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G.R. No.

3298 February 27, 1907

FELISA NEPOMUCENO AND MARCIANA CANON, plaintiffs-appellees,


vs.
GENARO HEREDIA, defendant-appellant.

Ramon Salinas for appellant.


Hartigan, Rohde & Gutierrez for appellees.

CARSON, J.:

The complaint alleges that on the 24th of September, 1904, the defendant had in his
possession for administration 500 pesos, the property of Felisa Nepomuceno, and 1,500
pesos, the property of Marciana Canon; that on that day he entered into an agreement with
them, in accordance with which he was to invest this money in a mortgage, or conditional
purchase of good real estate, the investment to bring in 1 per centum per month, and the
principal to be payable in one year; and that the defendant has failed to make the
investment in accordance with his agreement and has refused, and continues to refuse, to
return the money.

The following facts are fully established by the evidence of record, and are substantially
uncontroverted: That the defendant is the business adviser of the plaintiff, Marciana Canon,
and as such had in his hands 1,500 pesos paid to him on her account on the 22d of
September, 1904; that about the same time Felisa Nepomuceno, the other plaintiff, had an
unsecured debt due her of 500 pesos from one Marcelo Leao; that on demand for security
her debtor proposed to give her a deed of conditional sale (venta con pacto de retro) to a
certain tract of land, together with the buildings and improvements thereon, in consideration
of 2,000 pesos, she to be credited with 500 pesos on the purchase price and that to
advance the balance of 1,500 pesos; that knowing that the defendant had in his hands that
amount of money, the property of her coplaintiff, Marciana Canon, she proposed to the said
Marciana Canon that they make a joint investment in the land; that together they discussed
the proposition with the defendant and later directed him to draw up the necessary
documents; that a deed of conditional sale of the land was executed on the 24th of
September, 1904, the vendor reserving the privilege of repurchasing the land at the end of
one year and obligating himself to make monthly payments in considerations of the right to
retain the land in possession in sufficient amount to bring the plaintiffs' interest on their
money at the rate of 17 per centum per annum, and the vendees, the plaintiffs in this action,
paying to the vendor the sum of 1,500 pesos, cash, and discharging the above mentioned
credit of 500 pesos due the plaintiff, Felisa Nepomuceno; that the title to the land under the
deed was placed in the name of the defendant, Genaro Heredia; and that a few days
thereafter the defendant, at the request of the plaintiffs, executed before a notary public a
formal memorandum of the fact that the plaintiff had furnished the money with which the
land had been purchased, said memorandum setting forth the amount furnished by each
and their proportionate interest in the investment.

The plaintiffs insists that the defendant took the deed to the land in his own name without
their knowledge or consent, but we think that the weight of the evidence sustains the
defendant's claim that he did so by their express direction as their agent, and for their
convenience, and that in any event his action in this regard was ratified and approved by
their request for and acceptance of the memorandum setting out the facts and by their
continuance in the enjoyment of the profits of the transaction after the purchase and without
making any effort to have the title transferred in their own names.

The plaintiffs also allege that the defendant, without express authority from them, undertook
to extend, and did extend, the period within which the vendor had the privilege or
repurchase, but we think that this action in this contention was also ratified, approved, and
acquiesced in by the plaintiffs and that in any event it can have no bearing on the merits of
the question submitted on appeal.

More than a year after the transactions above set out, during which time the vendor of the
land continued to pay, and the plaintiff to receive, the stipulated payments in consideration
of the right to retain possession, a cloud was cast on the title to the land by the institution of
proceedings for the recovery of possession by third parties, which proceedings are still
pending on appeal from the judgment of the Court of First Instance, and the plaintiffs
thereupon brought this action in which they are seeking to recover from the defendant the
whole of the amount of money invested, with interest from the date of the investment,
alleging with that purchase of the land was not made in accordance with their instructions,
or on their account.

The trial court gave judgment in favor of the plaintiffs for the full amount claimed on the
ground that while acting as their agent the defendant invested their money in land to which
the vendor had not a good and sufficient title, contrary to the tenor of his instructions. On
appeal the plaintiffs ask that this judgment be affirmed, not on the grounds assigned by the
trial judge, but because, as they insists, their money was invested by the defendant in his
own name and on his account, and not as their agent, or on behalf. The judgment can not
be sustained on either ground.

It was clearly established at the trial that the defendant was acting merely as the agent for
the plaintiffs throughout the entire transaction; that the purchase of the land was made not
only with their full knowledge and consent, but at their suggestion; and that after the
purchase had been effected, the plaintiffs, with full knowledge of the facts, approved and
ratified the actions of their agent in the premises. There is nothing in the record which would
indicate that the defendant failed to exercise reasonable care and diligence in the
performance of his duty as such agent, or that he undertook to guarantee the vendors title
to the land purchased by direction of the plaintiffs.

The judgment of the lower court should be, and is hereby, reversed, with the costs against
the plaintiffs in the first instance and without special condemnation of costs in this instance.
After the expiration of twenty days let judgment be entered in accordance herewith, and ten
days thereafter let the record be returned to the court wherein it originated for execution. So
ordered.

Arellano, C.J., Torres, Mapa, Willard and Tracey, JJ., concur.

G.R. No. L-8346 March 30, 1915


GUTIERREZ HERMANOS, plaintiff-appellant,
vs.
ORIA HERMANOS & CO., defendant-appellant.

Rafael de la Sierra for plaintiff.


Chicote and Miranda for defendant.

TORRES, J.:

On August 12, 1909, counsel for the mercantile firm of Gutierrez Hermanos of this city filed
a written complaint in the Court of First Instance of Manila against the commercial concern
of Oria Hermanos & Co. of Laoang, Province of Samar, alleging therein as a cause of action
that between plaintiff and defendant there have existed commercial relations which gave
rise to the opening of a mutual current account, at 8 percent interest, under the name of
Oria Hermanos & Co., on the books of the plaintiff Gutierrez Hermanos; that, on January
11, 1909, plaintiff transmitted to defendant an abstract of the latter's current account on
December 31, 1908, which showed a balance in plaintiff's favor of P144,473.78 and which
was approved by defendant, Oria Hermanos & Co., by a letter of March 9, 1909, which was
copied literally in the complaint; that, on May 25, 1909, plaintiff notified defendant that the
current account existing between them would be closed at the end of thirty days counting
from that date, at the expiration of which period defendant should pay any debit balance
that might be owing; that, on June 30 of the same year, Gutierrez Hermanos transmitted to
the defendant, Oria Hermanos & Co., the statement of the latter's current account up to that
date and, confirming its previous letter to the defendant of May 25, 1909, called attention to
the necessity of paying the balance, which then amounted to P147,204.28; that the
defendant firm, notwithstanding the said demands and others subsequently made, and
without having made any objection whatever to the said statement of account, refused to
pay the principal and interest owing on the said account. Plaintiff's counsel therefore prayed
that Oria Hermanos and Co. be sentenced to pay the sum of P147,204.28, besides the
interest thereon at the rate of 8 per cent annum from June 30, 1909, and the costs.

Defendant filed its answer on November 9, 1909, setting up four cross complaints and six
counterclaims against the plaintiff, Gutierrez Hermanos, and specifically denied such of the
allegations of the complaint as were not in agreement with its answer. Plaintiff demurred to
certain paragraphs of the answer and as to the others thereof prayed the court to order
defendant to make its allegations more specific. The court overruled this demurrer, but
granted the petition that defendant should make its allegations more specific in the second,
third, and fourth cross complaints and first counterclaim.

In compliance with the said order, defendant, on May 4, 1910, filed am amended answer in
which it specifically admitted paragraphs 1 and 2 of the complaint, and as the first cross
complaint, alleged that, by reason of mercantile relations and the opening of a mutual
current account from May 1, 1900, the plaintiff had obligated itself periodically to send to the
defendant firm a memorandum or statement of the current account, and further obligated
itself, in case the said mercantile relations should be finally terminated, to present a general
and complete account, duly supported by vouchers and other proofs; that plaintiff, Gutierrez
Hermanos, had contended itself by sending to Oria Hermanos and Co. some memoranda or
abstracts of account, accepted by defendant as such "abstract of account," without the
latter's having waived its right to demand the presentation, as agreed upon, of the vouchers
and other proofs upon the closing of the current account, a stipulation which Gutierrez
Hermanos had failed to comply with. Defendant therefore prayed that the plaintiff, Gutierrez
Hermanos, be sentenced to render and present the said final account, duly accompanied by
vouchers, in conformity with the agreement made.

In the second cross complaint defendant alleged that, by virtue of a commission contract,
Oria Hermanos & Co. had from the 1st of May, 1900, to the 7th of September, 1909,
forwarded 65,119.66 piculs of copra, 70,420 bales of hemp, and 5,175.03 piculs of loose
hemp to Gutierrez Hermanos for sale on commission; that the latter firm informed the
defendant that it, the plaintiff, had sold the said products to third persons for the account of
the defendant, Oria Hermanos & Co.; that by reason of said sale or sales Gutierrez
Hermanos collected large and important sums for commission and brokerage and had
turned in for the goods sold amounts less than what they were actually worth in Manila; that
defendant, Oria Hermanos & Co., had recently received information that these lots of hemp
and copra were purchased by the firm of Gutierrez Hermanos for itself, notwithstanding that
the latter had stated to its principals, Oria Hermanos & Co., that they had been sold to third
persons; that it collected by reason of such sale, commission and brokerage; acts which
redound to the fraud, injury, and prejudice of the defendant, Oria Hermanos and Co.
Therefore the latter prayed that Gutierrez Hermanos be sentenced to render a general and
complete account of the amounts of hemp and copra received by it for sale on commission
from the year 1900 to 1909, setting out the dates of the receipt of the said merchandise,
dates of the sales, names of the purchasers, prices stipulated, discounts obtained, and
commissions collected by Gutierrez Hermanos, etc.

Defendant alleged as the third cross complaint that, by virtue of the said commission
contract, Gutierrez Hermanos sent to the firm of Oria Hermanos & Co., at different times
according to the latter's request, from May 1, 1900, up to the date of the closing of the
current account, 193,310 sacks of rice alleged to have been purchased from third persons,
wherefore Oria Hermanos & Co. paid a certain stipulated percentage as commission or
brokerage for the sales; but that now Oria Hermanos & Co. have received information which
it believes to be true, and so alleges, that the rice so forwarded had not been purchased
from third persons, but belonged to Gutierrez Hermanos who sold it directly to defendant,
collecting from the latter excessive prices, advance payments, commission and interest, all
to the fraud and injury of the defendant firm. Oria Hermanos & Co., therefore, prayed that
Gutierrez Hermanos be sentenced to render an account, duly supported by vouchers, of all
the lots of rice forwarded to Oria Hermanos, with a statement of the dates of the orders,
amounts, dates of the purchases, names of purchasers, amounts charged to Oria
Hermanos & Co., etc.

In the fourth cross complaint defendant related that, by reason of the same commission
contract existing between the two firms, Gutierrez Hermanos had sent to Oria Hermanos &
Co., from the 1st of May, 1900, up to the closing of the current account, various quantities of
salt, petroleum, tobacco, groceries and beverages, and had collected a commission for the
purchase thereof, that afterwards Oria Hermanos & Co. learned that the forwarding firm, the
plaintiff, had set larger prices on the said goods than it had actually paid for them and had
unduly charged such prices, before it had paid them, to the defendant's account, collecting
for itself commission and interest thereon, to the fraud and prejudice of the defendant firm.
Therefore the latter prayed that Gutierrez Hermanos be sentenced to render a complete
account, accompanied by vouchers, of the shipments aforementioned.

In the first counterclaim filed by the defendant, Oria Hermanos & Co., petition was made
that Gutierrez Hermanos be sentenced to pay it the sum of P13,894.60, as the amount of
an overcharge of 3 per cent in interest collected from defendant, in a charge of 8 percent
interest per annum on a private debt of P47,649 drawing 5 per cent interest per annum,
which latter amount Juan T. Molleda owed the firm of Gutierrez Hermanos and payment for
which was assumed by Oria Hermanos & Co. upon its organization into a mercantile firm in
May, 1900.

In the second counterclaim the defendant firm, Oria Hermanos & Co. set forth: That, on
April 18, 1900, its predecessor had ordered its consignee in Manila, Gutierrez Hermanos, to
insure against all war risks the stocks of hemp and merchandise which the said firm
possessed in the pueblo of Laoang, for P35,000, and likewise those it had in Catubig, for
P32,000; that Gutierrez Hermanos did not comply with the said order, only insuring the
stocks in Laoang for P67,000, leaving those of Catubig totally unprotected; that when, on
May 10, 1900, this latter pueblo was destroyed by fire Oria Hermanos & Co. lost all its
stocks there and could not collect the insurance of P32,000 on the said property, which,
through the fault, negligence, and omission of Gutierrez Hermanos had not been insured.
This amount last mentioned, added to the premiums, expenses, and interest paid by Oria
Hermanos & Co. aggregates the sum of P63,700, payment of which defendant demanded
of plaintiff.

As a third counterclaim it is alleged that, on May 18, 1900, the firm of Gutierrez Hermanos,
complying with orders from Oria Hermanos, & Co., insured against all war risks, in a certain
insurance company of London, England, whose agent in the Philippine Islands was
Stevenson & Co., the stock of hemp which the defendant company had in the pueblo of
Catarman, Samar, for 3,000 pounds sterling, and paid the premiums thereon at the rate of
10 per cent per quarter; that, during the first quarter for which the premiums had been so
paid, all the insured tobacco belonging to Oria Hermanos & Co., in Catarman, was stolen by
the insurgent forces; that then the underwriter refused to pay the amount of the insurance
on the ground that Gutierrez Hermanos had made out the said insurance defectively
wherefore Oria Hermanos & Co. ordered its agent Gutierrez Hermanos to institute
proceedings before the courts of these Islands for the collection of the amount of the said
insurance; but that plaintiff instead brought suit for the purpose before the courts of England
and by its negligence, indolence, and carelessness had, during a period of eight years,
obliged the defendant firm to incur costly expenditures which, added to the amount of the
insurance premiums paid, attorney's fees, costs, interest, etc., aggregated P67,000; that for
this sum, together with legal interests thereon, it prayed that it be reimbursed by Gutierrez
Hermanos.

With respect to the fourth counterclaim, the defendant firm set forth that, under the
commission contract and the current account contract existing between both companies,
Gutierrez Hermanos bound itself to acquire for and forward to Oria Hermanos & Co. such
rice and other effects, including cash, as defendant might order from plaintiff; but that, since
the beginning of 1904, the firm of Gutierrez Hermanos maliciously failed to make the
consignments of rice and other effects, under the false pretext that there were no such
articles in the market, thereby preventing the said firm of Oria Hermanos & Co. from
obtaining a profit of not less than P25,000 and, besides, injuring its fame, credit, and
mercantile reputation in the Island of Samar to the extent of approximately P50,000.
Therefore defendant prayed that Gutierrez Hermanos be sentenced to pay it the sum of
P75,000 as the amount of such losses and damages occasioned it.

As the fifth counterclaim defendant alleged that, for a period of twenty-two months, from the
month of May, 1900, it chartered several of its boats to the American military government;
that the charter parties aggregated a value of P400,000; that these contracts were executed
and the amounts thereof collected by Messrs. Oria & Fuster, members of the defendant
company, who turned the said amounts into the current account they had with the firm of
Gutierrez Hermanos; but the plaintiff charged in the current account, appropriated to itself,
and collected from the funds of Oria Hermanos & Co. which it had in its possession, 2 1/2
per cent of the amount collected by reason of the said charter parties for commission and
brokerage, there being no stipulation whatever relative to the collection of this commission;
that Gutierrez Hermanos, moreover, charged against the said amount collected by it 8 per
cent compound interest; and that the sum in such wise improperly charged and
appropriated amounted, together with the accumulated interest, to P15,000, which
defendant prayed be returned to it by Gutierrez Hermanos.

The object of the sixth counterclaim is the recovery of P31,000, in which amount defendant,
Oria Hermanos & Co., alleged it was injured by Gutierrez Hermanos having arbitrarily
charged in the current account compound interest at the rate of 8 per cent per semester
from the year 1900 up to the time of the closing of the said current account, while the
agreement made between both firms upon opening the said account was that the latter
should bear a mutual interest of 8 per cent per annum only.

On May 14, 1910, counsel for Gutierrez Hermanos filed a written answer to the foregoing
countercomplaints and counterclaims, and prayed that plaintiff be absolved therefrom.

On August 1, 1910, this case came up for hearing and was continued on the following days
until on April 24, 1912, the Honorable S. del Rosario, judge, rendering judgment therein, the
dispositive part of which is as follows: "Messrs. Oria Hermanos & Co. are sentenced to pay
to Messrs. Gutierrez Hermanos the sum of P147,204.28, with interest thereon at the rate of
8 per cent per annum from the 30th of June, 1909, after deduction of all the sums that result
as balances, in favor of the former, from the accounts that shall be rendered by the latter, in
conformity with the cross complaints and counterclaims that have been admitted.

Messrs. Gutierrez Hermanos are sentenced:

(a) With respect to the first cross complaint, to render to Messrs. Oria Hermanos &
co. accounts, supported by vouchers, only of those articles in the acquisition of
which fraud, deceit, or error has been proven and to which the following
pronouncements refer.

(b) As regards the second cross complaint, to return to Messrs. Oria Hermanos &
Co., after due settlement of the accounts, all the sums collected as internal-revenue
tax and referred to in the invoices of rice, salt, petroleum, lime, rattan, flour, aniseed
spirit, cigarettes, and other articles mentioned in their respective places in the
record, unless plaintiff shows in a satisfactory manner that it did actually pay to the
Bureau of Internal Revenue, the contents of Exhibit 178 notwithstanding, the sums
which, for the reason aforestated, were debited to defendant, in which case the latter
may bring an action against the said Bureau of Internal Revenue.

(c) With respect to the third cross complaint, plaintiff must render to defendant an
account, supported by vouchers, of the shipments of rice concerned in the invoices
examined in which fraud or error was discovered, and said account shall embrace
the 153 invoices referred to by the litigants in this suit (page 324 of the transcript of
the stenographic notes, session of November 29, 1910).

(d) With regard to the fourth cross complaint, plaintiff shall render an account,
supported by vouchers, of all the purchases it made of petroleum for Messrs. Oria
Hermanos & Co., and in connection with the invoices held in the latter's possession
and referred to on page 391 of the transcript of the stenographic notes of the session
of November 29, 1910.

(e) In the matter of the second counterclaim, plaintiff shall return to Messrs. Oria
Hermanos & Co. the sum of P1,812 with interest thereon at the rate of 8 per cent per
annum from the 5th of May, 1910, to the date of payment. The interest due shall be
compounded after each semester, reckoning from June 1, 1900, and both the
principal and the interest so compounded shall bear the same interest of 8 per cent
per annum.

Messrs. Gutierrez Hermanos are absolved, in the first place, from the second cross
complaint in so far as concerns the demand therein made for a rendition of accounts
in connection with the hemp and copra; and in the second place, from the first, third,
fourth, fifth, and sixth counterclaims.

Without special finding as to costs.

The parties, upon their notification of this judgment, duly excepted thereto and by written
motion prayed for a reopening of the case and a new trial. These motions were overruled,
with exception by the appellants, and the proper bills of exceptions having been filed, the
same were approved and forwarded to the clerk of this court.

This action was brought to recover the sum of P147,204.28, the balance of a current
account opened on May 1, 1900, between Gutierrez Hermanos and the commercial firm of
Oria Hermanos & Co., at the rate 8 per cent mutual interest up to June 30, 1909, which sum
was found to be owing by Oria Hermanos & Co. to the commercial firm of Gutierrez
Hermanos.

Other subject matters of the present suit are the rendition of accounts by Gutierrez
Hermanos, as commission agent, to Oria Hermanos & Co., as principal, and the collection
of various sums demanded by the latter in the cross complaints and counterclaims filed,
during the trial, by its counsel against the claim made by Gutierrez Hermanos for the
payment of the amount specified in the preceding paragraph.
To prove the propriety and justice of its complaint, Gutierrez Hermanos, plaintiff, alleged:
That, in accordance with the agreement made, it sent semiannually a general account that
comprised a statement of the business transacted during the preceding six months, to Oria
Hermanos & Co. who, after examining the account with its specification and vouchers,
sometimes approved the same without comment of any kind, and at others, after some
objections, but that, in the latter cases, upon explanations being subsequently given by
Gutierrez Hermanos, the defendant firm used at last to accept the account rendered; that
such was the procedure followed during the nine years approximately that both firms
maintained commercial relations, and that the record showed that during the said nine years
Oria Hermanos & Co. had given in favor of Gutierrez Hermanos 17 agreements or
approvals of account, the last of which, transcribed in the complaint, is of the following
tenor:

LAOAG, March 9, 1909.

Messrs. GUTIERREZ HERMANOS, Manila.

DEAR SIRS: In our possession, your very esteemed letter dated December
31 last, from which we have withdrawn the extract of our current account with
your firm, closed the same day, showing a balance in your favor of
P144,473.78, which extract meets with our approval.

We remain, Yours, very respectfully, ORIA


HERMANOS & Co.

That, on May 25, 1909, the plaintiff firm notified the defendant firm that it could not continue
to do business with the latter and therefore the current account stipulated between both
parties would be closed within a period of thirty days; plaintiff therefore transmitted to
defendant a general detailed account that comprised the period from January, 1909, to
June 30 of the same year, with the warning that after that date (May 25, 1909) defendant
would have to pay the debit balance, inasmuch as, although the said last account had not
been approved, no objection whatever had been made thereto by Oria Hermanos & Co.
Therefore in the said letter of May 25, plaintiff demanded of defendant the payment of the
sum mentioned of P147,204.28 which the latter had not paid in spite of plaintiff's demands
and notwithstanding the fact that defendant had made no objection whatever to the last
account rendered.

Counsel for defendant, Oria Hermanos & Co., after a denial of the facts that had not been
admitted prayed in special defense and in four cross complaints that the plaintiff, Gutierrez
Hermanos, be compelled to present a general account, duly verified and supported by
vouchers, of all the shipments of hemp, copra, rice and other effects specifically mentioned,
and to render a final account in conformity with the agreement made between both parties
and converting the details mentioned in the said cross complaints.

Notwithstanding the proof shown in the record of the certainty and reality of the debt as a
balance resulting from the current account kept between the parties, it is of course
impossible to determine the net amount, the object of the claim presented by plaintiff, until
there shall have first been decided whether there should or not be rendered a general
account, accompanied by vouchers, comprehensive of the business transacted in
connection with the different commercial articles dealt in, and of the mercantile relations
between both firms from May 1, 1900, to June 30, 1909, and also whether Gutierrez
Hermanos is indebted to Oria Hermanos & Co. and what is the amount of the debt.

