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[G.R. No. 161135. April 8, 2005]

SWAGMAN HOTELS AND TRAVEL, INC., petitioner, vs. HON. COURT OF APPEALS, and NEAL B. CHRISTIAN, respondents. DECISION DAVIDE, JR., C.J.: May a complaint that lacks a cause of action at the time it was filed be cured by the accrual of a cause of action during the pendency of the case? This is the basic issue raised in this petition for the Courts consideration. Sometime in 1996 and 1997, petitioner Swagman Hotels and Travel, Inc., through Atty. Leonor L. Infante and Rodney David Hegerty, its president and vice-president, respectively, obtained from private respondent Neal B. Christian loans evidenced by three promissory notes dated 7 August 1996, 14 March 1997, and 14 July 1997. Each of the promissory notes is in the amount of US$50,000 payable after three years from its date with an interest of 15% per annum payable every three months.[1] In a letter dated 16 December 1998, Christian informed the petitioner corporation that he was terminating the loans and demanded from the latter payment in the total amount of US$150,000 plus unpaid interests in the total amount of US$13,500.[2] On 2 February 1999, private respondent Christian filed with the Regional Trial Court of Baguio City, Branch 59, a complaint for a sum of money and damages against the petitioner corporation, Hegerty, and Atty. Infante. The complaint alleged as follows: On 7 August 1996, 14 March 1997, and 14 July 1997, the petitioner, as well as its president and vice-president obtained loans from him in the total amount of US$150,000 payable after three years, with an interest of 15% per annum payable quarterly or every three months. For a while, they paid an interest of 15% per annum every three months in accordance with the three promissory notes. However, starting January 1998 until December 1998, they paid him only an interest of 6% per annum, instead of 15% per annum, in violation of the terms of the three promissory notes. Thus, Christian prayed that the trial court order them to pay him jointly and solidarily the amount of US$150,000 representing the total amount of the loans; US$13,500 representing unpaid interests from January 1998 until December 1998; P100,000 for moral damages; P50,000 for attorneys fees; and the cost of the suit.[3] The petitioner corporation, together with its president and vicepresident, filed an Answer raising as defenses lack of cause of action and novation of the principal obligations. According to them, Christian had no cause of action because the three promissory notes were not yet due and demandable. In December 1997, since the petitioner corporation was experiencing huge losses due to the Asian financial crisis, Christian agreed (a) to waive the interest of 15% per annum, and (b) accept payments of the principal loans in installment basis, the amount and period of which would depend on the state of business of the petitioner corporation. Thus, the petitioner paid Christian capital repayment in the amount of US$750 per month from January 1998 until the time the complaint was filed in February 1999. The petitioner and its co-defendants then prayed that the complaint be dismissed and that Christian be ordered to pay P1 million as moral damages; P500,000 as exemplary damages; and P100,000 as attorneys fees.[4] In due course and after hearing, the trial court rendered a decision[5] on 5 May 2000 declaring the first two promissory notes dated 7 August 1996 and 14 March 1997 as already due and demandable and that the interest on the loans had been reduced by the parties from 15% to 6% per annum. It then ordered the petitioner corporation to pay Christian the amount of $100,000 representing the principal obligation covered by the promissory notes dated 7 August 1996 and 14 March 1997, plus interest of 6% per month thereon until fully paid, with all interest payments already paid by the defendant to the plaintiff to be deducted therefrom. The trial court ratiocinated in this wise:

(1) There was no novation of defendants obligation to the plaintiff. Under Article 1292 of the Civil Code, there is an implied novation only if the old and the new obligation be on every point incompatible with one another. The test of incompatibility between the two obligations or contracts, according to an imminent author, is whether they can stand together, each one having an independent existence. If they cannot, they are incompatible, and the subsequent obligation novates the first (Tolentino, Civil Code of the Philippines, Vol. IV, 1991 ed., p. 384). Otherwise, the old obligation will continue to subsist subject to the modifications agreed upon by the parties. Thus, it has been written that accidental modifications in an existing obligation do not extinguish it by novation. Mere modifications of the debt agreed upon between the parties do not constitute novation. When the changes refer to secondary agreement and not to the object or principal conditions of the contract, there is no novation; such changes will produce modifications of incidental facts, but will not extinguish the original obligation. Thus, the acceptance of partial payments or a partial remission does not involve novation (id., p. 387). Neither does the reduction of the amount of an obligation amount to a novation because it only means a partial remission or condonation of the same debt. In the instant case, the Court is of the view that the parties merely intended to change the rate of interest from 15% per annum to 6% per annum when the defendant started paying $750 per month which payments were all accepted by the plaintiff from January 1998 onward. The payment of the principal obligation, however, remains unaffected which means that the defendant should still pay the plaintiff $50,000 on August 9, 1999, March 14, 2000 and July 14, 2000. (2) When the instant case was filed on February 2, 1999, none of the promissory notes was due and demandable. As of this date however, the first and the second promissory notes have already matured. Hence, payment is already due. Under Section 5 of Rule 10 of the 1997 Rules of Civil Procedure, a complaint which states no cause of action may be cured by evidence presented without objection. Thus, even if the plaintiff had no cause of action at the time he filed the instant complaint, as defendants obligation are not yet due and demandable then, he may nevertheless recover on the first two promissory notes in view of the introduction of evidence showing that the obligations covered by the two promissory notes are now due and demandable. (3) Individual defendants Rodney Hegerty and Atty. Leonor L. Infante can not be held personally liable for the obligations contracted by the defendant corporation it being clear that they merely acted in representation of the defendant corporation in their capacity as General Manager and President, respectively, when they signed the promissory notes as evidenced by Board Resolution No. 1(94) passed by the Board of Directors of the defendant corporation (Exhibit 4).[6] In its decision[7] of 5 September 2003, the Court of Appeals denied petitioners appeal and affirmed in toto the decision of the trial court, holding as follows: In the case at bench, there is no incompatibility because the changes referred to by appellant Swagman consist only in the manner of payment. . . . Appellant Swagmans interpretation that the three (3) promissory notes have been novated by reason of appellee Christians acceptance of the monthly payments of US$750.00 as capital repayments continuously even after the filing of the instant case is a little bit strained considering the stiff requirements of the law on novation that the intention to novate must appear by express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken. Under the circumstances, the more reasonable interpretation of the act of the appellee Christian in receiving the monthly payments of US$750.00 is that appellee Christian merely allowed appellant Swagman to pay whatever amount the latter is capable of. This interpretation is supported by the letter of demand

dated December 16, 1998 wherein appellee Christian demanded from appellant Swagman to return the principal loan in the amount of US$150,000 plus unpaid interest in the amount of US$13,500.00 Appellant Swagman, likewise, contends that, at the time of the filing of the complaint, appellee Christian ha[d] no cause of action because none of the promissory notes was due and demandable. Again, We are not persuaded. In the case at bench, while it is true that appellant Swagman raised in its Answer the issue of prematurity in the filing of the complaint, appellant Swagman nonetheless failed to object to appellee Christians presentation of evidence to the effect that the promissory notes have become due and demandable. The afore-quoted rule allows a complaint which states no cause of action to be cured either by evidence presented without objection or, in the event of an objection sustained by the court, by an amendment of the complaint with leave of court (Herrera, Remedial Law, Vol. VII, 1997 ed., p. 108).[8] Its motion for reconsideration having been denied by the Court of Appeals in its Resolution of 4 December 2003,[9] the petitioner came to this Court raising the following issues: I. WHERE THE DECISION OF THE TRIAL COURT DROPPING TWO DEFENDANTS HAS BECOME FINAL AND EXECUTORY, MAY THE RESPONDENT COURT OF APPEALS STILL STUBBORNLY CONSIDER THEM AS APPELLANTS WHEN THEY DID NOT APPEAL? II. WHERE THERE IS NO CAUSE OF ACTION, IS THE DECISION OF THE LOWER COURT VALID? III. MAY THE RESPONDENT COURT OF APPEALS VALIDLY AFFIRM A DECISION OF THE LOWER COURT WHICH IS INVALID DUE TO LACK OF CAUSE OF ACTION? IV. WHERE THERE IS A VALID NOVATION, MAY THE ORIGINAL TERMS OF CONTRACT WHICH HAS BEEN NOVATED STILL PREVAIL?[10] The petitioner harps on the absence of a cause of action at the time the private respondents complaint was filed with the trial court. In connection with this, the petitioner raises the issue of novation by arguing that its obligations under the three promissory notes were novated by the renegotiation that happened in December 1997 wherein the private respondent agreed to waive the interest in each of the three promissory notes and to accept US$750 per month as installment payment for the principal loans in the total amount of US$150,000. Lastly, the petitioner questions the act of the Court of Appeals in considering Hegerty and Infante as appellants when they no longer appealed because the trial court had already absolved them of the liability of the petitioner corporation. On the other hand, the private respondent asserts that this petition is a mere ploy to continue delaying the payment of a just obligation. Anent the fact that Hegerty and Atty. Infante were considered by the Court of Appeals as appellants, the private respondent finds it immaterial because they are not affected by the assailed decision anyway. Cause of action, as defined in Section 2, Rule 2 of the 1997 Rules of Civil Procedure, is the act or omission by which a party violates the right of another. Its essential elements are as follows: 1. A right in favor of the plaintiff by whatever means and under whatever law it arises or is created; 2. An obligation on the part of the named defendant to respect or not to violate such right; and

3. Act or omission on the part of such defendant in violation of the right of the plaintiff or constituting a breach of the obligation of the defendant to the plaintiff for which the latter may maintain an action for recovery of damages or other appropriate relief.[11] It is, thus, only upon the occurrence of the last element that a cause of action arises, giving the plaintiff the right to maintain an action in court for recovery of damages or other appropriate relief. It is undisputed that the three promissory notes were for the amount of P50,000 each and uniformly provided for (1) a term of three years; (2) an interest of 15 % per annum, payable quarterly; and (3) the repayment of the principal loans after three years from their respective dates. However, both the Court of Appeals and the trial court found that a renegotiation of the three promissory notes indeed happened in December 1997 between the private respondent and the petitioner resulting in the reduction not waiver of the interest from 15% to 6% per annum, which from then on was payable monthly, instead of quarterly. The term of the principal loans remained unchanged in that they were still due three years from the respective dates of the promissory notes. Thus, at the time the complaint was filed with the trial court on 2 February 1999, none of the three promissory notes was due yet; although, two of the promissory notes with the due dates of 7 August 1999 and 14 March 2000 matured during the pendency of the case with the trial court. Both courts also found that the petitioner had been religiously paying the private respondent US$750 per month from January 1998 and even during the pendency of the case before the trial court and that the private respondent had accepted all these monthly payments. With these findings of facts, it has become glaringly obvious that when the complaint for a sum of money and damages was filed with the trial court on 2 February 1999, no cause of action has as yet existed because the petitioner had not committed any act in violation of the terms of the three promissory notes as modified by the renegotiation in December 1997. Without a cause of action, the private respondent had no right to maintain an action in court, and the trial court should have therefore dismissed his complaint. Despite its finding that the petitioner corporation did not violate the modified terms of the three promissory notes and that the payment of the principal loans were not yet due when the complaint was filed, the trial court did not dismiss the complaint, citing Section 5, Rule 10 of the 1997 Rules of Civil Procedure, which reads: Section 5. Amendment to conform to or authorize presentation of evidence. When issues not raised by the pleadings are tried with the express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment; but failure to amend does not affect the result of the trial of these issues. If evidence is objected to at the trial on the ground that it is not within the issues made by the pleadings, the court may allow the pleadings to be amended and shall do so with liberality if the presentation of the merits of the action and the ends of substantial justice will be subserved thereby. The court may grant a continuance to enable the amendment to be made. According to the trial court, and sustained by the Court of Appeals, this Section allows a complaint that does not state a cause of action to be cured by evidence presented without objection during the trial. Thus, it ruled that even if the private respondent had no cause of action when he filed the complaint for a sum of money and damages because none of the three promissory notes was due yet, he could nevertheless recover on the first two promissory notes dated 7 August 1996 and 14 March 1997, which became due during the pendency of the case in view of the introduction of evidence of their maturity during the trial. Such interpretation of Section 5, Rule 10 of the 1997 Rules of Civil Procedure is erroneous. Amendments of pleadings are allowed under Rule 10 of the 1997 Rules of Civil Procedure in order that the actual merits of a case may

be determined in the most expeditious and inexpensive manner without regard to technicalities and that all other matters included in the case may be determined in a single proceeding, thereby avoiding multiplicity of suits.[12] Section 5 thereof applies to situations wherein evidence not within the issues raised in the pleadings is presented by the parties during the trial, and to conform to such evidence the pleadings are subsequently amended on motion of a party. Thus, a complaint which fails to state a cause of action may be cured by evidence presented during the trial. However, the curing effect under Section 5 is applicable only if a cause of action in fact exists at the time the complaint is filed, but the complaint is defective for failure to allege the essential facts. For example, if a complaint failed to allege the fulfillment of a condition precedent upon which the cause of action depends, evidence showing that such condition had already been fulfilled when the complaint was filed may be presented during the trial, and the complaint may accordingly be amended thereafter.[13] Thus, in Roces v. Jalandoni,[14] this Court upheld the trial court in taking cognizance of an otherwise defective complaint which was later cured by the testimony of the plaintiff during the trial. In that case, there was in fact a cause of action and the only problem was the insufficiency of the allegations in the complaint. This ruling was reiterated in Pascua v. Court of Appeals.[15] It thus follows that a complaint whose cause of action has not yet accrued cannot be cured or remedied by an amended or supplemental pleading alleging the existence or accrual of a cause of action while the case is pending.[16] Such an action is prematurely brought and is, therefore, a groundless suit, which should be dismissed by the court upon proper motion seasonably filed by the defendant. The underlying reason for this rule is that a person should not be summoned before the public tribunals to answer for complaints which are immature. As this Court eloquently said in Surigao Mine Exploration Co., Inc. v. Harris:[17] It is a rule of law to which there is, perhaps, no exception, either at law or in equity, that to recover at all there must be some cause of action at the commencement of the suit. As observed by counsel for appellees, there are reasons of public policy why there should be no needless haste in bringing up litigation, and why people who are in no default and against whom there is yet no cause of action should not be summoned before the public tribunals to answer complaints which are groundless. We say groundless because if the action is immature, it should not be entertained, and an action prematurely brought is a groundless suit. It is true that an amended complaint and the answer thereto take the place of the originals which are thereby regarded as abandoned (Reynes vs. Compaa General de Tabacos [1912], 21 Phil. 416; Ruyman and Farris vs. Director of Lands [1916], 34 Phil., 428) and that the complaint and answer having been superseded by the amended complaint and answer thereto, and the answer to the original complaint not having been presented in evidence as an exhibit, the trial court was not authorized to take it into account. (Bastida vs. Menzi & Co. [1933], 58 Phil., 188.) But in none of these cases or in any other case have we held that if a right of action did not exist when the original complaint was filed, one could be created by filing an amended complaint. In some jurisdictions in the United States what was termed an imperfect cause of action could be perfected by suitable amendment (Brown vs. Galena Mining & Smelting Co., 32 Kan., 528; Hooper vs. City of Atlanta, 26 Ga. App., 221) and this is virtually permitted in Banzon and Rosauro vs. Sellner ([1933], 58 Phil., 453); Asiatic Potroleum [sic] Co. vs. Veloso ([1935], 62 Phil., 683); and recently in Ramos vs. Gibbon (38 Off. Gaz., 241). That, however, which is no cause of action whatsoever cannot by amendment or supplemental pleading be converted into a cause of action: Nihil de re accrescit ei qui nihil in re quando jus accresceret habet. We are therefore of the opinion, and so hold, that unless the plaintiff has a valid and subsisting cause of action at the time his action is commenced, the defect cannot be cured or remedied by the acquisition or accrual of one while the action is pending, and a supplemental complaint or an amendment setting up such afteraccrued cause of action is not permissible. (Emphasis ours).

Hence, contrary to the holding of the trial court and the Court of Appeals, the defect of lack of cause of action at the commencement of this suit cannot be cured by the accrual of a cause of action during the pendency of this case arising from the alleged maturity of two of the promissory notes on 7 August 1999 and 14 March 2000. Anent the issue of novation, this Court observes that the petitioner corporation argues the existence of novation based on its own version of what transpired during the renegotiation of the three promissory notes in December 1997. By using its own version of facts, the petitioner is, in a way, questioning the findings of facts of the trial court and the Court of Appeals. As a rule, the findings of fact of the trial court and the Court of Appeals are final and conclusive and cannot be reviewed on appeal to the Supreme Court[18] as long as they are borne out by the record or are based on substantial evidence.[19] The Supreme Court is not a trier of facts, its jurisdiction being limited to reviewing only errors of law that may have been committed by the lower courts. Among the exceptions is when the finding of fact of the trial court or the Court of Appeals is not supported by the evidence on record or is based on a misapprehension of facts. Such exception obtains in the present case.[20] This Court finds to be contrary to the evidence on record the finding of both the trial court and the Court of Appeals that the renegotiation in December 1997 resulted in the reduction of the interest from 15% to 6% per annum and that the monthly payments of US$750 made by the petitioner were for the reduced interests. It is worthy to note that the cash voucher dated January 1998[21] states that the payment of US$750 represents INVESTMENT PAYMENT. All the succeeding cash vouchers describe the payments from February 1998 to September 1999 as CAPITAL REPAYMENT.[22] All these cash vouchers served as receipts evidencing private respondents acknowledgment of the payments made by the petitioner: two of which were signed by the private respondent himself and all the others were signed by his representatives. The private respondent even identified and confirmed the existence of these receipts during the hearing. [23] Significantly, cognizant of these receipts, the private respondent applied these payments to the three consolidated principal loans in the summary of payments he submitted to the court.[24] Under Article 1253 of the Civil Code, if the debt produces interest, payment of the principal shall not be deemed to have been made until the interest has been covered. In this case, the private respondent would not have signed the receipts describing the payments made by the petitioner as capital repayment if the obligation to pay the interest was still subsisting. The receipts, as well as private respondents summary of payments, lend credence to petitioners claim that the payments were for the principal loans and that the interests on the three consolidated loans were waived by the private respondent during the undisputed renegotiation of the loans on account of the business reverses suffered by the petitioner at the time. There was therefore a novation of the terms of the three promissory notes in that the interest was waived and the principal was payable in monthly installments of US$750. Alterations of the terms and conditions of the obligation would generally result only in modificatory novation unless such terms and conditions are considered to be the essence of the obligation itself.[25] The resulting novation in this case was, therefore, of the modificatory type, not the extinctive type, since the obligation to pay a sum of money remains in force. Thus, since the petitioner did not renege on its obligation to pay the monthly installments conformably with their new agreement and even continued paying during the pendency of the case, the private respondent had no cause of action to file the complaint. It is only upon petitioners default in the payment of the monthly amortizations that a cause of action would arise and give the private respondent a right to maintain an action against the petitioner. Lastly, the petitioner contends that the Court of Appeals obstinately included its President Infante and Vice-President Hegerty as

appellants even if they did not appeal the trial courts decision since they were found to be not personally liable for the obligation of the petitioner. Indeed, the Court of Appeals erred in referring to them as defendants-appellants; nevertheless, that error is no cause for alarm because its ruling was clear that the petitioner corporation was the one solely liable for its obligation. In fact, the Court of Appeals affirmed in toto the decision of the trial court, which means that it also upheld the latters ruling that Hegerty and Infante were not personally liable for the pecuniary obligations of the petitioner to the private respondent. In sum, based on our disquisition on the lack of cause of action when the complaint for sum of money and damages was filed by the private respondent, the petition in the case at bar is impressed with merit. WHEREFORE, the petition is hereby GRANTED. The Decision of 5 September 2003 of the Court of Appeals in CA-G.R. CV No. 68109, which affirmed the Decision of 5 May 2000 of the Regional Trial Court of Baguio, Branch 59, granting in part private respondents complaint for sum of money and damages, and its Resolution of 4 December 2003, which denied petitioners motion for reconsideration are hereby REVERSED and SET ASIDE. The complaint docketed as Civil Case No. 4282-R is hereby DISMISSED for lack of cause of action. No costs. SO ORDERED. 2. G.R. No. 152346 November 25, 2005 ISAIAS F. FABRIGAS and MARCELINA R. FABRIGAS, Petitioners, vs. SAN FRANCISCO DEL MONTE, INC., Respondent. DECISION Tinga, J.: Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, which assails the Decision of the Court of Appeals in CA-G.R. CV No. 45203 and its Resolution therein denying petitioners motion for reconsideration. Said Decision affirmed the Decision dated January 3, 1994 of the Regional Trial Court (RTC), Branch 63, Makati City in Civil Case No. 902711 entitled San Francisco Del Monte, Inc. v. Isaias F. Fabrigas and Marcelina R. Fabrigas. The dispositive portion of the trial courts Decision reads: In the light of the foregoing, the Court is convinced that plaintiff has proven by preponderance of evidence, the allegation appearing in its complaint and is therefore, entitled to the reliefs prayed for. Considering, however, that defendants had already paid P78,152.00, the Court exercising its discretion, hereby renders judgment as follows: 1. Ordering defendant to make complete payment under the conditions of Contract to Sell No. 2491-V dated January 21, 1985, within twenty days from receipt of this Decision, and in the event that defendant fail or refuse to observe the latter, defendants and all persons claiming right of possession or occupation from defendants are ordered to vacate and leave the premises, described as Lot No. 9 Block No. 3 of Subdivision Plan (LRC) Psd-50064 covered by Transfer Certificate of Title No. 4980 (161653) T-1083 of the Registry of Deeds of Rizal, and to surrender possession thereof to plaintiff or any of its authorized representatives; 2. That in the event that defendants chose to surrender possession of the property, they are further ordered to pay plaintiff P206,223.80 as unpaid installments on the land inclusive of interests;

3. Ordering defendants to jointly and severally pay plaintiff the amount of P10,000.00 as and for attorneys fees; and 4. Ordering defendants to pay the costs of suit. SO ORDERED.1 The following factual antecedents are matters of record. On April 23, 1983, herein petitioner spouses Isaias and Marcelina Fabrigas ("Spouses Fabrigas" or "petitioners") and respondent San Francisco Del Monte, Inc. ("Del Monte") entered into an agreement, denominated as Contract to Sell No. 2482-V, whereby the latter agreed to sell to Spouses Fabrigas a parcel of residential land situated in Barrio Almanza, Las Pias, Manila for and in consideration of the amount of P109,200.00. Said property, which is known as Lot No. 9, Block No. 3 of Subdivision Plan (LRC) Psd-50064, is covered by Transfer Certificate of Title No. 4980 (161653) T-1083 registered in the name of respondent Del Monte. The agreement stipulated that Spouses Fabrigas shall pay P30,000.00 as downpayment and the balance within ten (10) years in monthly successive installments of P1,285.69.2 Among the clauses in the contract is an automatic cancellation clause in case of default, which states as follows: 7. Should the PURCHASER fail to make any of the payments including interest as herein provided, within 30 days after the due date, this contract will be deemed and considered as forfeited and annulled without necessity of notice to the PURCHASER, and said SELLER shall be at liberty to dispose of the said parcel of land to any other person in the same manner as if this contract had never been executed. In the event of such forfeiture, all sums of money paid under this contract will be considered and treated as rentals for the use of said parcel of land, and the PURCHASER hereby waives all right to ask or demand the return thereof and agrees to peaceably vacate the said premises.3 After paying P30,000.00, Spouses Fabrigas took possession of the property but failed to make any installment payments on the balance of the purchase price. Del Monte sent demand letters on four occasions to remind Spouses Fabrigas to satisfy their contractual obligation.4 In particular, Del Montes third letter dated November 9, 1983 demanded the payment of arrears in the amount of P8,999.00. Said notice granted Spouses Fabrigas a fifteen-day grace period within which to settle their accounts. Petitioners failure to heed Del Montes demands prompted the latter to send a final demand letter dated December 7, 1983, granting Spouses Fabrigas another grace period of fifteen days within which to pay the overdue amount and warned them that their failure to satisfy their obligation would cause the rescission of the contract and the forfeiture of the sums of money already paid. Petitioners received Del Montes final demand letter on December 23, 1983. Del Monte considered Contract to Sell No. 2482-V cancelled fifteen days thereafter, but did not furnish petitioners any notice regarding its cancellation.5 On November 6, 1984, petitioner Marcelina Fabrigas ("petitioner Marcelina") remitted the amount of P13,000.00 to Del Monte.6 On January 12, 1985, petitioner Marcelina again remitted the amount of P12,000.00.7 A few days thereafter, or on January 21, 1985, petitioner Marcelina and Del Monte entered into another agreement denominated as Contract to Sell No. 2491-V, covering the same property but under restructured terms of payment. Under the second contract, the parties agreed on a new purchase price of P131,642.58, the amount of P26,328.52 as downpayment and the balance to be paid in monthly installments of P2,984.60 each.8 Between March 1985 and January 1986, Spouses Fabrigas made irregular payments under Contract to Sell No. 2491-V, to wit: March 19, 1985 P1, 328.52 July 2, 1985 P2, 600.00 September 30, 1985 P2, 600.00 November 27, 1985 P2, 600.00

January 20, 1986 P2, 000.009 Del Monte sent a demand letter dated February 3, 1986, informing petitioners of their overdue account equivalent to nine (9) installments or a total amount of P26,861.40. Del Monte required petitioners to satisfy said amount immediately in two subsequent letters dated March 5 and April 2, 1986. 10 This prompted petitioners to pay the following amounts: February 3, 1986 P2, 000.00 March 10, 1986 P2, 000.00 April 9, 1986 P2, 000.00 May 13, 1986 P2, 000.00 June 6, 1986 P2, 000.00 July 14, 1986 P2, 000.0011 No other payments were made by petitioners except the amount of P10,000.00 which petitioners tendered sometime in October 1987 but which Del Monte refused to accept, the latter claiming that the payment was intended for the satisfaction of Contract to Sell No. 2482-V which had already been previously cancelled. On March 24, 1988, Del Monte sent a letter demanding the payment of accrued installments under Contract to Sell No. 2491-V in the amount of P165,759.60 less P48,128.52, representing the payments made under the restructured contract, or the net amount of P117,631.08. Del Monte allowed petitioners a grace period of thirty (30) days within which to pay the amount asked to avoid rescission of the contract. For failure to pay, Del Monte notified petitioners on March 30, 1989 that Contract to Sell No. 2482-V had been cancelled and demanded that petitioners vacate the property.12 On September 28, 1990, Del Monte instituted an action for Recovery of Possession with Damages against Spouses Fabrigas before the RTC, Branch 63 of Makati City. The complaint alleged that Spouses Fabrigas owed Del Monte the principal amount of P206,223.80 plus interest of 24% per annum. In their answer, Spouses Fabrigas claimed, among others, that Del Monte unilaterally cancelled the first contract and forced petitioner Marcelina to execute the second contract, which materially and unjustly altered the terms and conditions of the original contract.13 After trial on the merits, the trial court rendered a Decision on January 3, 1994, upholding the validity of Contract to Sell No. 2491V and ordering Spouses Fabrigas either to complete payments thereunder or to vacate the property. Aggrieved, Spouses Fabrigas elevated the matter to the Court of Appeals, arguing that the trial court should have upheld the validity and existence of Contract to Sell No. 2482-V instead and nullified Contract to Sell No. 2491-V. The Court of Appeals rejected this argument on the ground that Contract to Sell No. 2482-V had been rescinded pursuant to the automatic rescission clause therein. While the Court of Appeals declared Contract to Sell No. 2491-V as merely unenforceable for having been executed without petitioner Marcelinas signature, it upheld its validity upon finding that the contract was subsequently ratified. Hence, the instant petition attributing the following errors to the Court of Appeals: A. THE COURT OF APPEALS GRAVELY ERRED WHEN IT IGNORED THE PROVISIONS OF R.A. NO. 6552 (THE MACEDA LAW) AND RULED THAT CONTRACT TO SELL NO. 2482-V WAS VALIDLY CANCELLED BY SENDING A MERE NOTICE TO THE PETITIONERS. B. THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THERE WAS AN IMPLIED RATIFICATION OF CONTRACT TO SELL NO. 2491-V.

C. THE COURT OF APPEALS ERRED IN ITS APPLICATION OF THE RULES OF NOVATION TO THE INSTANT CASE. 14 As reframed for better understanding, the questions are the following: Was Contract to Sell No. 2482-V extinguished through rescission or was it novated by the subsequent Contract to Sell No. 2491-V? If Contract to Sell No. 2482-V was rescinded, should the manner of rescission comply with the requirements of Republic Act No. (R.A.) 6552? If Contract to Sell No. 2482-V was subsequently novated by Contract to Sell No. 2491-V, are petitioners liable for breach under the subsequent agreement? Petitioners theorize that Contract to Sell No. 2482-V should remain valid and subsisting because the notice of cancellation sent by Del Monte did not observe the requisites under Section 3 of R.A. 6552. 15 According to petitioners, since respondent did not send a notarial notice informing them of the cancellation or rescission of Contract to Sell No. 2482-V and also did not pay them the cash surrender value of the payments on the property, the Court of Appeals erred in concluding that respondent correctly applied the automatic rescission clause of Contract to Sell No. 2482-V. Petitioners also cite Section 716 of said law to bolster their theory that the automatic rescission clause in Contract to Sell No. 2482-V is invalid for being contrary to law and public policy. The Court of Appeals erred in ruling that Del Monte was "well within its right to cancel the contract by express grant of paragraph 7 without the need of notifying [petitioners],17" instead of applying the pertinent provisions of R.A. 6552. Petitioners contention that none of Del Montes demand letters constituted a valid rescission of Contract to Sell No. 2482-V is correct. Petitioners defaulted in all monthly installments. They may be credited only with the amount of P30,000.00 paid upon the execution of Contract to Sell No. 2482-V, which should be deemed equivalent to less than two (2) years installments. Given the nature of the contract between petitioners and Del Monte, the applicable legal provision on the mode of cancellation of Contract to Sell No. 2482-V is Section 4 and not Section 3 of R.A. 6552. Section 4 is applicable to instances where less than two years installments were paid. It reads: SECTION 4. In case where less than two years of installments were paid, the seller shall give the buyer a grace period of not less than sixty days from the date the installment became due. If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act. Thus, the cancellation of the contract under Section 4 is a two-step process. First, the seller should extend the buyer a grace period of at least sixty (60) days from the due date of the installment. Second, at the end of the grace period, the seller shall furnish the buyer with a notice of cancellation or demand for rescission through a notarial act, effective thirty (30) days from the buyers receipt thereof. It is worth mentioning, of course, that a mere notice or letter, short of a notarial act, would not suffice. While the Court concedes that Del Monte had allowed petitioners a grace period longer than the minimum sixty (60)-day requirement under Section 4, it did not comply, however, with the requirement of notice of cancellation or a demand for rescission. Instead, Del Monte applied the automatic rescission clause of the contract. Contrary, however, to Del Montes position which the appellate court sustained, the automatic cancellation clause is void under Section 7 18 in relation to Section 4 of R.A. 6552.19 Rescission, of course, is not the only mode of extinguishing obligations. Ordinarily, obligations are also extinguished by payment or performance, by the loss of the thing due, by the condonation or remission of the debt, by the confusion or merger of the rights of the creditor and debtor, by compensation, or by novation. 20

Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory agreement. An extinctive novation results either by changing the object or principal conditions (objective or real), or by substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or personal). Under this mode, novation would have dual functions one to extinguish an existing obligation, the other to substitute a new one in its placerequiring a conflux of four essential requisites: (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation.21 Notwithstanding the improper rescission, the facts of the case show that Contract to Sell No. 2482-V was subsequently novated by Contract to Sell No. 2491-V. The execution of Contract to Sell No. 2491-V accompanied an upward change in the contract price, which constitutes a change in the object or principal conditions of the contract. In entering into Contract to Sell No. 2491-V, the parties were impelled by causes different from those obtaining under Contract to Sell No. 2482-V. On the part of petitioners, they agreed to the terms and conditions of Contract to Sell No. 2491-V not only to acquire ownership over the subject property but also to avoid the consequences of their default under Contract No. 2482-V. On Del Montes end, the upward change in price was the consideration for entering into Contract to Sell No. 2491-V. In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other.22 The test of incompatibility is whether or not the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first. 23 The execution of Contract to Sell No. 2491-V created new obligations in lieu of those under Contract to Sell No. 2482-V, which are already considered extinguished upon the execution of the second contract. The two contracts do not have independent existence for to hold otherwise would present an absurd situation where the parties would be liable under each contract having only one subject matter. To dispel the novation of Contract to Sell No. 2482-V by Contract to Sell No. 2491-V, petitioners contend that the subsequent contract is void for two reasons: first, petitioner Isaias Fabrigas did not give his consent thereto, and second, the subsequent contract is a contract of adhesion. Petitioner rely on Article 172 of the Civil Code governing their property relations as spouses. Said article states that the wife cannot bind the conjugal partnership without the husbands consent except in cases provided by law. Since only petitioner Marcelina executed Contract to Sell No. 2491-V, the same is allegedly void, petitioners conclude. Under the Civil Code, the husband is the administrator of the conjugal partnership.24 Unless the wife has been declared a non compos mentis or a spendthrift, or is under civil interdiction or is confined in a leprosarium, the husband cannot alienate or encumber any real property of the conjugal partnership without the wife's consent.25 Conversely, the wife cannot bind the conjugal partnership without the husbands consent except in cases provided by law. 26 Thus, if a contract entered into by one spouse involving a conjugal property lacks the consent of the other spouse, as in the case at bar, is it automatically void for that reason alone? Article 17327 of the Civil Code expressly classifies a contract executed by the husband without the consent of the wife as merely annullable at the instance of the wife. However, there is no comparable provision covering an instance where the wife alone has consented to a contract involving conjugal property. Article 172 of the Civil Code, though, does not expressly declare as void a contract entered by the wife without the husbands consent. It is also not one

of the contracts considered as void under Article 140928 of the Civil Code. In Felipe v. Heirs of Maximo Aldon,29 the Court had the occasion to rule on the validity of a sale of lands belonging to the conjugal partnership made by the wife without the consent of the husband. Speaking through Mr. Justice Abad Santos, the Court declared such a contract as voidable because one of the parties is incapable of giving consent to the contract. The capacity to give consent belonged not even to the husband alone but to both spouses.30 In that case, the Court anchored its ruling on Article 173 of the Civil Code which states that contracts entered by the husband without the consent of the wife when such consent is required, are annullable at her instance during the marriage and within ten years from the transaction mentioned.31 The factual milieu of the instant case, however, differs from that in Felipe. The defect which Contract to Sell No. 2491-V suffers from is lack of consent of the husband, who was out of the country at the time of the execution of the contract. There is no express provision in the Civil Code governing a situation where the husband is absent and his absence incapacitates him from administering the conjugal partnership property. The following Civil Code provisions, however, are illuminating: ARTICLE 167. In case of abuse of powers of administration of the conjugal partnership property by the husband, the courts, on petition of the wife, may provide for receivership, or administration by the wife, or separation of property. ARTICLE 168. The wife may, by express authority of the husband embodied in a public instrument, administer the conjugal partnership property. ARTICLE 169. The wife may also, by express authority of the husband appearing in a public instrument, administer the latter's estate. While the husband is the recognized administrator of the conjugal property under the Civil Code, there are instances when the wife may assume administrative powers or ask for the separation of property. In the abovementioned instances, the wife must be authorized either by the court or by the husband. Where the husband is absent and incapable of administering the conjugal property, the wife must be expressly authorized by the husband or seek judicial authority to assume powers of administration. Thus, any transaction entered by the wife without the court or the husbands authority is unenforceable in accordance with Article 131732 of the Civil Code. That is the status to be accorded Contract to Sell No. 2491-V, it having been executed by petitioner Marcelina without her husbands conformity. Being an unenforceable contract, Contract to Sell No. 2491-V is susceptible to ratification. As found by the courts below, after being informed of the execution of the contract, the husband, petitioner Isaias Fabrigas, continued remitting payments for the satisfaction of the obligation under Contract to Sell No. 2491-V. These acts constitute ratification of the contract. Such ratification cleanses the contract from all its defects from the moment it was constituted. The factual findings of the courts below are beyond review at this stage. Anent Del Montes claim that Contract to Sell No. 2491-V is a contract of adhesion, suffice it to say that assuming for the nonce that the contract is such the characterization does not automatically render it void. A contract of adhesion is so-called because its terms are prepared by only one party while the other party merely affixes his signature signifying his adhesion thereto. Such contracts are not void in themselves. They are as binding as ordinary contracts. Parties who enter into such contracts are free to reject the stipulations entirely. 33 The Court quotes with approval the following factual observations of the trial court, which cannot be disturbed in this case, to wit: The Court notes that defendant, Marcelina Fabrigas, although she had to sign contract No. 2491-V, to avoid forfeiture of her downpayment,

and her other monthly amortizations, was entirely free to refuse to accept the new contract. There was no clear case of intimidation or threat on the part of plaintiff in offering the new contract to her. At most, since she was of sufficient intelligence to discern the agreement she is entering into, her signing of Contract No. 2491-V is taken to be valid and binding. The fact that she has paid monthly amortizations subsequent to the execution of Contract to Sell No. 2491-V, is an indication that she had recognized the validity of such contract. . . . 34 In sum, Contract to Sell No. 2491-V is valid and binding. There is nothing to prevent respondent Del Monte from enforcing its contractual stipulations and pursuing the proper court action to hold petitioners liable for their breach thereof. WHEREFORE, the instant Petition for Review is DENIED and the September 28, 2001 Decision of the Court of Appeals in CA-G.R. CV No. 45203 is AFFIRMED. Costs against petitioners. SO ORDERED.

Petitioner Rodriguez and PFC Silungan were then brought to the PC Crime Laboratory at Camp Crame. A physical examination was conducted on their persons. Both were found positive for the presence of ultraviolet fluorescent powder. The P50 bill, which formed part of the entrapment money, was recovered from PFC Silungan while the two P20 bills were retrieved from petitioner. An administrative case for grave misconduct was subsequently filed against Rodriguez, Silungan, and Pilandi, who was at large, with the National Police Commission or NAPOLCOM. Docketed as Adm. Case No. 90-80, the case was assigned to Atty. Narzal B. Mallares as hearing officer. A second administrative case was filed with NAPOLCOM against the three erring police officers for their summary dismissal. A charge for robbery/extortion was filed with Headquarters, PC-INP. It was docketed as Adm. Case No. 01-91 and assigned to P/Major Efren Santos as Summary Hearing Officer. On February 7, 1991, then PNP Chief Major General Cesar P. Nazareno issued Special Order No. 35 summarily dismissing Rodriguez, Silungan, and Pilandi from the police force. On March 27, 1991, petitioner appealed the summary dismissal to the NAPOLCOM National Appellate Board. He alleged that the summary dismissal proceedings violated his right to due process. He claimed that only a preliminary inquiry had been conducted by the NAPOLCOM hearing officer and that he had not been afforded a chance to present his side. In the meantime, the case against petitioner and his companions for robbery/extortion was filed by PC-INP with the public prosecutors office of Makati. The investigating prosecutor, however, subsequently recommended the dismissal of the complaint on the ground that [t]he scenarios of the arresting officers left so much to be desired. On November 5, 1992, the NAPOLCOM National Appellate Board dismissed the appeal of petitioner in the summary dismissal case. On March 29, 1993, petitioner filed a motion for reconsideration, but the NAPOLCOM denied it on March 11, 1996. Aggrieved, petitioner elevated his case to the Court of Appeals by way of certiorari and mandamus. Petitioner contended that the act of the PNP Director General in summarily dismissing him from the service, while Adm. Case No. 90-80 involving the same incident complained of was yet pending before the NAPOLCOM, was clearly with grave abuse of discretion and in excess of jurisdiction. On October 22, 1997, the appellate court denied the petition for lack of merit. Petitioner filed a motion for reconsideration of the appellate courts decision, but it was denied on May 27, 1998. On July 13, 1998, petitioner filed the instant petition for review under Rule 45, raising as sole issue: WHETHER OR NOT, THE NOMINAL RESPONDENT COURT OF APPEALS CORRECTLY DISMISSED THE PETITION FOR CERTIORARI AND MANDAMUS UNDER THE PREVAILING FACTS AND CIRCUMSTANCES ABOVE-CITED AND BASED UPON THE THEORY OF GRAVE ABUSE OF DISCRETION AND LACK ON (SIC) EXCESS OF JURISDICTION AT POINT WHEN THERE WAS NO APPEAL OR IF IT WAS STILL AVAILABLE, THE SAME WAS NOT ANYMORE ADEQUATE AND SPEEDY? Before us, Rodriguez contends that the Court of Appeals committed an error of law when it found that petitioners right to due process, instead of having been breached, was observed to the utmost. More specifically, petitioner contends that the Court of Appeals erred when it observed that: Since the petitioner admittedly received on April 15, 1996, a copy of the Resolution denying his motion for the reconsideration of the adverse Decision of the NAPOLCOM rendered by Secretary Alunan and Commissioners Guillermo Enriquez, Jr. and Federico S. Commandante, his remedy was to appeal to the Civil Service

3. [G.R. NO. 134278. August 7, 2002] PFC RODOLFO RODRIGUEZ, petitioner, vs. THE HON. COURT OF APPEALS, THE DIRECTOR-GENERAL OF THE PHILIPPINE NATIONAL POLICE (FORMERLY DIRECTOR GENERAL, INTEGRATED NATIONAL POLICE), NAPOLCOM, and ITS COMMISSIONERS, AND THE HON. SECRETARY OF THE DILG IN HIS CAPACITY AS THE NAPOLCOM CHAIRMAN, respondents. DECISION QUISUMBING, J.: This petition for review, under Rule 45 of the Rules of Court, seeks the reversal of the decision of the Court of Appeals in CA-GR No. SP 40504. Promulgated on October 22, 1997, said decision dismissed herein petitioners special civil action for certiorari and mandamus for lack of merit. Petitioner also assails the appellate courts resolution of May 27, 1998, denying his motion for reconsideration. The facts of this case, as culled from the records, are as follows: On May 24, 1990, the Philippine Constabulary-Integrated National Police (PC-INP), now Philippine National Police or PNP, launched OPLAN AJAX to minimize, if not entirely eliminate, the extortion activities of traffic policemen at the vicinity of Guadalupe Bridge, Makati, Metro Manila. On July 5, 1990, at about three oclock in the afternoon, two operatives of OPLAN AJAX, namely, 2LT Federico Bulanday, PC and Intelligence Agent Angelito C. Leoncio, both members of the Counter-Intelligence Group (CIG) stationed at Camp Crame, Quezon City, were on board a car with Plate No. NDK-238. They were traveling along J.P. Rizal Street, Makati, when they were flagged down by three policemen in uniform. These were petitioner PFC Rodolfo Rodriguez, PFC Arsenio Silungan, and PFC Rolando Pilandi. All were members of the Metropolitan Traffic Command assigned with the Makati Police Station. Upon pulling up, Bulanday and Leoncio were informed by the three policemen that they had violated traffic regulations. The three policemen demanded money. Bulanday and Leoncio handed over cash amounting to one hundred pesos consisting of two P20 bills, one P10 bill, and one P50 bill. The bills were marked with ultraviolet fluorescent powder. On seeing what happened, other CIG operatives who were behind the vehicle of Bulanday and Leoncio immediately swooped down on the three policemen. However, they were able to arrest only petitioner and PFC Silungan. PFC Pilandi was able to escape by commandeering a private vehicle at gunpoint.

