Villaroel v.

Estrada, 71 Phil 140 (1940)

Republic of the Philippines
SUPREME COURT
Manila EN BANC
GR No. L-47362 December 19, 1940 JOHN F. VILLARROEL
, appellant-appellant, vs.
BERNARDINO ESTRADA
, turned-appellee.
D. Felipe Agoncillo in representation of the appellant-appelante. D. Crispin Oben in representation
of the defendant-appellee.
DECISION
Avanceña,J.:
On May 9, 1912, Alejandro F. Callao, mother of defendant John F. Villarroel, obtained from
thespouses Mariano Estrada and Severina a loan of P1, 000 payable after seven years (ExhibitoA).
Alejandra died, leaving as sole heir to the defendant.Spouses Mariano Estrada and Severina
alsodied, leaving as sole heir to the plaintiff Bernardino Estrada. On August 9, 1930, the defendant
signeda document (Exhibito B) by which the applicant must declare in the amount of P1, 000,
with aninterest of 12 percent per year. This action relates to the recovery of this amount. The
Court of First Instance of Laguna, which was filed in this action, condemn the defendant to paythe
claimed amount of P1, 000 with legal interest of 12 percent per year since the August 9, 1930until
full pay. He appealed the sentence. It will be noted that the parties in the present case are,
respectively, the only heirs and creditors of the original debtor. This action is brought under the
defendant's liability as the only son of the originaldebtor in favor of the plaintiff contracted, sole
heir of primitive loa creditors. It is recognized that theamount of P1, 000 to which contracts this
obligation is the same debt of the mother's parents sued theplaintiff. Although the action to
recover the original debt has prescribed and when the lawsuit was filed in thiscase , the question
raised in this appeal is primarily whether, notwithstanding such requirement, theaction taken is
appropriate. However, this action is based on the original obligation contracted by themother of
the defendant, who has already prescribed, but in which the defendant contracted theAugust 9,
1930 (Exhibito B) by assuming the fulfillment of that obligation, as prescribed. Being theonly
defendant in the original herdero debtor eligible successor into his inheritance, that debt broughtby
his mother in law, although it lost its effectiveness by prescription, is now, however, for a
moralobligation, that is consideration enough to create and make effective and enforceable
obligationvoluntarily contracted its August 9, 1930 in Exhibito B. The rule that a new promise to
pay a debt prrescrita must be made by the same person obligated orotherwise legally authorized by
it, is not applicable to the present case is not required in compliancewith the mandatory obligation
orignalmente but which would give it voluntarily assumed thisobligation.It confirms the judgment
appealed from, with costs against the appellant. IT IS SO ORDERED.
Imperial, Diaz, Laurel, and Horrilleno, MM., Concur.

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12
71 PHIL 140-142

EN BANC

[G.R. No. 47362. Diciembre 19, 1940.]

JUAN F. VILLAROEL, recurrente-apelante, contra BERNARDINO ESTRADA, recurrido-

epelado.

D. Felipe Agoncillo en representacion del recurrente-apelante.

D. Crispin Oben en representacion del recurrido-apelado.

SYLLABUS

1. CONTRATOS; PROMESA NUEVA DE PAGAR UNA DEUDA PRESCRITA; OBLIGACION

MORAL COMO CONSIDERECION DE UN CONTRATO. — No se funda la presente accion en
la obligacion original eontraida por la madre del demandado, que ya ha preserito, sino en la que
contrajo el demandado el 9 de agosto de 1930 (Exhibito B) al asumir el cumplimiento de aquella
obligacion, ya prescrita. Siendo el dcmandado el unico heredelo de la primitiva deudora, con
derecho a sucederla en su herencia, aquella deuda contraida por su madre legalmente, aunque
perdio su eficacia por prescripcion, ahora es, sin embargo, para el una obligacion moral, que es
consideracion suficiente a crear y hacer efieaz y exigible su obligacion voluntariamente contraida
el 9 de agosto de 1930 en el Exhibito B.

2. ID.; ID.; ID. — La regla de que una promesa nueva de pagar una deuda prescrita debe ser hecha
por la misma persona obligada o por otra legalmente autorizada por ella, no es aplicable al caso
presente en que no se exige el cumplimiento de la obligacion de la obligada originalmente, sino
del que despues quiso voluntariamente asumir esta obligacion.

DECISION

AVANCEÑA, Pres p:

El 9 de mayo de 1912, Alejandra F. Callao, madre del demandado Juan F. Villarroel, obtuvo de los
esposos Mariano Estrada y Severina un prestamo de P1,000 pagadero al cabo de siete anos
(Exhibito A). Alejandra fallecio, dejando como unico heredero al demandado. Los esposos
Mariano Estrada y Severina fallecieron tambien, dejando como unico heredero al demandante
Bernardino Estrada. El 9 de agosto de 1930, el demandado suscribio un documento (Exhibito B)
por el cual declara en deber al demandante la cantidad de P1,000, con un interes de 12 por ciento
al año. Esta accion versa sobre el cobro de esta cantidad.

El Juzgado de Primera Instancia de Laguna, en el cual se interpuso esta accion, condeno al

demandado a pagar al demandante la cantidad reclamada de P1,000 con sus intereses legales de 12
por ciento al aiio desde el 9 de agosto de 1930 hasta su completo pago. Se apelo de esta sentencia.

Se notara que las partes en la presente causa son, respectivamente, los unicos herederos de los
acreedores y de la deudora originales. Esta accion se ejercita en virtud de la obligacion que el
demandado, como unico hijo de la primitiva deudora, contrajo en favor del demandante, unico
heredero de los primitivos acreedores. Se admite que la cantidad de P1,000 a que se contrae esta
obligacion es la misma deuda de la madre del demandado a los padres del demandante.

Aunque la accion para recobrar la deuda original ha prescrito ya cuando se interpuso la demanda
en esta causu, la cuestion que se suscita en esta apelacion es principalmente la de si, no obstante
tal prescripcion, es procedelltc la accion entablada. Sin embargo, no se funda la presente accion en
la obligacion original contraida por la madl e del demandado, que ya ha prescrito, sino en la que
contrajo el demandado el 9 de agosto de 1930 (Exhibito B) al asumir el cumplimiento de aquella
obligacion, ya prescrita. Siendo el demandado el unico heredero de la primitiva deudora, con
derecho a sucederla en su herencia, aquella deuda contraida por su madre legalmente, aunque
perdio su eficacia por prescripcion, ahora es, sin embargo, para el una obligacion moral, que es
consideracion suficiente a crear y hacer eficaz y exigible su obligacion voluntariamente contraida
el 9 de agosto de 1930 en el Exhibito B.

La regla de que una promesa nueva de pagar una deuda prescrita debe ser hecha por la misma
persona obligada o por otra legalmente autorizada por ella, no es aplicable al caso presente en que
no se exige el cumplimiento de la obligacion de la obligada originalmente, sino del que despues
quiso voluntariamente asumir esta obligacion.

Se confirma la sentencia apelada, con las costas al apelante. Asi se ordena.

Imperial, Diaz, Laurel y Horrilleno, MM., estan conformes.

12
||| (Villaroel v. Estrada, G.R. No. 47362, [December 19, 1940], 71 PHIL 140-142)

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69 PHIL 101-108

EN BANC

[G.R. No. 46274. November 2, 1939.]

A. O. FISHER, plaintiff-appellee, vs. JOHN C. ROBB, defendant-appellant.

Marcial P. Lichauco and Manuel M. Mejia for appellant.

Wolfson, Barrion & Baradi and Ignacio Ycaza for appellee.

SYLLABUS

1. ONEROUS CONTRACTS; CONSIDERATION; ARTICLE 1261 OF THE CIVIL CODE. —

The promise made by an organizer of a dog racing course to a stockholder to return to him certain
amounts paid by the latter in satisfaction of his subscription, upon the belief of said organizer that
he was morally responsible because of the failure of the enterprise, is not the consideration
required by article 1261 of the Civil Code as an essential element for the legal existence of an
onerous contract which would bind the promisor to comply with his promise.

DECISION

VILLA-REAL, J p:

The defendant John C. ROBB appeals to this Court from the judgment of the Court of First
Instance of Manila, the dispositive part of which reads:

"Judgment is hereby rendered in favor of the plaintiff and against the defendant, who is ordered to
pay to the former the sum of P2,000, with interest at the legal rate from March 11, 1938, until
paid, plus costs."

The facts established at the trial without discussion are the following:

In September, 1935, the board of directors of the Philip pine Greyhound Club, Inc., told the herein
defendant-appellant John C. ROBB, to make a business trip to Shanghai to study the operation of
a dog racing course. In Shanghai, the defendant-appellant stayed at the American Club where he
became acquainted with the plaintiff-appellee, A. O. Fisher, through their mutual friends. In the
course of a conversation, the defendant-appellant came to know that the plaintiff-appellee was the
manager of a dog racing course. Upon knowing the purpose of the defendant-appellant's trip, the
plaintiff-appellee showed great interest and invited him to his establishment and for several days
gave him information about the business. It seems that the plaintiff became interested in the
Philippine Greyhound Club, Inc., and asked the defendant if he could have a part therein as a
stockholder. As the defendant-appellant answered in the affirmative, the plaintiff-appellee
thereupon filled a subscription blank and, through his bank in Shanghai, sent to the Philippine
Greyhound Club, Inc., in Manila a telegraphic transfer for P3,000 in payment of the first
installment of his subscription. Later on the defendant-appellant returned to Manila from
Shanghai.

Some months thereafter, when the board of directors of the Philippine Greyhound Club, Inc.,
issued a call for the payment of the second installment of the subscriptions, the defendant-
appellant sent a radiogram to the plaintiff-appellee in Shanghai, requesting him to send the amount
of the second installment of his subscription. The plaintiff-appellee did so and sent P2,000 directly
to the Philippine Greyhound Club, Inc., in payment of the said installment. Due to the
manipulations of those who controlled the Philippine Greyhound Club, Inc., during the absence of
the defendant in Manila, the enterprise failed. Upon his return to Manila, the defendant-appellant
undertook the organization of a company called The Philippine Racing Club, which now manages
the race track of the Santa Ana Park. The defendant immediately endeavored to save the
investment of those who had subscribed to the Philippine Greyhound Club, Inc., by having the
Philippine Racing Club acquire the remaining assets of the Philippine Greyhound Club, Inc. The
defendant-appellant wrote a letter to the plaintiff-appellee in Shanghai explaining in detail the
critical condition of the Philippine Greyhound Club, Inc., and outlining his plans to save the
properties and assets of the plaintiff-appellee that he felt morally responsible to the stockholders
who had paid their second installment (Exh. C). In answer to said letter, the plaintiff-appellee
wrote the defendant-appellant requiring him to return the entire amount said by him to the
Philippine Greyhound Club, Inc., (Exhibit E). Upon receiving this letter, the defendant-appellant
answered the plaintiff-appellee on March 16, 1936, to the effect that it was not his duty under the
law to reimburse the plaintiff-appellee for any loss which he might have suffered in connection
with the Philippine Greyhound Club, Inc., in the same way that he could not expect anyone to
reimburse him for his own losses which were much more than those of the plaintiff-appellee (E xh.
B).

The principal question to be decided in this appeal is whether or not the trial court erred in holding
that there was sufficient consideration to justify the promise made by the defendant-appellant in
his letters Exhibits B and C.

In the fifth paragraph of the letter Exhibit B, dated March 16, 1936, addressed by the defendant-
appellant to the plaintiff-appellee, the former said: "I feel a moral responsibility for these second
payments, which were made in order to carry out my plan (not the first payments, as you have it in
your letter), and Mr. Hilscher and I will see to it that stockholders who made second payments
receive these amounts back as soon as possible, out of our own personal funds." And in the
seventh paragraph of the same letter Exhibit B, same defendant-appellant states the following: "As
it is, I have had to take my loss along with every one else here, and so far as I can see that is what
all of us must do. The corporation is finally flat, so it is out of the question to receive back any of
your investment from that source; the only salvage will be the second payment that you made, and
that will come from Hilscher and me personally, as I say, not because of any obligation, but simply
be cause we have taken it on ourselves to do that. (And I wish I could find someone who would
undertake to repay a part of my own losses in the enterprise!)" And in the seventh paragraph of the
letter Exhibit C, dated February 21, 1936, addressed by the same defendant-appellant to the same
plaintiff-appellee, the former said the following: "However, Mr. Hilscher and I feel a personal
responsibility to those few stockholders who made their second payments, including yourself, and
it is our intention to personally repay the amounts of the second payments made by those few.

. . . " And, finally, paragraph 8 of the same letter Exhibit C states: "We are to receive a certain
share of the new Philippine Racing Club for our services as promoters of that organization, and as
soon as this is received by us, we will be in a position to compensate you and the few others who
made the second payment, for the amount of those second payments. That, as I have said, will
come from us personally, in an effort to make things easier for those who were sportsmen enough
to try to save the Grey hound organization by making second payments."

Article 1254 of the Civil Code provides as follows:

"A contract exists from the moment one or more persons consent to be bound with respect to
another or others to deliver something or to render some services."

And article 1261 of the same Civil Code provides the following:

"ART. 1261. There is no contract unless the following requisites exist:

"1. The consent of the contracting parties;

"2. A definite object which is the subject-matter of the contract;

"3. A consideration for the obligation established."

In the present case, while the defendant-appellant told the plaintiff-appellee that he felt morally
responsible for the second payments which had been made to carry out his plan, and that Mr.
Hilscher and he would do everything possible so that the stockholders who had made second
payments may receive the amount paid by them from their personal funds without delay, not
because they were bound to do so, but because they voluntarily assumed the responsibility to
make such payment as soon as they receive from the Philippine Racing Club certain shares for
their services as promoters of said organization, nevertheless, it does not appea r that the plaintiff-
appellee had consented to said form of reimbursement of the P2,000 which he had directly paid to
the Philippine Greyhound Club, Inc., in satisfaction of the second installment.

The first essential requisite, therefore, required by the cited article 1261 of the Civil Code for the
existence of a contract, does not exist.
As to the third essential requisite, namely, "A consideration for the obligation established," article
1274 of the same Code provides:

"In onerous contracts the consideration as to each of the parties is the delivery or performance or
the promise of delivery or performance of a thing or service by the other party; in r emuneratory
contracts the consideration is the service or benefit for which the remuneration is given, and in
contracts of pure beneficence the consideration is the liberality of the benefactors."

And article 1275 of the same Code provides:

"ART. 1275. Contracts without consideration or with an illicit consideration produce no effect
whatsoever. A consideration is illicit when it is contrary to law or morality."

Manresa, in volume 8, 4th edition, pages 618-619 of his Commentaries on the Civil Code,
interpreting article 1274 to 1277 of the Civil Code, has this to say:

"Considering the concept of the consideration as the explanation and motive of the contract, it is
related to the latter's object and even more to its motives with which it is often confused. It is
differentiated from them, however, in that the former is the essential reason for the contract, while
the latter are the particular reasons of a contracting party which do not affect the other party and
which do not preclude the existence of a different consideration. To clarify by an example: A thing
purchased constitutes the consideration for the purchaser and not the motives which have
influenced his mind, like its usefulness, its perfection, its relation to another, the use thereof which
he may have in mind, etc., a very important distinction, which precludes the annulment of the
contract by the sole influence of the motives, unless the efficacy of the former had been
subordinated to compliance with the latter as conditions.

"The jurisprudence shows some cases wherein this important distinction is established. The
consideration of contracts, states the decision of February 24, 1904, is distinct from the motive
which may prompt the parties in executing them. The inaccuracies committed in expressing its
accidental or secondary details do not imply lack of consideration or false consideration,
wherefore, they do not affect the essence and validity of the contract. In a loan the consideration in
its essence is, for the borrower the acquisition of the amount, and for the lender the power to
demand its return, whether the money be for the former or for another person and whether it be
invested as stated or otherwise.

"The same distinction between the consideration and the motive is found in the decisions of
November 23, 1920 and March 5, 1924."

The contract sought to be judicially enforced by the plain tiff-appellee against the defendant-
appellant is onerous in character, because it supposes the deprivation of the latter of an amount of
money which impairs his property, which is a burden, and for it to be legally valid it is necessary
that it should have a consideration consisting in the lending or promise of a thing or service by
such party. The defendant-appellant is required to give a thing, namely, the payment of the sum of
P2,000, but the plaintiff-appellee has not given or promised anything or service to the former
which may compel him to make such payment. The promise which said defendant-appellant has
made to the plain tiff-appellee to return to him P2,000 which he had paid to the Philippine
Greyhound Club, Inc., as second installment of the payment of the amount of the shares for which
he had subscribed, was prompted by a feeling of pity which said defendant-appellant had for the
plaintiff-appellee as a result of the loss which the latter had suffered because of the failure of the
enterprise. The obligation which the said defendant-appellant had contracted with the plaintiff-
appellee is, therefore, purely moral and, as such, is not demand able in law but only in conscience,
over which human judges have no jurisdiction.

As to whether a moral obligation is a sufficient consideration, read in volume 12 of the American

Jurisprudence, pages 589-590, paragraphs 96, 67, the following:

"SEC. 96. Moral obligation. — Although there is authority in support of the broad proposition that
a moral obligation is sufficient consideration, such proposition is usually denied . . .

"The case presenting the question whether a moral obligation will sustain an express executory
promise may be divided into five classes: (1) Cases in which the moral obligation arose wholly
from ethical considerations, unconnected with any legal obligations, perfect or imperfect, and
without the receipt of actual pecuniary or material benefit by the promisor prior to the subsequent
promise; (2) cases in which the moral obligation arose from a legal liability already performed or
still enforceable; (3) cases in which the moral obligation arose out of, or was connected with, a
previous request or promise creating originally an enforceable legal liability, which, however, at
the time of the subsequent express promise had become discharged or barred by operation of a
positive rule of law, so that at that time there was no enforceable legal liability; (4) cases in which
the moral obligation arose from, or was connected with, a previous request or promise which,
however, never created any enforceable legal liability, because of a rule of law which rendered the
original agreement void, or at least unenforceable; and (5) cases in which the moral obligation
arose out of, or was connected with, the receipt of actual material or pecuniary benefit by the
promisor, without, however, any previous request or promise on his part, ex press or implied, and
therefore, of course, without any original legal liability, perfect or imperfect.

"Sec. 97. Moral obligation unconnected with legal liability or legal benefit. — Although, as
subsequently shown there was formerly some doubt as to the point. it is now well established that
a mere moral obligation or conscientious duty arising wholly from ethical motives or a mere
conscientious duty unconnected with any legal obligation, perfect or imperfect, or with the receipt
of benefit by the promisor of a material or pecuniary nature will not furnish a consideration for an
executory promise. . . . "

In view of the foregoing considerations, we are of the opinion and so hold, that the promise made
by an organizer of a dog racing course to a stockholder to return to him certain amounts paid by
the latter in satisfaction of his subscription upon the belief of said organizer that he was morally
responsible because of the failure of the enterprise, is not the consideration required by article
1261 of the Civil Code as an essential element for the legal existence of an onerous contract which
would bind the promisor to comply with his promise.

Wherefore, the appealed judgment is reversed and the defendant is absolved from the complaint,
with the costs to the plaintiff.

Avanceña, C.J., Imperial, Diaz, Laurel, Concepcion and Moran, JJ., concur.

||| (Fisher v. Robb, G.R. No. 46274, [November 2, 1939], 69 PHIL 101-108)

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104 PHIL 926-946

EN BANC

[G.R. No. L-10394. December 13, 1958.]

CLAUDINA VDA. DE VILLARUEL, ET AL., plaintiffs-appellees, vs. MANILA MOTOR CO.,

INC. and ARTURO COLMENARES, defendants-appellants.

Hilado & Hilado for appellees.

Ozaeta, Gibbs & Ozaeta for appellant company.

Jose L. Gamboa and Napoleon Garcia for appellant Arturo Colmenares.

SYLLABUS
1. INTERNATIONAL LAW; SEQUESTRATION OF PRIVATE PROPERTY BY
BELLIGERENT OCCUPANT RECOGNIZED; LESSOR OF SEIZED PROPERTY LIABLE
FOR DISTURBANCE. — Under the generally accepted principles of international law, which are
made part of the law of the Philippines, a belligerent occupant (like the Japanese) may legitimately
billet or quarter its troops in privately owned land and buildings for the duration of its military
operations, or as military necessity should demand. Thus, when the Japanese forces evicted
appellant lessee company from the leased buildings and occupied the same as quarters for its
troops, the Japanese authorities acted pursuant to a right recognized by international and domestic
law. Its act of dispossession, therefore, did not constitute a mere act of trespass (perturbacion de
mero hecho) but a trespass under color of title (perturbacion de derecho) chargeable to the lessors
of the seized premises, since the belligerent occupant acted pursuant to a right that the law
recognizes.

2. ID.; ID.; ID.; LIABILITY OF LESSEE FOR RENTS DURING OCCUPATION OF

PROPERTY. — Such dispossession, though not due to the fault of the lessors or lessee
nevertheless deprived the lessee of the enjoyment of the thing leased. Wherefore, the lessee's
corresponding obligation to pay rentals ceased during such deprivation.

3. ID.; ID.; ID.; IMPORTER REFUSAL TO ACCEPT RENTS PLACES LESSORS IN

DEFAULT; LIABILITY FOR SUPERVENING RISK. — Since the lessee was exempt from
paying the rents for the period of its ouster, the insistence of the lessors to collect the rentals
corresponding to said period was unwarranted and their refusal to accept the currant rents tendered
by the lessee was unjustified. Such refusal places the lessors in default (mora) and they must
shoulder the subsequent accidental loss of the premises leased.

4. ID.; ID.; ID.; ID.; ID.; MORA OF LESSORS NOT CURED BY FAILURE OF LESSEE TO
CONSIGN RENTS IN COURT. — The mora of the lessors was not cured by the failure of the
lessee to make the consignation of the rejected payments, but the lessee remained obligated to pay
the amounts tendered and not consigned by it in court.

5. PLEADING AND PRACTICE; CHANGE IN THE RELIEF PRAYED DURING THE

PENDENCY OF THE ACTION. — A change in the relief prayed, brought about by circumstances
occurring during the pendency of the action, is not improper. This is justified under Section 2,
Rule 17 of the Rules of Court (on amendments) "to the end that the real matter in dispute and all
matters in the action in dispute between the parties may, as far as possible be completely
determined in a single proceeding."

6. ID.; DISMISSAL WITHOUT PREJUDICE. — The dismissal of plaintiffs' two causes of action
in the case at bar was premised on the existence of the "Debt Moratorium" which suspended the
enforcement of the obligation up to a certain time. The reference thereto by the court amounted to
a dismissal "without prejudice", since in effect it ruled that the plaintiffs could not, at the time they
sought it, enforce their right of action against the defendants, but they must wait until the
moratorium was lifted. In this way, the court qualified its dismissal.
DECISION

REYES, J.B.L., J p:

Manila Motor Co., Inc., and Arturo Colmenares interpose this appeal against the decision of the
Court of First Instance of Negros Occidental, in its Civil Case No. 648, ordering the defendant
Manila Motor Co., Inc. to pay to the plaintiffs Villaruel the sum of (a) P11,900 with legal interest
from May 18, 1953, on which date, the court below declared invalid the continued operation of the
Debt Moratorium, under the first cause of action; (b) P38,395 with legal interest from the date of
filing of the original complaint on April 26, 1947, on the second cause of action; and against both
the Manila Motor Co., Inc. and its co-defendant, Arturo Colmenares, the sum of P30,000 to be
paid, jointly and severally, with respect to the third cause of action.

On May 31, 1940, the plaintiffs Villaruel and the defendant Manila Motor Co., Inc. entered into a
contract (Exhibit "A") whereby, the former agreed to convey by way of lease to the latter the
following described premises;

(a) Five hundred (500) square meters of floor space of a building of strong materials for
automobile showroom, offices, and store room for automobile spare parts;

(b) Another building of strong materials for automobile repair shop; and

(c) A 5-bedroom house of strong materials for residence of the Bacolod Branch Manager of the
defendant company.

The term of the lease was five (5) years, to commence from the time that the building were
delivered and placed at the disposal of the lessee company, ready for immediate occupancy. The
contract was renewable for an additional period of five (5) years. The Manila Motor Company, in
consideration of the above covenants, agreed to pay to the lessors, or their duly authorized
representative, a monthly rental of Three Hundred (P300) pesos payable in advance before the
fifth day of each month, and for the residential house of its branch manager, a monthly rental not
to exceed Fifty (P50) pesos "payable separately by the Manager".

The leased premises were placed in the possession of the lessee on the 31st day of October, 1940,
from which date, the period of the lease started to run under their agreement.

This situation, the Manila Motor Co., Inc. and its branch manager enjoying the premises, and the
lessors receiving the corresponding rentals as stipulated, continued until the invasion of 1941; and
shortly after the Japanese military occupation of the Provincial Capital of Bacolod the enemy
forces held and used the properties leased as part of their quarters from June 1, 1942 to March 29,
1945, ousting the lessee therefrom. No payment of rentals were made at any time during the said
period.

Immediately upon the liberation of the said city in 1945, the American Forces occupied the same
buildings that were vacated by the Japanese, including those leased by the plaintiffs, until October
31, 1945. Monthly rentals were paid by the said occupants to the owners during the time that they
were in possession, as the same rate that the defendant company used to pay.

Thereafter, when the United States Army finally gave up the occupancy the premises, the Manila
Motor Co., Inc., through their branch manager, Rafael B. Grey, decided to exercise their option to
renew the contract for the additional period of five (5) years, and the parties agreed that the seven
months occupancy by the U. S. Army would not be counted as part of the new 5-year term.
Simultaneously with such renewal, the company sublet the same buildings, except that used for
the residence of the branch manager, to the other defendant, Arturo Colmenares.

However, before resuming the collection of rentals, Dr. Alfredo Villaruel, who was entrusted with
the same, consulted Atty. Luis Hilado on whether they (the lessors) had the right to collect, from
the defendant company, rentals corresponding to the time during which the Japanese military
forces had control over the leased premises. Upon being advised that they had such a right, Dr.
Villaruel demanded payment thereof, but the defendant company refused to pay. As a result, Dr.
Villaruel gave notice seeking the rescission of the contract of lease and the payment of rentals
from June 1, 1942 to March 31, 1945 totalling P11,900. This was also rejected by the defendant
company in its letter to Villaruel, dated July 27, 1946.

Sometime on that same month of July, Rafael B. Grey offered to pay to Dr. Villaruel the sum of
P350, for which, tenderer requested a receipt that would state that it was in full payment for the
said month. The latter expressed willingness to accept the tendered amount provided, however,
that his acceptance should be understood to be without prejudice to their demand for the rescission
of the contract, and for increased rentals until their buildings were returned to them. Later, Dr.
Villaruel indicated his willingness to limit the condition of his acceptance to be that "neither the
lessee nor the lessors admit the contention of the other by the mere fact of payment". As no accord
could still be reached between the parties as to the context of the receipt, no payment was
thereafter tendered until the end of November, 1946. On December 4, 1946 (the day after the
defendant company notified Dr. Villaruel by telegram, that it cancelled the power of attorney
given to Grey, and that it now authorized Arturo Colmenares, instead, to pay the rent of P350 each
month), the Manila Motor Co., Inc. remitted to Dr. Villaruel by letter, the sum of P350.90. For this
payment, the latter issued a receipt stating that it was "without prejudice" to their demand for rents
in arrears and for the rescission of the contract of lease.

After it had become evident that the parties could not settle their case amicably, the lessors
commenced this action on April 26, 1947 with the Court of First Instance of Negros Occidental
against the appellants herein. During the pendency of the case, a fire originating from the
projection room of the City Theatre, into which Arturo Colmenares, (the sublessee) had converted
the former repair shop of the Manila Motor Co. Inc., completely razed the building, engulfing also
the main building where Colmenares had opened a soda fountain and refreshment parlor, and
made partitions for store spaces which he rented to other persons.

Because of the aforesaid occurrence, plaintiffs demanded reimbursement from the defendants, but
having been refused, they filed a supplemental complaint to include as their third cause of action,
the recovery of the value of the burned buildings.

Defendants filed their amended answer and also moved for the dismissal of the plaintiffs' first and
second causes of action invoking the Debt Moratorium that was then in force. The dismissal was
granted by the trial court on February 5, 1951, but hearing was set as regards the third cause of
action.

On August 11, 1952, the defendant company filed a motion for summary judgment dismissing the
plaintiffs, third cause of action, to which plaintiffs registered objection coupled with a petition for
reconsideration of the order of the court dismissing the first and second causes of action. Pending
the resolution of this incident, plaintiffs, on October 2, 1953, called the court's attention to the
decision in the case of Rutter vs. Esteban (93 Phil., 68; 49 Off. Gaz. [5] 1807) invalidating the
continued effectivity of the Moratorium Law (R. A. 342). On November 25, 1953, the trial court
denied the defendant company's motion for summary judgment and set aside its previous order
dismissing the first and second causes of action. The case was accordingly heard and thereafter,
judgment was rendered in plaintiffs' favor in the terms set in the opening paragraph of this
decision. Thereafter, the defendants regularly appealed to this Court.

The defendants-appellants raise a number of procedural points. The first of these relates to their
contention that the supplemental complaint which included a third cause of action, should not
have been admitted, as it brought about a change in the original theory of the case and that it
raised new issues not theretofore considered. This argument cannot be sustained under the
circumstances. This action was inceptionally instituted for the rescission of the contract of lease
and for the recovery of unpaid rentals before and after liberation. When the leased buildings were
destroyed, the plaintiffs-lessors demanded from the defendants-lessees, instead, the value of the
burned premises, basing their right to do so on defendants' alleged default in the payment of post-
liberation rentals (which was also their basis in formerly seeking for rescission). This cannot be
considered as already altering the theory of the case which is merely a change in the relief prayed
for, brought about by circumstances occurring during the pendency of the action, and is not
improper. (Southern Pacific Co. vs. Conway, 115 F. 2d 746; Suburban Improvement Company vs.
Scott Lumber Co., 87 A.L.R. 555, 59 F. 2d 711). The filing of the supplemental complaint can well
be justified also under section 2, Rule 17 of the Rules of Court (on amendments) "to the end that
the real matter in dispute and all matters in the action in dispute between the parties may, as far as
possible be completely determined in a single proceedings". It is to be noted furthermore, that the
admission or rejection of this kind of pleadings is within the sound discretion of the court that will
not be disturbed on appeal in the absence of abuse thereof (see Sec. 5, Rule 17, Rules of Court),
especially so, as in this case, where no substantial procedural prejudice is caused to the adverse
party.

It is urged that the dismissal of the first and second causes of action on February 5, 1951 had the
effect of a dismissal "with prejudice" as the court did not make any qualification in its dismissal
order. Appellants, apparently, lost sight of the fact that the dismissal was premised on the existence
of the "Debt Moratorium" which suspended the enforcement of the obligation up to a certain time.
The reference thereto by the lower court amounted to a dismissal "without prejudice", since in
effect it ruled that the plaintiffs could not, at the time they sought it, enforce their right of action
against the defendants, but plaintiffs must wait until the moratorium was lifted. In this way, the
court qualified its dismissal.

Taking up the case on its merits, it is readily seen that the key to the entire dispute is the question
whether the defendant-appellant Manila Motor Co., Inc. should be held liable for the rentals of the
premises leased corresponding to the lapse of time that they were occupied as quarters or barracks
by the invading Japanese army, and whether said appellant was placed in default by its refusal to
comply with the demand to pay such rents. For if the Motor Company was not so liable, then it
never was in default nor was it chargeable for the accidental lose of the buildings, nor for any
damages except the rental at the contract rate from its reoccupation of the premises leased until the
same were accidentally destroyed by fire on March 2, 1948.

The appellees contended, and the court below has held, that the ouster of the lessee company by
the Japanese occupation forces from 1942 until liberation, while operating to deprive the lessee of
the enjoyment of the thing leased, was, nevertheless, a mere act of trespass ("perturbacion de mero
hecho") that, under the Spanish Civil Code of 1889 (in force here until 1950), did not exempt the
lessee from the duty to pay rent. We find that contention and ruling erroneous and untenable.

The pertinent articles of the Civil Code of Spain of 1889 provide:

"ART. 1554. It shall be the duty of the lessor;

1. To deliver to the lessee the thing which is the subject matter of the contract;

2. To make thereon, during the lease, all repairs necessary in order to keep it in serviceable
condition for the purpose for which it was intended;

3. To maintain the lessee in the peaceful enjoyment of the lease during the entire term of the
contract."

"ART. 1560. The lessor shall not be liable for any act of mere disturbance of a third person of the
use of the leased property; but the lessee shall have a direct action against the trespasser.

If the third person, be it the Government or a private individual, has acted in reliance upon a right,
such action shall not be deemed a mere act of disturbance." (Italics supplied)

Under the first paragraph of article 1560 the lessor does not answer for a mere act of trespass
(perturbacion de mero hecho) as distinguished from trespass under color of title (perturbacion de
derecho). As to what would constitute a mere act of trespass, this Court in the case of Goldstein
vs. Roces (34 Phil. 562), made this pronouncement:
"Si el hecho perturbador no va acompañado ni precedido de nada que revele una intencion
propiamente juridica en el que lo realiza, de tal suerte que el arrendatario solo pueda apreciar el
hecho material desnudo de toda forma o motivacion de derecho, entendemos que se trata de una
perturbacion de mero hecho."

Upon the basis of the distinction thus established between the perturbacion de hecho and the
perturbacion de derecho, it is demonstrable that the ouster of the appellant by the Japanese
occupying forces belongs to the second class of disturbances, de derecho. For under the generally
accepted principles of international law (and it must be remembered that those principles are made
by our Constitution a part of the law of our nation 1 ) a belligerent occupant (like the Japanese in
1942-1945) may legitimately billet or quarter its troops in privately owned land and buildings for
the duration of its military operations, or as military necessity should demand. The well known
writer Oppenheim, discoursing on the laws of war on land, says upon this topic;

"Immovable private enemy property may under no circumstances or conditions be appropriated by

an invading belligerent. Should he confiscate and sell private land or buildings, the buyer would
acquire no right whatever to the property. Article 46 of the Hague Regulations expressly enacts
that 'private property may not be confiscated.' But confiscation differs from the temporary use of
private land and building for all kinds of purposes demanded by the necessities of war. What has
been said above with regard to utilization of public buildings applies equally to private buildings.
If necessary, they may be converted into hospitals, barracks, and stables without compensation for
the proprietors, and they may also be converted into fortifications. A humane belligerent will not
drive the wretched inhabitants into the street if he can help it. But under the pressure of necessity
he may be obliged to do this, and he is certainly not prohibited from doing it. (Italics supplied)
(Oppenheim & Lauterpach, International Law, Vol. II, p. 312, 1944 Ed.)

The view thus expressed is concurred in by other writers. Hyde (International Law, Vol. 3, p.
1893, 2nd Rev. Ed.) quotes the U. S. War Department 1940 Rules of Land Warfare (Rule No. 324)
to the effect that —

"The measure of permissible devastation is found in the strict necessities of war. As an end in
itself, as a separate measure of war, devastation is not sanctioned by the law of war. There must be
some reasonably close connection between the destruction of property and the overcoming of the
enemy's army. Thus the rule requiring respect for private property is not violated through damage
resulting from operations, movements, or combats of the army; that is, real estate may be utilized
for marches, camp sites, construction of trenches, etc. Building may be used for shelter for troops,
the sick and wounded, for animals, for reconnaisance, cover defense, etc. Fences, woods, crops,
buildings, etc., may be demolished, cut down, and removed to clear a field of fire, to construct
bridges, to furnish fuel if imperatively needed for the army." (Emphasis supplied)

Reference may also be made to Rule 336:

"What may be requisitioned. — Practically everything may be requisitioned under this article (art.
LII of the regulations above quoted) that is necessary for the maintenance of the army and not of
direct military use, such as fuel, food, forage, clothing, tobacco, printing presses, type, leather,
cloth, etc. Billeting of troops for quarters and subsistence is also authorized." (Emphasis supplied)

And Forest and Tucker state:

"The belligerent occupant may destroy or appropriate public property which may have a hostile
purpose, as forts, arms, armories, etc. The occupying force may enjoy the income from the public
sources. Strictly private property should be inviolable, exce pt so for as the necessity of war
requires contrary action." (Forest and Tucker, International Law, 9th Ed., p. 277) (Emphasis
supplied)

The distinction between confiscation and temporary sequestration of private property by a

belligerent occupant was also passed upon by this Court in Haw Pia vs. China Banking
Corporation, 80 Phil. 604, wherein the right of Japan to sequester or take temporary control over
enemy private property in the interest of its military effort was expressly recognized.

We are thus forced to conclude that in evicting the lessee, Manila Motor Co., Inc. from the leased
buildings and occupying the same as quarters for troops, the Japanese authorities acted pursuant to
a right recognized by international and domestic law. Its act of dispossession, therefore, did not
constitute perturbacion de hecho but a perturbacion de derecho for which the lessors Villaruel (and
not the appellants lessees) were liable (Art. 1560, su pra) and for the consequences of which said
lessors must respond, since the result of the disturbance was the deprivation of the lessee of the
peaceful use and enjoyment of the property leased. Wherefore, the latter's corresponding
obligation to pay rentals ceased during such deprivation.

The Supreme Court of Spain, in its Sentencia of 6 December 1944, squarely declared the
resolutory effect of the military sequestration of properties under lease upon the lessee's obligation
to pay rent (Jurisprudencia Civil, Segunda Serie, Tomo 8, pp. 583, 608):

"Considerando que para resolver acerca de la procedencia del presente recurso es preciso partir de
las bases de hecho sentadas en la sentencia recurrida, y no impugnadas al amparo del número 7.°
del articulo 1.692 de la Ley de Enjuiciamiento civil, es decir, de que hallandose vigente el contrato
de arrendamiento celebrado entre actor y demandada, en fecha que no se precisa, entre los dias del
18 al 31 de julio de 1936, los locales objeto de dicho contrato de arrendamiento, y en los que no
funcionaba de tiempo anterior la industria para cuyo ejercicio se arrendaron, fueron requisados por
el Ejercito Nacional, con motivo de la guerra civil, para que se instalara en los mismos la Junta de
Donativos al Ejercito del Sur, aun cundo en dicha incautacion, que se hizo a la propiedad de la
finca, no se observaron las formalidades legales, a causa de las circunstancias extraordinarias por
que a la sazon atravesaba Sevilla, hecho que no consta se hiciera saber por los arrendatarios
demandados al actor, pero que fue notorio en aquella capital, donde residia el actor, que de el
debio tener concoimiento. Se estima igualmente por la Sala que el hecho de que la industria no
funcionara en el local no tuvo iufluencia alguna sobre su incautacion por el Ejercito."

"Considerando que sobre tales bases de hecho es de desestimar el primer motivo del recurso:
violacion de los articulos 1.254, 1.278 y 1.091 del Codigo civil, que sancionan, en terminos
generales, la eficacia de los contratos, puesto que en el presente caso de los que se trata en
definitiva es de determinar si por virtud de fuerza mayor, la requisa a que se hace referencia, ajena,
por lo tanto, a culpa, asi del arrendatario como del arrendador, se vio aqúel privado del posible
disfrute de la finca arrendada, y de si por virtud de esta circunstancia este o no exento de la
obligacion de abonar la renta pactada durante el tiempo que subsistio la incautacion; y es
indudable la afirmativa en cuanto al primer extremo, puesto que la sentencia recurrida establece
que el hecho de que no funcionase la industria y estuvieran los locales cerrados no actuo como
causa de la requisa de estos por el Ejercito."

"Considerando que la sentencia recurrida, en cuanto no da lugar al pago de las rentas

correspondientes al tiempo que duro la incautacion, lejos de infringir, por aplicacion indebida, el
art. 1.568 del Codigo civil, se ajusta a la orientacion marcada en el mismo, puesto que este
precepto legal dispone que el arrendatario tiene accion contra el tercero perturbador de mero
hecho en la posesion de la finca arrendada, pero no contra la Administracion o contra los que
obran en virtud de un derecho que les corresponde; y aqui la perturbacion que experimento el
arrendador en su posesion, como consecuencia de la requisa, no puede calificarse como de mero
hecho, conforme al citado articulo, puesto que la finca fue requisada por la autoridad militar para
fines de guerra, de donde se sigue que el arrendatario tenia que soportar la privacion de su
tenencia material a traves del arrendador, con quien ha de entenderse la requisa de la cosa
arrendada."

In addition, the text of Art. 1560, in its first paragraph (jam quot.) assumes that in case of mere
disturbance ( perturbacion de mero hecho) "the lessee shall have a direct action against the
trespasser." This assumption evidently does not contemplate the case of dispossession of the lessee
by a military occupant, as pointed out by Mr. Chief Justice Paras in his dissenting opinion in
Reyes vs. Caltex (Phil.) Inc., 84 Phil. 669; for the reason that the lessee could not have a direct
action against the military occupant. It would be most unrealistic to expect that the occupation
courts, placed under the authority of the occupying belligerent, should entertain at the time a suit
for forcible entry against the Japanese army. The plaintiffs, their lawyers, and in all probability, the
Judge and court personnel, would face "severest penalties" for such defiance of the invader.

The present case is distinguishable from Lo Ching vs. Archbishop of Manila (81 Phil., 601) in that
the act of the Japanese military involved in the latter case clearly went beyond the limits set by the
Hague Conventions, in seizing the property and delivering it to another private party; and from
Reyes vs. Caltex (Phil.) Inc., 84 Phil. 654, in that the rights of the military occupant under
international law were not raised or put in issue in said case; and moreover, the lessee there, by
failing to rescind the lease upon seizure of the premises by the Japanese military, despite the
stipulated power to do so, resumed business and decided to hold unto the long term lease for the
balance of its 20-year period, starting from December 23, 1940. In the case before us, the
occupation of the leased property by the Japanese army covered the major portion of the five-year
contractual period, without any option to rescind by the lessee.

The lessor's position is not improved by regarding the military seizure of the property under lease
as a case of force majeure or fortuitous event. Ordinarily, a party may not be held responsible
therefor, despite the fact that it prevented compliance of its obligations. But lease being a contract
that calls for prestations that are both reciprocal and repetitive (tractum successivum), the
obligations of either party are not discharged at any given moment, but must be fulfilled all
throughout the term of the contract. As a result, any substantial failure by one party to fulfill its
commitments at any time during the contract period gives rise to a failure of consideration (causa)
for the obligations of the other party and excuses the latter from the correlative performance,
because the causa in lease must exist not only at the perfection but throughout the term of the
contract. No lessee would agree to pay rent for premises he could not enjoy. As expressed by
Marcel Planiol (quoted in 4 Castan, Derecho Civil, 7th Edition, p. 264) —

"Como la obligacion del arrendador es sucesiva y se renueva todos los dias, la subsistencia del
arrendamiento se hace imposible cuando, por cualquier razon, el arrendador no puede ya procurar
al arrendatario el disfrute de la cosa."

This effect of the failure of reciprocity appears whether the failure is due to fault or to fortuitous
event; the only difference being that in case of fault, the other party is entitled to rescind the
contract in toto, and collect damages, while in casual non-performance it becomes entitled only to
a suspension pro tanto of its own commitments. This rule is recognized in par. 2 of Art. 1558,
authorizing the lessee to demand reduction of the rent in case of repairs depriving him of the
possession of part of the property; and in Art. 1575, enabling the lessee of rural property to
demand reduction of the rent if more than one-half of the fruits are lost by extraordinary fortuitous
event. Of course, where it becomes immediately apparent that the loss of possession or enjoyment
will be permanent, as in the case of accidental destruction of a leased building, the lease contract
terminates.

Applying these principles, the Sentencia of December 1944, already adverted to, ruled as follows:

"Considerando que privado el arrendador, por tal hecho, del disfrute de esta, es menifiesta la
imposibilidad en que se vio de cumplir la tercera de las obligaciones que el impone el articulo
1.554 del Codigo Civil, obligacion (la de mantener al arrendatario en el disfrute de la cosa
arrendada) que ha de entenderse reciproca de la de pago de renta pactada, que impone al
arrendatario el número primero del art. 1.555 de dicho Cuerpo legal, y por ello no puede ser
exigida."

"Considerando que, aunque no sean estrictamente aplicables al caso los articulos 1.124, 1.556 y
1.568, que se citan como infringidos por el recurrente, suponiendo que a ellos ha entendido
referirse la Audiencia (lo que impediria, en todo caso, la estimacion del recurso por este motivo,
ya que dichos articulos no se citan en la sentencia de instancia), es evidente que ellos proclaman la
reciprocidad de las obligaciones entre arrendatario y arrendador, y en este sentido, tratandose de
un incumplimiento inculpable de contrato, pueden servir, como tambien el 1.558, en cuanto
preven la reduccion de rentas o posible restriccion del contrato cuando el arrendatario se ve
privado, por obras realizadas en la finca arrendada, del disfrute de este, de fundamento, con los
demas preceptos invocados, a una extencion de renta mientras subsiste la imposibilidad de utilizar
la cosa arrendada, sobre todo cuando los articulos 157 y 158 del Reglamento de Requisas de 13 de
enero de 1921 estatuyen claramente que les requisas de edificio se hacen a la propiedad, y es el
propietario el que puede pedir indemnizacion, uno de cuyos elementos es el precio del alquiler que
le sea satisfecho por el inmueble incautado."

We are aware that the rule in the common law is otherwise, due to its regarding a lease as a
conveyance to the lessee of a temporary estate or title to the leased property so that loss of
possession due to war or other fortuitous event leaves the tenant liable for the rent in the absence
of stipulation. The fundamental difference between the common law and the civil law concepts
has been outlined by the United States in Viterbo vs. Friedlander, 30 L. Ed. (U.S.) pp. 776, 778, in
this wise:

"But as to the nature and effect of a lease for years, at a certain rent which the lessee agrees to pay,
and containing no express covenant on the part of the lessor, the two systems differ materially. The
common law regards such a lease as the grant of an estate for years, which the lessee takes a title
in, end is bound to pay the stipulated rent for, notwithstanding any injury by flood, fire or external
violence, at least unless the injury is such a destruction of the lend as to amount to an eviction; end
by that law the lessor is under no implied covenant to repair, or even that the premises shall be fit
for the purpose for which they are leased. Fowler vs. Bott, 6 Mass. 63; 3 Kent, Com. 465, 466;
Broom, Legal Maxims, 3d ed. 213, 214; Doupe vs. Genin, 45 N. Y. 119; Kingbury vs. Westfall, 61
N. Y. 356. Naumberg vs. Young, 15 Vroom, 331; Bowe vs. Hunking, 135 Mass. 380; Manchester
Warehouse Co. vs. Carr, L.R. 5 C.P.D. 507.

The civil law, on the other hand, regards a lease for years as a mere transfer of the use and
enjoyment of the property; and holds the landlord bound, without any express covenant, to keep it
in repair and otherwise fit for use and enjoyment for the purpose for which it is leased, even when
the need of repair or the unfitness is caused by an inevitable accident, and if he does not do so, the
tenant may have the lease annulled, or the rent abated. Dig. 19, 2, 9, 2; 19, 2, 15, 1, 2; 19, 2, 25, 2;
19, 2, 39; 2 Gomez, Variae Resolutiones c. 3, secs. 1-3, 18, 19: Gregorio Lopes in 5 Partidas, tit. 8,
11. 8, 22; Domat, Droit Civil, pt. 1, lib. 1, tit. 4, sec. 1, no. 1; sec. 3 nos. 1, 3, 6, Pothier, Contract
de Louage, nos. 3, 6, 11, 22, 53, 103, 106, 139-155.

It is accordingly laid down in the Pandects, on the authority of Julian, 'If anyone has let an estate,
that, even if anything happens by vis major, he must make it good, he must stand by his contract,'
si quis fundum locaverit, ut, etiamsi quid vi majore accidisset, hoc ei praestaretur, pacto standum
esse; Dig. 19, 2, 9, 2; and on the authority of Ulpian, that 'A lease does not change the ownership,'
non solet locatio dominium mutare; Dig. 19, 2, 39; and that the lessee has a right of action, if he
cannot enjoy the thing which he has hired, si re quam conduxit frui non liceat, whether because his
possession, either of the whole or of part of the field, is not made good, or a house, or stable or
sheepfold, is not repaired; and the landlord ought to warrant the tenant, dominum colono praestare
debere, against every irresistible force, omnim vim cui resisti non potest, such as floods, flocks of
birds, or any like cause, or invasion of enemies; and if the whole crop should be destroyed by a
heavy rainfall, or the olives should be spoiled by blight, or by extraordinary heat of the sun, solis
fervore non assueto, it would be the loss of the landlord, damnum domini futurum; and so if the
field falls in by an earthquake, for there must be made good to the tenant a field that he can enjoy,
o portere enim agrum praestari conductori, ut frui possit; but if any loss arises from defects in the
thing itself, si qua tamen vitia ex i psa re oriantur, as if wine turns sour, or standing corn is spoiled
by worms or weeds, or if nothing extraordinary happens, si vero nihil extra consuetudinem
acciderit, it is the loss of the tenant, damnum coloni asse. Dig. 19, 2; 15, 1, 2." (Emphasis
supplied)

In short, the law applies to leases the rule enunciated by the Canonists and the Bartolist School of
Post glossatorse, that "contractus qui tractum successivum habent et de pendentiam de futuro, sub
conditione rebus sic stantibus intelliguntur," they are understood entered subject to the condition
that things will remain as they are, without material change.

It is also worthy of note that the lessors, through Dr. Javier Villaruel, agreed after liberation to a
renewal of the contract of lease for another five years (from June 1, 1946 to May 31 of 1951)
without making any reservation regarding the alleged liability of the lessee company for the
rentals corresponding to the period of occupancy of the premises by the Japanese army, and
without insisting that the non-payment of such rental was a breach of the contract of lease. This
passivity of the lessors strongly supports the claim of the lessees that the rentals in question were
verbally waived. The proffered explanation is that the lessors could not refuse to renew the lease,
because the privilege of renewal had been granted to the lessees in the original contract. Such
excuse is untenable: if the lessors deemed that the contract had been breached by the lessee's non-
payment of the occupation rents how could they admit the lessee's right to renew a contract that
the lessee itself had violated?

But this is not all. The lessors accepted payment of current rentals from October 1945 to June
1946. It was only in July 1946 that they insisted upon collecting also the 1942-1945 rents, and
refused to accept further payments tendered by the lessee unless their right to collect the
occupation rental was recognized or reserved. After refusing the rents from July to November
1946, unless the lessee recognized their right to occupation rentals, the appellees (lessors)
demanded rescission of the contract and a rental of P1,740 monthly in lieu of the stipulated P350
per month. (Exhibit "C").

This attitude of the lessors was doubly wrongful: first, because as already shown, the
dispossession by the Japanese army exempted the lessee from his obligation to pay rent for the
period of its ouster; and second, because even if the lessee had been liable for that rent, its
collection in 1946 was barred by the moratorium order, Executive Order No. 32, that remained in
force until replaced by Rep. Act 342 in 1948. To apply the current rentals to the occupation
obligations would amount to enforcing them contrary to the moratorium decreed by the
government.
Clearly, then, the lessor' insistence upon collecting the occupation rentals for 1942-1945 was
unwarranted in law. Hence, their refusal to accept the current rentals without qualification placed
them in default (mora creditoris or acci piendi) with the result that thereafter, they had to bear all
supervening risks of accidental injury or destruction of the leased premises. While not expressly
declared by the Code of 1889, this result is clearly inferable from the nature and effects of mora,
and from Articles 1185, 1452 [par. 3] and 1589).

"ART. 1185. When the obligation to deliver a certain and determinate thing arises from the
commission of a crime or misdemeanor the obligor shall not be exempted from the payment of its
value, whatever the cause of its loss may have been, unless, having offered the thing to the person
entitled 'to receive it, the latter should have refused without reason to accept it."

"Art. 1452. . . .

If fungible things should be sold for a price fixed with relation to weight, number, or measure,
they shall not be at the purchaser's risk until they have been weighed, counted, or measured, unless
the purchaser should be in default."

"ART. 1589. If the person who contracted to do the work bound himself to furnish the materials,
he shall bear the loss in case of the destruction of the work before it is delivered, unless its
acceptance has been delayed by the default of the other party."

While there is a presumption that the loss of the thing leased is due to the fault of the lessee (Civil
Code of 1889, Art. 1563), it is noteworthy that the lessors have not invoked that presumption
either here or in the court below. On the contrary, the parties and the trial court have all proceeded
and discussed the issues taking for granted that the destruction of the leased buildings was purely
fortuitous. We see no reason for departing from that assumption and further prolonging this
litigation.

That the lessee and sublessee did not consign or deposit in court the rentals tendered to and
improperly rejected by the lessors, did not render the debtor liable for default (mora solvendi) nor
answerable for fortuitous events because, as explained by the Supreme Court of Spain in its
Sentencia of 5 June 1944 —

"Al exigir el art. 1176 del Codigo Civil la consignacion para liberar al deudor no quiere decir que
necesariamente haya de practicarse, y no baste el ofrecimiento de pago que de aquella no fuere
seguido, a efectos de exclusion ds las consecuencias de la mora solvendi." (8 Manresa,
Comentarios, 5th Ed., Vol. I, p. 136).

In other words, the only effect of the failure to consign the rentals in court was that the obligation
to pay them subsisted (P.N.B. vs. Relativo, 92 Phil., 203) and the lessee remained liable for the
amount of the unpaid contract rent, corresponding to the period from July to November, 1946; it
being undisputed that, from December 1946 up to March 2, 1948, when the commercial buildings
were burned, the defendants-appellants have paid the contract rentals at the rate of P350 per
month. But the failure to consign did not eradicate the default (mora) of the lessors nor the risk of
loss that lay upon them. (3 Castan, Der. Civ., 8th Ed., p. 145; 4 Puig Peña, Der. Civ., part. 1, p.
234; Diaz Pairo, Teoria Gen. de las Obligaciones [3rd Ed.], Vol. 1, pp. 192-193).

In view of the foregoing, we hold:

(a) That the dispossession of the lessee from the premises by the Japanese army of occupation was
not an act of mere trespass ( perturbacion de mero hecho) but one de derecho chargeable to the
lessors;

(b) That such dispossession, though not due to fault of lessors or lessee, nevertheless resulted in
the exemption of the lessee from its obligation to pay rent during the period that it was deprived of
the possession and enjoyment of the premises leased;

(c) That the insistence of the lessors to collect such rentals was unwarranted;

(d) That the lessors were not justified in refusing to accept the tender of current rentals unless the
lessee should recognize their right to the rents corresponding to the period that the lessee was not
in possession;

(e) That by their improper refusal to accept the current rents tendered by the lessee, the lessors
incurred in default (mora) and they must shoulder the subsequent accidental loss of the premises
leased;

(f) That the mora of the lessors was not cured by the failure of the lessee to make the consignation
of the rejected payments, but the lessee remained obligated to pay the amounts tendered and not
consigned by it in court.

Consequently, it was reversible error to sentence the appellants to pay P2,165 a month as
reasonable value of the occupation of the premises from July 1946, and the value of the destroyed
buildings amounting to P30,000.

Wherefore, the decision appealed from is modified in the sense that the appellant Manila Motor
Company should pay to the appellees Villaruel only the rents for the leased premises
corresponding to the period from July up to November 1946, at the rate of P350 a month, or a total
of P1,750. Costs against appellees in both instances. So ordered.

Paras, C.J., Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion and Endencia,
JJ., concur.
Footnotes

1.Art. 2. Sec. 3. — The Philippines renounces war as an instrument of national policy, and adopts
the generally accepted principles of international law as part of the law of the nation."
(Constitution of the Philippines) — Applied in Go Kim Chan vs. Valdez, 75 Phil. 113; Tubb vs.
Griess, 78 Phil. 249; Dizon vs. Commanding General, 81 Phil. 286.

12
||| (Vda. de Villaruel v. Manila Motor Co., Inc., G.R. No. L-10394, [December 13, 1958], 104
PHIL 926-946)

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223 PHIL 266-279

SECOND DIVISION

[G.R. No. L-45710. October 3, 1985.]

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO,

JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as
statutory receiver of Island Savings Bank, petitioners, vs. THE HONORABLE COURT OF
APPEALS and SULPICIO M. TOLENTINO, respondents.

I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.

Antonio R. Tupaz for private respondent.

DECISION

MAKASIAR, C.J p:
This is a petition for review on certiorari to set aside as null and void the decision of the Court of
Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated
February 15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of
respondent Sulpicio M. Tolentino for injunction, specific performance or rescission, and damages
with preliminary injunction.

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department,
approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the
loan, executed on the same day a real estate mortgage over his 100-hectare land located in Cubo,
Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the
said title the next day. The approved loan application called for a lump sum P80,000.00 loan,
repayable in semi-annual installments for a period of 3 years, with 12% annual interest. It was
required that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to
develop his other property into a subdivision.

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the
Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for
P17,000.00 at 12% annual interest, payable within 3 years from the date of execution of the
contract at semi-annual installments of P3,459.00 (p. 64, rec.), An advance interest for the
P80,000.00 loan covering a 6-month period amounting to P4,800.00 was deducted from the partial
release of P17,000.00. But this pre-deducted interest was refunded to Sulpicio M. Tolentino on
July 23, 1965, after being informed by the Bank that there was no fund yet available for the
release of the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president and treasurer,
promised repeatedly the release of the P63,000.00 balance (p. 113, rec.).

On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank
was suffering liquidity problems, issued Resolution No. 1049, which provides:

"In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit
liabilities, the Board, by unanimous vote, decided as follows:

"1) To prohibit the bank from making new loans and investments [except investments in
government securities] excluding extensions or renewals of already approved loans, provided that
such extensions or renewals shall be subject to review by the Superintendent of Banks, who may
impose such limitations as may be necessary to insure correction of the bank's deficiency as soon
as possible;

. . ." (p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding that Island Savings Bank failed to put up the
required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings
Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to
take charge of the assets of Island Savings Bank (pp. 48-49, rec.).
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by
the promissory note, filed an application for the extra-judicial foreclosure of the real estate
mortgage covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the
auction for January 22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of
Agusan for injunction, specific performance or rescission and damages with preliminary
injunction, alleging that since Island Savings Bank failed to deliver the P63,000.00 balance of the
P80,000.00 loan, he is entitled to specific performance by ordering Island Savings Bank to deliver
the P63,000.00 with interest of 12% per annum from April 28, 1965, and if said balance cannot be
delivered, to rescind the real estate mortgage (pp. 32-43, rec.).

