Chapter 2 (Nature and Effect of Obligations (Art.

1163-1178)
requisite deed of conveyance. Mrs. Rigos was, likewise, sentenced to pay P200.00, as
attorney's fees, and other costs. Hence, this appeal by Mrs. Rigos.
Republic of the Philippines
SUPREME COURT This case admittedly hinges on the proper application of Article 1479 of our Civil Code, which
Manila provides:

EN BANC ART. 1479. A promise to buy and sell a determinate thing for a price
certain is reciprocally demandable.
G.R. No. L-25494 June 14, 1972
An accepted unilateral promise to buy or to sell a determinate thing for a
NICOLAS SANCHEZ, plaintiff-appellee, price certain is binding upon the promissor if the promise is supported by
vs. a consideration distinct from the price.
SEVERINA RIGOS, defendant-appellant.
In his complaint, plaintiff alleges that, by virtue of the option under consideration,
Santiago F. Bautista for plaintiff-appellee. "defendant agreed and committed to sell" and "the plaintiff agreed and committed to buy"
the land described in the option, copy of which was annexed to said pleading as Annex A
thereof and is quoted on the margin.1 Hence, plaintiff maintains that the promise contained
Jesus G. Villamar for defendant-appellant.
in the contract is "reciprocally demandable," pursuant to the first paragraph of said Article
1479. Although defendant had really "agreed, promised and committed" herself to sell the
CONCEPCION, C.J.:p land to the plaintiff, it is not true that the latter had, in turn, "agreed and committed himself
" to buy said property. Said Annex A does not bear out plaintiff's allegation to this effect.
Appeal from a decision of the Court of First Instance of Nueva Ecija to the Court of Appeals, What is more, since Annex A has been made "an integral part" of his complaint, the
which certified the case to Us, upon the ground that it involves a question purely of law. provisions of said instrument form part "and parcel"2 of said pleading.

The record shows that, on April 3, 1961, plaintiff Nicolas Sanchez and defendant Severina The option did not impose upon plaintiff the obligation to purchase defendant's property.
Rigos executed an instrument entitled "Option to Purchase," whereby Mrs. Rigos "agreed, Annex A is not a "contract to buy and sell." It merely granted plaintiff an "option" to buy. And
promised and committed ... to sell" to Sanchez the sum of P1,510.00, a parcel of land both parties so understood it, as indicated by the caption, "Option to Purchase," given by
situated in the barrios of Abar and Sibot, municipality of San Jose, province of Nueva Ecija, them to said instrument. Under the provisions thereof, the defendant "agreed, promised and
and more particularly described in Transfer Certificate of Title No. NT-12528 of said province, committed" herself to sell the land therein described to the plaintiff for P1,510.00, but there
within two (2) years from said date with the understanding that said option shall be deemed is nothing in the contract to indicate that her aforementioned agreement, promise and
"terminated and elapsed," if "Sanchez shall fail to exercise his right to buy the property" undertaking is supported by a consideration "distinct from the price" stipulated for the sale
within the stipulated period. Inasmuch as several tenders of payment of the sum of of the land.
Pl,510.00, made by Sanchez within said period, were rejected by Mrs. Rigos, on March 12,
1963, the former deposited said amount with the Court of First Instance of Nueva Ecija and Relying upon Article 1354 of our Civil Code, the lower court presumed the existence of said
commenced against the latter the present action, for specific performance and damages. consideration, and this would seem to be the main factor that influenced its decision in
plaintiff's favor. It should be noted, however, that:
After the filing of defendant's answer — admitting some allegations of the complaint,
denying other allegations thereof, and alleging, as special defense, that the contract between (1) Article 1354 applies to contracts in general, whereas the second paragraph of Article 1479
the parties "is a unilateral promise to sell, and the same being unsupported by any valuable refers to "sales" in particular, and, more specifically, to "an accepted unilateral promise to
consideration, by force of the New Civil Code, is null and void" — on February 11, 1964, both buy or to sell." In other words, Article 1479 is controlling in the case at bar.
parties, assisted by their respective counsel, jointly moved for a judgment on the pleadings.
Accordingly, on February 28, 1964, the lower court rendered judgment for Sanchez, ordering
(2) In order that said unilateral promise may be "binding upon the promisor, Article 1479
Mrs. Rigos to accept the sum judicially consigned by him and to execute, in his favor, the
requires the concurrence of a condition, namely, that the promise be "supported by a

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
consideration distinct from the price." Accordingly, the promisee can not compel the offer can no longer be withdrawn and in any event such withdrawal is
promisor to comply with the promise, unless the former establishes the existence of said ineffective. In support this contention, appellee invokes article 1324 of
distinct consideration. In other words, the promisee has the burden of proving such the Civil Code which provides:
consideration. Plaintiff herein has not even alleged the existence thereof in his complaint.
"ART. 1324. When the offerer has allowed the offeree
(3) Upon the other hand, defendant explicitly averred in her answer, and pleaded as a special a certain period to accept, the offer may be
defense, the absence of said consideration for her promise to sell and, by joining in the withdrawn any time before acceptance by
petition for a judgment on the pleadings, plaintiff has impliedly admitted the truth of said communicating such withdrawal, except when the
averment in defendant's answer. Indeed as early as March 14, 1908, it had been held, option is founded upon consideration as something
in Bauermann v. Casas,3 that: paid or promised."

One who prays for judgment on the pleadings without offering proof as There is no question that under article 1479 of the new Civil Code "an
to the truth of his own allegations, and without giving the opposing party option to sell," or "a promise to buy or to sell," as used in said article, to
an opportunity to introduce evidence, must be understood to admit the be valid must be "supported by a consideration distinct from the price."
truth of all the material and relevant allegations of the opposing party, This is clearly inferred from the context of said article that a unilateral
and to rest his motion for judgment on those allegations taken together promise to buy or to sell, even if accepted, is only binding if supported by
with such of his own as are admitted in the pleadings. (La Yebana consideration. In other words, "an accepted unilateral promise can only
Company vs. Sevilla, 9 Phil. 210). (Emphasis supplied.) have a binding effect if supported by a consideration which means that
the option can still be withdrawn, even if accepted, if the same is not
This view was reiterated in Evangelista v. De la Rosa4 and Mercy's Incorporated v. Herminia supported by any consideration. It is not disputed that the option is
Verde.5 without consideration. It can therefore be withdrawn notwithstanding
the acceptance of it by appellee.
Squarely in point is Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific Co.,6 from
which We quote: It is true that under article 1324 of the new Civil Code, the general rule
regarding offer and acceptance is that, when the offerer gives to the
offeree a certain period to accept, "the offer may be withdrawn at any
The main contention of appellant is that the option granted to appellee
time before acceptance" except when the option is founded upon
to sell to it barge No. 10 for the sum of P30,000 under the terms stated
consideration, but this general rule must be interpreted as modified by
above has no legal effect because it is not supported by any
the provision of article 1479 above referred to, which applies to "a
consideration and in support thereof it invokes article 1479 of the new
promise to buy and sell" specifically. As already stated, this rule requires
Civil Code. The article provides:
that a promise to sell to be valid must be supported by a consideration
distinct from the price.
"ART. 1479. A promise to buy and sell a determinate
thing for a price certain is reciprocally demandable.
We are not oblivious of the existence of American authorities which hold
that an offer, once accepted, cannot be withdrawn, regardless of
An accepted unilateral promise to buy or sell a whether it is supported or not by a consideration (12 Am. Jur. 528). These
determinate thing for a price certain is binding upon authorities, we note, uphold the general rule applicable to offer and
the promisor if the promise is supported by a acceptance as contained in our new Civil Code. But we are prevented
consideration distinct from the price." from applying them in view of the specific provision embodied in article
1479. While under the "offer of option" in question appellant has
On the other hand, Appellee contends that, even granting that the "offer assumed a clear obligation to sell its barge to appellee and the option has
of option" is not supported by any consideration, that option became been exercised in accordance with its terms, and there appears to be no
binding on appellant when the appellee gave notice to it of its valid or justifiable reason for appellant to withdraw its offer, this Court
acceptance, and that having accepted it within the period of option, the

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
cannot adopt a different attitude because the law on the matter is clear. In other words, since there may be no valid contract without a cause or consideration, the
Our imperative duty is to apply it unless modified by Congress. promisor is not bound by his promise and may, accordingly, withdraw it. Pending notice of its
withdrawal, his accepted promise partakes, however, of the nature of an offer to sell which,
However, this Court itself, in the case of Atkins, Kroll and Co., Inc. v. Cua Hian Tek,8 decided if accepted, results in a perfected contract of sale.
later that Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific Co.,9 saw no
distinction between Articles 1324 and 1479 of the Civil Code and applied the former where a This view has the advantage of avoiding a conflict between Articles 1324 — on the general
unilateral promise to sell similar to the one sued upon here was involved, treating such principles on contracts — and 1479 — on sales — of the Civil Code, in line with the cardinal
promise as an option which, although not binding as a contract in itself for lack of a separate rule of statutory construction that, in construing different provisions of one and the same law
consideration, nevertheless generated a bilateral contract of purchase and sale upon or code, such interpretation should be favored as will reconcile or harmonize said provisions
acceptance. Speaking through Associate Justice, later Chief Justice, Cesar Bengzon, this Court and avoid a conflict between the same. Indeed, the presumption is that, in the process of
said: drafting the Code, its author has maintained a consistent philosophy or position. Moreover,
the decision in Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific Co., 10 holding
Furthermore, an option is unilateral: a promise to sell at the price fixed that Art. 1324 is modified by Art. 1479 of the Civil Code, in effect, considers the latter as
whenever the offeree should decide to exercise his option within the an exception to the former, and exceptions are not favored, unless the intention to the
specified time. After accepting the promise and before he exercises his contrary is clear, and it is not so, insofar as said two (2) articles are concerned. What is more,
option, the holder of the option is not bound to buy. He is free either to the reference, in both the second paragraph of Art. 1479 and Art. 1324, to an option or
buy or not to buy later. In this case, however, upon accepting herein promise supported by or founded upon a consideration, strongly suggests that the two (2)
petitioner's offer a bilateral promise to sell and to buy ensued, and the provisions intended to enforce or implement the same principle.
respondent ipso facto assumed the obligation of a purchaser. He did not
just get the right subsequently to buy or not to buy. It was not a mere Upon mature deliberation, the Court is of the considered opinion that it should, as it hereby
option then; it was a bilateral contract of sale. reiterates the doctrine laid down in the Atkins, Kroll & Co. case, and that, insofar as
inconsistent therewith, the view adhered to in the Southwestern Sugar & Molasses Co. case
Lastly, even supposing that Exh. A granted an option which is not binding should be deemed abandoned or modified.
for lack of consideration, the authorities hold that:
WHEREFORE, the decision appealed from is hereby affirmed, with costs against defendant-
"If the option is given without a consideration, it is a appellant Severina Rigos. It is so ordered.
mere offer of a contract of sale, which is not binding
until accepted. If, however, acceptance is made Reyes, J.B.L., Makalintal, Zaldivar, Teehankee, Barredo and Makasiar, JJ., concur.
before a withdrawal, it constitutes a binding contract
of sale, even though the option was not supported by Castro, J., took no part.
a sufficient consideration. ... . (77 Corpus Juris
Secundum, p. 652. See also 27 Ruling Case Law 339 Separate Opinions
and cases cited.)
ANTONIO, J., concurring:
"It can be taken for granted, as contended by the
defendant, that the option contract was not valid for
I concur in the opinion of the Chief Justice.
lack of consideration. But it was, at least, an offer to
sell, which was accepted by letter, and of the
acceptance the offerer had knowledge before said I fully agree with the abandonment of the view previously adhered to in Southwestern Sugar
offer was withdrawn. The concurrence of both acts — & Molasses Co. vs. Atlantic Gulf and Pacific Co.,1 which holds that an option to sell can still be
the offer and the acceptance — could at all events withdrawn, even if accepted, if the same is not supported by any consideration, and the
have generated a contract, if none there was before reaffirmance of the doctrine in Atkins, Kroll & Co., Inc. vs. Cua Hian Tek,2 holding that "an
(arts. 1254 and 1262 of the Civil Code)." (Zayco vs. option implies ... the legal obligation to keep the offer (to sell) open for the time specified;"
Serra, 44 Phil. 331.) that it could be withdrawn before acceptance, if there was no consideration for the option,

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
but once the "offer to sell" is accepted, a bilateral promise to sell and to buy ensues, and the without being liable for damages which the offeree may suffer. A contrary view would
offeree ipso facto assumes the obligations of a purchaser. In other words, if the option is remove the stability and security of business transactions.3
given without a consideration, it is a mere offer to sell, which is not binding until accepted. If,
however, acceptance is made before a withdrawal, it constitutes a binding contract of sale. In the present case the trial court found that the "Plaintiff (Nicolas Sanchez) had offered the
The concurrence of both acts — the offer and the acceptance — could in such event sum of Pl,510.00 before any withdrawal from the contract has been made by the Defendant
generate a contract. (Severina Rigos)." Since Rigos' offer sell was accepted by Sanchez, before she could withdraw
her offer, a bilateral reciprocal contract — to sell and to buy — was generated.
While the law permits the offeror to withdraw the offer at any time before acceptance even
before the period has expired, some writers hold the view, that the offeror can not exercise
this right in an arbitrary or capricious manner. This is upon the principle that an offer implies FIRST DIVISION
an obligation on the part of the offeror to maintain in such length of time as to permit the
offeree to decide whether to accept or not, and therefore cannot arbitrarily revoke the offer
G.R. No. 147839 June 8, 2006
without being liable for damages which the offeree may suffer. A contrary view would
remove the stability and security of business transactions.3
GAISANO CAGAYAN, INC. Petitioner,
vs.
In the present case the trial court found that the "Plaintiff (Nicolas Sanchez) had offered the
INSURANCE COMPANY OF NORTH AMERICA, Respondent.
sum of Pl,510.00 before any withdrawal from the contract has been made by the Defendant
(Severina Rigos)." Since Rigos' offer sell was accepted by Sanchez, before she could withdraw
her offer, a bilateral reciprocal contract — to sell and to buy — was generated. DECISION

Separate Opinions AUSTRIA-MARTINEZ, J.:

ANTONIO, J., concurring: Before the Court is a petition for review on certiorari of the Decision1 dated October 11, 2000
of the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision dated
August 31, 1998 of the Regional Trial Court, Branch 138, Makati (RTC) in Civil Case No. 92-322
I concur in the opinion of the Chief Justice.
and upheld the causes of action for damages of Insurance Company of North America
(respondent) against Gaisano Cagayan, Inc. (petitioner); and the CA Resolution dated April
I fully agree with the abandonment of the view previously adhered to in Southwestern Sugar 11, 2001 which denied petitioner's motion for reconsideration.
& Molasses Co. vs. Atlantic Gulf and Pacific Co.,1 which holds that an option to sell can still be
withdrawn, even if accepted, if the same is not supported by any consideration, and the
The factual background of the case is as follows:
reaffirmance of the doctrine in Atkins, Kroll & Co., Inc. vs. Cua Hian Tek,2 holding that "an
option implies ... the legal obligation to keep the offer (to sell) open for the time specified;"
that it could be withdrawn before acceptance, if there was no consideration for the option, Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss
but once the "offer to sell" is accepted, a bilateral promise to sell and to buy ensues, and the (Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks owned by Levi
offeree ipso facto assumes the obligations of a purchaser. In other words, if the option is Strauss & Co.. IMC and LSPI separately obtained from respondent fire insurance policies with
given without a consideration, it is a mere offer to sell, which is not binding until accepted. If, book debt endorsements. The insurance policies provide for coverage on "book debts in
however, acceptance is made before a withdrawal, it constitutes a binding contract of sale. connection with ready-made clothing materials which have been sold or delivered to various
The concurrence of both acts — the offer and the acceptance — could in such event customers and dealers of the Insured anywhere in the Philippines."2 The policies defined
generate a contract. book debts as the "unpaid account still appearing in the Book of Account of the Insured 45
days after the time of the loss covered under this Policy."3 The policies also provide for the
following conditions:
While the law permits the offeror to withdraw the offer at any time before acceptance even
before the period has expired, some writers hold the view, that the offeror can not exercise
this right in an arbitrary or capricious manner. This is upon the principle that an offer implies 1. Warranted that the Company shall not be liable for any unpaid account in
an obligation on the part of the offeror to maintain in such length of time as to permit the respect of the merchandise sold and delivered by the Insured which are
offeree to decide whether to accept or not, and therefore cannot arbitrarily revoke the offer outstanding at the date of loss for a period in excess of six (6) months from the
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
date of the covering invoice or actual delivery of the merchandise whichever shall Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its
first occur. decision setting aside the decision of the RTC. The dispositive portion of the decision reads:

2. Warranted that the Insured shall submit to the Company within twelve (12) days WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE and
after the close of every calendar month all amount shown in their books of a new one is entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:
accounts as unpaid and thus become receivable item from their customers and
dealers. x x x4 1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-
appellant to the insured Inter Capitol Marketing Corporation, plus legal interest
xxxx from the time of demand until fully paid;

Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, 2. the amount of P535,613.00 representing the amount paid by the plaintiff-
the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed appellant to the insured Levi Strauss Phil., Inc., plus legal interest from the time of
by fire. Included in the items lost or destroyed in the fire were stocks of ready-made clothing demand until fully paid.
materials sold and delivered by IMC and LSPI.
With costs against the defendant-appellee.
On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges
that IMC and LSPI filed with respondent their claims under their respective fire insurance SO ORDERED.10
policies with book debt endorsements; that as of February 25, 1991, the unpaid accounts of
petitioner on the sale and delivery of ready-made clothing materials with IMC
The CA held that the sales invoices are proofs of sale, being detailed statements of the
was P2,119,205.00 while with LSPI it was P535,613.00; that respondent paid the claims of
nature, quantity and cost of the thing sold; that loss of the goods in the fire must be borne by
IMC and LSPI and, by virtue thereof, respondent was subrogated to their rights against
petitioner since the proviso contained in the sales invoices is an exception under Article 1504
petitioner; that respondent made several demands for payment upon petitioner but these
(1) of the Civil Code, to the general rule that if the thing is lost by a fortuitous event, the risk
went unheeded.5
is borne by the owner of the thing at the time the loss under the principle of res perit
domino; that petitioner's obligation to IMC and LSPI is not the delivery of the lost goods but
In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be the payment of its unpaid account and as such the obligation to pay is not extinguished, even
held liable because the property covered by the insurance policies were destroyed due to if the fire is considered a fortuitous event; that by subrogation, the insurer has the right to go
fortuities event or force majeure; that respondent's right of subrogation has no basis against petitioner; that, being a fire insurance with book debt endorsements, what was
inasmuch as there was no breach of contract committed by it since the loss was due to fire insured was the vendor's interest as a creditor.11
which it could not prevent or foresee; that IMC and LSPI never communicated to it that they
insured their properties; that it never consented to paying the claim of the insured.6
Petitioner filed a motion for reconsideration12 but it was denied by the CA in its Resolution
dated April 11, 2001.13
At the pre-trial conference the parties failed to arrive at an amicable settlement.7 Thus, trial
on the merits ensued.
Hence, the present petition for review on certiorari anchored on the following Assignment of
Errors:
On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint.8 It
held that the fire was purely accidental; that the cause of the fire was not attributable to the
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT CASE
negligence of the petitioner; that it has not been established that petitioner is the debtor of
WAS ONE OVER CREDIT.
IMC and LSPI; that since the sales invoices state that "it is further agreed that merely for
purpose of securing the payment of purchase price, the above-described merchandise
remains the property of the vendor until the purchase price is fully paid", IMC and LSPI THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT GOODS IN
retained ownership of the delivered goods and must bear the loss. THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY THEREOF.

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THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC SUBROGATION Nevertheless, jurisprudence has recognized several exceptions in which factual issues may be
UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14 resolved by this Court, such as: (1) when the findings are grounded entirely on speculation,
surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or
Anent the first error, petitioner contends that the insurance in the present case cannot be impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a
deemed to be over credit since an insurance "on credit" belies not only the nature of fire misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in making
insurance but the express terms of the policies; that it was not credit that was insured since its findings the CA went beyond the issues of the case, or its findings are contrary to the
respondent paid on the occasion of the loss of the insured goods to fire and not because of admissions of both the appellant and the appellee; (7) when the findings are contrary to the
the non-payment by petitioner of any obligation; that, even if the insurance is deemed as trial court; (8) when the findings are conclusions without citation of specific evidence on
one over credit, there was no loss as the accounts were not yet due since no prior demands which they are based; (9) when the facts set forth in the petition as well as in the petitioner's
were made by IMC and LSPI against petitioner for payment of the debt and such demands main and reply briefs are not disputed by the respondent; (10) when the findings of fact are
came from respondent only after it had already paid IMC and LSPI under the fire insurance premised on the supposed absence of evidence and contradicted by the evidence on record;
policies.15 and (11) when the CA manifestly overlooked certain relevant facts not disputed by the
parties, which, if properly considered, would justify a different conclusion.21 Exceptions (4),
(5), (7), and (11) apply to the present petition.
As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer
IMC and LSPI assumed the risk of loss when they secured fire insurance policies over the
goods. At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that
the CA erred in construing a fire insurance policy on book debts as one covering the unpaid
accounts of IMC and LSPI since such insurance applies to loss of the ready-made clothing
Concerning the third ground, petitioner submits that there is no subrogation in favor of
materials sold and delivered to petitioner.
respondent as no valid insurance could be maintained thereon by IMC and LSPI since all risk
had transferred to petitioner upon delivery of the goods; that petitioner was not privy to the
insurance contract or the payment between respondent and its insured nor was its consent The Court disagrees with petitioner's stand.
or approval ever secured; that this lack of privity forecloses any real interest on the part of
respondent in the obligation to pay, limiting its interest to keeping the insured goods safe It is well-settled that when the words of a contract are plain and readily understood, there is
from fire. no room for construction.22 In this case, the questioned insurance policies provide coverage
for "book debts in connection with ready-made clothing materials which have been sold or
For its part, respondent counters that while ownership over the ready- made clothing delivered to various customers and dealers of the Insured anywhere in the Philippines."23 ;
materials was transferred upon delivery to petitioner, IMC and LSPI have insurable interest and defined book debts as the "unpaid account still appearing in the Book of Account of the
over said goods as creditors who stand to suffer direct pecuniary loss from its destruction by Insured 45 days after the time of the loss covered under this Policy."24 Nowhere is it provided
fire; that petitioner is liable for loss of the ready-made clothing materials since it failed to in the questioned insurance policies that the subject of the insurance is the goods sold and
overcome the presumption of liability under Article 126516 of the Civil Code; that the fire was delivered to the customers and dealers of the insured.
caused through petitioner's negligence in failing to provide stringent measures of caution,
care and maintenance on its property because electric wires do not usually short circuit Indeed, when the terms of the agreement are clear and explicit that they do not justify an
unless there are defects in their installation or when there is lack of proper maintenance and attempt to read into it any alleged intention of the parties, the terms are to be understood
supervision of the property; that petitioner is guilty of gross and evident bad faith in refusing literally just as they appear on the face of the contract.25 Thus, what were insured against
to pay respondent's valid claim and should be liable to respondent for contracted lawyer's were the accounts of IMC and LSPI with petitioner which remained unpaid 45 days after the
fees, litigation expenses and cost of suit.17 loss through fire, and not the loss or destruction of the goods delivered.

As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of
it from the CA is limited to reviewing questions of law which involves no examination of the the goods by stipulating in the sales invoices that "[i]t is further agreed that merely for
probative value of the evidence presented by the litigants or any of them.18 The Supreme purpose of securing the payment of the purchase price the above described merchandise
Court is not a trier of facts; it is not its function to analyze or weigh evidence all over remains the property of the vendor until the purchase price thereof is fully paid."26
again.19 Accordingly, findings of fact of the appellate court are generally conclusive on the
Supreme Court.20 The Court is not persuaded.

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The present case clearly falls under paragraph (1), Article 1504 of the Civil Code: The next question is: Is petitioner liable for the unpaid accounts?

ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership Petitioner's argument that it is not liable because the fire is a fortuitous event under Article
therein is transferred to the buyer, but when the ownership therein is transferred to the 117432 of the Civil Code is misplaced. As held earlier, petitioner bears the loss under Article
buyer the goods are at the buyer's risk whether actual delivery has been made or not, except 1504 (1) of the Civil Code.
that:
Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire
(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in but for petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire.
pursuance of the contract and the ownership in the goods has been retained by the seller Accordingly, petitioner's obligation is for the payment of money. As correctly stated by the
merely to secure performance by the buyer of his obligations under the contract, the goods CA, where the obligation consists in the payment of money, the failure of the debtor to make
are at the buyer's risk from the time of such delivery; (Emphasis supplied) the payment even by reason of a fortuitous event shall not relieve him of his liability.33 The
rationale for this is that the rule that an obligor should be held exempt from liability when
xxxx the loss occurs thru a fortuitous event only holds true when the obligation consists in the
delivery of a determinate thing and there is no stipulation holding him liable even in case of
fortuitous event. It does not apply when the obligation is pecuniary in nature.34
Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the
risk of loss is borne by the buyer.27 Accordingly, petitioner bears the risk of loss of the goods
delivered. Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or
destruction of anything of the same kind does not extinguish the obligation." If the obligation
is generic in the sense that the object thereof is designated merely by its class or genus
IMC and LSPI did not lose complete interest over the goods. They have an insurable interest
without any particular designation or physical segregation from all others of the same class,
until full payment of the value of the delivered goods. Unlike the civil law concept of res perit
the loss or destruction of anything of the same kind even without the debtor's fault and
domino, where ownership is the basis for consideration of who bears the risk of loss, in
before he has incurred in delay will not have the effect of extinguishing the obligation.35 This
property insurance, one's interest is not determined by concept of title, but whether insured
rule is based on the principle that the genus of a thing can never perish. Genus nunquan
has substantial economic interest in the property.28
perit.36 An obligation to pay money is generic; therefore, it is not excused by fortuitous loss
of any specific property of the debtor.37
Section 13 of our Insurance Code defines insurable interest as "every interest in property,
whether real or personal, or any relation thereto, or liability in respect thereof, of such
Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to
nature that a contemplated peril might directly damnify the insured." Parenthetically, under
this case. What is relevant here is whether it has been established that petitioner has
Section 14 of the same Code, an insurable interest in property may consist in: (a) an existing
outstanding accounts with IMC and LSPI.
interest; (b) an inchoate interest founded on existing interest; or (c) an expectancy, coupled
with an existing interest in that out of which the expectancy arises.
With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C-
22"38 show that petitioner has an outstanding account with IMC in the amount
Therefore, an insurable interest in property does not necessarily imply a property interest in,
of P2,119,205.00. Exhibit "E"39 is the check voucher evidencing payment to IMC. Exhibit
or a lien upon, or possession of, the subject matter of the insurance, and neither the title nor
"F"40 is the subrogation receipt executed by IMC in favor of respondent upon receipt of the
a beneficial interest is requisite to the existence of such an interest, it is sufficient that the
insurance proceeds. All these documents have been properly identified, presented and
insured is so situated with reference to the property that he would be liable to loss should it
marked as exhibits in court. The subrogation receipt, by itself, is sufficient to establish not
be injured or destroyed by the peril against which it is insured.29 Anyone has an insurable
only the relationship of respondent as insurer and IMC as the insured, but also the amount
interest in property who derives a benefit from its existence or would suffer loss from its
paid to settle the insurance claim. The right of subrogation accrues simply upon payment by
destruction.30Indeed, a vendor or seller retains an insurable interest in the property sold so
the insurance company of the insurance claim.41 Respondent's action against petitioner is
long as he has any interest therein, in other words, so long as he would suffer by its
squarely sanctioned by Article 2207 of the Civil Code which provides:
destruction, as where he has a vendor's lien.31 In this case, the insurable interest of IMC and
LSPI pertain to the unpaid accounts appearing in their Books of Account 45 days after the
time of the loss covered by the policies. Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from
the insurance company for the injury or loss arising out of the wrong or breach of contract

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complained of, the insurance company shall be subrogated to the rights of the insured A. Precis
against the wrongdoer or the person who has violated the contract. x x x
In this jurisdiction, it is established that freedom of the press is crucial and so inextricably
Petitioner failed to refute respondent's evidence. woven into the right to free speech and free expression, that any attempt to restrict it must
be met with an examination so critical that only a danger that is clear and present would be
As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No allowed to curtail it.
evidentiary weight can be given to Exhibit "F Levi Strauss",42 a letter dated April 23, 1991
from petitioner's General Manager, Stephen S. Gaisano, Jr., since it is not an admission of Indeed, we have not wavered in the duty to uphold this cherished freedom. We have struck
petitioner's unpaid account with LSPI. It only confirms the loss of Levi's products in the down laws and issuances meant to curtail this right, as in Adiong v. COMELEC,1 Burgos v.
amount of P535,613.00 in the fire that razed petitioner's building on February 25, 1991. Chief of Staff,2 Social Weather Stations v. COMELEC,3 and Bayan v. Executive Secretary
Ermita.4 When on its face, it is clear that a governmental act is nothing more than a naked
Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation means to prevent the free exercise of speech, it must be nullified.
receipt was offered in evidence. Thus, there is no evidence that respondent has been
subrogated to any right which LSPI may have against petitioner. Failure to substantiate the B. The Facts
claim of subrogation is fatal to petitioner's case for recovery of the amount of P535,613.00.
1. The case originates from events that occurred a year after the 2004 national and local
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000 elections. On June 5, 2005, Press Secretary Ignacio Bunye told reporters that the opposition
and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848 was planning to destabilize the administration by releasing an audiotape of a mobile phone
are AFFIRMED with the MODIFICATION that the order to pay the amount of P535,613.00 to conversation allegedly between the President of the Philippines, Gloria Macapagal Arroyo,
respondent is DELETED for lack of factual basis. and a high-ranking official of the Commission on Elections (COMELEC). The conversation was
audiotaped allegedly through wire-tapping.5 Later, in a Malacañang press briefing, Secretary
No pronouncement as to costs. Bunye produced two versions of the tape, one supposedly the complete version, and the
other, a spliced, "doctored" or altered version, which would suggest that the President had
instructed the COMELEC official to manipulate the election results in the President’s
SO ORDERED.
favor. 6 It seems that Secretary Bunye admitted that the voice was that of President Arroyo,
but subsequently made a retraction. 7
Republic of the Philippines
SUPREME COURT
2. On June 7, 2005, former counsel of deposed President Joseph Estrada, Atty. Alan Paguia,
Manila
subsequently released an alleged authentic tape recording of the wiretap. Included in the
tapes were purported conversations of the President, the First Gentleman Jose Miguel
EN BANC Arroyo, COMELEC Commissioner Garcillano, and the late Senator Barbers.8

G.R. No. 168338 February 15, 2008 3. On June 8, 2005, respondent Department of Justice (DOJ) Secretary Raul Gonzales warned
reporters that those who had copies of the compact disc (CD) and those broadcasting or
FRANCISCO CHAVEZ, petitioner, publishing its contents could be held liable under the Anti-Wiretapping Act. These persons
vs. included Secretary Bunye and Atty. Paguia. He also stated that persons possessing or airing
RAUL M. GONZALES, in his capacity as the Secretary of the Department of Justice; and said tapes were committing a continuing offense, subject to arrest by anybody who had
NATIONAL TELECOMMUNICATIONS COMMISSION (NTC), respondents. personal knowledge if the crime was committed or was being committed in their presence.9

DECISION 4. On June 9, 2005, in another press briefing, Secretary Gonzales ordered the National
Bureau of Investigation (NBI) to go after media organizations "found to have caused the
PUNO, C.J.: spread, the playing and the printing of the contents of a tape" of an alleged wiretapped
conversation involving the President about fixing votes in the 2004 national elections.
Gonzales said that he was going to start with [Link], a joint venture between
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the Philippine Daily Inquirer and GMA7 television network, because by the very nature of broadcasting and television stations shall, during any broadcast or telecast, cut off
the Internet medium, it was able to disseminate the contents of the tape more widely. He from the air the speech, play, act or scene or other matters being broadcast or
then expressed his intention of inviting the editors and managers of [Link] and GMA7 to a telecast the tendency thereof is to disseminate false information or such other
probe, and supposedly declared, "I [have] asked the NBI to conduct a tactical interrogation of willful misrepresentation, or to propose and/or incite treason, rebellion or
all concerned." 10 sedition." The foregoing directive had been reiterated by NTC Memorandum
Circular No. 22-89, which, in addition thereto, prohibited radio, broadcasting and
5. On June 11, 2005, the NTC issued this press release: 11 television stations from using their stations to broadcast or telecast any speech,
language or scene disseminating false information or willful misrepresentation, or
inciting, encouraging or assisting in subversive or treasonable acts.
NTC GIVES FAIR WARNING TO RADIO AND TELEVISION OWNERS/OPERATORS TO
OBSERVE ANTI-WIRETAPPING LAW AND PERTINENT CIRCULARS ON PROGRAM
STANDARDS The [NTC] will not hesitate, after observing the requirements of due process, to
apply with full force the provisions of said Circulars and their accompanying
sanctions on erring radio and television stations and their owners/operators.
xxx xxx xxx

6. On June 14, 2005, NTC held a dialogue with the Board of Directors of the Kapisanan ng
Taking into consideration the country’s unusual situation, and in order not to
mga Brodkaster sa Pilipinas (KBP). NTC allegedly assured the KBP that the press release did
unnecessarily aggravate the same, the NTC warns all radio stations and television
not violate the constitutional freedom of speech, of expression, and of the press, and the
network owners/operators that the conditions of the authorization and permits
right to information. Accordingly, NTC and KBP issued a Joint Press Statement which states,
issued to them by Government like the Provisional Authority and/or Certificate of
among others, that: 12
Authority explicitly provides that said companies shall not use [their] stations for
the broadcasting or telecasting of false information or willful misrepresentation.
Relative thereto, it has come to the attention of the [NTC] that certain personalities • NTC respects and will not hinder freedom of the press and the right to information
are in possession of alleged taped conversations which they claim involve the on matters of public concern. KBP & its members have always been committed to
President of the Philippines and a Commissioner of the COMELEC regarding the exercise of press freedom with high sense of responsibility and discerning
supposed violation of election laws. judgment of fairness and honesty.
• NTC did not issue any MC [Memorandum Circular] or Order constituting a restraint
These personalities have admitted that the taped conversations are products of of press freedom or censorship. The NTC further denies and does not intend to
illegal wiretapping operations. limit or restrict the interview of members of the opposition or free expression of
views.
Considering that these taped conversations have not been duly authenticated nor
• What is being asked by NTC is that the exercise of press freedom [be] done
responsibly.
could it be said at this time that the tapes contain an accurate or truthful
representation of what was recorded therein, it is the position of the [NTC] that the • KBP has program standards that KBP members will observe in the treatment of
continuous airing or broadcast of the said taped conversations by radio and news and public affairs programs. These include verification of sources, non-airing
television stations is a continuing violation of the Anti-Wiretapping Law and the of materials that would constitute inciting to sedition and/or rebellion.
conditions of the Provisional Authority and/or Certificate of Authority issued to • The KBP Codes also require that no false statement or willful misrepresentation is
these radio and television stations. It has been subsequently established that the made in the treatment of news or commentaries.
said tapes are false and/or fraudulent after a prosecution or appropriate • The supposed wiretapped tapes should be treated with sensitivity and handled
investigation, the concerned radio and television companies are hereby warned responsibly giving due consideration to the process being undertaken to verify and
that their broadcast/airing of such false information and/or willful validate the authenticity and actual content of the same."
misrepresentation shall be just cause for the suspension, revocation and/or
cancellation of the licenses or authorizations issued to the said companies. C. The Petition

In addition to the above, the [NTC] reiterates the pertinent NTC circulars on Petitioner Chavez filed a petition under Rule 65 of the Rules of Court against respondents
program standards to be observed by radio and television stations. NTC Secretary Gonzales and the NTC, "praying for the issuance of the writs of certiorari and
Memorandum Circular 111-12-85 explicitly states, among others, that "all radio
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prohibition, as extraordinary legal remedies, to annul void proceedings, and to prevent the themselves within the limits of the Constitution and the laws and that they have not abused
unlawful, unconstitutional and oppressive exercise of authority by the respondents."13 the discretion given to them.

Alleging that the acts of respondents are violations of the freedom on expression and of the Thus, in line with the liberal policy of this Court on locus standi when a case involves an issue
press, and the right of the people to information on matters of public concern,14 petitioner of overarching significance to our society,22 we therefore brush aside technicalities of
specifically asked this Court: procedure and take cognizance of this petition,23 seeing as it involves a challenge to the most
exalted of all the civil rights, the freedom of expression. The petition raises other issues like
[F]or [the] nullification of acts, issuances, and orders of respondents committed or the extent of the right to information of the public. It is fundamental, however, that we
made since June 6, 2005 until the present that curtail the public’s rights to freedom need not address all issues but only the most decisive one which in the case at bar is
of expression and of the press, and to information on matters of public concern whether the acts of the respondents abridge freedom of speech and of the press.
specifically in relation to information regarding the controversial taped conversion
of President Arroyo and for prohibition of the further commission of such acts, and But aside from the primordial issue of determining whether free speech and freedom of
making of such issuances, and orders by respondents. 15 the press have been infringed, the case at bar also gives this Court the opportunity: (1) to
distill the essence of freedom of speech and of the press now beclouded by the vagaries of
Respondents16 denied that the acts transgress the Constitution, and questioned petitioner’s motherhood statements; (2) to clarify the types of speeches and their differing restraints
legal standing to file the petition. Among the arguments they raised as to the validity of the allowed by law; (3) to discuss the core concepts of prior restraint, content-neutral and
"fair warning" issued by respondent NTC, is that broadcast media enjoy lesser constitutional content-based regulations and their constitutional standard of review; (4) to examine the
guarantees compared to print media, and the warning was issued pursuant to the NTC’s historical difference in the treatment of restraints between print and broadcast media and
mandate to regulate the telecommunications industry. 17 It was also stressed that "most of stress the standard of review governing both; and (5) to call attention to the ongoing
the [television] and radio stations continue, even to this date, to air the tapes, but of late blurring of the lines of distinction between print and broadcast media.
within the parameters agreed upon between the NTC and KBP." 18
E. Re-examining The law on freedom of speech,
D. The Procedural Threshold: Legal Standing of expression and of the press

To be sure, the circumstances of this case make the constitutional challenge peculiar. No law shall be passed abridging the freedom of speech, of expression, or of the
Petitioner, who is not a member of the broadcast media, prays that we strike down the acts press, or the right of the people peaceably to assemble and petition the government
and statements made by respondents as violations of the right to free speech, free for redress of grievances.24
expression and a free press. For another, the recipients of the press statements have not
come forward—neither intervening nor joining petitioner in this action. Indeed, as a group, Freedom of expression has gained recognition as a fundamental principle of every
they issued a joint statement with respondent NTC that does not complain about restraints democratic government, and given a preferred right that stands on a higher level than
on freedom of the press. substantive economic freedom or other liberties. The cognate rights codified by Article III,
Section 4 of the Constitution, copied almost verbatim from the First Amendment of the U.S.
It would seem, then, that petitioner has not met the requisite legal standing, having failed to Bill of Rights,25 were considered the necessary consequence of republican institutions and
allege "such a personal stake in the outcome of the controversy as to assure that concrete the complement of free speech.26 This preferred status of free speech has also been codified
adverseness which sharpens the presentation of issues upon which the Court so largely at the international level, its recognition now enshrined in international law as a customary
depends for illumination of difficult constitutional questions." 19 norm that binds all nations.27

But as early as half a century ago, we have already held that where serious constitutional In the Philippines, the primacy and high esteem accorded freedom of expression is a
questions are involved, "the transcendental importance to the public of these cases demands fundamental postulate of our constitutional system. 28 This right was elevated to
that they be settled promptly and definitely, brushing aside if we must, technicalities of constitutional status in the 1935, the 1973 and the 1987 Constitutions, reflecting our own
procedure." 20 Subsequently, this Court has repeatedly and consistently refused to wield lesson of history, both political and legal, that freedom of speech is an indispensable
procedural barriers as impediments to its addressing and resolving serious legal questions condition for nearly every other form of freedom.29 Moreover, our history shows that the
that greatly impact on public interest,21 in keeping with the Court's duty under the 1987 struggle to protect the freedom of speech, expression and the press was, at bottom, the
Constitution to determine whether or not other branches of government have kept struggle for the indispensable preconditions for the exercise of other freedoms.30 For it is
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only when the people have unbridled access to information and the press that they will be information is needed or appropriate, so as to enable members of society to cope with the
capable of rendering enlightened judgments. In the oft-quoted words of Thomas Jefferson, exigencies of their period. The constitutional protection assures the broadest possible
we cannot both be free and ignorant. exercise of free speech and free press for religious, political, economic, scientific, news, or
informational ends, inasmuch as the Constitution's basic guarantee of freedom to advocate
E.1. Abstraction of Free Speech ideas is not confined to the expression of ideas that are conventional or shared by a majority.

Surrounding the freedom of speech clause are various concepts that we have adopted as The constitutional protection is not limited to the exposition of ideas. The protection
part and parcel of our own Bill of Rights provision on this basic freedom.31 What is embraced afforded free speech extends to speech or publications that are entertaining as well as
under this provision was discussed exhaustively by the Court in Gonzales v. Commission on instructive or informative. Specifically, in Eastern Broadcasting Corporation (DYRE) v.
Elections, 32 in which it was held: Dans,41 this Court stated that all forms of media, whether print or broadcast, are entitled to
the broad protection of the clause on freedom of speech and of expression.
…At the very least, free speech and free press may be identified with the liberty to
discuss publicly and truthfully any matter of public interest without censorship and While all forms of communication are entitled to the broad protection of freedom of
punishment. There is to be no previous restraint on the communication of views or expression clause, the freedom of film, television and radio broadcasting is somewhat
subsequent liability whether in libel suits, prosecution for sedition, or action for lesser in scope than the freedom accorded to newspapers and other print media, as will be
damages, or contempt proceedings unless there be a clear and present danger of subsequently discussed.
substantive evil that Congress has a right to prevent. 33
E.2. Differentiation: The Limits & Restraints of Free Speech
Gonzales further explained that the vital need of a constitutional democracy for freedom of
expression is undeniable, whether as a means of assuring individual self-fulfillment; of From the language of the specific constitutional provision, it would appear that the right to
attaining the truth; of assuring participation by the people in social, including political, free speech and a free press is not susceptible of any limitation. But the realities of life in a
decision-making; and of maintaining the balance between stability and change.34As early as complex society preclude a literal interpretation of the provision prohibiting the passage of a
the 1920s, the trend as reflected in Philippine and American decisions was to recognize the law that would abridge such freedom. For freedom of expression is not an absolute, 42 nor is
broadest scope and assure the widest latitude for this constitutional guarantee. The trend it an "unbridled license that gives immunity for every possible use of language and prevents
represents a profound commitment to the principle that debate on public issue should be the punishment of those who abuse this freedom."
uninhibited, robust, and wide-open. 35
Thus, all speech are not treated the same. Some types of speech may be subjected to some
Freedom of speech and of the press means something more than the right to approve regulation by the State under its pervasive police power, in order that it may not be injurious
existing political beliefs or economic arrangements, to lend support to official measures, and to the equal right of others or those of the community or society.43 The difference in
to take refuge in the existing climate of opinion on any matter of public treatment is expected because the relevant interests of one type of speech, e.g., political
consequence.36 When atrophied, the right becomes meaningless.37 The right belongs as well speech, may vary from those of another, e.g., obscene speech. Distinctions have therefore
-- if not more – to those who question, who do not conform, who differ.38 The ideas that may been made in the treatment, analysis, and evaluation of the permissible scope of restrictions
be expressed under this freedom are confined not only to those that are conventional or on various categories of speech. 44 We have ruled, for example, that in our jurisdiction
acceptable to the majority. To be truly meaningful, freedom of speech and of the press slander or libel, lewd and obscene speech, as well as "fighting words" are not entitled to
should allow and even encourage the articulation of the unorthodox view, though it be constitutional protection and may be penalized.45
hostile to or derided by others; or though such view "induces a condition of unrest, creates
dissatisfaction with conditions as they are, or even stirs people to anger."39 To paraphrase Moreover, the techniques of reviewing alleged restrictions on speech (overbreadth,
Justice Holmes, it is freedom for the thought that we hate, no less than for the thought that vagueness, and so on) have been applied differently to each category, either consciously or
agrees with us. 40 unconsciously. 46 A study of free speech jurisprudence—whether here or abroad—will reveal
that courts have developed different tests as to specific types or categories of speech in
The scope of freedom of expression is so broad that it extends protection to nearly all forms concrete situations; i.e., subversive speech; obscene speech; the speech of the broadcast
of communication. It protects speech, print and assembly regarding secular as well as media and of the traditional print media; libelous speech; speech affecting associational
political causes, and is not confined to any particular field of human interest. The protection rights; speech before hostile audiences; symbolic speech; speech that affects the right to a
covers myriad matters of public interest or concern embracing all issues, about which fair trial; and speech associated with rights of assembly and petition. 47
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Generally, restraints on freedom of speech and expression are evaluated by either or a (2) freedom from punishment subsequent to publication; 53 (3) freedom of access to
combination of three tests, i.e., (a) the dangerous tendency doctrine which permits information; 54 and (4) freedom of circulation.55
limitations on speech once a rational connection has been established between the speech
restrained and the danger contemplated; 48 (b) the balancing of interests tests,used as a Considering that petitioner has argued that respondents’ press statement constitutes a form
standard when courts need to balance conflicting social values and individual interests, and of impermissible prior restraint, a closer scrutiny of this principle is in order, as well as its
requires a conscious and detailed consideration of the interplay of interests observable in a sub-specie of content-based (as distinguished from content-neutral) regulations.
given situation of type of situation; 49 and (c) the clear and present danger rule which rests
on the premise that speech may be restrained because there is substantial danger that the
At this point, it should be noted that respondents in this case deny that their acts constitute
speech will likely lead to an evil the government has a right to prevent. This rule requires that
prior restraints. This presents a unique tinge to the present challenge, considering that the
the evil consequences sought to be prevented must be substantive, "extremely serious and
cases in our jurisdiction involving prior restrictions on speech never had any issue of whether
the degree of imminence extremely high." 50
the governmental act or issuance actually constituted prior restraint. Rather, the
determinations were always about whether the restraint was justified by the Constitution.
As articulated in our jurisprudence, we have applied either the dangerous tendency
doctrine or clear and present danger test to resolve free speech challenges. More recently,
Be that as it may, the determination in every case of whether there is an impermissible
we have concluded that we have generally adhered to the clear and present danger test. 51
restraint on the freedom of speech has always been based on the circumstances of each
case, including the nature of the restraint. And in its application in our jurisdiction, the
E.3. In Focus: Freedom of the Press parameters of this principle have been etched on a case-to-case basis, always tested by
scrutinizing the governmental issuance or act against the circumstances in which they
Much has been written on the philosophical basis of press freedom as part of the larger right operate, and then determining the appropriate test with which to evaluate.
of free discussion and expression. Its practical importance, though, is more easily grasped. It
is the chief source of information on current affairs. It is the most pervasive and perhaps Prior restraint refers to official governmental restrictions on the press or other forms of
most powerful vehicle of opinion on public questions. It is the instrument by which citizens expression in advance of actual publication or dissemination.56 Freedom from prior restraint
keep their government informed of their needs, their aspirations and their grievances. It is is largely freedom from government censorship of publications, whatever the form of
the sharpest weapon in the fight to keep government responsible and efficient. Without a censorship, and regardless of whether it is wielded by the executive, legislative or judicial
vigilant press, the mistakes of every administration would go uncorrected and its abuses branch of the government. Thus, it precludes governmental acts that required approval of a
unexposed. As Justice Malcolm wrote in United States v. Bustos:52 proposal to publish; licensing or permits as prerequisites to publication including the
payment of license taxes for the privilege to publish; and even injunctions against
The interest of society and the maintenance of good government demand a full discussion of publication. Even the closure of the business and printing offices of certain newspapers,
public affairs. Complete liberty to comment on the conduct of public men is a scalpel in the resulting in the discontinuation of their printing and publication, are deemed as previous
case of free speech. The sharp incision of its probe relieves the abscesses of officialdom. Men restraint or censorship. 57 Any law or official that requires some form of permission to be had
in public life may suffer under a hostile and unjust accusation; the wound can be assuaged before publication can be made, commits an infringement of the constitutional right, and
with the balm of clear conscience. remedy can be had at the courts.

Its contribution to the public weal makes freedom of the press deserving of extra protection. Given that deeply ensconced in our fundamental law is the hostility against all prior restraints
Indeed, the press benefits from certain ancillary rights. The productions of writers are on speech, and any act that restrains speech is presumed invalid,58 and "any act that
classified as intellectual and proprietary. Persons who interfere or defeat the freedom to restrains speech is hobbled by the presumption of invalidity and should be greeted with
write for the press or to maintain a periodical publication are liable for damages, be they furrowed brows," 59 it is important to stress not all prior restraints on speech are
private individuals or public officials. invalid. Certain previous restraints may be permitted by the Constitution, but determined
only upon a careful evaluation of the challenged act as against the appropriate test by which
E.4. Anatomy of Restrictions: Prior Restraint, Content-Neutral and Content-Based it should be measured against.
Regulations
Hence, it is not enough to determine whether the challenged act constitutes some form of
Philippine jurisprudence, even as early as the period under the 1935 Constitution, has restraint on freedom of speech. A distinction has to be made whether the restraint is (1)
recognized four aspects of freedom of the press. These are (1) freedom from prior restraint; a content-neutral regulation, i.e., merely concerned with the incidents of the speech, or one
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that merely controls the time, place or manner, and under well defined standards;60 or (2) Also, the incidental restriction on speech must be no greater than what is essential to the
a content-based restraint or censorship, i.e., the restriction is based on the subject matter of furtherance of that interest. 70 A restriction that is so broad that it encompasses more than
the utterance or speech. 61 The cast of the restriction determines the test by which the what is required to satisfy the governmental interest will be invalidated. 71 The regulation,
challenged act is assayed with. therefore, must be reasonable and narrowly drawn to fit the regulatory purpose, with the
least restrictive means undertaken. 72
When the speech restraints take the form of a content-neutral regulation, only a substantial
governmental interest is required for its validity.62 Because regulations of this type are not Thus, when the prior restraint partakes of a content-neutral regulation, it is subjected to an
designed to suppress any particular message, they are not subject to the strictest form of intermediate review. A content-based regulation,73 however, bears a heavy presumption of
judicial scrutiny but an intermediate approach—somewhere between the mere rationality invalidity and is measured against the clear and present danger rule. The latter will pass
that is required of any other law and the compelling interest standard applied to content- constitutional muster only if justified by a compelling reason, and the restrictions imposed
based restrictions.63 The test is called intermediate because the Court will not merely are neither overbroad nor vague. 74
rubberstamp the validity of a law but also require that the restrictions be narrowly-tailored
to promote an important or significant governmental interest that is unrelated to the Applying the foregoing, it is clear that the challenged acts in the case at bar need to be
suppression of expression. The intermediate approach has been formulated in this manner: subjected to the clear and present danger rule, as they are content-based restrictions. The
acts of respondents focused solely on but one object—a specific content— fixed as these
A governmental regulation is sufficiently justified if it is within the constitutional were on the alleged taped conversations between the President and a COMELEC official.
power of the Government, if it furthers an important or substantial governmental Undoubtedly these did not merely provide regulations as to the time, place or manner of the
interest; if the governmental interest is unrelated to the suppression of free dissemination of speech or expression.
expression; and if the incident restriction on alleged [freedom of speech &
expression] is no greater than is essential to the furtherance of that interest. 64 E.5. Dichotomy of Free Press: Print v. Broadcast Media

On the other hand, a governmental action that restricts freedom of speech or of the Finally, comes respondents’ argument that the challenged act is valid on the ground that
press based on content is given the strictest scrutiny in light of its inherent and invasive broadcast media enjoys free speech rights that are lesser in scope to that of print media. We
impact. Only when the challenged act has overcome the clear and present danger rule will it next explore and test the validity of this argument, insofar as it has been invoked to validate
pass constitutional muster,65 with the government having the burden of overcoming the a content-based restriction on broadcast media.
presumed unconstitutionality.
The regimes presently in place for each type of media differ from one other. Contrasted
Unless the government can overthrow this presumption, the content-based restraint will be with the regime in respect of books, newspapers, magazines and traditional printed matter,
struck down.66 broadcasting, film and video have been subjected to regulatory schemes.

With respect to content-based restrictions, the government must also show the type of harm The dichotomy between print and broadcast media traces its origins in the United States.
the speech sought to be restrained would bring about— especially the gravity and the There, broadcast radio and television have been held to have limited First Amendment
imminence of the threatened harm – otherwise the prior restraint will be invalid. Prior protection,75 and U.S. Courts have excludedbroadcast media from the application of the
restraint on speech based on its content cannot be justified by hypothetical fears, "but only "strict scrutiny" standard that they would otherwise apply to content-based
by showing a substantive and imminent evil that has taken the life of a reality already on restrictions.76 According to U.S. Courts, the three major reasons why broadcast media stands
ground."67 As formulated, "the question in every case is whether the words used are used in apart from print media are: (a) the scarcity of the frequencies by which the medium operates
such circumstances and are of such a nature as to create a clear and present danger that they [i.e., airwaves are physically limited while print medium may be limitless]; 77 (b) its
will bring about the substantive evils that Congress has a right to prevent. It is a question of "pervasiveness" as a medium; and (c) its unique accessibility to children.78 Because cases
proximity and degree."68 involving broadcast media need not follow "precisely the same approach that [U.S. courts]
have applied to other media," nor go "so far as to demand that such regulations serve
The regulation which restricts the speech content must also serve an important or ‘compelling’ government interests,"79 they are decided on whether the "governmental
substantial government interest, which is unrelated to the suppression of free expression. 69 restriction" is narrowly tailored to further a substantial governmental interest,"80 or the
intermediate test.

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As pointed out by respondents, Philippine jurisprudence has also echoed a differentiation in Broadcasting has to be licensed. Airwave frequencies have to be allocated among
treatment between broadcast and print media. Nevertheless, a review of Philippine case qualified users. A broadcast corporation cannot simply appropriate a certain
law on broadcast media will show that—as we have deviated with the American frequency without regard for government regulation or for the rights of others.
conception of the Bill of Rights81— we likewise did not adopt en masse the U.S. conception
of free speech as it relates to broadcast media, particularly as to which test would govern All forms of communication are entitled to the broad protection of the freedom of
content-based prior restraints. expression clause. Necessarily, however, the freedom of television and radio
broadcasting is somewhat lesser in scope than the freedom accorded to newspaper
Our cases show two distinct features of this dichotomy. First, the difference in treatment, in and print media.
the main, is in the regulatory scheme applied to broadcast media that is not imposed on
traditional print media, and narrowly confined to unprotected speech (e.g., obscenity, The American Court in Federal Communications Commission v. Pacifica
pornography, seditious and inciting speech), or is based on a compelling government interest Foundation (438 U.S. 726), confronted with a patently offensive and indecent
that also has constitutional protection, such as national security or the electoral process. regular radio program, explained why radio broadcasting, more than other forms of
communications, receives the most limited protection from the free expression
Second, regardless of the regulatory schemes that broadcast media is subjected to, the Court clause. First, broadcast media have established a uniquely pervasive presence in
has consistently held that the clear and present danger test applies to content-based the lives of all citizens, Material presented over the airwaves confronts the citizen,
restrictions on media, without making a distinction as to traditional print or broadcast media. not only in public, but in the privacy of his home. Second, broadcasting is uniquely
accessible to children. Bookstores and motion picture theaters may be prohibited
The distinction between broadcast and traditional print media was first enunciated in Eastern from making certain material available to children, but the same selectivity cannot
Broadcasting Corporation (DYRE) v. Dans,82 wherein it was held that "[a]ll forms of media, be done in radio or television, where the listener or viewer is constantly tuning in
whether print or broadcast, are entitled to the broad protection of the freedom of speech and and out.
expression clause. The test for limitations on freedom of expression continues to be the clear
and present danger rule…"83 Similar considerations apply in the area of national security.

Dans was a case filed to compel the reopening of a radio station which had been summarily The broadcast media have also established a uniquely pervasive presence in the
closed on grounds of national security. Although the issue had become moot and academic lives of all Filipinos. Newspapers and current books are found only in metropolitan
because the owners were no longer interested to reopen, the Court still proceeded to do an areas and in the poblaciones of municipalities accessible to fast and regular
analysis of the case and made formulations to serve as guidelines for all inferior courts and transportation. Even here, there are low income masses who find the cost of
bodies exercising quasi-judicial functions. Particularly, the Court made a detailed exposition books, newspapers, and magazines beyond their humble means. Basic needs like
as to what needs be considered in cases involving broadcast media. Thus:84 food and shelter perforce enjoy high priorities.

xxx xxx xxx On the other hand, the transistor radio is found everywhere. The television set is
also becoming universal. Their message may be simultaneously received by a
(3) All forms of media, whether print or broadcast, are entitled to the broad national or regional audience of listeners including the indifferent or unwilling who
protection of the freedom of speech and expression clause. The test for limitations happen to be within reach of a blaring radio or television set. The materials
on freedom of expression continues to be the clear and present danger rule, that broadcast over the airwaves reach every person of every age, persons of varying
words are used in such circumstances and are of such a nature as to create a clear susceptibilities to persuasion, persons of different I.Q.s and mental capabilities,
and present danger that they will bring about the substantive evils that the persons whose reactions to inflammatory or offensive speech would be difficult to
lawmaker has a right to prevent, In his Constitution of the Philippines (2nd Edition, monitor or predict. The impact of the vibrant speech is forceful and immediate.
pp. 569-570) Chief Justice Enrique M. Fernando cites at least nine of our decisions Unlike readers of the printed work, the radio audience has lesser opportunity to
which apply the test. More recently, the clear and present danger test was applied cogitate analyze, and reject the utterance.
in J.B.L. Reyes in behalf of the Anti-Bases Coalition v. Bagatsing. (4) The clear and
present danger test, however, does not lend itself to a simplistic and all embracing (5) The clear and present danger test, therefore, must take the particular
interpretation applicable to all utterances in all forums. circumstances of broadcast media into account. The supervision of radio stations-

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whether by government or through self-regulation by the industry itself calls for broadcast media but motion pictures. Although the issue involved obscenity standards as
thoughtful, intelligent and sophisticated handling. applied to movies,88 the Court concluded its decision with the following obiter dictum that a
less liberal approach would be used to resolve obscenity issues in television as opposed to
The government has a right to be protected against broadcasts which incite the motion pictures:
listeners to violently overthrow it. Radio and television may not be used to organize
a rebellion or to signal the start of widespread uprising. At the same time, the All that remains to be said is that the ruling is to be limited to the concept of
people have a right to be informed. Radio and television would have little reason obscenity applicable to motion pictures. It is the consensus of this Court that where
for existence if broadcasts are limited to bland, obsequious, or pleasantly television is concerned, a less liberal approach calls for observance. This is so
entertaining utterances. Since they are the most convenient and popular means of because unlike motion pictures where the patrons have to pay their way, television
disseminating varying views on public issues, they also deserve special protection. reaches every home where there is a set. Children then will likely be among the
avid viewers of the programs therein shown…..It cannot be denied though that the
(6) The freedom to comment on public affairs is essential to the vitality of a State as parens patriae is called upon to manifest an attitude of caring for the
representative democracy. In the 1918 case of United States v. Bustos (37 Phil. 731) welfare of the young.
this Court was already stressing that.
More recently, in resolving a case involving the conduct of exit polls and dissemination of the
The interest of society and the maintenance of good government demand a full results by a broadcast company, we reiterated that the clear and present danger rule is the
discussion of public affairs. Complete liberty to comment on the conduct of public test we unquestionably adhere to issues that involve freedoms of speech and of the press.89
men is a scalpel in the case of free speech. The sharp incision of its probe relieves
the abscesses of officialdom. Men in public life may suffer under a hostile and an This is not to suggest, however, that the clear and present danger rule has been applied to
unjust accusation; the wound can be assuaged with the balm of a clear conscience. all cases that involve the broadcast media. The rule applies to all media, including
A public officer must not be too thin-skinned with reference to comment upon his broadcast, but only when the challenged act is a content-based regulation that infringes on
official acts. Only thus can the intelligence and dignity of the individual be exalted. free speech, expression and the press. Indeed, in Osmena v. COMELEC,90 which also involved
broadcast media, the Court refused to apply the clear and present danger rule to a COMELEC
(7) Broadcast stations deserve the special protection given to all forms of media by regulation of time and manner of advertising of political advertisements because the
the due process and freedom of expression clauses of the Constitution. [Citations challenged restriction was content-neutral.91 And in a case involving due process and equal
omitted] protection issues, the Court in Telecommunications and Broadcast Attorneys of the
Philippines v. COMELEC92 treated a restriction imposed on a broadcast media as a reasonable
condition for the grant of the media’s franchise, without going into which test would apply.
It is interesting to note that the Court in Dans adopted the arguments found in U.S.
jurisprudence to justify differentiation of treatment (i.e., the scarcity, pervasiveness and
accessibility to children), but only after categorically declaring that "the test for limitations That broadcast media is subject to a regulatory regime absent in print media is observed also
on freedom of expression continues to be the clear and present danger rule," for all forms in other jurisdictions, where the statutory regimes in place over broadcast media include
of media, whether print or broadcast. Indeed, a close reading of the above-quoted elements of licensing, regulation by administrative bodies, and censorship. As explained by a
provisions would show that the differentiation that the Court in Dans referred to was British author:
narrowly restricted to what is otherwise deemed as "unprotected speech" (e.g., obscenity,
national security, seditious and inciting speech), or to validate a licensing or regulatory The reasons behind treating broadcast and films differently from the print media
scheme necessary to allocate the limited broadcast frequencies, which is absent in print differ in a number of respects, but have a common historical basis. The stricter
media. Thus, when this Court declared in Dans that the freedom given to broadcast media system of controls seems to have been adopted in answer to the view that owing
was "somewhat lesser in scope than the freedom accorded to newspaper and print media," it to their particular impact on audiences, films, videos and broadcasting require a
was not as to what test should be applied, but the context by which requirements of system of prior restraints, whereas it is now accepted that books and other printed
licensing, allocation of airwaves, and application of norms to unprotected speech. 85 media do not. These media are viewed as beneficial to the public in a number of
respects, but are also seen as possible sources of harm.93
In the same year that the Dans case was decided, it was reiterated in Gonzales v.
Katigbak,86 that the test to determine free expression challenges was the clear and present Parenthetically, these justifications are now the subject of debate. Historically, the scarcity of
danger, again without distinguishing the media.87Katigbak, strictly speaking, does not treat of frequencies was thought to provide a rationale. However, cable and satellite television have
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enormously increased the number of actual and potential channels. Digital technology will invisibles of this case. Fourthly, given all these unsettled facets of the tape, it is even
further increase the number of channels available. But still, the argument persists that arguable whether its airing would violate the anti-wiretapping law.
broadcasting is the most influential means of communication, since it comes into the home,
and so much time is spent watching television. Since it has a unique impact on people and We rule that not every violation of a law will justify straitjacketing the exercise of freedom
affects children in a way that the print media normally does not, that regulation is said to be of speech and of the press. Our laws are of different kinds and doubtless, some of them
necessary in order to preserve pluralism. It has been argued further that a significant main provide norms of conduct which even if violated have only an adverse effect on a person’s
threat to free expression—in terms of diversity—comes not from government, but from private comfort but does not endanger national security. There are laws of great significance
private corporate bodies. These developments show a need for a reexamination of the but their violation, by itself and without more, cannot support suppression of free speech
traditional notions of the scope and extent of broadcast media regulation. 94 and free press. In fine, violation of law is just a factor, a vital one to be sure, which should be
weighed in adjudging whether to restrain freedom of speech and of the press. The totality of
The emergence of digital technology -- which has led to the convergence of broadcasting, the injurious effects of the violation to private and public interest must be calibrated in light
telecommunications and the computer industry -- has likewise led to the question of whether of the preferred status accorded by the Constitution and by related international covenants
the regulatory model for broadcasting will continue to be appropriate in the converged protecting freedom of speech and of the press. In calling for a careful and calibrated
environment.95 Internet, for example, remains largely unregulated, yet the Internet and the measurement of the circumference of all these factors to determine compliance with the
broadcast media share similarities, 96 and the rationales used to support broadcast regulation clear and present danger test, the Court should not be misinterpreted as devaluing
apply equally to the Internet.97 Thus, it has been argued that courts, legislative bodies and violations of law. By all means, violations of law should be vigorously prosecuted by the
the government agencies regulating media must agree to regulate both, regulate neither or State for they breed their own evil consequence. But to repeat, the need to prevent their
develop a new regulatory framework and rationale to justify the differential treatment. 98 violation cannot per se trump the exercise of free speech and free press, a preferred right
whose breach can lead to greater evils. For this failure of the respondents alone to offer
F. The Case At Bar proof to satisfy the clear and present danger test, the Court has no option but to uphold the
exercise of free speech and free press. There is no showing that the feared violation of the
anti-wiretapping law clearly endangers the national security of the State.
Having settled the applicable standard to content-based restrictions on broadcast media, let
us go to its application to the case at bar. To recapitulate, a governmental action that
restricts freedom of speech or of the press based on content is given the strictest scrutiny, This is not all the faultline in the stance of the respondents. We slide to the issue of whether
with the government having the burden of overcoming the presumed unconstitutionality by the mere press statements of the Secretary of Justice and of the NTC in question constitute a
the clear and present danger rule. This rule applies equally to all kinds of media, including form of content-based prior restraint that has transgressed the Constitution. In resolving this
broadcast media. issue, we hold that it is not decisive that the press statements made by respondents were
not reduced in or followed up with formal orders or circulars. It is sufficient that the press
statements were made by respondents while in the exercise of their official
This outlines the procedural map to follow in cases like the one at bar as it spells out the
functions. Undoubtedly, respondent Gonzales made his statements as Secretary of Justice,
following: (a) the test; (b) the presumption; (c) the burden of proof; (d) the party to discharge
while the NTC issued its statement as the regulatory body of media. Any act done, such as a
the burden; and (e) the quantum of evidence necessary. On the basis of the records of the
speech uttered, for and on behalf of the government in an official capacity is covered by
case at bar, respondents who have the burden to show that these acts do not abridge
the rule on prior restraint. The concept of an "act" does not limit itself to acts already
freedom of speech and of the press failed to hurdle the clear and present danger test. It
converted to a formal order or official circular. Otherwise, the non formalization of an act
appears that the great evil which government wants to prevent is the airing of a tape
into an official order or circular will result in the easy circumvention of the prohibition on
recording in alleged violation of the anti-wiretapping law. The records of the case at bar,
prior restraint. The press statements at bar are acts that should be struck down as they
however, are confused and confusing, and respondents’ evidence falls short of satisfying the
constitute impermissible forms of prior restraints on the right to free speech and press.
clear and present danger test. Firstly, the various statements of the Press Secretary
obfuscate the identity of the voices in the tape recording. Secondly, the integrity of the
taped conversation is also suspect. The Press Secretary showed to the public two versions, There is enough evidence of chilling effect of the complained acts on record.
one supposed to be a "complete" version and the other, an "altered" version. Thirdly, the The warnings given to media came from no less the NTC, a regulatory agency that can cancel
evidence of the respondents on the who’s and the how’s of the wiretapping act is the Certificate of Authority of the radio and broadcast media. They also came from the
ambivalent, especially considering the tape’s different versions. The identity of the wire- Secretary of Justice, the alter ego of the Executive, who wields the awesome power to
tappers, the manner of its commission and other related and relevant proofs are some of the prosecute those perceived to be violating the laws of the land. After the warnings, the KBP
inexplicably joined the NTC in issuing an ambivalent Joint Press Statement. After the
warnings, petitioner Chavez was left alone to fight this battle for freedom of speech and of
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the press. This silence on the sidelines on the part of some media practitioners is too Before Us is a petition for review on certiorari of decision 1 of the then Intermediate
deafening to be the subject of misinterpretation. Appellate Court affirming in toto the decision of the former Court of First Instance of Rizal,
Seventh Judicial District, Branch XXIX, Pasay City.
The constitutional imperative for us to strike down unconstitutional acts should always be
exercised with care and in light of the distinct facts of each case. For there are no hard and The facts as found by the Appellate Court are as follows:
fast rules when it comes to slippery constitutional questions, and the limits and construct of
relative freedoms are never set in stone. Issues revolving on their construct must be decided "On February 20, 1980, the Social Security System, SSS for brevity, filed a complaint in the
on a case to case basis, always based on the peculiar shapes and shadows of each case. But in Court of First Instance of Rizal against Moonwalk Development & Housing Corporation,
cases where the challenged acts are patent invasions of a constitutionally protected right, we Moonwalk for short, alleging that the former had committed an error in failing to compute
should be swift in striking them down as nullities per se. A blow too soon struck for freedom the 12% interest due on delayed payments on the loan of Moonwalk — resulting in a chain of
is preferred than a blow too late. errors in the application of payments made by Moonwalk and, in an unpaid balance on the
principal loan agreement in the amount of P7,053.77 and, also in not reflecting in its
In VIEW WHEREOF, the petition is GRANTED. The writs of certiorari and prohibition are statement or account an unpaid balance on the said penalties for delayed payments in the
hereby issued, nullifying the official statements made by respondents on June 8, and 11, amount of P7,517,178.21 as of October 10, 1979.
2005 warning the media on airing the alleged wiretapped conversation between the
President and other personalities, for constituting unconstitutional prior restraint on the Moonwalk answered denying SSS' claims and asserting that SSS had the opportunity to
exercise of freedom of speech and of the press ascertain the truth but failed to do so.