Even upon the supposition that the plaintiff, Gutierrez Hermanos, is obliged to make a
general rendition of accounts comprehensive of the business transacted between both firms
within the dates mentioned, it is evident that, until it be known whether plaintiff is or is not
indebted to Oria Hermanos & Co. and what is the amount owing as disclosed by the
account rendered, it cannot be decided whether plaintiff is or is not entitled to collect the
whole amount claimed in the complaint, for only in view of the result of the rendition of
accounts requested by plaintiff can it be lawfully established whether Gutierrez Hermanos is
a creditor of Oria Hermanos & Co. and what amount is owing to it by the latter. All this is
referred to in the first error alleged by defendant.

In case it should be held that the law does not allow the rendition of accounts requested by
the defendant, Oria Hermanos & Co., and that this latter is not a creditor of Gutierrez
Hermanos, it is evident of course that plaintiff would be unquestionably entitled to collect the
amount specified in the complaint, or some other amount duly proved at trial to be owing it
by defendant. It is therefore incumbent upon us to elucidate hereinafter the propriety or
impropriety of the contentions made by defendant in its four cross complaints.

Defendant's counsel in his first cross-complaint and special defense prayed that the plaintiff,
Gutierrez Hermanos, be compelled to render and present a general, final, complete and
verified account, pursuant to the agreement made between both parties, inasmuch as
plaintiff bound itself to send periodically to defendant a note or numerical extract of the
current account, and in case the mercantile relations between both firms should come to an
end or be finally closed, Gutierrez Hermanos bound itself to present a general and complete
account, duly supported by vouchers, and defendant, in accepting and approving the
semiannual accounts rendered by plaintiff, did not waive its right to demand the general
account agreed upon, at the time of the final closing of the said current account, the
obligation to furnish which was not complied with by the plaintiff, Gutierrez Hermanos.

The latter denied in its answer the allegations made by Oria Hermanos & Co. in its cross-
complaint, and set forth that, in consequence of the mutual current account opened
between the parties from the year 1900, plaintiff transmitted weekly or fortnightly, according
to circumstances, a specific statement of the transactions effected, as well as,
semiannually, a general account of the business done during the six months last elapsed,
and that defendant, after an examination of such semiannual account together with its
details and vouchers, and after some objections thereto had been explained, was
accustomed to prove the same. This was the produre carried on for more than nine years
during which Oria Hermanos & Co. from time to time approved each one of the 17 account
that were presented to it, and upon Gutierrez Hermanos closing the current account from
January to June, 1909, it also presented to defendant a general detailed account, which,
nothwithstanding that no objection whatever was made to it, was not approved. Therefore
the complaint was filed that initiated this litigation.
Had the agreement between the parties been recorded with all its conditions in some
instrument, it would have appeared whether Gutierrez Hermanos actually bound itself to
present to Oria Hermanos and Co., besides the semiannual accounts rendered, a general
account comprising all the business undertaken between 1900 and June, 1909, on which
latter date it was considered by Gutierrez Hermanos as terminated. The allegation made by
defendant relative to this point had not been substantiated by any evidence whatever, and
therefore there is no reason nor legal ground whereby plaintiff could be compelled to
present that general account requested in the first cross-complaint.

It is, in our opinion, appropriate it insert hereinafter what the trial court, in the judgment
rendered, says with respect to this matter: "If commission agents be obliged to render to
their principals itemized accounts, supported by vouchers, of the sums they collect as
commission and of the transactions effected by them in relation with their principals, as
often as the latter may desire, in cases where there arises some trouble, some difference of
opinion or a conflict of interests, or where the commission agents close the account, as
occurs in the case at bar because the principals did not pay what they were owing or
because, instead of the debt being diminished, it was increased, the commission contract
would become an inexhaustible and never ending source of litigation and of claims without
number, a formidable arm for spiteful principals against which it would be insufficient to
oppose an arsenal of vouchers such as might be treasured by the most prescient
commission agent, because there could be avoided neither the brother resulting from their
necessary examination, nor the heavy expenses and loss of time that are the inevitable
accompaniment of this class of work."

When an account has been presented or rendered and has been approved by the party
whom it concerns or interests, it is not proper to revise it, unless it should be proved that in
its approval there was deceit, fraud, or error seriously prejudicial to the party who gave such
approval. Arts. 1265 and 1266, Civil Code.)

In the decision rendered in the case of Pastor vs. Nicasio, (6 Phil. Rep., 152), the following
doctrine was laid down;

When accounts of the agent to the principal are once approved by the principal, the
latter has no right to ask afterwards for a revision of the same or for a detailed
account of the business, unless he can show that there was fraud, deceit, error or
mistake in the approval of the accounts facts not proven in this case.

The record does not show it to have been duly proven that upon Oria Hermanos & Co.
giving its approval to the 17 accounts presented by Gutierrez Hermanos there was deceit,
fraud, or mistake prejudicial to the former's interests. For the sole reason that Gutierrez
Hermanos, upon closing the current account with Oria Hermanos & Co. was obliged,
certainly an unwarranted obligation, to render a general account comprehensive of all the
business transacted between both parties during more than nine years, and there being no
proof of the alleged agreement between them, it would be improper to hold that the plaintiff
is obliged to render and present a general account in the sense requested by Oria
Hermanos & Co. in its first cross-complaint.
With respect to the second cross-complaint, relative to the sale on commission of lots of
hemp and copra by defendants to plaintiff during the period from may, 1900, until the close
of the mercantile relations between both firms, it was alleged that for such sale or sale on
commission Gutierrez Hermanos collected a large and important commission of many
thousands of pesos and credited defendant in the current account with lesser prices than
those obtained and that defendant received information that these lots of hemp and copra
which were said to have sold to third persons were afterwards found to have been
purchased by the firm of Gutierrez Hermanos itself, to the fraud, injury, and prejudice of the
defendant, Oria Hermanos and Co.; wherefore the latter prayed that plaintiff should present
a general and complete account, duly verified by vouchers and with the details specified of
each and all of the shipments of hemp and copra forwarded to plaintiff from May, 1900, to
1909. These facts were denied by plaintiff, and the court, in view of the evidence adduced
by both parties, held that the record showed absolutely no proof that plaintiff, Gutierrez
Hermanos, had committed any fraud or error prejudicial to defendant.

In fact it was not proved that Gutierrez Hermanos credited in the current account a lesser
price than that obtained from the sale on commission of the lots of hemp and copra sent to
it by Oria Hermanos and Co., for from the documentary evidence consisting of account
transmitted by plaintiff to the commercial firms of Stevenson and Co. and Warner, Barnes
and Co. (Limited), in collection of the price of hemp and copra acquired by these houses, it
appears that the prices fixed at sale to the latter are the same and agree with those
specified in the statements transmitted by plaintiff to defendant, Oria Hermanos and Co.,
and that the hemp and copra shipped by the defendant were sold on commission to third
persons that is, to the aforesaid commercial firms.

The charge laid against plaintiff, that it did not disclose the name of the commercial firm or
concern from whom the hemp that it sold had come, does not, although it may have
concealed this fact, constitute a fraudulent act, nor one originating civil liability, inasmuch as
plaintiff realized on the lots of hemp under the marks of Oria Hermanos & Co. which they
bore from their point of origin and by which they were known both in Manila and abroad
(Exhibit DD) and not only in the invoices, but also in the accounts presented by Gutierrez
Hermanos upon its collecting the price of such hemp sold on commission, there appeared
the marks stamped by Oria Hermanos & Co. on their lots of hemp, and therefore it cannot
be affirmed that Gutierrez Hermanos superseded Oria Hermanos & Co. as the owner of the
hemp that plaintiff sold on commission and that came from defendant during the more than
nine years in which the former was a commission agent of the latter.

With respect to the fact of Gutierrez Hermanos not having disclosed the name of the
concern to which the hemp belonged, in the cases where plaintiff sold it in its own name,
plaintiff's procedure cannot be qualified as deceitful or fraudulent, inasmuch as article 245
of the Code of Commerce authorized it to act as it did, to contract on its own account
without need of disclosing the name of its principal, in which case Gutierrez Hermanos was
liable to the person or concern with whom it contracted, as if the business were its own. So,
then, the purchaser has no right of action against the principal, nor the latter against the
former, without prejudice to the actions which lie respectively in behalf of the principal and
the commission agent, pursuant to the provisions of article 246 of the Civil Code.
With regard to the lots of copra, notwithstanding the allegations made in this cross-
complaint, defendant has not produced any proof whatever of the facts charged, in face of
plaintiff's denial in its answer. Therefore, in consideration of the reasons set forth with
respect to the lots of hemp, the judgment of the lower court disallowing defendant's petition
that plaintiff render accounts relative to the sales of hemp and copra is held to be in
accordance with law.

In this part of the judgment of the trial court consideration was also given to the fact of
plaintiff's having debited against defendant in the account rendered it the payment of the
internal-revenue tax of one-third of 1 per cent.

With respect to the tax paid on the price of the hemp and copra sold by the plaintiff in the
name and for the account of the defendant, the procedure of the plaintiff is perfectly legal, in
accordance with the provisions of section 139 of the Internal Revenue Law, in laying upon
Oria Hermanos & Co. the obligation to pay the said tax as the owner of the hemp and copra
sold, and, therefore, the claim made by defendant against the account drawn up by
Gutierrez Hermanos is unreasonable and unfounded.

As regards the tax of one-third of 1 per cent which, according to accounts presented by
Gutierrez Hermanos to Oria Hermanos & Co., plaintiff had paid on the price of the rice, salt,
kerosene, lime, mats, rattan, flour, anise-seed spirits, and cigarettes, inasmuch as the said
section of the above cited Act obliges the vendors and not the purchasers of these articles
to pay the said tax, it is undeniable that the firm of Gutierrez Hermanos that had acquired
the said articles which were forwarded to Oria Hermanos & Co. should neither have paid
the tax in question, nor should have charged it for payment against defendant, since it had
already been paid to the Government by the owners of the articles sold to plaintiff.

In view of the provisions of law contained in the aforesaid section 139, it is not understood
how Gutierrez Hermanos could have been compelled to pay the said tax on the rice, salt,
petroleum, lime, mats, rattan, flour, anise-seed spirit, and cigarettes, nor on the price of the
beer, on the supposition that plaintiff acquired these articles from third persons in this city.
In the case of the rice imported from abroad, the payment of the tax thereon pertains to the
importer who sells it to third persons.

If Gutierrez Hermanos made a mistake, notwithstanding the clear phraseology of the said
section, said mistake should not prejudice defendant who, in July, 1905, had already stated
that it did not agree with plaintiff's action in the matter for, in the letter Exhibit FF, defendant
demanded that plaintiff investigate the case in order to avoid a double payment of the tax.

For the foregoing reasons the plaintiffs, Gutierrez Hermanos, after liquidation of the sums
paid as a tax of one-third of 1 per cent on the price of the rice acquired in this city and of the
salt, kerosene, lime, mats, flour, anise-seed spirit, cigarettes, and beer, referred to in the
second counter-complaint, must pay to Oria Hermanos & Co. the amount shown by said
liquidation to be owing.

As regards the third cross-complaint, wherein it is alleged that fraud, deceit, or error was
committed or incurred by Gutierrez Hermanos in connection with the accounts for the rice
forwarded to Oria Hermanos & Co., a fact denied by plaintiff, the trial judge, in view of the
evidence introduced at the hearing of the case, established the following conclusion:

Justice, therefore, demands that Messers. Gutierrez Hermanos render a new


account of the lots of rice which they shipped to Messrs. Oria Hermanos & Co.,
inasmuch as they, as proved in the verification of some of the lots, committed the
fraud of having collected a commission of 2 per cent for the purchase of the rice, as
commission agents, in addition to a profit in reference to the said lots, in their
capacity of merchants, on the price of the rice imported by them from Saigon.

If they acted as committed agents, they could have contented themselves with the 2
per cent commission and should not have charged any extra price. If, as commission
agents, it was more advantageous for them to reap the profits from the rice imported
from Saigon, they should neither have charged nor collected the 2 per cent
commission. The commission agent is obliged to acquire the articles or effects for
which he has received an order from his principal in the most advantageous and less
onerous conditions for the latter. Such an obligation, prescribed by article 258 of the
Code of Commerce, was not fulfilled by the procedure observed by plaintiff in the
matter of the verified invoices of rice, in some of which, as has been proved, there
appears to have been charged a larger amount than the cost price.

This court reserves its opinion, unit at such proper time it shall have seen to result, shown
by the new accounts to be presented by plaintiff, as to whether, in the rice accounts
rendered by it to defendant, there was fraud or only error susceptible of correction, for
plaintiff alleges in turn, as shown in the letter Exhibit , that Oria Hermanos & Co. required
plaintiff to increase the price in the invoices of rice, anise-seed spirit, petroleum, etc., by 25
per cent of the cost of these articles. Therefore plaintiff shall render an account, verified by
vouchers, to Oria Hermanos of all the shipments of rice concerned, not only in the invoices
examined, but also ion those that have not been examined, up to No. 153, which invoices
are those mentioned on page 324 of the transcript of the stenographic notes of the session
of November 29, 1910.

The approval and agreement given by defendant to the 17 semiannual accounts presented
by plaintiff is no impediment to a revision of the same, once it shall have been shown that
there was fraud, error, or serious in correction prejudicial to the party who accepted the said
accounts. The law which protects him who acts in good faith cannot permit any
considerable prejudice to be caused to the rights and interests of a third party who had
neither the occasion nor the opportunity to acquaint himself with the truth of the facts which
he had admitted as true in such manner as they were presented to him.

Oria Hermanos & Co., upon its accepting and approving the accounts which were
presented to it by Gutierrez Hermanos, as transcripts or copies from the latter's books, did
not have an opportunity to make the required verification of the entries of rice contained in
the said accounts or of the invoices of this article in all their details, and whenever it has
discovered that Gutierrez Hermanos, as commission agent, has made overcharged or
placed extra prices in addition to the 2 per cent commission, it has a right to demand
reimbursement of the excess in price which it had erroneously paid as principal. The
judgment of the lower court must, therefore, be affirmed with respect to the entries of rice
made in the 170 invoices referred to in the accounts presented by plaintiff, by means of a
revision of the accounts presented in connection with the said article of the Code of
Commerce.

With respect to the fourth crosscomplaint relative to Gutierrez Hermanos having entered in
the invoices transmitted to Oria Hermanos & Co. higher prices than those paid for the salt,
beverages, tobacco, wine, beer, and groceries, in spite of the allegations made by plaintiff
the record of the proceedings shows no proof of the truth of the act charged to plaintiff. The
fact of not having recorded in the invoices of the said effects shipped to defendant the
names of the persons who had acquired them does not constitute proof nor even a
presumption of illegal procedure on the part of Gutierrez Hermanos. Neither is plaintiff
obliged by any law to state the names of the owners of such articles, nor does the omission
thereof show bad faith on the part of the commission agents.

As regards the petroleum, it is undeniable that in the invoices to which the fourth cross-
complaint refers higher prices were given than those it actually cost. Moreover, Oria
Hermanos & Co. is entitled to the discount obtained by the commission house from the
commercial firm which sold the petroleum.

The trial judge, as grounds for his finding, says the following: "It is therefore evident that,
according to the proofs submitted, Messrs. Gutierrez Hermanos committed fraud in the
purchase and shipments of the said article, not only because they kept the discount allowed
by the selling firm by which their principals, for whom they purchased the petroleum should
have profited, and not the commission agents who acted for them simply in the capacity of
agents; but also because in one of the invoices they charged, besides, a greater price than
they paid to the vendors, and then collected a commission of 2 per cent on all the invoices.
It is the obligation of commission agents to make the purchases for their principals on the
most advantageous terms. For this they are paid the rate of commission stipulated. They
have no right to keep the discount allowed by the vendors on the price of the articles they
purchase for their principals, even less to increase, to their benefit, the price charged them."

In consideration, then, of evidence introduced relative to the purchase of the petroleum


shipped to defendant, referred to in the fourth cross-complaint, plaintiff must render an
account, verified by vouchers, of the price of all the petroleum that it acquired for Oria
Hermanos & Co. and which is covered by the invoices mentioned on page 391 of the
transcript of the stenographic notes taken of the session of December 28, 1910.

The judgment of the lower court treats of the fact that Gutierrez Hermanos charged interest
on the value of the articles which it had purchased for Oria Hermanos & Co., before even
having paid the vendors the price of the articles acquired. Defendant has complaint against
this procedure on the part of plaintiff and qualifies as improper and illegal the collection of
the 8 per cent interest on the price of the effects forwarded to Oria Hermanos & Co. from
the date of their shipment, when actual payment of such purchases was made many days
afterwards.

The accounts presented by Gutierrez Hermanos, wherein note was made of the collection
of interest at the rate of 8 per cent on the price of the effects acquired by plaintiff for Oria
Hermanos & Co. and shipped to defendant for its disposal, notwithstanding that they were
not paid for unit many days afterwards, were approved and accepted by plaintiff without any
objection thereto whatever and with no protest against the notation of the interest on the
price of the articles purchased. Therefore, aside from the reasons given by the lower court
in his judgment and relative to this point, it can not be held that there was either fraud or
error in the procedure observed by Gutierrez Hermanos in charging in its account the
stipulated interest from the date when it acquired the effects, afterwards shipped to the
defendant, Oria Hermanos & Co., because Gutierrez Hermanos could have paid cash for
the articles purchased. Even though payment might have been delayed for a few days more
it is certain that Gutierrez Hermanos as commission agent was obliged to pay the price of
the articles acquired and, consequently, said price began to draw interest chargeable to the
consignee who, as owner of such articles, could dispose of them freely. For these reasons
defendant's claim can not be sustained.

We now take up the fifth special defense, or the first counterclaim presented by defendant
against plaintiff, wherein it is prayed that the latter be sentenced to pay to the former the
sum of P13,894.60, together with the legal interest thereon, which sum is the difference
between the 5 per cent which was all Oria Hermanos & Co. should have the sum of
P47,649, the debt contracted by Juan T. Molleda in favor of Gutierrez Hermanos and
transferred to Oria Hermanos and Co. who assumed its payment instead of Molleda.

The reasons, set forth in the judgment appealed from and based on documentary evidence,
are so clear and conclusive that they could not be rejected by defendant, nor invalidated at
trial by other evidence in rebuttal. Consequently, we are constrained to admit them as
decisive of the point in controversy and as duly showing that the interest stipulated on the
amount which was transferred to Oria Hermanos and Co. is 8 per cent and not 5 per cent as
defendant claims. Therefore the sum of P13,894.60 claimed cannot be recovered, and it is
held that the finding made by the trial judge in respect to the first counterclaim filed by
defendant is in accord with the law and the evidence. This finding is based on the following
grounds: "If the firm of Molleda and Oria as well as that of Oria Hermanos & Co., of which
latter Mr. Tomas Oria is manager, both consented to Messrs. Gutierrez Hermanos charging
in all the extracts of current account sent to them an interest of 8 per cent on the sum of
P47,649 56; and if they willingly and constantly acquiesced in the payment of a particular
rate of interest instead of that of 5 per cent, during nine years without raising any objection
whatever, they are not entitled to obtained restitution for the difference paid of 3 per cent,
nor have they any right to consider as unlawfully collected the 8 per cent interest on the
sum above mentioned. The record shows no proof of the existence of any of the vices
which, according to law, might invalidate the consent given by defendant to the collection
from it of the interest of 8 per cent, which must be that stipulated, nor was such a vice
alleged by Oria Hermanos & Co." Moreover, against this finding in plaintiff's favor no error
whatever has been alleged by defendant.

In the second counterclaim, the sixth special defense, defendant prays that Gutierrez
Hermanos be sentenced to the payment of P63,700, with legal interest thereon from the
date of the presentation of this counterclaim, and alleged; that the firm of Gutierrez
Hermanos, disregarding the instructions of Molleda and Oria, the predecessor of Oria
Hermanos and Co., merely insured the stocks of hemp and merchandise which the latter
had in Laoang, for an imaginary value of P67,000, leaving totally unprotected the stocks of
hemp and merchandise in Catubig, valued at P32,000; that such failure to comply with said
instruction caused Oria Hermanos and Co., by reason of the fire that occurred in Catubig, to
lose the sum of P63,700, including the premiums. expenses, and interest paid, and that
defendant, immediately upon discovery of the loss by plaintiff's fault and negligence, filed
claim therefor and protested against the same.

In answer Gutierrez Hermanos alleged that in the letter from Oria Hermanos and Co., of the
date of April 28, 1900, the latter stated that it recommended to plaintiff the question of the
insurance of the warehouses in Laoang and of the houses in Catubig, advised that if the
stocks of hemp and merchandise therein were insured, as defendant believed they were,
plaintiff should endeavor to increase the insurance thereon; and that in another letter of the
same date Don Tomas Oria, after relating the fact that the insurgents had attacked the
pueblo of Catubig and killed the troops there garrisoned, stated that he earnestly
recommended to Gutierrez the matter of the insurance in order that it might be made as
soon as possible in the manner explained in the official letter of the same date.

Gutierrez Hermanos, supposing that Catubig might already have been burned and
destroyed as a result of the occurrences related by Oria in his letter, judging by the news
published in the newspapers of this city on May 2, 1900, deemed that it would be a useless
expense to increase the insurance of the merchandise held in stock in the said pueblo
under ordinary fire insurance which was that taken out by the firm of Molleda and Oria, for
the reason that the insurance companies would refuse to pay the amount of the insurance
in case the damage was caused by war, invasion, riot, military force, etc. As Gutierrez
Hermanos then had no means whereby it might communicates with Molleda and Oria to
request specific instructions from this latter firm in regard to the insurance ordered, which
ordinary and not war insurance, it had to consult Don Casimiro Oria, a partner of Oria
Hermanos and Co., and this gentleman, with a full knowledge of the state of affairs in
Catubig, advised that no further attempt be made to increase the ordinary fire insurance on
the goods in Catubig, because it would be a useless expense and because there were well-
founded reasons for supposing that at that date the pueblo had already been completely
destroyed, together with the buildings and stocks of merchandise which it was proposed to
insure. But after taking into account the importance of the buildings and the large stocks of
goods stored in Laoang, which pueblo, according to a letter from Oria to Gutierrez
Hermanos, was also in danger of being attacked by the insurgents, plaintiff proceeded to
insure them against war risks for three months for P7,000 sterling, a transaction which was
communicated by plaintiff to Molleda and Oria by a letter of May 5, 1900, and which this
latter firm acknowledged without making any objection whatever to the war insurance
placed; that, since the 2d of June of the same year, neither was any claim or protest made
by the firm of Oria Hermanos, but, on the contrary, Oria Hermanos and Co. applied to the
Government of the United States claiming an indemnity of P90,000 Philippine currency for
the burning of the buildings and goods in the pueblo of Catubig a claim still pending
decision by the Government.

The judge of the Court of First Instance, deciding the question raised in this counterclaim,
set forth among others the following considerations: "If Messrs. Gutierrez Hermanos had
taken steps to insure the stocks of merchandise in Catubig and had declared to any officer
of the insuring company the truth about the terrible slaughter which had just taken place, it
would have been impossible to obtain a war insurance on the said merchandise; and if,
instead of declaring the truth, plaintiff had omitted it, the insurance if obtained could not
have been collected. The insurance company would have learned of the circumstances
which had not been stated and had been omitted in the application and would have refused
to pay the insurance, as it did in the case of the Catarman insurance, as will be seen further
on. And if plaintiff had applied to the English courts, as it did in the case referred to, the
result would have been the same."