On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a
temporary restraining order enjoining the Island Savings Bank from continuing with the
foreclosure of the mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal
of the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the
Central Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).

On February 15, 1972, the trial court, after trial on the merits, rendered its decision, finding
unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the
amount of P17,000.00 plus legal interest and legal charges due thereon, and lifting the restraining
order so that the sheriff may proceed with the foreclosure (pp. 135-136, rec.).

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the
Court of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for
specific performance, but it ruled that Island Savings Bank can neither foreclose the real estate
mortgage nor collect the P17,000.00 loan (pp. 30-31, rec.). prcd

Hence, this instant petition by the Central Bank.

The issues are:

1. Can the action of Sulpicio M. Tolentino for specific performance prosper?

2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note?

3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage
be foreclosed to satisfy said amount?.

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement
on April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation
or promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46
[1981]; Vda. de Quirino vs. Pelarca, 29 SCRA 1 [1969]); and when one party has performed or is
ready and willing to perform his part of the contract, the other party who has not performed or is
not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of
Sulpicio M. Tolentino to pay was the consideration for the obligation of Island Savings Bank to
furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April
28, 1965, he signified his willingness to pay the P80,000.00 loan. From such date, the obligation
of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in
furnishing the entire loan started on April 28, 1965, and lasted for a period of 3 years or when the
Monetary Board of the Central Bank issued Resolution No. 967 on June 14, 1968, which
prohibited Island Savings Bank from doing further business. Such prohibition made it legally
impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The
power of the Monetary Board to take over insolvent banks for the protection of the public is
recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the validity of
which is not in question.

The Monetary Board Resolution No. 1049 issued on August 13, 1965 cannot interrupt the default
of Island Savings Bank in complying with its obligation of releasing the P63,000.00 balance
because said resolution merely prohibited the Bank from making new loans and investments, and
nowhere did it prohibit Island Savings Bank from releasing the balance of loan agreements
previously contracted. Besides, the mere pecuniary inability to fulfill an engagement does not
discharge the obligation of the contract, nor does it constitute any defense to a decree of specific
performance (Gutierrez Repide vs. Afzelins and Afzelins, 39 Phil. 190 [1918]). And, the mere fact
of insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but instead it
is taken as a breach of the contract by him (Vol. 17A, 1974 ed., CJS p. 650). LexLib

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be
taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in
asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper
considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be
legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio M. Tolentino of the
pre-deducted interest was an exercise of his right to it, which right exist independently of his right
to demand the completion of the P80,000.00 loan. The exercise of one right does not affect, much
less neutralize, the exercise of the other.

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot
exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. This
Court previously ruled that bank officials and employees are expected to exercise caution and
prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA
151 [1981]). It is the obligation of the bank's officials and employees that before they approve the
loan application of their customers, they must investigate the existence and valuation of the
properties being offered as a loan security. The recent rush of events where collaterals for bank
loans turn out to be non-existent or grossly over-valued underscore the importance of this
responsibility. The mere reliance by bank officials and employees on their customer's
representation regarding the loan collateral being offered as loan security is a patent non-
performance of this responsibility. If ever, bank officials and employees totally rely on the
representation of their customers as to the valuation of the loan collateral, the bank shall bear the
risk in case the collateral turn out to be over-valued. The representation made by the customer is
immaterial to the bank's responsibility to conduct its own investigation. Furthermore, the lower
court, on objections of Sulpicio M. Tolentino, had enjoined petitioners from presenting proof on
the alleged over-valuation because of their failure to raise the same in their pleadings (pp. 198-
199, t.s.n., Sept. 15, 1971). The lower court's action is sanctioned by the Rules of Court, Section 2,
Rule 9, which states that "defenses and objections not pleaded either in a motion to dismiss or in
the answer are deemed waived." Petitioners, thus, cannot raise the same issue before the Supreme
Court.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan
agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between
specific performance or rescission with damages in either case. But since Island Savings Bank is
now prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot
grant specific performance in favor of Sulpicio M. Tolentino.

Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the
P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such
amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the
partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory
note to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a
P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to
pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the
promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the
Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved
party, that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date
for payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire
loan because he cannot possibly be in default as there was no date for him to perform his
reciprocal obligation to pay.

Since both parties were in default in the performance of their respective reciprocal obligations,
that is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and
Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3
years as stipulated, they are both liable for damages. Cdpr

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts.
WE rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is
offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and
surcharges, for not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for
interest on his P17,000.00 debt shall not be included in offsetting the liabilities of both parties.
Since Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00, it is just that he
should account for the interest thereon.

WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely
foreclosed to satisfy his P17,000.00 debt.

The consideration of the accessory contract of real estate mortgage is the same as that of the
principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the
consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract of
real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of
a valid, voidable, or unenforceable debt (Art. 2086, in relation to Art. 2052, of the Civil Code).

The fact that when Sulpicio M. Tolentino executed his real estate mortgage, no consideration was
then in existence, as there was no debt yet because Island Savings Bank had not made any release
on the loan, does not make the real estate mortgage void for lack of consideration. It is not
necessary that any consideration should pass at the time of the execution of the contract of real
mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). It may either be a prior or subsequent
matter. But when the consideration is subsequent to the mortgage, the mortgage can take effect
only when the debt secured by it is created as a binding contract to pay (Parks vs. Sherman, Vol.
176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is
partial failure of consideration, the mortgage becomes unenforceable to the extent of such failure
(Dow, et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the
indebtedness actually owing to the holder of the mortgage is less than the sum named in the
mortgage, the mortgage cannot be enforced for more than the actual sum due (Metropolitan Life
Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 6th ed., Wiltsie on Mortgage, Vol. 1, p. 180).
LLpr

Since Island Savings Bank failed to furnish the P63,000.00 balance of the P80,000.00 loan, the
real estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is
78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to
the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a
security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00
debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code
is inapplicable to the facts of this case.

Article 2089 provides:

"A pledge or mortgage is indivisible even though the debt may be divided among the successors in
interest of the debtor or creditor.
"Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.

"Neither can the creditor's heir who have received his share of the debt return the pledge or cancel
the mortgage, to the prejudice of other heirs who have not been paid."

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes
several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of
indivisibility of a mortgage cannot apply.

WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977
IS HEREBY MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN

PETITIONERS THE SUM OF P17,000.00, PLUS P41,210.00 REPRESENTING 12%
INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22,
1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED' FROM AUGUST 22,
1985 UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE

COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL
INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY

DECLARED UNENFORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF
SULPICIO M. TOLENTINO.

NO COSTS. SO ORDERED.

Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur.

Aquino (Chairman) and Abad Santos, JJ., took no part.

2
||| (Central Bank of the Phils. v. Court of Appeals, G.R. No. L-45710, [October 3, 1985], 223 PHIL
266-279)
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93 PHIL 526-542

EN BANC

[G.R. No. L-4811. July 31, 1953.]

CHARLES F. WOODHOUSE, plaintiff-appellant, vs. FORTUNATO F. HALILI, defendant-

appellant.

Tañada, Pelaez & Teehankee for defendant and appellant.

Gibbs, Gibbs, Chuidian & Quasha for plaintiff and appellant.

SYLLABUS

1. EVIDENCE; PAROL EVIDENCE RULE; INTEGRATION OF JURAL ACTS. — Plaintiff

entered into a written agreement with the defendant to the effect that they shall organize a
partnership for the bottling and distribution of soft drinks, plaintiff to act as industrial partner or
manager, and the defendant a capitalist furnishing the capital necessary therefor. The defendant
claims that his consent to the agreement was secured by the representation of plaintiff that he was
the owner, or was about to become owner, of an exclusive bottling franchise, which representation
was false. The fraud and false representation is sought to be proven by means, among others, of
the drafts of the agreement prior to the final one, which drafts are presumed to have already been
integrated into the final agreement. Are those prior drafts excluded from the prohibition of the
parol evidence rule? Held: The purpose of considering the drafts is not to vary, alter, or modify the
agreement, but to discover the intent of the parties thereto and the circumstances surrounding the
execution of the contract. The issue of fact is, did plaintiff represent to defendant that he had an
exclusive franchise? Certainly, his acts or statements prior to the agreement are essential and
relevant to the determination of said issue. The act or statement of the plaintiff was not sought to
be introduced to change or alter the terms of the agreement, but to prove how he induced the
defendant to enter into it - to prove the representations or inducements, or fraud, with which or by
which he secured the other party's consent thereto. These are expressly excluded from the parol
evidence rule. (Bough and Bough vs. Cantiveros and Hanopol, 40 Phil., 209; Port Banga Lumber
Co., vs. Export & Import Lumber Co., 26 Phil., 602; 3 Moran 221, 1952 rev. ed.) Fraud and false
representation are an incident to the creation of a jural act, not to its integration, and are not
governed by the rules on integration. Where parties prohibited from proving said representations
or inducements, on the ground that the agreement had already been entered into, it would be
impossible to prove misrepresentation or fraud. The parol evidence rule expressly allows the
evidence to be introduced when the validity of an instrument is put in issue by the pleadings (sec.
22-a of Rule 123).

2. ID.; INTERPRETATION OF DOCUMENTS. — AS plaintiff knew what defendant believed

about his (plaintiff's exclusive franchise, as he induced him to that belief, plaintiff may not be
allowed to deny that defendant was induced by that belief (sec. 63 of Rule 123).

3. FRAUD; FALSE REPRESENTATION; DOLO CAUSANTE AND DOLO INCIDENTE; IT IS

THE FORMER THAT VITIATES CONSENT. — Fraud is manifested in illimitable number of
degrees or gradations — from the innocent praises of a salesman about the excellence of his wares
to those malicious machinations and representations that the law punishes as a crime. In
consequence, article 1270 of the Spanish Civil Code distinguishes two kinds of (civil) fraud, the
causal fraud which may be a ground for the annulment of a contract, and the incidental deceit
which only renders the party who employs it liable for damages. In order that fraud may vitiate
consent, it must be the causal (dolo causante), not merely the incidental (dolo incidente),
inducement to the making of the contract (art. 1270, Span. Civ. Code; Hill vs. Veloso, 31 Phil.,
160). In the case at bar, inasmuch as the principal consideration, the main cause that induced
defendant to enter into the partnership agreement with plaintiff, was the ability of plaintiff to get
the exclusive franchise to bottle and distribute for the defendant or for the partnership, the false
representation made by the plaintiff was not the casual consideration, or the principal inducement,
that led the defendant to enter into the partnership agreement.

4. ID.; ID.; ID.; DAMAGES FOR DOLO INCIDENTE; PARTNERSHIP. — While the
representation that plaintiff had the exclusive franchise did not vitiate defendant' consent to the
contract, it was used by plaintiff to get 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 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 other party's consent to a big share in the profits, an incidental matter in the agreement. (8
Manresa, 602.)

5. CONTRACTS AND OBLIGATIONS; CONSENT, NOT VITIATED BY DOLO INCIDENTE;

PARTNERSHIP; AGREEMENT TO FORM PARTNERSHIP, CANNOT BE ENFORCED. —
Having arrived at the conclusion that the agreement to organize a partnership may not be declared
null and void, may the agreement be carried out or executed? Held: Under the Spanish Civil Code,
the defendant has an obligation to do, not to give. The law recognizes the individual's freedom or
liberty to do an act he has promised to do, or not to do it, as he pleases. This is a very personal act
(acto personalisimo) of which courts may not compel compliance, as it is considered as an act of
violence to do so. (29 as it is considered as an act of violence to do so. (19 Scaevolla, 428, 431-
432.)

6. FALSE REPRESENTATION; DAMAGES FOR DOLO INCIDENTE. — Plaintiff is entitled

under the terms of the agreement to 30 per cent of the net profits of the business. Against this
amount of damages, the damage the defendant suffered by plaintiff's misrepresentation that he had
the exclusive franchise, must be set off. (Art. 1101, Span. Civ. Code.) When the defendant learned,
in Los Angeles, California, that plaintiff did not have the exclusive franchise which he pretended
he had and which he had agreed to transfer to the partnership, his spontaneous reaction was to
reduce the plaintiff's share from 30 per cent to 15 per cent only, to which reduction plaintiff
appears to have readily given his assent. Held: By the misrepresentation of the plaintiff, he
obtained a very high percentage (30%) of share in the profits. Upon learning of the
misrepresentation, defendant reduced plaintiff's share to 15 per cent, to which defendant assented.
The court can do no better than follow such appraisal of the damages as the parties themselves had
adopted.

DECISION

LABRADOR, J p:

On November 29, 1947, the plaintiff entered into a written agreement, Exhibit A, with the
defendant, the most important provisions of which are (1) that they shall organize a partnership for
the bottling and distribution of Mission soft drinks, plaintiff to act as industrial partner or manager,
and the defendant as a capitalist, furnishing the capital necessary therefor; (2) that the defendant
was to decide matters of general policy regarding the business, while the plaintiff was to attend to
the operation and development of the bottling plant; (3) that the plaintiff was to secure the Mission
Soft Drinks franchise for and in behalf of the proposed partnership; and (4) that the plaintiff was
to receive 30 per cent of the net profits of the business. The above agreement was arrived at after
various conferences and consultations by and between them, with the assistance of their respective
attorneys. Prior to entering into this agreement, plaintiff had informed the Mission Dry
Corporation of Los Angeles, California, U. S. A., manufacturers of the bases and ingredients of the
beverages bearing its name, that he had interested a prominent financier (defendant herein) in the
business, who was willing to invest half a million dollars in the bottling and distribution of the
said beverages, and requested, in order that he may close the deal with him, that the right to bottle
and distribute be granted him for a limited time under the condition that it will finally be
transferred to the corporation (Exhibit H). Pursuant to this request, plaintiff was given "a thirty
days' option on exclusive bottling and distribution rights for the Philippines" (Exhibit H). Formal
negotiations between plaintiff and defendant began at a meeting on November 27, 1947, at the
Manila Hotel, with their lawyers attending. Before this meeting plaintiff's lawyer had prepared a
draft of the agreement, Exhibit II or OO, but this was not satisfactory because a partnership,
instead of a corporation, was desired. Defendant's lawyer prepared after the meeting his own draft,
Exhibit HH. This last draft appears to be the main basis of the agreement, Exhibit A.

The contract was finally signed by plaintiff on December 3, 1947. Plaintiff did not like to go to the
United States without the agreement being first signed. On that day plaintiff and defendant went to
the United States, and on December 10, 1947, a franchise agreement (Exhibit V) was entered into
between the Mission Dry Corporation and Fortunato F. Halili and/or Charles F. Woodhouse,
granting defendant the exclusive right, license, and authority to produce, bottle, distribute, and sell
Mission beverages in the Philippines. The plaintiff and the defendant thereafter returned to the
Philippines. Plaintiff reported for duty in January, 1948, but operations were not begun until the
first week of February, 1948. In January plaintiff was given as advance, on account of profits, the
sum of P2,000, besides the use of a car; in February, 1948, also P2,000, and in March only P1,000.
The car was withdrawn from plaintiff on March 9, 1948.

When the bottling plant was already in operation, plaintiff demanded of defendant that the
partnership papers be executed. At first defendant excused himself, saying there was no hurry.
Then he promised to do so after the sales of the products had been increased to P50,000. As
nothing definite was forthcoming, after this condition was attained, and as defendant refused to
give further allowances to plaintiff, the latter caused his attorneys to take up the matter with
defendant with a view to a possible settlement. As none could be arrived at, the present action was
instituted.

In his complaint plaintiff asks for the execution of the contract of partnership, an accounting of the
profits, and a share thereof of 30 per cent, as well as damages in the amount of P200,000. In his
answer defendant alleges by way of defense (1) that defendant's consent to the agreement, Exhibit
A, was secured by the representation of plaintiff that he was the owner, or was about to become
owner of an exclusive bottling franchise, which representation was false, and that plaintiff did not
secure the franchise, but was given to defendant himself; (2) that defendant did not fail to carry
out his undertakings, bus that it was plaintiff who failed; (3) that plaintiff agreed to contribute the
exclusive franchise to the partnership, but plaintiff failed to do so. He also presented a
counterclaim for P200,000 as damages. On these issues the parties went to trial, and thereafter the
Court of First Instance rendered judgment ordering defendant to render an accounting of the
profits of the bottling and distribution business, subject of the action, and to pay plaintiff 15 per
cent thereof. It held that the execution of the contract of partnership could not be enforced upon
the parties, but it also held that the defense of fraud was not proved. Against this judgment both
parties have appealed.

The most important question of fact to be determined is whether defendant had falsely represented
that he had an exclusive franchise to bottle Mission beverages, and whether this false
representation or fraud, if it existed, annuls the agreement to form the partnership. The trial court
found that it is improbable that defendant was never shown the letter, Exhibit J, granting plaintiff
the option; that defendant would not have gone to the United States without knowing what
authority plaintiff had; that the drafts of the contract prior to the final one can not be considered
for the purpose of determining the issue, as they are presumed to have been already integrated into
the final agreement; that fraud is never presumed and must be proved; that the parties were
represented by attorneys, and that if any party thereto got the worse part of the bargain, this fact
alone would not invalidate the agreement. On this appeal the defendant, as appellant, insists that
plaintiff did represent to the defendant that he had an exclusive franchise, when as a matter of fact,
at the time of its execution, he no longer had it as the same had expired, and that, therefore, the
consent of the defendant to the contract was vitiated by fraud and it is, consequently, null and
void.

Our study of the record and a consideration of all the surrounding circumstances lead us to believe
that defendant's contention is not without merit. Plaintiff's attorney, Mr. Laurea, testified that
Woodhouse presented himself as being the exclusive grantee of a franchise, thus:

"A. I don't recall any discussion about that matter. I took along with me the file of the office with
regards to this matter. I notice from the first draft of the document which I prepared which calls
for the organization of a corporation, that the manager, that is, Mr. Woodhouse, is represented as
being the exclusive grantee of a franchise from the Mission Dry Corporation. . . . "(t.s.n., p. 518)

As a matter of fact, the first draft that Mr. Laurea prepared, which was made before the Manila
Hotel conference on November 27th, expressly states that plaintiff had the exclusive franchise.
Thus, the first paragraph states:

'Whereas, the manager is the exclusive grantee of a franchise from the Mission Dry Corporation
San Francisco, California, for the bottling of Mission products and their sale to the public
throughout the Philippines;

xxx xxx xxx

"3. That the manager, upon the organization of the said corporation, shall forthwith transfer to the
said corporation his exclusive right to bottle Mission products and to sell them throughout the
Philippines."

xxx xxx xxx

(Exhibit II; emphasis ours)

The trial court did not consider this draft on the principle of integration of jural acts. We find that
the principle invoked is inapplicable, since the purpose of considering the prior draft is not to vary,
alter, or modify the agreement, but to discover the intent of the parties thereto and the
circumstances surrounding the execution of the contract. The issue of fact is: Did plaintiff
represent to defendant that he had an exclusive franchise? Certainly, his acts or statements prior to
the agreement are essential and relevant to the determination of said issue. The act or statement of
the plaintiff was not sought to be introduced to change or alter the terms of the agreement, but to
prove how he induced the defendant to enter into it — to prove the representations or
inducements, or fraud, with which or by which he secured the other party's consent thereto. These
are expressly excluded from the parol evidence rule. (Bough and Bough vs. Cantiveros and
Hanopol, 40 Phil., 209; Port Banga Lumber Co. vs. Export & Import Lumber Co., 26 Phil., 602;
III Moran 221, 1952 rev. ed.) Fraud and false representation are an incident to the creation of a
jural act, not to its integration, and are not governed by the rules on integration. Were parties
prohibited from proving said representations or inducements, on the ground that the agreement
had already been entered into, it would be impossible to prove misrepresentation or fraud.
Furthermore, the parol evidence rule expressly allows the evidence to be introduced when the
validity of an instrument is put in issue by the pleadings (section 22, par. (a), Rule 123, Rules of
Court), as in this case.

That plaintiff did make the representation can also be easily gleaned from his own letters and his
own testimony. In his letter to Mission Dry Corporation, Exhibit H, he said:

". . . He told me to come back to him when I was able to speak with authority so that we could
come to terms as far as he and I were concerned. That is the reason why the cable was sent.
Without this authority, I am in a poor bargaining position. . . .

"I would propose that you grant me the exclusive bottling and distributing rights for a limited
period of time, during which I may consummate my plans. . . .. "

By virtue of this letter the option on exclusive bottling was given to the plaintiff on October 14,
1947. (See Exhibit J.) If this option for an exclusive franchise was intended by plaintiff as an
instrument with which to bargain with defendant and close the deal with him, he must have used
his said option for the above-indicated purpose, especially as it appears that he was able to secure,
through its use, what he wanted.

Plaintiff's own version of the preliminary conversation he had with defendant is to the effect that
when plaintiff called on the latter, the latter answered, "Well, come back to me when you have the
authority to operate. I am definitely interested in the bottling business." (t.s.n., pp. 60-61). When
after the elections of 1949 plaintiff went to see the defendant (and at the time he had already the
option), he must have exultantly told defendant that he had the authority already. It is improbable
and incredible for him to have disclosed the fact that he had only an option to the exclusive
franchise, which was to last thirty days only, and still more improbable for him to have disclosed
that, at the time of the signing of the formal agreement, his option had already expired. Had he
done so, he would have destroyed all his bargaining power and authority, and in all probability lost
the deal itself.

The trial court reasoned, and the plaintiff on this appeal argues, that plaintiff only undertook in the
agreement "to secure the Mission Dry franchise for and in behalf of the proposed partnership."
The existence of this provision in the final agreement does not militate against plaintiff having
represented that he had the exclusive franchise; it rather strengthens belief that he did actually
make the representation. How could plaintiff assure defendant that he would get the franchise for
the latter if he had not actually obtained it for himself? Defendant would not have gone into the
business unless the franchise was raised in his name, or at least in the name of the partnership.
Plaintiff assured defendant he could get the franchise. Thus, in the draft prepared by defendant's
attorney, Exhibit HH, the above provision is inserted, with the difference that instead of securing
the franchise for the defendant, plaintiff was to secure it for the partnership. To show that the
insertion of the above provision does not eliminate the probability of plaintiff representing himself
as the exclusive grantee of the franchise, the final agreement contains in its third paragraph the
following:

". . . and the manager is ready and willing to allow the capitalists to use the exclusive franchise . . .
.

and in paragraph 11 it also expressly states:

"1. In the event of dissolution or termination of the partnership, . . . the franchise from Mission
Dry Corporation shall be reassigned to the manager."

These statements confirm the conclusion that defendant believed, or was made to believe, the
plaintiff was the grantee of an exclusive franchise. Thus it is that it was also agreed upon that the
franchise was to be transferred to the name of the partnership, and that, upon its dissolution or
termination, the same shall be reassigned to the plaintiff.

Again, the immediate reaction of defendant, when in California he learned that plaintiff did not
have the exclusive franchise, was to reduce, as he himself testified, plaintiff's participation in the
net profits to one half of that agreed upon. He could not have had such a feeling had not plaintiff
actually made him believe that he (plaintiff) was the exclusive grantee of the franchise.

The learned trial judge reasons in his decision that the assistance of counsel in the making of the
contract made fraud improbable. Not necessarily, because the alleged representation took place
before the conferences were had; in other words, plaintiff had already represented to defendant,
and the latter had already believed in, the existence of plaintiff's exclusive franchise before the
formal negotiations, and they were assisted by their lawyers only when said formal negotiations
actually took place. Furthermore, plaintiff's attorney testified that plaintiff had said that he had the
exclusive franchise; and defendant's lawyer testified that plaintiff explained to him, upon being
asked for the franchise, that he had left the papers evidencing it. (t. s. n., p. 266.)

We conclude from all the foregoing that plaintiff did actually represent to defendant that he was
the holder of the exclusive franchise. The defendant was made to believe, and he actually
believed, that plaintiff had the exclusive franchise. Defendant would not perhaps have gone to
California and incurred expenses for the trip, unless he believed that plaintiff did have that
exclusive privilege, and that the latter would be able to get the same from the Mission Dry
Corporation itself. Plaintiff knew what defendant believed about his (plaintiff's) exclusive
franchise, as he induced him to that belief, and he may not be allowed to deny that defendant was
induced by that belief. (IX Wigmore, sec. 2423; Sec. 65, Rule 123, Rules of Court.)

We now come to the legal aspect of the false representation. Does it amount to a fraud that would
vitiate the contract? It must be noted that fraud is manifested in illimitable number of degrees or
gradations, from the innocent praises of a salesman about the excellence of his wares to those
malicious machinations and representations that the law punishes as a crime. In consequence,
article 1270 of the Spanish Civil Code distinguishes two kinds of (civil) fraud, the causal fraud,
which may be a ground for the annulment of a contract, and the incidental deceit, which only
renders the party who employs it liable for damages. This Court has held that in order that fraud
may vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo
incidente), inducement to the making of the contract. (Article 1270, Spanish Civil Code; Hill vs.
Veloso, 31 Phil. 160.) The record abounds with circumstances indicative of the fact that the
principal consideration, the main cause that induced defendant to enter into the partnership
agreement with plaintiff, was the ability of plaintiff to get the exclusive franchise to bottle and
distribute for the defendant or for the partnership. The original draft prepared by defendant's
counsel was to the effect that plaintiff obligated himself to secure a franchise for the defendant.
Correction appears in this same original draft, but the change is made not as to the said obligation
but as to the grantee. In the corrected draft the word "capitalist" (grantee) is changed to
"partnership." The contract in its final form retains the substituted term "partnership." The
defendant was, therefore, led to the belief that plaintiff had the exclusive franchise, but that the
same was to be secured for or transferred to the partnership. The plaintiff no longer had the
exclusive franchise, or the option thereto, at the time the contract was perfected. But while he had
already lost his option thereto (when the contract was entered into), the principal obligation that he
assumed or undertook was to secure said franchise for the partnership, as the bottler and
distributor for the Mission Dry Corporation. We declare, therefore, that if he was guilty of a false
representation, this was not the causal consideration, or the principal inducement, that led plaintiff
to enter into the partnership agreement.

But, on the other hand, this supposed ownership of an exclusive franchise was actually the
consideration or price plaintiff gave in exchange for the share of 30 per cent granted him in the net
profits of the partnership business. Defendant agreed to give plaintiff 30 per cent share in the net
profits because he was transferring his exclusive franchise to the partnership. Thus, in the draft
prepared by plaintiff's lawyer, Exhibit II, the following provision exists:

"3. That the MANAGER, upon the organization of the said corporation, shall forthwith transfer to
the said corporation his exclusive right to bottle Mission products and to sell them throughout the
Philippines. As a consideration for such transfer, the CAPITALIST shall transfer to the Manager
full paid non-assessable shares of the said corporation . . . twenty-five per centum of the capital
stock of the said corporation." (Par. 3, Exhibit II; emphasis ours.)

Plaintiff had never been a bottler or a chemist; he never had experience in the production or
distribution of beverages. As a matter of fact, when the bottling plant was being built, all that he
suggested was about the toilet facilities for the laborers.

We conclude from the above that while the representation that plaintiff had the exclusive franchise
did not vitiate defendant's consent to the contract, it was used by plaintiff to get 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 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 other party's consent to a big share in the
profits, an incidental matter in the agreement.

"El dolo incidental no es el que puede producirse en el cumplimiento del contrato sino que
significa aqui, el que concurriendo en el consentimiento, o precediendolo, no influyo para arrancar
por si solo el consentimiento ni en la totalidad de la obligacion, sino en algun extremo o accidente
de esta, dando lugar tan solo a una accion para reclamar indemnizacion de perjuicios." (8 Manresa
602.)

Having arrived at the conclusion that the agreement may not be declared null and void, the
question that next comes before us is, May the agreement be carried out or executed? We find no
merit in the claim of plaintiff that the partnership was already a fiat accompli from the time of the
operation of the plant, as it is evident from the very language of the agreement that the parties
intended that the execution of the agreement to form a partnership was to be carried out at a later
date. They expressly agreed that they shall form a partnership. (Par. No. 1, Exhibit A.) As a matter
of fact, from the time that the franchise from the Mission Dry Corporation was obtained in
California, plaintiff himself had been demanding that defendant comply with the agreement. And
plaintiff's present action seeks the enforcement of this agreement. Plaintiff's claim, therefore, is
both inconsistent with their intention and incompatible with his own conduct and suit.

As the trial court correctly concluded, the defendant may not be compelled against his will to
carry out the agreement nor execute the partnership papers. Under the Spanish Civil Code, the
defendant has an obligation to do, not to give. The law recognizes the individual's freedom or
liberty to do an act he has promised to do, or not to do it, as he pleases. It falls within what
Spanish commentators call a very personal act (acto personalisimo), of which courts may not
compel compliance, as it is considered an act of violence to do so.

"Efectos de las obligaciones consistentes en hechos personalisimo. Tratamos de la ejecucion de las

obligaciones de hacer en el solo caso de su incumplimiento por parte del deudor, y sean los hechos
personalisimos, ya se hallen en la facultad de un tercero; porque el complimiento espontaneo de
las mismas esta regido por los preceptos relativos al pago, y en nada les afectan las disposiciones
del art. 1.098.

"Esto supuesto, la primera dificultad del asunto consiste en resolver si el deudor puede ser
precisado a realizar el hecho y por que medios.

"Se tiene por corriente entre los autores, y se traslada generalmente sin observacion el pricipio
romano nemo potest precise cogi ad factum. Los que perciben la posibilidad de la destruccion de
este principio, añaden que, aun cuando se pudiera obligar al deudor, no deberia hacerse, porque
esto constituiria una violencia, y no es la violencia modo propio de cumplir las obligaciones
(Bigot, Rolland, etc.). El maestro Antonio Gomez opinaba lo mismo cuando decia que obligar por
la violencia seria infringir la libertad e imponer una especie de esclavitud."
xxx xxx xxx

"En efecto; las obligaciones contractuales no se acomodan bien con el empleo de la fuerza fisica,
no ya precisamente porque se constituya de este modo una especie de esclavitud, segun el dicho
de Antonio Gomez, sino porque se supone que el acreedor tuvo en cuenta el caracter
personalisimo del hecho ofrecido, y calculo sobre la posibilidad de que por alguna razon no se
realizase. Repugna, ademas, a la conciencia social el empleo de la fuerza publica, mediante
coaccion sobre las pesonas, en las relaciones puramente particulares; porque la evolucion de las
ideas ha ido poniendo mas de relieve cada dia el respeto a la personalidad humana, y no se admite
bien la violencia sobre el indivicuo la cual tiene caracter visiblemente penal, sino por motivos que
interesen a la colectividad de ciudadanos. Es, pues, posible y licita esta violencia cuando se trata
de las obligaciones que hemos llamado ex lege, que afectan al orden social y a la entidad de
Estado, y aparecen impuestas sin consideracion a las conveniencias particulares, y sin que por este
motivo puedan tampoco ser modificadas; pero no debe serlo cuando la obligacion reviste un
interes puramente particular, como sucede en las contractuales, y cuando, por consecuencia,
pareceria salirse el Estado de su esfera propia, entrado a dirimir, con apoyo de la fuerza colectiva,
las diferencias producidas entre los ciudadanos. (19 Scaevola 428, 431- 432.)"

The last question for us to decide is that of damages, damages that plaintiff is entitled to receive
because of defendant's refusal to form the partnership, and damages that defendant is also entitled
to collect because of the falsity of plaintiff's representation. (Article 1101, Spanish Civil Code.)
Under article 1106 of the Spanish Civil Code the measure of damages is the actual loss suffered
and the profits reasonably expected to be received, embraced in the terms daño emergente and
lucro cesante. Plaintiff is entitled under the terms of the agreement to 30 per cent of the net profits
of the business. Against this amount of damages, we must set off the damage defendant suffered
by plaintiff's misrepresentation that he had the exclusive franchise, by which misrepresentation he
obtained a very high percentage of share in the profits. We can do no better than follow the
appraisal that the parties themselves had adopted.

When defendant learned in Los Angeles that plaintiff did not have the exclusive franchise which
he pretended he had and which he had agreed to transfer to the partnership, his spontaneous
reaction was to reduce plaintiff's share from 30 per cent to 15 per cent only, to which reduction
defendant appears to have readily given his assent. It was under this understanding, which
amounts to a virtual modification of the contract, that the bottling plant was established and
plaintiff worked as Manager for the first three months. If the contract may not be considered
modified as to plaintiff's share in the profits, by the decision of defendant to reduce the same to
one-half and the assent thereto of plaintiff, then we may consider the said amount as a fair
estimate of the damages plaintiff is entitled to under the principle enunciated in the case of
Varadero de Manila vs. Insular Lumber Co., 46 Phil. 176. Defendant's decision to reduce plaintiff's
share and plaintiff's consent thereto amount to an admission on the part of each of the
reasonableness of this amount as plaintiff's share. This same amount was fixed by the trial court.
The agreement contains the stipulation that upon the termination of the partnership, defendant was
to convey the franchise back to plaintiff (Par. 11, Exhibit A). The judgment of the trial court does
not fix the period within which these damages shall be paid to plaintiff. In view of paragraph 11 of
Exhibit A, we declare that plaintiff's share of 15 per cent of the net profits shall continue to be paid
while defendant uses the franchise from the Mission Dry Corporation.

With the modification above indicated, the judgment appealed from is hereby affirmed. Without
costs.

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

12
||| (Woodhouse v. Halili, G.R. No. L-4811, [July 31, 1953], 93 PHIL 526-542)

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12
56 PHIL 177-181

EN BANC

[G.R. No. 34840. September 23, 1931.]

NARCISO GUTIERREZ, plaintiff-appellee, vs. BONIFACIO GUTIERREZ, MARIA V. DE

GUTIERREZ, MANUEL GUTIERREZ, ABELARDO VELASCO, and SATURNINO CORTEZ,
defendants-appellants.

L. D. Lockwood, for appellants Velasco and Cortez.

San Agustin & Roxas, for other appellants.

Ramon Diokno, for appellee.

SYLLABUS
1. DAMAGES; MASTER AND SERVANT; MOTOR VEHICLES; LIABILITY OF HEAD OF
HOUSE FOR ACTS OF DRIVER WHO IS HIS MINOR CHILD. — The head of a house, the
owner of an automobile, who maintains it for the general use of his family, is liable for its
negligent operation by one of his children, whom he designates or permits to run it, where the car
is occupied and being used at the time of the injury for the pleasure of other members of the
owner's family than the child driving it.

2. ID.; ID.; ID.; ID.; CASE AT BAR. — One G, a passenger in a truck, recovers damages in the
amount of P5,000 from the owner of a private automobile not in the car, the machine being
operated by a son 18 years of age, with other members of the family accommodated therein, and
from the chauffeur and owner of the truck which collided with the private automobile on a bridge,
causing physical injuries to G as a result of the automobile accident.

DECISION

MALCOLM, J p:

This is an action brought by the plaintiff in the Court of First Instance of Manila against the five
defendants, to recover damages in the amount of P10,000, for physical injuries suffered as a result
of an automobile accident. On judgment being rendered as prayed for by the plaintiff, both sets of
defendants appealed.

On February 2, 1930, a passenger truck and an automobile of private ownership collided while
attempting to pass each other on the Talon bridge on the Manila South Road in the municipality of
Las Pinas, Province of Rizal. The truck was driven by the chauffeur Abelardo Velasco, and was
owned by Saturnino Cortez. The automobile was being operated by Bonifacio Gutierrez, a lad 18
years of age, and was owned by Bonifacio's father and mother, Mr. and Mrs. Manuel Gutierrez. At
the time of the collision, the father was not in the car, but the mother, together with several other
members of the Gutierrez family, seven in all, were accommodated therein. A passenger in the
autobus, by the name of Narciso Gutierrez, was en route from San Pablo, Laguna, to Manila. The
collision between the bus and the automobile resulted in Narciso Gutierrez suffering a fractured
right leg which required medical attendance for a considerable period of time, and which even at
the date of the trial appears not to have healed properly.

It is conceded that the collision was caused by negligence pure and simple. The difference
between the parties is that, while the plaintiff blames both sets of defendants, the owner of the
passenger truck blames the automobile, and the owner of the automobile, in turn, blames the truck.
We have given close attention to these highly debatable points, and having done so, a majority of
the court are of the opinion that the findings of the trial judge on all controversial questions of fact
find sufficient support in the record, and so should be maintained. With this general statement set
down, we turn to consider the respective legal obligations of the defendants.

In amplification of so much of the above pronouncement as concerns the Gutierrez family, it may
be explained that the youth Bonifacio was an incompetent chauffeur, that he was driving at an
excessive rate of speed, and that, on approaching the bridge and the truck, he lost his head and so
contributed by his negligence to the accident. The guaranty given by the father at the time the son
was granted a license to operate motor vehicles made the father responsible for the acts of his son.
Based on these facts, pursuant to the provisions of article 1903 of the Civil Code, the father alone
and not the minor or the mother, would be liable for the damages caused by the minor.

We are here dealing with the civil law liability of parties for obligations which arise from fault or
negligence. At the same time, we believe that, as has been done in other cases, we can take
cognizance of the common law rule on the same subject. In the United States, it is uniformly held
that the head of a house, the owner of an automobile, who maintains it for the general use of his
family is liable for its negligent operation by one of his children, whom he designates or permits to
run it, where the car is occupied and being used at the time of the injury for the pleasure of other
members of the owner's family than the child driving it. The theory of the law is that the running
of the machine by a child to carry other members of the family is within the scope of the owner's
business, so that he is liable for the negligence of the child because of the relationship of master
and servant. (Huddy On Automobiles, 6th ed., sec. 660; Missell vs. Hayes [1914], 91 Alt., 322.)

The liability of Saturnino Cortez, the owner of the truck, and of his chauffeur Abelardo Velasco
rests on a different basis, namely, that of contract which, we think, has been sufficiently
demonstrated by the allegations of the complaint, not controverted, and the evidence. The reason
for this conclusion reaches to the findings of the trial court concerning the position of the truck on
the bridge, the speed in operating the machine, and the lack of care employed by the chauffeur.
While these facts are not as clearly evidenced as are those which convict the other defendant, we
nevertheless hesitate to disregard the points emphasized by the trial judge. In its broader aspects,
the case is one of two drivers approaching a narrow bridge from opposite directions, with neither
being willing to slow up and give the right of way to the other, with the inevitable result of a
collision and an accident.

The defendants Velasco and Cortez further contend that there existed contributory negligence on
the part of the plaintiff, consisting principally of his keeping his foot outside the truck, which
occasioned his injury. In this connection, it is sufficient to state that, aside from the fact that the
defense of contributory negligence was not pleaded, the evidence bearing out this theory of the
case is contradictory in the extreme and leads us far afield into speculative matters.

The last subject for consideration relates to the amount of the award. The appellee suggests that
the amount could justly be raised to P16,517, but naturally is not serious in asking for this sum,
since no appeal was taken by him from the judgment. The other parties unit in challenging the
award of P10,000, as excessive. All facts considered, including actual expenditures and damages
for the injury to the leg of the plaintiff, which may cause him permanent lameness, in connection
with other adjudications of this court, lead us to conclude that a total sum for the plaintiff of
P5,000 would be fair and reasonable. The difficulty in approximating the damages by monetary
compensation is well elucidated by the divergence of opinion among the members of the court,
three of whom have inclined to the view that P3,000 would be amply sufficient, while a fourth
member has argued that P7,500 would be none too much.

In consonance with the foregoing rulings, the judgment appealed from will be modified, and the
plaintiff will have judgment in his favor against the defendants Manuel Gutierrez, Abelardo
Velasco, and Saturnino Cortez, jointly and severally, for the sum of P5,000, and the costs of both
instances.

Avancena, C.J., Johnson, Street, Villamor, Ostrand, Romualdez and Imperial, JJ., concur.

Villa-Real, J., I vote for an indemnity of P7,500.

12
||| (Gutierrez v. Gutierrez, G.R. No. 34840, [September 23, 1931], 56 PHIL 177-181)

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74 PHIL 560-570

FIRST DIVISION

[G.R. No. 48930. February 23, 1944.]

ANTONIO VAZQUEZ, petitioner, vs. FRANCISCO DE BORJA, respondent.

[G.R. No. 48931. February 23, 1944.]

FRANCISCO DE BORJA, petitioner, vs. ANTONIO VAZQUEZ, respondent.

SYLLABUS

1. CORPORATIONS; OFFICERS' PERSONAL LIABILITY ON CONTRACTS. — It is well

known that a corporation is an artificial being invested by law with a personality of its own,
separate and distinct from that of its stockholders and from that of its officers who manage and run
its affairs. The mere fact that its personality is owing to a legal fiction and that it necessarily has to
act thru its agents, does not make the latter personally liable on a contract duly entered into, or for
an act lawfully performed, by them for and in its behalf. The legal fiction by which the personality
of a corporation is created is a practical reality and necessity. Without it no corporate entities may
exist and no corporate business may be transacted. Such legal fiction may be disregarded only
when an attempt is made to use it as a cloak to hide an unlawful or fraudulent purpose. No such
thing has been alleged or proven in this case. It has not been alleged nor even intimated that
Vazquez personally benefited by the contract of sale in question and that he is merely invoking the
legal fiction to avoid personal liability. Neither is it contended that he entered into said contract for
the corporation in bad faith and with intent to defraud the plaintiff. We find no legal and factual
basis upon which to hold him liable on the contract either principally or subsidiarily.

2. ID.; ID.; NEGLIGENCE. — The trial court found him guilty of negligence in the performance
of the contract and held him personally liable on that account. On the other hand, the Court of
Appeals found that he "no solamente obro con negligencia, sino interviniendo culpa de su parte,
por lo que de acuerdo con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser responsable
subsidiariamente del pago de la cantidad objeto de la demanda." We think both the trial court and
the Court of Appeals erred in law in so holding. They have manifestly failed to distinguish a
contractual from an extracontractual obligation, or an obligation arising from contract from an
obligation arising from culpa aquiliana. The fault and negligence referred to in articles 1101-1104
of the Civil Code are those incidental to the fulfillment or nonfulfillment of a contractual
obligation; while the fault or negligence referred to in article 1902 is the culpa aquiliana of the
civil law, homologous but not identical to tort of the common law, which gives rise to an
obligation independently of any contract. (Cf. Manila R. R. Co. vs. Cia. Trasatlantica, 38 Phil.,
875, 887-890; Cangco vs. Manila R. R. Co., 38 Phil., 768.) The fact that the corporation, acting
thru Vazquez as its manager, was guilty of negligence in the fulfillment of the contract, did not
make Vazquez principally or even subsidiarily liable for such negligence. Since it was the
corporation's contract, its nonfulfillment, whether due to negligence or fault or to any other cause,
made the corporation and not its agent liable.

3. ID.; ID.; ID. — On the other hand, independently of the contract Vazquez by his fault or
negligence caused damage to the plaintiff, he would be liable to the latter under article 1902 of the
Civil Code. But then the plaintiff's cause of action should be based on culpa aquiliana and not on
the contract alleged in his complaint herein; and Vazquez' liability would be principal and not
merely subsidiary, as the Court of Appeals has erroneously held.

4. ID.; ID.; ID.; NO CAUSE OF ACTION BASED ON "CULPA AQUILIANA" ALLEGED IN

COMPLAINT OR LITIGATED IN TRIAL COURT; NO JURISDICTION OVER THE ISSUE. —
No such cause of action was alleged in the complaint or tried by express or implied consent of the
parties by virtue of section 4 of Rule 17. Hence the trial court had no jurisdiction over the issue
and could not adjudicate upon it. (Reyes vs. Diaz, G. R. No. 48754.) Consequently it was error for
the Court of Appeals to remand the case to the trial court to try and decide such issue.
DECISION

OZAETA, J p:

This action was commenced in the Court of First Instance of Manila by Francisco de Borja against
Antonio Vazquez and Fernando Busuego to recover from them jointly and severally the total sum
of P4,702.70 upon three alleged causes of action, to wit: First, that in or about the month of
January, 1932, the defendants jointly and severally obligated themselves to sell to the plaintiff
4,000 cavans of palay at P2.10 per cavan, to be delivered during the month of February, 1932, the
said defendants having subsequently received from the plaintiff in virtue of said agreement the
sum of P8,400; that the defendants delivered to the plaintiff during the months of February,
March, and April, 1932, only 2,488 cavans of palay of the value of P5,224.80 and refused to
deliver the balance of 1,512 cavans of the value of P3,175.20 notwithstanding repeated demands.
Second, that because of defendants' refusal to deliver to the plaintiff the said 1,512 cavans of palay
within the period above mentioned, the plaintiff suffered damages in the sum of P1,000. And,
third, that on account of the agreement above mentioned the plaintiff delivered to the defendants
4,000 empty sacks, of which they returned to the plaintiff only 2,490 and refused to deliver to the
plaintiff the balance of 1,510 sacks or to pay their value amounting to P377.50; and that on
account of such refusal the plaintiff suffered damages in the sum of P150.

The defendant Antonio Vazquez answered the complaint, denying having entered into the contract
mentioned in the first cause of action in his own individual and personal capacity, either solely or
together with his codefendant Fernando Busuego, and alleging that the agreement for the purchase
of 4,000 cavans of palay and the payment of the price of P8,400 were made by the plaintiff with
and to the Natividad-Vazquez Sabani Development Co., Inc., a corporation organized and existing
under the laws of the Philippines, of which the defendant Antonio Vazquez was the acting
manager at the time the transaction took place. By way of counterclaim, the said defendant alleged
that he suffered damages in the sum of P1,000 on account of the filing of this action against him
by the plaintiff with full knowledge that the said defendant had nothing to do whatever with any
and all of the transactions mentioned in the complaint in his own individual and personal capacity.

The trial court rendered judgment ordering the defendant Antonio Vazquez to pay to the plaintiff
the sum of P3,175.20 plus the sum of P377.50, with legal interest on both sums, and absolving the
defendant Fernando Busuego (treasurer of the corporation) from the complaint and the plaintiff
from the defendant Antonio Vazquez' counterclaim. Upon appeal to the Court of Appeals, the latter
modified that judgment by reducing it to the total sum of P3,314.78, with legal interest thereon
and the costs. But by a subsequent resolution upon the defendant's motion for reconsideration, the
Court of Appeals set aside its judgment and ordered that the case be remanded to the court of
origin for further proceedings. The defendant Vazquez, not being agreeable to that result, filed the
present petition for certiorari (G.R. No. 48930) to review and reverse the judgment of the Court of
Appeals; and the plaintiff Francisco de Borja, excepting to the resolution of the Court of Appeals
whereby its original judgment was set aside and the case was ordered remanded to the court of
origin for further proceedings, filed a cross-petition for certiorari (G.R. No. 48931) to maintain the
original judgment of the Court of Appeals.

The original decision of the Court of Appeals and its subsequent resolutions on reconsideration
read as follows:

"Es hecho no controvertido que el 25 de Febrero de 1932, el demandado-apelante vendio al

demandante 4,000 cavanes de palay al precio de P2.10 el cavan, de los cuales, dicho demandante
solamente recibio 2,583 cavanes; y que asimismo recibio para su envase 4,000 sacos vacios. Esta
probado que de dichos 4,000 sacos vacios solamente se entregaron, 2,583 quedando en poder del
demandado el resto, y cuyo valor es el de P0.24 cada uno. Presentada la demanda contra los
demandados Antonio Vazquez y Fernando Busuego para el pago de la cantidad de P4,702.70, con
sus intereses legales desde el 1.0 de marzo de 1932 hasta su completeo pago y las costas, el
Juzgado de Primera Instancia de Manila fallo el asunto condenando a Antonio Vazquez a pagar al
demandante la cantidad de P3,175.20, mas la cantidad de P377.50, con sus intereses legales,
absolviendo al demandado Fernando Busuego de la demanda y al demandante de la reconvencion
de los demandados, sin especial pronunciamiento en cuanto a las costas. De dicha decision apelo
el demandado Antonio Vazquez, apuntando como principal error el de que el habia sido condenado
personalmente, y no la corporacion por el representada.

"Segun la preponderancia de las pruebas, la venta hecha por Antonio Vazquez a favor de Francisco
de Borja de los 4,000 cavanes de palay fue en su capacidad de Presidente interino y Manager de la
corporacion Natividad-Vazquez Sabani Development Co., Inc. Asi resulta del Exh. 1, que es la
copia al carbon del recibo otorgado por el demandado Vazquez, y cuyo original lo habia perdido el
demandante, segun el. Asi tambien consta en los libros de la corporacion arriba mencionada,
puesto que en los mismos se ha asentado tanto la entrada de los P8,400, precio del palay, como su
envio al gobierno en pago de los alquileres de la Hacienda Sabani. Asi mismo lo admitio
Francisco de Borja al abogado Sr. Jacinto Tomacruz, posterior presidente de la corporacion
sucesora en el arrendamiento de la Sabani Estate, cuando el solicito sus buenos oficios para el
cobro del precio del palay no entregado. Asi igualmente lo declaro el que hizo entrega de parte del
palay a Borja, Felipe Veneracion, cuyo testimonio no ha sido refutado. Y asi se deduce de la
misma demanda, cuando se incluyo en ella a Fernando Busuego, tesorero de la Natividad-Vazquez
Sabani Development Co., Inc.

"Siendo esto asi, la principal responsable debe ser la Natividad- Vazquez Sabani Development
Co., Inc., que quedo insolvente y dejo de existir. El Juez sentenciador declaro, sin embargo, al
demandado Vazquez responsable del pago de la cantidad reclamada por su negligencia al vender
los referidos 4,000 cavanes de palay sin averiguar antes si o no dicha cantidad existia en las
bodegas de la corporacion.

"Resulta del Exh. 8 que despues de la venta de los 4,000 cavanes de palay a Francisco de Borja, el
mismo demandado vendio a Kwong Ah Phoy 1,500 cavanes al precio de P2.00 el cavan, y
decimos 'despues' porque esta ultima venta aparece asentada despues de la primera. Segun esto, el
apelante no solamente obro con negligencia, sino interviniendo culpa de su parte, por lo que de
acuerdo con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser responsable
subsidiariamente del pago de la cantidad objeto de la demanda.

"En meritos de todo lo expuesto, se confirma la decision apelada con la modificacion de que el
apelante debe pagar al apelado la suma de P2,975.70 como valor de los 1,417 cavanes de palay
que dejo de entregar al demandante, mas la suma de P339.08 como importe de los 1,417 sacos
vacios, que dejo de devolver, a razon de P0.24 el saco, total P3,314.78, con sus intereses legales
desde la interposicion de la demanda y las costas de ambas instancias."

"Vista la mocion de reconsideracion de nuestra decision de fecha 13 de Octubre de 1942, y

alegandose en la misma que cuando el apelante vendio los 1,500 cavanes de palay a Ah Phoy, la
corporacion todavia tenia bastante existencia de dicho grano, y no estando dicho extremo
suficientemente discutido y probado, y pudiendo variar el resultado del asunto, dejamos sin efecto
nuestra citada decision, y ordenamos la devolucion de la causa al Juzgado de origen para que
reciba pruebas al efecto y dicte despues la decision correspondiente."

"Upon consideration of the motion of the attorney for the plaintiff-appellee in case CA-G.R. No.
8676, Francisco de Borja vs. Antonio Vazquez et al., praying, for the reasons therein given, that
the resolution of December 22, 1942, be reconsidered: Considering that said resolution remanding
the case to the lower court is for the benefit of the plaintiff-appellee to afford him opportunity to
refute the contention of the defendant-appellant Antonio Vazquez, motion denied."

The action is on a contract, and the only issue pleaded and tried is whether the plaintiff entered
into the contract with the defendant Antonio Vazquez in his personal capacity or as manager of the
Natividad-Vazquez Sabani Development Co., Inc. The Court of Appeals found that according to
the preponderance of the evidence "the sale made by Antonio Vazquez in favor of Francisco de
Borja of 4,000 cavans of palay was in his capacity as acting president and manager of the
corporation Natividad-Vazquez Sabani Development Co., Inc." That finding of fact is final and, it
resolving the only issue involved, should be determinative of the result.

The Court of Appeals doubly erred in ordering that the cause be remanded to the court of origin
for further trial to determine whether the corporation had sufficient stock of palay at the time
appellant sold 1,500 cavans of palay to Kwong Ah Phoy. First, if that point was material to the
issue, it should have been proven during the trial; and the statement of the court that it had not
been sufficiently discussed and proven was no justification for ordering a new trial, which, by the
way, neither party had solicited but against which, on the contrary, both parties now vehemently
protest. Second, the point is, in any event, beside the issue, and this we shall now discuss in
connection with the original judgment of the Court of Appeals which the plaintiff cross-petitioner
seeks to maintain.

The action being on a contract, and it appearing from the preponderance of the evidence that the
party liable on the contract is the Natividad-Vazquez Sabani Development Co., Inc., which is not a
party herein, the complaint should have been dismissed. Counsel for the plaintiff, in his brief as
respondent, argues that altho by the preponderance of the evidence the trial court and the Court of
Appeals found that Vazquez celebrated the contract in his capacity as acting president of the
corporation and altho it was the latter, thru Vazquez, with which the plaintiff had contracted and
which, thru Vazquez, had received the sum of P8,400 from Borja, and altho that was true from the
point of view of a legal fiction, "ello no impide que tambien sea verdad lo alegado en la demanda
de que la persona de Vazquez fue la que contrato con Borja y que la misma persona de Vazquez
fue quien recibio la suma de P8,400." But such argument is invalid and insufficient to show that
the president of the corporation is personally liable on the contract duly and lawfully entered into
by him in its behalf.

It is well known that a corporation is an artificial being invested by law with a personality of its
own, separate and distinct from that of its stockholders and from that of its officers who manage
and run its affairs. The mere fact that its personality is owing to a legal fiction and that it
necessarily has to act thru its agents, does not make the latter personally liable on a contract duly
entered into, or for an act lawfully performed, by them for and in its behalf. The legal fiction by
which the personality of a corporation is created is a practical reality and necessity. Without it no
corporate entities may exist and no corporate business may be transacted. Such legal fiction may
be disregarded only when an attempt is made to use it as a cloak to hide an unlawful or fraudulent
purpose. No such thing has been alleged or proven in this case. It has not been alleged nor even
intimated that Vazquez personally benefited by the contract of sale in question and that he is
merely invoking the legal fiction to avoid personal liability. Neither is it contended that he entered
into said contract for the corporation in bad faith and with intent to defraud the plaintiff. We find
no legal and factual basis upon which to hold him liable on the contract either principally or
subsidiarily.

The trial court found him guilty of negligence in the performance of the contract and held him
personally liable on that account. On the other hand, the Court of Appeals found that he "no
solamente obro con negligencia, sino interviniendo culpa de su parte, por lo que de acuerdo con
los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser responsable subsidiariamente del pago de
la cantidad objeto de la demanda." We think both the trial court and the Court of Appeals erred in
law in so holding. They have manifestly failed to distinguish a contractual from an
extracontractual obligation, or an obligation arising from contract from an obligation arising from
culpa aquiliana. The fault and negligence referred to in articles 1101-1104 of the Civil Code are
those incidental to the fulfillment or nonfulfillment of a contractual obligation; while the fault or
negligence referred to in article 1902 is the culpa aquiliana of the civil law, homologous but not
identical to tort of the common law, which gives rise to an obligation independently of any
contract. (Cf. Manila R. R. Co. vs. Cia. Trasatlantica, 38 Phil., 875, 887-890; Cangco vs. Manila
R. R. Co., 38 Phil., 768.) The fact that the corporation, acting thru Vazquez as its manager, was
guilty of negligence in the fulfillment of the contract, did not make Vazquez principally or even
subsidiarily liable for such negligence. Since it was the corporation's contract, its nonfulfillment,
whether due to negligence or fault or to any other cause, made the corporation and not its agent
liable.

On the other hand, if independently of the contract Vazquez by his fault or negligence caused
damage to the plaintiff, he would be liable to the latter under article 1902 of the Civil Code. But
then the plaintiff's cause of action should be based on culpa aquiliana and not on the contract
alleged in his complaint herein; and Vazquez' liability would be principal and not merely
subsidiary, as the Court of Appeals has erroneously held. No such cause of action was alleged in
the complaint or tried by express or implied consent of the parties by virtue of section 4 of Rule
17. Hence the trial court had no jurisdiction over the issue and could not adjudicate upon it.
(Reyes vs. Diaz, G. R. No. 48754.) Consequently it was error for the Court of Appeals to remand
the case to the trial court to try and decide such issue.

It only remains for us to consider petitioner's second assignment of error referring to the lower
courts' refusal to entertain his counterclaim for damages against the respondent Borja arising from
the bringing of this action. The lower courts having sustained plaintiff's action, they naturally
could not have entertained defendant's counterclaim for damages on account of the bringing of the
action. The finding of the Court of Appeals that according to the preponderance of the evidence
the defendant Vazquez celebrated the contract not in his personal capacity but as acting president
and manager of the corporation, does not warrant his contention that the suit against him is
malicious and tortious; and since we have to decide defendant's counterclaim upon the facts found
by the Court of Appeals, we find no sufficient basis upon which to sustain said counterclaim.
Indeed, we feel that as a matter of moral justice we ought to state here that the indignant attitude
adopted by the defendant towards the plaintiff for having brought this action against him is in our
estimation not wholly right. Altho from the legal point of view he was not personally liable for the
fulfillment of the contract entered into by him on behalf of the corporation of which he was the
acting president and manager, we think it was his moral duty towards the party with whom he
contracted in said capacity to see to it that the corporation represented by him fulfilled the contract
by delivering the palay it had sold, the price of which it had already received. Recreant to such
duty as a moral person, he has no legitimate cause for indignation. We feel that under the
circumstances he not only has no cause of action against the plaintiff for damages but is not even
entitled to costs.

The judgment of the Court of Appeals is reversed, and the complaint is hereby dismissed, without
any finding as to costs.

Yulo, C.J., Moran, Horrilleno, and Bocobo, JJ., concur.