Commission. We cannot thus entertain his present original action for certiorari and mandamus for these remedies cannot be resorted to as a substitute for appeal, especially so in this case where the petitioner had wasted two (2) chances of appealing, first, to the CSC; and then, to this Court. But even assuming that instant recourse is proper, still we are not prepared to hold that the petitioner was denied his right to due process by the respondents. Due process was designed to afford an opportunity to be heard, not that an actual hearing should always and indispensably be heard. As applied to administrative proceedings, the essence of due process is an opportunity to explain ones side or an opportunity to seek a reconsideration of the action or ruling complained of. xxx A reading, however, of the decision denying his appeal from the summary dismissal order of PNP Chief Nazareno demonstrates that the petitioner fully ventilated his defenses in his appeal(Citations omitted.) xxx The only issue for determination is whether or not the Court of Appeals erred when it dismissed the petition for certiorari and mandamus filed by petitioner PFC Rodolfo Rodriguez. In Republic v. Asuncion, 231 SCRA 211 (1994), we held that the civilian character of the PNP is unqualified, unconditional, and all embracing. Members of the PNP are deemed civilian personnel of the government. Police officers and personnel are part of the civil service. This is expressly recognized by R.A. No. 6975 when it provided for the applicability of civil service laws to all its personnel in Section 91 thereof, which states: SEC. 91. Application of Civil Service Laws. The Civil Service Law and its implementing rules and regulations shall apply to all personnel of the Department. The Civil Service Law referred to in Section 91 of R.A. No. 6975 is Subtitle A, Title I, Book V of the Administrative Code of 1987. The procedure for dismissal is outlined in Section 47 (2) of this subtitle. Thus: (2) The Secretaries and heads of agencies and instrumentalities, provinces, cities and municipalities shall have jurisdiction to investigate and decide matters involving disciplinary action against officers and employees under their jurisdiction. Their decisions shall be final in case the penalty imposed is suspension for not more than thirty days or fine in an amount not exceeding thirty days salary. In case the decision rendered by a bureau or office head is appealable to the Commission, the same may be initially appealed to the department and finally to the Commission and pending appeal, the same shall be executory except when the penalty is removal, in which case the same shall be executory only after confirmation by the Secretary concerned. (Emphasis supplied.) Rule XIV of the Omnibus Rules Implementing Book V of the Administrative Code of 1987 provides: SEC. 31. Except as otherwise provided by the Constitution or by law, the Commission shall have the final authority to pass upon the removal, separation and suspension of all officers and employees in the civil service and upon all matters relating to the conduct, discipline and efficiency of such officers and employees. SEC. 32. The Secretaries and heads of agencies and instrumentalities, provinces, cities and municipalities shall have jurisdiction to investigate and decide matters involving disciplinary action against officers and employees under their jurisdiction. Their decisions shall be final in case the penalty imposed is suspension for not more than thirty (30) days or fine in an amount not exceeding thirty (30) days salary. In case the decision rendered by a bureau or office head is appealable to the Commission, the same may be initially appealed to

the department, then to the Merit Systems Protection Board, and finally, to the Commission and pending appeal, the same shall be executory except when the penalty is removal, in which case the same shall be executory only after confirmation by the Secretary concerned. Clearly, where a police officer is dismissed by the PNP Director General and the dismissal is affirmed by the NAPOLCOM National Appellate Board, the proper remedy is to appeal the dismissal with the DILG Secretary. That the NAPOLCOM Chairman is also the DILG Secretary is of no moment, for under the aforecited laws and regulations, only the DILG Secretary can act on the appeal. Besides, what is involved here is not the sole act of the NAPOLCOM Chairman, but the decision of the Commission. Should the DILG Secretarys decision prove adverse to appellant, then he as the aggrieved party may bring an appeal to the Civil Service Commission. In instances where the CSC denies the appeal, the remedy under R.A. No. 7902 would be to appeal the adverse decision to the Court of Appeals. In the instant case, petitioner had three opportunities to appeal the decision of the NAPOLCOM. He chose not to avail of them, but instead opted to file an action for certiorari and mandamus with the appellate court. Thus, we are in agreement with the Court of Appeals when it observed that there were lapses in procedure which can adversely affect the fate of the instant petition. Neither certiorari nor mandamus can substitute for appeal where the latter is the proper remedy. The extraordinary remedies of certiorari, prohibition, and mandamus will lie only when there is no appeal or any plain, speedy, and adequate remedy in the ordinary course of law. The Court of Appeals committed no reversible error of law in dismissing petitioners special civil action for certiorari and mandamus. Petitioner cannot now claim that he was not afforded due process by the NAPOLCOM. In administrative proceedings, the filing of charges and giving reasonable opportunity for the person so charged to answer the accusations against him constitute the minimum requirements of due process. The essence of administrative due process is the opportunity to be heard. As long as a party was given the opportunity to defend his interests in due course, he was not denied due process. In the instant case, a scrutiny of the NAPOLCOM decision denying petitioners appeal from the PNP Chiefs order of dismissal clearly shows that petitioner was afforded an opportunity to present his side and defend his interests. Thus NAPOLCOM expressly held: In his present appeal, appellant Rodriguez raised the following issues: 1) That he was a victim of a frame-up and; 2) That he was denied due process. xxx On the second issue, records show that, contrary to his allegation, respondent-appellant Rodriguez as well as respondent-appellant Silungan were afforded opportunity to be heard. In fact during the summary dismissal proceedings, they submitted their respective counter-affidavits to disprove the accusation leveled against them, thus; respondent-appellant and his co-respondent were not denied their constitutional right to due process. Furthermore, lack of due process cannot be invoked where a party was given the chance to be heard on his motion for reconsideration. The resolution denying petitioners motion for reconsideration clearly shows that petitioner was given every opportunity to air his side, thus: In his herein Motion for Reconsideration, respondent-appellant, alleged, inter-alia, the following:

1. That his innocence had been established before the City Prosecutors Office of Makati, when the said office dismissed for lack of evidence sufficient to establish a probable cause the case filed against him, which arose from the same incident subject of his summary dismissal case; and 2. That he is pleading for pity and compassion in the name of his future and his family. As we have stated in the Decision, which is now under review, this Commission affirmed the summary dismissal from the service of herein respondent-appellant, because he was caught in the act of committing robbery extortion in an entrapment operation and, when subjected to laboratory examination, was found positive with ultraviolet fluorescent powder on both palmary portions of his hands, face and arms, including his left pants pocket, where pieces of P20.00 bills were found when searched. As we have ruled in a long line of cases, amply supported by legal jurisprudence, the dismissal of the criminal case will not necessarily result in the exoneration of the respondent in the corresponding administrative action, since they are separate and distinct both in purpose and in the quantum of evidence required to warrant a finding of guilt. All these lead us to conclude that petitioners claim of denial of due process has no leg to stand on. His present petition is clearly without merit. WHEREFORE, the instant petition is DENIED. The decision of the Court of Appeals dated October 22, 1997, and its resolution dated May 27, 1998, in CA-G.R. No. SP 40504, are hereby AFFIRMED. SO ORDERED.

extension of the insurance coverage until actual transhipment, which extension was approved upon payment of additional premium. The insurance coverage was extended under the same terms and conditions embodied in the original policies while in the process of making arrangements for the transhipment of the cargo from Durban to Manila, covering the period October 4-December 19, 1989. However, on December 11, 1989, the cargo was sold in Durban, South Africa, for US$154.40 per metric ton or a total of P10,304,231.75 due to its perishable nature which could no longer stand a voyage of twenty days to Manila and another twenty days for the discharge thereof. On January 5, 1990, private respondent forthwith reduced its claim to US$448,806.09 (or its peso equivalent of P9,879,928.89 at the exchange rate of P22.0138 per $1.00) representing private respondent's loss after the proceeds of the sale were deducted from the original claim of $916,886.66 or P20,184,159.55. Petitioner maintained its position that the arrest of the vessel by civil authorities on a question of ownership was an excepted risk under the marine insurance policies. This prompted private respondent to file a complaint for damages praying that aside from its claim, it be reimbursed the amount of P128,770.88 as legal expenses and the interest it paid for the loan it obtained to finance the shipment totalling P942,269.30. In addition, private respondent asked for moral damages amounting to P200,000.00, exemplary damages amounting to P200,000.00 and attorney's fees equivalent to 30% of what will be awarded by the court. The lower court decided in favor of private respondent and required petitioner to pay, aside from the insurance claim, consequential and liquidated damages amounting to P1,024,233.88, exemplary damages amounting to P100,000.00, reimbursement in the amount equivalent to 10% of whatever is recovered as attorney's fees as well as the costs of the suit. On private respondent's motion for reconsideration, petitioner was also required to further pay interest at the rate of 12% per annum on all amounts due and owing to the private respondent by virtue of the lower court decision counted from the inception of this case until the same is paid. On appeal, the Court of Appeals affirmed the decision of the lower court stating that with the deletion of Clause 12 of the policies issued to private respondent, the same became automatically covered under subsection 1.1 of Section 1 of the Institute War Clauses. The arrests, restraints or detainments contemplated in the former clause were those effected by political or executive acts. Losses occasioned by riot or ordinary judicial processes were not covered therein. In other words, arrest, restraint or detainment within the meaning of Clause 12 (or F.C. & S. Clause) rules out detention by ordinary legal processes. Hence, arrests by civil authorities, such as what happened in the instant case, is an excepted risk under Clause 12 of the Institute Cargo Clause or the F.C. & S. Clause. However, with the deletion of Clause 12 of the Institute Cargo Clause and the consequent adoption or institution of the Institute War Clauses (Cargo), the arrest and seizure by judicial processes which were excluded under the former policy became one of the covered risks. The appellate court added that the failure to deliver the consigned goods in the port of destination is a loss compensable, not only under the Institute War Clause but also under the Theft, Pilferage, and Nondelivery Clause (TNPD) of the insurance policies, as read in relation to Section 130 of the Insurance Code and as held in Williams v. Cole.2chanroblesvirtuallawlibrary Furthermore, the appellate court contended that since the vessel was prevented at an intermediate port from completing the voyage due to its seizure by civil authorities, a peril insured against, the liability of petitioner continued until the goods could have been transhipped. But due to the perishable nature of the goods, it had to be promptly sold to minimize loss. Accordingly, the sale of the goods being reasonable and justified, it should not operate to discharge petitioner from its contractual liability. Hence this petition, claiming that the Court of Appeals erred:

4. [G.R. No. 119599. March 20, 1997] MALAYAN INSURANCE CORPORATION, Petitioner, vs. THE HON. COURT OF APPEALS and TKC MARKETING CORPORATION, Respondents. DECISION ROMERO, J.: Assailed in this petition for review on certiorari is the decision of the Court of Appeals in CA-G.R. No. 430231 which affirmed, with slight modification, the decision of the Regional Trial Court of Cebu, Branch 15. Private respondent TKC Marketing Corp. was the owner/consignee of some 3,189.171 metric tons of soya bean meal which was loaded on board the ship MV Al Kaziemah on or about September 8, 1989 for carriage from the port of Rio del Grande, Brazil, to the port of Manila. Said cargo was insured against the risk of loss by petitioner Malayan Insurance Corporation for which it issued two (2) Marine Cargo Policy Nos. M/LP 97800305 amounting to P18,986,902.45 and M/LP 97800306 amounting to P1,195,005.45, both dated September 1989. While the vessel was docked in Durban, South Africa on September 11, 1989 enroute to Manila, the civil authorities arrested and detained it because of a lawsuit on a question of ownership and possession. As a result, private respondent notified petitioner on October 4, 1989 of the arrest of the vessel and made a formal claim for the amount of US$916,886.66, representing the dollar equivalent on the policies, for non-delivery of the cargo. Private respondent likewise sought the assistance of petitioner on what to do with the cargo. Petitioner replied that the arrest of the vessel by civil authority was not a peril covered by the policies. Private respondent, accordingly, advised petitioner that it might tranship the cargo and requested an

1. In ruling that the arrest of the vessel was a risk covered under the subject insurance policies. 2. In ruling that there was constructive total loss over the cargo. 3. In ruling that petitioner was in bad faith in declining private respondent's claim. 4. In giving undue reliance to the doctrine that insurance policies are strictly construed against the insurer. In assigning the first error, petitioner submits the following: (a) an arrest by civil authority is not compensable since the term "arrest" refers to "political or executive acts" and does not include a loss caused by riot or by ordinary judicial process as in this case; (b) the deletion of the Free from Capture or Seizure Clause would leave the assured covered solely for the perils specified by the wording of the policy itself; (c) the rationale for the exclusion of an arrest pursuant to judicial authorities is to eliminate collusion between unscrupulous assured and civil authorities. As to the second assigned error, petitioner submits that any loss which private respondent may have incurred was in the nature and form of unrecovered acquisition value brought about by a voluntary sacrifice sale and not by arrest, detention or seizure of the ship. As to the third issue, petitioner alleges that its act of rejecting the claim was a result of its honest belief that the arrest of the vessel was not a compensable risk under the policies issued. In fact, petitioner supported private respondent by accommodating the latter's request for an extension of the insurance coverage, notwithstanding that it was then under no legal obligation to do so. Private respondent, on the other hand, argued that when it appealed its case to the Court of Appeals, petitioner did not raise as an issue the award of exemplary damages. It cannot now, for the first time, raise the same before this Court. Likewise, petitioner cannot submit for the first time on appeal its argument that it was wrong for the Court of Appeals to have ruled the way it did based on facts that would need inquiry into the evidence. Even if inquiry into the facts were possible, such was not necessary because the coverage as ruled upon by the Court of Appeals is evident from the very terms of the policies. It also argued that petitioner, being the sole author of the policies, "arrests" should be strictly interpreted against it because the rule is that any ambiguity is to be taken contra proferentum. Risk policies should be construed reasonably and in a manner as to make effective the intentions and expectations of the parties. It added that the policies clearly stipulate that they cover the risks of non-delivery of an entire package and that it was petitioner itself that invited and granted the extensions and collected premiums thereon. The resolution of this controversy hinges on the interpretation of the "Perils" clause of the subject policies in relation to the excluded risks or warranty specifically stated therein. By way of a historical background, marine insurance developed as an all-risk coverage, using the phrase "perils of the sea" to encompass the wide and varied range of risks that were covered. 3 The subject policies contain the "Perils" clause which is a standard form in any marine insurance policy. Said clause reads: "Touching the adventures which the said MALAYAN INSURANCE CO., are content to bear, and to take upon them in this voyage; they are of the Seas; Men-of-War, Fire, Enemies, Pirates, Rovers, Thieves, Jettisons, Letters of Mart and Counter Mart, Suprisals, Takings of the Sea, Arrests, Restraints and Detainments of all Kings, Princess and Peoples, of what Nation, condition, or quality soever, Barratry of the Master and Mariners, and of all other Perils, Losses, and Misfortunes, that have come to hurt, detriment, or damage of the said goods and merchandise or any part thereof. AND in case of any loss or misfortune it shall be lawful to the ASSURED, their factors, servants and assigns, to sue, labour, and travel for, in and about the defence, safeguards, and recovery of the said goods and merchandises, and

ship, & c., or any part thereof, without prejudice to this INSURANCE; to the charges whereof the said COMPANY, will contribute according to the rate and quantity of the sum herein INSURED. AND it is expressly declared and agreed that no acts of the Insurer or Insured in recovering, saving, or preserving the Property insured shall be considered as a Waiver, or Acceptance of Abandonment. And it is agreed by the said COMPANY, that this writing or Policy of INSURANCE shall be of as much Force and Effect as the surest Writing or Policy of INSURANCE made in LONDON. And so the said MALAYAN INSURANCE COMPANY, INC., are contented, and do hereby promise and bind themselves, their Heirs, Executors, Goods and Chattel, to the ASSURED, his or their Executors, Administrators, or Assigns, for the true Performance of the Premises; confessing themselves paid the Consideration due unto them for this INSURANCE at and after the rate arranged." (Underscoring supplied) The exception or limitation to the "Perils" clause and the "All other perils" clause in the subject policies is specifically referred to as Clause 12 called the "Free from Capture & Seizure Clause" or the F.C. & S. Clause which reads, thus: "Warranted free of capture, seizure, arrest, restraint or detainment, and the consequences thereof or of any attempt thereat; also from the consequences of hostilities and warlike operations, whether there be a declaration of war or not; but this warranty shall not exclude collision, contact with any fixed or floating object (other than a mine or torpedo), stranding, heavy weather or fire unless caused directly (and independently of the nature of the voyage or service which the vessel concerned or, in the case of a collision, any other vessel involved therein is performing) by a hostile act by or against a belligerent power and for the purpose of this warranty 'power' includes any authorities maintaining naval, military or air forces in association with power. Further warranted free from the consequences of civil war, revolution, insurrection, or civil strike arising therefrom or piracy. Should Clause 12 be deleted, the relevant current institute war clauses shall be deemed to form part of this insurance." (Underscoring supplied) However, the F. C. & S. Clause was deleted from the policies. Consequently, the Institute War Clauses (Cargo) was deemed incorporated which, in subsection 1.1 of Section 1, provides: "1. This insurance covers: 1.1 The risks excluded from the standard form of English Marine Policy by the clause warranted free of capture, seizure, arrest, restraint or detainment, and the consequences thereof of hostilities or warlike operations, whether there be a declaration of war or not; but this warranty shall not exclude collision, contact with any fixed or floating object (other than a mine or torpedo), stranding, heavy weather or fire unless caused directly (and independently of the nature on voyage or service which the vessel concerned or, in the case of a collision any other vessel involved therein is performing) by a hostile act by or against a belligerent power; and for the purpose of this warranty 'power' includes any authority maintaining naval, military or air forces in association with a power. Further warranted free from the consequences of civil war, revolution, rebellion, insurrection, or civil strike arising therefrom, or piracy." According to petitioner, the automatic incorporation of subsection 1.1 of section 1 of the Institute War Clauses (Cargo), among others, means that any "capture, arrest, detention, etc." pertained exclusively to warlike operations if this Court strictly construes the heading of the said Clauses. However, it also claims that the parties intended to include arrests, etc. even if it were not the result of hostilities or warlike operations. It further claims that on the strength of jurisprudence on the matter, the term "arrests" would only cover those arising from political or executive acts, concluding that whether private respondent's claim is anchored on subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) or the F.C. & S. Clause, the arrest of the vessel by judicial authorities is an excluded risk.4chanroblesvirtuallawlibrary

This Court cannot agree with petitioner's assertions, particularly when it alleges that in the "Perils" Clause, it assumed the risk of arrest caused solely by executive or political acts of the government of the seizing state and thereby excludes "arrests" caused by ordinary legal processes, such as in the instant case. With the incorporation of subsection 1.1 of Section 1 of the Institute War Clauses, however, this Court agrees with the Court of Appeals and the private respondent that "arrest" caused by ordinary judicial process is deemed included among the covered risks. This interpretation becomes inevitable when subsection 1.1 of Section 1 of the Institute War Clauses provided that "this insurance covers the risks excluded from the Standard Form of English Marine Policy by the clause 'Warranted free of capture, seizure, arrest, etc. x x x'" or the F.C. & S. Clause. Jurisprudentially, "arrests" caused by ordinary judicial process is also a risk excluded from the Standard Form of English Marine Policy by the F.C. & S. Clause. Petitioner cannot adopt the argument that the "arrest" caused by ordinary judicial process is not included in the covered risk simply because the F.C. & S. Clause under the Institute War Clauses can only be operative in case of hostilities or warlike operations on account of its heading "Institute War Clauses." This Court agrees with the Court of Appeals when it held that "... Although the F.C. & S. Clause may have originally been inserted in marine policies to protect against risks of war, (see generally G. Gilmore & C. Black, The Law of Admiralty Section 2-9, at 71-73 [2d Ed. 1975]), its interpretation in recent years to include seizure or detention by civil authorities seems consistent with the general purposes of the clause, x x x"5 In fact, petitioner itself averred that subsection 1.1 of Section 1 of the Institute War Clauses included "arrest" even if it were not a result of hostilities or warlike operations.6 In this regard, since what was also excluded in the deleted F.C. & S. Clause was "arrest" occasioned by ordinary judicial process, logically, such "arrest" would now become a covered risk under subsection 1.1 of Section 1 of the Institute War Clauses, regardless of whether or not said "arrest" by civil authorities occurred in a state of war. Petitioner itself seems to be confused about the application of the F.C. & S. Clause as well as that of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo). It stated that "the F.C. & S. Clause was "originally incorporated in insurance policies to eliminate the risks of warlike operations". It also averred that the F.C. & S. Clause applies even if there be no war or warlike operations x x x"7 In the same vein, it contended that subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) "pertained exclusively to warlike operations" and yet it also stated that "the deletion of the F.C. & S. Clause and the consequent incorporation of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) was to include "arrest, etc. even if it were not a result of hostilities or warlike operations."8chanroblesvirtuallawlibrary This Court cannot help the impression that petitioner is overly straining its interpretation of the provisions of the policy in order to avoid being liable for private respondent's claim. This Court finds it pointless for petitioner to maintain its position that it only insures risks of "arrest" occasioned by executive or political acts of government which is interpreted as not referring to those caused by ordinary legal processes as contained in the "Perils" Clause; deletes the F.C. & S. Clause which excludes risks of arrest occasioned by executive or political acts of the government and naturally, also those caused by ordinary legal processes; and, thereafter incorporates subsection 1.1 of Section 1 of the Institute War Clauses which now includes in the coverage risks of arrest due to executive or political acts of a government but then still excludes "arrests" occasioned by ordinary legal processes when subsection 1.1 of Section 1 of said Clauses should also have included "arrests" previously excluded from the coverage of the F.C. & S. Clause. It has been held that a strained interpretation which is unnatural and forced, as to lead to an absurd conclusion or to render the policy nonsensical, should, by all means, be avoided.9 Likewise, it must be borne in mind that such contracts are invariably prepared by the companies and must be accepted by the insured in the form in which they are written.10 Any construction of a marine policy rendering it

void should be avoided.11 Such policies will, therefore, be construed strictly against the company in order to avoid a forfeiture, unless no other result is possible from the language used.12chanroblesvirtuallawlibrary If a marine insurance company desires to limit or restrict the operation of the general provisions of its contract by special proviso, exception, or exemption, it should express such limitation in clear and unmistakable language.13 Obviously, the deletion of the F.C. & S. Clause and the consequent incorporation of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) gave rise to ambiguity. If the risk of arrest occasioned by ordinary judicial process was expressly indicated as an exception in the subject policies, there would have been no controversy with respect to the interpretation of the subject clauses. Be that as it may, exceptions to the general coverage are construed most strongly against the company.14 Even an express exception in a policy is to be construed against the underwriters by whom the policy is framed, and for whose benefit the exception is introduced.15chanroblesvirtuallawlibrar An insurance contract should be so interpreted as to carry out the purpose for which the parties entered into the contract which is, to insure against risks of loss or damage to the goods. Such interpretation should result from the natural and reasonable meaning of language in the policy.16 Where restrictive provisions are open to two interpretations, that which is most favorable to the insured is adopted.17chanroblesvirtuallawlibrary Indemnity and liability insurance policies are construed in accordance with the general rule of resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. 18 A contract of insurance, being a contract of adhesion, par excellence, any ambiguity therein should be resolved against the insurer; in other words, it should be construed liberally in favor of the insured and strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be construed in such a way as to preclude the insurer from noncompliance with its obligations.19chanroblesvirtuallawlibrary In view of the foregoing, this Court sees no need to discuss the other issues presented. WHEREFORE, the petition for review is DENIED and the decision of the Court of Appeals is AFFIRMED. SO ORDERED. 6. G.R. No. 109125December 2, 1994 Ang Yu Asuncion vs. CA VITUG, J.: FACTS: On July 29, 1987 a Second Amended Complaint for SpecificPerformance was filed by Ang Yu Asuncion and Keh Tiong, et al., against BobbyCu Unjieng, Rose Cu Unjieng and Jose Tan before the Regional Trial Court,alleging, among others, that plaintiffs are tenants or lessees of residential andcommercial spaces owned by defendants; that they have occupied said spacessince 1935 and have been religiously paying the rental and complying with all theconditions of the lease contract; that on several occasions before October 9,1986, defendants informed plaintiffs that they are offering to sell the premisesand are giving them priority to acquire the same; that during the negotiations,Bobby Cu Unjieng offered a price of P6-million while plaintiffs made a counter offer of P5million; that plaintiffs thereafter asked the defendants to put their offer in writing to which request defendants acceded; that in reply to defendant's letter,plaintiffs wrote them on October 24, 1986 asking that they specify the terms andconditions of the offer to sell; that when plaintiffs did not receive any reply,

theysent another letter dated January 28, 1987 with the same request; that sincedefendants failed to specify the terms and conditions of the offer to sell andbecause of information received that defendants were about to sell the property,plaintiffs were compelled to file the complaint to compel defendants to sell theproperty to them.ISSUE: Whether or not defendants have the obligation to sell the property to theplaintiffs.HELD: An obligation is a juridical necessity to give, to do or not to do ( Art. 1156,Civil Code ). The obligation is constituted upon the concurrence of the essentialelements thereof, viz : (a) The vinculum juris or juridical tie which is the efficientcause established by the various sources of obligations (law, contracts, quasi-contracts, delicts and quasi delicts); (b) the object which is the prestation or conduct; required to be observed (to give, to do or not to do); and (c) the subject- persons who, viewed from the demandability of the obligation, are the active(obligee) and the passive (obligor) subjects.Among the sources of an obligation is a contract (Art. 1157, Civil Code), which isa meeting of minds between two persons whereby one binds himself, withrespect to the other, to give something or to render some service (Art. 1305, CivilCode). A contract undergoes various stages that include its negotiation or preparation, its perfection and, finally, its consummation. Negotiation covers the period from the time the prospective contracting parties indicate interest in the contract to the time the contract is concluded (perfected). The perfection of the contract takes place upon the concurrence of the essential elements thereof. Acontract which is consensual as to perfection is so established upon a meremeeting of minds, i.e., the concurrence of offer and acceptance, on the objectand on the cause thereof. A contract which requires, in addition to the above, thedelivery of the object of the agreement, as in a pledge or commodatum , iscommonly referred to as a real contract. In a solemn contract, compliance withcertain formalities prescribed by law, such as in a donation of real property, isessential in order to make the act valid, the prescribed form being thereby anessential element thereof. The stage of consummation begins when the partiesperform their respective undertakings under the contract culminating in theextinguishment thereof.Until the contract is perfected, it cannot, as an independent source of obligation,serve as a binding juridical relation. In sales, particularly, to which the topic for discussion about the case at bench belongs, the contract is perfected when aperson, called the seller, obligates himself, for a price certain, to deliver and totransfer ownership of a thing or right to another, called the buyer, over which thelatter agrees.WHEREFORE, the assailed decision is affirmed 7. [G.R. No. 128066. June 19, 2000] JARDINE DAVIES INC., petitioner, vs. COURT OF APPEALS and FAR EAST MILLS SUPPLY CORPORATION, respondents. [G.R. No. 128069 June 19, 2000] PURE FOODS CORPORATION, petitioner, vs. COURT OF APPEALS and FAR EAST MILLS SUPPLY CORPORATION, respondents. DECISION BELLOSILLO, J.: This is rather a simple case for specific performance with damages which could have been resolved through mediation and conciliation during its infancy stage had the parties been earnest in expediting the disposal of this case. They opted however to resort to full court proceedings and denied

themselves the benefits of alternative dispute resolution, thus making the process more arduous and long-drawn. The controversy started in 1992 at the height of the power crisis which the country was then experiencing. To remedy and curtail further losses due to the series of power failures, petitioner PURE FOODS CORPORATION (hereafter PUREFOODS) decided to install two (2) 1500 KW generators in its food processing plant in San Roque, Marikina City. Sometime in November 1992 a bidding for the supply and installation of the generators was held. Several suppliers and dealers were invited to attend a pre-bidding conference to discuss the conditions, propose scheme and specifications that would best suit the needs of PUREFOODS. Out of the eight (8) prospective bidders who attended the pre-bidding conference, only three (3) bidders, namely, respondent FAR EAST MILLS SUPPLY CORPORATION (hereafter FEMSCO), MONARK and ADVANCE POWER submitted bid proposals and gave bid bonds equivalent to 5% of their respective bids, as required. Thereafter, in a letter dated 12 December 1992 addressed to FEMSCO President Alfonso Po, PUREFOODS confirmed the award of the contract to FEMSCO Gentlemen: This will confirm that Pure Foods Corporation has awarded to your firm the project: Supply and Installation of two (2) units of 1500 KW/unit Generator Sets at the Processed Meats Plant, Bo. San Roque, Marikina, based on your proposal number PC 28-92 dated November 20, 1992, subject to the following basic terms and conditions: 1. Lump sum contract of P6,137,293.00 (VAT included), for the supply of materials and labor for the local portion and the labor for the imported materials, payable by progress billing twice a month, with ten percent (10%) retention. The retained amount shall be released thirty (30) days after acceptance of the completed project and upon posting of Guarantee Bond in an amount equivalent to twenty percent (20%) of the contract price. The Guarantee Bond shall be valid for one (1) year from completion and acceptance of project. The contract price includes future increase/s in costs of materials and labor; 2. The project shall the attached specifications. It is required to complete the project, the list of items shall be deemed shall be performed; be undertaken pursuant to understood that any item and those not included in included and covered and

3. All materials shall be brand new; 4. The project shall commence immediately and must be completed within twenty (20) working days after the delivery of Generator Set to Marikina Plant, penalty equivalent to 1/10 of 1% of the purchase price for every day of delay; 5. The Contractor shall put up Performance Bond equivalent to thirty (30%) of the contract price, and shall procure All Risk Insurance equivalent to the contract price upon commencement of the project. The All Risk Insurance Policy shall be endorsed in favor of and shall be delivered to Pure Foods Corporation; 6. Warranty of one (1) year against defective material and/or workmanship. Once finalized, we shall ask you to sign the formal contract embodying the foregoing terms and conditions.

Immediately, FEMSCO submitted the required performance bond in the amount of P1,841,187.90 and contractors all-risk insurance policy in the amount of P6,137,293.00 which PUREFOODS through its Vice President Benedicto G. Tope acknowledged in a letter dated 18 December 1992. FEMSCO also made arrangements with its principal and started the PUREFOODS project by purchasing the necessary materials. PUREFOODS on the other hand returned FEMSCOs Bidders Bond in the amount of P1,000,000.00, as requested. Later, however, in a letter dated 22 December 1992, PUREFOODS through its Senior Vice President Teodoro L. Dimayuga unilaterally canceled the award as "significant factors were uncovered and brought to (their) attention which dictate (the) cancellation and warrant a total review and re-bid of (the) project." Consequently, FEMSCO protested the cancellation of the award and sought a meeting with PUREFOODS. However, on 26 March 1993, before the matter could be resolved, PUREFOODS already awarded the project and entered into a contract with JARDINE NELL, a division of Jardine Davies, Inc. (hereafter JARDINE), which incidentally was not one of the bidders. FEMSCO thus wrote PUREFOODS to honor its contract with the former, and to JARDINE to cease and desist from delivering and installing the two (2) generators at PUREFOODS. Its demand letters unheeded, FEMSCO sued both PUREFOODS and JARDINE: PUREFOODS for reneging on its contract, and JARDINE for its unwarranted interference and inducement. Trial ensued. After FEMSCO presented its evidence, JARDINE filed a Demurrer to Evidence. On 27 June 1994 the Regional Trial Court of Pasig, Br. 68, granted JARDINEs Demurrer to Evidence. The trial court concluded that "[w]hile it may seem to the plaintiff that by the actions of the two defendants there is something underhanded going on, this is all a matter of perception, and unsupported by hard evidence, mere suspicions and suppositions would not stand up very well in a court of law." Meanwhile trial proceeded as regards the case against PUREFOODS. On 28 July 1994 the trial court rendered a decision ordering PUREFOODS: (a) to indemnify FEMSCO the sum of P2,300,000.00 representing the value of engineering services it rendered; (b) to pay FEMSCO the sum of US$14,000.00 or its peso equivalent, and P900,000.00 representing contractor's mark-up on installation work, considering that it would be impossible to compel PUREFOODS to honor, perform and fulfill its contractual obligations in view of PUREFOOD's contract with JARDINE and noting that construction had already started thereon; (c) to pay attorneys fees in an amount equivalent to 20% of the total amount due; and, (d) to pay the costs. The trial court dismissed the counterclaim filed by PUREFOODS for lack of factual and legal basis. Both FEMSCO and PUREFOODS appealed to the Court of Appeals. FEMSCO appealed the 27 June 1994 Resolution of the trial court which granted the Demurrer to Evidence filed by JARDINE resulting in the dismissal of the complaint against it, while PUREFOODS appealed the 28 July 1994 Decision of the same court which ordered it to pay FEMSCO. On 14 August 1996 the Court of Appeals affirmed in toto the 28 July 1994 Decision of the trial court. It also reversed the 27 June 1994 Resolution of the lower court and ordered JARDINE to pay FEMSCO damages for inducing PUREFOODS to violate the latters contract with FEMSCO. As such, JARDINE was ordered to pay FEMSCO P2,000,000.00 for moral damages. In addition, PUREFOODS was also directed to pay FEMSCO P2,000,000.00 as moral damages and P1,000,000.00 as exemplary damages as well as 20% of the total amount due as attorney's fees. On 31 January 1997 the Court of Appeals denied for lack of merit the separate motions for reconsideration filed by PUREFOODS and JARDINE. Hence, these two (2) petitions

for review filed by PUREFOODS and JARDINE which were subsequently consolidated. PUREFOODS maintains that the conclusions of both the trial court and the appellate court are premised on a misapprehension of facts. It argues that its 12 December 1992 letter to FEMSCO was not an acceptance of the latter's bid proposal and award of the project but more of a qualified acceptance constituting a counter-offer which required FEMSCO's express conforme. Since PUREFOODS never received FEMSCOs conforme, PUREFOODS was very well within reason to revoke its qualified acceptance or counteroffer. Hence, no contract was perfected between PUREFOODS and FEMSCO. PUREFOODS also contends that it was never in bad faith when it dealt with FEMSCO. Hence moral and exemplary damages should not have been awarded. Corollarily, JARDINE asserts that the records are bereft of any showing that it had prior knowledge of the supposed contract between PUREFOODS and FEMSCO, and that it induced PUREFOODS to violate the latters alleged contract with FEMSCO. Moreover, JARDINE reasons that FEMSCO, an artificial person, is not entitled to moral damages. But granting arguendo that the award of moral damages is proper, P2,000,000.00 is extremely excessive. In the main, these consolidated cases present two (2) issues: first, whether there existed a perfected contract between PUREFOODS and FEMSCO; and second, granting there existed a perfected contract, whether there is any showing that JARDINE induced or connived with PUREFOODS to violate the latter's contract with FEMSCO. A contract is defined as "a juridical convention manifested in legal form, by virtue of which one or more persons bind themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to do, or not to do." There can be no contract unless the following requisites concur: (a) consent of the contracting parties; (b) object certain which is the subject matter of the contract; and, (c) cause of the obligation which is established. A contract binds both contracting parties and has the force of law between them. Contracts are perfected by mere consent, upon the acceptance by the offeree of the offer made by the offeror. From that moment, the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. To produce a contract, the acceptance must not qualify the terms of the offer. However, the acceptance may be express or implied. For a contract to arise, the acceptance must be made known to the offeror. Accordingly, the acceptance can be withdrawn or revoked before it is made known to the offeror. In the instant case, there is no issue as regards the subject matter of the contract and the cause of the obligation. The controversy lies in the consent - whether there was an acceptance of the offer, and if so, if it was communicated, thereby perfecting the contract. To resolve the dispute, there is a need to determine what constituted the offer and the acceptance. Since petitioner PUREFOODS started the process of entering into the contract by conducting a bidding, Art. 1326 of the Civil Code, which provides that "[a]dvertisements for bidders are simply invitations to make proposals," applies. Accordingly, the Terms and Conditions of the Bidding disseminated by petitioner PUREFOODS constitutes the "advertisement" to bid on the project. The bid proposals or quotations submitted by the prospective suppliers including respondent FEMSCO, are the offers. And, the reply of petitioner PUREFOODS, the acceptance or rejection of the respective offers.

Quite obviously, the 12 December 1992 letter of petitioner PUREFOODS to FEMSCO constituted acceptance of respondent FEMSCOs offer as contemplated by law. The tenor of the letter, i.e., "This will confirm that Pure Foods has awarded to your firm (FEMSCO) the project," could not be more categorical. While the same letter enumerated certain "basic terms and conditions," these conditions were imposed on the performance of the obligation rather than on the perfection of the contract. Thus, the first "condition" was merely a reiteration of the contract price and billing scheme based on the Terms and Conditions of Bidding and the bid or previous offer of respondent FEMSCO. The second and third "conditions" were nothing more than general statements that all items and materials including those excluded in the list but necessary to complete the project shall be deemed included and should be brand new. The fourth "condition" concerned the completion of the work to be done, i.e., within twenty (20) days from the delivery of the generator set, the purchase of which was part of the contract. The fifth "condition" had to do with the putting up of a performance bond and an all-risk insurance, both of which should be given upon commencement of the project. The sixth "condition" related to the standard warranty of one (1) year. In fine, the enumerated "basic terms and conditions" were prescriptions on how the obligation was to be performed and implemented. They were far from being conditions imposed on the perfection of the contract. In Babasa v. Court of Appeals we distinguished between a condition imposed on the perfection of a contract and a condition imposed merely on the performance of an obligation. While failure to comply with the first condition results in the failure of a contract, failure to comply with the second merely gives the other party options and/or remedies to protect his interests. We thus agree with the conclusion of respondent appellate court which affirmed the trial court As can be inferred from the actual phrase used in the first portion of the letter, the decision to award the contract has already been made. The letter only serves as a confirmation of such decision. Hence, to the Courts mind, there is already an acceptance made of the offer received by Purefoods. Notwithstanding the terms and conditions enumerated therein, the offer has been accepted and/or amplified the details of the terms and conditions contained in the Terms and Conditions of Bidding given out by Purefoods to prospective bidders. But even granting arguendo that the 12 December 1992 letter of petitioner PUREFOODS constituted a "conditional counteroffer," respondent FEMCO's submission of the performance bond and contractor's all-risk insurance was an implied acceptance, if not a clear indication of its acquiescence to, the "conditional counter-offer," which expressly stated that the performance bond and the contractor's all-risk insurance should be given upon the commencement of the contract. Corollarily, the acknowledgment thereof by petitioner PUREFOODS, not to mention its return of FEMSCO's bidder's bond, was a concrete manifestation of its knowledge that respondent FEMSCO indeed consented to the "conditional counter-offer." After all, as earlier adverted to, an acceptance may either be express or implied, and this can be inferred from the contemporaneous and subsequent acts of the contracting parties. Accordingly, for all intents and purposes, the contract at that point has been perfected, and respondent FEMSCO's conforme would only be a mere surplusage. The discussion of the price of the project two (2) months after the 12 December 1992 letter can be deemed as nothing more than a pressure being exerted by petitioner PUREFOODS on respondent FEMSCO to lower the price even after the contract had been perfected. Indeed from the facts, it can easily be surmised that petitioner PUREFOODS was haggling for a lower price even after agreeing to the earlier quotation, and was threatening to

unilaterally cancel the contract, which it eventually did. Petitioner PUREFOODS also makes an issue out of the absence of a purchase order (PO). Suffice it to say that purchase orders or POs do not make or break a contract. Thus, even the tenor of the subsequent letter of petitioner PUREFOODS, i.e., "Pure Foods Corporation is hereby canceling the award to your company of the project," presupposes that the contract has been perfected. For, there can be no cancellation if the contract was not perfected in the first place. Petitioner PUREFOODS also argues that it was never in bad faith. On the contrary, it believed in good faith that no such contract was perfected. We are not convinced. We subscribe to the factual findings and conclusions of the trial court which were affirmed by the appellate court Hence, by the unilateral cancellation of the contract, the defendant (petitioner PURE FOODS) has acted with bad faith and this was further aggravated by the subsequent inking of a contract between defendant Purefoods and erstwhile co-defendant Jardine. It is very evident that Purefoods thought that by the expedient means of merely writing a letter would automatically cancel or nullify the existing contract entered into by both parties after a process of bidding. This, to the Courts mind, is a flagrant violation of the express provisions of the law and is contrary to fair and just dealings to which every man is due. This Court has awarded in the past moral damages to a corporation whose reputation has been besmirched. In the instant case, respondent FEMSCO has sufficiently shown that its reputation was tarnished after it immediately ordered equipment from its suppliers on account of the urgency of the project, only to be canceled later. We thus sustain respondent appellate court's award of moral damages. We however reduce the award from P2,000,000.00 to P1,000,000.00, as moral damages are never intended to enrich the recipient. Likewise, the award of exemplary damages by way of example for the public good is excessive and should be reduced to P100,000.00. Petitioner JARDINE maintains on the other hand that respondent appellate court erred in ordering it to pay moral damages to respondent FEMSCO as it supposedly induced PUREFOODS to violate the contract with FEMSCO. We agree. While it may seem that petitioners PUREFOODS and JARDINE connived to deceive respondent FEMSCO, we find no specific evidence on record to support such perception. Likewise, there is no showing whatsoever that petitioner JARDINE induced petitioner PUREFOODS. The similarity in the design submitted to petitioner PUREFOODS by both petitioner JARDINE and respondent FEMSCO, and the tender of a lower quotation by petitioner JARDINE are insufficient to show that petitioner JARDINE indeed induced petitioner PUREFOODS to violate its contract with respondent FEMSCO. WHEREFORE, judgment is hereby rendered as follows: (a) The petition in G.R. No. 128066 is GRANTED. The assailed Decision of the Court of Appeals reversing the 27 June 1994 resolution of the trial court and ordering petitioner JARDINE DAVIES, INC., to pay private respondent FAR EAST MILLS SUPPLY CORPORATION P2,000,000.00 as moral damages is REVERSED and SET ASIDE for insufficiency of evidence; and (b) The petition in G.R. No. 128069 is DENIED. The assailed Decision of the Court of Appeals ordering petitioner PURE FOODS CORPORATION to pay private respondent FAR EAST MILLS SUPPLY CORPORATION the sum of P2,300,000.00 representing the value of engineering services it rendered, US$14,000.00 or its peso equivalent, and P900,000.00 representing the contractor's mark-up on installation work, as well as attorney's fees equivalent to twenty percent (20%) of the total amount due, is AFFIRMED. In addtion, petitioner PURE FOODS CORPORATION is ordered

to pay private respondent FAR EAST MILLS SUPPLY CORPORATION moral damages in the amount of P1,000,000.00 and exemplary damages in the amount of P1,000,000.00. Costs against petitioner. SO ORDERED.

Petitioner opposed said motion claiming that there was no formal contract between the parties although they entered into an agreement defining their rights and obligations in undertaking the project. It emphasized that the agreement did not provide for arbitration and therefore the court could not be deprived of jurisdiction conferred by law by the mere allegation of the existence of an arbitration clause in the agreement between the parties. In reply to said opposition, SPI insisted that there was such an arbitration clause in the existing contract between petitioner and SPI. It alleged that suspension of proceedings would not necessarily deprive the court of its jurisdiction over the case and that arbitration would expedite rather than delay the settlement of the parties' respective claims against each other. In a rejoinder to SPI's reply, petitioner reiterated that there was no arbitration clause in the contract between the parties. It averred that granting that such a clause indeed formed part of the contract, suspension of the proceedings was no longer proper. It added that defendants should be declared in default for failure to file their answer within the reglementary period. In its sur-rejoinder, SPI pointed out the significance of petitioner's admission of the due execution of the "Articles of Agreement." Thus, on page D/6 thereof, the signatures of Rufo B. Colayco, SPI president, and Bayani Fernando, president of petitioner appear, while page D/7 shows that the agreement is a public document duly notarized on November 15, 1991 by Notary Public Nilberto R. Briones as document No. 345, page 5 70, book No. LXX, Series of 1991 of his notarial register. Thereafter, upon a finding that an arbitration clause indeed 6 exists, the lower court denied the motion to suspend proceedings, thus: It appears from the said document that in the letter-agreement dated May 30, 1991 (Annex C, Complaint), plaintiff BF and defendant Shangri-La Properties, Inc. agreed upon the terms and conditions of the Builders Work for the EDSA Plaza Project (Phases I, II and Carpark), subject to the execution by the parties of a formal trade contract. Defendants have submitted a copy of the alleged trade contract, which is entitled "Contract Documents For Builder's Work Trade Contractor" dated 01 May 1991, page 2 of which is entitled "Contents of Contract Documents" with a list of the documents therein contained, and Section A thereof consists of the abovementioned Letter-Agreement dated May 30, 1991. Section C of the said Contract Documents is entitled "Articles of Agreement and Conditions of Contract" which, per its Index, consists of Part A (Articles of Agreement) and B (Conditions of Contract). The said Articles of Agreement appears to have been duly signed by President Rufo B. Colayco of Shangri-La Properties, Inc. and President Bayani F. Fernando of BF and their witnesses, and was thereafter acknowledged before Notary Public Nilberto R. Briones of Makati, Metro Manila on November 15, 1991. The said Articles of Agreement also provides that the "Contract Documents" therein listed "shall be deemed an integral part of this Agreement", and one of the said documents is the "Conditions of Contract" which contains the Arbitration Clause relied upon by the defendants in their Motion to Suspend Proceedings. This Court notes, however, that the 'Conditions of Contract' referred to, contains the following provisions: 3. Contract Document. Three copies of the Contract Documents referred to in the Articles of Agreement shall be signed by the parties to the contract and distributed to the Owner and the Contractor for their safe keeping." (emphasis supplied).

