateral
rescission in their contract. However, paragraph 5 is not a resolutory
condition, as it is not one that constitutes a future and uncertain event[,] upon
the happening or fulfillment of which rights which are already acquired by
virtue of the obligation are extinguished or lost.[15]
Under paragraph 5, the clause satisfactory performance is expressly and
clearly a consideration for extending the life of the Contract. However, in the
same paragraph, there is no mention of the effect of unsatisfactory
performance.
In the absence of any stipulation or provision of law on the matter,
petitioners cannot be deemed to have the contractual right to pre-terminate
the Contract unilaterally as of August 31, 1994, on the ground of the allegedly
unsatisfactory performance of the security guards. Such interpretation is a
direct contravention of paragraph 12, which clearly states that the term of the
Contract shall be one year:
12. TERM OF CONTRACT:
This Contract shall take effect on May 25, 1994 and shall be for a period of One (1)
Year from said date. Thereafter, it shall be deemed renewed for the same period
unless either party notifies the other in writing not later than one (1) month before the
expiry of its intent not to renew.
x x x

xxx

xxx

14. Either party may terminate this contract for legal cause by written notice given
to the other party not later than thirty (30) days prior to the expiry date. [16]
The cases -- Pamintuan v. CA[17] and Viray v. Intermediate Appellate
Court[18] -- cited by petitioners to support the alleged existence of a resolutory
condition are not applicable to the present controversy. In the cited Decisions,
the obligations under the lease Contracts as well as the consequences of the
lessees failure to comply with those obligations -- particularly, rescission and
the landlords taking possession of the leased premises -- were clearly set
forth in the law and in the Contracts, respectively. Thus, it was clearly
discernible in those cases that the failure to comply with the contractual
obligations constituted a resolutory condition.
The foregoing situation does not obtain in the present case. The
consequence of unsatisfactory performance is not specified in the Contract of
Guard Services. There is no stipulation permitting petitioners to terminate the
Contract upon an unsatisfactory performance of the security
guards. Paragraph 5 cannot be deemed to be a resolutory condition.
The contention of petitioners that the grant to respondent of the option to
terminate gives them the same right is a non sequitur. As they themselves
argue, parties may validly provide for unilateral rescission in a contract.
Next, petitioners contend that the court a quo did not comply with Section
11 of Rule 130 of the Rules of Court, because it failed to give effect to
paragraph 5. They further invoke Section 12[19] of the same Rule, arguing that
relative to the provision of the Contract on the duration of its effectivity, which
is one year, paragraph 5 is a particular provision.[20] They conclude that since
the two provisions are inconsistent, paragraph 5 -- being the particular
provision -- should prevail.
Section 11 of Rule 130 of the Rules of Court states that [i]n the
construction of an instrument where there are several provisions or
particulars, such a construction is, if possible, to be adopted as will give effect
to all. Contrary to petitioners contention, paragraph 5 is not inconsistent with
paragraph 12. More important, the former does not in any way deal with the
termination of the Contract. Neither does it provide for a right to rescind.
At this point, we stress that the right to rescind is implied in reciprocal
obligations, as provided for in Article 1191 of the Civil Code, which states:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.

x x x

xxx

x x x.

Therefore, absent any provision providing for a right to rescind, the parties
may nevertheless rescind the contract should the other obligor fail to comply
with its obligations.
As correctly held by the CA in the instant case, petitioners failed to
produce evidence of the alleged breach of obligation by respondent. The
investigation made by Petitioner Danilo F. Cuneta cannot stand as competent
evidence. The Letter-Complaints presented in court were neither identified,
nor were their contents affirmed, by their authors. Therefore, insofar as they
purport to prove that the security guards were remiss in their duties, the
Letter-Complaints are hearsay and inadmissible evidence.[21] In Desierto v.
Estrada, we held as follows:
Evidence is called hearsay when its probative force depends, in whole or in part, on
the competency and credibility of some persons other than the witness by whom it is
sought to produce it. There are three reasons for excluding hearsay evidence: (1)
absence of cross examination; (2) absence of demeanor evidence, and (3) absence of
the oath.
Finally, it is a settled principle of law that rescission will not be permitted
for a slight or casual breach of a contract, but only for such breaches as are
so substantial and fundamental as to defeat the object of the parties in
entering into the agreement.[22] Petitioners failed to produce evidence of any
substantial and fundamental breach that would warrant the rescission of the
Contract.
WHEREFORE,
the
Petition
is DENIED and
Decision AFFIRMED. Costs against petitioners.

the

assailed

SO ORDERED.
Sandoval-Gutierrez, Corona, Carpio-Morales, and Garcia, JJ., concur.

FIRST DIVISION

[G.R. No. 119712. January 29, 1999]

DEVELOPMENT BANK OF THE PHILIPPINES and ASSET

PRIVATIZATION TRUST, petitioners, vs. COURT OF APPEALS and
CONTINENTAL CEMENT CORPORATION, respondents.
DECISION
MARTINEZ, J.:

This petition for review on certiorari assails the decision[1] rendered by the Court
of Appeals dated March 28, 1995 in CA-G.R. CV No. 42596 affirming the decision of
the Regional Trial Court-Branch 9 of Malolos, Bulacan dated October 9, 1992 and
adopting in toto the orders rendered by the same trial court dated August 25 and
December 14, 1992.
On November 18, 1985, the Development Bank of the Philippines (DBP), a
government owned and controlled corporation, filed with the Office of the Sheriff of
Malolos an application for extra-judicial foreclosure of real and personal properties
situated at San Jose del Monte and Norzagaray, Bulacan involving several real and/or
chattel mortgages executed by Continental Cement Corporation (CCC), a corporation
organized and existing under Philipine laws, engaged mainly in the manufacture of
cement, in favor of DBP on August 20, 1968; September 4, 1968; May 7, 1969;
September 19, 1969; October 24, 1969 and November 13, 1969.
On December 11, 1985, Continental Cement filed a complaint with the Regional
Trial Court of Malolos, Bulacan. The suit principally sought to enjoin the then
defendants DBP and the Sheriff of Malolos, Bulacan from commencing the
foreclosure proceedings on CCCs mortgages which were executed in favor of DBP to
secure various loans obtained by CCC. In addition, CCC also prayed that a new term
for its loan obligation be established, and that the court declare the interest escalation
clause contained in DBPs promissory notes as null and void.
A temporary restraining order (TRO) was issued and subsequently a Writ of
Preliminary Injunction was likewise issued on January 17, 1986, despite opposition
thereto by DBP.
Sometime in December 1986, Proclamation No. 50[2] was promulgated by then
President Corazon C. Aquino pursuant to Administrative Order No. 14. The

proclamation established the privatization program of the National Government and

created the Committee on Privatization and herein petitioner ASSET
PRIVATIZATION TRUST (APT) as the privatization arm for the government.
Several non-performing assets of the government financial institutions, including
DBP, were transferred to the National Government. The transfer was implemented
through a Deed of Transfer executed on February 27, 1987 between DBP and the
National Government, which in turn, designated petitioner APT to act as its trustee
over the assets. Among the non-performing assets identified and transferred to the
APT was the account of CCC. A Trust Agreement was thereafter executed between
the National Government and APT, wherein the latter was to take title to and
possession of liabilities and non-performing assets.
On September 18, 1987, DBP filed a motion to dismiss contending (1) that the
case has become moot and academic because CCC could no longer secure reliefs from
DBP as a result of the transfer of DBPs claim against CCC to APT; and (2) that the
court lost jurisdiction over the subject matter considering that Section 31 of Proc. No.
50 prohibits the issuance of any restraining order or injunction against APT in
connection with the acquisition, sale, or disposition of assets transferred to
it. However, the motion of DBP was denied by the trial court on January 27, 1988,
and APT was eventually allowed to join the defendant DBP pursuant to Proclamation
No. 50, as amended.
In July 1989, the accounting firm of J. C. Laya[3] was designated by the lower
court as Commissioner to resolve the main issue in the case, that is, the determination
of the actual arrearages of respondent CCC to petitioner APT and DBP arising from
loan accommodations obtained by CCC from DBP.
To aid the Commissioner and to expedite his task of determining the actual
indebtedness of CCC, both CCC and DBP provided the representatives of the
Commissioner with the pertinent data and documents which were within their custody
and possession. Among the documents provided was a copy of the Memorandum of
Agreement[4] executed between CCC and DBP which pegged CCCs total
indebtedness to DBP at P133,717,286.95 as of August 31, 1979.
The Commissioner was unable to accomplish his assigned task within the period
set by the court. He was initially given an extension of sixty (60) days. This proved
to be insufficient thus he was granted another forty-five (45) days from December 18,
1989.
Despite several extensions given to the Commissioner to complete his report, he
failed to do so. This prompted the trial court to issue an Order dated April 23, 1990
directing Atty. Jose Leynes[5] to explain why he should not be cited for contempt for
his unexplained omission to perform and accomplish his duties as the court appointed

Commissioner. This was followed by another Order dated July 2, 1990 citing Atty.
Leynes in contempt of court and ordered his imprisonment for his non-compliance
with the April 23, 1990 order.
To avoid the consequences of the contempt order, Atty. Leynes submitted a draft
report on July 11, 1990 entitled Summary of Initial Findings. The contempt order
was subsequently lifted by the trial court on August 20, 1990.
After several months of work had passed, the Commissioner, this time known as
Laya Manabat Salgado & Co., submitted to the lower court its report entitled
Commissioners Report on Loan Proceeds and Payments dated January 11,
1991. The findings of the Commissioner as cited by the Court of Appeals in its
decision were as follows:
It bears emphasis that the report is confined to a determination of CCCs
indebtedness to DBP in relation only to four (4) straight peso loans, namely, a
12% ten-year loan of P3,867,291 signed on August 20, 1968; a 10% ten-year loan
of P7,784,000 signed on September 19, 1969; a 10% ten-year loan signed on October
23, 1969; and a P5.5. Million loan not covered by any promissory note but released to
the extent of P1.0 Million in March 1972, and two (2) guaranteed foreign exchange
loans consisting of US$2,000,000 contracted on September 4, 1968 by CCC but
guaranteed by DBP in favor of Somex Ltd. and DM11,233,115 (German Deutsche
Marks) in favor of consortium of West German Manufacturers headed by KlocknerHumboldt-Deutz, A.G. dated May 9, 1969 (Report, p. 3). The Report excludes the
implications of, firstly, an industrial fund loan extended by DBP for CCCs
acquisition of coal conversion equipment appearing in DBPs books of accounts
as US$ 2,558,347 and, secondly, DBPs advances for insurance, management fees
and miscellaneous charges in the total amount of P4,436,807 (Report, pp. 8-9,
pars. 4.8, 4.9). x x x[6]
As a result of the report, the parties filed their respective comments and objections
thereto. During the trial, former Central Bank Governor Jaime C. Laya and a
representative of the Commissioner were called upon to testify. The parties also had
the opportunity to cross-examine the witnesses on matters touched upon in the report
as well as those disregarded by the Commissioner in its report.
After having cross-examined the representative of the Commissioner, the parties
were then allowed to submit their respective Position Papers. Contained in their
respective position papers was their own computation of the outstanding liabilities of
CCC. CCCs computation of its exact indebtedness to DBP as of December 1990,
covering the straight peso loans and foreign guarantees stood atP43,601,192.73. The
Commissioner reported that the indebtedness amounted to P61,698,849.00 while DBP
and APT computed CCCs total indebtedness in the sum of P2,656,573,716.11.[7]

On July 23, 1992, a hearing was scheduled for the sole purpose of examining
three (3) of CCCs witnesses, namely, Gregorio Lim, Urbano Cruz and Jessica
Alonzo. The cross-examination was to be conducted by APT as DBP had previously
conducted its own cross-examination. The counsel for CCC failed to appear as he
was allegedly ill. On that same date, the court issued an order resetting the crossexamination for CCCs witnesses on August 24, 25 and 26, 1992. Again, the counsel
for APT was not able to attend due to an alleged serious illness (Dengue Hemorrhagic
Fever). Also absent during the hearing was DBPs counsel and DBP/APTs lone
witness, Mr. Jaime V. Cruz.
On August 25, 1992, the trial court issued an order which considered the case
submitted for decision. The final paragraph of the order reads as follows:
In the light of the foregoing developments, and conformably with the agreement
entered into much earlier by the contending parties to the effect that after the affiants
to the position papers shall have been cross-examined, the parties shall dispense with
the presentation of further evidence, the case at bar is considered henceforth submitted
for adjudication on the merits.[8]
It is claimed by petitioner APT that when the above-mentioned order was issued,
APT did not yet have the opportunity to cross-examine the affiants of respondent
CCC; nor did it have the chance to present any of their affiants to support their
allegations as contained in their Joint Position Papers.
On September 18, 1992, APT filed a Motion for Reconsideration. In an order
dated October 13, 1992, the trial court declared that such motion became moot and
academic by reason of the decision rendered on October 5, 1992.
On that earlier date, the lower court rendered the assailed decision, the dispositive
portion of which is as follows:
WHEREFORE, premises considered, judgment is hereby rendered:
1. fixing the total indebtedness of plaintiff Continental Cement Corporation in favor of
defendant Development Bank of the Philippines on the straight peso loans and foreign
guarantees at P61,498,849.00 as of December 31, 1990;
2. fixing the indebtedness of plaintiff Continental Cement Corporation in favor of defendant
Development Bank of the Philippines on the coal conversion loan at US$977,000.00,
or P7,347,890.00 which is its equivalent in pesos at the official rate of exchange prevailing
in August 1979;
3. ordering the plaintiff to pay unto either of the defendants DBP or APT, within six (6) months
from the finality of this judgment, the aforementioned amount of P61,498,849.00 with
interest thereon at 10% per annum from January 1, 1991 until the same shall have been fully
paid and the aforementioned amount of US$997,000.00/P7,347,890.00 without interest
thereon;

4. declaring premature and without legal basis the application for extrajudicial foreclosure
(Annex A of the Complaint) filed on November 18, 1985 by defendant Development Bank
of the Philippines with the office of the defendant Sheriff of Malolos, Bulacan;
5. making permanent the writ of preliminary injunction issued by this Court on January 17,
1986 in the case at bar enjoining proceedings on the aforementioned application for
extrajudicial foreclosure, without prejudice to such rights (including the institution of
eventual foreclosure proceedings) as the defendants may opt to pursue against the plaintiff in
the event that the directive specified in the preceding paragraph hereof shall not have been
complied with; and
6. dismissing the plaintiffs claim for unspecified attorneys fees and expenses of litigation.

No pronouncement as to costs.
SO ORDERED.[9]
After having learned of the decision of the trial court, APT and DBP filed their
respective Omnibus Motions. APT, in its Omnibus Motion dated October 27, 1992,
prayed for the issuance of the following orders by the trial court:
1) vacating and nullifying its Decision dated October 5, 1992;
2) granting APT an opportunity to cross-examine plaintiffs witness;
3) allowing DBP and APT to present their witnesses and evidence;
4) after trial, requiring the parties to submit their respective Memoranda.[10]

The trial court, on December 14, 1992, issued an Order denying the separate
Omnibus Motions of APT and DBP. Both APT and DBP appealed the trial courts
decision dated October 5, 1992 and orders dated August 25, 1992 and December 14,
1992.
On June 7, 1993, APT and DBP filed with the Court of Appeals a petition
for certiorari and prohibition with prayer for an ex-parte issuance of a restraining
order and a writ of preliminary injunction docketed as CA-G.R. SP No.
32853. However, on January 31, 1994, the Court of Appeals dismissed the petition
for lack of merit.
Thus, on March 28, 1995, the Court of Appeals, in CA-G.R. CV No. 42596
rendered the assailed decision, the dispositive portion of which reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered AFFIRMING the
Decision dated October 5, 1992 and the orders dated August 25 and December 14,
1992 in toto. The order dated January 22, 1993 is hereby annulled and set aside
insofar as it directs the partial release of collaterals by defendants-appellants DBP and
APT.[11]

In the instant Petition for Review, APT assigns the following errors committed by
the appellate court:
I

THE COURT OF APPEALS IN AFFIRMING THE LOWER COURTS DECISION,

DISREGARDED THE PRINCIPLES EMBODIED IN THE DUE PROCESS
CLAUSE OF THE CONSTITUTION, THUS:
A

THE COURT OF APPEALS ERRED IN FINDING THAT PETITIONER HAS

WAIVED ITS RIGHT TO CROSS-EXAMINE RESPONDENTS WITNESS
II

THE COURT OF APPEALS ERRED WHEN IT AFFIRMED THE TRIAL

COURTS DECISION ADOPTING IN TOTO THE REPORT OF THE
COMMISSIONER
A

THE COURT OF APPEALS ERRED IN AFFIRMING THE TRIAL COURTS

DECISION
THAT
THE
MEMORANDUM
OF
AGREEMENT
IS
UNENFORCEABLE
B

THE COURT OF APPEALS ERRED IN AFFIRMING THE TRIAL COURTS

DECISION LIMITING THE LIABILITY OF RESPONDENT IN THE AMOUNT
OF P61,498,849.00 AS OF DECEMBER 31, 1990 INSTEAD OF P2,656,573,716.11
III

THE COURT OF APPEALS ERRED IN AFFIRMING THE TRIAL COURTS

ISSUANCE OF A TEMPORARY RESTRAINING ORDER AND WRITS OF
PRELIMINARY AND PERMANENT INJUNCTION.
Anent the first assigned error, petitioner APT insists that the lower court as well
as the Court of Appeals disregarded the principles of the due process clause embodied
in the Constitution when it found APT to have waived its right to cross-examine
respondents witnesses. On the other hand, respondent CCC counters that the findings
of the lower court may be attributed to the fault of APTs counsel. CCC alleges that
the counsel for APT often absented himself on scheduled hearing dates, resulting in
the failure to cross-examine the witnesses of respondent CCC.

The insistence of the petitioner is without basis.

Long ingrained in our jurisprudence is the principle that there can be no denial of
due process where a party had the opportunity to participate in the proceedings but did
not do so.[12]
As shown from the records, the counsel for APT was absent on several occasions,
specifically on April 7, May 5, June 2, June 16, August 24 and 25, 1992. Several
reasons were raised by APTs counsel to justify his absence, such as withdrawal of
previous counsel, unreadiness to conduct the cross-examinations, and serious illness.
These flimsy excuses do not warrant consideration from this Court. The
withdrawal of APTs previous counsel in the thick of the proceedings would be a
reasonable ground to seek postponement of the hearing. However, such reason
necessitates a duty, nay an obligation, on the part of the new counsel to prepare
himself for the next scheduled hearing. The excuse that it was due to the former
counsels failure to turn over the records of the case to APT, shows the negligence of
the new counsel to actively recover the records of the case. Mere demands are not
sufficient. Counsel should have taken adequate steps to fully protect the interest of
his client, rather than pass the blame on the previous counsel.
A motion to postpone trial on the ground that counsel is unprepared for trial
demonstrates indifference and disregard of a clients interest. A new counsel who
appears in a case in midstream is presumed and obliged to acquaint himself with all
the antecedent processes and proceedings that have transpired prior to his takeover.[13]
As regards the serious illness suffered by counsel during the trial dates of August
24 and 25, 1992, we take note that Dengue Hemorrhagic Fever, if not treated at its
early stage, could cause serious illness, sometimes even death. This Court is not
unmindful of the fact that counsels absence was due to this deadly disease. What
baffles this Court is the reason offered by counsel that although two other APT
lawyers were mentioned in the pleadings, only one was actively involved in the
handling of the case.[14] Counsel further adds that he could not have possibly appraised the two other
lawyers to appear during the scheduled hearing in his absence.

We cannot understand why it would be difficult for counsel to appraise his two
other collaborating counsels. Counsel himself readily admits that of the two, only one
is actively handling the case. It would take a mere phone call to inform his cocounsels than he would be unable to attend rather than be declared absent during
trial. Yet, counsel failed to do so.
In view of the foregoing, we find the Court of Appeals did not commit error,
when it declared that petitioner waived its right to cross-examine the respondents
witnesses. The due process requirement is satisfied where the parties are given the
opportunity to submit position papers,[15] as in this case. Both parties, CCC and

DBP/APT, were given opportunity to submit their respective position papers after the
Commissioner rendered his report. Contained in their position papers were their
respective comments and objections to the said report. Furthermore, the parties were
also given the chance to cross-examine the Commissioner and his
representative. They were likewise granted opportunity to cross-examine the
witnesses of the other party, however, like in APTs case, they were deemed to have
waived their right, as previously discussed.
The essence of due process is that a party be afforded a reasonable opportunity to
be heard and to support any evidence he may have in support of his defense. [16] What
the law prohibits is absolute absence of the opportunity to be heard, hence, a party
cannot feign denial of due process when he had been afforded the opportunity to
present his side.[17]
As to the second assigned error, petitioner avers that the Court of Appeals erred
when it affirmed the trial courts decision adopting in toto the report of the
Commissioner and the decision of the trial court declaring the Memorandum of
Agreement as unenforceable.
The above-mentioned issues involve matters which are factual in nature. As a
general rule, findings of fact of the Court of Appeals are binding and conclusive upon
this Court, and we will not normally disturb such factual findings unless the findings
of the court are palpably unsupported by the evidence on record or unless the
judgment itself is based on a misapprehension of facts.[18]
In the case at bar, we find no such error that would warrant a reversal of the
assailed decision. As to the matter of the memorandum of agreement, we concur with
the decision of the Court of Appeals. The Memorandum of Agreement itself stated
that failure of Continental to meet this deadline shall be construed as its objection to
this new restructuring scheme.[19] Moreover, CCC did not execute nor submit all the
documents needed to make said agreement effective. The fact that CCC did not
comply with the requirements of the Memorandum of Agreement at the expiration of
the period set by DBP, only shows CCCs non-conformity to the agreement.
Since CCC did not express its conformity to the agreement, it was only proper for
the Commissioner to consider the amount of indebtedness of CCC based on actual
loan releases. The Commissioner did consider the Memorandum of Agreement as a
source document, however, no one was able to satisfactorily explain how the figure
was arrived at. It must be emphasized that the Commissioners report was limited in
relation to four (4) straight peso loans and two (2) guaranteed foreign exchange
loans. It is, therefore, erroneous for APT and DBP to conclude that CCCs entire
outstanding obligations stood atP2,656,573,716.11.

As regards the determination of the Commissioner as to the actual indebtedness of

CCC, we uphold the ruling of the respondent court. The very reason why the
Commissioner was appointed as such was due to the complex nature of the issues
involved in the case which required the technical know-how and expertise possessed
by the Commissioner. The records also bear the fact that said Commissioner was
chosen by both parties.
As we have previously ruled in Quebral vs. CA[20] that factual findings of the
Court of Appeals normally are not reviewable by this Court under Rule 45 of the
Rules of Court, except when the findings of the appellate court are at variance with
those of the trial court. Since the trial court and the Court of Appeals were in unison
with the findings of the Commissioner, this Court is of the opinion that it finds no
compelling reason to reverse the same.
Lastly, petitioner APT argues that the Court of Appeals erred in affirming the trial
courts issuance of a temporary restraining order and a writ of preliminary and
permanent injunction against it (APT), despite the express provisions of Proclamation
No. 50. On the other hand, CCC asseverates that since APT was a mere
transferee pendente lite, it was bound by the preliminary injunction previously issued
against DBP.
We find merit in the assigned error of petitioner APT.
It must be recalled that the trial court did in fact issue a Writ of Preliminary
Injunction against petitioner APT. The particular section which contains the noninjunction rule is quoted hereunder:
Courts may not substitute their judgment for that of APT, nor block, by an injunction
the discharge of its function and the implementation of its decision in connection with
the acquisition, sale, or disposition of assets transferred to it.[21]
Furthermore, we reiterate the ruling held in that case that Proclamation No. 50
does not infringe any provision of the Constitution. Thus
The President, in the exercise of his legislative power under the Freedom
Constitution, issued Proclamation No. 50-A prohibiting the courts from issuing
restraining orders and writ of injunction against the APT and the purchasers of any
asset sold by it, to prevent courts from interfering in the discharge, by this
instrumentality of the executive branch of the Government, of its task of carrying out
`the expeditious disposition and privatization of certain government corporations
and/or the assets thereof (Proc. No. 50), absent any grave abuse of discretion
amounting to excess or lack of jurisdiction on its part. This proclamation, not being
inconsistent with the Constitution and not having been repealed or revoked by
Congress, has remained operative (Section 3, Art. XVIII, 1987 Constitution).[22]

The records of the case at bar does not disclose any grave abuse of discretion
committed by petitioner APT amounting to excess or lack of jurisdiction in its effort
to take possession of the assets transferred to it by DBP. We are of the opinion that
petitioners simply availed of judicial processes to recover the transferred assets
formerly owned by DBP. We hold respondent Court of Appeals liable of committing
the assigned error.
In sum, petitioner APT was not denied its right to due process when it failed to
cross-examine respondents witnesses as this was due to its own counsels failure and
negligence. A party cannot feign denial of due process when he had the opportunity
to present his side.[23] A careful review of the records reveal that DBP had the
opportunity to exhaustively cross-examine respondents witnesses. Furthermore, as
transferee pendente lite, APT merely stepped into the shoes of DBP.
As regards the indebtedness of CCC, petitioners APT/DBP must be reminded that
all is not lost when the Commissioner ruled that the outstanding loans amounted
to P61,498,849.00 only. As manifested by the Commissioner, the report limited itself
to four (4) straight peso loans and two (2) guaranteed foreign exchange loans. This
was due to the insufficiency of supporting documents submitted by both parties. We
wish to state that the affirmation by this Court of the rulings of the Court of Appeals
as to the indebtedness of CCC, does not in any way prejudice APT/DBPs right to
recover from CCC, provided they are fully able to substantiate their claim.
WHEREFORE, the petition is hereby DENIED and the assailed decision is
hereby AFFIRMED but with modification as follows:
The writ of preliminary injunction issued on January 17, 1986, and the writ of
permanent injunction issued on October 5, 1992 are hereby declared NULL AND
VOID pursuant to Section 31, Proclamation No. 50.
SO ORDERED.
Davide, Jr., C.J. (Chairman), Melo, Kapunan, and Pardo, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-42283 March 18, 1985
BUENAVENTURA ANGELES, ET AL., plaintiffs-appellees,
vs.
URSULA TORRES CALASANZ, ET AL., defendants-appellants.