Separate Opinions

PARAS, J., dissenting:

Upon the facts of this case as expressly or impliedly admitted in the majority opinion, the plaintiff
is entitled to a judgment against the defendant. The latter, as acting president and manager of
Natividad-Vazquez Sabani Development Co., Inc., and with full knowledge of the then insolvent
status of his company, agreed to sell to the plaintiff 4,000 cavans of palay. Notwithstanding the
receipt from the plaintiff of the full purchase price, the defendant delivered only 2,488 cavans and
failed and refused to deliver the remaining 1,512 cavans and a quantity of empty sacks, or their
value. Such failure resulted, according to the Court of First Instance of Manila and the Court of
Appeals, from his fault or negligence.

It is true that the cause of action made out by the complaint is technically based on a contract
between the plaintiff and Natividad- Vazquez Sabani Development Co., Inc., which is not a party
to this case. Nevertheless, inasmuch as it was proven at the trial that the defendant was guilty of
fault in that he prevented the performance of the plaintiff's contract and also of negligence
bordering on fraud which caused damage to the plaintiff, the error of procedure should not be a
hindrance to the rendition of a decision in accordance with the evidence actually introduced by the
parties, especially when in such a situation we may order the necessary amendment of the
pleadings, or even consider them correspondingly amended.

As already stated, the corporation of which the defendant was acting president and manager was,
at the time he made the sale to the plaintiff, known to him to be insolvent. As a matter of fact, said
corporation was soon thereafter dissolved. There is admitted damage on the part of the plaintiff,
proven to have been inflicted by reason of the fault or negligence of the defendant. In the interest
of simple justice and to avoid multiplicity of suits I am therefore impelled to consider the present
action as one based on fault or negligence and to sentence the defendant accordingly. Otherwise,
he would be allowed to profit by his own wrong under the protective cover of the corporate
existence of the company he represented. It cannot be pretended that any advantage under the sale
inured to the benefit of Natividad-Vazquez Sabani Development Co., Inc., and not of the
defendant personally, since the latter undoubtedly owned a considerable part of its capital.

||| (Vazquez v. De Borja, G.R. No. 48930, 48931, [February 23, 1944], 74 PHIL 560-570)

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JURISPRUDENCE Jurisprudences icon 120x120
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2
40 PHIL 706-717

FIRST DIVISION
[G.R. No. 14335. January 28, 1920.]

MANUEL DE GUIA, plaintiff-appellant, vs. THE MANILA ELECTIC RAILROAD & LIGHT
COMPANY, defendant-appellant.

Sumulong & Estrada, Crossfield & O'Brien and Francisco A. Delgado for plaintiff-appellant.

Lawrence & Ross for defendant-appellant.

SYLLABUS

1. CONTRACTS; NEGLIGENT PERFORMANCE; POWER OF COURT TO MODERATE

LIABILITY. — In determining the extent of liability for losses or damages resulting from
negligence in the fulfillment of a contractual obligation the courts have a discretionary power to
moderate liability according to the circumstances.

2. CARRIERS; CARRIAGE OF PASSENGERS FOR HIRE; CONTRACTUAL OBLIGATION

OF CARRIER. — The obligation assumed by a street-railway company, engaged in the
transportation of passengers for hire, towards a person who embarks for conveyance in one of its
coaches, is of a contractual nature; and the company is bound to convey its passengers safely and
securely with reference to the degree of care required by law and custom applicable to the case.

3. ID., ID.; ID.; LIABILITY OF CARRIER FOR NEGLIGENCE OF EMPLOYEE. — Upon

failure to comply with this obligation the carrier incurs the liability commonly incident to the
breach of contractual obligations; and where the delinquency is due to the negligence if its
employee, the carrier cannot avail itself of the defense that it had exercised due care in the
selection and instruction of such employee and that he was in fact an experienced and reliable
servant.

4. ID.; ID.; ID.; EXTENT OF CARRIER S LIABILITY FOR LOSSES AND DAMAGES; GOOD
FAITH. — A street-railway company which has exercised due care in the selection and instruction
of the motorman upon one of its cars should be considered a debtor in good faith as regards
liability towards a passenger who is injured by the negligence of the motorman in directing the
car; and the liability of the carrier to the injured party extends to such losses and damages only as
could be reasonably foreseen as a probable consequence of the physical injuries inflicted upon the
passenger and which are in fact a necessary result of those injuries.

5. PHYSICAL INJURIES; DAMAGES; EXPENSES OF MEDICAL SERVICE. — A person who

is entitled to recover expenses of cure as an item of damage in a civil action for physical injuries
cannot recover doctor's bills for services gratuitously rendered; and the claim must furthermore be
limited to medical services reasonably suited to the case. Charges of professional experts retained
merely with a view to promote the success of the action for damages should not be allowed.

DECISION
STREET, J p:

This is an appeal prosecuted both by the plaintiff and the defendant from a judgment of the Court
of First Instance of the City of Manila, whereby the plaintiff was awarded the sum of P6,100, with
interest and costs, as damages incurred by him in consequence of physical injuries sustained while
riding on one of the defendant's car.

The accident which gave rise to the litigation occurred on September 4, 1915, near the end of the
street-car line in Caloocan, Rizal, a northern suburb of the city of Manila. It appears that, at about
8 o'clock p. m., of the date mentioned, the plaintiff Manuel de Guia, a physician residing in
Caloocan, boarded a car at the end of the line with the intention of coming to the city. At about 30
meters from the starting point the car entered a switch, the plaintiff remaining on the back
platform holding the handle of the right-hand door. Upon coming out of the switch, the small
wheels of the rear truck left the track, ran for a short distance along the macadam filling, which
was flush with the rails, and struck a concrete post at the left of the track. The post was shattered;
and as the car stopped the plaintiff was thrown against the door with some violence, receiving
bruises and possibly certain internal injuries, the extent of which is a subject of dispute.

The trial court found that the motorman of the derailed car was negligent in having maintained too
rapid a speed. This inference appears to be based chiefly upon the results of the shock, involving
the shattering of the post and the bending of the kingpost of the car. It is insisted for the defendant
company that the derailment was due to the presence of a stone, somewhat larger than a goose
egg, which had become accidentally lodged between the rails at the juncture of the switch and
which was unobserved by the motorman. In this view the derailment of the car is supposed to be
due to casus fortuitos and not chargeable to the negligence of the motorman.

Even supposing that the derailment of the car was due to the accidental presence of such a stone as
suggested, we do not think that the existence of negligence is disproved. The motorman says that
upon approaching the switch he reduced the electrical energy to the point that the car barely
entered the switch under its own momentum, and this operation was repeated as he passed out.
Upon getting again on the straight track he put the control successively at points one, two, three
and lastly at point four. At the moment when the control was placed at point four he perceived that
the rear wheels were derailed and applied the brake; but at the same instant the car struck the post,
some 40 meters distant from the exit of the switch. One of the defendant's witnesses stated in court
that the rate of a car propelled by electricity with the control at point "four" should be about five or
6 miles per hour. There was some other evidence to the effect that the car was behind schedule
time and that it was being driven, after leaving the switch, at a higher I ate than would ordinarily
be indicated by the control at point four. This inference is rendered more tenable by the
circumstance that the car was practically empty. On the whole, we are of the opinion that the
finding of negligence in the operation of the car must be sustained, as not being clearly contrary to
the evidence; not so much because of excessive speed as because of the distance which the car
was allowed to run with the front wheels of the rear truck derailed. It seems to us that an
experienced and attentive motorman should have discovered that something was wrong and would
have stopped before he had driven the car over the entire distance from the point where the wheels
left the track to the place where the post was struck.

The conclusion being accepted that there was negligence on the part of the motorman in driving
the car, it results that the company is liable for the damage resulting to the plaintiff as a
consequence of that negligence. The plaintiff had boarded the car as a passenger for the city of
Manila and the company undertook to convey him for hire. The relation between the parties was,
therefore, of a contractual nature, and the duty of the carrier is to be determined with reference to
the principles of contract law, that is, the company was bound to convey and deliver the plaintiff
safely and securely with reference to the degree of care which, under the circumstances, is
required by law and custom applicable to the case (art. 1258, Civil Code). Upon failure to comply
with that obligation the company incurred the liability defined in articles 1103-1107 of the Civil
Code. (Cangco vs. Manila Railroad Company, 38 Phil. Rep., 768; Manila Railroad Company vs.
Compañia Trasatlantica, and Atlantic, Gulf & Pacific Co., 38 Phil. Rep., 875.)

From the nature of the liability thus incurred, it is clear that the defendant company can not avail
itself of the last paragraph of article 1903 of the Civil Code, since that provision has reference to
liability incurred by negligence in the absence of contractual relation, that is, to the culpa aquiliana
of the civil law. It was therefore irrelevant for the defendant company to prove, as it did, that the
company had exercised due care in the selection and instruction of the motorman who was in
charge of its car and that he was in fact an experienced and reliable servant.

At this point, however, it should be observed that although in case like this the defendant must
answer for the consequences of the negligence of its employee, the court has the power to
moderate liability according to the circumstances of the case (art. 1103, Civ. Code) . Furthermore,
we think it obvious that an employer who has in fact displayed due diligence in choosing and
instructing his servants is entitled to be considered a debtor in good faith, within the meaning of
article 1107 of the same Code. Construing these two provisions together, and applying them to the
facts of this case, it results that the defendant's liability is limited to such damages as might, at the
time of the accident, have been reasonably foreseen as a probable consequence of the physical
injuries inflicted upon the plaintiff and which were in fact a necessary result of those injuries.
There is nothing novel in this proposition, since both the civil and the common law are agreed
upon the point that the damages ordinarily recoverable for the breach of a contractual obligation,
against a person who has acted in good faith, are such as can reasonably be foreseen at the time
the obligation is contracted. In Daywalt vs. Corporacion de PP. Agustinos Recoletos (39 Phil.,
687), we said: "The extent of the liability for the breach of a contract must be determined in the
light of the situation in existence at the time the contract is made; and the damages ordinarily
recoverable are in all events limited to such as might be reasonably foreseen in the light of the
facts then known to the contracting parties."

This brings us to consider the amount which may be awarded to the plaintiff as damages. Upon
this point the trial judge found that, as a result of the physical and nervous derangement resulting
from the accident, Dr. De Guia was unable properly to attend to his professional labors for three
months and suspended his practice for that period. It was also proved by the testimony of the
plaintiff that his customary income, as a physician, was about P300 per month. The trial judge
accordingly allowed P900, as damages for loss of professional earnings. This allowance is
attacked upon appeal by the defendant as excessive both as to the period and rate of allowance.
Upon examining the evidence we fell disinclined to disturb this part of the judgment, though it
must be conceded that the estimate of the trial judge on this point was liberal enough to the
plaintiff.

Another item allowed by the trial judge consists of P3,900, which the plaintiff is supposed to have
lost by reason of his inability to accept a position as district health officer in Occidental Negros. It
appears in this connection that Mr. Alunan, representative from Occidental Negros, had asked Dr.
Montinola, who supposedly had the authority to make the appointment, to nominate the plaintiff to
such position. The job was supposed to be good for two years, with a salary of P1,600 per annum,
and possibility of outside practice worth P350. Accepting these suggestions as true, it is evident
that the damages thus incurred are too speculative to be the basis of recovery in a civil action. This
element of damages must therefore be eliminated. It goes without saying that damage of this
character could not, at. the time of the accident, have been foreseen by the delinquent party as a
probable consequence of the injury inflicted — a circumstance which makes applicable article
1107 of the Civil Code, as already expounded.

The last element of damages to be considered is the item of the plaintiff's doctor's bills, a subject
which we momentarily pass for discussion further on, since the controversy on this point can be
more readily understood in connection with the question raised by the plaintiff's appeal.

The plaintiff alleges in the complaint that the damages incurred by him as a result of the injuries in
question ascend to the amount of P40,000. Of this amount the sum of P10,000 is supposed to
represent the cost of medical treatment and other expenses incident to the plaintiff's cure, while the
remainder (P30,000) represents the damage resulting from the character of his injuries, which are
supposedly such as to incapacitate him for the exercise of the medical profession in the future. In
support of these claims the plaintiff introduced evidence, consisting of his own testimony and that
of numerous medical experts, tending to show that as a result of the injuries in question he had
developed infarct of the liver and traumatic neurosis, accompanied by nervousness, vertigo, and
other disturbing symptoms of a serious and permanent character, it being claimed that these
manifestations of disorder rendered him liable to a host of other dangerous diseases, such as
pleuresy, tuberculosis, pneumonia, and pulmonary gangrene, and that restoration to health could
only be accomplished, if at all, after long years of complete repose. The trial judge did not take
these pretensions very seriously, and, as already stated, limited the damages to the three items of
professional earnings, expenses of medical treatment, and the loss of the appointment as medical
inspector in Occidental Negros. As the appeal of the plaintiff opens the whole case upon the
question of damages, it is desirable to present a somewhat fuller statement than that already given
with respect to extent and character of the injuries in question.

The plaintiff testified that, at the time the car struck against the concrete post, he was standing on
the rear platform, grasping the handle of the right-hand door. The shock of the impact threw him
forward, and the left part of his chest struck against the door causing him to fall. In falling, the
plaintiff says, his head struck one of the seats and he became unconscious. He was presently taken
to his home which was only a short distance away, where he was seen at about 10 o'clock p. m., by
a physician in the employment of the defendant company. This physician says that the plaintiff
was then walking about and apparently suffering somewhat from bruises on his chest. He said
nothing about his head being injured and refused to go to a hospital. Later, during the same night
Dr. Carmelo Basa was called in to see the plaintiff. This physician says that he found Doctor De
Guia lying in bed and complaining of a severe pain in the side. During the visit of Doctor Basa the
plaintiff several times spit up blood, a manifestation no doubt due to the effects of the bruises
received in his side. The next day Doctor De Guia went into Manila to consult another physician,
Doctor Miciano, and during the course of a few weeks he called into consultation other doctors
who were introduced as witnesses in his behalf at the trial of this case. According to the testimony
of these witnesses, as well as that of the plaintiff himself, the symptoms of physical and nervous
derangement in the plaintiff speedily developed in portentous degree.

Other experts were introduced by the defendant whose testimony tended to show that the
plaintiff's injuries, considered in their physical effects, were trivial and that the attendant nervous
derangement, with its complicated train of ailments, was merely simulated.

Upon this question the opposing medical experts ventilated a considerable mass of professional
learning with reference to the nature and effects of the baffling disease known as traumatic
neurosis, or traumatic hysteria — a topic which has been the occasion of much controversy in
actions of this character in the tribunals of Europe and America. The subject is one of considerable
interest from a medico-legal point of view, but we deem it unnecessary in this opinion to enter
upon a discussion of its voluminous literature. It is enough to say that in our opinion the plaintiff's
case for large damages in respect to his supposed incapacitation for future professional practice is
not made out. Of course in this jurisdiction damages can not be assessed in favor of the plaintiff as
compensation for the physical or mental pain which he may have endured (Marcelo vs. Velasco,
11 Phil. Rep., 287); and the evidence relating to the injuries, both external and internal, received
by him must be examined chiefly in its bearing upon his material welfare, that is, in its results
upon his earning capacity and the expenses incurred in restoration to the usual condition of health.

The evidence before us shows that immediately after the accident in question Doctor De Guia,
sensing in the situation a possibility of profit, devoted himself with great assiduity to the
promotion of this litigation; and with the aid of his own professional knowledge, supplemented by
suggestions obtained from his professional friends and associates, he enveloped himself more or
less unconsciously in an atmosphere of delusion which rendered him incapable of appreciating at
their true value the symptoms of disorder which he developed. The trial court was in our opinion
fully justified in rejecting the exaggerated estimate of damages thus created.

We now pass to the consideration of the amount allowed to the plaintiff by the trial judge as the
expenses incurred for medical service. In this connection Doctor Montes testified that he was first
called to see the plaintiff upon September 14, 1915, when he found him suffering from traumatic
neurosis. Three months later he was called upon to treat the same patient for an acute catarrhal
condition, involving disturbance in the pulmonary region. The treatment for this malady was
successful after two months, but at the end of six months the same trouble recurred and required
further treatment. In October of the year 1916, or more than a year after the accident in question
occurred, Doctor Montes was called in consultation with Doctor Guerrero to make an examination
of the plaintiff. Doctor Montes says that his charges altogether for services rendered to the plaintiff
amount to P350, of which the sum of P200 had been paid by the plaintiff upon bills rendered from
time to time. This physician speaks in the most general terms with respect to the times and extent
of the services rendered; and it is by no means clear that those services which were rendered many
months, or year, after the accident had in fact any necessary or legitimate relation to the injuries
received by the plaintiff. In view of the vagueness and uncertainty of the testimony relating to
Doctor Montes's services we are of the opinion that the sum of P200, or the amount actually paid
to him by the plaintiff, represents the extent of the plaintiff's obligation with respect to treatment
for said injuries.

With regard to the obligation supposedly incurred by the plaintiff to three other physicians, we are
of the opinion that they are not a proper subject of recovery in this action; and this for more than
one reason. In the first place, it does not appear that said physicians have in fact made charges for
those services with the intention of imposing obligations on the plaintiff to pay for them. On the
contrary it would seem that said services were gratuitously rendered out of courtesy to the plaintiff
as a member of the medical profession. The suggestions made on the stand by these physicians to
the effect that their services were worth the amounts stated by them are not sufficient to prove that
the plaintiff had incurred the obligation to pay those amounts. In the second place, we are
convinced that in employing so many physicians the plaintiff must have bad in view the successful
promotion of the issue of this lawsuit rather than the bona fide purpose of effecting the cure of his
injuries. In order to constitute a proper element of recovery in an action of this character, the
medical service for which reimbursement is claimed should not only be such as to have created a
legal obligation upon the plaintiff but such as was reasonably necessary in view of his actual
condition. It can not be permitted that a litigant should retain an unusual and unnecessary number
of professional experts with a view to the successful promotion of a lawsuit and expect to recover
against his adversary the entire expense thus incurred. His claim for medical services must be
limited to such expenditures as were reasonably suited to the case.

The second error assigned in the brief of the defendant company presents a question of practice
which, though not vital to the solution of this case, is of sufficient general importance to merit
notice. It appears that four of the physicians examined as witnesses for the plaintiff had made
written statements at various dates certifying the results of their respective examinations into the
condition of the plaintiff. When these witnesses were examined in court they identified their
respective signatures to these certificates and the trial judge, over the defendant's objection,
admitted the documents as primary evidence in the case. This was undoubtedly erroneous. A
document of this character is not primary evidence in any sense, since it is fundamentally of a
hearsay nature; and the only legitimate use to which one of these certificates could be put, as
evidence for the plaintiff, was to allow the physician who issued it to refer thereto to refresh his
memory upon details which he might have forgotten. In Zwangizer vs. Newman (83 N. Y. Supp.,
1071) which was also an action to recover damages for personal injury, it appeared that a
physician, who had been sent by one of the parties to examine the plaintiff had made at the time a
written memorandum of the results of the examination; and it was proposed to introduce this
document in evidence at the trial. It was excluded by the trial judge, and it was held upon appeal
that this was proper. Said the court: "There was no failure or exhaustion of the memory, and no
impeachment of the memorandum on cross- examination; and the document was clearly
incompetent as evidence in chief."

It results from the foregoing that the judgment appealed from must be modified by reducing the
amount of the recovery to eleven hundred pesos (P1,100), with legal interest from November 8,
1916. As thus modified the judgment is affirmed, without any special pronouncement as to costs
of this instance. So ordered.

Arellano, C. J., Torres, Araullo, Malcolm and Avanceña, JJ., concur.

2
||| (De Guia v. Manila Electric Railroad and Light Co., G.R. No. 14335, [January 28, 1920], 40
PHIL 706-717)

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2
23 PHIL 434-443

FIRST DIVISION

[G.R. No. 7567. November 12, 1912.]

THE UNITED STATES, plaintiff-appellee, vs. SEGUNDO BARIAS, defendant-appellant.

Bruce, Lawrence, Ross & Block for appellant.

Solicitor-General Harvey for appellee.

SYLLABUS

1. NEGLIGENCE DEFINED. — Negligence is "the failure to observe, for the protection of the
interests of another person, that degree of care, precaution and vigilance which the circumstances
justly demand, whereby such other person suffers injury."

2. ID.; ID. — Silvela's observation that "if a moment's attention and reflexion would have shown a
person that the act which he was about to perform was liable to have the harmful consequences
which it had, such person acted with temerity and may be guilty of imprudencia temeraria," cited
with approval.

3. ID.; ID. — "The diligence with which the law requires the individual at all times to govern his
conduct varies with the nature of the situation in which he is placed and with the importance of the
act which he is to perform." (U. S. vs. Reyes, 1 Phil. Rep., 375, 377.)

4. ID.; STREET RAILWAYS; DUTIES AND RESPONSIBILITIES OF MOTORMEN. — Held,

that a motorman operating a street car on a public street in a densely populated section of the city
of Manila is bound to know and to recognize that any negligence on his part in observing the track
over which he is running his car may result in fatal accidents. He has no right, when he starts from
a standstill, to assume that the track before his car is clear. It is his duty to satisfy himself of that
fact by keeping a sharp lookout and doing everything in his power to avoid the danger which is
necessarily incident to the operation of heavy street cars on thoroughfares in populous sections of
the city.

5. ID.; ID.; ID. — In the absence of some regulation of his employers, a motorman who has
brought his car to a standstill is not bound to keep his eyes directly to the front while the car is
stopped, but before setting it again in motion, it is his duty to satisfy himself that the track is clear,
and for that purpose to look and to see the track just in front of his car.

6. ID.; ID.; ID. — The reasons of public policy which impose upon street car companies and their
employees the duty of exercising the utmost degree of diligence in securing the safety of
passengers, apply with equal force to the duty of avoiding infliction of injuries upon pedestrians
and others upon the public streets and thoroughfares over which such companies are authorized to
run their cars.

7. ID.; ID.; ID. — It is the manifest duty of a motorman operating an electric street car on a public
thoroughfare in as thickly settled district, to satisfy himself that the track is clear immediately in
front of his car before setting it in motion from a standstill and for that purpose to incline his body
slightly forward, if that be necessary, in order to bring the track immediately in front of his car
within his line of vision.
DECISION

CARSON, J p:

This is an appeal from a sentence imposed by the Honorable A. S. Crossfield, judge of the Court
of First Instance of Manila, for homicide resulting from reckless negligence. The information
charges:

"That on or about November 2, 1911, in the city of Manila, Philippine Islands, the said Segundo
Barias was a motorman on street car No. 9, run 7, of the Pasay-Cervantes lines of the Manila
Electric Railroad and Light Company, a corporation duly organized and doing business in the city
of Manila, Philippine Islands; as such motorman he was controlling and operating said street car
along Rizal Avenue, formerly Calle Cervantes, of this city, and as such motorman of said street car
he was under obligation to run the same with due care and diligence to avoid any accident that
might occur to vehicles and pedestrians who were traveling on said Rizal Avenue; said accused, at
said time and place, did willfully, with reckless imprudenced and inexcusable negligence and in
violation of the regulations promulgated to that effect, control and operate said street car, without
heeding the pedestrians crossing Rizal Avenue from one side to the other, thus knocking down and
causing by his carelessness and imprudent negligence that said street car No. 9, operated and
controlled by said accused, as hereinbefore stated, should knock down and pass over the body and
head of one Fermina Jose, a girl 2 years old, who at said time and place was crossing the said
Rizal Avenue, the body of said girl being dragged along the street-car track on said Rizal Avenue
for a long distance, thus crushing and destroying her head and causing her sudden death as a result
of the injury received; that if the acts executed by the accused had been done with malice, he
would be guilty of the serious crime of homicide."

The defendant was a motorman for the Manila Electric Railroad and Light Company. At about 6
o'clock on the morning of November 2, 1911, he was driving his car along Rizal Avenue and
stopped it near the intersection of that street with Calle Requesen to take on some passengers.
When the car stopped, the defendant looked backward, presumably to note whether all the
passengers were aboard, and then started his car. At that moment Ferminia Jose, a child about 3
years old, walked or ran in front of the car. She was knocked down and dragged some little
distance underneath the car, and was left dead upon the track. The motorman proceeded with his
car to the end of the track, some distance from the place of the accident, and apparently knew
nothing of it until his return, when he was informed of what had happened.

There is no substantial dispute as to the facts. It is true that one witness testified that the defendant
started the car without turning his head, and while he was still looking backwards and that this
testimony was directly contradicted by that of another witness. But we do not deem it necessary to
make an express finding as to the precise direction in which the defendant's head was turned at the
moment when he started his car. It is sufficient for the purpose of our decision to hold, as we do,
that the evidence clearly discloses that he started his car from a standstill without looking over the
track immediately in front of the car to satisfy himself that it was clear. He did not see the child
until after he had run his car over it, and after he had returned to the place where it was found
dead, and we think we are justified in saying that wherever he was looking at the moment when he
started his car, he was not looking at the track immediately in front of the car, and that he had not
satisfied himself that this portion of the track was clear immediately before putting the car in
motion.

The trial court found the defendant guilty of imprudencia temeraria (reckless negligence) as
charged in the information, and sentenced him to one year and one month of imprisonment in
Bilibid Prison, and to pay the costs of the action.

The sole question raised by this appeal is whether the evidence shows such carelessness or want of
ordinary care on the part of the defendant as to amount to reckless negligence (imprudencia
temeraria).

Judge Cooley in his work on Torts (3d ed., 1324) defines negligence to be: "The failure to observe,
for the protection of the interests of another person, that degree of care, precaution and vigilance
which the circumstances justly demand, whereby such other person suffers injury."

In the case of U. S. vs. Nava, (1 Phi. Rep., 580), we held that: "Reckless negligence consists of the
failure to take such precautions or advance measures in the performance of an act as the most
common prudence would suggest whereby injury is caused to persons or to property."

Silvela says in his "Derecho Penal," in speaking of reckless imprudence (imprudencia temeraria):

"The word 'negligencia' used in the code, and the term 'imprudencia' with which this punishable
act is defined, express this idea in such a clear manner that it is not necessary to enlarge upon it.
He who has done everything on his part to prevent his actions from causing damage to another,
although he has not succeeded in doing so, notwithstanding his efforts, is the victim of an
accident, and cannot be considered responsible for the same." (Vol. 2, p. 127 [153].)

"Temerario is, in our opinion, one who omits, with regard to his actions, which are liable to cause
injury to another, that care and diligence, that attention, which can be required of the least careful,
attentive, or diligent. If a moment's attention and reflection would have shown a person that the
act which he was about to perform was liable to have the harmful consequence which it had, such
person acted with temerity and may be guilty of 'imprudencia temeraria." It may be that in practice
this idea has been given a greater scope and acts of imprudence which did not show carelessness
as carried to such a high degree, might have been punished as 'imprudencia temeraria;' but in our
opinion, the proper meaning of the word does not authorize another interpretation." (Id., p 133
[161].)

Groizard, commenting upon "imprudencia temeraria," on page 389, volume 8, of his work on the
Penal Code, says:

"Prudence is that cardinal virtue which teaches us to discern and distinguish the good from the
bad, in order to adopt or to flee from it. It also means good judgment, temperance, and moderation
in one's action. 'Temerario' without reflection and without examining the same. Consequently, he
who from lack of good judgment, temperance, or moderation in his action, exposes himself
without reflection and examination to the danger of committing a crime, must be held responsible
under the provision of law aforementioned."

Negligence is want of the care required by the circumstances. It is a relative or comparative, not
an absolute, term and its application depends upon the situation of the parties and the degree of
care and vigilance which the circumstances reasonably require. Where the danger is great, a high
degree of care is necessary, and the failure to observe it is a want of ordinary care under the
circumstances. (Ahern vs. Oregon Telephone Co., 24 Oreg., 276, 294; 35 Pac., 549.)

Ordinary care, if the danger is great, may rise to the grade of a very exact and unchangeable
attention. (Parry Mfg. Co. vs. Eaton, 41 Ind. App., 81, 1908; 83 N. E., 510.)

In the case of U. S. vs. Reyes (1 Phil. Rep., 375-377), we held that: "The diligence with which the
law requires the individual at all times to govern his conduct varies with the nature of the situation
in which he is placed and with the importance of the act which he is to perform."

The question to be determined then, is whether, under all the circumstances, and having in mind
the situation of the defendant when he put his car in motion and ran it over the child, he was guilty
of a failure to take such precautions or advance measures as common prudence would suggest.

The evidence shows that the thoroughfare on which the incident occurred was a public street in a
densely populated section of the city. The hour was six in the morning, or about the time when the
residents of such streets begin to move about. Under such conditions a motorman of an electric
street car was clearly charged with a high degree of diligence in the performance of his duties. He
was bound to know and to recognize that any negligence on his part in observing the track over
which he was running his car might result in fatal accidents. He had no right to assume that the
track before his car was clear. It was his duty to satisfy himself of that fact by keeping a sharp
lookout, and to do everything in his power to avoid the danger which is necessarily incident to the
operation of heavy street cars on public thoroughfares in populous sections of the city.

Did he exercise the degree of diligence required of him? We think this question must be answered
in the negative. We do not go so far as to say that having brought his car to a standstill it was his
bounden duty to keep his eyes directed to the front. Indeed, in the absence of some regulation of
his employers, we can well understand that, at times, it might be highly proper and prudent for
him to gland back before again setting his car in motion, to satisfy himself that he understood
correctly a signal to go forward or that all the passengers had safely alighted or gotten on board.
But we do insist that before setting his car again in motion, it was his duty to satisfy himself that
the track was clear, and, for that purpose, to look and to see the track just in front of his car. This
the defendant did not do, and the result of his negligence was the death of the child.

In the case of Smith vs. St. Paul City Ry. Co., (32 Min., p. 1), the supreme court of Minnesota, in
discussing the diligence required of street railway companies in the conduct of their business
observed that: "The defendant was a carrier of passengers for hire, owning and controlling the
tracks and cars operated thereon. It is therefore subject to the rules applicable to passenger
carriers. (Thompson's Carriers, 442; Barrett vs. Third Ave. R. Co., 1 Sweeny, 568; 8 Abb. Pr. (N.
S.), 205.) As respects hazards and dangers incident to the business or employment, the law enjoins
upon such carrier the highest degree of care consistent with its undertaking, and it is responsible
for the slightest negligence. (Wilson vs. Northern Pacific R. Co., 26 minn., 278; Warren vs.
Fitchburg R. Co., 8 Allen, 233; 43 Am. Dec. 354, 356, notes and cases.) . . . The severe rule which
enjoins upon the carrier such extraordinary care and diligence, is intended, for reasons of public
policy, to secure the safe carriage of passengers, in so far as human skill and foresight can affect
such result." The case just cited was a civil case, and the doctrine therein announced d especial
reference to the care which should be exercised in securing the safety of passengers. But we hold
that the reasons of public policy which imposed upon street car companies and their employees
the duty of exercising the utmost degree of diligence in securing the safety of passengers, apply
with equal force to the duty of avoiding the infliction of injuries upon pedestrians and others on
the public streets and thoroughfares over which these companies are authorized to run their cars.
And while, in a criminal case, the courts will require proof of the guilt of the company or its
employees beyond a reasonable doubt, nevertheless the care or diligence required of the company
and its employees is the same in both cases, and the only question to be determined is whether the
proof shows beyond a reasonable doubt that the failure to exercise such care or diligence was the
cause of the accident, and that the defendant was guilty thereof.

Counsel for the defendant insist that the accident might have happened despite the exercise of the
utmost care by the defendant, and they have introduced photographs into the record for the
purpose of proving that while the motorman was standing in his proper place on the front platform
of the car, a child might have walked up immediately in front of the car, a child might have walked
up immediately in front of the car without coming within the line of his vision. Examining the
photographs, we think that this contention may have some foundation in fact; but only to this
extent, that standing erect, at the position he would ordinarily assume while the car is in motion,
the eye of the average motorman might just miss seeing the top of the head of a child, about three
years old, standing or walking close up to the front of the car. But it is also very evident that by
inclining the head and shoulders forward very slightly, and glancing in front of the car, a person in
the position of a motorman could not fail to see a child on the track immediately in front of his
car; and we hold that it is the manifest duty of a motorman, who is about to start his car on a
public thoroughfare in a thickly-settled district, to satisfy himself that the track is clear
immediately in front of his car, a person in the position of a motorman could not fail to see a child
on the track immediately in front of his car; and we hold that it is the manifest duty of a
motorman, who is about to start his car on a public thoroughfare in a thickly-settled district, to
satisfy himself that the track is clear immediately in front of his car, and to incline his body
slightly forward, if that be necessary, in order to bring the whole track within his line of vision. Of
course, this may not be, and usually is not necessary when the car is in motion, but we think that it
is required by the dictates of the most ordinary prudence in starting from a standstill.

We are not unmindful of our remarks in the case of U. S. vs. Bacho (10 Phil. Rep., 577), to which
our attention is directed by counsel for appellant. In that case we said that:

". . . In the general experience of mankind, accidents apparently unavoidable and often
inexplicable are unfortunately too frequent to permit us to conclude that some one must be
criminally liable for negligence in every case where an accident occurs. it is the duty of the
prosecution in each case to prove by competent evidence not only the existence of criminal
negligence, but that the accused was guilty thereof."

Nor do we overlook the ruling in the case of U. S. vs. Barnes (12 Phil. Rep., 93), to which our
attention is also invited, wherein we held that the defendant was not guilty of reckless negligence,
where it appeared that he killed another by the discharge of his gun under such circumstances that
he might have been held guilty of criminally reckless negligence had he had knowledge at that
moment that another person was in such position as to be in danger if the gun should be
discharged. In this latter case the defendant had no reason to anticipate that the person who was
injured was in the line of fire, or that there was any probability that he or anyone else would place
himself in the line of fire. In the case at bar, however, it was, as we have seen, the manifest duty of
the motorman to take reasonable precautions in starting his car to see that in doing so he was not
endangering the life of any pedestrian, old or young; and to this end it was further his duty to
guard against the reasonable possibility that some one might be on the evidence showing, is it
does, that the child was killed at the moment when the car was set in motion, we are justified in
holding that, had the motorman seen the child, he could have avoided the accident; the accident
was not, therefore, "unavoidable or inexplicable," and it appearing that the motorman, by the
exercise of ordinary diligence, might have seen the child before he set the car in motion, his
failure to satisfy himself that the track was clear before doing so was reckless negligence, of
which he was properly convicted in the court below.

We think, however, that the penalty should be reduced to that of six months and one day of prision
correccional. Modified by substituting for so much thereof as imposes the penalty of one year and
one month of imprisonment, the penalty of six months and one day of prision correccional, the
judgment of the lower court convicting and sentencing the appellant is affirmed, with the costs of
both instances against him. So ordered.

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

Johnson, J., concurs in the result.

Trent, J., dissents.

2
||| (U.S. v. Barias, G.R. No. 7567, [November 12, 1912], 23 PHIL 434-443)

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449 PHIL 108-117

THIRD DIVISION

[G.R. No. 141258. April 9, 2003.]

TOMASA SARMIENTO, petitioner, vs. SPS. LUIS & ROSE SUN-CABRIDO and MARIA
LOURDES SUN, respondents.

Liberato G. Casilan, Jr. for petitioner.

Victor dela Serna for respondents.

SYNOPSIS

The controversy herein arose when a piece of diamond was broken by Zenon Santos, an employee
at the jewelry shop, in the process of dismounting it from an original setting. The diamond was
claimed to be .33 carat and almost perfect in cut and clarity. As a result of the incident, the
petitioner herein was forced to replace the broken diamond to its owner in the amount of
P30,000.00. The petitioner filed a complaint for damages with the Metropolitan Trial Court in
Cities (MTCC) and claimed that the dismounting of the diamond from its original setting was part
of the obligation assumed by the respondents under the contract of service, the respondent spouses
being the owner of the jewelry shop and the other respondent their employee. Thus, they should be
held liable for the damages arising from its breakage. The MTCC decided in favor of the petitioner
herein. But on appeal, the Regional Trial Court (RTC) reversed the decision; thus absolving the
respondents of any responsibility arising from breach of contract. The Court of Appeals affirmed
the judgment of the RTC, hence, this petition for review.

According to the Supreme Court, preponderance of evidence supported the view that Marilou and
Zenon Santos were employed at the jewelry shop in order to perform activities, which were
usually necessary or desirable in its business. The Court, therefore, held that an obligation to pay
actual damages arose in favor of the petitioner against the respondent spouses who admittedly
owned and managed the jewelry shop. It was proven that petitioner replaced the damaged jewelry
in the amount of P30,000.00. The facts of the case also justified the award of moral damages. The
petition was granted and the assailed decision of the Court of Appeals was reversed and set aside
by the Supreme Court ordering the respondent spouses to pay petitioner actual damages of
P30,000.00 and moral damages of P10,000.00.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS; SHALL HAVE THE FORCE OF LAW BETWEEN PARTIES
WHEN THE SAME AROSE FROM CONTRACTS; EFFECT OF FAULT OR NEGLIGENCE IN
THE PERFORMANCE THEREOF. — Obligations arising from contracts have the force of law
between the contracting parties. Corollarily, those who in the performance of their obligations are
guilty of fraud, negligence or delay and those who in any manner contravene the tenor thereof, are
liable for damages. The fault or negligence of the obligor consists in the omission of that diligence
which is required by the nature of the obligation and corresponds with the circumstances of the
persons, of the time and of the place.

2. ID.; DAMAGES; MORAL DAMAGES; GENERALLY NOT RECOVERABLE IN ACTIONS

FOR BREACH OF CONTRACT; EXCEPTION. — As a general rule, moral damages are not
recoverable in actions for damages predicated on a breach of contract for it is not one of the items
enumerated under Article 2219 of the Civil Code. Moral damages may be awarded in a breach of
contract only when there is proof that defendant acted in bad faith, or was guilty of gross
negligence amounting to bad faith, or in wanton disregard of his contractual obligation. TSacCH

DECISION

CORONA, J p:

This appeal by certiorari stems from the Decision 1 of respondent Court of Appeals promulgated
on November 26, 1999 in CA-G.R. SP No. 47431 declaring the private respondents not liable for
damages.

Petitioner, Tomasa Sarmiento, states that sometime in April 1994, a friend, Dra. Virginia Lao,
requested her to find somebody to reset a pair of diamond earrings into two gold rings. 2
Accordingly, petitioner sent a certain Tita Payag with the pair of earrings to Dingding's Jewelry
Shop, owned and managed by respondent spouses Luis and Rose Cabrido, 3 which accepted the
job order for P400. 4

Petitioner provided 12 grams of gold to be used in crafting the pair of ring settings. 5 After 3 days,
Tita Payag delivered to the jewelry shop one of Dra. Lao's diamond earrings which was earlier
appraised as worth .33 carat and almost perfect in cut and clarity. 6 Respondent Ma. Lourdes
(Marilou) Sun went on to dismount the diamond from its original setting. Unsuccessful, she asked
their goldsmith, Zenon Santos, to do it. Santos removed the diamond by twisting the setting with a
pair of pliers, breaking the gem in the process. 7
Petitioner required the respondents to replace the diamond with the same size and quality. When
they refused, the petitioner was forced to buy a replacement in the amount of P30,000. 8

Respondent Rose Cabrido, manager of Dingding's Jewelry Shop, denied having entered into any
transaction with Tita Payag whom she met only after the latter came to the jewelry shop to seek
compensation from Santos for the broken piece of jewelry. 9 However, it was possible that Payag
may have availed of their services as she could not have known every customer who came to their
shop. Rose disclosed that she usually arrived at 11:00 a.m. When she was not around, her mother
and sister tended the shop. 10

Marilou admitted knowing Payag who came to Dingding's Jewelry Shop to avail of their services
regarding a certain piece of jewelry. After a short conversation, Payag went inside the shop to see
Santos. When the precious stone was broken by Santos, Payag demanded P15,000 from him. As
the latter had no money, she turned to Marilou for reimbursement apparently thinking that Marilou
was the owner of the shop. 11

For his part, Santos recalled that Payag requested him to dismount what appeared to him was a
sapphire. While clipping the setting with the use of a small pair of pliers, the stone accidentally
broke. Santos denied being an employee of Dingding's Jewelry Shop. 12

Attempts to settle the controversy before the barangay lupon proved futile. 13 Consequently,
petitioner filed a complaint for damages on June 28, 1994 with the Municipal Trial Court in Cities
(MTCC) of Tagbilaran City docketed as Civil Case No. 2339 which rendered a decision 14 in
favor of the petitioner, the dispositive portion of which reads:

WHEREFORE, Decision is hereby rendered in favor of plaintiff Tomasa Sarmiento and against
defendants Spouses Luis and Rose Sun-Cabrido, ordering defendants to pay jointly and severally
the amount of Thirty Thousand Pesos (P30,000.00) as actual or compensatory damages; Three
Thousand Pesos (P3,000.00) as moral damages; Five Thousand Pesos (P5,000.00) as attorney's
fees; Two Thousand Pesos (P2,000.00) as litigation expenses, with legal interest of 6% per annum
from the date of this decision and 12% per annum from the date when this decision becomes final
until the amounts shall have been fully paid and to pay the costs.

This case as against defendant Maria Lourdes Sun as well as defendants' counterclaim are
dismissed for lack of merit.

SO ORDERED.

On appeal, the Regional Trial Court (RTC) of Tagbilaran City, Branch 3, reversed the decision of
the MTCC, thus absolving the respondents of any responsibility arising from breach of contract.
15 Finding no reversible error, the Court of Appeals (CA) affirmed the judgment of the RTC in its
Decision promulgated on November 26, 1999. 16
Unable to accept the decision, the petitioner filed the instant petition for review with the following
assigned errors:

THE COURT OF APPEALS ERRED IN MAINTAINING AND SO HOLDING THAT ZENON

SANTOS IS NOT AN EMPLOYEE OF DEFENDANT (herein respondent) ROSE SUN-
CABRIDO, AND IS THEREFORE ANSWERABLE FOR HIS OWN ACTS OR OMISSIONS

II

THE HONORABLE COURT OF APPEALS ERRED IN SUSTAINING THE REGIONAL

TRIAL COURT'S PRONOUNCEMENTS THAT THERE EXISTS NO AGREEMENT
BETWEEN THE PETITIONER AND RESPONDENTS THAT THE LATTER WOULD
ANSWER FOR ANY LIABILITY SHOULD THE DIAMOND BE DAMAGED IN THE
PROCESS OF DISMOUNTING THEM FROM THE EARRINGS.

Essentially, petitioner claims that the dismounting of the diamond from its original setting was
part of the obligation assumed by the private respondents under the contract of service. Thus, they
should be held liable for damages arising from its breakage. On the other hand, the version of the
private respondents, upheld by the RTC and the CA, is that their agreement with the petitioner was
for crafting two gold rings mounted with diamonds only and did not include the dismounting of
the said diamonds from their original setting. 17 Consequently, the crux of the instant controversy
is the scope of the obligation assumed by the private respondents under the verbal contract of
service with the petitioner.

The Court notes that, during the trial, private respondents vigorously denied any transaction
between Dingding's' Jewelry Shop and the petitioner, through Tita Payag. Rose Cabrido, for
instance, denied having ever met Payag before the latter came to seek reimbursement for the value
of the broken diamond. Likewise, while Marilou acknowledged acquaintance with Payag, she
nevertheless denied accepting any job order from her. Debunking their protestations, however, the
MTCC of Tagbilaran City rendered its decision on November 26, 1999 in favor of herein
petitioner.

Apparently realizing the weakness and futility of their position, private respondents conceded, on
appeal, the existence of an agreement with the petitioner for crafting a pair of gold rings mounted
with diamonds. This apparent concession by the private respondents, however, was really nothing
but an ingenious maneuver, designed to preclude, just the same, any recovery for damages by the
petitioner. Thus, while ostensibly admitting the existence of the said agreement, private
respondents, nonetheless denied assuming any obligation to dismount the diamonds from their
original settings. 18

The inconsistent position of the private respondents impugns their credibility. They cannot be
permitted to adopt a certain stance, only to vacillate later to suit their interest. We are therefore
inclined to agree with the MTCC in giving credence to the version of the petitioner. The MTCC
had the unique opportunity to actually observe the behavior and demeanor of the witnesses as they
testified during the trial. 19

At any rate, the contemporaneous and subsequent acts of the parties 20 support the version of the
petitioner. Thus, when Tita Payag asked Marilou of Dingding's Jewelry Shop to reset a pair of
diamond earrings, she brought with her the said pieces of jewelry so that the diamonds which were
still mounted could be measured and the new ring settings crafted accordingly. On the said
occasion, Marilou expressed no reservation regarding the dismounting of the diamonds which,
after all, was an integral part of petitioner's job order. She should have instructed Payag to have
them dismounted first if Marilou had actually intended to spare the jewelry shop of the task but
she did not. Instead, petitioner was charged P400 for the job order which was readily accepted.
Thus, a perfected contract to reset the pair of diamond earrings arose between the petitioner,
through Payag, and Dingding's Jewelry Shop, through Marilou.

Marilou's subsequent actuations were even more revealing as regards the scope of obligation
assumed by the jewelry shop. After the new settings were completed in 3 days, she called up the
petitioner to bring the diamond earrings to be reset. 21 Having initially examined one of them,
Marilou went on to dismount the diamond from its original setting. Unsuccessful, she then
delegated the task to their goldsmith, Zenon Santos. Having acted the way she did, Marilou cannot
now deny the shop's obligation to reset the pair of earrings.

Obligations arising from contracts have the force of law between the contracting parties. 22
Corollarily, those who in the performance of their obligations are guilty of fraud, negligence or
delay and those who in any manner contravene the tenor thereof, are liable for damages. 23 The
fault or negligence of the obligor consists in the omission of that diligence which is required by
the nature of the obligation and corresponds with the circumstances of the persons, of the time and
of the place. 24

In the case at bar, it is beyond doubt that Santos acted negligently in dismounting the diamond
from its original setting. It appears to be the practice of the trade to use a miniature wire saw in
dismounting precious gems, such as diamonds, from their original settings. 25 However, Santos
employed a pair of pliers in clipping the original setting, thus resulting in breakage of the
diamond. The jewelry shop failed to perform its obligation with the ordinary diligence required by
the circumstances. It should be pointed out that Marilou examined the diamond before
dismounting it from the original setting and found the same to be in order. Its subsequent breakage
in the hands of Santos could only have been caused by his negligence in using the wrong
equipment. Res ipsa loquitur.

Private respondents seek to avoid liability by passing the buck to Santos who claimed to be an
independent worker. They also claim, rather lamely, that Marilou simply happened to drop by at
Dingding's Jewelry Shop when Payag arrived to place her job order. 26
We do not think so.

The facts show that Santos had been working at Dingding's Jewelry Shop as goldsmith for about 6
months accepting job orders through referrals from private respondents. 27 On the other hand,
Payag stated that she had transacted with Dingding's Jewelry Shop on at least 10 previous
occasions, always through Marilou. 28 The preponderance of evidence supports the view that
Marilou and Zenon Santos were employed at Dingding's Jewelry Shop in order to perform
activities which were usually necessary or desirable in its business. 29

We therefore hold that an obligation to pay actual damages arose in favor of the petitioner against
the respondents spouses who admittedly owned and managed Dingding's Jewelry Shop. It was
proven that petitioner replaced the damaged jewelry in the amount of P30,000. 30

The facts of the case also justify the award of moral damages. As a general rule, moral damages
are not recoverable in actions for damages predicated on a breach of contract for it is not one of
the items enumerated under Article 2219 of the Civil Code. 31 Moral damages may be awarded in
a breach of contract only when there is proof that defendant acted in bad faith, or was guilty of
gross negligence amounting to bad faith, or in wanton disregard of his contractual obligation. 32
Santos was a goldsmith for more than 40 years. 33 Given his long experience in the trade, he
should have known that using a pair of pliers instead of a miniature wire saw in dismounting a
precious stone like a diamond would have entailed an unnecessary risk of breakage. He went on
with it anyway. Hence, respondent spouses are liable for P10,000 as moral damages due to the
gross negligence of their employee.

However, private respondent's refusal to pay the value of the damaged jewelry emanated from an
honest belief that they were not responsible therefor, hence, negating any basis for the award of
attorney's fees. 34

WHEREFORE, the instant petition is GRANTED and the assailed decision of the Court of
Appeals dated November 26, 1999 is hereby reversed and set aside. Private respondents Luis
Cabrido and Rose Sun-Cabrido are hereby ordered to pay, jointly and severally, the amount of
P30,000 as actual damages and P10,000 as moral damages in favor of the petitioner. TIcEDC

No costs.

SO ORDERED.

Puno, Panganiban, Sandoval-Gutierrez, and Carpio Morales, JJ., concur.

Footnotes
1.Penned by Associate Justice Ma. Alicia Austria-Martinez and concurred in by Associate Justices
B.A. Adefuin-de la Cruz and Presbitero J. Velasco, Jr., Rollo, pp. 17-23.
2.TSN, December 14, 1994, pp. 7-8.

3.Exhibit "I"; TSN, February 7, 1995, p. 4.

4.Exhibit "1"; TSN, November 8, 1994, pp. 3-4.

5.Exhibit "C".

6.TSN, December 14, 1995, p. 9.

7.TSN, November 8, 1994, pp. 6-7.

8.Exhibit "B"; TSN, December 14, 1994, pp. 12-14.

9.TSN, February 7, 1995, pp. 4-5.

10.Id., p. 9.

11.TSN, August 18, 1995, pp. 3-4.

12.TSN, June 8, 1995, pp. 2-5.

13.Exhibit "D".

14.Petition, Annex "D", Rollo, pp. 29-36. Penned by Judge Emma Eronico-Supremo.

15.Petition, Annex "B", Rollo, pp. 24-28. Penned by Judge Pacito A. Yape.

16.See footnote no. 1.

17.Comment, Rollo, p. 57.

18.Appellant's Brief, Original Records, pp. 97-101.

19.People vs. Lacsa, 339 SCRA 178, 190 [2000]; People vs. Continente, 339 SCRA 1, 29 [2000];
People vs. Barro, Sr., 338 SCRA 312, 322 [2000].

20.Tangquilig vs. CA, 334 Phil. 68, 74 [1997].

21.TSN, December 14, 1994, p. 11.

22.Article 1159, Civil Code of the Philippines.

23.Article 1170, Civil Code of the Philippines.

24.Article 1173, Civil Code of the Philippines.

25.TSN, January 20, 1995, p. 3.

26.TSN, August 18, 1995, p. 3.

27.TSN, June 8, 1995, pp. 6-7.

28.TSN, November 8, 1994, p. 4.

29.Article 280 of the Labor Code pertinently provides:

Art. 280. Regular and Casual Employment. — The provisions of written agreement to the
contrary notwithstanding and regardless of the oral agreement of the parties, an employment shall
be deemed to be regular where the employee has been engaged to perform activities which are
usually necessary or desirable in the usual business or trade of the employer . . ..

30.Exhibits "B"; "F"; "G".

31.Calalas vs. Court of Appeals, 302 SCRA 356 [2000].

32.Magat, Jr. vs. Court of Appeals, 337 SCRA 298, 308 [2000]; Integrated Packaging Corporation
vs. Court of Appeals, 333 SCRA 170 [2000].

33.TSN, June 8, 1995, p. 4.

34.Bernardo vs. Court of Appeals, 275 SCRA 413, 432 [1997].

||| (Sarmiento v. Spouses Sun-Cabrido, G.R. No. 141258, [April 9, 2003], 449 PHIL 108-117)

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456 PHIL 845-860
FIRST DIVISION

[G.R. No. 138334. August 25, 2003.]

ESTELA L. CRISOSTOMO, petitioner, vs. THE COURT OF APPEALS and CARAVAN

TRAVEL & TOURS INTERNATIONAL, INC., respondents.

Bonifacio Law Office for petitioner.

Cabochan Reyes & Capones Law Offices for private respondent.

SYNOPSIS

Petitioner Estela L. Crisostomo contracted the services of respondent Caravan Travel and Tours
International, Inc. to facilitate her tour known as "Jewels of Europe." On June 12, 1991, Meriam
Menor, respondent's ticketing manager as well as petitioner's niece, delivered petitioner's travel
documents and plane tickets and informed her to be at the airport on June 15, 1991, two hours
before departure. On the stated date when the petitioner went to the airport, the flight that she was
supposed to take had departed the previous day. She complained to Menor, but the latter prevailed
upon her to take another tour known as "British Pageant." Upon petitioner's return from Europe,
she demanded from respondent the reimbursement of P61,421.70 representing the difference
between the sum she paid for "Jewels of Europe" and the amount she owed respondent for the
"British Pageant" tour, but despite several demands, respondent company refused to reimburse the
amount, contending that the same was non-refundable. Thus, she filed a complaint against
respondent for breach of contract of carriage and damages. In its answer, respondent denied the
responsibility and insisted that petitioner was duly informed of the correct departure as legibly
printed on the plane ticket two days ahead of the scheduled trip. After trial, the lower court
awarded damages to the petitioner on the basis that the respondent was negligent, but it deducted
10% from the amount for the contributory negligence of petitioner. On appeal, the Court of
Appeals found petitioner to be more negligent, hence, it directed her to pay the balance of the
price for the "British Pageant." Hence, this petition.

The Court did not agree with the finding of the lower court that Menor's negligence concurred
with the negligence of petitioner and resultantly caused damage to the latter. Menor's negligence
was not sufficiently proved, considering that the only evidence presented was petitioner's
uncorroborated narration of the events. It is well-settled that the party alleging a fact has the
burden of proving it and a mere allegation cannot take the place of evidence. If the plaintiff, upon
whom rests the burden of proving his cause of action, fails to show in a satisfactory manner facts
upon which he bases his claim, the defendant is under no obligation to prove his exception or
defense. Contrary to petitioner's claim, the evidence on record showed that respondent exercised
due diligence in performing its obligation under the contract and followed standard procedure in
rendering its services to petitioner. Accordingly, petitioner was ordered to pay respondent the
amount of P12,901.00 representing the balance of the price of the British Pageant Package tour.
SYLLABUS

1. CIVIL LAW; LEASE; COMMON CARRIERS; CONTRACT OF CARRIAGE;

ELUCIDATED. — By definition, a contract of carriage or transportation is one whereby a certain
person or association of persons obligate themselves to transport persons, things, or news from
one place to another for a fixed price. Such person or association of persons are regarded as
carriers and are classified as private or special carriers and common or public carriers. A common
carrier is defined under Article 1732 of the Civil Code as persons, corporations, firms or
associations engaged in the business of carrying or transporting passengers or goods or both, by
land, water or air, for compensation, offering their services to the public.

2. ID.; ID.; ID.; TRAVEL AGENCY IS NOT A COMMON CARRIER. — It is obvious from the
above definition that respondent is not an entity engaged in the business of transporting either
passengers or goods and is therefore, neither a private nor a common carrier. Respondent did not
undertake to transport petitioner from one place to another since its covenant with its customers is
simply to make travel arrangements in their behalf. Respondent's services as a travel agency
include procuring tickets and facilitating travel permits or visas as well as booking customers for
tours. While petitioner concededly bought her plane ticket through the efforts of respondent
company, this does not mean that the latter ipso facto is a common carrier. At most, respondent
acted merely as an agent of the airline, with whom petitioner ultimately contracted for her carriage
to Europe.

3. ID.; OBLIGATIONS AND CONTRACTS; CONTRACT BETWEEN THE TRAVEL AGENCY

AND ITS CLIENT IS ONE FOR SERVICES AND NOT ONE OF CARRIAGE. — Respondent's
obligation to petitioner in this regard was simply to see to it that petitioner was properly booked
with the airline for the appointed date and time. Her transport to the place of destination,
meanwhile, pertained directly to the airline. The object of petitioner's contractual relation with
respondent is the latter's service of arranging and facilitating petitioner's booking, ticketing and
accommodation in the package tour. In contrast, the object of a contract of carriage is the
transportation of passengers or goods. It is in this sense that the contract between the parties in this
case was an ordinary one for services and not one of carriage. Petitioner's submission is premised
on a wrong assumption.

4. ID.; ID.; TRAVEL AGENCY IS NOT BOUND TO OBSERVE EXTRAORDINARY

DILIGENCE IN THE PERFORMANCE OF ITS OBLIGATION. — The nature of the contractual
relation between petitioner and respondent is determinative of the degree of care required in the
performance of the latter's obligation under the contract. For reasons of public policy, a common
carrier in a contract of carriage is bound by law to carry passengers as far as human care and
foresight can provide using the utmost diligence of very cautious persons and with due regard for
all the circumstances. As earlier stated, however, respondent is not a common carrier but a travel
agency. It is thus not bound under the law to observe extraordinary diligence in the performance of
its obligation, as petitioner claims.
5. ID.; ID.; STANDARD OF CARE REQUIRED FOR THE TRAVEL AGENCY IS THAT OF A
GOOD FATHER OF A FAMILY. — Since the contract between the parties is an ordinary one for
services, the standard of care required of respondent is that of a good father of a family under
Article 1173 of the Civil Code. This connotes reasonable care consistent with that which an
ordinarily prudent person would have observed when confronted with a similar situation. The test
to determine whether negligence attended the performance of an obligation is: did the defendant in
doing the alleged negligent act use that reasonable care and caution which an ordinarily prudent
person would have used in the same situation? If not, then he is guilty of negligence.

6. REMEDIAL LAW; EVIDENCE; PRESUMPTIONS; EVIDENCE WILLFULLY

SUPPRESSED WOULD BE ADVERSE IF PRODUCED; EXCEPTIONS. — Respondent's
failure to present Menor as witness to rebut petitioner's testimony could not give rise to an
inference unfavorable to the former. Menor was already working in France at the time of the filing
of the complaint, thereby making it physically impossible for respondent to present her as a
witness. Then too, even if it were possible for respondent to secure Menor's testimony, the
presumption under Rule 131, Section 3(e) would still not apply. The opportunity and possibility
for obtaining Menor's testimony belonged to both parties, considering that Menor was not just
respondent's employee, but also petitioner's niece. It was thus error for the lower court to invoke
the presumption that respondent willfully suppressed evidence under Rule 131, Section 3(e). Said
presumption would logically be inoperative if the evidence is not intentionally omitted but is
simply unavailable, or when the same could have been obtained by both parties.