Even though Gutierrez Hermanos had increased by value of the insurance on the hemp and
merchandise in Catubig through means of ordinary fire insurance, pursuant to the
instructions given by Molleda and Oria, the predecessors of Oria Hermanos & Co. and
whose rights this latter firm represents, the same result would have followed, inasmuch as
in this class of insurance the insuring company does not assume risks for fires and
damages caused by war, riot, and military force; and as in the official letter aforementioned
plaintiff was not authorized to increase the insurance through means of a war insurance
policy, it is unquestionable that plaintiff, in not increasing the ordinary insurance, proceeded
in a prudent and reasonable manner and for the benefit of the defendant by saving the latter
from uselessly paying an important premium for an insurance which it afterwards could not
have collected, Furthermore, the news was already disseminated in Manila that the pueblo
of Catubig had been completely burned to the ground. Not only, therefore, would it have
been impossible to obtain the increase of an ordinary insurance, but even a war insurance,
though offering to pay a large and excessive premium.

In the letter of the date of May 34, 1900, Exhibit 5, page 190 of the file of the record,
Gutierrez Hermanos informed Oria Hermanos and Co. that the insurance firm refused to
pay the amount of the insurance on the merchandise in Catubig, for the reason that the
cases of fire caused through military force, etc., were excluded from the policy. So that even
though Gutierrez Hermanos had, in compliance with orders from Oria Hermanos & Co.,
increased the amount of the insurance on the stock of merchandise stored in Catubig, Oria
Hermanos & Co. would not have been benefited thereby, because the insurance company
would have refused to pay the increase, just as it did not pay the amount of the original
insurance for the reason aforementioned. Furthermore, as we have already stated, the
order to increase the insurance only refers to ordinary insurance against fire, and not to
extraordinary insurance against war risks.

With respect to the war insurance placed on the stocks of goods in Laoang, the trial court
could not in accordance with law hold plaintiff to be liable for the payment of the sum Oria
Hermanos and Co. did not protest nor object in any wise against the placing of the said war
insurance on the merchandise in Laoang, and also because in the second counterclaim no
petition or demand whatever was made in connection with this transaction. For these
reasons therefore, Gutierrez Hermanos must be absolved of the second counterclaim.

We now come to the third counterclaim, the seventh special defense presented by
defendant, wherein petition was made that the firm of Gutierrez Hermanos be compelled to
pay to Oria Hermanos the sum of P67,000, besides the legal interest thereon since the filing
of this claim, which sum was the amount of the insurance, premiums paid, fees, costs,
interest, and charges for telegrams, etc., alleged to have been expended and lost through
the inattention, negligence, improvidence, and carelessness of the plaintiff, Gutierrez
Hermanos, without defendant's being able to collect the amount of the insurance on the
stock of hemp in Catarman, Samar.
In a letter of May 10, 1900, addressed by Oria Hermanos & Co. to Gutierrez Hermanos, the
former commissioned the latter to try to insure against war risks some 1,400 piculs of hemp
that Oria Hermanos and Co. had in the pueblo of Catarman which had been evacuated by
the American troops; and in another letter of the same date Tomas Oria said to Gutierrez
Hermanos that Catarman had been evacuated by the troops three days after the departure
of the steamer Santander which was unable to load about 3,000 piculs of hemp that his firm
had there, and, as he knew that the said pueblo had not been burned, he wished to have
insurance taken out on the value of about 1,400 piculs of hemp stored in the Delgado
warehouse. Gutierrez Hermanos had Stevenson and Co., of Manila, cable to the latter's
head office in London for the desired insurance, and as soon as it was obtained Gutierrez
Hermanos wrote to Oria Hermanos & Co. informing defendant that plaintiff had insured
against war risks 1,400 piculs of hemp deposited in the Delgado warehouse in Catarman,
for three months from the 18th of May, 1900.

A few days subsequent to the placing of this insurance, Oria Hermanos & Co. ordered
Gutierrez Hermanos to collect the amount of the insurance, for the reason that all the stock
of hemp in Catarman had been stolen by the insurgents. The representative of the
underwriter refused, however, to pay the amount of the insurance because Oria Hermanos
and Co. had concealed certain facts which, had they been known to the underwriter, would
have deterred the company from issuing a policy for the hemp, and all the steps taken for
the purpose of obtaining the collection of the 3,000 sterling for which the hemp had been
insured, resulted in failure.

Therefore, on petition of the firm of Oria Hermanos & Co. through the firm of Stevenson and
Co., suit was duly brought before the English courts in London. The prosecution of this suit
was commended to English attorneys to whom Oria Hermanos & Co. furnished, through
Gutierrez Hermanos, all the documents and data conducive to a successful issue.
Notwithstanding, the claim of Oria Hermanos & Co. was rejected by the London courts. No
liability attached to Gutierrez Hermanos for the failure of the suit in London.

The firm of Gutierrez Hermanos merely complied with the orders of Oria Hermanos & Co. to
insure the stock of hemp in Cataraman, with an insurance company established in London,
through Stevenson and Co. of Manila, in view of the fact that there was no insurance
company in this city which would issue policies against war risks. For this purpose, by a
letter of October 17, 1905, Exhibit F-2 Oria Hermanos & Co. transmitted to Gutierrez
Hermanos the power of attorney and the letter for Messrs. Horsley, Kibble and Co. for the
purpose of the latter's negotiating with the underwriters for some honorable settlement of
the matter, during the time required for the receipt of all the documents that had been
requested. In another letter of January 25, 1906, Oria Hermanos & Co. stated to Stevenson
and Co. that it took pleasure in replying to the latter's favor of the 19th instant, addressed to
Mr. Oria; that Delgado's letter to Oria of the date of October 19, 1901, was forwarded in the
original to London, through Messrs. Gutierrez Hermanos, to Stevenson and Co., on July 16,
1904; that defendant inclosed a copy of Delgado's declaration before the municipal judge of
Catarman, transmitted to Stevenson and Co. on November 21, 1903; and that the two
letters to Gutierrez Hermanos, of May 28, 1903, and October 2, 1901, as well as the
memorandum of the values of the goods, had been transmitted to Gutierrez Hermanos with
a telegraphic order to said firm to deliver them to Stevenson and Co. If the amount of the
insurance could not afterwards be collected, it was not through fault of Gutierrez Hermanos,
who acted in the matter in accordance with instructions from Oria Hermanos and Co.

So that firm of Gutierrez Hermanos was a mere conductor through which the stock of hemp
in Catarman was insured by a firm in London through mediation of Messrs. Stevenson and
Co., for the firm of Oria Hermanos and Co. had to grant a power of attorney on behalf of the
said Messrs. Horsley, Kibble and Co. in order that the latter might represent the former
before the courts in England. If afterwards the representatives of Oria Hermanos and Co.
did not obtain a favorable decision in those courts, the loss of the suit cannot be ascribed to
either the fault or the negligence of Gutierrez Hermanos, inasmuch as this plaintiff merely
complied with the orders of the defendant, Oria Hermanos and Co., to bring suit in the
English courts, not against Stevenson and Co. of these Islands, but against the insurance
company of London.

The firm of Gutierrez Hermanos, in executing orders and charges of Oria Hermanos and
Co., became, by virtue of an implied agency, an agent of the latter and, in the fulfillment of
the orders of the principal, adjusted its action to the instructions of Oria Hermanos & Co.
The record does not show that in so doing it proceeded with negligence or with deceit.
Therefore there is no reason nor legal ground whereby plaintiff should be compelled to pay
the sum demanded in the third counterclaim for the causes therein stated. (Arts. 1710, 1719
and 1726 of the Civil Code.) Consequently Gutierrez Hermanos should be absolved from
the third counterclaim filed by defendant.

In the fourth counterclaim, the eighth special defense, defendant, Oria Hermanos & Co.,
prays that plaintiff, Gutierrez Hermanos, be sentenced to pay P75,000 for losses and
damages, with interest, inasmuch as by reason of a contract executed between both
parties, plaintiff bound itself to acquire for and transmit to defendant rice and other articles,
including coin, which Oria Hermanos & Co. might request at Laoang, Samar, and so plaintiff
did; but since 1904, the fifth year of their mercantile relations, plaintiff failed repeatedly to
comply with its obligation to send the rice and other article requested by defendant, totally
sometimes and at other times partially limiting the shipment of the effects ordered and
excusing itself from remitting money on the pretext that it could not obtain insurance for the
shipment of cash; that defendant afterwards discovered that there were in this city large
stocks of rice and other effects which plaintiff [defendant] had requested, and could surely
have been sold in Laoang and the pueblos of the coast of Samar, as Oria Hermanos & Co.
was the only importing firm in that island; and had defendant received from plaintiff the rice
and the other effects the former had requested to be shipped to it, defendant would have
obtained a profit of not less than P25,000 whereupon it could have bought large quantities
of hemp which would have brought it great profit. Defendant further alleged that such failure
on the part of plaintiff to comply with the agreement made caused injury to the reputation
and mercantile credit of Oria Hermanos and Co., in Samar, and losses and damages of the
value of about P50,000, the total of the losses and damages suffered on both accounts
amounting to a sum of not less than P75, 000; and that the motive of such procedure on the
part of Gutierrez Hermanos was to injure and destroy defendant's credit in Laoang and on
the entire coast of Samar, because plaintiff planned to establish there a business of its own
like that of Oria Hermanos and Co.
Plaintiff, Gutierrez Hermanos, specifically denied the facts alleged by defendant in its
counterclaim and set forth that the evidence introduced relative to such facts showed that
since 1904 plaintiff had been reducing the shipments of rice, wine, and other effects to such
extent that in 1906 and 1907 cases occurred where the order shipped was reduced to one-
third, and in 1908 also where the steamer Serantes was sent without any cargo whatever,
for the reason that the debit balance in defendant's current account amounted, in 1905, to
P321,000 and because Oria Hermanos and Co. did not send a quantity of hemp and copra
sufficient in value to cover the value of the remittance of money and of the shipments of the
effects requested; that defendant, instead of sending hemp to plaintiff for the gradual
payment of its debt, sent it to Cebu; that therefore Oria Hermanos & Co. had no well-
founded grounds whereupon to claim indemnity for losses and damages, especially since,
according to the stipulations of the agreement and as shown by the evidence, the part of the
credit utilized by defendant was to be covered and paid for with the price of the hemp, copra
and other effects which Oria Hermanos & Co. should have to send to Gutierrez Hermanos;
and that, if the debtor balance of the current account continued to increase instead of
decreasing, it must be concluded that the procedure of Gutierrez Hermanos in reducing the
amount of the shipments of the orders was due to the conduct of Oria Hermanos & Co. who
did not endeavor by the shipment of copra, hemp, and other effects gradually to pay even a
part of the credit opened, notwithstanding that the rights and obligations established in the
contract should have been mutual.

If defendant, without concerning itself with diminishing its debtor balance, did no more than
order goods for sale and remit drafts to the paid by Gutierrez Hermanos, not sending in
exchange to plaintiff hemp, copra, and other effects, plaintiff, Gutierrez Hermanos, in
refusing discretionally to furnish certain effects to defendant and to pay drafts drawn by the
latter, did not violate the obligations it assumed in the contract.

The fact that the debtor balance accepted by Oria Hermanos and Co. on March 9, 1909,
Exhibit A, was raised to P144,473.78, is the best proof of the good conduct observed by
plaintiff during the nine years of mercantile relations between both parties, and is at the
same time the most graphical demonstration that defendant's contention made in its fourth
counterclaim is not based on any just or legal grounds.

Article 1100, last paragraph of subarticle 2, of the Civil Code prescribes: "In mutual
obligations none of the persons bound shall incur default if the other does not fulfill or does
not submit to properly fulfill what is incumbent upon him. From the time one of the persons
obligated fulfills his obligation the default begins for the other party." Article 1124 of the
same Code provides as follows: "The right to rescind the obligations is considered as
implied in mutual ones, in case one of the obligated persons does not comply with what is
incumbent upon him.

The person prejudiced may chose between exacting the fulfillment of the obligation
or its rescission, with indemnity for damages and payment of interest in either case.
He may also demand the rescission, even after having requested its fulfillment,
should the latter appear impossible." Under these grounds we hold that the
absolutory finding contained in the judgment appealed from is in accordance with the
law and the evidence.
In the fifth counterclaim, the ninth special defense, defendant, Oria Hermanos and CO.,
prayed that Gutierrez Hermanos be sentenced to pay the sum of P15,000, together with the
legal interest thereon, inasmuch as plaintiff, Gutierrez Hermanos, charged in the current
account, collected and appropriated to itself the funds which Oria Hermanos & Co. had in
plaintiff's possession and assessed against the same compound interest at 8 per cent and 2
per cent on the net amount of the collection made as charterage for the
steamers Serantes and Laoang, the launches Comillas and Golondrina, and the
cutter Remedios, as commission for said charterage, when all the steps for the collection of
the same were taken personally by Messrs. Oria and further, defendant's partners and there
was no contracts whatever between the parties whereby Gutierrez Hermanos might collect,
enter into the current account and appropriate to itself the said amount as commission
through the collection of the aforesaid charterage.

Plaintiff's counsel merely denied the facts alleged, which certainly were not proved at the
trial. It was, on the contrary, fully proven that Don Tomas Oria and the managers of Oria
Hermanos & Co. knew, by reason of the accounts Gutierrez Hermanos had been sending
them, that the plaintiff firm charged the 2 per cent commission on the amount of the
charterages, for it is so recorded in the letter from Oria addressed to Gutierrez Hermanos
under date of June 12, 1901, in which P690 appears annotated as the amount of plaintiff's 2
per cent commission for the charterage of the Laoang and the Serantes, and in other letter
from Oria Hermanos and Co. of October 18, 1900, (Exhibit A-2, page 476 of the record)
wherein demand was made for vouchers and a memorandum of the collections effected for
the charterage of these steamers, the Laoang, and the Serates. Furthermore, it appears in
this same letter for it is stead that credit has been given in Gutierrez Hermanos' account for
P272.50, as being the amount this firm was entitled to receive as 2 per cent commission on
the P15,625 collected by it from the quartermaster for the charterage of the Serates and for
the transportation of eight passengers on the steamer Laoang; and it is also therein stated
that Gutierrez Hermanos' account has been credited with the sum of P24, as the amount of
2 per cent commission on P1,200 collected for four days' charterage of the Laoang. These
documents show that Gutierrez Hermanos has taken part in the collection of the said
charterages and, therefore, was entitled to receive the amount agreed upon as commission
for such collection. Oria's assertion that Gutierrez Hermanos did nothing for the collection of
the P400,000, the amount of the charterage for the boats of Oria Hermanos and Co.,
Gutierrez Hermanos relative to the collection of the charterages due for the
launches Golondrina and Adela, and for this purpose he sent the proper vouchers for such
collection. Consequently there is neither reason nor legal ground to prevent our holding as
proper the finding established by the trial court that Oria Hermanos & Co. did, with due
knowledge of the matter, approve the amount of the commissions collected by Gutierrez
Hermanos on the sums it had collected as charterage for the defendant's boats, in
accordance with the agreement made between the parties, which defendant can not
repudiate, nor can its regret for the part it took therein avail it for the reimbursement sought
in its fifth counterclaim. The finding of the trial judge in regard to the latter is, therefore, in
conformity with the law.

The object of the sixth counterclaim is to obtain reimbursement of the sum of P31,000, the
amount of the interest charged and compounded semiannually, instead of annually, at the
rate of 8 per cent net interest. Oria Hermanos & Co. demands this sum from Gutierrez
Hermanos, alleging that there was an agreement between the parties to the effect that a
settlement of the interest should be made at the end of each year, and also that the interest
due and unpaid should be capitalized annually.

The firm of Oria Hermanos & Co., Tomas Oria, one of the partners of the same, and the
defendant's bookkeeper, a relative of the said Oria and also a partner of the firm, had been
receiving extracts or copies of the semiannual accounts rendered by Gutierrez Hermanos,
and, after a careful examination of the same, after offering objections thereto which
sometimes delayed Oria Hermanos and Co.'s approval thereof for more than six months,
after receiving the explanations requested and vouchers demanded of plaintiff, they
concluded by admitting and agreeing to the accounts rendered and the amounts involved,
and made neither objection nor protest whatever against the system or method employed
by Gutierrez Hermanos in capitalizing at the end of each year the interest of the semiannual
accounts rendered, nor against the interest charged on the capitalized interest, not only in
defendant's debit, but also by reciprocation in the credit given it in the account of the
receipts obtained from price of the hemp, copra and other products shipped to Gutierrez
Hermanos. All the foregoing facts appear on page 18 of the transcript of the stenographic
notes taken of the hearing on July 14, 1914.

The transaction effected by Gutierrez Hermanos in the accounts it presented to defendant,


Oria Hermanos & Co., is confirmed by some twenty letters signed, some of them, by Pria
Hermanos and Co., others, the greater part of them, by Tomas Oria, and still others by Mr.
Fuster, a partner of the latter firm. Therefore the semiannual capitalization made by plaintiff,
Gutierrez Hermanos, was sanctioned and approved by defendant on the seventeen
occasions that it approved the accounts presented by plaintiff, expressive of such
capitalization of the reciprocal interest stipulated between the contracting parties.

Article 1109 of the Civil Code prescribes as follows: "Interest due shall earn legal interest
from the time it is judicially demanded, even if the obligation should have been silent on this
point.

In commercial transactions the provisions of the Code of Commerce shall be


observed.

Article 317 of the Code of Commerce provides: "Interest which has fallen due and has not
been paid shall not earn interest. The contracting parties may, however, capitalized the net
interest which has not been paid, which, as new principal, shall earn interest."

Upon the execution of the contract which was the origin of the mercantile relations between
Gutierrez Hermanos and Oria Hermanos & Co., the stipulation made between both parties
were not sent forth in any document, they being content with a verbal agreement in which it
was stipulated that the rate of interest of the reciprocal current account to be kept between
them should be 8 per cent, without determining whether such interest was to fall due
annually, as affirmed by Tomas Oria, the manager of Oria Hermanos & Co., or
semiannually, as contended by Gutierrez Hermanos. However, it is certain that in the
seventeen accounts presented by plaintiff to defendant, at the end of each period of six
months from 1900 to December 31, 1908, embracing nearly nine years, the interest due
was liquidated every six months in the reciprocal current account between both firms,
without opposition or protest on the part of Oria Hermanos and Co. In the absence of a
written agreement defendant's procedure raises the presumption that such were the
stipulations verbally made between made between the interested parties, and the verbal
agreement was constantly maintained and confirmed without protest or objection whatever
on the part of the managers of Oria Hermanos & Co. If Tomas Oria, changing his opinion,
after the firm of which he is principal member had approved the said seventeen accounts,
believed that he was authorized to contradict his own acts and to allege another manner of
computing and liquidating the 8 per cent interests stipulated by stating that it should have
been collected annually, and not semiannually as was done and approved in the seventeen
accounts rendered during a period of more than nine years, the rectification afterwards
made of an assent and agreement repentance what he himself did in agreement with
defendant, since they were authorized to take such action by article 317 of the Code of
Commerce. Therefore the ruling of the trial judge absolving plaintiff of the sixth counterclaim
filed by defendant is in accordance with the law and with the evidence as disclosed by the
record.

For all the reasons hereinabove set forth as grounds for the findings rendered in respect to
the complaint and to each one of the cross-complaints and counterclaims presented by
defendant, the errors assigned to the judgment appealed from and not admitted in this
decision have been duly refused.

Therefore, for the reasons assigned in this decision, we sentence the commercial firm of
Oria Hermanos & Co. to the payment of the sum of P147,204.28 and of the stipulated
interest at the rate of 8 per cent per annum from June 30, 1909, after deduction of all the
sums which as balances in favor of defendant may result from the accounts to be rendered
by Gutierrez Hermanos, in conformity with the finding made, especially in reference to the
second, third, and fourth cross-complaints.

Gutierrez Hermanos is absolved from the first cross-complaint, and also from the second, in
which latter defendant prayed for an accounting of the hemp and copra business. Plaintiff is
likewise absolved from the fourth cross-complaint, excepting the part thereof relative to the
petroleum, and also from the first, second, third, fourth, fifth, and sixth counterclaims filed by
defendant.

Held: (1) That Gutierrez Hermanos, after Liquidation of the sums paid as a one-third
per cent tax on the price of the rice acquired in this city, of that of the salt, kerosene,
lime, mats, rattan, flour, anisette, cigarettes, beer, and other articles, for which
plaintiff paid said sums and charged them to defendant's account, must pay to Oria
Hermanos & Co. the sum disclosed by the said liquidation, in conformity with the
second cross-complaint.

(2) That Gutierrez Hermanos shall render to defendant an account, supported by


vouchers, of the price, expenses, and all amounts paid for the shipments of rice
covered by the invoices examined during the trial of this case, as well as the 153
invoices mentioned by the parties in the hearing of November 29, 1910.

(3) That plaintiff shall render an account, supported by vouchers, of all the petroleum
it acquired for Oria Hermanos & Co., the invoices of which are mentioned in the
transcript of the stenographic notes taken at the hearing of December 28, 1910.
The judgment appealed from is affirmed in so far as it is in accord with this decision and is
reversed in so far as it is not, without special finding as to costs.

Arellano, C.J. and Johnson, J., concur.


Carson and Trent, JJ., concur in the result.

Separate Opinions

MORELAND, J., dissenting:

I do not agree to the return of this case to the court below for the purpose of having the
plaintiff "render accounts."

In the first place, there is no account to render, and the finding of the trial court and this
court to the contrary is clearly erroneous.

In the second place, the parties offered, or had every opportunity to offer, all of their
evidence relative to the sale and delivery of the merchandise described in the complaint and
the payment of the purchase price. It is a plain case of a sale of goods by plaintiff to
defendant. If there is evidence supporting the allegations of the complaint, plaintiff is entitled
to a judgment. If not, the defendant wins. There is no reason for a return of the cause. The
parties have already had every opportunity warranted by law. (Hicks vs. Manila Hotel Co.,
28 Phil. Rep., 325; Gov. of Phil., Islands vs. Philippine Sugar Estates Development Co.,
Ltd. ante, p. 27.)

In the third place, if this court is correct in its ruling, the judgment appealed from is not final
and we can do nothing but dismiss the appeal.

The judgment of the lower court is in part as follows:

Judgment is, therefore, rendered against Oria Hermanos y Compaia and in favor of
Gutierrez Hermanos for the sum of one hundred and forty-seven thousand two
hundred and four pesos and twenty-eight centavos (P147,204.28), with interest at
eight per cent annum from the 30th of June, 1909, but there must be deducted
therefrom the sums which are found in favor of the said Oria Hermanos y Compaia
from the rendition of accounts by said Gutierrez Hermanos in accordance with the
counterclaims and cross complaint which have heretofore been allowed.