GUTIERREZ, JR., J.:

This is an appeal from the decision of the Court of First Instance of Rizal, Seventh Judicial District,
Branch X, declaring the contract to sell as not having been validly cancelled and ordering the
defendants-appellants to execute a final deed of sale in favor of the plaintiffs-appellees, to pay
P500.00 attorney's fees and costs.
The facts being undisputed, the Court of Appeals certified the case to us since only pure questions
of law have been raised for appellate review.
On December 19, 1957, defendants-appellants Ursula Torres Calasanz and Tomas Calasanz and
plaintiffs-appellees Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of
land located in Cainta, Rizal for the amount of P3,920.00 plus 7% interest per annum.
The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They
promised to pay the balance in monthly installments of P 41.20 until fully paid, the installments being
due and payable on the 19th day of each month. The plaintiffs-appellees paid the monthly
installments until July 1966, when their aggregate payment already amounted to P4,533.38. On
numerous occasions, the defendants-appellants accepted and received delayed installment
payments from the plaintiffs-appellees.
On December 7, 1966, the defendants-appellants wrote the plaintiffs-appellees a letter requesting
the remittance of past due accounts.
On January 28, 1967, the defendants-appellants cancelled the said contract because the plaintiffsappellees failed to meet subsequent payments. The plaintiffs' letter with their plea for reconsideration
of the said cancellation was denied by the defendants-appellants.
The plaintiffs-appellees filed Civil Case No. 8943 with the Court of First Instance of Rizal, Seventh
Judicial District, Branch X to compel the defendants-appellants to execute in their favor the final
deed of sale alleging inter alia that after computing all subsequent payments for the land in question,
they found out that they have already paid the total amount of P4,533.38 including interests, realty
taxes and incidental expenses for the registration and transfer of the land.
The defendants-appellants alleged in their answer that the complaint states no cause of action and
that the plaintiffs-appellees violated paragraph six (6) of the contract to sell when they failed and
refused to pay and/or offer to pay the monthly installments corresponding to the month of August,

1966 for more than five (5) months, thereby constraining the defendants-appellants to cancel the
said contract.
The lower court rendered judgment in favor of the plaintiffs-appellees. The dispositive portion of the
decision reads:
WHEREFORE, based on the foregoing considerations, the Court hereby renders
judgment in favor of the plaintiffs and against the defendants declaring that the
contract subject matter of the instant case was NOT VALIDLY cancelled by the
defendants. Consequently, the defendants are ordered to execute a final Deed of
Sale in favor of the plaintiffs and to pay the sum of P500.00 by way of attorney's fees.
Costs against the defendants.
A motion for reconsideration filed by the defendants-appellants was denied.
As earlier stated, the then Court of Appeals certified the case to us considering that the appeal
involves pure questions of law.
The defendants-appellants assigned the following alleged errors of the lower court:
First Assignment of Error
THE LOWER COURT ERRED IN NOT HOLDING THE CONTRACT TO SELL
(ANNEX "A" OF COMPLIANCE) AS HAVING BEEN LEGALLY AND VALIDLY
CANCELLED.
Second Assignment of Error
EVEN ASSUMING ARGUENDO THAT THE SAID CONTRACT TO SELL HAS NOT
BEEN LEGALLY AND VALIDLY CANCELLED, THE LOWER COURT ERRED IN
ORDERING DEFENDANTS TO EXECUTE A FINAL DEED OF SALE IN FAVOR OF
THE PLAINTIFF.
Third Assignment of Error
THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO PAY PLAINTIFFS
THE SUM OF P500.00 AS ATTORNEY'S FEES.
The main issue to be resolved is whether or not the contract to sell has been automatically and
validly cancelled by the defendants-appellants.
The defendants-appellants submit that the contract was validly cancelled pursuant to paragraph six
of the contract which provides:
xxx xxx xxx
SIXTH.In case the party of the SECOND PART fails to satisfy any monthly
installments, or any other payments herein agreed upon, he is granted a month of
grace within which to make the retarded payment, together with the one
corresponding to the said month of grace; it is understood, however, that should the
month of grace herein granted to the party of the SECOND PART expired; without

the payments corresponding to both months having been satisfied, an interest of

10% per annum will be charged on the amounts he should have paid; it is
understood further, that should a period of 90 days elapse, to begin from the
expiration of the month of grace herein mentioned, and the party of SECOND PART
has not paid all the amounts he should have paid with the corresponding interest up
to that date, the party of the FIRST PART has the right to declare this contract
cancelled and of no effect, and as consequence thereof, the party of the FIRST
PART may dispose of the parcel of land covered by this contract in favor of other
persons, as if this contract had never been entered into. In case of such cancellation
of the contract, all the amounts paid in accordance with this agreement together with
all the improvements made on the premises, shall be considered as rents paid for the
use and occupation of the above mentioned premises, and as payment for the
damages suffered by failure of the party of the SECOND PART to fulfill his part of the
agreement; and the party of the SECOND PART hereby renounces all his right to
demand or reclaim the return of the same and obliges himself to peacefully vacate
the premises and deliver the same to the party of the FIRST PART. (Emphasis
supplied by appellant)
xxx xxx xxx
The defendants-appellants argue that the plaintiffs-appellees failed to pay the August, 1966
installment despite demands for more than four (4) months. The defendants-appellants point
to Jocson v. Capitol Subdivision (G.R. No. L-6573, February 28, 1955) where this Court upheld the
right of the subdivision owner to automatically cancel a contract to sell on the strength of a provision
or stipulation similar to paragraph 6 of the contract in this case. The defendants-appellants also
argue that even in the absence of the aforequoted provision, they had the right to cancel the contract
to sell under Article 1191 of the Civil Code of the Philippines.
The plaintiffs-appellees on the other hand contend that the Jocson ruling does not apply. They state
that paragraph 6 of the contract to sell is contrary to law insofar as it provides that in case of
specified breaches of its terms, the sellers have the right to declare the contract cancelled and of no
effect, because it granted the sellers an absolute and automatic right of rescission.
Article 1191 of the Civil Code on the rescission of reciprocal obligations provides:
The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
xxx xxx xxx
Article 1191 is explicit. In reciprocal obligations, either party the right to rescind the contract upon the
failure of the other to perform the obligation assumed thereunder. Moreover, there is nothing in the
law that prohibits the parties from entering into an agreement that violation of the terms of the
contract would cause its cancellation even without court intervention (Froilan v. Pan Oriental
Shipping, Co., et al., 12 SCRA 276)
Well settled is, however, the rule that a judicial action for the rescission of a contract
is not necessary where the contract provides that it may be revoked and cancelled

for violation of any of its terms and conditions' (Lopez v. Commissioner of Customs,
37 SCRA 327, and cases cited therein)
Resort to judicial action for rescission is obviously not contemplated . . . The validity
of the stipulation can not be seriously disputed. It is in the nature of a facultative
resolutory condition which in many cases has been upheld by this Court. (Ponce
Enrile v. Court of Appeals, 29 SCRA 504).
The rule that it is not always necessary for the injured party to resort to court for rescission of the
contract when the contract itself provides that it may be rescinded for violation of its terms and
conditions, was qualified by this Court in University of the Philippines v. De los Angeles, (35 SCRA
102) where we explained that:
Of course, it must be understood that the act of a party in treating a contract as
cancelled or resolved on account of infractions by the other contracting party must be
made known to the other and is always provisional, being ever subject to scrutiny
and review by the proper court. If the other party denies that rescission is justified, it
is free to resort to judicial action in its own behalf, and bring the matter to court.
Then, should the court, after due hearing, decide that the resolution of the contract
was not warranted, the responsible party will be sentenced to damages; in the
contrary case, the resolution will be affirmed, and the consequent indemnity awarded
to the party prejudiced.
In other words, the party who deems the contract violated many consider it resolved
or rescinded, and act accordingly, without previous court action, but it proceeds at its
own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in law.
... .
We see no conflict between this ruling and the previous jurisprudence of this Court
invoked by respondent declaring that judicial action is necessary for the resolution of
a reciprocal obligation; (Ocejo, Perez & Co. v. International Banking Corp., 37 Phil.
631; Republic v. Hospital de San Juan de Dios, et al., 84 Phil. 820) since in every
case where the extrajudicial resolution is contested only the final award of the court
of competent jurisdiction can conclusively settle whether the resolution was proper or
not. It is in this sense that judicial action will be necessary, as without it, the
extrajudicial resolution will remain contestable and subject to judicial invalidation,
unless attack thereon should become barred by acquiescence, estoppel or
prescription.
The right to rescind the contract for non-performance of one of its stipulations, therefore, is not
absolute. InUniversal Food Corp. v. Court of Appeals (33 SCRA 1) the Court stated that
The general rule is that rescission of a contract will not be permitted for a slight or
casual breach, but only for such substantial and fundamental breach as would defeat
the very object of the parties in making the agreement. (Song Fo & Co. v. HawaiianPhilippine Co., 47 Phil. 821, 827) The question of whether a breach of a contract is
substantial depends upon the attendant circumstances. (Corpus v. Hon. Alikpala, et
al., L-23707 & L-23720, Jan. 17, 1968). ... .
The defendants-appellants state that the plaintiffs-appellees violated Section two of the contract to
sell which provides:

SECOND.That in consideration of the agreement of sale of the above described

property, the party of the SECOND PART obligates himself to pay to the party of the
FIRST PART the Sum of THREE THOUSAND NINE HUNDRED TWENTY ONLY
(P3,920.00), Philippine Currency, plus interest at the rate of 7% per annum, as
follows:
(a) The amount of THREE HUNDRED NINETY TWO only (P392.00) when this
contract is signed; and
(b) The sum of FORTY ONE AND 20/100 ONLY (P4l.20) on or before the 19th day of
each month, from this date until the total payment of the price above stipulated,
including interest.
because they failed to pay the August installment, despite demand, for more than four (4) months.
The breach of the contract adverted to by the defendants-appellants is so slight and casual when we
consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had already paid
the monthly installments for a period of almost nine (9) years. In other words, in only a short time,
the entire obligation would have been paid. Furthermore, although the principal obligation was only P
3,920.00 excluding the 7 percent interests, the plaintiffs- appellees had already paid an aggregate
amount of P 4,533.38. To sanction the rescission made by the defendants-appellants will work
injustice to the plaintiffs- appellees. (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA 829) It would
unjustly enrich the defendants-appellants.
Article 1234 of the Civil Code which provides that:
If the obligation has been substantially performed in good faith, the obligor may
recover as though there had been a strict and complete fulfillment, less damages
suffered by the obligee.
also militates against the unilateral act of the defendants-appellants in cancelling the contract.
We agree with the observation of the lower court to the effect that:
Although the primary object of selling subdivided lots is business, yet, it cannot be
denied that this subdivision is likewise purposely done to afford those landless, low
income group people of realizing their dream of a little parcel of land which they can
really call their own.
The defendants-appellants cannot rely on paragraph 9 of the contract which provides:
NINTH.-That whatever consideration of the party of the FIRST PART may concede
to the party of the SECOND PART, as not exacting a strict compliance with the
conditions of paragraph 6 of this contract, as well as any other condonation that the
party of the FIRST PART may give to the party of the SECOND PART with regards
to the obligations of the latter, should not be interpreted as a renunciation on the part
of the party of the FIRST PART of any right granted it by this contract, in case of
default or non-compliance by the party of the SECOND PART.
The defendants-appellants argue that paragraph nine clearly allows the seller to waive the
observance of paragraph 6 not merely once, but for as many times as he wishes.

The defendants-appellants' contention is without merit. We agree with the plaintiffs-appellees that
when the defendants-appellants, instead of availing of their alleged right to rescind, have accepted
and received delayed payments of installments, though the plaintiffs-appellees have been in arrears
beyond the grace period mentioned in paragraph 6 of the contract, the defendants-appellants have
waived and are now estopped from exercising their alleged right of rescission. In De Guzman v.
Guieb (48 SCRA 68), we held that:
xxx xxx xxx
But defendants do not deny that in spite of the long arrearages, neither they nor their
predecessor, Teodoro de Guzman, even took steps to cancel the option or to eject
the appellees from the home-lot in question. On the contrary, it is admitted that the
delayed payments were received without protest or qualification. ... Under these
circumstances, We cannot but agree with the lower court that at the time appellees
exercised their option, appellants had already forfeited their right to invoke the
above-quoted provision regarding the nullifying effect of the non-payment of six
months rentals by appellees by their having accepted without qualification on July 21,
1964 the full payment by appellees of all their arrearages.
The defendants-appellants contend in the second assignment of error that the ledger of payments
show a balance of P671,67 due from the plaintiffs-appellees. They submit that while it is true that the
total monthly installments paid by the plaintiffs-appellees may have exceeded P3,920.00, a
substantial portion of the said payments were applied to the interests since the contract specifically
provides for a 7% interest per annum on the remaining balance. The defendants-appellants rely on
paragraph 2 of the contract which provides:
SECOND.That in consideration of the agreement of sale of the above described
property, the party of the SECOND PART obligates himself to pay to the party of the
FIRST PART the Sum of THREE THOUSAND NINE HUNDRED TWENTY ONLY (P
3,920.00), Philippine Currency, plus interest at the rate of 7% per annum ... .
(Emphasis supplied)
The plaintiffs-appellees on the other hand are firm in their submission that since they have already
paid the defendants-appellants a total sum of P4,533.38, the defendants-appellants must now be
compelled to execute the final deed of sale pursuant to paragraph 12 of the contract which provides:
TWELFTH.That once the payment of the sum of P3,920.00, the total price of the
sale is completed, the party to the FIRST PART will execute in favor of the party of
the SECOND PART, the necessary deed or deeds to transfer to the latter the title of
the parcel of land sold, free from all hens and encumbrances other than those
expressly provided in this contract; it is understood, however, that au the expenses
which may be incurred in the said transfer of title shall be paid by the party of the
SECOND PART, as above stated.
Closely related to the second assignment of error is the submission of the plaintiffs-appellees that
the contract herein is a contract of adhesion.
We agree with the plaintiffs-appellees. The contract to sell entered into by the parties has some
characteristics of a contract of adhesion. The defendants-appellants drafted and prepared the
contract. The plaintiffs-appellees, eager to acquire a lot upon which they could build a home, affixed
their signatures and assented to the terms and conditions of the contract. They had no opportunity to

question nor change any of the terms of the agreement. It was offered to them on a "take it or leave
it" basis. In Sweet Lines, Inc. v. Teves (83 SCRA 36 1), we held that:
xxx xxx xxx
... (W)hile generally, stipulations in a contract come about after deliberate drafting by
the parties thereto. . . . there are certain contracts almost all the provisions of which
have been drafted only by one party, usually a corporation. Such contracts are called
contracts of adhesion, because the only participation of the party is the signing of his
signature or his "adhesion" thereto. Insurance contracts, bills of lading, contracts of
sale of lots on the installment plan fall into this category. (Paras, Civil Code of the
Philippines, Seventh ed., Vol. 1, p. 80.) (Emphasis supplied)
While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the
defendants-appellants the sum of P3,920.00 plus 7% interest per annum, it is likewise true that
under paragraph 12 the seller is obligated to transfer the title to the buyer upon payment of the
P3,920.00 price sale.
The contract to sell, being a contract of adhesion, must be construed against the party causing it.
We agree with the observation of the plaintiffs-appellees to the effect that "the terms of a contract
must be interpreted against the party who drafted the same, especially where such interpretation will
help effect justice to buyers who, after having invested a big amount of money, are now sought to be
deprived of the same thru the prayed application of a contract clever in its phraseology,
condemnable in its lopsidedness and injurious in its effect which, in essence, and in its entirety is
most unfair to the buyers."
Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-appellees
have already paid an aggregate amount of P4,533.38, the courts should only order the payment of
the few remaining installments but not uphold the cancellation of the contract. Upon payment of the
balance of P671.67 without any interest thereon, the defendants-appellants must immediately
execute the final deed of sale in favor of the plaintiffs-appellees and execute the necessary transfer
documents as provided in paragraph 12 of the contract. The attorney's fees are justified.
WHEREFORE, the instant petition is DENIED for lack of merit. The decision appealed from is
AFFIRMED with the modification that the plaintiffs-appellees should pay the balance of SIX
HUNDRED SEVENTY ONE PESOS AND SIXTY-SEVEN CENTAVOS (P671.67) without any
interests. Costs against the defendants-appellants.
SO ORDERED.
Melencio-Herrera, Plana, Relova, De la Fuente and Alampay, JJ., concur.
Teehankee (Chairman), J., took no part.

SECOND DIVISION

[G.R. No. 129107. September 26, 2001]

ALFONSO L. IRINGAN, petitioner, vs. HON. COURT OF APPEALS and

ANTONIO PALAO, represented by his Attorney-in-Fact, FELISA P.
DELOS SANTOS,respondents.
DECISION
QUISUMBING, J.:

This petition assails the Decision[1] dated April 30, 1997 of the Court of Appeals in CA G.R.
CV No. 39949, affirming the decision of the Regional Trial Court and deleting the award of
attorneys fee.
The facts of the case are based on the records.
On March 22, 1985, private respondent Antonio Palao sold to petitioner Alfonso Iringan, an
undivided portion of Lot No. 992 of the Tuguegarao Cadastre, located at the Poblacion of
Tuguegarao and covered by Transfer Certificate of Title No. T-5790. The parties executed a
Deed of Sale[2] on the same date with the purchase price of P295,000.00, payable as follows:

(a) P10,000.00 upon the execution of this instrument, and for this purpose, the
vendor acknowledges having received the said amount from the vendee as of this
date;
(b) P140,000.00 on or before April 30, 1985;
(c) P145,000.00 on or before December 31, 1985.[3]
When the second payment was due, Iringan paid only P40,000. Thus, on July 18, 1985,
Palao sent a letter[4] to Iringan stating that he considered the contract as rescinded and that he
would not accept any further payment considering that Iringan failed to comply with his
obligation to pay the full amount of the second installment.
On August 20, 1985, Iringan through his counsel Atty. Hilarion L. Aquino,[5] replied that
they were not opposing the revocation of the Deed of Sale but asked for the reimbursement of
the following amounts:

(a) P50,000.00 cash received by you;

(b) P3,200.00 geodetic engineers fee;
(c) P500.00 attorneys fee;

(d) the current interest on P53,700.00.[6]

In response, Palao sent a letter dated January 10, 1986,[7] to Atty. Aquino, stating that he was
not amenable to the reimbursements claimed by Iringan.
On February 21, 1989, Iringan, now represented by a new counsel Atty. Carmelo Z.
Lasam, proposed that the P50,000 which he had already paid Palao be reimbursed[8] or Palao
could sell to Iringan, an equivalent portion of the land.
Palao instead wrote Iringan that the latters standing obligation had reached P61,600,
representing payment of arrears for rentals from October 1985 up to March 1989.[9] The parties
failed to arrive at an agreement.
On July 1, 1991, Palao filed a Complaint[10] for Judicial Confirmation of Rescission of
Contract and Damages against Iringan and his wife.
In their Answer,[11] the spouses alleged that the contract of sale was a consummated contract,
hence, the remedy of Palao was for collection of the balance of the purchase price and not
rescission. Besides, they said that they had always been ready and willing to comply with their
obligations in accordance with said contract.
In a Decision[12] dated September 25, 1992, the Regional Trial Court of Cagayan, Branch I,
ruled in favor of Palao and affirmed the rescission of the contract. It disposed,

WHEREFORE, the Court finds that the evidence preponderates in favor of the
plaintiff and against the defendants and judgment is hereby rendered as follows:
(a) Affirming the rescission of the contract of sale;
(b) Cancelling the adverse claim of the defendants annotated at the back of TCT No.
T-5790;
(c) Ordering the defendants to vacate the premises;
(d) Ordering the defendants to pay jointly and severally the sum of P100,000.00 as
reasonable compensation for use of the property minus 50% of the amount paid by
them; and to pay P50,000.00 as moral damages; P10,000.00 as exemplary damages;
and P50,000.00 as attorneys fee; and to pay the costs of suit.
SO ORDERED.[13]
As stated, the Court of Appeals affirmed the above decision. Hence, this petition for review.
Iringan avers in this petition that the Court of Appeals erred:
1. In holding that the lower court did not err in affirming the rescission of the contract of sale;
and

2. In holding that defendant was in bad faith for resisting rescission and was made liable to
pay moral and exemplary damages.[14]

We find two issues for resolution: (1) whether or not the contract of sale was validly
rescinded, and (2) whether or not the award of moral and exemplary damages is proper.
On the first issue, petitioner contends that no rescission was effected simply by virtue of the
letter[15] sent by respondent stating that he considered the contract of sale rescinded. Petitioner
asserts that a judicial or notarial act is necessary before one party can unilaterally effect a
rescission.
Respondent Palao, on the other hand, contends that the right to rescind is vested by law on
the obligee and since petitioner did not oppose the intent to rescind the contract, Iringan in effect
agreed to it and had the legal effect of a mutually agreed rescission.
Article 1592 of the Civil Code is the applicable provision regarding the sale of an
immovable property.

Article 1592. In the sale of immovable property, even though it may have been
stipulated that upon failure to pay the price at the time agreed upon the rescission of
the contract shall of right take place, the vendee may pay, even after the expiration of
the period, as long as no demand for rescission of the contract has been made upon
him either judicially or by a notarial act. After the demand, the court may not grant
him a new term. (Italics supplied)
Article 1592 requires the rescinding party to serve judicial or notarial notice of his intent to
resolve the contract.[16]
In the case of Villaruel v. Tan King,[17] we ruled in this wise,

since the subject-matter of the sale in question is real property, it does not come
strictly within the provisions of article 1124 (now Article 1191) of the Civil Code, but
is rather subjected to the stipulations agreed upon by the contracting parties and to the
provisions of article 1504 (now Article 1592) of the Civil Code.[18]
Citing Manresa, the Court said that the requirement of then Article 1504, refers to a
demand that the vendor makes upon the vendee for the latter to agree to the resolution of the
obligation and to create no obstacles to this contractual mode of extinguishing obligations.[19]
Clearly, a judicial or notarial act is necessary before a valid rescission can take place,
whether or not automatic rescission has been stipulated. It is to be noted that the law uses the
phrase even though[20] emphasizing that when no stipulation is found on automatic rescission,
the judicial or notarial requirement still applies.
On the first issue, both the trial and appellate courts affirmed the validity of the alleged
mutual agreement to rescind based on Article 1191 of the Civil Code, particularly paragraphs 1
and 2 thereof.

Article 1191. The power to rescind obligations is implied in reciprocal ones, in

case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become
impossible. [Emphasis ours.]
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
But in our view, even if Article 1191 were applicable, petitioner would still not be entitled to
automatic rescission. In Escueta v. Pando,[21] we ruled that under Article 1124 (now Article
1191) of the Civil Code, the right to resolve reciprocal obligations, is deemed implied in case one
of the obligors shall fail to comply with what is incumbent upon him. But that right must be
invoked judicially. The same article also provides: The Court shall decree the resolution
demanded, unless there should be grounds which justify the allowance of a term for the
performance of the obligation.
This requirement has been retained in the third paragraph of Article 1191, which states that
the court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
a period.
Consequently, even if the right to rescind is made available to the injured party,[22] the
obligation is not ipso facto erased by the failure of the other party to comply with what is
incumbent upon him. The party entitled to rescind should apply to the court for a decree of
rescission.[23] The right cannot be exercised solely on a partys own judgment that the other
committed a breach of the obligation.[24] The operative act which produces the resolution of the
contract is the decree of the court and not the mere act of the vendor.[25] Since a judicial or
notarial act is required by law for a valid rescission to take place, the letter written by respondent
declaring his intention to rescind did not operate to validly rescind the contract.
Notwithstanding the above, however, in our view when private respondent filed an action
for Judicial Confirmation of Rescission and Damages[26] before the RTC, he complied with the
requirement of the law for judicial decree of rescission. The complaint[27] categorically stated
that the purpose was 1) to compel appellants to formalize in a public document, their mutual
agreement of revocation and rescission; and/or 2) to have a judicial confirmation of the said
revocation/rescission under terms and conditions fair, proper and just for both parties.[28] In Luzon
Brokerage Co., Inc. v. Maritime Building Co., Inc.,[29] we held that even a crossclaim found in the
Answer could constitute a judicial demand for rescission that satisfies the requirement of the
law.[30]

Petitioner contends that even if the filing of the case were considered the judicial act
required, the action should be deemed prescribed based on the provisions of Article 1389 of the
Civil Code.[31]
This provision of law applies to rescissible contracts,[32] as enumerated and defined in
Articles 1380[33] and 1381.[34] We must stress however, that the rescission in Article 1381 is not
akin to the term rescission in Article 1191 and Article 1592.[35] In Articles 1191 and 1592, the
rescission is a principal action which seeks the resolution or cancellation of the contract while in
Article 1381, the action is a subsidiary one limited to cases of rescission for lesion as enumerated
in said article.[36]
The prescriptive period applicable to rescission under Articles 1191 and 1592, is found in
Article 1144,[37] which provides that the action upon a written contract should be brought within
ten years from the time the right of action accrues. The suit was brought on July 1, 1991, or six
years after the default. It was filed within the period for rescission. Thus, the contract of sale
between the parties as far as the prescriptive period applies, can still be validly rescinded.
On the issue of moral and exemplary damages, petitioner claims that the Court of Appeals
erred in finding bad faith on his part when he resisted the rescission[38] and claimed he was ready
to pay but never actually paid respondent, notwithstanding that he knew that appellees principal
motivation for selling the lot was to raise money to pay his SSS loan.[39] Petitioner would have us
reverse the said CA findings based on the exception[40] that these findings were made on a
misapprehension of facts.
The records do not support petitioners claims. First, per the records, petitioner knew
respondents reason for selling his property. As testified to by petitioner[41] and in the
deposition[42] of respondent, such fact was made known to petitioner during their negotiations as
well as in the letters sent to petitioner by Palao.[43] Second, petitioner adamantly refused to
formally execute an instrument showing their mutual agreement to rescind the contract of sale,
notwithstanding that it was petitioner who plainly breached the terms of their contract when he
did not pay the stipulated price on time, leaving private respondent desperate to find other
sources of funds to pay off his loan. Lastly, petitioner did not substantiate by clear and
convincing proof, his allegation that he was ready and willing to pay respondent. We are more
inclined to believe his claim of readiness to pay was an afterthought intended to evade the
consequence of his breach. There is no record to show the existence of such amount, which
could have been reflected, at the very least, in a bank account in his name, if indeed one existed;
or, alternatively, the proper deposit made in court which could serve as a formal tender of
payment.[44] Thus, we find the award of moral and exemplary damages proper.
WHEREFORE, the petition is DENIED. The assailed decision dated April 30, 1997 of the
Court of Appeals in CA G.R. CV No. 39949, affirming the Regional Trial Court decision and
deleting the award of attorneys fees, is hereby AFFIRMED. Costs against the petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

THIRD DIVISION

FERNANDO CARRASCOSO, JR.,

Petitioner,

-versus-

THE HONORABLE COURT OF APPEALS, LAURO LEVISTE, as

Director and Minority Stockholder and On Behalf of Other Stockholders of
El Dorado Plantation, Inc. and EL DORADO PLANTATION, INC.,
represented by one of its minority stockholders, Lauro P. Leviste,
Respondents.
x---------------------------------------x
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY,
Petitioner,
-versusLAURO LEVISTE, as Director and Minority Stockholder and On Behalf
of Other Stockholders of El Dorado Plantation, Inc., EL DORADO
PLANTATION, INC., represented by Minority Stockholder, Lauro P.
Leviste, and FERNANDO CARRASCOSO, JR.
Respondents.
G.R. No. 123672
Present:
PANGANIBAN, J., Chairman,
SANDOVAL-GUTIERREZ,
CORONA,
CARPIO MORALES, and GARCIA, JJ.

G. R. No. 164489

Promulgated:

December 14, 2005

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

DECISION
CARPIO MORALES, J.:
El Dorado Plantation, Inc. (El Dorado) was the registered owner of a parcel
of land (the property) with an area of approximately 1,825 hectares covered by
Transfer Certificate of Title (TCT) No. T-93[1] situated in Sablayan, Occidental
Mindoro.
On February 15, 1972, at a special meeting of El Dorados Board of
Directors, a Resolution[2] was passed authorizing Feliciano Leviste, then President
of El Dorado, to negotiate the sale of the property and sign all documents and
contracts bearing thereon.
On March 23, 1972, by a Deed of Sale of Real Property,[3] El Dorado,
through Feliciano Leviste, sold the property to Fernando O. Carrascoso, Jr.
(Carrascoso).
The pertinent provisions of the Deed of Sale read:
NOW, THEREFORE, for and in consideration of the sum of ONE
MILLION EIGHT HUNDRED THOUSAND (1,800,000.00) PESOS, Philippine
Currency, the Vendor hereby sells, cedes, and transfer (sic) unto the herein
VENDEE, his heirs, successors and assigns, the above-described property subject
to the following terms and consitions (sic):
1. Of the said sum of P1,800,000.00 which constitutes the full
consideration of this sale, P290,000.00 shall be paid, as it is hereby paid, to the
Philippines (sic) National Bank, thereby effecting the release and cancellation fo
(sic) the present mortgage over the above-described property.
2. That the sum of P210,000.00 shall be paid, as it is hereby paid by the
VENDEE to the VENDOR, receipt of which amount is hereby acknowledged by
the VENDOR.
3. The remaining balance of P1,300,000.00 plus interest thereon at the rate
of 10% per annum shall be paid by the VENDEE to the VENDOR within a
period of three (3) years, as follows:
(a) One (1) year from the date of the signing of this agreement, the
VENDEE shall pay to the VENDOR the sum of FIVE HUNDRED NINETEEN

THOUSAND EIGHT HUNDRED THIRTY THREE & 33/100 (P519,833.33)

PESOS.
(b) Two (2) years from the date of signing of this agreement, the
VENDEE shall pay to the VENDOR the sum of FIVE HUNDRED NINETTEN
(sic) THOUSAND EIGHT HUNDRED AND THIRTY-THREE & 33/100
(P519,833.33) PESOS.
(c) Three (3) years from the date of signing of this agreement, the
VENDEE shall pay to the VENDOR the sum of FIVE Hundred NINETEEN
THOUSAND EIGHT HUNDRED AND THIRTY-THREE & 33/100
(P519,833.33) PESOS.
4. The title of the property, subject of this agreement, shall pass and be
transferred to the VENDEE who shall have full authority to register the same and
obtain the corresponding transfer certificate of title in his name.
xxx
6. THE VENDOR certifies and warrants that the property above-described
is not being cultivated by any tenant and is therefore not covered by the
provisions of the Land Reform Code. If, therefore, the VENDEE becomes liable
under the said law, the VENDOR shall reimburse the VENDEE for all expenses
and damages he may incur thereon.[4] (Underscoring supplied)

From the above-quoted provisions of the Deed of Sale, Carrascoso was to

pay the full amount of the purchase price on March 23, 1975.
On even date, the Board of Directors of El Dorado passed a Resolution
reading:
RESOLVED that by reason of the sale of that parcel of land covered by
TCT No. T-93 to Dr. FERNANDO O. CARRASCOSO, JR., the corporation
interposes no objection to the property being mortgage (sic) by Dr.
FERNANDO O. CARRASCOSO, JR. to any bank of his choice as long as
the balance on the Deed of Sale shall be recognized by Dr. FERNANDO O.
CARRASCOSO, JR.;
RESOLVED, FURTHER, that the corporation authorizes the prefered
(sic) claim on the property to be subordinated to any mortgage that may be
constituted by Dr. FERNANDO O. CARRASCOSO, JR.;
RESOLVED, FINALLY, that in case of any mortgage on the property,
the corporation waives the preference of any vendors lien on the
property.[5] (Emphasis and underscoring supplied)

Feliciano Leviste also executed the following affidavit on the same day:
1. That by reason of the sale of that parcel of land covered by Transfer
Certificate of Title T-93 as evidenced by the Deed of Sale attached hereto as
Annex A and made an integral part hereof, the El Dorado Plantation, Inc.
has no objection to the aforementioned property being mortgaged by Dr.
Fernando O. Carrascoso, Jr. to any bank of his choice, as long as the
payment of the balance due the El Dorado Plantation, Inc. under the Deed of
Sale, Annex A hereof, shall be recognized by the vendee therein, Dr.
Fernando O. Carrascoso, Jr.though subordinated to the preferred claim of the
mortgagee bank.
2. That in case of any mortgage on the property, the vendor hereby waives
the preference of any vendors lien on the property, subject matter of the deed of
sale.
3. That this affidavit is being executed to avoid any question on the
authority of Dr. Fernando O. Carrascoso, Jr. to mortgage the property subject of
the Deed of Sale, Annex A hereof, where the purchase price provided therein
has not been fully paid.
4. That this affidavit has been executed pursuant to a board resolution of
El Dorado Plantation, Inc.[6] (Emphasis and underscoring supplied)