8. G.R. No. 120105 March 27, 1998 BF CORPORATION, petitioner, vs. COURT OF APPEALS, SHANGRI-LA PROPERTIES, INC., RUFO B. COLAYCO, ALFREDO C. RAMOS, MAXIMO G. LICAUCO III and BENJAMIN C. RAMOS, respondents. ROMERO, J.: The basic issue in this petition for review on certiorari is whether or not the contract for the construction of the EDSA Plaza between petitioner BF Corporation and respondent Shangri-la Properties, Inc. embodies an arbitration clause in case of disagreement between the parties in the implementation of contractual provisions. Petitioner and respondent Shangri-la Properties, Inc. (SPI) entered into an agreement whereby the latter engaged the former to construct the main structure of the "EDSA Plaza Project," a shopping mall complex in the City of Mandaluyong. The construction work was in progress when SPI decided to expand the project by engaging the services of petitioner again. Thus, the parties entered into an agreement for the main contract works after which construction work began. However, petitioner incurred delay in the construction work that 1 SPI considered as "serious and substantial." On the other hand, according to petitioner, the construction works "progressed in faithful compliance with the First Agreement until a fire broke out on November 30, 1990 damaging Phase I" 2 of the Project. Hence, SPI proposed the re-negotiation of the agreement between them. Consequently, on May 30, 1991, petitioner and SPI entered into a written agreement denominated as "Agreement for the Execution of Builder's Work for the EDSA Plaza Project." Said agreement would cover the construction work on said project as of May 1, 1991 until its eventual completion. According to SPI, petitioner "failed to complete the construction 3 works and abandoned the project." This resulted in disagreements between the parties as regards their respective liabilities under the contract. On July 12, 1993, upon SPI's initiative, the parties' respective representatives met in 4 conference but they failed to come to an agreement. Barely two days later or on July 14, 1993, petitioner filed with the Regional Trial Court of Pasig a complaint for collection of the balance due under the construction agreement. Named defendants therein were SPI and members of its board of directors namely, Alfredo C. Ramos, Rufo B. Calayco, Antonio B. Olbes, Gerardo O. Lanuza, Jr., Maximo G. Licauco III and Benjamin C. Ramos. On August 3, 1993, SPI and its co-defendants filed a motion to suspend proceedings instead of filing an answer. The motion was anchored on defendants' allegation that the formal trade contract for the construction of the project provided for a clause requiring prior resort to arbitration before judicial intervention could be invoked in any dispute arising from the contract. The following day, SPI submitted a copy of the conditions of the contract containing the arbitration clause that it failed to append to its motion to suspend proceedings.

And it is significant to note further that the said "Conditions of Contract" is not duly signed by the parties on any page thereof although it bears the initials of BF's representatives (Bayani F. Fernando and Reynaldo M. de la Cruz) without the initials thereon of any representative of Shangri-La Properties, Inc. Considering the insistence of the plaintiff that the said Conditions of Contract was not duly executed or signed by the parties, and the failure of the defendants to submit any signed copy of the said document, this Court entertains serious doubt whether or not the arbitration clause found in the said Conditions of Contract is binding upon the parties to the Articles of Agreement." (Emphasis supplied.) The lower court then ruled that, assuming that the arbitration clause was valid and binding, still, it was "too late in the day for defendants to invoke arbitration." It quoted the following provision of the arbitration clause: Notice of the demand for arbitration of a dispute shall be filed in writing with the other party to the contract and a copy filed with the Project Manager. The demand for arbitration shall be made within a reasonable time after the dispute has arisen and attempts to settle amicably have failed; in no case, however, shall the demand he made be later than the time of final payment except as otherwise expressly stipulated in the contract. Against the above backdrop, the lower court found that per the May 30, 1991 agreement, the project was to be completed by October 31, 1991. Thereafter, the contractor would pay P80,000 for each day of delay counted from November 1, 1991 with "liquified (sic) damages up to a maximum of 5% of the total contract price." The lower court also found that after the project was completed in accordance with the agreement that contained a provision on "progress payment billing," SPI "took possession and started operations thereof by opening the same to the public in November, 1991." SPI, having failed to pay for the works, petitioner billed SPI in the total amount of P110,883,101.52, contained in a demand letter sent by it to SPI on February 17, 1993. Instead of paying the amount demanded, SPI set up its own claim of P220,000,000.00 and scheduled a conference on that claim for July 12, 1993. The conference took place but it proved futile. Upon the above facts, the lower court concluded: Considering the fact that under the supposed Arbitration Clause invoked by defendants, it is required that "Notice of the demand for arbitration of a dispute shall be filed in writing with the other party . . . . in no case . . . . later than the time of final payment . . . "which apparently, had elapsed, not only because defendants had taken possession of the finished works and the plaintiff's billings for the payment thereof had remained pending since November, 1991 up to the filing of this case on July 14, 1993, but also for the reason that defendants have failed to file any written notice of any demand for arbitration during the said long period of one year and eight months, this Court finds that it cannot stay the proceedings in this case as required by Sec. 7 of Republic Act No. 876, because defendants are in default in proceeding with such arbitration. The lower court denied SPI's motion for reconsideration for lack of merit and directed it and the other defendants to file their responsive pleading or answer within fifteen (15) days from notice. Instead of filing an answer to the complaint, SPI filed a petition for certiorari under Rule 65 of the Rules of Court before the Court of Appeals. Said appellate court granted the petition,

annulled and set aside the orders and stayed the proceedings in the lower court. In so ruling, the Court of Appeals held: The reasons given by the respondent Court in denying petitioners' motion to suspend proceedings are untenable. 1. The notarized copy of the articles of agreement attached as Annex A to petitioners' reply dated August 26, 1993, has been submitted by them to the respondent Court (Annex G, petition). It bears the signature of petitioner Rufo B. Colayco, president of petitioner ShangriLa Properties, Inc., and of Bayani Fernando, president of respondent Corporation (Annex G-1, petition). At page D/4 of said articles of agreement it is expressly provided that the conditions of contract are "deemed an integral part" thereof (page 188, rollo). And it is at pages D/42 to D/44 of the conditions of contract that the provisions for arbitration are found (Annexes G-3 to G-5, petition, pp. 227-229). Clause No. 35 on arbitration specifically provides: Provided always that in case any dispute or difference shall arise between the Owner or the Project Manager on his behalf and the Contractor, either during the progress or after the completion or abandonment of the Works as to the construction of this Contract or as to any matter or thing of whatsoever nature arising thereunder or in connection therewith (including any matter or being left by this Contract to the discretion of the Project Manager or the withholding by the Project Manager of any certificate to which the Contractor may claim to be entitled or the measurement and valuation mentioned in clause 30 (5) (a) of these Conditions' or the rights and liabilities of the parties under clauses 25, 26, 32 or 33 of these Conditions), the Owner and the Contractor hereby agree to exert all efforts to settle their differences or dispute amicably. Failing these efforts then such dispute or difference shall be referred to Arbitration in accordance with the rules and procedures of the Philippine Arbitration Law. The fact that said conditions of contract containing the arbitration clause bear only the initials of respondent Corporation's representatives, Bayani Fernando and Reynaldo de la Cruz, without that of the representative of petitioner Shangri-La Properties, Inc. does not militate against its effectivity. Said petitioner having categorically admitted that the document, Annex A to its reply dated August 26, 1993 (Annex G, petition), is the agreement between the parties, the initial or signature of said petitioner's representative to signify conformity to arbitration is no longer necessary. The parties, therefore, should be allowed to submit their dispute to arbitration in accordance with their agreement. 2. The respondent Court held that petitioners "are in default in proceeding with such arbitration." It took note of "the fact that under the supposed Arbitration Clause invoked by defendants, it is required that "Notice of the demand for arbitration of a dispute shall be filed in writing with the other party . . . in no case . . . later than the time of final payment," which apparently, had elapsed, not only because defendants had taken possession of the finished works and the plaintiff's billings for the payment thereof had remained pending since November, 1991 up to the filing of this case on July 14, 1993, but also for the reason that defendants have failed to file any written notice of any demand for arbitration during the said long period of one year and eight months, . . . ." Respondent Court has overlooked the fact that the arbitration

under clause

Notice of the demand for arbitration dispute shall be filed in writing with the other party to the contract and a copy filed with the Project Manager. The

demand for arbitration shall be made within a reasonable time after the dispute has arisen and attempts to settle amicably had failed; in no case, however, shall the demand be made later than the time of final payment except as otherwise expressly stipulated in the contract (emphasis supplied) quoted in its order (Annex A, petition). As the respondent Court there said, after the final demand to pay the amount of P110,883,101.52, instead of paying, petitioners set up its own claim against respondent Corporation in the amount of P220,000,000.00 and set a conference thereon on July 12, 1993. Said conference proved futile. The next day, July 14, 1993, respondent Corporation filed its complaint against petitioners. On August 13, 1993, petitioners wrote to respondent Corporation requesting arbitration. Under the circumstances, it cannot be said that petitioners' resort to arbitration was made beyond reasonable time. Neither can they be considered in default of their obligation to respondent Corporation. Hence, this petition before this Court. Petitioner assigns the following errors: A THE COURT OF APPEALS ERRED IN ISSUING THE EXTRAORDINARY WRIT OF CERTIORARI ALTHOUGH THE REMEDY OF APPEAL WAS AVAILABLE TO RESPONDENTS. B THE COURT OF APPEALS ERRED IN FINDING GRAVE ABUSE OF DISCRETION IN THE FACTUAL FINDINGS OF THE TRIAL COURT THAT: (i) THE PARTIES DID NOT ENTER INTO AN AGREEMENT TO ARBITRATE. (ii) ASSUMING THAT THE PARTIES DID ENTER INTO THE AGREEMENT TO ARBITRATE, RESPONDENTS ARE ALREADY IN DEFAULT IN INVOKING THE AGREEMENT TO ARBITRATE. On the first assigned error, petitioner contends that the Order of the lower court denying the motion to suspend proceedings "is a resolution of an incident on the merits." As such, upon the continuation of the proceedings, the lower court would appreciate the evidence adduced in their totality and thereafter render a decision on the merits that may or may not sustain the existence of an arbitration clause. A decision containing a finding that the contract has no arbitration clause can then be elevated to a higher court "in an ordinary appeal" where an adequate remedy could be obtained. Hence, to petitioner, the Court of Appeals should have dismissed the petition for certiorari because the remedy of appeal would still be available 7 to private respondents at the proper time. The above contention is without merit. The rule that the special civil action of certiorari may not be invoked as a substitute for the remedy of appeal is succinctly 8 reiterated in Ongsitco v. Court of Appeals as follows: . . . . Countless times in the past, this Court has held that "where appeal is the proper remedy, certiorari will not lie." The writs of certiorari and prohibition are remedies to correct lack or excess of jurisdiction or grave abuse of discretion equivalent to lack of jurisdiction committed by a lower court. "Where the proper remedy is appeal, the action for certiorari will not be entertained. . . . Certiorari is not a remedy for errors of judgment. Errors of judgment are correctible by appeal, errors of jurisdiction are reviewable by certiorari."

Rule 65 is very clear. The extraordinary remedies of certiorari, prohibition and mandamus are available only when "there is no appeal or any plain, speedy and adequate remedy in the ordinary course of law . . . ." That is why they are referred to as "extraordinary." . . . . The Court has likewise ruled that "certiorari will not be issued to cure errors in proceedings or correct erroneous conclusions of law or fact. As long as a court acts within its jurisdiction, any alleged errors committed in the exercise of its jurisdiction will amount to nothing more than errors of judgment which are reviewable by timely appeal and not by a special civil action of 9 certiorari." This is not exactly so in the instant case. While this Court does not deny the eventual jurisdiction of the lower court over the controversy, the issue posed basically is whether the lower court prematurely assumed jurisdiction over it. If the lower court indeed prematurely assumed jurisdiction over the case, then it becomes an error of jurisdiction which is a proper subject of a petition for certiorari before the Court of Appeals. And if the lower court does not have jurisdiction over the controversy, then any decision or order it may render may be annulled and set aside by the appellate court. However, the question of jurisdiction, which is a question of law depends on the determination of the existence of the arbitration clause, which is a question of fact. In the instant case, the lower court found that there exists an arbitration clause. However, it ruled that in contemplation of law, said arbitration clause does not exist. The issue, therefore, posed before the Court of Appeals in a petition for certiorari is whether the Arbitration Clause does not in fact exist. On its face, the the question is one of fact which is not proper in a petition for certiorari. The Court of Appeals found that an Arbitration Clause does in fact exist. In resolving said question of fact, the Court of Appeals interpreted the construction of the subject contract documents containing the Arbitration Clause in accordance with Republic Act No. 876 (Arbitration Law) and existing jurisprudence which will be extensively discussed hereunder. In effect, the issue posed before the Court of Appeals was likewise a question of law. Being a question of law, the private respondents rightfully invoked the special civil action of certiorari. It is that mode of appeal taken by private respondents before the Court of Appeals that is being questioned by the petitioners before this Court. But at the heart of said issue is the question of whether there exists an Arbitration Clause because if an Arbitration Clause does not exist, then private respondents took the wrong mode of appeal before the Court of Appeals. For this Court to be able to resolve the question of whether private respondents took the proper mode of appeal, which, incidentally, is a question of law, then it has to answer the core issue of whether there exists an Arbitration Clause which, admittedly, is a question of fact. Moreover, where a rigid application of the rule that certiorari cannot be a substitute for appeal will result in a manifest failure or miscarriage of justice, the provisions of the Rules of Court 10 which are technical rules may be relaxed. As we shall show hereunder, had the Court of Appeals dismissed the petition for certiorari, the issue of whether or not an arbitration clause exists in the contract would not have been resolved in accordance with evidence extant in the record of the case. Consequently, this would have resulted in a judicial rejection of a contractual provision agreed by the parties to the contract. In the same vein, this Court holds that the question of the existence of the arbitration clause in the contract between

petitioner and private respondents is a legal issue that must be determined in this petition for review on certiorari. Petitioner, while not denying that there exists an arbitration clause in the contract in question, asserts that in contemplation of law there could not have been one considering the following points. First, the trial court found that the "conditions of contract" embodying the arbitration clause is not duly signed by the parties. Second, private respondents misrepresented before the Court of Appeals that they produced in the trial court a notarized duplicate original copy of the construction agreement because what were submitted were mere photocopies thereof. The contract(s) introduced in court by private respondents were therefore "of dubious authenticity" because: (a) the Agreement for the Execution of Builder's Work for the EDSA Plaza Project does not contain an arbitration clause, (b) private respondents "surreptitiously attached as Annexes "G-3" to "G-5" to their petition before the Court of Appeals but these documents are not parts of the Agreement of the parties as "there was no formal trade contract executed," (c) if the entire compilation of documents "is indeed a formal trade contract," then it should have been duly notarized, (d) the certification from the Records Management and Archives Office dated August 26, 1993 merely states that "the notarial record of Nilberto Briones . . . is available in the files of (said) office as Notarial Registry Entry only," (e) the same certification attests that the document entered in the notarial registry pertains to the Articles of Agreement only without any other accompanying documents, and therefore, it is not a formal trade contract, and (f) the compilation submitted by respondents are a "mere hodge-podge of documents and do not constitute a single intelligible agreement." In other words, petitioner denies the existence of the arbitration clause primarily on the ground that the representatives of the contracting corporations did not sign the "Conditions of Contract" that contained the said clause. Its other contentions, specifically that insinuating fraud as regards the alleged insertion of the arbitration clause, are questions of fact that should have been threshed out below. This Court may as well proceed to determine whether the arbitration clause does exist in the parties' contract. Republic Act No. 876 provides for the formal requisites of an arbitration agreement as follows: Sec. 4. Form of arbitration agreement. A contract to arbitrate a controversy thereafter arising between the parties, as well as a submission to arbitrate an existing controversy, shall be in writing and subscribed by the party sought to be charged, or by his lawful agent. The making of a contract or submission for arbitration described in section two hereof, providing for arbitration of any controversy, shall be deemed a consent of the parties of the province or city where any of the parties resides, to enforce such contract of submission. (Emphasis supplied.). The formal requirements of an agreement to arbitrate are therefore the following: (a) it must be in writing and (b) it must be subscribed by the parties or their representatives. There is no denying that the parties entered into a written contract that was submitted in evidence before the lower court. To "subscribe" means to write underneath, as one's name; to sign 11 at the end of a document. That word may sometimes be 12 construed to mean to give consent to or to attest. The Court finds that, upon a scrutiny of the records of this case, these requisites were complied with in the contract in question. The Articles of Agreement, which incorporates all the other contracts and agreements between the parties, was signed by representatives of both parties and duly notarized. The failure of the private respondent's representative to initial the "Conditions of Contract" would therefor not affect compliance with the formal requirements for arbitration

agreements because that particular portion of the covenants between the parties was included by reference in the Articles of Agreement. Petitioner's contention that there was no arbitration clause because the contract incorporating said provision is part of a "hodge-podge" document, is therefore untenable. A contract need not be contained in a single writing. It may be collected from several different writings which do not conflict with each other and which, when connected, show the parties, subject matter, terms and consideration, as in contracts entered into by 13 correspondence. A contract may be encompassed in several instruments even though every instrument is not signed by the parties, since it is sufficient if the unsigned instruments are clearly identified or referred to and made part of the signed instrument or instruments. Similarly, a written agreement of which there are two copies, one signed by each of the parties, is binding on both to the same extent as though there had 14 been only one copy of the agreement and both had signed it. The flaw in petitioner's contentions therefore lies in its having segmented the various components of the whole contract between the parties into several parts. This notwithstanding, petitioner ironically admits the execution of the Articles of Agreement. Notably, too, the lower court found that the said Articles of Agreement "also provides that the 'Contract Documents' therein listed 'shall be deemed an integral part of this Agreement,' and one of the said documents is the 'Conditions of Contract' which contains the Arbitration Clause.'" It is this Articles of Agreement that was duly signed by Rufo B. Colayco, president of private respondent SPI, and Bayani F. Fernando, president of petitioner corporation. The same agreement was duly subscribed before notary public Nilberto R. Briones. In other words, the subscription of the principal agreement effectively covered the other documents incorporated by reference therein. This Court likewise does not find that the Court of Appeals erred in ruling that private respondents were not in default in invoking the provisions of the arbitration clause which states that "(t)he demand for arbitration shall be made within a reasonable time after the dispute has arisen and attempts to settle amicably had failed." Under the factual milieu, private respondent SPI should have paid its liabilities tinder the contract in accordance with its terms. However, misunderstandings appeared to have cropped up between the parties ostensibly brought about by either delay in the completion of the construction work or by force majeure or the fire that partially gutted the project. The almost two-year delay in paying its liabilities may not therefore be wholly ascribed to private respondent SPI. Besides, private respondent SPI's initiative in calling for a conference between the parties was a step towards the agreed resort to arbitration. However, petitioner posthaste filed the complaint before the lower court. Thus, while private respondent SPI's request for arbitration on August 13, 1993 might appear an afterthought as it was made after it had filed the motion to suspend proceedings, it was because petitioner also appeared to act hastily in order to resolve the controversy through the courts. The arbitration clause provides for a "reasonable time" within which the parties may avail of the relief under that clause. "Reasonableness" is a relative term and the question of whether the time within which an act has to be done is 15 reasonable depends on attendant circumstances. This Court finds that under the circumstances obtaining in this case, a one-month period from the time the parties held a conference on July 12, 1993 until private respondent SPI notified petitioner that it was invoking the arbitration clause, is a reasonable time. Indeed, petitioner may not be faulted for resorting to the court to claim what was due it under the contract. However, we find its denial of the existence of the arbitration clause as an attempt to cover up its misstep in hurriedly filing the complaint before the lower court.

In this connection, it bears stressing that the lower court has not lost its jurisdiction over the case. Section 7 of Republic Act No. 876 provides that proceedings therein have only been 16 stayed. After the special proceeding of arbitration has been pursued and completed, then the lower court may confirm the 17 award made by the arbitrator. It should be noted that in this jurisdiction, arbitration has been held valid and constitutional. Even before the approval on June 19, 1953 of Republic Act No. 876, this Court has countenanced 18 the settlement of disputes through arbitration. Republic Act No. 876 was adopted to supplement the New Civil Code's 19 provisions on arbitration. Its potentials as one of the alternative dispute resolution methods that are now rightfully vaunted as "the wave of the future" in international relations, is recognized worldwide. To brush aside a contractual agreement calling for arbitration in case of disagreement between the parties would therefore be a step backward. WHEREFORE, the questioned Decision of the Court of Appeals is hereby AFFIRMED and the petition for certiorari DENIED. This Decision is immediately executory. Costs against petitioner. SO ORDERED. 9. G.R. No. 144732 ROLANDO versus SANDOVAL-GUTIERREZ,* CORONA,** AZCUNA, and GARCIA, JJ. COURT OF APPEALS and SECURITY BANK AND Promulgated: TRUST COMPANY, Respondents. DECISION AZCUNA, J.: For consideration in this petition for review are the resolutions of the Court of Appeals in CA-G.R. CV No. 45821 dated April 5, 2000 and August 30, 2000, respectively. Both parties have accepted the factual account narrated by the Court of Appeals and have identically quoted the portion of the assailed decision pertaining thereto in their memoranda. Accordingly, the Court adopts said findings, which are reproduced as follows: On November 11, 1980, plaintiff Security Bank & Trust Company filed a complaint for a Sum of Money with the Regional Trial Court of Pasig, Branch 158 entitled Security Bank & Trust Company, plaintiff, - versus Miguel F. Uy, Brigitte E. Uy and Rolando Limpo, defendants[.] Plaintiff Bank sought to recover the outstanding balance of a promissory note executed by the defendants. On February 1, 1983, defendantsspouses Miguel F. Uy and Brigitte Uy entered into a Compromise Agreement with plaintiff bank. On March 22, 1983, the trial court rendered decision, reproducing therein the February 13, 2006 LIMPO

pertinent provisions Agreement as follows:

of

the

Compromise

1. Defendant spouses admit liability to the plaintiff the said amount of P38,833.44 as of January 12, 1983; 2. Defendant spouses agree to pay the plaintiff the said amount of P38,833.44 with interest at the rate of 20% per annum with aforesaid interest rate computed based on declining balance, from January 12, 1983 in the following manner: a) P4,644.00 on or before March 14, 1983 of which P500.00 shall be applied as attorneys fee; P144.00 the cost of suit, and the remaining balance to the outstanding loan obligation; b) P4,000.00 th day of each month each on or before the 15 commencing April 1983 until June 1, 1983; c) P1,500.00 on or before the 15th day of each month commencing July 1983 until the balance and accruing interest thereon is fully paid. 3. In case of failure to pay any installment when due, the whole balance shall become due and payable, without necessity of demand and defendant spouses shall be assessed a default penalty of 3% per month until the obligation is fully paid. Moreover, plaintiff shall be entitled to a writ of execution upon ex-parte motion. (RTC Decision, p. 1) When defendants failed to comply with the terms and conditions of the compromise agreement, plaintiff bank, on November 27, 1984, filed an Ex-Parte Motion for the Issuance of Writ of Execution. The motion not having been acted upon, plaintiff bank, on July 22, 1992, filed a complaint for Revival of Judgment. The defendant-spouses, in their Answer, alleged as their defense laches, for failure of plaintiff bank to enforce its rights for more than eight (8) years. Defendant Limpo, on the other hand, alleged that he is not obligated to pay any amount to plaintiff under the said compromise agreement which was entered into only by and between plaintiff and defendant spouses Miguel F. Uy and Brigitte E. Uy without his knowledge and consent. (Records, p. 31) On February 5, 1993, plaintiff bank filed a Motion for Judgment on the Pleadings alleging that defendants spouses Answer failed to tender genuine issues. On April 20, 1993, the trial court issued an order against defendants spouses ordering them to pay plaintiff bank the amount of P38,833.44 with interest at the rate of 20% per annum computed from January 12, 1983 until the amount is fully paid. Defendant-spouses appealed this decision to the Court of Appeals, but said appeal was ordered dismissed by this Courts Special Fifth Division for

defendants spouses abuse of the extensions of time granted them, pursuant to Section 1 (f) of Rule 50 of the Rules of Court (Rollo, p. 84). Meanwhile, on June 30, 1993, defendant Limpo filed a Manifestation and Motion praying for the dismissal of the complaint on the ground that the judgment sought to be revived did not include defendant Limpo. After responsive pleadings were filed by the parties, the trial court issued an Order dated November 3, 1993 dismissing the complaint against defendant Limpo. This Order was reiterated by the trial court in the Order dated April 19, 1994 which likewise dismissed defendant Limpos compulsory counterclaim. Not satisfied with the Order of the trial court, plaintiff bank filed the appeal at bench. Plaintiff-appellant Security Bank & Trust Company assails the Order of the trial court on the basis of the sole assigned error, to wit: THE LOWER COURT ERRED IN DISMISSING THE INSTANT COMPLAINT AGAINST DEFENDANT-APPELLANT ROLANDO LIMPO. (Appellants Brief, p. 3) At first, the Court of Appeals dismissed the appeal holding that the Compromise Agreement had superseded the promissory note executed between the payee Security Bank & Trust Company (the Bank) and the makers spouses Miguel F. Uy and Brigitte E. Uy (spouses Uy) and Rolando Limpo (Limpo). Limpo, inasmuch as he was never a party to the new agreement, was held to be not bound by its terms and, therefore, was no longer obligated to the Bank. Upon the Banks motion for reconsideration, however, the Court of Appeals reversed itself and ordered the continuation of proceedings in Civil Case No. 62226 against Limpo. In this petition, Limpo presents the following issues to be resolved: 1. Whether Rolando Limpo is bound under the Compromise Agreement entered into by Security Bank Corporation and defendants Miguel Uy and Brigitte Uy. 2. Whether Rolando Limpo is liable to Security Bank Corporation under the trial courts judgment dated March 22, 1983 which was based on the Compromise Agreement entered into by Security Bank and the defendants Miguel Uy and Brigitte Uy. 3. Whether the action by Security Bank against Rolando Limpo, as co-maker of defendants Miguel Uy and Brigitte Uy, [was] already barred by prescription when the action for revival of judgment was filed on July 22, 1992.

Anent the first two issues, Limpo takes for the negative. He maintains that the Compromise Agreement was executed without his participation and so the trial courts judgment based on compromise, by obvious consequence, did not and could not have included him as a judgment debtor. Under this circumstance, there would be no basis to include him as a defendant in a complaint for revival of judgment. With respect to the second issue, Limpo answers in the affirmative. He avers that an action based on the promissory note, being a written contract, prescribes in ten years. Continuing from this premise, he computes that the right of action under the promissory note accrued when it became due and demandable on September 19, 1979 and was suspended upon institution of the action to collect on the note on November 11, 1980. By then, one year, one month and twentythree days had elapsed. The period began to run again on March 22, 1983, when the judgment approving the

Compromise Agreement was issued, and was tolled upon the filing of the complaint for revival of judgment on July 22, 1992. This next interval adds up to approximately nine years and four months. Add this to the first interval, the total period that had run would already be ten years and five months, making any suit on the promissory note barred by prescription. The Court finds the petition meritorious. It is settled that a compromise agreement cannot bind persons who are not parties to it. This rule is based on Article 1311(1) of the Civil Code which provides that contracts take effect only between the parties, their assigns and heirs x x x. The sound reason for the exclusion of non-parties to an agreement is the absence of a vinculum or juridical tie which is the efficient cause for the establishment of an obligation. In the Compromise Agreement that was presented to the trial court, there is no question that only the spouses Uy and the Bank were parties. Limpo did not participate in its execution and there was no reference to him in any of its provisions. He cannot be bound by the Compromise Agreement. What happens then if the court approves a

compromise agreement that fails to include all of the defendants? In approving a compromise agreement, no court can impose upon the parties a judgment different from their real agreement or against the very terms and conditions of the amicable settlement entered into. The principle of autonomy of contracts must be respected. These being said, considering that the Compromise Agreement imposed no obligation upon Limpo, it follows that the judgment rendered by the Regional

Trial Court (RTC) of Pasig, based on the Compromise Agreement, could likewise not impose any obligation upon him. The duty of the court is confined to the interpretation of the agreement that the contracting parties have made for themselves without regard to its wisdom or folly as the court cannot supply material stipulations or read into the contract words which it does not contain. Consequently, the contention of Limpo is correct. The terms and conditions set forth in the Compromise Agreement, as approved by the court, are controlling and, therefore, there is no basis to include him in reviving the judgment. However, there remains the question of whether the Bank may still continue the proceedings against Limpo in Civil Case No. 62226, as concluded by the Court of Appeals. The Court of Appeals gives the following reason: x x x If the spouses Uy would become insolvent and could not pay their obligation under the Compromise Agreement, the SBTC [the Bank] could collect the whole amount of the obligation from defendant Rolando Limpo. A judgment, therefore, against Rolando Limpo would not be incompatible with the existence of the Compromise Agreement for in such a situation SBTC could exercise its option to secure execution of judgment against either or both the Uys and Limpo. The only limitation is that SBTC could not collect more than the total amount of indebtedness.

Guadalupe and Bopis, were sued by the plaintiff for recovery of possession of real property. Later, a compromise agreement was executed among Camino, Eco and the plaintiff, whereby Camino and Eco agreed to pay the plaintiff a sum of money. The compromise agreement was later approved by the trial court. Camino and Eco, however, failed to pay the entire amount and, as a result, a writ of execution was issued against all four defendants. Guadalupe and Bopis questioned their inclusion in the writ of execution since the judgment approving the agreement did not include them. This Court found their contention meritorious and declared the writ of execution null and void with respect to Guadalupe and Bopis. Quoting from the Decision: As will be seen, only Rufina Camino and Pasto Eco were adjudged to pay Alfonso Ortega the amount of P140.00 on February 28, 1951. Although they were included as party defendants, the spouses Fermin Bopis and Emilia Guadalupe were not ordered to pay Alfonso Ortega. Obviously, they were absolved from liability. Accordingly, as to them, there was nothing to execute since they have been absolved from liability.

The Court, in that case, ostensibly concluded that a decision that fails to expressly mention the liability of one of the defendants will be taken to mean that he has been absolved in that case. From this pronouncement, the failure to mention Limpo in the judgment of the RTC of Pasig will

The sound reasoning of the Court of Appeals as to the liabilities of a solidary debtor is correct. However, it failed to consider two important incidents that make this case distinct: 1) a judgment had been rendered excluding Limpo; and 2) such judgment had become final. A compromise agreement once approved by order of the court becomes immediately final and executory with the force of res judicata. The courts sanction imbues it with the same effect as any other judgment. No doubt that as to the spouses Uy, there was a clear declaration of liability. Debate arises with respect to Limpo who was never mentioned in both the agreement and the judgment despite that fact that he was impleaded as a defendant. How should this omission affect him?

correspondingly mean his absence of liability to the Bank. As this implied declaration became final with the approval of the Compromise Agreement, the Court of Appeals instructions to continue the proceedings against Limpo in Civil Case No. 62226 amount to an alteration of a matter that is already res judicata. Since Limpo is no longer liable to the Bank, the issue of prescription is not necessary to resolve. WHEREFORE, the resolutions of the Court of Appeals dated April 5, 2000 and August 30, 2000 in CA-G.R. CV No. 45821 are hereby REVERSED and SET ASIDE. Rolando Limpo is ordered DROPPED as a defendant in Civil Case No. 62226. No pronouncement as to costs. SO ORDERED.

Judicial precedent as to the implication of a judgment approving a compromise agreement that fails to expressly mention or include all the defendants is found in Bopis v. Provincial Sheriff of Camarines Norte, the facts of which are akin to those of this case. There, four defendants, Camino, Eco, 10. [G.R. No. 126376. November 20, 2003] SPOUSES BERNARDO BUENAVENTURA and CONSOLACION JOAQUIN, SPOUSES JUANITO EDRA and NORA JOAQUIN, SPOUSES RUFINO VALDOZ and EMMA JOAQUIN, and NATIVIDAD JOAQUIN, petitioners, vs. COURT OF APPEALS,

SPOUSES LEONARDO JOAQUIN and FELICIANA LANDRITO, SPOUSES FIDEL JOAQUIN and CONCHITA BERNARDO, SPOUSES TOMAS JOAQUIN and SOLEDAD ALCORAN, SPOUSES ARTEMIO JOAQUIN and SOCORRO ANGELES, SPOUSES ALEXANDER MENDOZA and CLARITA JOAQUIN, SPOUSES TELESFORO CARREON and FELICITAS JOAQUIN, SPOUSES DANILO VALDOZ and FE JOAQUIN, and SPOUSES GAVINO JOAQUIN and LEA ASIS, respondents. DECISION CARPIO, J.:

In seeking the declaration of nullity of the aforesaid deeds of sale and certificates of title, plaintiffs, in their complaint, aver: - XXThe deeds of sale, Annexes C, D, E, F, and G, [and K] are simulated as they are, are NULL AND VOID AB INITIO because a) Firstly, there was no actual valid consideration for the deeds of sale xxx over the properties in litis; Secondly, assuming that there was consideration in the sums reflected in the questioned deeds, the properties are more than three-fold times more valuable than the measly sums appearing therein; Thirdly, the deeds of sale do not reflect and express the true intent of the parties (vendors and vendees); and Fourthly, the purported sale of the properties in litis was the result of a deliberate conspiracy designed to unjustly deprive the rest of the compulsory heirs (plaintiffs herein) of their legitime.

b) The Case This is a petition for review on certiorari to annul the Decision dated 26 June 1996 of the Court of Appeals in CA-G.R. CV No. 41996. The Court of Appeals affirmed the Decision dated 18 February 1993 rendered by Branch 65 of the Regional Trial Court of Makati (trial court) in Civil Case No. 89-5174. The trial court dismissed the case after it found that the parties executed the Deeds of Sale for valid consideration and that the plaintiffs did not have a cause of action against the defendants. The Facts The Court of Appeals summarized the facts of the case as follows: Defendant spouses Leonardo Joaquin and Feliciana Landrito are the parents of plaintiffs Consolacion, Nora, Emma and Natividad as well as of defendants Fidel, Tomas, Artemio, Clarita, Felicitas, Fe, and Gavino, all surnamed JOAQUIN. The married Joaquin children are joined in this action by their respective spouses. Sought to be declared null and void ab initio are certain deeds of sale of real property executed by defendant parents Leonardo Joaquin and Feliciana Landrito in favor of their co-defendant children and the corresponding certificates of title issued in their names, to wit: 1. Deed of Absolute Sale covering Lot 168-C-7 of subdivision plan (LRC) Psd-256395 executed on 11 July 1978, in favor of defendant Felicitas Joaquin, for a consideration of P6,000.00 (Exh. C), pursuant to which TCT No. [36113/T-172] was issued in her name (Exh. C-1); 2. Deed of Absolute Sale covering Lot 168-I-3 of subdivision plan (LRC) Psd-256394 executed on 7 June 1979, in favor of defendant Clarita Joaquin, for a consideration of P1[2],000.00 (Exh. D), pursuant to which TCT No. S-109772 was issued in her name (Exh. D-1); 3 Deed of Absolute Sale covering Lot 168-I-1 of subdivision plan (LRC) Psd-256394 executed on 12 May 1988, in favor of defendant spouses Fidel Joaquin and Conchita Bernardo, for a consideration of P54,[3]00.00 (Exh. E), pursuant to which TCT No. 155329 was issued to them (Exh. E-1); 4. Deed of Absolute Sale covering Lot 168-I-2 of subdivision plan (LRC) Psd-256394 executed on 12 May 1988, in favor of defendant spouses Artemio Joaquin and Socorro Angeles, for a consideration of P[54,3]00.00 (Exh. F), pursuant to which TCT No. 155330 was issued to them (Exh. F-1); and 5. Absolute Sale of Real Property covering Lot 168-C-4 of subdivision plan (LRC) Psd-256395 executed on 9 September 1988, in favor of Tomas Joaquin, for a consideration of P20,000.00 (Exh. G), pursuant to which TCT No. 157203 was issued in her name (Exh. G-1). [6. Deed of Absolute Sale covering Lot 168-C-1 of subdivision plan (LRC) Psd-256395 executed on 7 October 1988, in favor of Gavino Joaquin, for a consideration of P25,000.00 (Exh. K), pursuant to which TCT No. 157779 was issued in his name (Exh. K-1).] - XXI -

c)

d)

Necessarily, and as an inevitable consequence, Transfer Certificates of Title Nos. 36113/T-172, S-109772, 155329, 155330, 157203 [and 157779] issued by the Registrar of Deeds over the properties in litis xxx are NULL AND VOID AB INITIO. Defendants, on the other hand aver (1) that plaintiffs do not have a cause of action against them as well as the requisite standing and interest to assail their titles over the properties in litis; (2) that the sales were with sufficient considerations and made by defendants parents voluntarily, in good faith, and with full knowledge of the consequences of their deeds of sale; and (3) that the certificates of title were issued with sufficient factual and legal basis. (Emphasis in the original) The Ruling of the Trial Court Before the trial, the trial court ordered the dismissal of the case against defendant spouses Gavino Joaquin and Lea Asis. Instead of filing an Answer with their co-defendants, Gavino Joaquin and Lea Asis filed a Motion to Dismiss. In granting the dismissal to Gavino Joaquin and Lea Asis, the trial court noted that compulsory heirs have the right to a legitime but such right is contingent since said right commences only from the moment of death of the decedent pursuant to Article 777 of the Civil Code of the Philippines. After trial, the trial court ruled in favor of the defendants and dismissed the complaint. The trial court stated: In the first place, the testimony of the defendants, particularly that of the xxx father will show that the Deeds of Sale were all executed for valuable consideration. This assertion must prevail over the negative allegation of plaintiffs. And then there is the argument that plaintiffs do not have a valid cause of action against defendants since there can be no legitime to speak of prior to the death of their parents. The court finds this contention tenable. In determining the legitime, the value of the property left at the death of the testator shall be considered (Art. 908 of the New Civil Code). Hence, the legitime of a compulsory heir is computed as of the time of the death of the decedent. Plaintiffs therefore cannot claim an impairment of their legitime while their parents live. All the foregoing considered, this case is DISMISSED.