7. ID.; ID.; WEIGHT AND SUFFICIENCY; MERE ALLEGATION CANNOT TAKE THE
PLACE OF EVIDENCE. — In sum, we do not agree with the finding of the lower court that
Menor's negligence concurred with the negligence of petitioner and resultantly caused damage to
the latter. Menor's negligence was not sufficiently proved, considering that the only evidence
presented on this score was petitioner's uncorroborated narration of the events. It is well-settled
that the party alleging a fact has the burden of proving it and a mere allegation cannot take the
place of evidence. If the plaintiff, upon whom rests the burden of proving his cause of action, fails
to show in a satisfactory manner facts upon which he bases his claim, the defendant is under no
obligation to prove his exception or defense.

8. CIVIL LAW; OBLIGATIONS AND CONTRACTS; TRAVEL AGENCY EXERCISED DUE

DILIGENCE IN PERFORMING ITS OBLIGATIONS UNDER THE CONTRACT; CASE AT
BAR. — Contrary to petitioner's claim the evidence on record shows that respondent exercised
due diligence in performing its obligations under the contract and followed standard procedure in
rendering its services to petitioner. As correctly observed by the lower court, the plane ticket
issued to petitioner clearly reflected the departure date and time, contrary to petitioner's
contention. The travel documents, consisting of the tour itinerary, vouchers and instructions, were
likewise delivered to petitioner two days prior to the trip. Respondent also properly booked
petitioner for the tour, prepared the necessary documents and procured the plane tickets. It
arranged petitioner's hotel accommodation as well as food, land transfers and sightseeing
excursions, in accordance with its avowed undertaking. Therefore, it is clear that respondent
performed its prestation under the contract as well as everything else that was essential to book
petitioner for the tour. Had petitioner exercised due diligence in the conduct of her affairs, there
would have been no reason for her to miss the flight. Needless to say, after the travel papers were
delivered to petitioner, it became incumbent upon her to take ordinary care of her concerns. This
undoubtedly would require that she at least read the documents in order to assure herself of the
important details regarding the trip.

9. ID.; ID.; NEGLIGENCE OF THE OBLIGOR IN THE PERFORMANCE OF THE

OBLIGATION RENDERS HIM LIABLE FOR DAMAGES FOR THE RESULTING LOSS
SUFFERED BY THE OBLIGEE. — The negligence of the obligor in the performance of the
obligation renders him liable for damages for the resulting loss suffered by the obligee. Fault or
negligence of the obligor consists in his failure to exercise due care and prudence in the
performance of the obligation as the nature of the obligation so demands. There is no fixed
standard of diligence applicable to each and every contractual obligation and each case must be
determined upon its particular facts. The degree of diligence required depends on the
circumstances of the specific obligation and whether one has been negligent is a question of fact
that is to be determined after taking into account the particulars of each case.

10. REMEDIAL LAW; EVIDENCE; CREDIBILITY OF WITNESSES; FACTUAL FINDINGS

OF THE TRIAL COURT ARE GENERALLY CONCLUSIVE UPON THE SUPREME COURT;
EXCEPTIONS. — The lower court declared that respondent's employee was negligent. This
factual finding, however, is not supported by the evidence on record. While factual findings below
are generally conclusive upon this court, the rule is subject to certain exceptions, as when the trial
court overlooked, misunderstood, or misapplied some facts or circumstances of weight and
substance which will affect the result of the case.

DECISION

YNARES-SANTIAGO, J p:

In May 1991, petitioner Estela L. Crisostomo contracted the services of respondent Caravan
Travel and Tours International, Inc. to arrange and facilitate her booking, ticketing and
accommodation in a tour dubbed "Jewels of Europe." The package tour included the countries of
England, Holland, Germany, Austria, Liechtenstein, Switzerland and France at a total cost of
P74,322.70. Petitioner was given a 5% discount on the amount, which included airfare, and the
booking fee was also waived because petitioner's niece, Meriam Menor, was respondent
company's ticketing manager.

Pursuant to said contract, Menor went to her aunt's residence on June 12, 1991 — a Wednesday —
to deliver petitioner's travel documents and plane tickets. Petitioner, in turn, gave Menor the full
payment for the package tour. Menor then told her to be at the Ninoy Aquino International Airport
(NAIA) on Saturday, two hours before her flight on board British Airways.
Without checking her travel documents, petitioner went to NAIA on Saturday, June 15, 1991, to
take the flight for the first leg of her journey from Manila to Hongkong. To petitioner's dismay, she
discovered that the flight she was supposed to take had already departed the previous day. She
learned that her plane ticket was for the flight scheduled on June 14, 1991. She thus called up
Menor to complain.

Subsequently, Menor prevailed upon petitioner to take another tour — the "British Pageant" —
which included England, Scotland and Wales in its itinerary. For this tour package, petitioner was
asked anew to pay US$785.00 or P20,881.00 (at the then prevailing exchange rate of P26.60). She
gave respondent US$300 or P7,980.00 as partial payment and commenced the trip in July 1991.

Upon petitioner's return from Europe, she demanded from respondent the reimbursement of
P61,421.70, representing the difference between the sum she paid for "Jewels of Europe" and the
amount she owed respondent for the "British Pageant" tour. Despite several demands, respondent
company refused to reimburse the amount, contending that the same was non-refundable. 1
Petitioner was thus constrained to file a complaint against respondent for breach of contract of
carriage and damages, which was docketed as Civil Case No. 92-133 and raffled to Branch 59 of
the Regional Trial Court of Makati City.

In her complaint, 2 petitioner alleged that her failure to join "Jewels of Europe" was due to
respondent's fault since it did not clearly indicate the departure date on the plane ticket.
Respondent was also negligent in informing her of the wrong flight schedule through its employee
Menor. She insisted that the "British Pageant" was merely a substitute for the "Jewels of Europe"
tour, such that the cost of the former should be properly set-off against the sum paid for the latter.

For its part, respondent company, through its Operations Manager, Concepcion Chipeco, denied
responsibility for petitioner's failure to join the first tour. Chipeco insisted that petitioner was
informed of the correct departure date, which was clearly and legibly printed on the plane ticket.
The travel documents were given to petitioner two days ahead of the scheduled trip. Petitioner had
only herself to blame for missing the flight, as she did not bother to read or confirm her flight
schedule as printed on the ticket.

Respondent explained that it can no longer reimburse the amount paid for "Jewels of Europe,"
considering that the same had already been remitted to its principal in Singapore, Lotus Travel
Ltd., which had already billed the same even if petitioner did not join the tour. Lotus' European
tour organizer, Insight International Tours Ltd., determines the cost of a package tour based on a
minimum number of projected participants. For this reason, it is accepted industry practice to
disallow refund for individuals who failed to take a booked tour. 3

Lastly, respondent maintained that the "British Pageant" was not a substitute for the package tour
that petitioner missed. This tour was independently procured by petitioner after realizing that she
made a mistake in missing her flight for "Jewels of Europe." Petitioner was allowed to make a
partial payment of only US$300.00 for the second tour because her niece was then an employee of
the travel agency. Consequently, respondent prayed that petitioner be ordered to pay the balance of
P12,901.00 for the "British Pageant" package tour.

After due proceedings, the trial court rendered a decision, 4 the dispositive part of which reads:

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

1. Ordering the defendant to return and/or refund to the plaintiff the amount of Fifty Three
Thousand Nine Hundred Eighty Nine Pesos and Forty Three Centavos (P53,989.43) with legal
interest thereon at the rate of twelve percent (12%) per annum starting January 16, 1992, the date
when the complaint was filed;

2. Ordering the defendant to pay the plaintiff the amount of Five Thousand (P5,000.00) Pesos as
and for reasonable attorney's fees;

3. Dismissing the defendant's counterclaim, for lack of merit; and

4. With costs against the defendant.

SO ORDERED. 5

The trial court held that respondent was negligent in erroneously advising petitioner of her
departure date through its employee, Menor, who was not presented as witness to rebut petitioner's
testimony. However, petitioner should have verified the exact date and time of departure by
looking at her ticket and should have simply not relied on Menor's verbal representation. The trial
court thus declared that petitioner was guilty of contributory negligence and accordingly, deducted
10% from the amount being claimed as refund.

Respondent appealed to the Court of Appeals, which likewise found both parties to be at fault.
However, the appellate court held that petitioner is more negligent than respondent because as a
lawyer and well-traveled person, she should have known better than to simply rely on what was
told to her. This being so, she is not entitled to any form of damages. Petitioner also forfeited her
right to the "Jewels of Europe" tour and must therefore pay respondent the balance of the price for
the "British Pageant" tour. The dispositive portion of the judgment appealed from reads as follows:

WHEREFORE, premises considered, the decision of the Regional Trial Court dated October 26,
1995 is hereby REVERSED and SET ASIDE. A new judgment is hereby ENTERED requiring the
plaintiff-appellee to pay to the defendant-appellant the amount of P12,901.00, representing the
balance of the price of the British Pageant Package Tour, the same to earn legal interest at the rate
of SIX PERCENT (6%) per annum, to be computed from the time the counterclaim was filed until
the finality of this decision. After this decision becomes final and executory, the rate of TWELVE
PERCENT (12%) interest per annum shall be additionally imposed on the total obligation until
payment thereof is satisfied. The award of attorney's fees is DELETED. Costs against the plaintiff-
appellee.
SO ORDERED. 6

Upon denial of her motion for reconsideration, 7 petitioner filed the instant petition under Rule 45
on the following grounds:

It is respectfully submitted that the Honorable Court of Appeals committed a reversible error in
reversing and setting aside the decision of the trial court by ruling that the petitioner is not entitled
to a refund of the cost of unavailed "Jewels of Europe" tour she being equally, if not more,
negligent than the private respondent, for in the contract of carriage the common carrier is obliged
to observe utmost care and extra-ordinary diligence which is higher in degree than the ordinary
diligence required of the passenger. Thus, even if the petitioner and private respondent were both
negligent, the petitioner cannot be considered to be equally, or worse, more guilty than the private
respondent. At best, petitioner's negligence is only contributory while the private respondent [is
guilty] of gross negligence making the principle of pari delicto inapplicable in the case;

II

The Honorable Court of Appeals also erred in not ruling that the "Jewels of Europe" tour was not
indivisible and the amount paid therefor refundable;

III

The Honorable Court erred in not granting to the petitioner the consequential damages due her as a
result of breach of contract of carriage. 8

Petitioner contends that respondent did not observe the standard of care required of a common
carrier when it informed her wrongly of the flight schedule. She could not be deemed more
negligent than respondent since the latter is required by law to exercise extraordinary diligence in
the fulfillment of its obligation. If she were negligent at all, the same is merely contributory and
not the proximate cause of the damage she suffered. Her loss could only be attributed to
respondent as it was the direct consequence of its employee's gross negligence.

Petitioner's contention has no merit.

By definition, a contract of carriage or transportation is one whereby a certain person or

association of persons obligate themselves to transport persons, things, or news from one place to
another for a fixed price. 9 Such person or association of persons are regarded as carriers and are
classified as private or special carriers and common or public carriers. 10 A common carrier is
defined under Article 1732 of the Civil Code as persons, corporations, firms or associations
engaged in the business of carrying or transporting passengers or goods or both, by land, water or
air, for compensation, offering their services to the public.

It is obvious from the above definition that respondent is not an entity engaged in the business of
transporting either passengers or goods and is therefore, neither a private nor a common carrier.
Respondent did not undertake to transport petitioner from one place to another since its covenant
with its customers is simply to make travel arrangements in their behalf. Respondent's services as
a travel agency include procuring tickets and facilitating travel permits or visas as well as booking
customers for tours.

While petitioner concededly bought her plane ticket through the efforts of respondent company,
this does not mean that the latter ipso facto is a common carrier. At most, respondent acted merely
as an agent of the airline, with whom petitioner ultimately contracted for her carriage to Europe.
Respondent's obligation to petitioner in this regard was simply to see to it that petitioner was
properly booked with the airline for the appointed date and time. Her transport to the place of
destination, meanwhile, pertained directly to the airline.

The object of petitioner's contractual relation with respondent is the latter's service of arranging
and facilitating petitioner's booking, ticketing and accommodation in the package tour. In contrast,
the object of a contract of carriage is the transportation of passengers or goods. It is in this sense
that the contract between the parties in this case was an ordinary one for services and not one of
carriage. Petitioner's submission is premised on a wrong assumption.

The nature of the contractual relation between petitioner and respondent is determinative of the
degree of care required in the performance of the latter's obligation under the contract. For reasons
of public policy, a common carrier in a contract of carriage is bound by law to carry passengers as
far as human care and foresight can provide using the utmost diligence of very cautious persons
and with due regard for all the circumstances. 11 As earlier stated, however, respondent is not a
common carrier but a travel agency. It is thus not bound under the law to observe extraordinary
diligence in the performance of its obligation, as petitioner claims.

Since the contract between the parties is an ordinary one for services, the standard of care required
of respondent is that of a good father of a family under Article 1173 of the Civil Code. 12 This
connotes reasonable care consistent with that which an ordinarily prudent person would have
observed when confronted with a similar situation. The test to determine whether negligence
attended the performance of an obligation is: did the defendant in doing the alleged negligent act
use that reasonable care and caution which an ordinarily prudent person would have used in the
same situation? If not, then he is guilty of negligence. 13

In the case at bar, the lower court found Menor negligent when she allegedly informed petitioner
of the wrong day of departure. Petitioner's testimony was accepted as indubitable evidence of
Menor's alleged negligent act since respondent did not call Menor to the witness stand to refute the
allegation. The lower court applied the presumption under Rule 131, Section 3 (e) 14 of the Rules
of Court that evidence willfully suppressed would be adverse if produced and thus considered
petitioner's uncontradicted testimony to be sufficient proof of her claim.
On the other hand, respondent has consistently denied that Menor was negligent and maintains
that petitioner's assertion is belied by the evidence on record. The date and time of departure was
legibly written on the plane ticket and the travel papers were delivered two days in advance
precisely so that petitioner could prepare for the trip. It performed all its obligations to enable
petitioner to join the tour and exercised due diligence in its dealings with the latter.

We agree with respondent.

Respondent's failure to present Menor as witness to rebut petitioner's testimony could not give rise
to an inference unfavorable to the former. Menor was already working in France at the time of the
filing of the complaint, 15 thereby making it physically impossible for respondent to present her as
a witness. Then too, even if it were possible for respondent to secure Menor's testimony, the
presumption under Rule 131, Section 3(e) would still not apply. The opportunity and possibility
for obtaining Menor's testimony belonged to both parties, considering that Menor was not just
respondent's employee, but also petitioner's niece. It was thus error for the lower court to invoke
the presumption that respondent willfully suppressed evidence under Rule 131, Section 3(e). Said
presumption would logically be inoperative if the evidence is not intentionally omitted but is
simply unavailable, or when the same could have been obtained by both parties. 16

In sum, we do not agree with the finding of the lower court that Menor's negligence concurred
with the negligence of petitioner and resultantly caused damage to the latter. Menor's negligence
was not sufficiently proved, considering that the only evidence presented on this score was
petitioner's uncorroborated narration of the events. It is well-settled that the party alleging a fact
has the burden of proving it and a mere allegation cannot take the place of evidence. 17 If the
plaintiff, upon whom rests the burden of proving his cause of action, fails to show in a satisfactory
manner facts upon which he bases his claim, the defendant is under no obligation to prove his
exception or defense. 18

Contrary to petitioner's claim, the evidence on record shows that respondent exercised due
diligence in performing its obligations under the contract and followed standard procedure in
rendering its services to petitioner. As correctly observed by the lower court, the plane ticket 19
issued to petitioner clearly reflected the departure date and time, contrary to petitioner's
contention. The travel documents, consisting of the tour itinerary, vouchers and instructions, were
likewise delivered to petitioner two days prior to the trip. Respondent also properly booked
petitioner for the tour, prepared the necessary documents and procured the plane tickets. It
arranged petitioner's hotel accommodation as well as food, land transfers and sightseeing
excursions, in accordance with its avowed undertaking.

Therefore, it is clear that respondent performed its prestation under the contract as well as
everything else that was essential to book petitioner for the tour. Had petitioner exercised due
diligence in the conduct of her affairs, there would have been no reason for her to miss the flight.
Needless to say, after the travel papers were delivered to petitioner, it became incumbent upon her
to take ordinary care of her concerns. This undoubtedly would require that she at least read the
documents in order to assure herself of the important details regarding the trip.

The negligence of the obligor in the performance of the obligation renders him liable for damages
for the resulting loss suffered by the obligee. Fault or negligence of the obligor consists in his
failure to exercise due care and prudence in the performance of the obligation as the nature of the
obligation so demands. 20 There is no fixed standard of diligence applicable to each and every
contractual obligation and each case must be determined upon its particular facts. The degree of
diligence required depends on the circumstances of the specific obligation and whether one has
been negligent is a question of fact that is to be determined after taking into account the particulars
of each case. 21

The lower court declared that respondent's employee was negligent. This factual finding, however,
is not supported by the evidence on record. While factual findings below are generally conclusive
upon this court, the rule is subject to certain exceptions, as when the trial court overlooked,
misunderstood, or misapplied some facts or circumstances of weight and substance which will
affect the result of the case. 22

In the case at bar, the evidence on record shows that respondent company performed its duty
diligently and did not commit any contractual breach. Hence, petitioner cannot recover and must
bear her own damage.

WHEREFORE, the instant petition is DENIED for lack of merit. The decision of the Court of
Appeals in CA-G.R. CV No. 51932 is AFFIRMED. Accordingly, petitioner is ordered to pay
respondent the amount of P12,901.00 representing the balance of the price of the British Pageant
Package Tour, with legal interest thereon at the rate of 6% per annum, to be computed from the
time the counterclaim was filed until the finality of this Decision. After this Decision becomes
final and executory, the rate of 12% per annum shall be imposed until the obligation is fully
settled, this interim period being deemed to be by then an equivalent to a forbearance of credit. 23

SO ORDERED.

Davide, Jr., C .J ., Vitug, Carpio, and Azcuna, JJ ., concur.

Footnotes
1.TSN, March 4, 1993, pp. 4-6.

2.RTC Records, p. 1.

3.TSN, August 30, 1994, pp. 6-9.

4.Rollo, pp. 38-43.

5.Id. at 43; penned by Judge Lucia Violago Isnani.

6.Id. at 36.

7.Id. at 37.

8.Id. at 15.

9.Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. 4 (1993
Edition), Aguedo F. Agbayani, p. 1, citing 1 Blanco 640.

10.Id. at 4.

11.Civil Code of the Philippines, Article 1755.

12.Article 1173. The fault or negligence of the obligor consists in the omission of that diligence
which is required by the nature of the obligation and corresponds with the circumstances of the
persons, of the time and of the place. When negligence shows bad faith, the provisions of Articles
1171 and 2201, paragraph 2, shall apply.

If the law or contract does not state the diligence which is to be observed in the performance, that
which is expected of a good father of a family shall be required.

13.Jarco Marketing Corporation v. Court of Appeals, 378 Phil. 991, 1003 (1999), citing Picart v.
Smith, 37 Phil. 809 (1918).

14.This rule states:

SEC. 3. Disputable presumptions. — The following presumptions are satisfactory if

uncontradicted, but may be contradicted and overcome by other evidence:

xxx xxx xxx

(e) That evidence willfully suppressed would be adverse if produced;

xxx xxx xxx

15.Supra, note 3 at 10.

16.The Revised Rules of Court in the Philippines, Vol. VII, Part II (1999 Edition) V. Francisco, p.
92.

17.Pimentel v. Court of Appeals, 307 SCRA 38.

18.Castilex Industrial Corporation v. Vasquez, Jr., 378 Phil. 1009, 1018 (1999), citing Belen v.
Belen, 13 Phil. 202, 206 (1909), cited in Martin v. Court of Appeals, G.R. No. 82248, 205 SCRA
591 (1992).

19.Supra, note 2 at 60 & 94.

20.Bayne Adjusters and Surveyors, Inc. v. Court of Appeals, G.R. No. 116332, 323 SCRA 231
(2000), citing Articles 1170, 1172–73, Civil Code; Southeastern College, Inc. v. Court of Appeals,
354 Phil. 434 (1998).

21.Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV (1999 Edition),
Arturo M. Tolentino, p. 124.

22.Supra, note 13, citing Borillo v. CA, G.R. No. 55691, 209 SCRA 130 (1992); Mckee v.
Intermediate Appellate Court, G.R. No. 68102, 211 SCRA 517 (1992); and Salvador v. Court of
Appeals, 313 Phil. 36 (1995).

23.Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, 12 July 1994, 234 SCRA 78,
97.

||| (Crisostomo v. Court of Appeals, G.R. No. 138334, [August 25, 2003], 456 PHIL 845-860)

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12
143 PHIL 317-322

EN BANC

[G.R. No. L-27454. April 30, 1970.]

ROSENDO O. CHAVES, plaintiff-appellant, vs. FRUCTUOSO GONZALES, defendant-appellee.

Chaves, Elio, Chaves & Associates for plaintiff-appellant.

Sulpicio E. Platon for defendant-appellee.

SYLLABUS

1. CIVIL LAW; CONTRACTS; BREACH OF CONTRACT FOR NON-PERFORMANCE;

FIXING OF PERIOD BEFORE FILING OF COMPLAINT FOR NON-PERFORMANCE,
ACADEMIC.— Where the time for compliance had expired and there was breach of contract by
non-performance, it was academic for the plaintiff to have first petitioned the court to fix a period
for the performance of the contract before filing his complaint.

2. ID.; ID.; ID.; DEFENDANT CANNOT INVOKE ARTICLE 1197 OF THE CIVIL CODE OF
THE PHILIPPINES.— Where the defendant virtually admitted non-performance of the contract
by returning the typewriter that he was obliged to repair in a non-working condition, with essential
parts missing, Article 1197 of the Civil Code of the Philippines cannot be invoked. The fixing of a
period would thus be a mere formality and would serve no purpose than to delay.

3. ID.; ID.; ID.; DAMAGES RECOVERABLE; CASE AT BAR.— Where the defendant-appellee
contravened the tenor of his obligation because he not only did not repair the typewriter but
returned it "in shambles,'' he is liable for the cost of the labor or service expended in the repair of
the typewriter, which is in the amount of P58.75, because the obligation or contract was to repair
it. In addition, he is likewise liable under Art. 1170 of the Code, for the cost of the missing parts,
in the amount of P31.10, for in his obligation to repair the typewriter he was bound, but failed or
neglected, to return it in the same condition it was when he received it.

4. ID.; ID.; ID.; CLAIMS FOR DAMAGES OR ATTORNEY'S FEES NOT RECOVERABLE;
NOT ALLEGED OR PROVED IN INSTANT CASE.— Claims for damages and attorney's fees
must be pleaded, and the existence of the actual basis thereof must be proved. As no findings of
fact were made on the claims for damages and attorney's fees, there is no factual basis upon which
to make an award therefor.

5. REMEDIAL LAW; APPEALS; APPEAL FROM COURT OF FIRST INSTANCE TO

SUPREME COURT; ONLY QUESTIONS OF LAW REVIEWABLE.— Where the appellant
directly appeals from the decision of the trial court to the Supreme Court on questions of law, he is
bound by the judgment of the court a quo on its findings of fact.

DECISION

REYES, J.B.L., J p:

This is a direct appeal by the party who prevailed in a suit for breach of oral contract and recovery
of damages but was unsatisfied with the decision rendered by the Court of First Instance of
Manila, in its Civil Case No. 65138, because it awarded him only P31.10 out of his total claim of
P690 00 for actual, temperate and moral damages and attorney's fees.

The appealed judgment, which is brief, is hereunder quoted in full:

"In the early part of July, 1963, the plaintiff delivered to the defendant, who is a typewriter
repairer, a portable typewriter for routine cleaning and servicing. The defendant was not able to
finish the job after some time despite repeated reminders made by the plaintiff. The defendant
merely gave assurances, but failed to comply with the same. In October, 1963, the defendant asked
from the plaintiff the sum of P6.00 for the purchase of spare parts, which amount the plaintiff gave
to the defendant. On October 26, 1963, after getting exasperated with the delay of the repair of the
typewriter, the plaintiff went to the house of the defendant and asked for the return of the
typewriter. The defendant delivered the typewriter in a wrapped package. On reaching home, the
plaintiff examined the typewriter returned to him by the defendant and found out that the same
was in shambles, with the interior cover and some parts and screws missing. On October 29, 1963.
the plaintiff sent a letter to the defendant formally demanding the return of the missing parts, the
interior cover and the sum of P6.00 (Exhibit D). The following day, the defendant returned to the
plaintiff some of the missing parts, the interior cover and the P6.00.

"On August 29, 1964, the plaintiff had his typewriter repaired by Freixas Business Machines, and
the repair job cost him a total of P89.85, including labor and materials (Exhibit C).

"On August 23, 1965, the plaintiff commenced this action before the City Court of Manila,
demanding from the defendant the payment of P90.00 as actual and compensatory damages,
P100.00 for temperate damages, P500.00 for moral damages, and P500.00 as attorney's fees.

"In his answer as well as in his testimony given before this court, the defendant made no denials of
the facts narrated above, except the claim of the plaintiff that the typewriter was delivered to the
defendant through a certain Julio Bocalin, which the defendant denied allegedly because the
typewriter was delivered to him personally by the plaintiff.

"The repair done on the typewriter by Freixas Business Machines with the total cost of P89.85
should not, however, be fully chargeable against the defendant. The repair invoice, Exhibit C,
shows that the missing parts had a total value of only P31.10.

"WHEREFORE, judgment is hereby rendered ordering the defendant to pay the plaintiff the sum
of P31.10, and the costs of suit.

"SO ORDERED."

The error of the court a quo, according to the plaintiff-appellant, Rosendo O. Chaves, is that it
awarded only the value of the missing parts of the typewriter, instead of the whole cost of labor
and materials that went into the repair of the machine, as provided for in Article 1167 of the Civil
Code, reading as follows:
"ART. 1167. If a person obliged to do something fails to do it, the same shall be executed at his
cost.

This same rule shall be observed if he does it in contravention of the tenor of the obligation.
Furthermore it may be decreed that what has been poorly done he undone."

On the other hand, the position of the defendant-appellee, Fructuoso Gonzales, is that he is not
liable at all, not even for the sum of P31.10, because his contract with plaintiff-appellant did not
contain a period, so that plaintiff-appellant should have first filed a petition for the court to fix the
period, under Article 1197 of the Civil Code, within which the defendant appellee was to comply
with the contract before said defendant-appellee could be held liable for breach of contract.

Because the plaintiff appealed directly to the Supreme Court and the appellee did not interpose
any appeal, the facts, as found by the trial court, are now conclusive and non-reviewable. 1

The appealed judgment states that the "plaintiff delivered to the defendant . . . a portable
typewriter for routine cleaning and servicing"; that the defendant was not able to finish the job
after some time despite repeated reminders made by the plaintiff"; that the "defendant merely gave
assurances, but failed to comply with the same"; and that "after getting exasperated with the delay
of the repair of the typewriter", the plaintiff went to the house of the defendant and asked for its
return, which was done. The inferences derivable from these findings of fact are that the appellant
and the appellee had a perfected contract for cleaning and servicing a typewriter; that they
intended that the defendant was to finish it at some future time although such time was not
specified; and that such time had passed without the work having been accomplished, far the
defendant returned the typewriter cannibalized and unrepaired, which in itself is a breach of his
obligation, without demanding that he should be given more time to finish the job, or
compensation for the work he had already done. The time for compliance having evidently
expired, and there being a breach of contract by non-performance, it was academic for the plaintiff
to have first petitioned the court to fix a period for the performance of the contract before filing his
complaint in this case. Defendant cannot invoke Article 1197 of the Civil Code for he virtually
admitted non-performance by returning the typewriter that he was obliged to repair in a non-
working condition, with essential parts missing. The fixing of a period would thus be a mere
formality and would serve no purpose than to delay (cf. Tiglao. et al. V. Manila Railroad Co. 98
Phil. 181).

It is clear that the defendant-appellee contravened the tenor of his obligation because he not only
did not repair the typewriter but returned it "in shambles", according to the appealed decision. For
such contravention, as appellant contends, he is liable under Article 1167 of the Civil Code. jam
quot, for the cost of executing the obligation in a proper manner. The cost of the execution of the
obligation in this case should be the cost of the labor or service expended in the repair of the
typewriter, which is in the amount of P58.75. because the obligation or contract was to repair it.

In addition, the defendant-appellee is likewise liable, under Article 1170 of the Code, for the cost
of the missing parts, in the amount of P31.10, for in his obligation to repair the typewriter he was
bound, but failed or neglected, to return it in the same condition it was when he received it.

Appellant's claims for moral and temperate damages and attorney's fees were, however, correctly
rejected by the trial court, for these were not alleged in his complaint (Record on Appeal, pages 1-
5). Claims for damages and attorney's fees must be pleaded, and the existence of the actual basis
thereof must be proved. 2 The appealed judgment thus made no findings on these claims, nor on
the fraud or malice charged to the appellee. As no findings of fact were made on the claims for
damages and attorney's fees, there is no factual basis upon which to make an award therefor.
Appellant is bound by such judgment of the court, a quo, by reason of his having resorted directly
to the Supreme Court on questions of law.

IN VIEW OF THE FOREGOING REASONS, the appealed judgment is hereby modified, by

ordering the defendant-appellee to pay, as he is hereby ordered to pay, the plaintiff-appellant the
sum of P89.85, with interest at the legal rate from the filing of the complaint. Costs in all instances
against appellee Fructuoso Gonzales.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee and Villamor, JJ.,
concur.

Barredo, J., did not take part.

Footnotes
1.Perez v. Araneta, L-18414, 15 July 1968, 24 SCRA 43; Cebu Portland Cement Co. v. Mun. of
Naga L-24116-17, 22 August 1968, 24 SCRA 708.

2.Malonzo v. Galang, L-13851, 27 July 1960; Darang v. Belizear, L-22399, 31 March 1967, 19
SCRA 214.

12
||| (Chaves v. Gonzales, G.R. No. L-27454, [April 30, 1970], 143 PHIL 317-322)
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119 PHIL 339-350

EN BANC

[G.R. No. L-15645. January 31, 1964.]

PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffs-appellees, vs. NATIONAL RICE AND
CORN CORPORATION, defendant-appellant, MANILA UNDERWRITERS INSURANCE CO.,
INC., defendant-appellee.

Teehankee & Carreon for plaintiffs-appellees.

The Government Corporate Counsel for defendant-appellant.

Isidro A. Vera for defendant-appellee.

SYLLABUS

1. OBLIGATIONS AND CONTRACTS; LIABILITY FOR NON-PERFORMANCE; FAILURE

TO PUT UP LETTER OF CREDIT WITHIN AGREED PERIOD. — One who assumes a
contractual obligation and fails to perform the same on account of his inability to meet certain
bank requirements, which inability he knew and was aware of when he entered into the contract,
should be held liable in damages for breach of contract.

2. OBLIGATIONS AND CONTRACTS; LIABILITY OF NON-PERFORMANCE. — Under

Article 1170 of the Civil Code, not only debtors guilty of fraud, negligence or default but also
every debtor, in general, who fails in the performance of his obligations is bound to indemnify for
the losses and damages caused thereby.

3. ID.; ID.; MEANING OF PHRASE "IN ANY MANNER CONTRAVENE THE TENOR" OF
THE OBLIGATION IN ART. 1170, CIVIL CODE. — The phrase "in any manner contravene the
tenor" of the obligation in Art. 1170, Civil Code, includes any illicit task which impairs the strict
and faithful fulfillment of the obligation, or every kind of defective performance.

4. ID.; ID.; WAIVER OF BREACH OF CONTRACT NOT PRESUMED. — Waivers are not
presumed, but must be clearly and convincingly shown, either by express stipulation or acts
admitting of no other reasonable explanation.

5. ID.; PAYMENT OF AWARD; PHILIPPINE CURRENCY. — In view of Republic Act 529

which specifically requires the discharge of obligations only "in any coin or currency which at the
time of payment is legal tender for public and private debt", the award of damages in U.S. dollars
made by the lower court in the case at bar is modified by converting it into Philippine pesos at the
rate of exchange prevailing at the time the obligation was incurred or when the contract in
question was executed.

DECISION

REGALA, J p:

This is an appeal of the defendant-appellant NARIC from the decision of the trial court dated
February 20, 1958, awarding to the plaintiffs-appellees the amount of $286,000.00 as damages for
breach of contract and dismissing the counterclaim and third party complaint of the defendant-
appellant NARIC.

In accordance with Section 13 of Republic Act No. 3452, "the National Rice and Corn
Administration (NARIC) is hereby abolished and all its assets, liabilities, functions, powers which
are not inconsistent with the provisions of this Act, and all personnel are transferred" to the Rice
and Corn Administration (RCA).

All references, therefore, to the NARIC in this decision must accordingly be adjusted and read as
RCA pursuant to the aforementioned law.

On May 19, 1952, plaintiff-appellee participated in the public bidding called by the NARIC for the
supply of 20,000 metric tons of Burmese rice. As her bid of $203.00 per metric ton was the lowest,
she was awarded the contract for the same. Accordingly, on July 1, 1952, plaintiff-appellee Paz P.
Arrieta and the appellant corporation entered into a Contract of Sale of Rice, under the terms of
which the former obligated herself to deliver to the latter 20,000 metric tons of Burmese Rice at
$203.00 per metric ton, CIF Manila. In turn, the defendant Corporation committed itself to pay for
the imported rice "by means of an irrevocable, confirmed and assignable letter of credit in U.S.
currency in favor of the plaintiff-appellee and/or supplier in Burma, immediately."

Despite the commitment to pay immediately "by means of an irrevocable, confirmed and
assignable Letter of Credit," however, it was only on July 30, 1952, or a full month from the
execution of the contract, that the defendant corporation, thru its general manager, took the first
step to open a letter of credit by forwarding to the Philippine National Bank its Application for
Commercial Letter of Credit. The application was accompanied by a transmittal letter, the relevant
paragraphs of which read:

"In view of the fact that we do not have sufficient deposit with your institution with which to
cover the amount required to be deposited as a condition for the opening of letters of credit, we
will appreciate it if this application could be considered a special case.

"We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet which is August 4,
1952, and in order to comply therewith, it is imperative that the L/C be opened prior to that date.
We would therefore request your full cooperation on this matter."

On the same day, July 30, 1952, Mrs. Paz P. Arrieta, thru counsel, advised the appellant
corporation of the extreme necessity for the immediate opening of the letter of credit since she had
by then made a tender to her supplier in Rangoon, Burma "equivalent to 5% of the F.O.B. price of
20,000 tons at $180.70 and in compliance with the regulations in Rangoon this 5% will be
confiscated if the required letter of credit is not received by them before August 4, 1952."

On August 4, 1952, the Philippine National Bank informed the appellant corporation that its
application, "for a letter of credit for $3,614,000.00 in favor of Thiri Setkya has been approved by
the Board of Directors with the condition that 50% marginal cash deposit be paid and that drafts
are to be paid upon presentment" (Exh. J-pl.; Exh. 10-def., p. 19, Folder of Exhibits) Furthermore,
the Bank represented that it "will hold your application in abeyance pending compliance with the
above stated requirement."

As it turned out, however, the appellant corporation was not in any financial position to meet the
condition. As a matter of fact, in a letter dated August 2, 1952, the NARIC bluntly confessed to the
appellee its dilemma: "In this connection, please be advised that our application for the opening of
the letter of credit has been presented to the bank since July 30th but the latter requires that we
first deposit 50% of the value of the letter amounting to approximately $3,614,000.00 which we
are not in a position to meet." (Emphasis supplied. Exh. 9-Def.; Exh. 1-Pl., p. 18, Folder of
Exhibits)

Consequently, the credit instrument applied for was opened only on September 8, 1952 "in favor
of Thiri Setkya, Rangoon, Burma, and/or assignee for $3,614,000.00," (which is more than two
months from the execution of the contract) the party named by the appellee as beneficiary of the
letter of credit.

As a result of the delay, the allocation of appellee's supplier in Rangoon was cancelled and the 5%
deposit, amounting to 524,000 kyats or approximately P200,000.00 was forfeited. In this
connection, it must be made of record that although the Burmese authorities had set August 4,
1952 as the deadline for the remittance of the required letter of credit, the cancellation of the
allocation and the confiscation of the 5% deposit were not effected until August 20, 1952, or, a full
half month after the expiration of the deadline. And yet, even with that 15-day grace, appellant
corporation was unable to make good its commitment to open the disputed letter of credit.

The appellee endeavored, but failed, to restore the cancelled Burmese rice allocation. When the
futility of reinstating the same became apparent, she offered to substitute Thailand rice instead to
the defendant NARIC, communicating at the same time that the offer was "a solution which
should be beneficial to the NARIC and to us at the same time." (Exh. Y-Pl.; Exh. 25—Def., p. 38,
Folder of Exhibits) This offer for substitution, however, was rejected by the appellant in a
resolution dated November 15, 1952.

On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the
damages caused her in the sum of $286,000.00, U.S. currency, representing unrealized profit. The
demand having been rejected, she instituted this case now on appeal.

At the instance of the NARIC, a counterclaim was filed and the Manila Underwriters Insurance
Company was brought to the suit as a third party defendant to hold it liable on the performance
bond it executed in favor of the plaintiff-appellees.

We find for the appellee.

It is clear upon the records that the sole and principal reason for the cancellation of the allocation
contracted by the appellee herein in Rangoon, Burma was the failure of the letter of credit to be
opened within the contemplated period. This failure must, therefore, be taken as the immediate
cause for the consequent damage which resulted. As it is then, the disposition of this case depends
on a determination of who was responsible for such failure. Stated differently, the issue is whether
appellant's failure to open immediately the letter of credit in dispute amounted to a breach of the
contract of July 1, 1952 for which it may be held liable in damages.

Appellant corporation disclaims responsibility for the delay in the opening of the letter of credit.
On the contrary, it insists that the fault lies with the appellee. Appellant contends that the disputed
negotiable instrument was not promptly secured because the appellee failed to seasonably furnish
data necessary and required for opening the same, namely, "(1) the amount of the letter of credit,
(2) the person, company or corporation in whose favor it is to be opened, and (3) the place and
bank where it may be negotiated." Appellant would have this Court believe, therefore, that had
these information been forthwith furnished it, there would have been no delay in securing the
instrument.

Appellant's explanation has neither force nor merit. In the first place, the explanation reaches into
an area of the proceedings into which We are not at liberty to encroach. The explanation refers to a
question of fact. Nothing in the record suggests any arbitrary or abusive conduct on the part of the
trial judge in the formulation of the ruling. His conclusion on the matter is sufficiently borne out
by the evidence presented. We are denied, therefore, the prerogative to disturb that finding,
consonant to the time honored tradition of this Tribunal to hold trial judges better situated to make
conclusions on questions of fact. For the record, We quote hereunder the lower court's ruling on
the point:

"The defense that the delay, if any in opening the letter of credit was due to the failure of plaintiff
to name the supplier, the amount and the bank is not tenable. Plaintiff stated in Court that these
facts were known to defendant even before the contract was executed because these facts were
necessarily revealed to the defendant before she could qualify as a bidder. She stated too that she
had given the necessary data immediately after the execution of Exh. "A" (the contract of July 1,
1952) to Mr. GABRIEL BELMONTE, General Manager of the NARIC, both orally and in writing
and that she also pressed for the opening of the letter of credit on these occasions. These
statements have not been controverted and defendant NARIC, notwithstanding its previous
intention to do so, failed to present Mr. Belmonte to testify or refute this. . . ."

Secondly, from the correspondence and communications which form part of the record of this
case, it is clear that what singularly delayed the opening of the stipulated letter of credit and
which, in turn, caused the cancellation of the allocation in Burma, was the inability of the
appellant corporation to meet the condition imposed by the Bank for granting the same.

We do not think the appellant corporation can refute the fact that had it been able to put up the
50% marginal cash deposit demanded by the bank, then the letter of credit would have been
approved, opened and released as early as August 4, 1952. The letter of the Philippine National
Bank to the NARIC was plain and explicit that as of the said date, appellant's "application for a
letter of credit . . . has been approved by the Board of Directors with the condition that 50%
marginal cash deposit be paid and that drafts are to be paid upon presentment." (Emphasis
supplied)

The liability of the appellant, however, stems not alone from this failure or inability to satisfy the
requirements of the bank. Its culpability arises from its willful and deliberate assumption of
contractual obligations even as it was well aware of its financial incapacity to undertake the
presentation. We base this judgment upon the letter which accompanied the application filed by
the appellant with the bank, a part of which letter was quoted earlier in this decision. In the said
accompanying correspondence, appellant admitted and owned that it did "not have sufficient
deposit with your institution (the PNB) with which to cover the amount required to be deposited as
a condition for the opening of letters of credit. . . ."

A number of logical inferences may be drawn from the aforementioned admission. First, that the
appellant knew the bank requirements for opening letters of credit; second, that appellant also
knew it could not meet those requirements. When, therefore, despite this awareness that it was
financially incompetent to open a letter of credit immediately, appellant agreed in paragraph 8 of
the contract to pay immediately "by means of an irrevocable, confirmed and assignable letter of
credit," it must be similarly be held to have bound itself too answer far all and every consequences
that would result from the representation. As aptly observed by the trial court:

". . . Having called for bids for the importation of rice involving millions, $4,260,000.00 to be
exact, it should have ascertained its ability and capacity to comply with the inevitable
requirements in cash to pay for such importation. Having announced the bid, it must be deemed to
have impliedly assured suppliers of its capacity and facility to finance the importation within the
required period, especially since it had imposed on the supplier the 90-day period within which the
shipment of the rice must be brought into the Philippines. Having entered into the contract, it
should have taken steps immediately to arrange for the letter of credit for the large amount
involved and inquired into the possibility of its issuance."

In relation to the aforequoted observation of the trial court, We would like to make reference also
to Article 1170 of the Civil Code which provides:
"Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and
those who in any manner contravene the tenor thereof, are liable in damages."

Under this provision, not only debtors guilty of fraud, negligence or default in the performance of
obligations are decreed liable: in general, every debtor who fails in the performance of his
obligations is bound to indemnify for the losses and damages caused thereby (De la Cruz v.
Seminary of Manila, 18 Phil. 330; Municipality of Moncada v. Cajuigan, 21 Phil. 184; De la
Cavada v. Diaz, 37 Phil. 982; Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong, 49
Phil. 1003; Pando v. Gimenez, 54 Phil. 459; Acme Films v. Theaters Supply, 63 Phil. 657.) The
phrase "in any manner contravene the tenor" of the obligation includes any illicit act which
impairs the strict and faithful fulfillment of the obligation, or every kind of defective performance.
(IV Tolentino, Civil Code of the Philippines, citing authorities, p. 103)

The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice
for the originally contracted Burmese rice amounted to a waiver by the appellee of whatever rights
she might have derived from the breach of the contract. We disagree. Waivers are not presumed,
but must be clearly and convincingly shown, either by express stipulation or acts admitting no
other reasonable explanation. (Ramirez v. Court of Appeals, 98 Phil., 225; 52 O. G. 779). In the
case at bar, no such intent to waive has been established.

We have carefully examined and studied the oral and documentary evidence presented in this case
and upon which the lower court based its award. Under the contract, the NARIC bound itself to
buy 20,000 metric tons of Burmese rice at "$203.00 U. S. Dollars per metric ton, all net shipped
weight, and all in U. S. currency, C.I.F. Manila. . . ." On the other hand, documentary and other
evidence establish with equal certainty that the plaintiff-appellee was able to secure the contracted
commodity at the cost price of $180.70 per metric ton from her supplier in Burma. Considering
freights, insurance and charges incident to its shipment here and the forfeiture of the 5% deposit,
the award granted by the lower court is fair and equitable. For a clearer view of the equity of the
damages awarded, We reproduce below the testimony of the appellee, adequately supported by the
evidence and record:

"Q. Will you please tell the court, how much is the damage you suffered?

"A Because the selling price of my rice is $203.00 per metric ton, and the cost price of my rice is
$180.00. We had to pay also $6.25 for shipping and about $164 for insurance. So adding the cost
of the rice, the freight, the insurance, the total would be about $187.99 that would be $15.01 gross
profit per metric ton, multiply by 20,000 equals $300,200, that is my supposed profit if I went
through with the contract."

The above testimony of the plaintiff was a general approximation of the actual figures involved in
the transaction. A precise and more exact demonstration of the equity of the award herein is
provided by Exhibit HH of the plaintiff and Exhibit 34 of the defendant, hereunder quoted so far
as germane:
"It is equally of record of now that as shown in her request, dated July 29, 1959, and other
communications subsequent thereto for the opening by your corporation of the required letter of
credit, Mrs. Arrieta was supposed to pay her supplier in Burma at the rate of One Hundred Eighty
Dollars and Seventy Cents ($180.70) in U.S. Currency, per ton plus Eight Dollars ($8.00) in the
same currency per ton for shipping and other handling expenses, so that she is already assured of a
net profit of Fourteen Dollars and Thirty Cents ($14.30), U.S. Currency, per ton or a total of Two
Hundred and Eighty Six Thousand Dollars ($286,000.00), U.S. Currency, in the aforesaid
transaction. . . ."

Lastly, herein appellant filed a counterclaim asserting that it has suffered, likewise by way of
unrealized profit, damages in the total sum of $406,000 from the failure of the projected contract
to materialize. This counterclaim was supported by a cost study made and submitted by the
appellant itself and wherein it was illustrated how indeed, had the importation pushed thru,
NARIC would have realized in profit the amount asserted in the counterclaim. And yet, the said
amount of P406,000.00 was realizable by the appellant despite a number of expenses which the
appellee, under the contract, did not have to incur. Thus, under the cost study submitted by the
appellant, banking and unloading charges were to be shouldered by it, including an Import License
Fee of 2% and superintendence fee of $0.25 per metric ton. If the NARIC stood to profit over
P400,000.00 from the disputed transaction in spite of the above extra expenditures from which the
herein appellee was exempt, We are convinced of the fairness of the judgment presently under
appeal.

In the premises, however, a minor modification must be effected in the dispositive portion of the
decision appealed from insofar as it expresses the amount of damages in U.S. currency and not in
Philippine Peso. Republic Act 529 specifically requires the discharge of obligations only "in any
coin or currency which at the time of payment is legal tender for public and private debts." In view
of that law, therefore, the award should be converted into and expressed in Philippine Peso.

This brings us to a consideration of what rate of exchange should apply in the conversion here
decreed. Should it be at the time of the breach, at the time the obligation was incurred or at the rate
of exchange prevailing on the promulgation of this decision.

In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that in an action for recovery of
damages for breach of contract, even if the obligation assumed by the defendant was to pay the
plaintiff a sum of money expressed in American currency, the indemnity to be allowed should be
expressed in Philippine currency at the rate of exchange at the time of the judgment rather than at
the rate of exchange prevailing on the date of defendant's breach. This ruling, however, can either
be applied nor extended to the case at bar for the same was laid down when there was no law
against stipulating foreign currencies in Philippine contracts. But now we have Republic Act No.
529 which expressly declares such stipulations as contrary to public policy, void and of no effect.
And, as We already pronounced in the case of Eastboard Navigation, Ltd., v. Juan Ysmael & Co.,
Inc., G.R. No. L-9090, September 10, 1957, if there is any agreement to pay an obligation in the
currency other than Philippine legal tender, the same is null and void as contrary to public policy
(Republic Act 529), and the most that could be demanded is to pay said obligation in Philippine
currency "to be measured in the prevailing rate of exchange at the time the obligation was incurred
(Sec. 1, Idem.)"

UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole
modification that the award should be converted into the Philippine peso at the rate of exchange
prevailing at the time the obligation was incurred or on July 1, 1952 when the contract was
executed. The appellee insurance company, in the light of this judgment, is relieved of any liability
under this suit. No pronouncement as to costs.

Bengzon, C.J., Padilla, Concepcion, Paredes, Dizon, and Makalintal, JJ., concur.

Reyes, J.B.L., J., reserves his vote.

Barrera, J., took no part.

||| (Arrieta v. National Rice & Corn Corp., G.R. No. L-15645, [January 31, 1964], 119 PHIL 339-
350)

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JURISPRUDENCE Jurisprudences icon 120x120
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2
206 PHIL 341-349

SECOND DIVISION

[G.R. No. L-37120. April 20, 1983.]

VICTORINO D. MAGAT, petitioner, vs. HON. LEO D. MEDIALDEA and SANTIAGO A.

GUERRERO, respondents.

Sinesio S. Vergara for petitioner.

Eladio B. Samson for respondents.

SYLLABUS

1. REMEDIAL LAW; ACTION; CAUSE OF ACTION; SUFFICIENCY THEREOF

DETERMINED ON BASIS OF FACTS ALLEGED IN THE COMPLAINT; REQUISITES;
CASE AT BAR. — Both parties are in accord with the view that when a motion to dismiss is
based on the ground of lack of cause of action, the sufficiency of the cause of action can only be
determined on the basis of the facts alleged in the complaint; that the facts alleged are deemed
hypothetically admitted, including those which are fairly deducible therefrom; and that, admitting
the facts as alleged, whether or not the court can render a valid judgment against the defendant
upon said facts in accordance with the prayer in the complaint. After a thorough examination of
the complaint at bar, the Supreme Court finds the test of legal sufficiency of the cause of action
adequately satisfied. In a methodical and logical sequence, the complaint recites the circumstances
that led to the perfection of the contract entered into by the parties. It further avers that while
petitioner had fulfilled his part of the bargain (paragraph 8 of the Complaint), private respondent
failed to comply with his correlative obligation by refusing to open a letter of credit to cover
payment of the goods ordered by him (paragraphs 11 & 12 of the Complainant), and that
consequently, petitioner suffered not only loss of his expected profits, but moral and exemplary
damages as well. From these allegations, the essential elements of a cause of action are present, to
wit: (1) the existence of a legal right of the plaintiff; (2) a correlative duty of the defendant; and
(3) an act or omission of the defendant in violation of the plaintiff's right, with consequent injury
or damage to the latter for which he may maintain an action for recovery of damages or other
appropriate relief. In fine, the Supreme Court holds that on the basis of the facts alleged in the
complaint, the Court could render a valid judgment in accordance with the prayer thereof.

2. CIVIL LAW; DAMAGES; BREACH OF CONTRACT; LOSS SUFFERED BY VIRTUE

THEREOF BECOMES REAL, FIXED AND VESTED AT THE VERY MOMENT OF BREACH.
— Indisputably, the parties, both businessman, entered into the aforesaid contract with the evident
intention of deriving some profits therefrom. Upon breach of the contract by either of them, the
other would necessarily suffer loss of his expected profits. Since the loss comes into being at the
very moment of breach, such loss is real, "fixed and vested'' and therefore, recoverable under the
law.

3. ID.; ID.; ARTICLE 11700 of N.C.C.; PROVIDES FOR RECOVERY OF DAMAGES;

PHRASE "IN ANY MANNER CONTRAVENE THE TENOR" CONSTRUED. — Article 1170 of
the Civil Code provides: "Those who in the performance of their obligation are guilty of fraud,
negligence, or delay and those who in any manner contravene the tenor thereof are liable for
damages." The phrase "in any manner contravene the tenor" of the obligation includes any illicit
act or omission which impairs the strict and faithful fulfillment of the obligation and every kind of
defective performance.

4. ID.; ID.; EXTENT OF DAMAGES RECOVERABLE DEPENDS ON THE PRESENCE OR

ABSENCE OF BAD FAITH ATTENDANT IN THE BREACH. — The damages which the
obligor is liable for includes not only the value of the loss suffered by the obligee (daño
emergente) but also the profits which the latter failed to obtain (lucro cesante). If the obligor acted
in good faith, he shall be liable for those damages that are the natural and probable consequences
of the breach of the obligation and which the parties have foreseen or could have reasonably
foreseen at the time the obligation was constituted; and in case of fraud, bad faith, malice or
wanton attitude, he shall be liable for all damages which may be reasonably attributed to the non-
performance of the obligation.

5. ID.; ID.; MORAL AND EXEMPLARY DAMAGES; RECOVERABLE IN CASES OF BAD

FAITH. — The same is true with respect to moral and exemplary damages. The applicable legal
provisions on the matter, Articles 2220 and 2232 of the Civil Code, allow the award of such
damages in breaches of contract where the defendant acted in bad faith. The Supreme Court finds
that the complaint sufficiently alleges bad faith on the part of the defendant.

DECISION

ESCOLIN, J p:

Put to test in this petition for review on certiorari is the sufficiency of the averments contained in
the complaint for alleged breach of contract filed by petitioner Victorino D. Magat against
respondent Santiago A. Guerrero in Civil Case No. 17827 of the Court of First Instance of Rizal,
presided by respondent Judge Leo D. Medialdea, now Deputy Judicial Administrator, which
complaint was dismissed for failure to state a cause of action. cdrep

The pertinent allegations in the complaint, subject of inquiry, are as follows: 1

"3. That sometime in September 1972, the defendant entered into a contract with the U.S. Navy
Exchange, Subic Bay, Philippines, for the operation of a fleet of taxicabs, each taxicab to be
provided with the necessary taximeter and a radio transceiver for receiving and sending of
messages from mobile taxicab to fixed base stations within the Naval Base at Subic Bay,
Philippines;

"4. That Isidro Q. Aligada, acting as agent of the defendant herein conducted the necessary project
studies on how best the defendant may meet the requirements of his contract with the U.S. Navy
Exchange, Subic Bay, Philippines, and because of the experience of the plaintiff in connection
with his various contracts with the U.S. Navy, Subic Bay, Philippines, and his goodwill already
established with the Naval personnel of Subic Bay, Philippines, especially in providing the U.S.
Navy with needed materials or goods on time as specified by the U.S. Navy, be they of local
origin or imported either from the United States or from Japan, the said Isidro Q. Aligada
approached the plaintiff herein in behalf of the defendant and proposed to import from Japan thru
the plaintiff herein or thru plaintiff's Japanese business associates, all taximeters and radio
transceivers needed by the defendant in connection with his contract with the U.S. Navy
Exchange, Subic Bay, Philippines;
"5. That the defendant herein and his aforesaid agent Isidro Q. Aligada were able to import from
Japan with the assistance of the plaintiff and his Japanese business associates the necessary
taximeters for defendant's taxicabs in partial fulfillment of defendant's commitments with the U.S.
Navy Exchange, Subic Bay, Philippines, the plaintiff's assistance in this matter having been given
to the defendant gratis et amore;

"6. That Isidro Q. Aligada, also acting as agent of the defendant, made representations with the
plaintiff herein to the effect that defendant desired to procure from Japan thru the plaintiff herein
the needed radio transceivers and to this end, Isidro Q. Aligada secured a firm offer in writing
dated September 25, 1972, a copy of which is hereto attached marked as Annex 'A' and made an
integral part of this complaint, wherein the plaintiff quoted in his offer a total price of $77,620.59
[U.S. dollars] FOB Yokohama, the goods or articles therein offered for sale by the plaintiff to the
defendant to be delivered sixty to ninety [60-90] days after receipt of advice from the defendant of
the radio frequency assigned to the defendant by the proper authorities;

"7. That the plaintiff received notice of the fact that the defendant accepted plaintiff's offer to sell
to the defendant the items specified in Annex 'A', as well as the terms and conditions of said offer,
as shown by the signed conformity of the defendant appearing on Annex 'A' which was duly
delivered by the defendant's agent to the plaintiff herein, whereupon all that the plaintiff had to do
in the meantime was to await advice from the defendant as to the radio frequency to be assigned
by the proper authorities to the defendant;

"8. That believing that the defendant would faithfully fulfill his contract with the plaintiff herein,
considering his signed conformity appearing in Annex 'A' hereof as well as the letter dated
October 4, 1972, of his agent aforementioned which is attached hereto and marked as Annex 'B'
and made an integral part of this complaint, and in order that plaintiff's promised delivery would
not be delayed, the plaintiff herein took steps to advise the Japanese entity entrusted with the
manufacture of the items listed in Annex 'A' to the effect that the contract between the defendant
herein and the plaintiff has been perfected and that advice with regards to radio frequency would
follow as soon as same is received by the plaintiff from the defendant;

"9. That in his letter dated October 6, 1972, a copy of which is hereto attached marked as Annex
'C', the defendant advised his aforementioned agent to the effect that the U.S. Navy provided him
with the radio frequency of 34.2 MHZ [Megahertz] and defendant requested his said agent to
proceed with his order placed with the plaintiff herein, which fact was duly communicated to the
plaintiff by the defendant's aforementioned agent;

"10. That by his letter dated October 7, 1972, addressed to the plaintiff by the defendant's agent, a
copy of which is hereto attached and marked as Annex 'D', defendant's agent qualified defendant's
instructions contained in his letter of October 6, 1972 [Annex 'C'] in the sense that plaintiff herein
should proceed to fulfill defendant's order only upon receipt by the plaintiff of the defendant's
letter of credit;

"11. That it being normal business practice in case of foreign importation that the buyer opens a
letter of credit in favor of the foreign supplier before delivery of the goods sold, the plaintiff
herein awaited the opening of such a letter of credit by the defendant;

"12. That the defendant and his agent have repeatedly assured plaintiff herein of the defendant's
financial capabilities to pay for the goods ordered by him and in fact he accomplished the
necessary application for a letter of credit with his banker, but he subsequently instructed his
banker not to give due course to his application for a letter of credit and that for reasons only
known to the defendant, he fails and refuses to open the necessary letter of credit to cover payment
of the goods ordered by him;

"13. That it has come to the knowledge of the plaintiff herein that the defendant has been
operating his taxicabs without the required radio transceivers and when the U.S. Navy Authorities
of Subic Bay, Philippines, were pressing defendant for compliance with his commitments with
respect to the installations of radio transceivers on his taxicabs, he impliedly laid the blame for the
delay upon the plaintiff herein, thus destroying the reputation of the plaintiff herein with the said
Naval Authorities of Subic Bay, Philippines, with whom plaintiff herein transacts business;

"14. That on March 27, 1973, plaintiff wrote a letter thru his counsel, copy attached marked as
Annex 'E', to ascertain from the defendant as to whether it is his intention to fulfill his part of the
agreement with the plaintiff herein or whether he desired to have the contract between them
definitely cancelled, but defendant did not even have the courtesy to answer plaintiff's demand;

"15. That the defendant herein entered into a contract with the plaintiff herein as set forth in Annex
'A' without the least intention of faithfully complying with his obligations thereunder, but he did
so only in order to obtain the concession from the U.S. Navy Exchange, Subic Bay, Philippines, of
operating a fleet of taxicabs inside the U.S. Naval Base to hi financial benefit and at the expense
and prejudice of third parties such as the plaintiff herein;

"16. That in view of the defendant's failure to fulfill his contractual obligations with the plaintiff
herein, the plaintiff will suffer the following damages:.