On the following day, March 24, 1972, Carrascoso and his wife Marlene
executed a Real Estate Mortgage[7] over the property in favor of Home Savings
Bank (HSB) to secure a loan in the amount of P1,000,000.00. Of this
amount, P290,000.00 was paid to Philippine National Bank to release the
mortgage priorly constituted on the property andP210,000.00 was paid to El
Dorado pursuant to above-quoted paragraph Nos. 1 and 2 of the terms and
conditions of the Deed of Sale.[8]
The March 23, 1972 Deed of Sale of Real Property was registered and
annotated on El Dorados TCT No. T-93 as Entry No. 15240[9] on April 5,
1972. On even date, TCT No. T-93 covering the property was cancelled and TCT
No. T-6055[10] was in its stead issued by the Registry of Deeds of Occidental
Mindoro in the name of Carrascoso on which the real estate mortgage in favor of
HSB was annotated as Entry No. 15242.[11]

On May 18, 1972, the real estate mortgage in favor of HSB was amended to
include an additional three year loan of P70,000.00 as requested by the spouses
Carrascoso.[12] The Amendment of Real Estate Mortgage was also annotated on
TCT No. T-6055 as Entry No. 15486 on May 24, 1972.[13]
The 3-year period for Carrascoso to fully pay for the property on March 23,
1975 passed without him having complied therewith.
In the meantime, on July 11, 1975, Carrascoso and the Philippine Long
Distance Telephone Company (PLDT), through its President Ramon Cojuangco,
executed an Agreement to Buy and Sell[14] whereby the former agreed to sell 1,000
hectares of the property to the latter at a consideration of P3,000.00 per hectare or
a total ofP3,000,000.00.
The July 11, 1975 Agreement to Buy and Sell was not registered and
annotated on Carrascosos TCT No. T-6055.
Lauro Leviste (Lauro), a stockholder and member of the Board of Directors
of El Dorado, through his counsel, Atty. Benjamin Aquino, by letter [15] dated
December 27, 1976, called the attention of the Board to Carrascosos failure to
pay the balance of the purchase price of the property amounting
to P1,300,000.00. And Lauros lawyer manifested that:
Because of the default for a long time of Mr. Carrascoso to pay the balance
of the consideration of the sale, Don Lauro Leviste, in his behalf and in behalf of
the other shareholders similarly situated like him, want a rescission of the
sale made by the El Dorado Plantation, Inc. to Mr. Carrascoso. He desires that the
Board of Directors take the corresponding action for rescission.[16]

Lauros desire to rescind the sale was reiterated in two other

letters addressed to the Board dated January 20, 1977 and March 3, 1977.
[17]

Jose P. Leviste, as President of El Dorado, later sent a letter of February 21,

1977 to Carrascoso informing him that in view of his failure to pay the balance
of the purchase price of the property, El Dorado was seeking the rescission of the
March 23, 1972 Deed of Sale of Real Property.
[18]

The pertinent portions of the letter read:

xxx
I regret to inform you that the balance of P1,300,000.00 and the interest thereon
have long been due and payable, although you have mortgaged said property with
the Home Savings Bank for P1,000,000.00 on March 24, 1972, which was
subsequently increased to P1,070,000.00 on May 18, 1972.
You very well know that the El Dorado Plantation, Inc., is a close family
corporation, owned exclusively by the members of the Leviste family and I am one
of the co-owners of the land. As nothing appears to have been done on your part
after our numerous requests for payment of the said amount of P1,300,000.00 and
the interest of 10% per annum due thereon, please be advised that we would like to
rescind the contract of sale of the land.[19] (Underscoring supplied)

Jose Leviste, by letter[20] dated March 10, 1977, informed Lauros counsel
Atty. Aquino of his (Joses) February 21, 1977 letter to Carrascoso, he lamenting
that Carrascoso has not deemed it fit to give [his] letter the courtesy of a reply
and advis[ing] that some of the Directors of [El Dorado] could not see their way
clear in complying with the demands of your client [Lauro] and have failed to
reach a consensus to bring the corresponding action for rescission of the contract
against . . . Carrascoso.[21]
Lauro and El Dorado finally filed on March 15, 1977 a complaint[22] for
rescission of the March 23, 1972 Deed of Sale of Real Property between El Dorado
and Carrascoso with damages before the Court of First Instance (CFI) of
Occidental Mindoro, docketed as Civil Case No. R-226.

Lauro and El Dorado also sought the cancellation of TCT No. T-6055 in the
name of Carrascoso and the revival of TCT No. T-93 in the name of El Dorado,
free from any liens and encumbrances. Furthermore, the two prayed for the
issuance of an order for Carrascoso to: (1) reconvey the property to El Dorado
upon return to him of P500,000.00, (2) secure a discharge of the real estate
mortgage constituted on the property from HSB, (3) submit an accounting of the
fruits of the property from March 23, 1972 up to the return of possession of the

land to El Dorado, (4) turn over said fruits or the equivalent value thereof to El
Dorado and (5) pay the amount of P100,000.00 for attorneys fees and other
damages.[23]

Also on March 15, 1977, Lauro and El Dorado caused to be annotated on

TCT No. T-6055 a Notice of Lis Pendens, inscribed as Entry No. 39737.[24]
In the meantime, Carrascoso, as vendor and PLDT, as vendee forged on
April 6, 1977 a Deed of Absolute Sale[25] over the 1,000 hectare portion of the
property subject of their July 11, 1975 Agreement to Buy and Sell. The pertinent
portions of the Deed are as follows:
WHEREAS, the VENDOR and the VENDEE entered into an agreement To
Buy and Sell on July 11, 1975, which is made a part hereof by reference;
WHEREAS, the VENDOR and the VENDEE are now decided to execute
the Deed of Absolute Sale referred to in the aforementioned agreement to Buy and
Sell;
WHEREFORE, for and in consideration of the foregoing premises and the
terms hereunder stated, the VENDOR and the VENDEE have agreed as follows:
1. For and in consideration of the sum of THREE MILLION PESOS
(P3,000,000.00), Philippine currency, of which ONE HUNDRED TWENTY
THOUSAND PESOS P120,000.00 have (sic) already been received by the
VENDOR, the VENDOR hereby sells, transfers and conveys unto the VENDEE
one thousand hectares (1,000 has.) of his parcel of land covered by T.C.T. No. T6055 of the Registry of Deeds of Mindoro, delineated as Lot No. 3-B-1 in the
subdivision survey plan xxx
2. The VENDEE shall pay to the VENDOR upon the signing of this
agreement, the sum of TWO MILLION FIVE HUNDRED THOUSAND PESOS
(P2,500,000.00) in the following manner:
a) The sum of TWO MILLION THREE HUNDRED THOUSAND PESOS
(P2,300,000.00) to Home Savings Bank in full payment of the VENDORs
mortgaged obligation therewith;
b) The sum of TWO HUNDRED THOUSAND PESOS (P200,000.00) to
VENDOR;

The remaining balance of the purchase price in the sum of THREE

HUNDRED EIGHTY THOUSAND PESOS (P380,000.00), less such expenses
which may be advanced by the VENDEE but which are for the account of the
VENDOR under Paragraph 6 of the Agreement to Buy and Sell, shall be paid by
the VENDEE to the VENDOR upon issuance of title to the
VENDEE.[26] (Underscoring supplied)

In turn, PLDT, by Deed of Absolute Sale[27] dated May 30, 1977, conveyed
the aforesaid 1,000 hectare portion of the property to its subsidiary, PLDT
Agricultural Corporation (PLDTAC), for a consideration of P3,000,000.00, the
amount of P2,620,000.00 of which was payable to PLDT upon signing of said
Deed, and P380,000.00 to Carrascoso upon issuance of title to PLDTAC.
In the meantime, on October 19, 1977, the El Dorado Board of Directors, by
a special meeting,[28] adopted and approved a Resolution ratifying and conferring
the prosecution of Civil Case No. R-226 of the Court of First Instance of
Occidental Mindoro, entitled Lauro P. Leviste vs. Fernando Carascoso (sic), etc.
initiated by stockholder Mr. Lauro P. Leviste.[29]
In his Answer with Compulsory Counterclaim,[30] Carrascoso alleged that:
(1) he had not paid his remaining P1,300,000.00 obligation under the March 23,
1972 Deed of Sale of Real Property in view of the extensions of time to comply
therewith granted him by El Dorado; (2) the complaint suffered from fatal defects,
there being no showing of compliance with the condition precedent of exhaustion
of intra-corporate remedies and the requirement that a derivative suit instituted by
a complaining stockholder be verified under oath; (3) El Dorado committed a gross
misrepresentation when it warranted that the property was not being cultivated by
any tenant to take it out of the coverage of the Land Reform Code; and (4) he
suffered damages due to the premature filing of the complaint for which Lauro and
El Dorado must be held liable.
On February 21, 1978, the April 6, 1977 and May 30, 1977 Deeds of
Absolute Sale and the respective Articles of Incorporation of PLDT and PLDTAC
were
annotated
on
TCT
No.
T-6055
as
Entry
Nos.
[31]
[32]
[33]
[34]
24770, 42774, 42769 and 24772, respectively.
On even date,
Carrascosos TCT No. T-6055 was cancelled and TCT No. T-12480[35] covering

the 1,000 hectare portion of the property was issued in the name of PLDTAC. The
March 15, 1977 Notice of Lis Pendens was carried over to TCT No. T-12480.
On July 31, 1978, PLDT and PLDTAC filed an Urgent Motion for
Intervention[36] which was granted by the trial court by Order[37] of September 7,
1978.
PLDT and PLDTAC thereupon filed their Answer In Intervention with
Compulsory Counterclaim and Crossclaim[38] against Carrascoso on November 13,
1978, alleging that: (1) when Carrascoso executed the April 6, 1977 Deed of
Absolute Sale in favor of PLDT, PLDT was not aware of any litigation involving
the 1,000 hectare portion of the property or of any flaw in his title, (2) PLDT is a
purchaser in good faith and for value; (3) when PLDT executed the May 30, 1977
Deed of Absolute Sale in favor of PLDTAC, they had no knowledge of any
pending litigation over the property and neither were they aware that a notice of lis
pendens had been annotated on Carrascosos title; and (4) Lauro and El Dorado
knew of the sale by Carrascoso to PLDT and PLDTs actual possession of the
1,000 hectare portion of the property since June 30, 1975 and of its exercise of
exclusive rights of ownership thereon through agricultural development.[39]
By Decision[40] of January 28, 1991, Branch 45 of the San Jose Occidental
Mindoro Regional Trial Court to which the CFI has been renamed, dismissed the
complaint on the ground of prematurity, disposing as follows, quoted verbatim:
WHEREFORE, in view of all the foregoing considerations, judgment is
hereby rendered:
1. Dismissing the plaintiffs complaint against the defendant on the
ground of prematurity;
2. Ordering the plaintiffs to pay to the defendant the sum of P2,980,000.00
as actual and compensatory damages, as well as the sum of P100,000.00 as and
for attorneys fees; provided, however, that the aforesaid amounts must first be set
off from the latters unpaid balance to the former;
3. Dismissing the defendants-intervenors counterclaim and cross-claim;
and
4. Ordering the plaintiffs to pay to (sic) the costs of suit.

SO ORDERED.[41] (Underscoring supplied)

Carrascoso, PLDT and PLDTAC filed their respective appeals to the Court
of Appeals.
By Decision[42] of January 31, 1996, the appellate court reversed the
decision of the trial court, disposing as follows, quoted verbatim:
WHEREFORE, not being meritorious, PLDTs/PLDTACs appeal is
hereby DISMISSED and finding El Dorados appeal to be impressed with merit,
We REVERSE the appealed Decision and render the following judgment:
1. The Deed of Sale of Real Property (Exhibit C) is hereby rescinded and
TCT No. T-12480 (Exhibit Q) is cancelled while TCT No. T-93 (Exhibit A), is
reactivated.
2. Fernando Carrascoso, Jr. is commanded to:
2.1. return the possession of the 825 [hectare-] remaining portion
of the land to El Dorado Plantation, Inc. without prejudice to the
landholdings of legitimate tenants thereon;
2.2. return the net fruits of the land to El Dorado Plantation, Inc.
from March 23, 1972 to July 11, 1975, and of the 825-hectareremaining portion minus the tenants landholdings, from July 11,
1975 up to its delivery to El Dorado Plantation, Inc. including
whatever he may have received from the tenants if any by way of
compensation under the Operation Land Transfer or under any
other pertinent agrarian law;
2.3 Pay El Dorado Plantation, Inc. an attorneys fee of P20,000.00
and litigation expenses of P30,000.00;
2.4 Return to Philippine Long Distance Telephone
Company/PLDT Agricultural Corporation P3,000,000.00 plus
legal interest from April 6, 1977 until fully paid;
3. PLDT Agricultural Corporation is ordered to surrender the possession
of the 1000-hectare Farm to El Dorado Plantation, Inc.;
4. El Dorado Plantation, Inc. is directed to return the P500,000.00 to
Fernando Carrascoso, Jr. plus legal interest from March 23, 1972 until fully
paid. The performance of this obligation will however await the full compliance

by Fernando Carrascoso, Jr. of his obligation to account for and deliver the net
fruits of the land mentioned above to El Dorado Plantation, Inc.
5. To comply with paragraph 2.2 herein, Carrascoso is directed to submit
in (sic) the court a quo a full accounting of the fruits of the land during the period
mentioned above for the latters approval, after which the net fruits shall be
delivered to El Dorado, Plantation, Inc.
6. El Dorado Plantation, Inc. should inform Philippine Long Distance
Telephone Co. and PLDT Agricultural Corporation in writing within ten (10)
days after finality of this decision regarding the exercise of its option under Art.
448 of the Civil Code.
SO ORDERED.[43] (Underscoring supplied)

PLDT and PLDTAC filed on February 22, 1996, a Motion for

Reconsideration[44] of the January 31, 1996 CA Decision, while Carrascoso went up
this Court by filing on March 25, 1996 a petition for review,[45] docketed as G.R.
No. 123672, assailing the January 31, 1996 CA Decision and seeking the
reinstatement of the January 28, 1991 Decision of the trial court except with respect
to its finding that the acquisition of PLDT and PLDTAC of the 1,000 hectare
portion of the property was subject to the notice of lispendens.
Lauro, in the meantime, died, hence, on April 16, 1996, a Motion for
Substitution of Party[46] was filed praying that his heirs, represented by Conrad C.
Leviste, be substituted as respondents. The Motion was granted by Resolution[47] of
July 10, 1996.
PLDT and PLDTAC filed their Comment[48] to Carrascosos petition and
prayed that judgment be rendered finding them to be purchasers in good faith to
thus entitle them to possession and ownership of the 1,000 hectare portion of the
property, together with all the improvements they built thereon. Reiterating that
they were not purchaserspendente lite, they averred that El Dorado and Lauro had
actual knowledge of their interests in the said portion of the property prior to the
annotation of the notice of lis pendensto thereby render said notice ineffective.
El Dorado and the heirs of Lauro, both represented by Conrad C. Leviste,
also filed their Comment[49] to Carrascosos petition, praying that it be dismissed

for lack of merit and that paragraph 6 of the dispositive portion of the January 31,
1996 CA Decision be modified to read as follows:
6. El Dorado Plantation, Inc. should inform Philippine Long Distance
Telephone Co. and PLDT Agricultural Corporation in writing within ten (10)
days after finality of this decision regarding the exercise of its option under Arts.
449 and 450 of the Civil Code, without right to indemnity on the part of the latter
should the former decide to keep the improvements under Article
449.[50] (Underscoring supplied)

Carrascoso filed on November 13, 1996 his Reply[51] to the Comment of El

Dorado and the heirs of Lauro.
In the meantime, as the February 22, 1996 Motion for Reconsideration filed
by PLDT and PLDTAC of the CA decision had remained unresolved, this Court, by
Resolution[52] of June 30, 2003, directed the appellate court to resolve the same.
By Resolution[53] of July 8, 2004, the CA denied PLDT and PLDTACs
Motion for Reconsideration for lack of merit.
PLDT[54] thereupon filed on September 2, 2004 a petition for
review[55] before this Court, docketed as G.R. No. 164489, seeking to reverse and
set aside the January 31, 1996 Decision and the July 8, 2004 Resolution of the
appellate court. It prayed that judgment be rendered upholding its right, interest
and title to the 1,000 hectare portion of the property and that it and its successorsin-interest be declared owners and legal possessors thereof, together with all
improvements built, sown and planted thereon.
By Resolution[56] of August 25, 2004, G.R. No. 164489 was consolidated
with G.R. No. 123672.
In his petition, Carrascoso faults the CA as follows:
I
THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF
DISCRETION AND COMMITTED A MISTAKE OF LAW IN NOT

DECLARING THAT THE

PREMATURELY FILED.

ACTION

FOR

RESCISSION

WAS

II
THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF
DISCRETION AND COMMITTED A MISTAKE OF LAW IN
DISREGARDING THE CRUCIAL SIGNIFICANCE OF THE WARRANTY OF
NON-TENANCY EXPRESSLY STIPULATED IN THE CONTRACT OF
SALE.
III
THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF
DISCRETION IN REVERSING THE DECISION OF THE TRIAL
COURT.[57] (Underscoring supplied)

PLDT, on the other hand, faults the CA as follows:

I
THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN
HOLDING THAT PETITIONER AND PLTAC (sic) TOOK THEIR RIGHT,
INTEREST AND TITLE TO THE FARM SUBJECT TO THE NOTICE OF LIS
PENDENS, THE SAME IN DISREGARD OF THE PROTECTION
ACCORDED THEM UNDER ARTICLES 1181 AND 1187 OF THE NEW
CIVIL CODE.
II
THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN
HOLDING THAT PETITIONER AND PLDTAC TOOK THEIR RIGHT,
INTEREST AND TITLE TO THE FARM SUBJECT TO THE NOTICE OF LIS
PENDENS, THE SAME IN DISREGARD OF THE LEGAL PRINCIPLE THAT
RESPONDENTS EL DORADO ET AL.s PRIOR, ACTUAL KNOWLEDGE
OF PETITIONER PLDTS AGREEMENT TO BUY AND SELL WITH
RESPONDENT CARRASCOSO RESULTING IN THE DELIVERY TO, AND
POSSESSION, OCCUPATION AND DEVELOPMENT BY, SAID
PETITIONER OF THE FARM, IS EQUIVALENT TO REGISTRATION OF
SUCH RIGHT, INTEREST AND TITLE AND, THEREFORE, A PRIOR
REGISTRATION NOT AFFECTED BY THE LATER NOTICE OF LIS
PENDENS.[58] (Underscoring supplied)

Carrascoso posits that in the El Dorado Board Resolution and the Affidavit of
Feliciano Leviste, both dated March 23, 1972, no objection was interposed to his
mortgaging of the property to any bank provided that the balance of the purchase
price of the property under the March 23, 1972 Deed of Sale of Real Property is
recognized, hence, El Dorado could collect the unpaid balance of P1,300,000.00
only after the mortgage in favor of HSB is paid in full; and the filing of the
complaint for rescission with damages on March 15, 1977 was premature as he
fully paid his obligation to HSB only on April 5, 1977 as evidenced by the
Cancellation of Mortgage[59] signed by HSB President Gregorio B. Licaros.
Carrascoso further posits that extensions of the period to pay El Dorado were
verbally accorded him by El Dorados directors and officers, particularly Jose and
Angel Leviste.
Article 1191 of the Civil Code provides:
Art. 1191. The power to rescind obligations is implied in reciprocal ones,
in case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission
of the obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with Articles 1385 and 1388 and the
Mortgage Law.

Reciprocal obligations are those which arise from the same cause, and in
which each party is a debtor and a creditor of the other, such that the obligation of
one is dependent upon the obligation of the other.[60] They are to be performed
simultaneously such that the performance of one is conditioned upon the
simultaneous fulfillment of the other.[61]

The right of rescission of a party to an obligation under Article 1191 is

predicated on a breach of faith by the other party who violates the reciprocity
between them.[62]
A contract of sale is a reciprocal obligation. The seller obligates itself to
transfer the ownership of and deliver a determinate thing, and the buyer obligates
itself to pay therefor a price certain in money or its equivalent.[63] The nonpayment of the price by the buyer is a resolutory condition which extinguishes the
transaction that for a time existed, and discharges the obligations created
thereunder.[64] Such failure to pay the price in the manner prescribed by the
contract of sale entitles the unpaid seller to sue for collection or to rescind the
contract.[65]
In the case at bar, El Dorado already performed its obligation through the
execution of the March 23, 1972 Deed of Sale of Real Property which effectively
transferred ownership of the property to Carrascoso. The latter, on the other hand,
failed to perform his correlative obligation of paying in full the contract price in
the manner and within the period agreed upon.
The terms of the Deed are clear and unequivocal: Carrascoso was to pay
the balance of the purchase price of the property amounting to P1,300,000.00 plus
interest thereon at the rate of 10% per annum within a period of three (3) years
from the signing of the contract on March 23, 1972. When Jose Leviste informed
him that El Dorado was seeking rescission of the contract by letter of February 21,
1977, the period given to him within which to fully satisfy his obligation had long
lapsed.
The El Dorado Board Resolution and the Affidavit of Jose Leviste
interposing no objection to Carrascosos mortgaging of the property to any bank
did not have the effect of suspending the period to fully pay the purchase price, as
expressly stipulated in the Deed, pending full payment of any mortgage obligation
of Carrascoso.
As the CA correctly found:

The adverted resolution (Exhibit 2) does not say that the obligation of
Carrascoso to pay the balance was extended. Neither can We see in it anything
that can logically infer said accommodation.
A partially unpaid seller can agree to the buyers mortgaging the subject of
the sale without changing the time fixed for the payment of the balance of the
price. The two agreements are not incompatible with each other such that when
one is to be implemented, the other has to be suspended. In the case at bench, there
was no impediment for Carrascoso to pay the balance of the price after mortgaging
the land.
Also, El Dorados subordinating its preferred claim or waiving its
superior vendors lien over the land in favor of the mortgagee of said property
only means that in a situation where the unpaid price of the Land and loan secured
by the mortgage over the Land both become due and demandable, the mortgagee
shall have precedence in going after the Land for the satisfaction of the loan. Such
accommodations do not necessarily imply the modification of the period fixed in
the contract of sale for the payment by Carrascoso of the balance.
The palpable purpose of El Dorado in not raising any objection to
Carrascosos mortgaging the land was to eliminate any legal impediment to such a
contract. That was so succinctly expressed in the Affidavit (Exhibit 2-A) of
President Feleciano (sic) Leviste. El Dorados yielding its superior lien over the
land in favor of the mortgagee was plainly intended to overcome the natural
reluctance of lending institutions to accept a land whose price has not yet been
fully paid as collateral of a loan.[66] (Underscoring supplied)

Respecting Carrascosos insistence that he was granted verbal extensions

within which to pay the balance of the purchase price of the property by El
Dorados directors and officers Jose and Angel Leviste, this Court finds the same
unsubstantiated by the evidence on record.
It bears recalling that Jose Leviste wrote Carrascoso, by letter of February
21, 1977, calling his attention to his failure to comply, despite numerous
requests, with his obligation to pay the amount of P1,300,000.00 and 10% annual
interest thereon, and advising him that we would like to rescind the contract of
sale. This letter reiterated the term of payment agreed upon in the March 23,
1972 Deed of Sale of Real Property and Carrascososs non-compliance therewith.
Carrascoso, harping on Jose Levistes March 10, 1977 letter to Lauros
counsel wherein he (Jose Leviste) stated that some of the Directors of the

corporation could not see their way clear in complying with the demands of
[Lauro] and have failed to reach a consensus to bring the corresponding action for
rescission of the contract against Dr. Fernando Carrascoso, argues that the
extensions priorly given to him no doubt lead to the logical conclusion on some
of the directors inability to file suit against him.[67]
The argument is specious. As the CA found, even if some officers of El
Dorado were initially reluctant to file suit against him, the same should not be
interpreted to mean that this was brought about by a prior extension of the period
to pay the balance of the purchase price of the property as such reluctance could
have been due to a myriad of reasons totally unrelated to the period of payment of
the balance.
The bottomline however is, if El Dorado really intended to extend the
period of payment of the balance there was absolutely no reason why it did not do
it in writing in clear and unmistakable terms. That there is no such writing
negates all the speculations of the court a quo and pretensions of Carrascoso.
xxx
The unalterable fact here remains that on March 23, 1973, with or without
demand, the obligation of Carrascoso to pay P519,933.33 became due. The same
was true on March 23, 1974 and on March 23, 1975 for equal amounts. Since he
did not perform his obligation under the contract of sale, he, therefore, breached
it. Having breached the contract, El Dorados cause of action for rescission of
that contract arose.[68] (Underscoring supplied)

Carrascoso goes on to argue that the appellate court erred in ignoring the
import of the warranty of non-tenancy expressly stipulated in the March 23, 1972
Deed of Sale of Real Property. He alleges that on March 8, 1972 or two weeks
prior to the execution of the Deed of Sale, he discovered, while inspecting the
property on board a helicopter, that there were people and cattle in the area; when
he confronted El Dorado about it, he was told that the occupants were caretakers
of cattle who would soon leave;[69] four months after the execution of the Deed of
Sale, upon inquiry with the Bureau of Lands and the Bureau of Soils, he was
informed that there were people claiming to be tenants in certain portions of the
property;[70] and he thus brought the matter again to El Dorado which informed
him that the occupants were not tenants but squatters.[71]

Carrascoso now alleges that as a result of what he concludes to be a breach

of the warranty of non-tenancy committed by El Dorado, he incurred expenses in
the amount ofP2,890,000.00 for which he should be reimbursed, his unpaid
obligation to El Dorado amounting to P1,300,000.00 to be deducted therefrom.[72]
The breach of an express warranty makes the seller liable for
damages.[73] The following requisites must be established in order that there be an
express warranty in a contract of sale: (1) the express warranty must be an
affirmation of fact or any promise by the seller relating to the subject matter of the
sale; (2) the natural tendency of such affirmation or promise is to induce the buyer
to purchase the thing; and (3) the buyer purchases the thing relying on such
affirmation or promise thereon.[74]
Under the March 23, 1972 Deed of Sale of Real Property, El
Dorado warranted that the property was not being cultivated by any tenant and
was, and therefore, not covered by the provisions of the Land Reform Code. If
Carrascoso would become liable under the said law, he would be reimbursed for
all expenses and damages incurred thereon.
Carrascoso claims to have incurred expenses in relocating persons found on
the property four months after the execution of the Deed of Sale. Apart from such
bare claim, the records are bereft of any proof that those persons were indeed
tenants.[75] The fact of tenancy[76] not having been priorly established,[77] El
Dorado may not be held liable for actual damages.
Carrascoso further argues that both the trial and appellate courts erred in
holding that the sale of the 1,000 hectare portion of the property to PLDT, as well
as its subsequent sale to PLDTAC, is subject to the March 15, 1977 Notice of Lis
Pendens.
PLDT additionally argues that the CA incorrectly ignored the Agreement to
Buy and Sell which it entered into with Carrascoso on July 11, 1975, positing that
the efficacy of its purchase from Carrascoso, upon his fulfillment of the condition
it imposed resulting in its decision to formalize their transaction and execute the

April 6, 1977 Deed of Sale, retroacted to July 11, 1975 or before the annotation of
the Notice of Lis Pendens.[78]
The pertinent portions of the July 11, 1975 Agreement to Buy and Sell
between PLDT and Carrascoso read:
2. That the VENDOR hereby agrees to sell to the VENDEE and the latter
hereby agrees to purchase from the former, 1,000 hectares of the above-described
parcel of land as shown in the map hereto attached as Annex A and made an
integral part hereof and as hereafter to be more particularly determined by the
survey to be conducted by Certeza & Co., at the purchase price of P3,000.00 per
hectare or for a total consideration of Three Million Pesos (P3,000,000.00)
payable in cash.
3. That this contract shall be considered rescinded and cancelled and of
no further force and effect, upon failure of the VENDOR to clear the
aforementioned 1,000 hectares of land of all the occupants therein located, within
a period of one (1) year from the date of execution of this Agreement. However,
the VENDEE shall have the option to extend the life of this Agreement by
another six months, during which period the VENDEE shall definitely inform the
VENDOR of its decision on whether or not to finalize the deed of absolute sale
for the aforementioned 1,000 hectares of land.
The VENDOR agrees that the amount of P500.00 per family within the
aforementioned 1,000 hectares of land shall be spent by him for relocation
purposes, which amount however shall be advanced by the VENDEE and which
shall not exceed the total amount of P120,000.00, the same to be thereafter
deducted by the VENDEE from the aforementioned purchase price of
P3,000,000.00.
The aforementioned advance of P120,000.00 shall be remitted by the
VENDEE to the VENDOR upon the signing of this Agreement.
xxx
It is likewise further agreed that the VENDEE shall have the right to enter
into any part of the aforementioned 1,000 hectares at any time within the period
of this Agreement for purposes of commencing the development of the same.
xxx
5. Title to the aforementioned land shall also be cleared of all liens or
encumbrances and if there are any unpaid taxes, existing mortgages, liens and
encumbrances on the land, the payments to be made by the VENDEE to the
VENDOR of the purchase price shall first be applied to liquidate said mortgages,
liens and/or encumbrances, such that said payments shall be made directly to the

corresponding creditors. Thus, the balance of the purchase price will be paid to
the VENDOR after the title to the land is cleared of all such liens and
encumbrances.
xxx
7. The VENDOR agrees that, during the existence of this Agreement and
without the previous written permission from the VENDEE, he shall not sell,
cede, assign and/or transfer the parcel of land subject of this Agreement.[79]