SO ORDERED. The trial court set the case for pre-trial at which pre-trial conference, the court issued an
order giving both parties thirty (30) days within which to submit a stipulation of facts.
Republic of the Philippines
SUPREME COURT The Order of October 6, 1980 dismissing the complaint followed the submission by the
Manila parties on September 19, 1980 of the following stipulation of Facts:

SECOND DIVISION "1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for an
interim loan in the amount of THIRTY MILLION PESOS (P30,000,000.00) for the purpose of
G.R. No. 73345. April 7, 1993. developing and constructing a housing project in the provinces of Rizal and Cavite;

SOCIAL SECURITY SYSTEM, petitioner, "2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum of
vs. P9,595,000.00 was released to defendant Moonwalk as of November 28, 1973;
MOONWALK DEVELOPMENT & HOUSING CORPORATION, ROSITA U. ALBERTO, ROSITA U.
ALBERTO, JMA HOUSE, INC., MILAGROS SANCHEZ SANTIAGO, in her capacity as Register of "3. A third Amended Deed of First Mortgage was executed on December 18, 1973 Annex `D'
Deeds for the Province of Cavite, ARTURO SOLITO, in his capacity as Register of Deeds for providing for restructuring of the payment of the released amount of P9,595,000.00.
Metro Manila District IV, Makati, Metro Manila and the INTERMEDIATE APPELLATE COURT,
respondents.
"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter respectively,
under paragraph 5 of the aforesaid Third Amended Deed of First Mortgage substituted
The Solicitor General for petitioner. Associated Construction and Surveys Corporation, Philippine Model Homes Development
K.V. Faylona & Associates for private respondents. Corporation, Mariano Z. Velarde and Eusebio T. Ramos, as solidary obligors;

DECISION "5. On July 23, 1974, after considering additional releases in the amount of P2,659,700.00,
made to defendant Moonwalk, defendant Moonwalk delivered to the plaintiff a promissory
CAMPOS, JR., J p: note for TWELVE MILLION TWO HUNDRED FIFTY FOUR THOUSAND SEVEN HUNDRED PESOS

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(P12,254,700.00) Annex `E', signed by Eusebio T. Ramos, and the said Rosita U. Alberto and show that SSS made a clear, positive waiver of the penalties, made with full knowledge of the
Rosita U. Alberto; circumstances.

"6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal of Second, it misconstrued the ruling that SSS funds are trust funds, and SSS, being a mere
P12,254,700.00 released to it. The last payment made by Moonwalk in the amount of trustee, cannot perform acts affecting the same, including condonation of penalties, that
P15,004,905.74 were based on the Statement of Account, Annex "F" prepared by plaintiff SSS would diminish property rights of the owners and beneficiaries thereof. (United Christian
for defendant; Missionary Society v. Social Security Commission, 30 SCRA 982, 988 [1969]).

"7. After settlement of the account stated in Annex 'F' plaintiff issued to defendant Third, it ignored the fact that penalty at the rate of 12% p.a. is not inequitable.
Moonwalk the Release of Mortgage for Moonwalk's mortgaged properties in Cavite and
Rizal, Annexes 'G' and 'H' on October 9, 1979 and October 11, 1979 respectively. Fourth, it ignored the principle that equity will cancel a release on the ground of mistake of
fact." 4
"8. In letters to defendant Moonwalk, dated November 28, 1979 and followed up by another
letter dated December 17, 1979, plaintiff alleged that it committed an honest mistake in The same problem which confronted the respondent court is presented before Us: Is the
releasing defendant. penalty demandable even after the extinguishment of the principal obligation?

"9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had The former Intermediate Appellate Court, through Justice Eduard P. Caguioa, held in the
completely paid its obligations to SSS; negative. It reasoned, thus:

"10. The genuineness and due execution of the documents marked as Annex (sic) 'A' to 'O' "2. As we have explained under No. 1, contrary to what the plaintiff-appellant states in its
inclusive, of the Complaint and the letter dated December 21, 1979 of the defendant's Brief, what is sought to be recovered in this case is not the 12% interest on the loan but the
counsel to the plaintiff are admitted. 12% penalty for failure to pay on time the amortization. What is sought to be enforced
therefore is the penal clause of the contract entered into between the parties.
"Manila for Pasay City, September 2, 1980." 2
Now, what is a penal clause. A penal clause has been defined as
On October 6, 1990, the trial court issued an order dismissing the complaint on the ground
that the obligation was already extinguished by the payment by Moonwalk of its "an accessory obligation which the parties attach to a principal obligation for the purpose of
indebtedness to SSS and by the latter's act of cancelling the real estate mortgages executed insuring the performance thereof by imposing on the debtor a special presentation (generally
in its favor by defendant Moonwalk. The Motion for Reconsideration filed by SSS with the consisting in the payment of a sum of money) in case the obligation is not fulfilled or is
trial court was likewise dismissed by the latter. irregularly or inadequately fulfilled" (3 Castan 8th Ed. p. 118).

These orders were appealed to the Intermediate Appellate Court. Respondent Court reduced Now an accessory obligation has been defined as that attached to a principal obligation in
the errors assigned by the SSS into this issue: ". . . are defendants-appellees, namely, order to complete the same or take its place in the case of breach (4 Puig Peña Part 1 p. 76).
Moonwalk Development and Housing Corporation, Rosita U. Alberto, Rosita U. Alberto, JMA Note therefore that an accessory obligation is dependent for its existence on the existence of
House, Inc. still liable for the unpaid penalties as claimed by plaintiff-appellant or is their a principal obligation. A principal obligation may exist without an accessory obligation but an
obligation extinguished?" 3 As We have stated earlier, the respondent Court held that accessory obligation cannot exist without a principal obligation. For example, the contract of
Moonwalk's obligation was extinguished and affirmed the trial court. mortgage is an accessory obligation to enforce the performance of the main obligation of
indebtedness. An indebtedness can exist without the mortgage but a mortgage cannot exist
Hence, this Petition wherein SSS raises the following grounds for review: without the indebtedness, which is the principal obligation. In the present case, the principal
obligation is the loan between the parties. The accessory obligation of a penal clause is to
"First, in concluding that the penalties due from Moonwalk are "deemed waived and/or enforce the main obligation of payment of the loan. If therefore the principal obligation does
barred," the appellate court disregarded the basic tenet that waiver of a right must be not exist the penalty being accessory cannot exist.
express, made in a clear and unequivocal manner. There is no evidence in the case at bar to
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Now then when is the penalty demandable? A penalty is demandable in case of non 3. At the time of the payment made of the full obligation on October 10, 1979 together with
performance or late performance of the main obligation. In other words in order that the the 12% interest by defendant-appellee Moonwalk, its obligation was extinguished. It being
penalty may arise there must be a breach of the obligation either by total or partial non extinguished, there was no more need for the penal clause. Now, it is to be noted that
fulfillment or there is non fulfillment in point of time which is called mora or delay. The penalty at anytime can be modified by the Court. Even substantial performance under Art.
debtor therefore violates the obligation in point of time if there is mora or delay. Now, there 1234 authorizes the Court to consider it as complete performance minus damages. Now, Art,
is no mora or delay unless there is a demand. It is noteworthy that in the present case during 1229 Civil Code of the Philippines provides:
all the period when the principal obligation was still subsisting, although there were late
amortizations there was no demand made by the creditor, plaintiff-appellant for the "ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has
payment of the penalty. Therefore up to the time of the letter of plaintiff-appellant there been partly or irregularly complied with by the debtor. Even if there has been no
was no demand for the payment of the penalty, hence the debtor was no in mora in the performance, the penalty may also be reduced by the courts if it is iniquitous or
payment of the penalty. unconscionable."

However, on October 1, 1979, plaintiff-appellant issued its statement of account (Exhibit F) If the penalty can be reduced after the principal obligation has been partly or irregularly
showing the total obligation of Moonwalk as P15,004,905.74, and forthwith demanded complied with by the debtor, which is nonetheless a breach of the obligation, with more
payment from defendant-appellee. Because of the demand for payment, Moonwalk made reason the penal clause is not demandable when full obligation has been complied with since
several payments on September 29, October 9 and 19, 1979 respectively, all in all totalling in that case there is no breach of the obligation. In the present case, there has been as yet no
P15,004,905.74 which was a complete payment of its obligation as stated in Exhibit F. demand for payment of the penalty at the time of the extinguishment of the obligation,
Because of this payment the obligation of Moonwalk was considered extinguished, and hence there was likewise an extinguishment of the penalty.
pursuant to said extinguishment, the real estate mortgages given by Moonwalk were
released on October 9, 1979 and October 10, 1979 (Exhibits G and H). For all purposes
Let Us emphasize that the obligation of defendant-appellee was fully complied with by the
therefore the principal obligation of defendant-appellee was deemed extinguished as well as
debtor, that is, the amount loaned together with the 12% interest has been fully paid by the
the accessory obligation of real estate mortgage; and that is the reason for the release of all
appellee. That being so, there is no basis for demanding the penal clause since the obligation
the Real Estate Mortgages on October 9 and 10, 1979 respectively.
has been extinguished. Here there has been a waiver of the penal clause as it was not
demanded before the full obligation was fully paid and extinguished. Again, emphasis must
Now, besides the Real Estate Mortgages, the penal clause which is also an accessory be made on the fact that plaintiff-appellant has not lost anything under the contract since in
obligation must also be deemed extinguished considering that the principal obligation was got back in full the amount loan (sic) as well as the interest thereof. The same thing would
considered extinguished, and the penal clause being an accessory obligation. That being the have happened if the obligation was paid on time, for then the penal clause, under the terms
case, the demand for payment of the penal clause made by plaintiff-appellant in its demand of the contract would not apply. Payment of the penalty does not mean gain or loss of
letter dated November 28, 1979 and its follow up letter dated December 17, 1979 (which plaintiff-appellant since it is merely for the purpose of enforcing the performance of the main
parenthetically are the only demands for payment of the penalties) are therefore ineffective obligation has been fully complied with and extinguished, the penal clause has lost its raison
as there was nothing to demand. It would be otherwise, if the demand for the payment of d' entre." 5
the penalty was made prior to the extinguishment of the obligation because then the
obligation of Moonwalk would consist of: 1) the principal obligation 2) the interest of 12% on
We find no reason to depart from the appellate court's decision. We, however, advance the
the principal obligation and 3) the penalty of 12% for late payment for after demand,
following reasons for the denial of this petition.
Moonwalk would be in mora and therefore liable for the penalty.

Article 1226 of the Civil Code provides:

Let it be emphasized that at the time of the demand made in the letters of November 28,
1979 and December 17, 1979 as far as the penalty is concerned, the defendant-appellee was
not in default since there was no mora prior to the demand. That being the case, therefore, "Art. 1226. In obligations with a penal clause, he penalty shall substitute the indemnity for
the demand made after the extinguishment of the principal obligation which carried with it damages and the payment of interests in case of noncompliance, if there is no stipulation to
the extinguishment of the penal clause being merely an accessory obligation, was an exercise the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or
in futility. is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions
of this Code." (Emphasis Ours.)
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A penal clause is an accessory undertaking to assume greater liability in case of breach. 6 It delays performance; and (3) that the creditor requires the performance judicially and
has a double function: (1) to provide for liquidated damages, and (2) to strengthen the extrajudicially. 12 Default generally begins from the moment the creditor demands the
coercive force of the obligation by the threat of greater responsibility in the event of breach. performance of the obligation. 13
7 From the foregoing, it is clear that a penal clause is intended to prevent the obligor from
defaulting in the performance of his obligation. Thus, if there should be default, the penalty Nowhere in this case did it appear that SSS demanded from Moonwalk the payment of its
may be enforced. One commentator of the Civil Code wrote: monthly amortizations. Neither did it show that petitioner demanded the payment of the
stipulated penalty upon the failure of Moonwalk to meet its monthly amortization. What the
"Now when is the penalty deemed demandable in accordance with the provisions of the Civil complaint itself showed was that SSS tried to enforce the obligation sometime in September,
Code? We must make a distinction between a positive and a negative obligation. With regard 1977 by foreclosing the real estate mortgages executed by Moonwalk in favor of SSS. But this
to obligations which are positive (to give and to do), the penalty is demandable when the foreclosure did not push through upon Moonwalk's requests and promises to pay in full. The
debtor is in mora; hence, the necessity of demand by the debtor unless the same is excused . next demand for payment happened on October 1, 1979 when SSS issued a Statement of
. ." 8 Account to Moonwalk. And in accordance with said statement, Moonwalk paid its loan in full.
What is clear, therefore, is that Moonwalk was never in default because SSS never compelled
When does delay arise? Under the Civil Code, delay begins from the time the obligee performance. Though it tried to foreclose the mortgages, SSS itself desisted from doing so
judicially or extrajudicially demands from the obligor the performance of the obligation. upon the entreaties of Moonwalk. If the Statement of Account could properly be considered
as demand for payment, the demand was complied with on time. Hence, no delay occurred
and there was, therefore, no occasion when the penalty became demandable and
"Art. 1169. Those obliged to deliver or to do something incur in delay from the time the
enforceable. Since there was no default in the performance of the main obligation —
obligee judicially or extrajudicially demands from them the fulfillment of their obligation."
payment of the loan — SSS was never entitled to recover any penalty, not at the time it made
the Statement of Account and certainly, not after the extinguishment of the principal
There are only three instances when demand is not necessary to render the obligor in obligation because then, all the more that SSS had no reason to ask for the penalties. Thus,
default. These are the following: there could never be any occasion for waiver or even mistake in the application for payment
because there was nothing for SSS to waive as its right to enforce the penalty did not arise.
"(1) When the obligation or the law expressly so declares;
SSS, however, in buttressing its claim that it never waived the penalties, argued that the
(2) When from the nature and the circumstances of the obligation it appears that the funds it held were trust funds and as trustee, the petitioner could not perform acts affecting
designation of the time when the thing is to be delivered or the service is to be rendered was the funds that would diminish property rights of the owners and beneficiaries thereof. To
a controlling motive for the establishment of the contract; or support its claim, SSS cited the case of United Christian Missionary Society v. Social Security
Commission. 14
(3) When the demand would be useless, as when the obligor has rendered it beyond his
power to perform." 9 We looked into the case and found out that it is not applicable to the present case as it dealt
not with the right of the SSS to collect penalties which were provided for in contracts which it
This case does not fall within any of the established exceptions. Hence, despite the provision entered into but with its right to collect premiums and its duty to collect the penalty for
in the promissory note that "(a)ll amortization payments shall be made every first five (5) delayed payment or non-payment of premiums. The Supreme Court, in that case, stated:
days of the calendar month until the principal and interest on the loan or any portion thereof
actually released has been fully paid," 10 petitioner is not excused from making a demand. It "No discretion or alternative is granted respondent Commission in the enforcement of the
has been established that at the time of payment of the full obligation, private respondent law's mandate that the employer who fails to comply with his legal obligation to remit the
Moonwalk has long been delinquent in meeting its monthly arrears and in paying the full premiums to the System within the prescribed period shall pay a penalty of three (3%) per
amount of the loan itself as the obligation matured sometime in January, 1977. But mere month. The prescribed penalty is evidently of a punitive character, provided by the
delinquency in payment does not necessarily mean delay in the legal concept. To be in legislature to assure that employers do not take lightly the State's exercise of the police
default ". . . is different from mere delay in the grammatical sense, because it involves the power in the implementation of the Republic's declared policy "to develop, establish
beginning of a special condition or status which has its own peculiar effects or results." 11 In gradually and perfect a social security system which shall be suitable to the needs of the
order that the debtor may be in default it is necessary that the following requisites be people throughout the Philippines and (to) provide protection to employers against the
present: (1) that the obligation be demandable and already liquidated; (2) that the debtor hazards of disability, sickness, old age and death . . ."

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Thus, We agree with the decision of the respondent court on the matter which We quote, to IGNACIO BARZAGA, petitioner, vs. COURT OF APPEALS and ANGELITO ALVIAR, respondents.
wit:
DECISION
"Note that the above case refers to the condonation of the penalty for the non remittance of
the premium which is provided for by Section 22(a) of the Social Security Act . . . In other BELLOSILLO, J.:
words, what was sought to be condoned was the penalty provided for by law for non
remittance of premium for coverage under the Social Security Act. The Fates ordained that Christmas 1990 be bleak for Ignacio Barzaga and his family. On
the nineteenth of December Ignacio's wife succumbed to a debilitating ailment after
The case at bar does not refer to any penalty provided for by law nor does it refer to the non prolonged pain and suffering. Forewarned by her attending physicians of her impending death,
remittance of premium. The case at bar refers to a contract of loan entered into between she expressed her wish to be laid to rest before Christmas day to spare her family from keeping
plaintiff and defendant Moonwalk Development and Housing Corporation. Note, therefore, lonely vigil over her remains while the whole of Christendom celebrate the Nativity of their
that no provision of law is involved in this case, nor is there any penalty imposed by law nor a Redeemer.
case about non-remittance of premium required by law. The present case refers to a contract Drained to the bone from the tragedy that befell his family yet preoccupied with
of loan payable in installments not provided for by law but by agreement of the parties. overseeing the wake for his departed wife, Ignacio Barzaga set out to arrange for her interment
Therefore, the ratio decidendi of the case of United Christian Missionary Society vs. Social on the twenty-fourth of December in obedience semper fidelis to her dying wish. But her final
Security Commission which plaintiff-appellant relies is not applicable in this case; clearly, the entreaty, unfortunately, could not be carried out. Dire events conspired to block his plans that
Social Security Commission, which is a creature of the Social Security Act cannot condone a forthwith gave him and his family their gloomiest Christmas ever.
mandatory provision of law providing for the payment of premiums and for penalties for non
remittance. The life of the Social Security Act is in the premiums because these are the funds This is Barzaga's story. On 21 December 1990, at about three o`clock in the afternoon,
from which the Social Security Act gets the money for its purposes and the non-remittance of he went to the hardware store of respondent Angelito Alviar to inquire about the availability
the premiums is penalized not by the Social Security Commission but by law. of certain materials to be used in the construction of a niche for his wife. He also asked if the
materials could be delivered at once. Marina Boncales, Alviar's storekeeper, replied that she
xxx xxx xxx had yet to verify if the store had pending deliveries that afternoon because if there were then
all subsequent purchases would have to be delivered the following day. With that reply
petitioner left.
It is admitted that when a government created corporation enters into a contract with
private party concerning a loan, it descends to the level of a private person. Hence, the rules At seven o' clock the following morning, 22 December, Barzaga returned to Alviar's
on contract applicable to private parties are applicable to it. The argument therefore that the hardware store to follow up his purchase of construction materials. He told the store
Social Security Commission cannot waive or condone the penalties which was applied in the employees that the materials he was buying would have to be delivered at the Memorial
United Christian Missionary Society cannot apply in this case. First, because what was not Cemetery in Dasmarias, Cavite, by eight o'clock that morning since his hired workers were
paid were installments on a loan but premiums required by law to be paid by the parties already at the burial site and time was of the essence. Marina Boncales agreed to deliver the
covered by the Social Security Act. Secondly, what is sought to be condoned or waived are items at the designated time, date and place. With this assurance, Barzaga purchased the
penalties not imposed by law for failure to remit premiums required by law, but a penalty for materials and paid in full the amount of P2,110.00. Thereafter he joined his workers at the
non payment provided for by the agreement of the parties in the contract between them . . cemetery, which was only a kilometer away, to await the delivery.
." 15
The construction materials did not arrive at eight o'clock as promised. At nine o' clock,
the delivery was still nowhere in sight. Barzaga returned to the hardware store to inquire about
WHEREFORE, in view of the foregoing, the petition is DISMISSED and the decision of the
the delay. Boncales assured him that although the delivery truck was not yet around it had
respondent court is AFFIRMED. LLpr
already left the garage and that as soon as it arrived the materials would be brought over to
the cemetery in no time at all. That left petitioner no choice but to rejoin his workers at the
SO ORDERED. memorial park and wait for the materials.

FIRST DIVISION By ten o'clock, there was still no delivery. This prompted petitioner to return to the store
to inquire about the materials. But he received the same answer from respondent's employees
who even cajoled him to go back to the burial place as they would just follow with his
[G.R. No. 115129. February 12, 1997]
construction materials.
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
After hours of waiting - which seemed interminable to him - Barzaga became extremely Court of Appeals also held that assuming that there was delay, petitioner still had sufficient
upset. He decided to dismiss his laborers for the day. He proceeded to the police station, which time to construct the tomb and hold his wife's burial as she wished.
was just nearby, and lodged a complaint against Alviar. He had his complaint entered in the
police blotter. When he returned again to the store he saw the delivery truck already there but We sustain the trial court. An assiduous scrutiny of the record convinces us that
the materials he purchased were not yet ready for loading. Distressed that Alviar's employees respondent Angelito Alviar was negligent and incurred in delay in the performance of his
were not the least concerned, despite his impassioned pleas, Barzaga decided to cancel his contractual obligation. This sufficiently entitles petitioner Ignacio Barzaga to be indemnified
transaction with the store and look for construction materials elsewhere. for the damage he suffered as a consequence of delay or a contractual breach. The law
expressly provides that those who in the performance of their obligation are guilty of fraud,
In the afternoon of that day, petitioner was able to buy from another store. But since negligence, or delay and those who in any manner contravene the tenor thereof, are liable for
darkness was already setting in and his workers had left, he made up his mind to start his damages.[3]
project the following morning, 23 December. But he knew that the niche would not be finish
in time for the scheduled burial the following day. His laborers had to take a break on Contrary to the appellate court's factual determination, there was a specific time agreed
Christmas Day and they could only resume in the morning of the twenty-sixth. The niche was upon for the delivery of the materials to the cemetery. Petitioner went to private respondent's
completed in the afternoon and Barzaga's wife was finally laid to [Link], it was two- store on 21 December precisely to inquire if the materials he intended to purchase could be
and-a-half (2-1/2) days behind schedule. delivered immediately. But he was told by the storekeeper that if there were still deliveries to
be made that afternoon his order would be delivered the following day. With this in mind
On 21 January 1991, tormented perhaps by his inability to fulfill his wife's dying wish, Barzaga decided to buy the construction materials the following morning after he was assured
Barzaga wrote private respondent Alviar demanding recompense for the damage he of immediate delivery according to his time frame. The argument that the invoices never
suffered. Alviar did not respond. Consequently, petitioner sued him before the Regional Trial indicated a specific delivery time must fall in the face of the positive verbal commitment of
Court.[1] respondent's storekeeper. Consequently it was no longer necessary to indicate in the invoices
the exact time the purchased items were to be brought to the cemetery. In fact, storekeeper
Resisting petitioner's claim, private respondent contended that legal delay could not be Boncales admitted that it was her custom not to indicate the time of delivery whenever she
validly ascribed to him because no specific time of delivery was agreed upon between prepared invoices.[4]
them. He pointed out that the invoices evidencing the sale did not contain any stipulation as
to the exact time of delivery and that assuming that the materials were not delivered within Private respondent invokes fortuitous event as his handy excuse for that "bit of delay"
the period desired by petitioner, the delivery truck suffered a flat tire on the way to the store in the delivery of petitioner's purchases. He maintains that Barzaga should have allowed his
to pick up the materials. Besides, his men were ready to make the delivery by ten-thirty in the delivery men a little more time to bring the construction materials over to the cemetery since
morning of 22 December but petitioner refused to accept them. According to Alviar, it was this a few hours more would not really matter and considering that his truck had a flat tire. Besides,
obstinate refusal of petitioner to accept delivery that caused the delay in the construction of according to him, Barzaga still had sufficient time to build the tomb for his wife.
the niche and the consequent failure of the family to inter their loved one on the twenty-fourth
of December, and that, if at all, it was petitioner and no other who brought about all his This is a gratuitous assertion that borders on callousness. Private respondent had no
personal woes. right to manipulate petitioner's timetable and substitute it with his own. Petitioner had a
deadline to meet. A few hours of delay was no piddling matter to him who in his bereavement
Upholding the proposition that respondent incurred in delay in the delivery of the had yet to attend to other pressing family concerns. Despite this, respondent's employees still
construction materials resulting in undue prejudice to petitioner, the trial court ordered made light of his earnest importunings for an immediate delivery. As petitioner bitterly
respondent Alviar to pay petitioner (a) P2,110.00 as refund for the purchase price of the declared in court " x x x they (respondent's employees) were making a fool out of me."[5]
materials with interest per annum computed at the legal rate from the date of the filing of the
complaint, (b) P5,000.00 as temperate damages, (c) P20,000.00 as moral damages, We also find unacceptable respondent's justification that his truck had a flat tire, for this
(d) P5,000.00 as litigation expenses, and (e) P5,000.00 as attorney's fees. event, if indeed it happened, was forseeable according to the trial court, and as such should
have been reasonably guarded against. The nature of private respondent's business requires
On appeal, respondent Court of Appeals reversed the lower court and ruled that there that he should be ready at all times to meet contingencies of this kind. One piece of testimony
was no contractual commitment as to the exact time of delivery since this was not indicated by respondent's witness Marina Boncales has caught our attention - that the delivery truck
in the invoice receipts covering the sale.[2] arrived a little late than usual because it came from a delivery of materials in Langcaan,
Dasmarias, Cavite.[6] Significantly, this information was withheld by Boncales from petitioner
The arrangement to deliver the materials merely implied that delivery should be made when the latter was negotiating with her for the purchase of construction
within a reasonable time but that the conclusion that since petitioner's workers were already materials. Consequently, it is not unreasonable to suppose that had she told petitioner of this
at the graveyard the delivery had to be made at that precise moment, is non-sequitur. The fact and that the delivery of the materials would consequently be delayed, petitioner would

Page 22 of 118
Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
not have bought the materials from respondent's hardware store but elsewhere which could of actual or compensatory [Link]'s failure to prove actual expenditure
meet his time requirement. The deliberate suppression of this information by itself manifests consequently conduces to a failure of his claim. For in determining actual damages, the court
a certain degree of bad faith on the part of respondent's storekeeper. cannot rely on mere assertions, speculations, conjectures or guesswork but must depend on
competent proof and on the best evidence obtainable regarding the actual amount of loss.[8]
The appellate court appears to have belittled petitioner's submission that under the
prevailing circumstances time was of the essence in the delivery of the materials to the grave We affirm the award of attorney's fees and litigation expenses. Award of damages,
site. However, we find petitioner's assertion to be anchored on solid ground. The niche had to attorney's fees and litigation costs is left to the sound discretion of the court, and if such
be constructed at the very least on the twenty-second of December considering that it would discretion be well exercised, as in this case, it will not be disturbed on appeal.[9]
take about two (2) days to finish the job if the interment was to take place on the twenty-
fourth of the month. Respondent's delay in the delivery of the construction materials wasted WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE except
so much time that construction of the tomb could start only on the twenty-third. It could not insofar as it GRANTED on a motion for reconsideration the refund by private respondent of the
be ready for the scheduled burial of petitioner's [Link] undoubtedly prolonged the wake, in amount of P2,110.00 paid by petitioner for the construction materials. Consequently, except
addition to the fact that work at the cemetery had to be put off on Christmas day. for the award of P5,000.00 as temperate damages which we delete, the decision of the
Regional Trial Court granting petitioner (a) P2,110.00 as refund for the value of materials with
This case is clearly one of non-performance of a reciprocal obligation.[7] In their contract interest computed at the legal rate per annum from the date of the filing of the case;
of purchase and sale, petitioner had already complied fully with what was required of him as (b) P20,000.00 as moral damages; (c) P10,000.00 as exemplary damages; (d) P5,000.00 as
purchaser, i.e., the payment of the purchase price of P2,110.00. It was incumbent upon litigation expenses; and (4) P5,000.00 as attorney's fees, is AFFIRMED. No costs.
respondent to immediately fulfill his obligation to deliver the goods otherwise delay would
attach. SO ORDERED.

We therefore sustain the award of moral damages. It cannot be denied that petitioner Republic of the Philippines
and his family suffered wounded feelings, mental anguish and serious anxiety while keeping SUPREME COURT
watch on Christmas day over the remains of their loved one who could not be laid to rest on Manila
the date she herself had chosen. There is no gainsaying the inexpressible pain and sorrow
Ignacio Barzaga and his family bore at that moment caused no less by the ineptitude, cavalier
THIRD DIVISION
behavior and bad faith of respondent and his employees in the performance of an obligation
voluntarily entered into.
G.R. No. 100594. March 10, 1993.]
We also affirm the grant of exemplary damages. The lackadaisical and feckless attitude
of the employees of respondent over which he exercised supervisory authority indicates gross
BINALBAGAN TECH. INC., and HERMILO J. NAVA, petitioners, vs. THE COURT OF APPEALS,
negligence in the fulfillment of his business obligations. Respondent Alviar and his employees
MAGDALENA L. PUENTEVELLA, ANGELINA P. ECHAUS, ROMULO L. PUENTEVELLA, RENATO L.
should have exercised fairness and good judgment in dealing with petitioner who was then
PUENTEVELLA, NOLI L. PUENTEVELLA and NELIA LOURDES P. JACINTO, respondents.
grieving over the loss of his wife. Instead of commiserating with him, respondent and his
employees contributed to petitioner's anguish by causing him to bear the agony resulting from
his inability to fulfill his wife's dying wish. Mateo Valenzuela for petitioners.

We delete however the award of temperate damages. Under Art. 2224 of the Civil Code, Hilado, Hagad & Hilado for private respondents.
temperate damages are more than nominal but less than compensatory, and may be
recovered when the court finds that some pecuniary loss has been suffered but the amount
cannot, from the nature of the case, be proved with certainty. In this case, the trial court found SYLLABUS
that plaintiff suffered damages in the form of wages for the hired workers for 22 December
1990 and expenses incurred during the extra two (2) days of the [Link] record however 1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; PARTY CANNOT DEMAND PERFORMANCE OF
does not show that petitioner presented proof of the actual amount of expenses he incurred AN OBLIGATION UNLESS HE IS IN A POSITION TO COMPLY WITH HIS OWN OBLIGATIONS. — A
which seems to be the reason the trial court awarded to him temperate damages instead. This party to a contract cannot demand performance of the other party's obligations unless he is
is an erroneous application of the concept of temperate damages. While petitioner may have in a position to comply with his own obligations. Similarly, the right to rescind a contract can
indeed suffered pecuniary losses, these by their very nature could be established with be demanded only if a party thereto is ready, willing and able to comply with his own
certainty by means of payment receipts. As such, the claim falls unequivocally within the realm obligations thereunder (Art. 1191, Civil Code; Seva vs. Berwin, 48 Phil. 581 [1926]; Paras, Civil

Page 23 of 118
Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Code of the Philippines, 12th ed. Vol. IV, p. 200). In a contract of sale, the vendor is bound to It appears that there was a pending case, Civil Case No. 7435 of Regional Trial Court stationed
transfer the ownership of and deliver, as well as warrant, the thing which is the object of the at Himamaylan, Negros Occidental. Relative to said case we shall quote the findings of fact of
sale (Art. 1495, Civil Code); he warrants that the buyer shall, from the time ownership is the Court of Appeals in its decision dated October 30, 1978 in CA-G.R. No. 4211-R:
passed, have and enjoy the legal and peaceful possession of the thing.
To have a better perspective of the background facts leading to the filing of this instant case
2. ID.; PRESCRIPTIVE PERIOD WITHIN WHICH TO INSTITUTE ACTION UPON A WRITTEN on appeal, there is a need to make reference to the circumstances surrounding the filing of
CONTRACT; CASE AT BAR. — The prescriptive period within which to institute an action upon Civil Case No. 7435, to wit:
a written contract is ten years (Art. 1144, Civil Code). The cause of action of private
respondent Echaus is based on the deed of sale executed on May 11, 1967, whereby The intestate estate of the late Luis B. Puentebella as registered owner of several subdivision
ownership of the subdivision lots was transferred to petitioner. She filed Civil Case No. 1354 lots, specifically mentioned in paragraph 2 of plaintiffs' complaint, thru Judicial
for recovery of title and damages only on October 8, 1982. From May 11, 1967 to October 8, Administratrix, Angelina L. Puentevella sold said aforementioned lots to Raul Javellana with
1982, more than fifteen (15) years elapsed. Seemingly, the 10-year prescriptive period had the condition that the vendee-promisee would not transfer his rights to said lots without the
expired before she brought her action to recover title. However, the period 1974 to 1982 express consent of Puentevella and that in case of the cancellation of the contract by reason
should be deducted in computing the prescriptive period for the reason that from 1974 to of the violation of any of the terms thereof, all payments therefor made and all
1982, private respondent Echaus was not in a legal position to initiate action against improvements introduced on the property shall pertain to the promissor and shall be
petitioner since as aforestated, through no fault of hers, her warranty against eviction was considered as rentals for the use and occupation thereof.
breached. Deducting eight years (1974 to 1982) from the period 1967 to 1982, only seven
years elapsed. Consequently, Civil Case No. 1354 was filed within the 10-year prescriptive
Javellana having failed to pay the installments for a period of five years, Civil Case No. 7435
period.
was filed by defendant Puentevella against Raul Javellana and the Southern Negros Colleges
which was impleaded as a party defendant it being in actual possession thereof, for the
DECISION rescission of their contract to sell and the recovery of possession of the lots and buildings
with damages.
MELO, J p:
Accordingly, after trial, judgment was rendered in favor of Puentevella and thereafter,
The petition for review on certiorari now before us seeks to reverse the decision of the Court defendants Deputy Sheriffs served a copy of the writ of execution on the Acting Director of
of Appeals promulgated on March 27, 1991 in CA-G.R. CV No. 24635 (de Pano, Cacdac (P), the Southern Negros College and delivered possession of the lots and buildings to defendant
and Vailoces, JJ .). Puentevella's representative, Mrs. Manuel Gentapanan, and further levied execution on the
books and school equipment, supplies, library, apparatus, etc. to satisfy the monetary
The facts of the case, as borne out by the record, are as follows: portion of the judgment under execution on October 27, 1967. Said books, equipment, etc.
as reflected in the Depositary Receipt, (Exh. "B") dated October 28, 1965, were delivered by
the Sheriffs to the Acting Director of the Southern Negros College as depositary of the same.
On May 11, 1967, private respondents, through Angelina P. Echaus, in her capacity as Judicial
Administrator of the intestate estate of Luis B. Puentevella, executed a Contract to Sell and a
Deed of Sale of forty-two subdivision lots within the Phib-Khik Subdivision of the Puentebella Came December 29, 1965 when the plaintiffs in the instant case on appeal filed their Third-
family, conveying and transferring said lots to petitioner Binalbagan Tech., Inc. (hereinafter Party Claim based on an alleged Deed of Sale executed in their favor by spouses Jose and
referred to as Binalbagan). In turn Binalbagan, through its president, petitioner Hermilio J. Lolita Lopez, thus Puentevella was constrained to assert physical possession of the premises
Nava (hereinafter referred to as Nava), executed an Acknowledgment of Debt with Mortgage to counteract the fictitious and unenforceable claim of herein plaintiffs.
Agreement, mortgaging said lots in favor of the estate of Puentebella.
Upon the filing of the instant case for injunction and damages on January 3, 1966, an ex-
Upon the transfer to Binalbagan of titles to the 42 subdivision lots, said petitioner took parte writ of preliminary injunction was issued by the Honorable Presiding Judge Carlos
possession of the lots and the building and improvements thereon. Binalbagan started Abiera, which order, however, was elevated to the Honorable Court of Appeals which issued
operating a school on the property from 1967 when the titles and possession of the lots were a writ of preliminary injunction ordering Judge Carlos Abiera or any other persons or persons
transferred to it. in his behalf to refrain from further enforcing the injunction issued by him in this case and
from further issuing any other writs or prohibitions which would in any manner affect the
enforcement of the judgment rendered in Civil Case 7435, pending the finality of the decision
Page 24 of 118
Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
of the Honorable Court of Appeals in the latter case. Thus, defendant Puentevella was WHEREFORE, premises considered, the appealed decision is REVERSED and SET ASIDE and a
restored to the possession of the lots and buildings subject of this case. However, plaintiffs new one is rendered ordering the appellee Binalbagan Tech. Inc., through any of its officers,
filed a petition for review with the Supreme Court which issued a restraining order against to execute a deed of conveyance or any other instrument, transferring and returning unto
the sale of the properties claimed by the spouses-plaintiffs [in Abierra vs. Court of Appeals, the appellants the ownership and titles of the subject 42 subdivision lots. Costs against
45 SCRA 314]. appellees. (pp. 51-52, Rollo)

When the Supreme Court dissolved the aforesaid injunction issued by the Court of Appeals, Thus, this petition for review on certiorari wherein petitioners assign the following alleged
possession of the building and other property was taken from petitioner Binalbagan and errors of the Court of Appeals:
given to the third-party claimants, the de la Cruz spouses. Petitioner Binalbagan transferred
its school to another location. In the meantime, an appeal was interposed by the defendants First Error
in Civil Case No. 293 with the Court of Appeals where the appeal was docketed as CA-G.R.
No. 42211-R. On October 30, 1978, the Court of Appeals rendered judgment, reversing the
The Court of Appeals erred in holding that the cause of action of the respondents has not
appealed decision in Civil Case No. 293. On April 29, 1981, judgment was entered in CA-G.R.
prescribed.
No. 42211, and the record of the case was remanded to the court of origin on December 22,
1981. Consequently, in 1982 the judgment in Civil Case No. 7435 was finally executed and
enforced, and petitioner was restored to the possession of the subdivision lots on May 31, Second Error
1982. It will be noted that petitioner was not in possession of the lots from 1974 to May 31,
1982. The Court of Appeals erred in holding that Civil Case No. 293 interrupts the running of the
period of the prescription.
After petitioner Binalbagan was again placed in possession of the subdivision lots, private
respondent Angelina Echaus demanded payment from petitioner Binalbagan for the Third Error
subdivision lots, enclosing in the letter of demand a statement of account as of September
1982 showing a total amount due of P367,509.93, representing the price of the land and The Court of Appeals erred in citing the cases of David-Garlitos and Rivero vs. Rivero to
accrued interest as of that date. support its contention that the period of prescription was interrupted in the case at bar.

As petitioner Binalbagan failed to effect payment, private respondent Angelina P. Echaus Fourth Error
filed on October 8, 1982 Civil Case No. 1354 of the Regional Trial Court of the Sixth Judicial
Region stationed in Himamaylan, Negros Occidental against petitioners for recovery of title
and damages. An amended complaint was filed by private respondent Angelina P. Echaus by The finding of facts of the Honorable Court of Appeals in reversing the lower court decision
including her mother, brothers, and sisters as co-plaintiffs, which was admitted by the trial has no basis and is contradicted by the evidence on record of the case at bar as well as the
court on March 18, 1983. admission of parties." (p. 16, Rollo)

After trial, the trial court rendered a decision on August 30, 1989, the dispositive portion of The main issue of this case is: Whether private respondents' cause of action in Civil Case No.
which reads as follows: 1354 is barred by prescription.

IN VIEW OF THE FOREGOING, and inasmuch as there is no fraud and since the action on the On this point the Court of Appeals held:
written contract, Exh. "C", has long prescribed, judgment is hereby rendered in favor of the
defendants and against the plaintiffs dismissing the amended complaint. As it is evident that there was an interruption during the period from 1974 up to 1982, the
period of prescription, as correctly maintained by the appellants, was tolled during such
The counterclaim is likewise dismissed for lack of sufficient proof. Each shall bear their period, due to the injunctive writ in Civil Case No. 293 as discussed earlier when the vendors
respective expenses of litigation (pp. 71-72, Rollo). could not maintain the vendee in possession, and consequently was in no position to legally
demand payment of the price. Accordingly, while it may be conceded that appellants' cause
of action to demand performance had accrued on June 10, 1967 due to the appellee
Private respondents appealed to the Court of Appeals which rendered a decision on March institution's default in the payment of the first installment which became due on that date,
27, 1991, disposing:
Page 25 of 118
Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
the running of prescription was interrupted in 1974 when, from the words of the lower court petitioner to pay the price of said subdivision lots. In short, her right to demand payment was
itself, "the Supreme Court reversed the Court of Appeal's decision and dissolved the suspended during that period, 1974-1982.
injunction which the latter court had earlier issued in Civil Case No. 293, possession of the
building and other properties was taken from defendant Binalbagan Tech. Inc. and given to The prescriptive period within which to institute an action upon a written contract is ten
the de la Cruz spouses, through Southern Negros College". And the period of prescription years (Art. 1144, Civil Code). The cause of action of private respondent Echaus is based on
commenced to run anew only on May 31, 1982 when the appellants were finally able to fully the deed of sale aforementioned. The deed of sale whereby private respondent Echaus
implement the already executory judgment in Case No. 7435, and thus restore appellees in transferred ownership of the subdivision lots was executed on May 11, 1967. She filed Civil
possession of the 42 subdivision lots. Case No. 1354 for recovery of title and damages only on October 8, 1982. From May 11, 1967
to October 8, 1982, more than fifteen (15) years elapsed. Seemingly, the 10-year prescriptive
In other words, the period of prescription was interrupted, because from 1974 up to 1982, period had expired before she brought her action to recover title. However, the period 1974
the appellants themselves could not have restored unto the appellees the possession of the to 1982 should be deducted in computing the prescriptive period for the reason that, as
42 subdivision lots precisely because of the preliminary injunction mentioned elsewhere. above discussed, from 1974 to 1982, private respondent Echaus was not in a legal position to
Consequently, the appellants could not have prospered in any suit to compel performance or initiate action against petitioner since as aforestated, through no fault of hers, her warranty
payment from the appellees-buyers, because the appellants themselves were in no position against eviction was breached. In the case of Daniel vs. Garlitos, (95 Phil. 387 [1954]), it was
to perform their own corresponding obligation to deliver to and maintain said buyers in held that a court order deferring action on the execution of judgment suspended the running
possession of the lots subject matter of the sale. (Article 1458, 1495, 1537, Civil Code). (pp of the 5-year period for execution of a judgment. Here the execution of the judgment in Civil
49-50, Rollo) Case No. 7435 was stopped by the writ of preliminary injunction issued in Civil Case No. 293.
It was only when Civil Case No. 293 was dismissed that the writ of execution in Civil Case Na.
We agree with the Court of Appeals. 7435 could be implemented and petitioner Binalbagan restored to the possession of the
subject lots.
A party to a contract cannot demand performance of the other party's obligations unless he
is in a position to comply with his own obligations. Similarly, the right to rescind a contract Deducting eight years (1974 to 1982) from the period 1967 to 1982, only seven years
can be demanded only if a party thereto is ready, willing and able to comply with his own elapsed. Consequently, Civil Case No. 1354 was filed within the 10-year prescriptive period.
obligations thereunder (Art. 1191, Civil Code; Seva vs. Berwin, 48 Phil. 581 [1926]; Paras, Civil Working against petitioner's position too is the principle against unjust enrichment which
Code of the Philippines, 12th ed. Vol. IV, p. 200). In a contract of sale, the vendor is bound to would certainly be the result if petitioner is allowed to own the 42 lots without full payment
transfer the ownership of and deliver, as well as warrant, the thing which is the object of the thereof.
sale (Art. 1495, Civil Code); he warrants that the buyer shall, from the time ownership is
passed, have and enjoy the legal and peaceful possession of the thing — WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV
No. 24635 is AFFIRMED.
ARTICLE 1547. In a contract of sale, unless a contrary intention appears, there is:
SO ORDERED.
(1) An implied warranty on the part of the seller that he has a right to sell the thing at the
time when the ownership is to pass, and that the buyer shall from that time have and enjoy Republic of the Philippines
the legal and peaceful possession of the thing. SUPREME COURT
Manila
xxx xxx xxx
FIRST DIVISION
As afore-stated, petitioner was evicted from the subject subdivision lots in 1974 by virtue of
a court order in Civil Case No. 293 and reinstated to the possession thereof only in 1982. G.R. No. L-30056 August 30, 1988
During the period, therefore, from 1974 to 1982, seller private respondent Angelina Echaus'
warranty against eviction given to buyer petitioner was breached though, admittedly, MARCELO AGCAOILI, plaintiff-appellee
through no fault of her own. It follows that during that period, 1974 to 1982, private vs.
respondent Echaus was not in a legal position to demand compliance of the prestation of GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellant.

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Artemio L. Agcaoili for plaintiff-appellee. until and unless the GSIS completed the housing unit. What the GSIS did was to cancel the
award and require Agcaoili to vacate the premises. 4 Agcaoili reacted by instituting suit in the
Office of the Government Corporate Counsel for defendant-appellant. Court of First Instance of Manila for specific performance and damages. 5 Pending the action,
a written protest was lodged by other awardees of housing units in the same subdivision,
regarding the failure of the System to complete construction of their own houses. 6 Judgment
NARVASA, J.:
was in due course rendered ,7 on the basis of the evidence adduced by Agcaoili only, the GSIS
having opted to dispense with presentation of its own proofs. The judgment was in Agcaoili's
The appellant Government Service Insurance System, (GSIS, for short) having approved the favor and contained the following dispositions, 8 to wit:
application of the appellee Agcaoili for the purchase of a house and lot in the GSIS Housing
Project at Nangka Marikina, Rizal, subject to the condition that the latter should forthwith
1) Declaring the cancellation of the award (of a house and lot) in favor of
occupy the house, a condition that Agacoili tried to fulfill but could not for the reason that
plaintiff (Mariano Agcaoili) illegal and void;
the house was absolutely uninhabitable; Agcaoili, after paying the first installment and other
fees, having thereafter refused to make further payment of other stipulated installments
until GSIS had made the house habitable; and appellant having refused to do so, opting 2) Ordering the defendant (GSIS) to respect and enforce the aforesaid
instead to cancel the award and demand the vacation by Agcaoili of the premises; and award to the plaintiff relative to Lot No. 26, Block No. (48) 2 of the
Agcaoili having sued the GSIS in the Court of First Instance of Manila for specific performance Government Service Insurance System (GSIS) low cost housing project at
with damages and having obtained a favorable judgment, the case was appealled to this Nangka Marikina, Rizal;
Court by the GSIS. Its appeal must fail.
3) Ordering the defendant to complete the house in question so as to
The essential facts are not in dispute. Approval of Agcaoili's aforementioned application for make the same habitable and authorizing it (defendant) to collect the
purchase 1 was contained in a letter 2 addressed to Agcaoili and signed by GSIS Manager monthly amortization thereon only after said house shall have been
Archimedes Villanueva in behalf of the Chairman-General Manager, reading as follows: completed under the terms and conditions mentioned in Exhibit A ;and

Please be informed that your application to purchase a house and lot in 4) Ordering the defendant to pay P100.00 as damages and P300.00 as
our GSIS Housing Project at Nangka, Marikina, Rizal, has been approved and for attorney's fees, and costs.
by this Office. Lot No. 26, Block No. (48) 2, together with the housing unit
constructed thereon, has been allocated to you. Appellant GSIS would have this Court reverse this judgment on the argument that—

You are, therefore, advised to occupy the said house immediately. 1) Agcaoili had no right to suspend payment of amortizations on account of the
incompleteness of his housing unit, since said unit had been sold "in the condition and state
If you fail to occupy the same within three (3) days from receipt of this of completion then existing ... (and) he is deemed to have accepted the same in the condition
notice, your application shall be considered automatically disapproved he found it when he accepted the award;" and assuming indefiniteness of the contract in this
and the said house and lot will be awarded to another applicant. regard, such circumstance precludes a judgment for specific performance. 9

Agcaoili lost no time in occupying the house. He could not stay in it, however, and had to 2) Perfection of the contract of sale between it and Agcaoili being conditioned upon the
leave the very next day, because the house was nothing more than a shell, in such a state of latter's immediate occupancy of the house subject thereof, and the latter having failed to
incompleteness that civilized occupation was not possible: ceiling, stairs, double walling, comply with the condition, no contract ever came into existence between them ;10
lighting facilities, water connection, bathroom, toilet kitchen, drainage, were inexistent.
Agcaoili did however ask a homeless friend, a certain Villanueva, to stay in the premises as 3) Agcaoili's act of placing his homeless friend, Villanueva, in possession, "without the prior
some sort of watchman, pending completion of the construction of the house. Agcaoili or subsequent knowledge or consent of the defendant (GSIS)" operated as a repudiation by
thereafter complained to the GSIS, to no avail. Agcaoili of the award and a deprivation of the GSIS at the same time of the reasonable rental
value of the property. 11
The GSIS asked Agcaoili to pay the monthly amortizations and other fees. Agcaoili paid the
first monthly installment and the incidental fees, 3 but refused to make further payments
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Agcaoili's offer to buy from GSIS was contained in a printed form drawn up by the latter, Nor may the GSIS succeed in justifying its cancellation of the award to Agcaoili by the claim
entitled "Application to Purchase a House and/or Lot." Agcaoili filled up the form, signed it, that the latter had not complied with the condition of occupying the house within three (3)
and submitted it.12 The acceptance of the application was also set out in a form days. The record shows that Agcaoili did try to fulfill the condition; he did try to occupy the
(mimeographed) also prepared by the GSIS. As already mentioned, this form sent to Agcaoili, house but found it to be so uninhabitable that he had to leave it the following day. He did
duly filled up, advised him of the approval of his "application to purchase a house and lot in however leave a friend in the structure, who being homeless and hence willing to accept
our GSIS Housing Project at NANGKA, MARIKINA, RIZAL," and that "Lot No. 26, Block No. (48) shelter even of the most rudimentary sort, agreed to stay therein and look after it. Thus the
2, together with the housing unit constructed thereon, has been allocated to you." Neither argument that Agcaoili breached the agreement by failing to occupy the house, and by
the application form nor the acceptance or approval form of the GSIS — nor the notice to allowing another person to stay in it without the consent of the GSIS, must be rejected as
commence payment of a monthly amortizations, which again refers to "the house and lot devoid of merit.
awarded" — contained any hint that the house was incomplete, and was being sold "as is,"
i.e., in whatever state of completion it might be at the time. On the other hand, the condition Finally, the GSIS should not be heard to say that the agreement between it and Agcaoili is
explicitly imposed on Agcaoili — "to occupy the said house immediately," or in any case silent, or imprecise as to its exact prestation Blame for the imprecision cannot be imputed to
within three (3) days from notice, otherwise his "application shall be considered Agcaoili; it was after all the GSIS which caused the contract to come into being by its written
automatically disapproved and the said house and lot will be awarded to another applicant" acceptance of Agcaoili's offer to purchase, that offer being contained in a printed form
— would imply that construction of the house was more or less complete, and it was by supplied by the GSIS. Said appellant having caused the ambiguity of which it would now
reasonable standards, habitable, and that indeed, the awardee should stay and live in it; it make capital, the question of interpretation arising therefrom, should be resolved against it.
could not be interpreted as meaning that the awardee would occupy it in the sense of a
pioneer or settler in a rude wilderness, making do with whatever he found available in the
It will not do, however, to dispose of the controversy by simply declaring that the contract
envirornment.
between the parties had not been validly cancelled and was therefore still in force, and that
Agcaoili could not be compelled by the GSIS to pay the stipulated price of the house and lot
There was then a perfected contract of sale between the parties; there had been a meeting subject of the contract until and unless it had first completed construction of the house. This
of the minds upon the purchase by Agcaoili of a determinate house and lot in the GSIS would leave the contract hanging or in suspended animation, as it were, Agcaoili unwilling to
Housing Project at Nangka Marikina, Rizal at a definite price payable in amortizations at pay unless the house were first completed, and the GSIS averse to completing construction,
P31.56 per month, and from that moment the parties acquired the right to reciprocally which is precisely what has been the state of affairs between the parties for more than
demand performance. 13 It was, to be sure, the duty of the GSIS, as seller, to deliver the thing twenty (20) years now. On the other hand, assuming it to be feasible to still finish the
sold in a condition suitable for its enjoyment by the buyer for the purpose contemplated construction of the house at this time, to compel the GSIS to do so so that Agcaoili's
,14 in other words, to deliver the house subject of the contract in a reasonably livable state. prestation to pay the price might in turn be demanded, without modifying the price therefor,
This it failed to do. would not be quite fair. The cost to the GSIS of completion of construction at present
prices would make the stipulated price disproportionate, unrealistic.
It sold a house to Agcaoili, and required him to immediately occupy it under pain of
cancellation of the sale. Under the circumstances there can hardly be any doubt that the The situation calls for the exercise by this Court of its equity jurisdiction, to the end that it
house contemplated was one that could be occupied for purposes of residence in reasonable may render complete justice to both parties.
comfort and convenience. There would be no sense to require the awardee to immediately
occupy and live in a shell of a house, a structure consisting only of four walls with openings,
As we . . reaffirmed in Air Manila, Inc. vs. Court of Industrial Relations (83
and a roof, and to theorize, as the GSIS does, that this was what was intended by the parties,
SCRA 579, 589 [1978]). "(E)quity as the complement of legal jurisdiction
since the contract did not clearly impose upon it the obligation to deliver a habitable house,
seeks to reach and do complete justice where courts of law, through the
is to advocate an absurdity, the creation of an unfair situation. By any objective
inflexibility of their rules and want of power to adapt their judgments to
interpretation of its terms, the contract can only be understood as imposing on the GSIS an
the special circumstances of cases, are incompetent so to do. Equity
obligation to deliver to Agcaoili a reasonably habitable dwelling in return for his undertaking
regards the spirit of and not the letter, the intent and not the form, the
to pay the stipulated price. Since GSIS did not fulfill that obligation, and was not willing to put
substance rather than the circumstance, as it is variously expressed by
the house in habitable state, it cannot invoke Agcaoili's suspension of payment of
different courts... " 16
amortizations as cause to cancel the contract between them. It is axiomatic that "(i)n
reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him."15

Page 28 of 118
Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
In this case, the Court can not require specific performance of the contract in question In determining the precise relief to give, the Court will "balance the equities" or the
according to its literal terms, as this would result in inequity. The prevailing rule is that in respective interests of the parties, and take account of the relative hardship that one relief or
decreeing specific performance equity requires 17 — another may occasion to them .22

... not only that the contract be just and equitable in its provisions, but The completion of the unfinished house so that it may be put into habitable condition, as one
that the consequences of specific performance likewise be equitable and form of relief to the plaintiff Agcaoili, no longer appears to be a feasible option in view of the
just. The general rule is that this equitable relief will not be granted if, not inconsiderable time that has already elapsed. That would require an adjustment of the
under the circumstances of the case, the result of the specific price of the subject of the sale to conform to present prices of construction materials and
enforcement of the contract would be harsh, inequitable, oppressive, or labor. It is more in keeping with the realities of the situation, and with equitable norms, to
result in an unconscionable advantage to the plaintiff . . simply require payment for the land on which the house stands, and for the house itself, in
its unfinished state, as of the time of the contract. In fact, this is an alternative relief
In the exercise of its equity jurisdiction, the Court may adjust the rights of parties in proposed by Agcaoili himself, i.e., "that judgment issue . . (o)rdering the defendant (GSIS) to
accordance with the circumstances obtaining at the time of rendition of judgment, when execute a deed of sale that would embody and provide for a reasonable amortization of
these are significantly different from those existing at the time of generation of those rights. payment on the basis of the present actual unfinished and uncompleted condition, worth
and value of the said house. 23
The Court is not restricted to an adjustment of the rights of the parties as
they existed when suit was brought, but will give relief appropriate to WHEREFORE, the judgment of the Court a quo insofar as it invalidates and sets aside the
events occuring ending the suit. 18 cancellation by respondent GSIS of the award in favor of petitioner Agcaoili of Lot No. 26,
Block No. (48) 2 of the GSIS low cost housing project at Nangka, Marikina, Rizal, and orders
the former to respect the aforesaid award and to pay damages in the amounts specified, is
While equitable jurisdiction is generally to be determined with reference
AFFIRMED as being in accord with the facts and the law. Said judgments is however modified
to the situation existing at the time the suit is filed, the relief to be
by deleting the requirement for respondent GSIS "to complete the house in question so as to
accorded by the decree is governed by the conditions which are shown to
make the same habitable," and instead it is hereby ORDERED that the contract between the
exist at the time of making thereof, and not by the circumstances
parties relative to the property above described be modified by adding to the cost of the
attending the inception of the litigation. In making up the final decree in
land, as of the time of perfection of the contract, the cost of the house in its unfinished state
an equity suit the judge may rightly consider matters arising after suit
also as of the time of perfection of the contract, and correspondingly adjusting the
was brought. Therefore, as a general rule, equity will administer such
amortizations to be paid by petitioner Agcaoili, the modification to be effected after
relief as the nature, rights, facts and exigencies of the case demand at the
determination by the Court a quo of the value of said house on the basis of the agreement of
close of the trial or at the time of the making of the decree. 19
the parties, or if this is not possible by such commissioner or commissioners as the Court may
appoint. No pronouncement as to costs.
That adjustment is entirely consistent with the Civil Law principle that in the exercise of
rights a person must act with justice, give everyone his due, and observe honesty and good
SO ORDERED.
faith. 20 Adjustment of rights has been held to be particularly applicable when there has been
a depreciation of currency.
FIRST DIVISION
Depreciation of the currency or other medium of payment contracted for
[G.R. No. 117190. January 2, 1997]
has frequently been held to justify the court in withholding specific
performance or at least conditioning it upon payment of the actual value
of the property contracted for. Thus, in an action for the specific JACINTO TANGUILIG doing business under the name and style J.M.T. ENGINEERING AND
performance of a real estate contract, it has been held that where the GENERAL MERCHANDISING, petitioner, vs. COURT OF APPEALS and VICENTE
currency in which the plaintiff had contracted to pay had greatly HERCE JR., respondents.
depreciated before enforcement was sought, the relief would be denied
unless the complaint would undertake to pay the equitable value of the DECISION
land. (Willard & Tayloe [U.S.] 8 Wall 557,19 L. Ed 501; Doughdrill v.
Edwards, 59 Ala 424) 21 BELLOSILLO, J.:

Page 29 of 118
Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
This case involves the proper interpretation of the contract entered into between the of force majeure and ordered the latter to reconstruct the windmill in accordance with the
parties. stipulated one-year guaranty.