[a] As the radio transceivers ordered by the defendant are now in the hands of the plaintiff's
Japanese representative, the plaintiff will have to pay for them, thus he will have to suffer as total
loss to him the amount of P523,938.98 (converting the amount of $77,620.59 to pesos at the rate
of P6.75 to the dollar) as said radio transceivers were purposely made or manufactured solely for
the use of the defendant herein and cannot possibly be marketed by the plaintiff herein to the
general public;

[b] The amount of P52,393.89 or 10% of the purchase price by way of loss of expected profits
from the transaction or contract between plaintiff and the defendant;

[c] Loss of confidence in him and goodwill of the plaintiff which will result in the impairment of
his business dealings with Japanese firms, thereby resulting also in loss of possible profits in the
future which plaintiff assess at no less than P200,000.00;

[d] That in view of the defendant's bad faith in inducing plaintiff to enter into the contract with
him as set forth hereinabove, defendant should be assessed by this Honorable Court in favor of the
plaintiff the sum of P200,000.00 as moral and exemplary damages;

[e] That in view of the defendant's fault and to protect his interests, plaintiff herein is constrained
to retain the services of counsel with whom he agreed to pay by way of attorney's fees the sum of
P50,000.00".

Respondent Guerrero filed a motion to dismiss said complaint for lack of cause of action, which
ground is propounded by respondent's counsel thus: 2

". . . it is clear that plaintiff was merely anticipating his loss or damage which might result from
the alleged failure of defendant to comply with the terms of the alleged contract. Hence, plaintiff's
right of recovery under his cause of action is premised not on any loss or damage which he is
expecting to incur in the near future. Plaintiff's right therefore under his cause of action is not yet
fixed or vested.

"Inasmuch as there is no other allegation in the present Complaint wherein the same could be
maintained against defendant, the present Complaint should be dismissed for its failure to state a
cause of action against defendant".

The respondent judge, over petitioner's opposition, issued a minute order dismissing the complaint
as follow: 3

"Acting upon the 'Motion to Dismiss' filed by the defendant, through counsel, date June 7, 1973,
as well as the opposition thereto filed by the plaintiff, through counsel, dated June 14, 1973, for
the reasons therein alleged, this Court hereby grants said motion and, as prayed for, the complaint
in the above-entitled case is dismissed.

"SO ORDERED".

Both parties are in accord with the view that when a motion to dismiss is based on the ground of
lack of cause of action, the sufficiency of the case of action can only be determined on the basis of
the facts alleged in the complaint 4 ; that the facts alleged are deemed hypothetically admitted,
including those which are fairly deducible therefrom 5 ; and that, admitting the facts as alleged,
whether or not the Court can render a valid judgment against the defendant upon said facts in
accordance with the prayer in the complaint 6

After a thorough examination of the complaint at bar, We find the test of legal sufficiency of the
cause of action adequately satisfied. In a methodical and logical sequence, the complaint recites
the circumstances that led to the perfection of the contract entered into by the parties. It further
avers that while petitioner had fulfilled his part of the bargain [paragraph 8 of the Complaint],
private respondent failed to comply with his correlative obligation by refusing to open a letter of
credit to cover payment of the goods ordered by him [paragraphs 11 & 12 of the Complaint], and
that consequently, petitioner suffered not only loss of his expected profits, but moral and
exemplary damages as well. From these allegations, the essential elements of a cause of action are
present, to wit: [1] the existence of a legal right to the plaintiff; [2] a correlative duty of the
defendant and [3] an act or omission of the defendant in violation of the plaintiff's right, with
consequent injury or damage to the latter for which he may maintain an action for recovery of
damages or other appropriate relief. 7

Indisputably, the parties, both businessmen, entered into the aforesaid contract with the evident
intention of deriving some profits therefrom. Upon breach of the contract by either of them, the
other would necessarily suffer loss of his expected profits. Since the loss comes into being at the
very moment of breach, such loss is real, "fixed and vested" and, therefore, recoverable under the
law. LibLex

Article 1170 of the Civil Code provides:

"Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and
those who in any manner contravene the tenor thereof are liable for damages."

The phrase "in any manner contravene the tenor" of the obligation includes any illicit act or
omission which impairs the strict and faithful fulfillment of the obligation and every kind of
defective performance. 8

The damages which the obligor is liable for includes not only the value of the loss suffered by the
obligee [daño emergente] but also the profits which the latter failed to obtain [lucro cesante] 9 . If
the obligor acted in good faith, he shall be liable for those damages that are the natural and
probable consequences of the breach of the obligation and which the parties have foreseen or
could have reasonably foreseen at the time the obligation was constituted; and in case of fraud,
bad faith, malice or wanton attitude, he shall be liable for all damages which may be reasonably
attributed to the nonperformance of the obligation 10

The same is true with respect to moral and exemplary damages. The applicable legal provisions on
the matter, Articles 2220 and 2232 of the Civil Code, allow the award of such damages in breaches
of contract where the defendant acted in bad faith. To Our mind, the complaint sufficiently alleges
bad faith on the part of the defendant.

In fine, We hold that on the basis of the facts alleged in the complaint, the court could render a
valid judgment in accordance with the prayer thereof. LLphil

ACCORDINGLY, the questioned order of dismissal is hereby set aside and the case ordered
remanded to the court of origin for further proceedings. No costs.
SO ORDERED.

Makasiar (Chairman), Concepcion, Jr., Guerrero and Abad Santos, JJ., concur.

Aquino, J., is on leave.

De Castro, J., took no part.

Footnotes
1.Annex "A" of the petition.

2.Annex "B" of the petition.

3.Annex "D" of the petition.

4.Mindanao Realty Corp. vs Kintanar, 6 SCRA 894.

5.Mathay vs. Consolidated Bank & Trust Co., 58 SCRA 559.

6.La Suerte Cigar & Cigarette Factory vs. Central Azucarera de Danao, 23 SCRA 686.

7.Mathay vs. Consolidated Bank & Trust Co., supra.

8.Arrieta vs. National Rice & Corn Corp., 10 SCRA 79.

9.Article 2200, Civil Code.

10.Article 2201, Civil Code.

2
||| (Magat v. Medialdea, G.R. No. L-37120, [April 20, 1983], 206 PHIL 341-349)

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334 PHIL 68-76

FIRST DIVISION

[G.R. No. 117190. January 2, 1997.]

JACINTO TANGUILIG doing business under the name and style J.M.T. ENGINEERING AND
GENERAL MERCHANDISING, petitioner, vs. COURT OF APPEALS and VICENTE HERCE
JR., respondents.

Ricardo C. Valmonte for petitioner.

Restituto M. Mendoza for private respondent.

SYLLABUS

1. CIVIL LAW; CONTRACT; INTERPRETATION; INTENTION OF THE PARTIES SHALL BE

ACCORDED PRIMORDIAL CONSIDERATION. — It is a cardinal rule in the interpretation of
contracts that the intention of the parties shall be accorded primordial consideration and, in case of
doubt, their contemporaneous and subsequent acts shall be principally considered. prLL

2. OBLIGATION; NATURE AND EFFECTS; EXEMPTION FROM LIABILITY BY REASON

OF FORTUITOUS EVENTS; REQUISITES. — This Court has consistently 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 or destruction of the object of
the contract. In Nakpil vs. Court of Appeals, Nos. L-47851 and L- 47896, 3 October 1986, 144
SCRA 596, four (4) requisites must concur: (a) the cause of the breach of the obligation must be
independent of the will of the debtor; (b) the event must be either unforseeable or unavoidable; (c)
the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal
manner; and, (d) the debtor must be free from any participation in or aggravation of the injury to
the creditor.

3. ID.; ID.; ID.; APPLICATION OF ART. 1167 OF THE CIVIL CODE; WHEN A PERSON
OBLIGED TO DO SOMETHING FAILS TO DO IT, THE SAME SHALL BE EXECUTED AT
HIS COST. — In reciprocal obligations, neither party incurs in delay if the other does not comply
or is not ready to comply in a proper manner with what is incumbent upon him. (Art. 1169, last
par., New Civil Code) When the windmill failed to function properly it became incumbent upon
petitioner to institute the 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 the reconstruction of the windmill. Article 1167 of the Civil Code is explicit on
this point that if a person obliged to do something fails to do it, the same shall be executed at his
cost. llcd

DECISION

BELLOSILLO, J p:

This case involves the proper interpretation of the contract entered into between the parties.

Sometime in April 1987 petitioner Jacinto M. Tanguilig doing business under the name and style
J.M.T. Engineering and General Merchandising proposed to respondent Vicente Herce Jr. to
construct a windmill system for him. After some negotiations they agreed on the construction of
the windmill for a consideration of P60,000.00 with a one-year guaranty from 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 payment of
P15,000.00, leaving a balance of P15,000.00.

On 14 March 1988, due to the refusal and failure of respondent to pay the balance, petitioner filed
a complaint to collect the amount. In his Answer before the trial court respondent denied the claim
saying that he had already paid this amount to the San Pedro General Merchandising Inc.
(SPGMI) which constructed the deep well to which the windmill system was to be connected.
According to respondent, since the deep well formed part of the system the payment he tendered
to SPGMI should be credited to his account by petitioner. Moreover, assuming that he owed
petitioner a balance of P15,000.00, this should be offset by the defects in the windmill system
which caused the structure to collapse after a strong wind hit their place. 1

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 assembly and its
installation, exclusive of other incidental materials needed for the project. He also disowned any
obligation to repair or reconstruct the system and insisted that he delivered it in good and working
condition to respondent who accepted the same without protest. Besides, its collapse was
attributable to a typhoon, a force majeure, which relieved him of any liability.

In finding for plaintiff, the trial court held that the construction of the 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 proposals. In the absence of such an agreement, it could
be safely concluded that the 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 proof that the windmill system fell down due to the defect of the
construction. " 4

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 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 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 effectively extinguishing his
contractual obligation. However, it rejected petitioner's claim of force majeure and ordered the
latter to reconstruct the windmill in accordance with the stipulated one-year guaranty.

His motion for reconsideration having been denied by the Court of Appeals, petitioner now seeks
relief from this Court. He raises two issues: firstly, whether the agreement to construct the
windmill system included the installation of a deep well and, secondly, whether petitioner is under
obligation to reconstruct the windmill after it collapsed.

We reverse the appellate court on the first issue but sustain it on the second.

The preponderance of evidence supports the finding of the trial court that the installation of a deep
well was not included in the proposals of petitioner to construct a windmill system for respondent.
There were in fact two (2) proposals: one dated 19 May 1987 which pegged the contract price at
P87,000.00 (Exh. "1"). This was rejected by respondent. The other was submitted three days later,
i.e., on 22 May 1987 which contained more specifications but proposed a lower contract price of
P60,000.00 (Exh. "A"). The latter proposal was accepted by respondent and the construction
immediately followed. The pertinent portions of the first letter-proposal (Exh. "1") are reproduced
hereunder —

In connection with your Windmill System and Installation, we would like to quote to you as
follows:

One (1) Set — Windmill suitable for 2 inches diameter deepwell, 2 HP, capacity, 14 feet in
diameter, with 20 pieces blade, Tower 40 feet high, including mechanism which is not advisable to
operate during extra-intensity wind. Excluding cylinder pump.

UNIT CONTRACT PRICE P87,000.00

The second letter-proposal (Exh. "A") provides as follows:

In connection with your Windmill system, Supply of Labor Materials and Installation, operated
water pump, we would like to quote to you as follows —

One (1) set — Windmill assembly for 2 inches or 3 inches deep-well pump, 6 Stroke, 14 feet
diameter, 1-lot blade materials, 40 feet Tower complete with standard appurtenances up to
Cylinder pump, shafting U.S. adjustable International Metal.

One (1) lot — Angle bar, G. I. pipe, Reducer Coupling, Elbow Gate valve, cross Tee coupling.
One (1) lot— Float valve.

One (1) lot — Concreting materials foundation.

F. O. B. Laguna

Contract Price P60,000.00

Notably, nowhere in either proposal is the installation of a deep well mentioned, even remotely.
Neither is there an itemization or description of the materials to be used in constructing the deep
well. There is absolutely no mention in the two (2) documents that a deep well pump is a
component of the proposed windmill system. The contract prices fixed in both proposals cover
only the features specifically described therein and no other. While the words "deep well" and
"deep well pump" are mentioned in both, these do not indicate that a deep well is part of the
windmill system. They merely describe the type of deep well pump for which the proposed
windmill would be suitable. As correctly pointed out by petitioner, the words "deep well" preceded
by the prepositions "for" and "suitable for" were meant only to convey the idea that the proposed
windmill would be appropriate for a deep well pump with 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 conjunctions "and" or "with." Since the terms of the instruments are
clear and leave no doubt as to their meaning they should not be disturbed. aisadc

Moreover, it is a cardinal rule in the interpretation of contracts that the intention of the parties
shall be accorded primordial consideration 5 and, in case of doubt, their contemporaneous and
subsequent acts shall be principally considered. 6 An examination of such contemporaneous and
subsequent acts of respondent as well as the attendant circumstances does not persuade us to
uphold him.

Respondent insists that petitioner verbally agreed that the contract price of P60,000.00 covered the
installation of a deep well pump. He contends that since petitioner did not have the capacity to
install the pump the latter agreed to have a third party do the work the cost of which was to be
deducted from the contract price. To prove his point, he presented Guillermo 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 Engineer (Herce) had with Mr.
Tanguilig." 7

We are disinclined to accept the version of respondent. The claim of Pili that Herce Jr. wrote him a
letter is unsubstantiated. The alleged letter was never presented in court by private respondent for
reasons known only to him. But granting that this written communication existed, it could not
have simply contained a request for Pili to install a deep well; it would have also mentioned the
party who would pay for the undertaking. It strains credulity that respondent would keep silent on
this matter and leave it all to petitioner 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.

We find it also unusual that Pili would readily consent to build a deep well the payment for which
would come supposedly from the windmill contract price on the mere representation of petitioner,
whom he had never met before, without a written commitment at least from the former. For if
indeed the deep well were part of the windmill project, the 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 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 well, the obligation of respondent was to pay the entire
amount to petitioner without prejudice to any action that Guillermo Pili or SPGMI may take, if
any, against the latter. Significantly, when asked why he tendered payment directly to Pili and not
to petitioner, respondent explained, rather lamely, that he did it "because he has (sic) the money, so
(he) just paid the money in his possession. 8

Can respondent claim that Pili accepted his payment on behalf of petitioner? No. While the law is
clear that "payment shall be made to the person in whose favor the obligation has been constituted,
or his successor in interest, or any person authorized to receive it, " 9 it does not appear from the
record that Pili and/or SPGMI was so authorized.

Respondent cannot claim the benefit of the law "concerning payments made by a third person." 10
The Civil Code provisions do not apply in the instant case because no creditor-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 entered into a
contract with petitioner for the construction of respondent's deep well. If SPGMI was really
commissioned by petitioner to construct the deep well, an agreement particularly to this effect
should have been entered into.

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 SPGMI was for the
sole account of respondent and that petitioner merely supervised the installation of the well
because the windmill was to be connected to it. There is no legal nor factual basis by which this
Court can impose upon petitioner an obligation he did not expressly assume nor ratify.

The second issue is not a novel one. In a long line of cases 11 this Court has consistently 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 or destruction of the
object of the contract. In Nakpil vs. Court of Appeals, 12 four (4) requisites must concur: (a) the
cause of the breach of the obligation must be independent of the will of the debtor; (b) the event
must be either unforeseeable or unavoidable; (c) the event must be such as to render it impossible
for the debtor to fulfill his obligation in a normal manner; and, (d) the debtor must be free from
any participation in or aggravation of the injury to the creditor.
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 day the
windmill collapsed. Petitioner merely stated that there was a "strong wind." But a strong wind in
this case cannot be fortuitous — unforeseeable nor unavoidable. On the contrary, a strong wind
should be present in places where windmills are constructed, otherwise the windmills will not
turn.

The appellate court correctly observed that "given the newly-constructed windmill system, the
same would not have collapsed had there been no inherent defect in it which could only be
attributable to the appellee." 13 It emphasized that respondent had in his favor the presumption
that "things have happened according to the ordinary course of nature and the ordinary habits of
life." 14 This presumption has not been rebutted by petitioner.

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 or is not ready to comply in
a proper manner with what is incumbent upon him. 15 When the windmill failed to function
properly it became incumbent upon petitioner to institute the 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 the reconstruction of the windmill. Article 1167 of
the Civil Code is explicit on this point that if a person obliged to do something fails to do it, the
same shall be executed at his cost

WHEREFORE, the appealed decision is MODIFIED. Respondent VICENTE HERCE JR. is

directed to pay petitioner JACINTO M. TANGUILIG the balance of P15,000.00 with interest at
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 guaranty" 16 and
to complete the same within three (3) months from the finality of this decision.

SO ORDERED.

Padilla, Vitug, Kapunan and Hermosisima, Jr., JJ., concur.

Footnotes
1.TSN, 20 December 1988, pp. 10-12.

2.Exh. "A" and Exh. "1.

3.Rollo, p. 36.

4.Id., p. 37.
5.Kasilag v. Rodriguez, 69 Phil. 217 (1939).

6.Art. 1371, New Civil Code; GSIS v. Court of Appeals, G.R. No. 52478, 30 October 1986, 145
SCRA 311; Serrano v. Court of Appeals, No. L-46357, 9 October 1985, 139 SCRA 179.

7.TSN, 13 April 1989, pp. 18-19.

8.TSN, 13 April 1989, p. 22.

9.Art. 1240, New Civil Code.

10.Arts. 1236 and 1237, New Civil Code .

11.Nakpil v. Court of Appeals, Nos. L-47851, L-47863, L-47896, 3 October 1986, 144 SCRA 596;
National Power Corporation v. Court of Appeals, G.R. Nos. L-47379 and 47481, 16 May 1988,
161 SCRA 334; National Power Corporation v. Court of Appeals, G.R. Nos. 103442-45, 21 May
1993, 222 SCRA 415.

12.See Note 11.

13.Rollo, p. 44.

14.Sec. 3, par. (y), Rule 131, Revised Rules on Evidence.

15.Art. 1169, last par., New Civil Code.

16.See CA Decision, p. 7; Rollo, p. 27.

||| (Tanguilig v. Court of Appeals, G.R. No. 117190, [January 2, 1997], 334 PHIL 68-76)

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2
407 PHIL 1058-1072
FIRST DIVISION

[G.R. No. 144169. March 28, 2001.]

KHE HONG CHENG, alias FELIX KHE, SANDRA JOY KHE and RAY STEVEN KHE,
petitioners, vs. COURT OF APPEALS, HON. TEOFILO GUADIZ, RTC 147, MAKATI CITY
and PHILAM INSURANCE CO., INC., respondents.

DECISION

KAPUNAN, J p:

Before the Court is a Petition for Review on Certiorari under Rule 45, seeking to set aside the
decision of the Court of Appeals dated April 10, 2000 and its resolution dated July 11, 2000
denying the motion for reconsideration of the aforesaid decision. The original complaint that is the
subject matter of this case is an accion pauliana — an action filed by Philam Insurance Company,
Inc. (respondent Philam) to rescind or annul the donations made by petitioner Khe Hong Cheng
allegedly in fraud of creditors. The main issue for resolution is whether or not the action to rescind
the donations has already prescribed. While the first paragraph of Article 1389 of the Civil Code
states: "The action to claim rescission must be commenced within four years . . ." the question is,
from which point or event does this prescriptive period commence to run? EScIAa

The facts are as follows:

Petitioner Khe Hong Cheng, alias Felix Khe, is the owner of Butuan Shipping Lines. It appears
that on or about October 4, 1985, the Philippine Agricultural Trading Corporation shipped on
board the vessel M/V PRINCE ERIC, owned by petitioner Khe Hong Cheng, 3,400 bags of copra
at Masbate, Masbate, for delivery to Dipolog City, Zamboanga del Norte. The said shipment of
copra was covered by a marine insurance policy issued by American Home Insurance Company
(respondent Philam's assured). M/V PRINCE ERIC, however, sank somewhere between Negros
Island and Northeastern Mindanao, resulting in the total loss of the shipment. Because of the loss,
the insurer, American Home, paid the amount of P354,000.00 (the value of the copra) to the
consignee.

Having been subrogated into the rights of the consignee, American Home instituted Civil Case No.
13357 in the Regional Trial Court (RTC) of Makati, Branch 147 to recover the money paid to the
consignee, based on breach of contract of carriage. While the case was still pending, or on
December 20, 1989, petitioner Khe Hong Cheng executed deeds of donations of parcels of land in
favor of his children, herein co-petitioners Sandra Joy and Ray Steven. The parcel of land with an
area of 1,000 square meters covered by Transfer Certificate of Title (TCT) No. T-3816 was
donated to Ray Steven. Petitioner Khe Hong Cheng likewise donated in favor of Sandra Joy two
(2) parcels of land located in Butuan City, covered by TCT No. RT-12838. On the basis of said
deeds, TCT No. T-3816 was cancelled and in lieu thereof, TCT No. T-5072 was issued in favor of
Ray Steven and TCT No. RT-12838 was cancelled and in lieu thereof, TCT No. RT-21054 was
issued in the name of Sandra Joy.

The trial court rendered judgment against petitioner Khe Hong Cheng in Civil Case No. 13357 on
December 29, 1993, four years after the donations were made and the TCTs were registered in the
donees' names. The decretal portion of the aforesaid decision reads:

"Wherefore, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff
and against the defendant, ordering the latter to pay the former:

1) the sum of P354,000.00 representing the amount paid by the plaintiff to the Philippine
Agricultural Trading Corporation with legal interest at 12% from the time of the filing of the
complaint in this case;

2) the sum of P50,000.00 as attorney's fees;

3) the costs. 1

After the said decision became final and executory, a writ of execution was forthwith, issued on
September 14, 1995. Said writ of execution, however, was not served. An alias writ of execution
was, thereafter, applied for and granted in October 1996. Despite earnest efforts, the sheriff found
no property under the name of Butuan Shipping Lines and/or petitioner Khe Hong Cheng to levy
or garnish for the satisfaction of the trial court's decision. When the sheriff, accompanied by
counsel of respondent Philam, went to Butuan City on January 17, 1997, to enforce the alias writ
of execution, they discovered that petitioner Khe Hong Cheng no longer had any property and that
he had conveyed the subject properties to his children.

On February 25, 1997, respondent Philam filed a complaint with the Regional Trial Court of
Makati City, Branch 147, for the rescission of the deeds of donation executed by petitioner Khe
Hong Cheng in favor of his children and for the nullification of their titles (Civil Case No. 97-
415). Respondent Philam alleged, inter alia, that petitioner Khe Hong Cheng executed the
aforesaid deeds in fraud of his creditors, including respondent Philam. 2

Petitioners subsequently filed their answer to the complaint a quo. They moved for its dismissal on
the ground that the action had already prescribed. They posited that the registration of the deeds of
donation on December 27, 1989 constituted constructive notice and since the complaint a quo was
filed only on February 25, 1997, or more than four (4) years after said registration, the action was
already barred by prescription. 3

Acting thereon, the trial court denied the motion to dismiss. It held that respondent Philam's
complaint had not yet prescribed. According to the trial court, the prescriptive period began to run
only from December 29, 1993, the date of the decision of the trial court in Civil Case No. 13357. 4

On appeal by petitioners, the CA affirmed the trial court's decision in favor of respondent Philam.
The CA declared that the action to rescind the donations had not yet prescribed. Citing Articles
1381 and 1383 of the Civil Code, the CA basically ruled that the four year period to institute the
action for rescission began to run only in January 1997, and not when the decision in the civil case
became final and executory on December 29, 1993. The CA reckoned the accrual of respondent
Philam's cause of action on January 1997, the time when it first learned that the judgment award
could not be satisfied because the judgment creditor, petitioner Khe Hong Cheng, had no more
properties in his name. Prior thereto, respondent Philam had not yet exhausted all legal means for
the satisfaction of the decision in its favor, as prescribed under Article 1383 of the Civil Code. 5

The Court of Appeals thus denied the petition for certiorari filed before it, and held that the trial
court did not commit any error in denying petitioners' motion to dismiss. Their motion for
reconsideration was likewise dismissed in the appellate court's resolution dated July 11, 2000.

Petitioners now assail the aforesaid decision and resolution of the CA alleging that:

PUBLIC RESPONDENT GRAVELY ERRED AND ACTED IN GRAVE ABUSE OF

DISCRETION WHEN IT DENIED THE PETITION TO DISMISS THE CASE BASED ON THE
GROUND OF PRESCRIPTION. cHSIAC

II

PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT

PRESCRIPTION BEGINS TO RUN WHEN IN JANUARY 1997 THE SHERIFF WENT TO
BUTUAN CITY IN SEARCH OF PROPERTIES OF PETITIONER FELIX KHE CHENG TO
SATISFY THE JUDGMENT IN CIVIL CASE NO. 13357 AND FOUND OUT THAT AS EARLY
AS DEC. 20, 1989, PETITIONERS KHE CHENG EXECUTED THE DEEDS OF DONATIONS
IN FAVOR OF HIS CO-PETITIONERS THAT THE ACTION FOR RESCISSION ACCRUED
BECAUSE PRESCRIPTION BEGAN TO RUN WHEN THESE DONATIONS WERE
REGISTERED WITH THE REGISTER OF DEEDS IN DECEMBER 1989, AND WHEN THE
COMPLAINT WAS FILED ONLY IN FEBRUARY 1997, MORE THAN FOUR YEARS HAVE
ALREADY LAPSED AND THEREFORE, IT HAS ALREADY PRESCRIBED. 6

Essentially, the issue for resolution posed by petitioners is this: When did the four (4) year
prescriptive period as provided for in Article 1389 of the Civil Code for respondent Philam to file
its action for rescission of the subject deeds of donation commence to run?

The petition is without merit.

Article 1389 of the Civil Code simply provides that, "The action to claim rescission must be
commenced within four years." Since this provision of law is silent as to when the prescriptive
period would commence, the general rule, i.e, from the moment the cause of action accrues,
therefore, applies. Article 1150 of the Civil Code is particularly instructive:
ARTICLE 1150. The time for prescription for all kinds of actions, when there is no special
provision which ordains otherwise, shall be counted from the day they may be brought.

Indeed, this Court enunciated the principle that it is the legal possibility of bringing the action
which determines the starting point for the computation of the prescriptive period for the action. 7
Article 1383 of the Civil Code provides as follows:

ARTICLE 1383. An action for rescission is subsidiary; it cannot be instituted except when the
party suffering damage has no other legal means to obtain reparation for the same.

It is thus apparent that an action to rescind or an accion pauliana must be of last resort, availed of
only after all other legal remedies have been exhausted and have been proven futile. For an accion
pauliana to accrue, the following requisites must concur:

1) That the plaintiff asking for rescission, has a credit prior to the alienation, although demandable
later; 2) That the debtor has made a subsequent contract conveying a patrimonial benefit to a third
person; 3) That the creditor has no other legal remedy to satisfy his claim, but would benefit by
rescission of the conveyance to the third person; 4) That the act being impugned is fraudulent; 5)
That the third person who received the property conveyed, if by onerous title, has been an
accomplice in the fraud. 8 (Emphasis ours)

We quote with approval the following disquisition of the CA on the matter:

An accion pauliana accrues only when the creditor discovers that he has no other legal remedy for
the satisfaction of his claim against the debtor other than an accion pauliana. The accion pauliana
is an action of a last resort. For as long as the creditor still has a remedy at law for the enforcement
of his claim against the debtor, the creditor will not have any cause of action against the creditor
for rescission of the contracts entered into by and between the debtor and another person or
persons. Indeed, an accion pauliana presupposes a judgment and the issuance by the trial court of a
writ of execution for the satisfaction of the judgment and the failure of the Sheriff to enforce and
satisfy the judgment of the court. It presupposes that the creditor has exhausted the property of the
debtor. The date of the decision of the trial court against the debtor is immaterial. What is
important is that the credit of the plaintiff antedates that of the fraudulent alienation by the debtor
of his property. After all, the decision of the trial court against the debtor will retroact to the time
when the debtor became indebted to the creditor. 9

Petitioners, however, maintain that the cause of action of respondent Philam against them for the
rescission of the deeds of donation accrued as early as December 27, 1989, when petitioner Khe
Hong Cheng registered the subject conveyances with the Register of Deeds. Respondent Philam
allegedly had constructive knowledge of the execution of said deeds under Section 52 of
Presidential Decree No. 1529, quoted infra, as follows:
SECTION 52. Constructive knowledge upon registration. — Every conveyance, mortgage, lease,
lien, attachment, order, judgment, instrument or entry affecting registered land shall, if registered,
filed or entered in the Office of the Register of Deeds for the province or city where the land to
which it relates lies, be constructive notice to all persons from the time of such registering, filing,
or entering. THAICD

Petitioners argument that the Civil Code must yield to the Mortgage and Registration Laws is
misplaced, for in no way does this imply that the specific provisions of the former may be all
together ignored. To count the four year prescriptive period to rescind an allegedly fraudulent
contract from the date of registration of the conveyance with the Register of Deeds, as alleged by
the petitioners, would run counter to Article 1383 of the Civil Code as well as settled
jurisprudence. It would likewise violate the third requisite to file an action for rescission of an
allegedly fraudulent conveyance of property, i.e., the creditor has no other legal remedy to satisfy
his claim.

An accion pauliana thus presupposes the following: 1) A judgment; 2) the issuance by the trial
court of a writ of execution for the satisfaction of the judgment, and 3) the failure of the sheriff to
enforce and satisfy the judgment of the court. It requires that the creditor has exhausted the
property of the debtor. The date of the decision of the trial court is immaterial. What is important
is that the credit of the plaintiff antedates that of the fraudulent alienation by the debtor of his
property. After all, the decision of the trial court against the debtor will retroact to the time when
the debtor became indebted to the creditor.

Tolentino, a noted civilist, explained:

". . . [T]herefore, credits with suspensive term or condition are excluded, because the accion
pauliana presupposes a judgment and unsatisfied execution, which cannot exist when the debt is
not yet demandable at the time the rescissory action is brought. Rescission is a subsidiary action,
which presupposes that the creditor has exhausted the property of the debtor which is impossible
in credits which cannot be enforced because of a suspensive term or condition.

While it is necessary that the credit of the plaintiff in the accion pauliana must be prior to the
fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be
subsequent to the alienation, it is merely declaratory with retroactive effect to the date when the
credit was constituted." 10

These principles were reiterated by the Court when it explained the requisites of an accion
pauliana in greater detail, to wit:

"The following successive measures must be taken by a creditor before he may bring an action for
rescission of an allegedly fraudulent sale: (1) exhaust the properties of the debtor through levying
by attachment and execution upon all the property of the debtor, except such as are exempt from
execution; (2) exercise all the rights and actions of the debtor, save those personal to him (accion
subrogatoria); and (3) seek rescission of the contracts executed by the debtor in fraud of their
rights (accion pauliana). Without availing of the first and second remedies, i.e., exhausting the
properties of the debtor or subrogating themselves in Francisco Bareg's transmissible rights and
actions. petitioners simply undertook the third measure and filed an action for annulment of sale.
This cannot be done." 11 (Emphasis ours)

In the same case, the Court also quoted the rationale of the CA when it upheld the dismissal of the
accion pauliana on the basis of lack of cause of action:

"In this case, plaintiff's appellants had not even commenced an action against defendants-appellees
Bareng for the collection of the alleged indebtedness. Plaintiffs-appellants had not even tried to
exhaust the property of defendants-appellees Bareng. Plaintiffs-appellants, in seeking the
rescission of the contracts of sale entered into between defendants-appellees, failed to show and
prove that defendants-appellees Bareng had no other property, either at the time of the sale or at
the time this action was filed, out of which they could have collected this (sic) debts." (Emphasis
ours)

Even if respondent Philam was aware, as of December 27, 1989, that petitioner Khe Hong Cheng
had executed the deeds of donation in favor of his children, the complaint against Butuan Shipping
Lines and/or petitioner Khe Hong Cheng was still pending before the trial court. Respondent
Philam had no inkling, at the time, that the trial court's judgment would be in its favor and further,
that such judgment would not be satisfied due to the deeds of donation executed by petitioner Khe
Hong Cheng during the pendency of the case. Had respondent Philam filed his complaint on
December 27, 1989, such complaint would have been dismissed for being premature. Not only
were all other legal remedies for the enforcement of respondent Philam's claims not yet exhausted
at the time the deeds of donation were executed and registered. Respondent Philam would also not
have been able to prove then that petitioner Khe Hong Cheng had no more property other than
those covered by the subject deeds to satisfy a favorable judgment by the trial court. DCAHcT

It bears stressing that petitioner Khe Hong Cheng even expressly declared and represented that he
had reserved to himself property sufficient to answer for his debts contracted prior to this date:

"That the DONOR further states, for the same purpose as expressed in the next preceding
paragraph, that this donation is not made with the object of defrauding his creditors having
reserved to himself property sufficient to answer his debts contracted prior to this date". 12

As mentioned earlier, respondent Philam only learned about the unlawful conveyances made by
petitioner Khe Hong Cheng in January 1997 when its counsel accompanied the sheriff to Butuan
City to attach the properties of petitioner Khe Hong Cheng. There they found that he no longer
had any properties in his name. It was only then that respondent Philam's action for rescission of
the deeds of donation accrued because then it could be said that respondent Philam had exhausted
all legal means to satisfy the trial court's judgment in its favor. Since respondent Philam filed its
complaint for accion pauliana against petitioners on February 25, 1997, barely a month from its
discovery that petitioner Khe Hong Cheng had no other property to satisfy the judgment award
against him, its action for rescission of the subject deeds clearly had not yet prescribed.

A final point. Petitioners now belatedly raise on appeal the defense of improper venue claiming
that respondent Philam's complaint is a real action and should have been filed with the RTC of
Butuan City since the property subject matter of the donations are located therein. Suffice it to say
that petitioners are already deemed to have waived their right to question the venue of the instant
case. Improper venue should be objected to as follows 1) in a motion to dismiss filed within the
time but before the filing of the answer; 13 or 2) in the answer as an affirmative defense over
which, in the discretion of the court, a preliminary hearing may be held as if a motion to dismiss
had been filed. 14 Having failed to either file a motion to dismiss on the ground of improper of
venue or include the same as an affirmative defense in their answer, petitioners are deemed to
have their right to object to improper venue.

WHEREFORE, premises considered, the petition is hereby DENIED for lack of merit.

SO ORDERED.

Davide, Jr., C.J., Pardo and Ynares-Santiago, JJ., concur.

Puno, J., is on official leave.

Footnotes
1.Rollo, p. 106-107.

2.Id., at 50-55.

3.Id., at 57-60.

4.Id., at 70-71.

5.Id., at 44-47.

6.Id., at 16.

7.Constancia C. Tolentino vs. CA, et al., 162 SCRA 66, 72.

8.Siguan vs. Lim, 318 SCRA 725, 735, quoting TOLENTINO, ARTHUR M., CIVIL CODE OF
THE PHILIPPINES 576 (1991); citing 8 Manresa 756, 2 Castan 543-555, and 3 Camus 207.

9.See Note 1, at 44-45.

10.Tolentino, New Civil Code, Volume IV, 1973, ed., at p. 543.

11Adorable vs. CA, 319 SCRA 201, 207 ( 1999).

12Annex "K".

13.Section 1, Rule 16, 1997 Rules of Court.

14.Section 6, Rule 16, 1997 Rules of Court.

2
||| (Khe Hong Cheng v. Court of Appeals, G.R. No. 144169, [March 28, 2001], 407 PHIL 1058-
1072)

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JURISPRUDENCE Jurisprudences icon 120x120
18d623f0c132036f56cae92fb52b20c2af27b43f2646c7ffa940287812634a6c
376 PHIL 840-857
FIRST DIVISION

[G.R. No. 134685. November 19, 1999.]

MARIA ANTONIA SIGUAN, petitioner, vs. ROSA LIM, LINDE LIM, INGRID LIM and NEIL
LIM, respondents.

Florido & Associates for petitioner.

Zosa & Quijano Law Offices for respondents.

SYNOPSIS

Respondent Rosa was charged by petitioner with two counts of violation of Batas Pambansa Blg.
22 for issuing checks, in the total amount of P541,668, dishonored by the bank for the reason of
"account closed." The conviction was affirmed by the Court of Appeals and is now pending review
with this Court. Petitioner, thereafter filed action pauliana against respondent Rosa to rescind, the
notarized deed of donation over 4 parcels of land Rosa executed in favor of her three children, the
other respondents. Petitioner claimed that there was fraudulent transfer leaving no sufficient
properties to pay her obligations with her and that the deed of donation was not antedated. During
the hearing of the case, petitioner presented evidence on Rosa's civil liability to one Victoria
Suarez in the amount of P169,000. For her defense, Rosa denied liability and the alleged
antedating of the deed. The trial court rendered judgment in favor of petitioner, ordered the
rescission of the contract and declared the titles in the name of Rosa's children null and void. On
appeal, the Court of Appeals reversed the trial court and dismissed the action pauliana. It ruled that
the deed of donation was not fraudulent transfer as respondent debtor Rosa still owns 4 parcels of
land sufficient to cover her debts to petitioner, that the notarized deed of donation, a public
document in the absence of convincing evidence that the notary and the parties antedated the
instrument, is evidence of the fact that gave rise to its execution and of the date thereof.
Petitioner's motion for reconsideration having been denied she resorted to this recourse.

The Supreme Court held that contracts undertaken in fraud of creditors are rescissible when the
latter cannot in any other manner collect the claims due them; that rescission is but a subsidiary
remedy which cannot be instituted except when the party suffering damage has no other legal
means to obtain reparation for the same. In the case at bar, respondent Rosa has 4 other real
properties, hence, the presumption of fraud will not come into play; and that a party cannot invoke
the credit of others to justify rescission of the deed of donation.

SYLLABUS

1. REMEDIAL LAW; EVIDENCE; FINDINGS OF FACT OF COURT OF APPEALS

GENERALLY CONCLUSIVE ON APPEAL; EXCEPTION. — The rule is well settled that the
jurisdiction of this Court in cases brought before it from the Court of Appeals via Rule 45 of the
Rules of Court is limited to reviewing errors of law. Findings of fact of the latter court are
conclusive, except in a number of instances. In the case at bar, one of the recognized exceptions
warranting a review by this Court of the factual findings of the Court of Appeals exists, to wit, the
factual findings and conclusions of the lower court and Court of Appeals are conflicting,
especially on the issue of whether the Deed of Donation in question was in fraud of creditors.
HTIEaS

2. ID.; ACTIONS; ACCION PAULIANA; REQUISITE FOR ACTION TO PROSPER. — The

action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to
prosper, the following requisites must be present: (1) the plaintiff asking for rescission has a credit
prior to the alienation, although demandable later; (2) the debtor has made a subsequent contract
conveying a patrimonial benefit to a third person; (3) the creditor has no other legal remedy to
satisfy his claim; (4) the act being impugned is fraudulent; (5) the third person who received the
property conveyed, if it is by onerous title, has been an accomplice in the fraud.

3. ID.; ID.; ID.; CREDIT MUST EXIST PRIOR TO FRAUDULENT ALIENATION. — The
general rule is that rescission requires the existence of creditors at the time of the alleged
fraudulent alienation, and this must be proved as one of the bases of the judicial pronouncement
setting aside the contract. Without any prior existing debt, there can neither be injury nor fraud.
While it is necessary that the credit of the plaintiff in the accion pauliana must exist prior to the
fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be
subsequent to the alienation, it is merely declaratory, with retroactive effect to the date when the
credit was constituted.

4. ID.; ID.; ID.; ID.; ALLEGED ANTEDATING OF DOCUMENT NOT PROVED BY LATE
REGISTRATION OF ACKNOWLEDGED DOCUMENT. — In the instant case, the alleged debt
of LIM in favor of petitioner was incurred in August 1990, while the deed of donation was
purportedly executed on 10 August 1989. We are not convinced with the allegation of the
petitioner that the questioned deed was antedated to make it appear that it was made prior to
petitioner's credit. Notably, that deed is a public document, it having been acknowledged before a
notary public. As such, it is evidence of the fact which gave rise to its execution and of its date,
pursuant to Section 23, Rule 132 of the Rules of Court. In the present case, the fact that the
questioned Deed was registered only on 2 July 1991 is not enough to overcome the presumption as
to the truthfulness of the statement of the date in the questioned deed, which is 10 August 1989.
Petitioner's claim against LIM was constituted only in August 1990, or a year after the questioned
alienation. Thus, the first two requisites for the rescission of contracts are absent.

5. ID.; ID.; ID.; CREDITOR CANNOT IN ANY MANNER COLLECT CLAIM. — Even
assuming arguendo that petitioner became a creditor of LIM prior to the celebration of the contract
of donation, still her action for rescission would not fare well because the third requisite was not
met. Under Article 1381 of the Civil Code, contracts entered into in fraud of creditors may be
rescinded only when the creditors cannot in any manner collect the claims due them. Also, Article
1383 of the same Code provides that the action for rescission is but a subsidiary remedy which
cannot be instituted except when the party suffering damage has no other legal means to obtain
reparation for the same. The term "subsidiary remedy" has been defined as "the exhaustion of all
remedies by the prejudiced creditor to collect claims due him before rescission is resorted to." It
is, therefore, "essential that the party asking for rescission prove that he has exhausted all other
legal means to obtain satisfaction of his claim. Petitioner neither alleged nor proved that she did
so. On this score, her action for the rescission of the questioned deed is not maintainable even if
the fraud charged actually did exist.

6. ID.; ID.; ID.; DEBTOR DID NOT RESERVE SUFFICIENT PROPERTY TO PAY DEBT
PRIOR TO DONATION. — The fourth requisite for an accion pauliana to prosper is not present
either. Article 1387, first paragraph, of the Civil Code provides: "All contracts by virtue of which
the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of
creditors when the donor did not reserve sufficient property to pay all debts contracted before the
donation." Likewise, Article 759 of the same Code, second paragraph, states that the donation is
always presumed to be in fraud of creditors when at the time thereof the donor did not reserve
sufficient property to pay his debts prior to the donation. For this presumption of fraud to apply, it
must be established that the donor did not leave adequate properties which creditors might have
recourse for the collection of their credits existing before the execution of the donation. As earlier
discussed, petitioner's alleged credit existed only a year after the deed of donation was executed.
She cannot, therefore, be said to have been prejudiced or defrauded by such alienation.

7. ID.; ID.; ID.; BADGES OF FRAUD. — Nevertheless, a creditor need not depend solely upon
the presumption laid down in Articles 759 and 1387 of the Civil Code. Under the third paragraph
of Article 1387, the design to defraud may be proved in any other manner recognized by the law
of evidence. Thus in the consideration of whether certain transfers are fraudulent, the Court has
laid down specific rules by which the character of the transaction may be determined. The
following have been denominated by the Court as badges of fraud: (1) The fact that the
consideration of the conveyance is fictitious or is inadequate; (2) A transfer made by a debtor after
suit has begun and while it is pending against him; (3) A sale upon credit by an insolvent debtor;
(4) Evidence of large indebtedness or complete insolvency; (5) The transfer of all or nearly all of
his property by a debtor, especially when he is insolvent or greatly embarrassed financially; (6)
The fact that the transfer is made between father and son, when there are present other of the
above circumstances; and (7) The failure of the vendee to take exclusive possession of all the
property. The above enumeration, however, is not an exclusive list. The circumstances evidencing
fraud are as varied as the men who perpetrate the fraud in each case. This Court has therefore
declined to define it, reserving the liberty to deal with it under whatever form it may present itself.

8. ID.; ID.; ID.; RESCISSION SHALL ONLY BE TO EXTENT OF CREDITOR'S

UNSATISFIED CREDIT. — It should be noted that the complainant in that case, Victoria Suarez,
albeit a creditor prior to the questioned alienation, is not a party to this accion pauliana. Article
1384 of the Civil Code provides that rescission shall only be to the extent necessary to cover the
damages caused. Under this Article, only the creditor who brought the action for rescission can
benefit from the rescission; those who are strangers to the action cannot benefit from its effects.
And the revocation is only to the extent of the plaintiff creditors unsatisfied credit; as to the
excess, the alienation is maintained. Thus, petitioner cannot invoke the credit of Suarez to justify
rescission of the subject deed of donation.

9. CIVIL LAW; DAMAGES; MORAL DAMAGES, ATTORNEY'S FEES AND EXPENSES OF

LITIGATION; AWARD DELETED FOR WANT OF BASIS IN FACT, LAW OR EQUITY. —
Now on the propriety of the trial court's awards of moral damages, attorney's fees and expenses of
litigation in favor of the petitioner. We have pored over the records and found no factual or legal
basis therefor. The trial court made these awards in the dispositive portion of its decision without
stating, however, any justification for the same in the ratio decidendi. Hence, the Court of Appeals
correctly deleted these awards for want of basis in fact, law or equity.

DECISION

DAVIDE, JR., C.J p:

May the Deed of Donation executed by respondent Rosa Lim (hereafter LIM) in favor of her
children be rescinded for being in fraud of her alleged creditor, petitioner Maria Antonia Siguan?
This is the pivotal issue to be resolved in this petition for review on certiorari under Rule 45 of the
Revised Rules of Court. LibLex

The relevant facts, as borne out of the records, are as follows:

On 25 and 26 August 1990, LIM issued two Metrobank checks in the sums of P300,000 and
P241,668, respectively, payable to "cash." Upon presentment by petitioner with the drawee bank,
the checks were dishonored for the reason "account closed." Demands to make good the checks
proved futile. As a consequence, a criminal case for violation of Batas Pambansa Blg. 22,
docketed as Criminal Cases Nos. 22127-28, were filed by petitioner against LIM with Branch 23
of the Regional Trial Court (RTC) of Cebu City. In its decision 1 dated 29 December 1992, the
court a quo convicted LIM as charged. The case is pending before this Court for review and
docketed as G.R. No. 134685.

It also appears that on 31 July 1990 LIM was convicted of estafa by the RTC of Quezon City in
Criminal Case No. Q-89-2216 2 filed by a certain Victoria Suarez. This decision was affirmed by
the Court of Appeals. On appeal, however, this Court, in a decision 3 promulgated on 7 April
1997, acquitted LIM but held her civilly liable in the amount of P169,000, as actual damages, plus
legal interest.

Meanwhile, on 2 July 1991, a Deed of Donation 4 conveying the following parcels of land and
purportedly executed by LIM on 10 August 1989 in favor of her children, Linde, Ingrid and Neil,
was registered with the Office of the Register of Deeds of Cebu City:

(1) a parcel of land situated at Barrio Lahug, Cebu City, containing an area of 563 sq. m. and
covered by TCT No. 93433;

(2) a parcel of land situated at Barrio Lahug, Cebu City, containing an area of 600 sq. m. and
covered by TCT No. 93434;

(3) a parcel of land situated at Cebu City containing an area of 368 sq. m. and covered by TCT No.
87019; and

(4) a parcel of land situated at Cebu City, Cebu containing an area of 511 sq. m. and covered by
TCT No. 87020.

New transfer certificates of title were thereafter issued in the names of the donees. 5

On 23 June 1993, petitioner filed an accion pauliana against LIM and her children before Branch
18 of the RTC of Cebu City to rescind the questioned Deed of Donation and to declare as null and
void the new transfer certificates of title issued for the lots covered by the questioned Deed. The
complaint was docketed as Civil Case No. CEB-14181. Petitioner claimed therein that sometime
in July 1991, LIM, through a Deed of Donation, fraudulently transferred all her real property to
her children in bad faith and in fraud of creditors, including her; that LIM conspired and
confederated with her children in antedating the questioned Deed of Donation, to petitioner's and
other creditors' prejudice; and that LIM, at the time of the fraudulent conveyance, left no sufficient
properties to pay her obligations.
On the other hand, LIM denied any liability to petitioner. She claimed that her convictions in
Criminal Cases Nos. 22127-28 were erroneous, which was the reason why she appealed said
decision to the Court of Appeals. As regards the questioned Deed of Donation, she maintained that
it was not antedated but was made in good faith at a time when she had sufficient property.
Finally, she alleged that the Deed of Donation was registered only on 2 July 1991 because she was
seriously ill.

In its decision of 31 December 1994, 6 the trial court ordered the rescission of the questioned deed
of donation; (2) declared null and void the transfer certificates of title issued in the names of
private respondents Linde, Ingrid and Neil Lim; (3) ordered the Register of Deeds of Cebu City to
cancel said titles and to reinstate the previous titles in the name of Rosa Lim; and (4) directed the
LIMs to pay the petitioner, jointly and severally, the sum of P10,000 as moral damages; P10,000
as attorney's fees; and P5,000 as expenses of litigation.

On appeal, the Court of Appeals, in a decision 7 promulgated on 20 February 1998, reversed the
decision of the trial court and dismissed petitioner's accion pauliana. It held that two of the
requisites for filing an accion pauliana were absent, namely, (1) there must be a credit existing
prior to the celebration of the contract; and (2) there must be a fraud, or at least the intent to
commit fraud, to the prejudice of the creditor seeking the rescission.

According to the Court of Appeals, the Deed of Donation, which was executed and acknowledged
before a notary public, appears on its face to have been executed on 10 August 1989. Under
Section 23 of Rule 132 of the Rules of Court, the questioned Deed, being a public document, is
evidence of the fact which gave rise to its execution and of the date thereof. No antedating of the
Deed of Donation was made, there being no convincing evidence on record to indicate that the
notary public and the parties did antedate it. Since LIM's indebtedness to petitioner was incurred
in August 1990, or a year after the execution of the Deed of Donation, the first requirement for
accion pauliana was not met.

Anent petitioner's contention that assuming that the Deed of Donation was not antedated it was
nevertheless in fraud of creditors because Victoria Suarez became LIM's creditor on 8 October
1987, the Court of Appeals found the same untenable, for the rule is basic that the fraud must
prejudice the creditor seeking the rescission. cdll

Her motion for reconsideration having been denied, petitioner came to this Court and submits the
following issue:

WHETHER OR NOT THE DEED OF DONATION, EXH. 1, WAS ENTERED INTO IN FRAUD
OF [THE] CREDITORS OF RESPONDENT ROSA [LIM].

Petitioner argues that the finding of the Court of Appeals that the Deed of Donation was not in
fraud of creditors is contrary to well-settled jurisprudence laid down by this Court as early as 1912
in the case of Oria v. McMicking, 8 which enumerated the various circumstances indicating the
existence of fraud in a transaction. She reiterates her arguments below, and adds that another fact
found by the trial court and admitted by the parties but untouched by the Court of Appeals is the
existence of a prior final judgment against LIM in Criminal Case No. Q-89-2216 declaring
Victoria Suarez as LIM's judgment creditor before the execution of the Deed of Donation.

Petitioner further argues that the Court of Appeals incorrectly applied or interpreted Section 23, 9
Rule 132 of the Rules of Court, in holding that "being a public document, the said deed of
donation is evidence of the fact which gave rise to its execution and of the date of the latter." Said
provision should be read with Section 30 10 of the same Rule which provides that notarial
documents are prima facie evidence of their execution, not "of the facts which gave rise to their
execution and of the date of the latter."

Finally, petitioner avers that the Court of Appeals overlooked Article 759 of the New Civil Code,
which provides: "The donation is always presumed to be in fraud of creditors when at the time of
the execution thereof the donor did not reserve sufficient property to pay his debts prior to the
donation." In this case, LIM made no reservation of sufficient property to pay her creditors prior to
the execution of the Deed of Donation.

On the other hand, respondents argue that (a) having agreed on the law and requisites of accion
pauliana, petitioner cannot take shelter under a different law; (b) petitioner cannot invoke the
credit of Victoria Suarez, who is not a party to this case, to support her accion pauliana; (c) the
Court of Appeals correctly applied or interpreted Section 23 of Rule 132 of the Rules of Court; (d)
petitioner failed to present convincing evidence that the Deed of Donation was antedated and
executed in fraud of petitioner; and (e) the Court of Appeals correctly struck down the awards of
damages, attorney's fees and expenses of litigation because there is no factual basis therefor in the
body of the trial court's decision.

The primordial issue for resolution is whether the questioned Deed of Donation was made in fraud
of petitioner and, therefore, rescissible. A corollary issue is whether the awards of damages,
attorney's fees and expenses of litigation are proper.

We resolve these issues in the negative.

The rule is well settled that the jurisdiction of this Court in cases brought before it from the Court
of Appeals via Rule 45 of the Rules of Court is limited to reviewing errors of law. Findings of fact
of the latter court are conclusive, except in a number of instances. 11 In the case at bar, one of the
recognized exceptions warranting a review by this Court of the factual findings of the Court of
Appeals exists, to wit, the factual findings and conclusions of the lower court and Court of
Appeals are conflicting, especially on the issue of whether the Deed of Donation in question was
in fraud of creditors.

Article 1381 of the Civil Code enumerates the contracts which are rescissible, and among them are
"those contracts undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due them."
The action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to
prosper, the following requisites must be present: (1) the plaintiff asking for rescission has a credit
prior to the alienation, 12 although demandable later; (2) the debtor has made a subsequent
contract conveying a patrimonial benefit to a third person; (3) the creditor has no other legal
remedy to satisfy his claim; 13 (4) the act being impugned is fraudulent; 14 (5) the third person
who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud.
15

The general rule is that rescission requires the existence of creditors at the time of the alleged
fraudulent alienation, and this must be proved as one of the bases of the judicial pronouncement
setting aside the contract. 16 Without any prior existing debt, there can neither be injury nor fraud.
While it is necessary that the credit of the plaintiff in the accion pauliana must exist prior to the
fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be
subsequent to the alienation, it is merely declaratory, with retroactive effect to the date when the
credit was constituted. 17

In the instant case, the alleged debt of LIM in favor of petitioner was incurred in August 1990,
while the deed of donation was purportedly executed on 10 August 1989.

We are not convinced with the allegation of the petitioner that the questioned deed was antedated
to make it appear that it was made prior to petitioner's credit. Notably, that deed is a public
document, it having been acknowledged before a notary public. 18 As such, it is evidence of the
fact which gave rise to its execution and of its date, pursuant to Section 23, Rule 132 of the Rules
of Court.

Petitioner's contention that the public documents referred to in said Section 23 are only those
entries in public records made in the performance of a duty by a public officer does not hold water.
Section 23 reads:

SEC. 23. Public documents as evidence. — Documents consisting of entries in public records
made in the performance of a duty by a public officer are prima facie evidence of the facts therein
stated. All other public documents are evidence, even against a third person, of the fact which
gave rise to their execution and of the date of the latter. (Emphasis supplied).

The phrase "all other public documents" in the second sentence of Section 23 means those public
documents other than the entries in public records made in the performance of a duty by a public
officer. And these include notarial documents, like the subject deed of donation. Section 19, Rule
132 of the Rules of Court provides:

SEC. 19. Classes of documents. — For the purpose of their presentation in evidence, documents
are either public or private.
Public documents are:

(a) . . .

(b) Documents acknowledged before a notary public except last wills and testaments. . . .

It bears repeating that notarial documents, except last wills and testaments, are public documents
and are evidence of the facts that gave rise to their execution and of their date.

In the present case, the fact that the questioned Deed was registered only on 2 July 1991 is not
enough to overcome the presumption as to the truthfulness of the statement of the date in the
questioned deed, which is 10 August 1989. Petitioner's claim against LIM was constituted only in
August 1990, or a year after the questioned alienation. Thus, the first two requisites for the
rescission of contracts are absent.

Even assuming arguendo that petitioner became a creditor of LIM prior to the celebration of the
contract of donation, still her action for rescission would not fare well because the third requisite
was not met. Under Article 1381 of the Civil Code, contracts entered into in fraud of creditors may
be rescinded only when the creditors cannot in any manner collect the claims due them. Also,
Article 1383 of the same Code provides that the action for rescission is but a subsidiary remedy
which cannot be instituted except when the party suffering damage has no other legal means to
obtain reparation for the same. The term "subsidiary remedy" has been defined as "the exhaustion
of all remedies by the prejudiced creditor to collect claims due him before rescission is resorted
to." 19 It is, therefore, essential that the party asking for rescission prove that he has exhausted all
other legal means to obtain satisfaction of his claim. 20 Petitioner neither alleged nor proved that
she did so. On this score, her action for the rescission of the questioned deed is not maintainable
even if the fraud charged actually did exist." 21

The fourth requisite for an accion pauliana to prosper is not present either.

Article 1387, first paragraph, of the Civil Code provides: "All contracts by virtue of which the
debtor alienates property by gratuitous title are presumed to have been entered into in fraud of
creditors when the donor did not reserve sufficient property to pay all debts contracted before the
donation. Likewise, Article 759 of the same Code, second paragraph, states that the donation is
always presumed to be in fraud of creditors when at the time thereof the donor did not reserve
sufficient property to pay his debts prior to the donation. prcd

For this presumption of fraud to apply, it must be established that the donor did not leave adequate
properties which creditors might have recourse for the collection of their credits existing before
the execution of the donation.

As earlier discussed, petitioner's alleged credit existed only a year after the deed of donation was
executed. She cannot, therefore, be said to have been prejudiced or defrauded by such alienation.
Besides, the evidence disclose that as of 10 August 1989, when the deed of donation was
executed, LIM had the following properties:

(1) A parcel of land containing an area of 220 square meters, together with the house constructed
thereon, situated in Sto. Niño Village, Mandaue City, Cebu, registered in the name of Rosa Lim
and covered by TCT No. 19706; 22

(2) A parcel of land located in Benros Subdivision, Lawa-an, Talisay, Cebu; 23

(3) A parcel of land containing an area of 2.152 hectares, with coconut trees thereon, situated at
Hindag-an, St. Bernard, Southern Leyte, and covered by Tax Declaration No. 13572. 24

(4) A parcel of land containing an area of 3.6 hectares, with coconut trees thereon, situated at
Hindag-an, St. Bernard, Southern Leyte, and covered by Tax Declaration No. 13571. 25

During her cross-examination, LIM declared that the house and lot mentioned in no. 1 was bought
by her in the amount of about P800,000 to P900,000. 26 Thus:

ATTY. FLORIDO:

Q These properties at the Sto. Niño Village, how much did you acquire this property?