A notice of lis pendens is an announcement to the whole world that a

particular real property is in litigation, and serves as a warning that one who
acquires an interest over said property does so at his own risk, or that he gambles
on the result of the litigation over said property.[80]
Once a notice of lis pendens has been duly registered, any cancellation or
issuance of title over the land involved as well as any subsequent transaction
affecting the same would have to be subject to the outcome of the suit. In other
words, a purchaser who buys registered land with full notice of the fact that it is in
litigation between the vendor and a third party stands in the shoes of his vendor and
his title is subject to the incidents and result of the pending litigation.[81]
x x x Notice of lis pendens has been conceived and, more often than not,
availed of, to protect the real rights of the registrant while the case involving such
rights is pending resolution or decision. With the notice of lis pendens duly
recorded, and while it remains uncancelled, the registrant could rest secure that he
would not lose the property or any part of it during the litigation.
The filing of a notice of lis pendens in effect (1) keeps the subject matter of
litigation within the power of the court until the entry of the final judgment so as to
prevent the defeat of the latter by successive alienations; and (2) binds a purchaser
of the land subject of the litigation to the judgment or decree that will be
promulgated thereon whether such a purchaser is a bona fidepurchaser or not; but
(3) does not create a non-existent right or lien.
The doctrine of lis pendens is founded upon reason of public policy and
necessity, the purpose of which is to keep the subject matter of the litigation within
the power of the court until the judgment or decree shall have been entered;
otherwise by successive alienations pending the litigation, its judgment or decree
shall be rendered abortive and impossible of execution. The doctrine of lis
pendens is based on considerations of public policy and convenience, which forbid
a litigant to give rights to others, pending the litigation, so as to affect the

proceedings of the court then progressing to enforce those rights, the rule being
necessary to the administration of justice in order that decisions in pending suits
may be binding and may be given full effect, by keeping the subject matter in
controversy within the power of the court until final adjudication, that there may be
an end to litigation, and to preserve the property that the purpose of the pending
suit may not be defeated by successive alienations and transfers of title. [82] (Italics
in the original)

In ruling against PLDT and PLDTAC, the appellate court held:

PLDT and PLDTAC argue that in reality the Farm was bought by the
former on July 11, 1975 when Carrascoso and it entered into the Agreement to Buy
and Sell (Exhibit 15). How can an agreement to buy and sell which is a
preparatory contract be the same as a contract of sale which is a principal
contract? If PLDTs contention is correct that it bought the Farm on July 11, 1975,
why did it buy the same property again on April 6, 1977? There is simply no way
PLDT and PLDTAC can extricate themselves from the effects of said Notice of Lis
Pendens. It is admitted that PLDT took possession of the Farm on July 11, 1975
after the execution of the Agreement to Buy and Sell but it did so not as owner but
as prospective buyer of the property. As prospective buyer which had actual on
(sic) constructive notice of the lis pendens, why did it pursue and go through with
the sale if it had not been willing to gamble with the result of this
case?[83] (Underscoring supplied)

Further, in its July 8, 2004 Resolution, the CA held:

PLDT cannot shield itself from the notice of lis pendens because all that it
had at the time of its inscription was an Agreement to Buy and Sell with
CARRASCOSO, which in effect is amere contract to sell that did not pass to it
the ownership of the property.
xxx
Ownership was retained by CARRASCOSO which EL DORADO may very well
recover through its action for rescission.
xxx
PLDTs possession at the time the notice of lis
pendens was registered not being a legal possession based on ownership but
a mere possession in fact and the Agreement to Buy and Sell under which it
supposedly took possession not being registered, it is not protected from an
adverse judgment that may be rendered in the case subject of the notice of lis
pendens.[84] (Underscoring supplied)

In a contract of sale, the title passes to the vendee upon the delivery of the
thing sold; whereas in a contract to sell, ownership is not transferred upon delivery
of the property but upon full payment of the purchase price.[85] In the former, the
vendor has lost and cannot recover ownership until and unless the contract is
resolved or rescinded; whereas in the latter, title is retained by the vendor until
the full payment of the price, such payment being a positive suspensive condition
and failure of which is not a breach but an event that prevents the obligation of the
vendor to convey title from becoming effective.[86]
PLDT argues that the July 11, 1975 Agreement to Buy and Sell is a
conditional contract of sale, thus calling for the application of Articles 1181 [87] and
1187[88] of the Civil Code as held in Coronel v. Court of Appeals.[89]
The Court is not persuaded.
For in a conditional contract of sale, if the suspensive condition is fulfilled,
the contract of sale is thereby perfected, such that if there had already been
previous delivery of the property subject of the sale to the buyer, ownership
thereto automatically transfers to the buyer by operation of law without any
further act having to be performed by the seller.[90] Whereas in a contract to sell,
upon fulfillment of the suspensive condition, ownership will not
automatically transfer to the buyer although the property may have been
previously delivered to him. The prospective seller still has to convey title to the
prospective buyer by entering into a contract of absolute sale.[91]
A perusal of the contract[92] adverted to in Coronel reveals marked
differences from the Agreement to Buy and Sell in the case at bar. In
the Coronel contract, there was a clear intent on the part of the therein petitionerssellers to transfer title to the therein respondent-buyer. In the July 11, 1975
Agreement to Buy and Sell, PLDT still had to definitely inform Carrascoso of its
decision on whether or not to finalize the deed of absolute sale for the 1,000
hectare portion of the property, such that in the April 6, 1977 Deed of Absolute
Sale subsequently executed, the parties declared that they are now decided to
execute such deed, indicating that the Agreement to Buy and Sell was, as the

appellate court held, merely a preparatory contract in the nature of a contract to

sell. In fact, the parties even had to stipulate in the said Agreement to Buy and
Sell that Carrascoso, during the existence of the Agreement, shall not sell, cede,
assign and/or transfer the parcel of land, which provision this Court has held to
be a typical characteristic of a contract to sell.[93]
Being a contract to sell, what was vested by the July 11, 1975 Agreement to
Buy and Sell to PLDT was merely the beneficial title to the 1,000 hectare portion
of the property.
The right of Daniel Jovellanos to the property under the contract [to sell]
with Philamlife was merely an inchoate and expectant right which would ripen
into a vested right only upon his acquisition of ownership which, as aforestated,
was contingent upon his full payment of the rentals and compliance with all his
contractual obligations thereunder. A vested right is an immediate fixed right of
present and future enjoyment. It is to be distinguished from a right that is
expectant or contingent. It is a right which is fixed, unalterable, absolute,
complete and unconditional to the exercise of which no obstacle exists, and which
is perfect in itself and not dependent upon a contingency. Thus, for a property
right to be vested, there must be a transition from the potential or contingent to
the actual, and the proprietary interest must have attached to a thing; it must have
become fixed or established and is no longer open to doubt or
controversy.[94] (Underscoring supplied)

In the case at bar, the July 11, 1975 Agreement to Buy and Sell was not
registered, which act of registration is the operative act to convey and affect the
land.
An agreement to sell is a voluntary instrument as it is a willful act of the
registered owner. As such voluntary instrument, Section 50 of Act No. 496 [now
Section 51 of PD 1529] expressly provides that the act of registration shall be the
operative act to convey and affect the land. And Section 55 of the same Act [now
Section 53 of PD 1529] requires the presentation of the owners duplicate
certificate of title for the registration of any deed or voluntary instrument. As the
agreement to sell involves an interest less than an estate in fee simple, the same
should have been registered by filing it with the Register of Deeds who, in turn,
makes a brief memorandum thereof upon the original and owners duplicate
certificate of title. The reason for requiring the production of the owners duplicate
certificate in the registration of a voluntary instrument is that, being a willful act of
the registered owner, it is to be presumed that he is interested in registering the
instrument and would willingly surrender, present or produce his duplicate

certificate of title to the Register of Deeds in order to accomplish such

registration. However, where the owner refuses to surrender the duplicate
certificate for the annotation of the voluntary instrument, the grantee may file with
the Register of Deeds a statement setting forth his adverse claim, as provided for in
Section 110 of Act No. 496. xxx[95] (Underscoring supplied)

In Valley Golf Club, Inc. v. Salas,[96] where a Deed of Absolute Sale

covering a parcel of land was executed prior to the annotation of a notice of lis
pendens by the original owner thereof but which Deed was registered after such
annotation, this Court held:
The advance payment of P15,000.00 by the CLUB on October 18, 1960 to
ROMERO, and the additional payment by the CLUB of P54,887.50 as full
payment of the purchase price on October 26, 1960, also to ROMERO, cannot be
held to be the dates of sale such as to precede the annotation of the adverse claim
by the SISTERS on October 25, 1960 and the lis pendens on October 27, 1960. It
is basic that it is the act of registration of the sale that is the operative act to
convey and affect the land. That registration was not effected by the CLUB until
December 4, 1963, or three (3) years after it had made full payment to ROMERO.
xxx
xxx
As matters stand, therefore, in view of the prior annotations of the adverse
claim and lis pendens, the CLUB must be legally held to have been aware of the
flaws in the title. By virtue of the lis pendens, its acquisition of the property was
subject to whatever judgment was to be rendered in Civil Case No. 6365. xxx The
CLUBs cause of action lies, not against the SISTERS, to whom the property had
been adjudged by final judgment in Civil Case No. 6365, but against ROMERO
who was found to have had no right to dispose of the land.[97] (Underscoring
supplied)

PLDT further argues that El Dorados prior, actual knowledge of the July
11, 1975 Agreement to Buy and Sell is equivalent to prior registration not affected
by the Notice of Lis Pendens. As such, it concludes that it was not a
purchaser pendente lite nor a purchaser in bad faith.
PLDT anchors its argument on the testimony of Lauro and El Dorados
counsel Atty. Aquino from which it infers that Atty. Aquino filed the complaint
for rescission and caused the notice of lis pendens to be annotated on Carrascosos

title only after reading newspaper reports on the sale to PLDT of the 1,000 hectare
portion of the property.
The pertinent portions of Atty. Aquinos testimony are reproduced
hereunder:
Q:

Do you know, Atty. Aquino, what you did after the filing of the complaint
in the instant case of Dr. Carrascoso?

A:

Yes, I asked my associates to go to Mamburao and had the notice of Lis

Pendens covering the property as a result of the filing of the instant
complaint.

Q:

Do you know the notice of Lis Pendens?

A:

Yes, it is evidenced by a [Transfer] Certificate Copy of Title of Dr.

Carrascoso entitled Notice of Lis Pendens.

Q:

As a consequence of the filing of the complaint which was annotated, you

have known that?

A:

Yes.
xxx

Q:

After the annotation of the notice of Lis Pendens, do you know, if any
further transaction was held on the property?

A:

As we have read in the newspaper, that Dr. Carrascoso had sold the
property in favor of the PLDT, Co.

Q:

And what did you do?

A:

We verified the portion of the property having recorded under entry No.
24770 xxx and we also discovered that the articles incorporated (sic) and
other corporate matters had been organized and established of the PLDT,
Co., and had been annotated.
xxx

Q:

Do you know what happened to the property?

A:

It was sold by the PLDT to its sub-PLDT Agitating (sic) Co. when at that
time there was already notice of Lis Pendens.

xxx
Q:

In your testimony, you mentioned that you had come cross- (sic) reading
the sale of the subject litigation (sic) between Dr. Fernando Carrascoso, the
defendant herein and the PLDT, one of defendants-intervenor, may I say
when?

A:

I cannot remember now, but it was in the newspaper where it was informed
or mentioned of the sold property to PLDT.
xxx

Q:

Will you tell to the Honorable Court what newspaper was that?

A:

Well, I cannot remember what is that newspaper. That is only a means of

[confirming] the transaction. What was [confirmed] to us is whether there
was really transaction (sic) and we found out that there was in the Register
of Deeds and that was the reason why we obtained the case.

Q:

Well, may I say, is there any reason, the answer is immaterial. The
question is as regard the matter of time when counsel is being able (sic) to
read the newspaper allegedly (interrupted)
xxx

Q:

The idea of the question, your Honor, is to establish and ask further the
notice of [lis pendens] with regards (sic) to the transfer of property to
PLDT, would have been accorded prior to the pendency of the case.
xxx

A:

I cannot remember.[98]

PLDT also relies on the following testimony of Carrascoso:

Q:

You mentioned Doctor a while ago that you mentioned to the late
Governor Feliciano Leviste regarding your transaction with the PLDT in
relation to the subject property you allegedly mention (sic) your intention
to sell with the PLDT?

A:

It was Dr. Jose Leviste and Dr. Angel Leviste that was constantly in
touched (sic) with me with respect to my transaction with the PLDT, sir.

Q:

Any other officer of the corporation who knows with instruction aside
from Dr. Angel Leviste and Dr. Jose Leviste?

A:

Yes, sir. It was Trinidad Andaya Leviste and Assemblyman Expedito

Leviste.

Q:

xxx
What is the position of Mrs. Trinidad Andaya Leviste with the plaintiffcorporation?

A:

One of the stockholders and director of the plaintiff-corporation, sir.

Q:

Will you please tell us the other officers?

A:

Expedito Leviste, sir.

A:

Will you tell the position of Expedito Leviste?

A:

He was the corporate secretary, sir.

Q:

If you know, was Dr. Jose Leviste also a director at that time?

A:

Yes, sir.[99]

On the other hand, El Dorado asserts that it had no knowledge of the July
11, 1975 Agreement to Buy and Sell prior to the filing of the complaint for
rescission against Carrascoso and the annotation of the notice of lis pendens on his
title. It further asserts that it always acted in good faith:
xxx The contract to sell between the Petitioner [Carrascoso] and PLDT was
executed in July 11, 1975. There is no evidence that El Dorado was notified of this
contract. The property is located in Mindoro, El Dorado is based in Manila. The
land was planted to rice. This was not an unusual activity on the land, thus it could
have been the Petitioner who was using the land. Not having been notified of this
sale, El Dorado could not have stopped PLDT from developing the land.
The absolute sale of the land to PLDT took place on April 6, 1977, or
AFTER the filing of this case on March 15, 1977 and the annotation of a notice of
lis pendens on March 16, 1977. Inspite of the notice of lis pendens, PLDT then
PLDTAC persisted not only in buying the land but also in putting up improvements
on the property such as buildings, roads, irrigation systems and drainage. This was
done during the pendency of this case, where PLDT and PLDTAC actively
participated as intervenors. They were not innocent bystanders. xxx[100]

This Court finds the above-quoted testimony of Atty. Aquino to be

susceptible of conflicting interpretations. As such, it cannot be the basis for

inferring that El Dorado knew of the July 11, 1975 Agreement to Buy and Sell
prior to the annotation of the notice of lis pendens on Carrascosos title.
Respecting Carrascosos allegation that some of the directors and officers of
El Dorado had knowledge of his dealings with PLDT, it is true that knowledge of
facts acquired or possessed by an officer or agent of a corporation in the course of
his employment, and in relation to matters within the scope of his authority, is
notice to the corporation, whether he communicates such knowledge or not.[101] In
the case at bar, however, apart from Carrascosos claim that he in fact notified
several of the directors about his intention to sell the 1,000 hectare portion of the
property to PLDT, no evidence was presented to substantiate his claim. Such selfserving, uncorroborated assertion is indubitably inadequate to prove that El
Dorado had notice of the July 11, 1975 Agreement to Buy and Sell before the
annotation of the notice of lis pendens on his title.
PLDT is, of course, not without recourse. As held by the CA:
Between Carrascoso and PLDT/PLDTAC, the former acted in bad faith
while the latter acted in good faith. This is so because it was Carrascosos refusal
to pay his just debt to El Dorado that caused PLDT/PLDTAC to suffer pecuniary
losses. Therefore, Carrascoso should return to PLDT/PLDTAC the P3,000,000.00
price of the farm plus legal interest from receipt thereof until
paid.[102] (Underscoring supplied)

The appellate courts decision ordering the rescission of the March 23, 1972
Deed of Sale of Real Property between El Dorado and Carrascoso being in order,
mutual restitution follows to put back the parties to their original situation prior to
the consummation of the contract.
The exercise of the power to rescind extinguishes the obligatory relation as
if it had never been created, the extinction having a retroactive effect. The
rescission is equivalent to invalidating and unmaking the juridical tie, leaving
things in their status before the celebration of the contract.
Where a contract is rescinded, it is the duty of the court to require both
parties to surrender that which they have respectively received and to place each
other as far as practicable in his original situation, the rescission has the effect of
abrogating the contract in all parts.[103] (Underscoring supplied)

The April 6, 1977 and May 30, 1977 Deeds of Absolute Sale being subject
to the notice of lis pendens, and as the Court affirms the declaration by the
appellate court of the rescission of the Deed of Sale executed by El Dorado in
favor of Carrascoso, possession of the 1,000 hectare portion of the property should
be turned over by PLDT to El Dorado.
As regards the improvements introduced by PLDT on the 1,000 hectare
portion of the property, a distinction should be made between those which it built
prior to the annotation of the notice of lis pendens and those which it introduced
subsequent thereto.
When a person builds in good faith on the land of another, Article 448 of the
Civil Code governs:
Art. 448. The owner of the land on which anything has been built, sown
or planted in good faith, shall have the right to appropriate as his own the works,
sowing or planting, after payment of the indemnity provided for in Articles 546
and 548, or to oblige the one who built or planted to pay the price of the land, and
the one who sowed, the proper rent. However, the builder or planter cannot be
obliged to buy the land if its value is considerably more than that of the building
or trees. In such a case, he shall pay reasonable rent, if the owner of the land does
not choose to appropriate the building or trees after the proper indemnity. The
parties shall agree upon the terms of the lease and in case of disagreement, the
court shall fix the terms thereof.

The above provision covers cases in which the builders, sowers or planters
believe themselves to be owners of the land or, at least, to have a claim of title
thereto.[104] Good faith is thus identified by the belief that the land is owned; or
that by some title one has the right to build, plant, or sow thereon.[105]
The owner of the land on which anything has been built, sown or planted in
good faith shall have the right to appropriate as his own the building, planting or
sowing, after payment to the builder, planter or sower of the necessary and useful
expenses,[106] and in the proper case, expenses for pure luxury or mere
pleasure.[107]

The owner of the land may also oblige the builder, planter or sower to
purchase and pay the price of the land.
If the owner chooses to sell his land, the builder, planter or sower must
purchase the land, otherwise the owner may remove the improvements
thereon. The builder, planter or sower, however, is not obliged to purchase the
land if its value is considerably more than the building, planting or sowing. In
such case, the builder, planter or sower must pay rent to the owner of the land.
If the parties cannot come to terms over the conditions of the lease, the court
must fix the terms thereof.
The right to choose between appropriating the improvement or selling the
land on which the improvement of the builder, planter or sower stands, is given to
the owner of the land.[108]
On the other hand, when a person builds in bad faith on the land of another,
Articles 449 and 450 govern:
Art. 449. He who builds, plants or sows in bad faith on the land of another,
loses what is built, planted or sown without right to indemnity.
Art. 450. The owner of the land on which anything has been built, planted
or sown in bad faith may demand the demolition of the work, or that the planting or
sowing be removed, in order to replace things in their former condition at the
expense of the person who built, planted or sowed; or he may compel the builder or
planter to pay the price of the land, and the sower the proper rent.

In the case at bar, it is undisputed that PLDT commenced construction of

improvements on the 1,000 hectare portion of the property immediately after the
execution of the July 11, 1975 Agreement to Buy and Sell with the full consent of
Carrascoso.[109] Thus, until March 15, 1977 when the Notice of Lis Pendens was
annotated on Carrascosos TCT No. T-6055, PLDT is deemed to have been in
good faith in introducing improvements on the 1,000 hectare portion of the
property.

After March 15, 1977, however, PLDT could no longer invoke the rights of
a builder in good faith.
Should El Dorado then opt to appropriate the improvements made by PLDT
on the 1,000 hectare portion of the property, it should only be made to pay for
those improvements at the time good faith existed on the part of PLDT or until
March 15, 1977,[110] to be pegged at its current fair market value.[111]
The commencement of PLDTs payment of reasonable rent should start on
March 15, 1977 as well, to be paid until such time that the possession of the 1,000
hectare portion is delivered to El Dorado, subject to the reimbursement of
expenses as aforestated, that is, if El Dorado opts to appropriate the
improvements.[112]
If El Dorado opts for compulsory sale, however, the payment of rent should
continue up to the actual transfer of ownership.[113]
WHEREFORE, the petitions are DENIED. The Decision dated January
13, 1996 and Resolution dated July 8, 2004 of the Court of Appeals
are AFFIRMED withMODIFICATION in that
1) the Regional Trial Court of San Jose, Occidental Mindoro, Branch 45 is
further directed to:
a. determine the present fair price of the 1,000 hectare portion of the
property and the amount of the expenses actually spent by PLDT for the
improvements thereon as of March 15, 1977;
b. include for determination the increase in value (plus value) which the
1,000 hectare portion may have acquired by reason of the existence of the
improvements built by PLDT before March 15, 1977 and the current fair market
value of said improvements;
2. El Dorado is ordered to exercise its option under the law, whether to
appropriate the improvements, or to oblige PLDT to pay the price of the land, and

3) PLDT shall pay El Dorado the amount of Two Thousand Pesos

(P2,000.00) per month as reasonable compensation for its occupancy of the 1,000
hectare portion of the property from the time that its good faith ceased to exist
until such time that possession of the same is delivered to El Dorado, subject to
the reimbursement of the aforesaid expenses in favor of PLDT or until such time
that the payment of the purchase price of the 1,000 hectare portion is made by
PLDT in favor of El Dorado in case the latter opts for its compulsory sale.
Costs against petitioners.
SO ORDERED.

THIRD DIVISION

[G.R. No. 130913. June 21, 2005]

OLIVERIO LAPERAL and FILIPINAS GOLF & COUNTRY CLUB

INC., petitioners, vs. SOLID HOMES, INC., respondent.
SOUTHRIDGE VILLAGE HOMEOWNERS ASSOCIATION, intervenor.
DECISION
GARCIA, J.:

Before us is this petition for review on certriorari under Rule 45 of the

Rules of Court to nullify and set aside the following issuances of the Court of
Appeals in CA-G.R. CV No. 37853, to wit:
1. Decision dated September 18, 1996,[1] affirming with modification an earlier
decision of the Regional Trial Court at Laguna, Br. XXV, in an action for reformation
of document thereat commenced by herein respondent Solid Homes, Inc. against
the petitioners; and
2. Resolution dated September 23, 1997,[2] denying the parties respective motions
for reconsideration.

As found by the Court of Appeals in the decision under review, the

material facts may be briefly stated, as follows:
On June 6, 1981, Filipinas Golf Sales and Development Corporation
(FGSDC), predecessor-in-interest of petitioner Filipinas Golf and Country
Club, Inc. (FGCCI), represented by its then President, the other petitioner
herein, Oliverio Laperal, entered into a Development and Management
Agreement (Agreement, for short) with herein respondent Solid Homes, Inc.,
a registered subdivision developer, involving several parcels of land owned by
Laperal and FGSDC with an aggregate area of approximately 42 hectares and
located at Bo. San Antonio, San Pedro, Laguna.
[3]

Under the terms and conditions of the aforementioned Agreement and

the Supplement thereto dated January 19, 1982, respondent Solid Homes,
Inc., undertook to convert at its own expense the land subject of the
agreement into a first-class residential subdivision, in consideration of which
respondent will get 45% of the lot titles of the saleable area in the entire
project.
[4]

On different dates, or more specifically on June 8, 1983, June 22, 1983

and July 29, 1983, Victorio V. Soliven, President and General Manager of
respondent Solid Homes, Inc., wrote Oliverio Laperal, President of FGSDC,
requesting Laperal to furnish Solid Homes, Inc., with the owners duplicate
copies of the Torrens titles covering the subject land in order to facilitate the
processing of respondents application with the Human Settlements
Regulatory Commission (HSRC) for a license to sell subdivision lots, as
required under Presidential Decree No. 957.
Despite repeated requests, however, Laperal did not comply.
On October 7, 1983, the aforementioned Agreement was cancelled by the
parties, and, in lieu thereof, two (2) contracts identically denominated Revised
Development and Management Agreement (Revised Agreements, for
short) were entered into by respondent with the two (2) successors-in-interest
of FGSDC, to wit: (1) one, with petitioner Oliverio Laperal as owner of the
181,075-square meter area of the subject land; and (2) another, with
petitioner FGCCI as owner of the 399,075-square meter area thereof.
[5]

Unlike the original agreement, both Revised Agreements omitted the

obligation of herein petitioners Laperal and FGCCI to make available to
respondent Solid Homes, Inc. the owners duplicate copies of the titles
covering the subject parcels of land.
And, because there were still other matters which were inadvertently
omitted in the said Revised Agreements, the parties executed
an Addendum thereto dated November 11, 1983.
[6]

In addition to the provision on the automatic rescission of the Revised

Agreements in case of breach of the terms and conditions thereof under
paragraph 10 of the same, the parties further agreed in the Addendum that
upon a showing that respondent deliberately abandoned or discontinued work
in the subject project, all improvements of whatever nature and kind it may
have introduced in the property and existing as of the date of the violation
shall be forfeited in favor of the petitioners without any obligation on their part
to pay respondent therefor. Likewise, the parties agreed in the
same Addendum to a forfeiture of all advances made and remittances of
proceeds from reservations and sales upon occurrence of the aforesaid
default or violation of any of the terms and conditions of the Revised
Agreements and the Addendum. Under the Addendum, abandonment is
deemed to have occurred upon failure or absence of any work for
development for any ten (10) days.

It appears, however, that even as the Revised Agreements already

provided for the non-surrender of the owners duplicate copies of the titles,
respondent persisted in its request for the delivery thereof, explaining that said
owners duplicate copies were necessary for: (1) the issuance by the HSRC of
the license to sell; (2) the segregation of the golf course portion from the rest
of the subdivision area; (3) the segregation of the individual titles for portions
which are supposed to be made available for PAG-IBIG take-outs; and (4) the
preparation of the technical description of nine (9) blocks already approved by
the Bureau of Lands.
Then, in a letter dated December 7, 1983 addressed to herein petitioners,
respondent, through its Executive Vice-President and Treasurer, Purita R.
Soliven, explained that it was unable to meet the November 30, 1983 deadline
for the payment of P1 Million as provided for in the Revised
Agreements because there was delay in the processing of its license to sell,
which, in turn, is due to petitioners continued refusal to deliver the owners
duplicate copies of the titles, contrary to what was allegedly agreed upon by
the parties. Respondent reiterated in the same letter that in the absence of
such license from HSRC, it would not be able to comply with the rest of its
undertakings within the allotted periods since the projected collection of
amounts from sales and reservations of the subdivision lots did not
materialize. Nonetheless, in order to demonstrate that it was not reneging on
its commitments under the Revised Agreements despite its difficulties to
generate more funds, respondent proposed that it be allowed to assign to
petitioners P1Million out of its receivables worth P1,209,000.00 from loan
proceeds due in its favor under the PAG-IBIG housing program, which it
expected to receive for some of the completed housing units.
In separate letters both dated December 9, 1983, however, petitioners
rejected respondents proposal and instead insisted on the payment
of P1Million to each of them.
It was only at this point, as alleged in respondents reply letter dated
December 13, 1983, that respondent supposedly realized that instead of
providing for the payment of onlyP500,000.00 in each contract, or a total
of P1Million for both Revised Agreements, the total amount of P1Million was
erroneously carried over in each of the Revised Agreements, with the
consequence that under said two (2) Revised Agreements, it was bound to
pay a total of P2Million to the petitioners.
Meanwhile, in subsequent letters dated January 6, 1984, January 17,
1984 and February 6, 1984, respondent continued to press petitioners for the

delivery of the owners duplicate copies of their titles covering the subject
parcel of land.
Then, on March 9, 1984, petitioners served on respondent notices of
rescission of the Revised Agreements with a demand to vacate the subject
properties and yield possession thereof to them. In the same letter, petitioners
made it clear that they are enforcing the rescission clause of the Revised
Agreements on account of respondents failure to: (1) pay them P1Million
each on November 30, 1983; (2) complete the development of Phase I-A of
the project not later than February 15, 1984; and (3) obtain from the HSRC
the license to sell subdivision lots.
In its response-letter dated March 14, 1984, respondent, through counsel,
objected to the announced rescission, arguing that the proximate cause of its
inability to meet its contractual obligations was petitioners own failure and
refusal to deliver their owners duplicate copies of the titles for processing by
the HSRC, PAG-IBIG, accredited banks, and other government agencies,
adding that on account of petitioners failure to do so, it was not issued the
necessary license to sell, thus resulting in the slowdown in the development
works in the project due to its inability to generate additional funds and to the
slackening of its sales campaign.
Such was the state of things when, on April 2, 1984, in the Regional Trial
Court (RTC) at Bian, Laguna respondent Solid Homes, Inc. instituted the
complaint in this case praying for the reformation of the Revised
Agreements and the Addendum on the ground that these contracts failed to
express the true intent of the parties. In the same complaint, respondent
prayed for the issuance of a temporary restraining order (TRO) and a writ of
preliminary injunction to prevent petitioners from exercising their rights as
owners of the subject properties. Docketed with the same court as Civil Case
No. B-2069, the complaint was raffled to Branch XXV thereof.
On the very day that the complaint was filed, the trial court issued a TRO
to prevent petitioners from implementing the unilateral rescission of
the Revised Agreements and theAddendum.
Later, in an order dated May 23, 1984, the same court granted
respondents application for a writ of preliminary injunction upon its posting of
a bond in the amount of P1Million.
[7]

On
April
18,
1985, the Southridge
Village
Homeowners
Association filed a complaint-in-intervention praying that the rights and
preferential status of its members who have been occupying some of the
[8]

completed units in the subdivision project be respected by whoever between

the principal litigants may later be adjudged as the prevailing party.
Both the petitioners and respondent filed their respective answers to the
aforesaid complaint-in-intervention, commonly alleging intervenors lack of
capacity to sue. Petitioners added in their answer that it should be respondent
which must be made solely liable to the intervenor for whatever claims its
members may be entitled to. For its part, respondent prayed for the
cancellation, in whole or in part, of its contracts with the members of the
intervenor Association to the extent compatible with prevailing economic
conditions.
Upon petitioners motion, the trial court issued an order on May 20, 1985
lifting the writ of preliminary injunction over the entire property except as to
Phase I-A thereof, and reducing respondents injunction bond from P1Million
to only P200,000.00.
Petitioners then filed a motion for reconsideration. Finding merit in the
motion, the trial court, in its order of August 15, 1985, as clarified in its order
of September 27, 1985, completely lifted the writ of preliminary injunction so
as to include the area covered by Phase I-A, and cancelled the bond
of P200,000.00 earlier posted by respondent.
[9]

[10]

To these orders, both parties filed their respective motions for

reconsideration. In its subsequent order dated November 8, 1985, the trial
court modified its August 15, 1985 order by maintaining the complete lifting of
the writ of preliminary injunction but ordering the restoration of
respondents P1Million bond or its substitution with another if the same had
already been cancelled, to answer for whatever damages that may be proven
by the petitioners during the trial of the case.
[11]

The above-mentioned orders, namely, orders dated May 20, 1985, August
15, 1985, September 27, 1985 and November 8, 1985 involving the
dissolution of the writ of preliminary injunction over the entire property and the
maintenance of the P1Million bond against respondent, became the subject of
a petition for certiorari filed by respondent before the Court of Appeals
docketed therein as CA-G.R. SP No. 47885.
In a decision dated October 9, 1987, the Court of Appeals dismissed the
petition.
Therefrom, respondent went to this Court in G.R, No. 80290 but later
abandoned the same, prompting this Court, in its Resolution dated February
22, 1988, to consider the Court of Appeals dismissal of respondents petition
final and executory.