The judgment further says: "(a) With reference to the first counterclaim, to render accounts
duly vouchered to Oria Hermanos y Compaia with reference to those articles as to which
fraud or error has been proved and to which the subsequent pronouncements herein made
refer.
(b) With reference to the second counterclaim, to restore to Oria Hermanos y
Compaia after the proper rendering if accounts with reference thereto, all of the
sums, etc.

xxx xxx xxx

(d) With reference to the fourth counterclaim, to render vouchered accounts of all the
purchases of petroleum which Oria Hermanos y Compaia have made from the
plaintiffs, etc.

If we take this judgment at its face, then it is clear that is it not final, that something is
necessary yet to be done before the sum due from defendant to plaintiff, if anything, can be
determined. Whereas judgment is not final, we have no authority to take jurisdiction for the
purpose of determining the merits; and the determination of this court in the prevailing
opinion of many of the questions which would have been presented if the judgment was
final is without authority. This proposition has been so frequently held by this court that the
contrary doctrine laid down by this case will come as a shock to both the bench and bar
(Code of Civil Procedure, sections 123 and 143; International Bank vs. Martinez, 220 U.S.,
214).

In the case of Montemayor vs. Cunanan (14 Phil. rep., 454), it appeared that "M
commenced an action in the Court of First Instance against C for divorce and also for a
division of the marital property. The court, after hearing the evidence, entered a decree
granting to M her divorce and appointed a commission to make an inventory of the marital
property and report to the court for a division of the same. C duly excepted to the order
decreeing the divorce and without waiting for a division of the marital property presented a
bill of exceptions, which was duly allowed. After the bill of exceptions was received in the
Supreme Court M presented a motion asking that the appeal of C be not allowed upon the
ground that the judgment of the lower court was not final." In that case the court held "that
said motion should be granted for the reason that the lower court had only resolved a part of
the question presented to it and that the decree of the lower court did not finally determine
the action or proceeding in said cause; that bills of exceptions should only be allowed upon
final judgments which finally determine the action or proceeding in the lower court." In the
opinion the court said: "We are of the opinion and so hold that it was the purpose of the
legislature in enacting the provisions of sections 123 and 143 of the Code of Procedure in
Civil Actions to prohibit appeals except from decisions of the lower court which finally
determine the action or proceeding." The opinion cites many cases from Supreme Court of
the United States and other American courts and also several decisions of this court. It is
entirely in point with the case at bar and should be followed. No one has offered any
explanation why it is not followed and I know of none.

In the case of Toribio vs. Toribio (7 Phil. Rep., 526), the judgment provided that "therefore,
the court, after considering the facts proved and the law applicable thereto, orders that the
defendants within sixty days submit for the consideration of the court an inventory of all of
the goods and property of them deceased Narciso Natalio Lopez, and that they render
accounts of administration of the same in order that the court may make the proper order for
the protection of the respective rights of all the parties interested, reserving final decision of
the cause until the proper time."
The opinion, after citing sections 123 and 143 of the Code of Civil Procedure and decisions
of the Supreme Court of the United States, held that the judgment was not final inasmuch
as the court required the rendering of an account by the defendants. Many of the cases
cited assert the proposition that, under laws such as are found in sections 123 and 143 of
the Code of Civil Procedure, an appellate court has no jurisdiction in an appeal taken from a
judgment which is not final. (Guarantee Company vs. Mechanics' Savings Bank etc., 173
U.S., 582.)

In the case of Ron vs. Mojica (8 Phil. Rep., 328), it was held that "in a suit for the partition of
property, brought in accordance with the provisions of the Code of Civil Procedure, the
judicial order or resolution by virtue of which the judge declares who are the parties who
have a right to certain property belonging to several owners is not final, nor does it definitely
close the case, and is subject to exception." (Araullo vs. Araullo, 3 Phil. Rep., 567.)

I am of the opinion that the cases cited fully dispose of the right of the parties to appeal in
this case, as the judgment is not final by virtue of its very terms and the amount thereof
cannot possibly be known, if we accept the decision of the court below and of this court,
until the accountings required have been duly made and the amount fixed which one party
owes to the other.

This court, in dealing with the merits of this cause, has definitely settled the liability of the
defendant for many thousands or pesos. Will the judgment of this court as to this sum
become final at the end of the time prescribed by law? If so, what will the situation be if, on
the rendering of the accounts ordered by this decision, it shall be determined that the
plaintiff owes to the defendant a sum sufficient to offset the amount already found to be due
from the defendant to the plaintiff by the judgment of this court? Will the defendant be able
to reduce the final judgment in favor of the plaintiff, rendered by this court, by the amount
which is found due on the accounting? Or will it be obliged to offset the judgment of this
court in favor of the plaintiff by the sums found due it on the accounting in a separate
proceeding for that purpose? If there is a judgment in favor of the plaintiff and against the
defendant for P100,000, how can the defendant get the benefit of subsequent accountings
for P100,000 in its favor? This is not like an action of divorce or partition which can be
divided into two parts, each separate and distinct from the other, and the judgment as to
one part be, in a way, independent of the other. This is an action for a sum of money and
the several amounts claimed by the plaintiff and defendant, respectively, must be
aggregated and a balance struck before it can be determined how much one owes the
other. The action cannot be divided into parts. it is one single action; it cannot be
determined that the plaintiff is entitled to P100,000 on one cause of action, and that
determination affirmed by this court, and then the cause be sent back for the determination
of how much the plaintiff owes defendant on counterclaims. The determination necessary to
be made in an action for a sum of money is the amount due from defendant to plaintiff. In
the very nature of things, no final judgment can be rendered until the amount due is actually
determined and fixed. No such determination has been made in this case.

For these reasons I dissent. The treatment of this case by the court is without precedent.

G.R. No. L-3407 June 29, 1951


PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
BERNARDO BAGAMASPAD and BIENVENIDO M. FERRER, defendants-appellants.

Jose G. Flores, for appellants.


Nemesio P. Labunao for appellee.

MONTEMAYOR, J.:

On May 25, 1948, the plaintiff Philippine National Bank, a banking corporation organized
and operating under the laws of the Philippines, with main office in the City of Manila and
agencies in different provinces like the province of Cotabato, initiated this suit in the Court of
First Instance of Cotabato for the purpose of collecting from the defendants Bernardo
Bagamaspad and Bienvenido M. Ferrer who, in the years 1946 and 1947, were its Agent
and Assistant Agent, respectively, in its Cotabato Agency, the sum of P704,903.18, said to
have been disbursed and released by them as special crop loans, without authority and in a
careless manner to manifestly insolvent, unqualified or fictitious borrowers, all contrary to
the rules and regulations of the plaintiff Bank. In the course of the trial, upon petition of
plaintiff's counsel, the amount of the claim was reduced to P699,803.57, due to payments
made by some of the borrowers. On March 31, 1949, the trial court rendered judgment in
favor of the plaintiff, ordering both defendants to pay jointly and severally to it the sum of
P699,803.57, representing the uncollected balance of the special crop loans improperly
released by said defendants, with legal interest thereon from the date of the filing of the
complaint, plus costs. The two defendants appealed from that decision. The appeal was first
taken to the Court of Appeals but in view of the amount involved it was certified to this
Tribunal by the said Court of Appeals.

The uncontroverted facts in the present case may be briefly stated as follows. Because of
the Pacific War and by reason of the destruction and loss of animals of labor, farm
implements, and damage to or abandonment of farm lands, after liberation there was acute
shortage of foodstuff. President Roxas in order to foment and encourage food production,
instructed the plaintiff Philippine National Bank to extend special facilities to farmers in the
form of crop loans in order to enable them to rehabilitate their farms. In pursuance of said
instructions and to cooperate with the Administration, the plaintiff Bank passed the
corresponding resolution (Exhibit B) authorizing the granting of ten-month special crop
loans to bona fide food producers, land-owners or their tenants, under certain conditions.
Delfin Buencamino, one of the Vice-President of the Bank and head of the Branches and
Agencies Department of said institution, was entrusted with the supervision of the granting
of these loans. Juan Tueres, one of the Assistant Managers of said Department drafted the
corresponding rules and regulations regarding the granting of said specials crops loans.
After approval by Buencamino, these rules and regulations were embodied in a circular
letter (Exhibit C), a copy of which was personally delivered to defendant Ferrer. These rules
and regulations were later amplified by another circular letter (Exhibit D). Besides
circularizing its branches and agencies with these rules and regulations, on June 14, 1946,
the Bank held in Manila a conference in of all its manager and Agents. Defendant Ferrer,
Assistant Agent of the Cotabato Agency attended the conference in representation of said
Agency. He arrived late but Tueres explained to him what had been discussed during the
conference, emphasizing to him the necessity of exercising diligence and care in the
granting of the crop loans to see to it that they are granted only tobona fide planters, land-
owners or tenants, as well as repeating to him the advice of Vicente Carmona, President of
the bank, that the Managers and Agents of the Bank should not allow themselves to be
fooled.

The Cotabato Agency under the management of the two defendants began granting these
special crop loans in July, 1946, and by March of the following year, 1947, said Agency had
granted to over 5,000 borrowers, loans in the total amount of a little over eight and half
million pesos.

The theory on which the Bank's claim and complaint are based is that the two defendants
Bagamaspad and Ferrer acting as Agent and Assistant Agent of the Cotabato Agency, in
granting new crop loans after November 13, 1946, violated the instructions of the Bank, and
that furthermore, in granting said crop loans, they acted negligently and did not exercise the
care and precaution required of them in order to prevent the release of crop loans to
persons who were neither qualified borrowers nor entitled to the assistance being rendered
by the Government and the Bank, all contrary to the rules and regulations issued by the
Bank.

Because of the form heavy disbursements made by the Cotabato Agency in the form of
crop loans and because of exhaustion of its funds, said agency sent a telegram, Exhibit 11,
dated November 11, 1946, requesting authority from the central office to secure cash from
the Zamboanga Agency. Replying to this telegram, Delfin Buencamino sent a letter, Exhibit
E, dated November 13, 1946, addressed to the Cotabato Agency stating among other
things that the purposes of these funds (to be obtained from the Zamboanga Agency was to
meet the release of the second installment crop loans being granted which according to the
telegram aggregated P60,000 daily. The letter reminded the Agency's that the Central office
had not yet received the Agency's monthly reports on special crop loans granted, as
required by the regulations, and it emphasized the necessity of performing inspection of the
field to verify whether the amount released as first installment was actually used for the
purpose for which it was granted, before releasing the second installment. In relation with
the said letter, Exhibit F, dated November 18, 1946, to the central office making reference to
said Exhibit E, reiterating the Agency's heavy disbursements on second installments for
crop loans and stating that Ferrer had been instructed to proceed to Zamboanga to secure
the needed cash, and that Ferrer was able to secure P300,000 from the Zamboanga
Agency. Then making reference to and quoting a portion of the letter of Buencamino,
Exhibit E, Bagamaspad in his letter said:

In connection with the following portion:

"In this connection, we would like to state that the purpose of these funds is to meet
the release of the second installment of crop loans being granted by that agency,
which, according to your said telegram, will run toP600,000 daily."

of your above mentioned letter, may we know if could still entertain new applicants
on Special Crop Loans? We are constrained to request for this matter because there
are now on file no less than 1,000 new applicants which we could not entertain
because of your above quoted statement. Yesterday they held a demonstration and
copy of the picture is hereto attached. In addition, there are about 5,000 settlers in
Koronadal Valley who, according to your indorsement of Oct. 31, 1946 to the
Technical Assistant to the President of the Philippines, could be given crop loans. If
we could not therefore disburse from the funds taken from Zamboanga Agency
against first installment of applicants on crop loans, we shall appreciate if you could
give us definite course of action towards the clarifications of our stand to the public.

We are again sending Asst. Agent B.M. Ferrer to Zamboanga to despatch this letter
without delay and wait there for whatever instruction that you may give with
reference to our desire to secure more cash from our Zamboanga Agency, say
P1,000,000 and whether we shall continue granting special crop loans or not.

With reference to the cash that we desire to secure more, we could tell you with
assurance that the same shall arrive their safely under guard on a chartered plane
which will cost not more than P300 only.

From this letter of Bagamaspad of which his co-defendant and Ferrer must have been
aware, because he himself prepared it upon order of Bagamaspad(pp. 340-344, t.s.n.),
particularly the portion above-quoted, it will be seen that without waiting for authority to
secure funds from the Zamboanga Agency, Ferrer obtained P300,000 from said Agency,
and that Bagamaspad again had sent Ferrer to Zamboanga to await instruction from the
central office regarding their desire and intention to secure in additional P1,000,000 for the
Cotabato Agency. As matter of fact, however, once in Zamboanga, and without waiting for
instructions, Ferrer again secured P500,000 from the Zamboanga Agency. It was while
Ferrer already carrying the P500,000 was about to board the plane that was to taken him to
Cotabato, that he received the answer from the central office, Exhibit G, authorizing him to
obtain only P3,0000,000 from the Zamboanga Agency, with the statement that as soon as
the said amount was exhausted, the Cotabato Agency may again request for
replenishment. This letter of the Central Office again emphasized the necessity of strict
compliance with the rules and regulations regarding the required field inspection before
releasing the second installment. The said letter, Exhibit G, ended with the following:

Concerning the new special crop loan applications numbering about 1,000, we would
like to be informed whether the farms of the said applicants have already been
actually planted, considering that at this periodplanting season in low-land palay
region is now over. As the purpose for which special crop loans are being granted by
the Bank is to provide the farmers with funds to meet the expenses of their farms
and if said farms have already been planted, we believe that the farmers may not
need said credit facilities unless it has been found out by actual investigation and
verification that said loans are needed by them.

Please, therefore, let us hear from you regarding this matter. (Emphasis ours)

In answer to this letter, Exhibit G, defendants sent a telegram, Exhibit H, dated November
25, 1946 to the central office in Manila, stating that for Cotabato, the planting season for
second crops of December. In answer to Exhibit H, the central office sent a telegram,
Exhibit I, dated November 28, 1946, expressly instructing the Cotabato Agency to
discontinue granting new crop loans. The defendants claim that this telegram, Exhibit I, was
received by them by mail on December 7, 1946.

In their brief the appellant contend that the trial court erred in finding and holding that
extending new special crop loans after November 26, 1946, amounting to P726,680, as
they as Agent and Assistant Agent, respectively, of the of the Cotabato Agency, did so at
their own risk and in violation of the instructions received from the Manila office; also that
the court erred in holding that they (appellants) acted with extreme laxity, negligence and
carelessness in granting said new special crops loans. On the first assigned error
appellants maintain that outside of the telegram, Exhibit I, which they claim to have received
only on December 7, 1946, there was no instruction by the central office stopping the
granting of new special crop loans.

It may be that there was no such express instruction couched in so many words directly
ordering the defendants to stop granting new special crop loans, but that said idea of the
central office could be gathered from its letter, Exhibit E, and that it was understood and
clearly, by the defendants, is evident. If defendants did not so understand it, namely, that
they were no longer authorized to grant new special crop loans, how else may we interpret
the contents of the letter of Bagamaspad, Exhibit F, particularly that portion wherein after
quoting a portion of the central office letter Exhibit E, he asks if they (defendants) could still
entertain new applications for special crop loans? At least, they then doubted their to grant
new special crop loans and until that doubt was cleared up and determined by new
instructions from their superiors, it was their bounden duty to stop granting new loans.
Appellant Ferrer himself, in response to question asked by the trial court during the hearing,
said that in case of doubt as to whether or not to disburse funds of the bank, he should
consult and await instructions. Appellants asked for instructions as to whether or not they
should grant new special crop loans. This request for instructions is contained clearly in
Bagamaspad's letter, Exhibit F, where in one paragraph he ask: "May we know if we could
still entertain new applications on special crop loans?" And, in another paragraph he says?
"We are again sending Asst. Agent B.M. Ferrer to Zamboanga . . . and wait there for further
instructions that you may give . . . and whether we shall continue granting special crops
loans or not." The trouble is that without waiting for said requested instructions, appellants
proceeded to grant new special crop loans from November 26, 1946, to January 4, 1947.

Appellants not only granted new special crop loans after they were given to understand by
the central office that they should no longer grant said loans and before appellants received
instructions as to what they should do in that regard, but they also violated the express
instructions of the Bank to the effect that funds received from the Zamboanga Agency
should be utilized only to pay second installments on special crop loans. Of course,
defendants contend that the total of P800,000 secured from the Zamboanga Agency were
all used in paying second installments, but the contrary is amply established by Exhibit T, a
statement prepared by Felicisimo Lopez, Chief Examiner of the Bank showing that out of
the P500,000 secured from the Zamboanga Agency on or about November 18, 1946, the
amount of P232,931.58 was paid on account of new special crop loans or first installments.
The plaintiff-appellee Bank in its brief explains in details this use of part of the Zamboanga
funds in paying first installments on new crop loans.
As to the alleged error committed by the trial court in finding and holding that the appellants
were extremely lax, negligent and careless in granting new special crop loans, we quote
with approval a portion of the well considered decision of the trial Judge, Hon. Arsenio
Solidum, on this point:

From the evidence of record, one cannot help but be amazed at the extreme laxity,
negligence and carelessness on the part of the defendants in the granting of the
special crop loans. It seems that all precautions to protect the interest of the
Philippine National Bank as the principal of the defendants were thrown overboard.
From all appearances, the door of the Cotabato Agency was left wide open by the
defendants as an invitation for all persons to come in secure from them special crop
loans regardless of whether or not under the rules prescribed therefor they were
rightfully entitled thereto. . . . (p. 165, Record on Appeal)

xxx xxx xxx

What really happened was that in those days of crop loan boom, the borrowers
made a holiday of the funds of the Cotabato Agency of the Philippine National Bank
with indulgence and tolerance of the defendants as the managing officials of the
Agency. And the saddest part of it all was that the money did not go to the farmers
who needed it most but to unscrupulous persons, who, taking undue advantage of
the laxity and looseness of the defendants in doling out these loans, secured special
crop loan funds without the least idea of investing them in food production campaign
for which they were primarily intended. Part of the booty went to the pockets of those
who acted as intermediaries in the procurement of the loans under the very noses of
the defendants fully knowing that such practice was prohibited by the rules and
regulations of the Philippine National Bank governing the operation of the provincial
agencies (Exhibits "W", "T-1", to "T-11", "U-1" to "U-2") . . . (pp. 176-177, Record on
Appeal)

The lower court as may be seen, severely critcized and condemned the acts of laxity,
negligence and carelessness of the appellants. But the severity of this criticism and
condemnation would appear to be amply warranted by the evidence. Out of the numerous
acts of laxity, negligence and carelessness established by the record, a few cases may be
cited. Exhibit C and D which contain instructions and rules and regulations governing the
granting of special crop loans, provide that before a crop is granted the Agent or Sub-Agent
of the Bank must be satisfied that the applicant is either landowner well known to be
possessing the particular property on which the crop is to be produced, the particular
property on which the crop ids to be produced, or if the applicant be tenant he must be
recommended by the landowner concerned or in the absence of said landowner must be
properly identified that he is the bona fide tenant actually tilling the land from which the crop
to mortgage would be harvested.

The evidence shows that in violation of these instructions and regulations, the defendants
released large loans aggregating P348,768.22 to about 103 borrowers who were neither
landowners or tenants but only public land sales applicants that is to say, persons who have
merely filed applications to buy public lands. It is a well known fact that when a person
desires to apply for the purchase of public lands usually containing trees, under brush,
cogon or other wild vegetation, and never previously cultivated, he merely goes over the
land, takes it out and then files his application, tries to determine the location of the land, its
identity, proceeds to classify it to see if it is open to sale and if so, perhaps makes rough
survey of it to establish its exact location and fix boundaries with respect to the entire area
of the public domain. The application naturally carries no implication of occupancy,
possession, much less cultivation and dominion. And yet, in spite of all this, the applicants
who were neither landowners or tenants.

The record further shows that Mr. Villamarzo, District Land Officer for Cotabato with whom
these sale applications had been filed, came to know that he had been issuing to the
applicants, which were nothing but acknowledgements of the filing of the applications, had
been used by said applicants to secure special crop loans, and so he went to see the
appellants as early as the middle of August of 1946 and advised them that those certificates
were issued merely to show that applications had been filed with him but that it did not
mean that said applications had already been investigated, much less that the lands
covered by them had been surveyed. Then about the end of the same month Villamarzo
accompanied by Almonte, a Division Land Inspector of the Bureau of Lands, again went to
the defendants and repeated the advice and warning. Despite all these, as already stated,
appellants granted new special crop loans to 103 of these public land sales applicants,
knowing as they must have known that the borrowers were neither landowners nor tenants.
Furthermore, it should be remembered that these special crop loans according to
regulations were payable in ten (10) months, and were to be secured by chattel mortgages
on the crops to be produced. A virgin land, especially if covered with trees or underbrush,
needs to be cleared and placed in condition for cultivation before crops may produced. That
work of clearing would take some time. A public land sale applicant, even assuming that he
immediately began to clear the land applied for even before favorable action on his
application is taken, is hardly in a position to meet the requirements of the regulations
governing the granting of special crop loans, namely, to mortgage the crop he is going to
produce, and pay the loan within ten months.

Appellants in their over-enthusiasm and seemingly inordinate desire to grant as many loans
as possible and in amounts disproportionate to the needs of the borrowers, admitted and
passed upon more loan applications than they could properly handle. From July, 1946 to
March, 1947 the total amount of about eight and half (81/2) million pesos was released in
the form of special crop loans to about 5,105 borrowers and this, in a relatively sparsely
populated province like Cotabato. As a consequence of this big volume of business the
bookkeeper of the Agency could not keep up with the posting of the daily transactions in his
books and ledgers and he was several months behind. There were so many applications
acted upon and accepted that they could not all be carefully examined and many of them do
not even bear the initials or signatures of the appellants as required by regulations. Some of
the chattel mortgages given to secure the payments of the loans, contrary to regulations, do
not show the number of cavans of palay to be produced on the land and to be mortgaged in
favor of the Bank.

Contrary to the Bank's rules and regulations regarding the granting of special crops loans,
the defendants allowed intermediaries to intervene in the granting of special crop loans.
Many lawyers, business agents and other persons intervened in the granting of the loans.
We may have an idea of the of the part played by these intermediaries by referring to a
portion of the report, Exhibit V, prepared by Mr. Lagdameo, one of the Assistant Managers
of the Agencies and Branches Department of the plaintiff Bank, sent to Cotabato to
investigate the crop loan anomalies in the Cotabato Agency, which portion we quote below:

On top of this, were the heavy expenses incurred by the borrowers to secure crop
loans. The rush was so unprecendented that applicants had to stay had to stay for
weeks in hotels in Cotabato to lobby for the approval of their applications. They even
went to the extent of engaging intermediaries who in the words of some borrowers
were the best ones to fix things with the agency for the approval and immediate
release of the loan. These intermediaries are government employees and business
agents and particularly practicing attorneys who charged fees up to 5 per cent of the
total loans approved. Instances have been shown that the Agency itself collected the
attorney's fees and delivered them to the parties concerned. In other cases, the
intermediaries themselves were the ones who received the proceeds of the loans
and distributed them to the borrowers. It has also been found that loan papers
including the preparation of promissory notes, debit tickets, etc., were prepared by
said intermediaries and submitted to the Agency already executed. . . ..