Sometime in April 1987 petitioner Jacinto M. Tanguilig doing business under the name His motion for reconsideration having been denied by the Court of Appeals, petitioner
and style J. M. T. Engineering and General Merchandising proposed to respondent Vicente now seeks relief from this Court. He raises two issues: firstly, whether the agreement to
Herce Jr. to construct a windmill system for him. After some negotiations they agreed on the construct the windmill system included the installation of a deep well and, secondly, whether
construction of the windmill for a consideration of P60,000.00 with a one-year guaranty from petitioner is under obligation to reconstruct the windmill after it collapsed.
the date of completion and acceptance by respondent Herce Jr. of the project. Pursuant to the
agreement respondent paid petitioner a down payment of P30,000.00 and an installment We reverse the appellate court on the first issue but sustain it on the second.
payment of P15,000.00, leaving a balance of P15,000.00. The preponderance of evidence supports the finding of the trial court that the
On 14 March 1988, due to the refusal and failure of respondent to pay the balance, installation of a deep well was not included in the proposals of petitioner to construct a
petitioner filed a complaint to collect the amount. In his Answer before the trial court windmill system for respondent. There were in fact two (2) proposals: one dated 19 May 1987
respondent denied the claim saying that he had already paid this amount to the San Pedro which pegged the contract price at P87,000.00 (Exh. "1"). This was rejected by respondent. The
General Merchandising Inc. (SPGMI) which constructed the deep well to which the windmill other was submitted three days later, i.e., on 22 May 1987 which contained more
system was to be connected. According to respondent, since the deep well formed part of the specifications but proposed a lower contract price of P60,000.00 (Exh. "A").The latter proposal
system the payment he tendered to SPGMI should be credited to his account by was accepted by respondent and the construction immediately followed. The pertinent
petitioner. Moreover, assuming that he owed petitioner a balance of P15,000.00, this should portions of the first letter-proposal (Exh. "1") are reproducedhereunder -
be offset by the defects in the windmill system which caused the structure to collapse after a
strong wind hit their place.[1] In connection with your Windmill System and Installation, we would like to quote to you as
follows:
Petitioner denied that the construction of a deep well was included in the agreement to
build the windmill system, for the contract price of P60,000.00 was solely for the windmill
One (1) Set - Windmill suitable for 2 inches diameter deepwell, 2 HP, capacity, 14 feet in
assembly and its installation, exclusive of other incidental materials needed for the project. He
diameter, with 20 pieces blade, Tower 40 feet high, including mechanism which is not
also disowned any obligation to repair or reconstruct the system and insisted that he delivered
advisable to operate during extra-intensity wind. Excluding cylinder pump.
it in good and working condition to respondent who accepted the same without
protest. Besides, its collapse was attributable to a typhoon, a forcemajeure, which relieved him
of any liability. UNIT CONTRACT PRICE P87,000.00

In finding for plaintiff, the trial court held that the construction of the
The second letter-proposal (Exh. "A") provides as follows:
deep well was not part of the windmill project as evidenced clearly by the letter proposals
submitted by petitioner to respondent.[2] It noted that "[i]f the intention of the parties is to
include the construction of the deep well in the project, the same should be stated in the In connection with your Windmill system Supply of Labor Materials and Installation, operated
proposals. In the absence of such an agreement, it could be safely concluded that the water pump, we would like to quote to you as follows -
construction of the deep well is not a part of the project undertaken by the plaintiff."[3] With
respect to the repair of the windmill, the trial court found that "there is no clear and convincing One (1) set - Windmill assembly for 2 inches or 3 inches deep-well pump, 6 Stroke, 14 feet
proof that the windmill system fell down due to the defect of the construction."[4] diameter, 1-lot blade materials, 40 feet Tower complete with standard appurtenances up to
Cylinder pump, shafting U.S. adjustable International Metal.
The Court of Appeals reversed the trial court. It ruled that the construction of the deep
well was included in the agreement of the parties because the term "deep well" was
mentioned in both proposals. It also gave credence to the testimony of respondent's witness One (1) lot - Angle bar, G. I. pipe, Reducer Coupling, Elbow Gate valve, cross Tee coupling.
Guillermo Pili, the proprietor of SPGMI which installed the deep well, that petitioner Tanguilig
told him that the cost of constructing the deep well would be deducted from the contract price One (1) lot - Float valve.
of P60,000.00. Upon these premises the appellate court concluded that respondent's payment
of P15,000.00 to SPGMI should be applied to his remaining balance with petitioner thus One (1) lot - Concreting materials foundation.
effectively extinguishing his contractual obligation. However, it rejected petitioner's claim
F. O. B. Laguna
Page 30 of 118
Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Contract Price P60,000.00 indicates that the contract for the deep well was not part of the windmill project but a separate
agreement between respondent and Pili. Besides, if the price of P60,000.00 included the deep
Notably, nowhere in either proposal is the installation of a deep well mentioned, even well, the obligation of respondent was to pay the entire amount to petitioner without
remotely. Neither is there an itemization or description of the materials to be used in prejudice to any action that Guillermo Pili or SPGMI may take, if any, against the
constructing the deep well. There is absolutely no mention in the two (2) documents that a latter. Significantly, when asked why he tendered payment directly to Pili and not to petitioner,
deep well pump is a component of the proposed windmill system. The contract prices fixed in respondent explained, rather lamely, that he did it "because he has (sic) the money, so (he)
both proposals cover only the features specifically described therein and no other. While the just paid the money in his possession."[8]
words "deep well" and "deep well pump" are mentioned in both, these do not indicate that a Can respondent claim that Pili accepted his payment on behalf of
deep well is part of the windmill system. They merely describe the type of deep well pump for petitioner? No. While the law is clear that "payment shall be made to the person in
which the proposed windmill would be suitable. As correctly pointed out by petitioner, the whose favor theobligation has been constituted, or his successor in
words "deep well" preceded by the prepositions "for" and "suitable for" were meant only to interest, or any person authorized to receive it,".[9] It does not appear from the record
convey the idea that the proposed windmill would be appropriate for a deep well pump with that Pili and/or SPGMI was so authorized.
a diameter of 2 to 3 inches. For if the real intent of petitioner was to include a deep well in the
agreement to construct a windmill, he would have used instead the Respondent cannot claim the benefit of the law concerning "payments made by a third
conjunctions "and" or "with." Since the terms of the instruments are clear and leave no doubt person."[10] The Civil Code provisions do not apply in the instant case because no creditor-
as to their meaning they should not be disturbed. debtor relationship between petitioner and Guillermo Pili and/or SPGMI has been established
regarding the construction of the deep well. Specifically, witness Pili did not testify that he
Moreover, it is a cardinal rule in the interpretation of contracts that the intention of the entered into a contract with petitioner for the construction of respondent's deep well. If
parties shall be accorded primordial consideration[5] and, in case of doubt, their SPGMI was really commissioned by petitioner to construct the deep well, an agreement
contemporaneous and subsequent acts shall be principally considered.[6] An examination of particularly to this effect should have been entered into.
such contemporaneous and subsequent acts of respondent as well as the attendant
circumstances does not persuade us to uphold him. The contemporaneous and subsequent acts of the parties concerned effectively belie
respondent's assertions. These circumstances only show that the construction of the well by
Respondent insists that petitioner verbally agreed that the contract price of P60,000.00 SPGMI was for the sole account of respondent and that petitioner merely supervised the
covered the installation of a deep well pump. He contends that since petitioner did not have installation of the well because the windmill was to be connected to it. There is no legal nor
the capacity to install the pump the latter agreed to have a third party do the work the cost of factual basis by which this Court can impose upon petitioner an obligation he did not expressly
which was to be deducted from the contract price. To prove his point, he presented Guillermo assume nor ratify.
Pili of SPGMI who declared that petitioner Tanguilig approached him with a letter from
respondent Herce Jr. asking him to build a deep well pump as "part of the price/contract which The second issue is not a novel one. In a long line of cases[11] this Court has consistently
Engineer (Herce) had with Mr. Tanguilig."[7] held that in order for a party to claim exemption from liability by reason of fortuitous event
under Art. 1174 of the Civil Code the event should be the sole and proximate cause of the loss
We are disinclined to accept the version of respondent. The claim of Pili that Herce Jr. or destruction of the object of the contract. In Nakpil vs. Court of Appeals,[12] four (4) requisites
wrote him a letter is unsubstantiated. The alleged letter was never presented in court by must concur: (a) the cause of the breach of the obligation must be independent of the will of
private respondent for reasons known only to him. But granting that this written the debtor; (b) the event must be either unforeseeable or unavoidable; (c) the event must be
communication existed, it could not have simply contained a request for Pili to install a deep such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and,
well; it would have also mentioned the party who would pay for the undertaking. It strains (d) the debtor must be free from any participation in or aggravation of the injury to the
credulity that respondent would keep silent on this matter and leave it all to petitioner creditor.
Tanguilig to verbally convey to Pili that the deep well was part of the windmill construction
and that its payment would come from the contract price of P60,000.00. Petitioner failed to show that the collapse of the windmill was due solely to a fortuitous
event. Interestingly, the evidence does not disclose that there was actually a typhoon on the
We find it also unusual that Pili would readily consent to build a deep well the payment day the windmill collapsed. Petitioner merely stated that there was a "strong wind." But a
for which would come supposedly from the windmill contract price on the mere strong wind in this case cannot be fortuitous - unforeseeable nor [Link] the contrary,
representation of petitioner, whom he had never met before, without a written commitment a strong wind should be present in places where windmills are constructed, otherwise the
at least from the former. For if indeed the deep well were part of the windmill project, the windmills will not turn.
contract for its installation would have been strictly a matter between petitioner and Pili
himself with the former assuming the obligation to pay the price. That it was respondent Herce
Jr. himself who paid for the deep well by handing over to Pili the amount of P15,000.00 clearly
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
The appellate court correctly observed that "given the newly-constructed windmill On February 15, 2001, petitioners spouses Deo Agner and Maricon Agner executed a
system, the same would not have collapsed had there been no inherent defect in it which could Promissory Note with Chattel Mortgage in favor of Citimotors, Inc. The contract provides,
only be attributable to the appellee."[13] It emphasized that respondent had in his favor the among others, that: for receiving the amount of Php834, 768.00, petitioners shall pay Php
presumption that "things have happened according to the ordinary course of nature and the 17,391.00 every 15th day of each succeeding month until fully paid; the loan is secured by a
ordinary habits of life."[14] This presumption has not been rebutted by petitioner. 2001 Mitsubishi Adventure Super Sport; and an interest of 6% per month shall be imposed
for failure to pay each installment on or before the stated due date.4
Finally, petitioner's argument that private respondent was already in default in the
payment of his outstanding balance of P15,000.00 and hence should bear his own loss, is
untenable. In reciprocal obligations, neither party incurs in delay if the other does not comply On the same day, Citimotors, Inc. assigned all its rights, title and interests in the Promissory
or is not ready to comply in a proper manner with what is incumbent upon him.[15]When the Note with Chattel Mortgage to ABN AMRO Savings Bank, Inc. (ABN AMRO), which, on May
windmill failed to function properly it became incumbent upon petitioner to institute the 31, 2002, likewise assigned the same to respondent BPI Family Savings Bank, Inc.5
proper repairs in accordance with the guaranty stated in the contract. Thus, respondent
cannot be said to have incurred in delay; instead, it is petitioner who should bear the expenses For failure to pay four successive installments from May 15, 2002 to August 15, 2002,
for the reconstruction of the windmill. Article 1167 of the Civil Code is explicit on this point respondent, through counsel, sent to petitioners a demand letter dated August 29, 2002,
that if a person obliged to do something fails to do it, the same shall be executed at his cost. declaring the entire obligation as due and demandable and requiring to pay Php576,664.04,
or surrender the mortgaged vehicle immediately upon receiving the letter.6 As the demand
WHEREFORE, the appealed decision is MODIFIED. Respondent VICENTE HERCE JR. is was left unheeded, respondent filed on October 4, 2002 an action for Replevin and Damages
directed to pay petitioner JACINTO M. TANGUILIG the balance of P15,000.00 with interest at before the Manila Regional Trial Court (RTC).
the legal rate from the date of the filing of the complaint. In return, petitioner is ordered to
"reconstruct subject defective windmill system, in accordance with the one-year
A writ of replevin was issued.7 Despite this, the subject vehicle was not seized.8 Trial on the
guaranty"[16]and to complete the same within three (3) months from the finality of this
merits ensued. On August 11, 2005, the Manila RTC Br. 33 ruled for the respondent and
decision.
ordered petitioners to jointly and severally pay the amount of Php576,664.04 plus interest at
SO ORDERED. the rate of 72% per annum from August 20, 2002 until fully paid, and the costs of suit.

Republic of the Philippines Petitioners appealed the decision to the Court of Appeals (CA), but the CA affirmed the lower
SUPREME COURT court’s decision and, subsequently, denied the motion for reconsideration; hence, this
Manila petition.

THIRD DIVISION Before this Court, petitioners argue that: (1) respondent has no cause of action, because the
Deed of Assignment executed in its favor did not specifically mention ABN AMRO’s account
receivable from petitioners; (2) petitioners cannot be considered to have defaulted in
G.R. No. 182963 June 3, 2013
payment for lack of competent proof that they received the demand letter; and (3)
respondent’s remedy of resorting to both actions of replevin and collection of sum of money
SPOUSES DEO AGNER and MARICON AGNER, Petitioners, is contrary to the provision of Article 14849 of the Civil Code and the Elisco Tool
vs. Manufacturing Corporation v. Court of Appeals10ruling.
BPI FAMILY SAVINGS BANK, INC., Respondent.
The contentions are untenable.
DECISION
With respect to the first issue, it would be sufficient to state that the matter surrounding the
PERALTA, J.: Deed of Assignment had already been considered by the trial court and the CA. Likewise, it is
an issue of fact that is not a proper subject of a petition for review under Rule 45. An issue is
This is a petition for review on certiorari assailing the April 30, 2007 Decision1 and May 19, factual when the doubt or difference arises as to the truth or falsehood of alleged facts, or
2008 Resolution2of the Court of Appeals in CAG.R. CV No. 86021, which affirmed the August when the query invites calibration of the whole evidence, considering mainly the credibility
11, 2005 Decision3 of the Regional Trial Court, Branch 33, Manila City. of witnesses, existence and relevancy of specific surrounding circumstances, their relation to
each other and to the whole, and the probabilities of the situation.11 Time and again, We
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
stress that this Court is not a trier of facts and generally does not weigh anew evidence which relieve the MORTGAGOR from the effects of such notice.16 (Emphasis and underscoring
lower courts have passed upon. supplied)

As to the second issue, records bear that both verbal and written demands were in fact made The Court cannot yield to petitioners’ denial in receiving respondent’s demand letter. To
by respondent prior to the institution of the case against petitioners.12 Even assuming, for note, their postal address evidently remained unchanged from the time they executed the
argument’s sake, that no demand letter was sent by respondent, there is really no need for it Promissory Note with Chattel Mortgage up to time the case was filed against them. Thus, the
because petitioners legally waived the necessity of notice or demand in the Promissory Note presumption that "a letter duly directed and mailed was received in the regular course of the
with Chattel Mortgage, which they voluntarily and knowingly signed in favor of respondent’s mail"17 stands in the absence of satisfactory proof to the contrary.
predecessor-in-interest. Said contract expressly stipulates:
Petitioners cannot find succour from Ting v. Court of Appeals18 simply because it pertained to
In case of my/our failure to pay when due and payable, any sum which I/We are obliged to violation of Batas Pambansa Blg. 22 or the Bouncing Checks Law. As a higher quantum of
pay under this note and/or any other obligation which I/We or any of us may now or in the proof – that is, proof beyond reasonable doubt – is required in view of the criminal nature of
future owe to the holder of this note or to any other party whether as principal or guarantor the case, We found insufficient the mere presentation of a copy of the demand letter
x x x then the entire sum outstanding under this note shall, without prior notice or demand, allegedly sent through registered mail and its corresponding registry receipt as proof of
immediately become due and payable. (Emphasis and underscoring supplied) receiving the notice of dishonor.

A provision on waiver of notice or demand has been recognized as legal and valid in Bank of Perusing over the records, what is clear is that petitioners did not take advantage of all the
the Philippine Islands v. Court of Appeals,13 wherein We held: opportunities to present their evidence in the proceedings before the courts below. They
miserably failed to produce the original cash deposit slips proving payment of the monthly
The Civil Code in Article 1169 provides that one incurs in delay or is in default from the time amortizations in question. Not even a photocopy of the alleged proof of payment was
the obligor demands the fulfillment of the obligation from the obligee. However, the law appended to their Answer or shown during the trial. Neither have they demonstrated any
expressly provides that demand is not necessary under certain circumstances, and one of written requests to respondent to furnish them with official receipts or a statement of
these circumstances is when the parties expressly waive demand. Hence, since the co-signors account. Worse, petitioners were not able to make a formal offer of evidence considering
expressly waived demand in the promissory notes, demand was unnecessary for them to be that they have not marked any documentary evidence during the presentation of Deo
in default.14 Agner’s testimony.19

Further, the Court even ruled in Navarro v. Escobido15 that prior demand is not a condition Jurisprudence abounds that, in civil cases, one who pleads payment has the burden of
precedent to an action for a writ of replevin, since there is nothing in Section 2, Rule 60 of proving it; the burden rests on the defendant to prove payment, rather than on the plaintiff
the Rules of Court that requires the applicant to make a demand on the possessor of the to prove non-payment.20 When the creditor is in possession of the document of credit, proof
property before an action for a writ of replevin could be filed. of non-payment is not needed for it is presumed.21 Respondent's possession of the
Promissory Note with Chattel Mortgage strongly buttresses its claim that the obligation has
not been extinguished. As held in Bank of the Philippine Islands v. Spouses Royeca:22
Also, petitioners’ representation that they have not received a demand letter is completely
inconsequential as the mere act of sending it would suffice. Again, We look into the
Promissory Note with Chattel Mortgage, which provides: x x x The creditor's possession of the evidence of debt is proof that the debt has not been
discharged by payment. A promissory note in the hands of the creditor is a proof of
indebtedness rather than proof of payment. In an action for replevin by a mortgagee, it is
All correspondence relative to this mortgage, including demand letters, summonses,
prima facie evidence that the promissory note has not been paid. Likewise, an uncanceled
subpoenas, or notifications of any judicial or extrajudicial action shall be sent to the
mortgage in the possession of the mortgagee gives rise to the presumption that the
MORTGAGOR at the address indicated on this promissory note with chattel mortgage or at
mortgage debt is unpaid.23
the address that may hereafter be given in writing by the MORTGAGOR to the MORTGAGEE
or his/its assignee. The mere act of sending any correspondence by mail or by personal
delivery to the said address shall be valid and effective notice to the mortgagor for all legal Indeed, when the existence of a debt is fully established by the evidence contained in the
purposes and the fact that any communication is not actually received by the MORTGAGOR record, the burden of proving that it has been extinguished by payment devolves upon the
or that it has been returned unclaimed to the MORTGAGEE or that no person was found at debtor who offers such defense to the claim of the creditor.24 The debtor has the burden of
the address given, or that the address is fictitious or cannot be located shall not excuse or showing with legal certainty that the obligation has been discharged by payment.25
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Lastly, there is no violation of Article 1484 of the Civil Code and the Court’s decision in Elisco recover possession of movable property. By virtue of the writ of seizure issued by the trial
Tool Manufacturing Corporation v. Court of Appeals.26 court, the deputy sheriff seized the vehicle on August 6, 1986 and thereby deprived private
respondents of its use. The car was not returned to private respondent until April 16, 1989,
In Elisco, petitioner's complaint contained the following prayer: after two (2) years and eight (8) months, upon issuance by the Court of Appeals of a writ of
execution.
WHEREFORE, plaintiffs pray that judgment be rendered as follows:
Petitioner prayed that private respondents be made to pay the sum of ₱39,054.86, the
amount that they were supposed to pay as of May 1986, plus interest at the legal rate. At the
ON THE FIRST CAUSE OF ACTION
same time, it prayed for the issuance of a writ of replevin or the delivery to it of the motor
vehicle "complete
Ordering defendant Rolando Lantan to pay the plaintiff the sum of ₱39,054.86 plus legal
interest from the date of demand until the whole obligation is fully paid;
with accessories and equipment." In the event the car could not be delivered to petitioner, it
was prayed that private respondent Rolando Lantan be made to pay petitioner the amount
ON THE SECOND CAUSE OF ACTION of ₱60,000.00, the "estimated actual value" of the car, "plus accrued monthly rentals thereof
with interests at the rate of fourteen percent (14%) per annum until fully paid." This prayer
To forthwith issue a Writ of Replevin ordering the seizure of the motor vehicle more of course cannot be granted, even assuming that private respondents have defaulted in the
particularly described in paragraph 3 of the Complaint, from defendant Rolando Lantan payment of their obligation. This led the trial court to say that petitioner wanted to eat its
and/or defendants Rina Lantan, John Doe, Susan Doe and other person or persons in whose cake and have it too.28
possession the said motor vehicle may be found, complete with accessories and equipment,
and direct deliver thereof to plaintiff in accordance with law, and after due hearing to In contrast, respondent in this case prayed:
confirm said seizure and plaintiff's possession over the same;
(a) Before trial, and upon filing and approval of the bond, to forthwith issue a Writ
PRAYER COMMON TO ALL CAUSES OF ACTION of Replevin ordering the seizure of the motor vehicle above-described, complete
with all its accessories and equipments, together with the Registration Certificate
1. Ordering the defendant Rolando Lantan to pay the plaintiff an amount thereof, and direct the delivery thereof to plaintiff in accordance with law and after
equivalent to twenty-five percent (25%) of his outstanding obligation, for and as due hearing, to confirm the said seizure;
attorney's fees;
(b) Or, in the event that manual delivery of the said motor vehicle cannot be
2. Ordering defendants to pay the cost or expenses of collection, repossession, effected to render judgment in favor of plaintiff and against defendant(s) ordering
bonding fees and other incidental expenses to be proved during the trial; and them to pay to plaintiff, jointly and severally, the sum of ₱576,664.04 plus interest
and/or late payment charges thereon at the rate of 72% per annum from August
3. Ordering defendants to pay the costs of suit. 20, 2002 until fully paid;

Plaintiff also prays for such further reliefs as this Honorable Court may deem just and (c) In either case, to order defendant(s) to pay jointly and severally:
equitable under the premises.27
(1) the sum of ₱297,857.54 as attorney’s fees, liquidated damages,
The Court therein ruled: bonding fees and other expenses incurred in the seizure of the said
motor vehicle; and

The remedies provided for in Art. 1484 are alternative, not cumulative. The exercise of one
bars the exercise of the others. This limitation applies to contracts purporting to be leases of (2) the costs of suit.
personal property with option to buy by virtue of Art. 1485. The condition that the lessor has
deprived the lessee of possession or enjoyment of the thing for the purpose of applying Art. Plaintiff further prays for such other relief as this Honorable Court may deem just and
1485 was fulfilled in this case by the filing by petitioner of the complaint for replevin to equitable in the premises.29
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Compared with Elisco, the vehicle subject matter of this case was never recovered and SOLAR HARVEST, INC., Petitioner,
delivered to respondent despite the issuance of a writ of replevin. As there was no seizure vs.
that transpired, it cannot be said that petitioners were deprived of the use and enjoyment of DAVAO CORRUGATED CARTON CORPORATION, Respondent.
the mortgaged vehicle or that respondent pursued, commenced or concluded its actual
foreclosure. The trial court, therefore, rightfully granted the alternative prayer for sum of DECISION
money, which is equivalent to the remedy of "exacting fulfillment of the obligation."
Certainly, there is no double recovery or unjust enrichment30 to speak of.1âwphi1
NACHURA, J.:

All the foregoing notwithstanding, We are of the opinion that the interest of 6% per month
Petitioner seeks a review of the Court of Appeals (CA) Decision1 dated September 21, 2006
should be equitably reduced to one percent (1%) per month or twelve percent (12%) per
and Resolution2 dated February 23, 2007, which denied petitioner’s motion for
annum, to be reckoned from May 16, 2002 until full payment and with the remaining
reconsideration. The assailed Decision denied petitioner’s claim for reimbursement for the
outstanding balance of their car loan as of May 15, 2002 as the base amount.
amount it paid to respondent for the manufacture of corrugated carton boxes.

Settled is the principle which this Court has affirmed in a number of cases that stipulated
The case arose from the following antecedents:
interest rates of three percent (3%) per month and higher are excessive, iniquitous,
unconscionable, and exorbitant.31 While Central Bank Circular No. 905-82, which took effect
on January 1, 1983, effectively removed the ceiling on interest rates for both secured and In the first quarter of 1998, petitioner, Solar Harvest, Inc., entered into an agreement with
unsecured loans, regardless of maturity, nothing in the said circular could possibly be read as respondent, Davao Corrugated Carton Corporation, for the purchase of corrugated carton
granting carte blanche authority to lenders to raise interest rates to levels which would boxes, specifically designed for petitioner’s business of exporting fresh bananas, at US$1.10
either enslave their borrowers or lead to a hemorrhaging of their assets.32 Since the each. The agreement was not reduced into writing. To get the production underway,
stipulation on the interest rate is void for being contrary to morals, if not against the law, it is petitioner deposited, on March 31, 1998, US$40,150.00 in respondent’s US Dollar Savings
as if there was no express contract on said interest rate; thus, the interest rate may be Account with Westmont Bank, as full payment for the ordered boxes.
reduced as reason and equity demand.33
Despite such payment, petitioner did not receive any boxes from respondent. On January 3,
WHEREFORE, the petition is DENIED and the Court AFFIRMS WITH MODIFICATION the April 2001, petitioner wrote a demand letter for reimbursement of the amount paid.3 On February
30, 2007 Decision and May 19, 2008 Resolution of the Court of Appeals in CA-G.R. CV No. 19, 2001, respondent replied that the boxes had been completed as early as April 3, 1998
86021. Petitioners spouses Deo Agner and Maricon Agner are ORDERED to pay, jointly and and that petitioner failed to pick them up from the former’s warehouse 30 days from
severally, respondent BPI Family Savings Bank, Inc. ( 1) the remaining outstanding balance of completion, as agreed upon. Respondent mentioned that petitioner even placed an
their auto loan obligation as of May 15, 2002 with interest at one percent ( 1 o/o) per month additional order of 24,000 boxes, out of which, 14,000 had been manufactured without any
from May 16, 2002 until fully paid; and (2) costs of suit. advanced payment from petitioner. Respondent then demanded petitioner to remove the
boxes from the factory and to pay the balance of US$15,400.00 for the additional boxes and
₱132,000.00 as storage fee.
SO ORDERED.

On August 17, 2001, petitioner filed a Complaint for sum of money and damages against
Republic of the Philippines
respondent. The Complaint averred that the parties agreed that the boxes will be delivered
SUPREME COURT
within 30 days from payment but respondent failed to manufacture and deliver the boxes
Manila
within such time. It further alleged

SECOND DIVISION
6. That repeated follow-up was made by the plaintiff for the immediate production of the
ordered boxes, but every time, defendant [would] only show samples of boxes and ma[k]e
G.R. No. 176868 July 26, 2010 repeated promises to deliver the said ordered boxes.

7. That because of the failure of the defendant to deliver the ordered boxes, plaintiff ha[d] to
cancel the same and demand payment and/or refund from the defendant but the latter
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
refused to pay and/or refund the US$40,150.00 payment made by the former for the ordered respondent, also testified that his company finished production of the 36,500 boxes on April
boxes.41avvphi1 3, 1998 and that petitioner made a second order of 24,000 boxes. He said that the
agreement was for respondent to produce the boxes and for petitioner to pick them up from
In its Answer with Counterclaim,5 respondent insisted that, as early as April 3, 1998, it had the warehouse.12 He also said that the reason why petitioner did not pick up the boxes was
already completed production of the 36,500 boxes, contrary to petitioner’s allegation. that the ship that was to carry the bananas did not arrive.13 According to him, during the last
According to respondent, petitioner, in fact, made an additional order of 24,000 boxes, out of visit of Que and Estanislao, he asked them to withdraw the boxes immediately because they
which, 14,000 had been completed without waiting for petitioner’s payment. Respondent were occupying a big space in his plant, but they, instead, told him to sell the cartons as
stated that petitioner was to pick up the boxes at the factory as agreed upon, but petitioner rejects. He was able to sell 5,000 boxes at ₱20.00 each for a total of ₱100,000.00. They then
failed to do so. Respondent averred that, on October 8, 1998, petitioner’s representative, told him to apply the said amount to the unpaid balance.
Bobby Que (Que), went to the factory and saw that the boxes were ready for pick up. On
February 20, 1999, Que visited the factory again and supposedly advised respondent to sell In its March 2, 2004 Decision, the Regional Trial Court (RTC) ruled that respondent did not
the boxes as rejects to recoup the cost of the unpaid 14,000 boxes, because petitioner’s commit any breach of faith that would justify rescission of the contract and the consequent
transaction to ship bananas to China did not materialize. Respondent claimed that the boxes reimbursement of the amount paid by petitioner. The RTC said that respondent was able to
were occupying warehouse space and that petitioner should be made to pay storage fee at produce the ordered boxes but petitioner failed to obtain possession thereof because its ship
₱60.00 per square meter for every month from April 1998. As counterclaim, respondent did not arrive. It thus dismissed the complaint and respondent’s counterclaims, disposing as
prayed that judgment be rendered ordering petitioner to pay $15,400.00, plus interest, follows:
moral and exemplary damages, attorney’s fees, and costs of the suit.
WHEREFORE, premises considered, judgment is hereby rendered in favor of defendant and
In reply, petitioner denied that it made a second order of 24,000 boxes and that respondent against the plaintiff and, accordingly, plaintiff’s complaint is hereby ordered DISMISSED
already completed the initial order of 36,500 boxes and 14,000 boxes out of the second without pronouncement as to cost. Defendant’s counterclaims are similarly dismissed for
order. It maintained that lack of merit.

respondent only manufactured a sample of the ordered boxes and that respondent could not SO ORDERED.14
have produced 14,000 boxes without the required pre-payments.6
Petitioner filed a notice of appeal with the CA.
During trial, petitioner presented Que as its sole witness. Que testified that he ordered the
boxes from respondent and deposited the money in respondent’s account.7 He specifically On September 21, 2006, the CA denied the appeal for lack of merit.15 The appellate court
stated that, when he visited respondent’s factory, he saw that the boxes had no print of held that petitioner failed to discharge its burden of proving what it claimed to be the
petitioner’s logo.8 A few months later, he followed-up the order and was told that the parties’ agreement with respect to the delivery of the boxes. According to the CA, it was
company had full production, and thus, was promised that production of the order would be unthinkable that, over a period of more than two years, petitioner did not even demand for
rushed. He told respondent that it should indeed rush production because the need for the the delivery of the boxes. The CA added that even assuming that the agreement was for
boxes was urgent. Thereafter, he asked his partner, Alfred Ong, to cancel the order because respondent to deliver the boxes, respondent would not be liable for breach of contract as
it was already late for them to meet their commitment to ship the bananas to China.9 On petitioner had not yet demanded from it the delivery of the boxes.16
cross-examination, Que further testified that China Zero Food, the Chinese company that
ordered the bananas, was sending a ship to Davao to get the bananas, but since there were
Petitioner moved for reconsideration,17 but the motion was denied by the CA in its
no cartons, the ship could not proceed. He said that, at that time, bananas from Tagum
Resolution of February 23, 2007.18
Agricultural Development Corporation (TADECO) were already there. He denied that
petitioner made an additional order of 24,000 boxes. He explained that it took three years to
refer the matter to counsel because respondent promised to pay.10 In this petition, petitioner insists that respondent did not completely manufacture the boxes
and that it was respondent which was obliged to deliver the boxes to TADECO.
For respondent, Bienvenido Estanislao (Estanislao) testified that he met Que in Davao in
October 1998 to inspect the boxes and that the latter got samples of them. In February 2000, We find no reversible error in the assailed Decision that would justify the grant of this
they inspected the boxes again and Que got more samples. Estanislao said that petitioner did petition.
not pick up the boxes because the ship did not arrive.11 Jaime Tan (Tan), president of
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Petitioner’s claim for reimbursement is actually one for rescission (or resolution) of contract obligations are fixed, the default for each obligation must be determined by the rules given in
under Article 1191 of the Civil Code, which reads: the first paragraph of the present article,19 that is, the other party would incur in delay only
from the moment the other party demands fulfillment of the former’s obligation. Thus, even
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the in reciprocal obligations, if the period for the fulfillment of the obligation is fixed, demand
obligors should not comply with what is incumbent upon him. upon the obligee is still necessary before the obligor can be considered in default and before
a cause of action for rescission will accrue.
The injured party may choose between the fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission, even after he has Evident from the records and even from the allegations in the complaint was the lack of
chosen fulfillment, if the latter should become impossible. demand by petitioner upon respondent to fulfill its obligation to manufacture and deliver the
boxes. The Complaint only alleged that petitioner made a "follow-up" upon respondent,
which, however, would not qualify as a demand for the fulfillment of the obligation.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing
Petitioner’s witness also testified that they made a follow-up of the boxes, but not a demand.
of a period.
Note is taken of the fact that, with respect to their claim for reimbursement, the Complaint
alleged and the witness testified that a demand letter was sent to respondent. Without a
This is understood to be without prejudice to the rights of third persons who have acquired previous demand for the fulfillment of the obligation, petitioner would not have a cause of
the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. action for rescission against respondent as the latter would not yet be considered in breach
of its contractual obligation.
The right to rescind a contract arises once the other party defaults in the performance of his
obligation. In determining when default occurs, Art. 1191 should be taken in conjunction Even assuming that a demand had been previously made before filing the present case,
with Art. 1169 of the same law, which provides: petitioner’s claim for reimbursement would still fail, as the circumstances would show that
respondent was not guilty of breach of contract.
Art. 1169. Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their obligation. The existence of a breach of contract is a factual matter not usually reviewed in a petition for
review under Rule 45.20 The Court, in petitions for review, limits its inquiry only to questions
However, the demand by the creditor shall not be necessary in order that delay may exist: of law. After all, it is not a trier of facts, and findings of fact made by the trial court, especially
when reiterated by the CA, must be given great respect if not considered as final.21 In dealing
(1) When the obligation or the law expressly so declares; or with this petition, we will not veer away from this doctrine and will thus sustain the factual
findings of the CA, which we find to be adequately supported by the evidence on record.

(2) When from the nature and the circumstances of the obligation it appears that
the designation of the time when the thing is to be delivered or the service is to be As correctly observed by the CA, aside from the pictures of the finished boxes and the
rendered was a controlling motive for the establishment of the contract; or production report thereof, there is ample showing that the boxes had already been
manufactured by respondent. There is the testimony of Estanislao who accompanied Que to
the factory, attesting that, during their first visit to the company, they saw the pile of
(3) When demand would be useless, as when the obligor has rendered it beyond petitioner’s boxes and Que took samples thereof. Que, petitioner’s witness, himself
his power to perform. confirmed this incident. He testified that Tan pointed the boxes to him and that he got a
sample and saw that it was blank. Que’s absolute assertion that the boxes were not
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not manufactured is, therefore, implausible and suspicious.
ready to comply in a proper manner with what is incumbent upon him. From the moment
one of the parties fulfills his obligation, delay by the other begins. In fact, we note that respondent’s counsel manifested in court, during trial, that his client
was willing to shoulder expenses for a representative of the court to visit the plant and see
In reciprocal obligations, as in a contract of sale, the general rule is that the fulfillment of the the boxes.22 Had it been true that the boxes were not yet completed, respondent would not
parties’ respective obligations should be simultaneous. Hence, no demand is generally have been so bold as to challenge the court to conduct an ocular inspection of their
necessary because, once a party fulfills his obligation and the other party does not fulfill his, warehouse. Even in its Comment to this petition, respondent prays that petitioner be
the latter automatically incurs in delay. But when different dates for performance of the

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
ordered to remove the boxes from its factory site,23 which could only mean that the boxes Moreover, assuming that respondent was obliged to deliver the boxes, it could not
are, up to the present, still in respondent’s premises. have complied with such obligation. Que, insisting that the boxes had not been
manufactured, admitted that he did not give respondent the authority to deliver
We also believe that the agreement between the parties was for petitioner to pick up the the boxes to TADECO:
boxes from respondent’s warehouse, contrary to petitioner’s allegation. Thus, it was due to
petitioner’s fault that the boxes were not delivered to TADECO. Q. Did you give authority to Mr. Tan to deliver these boxes to TADECO?

Petitioner had the burden to prove that the agreement was, in fact, for respondent to deliver A. No, sir. As I have said, before the delivery, we must have to check the carton, the
the boxes within 30 days from payment, as alleged in the Complaint. Its sole witness, Que, quantity and quality. But I have not seen a single carton.
was not even competent to testify on the terms of the agreement and, therefore, we cannot
give much credence to his testimony. It appeared from the testimony of Que that he did not Q. Are you trying to impress upon the [c]ourt that it is only after the boxes are
personally place the order with Tan, thus: completed, will you give authority to Mr. Tan to deliver the boxes to TADECO[?]

Q. No, my question is, you went to Davao City and placed your order there? A. Sir, because when I checked the plant, I have not seen any carton. I asked Mr.
Tan to rush the carton but not…26
A. I made a phone call.
Q. Did you give any authority for Mr. Tan to deliver these boxes to TADECO?
Q. You made a phone call to Mr. Tan?
A. Because I have not seen any of my carton.
A. The first time, the first call to Mr. Alf[re]d Ong. Alfred Ong has a contact with Mr.
Tan. Q. You don’t have any authority yet given to Mr. Tan?

Q. So, your first statement that you were the one who placed the order is not true? A. None, your Honor.27

A. That’s true. The Solar Harvest made a contact with Mr. Tan and I deposited the Surely, without such authority, TADECO would not have allowed respondent to deposit the
money in the bank. boxes within its premises.

Q. You said a while ago [t]hat you were the one who called Mr. Tan and placed the In sum, the Court finds that petitioner failed to establish a cause of action for rescission, the
order for 36,500 boxes, isn’t it? evidence having shown that respondent did not commit any breach of its contractual
obligation. As previously stated, the subject boxes are still within respondent’s premises. To
A. First time it was Mr. Alfred Ong. put a rest to this dispute, we therefore relieve respondent from the burden of having to keep
the boxes within its premises and, consequently, give it the right to dispose of them, after
Q. It was Mr. Ong who placed the order[,] not you? petitioner is given a period of time within which to remove them from the premises.

A. Yes, sir.24 WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision
dated September 21, 2006 and Resolution dated February 23, 2007 are AFFIRMED. In
addition, petitioner is given a period of 30 days from notice within which to cause the
Q. Is it not a fact that the cartons were ordered through Mr. Bienvenido Estanislao?
removal of the 36,500

A. Yes, sir.25
boxes from respondent’s warehouse. After the lapse of said period and petitioner fails to
effect such removal, respondent shall have the right to dispose of the boxes in any manner it
may deem fit.

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
SO ORDERED. Indemnity Agreements both as President of the Autocorp Group and in his personal capacity.
Petitioners thus agreed to the following provisions:

INDEMNITY: - The undersigned agree at all times to jointly and severally indemnify
Republic of the Philippines the COMPANY and keep it indemnified and hold and save it harmless from and
SUPREME COURT against any and all damages, losses, costs, stamps, taxes, penalties, charges and
Manila expenses of whatsoever kind and nature including counsel or attorney’s fee which
the COMPANY shall or may at any time sustain or incur in consequence of having
become surety upon the bond herein above referred to or any extension, renewal,
THIRD DIVISION
substitution or alteration thereof, made at the instance of the undersigned or any
of them, or any other bond executed on behalf of the undersigned or any of them,
G.R. No. 166662 June 27, 2008 and to pay; reimburse and make good to the COMPANY, its successors and assigns,
alls sums and amounts of money which it or its representatives shall pay or cause
AUTOCORP GROUP and PETER Y. RODRIGUEZ, petitioner, to be paid, or become liable to pay on accounts of the undersigned or any of them,
vs. of whatsoever kind and nature, including 25% of the amount involved in the
INTRA STRATA ASSURANCE CORPORATION and BUREAU OF CUSTOMS, respondents. litigation or other matters growing out of or connected therewith, for and as
attorney’s fees, but in no case less than P300.00 and which shall be payable
DECISION whether or not the case be extrajudicially settled, it being understood that demand
made upon anyone of the undersigned herein is admitted as demand made on all
of the signatories hereof. It is hereby further agreed that in case of any extension
CHICO-NAZARIO, J.: or renewal of the bond, we equally bind ourselves to the COMPANY under the
same terms and conditions as therein provided without the necessity of executing
This is a Petition for Review on Certiorari from the Decision1 of the Court of Appeals dated 30 another indemnity agreement for the purpose and that we may be granted under
June 2004 in CA-G.R. CV No. 62564 which affirmed with modification the Decision2 of the this indemnity agreement.
Regional Trial Court (RTC) of Makati City, Branch 150 in Civil Case No. 95-1584 dated 16
September 1998. MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH AND ACCRUAL OF
ACTION: - Notwithstanding of (sic) the next preceding paragraph where the
The factual and procedural antecedents of this case are as follows: obligation involves a liquidated amount for the payment of which the COMPANY
has become legally liable under the terms of the obligation and its suretyship
On 19 August 1990, petitioner Autocorp Group, represented by its President, petitioner Peter undertaking, or by the demand of the obligee or otherwise and the latter has
Y. Rodriguez, secured an ordinary re-export bond, Instrata Bond No. 5770, from private merely allowed the COMPANY’s aforesaid liability irrespective of whether or not
respondent Intra Strata Assurance Corporation (ISAC) in favor of public respondent Bureau of payment has actually been made by the COMPANY, the COMPANY for the
Customs (BOC), in the amount of P327,040.00, to guarantee the re-export of one unit of protection of its interest may forthwith proceed against the undersigned or either
Hyundai Excel 4-door 1.5 LS and/or to pay the taxes and duties thereon. of them by court action or otherwise to enforce payment, even prior to making
payment to the obligee which may hereafter be done by the COMPANY.
On 21 December 1990, petitioners obtained another ordinary re-export bond, Instrata Bond
No. 7154, from ISAC in favor of the BOC, in the amount of P447,671.00, which was eventually INTEREST IN CASE OF DELAY: - In the event of delay in payment of the said sum or
increased to P707,609.00 per Bond Endorsement No. BE-0912/91 dated 10 January 1991, to sums by the undersigned they will pay interest at the rate of 12% per annum or
guarantee the re-export of one unit of Hyundai Sonata 2.4 GLS and/or to pay the taxes and same, which interest, if not paid, will be liquidated and accumulated to the capital
duties thereon. quarterly, and shall earn the same interest as the capital; all this without prejudice
to the COMPANY’s right to demand judicially or extrajudicially the full payment of
its claims.
Petitioners executed and signed two Indemnity Agreements with identical stipulations in
favor of ISAC, agreeing to act as surety of the subject bonds. Petitioner Rodriguez signed the

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
INCONTESTABILITY OF PAYMENT MADE BY THE COMPANY: - Any payment or of any substitution for said Bond with the same or different, conditions and parties,
disbursement made by the COMPANY on account of the above-mentioned Bond, and the undersigned hereby hold themselves jointly and severally liable to the
its renewals, extensions or substitutions, replacement or novation in the belief COMPANY for the original Bond herein above-mentioned or for any extension,
either that the COMPANY was obligated to make such payment or that said continuation, increase, modification, change, alteration, renewal or substitution
payment was necessary in order to avoid greater losses or obligations for which the thereof without the necessary of any new indemnity agreement being executed
COMPANY might be liable by virtue of the terms of the above-mentioned Bond, its until the full amount including principal, interest, premiums, costs, and other
renewal, extensions or substitutions, shall be final and will not be disputed by the expenses due to the COMPANY thereunder is fully paid up.
undersigned, who bind themselves to jointly and severally indemnify the COMPANY
of any such payments, as stated in the preceding clauses: SEVERABILITY OF PROVISIONS: - It is hereby agreed that should any provision or
provisions of this agreement be declared by competent public authority to be
WAIVER OF VENUE OF ACTION: - We hereby agree that any question which may invalid or otherwise unenforceable, all remaining provisions herein contained shall
arise between the COMPANY and the undersigned by reason of this document and remain in full force and effect.
which has to be submitted for decision to a court of justice shall be brought before
the court of competent jurisdiction in Makati, Rizal, waiving for this purpose any NOTIFICATION: - The undersigned hereby accept due notice of that the COMPANY
other venue. has accepted this guaranty, executed by the undersigned in favor of the
COMPANY.3
WAIVER: - The undersigned hereby waive all the rights[,] privileges and benefits
that they have or may have under Articles 2077, 2078, 2079, 2080 and 2081, of the In sum, ISAC issued the subject bonds to guarantee compliance by petitioners with their
Civil Code of the Philippines. undertaking with the BOC to re-export the imported vehicles within the given period and pay
the taxes and/or duties due thereon. In turn, petitioners agreed, as surety, to indemnify ISAC
The undersigned, by this instrument, grant a special power of attorney in favor of for the liability the latter may incur on the said bonds.
all or any of the other undersigned so that any of the undersigned may represent
all the others in all transactions related to this Bond, its renewals, extensions, or Petitioner Autocorp Group failed to re-export the items guaranteed by the bonds and/or
any other agreements in connection with this Counter-Guaranty, without the liquidate the entries or cancel the bonds, and pay the taxes and duties pertaining to the said
necessity of the knowledge or consent of the others who hereby promise to accept items despite repeated demands made by the BOC, as well as by ISAC. By reason thereof, the
as valid each and every act done or executed by any of the attorney’s-in-fact by BOC considered the two bonds, with a total face value of P1,034,649.00, forfeited.
virtue of the special power of attorney.
Failing to secure from petitioners the payment of the face value of the two bonds, despite
OUR LIABILITY HEREUNDER: - It shall not be necessary for the COMPANY to bring several demands sent to each of them as surety under the Indemnity Agreements, ISAC filed
suit against the principal upon his default or to exhaust the property of the with the RTC on 24 October 1995 an action against petitioners to recover the sum
principal, but the liability hereunder of the undersigned indemnitors shall be jointly of P1,034,649.00, plus 25% thereof or P258,662.25 as attorney’s fees. ISAC impleaded the
and severally, a primary one, the same as that of the principal, and shall be exigible BOC "as a necessary party plaintiff in order that the reward of money or judgment shall be
immediately upon the occurrence of such default. adjudged unto the said necessary plaintiff."4 The case was docketed as Civil Case No. 95-
1584.
CANCELLATION OF BOND BY THE COMPANY: - The COMPANY may at any time
cancel the above-mentioned Bond, its renewals, extensions or substitutions, Petitioners filed a Motion to Dismiss on 11 December 1995 on the grounds that (1) the
subject to any liability which might have accrued prior to the date of cancellation Complaint states no cause of action; and (2) the BOC is an improper party.
refunding the proportionate amount of the premium unearned on the date of
cancellation.
The RTC, in an Order5 dated 27 February 1996, denied petitioners’ Motion to Dismiss.
Petitioners thus filed their Answer to the Complaint, claiming that they sought permission
RENEWALS, ALTERATIONS AND SUBSTITUTIONS: - The undersigned hereby from the BOC for an extension of time to re-export the items covered by the bonds; that the
empower and authorize the COMPANY to grant or consent to the granting of any BOC has yet to issue an assessment for petitioners’ alleged default; and that the claim of ISAC
extension, continuation, increase, modification, change, alteration and/or renewal for payment is premature as the subject bonds are not yet due and demandable.
of the original bond herein referred to, and to execute or consent to the execution
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
During the pre-trial conference, petitioners admitted the genuineness and due execution of III. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT GIVING MERIT TO
Instrata Bonds No. 5770 and No. 7154, but specifically denied those of the corresponding THE ISSUE RAISED BY PETITIONERS THAT THE BUREAU OF CUSTOMS IS
Indemnity Agreements. The parties agreed to limit the issue to "whether or not these bonds IMPROPERLY IMPLEADED BY INTRA STRATA.
are now due and demandable."
IV. THE HONORABLE COURT OF APPEALS GRAVELY ERRED [IN] AFFIRMING THE
On 16 September 1998, the RTC rendered its Decision ordering petitioners to pay ISAC PORTION OF THE DECISION HOLDING PETITIONER PETER Y. RODRIGUEZ AS JOINTLY
and/or the BOC the face value of the subject bonds in the total amount of P1,034,649.00, LIABLE WHEN AMENDMENTS WERE INTRODUCED, WITHOUT HIS CONSENT AND
and to pay ISAC P258,662.25 as attorney’s fees, thus: APPROVAL.9

WHEREFORE, judgment is hereby rendered in favor of the [herein private The present Petition is without merit.
respondent ISAC] and as against the [herein petitioners] who are ordered to pay
the [private respondent] Intra Strata Assurance Corporation and/or the Bureau of Absence of actual forfeiture of the subject bonds
Customs the amount of P1,034,649.00 which is the equivalent amount of the
subject bonds as well as to pay the plaintiff corporation the sum of P258,662.25 as
Petitioners contend that their obligation to ISAC is not yet due and demandable. They cannot
and for attorney’s fees.6
be made liable by ISAC in the absence of an actual forfeiture of the subject bonds by the BOC
and/or an explicit pronouncement by the same bureau that ISAC is already liable on the said
Petitioners’ Motion for Reconsideration was denied by the RTC in a Resolution dated 15 bonds. In this case, there is yet no actual forfeiture of the bonds, but merely a
January 1999.7 recommendation of forfeiture, for no writ of execution has been issued against such
bonds.10Hence, Civil Case No. 95-1584 was prematurely filed by ISAC. Petitioners further
Petitioners appealed to the Court of Appeals. On 30 June 2004, the Court of Appeals argue that:
rendered its Decision affirming the RTC Decision, only modifying the amount of the
attorney’s fees awarded: Secondly, it bears emphasis that as borne by the records, not only is there no writ
of forfeiture against Surety Bond No. 7154, there is likewise no evidence adduced
WHEREFORE, the appealed 16 September 1998 Decision is MODIFIED to reduce the on record to prove that respondent Intra Strata has made legal demand against
award of attorney’s fees to One Hundred Three Thousand Four Hundred Sixty Four Surety Bond No. 5770 neither is there a showing that respondent BOC initiated a
Pesos & Ninety Centavos (P103,464.90). The rest is affirmed in toto. Costs against demand or issued notice for its forfeiture and/or confiscation.11
[herein petitioners].8
The Court of Appeals, in its assailed Decision, already directly addressed petitioners’
In a Resolution dated 5 January 2005, the Court of Appeals refused to reconsider its Decision. arguments by ruling that an actual forfeiture of the subject bonds is not necessary for
petitioners to be liable thereon to ISAC as surety under the Indemnity Agreements.
Petitioners thus filed the instant Petition for Review on Certiorari, assigning the following
errors allegedly committed by the Court of Appeals: According to the relevant provision of the Indemnity Agreements executed between
petitioner and ISAC, which reads:
I. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RENDERING JUDGMENT
AGAINST PETITIONERS BASED ON A PREMATURE ACTION AND/OR RULING IN [W]here the obligation involves a liquidated amount for the payment of which
FAVOR OF RESPONDENTS WHO HAVE NO CAUSE OF ACTION AGAINST [ISAC] has become legally liable under the terms of the obligation and its suretyship
PETITIONERS. undertaking or by the demand of the [BOC] or otherwise and the latter has merely
allowed the [ISAC’s] aforesaid liability, irrespective of whether or not payment has
II. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE actually been made by the [ISAC], the [ISAC] for the protection of its interest may
DECISION OF BRANCH 150, REGIONAL TRIAL COURT OF MAKATI CITY BASED ON forthwith proceed against [petitioners Autocorp Group and Rodriguez] or either of
MISAPPREHENSION OF FACTS, UNSUPPORTED BY EVIDENCE ON RECORD & them by court action or otherwise to enforce payment, even prior to making
CONTRARY TO LAW. payment to the [BOC] which may hereafter be done by [ISAC][,]12

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
petitioners’ obligation to indemnify ISAC became due and demandable the moment the (3) When the debtor has bound himself to relieve him from the guaranty within a
bonds issued by ISAC became answerable for petitioners’ non-compliance with its specified period, and this period has expired;
undertaking with the BOC. Stated differently, petitioners became liable to indemnify ISAC at
the same time the bonds issued by ISAC were placed at the risk of forfeiture by the BOC for (4) When the debt has become demandable, by reason of the expiration of the
non-compliance by petitioners with its undertaking. period for payment;

The subject bonds, Instrata Bonds No. 5770 and No. 7154, became due and demandable (5) After the lapse of ten years, when the principal obligation has no fixed period
upon the failure of petitioner Autocorp Group to comply with a condition set forth in its for its maturity, unless it be of such nature that it cannot be extinguished except
undertaking with the BOC, specifically to re-export the imported vehicles within the period of within a period longer than ten years;
six months from their date of entry. Since it issued the subject bonds, ISAC then also became
liable to the BOC. At this point, the Indemnity Agreements already give ISAC the right to
(6) If there are reasonable grounds to fear that the principal debtor intends to
proceed against petitioners via court action or otherwise.
abscond;

The Indemnity Agreements, therefore, give ISAC the right to recover from petitioners the
(7) If the principal debtor is in imminent danger of becoming insolvent.
face value of the subject bonds plus attorney’s fees at the time ISAC becomes liable on the
said bonds to the BOC, regardless of whether the BOC had actually forfeited the bonds,
demanded payment thereof and/or received such payment. It must be pointed out that the In all these cases, the action of the guarantor is to obtain release from the
Indemnity Agreements explicitly provide that petitioners shall be liable to indemnify ISAC guaranty, or to demand a security that shall protect him from any proceedings by
"whether or not payment has actually been made by the [ISAC]" and ISAC may proceed the creditor and from the danger of insolvency of the debtor. (Emphases ours.)
against petitioners by court action or otherwise "even prior to making payment to the [BOC]
which may hereafter be done by [ISAC]." Petitioners also invoke the alleged lack of demand on the part of ISAC on petitioners as
regards Instrata Bond No. 5770 before it instituted Civil Case No. 95-1584. Even if proven
Even when the BOC already admitted that it not only made a demand upon ISAC for the true, such a fact does not carry much weight considering that demand, whether judicial or
payment of the bond but even filed a complaint against ISAC for such extrajudicial, is not required before an obligation becomes due and demandable. A demand
payment,13 such demand and complaint are not necessary to hold petitioners liable to ISAC is only necessary in order to put an obligor in a due and demandable obligation in
for the amount of such bonds. Petitioners’ attempts to prove that there was no actual delay,14which in turn is for the purpose of making the obligor liable for interests or damages
forfeiture of the subject bonds are completely irrelevant to the case at bar. for the period of delay.15 Thus, unless stipulated otherwise, an extrajudicial demand is not
required before a judicial demand, i.e., filing a civil case for collection, can be resorted to.
It is worthy to note that petitioners did not impugn the validity of the stipulation in the
Indemnity Agreements allowing ISAC to proceed against petitioners the moment the subject Inclusion of the Bureau of Customs as a party to the case
bonds become due and demandable, even prior to actual forfeiture or payment thereof.
Even if they did so, the Court would be constrained to uphold the validity of such a ISAC included the BOC "as a necessary party plaintiff in order that the reward of money or
stipulation for it is but a slightly expanded contractual expression of Article 2071 of the Civil judgment shall be adjudged unto the said necessary plaintiff."16
Code which provides, inter alia, that the guarantor may proceed against the principal debtor
the moment the debt becomes due and demandable. Article 2071 of the Civil Code provides: Petitioners assail this inclusion of the BOC as a party in Civil Case No. 95-1584 on the ground
that it was not properly represented by the Solicitor General. Petitioners also contend that
Art. 2071. The guarantor, even before having paid, may proceed against the the inclusion of the BOC as a party in Civil Case No. 95-1584 "is highly improper and should
principal debtor: not be countenanced as the net result would be tantamount to collusion between Intra
Strata and the Bureau of Customs which would deny and deprive petitioners their personal
(1) When he is sued for the payment; defenses against the BOC."17

(2) In case of insolvency of the principal debtor; In its assailed Decision, the Court of Appeals did not find merit in petitioners’ arguments on
the matter, holding that when the BOC forfeited the subject bonds issued by ISAC,
subrogation took place so that whatever right the BOC had against petitioners were
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
eventually transferred to ISAC. As ISAC merely steps into the shoes of the BOC, whatever proper way to implead the BOC as a necessary party to Civil Case No. 95-1584 should have
defenses petitioners may have against the BOC would still be available against ISAC. been in accordance with Section 10, Rule 3 of the Rules of Court, viz:

The Court likewise cannot sustain petitioners’ position. SEC. 10. Unwilling co-plaintiff.— If the consent of any party who should be joined
as plaintiff can not be obtained, he may be made a defendant and the reason
The misjoinder of parties does not warrant the dismissal of the action. Section 11, Rule 3 of therefor shall be stated in the complaint.
the Rules of Court explicitly states:
Nonetheless, the irregularity in the inclusion of the BOC as a party to Civil Case No. 95-1584
SEC. 11. Misjoinder and non-joinder of parties.—Neither misjoinder nor non- would not in any way affect the disposition thereof. As the Court already found that the BOC
joinder of parties is ground for dismissal of an action. Parties may be dropped or is a necessary party to Civil Case No. 95-1584, it would be a graver injustice to drop it as a
added by order of the court on motion of any party or on its own initiative at any party.
stage of the action and on such terms as are just. Any claim against a misjoined
party may be severed and proceeded with separately. Petitioners’ argument that the inclusion of the BOC as a party to this case would deprive
them of their personal defenses against the BOC is utterly baseless.
Consequently, the purported misjoinder of the BOC as a party cannot result in the dismissal
of Civil Case No. 95-1584. If indeed the BOC was improperly impleaded as a party in Civil Case First, as ruled by the Court of Appeals, petitioners’ defenses against the BOC are completely
No. 95-1584, at most, it may be dropped by order of the court, on motion of any party or on available against ISAC, since the right of the latter to seek indemnity from petitioner depends
its own initiative, at any stage of the action and on such terms as are just. on the right of the BOC to proceed against the bonds.