A Including the residential house P800,000.00 to P900,000.00.

Q How about the lot which includes the house. How much was the price in the Deed of Sale of the
house and lot at Sto. Niño Violage [sic]?

A I forgot.

Q How much did you pay for it?

A That is P800,000.00 to P900,000.00.

Petitioner did not adduce any evidence that the price of said property was lower. Anent the
property in no. 2, LIM testified that she sold it in 1990. 27 As to the properties in nos. 3 and 4, the
total market value stated in the tax declarations dated 23 November 1993 was P56,871.60. Aside
from these tax declarations, petitioner did not present evidence that would indicate the actual
market value of said properties. It was not, therefore, sufficiently established that the properties
left behind by LIM were not sufficient to cover her debts existing before the donation was made.
Hence, the presumption of fraud will not come into play.

Nevertheless, a creditor need not depend solely upon the presumption laid down in Articles 759
and 1387 of the Civil Code. Under the third paragraph of Article 1387, the design to defraud may
be proved in any other manner recognized by the law of evidence. Thus in the consideration of
whether certain transfers are fraudulent, the Court has laid down specific rules by which the
character of the transaction may be determined. The following have been denominated by the
Court as badges of fraud:

(1) The fact that the consideration of the conveyance is fictitious or is inadequate;

(2) A transfer made by a debtor after suit has begun and while it is pending against him;

(3) A sale upon credit by an insolvent debtor;

(4) Evidence of large indebtedness or complete insolvency;

(5) The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or
greatly embarrassed financially;

(6) The fact that the transfer is made between father and son, when there are present other of the
above circumstances; and

(7) The failure of the vendee to take exclusive possession of all the property. 28

The above enumeration, however, is not an exclusive list. The circumstances evidencing fraud are
as varied as the men who perpetrate the fraud in each case. This Court has therefore declined to
define it, reserving the liberty to deal with it under whatever form it may present itself. 29

Petitioner failed to discharge the burden of proving any of the circumstances enumerated above or
any other circumstance from which fraud can be inferred. Accordingly, since the four
requirements for the rescission of a gratuitous contract are not present in this case, petitioner's
action must fail.

In her further attempt to support her action for rescission, petitioner brings to our attention the 31
July 1990 Decision 30 of the RTC of Quezon City, Branch 92, in Criminal Case No. Q-89-2216.
LIM was therein held guilty of estafa and was ordered to pay complainant Victoria Suarez the sum
of P169,000 for the obligation LIM incurred on 8 October 1987. This decision was affirmed by the
Court of Appeals. Upon appeal, however, this Court acquitted LIM of estafa but held her civilly
liable for P169,000 as actual damages.

It should be noted that the complainant in that case, Victoria Suarez, albeit a creditor prior to the
questioned alienation, is not a party to this accion pauliana. Article 1384 of the Civil Code
provides that rescission shall only be to the extent necessary to cover the damages caused. Under
this Article, only the creditor who brought the action for rescission can benefit from the rescission;
those who are strangers to the action cannot benefit from its effects. 31 And the revocation is only
to the extent of the plaintiff creditor's unsatisfied credit; as to the excess, the alienation is
maintained. 32 Thus, petitioner cannot invoke the credit of Suarez to justify rescission of the
subject deed of donation.

Now on the propriety of the trial court's awards of moral damages, attorney's fees and expenses of
litigation in favor of the petitioner. We have pored over the records and found no factual or legal
basis therefor. The trial court made these awards in the dispositive portion of its decision without
stating, however, any justification for the same in the ratio decidendi. Hence, the Court of Appeals
correctly deleted these awards for want of basis in fact, law or equity.

WHEREFORE, the petition is hereby DISMISSED and the challenged decision of the Court of
Appeals in CA-G.R. CV. No. 50091 is AFFIRMED in toto. cda

No pronouncement as to costs.

SO ORDERED.

Puno, Kapunan, Pardo and Ynares-Santiago, JJ., concur.

Footnotes
1.Original Record (OR), 42.

2.Id., 135.

3.G.R. No. 102784, 271 SCRA 12 (1997).

4.OR, 10-12.

5.Id., 6-9.

6.OR, 160; Rollo, 22. Per Judge Galicano C. Arriesgado.

7.Rollo, 31. Per Tuquero, A., J., with Imperial, J., and Verzola, E., JJ., concurring.

8.21 Phil. 243 (1912)

9.Sec. 23. Public documents as evidence. — Documents consisting of entries in public records
made in the performance of a duty by a public officer are prima facie evidence of the facts therein
stated. All other public documents are evidence, even against a third person, of the fact which
gave rise to their execution and of the date of the latter.

10.Sec. 30. Proof of notarial documents. — Every instrument duly acknowledged or proved and
certified as provided by law may be presented in evidence without further proof, the certificate of
acknowledgment being prima facie evidence of the execution of the instrument or document
involved.
11.In Sta. Maria v. Court of Appeals, 285 SCRA 351 (1998), the Court enumerated some of the
instances when the factual findings of the Court of Appeals are not deemed conclusive, to wit: (1)
when the findings are grounded entirely on speculation, surmises, or conjectures; (2) when the
inference made is manifestly mistaken, absurd, or impossible; (3) when there is grave abuse of
discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of
fact are conflicting; (6) when in making its findings the Court of Appeals went beyond the issues
of the case, or its findings are contrary to the admissions of both the appellant and the appellee; (7)
when the findings are contrary to those of the trial court; (8) when the findings are conclusions
without citation of specific evidence on which they are based; (9) when the facts set forth in the
petition as well as in the petitioner's main and reply briefs are not disputed by the respondent; and
(10) when the findings of fact are premised on the supposed absence of evidence and contradicted
by the evidence on record.

12.Panlilio v. Victoria, 35 Phil. 706 (1916); Solis v. Chua Pua Hermanos, 50 Phil. 636 (1927)

13.Article 1383, Civil Code.

14.4 TOLENTINO, ARTURO M., CIVIL CODE OF THE PHILIPPINES 576 (1991), [hereafter 4
TOLENTINO]; citing 8 MANRESA 756, 2 Castan 543-555, and 3 Camus 207.

15.4 TOLENTINO 576, citing 2 Castan 543-555 and 3 Camus 107.

16.Solis v. Chua Pua Hernanes, supra note 12, at 639.

17.4 TOLENTINO 576-577, citing Sentencia (Cuba) of 7 May 1910 and 1 Gasperi 484-485.

18.Section 19(b), Rule 132, Rules of Court.

19.MORENO, FEDERICO B., PHILIPPINE LAW DICTIONARY 915 (1988)

20.Article 1177, Civil Code.

21.See Goquiolay v. Sycip, 9 SCRA 663, 677 [1963]; Solis v. Chua Pua Hermanos, supra note 12,
at 639-640.

22.Exhibit "M"; Exhibit "2"; OR, 114.

23.TSN, 12 November 1993, 4.

24.Exhibit "N"; OR, 146.

25.Exhibit "O"; Id., 147.

26.TSN, 12 November 1993, 7.

27.Id., 6.

28.Oria v. McMicking, supra note 8.

29.Rivera v. Litam & Co., 4 SCRA 1072 [1962].

30.Exhibit "K"; OR, 135.

31.4 PARAS, EDGARDO L., CIVIL CODE OF THE PHILIPPINES, 70 (1994); 4 TOLENTINO
586, citing 7 Planiol & Ripert 274-275.

32.4 TOLENTINO 586, Citing 7 Planiol & Ripert 271-272.

||| (Siguan v. Lim, G.R. No. 134685, [November 19, 1999], 376 PHIL 840-857)

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228 PHIL 564-594

SECOND DIVISION

[G.R. No. L-47851. October 3, 1986.]

JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners, vs. THE COURT OF APPEALS,
UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and the PHILIPPINE BAR
ASSOCIATION, respondents.

[G.R. No. L-47863. October 3, 1986.]

THE UNITED CONSTRUCTION CO., INC., petitioner, vs. COURT OF APPEALS, ET AL.,
respondents.

[G.R. No. L-47896. October 3, 1986.]

PHILIPPINE BAR ASSOCIATION, ET AL., petitioners, vs. COURT OF APPEALS, ET AL.,
respondents.

SYLLABUS

1. CIVIL LAW; ACT OF GOD; DEFINED. — An act of God has been defined as an accident, due
directly and exclusively to natural causes without human intervention, which by no amount of
foresight, pains or care, reasonably to have been expected, could have been prevented. (1 Corpus
Juris 1174).

2. ID.; ID.; GENERAL RULE; REQUISITES TO EXEMPT OBLIGOR FROM LIABILITY. —

The general rule is that no person shall be responsible for events which could not be foreseen or
which, though foreseen, were inevitable (Article 1174, New Civil Code). To exempt the obligor
from liability under this Article, for a breach of an obligation due to an "act of God", the following
must concur: (a) the cause of the breach of the obligation must be independent of the will of the
debtor; (b) the event must be either unforeseeable or unavoidable; (c) the event must be such as to
render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the debtor
must be free from any participation in, or aggravation of the injury to the creditor. (Vasquez v.
Court of Appeals, 138 SCRA 553; Estrada v. Consolacion, 71 SCRA 423; Austria v. Court of
Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279; Lasam
v. Smith, 45 Phil. 657). The principle embodied in the act of God doctrine strictly requires that the
act must be one occasioned exclusively by the violence of nature and all human agencies are to be
excluded from creating or entering into the cause of the mischief.

3. ID.; ID.; INSTANCES WHEN THE RULE DOES NOT APPLY. — When the effect, the cause
of which is to be considered, is found to be in part the result of the participation of man, whether it
be from active intervention or neglect, or failure to act, the whole occurrence is thereby
humanized, as it were, and removed from the rules applicable to the acts of God. (1 Corpus Juris,
pp. 1174-1175) Thus, if upon the happening of a fortuitous event or an act of God, there concurs a
corresponding fraud, negligence, delay or violation or contravention in any manner of the tenor of
the obligation as provided for in Article 1170 of the Civil Code, which results in loss or damage,
the obligor cannot escape liability. It has also been held that when the negligence of a person
concurs with an act of God in producing a loss, such person is not exempt from liability by
showing that the immediate cause of the damage was the act of God. To be exempt from liability
for loss because of an act of God, he must be free from any previous negligence or misconduct by
which that loss or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55
Phil. 129; Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil.
594, 604; Lasam v. Smith, 45 Phil. 657)

4. ID.; QUASI-DELICTS; NEGLIGENCE EQUIVALENT TO BAD FAITH; — The afore-

mentioned facts clearly indicate the wanton negligence of both the defendant and the third-party
defendants in effecting the plans, designs, specifications, and construction of the PBA building
and We hold such negligence as equivalent to bad faith in the performance of their respective
tasks. Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379 ,4380)
which may be in point in this case, reads: "One who negligently creates a dangerous condition
cannot escape liability for the natural and probable consequences thereof, although the act of a
third person, or an act of God for which he is not responsible, intervenes to precipitate the loss."

5. REMEDIAL LAW; COURT OF APPEALS; FINDINGS OF FACTS CONCLUSIVE ON THE

PARTIES AND ON THE SUPREME COURT; EXCEPTIONS. — It is well settled that the
findings of facts of the Court of Appeals are conclusive on the parties and on this Court (cases
cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs. Sandiganbayan, January 17, 1985, 134
SCRA 105, 121), unless (1) the conclusion is a finding grounded entirely on speculation, surmise
and conjectures; (2) the inference made is manifestly mistaken; (3) there is grave abuse of
discretion; (4) the judgment is based on misapprehension of facts; (5) the findings of fact are
conflicting; (6) the Court of Appeals went beyond the issues of the case and its findings are
contrary to the admissions of both appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co.,
February 8, 1967, 19 SCRA 289, 291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651);
(7) the findings of facts of the Court of Appeals are contrary to those of the trial court; (8) said
findings of facts are conclusions without citation of specific evidence on which they are based; (9)
the facts set forth in the petition as well as in the petitioner's main and reply briefs are not disputed
by the respondents (Garcia vs. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals,
July 30, 1979, 92 SCRA 322, 366); (10) the finding of fact of the Court of Appeals is premised on
the supposed absence of evidence and is contradicted by evidence on record (Salazar vs.
Gutierrez, May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v.
Sandiganbayan, July 10, 1986).

DECISION

PARAS, J p:

These are petitions for review on certiorari of the November 28, 1977 decision of the Court of
Appeals in CA G.R. No. 51771-R modifying the decision of the Court of First Instance of Manila,
Branch V, in Civil Case No. 74958 dated September 21, 1971 as modified by the Order of the
lower court dated December 8, 1971. The Court of Appeals in modifying the decision of the lower
court included an award of an additional amount of P200,000.00 to the Philippine Bar Association
to be paid jointly and severally by the defendant United Construction Co. and by the third-party
defendants Juan F. Nakpil and Sons and Juan F. Nakpil.

The dispositive portion of the modified decision of the lower court reads: cdll

"WHEREFORE, judgment is hereby rendered:

"(a) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman
Ozaeta) to pay the plaintiff, jointly and severally, the sum of P989,335.68 with interest at the legal
rate from November 29, 1968, the date of the filing of the complaint until full payment;
"(b) Dismissing the complaint with respect to defendant Juan J. Carlos;

"(c) Dismissing the third-party complaint;

"(d) Dismissing the defendant's and third-party defendants' counterclaims for lack of merit;

"(e) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman
Ozaeta) to pay the costs in equal shares.

"SO ORDERED." (Record on Appeal, p. 521; Rollo, L-47851, p. 169).

The dispositive portion of the decision of the Court of Appeals reads:

"WHEREFORE, the judgment appealed from is modified to include an award of P200,000.00 in

favor of plaintiff-appellant Philippine Bar Association, with interest at the legal rate from
November 29, 1968 until full payment to be paid jointly and severally by defendant United
Construction Co., Inc. and third party defendants (except Roman Ozaeta). In all other respects, the
judgment dated September 21, 1971 as modified in the December 8, 1971 Order of the lower court
is hereby affirmed with COSTS to be paid by the defendant and third party defendant (except
Roman Ozaeta) in equal shares.

"SO ORDERED."

Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan J. Carlos
in L-47863 seek the reversal of the decision of the Court of Appeals, among other things, for
exoneration from liability while petitioner Philippine Bar Association in L-47896 seeks the
modification of aforesaid decision to obtain an award of P1,830,000.00 for the loss of the PBA
building plus four (4) times such amount as damages resulting in increased cost of the building;
P100,000.00 as exemplary damages; and P100,000.00 as attorney's fees. cdrep

These petitions arising from the same case filed in the Court of First Instance of Manila were
consolidated by this Court in the resolution of May 10, 1978 requiring the respective respondents
to comment. (Rollo, L-47851, p. 172).

The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp. 269-348;
pp. 520-521; Rollo, L-47851, p. 169) and affirmed by the Court of Appeals are as follows:

The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated under the
Corporation Law, decided to construct an office building on its 840 square meters lot located at the
corner of Aduana and Arzobispo Streets, Intramuros, Manila. The construction was undertaken by
the United Construction, Inc. on an "administration" basis, on the suggestion of Juan J. Carlos, the
president and general manager of said corporation. The proposal was approved by plaintiff's board
of directors and signed by its president Roman Ozaeta, a third-party defendant in this case. The
plans and specifications for the building were prepared by the other third-party defendants Juan F.
Nakpil & Sons. The building was completed in June, 1966.

In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and its environs
and the building in question sustained major damage. The front columns of the building buckled,
causing the building to tilt forward dangerously. The tenants vacated the building in view of its
precarious condition. As a temporary remedial measure, the building was shored up by United
Construction, Inc. at the cost of P13,661.28.

On November 29, 1968, the plaintiff commenced this action for the recovery of damages arising
from the partial collapse of the building against United Construction, Inc. and its President and
General Manager Juan J. Carlos as defendants. Plaintiff alleges that the collapse of the building
was accused by defects in the construction, the failure of the contractors to follow plans and
specifications and violations by the defendants of the terms of the contract.

Defendants in turn filed a third-party complaint against the architects who prepared the plans and
specifications, alleging in essence that the collapse of the building was due to the defects in the
said plans and specifications. Roman Ozaeta, the then president of the plaintiff Bar Association
was included as a third-party defendant for damages for having included Juan J. Carlos, President
of the United Construction Co., Inc. as party defendant. LLjur

On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and Juan F.
Nakpil presented a written stipulation which reads:

"1. That in relation to defendants' answer with counterclaims and third-party complaints and the
third-party defendants Nakpil & Sons' answer thereto, the plaintiff need not amend its complaint
by including the said Juan F. Nakpil & Sons and Juan F. Nakpil personally as parties defendant.

2. That in the event (unexpected by the undersigned) that the Court should find after the trial that
the above-named defendants Juan J. Carlos and United Construction Co., Inc. are free from any
blame and liability for the collapse of the PBA Building, and should further find that the collapse
of said building was due to defects and/or inadequacy of the plans, designs, and specifications
prepared by the third-party defendants, or in the event that the Court may find Juan F. Nakpil and
Sons and/or Juan F. Nakpil contributorily negligent or in any way jointly and solidarily liable with
the defendants, judgment may be rendered in whole or in part, as the case may be, against Juan F.
Nakpil & Sons and/or Juan F. Nakpil in favor of the plaintiff to all intents and purposes as if
plaintiff's complaint has been duly amended by including the said Juan F. Nakpil & Sons and Juan
F. Nakpil as parties defendant and by alleging causes of action against them including, among
others, the defects or inadequacy of the plans, designs, and specifications prepared by them and/or
failure in the performance of their contract with plaintiff.

3. Both parties hereby jointly petition this Honorable Court to approve this stipulation." (Record
on Appeal, pp. 274-275; Rollo, L-47851, p. 169).
Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which among
others, the parties agreed to refer the technical issues involved in the case to a Commissioner. Mr.
Andres O. Hizon, who was ultimately appointed by the trial court, assumed his office as
Commissioner, charged with the duty to try the following issues:

"1. Whether the damage sustained by the PBA building during the August 2, 1968 earthquake had
been caused, directly or indirectly, by:

(a) The inadequacies or defects in the plans and specifications prepared by third-party defendants;

(b) The deviations, if any, made by the defendants from said plans and specifications and how said
deviations contributed to the damage sustained;

(c) The alleged failure of defendants to observe the requisite quality of materials and workmanship
in the construction of the building;

(d) The alleged failure to exercise the requisite degree of supervision expected of the architect, the
contractor and/or the owner of the building;

(e) An act of God or a fortuitous event; and

(f) Any other cause not herein above specified.

2. If the cause of the damage suffered by the building arose from a combination of the above-
enumerated factors, the degree or proportion in which each individual factor contributed to the
damage sustained;

3. Whether the building is now a total loss and should be completely demolished or whether it
may still be repaired and restored to a tenantable condition. In the latter case, the determination of
the cost of such restoration or repair, and the value of any remaining construction, such as the
foundation, which may still be utilized or availed of." (Record on Appeal pp. 275-276; Rollo, L-
47851, p. 169).

Thus, the issues of this case were divided into technical issues and non-technical issues. As
aforestated the technical issues were referred to the Commissioner. The non-technical issues were
tried by the Court. prcd

Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it may
topple down in case of a strong earthquake. The motions were opposed by the defendants and the
matter was referred to the Commissioner. Finally, on April 30, 1979 the building was authorized to
be demolished at the expense of the plaintiff, but not another earthquake of high intensity on April
7, 1970 followed by other strong earthquakes on April 9, and 12, 1970, caused further damage to
the property. The actual demolition was undertaken by the buyer of the damaged building. (Record
on Appeal, pp. 278-280; Ibid.).

After the protracted hearings, the Commissioner eventually submitted his report on September 25,
1970 with the findings that while the damage sustained by the PBA building was caused directly
by the August 2, 1968 earthquake whose magnitude was estimated at 7.3 they were also caused by
the defects in the plans and specifications prepared by the third-party defendants' architects,
deviations from said plans and specifications by the defendant contractors and failure of the latter
to observe the requisite workmanship in the construction of the building and of the contractors,
architects and even the owners to exercise the requisite degree of supervision in the construction
of subject building.

All the parties registered their objections to aforesaid findings which in turn were answered by the
Commissioner.

The trial court agreed with the findings of the Commissioner except as to the holding that the
owner is charged with full time supervision of the construction. The Court sees no legal or
contractual basis for such conclusion. (Record on Appeal, pp. 309-328; Ibid.).

Thus, on September 21, 1971, the lower court rendered the assailed decision which was modified
by the Intermediate Appellate Court on November 28, 1977.

All the parties herein appealed from the decision of the Intermediate Appellate Court. Hence, these
petitions.

On May 11, 1978, the United Architects of the Philippines, the Association of Civil Engineers, and
the Philippine Institute of Architects filed with the Court a motion to intervene as amicus curiae.
They proposed to present a position paper on the liability of architects when a building collapses
and to submit likewise a critical analysis with computations on the divergent views on the design
and plans as submitted by the experts procured by the parties. The motion having been granted,
the amicus curiae were granted a period of 60 days within which to submit their position.

After the parties had all filed their comments, We gave due course to the petitions in Our
Resolution of July 21, 1978.

The position papers of the amicus curiae (submitted on November 24, 1978) were duly noted.

The amicus curiae gave the opinion that the plans and specifications of the Nakpils were not
defective. But the Commissioner, when asked by Us to comment, reiterated his conclusion that the
defects in the plans and specifications indeed existed. LLpr

Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord. No.
4131) and the 1966 Asep Code, the Commissioner added that even if it can be proved that the
defects in the construction alone (and not in the plans and design) caused the damage to the
building, still the deficiency in the original design and lack of specific provisions against torsion in
the original plans and the overload on the ground floor columns (found by all the experts including
the original designer) certainly contributed to the damage which occurred. (Ibid, p. 174).

In their respective briefs petitioners, among others, raised the following assignments of errors:
Philippine Bar Association claimed that the measure of damages should not be limited to
P1,100,000.00 as estimated cost of repairs or to the period of six (6) months for loss of rentals
while United Construction Co., Inc. and the Nakpils claimed that it was an act of God that caused
the failure of the building which should exempt them from responsibility and not the defective
construction, poor workmanship, deviations from plans and specifications and other imperfections
in the case of United Construction Co., Inc. or the deficiencies in the design, plans and
specifications prepared by petitioners in the case of the Nakpils. Both UCCI and the Nakpils
object to the payment of the additional amount of P200,000.00 imposed by the Court of Appeals.
UCCI also claimed that it should be reimbursed the expenses of shoring the building in the amount
of P13,661.28 while the Nakpils opposed the payment of damages jointly and solidarily with
UCCI. cdll

The pivotal issue in this case is whether or not an act of God, — an unusually strong earthquake
— which caused the failure of the building, exempts from liability, parties who are otherwise
liable because of their negligence.

The applicable law governing the rights and liabilities of the parties herein is Article 1723 of the
New Civil Code, which provides:

"Art. 1723. The engineer or architect who drew up the plans and specifications for a building is
liable for damages if within fifteen years from the completion of the structure the same should
collapse by reason of a defect in those plans and specifications, or due to the defects in the ground.
The contractor is likewise responsible for the damage if the edifice falls within the same period on
account of defects in the construction or the use of materials of inferior quality furnished by him,
or due to any violation of the terms of the contract. If the engineer or architect supervises the
construction, he shall be solidarily liable with the contractor.

Acceptance of the building, after completion, does not imply waiver of any of the causes of action
by reason of any defect mentioned in the preceding paragraph.

The action must be brought within ten years following the collapse of the building."

On the other hand, the general rule is that no person shall be responsible for events which could
not be foreseen or which, though foreseen, were inevitable (Article 1174, New Civil Code).

An act of God has been defined as an accident, due directly and exclusively to natural causes
without human intervention, which by no amount of foresight, pains or care, reasonably to have
been expected, could have been prevented. (1 Corpus Juris 1174).
There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act of God.

To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an
obligation due to an "act of God, " the following must concur: (a) the cause of the breach of the
obligation must be independent of the will of the debtor; (b) the event must be either unforseeable
or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his
obligation in a normal manner; and (d) the debtor must be free from any participation in, or
aggravation of the injury to the creditor. (Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v.
Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA 527; Republic of the Phil. v.
Luzon Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).

Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding
fraud, negligence, delay or violation or contravention in any manner of the tenor of the obligation
as provided for in Article 1170 of the Civil Code, which results in loss or damage, the obligor
cannot escape liability.

The principle embodied in the act of God doctrine strictly requires that the act must be one
occasioned exclusively by the violence of nature and all human agencies are to be excluded from
creating or entering into the cause of the mischief. When the effect, the cause of which is to be
considered, is found to be in part the result of the participation of man, whether it be from active
intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it were,
and removed from the rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).

Thus it has been held that when the negligence of a person concurs with an act of God in
producing a loss, such person is not exempt from liability by showing that the immediate cause of
the damage was the act of God. To be exempt from liability for loss because of an act of God, he
must be free from any previous negligence or misconduct by which that loss or damage may have
been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan, 49 O.G.
4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil.
657). LLjur

The negligence of the defendant and the third-party defendants petitioners was established beyond
dispute both in the lower court and in the Intermediate Appellate Court. Defendant United
Construction Co., Inc. was found to have made substantial deviations from the plans and
specifications, and to have failed to observe the requisite workmanship in the construction as well
as to exercise the requisite degree of supervision; while the third-party defendants were found to
have inadequacies or defects in the plans and specifications prepared by them. As correctly
assessed by both courts, the defects in the construction and in the plans and specifications were the
proximate causes that rendered the PBA building unable to withstand the earthquake of August 2,
1968. For this reason the defendant and third-party defendants cannot claim exemption from
liability. (Decision, Court of Appeals, pp. 30-31).

It is well settled that the findings of facts of the Court of Appeals are conclusive on the parties and
on this court (cases cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs. Sandiganbayan,
January 17, 1985, 134 SCRA 105, 121), unless (1) the conclusion is a finding grounded entirely on
speculation surmise and conjectures; (2) the inference made is manifestly mistaken; (3) there is
grave abuse of discretion; (4) the judgment is based on misapprehension of facts; (5) the findings
of fact are conflicting; (6) the Court of Appeals went beyond the issues of the case and its findings
are contrary to the admissions of both appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co.,
February 8, 1967, 19 SCRA 289, 291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651);
(7) the findings of facts of the Court of Appeals are contrary to those of the trial court; (8) said
findings of facts are conclusions without citation of specific evidence on which they are based; (9)
the facts set forth in the petition as well as in the petitioner's main and reply briefs are not disputed
by the respondents (Garcia vs. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals,
July 30, 1979, 92 SCRA 322, 366); (10) the finding of fact of the Court of Appeals is premised on
the supposed absence of evidence and is contradicted by evidence on record (Salazar vs.
Gutierrez, May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v.
Sandiganbayan, July 10, 1986).

It is evident that the case at bar does not fall under any of the exceptions above-mentioned. On the
contrary, the records show that the lower court spared no effort in arriving at the correct
appreciation of facts by the referral of technical issues to a Commissioner chosen by the parties
whose findings and conclusions remained convincingly unrebutted by the intervenors/amicus
curiae who were allowed to intervene in the Supreme Court.

In any event, the relevant and logical observations of the trial court as affirmed by the Court of
Appeals that "while it is not possible to state with certainty that the building would not have
collapsed were those defects not present, the fact remains that several buildings in the same area
withstood the earthquake to which the building of the plaintiff was similarly subjected," cannot be
ignored.

The next issue to be resolved is the amount of damages to be awarded to the PBA for the partial
collapse (and eventual complete collapse) of its building.

The Court of Appeals affirmed the finding of the trial court based on the report of the
Commissioner that the total amount required to repair the PBA building and to restore it to
tenantable condition was P900,000.00 inasmuch as it was not initially a total loss. However, while
the trial court awarded the PBA said amount as damages, plus unrealized rental income for one-
half year, the Court of Appeals modified the amount by awarding in favor of PBA an additional
sum of P200,000.00 representing the damage suffered by the PBA building as a result of another
earthquake that occurred on April 7, 1970 (L-47896, Vol. I, p. 92). LLphil

The PBA in its brief insists that the proper award should be P1,830,000.00 representing the total
value of the building (L-47896, PBA's No. 1 Assignment of Error, p. 19), while both the
NAKPILS and UNITED question the additional award of P200,000.00 in favor of the PBA (L-
47851, NAKPIL's Brief as Petitioner, p. 6, UNITED's Brief as Petitioner, p, 25). The PBA further
urges that the unrealized rental income awarded to it should not be limited to a period of one-half
year but should be computed on a continuing basis at the rate of P178,671.76 a year until the
judgment for the principal amount shall have been satisfied (L-47896, PBA's No. 11 Assignment
of Errors, p. 19).

The collapse of the PBA building as a result of the August 2, 1968 earthquake was only partial and
it is undisputed that the building could then still be repaired and restored to its tenantable
condition. The PBA, however, in view of its lack of needed funding, was unable, thru no fault of
its own, to have the building repaired. UNITED, on the other hand, spent P13,661.28 to shore up
the building after the August 2, 1968 earthquake (L-47896, CA Decision, p. 46). Because of the
earthquake on April 7, 1970, the trial court after the needed consultations, authorized the total
demolition of the building (L-47896, Vol. 1, pp. 53-54).

There should be no question that the NAKPILS and UNITED are liable for the damage resulting
from the partial and eventual collapse of the PBA building as a result of the earthquakes.

We quote with approval the following from the erudite decision penned by Justice Hugo E.
Gutierrez (now an Associate Justice of the Supreme Court) while still an Associate Justice of the
Court of, Appeals:

"There is no question that an earthquake and other forces of nature such as cyclones, drought,
floods, lightning, and perils of the sea are acts of God. It does not necessarily follow, however, that
specific losses and suffering resulting from the occurrence of these natural force are also acts of
God. We are not convinced on the basis of the evidence on record that from the thousands of
structures in Manila, God singled out the blameless PBA building in Intramuros and around six or
seven other buildings in various parts of the city for collapse or severe damage and that God alone
was responsible for the damages and losses thus suffered.

The record is replete with evidence of defects and deficiencies in the designs and plans, defective
construction, poor workmanship, deviation from plans and specifications and other imperfections.
These deficiencies are attributable to negligent men and not to a perfect God.

The act-of-God arguments of the defendants-appellants and third party defendants-appellants

presented in their briefs are premised on legal generalizations or speculations and on theological
fatalism both of which ignore the plain facts. The lengthy discussion of United on ordinary
earthquakes and unusually strong earthquakes and on ordinary fortuitous events and extraordinary
fortuitous events leads to its argument that the August 2, 1968 earthquake was of such an
overwhelming and destructive character that by its own force and independent of the particular
negligence alleged, the injury would have been produced. If we follow this line of speculative
reasoning, we will be forced to conclude that under such a situation scores of buildings in the
vicinity and in other parts of Manila would have toppled down. Following the same line of
reasoning, Nakpil and Sons alleges that the designs were adequate in accordance with pre-August
2, 1968 knowledge and appear inadequate only in the light of engineering information acquired
after the earthquake. If this were so, hundreds of ancient buildings which survived the earthquake
better than the two-year old PBA building must have been designed and constructed by architects
and contractors whose knowledge and foresight were unexplainably auspicious and prophetic.
Fortunately, the facts on record allow a more down to earth explanation of the collapse. The
failure of the PBA building, as a unique and distinct construction with no reference or comparison
to other buildings, to weather the severe earthquake forces was traced to design deficiencies and
defective construction, factors which are neither mysterious nor esoteric. The theological allusion
of appellant United that God acts in mysterious ways His wonders to perform impresses us to be
inappropriate. The evidence reveals defects and deficiencies in design and construction. There is
no mystery about these acts of negligence. The collapse of the PBA building was no wonder
performed by God. It was a result of the imperfections in the work of the architects and the people
in the construction company. More relevant to our mind is the lesson from the parable of the wise
man in the Sermon on the Mount, "which built his house upon a rock; and the rain descended and
the floods came and the winds blew and beat upon that house: and it fell not; for it was founded
upon a rock" and of the "foolish man which built his house upon the sand. And the rain descended
and the floods came, and the winds blew, and beat upon that house; and it fell and great was the
fall of it. (St. Matthew 7: 24-27)." The requirement that a building should withstand rains, floods,
winds, earthquakes, and natural forces is precisely the reason why we have professional experts
like architects, and engineers. Designs and constructions vary under varying circumstances and
conditions but the requirement to design and build well does not change.

The findings of the lower Court on the cause of the collapse are more rational and accurate.
Instead of laying the blame solely on the motions and forces generated by the earthquake, it also
examined the ability of the PBA building, as designed and constructed, to withstand and
successfully weather those forces.

The evidence sufficiently supports a conclusion that the negligence and fault of both United and
Nakpil and Sons, not a mysterious act of an inscrutable God, were responsible for the damages.
The Report of the Commissioner, Plaintiff's Objections to the Report, Third Party Defendants'
Objections to the Report, Defendants' Objections to the Report, Commissioner's Answer to the
various Objections, Plaintiffs' Reply to the Commissioner's Answer, Defendants' Reply to the
Commissioner's Answer, Counter-Reply to Defendants' Reply, and Third-Party Defendants' Reply
to the Commissioner's Report not to mention the exhibits and the testimonies show that the main
arguments raised on appeal were already raised during the trial and fully considered by the lower
Court. A reiteration of these same arguments on appeal fails to convince us that we should reverse
or disturb the lower Court's factual findings and its conclusions drawn from the facts, among
them:

"The Commissioner also found merit in the allegations of the defendants as to the physical
evidence before and after the earthquake showing the inadequacy of design, to wit:

"Physical evidence before the earthquake, providing (sic) inadequacy of design;

1. Inadequate design was the cause of the failure of the building.

2. Sub-baffles on the two sides and in front of the building;

a. Increase the inertia forces that move the building laterally toward the Manila Fire Department.

b. Create another stiffness-imbalance.

3. The embedded 4" diameter cast iron downspout on all exterior columns reduces the cross-
sectional area of each of the columns and the strength thereof.

4. Two front corners, A7 and D7 columns were very much less reinforced.

Physical Evidence After the Earthquake, Proving Inadequacy of design;

1. Column A7 suffered the severest fracture and maximum sagging Also D7.

2. There are more damages in the front part of the building than towards the rear, not only in
columns but also in slabs.

3. Building leaned and sagged more on the front part of the building.

4. Floors showed maximum sagging on the sides and toward the front corner parts of the building.

5. There was a lateral displacement of the building of about 8", Maximum sagging occurs at the
column A7 where the floor is lower by 80 cm. than the highest slab level.

6. Slab at the corner column D7 sagged by 38 cm."

The Commissioner concluded that there were deficiencies or defects in the design, plans and
specifications of the PBA building which involved appreciable risks with respect to the accidental
forces which may result from earthquake shocks. He conceded, however, that the fact that those
deficiencies or defects may have arisen from an obsolete or not too conservative code or even a
code that does not require a design for earthquake forces mitigates in a large measure the
responsibility or liability of the architect and engineer designer.

The Third-party defendants, who are the most concerned with this portion of the Commissioner's
report, voiced opposition to the same on the grounds that (a) the finding is based on a basic
erroneous conception as to the design concept of the building, to wit, that the design is essentially
that of a heavy rectangular box on stilts with shear wall at one end; (b) the finding that there were
defects and a deficiency in the design of the building would at best be based on an approximation
and, therefore, rightly belonged to the realm of speculation, rather than of certainty and could very
possibly be outright error; (c) the Commissioner has failed to back up or support his finding with
extensive, complex and highly specialized computations and analyzes which he himself
emphasizes are necessary in the determination of such a highly technical question; and (d) the
Commissioner has analyzed the design of the PBA building not in the light of existing and
available earthquake engineering knowledge at the time of the preparation of the design, but in the
light of recent and current standards.

The Commissioner answered the said objections alleging that third-party defendants' objections
were based on estimates or exhibits not presented during the hearing; that the resort to engineering
references posterior to the date of the preparation of the plans was induced by the third-party
defendants themselves who submitted computations of the third-party defendants are erroneous.'

The issue presently considered is admittedly a technical one of the highest degree. It involves
questions not within the ordinary competence of the bench and the bar to resolve by themselves.
Counsel for the third-party defendants has aptly remarked that "engineering, although dealing in
mathematics, is not an exact science and that the present knowledge as to the nature of
earthquakes and the behavior of forces generated by them still leaves much to be desired; so much
so "that the experts of the different parties, who are all engineers, cannot agree on what equation
to use, as to what earthquake co-efficients are, on the codes to be used and even as to the type of
structure that the PBA building (is) was" (p. 29, Memo, of third-party defendants before the
Commissioner).

The difficulty expected by the Court if this technical matter were to be tried and inquired into by
the Court itself, coupled with the intrinsic nature of the questions involved therein, constituted the
reason for the reference of the said issues to a Commissioner whose qualifications and experience
have eminently qualified him for the task, and whose competence had not been questioned by the
parties until he submitted his report. Within the pardonable limit of the Court's ability to
comprehend the meaning of the Commissioner's report on this issue, and the objections voiced to
the same, the Court sees no compelling reasons to disturb the findings of the Commissioner that
there were defects and deficiencies in the design, plans and specifications prepared by third-party
defendants, and that said defects and deficiencies involved appreciable risks with respect to the
accidental forces which may result from earthquake shocks.

(2) (a) The deviations, if any, made by the defendants from the plans and specifications, and how
said deviations contributed to the damage sustained by the building.

(b) The alleged failure of defendants to observe the requisite quality of materials and
workmanship in the construction of the building.

These two issues, being interrelated with each other, will be discussed together.

The findings of the Commissioner on these issues were as follows:

"We now turn to the construction of the PBA Building and the alleged deficiencies or defects in
the construction and violations or deviations from the plans and specifications. All these may be
summarized as follows:
a. Summary of alleged defects as reported by Engineer Mario M. Bundalian.

(1) Wrongful and defective placing of reinforcing bars.

(2) Absence of effective and desirable integration of the 3 bars in the cluster.

(3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires no larger than 1 inch.

(4) Reinforcement assembly is not concentric with the column, eccentricity being 3" off when on
one face the main bars are only 1 1/2" from the surface.

(5) Prevalence of honeycombs,

(6) Contraband construction joints,

(7) Absence, or omission, or over spacing of spiral hoops,

(8) Deliberate severance of spirals into semi-circles in noted on Col. A5, ground floor,

(9) Defective construction joints in Columns A3, C7, D7 and D4, ground floor.

(10) Undergraduate concrete is evident,

(11) Big cavity in core of Column 2A-4, second floor,

(12) Columns buckled at different planes. Columns buckled worst where there are no spirals or
where spirals are cut. Columns suffered worst displacement where the eccentricity of the columnar
reinforcement assembly is more acute.

b. Summary of alleged defects as reported by Engr. Antonio Avecilla.

Columns are first (or ground) floor, unless otherwise stated.

(1) Column D4 — Spacing of spiral is changed from 2" to 5" on centers,

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

(3) Column D6 — Spacing of spiral over 4 1/2,(4) Column D7 - Lack of lateral ties,

(5) Column C7 — Absence of spiral to a height of 20" from the ground level, Spirals are at 2"
from the exterior column face and 6" from the inner column face,

(6) Column B6 — Lack of spiral on 2 feet below the floor beams,

(7) Column B5 — Lack of spirals at a distance of 26" below the beam,

(8) Column B7 — Spirals not tied to vertical reinforcing bars, Spirals are uneven 2" to 4",

(9) Column A3 — Lack of lateral ties,

(10) Column A4 — Spirals cut off and welded to two separate clustered vertical bars,

(11) Column A4 — (second floor) Column is completely hollow to a height of 30"

(12) Column A5 — Spirals were cut from the floor level to the bottom of the spandrel beam to a
height of 6 feet,

(13) Column A6 — No spirals up to a height of 30" above the ground floor level,

(14) Column A7 — Lack of lateral ties or spirals,

c. Summary of alleged defects as reported by the experts of the Third-Party defendants.

Ground floor columns.

(1) Column A4 — Spirals are cut,

(2) Column A5 — Spirals are cut,

(3) Column A6 — At lower 18" spirals are absent,

(4) Column A7 — Ties are too far apart,

(5) Column B5 — At upper fourth of column spirals are either absent or improperly spliced,

(6) Column B6 — At upper 2 feet spirals are absent,

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

(8) Column C7 — Spirals are absent at lowest 18"

(9) Column D5 — At lowest 2 feet spirals are absent,

(10) Column D6 — Spirals are too far apart and apparently improperly spliced,

(11) Column D7 — Lateral ties are too far apart, spaced 16" on centers.
There is merit in many of these allegations. The explanations given by the engineering experts for
the defendants are either contrary to general principles of engineering design for reinforced
concrete or not applicable to the requirements for ductility and strength of reinforced concrete in
earthquake-resistant design and construction.

We shall first classify and consider defects which may have appreciable bearing or relation to the
earthquake-resistant property of the building.

As heretofore mentioned, details which insure ductility at or near the connections between
columns and girders are desirable in earthquake-resistant design and construction. The omission of
spirals and ties or hoops at the bottom and/or tops of columns contributed greatly to the loss of
earthquake-resistant strength. The plans and specifications required that these spirals and ties be
carried from the floor level to the bottom reinforcement of the deeper beam (p. 1, Specifications,
p. 970, Reference 11). There were several clear evidences where this was not done especially in
some of the ground floor columns which failed.

There were also unmistakable evidences that the spacings of the spirals and ties in the columns
were in many cases greater than those called for in the plans and specifications resulting again in
loss of earthquake-resistant strength. The assertion of the engineering experts for the defendants
that the improper spacings and the cutting of the spirals did not result in loss of strength in the
column cannot be maintained and is certainly contrary to the general principles of column design
and construction. And even granting that there be no loss in strength at the yield point (an
assumption which is very doubtful) the cutting or improper spacings of spirals will certainly result
in the loss of the plastic range or ductility in the column and it is precisely this plastic range or
ductility which is desirable and needed for earthquake-resistant strength. Cdpr

There is no excuse for the cavity or hollow portion in the column A4, second floor, and although
this column did not fail, this is certainly an evidence on the part of the contractor of poor
construction.

The effect of eccentricities in the columns which were measured at about 2 1/2 inches maximum
may be approximated in relation to column loads and column and beam moments. The main effect
of eccentricity is to change the beam or girder span. The effect on the measured eccentricity of 2
1/2 inches, therefore, is to increase or diminish the column load by a maximum of about 1% and to
increase or diminish the column or beam movements by about a maximum of 2%. While these can
certainly be absorbed within the factor of safety, they nevertheless diminish said factor of safety.

The cutting of the spirals in column A5, ground floor is the subject of great contention between the
parties and deserves special consideration.

The proper placing of the main reinforcements and spirals in column A5, ground floor, is the
responsibility of the general contractor which is the UCCI. The burden of proof, therefore that this
cutting was done by others is upon the defendants. Other than a strong allegation and assertion
that it is the plumber or his men who may have done the cutting (and this was flatly denied by the
plumber) no conclusive proof was presented. The engineering experts for the defendants asserted
that they could have no motivation for cutting the bar because they can simply replace the spirals
by wrapping around a new set of spirals. This is not quite correct. There is evidence to show that
the pouring of concrete for columns was sometimes done through the beam and girder
reinforcements which were already in place as in the case of column A4 second floor. If the
reinforcement for the girder and column is to subsequently wrap around the spirals, this would not
do for the elasticity of steel would prevent the making of tight column spirals and loose or
improper spirals would result. The proper way is to produce correct spirals down from the top of
the main column bars, a procedure which can not be done if either the beam or girder
reinforcement is already in place. The engineering experts for the defendants strongly assert and
apparently believe that the cutting of the spirals did not materially diminish the strength of the
column. This belief together with the difficulty of slipping the spirals on the top of the column
once the beam reinforcement is in place may be a sufficient motivation for the cutting of the
spirals themselves. The defendants, therefore, should be held responsible for the consequences
arising from the loss of strength or ductility in column A5 which may have contributed to the
damages sustained by the building.

The lack of proper length of splicing of spirals was also proven in the visible spirals of the
columns where spalling of the concrete cover had taken place. This lack of proper splicing
contributed in a small measure to the loss of strength.

The effects of all the other proven and visible defects although minor can certainly be accumulated
so that they can contribute to an appreciable loss in earthquake-resistant strength. The engineering
experts for the defendants submitted an estimate on some of these defects in the amount of a few
percent. If accumulated, therefore, including the effect of eccentricity in the column the loss in
strength due to these minor defects may run to as much as ten percent.

To recapitulate: the omission or lack of spirals and ties at the bottom and/or at the top of some of
the ground floor columns contributed greatly to the collapse of the PBA building since it is at
these points where the greater part of the failure occurred. The liability for the cutting of the
spirals in column A5, ground floor, in the considered opinion of the Commissioner rests on the
shoulders of the defendants and the loss of strength in this column contributed to the damage
which occurred.

It is reasonable to conclude, therefore, that the proven defects, deficiencies and violations of the
plans and specifications of the PBA building contributed to the damages which resulted during the
earthquake of August 2, 1968 and the vice of these defects and deficiencies is that they not only
increase but also aggravate the weakness mentioned in the design of the structure. In other words,
these defects and deficiencies not only tend to add but also to multiply the effects of the
shortcomings in the design of the building. We may say, therefore, that the defects and deficiencies
in the construction contributed greatly to the damage which occurred.

Since the execution and supervision of the construction work in the hands of the contractor is
direct and positive, the presence of existence of all the major defects and deficiencies noted and
proven manifests an element of negligence which may amount to imprudence in the construction
work." (pp. 42-49, Commissioner's Report).

As the parties most directly concerned with this portion of the Commissioner's report, the
defendants voiced their objections to the same on the grounds that the Commissioner should have
specified the defects found by him to be "meritorious"; that the Commissioner failed to indicate
the number of cases where the spirals and ties were not carried from the floor level to the bottom
reinforcement of the deeper beam, or where the spacing of the spirals and ties in the columns were
greater than that called for in the specifications; that the hollow in column A-4, second floor, the
eccentricities in the columns, the lack of proper length of splicing of spirals, and the cut in the
spirals in column A-5, ground floor, did not aggravate or contribute to the damage suffered by the
building; that the defects in the construction were within the tolerable margin of safety; and that
the cutting of the spirals in column A-5, ground floor, was done by the lumber or his men, and not
by the defendants.

Answering the said objections, the Commissioner stated that, since many of the defects were
minor only the totality of the defects was considered. As regards the objection as to failure to state
the number of cases where the spirals and ties were not carried from the floor level to the bottom
reinforcement, the Commissioner specified groundfloor columns B-6 and C-5, the first one
without spirals for 03 inches at the top, and in the latter, there were no spirals for 10 inches at the
bottom. The Commissioner likewise specified the first storey columns where the spacings were
greater than that called for in the specifications to be columns B-5, B-6, C-7, C-6, C-5, D-5 and B-
7. The objection to the failure of the Commissioner to specify the number of columns where there
was lack of proper length of splicing of spirals, the Commissioner mentioned groundfloor columns
B-6 and B-5 where all the splices were less than 1-1/2 turns and were not welded, resulting in
some loss of strength which could be critical near the ends of the columns. He answered the
supposition of the defendants that the spirals and the ties must have been looted, by calling
attention to the fact that the missing spirals and ties were only in two out of the 25 columns, which
rendered said supposition to be improbable.

The Commissioner conceded that the hollow in column A-4, second floor, did not aggravate or
contribute to the damage, but averred that it is "evidence of poor construction." On the claim that
the eccentricity could be absorbed within the factor of safety, the Commissioner answered that,
while the same may be true, it also contributed to or aggravated the damage suffered by the
building.

The objection regarding the cutting of the spirals in Column A-5, groundfloor, was answered by
the Commissioner by reiterating the observation in his report that irrespective of who did the
cutting of the spirals, the defendants should be held liable for the same as the general contractor of
the building. The Commissioner further stated that the loss of strength of the cut spirals and
inelastic deflections of the supposed lattice work defeated the purpose of the spiral containment in
the column and resulted in the loss of strength, as evidenced by the actual failure of this column.
Again, the Court concurs in the findings of the Commissioner on these issues and fails to find any
sufficient cause to disregard or modify the same. As found by the Commissioner, the "deviations
made by the defendants from the plans and specifications caused indirectly the damage sustained
and that those deviations not only added but also aggravated the damage caused by the defects in
the plans and specifications prepared by third-party defendants." (Rollo, Vol. I, pp. 128-142)

The afore-mentioned facts clearly indicate the wanton negligence of both the defendant and the
third-party defendants in effecting the plans, designs, specifications, and construction of the PBA
building and We hold such negligence as equivalent to bad faith in the performance of their
respective tasks.

Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379, 4380) which
may be in point in this case, reads:

"One who negligently creates a dangerous condition cannot escape liability for the natural and
probable consequences thereof, although the act of a third person, or an act of God for which he is
not responsible, intervenes to precipitate the loss."

As already discussed, the destruction was not purely an act of God. Truth to tell hundreds of
ancient buildings in the vicinity were hardly affected by the earthquake. Only one thing spells out
the fatal difference; gross negligence and evident bad faith, without which the damage would not
have occurred.

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and
environmental circumstances of this case, We deem it reasonable to render a decision imposing, as
We do hereby impose, upon the defendant and the third-party defendants (with the exception of
Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra, p. 10) indemnity in favor of the
Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with
the exception of attorney's fees) occasioned by the loss of the building (including interest charges
and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for
attorney's fees, the total sum being payable upon the finality of this decision. Upon failure to pay
on such finality, twelve (12%) per cent interest per annum shall be imposed upon afore-mentioned
amounts from finality until paid. Solidary costs against the defendant and third-party defendants
(except Roman Ozaeta).

SO ORDERED

Feria (Chairman), Fernan, Alampay and Cruz, JJ., concur.

||| (Nakpil & Sons v. Court of Appeals, G.R. No. L-47851, L-47863, L-47896, [October 3, 1986],
228 PHIL 564-594)

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18d623f0c132036f56cae92fb52b20c2af27b43f2646c7ffa940287812634a6c
128 PHIL 313-319

EN BANC

[G.R. No. L-21749. September 29, 1967.]

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. LUZON STEVEDORING

CORPORATION, defendant-appellant.

The Solicitor General for the plaintiff-appellee.

H. San Luis and L.V. Simbulan for defendant-appellant.

SYLLABUS

1. REMEDIAL LAW; APPEALS, EFFECT OF; WAIVER; ESTOPPEL. — The established rule in
this jurisdiction is that when a party appeals directly to the Supreme Court and submits his case
there for decision, he is deemed to have waived the right to dispute any finding of fact made by
the trial court. The only questions that may be raised are those of law. A converso, a party who
resorts to the Court of Appeals and submits his case for decision there, is barred from contending
later that his claim was beyond the jurisdiction of that Court.

2. CIVIL LAW; CULPA AQUILIANA; PRESUMPTIONS; RES IPSA LOQUITUR. — Where an

immovable and stationary object like the Nagtahan bridge, uncontrovertedly provided with
adequate openings for passage of watercraft, is rammed by a barge exclusively controlled by
appellant, causing damage to its supports, there arises a presumption of negligence on appellant's
part or its employees, manning the barge or the tugs that towed it. In the ordinary course of events,
such a thing does not happen if proper care is used. In Anglo-American Jurisprudence, the
inference arises by what is known as the "res ipsa loquitur" rule.

3. ID; CASO FORTUITO. — Caso fortuito or force majeure (which in law are identical insofar as
they exempt an obligor from liability) by definition, means extraordinary events not forseeable or
avoidable, "events that could not be forseen, or which though foreseen, were inevitable." It is
therefore not enough that the event should not have been forseen or anticipated, but it must be one
impossible to foresee or to avoid. The mere difficulty to foresee the happening is not impossibility
to foresee the same: "un hecho no constituye caso fortuito por la sola circunstancia de que su
existencia haga más dificil o más onerosa la acción diligente del presénto ofensor."

4. ID.; CASO FORTUITO, INVOCATION OF. — Where appellant adopted precautionary

measures by assigning two of its most powerful tugboats to tow its barge down river and by
assigning its more competent and experienced patrons to take care of the towlines, who were
instructed to take precautions; and where the engines and equipment had been double-checked and
unspected so that it had done all it could do to prevent an accident, said appellant cannot invoke
caso fortuito or force majeure, as the possibility of danger was not only foreseeable, but actually
foreseen. Otherwise stated, appellant, knowing or appreciating the perils posed by the swollen
stream and its swift current, voluntarily entered into a situation involving obvious danger; it
therefore assumed the risk, and cannot shed responsibility merely because the precautions it
adopted turned out to be insufficient.

5. REMEDIAL LAW; EVIDENCE; DISCRETION OF JUDGE. — Whether or not further

evidence will be allowed after a party offering the evidence had rested his case, lies within the
sound discretion of the trial judge, and this discretion will not be reviewed except in clear case of
abuse.

DECISION

REYES, J.B.L., J p:

The present case comes by direct appeal from a decision of the Court of First Instance of Manila
(Case No. 44572) adjudging the defendant-appellant, Luzon Stevedoring Corporation, liable in
damages to the plaintiff-appellee Republic of the Philippines.

In the early afternoon of August 17, 1960, barge L-1892, owned by the Luzon Stevedoring
Corporation was being towed down the Pasig river by tugboats "Bangus" and "Barbero," 1 also
belonging to the same corporation, when the barge rammed against one of the wooden piles of the
Nagtahan bailey bridge, smashing the posts and causing the bridge to list. The river, at the time,
was swollen and the current swift, on account of the heavy downpour in Manila and the
surrounding provinces on August 15 and 16, 1960.
Sued by the Republic of the Philippines for actual and consequential damage caused by its
employees, amounting to P200,000 (Civil Case No. 44562, CFI of Manila), defendant Luzon
Stevedoring Corporation disclaimed liability therefor, on the grounds that it had exercised due
diligence in the selection and supervision of its employees; that the damages to the bridge were
caused by force majeure; that plaintiff has no capacity to sue; and that the Nagtahan bailey bridge
is an obstruction to navigation.

After due trial, the court rendered judgment on June 11, 1963, holding the defendant liable for the
damage caused by its employees and ordering it to pay plaintiff the actual cost of 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.

Defendant appealed directly to this Court assigning the following errors allegedly committed by
the court a quo, to wit:

I — The lower court erred in not holding that the herein defendant-appellant had exercised the
diligence required of it in the selection and supervision of its personnel to prevent damage or
injury to others.

II — The lower court erred in not holding that the ramming of the Nagtahan bailey bridge by
barge L-1892 was caused by force majeure.

III — The lower court erred in not holding that the Nagtahan bailey bridge is an obstruction, if not
a menace, to navigation in the Pasig river.

IV — The lower court erred in not blaming the damage sustained by the Nagtahan bailey bridge to
the improper placement of the dolphins.

V — The lower court erred in granting the plaintiff's motion to adduce further evidence in chief
after it has rested its case.

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.

However, it must be recalled that the established rule in this jurisdiction is that when a party
appeals directly to the Supreme Court, and submits his case there for decision, he is deemed to
have waived the right to dispute any finding of fact made by the trial Court. The only questions
that may be raised are those of law (Savellano vs. Diaz, L-17941, July 31, 1963; Aballe vs.
Santiago, L- 16307, April 30, 1963, G.S.I.S. vs. Cloribel, L-22236, June 22, 1965). A converso, a
party who resorts to the Court of Appeals, and submits his case for decision there, is barred from
contending later that his claim was beyond the jurisdiction of the aforesaid Court. The reason is
that a contrary rule would encourage the undesirable practice of appellants' submitting their cases
for decision to either court in expectation of favorable judgment, but with intent of attacking its
jurisdiction should the decision be unfavorable (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 raised in the appellant's brief.

Taking the aforesaid rules into account, it can be seen that the only reviewable issues in this appeal
are reduced to two:

1) Whether or not the collision of appellant's barge with the supports or piers of the Nagtahan
bridge was in law caused by fortuitous event or force majeure, and

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 its case.

As to the first question considering that the Nagtahan bridge was an immovable and stationary
object and uncontrovertedly provided with adequate openings for the passage of water craft,
including barges like of appellant's, it is undeniable that the unusual event that 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 the tugs that towed it.
For in the ordinary course of events, such a thing does not happen if 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 N.W. 299; Bryne vs. Great Atlantic &
Pacific Tea Co., 269 Mass. 130; 168 N.E. 540; Gribsby vs. Smith, 146 S.W. 2d 719).

The appellant strongly stresses the precautions taken by it on the day in question: that it 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 towlines, engines and equipment
double-checked and inspected' that it instructed 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.

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 liability) 2 by
definition, are extraordinary events not foreseeable or avoidable, "events that could not be
foreseen, or which, though foreseen, were inevitable" (Art. 1174, Civ. Code of the Philippines). It
is therefore, not enough that the event should not have been foreseen or anticipated, as is
commonly believed but it must be one impossible to foresee or to avoid. The mere difficulty to
foresee the happening is not impossibility to foresee the same: "un hecho no constituye caso
fortuito por la sola circunstancia de que su existencia haga mas dificil o mas onerosa la accion
diligente del presento ofensor" (Peirano Facio, Responsabilidad Extra-contractual, p. 465;
Mazeaud, Trait de la Responsabilite Civil, Vol. 2, sec. 1569). The very measures adopted by
appellant prove that the possibility of danger was not only foreseeable, but actually foreseen, and
was not caso fortuito.
Otherwise state, the appellant, Luzon Stevedoring Corporation, knowing and appreciating the
perils posed by the swollen stream and its swift current, voluntarily entered into a situation
involving obvious danger; it therefore assumed the risk, and can not shed responsibility merely
because the precautions it adopted turned out to be insufficient. Hence, the lower Court committed
no error in holding it negligent in not suspending operations and in holding it liable for the
damages caused.

It avails the appellant naught to argue that the dolphins, like the bridge, were improperly located.
Even if true, these circumstances would merely emphasize the need of even higher 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 danger posed by these
allegedly improper constructions that had been erected and, in place, for years.