In order to preserve whatever is left of the ties that should bind families together, the counterclaim is likewise DISMISSED. No costs. SO ORDERED. The Ruling of the Court of Appeals

OF THE CHILDREN OF THE SPOUSES LEONARDO JOAQUIN AND FELICIANA LANDRITO OF THEIR INTEREST OVER THE SUBJECT PROPERTIES. 5. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONERS HAVE A GOOD, SUFFICIENT AND VALID CAUSE OF ACTION AGAINST THE PRIVATE RESPONDENTS. The Ruling of the Court

The Court of Appeals affirmed the decision of the trial court. The appellate court ruled: To the mind of the Court, appellants are skirting the real and decisive issue in this case, which is, whether xxx they have a cause of action against appellees. Upon this point, there is no question that plaintiffs-appellants, like their defendant brothers and sisters, are compulsory heirs of defendant spouses, Leonardo Joaquin and Feliciana Landrito, who are their parents. However, their right to the properties of their defendant parents, as compulsory heirs, is merely inchoate and vests only upon the latters death. While still alive, defendant parents are free to dispose of their properties, provided that such dispositions are not made in fraud of creditors. Plaintiffs-appellants are definitely not parties to the deeds of sale in question. Neither do they claim to be creditors of their defendant parents. Consequently, they cannot be considered as real parties in interest to assail the validity of said deeds either for gross inadequacy or lack of consideration or for failure to express the true intent of the parties. In point is the ruling of the Supreme Court in Velarde, et al. vs. Paez, et al., 101 SCRA 376, thus: The plaintiffs are not parties to the alleged deed of sale and are not principally or subsidiarily bound thereby; hence, they have no legal capacity to challenge their validity. Plaintiffs-appellants anchor their action on the supposed impairment of their legitime by the dispositions made by their defendant parents in favor of their defendant brothers and sisters. But, as correctly held by the court a quo, the legitime of a compulsory heir is computed as of the time of the death of the decedent. Plaintiffs therefore cannot claim an impairment of their legitime while their parents live. With this posture taken by the Court, consideration of the errors assigned by plaintiffs-appellants is inconsequential. WHEREFORE, the decision appealed from is hereby AFFIRMED, with costs against plaintiffs-appellants. SO ORDERED. Hence, the instant petition. Issues Petitioners assign the following as errors of the Court of Appeals: 1. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE CONVEYANCE IN QUESTION HAD NO VALID CONSIDERATION. 2. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT EVEN ASSUMING THAT THERE WAS A CONSIDERATION, THE SAME IS GROSSLY INADEQUATE. 3. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE DEEDS OF SALE DO NOT EXPRESS THE TRUE INTENT OF THE PARTIES. 4. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE CONVEYANCE WAS PART AND PARCEL OF A CONSPIRACY AIMED AT UNJUSTLY DEPRIVING THE REST

We find the petition without merit. We will discuss petitioners legal interest over the properties subject of the Deeds of Sale before discussing the issues on the purported lack of consideration and gross inadequacy of the prices of the Deeds of Sale. Whether Petitioners have a legal interest over the properties subject of the Deeds of Sale Petitioners Complaint betrays their motive for filing this case. In their Complaint, petitioners asserted that the purported sale of the properties in litis was the result of a deliberate conspiracy designed to unjustly deprive the rest of the compulsory heirs (plaintiffs herein) of their legitime. Petitioners strategy was to have the Deeds of Sale declared void so that ownership of the lots would eventually revert to their respondent parents. If their parents die still owning the lots, petitioners and their respondent siblings will then co-own their parents estate by hereditary succession. It is evident from the records that petitioners are interested in the properties subject of the Deeds of Sale, but they have failed to show any legal right to the properties. The trial and appellate courts should have dismissed the action for this reason alone. An action must be prosecuted in the name of the real party-in-interest. [T]he question as to real party-in-interest is whether he is the party who would be benefitted or injured by the judgment, or the party entitled to the avails of the suit. xxx In actions for the annulment of contracts, such as this action, the real parties are those who are parties to the agreement or are bound either principally or subsidiarily or are prejudiced in their rights with respect to one of the contracting parties and can show the detriment which would positively result to them from the contract even though they did not intervene in it (Ibaez v. Hongkong & Shanghai Bank, 22 Phil. 572 [1912]) xxx. These are parties with a present substantial interest, as distinguished from a mere expectancy or future, contingent, subordinate, or consequential interest. The phrase present substantial interest more concretely is meant such interest of a party in the subject matter of the action as will entitle him, under the substantive law, to recover if the evidence is sufficient, or that he has the legal title to demand and the defendant will be protected in a payment to or recovery by him. Petitioners do not have any legal interest over the properties subject of the Deeds of Sale. As the appellate court stated, petitioners right to their parents properties is merely inchoate and vests only upon their parents death. While still living, the parents of petitioners are free to dispose of their properties. In their overzealousness to safeguard their future legitime, petitioners forget that theoretically, the sale of the lots to their siblings does not affect the value of their parents estate. While the sale of the lots reduced the estate, cash of equivalent value replaced the lots taken from the estate. Whether the Deeds of Sale are void for lack of consideration

Petitioners assert that their respondent siblings did not actually pay the prices stated in the Deeds of Sale to their respondent father. Thus, petitioners ask the court to declare the Deeds of Sale void. A contract of sale is not a real contract, but a consensual contract. As a consensual contract, a contract of sale becomes a binding and valid contract upon the meeting of the minds as to price. If there is a meeting of the minds of the parties as to the price, the contract of sale is valid, despite the manner of payment, or even the breach of that manner of payment. If the real price is not stated in the contract, then the contract of sale is valid but subject to reformation. If there is no meeting of the minds of the parties as to the price, because the price stipulated in the contract is simulated, then the contract is void. Article 1471 of the Civil Code states that if the price in a contract of sale is simulated, the sale is void. It is not the act of payment of price that determines the validity of a contract of sale. Payment of the price has nothing to do with the perfection of the contract. Payment of the price goes into the performance of the contract. Failure to pay the consideration is different from lack of consideration. The former results in a right to demand the fulfillment or cancellation of the obligation under an existing valid contract while the latter prevents the existence of a valid contract. Petitioners failed to show that the prices in the Deeds of Sale were absolutely simulated. To prove simulation, petitioners presented Emma Joaquin Valdozs testimony stating that their father, respondent Leonardo Joaquin, told her that he would transfer a lot to her through a deed of sale without need for her payment of the purchase price. The trial court did not find the allegation of absolute simulation of price credible. Petitioners failure to prove absolute simulation of price is magnified by their lack of knowledge of their respondent siblings financial capacity to buy the questioned lots. On the other hand, the Deeds of Sale which petitioners presented as evidence plainly showed the cost of each lot sold. Not only did respondents minds meet as to the purchase price, but the real price was also stated in the Deeds of Sale. As of the filing of the complaint, respondent siblings have also fully paid the price to their respondent father. Whether the Deeds of Sale are void for gross inadequacy of price Petitioners ask that assuming that there is consideration, the same is grossly inadequate as to invalidate the Deeds of Sale. Articles 1355 of the Civil Code states: Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence. (Emphasis supplied) Article 1470 of the Civil Code further provides: Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as may indicate a defect in the consent, or that the parties really intended a donation or some other act or contract. (Emphasis supplied) Petitioners failed to prove any of the instances mentioned in Articles 1355 and 1470 of the Civil Code which would invalidate, or even affect, the Deeds of Sale. Indeed, there is no requirement that the price be equal to the exact value of the subject matter of sale. All the respondents believed that they received the commutative value of what they gave. As we stated in Vales v. Villa: Courts cannot follow one every step of his life and extricate him from bad bargains, protect him from unwise investments, relieve him from one-sided contracts, or annul the effects of foolish acts. Courts cannot constitute themselves guardians of persons who are not legally incompetent. Courts operate not because one person has been defeated or overcome by another, but because he has been defeated or overcome illegally. Men may do foolish things, make ridiculous contracts, use miserable judgment, and lose money by them indeed,

all they have in the world; but not for that alone can the law intervene and restore. There must be, in addition, a violation of the law, the commission of what the law knows as an actionable wrong, before the courts are authorized to lay hold of the situation and remedy it. (Emphasis in the original) Moreover, the factual findings of the appellate court are conclusive on the parties and carry greater weight when they coincide with the factual findings of the trial court. This Court will not weigh the evidence all over again unless there has been a showing that the findings of the lower court are totally devoid of support or are clearly erroneous so as to constitute serious abuse of discretion. In the instant case, the trial court found that the lots were sold for a valid consideration, and that the defendant children actually paid the purchase price stipulated in their respective Deeds of Sale. Actual payment of the purchase price by the buyer to the seller is a factual finding that is now conclusive upon us. WHEREFORE, we AFFIRM the decision of the Court of Appeals in toto. SO ORDERED. 11. G.R. No. 164301 August 10, 2010

BANK OF THE PHILIPPINE ISLANDS, Petitioner, vs. BPI EMPLOYEES UNION-DAVAO CHAPTER-FEDERATION OF UNIONS IN BPI UNIBANK, Respondent. DECISION LEONARDO-DE CASTRO, J.: May a corporation invoke its merger with another corporation as a valid ground to exempt its "absorbed employees" from the coverage of a union shop clause contained in its existing Collective Bargaining Agreement (CBA) with its own certified labor union? That is the question we shall endeavor to answer in this petition for review filed by an employer after the Court of Appeals decided in favor of respondent union, which is the employees recognized collective bargaining representative. At the outset, we should call to mind the spirit and the letter of the Labor Code provisions on union security clauses, specifically Article 248 (e), which states, "x x x Nothing in this Code or in any other law shall stop the parties from requiring membership in a recognized collective bargaining agent as a condition for employment, except those employees who are already members of another union at the time of the signing of the collective bargaining agreement." 1 This case which involves the application of a collective bargaining agreement with a union shop clause should be resolved principally from the standpoint of the clear provisions of our labor laws, and the express terms of the CBA in question, and not by inference from the general consequence of the merger of corporations under the Corporation Code, which obviously does not deal with and, therefore, is silent on the terms and conditions of employment in corporations or juridical entities. This issue must be resolved NOW, instead of postponing it to a future time when the CBA is renegotiated as suggested by the Honorable Justice Arturo D. Brion because the same issue may still be resurrected in the renegotiation if the absorbed employees insist on their privileged status of being exempt from any union shop clause or any variant thereof. We find it significant to note that it is only the employer, Bank of the Philippine Islands (BPI), that brought the case up to this Court via the instant petition for review; while the employees actually involved in the case did not pursue the same relief, but had instead chosen in effect to acquiesce to the decision of the Court of Appeals which effectively required them to comply with the union shop clause under the existing CBA at the time of the merger of BPI with Far East Bank and Trust Company (FEBTC), which decision had already become final and executory as to the aforesaid employees. By not appealing

the decision of the Court of Appeals, the aforesaid employees are bound by the said Court of Appeals decision to join BPIs duly certified labor union. In view of the apparent acquiescence of the affected FEBTC employees in the Court of Appeals decision, BPI should not have pursued this petition for review. However, even assuming that BPI may do so, the same still cannot prosper. What is before us now is a petition for review under Rule 45 of the Rules of Court of the Decision2 dated September 30, 2003 of the Court of Appeals, as reiterated in its Resolution3 of June 9, 2004, reversing and setting aside the Decision4 dated November 23, 2001 of Voluntary Arbitrator Rosalina Letrondo-Montejo, in CA-G.R. SP No. 70445, entitled BPI Employees Union-Davao Chapter-Federation of Unions in BPI Unibank v. Bank of the Philippine Islands, et al. The antecedent facts are as follows: On March 23, 2000, the Bangko Sentral ng Pilipinas approved the Articles of Merger executed on January 20, 2000 by and between BPI, herein petitioner, and FEBTC.5 This Article and Plan of Merger was approved by the Securities and Exchange Commission on April 7, 2000.6 Pursuant to the Article and Plan of Merger, all the assets and liabilities of FEBTC were transferred to and absorbed by BPI as the surviving corporation. FEBTC employees, including those in its different branches across the country, were hired by petitioner as its own employees, with their status and tenure recognized and salaries and benefits maintained. Respondent BPI Employees Union-Davao Chapter - Federation of Unions in BPI Unibank (hereinafter the "Union," for brevity) is the exclusive bargaining agent of BPIs rank and file employees in Davao City. The former FEBTC rank-and-file employees in Davao City did not belong to any labor union at the time of the merger. Prior to the effectivity of the merger, or on March 31, 2000, respondent Union invited said FEBTC employees to a meeting regarding the Union Shop Clause (Article II, Section 2) of the existing CBA between petitioner BPI and respondent Union.7 The parties both advert to certain provisions of the existing CBA, which are quoted below: ARTICLE I Section 1. Recognition and Bargaining Unit The BANK recognizes the UNION as the sole and exclusive collective bargaining representative of all the regular rank and file employees of the Bank offices in Davao City. Section 2. Exclusions Section 3. Additional Exclusions Section 4. Copy of Contract ARTICLE II Section 1. Maintenance of Membership All employees within the bargaining unit who are members of the Union on the date of the effectivity of this Agreement as well as employees within the bargaining unit who subsequently join or become members of the Union during the lifetime of this Agreement shall as a condition of their continued employment with the Bank, maintain their membership in the Union in good standing. Section 2. Union Shop - New employees falling within the bargaining unit as defined in Article I of this Agreement, who may hereafter be regularly employed by the Bank shall, within thirty (30) days after they become regular employees, join the Union as a condition of their continued employment. It is understood that membership in good standing in the Union is a condition of their continued employment with the Bank.8 (Emphases supplied.)

After the meeting called by the Union, some of the former FEBTC employees joined the Union, while others refused. Later, however, some of those who initially joined retracted their membership. 9 Respondent Union then sent notices to the former FEBTC employees who refused to join, as well as those who retracted their membership, and called them to a hearing regarding the matter. When these former FEBTC employees refused to attend the hearing, the president of the Union requested BPI to implement the Union Shop Clause of the CBA and to terminate their employment pursuant thereto.10 After two months of management inaction on the request, respondent Union informed petitioner BPI of its decision to refer the issue of the implementation of the Union Shop Clause of the CBA to the Grievance Committee. However, the issue remained unresolved at this level and so it was subsequently submitted for voluntary arbitration by the parties.11 Voluntary Arbitrator Rosalina Letrondo-Montejo, in a Decision12 dated November 23, 2001, ruled in favor of petitioner BPIs interpretation that the former FEBTC employees were not covered by the Union Security Clause of the CBA between the Union and the Bank on the ground that the said employees were not new employees who were hired and subsequently regularized, but were absorbed employees "by operation of law" because the "former employees of FEBTC can be considered assets and liabilities of the absorbed corporation." The Voluntary Arbitrator concluded that the former FEBTC employees could not be compelled to join the Union, as it was their constitutional right to join or not to join any organization. Respondent Union filed a Motion for Reconsideration, but the Voluntary Arbitrator denied the same in an Order dated March 25, 2002.13 Dissatisfied, respondent then appealed the Voluntary Arbitrators decision to the Court of Appeals. In the herein assailed Decision dated September 30, 2003, the Court of Appeals reversed and set aside the Decision of the Voluntary Arbitrator.14 Likewise, the Court of Appeals denied herein petitioners Motion for Reconsideration in a Resolution dated June 9, 2004. The Court of Appeals pertinently ruled in its Decision: A union-shop clause has been defined as a form of union security provision wherein non-members may be hired, but to retain employment must become union members after a certain period. There is no question as to the existence of the union-shop clause in the CBA between the petitioner-union and the company. The controversy lies in its application to the "absorbed" employees. This Court agrees with the voluntary arbitrator that the ABSORBED employees are distinct and different from NEW employees BUT only in so far as their employment service is concerned. The distinction ends there. In the case at bar, the absorbed employees length of service from its former employer is tacked with their employment with BPI. Otherwise stated, the absorbed employees service is continuous and there is no gap in their service record. This Court is persuaded that the similarities of "new" and "absorbed" employees far outweighs the distinction between them. The similarities lies on the following, to wit: (a) they have a new employer; (b) new working conditions; (c) new terms of employment and; (d) new company policy to follow. As such, they should be considered as "new" employees for purposes of applying the provisions of the CBA regarding the "union-shop" clause. To rule otherwise would definitely result to a very awkward and unfair situation wherein the "absorbed" employees shall be in a different if not, better situation than the existing BPI employees. The existing BPI employees by virtue of the "union-shop" clause are required to pay the monthly union dues, remain as members in good standing of the union otherwise, they shall be terminated from the company, and other union-related obligations. On the other hand, the "absorbed" employees shall enjoy the "fruits of labor" of the

petitioner-union and its members for nothing in exchange. Certainly, this would disturb industrial peace in the company which is the paramount reason for the existence of the CBA and the union. The voluntary arbitrators interpretation of the provisions of the CBA concerning the coverage of the "union-shop" clause is at war with the spirit and the rationale why the Labor Code itself allows the existence of such provision. The Supreme Court in the case of Manila Mandarin Employees Union vs. NLRC (G.R. No. 76989, September 29, 1987) rule, to quote: "This Court has held that a valid form of union security, and such a provision in a collective bargaining agreement is not a restriction of the right of freedom of association guaranteed by the Constitution. A closed-shop agreement is an agreement whereby an employer binds himself to hire only members of the contracting union who must continue to remain members in good standing to keep their jobs. It is "THE MOST PRIZED ACHIEVEMENT OF UNIONISM." IT ADDS MEMBERSHIP AND COMPULSORY DUES. By holding out to loyal members a promise of employment in the closedshop, it wields group solidarity." (Emphasis supplied) Hence, the voluntary arbitrator erred in construing the CBA literally at the expense of industrial peace in the company. With the foregoing ruling from this Court, necessarily, the alternative prayer of the petitioner to require the individual respondents to become members or if they refuse, for this Court to direct respondent BPI to dismiss them, follows.15 Hence, petitioners present recourse, raising the following issues: I WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE FORMER FEBTC EMPLOYEES SHOULD BE CONSIDERED NEW EMPLOYEES OF BPI FOR PURPOSES OF APPLYING THE UNION SHOP CLAUSE OF THE CBA II WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN FINDING THAT THE VOLUNTARY ARBITRATORS INTERPRETATION OF THE COVERAGE OF THE UNION SHOP CLAUSE IS "AT WAR WITH THE SPIRIT AND THE RATIONALE WHY THE LABOR CODE ITSELF ALLOWS THE EXISTENCE OF SUCH PROVISION"16 In essence, the sole issue in this case is whether or not the former FEBTC employees that were absorbed by petitioner upon the merger between FEBTC and BPI should be covered by the Union Shop Clause found in the existing CBA between petitioner and respondent Union. Petitioner is of the position that the former FEBTC employees are not new employees of BPI for purposes of applying the Union Shop Clause of the CBA, on this note, petitioner points to Section 2, Article II of the CBA, which provides: New employees falling within the bargaining unit as defined in Article I of this Agreement, who may hereafter be regularly employed by the Bank shall, within thirty (30) days after they become regular employees, join the Union as a condition of their continued employment. It is understood that membership in good standing in the Union is a condition of their continued employment with the Bank.17 (Emphases supplied.) Petitioner argues that the term "new employees" in the Union Shop Clause of the CBA is qualified by the phrases "who may hereafter be

regularly employed" and "after they become regular employees" which led petitioner to conclude that the "new employees" referred to in, and contemplated by, the Union Shop Clause of the CBA were only those employees who were "new" to BPI, on account of having been hired initially on a temporary or probationary status for possible regular employment at some future date. BPI argues that the FEBTC employees absorbed by BPI cannot be considered as "new employees" of BPI for purposes of applying the Union Shop Clause of the CBA.18 According to petitioner, the contrary interpretation made by the Court of Appeals of this particular CBA provision ignores, or even defies, what petitioner assumes as its clear meaning and scope which allegedly contradicts the Courts strict and restrictive enforcement of union security agreements. We do not agree. Section 2, Article II of the CBA is silent as to how one becomes a "regular employee" of the BPI for the first time. There is nothing in the said provision which requires that a "new" regular employee first undergo a temporary or probationary status before being deemed as such under the union shop clause of the CBA. "Union security" is a generic term which is applied to and comprehends "closed shop," "union shop," "maintenance of membership" or any other form of agreement which imposes upon employees the obligation to acquire or retain union membership as a condition affecting employment. There is union shop when all new regular employees are required to join the union within a certain period for their continued employment. There is maintenance of membership shop when employees, who are union members as of the effective date of the agreement, or who thereafter become members, must maintain union membership as a condition for continued employment until they are promoted or transferred out of the bargaining unit or the agreement is terminated. A closed-shop, on the other hand, may be defined as an enterprise in which, by agreement between the employer and his employees or their representatives, no person may be employed in any or certain agreed departments of the enterprise unless he or she is, becomes, and, for the duration of the agreement, remains a member in good standing of a union entirely comprised of or of which the employees in interest are a part. 19 In the case of Liberty Flour Mills Employees v. Liberty Flour Mills, Inc.,20 we ruled that: It is the policy of the State to promote unionism to enable the workers to negotiate with management on the same level and with more persuasiveness than if they were to individually and independently bargain for the improvement of their respective conditions. To this end, the Constitution guarantees to them the rights "to self-organization, collective bargaining and negotiations and peaceful concerted actions including the right to strike in accordance with law." There is no question that these purposes could be thwarted if every worker were to choose to go his own separate way instead of joining his co-employees in planning collective action and presenting a united front when they sit down to bargain with their employers. It is for this reason that the law has sanctioned stipulations for the union shop and the closed shop as a means of encouraging the workers to join and support the labor union of their own choice as their representative in the negotiation of their demands and the protection of their interest vis--vis the employer. (Emphasis ours.) In other words, the purpose of a union shop or other union security arrangement is to guarantee the continued existence of the union through enforced membership for the benefit of the workers. All employees in the bargaining unit covered by a Union Shop Clause in their CBA with management are subject to its terms. However, under law and jurisprudence, the following kinds of employees are exempted from its coverage, namely, employees who at the time the union shop agreement takes effect are bona fide members of a religious organization which prohibits its members from joining labor unions on religious grounds;21 employees already in the service and already members of a union other than the

majority at the time the union shop agreement took effect;22 confidential employees who are excluded from the rank and file bargaining unit;23 and employees excluded from the union shop by express terms of the agreement. When certain employees are obliged to join a particular union as a requisite for continued employment, as in the case of Union Security Clauses, this condition is a valid restriction of the freedom or right not to join any labor organization because it is in favor of unionism. This Court, on occasion, has even held that a union security clause in a CBA is not a restriction of the right of freedom of association guaranteed by the Constitution.24 Moreover, a closed shop agreement is an agreement whereby an employer binds himself to hire only members of the contracting union who must continue to remain members in good standing to keep their jobs. It is "the most prized achievement of unionism." It adds membership and compulsory dues. By holding out to loyal members a promise of employment in the closed shop, it wields group solidarity.25 Indeed, the situation of the former FEBTC employees in this case clearly does not fall within the first three exceptions to the application of the Union Shop Clause discussed earlier. No allegation or evidence of religious exemption or prior membership in another union or engagement as a confidential employee was presented by both parties. The sole category therefore in which petitioner may prove its claim is the fourth recognized exception or whether the former FEBTC employees are excluded by the express terms of the existing CBA between petitioner and respondent. To reiterate, petitioner insists that the term "new employees," as the same is used in the Union Shop Clause of the CBA at issue, refers only to employees hired by BPI as non-regular employees who later qualify for regular employment and become regular employees, and not those who, as a legal consequence of a merger, are allegedly automatically deemed regular employees of BPI. However, the CBA does not make a distinction as to how a regular employee attains such a status. Moreover, there is nothing in the Corporation Law and the merger agreement mandating the automatic employment as regular employees by the surviving corporation in the merger. It is apparent that petitioner hinges its argument that the former FEBTC employees were absorbed by BPI merely as a legal consequence of a merger based on the characterization by the Voluntary Arbiter of these absorbed employees as included in the "assets and liabilities" of the dissolved corporation - assets because they help the Bank in its operation and liabilities because redundant employees may be terminated and company benefits will be paid to them, thus reducing the Banks financial status. Based on this ratiocination, she ruled that the same are not new employees of BPI as contemplated by the CBA at issue, noting that the Certificate of Filing of the Articles of Merger and Plan of Merger between FEBTC and BPI stated that "x x x the entire assets and liabilities of FAR EASTERN BANK & TRUST COMPANY will be transferred to and absorbed by the BANK OF THE PHILIPPINE ISLANDS x x x (underlining supplied)."26 In sum, the Voluntary Arbiter upheld the reasoning of petitioner that the FEBTC employees became BPI employees by "operation of law" because they are included in the term "assets and liabilities." Absorbed FEBTC Employees are Neither Assets nor Liabilities In legal parlance, however, human beings are never embraced in the term "assets and liabilities." Moreover, BPIs absorption of former FEBTC employees was neither by operation of law nor by legal consequence of contract. There was no government regulation or law that compelled the merger of the two banks or the absorption of the employees of the dissolved corporation by the surviving corporation. Had there been such law or regulation, the absorption of employees of the non-surviving entities of the merger would have been mandatory on the surviving corporation.27 In the present case, the merger was voluntarily entered into by both banks presumably for some mutually acceptable consideration. In fact, the Corporation Code does not also mandate the absorption of the employees of the

non-surviving corporation by the surviving corporation in the case of a merger. Section 80 of the Corporation Code provides: SEC. 80. Effects of merger or consolidation. The merger or consolidation, as provided in the preceding sections shall have the following effects: 1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation; 2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; 3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code; 4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be taken and deemed to be transferred to and vested in such surviving or consolidated corporation without further act or deed; and 5. The surviving or the consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any claim, action or proceeding pending by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation, as the case may be. Neither the rights of creditors nor any lien upon the property of any of such constituent corporations shall be impaired by such merger or consolidated. Significantly, too, the Articles of Merger and Plan of Merger dated April 7, 2000 did not contain any specific stipulation with respect to the employment contracts of existing personnel of the non-surviving entity which is FEBTC. Unlike the Voluntary Arbitrator, this Court cannot uphold the reasoning that the general stipulation regarding transfer of FEBTC assets and liabilities to BPI as set forth in the Articles of Merger necessarily includes the transfer of all FEBTC employees into the employ of BPI and neither BPI nor the FEBTC employees allegedly could do anything about it. Even if it is so, it does not follow that the absorbed employees should not be subject to the terms and conditions of employment obtaining in the surviving corporation. The rule is that unless expressly assumed, labor contracts such as employment contracts and collective bargaining agreements are not enforceable against a transferee of an enterprise, labor contracts being in personam, thus binding only between the parties. A labor contract merely creates an action in personam and does not create any real right which should be respected by third parties. This conclusion draws its force from the right of an employer to select his employees and to decide when to engage them as protected under our Constitution, and the same can only be restricted by law through the exercise of the police power.28 Furthermore, this Court believes that it is contrary to public policy to declare the former FEBTC employees as forming part of the assets or liabilities of FEBTC that were transferred and absorbed by BPI in the Articles of Merger. Assets and liabilities, in this instance, should be deemed to refer only to property rights and obligations of FEBTC and do not include the employment contracts of its personnel. A

corporation cannot unilaterally transfer its employees to another employer like chattel. Certainly, if BPI as an employer had the right to choose who to retain among FEBTCs employees, FEBTC employees had the concomitant right to choose not to be absorbed by BPI. Even though FEBTC employees had no choice or control over the merger of their employer with BPI, they had a choice whether or not they would allow themselves to be absorbed by BPI. Certainly nothing prevented the FEBTCs employees from resigning or retiring and seeking employment elsewhere instead of going along with the proposed absorption. Employment is a personal consensual contract and absorption by BPI of a former FEBTC employee without the consent of the employee is in violation of an individuals freedom to contract. It would have been a different matter if there was an express provision in the articles of merger that as a condition for the merger, BPI was being required to assume all the employment contracts of all existing FEBTC employees with the conformity of the employees. In the absence of such a provision in the articles of merger, then BPI clearly had the business management decision as to whether or not employ FEBTCs employees. FEBTC employees likewise retained the prerogative to allow themselves to be absorbed or not; otherwise, that would be tantamount to involuntary servitude. There appears to be no dispute that with respect to FEBTC employees that BPI chose not to employ or FEBTC employees who chose to retire or be separated from employment instead of "being absorbed," BPIs assumed liability to these employees pursuant to the merger is FEBTCs liability to them in terms of separation pay,29 retirement pay30 or other benefits that may be due them depending on the circumstances. Legal Consequences of Mergers Although not binding on this Court, American jurisprudence on the consequences of voluntary mergers on the right to employment and seniority rights is persuasive and illuminating. We quote the following pertinent discussion from the American Law Reports: Several cases have involved the situation where as a result of mergers, consolidations, or shutdowns, one group of employees, who had accumulated seniority at one plant or for one employer, finds that their jobs have been discontinued except to the extent that they are offered employment at the place or by the employer where the work is to be carried on in the future. Such cases have involved the question whether such transferring employees should be entitled to carry with them their accumulated seniority or whether they are to be compelled to start over at the bottom of the seniority list in the "new" job. It has been recognized in some cases that the accumulated seniority does not survive and cannot be transferred to the "new" job. In Carver v Brien (1942) 315 Ill App 643, 43 NE2d 597, the shop work of three formerly separate railroad corporations, which had previously operated separate facilities, was consolidated in the shops of one of the roads. Displaced employees of the other two roads were given preference for the new jobs created in the shops of the railroad which took over the work. A controversy arose between the employees as to whether the displaced employees were entitled to carry with them to the new jobs the seniority rights they had accumulated with their prior employers, that is, whether the rosters of the three corporations, for seniority purposes, should be "dovetailed" or whether the transferring employees should go to the bottom of the roster of their new employer. Labor representatives of the various systems involved attempted to work out an agreement which, in effect, preserved the seniority status obtained in the prior employment on other roads, and the action was for specific performance of this agreement against a demurring group of the original employees of the railroad which was operating the consolidated shops. The relief sought was denied, the court saying that, absent some specific contract provision otherwise, seniority rights were ordinarily limited to the employment in which they were earned, and concluding that the contract for which specific performance was sought was not such a completed and binding agreement as would support such equitable relief, since the railroad, whose concurrence in the arrangements made was essential to their effectuation, was not a party to the agreement.

Where the provisions of a labor contract provided that in the event that a trucker absorbed the business of another private contractor or common carrier, or was a party to a merger of lines, the seniority of the employees absorbed or affected thereby should be determined by mutual agreement between the trucker and the unions involved, it was held in Moore v International Brotherhood of Teamsters, etc. (1962, Ky) 356 SW2d 241, that the trucker was not required to absorb the affected employees as well as the business, the court saying that they could find no such meaning in the above clause, stating that it dealt only with seniority, and not with initial employment. Unless and until the absorbing company agreed to take the employees of the company whose business was being absorbed, no seniority problem was created, said the court, hence the provision of the contract could have no application. Furthermore, said the court, it did not require that the absorbing company take these employees, but only that if it did take them the question of seniority between the old and new employees would be worked out by agreement or else be submitted to the grievance procedure.31 (Emphasis ours.) Indeed, from the tenor of local and foreign authorities, in voluntary mergers, absorption of the dissolved corporations employees or the recognition of the absorbed employees service with their previous employer may be demanded from the surviving corporation if required by provision of law or contract. The dissent of Justice Arturo D. Brion tries to make a distinction as to the terms and conditions of employment of the absorbed employees in the case of a corporate merger or consolidation which will, in effect, take away from corporate management the prerogative to make purely business decisions on the hiring of employees or will give it an excuse not to apply the CBA in force to the prejudice of its own employees and their recognized collective bargaining agent. In this regard, we disagree with Justice Brion. Justice Brion takes the position that because the surviving corporation continues the personality of the dissolved corporation and acquires all the latters rights and obligations, it is duty-bound to absorb the dissolved corporations employees, even in the absence of a stipulation in the plan of merger. He proposes that this interpretation would provide the necessary protection to labor as it spares workers from being "left in legal limbo." However, there are instances where an employer can validly discontinue or terminate the employment of an employee without violating his right to security of tenure. Among others, in case of redundancy, for example, superfluous employees may be terminated and such termination would be authorized under Article 283 of the Labor Code.32 Moreover, assuming for the sake of argument that there is an obligation to hire or absorb all employees of the non-surviving corporation, there is still no basis to conclude that the terms and conditions of employment under a valid collective bargaining agreement in force in the surviving corporation should not be made to apply to the absorbed employees. The Corporation Code and the Subject Merger Agreement are Silent on Efficacy, Terms and Conditions of Employment Contracts The lack of a provision in the plan of merger regarding the transfer of employment contracts to the surviving corporation could have very well been deliberate on the part of the parties to the merger, in order to grant the surviving corporation the freedom to choose who among the dissolved corporations employees to retain, in accordance with the surviving corporations business needs. If terminations, for instance due to redundancy or labor-saving devices or to prevent losses, are done in good faith, they would be valid. The surviving corporation too is duty-bound to protect the rights of its own employees who may be affected by the merger in terms of seniority and other conditions of their employment due to the merger. Thus, we are not convinced that in the absence of a stipulation in the merger plan the surviving corporation was compelled, or may be judicially compelled, to absorb all employees under the same terms and conditions obtaining in the dissolved corporation as the surviving corporation should also take into consideration the state of its business and its obligations to its own employees, and to their certified collective bargaining agent or labor union.

Even assuming we accept Justice Brions theory that in a merger situation the surviving corporation should be compelled to absorb the dissolved corporations employees as a legal consequence of the merger and as a social justice consideration, it bears to emphasize his dissent also recognizes that the employee may choose to end his employment at any time by voluntarily resigning. For the employee to be "absorbed" by BPI, it requires the employees implied or express consent. It is because of this human element in employment contracts and the personal, consensual nature thereof that we cannot agree that, in a merger situation, employment contracts are automatically transferable from one entity to another in the same manner that a contract pertaining to purely proprietary rights such as a promissory note or a deed of sale of property is perfectly and automatically transferable to the surviving corporation. That BPI is the same entity as FEBTC after the merger is but a legal fiction intended as a tool to adjudicate rights and obligations between and among the merged corporations and the persons that deal with them. Although in a merger it is as if there is no change in the personality of the employer, there is in reality a change in the situation of the employee. Once an FEBTC employee is absorbed, there are presumably changes in his condition of employment even if his previous tenure and salary rate is recognized by BPI. It is reasonable to assume that BPI would have different rules and regulations and company practices than FEBTC and it is incumbent upon the former FEBTC employees to obey these new rules and adapt to their new environment. Not the least of the changes in employment condition that the absorbed FEBTC employees must face is the fact that prior to the merger they were employees of an unorganized establishment and after the merger they became employees of a unionized company that had an existing collective bargaining agreement with the certified union. This presupposes that the union who is party to the collective bargaining agreement is the certified union that has, in the appropriate certification election, been shown to represent a majority of the members of the bargaining unit. Likewise, with respect to FEBTC employees that BPI chose to employ and who also chose to be absorbed, then due to BPIs blanket assumption of liabilities and obligations under the articles of merger, BPI was bound to respect the years of service of these FEBTC employees and to pay the same, or commensurate salaries and other benefits that these employees previously enjoyed with FEBTC. As the Union likewise pointed out in its pleadings, there were benefits under the CBA that the former FEBTC employees did not enjoy with their previous employer. As BPI employees, they will enjoy all these CBA benefits upon their "absorption." Thus, although in a sense BPI is continuing FEBTCs employment of these absorbed employees, BPIs employment of these absorbed employees was not under exactly the same terms and conditions as stated in the latters employment contracts with FEBTC. This further strengthens the view that BPI and the former FEBTC employees voluntarily contracted with each other for their employment in the surviving corporation. Proper Appreciation of the Term "New Employees" Under the CBA In any event, it is of no moment that the former FEBTC employees retained the regular status that they possessed while working for their former employer upon their absorption by petitioner. This fact would not remove them from the scope of the phrase "new employees" as contemplated in the Union Shop Clause of the CBA, contrary to petitioners insistence that the term "new employees" only refers to those who are initially hired as non-regular employees for possible regular employment. The Union Shop Clause in the CBA simply states that "new employees" who during the effectivity of the CBA "may be regularly employed" by the Bank must join the union within thirty (30) days from their regularization. There is nothing in the said clause that limits its application to only new employees who possess non-regular status, meaning probationary status, at the start of their employment. Petitioner likewise failed to point to any provision in the CBA expressly excluding from the Union Shop Clause new employees who are "absorbed" as regular employees from the beginning of their employment. What is indubitable from the Union Shop Clause is that

upon the effectivity of the CBA, petitioners new regular employees (regardless of the manner by which they became employees of BPI) are required to join the Union as a condition of their continued employment. The dissenting opinion of Justice Brion dovetails with Justice Carpios view only in their restrictive interpretation of who are "new employees" under the CBA. To our dissenting colleagues, the phrase "new employees" (who are covered by the union shop clause) should only include new employees who were hired as probationary during the life of the CBA and were later granted regular status. They propose that the former FEBTC employees who were deemed regular employees from the beginning of their employment with BPI should be treated as a special class of employees and be excluded from the union shop clause. Justice Brion himself points out that there is no clear, categorical definition of "new employee" in the CBA. In other words, the term "new employee" as used in the union shop clause is used broadly without any qualification or distinction. However, the Court should not uphold an interpretation of the term "new employee" based on the general and extraneous provisions of the Corporation Code on merger that would defeat, rather than fulfill, the purpose of the union shop clause. To reiterate, the provision of the Article 248(e) of the Labor Code in point mandates that nothing in the said Code or any other law should stop the parties from requiring membership in a recognized collective bargaining agent as a condition of employment. Significantly, petitioner BPI never stretches its arguments so far as to state that the absorbed employees should be deemed "old employees" who are not covered by the Union Shop Clause. This is not surprising. By law and jurisprudence, a merger only becomes effective upon approval by the Securities and Exchange Commission (SEC) of the articles of merger. In Associated Bank v. Court of Appeals, 33 we held: The procedure to be followed is prescribed under the Corporation Code. Section 79 of said Code requires the approval by the Securities and Exchange Commission (SEC) of the articles of merger which, in turn, must have been duly approved by a majority of the respective stockholders of the constituent corporations. The same provision further states that the merger shall be effective only upon the issuance by the SEC of a certificate of merger. The effectivity date of the merger is crucial for determining when the merged or absorbed corporation ceases to exist; and when its rights, privileges, properties as well as liabilities pass on to the surviving corporation. (Emphasis ours.) In other words, even though BPI steps into the shoes of FEBTC as the surviving corporation, BPI does so at a particular point in time, i.e., the effectivity of the merger upon the SECs issuance of a certificate of merger. In fact, the articles of merger themselves provided that both BPI and FEBTC will continue their respective business operations until the SEC issues the certificate of merger and in the event SEC does not issue such a certificate, they agree to hold each other blameless for the non-consummation of the merger. Considering the foregoing principle, BPI could have only become the employer of the FEBTC employees it absorbed after the approval by the SEC of the merger. If the SEC did not approve the merger, BPI would not be in the position to absorb the employees of FEBTC at all. Indeed, there is evidence on record that BPI made the assignments of its absorbed employees in BPI effective April 10, 2000, or after the SECs approval of the merger.34 In other words, BPI became the employer of the absorbed employees only at some point after the effectivity of the merger, notwithstanding the fact that the absorbed employees years of service with FEBTC were voluntarily recognized by BPI. Even assuming for the sake of argument that we consider the absorbed FEBTC employees as "old employees" of BPI who are not members of any union (i.e., it is their date of hiring by FEBTC and not the date of their absorption that is considered), this does not necessarily exclude them from the union security clause in the CBA.

The CBA subject of this case was effective from April 1, 1996 until March 31, 2001. Based on the allegations of the former FEBTC employees themselves, there were former FEBTC employees who were hired by FEBTC after April 1, 1996 and if their date of hiring by FEBTC is considered as their date of hiring by BPI, they would undeniably be considered "new employees" of BPI within the contemplation of the Union Shop Clause of the said CBA. Otherwise, it would lead to the absurd situation that we would discriminate not only between new BPI employees (hired during the life of the CBA) and former FEBTC employees (absorbed during the life of the CBA) but also among the former FEBTC employees themselves. In other words, we would be treating employees who are exactly similarly situated (i.e., the group of absorbed FEBTC employees) differently. This hardly satisfies the demands of equality and justice. Petitioner limited itself to the argument that its absorbed employees do not fall within the term "new employees" contemplated under the Union Shop Clause with the apparent objective of excluding all, and not just some, of the former FEBTC employees from the application of the Union Shop Clause. However, in law or even under the express terms of the CBA, there is no special class of employees called "absorbed employees." In order for the Court to apply or not apply the Union Shop Clause, we can only classify the former FEBTC employees as either "old" or "new." If they are not "old" employees, they are necessarily "new" employees. If they are new employees, the Union Shop Clause did not distinguish between new employees who are non-regular at their hiring but who subsequently become regular and new employees who are "absorbed" as regular and permanent from the beginning of their employment. The Union Shop Clause did not so distinguish, and so neither must we. No Substantial Distinction Under the CBA Between Regular Employees Hired After Probationary Status and Regular Employees Hired After the Merger Verily, we agree with the Court of Appeals that there are no substantial differences between a newly hired non-regular employee who was regularized weeks or months after his hiring and a new employee who was absorbed from another bank as a regular employee pursuant to a merger, for purposes of applying the Union Shop Clause. Both employees were hired/employed only after the CBA was signed. At the time they are being required to join the Union, they are both already regular rank and file employees of BPI. They belong to the same bargaining unit being represented by the Union. They both enjoy benefits that the Union was able to secure for them under the CBA. When they both entered the employ of BPI, the CBA and the Union Shop Clause therein were already in effect and neither of them had the opportunity to express their preference for unionism or not. We see no cogent reason why the Union Shop Clause should not be applied equally to these two types of new employees, for they are undeniably similarly situated. The effect or consequence of BPIs so-called "absorption" of former FEBTC employees should be limited to what they actually agreed to, i.e. recognition of the FEBTC employees years of service, salary rate and other benefits with their previous employer. The effect should not be stretched so far as to exempt former FEBTC employees from the existing CBA terms, company policies and rules which apply to employees similarly situated. If the Union Shop Clause is valid as to other new regular BPI employees, there is no reason why the same clause would be a violation of the "absorbed" employees freedom of association. Non-Application of Union Shop Clause Contrary to the Policy of the Labor Code and Inimical to Industrial Peace It is but fair that similarly situated employees who enjoy the same privileges of a CBA should be likewise subject to the same obligations the CBA imposes upon them. A contrary interpretation of the Union Shop Clause will be inimical to industrial peace and workers solidarity. This unfavorable situation will not be sufficiently addressed by asking the former FEBTC employees to simply pay agency fees to the Union in lieu of union membership, as the dissent of Justice Carpio suggests. The fact remains that other new regular

employees, to whom the "absorbed employees" should be compared, do not have the option to simply pay the agency fees and they must join the Union or face termination. Petitioners restrictive reading of the Union Shop Clause could also inadvertently open an avenue, which an employer could readily use, in order to dilute the membership base of the certified union in the collective bargaining unit (CBU). By entering into a voluntary merger with a non-unionized company that employs more workers, an employer could get rid of its existing union by the simple expedient of arguing that the "absorbed employees" are not new employees, as are commonly understood to be covered by a CBAs union security clause. This could then lead to a new majority within the CBU that could potentially threaten the majority status of the existing union and, ultimately, spell its demise as the CBUs bargaining representative. Such a dreaded but not entirely far-fetched scenario is no different from the ingenious and creative "unionbusting" schemes that corporations have fomented throughout the years, which this Court has foiled time and again in order to preserve and protect the valued place of labor in this jurisdiction consistent with the Constitutions mandate of insuring social justice. There is nothing in the Labor Code and other applicable laws or the CBA provision at issue that requires that a new employee has to be of probationary or non-regular status at the beginning of the employment relationship. An employer may confer upon a new employee the status of regular employment even at the onset of his engagement. Moreover, no law prohibits an employer from voluntarily recognizing the length of service of a new employee with a previous employer in relation to computation of benefits or seniority but it should not unduly be interpreted to exclude them from the coverage of the CBA which is a binding contractual obligation of the employer and employees. Indeed, a union security clause in a CBA should be interpreted to give meaning and effect to its purpose, which is to afford protection to the certified bargaining agent and ensure that the employer is dealing with a union that represents the interests of the legally mandated percentage of the members of the bargaining unit. The union shop clause offers protection to the certified bargaining agent by ensuring that future regular employees who (a) enter the employ of the company during the life of the CBA; (b) are deemed part of the collective bargaining unit; and (c) whose number will affect the number of members of the collective bargaining unit will be compelled to join the union. Such compulsion has legal effect, precisely because the employer by voluntarily entering in to a union shop clause in a CBA with the certified bargaining agent takes on the responsibility of dismissing the new regular employee who does not join the union. Without the union shop clause or with the restrictive interpretation thereof as proposed in the dissenting opinions, the company can jeopardize the majority status of the certified union by excluding from union membership all new regular employees whom the Company will "absorb" in future mergers and all new regular employees whom the Company hires as regular from the beginning of their employment without undergoing a probationary period. In this manner, the Company can increase the number of members of the collective bargaining unit and if this increase is not accompanied by a corresponding increase in union membership, the certified union may lose its majority status and render it vulnerable to attack by another union who wishes to represent the same bargaining unit.35 Or worse, a certified union whose membership falls below twenty percent (20%) of the total members of the collective bargaining unit may lose its status as a legitimate labor organization altogether, even in a situation where there is no competing union. 36 In such a case, an interested party may file for the cancellation of the unions certificate of registration with the Bureau of Labor Relations. 37 Plainly, the restrictive interpretation of the union shop clause would place the certified unions very existence at the mercy and control of the employer. Relevantly, only BPI, the employer appears to be interested in pursuing this case. The former FEBTC employees have not joined BPI in this appeal.