Should the BOC then be dropped as a party to Civil Case No. 95-1584? The Court, however, deems it essential to qualify that ISAC’s right to seek indemnity from
petitioners does not constitute subrogation under the Civil Code, considering that there has
ISAC alleged in its Complaint18 that the BOC is being joined as a necessary party in Civil Case been no payment yet by ISAC to the BOC. There are indeed cases in the aforementioned
No. 95-1584. Article 2071 of the Civil Code wherein the guarantor or surety, even before having paid, may
proceed against the principal debtor, but in all these cases, Article 2071 of the Civil Code
merely grants the guarantor or surety an action "to obtain release from the guaranty, or to
A necessary party is defined in Section 8, Rule 3 of the Rules of Court as follows:
demand a security that shall protect him from any proceedings by the creditor and from the
danger of insolvency of the debtor." The benefit of subrogation, an extinctive subjective
SEC. 8. Necessary party.—A necessary party is one who is not indispensable but novation by a change of creditor, which "transfers to the person subrogated, the credit and
who ought to be joined as a party if complete relief is to be accorded as to those all the rights thereto appertaining, either against the debtor or against third persons,"19 is
already parties, or for a complete determination or settlement of the claim subject granted by the Article 2067 of the Civil Code only to the "guarantor (or surety) who pays."20
of the action.
ISAC cannot be said to have stepped into the shoes of the BOC, because the BOC still retains
The subject matter of Civil Case No. 95-1584 is the liability of Autocorp Group to the BOC, said rights until it is paid. ISAC’s right to file Civil Case No. 95-1584 is based on the express
which ISAC is also bound to pay as the guarantor who issued the bonds therefor. Clearly, provision of the Indemnity Agreements making petitioners liable to ISAC at the very moment
there would be no complete settlement of the subject matter of the case at bar – the liability ISAC’s bonds become due and demandable for the liability of Autocorp Group to the BOC,
of Autocorp Group to the BOC – should Autocorp Group be merely ordered to pay its without need for actual payment by ISAC to the BOC. But it is still correct to say that all the
obligations with the BOC to ISAC. BOC is, therefore, a necessary party in the case at bar, and defenses available to petitioners against the BOC can likewise be invoked against ISAC
should not be dropped as a party to the present case. because the latter’s contractual right to proceed against petitioners only arises when the
Autocorp Group becomes liable to the BOC for non-compliance with its undertakings. Indeed,
It can only be conceded that there was an irregularity in the manner the BOC was joined as a the arguments and evidence petitioners can present against the BOC to prove that Autocorp
necessary party in Civil Case No. 95-1584. As the BOC, through the Solicitor General, was not Group’s liability to the BOC is not yet due and demandable would also establish that
the one who initiated Civil Case No. 95-1584, and neither was its consent obtained for the petitioners’ liability to ISAC under the Indemnity Agreements has not yet arisen.
filing of the same, it may be considered an unwilling co-plaintiff of ISAC in said action. The

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Second, making the BOC a necessary party to Civil Case No. 95-1584 actually allows OUR LIABILITY HEREUNDER: - It shall not be necessary for the COMPANY [ISAC] to
petitioners to simultaneously invoke its defenses against both the BOC and ISAC. Instead of bring suit against the principal [Autocorp Group] upon his default or to exhaust the
depriving petitioners of their personal defenses against the BOC, Civil Case No. 95-1584 property of the principal [Autocorp Group], but the liability hereunder of the
actually gave them the opportunity to kill two birds with one stone: to disprove its liability to undersigned indemnitors [Rodriguez] shall be jointly and severally, a primary
the BOC and, thus, negate its liability to ISAC. one, the same as that of the principal [Autocorp Group], and shall be exigible
immediately upon the occurrence of such default. (Emphases supplied.)
Liability of petitioner Rodriguez
The Court of Appeals concluded that since petitioner Rodriguez was a surety, Article 2079 of
Petitioner Rodriguez posits that he is merely a guarantor, and that his liability arises only the Civil Code does not apply. The appellate court further noted that both petitioners
when the person with whom he guarantees the credit, Autocorp Group in this case, fails to authorized ISAC to consent to the granting of an extension of the subject bonds.
pay the obligation. Petitioner Rodriguez invokes Article 2079 of the Civil Code on
Extinguishment of Guaranty, which states: The Court of Appeals committed a slight error on this point. The provisions of the Civil Code
on Guarantee, other than the benefit of excussion, are applicable and available to the
Art. 2079. An extension granted to the debtor by the creditor without the consent surety.22 The Court finds no reason why the provisions of Article 2079 would not apply to a
of the guarantor extinguishes the guaranty. The mere failure on the part of the surety.
creditor to demand payment after the debt has become due does not of itself
constitute any extension of time referred to herein. This, however, would not cause a reversal of the Decision of the Court of Appeals. The Court
of Appeals was correct that even granting arguendo that there was a modification as to the
Petitioner Rodriguez argues that there was an amendment as to the effectivity of the bonds, effectivity of the bonds, petitioners would still not be absolved from liability since they had
and this constitutes a modification of the agreement without his consent, thereby authorized ISAC to consent to the granting of any extension, modification, alteration and/or
exonerating him from any liability. renewal of the subject bonds, as expressly set out in the Indemnity Agreements:

We must take note at this point that petitioners have not presented any evidence of this RENEWALS, ALTERATIONS AND SUBSTITUTIONS: - The undersigned [Autocorp
alleged amendment as to the effectivity of the bonds.21 Be that as it may, even if there was Group and Rodriguez] hereby empower and authorize the COMPANY [ISAC] to
indeed such an amendment, such would not cause the exoneration of petitioner Rodriguez grant or consent to the granting of any extension, continuation, increase,
from liability on the bonds. modification, change, alteration and/or renewal of the original bond herein
referred to, and to execute or consent to the execution of any substitution for said
Bond with the same or different, conditions and parties, and the undersigned
The Court of Appeals, in its assailed Decision, held that the use of the term guarantee in a
[Autocorp Group and Rodriguez] hereby hold themselves jointly and severally
contract does not ipso facto mean that the contract is one of guaranty. It thus ruled that both
liable to the COMPANY [ISAC] for the original Bond herein above-mentioned or
petitioners assumed liability as a regular party and obligated themselves as original
for any extension, continuation, increase, modification, change, alteration,
promissors, i.e., sureties, as shown in the following provisions of the Indemnity Agreement:
renewal or substitution thereof without the necessary of any new indemnity
agreement being executed until the full amount including principal, interest,
INDEMNITY: - The undersigned [Autocorp Group and Rodriguez] agree at all times premiums, costs, and other expenses due to the COMPANY [ISAC] thereunder is
to jointly and severally indemnify the COMPANY [ISAC] and keep it indemnified fully paid up.23 (Emphases supplied.)
and hold and save it harmless from and against any and all damages, losses, costs,
stamps, taxes, penalties, charges and expenses of whatsoever kind and nature
The foregoing provision in the Indemnity Agreements clearly authorized ISAC to consent to
including counsel or attorney’s fee which the COMPANY [ISAC] shall or may at any
the granting of any extension, modification, alteration and/or renewal of the subject bonds.
time sustain or incur in consequence of having become surety upon the bond
herein above referred to x x x
There is nothing illegal in such a provision. In Philippine American General Insurance Co., Inc.
v. Mutuc,24 the Court held that an agreement whereby the sureties bound themselves to be
xxxx
liable in case of an extension or renewal of the bond, without the necessity of executing
another indemnity agreement for the purpose and without the necessity of being notified of

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
such extension or renewal, is valid; and that there is nothing in it that militates against the Chamber of Commerce for a total contract price of ID5,416,089/046 (or about
law, good customs, good morals, public order or public policy. US$18,739,668).2

WHEREFORE, the instant Petition for Review on Certiorari is DENIED. The Decision of the On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of
Court of Appeals dated 30 June 2004 in CA-G.R. CV No. 62564 which affirmed with respondent 3-Plex International, Inc. (hereinafter 3-Plex), a local contractor engaged in
modification the Decision of the Regional Trial Court of Makati City, in Civil Case No. 95-1584 construction business, entered into a joint venture agreement with Ajyal wherein the former
dated 16 September 1998 is AFFIRMED in toto. Costs against petitioners. undertook the execution of the entire Project, while the latter would be entitled to a
commission of 4% of the contract price.3 Later, or on 8 April 1981, respondent 3-Plex, not
SO ORDERED. being accredited by or registered with the Philippine Overseas Construction Board (POCB),
assigned and transferred all its rights and interests under the joint venture agreement to
VPECI, a construction and engineering firm duly registered with the POCB.4 However, on 2
May 1981, 3-Plex and VPECI entered into an agreement that the execution of the Project
would be under their joint management.5
FIRST DIVISION
The SOB required the contractors to submit (1) a performance bond of ID271,808/610
G.R. No. 140047 July 13, 2004 representing 5% of the total contract price and (2) an advance payment bond of
ID541,608/901 representing 10% of the advance payment to be released upon signing of the
PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, petitioner, contract.6 To comply with these requirements, respondents 3-Plex and VPECI applied for the
vs. issuance of a guarantee with petitioner Philguarantee, a government financial institution
V.P. EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO; empowered to issue guarantees for qualified Filipino contractors to secure the performance
SOLEDAD C. EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST INTEGRATED of approved service contracts abroad.7
BONDING AND INSURANCE COMPANY, INC., respondents.
Petitioner Philguarantee approved respondents' application. Subsequently, letters of
DECISION guarantee8 were issued by Philguarantee to the Rafidain Bank of Baghdad covering 100% of
the performance and advance payment bonds, but they were not accepted by SOB. What
DAVIDE, JR., C.J.: SOB required was a letter-guarantee from Rafidain Bank, the government bank of Iraq.
Rafidain Bank then issued a performance bond in favor of SOB on the condition that another
This case is an offshoot of a service contract entered into by a Filipino construction firm with foreign bank, not Philguarantee, would issue a counter-guarantee to cover its exposure. Al
the Iraqi Government for the construction of the Institute of Physical Therapy-Medical Ahli Bank of Kuwait was, therefore, engaged to provide a counter-guarantee to Rafidain
Center, Phase II, in Baghdad, Iraq, at a time when the Iran-Iraq war was ongoing. Bank, but it required a similar counter-guarantee in its favor from the petitioner. Thus, three
layers of guarantees had to be arranged.9

In a complaint filed with the Regional Trial Court of Makati City, docketed as Civil Case No.
91-1906 and assigned to Branch 58, petitioner Philippine Export and Foreign Loan Guarantee Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee issued in
Corporation1 (hereinafter Philguarantee) sought reimbursement from the respondents of the favor of Al Ahli Bank of Kuwait Letter of Guarantee No. 81-194-F 10 (Performance Bond
sum of money it paid to Al Ahli Bank of Kuwait pursuant to a guarantee it issued for Guarantee) in the amount of ID271,808/610 and Letter of Guarantee No. 81-195-
respondent V.P. Eusebio Construction, Inc. (VPECI). F11 (Advance Payment Guarantee) in the amount of ID541,608/901, both for a term of
eighteen months from 25 May 1981. These letters of guarantee were secured by (1) a Deed
of Undertaking12executed by respondents VPECI, Spouses Vicente P. Eusebio and Soledad C.
The factual and procedural antecedents in this case are as follows: Eusebio, 3-Plex, and Spouses Eduardo E. Santos and Iluminada Santos; and (2) a surety
bond13 issued by respondent First Integrated Bonding and Insurance Company, Inc. (FIBICI).
On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and The Surety Bond was later amended on 23 June 1981 to increase the amount of coverage
Construction, Baghdad, Iraq, awarded the construction of the Institute of Physical Therapy– from P6.4 million to P6.967 million and to change the bank in whose favor the petitioner's
Medical Rehabilitation Center, Phase II, in Baghdad, Iraq, (hereinafter the Project) to Ajyal guarantee was issued, from Rafidain Bank to Al Ahli Bank of Kuwait.14
Trading and Contracting Company (hereinafter Ajyal), a firm duly licensed with the Kuwait

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service On 14 April 1987, the petitioner received another telex message from Al Ahli Bank stating
contract15 for the construction of the Institute of Physical Therapy – Medical Rehabilitation that it had already paid to Rafidain Bank the sum of US$876,564 under its letter of
Center, Phase II, in Baghdad, Iraq, wherein the joint venture contractor undertook to guarantee, and demanding reimbursement by the petitioner of what it paid to the latter
complete the Project within a period of 547 days or 18 months. Under the Contract, the Joint bank plus interest thereon and related expenses.26
Venture would supply manpower and materials, and SOB would refund to the former 25% of
the project cost in Iraqi Dinar and the 75% in US dollars at the exchange rate of 1 Dinar to Both petitioner Philguarantee and respondent VPECI sought the assistance of some
3.37777 US Dollars.16 government agencies of the Philippines. On 10 August 1987, VPECI requested the Central
Bank to hold in abeyance the payment by the petitioner "to allow the diplomatic machinery
The construction, which was supposed to start on 2 June 1981, commenced only on the last to take its course, for otherwise, the Philippine government , through the Philguarantee and
week of August 1981. Because of this delay and the slow progress of the construction work the Central Bank, would become instruments of the Iraqi Government in consummating a
due to some setbacks and difficulties, the Project was not completed on 15 November 1982 clear act of injustice and inequity committed against a Filipino contractor."27
as scheduled. But in October 1982, upon foreseeing the impossibility of meeting the deadline
and upon the request of Al Ahli Bank, the joint venture contractor worked for the renewal or On 27 August 1987, the Central Bank authorized the remittance for its account of the amount
extension of the Performance Bond and Advance Payment Guarantee. Petitioner's Letters of of US$876,564 (equivalent to ID271, 808/610) to Al Ahli Bank representing full payment of
Guarantee Nos. 81-194-F (Performance Bond) and 81-195-F (Advance Payment Bond) with the performance counter-guarantee for VPECI's project in Iraq. 28
expiry date of 25 November 1982 were then renewed or extended to 9 February 1983 and 9
March 1983, respectively.17 The surety bond was also extended for another period of one
On 6 November 1987, Philguarantee informed VPECI that it would remit US$876,564 to Al
year, from 12 May 1982 to 12 May 1983.18 The Performance Bond was further extended
Ahli Bank, and reiterated the joint and solidary obligation of the respondents to reimburse
twelve times with validity of up to 8 December 1986,19 while the Advance Payment
the petitioner for the advances made on its counter-guarantee.29
Guarantee was extended three times more up to 24 May 1984 when the latter was cancelled
after full refund or reimbursement by the joint venture contractor.20 The surety bond was
likewise extended to 8 May 1987.21 The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21 January
1988.30 Then, on 6 May 1988, the petitioner paid to Al Ahli Bank of Kuwait US$59,129.83
representing interest and penalty charges demanded by the latter bank.31
As of March 1986, the status of the Project was 51% accomplished, meaning the structures
were already finished. The remaining 47% consisted in electro-mechanical works and the 2%,
sanitary works, which both required importation of equipment and materials.22 On 19 June 1991, the petitioner sent to the respondents separate letters demanding full
payment of the amount of P47,872,373.98 plus accruing interest, penalty charges, and 10%
attorney's fees pursuant to their joint and solidary obligations under the deed of undertaking
On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner demanding full
and surety bond.32 When the respondents failed to pay, the petitioner filed on 9 July 1991 a
payment of its performance bond counter-guarantee.
civil case for collection of a sum of money against the respondents before the RTC of Makati
City.
Upon receiving a copy of that telex message on 27 October 1986, respondent VPECI
requested Iraq Trade and Economic Development Minister Mohammad Fadhi Hussein to
After due trial, the trial court ruled against Philguarantee and held that the latter had no valid
recall the telex call on the performance guarantee for being a drastic action in contravention
cause of action against the respondents. It opined that at the time the call was made on the
of its mutual agreement with the latter that (1) the imposition of penalty would be held in
guarantee which was executed for a specific period, the guarantee had already lapsed or
abeyance until the completion of the project; and (2) the time extension would be open,
expired. There was no valid renewal or extension of the guarantee for failure of the
depending on the developments on the negotiations for a foreign loan to finance the
petitioner to secure respondents' express consent thereto. The trial court also found that the
completion of the project.23 It also wrote SOB protesting the call for lack of factual or legal
joint venture contractor incurred no delay in the execution of the Project. Considering the
basis, since the failure to complete the Project was due to (1) the Iraqi government's lack of
Project owner's violations of the contract which rendered impossible the joint venture
foreign exchange with which to pay its (VPECI's) accomplishments and (2) SOB's
contractor's performance of its undertaking, no valid call on the guarantee could be made.
noncompliance for the past several years with the provision in the contract that 75% of the
Furthermore, the trial court held that no valid notice was first made by the Project owner
billings would be paid in US dollars.24 Subsequently, or on 19 November 1986, respondent
SOB to the joint venture contractor before the call on the guarantee. Accordingly, it
VPECI advised the petitioner not to pay yet Al Ahli Bank because efforts were being exerted
dismissed the complaint, as well as the counterclaims and cross-claim, and ordered the
for the amicable settlement of the Project.25
petitioner to pay attorney's fees of P100,000 to respondents VPECI and Eusebio Spouses
and P100,000 to 3-Plex and the Santos Spouses, plus costs. 33
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
In its 14 June 1999 Decision,34 the Court of Appeals affirmed the trial court's decision, COUNTER-GUARANTEE AND THAT PETITIONER CANNOT PASS ON TO
ratiocinating as follows: RESPONDENTS WHAT IT HAD PAID UNDER THE SAID COUNTER-GUARANTEE.

First, appellant cannot deny the fact that it was fully aware of the status of project II
implementation as well as the problems besetting the contractors, between 1982
to 1985, having sent some of its people to Baghdad during that period. The …PETITIONER CANNOT CLAIM SUBROGATION.
successive renewals/extensions of the guarantees in fact, was prompted by delays,
not solely attributable to the contractors, and such extension understandably
III
allowed by the SOB (project owner) which had not anyway complied with its
contractual commitment to tender 75% of payment in US Dollars, and which still
retained overdue amounts collectible by VPECI. …IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS LIABLE
UNDER THEIR DEED OF UNDERTAKING.36
…
The main issue in this case is whether the petitioner is entitled to reimbursement of what it
paid under Letter of Guarantee No. 81-194-F it issued to Al Ahli Bank of Kuwait based on the
Second, appellant was very much aware of the violations committed by the SOB of
deed of undertaking and surety bond from the respondents.
its contractual undertakings with VPECI, principally, the payment of foreign
currency (US$) for 75% of the total contract price, as well as of the complications
and injustice that will result from its payment of the full amount of the The petitioner asserts that since the guarantee it issued was absolute, unconditional, and
performance guarantee, as evident in PHILGUARANTEE's letter dated 13 May 1987 irrevocable the nature and extent of its liability are analogous to those of suretyship. Its
…. liability accrued upon the failure of the respondents to finish the construction of the Institute
of Physical Therapy Buildings in Baghdad.
…
By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so. If a person binds
Third, appellant was fully aware that SOB was in fact still obligated to the Joint
himself solidarily with the principal debtor, the contract is called suretyship. 37
Venture and there was still an amount collectible from and still being retained by
the project owner, which amount can be set-off with the sum covered by the
performance guarantee. Strictly speaking, guaranty and surety are nearly related, and many of the principles are
common to both. In both contracts, there is a promise to answer for the debt or default of
another. However, in this jurisdiction, they may be distinguished thus:
…

1. A surety is usually bound with his principal by the same instrument executed at
Fourth, well-apprised of the above conditions obtaining at the Project site and
the same time and on the same consideration. On the other hand, the contract of
cognizant of the war situation at the time in Iraq, appellant, though earlier has
guaranty is the guarantor's own separate undertaking often supported by a
made representations with the SOB regarding a possible amicable termination of
consideration separate from that supporting the contract of the principal; the
the Project as suggested by VPECI, made a complete turn-around and insisted on
original contract of his principal is not his contract.
acting in favor of the unjustified "call" by the foreign banks.35

2. A surety assumes liability as a regular party to the undertaking; while the liability
The petitioner then came to this Court via Rule 45 of the Rules of Court claiming that the
of a guarantor is conditional depending on the failure of the primary debtor to pay
Court of Appeals erred in affirming the trial court's ruling that
the obligation.

I
3. The obligation of a surety is primary, while that of a guarantor is secondary.

…RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY

EXECUTED IN FAVOR OF PETITIONER IN CONSIDERATION FOR THE ISSUANCE OF ITS
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
4. A surety is an original promissor and debtor from the beginning, while a fact that petitioner's guaranty is unconditional does not make it a surety. Besides, surety is
guarantor is charged on his own undertaking. never presumed. A party should not be considered a surety where the contract itself
stipulates that he is acting only as a guarantor. It is only when the guarantor binds himself
5. A surety is, ordinarily, held to know every default of his principal; whereas a solidarily with the principal debtor that the contract becomes one of suretyship.42
guarantor is not bound to take notice of the non-performance of his principal.
Having determined petitioner's liability as guarantor, the next question we have to grapple
6. Usually, a surety will not be discharged either by the mere indulgence of the with is whether the respondent contractor has defaulted in its obligations that would justify
creditor to the principal or by want of notice of the default of the principal, no resort to the guaranty. This is a mixed question of fact and law that is better addressed by
matter how much he may be injured thereby. A guarantor is often discharged by the lower courts, since this Court is not a trier of facts.
the mere indulgence of the creditor to the principal, and is usually not liable unless
notified of the default of the principal. 38 It is a fundamental and settled rule that the findings of fact of the trial court and the Court of
Appeals are binding or conclusive upon this Court unless they are not supported by the
In determining petitioner's status, it is necessary to read Letter of Guarantee No. 81-194-F, evidence or unless strong and cogent reasons dictate otherwise.43 The factual findings of the
which provides in part as follows: Court of Appeals are normally not reviewable by us under Rule 45 of the Rules of Court
except when they are at variance with those of the trial court. 44 The trial court and the Court
of Appeals were in unison that the respondent contractor cannot be considered to have
In consideration of your issuing the above performance guarantee/counter-
defaulted in its obligations because the cause of the delay was not primarily attributable to
guarantee, we hereby unconditionally and irrevocably guarantee, under our Ref.
it.
No. LG-81-194 F to pay you on your first written or telex demand Iraq Dinars Two
Hundred Seventy One Thousand Eight Hundred Eight and fils six hundred ten
(ID271,808/610) representing 100% of the performance bond required of V.P. A corollary issue is what law should be applied in determining whether the respondent
EUSEBIO for the construction of the Physical Therapy Institute, Phase II, Baghdad, contractor has defaulted in the performance of its obligations under the service contract.
Iraq, plus interest and other incidental expenses related thereto. The question of whether there is a breach of an agreement, which
includes default or mora,45 pertains to the essential or intrinsic validity of a contract. 46
In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation
unpaid but in no case shall such amount exceed Iraq Dinars (ID) 271,808/610 plus No conflicts rule on essential validity of contracts is expressly provided for in our laws. The
interest and other incidental expenses…. (Emphasis supplied)39 rule followed by most legal systems, however, is that the intrinsic validity of a contract must
be governed by the lex contractus or "proper law of the contract." This is the law voluntarily
agreed upon by the parties (the lex loci voluntatis) or the law intended by them either
Guided by the abovementioned distinctions between a surety and a guaranty, as well as the
expressly or implicitly (the lex loci intentionis). The law selected may be implied from such
factual milieu of this case, we find that the Court of Appeals and the trial court were correct
factors as substantial connection with the transaction, or the nationality or domicile of the
in ruling that the petitioner is a guarantor and not a surety. That the guarantee issued by the
parties.47 Philippine courts would do well to adopt the first and most basic rule in most legal
petitioner is unconditional and irrevocable does not make the petitioner a surety. As a
systems, namely, to allow the parties to select the law applicable to their contract, subject to
guaranty, it is still characterized by its subsidiary and conditional quality because it does not
the limitation that it is not against the law, morals, or public policy of the forum and that the
take effect until the fulfillment of the condition, namely, that the principal obligor should fail
chosen law must bear a substantive relationship to the transaction. 48
in his obligation at the time and in the form he bound himself.40 In other words, an
unconditional guarantee is still subject to the condition that the principal debtor should
default in his obligation first before resort to the guarantor could be had. A conditional It must be noted that the service contract between SOB and VPECI contains no express
guaranty, as opposed to an unconditional guaranty, is one which depends upon some choice of the law that would govern it. In the United States and Europe, the two rules that
extraneous event, beyond the mere default of the principal, and generally upon notice of the now seem to have emerged as "kings of the hill" are (1) the parties may choose the
principal's default and reasonable diligence in exhausting proper remedies against the governing law; and (2) in the absence of such a choice, the applicable law is that of the State
principal.41 that "has the most significant relationship to the transaction and the parties."49 Another
authority proposed that all matters relating to the time, place, and manner of performance
and valid excuses for non-performance are determined by the law of the place of
It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of default
performance or lex loci solutionis, which is useful because it is undoubtedly always connected
by respondent VPECI the petitioner shall pay, the obligation assumed by the petitioner was
to the contract in a significant way.50
simply that of an unconditional guaranty, not conditional guaranty. But as earlier ruled the
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
In this case, the laws of Iraq bear substantial connection to the transaction, since one of the 5.3 That the Ministry of Labor and Employment of the Philippines requires the
parties is the Iraqi Government and the place of performance is in Iraq. Hence, the issue of remittance into the Philippines of 70% of the salaries of Filipino workers working
whether respondent VPECI defaulted in its obligations may be determined by the laws of abroad in US Dollars;
Iraq. However, since that foreign law was not properly pleaded or proved, the presumption
of identity or similarity, otherwise known as the processual presumption, comes into play. …
Where foreign law is not pleaded or, even if pleaded, is not proved, the presumption is that
foreign law is the same as ours.51
5.5 That the Iraqi Dinar is not a freely convertible currency such that the same
cannot be used to purchase equipment, materials, supplies, etc. outside of Iraq;
Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: "In reciprocal
obligations, neither party incurs in delay if the other party does not comply or is not ready to
5.6 That most of the materials specified by SOB in the CONTRACT are not available
comply in a proper manner with what is incumbent upon him."
in Iraq and therefore have to be imported;

Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by
5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui
reason of a cause imputable to the former. 52 It is the non-fulfillment of an obligation with
Dinars) out of Iraq and hence, imported materials, equipment, etc., cannot be
respect to time.53
purchased or obtained using Iraqui Dinars as medium of acquisition.

It is undisputed that only 51.7% of the total work had been accomplished. The 48.3%
…
unfinished portion consisted in the purchase and installation of electro-mechanical
equipment and materials, which were available from foreign suppliers, thus requiring US
Dollars for their importation. The monthly billings and payments made by SOB54 reveal that 8. Following the approved construction program of the CONTRACT, upon
the agreement between the parties was a periodic payment by the Project owner to the completion of the civil works portion of the installation of equipment for the
contractor depending on the percentage of accomplishment within the period. 55 The building, should immediately follow, however, the CONTRACT specified that these
payments were, in turn, to be used by the contractor to finance the subsequent phase of the equipment which are to be installed and to form part of the PROJECT have to be
work. 56 However, as explained by VPECI in its letter to the Department of Foreign Affairs procured outside Iraq since these are not being locally manufactured. Copy f the
(DFA), the payment by SOB purely in Dinars adversely affected the completion of the project; relevant portion of the Technical Specification is hereto attached as Annex "C" and
thus: made an integral part hereof;

4. Despite protests from the plaintiff, SOB continued paying the accomplishment …
billings of the Contractor purely in Iraqi Dinars and which payment came only after
some delays. 10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist
the Iraqi government in completing the PROJECT, the Contractor without any
5. SOB is fully aware of the following: obligation on its part to do so but with the knowledge and consent of SOB and the
Ministry of Housing & Construction of Iraq, offered to arrange on behalf of SOB, a
foreign currency loan, through the facilities of Circle International S.A., the
…
Contractor's Sub-contractor and SACE MEDIO CREDITO which will act as the
guarantor for this foreign currency loan.
5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need foreign
currency (US$), to finance the purchase of various equipment, materials, supplies,
Arrangements were first made with Banco di Roma. Negotiation started in June
tools and to pay for the cost of project management, supervision and skilled labor
1985. SOB is informed of the developments of this negotiation, attached is a copy
not available in Iraq and therefore have to be imported and or obtained from the
of the draft of the loan Agreement between SOB as the Borrower and Agent. The
Philippines and other sources outside Iraq.
Several Banks, as Lender, and counter-guaranteed by Istituto Centrale Per II Credito
A Medio Termine (Mediocredito) Sezione Speciale Per L'Assicurazione Del Credito
All'Exportazione (Sace). Negotiations went on and continued until it suddenly
collapsed due to the reported default by Iraq in the payment of its obligations with
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Italian government, copy of the news clipping dated June 18, 1986 is hereto delay. Even assuming that there was delay and that the delay was attributable to VPECI, still
attached as Annex "D" to form an integral part hereof; the effects of that delay ceased upon the renunciation by the creditor, SOB, which could be
implied when the latter granted several extensions of time to the former. 60 Besides, no
15. On September 15, 1986, Contractor received information from Circle demand has yet been made by SOB against the respondent contractor. Demand is generally
International S.A. that because of the news report that Iraq defaulted in its necessary even if a period has been fixed in the obligation. And default generally begins from
obligations with European banks, the approval by Banco di Roma of the loan to SOB the moment the creditor demands judicially or extra-judicially the performance of the
shall be deferred indefinitely, a copy of the letter of Circle International together obligation. Without such demand, the effects of default will not arise.61
with the news clippings are hereto attached as Annexes "F" and "F-1",
respectively.57 Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it
cannot be compelled to pay the creditor SOB unless the property of the debtor VPECI has
As found by both the Court of Appeals and the trial court, the delay or the non-completion of been exhausted and all legal remedies against the said debtor have been resorted to by the
the Project was caused by factors not imputable to the respondent contractor. It was rather creditor.62 It could also set up compensation as regards what the creditor SOB may owe the
due mainly to the persistent violations by SOB of the terms and conditions of the contract, principal debtor VPECI.63 In this case, however, the petitioner has clearly waived these rights
particularly its failure to pay 75% of the accomplished work in US Dollars. Indeed, where one and remedies by making the payment of an obligation that was yet to be shown to be
of the parties to a contract does not perform in a proper manner the prestation which he is rightfully due the creditor and demandable of the principal debtor.
bound to perform under the contract, he is not entitled to demand the performance of the
other party. A party does not incur in delay if the other party fails to perform the obligation As found by the Court of Appeals, the petitioner fully knew that the joint venture contractor
incumbent upon him. had collectibles from SOB which could be set off with the amount covered by the
performance guarantee. In February 1987, the OMEAA transmitted to the petitioner a copy
The petitioner, however, maintains that the payments by SOB of the monthly billings in of a telex dated 10 February 1987 of the Philippine Ambassador in Baghdad, Iraq, informing it
purely Iraqi Dinars did not render impossible the performance of the Project by VPECI. Such of the note verbale sent by the Iraqi Ministry of Foreign Affairs stating that the past due
posture is quite contrary to its previous representations. In his 26 March 1987 letter to the obligations of the joint venture contractor from the petitioner would "be deducted from the
Office of the Middle Eastern and African Affairs (OMEAA), DFA, Manila, petitioner's Executive dues of the two contractors."64
Vice-President Jesus M. Tañedo stated that while VPECI had taken every possible measure to
complete the Project, the war situation in Iraq, particularly the lack of foreign exchange, was Also, in the project situationer attached to the letter to the OMEAA dated 26 March 1987,
proving to be a great obstacle; thus: the petitioner raised as among the arguments to be presented in support of the cancellation
of the counter-guarantee the fact that the amount of ID281,414/066 retained by SOB from
VPECI has taken every possible measure for the completion of the project but the the Project was more than enough to cover the counter-guarantee of ID271,808/610; thus:
war situation in Iraq particularly the lack of foreign exchange is proving to be a
great obstacle. Our performance counterguarantee was called last 26 October 1986 6.1 Present the following arguments in cancelling the counterguarantee:
when the negotiations for a foreign currency loan with the Italian government
through Banco de Roma bogged down following news report that Iraq has · The Iraqi Government does not have the foreign exchange to fulfill its
defaulted in its obligation with major European banks. Unless the situation in Iraq is contractual obligations of paying 75% of progress billings in US dollars.
improved as to allay the bank's apprehension, there is no assurance that the
project will ever be completed. 58
…

In order that the debtor may be in default it is necessary that the following requisites be
· It could also be argued that the amount of ID281,414/066 retained by
present: (1) that the obligation be demandable and already liquidated; (2) that the debtor
SOB from the proposed project is more than the amount of the
delays performance; and (3) that the creditor requires the performance because it must
outstanding counterguarantee.65
appear that the tolerance or benevolence of the creditor must have ended. 59

In a nutshell, since the petitioner was aware of the contractor's outstanding receivables from
As stated earlier, SOB cannot yet demand complete performance from VPECI because it has
SOB, it should have set up compensation as was proposed in its project situationer.
not yet itself performed its obligation in a proper manner, particularly the payment of the
75% of the cost of the Project in US Dollars. The VPECI cannot yet be said to have incurred in
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Moreover, the petitioner was very much aware of the predicament of the respondents. In The petitioner guarantor should have waited for the natural course of guaranty: the debtor
fact, in its 13 May 1987 letter to the OMEAA, DFA, Manila, it stated: VPECI should have, in the first place, defaulted in its obligation and that the creditor SOB
should have first made a demand from the principal debtor. It is only when the debtor does
VPECI also maintains that the delay in the completion of the project was mainly not or cannot pay, in whole or in part, that the guarantor should pay.71 When the petitioner
due to SOB's violation of contract terms and as such, call on the guarantee has no guarantor in this case paid against the will of the debtor VPECI, the debtor VPECI may set up
basis. against it defenses available against the creditor SOB at the time of payment. This is the hard
lesson that the petitioner must learn.
While PHILGUARANTEE is prepared to honor its commitment under the guarantee,
PHILGUARANTEE does not want to be an instrument in any case of inequity As the government arm in pursuing its objective of providing "the necessary support and
committed against a Filipino contractor. It is for this reason that we are constrained assistance in order to enable … [Filipino exporters and contractors to operate viably under
to seek your assistance not only in ascertaining the veracity of Al Ahli Bank's claim the prevailing economic and business conditions,"72 the petitioner should have exercised
that it has paid Rafidain Bank but possibly averting such an event. As any payment prudence and caution under the circumstances. As aptly put by the Court of Appeals, it
effected by the banks will complicate matters, we cannot help underscore the would be the height of inequity to allow the petitioner to pass on its losses to the Filipino
urgency of VPECI's bid for government intervention for the amicable termination of contractor VPECI which had sternly warned against paying the Al Ahli Bank and constantly
the contract and release of the performance guarantee. 66 apprised it of the developments in the Project implementation.

But surprisingly, though fully cognizant of SOB's violations of the service contract and VPECI's WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit, and the
outstanding receivables from SOB, as well as the situation obtaining in the Project site decision of the Court of appeals in CA-G.R. CV No. 39302 is AFFIRMED.
compounded by the Iran-Iraq war, the petitioner opted to pay the second layer guarantor
not only the full amount of the performance bond counter-guarantee but also interests and No pronouncement as to costs.
penalty charges.
SO ORDERED.
This brings us to the next question: May the petitioner as a guarantor secure reimbursement
from the respondents for what it has paid under Letter of Guarantee No. 81-194-F? Republic of the Philippines
SUPREME COURT
As a rule, a guarantor who pays for a debtor should be indemnified by the latter67 and would Manila
be legally subrogated to the rights which the creditor has against the debtor.68 However, a
person who makes payment without the knowledge or against the will of the debtor has the THIRD DIVISION
right to recover only insofar as the payment has been beneficial to the debtor.69 If the
obligation was subject to defenses on the part of the debtor, the same defenses which could
G.R. No. 171428 November 11, 2013
have been set up against the creditor can be set up against the paying guarantor.70

ALEJANDRO V. TANKEH, Petitioner,

From the findings of the Court of Appeals and the trial court, it is clear that the payment
vs.
made by the petitioner guarantor did not in any way benefit the principal debtor, given the
DEVELOPMENT BANK OF THE PHILIPPINES, STERLING SHIPPING LINES, INC., RUPERTO V.
project status and the conditions obtaining at the Project site at that time. Moreover, the
TANKEH, VICENTE ARENAS, and ASSET PRIVATIZATION TRUST, Respondents.
respondent contractor was found to have valid defenses against SOB, which are fully
supported by evidence and which have been meritoriously set up against the paying
guarantor, the petitioner in this case. And even if the deed of undertaking and the surety DECISION
bond secured petitioner's guaranty, the petitioner is precluded from enforcing the same by
reason of the petitioner's undue payment on the guaranty. Rights under the deed of LEONEN, J.:
undertaking and the surety bond do not arise because these contracts depend on the validity
of the enforcement of the guaranty. This is a Petition for Review on Certiorari praying that the assailed October 25, 2005 Decision
and the February 9, 2006 Resolution of the Court of Appeals1 be reversed, and that the

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
January 4, 1996 Decision of the Regional Trial Court of Manila Branch 32 be affirmed. and shipping contracts, it being understood that this assignment shall continue to subsist for
Petitioner prays that this Court grant his claims for moral damages and attorney’s fees, as as long as the ASSIGNOR’S obligation with the herein ASSIGNEE remains unpaid.9
proven by the evidence.
On June 16, 1983, petitioner wrote a letter to respondent Ruperto V. Tankeh saying that he
Respondent Ruperto V. Tankeh is the president of Sterling Shipping Lines, Inc. It was was severing all ties and terminating his involvement with Sterling Shipping Lines, Inc.10 He
incorporated on April 23, 1979 to operate ocean-going vessels engaged primarily in foreign required that its board of directors pass a resolution releasing him from all liabilities,
trade.2 Ruperto V. Tankeh applied for a $3.5 million loan from public respondent particularly the loan contract with Development Bank of the Philippines. In addition,
Development Bank of the Philippines for the partial financing of an ocean-going vessel petitioner asked that the private respondents notify Development Bank of the Philippines
named the M/V Golden Lilac. To authorize the loan, Development Bank of the Philippines that he had severed his ties with Sterling Shipping Lines, Inc.11
required that the following conditions be met:
The accounts of respondent Sterling Shipping Lines, Inc. in the Development Bank of the
1) A first mortgage must be obtained over the vessel, which by then had been renamed the Philippines were transferred to public respondent Asset Privatization Trust on June 30,
M/V Sterling Ace; 1986.12

2) Ruperto V. Tankeh, petitioner Dr. Alejandro V. Tankeh, Jose Marie Vargas, as well as Presently, respondent Asset Privatization Trust is known as the Privatization and
respondents Sterling Shipping Lines, Inc. and Vicente Arenas should become liable jointly and Management Office. Asset Privatization Trust was a government agency created through
severally for the amount of the loan; Presidential Proclamation No. 50, issued in 1986. Through Administrative Order No. 14,
issued by former President Corazon Aquino dated February 3, 1987, assets including loans in
3) The future earnings of the mortgaged vessel, including proceeds of Charter and Shipping favor of Development Bank of the Philippines were ordered to be transferred to the national
Contracts, should be assigned to Development Bank of the Philippines; and government. In turn, the management and facilitation of these assets were delegated to
Asset Privatization Trust, pursuant to Presidential Proclamation No. 50. In 1999, Republic Act
No. 8758 was signed into law, and it provided that the corporate term of Asset Privatization
4) Development Bank of the Philippines should be assigned no less than 67% of the total
Trust would end on December 31, 2000. The same law empowered the President of the
subscribed and outstanding voting shares of the company. The percentage of shares assigned
Philippines to determine which office would facilitate the management of assets held by
should be maintained at all times, and the assignment was to subsist as long as the assignee,
Asset Privatization Trust. Thus, on December 6, 2000, former President Joseph E. Estrada
Development Bank of the Philippines, deemed it necessary during the existence of the loan.3
signed Executive Order No. 323, creating the Privatization Management Office. Its present
function is to identify disposable assets, monitor the progress of privatization activities, and
According to petitioner Dr. Alejandro V. Tankeh, Ruperto V. Tankeh approached him approve the sale or divestment of assets with respect to price and buyer.13
sometime in 1980.4 Ruperto informed petitioner that he was operating a new shipping line
business. Petitioner claimed that respondent, who is also petitioner’s younger brother, had
On January 29, 1987, the M/V Sterling Ace was sold in Singapore for $350,000.00 by
told him that petitioner would be given one thousand (1,000) shares to be a director of the
Development Bank of the Philippines’ legal counsel Atty. Prospero N. Nograles. When
business. The shares were worth ₱1,000,000.00.5
petitioner came to know of the sale, he wrote respondent Development Bank of the
Philippines to express that the final price was inadequate, and therefore, the transaction was
On May 12, 1981, petitioner signed the Assignment of Shares of Stock with Voting irregular. At this time, petitioner was still bound as a debtor because of the promissory note
Rights.6 Petitioner then signed the May 12, 1981 promissory note in December 1981. He was dated May 12, 1981, which petitioner signed in December of 1981. The promissory note
the last to sign this note as far as the other signatories were concerned.7 The loan was subsisted despite Sterling Shipping Lines, Inc.’s assignment of all future earnings of the
approved by respondent Development Bank of the Philippines on March 18, 1981. The vessel mortgaged M/V Sterling Ace to Development Bank of the Philippines. The loan also
was acquired on September 29, 1981 for $5.3 million.8 On December 3, 1981, respondent continued to bind petitioner despite Sterling Shipping Lines, Inc.’s cash equity contribution of
corporation Sterling Shipping Lines, Inc. through respondent Ruperto V. Tankeh executed a ₱13,663,200.00 which was used to cover part of the acquisition cost of the vessel, pre-
Deed of Assignment in favor of Development Bank of the Philippines. The deed stated that operating expenses, and initial working capital.14
the assignor, Sterling Shipping Lines, Inc.:
Petitioner filed several Complaints15 against respondents, praying that the promissory note
x x x does hereby transfer and assign in favor of the ASSIGNEE (DBP), its successors and be declared null and void and that he be absolved from any liability from the mortgage of the
assigns, future earnings of the mortgaged M/V "Sterling Ace," including proceeds of charter vessel and the note in question.
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
In the Complaints, petitioner alleged that respondent Ruperto V. Tankeh, together with In their Answers28 to the Complaints, respondents raised the following defenses against
Vicente L. Arenas, Jr. and Jose Maria Vargas, had exercised deceit and fraud in causing petitioner: Respondent Development Bank of the Philippines categorically denied receiving
petitioner to bind himself jointly and severally to pay respondent Development Bank of the any amount from Sterling Shipping Lines, Inc.’s future earnings and from the proceeds of the
Philippines the amount of the mortgage loan.16 Although he had been made a stockholder shipping contracts. It maintained that equity contributions could not be deducted from the
and director of the respondent corporation Sterling Shipping Lines, Inc., petitioner alleged outstanding loan obligation that stood at ₱245.86 million as of December 31, 1986.
that he had never invested any amount in the corporation and that he had never been an Development Bank of the Philippines also maintained that it is immaterial to the case
actual member of the board of directors.17 He alleged that all the money he had supposedly whether the petitioner is a "real stockholder" or merely a "pseudo-stockholder" of the
invested was provided by respondent Ruperto V. Tankeh.18 He claimed that he only attended corporation.29 By affixing his signature to the loan agreement, he was liable for the
one meeting of the board. In that meeting, he was introduced to two directors representing obligation. According to Development Bank of the Philippines, he was in pari delicto and
Development Bank of the Philippines, namely, Mr. Jesus Macalinag and Mr. Gil Corpus. Other could not be discharged from his obligation. Furthermore, petitioner had no cause of action
than that, he had never been notified of another meeting of the board of directors. against Development Bank of the Philippines since this was a case between family members,
and earnest efforts toward compromise should have been complied with in accordance with
Petitioner further claimed that he had been excluded deliberately from participating in the Article 222 of the Civil Code of the Philippines.30
affairs of the corporation and had never been compensated by Sterling Shipping Lines, Inc. as
a director and stockholder.19 According to petitioner, when Sterling Shipping Lines, Inc. was Respondent Ruperto V. Tankeh stated that petitioner had voluntarily signed the promissory
organized, respondent Ruperto V. Tankeh had promised him that he would become part of note in favor of Development Bank of the Philippines and with full knowledge of the
the administration staff and oversee company operations. Respondent Ruperto V. Tankeh consequences. Respondent Tankeh also alleged that he did not employ any fraud or deceit to
had also promised petitioner that the latter’s son would be given a position in the secure petitioner’s involvement in the company, and petitioner had been fully aware of
company.20 However, after being designated as vice president, petitioner had not been made company operations. Also, all that petitioner had to do to avoid liability had been to sell his
an officer and had been alienated from taking part in the respondent corporation.21 shareholdings in the company.31

Petitioner also alleged that respondent Development Bank of the Philippines had been Respondent Asset Privatization Trust raised that petitioner had no cause of action against
inexcusably negligent in the performance of its duties.22 He alleged that Development Bank them since Asset Privatization Trust had been mandated under Proclamation No. 50 to take
of the Philippines must have been fully aware of Sterling Shipping Lines, Inc.’s financial title to and provisionally manage and dispose the assets identified for privatization or
situation. Petitioner claimed that Sterling Shipping Lines, Inc. was controlled by the deposition within the shortest possible period. Development Bank of the Philippines had
Development Bank of the Philippines because 67% of voting shares had been assigned to the transferred and conveyed all its rights, titles, and interests in favor of the national
latter.23Furthermore, the mortgage contracts had mandated that Sterling Shipping Lines, Inc. government in accordance with Administrative Order No. 14. In line with that, Asset
"shall furnish the DBP with copies of the minutes of each meeting of the Board of Directors Privatization Trust was constituted as trustee of the assets transferred to the national
within one week after the meeting. Sterling Shipping Lines Inc. shall likewise furnish DBP its government to effect privatization of these assets, including respondent Sterling Shipping
annual audited financial statements and other information or data that may be needed by Lines, Inc.32 Respondent Asset Privatization Trust also filed a compulsory counterclaim
DBP as its accommodations [sic] with DBP are outstanding."24 Petitioner further alleged that against petitioner and its co-respondents Sterling Shipping Lines, Inc., Ruperto V. Tankeh, and
the Development Bank of the Philippines had allowed "highly questionable acts"25 to take Vicente L. Arenas, Jr. for the amount of ₱264,386,713.84.
place, including the gross undervaluing of the M/V Sterling Aces.26 Petitioner alleged that one
day after Development Bank of the Philippines’ Atty. Nograles sold the vessel, the ship was Respondent Arenas did not file an Answer to any of the Complaints of petitioner but filed a
re-sold by its buyer for double the amount that the ship had been bought.27 Motion to Dismiss that the Regional Trial Court denied. Respondent Asset Privatization Trust
filed a Cross Claim against Arenas. In his Answer33 to Asset Privatization Trust’s Cross Claim,
As for respondent Vicente L. Arenas, Jr., petitioner alleged that since Arenas had been the Arenas claimed that he had been released from any further obligation to Development Bank
treasurer of Sterling Shipping Lines, Inc. and later on had served as its vice president, he was of the Philippines and its successor Asset Privatization Trust because an extension had been
also responsible for the financial situation of Sterling Shipping Lines, Inc. granted by the Development Bank of the Philippines to the debtors of Sterling Shipping Lines,
Inc. and/or Ruperto V. Tankeh, which had been secured without Arenas’ consent.
Lastly, in the Amended Complaint dated April 16, 1991, petitioner impleaded respondent
Asset Privatization Trust for being the agent and assignee of the M/V Sterling Ace. The trial proceeded with the petitioner serving as a sole witness for his case. In a January 4,
1996 Decision,34 the Regional Trial Court ruled:

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Here, we find – Note contract terms. He did not ratify, by concurring acts, express or tacit, after the
reasons had surfaced entitling him to render the contract voidable, defendants’
1. Plaintiff being promised by his younger brother, Ruperto V. Tankeh, 1,000 shares acts in implementing or not the conditions of the mortgage, the promissory note,
with par value of ₱1 Million with all the perks and privileges of being stockholder the deed of assignment, the lack of audit and accounting, and the negotiated sale
and director of SSLI, a new international shipping line; of MV Sterling Ace. He did not ratify defendants [sic] defective acts (Art. 1396, New
Civil Code (NCC).
2. That plaintiff will be part of the administration and operation of the business, so
with his son who is with the law firm Romulo Ozaeta Law Offices; The foregoing and the following essays, supported by evidence, the fraud committed by
plaintiff’s brother before the several documents were signed (SEC documents, Promissory
Note, Mortgage (MC) Contract, assignment (DA)), namely:
3. But this was merely the come-on or appetizer for the Real McCoy or the
primordial end of congregating the incorporators proposed - - that he sign the
promissory note (Exhibit "C"), the mortgage contract (Exhibit "A"), and deed of 1. Ruperto V. Tankeh approaches his brother Alejandro to tell the latter of his new
assignment so SSLI could get the US $3.5 M loan from DBP to partially finance the shipping business. The project was good business proposal [sic].
importation of vessel M.V. "Golden Lilac" renamed M.V. "Sterling ACE";
2. Ruperto tells Alejandro he’s giving him shares worth ₱1 Million and he’s going to
4. True it is, plaintiff was made a stockholder and director and Vice-President in be a Director.
1979 but he was never notified of any meeting of the Board except only once, and
only to be introduced to the two (2) directors representing no less than 67% of the 3. He tells his brother that he will be part of the company’s Administration and
total subscribed and outstanding voting shares of the company. Thereafter, he was Operations and his eldest son will be in it, too.
excluded from any board meeting, shorn of his powers and duties as director or
Vice-President, and was altogether deliberately demeaned as an outsider. 4. Ruperto tells his brother they need a ship, they need to buy one for the business,
and they therefore need a loan, and they could secure a loan from DBP with the
5. What kind of a company is SSLI who treated one of their incorporators, one of vessel brought to have a first mortgage with DBP but anyway the other two
their Directors and their paper Vice-President in 1979 by preventing him access to directors and comptroller will be from DBP with a 67% SSLI shares voting rights.
corporate books, to corporate earnings, or losses, and to any compensation or
remuneration whatsoever? Whose President and Treasurer did not submit the Without these insidious, devastating and alluring words, without the machinations used by
required SEC yearly report? Who did not remit to DBP the proceeds on charter defendant Ruperto V. Tankeh upon the doctor, without the inducement and promise of
mortgage contracts on M/V Sterling Ace? ownership of shares and the exercise of administrative and operating functions, and the
partial financing by one of the best financial institutions, the DBP, plaintiff would not have
6. The M/V Sterling Ace was already in the Davao Port when it was then diverted to agreed to join his brother; and the safeguarding of the Bank’s interest by its nominated two
Singapore to be disposed on negotiated sale, and not by public bidding contrary to (2) directors in the Board added to his agreeing to the new shipping business. His consent
COA Circular No. 86-264 and without COA’s approval. Sterling Ace was seaworthy was vitiated by the fraud before the several contracts were consummated.
but was sold as scrap in Singapore. No foreclosure with public bidding was made in
contravention of the Promissory Note to recover any deficiency should DBP seeks This alone convenes [sic] this Court to annul the Promissory Note as it relates to plaintiff
[sic] to recover it on the outstanding mortgage loan. Moreover the sale was done himself.
after the account and asset (nay, now only a liability) were transferred to APT. No
approval of SSLI Board of Directors to the negotiated sale was given.
Plaintiff also pleads annulment on ground of equity. Article 19, NCC, provides him the way as
it requires every person, in the exercise of his rights and performance of his duties, to act
7. Plaintiff’s letter to his brother President, Ruperto V. Tankeh, dated June 15, 1983 with justice, give everyone his due, and observe honesty and good faith (Velayo vs. Shell Co.
(Exhibit "D") his letter thru his lawyer to DBP (Exhibit "J") and another letter to it of the Phils., G.R. L-7817, October 31, 1956). Not to release him from the clutch of the
(Exhibit "K") show no estoppel on his part as he consistently and continuously Promissory Note when he was never made a part of the operation of the SSLI, when he was
assailed the several injurious acts of defendants while assailing the Promissory not notified of the Board Meetings, when the corporation nary remitted earnings of M/V
Note itself x x x (Citations omitted) applying the maxim: Rencintiatio non Sterling Ace from charter or shipping contracts to DBP, when the SSLI did not comply with
praesumitur. By this Dr. Tankeh never waived the right to question the Promissory
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
the deed of assignment and mortgage contract, and when the vessel was sold in Singapore Respondents Ruperto V. Tankeh, Asset Privatization Trust, and Arenas immediately filed their
(he, learning of the sale only from the newspapers) in contravention of the Promissory Note, respective Notices of Appeal with the Regional Trial Court. The petitioner filed a Motion for
and which he questioned, will be an injustice, inequitable, and even iniquitous to plaintiff. Reconsideration with regard to the denial of his prayer for damages. After this Motion had
SSLI and the private defendants did not observe honesty and good faith to one of their been denied, he then filed his own Notice of Appeal.
incorporators and directors. As to DBP, the Court cannot put demerits on what plaintiff’s
memorandum has pointed out: In a Decision37 promulgated on October 25, 2005, the Third Division of the Court of Appeals
reversed the trial court’s findings. The Court of Appeals held that petitioner had no cause of
While defendant DBP did not exercise the caution and prudence in the discharge of their action against public respondent Asset Privatization Trust. This was based on the Court of
functions to protect its interest as expected of them and worst, allowed the perpetuation of Appeals’ assessment of the case records and its findings that Asset Privatization Trust did not
the illegal acts committed in contrast to the virtues they publicly profess, namely: "palabra commit any act violative of the right of petitioner or constituting a breach of Asset
de honor, delicadeza, katapatan, kaayusan, pagkamasinop at kagalingan" Where is the vision Privatization Trust’s obligations to petitioner. The Court of Appeals found that petitioner’s
banking they have for our country? claim for damages against Asset Privatization Trust was based merely on his own self-serving
allegations.38
Had DBP listened to a cry in the wilderness – that of the voice of the doctor – the doctor
would not have allowed the officers and board members to defraud DBP and he would As to the finding of fraud, the Court of Appeals held that:
demand of them to hew and align themselves to the deed of assignment.
xxxx
Prescinding from the above, plaintiff’s consent to be with SSLI was vitiated by fraud. The fact
that defendant Ruperto Tankeh has not questioned his liability to DBP or that Jose Maria In all the complaints from the original through the first, second and third amendments, the
Vargas has been declared in default do not detract from the fact that there was attendant plaintiff imputes fraud only to defendant Ruperto, to wit:
fraud and that there was continuing fraud insofar as plaintiff is concerned.
4. That on May 12, 1981, due to the deceit and fraud exercised by Ruperto V. Tankeh,
Ipinaglaban lang ni Doctor ang karapatan niya. Kung wala siyang sense of righteous plaintiff, together with Vicente L. Arenas, Jr. and Jose Maria Vargas signed a promissory note
indignation and fairness, tatahimik na lang siya, sira naman ang pinangangalagaan niyang in favor of the defendant, DBP, wherein plaintiff bound himself to jointly and severally pay
pangalan, honor and family prestige [sic] (Emphasis provided).35 the DBP the amount of the mortgage loan. This document insofar as plaintiff is concerned is a
simulated document considering that plaintiff was never a real stockholder of Sterling
xxxx Shipping Lines, Inc. (Emphasis provided)

All of the defendants’ counterclaims and cross-claims x x x including plaintiff’s and the other More allegations of deceit were added in the Second Amended Complaint, but they are also
defendants’ prayer for damages are not, for the moment, sourced and proven by substantial attributed against Ruperto:
evidence, and must perforce be denied and dismissed.
6. That THE DECEIT OF DEFENDANT RUPERTO V. TANKEH IS SHOWN BY THE FACT THAT when
WHEREFORE, this Court, finding and declaring the Promissory Note (Exhibit "C") and the the Sterling Shipping Lines, Inc. was organized in 1980, Ruperto V. Tankeh promised plaintiff
Mortgage Contract (Exhibit "A") null and void insofar as plaintiff DR. ALEJANDRO V. TANKEH that he would be a part of the administration staff so that he could oversee the operation of
is concerned, hereby ANNULS and VOIDS those documents as to plaintiff, and it is hereby the company. He was also promised that his son, a lawyer, would be given a position in the
further ordered that he be released from any obligation or liability arising therefrom. company. None of these promsies [sic] was complied with. In fact he was not even allowed to
find out the data about the income and expenses of the company.
All the defendants’ counterclaims and cross-claims and plaintiff’s and defendants’ prayer for
damages are hereby denied and dismissed, without prejudice. 7. THAT THE DECEIT OF RUPERTO V. TANKEH IS ALSO SHOWN BY THE FACT THAT PLAINTIFF
WAS INVITED TO ATTEND THE BOARD MEETING OF THE STERLING SHIPPING LINES INC. ONLY
SO ORDERED.36 ONCE, WHICH WAS FOR THE SOLE PURPOSE OF INTRODUCING HIM TO THE TWO DIRECTORS
OF THE DBP IN THE BOARD OF THE STERLING SHIPPING LINES, INC., NAMELY, MR. JESUS
MACALINAG AND MR. GIL CORPUS. THEREAFTER HE WAS NEVER INVITED AGAIN. PLAINTIFF

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
WAS NEVER COMPENSATED BY THE STERLING SHIPPING LINES, INC. FOR HIS BEING A SO- signed. Certainly he knew what he was signing. He should have known that being an officer
CALLED DIRECTOR AND STOCKHOLDER. of SSLI, his signing of the promissory note together with the other officers of the corporation
was expected, as the other officers also did. It cannot therefore be said that the promissory
xxxx note was simulated. The same is a contract validly entered into, which the parties are obliged
to comply with.40 (Citations omitted)
8-A THAT A WEEK AFTER SENDING THE ABOVE LETTER PLAINTIFF MADE EARNEST EFFORTS
TOWARDS A COMPROMISE BETWEEN HIM AND HIS BROTHER RUPERTO V. TANKEH, WHICH The Court of Appeals ruled that in the absence of any competent proof, Ruperto V. Tankeh
EFFORTS WERE SPURNED BY RUPERTO V. TANKEH, AND ALSO AFTER THE NEWS OF THE SALE did not commit any fraud. Petitioner Alejandro V. Tankeh was unable to prove by a
OF THE ‘STERLING ACE’ WAS PUBLISHED AT THE NEWSPAPER, PLAINTIFF TRIED ALL EFFORTS preponderance of evidence that fraud or deceit had been employed by Ruperto to make him
TO CONTACT RUPERTO V. TANKEH FOR THE PURPOSE OF ARRIVING AT SOME COMPROMISE, sign the promissory note. The Court of Appeals reasoned that:
BUT DEFENDANT RUPERTO V. TANKEH AVOIDED ALL CONTACTS WITH THE PLAINTIFF UNTIL
HE WAS FORCED TO SEEK LEGAL ASSISTANCE FROM HIS LAWYER. Fraud is never presumed but must be proved by clear and convincing evidence, mere
preponderance of evidence not even being adequate. Contentions must be proved by
In the absence of any allegations of fraud and/or deceit against the other defendants, competent evidence and reliance must be had on the strength of the party’s evidence and
namely, the DBP, Vicente Arenas, Sterling Shipping Lines, Inc., and the Asset Privatization not upon the weakness of the opponent’s defense. The plaintiff clearly failed to discharge
Trust, the plaintiff’s evidence thereon should only be against Ruperto, since a plaintiff is such burden.41 (Citations omitted)
bound to prove only the allegations of his complaint. In any case, no evidence of fraud or
deceit was ever presented against defendants DBP, Arenas, SSLI and APT. With that, the Court of Appeals reversed and set aside the judgment and ordered that
plaintiff’s Complaint be dismissed. Petitioner filed a Motion for Reconsideration dated
As to the evidence against Ruperto, the same consists only of the testimony of the plaintiff. October 25, 2005 that was denied in a Resolution42promulgated on February 9, 2006.
None of his documentary evidence would prove that Ruperto was guilty of fraud or deceit in
causing him to sign the subject promissory note.39 Hence, this Petition was filed.

xxxx In this Petition, Alejandro V. Tankeh stated that the Court of Appeals seriously erred and
gravely abused its discretion in acting and deciding as if the evidence stated in the Decision
Analyzing closely the foregoing statements, we find no evidence of fraud or deceit. The of the Regional Trial Court did not exist. He averred that the ruling of lack of cause of action
mention of a new shipping lines business and the promise of a free 1,000-share and had no leg to stand on, and the Court of Appeals had unreasonably, whimsically, and
directorship in the corporation do not amount to insidious words or machinations. In any capriciously ignored the ample evidence on record proving the fraud and deceit perpetrated
case, the shipping business was indeed established, with the plaintiff himself as one of the on the petitioner by the respondent. He stated that the appellate court failed to appreciate
incorporators and stockholders with a share of 4,000, worth ₱4,000,000.00 of which the findings of fact of the lower court, which are generally binding on appellate courts. He
₱1,000,000.00 was reportedly paid up. As such, he signed the Articles of Incorporation and also maintained that he is entitled to damages and attorney's fees due to the deceit and
the corporation’s By-Laws which were registered with the Securities and Exchange machinations committed by the respondent.
Commission in April 1979. It was not until May 12, 1981 that he signed the questioned
promissory note. From his own declaration at the witness stand, the plaintiff signed the In his Memorandum, respondent Ruperto V. Tankeh averred that petitioner had chosen the
promissory note voluntarily. No pressure, force or intimidation was made to bear upon him. wrong remedy. He ought to have filed a special civil action of certiorari and not a Petition for
In fact, according to him, only a messenger brought the paper to him for signature. The Review. Petitioner raised questions of fact, and not questions of law, and this required the
promised shares of stock were given and recorded in the plaintiff’s name. He was made a review or evaluation of evidence. However, this is not the function of this Court, as it is not a
director and Vice-President of SSLI. Apparently, only the promise that his son would be given trier of facts. He also contended that petitioner had voluntarily entered into the loan
a position in the company remained unfulfilled. However, the same should have been agreement and the position with Sterling Shipping Lines, Inc. and that he did not fraudulently
threshed out between the plaintiff and his brother, defendant Ruperto, and its non- induce the petitioner to enter into the contract.
fulfillment did not amount to fraud or deceit, but was only an unfulfilled promise.
Respondents Development Bank of the Philippines and Asset Privatization Trust also
It should be pointed out that the plaintiff is a doctor of medicine and a seasoned contended that petitioner's mode of appeal had been wrong, and he had actually sought a
businessman. It cannot be said that he did not understand the import of the documents he special civil action of certiorari. This alone merited its dismissal.
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The main issue in this case is whether the Court of Appeals erred in finding that respondent Petition for review; (2) when errors of judgment are averred; and (3) when there is sufficient
Rupert V. Tankeh did not commit fraud against the petitioner. reason to justify the relaxation of the rules.48 When this Court exercises this discretion, there
is no need to comply with the requirements provided for in Rule 65.
The Petition is partly granted.
In this case, petitioner filed his Petition within the reglementary period of filing a Petition for
Before disposing of the main issue in this case, this Court needs to address a procedural issue Review.49 His Petition assigns errors of judgment and appreciation of facts and law on the
raised by respondents. Collectively, respondents argue that the Petition is actually one of part of the Court of Appeals. Thus, even if the Petition was designated as one that sought the
certiorari under Rule 65 of the Rules of Court43 and not a Petition for Review on Certiorari remedy of certiorari, this Court may exercise its discretion to treat it as a Petition for Review
under Rule 45.44 Thus, petitioner’s failure to show that there was neither appeal nor any in the interest of substantial justice.
other plain, speedy or adequate remedy merited the dismissal of the Complaint.
We now proceed to the substantive issue, that of petitioner’s imputation of fraud on the part
Contrary to respondent’s imputation, the remedy contemplated by petitioner is clearly that of respondents. We are required by the circumstances of this case to review our doctrines of
of a Rule 45 Petition for Review. In Tagle v. Equitable PCI Bank,45 this Court made the fraud that are alleged to be present in contractual relations.
distinction between a Rule 45 Petition for Review on Certiorari and a Rule 65 Petition for
Certiorari: Types of Fraud in Contracts

Certiorari is a remedy designed for the correction of errors of jurisdiction, not errors of Fraud is defined in Article 1338 of the Civil Code as:
judgment.1âwphi1 In Pure Foods Corporation v. NLRC, we explained the simple reason for
the rule in this light: When a court exercises its jurisdiction, an error committed while so x x x fraud when, through insidious words or machinations of one of the contracting parties,
engaged does not deprive it of the jurisdiction being exercised when the error is committed x the other is induced to enter into a contract which, without them, he would not have agreed
x x. Consequently, an error of judgment that the court may commit in the exercise of its to.
jurisdiction is not correctable through the original civil action of certiorari.
This is followed by the articles which provide legal examples and illustrations of fraud.
xxxx
Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties
Even if the findings of the court are incorrect, as long as it has jurisdiction over the case, such are bound by confidential relations, constitutes fraud. (n)
correction is normally beyond the province of certiorari. Where the error is not one of
jurisdiction, but of an error of law or fact a mistake of judgment, appeal is the remedy.
Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to
know the facts, are not in themselves fraudulent. (n)
In this case, what petitioner seeks to rectify may be construed as errors of judgment of the
Court of Appeals. These errors pertain to the petitioner’s allegation that the appellate court
Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert
failed to uphold the findings of facts of the lower court. He does not impute any error with
and the other party has relied on the former's special knowledge. (n)
respect to the Court of Appeals’ exercise of jurisdiction. As such, this Petition is simply a
continuation of the appellate process where a case is elevated from the trial court of origin,
to the Court of Appeals, and to this Court via Rule 45. Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual. (n)
Contrary to respondents’ arguments, the allegations of petitioner that the Court of Appeals
"committed grave abuse of discretion"46 did not ipso facto render the intended remedy that Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error.
of certiorari under Rule 65 of the Rules of Court.47 (n)

In any case, even if the Petition is one for the special civil action of certiorari, this Court has The distinction between fraud as a ground for rendering a contract voidable or as basis for an
the discretion to treat a Rule 65 Petition for Certiorari as a Rule 45 Petition for Review on award of damages is provided in Article 1344:
Certiorari. This is allowed if (1) the Petition is filed within the reglementary period for filing a
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In order that fraud may make a contract voidable, it should be serious and should not have burned certificate of title, not a deed of sale; (2) when the signature of the authorized
been employed by both contracting parties. corporate officer was forged; or (3) when the seller was seriously ill, and died a week after
signing the deed of sale raising doubts on whether the seller could have read, or fully
Incidental fraud only obliges the person employing it to pay damages. (1270) understood, the contents of the documents he signed or of the consequences of his
act.55 (Citations omitted)
There are two types of fraud contemplated in the performance of contracts: dolo incidente
or incidental fraud and dolo causante or fraud serious enough to render a contract voidable. However, Article 1344 also provides that if fraud is incidental, it follows that this type of
fraud is not serious enough so as to render the original contract voidable.
In Geraldez v. Court of Appeals,50 this Court held that:
A classic example of dolo incidente is Woodhouse v. Halili.56 In this case, the plaintiff Charles
Woodhouse entered into a written agreement with the defendant Fortunato Halili to
This fraud or dolo which is present or employed at the time of birth or perfection of a
organize a partnership for the bottling and distribution of soft drinks. However, the
contract may either be dolo causante or dolo incidente. The first, or causal fraud referred to
partnership did not come into fruition, and the plaintiff filed a Complaint in order to execute
in Article 1338, are those deceptions or misrepresentations of a serious character employed
the partnership. The defendant filed a Counterclaim, alleging that the plaintiff had defrauded
by one party and without which the other party would not have entered into the contract.
him because the latter was not actually the owner of the franchise of a soft drink bottling
Dolo incidente, or incidental fraud which is referred to in Article 1344, are those which are
operation. Thus, defendant sought the nullification of the contract to enter into the
not serious in character and without which the other party would still have entered into the
partnership. This Court concluded that:
contract. Dolo causante determines or is the essential cause of the consent, while dolo
incidente refers only to some particular or accident of the obligation. The effects of dolo
causante are the nullity of the contract and the indemnification of damages, and dolo x x x from all the foregoing x x x plaintiff did actually represent to defendant that he was the
incidente also obliges the person employing it to pay damages.51 holder of the exclusive franchise. The defendant was made to believe, and he actually
believed, that plaintiff had the exclusive franchise. x x x The record abounds with
circumstances indicative that the fact that the principal consideration, the main cause that
In Solidbank Corporation v. Mindanao Ferroalloy Corporation, et al.,52 this Court elaborated
induced defendant to enter into the partnership agreement with plaintiff, was the ability of
on the distinction between dolo causante and dolo incidente:
plaintiff to get the exclusive franchise to bottle and distribute for the defendant or for the
partnership. x x x The defendant was, therefore, led to the belief that plaintiff had the
Fraud refers to all kinds of deception -- whether through insidious machination, exclusive franchise, but that the same was to be secured for or transferred to the
manipulation, concealment or misrepresentation -- that would lead an ordinarily prudent partnership. The plaintiff no longer had the exclusive franchise, or the option thereto, at the
person into error after taking the circumstances into account. In contracts, a fraud known as time the contract was perfected. But while he had already lost his option thereto (when the
dolo causante or causal fraud is basically a deception used by one party prior to or contract was entered into), the principal obligation that he assumed or undertook was to
simultaneous with the contract, in order to secure the consent of the other. Needless to say, secure said franchise for the partnership, as the bottler and distributor for the Mission Dry
the deceit employed must be serious. In contradistinction, only some particular or accident Corporation. We declare, therefore, that if he was guilty of a false representation, this was
of the obligation is referred to by incidental fraud or dolo incidente, or that which is not not the causal consideration, or the principal inducement, that led plaintiff to enter into the
serious in character and without which the other party would have entered into the contract partnership agreement.
anyway.53
But, on the other hand, this supposed ownership of an exclusive franchise was actually the
Under Article 1344, the fraud must be serious to annul or avoid a contract and render it consideration or price plaintiff gave in exchange for the share of 30 percent granted him in
voidable. This fraud or deception must be so material that had it not been present, the the net profits of the partnership business. Defendant agreed to give plaintiff 30 per cent
defrauded party would not have entered into the contract. In the recent case of Spouses share in the net profits because he was transferring his exclusive franchise to the
Carmen S. Tongson and Jose C. Tongson, et al., v. Emergency Pawnshop Bula, Inc.,54 this partnership. x x x.
Court provided some examples of what constituted dolo causante or causal fraud:
Plaintiff had never been a bottler or a chemist; he never had experience in the production or
Some of the instances where this Court found the existence of causal fraud include: (1) when distribution of beverages. As a matter of fact, when the bottling plant being built, all that he
the seller, who had no intention to part with her property, was "tricked into believing" that suggested was about the toilet facilities for the laborers.
what she signed were papers pertinent to her application for the reconstitution of her

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We conclude from the above that while the representation that plaintiff had the exclusive In Viloria, this Court cited Sierra v. Court of Appeals60 stating that mere preponderance of
franchise did not vitiate defendant's consent to the contract, it was used by plaintiff to get evidence will not suffice in proving fraud.
from defendant a share of 30 per cent of the net profits; in other words, by pretending that
he had the exclusive franchise and promising to transfer it to defendant, he obtained the Fraud must also be discounted, for according to the Civil Code:
consent of the latter to give him (plaintiff) a big slice in the net profits. This is the dolo
incidente defined in article 1270 of the Spanish Civil Code, because it was used to get the
Art. 1338. There is fraud when, through insidious words or machinations of one of the
other party's consent to a big share in the profits, an incidental matter in the agreement.57
contracting parties, the other is induced to enter into a contract which without them, he
would not have agreed to.
Thus, this Court held that the original agreement may not be declared null and void. This
Court also said that the plaintiff had been entitled to damages because of the refusal of the
Art. 1344. In order that fraud may make a contract voidable, it should be serious and should
defendant to enter into the partnership. However, the plaintiff was also held liable for
not have been employed by both contracting parties.
damages to the defendant for the misrepresentation that the former had the exclusive
franchise to soft drink bottling operations.
To quote Tolentino again, the "misrepresentation constituting the fraud must be established
by full, clear, and convincing evidence, and not merely by a preponderance thereof. The
To summarize, if there is fraud in the performance of the contract, then this fraud will give
deceit must be serious. The fraud is serious when it is sufficient to impress, or to lead an
rise to damages. If the fraud did not compel the imputing party to give his or her consent, it
ordinarily prudent person into error; that which cannot deceive a prudent person cannot be
may not serve as the basis to annul the contract, which exhibits dolo causante. However, the
a ground for nullity. The circumstances of each case should be considered, taking into
party alleging the existence of fraud may prove the existence of dolo incidente.
account the personal conditions of the victim."61

This may make the party against whom fraud is alleged liable for damages.
Thus, to annul a contract on the basis of dolo causante, the following must happen: First, the
deceit must be serious or sufficient to impress and lead an ordinarily prudent person to
Quantum of Evidence to Prove the Existence of Fraud and the Liability of the Parties error. If the allegedly fraudulent actions do not deceive a prudent person, given the
circumstances, the deceit here cannot be considered sufficient basis to nullify the contract. In
The Civil Code, however, does not mandate the quantum of evidence required to prove order for the deceit to be considered serious, it is necessary and essential to obtain the
actionable fraud, either for purposes of annulling a contract (dolo causante) or rendering a consent of the party imputing fraud. To determine whether a person may be sufficiently
party liable for damages (dolo incidente). The definition of fraud is different from the deceived, the personal conditions and other factual circumstances need to be considered.
quantum of evidence needed to prove the existence of fraud. Article 1338 provides the legal
definition of fraud. Articles 1339 to 1343 constitute the behavior and actions that, when in Second, the standard of proof required is clear and convincing evidence. This standard of
conformity with the legal provision, may constitute fraud. proof is derived from American common law. It is less than proof beyond reasonable doubt
(for criminal cases) but greater than preponderance of evidence (for civil cases). The degree
Jurisprudence has shown that in order to constitute fraud that provides basis to annul of believability is higher than that of an ordinary civil case. Civil cases only require a
contracts, it must fulfill two conditions. First, the fraud must be dolo causante or it must be preponderance of evidence to meet the required burden of proof. However, when fraud is
fraud in obtaining the consent of the party. Second, this fraud must be proven by clear and alleged in an ordinary civil case involving contractual relations, an entirely different standard
convincing evidence. In Viloria v. Continental Airlines,58 this Court held that: of proof needs to be satisfied. The imputation of fraud in a civil case requires the
presentation of clear and convincing evidence. Mere allegations will not suffice to sustain the
Under Article 1338 of the Civil Code, there is fraud when, through insidious words or existence of fraud. The burden of evidence rests on the part of the plaintiff or the party
machinations of one of the contracting parties, the other is induced to enter into a contract alleging fraud. The quantum of evidence is such that fraud must be clearly and convincingly
which, without them, he would not have agreed to. In order that fraud may vitiate consent, it shown.
must be the causal (dolo causante), not merely the incidental (dolo incidente), inducement to
the making of the contract. In Samson v. Court of Appeals, causal fraud was defined as "a The Determination of the Existence of Fraud in the Present Case
deception employed by one party prior to or simultaneous to the contract in order to secure
the consent of the other." Also, fraud must be serious and its existence must be established We now determine the application of these doctrines regarding fraud to ascertain the
by clear and convincing evidence. (Citations omitted)59 liability, if any, of the respondents.