There is evidence to the effect that sometimes the fees of these intermediaries were
collected by the Agency itself and were later turned over to appellant Ferrer, perhaps to be
later given by him to said intermediaries.

One of the provisions of the rules and regulations concerning the granting of loans is to the
effect that loans to be released by a Provincial Agency like that of the appellant's should be
approved by loan Board to be composed of the Agent, like defendant Bagamaspad; the
Assistant Agent, like defendant Ferrer or the Inspector if there is no Assistant Agent; and
the Municipal Treasurer where the borrower resides. The evidence, however, shows that
many of the special crop loans released by the appellants have not been approved by this
Board and others have not even been approved by anyone of them.

It will be remembered that in the letter of Vice President Buencamino, Exhibit G, dated
November 19, 1946, speaking of the new special crop loan applications numbering about
1,000 mentioned by appellant Bagamaspad in his letter, Exhibit F, the plaintiff Bank wanted
to know whether on that date, November 19th, the farmers in Cotabato had already planted
their farms in which case there was no need for obtaining crop loans to meet the expenses
of planting. Answering this query, the Cotabato Agency under the appellants, sent a
telegram (Exhibit H) dated November 25, 1946, to the plaintiff Bank saying that the planting
season for Cotabato for second crops ends in December. This was evidently intended to
justify the granting of special crop loans even at the end of the year. The evidence however,
belies the correctness of this statement and information. Mr. Aniceto Padilla, Assistant
Provincial Agricultural Supervisor, a graduate of the College of Agriculture of the University
of the Philippines, told the court that his office, which is the Provincial Agricultural Station in
Cotabato, has determined the proper period for planting crops raised in that province and
that for upland palay, the planting season is during the months of March, April up to May;
that for lowland palay is June and July; and that second crops may be planted in September
even as late as October. From this, one may conclude that it is not true as the appellants
informed the bank that the planting season for palay (second crop) in Cotabato ends in
December. Whether this incorrect information was given deliberately or thru negligence and
carelessness, we deem it unnecessary to determine.

To give a further idea of the confusion, lack of care and method with which the Cotabato
Agency was managed by the appellants, the record shows that in January, 1947, Mr.
Simeon Intal, Traveling Auditor of the Philippine National Bank, was sent to Cotabato with
instructions to make an audit of the accounts of the Cotabato Agency and to see for himself
the reported irregularities being committed in said Agency with respect to the granting of
special crop loans. According to Mr. Intal he found the Cotabato Agency like a market place
full of people. He saw crop loan papers like promissory notes, loan applications and chattel
mortgages scattered all over the Agency, some on the desks of employees, on open
shelves or on top of filing cabinets, and others on the floor. He found that transactions which
had taken place five months before were not yet posted in the books of the Agency. In
February, 1947, Mr. Amado Lagdameo, then one of the Assistant Managers of the
Branches and Agencies Department of the Bank, was also sent to Cotabato and there he
found the same condition found and reported by Intal. In order to make thorough
investigation of the anomalies reportedly obtaining in the Cotabato Agency, Felicisimo
Lopez, a certified public accountant and Chief Examiner of the plaintiff Bank, was sent to
Cotabato in June, 1947. He checked up the findings of Intal about the deplorable condition
of the books and records of the Agency and he agreed with said findings. Lopez and Intal
and assisted by Benjamin de Guzman, Branch Auditor of the Bank at the Davao Branch,
Mr. Macuja (who later succeeded Benjamin de Guzman), Mr. Juan B. Sanchez, now Branch
Auditor in Legaspi, Mr. Antonio Cruz of the Head Office, Mr. Danao from Oriental Misamis,
Mr. Fernandez from Zamboanga and Mr. Romena of the Davao Branch, went to work on
the books and records of the books and records of the Cotabato Agency and it took them
almost four months to straighten out the special crop loan accounts and bring the books up-
to-date, after which, they found that as of June 10, 1947, the Cotabato Agency had released
special crop loans in the aggregate sum of P8,688,864.

To us who have always had the impression and the idea that the business of a Bank is
conducted in an orderly, methodical and businesslike manner, that its papers, especially
those relating to loans with their corresponding securities, are properly filed, well-kept and in
a safe place, its books kept up-to-date, and that its funds are not given out in loans without
careful and scrupulous scrutiny of the responsibility and solvency of the borrowers and the
sufficiency of the security given by them, the conditions obtaining in the Cotabato Agency
due to the apparent indifference, carelessness or negligence of the appellants, is indeed
shocking. And it is because of these shortcomings of the appellants their disregard of the
elementary rules and practice of banking and their violation of instructions of their superiors,
that these anomalies resulting in financial losses to the Bank were made possible.

The trial court based the civil liability of the appellants herein on the provisions of Arts. 1718
and 1719 of the Civil Code, defining and enumerating the duties and obligations of an agent
and his liability for failure to comply with such duties, and Art. 259 of the Code of Commerce
which provides that an agent must observe the provisions of law and regulations with
respect to business transactions entrusted to him otherwise he shall be responsible for the
consequences resulting from their breach or omissions; and also Art. 1902 of the Civil Code
which provides for the liability of one for his tortious act, that is to say, any act or omission
which causes damage to another by his fault or negligence. Appellants while agreeing with
the meaning and scope of the legal provisions cited, nevertheless insist that those
provisions are not applicable to them inasmuch as they are not guilty of any violation of
instructions or regulations of the plaintiff Bank; and that neither are they guilty of negligence
of carelessness as found by the trial court. A careful study and consideration of the record,
however, convinces us and we agree with the trial court that the defendants-appellants
have not only violated instructions of the plaintiff Bank, including things which said Bank
wanted done or not done, all of which were fully understood by them, but they (appellants)
also violated standing regulations regarding the granting of loans; and, what is more, thru
their carelessness, laxity and negligence, they allowed loans to be granted to persons who
were not entitled to receive loans.

It is the contention of the appellants that the act of plaintiff Bank in filling suits against the
borrowers to whom appellants were said to have granted loans without authority, which
suits resulted in the payment of part of said loans resulting in the reduction of the original
claim of the plaintiff Bank from P704,903.18 to P699,803.57, should be interpreted and
considered as a ratification of the acts of the appellants. What is more, it is more, it is
contended that it would be iniquitous for the plaintiff to go against the defendants for
whatever amounts may have been loaned by the latter and at the same time go against the
individual borrowers for collection of the respective sums borrowed by them. That would be
enriching the plaintiff at the expense of the defendants." We cannot subscribe to this theory.
As pointed out by Counsel for appellee, ordinarily, a principal who collects either judicially or
extrajudicially a loan made by an agent without authority, thereby ratifies the said act of the
agent. In the present case, however, in filing suits against some of the borrowers to collect
at least part of the unauthorized loans, there was no intention on the part of the plaintiff
Bank to ratify the acts of appellants. Neither did the plaintiff receive any substantial benefit
by its act of filing these suits if we consider the fact that the collections so far made, form a
small or insignificant portion of the entire principal and interest. And, we fail to see any
iniquity in this act of the plaintiff in suing some of the borrowers to collect what it could at the
same time holding the appellants liable for the balance, because the plaintiff Bank is not
trying to enrich itself at the expense of the defendants but is merely trying to diminish as
much as possible the loss to itself and automatically decrease the financial liability of
appellants. Considering the large amount for which appellants are found liable, it is a matter
of serious doubt if they are in a position to pay it. Moreover, whatever amount is collected
by the plaintiff Bank from borrowers, serves to diminish the financial liability of the
appellants, in the same way that the original claim of P704,903.18, at the very instance of
plaintiff was reduced to P699,803.57. In other words, the act of the plaintiff Bank in the
matter, far from being iniquitous, is really beneficial to the appellants.

Appellants further contend that the present action is rather premature for the reason that
there is no showing that the borrowers to whom they allegedly gave loans without authority,
are manifestly insolvent or unqualified, and that the loans granted to them are uncollectible
and have been written off the books of the Bank as "bad debts". We find this contention
untenable. It is not necessary for the plaintiff Bank to first go against the individual
borrowers, exhaust all remedies against them and then hold the defendants liable only for
the balance which cannot be collected. The case of Corsicana National Bank vs. Johnson,
64 L. ed. 141, cited by the trial court and by the plaintiff bank is in point. The issue in that
case whether or not a bank could proceed against one of its officials for losses which it had
sustained in consequence of the unauthorized loans released by said official, or whether it
should first pursue its remedies against the borrowers or await the liquidation of their
estates. The Supreme Court of the United States in said case held that the cause of action
of the Bank accrued and the injury to it was complete on the very day that the amounts of
the unauthorized loans were released by the erring official. We quote a part of that decision:

Assuming the Fleming and Templeton notes were found to represent an excessive
loan, knowingly participated in or assented to by defendant as a director of the Bank,
in our opinion the cause of action against him accrued on or about June 10, 1907,
when the Bank, through his act, parted with the money loaned, receiving in return
only negotiable paper that it could not lawfully accept because the transaction was
prohibited by section 5200, Rev. Stat. (Comp. Stat. section 9761, 6 Fed. Stat. Anno.
2d ed., p. 761). The damage as well as the injury was complete at that time, and the
Bank was not obliged to await the maturity of the notes, because immediately it
became the duty of the officers or directors who knowingly participated in making the
excessive loan to undo the wrong done by taking the notes off the hands of the Bank
and restoring to it the money that had been loaned. Of course, whatever of value the
Bank recovered from the borrowers on account of the loan would go in diminution of
the damages; but the responsible officials would have no right to require the Bank to
pursue its remedies against the borrowers or await the liquidation of their estates.
The liability imposed by the statute upon the director is a direct liability, not
contingent or collateral.

In view of all the foregoing, and finding no reversible error in the decision appealed from,
the same is hereby affirmed with costs against the appellants. So ordered.

Paras, C. J., Feria, Pablo, Bengzon, Tuason, Jugo and Bautista Angelo, JJ., concur.

SARGASSO CONSTRUCTION G.R. NO. 170530


& DEVELOPMENT
CORPORATION/PICK & Present:
SHOVEL, INC.,/ATLANTIC
ERECTORS, INC. (JOINT CARPIO, J., Chairperson,
VENTURE), NACHURA,
Petitioner, PERALTA,
ABAD, and
MENDOZA, JJ.

- versus -

PHILIPPINE PORTS Promulgated:


AUTHORITY,
Respondent. July 5, 2010
X -------------------------------------------------------------------------------------- X
DECISION

MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 which seeks to annul
and set aside the August 22, 2005 Decision[1] of the Court of Appeals (CA) in CA-
G.R. CV No. 63180 and its November 14, 2005 Resolution[2] denying petitioners
motion for the reconsideration thereof. The questioned CA decision reversed the
June 8, 1998 Decision[3] of the Regional Trial Court of Manila, Branch 14, in Civil
Case No. 97-83916, which granted petitioners action for specific performance.
The factual and procedural antecedents have been succinctly recited in the
subject Court of Appeals decision in this wise:[4]

Plaintiff Sargasso Construction and Development Corporation, Pick


and Shovel, Inc. and Atlantic Erectors, Inc., a joint venture, was awarded
the construction of Pier 2 and the rock causeway (R.C. Pier 2) for
the port of San Fernando, La Union, after a public bidding conducted by
the defendant PPA. Implementation of the project commenced on August
14, 1990. The port construction was in pursuance of the development of
the Northwest Luzon Growth Quadrangle. Adjacent to Pier 2 is an area
of P4,280 square meters intended for the reclamation project as part of
the overall port development plan.

In a letter dated October 1, 1992 of Mr. Melecio J. Go, Executive


Director of the consortium, plaintiff offered to undertake the reclamation
between the Timber Pier and Pier 2 of the Port of San Fernando, La Union,
as an extra work to its existing construction of R.C. Pier 2 and Rock
Causeway for a price of P36,294,857.03. Defendant replied thru its
Assistant General Manager Teofilo H. Landicho who sent the following
letter dated December 18, 1992:

This is to acknowledge receipt of your letter dated 01 October


1992offering to undertake the reclamation between the
Timber Pier and Pier 2, at the Port of San Fernando, La
Union as an extra work to your existing contract.

Your proposal to undertake the project at a total cost of


THIRTY SIX MILLION TWO HUNDRED NINETY FOUR
THOUSAND EIGHT HUNDRED FIFTY SEVEN AND
03/100 PESOS (P36,294,857.03) is not acceptable to PPA. If
you can reduce your offer to THIRTY MILLION SEVEN
HUNDRED NINETY FOUR THOUSAND TWO HUNDRED
THIRTY AND 89/100 (P30,794,230.89) we may consider
favorably award of the project in your favor, subject to the
approval of higher authority.

Please signify your agreement to the reduced amount


of P30,794,230.89 by signing in the space provided below.
(emphasis in the original)

On August 26, 1993, a Notice of Award signed by PPA General


Manager Rogelio Dayan was sent to plaintiff for the phase I Reclamation
Contract in the amount of P30,794,230.89 and instructing it to enter into
and execute the contract agreement with this Office and to furnish the
documents representing performance security and credit line. Defendant
likewise stated [and] made it a condition that fendering of Pier No. 2 Port
of San Fernando, and the Port of Tabaco is completed before the approval
of the contract for the reclamation project. Installation of the rubber dock
fenders in the said ports was accomplished in the year 1994. PPA
Management further set a condition [that] the acceptance by the
contractor that mobilization/demobilization cost shall not be included in
the contract and that escalation shall be reckoned upon approval of the
Supplemental Agreement. The award of the negotiated contract as
additional or supplemental project in favor of plaintiff was intended to
save on the mobilization/demobilization costs and some items as provided
for in the original contract. Hence, then General Manager Carlos L.
Agustin presented for consideration by the PPA Board of Directors the
contract proposal for the reclamation project.

At its meeting held on September 9, 1994, the Board decided not to


approve the contract proposal, as reflected in the following excerpt of the
minutes taken during said board meeting:

After due deliberation, the Board advised


Management to bid the project since there is no strong legal
basis for Management to award the supplemental contract
through negotiation. The Board noted that the Pier 2 Project
was basically for the construction of a pier while the
supplemental agreement refers to reclamation. Thus there is
no basis to compare the terms and conditions of the
reclamation project with the original contract (Pier 2 Project)
of Sargasso.[5]

It appears that PPA did not formally advise the plaintiff of the Boards
action on their contract proposal. As plaintiff learned that the Board was
not inclined to favor its Supplemental Agreement, Mr. Go wrote General
Manager Agustin requesting that the same be presented again to the Board
meeting for approval. However, no reply was received by plaintiff from the
defendant.

On June 30, 1997, plaintiff filed a complaint for specific performance and
damages before the Regional Trial Court of Manila alleging that defendant
PPAs unjustified refusal to comply with its undertaking, unnecessarily
leading to the delay in the implementation of the award under the August
26, 1993 Notice of Award, has put on hold plaintiffs men and resources
earmarked for the project, aside from effectively tying its hands in
undertaking other projects for fear that plaintiffs incapacity to undertake
work might be spread thinly and it might not be able to function efficiently
if the PPA project and other projects should require simultaneous
attention. Plaintiff averred that it sought reconsideration of the August 9,
1996 letter of PPA informing it that it did not qualify to bid for the
proposed extension of RC Pier No. 2, Port of San Fernando, La Union for
not having IAC Registration and Classification and not complying with
equipment requirement. In its letter dated September 19, 1996, plaintiff
pointed out that the disqualification was clearly unjust and totally without
basis considering that individual contractors of the joint venture have
undertaken separately bigger projects, and have been such individual
contractors for almost 16 years. It thus prayed that judgment be rendered
by the court directing the defendant (a) to comply with its undertaking
under the Notice of Award dated August 26, 1993; and (b) to pay plaintiff
actual damages (P1,000,000.00), exemplary damages (P1,000,000.00),
attorneys fees (P300,000.00) and expenses of litigation and costs
(P50,000.00).

Defendant PPA thru the Office of the Government Corporate Counsel


(OGCC) filed its Answer with Compulsory Counterclaim contending that
the alleged Notice of Award has already been properly revoked when the
Supplemental Agreement which should have implemented the award was
denied approval by defendants Board of Directors. As to plaintiffs pre-
disqualification from participating in the bidding for the extension of R.C.
Pier No. 2 Project at the Port of San Fernando, La Union, the same is
based on factual determination by the defendant that plaintiff lacked IAC
Registration and Classification and equipment for the said project as
communicated in the August 9, 1996 letter. Defendant disclaimed any
liability for whatever damages suffered by the plaintiff when it jumped the
gun by committing its alleged resources for the reclamation project despite
the fact that no Notice to Proceed was issued to plaintiff by the defendant.
The cause of action insofar as the Extension of R.C. Pier No. 2 of the Port
of San Fernando, La Union, is barred by the statute of limitation since
plaintiff filed its request for reconsideration way beyond the seven (7) day-
period allowed under IB 6-5 of the Implementing Rules and Regulations of
P.D. 1594. Defendant clarified that the proposed Reclamation Project and
Extension of R.C. Pier No. 2 San Fernando, La Union, are separate
projects of PPA. The Board of Directors denied approval of the
Supplemental Agreement on September 9, 1994 for lack of legal basis to
award the supplemental contract through negotiation which was properly
communicated to the plaintiff as shown by its letter dated September 19,
1994 seeking reconsideration thereof. As advised by the Board, PPA
Management began to make preparations for the public bidding for the
proposed reclamation project. In the meantime, defendant decided to
pursue the extension of R.C. Pier 2, San Fernando, La Union. xxx It
[prayed that the complaint be dismissed]. (Emphasis supplied)

After trial, the lower court rendered a decision in favor of the plaintiff, the
dispositive portion of which reads:

WHEREFORE, and in view of the foregoing considerations,


judgment is hereby rendered ordering the defendant to execute a contract
in favor of the plaintiff for the reclamation of the area between the Timber
Pier and Pier 2 located at San Fernando, La Union for the price
of P30,794,230.89 and to pay the costs.

The counterclaim is dismissed for lack of merit.

SO ORDERED.[6]

In addressing affirmatively the basic issue of whether there was a perfected


contract between the parties for the reclamation project, the trial court ruled that
the higher authority x x adverted to does not necessarily mean the Board of
Directors (Board). Under IRR, P.D. 1594 (1)B10.6, approval of award and
contracts is vested on the head of the infrastructure department or its duly
authorized representative. Under Sec. 9 (iii) of P.D. 857 which has amended P.D.
505 that created the PPA, one of the particular powers and duties of the General
Manager and Assistant General Manager is to sign contracts.[7] It went on to say
that in the case of the PPA, the power to enter into contracts is not only vested on
the Board of Directors, but also to the manager citing Section 9 (III) of P.D. No.
857.[8]
The trial court added that the tenor of the Notice of Award implied that
respondents general manager had been empowered by its Board of Directors to
bind respondent by contract. It noted that whereas the letter-reply contained the
phrase approval of the higher authority, the conspicuous absence of the same in the
Notice of Award supported the finding that the general manager had been vested
with authority to enter into the contract for and in behalf of respondent. To the trial
court, the disapproval by the PPA Board of the supplementary contract for the
reclamation on a ground other than the general managers lack of authority was an
explicit recognition that the latter was so authorized to enter into the purported
contract.

Respondent moved for a reconsideration of the RTC decision but it was


denied for lack of merit. Respondent then filed its Notice of Appeal. Subsequently,
petitioner moved to dismiss the appeal on the ground that respondent failed to
perfect its appeal seasonably. On June 27, 2000, the Court of Appeals issued a
Resolution[9] dismissing respondents appeal for having been filed out time.
Respondents motion for reconsideration of said resolution was also denied.[10]

Undaunted, respondent elevated its problem to this Court via a petition for
review on certiorari under Rule 45 assailing the denial of its appeal. On July 30,
2004, the Court rendered an en banc decision[11] granting respondents petition on a
liberal interpretation of the rules of procedure, and ordering the CA to conduct
further proceedings.

On August 22, 2005, the CA rendered the assailed decision reversing the
trial courts decision and dismissing petitioners complaint for specific performance
and damages. Thus, the dispositive portion thereof reads:

WHEREFORE, premises considered, the present appeal is hereby


GRANTED. The appealed Decision dated June 8, 1998 of the trial court in
Civil Case No. 97-83916 is hereby REVERSED and SET ASIDE. A new
judgment is hereby entered DISMISSING the complaint for specific
performance and damages filed by Plaintiff Sargasso Construction and
Development Corporation/Pick & Shovel, Inc./Atlantic Erectors, Inc.,
(Joint Venture) against the Philippine Ports Authority for lack of merit.
In setting aside the trial courts decision, the CA ruled that the law itself
should serve as the basis of the general managers authority to bind respondent
corporation and, thus, the trial court erred in merely relying on the wordings of the
Notice of Award and the Minutes of the Board meeting in determining the limits of
his authority; that the power of the general manager to sign contracts is different
from the Boards power to make or enter (into) contracts; and that, in the execution
of contracts, the general manager only exercised a delegated power, in reference to
which, evidence was wanting that the PPA Board delegated to its general manager
the authority to enter into a supplementary contract for the reclamation project.

The CA also found the disapproval of the contract on a ground other than the
general managers lack of authority rather inconsequential because Executive Order
380[12] expressly authorized the governing boards of government-owned or
controlled corporations to enter into negotiated infrastructure contracts involving
not more than fifty million (P50 million). The CA further noted that the Notice of
Award was only one of those documents that comprised the entire contract and,
therefore, did not in itself evidence the perfection of a contract.

Hence, this petition.

The issue to be resolved in this case is whether or not a contract has been
perfected between the parties which, in turn, depends on whether or not the general
manager of PPA is vested with authority to enter into a contract for and on behalf
of PPA.

The petition fails.

Petitioner contends that the existence of Notice of Award of Contract and


Contractors Conforme thereto, resulting from its negotiation with respondent,
proves that a contract has already been perfected, and that the other documents
enumerated under the amended Rules and Regulations[13] implementing P.D.
1594[14] are mere physical representations of the parties meeting of the minds; that
the Approval of Award by Approving Authority is only a supporting document,
and not an evidence of perfection of contract, and which merely facilitates the
approval of the contract;[15] that PPA is bound by the acts of its general manager in
issuing the Notice of Award under the doctrine of apparent authority; and that the
doctrine of estoppel, being an equitable doctrine, cannot be invoked to perpetuate
an injustice against petitioner.

At the outset, it must be stated that there are two (2) separate and distinct,
though related, projects involving the parties herein, viz: (i) the construction of
Pier 2 and the rock causeway for the port of San Fernando, La Union, and (ii) the
reclamation of the area between the Timber Pier and Pier 2 of the same port.
Petitioners action for specific performance and damages merely relates to the
latter.