For the foregoing reasons, Justice Carpios proposal to simply require the former FEBTC to pay agency fees is wholly inadequate to compensate the certified union for the loss of additional membership supposedly guaranteed by compliance with the union shop clause. This is apart from the fact that treating these "absorbed employees" as a special class of new employees does not encourage worker solidarity in the company since another class of new employees (i.e. those whose were hired as probationary and later regularized during the life of the CBA) would not have the option of substituting union membership with payment of agency fees. Justice Brion, on the other hand, appears to recognize the inherent unfairness of perpetually excluding the "absorbed" employees from the ambit of the union shop clause. He proposes that this matter be left to negotiation by the parties in the next CBA. To our mind, however, this proposal does not sufficiently address the issue. With BPI already taking the position that employees "absorbed" pursuant to its voluntary mergers with other banks are exempt from the union shop clause, the chances of the said bank ever agreeing to the inclusion of such employees in a future CBA is next to nil more so, if BPIs narrow interpretation of the union shop clause is sustained by this Court. Right of an Employee not to Join a Union is not Absolute and Must Give Way to the Collective Good of All Members of the Bargaining Unit The dissenting opinions place a premium on the fact that even if the former FEBTC employees are not old employees, they nonetheless were employed as regular and permanent employees without a gap in their service. However, an employees permanent and regular employment status in itself does not necessarily exempt him from the coverage of a union shop clause. In the past this Court has upheld even the more stringent type of union security clause, i.e., the closed shop provision, and held that it can be made applicable to old employees who are already regular and permanent but have chosen not to join a union. In the early case of Juat v. Court of Industrial Relations,38 the Court held that an old employee who had no union may be compelled to join the union even if the collective bargaining agreement (CBA) imposing the closed shop provision was only entered into seven years after of the hiring of the said employee. To quote from that decision: A closed-shop agreement has been considered as one form of union security whereby only union members can be hired and workers must remain union members as a condition of continued employment. The requirement for employees or workers to become members of a union as a condition for employment redounds to the benefit and advantage of said employees because by holding out to loyal members a promise of employment in the closed-shop the union wields group solidarity. In fact, it is said that "the closed-shop contract is the most prized achievement of unionism." xxxx This Court had categorically held in the case of Freeman Shirt Manufacturing Co., Inc., et al. vs. Court of Industrial Relations, et al., G.R. No. L-16561, Jan. 28, 1961, that the closed-shop proviso of a collective bargaining agreement entered into between an employer and a duly authorized labor union is applicable not only to the employees or laborers that are employed after the collective bargaining agreement had been entered into but also to old employees who are not members of any labor union at the time the said collective bargaining agreement was entered into. In other words, if an employee or laborer is already a member of a labor union different from the union that entered into a collective bargaining agreement with the employer providing for a closed-shop, said employee or worker cannot be obliged to become a member of that union which had entered into a collective bargaining agreement with the employer as a condition for his continued employment. (Emphasis and underscoring supplied.) Although the present case does not involve a closed shop provision that included even old employees, the Juat example is but one of the cases that laid down the doctrine that the right not to join a union is

not absolute. Theoretically, there is nothing in law or jurisprudence to prevent an employer and a union from stipulating that existing employees (who already attained regular and permanent status but who are not members of any union) are to be included in the coverage of a union security clause. Even Article 248(e) of the Labor Code only expressly exempts old employees who already have a union from inclusion in a union security clause.39 Contrary to the assertion in the dissent of Justice Carpio, Juat has not been overturned by Victoriano v. Elizalde Rope Workers Union40 nor by Reyes v. Trajano.41 The factual milieus of these three cases are vastly different. In Victoriano, the issue that confronted the Court was whether or not employees who were members of the Iglesia ni Kristo (INK) sect could be compelled to join the union under a closed shop provision, despite the fact that their religious beliefs prohibited them from joining a union. In that case, the Court was asked to balance the constitutional right to religious freedom against a host of other constitutional provisions including the freedom of association, the non-establishment clause, the non-impairment of contracts clause, the equal protection clause, and the social justice provision. In the end, the Court held that "religious freedom, although not unlimited, is a fundamental personal right and liberty, and has a preferred position in the hierarchy of values."42 However, Victoriano is consistent with Juat since they both affirm that the right to refrain from joining a union is not absolute. The relevant portion of Victoriano is quoted below: The right to refrain from joining labor organizations recognized by Section 3 of the Industrial Peace Act is, however, limited. The legal protection granted to such right to refrain from joining is withdrawn by operation of law, where a labor union and an employer have agreed on a closed shop, by virtue of which the employer may employ only member of the collective bargaining union, and the employees must continue to be members of the union for the duration of the contract in order to keep their jobs. Thus Section 4 (a) (4) of the Industrial Peace Act, before its amendment by Republic Act No. 3350, provides that although it would be an unfair labor practice for an employer "to discriminate in regard to hire or tenure of employment or any term or condition of employment to encourage or discourage membership in any labor organization" the employer is, however, not precluded "from making an agreement with a labor organization to require as a condition of employment membership therein, if such labor organization is the representative of the employees." By virtue, therefore, of a closed shop agreement, before the enactment of Republic Act No. 3350, if any person, regardless of his religious beliefs, wishes to be employed or to keep his employment, he must become a member of the collective bargaining union. Hence, the right of said employee not to join the labor union is curtailed and withdrawn.43 (Emphases supplied.) If Juat exemplified an exception to the rule that a person has the right not to join a union, Victoriano merely created an exception to the exception on the ground of religious freedom. Reyes, on the other hand, did not involve the interpretation of any union security clause. In that case, there was no certified bargaining agent yet since the controversy arose during a certification election. In Reyes, the Court highlighted the idea that the freedom of association included the right not to associate or join a union in resolving the issue whether or not the votes of members of the INK sect who were part of the bargaining unit could be excluded in the results of a certification election, simply because they were not members of the two contesting unions and were expected to have voted for "NO UNION" in view of their religious affiliation. The Court upheld the inclusion of the votes of the INK members since in the previous case of Victoriano we held that INK members may not be compelled to join a union on the ground of religious freedom and even without Victoriano every employee has the right to vote "no union" in a certification election as part of his freedom of association. However, Reyes is not authority for Justice Carpios proposition that an employee who is not a member of any union may claim an exemption from an existing union security clause because he already

has regular and permanent status but simply prefers not to join a union. The other cases cited in Justice Carpios dissent on this point are likewise inapplicable. Basa v. Federacion Obrera de la Industria Tabaquera y Otros Trabajadores de Filipinas,44 Anucension v. National Labor Union,45 and Gonzales v. Central Azucarera de Tarlac Labor Union46 all involved members of the INK. In line with Victoriano, these cases upheld the INK members claimed exemption from the union security clause on religious grounds. In the present case, the former FEBTC employees never claimed any religious grounds for their exemption from the Union Shop Clause. As for Philips Industrial Development, Inc. v. National Labor Relations Corporation47 and Knitjoy Manufacturing, Inc. v. Ferrer-Calleja,48 the employees who were exempted from joining the respondent union or who were excluded from participating in the certification election were found to be not members of the bargaining unit represented by respondent union and were free to form/join their own union. In the case at bar, it is undisputed that the former FEBTC employees were part of the bargaining unit that the Union represented. Thus, the rulings in Philips and Knitjoy have no relevance to the issues at hand. Time and again, this Court has ruled that the individual employees right not to join a union may be validly restricted by a union security clause in a CBA49 and such union security clause is not a violation of the employees constitutional right to freedom of association. 50 It is unsurprising that significant provisions on labor protection of the 1987 Constitution are found in Article XIII on Social Justice. The constitutional guarantee given the right to form unions51 and the State policy to promote unionism52 have social justice considerations. In Peoples Industrial and Commercial Employees and Workers Organization v. Peoples Industrial and Commercial Corporation, 53 we recognized that "[l]abor, being the weaker in economic power and resources than capital, deserve protection that is actually substantial and material." The rationale for upholding the validity of union shop clauses in a CBA, even if they impinge upon the individual employees right or freedom of association, is not to protect the union for the unions sake. Laws and jurisprudence promote unionism and afford certain protections to the certified bargaining agent in a unionized company because a strong and effective union presumably benefits all employees in the bargaining unit since such a union would be in a better position to demand improved benefits and conditions of work from the employer. This is the rationale behind the State policy to promote unionism declared in the Constitution, which was elucidated in the above-cited case of Liberty Flour Mills Employees v. Liberty Flour Mills, Inc.54 In the case at bar, since the former FEBTC employees are deemed covered by the Union Shop Clause, they are required to join the certified bargaining agent, which supposedly has gathered the support of the majority of workers within the bargaining unit in the appropriate certification proceeding. Their joining the certified union would, in fact, be in the best interests of the former FEBTC employees for it unites their interests with the majority of employees in the bargaining unit. It encourages employee solidarity and affords sufficient protection to the majority status of the union during the life of the CBA which are the precisely the objectives of union security clauses, such as the Union Shop Clause involved herein. We are indeed not being called to balance the interests of individual employees as against the State policy of promoting unionism, since the employees, who were parties in the court below, no longer contested the adverse Court of Appeals decision. Nonetheless, settled jurisprudence has already swung the balance in favor of unionism, in recognition that ultimately the individual employee will be benefited by that policy. In the hierarchy of constitutional values, this Court has repeatedly held that the right to abstain from joining a labor organization is subordinate to the policy of encouraging unionism as an instrument of social justice. Also in the dissenting opinion of Justice Carpio, he maintains that one of the dire consequences to the former FEBTC employees who refuse to join the union is the forfeiture of their retirement benefits. This is clearly not the case precisely because BPI expressly

recognized under the merger the length of service of the absorbed employees with FEBTC. Should some refuse to become members of the union, they may still opt to retire if they are qualified under the law, the applicable retirement plan, or the CBA, based on their combined length of service with FEBTC and BPI. Certainly, there is nothing in the union shop clause that should be read as to curtail an employees eligibility to apply for retirement if qualified under the law, the existing retirement plan, or the CBA as the case may be. In sum, this Court finds it reasonable and just to conclude that the Union Shop Clause of the CBA covers the former FEBTC employees who were hired/employed by BPI during the effectivity of the CBA in a manner which petitioner describes as "absorption." A contrary appreciation of the facts of this case would, undoubtedly, lead to an inequitable and very volatile labor situation which this Court has consistently ruled against.1avvphi1 In the case of former FEBTC employees who initially joined the union but later withdrew their membership, there is even greater reason for the union to request their dismissal from the employer since the CBA also contained a Maintenance of Membership Clause. A final point in relation to procedural due process, the Court is not unmindful that the former FEBTC employees refusal to join the union and BPIs refusal to enforce the Union Shop Clause in this instance may have been based on the honest belief that the former FEBTC employees were not covered by said clause. In the interest of fairness, we believe the former FEBTC employees should be given a fresh thirty (30) days from notice of finality of this decision to join the union before the union demands BPI to terminate their employment under the Union Shop Clause, assuming said clause has been carried over in the present CBA and there has been no material change in the situation of the parties. WHEREFORE, the petition is hereby DENIED, and the Decision dated September 30, 2003 of the Court of Appeals is AFFIRMED, subject to the thirty (30) day notice requirement imposed herein. Former FEBTC employees who opt not to become union members but who qualify for retirement shall receive their retirement benefits in accordance with law, the applicable retirement plan, or the CBA, as the case may be. SO ORDERED. 12. G.R. No. 169606 BERNARDO Petitioner, B. JOSE, JR.,

Present: CARPIO, J., Chairperson, LEONARDO-DE CASTRO,* - versus - BRION, DEL CASTILLO, and ABAD, JJ. MICHAELMAR SHIPPING Respondents. DECISION CARPIO, J.: The Case This is a petition for review on certiorari under Rule 45 of the Rules of Court. The petition challenges the 11 May 2005 Decision and 5 August 2005 Resolution of the Court of Appeals in CA-G.R. SP No. 83272. The Court of Appeals set aside the 19 January and 22 March 2004 Resolutions of the National Labor Relations Commission (NLRC) in NLRC NCR CA No. 036666-03 PHILS., INC. and MICHAELMAR Promulgated: SERVICES, INC., November 27, 2009

and reinstated the 18 June 2003 Decision of the Labor Arbiter in NLRC NCR OFW Case No. (M)02-12-3137-00. The Facts Michaelmar Philippines, Inc. (MPI) is the Philippine agent of Michaelmar Shipping Services, Inc. (MSSI). In an undertaking dated 2 July 2002 and an employment contract dated 4 July 2002, MSSI through MPI engaged the services of Bernardo B. Jose, Jr. (Jose, Jr.) as oiler of M/T Limar. The employment contract stated: That the employee shall be employed on board under the following terms and conditions:

Jose, Jr. began performing his duties on board the M/T Limar on 21 August 2002. On 8 October 2002, a random drug test was conducted on all officers and crew members of M/T Limar at the port of Curacao. Jose, Jr. was found positive for marijuana. Jose, Jr. was informed about the result of his drug test and was asked if he was taking any medication. Jose, Jr. said that he was taking Centrum vitamins. Jose, Jr. was allowed to continue performing his duties on board the M/T Limar from 8 October to 29 November 2002. In the Sea Going Staff Appraisal Report on Jose Jr.s work performance for the period of 1 August to 28 November 2002, Jose, Jr. received a 96% total rating and was described as very hardworking, trustworthy, and reliable. On 29 December 2002, M/T Limar reached the next port after the random drug test and Jose, Jr. was repatriated to the Philippines. When Jose, Jr. arrived in the Philippines, he asked MPI that a drug test be conducted on him. MPI ignored his request. On his own, Jose, Jr. procured drug tests from Manila Doctors Hospital, S.M. Lazo Medical Clinic, Inc., and Maritime Clinic for International Services, Inc. He was found negative for marijuana.

1.1

Duration

of Contract MONTHS OILER

EIGHT

(8)

Position Basic Monthly Salary TANKER Hours of Work Overtime HRS/ Vacation Leave with Pay OWNERS Point of Hire

US$ 450.00 & US$ 39.00 ALLOWANCE 48 HOURS/WEEK US$ 386.00 FIXED OT. 105 MOS. US$ 190.00 & US$ 150 BONUS Jose, Jr. filed with the NLRC a complaint against MPI and MSSI for illegal dismissal with claim for his salaries for the unexpired portion of the employment contract. The Labor Arbiters Ruling In her 18 June 2003 Decision, the Labor Arbiter dismissed the complaint for lack of merit. The Labor Arbiter held that: Based from the facts and evidence, this office inclined [sic] to rule in favor of the respondents: we find that complainants termination from employment was valid and lawful. It is established that complainant, after an unannounced drug test conducted by the respondent principal on the officers and crew on board the vessel, was found positive of marijuana, a prohibited drug. It is a universally known fact the menace that drugs bring on the user as well as to others who may have got on his way. It is noted too that complainant worked on board a tanker vessel which carries toxic materials such as fuels, gasoline and other combustible materials which require delicate and careful handling and being an oiler, complainant is expected to be in a proper disposition. Thus, we agree with respondents that immediate repatriation of complainant is warranted for the safety of the vessel as well as to complainants co-workers on board. It is therefore a risk that should be avoided at all cost. Moreover, under the POEA Standard Employment Contract as cited by the respondents (supra), violation of the drug and alcohol policy of the company carries with it the penalty of dismissal to be effected by the master of the vessel. It is also noted that complainant was made aware of the results of the drug test as per Drug Test Certificate dated October 29, 2002. He was not dismissed right there and then but it was only on December 29, 2002 that he was repatriated for cause.

MANILA, PHILIPPINES

In connection with the employment contract, Jose, Jr. signed a declaration dated 10 June 2002 stating that: In order to implement the Drug and Alcohol Policy on board the managed vessels the following with [sic] apply:

All alcoholic beverages, banned substances and unprescribed drugs including but not limited to the following: Marijuana Cocaine Phencyclidine Amphetamines Heroin Opiates are banned from Stelmar Tankers (Management) Ltd. managed vessels. Disciplinary action up to and including dismissal will be taken against any employee found to be in possession of or impaired by the use of any of the above mentioned substances. A system of random testing for any of the above banned substances will be used to enforce this policy. Any refusal to submit to such tests shall be deemed as a serious breach of the employment contract and shall result to the seamans dismissal due to his own offense. Therefore any seaman will be instantly dismissed if: xxx They are found to have positive trace of alcohol or any of the banned substances in any random testing sample.

As to the complainants contention that the ship doctors report can not be relied upon in the absence of other evidence supporting the doctors findings for the simple reason that the ship doctor is under the control of the principal employer, the same is untenable. On the contrary, the findings of the doctor on board should be given credence as he would not make a false clarification.

Dr. A.R.A Heath could not be said to have outrageously contrived the results of the complainants drug test. We are therefore more inclined to believe the original results of the unannounced drug test as it was officially conducted on board the vessel rather than the subsequent testing procured by complainant on his own initiative. The result of the original drug test is evidence in itself and does not require additional supporting evidence except if it was shown that the drug test was conducted not in accordance with the drug testing procedure which is not obtaining in this particular case. [H]ence, the first test prevails. We can not also say that respondents were motivated by ill will against the complainant considering that he was appraised to be a good worker. For this reason that respondents would not terminate [sic] the services of complainant were it not for the fact that he violated the drug and alcohol policy of the company. [T]hus, we find that just cause exist [sic] to justify the termination of complainant. Jose, Jr. appealed the Labor Arbiters 18 June 2003 Decision to the NLRC. Jose, Jr. claimed that the Labor Arbiter committed grave abuse of discretion in ruling that he was dismissed for just cause. The NLRCs Ruling In its 19 January 2004 Resolution, the NLRC set aside the Labor Arbiters 18 June 2003 Decision. The NLRC held that Jose, Jr.s dismissal was illegal and ordered MPI and MSSI to pay Jose, Jr. his salaries for the unexpired portion of the employment contract. The NLRC held that: Here, a copy of the purported drug test result for Complainant indicates, among others, the following typewritten words Hoofd: Drs. R.R.L. Petronia Apotheker and THC-COOH POS.; the handwritten word Marihuana; and the stamped words Dr. A.R.A. Heath, MD, SHIPS DOCTOR and 29 OKT. 2002. However, said test result does not contain any signature, much less the signature of any of the doctors whose names were printed therein (Page 45, Records). Verily, the veracity of this purported drug test result is questionable, hence, it cannot be deemed as substantial proof that Complainant violated his employers no alcohol, no drug policy. In fact, in his November 14, 2002 message to Stelmar Tanker Group, the Master of the vessel where Complainant worked, suggested that another drug test for complainant should be taken when the vessel arrived [sic] in Curacao next call for final findings (Page 33, Records), which is an indication that the Master, himself, was in doubt with the purported drug test result. Indeed there is reason for the Master of the vessel to doubt that Complainant was taking in the prohibited drug marihuana. The Sea Going Staff Appraisal Report signed by Appraiser David A. Amaro, Jr. and reviewed by the Master of the vessel himself on complainants work performance as Wiper from August 1, 2002 to November 28, 2002 which included a two-month period after the purported drug test, indicates that out of a total score of 100% on Safety Consciousness (30%), Ability (30%), Reliability (20%) and Behavior & Attitude (20%), Complainant was assessed a score of 96% (Pages 30-31, Records). Truly, a worker who had been taking in prohibited drug could not have given such an excellent job performance. Significantly, under the category Behavior & Attitude (20%), referring to his personal relationship and his interactions with the rest of the ships staff and his attitude towards his job and how the rest of the crew regard him, Complainant was assessed the full score of 20% (Page 31, Records), which belies Respondents insinuation that his alleged offense directly affected the safety of the vessel, its

officers and crew members. Indeed, if Complainant had been a threat to the safety of the vessel, officers and crew members, he would not be been [sic] allowed to continue working almost three (3) months after his alleged offense until his repatriation on December 29, 2002. Clearly, Respondents failed to present substantial proof that Complainants dismissal was with just or authorized cause.

Moreover, Respondents failed to accord Complainant due process prior to his dismissal. There is no showing that Complainants employer furnished him with a written notice apprising him of the particular act or omission for which his dismissal was sought and a subsequent written notice informing him of the decision to dismiss him, much less any proof that Complainant was given an opportunity to answer and rebut the charges against him prior to his dismissal. Worse, Respondents invoke the provision in the employment contract which allows summary dismissal for cases provided therein. Consequently, Respondents argue that there was no need for him to be notified of his dismissal. Such blatant violation of basic labor law principles cannot be permitted by this Office. Although a contract is law between the parties, the provisions of positive law which regulate such contracts are deemed included and shall limit and govern the relations between the parties (Asia World Recruitment, Inc. vs. NLRC, G.R. No. 113363, August 24, 1999). Relative thereto, it is worth noting Section 10 of Republic Act No. 8042, which provides that In cases of termination of overseas employment without just, valid or authorized cause as defined by law or contract, the worker shall be entitled to the full reimbursement of his placement fee with interest of twelve percent (12%) per annum, plus his salaries for the unexpired portion of his employment contract or for three (3) months for every year of the unexpired term, whichever is less. MPI and MSSI filed a motion for reconsideration. In its 22 March 2004 Resolution, the NLRC denied the motion for lack of merit. MPI and MSSI filed with the Court of Appeals a petition for certiorari under Rule 65 of the Rules of Court. MPI and MSSI claimed that the NLRC gravely abused its discretion when it (1) reversed the Labor Arbiters factual finding that Jose, Jr. was legally dismissed; (2) awarded Jose, Jr. his salaries for the unexpired portion of the employment contract; (3) awarded Jose, Jr. $386 overtime pay; and (4) ruled that Jose, Jr. perfected his appeal within the reglementary period. The Court of Appeals Ruling In its 11 May 2005 Decision, the Court of Appeals set aside the 19 January and 22 March 2004 Resolutions of the NLRC and reinstated the 18 June 2003 Decision of the Labor Arbiter. The Court of Appeals held that: The POEA standard employment contract adverted to in the labor arbiters decision to which all seamens contracts must adhere explicitly provides that the failure of a seaman to obey the policy warrants a penalty of dismissal which may be carried out by the master even without a notice of dismissal if there is a clear and existing danger to the safety of the vessel or the crew. That the petitioners were implementing a no-alcohol, no drug policy that was communicated to the respondent when he embarked is not in question. He had signed a document entitled Drug and Alcohol Declaration in which he acknowledged that alcohol beverages and unprescribed drugs such as marijuana were banned on the vessel and that any employee found possessing or using these

substances would be subject to instant dismissal. He undertook to comply with the policy and abide by all the relevant rules and guidelines, including the system of random testing that would be employed to enforce it. We can hardly belabor the reasons and justification for this policy. The safety of the vessel on the high seas is a matter of supreme and unavoidable concern to all the owners, the crew and the riding public. In the ultimate analysis, a vessel is only as seaworthy as the men who sail it, so that it is necessary to maintain at every moment the efficiency and competence of the crew. Without an effective no alcohol, no drug policy on board the ship, the vessels safety will be seriously compromised. The policy is, therefore, a reasonable and lawful order or regulation that, once made known to the employee, must be observed by him, and the failure or refusal of a seaman to comply with it should constitute serious misconduct or willful disobedience that is a just cause for the termination of employment under the Labor Code (Aparente vs. National Labor Relations Commission, 331 SCRA 82). As the labor arbiter has discerned, the seriousness and earnestness in the enforcement of the ban is highlighted by the provision of the POEA Standard Employment Contract allowing the ship master to forego the notice of dismissal requirement in effecting the repatriation of the seaman violating it. xxxx Under legal rules of evidence, not all unsigned documents or papers fail the test of admissibility. There are kinds of evidence known as exceptions to the hearsay rule which need not be invariably signed by the author if it is clear that it issues from him because of necessity and under circumstances that safeguard the trustworthiness of the paper. A number of evidence of this sort are called entries in the course of business, which are transactions made by persons in the regular course of their duty or business. We agree with the labor arbiter that the drug test result constitutes entries made in the ordinary or regular course of duty of a responsible officer of the vessel. The tests administered to the crew were routine measures of the vessel conducted to enforce its stated policy, and it was a matter of course for medical reports to be issued and released by the medical officer. The ships physician at Curacao under whom the tests were conducted was admittedly Dr. Heath. It was under his name and with his handwritten comments that the report on the respondent came out, and there is no basis to suspect that these results were issued other than in the ordinary course of his duty. As the labor arbiter points out, the drug test report is evidence in itself and does not require additional supporting evidence except if it appears that the drug test was conducted not in accordance with drug testing procedures. Nothing of the sort, he says, has even been suggested in this particular case.

The working environment in a seagoing vessel is sui generis which amply justifies the difference in treatment of seamen found guilty of serious infractions at sea. The POEA Standard Employment Contract allows the ship master to implement a repatriation for just cause without a notice of dismissal if this is necessary to avoid a clear and existing danger to the vessel. The petitioners have explained that that [sic] it is usually at the next port of call where the offending crewman is made to disembark. In this case, a month had passed by after the date of the medical report before they reached the next port. We may not second-guess the judgment of the master in allowing him to remain at his post in the meantime. It is still reasonable to believe that the proper safeguards were taken and proper limitations observed during the period when the respondent remained on board. Finally, the fact that the respondent obtained negative results in subsequent drug tests in the Philippines does not negate the findings made of his condition on board the vessel. A drug test can be negative if the user undergoes a sufficient period of abstinence before taking the test. Unlike the tests made at his instance, the drug test on the vessel was unannounced. The credibility of the first test is, therefore, greater than the subsequent ones. Jose, Jr. filed a motion for reconsideration. In its 5 August 2005 Resolution, the Court of Appeals denied the motion for lack of merit. Hence, the present petition. In a motion dated 1 August 2007, MPI and MSSI prayed that they be substituted by OSG Ship Management Manila, Inc. as respondent in the present case. In a Resolution dated 14 November 2007, the Court noted the motion. The Issues In his petition dated 13 September 2005, Jose, Jr. claims that he was illegally dismissed from employment for two reasons: (1) there is no just cause for his dismissal because the drug test result is unsigned by the doctor, and (2) he was not afforded due process. He stated that: 2. The purported drug test result conducted to petitioner indicates, among others, the following: [sic] typwritten words Hool: Drs. R.R.L.. [sic] Petronia Apotheker [sic] and :THC-COOH POS. [sic]; the handwritten word Marihuana; and the stamped words Dr. A.R.A Heath, MD, SHIPS DOCTOR and 29 OKT. 2002. However, said test result does not contain any signature, much less the signature of any of the doctors whose name [sic] were printed therein. This omission is fatal as it goes to the veracity of the said purported drug test result. Consequently, the purported drug test result cannot be deemed as substantial proof that petitioner violated his employers no alcohol, no drug policy [sic]. xxxx Even assuming arguendo that there was just cause, respondents miserably failed to show that the presence of the petitioner in the vessel constitutes a clear and existing danger to the safety of the crew or the vessel. x x x

The regularity of the procedure observed in the administration and reporting of the tests is the very assurance of the reports admissibility and credibility under the laws of the evidence. We see no reason why it cannot be considered substantial evidence, which, parenthetically, is the lowest rung in the ladder of evidence. It is from the fact that a report or entry is a part of the regular routine work of a business or profession that it derives its value as legal evidence. Then the respondent was notified of the results and allowed to explain himself. He could not show any history of medication that could account for the traces of drugs in his system. Despite his lack of plausible excuses, the ship captain came out in support of him and asked his superiors to give him another chance. These developments prove that the respondent was afforded due process consistent with the exigencies of his service at sea. For the NLRC to annul the process because he was somehow not furnished with written notice is already being pedantic. What is the importance to the respondent of the difference between a written and verbal notice when he was actually given the opportunity to be heard? x x x

It is a basic principle in Labor Law that in termination disputes, the burden is on the employer to show that the dismissal was for a just and valid cause. x x x x x x [T]he Honorable Labor Arbiter as well as the Honorable Court of Appeals clearly erred in ruling that there was just cause for the termination of petitioners employment. Petitioners employment was terminated on the basis only of a mere allegation that is unsubstantiated, unfounded and on the basis of the drug test report

that was not even signed by the doctor who purportedly conducted such test. 5. Moreover, respondents failed to observe due process in terminating petitioners employment. There is no evidence on record that petitioner was furnished by his employer with a written notice apprising him of the particular act or omission which is the basis for his dismissal. Furthermore, there is also no evidence on record that the second notice, informing petitioner of the decision to dismiss, was served to the petitioner. There is also no proof on record that petitioner was given an opportunity to answer and rebut the charges against him prior to the dismissal. The Courts Ruling In its 11 May 2005 Decision, the Court of Appeals held that there was just cause for Jose, Jr.s dismissal. The Court of Appeals gave credence to the drug test result showing that Jose, Jr. was positive for marijuana. The Court of Appeals considered the drug test result as part of entries in the course of business. The Court of Appeals held that: Under legal rules of evidence, not all unsigned documents or papers fail the test of admissibility. There are kinds of evidence known as exceptions to the hearsay rule which need not be invariably signed by the author if it is clear that it issues from him because of necessity and under circumstances that safeguard the trustworthiness of the paper. A number of evidence of this sort are called entries in the course of business, which are transactions made by persons in the regular course of their duty or business. We agree with the labor arbiter that the drug test result constitutes entries made in the ordinary or regular course of duty of a responsible officer of the vessel. The tests administered to the crew were routine measures of the vessel conducted to enforce its stated policy, and it was a matter of course for medical reports to be issued and released by the medical officer. The ships physician at Curacao under whom the tests were conducted was admittedly Dr. Heath. It was under his name and with his handwritten comments that the report on the respondent came out, and there is no basis to suspect that these results were issued other than in the ordinary course of his duty. As the labor arbiter points out, the drug test report is evidence in itself and does not require additional supporting evidence except if it appears that the drug test was conducted not in accordance with drug testing procedures. Nothing of the sort, he says, has even been suggested in this particular case. (Emphasis supplied) Jose, Jr. claims that the Court of Appeals erred when it ruled that there was just cause for his dismissal. The Court is not impressed. In a petition for review on certiorari under Rule 45 of the Rules of Court, a mere statement that the Court of Appeals erred is insufficient. The petition must state the law or jurisprudence and the particular ruling of the appellate court violative of such law or jurisprudence. In Encarnacion v. Court of Appeals, the Court held that: Petitioner asserts that there is a question of law involved in this appeal. We do not think so. The appeal involves an appreciation of facts, i.e., whether the questioned decision is supported by the evidence and the records of the case. In other words, did the Court of Appeals commit a reversible error in considering the trouble record of the subject telephone? Or is this within

the province of the appellate court to consider? Absent grave abuse of discretion, this Court will not reverse the appellate courts findings of fact. In a petition for review under Rule 45, Rules of Court, invoking the usual reason, i.e., that the Court of Appeals has decided a question of substance not in accord with law or with applicable decisions of the Supreme Court, a mere statement of the ceremonial phrase is not sufficient to confer merit on the petition. The petition must specify the law or prevailing jurisprudence on the matter and the particular ruling of the appellate court violative of such law or previous doctrine laid down by the Supreme Court. (Emphasis supplied) In the present case, Jose, Jr. did not show that the Court of Appeals ruling is violative of any law or jurisprudence. Section 43, Rule 130, of the Rules of Court states: SEC. 43. Entries in the course of business. Entries made at, or near the time of the transactions to which they refer, by a person deceased, or unable to testify, who was in a position to know the facts therein stated, may be received as prima facie evidence, if such person made the entries in his professional capacity or in the performance of duty and in the ordinary or regular course of business or duty. In Canque v. Court of Appeals, the Court laid down the requisites for admission in evidence of entries in the course of business: (1) the person who made the entry is dead, outside the country, or unable to testify; (2) the entries were made at or near the time of the transactions to which they refer; (3) the person who made the entry was in a position to know the facts stated in the entries; (4) the entries were made in a professional capacity or in the performance of a duty; and (5) the entries were made in the ordinary or regular course of business or duty. Here, all the requisites are present: (1) Dr. Heath is outside the country; (2) the entries were made near the time the random drug test was conducted; (3) Dr. Heath was in a position to know the facts made in the entries; (4) Dr. Heath made the entries in his professional capacity and in the performance of his duty; and (5) the entries were made in the ordinary or regular course of business or duty. The fact that the drug test result is unsigned does not necessarily lead to the conclusion that Jose, Jr. was not found positive for marijuana. In KAR ASIA, Inc. v. Corona, the Court admitted in evidence unsigned payrolls. In that case, the Court held that: Entries in the payroll, being entries in the course of business, enjoy the presumption of regularity under Rule 130, Section 43 of the Rules of Court. It is therefore incumbent upon the respondents to adduce clear and convincing evidence in support of their claim. Unfortunately, respondents naked assertions without proof in corroboration will not suffice to overcome the disputable presumption. In disputing the probative value of the payrolls for December 1994, the appellate court observed that the same contain only the signatures of Ermina Daray and Celestino Barreto, the paymaster and the president, respectively. It further opined that the payrolls presented were only copies of the approved payment, and not copies disclosing actual payment. The December 1994 payrolls contain a computation of the amounts payable to the employees for the given period, including a breakdown of the allowances and deductions on the amount due, but

the signatures of the respondents are conspicuously missing. Ideally, the signatures of the respondents should appear in the payroll as evidence of actual payment. However, the absence of such signatures does not necessarily lead to the conclusion that the December 1994 COLA was not received. (Emphasis supplied) In the present case, the following facts are established (1) random drug tests are regularly conducted on all officers and crew members of M/T Limar; (2) a random drug test was conducted at the port of Curacao on 8 October 2002; (3) Dr. Heath was the

Jose, Jr. claims that he was not afforded due process. The Court agrees. There are two requisites for a valid dismissal: (1) there must be just cause, and (2) the employee must be afforded due process. To meet the requirements of due process, the employer must furnish the employee with two written notices a notice apprising the employee of the particular act or omission for which the dismissal is sought and another notice informing the employee of the employers decision to dismiss. In Talidano v. Falcon Maritime & Allied Services, Inc., the Court held that: [R]espondent failed to comply with the procedural due process required for terminating the employment of the employee. Such requirement is not a mere formality that may be dispensed with at will. Its disregard is a matter of serious concern since it constitutes a safeguard of the highest order in response to mans innate sense of justice. The Labor Code does not, of course, require a formal or trial type proceeding before an erring employee may be dismissed. This is especially true in the case of a vessel on the ocean or in a foreign port. The minimum requirement of due process termination proceedings, which must be complied with even with respect to seamen on board a vessel, consists of notice to the employees intended to be dismissed and the grant to them of an opportunity to present their own side of the alleged offense or misconduct, which led to the managements decision to terminate. To meet the requirements of due process, the employer must furnish the worker sought to be dismissed with two written notices before termination of employment can be legally effected, i.e., (1) a notice which apprises the employee of the particular acts or omissions for which his dismissal is sought; and (2) the subsequent notice after due hearing which informs the employee of the employers decision to dismiss him. (Emphasis supplied) In the present case, Jose, Jr. was not given any written notice about his dismissal. However, the propriety of Jose, Jr.s dismissal is not affected by the lack of written notices. When the dismissal is for just cause, the lack of due process does not render the dismissal ineffectual but merely gives rise to the payment of P30,000 in nominal damages.

authorized physician of M/T Limar; (4) the drug test result of Jose, Jr. showed that he was positive for marijuana; (5) the drug test result was issued under Dr. Heaths name and contained his handwritten comments. The Court of Appeals found that: The tests administered to the crew were routine measures of the vessel conducted to enforce its stated policy, and it was a matter of course for medical reports to be issued and released by the medical officer. The ships physician at Curacao under whom the tests were conducted was admittedly Dr. Heath. It was under his name and with his handwritten comments that the report on the respondent came out, and there is no basis to suspect that these results were issued other than in the ordinary course of his duty. As the labor arbiter points out, the drug test report is evidence in itself and does not require additional supporting evidence except if it appears that the drug test was conducted not in accordance with drug testing procedures. Nothing of the sort, he says, has even been suggested in this particular case. Factual findings of the Court of Appeals are binding on the Court. Absent grave abuse of discretion, the Court will not disturb the Court of Appeals factual findings. In Encarnacion, the Court held that, unless there is a clearly grave or whimsical abuse on its part, findings of fact of the appellate court will not be disturbed. The Supreme Court will only exercise its power of review in known exceptions such as gross misappreciation of evidence or a total void of evidence. Jose, Jr. failed to show that the Court of Appeals gravely abused its discretion. Article 282(a) of the Labor Code states that the employer may terminate an employment for serious misconduct. Drug use in the premises of the employer constitutes serious misconduct. In Bughaw, Jr. v. Treasure Island Industrial Corporation, the Court held that: The charge of drug use inside the companys premises and during working hours against petitioner constitutes serious misconduct, which is one of the just causes for termination. Misconduct is improper or wrong conduct. It is the transgression of some established and definite rule of action, a forbidden act, a dereliction of duty, willful in character, and implies wrongful intent and not merely an error in judgment. The misconduct to be serious within the meaning of the Act must be of such a grave and aggravated character and not merely trivial or unimportant. Such misconduct, however serious, must nevertheless, in connection with the work of the employee, constitute just cause for his separation. This Court took judicial notice of scientific findings that drug abuse can damage the mental faculties of the user. It is beyond question therefore that any employee under the influence of drugs cannot possibly continue doing his duties without posing a serious threat to the lives and property of his co-workers and even his employer. (Emphasis supplied)

WHEREFORE, the petition is DENIED. The 11 May 2005 Decision and 5 August 2005 Resolution of the Court of Appeals in CA-G.R. SP No. 83272 are AFFIRMED with the

MODIFICATION that OSG Ship Management Manila, Inc. is ordered to pay Bernardo B. Jose, Jr. P30,000 in nominal damages. SO ORDERED. 13. G.R. No. 153674 December 20, 2006

AVON COSMETICS, INCORPORATED and JOSE MARIE FRANCO, petitioners, vs. LETICIA H. LUNA, respondent. DECISION CHICO-NAZARIO, J.: The Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, seeking to reverse and set aside the Decision1 dated 20 May 2002 of the Court of Appeals in CA-G.R. CV No. 52550, which affirmed in toto the Decision2 dated 26 January 1996 of the Regional Trial Court (RTC) of Makati City, Branch 138, in Civil Case No. 88-2595, in favor of herein respondent Leticia H. Luna (Luna), rendered by the Honorable Ed Vicente S. Albano, designated as the "assisting judge" pursuant to Supreme Court Administrative Order No. 70-94, dated 16 June 1994. The Facts The facts of the case are not in dispute. As culled from the records, they are as follows: The present petition stemmed from a complaint3 dated 1 December 1988, filed by herein respondent Luna alleging, inter alia that she began working for Beautifont, Inc. in 1972, first as a franchise dealer and then a year later, as a Supervisor. Sometime in 1978, Avon Cosmetics, Inc. (Avon), herein petitioner, acquired and took over the management and operations of Beautifont, Inc. Nonetheless, respondent Luna continued working for said successor company. Aside from her work as a supervisor, respondent Luna also acted as a make-up artist of petitioner Avons Theatrical Promotions Group, for which she received a per diem for each theatrical performance. On 5 November 1985, petitioner Avon and respondent Luna entered into an agreement, entitled Supervisors Agreement, whereby said parties contracted in the manner quoted below: The Company agrees: xxxx 1) To allow the Supervisor to purchase at wholesale the products of the Company. xxxx The Supervisor agrees: 1) To purchase products from the Company exclusively for resale and to be responsible for obtaining all permits and licenses required to sell the products on retail. xxxx The Company and the Supervisor mutually agree: xxxx 2) That this agreement in no way makes the Supervisor an employee or agent of the Company, therefore, the Supervisor has no authority to bind the Company in any contracts with other parties. 3) That the Supervisor is an independent retailer/dealer insofar as the Company is concerned, and shall have the sole discretion to determine where and how products purchased from the Company will be sold. However, the Supervisor shall not sell such products to stores, supermarkets or to any entity or person who sells things at a fixed place of business. 4) That this agreement supersedes any agreement/s between the Company and the Supervisor. 5) That the Supervisor shall sell or offer to sell, display or promote only and exclusively products sold by the Company.

6) Either party may terminate this agreement at will, with or without cause, at any time upon notice to the other. x x x x.4 By virtue of the execution of the aforequoted Supervisors Agreement, respondent Luna became part of the independent sales force of petitioner Avon. Sometime in the latter part of 1988, respondent Luna was invited by a former Avon employee who was then currently a Sales Manager of Sandr Philippines, Inc., a domestic corporation engaged in direct selling of vitamins and other food supplements, to sell said products. Respondent Luna apparently accepted the invitation as she then became a Group Franchise Director of Sandr Philippines, Inc. concurrently with being a Group Supervisor of petitioner Avon. As Group Franchise Director, respondent Luna began selling and/or promoting Sandr products to other Avon employees and friends. On 23 September 1988, she requested a law firm to render a legal opinion as to the legal consequence of the Supervisors Agreement she executed with petitioner Avon. In response to her query, a lawyer of the firm opined that the Supervisors Agreement was "contrary to law and public policy." Wanting to share the legal opinion she obtained from her legal counsel, respondent Luna wrote a letter to her colleagues and attached mimeographed copies of the opinion and then circulated them. The full text of her letter reads: We all love our work as independent dealers and we all love to continue in this livelihood. Because my livelihood is important to me, I have asked the legal opinion of a leading Makati law office regarding my status as an independent dealer, I am sharing this opinion with you. I have asked their advice on three specific things: 1) May the company legally change the conditions of the existing "Supervisors Agreement" without the Supervisors consent? If I should refuse to sign the new Agreement, may the company terminate my dealership? On the first issue, my lawyers said that the company cannot change the existing "Agreement" without my consent, and that it would be illegal if the company will compel me to sign the new agreement. 2) Is Section 5 of the "Supervisors Agreement" which says that a dealer may only sell products sold by the company, legal? My lawyers said that Section 5 of the Supervisors Agreement is NOT valid because it is contrary to public policy, being an unreasonable restraint of trade. 3) Is Section 6 of the "Supervisors Agreement" which authorizes the company to terminate the contract at any time, with or without cause, legal? My lawyer said Section 6 is NOT valid because it is contrary to law and public policy. The company cannot terminate the "Supervisors Agreement" without a valid cause. Therefore, I can conclude that I dont violate Section 5 if I sell any product which is not in direct competition with the companys products, and there is no valid reason for the company to terminate my dealership contract if I sell a noncompetitive product. Dear co-supervisor[s], let us all support the reasonable and legal policies of the company. However, we must all be conscious of our legal rights and be ready to protect ourselves if they are trampled upon.