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Neither law nor jurisprudence distinguishes whether it is dolo incidente or dolo causante that Amendment to conform to or authorize presentation of evidence. — When issues not raised
must be proven by clear and convincing evidence. It stands to reason that both dolo by the pleadings are tried with the express or implied consent of the parties they shall be
incidente and dolo causante must be proven by clear and convincing evidence. The only treated in all respects as if they had been raised in the pleadings. Such amendment of the
question is whether this fraud, when proven, may be the basis for making a contract voidable pleadings as may be necessary to cause them to conform to the evidence and to raise these
(dolo causante), or for awarding damages (dolo incidente), or both. issues may be made upon motion of any party at any time, even after judgment; but failure
to amend does not effect the result of the trial of these issues. If evidence is objected to at
Hence, there is a need to examine all the circumstances thoroughly and to assess the the trial on the ground that it is not within the issues made by the pleadings, the court may
personal circumstances of the party alleging fraud. This may require a review of the case allow the pleadings to be amended and shall do so with liberality if the presentation of the
facts and the evidence on record. 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. (5a)
In general, this Court is not a trier of facts. It makes its rulings based on applicable law and on
standing jurisprudence. The findings of the Court of Appeals are generally binding on this In this case, the commission of fraud was an issue that had been tried with the implied
Court provided that these are supported by the evidence on record. In the recent case of consent of the respondents, particularly Sterling Shipping Lines, Inc., Asset Privatization
Medina v. Court of Appeals,62 this Court held that: Trust, Development Bank of the Philippines, and Arenas. Hence, although there is a lack of a
categorical allegation in the pleading, the courts may still be allowed to ascertain fraud.
It is axiomatic that a question of fact is not appropriate for a petition for review on certiorari
under Rule 45. This rule provides that the parties may raise only questions of law, because The records will show why and how the petitioner agreed to enter into the contract with
the Supreme Court is not a trier of facts. Generally, we are not duty-bound to analyze again respondent Ruperto V. Tankeh:
and weigh the evidence introduced in and considered by the tribunals below. When
supported by substantial evidence, the findings of fact of the Court of Appeals are conclusive ATTY. VELAYO: How did you get involved in the business of the Sterling Shipping Lines,
and binding on the parties and are not reviewable by this Court, unless the case falls under Incorporated" [sic]
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 DR. TANKEH: Sometime in the year 1980, I was approached by Ruperto Tankeh mentioning to
mistaken, absurd or impossible; (3) Where there is a grave abuse of discretion; (4) When the me that he is operating a new shipping lines business and he is giving me free one thousand
judgment is based on a misapprehension of facts; (5) When the findings of fact are shares (1,000) to be a director of this new business which is worth one million pesos
conflicting; (6) When the Court of Appeals, in making its findings, went beyond the issues of (₱1,000,000.00.),
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
ATTY. VELAYO: Are you related to Ruperto V. Tankeh?
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 petitioner’s main and reply briefs are not disputed
by the respondents; and (10) When the findings of fact of the Court of Appeals are premised DR. TANKEH: Yes, sir. He is my younger brother.
on the supposed absence of evidence and contradicted by the evidence on record. (Emphasis
provided)63 ATTY. VELAYO: Did you accept the offer?

The trial court and the Court of Appeals had appreciated the facts of this case differently. DR. TANKEH: I accepted the offer based on his promise to me that I will be made a part of the
administration staff so that I can oversee the operation of the business plus my son, the
The Court of Appeals was not correct in saying that petitioner could only raise fraud as a eldest one who is already a graduate lawyer with a couple of years of experience in the law
ground to annul his participation in the contract as against respondent Rupert V. Tankeh, firm of Romulo Ozaeta Law Offices (TSN, April 28, 1988, pp. 10-11.).65
since the petitioner did not make any categorical allegation that respondents Development
Bank of the Philippines, Sterling Shipping Lines, Inc., and Asset Privatization Trust had acted The Second Amended Complaint of petitioner is substantially reproduced below to ascertain
fraudulently. Admittedly, it was only in the Petition before this Court that the petitioner had the claim:
made the allegation of a "well-orchestrated fraud"64 by the respondents. However, Rule 10,
Section 5 of the Rules of Civil Procedure provides that: xxxx

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2. That on May 12, 1981, due to the deceit and fraud exercised by Ruperto V. 8-A. THAT A WEEK AFTER SENDING THE ABOVE LETTER, PLAINTIFF MADE EARNEST
Tankeh, plaintiff, together with Vicente L. Arenas, Jr. and Jose Maria Vargas, signed EFFORTS TOWARDS A COMPROMISE BETWEEN HIM AND HIS BROTHER RUPERTO V.
a promissory note in favor of the defendant DBP, wherein plaintiff bound himself TANKEH, WHICH EFFORTS WERE SPURNED BY RUPERTO V. TANKEH, AND ALSO
to jointly and severally pay the DBP the amount of the mortgage loan. This AFTER THE NEWS OF THE SALE OF THE "STERLING ACE" WAS PUBLISHED AT THE
document insofar as plaintiff is concerned is a simulated document considering NEWSPAPER [sic], PLAINTIFF TRIED ALL EFFORTS TO CONTACT RUPERTO V. TANKEH
that plaintiff was never a real stockholder of the Sterling Shipping Lines, Inc. FOR THE PURPOSE OF ARRIVING AT SOME COMPROMISE, BUT DEFENDANT
RUPERTO V. TANKEH AVOIDED ALL CONTACTS [sic] WITH THE PLAINTIFF UNTIL HE
3. That although plaintiff’s name appears in the records of Sterling Shipping Lines, WAS FORCED TO SEEK LEGAL ASSISTANCE FROM HIS LAWYER.66
Inc. as one of its incorporators, the truth is that he had never invested any amount
in said corporation and that he had never been an actual member of said In his Answer, respondent Ruperto V. Tankeh stated that:
corporation. All the money supposedly invested by him were put by defendant
Ruperto V. Tankeh. Thus, all the shares of stock under his name in fact belongs to COMES NOW defendant RUPERTO V. TANKEH, through the undersigned counsel, and to the
Ruperto V. Tankeh. Plaintiff was invited to attend the board meeting of the Sterling Honorable Court, most respectfully alleges:
Shipping Lines, Inc. only once, which was for the sole purpose of introducing him to
the two directors of the DBP, namely, Mr. Jesus Macalinag and Mr. Gil Corpus.
xxxx
Thereafter he was never invited again. Plaintiff was never compensated by the
Sterling Shipping Lines, Inc. for his being a so-called director and stockholder. It is
clear therefore that the DBP knew all along that plaintiff was not a true stockholder 3. That paragraph 4 is admitted that herein answering defendant together with the
of the company. plaintiff signed the promissory note in favor of DBP but specifically denied that the
same was done through deceit and fraud of herein answering defendant the truth
being that plaintiff signed said promissory note voluntarily and with full knowledge
4. That THE DECEIT OF DEFENDANT RUPERTO V. TANKEH IS SHOWN BY THE FACT
of the consequences thereof; it is further denied that said document is a simulated
THAT when the Sterling Shipping Lines, Inc. was organized in 1980, Ruperto V.
document as plaintiff was never a real stockholder of the company, the truth being
Tankeh promised plaintiff that he would be a part of the administration staff so
those alleged in the special and affirmative defenses;
that he could oversee the operation of the company. He was also promised that his
son, a lawyer, would be given a position in the company. None of these promises
was complied with. In fact, he was not even allowed to find out the data about the 4. That paragraphs 5,6,7,8 and 8-A are specifically denied specially the imputation
income and expenses of the company. of deceit and fraud against herein answering defendant, the truth being those
alleged in the special and affirmative defenses;
5. THAT THE DECEIT OF RUPERTO V. TANKEH IS ALSO SHOWN BY THE FACT THAT
PLAINTIFF WAS INVITED TO ATTEND THE BOARD MEETING OF THE STERLING xxxx
SHIPPING LINES, INC. ONLY ONCE, WHICH WAS FOR THE SOLE PUPOSE OF
INTRODUCING HIM TO THE TWO DIRECTORS OF THE DBP IN THE BOARD OF THE SPECIAL AND AFFIRMATIVE DEFENSES x x x
STERLING SHIPPING LINES, INC., NAMELY, MR. JESUS MACALINAG AND MR. GIL
CORPUS. THEREAFTER HE WAS NEVER INVITED AGAIN. PLAINTIFF WAS NEVER 8. The complaint states no cause of action as against herein answering defendant;
COMPENSATED BY THE STERLING SHIPPING LINES, INC. FOR HIS BEING A SO-
CALLED DIRECTOR AND STOCKHOLDER.
9. The Sterling Shipping Lines, Inc. was a legitimate company organized in
accordance with the laws of the Republic of the Philippines with the plaintiff as one
6. That in 1983, upon realizing that he was only being made a tool to realize the of the incorporators;
purposes of Ruperto V. Tankeh, plaintiff officially informed the company by means
of a letter dated June 15, 1983 addressed to the company that he has severed his
connection with the company, and demanded among others, that the company 10. Plaintiff as one of the incorporators and directors of the board was fully aware
board of directors pass a resolution releasing him from any liabilities especially of the by-laws of the company and if he attended the board meeting only once as
with reference to the loan mortgage contract with the DBP and to notify the DBP of alleged, the reason thereof was known only to him;
his severance from the Sterling Shipping Lines, Inc.

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11. The Sterling Shipping Lines, Inc. being a corporation acting through its board of Songco v. Sellner70 serves as one of the key guidelines in ascertaining whether a party is
directors, herein answering defendant could not have promised plaintiff that he guilty of fraud in obtaining the consent of the party claiming that fraud existed. The plaintiff
would be a part of the administration staff; Lamberto Songco sought to recover earnings from a promissory note that defendant George
Sellner had made out to him for payment of Songco’s sugar cane production. Sellner claimed
12. As member of the board, plaintiff had all the access to the data and records of that he had refused to pay because Songco had promised that the crop would yield 3,000
the company; further, as alleged in the complaint, plaintiff has a son who is a piculs of sugar, when in fact, only 2,017 piculs of sugar had been produced. This Court held
lawyer who could have advised him; that Sellner would still be liable to pay the promissory note, as follows:

13. Assuming plaintiff wrote a letter to the company to sever his connection with Notwithstanding the fact that Songco's statement as to the probable output of his crop was
the company, he should have been aware that all he had to do was sell all his disingenuous and uncandid, we nevertheless think that Sellner was bound and that he must
holdings in the company; pay the price stipulated. The representation in question can only be considered matter of
opinion as the cane was still standing in the field, and the quantity of the sugar it would
produce could not be known with certainty until it should be harvested and milled.
14. Herein answering defendant came to know only of plaintiff’s alleged
Undoubtedly Songco had better experience and better information on which to form an
predicament when he received the summons and copy of the complaint; x x x.67
opinion on this question than Sellner. Nevertheless the latter could judge with his own eyes
as to the character of the cane, and it is shown that he measured the fields and ascertained
An assessment of the allegations in the pleadings and the findings of fact of both the trial that they contained 96 1/2 hectares.
court and appellate court based on the evidence on record led to the conclusion that there
had been no dolo causante committed against the petitioner by Ruperto V. Tankeh.
xxxx

The petitioner had given his consent to become a shareholder of the company without
The law allows considerable latitude to seller's statements, or dealer's talk; and experience
contributing a single peso to pay for the shares of stock given to him by Ruperto V. Tankeh.
teaches that it is exceedingly risky to accept it at its face value. The refusal of the seller to
This fact was admitted by both petitioner and respondent in their respective pleadings
warrant his estimate should have admonished the purchaser that that estimate was put forth
submitted to the lower court.
as a mere opinion; and we will not now hold the seller to a liability equal to that which would
have been created by a warranty, if one had been given.
In his Amended Complaint,68 the petitioner admitted that "he had never invested any
amount in said corporation and that he had never been an actual member of said
xxxx
corporation. All the money supposedly invested by him were put up by defendant Ruperto V.
Tankeh."69 This fact alone should have already alerted petitioner to the gravity of the
obligation that he would be undertaking as a member of the board of directors and the It is not every false representation relating to the subject matter of a contract which will
attendant circumstances that this undertaking would entail. It also does not add any render it void. It must be as to matters of fact substantially affecting the buyer's interest, not
evidentiary weight to strengthen petitioner’s claim of fraud. If anything, it only strengthens as to matters of opinion, judgment, probability, or expectation. (Long vs. Woodman, 58 Me.,
the position that petitioner’s consent was not obtained through insidious words or deceitful 52; Hazard vs. Irwin, 18 Pick. [Mass.], 95; Gordon vs. Parmelee, 2 Allen [Mass.], 212;
machinations. Williamson vs. McFadden, 23 Fla., 143, 11 Am. St. Rep., 345.) When the purchaser
undertakes to make an investigation of his own, and the seller does nothing to prevent this
investigation from being as full as he chooses to make it, the purchaser cannot afterwards
Article 1340 of the Civil Code recognizes the reality of some exaggerations in trade which
allege that the seller made misrepresentations. (National Cash Register Co. vs. Townsend,
negates fraud. It reads:
137 N. C., 652, 70 L. R. A., 349; Williamson vs. Holt, 147 N. C., 515.)

Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to
We are aware that where one party to a contract, having special or expert knowledge, takes
know the facts, are not in themselves fraudulent.
advantage of the ignorance of another to impose upon him, the false representation may
afford ground for relief, though otherwise the injured party would be bound. But we do not
Given the standing and stature of the petitioner, he was in a position to ascertain more think that the fact that Songco was an experienced farmer, while Sellner was, as he claims, a
information about the contract. mere novice in the business, brings this case within that exception.71

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The following facts show that petitioner was fully aware of the magnitude of his undertaking: directors"74 and that petitioner "was fully aware of the by-laws of the company."75 It was
incumbent upon respondent to act in good faith and to ensure that petitioner would not be
First, petitioner was fully aware of the financial reverses that Sterling Shipping Lines, Inc. had excluded from the affairs of Sterling Shipping Lines, Inc. After all, respondent asserted that
been undergoing, and he took great pains to release himself from the obligation. petitioner had entered into the contract voluntarily and with full consent.

Second, his background as a doctor, as a bank organizer, and as a businessman with Second, respondent claimed that if petitioner was intent on severing his connection with the
experience in the textile business and real estate should have apprised him of the irregularity company, all that petitioner had to do was to sell all his holdings in the company. Clearly, the
in the contract that he would be undertaking. This meant that at the time petitioner gave his respondent did not consider the fact that the sale of the shares of stock alone did not free
consent to become a part of the corporation, he had been fully aware of the circumstances petitioner from his liability to Development Bank of the Philippines or Asset Privatization
and the risks of his participation. Intent is determined by the acts. Trust, since the latter had signed the promissory and had still been liable for the loan. A sale
of petitioners’ shares of stock would not have negated the petitioner’s responsibility to pay
for the loan.
Finally, the records showed that petitioner had been fully aware of the effect of his signing
the promissory note. The bare assertion that he was not privy to the records cannot
counteract the fact that petitioner himself had admitted that after he had severed ties with Third, respondent Ruperto V. Tankeh did not rebuff petitioner’s claim that the latter only
his brother, he had written a letter seeking to reach an amicable settlement with respondent received news about the sale of the vessel M/V Sterling Ace through the media and not as
Rupert V. Tankeh. Petitioner’s actions defied his claim of a complete lack of awareness one of the board members or directors of Sterling Shipping Lines, Inc.
regarding the circumstances and the contract he had been entering.
All in all, respondent Ruperto V. Tankeh’s bare assertion that petitioner had access to the
The required standard of proof – clear and convincing evidence – was not met. There was no records cannot discredit the fact that the petitioner had been effectively deprived of the
dolo causante or fraud used to obtain the petitioner’s consent to enter into the contract. opportunity to actually engage in the operations of Sterling Shipping Lines, Inc. Petitioner
Petitioner had the opportunity to become aware of the facts that attended the signing of the had a reasonable expectation that the same level of engagement would be present for the
promissory note. He even admitted that he has a lawyer-son who the petitioner had hoped duration of their working relationship. This would include an undertaking in good faith by
would assist him in the administration of Sterling Shipping Lines, Inc. The totality of the facts respondent Ruperto V. Tankeh to be transparent with his brother that he would not
on record belies petitioner’s claim that fraud was used to obtain his consent to the contract automatically be made part of the company’s administration.
given his personal circumstances and the applicable law.
However, this Court finds there is nothing to support the assertion that Sterling Shipping
However, in refusing to allow petitioner to participate in the management of the business, Lines, Inc. and Arenas committed incidental fraud and must be held liable. Sterling Shipping
respondent Ruperto V. Tankeh was liable for the commission of incidental fraud. In Geraldez, Lines, Inc. acted through its board of directors, and the liability of respondent Tankeh cannot
this Court defined incidental fraud as "those which are not serious in character and without be imposed on Sterling Shipping Lines, Inc. The shipping line has a separate and distinct
which the other party would still have entered into the contract."72 personality from its officers, and petitioner’s assertion that the corporation conspired with
the respondent Ruperto V. Tankeh to defraud him is not supported by the evidence and the
records of the case.
Although there was no fraud that had been undertaken to obtain petitioner’s consent, there
was fraud in the performance of the contract. The records showed that petitioner had been
unjustly excluded from participating in the management of the affairs of the corporation. As for Arenas, in Lim Tanhu v. Remolete,76 this Court held that:
This exclusion from the management in the affairs of Sterling Shipping Lines, Inc. constituted
fraud incidental to the performance of the obligation. In all instances where a common cause of action is alleged against several defendants, some
of whom answer and the others do not, the latter or those in default acquire a vested right
This can be concluded from the following circumstances. not only to own the defense interposed in the answer of their co-defendant or co-defendants
not in default but also to expect a result of the litigation totally common with them in kind
and in amount whether favorable or unfavorable. The substantive unity of the plaintiffs’
First, respondent raised in his Answer that petitioner "could not have promised plaintiff that
cause against all the defendants is carried through to its adjective phase as ineluctably
he would be a part of the administration staff"73 since petitioner had been fully aware that,
demanded by the homogeneity and indivisibility of justice itself.77
as a corporation, Sterling Shipping Lines, Inc. acted through its board of directors.
Respondent admitted that petitioner had been "an incorporator and member of the board of

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
As such, despite Arenas’ failure to submit his Answer to the Complaint or his declaration of In addition to this obligation as the result of the contract between petitioner and
default, his liability or lack thereof is concomitant with the liability attributed to his co- respondents, there was also a patent abuse of right on the part of respondent Tankeh. This
defendants or co-respondents. However, unlike respondent Ruperto V. Tankeh’s liability, abuse of right is included in Articles 19 and 21 of the Civil Code which provide that:
there is no action or series of actions that may be attributed to Arenas that may lead to an
inference that he was liable for incidental fraud. In so far as the required evidence for both Article 19. Every person must, in the exercise of his rights and in the performance of his
Sterling Shipping Lines, Inc. and Arenas is concerned, there is no basis to justify the claim of duties, act with justice, give everyone his due, and observe honesty and good faith.
incidental fraud.
Article 21. Any person who willfully causes loss or injury to another in manner that is
In addition, respondents Development Bank of the Philippines and Asset Privatization Trust contrary to morals, good customs or public policy shall compensate the latter for the
or Privatization and Management Office cannot be held liable for fraud. Incidental fraud damage.
cannot be attributed to the execution of their actions, which were undertaken pursuant to
their mandated functions under the law. "Absent convincing evidence to the contrary, the
Respondent Ruperto V. Tankeh abused his right to pursue undertakings in the interest of his
presumption of regularity in the performance of official functions has to be upheld."78
business operations. This is because of his failure to at least act in good faith and be
transparent with petitioner regarding Sterling Shipping Lines, Inc.’s daily operations.
The Obligation to Pay Damages
In National Power Corporation v. Heirs of Macabangkit Sangkay,79 this Court held that:
As such, respondent Ruperto V. Tankeh is liable to his older brother, petitioner Alejandro, for
damages. The obligation to pay damages to petitioner is based on several provisions of the
When a right is exercised in a manner not conformable with the norms enshrined in Article
Civil Code.
19 and like provisions on human relations in the Civil Code, and the exercise results to [sic]
the damage of [sic] another, a legal wrong is committed and the wrongdoer is held
Article 1157 enumerates the sources of obligations. responsible.80

Article 1157. Obligations arise from: The damage, loss, and injury done to petitioner are shown by the following circumstances.

(1) Law; First, petitioner was informed by Development Bank of the Philippines that it would still
pursue his liability for the payment of the promissory note. This would not have happened if
(2) Contracts; petitioner had allowed himself to be fully apprised of Sterling Shipping Lines, Inc.’s financial
straits and if he felt that he could still participate in the company’s operations. There is no
(3) Quasi-contracts; evidence that respondent Ruperto V. Tankeh showed an earnest effort to at least allow the
possibility of making petitioner part of the administration a reality. The respondent was the
brother of the petitioner and was also the primary party that compelled petitioner Alejandro
(4) Acts or omissions punished by law; and
Tankeh to be solidarily bound to the promissory note. Ruperto V. Tankeh should have done
his best to ensure that he had exerted the diligence to comply with the obligations attendant
(5) Quasi-delicts. (1089a) to the participation of petitioner.

This enumeration does not preclude the possibility that a single action may serve as the Second, respondent Ruperto V. Tankeh’s refusal to enter into an agreement or settlement
source of several obligations to pay damages in accordance with the Civil Code. Thus, the with petitioner after the latter’s discovery of the sale of the M/V Sterling Ace was an action
liability of respondent Ruperto V. Tankeh is based on the law, under Article 1344, which that constituted bad faith. Due to Ruperto’s refusal, his brother, petitioner Alejandro,
provides that the commission of incidental fraud obliges the person employing it to pay became solidarily liable for an obligation that the latter could have avoided if he had been
damages. given an opportunity to participate in the operations of Sterling Shipping Lines, Inc. The
simple sale of all of petitioner’s shares would not have solved petitioner’s problems, as it
would not have negated his liability under the terms of the promissory note.

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Finally, petitioner is still bound to the creditors of Sterling Shipping Lines, Inc., namely, public the wrongful act or omission of the defendant is the proximate cause of the injury sustained
respondents Development Bank of the Philippines and Asset Privatization Trust. This is an by the claimant; and (4) fourth, the award of damages is predicated on any of the cases
additional financial burden for petitioner. Nothing in the records suggested the possibility stated in Article 2219 of the Civil Code. (Citations omitted)82
that Development Bank of the Philippines or Asset Privatization Trust through the
Privatization Management Office will not pursue or is precluded from pursuing its claim In this case, the four elements cited in Francisco are present. First, petitioner suffered an
against the petitioner. Although petitioner Alejandro voluntarily signed the promissory note injury due to the mental duress of being bound to such an onerous debt to Development
and became a stockholder and board member, respondent should have treated him with Bank of the Philippines and Asset Privatization Trust. Second, the wrongful acts of undue
fairness, transparency, and consideration to minimize the risk of incurring grave financial exclusion done by respondent Ruperto V. Tankeh clearly fulfilled the same requirement.
reverses. Third, the proximate cause of his injury was the failure of respondent Ruperto V. Tankeh to
comply with his obligation to allow petitioner to either participate in the business or to fulfill
In Francisco v. Ferrer,81 this Court ruled that moral damages may be awarded on the his fiduciary responsibilities with candor and good faith. Finally, Article 221983 of the Civil
following bases: Code provides that moral damages may be awarded in case of acts and actions referred to in
Article 21, which, as stated, had been found to be attributed to respondent Ruperto V.
To recover moral damages in an action for breach of contract, the breach must be palpably Tankeh.
wanton, reckless, malicious, in bad faith, oppressive or abusive.
In the Appellant’s Brief,84 petitioner asked the Court of Appeals to demand from
Under the provisions of this law, in culpa contractual or breach of contract, moral damages respondents, except from respondent Asset Privatization Trust, the amount of five million
may be recovered when the defendant acted in bad faith or was guilty of gross negligence pesos (₱5,000,000.00). This Court finds that the amount of five hundred thousand pesos
(amounting to bad faith) or in wanton disregard of his contractual obligation and, (₱500,000.00) is a sufficient amount of moral damages.
exceptionally, when the act of breach of contract itself is constitutive of tort resulting in
physical injuries. In addition to moral damages, this Court may also impose the payment of exemplary
damages.1âwphi1 Exemplary damages are discussed in Article 2229 of the Civil Code, as
Moral damages may be awarded in breaches of contracts where the defendant acted follows:
fraudulently or in bad faith.
ART. 2229. Exemplary or corrective damages are imposed, by way of example or correction
Bad faith does not simply connote bad judgment or negligence, it imports a dishonest of the public good, in addition to moral, temperate, liquidated or compensatory damages.
purpose or some moral obliquity and conscious doing of a wrong, a breach of known duty
through some motive or interest or ill will that partakes of the nature of fraud. Exemplary damages are further discussed in Articles 2233 and 2234, particularly regarding
the pre-requisites of ascertaining moral damages and the fact that it is discretionary upon
xxxx this Court to award them or not:

The person claiming moral damages must prove the existence of bad faith by clear and ART. 2233. Exemplary damages cannot be recovered as a matter of right; the court will
convincing evidence for the law always presumes good faith. It is not enough that one merely decide whether or not they should be adjudicated.
suffered sleepless nights, mental anguish, serious anxiety as the result of the actuations of
the other party. Invariably such action must be shown to have been willfully done in bad faith ART. 2234. While the amount of the exemplary damages need not be proven, the plaintiff
or will ill motive. Mere allegations of besmirched reputation, embarrassment and sleepless must show that he is entitled to moral, temperate or compensatory damages before the
nights are insufficient to warrant an award for moral damages. It must be shown that the court may consider the question of whether or not exemplary damages should be awarded x
proximate cause thereof was the unlawful act or omission of the [private respondent] xx
petitioners.
The purpose of exemplary damages is to serve as a deterrent to future and subsequent
An award of moral damages would require certain conditions to be met, to wit: (1) first, parties from the commission of a similar offense. The case of People v. Rante85 citing People
there must be an injury, whether physical, mental or psychological, clearly sustained by the v. Dalisay86 held that:
claimant; (2) second, there must be culpable act or omission factually established; (3) third,

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective damages are G.R. No.171692 June 3, 2013
intended to serve as a deterrent to serious wrong doings, and as a vindication of undue
sufferings and wanton invasion of the rights of an injured or a punishment for those guilty of SPOUSES DELFIN O. TUMIBAY and AURORA T. TUMIBAY-deceased; GRACE JULIE ANN
outrageous conduct. These terms are generally, but not always, used interchangeably. In TUMIBAY MANUEL, legal representative, Petitioners,
common law, there is preference in the use of exemplary damages when the award is to vs.
account for injury to feelings and for the sense of indignity and humiliation suffered by a SPOUSES MELVIN A. LOPEZ and ROWENA GAY T. VISITACION LOPEZ, Respondents.
person as a result of an injury that has been maliciously and wantonly inflicted, the theory
being that there should be compensation for the hurt caused by the highly reprehensible
DECISION
conduct of the defendant—associated with such circumstances as willfulness, wantonness,
malice, gross negligence or recklessness, oppression, insult or fraud or gross fraud—that
intensifies the injury. The terms punitive or vindictive damages are often used to refer to DEL CASTILLO, J.:
those species of damages that may be awarded against a person to punish him for his
outrageous conduct. In either case, these damages are intended in good measure to deter In a contract to sell, the seller retains ownership of the property until the buyer has paid the
the wrongdoer and others like him from similar conduct in the future.87 price in full. A -buyer who covertly usurps the seller's ownership of the property prior to the
full payment of the price is in breach of the contract and the seller is entitled to rescission
To justify an award for exemplary damages, the wrongful act must be accompanied by bad because the breach is substantial and fundamental as it defeats the very object of the parties
faith, and an award of damages would be allowed only if the guilty party acted in a wanton, in entering into the contract to sell.
fraudulent, reckless or malevolent manner.88 In this case, this Court finds that respondent
Ruperto V. Tankeh acted in a fraudulent manner through the finding of dolo incidente due to The Petition for Review on Certiorari1 assails the May 19, 2005 Decision2 of the Court of
his failure to act in a manner consistent with propriety, good morals, and prudence. Appeals (CA) in CA-G.R. CV No. 79029, which reversed the January 6, 2003 Decision3 of the
Regional Trial Court (RTC) of Malaybalay City, Branch 9 in Civil Case No. 2759-98, and the
Since exemplary damages ensure that future litigants or parties are enjoined from acting in a February 10, 2006 Resolution4 denying petitioner-spouses Delfin O. Tumibay and Aurora5 T.
similarly malevolent manner, it is incumbent upon this Court to impose the damages in such Tumibay’s Motion for Reconsideration.6
a way that will serve as a categorical warning and will show that wanton actions will be dealt
with in a similar manner. This Court finds that the amount of two hundred thousand pesos Factual Antecedents
(₱200,000.00) is sufficient for this purpose.
On March 23, 1998, petitioners filed a Complaint7 for declaration of nullity ab initio of sale,
In sum, this Court must act in the best interests of all future litigants by establishing and and recovery of ownership and possession of land with the RTC of Malaybalay City. The case
applying clearly defined standards and guidelines to ascertain the existence of fraud. was raffled to Branch 9 and docketed as Civil Case No. 2759-98.

WHEREFORE, this Petition is PARTIALLY GRANTED. The Decision of the Court of Appeals as to In their Complaint, petitioners alleged that they are the owners of a parcel of land located in
the assailed Decision in so far as the finding of fraud is SUSTAINED with the MODIFICATION Sumpong, Malaybalay, Bukidnon covered by Transfer Certificate of Title (TCT) No. T-
that respondent RUPERTO V. TANKEH be ordered to pay moral damages in the amount of 253348 (subject land) in the name of petitioner Aurora; that they are natural born Filipino
FIVE HUNDRED THOUSAND PESOS (₱500,000.00) and the amount of TWO HUNDRED citizens but petitioner Delfin acquired American citizenship while his wife, petitioner Aurora,
THOUSAND PESOS (₱200,000.00) by way of exemplary damages. remained a Filipino citizen; that petitioner Aurora is the sister of Reynalda Visitacion
(Reynalda);9that on July 23, 1997, Reynalda sold the subject land to her daughter, Rowena
SO ORDERED. Gay T. Visitacion Lopez (respondent Rowena), through a deed of sale10 for an unconscionable
amount of ₱95,000.00 although said property had a market value of more than
₱2,000,000.00; that the subject sale was done without the knowledge and consent of
Republic of the Philippines
petitioners; and that, for these fraudulent acts, respondents should be held liable for
SUPREME COURT
damages. Petitioners prayed that (1) the deed of sale dated July 23, 1997 be declared void ab
Manila
initio, (2) the subject land be reconveyed to petitioners, and (3) respondents be ordered to
pay damages.
SECOND DIVISION

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
On May 19, 1998, respondents filed their Answer11 with counterclaim. Respondents averred (4) No x x x damages are awarded. The respective parties must bear their own
that on December 12, 1990, petitioners executed a special power of attorney (SPA)12 in favor expenses except that respondents, jointly and severally, must pay the costs of this
of Reynalda granting the latter the power to offer for sale the subject land; that sometime in suit.
1994, respondent Rowena and petitioners agreed that the former would buy the subject land
for the price of ₱800,000.00 to be paid on installment; that on January 25, 1995, respondent SO ORDERED.14
Rowena paid in cash to petitioners the sum of $1,000.00; that from 1995 to 1997,
respondent Rowena paid the monthly installments thereon as evidenced by money orders;
In ruling in favor of petitioners, the trial court held: (1) the SPA merely authorized Reynalda
that, in furtherance of the agreement, a deed of sale was executed and the corresponding
to offer for sale the subject land for a price subject to the approval of the petitioners; (2)
title was issued in favor of respondent Rowena; that the subject sale was done with the
Reynalda violated the terms of the SPA when she sold the subject land to her daughter,
knowledge and consent of the petitioners as evidenced by the receipt of payment by
respondent Rowena, without first seeking the approval of petitioners as to the selling price
petitioners; and that petitioners should be held liable for damages for filing the subject
thereof; (3) the SPA does not sufficiently confer on Reynalda the authority to sell the subject
Complaint in bad faith. Respondents prayed that the Complaint be dismissed and that
land; (4) Reynalda, through fraud and with bad faith, connived with her daughter,
petitioners be ordered to pay damages.
respondent Rowena, to sell the subject land to the latter; and, (5) the sale contravenes
Article 1491, paragraph 2, of the Civil Code which prohibits the agent from acquiring the
On May 25, 1998, petitioners filed an Answer to Counterclaim.13 Petitioners admitted the property subject of the agency unless the consent of the principal has been given. The trial
existence of the SPA but claimed that Reynalda violated the terms thereof when she court held that Reynalda, as agent, acted outside the scope of her authority under the SPA.
(Reynalda) sold the subject land without seeking the approval of petitioners as to the selling Thus, the sale is null and void and the subject land should be reconveyed to petitioners. The
price. Petitioners also claimed that the monthly payments from 1995 to 1997 were mere trial court further ruled that petitioners are not entirely free from liability because they
deposits as requested by respondent Rowena so that she (Rowena) would not spend the received from respondent Rowena deposits totaling $12,000.00. Under the principle of
same pending their agreement as to the purchase price; and that Reynalda, acting with unjust enrichment, petitioners should, thus, be ordered to reimburse the same without
evident bad faith, executed the deed of sale in her favor but placed it in the name of her interest.
daughter, respondent Rowena, which sale is null and void because an agent cannot purchase
for herself the property subject of the agency.
Petitioners filed a partial motion for reconsideration15 praying for the award of attorney’s
fees. In its January 14, 2003 Order16 denying the aforesaid motion, the trial court clarified
Ruling of the Regional Trial Court that the reimbursement of $12,000.00 in favor of respondents was without interest because
there was also no award of rental income in favor of petitioners. Both parties are deemed
On January 6, 2003, the RTC rendered a Decision in favor of petitioners, viz: mutually compensated and must bear their own expenses.

WHEREFORE, Decision is hereby rendered, as follows; From this Decision, respondents appealed to the CA.

(1) Ordering the petitioners, jointly and severally, to return the said amount of Ruling of the Court of Appeals
$12,000.00 at the present rate of exchange less the expenses to be incurred for the
transfer of the property in question under the name of the petitioners; On May 19, 2005, the CA rendered the assailed Decision reversing the judgment of the trial
court, viz:
(2) Ordering the Register of Deeds of Bukidnon to cancel TCT No. T-62674 in the
name of the respondent Rowena Gay T. Visitacion-Lopez and to issue a new TCT in WHEREFORE, premises considered, the appealed Decision of the Court a quo is hereby
the name of the petitioners; REVERSED and SET ASIDE. Accordingly, title to the subject property shall remain in the name
of the Appellant ROWENA GAY VISITACION-LOPEZ. The latter and her spouse MELVIN LOPEZ
(3) Ordering respondents, spouses Melvin and Rowena Gay Lopez, to execute a are directed to pay the balance of Four Hundred Eighty Eight Thousand Pesos (₱488,000.00)
Deed of Reconveyance in favor of the petitioners, or if said respondents should to the petitioners effective within 30 days from receipt of this Decision and in case of delay,
refuse to do so or are unable to do so, the Clerk of Court of the RTC and ex-officio to pay the legal rate of interests [sic] at 12% per annum until fully paid.
Provincial Sheriff to execute such Deed of Reconveyance;
SO ORDERED.17

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
In reversing the trial court’s Decision, the appellate court ruled that: (1) the SPA sufficiently failed to agree on the purchase price as stated by petitioner Aurora in her testimony. The
conferred on Reynalda the authority to sell the subject land; (2) although there is no direct money, in cash and checks, given to petitioners from 1995 to 1997 were mere deposits until
evidence of petitioners’ approval of the selling price of the subject land, petitioner Aurora’s the parties could agree to the purchase price. Moreover, Reynalda acted beyond the scope of
acts of receiving two money orders and several dollar checks from respondent Rowena over her authority under the SPA because she was merely authorized to look for prospective
the span of three years amount to the ratification of any defect in the authority of Reynalda buyers of the subject land. Even assuming that she had the power to sell the subject land
under the SPA; (3) petitioners are estopped from repudiating the sale after they had received under the SPA, she did not secure the approval as to the price from petitioners before
the deposits totaling $12,000.00; (4) the sale is not contrary to public policy because there is executing the subject deed of sale, hence, the sale is null and void. Petitioners also contend
no rule or law which prohibits the sale of property subject of the agency between the agent that there was no ratification of the subject sale through petitioners’ acceptance of the
and his children unless it would be in fraud of creditors which is not the case here; (5) monthly checks from respondent Rowena because the sale occurred subsequent to the
petitioners impliedly ratified the subject SPA and contract of sale as well as its effects; and, receipt of the aforesaid checks. They further claim that the sale was void because it was not
(6) the selling price of ₱800,000.00 for the subject land is deemed reasonable based on the only simulated but violates Article 1491 of the Civil Code which prohibits the agent from
testimony of respondent Rowena as this was the selling price agreed upon by her and acquiring the property subject of the agency. Here, Reynalda merely used her daughter,
petitioner Delfin. Considering that respondent Rowena proved that she remitted a total of respondent Rowena, as a dummy to acquire the subject land. Finally, petitioners question
$12,000.00 to petitioners and pegging the exchange rate at that time at ₱26.00 per dollar, the determination by the appellate court that the fair market value of the subject land is
the appellate court ruled that ₱312,000.00 of the ₱800,000.00 selling price was already ₱800,000.00 for lack of any factual and legal basis.
received by petitioners. Thus, respondents are only liable for the balance of ₱488,000.00.
Respondents’ Arguments
Hence, this Petition.
Respondents counter that the issue as to whether there was a perfected contract of sale
Issues between petitioners and respondent Rowena is inextricably related to the issue of whether
the deed of sale dated July 23, 1997 is valid, hence, the appellate court properly ruled on the
Petitioners raise the following issues for our resolution: former. Furthermore, they reiterate the findings of the appellate court that the receipt of
monthly installments constitutes an implied ratification of any defect in the SPA and deed of
sale dated July 23, 1997. They emphasize that petitioners received a total of $12,000.00 as
I. Whether the CA erred in resolving the issue in the case at bar.
consideration for the subject land.

II. Whether under the SPA Reynalda had the power to sell the subject land.
Our Ruling

III. Whether the actuations of petitioner Aurora in receiving money from

The Petition is meritorious.
respondent Rowena amounted to the ratification of the breach in the exercise of
the SPA.
As a general rule, we do not disturb the factual findings of the appellate court. However, this
case falls under one of the recognized exceptions thereto because the factual findings of the
IV. Whether the CA erred in not declaring the sale void on grounds of public policy.
trial court and appellate court are conflicting.19Our review of the records leads us to
conclude that the following are the relevant factual antecedents of this case.
V. Whether the CA erred in adopting the testimony of respondent Rowena as to
the ₱800,000.00 selling price of the subject land.18
Petitioners were the owners of the subject land covered by TCT No. T-25334 in the name of
petitioner Aurora. On December 12, 1990, petitioners, as principals and sellers, executed an
Petitioners’ Arguments SPA in favor of Reynalda, as agent, to, among others, offer for sale the subject land provided
that the purchase price thereof should be approved by the former. Sometime in 1994,
Petitioners argue that the appellate court went beyond the issues of this case when it ruled petitioners and respondent Rowena agreed to enter into an oral contract to sell over the
that there was a contract of sale between respondent Rowena and petitioner Aurora subject land for the price of ₱800,000.00 to be paid in 10 years through monthly
because the issues before the trial court were limited to the validity of the deed of sale dated installments.
July 23, 1997 for being executed by Reynalda beyond the scope of her authority under the
SPA. Further, the existence of the alleged contract of sale was not proven because the parties
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
On January 25, 1995, respondent Rowena paid the first monthly installment of $1,000.00 to May 29, 1996 500.00
petitioner Aurora which was followed by 22 intermittent monthly installments of $500.00
spanning almost three years. Sometime in 1997, after having paid a total of $10,000.00, June 30, 1996 500.00
respondent Rowena called her mother, Reynalda, claiming that she had already bought the July 31, 1996 500.00
subject land from petitioners. Using the aforesaid SPA, Reynalda then transferred the title to
August 31, 1996 500.00
the subject land in respondent Rowena’s name through a deed of sale dated July 23, 1997
without the knowledge and consent of petitioners. In the aforesaid deed, Reynalda appeared September 30, 1996 500.00
and signed as attorney-in-fact of petitioner Aurora, as seller, while respondent Rowena
October 29, 1996 500.00
appeared as buyer. After which, a new title, i.e., TCT No. 62674,20 to thesubject land was
issued in the name of respondent Rowena. December 31, 1996 500.00
January 31, 1997 500.00
We explain these factual findings and the consequences thereof below.
February 28, 1997 500.00

Petitioners and respondent March 31, 1997 500.00

May 31, 1997 500.00
Rowena entered into a contract to sell over the subject land.
July 19, 1997 500.00
August 31, 1997 500.00
Petitioners deny that they agreed to sell the subject land to respondent Rowena for the price
of ₱800,000.00 payable in 10 years through monthly installments. They claim that the September 30, 1997 500.00
payments received from respondent Rowena were for safekeeping purposes only pending
October 31, 1997 500.00
the final agreement as to the purchase price of the subject land.
November 30, 1997 500.00
We are inclined to give credence to the claim of the respondents for the following reasons. Total 12,000.00

First, the payment of monthly installments was duly established by the evidence on record Second, in her testimony, petitioner Aurora claimed that the $1,000.00 in cash that she
consisting of money orders21 and checks22 payable to petitioner Aurora. Petitioners do not received from respondent Rowena on January 25, 1995 was a mere deposit until the
deny that they received 23 monthly installments over the span of almost three years. As of purchase price of the subject land would have been finally agreed upon by both
November 30, 1997 (i.e., the date of the last monthly installment), the payments already parties.24 However, petitioner Aurora failed to explain why, after receiving this initial sum of
totaled $12,000.00, to wit: $1,000.00, she thereafter accepted from respondent Rowena 22 intermittent monthly
installments in the amount of $500.00. No attempt was made on the part of petitioners to
Date Amount Paid return these amounts and it is fair to assume that petitioners benefited therefrom.
(in dollars)
January 25, 1995 1,000.0023 Third, it strains credulity that respondent Rowena would make such monthly installments for
a substantial amount of money and for a long period of time had there been no agreement
February 21, 1995 500.00 between the parties as to the purchase price of the subject land.
March 27, 1995 500.00
April 25, 1995 500.00 We are, thus, inclined to rule that there was, indeed, a contractual agreement between the
parties for the purchase of the subject land and that this agreement partook of an oral
June 1, 1995 500.00 contract to sell for the sum of ₱800,000.00. A contract to sell has been defined as "a bilateral
June 30, 1995 500.00 contract whereby the prospective seller, while expressly reserving the ownership of the
subject property despite delivery thereof to the prospective buyer, binds himself to sell the
July 31, 1995 500.00 said property exclusively to the prospective buyer upon fulfillment of the condition agreed
upon, that is, full payment of the purchase price."25 In a contract to sell, "ownership is
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retained by the seller and is not to pass until the full payment of the price x x x."26 It is July 31, 1996 500.00 26.2280 13,114.00
"commonly entered into so as to protect the seller against a buyer who intends to buy the
property in installments by withholding ownership over the property until the buyer effects August 31, 1996 500.00 26.202034 13,101.00
full payment therefor."27 September 30, 1996 500.00 26.2570 13,128.50
October 29, 1996 500.00 26.2830 13,141.50
In the case at bar, while there was no written agreement evincing the intention of the parties
to enter into a contract to sell, its existence and partial execution were sufficiently December 31, 1996 500.00 26.288035 13,144.00
established by, and may be reasonably inferred from the actuations of the parties, to wit: (1) January 31, 1997 500.00 26.3440 13,172.00
the title to the subject land was not immediately transferred, through a formal deed of
conveyance, in the name of respondent Rowena prior to or at the time of the first payment February 28, 1997 500.00 26.3330 13,166.50
of $1,000.00 by respondent Rowena to petitioner Aurora on January 25, 1995;28 (2) after this March 31, 1997 500.00 26.3670 13,183.50
initial payment, petitioners received 22 intermittent monthly installments from respondent
May 31, 1997 500.00 26.374036 13,187.00
Rowena in the sum of $500.00; and, (3) in her testimony, respondent Rowena admitted that
she had the title to the subject land transferred in her name only later on or on July 23, 1997, July 19, 1997 500.00 28.574037 14,287.00
through a deed of sale, because she believed that she had substantially paid the purchase
Total 260,626.50
price thereof,29 and that she was entitled thereto as a form of security for the installments
she had already paid.30
Thus, as of July 19, 1997 or prior to the execution of the deed of sale dated July 23, 1997, the
Respondent Rowena was in breach of the contract to sell. total amount of monthly installments paid by respondent Rowena to petitioners was only
₱260,626.50 or 32.58%38 of the ₱800,000.00 purchase price. That the full price was yet to be
paid at the time of the subject transfer of title was admitted by respondent Rowena on cross-
Although we rule that there was a contract to sell over the subject land between petitioners
examination, viz:
and respondent Rowena, we find that respondent Rowena was in breach thereof because, at
the time the aforesaid deed of sale was executed on July 23, 1997, the full price of the
subject land was yet to be paid. In arriving at this conclusion, we take judicial notice31 of the ATTY. OKIT:
prevailing exchange rates at the time, as published by the Bangko Sentral ng Pilipinas,32 and
multiply the same with the monthly installments respondent Rowena paid to petitioners, as Q - Let us make this clear. You now admit that x x x you agreed to buy the lot at eight
supported by the evidence on record, to wit: hundred thousand, to which the Plaintiff x x x agreed. Now based on the dollar rate, your
total payment did not reach x x x eight hundred thousand pesos? Is that correct? [sic]
Amount Paid Exchange Rate
Date Peso Equivalent A - Yes.
(in dollars) (peso per dollar)
January 25, 1995 1,000.00 24.7700 24,770.00
Q - Since notwithstanding the fact this eight hundred thousand which you have agreed is not
February 21, 500.00 25.1140 12,557.00 fully paid why did your mother finalize the deed of sale?
1995
March 27, 1995 500.00 25.9670 12,983.50 A - My mother is equipped with the SPA to transfer the lot to me only for security purposes
but actually there is no full payment.39 (Emphasis supplied)
April 25, 1995 500.00 26.0270 13,013.50
June 1, 1995 500.00 25.8040 12,902.00 Respondent Rowena tried to justify the premature transfer of title by stating that she had
June 30, 1995 500.00 25.5750 12,787.50 substantially paid the full amount of the purchase price and that this was necessary as a
security for the installments she had already paid. However, her own evidence clearly
July 31, 1995 500.00 25.5850 12,792.50
showed that she had, by that time, paid only 32.58% thereof. Neither can we accept her
May 29, 1996 500.00 26.1880 13,094.00 justification that the premature transfer of title was necessary as a security for the
installments she had already paid absent proof that petitioners agreed to this new
June 30, 1996 500.00 26.203033 13,101.50
arrangement. Verily, she failed to prove that petitioners agreed to amend or novate the
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contract to sell in order to allow her to acquire title over the subject land even if she had not Respondent Rowena’s reliance on the SPA as the authority or consent to effect the
paid the price in full. premature transfer of title in her name is plainly misplaced. The terms of the SPA are clear. It
merely authorized Reynalda to sell the subject land at a price approved by petitioners. The
Significantly, the evidence on record indicates that the premature transfer of title in the SPA could not have amended or novated the contract to sell to allow respondent Rowena to
name of respondent Rowena was done without the knowledge and consent of petitioners. In acquire the title over the subject land despite non-payment of the price in full for the reason
particular, respondent Rowena’s narration of the events leading to the transfer of title that the SPA was executed four years prior to the contract to sell. In fine, the tenor of her
showed that she and her mother, Reynalda, never sought the consent of petitioners prior to testimony indicates that respondent Rowena made a unilateral determination that she had
said transfer of title, viz: substantially paid the purchase price and that she is entitled to the transfer of title as a form
of security for the installments she had already paid, reasons, we previously noted, as
unjustified.
COURT:

The contract to sell is rescissible.

Q- Why is this check (in the amount of $1,000.00) in your possession now?

Article 1191 of the Civil Code provides:

A- This is the check I paid to her (referring to petitioner Aurora) which is in cash. [sic]

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
ATTY. BARROSO:
obligors should not comply with what is incumbent upon him.

Q - Now did you continue x x x paying the $500.00 dollar to him (referring to petitioner
The injured party may choose between fulfillment and the rescission of the obligation, with
Delfin)?
the payment of damages in either case. He may also seek rescission even after he has chosen
fulfillment, if the latter should become impossible.
A - Yes.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing
xxxx of a period. x x x

Q - Now having stated substantially paid, what did you do with the land subject of this case? As a general rule, "rescission will not be permitted for a slight or casual breach of the
[sic] contract, but only for such breaches as are substantial and fundamental as to defeat the
object of the parties in making the agreement."41
A - I called my mother who has equipped with SPA to my Uncle that I have already bought
the land. [sic] In the case at bar, we find that respondent Rowena’s act of transferring the title to the
subject land in her name, without the knowledge and consent of petitioners and despite non-
Q - And you called your mother? payment of the full price thereof, constitutes a substantial and fundamental breach of the
contract to sell. As previously noted, the main object or purpose of a seller in entering into a
A - Yes. contract to sell is to protect himself against a buyer who intends to buy the property in
installments by withholding ownership over the property until the buyer effects full payment
therefor.42 As a result, the seller’s obligation to convey and the buyer’s right toconveyance of
xxxx the property arise only upon full payment of the price. Thus, a buyer who willfully
contravenes this fundamental object or purpose of the contract, by covertly transferring the
Q - Then what transpired next? ownership of the property in his name at a time when the full purchase price has yet to be
paid, commits a substantial and fundamental breach which entitles the seller to rescission of
A - After two years my mother called me if how much I have paid the land and being the contract.43
equipped with SPA, so she transferred the land to me. [sic]40 (Emphases supplied)

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Indeed, it would be highly iniquitous for us to rule that petitioners, as sellers, should continue respondent Rowena presented the proof of payment of the monthly installments in her
with the contract to sell even after the discovery of the aforesaid breach committed by Answer to the Complaint, that this was brought to light to which petitioners readily admitted.
respondent Rowena, as buyer, considering that these acts betrayed in no small measure the Further, no evidence was presented to prove that respondent Rowena occupied the subject
trust reposed by petitioners in her and her mother, Reynalda. Put simply, respondent land or benefited from the use thereof upon commencement of the contract to sell which
Rowena took advantage of the SPA, in the name of her mother and executed four years prior would have justified the setting off of rental income against the monthly installments paid by
to the contract to sell, to effect the transfer of title to the subject land in her (Rowena’s) respondent Rowena to petitioners.
name without the knowledge and consent of petitioners and despite non-payment of the full
price. In view of the foregoing, the sums paid by respondent Rowena as monthly installments to
petitioners should, thus, be returned to her with legal interest. The total amount to be
We, thus, rule that petitioners are entitled to the rescission of the subject contract to sell. reimbursed by petitioners to respondent Rowena is computed as follows:

Petitioners are entitled to moral damages and attorney’s fees while respondent Rowena is Exchange
entitled to the reimbursement of the monthly installments with legal interest. Amount
Rate
Date Paid Peso Equivalent
(peso per
(in dollars)
Article 1170 of the Civil Code provides: dollar)
January 25, 1995 1,000.00 24.7700 24,770.00
Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence,
February 21, 1995 500.00 25.1140 12,557.00
or delay, and those who in any manner contravene the tenor thereof, are liable for damages.
March 27, 1995 500.00 25.9670 12,983.50
Fraud or malice (dolo) has been defined as a "conscious and intentional design to evade the April 25, 1995 500.00 26.0270 13,013.50
normal fulfillment of existing obligations" and is, thus, incompatible with good faith.44 In the
case at bar, we find that respondent Rowena was guilty of fraud in the performance of her June 1, 1995 500.00 25.8040 12,902.00
obligation under the subject contract to sell because (1) she knew that she had not yet paid June 30, 1995 500.00 25.5750 12,787.50
the full price (having paid only 32.58% thereof) when she had the title to the subject land
July 31, 1995 500.00 25.5850 12,792.50
transferred to her name, and (2) she orchestrated the aforesaid transfer of title without the
knowledge and consent of petitioners. Her own testimony and documentary evidence May 29, 1996 500.00 26.1880 13,094.00
established this fact. Where fraud and bad faith have been established, the award of moral
June 30, 1996 500.00 26.2030 13,101.50
damages is proper.45 Further, under Article 2208(2)46 of the Civil Code, the award of
attorney’s fees is proper where the plaintiff is compelled to litigate with third persons or July 31, 1996 500.00 26.2280 13,114.00
incur expenses to protect his interest because of the defendant’s act or omission. Here,
August 31, 1996 500.00 26.2020 13,101.00
respondent Rowena’s aforesaid acts caused petitioners to incur expenses in litigating their
just claims. We, thus, find respondent Rowena liable for moral damages and attorney’s fees September 30, 1996 500.00 26.2570 13,128.50
which we fix at ₱100,000.00 and ₱50,000.00, respectively.47 October 29, 1996 500.00 26.2830 13,141.50
December 31, 1996 500.00 26.2880 13,144.00
Anent the monthly installments respondent Rowena paid to petitioners, our review of the
records leads us to conclude that respondent Rowena is entitled to the reimbursement of the January 31, 1997 500.00 26.3440 13,172.00
same with legal interest. Although respondent Rowena was clearly unjustified in prematurely
February 28, 1997 500.00 26.3330 13,166.50
and covertly transferring the title to the subject land in her name, we deplore petitioners’
lack of candor in prosecuting their claims before the trial court and intent to evade March 31, 1997 500.00 26.3670 13,183.50
recognition of the monthly installments that they received from respondent Rowena. The May 31, 1997 500.00 26.3740 13,187.00
records indicate that, in their Complaint, petitioners made no mention of the fact that they
had entered into a contract to sell with respondent Rowena and that they had received 23 July 19, 1997 500.00 28.5740 14,287.00
monthly installments from the latter. The Complaint merely alleged that the subject sale was August 31, 1997 500.00 30.1650 15,082.50
done without the knowledge and consent of petitioners. It was only later on, when
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September 30, 1997 500.00 33.8730 16,936.50 As can be seen, the SPA gave Reynalda the power and duty to, among others, (1) offer for
sale the subject land to prospective buyers, (2) seek the approval of petitioners as to the
October 31, 1997 500.00 34.9380 17,469.00 selling price thereof, and (3) sign the contract of sale on behalf of petitioners upon locating a
November 30, 1997 500.00 34.6550 17,327.50 buyer willing and able to purchase the subject land at the price approved by petitioners.
Although the SPA was executed four years prior to the contract to sell, there would have
Total 327,442.00
been no obstacle to its use by Reynalda had the ensuing sale been consummated according
to its terms. However, as previously discussed, when Reynalda, as attorney-in-fact of
Since this amount is neither a loan nor forbearance of money, we set the interest rate at 6% petitioner Aurora, signed the subject deed of sale dated July 23, 1997, the agreed price of
per annum computed from the time of the filing of the Answer48 to the Complaint on May ₱800,000.00 (which may be treated as the approved price) was not yet fully paid because
19, 199849 until finality of judgement and thereafter at 12% per annum until fully paid in respondent Rowena at the time had paid only ₱260,262.50.52 Reynalda, therefore, acted
accordance with our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals.50 Petitioners beyond the scope of her authority because she signed the subject deed of sale, on behalf of
are, thus, ordered to pay respondent Rowena the sum of ₱327,442.00 with an interest of 6% petitioners, at a price of ₱95,000.00 which was not approved by the latter. For her part,
per annum computed from May 19, 1998 until finality of judgment and thereafter of 12% per respondent Rowena cannot deny that she was aware of the limits of Reynalda’s power under
annum until fully paid. the SPA because she (Rowena) was the one who testified that the agreed price for the
subject land was ₱800,000.00.
The sale of the subject land, effected through the deed of sale dated July 23, 1997, is void.
Article 1898 of the Civil Code provides:
Having ruled that respondent Rowena was in substantial breach of the contract to sell
because she had the title to the subject land transferred in her name without the knowledge Art. 1898. If the agent contracts in the name of the principal, exceeding the scope of his
and consent of petitioners and despite lack of full payment of the purchase price, we now authority, and the principal does not ratify the contract, it shall be void if the party with
rule on the validity of the deed of sale dated July 23, 1997 which was used to effect the whom the agent contracted is aware of the limits of the powers granted by the principal. In
aforesaid transfer of ownership. this case, however, the agent is liable if he undertook to secure the principal’s ratification.