Meanwhile, upon respondents application, a notice of lis pendens was

annotated on the Torrens titles covering the properties in litigation. Said
notice, however, was lifted by the trial court in its orders of April 12, 1988 and
May 21, 1991.
Eventually, after due proceedings in the main case, the trial court, in a
decision dated December 19, 1991, rendered judgment dismissing
respondents complaint for reformation. We quote the dispositive portion of the
same decision:
[12]

IN THE LIGHT OF THE FOREGOING, judgment is hereby rendered in favor of the

defendants and against the plaintiff dismissing the complaint with costs:
On defendants recovery upon the bond posted by the plaintiff to answer to whatever
damages that the party enjoined may suffer by reason of the injunction, resolution as
to the propriety of its award is hereby held in abeyance until after proper application
by the defendants and hearing thereon, as reserved by the defendants in their
memorandum.
As regards the Intervenors, the defendants are directed to respect and acknowledge
their preferential rights over said Intervenors occupied houses and lots.
SO ORDERED.
Therefrom, respondent went to the Court of Appeals via ordinary appeal
in CA-G.R. CV No. 37853.
As stated at the threshold hereof, the Court of Appeals, in a decision
dated September 18, 1996, affirmed with modification the appealed
decision of the trial court, thus:
[13]

WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision appealed

from is AFFIRMED with the modification that [petitioners] are ordered to reimburse
[respondent], jointly and severally, the amount of Five Million Two Hundred
Thousand Eight Hundred Thirty Three Pesos and Twenty Seven Centavos
(P5,200,833.27) representing the actual cost of the development and the completed
improvements on the project. In all other respects, the judgment of the trial court
is AFFIRMED.
SO ORDERED.

Both parties separately moved for reconsideration, but their respective

motions were denied by the appellate court in its resolution of September
23, 1997.
[14]

And, as they did not agree with the judgment, petitioners are now
appealing to this Court for relief via the present recourse, it being their
submission that the Court of Appeals erredI.

xxx IN HOLDING THAT PETITIONERS TERMINATION OF THE REVISED

AGREEMENT AND ADDENDUM, BECAUSE OF THE CONTRACTUAL
BREACH COMMITTED BY RESPONDENT SOLID HOMES, CARRIED WITH IT
THE EFFECT PROVIDED UNDER ARTICLE 1385 OF THE NEW CIVIL CODE.
II.

xxx IN VOIDING THE FORFEITURE CLAUSES OF THE ADDENDUM, AND IN

ORDERING THE REFUND OF THE SUM OF P5,200,833.27 TO RESPONDENT
SOLID HOMES.
III.

xxx IN HOLDING, IN EFFECT, THAT PETITIONERS ARE NOT ENTITLED TO

DAMAGES.
The Court finds merit in the petition.
While this Court does not agree with petitioners that the right to rescind
under Article 1191 of the Civil Code does not carry with it the corresponding
obligation for restitution, we do not subscribe to the Court of Appeals
conclusion that: (1) the forfeiture/penalty clause under paragraphs Nos. 2 and
3 of the Addendum to the Revised Development and Management
Agreements is, under the factual milieu of this case, unreasonable and
unconscionable and, therefore, void for being contrary to morals and good
customs ; and (2) petitioners must reimburse respondent the actual cost of
development and completed improvements on the project in the total amount
of P5,200,833.27.
[15]

[16]

It is petitioners thesis that inasmuch as the rescission of the Revised

Agreements and its Addendum was made pursuant to Article 1191 of the Civil
Code, the provision of Article 1385 of the same Code, which requires mutual
restitution should not apply because Article 1385 applies only if the
rescission is made under the instances enumerated in Article 1381 of the
Code.
[17]

[18]

We do not agree.
Mutual restitution is required in cases involving rescission under Article
1191. In Velarde vs. Court of Appeals, this Court, in no uncertain terms,
squarely ruled on this matter:
[19]

Considering that the rescission of the contract is based on Article 1191 of the
Civil Code, mutual restitution is required to bring back the parties to their original
situation prior to the inception of the contract. Accordingly, the initial payment of
P800,000 and the corresponding mortgage payments in the amounts of P27,225,
P23,000 and P23,925 (totaling P874,150.00) advanced by petitioners should be
returned by private respondents, lest the latter unjustly enrich themselves at the
expense of the former.
Rescission creates the obligation to return the object of the contract. It can be carried
out only when the one who demands rescission can return whatever he may be obliged
to restore (citing Co v. Court of Appeals, 312 SCRA 528, August 17, 1999; and
Vitug, Compendium of Civil Law and Jurisprudence, 1993 revised ed., p. 556). To
rescind is to declare a contract void at its inception and to put an end to it as though it
never was. It is not merely to terminate it and release the parties from further
obligations to each other, but to abrogate it from the beginning and restore the parties
to their relative positions as if no contract has been made (citing Ocampo v. Court of
Appeals, 233 SCRA 551, June 30, 1994).
Article 1191 of the Civil Code provides:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one
of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of the period.
This is understood without prejudice to the rights of third persons who have acquired
the thing, in accordance with articles 1385 and 1388 and the Mortgage Law. (1124)
Despite the fact that Article 1124 of the old Civil Code from whence Article
1191 was taken, used the term resolution, the amendment thereto
(presently, Article 1191) explicitly and clearly used the term
rescission. Unless Article 1191 is subsequently amended to revert back to

the term resolution, this Court has no alternative but to apply the law, as it is
written.
Again, since Article 1385 of the Civil Code expressly and clearly states
that rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest,
the Court finds no justification to sustain petitioners position that said Article
1385 does not apply to rescission under Article 1191.
In Palay, Inc. vs. Clave, this Court applied Article 1385 in a case
involving resolution under Article 1191, thus:
[20]

Regarding the second issue on refund of the installment payments made by private
respondent. Article 1385 of the Civil Code provides:
ART. 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission can return
whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the
loss.
As a consequence of the resolution by petitioners, rights to the lot should be
restored to private respondent or the same should be replaced by another
acceptable lot. However, considering that the property had already been sold to a
third person and there is no evidence on record that other lots are still available,
private respondent is entitled to the refund of installments paid plus interest at the
legal rate of 12% computed from the date of the institution of the action. It would be
most inequitable if petitioners were to be allowed to retain private respondent's
payments and at the same time appropriate the proceeds of the second sale to another.
Applying the clear language of the law and the consistent jurisprudence on
the matter, therefore, the Court rules that rescission under Article 1191 in the
present case, carries with it the corresponding obligation of restitution.
This notwithstanding, the Court does not agree with the Court of Appeals
that, as a consequence of the obligation of mutual restitution in this case,
petitioners should return the amount of P5,200,833.27 to respondent.

Article 1191 states that the injured party may choose between fulfillment
and rescission of the obligation, with the payment of damages in either
case. In other words, while petitioners are indeed obliged to return the said
amount to respondent under Article 1385, assuming said figure is correct,
respondent is at the same time liable to petitioners in the same amount as
liquidated damages by virtue of the forfeiture/penalty clause as freely
stipulated upon by the parties in the Addendum, paragraphs 1 and 2 of
which respectively read:
[21]

WHEREAS, included as part of said agreement are the following:

1.
Further to the stipulations on paragraph 10, upon default of performances,
violations and/or non-compliance with the terms and conditions herein agreed upon
by the DEVELOPER wherein it appears that the DEVELOPER deliberately
abandoned or discontinued the work on the project, said party shall lose any
entitlement, if any, to any refund and/or advances it may have incurred in connection
with or relative to previous development works in the subdivision; likewise, all
improvements of whatever nature and kind introduced by the DEVELOPER on the
property, existing as of the date of default or violation, shall automatically belong to
the OWNER without obligation on his part to pay for the costs thereof.
2.
Similarly with the same condition of default or violation obtaining, as stated in
paragraph 10 of said agreement, all advances made and remittances of proceeds from
reservations and sales given by the DEVELOPER to the OWNER as provided for in
this agreement shall be deemed absolutely forfeited in favor of the OWNER, resulting
to waiver of DEVELOPERs rights, if any, with respect to said amount(s).
If this Court recognized the right of the parties to stipulate on an
extrajudicial rescission under Article 1191, there is no reason why this Court
will not allow the parties to stipulate on the matter of damages in case of such
rescission under Book IV, Title VIII, Chapter 3, Section 2 of the Civil Code
governing liquidated damages.
[22]

[23]

For sure, we find no factual and legal justification to sustain the appellate
courts conclusion that the agreed forfeiture/penalty clause is unreasonable
and unconscionable unless respondent had sufficiently shown that it had
completely accounted for the proceeds of the sale of subdivision lots it made
during the effectivity of the agreement. It must be stressed that the lots sold
by respondent were owned by petitioners Laperal and FGCCI. How then
could there be unjust enrichment in favor of petitioners in such a case?
Furthermore, a substantial part of the funds spent by respondent in the
construction works which by the Court of Appeals required to be reimbursed

by petitioners admittedly came from the proceeds of the sale of the real
property still owned by petitioners. This may be gleaned from the fact that
one of the main reasons respondent raised in its complaint for reformation
before the trial court was that it was unable to proceed with the construction
works due to lack of funds on account of the slackening of its sales campaign
resulting from the alleged refusal, which is after all justified, of the petitioners
to surrender their titles to respondent.
Finally, even assuming that the foregoing forfeiture/penalty clause in the
Addendum would result in considerable losses on the part of respondent, it
is not for this Court to release said party from its obligation. Our
pronouncement in Esguerra vs. Court of Appeals is apt and pertinent:
[24]

xxx. It is a long established doctrine that the law does not relieve a party from the
effects of an unwise, foolish, or disastrous contract, entered into with all the required
formalities and with full awareness of what he was doing. Courts have no power to
relieve parties from obligations voluntarily assumed, simply because their contracts
turned out to be disastrous deals or unwise investments. xxx.
WHEREFORE, the petition is hereby GRANTED. Accordingly, the
assailed decision and resolution of the Court of appeals are REVERSED and
SET ASIDE and the decision dated December 19, 1991 of the Regional Trial
Court in Civil Case No. B-2069 REINSTATED.
No pronouncement as to costs.
SO ORDERED.
Panganiban,
(Chairman),
Corona, and Carpio-Morales, JJ., concur.

Sandoval-Gutierrez,

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION
KOREA TECHNOLOGIES CO.,
LTD.,
Petitioner,

G.R. No. 143581

Present:
- versus -

QUISUMBING, J., Chairperson,

CARPIO,
CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.

HON. ALBERTO A. LERMA, in

his capacity as Presiding Judge of
Branch 256 of Regional Trial
Court of Muntinlupa City, and
PACIFIC GENERAL STEEL
Promulgated:
MANUFACTURING
CORPORATION,
Respondents.
January 7, 2008
x-----------------------------------------------------------------------------------------x
DECISION

VELASCO, JR., J.:

In our jurisdiction, the policy is to favor alternative methods of resolving
disputes, particularly in civil and commercial disputes. Arbitration along with
mediation, conciliation, and negotiation, being inexpensive, speedy and less hostile
methods have long been favored by this Court. The petition before us puts at issue
an arbitration clause in a contract mutually agreed upon by the parties stipulating
that they would submit themselves to arbitration in a foreign country. Regrettably,
instead of hastening the resolution of their dispute, the parties wittingly or
unwittingly prolonged the controversy.

Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean corporation

which is engaged in the supply and installation of Liquefied Petroleum Gas (LPG)
Cylinder manufacturing plants, while private respondent Pacific General Steel
Manufacturing Corp. (PGSMC) is a domestic corporation.
On March 5, 1997, PGSMC and KOGIES executed a Contract[1] whereby
KOGIES would set up an LPG Cylinder Manufacturing Plant in
Carmona, Cavite. The contract was executed in the Philippines. On April 7, 1997,
the parties executed, in Korea, an Amendment for Contract No. KLP-970301
dated March 5, 1997[2] amending the terms of payment. The contract and its
amendment stipulated that KOGIES will ship the machinery and facilities
necessary for manufacturing LPG cylinders for which PGSMC would pay USD
1,224,000. KOGIES would install and initiate the operation of the plant for which
PGSMC bound itself to pay USD 306,000 upon the plants production of the 11kg. LPG cylinder samples. Thus, the total contract price amounted to USD
1,530,000.
On October 14, 1997, PGSMC entered into a Contract of Lease[3] with
Worth Properties, Inc. (Worth) for use of Worths 5,079-square meter property
with a 4,032-square meter warehouse building to house the LPG manufacturing
plant. The monthly rental was PhP 322,560 commencing on January 1, 1998 with
a 10% annual increment clause. Subsequently, the machineries, equipment, and
facilities for the manufacture of LPG cylinders were shipped, delivered, and
installed in the Carmona plant. PGSMC paid KOGIES USD 1,224,000.
However, gleaned from the Certificate[4] executed by the parties on January
22, 1998, after the installation of the plant, the initial operation could not be
conducted as PGSMC encountered financial difficulties affecting the supply of
materials, thus forcing the parties to agree that KOGIES would be deemed to have
completely complied with the terms and conditions of the March 5, 1997 contract.
For the remaining balance of USD306,000 for the installation and initial
operation of the plant, PGSMC issued two postdated checks: (1) BPI Check No.
0316412 dated January 30, 1998 for PhP 4,500,000; and (2) BPI Check No.
0316413 dated March 30, 1998 for PhP 4,500,000.[5]

When KOGIES deposited the checks, these were dishonored for the reason
PAYMENT STOPPED. Thus, on May 8, 1998, KOGIES sent a demand
letter[6] to PGSMC threatening criminal action for violation of Batas Pambansa
Blg. 22 in case of nonpayment. On the same date, the wife of PGSMCs President
faxed a letter dated May 7, 1998to KOGIES President who was then staying at
a Makati City hotel. She complained that not only did KOGIES deliver a different
brand of hydraulic press from that agreed upon but it had not delivered several
equipment parts already paid for.
On May 14, 1998, PGSMC replied that the two checks it issued KOGIES
were fully funded but the payments were stopped for reasons previously made
known to KOGIES.[7]
On June 1, 1998, PGSMC informed KOGIES that PGSMC was canceling
their Contract dated March 5, 1997 on the ground that KOGIES had altered the
quantity and lowered the quality of the machineries and equipment it delivered to
PGSMC, and that PGSMC would dismantle and transfer the machineries,
equipment, and facilities installed in the Carmona plant. Five days later, PGSMC
filed before the Office of the Public Prosecutor an Affidavit-Complaint
for Estafa docketed as I.S. No. 98-03813 against Mr. Dae Hyun Kang, President of
KOGIES.
On June 15, 1998, KOGIES wrote PGSMC informing the latter that PGSMC
could not unilaterally rescind their contract nor dismantle and transfer the
machineries and equipment on mere imagined violations by KOGIES. It also
insisted that their disputes should be settled by arbitration as agreed upon in Article
15, the arbitration clause of their contract.
On June 23, 1998, PGSMC again wrote KOGIES reiterating the contents of
its June 1, 1998 letter threatening that the machineries, equipment, and facilities
installed in the plant would be dismantled and transferred on July 4, 1998. Thus,
on July 1, 1998, KOGIES instituted an Application for Arbitration before the
Korean Commercial Arbitration Board (KCAB) in Seoul, Korea pursuant to Art.
15 of the Contract as amended.

On July 3, 1998, KOGIES filed a Complaint for Specific Performance,

docketed as Civil Case No. 98-117[8] against PGSMC before the Muntinlupa City
Regional Trial Court (RTC). The RTC granted a temporary restraining order
(TRO) on July 4, 1998, which was subsequently extended until July 22, 1998. In
its complaint, KOGIES alleged that PGSMC had initially admitted that the checks
that were stopped were not funded but later on claimed that it stopped payment of
the checks for the reason that their value was not received as the former
allegedly breached their contract by altering the quantity and lowering the quality
of the machinery and equipment installed in the plant and failed to make the plant
operational although it earlier certified to the contrary as shown in a January 22,
1998 Certificate. Likewise, KOGIES averred that PGSMC violated Art. 15 of their
Contract, as amended, by unilaterally rescinding the contract without resorting to
arbitration. KOGIES also asked that PGSMC be restrained from dismantling and
transferring the machinery and equipment installed in the plant which the latter
threatened to do on July 4, 1998.
On July 9, 1998, PGSMC filed an opposition to the TRO arguing that
KOGIES was not entitled to the TRO since Art. 15, the arbitration clause, was null
and void for being against public policy as it ousts the local courts of jurisdiction
over the instant controversy.
On July 17, 1998, PGSMC filed its Answer with Compulsory
Counterclaim[9] asserting that it had the full right to dismantle and transfer the
machineries and equipment because it had paid for them in full as stipulated in the
contract; that KOGIES was not entitled to the PhP 9,000,000 covered by the
checks for failing to completely install and make the plant operational; and that
KOGIES was liable for damages amounting to PhP 4,500,000 for altering the
quantity and lowering the quality of the machineries and equipment. Moreover,
PGSMC averred that it has already paid PhP 2,257,920 in rent (covering January to
July 1998) to Worth and it was not willing to further shoulder the cost of renting
the premises of the plant considering that the LPG cylinder manufacturing plant
never became operational.
After the parties submitted their Memoranda, on July 23, 1998, the RTC
issued an Order denying the application for a writ of preliminary injunction,
reasoning that PGSMC had paid KOGIES USD 1,224,000, the value of the

machineries and equipment as shown in the contract such that KOGIES no longer
had proprietary rights over them. And finally, the RTC held that Art. 15 of the
Contract as amended was invalid as it tended to oust the trial court or any other
court jurisdiction over any dispute that may arise between the parties. KOGIES
prayer for an injunctive writ was denied.[10] The dispositive portion of the Order
stated:

WHEREFORE, in view of the foregoing consideration, this

Court believes and so holds that no cogent reason exists for this Court to
grant the writ of preliminary injunction to restrain and refrain defendant
from dismantling the machineries and facilities at the lot and building of
Worth Properties, Incorporated at Carmona, Cavite and transfer the same
to another site: and therefore denies plaintiffs application for a writ of
preliminary injunction.

On July 29, 1998, KOGIES filed its Reply to Answer and Answer to
Counterclaim.[11] KOGIES denied it had altered the quantity and lowered the
quality of the machinery, equipment, and facilities it delivered to the plant. It
claimed that it had performed all the undertakings under the contract and had
already produced certified samples of LPG cylinders. It averred that whatever was
unfinished was PGSMCs fault since it failed to procure raw materials due to lack
of funds. KOGIES, relying on Chung Fu Industries (Phils.), Inc. v. Court of
Appeals,[12] insisted that the arbitration clause was without question valid.
After KOGIES filed a Supplemental Memorandum with Motion to
Dismiss[13] answering PGSMCs memorandum of July 22, 1998 and seeking
dismissal of PGSMCs counterclaims, KOGIES, on August 4, 1998, filed its
Motion for Reconsideration[14] of the July 23, 1998 Order denying its application
for an injunctive writ claiming that the contract was not merely for machinery and
facilities worth USD 1,224,000 but was for the sale of an LPG manufacturing
plant consisting of supply of all the machinery and facilities and transfer of
technology for a total contract price of USD 1,530,000 such that the dismantling
and transfer of the machinery and facilities would result in the dismantling and
transfer of the very plant itself to the great prejudice of KOGIES as the still unpaid

owner/seller of the plant. Moreover, KOGIES points out that the arbitration clause
under Art. 15 of the Contract as amended was a valid arbitration stipulation under
Art. 2044 of the Civil Code and as held by this Court in Chung Fu Industries
(Phils.), Inc.[15]
In the meantime, PGSMC filed a Motion for Inspection of Things[16] to
determine whether there was indeed alteration of the quantity and lowering of
quality of the machineries and equipment, and whether these were properly
installed. KOGIES opposed the motion positing that the queries and issues raised
in the motion for inspection fell under the coverage of the arbitration clause in their
contract.
On September 21, 1998, the trial court issued an Order (1) granting
PGSMCs motion for inspection; (2) denying KOGIES motion for reconsideration
of the July 23, 1998 RTC Order; and (3) denying KOGIES motion to dismiss
PGSMCs compulsory counterclaims as these counterclaims fell within the
requisites of compulsory counterclaims.
On October 2, 1998, KOGIES filed an Urgent Motion for
Reconsideration[17] of the September 21, 1998 RTC Order granting inspection of
the plant and denying dismissal of PGSMCs compulsory counterclaims.
Ten days after, on October 12, 1998, without waiting for the resolution of its
October 2, 1998 urgent motion for reconsideration, KOGIES filed before the Court
of Appeals (CA) a petition for certiorari[18] docketed as CA-G.R. SP No. 49249,
seeking annulment of the July 23, 1998 and September 21, 1998 RTC Orders and
praying for the issuance of writs of prohibition, mandamus, and preliminary
injunction to enjoin the RTC and PGSMC from inspecting, dismantling, and
transferring the machineries and equipment in the Carmona plant, and to direct the
RTC to enforce the specific agreement on arbitration to resolve the dispute.
In the meantime, on October 19, 1998, the RTC denied KOGIES urgent
motion for reconsideration and directed the Branch Sheriff to proceed with the
inspection of the machineries and equipment in the plant on October 28, 1998.[19]

Thereafter, KOGIES filed a Supplement to the Petition[20] in CA-G.R. SP

No. 49249 informing the CA about the October 19, 1998 RTC Order. It also
reiterated its prayer for the issuance of the writs of prohibition, mandamus and
preliminary injunction which was not acted upon by the CA. KOGIES asserted
that the Branch Sheriff did not have the technical expertise to ascertain whether or
not the machineries and equipment conformed to the specifications in the contract
and were properly installed.
On November 11, 1998, the Branch Sheriff filed his Sheriffs
Report[21] finding that the enumerated machineries and equipment were not fully
and properly installed.
The Court of Appeals affirmed the trial court and declared
the arbitration clause against public policy
On May 30, 2000, the CA rendered the assailed Decision[22] affirming the
RTC Orders and dismissing the petition for certiorari filed by KOGIES. The CA
found that the RTC did not gravely abuse its discretion in issuing the assailed July
23, 1998 and September 21, 1998 Orders. Moreover, the CA reasoned that
KOGIES contention that the total contract price for USD 1,530,000 was for the
whole plant and had not been fully paid was contrary to the finding of the RTC that
PGSMC fully paid the price of USD 1,224,000, which was for all the machineries
and equipment. According to the CA, this determination by the RTC was a factual
finding beyond the ambit of a petition for certiorari.
On the issue of the validity of the arbitration clause, the CA agreed with the
lower court that an arbitration clause which provided for a final determination of
the legal rights of the parties to the contract by arbitration was against public
policy.
On the issue of nonpayment of docket fees and non-attachment of a
certificate of non-forum shopping by PGSMC, the CA held that the counterclaims
of PGSMC were compulsory ones and payment of docket fees was not required
since the Answer with counterclaim was not an initiatory pleading. For the same
reason, the CA said a certificate of non-forum shopping was also not required.

Furthermore, the CA held that the petition for certiorari had been filed
prematurely since KOGIES did not wait for the resolution of its urgent motion for
reconsideration of the September 21, 1998 RTC Order which was the plain,
speedy, and adequate remedy available. According to the CA, the RTC must be
given the opportunity to correct any alleged error it has committed, and that since
the assailed orders were interlocutory, these cannot be the subject of a petition for
certiorari.
Hence, we have this Petition for Review on Certiorari under Rule 45.
The Issues
Petitioner posits that the appellate court committed the following errors:
a.
PRONOUNCING THE QUESTION OF OWNERSHIP OVER
THE MACHINERY AND FACILITIES AS A QUESTION OF FACT
BEYOND THE AMBIT OF A PETITION FOR CERTIORARI
INTENDED ONLY FOR CORRECTION OF ERRORS OF
JURISDICTION OR GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OF (SIC) EXCESS OF JURISDICTION,
AND CONCLUDING THAT THE TRIAL COURTS FINDING ON
THE SAME QUESTION WAS IMPROPERLY RAISED IN THE
PETITION BELOW;
b.
DECLARING AS NULL AND VOID THE ARBITRATION
CLAUSE IN ARTICLE 15 OF THE CONTRACT BETWEEN THE
PARTIES FOR BEING CONTRARY TO PUBLIC POLICY AND
FOR OUSTING THE COURTS OF JURISDICTION;
c.
DECREEING
PRIVATE
RESPONDENTS
COUNTERCLAIMS TO BE ALL COMPULSORY NOT
NECESSITATING PAYMENT OF DOCKET FEES AND
CERTIFICATION OF NON-FORUM SHOPPING;
d.
RULING
THAT
THE
PETITION
WAS
FILED
PREMATURELY WITHOUT WAITING FOR THE RESOLUTION
OF THE MOTION FOR RECONSIDERATION OF THE ORDER
DATED SEPTEMBER 21, 1998 OR WITHOUT GIVING THE TRIAL
COURT AN OPPORTUNITY TO CORRECT ITSELF;

e.
PROCLAIMING THE TWO ORDERS DATED JULY 23
AND SEPTEMBER 21, 1998 NOT TO BE PROPER SUBJECTS OF
CERTIORARI
AND
PROHIBITION
FOR
BEING
INTERLOCUTORY IN NATURE;
f.
NOT GRANTING THE RELIEFS AND REMEDIES PRAYED
FOR IN HE (SIC) PETITION AND, INSTEAD, DISMISSING THE
SAME FOR ALLEGEDLY WITHOUT MERIT.[23]

The Courts Ruling

The petition is partly meritorious.
Before we delve into the substantive issues, we shall first tackle the
procedural issues.
The rules on the payment of docket fees for counterclaims
and cross claims were amended effective August 16, 2004
KOGIES strongly argues that when PGSMC filed the counterclaims, it
should have paid docket fees and filed a certificate of non-forum shopping, and
that its failure to do so was a fatal defect.
We disagree with KOGIES.
As aptly ruled by the CA, the counterclaims of PGSMC were incorporated in
its Answer with Compulsory Counterclaim dated July 17, 1998 in accordance with
Section 8 of Rule 11, 1997 Revised Rules of Civil Procedure, the rule that was
effective at the time the Answer with Counterclaim was filed. Sec. 8 on existing
counterclaim or cross-claimstates, A compulsory counterclaim or a cross-claim
that a defending party has at the time he files his answer shall be contained
therein.