I hope we will all stay together selling Avon products for a long time and at the same time increase our earning opportunity by engaging in other businesses without being afraid to do so. In a letter5 dated 11 October 1988, petitioner Avon, through its President and General Manager, Jose Mari Franco, notified respondent Luna of the termination or cancellation of her Supervisors Agreement with petitioner Avon. Said letter reads in part: In September, (sic) 1988, you brought to our attention that you signed up as Group Franchise Director of another company, Sandr Philippines, Inc. (SPI). Not only that. You have also sold and promoted products of SPI (please refer for example to SPI Invoice No. 1695 dated Sept. 30, 1988). Worse, you promoted/sold SPI products even to several employees of our company including Mary Arlene Nolasco, Regina Porter, Emelisa Aguilar, Hermie Esteller and Emma Ticsay. To compound your violation of the above-quoted provision, you have written letters to other members of the Avon salesforce inducing them to violate their own contracts with our company. x x x. For violating paragraph 5 x x x, the Company, pursuant to paragraph 6 of the same Agreement, is terminating and canceling its Supervisors Agreement with you effective upon your receipt of this notice. We regret having to do this, but your repeated disregard of the Agreement, despite warnings, leaves (sic) the Company no other choice. xxxx Aggrieved, respondent Luna filed a complaint for damages before the RTC of Makati City, Branch 138. The complaint was docketed as Civil Case No. 88-2595. On 26 January 1996, after trial on the merits, the RTC rendered judgment in favor of respondent Luna stating that: WHEREFORE, in view of the foregoing premises, judgment is hereby rendered in favor of the plaintiff, and against defendant, Avon, ordering the latter: 1) to pay moral damages to the plaintiff in the amount of P100,000.00 with interest from the date of this judgment up to the time of complete payment; 2) to pay attorneys fees in the amount of P20,000.00; 3) to pay the costs.6

I. THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN DECLARING THAT THE SUPERVISORS AGREEMENT EXECUTED BETWEEN AVON AND RESPONDENT LUNA AS NULL AND VOID FOR BEING AGAINST PUBLIC POLICY; II. THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN HOLDING THAT AVON HAD NO RIGHT TO TERMINATE OR CANCEL THE SUPERVIOSRS AGREEMENT; III. THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN UPHOLDING THE AWARD OF MORAL DAMAGES AND ATTORNEYS FEES IN FAVOR OF RESPONDENT LUNA; and IV. THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN NOT AWARDING ATTORNEYS FEES AND LITIGATION EXPENSES IN FAVOR OF PETITIONER. The Courts Ruling A priori, respondent Luna objects to the presentation, and eventual resolution, of the issues raised herein as they allegedly involve questions of facts. To be sure, questions of law are those that involve doubts or controversies on what the law is on certain state of facts; and questions of fact, on the other hand, are those in which there is doubt or difference as to the truth or falsehood of the alleged facts. One test, it has been held, is whether the appellate court can determine the issue raised without reviewing or evaluating the evidence, in which case it is a question of law, otherwise it will be a question of fact. 10 In the present case, the threshold issues are a) whether or not paragraph 5 of the Supervisors Agreement is void for being violative of law and public policy; and b) whether or not paragraph 6 of the Supervisors Agreement which authorizes petitioner Avon to terminate or cancel the agreement at will is void for being contrary to law and public policy. Certainly, it is quite obvious that the foregoing issues are questions of law. In affirming the decision of the RTC declaring the subject contract null and void for being against public policy, the Court of Appeals ruled that the exclusivity clause, which states that: The Company and the Supervisor mutually agree:

On 8 February 1996, petitioner Avon filed a Notice of Appeal dated the same day. In an Order7 dated 15 February 1996, the RTC gave due course to the appeal and directed its Branch Clerk of Court to transmit the entire records of the case to the Court of Appeals, which docketed the appeal as CA G.R. CV No. 52550. On 20 May 2002, the Court of Appeals promulgated the assailed Decision, the dispositive part of which states thus: WHEREFORE, the foregoing premises considered, the decision appealed from is hereby AFFIRMED in toto.8 The Issues In predictable displeasure with the conclusions reached by the appellate court, petitioner Avon now implores this Court to review, via a petition for review on certiorari under Rule 45 of the Revised Rules of Court, the formers decision and to resolve the following assigned errors:9

xxxx 5) That the Supervisor shall sell or offer to sell, display or promote only and exclusively products sold by the Company. [Emphasis supplied.] should be interpreted to apply solely to those products directly in competition with those of petitioner Avons, i.e., cosmetics and/or beauty supplies and lingerie products. Its declaration is anchored on the fact that Avon products, at that time, were not in any way similar to the products sold by Sandr Philippines, Inc. At that time, the latter was merely selling vitamin products. Put simply, the products of the two companies do not compete with each other. The appellate court ratiocinated that: x x x If the agreement were interpreted otherwise, so as to include products that do not directly compete with the products of defendant-appellant Avon, such would result in absurdity. x x x

[A]greements which prohibit a person from engaging in any enterprise whether similar or not to the enterprise of the employer constitute an unreasonable restraint of trade, thus, it is void as against public policy.11 Petitioner Avon disputes the abovestated conclusion reached by the Court of Appeals. It argues that the latter went beyond the literal and obvious intent of the parties to the subject contract when it interpreted the abovequoted clause to apply only to those products that do not compete with that of petitioner Avons; and that the words "only and exclusively" need no other interpretation other than the literal meaning that "THE SUPERVISORS CANNOT SELL THE PRODUCTS OF OTHER COMPANIES WHETHER OR NOT THEY ARE COMPETING PRODUCTS." 12 Moreover, petitioner Avon reasons that: The exclusivity clause was directed against the supervisors selling other products utilizing their training and experience, and capitalizing on Avons existing network for the promotion and sale of the said products. The exclusivity clause was meant to protect Avon from other companies, whether competitors or not, who would exploit the sales and promotions network already established by Avon at great expense and effort. xxxx Obviously, Sandre Phils., Inc. did not have the (sic) its own trained personnel and network to sell and promote its products. It was precisely why Sandre simply invited, and then and there hired Luna and other Avon supervisors and dealers to sell and promote its products. They had the training and experience, they also had a ready market for the other products the customers to whom they had been selling the Avon products. It was easy to entice the supervisors to sign up. The supervisors could continue to sell Avon products, and at the same time earn additional income by selling other products. This is most unfair to Avon. The other companies cannot ride on and exploit the training and experience of the Avon sales force to sell and promote their own products. [Emphasis supplied.] On the other hand, in her Memorandum, respondent Luna counters that "there is no allegation nor any finding by the trial court or the Court of Appeals of an existing nationwide sales and promotions network established by Avon or Avons existing sales promotions network or Avons tried and tested sales and promotions network nor the alleged damage caused to such system caused by other companies." Further, well worth noting is the opinion of respondent Lunas counsel which started the set off the series of events which culminated to the termination or cancellation of the Supervisors Agreement. In response to the query-letter13 of respondent Luna, the latters legal counsel opined that, as allegedly held in the case of Ferrazzini v. Gsell,14 paragraph 5 of the subject Supervisors Agreement "not only prohibits the supervisor from selling products which compete with the companys product but restricts likewise the supervisor from engaging in any industry which involves sales in general."15 Said counsel thereafter concluded that the subject provision in the Supervisors Agreement constitutes an unreasonable restraint of trade and, therefore, void for being contrary to public policy. At the crux of the first issue is the validity of paragraph 5 of the Supervisors Agreement, viz: The Company and the Supervisor mutually agree: xxxx 5) That the Supervisor shall sell or offer to sell, display or promote only and exclusively products sold by the Company. [Emphasis supplied.]

In business parlance, this is commonly termed as the "exclusivity clause." This is defined as agreements which prohibit the obligor from engaging in "business" in competition with the obligee. This exclusivity clause is more often the subject of critical scrutiny when it is perceived to collide with the Constitutional proscription against "reasonable restraint of trade or occupation." The pertinent provision of the Constitution is quoted hereunder. Section 19 of Article XII of the 1987 Constitution on the National Economy and Patrimony states that: SEC. 19. The State shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed. First off, restraint of trade or occupation embraces acts, contracts, agreements or combinations which restrict competition or obstruct due course of trade.16 Now to the basics. From the wordings of the Constitution, truly then, what is brought about to lay the test on whether a given agreement constitutes an unlawful machination or combination in restraint of trade is whether under the particular circumstances of the case and the nature of the particular contract involved, such contract is, or is not, against public interest.17 Thus, restrictions upon trade may be upheld when not contrary to public welfare and not greater than is necessary to afford a fair and reasonable protection to the party in whose favor it is imposed. 18 Even contracts which prohibit an employee from engaging in business in competition with the employer are not necessarily void for being in restraint of trade. In sum, contracts requiring exclusivity are not per se void. Each contract must be viewed vis--vis all the circumstances surrounding such agreement in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition. The question that now crops up is this, when is a restraint in trade unreasonable? Authorities are one in declaring that a restraint in trade is unreasonable when it is contrary to public policy or public welfare. As far back as 1916, in the case of Ferrazzini v. Gsell,19 this Court has had the occasion to declare that: There is no difference in principle between the public policy (orden pblico) in the in the two jurisdictions (United States and the Philippine Islands) as determined by the Constitution, laws, and judicial decisions. In the United States it is well settled that contracts in undue or unreasonable restraint of trade are unenforcible because they are repugnant to the established public policy in that country. Such contracts are illegal in the sense that the law will not enforce them. The Supreme Court in the United States, in Oregon Steam Navigation Co. vs. Winsor )20 Will., 64), quoted with approval in Gibbs v. Consolidated gas Co. of Baltimore (130 U.S., 396), said: Cases must be judged according to their circumstances, and can only be rightly judged when reason and grounds of the rule are carefully considered. There are two principle grounds on which the doctrine is founded that a contract in restraint of trade is void as against public policy. One is, the injury to the public by being deprived of the restricted partys industry; and the other is, the injury to the party himself by being precluded from pursuing his occupation, and thus being prevented from supporting himself and his family. And what is public policy? In the words of the eminent Spanish jurist, Don Jose Maria Manresa, in his commentaries of the Codigo Civil, public policy (orden pblico): Represents in the law of persons the public, social and legal interest, that which is permanent and essential of the institutions, that which, even if favoring an individual in whom the right lies,

cannot be left to his own will. It is an idea which, in cases of the waiver of any right, is manifested with clearness and force. 20 As applied to agreements, Quintus Mucius Scaevola, another distinguished civilist gives the term "public policy" a more defined meaning: Agreements in violation of orden pblico must be considered as those which conflict with law, whether properly, strictly and wholly a public law (derecho) or whether a law of the person, but law which in certain respects affects the interest of society. 21 Plainly put, public policy is that principle of the law which holds that no subject or citizen can lawfully do that which has a tendency to be injurious to the public or against the public good.22 As applied to contracts, in the absence of express legislation or constitutional prohibition, a court, in order to declare a contract void as against public policy, must find that the contract as to the consideration or thing to be done, has a tendency to injure the public, is against the public good, or contravenes some established interests of society, or is inconsistent with sound policy and good morals, or tends clearly to undermine the security of individual rights, whether of personal liability or of private property. 23 From another perspective, the main objection to exclusive dealing is its tendency to foreclose existing competitors or new entrants from competition in the covered portion of the relevant market during the term of the agreement.24 Only those arrangements whose probable effect is to foreclose competition in a substantial share of the line of commerce affected can be considered as void for being against public policy. The foreclosure effect, if any, depends on the market share involved. The relevant market for this purpose includes the full range of selling opportunities reasonably open to rivals, namely, all the product and geographic sales they may readily compete for, using easily convertible plants and marketing organizations.25 Applying the preceding principles to the case at bar, there is nothing invalid or contrary to public policy either in the objectives sought to be attained by paragraph 5, i.e., the exclusivity clause, in prohibiting respondent Luna, and all other Avon supervisors, from selling products other than those manufactured by petitioner Avon. We quote with approval the determination of the U.S. Supreme Court in the case of Board of Trade of Chicago v. U.S.26 that "the question to be determined is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition, or whether it is such as may suppress or even destroy competition." Such prohibition is neither directed to eliminate the competition like Sandr Phils., Inc. nor foreclose new entrants to the market. In its Memorandum, it admits that the reason for such exclusion is to safeguard the network that it has cultivated through the years. Admittedly, both companies employ the direct selling method in order to peddle their products. By direct selling, petitioner Avon and Sandre, the manufacturer, forego the use of a middleman in selling their products, thus, controlling the price by which they are to be sold. The limitation does not affect the public at all. It is only a means by which petitioner Avon is able to protect its investment. It was not by chance that Sandr Philippines, Inc. made respondent Luna one of its Group Franchise Directors. It doesnt take a genius to realize that by making her an important part of its distribution arm, Sandr Philippines, Inc., a newly formed direct-selling business, would be saving time, effort and money as it will no longer have to recruit, train and motivate supervisors and dealers. Respondent Luna, who learned the tricks of the trade from petitioner Avon, will do it for them. This is tantamount to unjust enrichment. Worse, the goodwill established by petitioner Avon among its loyal customers will be taken advantaged of by Sandre Philippines, Inc. It is not so hard to imagine the scenario wherein the sale of Sandr products by Avon dealers will engender a belief in the minds of loyal Avon customers that the product that they are buying had been manufactured by Avon. In other words, they will be misled into thinking that the Sandr products are in fact Avon products. From the foregoing, it cannot be said that the purpose of the subject exclusivity clause is to foreclose the competition, that is, the entrance of Sandr products in

to the market. Therefore, it cannot be considered void for being against public policy. How can the protection of ones property be violative of public policy? Sandr Philippines, Inc. is still very much free to distribute its products in the market but it must do so at its own expense. The exclusivity clause does not in any way limit its selling opportunities, just the undue use of the resources of petitioner Avon. It has been argued that the Supervisors Agreement is in the nature of a contract of adhesion; but just because it is does not necessarily mean that it is void. A contract of adhesion is so-called because its terms are prepared by only one party while the other party merely affixes his signature signifying his adhesion thereto. 27 Such contract is just as binding as ordinary contracts. "It is true that we have, on occasion, struck down such contracts as void when the weaker party is imposed upon in dealing with the dominant bargaining party and is reduced to the alternative of taking it or leaving it, completely deprived of the opportunity to bargain on equal footing. Nevertheless, contracts of adhesion are not invalid per se and they are not entirely prohibited. The one who adheres to the contract is in reality free to reject it entirely, if he adheres, he gives his consent." 28 In the case at bar, there was no indication that respondent Luna was forced to sign the subject agreement. Being of age, financially stable and with vast business experience, she is presumed to have acted with due care and to have signed the assailed contract with full knowledge of its import. Under the premises, it would be difficult to assume that she was morally abused. She was free to reject the agreement if she wanted to. Accordingly, a contract duly executed is the law between the parties, and they are obliged to comply fully and not selectively with its terms. A contract of adhesion is no exception.29 The foregoing premises noted, the Court of Appeals, therefore, committed reversible error in interpreting the subject exclusivity clause to apply merely to those products in direct competition to those manufactured and sold by petitioner Avon. When the terms of the agreement are clear and explicit, that they do not justify an attempt to read into any alleged intention of the parties, the terms are to be understood literally just as they appear on the face of the contract.30 Thus, in order to judge the intention of the contracting parties, "the circumstances under which it was made, including the situation of the subject thereof and of the parties to it, may be shown, so that the judge may be placed in the position of those whose language he is to interpret."31 It has been held that once this intention of the parties has been ascertained, it becomes an integral part of the contract as though it has been originally expressed therein in unequivocal terms.32 Having held that the "exclusivity clause" as embodied in paragraph 5 of the Supervisors Agreement is valid and not against public policy, we now pass to a consideration of respondent Lunas objections to the validity of her termination as provided for under paragraph 6 of the Supervisors Agreement giving petitioner Avon the right to terminate or cancel such contract. The paragraph 6 or the "termination clause" therein expressly provides that: The Company and the Supervisor mutually agree: xxxx 6) Either party may terminate this agreement at will, with or without cause, at any time upon notice to the other. [Emphasis supplied.] In the case of Petrophil Corporation v. Court of Appeals,33 this Court already had the opportunity to opine that termination or cancellation clauses such as that subject of the case at bar are legitimate if exercised in good faith. The facts of said case likewise involved a termination or cancellation clause that clearly provided for two ways of terminating the contract, i.e., with or without cause. The utilization of one mode will not preclude the use of the other. Therein, we stated that the finding that the termination of the contra 14. G.R. No. 164549 September 18, 2009

PHILIPPINE NATIONAL BANK, Petitioner, Rocamoras loan (including interests and penalties) was vs. P206,297.47, broken down as follows: SPOUSES AGUSTIN and PILAR ROCAMORA, Respondents. Principal............. P 79,484.65 DECISION Total interest due up to 01-07-94.. 51,229.35 Total penalty due up to 01-07-94.. 75,583.47 BRION, J.: P 206,297.477 TOTAL AMOUNT DUE AND PAYABLE We resolve in this petition for review on certiorari1 the legal propriety of the deficiency judgment that the petitioner Philippine National Bank (PNB) seeks against the respondents the spouses Agustin and Pilar Rocamora (spouses Rocamora). THE FACTUAL ANTECEDENTS On September 25, 1981, the spouses Rocamora obtained a loan from PNB in the aggregate amount of P100,000.00 under the Cottage Industry Guarantee and Loan Fund (CIGLF). The loan was payable in five years, under the following terms: P35,000 payable semi-annually and P65,000 payable annually. In addition to the principal amount, the spouses Rocamora agreed to pay interest at the rate of 12% per annum, plus a penalty fee of 5% per annum in case of delayed payments. The spouses Rocamora signed two promissory notes2 evidencing the loan. To secure their loan obligations, the spouses Rocamora executed two mortgages: a real estate mortgage3 over a property covered by Transfer Certificate of Title No. 7160 in the amount of P10,000, and a chattel mortgage4 over various machineries in the amount of P25,000. Payment of the remaining P65,000 was under the CIGLF guarantee, with the spouses Rocamora paying the required guarantee fee. Both the promissory note and the real estate mortgage deed contained an escalation clause that allowed PNB to increase the 12% interest rate at anytime without notice, within the limits allowed by law. The pertinent portion of the promissory note stated: For value received, we, jointly and severally, promise to pay to the ORDER of the PHILIPPINE NATIONAL BANK, at its office in Pto. Princesa City, Philippines, the sum of xxx together with interest thereon at the rate of 12% per annum until paid, which interest rate the Bank may at any time, without notice, raise within the limits allowed by law, and I/we also agree to pay jointly and severally, 5% per annum penalty charge, by way of liquidated damages, should this note be unpaid or is not renewed on due date. [Emphasis supplied.] While paragraph (k) of the real estate mortgage deed provided: THE PETITION (k) INCREASE OF INTEREST RATE The MORTGAGEE reserves the right to increase the interest rate charged on the obligation secured by this mortgage including any amount which it may have advanced within the limits allowed by law at any time depending on whatever policy it may adopt in the future; Provided, that the interest rate on the accommodation/s secured by the mortgage shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in that maximum interest rate. [Emphasis supplied.] The spouses Rocamora only paid a total of P32,383.655 on the loan. Hence, the PNB commenced foreclosure proceedings in August and October 1990. The foreclosure of the mortgaged properties yielded P75,500.00 as total proceeds. After the foreclosure, PNB found that the recovered proceeds and the amounts the spouses Rocamora previously paid were not sufficient to satisfy the loan obligations. PNB thus filed, on January 18, 1994, a complaint for deficiency judgment6 before the Regional Trial Court (RTC) of Puerto Princesa City, Branch 48. The PNB alleged that as of January 7, 1994, the outstanding balance of the spouses In insisting that it is entitled to a deficiency judgment of P206,297.47, PNB argues that the RTC and the CA erred in invalidating the escalation clause in the parties agreement because it fully complied with the requirements for a valid escalation clause under this Courts following pronouncement in Banco Filipino Savings and Mortgage Bank v. Navarro:12] It is now clear that from March 17, 1980 [the effectivity date of Presidential Decree No. 1684 allowing the increase in the stipulated rate of interest], escalation clauses, to be valid, should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board." [Emphasis supplied.] The PNB posits that the presence of a "de-escalation clause" (referring to the second of the above requirements, which was designed to prevent a resulting one-sided situation on the part of the lender-bank) in the real estate mortgage deed rules out any violation of the principle of mutuality of contracts. The PNB also contends that it did not unreasonably delay the institution of foreclosure proceedings by acting three years after the The PNB claimed that the outstanding principal balance as of foreclosure date (September 19, 1990) was P79,484.65, plus interest and penalties, for a total due and demandable obligation of P250,812.10. Allegedly, after deducting the P75,500 proceeds of the foreclosure sale, the spouses Rocamora still owed the bank P206,297.47. The spouses Rocamora refused to pay the amount claimed as deficiency. They alleged that the PNB "practically created" the deficiency by (a) increasing the interest rates from 12% to 42% per annum, and (b) failing to immediately foreclose the mortgage pursuant to Presidential Decree No. 385 (PD 385 or the Mandatory Foreclosure Law) to prevent the interest and penalty charges from accruing. The RTC dismissed PNBs complaint in its decision dated November 10, 1999.8 The trial court invalidated the escalation clause in the promissory note and the resulting increased interest rates. The court also rejected PNBs reason for the delay in commencing foreclosure proceedings, ruling that the delay was contrary to the immediate and mandatory foreclosure that PD 385 required. The finding that the banks actions were contrary to law, justice, and morals justified the award of actual, moral, and exemplary damages to the spouses Rocamora. Attorneys fees and costs of suit were also ordered paid.9 Except for modifications in the awarded damages, the Court of Appeals (CA) decision of March 23, 2004 affirmed the RTC ruling. 10 The CA held that the PNB effectively negated the principle of mutuality of contracts when it increased the interest rates without the spouses Rocamoras conformity. The CA also found the long delay in the foreclosure of the mortgage, apparently a management lapse, prejudicial to the spouses Rocamoras interests and contrary as well to law and justice. More importantly, the CA found insufficient evidence to support the P206,297.47 deficiency claim; the banks testimonial and documentary evidence did not support the deficiency claim that, moreover, was computed based on bloated interest rates. The CA maintained these rulings despite the motion for reconsideration PNB filed;11 hence, PNBs present recourse to this Court.

spouses Rocamora defaulted on their obligation. Under Article 1142 of the Civil Code, a mortgage action prescribes in 10 years; the same 10-year period is provided in Article 1144 (1) for actions based on written contracts. Thus, the PNB alleges that it had 10 years from 1987 (the time when the spouses Rocamora allegedly defaulted from paying their loan obligation) to institute the foreclosure proceedings. Its decision to foreclose in 1990 three years after the default should not be taken against it, especially since the delay was prompted by the banks sincere desire to assist the spouses Rocamora. Additionally, the PNB claims that the decision to foreclose is entirely the banks prerogative. The provisions of PD 385 should not be read as a limitation affecting the right of banks to foreclose within the 10year period granted under the Civil Code. While PD 385 requires government banks to immediately foreclose mortgages under specified conditions, the provision does not limit the period within which the bank can foreclose; to hold otherwise would be contrary to the stated objectives of PD 385 to enhance the resources of government financial institutions and to facilitate the financing of essential development programs and projects. On the basis of these arguments, the PNB contests the damages awarded to the spouses Rocamora, as the PNB had no malice, nor any furtive design: when it increased the interest rates pursuant to the escalation clause; when it decided to foreclose the mortgages only in 1990; and when it sought to claim the deficiency. PNB claimed all these to be proper acts made in the exercise of its rights. Opposing the PNBs arguments, the spouses Rocamora allege the following: a. The PNB failed to sufficiently and satisfactorily prove the amount of P250,812.10, claimed to be the total obligation due at the time of foreclosure, against which the proceeds of the foreclosure sale (P75,500.00) were deducted and which became the basis of the banks deficiency claim (P206,297.47); b. The "ballooning" of the spouses Rocamoras loan obligation was the PNBs own doing when it increased the interest rates and failed to immediately foreclose the mortgages; c. The PNBs unilateral increase of interest rates violated the principle of mutuality of contracts; d. The PNB failed to comply with the immediate and mandatory foreclosure required under PD 385; and e. The PNB failed to call on the CIGLF which secured the payment of P65,000.00 of the loan. THE COURTS RULING We find no basis to reverse the CAs decision and, consequently, deny the petition. Proof of Deficiency Claim Necessary The foreclosure of chattel and real estate mortgages is governed by Act Nos. 1508 and 3135, respectively. Although both laws do not contain a provision expressly or impliedly authorizing the mortgagee to recover the deficiency resulting after the foreclosure proceeds are deducted from the principal obligation, the Court has construed the laws silence as a grant to the mortgagee of the right to maintain an action for the deficiency; the mortgages are given merely as security, not as settlement or satisfaction of the indebtedness.13 As in any claim for payment of money, a mortgagee must be able to prove the basis for the deficiency judgment it seeks. The right of the mortgagee to pursue the debtor arises only when the proceeds of the foreclosure sale are ascertained to be insufficient to cover the obligation and the other costs at the time of the sale. 14 Thus, the amount of the obligation prior to foreclosure and the proceeds of the foreclosure are material in a claim for deficiency.

In this case, both the RTC and the CA found that PNB failed to prove the claimed deficiency; its own testimonial and documentary evidence in fact contradicted one another. The PNB alleged that the spouses Rocamoras obligation at the time of foreclosure (September 19, 1990) amounted to P250,812.10, yet its own documentary evidence15 showed that, as of that date, the total obligation was only P206,664.34; the PNBs own witness, Mr. Reynaldo Caso, testified that the amount due from the spouses Rocamora was only P206,664.34. At any rate, whether the total obligation due at the time of foreclosure was P250,812.10 as PNB insisted or P206,664.34 as its own record disclosed, our own computation of the amounts involved does not add up to the P206,297.47 PNB claimed as deficiency.16 We find it significant that PNB has been consistently unable to provide a detailed and credible accounting of the claimed deficiency. What appears clear is that after adding up the spouses Rocamoras partial payments and the proceeds of the foreclosure, the PNB has already received a total of P107,883.68 as payment for the spouses Rocamoras P100,000.00 loan; the claimed P206,297.47 deficiency consisted mainly of interests and penalty charges (or about 61.5% of the amount claimed). The spouses Rocamora posit that their loan would not have bloated to more than double the original amount if PNB had not increased the interest rates and had it immediately foreclosed the mortgages. Escalation clauses do not authorize the unilateral increase of interest rates Escalation clauses are valid and do not contravene public policy. 17 These clauses are common in credit agreements as means of maintaining fiscal stability and retaining the value of money on longterm contracts. To avoid any resulting one-sided situation that escalation clauses may bring, we required in Banco Filipino18] the inclusion in the parties agreement of a de-escalation clause that would authorize a reduction in the interest rates corresponding to downward changes made by law or by the Monetary Board. The validity of escalation clauses notwithstanding, we cautioned that these clauses do not give creditors the unbridled right to adjust interest rates unilaterally.19 As we said in the same Banco Filipino case, any increase in the rate of interest made pursuant to an escalation clause must be the result of an agreement between the parties.20 The minds of all the parties must meet on the proposed modification as this modification affects an important aspect of the agreement. There can be no contract in the true sense in the absence of the element of an agreement, i.e., the parties mutual consent. Thus, any change must be mutually agreed upon, otherwise, the change carries no binding effect.21 A stipulation on the validity or compliance with the contract that is left solely to the will of one of the parties is void; the stipulation goes against the principle of mutuality of contract under Article 1308 of the Civil Code. 22 As correctly found by the appellate court, even with a de-escalation clause, no matter how elaborately worded, an unconsented increase in interest rates is ineffective if it transgresses the principle of mutuality of contracts. Precisely for this reason, we struck down in several cases many of them involving PNB the increase of interest rates unilaterally imposed by creditors. In the 1991 case of PNB v. CA and Ambrosio Padilla,23 we declared: In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void. Hence, even assuming that the P1.8 million loan agreement between the PNB and private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker partys (the debtor) participation being reduced to the alternative "to take it or leave it." Such a contract is a

veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. We repeated this rule in the 1994 case of PNB v. CA and JaymeFernandez24 and the 1996 case of PNB v. CA and Spouses Basco. 25 Taking no heed of these rulings, the escalation clause PNB used in the present case to justify the increased interest rates is no different from the escalation clause assailed in the 1996 PNB case;26 in both, the interest rates were increased from the agreed 12% per annum rate to 42%. We held: PNB successively increased the stipulated interest so that what was originally 12% per annum became, after only two years, 42%. In declaring the increases invalid, we held: We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right to unilaterally upwardly adjust the interest on private respondents' loan. That would completely take away from private respondents the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts. xxxx In this case no attempt was made by PNB to secure the conformity of private respondents to the successive increases in the interest rate. Private respondents' assent to the increases cannot be implied from their lack of response to the letters sent by PNB, informing them of the increases. For as stated in one case, no one receiving a proposal to change a contract is obliged to answer the proposal.27 [Emphasis supplied.] On the strength of this ruling, PNBs argument that the spouses Rocamoras failure to contest the increased interest rates that were purportedly reflected in the statements of account and the demand letters sent by the bank amounted to their implied acceptance of the increase should likewise fail. Evidently, PNBs failure to secure the spouses Rocamoras consent to the increased interest rates prompted the lower courts to declare excessive and illegal the interest rates imposed. To go around this lower court finding, PNB alleges that the P206,297.47 deficiency claim was computed using only the original 12% per annum interest rate. We find this unlikely. Our examination of PNBs own ledgers, included in the records of the case, clearly indicates that PNB imposed interest rates higher than the agreed 12% per annum rate. 28 This confirmatory finding, albeit based solely on ledgers found in the records, reinforces the application in this case of the rule that findings of the RTC, when affirmed by the CA, are binding upon this Court.1avvphi1 PD 385 mandates immediate foreclosure of collaterals and securities when the arrearages amount to at least 20% of the total outstanding obligation Another reason that militates against the deficiency claim is PNBs own admitted delay in instituting the foreclosure proceedings. 29 Section 1 of PD 385 states: Section 1. It shall be mandatory for government financial institutions, after the lapse of sixty (60) days from the issuance of this Decree, to foreclose the collaterals and/or securities for any loan, credit, accommodation, and/or guarantees granted by them whenever the arrearages on such account, including accrued interest and other charges, amount to at least twenty percent (20%) of the total outstanding obligations, including interest and other charges, as appearing in the books of account and/or related records of the financial institution concerned. This shall be without prejudice to the exercise by the government financial institutions of such rights and/or remedies available to them under their respective contracts with their debtors, including the right to foreclose on loans, credits, accommodations and/or guarantees on which the arrearages are less than twenty percent (20%). [Emphasis supplied.]

Under PD 385, government financial institutions which was PNBs status prior to its full privatization in 1996 are mandated to immediately foreclose the securities given for any loan when the arrearages amount to at least 20% of the total outstanding obligation.30 As stated in the narrated facts, PNB commenced foreclosure proceedings in 1990 or three years after the spouses defaulted on their obligation in 1987. On this factual premise, the PNB now insists as a legal argument that its right to foreclose should not be affected by the mandatory tenor of PD 385, since it exercised its right still within the 10-year prescription period allowed under Articles 1142 and 1144 (1) of the Civil Code. PNBs argument completely misses the point. The issue before us is the effect of the delay in commencing foreclosure proceedings on PNBs right to recover the deficiency, not on its right to foreclose. The delay in commencing foreclosure proceedings bears a significant function in the deficiency amount being claimed, as the amount undoubtedly includes interest and penalty charges which accrued during the period covered by the delay. The depreciation of the mortgaged properties during the period of delay must also be factored in, as this affects the proceeds that the mortgagee can recover in the foreclosure sale, which in turn affects its deficiency claim. There was also, in this case, the four-year gap between the foreclosure proceedings and the filing of the complaint for deficiency judgment during which time interest, whether at the 12% per annum rate or higher, and penalty charges also accrued. For the Court to grant the PNBs deficiency claim would be to award it for its delay and its undisputed disregard of PD 385. The Award for Damages Moral damages are not recoverable simply because a contract has been breached. They are recoverable only if the defendant acted fraudulently or in bad faith or in wanton disregard of his contractual obligations.31 The breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive. Likewise, a breach of contract may give rise to exemplary damages only if the guilty party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.32 We are not sufficiently convinced that PNB acted fraudulently, in bad faith, or in wanton disregard of its contractual obligations, simply because it increased the interest rates and delayed the foreclosure of the mortgages. Bad faith cannot be imputed simply because the defendant acted with bad judgment or with attendant negligence. Bad faith is more than these; it pertains to a dishonest purpose, to some moral obliquity, or to the conscious doing of a wrong, a breach of a known duty attributable to a motive, interest or ill will that partakes of the nature of fraud.33 Proof of actions of this character is undisputably lacking in this case. Consequently, we do not find the spouses Rocamora entitled to an award of moral and exemplary damages. Under these circumstances, neither should they recover attorneys fees and litigation expense.34 These awards are accordingly deleted. WHEREFORE, we DENY the petitioners petition for review on certiorari, and MODIFY the March 23, 2004 decision of the Court of Appeals in CA-G.R. CV No. 66088 by DELETING the moral and exemplary damages, attorneys fees, and litigation costs awarded to the respondents. All other aspects of the assailed decision are AFFIRMED. Costs against the petitioner. SO ORDERED. 15. G.R. No. 164538 : August 9, 2010 METROPOLITAN BANK and TRUST COMPANY, Petitioner, vs. ROGELIO REYNADO and JOSE C. ADRANDEA,** Respondents. DECISION DEL CASTILLO, J.:

"It is a hornbook doctrine in our criminal law that the criminal liability for estafa is not affected by a compromise, for it is a public offense which must be prosecuted and punished by the government on its own motion, even though complete reparation [has] been made of the damage suffered by the private offended party. Since a criminal offense like estafa is committed against the State, the private offended party may not waive or extinguish the criminal liability that the law imposes for the commission of the crime." 1cra1aw This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks the reversal of the Court of Appeals' (CA's) Decision2cra1aw dated October 21, 2002 in CA-G.R. SP No. 58548 and its further Resolution3cra1aw dated July 12, 2004 denying petitioner's Motion for Reconsideration.4cra1aw Factual Antecedents On January 31, 1997, petitioner Metropolitan Bank and Trust Company charged respondents before the Office of the City Prosecutor of Manila with the crime of estafa under Article 315, paragraph 1(b) of the Revised Penal Code. In the affidavit 5cra1aw of petitioner's audit officer, Antonio Ivan S. Aguirre, it was alleged that the special audit conducted on the cash and lending operations of its Port Area branch uncovered anomalous/fraudulent transactions perpetrated by respondents in connivance with client Universal Converter Philippines, Inc. (Universal); that respondents were the only voting members of the branch's credit committee authorized to extend credit accommodation to clients up to P200,000.00; that through the so-called Bills Purchase Transaction, Universal, which has a paid-up capital of only P125,000.00 and actual maintaining balance of P5,000.00, was able to make withdrawals totaling P81,652,000.006cra1aw against uncleared regional checks deposited in its account at petitioner's Port Area branch; that, consequently, Universal was able to utilize petitioner's funds even before the sevenday clearing period for regional checks expired; that Universal's withdrawals against uncleared regional check deposits were without prior approval of petitioner's head office; that the uncleared checks were later dishonored by the drawee bank for the reason "Account Closed"; and, that respondents acted with fraud, deceit, and abuse of confidence. In their defense, respondents denied responsibility in the anomalous transactions with Universal and claimed that they only intended to help the Port Area branch solicit and increase its deposit accounts and daily transactions. Meanwhile, on February 26, 1997, petitioner and Universal entered into a Debt Settlement Agreement7cra1aw whereby the latter acknowledged its indebtedness to the former in the total amount of P50,990,976.278cra1aw as of February 4, 1997 and undertook to pay the same in bi-monthly amortizations in the sum of P300,000.00 starting January 15, 1997, covered by postdated checks, "plus balloon payment of the remaining principal balance and interest and other charges, if any, on December 31, 2001."9cra1aw Findings of the Prosecutor Following the requisite preliminary investigation, Assistant City Prosecutor Winnie M. Edad (Prosecutor Edad) in her Resolution10cra1aw dated July 10, 1997 found petitioner's evidence insufficient to hold respondents liable for estafa. According to Prosecutor Edad:chan robles virtual law library The execution of the Debt Settlement Agreement puts complainant bank in estoppel to argue that the liability is criminal. Since the agreement was made even before the filing of this case, the relations between the parties [have] change[d], novation has set in and prevented the incipience of any criminal liability on the part of respondents.11cra1aw Thus, Prosecutor Edad recommended the dismissal of the case:chan robles virtual law library WHEREFORE, for insufficiency of evidence, it is respectfully recommended that the case be dismissed.12cra1aw

On December 9, 1997, petitioner appealed the Resolution of Prosecutor Edad to the Department of Justice (DOJ) by means of a Petition for Review.13cra1aw Ruling of the Department of Justice On June 22, 1998, the DOJ dismissed the petition ratiocinating that:chan robles virtual law library It is evident that your client based on the same transaction chose to file estafa only against its employees and treat with kid gloves its big time client Universal who was the one who benefited from this transaction and instead, agreed that it should be paid on installment basis. To allow your client to make the choice is to make an unwarranted classification under the law which will result in grave injustice against herein respondents. Thus, if your client agreed that no estafa was committed in this transaction with Universal who was the principal player and beneficiary of this transaction[,] more so with herein respondents whose liabilities are based only on conspiracy with Universal. Equivocally, there is no estafa in the instant case as it was not clearly shown how respondents misappropriated the P53,873,500.00 which Universal owed your client after its checks deposited with Metrobank were dishonored. Moreover, fraud is not present considering that the Executive Committee and the Credit Committee of Metrobank were duly notified of these transactions which they approved. Further, no damage was caused to your client as it agreed [to] the settlement [with] Universal.14cra1aw A Motion for Reconsideration15cra1aw was filed by petitioner, but the same was denied on March 1, 2000 by then Acting Secretary of Justice Artemio G. Tuquero.16cra1aw Aggrieved, petitioner went to the CA by filing a Petition for Certiorari & Mandamus.17cra1aw Ruling of the Court of Appeals By Decision18cra1aw of October 21, 2002, the CA affirmed the twin resolutions of the Secretary of Justice. Citing jurisprudence 19cra1aw wherein we ruled that while novation does not extinguish criminal liability, it may prevent the rise of such liability as long as it occurs prior to the filing of the criminal information in court. 20cra1aw Hence, according to the CA, "[j]ust as Universal cannot be held responsible under the bills purchase transactions on account of novation, private respondents, who acted in complicity with the former, cannot be made liable [for] the same transactions." 21cra1aw The CA added that "[s]ince the dismissal of the complaint is founded on legal ground, public respondents may not be compelled by mandamus to file an information in court." 22cra1aw Incidentally, the CA totally ignored the Comment23cra1aw of the Office of the Solicitor General (OSG) where the latter, despite being the statutory counsel of public respondent DOJ, agreed with petitioner that the DOJ erred in dismissing the complaint. It alleged that where novation does not extinguish criminal liability for estafa neither does restitution negate the offense already committed.24cra1aw Additionally, the OSG, in sharing the views of petitioner contended that failure to implead other responsible individuals in the complaint does not warrant its dismissal, suggesting that the proper remedy is to cause their inclusion in the information.25cra1aw This notwithstanding, however, the CA disposed of the petition as follows:chan robles virtual law library WHEREFORE, the petition is DENIED due course and, accordingly, DISMISSED. Consequently, the resolutions dated June 22, 1998 and March 1, 2000 of the Secretary of Justice are AFFIRMED. SO ORDERED.26cra1aw

Hence, this instant petition before the Court. On November 8, 2004, we required 27cra1aw respondents to file Comment, not a motion to dismiss, on the petition within 10 days from notice. The OSG filed a Manifestation and Motion in Lieu of Comment28cra1aw while respondent Jose C. Adraneda (Adraneda) submitted his Comment29cra1aw on the petition. The Secretary of Justice failed to file the required comment on the OSG's Manifestation and Motion in Lieu of Comment and respondent Rogelio Reynado (Reynado) did not submit any. For which reason, we issued a show cause order30cra1aw on July 19, 2006. Their persistent non-compliance with our directives constrained us to resolve that they had waived the filing of comment and to impose a fine of P1,000.00 on Reynado. Upon submission of the required memorandum by petitioner and Adraneda, the instant petition was submitted for resolution. Issues Petitioner presented the following main arguments for our consideration: 1. Novation and undertaking to pay the amount embezzled do not extinguish criminal liability. 2. It is the duty of the public prosecutor to implead all persons who appear criminally liable for the offense charged. Petitioner persistently insists that the execution of the Debt Settlement Agreement with Universal did not absolve private respondents from criminal liability for estafa. Petitioner submits that the settlement affects only the civil obligation of Universal but did not extinguish the criminal liability of the respondents. Petitioner thus faults the CA in sustaining the DOJ which in turn affirmed the finding of Prosecutor Edad for committing apparent error in the appreciation and the application of the law on novation. By petitioner's claim, citing Metropolitan Bank and Trust Co. v. Tonda,31cra1aw the "negotiations pertain [to] and affect only the civil aspect of the case but [do] not preclude prosecution for the offense already committed."32cra1aw In his Comment, Adraneda denies being a privy to the anomalous transactions and passes on the sole responsibility to his co-respondent Reynado as the latter was able to conceal the pertinent documents being the head of petitioner's Port Area branch. Nonetheless, he contends that because of the Debt Settlement Agreement, they cannot be held liable for estafa. The OSG, for its part, instead of contesting the arguments of petitioner, even prayed before the CA to give due course to the petition contending that DOJ indeed erred in dismissing the complaint for estafa. Given the facts of the case, the basic issue presented before this Court is whether the execution of the Debt Settlement Agreement precluded petitioner from holding respondents liable to stand trial for estafa under Art. 315 (1)(b) of the Revised Penal Code. 33cra1aw Our Ruling We find the petition highly meritorious. Novation not a mode of extinguishing criminal liability for estafa; Criminal liability for estafa not affected by compromise or novation of contract. Initially, it is best to emphasize that "novation is not one of the grounds prescribed by the Revised Penal Code for the extinguishment of criminal liability."34cra1aw In a catena of cases, it was ruled that criminal liability for estafa is not affected by a compromise or novation of contract. In Firaza v. People35cra1aw and Recuerdo v. People,36cra1aw this Court ruled

that in a crime of estafa, reimbursement or belated payment to the offended party of the money swindled by the accused does not extinguish the criminal liability of the latter. We also held in People v. Moreno37cra1aw and in People v. Ladera38cra1aw that "criminal liability for estafa is not affected by compromise or novation of contract, for it is a public offense which must be prosecuted and punished by the Government on its own motion even though complete reparation should have been made of the damage suffered by the offended party." Similarly in the case of Metropolitan Bank and Trust Company v. Tonda39cra1aw cited by petitioner, we held that in a crime of estafa, reimbursement of or compromise as to the amount misappropriated, after the commission of the crime, affects only the civil liability of the offender, and not his criminal liability. Thus, the doctrine that evolved from the aforecited cases is that a compromise or settlement entered into after the commission of the crime does not extinguish accused's liability for estafa. Neither will the same bar the prosecution of said crime. Accordingly, in such a situation, as in this case, the complaint for estafa against respondents should not be dismissed just because petitioner entered into a Debt Settlement Agreement with Universal. Even the OSG arrived at the same conclusion:chan robles virtual law library Contrary to the conclusion of public respondent, the Debt Settlement Agreement entered into between petitioner and Universal Converter Philippines extinguishes merely the civil aspect of the latter's liability as a corporate entity but not the criminal liability of the persons who actually committed the crime of estafa against petitioner Metrobank. x x x40cra1aw Unfortunately for petitioner, the above observation of the OSG was wittingly glossed over in the body of the assailed Decision of the CA. Execution of the Debt Settlement Agreement did not prevent the incipience of criminal liability. Even if the instant case is viewed from the standpoint of the law on contracts, the disposition absolving the respondents from criminal liability because of novation is still erroneous. Under Article 1311 of the Civil Code, "contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law." The civil law principle of relativity of contracts provides that "contracts can only bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof."41cra1aw In the case at bar, it is beyond cavil that respondents are not parties to the agreement. The intention of the parties thereto not to include them is evident either in the onerous or in the beneficent provisions of said agreement. They are not assigns or heirs of either of the parties. Not being parties to the agreement, respondents cannot take refuge therefrom to bar their anticipated trial for the crime they committed. It may do well for respondents to remember that the criminal action commenced by petitioner had its genesis from the alleged fraud, unfaithfulness, and abuse of confidence perpetrated by them in relation to their positions as responsible bank officers. It did not arise from a contractual dispute or matters strictly between petitioner and Universal. This being so, respondents cannot rely on subject settlement agreement to preclude prosecution of the offense already committed to the end of extinguishing their criminal liability or prevent the incipience of any liability that may arise from the criminal offense. This only demonstrates that the execution of the agreement between petitioner and Universal has no bearing on the innocence or guilt of the respondents. Determination of the probable cause, a function belonging to the public prosecutor; judicial review allowed where it has been clearly established that the prosecutor committed grave abuse of discretion. In a preliminary investigation, a public prosecutor determines whether a crime has been committed and whether there is probable

cause that the accused is guilty thereof.42cra1aw The Secretary of Justice, however, may review or modify the resolution of the prosecutor. "Probable cause is defined as such facts and circumstances that will engender a well-founded belief that a crime has been committed and that the respondent is probably guilty thereof and should be held for trial."43cra1aw Generally, a public prosecutor is afforded a wide latitude of discretion in the conduct of a preliminary investigation. By way of exception, however, judicial review is allowed where respondent has clearly established that the prosecutor committed grave abuse of discretion that is, when he has exercised his discretion "in an arbitrary, capricious, whimsical or despotic manner by reason of passion or personal hostility, patent and gross enough as to amount to an evasion of a positive duty or virtual refusal to perform a duty enjoined by law."44cra1aw Tested against these guidelines, we find that this case falls under the exception rather than the general rule. A close scrutiny of the substance of Prosecutor Edad's Resolution dated July 10, 1997 readily reveals that were it not for the Debt Settlement Agreement, there was indeed probable cause to indict respondents for the crime charged. From her own assessment of the Complaint-Affidavit of petitioner's auditor, her preliminary finding is that "Ordinarily, the offense of estafa has been sufficiently established."45cra1aw Interestingly, she suddenly changed tack and declared that the agreement altered the relation of the parties and that novation had set in preventing the incipience of any criminal liability on respondents. In light of the jurisprudence herein earlier discussed, the prosecutor should not have gone that far and executed an apparent somersault. Compounding further the error, the DOJ in dismissing petitioner's petition, ruled out estafa contrary to the findings of the prosecutor. Pertinent portion of the ruling reads:chan robles virtual law library Equivocally, there is no estafa in the instant case as it was not clearly shown how respondents misappropriated the P53,873,500.00 which Universal owed your client after its checks deposited with Metrobank were dishonored. Moreover, fraud is not present considering that the Executive Committee and the Credit Committee of Metrobank were duly notified of these transactions which they approved. Further, no damage was caused to your client as it agreed [to] the settlement [with] Universal.46cra1aw The findings of the Secretary of Justice in sustaining the dismissal of the Complaint are matters of defense best left to the trial court's deliberation and contemplation after conducting the trial of the criminal case. To emphasize, a preliminary investigation for the purpose of determining the existence of probable cause is "not a part of the trial. A full and exhaustive presentation of the parties' evidence is not required, but only such as may engender a well-grounded belief that an offense has been committed and that the accused is probably guilty thereof."47cra1aw A "finding of probable cause does not require an inquiry into whether there is sufficient evidence to procure a conviction. It is enough that it is believed that the act or omission complained of constitutes the offense charged." 48cra1aw So we held in Balangauan v. Court of Appeals:49cra1aw Applying the foregoing disquisition to the present petition, the reasons of DOJ for affirming the dismissal of the criminal complaints for estafa and/or qualified estafa are determinative of whether or not it committed grave abuse of discretion amounting to lack or excess of jurisdiction. In requiring "hard facts and solid evidence" as the basis for a finding of probable cause to hold petitioners Bernyl and Katherene liable to stand trial for the crime complained of, the DOJ disregards the definition of probable cause - that it is a reasonable ground of presumption that a matter is, or may be, well-founded, such a state of facts in the mind of the prosecutor as would lead a person of ordinary caution and prudence to believe, or entertain an honest or strong suspicion, that a thing is so. The term does not mean "actual and positive cause" nor does it import absolute certainty. It is merely based on opinion and reasonable belief; that is, the belief that the act or omission complained of constitutes the offense charged. While probable cause demands more than "bare suspicion," it requires "less than evidence which would justify conviction." Herein, the DOJ reasoned as if no evidence was actually presented by respondent HSBC when in fact the records of the case were teeming; or it

discounted the value of such substantiation when in fact the evidence presented was adequate to excite in a reasonable mind the probability that petitioners Bernyl and Katherene committed the crime/s complained of. In so doing, the DOJ whimsically and capriciously exercised its discretion, amounting to grave abuse of discretion, which rendered its resolutions amenable to correction and annulment by the extraordinary remedy of certiorari. In the case at bar, as analyzed by the prosecutor, a prima facie case of estafa exists against respondents. As perused by her, the facts as presented in the Complaint-Affidavit of the auditor are reasonable enough to excite her belief that respondents are guilty of the crime complained of. In Andres v. Justice Secretary Cuevas50cra1aw we had occasion to rule that the "presence or absence of the elements of the crime is evidentiary in nature and is a matter of defense that may be passed upon after a full-blown trial on the merits."51cra1aw Thus confronted with the issue on whether the public prosecutor and the Secretary of Justice committed grave abuse of discretion in disposing of the case of petitioner, given the sufficiency of evidence on hand, we do not hesitate to rule in the affirmative. We have previously ruled that grave abuse of discretion may arise when a lower court or tribunal violates and contravenes the Constitution, the law or existing jurisprudence. Non-inclusion of officers of Universal not a ground for the dismissal of the complaint. The DOJ in resolving to deny petitioner's appeal from the resolution of the prosecutor gave another ground - failure to implead the officers of Universal. It explained:chan robles virtual law library To allow your client to make the choice is to make an unwarranted classification under the law which will result in grave injustice against herein respondents. Thus, if your client agreed that no estafa was committed in this transaction with Universal who was the principal player and beneficiary of this transaction[,] more so with herein respondents whose liabilities are based only on conspiracy with Universal.52cra1aw The ratiocination of the Secretary of Justice conveys the idea that if the charge against respondents rests upon the same evidence used to charge co-accused (officers of Universal) based on the latter's conspiratorial participation, the non-inclusion of said co-accused in the charge should benefit the respondents. The reasoning of the DOJ is flawed. Suffice it to say that it is indubitably within the discretion of the prosecutor to determine who must be charged with what crime or for what offense. Public prosecutors, not the private complainant, are the ones obliged to bring forth before the law those who have transgressed it. Section 2, Rule 110 of the Rules of Court53cra1aw mandates that all criminal actions must be commenced either by complaint or information in the name of the People of the Philippines against all persons who appear to be responsible therefor. Thus the law makes it a legal duty for prosecuting officers to file the charges against whomsoever the evidence may show to be responsible for the offense. The proper remedy under the circumstances where persons who ought to be charged were not included in the complaint of the private complainant is definitely not to dismiss the complaint but to include them in the information. As the OSG correctly suggested, the proper remedy should have been the inclusion of certain employees of Universal who were found to have been in cahoots with respondents in defrauding petitioner. The DOJ, therefore, cannot seriously argue that because the officers of Universal were not indicted, respondents themselves should not likewise be charged. Their non-inclusion cannot be perversely used to justify desistance by the public prosecutor from prosecution of the criminal case just because not all of those who are probably guilty thereof were charged.