On the second point: appellant charges the lower court with having abused its discretion in the
admission of plaintiff's additional evidence after the latter had rested its case. There is an
insinuation that the delay was deliberate to enable the manipulation of evidence to prejudice
defendant-appellant.

We find no merit in the contention. Whether or not further evidence will be allowed after a party
offering the evidence has rested his case, lies within the sound discretion of the trial Judge, and
this discretion will not be reviewed except in clear case of abuse. 3

In the present case, no abuse of that discretion is shown. What was allowed to be introduced, after
plaintiff had rested its evidence in chief, were vouchers and papers to support an item of P1,558,00
allegedly spent for the reinforcement of the panel of the bailey bridge, and which item already
appeared in Exhibit GG. Appellant, in fact, has no reason to charge the trial court of being unfair,
because it was also able to secure, upon written motion, a similar order dated November 24, 1962,
allowing reception of additional evidence for the said defendant-appellant. 4

WHEREFORE, finding no error in the decision of the lower Court appealed from, the same is
hereby affirmed. Costs against the defendant-appellant.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ.,
concur.

Footnotes
1.The lead - tugboat "Bangus" was pulling the barge, while the tugboat "Barbero" was holding or
restraining it at the back.

2.Lasam vs. Smith, 45 Phil. 661.

3.Lopez vs. Liboro. 81 Phil. 429.

4.p. 89, Record on Appeal.

||| (Republic v. Luzon Stevedoring Corp., G.R. No. L-21749, [September 29, 1967], 128 PHIL
313-319)

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JURISPRUDENCE Jurisprudences icon 120x120
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2
144 PHIL 78-86

EN BANC

[G.R. No. L-25906. May 28, 1970.]

PEDRO D. DIOQUINO, plaintiff-appellee, vs. FEDERICO LAUREANO, AIDA DE

LAUREANO and JUANITO LAUREANO, defendants-appellants.

Pedro D. Dioquino in his own behalf.

Arturo E. Valdomero, Jose L. Almario and Rolando S. Relova for defendants-appellants.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; FORTUITOUS EVENT; NO

RESPONSIBILITY THEREFOR. — The express language of Article 1174 of the present Civil
Code which is a restatement of Article 1105 of the Old Civil Code, except for the addition of the
nature of an obligation requiring the assumption of risk reads thus: "Except in cases expressly
specified by law, or when it is otherwise declared by stipulation, or when the nature of the
obligation requires the assumption of risk, no person shall be responsible for those events which
could not be foreseen, or which though foreseen were inevitable.
2. ID.; ID.; ID.; ID.; BASIS. — Its basis, as Justice Moreland stressed, is the Roman law principle
major casus est, cui humana infirmintas resistere non potest.

3. ID.; ID.; ID.; CONCERNING OBLIGATION ARISING FROM CONTRACT. — Authorities of

repute are in agreement, more specifically considering an obligation arising from contract "that
some extraordinary circumstance independent of the will of the obligor, or of his employees, is an
essential element of a caso fortuito." If it could be shown that such indeed was the case, liability is
ruled out. There is no requirement of "diligence beyond what human care and foresight can
provide."

4. ID.; ID.; ID.; INSTANT CASE. — Where, as in the instant case, the car borrowed by defendant
from plaintiff and driven by the latter's driver and with defendant as the sole passenger while on
the way to the P.C. Barracks at Masbate, was stoned by some mischievous boys and its windshield
was broken, said defendant should not be liable for such damages for what happened was clearly
unforeseen. It was fortuitous event resulting in a loss which must be borne by the owner of 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 situation of defendant
Laureano. Article 1174 of the Civil Code guards against the possibility of its being visited with
such reproach.

5. ID.; ID.; ID.; ID.; ARTICLE 1174 PRESENT CIVIL CODE CONSTRUED. — The very
wording of Article 1174, Civil Code of the Philippines dispels any doubt that what is therein
contemplated is the resulting liability even if caused by a fortuitous event where the party charged
may be considered as having assumed the risk incident in the nature of the obligation to be
performed.

6. ID.; ID.; ID.; EXPLAINED. — Caso fortuito or force majeure (which in law are identical in so
far as they exempt an obligor from liability) by definition, are extraordinary events not foreseeable
or avoidable, events that could not be foreseen, or which, though foreseen, were or anticipated, as
is commonly believed, but it must be one impossible to foresee or to avoid. The mere difficulty to
foresee the happening is not impossibility to foresee the same: "un hecho no constituye caso
fortuito por la sola circunstancia de que su existencia haga mas dificilo mas onerosa la accion
diligente del presente ofensor." (Peirano Facio, Responsibilidad Extra-contractual, p. 465;
Mezand, Traite dela Responsibilite Civile, Vol. 2, Sec. 1569)

7. ID.; ID.; ID.; ASSUMPTION OF RISK; CASE OF REPUBLIC vs. LUZON STEVEDORING
CORP. DISTINGUISHED FROM INSTANT CASE. — In the case of Republic vs. Luzon
Stevedoring Corp., appellant took all the precautions necessary for safety however, these very
precautions completely destroy the appellant's defense force majeure. In that instant case then, the
risk was quite evident and the nature of the obligation such that a party could rightfully be deemed
as having assumed it. It is not so in the instant case. It is anything but that. If the lower court,
therefore, were duly mindful of what this particular legal provision contemplates, it could not have
reached the conclusion that defendant Federico Laureano could beheld liable. To repeat, that was
clear error on its part.

8. ID.; ID.; RIGHT TO DAMAGES FOR WRONG INCLUSION OF PARTIES IN

COMPLAINT; NOT ALLOWED IN INSTANT CASE. — As regards appellant's position to have
plaintiff pay damages for having joined appellant's wife and father-in-law in the complaint, We are
not disposed to view the matter thus: "Considering the equities of the situation, plaintiff having
suffered a pecuniary loss which, while resulting from a fortuitous event, perhaps would not have
occurred at all had not defendant Federico Laureano borrowed his car, we feel that he is not to be
penalized further by his mistaken view of the law including them in his complaint.

9. REMEDIAL LAW; ACTIONS; COSTS; PART OF SOCIAL BURDEN. — Well worth

paraphrasing is the thought expressed in a United States Supreme Court decision as to be
existence of an abiding and fundamental principle that the expenses and annoyance of litigation
from part of the social burden of living in a society which seeks to attain social control through
law.

DECISION

FERNANDO, J p:

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
casual and temporary but unfortunately marred by an occurrence resulting in its windshield being
damaged. A stone thrown by a boy who, with his other companions, was thus engaged 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 for the loss thus
sustained, including in the action filed the wife, Aida de Laureano, and the father, Juanito
Laureano. Plaintiff prevailed in the lower court, the judgment however going only against the
principal defendant, his spouse and his father being absolved of any responsibility. Nonetheless,
all three of them appealed directly to us, raising two questions of 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 litigation. We agree that the lower court
ought to have dismissed the suit, but it does not follow that thereby damages for the inclusion of
the above two other parties in the complaint should have been awarded appellants.

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 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 introduce him to one
of the clerks in the MVO Office, who could facilitate the registration of his ear and the request
was graciously attended to. Defendant Laureano rode on the car of Atty. Dioquino on his way to
the P.C. Barracks at Masbate. While about to reach their destination, the car driven by plaintiff's
driver and with defendant Federico Laureano as the 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 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] made about the damage to the windshield." 1

It was likewise noted in the decision now on appeal: "The defendant Federico Laureano refused to
file any charges against the boy and his parents because he thought that the 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, 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 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, 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

1. The law being what it is, such a belief on the part of defendant Federico Laureano was justified.
The express language of Art. 1174 of the present Civil Code which is a restatement of Art. 1105 of
the Old Civil Code, except for the addition of the nature of an obligation requiring the assumption
of risk, compels such a conclusion. It reads thus: "Except in cases expressly specified by the law,
or when it is otherwise declared by stipulation or when the nature of the obligation requires the
assumption of risk, no person shall be responsible for those events which could not be foreseen, or
which, though foreseen, were inevitable." Even under the old Civil Code then, as stressed by us in
the first decision dating back to 1908, in an opinion by Justice Mapa, the rule was well-settled that
in the absence of a legal provision or an express covenant, "no one should be held to account for
fortuitous cases." 3 Its basis, as Justice Moreland stressed, is the Roman law principle major casus
est, cui humana infirmitas resistere non potest. 4 Authorities of repute are in agreement, more
specifically concerning an obligation arising from contract "that some extraordinary circumstance
independent of the will of the obligor, or of his employees, is an essential element of a caso
fortuito." 5 If it could be shown that such indeed was the case, liability is ruled out. There is no
requirement of "diligence beyond what human care and foresight can provide." 6

The error committed by the lower court in holding defendant Federico Laureano liable appears to
be thus obvious. Its own findings of fact repel the motion that he should be made to respond in
damages to the plaintiff for the broken windshield. What happened was clear]y unforeseen. It was
a fortuitous event resulting in a loss which must be borne by the owner of 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 situation of defendant Laureano. Art.
1174 of the Civil Code guards against the possibility of its being visited with such a reproach.
Unfortunately, the lower court was of a different mind and thus failed to heed its command.

It was misled, apparently, by the inclusion of the exemption from the operation of such a 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 interpretation. The very wording
of the law dispels any doubt that what is therein contemplated is the resulting liability even if
caused by a fortuitous event where the party charged may be considered as having assumed the
risk incident in the nature of the obligation to be performed It would be an affront, not only to the
logic but to the realities of the situation, if in the light of what transpired, as found by the lower
court, defendant Federico Laureano could be held as bound to assume a risk of this nature. There
was no such obligation on his part.

Reference to the leading case of Republic v. Luzon Stevedoring Corp. 7 will illustrate when the
nature of the obligation is such that the risk could be considered as having been assumed. As noted
in the opinion of Justice J.B.L. Reyes, speaking for the Court: "The appellant strongly stresses the
precautions taken by it on the day in question: that it 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 towlines, engines and equipment double-checked and inspected; that it
instructed 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." Its
next paragraph explained clearly why the defense of caso fortuito or force majeure does not lie.
Thus: "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
liability) by definition, are extraordinary events not foreseeable or avoidable, 'events that could not
be foreseen, or which, though foreseen, were inevitable' (Art. 1174, Civ. Code of the Philippines).
It is, therefore, not enough that the event should not have been foreseen or anticipated, as is
commonly believed, but it must be one impossible to foresee or to avoid. The mere difficulty to
foresee the happening is not impossibility to foresee the same: 'un hecho no constituye caso
fortuito por la sola circunstancia de que su existencia haga mas dificil o mas onerosa la accion
diligente dal presenta ofensor' (Peirano Facio, Responsibilidad Extra-contractual, p. 465;
Mazeaud, Traite de la Responsabilite Civile, Vol. 2, sec. 1569). The very measures adopted by
appellant prove that the possibility of danger was not only foreseeable, but actual]y foreseen, and
was not caso fortuito."

In that case then, the risk was quite evident and the nature of the obligation such that a party could
rightfully be deemed as having assumed it. It is not so in the case before us. It is anything but that.
If the lower court, therefore, were duly mindful of what this particular legal provision
contemplates, it could not have reached the conclusion that defendant Federico Laureano could be
held liable. To repeat, that was clear error on its part.

2. Appellants do not stop there. It does not suffice for them that defendant Federico Laureano
would be freed from liability. They would go farther. They would take plaintiff to task for his
complaint having joined the wife, Aida de Laureano, and the father, Juanito 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 litigation. We are not
disposed to view the matter thus.

It is to be admitted, of course, that plaintiff, who is a member of the bar, ought to have exercised
greater care in selecting the parties against whom he would proceed. It may be said that his view
of the law that would consider defendant Federico Laureano liable on the facts as thus disclosed,
while erroneous, is not bereft of plausibility. Even the lower court, mistakenly of course,
entertained a similar view. For plaintiff, however, to have included the wife and the father would
seem to indicate that his understanding of the law is not all that it ought to have been.

Plaintiff apparently was not entirely unaware that their inclusion in the suit filed by him was
characterized by unorthodoxy. He did attempt to lend some color of justification by explicitly
setting forth that the father was joined as party defendant in the case as he was the administrator of
the inheritance of an undivided property to which defendant Federico Laureano could lay claim
and that the wife was likewise proceeded against because the conjugal partnership would be made
to respond for whatever liability would be adjudicated against the husband.

It cannot be said that such an attempt at justification is impressed with a high persuasive quality.
Far from it. Nonetheless, mistaken as plaintiff apparently was, it cannot be concluded that he was
prompted solely by the desire to inflict needless and unjustified vexation on them. Considering the
equities of the situation, plaintiff having suffered a pecuniary loss which, while resulting from a
fortuitous event, perhaps would not have occurred at all had not defendant Federico Laureano
borrowed his car, we feel that he is not to be penalized further by his mistaken view of the law in
including them in his complaint. Well-worth paraphrasing is the thought expressed in a United
States Supreme Court decision as to the existence of an abiding and fundamental principle that the
expenses and annoyance of litigation form part of the social burden of living in a society which
seeks to attain social control through law. 8

WHEREFORE, the decision of the lower court of November 2, 1965 insofar as it orders defendant
Federico Laureano to pay plaintiff the amount of P30,000.00 as damages plus the payment of
costs, is hereby reversed. It is affirmed insofar as it dismissed the case against the other two
defendants, Juanito Laureano and Aida de Laureano, and declared that no moral damages should
be awarded the parties. Without pronouncement as to costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Teehankee, Barredo and Villamor,
JJ., concur.

Castro, J., is on leave.

Footnotes
1.Decision, Record on Appeal, pp. 23-30.

2.Ibid, pp. 36-37.

3.Crame Sy Panco v. Gonzaga, 10 Phil. 646, 648. Cf. Chan Keep v. Chan Gioco, 14 Phil. 5 (1909)
and Novo & Co. v. Ainsworth, 26 Phil. 380 (1913).

4.Roman Catholic Bishop of Jaro v. De la Peña, 26 Phil. 144, 146 (1913).

5.Lasam v. Smith, 45 Phil. 657, 661-662 (1924). Cf. Yap Kim Chuan v. Tiaoqui, 31 Phil. 433
(1955) University of Santo Tomas v. Descals, 38 Phil. 267 (1918); Lizares v. Hernaez, 40 Phil. 981
(1920); Garcia v. Escudero, 43 Phil. 437 (1922); Millan v. Rio y Olabarrieta, 45 Phil. 718 (1924);
Obejera v. Iga Sy, 76 Phil. 580 (1946).

6.Gillaco v. Manila Railroad Co., 97 Phil. 884 (1955).

7.L-21749, Sept. 29, 1967, 21 SCRA 279.

8.Cf., Petroleum Exploration v. Public Service Commission, 304 US 209 (1938).

2
||| (Dioquino v. Laureano, G.R. No. L-25906, [May 28, 1970], 144 PHIL 78-86)

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12
148-A PHIL 462-467

EN BANC

[G.R. No. L-29640. June 10, 1971.]

GUILLERMO AUSTRIA, petitioner, vs. THE COURT OF APPEALS (Second Division),

PACIFICO ABAD and MARIA G. ABAD, respondents.

Antonio Enrile Inton for petitioner.

Jose A. Buendia for respondents.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS; REQUISITES OF FORTUITOUS EVENT. — It is recognized

in this jurisdiction that to constitute a caso fortuito that would exempt a person from responsibility,
it is necessary that (1) the event must be independent of the human will (or rather, of the debtor's
or obligor's); (2) the occurrence must render it impossible for the debtor to fulfill the obligation in
a normal manner; and that (3) the obligor must be free of participation in, or aggravation of, the
injury to the creditor. A fortuitous event, therefore, can be produced by nature, e.g., earthquakes,
storms, floods, etc., or by the act of man, such as war, attack by bandits, robbery, etc., provided
that the event has all the characteristics enumerated above.

2. ID.; ID.; ID.; FOR ROBBERY TO CONSTITUTE A FORTUITOUS EVENT, IT IS NOT

REQUIRED THAT THE ACCUSED IN THE ROBBERY CASE BE FIRST CONVICTED;
REASON. — The point at issue in this proceeding is how the fact of robbery is to be established
in order that a person may avail of the exempting provision of Article 1174 of the new Civil Code,
which reads as follows: . . It may be noted therefrom that the emphasis of the provision is on the
events, not on the agents or factors responsible for them. To avail of the exemption granted in the
law, it is not necessary that the persons responsible for the occurrence should be found or
punished; it would only be sufficient to establish that the unforeseeable event, the robbery in this
case, did take place without any concurrent fault on the debtor's part, and this can be done by
preponderant evidence. To require in the present action for recovery the prior conviction of the
culprits in the criminal case, in order to establish the robbery as a fact, would be to demand proof
beyond reasonable doubt to prove a fact in a civil case.

3. ID.; ID.; ID.; ID.; THE COMMISSION AGENT WHO TRAVELED ALONE AT NIGHT 1961
IS NOT NEGLIGENT AND NOT RESPONSIBLE FOR THE LOSS DUE TO ROBBERY OF
JEWELRY RECEIVED ON CONSIGNMENT; IT IS OTHER WISE IN 1971; CASE AT BAR. —
It is undeniable that in order to completely exonerate the debtor for reason of a fortuitous event,
such debtor must, in addition to the casus itself, be free of any concurrent or contributory fault or
negligence. This is apparent from Article 1170 of the Civil Code of the Philippines, providing that:
. . It is clear that under the circumstances prevailing at present in the City of Manila and its
suburbs, with their high incidence of crimes against persons and property, that renders travel after
nightfall a matter to be sedulously avoided without suitable precaution and protection, the conduct
of respondent Maria G. Abad, in returning alone to her house in the evening, carrying jewelry of
considerable value, would be negligent per se, and would not exempt her from responsibility in
the case of a robbery. We are not persuaded, however, that the same rule should obtain ten years
previously, in 1961, when the robbery in question did take place, for at that time criminality had
not by far reached the levels attained in the present day.
4. REMEDIAL LAW; EVIDENCE; THE RECOGNITION IN THE CIVIL CASE FOR
RECOVERY AGAINST THE COMMISSION AGENT OF THE FACT OF ROBBERY BEFORE
CONVICTION IN THE CRIMINAL CASE FOR ROBBERY WILL NOT PREJUDICE THE
LATTER CASE, NEITHER WILL IT RESULT IN INCONSISTENCY SHOULD THE
ACCUSED OBTAIN AN ACQUITTAL OR SHOULD THE CRIMINAL CASE BE DISMISSED;
REASON. — There is likewise no merit in petitioner's argument that to allow the fact of robbery
to be recognized in the civil case before conviction is secured in the criminal action, would
prejudice the latter case, or would result in inconsistency should the accused obtain an acquittal or
should the criminal case be dismissed. It must be realized that a court finding that a robbery has
happened would not necessarily mean that those accused in the criminal action should be found
guilty of the crime; nor would a ruling that those actually accused did not commit the robbery be
inconsistent with a finding that a robbery did take place. The evidence to establish these facts
would not necessarily be the same.

DECISION

REYES, J.B.L., J p:

Guillermo Austria petitions for the review of the decision rendered by the Court of Appeals (in
CA-G.R. No. 33572-R), on the sole issue of whether in a contract of agency (consignment of
goods for sale) it is necessary that there be prior conviction for robbery before the loss of the
article shall exempt the consignee from liability for such loss.

In a receipt dated 30 January 1961, Maria G. Abad acknowledged having received from Guillermo
Austria one (1) pendant with diamonds valued at P4,500.00, to be sold on commission basis or to
be returned on demand. On 1 February 1961, however while walking home to her residence in
Mandaluyong, Rizal, Abad was said to have been accosted by two men, one of whom hit her on
the face, while the other snatched her purse containing jewelry and cash, and ran away. Among the
pieces of jewelry allegedly taken by the robbers was the consigned pendant. The incident became
the subject of a criminal case filed in the Court of First Instance of Rizal against certain persons
(Criminal Case No. 10649, People vs. Rene Garcia, et al.).

As Abad failed to return the jewelry or pay for its value notwithstanding demands, Austria brought
in the Court of First Instance of Manila an action against her and her husband for recovery of the
pendant or of its value, and damages. Answering the allegations of the complaint, defendants
spouses set up the defense that the alleged robbery had extinguished their obligation.

After due hearing, the trial court rendered judgment for the plaintiff, and ordered defendants
spouses, jointly and severally, to pay to the former the sum of P4,500.00, with legal interest
thereon, plus the amount of P450.00 as reasonable attorneys' fees, and the costs. It was held that
defendants failed to prove the fact of robbery, or, if indeed it was committed, that defendant Maria
Abad was guilty of negligence when she went home without any companion, although it was
already getting dark and she was carrying a large amount of cash and valuables on the day in
question, and such negligence did not free her from liability for damages for the loss of the
jewelry.

Not satisfied with his decision, the defendants went to the Court of Appeals, and there secured a
reversal of the judgment. The appellate court, overruling the finding of the trial court on the lack
of credibility of the two defense witnesses who testified on the occurrence of the robbery, and
holding that the facts of robbery and defendant Maria Abad's possession of the pendant on that
unfortunate day have been duly established, declared respondents not responsible for the loss of
the jewelry on account of a fortuitous event, and relieved them from liability for damages to the
owner. Plaintiff thereupon instituted the present proceeding.

It is now contended by herein petitioner that the Court of Appeals erred in finding that there was
robbery in the case, although nobody has been found guilty of the supposed crime. It is petitioner's
theory that for robbery to fall under the category of a fortuitous event and relieve the obligor from
is obligation under a contract, pursuant to Article 1174 of the new Civil Code, there ought to be
prior finding on the guilt of the persons responsible there for. In short, that the occurrence of the
robbery should be proved by a final judgment of conviction in the criminal case. To adopt a
different view, petitioner argues, would be to encourage persons accountable for goods or
properties received in trust or consignment to connive with others, who would be willing to be
accused in court for the robbery, in order to be absolved from civil liability for the lass or
disappearance of the entrusted articles.

We find no merit in the contention of petitioner.

It is recognized in this jurisdiction that to constitute a caso fortuito that would exempt a person
from responsibility, it is necessary that (1) the event must be independent of the human will (or
rather, of the debtor's or obligor's); (2) the occurrence must render it impossible for the debtor to
fulfill the obligation, in a normal manner; and that (3) the obligor must be free of participation in,
or aggravation of, the injury to the creditor. 1 A fortuitous event, therefore, can be produced by
nature, e.g., earthquakes, storms, floods, etc., or by the act of man, such as war, attack by bandits,
robbery, 2 etc., provided that the event has all the characteristics enumerated above.

It is not here disputed that if respondent Maria Abad were indeed the victim of robbery, and if it
were really true that the pendant, which she was obliged either to sell on commission or to return
to petitioner, were taken during the robbery, then the occurrence of that fortuitous event would
have extinguished her liability. The point at issue in this proceeding is how the fact of robbery is to
be established in order that a person may avail of the exempting provision of Article 1174 of the
new Civil Code, which reads as follows:

"ART. 1174. Except in cases expressly specified by law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be
responsible for those events which could not be foreseen, or which, though foreseen, were
inevitable."
It may be noted the reform that the emphasis of the provision is on the events, not on the agents or
factors responsible for them. To avail of the exemption granted in the law, it is not necessary that
the persons responsible for the occurrence should be found or punished; it would only be
sufficient to establish that the enforceable event, the robbery in this case, did take place without
any concurrent fault on the debtor's part, and this can be done by preponderant evidence. To
require in the present action for recovery the prior conviction of the culprits in the criminal case,
in order to establish the robbery as a fact, would be to demand proof beyond reasonable doubt to
prove a fact in a civil case.

It is undeniable that in order to completely exonerate the debtor for reason of a fortuitous event,
such debtor must, in addition to the casus itself, be free of any concurrent or contributory fault or
negligence, 3 This is apparent from Article 1170 of the Civil Code of the Philippines, providing
that:

"ART. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof, are liable for damages."

It is clear that under the circumstances prevailing at present in the City of Manila and its suburbs,
with their high incidence of crimes against persons and property, that renders travel after nightfall
a matter to be sedulously avoided without suitable precaution and protection, the conduct of
respondent Maria G. Abad, in returning alone to her house in the evening, carrying jewelry of
considerable value, would be negligent per se, and would not exempt her from responsibility in
the case of a robbery. We are not persuaded, however, that the same rule should obtain ten years
previously, in 1961, when the robbery in question did take place, for at that time criminality had
not by far reached the levels attained in the present day.

There is likewise no merit in petitioner's argument that to allow the fact of robbery to be
recognized in the civil case before conviction is secured in the criminal action, would prejudice
the latter case, or would result in inconsistency should the accused obtain an acquittal or should
the criminal case be dismissed. It must be realized that a court finding that a robbery has happened
would not necessarily mean that those accused in the criminal action should be found guilty of the
crime; nor would a ruling that those actually accused did not commit the robbery be inconsistent
with a finding that a robbery did take place. The evidence to establish these facts would not
necessarily be the same.

WHEREFORE, finding no error in the decision of the Court of Appeals under review, the petition
in this case is hereby dismissed, with costs against the petitioner.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo, Villamor and
Makasiar, JJ., concur.

Castro, J., did not take part.

Footnotes

1.Reyes & Puno, Outline of Philippine Civil Law, Vol. IV, pages 25-26, citing Lasam vs. Smith, 45
Phil. 657, 661.

2.Tolentino, Civil Code of the Philippines, Vol. IV, 1962 ed., page 117, citing 3 Salvat 83-84.

3.V. Lachica vs. Gayoso, 48 Off. Gaz. (No. 1) 205, and cases cited; Lanaso Fruit SS Co. vs. Univ.
Ins. Co., 82 L. Ed. 422.

12
||| (Austria v. Court of Appeals, G.R. No. L-29640, [June 10, 1971], 148-A PHIL 462-467)

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346 PHIL 1-13

THIRD DIVISION

[G.R. No. 113003. October 17, 1997.]

ALBERTA YOBIDO and CRESENCIO YOBIDO, petitioners, vs. COURT OF APPEALS, LENY
TUMBOY, ARDEE TUMBOY and JASMIN TUMBOY, respondents.

Silvanio T. Liza for petitioners.

Gershon A. Patalinghug, Jr. for private respondents.

SYNOPSIS

On April 26, 1988, spouses Tito and Leny Tumboy and their minor children, Ardee and Jasmin,
boarded at Mangagoy, Surigao del Sur, a Yobido bus bound for Davao City. Along Picop road in
Km. 17, Sta. Maria, Agusan del Sur, the left front tire of the bus suddenly exploded. The bus fell
into a ravine around three (3) feet from the road and struck a tree which resulted in the death of
Tito Tumboy and physical injuries to other passengers. Thereafter, a complaint for breach of
contract of carriage, damages and attorney's fees was filed by Leny and her children against
Alberta Yobido, the owner of the bus, and Cresencio Yobido, its driver in the Regional Trial Court
of Davao City. After trial, the lower court rendered a decision dismissing the action for lack of
merit. Respondents appealed to the Court of Appeals. On August 23, 1993, respondent court
rendered a decision reversing that of the lower court. In this instant petition, petitioners assert that
the tire blowout that caused the death of Tito Tumboy was a caso fortuito and herein respondent
court misapprehended the facts of the case, therefore, its findings cannot be considered final which
shall bind the Court. aIHSEc

The Supreme Court ruled that there is no reason to overturn the findings and conclusions of the
Court of Appeals. Petitioners' contention that they are exempted from liability because the tire
blowout was a fortuitous event that could not have been foreseen, must fail. It is settled that an
accident caused either by defects in the automobile or through the negligence of its driver is not a
caso fortuito that would exempt the carrier from liability for damages. Accordingly, the challenged
decision is affirmed subject to modification that petitioners shall additionally pay herein,
respondents P20,000.00 as exemplary damages.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; FORTUITOUS EVENT;

CHARACTERISTICS THEREOF. — 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 with his obligations must be independent of human will; (b) it must be
impossible to foresee the event which constitutes the caso fortuito, or if it can be foreseen, it must
be impossible to avoid; (c) the occurrence must be such as to render it impossible for the debtor to
fulfill his obligation in a normal manner; and (d) the obligor must be free from any participation in
the aggravation of the injury resulting to the creditor. As Article 1174 provides, no person 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 from the cause of
injury or loss.

2. ID.; COMMON CARRIER; WHEN A PASSENGER IS INJURED OR DIES WHILE

TRAVELLING, THE LAW PRESUMES THAT THE COMMON CARRIER IS NEGLIGENT. —
When a passenger boards a common carrier, he takes the risks incidental to the mode of travel he
has taken. After all, a carrier is not an insurer of the safety of its passengers and is not bound
absolutely and at all events to carry them safely and without injury. However, when a passenger is
injured or dies while travelling, the law presumes that the common carrier is negligent. . . . Article
1755 provides that "(a) common carrier is bound to carry the passengers safely as far as human
care and foresight can provide, using the utmost diligence of very cautious persons, with a due
regard for all the circumstances." Accordingly, the culpa contractual, once a passenger dies or is
injured the carrier is presumed to have been at fault or to have acted negligently. This disputable
presumption may only be overcome by evidence that the carrier had observed extraordinary
diligence as prescribed by Articles 1733, 1755 and 1756 of the Civil Code or that the death or
injury of the passenger was due to a fortuitous event. Consequently, the court need not make an
express finding of fault or negligence on the part of the carrier to hold it responsible for damages
sought by the passenger.

3. ID.; ID.; AN ACCIDENT CAUSED EITHER BY DEFECTS IN THE AUTOMOBILE OR

THROUGH THE NEGLIGENCE OF ITS DRIVER IS NOT A CASO FORTUITO THAT
WOULD EXEMPT THE CARRIER FROM LIABILITY FOR DAMAGES. — The explosion of
the new tire may not be considered a fortuitous event. There are human factors involved in the
situation. The fact that the tire was 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 of a brand name noted for quality, resulting in the conclusion that it
could not explode within five days' use. Be that as it may, it is settled that an accident caused
either by defects in the automobile or through the negligence of its driver is not a caso fortuito that
would exempt the carrier from liability for damages.

4. ID.; ID.; PROOF THAT THE TIRE WAS NEW AND OF GOOD QUALITY IS NOT
SUFFICIENT PROOF THAT PETITIONER IS NOT NEGLIGENT. — It was incumbent upon the
defense to establish that it took precautionary measures considering partially dangerous condition
of the road. As stated 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 the care of its carrier such as conducting daily routinary check-ups of the vehicle's parts. As the
late Justice J.B.L. Reyes said: "It may be impracticable, as appellee argues, to require of carriers to
test the strength of each and every part of its vehicles before each trip, but we are of the opinion
that a due regard for the carrier's obligations toward the traveling public demands adequate
periodical tests to determine the condition and strength of those vehicle portions the failure of
which may endanger the safety of the passengers."

5. ID.; ID.; PRESENCE OF CONTRADICTORY FACTS MUST BE RESOLVED IN FAVOR OF

LIABILITY IN VIEW OF THE PRESUMPTION OF NEGLIGENCE OF THE CARRIER IN
THE LAW; CASE AT BAR. — It is interesting to note that petitioners proved through the bus
conductor, Salce, that the bus was running at "60-50" kilometers per hour only within the
prescribed lawful speed limit. However, they failed to rebut the testimony of Leny Tumboy that
the bus was running so fast that she cautioned the driver to slow down. These contradictory facts
must, therefore, be resolved in favor of liability in view of the presumption of negligence of the
carrier in the law.

6. ID.; ID.; DAMAGES; FOR THE DEATH OF A PASSENGER, THE HEIRS ARE ENTITLED
TO P50,000.00. — Having failed to discharge its duty to overthrow the presumption of negligence
with clear and convincing evidence, petitioners are hereby held liable for damages. Article 1764 in
relation to Article 2206 of the Civil Code prescribes the amount of at least three thousand pesos as
damages for the death of a passenger. Under prevailing jurisprudence, the award of damages under
Article 2206 has been increased to fifty thousand pesos (P50,000.00).

7. ID.; ID.; ID.; MORAL DAMAGES; RECOVERABLE WHEN THERE IS A BREACH OF

CONTRACT OF CARRIAGE RESULTING IN THE DEATH OF A PASSENGER. — Moral
damages are generally not recoverable in culpa contractual except when bad faith had been
proven. However, the same damages may be recovered when breach of contract of carriage results
in the death of a passenger, as in this case. ISDCaT

8. ID.; ID.; EXEMPLARY DAMAGES; RESPONDENTS ARE ENTITLED TO P20,000.00 AS

EXEMPLARY DAMAGES BECAUSE PETITIONER IS DEEMED TO HAVE ACTED
RECKLESSLY. — Exemplary damages, awarded by way of example or correction for the public
good when moral damages are awarded, may likewise be recovered in contractual obligations if
the defendant acted in wanton, fraudulent, reckless, oppressive, or malevolent manner. Because
petitioners failed to exercise the extraordinary diligence required of a common carrier, which
resulted in the death of Tito Tumboy, it is deemed to have acted recklessly. As such, private
respondents shall be entitled to exemplary damages in the amount of P20,000.00. CaDEAT

DECISION

ROMERO, J p:

In this petition for review on certiorari of the decision of the Court of Appeals, the issue is 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.

On April 26, 1988, spouses Tito and Leny Tumboy and their minor children named Ardee and
Jasmin, boarded at Mangagoy, Surigao del Sur, a Yobido Liner bus bound for Davao City. Along
Picop Road in Km. 17, Sta. Maria, Agusan del Sur, the left front tire of the bus exploded. The bus
fell into a ravine around three (3) feet from the road and struck a tree. The incident resulted in the
death of 28-year-old Tito Tumboy, and physical injuries to other passengers.

On November 21, 1988, a complaint for breach of contract of carriage, damages and attorney's
fees was filed by Leny and her children against Alberta Yobido, the owner of the bus, and
Cresencio Yobido, its driver, before the Regional Trial Court of Davao City. When the defendants
therein filed their answer to the complaint, they raised the affirmative defense of caso fortuito.
They also filed a third-party complaint against Philippine Phoenix Surety and 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

Upon a finding that the third party defendant was not liable under the insurance contract, the lower
court dismissed the third party complaint. No amicable settlement having been arrived at by the
parties, trial on the merits ensued. cdasia

The plaintiffs asserted that violation of the contract of carriage between them and the defendants
was brought about by the driver's failure to exercise the diligence required of the carrier in
transporting passengers safely to their place of destination. According to Leny 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. 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 3:30 p.m., in Trento, she heard
something explode and immediately, the bus fell into a ravine.

For their part, the defendants tried to establish that the accident was due to a fortuitous 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 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 (5) days before the incident. The Yobido
Liner secretary, Minerva Fernando, bought the new Goodyear tire from Davao Toyo Parts on April
20, 1988 and she was present when it was mounted on the bus by Salce. She stated that all driver
applicants in Yobido Liner underwent actual driving tests. before they were employed. Defendant
Cresencio Yobido underwent such test and submitted his professional driver's license and
clearances from the barangay, the fiscal and the police.

On August 29, 1991, the lower court rendered a decision 2 dismissing the action for lack of merit.
On the issue of whether or not the tire blowout was a caso fortuito, it found that "the falling of the
bus to the cliff was a result of no other outside factor than the tire blow-out." It held that the ruling
in the La Mallorca and Pampanga Bus Co. v. De Jesus 3 that a tire blowout 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 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 front tire "was pressed between the
inner circle of the left wheel and the rim which had slipped out of the wheel." In this case,
however, "the cause of the explosion remains a mystery until at present." As such, the court added,
the tire blowout was "a caso 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 1174 4 of the Civil
Code."

Dissatisfied, the plaintiffs appealed to the Court of Appeals. They ascribed to the lower court the
following errors: (a) finding that the tire blowout was a caso fortuito; (b) failing to hold that the
defendants did not exercise utmost and/or extraordinary diligence required of carriers under
Article 1755 of the Civil Code, and (c) deciding the case contrary to the ruling in Juntilla v.
Fontanar, 5 and Necesito v. Paras. 6

On August 23, 1993, the Court of Appeals rendered the Decision 7 reversing that of the lower
court. It held that:

"To Our mind, the explosion of the tire is not in itself a fortuitous event. The cause of the blow-
out, if due to a factory defect, improper mounting, excessive tire pressure, is not an unavoidable
event. On the other hand, there may have been 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 presumption of negligence against the carrier and its obligation to exercise the utmost
diligence of very cautious persons to carry the passenger safely as far as human care and foresight
can provide, it is the burden of the defendants to prove that the cause of the blow-out was a
fortuitous event. It is not incumbent upon the plaintiff to prove that the cause of the blow-out is
not caso fortuito.

Proving that the tire that exploded is a new Goodyear tire is not sufficient to discharge defendants'
burden. As enunciated in Necesito vs. Paras, the passenger has neither choice nor control over the
carrier in the selection and use of its equipment and the good repute of the manufacturer will not
necessarily, relieve the carrier from liability.

Moreover, there is evidence that the bus was moving fast, and the road was wet and rough. The
driver could have explained that the blow out that precipitated the accident that caused the death
of Tito Tumboy could not have been prevented even if he had exercised due care to avoid the
same, but he was not presented as witness."

The Court of Appeals thus disposed of the appeal as follows:

"WHEREFORE, the judgment of the court a quo is set aside and another one entered ordering
defendants to pay plaintiffs the sum of P50,000.00 for the death of Tito Tumboy, P30,000.00 in
moral damages, and P7,000.00 for funeral and burial expenses.

SO ORDERED."

The defendants filed a motion for reconsideration of said decision which was denied on November
4, 1993 by the Court of Appeals. Hence, the instant petition asserting the position that the tire
blowout that caused the death of Tito Tumboy was a caso fortuito. Petitioners claim further that
the Court of Appeals, in ruling contrary to that of the lower court, 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.

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 as the one
present in this case, namely, that the lower court and the Court of Appeals arrived at diverse
factual findings. 8 However, upon such re-examination, we found no reason to overturn the
findings and conclusions of the Court of Appeals.

As a rule, when a passenger boards a common carrier, he takes the risks incidental to the mode of
travel he has taken. After all, a carrier is not an insurer of the safety of its passengers and is not
bound absolutely and at all events to carry them safely and without injury. 9 However, when a
passenger is injured or dies, while traveling, the law presumes that the common carrier is
negligent. Thus, the Civil Code provides:

"Art. 1756. In case of death or injuries to passengers, common carriers are presumed to have been
at fault or to have acted negligently, unless they prove that they observed extraordinary diligence
as prescribed in articles 1733 and 1755."

Article 1755 provides that "(a) common carrier is bound to carry the passengers safely as far as
human care and foresight can provide, using the utmost diligence of very cautious persons, with a
due regard for all the circumstances." Accordingly, in culpa contractual, once a passenger dies or
is injured, the carrier is presumed to have been at fault or to have acted negligently. This
disputable presumption may only be overcome by evidence that the carrier had observed
extraordinary diligence as prescribed by Articles 1733, 10 1755 and 1756 of the Civil Code or that
the death or injury of the passenger was due to a fortuitous event. 11 Consequently, the court need
not make an express finding of fault or negligence on the part of the carrier to hold it responsible
for damages sought by the passenger. 12

In view of the foregoing, petitioners' contention that they should be exempt from liability because
the tire blowout was no more than a fortuitous event that could not have been 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 with his obligations, must be
independent of human will; (b) it must be impossible to foresee the event which constitutes the
caso fortuito, or if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be
such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and (d)
the obligor must be free from any participation in the aggravation of the injury resulting to the
creditor. 13 As Article 1174 provides, no person 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 from the cause of injury or loss. 14 aisadc

Under the circumstances of this case, the explosion of the new tire may not be considered a
fortuitous event. There are human factors involved in the situation. The fact that the tire was 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 of a brand name
noted for quality, resulting in the conclusion that it could not explode within five days' use. Be that
as it may, it is settled that an accident caused either by defects in the automobile or through the
negligence of its driver is not a caso fortuito that would exempt the carrier from liability for
damages. 15

Moreover, a common carrier may not be absolved from liability in case of force majeure or
fortuitous event alone. The common carrier must still prove that it was not negligent in causing the
death or injury resulting from an accident. 16 This Court has had occasion to state:

"While it may be true that the tire that blew-up was still good because the grooves & the tire were
still visible, this fact alone does not make the explosion of the tire a fortuitous event. No evidence
was presented to show that the accident was due to 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, 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

It is interesting to note that petitioners proved through the bus conductor, Salce, that the bus was
running at "60-50" kilometers per hour only or within the prescribed lawful speed limit. However,
they failed to rebut the testimony of Leny Tumboy that the bus was running so fast that she
cautioned the driver to slow down. These contradictory facts must, therefore, be resolved in favor
of liability in view of the presumption of negligence of the carrier in the law. Coupled with this is
the established condition of the road — rough, winding and wet due to the rain. It was incumbent
upon the defense to establish that it took precautionary measures considering partially dangerous
condition of the road. As stated 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 the care of its carrier, such as conducting daily routinary check-ups of
the vehicle's parts. As the late Justice J.B.L. Reyes said:

"It may be impracticable, as appellee argues, to require of carriers to test the strength of each and
every part of its vehicles before each trip; but we are of the opinion that a due regard for the
carrier's obligations toward the traveling public demands adequate periodical tests to determine the
condition and strength of those vehicle portions the failure of which may endanger the safety of
the passengers." 18

Having failed to discharge its duty to overthrow the presumption of negligence with clear and
convincing evidence, petitioners are hereby held liable for damages. Article 1764 19 in relation to
Article 2206 20 of the Civil Code prescribes the amount of at least three thousand pesos as
damages for the death of a passenger. Under prevailing jurisprudence, the award of damages under
Article 2206 has been increased to fifty thousand pesos (P50,000.00). 21

Moral damages are generally not recoverable in culpa contractual except when bad faith had been
proven. However, the same damages may be recovered when breach of contract of carriage results
in the death of a passenger, 22 as in this case. Exemplary damages, awarded by way of example or
correction for the public good when moral damages are 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 to exercise the extraordinary diligence required
of a common carrier, which resulted in the death of Tito Tumboy, it is deemed to have acted
recklessly. 25 As such, private respondents shall be entitled to exemplary damages.

WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED subject to the
modification that petitioners shall, in addition to the monetary awards therein, be liable for the
award of exemplary damages in the amount of P20,000.00. Costs against petitioners.

SO ORDERED.

Narvasa, C .J ., Melo, Francisco and Panganiban, JJ ., concur.

Footnotes
1.Record, pp. 77-78.

2.Penned by Judge William M. Layague.

3.123 Phil. 875 (1966).

4.Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be
responsible for those events which could not be foreseen, or which though foreseen, were
inevitable.

5.L-45637, May 31, 1985, 136 SCRA 624.

6.104 Phil. 75 (1958).

7.Penned by Associate Justice Minerva P. Gonzaga-Reyes and concurred in by Associate Justices

Vicente V. Mendoza and Pacita Cañizares-Nye.

8.Philippine Rabbit Bus Lines, Inc. v. IAC, G.R. Nos. 66102-04, August 30, 1990, 189 SCRA 158,
159.

9.TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. V, 1992 ed., p. 312.

10.Art. 1733. Common carriers, from the nature of their business and for reasons of public policy,
are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of
the passengers transported by them, according to all the circumstances of each case.

Such extraordinary diligence in the vigilance over the goods is further expressed in articles 1734,
1735, and 1745, Nos. 5, 6, and 7, while the extraordinary diligence for the safety of the passengers
is further set forth in articles 1755 and 1756.

11.Phil. Rabbit Bus Lines, Inc. vs. IAC, supra, at pp. 171-172 citing Lasam v. Smith, Jr., 45 Phil.
657 (1924).

12.Batangas Trans. Co. v. Caguimbal, 130 Phil. 166, 171 (1968) citing Brito Sy v. Malate Taxicab
& Garage, Inc., 102 Phil. 452 (1957).

13.Metal Forming Corp. v. Office of the President, 317 Phil. 853, 859 (1995); Vasquez v. Court of
Appeals, L-42926, September 13, 1985, 138 SCRA 553, 557 citing Lasam v. Smith, supra at p.
661 and Austria v. Court of Appeals, 148-A Phil. 462 (1971); Estrada v. Consolacion, L-40948,
June 29, 1976, 71 SCRA 523, 530; Republic of the Phil. v. Luzon Stevedoring Corporation, 128
Phil. 313 (1967).

14.Vasquez v. Court of Appeals, supra, at p. 557.

15.Son v. Cebu Autobus Co., 94 Phil. 893, 896 (1954) citing Lasam v. Smith, supra.

16.Bachelor Express, Inc. v. Court of Appeals, G.R. No. 85691, July 31, 1990, 188 SCRA 216,
222-223.

17.Juntilla v. Fontanar, supra, at p. 630.

18.Necesito v. Paras, supra at p. 82.

19.Art. 1764. Damages in cases comprised in this Section shall be awarded in accordance with
Title XVIII of this Book, concerning Damages. Article 2206 shall also apply to the death of a
passenger caused by the breach of contract by a common carrier.

20.Art. 2206. The amount of damages for death caused by a crime or quasi-delict shall be at least
three thousand pesos even though there may have been mitigating circumstances. . . .

21.Sulpicio Lines, Inc. v. Court of Appeals, 316 Phil. 455, 460 (1995) citing People v. Flores, G.R.
Nos. 103801-02, October 19, 1994, 237 SCRA 653.

22.Sulpicio Lines, Inc. v. Court of Appeals, supra at pp. 460-461 citing Trans World Air Lines v.
Court of Appeals, GR. No. 78656, August 30, 1988, 165 SCRA 143; Philippine Rabbit Bus Lines,
Inc. v. Esguerra, 203 Phil. 107 (1982) and Vasquez v. Court of Appeals, supra.

23.Art. 2229, Civil Code.

24.Art. 2232, supra.

25.Sulpicio Lines, Inc. v. Court of Appeals, supra at p. 461.

||| (Yobido v. Court of Appeals, G.R. No. 113003, [October 17, 1997], 346 PHIL 1-13)

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261 PHIL 128-146

SECOND DIVISION

[G.R. Nos. 81100-01. February 7, 1990.]

BACOLOD-MURCIA MILLING CO., INC., petitioner, vs. HON. COURT OF APPEALS AND
ALONSO GATUSLAO, respondents.

BACOLOD-MURCIA MILLING CO., INC., petitioner, vs. HON. COURT OF APPEALS,

ALONSO GATUSLAO, AGRO-INDUSTRIAL DEVELOPMENT OF SILAY-SARAVIA
(AIDSISA) AND BACOLOD-MURCIA AGRICULTURAL COOPERATIVE MARKETING
ASSOCIATION (BM-ACMA), respondents.

Jalandoni, Herrera, Del Castillo & Associates for petitioner.

Tañada, Vico & Tan for respondent AIDSISA.

San Juan, Gonzalez, San Agustin & Sinense for respondents Alfonso Gatuslao and BM-ACMA.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS; FORCE MAJEURE; ELEMENTS. — This Court has

consistently ruled that when an obligor is exempted from liability under the aforecited provision of
the Civil Code for a breach of an obligation due to an act of God, the following elements must
concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor;
(b) the event must be either unforseeable or unavoidable; (c) the event must be such as to render it
impossible for the debtor to fulfill his obligation in a normal manner; (b) the debtor must be free
from any participation in, or aggravation of the injury to the creditor (Vasquez v. Court of Appeals,
138 SCRA 553 [1985]; Juan F. Nakpil & Sons v. Court of Appeals, 144 SCRA 596 [1986]).

2. ID.; ID.; ID.; ID.; EVENT MUST BE IMPOSSIBLE TO FORESEE; CASE AT BAR. — In the
language of the law, the event must have been impossible to foresee, or if it could be foreseen,
must have been impossible to avoid. There must be an entire exclusion of human agency from the
cause of the injury or loss (Vasquez v. Court of Appeals, supra). In the case at bar, despite its
awareness that the conventional contract of lease would expire in Crop Year 1964-1965 and that
refusal on the part of any one of the landowners to renew their milling contracts and the
corresponding use of the right of way on their lands would render impossible compliance of its
commitments, petitioner took a calculated risk that all the landowners would renew their contracts.
Unfortunately, the sugar plantation of Angela Estate, Inc. which is located at the entrance of the
mill was the one which refused to renew its milling contract. As a result, the closure of the railway
located inside said plantation paralyzed the entire transportation system. Thus, the closure of the
railway lines was not an act of God nor does it constitute force majeure.

3. ID.; ID.; RECIPROCAL OBLIGATIONS; POWER TO RESCIND IS IMPLIED IN CASE

OBLIGOR FAILED TO COMPLY WITH OBLIGATION. — Under Article 1191 of the Civil
Code, the power to rescind obligations is implied in reciprocal ones in case one of the obligors
should not comply with what is incumbent upon him. In fact, it is well established that the party
who deems the contract violated may consider it revoked or rescinded pursuant to their agreement
and act accordingly, even without previous court action (U.P. v. de los Angeles, 35 SCRA 102
[1970]; Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 94 [1972]).

4. ID.; ID.; ID.; ID.; RESCISSION NOT PERMITTED FOR A SLIGHT OR CASUAL BREACH.
— It is the general rule, however, that rescission of a contract will not be permitted for a slight or
casual breach, but only for such substantial and fundamental breach as would defeat the very
object of the parties in making the agreement. The question of whether a breach of a contract is
substantial depends upon the attendant circumstances (Universal Food Corporation v. Court of
Appeals, et al., 33 SCRA 1 [1970]).

5. ID.; ID.; ID.; OFFENDING PARTY HAS FORFEITED RIGHT TO ENFORCEMENT OF

TERMS OF CONTRACT. — BMMC cannot claim enforcement of the contract. As ruled by this
Court, by virtue of the violations of the terms of the contract, the offending party has forfeited any
right to its enforcement (Boysaw v. Interphil Promotions, Inc., 148 SCRA 645 [1987]).

DECISION

PARAS, J p:

This is a petition for review on certiorari of the decision of the Court of Appeals in CA-G.R. CV
Nos. 59716-59717 promulgated on September 11, 1987 affirming in toto the decision of the Court
of First Instance of Negros Occidental in two consolidated civil cases, the dispositive portion of
which reads as follows:

"PREMISES CONSIDERED, the decision appealed from is hereby affirmed in toto."

The uncontroverted facts of the case 1 are as follows:

"1. . . .

"2. BMMC is the owner and operator of the sugar central in Bacolod City, Philippines;

"3. ALONSO GATUSLAO is a registered planter of the Bacolod-Murcia Mill District with
Plantation Audit No. 3-79, being a registered owner of Lot Nos. 310, 140, 141 and 101-A of the
Cadastral Survey of Murcia, Negros Occidental, otherwise known as Hda. San Roque;

"4. On May 24, 1957 BMMC and Alonso Gatuslao executed an 'Extension and Modification of
Milling Contract' (Annex 'A' of the complaint in both cases) which was registered on September
17, 1962 in the Office of the Register of Deeds of Negros Occidental, and annotated on Transfer
Certificates of Title Nos. T-24207, RT-2252, RT-12035, and RT-12036 covering said Lot Nos. 310,
140, 141 and 101-A;

"5. That since the crop year 1957-1953 up to crop year 1967-1968, inclusive, Alonso Gatuslao has
been milling all the sugarcane grown and produced on said Lot Nos. 310, 140, 141 and 101-A with
the Mill of BMMC;

"6. Since the crop year 1920-21 to crop year 1967-1963, inclusive, the canes of planters adhered to
the mill of BMMC were transported from the plantation to the mill by means of cane cars and
through railway system operated by BMMC;

"7. The loading points at which planters Alonso Gatuslao was and should deliver and load all his
canes produced in his plantation, Hda. San Roque, were at the Arimas Line, Switch 2, and from
which loading stations, BMMC had been hauling planter Gatuslao's sugar cane to its mill or
factory continuously until the crop year 1967-68;
"8. BMMC had not been able to use its came cars and railway system for the cargo crop year
1968-1969;

"9. Planter Alonso Gatuslao on various dates requested transportation facilities of BMMC to be
sent to his loading stations or switches for purposes of hauling and milling his sugarcane crops of
crop year 1968-1969;

"10. The estimated gross production of Hda. San Roque for the crop year 1968-1969 is 4,500
piculs."

The records show that since the crop year 1920-1921 to the crop year 1967-1968, the canes of the
adhered planters were transported from the plantation to the mill of BMMC by means of cane cars
and through a railway system operated by BMMC which traversed the land of the adherent
planters, corresponding to the rights of way on their lands granted by the planters to the Central
for the duration of the milling contracts which is for "un periodo de cuarenta y cinco anos o
cosechas, a contar desde la cosecha de 1920-1921" 2 (a period of 45 years or harvests, beginning
with a harvest of 1920-1921).

BMMC constructed the railroad tracks in 1920 and the adherent planters granted the BMMC a
right of way over their lands as provided for in the milling contracts. The owners of the hacienda
Helvetia were among the signatories of the milling contracts. When their milling contracts with
petitioner BMMC expired at the end of the 1964-1965 crop year, the corresponding right of way
of the owners of the hacienda Helvetia granted to the Central also expired. llcd

Thus, the BMMC was unable to use its railroad facilities during the crop year 1968-1969 due to
the closure in 1968 of the portion of the railway traversing the hacienda Helvetia as per decision
of the Court in Angela Estate, Inc. and Fernando F. Gonzaga, Inc. v. Court of First Instance of
Negros Occidental, G.R. No. L-27084, (24 SCRA 500 [1968]). In the same case the Court ruled
that the Central's conventional right of way over the hacienda Helvetia ceased with the expiration
of its amended milling contracts with the landowners of the hacienda at the end of the 1964-1965
crop year and that in the absence of a renewal contract or the establishment of a compulsory
servitude of right of way on the same spot and route which must be predicated on the satisfaction
of the preconditions required by law, there subsists no right of way to be protected.

Consequently, the owners of the hacienda Helvetia required the Central to remove the railway
tracks in the hacienda occupying at least 3,245 lineal meters with a width of 7 meters or a total of
22,715 square meters, more or less. That was the natural consequence of the expiration of the
milling contracts with the landowners of the hacienda Helvetia (Angela Estate, Inc. and Fernando
Gonzaga, Inc. v. Court of First Instance of Negros Occidental, ibid). BMMC filed a complaint for
legal easement against the owners of the hacienda, with the Court of First Instance of Negros
Occidental which issued on October 4, 1965 an ex parte writ of preliminary injunction restraining
the landowners from reversing and/or destroying the railroad tracks in question and from
impeding, obstructing or in any way preventing the passage and operation of plaintiff's
locomotives and cane cars over defendants' property during the pendency of the litigation and
maintained the same in its subsequent orders of May 31, and November 26, 1966. The outcome of
the case, however, was not favorable to the plaintiff BMMC. In the same case the landowners
asked this Court to restrain the lower court from enforcing the writ of preliminary injunction it
issued, praying that after the hearing on the merits, the restraining order be made permanent and
the orders complained of be annulled and set aside. The Court gave due course to the landowner's
petition and on August 10, 1967 issued the writ of preliminary injunction enjoining the lower court
from enforcing the writ of preliminary injunction issued by the latter on October 4, 1965.

The writ of preliminary injunction issued by the Court was lifted temporarily on motion that
through the mediation of the President of the Philippines the Angela Estate and the Gonzaga
Estate agreed with the Central to allow the use of the railroad tracks passing through the hacienda
Helvetia during the 1967-1968 milling season only, for the same purpose for which they had been
previously used, but it was understood that the lifting of the writ was without prejudice to the
respective rights and positions of the parties in the case and not deemed a waiver of any of their
respective claims and allegations in G.R. No. L-27084 or in any other case between the same
parties, future or pending. The Court resolved to approve the motion only up to and including June
30, 1968 to give effect to the agreement but to be deemed automatically reinstated beginning July
1, 1968 (Angela Estate, Inc. and Fernando F. Gonzaga, Inc. v. Court of First Instance of Negros
Occidental, ibid.)