On July 17, 1998, at the time PGSMC filed its Answer incorporating its
counterclaims against KOGIES, it was not liable to pay filing fees for said

counterclaims being compulsory in nature. We stress, however, that

effective August 16, 2004 under Sec. 7, Rule 141, as amended by A.M. No. 04-204-SC, docket fees are now required to be paid in compulsory counterclaim or
cross-claims.
As to the failure to submit a certificate of forum shopping, PGSMCs
Answer is not an initiatory pleading which requires a certification against forum
shopping under Sec. 5[24] of Rule 7, 1997 Revised Rules of Civil Procedure. It is a
responsive pleading, hence, the courts a quo did not commit reversible error in
denying KOGIES motion to dismiss PGSMCs compulsory counterclaims.
Interlocutory orders proper subject of certiorari
Citing Gamboa v. Cruz,[25] the CA also pronounced that certiorari and
Prohibition are neither the remedies to question the propriety of an interlocutory
order of the trial court.[26] The CA erred on its reliance
on Gamboa. Gamboa involved the denial of a motion to acquit in a criminal case
which was not assailable in an action for certiorari since the denial of a motion to
quash required the accused to plead and to continue with the trial, and whatever
objections the accused had in his motion to quash can then be used as part of his
defense and subsequently can be raised as errors on his appeal if the judgment of
the trial court is adverse to him. The general rule is that interlocutory orders
cannot be challenged by an appeal.[27] Thus, in Yamaoka v. Pescarich
Manufacturing Corporation, we held:
The proper remedy in such cases is an ordinary appeal from an
adverse judgment on the merits, incorporating in said appeal the grounds
for assailing the interlocutory orders. Allowing appeals from
interlocutory orders would result in the sorry spectacle of a case being
subject of a counterproductive ping-pong to and from the appellate court
as often as a trial court is perceived to have made an error in any of its
interlocutory rulings. However, where the assailed interlocutory order
was issued with grave abuse of discretion or patently erroneous and the
remedy of appeal would not afford adequate and expeditious relief, the
Court allows certiorari as a mode of redress.[28]

Also, appeals from interlocutory orders would open the floodgates to endless
occasions for dilatory motions. Thus, where the interlocutory order was issued
without or in excess of jurisdiction or with grave abuse of discretion, the remedy is
certiorari.[29]
The alleged grave abuse of discretion of the respondent court equivalent to
lack of jurisdiction in the issuance of the two assailed orders coupled with the fact
that there is no plain, speedy, and adequate remedy in the ordinary course of law
amply provides the basis for allowing the resort to a petition for certiorari under
Rule 65.
Prematurity of the petition before the CA
Neither do we think that KOGIES was guilty of forum shopping in filing the
petition for certiorari. Note that KOGIES motion for reconsideration of the July
23, 1998 RTC Order which denied the issuance of the injunctive writ had already
been denied. Thus, KOGIES only remedy was to assail the RTCs interlocutory
order via a petition for certiorari under Rule 65.
While the October 2, 1998 motion for reconsideration of KOGIES of the
September 21, 1998 RTC Order relating to the inspection of things, and the
allowance of the compulsory counterclaims has not yet been resolved, the
circumstances in this case would allow an exception to the rule that before
certiorari may be availed of, the petitioner must have filed a motion for
reconsideration and said motion should have been first resolved by the court a
quo. The reason behind the rule is to enable the lower court, in the first instance,
to pass upon and correct its mistakes without the intervention of the higher
court.[30]
The September 21, 1998 RTC Order directing the branch sheriff to inspect
the plant, equipment, and facilities when he is not competent and knowledgeable
on said matters is evidently flawed and devoid of any legal support. Moreover,
there is an urgent necessity to resolve the issue on the dismantling of the facilities
and any further delay would prejudice the interests of KOGIES. Indeed, there is
real and imminent threat of irreparable destruction or substantial damage to
KOGIES equipment and machineries. We find the resort to certiorari based on

the gravely abusive orders of the trial court sans the ruling on the October 2,
1998 motion for reconsideration to be proper.
The Core Issue: Article 15 of the Contract
We now go to the core issue of the validity of Art. 15 of the Contract, the
arbitration clause. It provides:
Article 15. Arbitration.All disputes, controversies, or
differences which may arise between the parties, out of or in relation to
or in connection with this Contract or for the breach thereof, shall finally
be settled by arbitration in Seoul, Korea in accordance with the
Commercial Arbitration Rules of the Korean Commercial Arbitration
Board. The award rendered by the arbitration(s) shall be final and
binding upon both parties concerned. (Emphasis supplied.)

Petitioner claims the RTC and the CA erred in ruling that the arbitration
clause is null and void.
Petitioner is correct.
Established in this jurisdiction is the rule that the law of the place where the
contract is made governs. Lex loci contractus. The contract in this case was
perfected here in the Philippines. Therefore, our laws ought to
govern. Nonetheless, Art. 2044 of the Civil Code sanctions the validity of
mutually agreed arbitral clause or the finality and binding effect of an arbitral
award. Art. 2044 provides, Any stipulation that the arbitrators award or
decision shall be final, is valid, without prejudice to Articles 2038, 2039 and
2040. (Emphasis supplied.)
Arts. 2038,[31] 2039,[32] and 2040[33] abovecited refer to instances where a
compromise or an arbitral award, as applied to Art. 2044 pursuant to Art.
2043,[34] may be voided, rescinded, or annulled, but these would not denigrate the
finality of the arbitral award.

The arbitration clause was mutually and voluntarily agreed upon by the
parties. It has not been shown to be contrary to any law, or against morals, good
customs, public order, or public policy. There has been no showing that the parties
have not dealt with each other on equal footing. We find no reason why the
arbitration clause should not be respected and complied with by both
parties. In Gonzales v. Climax Mining Ltd.,[35] we held that submission to
arbitration is a contract and that a clause in a contract providing that all matters in
dispute between the parties shall be referred to arbitration is a contract.[36] Again
in Del Monte Corporation-USA v. Court of Appeals, we likewise ruled that [t]he
provision to submit to arbitration any dispute arising therefrom and the relationship
of the parties is part of that contract and is itself a contract.[37]
Arbitration clause not contrary to public policy
The arbitration clause which stipulates that the arbitration must be done
in Seoul, Korea in accordance with the Commercial Arbitration Rules of the
KCAB, and that the arbitral award is final and binding, is not contrary to public
policy. This Court has sanctioned the validity of arbitration clauses in a catena of
cases. In the 1957 case ofEastboard Navigation Ltd. v. Juan Ysmael and Co.,
Inc.,[38] this Court had occasion to rule that an arbitration clause to resolve
differences and breaches of mutually agreed contractual terms is valid. In BF
Corporation v. Court of Appeals, we held that [i]n this jurisdiction, arbitration has
been held valid and constitutional. Even before the approval on June 19, 1953 of
Republic Act No. 876, this Court has countenanced the settlement of disputes
through arbitration. Republic Act No. 876 was adopted to supplement the New
Civil Codes provisions on arbitration.[39] And in LM Power Engineering
Corporation v. Capitol Industrial Construction Groups, Inc., we declared that:
Being an inexpensive, speedy and amicable method of settling
disputes, arbitrationalong
with
mediation,
conciliation and
negotiationis encouraged by the Supreme Court. Aside from
unclogging judicial dockets, arbitration also hastens the resolution of
disputes, especially of the commercial kind. It is thus regarded as the
wave of the future in international civil and commercial
disputes. Brushing aside a contractual agreement calling for arbitration
between the parties would be a step backward.

Consistent with the above-mentioned policy of encouraging

alternative dispute resolution methods, courts should liberally construe
arbitration clauses. Provided such clause is susceptible of an
interpretation that covers the asserted dispute, an order to arbitrate
should be granted. Any doubt should be resolved in favor of
arbitration.[40]

Having said that the instant arbitration clause is not against public policy, we
come to the question on what governs an arbitration clause specifying that in case
of any dispute arising from the contract, an arbitral panel will be constituted in a
foreign country and the arbitration rules of the foreign country would govern and
its award shall be final and binding.
RA 9285 incorporated the UNCITRAL Model law
to which we are a signatory

For domestic arbitration proceedings, we have particular agencies to

arbitrate disputes arising from contractual relations. In case a foreign arbitral body
is chosen by the parties, the arbitration rules of our domestic arbitration bodies
would not be applied. As signatory to the Arbitration Rules of the UNCITRAL
Model Law on International Commercial Arbitration[41] of the United Nations
Commission on International Trade Law (UNCITRAL) in the New York
Convention on June 21, 1985, the Philippinescommitted itself to be bound by the
Model Law. We have even incorporated the Model Law in Republic Act No. (RA)
9285, otherwise known as the Alternative Dispute Resolution Act of
2004 entitled An Act to Institutionalize the Use of an Alternative Dispute
Resolution System in the Philippines and to Establish the Office for Alternative
Dispute Resolution, and for Other Purposes, promulgated on April 2, 2004. Secs.
19 and 20 of Chapter 4 of the Model Law are the pertinent provisions:
CHAPTER 4 - INTERNATIONAL COMMERCIAL ARBITRATION
SEC. 19. Adoption of the Model Law on International
Commercial Arbitration.International commercial arbitration shall be
governed by the Model Law on International Commercial Arbitration
(the Model Law) adopted by the United Nations Commission on

International Trade Law on June 21, 1985 (United Nations Document

A/40/17) and recommended for enactment by the General Assembly in
Resolution No. 40/72 approved on December 11, 1985, copy of which is
hereto attached as Appendix A.
SEC. 20. Interpretation of Model Law.In interpreting the
Model Law, regard shall be had to its international origin and to the need
for uniformity in its interpretation and resort may be made to the travaux
preparatories and the report of the Secretary General of the United
Nations Commission on International Trade Law dated March 25, 1985
entitled, International Commercial Arbitration: Analytical Commentary
on Draft Trade identified by reference number A/CN. 9/264.

While RA 9285 was passed only in 2004, it nonetheless applies in the instant
case since it is a procedural law which has a retroactive effect. Likewise, KOGIES
filed its application for arbitration before the KCAB on July 1, 1998 and it is still
pending because no arbitral award has yet been rendered. Thus, RA 9285 is
applicable to the instant case. Well-settled is the rule that procedural laws are
construed to be applicable to actions pending and undetermined at the time of their
passage, and are deemed retroactive in that sense and to that extent. As a general
rule, the retroactive application of procedural laws does not violate any personal
rights because no vested right has yet attached nor arisen from them.[42]
Among the pertinent features of RA 9285 applying and incorporating the
UNCITRAL Model Law are the following:
(1)

The RTC must refer to arbitration in proper cases

Under Sec. 24, the RTC does not have jurisdiction over disputes that are
properly the subject of arbitration pursuant to an arbitration clause, and mandates
the referral to arbitration in such cases, thus:
SEC. 24. Referral to Arbitration.A court before which an
action is brought in a matter which is the subject matter of an arbitration
agreement shall, if at least one party so requests not later than the pretrial conference, or upon the request of both parties thereafter, refer the

parties to arbitration unless it finds that the arbitration agreement is null

and void, inoperative or incapable of being performed.

(2)

Foreign arbitral awards must be confirmed by the RTC

Foreign arbitral awards while mutually stipulated by the parties in the

arbitration clause to be final and binding are not immediately enforceable or cannot
be implemented immediately. Sec. 35[43] of the UNCITRAL Model Law stipulates
the requirement for the arbitral award to be recognized by a competent court for
enforcement, which court under Sec. 36 of the UNCITRAL Model Law may refuse
recognition or enforcement on the grounds provided for. RA 9285 incorporated
these provisos to Secs. 42, 43, and 44 relative to Secs. 47 and 48, thus:
SEC. 42. Application of the New York Convention.The New
York Convention shall govern the recognition and enforcement of
arbitral awards covered by said Convention.
The recognition and enforcement of such arbitral awards shall be
filed with the Regional Trial Court in accordance with the rules of
procedure to be promulgated by the Supreme Court. Said procedural
rules shall provide that the party relying on the award or applying for its
enforcement shall file with the court the original or authenticated copy of
the award and the arbitration agreement. If the award or agreement is
not made in any of the official languages, the party shall supply a duly
certified translation thereof into any of such languages.
The applicant shall establish that the country in which foreign
arbitration award was made in party to the New York Convention.
xxxx
SEC. 43. Recognition and Enforcement of Foreign Arbitral
Awards Not Covered by the New York Convention.The recognition
and enforcement of foreign arbitral awards not covered by the New York
Convention shall be done in accordance with procedural rules to be
promulgated by the Supreme Court. The Court may, on grounds of

comity and reciprocity, recognize and enforce a non-convention award

as a convention award.
SEC. 44. Foreign Arbitral Award Not Foreign Judgment.A
foreign arbitral award when confirmed by a court of a foreign country,
shall be recognized and enforced as a foreign arbitral award and not as a
judgment of a foreign court.
A foreign arbitral award, when confirmed by the Regional Trial
Court, shall be enforced in the same manner as final and executory
decisions of courts of law of the Philippines
xxxx
SEC. 47. Venue and Jurisdiction.Proceedings for recognition
and enforcement of an arbitration agreement or for vacations, setting
aside, correction or modification of an arbitral award, and any
application with a court for arbitration assistance and supervision shall
be deemed as special proceedings and shall be filed with the Regional
Trial Court (i) where arbitration proceedings are conducted; (ii) where
the asset to be attached or levied upon, or the act to be enjoined is
located; (iii) where any of the parties to the dispute resides or has his
place of business; or (iv) in the National Judicial Capital Region, at the
option of the applicant.
SEC. 48. Notice of Proceeding to Parties.In a special
proceeding for recognition and enforcement of an arbitral award, the
Court shall send notice to the parties at their address of record in the
arbitration, or if any part cannot be served notice at such address, at such
partys last known address. The notice shall be sent al least fifteen (15)
days before the date set for the initial hearing of the application.

It is now clear that foreign arbitral awards when confirmed by the RTC are
deemed not as a judgment of a foreign court but as a foreign arbitral award, and
when confirmed, are enforced as final and executory decisions of our courts of law.
Thus, it can be gleaned that the concept of a final and binding arbitral award
is similar to judgments or awards given by some of our quasi-judicial bodies, like
the National Labor Relations Commission and Mines Adjudication Board, whose

final judgments are stipulated to be final and binding, but not immediately
executory in the sense that they may still be judicially reviewed, upon the instance
of any party. Therefore, the final foreign arbitral awards are similarly situated in
that they need first to be confirmed by the RTC.
(3)

The RTC has jurisdiction to review foreign arbitral awards

Sec. 42 in relation to Sec. 45 of RA 9285 designated and vested the RTC

with specific authority and jurisdiction to set aside, reject, or vacate a foreign
arbitral award on grounds provided under Art. 34(2) of the UNCITRAL Model
Law. Secs. 42 and 45 provide:
SEC. 42. Application of the New York Convention.The New
York Convention shall govern the recognition and enforcement of
arbitral awards covered by said Convention.
The recognition and enforcement of such arbitral awards shall be
filed with the Regional Trial Court in accordance with the rules of
procedure to be promulgated by the Supreme Court. Said procedural
rules shall provide that the party relying on the award or applying for its
enforcement shall file with the court the original or authenticated copy of
the award and the arbitration agreement. If the award or agreement is
not made in any of the official languages, the party shall supply a duly
certified translation thereof into any of such languages.
The applicant shall establish that the country in which foreign
arbitration award was made is party to the New York Convention.
If the application for rejection or suspension of enforcement of an
award has been made, the Regional Trial Court may, if it considers it
proper, vacate its decision and may also, on the application of the party
claiming recognition or enforcement of the award, order the party to
provide appropriate security.
xxxx
SEC. 45. Rejection of a Foreign Arbitral Award.A party to a
foreign arbitration proceeding may oppose an application for recognition
and enforcement of the arbitral award in accordance with the procedures
and rules to be promulgated by the Supreme Court only on those grounds

enumerated under Article V of the New York Convention. Any other

ground raised shall be disregarded by the Regional Trial Court.

Thus, while the RTC does not have jurisdiction over disputes governed by
arbitration mutually agreed upon by the parties, still the foreign arbitral award is
subject to judicial review by the RTC which can set aside, reject, or vacate it. In
this sense, what this Court held in Chung Fu Industries (Phils.), Inc. relied upon by
KOGIES is applicable insofar as the foreign arbitral awards, while final and
binding, do not oust courts of jurisdiction since these arbitral awards are not
absolute and without exceptions as they are still judicially reviewable. Chapter 7
of RA 9285 has made it clear that all arbitral awards, whether domestic or foreign,
are subject to judicial review on specific grounds provided for.
(4) Grounds for judicial review different in domestic and foreign arbitral
awards
The differences between a final arbitral award from an international or
foreign arbitral tribunal and an award given by a local arbitral tribunal are the
specific grounds or conditions that vest jurisdiction over our courts to review the
awards.
For foreign or international arbitral awards which must first be confirmed by
the RTC, the grounds for setting aside, rejecting or vacating the award by the RTC
are provided under Art. 34(2) of the UNCITRAL Model Law.
For final domestic arbitral awards, which also need confirmation by the RTC
pursuant to Sec. 23 of RA 876[44] and shall be recognized as final and executory
decisions of the RTC,[45] they may only be assailed before the RTC and vacated on
the grounds provided under Sec. 25 of RA 876.[46]
(5)

RTC decision of assailed foreign arbitral award appealable

Sec. 46 of RA 9285 provides for an appeal before the CA as the remedy of

an aggrieved party in cases where the RTC sets aside, rejects, vacates, modifies, or
corrects an arbitral award, thus:

SEC. 46. Appeal from Court Decision or Arbitral Awards.A

decision of the Regional Trial Court confirming, vacating, setting aside,
modifying or correcting an arbitral award may be appealed to the Court
of Appeals in accordance with the rules and procedure to be promulgated
by the Supreme Court.
The losing party who appeals from the judgment of the court
confirming an arbitral award shall be required by the appellate court to
post a counterbond executed in favor of the prevailing party equal to the
amount of the award in accordance with the rules to be promulgated by
the Supreme Court.

Thereafter, the CA decision may further be appealed or reviewed before this

Court through a petition for review under Rule 45 of the Rules of Court.
PGSMC has remedies to protect its interests
Thus, based on the foregoing features of RA 9285, PGSMC must submit to
the foreign arbitration as it bound itself through the subject contract. While it may
have misgivings on the foreign arbitration done in Korea by the KCAB, it has
available remedies under RA 9285. Its interests are duly protected by the law
which requires that the arbitral award that may be rendered by KCAB must be
confirmed here by the RTC before it can be enforced.
With our disquisition above, petitioner is correct in its contention that an
arbitration clause, stipulating that the arbitral award is final and binding, does not
oust our courts of jurisdiction as the international arbitral award, the award of
which is not absolute and without exceptions, is still judicially reviewable under
certain conditions provided for by the UNCITRAL Model Law on ICA as applied
and incorporated in RA 9285.
Finally, it must be noted that there is nothing in the subject Contract which
provides that the parties may dispense with the arbitration clause.
Unilateral rescission improper and illegal

Having ruled that the arbitration clause of the subject contract is valid and
binding on the parties, and not contrary to public policy; consequently, being
bound to the contract of arbitration, a party may not unilaterally rescind or
terminate the contract for whatever cause without first resorting to arbitration.
What this Court held in University of the Philippines v. De Los
Angeles[47] and reiterated in succeeding cases,[48] that the act of treating a contract
as rescinded on account of infractions by the other contracting party is valid albeit
provisional as it can be judicially assailed, is not applicable to the instant case on
account of a valid stipulation on arbitration. Where an arbitration clause in a
contract is availing, neither of the parties can unilaterally treat the contract as
rescinded since whatever infractions or breaches by a party or differences arising
from the contract must be brought first and resolved by arbitration, and not through
an extrajudicial rescission or judicial action.
The issues arising from the contract between PGSMC and KOGIES on
whether the equipment and machineries delivered and installed were properly
installed and operational in the plant in Carmona, Cavite; the ownership of
equipment and payment of the contract price; and whether there was substantial
compliance by KOGIES in the production of the samples, given the alleged fact
that PGSMC could not supply the raw materials required to produce the sample
LPG cylinders, are matters proper for arbitration. Indeed, we note that on July 1,
1998, KOGIES instituted an Application for Arbitration before the KCAB
in Seoul, Korea pursuant to Art. 15 of the Contract as amended. Thus, it is
incumbent upon PGSMC to abide by its commitment to arbitrate.
Corollarily, the trial court gravely abused its discretion in granting
PGSMCs Motion for Inspection of Things on September 21, 1998, as the subject
matter of the motion is under the primary jurisdiction of the mutually agreed
arbitral body, the KCAB in Korea.
In addition, whatever findings and conclusions made by the RTC Branch
Sheriff from the inspection made on October 28, 1998, as ordered by the trial court
on October 19, 1998, is of no worth as said Sheriff is not technically competent to
ascertain the actual status of the equipment and machineries as installed in the
plant.

For these reasons, the September 21, 1998 and October 19, 1998 RTC
Orders pertaining to the grant of the inspection of the equipment and machineries
have to be recalled and nullified.
Issue on ownership of plant proper for arbitration
Petitioner assails the CA ruling that the issue petitioner raised on whether the
total contract price of USD 1,530,000 was for the whole plant and its installation
is beyond the ambit of a Petition for Certiorari.
Petitioners position is untenable.
It is settled that questions of fact cannot be raised in an original action for
certiorari.[49] Whether or not there was full payment for the machineries and
equipment and installation is indeed a factual issue prohibited by Rule 65.
However, what appears to constitute a grave abuse of discretion is the order
of the RTC in resolving the issue on the ownership of the plant when it is the
arbitral body (KCAB) and not the RTC which has jurisdiction and authority over
the said issue. The RTCs determination of such factual issue constitutes grave
abuse of discretion and must be reversed and set aside.

RTC has interim jurisdiction to protect the rights of the parties

Anent the July 23, 1998 Order denying the issuance of the injunctive writ
paving the way for PGSMC to dismantle and transfer the equipment and
machineries, we find it to be in order considering the factual milieu of the instant
case.
Firstly, while the issue of the proper installation of the equipment and
machineries might well be under the primary jurisdiction of the arbitral body to
decide, yet the RTC under Sec. 28 of RA 9285 has jurisdiction to hear and grant
interim measures to protect vested rights of the parties. Sec. 28 pertinently
provides:

SEC. 28. Grant of interim Measure of Protection.(a) It is not

incompatible with an arbitration agreement for a party to request,
before constitution of the tribunal, from a Court to grant such
measure. After constitution of the arbitral tribunal and during arbitral
proceedings, a request for an interim measure of protection, or
modification thereof, may be made with the arbitral or to the extent
that the arbitral tribunal has no power to act or is unable to act
effectivity, the request may be made with the Court. The arbitral
tribunal is deemed constituted when the sole arbitrator or the third
arbitrator, who has been nominated, has accepted the nomination and
written communication of said nomination and acceptance has been
received by the party making the request.
(b) The following rules on interim or provisional relief shall be
observed:
Any party may request that provisional relief be granted against
the adverse party.
Such relief may be granted:
(i)
(ii)
(iii)
(iv)

to prevent irreparable loss or injury;

to provide security for the performance of any obligation;
to produce or preserve any evidence; or
to compel any other appropriate act or omission.

(c) The order granting provisional relief may be conditioned upon

the provision of security or any act or omission specified in the order.
(d) Interim or provisional relief is requested by written
application transmitted by reasonable means to the Court or arbitral
tribunal as the case may be and the party against whom the relief is
sought, describing in appropriate detail the precise relief, the party
against whom the relief is requested, the grounds for the relief, and the
evidence supporting the request.
(e) The order shall be binding upon the parties.

(f) Either party may apply with the Court for assistance in
implementing or enforcing an interim measure ordered by an arbitral
tribunal.
(g) A party who does not comply with the order shall be liable for
all damages resulting from noncompliance, including all expenses, and
reasonable attorney's fees, paid in obtaining the orders judicial
enforcement. (Emphasis ours.)

Art. 17(2) of the UNCITRAL Model Law on ICA defines an interim

measure of protection as:
Article 17. Power of arbitral tribunal to order interim measures
xxx

xxx

xxx

(2) An interim measure is any temporary measure, whether in the form

of an award or in another form, by which, at any time prior to the
issuance of the award by which the dispute is finally decided, the arbitral
tribunal orders a party to:
(a) Maintain or restore the status quo pending determination of the
dispute;
(b) Take action that would prevent, or refrain from taking action that is
likely to cause, current or imminent harm or prejudice to the arbitral
process itself;
(c) Provide a means of preserving assets out of which a subsequent
award may be satisfied; or
(d) Preserve evidence that may be relevant and material to the resolution
of the dispute.

Art. 17 J of UNCITRAL Model Law on ICA also grants courts power and
jurisdiction to issue interim measures:
Article 17 J. Court-ordered interim measures

A court shall have the same power of issuing an interim measure

in relation to arbitration proceedings, irrespective of whether their place
is in the territory of this State, as it has in relation to proceedings in
courts. The court shall exercise such power in accordance with its own
procedures in consideration of the specific features of international
arbitration.

In the recent 2006 case of Transfield Philippines, Inc. v. Luzon Hydro

Corporation, we were explicit that even the pendency of an arbitral proceeding
does not foreclose resort to the courts for provisional reliefs. We explicated this
way:
As a fundamental point, the pendency of arbitral proceedings does not
foreclose resort to the courts for provisional reliefs. The Rules of the
ICC, which governs the parties arbitral dispute, allows the application
of a party to a judicial authority for interim or conservatory
measures. Likewise, Section 14 of Republic Act (R.A.) No. 876 (The
Arbitration Law) recognizes the rights of any party to petition the court
to take measures to safeguard and/or conserve any matter which is the
subject of the dispute in arbitration. In addition, R.A. 9285, otherwise
known as the Alternative Dispute Resolution Act of 2004, allows the
filing of provisional or interim measures with the regular courts
whenever the arbitral tribunal has no power to act or to act effectively.[50]

It is thus beyond cavil that the RTC has authority and jurisdiction to grant
interim measures of protection.
Secondly, considering that the equipment and machineries are in the
possession of PGSMC, it has the right to protect and preserve the equipment and
machineries in the best way it can. Considering that the LPG plant was nonoperational, PGSMC has the right to dismantle and transfer the equipment and
machineries either for their protection and preservation or for the better way to
make good use of them which is ineluctably within the management discretion of
PGSMC.

Thirdly, and of greater import is the reason that maintaining the equipment
and machineries in Worths property is not to the best interest of PGSMC due to
the prohibitive rent while the LPG plant as set-up is not operational. PGSMC was
losing PhP322,560 as monthly rentals or PhP3.87M for 1998 alone without
considering the 10% annual rent increment in maintaining the plant.
Fourthly, and corollarily, while the KCAB can rule on motions or petitions
relating to the preservation or transfer of the equipment and machineries as an
interim measure, yet on hindsight, the July 23, 1998 Order of the RTC allowing the
transfer of the equipment and machineries given the non-recognition by the lower
courts of the arbitral clause, has accorded an interim measure of protection to
PGSMC which would otherwise been irreparably damaged.
Fifth, KOGIES is not unjustly prejudiced as it has already been
paid a substantial amount based on the contract. Moreover, KOGIES is amply
protected by the arbitral action it has instituted before the KCAB, the award of
which can be enforced in our jurisdiction through the RTC. Besides, by our
decision, PGSMC is compelled to submit to arbitration pursuant to the valid
arbitration clause of its contract with KOGIES.
PGSMC to preserve the subject equipment and machineries
Finally, while PGSMC may have been granted the right to dismantle and
transfer the subject equipment and machineries, it does not have the right to
convey or dispose of the same considering the pending arbitral proceedings to
settle the differences of the parties. PGSMC therefore must preserve and maintain
the subject equipment and machineries with the diligence of a good father of a
family[51] until final resolution of the arbitral proceedings and enforcement of the
award, if any.

WHEREFORE, this petition is PARTLY GRANTED, in that:

(1) The May 30, 2000 CA Decision in CA-G.R. SP No. 49249
is REVERSED and SET ASIDE;

(2) The September 21, 1998 and October 19, 1998 RTC Orders in Civil
Case No. 98-117 are REVERSED and SET ASIDE;
(3) The parties are hereby ORDERED to submit themselves to the
arbitration of their dispute and differences arising from the subject Contract before
the KCAB; and
(4) PGSMC is hereby ALLOWED to dismantle and transfer the
equipment and machineries, if it had not done so, and ORDERED to preserve and
maintain them until the finality of whatever arbitral award is given in the
arbitration proceedings.
No pronouncement as to costs.
SO ORDERED.

Republic of the Philippines

Supreme Court
Baguio City

SECOND DIVISION
ESTELITA VILLAMAR,
Petitioner,

G.R. No. 188661

Present:
CARPIO, J.,
Chairperson,
BRION,
PEREZ,
SERENO,
and
REYES, JJ.

- versus -

BALBINO MANGAOIL,
Respondent.

Promulgated:
April 11, 2012
x--------------------------------------------------------------------------------------------x
DECISION

REYES, J.:
The Case
Before us is a petition for review on certiorari[1] under Rule 45 of the Rules
of Court filed by Estelita Villamar (Villamar) to assail the Decision [2] rendered by
the Court of Appeals (CA) on February 20, 2009 in CA-G.R. CV No. 86286, the
dispositive portion of which reads:
WHEREFORE, the instant appeal is DISMISSED. The assailed
decision is AFFIRMED in toto.