It will be recalled that on December 12, 1990, petitioners, as principals and sellers, executed It should be noted that, under Article 1898 of the Civil Code, the principal’s ratification of the
an SPA in favor of Reynalda, as agent. The SPA stated in part: acts of the agent, done beyond the scope of the latter’s authority, may cure the defect in the
contract entered into between the agent and a third person. This seems to be the line of
That we spouses, AURORA TUMIBAY and DELFIN TUMIBAY, of legal age and presently reasoning adopted by the appellate court in upholding the validity of the subject sale. The
residing at 36 Armstrong Drive, Clark, New Jersey, 07066 name, constitute and appoint appellate court conceded that there was no evidence that respondents sought the approval
REYNALDA VISITACION, widow, of legal age and residing at Don Carlos, Bukidnon, Philippines, of petitioners for the subject sale but it, nonetheless, ruled that whatever defect attended
to be our true and lawful Attorney-in-fact, for us and in our name, place and stead and for the sale of the subject land should be deemed impliedly ratified by petitioners’ acceptance of
our use and benefit to do and perform the following acts and deed: the monthly installments paid by respondent Rowena. Though not clearly stated in its
Decision, the appellate court seemed to rely on the four monthly installments (i.e., August
31, September 30, October 31, and November 30, 1997) respondent Rowena paid to
To administer our real property located in the Province of Bikidnon, Town of Malaybalay, petitioners which the latter presumably received and accepted even after the execution of
Barrio of Bantaunon, Towns of Maramag, Paradise, Maramag and Barrio of Kiburiao, Town of the deed of sale dated July 23, 1997.
Quezon.
We disagree.
To offer for sale said properties, the selling price of which will be subject to our approval.
That petitioners continued to receive four monthly installments even after the premature
xxxx titling of the subject land in the name of respondent Rowena, through the deed of sale dated
July 23, 1997, did not, by itself, establish that petitioners ratified such sale. On the contrary,
To sign all papers and documents on our behalf in a contract of sale x x x.51. the fact that petitioners continued to receive the aforesaid monthly installments tended to
establish that they had yet to discover the covert transfer of title in the name of respondent
Rowena. As stated earlier, the evidence on record established that the subject sale was done
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without petitioners’ knowledge and consent which would explain why receipt or acceptance 5. Petitioners are ordered to pay respondent Rowena the sum of ₱327,442.00 with
by petitioners of the aforementioned four monthly installments still occurred. Further, it runs legal interest of 6% per annum from May 19, 1998 until finality of this Decision. In
contrary to common human experience and reason that petitioners, as sellers, would forego case petitioners fail to pay the amount due upon finality of this Decision, they shall
the reservation or retention of the ownership over the subject land, which was intended to pay legal interest thereon at the rate of 12% per annum until fully paid.
guarantee the full payment of the price under the contract to sell, especially so in this case
where respondent Rowena, as buyer, had paid only 32.58% of the purchase price. In a No costs.
contract to sell, it would be unusual for the seller to consent to the transfer of ownership of
the property to the buyer prior to the full payment of the purchase price because the
SO ORDERED.
reservation of the ownership in the seller is precisely intended to protect the seller from the
buyer. We, therefore, find that petitioners’ claim that they did not ratify the subject sale,
which was done without their knowledge and consent, and that the subsequent discovery of Republic of the Philippines
the aforesaid fraudulent sale led them to promptly file this case with the courts to be more SUPREME COURT
credible and in accord with the evidence on record. To rule otherwise would be to reward Manila
respondent Rowena for the fraud that she committed on petitioners.
SECOND DIVISION
Based on the foregoing, we rule that (1) Reynalda, as agent, acted beyond the scope of her
authority under the SPA when she executed the deed of sale dated July 23, 1997 in favor of G.R. No. 98695 January 27, 1993
respondent Rowena, as buyer, without the knowledge and consent of petitioners, and
conveyed the subject land to respondent Rowena at a price not approved by petitioners, as JUAN J. SYQUIA, CORAZON C. SYQUIA, CARLOTA C. SYQUIA, CARLOS C. SYQUIA and
principals and sellers, (2) respondent Rowena was aware of the limits of the authority of ANTHONY C. SYQUIA, petitioners,
Reynalda under the SPA, and (3) petitioners did not ratify, impliedly or expressly, the acts of vs.
Reynalda. Under Article 1898 of the Civil Code, the sale is void and petitioners are, thus, THE HONORABLE COURT OF APPEALS, and THE MANILA MEMORIAL PARK CEMETERY,
entitled to the reconveyance of the subject land. INC., respondents.

WHEREFORE, the Petition is GRANTED. The May 19, 2005 Decision and February 10, 2006 Pacis & Reyes Law Offices for petitioners.
Resolution of the Court of Appeals in CA-G.R. CV No. 79029 are ANNULLED and SET ASIDE.
The January 6, 2003 Decision of the Regional Trial Court of Malaybalay City, Branch 9 in Civil
Case No. 2759-98 is REINSTATED and MODIFIED to read as follows: Augusto S. San Pedro & Ari-Ben C. Sebastian for private respondents.

1. The deed of sale dated July 23, 1997 over the subject land, covered by TCT No. T- CAMPOS, JR., J.:
62674, between petitioner Aurora, represented by Reynalda as her attorney-in-
fact, and respondent Rowena is declared void. Herein petitioners, Juan J. Syquia and Corazon C. Syquia, Carlota C. Syquia, Carlos C. Syquia,
and Anthony Syquia, were the parents and siblings, respectively, of the deceased Vicente
2. The contract to sell over the subject land, covered by TCT No. T-25334, between Juan Syquia. On March 5, 1979, they filed a complaint1 in the then Court of First Instance
petitioners, as sellers, and respondent Rowena, as buyer, is declared against herein private respondent, Manila Memorial Park Cemetery, Inc. for recovery of
rescinded.1âwphi1 damages arising from breach of contract and/or quasi-delict. The trial court dismissed the
complaint.
3. The Register of Deeds of Malaybalay City is ordered to cancel TCT No. T-62674 in
the name of respondent Rowena and to reinstate TCT No. T-25334 in the name of The antecedent facts, as gathered by the respondent Court, are as follows:
petitioner Aurora.
On March 5, 1979, Juan, Corazon, Carlota and Anthony all surnamed
4. Respondent Rowena is ordered to pay petitioners the sum of ₱100,000.00 as Syquia, plaintiff-appellants herein, filed a complaint for damages against
moral damages and ₱50,000.00 as attorney’s fees. defendant-appellee, Manila Memorial Park Cemetery, Inc.

Page 74 of 118
Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
The complaint alleged among others, that pursuant to a Deed of Sale amount determined by the court, 20% of defendant-appellee's total
(Contract No. 6885) dated August 27, 1969 and Interment Order No. liability as attorney's fees, and expenses of litigation and costs of suit.2
7106 dated July 21, 1978 executed between plaintiff-appellant Juan J.
Syquia and defendant-appellee, the former, father of deceased Vicente In dismissing the complaint, the trial court held that the contract between the parties did not
Juan J. Syquia authorized and instructed defendant-appellee to inter the guarantee that the cement vault would be waterproof; that there could be no quasi-delict
remains of deceased in the Manila Memorial Park Cemetery in the because the defendant was not guilty of any fault or negligence, and because there was a
morning of July 25, 1978 conformably and in accordance with defendant- pre-existing contractual relation between the Syquias and defendant Manila Memorial Park
appellant's (sic) interment procedures; that on September 4, 1978, Cemetery, Inc.. The trial court also noted that the father himself, Juan Syquia, chose the
preparatory to transferring the said remains to a newly purchased family gravesite despite knowing that said area had to be constantly sprinkled with water to keep
plot also at the Manila Memorial Park Cemetery, the concrete vault the grass green and that water would eventually seep through the vault. The trial court also
encasing the coffin of the deceased was removed from its niche accepted the explanation given by defendant for boring a hole at the bottom side of the
underground with the assistance of certain employees of defendant- vault: "The hole had to be bored through the concrete vault because if it has no hole the
appellant (sic); that as the concrete vault was being raised to the surface, vault will (sic) float and the grave would be filled with water and the digging would caved
plaintiffs-appellants discovered that the concrete vault had a hole (sic) in the earth, the earth would caved (sic) in the (sic) fill up the grave."3
approximately three (3) inches in diameter near the bottom of one of the
walls closing out the width of the vault on one end and that for a certain
From this judgment, the Syquias appealed. They alleged that the trial court erred in holding
length of time (one hour, more or less), water drained out of the hole;
that the contract allowed the flooding of the vault; that there was no desecration; that the
that because of the aforesaid discovery, plaintiffs-appellants became
boring of the hole was justifiable; and in not awarding damages.
agitated and upset with concern that the water which had collected
inside the vault might have risen as it in fact did rise, to the level of the
coffin and flooded the same as well as the remains of the deceased with The Court of Appeals in the Decision4 dated December 7, 1990 however, affirmed the
ill effects thereto; that pursuant to an authority granted by the Municipal judgment of dismissal. Petitioner's motion for reconsideration was denied in a Resolution
Court of Parañaque, Metro Manila on September 14, 1978, plaintiffs- dated April 25, 1991.5
appellants with the assistance of licensed morticians and certain
personnel of defendant-appellant (sic) caused the opening of the Unsatisfied with the respondent Court's decision, the Syquias filed the instant petition. They
concrete vault on September 15, 1978; that upon opening the vault, the allege herein that the Court of Appeals committed the following errors when it:
following became apparent to the plaintiffs-appellants: (a) the interior
walls of the concrete vault showed evidence of total flooding; (b) the 1. held that the contract and the Rules and Resolutions of private
coffin was entirely damaged by water, filth and silt causing the wooden respondent allowed the flooding of the vault and the entrance thereto of
parts to warp and separate and to crack the viewing glass panel located filth and silt;
directly above the head and torso of the deceased; (c) the entire lining of
the coffin, the clothing of the deceased, and the exposed parts of the
deceased's remains were damaged and soiled by the action of the water 2. held that the act of boring a hole was justifiable and corollarily, when it
and silt and were also coated with filth. held that no act of desecration was committed;

Due to the alleged unlawful and malicious breach by the defendant- 3. overlooked and refused to consider relevant, undisputed facts, such as
appellee of its obligation to deliver a defect-free concrete vault designed those which have been stipulated upon by the parties, testified to by
to protect the remains of the deceased and the coffin against the private respondent's witnesses, and admitted in the answer, which could
elements which resulted in the desecration of deceased's grave and in have justified a different conclusion;
the alternative, because of defendant-appellee's gross negligence
conformably to Article 2176 of the New Civil Code in failing to seal the 4. held that there was no tort because of a pre-existing contract and the
concrete vault, the complaint prayed that judgment be rendered ordering absence of fault/negligence; and
defendant-appellee to pay plaintiffs-appellants P30,000.00 for actual
damages, P500,000.00 for moral damages, exemplary damages in the 5. did not award the P25,000.00 actual damages which was agreed upon
by the parties, moral and exemplary damages, and attorney's fees.
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At the bottom of the entire proceedings is the act of boring a hole by private respondent on Rule 17. Every earth interment shall be made enclosed in a concrete box,
the vault of the deceased kin of the bereaved petitioners. The latter allege that such act was or in an outer wall of stone, brick or concrete, the actual installment of
either a breach of private respondent's contractual obligation to provide a sealed vault, or, in which shall be made by the employees of the Association.7
the alternative, a negligent act which constituted a quasi-delict. Nonetheless, petitioners
claim that whatever kind of negligence private respondent has committed, the latter is liable Pursuant to this above-mentioned Rule, a concrete vault was provided on July 27, 1978, the
for desecrating the grave of petitioners' dead. day before the interment, and was, on the same day, installed by private respondent's
employees in the grave which was dug earlier. After the burial, the vault was covered by a
In the instant case, We are called upon to determine whether the Manila Memorial Park cement lid.
Cemetery, Inc., breached its contract with petitioners; or, alternatively, whether private
respondent was guilty of a tort. Petitioners however claim that private respondent breached its contract with them as the
latter held out in the brochure it distributed that the . . . lot may hold single or double
We understand the feelings of petitioners and empathize with them. Unfortunately, internment (sic) underground in sealed concrete vault."8 Petitioners claim that the vault
however, We are more inclined to answer the foregoing questions in the negative. There is provided by private respondent was not sealed, that is, not waterproof. Consequently, water
not enough ground, both in fact and in law, to justify a reversal of the decision of the seeped through the cement enclosure and damaged everything inside it.
respondent Court and to uphold the pleas of the petitioners.
We do not agree. There was no stipulation in the Deed of Sale and Certificate of Perpetual
With respect to herein petitioners' averment that private respondent has committed culpa Care and in the Rules and Regulations of the Manila Memorial Park Cemetery, Inc. that the
aquiliana, the Court of Appeals found no negligent act on the part of private respondent to vault would be waterproof. Private respondent's witness, Mr. Dexter Heuschkel, explained
justify an award of damages against it. Although a pre-existing contractual relation between that the term "sealed" meant "closed."9 On the other hand, the word "seal" is defined as . . .
the parties does not preclude the existence of a culpa aquiliana, We find no reason to any of various closures or fastenings . . . that cannot be opened without rupture and that
disregard the respondent's Court finding that there was no negligence. serve as a check against tampering or unauthorized opening." 10 The meaning that has been
given by private respondent to the word conforms with the cited dictionary definition.
Art. 2176. Whoever by act or omission causes damage to another, there Moreover, it is also quite clear that "sealed" cannot be equated with "waterproof". Well
being fault or negligence, is obliged to pay for the damage done. Such settled is the rule that when the terms of the contract are clear and leave no doubt as to the
fault or negligence, if there is no pre-existing contractual relation intention of the contracting parties, then the literal meaning of the stipulation shall
between the parties, is called a quasi-delict . . . . (Emphasis supplied). control. 11 Contracts should be interpreted according to their literal meaning and should not
be interpreted beyond their obvious intendment. 12 As ruled by the respondent Court:
In this case, it has been established that the Syquias and the Manila Memorial Park
Cemetery, Inc., entered into a contract entitled "Deed of Sale and Certificate of When plaintiff-appellant Juan J. Syquia affixed his signature to the Deed
Perpetual Care"6 on August 27, 1969. That agreement governed the relations of the of Sale (Exhibit "A") and the attached Rules and Regulations (Exhibit "1"),
parties and defined their respective rights and obligations. Hence, had there been it can be assumed that he has accepted defendant-appellee's undertaking
actual negligence on the part of the Manila Memorial Park Cemetery, Inc., it would to merely provide a concrete vault. He can not now claim that said
be held liable not for a quasi-delict or culpa aquiliana, but for culpa contractual as concrete vault must in addition, also be waterproofed (sic). It is basic that
provided by Article 1170 of the Civil Code, to wit: the parties are bound by the terms of their contract, which is the law
between them (Rizal Commercial Banking Corporation vs. Court of
Appeals, et al. 178 SCRA 739). Where there is nothing in the contract
Those who in the performance of their obligations are guilty of fraud,
which is contrary to law, morals, good customs, public order, or public
negligence, or delay, and those who in any manner contravene the tenor
policy, the validity of the contract must be sustained (Phil. American
thereof, are liable for damages.
Insurance Co. vs. Judge Pineda, 175 SCRA 416). Consonant with this
ruling, a contracting party cannot incur a liability more than what is
The Manila Memorial Park Cemetery, Inc. bound itself to provide the concrete box to be send expressly specified in his undertaking. It cannot be extended by
in the interment. Rule 17 of the Rules and Regulations of private respondent provides that: implication, beyond the terms of the contract (Rizal Commercial Banking
Corporation vs. Court of Appeals, supra). And as a rule of evidence,
where the terms of an agreement are reduced to writing, the document

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
itself, being constituted by the parties as the expositor of their intentions, Thus, finding no evidence of negligence on the part of private respondent, We find no reason
is the only instrument of evidence in respect of that agreement which the to award damages in favor of petitioners.
law will recognize, so long as its (sic) exists for the purpose of evidence
(Starkie, Ev., pp. 648, 655, Kasheenath vs. Chundy, 5 W.R. 68 cited in In the light of the foregoing facts, and construed in the language of the applicable laws and
Francisco, Revised Rules of Court in the Phil. p. 153, 1973 Ed.). And if the jurisprudence, We are constrained to AFFIRM in toto the decision of the respondent Court of
terms of the contract are clear and leave no doubt upon the intention of Appeals dated December 7, 1990. No costs.
the contracting parties, the literal meaning of its stipulations shall control
(Santos vs. CA, et al., G. R. No. 83664, Nov. 13, 1989; Prudential Bank &
SO ORDERED.
Trust Co. vs. Community Builders Co., Inc., 165 SCRA 285; Balatero vs.
IAC, 154 SCRA 530). 13
Republic of the Philippines
SUPREME COURT
We hold, therefore, that private respondent did not breach the tenor of its obligation to the
Manila
Syquias. While this may be so, can private respondent be liable for culpa aquiliana for boring
the hole on the vault? It cannot be denied that the hole made possible the entry of more
water and soil than was natural had there been no hole. SECOND DIVISION

The law defines negligence as the "omission of that diligence which is required by the nature G.R. No. 108245 November 25, 1994
of the obligation and corresponds with the circumstances of the persons, of the time and of
the place." 14 In the absence of stipulation or legal provision providing the contrary, the MANOLO P. SAMSON, petitioner,
diligence to be observed in the performance of the obligation is that which is expected of a vs.
good father of a family. COURT OF APPEALS, SANTOS & SONS, INC., and ANGEL SANTOS, respondents.

The circumstances surrounding the commission of the assailed act — boring of the hole — Clara Dumandan-Singh for petitioner.
negate the allegation of negligence. The reason for the act was explained by Henry Flores,
Interment Foreman, who said that: Paterno A. Catacutan for private respondents.

Q It has been established in this particular case that a certain Vicente Juan Syquia PUNO, J.:
was interred on July 25, 1978 at the Parañaque Cemetery of the Manila Memorial
Park Cemetery, Inc., will you please tell the Hon. Court what or whether you have
participation in connection with said internment (sic)? Petitioner MANOLO P. SAMSON prays for the reversal of the Decision of the Court of
Appeals, dated November 27, 1992,1 modifying the decision of the Regional Trial Court of
Pasig, Branch 157, dated November 29, 1990, and absolving private respondent Angel Santos
A A day before Juan (sic) Syquia was buried our personnel dug a grave. After from liability for the damages sustained by petitioner.
digging the next morning a vault was taken and placed in the grave and when the
vault was placed on the grave a hole was placed on the vault so that water could
come into the vault because it was raining heavily then because the vault has no The antecedent facts, as borne by the records, are as follows:
hole the vault will float and the grave would be filled with water and the digging
would caved (sic) in and the earth, the earth would (sic) caved in and fill up the The subject matter of this case is a commercial unit at the Madrigal Building, located at Claro
grave. 15 (Emphasis ours) M. Recto Avenue, Sta. Cruz, Manila. The building is owned by Susana Realty Corporation and
the subject premises was leased to private respondent Angel Santos. The lessee's
Except for the foreman's opinion that the concrete vault may float should there be a heavy haberdashery store, Santos & Sons, Inc., occupied the premises for almost twenty (20) years
rainfall, from the above-mentioned explanation, private respondent has exercised the on a yearly basis.2 Thus, the lease contract in force between the parties in the year 1983
diligence of a good father of a family in preventing the accumulation of water inside the vault provided that the term of the lease shall be one (1) year, starting on August 1, 1983 until July
which would have resulted in the caving in of earth around the grave filling the same with 31, 1984.3
earth.
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
On June 28, 1984, the lessor Susana Realty Corporation, through its representative Mr. Jes Petitioner affixed his signature on the letter-proposal signifying his acceptance.8 They agreed
Gal R. Sarmiento, Jr., informed respondents that the lease contract which was to expire on that the consideration for the sale of the store and leasehold right of Santos & Sons, Inc. shall
July 31, 1984 would not be renewed.4 be P300,000.00.

Nonetheless, private respondent's lease contract was extended until December 31, On February 20, 1985, petitioner paid P150,000.00 to private respondent representing the
1984.5 Private respondent also continued to occupy the leased premises beyond the value of existing improvements in the Santos & Sons store. The parties agreed that the
extended term. balance of P150,000.00 shall be paid upon the formal renewal of the lease contract between
private respondent and Susana Realty. It was also a condition precedent to the transfer of
On February 5, 1985, private respondent received a letter6 from the lessor, through its Real the leasehold right of private respondent to petitioner.9
Estate Accountant Jane F. Bartolome, informing him of the increase in rentals, retroactive to
January 1985, pending renewal of his contract until the arrival of Ms. Ma. Rosa Madrigal (one In March 1985, petitioner began to occupy the Santos & Sons store. He utilized the store for
of the owners of Susana Realty). the sale of his own goods.10

Four days later or on February 9, 1985, petitioner Manolo Samson saw private respondent in All went well for a few months. In July 1985, however, petitioner received a notice from
the latter's house and offered to buy the store of Santos & Sons and his right to lease the Susana Realty, addressed to Santos & Sons, Inc., directing the latter to vacate the leased
subject premises.7 Petitioner was advised to return after a week. premises on or before July 15, 1985. 11 Private respondent failed to renew his lease over the
premises and petitioner was forced to vacate the same on July 16, 1985.
On February 15, 1985, petitioner returned to private respondent's house to confirm his offer.
On said occasion, private respondent presented petitioner with a letter containing his Petitioner then filed an action for damages against private respondent. He imputed fraud and
counter proposal, thus: bad faith against private respondent when the latter stated in his letter-proposal that his
lease contract with Susana Realty has been impliedly renewed. Petitioner claimed that this
MANOLO SAMSON misrepresentation induced him to purchase the store of Santos & Sons and the leasehold
Marikina, Metro Manila right of private respondent.

Sir: In defense, respondent alleged that their agreement was to the effect that the consideration
for the sale was P300,000.00, broken down as follows: P150,000.00 shall be for the
improvements in the store, and the balance of P150,000.00 shall be for the sale of the
In line with our negotiation to sell our rights in the Madrigal building at
leasehold right of Santos & Sons over the subject premises. The balance shall be paid only
Recto, Rizal Avenue, I propose the following:
after the formal renewal of the lease contract and its actual transfer to petitioner.

1. The lease contract between Santos and Sons, Inc. and Madrigal was
Trial on the merits ensued. On November 29, 1990, the trial court rendered a decision 12 in
impliedly renewed. It will be formally renewed this monthly (sic) when
favor of petitioner. The dispositive portion reads:
Tanya Madrigal arrives.

WHEREFORE, AND IN VIEW OF ALL THE FOREGOING, judgment is hereby

2. To avoid breach of contract with Madrigal, I suggest that you acquire
rendered in favor of plaintiff Manolo P. Samson and against defendants
all our shares in Santos and Sons, Inc.
Santos and Sons, Inc., and Angel C. Santos, ordering the said defendants
to pay jointly and severally unto the plaintiff:
3. I will answer and pay all obligations of Santos and Sons, Inc. as of
February 28, 1985.
1. The sum of P150,000.00, representing the cash advance payment for
the store and the right to occupy its leased premises subject matter of
Very truly yours, the sale involved, with interest thereon at the legal rate from the filing of
the complaint on November 5, 1985 until the same is fully paid;
Angel C. Santos

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
2. The sum of P70,000.00 representing the cost of additional SO ORDERED.15
improvements of the store sold, also with legal interest from November
5, 1985 until the full payment thereof; Hence this petition for review with the following assigned errors:

3. The sum of P150,000.00, representing the loss that the plaintiff I

suffered from the sale at bargain prices of the goods taken out of the
store, with legal interest thereon from the (d)ate of this decision until the
WHETHER OR NOT THE COURT OF APPEALS ERRED IN DISREGARDING THE
same is fully paid;
FOLLOWING FACTUAL FINDINGS OF THE TRIAL COURT:

4. The sum of P100,000.00 representing the profits which plaintiff failed

1. THAT RESPONDENTS DELIBERATELY AND
to realize from the sale of the goods referred to above, with legal interest
FRAUDULENTLY CONCEALED FROM THE PETITIONER
thereon from the date of the decision until said amount is fully paid;
THE FACT THAT THE LEASE ON THE SUBJECT STORE
PREMISES HAD ALREADY EXPIRED AND WOULD NO
5. The amounts of P100,000.00 and P50,000.00 as moral and exemplary LONGER BE RENEWED BY THE LESSOR.
damages, respectively, also with legal interest thereon, from the date of
this judgment until fully paid; and
2. THAT SOLELY BY REASON OF RESPONDENTS'
FRAUDULENT CONDUCT AND BAD FAITH, PETITIONER
6. The sum of P45,000.00 as and for attorney's fees and expenses of EXERCISING THE DILIGENCE REQUIRED UNDER THE
litigation, in addition to judicial costs. CIRCUMSTANCES, THE LATTER INCURRED DAMAGES
AND LOSSES.
On the defendants' counterclaim, the plaintiff is ordered to return to the
defendants the latter's steel filing cabinet, adding machine, typewriter II
and all its unused sales invoices, receipts and blank checks, if the plaintiff
still has any of the said papers or documents.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING
RESPONDENTS FREE FROM LIABILITY TO PETITIONER FOR THE DAMAGES
SO ORDERED.13 THE LATTER HAD INCURRED ON ACCOUNT OF THE RESPONDENTS' BAD
FAITH.
Private respondent appealed to the Court of Appeals. In a Decision dated November 27,
1992,14 the appellate court modified the decision of the trial court after finding that private The pivotal issue in the case at bench is whether or not private respondent Angel Santos
respondent did not exercise fraud or bad faith in its dealings with petitioner. The dispositive committed fraud or bad faith in representing to petitioner that his contract of lease over the
portion of the impugned decision reads: subject premises has been impliedly renewed by Susana Realty. Undoubtedly, it was this
representation which induced petitioner to enter into the subject contract with private
WHEREFORE, the appealed decision is hereby MODIFIED by reducing the respondent.
amounts the trial court awarded to appellee Manolo P. Samson in that
appellants Santos & Sons, Inc. and Angel C. Santos are ordered to pay We find the petition devoid of merit.
appellee, by way of reimbursement, the P150,000.00 which the latter
gave appellants as advance payment for their store and lease right with
Bad faith is essentially a state of mind affirmatively operating with furtive design or with
legal interest to be reckoned from the promulgation date of this decision;
some motive of ill-will.16 It does not simply connote bad judgment or negligence. It imports a
and AFFIRMED with respect to the trial court's judgment ordering
dishonest purpose or some moral obliquity and conscious doing of wrong.17 Bad faith is thus
appellee to return to appellants the latter's filing cabinet, adding
synonymous with fraud and involves a design to mislead or deceive another, not prompted
machine, typewriter, and all their unused sales invoices, receipts and
by an honest mistake as to one's rights or duties, but by some interested or sinister motive.18
blank checks, if appellee still has any of these documents. No costs.

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
In contracts, the kind of fraud that will vitiate consent is one where, through insidious words Please note that we are charging the same for everybody and they all agreed to pay
or machinations of one of the contracting parties, the other is induced to enter into a the new rate.
contract which, without them, he would not have agreed to.19 This is known as dolo
causante or causal fraud which is basically a deception employed by one party prior to or We do expect your full cooperation with regards (sic) to this matter.
simultaneous to the contract in order to secure the consent of the other.
Very truly yours,
Petitioner claims that their agreement was that the amount of P300,000.00 is the
consideration for the transfer of private respondent's leasehold right to him and he paid
(Sgd.) JANE F. BARTOLOME
P150,000.00 as downpayment therefor. He insists that private respondent acted in bad faith
Accountant-Real Estate
in assuring him that his lease contract with Susana Realty has been impliedly renewed and
would be formally renewed upon the arrival of Tanya Madrigal (representative of Susana
Realty). As evidence of private respondent's bad faith, petitioner stresses that private Clearly, this letter led private respondent to believe and conclude that his lease contract was
respondent himself admitted that prior to February 15, 1985, he was informed by his lawyer impliedly renewed and that formal renewal thereof would be made upon the arrival of Tanya
that he could not yet sell his lease right to petitioner for his lease over the premises has not Madrigal. This much was admitted by petitioner himself when he testified during cross-
been renewed by Susana Realty Corporation. examination that private respondent initially told him of the fact that his lease contract with
Susana Realty has already expired but he was anticipating its formal renewal upon the arrival
of Madrigal. 21 Thus, from the start, it was known to both parties that, insofar as the
After carefully examining the records, we sustain the finding of public respondent Court of
agreement regarding the transfer of private respondent's leasehold right to petitioner was
Appeals that private respondent was neither guilty of fraud nor bad faith in claiming that
concerned, the object thereof relates to a future right.22 It is a conditional contract
there was implied renewal of his contract of lease with Susana Realty. The records will bear
recognized in civil law,23 the efficacy of which depends upon an expectancy — the formal
that the original contract of lease between the lessor Susana Realty and the lessee private
renewal of the lease contract between private respondent and Susana Realty.
respondent was for a period of one year, commencing on August 1, 1983 until July 31, 1984.
Subsequently, however, private respondent's lease was extended until December 31, 1984.
At this point, it was clear that the lessor had no intention to renew the lease contract of The records would also reveal that private respondent's lawyer informed him that he could
private respondent for another year. However, on February 5, 1985, the lessor, thru its Real sell the improvements within the store for he already owned them but the sale of his
Estate Accountant, sent petitioner a letter20 of even date, worded as follows: leasehold right over the store could not as yet be made for his lease contract had not been
actually renewed by Susana Realty. Indeed, it was precisely pursuant to this advice that
private respondent and petitioner agreed that the improvements in the store shall be sold to
February 5, 1985
petitioner for P150,000.00 24 while the leasehold right shall be sold for the same amount of
P150,000.00, payable only upon the formal renewal of the lease contract and the actual
Mr. Angel Santos transfer of the leasehold right to petitioner. 25 The efficacy of the contract between the
1609-1613 C.M. Recto Avenue parties was thus made dependent upon the happening of this suspensive condition.
Sta. Cruz, Manila
Moreover, public respondent Court of Appeals was correct when it faulted petitioner for
Dear Mr. Santos: failing to exercise sufficient diligence in verifying first the status of private respondent's
lease. We thus quote with approval the decision of the Court of Appeals when it ruled, thus:
This is to notify you that the rentals for the 1609-1613 C.M. Recto Avenue, Sta.
Cruz, Manila, which you are leasing with (sic) us has been increased from P77.81 to When appellant Angel C. Santos said that the lease contract had expired
P100.00 per square meter retroactive January 1985 (as you have not vacated the but that it was impliedly renewed, that representation should have put
place) pending renewal of your contract until the arrival of Miss Ma. Rosa appellee on guard. To protect his interest, appellee should have checked
A.S. Madrigal. with the lessor whether that was so, and this he failed to do; or he would
have simply deferred his decision on the proposed sale until Miss
Thus, your new rate will be PESOS: FOURTEEN THOUSAND TWO HUNDRED FIFTY Madrigal's arrival, and this appellee also failed to do. In short, as a buyer
ONLY (P14,250.00) since you are occupying One Hundred Forty-Two and 50/100 of the store and lease right in question — or as a buyer of any object of
square meters. commerce for that matter — appellee was charged with the obligation of
caution aptly expressed in the universal maxim caveat emptor. 26
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Indeed, petitioner had every opportunity to verify the status of the lease contract of private The case arose from the following antecedents:
respondent with Susana Realty. As held by this Court in the case of Caram,
Jr. v. Laureta, 27 the rule caveat emptor requires the purchaser to be aware of the supposed Estela Dizon-Garcia, mother of respondent Amelia G. Quiazon, was the registered owner of a
title of the vendor and he who buys without checking the vendor's title takes all the risks and parcel of land covered by Transfer Certificate of Title (TCT) No. 107576, situated in Sto.
losses consequent to such failure. In the case at bench, the means of verifying for himself the Domingo II, Capas, Tarlac. The property was brought under the coverage of Operation Land
status of private respondent's lease contract with Susana Realty was open to petitioner. Transfer pursuant to Presidential Decree (P.D.) No. 27.2 On June 8, 1981, Feliciano dela Cruz,
Nonetheless, no effort was exerted by petitioner to confirm the status of the subject lease a tenant-farmer, was issued CLT No. 0-0362073 over a 3.7200-hectare portion of the said
right. 28 He cannot now claim that he has been deceived. property.

In sum, we hold that under the facts proved, private respondent cannot be held guilty of On March 9, 1992, the heirs of Estela Dizon-Garcia executed a Deed of Extrajudicial
fraud or bad faith when he entered into the subject contract with petitioner. Causal fraud or Admission and Partition with Waiver adjudicating among themselves all the properties left by
bad faith on the part of one of the contracting parties which allegedly induced the other to both of their parents, except for the subject property, which was adjudicated solely in favor
enter into a contract must be proved by clear and convincing evidence. This petitioner failed of respondent.
to do.
On May 15, 1993, respondent filed a Complaint with the Provincial Adjudication Board of the
IN VIEW WHEREOF, the appealed decision is hereby AFFIRMED in toto. Costs against Department of Agrarian Reform (DAR) against petitioner Ferdinand dela Cruz, alleging that in
petitioner. 1991, he entered into a leasehold contract with respondent, by virtue of which he bound
himself to deliver 28 cavans of palay as rental. Since 1991, petitioner Ferdinand dela Cruz
SO ORDERED. allegedly failed to deliver the stipulated rental because he had already abandoned the
landholding. For this reason, respondent prayed for his ejectment from the property and the
Republic of the Philippines termination of their tenancy relationship.4
SUPREME COURT
Manila In his Answer, petitioner Ferdinand dela Cruz, through petitioner Renato dela Cruz, alleged
that the execution of the leasehold contract was erroneous considering that a CLT had
THIRD DIVISION already been issued in favor of his father. He contended that by virtue of the CLT, they
became the owners of the landholding, without any obligation to pay rentals to respondent
but only to pay amortizations to the Land Bank of the Philippines. He claimed that they paid
G.R. No. 171961 November 28, 2008
the rentals until 1992, which rentals should now be considered as advance payments for the
land.5
FERDINAND A. DELA CRUZ and RENATO A. DELA CRUZ,petitioners,
vs.
Later, respondent amended the complaint to implead Feliciano and Renato dela Cruz.6 The
AMELIA G. QUIAZON, respondent.
amended complaint alleged that petitioners Ferdinand and Feliciano dela Cruz were already
immigrants to the United States of America (U.S.A.) and that petitioner Renato dela Cruz, the
DECISION actual tiller of the land, was a usurper because his possession of the land was without the
consent of the landowner. Respondent argued that by migrating to the U.S.A., Feliciano was
NACHURA, J.: deemed to have abandoned the landholding, for which reason his CLT should now be
canceled.
Petitioners, Ferdinand and Renato dela Cruz, seek the review of the Court of Appeals
Decision1 dated January 19, 2006 and Resolution dated March 21, 2006. The assailed decision In turn, petitioners amended their Answer. They averred that their father was just
affirmed the Department of Agrarian Reform Adjudication Board (DARAB) Resolution temporarily out of the country and that petitioner Renato’s possession and cultivation of the
canceling the Certificate of Land Transfer (CLT) in the name of petitioners’ father, Feliciano land did not need the consent of the landowner because it was done in aid of their father’s
dela Cruz, and directing petitioners to vacate the property. cultivation of the land.7

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
On November 8, 1993, petitioners began paying amortizations to the Land Bank of the 3. DIRECTING the herein landowners-applicant to cause the segregation of the
Philippines.8 retained area at their own expense and to submit report to this Office within thirty
(30) days from receipt hereof.
On December 21, 1993, Provincial Adjudicator Romeo B. Bello dismissed the complaint based
on his finding that the landholding had not been abandoned by Feliciano considering that SO ORDERED.15
petitioner Renato dela Cruz, a member of Feliciano’s immediate family, was in actual and
physical possession thereof.9 In a letter16 dated April 15, 1996, the heirs of Feliciano dela Cruz prayed for the setting aside
of the said order. DAR Secretary Ernesto D. Garilao treated the letter as an appeal but,
Respondent filed a Motion for Reconsideration. In an Order10 dated June 8, 1994, the nevertheless, denied the same in an Order17 dated May 13, 1997.
Provincial Adjudicator denied respondent’s motion for reconsideration for lack of merit and
directed the Municipal Agrarian Reform Office of Capas, Tarlac, to determine whether the On July 7, 1999, the DARAB finally dismissed respondent’s appeal (DARAB Case No. 3335)
amortizations had been fully paid and, if so, to issue an Emancipation Patent. from the decision of the Provincial Adjudicator.18 This decision became final and executory.19

On July 11, 1994, respondent filed a Notice of Appeal from said decision.11 During the On October 19, 1999, respondent filed a Petition for Relief from Judgment,20 claiming that
pendency of the appeal, respondent executed, on October 6, 1994, a Deed of Conveyance she just arrived from the U.S.A. on September 10, 1999 and it was only then that she found
and Waiver of her rights over the subject property in favor of her siblings.12 She then filed her out about the July 7, 1999 DARAB Decision. She purportedly tried to contact her counsel only
Appeal Memorandum on November 29, 1994.13 The appeal was docketed as DARAB Case No. to discover that he died on December 21, 1994. Respondent insisted that petitioners had
3335. already abandoned the landholding and failed to pay the lease and amortization payments
therefor, thus, the cancellation of their CLT was justified. She argued that the CLT was
Unknown to petitioners, respondent and her siblings, as heirs of Estela Dizon-Garcia, had rendered moot by the DAR’s grant of their application for retention of their property which
filed an Application for Retention before the DAR Regional Office for Region III, as early as included the subject landholding.
June 1, 1994.14 The application was granted on February 8, 1996. The dispositive portion of
the Regional Director’s Order reads: In its Resolution dated February 7, 2001, the DARAB granted the petition for relief from
judgment. The DARAB set aside its July 7, 1999 Decision primarily based on the DAR Order
WHEREFORE, all premises considered, Order is hereby issued, as follows: granting the application for retention, as well as its finding that Ferdinand and Feliciano dela
Cruz abandoned the subject landholding when they went to the U.S.A. The dispositive
1. GRANTING the application for retention of the Heirs of Estela Dizon-Garcia over portion of the Resolution reads:
a landholding covered by TCT No. 107576, with a total area of 12.5431, located at
Sto. Domingo, Capas, Tarlac, to be divided among the heirs as follows: WHEREFORE, all of the above premises considered, and in the interest of agrarian
justice, the decision of this Board dated July 7, 1999 is hereby SET ASIDE, and a new
one is entered:
Rosita Garcia - 3.9641 has.

Buena Garcia - 2.5796 has. 1. Declaring the dissolution of the tenancy relationship between the
parties-litigants;
Bella Garcia - 3.0000 has.

Estellita Garcia - 3.0000 has. 2. Declaring the cancellation of the CLT issued in the name of defendant
Feliciano dela Cruz, the land subject thereof being part of the retention
area of petitioner per order dated February 8, 1996; and
2. ORDERING the herein landowners-applicant to maintain in peaceful possession
the tenants of the subject landholding, namely: Renato dela Cruz, Carlos Aquino
and Francisco Manayang as leaseholders; and 3. Ordering the respondents or any person acting in their behalf to vacate
the subject land in favor of the petitioner.

SO ORDERED.21
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
On August 7, 2002, the DARAB denied petitioners’ motion for reconsideration. On November Secondly, petitioners contend that respondent had no legal standing to file the petition for
27, 2003, the DARAB likewise denied petitioners’ Ex-Parte Manifestation with Motion and relief from judgment because she no longer had any interest in the subject property since
Comments and Manifestation.22 respondent already waived her rights over the same in favor of her siblings.

Petitioners thereafter filed a petition for review with the Court of Appeals (CA). Pending the In addition, petitioners posit that with the issuance of the CLT in favor of their father, their
resolution of the appeal, Feliciano dela Cruz passed away. tenancy relationship with respondent ceased, and ownership over the subject property was
effectively transferred to them. In any case, they deny that they have abandoned the
On January 19, 2006, the CA denied the petition. On March 21, 2006, the CA also denied landholding as it is still being cultivated by petitioner Renato dela Cruz, son of the farmer-
petitioners’ motion for reconsideration. Consequently, petitioners filed this petition for beneficiary. Assuming that they have abandoned the property, the right of action to oust
review on certiorari based on the following grounds: them from the property lies with the Republic of the Philippines to whom the property will
revert.
A.
Finally, petitioners assert that the DAR Decision in the retention case is null and void for lack
of due process; hence, the DARAB erred in relying on the said decision. They complain that
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN AFFIRMING THE
they were not impleaded as parties in the said case, nor were they given notice of its filing.
DECISION OF THE DARAB IN DSCA NO. 0151, WHICH GAVE DUE COURSE TO THE
Petitioners likewise point out that the retention right of the heirs, who merely succeeded to
PETITION FOR RELIEF FROM JUDGMENT.
the rights of their mother, the landowner, should be limited to five hectares only.

B.
The petition is meritorious.

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN AFFIRMING THE

At the outset, we sustain respondent’s personality to file the petition for relief from
DECISION OF THE DARAB IN DSCA NO. 0151 WHEREBY IT WAS RULED THAT
judgment. A petition for relief from judgment is a remedy available to a party who, through
PETITIONERS HAD THE OBLIGATION TO PAY LEASE RENTALS AND WERE GUILTY OF
fraud, accident, mistake or excusable negligence, was prevented from taking an appeal from
ABANDONMENT.
a judgment or final order therein. The personality to file a petition for relief from judgment,
therefore, resides in a person who is a party to the principal case. This legal standing is not
C. lost by the mere transfer of the disputed property pendente lite. The original party does not
lose his personality as a real party-in-interest merely because of the transfer of interest to
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN AFFIRMING THE another pendente lite.25
DECISION OF THE DARAB IN DSCA NO. 0151 WHEREBY IT WAS RULED THAT
RESPONDENT HAD THE RIGHT TO RETAIN THE SUBJECT PROPERTY BY VIRTUE OF Nonetheless, even as we acknowledge the legal personality of respondent, we hold that the
THE DECISION IN THE DAR RETENTION CASE.23 DARAB, as sustained by the CA, erred in granting the petition for relief from judgment.

Petitioners argue that there was no basis for the grant of the petition for relief from A petition for relief from judgment is an equitable remedy that is allowed only in exceptional
judgment because it was respondent’s own neglect, and not her counsel’s demise, that cases when there is no other available or adequate remedy. When a party has another
caused the loss of her right to appeal. They claim that as early as June 5, 1995, respondent remedy available to him, which may be either a motion for new trial or appeal from an
personally knew of the death of her lawyer and she could have employed a new counsel by adverse decision of the trial court, and he was not prevented by fraud, accident, mistake or
then. To elaborate, petitioners narrate that, in another case pending before the Regional excusable negligence from filing such motion or taking such appeal, he cannot avail himself
Trial Court (RTC) of Capas, Tarlac in which respondent is plaintiff, she was ordered to replace of this remedy. Indeed, relief will not be granted to a party who seeks avoidance from the
her former counsel and a new counsel, in fact, entered his appearance therein on June 5, effects of the judgment when the loss of the remedy at law was due to his own negligence;
1995.24 And even assuming that respondent learned about the July 7, 1999 DARAB Decision otherwise, the petition for relief can be used to revive the right to appeal which had been
only on September 10, 1999, she could have filed her appeal with the CA within 15 days from lost thru inexcusable negligence.26
the said date.
In this case, respondent’s failure to avail herself of a motion for reconsideration or an appeal
to the CA was due to her inexcusable negligence. Negligence to be excusable must be one
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which ordinary diligence and prudence could not have guarded against.27 We note that a requires (a) a clear and absolute intention to renounce a right or claim or to desert a right or
copy of the July 7, 1999 DARAB Decision was in fact served on the respondent herself at her property; and (b) an external act by which that intention is expressed or carried into effect.
residence, based on her narration that when she arrived from the U.S.A., her helper handed The intention to abandon implies a departure, with the avowed intent of never returning,
to her the envelope containing the DARAB Decision.28 By her own account, she arrived on resuming or claiming the right and the interest that have been abandoned.33 The immigration
September 10, 1999. She cannot, therefore, feign ignorance of the said decision and blame of the original farmer-beneficiary to the U.S.A. did not necessarily result in the abandonment
the death of her counsel for such ignorance. of the landholding, considering that one of his sons, petitioner Renato dela Cruz, continued
cultivating the land. Personal cultivation, as required by law, includes cultivation of the land
Moreover, we cannot disregard the fact that respondent was able to engage the services of a by the tenant (lessee) himself or with the aid of the immediate farm household, which refers
new counsel to represent her in another case pending before the RTC as early as June 5, to the members of the family of the tenant and other persons who are dependent upon him
1995, in compliance with the court’s directive for her to hire a substitute for her deceased for support and who usually help him in the [agricultural] activities.34
counsel. Given this, respondent cannot claim lack of knowledge of the death of her former
counsel, and use it as an excuse for her failure to file a motion for reconsideration or an Without doubt, the landowner’s right of retention may be exercised over tenanted land
appeal from the said DARAB Decision. despite the issuance of a CLT to farmer-beneficiaries.35 However, the cancellation of a CLT
over the subject landholding as a necessary consequence of the landowner’s exercise of his
Besides, the case had been pending before the DARAB for almost five years. To recall, she right of retention is within the jurisdiction of the DAR Secretary, not the DARAB, as it does
filed, through counsel, her notice of appeal on July 11, 1994 and her Appeal Memorandum not involve an agrarian dispute.36
on November 29, 1994. Her former counsel died barely a month later (December 21, 1994).
Had respondent bothered to check the status of the case, she would have discovered her Under Section 1(g), Rule II of the then DARAB Rules of Procedure,37 matters involving strictly
counsel’s demise. Parties are not expected to simply sit back and await the outcome of their the administrative implementation of agrarian laws shall be the exclusive prerogative of and
case. They should be assiduous in keeping track of the status of any litigation to which they cognizable by the Secretary of the DAR. Although Section 1(f) of the said Rules provides that
are a party. By allowing almost five years to lapse without monitoring the status of her the DARAB shall have jurisdiction over cases involving the issuance of a CLT and the
appeal, respondent exhibited a total lack of vigilance tantamount to inexcusable negligence. administrative correction thereof, it should be understood that for the DARAB to exercise
jurisdiction in such cases, there must be an agrarian dispute between the landowner and the
Not only did the DARAB err in granting the petition for relief from judgment, it also erred in tenant.38
canceling the petitioners’ CLT and ordering them to vacate the property based on a finding
that petitioners had abandoned the landholding. In Tenants of the Estate of Dr. Jose Sison v. Court of Appeals,39 the Court sustained the
authority or jurisdiction of the DAR Secretary to cancel the CLT issued to tenant-beneficiaries
However, contrary to petitioners’ posture, the issuance of a CLT does not vest full ownership after the landowners’ right to retain the subject landholding was upheld. The Court ruled
in the holder.29 The issuance of the CLT does not sever the tenancy relationship between the that the issuance, recall or cancellation of certificates of land transfer falls within the
landowner and the tenant-farmer. A certificate of land transfer merely evinces that the Secretary’s administrative jurisdiction as implementor of P.D. No. 27.
grantee thereof is qualified to avail himself of the statutory mechanism for the acquisition of
ownership of the land tilled by him as provided under P.D. No. 27. It is not a muniment of To conclude, respondent’s remedy is to raise before the DAR Secretary the matter of
title that vests in the farmer/grantee absolute ownership of his tillage. 30 It is only after cancellation of petitioner’s CLT as an incident of the order granting the landowners’
compliance with the conditions which entitle a farmer/grantee to an emancipation patent application for retention over the said landholding. In the same forum, petitioners can raise
that he acquires the vested right of absolute ownership in the landholding–a right which then the issue of the validity of the DAR order granting the application for retention based on their
would have become fixed and established, and no longer open to doubt or controversy.31 claim of denial of due process, or in a separate action specifically filed to assail the validity of
the judgment. A collateral attack against a judgment is generally not allowed, unless the
For this reason, the landowner retains an interest over the property that gives him the right judgment is void upon its face or its nullity is apparent by virtue of its own recitals.40
to file the necessary action to evict the tenant from the landholding should there be an
abandonment despite the fact that land acquired under P.D. No. 27 will not revert to the But as a reminder to respondent, this tack can achieve only the cancellation of petitioner’s
landowner.32 CLT. Under Sec. 6 of R.A. No. 6657, if the area retained is tenanted, the tenant shall have the
option to choose whether to remain therein or be a beneficiary in the same or another
Nonetheless, we agree with petitioners that they have not abandoned the subject agricultural land with similar or comparable features. Petitioners may not be ejected from
landholding, as in fact they have continuously cultivated the property. Abandonment
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
the subject landholding even if their CLT is canceled, unless they choose to be beneficiaries of WHEREFORE, premises considered, judgment is hereby rendered in favor
another agricultural land. of the plaintiff and against the defendant, Security Bank & Trust
Company, ordering the defendant bank to pay the plaintiff the sum of —
WHEREFORE, premises considered, the petition is GRANTED. The January 19, 2006 Decision
and March 21, 2006 Resolution of the Court of Appeals are REVERSED and SET ASIDE. a) Twenty Thousand Pesos (P20,000.00), Philippine Currency, as actual
Consequently, the February 7, 2001 DARAB Decision granting the petition for relief from damages;
judgment is SET ASIDE and the July 7, 1999 DARAB Decision is REINSTATED.
b) One Hundred Thousand Pesos (P100,000.00), Philippine Currency, as
SO ORDERED. moral damages; and

Republic of the Philippines c) Five Thousand Pesos (P5,000.00), Philippine Currency, as attorney's
SUPREME COURT fees and legal expenses.
Manila
The counterclaim set up by the defendant are hereby dismissed for lack
THIRD DIVISION of merit.

G.R. No. 102970 May 13, 1993 No costs.

LUZAN SIA, petitioner, SO ORDERED.4

vs.
COURT OF APPEALS and SECURITY BANK and TRUST COMPANY, respondents. The antecedent facts of the present controversy are summarized by the public respondent in
its challenged decision as follows:
Asuncion Law Offices for petitioner.
The plaintiff rented on March 22, 1985 the Safety Deposit Box No. 54 of
Cauton, Banares, Carpio & Associates for private respondent. the defendant bank at its Binondo Branch located at the Fookien Times
Building, Soler St., Binondo, Manila wherein he placed his collection of
DAVIDE, JR., J.: stamps. The said safety deposit box leased by the plaintiff was at the
bottom or at the lowest level of the safety deposit boxes of the
defendant bank at its aforesaid Binondo Branch.
The Decision of public respondent Court of Appeals in CA-G.R. CV No. 26737, promulgated on
21 August 1991,1reversing and setting aside the Decision, dated 19 February 1990, 2 of
Branch 47 of the Regional Trial Court (RTC) of Manila in Civil Case No. 87-42601, entitled During the floods that took place in 1985 and 1986, floodwater entered
"LUZAN SIA vs. SECURITY BANK and TRUST CO.," is challenged in this petition for review into the defendant bank's premises, seeped into the safety deposit box
on certiorari under Rule 45 of the Rules Court. leased by the plaintiff and caused, according to the plaintiff, damage to
his stamps collection. The defendant bank rejected the plaintiff's claim
for compensation for his damaged stamps collection, so, the plaintiff
Civil Case No. 87-42601 is an action for damages arising out of the destruction or loss of the
instituted an action for damages against the defendant bank.
stamp collection of the plaintiff (petitioner herein) contained in Safety Deposit Box No. 54
which had been rented from the defendant pursuant to a contract denominated as a Lease
Agreement. 3 Judgment therein was rendered in favor of the dispositive portion of which The defendant bank denied liability for the damaged stamps collection of
reads: the plaintiff on the basis of the "Rules and Regulations Governing the
Lease of Safe Deposit Boxes" (Exhs. "A-1", "1-A"), particularly paragraphs
9 and 13, which reads (sic):

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
"9. The liability of the Bank by reason of the lease, is limited to the cannot be lifted without destroying it, hence the stamps contained
exercise of the diligence to prevent the opening of the safe by any person therein are no longer visible.
other than the Renter, his authorized agent or legal representative;
2. The second album measure 12 1/2 inches in length, 9 3/4 in width 1
xxx xxx xxx inch thick. Some of its pages can still be lifted. The stamps therein can still
be distinguished but beyond restoration. Others have lost its original
"13. The Bank is not a depository of the contents of the safe and it has form.
neither the possession nor the control of the same. The Bank has no
interest whatsoever in said contents, except as herein provided, and it 3. The tin box is rusty inside. It contains an album with several pieces of
assumes absolutely no liability in connection therewith." papers stuck up to the cover of the box. The condition of the album is the
second abovementioned album."5
The defendant bank also contended that its contract with the plaintiff
over safety deposit box No. 54 was one of lease and not of deposit and, The SECURITY BANK AND TRUST COMPANY, hereinafter referred to as SBTC, appealed the
therefore, governed by the lease agreement (Exhs. "A", "L") which should trial court's decision to the public respondent Court of Appeals. The appeal was docketed as
be the applicable law; that the destruction of the plaintiff's stamps CA-G.R. CV No. 26737.
collection was due to a calamity beyond obligation on its part to notify
the plaintiff about the floodwaters that inundated its premises at In urging the public respondent to reverse the decision of the trial court, SBTC contended
Binondo branch which allegedly seeped into the safety deposit box that the latter erred in (a) holding that the lease agreement is a contract of adhesion; (b)
leased to the plaintiff. finding that the defendant had failed to exercise the required diligence expected of a bank in
maintaining the safety deposit box; (c) awarding to the plaintiff actual damages in the
The trial court then directed that an ocular inspection on (sic) the amount of P20,000.00, moral damages in the amount of P100,000.00 and attorney's fees and
contents of the safety deposit box be conducted, which was done on legal expenses in the amount of P5,000.00; and (d) dismissing the counterclaim.
December 8, 1988 by its clerk of court in the presence of the parties and
their counsels. A report thereon was then submitted on December 12, On 21 August 1991, the respondent promulgated its decision the dispositive portion of which
1988 (Records, p. 98-A) and confirmed in open court by both parties thru reads:
counsel during the hearing on the same date (Ibid., p. 102) stating:
WHEREFORE, the decision appealed from is hereby REVERSED and
"That the Safety Box Deposit No. 54 was opened by instead the appellee's complaint is hereby DISMISSED. The appellant
both plaintiff Luzan Sia and the Acting Branch bank's counterclaim is likewise DISMISSED. No costs.6
Manager Jimmy B. Ynion in the presence of the
undersigned, plaintiff's and defendant's counsel. Said
In reversing the trial court's decision and absolving SBTC from liability, the public respondent
Safety Box when opened contains two albums of
found and ruled that:
different sizes and thickness, length and width and a
tin box with printed word 'Tai Ping Shiang Roast Pork
in pieces with Chinese designs and character." a) the fine print in the "Lease Agreement " (Exhibits "A" and "1" ) constitutes the terms and
conditions of the contract of lease which the appellee (now petitioner) had voluntarily and
knowingly executed with SBTC;
Condition of the above-stated Items —

b) the contract entered into by the parties regarding Safe Deposit Box No. 54 was not a
"Both albums are wet, moldy and badly damaged.
contract of deposit wherein the bank became a depositary of the subject stamp collection;
hence, as contended by SBTC, the provisions of Book IV, Title XII of the Civil Code on deposits
1. The first album measures 10 1/8 inches in length, 8 inches in width and do not apply;
3/4 in thick. The leaves of the album are attached to every page and

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
c) The following provisions of the questioned lease agreement of the safety deposit box III
limiting SBTC's liability:
THE RESPONDENT COURT SERIOUSLY ERRED IN NOT UPHOLDING THE
9. The liability of the bank by reason of the lease, is limited to the AWARDS OF THE TRIAL COURT FOR ACTUAL AND MORAL DAMAGES,
exercise of the diligence to prevent the opening of the Safe by any person INCLUDING ATTORNEY'S FEES AND LEGAL EXPENSES, IN FAVOR OF THE
other than the Renter, his authorized agent or legal representative. PETITIONER.8

xxx xxx xxx We subsequently gave due course the petition and required both parties to submit their
respective memoranda, which they complied with.9
13. The bank is not a depository of the contents of the Safe and it has
neither the possession nor the control of the same. The Bank has no Petitioner insists that the trial court correctly ruled that SBTC had failed "to exercise the
interest whatsoever in said contents, except as herein provided, and it required diligence expected of a bank maintaining such safety deposit box . . . in the light of
assumes absolutely no liability in connection therewith. the environmental circumstance of said safety deposit box after the floods of 1985 and
1986." He argues that such a conclusion is supported by the evidence on record, to wit: SBTC
are valid since said stipulations are not contrary to law, morals, good customs, public order was fully cognizant of the exact location of the safety deposit box in question; it knew that
or public policy; and the premises were inundated by floodwaters in 1985 and 1986 and considering that the bank
is guarded twenty-four (24) hours a day , it is safe to conclude that it was also aware of the
inundation of the premises where the safety deposit box was located; despite such
d) there is no concrete evidence to show that SBTC failed to exercise the required diligence in
knowledge, however, it never bothered to inform the petitioner of the flooding or take any
maintaining the safety deposit box; what was proven was that the floods of 1985 and 1986,
appropriate measures to insure the safety and good maintenance of the safety deposit box in
which were beyond the control of SBTC, caused the damage to the stamp collection; said
question.
floods were fortuitous events which SBTC should not be held liable for since it was not shown
to have participated in the aggravation of the damage to the stamp collection; on the
contrary, it offered its services to secure the assistance of an expert in order to save most of SBTC does not squarely dispute these facts; rather, it relies on the rule that findings of facts
the stamps, but the appellee refused; appellee must then bear the lose under the principle of of the Court of Appeals, when supported by substantial exidence, are not reviewable on
"res perit domino." appeal by certiorari. 10

Unsuccessful in his bid to have the above decision reconsidered by the public The foregoing rule is, of course, subject to certain exceptions such as when there exists a
respondent, 7 petitioner filed the instant petition wherein he contends that: disparity between the factual findings and conclusions of the Court of Appeals and the trial
court. 11 Such a disparity obtains in the present case.
I
As We see it, SBTC's theory, which was upheld by the public respondent, is that the "Lease
Agreement " covering Safe Deposit Box No. 54 (Exhibit "A and "1") is just that — a contract of
IT WAS A GRAVE ERROR OR AN ABUSE OF DISCRETION ON THE PART OF
lease — and not a contract of deposit, and that paragraphs 9 and 13 thereof, which expressly
THE RESPONDENT COURT WHEN IT RULED THAT RESPONDENT SBTC DID
limit the bank's liability as follows:
NOT FAIL TO EXERCISE THE REQUIRED DILIGENCE IN MAINTAINING THE
SAFETY DEPOSIT BOX OF THE PETITIONER CONSIDERING THAT
SUBSTANTIAL EVIDENCE EXIST (sic) PROVING THE CONTRARY. 9. The liability of the bank by reason of the lease, is limited to the
exercise of the diligence to prevent the opening of the Safe by any person
other than the Renter, his autliorized agent or legal representative;
II

xxx xxx xxx

THE RESPONDENT COURT SERIOUSLY ERRED IN EXCULPATING PRIVATE
RESPONDENT FROM ANY LIABILITY WHATSOEVER BY REASON OF THE
PROVISIONS OF PARAGRAPHS 9 AND 13 OF THE AGREEMENT (EXHS. "A" 13. The bank is not a depository of the contents of the Safe and it has
AND "A-1"). neither the possession nor the control of the same. The Bank has no
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
interest whatsoever said contents, except as herein provided, and it deposit boxes is not independent from, but related to or in conjunction
assumes absolutely no liability in connection therewith. 12 with, this principal function. A contract of deposit may be entered into
orally or in writing (Art. 1969, Civil Code] and, pursuant to Article 1306 of
are valid and binding upon the parties. In the challenged decision, the public respondent the Civil Code, the parties thereto may establish such stipulations,
further avers that even without such a limitation of liability, SBTC should still be absolved clauses, terms and conditions as they may deem convenient, provided
from any responsibility for the damage sustained by the petitioner as it appears that such they are not contrary to law, morals, good customs, public order or public
damage was occasioned by a fortuitous event and that the respondent bank was free from policy. The depositary's responsibility for the safekeeping of the objects
any participation in the aggravation of the injury. deposited in the case at bar is governed by Title I, Book IV of the Civil
Code. Accordingly, the depositary would be liable if, in performing its
obligation, it is found guilty of fraud, negligence, delay or contravention
We cannot accept this theory and ratiocination. Consequently, this Court finds the petition to
of the tenor of the agreement [Art. 1170, id.]. In the absence of any
be impressed with merit.
stipulation prescribing the degree of diligence required, that of a good
father of a family is to be observed [Art. 1173, id.]. Hence, any stipulation
In the recent case CA Agro-Industrial Development Corp. vs. Court of Appeals, 13 this Court exempting the depositary from any liability arising from the loss of the
explicitly rejected the contention that a contract for the use of a safety deposit box is a thing deposited on account of fraud, negligence or delay would be void
contract of lease governed by Title VII, Book IV of the Civil Code. Nor did We fully subscribe for being contrary to law and public policy. In the instant case, petitioner
to the view that it is a contract of deposit to be strictly governed by the Civil Code provision maintains that conditions 13 and l4 of the questioned contract of lease of
on deposit; 14 it is, as We declared, a special kind of deposit. The prevailing rule in American the safety deposit box, which read:
jurisprudence — that the relation between a bank renting out safe deposit boxes and its
customer with respect to the contents of the box is that of a bailor and bailee, the bailment
"13. The bank is a depositary of the contents of the safe and it has
for hire and mutual benefit 15 — has been adopted in this jurisdiction, thus:
neither the possession nor control of the same.