Mandamus a proper remedy when resolution of public respondent is tainted with grave abuse of discretion. Mandamus is a remedial measure for parties aggrieved. It shall issue when "any tribunal, corporation, board, officer or person unlawfully neglects the performance of an act which the law specifically enjoins as a duty resulting from an office, trust or station."54cra1aw The writ of mandamus is not available to control discretion neither may it be issued to compel the exercise of discretion. Truly, it is a matter of discretion on the part of the prosecutor to determine which persons appear responsible for the commission of a crime. However, the moment he finds one to be so liable it becomes his inescapable duty to charge him therewith and to prosecute him for the same. In such a situation, the rule loses its discretionary character and becomes mandatory. Thus, where, as in this case, despite the sufficiency of the evidence before the prosecutor, he refuses to file the corresponding information against the person responsible, he abuses his discretion. His act is tantamount to a deliberate refusal to perform a duty enjoined by law. The Secretary of Justice, on the other hand, gravely abused his discretion when, despite the existence of sufficient evidence for the crime of estafa as acknowledged by the investigating prosecutor, he completely ignored the latter's finding and proceeded with the questioned resolution anchored on purely evidentiary matters in utter disregard of the concept of probable cause as pointed out in Balangauan. To be sure, findings of the Secretary of Justice are not subject to review unless shown to have been made with grave abuse.55cra1aw The present case calls for the application of the exception. Given the facts of this case, petitioner has clearly established that the public prosecutor and the Secretary of Justice committed grave abuse of discretion. WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals in CA-G.R. SP No. 58548 promulgated on October 21, 2002 affirming the Resolutions dated June 22, 1998 and March 1, 2000 of the Secretary of Justice, and its Resolution dated July 12, 2004 denying reconsideration thereon are hereby REVERSED and SET ASIDE. The public prosecutor is ordered to file the necessary information for estafa against the respondents. SO ORDERED. 16. G.R. No. 175994 JESUS CAMPOS and ROSEMARIE CAMPOS-BAUTISTA, Petitioners, - versus NENITA BUENVENIDA PASTRANA, ROGER BUENVENIDA, SONIA BUENVENIDA, TEDDY BUENVENIDA, VICTOR BUENVENIDA, HARRY BUENVENIDA, MILDRED BUENVENIDA, MANOLITO BUENVENIDA and DAISY BUENVENIDA, represented by their Attorney-in-Fact CARLITO BUENVENIDA, Respondents. DECISION DEL CASTILLO, J.: It sometimes happens that a creditor, after securing a judgment against a debtor, finds that the debtor had transferred all his properties to another leaving nothing to satisfy the obligation to the creditor. In this petition for review on certiorari, petitioners ask us to set aside the November 23, 2005 Decision of the Court of Appeals (CA) in CA-G.R. CV No. 68731 declaring as null the sale of several parcels of land made by their parents in

their favor, for being absolutely simulated transactions. Also assailed is the November 21, 2006 Resolution. Factual antecedents This is the third case between essentially the same parties and the second among those cases to reach this Court on appeal, spanning a period of close to three decades. The first case arose from the refusal of Carlito Campos (Carlito), the father of herein petitioners, to surrender the possession of a fishpond he leased from respondents mother, Salvacion Buenvenida, despite the expiration of their contract of lease in 1980. Alleging that he was an agricultural lessee, Carlito filed an agrarian case docketed as CAR Case No. 1196 (Agrarian Case) against his lessor. After trial, the Regional Trial Court of Roxas City, Branch 14, found that Carlito was not an agricultural tenant. He then appealed to the CA and subsequently to this Court, but was unsuccessful. While the appeal in the Agrarian Case was pending before the CA, herein respondents filed the second case, Civil Case No. V-5417, against Carlito for Recovery of Possession and Damages with Preliminary Mandatory Injunction (Possession Case) involving the same fishpond subject of the earlier agrarian case. On November 27, 1990, the Regional Trial Court of Roxas City, Branch 16, rendered a Decision finding Carlito to have retained possession of the fishpond notwithstanding the expiration of the contract of lease and ordering him to pay rentals, the value of the produce and damages to the herein respondents. The Decision became final and executory and a Writ of Execution was issued on February 7, 1995. Subsequently, on September 19, 1995, an Alias Writ of Execution was also issued. Both were returned unsatisfied as per Sheriffs Return of Service dated November 14, 1995.

Present: During the pendency of the Agrarian Case, as well as prior to the filing of the Possession Case, Carlito was the registered owner of the following properties: CARPIO, J., Chairperson, LEONARDO-DE CASTRO, BRION, 1. Residential Lots 3715-A and 3715-B-2 covered by DEL CASTILLO, and Transfer Certificates of Title Nos. 18205 and 18417, respectively and ABAD, JJ. 2. Agricultural Lots 850 and 852 covered by Original

Certificates of Title Promulgated: Nos. P-9199 and P-9200, respectively. December 8, 2009 When the respondents were about to levy these properties to satisfy the judgment in the Possession Case, they discovered that spouses Carlito and Margarita Campos transferred these lots to their children Rosemarie and Jesus Campos, herein petitioners, by virtue of Deeds of Absolute Sale dated October 18, 1985 and November 2, 1988. Specifically, spouses Campos sold the residential lots (Lots 3715-A and 3715-B-2), with a total area of 1,393 square meters, to their daughter Rosemarie for P7,000.00 and the agricultural lots (Lots 850 and 852) with a combined area of 7,972 square meters, to their son Jesus for P5,600.00. Proceedings before the Regional Trial Court Civil Case No. V-7028

On February 18, 1997, respondents instituted the third case, Civil Case No. V-7028 (Nullity of Sale Case), subject of this appeal, seeking to declare as null the aforesaid deeds of sale and the transfer certificates of title issued pursuant thereto. They alleged that the contracts of sale between spouses Campos and petitioners were simulated for the sole purpose of evading the levy of the abovementioned properties in satisfaction of a money judgment that might be rendered in the Possession Case. In their Answer with Counterclaim, spouses Campos and petitioners averred that Rosemarie and Jesus Campos acquired the lots in question in good faith and for value because they were sold to them before they had any notice of the claims or interests of other persons thereover. On August 21, 2000, the Regional Trial Court of Roxas City, Branch 14, dismissed the complaint. It held that

August 21, 2000 in Civil Case No. V-7028 is REVERSED and SET ASIDE. Let a copy of this Decision be furnished to the Register of Deeds of the Province of Capiz who is hereby ordered to cancel Transfer Certificates of Title Nos. T-26092 and T-26093 in the name of Rosemarie Campos, and Transfer Certificates of Title Nos. T23248 and 23249 in the name of Jesus Campos and restore said titles in the name of the previous owner, Carlito Campos SO ORDERED. Only petitioners moved for reconsideration but the CA denied the same. Issues Hence, this petition for review on certiorari raising the following errors: I. THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN APPLYING ARTICLE 1409, CIVIL CODE, INSTEAD OF ARTIcLE 1381 (3), CIVIL CODE, AND IN SPECULATING THAT A CAUSE OF ACTION OF SUPPOSED SALE IN FRAUD OF CREDITORS EXISTS DESPITE NON-EXHAUSTION OF REMEDIES TO ENFORCE THE JUDGMENT IN CIVIL CASE NO. V-5417. II. THE COURT OF APPEALS COMMITTED AN ERROR OF LAW OVERLOOKING THAT THE CAUSE OF ACTION HAD PRESCRIBED, THE COMPLAINT HAVING BEEN FILED AFTER SEVEN (7) YEARS OR ONLY ON 14 OCTOBER 1997, FROM THE TIME THE TITLES WERE ISSUED IN 1990. III. THE COURT OF APPEALS ERRONEOUSLY ANCHORED ITS IMPUGNED JUDGMENT ON MISAPPREHENSION OF FACTS THAT THE SALE WERE ANTEDATED, HENCE SIMULATED DESPITE GLARING ABSENCE OF EVIDENCE IN SUPPORT THEREOF. IV. THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN CASTING ASIDE OVERWHELMING EVIDENCE DULY APPRECIATED BY THE TRIAL COURT THAT PETITIONERS ARE BUYERS IN GOOD FAITH AND FOR VALUE, WHO EXERCISED DOMINION OVER THE SUBJECT LOTS, WHICH IF PROPERLY CONSIDERED, SHALL WARRANT THE SINGULAR CONCLUSION THAT THE SALE AND TRANSFER OF TITLES ARE VALID. Petitioners arguments

In the Resolution of this case the issue is whether or not the spouses Carlito Campos and Margarita Arduo, sensing that an unfavorable judgment might be rendered against them in Civil Case No. V-5417 filed in Branch 16 on July 17, 1987 by the same plaintiffs for Recovery of Possession and Damages with Preliminary Mandatory Injunction, in evident bad faith and wanton disregard of the law, maliciously and fraudulently, executed a purely fictitious and simulated sale of their properties thereby ceding and transferring their ownership thereto to their children Rosemarie Campos-Bautista and Jesus Campos. A close scrutiny of the defendants documentary exhibits and testimonies showed that as early as 1981 defendant Jesus Campos was already leasing a fishpond in Brgy. Majanlud, Sapian, Capiz from Victorino Jumpay and defendant Rosemarie Campos was engaged in the sari-sari store business starting 1985 so that they were able to purchase the properties of their parents out of their profits derived therefrom. The Deed of Absolute Sale (Exh. 6 & 10) executed by the spouses Carlito Campos and Margarita Arduo to Rosemarie Campos and Jesus Campos were dated October 17, 1985 and November 2, 1988, respectively. It can readily [be] gleaned from the records that Civil Case No. V-5417 was filed on July 7, 1987 and was decided on November 27, 1990. Furthermore, the alias writ of execution was issued only on July 5, 1995 for which the Sheriffs Return of Service was returned unsatisfied on November 14, 1995. WHEREFORE, the complaint of the plaintiffs against the defendants is DISMISSED. Their claim for damages is likewise DISMISSED. The counter-claim of the defendants must also be DISMISSED as the case was not filed in evident bad faith and with malicious intent. SO ORDERED. Proceedings before the Court of Appeals

Petitioners assail the application of Article 1409 of the Civil Code on void Upon review of the evidence presented, the CA found that the conveyances were made in 1990, and not in 1985 or 1988, or just before their actual registration with the Registry of Deeds, evidently to avoid the properties from being attached or levied upon by the respondents. The CA likewise noted that the zonal value of the subject properties were much higher than the value for which they were actually sold. The appellate court further observed that despite the sales, spouses Campos retained possession of the properties in question. Finally, the CA took note of the fact that the writ of execution and alias writ issued in the Possession Case remained unsatisfied as the lower court could not find any other property owned by the spouses Campos that could be levied upon to satisfy its judgment, except the parcels of land subject of the assailed transactions. On these bases, the CA ruled that the assailed contracts of sale were indeed absolutely simulated transactions and declared the same to be void ab initio. The dispositive portion of the Decision of the CA reads: WHEREFORE, the instant appeal is GRANTED. The decision of the Regional Trial Court of Roxas City, Branch 14, dated contracts as against Article 1381(3) of the Civil Code on rescissible contracts in fraud of creditors, considering that the questioned conveyances executed by the spouses Campos to their children were allegedly done to evade the enforcement of the writ of execution in the Possession Case. In addition, petitioners allege that the CA misappreciated the facts of this case when it found that the questioned transactions were tainted with badges of fraud. Respondents arguments Respondents argue that the application of Article 1409 on void contracts was a natural and logical consequence of the CAs finding that subject deeds of sale were absolutely simulated and fictitious, consistent with the nature of the respondents cause of action which was for declaration of nullity of said contracts and the transfer certificates of titles issued pursuant thereto. Respondents also stressed that the CAs finding is conclusive upon us and that only questions of law may be raised in a petition for review on certiorari under Rule 45 of the Rules of Court.

Our Ruling The petition lacks merit. Well-settled is the rule that this Court is not a trier of facts. When supported by substantial evidence, the findings of fact of the CA are conclusive and binding, and are not reviewable by this Court, unless the case falls under any of the following recognized exceptions: (1) When the conclusion is a finding grounded entirely on speculation, surmises and conjectures; (2) When the inference made is manifestly mistaken, absurd or impossible; (3) Where there is a grave abuse of discretion; (4) When the judgment is based on a misappreciation of facts; (5) When the findings of fact are conflicting; (6) When the CA in making its findings, went beyond the issues of the case and the same is contrary to the admissions of both appellant and appellee; (7) When the findings are contrary to those of the trial court; (8) When the findings of fact are conclusions without citation of specific evidence on which they are based; (9) When the facts set forth in the petition as well as in the petitioners main and reply briefs are not disputed by the respondents; and (10) When the findings of fact of the CA are premised on the supposed absence of evidence and contradicted by the evidence on record. None of these exceptions is present in this case. We find that the Decision of the CA is supported by the required quantum of evidence. The subject Deeds of Absolute Sale executed by the Spouses Campos to their children (herein petitioners) are absolutely simulated and fictitious. The CA correctly held that the assailed Deeds of Absolute Sale were executed when the Possession Case was already pending, evidently to avoid the properties subject thereof from being attached or levied upon by the respondents. While the sales in question transpired on October 18, 1985 and November 2, 1988, as reflected on the Deeds of Absolute Sale, the same were registered with the Registry of Deeds only on October 25, 1990 and September 25, 1990. We also agree with the findings of the CA that petitioners failed to explain the reasons for the delay in the registration of the sale, leading the appellate court to conclude that the conveyances were made only in 1990 or sometime just before their actual registration and that the corresponding Deeds of Absolute Sale were antedated. This conclusion is bolstered by the fact that the supposed notary public before whom the deeds of sale were acknowledged had no valid notarial commission at the time of the notarization of said documents. Indeed, the Deeds of Absolute Sale were executed for the purpose of putting the lots in question beyond the reach of creditors. First, the Deeds of Absolute Sale were registered exactly one month apart from each other and about another one month from the time of the promulgation of the judgment in the Possession Case. The Deeds of Absolute Sale were antedated and that the same were executed when the Possession Case was already pending. A: A: Q:

Second, there was a wide disparity in the alleged consideration specified in the Deeds of Absolute Sale and the actual zonal valuation of the subject properties as per the BIR Certification, as follows: Consideration specified in Deed of Absolute Sale Residential Lots: From Spouses Campos to daughter, Rosemarie Campos Agricultural Lots: From Spouses Campos to son, Jesus Campos Market Value as per Tax Declaration Computed Zonal Valuation (BIR Certification)

P 7,000.00

P 83,580.00

P 417,900.00

P 5,600.00

P 25,000.19

P 39,860.00

As correctly noted by the CA, the appraised value of the properties subject of this controversy may be lower at the time of the sale in 1990 but it could not go lower than P7,000.00 and P5,600.00. We likewise find the considerations involved in the assailed contracts of sale to be inadequate considering the market values presented in the tax declaration and in the BIR zonal valuation. Third, we cannot believe that the buyer of the 1,393-square meter residential land could not recall the exact area of the two lots she purchased. In her cross-examination, petitioner Rosemarie Campos stated: Q: Can you tell us the total area of those two (2) lots that they sold to you? It consists of One Thousand (1,000) Square Meters. By the way, for how much did you buy this [piece] of land consisting of 1,000 square meters? Seven Thousand Pesos (P7,000.00) Your Honor.

Fourth, it appears on record that the money judgment in the Possession Case has not been discharged with. Per Sheriffs Service Return dated November 14, 1995, the Alias Writ of Execution and Sheriffs Demand for Payment dated September 19, 1995 remain unsatisfied. Finally, spouses Campos continue to be in actual possession of the properties in question. Respondents have established through the unrebutted testimony of Rolando Azoro that spouses Campos have their house within Lot 3715-A and Lot 3715-B-2 and that they reside there together with their daughter Rosemarie. In addition, spouses Campos continued to cultivate the rice lands which they purportedly sold to their son Jesus. Meantime, Jesus, the supposed new owner of said rice lands, has relocated to Bulacan where he worked as a security guard. In other words, despite the transfer of the said properties to their children, the latter have not exercised complete dominion over the same. Neither have the petitioners shown if their parents are paying rent for the use of the properties which they already sold to their children. In Suntay v. Court of Appeals, we held that:

The failure of the late Rafael to take exclusive possession of the property allegedly sold to him is a clear badge of fraud. The fact that, notwithstanding the title transfer, Federico

remained in actual possession, cultivation and occupation of the disputed lot from the time the deed of sale was executed until the present, is a circumstance which is unmistakably added proof of the fictitiousness of the said transfer, the same being contrary to the principle of ownership. While in Spouses Santiago v. Court of Appeals, we held that the failure of petitioners to take exclusive possession of the property allegedly sold to them, or in the alternative, to collect rentals from the alleged vendor x x x is contrary to the principle of ownership and a clear badge of simulation that renders the whole transaction void and without force and effect, pursuant to Article 1409 of the Civil Code.

We cannot agree. As discussed above, the sale of subject properties to herein petitioners are null and void. And under Article 1410 of the Civil Code, an action or defense for the declaration of the inexistence of a contract is imprescriptible. Hence, petitioners contention that respondents cause of action is already barred by prescription is without legal basis.

Since the assailed Deeds of Absolute Sale are null and void, the Civil Code provisions on rescission have no application in the instant case. Finally, petitioners argument that the applicable law in this case is Article 1381(3) of the Civil Code on rescissible contracts and not Article 1409 on void contracts is not a question of first impression. This issue had already been settled several decades ago when we held that an action to rescind is founded upon and presupposes the existence of a contract. A contract which is null and void is no contract at all and hence could not be the subject of rescission. In the instant case, we have declared the Deeds of Absolute Sale to be fictitious and inexistent for being absolutely simulated contracts. It is true that the CA cited instances that may constitute badges of fraud under Article 1387 of the Civil Code on rescissible contracts. But there is nothing else in the appealed decision to indicate that rescission was contemplated under the said provision of the Civil Code. The aforementioned badges must have been considered merely as grounds for holding that the sale is fictitious. Consequently, we find that the CA properly applied the governing law over the matter under consideration which is Article 1409 of the Civil Code on void or inexistent contracts. WHEREFORE, the petition is DENIED. Costs against petitioners. SO ORDERED. 17. G.R. No. 119850 June 20, 1996

The issuance of transfer certificates of title to petitioners did not vest upon them ownership of the properties. The fact that petitioners were able to secure titles in their names did not operate to vest upon them ownership over the subject properties. That act has never been recognized as a mode of acquiring ownership. The Torrens system does not create or vest title. It only confirms and records title already existing and vested. It does not protect a usurper from the true owner. It cannot be a shield for the commission of fraud. In the instant case, petitioner Rosemarie Campos supposedly bought the residential properties in 1985 but did not have the assailed Deed of Absolute Sale registered with the proper Registry of Deeds for more than five years, or until a month before the promulgation of the judgment in the Possession Case. Hence, we affirm the finding of the CA that the purported deed was antedated. Moreover, her failure to take exclusive possession of the property allegedly sold, or, alternatively, to collect rentals is contrary to the principle of ownership and a clear badge of simulation. On these grounds, we cannot hold that Rosemarie Campos was an innocent buyer for value. Likewise, petitioner Jesus Campos supposedly bought the rice land from his parents in 1988 but did not have the assailed Deed of Absolute Sale registered with the proper Registry of Deeds for more than two years, or until two months before the promulgation of the judgment in the Possession Case. Thus, we likewise affirm the finding of the CA that the purported deed was antedated. In addition, on cross, he confirmed that he had knowledge of the prior pending cases when he supposedly purchased his parents rice land stating that:

MANDARIN VILLA, INC., petitioner, vs. COURT OF APPEALS, and CLODUALDO DE JESUS, respondents. RESOLUTION FRANCISCO, J.:p

Q: You never knew that your parents and the plaintiffs in this case have cases in the past prior to this case now, is that right? A: Yes, sir. I knew about it.

With ample evidentiary support are the following antecedent facts: In the evening of October 19, 1989, private respondent, Clodualdo de Jesus, a practicing lawyer and businessman, hosted a dinner for his friends at the petitioner's restaurant, the Mandarin Villa Seafoods Village Greenhills, Mandaluyong City. After dinner the waiter handed to him the bill in the amount of P2,658.50. Private respondent offered to pay the bill through his credit card issued by Philippine Commercial Credit Card Inc. (BANKARD). This card was accepted by the waiter who immediately proceeded to the restaurant's cashier for card verification. Ten minutes later, however, the waiter returned and audibly informed private respondent that his credit card 1 had expired. Private respondent remonstrated that said credit card had yet to expire on September 1990, as embossed on its 2 face. The waiter was unmoved, thus, private respondent and two of his guests approached the restaurant's cashier who again passed the credit card over the verification computer. The same information was produced, i.e., CARD EXPIRED. Private respondent and his guests returned to their table and at this juncture, Professor Lirag, another guest, uttered the following remarks: "Clody [referring to Clodualdo de Jesus], may problema ba? Baka kailangang maghugas na kami ng 3 pinggan?" Thereupon, private respondent left the restaurant and got his BPI Express Credit Card from his car and offered it to pay their bill. This was accepted and honored by the cashier 4 after verification. Petitioner and his companions left afterwards.

Q: And in spite of your knowledge, that there was a pending case between your parents and the plaintiffs here, you still purchased these two (2) lots 850 and 852 from your parents, is that what you are telling us? A: All I knew was that, that case was a different case from the subject matter then [sic] the lot now in question. On these findings of fact, petitioner Jesus Campos cannot be considered as an innocent buyer and for value. Since both the transferees, Rosemarie and Jesus Campos, are not innocent purchasers for value, the subsequent registration procured by the presentation of the void deeds of absolute sale is likewise null and void.

The action for the declaration of the inexistence of the assailed Deeds of Absolute Sale does not prescribe. Petitioners argue that respondents cause of action had prescribed when they filed the Nullity of the Sale Case on October 14, 1997, or seven years after the registration of the questioned sales in 1990.

The incident triggered the filing of a suit for damages by private respondent. Following a full-dress trial, judgment was rendered directing the petitioner and BANKARD to pay jointly and severally the private respondent: (a) moral damages in the amount of P250,000.00; (b) exemplary damages in the amount of P100,000.00, and (c) attorney's fees and litigation expenses in the amount of P50,000.00. Both the petitioner and BANKARD appealed to the respondent Court of Appeals which rendered a decision, thus: WHEREFORE, the decision appealed from is hereby MODIFIED by: 1. Finding appellant MANDARIN responsible for damages in favor of appellee; solely

and under Article 1311 of the Civil Code private respondent may demand its fulfillment provided he communicated his 8 acceptance to the petitioner before its revocation. In this case, private respondent's offer to pay by means of his BANKARD credit card constitutes not only an acceptance of the said stipulation but also an explicit communication of his acceptance to the obligor. In addition, the record shows that petitioner posted a logo inside Mandarin Villa Seafood Village stating that "Bankard is 9 accepted here. This representation is conclusive upon the petitioner which it cannot deny or disprove as against the private respondent, the party relying thereon. Petitioner, therefore, cannot disclaim its obligation to accept private respondent's BANKARD credit card without violating the 10 equitable principle of estoppel. Anent the second issue, petitioner insists that it is not negligent. In support thereof, petitioner cites its good faith in checking, not just once but twice, the validity of the aforementioned credit card prior to its dishonor. It argues that since the verification machine flashed an information that the credit card has expired, petitioner could not be expected to honor the same much less be adjudged negligent for dishonoring it. Further, petitioner asseverates that it only followed the guidelines and instructions issued by BANKARD in dishonoring the aforementioned credit card. The argument is untenable. The test for determining the existence of negligence in a particular case may be stated as follows: Did the defendant in doing the alleged negligent act use the reasonable care and caution which an ordinary prudent person would have used in 11 the same situation? If not, then he is guilty of negligence. The Point of Sale (POS) Guidelines which outlined the steps that petitioner must follow under the circumstances provides. xxx xxx xxx

2. Absolving appellant BANKARD of any responsibility for damages; 3. Reducing moral damages awarded to appellee to TWENTY FIVE THOUSAND and 00/100 (P25,000.00) PESOS; 4. Reducing exemplary damages awarded to appellee to TEN THOUSAND and 00/100 (P10,000.00) PESOS; 5. Reversing and setting aside the award of P250,000.00 for attorney's fees as well as interest awarded, and 6. AFFIRMING counterclaims and cross-claims. the dismissal of all

Costs against appellant Mandarin. SO ORDERED.


5

CARD EXPIRED Mandarin Villa, thus, interposed this present petition, faulting the respondent court with six (6) assigned errors which may be reduced to the following issues, to wit: (1) whether or not petitioner is bound to accept payment by means of credit card; (2) whether or not petitioner is negligent under the circumstances obtaining in this case; and (3) if negligent, whether or not such negligence is the proximate cause of the private respondent's damage. Petitioner contends that it cannot be faulted for its cashier's refusal to accept private respondent's BANKARD credit card, the same not being a legal tender. It argues that private respondent's offer to pay by means of credit card partook of the nature of a proposal to novate an existing obligation for which petitioner, as creditor, must first give its consent otherwise there will be no binding contract between them. Petitioner cannot seek refuge behind this averment. We note that Mandarin Villa Seafood Village is affiliated with 6 BANKARD. In fact, an "Agreement" entered into by petitioner and BANKARD dated June 23, 1989, provides inter alia: The MERCHANT shall honor validly issued PCCCI credit cards presented by their corresponding holders in the purchase of goods and/or services supplied by it provided that the card expiration date has not elapsed and the card number does not appear on the latest cancellation bulletin of lost, suspended and canceled PCCCI credit cards and, no signs of tampering, alterations or irregularities appear 7 on the face of the credit card. While private respondent, may not be a party to the said agreement, the above-quoted stipulation conferred a favor upon the private respondent, a holder of credit card validly issued by BANKARD. This stipulation is a stipulation pour autri a. Check expiry date on card. b. If unexpired, refer to CB. b.1. If valid, honor up to maximum of SPL only. b.2. If in CB as Lost, do procedures 2a to 2e., b.3. If in CB as Suspended/Cancelled, do not honor card. c. If expired, do not honor card.
12

A cursory reading of said rule reveals that whenever the words CARD EXPIRED flashes on the screen of the verification machine, petitioner should check the credit card's expiry date embossed on the card itself. If unexpired, petitioner should honor the card provided it is not invalid, cancelled or otherwise suspended. But if expired, petitioner should not honor the card. In this case, private respondent's BANKARD credit card has an 13 embossed expiry date of September 1990. Clearly, it has not yet expired on October 19, 1989, when the same was wrongfully dishonored by the petitioner. Hence, petitioner did not use the reasonable care and caution which an ordinary prudent person would have used in the same situation and as such petitioner is guilty of negligence. In this connection, we quote with approval the following observations of the respondent Court. Mandarin argues that based on the POS Guidelines (supra), it has three options in case the verification machine flashes "CARD EXPIRED". It chose to exercise option (c) by not honoring appellee's credit card.

However, appellant apparently intentionally glossed over option "(a) Check expiry date on card" (id.) which would have shown without any shadow of doubt that the expiry date embossed on the BANKARD was "SEP 90". (Exhibit "D".) A cursory look at the appellee's BANKARD would also reveal that appellee had been as of that date a cardholder since 1982, a fact which would have entitled the customer the 14 courtesy of better treatment. Petitioner, however, argues that private respondent's own negligence in not bringing with him sufficient cash was the proximate cause of his damage. It likewise sought exculpation 15 by contending that the remark of Professor Lirag is a supervening event and at the same time the proximate cause of private respondent's injury. We find this contention also devoid of merit. While it is true that private respondent did not have sufficient cash on hand when he hosted a dinner at petitioner's restaurant, this fact alone does not constitute negligence on his part. Neither can it be claimed that the same was the proximate cause of private 16 respondent's damage. We take judicial notice of the current practice among major establishments, petitioner included, to accept payment by means of credit cards in lieu of cash. Thus, petitioner accepted private respondent's BPI Express Credit 1 Card after verifying its validity, 7 a fact which all the more refutes petitioner's imputation of negligence on the private respondent. Neither can we conclude that the remark of Professor Lirag was a supervening event and the proximate cause of private respondent's injury. The humiliation and embarrassment of the private respondent was brought about not by such a remark of Professor Lirag but by the fact of dishonor by the petitioner of private respondent's valid BANKARD credit card. If at all, the remark of Professor Lirag served only to aggravate the embarrassment then felt by private respondent, albeit silently within himself. WHEREFORE, the instant petition is hereby DISMISSED. SO ORDERED. 18. G.R. No. 163663 June 30, 2006

with Asea Brown Boveri under the firm name JANCOM Environmental Corporation (JANCOM), its co-respondent. On February 12, 1997, the above-said Executive Committee approved the recommendation of the Pre-qualification, Bids and Awards Committee to declare JANCOM as the sole complying bidder for the San Mateo Waste Disposal Site. On December 19, 1997, a Contract for the BOT Implementation of the Solid Waste Management Project for the San Mateo, Rizal Waste Disposal Site4 (the contract) was entered into by the Republic of the Philippines, represented by the Presidential Task Force on Solid Waste Management through then Department of Environment and Natural Resources Secretary Victor Ramos, then Cabinet Office for Regional Development-National Capital Region Chairman Dionisio dela Serna, and then MMDA Chairman Prospero Oreta on one hand, and JANCOM represented by its Chief Executive Officer Jorge Mora Aisa and its Chairman Jay Alparslan, on the other. On March 5, 1998, the contract was submitted for approval to President Ramos who subsequently endorsed it to then incoming President Joseph E. Estrada. Owing to the clamor of the residents of Rizal, the Estrada administration ordered the closure of the San Mateo landfill. Petitioner GMMSWMC thereupon adopted a Resolution not to pursue the contract with JANCOM, citing as reasons therefor the passage of Republic Act 8749, otherwise known as the Clean Air Act of 1999, the non-availability of the San Mateo site, and costly tipping fees.5 The Board of Directors of Jancom International thereafter adopted on January 4, 2000 a Resolution6 authorizing Atty. Manuel Molina to act as legal counsel for respondents and "determine and file such legal action as deemed necessary before the Philippine courts in any manner he may deem appropriate" against petitioners. The Board of Directors of JANCOM also adopted a Resolution 7 on February 7, 2000 granting Atty. Molina similar authorization to file legal action as may be necessary to protect its interest with respect to the contract. On March 14, 2000, respondents filed a petition for certiorari8 with the Regional Trial Court (RTC) of Pasig City where it was docketed as Special Civil Action No. 1955, to declare the GMMSWMC Resolution and the acts of the MMDA calling for bids for and authorizing the forging of a new contract for the Metro Manila waste management as illegal, unconstitutional and void and to enjoin petitioners from implementing the Resolution and making another award in lieu thereof. By Decision9 of May 29, 2000, Branch 68 of the Pasig City RTC found in favor of respondents. 10 Petitioners thereupon assailed the RTC Decision via petition for certiorari11 with prayer for a temporary restraining order with the CA, docketed as CA-G.R. SP No. 59021. By Decision12 of November 13, 2000, the CA denied the petition for lack of merit and affirmed in toto the May 29, 2000 RTC Decision. Petitioners Motion for Reconsideration was denied, prompting them to file a petition for review before this Court, docketed as G.R. No. 147465. By Decision13 of January 30, 2002 and Resolution14 of April 10, 2002, this Court affirmed the November 13, 2001 CA Decision and declared the contract valid and perfected, albeit ineffective and unimplementable pending approval by the President. JANCOM and the MMDA later purportedly entered into negotiations to modify certain provisions of the contract which were embodied in a draft Amended Agreement15 dated June 2002. The draft Amended Agreement bore no signature of the parties.

GREATER METROPOLITAN MANILA SOLID WASTE MANAGEMENT COMMITTEE and the METROPOLITAN MANILA DEVELOPMENT AUTHORITY, Petitioners, vs. JANCOM ENVIRONMENTAL CORPORATION and JANCOM INTERNATIONAL DEVELOPMENT PROJECTS PTY. LIMITED OF AUSTRALIA, Respondents. DECISION CARPIO MORALES, J.: The present petition for review on certiorari challenges the Decision 1 dated December 19, 2003 and Resolution2 dated May 11, 2004 of the Court of Appeals (CA)3 in CA-G.R. SP No. 78752 which denied the petition for certiorari filed by herein petitioners Greater Metropolitan Manila Solid Waste Management Committee (GMMSWMC) and the Metropolitan Manila Development Authority (MMDA) and their Motion for Reconsideration, respectively. In 1994, Presidential Memorandum Order No. 202 was issued by then President Fidel V. Ramos creating an Executive Committee to oversee and develop waste-to-energy projects for the waste disposal sites in San Mateo, Rizal and Carmona, Cavite under the BuildOperate-Transfer (BOT) scheme. Respondent Jancom International Development Projects Pty. Limited of Australia (Jancom International) was one of the bidders for the San Mateo Waste Disposal Site. It subsequently entered into a partnership

Respondents, through Atty. Molina, subsequently filed before Branch 68 of the Pasig City RTC an Omnibus Motion16 dated July 29, 2002 praying that: (1) an alias writ of execution be issued prohibiting and enjoining petitioners and their representatives from calling for, accepting, evaluating, approving, awarding, negotiating or implementing all bids, awards and contracts involving other Metro Manila waste management projects intended to be pursued or which are already being pursued; (2) the MMDA, through its Chairman Bayani F. Fernando, be directed to immediately forward and recommend the approval of the Amended Agreement to President Gloria Macapagal Arroyo; (3) Chairman Fernando be ordered to personally appear before the court and explain his acts and public pronouncements which are in direct violation and gross defiance of the final and executory May 29, 2000 RTC Decision; (4) the Executive Secretary and the Cabinet Secretaries of the departmentsmembers of the National Solid Waste Management Commission be directed "to submit the contract within 30 days from notice to the President for signature and approval and if the latter chooses not to sign or approve the contract, the Executive Secretary be made to show cause therefor;" and (5) petitioners be directed to comply with and submit their written compliance with their obligations specifically directed under the provisions of Article 18, paragraphs 18.1, 18.1.1 (a), (b), (c) and (d) of the contract within 30 days from notice.17 To the Omnibus Motion petitioners filed their Opposition 18 which merited JANCOMs Reply19 filed on August 19, 2002. On August 21, 2002, Atty. Simeon M. Magdamit, on behalf of Jancom International, filed before the RTC an Entry of Special Appearance and Manifestation with Motion to Reject the Pending Omnibus Motion20 alleging that: (1) the Omnibus Motion was never approved by Jancom International; (2) the Omnibus Motion was initiated by lawyers whose services had already been terminated, hence, were unauthorized to represent it; and (3) the agreed judicial venue for dispute resolution relative to the implementation of the contract is the International Court of Arbitration in the United Kingdom pursuant to Article 16.121 of said contract. In the meantime, on November 3, 2002, the MMDA forwarded the contract to the Office of the President for appropriate action, 22 together with MMDA Resolution No. 02-1823 dated June 26, 2002, "Recommending to her Excellency the President of the Republic of the Philippines to Disapprove the Contract Entered Into by the Executive Committee of the Presidential Task Force on Waste Management with Jancom Environmental Corporation and for Other Purposes." By Order24 of November 18, 2002, the RTC noted the above-stated Entry of Special Appearance of Atty. Magdamit for Jancom International and denied the Motion to Reject Pending Omnibus Motion for lack of merit. Jancom International filed on December 9, 2002 a Motion for Reconsideration25 which was denied for lack of merit by Order26 of January 8, 2003. Petitioners and respondents then filed their Memoranda27 on May 23, 2003 and May 26, 2003, respectively. By Order28 of June 11, 2003, the RTC granted respondents Omnibus Motion in part. The dispositive portion of the Order reads, quoted verbatim: WHEREFORE, in view of the foregoing, let an Alias Writ of Execution immediately issue and the Clerk of Court and Ex-Oficio Sheriff or any o[f] her Deputies is directed to implement the same within sixty (60) days from receipt thereof. Thus, any and all such bids or contracts entered into by respondent MMDA with third parties covering the waste disposal and management within the Metro Manila after August 14, 2000 are hereby declared NULL and VOID. Respondents are henceforth enjoined and prohibited, with a stern warning, from entering into any such contract with any third party whether directly or indirectly, in violation of the contractual rights of petitioner JANCOM under the BOT Contract Award, consistent with the Supreme Courts Decision of January 30, 2002.