SO ORDERED.[3]

The resolution[4] issued by the CA on July 8, 2009 denied the petitioner's

motion for reconsideration to the foregoing.
The ruling[5] of Branch 23, Regional Trial Court (RTC) of Roxas, Isabela,
which was affirmed by the CA in the herein assailed decision and resolution,
ordered the (1) rescission of the contract of sale of real property entered into by
Villamar and Balbino Mangaoil (Mangaoil); and (2) return of the down payment
made relative to the said contract.
Antecedents Facts
The CA aptly summarized as follows the facts of the case prior to the filing
by Mangaoil of the complaint[6] for rescission of contract before the RTC:
Villamar is the registered owner of a 3.6080 hectares parcel of
land [hereinafter referred as the subject property] in San Francisco,
Manuel, Isabela covered by Transfer Certificate of Title (TCT) No. T92958-A. On March 30, 1998, she entered into an Agreement with
Mangaoil for the purchase and sale of said parcel of land, under the
following terms and conditions:
1. The price of the land is ONE HUNDRED
AND EIGHTY THOUSAND (180,000.00) PESOS per
hectare but only the 3.5000 hec. shall be paid and the rest
shall be given free, so that the total purchase or selling
price shall be [P]630,000.00 only;
2. ONE
HUNDRED
EIGHTY
FIVE
THOUSAND (185,000.00) PESOS of the total price was
already received on March 27, 1998 for payment of the
loan secured by the certificate of title covering the land
in favor of the Rural Bank of Cauayan, San Manuel
Branch, San Manuel, Isabela [Rural Bank of Cauayan], in
order that the certificate of title thereof be withdrawn and
released from the said bank, and the rest shall be for
the payment of the mortgag[e]s in favor of Romeo
Lacaden and Florante Parangan;

3. After the release of the certificate of title covering

the land subject-matter of this agreement, the
necessary deed of absolute sale in favor of the PARTY OF
THE SECOND PART shall be executed and the transfer be
immediately effected so that the latter can apply for a loan
from any lending institution using the corresponding
certificate of title as collateral therefor, and the proceeds of
the loan, whatever be the amount, be given to the PARTY
OF THE FIRST PART;
4. Whatever balance left from the agreed purchase
price of the land subject matter hereof after deducting the
proceed of the loan and the [P]185,000.00 already received
as above-mentioned, the PARTY OF THE SECOND
PART shall pay unto the PARTY OF THE FIRST PART
not later than June 30, 1998 and thereafter the parties shall
be released of any obligations for and against each other;
xxx
On April 1, 1998, the parties executed a Deed of Absolute
Sale whereby Villamar (then Estelita Bernabe) transferred the subject
parcel of land to Mangaoil for and in consideration of [P]150,000.00.
In a letter dated September 18, 1998, Mangaoil informed Villamar
that he was backing out from the sale agreed upon giving as one of the
reasons therefor:
3. That the area is not yet fully cleared by
incumbrances as there are tenants who are not willing to
vacate the land without giving them back the amount that
they mortgaged the land.
Mangaoil demanded refund of his [P]185,000.00 down payment.
Reiterating said demand in another letter dated April 29, 1999, the same,
however, was unheeded.[7] x x x (Citations omitted)

On January 28, 2002, the respondent filed before the RTC a complaint[8] for
rescission of contract against the petitioner. In the said complaint, the respondent
sought the return of P185,000.00 which he paid to the petitioner, payment of
interests thereon to be computed from March 27, 1998 until the suit's termination,

and the award of damages, costs and P20,000.00 attorney's fees. The respondent's
factual allegations were as follows:
5. That as could be gleaned the Agreement (Annex A), the
plaintiff [Mangaoil] handed to the defendant [Villamar] the sum
of [P]185,000.00 to be applied as follows; [P]80,000 was for the
redemption of the land which was mortgaged to the Rural Bank of
Cauayan, San Manuel Branch, San Manuel, Isabela, to enable the
plaintiff to get hold of the title and register the salex x
x and [P]105,000.00 was for the redemption of the said land from private
mortgages to enable plaintiff to posses[s] and cultivate the same;
6. That although the defendant had already long redeemed the said
land from the said bank and withdrawn TCT No. T-92958-A, she has
failed and refused, despite repeated demands, to hand over the said title
to the plaintiff and still refuses and fails to do so;
7. That, also, the plaintiff could not physically, actually and
materially posses[s] and cultivate the said land because the private
mortgage[e]s and/or present possessors refuse to vacate the same;
xxxx
11. That on September 18, 1998, the plaintiff sent a letter to the
defendant demanding a return of the amount so advanced by him, but the
latter ignored the same, x x x;
12. That, again, on April 29, 1999, the plaintiff sent to the
defendant another demand letter but the latter likewise ignored the same,
x x x;
13. That, finally, the plaintiff notified the defendant by a notarial
act of his desire and intention to rescind the said contract of sale, xxx;
x x x x.[9] (Citations omitted)

In the respondents answer to the complaint, she averred that she had
complied with her obligations to the respondent. Specifically, she claimed having
caused the release of TCT No. T-92958-A by the Rural Bank of Cauayan and its
delivery to a certain Atty. Pedro C. Antonio (Atty. Antonio). The petitioner

alleged that Atty. Antonio was commissioned to facilitate the transfer of the said
title in the respondent's name. The petitioner likewise insisted that it was the
respondent who unceremoniously withdrew from their agreement for reasons only
the latter knew.
The Ruling of the RTC
On September 9, 2005, the RTC ordered the rescission of the agreement and
the deed of absolute sale executed between the respondent and the petitioner. The
petitioner was, thus directed to return to the respondent the sum of P185,000.00
which the latter tendered as initial payment for the purchase of the subject
property. The RTC ratiocinated that:
There is no dispute that the defendant sold the LAND to the
plaintiff for [P]630,000.00 with down payment of [P]185,000.00. There
is no evidence presented if there were any other partial payments made
after the perfection of the contract of sale.
Article 1458 of the Civil Code provides:
Art. 1458. By the contract of sale[,] one of the
contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the
other to pay therefore a price certain in money or its
equivalent.
As such, in a contract of sale, the obligation of the vendee to pay
the price is correlative of the obligation of the vendor to deliver the thing
sold. It created or established at the same time, out of the same course,
and which result in mutual relations of creditor and debtor between the
parties.
The claim of the plaintiff that the LAND has not been delivered
to him was not refuted by the defendant. Considering that defendant
failed to deliver to him the certificate of title and of the possession over
the LAND to the plaintiff, the contract must be rescinded pursuant to
Article 1191 of the Civil Code which, in part, provides:

Art. 1191. The power of rescind obligations is

implied in reciprocal ones in case one of the obligors
should not comply with what is incumbent upon
him.[10]

The petitioner filed before the CA an appeal to challenge the foregoing. She
ascribed error on the part of the RTC when the latter ruled that the agreement and
deed of sale executed by and between the parties can be rescinded as she failed to
deliver to the respondent both the subject property and the certificate of title
covering the same.
The Ruling of the CA
On February 20, 2009, the CA rendered the now assailed decision dismissing
the petitioners appeal based on the following grounds:
Burden of proof is the duty of a party to prove the truth of his
claim or defense, or any fact in issue necessary to establish his claim or
defense by the amount of evidence required by law. In civil cases, the
burden of proof is on the defendant if he alleges, in his answer, an
affirmative defense, which is not a denial of an essential ingredient in
the plaintiff's cause of action, but is one which, if established, will be a
good defense i.e., an avoidance of the claim, which prima facie, the
plaintiff already has because of the defendant's own admissions in the
pleadings.
Defendant-appellant Villamar's defense in this case was
an affirmative defense. She did not deny plaintiff-appellees allegation
that she had an agreement with plaintiff-appellee for the sale of the
subject parcel of land. Neither did she deny that she was obliged under
the contract to deliver the certificate of title to plaintiff-appellee
immediately after said title/property was redeemed from the bank. What
she rather claims is that she already complied with her obligation to
deliver the title to plaintiff-appellee when she delivered the same to
Atty. Antonioas it was plaintiff-appellee himself who engaged the
services of said lawyer to precisely work for the immediate transfer of
said title in his name. Since, however, this affirmative defense as alleged
in defendant-appellant's answer was not admitted by plaintiff-appellee, it

then follows that it behooved the defendant-appellant to prove her

averments by preponderance of evidence.
Yet, a careful perusal of the record shows that the defendantappellant failed to sufficiently prove said affirmative defense. She failed
to prove that in the first place, Atty. Antonio existed to receive the
title for and in behalf of plaintiff-appellee. Worse, the defendantappellant failed to prove that Atty. Antonio received said title
as allegedly agreed upon.
We likewise sustain the RTC's finding that defendant-appellant
V[i]llamar failed to deliver possession of the subject property to
plaintiff-appellee Mangaoil. As correctly observed by the RTC - [t]he
claim of the plaintiff that the land has not been delivered to him was not
refuted by the defendant. Not only that. On cross-examination, the
defendant-appellant gave Us insight on why no such delivery could be
made, viz.:
x x x x
Q:
So, you were not able to deliver this
property to Mr. Mangaoil just after you redeem the
property because of the presence of these two (2)
persons, is it not?
xxx
A:

Yes, sir.

Q:
Forcing you to file the case against them and
which according to you, you have won, is it not?
A:

Yes, sir.

Q:
And now at present[,] you are in actual
possession of the land?
A:

Yes, sir. x x x

With the foregoing judicial admission, the RTC could not have
erred in finding that defendant-[appellant] failed to deliver the
possession of the property sold, to plaintiff-appellee.
Neither can We agree with defendant-appellant in her argument
that the execution of the Deed of Absolute Sale by the parties is already
equivalent to a valid and constructive deliveryof the property to
plaintiff-appellee. Not only is it doctrinally settled that in a contract of
sale, the vendor is bound to transfer the ownership of, and to deliver
the thing that is the object of the sale, the way Article 1547 of the
Civil Code is worded, viz.:
Art. 1547. In a contract of sale, unless a contrary
intention appears, there is:
(1) An implied warranty on the part of the
seller that he has a right to sell the thing at the time when
the ownership is to pass, and that the buyer shall from
that time have and enjoy the legal and peaceful
possession of the thing;
(2) An implied warranty that the thing shall be free
from any hidden defaults or defects, or any change or
encumbrance not declared or known to the buyer.
x x x.
shows that actual, and not mere constructive delivery is warrantied by
the seller to the buyer. (P)eaceful possession of the thing sold can
hardly be enjoyed in a mere constructive delivery.
The obligation of defendant-appellant Villamar to transfer ownership
and deliver possession of the subject parcel of land was
her correlative obligation to plaintiff-appellee in exchange for the latter's
purchase price thereof. Thus, if she fails to comply with what is
incumbent upon her, a correlative right to rescind such contract from
plaintiff-appellee arises, pursuant to Article 1191 of the Civil Code.[11] x
x x (Citations omitted)

The Issues

Aggrieved, the petitioner filed before us the instant petition and submits the
following issues for resolution:
I.
WHETHER THE FAILURE OF PETITIONER-SELLER TO DELIVER
THE CERTIFICATE OF TITLE OVER THE PROPERTY TO
RESPONDENT-BUYER IS A BREACH OF OBLIGATION IN A
CONTRACT OF SALE OF REAL PROPERTY THAT WOULD
WARRANT RESCISSION OF THE CONTRACT;

II.
WHETHER PETITIONER IS LIABLE FOR BREACH OF
OBLIGATION IN A CONTRACT OF SALE FOR FAILURE OF
RESPONDENT[-]BUYER TO IMMEDIATELY TAKE ACTUAL
POSSESSION OF THE PROPERTY NOTWITHSTANDING THE
ABSENCE OF ANY STIPULATION IN THE CONTRACT
PROVIDING FOR THE SAME;
III.
WHETHER THE EXECUTION OF A DEED OF SALE OF REAL
PROPERTY IN THE PRESENT CASE IS ALREADY EQUIVALENT
TO A VALID AND CONSTRUCTIVE DELIVERY OF THE
PROPERTY TO THE BUYER;
IV.
WHETHER OR NOT THE CONTRACT OF SALE SUBJECT
MATTER OF THIS CASE SHOULD BE RESCINDED ON SLIGHT
OR CASUAL BREACH;
V.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN
AFFIRMING THE DECISION OF THE RTC ORDERING THE
RESCISSION OF THE CONTRACT OF SALE[.][12]

The Petitioner's Arguments

The petitioner avers that the CA, in ordering the rescission of the agreement
and deed of sale, which she entered into with the respondent, on the basis of her
alleged failure to deliver the certificate of title, effectively imposed upon her an
extra duty which was neither stipulated in the contract nor required by law. She
argues that under Articles 1495[13] and 1496[14] of the New Civil Code (NCC), the
obligation to deliver the thing sold is complied with by a seller who executes in
favor of a buyer an instrument of sale in a public document. Citing Chua v. Court
of Appeals,[15] she claims that there is a distinction between transferring a
certificate of title in the buyer's name, on one hand, and transferring ownership
over the property sold, on the other. The latter can be accomplished by the seller's
execution of an instrument of sale in a public document. The recording of the sale
with the Registry of Deeds and the transfer of the certificate of title in the buyer's
name are necessary only to bind third parties to the transfer of ownership.[16]
The petitioner contends that in her case, she had already complied with her
obligations under the agreement and the law when she had caused the release of
TCT No. T-92958-A from the Rural Bank of Cauayan, paid individual mortgagees
Romeo Lacaden (Lacaden) and Florante Parangan (Paranga), and executed an
absolute deed of sale in the respondent's favor. She adds that before T-92958-A
can be cancelled and a new one be issued in the respondent's favor, the latter
decided to withdraw from their agreement. She also points out that in the letters
seeking for an outright rescission of their agreement sent to her by the respondent,
not once did he demand for the delivery of TCT.
The petitioner insists that the respondent's change of heart was due to (1) the
latter's realization of the difficulty in determining the subject property's perimeter
boundary; (2) his doubt that the property he purchased would yield harvests in the
amount he expected; and (3) the presence of mortgagees who were not willing to
give up possession without first being paid the amounts due to them. The petitioner
contends that the actual reasons for the respondent's intent to rescind their
agreement did not at all constitute a substantial breach of her obligations.
The petitioner stresses that under Article 1498 of the NCC, when a sale is
made through a public instrument, its execution is equivalent to the delivery of the
thing which is the contract's object, unless in the deed, the contrary appears or can

be inferred. Further, in Power Commercial and Industrial Corporation v. CA,[17] it

was ruled that the failure of a seller to eject lessees from the property he sold and
to deliver actual and physical possession, cannot be considered a substantial
breach, when such failure was not stipulated as a resolutory or suspensive
condition in the contract and when the effects and consequences of the said failure
were not specified as well. The execution of a deed of sale operates as a formal or
symbolic delivery of the property sold and it already authorizes the buyer to use
the instrument as proof of ownership.[18]
The petitioner argues that in the case at bar, the agreement and the absolute
deed of sale contains no stipulation that she was obliged to actually and physically
deliver the subject property to the respondent. The respondent fully knew
Lacaden's and Parangan's possession of the subject property. When they agreed on
the sale of the property, the respondent consciously assumed the risk of not being
able to take immediate physical possession on account of Lacaden's and Parangan's
presence therein.
The petitioner likewise laments that the CA allegedly misappreciated the
evidence offered before it when it declared that she failed to prove the existence of
Atty. Antonio. For the record, she emphasizes that the said lawyer prepared and
notarized the agreement and deed of absolute sale which were executed between
the parties. He was also the petitioners counsel in the proceedings before the RTC.
Atty. Antonio was also the one asked by the respondent to cease the transfer of the
title over the subject property in the latter's name and to return the money he paid
in advance.
The Respondent's Contentions
In the respondent's comment,[19] he seeks the dismissal of the instant petition.
He invokes Articles 1191 and 1458 to argue that when a seller fails to transfer the
ownership and possession of a property sold, the buyer is entitled to rescind the
contract of sale. Further, he contends that the execution of a deed of absolute sale
does not necessarily amount to a valid and constructive delivery. In Masallo v.
Cesar,[20] it was ruled that a person who does not have actual possession of real
property cannot transfer constructive possession by the execution and delivery of a
public document by which the title to the land is transferred. In Addison v. Felix

and Tioco,[21] the Court was emphatic that symbolic delivery by the execution of a
public instrument is equivalent to actual delivery only when the thing sold is
subject to the control of the vendor.
Our Ruling
The instant petition is bereft of merit.
There is only a single issue for resolution in the instant petition, to wit,
whether or not the failure of the petitioner to deliver to the respondent both the
physical possession of the subject property and the certificate of title covering the
same amount to a substantial breach of the former's obligations to the latter
constituting a valid cause to rescind the agreement and deed of sale entered into by
the parties.
We rule in the affirmative.
The RTC and the CA both found that the petitioner failed to comply with her
obligations to deliver to the respondent both the possession of the subject property
and the certificate of title covering the same.
Although Articles 1458, 1495 and 1498 of
the NCC and case law do not generally
require the seller to deliver to the buyer
the physical possession of the property
subject of a contract of sale and the
certificate of title covering the same, the
agreement entered into by the petitioner
and the respondent provides otherwise.
However, the terms of the agreement
cannot be considered as violative of law,
morals, good customs, public order, or
public policy, hence, valid.
Article 1458 of the NCC obliges the seller to transfer the ownership of and to
deliver a determinate thing to the buyer, who shall in turn pay therefor a price

certain in money or its equivalent. In addition thereto, Article 1495 of the NCC
binds the seller to warrant the thing which is the object of the sale. On the other
hand, Article 1498 of the same code provides that when the sale is made through a
public instrument, the execution thereof shall be equivalent to the delivery of the
thing which is the object of the contract, if from the deed, the contrary does not
appear or cannot clearly be inferred.
In the case of Chua v. Court of Appeals,[22] which was cited by the petitioner,
it was ruled that when the deed of absolute sale is signed by the parties and
notarized, then delivery of the real property is deemed made by the seller to the
buyer.[23] The transfer of the certificate of title in the name of the buyer is not
necessary to confer ownership upon him.
In the case now under our consideration, item nos. 2 and 3 of the agreement
entered into by the petitioner and the respondent explicitly provide:
2.
ONE HUNDRED EIGHTY FIVE THOUSAND (P185,000.00)
PESOS of the total price was already received on March 27, 1998 for
payment of the loan secured by the certificate of title covering the land
in favor of the Rural Bank of Cauayan, San Manuel Branch, San
Manuel, Isabela, in order that the certificate of title thereof be withdrawn
and released from the said bank, and the rest shall be for the payment of
the mortgages in favor of Romeo Lacaden and Florante Parangan;
3.
After the release of the certificate of title covering the land
subject-matter of this agreement, the necessary deed of absolute sale in
favor of the PARTY OF THE SECOND PART shall be executed and the
transfer be immediately effected so that the latter can apply for a loan
from any lending institution using the corresponding certificate of title as
collateral therefor, and the proceeds of the loan, whatever be the amount,
be given to the PARTY OF THE FIRST PART;[24] (underlining
supplied)

As can be gleaned from the agreement of the contending parties, the

respondent initially paid the petitioner P185,000.00 for the latter to pay the loan
obtained from the Rural Bank of Cauayan and to cause the release from the said
bank of the certificate of title covering the subject property. The rest of the amount

shall be used to pay the mortgages over the subject property which was executed in
favor of Lacaden and Parangan. After the release of the TCT, a deed of sale shall
be executed and transfer shall be immediately effected so that the title covering the
subject property can be used as a collateral for a loan the respondent will apply for,
the proceeds of which shall be given to the petitioner.
Under Article 1306 of the NCC, the contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs, public order or public policy.
While Articles 1458 and 1495 of the NCC and the doctrine enunciated in the
case of Chua do not impose upon the petitioner the obligation to physically deliver
to the respondent the certificate of title covering the subject property or cause the
transfer in the latter's name of the said title, a stipulation requiring otherwise is not
prohibited by law and cannot be regarded as violative of morals, good customs,
public order or public policy. Item no. 3 of the agreement executed by the parties
expressly states that transfer [shall] be immediately effected so that the latter can
apply for a loan from any lending institution using the corresponding certificate of
title as collateral therefore. Item no. 3 is literal enough to mean that there should
be physical delivery of the TCT for how else can the respondent use it as a
collateral to obtain a loan if the title remains in the petitioners possession. We
agree with the RTC and the CA that the petitioner failed to prove that she delivered
the TCT covering the subject property to the respondent. What the petitioner
attempted to establish was that she gave the TCT to Atty. Antonio whom she
alleged was commissioned to effect the transfer of the title in the respondent's
name. Although Atty. Antonio's existence is certain as he was the petitioners
counsel in the proceedings before the RTC, there was no proof that the former
indeed received the TCT or that he was commissioned to process the transfer of the
title in the respondent's name.
It is likewise the petitioners contention that pursuant to Article 1498 of the
NCC, she had already complied with her obligation to deliver the subject property
upon her execution of an absolute deed of sale in the respondents favor. The
petitioner avers that she did not undertake to eject the mortgagors Parangan and
Lacaden, whose presence in the premises of the subject property was known to the
respondent.

We are not persuaded.

In the case of Power Commercial and Industrial Corporation[25] cited by the
petitioner, the Court ruled that the failure of the seller to eject the squatters from
the property sold cannot be made a ground for rescission if the said ejectment was
not stipulated as a condition in the contract of sale, and when in the negotiation
stage, the buyer's counsel himself undertook to eject the illegal settlers.
The circumstances surrounding the case now under our consideration are
different. In item no. 2 of the agreement, it is stated that part of the P185,000.00
initially paid to the petitioner shall be used to pay the mortgagors, Parangan and
Lacaden. While the provision does not expressly impose upon the petitioner the
obligation to eject the said mortgagors, the undertaking is necessarily implied.
Cessation of occupancy of the subject property is logically expected from the
mortgagors upon payment by the petitioner of the amounts due to them.
We note that in the demand letter[26] dated September 18, 1998, which was
sent by the respondent to the petitioner, the former lamented that the area is not
yet fully cleared of incumbrances as there are tenants who are not willing to vacate
the land without giving them back the amount that they mortgaged the land.
Further, in the proceedings before the RTC conducted after the complaint for
rescission was filed, the petitioner herself testified that she won the ejectment suit
against the mortgagors only last year.[27] The complaint was filed on September
8, 2002 or more than four years from the execution of the parties' agreement. This
means that after the lapse of a considerable period of time from the agreement's
execution, the mortgagors remained in possession of the subject property.
Notwithstanding
the
absence
of stipulations in the agreement and
absolute deed of sale entered into by
Villamar
and
Mangaoil
expressly
indicating the consequences of the
former's failure to deliver the physical
possession of the subject property and
the certificate of title covering the same,

the latter is entitled to demand for the

rescission of their contract pursuant to
Article 1191 of the NCC.
We note that the agreement entered into by the petitioner and the respondent
only contains three items specifying the parties' undertakings. In item no. 5, the
parties consented to abide with all the terms and conditions set forth in this
agreement and never violate the same.[28]
Article 1191 of the NCC is clear that the power to rescind obligations is
implied in reciprocal ones, in case one of the obligors should not comply with what
is incumbent upon him. The respondent cannot be deprived of his right to demand
for rescission in view of the petitioners failure to abide with item nos. 2 and 3 of
the agreement. This remains true notwithstanding the absence of express
stipulations in the agreement indicating the consequences of breaches which the
parties may commit. To hold otherwise would render Article 1191 of the NCC as
useless.
Article 1498 of the NCC generally
considers the execution of a public
instrument as constructive delivery by the
seller to the buyer of the property subject
of a contract of sale. The case at bar,
however, falls among the exceptions to the
foregoing rule since a mere presumptive
and not conclusive delivery is created as
the respondent failed to take material
possession of the subject property.

Further, even if we were to assume for argument's sake that the agreement
entered into by the contending parties does not require the delivery of the physical
possession of the subject property from the mortgagors to the respondent, still, the
petitioner's claim that her execution of an absolute deed of sale was already
sufficient as it already amounted to a constructive delivery of the thing sold which
Article 1498 of the NCC allows, cannot stand.

In Philippine Suburban
General,[29] we held:

Development

Corporation

v.

The

Auditor

When the sale of real property is made in a public instrument, the

execution thereof is equivalent to the delivery of the thing object of the
contract, if from the deed the contrary does not appear or cannot clearly
be inferred.
In other words, there is symbolic delivery of the property subject
of the sale by the execution of the public instrument, unless from the
express terms of the instrument, or by clear inference therefrom, this was
not the intention of the parties. Such would be the case, for instance, x x
x where the vendor has no control over the thing sold at the moment of
the sale, and, therefore, its material delivery could not have been
made.[30] (Underlining supplied and citations omitted)

Stated differently, as a general rule, the execution of a public instrument

amounts to a constructive delivery of the thing subject of a contract of sale.
However, exceptions exist, among which is when mere presumptive and not
conclusive delivery is created in cases where the buyer fails to take material
possession of the subject of sale. A person who does not have actual possession of
the thing sold cannot transfer constructive possession by the execution and delivery
of a public instrument.
In the case at bar, the RTC and the CA found that the petitioner failed to
deliver to the respondent the possession of the subject property due to the
continued presence and occupation of Parangan and Lacaden. We find no ample
reason to reverse the said findings. Considered in the light of either the agreement
entered into by the parties or the pertinent provisions of law, the petitioner failed in
her undertaking to deliver the subject property to the respondent.
IN VIEW OF THE FOREGOING, the instant petition is DENIED. The
February 20, 2009 Decision and July 8, 2009 Resolution of the Court of Appeals,
directing the rescission of the agreement and absolute deed of sale entered into by
Estelita Villamar and Balbino Mangaoil and the return of the down payment made
for the purchase of the subject property, are AFFIRMED. However, pursuant to
our ruling in Eastern Shipping Lines, Inc. v. CA,[31] an interest of 12% per

annum is imposed on the sum ofP185,000.00 to be returned to Mangaoil to be

computed from the date of finality of this Decision until full satisfaction thereof.
SO ORDERED.

FIRST DIVISION
[G.R. No. 146839, March 23 : 2011]
ROLANDO T. CATUNGAL, JOSE T. CATUNGAL, JR., CAROLYN T. CATUNGAL AND ERLINDA CATUNGALWESSEL, PETITIONERS, VS. ANGEL S. RODRIGUEZ, RESPONDENT.
DECISION
LEONARDO-DE CASTRO, J.:
Before the Court is a Petition for Review on Certiorari, assailing the following issuances of the Court of Appeals in
CA-G.R. CV No. 40627 consolidated with CA-G.R. SP No. 27565: (a) the August 8, 2000 Decision,[1] which affirmed
the Decision[2] dated May 30, 1992 of the Regional Trial Court (RTC), Branch 27 of Lapu-lapu City, Cebu in Civil
Case No. 2365-L, and (b) the January 30, 2001 Resolution,[3] denying herein petitioners' motion for reconsideration
of the August 8, 2000 Decision.
The relevant factual and procedural antecedents of this case are as follows:
This controversy arose from a Complaint for Damages and Injunction with Preliminary Injunction/Restraining
Order[4] filed on December 10, 1990 by herein respondent Angel S. Rodriguez (Rodriguez), with the RTC, Branch
27, Lapu-lapu City, Cebu, docketed as Civil Case No. 2365-L against the spouses Agapita and Jose Catungal (the
spouses Catungal), the parents of petitioners.
In the said Complaint, it was alleged that Agapita T. Catungal (Agapita) owned a parcel of land (Lot 10963) with an
area of 65,246 square meters, covered by Original Certificate of Title (OCT) No. 105 [5] in her name situated in the
Barrio of Talamban, Cebu City. The said property was allegedly the exclusive paraphernal property of Agapita.
On April 23, 1990, Agapita, with the consent of her husband Jose, entered into a Contract to Sell [6] with respondent
Rodriguez. Subsequently, the Contract to Sell was purportedly "upgraded" into a Conditional Deed of Sale dated
July 26, 1990 between the same parties. Both the Contract to Sell and the Conditional Deed of Sale were
annotated on the title.
The provisions of the Conditional Deed of Sale pertinent to the present dispute are quoted below:
1. The VENDOR for and in consideration of the sum of TWENTY[-]FIVE MILLION PESOS (25,000,000.00) payable
as follows:
a. FIVE HUNDRED THOUSAND PESOS (P500,000.00) downpayment upon the signing of this agreement, receipt of
which sum is hereby acknowledged in full from the VENDEE.
b. The balance of TWENTY[-]FOUR MILLION FIVE HUNDRED THOUSAND PESO'S (P24,500,000.00) shall be payable
in five separate checks, made to the order of JOSE Ch. CATUNGAL, the first check shall be for FOUR MILLION FIVE
HUNDRED THOUSAND PESOS (P4,500,000.00) and the remaining balance to be paid in four checks in the amounts
of FIVE MILLION PESOS (P5,000,000.00) each after the VENDEE have (sic)' successfully negotiated, secured and
provided a Road Right of Way consisting of 12 meters in width cutting across Lot 10884 up to the national road,
either by widening the existing Road Right of Way or by securing a new Road Right of Way of 12 meters in width. If
however said Road Right of Way could not be negotiated, the VENDEE shall give notice to the VENDOR for them to
reassess and solve the problem by taking other options and should the situation ultimately prove futile, he shall
take steps to rescind or cancel the herein Conditional Deed of Sale.
c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility of the VENDEE to
secure and any or all cost relative to the acquisition thereof shall be borne solely by the VENDEE. He shall,
however, be accorded with enough time necessary for the success of his endeavor, granting him a free hand in
negotiating for the passage.
BY THESE PRESENTS, the VENDOR do hereby agree to sell by way of herein CONDITIONAL DEED OF SALE to
VENDEE, his heirs, successors and assigns, the real property described in the Original Certificate of Title No. 105 x
x x.
xxxx
5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his option to rescind the
herein Conditional Deed of Sale, the VENDEE shall notify the VENDOR by way of a written notice relinquishing his
rights over the property. The VENDEE shall then be reimbursed by the VENDOR the sum of FIVE HUNDRED

THOUSAND PESOS (P500,000.00) representing the downpayment, interest free, payable but contingent upon the
event that the VENDOR shall have been able to sell the property to another party.[8]
In accordance with the Conditional Deed of Sale, Rodriguez purportedly secured the necessary surveys and plans
and through his efforts, the properly was reclassified from agricultural land into residential land which he claimed
substantially increased the property's value. He likewise alleged that he actively negotiated for the road right of
way as stipulated in the contract.[9]
Rodriguez further claimed that on August 31, 1990 the spouses Catungal requested an advance of P5,000,000.00
on the purchase price for personal reasons. Rodriquez allegedly refused on the ground that the amount was
substantial and was not due under the terms of their agreement. Shortly after his refusal to pay the advance, he
purportedly learned that the Catungals were offering the property for sale to third parties.[10]
Thereafter, Rodriguez received letters dated October 22, 1990,[11] October 24, 1990[12] and October 29, 1990,[13] all
signed by Jose Catungal who was a lawyer, essentially demanding that the former make up his mind about buying
the land or exercising his "option" to buy because the spouses Catungal allegedly received other offers and they
needed money to pay for personal obligations and for investing in other properties/business ventures. Should
Rodriguez fail to exercise his option to buy the land, the Catungals warned that they would consider the contract
cancelled and that they were free to look for other buyers.
In a letter dated November 4, 1990,[14] Rodriguez registered his objections to what he termed the Catungals'
unwarranted demands in view of the terms of the Conditional Deed of Sale which allowed him sufficient time to
negotiate a road right of way and granted him, the vendee, the exclusive right to rescind the contract. Still, on
November 15, 1990, Rodriguez purportedly received a letter dated November 9, 1990 [15] from Atty. Catungal,
stating that the contract had been cancelled and terminated.
Contending that the Catungals' unilateral rescission of the Conditional Deed of Sale was unjustified, arbitrary and
unwarranted, Rodriquez prayed in his Complaint, that:
1. Upon the filing of this complaint, a restraining order be issued enjoining defendants [the spouses Catungal],
their employees, agents, representatives or other persons acting in their behalf from offering the property subject
of this case for sale to third persons; from entertaining offers or proposals by third persons to purchase the said
property; and, in general, from performing acts in furtherance or implementation of defendants' rescission of their
Conditional Deed of Sale with plaintiff [Rodriguez].
2. After hearing, a writ of preliminary injunction be issued upon such reasonable bond as may be fixed by the court
enjoining defendants and other persons acting in their behalf from performing any of the acts mentioned in the
next preceding paragraph.
3. After trial, a Decision be rendered:
a) Making the injunction permanent;
b) Condemning defendants to pay to plaintiff, jointly and solidarily:
Actual damages in the amount of P400,000.00 for their unlawful rescission of the Agreement and their performance
of acts in violation or disregard of the said Agreement;
Moral damages in the amount of P200,000.00;
Exemplary damages in the amount of P200,000.00; Expenses of litigation and attorney's fees in the amount of
P100,000.00; and Costs of suit.[16]
On December 12, 1990, the trial court issued a temporary restraining order and set the application for a writ of
preliminary injunction for hearing on December 21, 1990 with a directive to the spouses Catungal to show cause
within five days from notice why preliminary injunction should not be granted. The trial court likewise ordered that
summons be served on them.[17]
Thereafter, the spouses Catungal filed their opposition[18] to the issuance of a writ of preliminary injunction and
later filed a motion to dismiss[19] on the ground of improper venue. According to the Catungals, the subject
property was located in Cebu City and thus, the complaint should have been filed in Cebu City, not Lapu-lapu City.
Rodriguez opposed the motion to dismiss on the ground that his action was a personal action as its subject was
breach of a contract, the Conditional Deed of Sale, and not title to, or possession of real property. [20]
In an Order dated January 17, 1991,[21] the trial court denied the motion to dismiss and ruled that the complaint
involved a personal action, being merely for damages with a prayer for injunction.