In the context of our laws which authorize banking institutions to rent out
"14. The bank has no interest whatsoever in said contents, except as
safety deposit boxes, it is clear that in this jurisdiction, the prevailing rule
herein expressly provided, and it assumes absolutely no liability in
in the United States has been adopted. Section 72 of the General Banking
connection therewith."
Act [R.A. 337, as amended] pertinently provides:

are void as they are contrary to law and public policy. We find Ourselves
"Sec. 72. In addition to the operations specifically authorized elsewhere
in agreement with this proposition for indeed, said provisions are
in this Act, banking institutions other than building and loan associations
inconsistent with the respondent Bank's responsibility as a depositary
may perform the following services:
under Section 72 (a) of the General Banking Act. Both exempt the latter
from any liability except as contemplated in condition 8 thereof which
(a) Receive in custody funds, documents, and limits its duty to exercise reasonable diligence only with respect to who
valuable objects, and rent safety deposit boxes for shall be admitted to any rented safe, to wit:
the safequarding of such effects.
"8. The Bank shall use due diligence that no
xxx xxx xxx unauthorized person shall be admitted to any rented
safe and beyond this, the Bank will not be responsible
The banks shall perform the services permitted under subsections (a), (b) for the contents of any safe rented from it."
and (c) of this section as depositories or as agents. . . ."(emphasis
supplied) Furthermore condition 13 stands on a wrong premise and is contrary to
the actual practice of the Bank. It is not correct to assert that the Bank
Note that the primary function is still found within the parameters of a has neither the possession nor control of the contents of the box since in
contract of deposit, i.e., the receiving in custody of funds, documents and fact, the safety deposit box itself is located in its premises and is under its
other valuable objects for safekeeping. The renting out of the safety absolute control; moreover, the respondent Bank keeps the guard key to
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the said box. As stated earlier, renters cannot open their respective boxes "Except in cases expressly specified by the law, or when it is
unless the Bank cooperates by presenting and using this guard key. otherwise declared by stipulation, or when the nature of the
Clearly then, to the extent above stated, the foregoing conditions in the obligation requires the assumption of risk, no person shall be
contract in question are void and ineffective. It has been said: responsible for those events which could not be foreseen, or
which, though foreseen, were inevitable.'
"With respect to property deposited in a safe-deposit box by a customer
of a safe-deposit company, the parties, since the relation is a contractual In its dissertation of the phrase "caso fortuito" the Enciclopedia
one, may by special contract define their respective duties or provide for Jurisdicada Española 17 says: "In a legal sense and, consequently, also in
increasing or limiting the liability of the deposit company, provided such relation to contracts, a "caso fortuito" prevents (sic) 18 the following
contract is not in violation of law or public policy. It must clearly appear essential characteristics: (1) the cause of the unforeseen ands
that there actually was such a special contract, however, in order to vary unexpected occurrence, or of the failure of the debtor to comply with his
the ordinary obligations implied by law from the relationship of the obligation, must be independent of the human will; (2) it must be
parties; liability of the deposit company will not be enlarged or restricted impossible to foresee the event which constitutes the "caso fortuito," or
by words of doubtful meaning. The company, in renting safe-deposit if it can be foreseen, it must be impossible to avoid; (3) the occurrence
boxes, cannot exempt itself from liability for loss of the contents by its must be such as to render it impossible for one debtor to fulfill his
own fraud or negligence or that, of its agents or servants, and if a obligation in a normal manner; and (4) the obligor must be free from any
provision of the contract may be construed as an attempt to do so, it will participation in the aggravation of the injury resulting to the creditor."
be held ineffective for the purpose. Although it has been held that the (cited in Servando vs. Phil., Steam Navigation Co., supra). 19
lessor of a safe-deposit box cannot limit its liability for loss of the
contents thereof through its own negligence, the view has been taken Here, the unforeseen or unexpected inundating floods were independent
that such a lessor may limit its liability to some extent by agreement or of the will of the appellant bank and the latter was not shown to have
stipulation ."[10 AM JUR 2d., 466]. (citations omitted) 16 participated in aggravating damage (sic) to the stamps collection of the
appellee. In fact, the appellant bank offered its services to secure the
It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of Safety Deposit assistance of an expert to save most of the then good stamps but the
Box in CA Agro-Industrial Development Corp. are strikingly similar to condition No. 13 in the appelle refused and let (sic) these recoverable stamps inside the safety
instant case. On the other hand, both condition No. 8 in CA Agro-Industrial Development deposit box until they were ruined. 20
Corp. and condition No. 9 in the present case limit the scope of the exercise of due diligence
by the banks involved to merely seeing to it that only the renter, his authorized agent or his Both the law and authority cited are clear enough and require no further elucidation.
legal representative should open or have access to the safety deposit box. In short, in all Unfortunately, however, the public respondent failed to consider that in the instant case, as
other situations, it would seem that SBTC is not bound to exercise diligence of any kind at all. correctly held by the trial court, SBTC was guilty of negligence. The facts constituting
Assayed in the light of Our aforementioned pronouncements in CA Agro-lndustrial negligence are enumerated in the petition and have been summarized in
Development Corp., it is not at all difficult to conclude that both conditions No. 9 and No. 13 thisponencia. SBTC's negligence aggravated the injury or damage to the stamp collection.
of the "Lease Agreement" covering the safety deposit box in question (Exhibits "A" and "1") SBTC was aware of the floods of 1985 and 1986; it also knew that the floodwaters inundated
must be stricken down for being contrary to law and public policy as they are meant to the room where Safe Deposit Box No. 54 was located. In view thereof, it should have lost no
exempt SBTC from any liability for damage, loss or destruction of the contents of the safety time in notifying the petitioner in order that the box could have been opened to retrieve the
deposit box which may arise from its own or its agents' fraud, negligence or delay. stamps, thus saving the same from further deterioration and loss. In this respect, it failed to
Accordingly, SBTC cannot take refuge under the said conditions. exercise the reasonable care and prudence expected of a good father of a family, thereby
becoming a party to the aggravation of the injury or loss. Accordingly, the aforementioned
Public respondent further postulates that SBTC cannot be held responsible for the fourth characteristic of a fortuitous event is absent Article 1170 of the Civil Code, which
destruction or loss of the stamp collection because the flooding was a fortuitous event and reads:
there was no showing of SBTC's participation in the aggravation of the loss or injury. It states:
Those who in the performance of their obligation are guilty of fraud,
Article 1174 of the Civil Code provides: negligence, or delay, and those who in any manner contravene the tenor
thereof, are liable for damages,

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
thus comes to the succor of the petitioner. The destruction or loss of the stamp collection casual and temporary but unfortunately married by an occurrence resulting in its windshield
which was, in the language of the trial court, the "product of 27 years of patience and being damaged. A stone thrown by a boy who, with his other companions, was thus engaged
diligence" 21 caused the petitioner pecuniary loss; hence, he must be compensated therefor. in what undoubtedly for them must have been mistakenly thought to be a none too harmful
prank did not miss its mark. Plaintiff would hold defendant Federico Laureano accountable
We cannot, however, place Our imprimatur on the trial court's award of moral damages. for the loss thus sustained, including in the action filed the wife, Aida de Laureano, and the
Since the relationship between the petitioner and SBTC is based on a contract, either of them father, Juanito Laureano. Plaintiff prevail in the lower court, the judgment however going
may be held liable for moral damages for breach thereof only if said party had acted only against the principal defendant, his spouse and his father being absolved of any
fraudulently or in bad faith. 22 There is here no proof of fraud or bad faith on the part of responsibility. Nonetheless, all three of them appealed directly to us, raising two questions of
SBTC. law, the first being the failure of the lower court to dismiss such a suit as no liability could
have been incurred as a result of a fortuitous event and the other being its failure to award
damages against plaintiff for the unwarranted inclusion of the wife and the father in this
WHEREFORE, the instant petition is hereby GRANTED. The challenged Decision and
litigation. We agree that the lower court ought to have dismissed the suit, but it does not
Resolution of the public respondent Court of Appeals of 21 August 1991 and 21 November
follow that thereby damages for the inclusion of the above two other parties in the
1991, respectively, in CA-G.R. CV No. 26737, are hereby SET ASIDE and the Decision of 19
complaint should have been awarded appellants.
February 1990 of Branch 47 of the Regional Trial Court of Manila in Civil Case No. 87-42601 is
hereby REINSTATED in full, except as to the award of moral damages which is hereby set
aside. The facts as found by the lower court follow: "Attorney Pedro Dioquino, a practicing lawyer
of Masbate, is the owner of a car. On March 31, 1964, he went to the office of the MVO,
Masbate, to register the same. He met the defendant Federico Laureano, a patrol officer of
Costs against the private respondent.
said MVO office, who was waiting for a jeepney to take him to the office of the Provincial
Commander, PC, Masbate. Attorney Dioquino requested the defendant Federico Laureano to
SO ORDERED. introduce him to one of the clerks in the MVO Office, who could facilitate the registration of
his car and the request was graciously attended to. Defendant Laureano rode on the car of
Republic of the Philippines Atty. Dioquino on his way to the P.C. Barracks at Masbate. While about to reach their
SUPREME COURT destination, the car driven by plaintiff's driver and with defendant Federico Laureano as the
Manila sole passenger was stoned by some 'mischievous boys,' and its windshield was broken.
Defendant Federico Laureano chased the boys and he was able to catch one of them. The
EN BANC boy was taken to Atty. Dioquino [and] admitted having thrown the stone that broke the car's
windshield. The plaintiff and the defendant Federico Laureano with the boy returned to the
P.C. barracks and the father of the boy was called, but no satisfactory arrangements [were]
G.R. No. L-25906 May 28, 1970 made about the damage to the
windshield."1
PEDRO D. DIOQUINO, plaintiff-appellee,
vs. It was likewise noted in the decision now on appeal: "The defendant Federico Laureano
FEDERICO LAUREANO, AIDA DE LAUREANO and JUANITO LAUREANO, defendants- refused to file any charges against the boy and his parents because he thought that the
appellants. stone-throwing was merely accidental and that it was due to force majeure. So he did not
want to take any action and after delaying the settlement, after perhaps consulting a lawyer,
Pedro D. Dioquino in his own behalf. the defendant Federico Laureano refused to pay the windshield himself and challenged that
the case be brought to court for judicial adjudication. There is no question that the plaintiff
Arturo E. Valdomero, Jose L. Almario and Rolando S. Relova for defendants-appellants. tried to convince the defendant Federico Laureano just to pay the value of the windshield
and he even came to the extent of asking the wife to convince her husband to settle the
matter amicably but the defendant Federico Laureano refused to make any settlement,
FERNANDO, J.:
clinging [to] the belief that he could not be held liable because a minor child threw a stone
accidentally on the windshield and therefore, the same was due to force majeure."2
The present lawsuit had its origin in a relationship, if it could be called such, the use of a car
owned by plaintiff Pedro D. Dioquino by defendant Federico Laureano, clearly of a character

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1. The law being what it is, such a belief on the part of defendant Federico Laureano was concludes that it had done all it was called to do, and that the accident, therefore, should be
justified. The express language of Art. 1174 of the present Civil Code which is a restatement held due to force majeure or fortuitous event." Its next paragraph explained clearly why the
of Art. 1105 of the Old Civil Code, except for the addition of the nature of an obligation defense of caso fortuito or force majeure does not lie. Thus: "These very precautions,
requiring the assumption of risk, compels such a conclusion. It reads thus: "Except in cases however, completely destroy the appellant's defense. For caso fortuito or force
expressly specified by the law, or when it is otherwise declared by stipulation, or when the majeure (which in law are identical in so far as they exempt an obligor from liability) by
nature of the obligation requires the assumption of risk, no person shall be responsible for definition, are extraordinary events not foreseeable or avoidable, 'events that could not be
those events which could not be, foreseen, or which, though foreseen were inevitable." Even foreseen, or which, though foreseen, were inevitable' (Art. 1174, Civil Code of the
under the old Civil Code then, as stressed by us in the first decision dating back to 1908, in an Philippines). It is, therefore, not enough that the event should not have been foreseen or
opinion by Justice Mapa, the rule was well-settled that in the absence of a legal provision or participated, as is commonly believed, but it must be one impossible to foresee or to avoid.
an express covenant, "no one should be held to account for fortuitous cases."3 Its basis, as The mere difficulty to foresee the happening is not impossibility to foresee the same: un
Justice Moreland stressed, is the Roman law principle major casus est, cui humana infirmitas hecho no constituye caso fortuito por la sola circunstancia de que su existencia haga mas
resistere non potest.4Authorities of repute are in agreement, more specifically concerning an dificil o mas onerosa la accion diligente del presente ofensor' (Peirano Facio, Responsibilidad
obligation arising from contract "that some extraordinary circumstance independent of the Extra-contractual, p. 465; Mazeaud, Traite de la Responsibilite Civile, Vol. 2, sec. 1569). The
will of the obligor, or of his employees, is an essential element of a caso fortuito."5 If it could very measures adopted by appellant prove that the possibility of danger was not only
be shown that such indeed was the case, liability is ruled out. There is no requirement of foreseeable, but actually foreseen, and was not caso fortuito."
"diligence beyond what human care and foresight can provide."6
In that case then, the risk was quite evident and the nature of the obligation such that a
The error committed by the lower court in holding defendant Federico Laureano liable party could rightfully be deemed as having assumed it. It is not so in the case before us. It is
appears to be thus obvious. Its own findings of fact repel the motion that he should be made anything but that. If the lower court, therefore, were duly mindful of what this particular
to respond in damages to the plaintiff for the broken windshield. What happened was clearly legal provision contemplates, it could not have reached the conclusion that defendant
unforeseen. It was a fortuitous event resulting in a loss which must be borne by the owner of Federico Laureano could be held liable. To repeat, that was clear error on its part.
the car. An element of reasonableness in the law would be manifestly lacking if, on the
circumstances as thus disclosed, legal responsibility could be imputed to an individual in the 2. Appellants do not stop there. It does not suffice for them that defendant Federico
situation of defendant Laureano. Art. 1174 of the Civil Code guards against the possibility of Laureano would be freed from liability. They would go farther. They would take plaintiff to
its being visited with such a reproach. Unfortunately, the lower court was of a different mind task for his complaint having joined the wife, Aida de Laureano, and the father, Juanita
and thus failed to heed its command. Laureano. They were far from satisfied with the lower court's absolving these two from any
financial responsibility. Appellants would have plaintiff pay damages for their inclusion in this
It was misled, apparently, by the inclusion of the exemption from the operation of such a litigation. We are not disposed to view the matter thus.
provision of a party assuming the risk, considering the nature of the obligation undertaken. A
more careful analysis would have led the lower court to a different and correct It is to be admitted, of course, that plaintiff, who is a member of the bar, ought to have
interpretation. The very wording of the law dispels any doubt that what is therein exercised greater care in selecting the parties against whom he would proceed. It may be
contemplated is the resulting liability even if caused by a fortuitous event where the party said that his view of the law that would consider defendant Federico Laureano liable on the
charged may be considered as having assumed the risk incident in the nature of the facts as thus disclosed, while erroneous, is not bereft of plausibility. Even the lower court,
obligation to be performed. It would be an affront, not only to the logic but to the realities of mistakenly of course, entertained similar view. For plaintiff, however, to have included the
the situation, if in the light of what transpired, as found by the lower court, defendant wife and the father would seem to indicate that his understanding of the law is not all that it
Federico Laureano could be held as bound to assume a risk of this nature. There was no such ought to have been.
obligation on his part.
Plaintiff apparently was not entirely unaware that the inclusion in the suit filed by him was
Reference to the leading case of Republic v. Luzon Stevedoring Corp.7 will illustrate when the characterized by unorthodoxy. He did attempt to lend some color of justification by explicitly
nature of the obligation is such that the risk could be considered as having been assumed. As setting forth that the father was joined as party defendant in the case as he was the
noted in the opinion of Justice J.B.L. Reyes, speaking for the Court: "The appellant strongly administrator of the inheritance of an undivided property to which defendant Federico
stresses the precautions taken by it on the day in question: that it assigned two of its most Laureano could lay claim and that the wife was likewise proceeded against because the
powerful tugboats to tow down river its barge L-1892; that it assigned to the task the more conjugal partnership would be made to respond for whatever liability would be adjudicated
competent and experienced among its patrons, had the towlines, engines and equipment against the husband.
double-checked and inspected; that it instructed its patrons to take extra-precautions; and
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
It cannot be said that such an attempt at justification is impressed with a high persuasive 1. That petitioners Victorias Planters Association, Inc. and North Negros Planters
quality. Far from it. Nonetheless, mistaken as plaintiff apparently was, it cannot be concluded Association, Inc. are non-stock corporations duly established and existing under
that he was prompted solely by the desire to inflict needless and unjustified vexation on and by virtue of the laws of the Philippines, with main offices at Victorias, Negros
them. Considering the equities of the situation, plaintiff having suffered a pecuniary loss Occidental, and Manapla, Negros Occidental, respectively, and were organized by,
which, while resulting from a fortuitous event, perhaps would not have occurred at all had and are composed of, sugar cane planters in the districts of Victorias, Manapla and
not defendant Federico Laureano borrowed his car, we, feel that he is not to be penalized Cadiz, respectively, having been established principally as the representative
further by his mistaken view of the law in including them in his complaint. Well-worth entities of the numerous sugar cane planters in said districts whose sugar cane
paraphrasing is the thought expressed in a United States Supreme Court decision as to the productions are milled by the respondent corporation, with the main object of
existence of an abiding and fundamental principle that the expenses and annoyance of safeguarding their interests and of taking up with the latter problems and
litigation form part of the social burden of living in a society which seeks to attain social questions which from time to time, may come up between the said respondent
control through law.8 corporation the said sugar cane planters; the other petitioners are Filipinos, of legal
age, and together with numerous other sugar cane planters who own sugar cane
WHEREFORE, the decision of the lower court of November 2, 1965 insofar as it orders producing properties at Victorias, Manapla, and Cadiz Districts, Negros Occidental,
defendant Federico Laureano to pay plaintiff the amount of P30,000.00 as damages plus the are bona fide officials and members of either one of the two petitioner
payment of costs, is hereby reversed. It is affirmed insofar as it dismissed the case against the associations; that petitioner Fernando Gonzaga is a resident of Victorias, Negros
other two defendants, Juanita Laureano and Aida de Laureano, and declared that no moral Occidental, petitioner Jose Gaston is a resident of Victorias, Negros Occidental, and
damages should be awarded the parties. Without pronouncement as to costs. petitioner Cesar L. Lopez is a resident of Bacolod City, Negros Occidental; and that
said petitioners bring this action for the benefit and on behalf of all their fellow
sugar cane planters, owners of sugar cane producing lands in the said districts of
Republic of the Philippines
Victorias, Manapla, and Cadiz, whose sugar cane productions are milled by
SUPREME COURT
respondent corporation, and who are so numerous that it would be impractical to
Manila
include them all as parties herein;

EN BANC
2. That respondent Victorias Milling Co., Inc. is a corporation likewise duly
organized and established under and by virtue of the laws of the Philippines, with
G.R. No. L-6648 July 25, 1955 main offices at Ayala Building Manila, where it may be served with summons;

VICTORIAS PLANTERS ASSOCIATION, INC., NORTH NEGROS PLANTERS ASSOCIATION, INC., 3. That at various dates, from the year 1917 to 1934, the sugar cane planters
FERNANDO GONZAGA, JOSE GASTON and CESAR L. LOPEZ, on their own behalf and on pertaining to the districts of Manapla and Cadiz, Negros Occidental, executed
behalf of other sugar cane planters in Manapla, Cadiz and Victorias Districts, petitioners- identical milling contracts, setting forth the terms and conditions under which the
appellees, sugar central "North Negros Sugar Co. Inc." would mill the sugar produced by the
vs. sugar cane planters of the Manapla and Cadiz districts;
VICTORIAS MILLING CO., INC., respondent-appellant.
A copy of the standard form of said milling contracts with North Negros Sugar Co.,
Ross, Selph, Carrascoso and Janda for appellant. Inc. is hereto attached and made an integral part hereof as Annex "A.
Tañada, Pelaez and Teehankee for appellees.
As may be seen from the said standard form of milling contract, Annex "A," the
PADILLA, J.: sugar cane planters of Manapla and Cadiz, Negros Occidental had executed on
November 17, 1916 with Miguel J. Ossorio, a contract entitled "Contrato de la
This is an action for declaratory judgment under Rule 66. The relief prayed for calls for an Central Azucarrera de 300 Toneladas," whereby said Miguel J. Ossorio was given a
interpretation of contracts entered into by and between the sugar cane planters in the period up to December 31, 1916 within which to make a study of and decide
districts of Manapla, Cadiz and Victorias, Occidental Negros, and the Victorias Milling whether he would construct a sugar central or mill with a capacity of milling 300
Company, Inc. After issues had been joined the parties submitted the case for judgment upon tons of sugar cane every 24 hours and setting forth the mutual obligations and
the testimony of Jesus Jose Ossorio and the following stipulation of facts: undertakings of such central and the planters and the terms and conditions under

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
which the sugar cane produced by said sugar can planters would be milled in the (a) Que entregaran a la Central de la `North Negros Sugar Co., Inc.' o a la que se
event of the construction of such sugar central by said Miguel J. Ossorio. Such construya en Victorias por Don Miguel J. Ossorio o sus cesionarios por espacio de
central was in fact constructed by said Miguel J. Ossorio in Manapla, Negros treinta (30) años desde la primera molienda, la caña que produzcan sus respectivas
Occidental, through the North Negros Sugar Co., Inc., where after the standard haciendas, obligandose ademas a sembrar anualmente con cañadulce por lo menos
form of milling contracts (Annex "A") were executed, as above stated. en tres quintas partes de su extension total apropiado para caña, incluyendo en
esta denominacion tanto la siembra con puntas nuevas como el cultivo del retoño
The parties cannot stipulate as to the milling contracts executed by the planters by o cala-anan y sujetando la siembra a las epocas convenientes designadas por el
Victorias, Negros Occidental, other than as follows; a number of them executed comite de hacenderos a fin de poder proporcionar caña a la Central de
such milling contracts with the North Negros Sugar Co., Inc., as per the standard conformidad con las clausulas 17 y 18 de esta escritura.
forms hereto attached and made an integral part as Annexes "B" and "B-1," while a
number of them executed milling contracts with the Victorias Milling Co., Inc., xxx xxx xxx
which was likewise organized by Miguel J. Ossorio and which had constructed
another Central at Victorias, Negros Occidental, as per the standard form hereto (i) Los hacenderos' imponen sobre sus haciendas mencionadas y citadas en esta
attached and made an integral part hereof as Annex "C". escritura servidumbres voluntarias a favor de Don Miguel J. Ossorio de sembrar
caña por lo menos en tres quintas partes (3/5) de su extension superficial y
4. The North Negros Sugar Co., Inc. had its first molienda or milling during the entregar la caña que produzcan a Don Miguel J. Ossorio, de acuerdo con este
1918-1919 crop year, and the Victorias Milling Co., had its first molienda or milling contrato, por espacio de treinta (30) años, a contar un (1) año desde la fecha de la
during the 1921-1922 crop year. primera molienda. repeated representation were made with respondent
corporation for negotiations regarding the execution of new milling contracts
Subsequent moliendas or millings took place every successive crop year thereafter, which would take into consideration the charged circumstances presently
except the 6-year period, comprising 4 years of the last World War II and 2 years of prevailing in the sugar industry as compared with those prevailing over 30 years
post-war reconstruction of respondent's central at Victorias, Negros Occidental. ago and would provide for an increased participation in the milled sugar for the
benefit of the planters and their workers.
5. That after the liberation, the North Negros Sugar Co., Inc. did not reconstruct its
destroyed central at Manapla, Negros Occidental, and in 1946, it advised the North 7. That notwithstanding these repeated representations made by the herein
Negros Planters Association, Inc. that it had made arrangements with the petitioners with the respondent corporation for the negotiation and execution of
respondent Victorias Milling Co., Inc. for said respondent corporation to mill the new milling contracts, the herein respondent has refused and still refuses to accede
sugar cane produced by the planters of Manapla and Cadiz holding milling to the same, contending that under the provisions of the mining contract (Annex
contracts with it. Thus, after the war, all the sugar cane produced by the planters of "A".) "It is the view of the majority of the stockholder-investors, that our contracts
petitioner associations, in Manapla, Cadiz, as well as in Victorias, who held milling with the planters call for 30 years of milling — not 30 years in time" and that "as
contracts, were milled in only one central, that of the respondent corporation at there was no milling during 4 years of the recent war and two years of
Victorias; reconstruction, when these six years are added on to the earliest of our contracts
in Manapla, the contracts by this view terminate in the autumn of 1952," and the
"the contracts for the Victorias Planters would terminate in 1957, and still later for
6. Beginning with the year 1948, and in the following years, when the planters-
those in the Cadiz districts," and that "apart from the contractual agreements, the
members of the North Negros Planters Association, Inc. considered that the
Company believes these war and reconstruction years accrue to it in equity.
stipulated 30-year period of their milling contracts executed in the year 1918 had
already expired and terminated in the crop year 1947-1948, and the planters-
members of the Victorias Planters Association, Inc. likewise considered the The trial court rendered judgment the dispositive part of which is —
stipulated 30-year period of their milling contracts, as having likewise expired and
terminated in the crop year 1948-1949, under the pertinent provisions of the Wherefore, the Court renders judgment in favor of the petitioners and against the
standard milling contract (Annex "A") on the duration thereof, which provided in respondent and declares that the milling contracts executed between the sugar
Par. 21 thereof as follows: cane planters of Victorias, Manapla and Cadiz, Negros Occidental, and the
respondent corporation or its predecessors-in-interest, the North Negros Sugar Co.,
Inc., expired and terminated upon the lapse of the therein stipulated 30-year
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period, and that respondent corporation is not entitled to claim any extension of or In accord with the rule laid down in the case of Lacson vs. Diaz, 47 Off. Gaz., Supp. No. 12, p.
addition to the said 30-year term or period of said milling contracts by virtue of an 337, where despite the fact that the lease contract stipulated seven sugar crops and not
equivalent to 6 years of the last war and reconstruction of its central, during which seven crop years as the term thereof, we held that such stipulation contemplated seven
there was no planting and/or milling. consecutive agricultural years and affirmed the judgment which declared that the leasee was
not entitled to an extension of the term of the lease for the number of years the country was
From this judgment the respondent corporation has appealed. occupied by the Japanese Army during which no sugar cane was planted2 we are of the
opinion and so hold that the thirty-year period stipulated in the contracts expired on the
thirtieth agricultural year. The period of six years — four during the Japanese occupation
The appellant contends that the term stipulated in the contracts is thirty milling years and
when the appellant did not operate its mill and the last two during which the appellant
not thirty calendar years and postulates that the planters fulfill their obligation — the six
reconstructed its mill — cannot be deducted from the thirty-year period stipulated in the
installments of their indebtedness--which they failed to perform during the six milling years
contracts.
from 1941-42 to 1946-47. The reason the planters failed to deliver the sugar cane was the
war or a fortuitious event. The appellant ceased to run its mill due to the same cause.
The judgment appealed from is affirmed, with costs against the appellant.
Fortuitious event relieves the obligor from fulfilling a contractual obligation.1 The fact that
the contracts make reference to "first milling" does not make the period of thirty years one SECOND DIVISION
of thirty milling years. The term "first milling" used in the contracts under consideration was
for the purpose of reckoning the thirty-year period stipulated therein. Even if the thirty-year [G.R. No. 119729. January 21, 1997]
period provided for in the contracts be construed as milling years, the deduction or extension
of six years would not be justified. At most on the last year of the thirty-year period ACE-AGRO DEVELOPMENT CORPORATION, petitioner, vs. COURT OF APPEALS and COSMOS
stipulated in the contracts the delivery of sugar cane could be extended up to a time when all BOTTLING CORPORATION, respondents.
the amount of sugar cane raised and harvested should have been delivered to the appellant's
mill as agreed upon. The seventh paragraph of Annex "C", not found in the earlier contracts DECISION
(Annexes "A", "B", and "B-1"), quoted by the appellant in its brief, where the parties
stipulated that in the event of flood, typhoon, earthquake, or other force majeure, war, MENDOZA, J.:
insurrection, civil commotion, organized strike, etc., the contract shall be deemed suspended
during said period, does not mean that the happening of any of those events stops the This case originated in a complaint for damages for breach of contract which petitioner
running of the period agreed upon. It only relieves the parties from the fulfillment of their filed against private respondent. From the decision of the Regional Trial Court, Branch 72,
respective obligations during that time — the planters from delivering sugar cane and the Malabon, Metro Manila, finding private respondent guilty of breach of contract and ordering
central from milling it. In order that the central, the herein appellant, may be entitled to it to pay damages, private respondent appealed to the Court of Appeals which reversed the
demand from the other parties the fulfillment of their part in the contracts, the latter must trial courts decision and dismissed the complaint for lack of merit. Petitioner in turn moved for
have been able to perform it but failed or refused to do so and not when they were a reconsideration, but its motion was denied. Hence, this petition for review on certiorari.
prevented by force majeure such as war. To require the planters to deliver the sugar cane
which they failed to deliver during the four years of the Japanese occupation and the two The facts are as follows:
years after liberation when the mill was being rebuilt is to demand from the obligors the
Petitioner Ace-Agro Development Corporation and private respondent Cosmos Bottling
fulfillment of an obligation which was impossible of performance at the time it became
Corporation are corporations duly organized and existing under Philippine laws. Private
due. Nemo tenetur ad impossibilia. The obligee not being entitled to demand from the
respondent Cosmos Bottling Corp. is engaged in the manufacture of soft drinks. Since 1979
obligors the performance of the latters' part of the contracts under those circumstances
petitioner Ace-Agro Development Corp. (Ace-Agro) had been cleaning soft drink bottles and
cannot later on demand its fulfillment. The performance of what the law has written off
repairing wooden shells for Cosmos, rendering its services within the company premises in San
cannot be demanded and required. The prayer that the plaintiffs be compelled to deliver
Fernando, Pampanga. The parties entered into service contracts which they renewed every
sugar cane to the appellant for six more years to make up for what they failed to deliver
year. On January 18, 1990, they signed a contract covering the period January 1, 1990 to
during those trying years, the fulfillment of which was impossible, if granted, would in effect
December 31, 1990. Private respondent had earlier contracted the services of Aren Enterprises
be an extension of the term of the contracts entered into by and between the parties.
in view of the fact that petitioner could handle only from 2,000 to 2,500 cases a day and could
not cope with private respondents daily production of 8,000 cases. Unlike petitioner, Aren
Enterprises rendered service outside private respondents plant.
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
On April 25, 1990, fire broke out in private respondents plant, destroying, among other San Isidro, MacArthur Highway
places, the area where petitioner did its work. As a result, petitioners work was stopped. San Fernando, Pampanga

On May 15, 1990, petitioner asked private respondent to allow it to resume its service,
but petitioner was advised that on account of the fire, which had practically burned all . . . old Attention: Mr. Norman P. Uy
soft drink bottles and wooden shells, private respondent was terminating their contract. General Services Manager

Petitioner expressed surprise at the termination of the contract and requested private Gentlemen:
respondent, on June 13, 1990, to reconsider its decision and allow petitioner to resume its
work in order to cushion the sudden impact of the unemployment of many of [its] workers. As
In our letter to you dated June 13, 1990 seeking your kind reconsideration of your sudden
it received no reply from private respondent, petitioner, on June 20, 1990, informed its
drastic decision to terminate our mutually beneficial contract of long standing, it is more
employees of the termination of their employment. Petitioners memorandum [1] read:
than a month now but our office has not received a reply from you.

MEMORANDUM TO : All Workers/Union Members

Our workers, who have been anxiously waiting for the resumption of the operations and who
are the ones most affected by your sudden decision, are now becoming restless due to the
THRU : Mr. Angelito B. Catalan financial difficulties they are now suffering.

Local Chapter President We are, therefore, again seeking for the reconsideration of your decision to help alleviate the
sufferings of the displaced workers, which we also have to consider for humanitarian reason.
Bisig Manggagawa sa Ace Agro-NAFLU
Yours very truly,
This is to inform you that the Cosmos Bottling Corp. has sent a letter to Ace Agro-
Development Corp. terminating our contract with them. ACE AGRO-DEVELOPMENT CORP.

However, we are still doing what we can to save our contract and resume our operations, (Sgd.) ANTONIO I. ARQUIZA
though this might take some time. Manager

We will notify you whatever would be the outcome of our negotiation with them in due time. In response, private respondent advised petitioner on August 28, 1990 that the latter
could resume the repair of wooden shells under terms similar to those contained in its contract
Truly yours, but work had to be done outside the company premises. Private respondents letter [3] read:

ACE AGRO-DEVELOPMENT CORP. MR. ANTONIO I. ARQUIZA

Manager
(Sgd.) ANTONIO L. ARQUIZA ACE-AGRO DEVELOPMENT CORPORATION
Manager 165 J.P. Bautista Street
Malabon, Metro Manila
This led the employees to file a complaint for illegal dismissal before the Labor Arbiter
against petitioner and private respondent. Dear Mr. Arquiza:

On July 17, 1990, petitioner sent another letter to private respondent, reiterating its We are pleased to inform you that COSMOS BOTTLING CORPORATION, San
request for reconsideration. Its letter [2] read: Fernando Plant is again accepting job-out contract for the repair of our wooden shells.

COSMOS BOTTLING CORPORATION

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Work shall be done outside the premises of the plant and under similar terms you previously Mr. Michael M. Albino
had with the company. We intend to give you priority so please see or contact me at my VP-Luzon/Plant General Manager
office soonest for the particulars regarding the job. Cosmos Bottling Corporation
San Fernando, Pampanga
Here is looking forward to doing business with you at the earliest possible time.
Dear Mr. Albino,
(Sgd.) DANILO M. DE CASTRO
Plant General Manager This is in connection with your letter dated November 7, 1990 regarding the resumption of
the repair of your wooden shells inside San Fernando, Pampanga Plant according to the
Petitioner refused the offer, claiming that to do its work outside the companys premises existing contract with your company.
would make it (petitioner) incur additional costs for transportation which will eat up the
meager profits that [it] realizes from its original contract with Cosmos. In subsequent meetings At present, there is a pending case before the Department of Labor and Employment in San
with Danilo M. de Castro, Butch Cea and Norman Uy of Cosmos, petitioners manager, Antonio Fernando, Pampanga which was a result of the premature termination of the said existing
I. Arquiza, asked for an extension of the term of the contract in view of the suspension of contract with your company. In view of that, we find it proper for us to work for the
work. But its request was apparently turned down. resolution of the said pending case and include in the Compromise Agreement the matter of
the resumption of the repair of wooden shells in your San Fernando, Pampanga Plant.
On November 7, 1990, private respondent advised petitioner that the latter could then
resume its work inside the plant in accordance with its original contract with Cosmos. Private
respondents letter [4] stated: Thank you very much.

MR. ANTONIO I. ARQUIZA Very truly yours,

General Manager
Ace-Agro Development Corporation ACE AGRO-DEVELOPMENT CORP.
165 J. P. Bautista St., Malabon
Metro Manila (Sgd.) ANTONIO I. ARQUIZA
Manager
Dear Mr. Arquiza:
On January 3, 1991, petitioner brought this case against private respondent for breach
This is to officially inform you that you can now resume the repair of wooden of contract and damages in the Regional Trial Court of Malabon. It complained that the
shells inside the plant according to your existing contract with the Company. termination of its service contract was illegal and arbitrary and that, as a result, it stood to lose
profits and to be held liable to its employees for backwages, damages and/or separation pay.
Please see Mr. Ener G. Ocampo, OIC-PDGS, on your new job site in the Plant. On January 16, 1991, a decision was rendered in the labor case, finding petitioner liable
for the claims of its employees. Petitioner was ordered to reinstate the employees and pay
Very truly yours, them backwages. However, private respondent Cosmos was absolved from the employees
claims on the ground that there was no privity of contract between them and private
COSMOS BOTTLING CORPORATION respondent.

On the other hand, in its decision rendered on November 21, 1991, the RTC found private
(Sgd.) MICHAEL M. ALBINO respondent guilty of breach of contract and ordered it to pay damages to
VP-Luzon/Plant General Manager petitioner. Petitioners claim for reimbursement for what it had paid to its employees in the
labor case was denied. The dispositive portion of the trial courts decision read:
On November 17, 1990, petitioner rejected private respondents offer, this time, citing
the fact that there was a pending labor case. Its letter [5] to private respondent stated:

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WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff Ace- x x x (O)bligations may be extinguished by the happening of unforeseen events, under whose
Agro Development Corporation and against defendant Cosmos Bottling Corporation, influence the obligation would never have been contracted, because in such cases, the very
ordering the latter to pay to the former the following: basis upon which the existence of the obligation is founded would be wanting.

a) The amount of P1,008,418.01 as actual damages; Both parties admitted that the April 25, 1990 fire was a force majeure or unforeseen
b) P100,000.00 as corrective or exemplary damages; event and that the same even burned practically all the softdrink bottles and wooden shells -
c) The amount of P50,000.00 as and for attorneys fees; and - which are the objects of the agreement. But the story did not end there.
d) Costs and expenses of litigation.
It is true that defendant-appellant still had other bottles that needed cleaning and wooden
Defendants counterclaims are dismissed. shells that needed repairing (pp. 110-111, orig. rec.); therefore, the suspension of the work
of the plaintiff-appellee brought about by the fire is, at best, temporary as found by the trial
SO ORDERED. court . Hence, plaintiff-appellees letters of reconsideration of the termination of the
agreement addressed to defendant-appellant dated June 13, 1990 and July 17, 1990.
Private respondent appealed to the Court of Appeals, which on December 29, 1994,
reversed the trial courts decision and dismissed petitioners complaint. The appellate court It is obvious that what petitioner thought was the appellate courts ruling is merely its
found that it was petitioner which had refused to resume work, after failing to secure an summary of private respondents allegations. Precisely the appellate court does not agree with
extension of its contract. Petitioner now seeks a review of the Court of Appeals decision. private respondent, that is why, in the last paragraph of the above excerpt, the court says that
there was no cause for terminating the contract but at most a temporary suspension of
First. Petitioner claims that the appellate court erred in ruling that respondent was work. The court thus rejects private respondents claim that, as a result of the fire, the
justified in unilaterally terminating the contract on account of a force majeure. Quite possibly obligation of contract must be deemed to have been extinguished.
it did not understand the appellate courts decision, or it would not be contending that there
was no valid cause for the termination of the contract but only for its suspension. The following Nonetheless, the Court of Appeals found that private respondent had reconsidered its
is what the appellate court said: [6] decision to terminate the contract and tried to accommodate the request of petitioner, first,
by notifying petitioner on August 28, 1990 that it could resume work provided that this was
done outside the premises and, later, on November 7, 1990, by notifying petitioner that it
Article 1231 of the New Civil Code on extinguishment of obligations does not specifically
could then work in its premises, under the terms of their contract. However, petitioner
mention unilateral termination as a mode of extinguishment of obligation but, according to
unjustifiably refused the offer because it wanted an extension of the contract to make up for
Tolentino, there are other causes of extinguishment of obligations which are not expressly
the period of inactivity. As the Court of Appeals said in its decision: [7]
provided for in this chapter (Tolentino, Civil Code of the Phils., Vol. IV, 1986 ed., p. 273). He
further said:
It took defendant-appellant time to make a reply to plaintiff-appellees letters. But when it
did on August 28, 1990, it granted plaintiff-appellee priority to resume its work under the
But in some contracts, either because of its indeterminate duration or because of the nature
terms of their agreement (but outside its premises), and the plaintiff-appellee refused the
of the prestation which is its object, one of the parties may free himself from the contractual
same on the ground that working outside the defendant-appellants San Fernando Plant
tie by his own will (unilateral extinguishment); x x x. (p. 274-275, Ibid)
would mean added transportation costs that would offset any profit it would earn.

And that was just what defendant-appellant did when it unilaterally terminated the
The appellee was without legal ground to refuse resumption of work as offered by the
agreement it had with plaintiff-appellee by sending the May 23, 1990 letter. As per its letter,
appellant, under the terms of their above agreement. It could not legally insist on staying
the reason given by defendant-appellant for unilaterally terminating the agreement was
inside property it did not own, nor was under lease to it . . . . In its refusal to resume its work
because the April 25, 1990 fire practically burned all of the softdrink bottles and wooden
because of the additional transportation costs to be brought about by working outside the
shells which plaintiff-appellee was working on under the agreement. What defendant-
appellants San Fernando plant, the appellee could be held liable for damages for breach of
appellant was trying to say was that the prestation or the object of their agreement had been
contract.
lost and destroyed in the above-described [Link], the defendant-appellant would
like this situation to fall within what -- according to Tolentino -- would be:
....

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Thereafter, appellant sent its November 7, 1990 letter to appellee, this time specifically premises. That petitioner would incur additional cost for transportation was not a good reason
stating that plaintiff-appellee can now resume work in accordance with their existing for its refusal. Petitioner has not shown that on August 28, 1990, when it was notified of the
agreement. This time, it could not be denied that by the tenor of the letter, appellant was private respondents offer, the latters premises had so far been restored so as to permit
willing to honor its agreement with appellee, that it had finally made a reconsideration of petitioner to resume work there. In fact, even when petitioner was finally allowed to resume
appellees plea to resume work under the contract. But again, plaintiff-appellee refused this work within the plant, it was not in the former work place but in a new one, which shows that
offer to resume work. private respondents reason for not granting petitioners request was not just a pretext.

Nor was petitioner justified in refusing to resume work on November 7 when it was again
Why did the appellee refuse to resume work? Its November 17, 1990 letter stated that it had notified by petitioner to work. Although it cited the pending labor case as reason for turning
something to do with the settlement of the NLRC case filed against it by its employees. But down private respondents offer, it would appear that the real reason for petitioners refusal
that was not the real reason. In his cross-examination, the witness for appellee stated that its was the fact that the term of the contract was expiring in two months and its request for an
real reason for refusing to resume work with the appellant was -- as in its previous refusal -- extension was not granted. But, as the appellate court correctly ruled, the suspension of work
because it wanted an extension of the period or duration of the contract beyond December under the contract was brought about by force majeure. Therefore, the period during which
31, 1991, to cover the period within which it was unable to work. work was suspended did not justify an extension of the term of the contract. [8] For the fact is
that the contract was subject to a resolutory period which relieved the parties of their
The agreement between the appellee and the appellant is with a resolutory period, respective obligations but did not stop the running of the period of their contract.
beginning from January 1, 1990 and ending on December 31, 1990. When the fire broke out
on April 25, 1990, there resulted a suspension of the appellees work as per agreement. But The truth of the matter is that while private respondent had made efforts towards
this suspension of work due to force majeure did not merit an automatic extension of the accommodation, petitioner was unwilling to make adjustments as it insisted that it cannot
period of the agreement between them. According to Tolentino: profitably resume operation under the same terms and conditions [of] the terminated contract
but with an outside work venue [as] transportation costs alone will eat up the meager profit
that Ace-Agro realizes from its original contract. [9] While this so- called job-out offer of private
The stipulation that in the event of a fortuitous event or force majeure the contract shall be
respondent had the effect of varying the terms of the contract in the sense that it could
deemed suspended during the said period does not mean that the happening of any of those
increase its cost, what petitioner did not seem to realize was that the change was brought
events stops the running of the period the contract has been agreed upon to run. It only
about by circumstances not of private respondents making.
relieves the parties from the fulfillment of their respective obligations during that time. If
during six of the thirty years fixed as the duration of a contract, one of the parties is Again when private respondent finally advised petitioner on November 7, 1990 to work
prevented by force majeure to perform his obligation during those years, he cannot after the under the strict terms of its contract and inside the plant, petitioner thought only of its interest
expiration of the thirty-year period, be compelled to perform his obligation for six more years by insisting that the contract be extended. Petitioners manager, Antonio I. Arquiza, testified
to make up for what he failed to perform during the said six years, because it would in that he tried to secure a term extension for his company but his request was turned down
effect be an extension of the term of the [Link] contract is stipulated to run for thirty because the management of private respondent wanted a new contract after the expiration
years, and the period expires on the thirtieth year; the period of six years during which of the contract on December 31, 1990. Arquiza testified: [10]
performance by one of the parties is prevented by force majeurecannot be deducted from
the period stipulated. A [Butch Cea] told me that Cosmos is agreeable to allow us to resume our
operation and when I inquired about the extension of the contract he told
me that I better refer the matter to Mr. Norman Uy.
In fine, the appellant withdrew its unilateral termination of its agreement with appellee in its
letter dated November 7, 1990. But the appellees refusal to resume work was, in effect, a ....
unilateral termination of the parties agreement -- an act that was without basis. When the
appellee asked for an extension of the period of the contract beyond December 31, 1990 it Q Did you see Mr. Norman Uy?
was, in effect, asking fora new contract which needed the consent of defendant-
A Yes, sir, when I went to see Mr. Norman Uy he asked me why I was there and he
appellant. The appellee might be forgiven for its first refusal (pertaining to defendant-
told me why I did not start operation I told him that what we are expecting
appellants August 28, 1990 letter), but the second refusal must be construed as a breach of
that Mr. Cea would give me the formal letter regarding the resumption of
contract by plaintiff-appellee. . . .
the operation and honoring of contract and he said that our price was so high
and if we are willing to use said contract and when I said yes he told me that
The Court of Appeals was right that petitioner had no basis for refusing private we will just send you a letter considering that another contractor repairing
respondents offer unless petitioner was allowed to carry out its work in the company our damaged shells and cleaning of dirty bottles. When I asked him that does
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
that mean that the meeting I had with Mr. Cea, he told me that was null and Petitioner may not be to blame for the failure to resume work after the fire, but neither
void and he told me that Mr. Cea want a new contract. is private respondent. Since the question is whether private respondent is guilty of breach of
contract, the fact that private respondent is blameless can only lead to the conclusion that the
As already stated, because the suspension of work was due to force majeure, there was appealed decision is correct.
no justification for petitioners demand for an extension of the terms of the [Link]
respondent was justified in insisting that after the expiration of the contract, the parties must WHEREFORE, the petition for review is DENIED and the decision of the Court of
negotiate a new one as they had done every year since the start of their business relations in Appeals is AFFIRMED.
1979.
SO ORDERED.
Second. Petitioner slams the Court of Appeals for ruling that it was [petitioners]
unjustified refusal which finally terminated the contract between the parties. This contention Republic of the Philippines
is likewise without merit. Petitioner may not be responsible for the termination of the SUPREME COURT
contract, but neither is private respondent, since the question in this case is whether private Manila
respondent is guilty of breach of contract. The trial court held that private respondent
committed a breach of contract because, even as its August 28, 1990 letter allowed petitioner
EN BANC
to resume work, private respondents offer was limited to the repairs of wooden shells and this
had to be done outside the companys premises. On the other hand, the final offer made on
November 7, 1990, while allowing the repair of wooden shells [to be done] inside the plant G.R. No. L-21749 September 29, 1967
according to your contract with the company, was still limited to the repair of the wooden
shells, when the fact was that the parties contract was both for the repair of wooden crates REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
and for the cleaning of soft drink bottles. vs.
LUZON STEVEDORING CORPORATION, defendant-appellant.
But this was not the petitioners complaint. There was never an issue whether the
companys offer included the cleaning of bottles. Both parties understood private respondents
offer as including the cleaning of empty soft drink bottles and the repair of the wooden Office of the Solicitor General for plaintiff-appellee.
crates. Rather, the discussions between petitioner and private respondents representatives H. San Luis and L.V. Simbulan for defendant-appellant.
focused first, on the insistence of petitioner that it be allowed to work inside the company
plant and, later, on its request for the extension of the life of the contract. REYES, J.B.L., J.:

Petitioner claims that private respondent had a reason to want to terminate the contract
and that was to give the business to Aren Enterprises, as the latter offered its services at a The present case comes by direct appeal from a decision of the Court of First Instance of
much lower rate than petitioner. Aren Enterprises rate was P2.50 per shell while petitioners Manila (Case No. 44572) adjudging the defendant-appellant, Luzon Stevedoring Corporation,
rates were P4.00 and P6.00 per shell for ordinary and super sized bottles, respectively. [11] liable in damages to the plaintiff-appellee Republic of the Philippines.

The contention has no basis in fact. The contract between private respondent and Aren In the early afternoon of August 17, 1960, barge L-1892, owned by the Luzon Stevedoring
Enterprises had been made on March 29, 1990 before the fire broke out. The contract Corporation was being towed down the Pasig river by tugboats "Bangus" and "Barbero"1 also
between petitioner and private respondent did not prohibit the hiring by private respondent belonging to the same corporation, when the barge rammed against one of the wooden piles
of another service contractor. With private respondent hitting production at 8,000 bottles of of the Nagtahan bailey bridge, smashing the posts and causing the bridge to list. The river, at
soft drinks per day, petitioner could clearly not handle the business, since it could clean only the time, was swollen and the current swift, on account of the heavy downpour of Manila
2,500 bottles a day. [12] These facts show that although Aren Enterprises rate was lower than and the surrounding provinces on August 15 and 16, 1960.
petitioners, they did not affect private respondents business relation with petitioner. Despite
private respondents contract with Aren Enterprises, private respondent continued doing
Sued by the Republic of the Philippines for actual and consequential damage caused by its
business with petitioner and would probably have done so were it not for the fire. On the other
employees, amounting to P200,000 (Civil Case No. 44562, CFI of Manila), defendant Luzon
hand, Aren Enterprises could not be begrudged for being allowed to continue rendering service
Stevedoring Corporation disclaimed liability therefor, on the grounds that it had exercised
even after the fire because it was doing its work outside private respondents plant. For that
due diligence in the selection and supervision of its employees; that the damages to the
matter, after the fire, private respondent on August 28, 1990 offered to let petitioner resume
bridge were caused by force majeure; that plaintiff has no capacity to sue; and that the
its service provided this was done outside the plant.
Nagtahan bailey bridge is an obstruction to navigation.
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
After due trial, the court rendered judgment on June 11, 1963, holding the defendant liable 1) Whether or not the collision of appellant's barge with the supports or piers of
for the damage caused by its employees and ordering it to pay to plaintiff the actual cost of the Nagtahan bridge was in law caused by fortuitous event or force majeure, and
the repair of the Nagtahan bailey bridge which amounted to P192,561.72, with legal interest
thereon from the date of the filing of the complaint. 2) Whether or not it was error for the Court to have permitted the plaintiff-
appellee to introduce additional evidence of damages after said party had rested
Defendant appealed directly to this Court assigning the following errors allegedly committed its case.
by the court a quo, to wit:
As to the first question, considering that the Nagtahan bridge was an immovable and
I — The lower court erred in not holding that the herein defendant-appellant had stationary object and uncontrovertedly provided with adequate openings for the passage of
exercised the diligence required of it in the selection and supervision of its water craft, including barges like of appellant's, it is undeniable that the unusual event that
personnel to prevent damage or injury to others.1awphîl.nèt the barge, exclusively controlled by appellant, rammed the bridge supports raises a
presumption of negligence on the part of appellant or its employees manning the barge or
II — The lower court erred in not holding that the ramming of the Nagtahan bailey the tugs that towed it. For in the ordinary course of events, such a thing does not happen if
bridge by barge L-1892 was caused by force majeure. proper care is used. In Anglo American Jurisprudence, the inference arises by what is known
as the "res ipsa loquitur" rule (Scott vs. London Docks Co., 2 H & C 596; San Juan Light &
Transit Co. vs. Requena, 224 U.S. 89, 56 L. Ed., 680; Whitwell vs. Wolf, 127 Minn. 529, 149
III — The lower court erred in not holding that the Nagtahan bailey bridge is an
N.W. 299; Bryne vs. Great Atlantic & Pacific Tea Co., 269 Mass. 130; 168 N.E. 540; Gribsby vs.
obstruction, if not a menace, to navigation in the Pasig river.
Smith, 146 S.W. 2d 719).

IV — The lower court erred in not blaming the damage sustained by the Nagtahan
The appellant strongly stresses the precautions taken by it on the day in question: that it
bailey bridge to the improper placement of the dolphins.
assigned two of its most powerful tugboats to tow down river its barge L-1892; that it
assigned to the task the more competent and experienced among its patrons, had the
V — The lower court erred in granting plaintiff's motion to adduce further evidence towlines, engines and equipment double-checked and inspected; that it instructed
in chief after it has rested its case. its patrons to take extra precautions; and concludes that it had done all it was called to do,
and that the accident, therefore, should be held due to force majeure or fortuitous event.
VI — The lower court erred in finding the plaintiff entitled to the amount of
P192,561.72 for damages which is clearly exorbitant and without any factual basis. These very precautions, however, completely destroy the appellant's defense. For caso
fortuito or force majeure(which in law are identical in so far as they exempt an obligor from
However, it must be recalled that the established rule in this jurisdiction is that when a party liability)2 by definition, are extraordinary events not foreseeable or avoidable, "events
appeals directly to the Supreme Court, and submits his case there for decision, he is deemed that could not be foreseen, or which, though foreseen, were inevitable" (Art. 1174, Civ. Code
to have waived the right to dispute any finding of fact made by the trial Court. The only of the Philippines). It is, therefore, not enough that the event should not have been foreseen
questions that may be raised are those of law (Savellano vs. Diaz, L-17441, July 31, 1963; or anticipated, as is commonly believed, but it must be one impossible to foresee or to avoid.
Aballe vs. Santiago, L-16307, April 30, 1963; G.S.I.S. vs. Cloribel, L-22236, June 22, 1965). A The mere difficulty to foresee the happening is not impossibility to foresee the same: "un
converso, a party who resorts to the Court of Appeals, and submits his case for decision hecho no constituye caso fortuito por la sola circunstancia de que su existencia haga mas
there, is barred from contending later that his claim was beyond the jurisdiction of the dificil o mas onerosa la accion diligente del presento ofensor" (Peirano Facio, Responsibilidad
aforesaid Court. The reason is that a contrary rule would encourage the undesirable practice Extra-contractual, p. 465; Mazeaud Trait de la Responsibilite Civil, Vol. 2, sec. 1569). The very
of appellants' submitting their cases for decision to either court in expectation of favorable measures adopted by appellant prove that the possibility of danger was not only foreseeable,
judgment, but with intent of attacking its jurisdiction should the decision be unfavorable but actually foreseen, and was not caso fortuito.
(Tyson Tan, et al. vs. Filipinas Compañia de Seguros) et al., L-10096, Res. on Motion to
Reconsider, March 23, 1966). Consequently, we are limited in this appeal to the issues of law Otherwise stated, the appellant, Luzon Stevedoring Corporation, knowing and appreciating
raised in the appellant's brief. the perils posed by the swollen stream and its swift current, voluntarily entered into a
situation involving obvious danger; it therefore assured the risk, and can not shed
Taking the aforesaid rules into account, it can be seen that the only reviewable issues in this responsibility merely because the precautions it adopted turned out to be insufficient.
appeal are reduced to two:
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Hence, the lower Court committed no error in holding it negligent in not suspending TINGA, J.:
operations and in holding it liable for the damages caused.
This is a Rule 45 petition1 which seeks the reversal of the Court of Appeals’ decision2 and
It avails the appellant naught to argue that the dolphins, like the bridge, were improperly resolution3 affirming the RTC’s decision4 holding petitioner liable for actual damages for
located. Even if true, these circumstances would merely emphasize the need of even higher breach of contract.
degree of care on appellant's part in the situation involved in the present case. The appellant,
whose barges and tugs travel up and down the river everyday, could not safely ignore the Petitioner Asset Privatization Trust5 (petitioner) was a government entity created for the
danger posed by these allegedly improper constructions that had been erected, and in place, purpose to conserve, to provisionally manage and to dispose assets of government
for years. institutions.6 Petitioner had acquired from the Development Bank of the Philippines (DBP)
assets consisting of machinery and refrigeration equipment which were then stored at
On the second point: appellant charges the lower court with having abused its discretion in Golden City compound, Pasay City. The compound was then leased to and in the physical
the admission of plaintiff's additional evidence after the latter had rested its case. There is an possession of Creative Lines, Inc., (Creative Lines). These assets were being sold on an as-is-
insinuation that the delay was deliberate to enable the manipulation of evidence to prejudice where-is basis.
defendant-appellant.
On 7 November 1990, petitioner and respondent entered into an absolute deed of sale over
We find no merit in the contention. Whether or not further evidence will be allowed after a certain machinery and refrigeration equipment identified as Lots Nos. 2, 3 and 5. Respondent
party offering the evidence has rested his case, lies within the sound discretion of the trial paid the full amount of ₱84,000.00 as evidenced by petitioner’s Receipt No. 12844. After two
Judge, and this discretion will not be reviewed except in clear case of abuse.3 (2) days, respondent demanded the delivery of the machinery it had purchased. Sometime in
March 1991, petitioner issued Gate Pass No. 4955. Respondent was able to pull out from the
In the present case, no abuse of that discretion is shown. What was allowed to be compound the properties designated as Lots Nos. 3 and 5. However, during the hauling of Lot
introduced, after plaintiff had rested its evidence in chief, were vouchers and papers to No. 2 consisting of sixteen (16) items, only nine (9) items were pulled out by respondent. The
support an item of P1,558.00 allegedly spent for the reinforcement of the panel of the bailey seven (7) items that were left behind consisted of the following: (1) one (1) Reefer Unit 1; (2)
bridge, and which item already appeared in Exhibit GG. Appellant, in fact, has no reason to one (1) Reefer Unit 2; (3) one (1) Reefer Unit 3; (4) one (1) unit blast freezer with all
charge the trial court of being unfair, because it was also able to secure, upon written accessories; (5) one (1) unit chest freezer; (6) one (1) unit room air-conditioner; and (7) one
motion, a similar order dated November 24, 1962, allowing reception of additional evidence (1) unit air compressor. Creative Lines’ employees prevented respondent from hauling the
for the said defendant-appellant.4 remaining machinery and equipment.

WHEREFORE, finding no error in the decision of the lower Court appealed from, the same is Respondent filed a complaint for specific performance and damages against petitioner and
hereby affirmed. Costs against the defendant-appellant. Creative Lines.7 During the pendency of the case, respondent was able to pull out the
remaining machinery and equipment. However, upon inspection it was discovered that the
machinery and equipment were damaged and had missing parts.
Republic of the Philippines
SUPREME COURT
Manila Petitioner argued that upon the execution of the deed of sale it had complied with its
obligation to deliver the object of the sale since there was no stipulation to the contrary. It
further argued that being a sale on an as-is-where-is basis, it was the duty of respondent to
SECOND DIVISION
take possession of the property. Petitioner claimed that there was already a constructive
delivery of the machinery and equipment.
G.R. No. 167195 May 8, 2009
The RTC ruled that the execution of the deed of absolute sale did not result in constructive
ASSET PRIVATIZATION TRUST, Petitioner, delivery of the machinery and equipment. It found that at the time of the sale, petitioner did
vs. not have control over the machinery and equipment and, thus, could not have transferred
T.J. ENTERPRISES, Respondent. ownership by constructive delivery. The RTC ruled that petitioner is liable for breach of
contract and should pay for the actual damages suffered by respondent.
DECISION
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
On petitioner’s appeal, the Court of Appeals affirmed in toto the decision of the RTC. where it is stored or kept.11 In order for the execution of a public instrument to effect
tradition, the purchaser must be placed in control of the thing sold.12
Hence this petition.
However, the execution of a public instrument only gives rise to a prima facie presumption of
Before this Court, petitioner raises issues by attributing the following errors to the Court of delivery. Such presumption is destroyed when the delivery is not effected because of a legal
Appeals, to wit: impediment.13 It is necessary that the vendor shall have control over the thing sold that, at
the moment of sale, its material delivery could have been made.14 Thus, a person who does
not have actual possession of the thing sold cannot transfer constructive possession by the
I.
execution and delivery of a public instrument.15

The Court of Appeals erred in not finding that petitioner had complied with its obligation to
In this case, there was no constructive delivery of the machinery and equipment upon the
make delivery of the properties subject of the contract of sale.
execution of the deed of absolute sale or upon the issuance of the gate pass since it was not
petitioner but Creative Lines which had actual possession of the property. The presumption
II. of constructive delivery is not applicable as it has to yield to the reality that the purchaser
was not placed in possession and control of the property.
The Court of Appeals erred in not considering that the sale was on an "as-is-where-is" basis
wherein the properties were sold in the condition and in the place where they were located. On the second issue, petitioner posits that the sale being in an as-is-where-is basis,
respondent agreed to take possession of the things sold in the condition where they are
III. found and from the place

The Court of Appeals erred in not considering that respondent’s acceptance of petitioner’s where they are located. The phrase as-is where-is basis pertains solely to the physical
disclaimer of warranty forecloses respondent’s legal basis to enforce any right arising from condition of the thing sold, not to its legal situation.16 It is merely descriptive of the state of
the contract. the thing sold. Thus, the as-is where-is basis merely describes the actual state and location of
the machinery and equipment sold by petitioner to respondent. The depiction does not alter
IV. petitioner’s responsibility to deliver the property to [Link]+

The reason for the failure to make actual delivery of the properties was not attributable to Anent the third issue, petitioner maintains that the presence of the disclaimer of warranty in
the fault and was beyond the control of petitioner. The claim for damages against petitioner the deed of absolute sale absolves it from all warranties, implied or otherwise. The position is
is therefore bereft of legal basis.8 untenable.

The first issue hinges on the determination of whether there was a constructive delivery of The vendor is bound to transfer the ownership of and deliver, as well as warrant the thing
the machinery and equipment upon the execution of the deed of absolute sale between which is the object of the sale.17 Ownership of the thing sold is acquired by the vendee from
petitioner and respondent. the moment it its delivered to him in any of the ways specified in articles 1497 to 1501, or in
any other manner signifying an agreement that the possession is transferred from the vendor
to the vendee.18 A perusal of the deed of absolute sale shows that both the vendor and the
The ownership of a thing sold shall be transferred to the vendee upon the actual or vendee represented and warranted to each other that each had all the requisite power and
constructive delivery thereof.9The thing sold shall be understood as delivered when it is authority to enter into the deed of absolute sale and that they shall perform each of their
placed in the control and possession of the vendee.10 respective obligations under the deed of absolute in accordance with the terms thereof.19 As
previously shown, there was no actual or constructive delivery of the things sold. Thus,
As a general rule, when the sale is made through a public instrument, the execution thereof petitioner has not performed its obligation to transfer ownership and possession of the
shall be equivalent to the delivery of the thing which is the object of the contract, if from the things sold to respondent.
deed the contrary does not appear or cannot clearly be inferred. And with regard to movable
property, its delivery may also be made by the delivery of the keys of the place or depository

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
As to the last issue, petitioner claims that its failure to make actual delivery was beyond its Assuming arguendo that Creative Lines’ refusal to allow the hauling of the machinery and
control. It posits that the refusal of Creative Lines to allow the hauling of the machinery and equipment is a fortuitous event, petitioner will still be liable for damages. This Court agrees
equipment was unforeseen and constituted a fortuitous event. with the appellate court’s findings on the matter of damages, thus:

The matter of fortuitous events is governed by Art. 1174 of the Civil Code which provides Article 1170 of the Civil Code states: "Those who in the performance of their obligations are
that except in cases expressly specified by the law, or when it is otherwise declared by guilty of fraud, negligence, or delay and those who in any manner contravene the tenor
stipulation, or when the nature of the obligation requires assumption of risk, no person shall thereof are liable for damages." In contracts and quasi-contracts, the damages for which the
be responsible for those events which could not be foreseen, or which though foreseen, obligor who acted in good faith is liable shall be those that are the natural and probable
were inevitable. The elements of a fortuitous event are: (a) the cause of the unforeseen and consequences of the breach of the obligation, and which the parties have foreseen or could
unexpected occurrence, must have been independent of human will; (b) the event that have reasonably foreseen at the time the obligation was constituted.24 The trial court
constituted the caso fortuito must have been impossible to foresee or, if foreseeable, correctly awarded actual damages as pleaded and proven during trial.25
impossible to avoid; (c) the occurrence must have been such as to render it impossible for
the debtors to fulfill their obligation in a normal manner, and; (d) the obligor must have been WHEREFORE, the Court AFFIRMS in toto the Decision of the Court of Appeals dated 31
free from any participation in the aggravation of the resulting injury to the creditor.20 August 2004. Cost against petitioner.

A fortuitous event may either be an act of God, or natural occurrences such as floods or SO ORDERED.
typhoons, or an act of man such as riots, strikes or wars.21 However, when the loss is found
to be partly the result of a person’s participation–whether by active intervention, neglect or
THIRD DIVISION
failure to act—the whole occurrence is humanized and removed from the rules applicable to
a fortuitous event.22
G.R. No. 146018 June 25, 2003
We quote with approval the following findings of the Court of Appeals, to wit:
EDGAR COKALIONG SHIPPING LINES, INC., Petitioner,
vs.
We find that Creative Lines’ refusal to surrender the property to the vendee does not
UCPB GENERAL INSURANCE COMPANY, INC., Respondent.
constitute force majeure which exculpates APT from the payment of damages. This event
cannot be considered unavoidable or unforeseen. APT knew for a fact that the properties to
be sold were housed in the premises leased by Creative Lines. It should have made DECISION
arrangements with Creative Lines beforehand for the smooth and orderly removal of the
equipment. The principle embodied in the act of God doctrine strictly requires that the act PANGANIBAN, J.:
must be one occasioned exclusively by the violence of nature and all human agencies are to
be excluded from creating or entering into the cause of the mischief. When the effect, the The liability of a common carrier for the loss of goods may, by stipulation in the bill of lading,
cause of which is to be considered, is found to be in part the result of the participation of be limited to the value declared by the shipper. On the other hand, the liability of the insurer
man, whether it be from active intervention or neglect, or failure to act, the whole is determined by the actual value covered by the insurance policy and the insurance
occurrence is thereby humanized, as it were, and removed from the rules applicable to the premiums paid therefor, and not necessarily by the value declared in the bill of lading.
acts of God.23

The Case
Moreover, Art. 1504 of the Civil Code provides that where actual delivery has been delayed
through the fault of either the buyer or seller the goods are at the risk of the party in fault.
The risk of loss or deterioration of the goods sold does not pass to the buyer until there is Before the Court is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to set
actual or constructive delivery thereof. As previously discussed, there was no actual or aside the August 31, 2000 Decision2 and the November 17, 2000 Resolution3 of the Court of
constructive delivery of the machinery and equipment. Thus, the risk of loss or deterioration Appeals4 (CA) in CA-GR SP No. 62751. The dispositive part of the Decision reads:
of property is borne by petitioner. Thus, it should be liable for the damages that may arise
from the delay.1avvphi1 "IN THE LIGHT OF THE FOREGOING, the appeal is GRANTED. The Decision appealed from
is REVERSED. [Petitioner] is hereby condemned to pay to [respondent] the total amount of

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
₱148,500.00, with interest thereon, at the rate of 6% per annum, from date of this Decision vessel, the fire engulfed and destroyed the entire vessel resulting in the loss of the vessel and
of the Court. [Respondent’s] claim for attorney’s fees [is] DISMISSED. [Petitioner’s] the cargoes therein. The Captain filed the required Marine Protest.
counterclaims are DISMISSED."5
"Shortly thereafter, Feliciana Legaspi filed a claim, with [respondent], for the value of the
The assailed Resolution denied petitioner’s Motion for Reconsideration. cargo insured under Marine Risk Note No. 18409 and covered by Bill of Lading No. 59. She
submitted, in support of her claim, a Receipt, dated December 11, 1991, purportedly signed
On the other hand, the disposition of the Regional Trial Court’s6 Decision,7 which was later by Zosimo Mercado, and Order Slips purportedly signed by him for the goods he received
reversed by the CA, states: from Feliciana Legaspi valued in the amount of ₱110,056.00. [Respondent] approved the
claim of Feliciana Legaspi and drew and issued UCPB Check No. 612939, dated March 9,
1992, in the net amount of ₱99,000.00, in settlement of her claim after which she executed
"WHEREFORE, premises considered, the case is hereby DISMISSED for lack of merit.
a Subrogation Receipt/Deed, for said amount, in favor of [respondent]. She also filed a claim
for the value of the cargo covered by Bill of Lading No. 58. She submitted to [respondent]
"No cost."8 a Receipt, dated December 11, 1991 and Order Slips, purportedly signed by Nestor Angelia
for the goods he received from Feliciana Legaspi valued at ₱60,338.00. [Respondent]
The Facts approved her claim and remitted to Feliciana Legaspi the net amount of ₱49,500.00, after
which she signed a Subrogation Receipt/Deed, dated March 9, 1992, in favor of
The facts of the case are summarized by the appellate court in this wise: [respondent].