Every contract has the following essential elements: (i) consent, (ii) object
certain and (iii) cause. Consent has been defined as the concurrence of the wills of
the contracting parties with respect to the object and cause which shall constitute
the contract.[16] In general, contracts undergo three distinct stages, to wit:
negotiation, perfection or birth, and consummation. Negotiation[17] begins from the
time the prospective contracting parties manifest their interest in the contract and
ends at the moment of their agreement. Perfection or birth of the contract takes
place when the parties agree upon the essential elements of the contract, i.e.,
consent, object and price. Consummation occurs when the parties fulfill or
perform the terms agreed upon in the contract, culminating in the extinguishment
thereof. The birth or the perfection of the contract, which is the crux of the present
controversy, refers to that moment in the life of a contract when there is finally a
concurrence of the wills of the contracting parties with respect to the object and the
cause of the contract.[18]
A government or public contract has been defined as a contract entered
into by state officers acting on behalf of the state, and in which the entire people of
the state are directly interested. It relates wholly to matter of public concern, and
affects private rights only so far as the statute confers such rights when its
provisions are carried out by the officer to whom it is confided to perform.[19]

A government contract is essentially similar to a private contract


contemplated under the Civil Code. The legal requisites of consent of the
contracting parties, an object certain which is the subject matter, and cause or
consideration of the obligation must likewise concur. Otherwise, there is no
government contract to speak of.[20]

As correctly found by the CA, the issue on the reclamation of the area
between Timber Pier and Pier 2 of the Port of San Fernando involves a government
infrastructure project, and it is beyond dispute that the applicable laws, rules and
regulations on government contracts or projects apply.

On the matter of entering into negotiated contracts by government-owned


and controlled corporations, the provisions of existing laws are crystal clear in
requiring the governing boards approval thereof. The Court holds that the CA
correctly applied the pertinent laws, to wit:
Executive Order No. 380 provides for revised levels of authority on
approval of government contracts. Section 1 thereof authorizes GOCCs:
1. To enter into infrastructure contracts awarded
through public bidding regardless of the amount involved;
2. To enter into negotiated infrastructure contracts
involving not more than one hundred million pesos (P100
million) in the case of the Department of Transportation and
Communications and the Department of Public Works and
Highways, and not more than fifty million pesos (P50 million) in
the case of the other Departments and governments
corporations; Provided, That contracts exceeding the said
amounts shall only be entered into upon prior authority from
the Office of the President; and Provided, Further, That said
contracts shall only be awarded in strict compliance with
Section 5 of Executive Order No. 164, S. of 1987.
xxx
The rule on negotiated contracts, as amended on August 12, 2000 (IB
10.6.2) now reads

1. Negotiated contract may be entered into only where any of the


following conditions exists and the implementing
office/agency/corporation is not capable of undertaking the contract by
administration:

a. In times of emergencies arising from natural calamities


where immediate action is necessary to prevent imminent
loss of life and/or property or to restore vital public
services, infrastructure and utilities such as
b. Failure to award the contract after competitive public
bidding for valid cause or causes

c. Where the subject project is adjacent or contiguous to an


on-going project and it could be economically prosecuted
by the same contractor provided that subject contract has
similar or related scope of works and it is within the
contracting capacity of the contractor, in which case, direct
negotiation may be undertaken with the said contractor

xxx

In cases a and b above, bidding may be undertaken through sealed


canvass of at least three (3) qualified contractors Authority to negotiate
contract for projects under these exceptional cases shall be subject to
prior approval by heads of agencies within their limits of approving
authority.[21](emphasis in the original)

Furthermore, the Revised Administrative Code[22] lays down the same requirement,
thus:

Sec. 51. Who May Execute Contracts. Contracts in behalf of the


Republic of the Philippines shall be executed by the President unless
authority therefore is expressly vested by law or by him in any other
public officer.

Contracts in behalf of the political subdivisions and corporate


agencies or instrumentalities shall be approved by their respective
governing boards or councils and executed by their respective executive
heads.

Petitioner neither disputes nor admits the application of the foregoing


statutory provisions but insists, nonetheless, that the Notice of Award itself already
embodies a perfected contract having passed the negotiation stage[23] despite the
clear absence thereon of a condition requiring the prior approval of respondents
higher authority.

Petitioners argument is untenable. Contracts to which the government is a


party are generally subject to the same laws and regulations which govern the
validity and sufficiency of contracts between private individuals.[24] A government
contract, however, is perfected[25] only upon approval by a competent authority,
where such approval is required.[26]

The contracting officer functions as agent of the Philippine


government for the purpose of making the contract. There arises then, in
that regard, a principal-agent relationship between the Government, on
one hand, and the contracting official, on the other. The latter though, in
contemplation of law, possesses only actual agency authority. This is to
say that his contracting power exists, where it exists at all, only because and
by virtue of a law, or by authority of law, creating and conferring it. And it is
well settled that he may make only such contracts as he is so authorized to
make. Flowing from these basic guiding principles is another stating that
the government is bound only to the extent of the power it has actually
given its officers-agents. It goes without saying then that, conformably to a
fundamental principle in agency, the acts of such agents in entering into
agreements or contracts beyond the scope of their actual authority do not
bind or obligate the Government. The moment this happens, the principal-
agent relationship between the Government and the contracting officer
ceases to exist.[27] (emphasis supplied)

It was stressed that

the contracting official who gives his consent as to the subject


matter and the consideration ought to be empowered legally to bind the
Government and that his actuations in a particular contractual
undertaking on behalf of the government come within the ambit of his
authority. On top of that, the approval of the contract by a higher authority
is usually required by law or administrative regulation as a requisite for its
perfection.[28]

Under Article 1881 of the Civil Code, the agent must act within the scope of
his authority to bind his principal. So long as the agent has authority, express or
implied, the principal is bound by the acts of the agent on his behalf, whether or
not the third person dealing with the agent believes that the agent has actual
authority.[29] Thus, all signatories in a contract should be clothed with authority to
bind the parties they represent.

P.D. 857 likewise states that one of the corporate powers of respondents
Board of Directors is to reclaim any part of the lands vested in the Authority. It
also exercise[s] all the powers of a corporation under the Corporation Law. On the
other hand, the law merely vests the general manager the general power to sign
contracts and to perform such other duties as the Board may assign Therefore,
unless respondents Board validly authorizes its general manager, the latter cannot
bind respondent PPA to a contract.

The Court completely agrees with the CA that the petitioner failed to present
competent evidence to prove that the respondents general manager possessed such
actual authority delegated either by the Board of Directors, or by statutory
provision. The authority of government officials to represent the government in
any contract must proceed from an express provision of law or valid delegation of
authority.[30] Without such actual authority being possessed by PPAs general
manager, there could be no real consent, much less a perfected contract, to speak
of.

It is of no moment if the phrase approval of higher authority appears


nowhere in the Notice of Award. It neither justifies petitioners presumption that the
required approval had already been granted nor supports its conclusion that
no other condition (than the completion of fendering of Pier 2 as stated in the
Notice of Award) ought to be complied with to create a perfected
contract.[31] Applicable laws form part of, and are read into, the contract without
need for any express reference thereto;[32] more so, to a purported government
contract, which is imbued with public interest.

Adopting the trial courts ratiocination, petitioner further argues that had it been
true that respondents general manager was without authority to bind respondent by
contract, then the former should have disapproved the supplemental contract on
that ground.[33]Petitioner also interprets the Boards silence on the matter as an
explicit recognition of the latters authority to enter into a negotiated contract
involving the reclamation project. This posture, however, does not conform with
the basic provisions of the law to which we always go back. Section 4 of P.D.
1594[34] provides:[35]

Section 4. Bidding. Construction projects shall generally be


undertaken by contract after competitive public bidding. Projects may be
undertaken by administration or force account or by negotiated
contract only in exceptional cases where time is of the essence, or where
there is lack of qualified bidders or contractors, or where there is a
conclusive evidence that greater economy and efficiency would be
achieved through this arrangement, and in accordance with provision of
laws and acts on the matter, subject to the approval of the Ministry of
Public Works, Transportation and Communications, the Minister of Public
Highways, or the Minister of Energy, as the case may be, if the project cost
is less than P1 Million, and of the President of the Philippines, upon the
recommendation of the Minister, if the project cost is P1 Million or more.

Precisely, the Board of Directors of the respondent did not see fit to approve the
contract by negotiation after finding that the Pier 2 Project was basically for the
construction of a pier while the supplemental agreement refers to reclamation.
Thus, there is no basis to compare the terms and conditions of the reclamation
project with the original contract (Pier 2 Project) of Sargasso. So even
granting arguendo that the Boards action or inaction is an explicit recognition of
the authority of the general manager, the purported contract cannot possibly be the
basis of an action for specific performance because the negotiated contract itself
basically contravenes stringent legal requirements aimed at protecting the interest
of the public. The bottom line here is that the facts do not conform to what the law
requires.
No wonder petitioner conveniently omitted any attempt at presenting its case
within the statutory exceptions, and insisted that respondents disapproval of the
supplemental agreement was a mere afterthought perhaps realizing the infirmity of
its excuse (referring to petitioners belated pre-disqualification in the construction
project). But the Court, at the very outset, has previously clarified that the two
projects involved herein are distinct from each other. Hence, petitioners
disqualification in the construction project due to its lack of certain requirements
has no significant bearing in this case.

Lastly, petitioners invocation of the doctrine of apparent authority[36] is


misplaced. This doctrine, in the realm of government contracts, has been restated
to mean that the government is NOT bound by unauthorized acts of its agents, even
though within the apparent scope of their authority.[37] Under the law on agency,
however, apparent authority is defined as the power to affect the legal relations of
another person by transactions with third persons arising from the others
manifestations to such third person[38] such that the liability of the principal for the
acts and contracts of his agent extends to those which are within the apparent scope
of the authority conferred on him, although no actual authority to do such acts or to
make such contracts has been conferred.[39]

Apparent authority, or what is sometimes referred to as the holding out


theory, or doctrine of ostensible agency, imposes liability, not as the result of the
reality of a contractual relationship, but rather because of the actions of a principal
or an employer in somehow misleading the public into believing that the
relationship or the authority exists.[40] The existence of apparent authority may be
ascertained through (1) the general manner in which the corporation holds out an
officer or agent as having the power to act or, in other words, the apparent
authority to act in general, with which it clothes him; or (2) the acquiescence in his
acts of a particular nature, with actual or constructive knowledge thereof, whether
within or beyond the scope of his ordinary powers. It requires presentation of
evidence of similar act(s) executed either in its favor or in favor of other parties.[41]

Easily discernible from the foregoing is that apparent authority is determined


only by the acts of the principal and not by the acts of the agent. The principal is,
therefore, not responsible where the agents own conduct and statements have
created the apparent authority.[42]

In this case, not a single act of respondent, acting through its Board of
Directors, was cited as having clothed its general manager with apparent authority
to execute the contract with it.

With the foregoing disquisition, the Court finds it unnecessary to discuss the
other arguments posed by petitioner.

WHEREFORE, the petition is DENIED.


SO ORDERED.

JOSE CATRAL MENDOZA


Associate Justice
WE CONCUR:

ANTONIO T. CARPIO
Associate Justice
Chairperson

ANTONIO EDUARDO B. NACHURA DIOSDADO M. PERALTA


Associate Justice Associate Justice

ROBERTO A. ABAD
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the
Courts Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division
Chairpersons Attestation, I certify that the conclusions in the above Decision had
been reached in consultation before the case was assigned to the writer of the
opinion of the Courts Division.

RENATO C. CORONA
Chief Justice

[1]
Penned by Associate Justice Martin S. Villarama, Jr., (now a member of this Court) with Associate Justice
Bienvenido L. Reyes and Associate Justice Lucenito N. Tagle concurring.
[2]
Rollo, p. 30.
[3]
Penned by Judge Inocencio D. Maliaman.
[4]
Rollo, pp. 11-29.
[5]
Emphasis in the original.
[6]
Decision of the Trial Court, rollo, pp. 158-167.
[7]
Id. at 163.
[8]
Providing for the Reorganization of Port Administrative and Operation Functions in the Philippines, Revising
Presidential Decree No. 505 dated July 11, 1974, Creating The Philippine Port Authority, by Substitution, and for
other Purposes otherwise known as the Revised Charter of the Philippine Ports Authority. Section 9 thereof
provides:

Section 9. General Powers and Duties of the General Manager and Assistant General Managers

a) General Powers and Duties of the General Manager.

The General Manager shall be responsible to the Board, and shall have the following general powers,
functions, and duties: xxx

(iii) To sign contracts, to approve expenditures and payments within the budget
provisions, and generally to do any all acts or things for the proper operations of the
Authority or any of the Ports under the jurisdiction, control or ownership of the
Authority.
[9]
Rollo, pp. 268-271.
[10]
Id. at 277.
[11]
Philippine Ports Authority v. Sargasso Construction and Development Corp., Pick & Shovel, Inc./ Atlantic
Erectors, Inc. (Joint Venture), G.R. No. 146478, July 30, 2004, 435 SCRA 512.
[12]
Revising the Levels of Authority on Approval of Government Contracts (1989).
[13]
IB [2.10] 2.8 Documents Comprising The Contract

The following documents shall form part of the contract:


1. Contract Agreement
2. Conditions of Contract
3. Drawings/Plans
4. Specifications
5. Invitations to Bid
6. Instructions to Bidders
7. Addenda
8. Bid Form including the following Annexes:
a. Authority of the Signing Official
b. Bid Prices in the Bill of Quantities
c. Detailed Estimates
d. Construction Schedule
e. Construction Methods
f. Project Organizational Chart
g. Manpower Schedule
h. Equipment Utilization Schedule
i. Cash Flow and Payments Schedule
j. [Certification] AFFIDAVIT of Site Inspection
9. Performance Bond
10. Prequalification [and Post qualification Statements]
11. Certificate of Cash Deposit for Operating Expenses (IF NECESSARY)
12. Notice of Award of Contract and Contractors Conforme thereto
13. Other Contract Documents that may be required by the Office/Agency/Corporation concerned
[14]
Prescribing Policies, Guidelines, Rules and Regulations for Government Infrastructure Contracts (1978).
[15]
IB [2.11] 2.9 Supporting Documents
To facilitate the approval of the contract, the following supporting documents shall be submitted:
1. xxx
6. Approval of Award by Approving Authority
xxx
[16]
Jurado. Desiderio P., Comments and Jurisprudence on Obligations and Contracts, 1993, Tenth Revised Edition,
p. 396; citing 3 Castan, 7th Ed., pp. 326-327, 8 Manresa, 5th Ed., Bk. P. 365, and Sanchez Roman 191.
[17]
A negotiation is formally initiated by an offer which should be certain with respect to both the object and the
cause or consideration of the envisioned contract. In order to produce a contract, there must be acceptance, which
may be express or implied, but it must not qualify the terms of the offer. The acceptance of an offer must be
unqualified and absolute to perfect the contract. In other words, it must be identical in all respects with that of the
offer so as to produce consent or meeting of the minds.
[18]
Supra note 16 at 390.
[19]
Cobacha, Agapito P. and Lucenario, Domingo O, Law on Public Bidding and Government Contracts, 1960, p.
283, citing People v. Palmer, 35 N.Y.S. 222, 14 Misc. 41.
[20]
Fernandez, Jr., Bartolome C., A Treatise on Government Contracts under Philippine Law, 2003 Revised Edition,
p. 10.
[21]
Decision of the Court of Appeals, pp. 14,16-17; rollo, pp. 86, 88-89.
[22]
Chapter II Book I Section 51.
[23]
Memorandum for the Petitioner, p. 20; rollo, p. 401.
[24]
Manual on Contracts Review, March 1997, p. 14.
[25]
The Court in Central Bank of the Philippines vs. Court of Appeals, G.R. No. L-33022, April 22, 1975, 63 SCRA
446-447, involving a government contract, said An agreement presupposes a meeting of minds and when that point
is reached in the negotiations between two parties intending to enter into a contract, the purported contract is
deemed perfected and none of them may thereafter disengage himself therefrom without being liable to the other in
an action for specific performance.xxx Even a government-owned corporation may not under the guise of protecting
the public interest unceremoniously disregard contractual commitments to the prejudice of the other party., cited in
Government Contracts, U.P. Law Center, 1982, p. 42. In said case, however, it is the Monetary Board of respondent
Central Bank which unanimously voted and approved the award to the plaintiff [petitioner therein].
[26]
Supra note 19.
[27]
Supra note 20 at 8.
[28]
Id. at 10; cited in the Decision of the Court of Appeals.
[29]
De Leon, Hector S., Comments and Cases on Partnership, Agency, and Trusts, 2005 Sixth Edition, p. 460.
[30]
Manual on Contracts Review, March 1997, p. 25.
[31]
Memorandum for Petitioner, p. 24; rollo, p. 405.
[32]
Intra-Strata Assurance Corp. and Philippine Home Assurance Corp. v. Republic, G.R. No. 156571, July 9, 2008,
557 SCRA 363.
[33]
Memorandum for the Petitioner, p. 29; rollo, pp. 410-412.
[34]
Now expressly repealed by R.A. 9184 (An Act Providing for the Modernization, Standardization and Regulation
of the Procurement Activities of the Government and for Other Purposes) otherwise known as Government
Procurement Reform Act of 2003.
[35]
Cited in the Decision of the Court of Appeals.
[36]
Memorandum for Petitioner, p. 32, citing the case of First Phil. International Bank v. Court of Appeals, 252
SCRA 259,295; rollo, p. 413.
[37]
Supra note 19 at 294-295.
[38]
3 Am. Jur. 2d 79.
[39]
2 Am. Jur. 82.
[40]
Professional Services, Inc. v. Agana, G.R. No. 126297, January 31, 2007, 513 SCRA 500-501.
[41]
Peoples Aircargo and Warehousing Co., Inc. v. CA, 357 Phil. 850 (1998).
[42]
3 Am. Jur. 2d 79.
PACIFIC REHOUSE G.R. No. 184036
CORPORATION, PACIFIC
CONCORDE CORPORATION, Present:
MIZPAH HOLDINGS, INC.,
FORUM HOLDINGS CORONA, C.J., Chairperson,
CORPORATION, and VELASCO, JR.,
EAST ASIA OIL COMPANY,INC., LEONARDO-DE CASTRO,
Petitioners, DEL CASTILLO, and
PEREZ, JJ.
- versus -
Promulgated:
EIB SECURITIES, INC.,
Respondent. October 13, 2010
x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

The Case

Via this Petition for Review on Certiorari under Rule 45, petitioners seek
reversal of the Decision[1] dated April 11, 2008 of the Court of Appeals (CA) in
CA-G.R. CV No. 87713 which revoked the October 18, 2005 Resolution,[2] a
judgment on the pleadings, of the Regional Trial Court (RTC), Branch 66 in
Makati City, in Civil Case No. 05-178 entitled Pacific Rehouse Corporation,
Pacific Concorde Corporation, Mizpah Holdings, Inc., et al. v. EIB Securities,
Inc., and remanded the case for further proceedings. Also assailed is the CA
Resolution[3] dated August 5, 2008 denying petitioners motion for reconsideration.
Petitioners initiatory pleading in Civil Case No. 05-178 reveals the following
averments:

COMMON ALLEGATIONS FOR ALL CAUSES OF ACTION

1. On various dates during the period June 2003 to March 2004, plaintiffs
bought 60,790,000 Kuok Properties, Inc. (KPP) shares of stock through the
Philippine Stock Exchange (PSE). The KPP shares were acquired by plaintiffs
through their broker, defendant EIB.

2. The KPP shares of stock were bought by plaintiffs at an average price of


P0.22 per share.

3. Also on various dates in July and August 2003, plaintiffs bought/acquired


32,180,000 DMCI shares of stock through the PSE. Of these shares, 16,180,000
were likewise acquired by the plaintiffs through their broker, defendant EIB,
while the remaining 16,000,000 DMCI shares were transferred from Westlink
Global Equities, Inc.

4. The DMCI shares of stock were bought by plaintiffs at an average price


of P0.38 per share.

5. On 01 April 2004, plaintiffs and defendant EIB agreed to sell the


60,790,000 KPP shares of plaintiffs to any party for the price of P0.14 per share.
Attached as Annexes A to A-6 are copies of the notices of sales sent by defendant
EIB to the plaintiffs, which bear the conformity of plaintiffs representative.

6. As agreed by plaintiffs and defendant, the sale of the KPP shares of


plaintiffs was made with an option on the part of the plaintiffs to buy back or
reacquire the said KPP shares within a period of thirty (30) days from the
transaction date, at the buy-back price of P0.18 per share (See Annexes A to A-6).

7. When the last day of the 30-day buy back period for the KPP shares
came, plaintiff were undecided on whether or not to exercise their option to
reacquire said shares. Thus, plaintiffs and defendant EIB agreed that plaintiffs
would have an extended period of until 03 June 2004 to exercise their option to
buy back/reacquire the KKP shares that had been sold.

8. Eventually, plaintiffs decided not to exercise their option to buy back the
KPP shares and did not give any buy-back instruction/s to their broker, defendant
EIB.

9. On various dates in June 2004, without plaintiffs prior knowledge and


consent, defendant EIB sold plaintiffs 32,180,000 DMCI shares of stock for an
average price of P0.24 per share. Defendant EIB sold the DMCI shares of
plaintiffs for an average price of only P0.24 per share despite full knowledge by
defendant EIB that the sale would result in a substantial loss to the plaintiffs of
around P4.5 Million since plaintiffs acquired the DMCI shares at P0.38 per share.
(cf. Article 1888, Civil Code). Attached Annexes B to B-7 are the Sell
Confirmation slips issued by defendant EIB showing the unauthorized sale of
plaintiffs 32,180,000 DMCI shares.
9.1 The proceeds of said DMCI shares sold by defendant EIB without
plaintiffs knowledge and consent were used by defendant EIB to buy back
61,100,000 KPP shares earlier sold by plaintiffs on 01 April 2004.
Attached as Annexes C to C-5 are the Buy Confirmation slips issued by
defendant showing the unauthorized buy back of KPP shares.

9.2 Defendant EIB sold without authority plaintiffs 32,180,000 DMCI


shares and used the proceeds thereof to buy back 61,000,000 KPP shares
because defendant EIB made an unauthorized promise and commitment to
the buyer/s of plantiffs KPP shares in April 2004 that plaintiffs would buy
back the KPP shares.

9.3 Plaintiffs learned of the unauthorized sale of their 32,180,000 DMCI


shares and the unauthorized buy back of 61,000,000 KPP shares only
much later. Upon further inquiry, plaintiffs also learned that all throughout
their business dealings, defendant EIB had surreptitiously charged and
collected from plaintiffs exorbitant interest amounting to thirty percent
(30%) of all amounts owing from the plaintiffs.

10. On 05 January 2005, plaintiffs wrote to defendant EIB to demand that their
32,180,000 DMCI shares be transferred to Westlink Global Equities Inc.
(Westlink). Copies of the demand letters, all dated 05 January 2005, are attached
as Annex D to D-4 respectively.

11. Since the 32,180,000 DMCI shares belonging to plaintiffs had already been sold
by defendant EIB without plaintiffs prior knowledge and consent as early as June
2004, defendant EIB could not comply with the demand of plaintiffs as stated in
their demand letters dated 05 January 2005.