Respondent MMDA is hereby directed to SUBMIT the Amended Agreement concluded by petitioners with the previous MMDA officials, or in its discretion if it finds [it] more advantageous to the government, to require petitioners to make adjustments in the Contract in accordance with existing environmental laws and other relevant concerns, and thereafter forward the Amended Agreement for signature and approval by the President of the Philippines. The concerned respondents are hereby further directed to comply fully and in good faith with its institutional obligations or undertakings as provided in Article 18 of the BOT Contract. Let a copy of this Order be furnished the Office of the Clerk of Court and the Commission on Audit for its information and guidance. SO ORDERED.29 (Emphasis in the original) On June 23, 2003 the RTC issued an Alias Writ of Execution 30 reading: WHEREAS, on May 29, 2000, a Decision was rendered by this Court in the above-entitled case, the pertinent portions of which is [sic] hereunder quoted as follows: WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of petitioners JANCOM ENVIRONMENTAL CORP and JANCOM INTERNATIONAL DEVELOPMENT PROJECTS PTY., LIMITED OF AUSTRALIAS [sic], and against respondents GREATER METROPOLITAN MANILA SOLID WASTE MANAGEMENT COMM., and HON. ROBERTO N. AVENTAJADO, in his capacity as Chairman of the said Committee, METRO MANILA DEVELOPMENT AUTHORITY and HON. JEJOMAR C. BINAY, in his capacity as Chairman of said Authority, declaring the Resolution of respondent Greater Metropolitan Manila Solid Waste Management Committee disregarding petitioners BOT Award Contract and calling for bids for and authorizing a new contract for the Metro Manila waste management ILLEGAL an[d] VOID. Moreover, respondents and their agents are hereby PROHIBITED and ENJOINED from implementing the aforesaid Resolution and disregarding petitioners BOT Award Contract and from making another award in its place. Let it be emphasized that this Court is not preventing or stopping the government from implementing infrastructure projects as it is aware of the proscription under PD 1818. On the contrary, the Court is paving the way for the necessary and modern solution to the perennial garbage problem that has been the major headache of the government and in the process would serve to attract more investors in the country. SO ORDERED. WHEREAS, on August 7, 2000, petitioners through counsel filed a "Motion for Execution" which the Court GRANTED in its Order dated August 14, 2000; WHEREAS, as a consequence thereof, a Writ of Execution was issued on August 14, 2000 and was duly served upon respondents as per Sheriffs Return dated August 27, 2000; WHEREAS, ON July 29, 2002, petitioners through counsel filed an "Omnibus Motion," praying, among others, for the issuance of an Alias Writ of Execution which the Court GRANTED in its Order dated June 11, 2003, the dispositive portion of which reads as follows: WHEREFORE, in view of the foregoing, let an Alias Writ of Execution immediately issue and the Clerk of Court and Ex-Oficio Sheriff or any of her Deputies is directed to implement the same within sixty (60) days from receipt thereof. Thus, any and all such bids or contracts entered into by respondent MMDA [with] third parties covering the waste disposal and

management within the Metro Manila after August 14, 2000 are hereby declared NULL and VOID. Respondents are henceforth enjoined and prohibited, with a stern warning, from entering into any such contract with any third party whether directly or indirectly, in violation of the contractual rights of petitioner Jancom under the BOT Contract Award, consistent with the Supreme Courts Decision of January 30, 2002. Respondent MMDA is hereby directed to SUBMIT the Amended Agreement concluded by petitioners with the previous MMDA officials, or in its discretion if it finds [it] more advantageous to the government, to require petitioners to make adjustments in the Contract in accordance with existing environmental laws and other relevant concerns, and thereafter forward the Amended Agreement for signature and approval by the President of the Philippines. The concerned respondents are hereby further directed to comply fully and in good faith with its institutional obligations or undertakings as provided in Article 18 of the BOT Contract. Let a copy of this Order be furnished the Office of the Clerk of Court and the Commission on Audit for its information and guidance. SO ORDERED. x x x x (Emphasis in the original) By letter31 of August 15, 2003, Chairman Fernando advised Sheriff Alejandro Q. Loquinario of the Office of the Clerk of Court and ExOficio Sheriff, Pasig City RTC that: 1. MMDA has not entered into a new contract for solid waste management in lieu of JANCOMs Contract. 2. JANCOMs Contract has been referred to the Office of the President for appropriate action. 3. Without the Presidents approval, JANCOMs Contract cannot be implemented.32 Petitioners later challenged the RTC June 11, 2003 Order via petition for certiorari33 with prayer for the issuance of a temporary restraining order and/or writ of preliminary injunction before the CA. They subsequently filed an Amended Petition34 on September 26, 2003. To the Amended Petition JANCOM filed on October 8, 2003 its Comment35 after which petitioners filed their Reply36 on November 24, 2003. By the challenged Decision of December 19, 2003, the CA denied the petition and affirmed the June 11, 2003 RTC Order in this wise: The Supreme Court ruled that the Jancom contract has the force of law and the parties must abide in good faith by their respective contractual commitments. It is precisely this pronouncement that the alias writ of execution issued by respondent judge seeks to enforce. x xx xxxx The fact that the Jancom contract has been declared unimplementable without the Presidents signature, would not excuse petitioners failure to comply with their undertakings under Article 18 of the contract. x x x xxxx Petitioners complain that respondent judge focused only on requiring them to perform their supposed obligations under Article 18 of the contract when private respondents are also required thereunder to post a Performance Security acceptable to the Republic in the amount allowed in the BOT Law. Petitioners complaint is not justified. x x x xxxx

It cannot x x x be said that respondent judge had been unfair or onesided in directing only petitioners to fulfill their own obligations under Article 18 of the Jancom contract. Compliance with private respondents obligations under the contract had not yet become due. xxxx There is no debate that the trial courts Decision has attained finality. Once a judgment becomes final and executory, the prevailing party can have it executed as a matter of right and the granting of execution becomes a mandatory or ministerial duty of the court. After a judgment has become final and executory, vested rights are acquired by the winning party. Just as the losing party has the right to file an appeal within the prescribed period, so also the winning party has the correlative right to enjoy the finality of the resolution of the case. It is true that the ministerial duty of the court to order the execution of a final and executory judgment admits of exceptions as (a) where it becomes imperative in the higher interest of justice to direct the suspension of its execution; or (b) whenever it is necessary to accomplish the aims of justice; or (c) when certain facts and circumstances transpired after the judgment became final which could render the execution of the judgment unjust. Petitioners have not shown that any of these exceptions exists to prevent the mandatory execution of the trial courts Decision.37 (Italics in the original) Petitioners Motion for Reconsideration38 having been denied by the CA by Resolution of May 11, 2004, the present petition for review 39 was filed on July 12, 2004 positing that: THE COURT OF APPEALS GRAVELY ERRED IN UPHOLDING THE LOWER COURT AND IN DISREGARDING THE FOLLOWING PROPOSITIONS: I THE SUBJECT CONTRACT IS INEFFECTIVE AND UNIMPLEMENTABLE UNTIL AND UNLESS IT IS APPROVED BY THE PRESIDENT. II THE SUBJECT CONTRACT ONLY COVERS THE DISPOSITION OF 3,000 TONS OF SOLID WASTE A DAY. III THE ALLEGED AMENDED AGREEMENT IS ONLY A DRAFT OR PROPOSAL SUBMITTED BY RESPONDENTS. IV RESPONDENTS MUST ALSO BE MADE TO COMPLY WITH THEIR CONTRACTUAL COMMITMENTS.40 (Underscoring supplied) JANCOM filed on September 20, 2004 its Comment41 on the petition to which petitioners filed their Reply42 on January 28, 2005. On May 4, 2005, Jancom International filed its Comment, 43 reiterating its position that it did not authorize the filing before the RTC by Atty. Molina of the July 29, 2002 Omnibus Motion that impleaded it as party-movant. On July 7, 2005, petitioners filed their Reply44 to Jancom Internationals Comment. Petitioners argue that since the contract remains unsigned by the President, it cannot yet be executed. Ergo, they conclude, the proceedings which resulted in the issuance of an alias writ of execution "ran afoul of the [January 30, 2002] decision of [the Supreme] Court in G.R. No. 147465." 45

Petitioners go on to argue that since the contract covers only 3,000 tons of garbage per day while Metro Manila generates at least 6,000 tons of solid waste a day, MMDA may properly bid out the other 3,000 tons of solid waste to other interested groups or entities. Petitioners moreover argue that the alleged Amended Agreement concluded supposedly between JANCOM and former MMDA Chairman Benjamin Abalos is a mere scrap of paper, a mere draft or proposal submitted by JANCOM to the MMDA, no agreement on which was reached by the parties; and at all events, express authority ought to have first been accorded the MMDA to conclude such an amended agreement with JANCOM, the original contract having been concluded between the Republic of the Philippines and JANCOM. Finally, petitioners argue that respondents should also be required to perform their commitments pursuant to Article 18 46 of the contract. The petition is impressed with merit in light of the following considerations. Section 1, Rule 39 of the Rules of Court provides: SECTION 1. Execution upon judgments or final orders. Execution shall issue as a matter of right, on motion, upon a judgment or order that disposes of the action or proceeding upon the expiration of the period to appeal therefrom if no appeal has been duly perfected. If the appeal has been duly perfected and finally resolved, the execution may forthwith be applied for in the court of origin, on motion of the judgment obligee, submitting therewith certified true copies of the judgment or judgments or final order or orders sought to be enforced and of the entry thereof, with notice to the adverse party. The appellate court may, on motion in the same case, when the interest of justice so requires, direct the court of origin to issue the writ of execution. Once a judgment becomes final, it is basic that the prevailing party is entitled as a matter of right to a writ of execution the issuance of which is the trial courts ministerial duty, compellable by mandamus.47 There are instances, however, when an error may be committed in the course of execution proceedings prejudicial to the rights of a party. These instances call for correction by a superior court, as where: 1) the writ of execution varies the judgment; 2) there has been a change in the situation of the parties making execution inequitable or unjust; 3) execution is sought to be enforced against property exempt from execution; 4) it appears that the controversy has never been submitted to the judgment of the court; 5) the terms of the judgment are not clear enough and there remains room for interpretation thereof; or 6) it appears that the writ of execution has been improvidently issued, or that it is defective in substance, or is issued against the wrong party, or that the judgment debt has been paid or otherwise satisfied, or the writ was issued without authority.48 (Emphasis and Underscoring supplied) That a writ of execution must conform to the judgment which is to be executed, substantially to every essential particular thereof,49 it is settled. It may not thus vary the terms of the judgment it seeks to enforce,50 nor go beyond its terms. Where the execution is not in harmony with the judgment which gives it life and exceeds it, it has no validity.51

This Courts January 30, 2002 Decision in G.R. No. 147465 held: We, therefore, hold that the Court of Appeals did not err when it declared the existence of a valid and perfected contract between the Republic of the Philippines and JANCOM. There being a perfected contract, MMDA cannot revoke or renounce the same without the consent of the other. From the moment of perfection, the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage, and law (Article 1315, Civil Code). The contract has the force of law between the parties and they are expected to abide in good faith by their respective contractual commitments, not weasel out of them. Just as nobody can be forced to enter into a contract, in the same manner, once a contract is entered into, no party can renounce it unilaterally or without the consent of the other. It is a general principle of law that no one may be permitted to change his mind or disavow and go back upon his own acts, or to proceed contrary thereto, to the prejudice of the other party. Nonetheless, it has to be repeated that although the contract is a perfected one, it is still ineffective or unimplementable until and unless it is approved by the President.52 (Emphasis and Underscoring supplied) This Courts April 10, 2002 Resolution also in G.R. No. 147465 moreover held: x x x The only question before the Court is whether or not there is a valid and perfected contract between the parties. As to the necessity, expediency, and wisdom of the contract, these are outside the realm of judicial adjudication. These considerations are primarily and exclusively a matter for the President to decide. While the Court recognizes that the garbage problem is a matter of grave public concern, it can only declare that the contract in question is a valid and perfected one between the parties, but the same is still ineffective or unimplementable until and unless it is approved by the President, the contract itself providing that such approval by the President is necessary for its effectivity.53 (Emphasis and Underscoring supplied) Article 19 of the contract provides: Article 19. Effectivity. This Contract shall become effective upon approval by the President of the Republic of [the] Philippines pursuant to existing Laws subject to condition precedent in Article 18. This Contract shall remain in full force and effect for twenty five (25) years subject to renewal for another twenty five (25) years from the date of Effectivity. Such renewal will be subject to mutual agreement of the parties and approval by the [P]resident of the Republic of [the] Philippines. (Emphasis and underscoring supplied) In issuing the alias writ of execution, the trial court in effect ordered the enforcement of the contract despite this Courts unequivocal pronouncement that albeit valid and perfected, the contract shall become effective only upon approval by the President. Indubitably, the alias writ of execution varied the tenor of this Courts judgment, went against essential portions and exceeded the terms thereof. x x x a lower court is without supervisory jurisdiction to interpret or to reverse the judgment of the higher court x x x. A judge of a lower court cannot enforce different decrees than those rendered by the superior court. x x x The inferior court is bound by the decree as the law of the case, and must carry it into execution according to the mandate. They cannot vary it, or examine it for any other purpose than execution, or give any other or further relief, or review it upon any matter decided on appeal for error apparent, or intermeddle with it, further than to settle so much as has been remanded. x x x54 The execution directed by the trial court being out of harmony with the judgment, legal implications cannot save it from being found to be fatally defective.55

Notably, while the trial court ratiocinated that it issued on June 23, 2003 the alias writ "to set into motion the legal mechanism for Presidential approval and signature," 56 it failed to take due consideration of the fact that during the pendency of the Omnibus Motion, the contract had earlier been forwarded for appropriate action on November 3, 2002 by Chairman Fernando to the Office of the President, with recommendation for its disapproval, which fact the trial court had been duly informed of through pleadings and open court manifestations.57 Additionally, it bears noting that the June 11, 2003 Order of the trial court is likewise indisputably defective in substance for having directed the submission of the draft Amended Agreement to the President. The appellate court, in affirming the June 11, 2003 Order of the trial court, overlooked the fact that the Amended Agreement was unsigned by the parties and it instead speculated and rationalized that the submission thereof to the President would at all events solve the mounting garbage problem in Metro Manila: We find that the submission of the Amended Agreement to the President will break the impasse now existing between the parties which has effectively halted the governments efforts to address Metro Manilas mounting garbage problem. x x x As long as petitioners refuse to deal with private respondents, the Metro Manila garbage problem will only continue to worsen. x x x That the Amended Agreement could have well been negotiated, if not concluded between private respondents and the former MMDA administration, is not far-fetched. Petitioners do not dispute that the President had referred the Jancom contract to then MMDA Chairman Benjamin Abalos for recommendation. Petitioners also do not dispute that private respondents negotiated with the MMDA for the amendment of the contract. Besides, the Amended Agreement does not veer away from the original Jancom contract. x x x58 lawphil.net The Amended Agreement was, as petitioners correctly allege, merely a draft document containing the proposals of JANCOM, subject to the approval of the MMDA. As earlier stated, it was not signed by the parties.59 The original contract itself provides in Article 17.6 that it "may not be amended except by a written [c]ontract signed by the parties."60 It is elementary that, being consensual, a contract is perfected by mere consent.61 The essence of consent is the conformity of the parties to the terms of the contract, the acceptance by one of the offer made by the other;62 it is the concurrence of the minds of the parties on the object and the cause which shall constitute the contract. 63 Where there is merely an offer by one party without acceptance by the other, there is no consent and the contract does not come into existence.64 As distinguished from the original contract in which this Court held in G.R. No. 147465: x x x the signing and execution of the contract by the parties clearly show that, as between the parties, there was concurrence of offer and acceptance with respect to the material details of the contract, thereby giving rise to the perfection of the contract. The execution and signing of the contract is not disputed by the parties x x x, 65 the parties did not, with respect to the Amended Agreement, get past the negotiation stage. No meeting of minds was established. While there was an initial offer made, there was no acceptance. Even JANCOM President Alfonso G. Tuzon conceded, by letter of June 17, 2002 to Chairman Fernando, that the Amended Agreement was a mere proposal:
66

Apropos to all these, we are seeking an urgent EXECUTIVE SESSION on your best time and venue. We can thresh up major points to establish a common perspective based on data and merit. We are optimistic you shall then consider with confidence the proposed Amended Contract which incorporates the adjustments we committed to as stated and earlier submitted to your Office during the incumbency of your predecessor, for evaluation and appropriate action by NEDA in compliance with the BOT Law and Article 18.1.1 of our contract.67 While respondents aver that an acceptance was made, they have not proffered any proof. While indeed the MMDA, by a letter 68 issued by then MMDA General Manager Jaime Paz, requested then Secretary of Justice Hernando B. Perez for his legal opinion on the draft Amended Agreement, nowhere in the letter is there any statement indicating that the MMDA, or the Republic of the Philippines for that matter, had approved respondents proposals embodied in the said draft agreement. The pertinent portions of the letter read: Attention: HON. HERNANDO B. PEREZ Secretary Subject: Request for Opinion Regarding the Compromise Offer of Jancom Environmental Corporation for the Municipal Solid Waste Management of Metro Manila Dear Secretary Perez: This is to respectfully request for an opinion from your Honorable Office regarding the Compromise Proposal offered by JANCOM Environmental Corporation ("JANCOM") in relation to its Contract for the BOT Implementation of the Waste Management Project for the San Mateo, Rizal Waste Disposal Site dated 19 December 1997 (hereinafter referred to as the BOT Contract for brevity) with the Republic of the Philippines. xxxx x x x this representation is requesting your Honorable Office to render a legal opinion on the following: Does the offer of JANCOM to temporarily set aside the waste-toenergy plant and implement only the other two major components of the BOT Contract amount to a novation of the BOT Contract, and therefore necessitating a re-bidding? If the same does not amount to a novation, by what authority may Jancom set aside temporarily a major component of the BOT Contract? x x x x69 Only an absolute or unqualified acceptance of a definite offer manifests the consent necessary to perfect a contract. 70 If at all, the MMDA letter only shows that the parties had not gone beyond the preparation stage, which is the period from the start of the negotiations until the moment just before the agreement of the parties.71 Obviously, other material considerations still remained before the Amended Agreement could be perfected. At any time prior to the perfection of a contract, unaccepted offers and proposals remain as such and cannot be considered as binding commitments. 72 Respecting petitioners argument that respondents should be directed to comply with their commitments under Article 18 of the contract, this Court is not convinced. Article 18.2.1 of the contract provides: 18.2.1 The BOT COMPANY hereby undertakes to provide the following within 2 months from execution of this Contract as an effective document:

a) sufficient proof of the actual equity contributions from the proposed shareholders of the BOT COMPANY in a total amount not less than PHP 500,000,000 in accordance with the BOT Law and the implementing rules and regulations;1avvphil.net b) sufficient proof of financial commitment from a lending institution sufficient to cover total project cost in accordance with the BOT Law and the implementing rules and regulations; c) to support its obligation under this Contract, the BOT COMPANY shall submit a security bond to the CLIENT in accordance with the form and amount required under the BOT Law. (Underscoring supplied) As this Court held in G.R. No. 147465: As clearly stated in Article 18, JANCOM undertook to comply with the stated conditions within 2 months from execution of the Contract as an effective document. Since the President of the Philippines has not yet affixed his signature on the contract, the same has not yet become an effective document. Thus, the two-month period within which JANCOM should comply with the conditions has not yet started to run. x x x73 (Underscoring supplied) A final point. The argument raised against the authority of Atty. Molina to file respondents Omnibus Motion before the RTC does not lie. Representation continues until the court dispenses with the services of counsel in accordance with Section 26, Rule 138 of the Rules of Court.74 No substitution of counsel of record is allowed unless the following essential requisites concur: (1) there must be a written request for substitution; (2) it must be filed with the written consent of the client; (3) it must be with the written consent of the attorney to be substituted; and (4) in case the consent of the attorney to be substituted cannot be obtained, there must be at least a proof of notice that the motion for substitution was served on him in the manner prescribed by the Rules of Court.75 In the case at bar, there is no showing that there was a valid substitution of counsel at the time Atty. Molina filed the Omnibus Motion on July 29, 2002 before the RTC, nor that he had priorly filed a Withdrawal of Appearance. He thus continued to enjoy the presumption of authority granted to him by respondents. While clients undoubtedly have the right to terminate their relations with their counsel and effect a substitution or change at any stage of the proceedings, the exercise of such right is subject to compliance with the prescribed requirements. Otherwise, no substitution can be effective and the counsel who last appeared in the case before the substitution became effective shall still be responsible for the conduct of the case.76 The rule is intended to ensure the orderly disposition of cases.77 In the absence then of compliance with the essential requirements for valid substitution of the counsel of record, Atty. Molina enjoys the presumption of authority granted to him by respondents. In light of the foregoing disquisition, a discussion of the other matters raised by petitioners has been rendered unnecessary. WHEREFORE, the petition is GRANTED. The Decision dated December 19, 2003 and Resolution dated May 11, 2004 of the Court of Appeals in CA-G.R. SP No. 78752 are REVERSED and SET ASIDE. The June 11, 2003 Order of the Regional Trial Court of Pasig, Branch 68 in SCA No. 1955 is declared NULL and VOID. SO ORDERED. 19. [G.R. No. 143370. February 6, 2002]

MARIO J. MENDEZONA and TERESITA M. MENDEZONA, LUIS J. MENDEZONA and MARICAR L. MENDEZONA and TERESITA ADAD VDA. DE MENDEZONA, petitioners, vs. JULIO H. OZAMIZ, ROBERTO J. MONTALVAN, JOSE MA. OZAMIZ, CARMEN H. OZAMIZ, PAZ O. MONTALVAN, MA. TERESA O.F. ZARRAGA, CARLOS O. FORTICH, JOSE LUIS O. ROS, PAULITA O. RODRIGUEZ, and LOURDES O. LON, respondents. DECISION DE LEON, JR., J.: Before us is a petition for review on certiorari of the Decision and the Resolution of the Court of Appeals dated July 27, 1998 and May 19, 2000, respectively, in CA-G.R. CV No. 39752 which reversed and set aside the Decision dated September 23, 1992 rendered in favor of the petitioners by the Regional Trial Court (RTC) of Cebu City, Branch 6 in Civil Case No. CEB-10766. Civil Case No. CEB-10766 is a suit for quieting of title. It was instituted on September 25, 1991 by petitioner spouses Mario J. Mendezona and Teresita M. Mendezona as initial plaintiffs, and in the amended complaint filed on October 7, 1991, herein co-petitioner spouses Luis J. Mendezona and Maricar L. Mendezona and Teresita Adad Vda. de Mendezona joined as co-plaintiffs. In their complaint, the petitioners, as plaintiffs therein, alleged that petitioner spouses Mario J. Mendezona and Teresita M. Mendezona, petitioner spouses Luis J. Mendezona and Maricar L. Mendezona, and petitioner Teresita Adad Vda. de Mendezona own a parcel of land each in the Banilad Estate, Lahug, Cebu City with almost similar areas of 3,462 square meters, 3,466 square meters and 3,468 square meters, covered and described in Transfer Certificate of Title (TCT) Nos. 116834, 116835, and 116836 respectively, of the Registry of Deeds of Cebu City. The petitioners ultimately traced their titles of ownership over their respective properties from a notarized Deed of Absolute Sale dated April 28, 1989 executed in their favor by Carmen Ozamiz for and in consideration of the sum of One Million Forty Thousand Pesos (P1,040,000.00). The petitioners initiated the suit to remove a cloud on their said respective titles caused by the inscription thereon of a notice of lis pendens, which came about as a result of an incident in Special Proceeding No. 1250 of the RTC of Oroquieta City. Special Proceeding No. 1250 is a proceeding for guardianship over the person and properties of Carmen Ozamiz initiated by the respondents Julio H. Ozamiz, Jose Ma. Ozamiz, Carmen H. Ozamiz, Paz O. Montalvan, Ma. Teresa O.F. Zarraga, Carlos O. Fortich, Jose Luis O. Ros, Paulita O. Rodriguez and Lourdes O. Lon. It appears that on January 15, 1991, the respondents instituted the petition for guardianship with the Regional Trial Court of Oroquieta City, alleging therein that Carmen Ozamiz, then 86 years old, after an illness in July 1987, had become disoriented and could not recognize most of her friends; that she could no longer take care of herself nor manage her properties by reason of her failing health, weak mind and absent-mindedness. Mario Mendezona and Luis Mendezona, herein petitioners who are nephews of Carmen Ozamiz, and Pilar Mendezona, a sister of Carmen Ozamiz, filed an opposition to the guardianship petition. In the course of the guardianship proceeding, the petitioners and the oppositors thereto agreed that Carmen Ozamiz needed a guardian over her person and her properties, and thus respondent Paz O. Montalvan was designated as guardian over the person of Carmen Ozamiz while petitioner Mario J. Mendezona, respondents Roberto J. Montalvan and Julio H. Ozamiz were designated as joint guardians over the properties of the said ward. As guardians, respondents Roberto J. Montalvan and Julio H. Ozamiz filed on August 6, 1991 with the guardianship court their inventories and Accounts, listing therein Carmen Ozamizs properties, cash,

shares of stock, vehicles and fixed assets, including a 10,396 square meter property known as the Lahug property. Said Lahug property is the same property covered by the Deed of Absolute Sale dated April 28, 1989 executed by Carmen Ozamiz in favor of the petitioners. Respondents Roberto J. Montalvan and Julio H. Ozamiz caused the inscription on the titles of petitioners a notice of lis pendens, regarding Special Proceeding No. 1250, thus giving rise to the suit for quieting of title, Civil Case No. CEB-10766, filed by herein petitioners. In their Answer in Civil Case No. CEB-10766 the respondents opposed the petitioners claim of ownership of the Lahug property and alleged that the titles issued in the petitioners names are defective and illegal, and the ownership of the said property was acquired in bad faith and without value inasmuch as the consideration for the sale is grossly inadequate and unconscionable. Respondents further alleged that at the time of the sale on April 28, 1989 Carmen Ozamiz was already ailing and not in full possession of her mental faculties; and that her properties having been placed in administration, she was in effect incapacitated to contract with petitioners. The issues for resolution were delimited in the pre-trial to: (a) the propriety of recourse to quieting of title; (b) the validity or nullity of the Deed of Absolute Sale dated April 28, 1989 executed by Carmen Ozamiz in favor of herein petitioners; (c) whether the titles over the subject parcel of land in plaintiffs names be maintained or should they be cancelled and the subject parcels of land reconveyed; and (d) damages and attorneys fees. Trial on the merits ensued with the parties presenting evidence to prove their respective allegations. Petitioners Mario Mendezona, Teresita Adad Vda. de Mendezona and Luis Mendezona, as plaintiffs therein, testified on the circumstances surrounding the sale. Carmencita Cedeno and Martin Yungco, instrumental witnesses to the Deed of Absolute Sale dated April 28, 1989, and, Atty. Asuncion Bernades, the notary public who notarized the said document, testified that on the day of execution of the said contract that Carmen Ozamiz was of sound mind and that she voluntarily and knowingly executed the said deed of sale. For the defendants, the testimonies of respondent Paz O. Montalvan, a sister of Carmen Ozamiz; Concepcion Agac-ac, an assistant of Carmen Ozamiz; respondent Julio Ozamiz; Carolina Lagura, a househelper of Carmen Ozamiz; Joselito Gunio, an appraiser of land; Nelfa Perdido, a part-time bookkeeper of Carmen Ozamiz, and the deposition of Dr. Faith Go, physician of Carmen Ozamiz, were offered in evidence. The petitioners presented as rebuttal witnesses petitioners Mario Mendezona and Luis Mendezona, to rebut the testimony of respondent Julio H. Ozamiz; and, Dr. William Buot, a doctor of neurology to rebut aspects of the deposition of Dr. Faith Go on the mental capacity of Carmen Ozamiz at the time of the sale. During the trial, the trial court found that the following facts have been duly established: (1) On April 28, 1989, Carmen Ozamiz sold to her nephews, Mario, Antonio and Luis, all surnamed Mendezona, three (3) parcels of residential land in Cebu City, per a Deed of Absolute Sale (Exh. D) for a consideration of P1,040,000.00, in which deed the usufructuary rights were reserved during her lifetime. (2) The three parcels of land were subsequently transferred to the names of the three vendees per TCTs Nos. 108729, 108730 and 108731 (Exhs. J, K & L, respectively). A partition agreement was entered into by the three vendees (Exh. 3) and the parcels of land are now titled in the names of the plaintiffs. Mario Mendezona TCT No. 116834 (Exh. A); Luis Mendezona TCT No. 116835 (Exh. B); Antonio Mendezona TCT No. 116836 (Exh. C);

(3) The reservation of the usufructuary rights to the vendor Carmen Ozamiz during her lifetime was confirmed by the plaintiffs-spouses Mario Mendezona and Teresita Moraza and plaintiffs spouses Luis Mendezona and Maricar Longa in a sworn statement (Exh. I) executed on October 15, 1990, which was duly annotated on the titles of the property; (4) The capital gains tax was paid (Exh. H) on May 5, 1989 and a certificate (Exh. H-1) was issued by the Bureau of Internal Revenue authorizing the Register of Deeds to transfer the property to the vendees; (5) A petition for guardianship over the person and properties of Carmen Ozamiz (Exh. E) was filed by all the defendants, (except the defendant Roberto Montalvan) on January 15, 1991 with the Regional Trial Court of Oroquieta City, denominated as Spec. Proc. No. 1250 and subsequently, an Inventories and Accounts (Exh. F) was filed by court-appointed guardians Roberto Montalvan and Julio Ozamiz, in which the property was listed (Exh. F-1) and a Notice of Lis Pendens was filed with the Register of Deeds of Cebu City on August 13, 1991 by said joint guardians. Plaintiff Mario Mendezona, as another joint guardian over Carmen Ozamiz, filed his opposition (Exh. R) to the Inventories and Accounts, with the Oroquieta Court as to the inclusion of the property (Exh.R-1). (6) Prior to his death, the deceased husband of plaintiff Teresita Adad Mendezona was granted a General Power of Attorney (Exh. 1) by Carmen Ozamiz on March 23, 1988 and after his demise, Carmen Ozamiz granted Mario Mendezona a General Power of Attorney (Exh. 2.) on August 11, 1990. Both powers of attorney relate to the administration of the property, subject of this action, in Cebu City. On September 23, 1992 the trial court rendered its decision in favor of the petitioners, the dispositive portion of which reads, to wit: Wherefore, premises considered, the Court is of the opinion and so declares that: 1. The property described in the complaint was sold, with reservation of usufructuary rights by Carmen Ozamiz to the plaintiffs under a valid contract, voluntarily and deliberately entered into while she was of sound mind, for sufficient and good consideration, and without fraud, force, undue influence or intimidation having been exercised upon her, and consequently, the Court orders the defendants herein to acknowledge and recognize the plaintiffs title to the aforecited property and to refrain from further clouding the same; 2. That the one-third (1/3) share erroneously titled to Antonio Mendezona should be titled in the name of Teresita Adad vda. de Mendezona as her paraphernal property and the Register of Deeds of Cebu City is hereby ordered to do so; 3. The Notice of Lis Pendens affecting the property should be eliminated from the record and the Register of Deeds of Cebu City is ordered to expunge the same. No pronouncement as to costs. SO ORDERED. On appeal to the Court of Appeals, the appellate court reversed the factual findings of the trial court and ruled that the Deed of Absolute Sale dated April 28, 1989 was a simulated contract since the petitioners failed to prove that the consideration was actually paid, and, furthermore, that at the time of the execution of the contract the mental faculties of Carmen Ozamiz were already seriously impaired. Thus, the appellate court declared that the Deed of Absolute Sale of April 28, 1989 is null and void. It ordered the cancellation of the certificates of title issued in the petitioners names and directed the issuance of new certificates of title in favor of Carmen Ozamiz or her estate. Petitioners filed a motion for reconsideration of the decision of the appellate court. Subsequent thereto, the petitioners filed a motion for a new trial and/or for reception of evidence. They contended, among

other things, that the appellate court totally ignored the testimony of Judge Teodorico Durias regarding the mental condition of Carmen Ozamiz a month before the execution of the Deed of Absolute Sale in question. The said testimony was taken in the Special Proceeding No. 1250 in the Regional Trial Court of Oroquieta City. However, Judge Durias was not presented as a witness in Civil Case No. CEB-10766 in the Regional Trial Court of Cebu City. Petitioners alleged that Judge Duriass testimony is a newly-discovered evidence which could not have been discovered prior to the trial in the court below by the exercise of due diligence. The appellate court denied both motions in its Resolution dated May 19, 2000. Hence, the instant petition anchored on the following grounds: I. THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE APRIL 28, 1989 DEED OF ABSOLUTE SALE WAS A SIMULATED CONTRACT. A. THE COURT OF APPEALS GRAVELY ERRED IN IGNORING THE STATUTORY PRESUMPTIONS OF ACTUAL AND SUFFICIENT CONSIDERATION FOR, AND OF THE REGULARITY AND TRUTHFULNESS OF, THE NOTARIZED DEED OF ABSOLUTE SALE. B. THE COURT OF APPEALS GRAVELY ERRED IN IMPOSING ON THE PETITIONERS THE BURDEN OF PROVING PAYMENT, AND IN REFUSING TO RECOGNIZE AND RULE THAT IT WAS THE RESPONDENTS - AS THE PARTIES ASSAILING THE DEED OF ABSOLUTE SALE - WHO HAD FAILED TO DISCHARGE THEIR BURDEN OF PROVING THAT THERE WAS NO CONSIDERATION FOR THE TRANSACTION. C. THE COURT OF APPEALS GRAVELY ERRED IN REFUSING TO RECEIVE IN EVIDENCE THE THREE (3) CHECKS, WHICH PROVED BEYOND ANY DOUBT THAT THE PURCHASE PRICE FOR THE LAHUG PROPERTY HAD BEEN PAID TO CARMEN OZAMIZ, AFTER ASKING FOR THEM AND HAVING THEM PRESENTED TO IT IN OPEN COURT, THUS COOPERATING WITH RESPONDENTS EFFORTS TO SUPPRESS THE CHECKS (WHICH THE COURT ITSELF AND RESPONDENTS CHALLENGED PETITIONERS TO PRODUCE). II. THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT CARMEN OZAMIZS MENTAL FACULTIES WERE SERIOUSLY IMPAIRED WHEN SHE EXECUTED THE DEED OF ABSOLUTE SALE ON APRIL 28, 1989. A. THE COURT OF APPEALS GRAVELY ERRED IN IGNORING THE STATUTORY PRESUMPTION THAT CARMEN OZAMIZ WAS OF SOUND MIND AND HAD THE REQUISITE CAPACITY TO CONTRACT WHEN SHE EXECUTED THE DEED OF ABSOLUTE SALE, AND IN REFUSING TO RULE THAT IT WAS THE RESPONDENTS - AS THE PARTIES ALLEGING MENTAL INCAPACITY- WHO HAD FAILED TO DISCHARGE THEIR BURDEN OF REBUTTING THAT PRESUMPTION. B. THE COURT OF APPEALS GRAVELY ERRED IN REFUSING TO ACCEPT AND GIVE DUE AND PREPONDERANT WEIGHT

TO UNREFUTED EVIDENCE, INCLUDING THE UNREFUTED TESTIMONIES OF THE INSTRUMENTAL WITNESSES AND OF THE NOTARY PUBLIC, THAT CARMEN OZAMIZ EXECUTED THE DEED OF ABSOLUTE SALE FREELY, VOLUNTARILY, KNOWINGLY, AND INTELLIGENTLY. C. THE COURT OF APPEALS GRAVELY ERRED IN GIVING WEIGHT TO THE HEARSAY TESTIMONY OF DR. FAITH GO ON THE MENTAL CONDITION OF CARMEN OZAMIZ ON THE DATE SHE EXECUTED THE DEED OF ABSOLUTE SALE. D. THE COURT OF APPEALS GRAVELY ERRED IN IGNORING, AND IN REFUSING TO RECEIVE IN EVIDENCE, JUDGE TEODORICO DURIASS TESTIMONY (THAT CARMEN OZAMIZ WAS OF SOUND MIND WHEN SHE EXECUTED ANOTHER CONTRACT BARELY A MONTH BEFORE SHE EXECUTED THE DEED OF ABSOLUTE SALE) ON THE GROUND THAT THAT TESTIMONY WAS FORGOTTEN EVIDENCE. We shall first rule on the issue of whether to consider the testimony of Judge Durias as newly discovered evidence. A motion for new trial upon the ground of newly discovered evidence is properly granted only where there is concurrence of the following requisites, namely: (a) the evidence had been discovered after trial; (b) the evidence could not have been discovered and produced during trial even with the exercise of reasonable diligence; and (c) the evidence is material and not merely corroborative, cumulative or impeaching and is of such weight that if admitted, would probably alter the result. All three (3) requisites must characterize the evidence sought to be introduced at the new trial. We find that the requirement of reasonable diligence has not been met by the petitioners. As early as the pre-trial of the case at bar, the name of Judge Durias has already cropped up as a possible witness for the defendants, herein respondents. That the respondents chose not to present him is not an indicia per se of suppression of evidence, since a party in a civil case is free to choose who to present as his witness. Neither can Judge Durias testimony in another case be considered as newly discovered evidence since the facts to be testified to by Judge Durias which were existing before and during the trial, could have been presented by the petitioners at the trial below. The testimony of Judge Durias has been in existence waiting only to be elicited from him by questioning. It has been held that a lack of diligence is exhibited where the newly discovered evidence was necessary or proper under the pleadings, and its existence must have occurred to the party in the course of the preparation of the case, but no effort was made to secure it; there is a failure to make inquiry of persons who were likely to know the facts in question, especially where information was not sought from coparties; there is a failure to seek evidence available through public records; there is a failure to discover evidence that is within the control of the complaining party; there is a failure to follow leads contained in other evidence; and, there is a failure to utilize available discovery procedures. Thus, the testimony of Judge Durias cannot be considered as newly discovered evidence to warrant a new trial. In this petition at bench, herein petitioners essentially take exception to two (2) main factual findings of the appellate court, namely, (a) that the notarized Deed of Absolute Sale dated April 28, 1989 was a simulated contract, and (b) that Carmen Ozamizs mental faculties were seriously impaired when she executed the said contract on April 28, 1989. The petitioners allege that both conclusions are contrary or opposed to well-recognized statutory presumptions of regularity enjoyed by a notarized document and that a contracting party to a notarized contract is of sound and disposing mind when she executes the contract. The respondents posit a different view. They contend that clear and convincing evidence refuted the presumptions on regularity of

execution of the Deed of Absolute Sale and existence of consideration thereof. Relying upon the testimonies of Paz O. Montalvan, Concepcion Agac-ac, Carolina Lagura and Dr. Faith Go, they aver that they were able to show that Carmen Ozamiz was already physically and mentally incapacitated since the latter part of 1987 and could not have executed the said Deed of Absolute Sale on April 28, 1989 covering the disputed Lahug property. They also alleged that no error is ascribable to the appellate court for not considering the allegedly rehearsed testimonies of the instrumental witnesses and the notary public. Factual findings of the appellate court are generally conclusive on this Court which is not a trier of facts. It is not the function of the Supreme Court to analyze or weigh evidence all over again. However, this rule is not without exception. If there is a showing that the appellate courts findings of facts complained of are totally devoid of support in the record or that they are so glaringly erroneous as to constitute grave abuse of discretion, this Court must discard such erroneous findings of facts. We find that the exception applies in the case at bench. Simulation is defined as the declaration of a fictitious will, deliberately made by agreement of the parties, in order to produce, for the purposes of deception, the appearances of a juridical act which does not exist or is different from what that which was really executed. The requisites of simulation are: (a) an outward declaration of will different from the will of the parties; (b) the false appearance must have been intended by mutual agreement; and (c) the purpose is to deceive third persons. None of these were clearly shown to exist in the case at bar. Contrary to the erroneous conclusions of the appellate court, a simulated contract cannot be inferred from the mere non-production of the checks. It was not the burden of the petitioners to prove so. It is significant to note that the Deed of Absolute Sale dated April 28, 1989 is a notarized document duly acknowledged before a notary public. As such, it has in its favor the presumption of regularity, and it carries the evidentiary weight conferred upon it with respect to its due execution. It is admissible in evidence without further proof of its authenticity and is entitled to full faith and credit upon its face. Payment is not merely presumed from the fact that the notarized Deed of Absolute Sale dated April 28, 1989 has gone through the regular procedure as evidenced by the transfer certificates of title issued in petitioners names by the Register of Deeds. In other words, whosoever alleges the fraud or invalidity of a notarized document has the burden of proving the same by evidence that is clear, convincing, and more than merely preponderant. Therefore, with this wellrecognized statutory presumption, the burden fell upon the respondents to prove their allegations attacking the validity and due execution of the said Deed of Absolute Sale. Respondents failed to discharge that burden; hence, the presumption in favor of the said deed stands. But more importantly, that notarized deed shows on its face that the consideration of One Million Forty Thousand Pesos (P1,040,000.00) was acknowledged to have been received by Carmen Ozamiz. Simulation cannot be inferred from the alleged absence of payment based on the testimonies of Concepcion Agac-ac, assistant of Carmen Ozamiz, and Nelfa Perdido, part-time bookkeeper of Carmen Ozamiz. The testimonies of these two (2) witnesses are unreliable and inconsistent. While Concepcion Agac-ac testified that she was aware of all the transactions of Carmen Ozamiz, she also admitted that not all income of Carmen Ozamiz passed through her since Antonio Mendezona, as appointed administrator, directly reported to Carmen Ozamiz. With respect to Nelfa Perdido, she testified that most of the transactions that she recorded refer only to rental income and expenses, and the amounts thereof were reported to her by Concepcion Agac-ac only, not by Carmen Ozamiz. She does not record deposits or withdrawals in the bank accounts of Carmen Ozamiz. Their testimonies hardly deserve any credit and, hence, the appellate court misplaced reliance thereon.

Considering that Carmen Ozamiz acknowledged, on the face of the notarized deed, that she received the consideration at One Million Forty Thousand Pesos (P1,040,000.00), the appellate court should not have placed too much emphasis on the checks, the presentation of which is not really necessary. Besides, the burden to prove alleged non-payment of the consideration of the sale was on the respondents, not on the petitioners. Also, between its conclusion based on inconsistent oral testimonies and a duly notarized document that enjoys presumption of regularity, the appellate court should have given more weight to the latter. Spoken words could be notoriously unreliable as against a written document that speaks a uniform language. Furthermore, the appellate court erred in ruling that at the time of the execution of the Deed of Absolute Sale on April 28, 1989 the mental faculties of Carmen Ozamiz were already seriously impaired. It placed too much reliance upon the testimonies of the respondents witnesses. However, after a thorough scrutiny of the transcripts of the testimonies of the witnesses, we find that the respondents core witnesses all made sweeping statements which failed to show the true state of mind of Carmen Ozamiz at the time of the execution of the disputed document. The testimonies of the respondents witnesses on the mental capacity of Carmen Ozamiz are far from being clear and convincing, to say the least. Carolina Lagura, a househelper of Carmen Ozamiz, testified that when Carmen Ozamiz was confronted by Paz O. Montalvan in January 1989 with the sale of the Lahug property, Carmen Ozamiz denied the same. She testified that Carmen Ozamiz understood the question then. However, this declaration is inconsistent with her (Carolinas) statement that since 1988 Carmen Ozamiz could not fully understand the things around her, that she was physically fit but mentally could not carry a conversation or recognize persons who visited her. Furthermore, the disputed sale occurred on April 28, 1989 or three (3) months after this alleged confrontation in January 1989. This inconsistency was not explained by the respondents. The revelation of Dr. Faith Go did not also shed light on the mental capacity of Carmen Ozamiz on the relevant day - April 28, 1989 when the Deed of Absolute Sale was executed and notarized. At best, she merely revealed that Carmen Ozamiz was suffering from certain infirmities in her body and at times, she was forgetful, but there was no categorical statement that Carmen Ozamiz succumbed to what the respondents suggest as her alleged second childhood as early as 1987. The petitioners rebuttal witness, Dr. William Buot, a doctor of neurology, testified that no conclusion of mental incapacity at the time the said deed was executed can be inferred from Dr. Faith Gos clinical notes nor can such fact be deduced from the mere prescription of a medication for episodic memory loss. It has been held that a person is not incapacitated to contract merely because of advanced years or by reason of physical infirmities. Only when such age or infirmities impair her mental faculties to such extent as to prevent her from properly, intelligently, and fairly protecting her property rights, is she considered incapacitated. The respondents utterly failed to show adequate proof that at the time of the sale on April 28, 1989 Carmen Ozamiz had allegedly lost control of her mental faculties. We note that the respondents sought to impugn only one document, namely, the Deed of Absolute Sale dated April 28, 1989, executed by Carmen Ozamiz. However, there are nine (9) other important documents that were, signed by Carmen Ozamiz either before or after April 28, 1989 which were not assailed by the respondents. Such is contrary to their assertion of complete incapacity of Carmen Ozamiz to handle her affairs since 1987. We agree with the trial courts assessment that it is unfair for the [respondents] to claim soundness of mind of Carmen Ozamiz when it benefits them and otherwise when it disadvantages them. A person is presumed to be of sound mind at any particular time and the condition is presumed to continue to exist, in the absence of proof to the contrary. Competency and freedom from undue influence, shown to have existed in the other acts done or contracts executed, are presumed to continue until the contrary is shown.

All the foregoing considered, we find the instant petition to be meritorious and the same should be granted. WHEREFORE, the instant petition is hereby GRANTED and the assailed Decision and Resolution of the Court of Appeals are hereby REVERSED and SET ASIDE. The Decision dated September 23, 1992 of the Regional Trial Court of Cebu City, Branch 6, in Civil Case No. CEB-10766 is REINSTATED. No pronouncement as to costs. SO ORDERED. 20. G.R. Chavez 133250, vs November PEA 2003

No.

11,

Facts: Petitioner asked to legitimize a government contract that conveyed to a private entity 157.84 hectares of reclaimed public lands along Roxas Boulevard in Metro Manila. However, published reports place the market price of land near that area at a price higher than negotiated price. The private entity somehow managed to deceive the government to sell the reclaimed lands without public bidding in patent violation of the Government Auditing Code. The Senate Committees established the clear, indisputable and unalterable fact that the sale of the public lands is grossly and unconscionably undervalued based on official documents submitted by the proper government agencies during the Senate investigation. Issue: Whether or not stipulations in the Amended JVA for the transfer to AMARI of lands, reclaimed or to be reclaimed on portions of Manila Bay, violate the Constitution? Ruling: The bulk of the lands subject of the Amended JVA are still submerged lands even to this very day, and therefore inalienable and outside the commerce of man. Of the 750 hectares subject of the Amended JVA, 78% of the total area is still submerged, permanently under the waters of Manila Bay. Under the Amended JVA, the PEA conveyed to Amari the submerged lands even before their actual reclamation, although the documentation of the deed of transfer and issuance of the certificates of title would be made only after actual reclamation. To allow vast areas of reclaimed lands of the public domain to be transferred to PEA as private lands is in violation of Sec. 2 Article XII of the constitution.

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