"Sometime on December 11, 1991, Nestor Angelia delivered to the Edgar Cokaliong Shipping "On July 14, 1992, [respondent], as subrogee of Feliciana Legaspi, filed a complaint anchored
Lines, Inc. (now Cokaliong Shipping Lines), [petitioner] for brevity, cargo consisting of one (1) on torts against [petitioner], with the Regional Trial Court of Makati City, for the collection of
carton of Christmas décor and two (2) sacks of plastic toys, to be transported on board the total principal amount of ₱148,500.00, which it paid to Feliciana Legaspi for the loss of
the M/V Tandag on its Voyage No. T-189 scheduled to depart from Cebu City, on December the cargo, praying that judgment be rendered in its favor and against the [petitioner] as
12, 1991, for Tandag, Surigao del Sur. [Petitioner] issued Bill of Lading No. 58, freight follows:
prepaid, covering the cargo. Nestor Angelia was both the shipper and consignee of the cargo
valued, on the face thereof, in the amount of ₱6,500.00. Zosimo Mercado likewise delivered ‘WHEREFORE, it is respectfully prayed of this Honorable Court that after due hearing,
cargo to [petitioner], consisting of two (2) cartons of plastic toys and Christmas decor, one (1) judgment be rendered ordering [petitioner] to pay [respondent] the following.
roll of floor mat and one (1) bundle of various or assorted goods for transportation thereof
from Cebu City to Tandag, Surigao del Sur, on board the said vessel, and said voyage. 1. Actual damages in the amount of ₱148,500.00 plus interest thereon at the legal
[Petitioner] issued Bill of Lading No. 59 covering the cargo which, on the face thereof, was rate from the time of filing of this complaint until fully paid;
valued in the amount of ₱14,000.00. Under the Bill of Lading, Zosimo Mercado was both the
shipper and consignee of the cargo.
2. Attorney’s fees in the amount of ₱10,000.00; and

"On December 12, 1991, Feliciana Legaspi insured the cargo, covered by Bill of Lading No.
3. Cost of suit.
59, with the UCPB General Insurance Co., Inc., [respondent] for brevity, for the amount of
₱100,000.00 ‘against all risks’ under Open Policy No. 002/9 1/254 for which she was issued,
by [respondent], Marine Risk Note No. 18409 on said date. She also insured the cargo ‘[Respondent] further prays for such other reliefs and remedies as this Honorable Court may
covered by Bill of Lading No. 58, with [respondent], for the amount of ₱50,000.00, deem just and equitable under the premises.’
under Open Policy No. 002/9 1/254 on the basis of which [respondent] issued Marine Risk
Note No. 18410 on said date. "[Respondent] alleged, inter alia, in its complaint, that the cargo subject of its complaint was
delivered to, and received by, [petitioner] for transportation to Tandag, Surigao del Sur under
"When the vessel left port, it had thirty-four (34) passengers and assorted cargo on board, ‘Bill of Ladings,’ Annexes ‘A’ and ‘B’ of the complaint; that the loss of the cargo was due to
including the goods of Legaspi. After the vessel had passed by the Mandaue-Mactan Bridge, the negligence of the [petitioner]; and that Feliciana Legaspi had executed Subrogation
fire ensued in the engine room, and, despite earnest efforts of the officers and crew of the Receipts/Deeds in favor of [respondent] after paying to her the value of the cargo on
account of the Marine Risk Notes it issued in her favor covering the cargo.

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
"In its Answer to the complaint, [petitioner] alleged that: (a) [petitioner] was cleared by the summons and complaint, on October 8, 1992; after settling his claim, Nestor Angelia x x x
Board of Marine Inquiry of any negligence in the burning of the vessel; (b) the complaint executed the Release and Quitclaim, dated July 2, 1993, and Affidavit, dated July 2, 1993 in
stated no cause of action against [petitioner]; and (c) the shippers/consignee had already favor of [respondent]; hence, [petitioner] was absolved of any liability for the loss of the
been paid the value of the goods as stated in the Bill of Lading and, hence, [petitioner] cargo covered by Bills of Lading Nos. 58 and 59; and even if it was, its liability should not
cannot be held liable for the loss of the cargo beyond the value thereof declared in the Bill of exceed the value of the cargo as stated in the Bills of Lading.
Lading.
"[Petitioner] did not anymore present any other witnesses on its evidence-in-chief. x x
"After [respondent] rested its case, [petitioner] prayed for and was allowed, by the Court a x"9 (Citations omitted)
quo, to take the depositions of Chester Cokaliong, the Vice-President and Chief Operating
Officer of [petitioner], and a resident of Cebu City, and of Noel Tanyu, an officer of the Ruling of the Court of Appeals
Equitable Banking Corporation, in Cebu City, and a resident of Cebu City, to be given before
the Presiding Judge of Branch 106 of the Regional Trial Court of Cebu City. Chester Cokaliong
The CA held that petitioner had failed "to prove that the fire which consumed the vessel and
and Noel Tanyu did testify, by way of deposition, before the Court and declared inter alia,
its cargo was caused by something other than its negligence in the upkeep, maintenance and
that: [petitioner] is a family corporation like the Chester Marketing, Inc.; Nestor Angelia had
operation of the vessel."10
been doing business with [petitioner] and Chester Marketing, Inc., for years, and incurred an
account with Chester Marketing, Inc. for his purchases from said corporation; [petitioner] did
issue Bills of Lading Nos. 58 and 59 for the cargo described therein with Zosimo Mercado Petitioner had paid ₱14,000 to Legaspi Marketing for the cargo covered by Bill of Lading No.
and Nestor Angelia as shippers/consignees, respectively; the engine room of the M/V 59. The CA, however, held that the payment did not extinguish petitioner’s obligation to
Tandag caught fire after it passed the Mandaue/Mactan Bridge resulting in the total loss of respondent, because there was no evidence that Feliciana Legaspi (the insured) was the
the vessel and its cargo; an investigation was conducted by the Board of Marine Inquiry of owner/proprietor of Legaspi Marketing. The CA also pointed out the impropriety of treating
the Philippine Coast Guard which rendered a Report, dated February 13, 1992 absolving the claim under Bill of Lading No. 58 -- covering cargo valued therein at ₱6,500 -- as a setoff
[petitioner] of any responsibility on account of the fire, which Report of the Board was against Nestor Angelia’s account with Chester Enterprises, Inc.
approved by the District Commander of the Philippine Coast Guard; a few days after the
sinking of the vessel, a representative of the Legaspi Marketing filed claims for the values of Finally, it ruled that respondent "is not bound by the valuation of the cargo under the Bills of
the goods under Bills of Lading Nos. 58 and 59 in behalf of the shippers/consignees, Nestor Lading, x x x nor is the value of the cargo under said Bills of Lading conclusive on the
Angelia and Zosimo Mercado; [petitioner] was able to ascertain, from the [respondent]. This is so because, in the first place, the goods were insured with the
shippers/consignees and the representative of the Legaspi Marketing that the cargo covered [respondent] for the total amount of ₱150,000.00, which amount may be considered as the
by Bill of Lading No. 59 was owned by Legaspi Marketing and consigned to Zosimo Mercado face value of the goods."11
while that covered by Bill of Lading No. 58 was purchased by Nestor Angelia from the Legaspi
Marketing; that [petitioner] approved the claim of Legaspi Marketing for the value of the Hence this Petition.12
cargo under Bill of Lading No. 59 and remitted to Legaspi Marketing the said amount under
Equitable Banking Corporation Check No. 20230486 dated August 12, 1992, in the amount of
₱14,000.00 for which the representative of the Legaspi Marketing signed Voucher No. 4379, Issues
dated August 12, 1992, for the said amount of ₱14,000.00 in full payment of claims under Bill
of Lading No. 59; that [petitioner] approved the claim of Nestor Angelia in the amount of Petitioner raises for our consideration the following alleged errors of the CA:
₱6,500.00 but that since the latter owed Chester Marketing, Inc., for some purchases,
[petitioner] merely set off the amount due to Nestor Angelia under Bill of Lading No. "I
58 against his account with Chester Marketing, Inc.; [petitioner] lost/[misplaced] the original
of the check after it was received by Legaspi Marketing, hence, the production of the
"The Honorable Court of Appeals erred, granting arguendo that petitioner is liable, in holding
microfilm copy by Noel Tanyu of the Equitable Banking Corporation; [petitioner] never knew,
that petitioner’s liability should be based on the ‘actual insured value’ of the goods and not
before settling with Legaspi Marketing and Nestor Angelia that the cargo under both Bills of
from actual valuation declared by the shipper/consignee in the bill of lading.
Lading were insured with [respondent], or that Feliciana Legaspi filed claims for the value of
the cargo with [respondent] and that the latter approved the claims of Feliciana Legaspi and
paid the total amount of ₱148,500.00 to her; [petitioner] came to know, for the first time, of "II
the payments by [respondent] of the claims of Feliciana Legaspi when it was served with the

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
"The Court of Appeals erred in not affirming the findings of the Philippine Coast Guard, as other natural disaster or calamity. It may even be caused by the actual fault or privity of the
sustained by the trial court a quo, holding that the cause of loss of the aforesaid cargoes carrier.
under Bill of Lading Nos. 58 and 59 was due to force majeure and due diligence was
[exercised] by petitioner prior to, during and immediately after the fire on [petitioner’s] "Article 1680 of the Civil Code, which considers fire as an extraordinary fortuitous event
vessel. refers to leases or rural lands where a reduction of the rent is allowed when more than one-
half of the fruits have been lost due to such event, considering that the law adopts a
"III protective policy towards agriculture.

"The Court of Appeals erred in not holding that respondent UCPB General Insurance has no "As the peril of fire is not comprehended within the exceptions in Article 1734, supra, Article
cause of action against the petitioner."13 1735 of the Civil Code provides that in all cases other than those mentioned in Article 1734,
the common carrier shall be presumed to have been at fault or to have acted negligently,
In sum, the issues are: (1) Is petitioner liable for the loss of the goods? (2) If it is liable, what unless it proves that it has observed the extraordinary diligence required by law."
is the extent of its liability?
Where loss of cargo results from the failure of the officers of a vessel to inspect their ship
This Court’s Ruling frequently so as to discover the existence of cracked parts, that loss cannot be attributed to
force majeure, but to the negligence of those officials.16
The Petition is partly meritorious.
The law provides that a common carrier is presumed to have been negligent if it fails to
prove that it exercised extraordinary vigilance over the goods it transported. Ensuring the
First Issue:
seaworthiness of the vessel is the first step in exercising the required vigilance. Petitioner did
not present sufficient evidence showing what measures or acts it had undertaken to ensure
Liability for Loss the seaworthiness of the vessel. It failed to show when the last inspection and care of the
auxiliary engine fuel oil service tank was made, what the normal practice was for its
Petitioner argues that the cause of the loss of the goods, subject of this case, was force maintenance, or some other evidence to establish that it had exercised extraordinary
majeure. It adds that its exercise of due diligence was adequately proven by the findings of diligence. It merely stated that constant inspection and care were not possible, and that the
the Philippine Coast Guard. last time the vessel was dry-docked was in November 1990. Necessarily, in accordance with
Article 173517 of the Civil Code, we hold petitioner responsible for the loss of the goods
We are not convinced. The uncontroverted findings of the Philippine Coast Guard show that covered by Bills of Lading Nos. 58 and 59.
the M/V Tandag sank due to a fire, which resulted from a crack in the auxiliary engine fuel oil
service tank. Fuel spurted out of the crack and dripped to the heating exhaust manifold, Second Issue:
causing the ship to burst into flames. The crack was located on the side of the fuel oil tank,
which had a mere two-inch gap from the engine room walling, thus precluding constant Extent of Liability
inspection and care by the crew.
Respondent contends that petitioner’s liability should be based on the actual insured value of
Having originated from an unchecked crack in the fuel oil service tank, the fire could not have the goods, subject of this case. On the other hand, petitioner claims that its liability should be
been caused by force majeure. Broadly speaking, force majeure generally applies to a natural limited to the value declared by the shipper/consignee in the Bill of Lading.
accident, such as that caused by a lightning, an earthquake, a tempest or a public
enemy.14 Hence, fire is not considered a natural disaster or calamity. In Eastern Shipping
The records18 show that the Bills of Lading covering the lost goods contain the stipulation
Lines, Inc. v. Intermediate Appellate Court,15 we explained:
that in case of claim for loss or for damage to the shipped merchandise or property, "[t]he
liability of the common carrier x x x shall not exceed the value of the goods as appearing in
"x x x. This must be so as it arises almost invariably from some act of man or by human the bill of lading."19 The attempt by respondent to make light of this stipulation is
means. It does not fall within the category of an act of God unless caused by lighting or by unconvincing. As it had the consignees’ copies of the Bills of Lading,20 it could have easily
produced those copies, instead of relying on mere allegations and suppositions. However, it

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
presented mere photocopies thereof to disprove petitioner’s evidence showing the existence ‘The carrier shall not be liable for any loss of or any damage to or in any connection with,
of the above stipulation. goods in an amount exceeding One Hundred Thousand Yen in Japanese Currency
(¥100,000.00) or its equivalent in any other currency per package or customary freight unit
A stipulation that limits liability is valid21 as long as it is not against public policy. In Everett (whichever is least) unless the value of the goods higher than this amount is declared in
Steamship Corporation v. Court of Appeals,22 the Court stated: writing by the shipper before receipt of the goods by the carrier and inserted in the Bill of
Lading and extra freight is paid as required.’
"A stipulation in the bill of lading limiting the common carrier’s liability for loss or destruction
of a cargo to a certain sum, unless the shipper or owner declares a greater value, is "The above stipulations are, to our mind, reasonable and just.1avvphi1 In the bill of lading,
sanctioned by law, particularly Articles 1749 and 1750 of the Civil Code which provides: the carrier made it clear that its liability would only be up to One Hundred Thousand
(Y100,000.00) Yen. However, the shipper, Maruman Trading, had the option to declare a
higher valuation if the value of its cargo was higher than the limited liability of the carrier.
‘Art. 1749. A stipulation that the common carrier’s liability is limited to the value of the goods
Considering that the shipper did not declare a higher valuation, it had itself to blame for not
appearing in the bill of lading, unless the shipper or owner declares a greater value, is
complying with the stipulations." (Italics supplied)
binding.’

In the present case, the stipulation limiting petitioner’s liability is not contrary to public
‘Art. 1750. A contract fixing the sum that may be recovered by the owner or shipper for the
policy. In fact, its just and reasonable character is evident. The shippers/consignees may
loss, destruction, or deterioration of the goods is valid, if it is reasonable and just under the
recover the full value of the goods by the simple expedient of declaring the true value of the
circumstances, and has been freely and fairly agreed upon.’
shipment in the Bill of Lading. Other than the payment of a higher freight, there was nothing
to stop them from placing the actual value of the goods therein. In fact, they committed
"Such limited-liability clause has also been consistently upheld by this Court in a number of fraud against the common carrier by deliberately undervaluing the goods in their Bill of
cases. Thus, in Sea-Land Service, Inc. vs. Intermediate Appellate Court, we ruled: Lading, thus depriving the carrier of its proper and just transport fare.

‘It seems clear that even if said section 4 (5) of the Carriage of Goods by Sea Act did not exist, Concededly, the purpose of the limiting stipulation in the Bill of Lading is to protect the
the validity and binding effect of the liability limitation clause in the bill of lading here are common carrier. Such stipulation obliges the shipper/consignee to notify the common carrier
nevertheless fully sustainable on the basis alone of the cited Civil Code Provisions. That said of the amount that the latter may be liable for in case of loss of the goods. The common
stipulation is just and reasonable is arguable from the fact that it echoes Art. 1750 itself in carrier can then take appropriate measures -- getting insurance, if needed, to cover or
providing a limit to liability only if a greater value is not declared for the shipment in the bill protect itself. This precaution on the part of the carrier is reasonable and prudent. Hence, a
of lading. To hold otherwise would amount to questioning the justness and fairness of the shipper/consignee that undervalues the real worth of the goods it seeks to transport does
law itself, and this the private respondent does not pretend to do. But over and above that not only violate a valid contractual stipulation, but commits a fraudulent act when it seeks to
consideration, the just and reasonable character of such stipulation is implicit in it giving the make the common carrier liable for more than the amount it declared in the bill of lading.
shipper or owner the option of avoiding accrual of liability limitation by the simple and surely
far from onerous expedient of declaring the nature and value of the shipment in the bill of
Indeed, Zosimo Mercado and Nestor Angelia misled petitioner by undervaluing the goods in
lading.’
their respective Bills of Lading. Hence, petitioner was exposed to a risk that was deliberately
hidden from it, and from which it could not protect itself.
"Pursuant to the afore-quoted provisions of law, it is required that the stipulation limiting the
common carrier’s liability for loss must be ‘reasonable and just under the circumstances, and
It is well to point out that, for assuming a higher risk (the alleged actual value of the goods)
has been freely and fairly agreed upon.
the insurance company was paid the correct higher premium by Feliciana Legaspi; while
petitioner was paid a fee lower than what it was entitled to for transporting the goods that
"The bill of lading subject of the present controversy specifically provides, among others: had been deliberately undervalued by the shippers in the Bill of Lading. Between the two of
them, the insurer should bear the loss in excess of the value declared in the Bills of Lading.
’18. All claims for which the carrier may be liable shall be adjusted and settled on the basis of This is the just and equitable solution.
the shipper’s net invoice cost plus freight and insurance premiums, if paid, and in no event
shall the carrier be liable for any loss of possible profits or any consequential loss. In Aboitiz Shipping Corporation v. Court of Appeals,23 the description of the nature and the
value of the goods shipped were declared and reflected in the bill of lading, like in the
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
present case. The Court therein considered this declaration as the basis of the carrier’s ROMERO, J.:
liability and ordered payment based on such amount. Following this ruling, petitioner should
not be held liable for more than what was declared by the shippers/consignees as the value In this petition for review on certiorari of the decision of the Court of Appeals, the issue is
of the goods in the bills of lading. whether or not the explosion of a newly installed tire of a passenger vehicle is a fortuitous
event that exempts the carrier from liability for the death of a passenger.
We find no cogent reason to disturb the CA’s finding that Feliciana Legaspi was the owner of
the goods covered by Bills of Lading Nos. 58 and 59. Undoubtedly, the goods were merely On April 26, 1988, spouses Tito and Leny Tumboy and their minor children named Ardee and
consigned to Nestor Angelia and Zosimo Mercado, respectively; thus, Feliciana Legaspi or her Jasmin, bearded at Mangagoy, Surigao del Sur, a Yobido Liner bus bound for Davao City.
subrogee (respondent) was entitled to the goods or, in case of loss, to compensation Along Picop Road in Km. 17, Sta. Maria, Agusan del Sur, the left front tire of the bus
therefor. There is no evidence showing that petitioner paid her for the loss of those goods. It exploded. The bus fell into a ravine around three (3) feet from the road and struck a tree. The
does not even claim to have paid her. incident resulted in the death of 28-year-old Tito Tumboy and physical injuries to other
passengers.
On the other hand, Legaspi Marketing filed with petitioner a claim for the lost goods under
Bill of Lading No. 59, for which the latter subsequently paid ₱14,000. But nothing in the On November 21, 1988, a complaint for breach of contract of carriage, damages and
records convincingly shows that the former was the owner of the goods. Respondent was, attorney's fees was filed by Leny and her children against Alberta Yobido, the owner of the
however, able to prove that it was Feliciana Legaspi who owned those goods, and who was bus, and Cresencio Yobido, its driver, before the Regional Trial Court of Davao City. When the
thus entitled to payment for their loss. Hence, the claim for the goods under Bill of Lading defendants therein filed their answer to the complaint, they raised the affirmative defense
No. 59 cannot be deemed to have been extinguished, because payment was made to a of caso fortuito. They also filed a third-party complaint against Philippine Phoenix Surety and
person who was not entitled thereto. Insurance, Inc. This third-party defendant filed an answer with compulsory counterclaim. At
the pre-trial conference, the parties agreed to a stipulation of facts.1
With regard to the claim for the goods that were covered by Bill of Lading No. 58 and valued
at ₱6,500, the parties have not convinced us to disturb the findings of the CA that Upon a finding that the third party defendant was not liable under the insurance contract,
compensation could not validly take place. Thus, we uphold the appellate court’s ruling on the lower court dismissed the third party complaint. No amicable settlement having been
this point. arrived at by the parties, trial on the merits ensued.

WHEREFORE, the Petition is hereby PARTIALLY GRANTED. The assailed Decision The plaintiffs asserted that violation of the contract of carriage between them and the
is MODIFIED in the sense that petitioner is ORDERED to pay respondent the sums of ₱14,000 defendants was brought about by the driver's failure to exercise the diligence required of the
and ₱6,500, which represent the value of the goods stated in Bills of Lading Nos. 59 and 58, carrier in transporting passengers safely to their place of destination. According to Leny
respectively. No costs. Tumboy, the bus left Mangagoy at 3:00 o'clock in the afternoon. The winding road it
traversed was not cemented and was wet due to the rain; it was rough with crushed rocks.
SO ORDERED. The bus which was full of passengers had cargoes on top. Since it was "running fast," she
cautioned the driver to slow down but he merely stared at her through the mirror. At around
Republic of the Philippines 3:30 p.m., in Trento, she heard something explode and immediately, the bus fell into a
SUPREME COURT ravine.
Manila
For their part, the defendants tried to establish that the accident was due to a fortuitous
THIRD DIVISION event. Abundio Salce, who was the bus conductor when the incident happened, testified that
the 42-seater bus was not full as there were only 32 passengers, such that he himself
managed to get a seat. He added that the bus was running at a speed of "60 to 50" and that
G.R. No. 113003 October 17, 1997
it was going slow because of the zigzag road. He affirmed that the left front tire that
exploded was a "brand new tire" that he mounted on the bus on April 21, 1988 or only five
ALBERTA YOBIDO and CRESENCIO YOBIDO, petitioners, (5) days before the incident. The Yobido Liner secretary, Minerva Fernando, bought the new
vs. Goodyear tire from Davao Toyo Parts on April 20, 1988 and she was present when it was
COURT OF APPEALS, LENY TUMBOY, ARDEE TUMBOY and JASMIN TUMBOY, respondents. mounted on the bus by Salce. She stated that all driver applicants in Yobido Liner underwent
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
actual driving tests before they were employed. Defendant Cresencio Yobido underwent equipment, and the good repute of the manufacturer will not necessarily relieve
such test and submitted his professional driver's license and clearances from the barangay, the carrier from liability.
the fiscal and the police.
Moreover, there is evidence that the bus was moving fast, and the road was wet
On August 29, 1991, the lower court rendered a decision2 dismissing the action for lack of and rough. The driver could have explained that the blow-out that precipitated the
merit. On the issue of whether or not the tire blowout was a caso fortuito, it found that "the accident that caused the death of Toto Tumboy could not have been prevented
falling of the bus to the cliff was a result of no other outside factor than the tire blow-out." It even if he had exercised due care to avoid the same, but he was not presented as
held that the ruling in the La Mallorca and Pampanga Bus Co. v. De Jesus3 that a tire blowout witness.
is "a mechanical defect of the conveyance or a fault in its equipment which was easily
discoverable if the bus had been subjected to a more thorough or rigid check-up before it The Court of Appeals thus disposed of the appeal as follows:
took to the road that morning" is inapplicable to this case. It reasoned out that in said case, it
was found that the blowout was caused by the established fact that the inner tube of the left
WHEREFORE, the judgment of the court a quo is set aside and another one entered
front tire "was pressed between the inner circle of the left wheel and the rim which had
ordering defendants to pay plaintiffs the sum of P50,000.00 for the death of Tito
slipped out of the wheel." In this case, however, "the cause of the explosion remains a
Tumboy, P30,000.00 in moral damages, and P7,000.00 for funeral and burial
mystery until at present." As such, the court added, the tire blowout was "a caso
expenses.
fortuito which is completely an extraordinary circumstance independent of the will" of the
defendants who should be relieved of "whatever liability the plaintiffs may have suffered by
reason of the explosion pursuant to Article 11744 of the Civil Code." SO ORDERED.

Dissatisfied, the plaintiffs appealed to the Court of Appeals. They ascribed to the lower court The defendants filed a motion for reconsideration of said decision which was denied on
the following errors: (a) finding that the tire blowout was a caso fortuito; (b) failing to hold November 4, 1993 by the Court of Appeals. Hence, the instant petition asserting the position
that the defendants did not exercise utmost and/or extraordinary diligence required of that the tire blowout that caused the death of Tito Tumboy was a caso fortuito. Petitioners
carriers under Article 1755 of the Civil Code, and (c) deciding the case contrary to the ruling claim further that the Court of Appeals, in ruling contrary to that of the lower court,
in Juntilla v. Fontanar,5 and Necesito v. Paras.6 misapprehended facts and, therefore, its findings of fact cannot be considered final which
shall bind this Court. Hence, they pray that this Court review the facts of the case.
On August 23, 1993, the Court of Appeals rendered the Decision7 reversing that of the lower
court. It held that: The Court did re-examine the facts and evidence in this case because of the inapplicability of
the established principle that the factual findings of the Court of Appeals are final and may
not be reviewed on appeal by this Court. This general principle is subject to exceptions such
To Our mind, the explosion of the tire is not in itself a fortuitous event. The cause
as the one present in this case, namely, that the lower court and the Court of Appeals arrived
of the blow-out, if due to a factory defect, improper mounting, excessive tire
at diverse factual findings.8 However, upon such re-examination, we found no reason to
pressure, is not an unavoidable event. On the other hand, there may have been
overturn the findings and conclusions of the Court of Appeals.
adverse conditions on the road that were unforeseeable and/or inevitable, which
could make the blow-out a caso fortuito. The fact that the cause of the blow-out
was not known does not relieve the carrier of liability. Owing to the statutory As a rule, when a passenger boards a common carrier, he takes the risks incidental to the
presumption of negligence against the carrier and its obligation to exercise the mode of travel he has taken. After all, a carrier is not an insurer of the safety of its
utmost diligence of very cautious persons to carry the passenger safely as far as passengers and is not bound absolutely and at all events to carry them safely and without
human care and foresight can provide, it is the burden of the defendants to prove injury.9 However, when a passenger is injured or dies while travelling, the law presumes that
that the cause of the blow-out was a fortuitous event. It is not incumbent upon the the common carrier is negligent. Thus, the Civil Code provides:
plaintiff to prove that the cause of the blow-out is not caso-fortuito.
Art. 1756. In case of death or injuries to passengers, common carriers are
Proving that the tire that exploded is a new Goodyear tire is not sufficient to presumed to have been at fault or to have acted negligently, unless they prove that
discharge defendants' burden. As enunciated in Necesito vs. Paras, the passenger they observed extraordinary diligence as prescribed in articles 1733 and 1755.
has neither choice nor control over the carrier in the selection and use of its

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Article 1755 provides that "(a) common carrier is bound to carry the passengers safely as far It is interesting to note that petitioners proved through the bus conductor, Salce, that the
as human care and foresight can provide, using the utmost diligence of very cautious bus was running at "60-50" kilometers per hour only or within the prescribed lawful speed
persons, with a due regard for all the circumstances." Accordingly, in culpa contractual, once limit. However, they failed to rebut the testimony of Leny Tumboy that the bus was running
a passenger dies or is injured, the carrier is presumed to have been at fault or to have acted so fast that she cautioned the driver to slow down. These contradictory facts must,
negligently. This disputable presumption may only be overcome by evidence that the carrier therefore, be resolved in favor of liability in view of the presumption of negligence of the
had observed extraordinary diligence as prescribed by Articles 1733,10 1755 and 1756 of the carrier in the law. Coupled with this is the established condition of the road — rough,
Civil Code or that the death or injury of the passenger was due to a fortuitous winding and wet due to the rain. It was incumbent upon the defense to establish that it took
event.11 Consequently, the court need not make an express finding of fault or negligence on precautionary measures considering partially dangerous condition of the road. As stated
the part of the carrier to hold it responsible for damages sought by the passenger.12 above, proof that the tire was new and of good quality is not sufficient proof that it
was not negligent. Petitioners should have shown that it undertook extraordinary diligence in
In view of the foregoing, petitioners' contention that they should be exempt from liability the care of its carrier, such as conducting daily routinary check-ups of the vehicle's parts. As
because the tire blowout was no more than a fortuitous event that could not have been the late Justice J.B.L. Reyes said:
foreseen, must fail. A fortuitous event is possessed of the following characteristics: (a) the
cause of the unforeseen and unexpected occurrence, or the failure of the debtor to comply It may be impracticable, as appellee argues, to require of carriers to test the
with his obligations, must be independent of human will; (b) it must be impossible to foresee strength of each and every part of its vehicles before each trip; but we are of the
the event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible opinion that a due regard for the carrier's obligations toward the traveling public
to avoid; (c) the occurrence must be such as to render it impossible for the debtor to fulfill demands adequate periodical tests to determine the condition and strength of
his obligation in a normal manner; and (d) the obliger must be free from any participation in those vehicle portions the failure of which may endanger the safety of the
the aggravation of the injury resulting to the creditor.13 As Article 1174 provides, no person passengers.18
shall be responsible for a fortuitous event which could not be foreseen, or which, though
foreseen, was inevitable. In other words, there must be an entire exclusion of human agency Having failed to discharge its duty to overthrow the presumption of negligence with clear and
from the cause of injury or loss.14 convincing evidence, petitioners are hereby held liable for damages. Article 176419 in relation
to Article 220620 of the Civil Code prescribes the amount of at least three thousand pesos as
Under the circumstances of this case, the explosion of the new tire may not be considered a damages for the death of a passenger. Under prevailing jurisprudence, the award of damages
fortuitous event. There are human factors involved in the situation. The fact that the tire was under Article 2206 has been increased to fifty thousand pesos (P50,000.00).21
new did not imply that it was entirely free from manufacturing defects or that it was properly
mounted on the vehicle. Neither may the fact that the tire bought and used in the vehicle is Moral damages are generally not recoverable in culpa contractual except when bad faith had
of a brand name noted for quality, resulting in the conclusion that it could not explode within been proven. However, the same damages may be recovered when breach of contract of
five days' use. Be that as it may, it is settled that an accident caused either by defects in the carriage results in the death of a passenger,22 as in this case. Exemplary damages, awarded
automobile or through the negligence of its driver is not a caso fortuito that would exempt by way of example or correction for the public good when moral damages are
the carrier from liability for damages.15 awarded,23 may likewise be recovered in contractual obligations if the defendant acted in
wanton, fraudulent, reckless, oppressive, or malevolent manner.24 Because petitioners failed
Moreover, a common carrier may not be absolved from liability in case of force majeure or to exercise the extraordinary diligence required of a common carrier, which resulted in the
fortuitous event alone. The common carrier must still prove that it was not negligent in death of Tito Tumboy, it is deemed to have acted recklessly.25 As such, private respondents
causing the death or injury resulting from an accident.16 This Court has had occasion to state: shall be entitled to exemplary damages.

While it may be true that the tire that blew-up was still good because the grooves WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED subject to the
of the tire were still visible, this fact alone does not make the explosion of the tire a modification that petitioners shall, in addition to the monetary awards therein, be liable for
fortuitous event. No evidence was presented to show that the accident was due to the award of exemplary damages in the amount of P20,000.00. Costs against petitioners.
adverse road conditions or that precautions were taken by the jeepney driver to
compensate for any conditions liable to cause accidents. The sudden blowing-up, SO ORDERED.
therefore, could have been caused by too much air pressure injected into the tire
coupled by the fact that the jeepney was overloaded and speeding at the time of
the accident.17

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
Republic of the Philippines to Jacob Cabarrus, who, in turn, transferred to Marinduque Iron Mines Agents, Inc., his rights
SUPREME COURT under the lease contract. By virtue of still another contract executed by these lessors on 29
Manila February 1952, 43% of the royalties due from Marinduque Iron Mines Agents, Inc., were
agreed upon to be paid to Lincallo.
EN BANC
As early as August, 1939 and down to September, 1952, Jimena repeatedly apprised Gold
G.R. No. L-25301 October 26, 1968 Star Mining Co., Inc., and Marinduque Iron Mines Agents, Inc., of his interests over the
mining claims so assigned and/or leased by Lincallo and, accordingly, demanded recognition
and payment of his one-half share in all the royalties, allocated and paid and, thereafter, to
GOLD STAR MINING CO., INC., petitioner,
be paid to the latter. Both corporations, however, ignored Jimena's demands.
vs.
MARTA LIM-JIMENA, CARLOS JIMENA, GLORIA JIMENA, AURORA JIMENA, JAIME JIMENA,
DANTE JIMENA, JORGE JIMENA, JOYCE JIMENA, as legal heirs of the deceased VICTOR Payment of the P5,800 advanced for the purchase of the mining claims, as well as the one-
JIMENA, and JOSE HIDALGO, respondents. half share in the royalties paid by the two corporations, were also repeatedly demanded by
Jimena from Lincallo. Acknowledging Jimena's contractual claim, Lincallo off and on promised
to settle his obligations. And on 14 July 1952, Lincallo promised for the last time, to settle
Emiliano S. Samson and R. Balderrama-Samson for petitioner.
everything on or before the 30th day of the same month.
Leandro Sevilla and Ramon C. Aquino for respondents.

Lincallo, however, did not only fail to settle his accounts with Jimena but transferred on 16
REYES, J.B.L., J.:
August 1952, a month after he promised to pay Jimena, 35 of his 45% share in the royalties
due from Gold Star Mining Co., Inc., to one Gregorio Tolentino, a salaried employee, for an
From an affirmance in toto by the Court of Appeals1 of a decision of the Court of First alleged consideration of P10,000.00.
Instance of Manila,2specifically the portion thereof condemning Gold Star Mining Co., Inc. to
pay Marta Lim Vda. de Jimena, et al., the sum of P30,691.92 solidarily with Ananias Isaac
On 2 September 1954, Jimena commenced a suit against Lincallo for recovery of his advances
Lincallo for violation of an injunction this appeal is taken.
and his one-half share in the royalties. Gold Star Mining Co., Inc., and Marinduque Iron
Mines, Inc., together with Tolentino, were later joined as defendants.
It is of record that in 1937, Ananias Isaac Lincallo bound himself in writing to turn to Victor
Jimena one-half (1/2) of the proceeds from all mining claims that he would purchase with the
On 17 September 1954, the trial court issued, upon petition of Jimena, a writ of preliminary
money to be advanced by the latter. This agreement was later on modified (in a 1939 notarial
injunction restraining Gold Star Mining Co., Inc., and Marinduque Iron Mines Agents, Inc.,
instrument duly registered with the Register of Deeds of Marinduque in his capacity as
from paying royalties during the pendency of the case to Lincallo, his assigns or legal
mining recorder) so as to include in the equal sharing arrangement not only the proceeds
representatives. Despite the injunction, however, Gold Star Mining Co., Inc., was found out
from several mining claims, which by that time had already been purchased by Lincallo with
to have paid P30, 691.92 to Lincallo and Tolentino. Said corporation claimed later on (on
various sums totalling P5,800.00 supplied by Jimena, but also the lands constituting the
appeal) that the injunction had been superseded and/or dissolved on 25 May 1955 by the
same, and so as to bind thereby their "heirs, assigns, or legal representatives." Apparently,
trial court's grant of Jimena's petition for a writ of preliminary attachment "to supersede the
the mining rights over part of the claims were assigned by Lincallo to Gold Star Mining Co.,
writ of preliminary injunction previously issued." But as the grant was conditioned upon filing
Inc., sometime before World War Il because in 1950 the corporation paid him P5,000 in
of a bond to be approved by the trial court, no writ of attachment was issued because the
consideration of, and as a quitclaim for, pre-war royalties.
bond offered by Jimena was disapproved.3

On several occasions thereafter, the mining claims in question were made subject-matter of
Jimena and Tolentino died successively during the pendency of the case in the trial court and
contracts entered into by Lincallo in his own name and for his benefit alone without the
were, accordingly, substituted by their respective widows and children.
slightest intimation of Jimena's interests over the same. Thus, on 19 September 1951,
Lincallo and one Alejandro Marquez, as separate owners of particular mining claims, entered
into an agreement with Gold Star Mining Co., Inc., the assignee thereof, regarding allotment After a protracted trial, the lower court rendered a decision, the dispositive portion of which
to Lincallo of 45% of the royalties due from the corporation. Four months later, Lincallo, reads as follows:
Marquez and Congressman Panfilo Manguerra, again as owners, leased certain mining claims

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
IN VIEW WHEREOF, judgment is rendered: 4. Judgment is also rendered condemning the estate of Gregorio Tolentino but not
the heirs personally, to pay unto plaintiffs the sum of P24,386.51 with legal interest
1. Declaring the plaintiffs — from the date of the filing of the complaint against Gregorio Tolentino.

(a) as successors in interest of Victor Jimena to be entitled to 1/2 of the 5. Judgment is rendered condemning defendant Gold Star Mining Company to pay
45% share of the royalties of defendant Lincallo under the latter's to plaintiffs solidarily with Lincallo and to be imputed to Lincallo's liability under this
contract with Gold Star, Exh. D or Exh. D-l, dated September 19, 1951; judgment unto Jimena, the sum of P30,691.92;

(b) to 1/2 of the 43% shares of the rental of defendant Lincallo under his 6. Judgment is rendered condemning defendant Marinduque Iron Mines to pay
contract with Jesus (Jacob) Cabarrus assigned to Marinduque Iron Mines, unto plaintiffs the sum of P7,330.36;
and his contract with Alejandro Marquez, dated December 5, 1951, and
February 29, 1952, Exhs. J and J-1; . 7. The counterclaims of defendants are dismissed;

(c) and condemning defendants Gold Star and Marinduque Iron Mines to 8. Costs against defendant Lincallo.
pay direct to plaintiffs said 1/2 shares of the royalties until said contracts
are terminated; SO ORDERED. (Emphasis supplied.)

2. Condemning defendant Lincallo to pay unto plaintiffs, as successors in interest of From this judgment, all four defendants, namely, Lincallo, the widow and children of
Victor Jimena — Tolentino, and the two corporations, appealed to the Court of Appeals. The appeal
interposed by Marinduque Iron Mines Agents, Inc., was, however, withdrawn, while that of
(a) the sum of P5,800 with legal interest from the date of the filing of the Lincallo was dismissed for the failure to file brief. Pending outcome of the appeal, the
complaint; royalties due from Gold Star Mining Co., Inc., were required to be deposited with the trial
court, as per order of 17 June 1958 issued by the same court. In compliance therewith, Gold
(b) the sum of P40,167.52 which is the 1/2 share of the royalties paid by Star Mining Co., Inc., made a judicial deposit in the amount of P30,691.92.
Gold Star unto Lincallo as of the September 14, 1957;
On 8 October 1965, the Court of Appeals handed down a decision sustaining in its entirety
(c) the sum of P3,235.64 which is the 1/2 share of Jimena on the rentals that of the trial court. Gold Star Mining Co., Inc., moved for reconsideration of said decision
amounting to P6,471.27 corresponding to Lincallo's share paid by insofar as its adjudged solidary liability with Lincallo to pay to the Jimenas the sum of
Marinduque Iron Mines unto Lincallo from December, 1951 to August 25, P30,691.92 "for flagrant violation of the injunction" was concerned. The motion was denied.
1954; under Exhibit N; Hence, the present appeal.

(d) P1,000.00 as attorneys fees; Petitioner Gold Star Mining Co., Inc., argues that the Court of Appeals' decision finding that
respondents Jimenas have a cause of action against it, and condemning it to pay the sum of
P30,691.92 for violation of an allegedly non-existent injunction, are reversible errors.
3. Declaring that the deed of sale, Exh. H, dated August 16, 1952, between
Reasons: As to respondents Jimena's cause of action, the same does not allegedly appear in
defendant Lincallo and Gregorio Tolentino was effective and transferred only 1/2 of
the complaint filed against petitioner corporation. And as to the P30,691.92 penalty for
the 45% (43%) share of Lincallo, and ordering Gold Star Mining Company to make
violation of the injunction, the same can not allegedly be imposed because (1) the sum of
payment hereafter unto plaintiffs, pursuant to this decision on the royalties due
P30,691.92 was not prayed for, (2) the injunction in question had already been superseded
unto Lincallo, notwithstanding the cession unto Tolentino, so that of the royalties
and/or dissolved by the trial court's grant of Jimena's petition for writ of preliminary
due unto Lincallo 1/2 should always be paid by Gold Star unto plaintiffs
attachment; and (3) the corporation was never charged, heard, nor found guilty in
notwithstanding said session, Exh. H, unto Tolentino by Lincallo;
accordance with, and pursuant to, the provisions, of Rule 64 of the (Old) Rules of Court.

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
We are of the same opinion with the Court of Appeals that respondents Jimenas have a As counsel for Jimena has correctly contended, "the remedy of garnishment
cause of action against petitioner corporation and that the latter's joinder as one of the suggested by Gold Star is utterly inadequate for the enforcement of Jimena's right
defendants before the trial court is fitting and proper. Said the Court of Appeals, and we against Lincallo because Jimena wanted an accounting and wanted to receive
adopt the same: directly his share of the royalties from Gold Star. That recourse is not open to
Jimena unless Gold Star is made a party in this action."
There first assigned error is the Trial Court erred in not dismissing this instant
action as "there is no privity of contract between Gold Star and Jimena." This Coming now to the violation of the injunction, we observe that the facts speak for
contention is without merit. themselves. Considering that no writ of preliminary attachment was issued by the trial court,
the condition for its issuance not having been met by Jimena, nothing can be said to have
The situation at bar is similar to the status of the first and second mortgagees of a superseded the writ of preliminary injunction in question. The preliminary injunction was,
duly registered real estate mortgage. While there exists no privity of contract therefore, subsisting and evidently violated by petitioner corporation when it paid the sum of
between them, yet the common subject-matter supplies the juridical link. P30,691.92 to Lincallo and Tolentino.

Here the evidence overwhelmingly established that Jimena made prewar and Gold Star Mining Co., Inc., insists that it may not be penalized for breach of the injunction,
postwar demands upon Gold Star for the payment of his 1/2 share of the royalties issued by the court of origin, without prior written charge for indirect contempt, and due
but all in vain so he (Jimena) was constrained to implead Gold Star because it hearing, citing section 3 of Rule 64 of the old Rules of Court, now Rule 71 of the Revised
refused to recognize his right. Rules. We fail to see any merit in this contention, as it misses the true nature and intent of
the award of P30,691.92 to Jimena, payable by Gold Star and Lincallo's estate.
Jimena now seeks for accounting of the royalties paid by Gold Star to Lincallo, and
for direct payment to himself of his share of the royalties. This relief cannot be Said award is not so much a penalty against petitioner as a decree of restitution, in order to
granted without joining the Gold Star specially in the face of the attitude it had make the violated injunction effective, as it should be, by placing the parties in the same
displayed towards Jimena. condition as if the injunction had been fully obeyed. If Gold Star Mining Co., Inc., had only
heeded the injunction and had not paid to Lincallo the royalties of P30,691.92, such amount
would now be available for the satisfaction of the claims of Jimena and his heirs against
Borrowing the Spanish maxim cited by Jimena's counsel, "el deudor de mi deudor
Lincallo. By sentencing Gold Star Mining Co., Inc., to pay, for the account of Lincallo, the sum
es deudor mio," this legal maxim finds sanction in Article 1177, new Civil Code
aforesaid, the court merely endeavoured to prevent its award from being rendered pro
which provides that "creditors, after having pursued the property in possession of
tanto nugatory and ineffective, and thus make it conformable to law and justice.
the debtor to satisfy their claims, may exercise all the rights and bring all the
actions of the latter (debtor) for the same purpose, save those which are inherent
in his person; they may also impugn the acts which the debtor may have done to That the questioned award was not intended to be a penalty against appellant Gold Star
defraud them (1111)." Mining Co., Inc., is shown by the provision in the judgment that the P30,691.92 to be paid by
it to Jimena is "to be imputed to Lincallo's liability under this judgment." The court thus left
the way open for Gold Star Mining Co., Inc., to recover later the whole amount from Lincallo,
From another standpoint, equally valid and acceptable, it can be said that Lincallo,
whether by direct action against him or by deducting it from the royalties that may fall due
in transferring the mining claims to Gold Star (without disclosing that Jimena was a
under his 1951 contract with appellant.
co-owner although Gold Star had knowledge of the fact as shown by the proofs
heretofore mentioned) acted as Jimena's agent with respect to Jimena's share of
the claims. That the recovery of this particular amount was not specifically sought in the complaint is of
no moment, since the complaint prayed in general for "other equitable relief."
Under such conditions, Jimena has an action against Gold Star, pursuant to Article
1883, New Civil Code, which provides that the principal may sue the person with WHEREFORE, finding no reversible error in the decision appealed from, the same is affirmed,
whom the agent dealt with in his (agent's) own name, when the transaction with costs against petitioner-appellant, Gold Star Mining Co., Inc.
"involves things belonging to the principal."

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
For the purpose of increasing its capital, SSC entered into a Credit Agreement with herein
respondent International Exchange Bank (IEB) on September 10, 2001 wherein the latter
Republic of the Philippines granted the former an omnibus credit line in the amount of ₱60,000,000.00, a loan of
SUPREME COURT ₱20,000,000.00 and a subsequent credit line with a limit of ₱100,000,000.00.
Manila
As security for its loan obligations, SSC executed five separate deeds of chattel mortgage
THIRD DIVISION constituted over various equipment found in its steel manufacturing plant. The deeds of
mortgage were dated September 17, 2001, February 26, 2003, April 16, 2003, May 25, 2004
and June 7, 2004.
G.R. No. 176008 August 10, 2011

Subsequently, SSC defaulted in the payment of its obligations. IEB's demand for payment
METROPOLITAN BANK and TRUST COMPANY, substituted by MERIDIAN (SPV-AMCI)
went unheeded. On July 7, 2004, the IEB filed with the RTC of Misamis Oriental an action for
CORPORATION,Petitioner,
injunction for the purpose of enjoining SSC from taking out the mortgaged equipment from
vs.
its premises. The case was docketed as Civil Case No. 2004-197. Thereafter, IEB filed a
INTERNATIONAL EXCHANGE BANK, Respondent.
Supplemental Complaint praying for the issuance of a writ of replevin or, in the alternative,
for the payment of SSC's outstanding obligations and attorney's fees.3
x - - - - - - - - - - - - - - - - - - - - - - -x
On the other hand, on July 18, 2004, SSC filed with the same RTC of Misamis Oriental a
G.R. No. 176131 Complaint for annulment of mortgage and specific performance for the purpose of
compelling the IEB to restructure SSC's outstanding obligations. SSC also prayed for the
CHUAYUCO STEEL MANUFACTURING, Petitioner, issuance of a Temporary Restraining Order (TRO) and writ of preliminary injunction to
vs. prevent IEB from taking any steps to dispossess SSC of any equipment in its steel
INTERNATIONAL EXCHANGE BANK (now UNION BANK OF THE PHILIPPINES), Respondent. manufacturing plant as well as to restrain it from foreclosing the mortgage on the said
equipment.4 The RTC issued a TRO. The case was docketed as Civil Case No. 2004-200 and
DECISION was subsequently consolidated with Civil Case No. 2004-197.

PERALTA, J.: On July 23, 2004, the RTC issued an Order5 granting IEB's application for the issuance of a
writ of replevin. However, upon agreement of the parties, the implementation of the said
writ was held in abeyance pending the trial court's resolution of the other incidents in the
Before the Court are two consolidated petitions for review on certiorari under Rule 45 of the said case.6 The RTC also directed that there shall be "no commercial operation without court
Rules of Court, both of which are seeking the reversal and setting aside of the Decision1 and approval.7
Resolution2 of the Court of Appeals (CA) dated May 5, 2006 and December 22, 2006,
respectively, in CA-G.R. SP No. 00549-MIN which annulled and set aside the Orders dated
September 6, 2004 and February 14, 2005, the Resolution dated March 15, 2005 and the On August 26, 2004, the IEB filed a petition for extrajudicial foreclosure of chattel mortgage.
Joint Resolution dated June 8, 2005 of the Regional Trial Court (RTC) of Misamis Oriental,
Branch 17 in Civil Case Nos. 2004-197 and 2004-200. SSC opposed IEB's petition and prayed for the issuance of a writ of preliminary injunction.

The pertinent factual and procedural antecedents of the case are as follows: On September 6, 2004, the RTC issued an Order disposing as follows:

Sacramento Steel Corporation (SSC) is a business entity engaged in manufacturing and WHEREFORE, let a Writ of preliminary injunction be issued restraining defendant iBank [IEB],
producing steel and steel products, such as cold rolled coils and galvanized sheets, in its own the Sheriff, his agents and other person/s acting in their behalf as agents – privies or
steel manufacturing plant located at Tagoloan, Misamis Oriental. representative[s] in whatever capacity, from conducting foreclosure, whether judicial or
extrajudicial, of any properties subject of the controversy and are further directed not to take
any steps that will, in effect, dispossess plaintiff [SSC] of any of its machineries and

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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
equipment in its steel manufacturing plant pending determination of the case. Let a bond On May 5, 2006, the CA rendered its presently assailed Decision which disposed of the case
(cash or surety) of Five Hundred Thousand (P500,000.00) Pesos be posted by the plaintiff as follows:
Sacramento Steel Corporation as required by law.
WHEREFORE, the petition is hereby GRANTED. The questioned Orders dated September 6,
SO ORDERED.8 2004, February 14, 2005, March 15, 2005 and June 8, 2005 issued by public respondent RTC,
Branch 17, Misamis Oriental, presided by Hon. Florencia D. Sealana-Abbu in Civil Case Nos.
Meanwhile, on August 30, 2004, SSC entered into a Capacity Lease Agreement with herein 2004-197 and 2004-200 are hereby ANNULLED and SET ASIDE. Public respondent is hereby
petitioner Chuayuco Steel Manufacturing Corporation (CSMC) which allowed the latter to DIRECTED to turn-over the mortgaged properties covered by the writ of replevin to
lease and operate the former's cold rolling mill and galvanizing plant for a period of five petitioner I-Bank for the eventual foreclosure thereof.
years.
SO ORDERED.16
On October 21, 2004, herein petitioner Metropolitan Bank and Trust Company (Metrobank)
filed a motion for intervention contending that it has legal interest in the properties subject Metrobank, CSMC and SSC filed their respective motions for reconsideration, but these were
of the litigation between IEB and SSC because it is a creditor of SSC and that the mortgage all denied by the CA in its Resolution dated December 22, 2006.
contracts between IEB and SSC were entered into to defraud the latter's
creditors.9 Metrobank prayed for the rescission of the chattel mortgages executed by SSC in Hence, the instant petitions for review on certiorari.
favor of IEB.
In G.R. No. 176008, petitioner Metrobank submits the following issues:
On January 21, 2005, CSMC filed an Omnibus Motion for intervention and for allowance to
immediately operate the cold rolling mill and galvanizing plant of SSC contending that its
(A) WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED WHEN IT
purpose in intervening is to seek the approval of the court to operate the said plant pursuant
RULED THAT PETITIONER'S COMPLAINT-IN-INTERVENTION IS AN ACCION
to the Capacity Lease Agreement it entered into with SSC.10 IEB filed its Opposition to the
PAULIANA, A SUBSIDIARY ACTION, WHICH PRESUPPOSES AN UNSATISFIED
said Motion.11
JUDGMENT, WHICH UNSATISFIED JUDGMENT IS ABSENT IN THE CASE AT BAR.

On February 14, 2005, the RTC issued an Order12 admitting the motions for intervention filed
(B) WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED WHEN IT
by CSMC and Metrobank.
RULED THAT THE TRIAL COURT COMMITTED GRAVE ABUSE OF DISCRETION IN
ALLOWING PETITIONER'S COMPLAINT-IN-INTERVENTION.17
On March 15, 2005, the RTC issued a Resolution, the dispositive portion of which reads, thus:
In G.R. No. 176131, petitioner CSMC raises the following grounds:
WHEREFORE, premises considered, the motion to operate the machineries pendente lite is
hereby GRANTED based on law and equity as soon as practicable. This is without prejudice on
I. THE HONORABLE COURT ERRED IN NOT PASSING UPON THE ISSUE THAT HEREIN
the part of the I-bank [IEB] to assert the enforcement of the proposed schedule of payment
RESPONDENT IBANK IS GUILTY OF FORUM-SHOPPING.
submitted by SSC to the Court (Exh. "A" – Motion for Early Resolution, 2/16/2005 hearing)
and to continually post their security guards unless withdrawn.
II. THE HONORABLE COURT ERRED IN NOT RULING THAT HEREIN RESPONDENT
IBANK'S FAILURE TO FILE A MOTION FOR RECONSIDERATION TO THE ORDER DATED
SO ORDERED.13
08 JUNE 2005 IS FATAL TO ITS PETITION.

On June 8, 2005, the RTC issued a Joint Resolution14 reiterating its admission of CSMC's
III. THE HONORABLE COURT ERRED IN RULING THAT THE ORDER OF JUDGE
motion for intervention and directing the latter to file its complaint-in-intervention.
SEALANA-ABBU ADMITTING THE INTERVENTION OF HEREIN PETITIONER CSMC IS
WITHOUT LEGAL BASIS.18
On August 25, 2005, IEB filed a petition for certiorari, prohibition and mandamus with the CA
assailing the RTC Orders dated September 6, 2004 and February 14, 2005, Resolution dated
March 15, 2005 and Joint Resolution dated June 8, 2005.15
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In a Manifestation and Motion dated September 26, 2007, petitioner Metrobank manifested x x x x21
that it no longer has any interest in pursuing the instant case as the loan obligation owed by
SSC to it has been sold by the latter to a corporation known as Meridian (SPV-AMC) Under Article 1381 of the Civil Code, an accion pauliana is an action to rescind contracts in
Corporation (Meridian). Accordingly, Metrobank prayed that it be substituted by Meridian as fraud of creditors.22
petitioner in the instant case.19
However, jurisprudence is clear that the following successive measures must be taken by a
In a Resolution20 dated November 12, 2007, this Court granted Metrobank's Motion. creditor before he may bring an action for rescission of an allegedly fraudulent contract: (1)
exhaust the properties of the debtor through levying by attachment and execution upon all
At the outset, the Court takes note that no arguments or questions were raised by the property of the debtor, except such as are exempt by law from execution; (2) exercise all
petitioners with respect to the September 6, 2004 Order and March 15, 2005 Resolution of the rights and actions of the debtor, save those personal to him (accion subrogatoria); and
the RTC which were annulled by the CA. Hence, the only issues left for resolution in the (3) seek rescission of the contracts executed by the debtor in fraud of their rights (accion
instant petition are whether or not petitioners Metrobank and CSMC may be allowed to pauliana).23 It is thus apparent that an action to rescind, or an accion pauliana, must be of
intervene in Civil Case Nos. 2004-197 and 2004-200. last resort, availed of only after the creditor has exhausted all the properties of the debtor
not exempt from execution or after all other legal remedies have been exhausted and have
The Court will dwell first on the issues raised by Metrobank in G.R. No. 176008. been proven futile.24

In its first assigned error, Metrobank contends that the CA erred in ruling that its Complaint- It does not appear that Metrobank sought other properties of SSC other than the subject lots
in-Intervention is in the nature of an accion pauliana. alleged to have been transferred in fraud of creditors. Neither is there any showing that
Metrobank subrogated itself in SSC's transmissible rights and actions. Without availing of the
first and second remedies, Metrobank simply undertook the third measure and filed an
The Court does not agree.
action for annulment of the chattel mortgages. This cannot be done. Article 1383 of the New
Civil Code is very explicit that the right or remedy of the creditor to impugn the acts which
A perusal of Metrobank's Complaint-in-Intervention would show that its main objective is to the debtor may have done to defraud them is subsidiary in nature.25 It can only be availed of
have the chattel mortgages executed by SSC in favor of IEB rescinded. This is clearly evident in the absence of any other legal remedy to obtain reparation for the injury.26 This fact is not
in its prayer, which reads as follows: present in this case. No evidence was presented nor even an allegation was offered to show
that Metrobank had availed of the abovementioned remedies before it tried to question the
WHEREFORE, premises considered, it is respectfully prayed unto the Honorable Court that validity of the contracts of chattel mortgage between IEB and SSC.
judgment be rendered:
Metrobank also contends that in order to apply the concept of, and the rules pertaining
(1) RESCINDING the chattel mortgages executed by Defendants Sacramento and to, accion pauliana, the subject matter must be a conveyance, otherwise valid, which is
Delmo in favor of Defendant Ibank dated May 25, 2004 and June 7, 2004, undertaken in fraud of creditors. Metrobank claims that since there is no conveyance
respectively; involved in the contract of chattel mortgage between SSC and IEB, which Metrobank seeks to
rescind, the CA erred in ruling that the latter's Complaint-in-Intervention is an accion
(2) Ordering defendants Sacramento, Delmo and Ibank to pay, jointly and severally, pauliana.
Plaintiff-Intervenor the amounts of:
The Court is not persuaded.
(A) ₱500,000.00, as and by way of exemplary damages;
In the instant case, the contract of chattel mortgage entered into by and between SSC and
(B) ₱500,000.00, as and by way of attorney's fees; and IEB involves a conveyance of patrimonial benefit in favor of the latter as the properties
subject of the chattel mortgage stand as security for the credit it extended to SSC. In a very
recent case involving an action for the rescission of a real estate mortgage,27 while this Court
(C) Costs of suit. found that some of the elements of accion pauliana were not present, it found that a
mortgage contract involves the conveyance of a patrimonial benefit.
Other reliefs as may be just and equitable under the premises are likewise prayed for.
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
In sum, Metrobank may not be allowed to intervene and pray for the rescission of the chattel The Court is not persuaded.
mortgages executed by SSC in favor of IEB. The remedy being sought by Metrobank is in the
nature of an accion pauliana which, under the factual circumstances obtaining in the present While the general rule is that before certiorari may be availed of, petitioner must have filed a
case, may not be allowed. Based on the foregoing, the Court finds no error in the ruling of motion for reconsideration of the act or order complained of, the Court has dispensed with
the CA that the RTC committed grave abuse of discretion in allowing Metrobank's this requirement in several instances.32 Thus, a previous motion for reconsideration before
intervention. the filing of a petition for certiorari is necessary unless: (i) the issue raised is one purely of
law; (ii) public interest is involved; (iii) there is urgency; (iv) a question of jurisdiction is
The Court will now proceed to resolve the issues raised by petitioner CSMC in G.R. No. squarely raised before and decided by the lower court; and (v) the order is a patent
176131. nullity.33 In the instant case, the Court agrees with the CA that there is no need for such
motion because the issue regarding the applicability of the rule on intervention raised by IEB
Firstly, CSMC contends that IEB was forum shopping when it filed a petition in its petition for certiorari filed with the CA, insofar as the June 8, 2005 Order of the RTC is
for certiorari with the CA seeking, among others, the enjoinment of the commercial concerned, is one purely of law.
operation of the subject machineries and equipment when its Opposition28 to the
implementation of the Capacity Lease Agreement between SSC and CSMC is still pending The foregoing notwithstanding, the Court finds that the CA erred in ruling that the allowance
determination by the RTC. of CSMC's motion for intervention is improper. CSMC's intervention should be allowed.

The Court does not agree. The purpose of intervention is to enable a stranger to an action to become a party in order
for him to protect his interest and for the court to settle all conflicting claims.34 Intervention
Forum shopping has been defined as an act of a party, against whom an adverse judgment is allowed to avoid multiplicity of suits more than on due process considerations.35 To
has been rendered in one forum, of seeking and possibly getting a favorable opinion in warrant intervention under Rule 19 of the Rules of Court, two requisites must concur: (1) the
another forum, other than by appeal or a special civil action for certiorari, or the institution movant has a legal interest on the matter in litigation; and (2) intervention must not unduly
of two or more actions or proceedings grounded on the same cause on the supposition that delay or prejudice the adjudication of the rights of the parties, nor should the claim of the
one or the other court would make a favorable disposition.29 intervenor be capable of being properly decided in a separate proceeding.36

Forum shopping exists when two or more actions involve the same transactions, essential In the present case, CSMC, being a lessee of the subject properties, has a legal interest
facts and circumstances, and raise identical causes of action, subject matter, and therein.1awphil The RTC correctly held, thus:
issues.30 Still another test of forum shopping is when the elements of litis pendencia are
present or where a final judgment in one case will amount to res judicata in another – Under the Rules of Court, intervention is permissive and maybe permitted by the Court when
whether in the two or more pending cases, there is an identity of (a) parties (or at least such the applicant shows facts which satisfy the requirements of the law authorizing intervention.
parties as represent the same interests in both actions); (b) rights or causes of action, and (c) (Firestone Ceramics Inc. vs. CA 313 SCRA 522) Records of the case showed that on August 30,
reliefs sought.31 2004, an agreement was finalized and entered into by applicant Chuayuco and
defendant/plaintiff Sacramento Steel Corporation whereby the former shall lease and make
In the instant case on the one hand, IEB's Opposition questions the legality and seeks to use of the machineries of Sacramento Steel under the Capacity Lease Agreement (CLA). One
prevent the implementation of the Capacity Lease Agreement between CSMC and SSC which, of the terms and condition[s] under [the] CLA was for the monthly lease payments to take
in essence, authorizes CSMC to operate the subject machineries pendente lite. On the other effect upon signing of the contract. A person seeking to intervene in a suit must show that he
hand, the petition for certiorari filed by IEB assails and seeks to nullify, among others, the has legal interest which must be actual and material, direct and immediate. He must show
March 15, 2005 and June 8, 2005 Orders of the RTC allowing SSC to operate the subject that he will either gain or lose by direct legal operation and effect of a judgment. (Hrs. of
machineries pendente lite. It is, thus, clear that there is no identity of subject matter, cause Nicolas Orosa vs. Migrino 218 SCRA 311) The Court finds that Chuayuco had a constituted
of action and reliefs sought in IEB's Opposition filed with the RTC and in its petition and sufficient legal interest in the machineries subject of the litigation which is actual and
for certiorari filed with the CA. Hence, IEB is not guilty of forum shopping. material. Any disposition of the case will adversely affect the standing of the intervenor.37

Secondly, CSMC argues that IEB's failure to file a motion for reconsideration of the RTC Order Moreover, considering that CSMC's interest is limited only to the operation of the subject
dated June 8, 2005 is fatal to its petition for certiorari filed with the CA. machineries pursuant to its lease contract with SSC, its intervention would not unduly delay
or prejudice the adjudication of the rights of SSC and IEB. CSMC's intervention should be
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Chapter 2 (Nature and Effect of Obligations (Art. 1163-1178)
treated as one pro interesse suo which is a mode of intervention in equity wherein a stranger
desires to intervene for the purpose of asserting a property right in the res, or thing, which is
the subject matter of the litigation, without becoming a formal plaintiff or defendant, and
without acquiring control over the course of a litigation, which is conceded to the main
actors therein.38

Lastly, the Court does not agree with the CA when it ruled that the applicable provision is
Rule 3, Section 19 (erroneously cited as Section 20) of the Rules of Court on transfer of
interest and substitution of parties. Being a mere lessee of the subject properties, CSMC is a
stranger insofar as the dispute between SSC and IEB is concerned. The action filed by IEB
against SSC is an action for the payment or satisfaction of the loans incurred by the latter,
which includes a possible foreclosure of the subject properties given as security for the said
loans. CSMC may not be considered a successor, and may not be substituted in place of SSC,
insofar as these loans are concerned. If any, what has been transferred to CSMC is only the
right of SSC to operate the subject equipment and machineries which it owns. As such, SSC
may not be removed as defendant because its interest in the subject properties remains,
being the owner thereof.

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. SP No.
00549-MIN are AFFIRMED with MODIFICATION. The February 14, 2005 Order of the Regional
Trial Court of Misamis Oriental, Branch 17, is MODIFIED by denying Metrobank's Motion for
Intervention, while the Joint Resolution of the same trial court, dated June 8, 2005,
reiterating its admission of CSMC's Motion for Intervention and directing the latter to file its
complaint-in-intervention, is REINSTATED.

SO ORDERED.

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