12. In his letters to the plaintiffs dated 12 January 2005, defendant EIB admitted
having sold the 32,180,000 DMCI shares of stock of plaintiffs without the latters
prior knowledge and consent. Copies of defendant EIBs letters to plaintiffs, all
dated 12 January 2005, are attached as Annexes E to E-4, respectively.

12.1 Defendant EIB states in its aforesaid letters that it sent statements
of account to plaintiffs in July 2004. Defendant EIB claims, albeit
erroneously, that since plaintiffs made no exceptions to the statements of
account, the sale of plaintiffs DMCI shares in June 2004 [was] supposedly
validly executed.
13. Hence, this Complaint.

xxxx

SECOND CAUSE OF ACTION

17. Plaintiffs replead all of the foregoing allegations.

18. The sale by defendant EIB of the 32,180,000 DMCI shares of plaintiffs was
done with malice and fraudulent intent. As such, defendant should be directed to
pay plaintiffs the amount of at least PhP3,000,000.00 as moral damages.[4]

In response, respondent EIB Securities, Inc. (EIB) submitted its Answer


which contained the following averments:

ADMISSIONS AND DENIALS:


1. Defendant admits the allegations contained in paragraphs under the
heading The Parties. Likewise, defendant admits the allegations contained in
paragraph 1.
2. Paragraph 2 of the Complaint is specifically denied, the truth of the
matter is that the KPP shares of stock were bought by plaintiffs at an average
price of only 18 centavos per share.
3. Paragraph 3 is admitted, qualified, however, that the remaining
16,000,000 DMCI shares of plaintiffs were transferred by Westlink Global
Equities, Inc. and other brokerages firms to the defendant primarily to serve as a
collateral in the cash account obligations of the plaintiffs to the defendant.
4. Paragraph 4 of the Complaint is specifically denied, the truth of the
matter being the DMCI shares of stock were bought by the plaintiffs at an
approximate average price of only 25 centavos per share.
5. Defendant admits paragraph 5 of the Complaint insofar as the allegation
that plaintiffs and defendant agreed to sell the 60,790,000 KPP share of plaintiffs
to any party for the price of 14 centavos per share, qualified, however, by the
presence of a provision Full Cross to Seller meaning that the Sellers (who are the
plaintiffs) have the obligation to buy back or reacquire the shares from the buyers.
6. Defendant specifically denies paragraph 6 of the Complaint, the truth of
the matter and as evidenced by the same Notices of Sale (AnnexA to A-6 of the
Complaint), plaintiffs have no option to buy back or reacquire the said KPP
shares, the nature or kind of transaction agreement is Full Cross to seller which is
an obligation and not merely an option on the part of the plaintiffs to buy back or
reacquire the said KPP shares sold to buyers.
7. Defendant specifically and vehemently denies the allegations of
paragraphs 7 and 8 of the Complaint. The truth of the matter is that there was no
extension agreed upon by the parties for the plaintiffs to exercise option to buy
back/reacquire the Kuok Properties, Inc. shares of stocks (KKP). The Contracts
for the sale of KPP shares of stocks as already stated above and as clearly shown
from the same Annexes A to A-6 of the Complaint was an obligation that there
was no extension period given to the plaintiffs.
8. Defendant also specifically and vehemently denies the allegations of
paragraphs 9 of the Complaint and its sub-paragraphs. The truth of the matter
being that under the trading rules, honoring ones obligation is a sacred
commitment of stocks and market traders. Considering that in the sale of the KPP
shares there is an obligation as certified by the word Full Cross to Seller, the KPP
shares of stocks that were sold to buyers have to be bought back 30 days from the
transaction date at the Buy Back Amount of 18 centavos per share and that
plaintiffs and defendant have to honor the said buy back obligation. Considering,
however, that plaintiffs were not delivering funds to the defendant in order to
honor the said buy back obligation, not to mention the Cash account obligations
of the plaintiffs to the defendant amounting to more or less 70 Million Pesos,
defendant had no more recourse but to buy back the KPP shares from the buyers
by selling the DMCI shares of the plaintiffs under the defendants possession, and
thus, enforcing the provisions of the Securities Dealing Accounts Agreements that
was signed by the plaintiffs in favor of the defendant, a copy of which is hereto
attached and made an integral part hereof as Annex 1. Section 7 of the aforesaid
Securities Dealing Accounts Agreements states:
7. Lien
The client agrees that all monies and/or securities and/or all other property
of the Client (plaintiffs) in the Companys (defendant) custody or control
held from time to time shall be subject to a general lien in favour of
Company for the discharge of all or any indebtedness of the Client to the
Company. The Client shall not be entitled to withdraw any monies or
securities held by the Company pending the payment in full to the
Company of any indebtedness of the Client to the Company. The
company shall be entitled at any time and without notice to the Client
to retain, apply, sell or dispose of all or any of the [clients] property if
any such obligation or liability is not discharged in full by the client
when due or on demand in or towards the payment and discharge of
such obligation or liability and the Company shall be under no duty to
the client as to the price obtained or any losses or liabilities incurred
or arising in respect of any such sale or disposal. Subject to the relevant
law and regulation on the matter, the client hereby authorizes the
Company, on his/its behalf, at any time and without notice to the clients
property if any such obligation or liability is not discharged. [Emphasis in
the original.]
[Defendant] specifically denies the allegation of the plaintiffs that
defendant sold the DMCI shares of plaintiffs for an average price of only 24
centavos for the truth of the matter being the average price those DMCI shares
were sold was P0.2565 centavos per share and likewise, that price was the
controlling market price of DMCI share at the time of the transaction. Defendant
likewise, specifically denies the allegation that defendant surreptitiously charged
and collected an interest of 30% from the plaintiff for the truth of the matter is
that what defendant did not charge such interest.
Moreoever, and contrary to the allegations of the Complaint, plaintiffs are
fully aware and knowledgeable of the sale of their DMCI shares as early as June
2004 and that the proceeds thereof were not even enough to fully pay the buy
back obligation of the plaintiffs to the buyers of KPP shares of stocks.
Plaintiffs, in order to feign ignorance of the sale of their DMCI shares had
attached in the Complaint various Sales Confirmations Receipts which were
marked thereto as Annexes B to B-7. Wittingly or unwittingly, plaintiffs attached
only the Receipts that do not bear the corresponding acknowledgement signatures
of their respective officers. As averred by the defendant, plaintiffs were fully
aware and knowledgeable of the sale of their DMCI shares as early June 2004,
and to expose the real truth, defendant hereto attaches the identical Sales
Confirmation Receipts hereto marked as Annexes 2 to 2-G.
In the same manner that in each and every Sales Confirmation Receipts
(Annexes 2 to 2-G) the following IMPORTANT NOTICE is written:
All transaction are subject to the rules and customs of the
Exchange and its Clearing House. It is agreed that all securities shall
secure all my/our liabilities to e.securities and is authorized in their
discretion to all or any of them without notice to we/us whenever in
the opinion of e.securities my/our account is not properly secured.
[Emphasis in the original.]
Likewise, after each and every transaction, defendant sent Statement of
Accounts showing a detailed transaction that were entered into and that plaintiffs
duly received aforesaid Statement of Accounts from the defendants as evidenced
by the signatures of plaintiffs respective officers hereto marked as Annexes 3 to
3-G.
In each and every Statements of Accounts the following Notice is clearly
printed therein:
This statement will be considered correct unless we receive notice
in writing of any exceptions within 5 days from receipt. Please address all
correspondence concerning exceptions to our OPERATIONS
DEPARTMENT. Kindly notify us in writing of any changes in your
address.
Hence, plaintiffs, may have other ulterior motives in filing this baseless
Complaint since they fully knew and consented almost a year ago of the nature of
their transactions with the defendant.
9. Defendant admits paragraphs 10 to 12 inclusive of the subparagraphs
only to the existence of the plaintiffs demand letters all dated January 5, 20[0]5,
but qualifies that the aforesaid letters had been answered by the defendant on
January 12, 2005. The rest of the allegations are being specifically denied. In
defendants reply to the said letters, defendant clearly pointed out that plaintiffs
had been duly notified of the subject transactions as early as June 9, 2004. That
defendant had furnished the plaintiffs as early as July 14, 2004 Statements of
Accounts of all their transactions for the period of June 1-20, 2004 which
included the sale of the subject shares with a clear instruction to notify the
defendant in writing within five (5) days from receipt thereof of any exception
therein. That if no correspondence was received by the defendant from the
plaintiffs, the sale shall be considered as validly executed.[5]

On July 19, 2005, petitioners registered a Motion for Judgment on the


Pleadings,[6] asserting that EIB materially admitted the allegations of their
complaint by not tendering any genuine issue in its answer. This was opposed[7] by
EIB, with both parties subsequently filing their respective reply and rejoinder. On
October 7, 2005, petitioners moved that the trial court resolve their motion for
judgment on the pleadings.

The Ruling of the RTC

On October 18, 2005, the RTC rendered its judgment on the pleadings
through a Resolution, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered


directing the defendant [EIB] to return the plaintiffs [petitioners] 32,180,000
DMCI shares, as of judicial demand.

On the other hand, plaintiffs are directed to reimburse the defendant the
amount of P10,942,200.00, representing the buy back price of the 60,790,000
KPP shares of stocks at P0.18 per share.

Defendants Motion to Discharge Writ of Preliminary Attachment, based


on the submitted counter bond issued by Intra Strata Assurance Corporation is
hereby GRANTED.

SO ORDERED.[8]

The trial court found merit in rendering a judgment on the pleadings: first,
the assailed transactions were all documented; second, the transactions were
admitted by the parties; and third, the main issues can be resolved based on the
parties documentary evidence appended to the pleadings.
The RTC, interpreting the agreement agreed upon by the parties, held that
the sale of the Kuok Properties, Inc. (KKP) shares was with a buy-back obligation
and not an option as petitioners argued. However, it found that, as per their notices
of sale agreements, the collateral for the sale transactions is the same KKP
shares. Thus, it held that EIB erred in selling the DMCI shares instead of the KKP
shares which served as collateral. It ruled that Section 7 of the Securities Dealings
Account Agreement (SDAA) does not apply, since it provided for a general
agreement executed prior to the subsequent and specific agreements entered into
by the parties specifically for the sale and repurchase of the KKP shares. Thus, the
trial court concluded that EIB went beyond its authority in selling petitioners
DMCI shares in order to buy back the KKP shares.

Anent petitioners apparent lack of objection to the account statements issued


by EIB and the sales confirmation receipts covering the sale of DMCI shares, the
RTC viewed it as not constituting ratification by petitioners for said documents did
not disclose the purpose of the sale, applying the rule that any ambiguity in a
written document should be strictly construed against the party who caused its
preparation. In fine, it held that since the parties relation is fiduciary in nature, with
more reason that EIB should have been more forthright in getting the prior consent
of petitioners before selling the DMCI shares.

EIB timely filed its motion for partial reconsideration of the RTC Resolution
dated October 18, 2005. In the meantime, EIB moved to inhibit Judge Rommel O.
Baybay from further handling the case. Both motions of EIB were opposed by
petitioners.

On April 28, 2006, RTC Judge Baybay inhibited himself.[9]

Subsequently, on July 26, 2006, the RTC, Branch 66, through its new
Presiding Judge, Joselito C. Villarosa, denied EIBs motion for partial
reconsideration.[10] After oral arguments on June 23, 2006, the RTC affirmed the
propriety of the judgment on the pleadings rendered by Pairing Judge
Baybay. Citing Savellano v. Northwest Airlines,[11]on the strict construal of any
ambiguity on a written document on the party issuing it, the trial court reiterated its
ruling that petitioners are not estopped from assailing the sale by EIB of their
DMCI shares, for the sale confirmation receipts do not disclose the purpose of the
sales made.

The Ruling of the CA

On April 11, 2008, the appellate court rendered the assailed decision,
revoking the RTCs judgment on the pleadings and remanding the case back to the
RTC for further proceedings. The fallo reads:

WHEREFORE, premises considered, the instant appeal


is GRANTED.Accordingly, the Court a quos Resolution dated 18 October 2005
is REVOKED and SET ASIDE and this case is ordered remanded to the Court a
quo which is directed to conduct further proceedings hereof with dispatch.

SO ORDERED.[12]

While EIB raised six issues on appeal, the CA resolvedwhat it considered


the pivotal issuethe propriety of the rendition by the trial court of a judgment on
the pleadings. The CA found that while some material allegations in petitioners
complaint were admitted by EIB, the latters answer nonetheless raised other
genuine issues which it viewed can only be threshed out in a full-blown trial, like
the average price of the KPP shares of stock, the scope of the collaterals stated in
the Notices of Sale and the monetary claims of the Appellant [EIB] against the
Appellees [petitioners].[13]

Petitioners filed their motion for reconsideration, while EIB filed a


Manifestation with Motion for Clarification/Deletion which was opposed by
petitioners. In its motion for clarification/deletion, EIB took exception to the
appellate courts pronouncement that it (EIB) admitted the sale of petitioners DMCI
shares for the purpose of buying back the KKP shares, which strengthened
petitioners claim of the nullity of the sale. Both motions were denied by the
assailed resolution issued on August 5, 2008.

Thus, we have this petition.

The Issues

CONTRARY TO THE RULING OF THE COURT OF APPEALS, THE TRIAL


COURT WAS CORRECT IN RENDERING JUDGMENT ON THE
PLEADINGS IN THE CASE BEFORE IT.

II

THE TRIAL COURT WAS CORRECT IN RULING THAT PETITIONERS


DMCI SHARES COULD NOT BE SOLD BY RESPONDENT EIB UNDER
THE NOTICES OF SALE.

III

THE TRIAL COURT WAS CORRECT IN HOLDING THAT RESPONDENT


EIB COULD NOT INVOKE SECTION 7 OF THE SECURITIES DEALINGS
ACCOUNT AGREEMENT AS BASIS FOR THE SALE OF PETITIONERS
DMCI SHARES.

IV

THE TRIAL COURT WAS CORRECT IN HOLDING THAT PETITIONERS


WERE NOT BARRED BY RATIFICATION, LACHES OR ESTOPPEL FROM
QUESTIONING THE UNAUTHORIZED SALE OF THEIR DMCI SHARES.

THE TRIAL COURT HAD JURISDICTION OVER THE CASE FILED


BEFORE IT BY PETITIONERS WHO HAD FULLY PAID THE DOCKET
FEES ASSESSED BY THE CLERK OF COURT.

VI

UNDER PREVAILING JURISPRUDENCE, THE PAIRING JUDGE DID NOT


COMMIT GRAVE ABUSE OF DISCRETION. IN ANY EVENT, THE
APPOINTMENT OF A PRESIDING JUDGE WHO EVENTUALLY DENIED
RESPONDENTS MOTION FOR RECONSIDERATION RENDERED THE
MATTER MOOT AND ACADEMIC.[14]

The Courts Ruling

We grant the petition.

Threshold Issue: Proper Payment of Docket Fees

EIB asserts that the trial court has no jurisdiction over the complaint on
account of insufficient dockets fees. Although petitioners paid a total of PhP
120,758.80[15] in legal fees with the RTC, EIB argues that what was paid is based
merely on petitioners prayer for moral damages of PhP 3 million, exemplary
damages of PhP 3 million, and attorneys fees of PhP 2 million, but not including
petitioners claim for PhP 4.5 million as actual damages as averred in paragraph 9
of the complaint. Thus, EIB, relying on Manchester Development Corporation v.
Court of Appeals[16] (Manchester) and Sun Insurance Office, Ltd. v.
Asuncion,[17] maintains that the RTC should not have entertained the case.

It is hornbook law that courts acquire jurisdiction over a case only upon
payment of the prescribed docket fee. A plain reading of the prayer does not show
that petitioners asked for the payment of actual damages of PhP 4.5 million. The
reliefs asked by petitioners in the prayer are:

1. Upon the filing of the Complaint, a writ of preliminary attachment be


issued ex parte against defendant pursuant to Section 2, Rule 57 of the
1997 Rules of Civil Procedure;
2. After trial, judgment rendered in favor of plaintiffs and against defendant as
follows:
On the FIRST CAUSE OF ACTION declaring void the sale by defendant of
the 32,180,000 DMCI shares of stock of plaintiffs and directing defendant to
return to plaintiffs the latters 32,180,000 DMCI shares of stock, or in the event
the return thereof is not possible, holding defendant liable under Articles
1888,1889,1909 and other pertinent provisions of the Civil Code.
On the SECOND CAUSE OF ACTION directing defendant to pay plaintiffs
moral damages in the amount of at least P3,000,000.00;
On the THIRD CAUSE OF ACTION directing defendant to pay plaintiffs
exemplary damages in the amount of at least P3,000,000.00; and
On the FOURTH CAUSE OF ACTION directing defendant to pay plaintiffs
attorneys fees in the amount of P2,000,000.00 and such amounts as may be
proven at the trial as litigation expenses.
Other just and equitable relief are likewise prayed for.[18]

Since the prayer did not ask for the payment of actual damages of PhP 4.5
million, the clerk of court correctly assessed the amount of PhP 120,758.80 as
docket fees based on the total amount of PhP 8 million consisting of PhP 3 million
as moral damages, PhP 3 million as exemplary damages, and PhP 2 million as
attorneys fees.

In disputing the fees paid by petitioners, respondent relies on our ruling


in Manchester, where we said that all complaints, petitions, answers and other
similar pleadings should specify the amount of damages being prayed for not only
in the body of the pleading but also in the prayer, and said damages shall be
considered in the assessment of the filing fees in any case.[19]

EIB insinuates that petitioners, by alleging the substantial loss of PhP 4.5
million from the sale of the DMCI shares but not specifying the amount in their
prayer, circumvented the Manchester ruling to evade the payment of the correct
filing fees. This postulation is incorrect. It is clear that petitioners demanded the
return of the DMCI shares in the prayer of the complaint and NOT the alleged loss
in the value of the shares. If the DMCI shares are returned, then no actual damages
are suffered by petitioners. A recall of the averment in par. 9 of the complaint
shows that the alleged loss of PhP 4.5 million to petitioners resulted from the sale
of DMCI shares at PhP 0.24 per share when they acquired it at PhP 0.38 per share.
More importantly, the court was proscribed by the Manchester ruling from
granting actual damages of PhP 4.5 million to petitioners, because precisely the
alleged damages were never sought in the prayer. Ergo, EIBs attack on the trial
courts assumption of jurisdiction must fail.
Procedural Issue: Judgment on the Pleadings

At the outset, we lay stress on the Courts policy that cases should be
promptly and expeditiously resolved. The Rules of Court seeks to abbreviate court
procedure in order to allow the swift disposition of cases. Specifically, special
strategies like demurrer to evidence, judgment on the pleadings, and summary
judgment were adopted to attain this avowed goal. Full-blown trial is dispensed
with and judgment is rendered on the basis of the pleadings, supporting affidavits,
depositions, and admissions of the parties.

In the instant petition, the Court is confronted with the propriety of the
judgment on the pleadings rendered by the Makati City RTC. Petitioners claim
such adjudication on said papers and attachments is proper.

The petitioners position is impressed with merit.

Rule 34 of the Rules of Court provides that where an answer fails to tender
an issue or otherwise admits the material allegations of the adverse partys pleading,
the court may, on motion of that party, direct judgment on such
pleading. Judgment on the pleadings is, therefore, based exclusively upon the
allegations appearing in the pleadings of the parties and the annexes, if any,
without consideration of any evidence aliunde.[20]

When what is left are not genuinely issues requiring trial but questions
concerning the proper interpretation of the provisions of some written
contract attached to the pleadings, judgment on the pleadings is proper.[21]

From the pleadings, the parties admitted the following facts:

(1) EIB is the stockbroker of petitioners.

(2) Petitioners and EIB entered into a SDAA, Annex 1 of EIBs answer,
which governed the relationship between petitioners as clients and EIB as
stockbroker. Sec. 7 of the SDAA provides:

7. Lien
The client agrees that all monies and/or securities and/or all other property
of the Client (plaintiffs) in the Companys (defendant) custody or control held
from time to time shall be subject to a general lien in favour of Company for
the discharge of all or any indebtedness of the Client to the Company. The
Client shall not be entitled to withdraw any monies or securities held by the
Company pending the payment in full to the Company of any indebtedness
of the Client to the Company. The company shall be entitled at any time and
without notice to the Client to retain, apply, sell or dispose of all or any of the
[clients] property if any such obligation or liability is not discharged in full by the
client when due or on demand in or towards the payment and discharge of such
obligation or liability and the Company shall be under no duty to the client as to
the price obtained or any losses or liabilities incurred or arising in respect of any
such sale or disposal. Subject to the relevant law and regulation on the matter, the
client hereby authorizes the Company, on his/its behalf, at any time and
without notice to the clients property if any such obligation or liability is not
discharged.[22] (Emphasis supplied.)

It is clear from the SDAA that all monies, securities, and other properties of
petitioners in EIBs custody or control shall be subject to a general lien in favor of
the latter solely for the discharge of all or any indebtedness to EIB.

(3) From June 2003 to March 2004, petitioners, through their broker, EIB,
bought 60,790,000 KKP shares of stock at the Philippine Stock Exchange (PSE).

(4) On various dates in July and August 2003, petitioners bought 16,180,000
DMCI shares of stock through EIB likewise at the PSE, while 16,000,000 DMCI
shares of petitioners were transferred to EIB by Westlink Global Equities, Inc.
Thus, a total of 32,180,000 DMCI shares of stock owned by petitioners were
placed in the custody or control of EIB.

(5) On April 1, 2004, petitioners ordered the sale of 60,790,000 KPP shares
to any buyer at the price of PhP 0.14 per share. The KPP shares were eventually
sold at PhP 0.14 per share to interested buyers.

(6) Petitioners failed to reacquire or buy back the KPP shares at PhP 0.18 per
share after 30 days from date of transaction.

(7) As petitioners failed to deliver funds to EIB to honor the buy-back


obligation, not to mention the cash account obligations of petitioners in the amount
of PhP 70 million to EIB, EIB had no recourse but to sell the DMCI shares of
petitioners to reacquire the KPP shares.

(8) Thus, on various dates in June 2004, EIB, without petitioners knowledge
and consent, sold petitioners 32,180,000 DMCI shares at the controlling market
price. EIB later sent sales confirmation receipts to petitioners regarding the sale of
their DMCI shares, said receipts containing the common notice, which reads:
All transaction[s] are subject to the rules and customs of the Exchange and
its Clearing House. It is agreed that all securities shall secure all my/our
liabilities to e.securities and is authorized in their discretion to sell all or any of
them without notice to we/us whenever in the opinion of e.securities my/our
account is not properly secured.[23] (Emphasis supplied.)

(9) EIB sent statements of accounts to petitioners showing the sale of the
DMCI shares which uniformly contained the following notice:

This statement will be considered correct unless we receive notice in writing of


any exceptions within 5 days from receipt. Please address all correspondence
concerning exceptions to our OPERATIONS DEPARTMENT. Kindly notify us
in writing of any changes in your address.[24]

(10) On January 12, 2005, petitioners wrote EIB demanding the return of the
32,180,000 DMCI shares.