Subsequently, on January 30, 1991, the trial court ordered the issuance of a writ of preliminary injunction upon
posting by Rodriguez of a bond in the amount of P100,000.00 to answer for damages that the defendants may
sustain by reason of the injunction.
On February 1, 1991, the spouses Catungal filed their Answer with Counterclaim[22] alleging that they had the right
to rescind the contract in view of (1) Rodriguez's failure to negotiate the road right of way despite the lapse of
several months since the signing of the contract, and (2) his refusal to pay the additional amount of P5,000,000.00
asked by the Catungals, which to them indicated his lack of funds to purchase the property. The Catungals likewise
contended that Rodriguez did not have an exclusive right to rescind the contract and that the contract, being
reciprocal, meant both parties had the right to rescind.[23] The spouses Catungal further claimed that it was
Rodriguez who was in breach of their agreement and guilty of bad faith which justified their rescission of the
contract.[24] By way of counterclaim, the spouses Catungal prayed for actual and consequential damages in the
form of unearned interests from the balance (of the purchase price in the amount) of P24,500,000.00, moral and
exemplary damages in the amount of P2,000,000.00, attorney's fees in the amount of P200,000.00 and costs of
suits and litigation expenses in the amount of P10,000.00.[25] The spouses Catungal prayed for the dismissal of the
complaint and the grant of their counterclaim.
The Catungals amended their Answer twice,[26] retaining their basic allegations but amplifying their charges of
contractual breach and bad faith on the part of Rodriguez and adding the argument that in view of Article 1191 of
the Civil Code, the power to rescind reciprocal obligations is granted by the law itself to both parties and does not
need an express stipulation to grant the same to the injured party. In the Second Amended Answer with
Counterclaim, the spouses Catungal added a prayer for the trial court to order the Register of Deeds to cancel the
annotations of the two contracts at the back of their OCT.
On October 24, 1991, Rodriguez filed an Amended Complaint,[28] adding allegations to the effect that the Catungals
were guilty of several misrepresentations which purportedly induced Rodriguez to buy the property at the price of
P25,000,000.00. Among others, it was alleged that the spouses Catungal misrepresented that their Lot 10963
includes a flat portion of land which later turned out to be a separate lot (Lot 10986) owned by Teodora Tudtud
who sold the same to one Antonio Pablo. The Catungals also allegedly misrepresented that the road right of way
will only traverse two lots owned by Anatolia Tudtud and her daughter Sally who were their relatives and who had
already agreed to sell a portion of the said lots for the road right of way at a price of P550.00 per square meter.
However, because of the Catungals' acts of offering the property to other buyers who offered to buy the road lots
for P2,500.00 per square meter, the adjacent lot owners were no longer willing to sell the road lots to Rodriguez at
P550.00 per square meter but were asking for a price of P3,500.00 per square meter. In other words, instead of
assisting Rodriguez in his efforts to negotiate the road right of way, the spouses Catungal allegedly intentionally
and maliciously defeated Rodriguez's negotiations for a road right of way in order to justify rescission of the said
contract and enable them to offer the property to other buyers.
Despite requesting the trial court for an extension of time to file an amended Answer,[29] the Catungals did not file
an amended Answer and instead filed an Urgent Motion to Dismiss[30] again invoking the ground of improper venue.
In the meantime, for failure to file an amended Answer within the period allowed, the trial court set the case for
pre-trial on December 20, 1991.
During the pre-trial held on December 20, 1991, the trial court denied in open court the Catungals' Urgent Motion
to Dismiss for violation of the rules and for being repetitious and having been previously denied. However, Atty.
Catungal refused to enter into pre-trial which prompted the trial court to declare the defendants in default and to
set the presentation of the plaintiffs evidence on February 14, 1992;[32]
On December 23, 1991, the Catungals filed a motion for reconsideration[33] of the December 20, 1991 Order
denying their Urgent Motion to Dismiss but the trial court denied reconsideration in an Order dated February 3,
1992.[34] Undeterred, the Catungals subsequently filed a Motion to Lift and to Set Aside Order of Default [35] but it
was likewise denied for being in violation of the rules and for being not meritorious.[36]On February 28, 1992, the
Catungals filed a Petition for Certiorari and Prohibition[37] with the Court of Appeals, questioning the denial of their
motion to dismiss and the order of default. This was docketed asCA-G.R. SP No. 27565.
Meanwhile, Rodriguez proceeded to present his evidence before the trial court.
In a Decision dated May 30, 1992, the trial court ruled in favor of Rodriguez, finding that: (a) under the contract it
was complainant (Rodriguez) that had the option to rescind the sale; (b) Rodriguez's obligation to pay the balance
of the purchase price arises only upon successful negotiation of the road right of way; (c) he proved his diligent
efforts to negotiate the road right of way; (d) the spouses Catungal were guilty of misrepresentation which
defeated Rodriguez's efforts to acquire the road right of way; and (e) the Catungals' rescission of the contract had
no basis and was in bad faith. Thus, the trial court made the injunction permanent, ordered the Catungals to
reduce the purchase price by the amount of acquisition of Lot 10963 which they misrepresented was part of the
property sold but was in fact owned by a third party and ordered them to pay P100,000.00 as damages,

P30,000.00 as attorney's fees and costs.

The Catungals appealed the decision to the Court of Appeals, asserting the commission of the following errors by
the trial court in their appellants' brief8 dated February 9, 1994:
I
THE COURT A QUO ERRED IN NOT DISMISSING OF (SIC) THE CASE ON THE GROUNDS OF IMPROPER VENUE AND
LACK OF JURISDICTION.
II
THE COURT A QUO ERRED IN CONSIDERING THE CASE AS A PERSONAL AND NOT A REAL ACTION.
III
GRANTING WITHOUT ADMITTING THAT VENUE WAS PROPERLY LAID AND THE CASE IS A PERSONAL ACTION, THE
COURT A QUO ERRED IN DECLARING THE DEFENDANTS IN DEFAULT DURING THE PRE-TRIAL WHEN AT THAT TIME
THE DEFENDANTS HAD ALREADY FILED THEIR ANSWER TO THE COMPLAINT.
IV
THE COURT A QUO ERRED IN CONSIDERING THE DEFENDANTS AS HAVING LOST THEIR LEGAL STANDING IN
COURT WHEN AT MOST THEY COULD ONLY BE CONSIDERED AS IN DEFAULT AND STILL ENTITLED TO NOTICES OF
ALL FURTHER PROCEEDINGS ESPECIALLY AFTER THEY HAD FILED THE MOTION TO LIFT THE ORDER OF DEFAULT.
V
THE COURT A QUO ERRED IN ISSUING THE WRIT [OF] PRELIMINARY INJUNCTION RESTRAINING THE EXERCISE
OF ACTS OF OWNERSHIP AND OTHER RIGHTS OVER REAL PROPERTY OUTSIDE OF THE COURT'S TERRITORIAL
JURISDICTION AND INCLUDING PERSONS WHO WERE NOT BROUGHT UNDER ITS JURISDICTION, THUS THE
NULLITY OF THE WRIT.
VI
THE COURT A QUO ERRED IN NOT RESTRAINING ITSELF MOTU PROP[R]IO FROM CONTINUING WITH THE
PROCEEDINGS IN THE CASE AND IN RENDERING DECISION THEREIN IF ONLY FOR REASON OF COURTESY AND
FAIRNESS BEING MANDATED AS DISPENSER OF FAIR AND EQUAL JUSTICE TO ALL AND SUNDRY WITHOUT FEAR
OR FAVOR IT HAVING BEEN SERVED EARLIER WITH A COPY OF THE PETITION FOR CERTIORARI QUESTIONING
ITS VENUE AND JURISDICTION IN CA-G.R. NO. SP 27565 IN FACT NOTICES FOR THE FILING OF COMMENT
THERETO HAD ALREADY BEEN SENT OUT BY THE HONORABLE COURT OF APPEALS, SECOND DIVISION, AND THE
COURT A QUO WAS FURNISHED WITH COPY OF SAID NOTICE.
VII
THE COURT A QUO ERRED IN DECIDING THE CASE IN FAVOR OF THE PLAINTIFF AND AGAINST THE DEFENDANTS
ON THE BASIS OF EVIDENCE WHICH ARE IMAGINARY, FABRICATED, AND DEVOID OF TRUTH, TO BE STATED IN
DETAIL IN THE DISCUSSION OF THIS PARTICULAR ERROR, AND, THEREFORE, THE DECISION IS REVERSIBLE.[39]
On August 31, 1995, after being granted several extensions, Rodriguez filed his appellee's brief, [40]essentially
arguing the correctness of the trial court's Decision regarding the foregoing issues raised by the Catungals.
Subsequently, the Catungals filed a Reply Brief[41] dated October 16, 1995.
From the filing of the appellants' brief in 1994 up to the filing of the Reply Brief, the spouses Catungal were
represented by appellant Jose Catungal himself. However, a new counsel for the Catungals, Atty. Jesus N.
Borromeo (Atty. Borromeo), entered his appearance before the Court of Appeals on September 2, 1997. [42] On the
same date, Atty. Borromeo filed a Motion for Leave of Court to File Citation of Authorities [43] and a Citation of
Authorities.[44] This would be followed by Atty. Borromeo's filing of an Additional Citation of Authority and Second
Additional Citation of Authority both on November 17, 1997.[45]
During the pendency of the case with the Court of Appeals, Agapita Catungal passed away and thus, her husband,
Jose, filed on February 17, 1999 a motion for Agapita's substitution by her surviving children [46]
On August 8, 2000, the Court of Appeals rendered a Decision in the consolidated cases CA-G.R. CV No. 40627 and
CA-G.R. SP No. 27565,[47] affirming the trial court's Decision.

In a Motion for Reconsideration dated August 21, 2000,[48] counsel for the Catungals, Atty. Borromeo, argued for
the first time that paragraphs 1(b) and 5[49] of the Conditional Deed of Sale, whether taken separately or jointly,
violated the principle of mutuality of contracts under Article 1308 of the Civil Code and thus, said contract was
void ab initio. He adverted to the cases mentioned in his various citations of authorities to support his argument of
nullity of the contract and his position that this issue may be raised for the first time on appeal.
Meanwhile, a Second Motion for Substitution[50] was filed by Atty. Borromeo in view of the death of Jose Catungal.
In a Resolution dated January 30, 2001, the Court of Appeals allowed the substitution of the deceased Agapita and
Jose Catungal by their surviving heirs and denied the motion for reconsideration for lack of merit
Hence, the heirs of Agapita and Jose Catungal filed on March 2001 the present petition for review,[51]which
essentially argued that the Court of Appeals erred in not finding that paragraphs 1(b) and/or 5 of the Conditional
Deed of Sale, violated the principle of mutuality of contracts under Article 1308 of the Civil Code. Thus, said
contract was supposedly void ab initio and the Catungals' rescission thereof was superfluous.
In his Comment,[52] Rodriguez highlighted that (a) petitioners were raising new matters that cannot be passed
upon on appeal; (b) the validity of the Conditional Deed of Sale was already admitted and petitioners cannot be
allowed to change theories on appeal; (c) the questioned paragraphs of the Conditional Deed of Sale were valid;
and (d) petitioners were the ones who committed fraud and breach of contract and were not entitled to relief for
not having come to court with clean hands.
The Court gave due course to the Petition[53] and the parties filed their respective Memoranda.
The issues to be resolved in, the case at bar can be summed into two questions:
I.

II.

Are petitioners allowed to raise their theory of nullity of the Conditional Deed of Sale for the first time on
appeal?
Do paragraphs 1(b) and 5 of the Conditional Deed of Sale violate the principle of mutuality of contracts
under Article 1308 of the Civil Code?

On petitioners' change of theory

Petitioners claimed that the Court of Appeals should have reversed the trial courts' Decision on the ground of the
alleged nullity of paragraphs 1(b) and 5 of the Conditional Deed of Sale notwithstanding that the same was not
raised as an error in their appellants' brief. Citing Catholic Bishop of Balanga v. Court of Appeals,[54] petitioners
argued in the Petition that this case falls under the following exceptions:
(3) Matters not assigned as errors on appeal but consideration of which is necessary in arriving at a just decision
and complete resolution of the case or to serve the interest of justice or to avoid dispensing piecemeal justice;
(4) Matters not specifically assigned as errors on appeal but raised in the trial court and are matters of record
having some bearing on the issue submitted which the parties failed to raise or which the lower court ignored;
(5) Matters not assigned as errors on appeal but closely related to an error assigned; and
(6) Matters not assigned as errors but upon which the determination of a question properly assigned is dependent.
We are not persuaded.
This is not an instance where a party merely failed to assign an issue as an error in the brief nor failed to argue a
material point on appeal that was raised in the trial court and supported by the record. Neither is this a case where
a party raised an error closely related to, nor dependent on the resolution of, an error properly assigned in his
brief. This is a situation where a party completely changes his theory of the case on appeal and abandons his
previous assignment of errors in his brief, which plainly should not be allowed as anathema to due process.
Petitioners should be reminded that the object of pleadings is to draw the lines of battle between the litigants and
to indicate fairly the nature of the claims or defenses of both parties.[56] In Philippine National Construction
Corporation v. Court of Appeals,[57] we held that "[w]hen a party adopts a certain theory in the trial court, he will
not be permitted to change his theory on appeal, for to permit him to do so would not only be unfair to the other
party but it would also be offensive' to the basic rules of fair play, justice and due process."

We have also previously ruled that "courts of justice have no jurisdiction or power to decide a question not in issue.
Thus, a judgment that goes beyond the issues and purports to adjudicate something on which the court did not
hear the parties, is not only irregular but also extrajudicial and invalid. The rule rests on the fundamental tenets of
fair play."[59]
During the proceedings before the trial court, the spouses Catungal never claimed that the provisions in the
Conditional Deed of Sale, stipulating that the payment of the balance of the purchase price was contingent upon
the successful negotiation of a road right of way (paragraph 1[b]) and granting Rodriguez the option to rescind
(paragraph 5), were void for allegedly making the fulfillment of the contract dependent solely on the will of
Rodriguez.
On the contrary, with respect to paragraph 1(b), the Catungals did not aver in the Answer (and its amended
versions) that the payment of the purchase price was subject to the will of Rodriguez but rather they claimed that
paragraph 1(b) in relation to 1(c) only presupposed a reasonable time be given to Rodriguez to negotiate the road
right of way. However, it was petitioners' theory that more than sufficient time had already been given Rodriguez
to negotiate the road right of way. Consequently, Rodriguez's refusal/failure to pay the balance of the purchase
price, upon demand, was allegedly indicative of lack of funds and a breach of the contract on the part of Rodriguez.
Anent paragraph 5 of the Conditional Deed of Sale, regarding Rodriguez's option to rescind, it was petitioners'
theory in the court a quo that notwithstanding such provision, they retained the right to rescind the contract for
Rodriguez's breach of the same under Article 1191 of the Civil Code.
Verily, the first time petitioners raised their theory of the nullity of the Conditional Deed of Sale in view of the
questioned provisions was only in their Motion for Reconsideration of the Court of Appeals' Decision, affirming the
trial court's judgment. The previous filing of various citations of authorities by Atty. Borromeo and the Court of
Appeals' resolutions noting such citations were of no moment. The citations of authorities merely listed cases and
their main rulings without even any mention of their relevance to the present case or any prayer for the Court of
Appeals to consider them. In sum, the Court of Appeals did not err in disregarding the citations of authorities or in
denying petitioners' motion for reconsideration of the assailed August 8, 2000 Decision in view of the proscription
against changing legal theories on appeal.
Ruling on the questioned provisions of the
Conditional Deed of Sale
Even assuming for the sake of argument that this Court may overlook the procedural misstep of petitioners, we still
cannot uphold their belatedly proffered arguments.
At the outset, it should be noted that what the parties entered into is a Conditional Deed of Sale, whereby the
spouses Catungal agreed to sell and Rodriguez agreed to buy Lot 10963 conditioned on the payment of a certain
price but the payment of the purchase price was additionally made contingent on the successful negotiation of a
road right of way. It is elementary that "[i]n conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes
the condition."[60]
Petitioners rely on Article 1308 of the Civil Code to support their conclusion regarding the claimed nullity of the
aforementioned provisions. Article 1308 states that "[t]he contract must bind both contracting parties; its validity
or compliance cannot be left to the will of one of them."
Article 1182 of the Civil Code, in turn, provides:
Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation
shall be void. If it depends upon chance or upon the will of a third person, the obligation shall take effect in
conformity with the provisions of this Code.
In the past, this Court has distinguished between a condition imposed on the perfection of a contract and a
condition imposed merely on the performance of an obligation. While failure to comply with the first condition
results in the failure of a contract, failure to comply with the second merely gives the other party the option to
either refuse to proceed with the sale or to waive the condition.[61] This principle is evident in Article 1545 of the
Civil Code on sales, which provides in part:
Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition which is not
performed, such party may refuse to proceed with the contract or he may waive performance of the condition x x
x.
Paragraph 1(b) of the Conditional Deed of Sale, stating that respondent shall pay the balance of the purchase price
when he has successfully negotiated and secured a road right of way, is not a condition on the perfection of the

contract nor on the validity of the entire contract or its compliance as contemplated in Article 1308. It is a condition
imposed only on respondent's obligation to pay the remainder of the purchase price. In our view and applying
Article 1182, such a condition is not purely potestative as petitioners contend. It is not dependent on the sole will
of the debtor but also on the will of third persons who own the adjacent land and from whom the road right of way
shall be negotiated. In a manner of speaking, such a condition is likewise dependent on chance as there is no
guarantee that respondent and the third party-landowners would come to an agreement regarding the road right of
way. This type of mixed condition is expressly allowed under Article 1182 of the Civil Code.
Analogous to the present case is Romero v. Court of Appeals,[62] wherein the Court interpreted the legal effect of a
condition in a deed of sale that the balance of the purchase price would be paid by the vendee when the vendor
has successfully ejected the informal settlers occupying the property. In Romero, we found that such a condition
did not affect the perfection of the contract but only imposed a condition on the fulfillment of the obligation to pay
the balance of the purchase price, to wit:
From the moment the contract is perfected, the parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good
faith, usage and law. Under the agreement, private respondent is obligated to evict the squatters on the
property. The ejectment of the squatters is a condition the operative act of which sets into motion the
period of compliance by petitioner of his own obligation, i.e., to pay the balance of the purchase price.
Private respondent's failure "to remove the squatters from the property" within the stipulated period
gives petitioner the right to either refuse to proceed! with the agreement or waive that condition in
consonance with Article 1545 of the Civil Code. This option clearly belongs to petitioner and not to private
respondent.
We share the opinion of the appellate court that the undertaking required of private respondent does
not constitute a "potestative condition dependent solely on his will" that might, otherwise, be void in
accordance with Article 1182 of the Civil Code but a "mixed" condition "dependent not on the will of
the vendor alone but also of third persons like the squatters and government agencies and personnel
concerned." We must hasten to add, however, that where the so-called "potestative condition" is imposed not on
the birth of the obligation but on its fulfillment, only the condition is avoided, leaving unaffected the obligation
itself.[63] (Emphases supplied.)
From the provisions of the Conditional Deed of Sale subject matter of this case, it was the vendee (Rodriguez) that
had the obligation to successfully negotiate and secure the road right of way. However, in the decision of the trial
court, which was affirmed by the Court of Appeals, it was found that respondent Rodriguez diligently exerted
efforts to secure the road right of way but the spouses Catungal, in bad faith, contributed to the collapse of the
negotiations for said road right of way. To quote from the trial court's decision:
It is therefore apparent that the vendee's obligations (sic) to pay the balance of the purchase price arises only
when the road-right-of-way to the property shall have been successfully negotiated, secured and provided. In other
words, the obligation to pay the balance is conditioned upon the acquisition of the road-right-of-way, in accordance
with paragraph 2 of Article 1181 of the New Civil Code. Accordingly, "an obligation dependent upon a suspensive
condition cannot be demanded until after the condition takes place because it is only after the fulfillment of the
condition that the obligation arises." (Javier v[s] CA 183 SCRA) Exhibits H, D, P, R, T, FF and JJ show that plaintiff
[Rodriguez] indeed was diligent in his efforts to negotiate for a road-right-of-way to the property. The
written offers, proposals and follow-up of his proposals show that plaintiff [Rodriguez] went all out in his efforts to
immediately acquire an access road to the property, even going to the extent of offering P3,000.00 per square
meter for the road lots (Exh. Q) from the original P550.00 per sq. meter. This Court also notes that defendant
(sic) [the Catungals] made misrepresentation in the negotiation they have entered into with
plaintiff [Rodriguez]. (Exhs. F and G) The misrepresentation of defendant (sic) [the Catungals] as to the third lot
(Lot 10986) to be part and parcel of the subject property [(]Lot 10963) contributed in defeating the plaintiffs
[Rodriguez's] effort in acquiring the road-right-of-way to the property. Defendants [the Catungals]
cannot now invoke the non-fulfillment of the condition in the contract as a ground for rescission when
defendants [the Catungals] themselves are guilty of preventing the fulfillment of such condition.
From the foregoing, this Court is of the considered view that rescission of the conditional deed of sale by the
defendants is without any legal or factual basis.[64] x x x. (Emphases supplied.)
In all, we see no cogent reason to disturb the foregoing factual findings of the trial court.
Furthermore, it is evident from the language of paragraph 1(b) that the condition precedent (for respondent's
obligation to pay the balance of the purchase price to arise) in itself partly involves an obligation to do, i.e., the
undertaking of respondent to negotiate and secure a road right of way at his own expense. [65] It does not escape
our notice as well, that far from disclaiming paragraph 1(b) as void, it was the Catungals' contention before the
trial court that said provision should be read in relation to paragraph 1(c) which stated:

c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility of the VENDEE to
secure and any or all cost relative to the acquisition thereof shall be borne solely by the VENDEE. He shall,
however, be accorded with enough time necessary for the success of his endeavor; granting him a free
hand in negotiating for the passage.[66] (Emphasis supplied.)
The Catungals' interpretation of the foregoing stipulation was that Rodriguez's obligation to negotiate and secure a
road right of way was one with a period and that period, i.e., "enough time" to negotiate, had already lapsed by
the time they demanded the payment of P5,000,000.00 from respondent. Even assuming arguendo that the
Catungals were correct that the respondent's obligation to negotiate a road right of way was one with an uncertain
period, their rescission of the Conditional Deed of Sale would still be unwarranted. Based on their own theory, the
Catungals had a remedy under Article 1197 of the Civil Code, which mandates:
Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a
period was intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of the debtor.
In every case, the courts shall determine such period as may under the circumstances have been probably
contemplated by the parties. Once fixed by the courts, the period cannot be changed by them.
What the Catungals should have done was to first file an action in court to fix the period within which Rodriguez
should accomplish the successful negotiation of the road fight of way pursuant to the above quoted provision.
Thus, the Catungals' demand for Rodriguez to make an additional payment of P5,000,000.00 was premature and
Rodriguez's failure to accede to such demand did not justify the rescission of the contract.
With respect to petitioners' argument that paragraph 5 of the Conditional Deed of Sale likewise rendered the said
contract void, we find no merit to this theory. Paragraph 5 provides:
5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his option to rescind the
herein Conditional Deed of Sale, the VENDEE shall notify the VENDOR by way of a written notice relinquishing his
rights over the property. The VENDEE shall then be reimbursed by the VENDOR the sum of FIVE HUNDRED
THOUSAND PESOS (500,000,00) representing the downpayment, interest free, payable but contingent upon the
event that the VENDOR shall have been able to sell the property to another party.[67]
Petitioners posited that the above stipulation was the "deadliest" provision in the Conditional Deed of Sale for
violating the principle of mutuality of contracts since it purportedly rendered the contract subject to the will of
respondent.
We do not agree.
It is petitioners' strategy to insist that the Court examine the first sentence of paragraph 5 alone and, resist a
correlation of such sentence with other provisions of the contract. Petitioners' view, however, ignores a basic rule
in the interpretation of contracts - that the contract should be taken as a whole.
Article 1374 of the Civil Code provides that "[t]he various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them taken jointly." The same Code further
sets down the rule that "[i]f some stipulation of any contract should admit of several meanings, it shall be
understood as bearing that import which is most adequate to render it effectual."[68]
Similarly, under the Rules of Court it is prescribed that "[i]n the construction of an instrument where there are
several provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all"[69] and
"for the proper construction of an instrument, the circumstances under which it was made, including the situation
of the subject thereof and of the parties to it, may be shown, so that the judge may be placed in the position of
those whose language he is to interpret."[70]
Bearing in mind the aforementioned interpretative rules, we find that the first sentence of paragraph 5 must be
taken in relation with the rest of paragraph 5 and with the other provisions of the Conditional Deed of Sale.
Reading paragraph 5 in its entirety will show that Rodriguez's option to rescind the contract is not absolute as it is
subject to the requirement that there should be written notice to the vendor and the vendor shall only return
Rodriguez's downpayment of P500,000.00, without interest, when the vendor shall have been able to sell the
property to another party. That what is stipulated to be returned is oniy the downpayment of P500,000.00 in the
event that Rodriguez exercises his option to rescind is significant. To recall, paragraph 1(b) of the contract clearly
states that the installments on the balance of the purchase price shall only be paid upon successful negotiation and
procurement of a road right of way. It is clear from such provision that the existence of a road right of way is a
material consideration for Rodriguez to purchase the property. Thus, prior to him being able to procure the road

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

the return of his downpayment, in accordance with the provisions of paragraphs 1(b) and 5 of the Conditional Deed
of Sale or (b) waive the road right of way and pay the balance of the deducted purchase price as determined in the
RTC Decision dated May 30, 1992.
No pronouncement as to costs.
SO ORDERED.
Corona, C.J., (Chairperson), Velasco, Jr., Del Castillo, and Perez, JJ., concur.