(11) On January 12, 2005, EIB rejected petitioners demand for the return of
the DMCI shares, as those were already sold to cover the buy back of the KPP
shares.

(12) Petitioners prayer is the return of the 32,180,000 DMCI shares by EIB
to them.

The principal issue in petitioners complaint is whether EIB can be compelled


to return DMCI shares to petitioners based on the alleged unauthorized disposal or
sale of said shares to comply with the buy back of the KKP shares. The threshold
issue raised in the answer is the lack of jurisdiction over the complaint due to the
alleged nonpayment of the proper docket fees. Affirmative defenses presented are
that EIB disposed of the DMCI shares pursuant to Sec. 7 of the SDAA, and the
notices of sale, ratification and laches.
Based on the admissions in the pleadings and documents attached, the Court
finds that the issues presented by the complaint and the answer can be resolved
within the four corners of said pleadings without need to conduct further hearings.
As explained by the Court in Philippine National Bank v. Utility Assurance &
Surety Co., Inc.,[25] when what remains to be done is the proper interpretation
of the contracts or documents attached to the pleadings, then judgment on the
pleadings is proper. In the case at bar, the issue of whether the sale of DMCI
shares to effectuate the buy back of the KKP shares is valid can be decided by the
trial court based on the SDAA, Notices of Sale, Sales Confirmation Receipts, the
letters of the parties, and other appendages to the pleadings in conjunction with the
allegations or admissions contained in the pleadings without need of trial. The
Makati City RTC is, therefore, correct in issuing the October 18, 2005 Resolution
granting the Motion for Judgment on the Pleadings.

The CA nullified the October 18, 2005 Resolution on the ground that there
are other issues that must be resolved during a full-blown trial, ratiocinating this
way:

While it may be true that the Appellant has already admitted that the sale
of the DMCI shares was for the purpose of buying back the KPP shares and that
such admission strengthened Appellees claim that the sale of the DMCI shares is
a nullity, there were other issues raised by the Appellant that can only be threshed
out during a full blown trial, viz: the average price of the KPP shares of stock, the
scope of the collaterals stated in the Notices of Sale and the monetary claims of
the Appellant against the Appellees.[26]

To the mind of the Court, these matters are not genuinely triable issues but
actually minor issues or mere incidental questions that can be resolved by
construing the statements embodied in the appendages to the pleadings. The facts
that gave rise to the side issues are undisputed and were already presented to the
trial court rendering trial unnecessary.

On the disparity in the average price of KPP shares of stock, petitioners


claim that the average purchase price of the KPP share is PhP 0.22 per share (par. 2
of the complaint), while EIB claims it is only PhP 0.18 per share (par. 2 of the
answer). The dissimilarity in the acquisition price paid by petitioners for the KPP
shares is a non-issue, since the relief prayed for is the return of the DMCI shares
and not the KPP shares. Petitioners did not even claim actual damages in the prayer
of the complaint.

On the scope of the collaterals stated in the Notices of Sale, it is clear from
the notices that the collateral is KPP Shares/Property:

April 01, 2004

PACIFIC REHOUSE CORP.


Makati City
Philippine[s]
RE: SALE OF KUOK PROPERTIES INC., (KPP)

As agreed upon the above mentioned stock will be sold to a party with the
following conditions attached:

NUMBER OF SHARES : 5,800,000/SHARES


AMOUNT @ SHARE : PHP 0.14
CHARGES : Sellers Account
BUY BACK DATE : after 30 days (used on transaction date)
BUY BACK AMOUNT : PHP 0.18
DATE OF EXECUTION : APRIL 01, 200[4]
KIND OF TRANSACTION : FULL CROSS TO SELLER
COLLATERAL : KPP SHARES/PROPERTY

For and behalf of EIB Securities.

[Signed]
PAULINE TAN[27]

April 01, 2004

FORUM HOLDINGS CORP.


Makati City
Philippine[s]

RE: SALE OF KUOK PROPERTIES INC., (KPP)

As agreed upon the above mentioned stock will be sold to a party with the
following conditions attached:

NUMBER OF SHARES : 15,560,000/SHARES


AMOUNT @ SHARE : PHP 0.14
CHARGES : Sellers Account
BUY BACK DATE : after 30 days (used on transaction date)
BUY BACK AMOUNT : PHP 0.18
DATE OF EXECUTION : APRIL 01, 200[4]
KIND OF TRANSACTION : FULL CROSS TO SELLER
COLLATERAL : KPP SHARES/PROPERTY

For and behalf of EIB Securities.

[Signed]
PAULINE TAN[28]

April 01, 2004

MIZPAH HOLDINGS INC.


Makati City
Philippine[s]
RE: SALE OF KUOK PROPERTIES INC., (KPP)

As agreed upon the above mentioned stock will be sold to a party with the
following conditions attached:

NUMBER OF SHARES : 8,430,000/SHARES


AMOUNT @ SHARE : PHP 0.14
CHARGES : Sellers Account
BUY BACK DATE : after 30 days (used on transaction date)
BUY BACK AMOUNT : PHP 0.18
DATE OF EXECUTION : APRIL 01, 200[4]
KIND OF TRANSACTION : FULL CROSS TO SELLER
COLLATERAL : KPP SHARES/PROPERTY

For and behalf of EIB Securities.

[Signed]
PAULINE TAN[29]

April 01, 2004

REXLON REALTY GROUP INC.


Makati City
Philippine[s]
RE: SALE OF KUOK PROPERTIES INC., (KPP)
As agreed upon the above mentioned stock will be sold to a party with the
following conditions attached:

NUMBER OF SHARES : 5,000,000/SHARES


AMOUNT @ SHARE : PHP 0.14
CHARGES : Sellers Account
BUY BACK DATE : after 30 days (used on transaction date)
BUY BACK AMOUNT : PHP 0.18
DATE OF EXECUTION : APRIL 01, 200[4]
KIND OF TRANSACTION : FULL CROSS TO SELLER
COLLATERAL : KPP SHARES/PROPERTY

For and behalf of EIB Securities.

[Signed]
PAULINE TAN[30]

April 01, 2004

RECOVERY DEVELOPMENT CORP.


Makati City
Philippine[s]
RE: SALE OF KUOK PROPERTIES INC., (KPP)

As agreed upon the above mentioned stock will be sold to a party with the
following conditions attached:

NUMBER OF SHARES : 12,350,000/SHARES


AMOUNT @ SHARE : PHP 0.14
CHARGES : Sellers Account
BUY BACK DATE : after 30 days (used on transaction date)
BUY BACK AMOUNT : PHP 0.18
DATE OF EXECUTION : APRIL 01, 200[4]
KIND OF TRANSACTION : FULL CROSS TO SELLER
COLLATERAL : KPP SHARES/PROPERTY

For and behalf of EIB Securities.

[Signed]
PAULINE TAN[31]

April 01, 2004


PACIFIC WIDE REALTY DEVELOPMENT CORP.
Makati City
Philippine[s]
RE: SALE OF KUOK PROPERTIES INC., (KPP)

As agreed upon the above mentioned stock will be sold to a party with the
following conditions attached:

NUMBER OF SHARES : 9,000,000/SHARES


AMOUNT @ SHARE : PHP 0.14
CHARGES : Sellers Account
BUY BACK DATE : after 30 days (used on transaction date)
BUY BACK AMOUNT : PHP 0.18
DATE OF EXECUTION : APRIL 01, 200[4]
KIND OF TRANSACTION : FULL CROSS TO SELLER
COLLATERAL : KPP SHARES/PROPERTY

For and behalf of EIB Securities

[Signed]
PAULINE TAN[32]

The determination of the collateral in said notices can easily be made from
the notices itself and Sec. 7 of the SDAA. The KPP shares stated in the notices
refer to the KPP shares owned by the Petitioners and sold to third parties by EIB.
The word Property in the notices is elucidated in the aforementioned Sec. 7 as all
monies and/or securities and/or all other property of the Client in the companys
custody or control held from time to time (Clients Property) x x x. These properties
shall be subject to a general lien in favour of the Company for the discharge of all
or any indebtedness and other obligations of the client to [EIB].[33] Thus, the DMCI
shares owned by petitioners are covered by the word Property in the Notices of
Sale.

On the monetary claims by petitioners against EIB, said claims are not a bar
to a judgment on the pleadings. While it was averred by petitioners under par. 9 of
the complaint that they suffered a loss of PhP 4.5 million from the sale of the
DMCI shares, the claim for actual damages was not set up as a relief in the prayer
and, therefore, the Manchester doctrine precludes such award to petitioners. Anent
the claim for moral damages of PhP 3 million, exemplary damages of PhP 3
million, and attorneys fees of PhP 2 million, the claim is not proper in a judgment
on the pleadings in the absence of proof.[34] Sans such proof extent on record, the
claim for damages is a non-issue.

In sum, there are no genuine issues that cannot be determined based on the
pleadings. Ergo, the assailed October 18, 2005 Resolution of the Makati City RTC
granting judgment on the pleadings is in accord with Rule 34 of the Rules of
Court and settled jurisprudence.

Authority of EIB to Sell DMCI Shares of Petitioners

Petitioners assert the inapplicability of Sec. 7 of the SDAA to their liability


to reacquire the KKP shares, as the DMCI shares were not sold to pay for their
PhP 70 million obligation to EIB but to settle their obligation to the buyers of their
KKP shares.

Petitioners position is impressed with merit. We rule that EIB has no legal
authority to sell the DMCI shares for the purpose or reacquiring the KKP shares.

Sec. 7 of the SDAA pertains to outstanding obligations or indebtedness of


petitioners to EIB but does not cover any obligation of petitioners to third-party
purchasers to reacquire its KKP shares under the full cross to seller buy-back
obligation subject of the various notices of sale.

Let us scrutinize anew Sec. 7 of the SDAA:


7. Lien

The client agrees that all monies and/or securities and/or all other property
of the Client (plaintiffs) in the Companys (defendant) custody or control held
from time to time shall be subject to a general lien in favour of Company for
the discharge of all or any indebtedness of the Client to the Company. The
Client shall not be entitled to withdraw any monies or securities held by the
Company pending the payment in full to the Company of any indebtedness of the
Client to the Company. The company shall be entitled at any time and without
notice to the Client to retain, apply, sell or dispose of all or any of the [clients]
property if any such obligation or liability is not discharged in full by the client
when due or on demand in or towards the payment and discharge of such
obligation or liability and the Company shall be under no duty to the client as to
the price obtained or any losses or liabilities incurred or arising in respect of any
such sale or disposal. Subject to the relevant law and regulation on the matter, the
client hereby authorizes the Company, on his/its behalf, at any time and without
notice to the clients property if any such obligation or liability is not discharged.
(Emphasis supplied.)

As couched, the lien in favor of EIB attaches to any money, securities, or


properties of petitioners which are in EIBs possession for the discharge of all or
any indebtedness and obligations of petitioners to EIB. For this, petitioners are also
barred from withdrawing its assets that are in the possession of EIB pending full
payment by petitioners of their indebtedness to EIB. The above proviso also gives
EIB the authority to sell or dispose of petitioners securities or properties in its
possession to pay for petitioners indebtedness to EIB. It is, thus, evident from the
above SDAA provision that said lien and authority granted to EIB to dispose of
petitioners securities or properties in the formers possession apply only to
discharge and pay off petitioners indebtedness to EIB and nothing more.

Sec. 7 of the SDAA does not apply to petitioners obligations to third-party


purchasers of their KKP shares under the full cross to seller obligation, and
certainly EIB could not use said provision for the repurchase of the KKP shares.
Indubitably, the sale of the DMCI shares made by EIB is null and void for lack of
authority to do so, for petitioners never gave their consent or permission to the
sale.

Moreover, Article 1881 of the Civil Code provides that the agent must act
within the scope of his authority. Pursuant to the authority given by the principal,
the agent is granted the right to affect the legal relations of his principal by the
performance of acts effectuated in accordance with the principals manifestation of
consent.[35] In the case at bar, the scope of authority of EIB as agent of petitioners
is to retain, apply, sell or dispose of all or any of the clients [petitioners] property,
if all or any indebtedness or other obligations of petitioners to EIB are not
discharged in full by petitioners when due or on demand in or towards the payment
and discharge of such obligation or liability. The right to sell or dispose of the
properties of petitioners by EIB is unequivocally confined to payment of the
obligations and liabilities of petitioners to EIB and none other. Thus, when EIB
sold the DMCI shares to buy back the KKP shares, it paid the proceeds to the
vendees of said shares, the act of which is clearly an obligation to a third party and,
hence, is beyond the ambit of its authority as agent. Such act is surely illegal and
does not bind petitioners as principals of EIB.

As a last-ditch effort, EIB seeks refuge from the notices of sales it issued to
petitioners:

Let us scrutinize a typical notice of sale issued to petitioners, thus:

RE: SALE OF KUOK PROPERTIES INC. (KPP)

As agreed upon the above mentioned stock will be sold to a party with the
following conditions attached:

NUMBER OF SHARES : x x x/SHARES


AMOUNT @ SHARE : PHP 0.14
CHARGES : Sellers Account
BUY BACK DATE : After 30 days [based on transaction
Date]
BUY BACK AMOUNT : PHP 0.18
DATE OF EXECUTION : APRIL 1, 200[4]
KIND OF TRANSACTION : FULL CROSS TO SELLER
COLLATERAL : KPP SHARES/PROPERTY

For and behalf of EIB Securities.


[Signed]
PAULINE TAN

The above notice states that the collateral is KPP Shares/Property.


EIB asserts that the word Property refers to all the monies and/or securities and/or
all other property of petitioners in EIBs custody or control pursuant to Sec. 7 of the
SDAA. This postulation is correct. The DMCI shares are included in the word
Property under Sec. 7 of the SDAA. However, EIBs theory stops there. As earlier
explained, the SDAA, more particularly its Sec. 7, cannot be made the legal basis
for EIB to sell petitioners properties in its possession or custody to pay petitioners
obligations to third parties. The SDAA is confined only to obligations of
petitioners to EIB and not to third parties like the purchases of the KKP shares.
Thus, the sale of the DMCI shares to buy back the KPP shares is illegal and
ineffective, since it is only answerable for the liabilities of petitioners to EIB and
no one else.

The notices of sale issued by EIB covering the sale of the KKP shares of
petitioners clearly show that the very same KKP shares sold to third parties albeit
under a buy-back arrangement and the Property of petitioners were made the
collaterals to secure the payment of the reacquisition. Since the possession of the
KKP shares and the Property were placed in EIB, a third party by common
agreement, then the accessory contract in the case at bar is a contract of pledge
governed by Arts. 2085 to 2092 of the Civil Code, which are provisions common
to pledge and mortgage, and Arts. 2093 to 2139 on pledge.

The query is whether or not the pledge on KKP Shares/Property is valid. The
answer is no.
Art. 2085 of the Civil Code provides:

Art. 2085. The following requisites are essential to the contracts of pledge and
mortgage:

(1) That they be constituted to secure the fulfillment of a principal


obligation;

(2) That the pledgor or mortgator be the absolute owner of the thing
pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free
disposal of their property, and in the absence thereof, that they be legally
authorized for the purpose.

Third persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property.

It is indispensable that the pledgor is the absolute owner of the thing pledged
(second element). In the case at bar, the KKP shares were sold to third parties by
EIB at PhP 0.14 and, as a result, petitioners lost their right of ownership over the
KKP shares. Hence, from the time of the sale, petitioners were no longer the
absolute owners of said shares, making the pledge constituted over said KKP
shares null and void.[36]

Also, it is necessary under Art. 2085 that the person constituting the pledge has the
free disposal of his or her property, and in the absence of that free disposal, that he
or she be legally authorized for the purpose (third element). This element is absent
in the case at bar. Petitioners no longer have the free disposal of the KKP shares
when EIB sold said shares at the stock exchange as they are no longer the owners
of the shares. Thus, there was no valid pledge constituted on the KKP shares.

The notice of sale, assuming it incorporates the accessory contract of pledge,


merely stated Property as collateral in addition to KKP shares. This is a blatant
violation of Art. 2096, which provides that a pledge shall not take effect against
third persons if description of the thing pledged and the date of the pledge do not
appear in a public instrument. The thing pledged must be amply and clearly
described and specifically identified. Evidently, the word Property is vague, broad,
and confusing as to the ownership. Hence, it does not satisfy the prescription under
Art. 2096 of the Code. Worse, the notice of sale is not in a public instrument as
required by said legal provision; therefore, the pledge on property is void and
without legal effect.
Moreover, the notices of sale must be construed against EIB. Any ambiguity in a
contract whose terms are susceptible of different interpretations must be read
against the party who drafted it.[37]

The DMCI shares which EIB construed to be included within the ambit of the
word property cannot be considered the thing pledged to secure the buy back of the
KKP shares in view of the vagueness of the word Property and the non-
applicability of the SDAA to the sale of the KKP shares.

Lastly, the appellate court ruled that the affirmative defense of estoppel was
raised by EIB due to the alleged failure of petitioners to object to the sale of the
DMCI shares.

The principle of estoppel rests on the rule that:

[W]here a party, by his or her deed or conduct, has induced another to act
in particular manner, estoppel effectively bars the former from adopting an
inconsistent position, attitude or course of conduct that causes loss or injury to the
latter. The doctrine of estoppel is based upon the grounds of public policy, fair
dealing, good faith and justice, and its purpose is to forbid one to speak against
his own act, representations, or commitments to the injury of one whom they were
directed and who reasonably relied thereon.[38]

The essential elements of estoppel as related to the party estopped are: (1)
conduct which amounts to a false representation or concealment of material facts,
or, at least, which calculated to convey the impression that the facts are otherwise
than, and inconsistent with, those which the party subsequently attempts to assert;
(2) intention, or at least expectation, that such conduct shall be acted upon by the
other party; and (3) knowledge, actual or constructive, of the actual facts.[39]

Reliance by respondent EIB on estoppel is misplaced. The first element does


not obtain from the factual setting presented by the pleadings, attachments, and
admissions. There is no allegation that petitioners performed an act which can be
considered as false representation that EIB can sell their DMCI shares to reacquire
the KKP shares, or concealed a material fact. Sec. 7 of the SDAA is unequivocal
that EIB can only sell the shares of petitioners for payment of any indebtedness to
EIB. There was no act or concealment on the part of petitioners that made known
or conveyed the impression to EIB that it can sell the DMCI shares of petitioners
for the latters indebtedness or obligation to a third party in contravention of EIBs
authority under Sec. 7 of the SDAA. Moreover, the second element is also absent.
There was no showing that petitioners authorized EIB to pay a third party from the
proceeds of the sale of their DMCI shares. Lastly, on the third element, petitioners
had no knowledge of the fact that the proceeds of the sale of DMCI shares were
paid to buy back the KPP shares. Reliance of EIB on the sales confirmation
receipts[40] issued to petitioners does not help any. The condition printed on said
receipts explicitly states that the securities shall secure [petitioners] liabilities to
e.securities. Even the account statements[41] issued by EIB do not reflect the
payment of the proceeds of the sale of DMCI shares owned by petitioners to buy
back the KKP shares previously owned by petitioners. All that these accounts show
is the crediting of the proceeds of the sale of DMCI shares to petitioners and
nothing more. There was no disclosure of the purpose of the sale of the DMCI
shares. Clearly, there is no estoppel.

WHEREFORE, the petition is GRANTED. The CA Decision dated April


11, 2008 in CA-G.R. CV No. 87713 is REVERSED and SET ASIDE. The RTC
Resolution dated October 18, 2005 in Civil Case No. 05-178 is
hereby REINSTATED.

No costs.

SO ORDERED.

PRESBITERO J. VELASCO, JR.


Associate Justice
WE CONCUR:

RENATO C. CORONA
Chief Justice
Chairperson

TERESITA J. LEONARDO-DE CASTRO MARIANO


C. DEL CASTILLO Associate Justice Associate Justice

JOSE PORTUGAL PEREZ


Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the
conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.

RENATO C. CORONA
Chief Justice
[1]
Rollo, pp. 50-59. Penned by Associate Justice Myrna Dimaranan Vidal and concurred in by Associate
Justices Bienvenido L. Reyes and Vicente Q. Roxas.
[2]
Id. at 186-190. Penned by Judge Rommel O. Baybay.
[3]
Id. at 61-63.
[4]
Id. at 65-69.
[5]
Id. at 114-118.
[6]
Id. at 157-166.
[7]
Id. at 167-171.
[8]
Id. at 190.
[9]
Id. at 207.
[10]
Id. at 208-209.
[11]
G.R. No. 151783, July 8, 2003, 405 SCRA 416.
[12]
Rollo, pp. 58-59.
[13]
Id. at 58.
[14]
Id. at 16-18.
[15]
Broken down as follows:
Special Allowances for Judiciary - PhP 55,162.00
Judiciary Development Fund - 63,274.00
Legal Research Fund - 1,173.80
Summons Fee - 144.00
Victims Compensation - 5.00
Sheriffs Trust Fund - 1,000.00
Total Payment - PhP 120,758.80
[16]
No. L-75919, May 7, 1987, 149 SCRA 562.
[17]
G.R. Nos. 79937-38, February 13, 1989, 170 SCRA 274.
[18]
Rollo, pp. 72-73.
[19]
Supra note 16, at 569.
[20]
1 F.D. Regalado, REMEDIAL LAW COMPENDIUM 393 (9th revised ed., 2005).
[21]
Philippine National Bank v. Utility Assurance & Surety Co., Inc., G.R. No. 32915, September 1, 1989,
177 SCRA 208, 215-216.
[22]
Rollo, p. 116.
[23]
Id. at 117.
[24]
Id. at 118.
[25]
Supra note 21.
[26]
Rollo, p. 58.
[27]
Id. at 88. Annex A-1 of the Complaint.
[28]
Id. at 89. Annex A-2 of the Complaint.
[29]
Id. at 90. Annex A-3 of the Complaint.
[30]
Id. at 91. Annex A-4 of the Complaint.
[31]
Id. at 92. Annex A-5 of the Complaint.
[32]
Id. at 93. Annex A-6 of the Complaint.
[33]
Id. at 130.
[34]
Lichauco v. Guash, 76 Phil. 5 (1946).
[35]
Paras, CIVIL CODE OF THE PHILIPPINES ANNOTATED 762 (1st ed., 1995).
[36]
National Bank v. Palma Gil, 55 Phil. 639 (1931).
[37]
Prudential Bank v. Alviar, G.R. No. 150197, July 28, 2005, 464 SCRA 353, 368-369; citing Garcia v.
Court of Appeals, G.R. No. 119845, July 5, 1996, 258 SCRA 446, 457.
[38]
Genato v. Viola, G.R. No. 169706, February 5, 2010, 611 SCRA 677, 688.
[39]
Board of Directors v. Alanday, 109 Phil. 1058 (1960).
[40]
Rollo, pp. 136-143.
[41]
Id. at 144-148.

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