The temporary lifting of the writ of preliminary injunction assured the milling of the 1967-1968
crop but not the produce of the succeeding crop years which situation was duly communicated by
the President and General Manager of the BMMC to the President of Bacolod-Murcia Sugar
Farmers Corporation (BMSFC) on January 2, 1968. 3

On October 30, 1968, Alonso Gatuslao, one of private respondents herein, and his wife, Maria H.
Gatuslao, filed Civil Case No. 8719 in the Court of First Instance of Negros Occidental, against
petitioner herein, Bacolod-Murcia Milling Co., Inc. (BMMC), for breach of contract, praying
among others, for the issuance of a writ of preliminary mandatory injunction ordering defendant to
immediately send transportation facilities and haul the already cut sugarcane to the mill site and
principally praying after hearing, that judgment be rendered declaring the rescission of the milling
contract executed by plaintiffs and defendant in 1957 for seventeen (17) years or up to crop year
1973-74, invoking as ground the alleged failure and/or inability of defendant to comply with its
specific obligation of providing the necessary transportation facilities to haul the sugarcane of
Gatuslao from plaintiff's plantation specifically for the crop year 1967-1968. Plaintiffs further
prayed for the recovery of actual and compensatory damages as well as moral and exemplary
damages and attorney's fees. 4

In answer, defendant BMMC claimed that despite its inability to use its railways system for its
locomotives and cane cars to haul the sugarcanes of all its adhered planters including plaintiffs for
the 1968-69 crop year allegedly due to force majeure, in order to comply with its obligation,
defendant hired at tremendous expense, private trucks as prime movers for its trailers to be used
for hauling of the canes, especially for those who applied for and requested transportation
facilities. Plaintiffs, being one of said planters, instead of loading their cut canes for the 1968-69
crop on the cargo trucks of defendant, loaded their cut canes on trucks provided by the Bacolod-
Murcia Agricultural Cooperative Marketing Association, Inc. (B-M ACMA) which transported
plaintiffs' canes of the 1968-69 sugarcanes crop. Defendant prayed in its counterclaim for the
dismissal of Civil Case No. 8719 for the recovery of actual damages, moral and exemplary
damages and for attorney's fees. 5

On November 21, 1968, BMMC filed in the same court Civil Case No. 8745 against Alonso
Gatuslao, the Agro-Industrial Development of Silay-Saravia (AIDSISA) and the Bacolod-Murcia
Agricultural Cooperative Marketing Associations, Inc. (B-M ACMA), seeking specific
performance under the mining contract executed on May 24, 1957 between plaintiff and defendant
Alonso Gatuslao praying for the issuance of writs of preliminary mandatory injunction to stop the
alleged violation of the contract by defendant Alonso Gatuslao in confederation, collaboration and
connivance with defendant BM-ACMA, AIDSISA, and for the recovery of actual, moral and
exemplary damages and attorney's fees. 6

Defendant Alonso Gatuslao and the Bacolod-Murcia Agricultural Cooperative Marketing

Association, Inc. filed their answer on January 27, 1969 with compulsory counter-claims, stating
by way of special and affirmative defense, among others, that the case is barred by another action
pending between the same parties for the same cause of action. 7

Defendant Agro-Industrial Development Corporation of Silay-Saravia, Inc. filed its answer on

February 8, 1969, alleging among others by way of affirmative defense that before it agreed to
mill the sugarcane of its co-defendant Alonso Gatuslao, it carefully ascertained and believed in
good faith that: (a) plaintiff was incapable of milling the sugarcane of AIDSISA's co-defendant
planters as well as the sugarcane of other planters formerly adherent to plaintiff; (b) plaintiff had
in effect agreed to a rescission of its milling contracts with its adhered planters, including the
defendant planter, because of inadequate means of transportation and had warned and advised
them to mill their sugarcane elsewhere, and had thus induced them to believe, and act on the
belief, that it could not mill their sugarcane and that it would not object to their milling with other
centrals; and (c) up to now plaintiff is incapable of hauling the sugarcane of AlDSISA's co-
defendants to plaintiff's mill site for milling purposes. cdrep

The two cases, Civil Cases Nos. 8719 and 8745 were consolidated for joint trial before Branch II
of the Court of First Instance of Negros Occidental. 8 On September 8, 1969, the parties in both
civil cases filed their partial stipulation of facts which included a statement of the issues raised by
the parties. 9

On February 6, 1976, the lower court rendered judgment declaring the milling contract dated May
24, 1957 rescinded. The dispositive portion of the decision 10 reads:

"WHEREFORE, judgment is hereby rendered as follows:

(1) In Civil Case No. 8719 the milling contract (Exh. "121") dated May 24, 1957 is hereby
declared rescinded or resolved and the defendant Bacolod-Murcia Company, Inc. is hereby
ordered to pay plaintiffs Alonso Gatuslao and Maria H. Gatuslao the amount of P2,625.00 with
legal interest from the time of the filing of the complaint by way of actual damages; P5,000.00 as
attorney's fees and the costs of the suit; defendant's counterclaim is dismissed; and

(2) The complaint in Civil Case No. 8745 as well as the counterclaims therein are ordered
dismissed, without costs."

Bacolod-Murcia Milling Co., Inc. defendant in Civil Case No. 8719 and plaintiff in Civil Case No.
8745 appealed the case to respondent Court of Appeals which affirmed in toto (Rollo, p. 81 ) the
decision of the lower court. The motion for reconsideration filed by defendant-appellant Bacolod-
Murcia Milling Company, petitioner herein, was denied by the appellate court for lack of merit. 11
Hence, this petition.

The issues 12 raised by petitioner are as follows:

WHETHER OR NOT THE CLOSURE OF PETITIONER'S RAILROAD LINES CONSTITUTE

FORCE MAJEURE.

II

WHETHER OR NOT PRIVATE RESPONDENT GATUSLAO HAS THE RIGHT TO RESCIND

THE MILLING CONTRACT WITH PETITIONER UNDER ARTICLE 1191 OF THE CIVIL
CODE.

III

WHETHER OR NOT PRIVATE RESPONDENT GATUSLAO WAS JUSTIFIED IN

VIOLATING HIS MILLING CONTRACT WITH PETITIONER.

IV

WHETHER OR NOT PRIVATE RESPONDENTS GATUSLAO AND B-M ACMA ARE

GUILTY OF BAD FAITH IN THE EXERCISE OF THEIR DUTIES AND ARE IN ESTOPPEL
TO QUESTION THE ADEQUACY OF THE TRANSPORTATION FACILITIES OF
PETITIONER AND ITS CAPACITY TO MILL AND HAUL THE CANES OF ITS ADHERENT
PLANTERS.

The crux of the issue is whether or not the termination of petitioner's right of way over the
hacienda Helvetia caused by the expiration of its amended milling contracts with the landowners
of the lands in question is a fortuitous event or force majeure which will exempt petitioner BMMC
from fulfillment of its contractual obligations.

It is the position of petitioner Bacolod-Murcia Milling Co., Inc. (BMMC) that the closure of its
railroad lines constitute force majeure, citing Article 1174 of the Civil Code, exempting a person
from liability for events which could not be foreseen or which though foreseen were inevitable.

This Court has consistently ruled that when an obligor is exempted from liability under the
aforecited provision of the Civil Code for a breach of an obligation due to an act of God, the
following elements must concur: (a) the cause of the breach of the obligation must be independent
of the will of the debtor; (b) the event must be either unforseeable or unavoidable; (c) the event
must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner;
(b) the debtor must be free from any participation in, or aggravation of the injury to the creditor
(Vasquez v. Court of Appeals, 138 SCRA 553 [1985]; Juan F. Nakpil & Sons v. Court of Appeals,
144 SCRA 596 [1986]). Applying the criteria to the instant case, there can be no other conclusion
than that the closure of the railroad tracks does not constitute force majeure.

The terms of the milling contracts were clear and undoubtedly there was no reason for BMMC to
expect otherwise. The closure of any portion of the railroad track, not necessarily in the hacienda
Helvetia but in any of the properties whose owners decided not to renew their milling contracts
with the Central upon their expiration, was forseeable and inevitable. LibLex

Petitioner Central should have anticipated and should have provided for the eventuality before
committing itself. Under the circumstances it has no one to blame but itself and cannot now claim
exemption from liability.

In the language of the law, the event must have been impossible to foresee, or if it could be
foreseen, must have been impossible to avoid. There must be an entire exclusion of human agency
from the cause of the injury or loss (Vasquez v. Court of Appeals, supra). In the case at bar, despite
its awareness that the conventional contract of lease would expire in Crop Year 1964-1965 and
that refusal on the part of any one of the landowners to renew their milling contracts and the
corresponding use of the right of way on their lands would render impossible compliance of its
commitments, petitioner took a calculated risk that all the landowners would renew their contracts.
Unfortunately, the sugar plantation of Angela Estate, Inc. which is located at the entrance of the
mill was the one which refused to renew its milling contract. As a result, the closure of the railway
located inside said plantation paralyzed the entire transportation system. Thus, the closure of the
railway lines was not an act of God nor does it constitute force majeure. It was due to the
termination of the contractual relationships of the parties, for which petitioner is charged with
knowledge. Verily, the lower court found that the Angela Estate, Inc. notified BMMC as far back
as August or September 1965 of its intention not to allow the passage of the railway system thru
its land after the aforesaid crop year. Adequate measures should have been adopted by BMMC to
forestall such paralyzation but the records show none. All its efforts were geared toward the
outcome of the court litigation but provided no solutions to the transport problem early enough in
case of an adverse decision.
The last three issues being inter-related will be treated as one. Private respondent Gatuslao filed an
action for rescission while BMMC filed in the same court an action against Gatuslao, the Agro
Industrial Development Silay Saravia (AIDSISA) and the Bacolod-Murcia Agricultural
Cooperative Marketing Association, Inc. (B-M ACMA) for specific performance under the milling
contract.

There is no question that the contract in question involves reciprocal obligations; as such party is a
debtor and creditor of the other, such that the obligation of one is dependent upon the obligation of
the other. They are to be performed simultaneously so that the performance of one is conditioned
upon the simultaneous fulfillment of the other (Boysaw v. Interphil Promotions, Inc., 148 SCRA
643 [1987]). cdrep

Under Article 1191 of the Civil Code, the power to rescind obligations is implied in reciprocal
ones in case one of the obligors should not comply with what is incumbent upon him. In fact, it is
well established that the party who deems the contract violated may consider it revoked or
rescinded pursuant to their agreement and act accordingly, even without previous court action
(U.P. v. de los Angeles, 35 SCRA 102 [1970]; Luzon Brokerage Co., Inc. v. Maritime Building
Co., Inc., 43 SCRA 94 [1972]).

It is the general rule, however, that rescission of a contract will not be permitted for a slight or
casual breach, but only for such substantial and fundamental breach as would defeat the very
object of the parties in making the agreement. The question of whether a breach of a contract is
substantial depends upon the attendant circumstances (Universal Food Corporation v. Court of
Appeals, et al., 33 SCRA 1 [1970]).

The issue therefore, hinges on who is guilty of the breach of the milling contract. cdll

Both parties are agreed that time is of the essence in the sugar industry; so that the sugarcanes
have to be milled at the right time, not too early or too late, if the quantity and quality of the juice
are to be assured. As found by the trial court, upon the execution of the amended milling contract
on May 24, 1957 for a period of 17 crop years, BMMC undertook expressly among its principal
prestations not only to mill Gatuslao's canes but to haul them by railway from the loading stations
to the mill. Atty. Solidum, Chief Legal Counsel and in Charge of the Legal-Crop Loan Department
of the BMMC Bacolod City admits that the mode of transportation of canes from the fields to the
mill is a vital factor in the sugar industry; precisely for this reason the mode of transportation or
hauling the canes is embodied in the milling contract. 13 But BMMC is now unable to haul the
canes by railways as stipulated because of the closure of the railway lines; so that resolution of
this issue ultimately rests on whether or not BMMC was able to provide adequate and efficient
transportation facilities of the canes of Gatuslao and the other planters milling with BMMC during
the crop year 1968-1969. As found by both the trial court and the Court of Appeals, the answer is
in the negative.
Armando Guanzon, Dispatcher of the Transportation Department of BMMC testified that when
the Central was still using the railway lines, it had between 900 to 1,000 cane cars and 10
locomotives, each locomotive pulling from 30 to 50 cane cars with maximum capacity of 8 tons
each. 14 This testimony was corroborated by Rodolfo Javelosa, Assistant Crop Loan Inspector in
the Crop Loan Department of petitioner. 15 After the closure of the railway lines, petitioner on
February 5, 1968 through its President and General Manager, informed the National Committee of
the National Federation of Sugarcane Planters that the trucking requirement for hauling adherent
planters produce with a milling average of 3,500 tons of canes daily at an average load of 5 tons
per truck is not less than 700 trucks daily plus another 700 empty trucks to be shuttled back to the
plantations to be available for loading the same day. 16 Guanzon, however, testified that petitioner
had only 280 units of trailers, 20 tractors and 3 trucks plus 20 trucks more or less hired by the
Central and given as repartos (allotments) to the different planters. 17 The 180 trailers that the
Central initially had were permanently leased to some planters who had their own cargo trucks
while out of the 250 BMMC trailers existing during the entire milling season only 70 were left
available to the rest of the planters pulled by 3 trucks. 18

It is true that BMMC purchased 20 units John Deere Tractors (prime movers) and 230 units,
Vanguard Trailers with land capacity of 3 tons each but that was only on October 1968 as
registered in the Land Transportation Commission, Bacolod City. 19

The evidence shows that great efforts had been exerted by the planters to enter into some concrete
understanding with BMMC with a view of obtaining a reasonable assurance that the latter would
be able to haul and mill their canes for the 1968-1969 crop year, but to no avail. 20

As admitted by BMMC itself, in its communications with the planters, it is not in a position to
provide adequate transportation for the canes in compliance with its commitment under the
milling contract. Said communications 21 were quoted by the Court of Appeals as follows:

"We are sorry to inform you that unless we can work out a fair and equitable solution to this
problem of closure of our railroad lines, the milling of your canes for the crop year 1968-69 would
be greatly hampered to the great detriment of our economy and the near elimination of the means
of livelihood of most planters and the possible starvation of thousands of laborers working in the
sugar District of Bacolod-Murcia Milling Co."

and

"We are fully conscious of our contractual obligations to our existing Milling Contract. But, if
prevented by judicial order we will find ourselves unable to serve you in the hauling of the canes
through our railroad lines. It is for this reason that we suggest you explore other solutions to the
problem in the face of such an eventuality so that you may be able to proceed with the planting of
your canes with absolute peace of mind and the certainty that the same will be properly milled and
not left to rot in the fields.

also,
"In the meantime, and before July 1, 1968, the end of the temporary arrangement we have with
Fernando Gonzaga, Inc. and the Angela Estate, Inc. for the use of the rights of ways, our lawyers
are studying the possibility of getting a new injunction from the Supreme Court or the Court of
First Instance of Negros Occidental based on the new grounds interposed in said memorandum not
heretofore raised previously nor in the Capitol Subdivision case. And if we are doing this, it is
principally to prevent any injury to your crops or foreclosure of you property, which is just in line
with the object of your plans."

On March 26, 1968 the President of the Bacolod-Murcia Sugar Farmer's Corporation writing on
behalf of its planter-members demanded to know the plans of the Central for the crop year 1968-
1969, stating that if they fail to hear from the Central on or before the 15th of April they will feel
free to make their own plans in order to save their crops and the possibility of foreclosure of their
properties. 22

In its letter dated April 1, 1968, the president of BMMC simply informed the Bacolod-Murcia
Sugar Farmer's Corporation that they were studying the possibility of getting a new injunction
from the court before expiration of their temporary arrangement with Fernando Gonzaga, Inc. and
the Angela Estate, Inc. 23

Pressing for a more definite commitment (not a mere hope or expectation), on May 30, 1968 the
Bacolod-Murcia Sugar Farmer's Corporation requested the Central to put up a performance bond
in the amount of P13 million within a 5-day period to allay the fears of the planters that their sugar
canes can not be milled at the Central in the coming milling season. 24

BMMC's reply was only to express optimism over the final outcome of its pending cases in court.

Hence, what actually happened afterwards is that petitioner failed to provide adequate
transportation facilities to Gatuslao and other adherent planters. cdll

As found by the trial court, the experience of Alfonso Gatuslao at the start of the 1968-1969
milling season is reflective of the inadequacies of the reparto or trailer allotment as well as the
state of unpreparedness on the part of BMMC to meet the problem posed by the closure of the
railway lines.

It was established that after Gatuslao had cut his sugarcanes for hauling, no trailers arrived and
when two trailers finally arrived on October 20, 1968 after several unheeded requests, they were
left on the national highway about one (1) kilometer away from the loading station. Such fact was
confirmed by Carlos But-og, the driver of the truck that hauled the trailers. 25

Still further, Javelosa, Assistant Crop Loan Inspector, testified that the estimated production of
Gatuslao for the crop year 1968-1969 was 4,400 piculs hauled by 10 cane cars a week with a
maximum capacity of 8 tons. 26 Compared with his later schedule of only one trailer a week with
a maximum capacity of only 3 to 4 tons, 27 there appears to be no question that the means of
transportation provided by BMMC is very inadequate to answer the needs of Gatuslao.

Undoubtedly, BMMC is guilty of breach of the conditions of the milling contract and that
Gatuslao is the injured party. Under the same Article 1191 of the Civil Code, the injured party may
choose between the fulfillment and the rescission of the obligation, with the payment of damages
in either case. In fact, he may also seek rescission even after he had chosen fulfillment if the latter
should become impossible.

Under the foregoing, Gatuslao has the right to rescind the milling contract and neither the court a
quo erred in decreeing the rescission claimed nor the Court of Appeals in affirming the same.

Conversely, BMMC cannot claim enforcement of the contract. As ruled by this Court, by virtue of
the violations of the terms of the contract, the offending party has forfeited any right to its
enforcement (Boysaw v. Interphil Promotions, Inc., 148 SCRA 645 [1987]).

Likewise, the Bacolod-Murcia Agricultural Cooperative Marketing Association, Inc. (B-M

ACMA) cannot be faulted for organizing itself to take care of the needs of its members. Definitely,
it was organized at that time when petitioner could not assure the planters that it could definitely
haul and mill their canes. More importantly, as mentioned earlier in a letter dated January 12,
1968, J. Araneta, President & General Manager of the Central itself suggested to the Bacolod-
Murcia Sugar Farmer's Corporation that it explore solutions to the problem of hauling the canes to
the milling station in the face of the eventuality of a judicial order permanently closing the railroad
lines so that the planters may be able to proceed with their planting of the canes with absolute
peace of mind and the certainty that they will be properly milled and not left to rot in the fields. As
a result, the signing of the milling contract between private respondents AIDSISA and B-M
ACMA on June 19, 1968 28 was a matter of self-preservation inasmuch as the sugarcanes were
already matured and the planters had crop loans to pay. Further delay would mean tremendous
losses. 29

In its defense AIDSISA stressed as earlier stated, that it agreed to mill the sugarcanes of Gatuslao
only after it had carefully ascertained and believed in good faith that BMMC was incapable of
milling the sugarcanes of the adherent planters because of inadequate transportation and in fact up
to now said Central is incapable of hauling the sugarcanes of the said planters to its mill site for
milling purposes. Cdpr

As an extra precaution, AIDSISA provided in paragraph 15 30 of its milling contract that —

"If any member of the planter has an existing milling contract with other sugar central, then this
milling contract with the Central shall be of no force and effect with respect to that member or
those members having such contract, if that other sugar central is able, ready and willing, to mill
said member or members' canes in accordance with their said milling contract." (Emphasis
supplied)
The President of BMMC himself induced the planters to believe and to act on the belief that said
Central would not object to the milling of their canes with other centrals.

Under the circumstances, no evidence of bad faith on the part of private respondents could be
found much less any plausible reason to disturb the findings and conclusions of the trial court and
the Court of Appeals.

PREMISES CONSIDERED, the petition is hereby DENIED for lack of merit and the decision of
the Court of Appeals is hereby AFFIRMED in toto.

SO ORDERED.

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

Footnotes
1.Record on Appeal, p. 234, Rollo.

2.Milling Contract, par. 9, p. 335, Rollo.

3.Exhibits, p. 13.

4.Rollo, p. 116.

5.Rollo, p. 148.

6.Rollo, p. 157.

7.Rollo, p. 293.

8.Rollo, p. 233.

9.Rollo, p. 234.

10.Rollo, p. 238.

11.Rollo, p. 113.

12.Rollo, p. 445.

13.Rollo, p. 97.

14.TSN, June 29, 1971, pp. 21-22.

15.TSN, January 24, 1973, pp. 16-18.

16.Exhibits, p. 51.

17.TSN, June 29, 1971, p. 13.

18.TSN, July 29, 1971, pp. 13-20.

19.Exhibits, p. 34.

20.Rollo, pp. 97-98.

21.Rollo, p. 108.

22.Exhibits, p. 17.

23.Exhibits, p. 18.

24.Exhibits, p. 21.

25.TSN, February 23, 1971, pp. 7-12.

26.TSN, January 24, 1973, pp. 24, 30.

27.TSN, January 15, 1970, p. 25.

28.Exhibits, p. 30.

29.TSN, September 9, 1969, pp. 36-37.

30.Rollo, p. 91.

2
||| (Bacolod-Murcia Milling Co., Inc. v. Court of Appeals, G.R. Nos. 81100-01, [February 7, 1990],
261 PHIL 128-146)
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363 PHIL 701-709

THIRD DIVISION

[G.R. No. 128721. March 9, 1999.]

CRISMINA GARMENTS, INC., petitioner, vs. COURT OF APPEALS and NORMA SIAPNO,
respondents.

M.D. Tumaneng & Associates for petitioner.

Punzalan and Associates Law Office for private respondent.

SYNOPSIS

Petitioner Crismina Garments, Inc. contracted the services of respondent Norma Siapno, the sole
proprietress of D' Wilmar Garments for sewing assorted pieces of assorted girl's denims supplied
by petitioner under several purchase orders. Petitioner was obliged to pay the respondent for her
services, in the total amount of P76,410.00. However, petitioner failed to pay said amount.
Respondent filed a complaint with the trial court for the collection of the principal amount of
P76,410.00 and after due proceedings, the trial court rendered judgment in favor of respondent
ordering petitioner to pay respondent the amount of P76,410.00 with interest thereon at 12% per
annum. On appeal to the Court of Appeals, the appellate court affirmed the trial court's ruling.
Petitioner's motion for reconsideration was subsequently denied by the Court of Appeals. Hence,
the present petition. Petitioner contended that the interest rate should be six percent (6%) per
annum, pursuant to Article 2209 of the Civil Code. On the other hand, private respondent
maintained that the interest rate should be twelve percent (12%) per annum, in accordance with
Central Bank Circular No. 416. TAIESD

The Supreme Court found petitioner's contention tenable. The Court had previously ruled that the
interest rate under CB Circular No. 416 applies to (1) loans; (2) forbearance of money, goods or
credits; or (3) a judgment involving a loan or forbearance of money, goods or credits. Cases
beyond the scope of said circular are governed by Article 2209 of the Civil Code, which considers
interest a form of indemnity for the delay in the performance of an obligation. Applying the said
doctrine in the case at bar, the Court ruled that since the amount due in the present case arose from
a contract for a piece of work, not from a loan or forbearance of money, the legal rate of six
percent (6%) interest per annum should be applied. Private respondent's contention that the twelve
percent (12%) interest per annum should be imposed because the obligation arose from a
forbearance of money was found by the Court erroneous because a "forbearance" in the context of
the Usury Law is "a contractual obligation of lender or creditor to refrain, during a given period of
time from requiring the borrower or debtor to repay a loan or debt then due and payable." Using
the said standard in case at bar, the Court concluded that the obligation was obviously not a
forbearance of money, goods or credits.

SYLLABUS

CIVIL LAW; DAMAGES; ACTUAL OR COMPENSATORY; RATE OF INTEREST OF THE

AMOUNT DUE IN A CASE ARISING FROM A CONTRACT FOR A PIECE OF WORK, NOT
FROM A LOAN OR FORBEARANCE OF MONEY SHOULD BE THE LEGAL INTEREST OF
SIX PERCENT (6%) PER ANNUM PURSUANT TO ARTICLE 2209 OF THE CIVIL CODE. —
Because the amount due in this case arose from a contract for a piece of work, not from a loan or
forbearance of money, the legal interest of six percent (6%) per annum should be applied.
Furthermore, since the amount of the demand could be established with certainty when the
Complaint was filed, the six percent (6%) interest should be computed from the filing of the said
Complaint. But after the judgment becomes final and executory until the obligation is satisfied, the
interest should be reckoned at twelve percent (12%) per year. Private respondent maintains that
the twelve percent (12%) interest should be imposed, because the obligation arose from a
forbearance of money. This is erroneous. In Eastern Shipping, the Court observed that a
"forbearance" in the context of the usury law is a "contractual obligation of lender or creditor to
refrain, during a given period of time, from requiring the borrower or debtor to repay a loan or
debt then due and payable." Using this standard, the obligation in this case was obviously not a
forbearance of money, goods or credit.

DECISION

PANGANIBAN, J p:

Interest shall be computed in accordance with the stipulation of the parties. In the absence of such
agreement, the rate shall be twelve percent (12%) per annum when the obligation arises out of a
loan or a forbearance of money, goods or credits. In other cases, it shall be six percent (6%).

The Case

On May 5, 1997, Crismina Garments, Inc. filed a Petition for Review on Certiorari 1 assailing the
December 28, 1995 Decision 2 and March 17, 1997 Resolution 3 of the Court of Appeals in CA-
GR CV No. 28973. On September 24, 1997, this Court issued a minute Resolution 4 denying the
petition "for its failure to show any reversible error on the part of the Court of Appeals."

Petitioner then filed a Motion for Reconsideration, 5 arguing that the interest rate should be
computed at 6 percent per annum as provided under Article 2209 of the Civil Code, not 12 percent
per annum as prescribed under Circular No. 416 of the Central Bank of the Philippines. Acting on
the Motion, the Court reinstated 6 the Petition, but only with respect to the issue of which interest
rate should be applied. 7 cdphil

The Facts

As the facts of the case are no longer disputed, we are reproducing hereunder the findings of the
appellate court:

"During the period from February 1979 to April 1979, the [herein petitioner], which was engaged
in the export of girls' denim pants, contracted the services of the [respondent], the sole proprietress
of the D' Wilmar Garments, for the sewing of 20,762 pieces of assorted girls['] denims supplied by
the [petitioner] under Purchase Orders Nos. 1404, dated February 15, 1979, 0430 dated February
1, 1979, 1453 dated April 30, 1979. The [petitioner] was obliged to pay the [respondent], for her
services, in the total amount of P76,410.00. The [respondent] sew[ed] the materials and delivered
the same to the [petitioner] which acknowledged the same per Delivery Receipt Nos. 0030, dated
February 9, 1979; 0032, dated February 15, 1979; 0033 dated February 21, 1979; 0034, dated
February 24, 1979; 0036, dated February 20, 1979; 0038, dated March 11, 1979[;] 0039, dated
March 24, 1979; 0040 dated March 27, 1979; 0041, dated March 29, 1979; 0044, dated Marc[h]
25, 1979; 0101 dated May 18, 1979[;] 0037, dated March 10, 1979 and 0042 dated March 10,
1979, in good order condition. At first, the [respondent] was told that the sewing of some of the
pants w[as] defective. She offered to take delivery of the defective pants. However, she was later
told by [petitioner]'s representative that the goods were already good. She was told to just return
for her check of P76,410.00. However, the [petitioner] failed to pay her the aforesaid amount. This
prompted her to hire the services of counsel who, on November 12, 1979, wrote a letter to the
[petitioner] demanding payment of the aforesaid amount within ten (10) days from receipt thereof.
On February 7, 1990, the [petitioner]'s [v]ice-[p]resident-[c]omptroller, wrote a letter to
[respondent]'s counsel, averring, inter alia, that the pairs of jeans sewn by her, numbering 6,164
pairs, were defective and that she was liable to the [petitioner] for the amount of P49,925.51
which was the value of the damaged pairs of denim pants and demanded refund of the aforesaid
amount. prcd

"On January 8, 1981, the [respondent] filed her complaint against the [petitioner] with the [trial
court] for the collection of the principal amount of P76,410.00. . . .

xxx xxx xxx

"After due proceedings, the [trial court] rendered judgment, on February 28, 1989, in favor of the
[respondent] against the [petitioner], the dispositive portion of which reads as follows:

'WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant
ordering the latter to pay the former:

(1) The sum of P76,140.00 with interest thereon at 12% per annum, to be counted from the filing
of this complaint on January 8, 1981, until fully paid;
(2) The sum of P5,000 as attorney[']s fees; and

(3) The costs of this suit;

(4) Defendant's counterclaim is hereby dismissed.'" 8

The Court of Appeals (CA) affirmed the trial court's ruling, except for the award of attorney's fees
which was deleted. 9 Subsequently, the CA denied the Motion for Reconsideration. 10

Hence, this recourse to this Court. 11

Sole Issue

In light of the Court's Resolution dated April 27, 1998, petitioner submits for our consideration
this sole issue:

"Whether or not it is proper to impose interest at the rate of twelve percent (12%) per annum for
an obligation that does not involve a loan or forbearance of money in the absence of stipulation of
the parties." 12 LibLex

This Court's Ruling

We sustain petitioner's contention that the interest rate should be computed at six percent (6%) per
annum.

Sole Issue: Interest Rate

The controversy revolves around petitioner's payment of the price beyond the period prescribed in
a contract for a piece of work. Article 1589 of the Civil Code provides that "[t]he vendee [herein
petitioner] shall owe interest for the period between the delivery of the thing and the payment of
the price . . . should he be in default, from the time of judicial or extrajudicial demand for the
payment of the price." The only issue now is the applicable rate of interest for the late payment.

Because the case before us is "an action for the enforcement of an obligation for payment of
money arising from a contract for a piece of work," 13 petitioner submits that the interest rate
should be six percent (6%), pursuant to Article 2209 of the Civil Code, which states:

"If the obligation consists in the payment of money and the debtor incurs in delay, the indemnity
for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed
upon, and in the absence of stipulation, the legal interest, which is six per cent per annum."
(Emphasis supplied.)
On the other hand, private respondent maintains that the interest rate should be twelve percent
(12%) per annum, in accordance with Central Bank (CB) Circular No. 416, which reads:

"By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended, otherwise
known as the 'Usury Law', the Monetary Board, in its Resolution No. 1622 dated July 29, 1974,
has prescribed that the rate of interest for the loan or forbearance of any money, goods or credits
and the rate allowed in judgments, in the absence of express contract as to such rate of interest,
shall be twelve per cent (12%) per annum." (Emphasis supplied.)

She argues that the circular applies, since "the money sought to be recovered by her is in the form
of forbearance." 14

We agree with the petitioner. In Reformina v. Tomol Jr., 15 this Court stressed that the interest rate
under CB Circular No. 416 applies to (1) loans; (2) forbearance of money, goods or credits; or (3)
a judgment involving a loan or forbearance of money, goods or credits. Cases beyond the scope of
the said circular are governed by Article 2209 of the Civil Code, 16 which considers interest a
form of indemnity for the delay in the performance of an obligation. 17

In Eastern Shipping Lines, Inc. v. Court of Appeals, 18 the Court gave the following guidelines for
the application of the proper interest rates:

"I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under
Title XVIII on 'Damages' of the Civil Code govern in determining the measure of recoverable
damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code. Cdpr

"2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest
on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%
per annum. No interest, however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot
be so reasonably established at the time the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which time the quantification of damages may
be deemed to have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be . . . the amount finally adjudged.

"3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12%
per annum from such finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit." 19

In Keng Hua Paper Products Co., Inc. v. CA, 20 we also ruled that the monetary award shall earn
interest at twelve percent (12%) per annum from the date of the finality of the judgment until its
satisfaction, regardless of whether or not the case involves a loan or forbearance of money. The
interim period is deemed to be equivalent to a forbearance of credit. 21

Because the amount due in this case arose from a contract for a piece of work, not from a loan or
forbearance of money, the legal interest of six percent (6%) per annum should be applied.
Furthermore, since the amount of the demand could be established with certainty when the
Complaint was filed, the six percent (6%) interest should be computed from the filing of the said
Complaint. But after the judgment becomes final and executory until the obligation is satisfied, the
interest should be reckoned at twelve percent (12%) per year. cda

Private respondent maintains that the twelve percent (12%) interest should be imposed, because
the obligation arose from a forbearance of money. 22 This is erroneous. In Eastern Shipping, 23
the Court observed that a "forbearance" in the context of the usury law is a "contractual obligation
of lender or creditor to refrain, during a given period of time, from requiring the borrower or
debtor to repay a loan or debt then due and payable." Using this standard, the obligation in this
case was obviously not a forbearance of money, goods or credit.

WHEREFORE, the appealed Decision is MODIFIED. The rate of interest shall be six percent
(6%) per annum, computed from the time of the filing of the Complaint in the trial court until the
finality of the judgment. If the adjudged principal and the interest (or any part thereof) remain
unpaid thereafter, the interest rate shall be twelve percent (12%) per annum computed from the
time the judgment becomes final and executory until it is fully satisfied. No pronouncement as to
costs. LLpr

SO ORDERED.

Romero, Vitug, Purisima and Gonzaga-Reyes, JJ., concur.

Footnotes
1.Rollo, pp. 7-21.

2.Penned by Justice Romeo J. Callejo Sr.; with the concurrence of J. Antonio M. Martinez,
Division chairman (now a retired member of this Court), and Pacita Cañizares-Nye, member.

3.Also penned by Justice Callejo, Sr. with JJ. Antonio M. Martinez, Division chairman, and Ruben
T. Reyes, member, both concurring.

4.Rollo, pp. 104-105.

5.Ibid., pp. 106-112.

6.Resolution dated April 27, 1998; rollo, p. 118.

7.Rollo, pp. 140-141.

8.CA Decision, pp. 1-4; rollo, pp. 25-28 (citations omitted).

9.Ibid., p. 8; rollo, p. 31.

10.Rollo, p. 33.

11.The case was deemed submitted for resolution on December 17, 1998, when this Court
received private respondent's Memorandum.

12.Petitioner's Memorandum, p. 2; rollo, p. 160.

13.Ibid., p. 3; rollo, p. 161.

14.Memorandum for Private Respondent, p. 8; rollo, p. 175.

15.139 SCRA 260, October 11, 1985, per Cuevas, J. See also Philippine Rabbit Bus Lines, Inc. v.
Cruz, 143 SCRA 158, 160-161, July 28, 1986; and Pilipinas Bank v. Court of Appeals, 225 SCRA
268, 275, August 12, 1993.

16.National Power Corporation v. Angas, 208 SCRA 542, 546-549, May 8, 1992; Tio Khe Cho v.
Court of Appeals, 202 SCRA 119, 123-124, September 30, 1991; Philippine Virginia Tobacco
Administration v. Tensuan, 188 SCRA 628, 632-633, August 20, 1990; Central Azucarera de Bais
v. Court of Appeals, 188 SCRA 328, 338-339, August 3, 1990; Meridian Assurance Corporation v.
Dayrit, 184 SCRA 20, 23-24, April 3, 1990; and GSIS v. Court of Appeals, 145 SCRA 311, 321,
October 30, 1986.

17.Castelo v. Court of Appeals, 244 SCRA 180, 190, May 22, 1995 and Pacific Mills, Inc. v. Court
of Appeals, 206 SCRA 317, 326, February 17, 1992.

18.234 SCRA 78, 95-97, July 12, 1994, per Vitug, J .

19.A C Enterprises, Inc. v. Construction Industry Arbitration Commission, 244 SCRA 55, 57-58,
May 9, 1995, per Quiason, J.

20.GR No. 116863, February 12, 1998, per Panganiban, J.

21.Philippine National Bank v. Court of Appeals, 263 SCRA 766, 770-772, October 30, 1996; and
Food Terminal, Inc. v. Court of Appeals, 262 SCRA 339, 343-344, September 23, 1996.

22.Private respondent's Memorandum, p. 8; rollo, p. 175.

23.Supra, at p. 94.

2
||| (Crismina Garments, Inc. v. Court of Appeals, G.R. No. 128721, [March 9, 1999], 363 PHIL
701-709)

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JURISPRUDENCE Jurisprudences icon 120x120
18d623f0c132036f56cae92fb52b20c2af27b43f2646c7ffa940287812634a6c
349 PHIL 925-942

FIRST DIVISION

[G.R. No. 116863. February 12, 1998.]

KENG HUA PAPER PRODUCTS CO. INC., petitioner, vs. COURT OF APPEALS, REGIONAL
TRIAL COURT OF MANILA, BR. 21, and SEA-LAND SERVICE, INC., respondents.

Cabio Rabanes Law Office and Romeo B. Perez for petitioner.

Sycip Salazar Hernandez & Gatmaitan for private respondents.

SYNOPSIS
Sea-Land Service, Inc. (petitioner herein) received at its Hong Kong terminal a sealed container,
containing seventy-six bales of "unsorted waste paper" for shipment to defendant, Keng Hua
Paper Products. Co. in Manila. A bill of lading to cover the shipment was issued by Sea-Land.
Notices of arrival were transmitted to Keng Hua but the latter failed to discharge the shipment
from the container during the "free time" or grace period. The said shipment remained inside the
plaintiff's container from the moment the free time period expired until the time when the
shipment was unloaded from the container. During the period, demurrage charges accrued.
Numerous demands were made on Keng Hua but the obligation remained unpaid. Sea-Land
thereafter commenced this civil action for collection and damages. The RTC found petitioner
liable for demurrage, attorney's fees and expenses of litigation. The petitioner appealed to the
Court of Appeals. Respondent Court of Appeals denied the appeal and affirmed the lower court's
decision in toto. It also denied the petitioner's motion for reconsideration. Hence, this petition for
review. In the main, the case revolves around the question of whether petitioner was bound by the
bill of lading.

The assailed decision was affirmed by the Supreme Court with modification as to the rate of
interest paid. Both lower courts held that the bill of lading was a valid and perfected contract
between the shipper (Ho Kee), the consignee (Keng Hua), and the carrier (Sea-Land). In the case
at bar, the prolonged failure of petitioner to receive and discharge the cargo from the private
respondent's vessel constitutes a violation of the terms of the bill of lading. It should thus be liable
for demurrage to the former. As to the rate of interest, this case involves an obligation not arising
from a loan or forbearance of money; thus, pursuant to Article 2209 of the Civil Code, the
applicable interest rate is six percent per annum, computed from the date of the trial court's
decision. TEDaAc

SYLLABUS

1. COMMERCIAL LAW; CODE OF COMMERCE; BILL OF LADING, CONSTRUED. — A

bill of lading serves two functions. First, it is a receipt for the goods shipped. Second, it is a
contract by which three parties, namely, the shipper, the carrier, and the consignee undertake
specific responsibilities and assume stipulated obligations. A "bill of lading delivered and accepted
constitutes the contract of carriage even though not signed," because the "(a)cceptance of a paper
containing the terms of a proposed contract generally constitutes an acceptance of the contract and
of all of its terms and conditions of which the acceptor has actual or constructive notice." In a
nutshell, the acceptance of a bill of lading by the shipper and the consignee, with full knowledge
of its contents, gives rise to the presumption that the same was a perfected and binding contract.
IEcaHS

2. ID.; ID.; DEMURRAGE, DEFINED. — In The Apollon, 22 U.S. (9 Wheat.) 362; 6L Ed. 111
(1824) Justice Story made the following relevant comment on the nature of demurrage: "In truth,
demurrage is merely an allowance or compensation for the delay or detention of a vessel. It is
often a matter of contract, but not necessarily so. The very circumstance that in ordinary
commercial voyages, a particular sum is deemed by the parties a fair compensation for delays, is
the very reason why it is, and ought to be, adopted as a measure of compensation, in cases ex
delicto. What fairer rule can be adopted than that which founds itself upon mercantile usage as to
indemnity, and fixes a recompense upon the deliberate consideration of all the circumstances
attending the usual earnings and expenditures in common voyages? It appears to us that an
allowance, by way of demurrage, is the true measure of damages in all cases of mere detention, for
that allowance has reference to the ship's expenses, wear and tear, and common employment." (22
U.S. at 378.)

3. ID.; TRANSPORTATION; LETTER OF CREDIT; NATURE THEREOF; CASE AT BAR. —

In a letter of credit, there are three distinct and independent contracts: (1) the contract of sale
between the buyer and the seller, (2) the contract of the buyer with the issuing bank, and (3) the
letter of credit proper in which the bank promises to pay the seller pursuant to the terms and
conditions stated therein. "Few things are more clearly settled in law than that of the three
contracts which make up the letter of credit arrangement are to be maintained in a state of
perpetual separation." A transaction involving the purchase of goods may also require, apart from
a letter of credit, a contract of transportation specially when the seller and the buyer are not in the
same locale or country, and the goods purchased have to be transported to the latter. Hence, the
contract of carriage, as stipulated in the bill of lading in the present case, must be treated
independently of the contract of sale between the seller and the buyer, and the contract for the
issuance of a letter of credit between the buyer and the issuing bank. Any discrepancy between the
amount of the goods described in the commercial invoice in the contract of sale and the amount
allowed in the letter of credit will not affect the validity and enforceability of the contract of
carriage as embodied in the bill of lading. As the bank cannot be expected to look beyond the
documents presented to it by the seller pursuant to the letter of credit, neither can the carrier be
expected to go beyond the representations of the shipper in the bill of lading and to verify their
accuracy vis-a-vis the commercial invoice and the letter of credit.

4. CIVIL LAW; OBLIGATIONS; INTEREST; LEGAL RATE; WHEN APPLICABLE. —

Jurisprudence teaches us: "2. When an obligation, not constituting a loan or forbearance of money,
is breached, an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall begin to
run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when
such certainty cannot be so reasonably established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base
for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When
the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit."

5. ID.; DAMAGES; LEGAL INTEREST RATE; APPLICATION IN CASE AT BAR. — The case
before us involves an obligation not arising from a loan or forbearance of money; thus, pursuant to
Article 2209 of the Civil Code, the applicable interest rate is six percent per annum. Since the bill
of lading did not specify the amount of demurrage, and the sum claimed by private respondent
increased as the days went by, the total amount demanded cannot be deemed to have been
established with reasonable certainty until the trial court rendered its judgment. Indeed,
"(u)nliquidated damages or claims, it is said, are those which are not or cannot be known until
definitely ascertained, assessed and determined by the courts after presentation of proof."
Consequently, the legal interest rate is six percent, to be computed from September 28, 1990, the
date of the trial court's decision. And in accordance with Philippine National Bank, 263 SCRA at
772, and Eastern Shipping, 234 SCRA at 97, the rate of twelve percent per annum shall be charged
on the total then outstanding, from the time the judgment becomes final and executory until its
satisfaction.

6. ID.; ID.; ATTORNEY'S FEES; TEXT OF DECISION SHOULD STATE REASON FOR THE
AWARD; ABSENT IN CASE AT BAR. — The Court notes that the matter of attorney's fees was
taken up only in the dispositive portion of the trial court's decision. This falls short of the settled
requirement that the text of the decision should state the reason for the award of attorney's fees, for
without such justification, its award would be a "conclusion without a premise, its basis being
improperly left to speculation and conjecture." aIcTCS

DECISION

PANGANIBAN, J p:

What is the nature of a bill of lading? When does a bill of lading become binding on a consignee?
Will an alleged overshipment justify the consignee's refusal to receive the goods described in the
bill of lading? When may interest be computed on unpaid demurrage charges? LLphil

Statement of the Case

These are the main questions raised in this petition assailing the Decision 1 of the Court of
Appeals 2 promulgated on May 20, 1994 in C.A.-G.R. CV No. 29953 affirming in toto the
decision 3 dated September 28, 1990 in Civil Case No. 85-33269 of the Regional Trial Court of
Manila, Branch 21. The dispositive portion of the said RTC decision reads:

"WHEREFORE, the Court finds by preponderance of evidence that Plaintiff has proved its cause
of action and right to relief. Accordingly, judgment is hereby rendered in favor of the Plaintiff and
against Defendant, ordering the Defendant to pay plaintiff:

1. The sum of P67,340.00 as demurrage charges, with interest at the legal rate from the date of the
extrajudicial demand until fully paid;

2. A sum equivalent to ten (10%) percent of the total amount due as Attorney's fees and litigation
expenses.

Send copy to respective counsel of the parties.

SO ORDERED." 4

The Facts

The factual antecedents of this case as found by the Court of Appeals are as follows:

"Plaintiff (herein private respondent), a shipping company, is a foreign corporation licensed to do

business in the Philippines. On June 29, 1982, plaintiff received at its Hong Kong terminal a
sealed container, Container No. SEAU 67523, containing seventy-six bales of "unsorted waste
paper" for shipment to defendant (herein petitioner), Keng Hua Paper Products, Co. in Manila. A
bill of lading (Exh. A) to cover the shipment was issued by the plaintiff.

On July 9, 1982, the shipment was discharged at the Manila International Container Port. Notices
of arrival were transmitted to the defendant but the latter failed to discharge the shipment from the
container during the "free time" period or grace period. The said shipment remained inside the
plaintiff's container from the moment the free time period expired on July 29, 1982 until the time
when the shipment was unloaded from the container on November 22, 1983, or a total of four
hundred eighty-one (481) days. During the 481-day period, demurrage charges accrued. Within the
same period, letters demanding payment were sent by the plaintiff to the defendant who, however,
refused to settle its obligation which eventually amounted to P67,340.00. Numerous demands
were made on the defendant but the obligation remained unpaid. Plaintiff thereafter commenced
this civil action for collection and damages.

In its answer, defendant, by way of special and affirmative defense, alleged that it purchased fifty
(50) tons of waste paper from the shipper in Hong Kong, Ho Kee Waste Paper, as manifested in
Letter of Credit No. 824858 (Exh. 7, p. 110, Original Record) issued by Equitable Banking
Corporation, with partial shipment permitted; that under the letter of credit, the remaining balance
of the shipment was only ten (10) metric tons as shown in Invoice No. H-15/82 (Exh. 8, p. 111,
Original Record); that the shipment plaintiff was asking defendant to accept was twenty (20)
metric tons which is ten (10) metric tons more than the remaining balance; that if defendant were
to accept the shipment, it would be violating Central Bank rules and regulations and custom and
tariff laws; that plaintiff had no cause of action against the defendant because the latter did not hire
the former to carry the merchandise; that the cause of action should be against the shipper which
contracted the plaintiff's services and not against defendant; and that the defendant duly notified
the plaintiff about the wrong shipment through a letter dated January 24, 1983 (Exh. D for
plaintiff, Exh. 4 for defendant, p. 5. Folder of Exhibits)."

As previously mentioned, the RTC found petitioner liable for demurrage, attorney's fees and
expenses of litigation. The petitioner appealed to the Court of Appeals, arguing that the lower
court erred in (1) awarding the sum of P67,340 in favor of the private respondent, (2) rejecting
petitioner's contention that there was overshipment, (3) ruling that petitioner's recourse was
against the shipper, and (4) computing legal interest from date of extrajudicial demand. 5

Respondent Court of Appeals denied the appeal and affirmed the lower court's decision in toto. In
a subsequent resolution, 6 it also denied the petitioner's motion for reconsideration. cdphil

Hence, this petition for review. 7

The Issues

In its memorandum, petitioner submits the following issues:

"I. Whether or not petitioner had accepted the bill of lading;

II. Whether or not the award of the sum of P67,340.00 to private respondent was proper;

III. Whether or not petitioner was correct in not accepting the overshipment;

IV. Whether or not the award of legal interest from the date of private respondent's extrajudicial
demand was proper." 8

In the main, the case revolves around the question of whether petitioner was bound by the bill of
lading. We shall, thus, discuss the above four issues as they intertwine with this main question.

The Court's Ruling

The petition is partly meritorious. We affirm petitioner's liability for demurrage, but modify the
interest rate thereon.

Main Issue: Liability Under the Bill of Lading

A bill of lading serves two functions. First, it is a receipt for the goods shipped. Second, it is a
contract by which three parties, namely, the shipper, the carrier, and the consignee undertake
specific responsibilities and assume stipulated obligations. 9 A "bill of lading delivered and
accepted constitutes the contract of carriage even though not signed," 10 because the
"(a)cceptance of a paper containing the terms of a proposed contract generally constitutes an
acceptance of the contract and of all of its terms and conditions of which the acceptor has actual or
constructive notice." 11 In a nutshell, the acceptance of a bill of lading by the shipper and the
consignee, with full knowledge of its contents, gives rise to the presumption that the same was a
perfected and binding contract. 12

In the case at bar, both lower courts held that the bill of lading was a valid and perfected contract
between the shipper (Ho Kee), the consignee (Petitioner Keng Hua), and the carrier (Private
Respondent Sea-Land). Section 17 of the bill of lading provided that the shipper and the consignee
were liable for the payment of demurrage charges for the failure to discharge the containerized
shipment beyond the grace period allowed by tariff rules. Applying said stipulation, both lower
courts found petitioner liable. The aforementioned section of the bill of lading reads:

"17. COOPERAGE FINES. The shipper and consignee shall be liable for, indemnify the carrier
and ship and hold them harmless against, and the carrier shall have a lien on the goods for, all
expenses and charges for mending cooperage, baling, repairing or reconditioning the goods, or the
van, trailers or containers, and all expenses incurred in protecting, caring for or otherwise made
for the benefit of the goods, whether the goods be damaged or not, and for any payment, expense,
penalty fine, dues, duty, tax or impost, loss, damage, detention, demurrage, or liability of
whatsoever nature, sustained or incurred by or levied upon the carrier or the ship in connection
with the goods or by reason of the goods being or having been on board, or because of shipper's
failure to procure consular or other proper permits, certificates or any papers that may be required
at any port or place or shipper's failure to supply information or otherwise to comply with all laws,
regulations and requirements of law in connection with the goods of from any other act or
omission of the shipper or consignee." (Emphasis supplied.)

Petitioner contends, however, that it should not be bound by the bill of lading because it never
gave its consent thereto. Although petitioner admits "physical acceptance" of the bill of lading, it
argues that its subsequent actions belie the finding that it accepted the terms and conditions printed
therein. 13 Petitioner cites as support the "Notice of Refused or On Hand Freight" it received on
November 2, 1982 from private respondent, which acknowledged that petitioner declined to
accept the shipment. Petitioner adds that it sent a copy of the said notice to the shipper on
December 29, 1982. Petitioner points to its January 24, 1983 letter to the private respondent,
stressing "that its acceptance of the bill of lading would be tantamount to an act of smuggling as
the amount it had imported (with full documentary support) was only (at that time) for 10,000
kilograms and not for 20,313 kilograms as stated in the bill of lading" and "could lay them
vulnerable to legal sanctions for violation of customs and tariff as well as Central Bank laws." 14
Petitioner further argues that the demurrage "was a consequence of the shipper's mistake" of
shipping more than what was bought. The discrepancy in the amount of waste paper it actually
purchased, as reflected in the invoice vis-a-vis the excess amount in the bill of lading, allegedly
justifies its refusal to accept the shipment. 15

Petitioner Bound by

the Bill of Lading

We are not persuaded. Petitioner admits that it "received the bill of lading immediately after the
arrival of the shipment" 16 on July 8, 1982. 17 Having been afforded an opportunity to examine
the said document, petitioner did not immediately object to or dissent from any term or stipulation
therein. It was only six months later, on January 24, 1983, that petitioner sent a letter to private
respondent saying that it could not accept the shipment. Petitioner's inaction for such a long period
conveys the clear inference that it accepted the terms and conditions of the bill of lading.
Moreover, said letter spoke only of petitioner's inability to use the delivery permit, i.e. to pick up
the cargo, due to the shipper's failure to comply with the terms and conditions of the letter of
credit, for which reason the bill of lading and other shipping documents were returned by the
"banks" to the shipper. 18 The letter merely proved petitioner's refusal to pick up the cargo, not its
rejection of the bill of lading.

Petitioner's reliance on the Notice of Refused or On Hand Freight, as proof of its nonacceptance of
the bill of lading, is of no consequence. Said notice was not written by petitioner; it was sent by
private respondent to petitioner in November 1982, or four months after petitioner received the
bill of lading. If the notice has any legal significance at all, it is to highlight petitioner's prolonged
failure to object to the bill of lading. Contrary to petitioner's contention, the notice and the letter
support — not belie — the findings of the two lower courts that the bill of lading was impliedly
accepted by petitioner.

As aptly stated by Respondent Court of Appeals:

"In the instant case, (herein petitioner) cannot and did not allege non-receipt of its copy of the bill
of lading from the shipper. Hence, the terms and conditions as well as the various entries
contained therein were brought to its knowledge. (Herein petitioner) accepted the bill of lading
without interposing any objection as to its contents. This raises the presumption that (herein
petitioner) agreed to the entries and stipulations imposed therein.

Moreover, it is puzzling that (herein petitioner) allowed months to pass, six (6) months to be exact,
before notifying (herein private respondent) of the 'wrong shipment.' It was only on January 24,
1983 that (herein petitioner) sent (herein private respondent) such a letter of notification (Exh. D
for plaintiff, Exh. 4 for defendant; p. 5, Folder of Exhibits). Thus, for the duration of those six
months (herein private respondent never knew the reason for (herein petitioner's) refusal to
discharge the shipment. LLpr

After accepting the bill of lading, receiving notices of arrival of the shipment, failing to object
thereto, (herein petitioner) cannot now deny that it is bound by the terms in the bill of lading. If it
did not intend to be bound, (herein petitioner) would not have waited for six months to lapse
before finally bringing the matter to (herein private respondent's attention. The most logical
reaction in such a case would be to immediately verify the matter with the other parties involved.
In this case, however, (herein petitioner) unreasonably detained (herein private respondent's)
vessel to the latter's prejudice." 19

Petitioner's attempt to evade its obligation to receive the shipment on the pretext that this may
cause it to violate customs, tariff and central bank laws must likewise fail. Mere apprehension of
violating said laws, without a clear demonstration that taking delivery of the shipment has become
legally impossible, 20 cannot defeat the petitioner's contractual obligation and liability under the
bill of lading.
In any event, the issue of whether petitioner accepted the bill of lading was raised for the first time
only in petitioner's memorandum before this Court. Clearly, we cannot now entertain an issue
raised for the very first time on appeal, in deference to the well-settled doctrine that "(a)n issue
raised for the first time on appeal and not raised timely in the proceedings in the lower court is
barred by estoppel. Questions raised on appeal must be within the issues framed by the parties
and, consequently, issues not raised in the trial court cannot be raised for the first time on appeal."
21

In the case at bar, the prolonged failure of petitioner to receive and discharge the cargo from the
private respondent's vessel constitutes a violation of the terms of the bill of lading. It should thus
be liable for demurrage to the former.

In The Apollon, 22 Justice Story made the following relevant comment on the nature of
demurrage:

"In truth, demurrage is merely an allowance or compensation for the delay or detention of a
vessel. It is often a matter of contract, but not necessarily so. The very circumstance that in
ordinary commercial voyages, a particular sum is deemed by the parties a fair compensation for
delays, is the very reason why it is, and ought to be, adopted as a measure of compensation, in
cases ex delicto. What fairer rule can be adopted than that which founds itself upon mercantile
usage as to indemnity, and fixes a recompense upon the deliberate consideration of all the
circumstances attending the usual earnings and expenditures in common voyages? It appears to us
that an allowance, by way of demurrage, is the true measure of damages in all cases of mere
detention, for that allowance has reference to the ship's expenses, wear and tear, and common
employment." 23

Amount of Demurrage Charges

Petitioner argues that it is not obligated to pay any demurrage charges because, prior to the filing
of the complaint, private respondent made no demand for the sum of P67,340. Moreover, private
respondent's loss and prevention manager, Loi Gillera, demanded P50,260; but its counsel,
Sofronio Larcia, subsequently asked for a different amount of P37,800. cda

Petitioner's position is puerile. The amount of demurrage charges in the sum of P67,340 is a
factual conclusion of the trial court that was affirmed by the Court of Appeals and, thus, binding
on this Court. 24 Besides, such factual finding is supported by the extant evidence. 25 The
apparent discrepancy was a result of the variance of the dates when the two demands were made.
Necessarily, the longer the cargo remained unclaimed, the higher the demurrage. Thus, while in
his letter dated April 24, 1983, 26 private respondent's counsel demanded payment of only
P37,800, the additional demurrage incurred by petitioner due to its continued refusal to receive
delivery of the cargo ballooned to P67,340 by November 22, 1983. The testimony of Counsel
Sofronio Larcia as regards said letter of April 24, 1983 elucidates, viz:

"Q Now, after you sent this letter, do you know what happened?
A Defendant continued to refuse to take delivery of the shipment and the shipment stayed at the
port for a longer period.

Q So, what happened to the shipment?

A The shipment incurred additional demurrage charges which amounted to P67,340.00 as of

November 22, 1983 or more than a year after — almost a year after the shipment arrived at the
port.

Q So, what did you do?

A We requested our collection agency to pursue the collection of this amount." 27

Bill of Lading Separate from

Other Letter of Credit Arrangements

In a letter of credit, there are three distinct and independent contracts: (1) the contract of sale
between the buyer and the seller, (2) the contract of the buyer with the issuing bank, and (3) the
letter of credit proper in which the bank promises to pay the seller pursuant to the terms and
conditions stated therein. "Few things are more clearly settled in law than that the three contracts
which make up the letter of credit arrangement are to be maintained in a state of perpetual
separation." 28 A transaction involving the purchase of goods may also require, apart from a letter
of credit, a contract of transportation specially when the seller and the buyer are not in the same
locale or country, and the goods purchased have to be transported to the latter.

Hence, the contract of carriage, as stipulated in the bill of lading in the present case, must be
treated independently of the contract of sale between the seller and the buyer, and the contract for
the issuance of a letter of credit between the buyer and the issuing bank. Any discrepancy between
the amount of the goods described in the commercial invoice in the contract of sale and the
amount allowed in the letter of credit will not affect the validity and enforceability of the contract
of carriage as embodied in the bill of lading. As the bank cannot be expected to look beyond the
documents presented to it by the seller pursuant to the letter of credit, 29 neither can the carrier be
expected to go beyond the representations of the shipper in the bill of lading and to verify their
accuracy vis-a-vis the commercial invoice and the letter of credit. Thus, the discrepancy between
the amount of goods indicated in the invoice and the amount in the bill of lading cannot negate
petitioner's obligation to private respondent arising from the contract of transportation.
Furthermore, private respondent, as carrier, had no knowledge of the contents of the container. The
contract of carriage was under the arrangement known as "Shipper's Load And Count," and the
shipper was solely responsible for the loading of the container while the carrier was oblivious to
the contents of the shipment. Petitioner's remedy in case of overshipment lies against the
seller/shipper, not against the carrier. prLL
Payment of Interest

Petitioner posits that it "first knew" of the demurrage claim of P67,340 only when it received, by
summons, private respondent's complaint. Hence, interest may not be allowed to run from the date
of private respondent's extrajudicial demands on March 8, 1983 for P50,260 or on April 24, 1983
for P37,800, considering that, in both cases, "there was no demand for interest." 30 We agree.

Jurisprudence teaches us:

"2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest
on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%
per annum. No interest, however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot
be so reasonably established at the time the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which time the quantification of damages may
be deemed to have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit." 31

The case before us involves an obligation not arising from a loan or forbearance of money; thus,
pursuant to Article 2209 of the Civil Code, the applicable interest rate is six percent per annum.
Since the bill of lading did not specify the amount of demurrage, and the sum claimed by private
respondent increased as the days went by, the total amount demanded cannot be deemed to have
been established with reasonable certainty until the trial court rendered its judgment. Indeed,
"(u)nliquidated damages or claims, it is said, are those which are not or cannot be known until
definitely ascertained, assessed and determined by the courts after presentation of proof." 32
Consequently, the legal interest rate is six percent, to be computed from September 28, 1990, the
date of the trial court's decision. And in accordance with Philippine National Bank 33 and Eastern
Shipping, 34 the rate of twelve percent per annum shall be charged on the total then outstanding,
from the time the judgment becomes final and executory until its satisfaction.

Finally, the Court notes that the matter of attorney's fees was taken up only in the dispositive
portion of the trial court's decision. This falls short of the settled requirement that the text of the
decision should state the reason for the award of attorney's fees, for without such justification, its
award would be a "conclusion without a premise, its basis being improperly left to speculation and
conjecture." 35
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that the
legal interest of six percent per annum shall be computed from September 28, 1990 until its full
payment before finality of judgment. The rate of interest shall be adjusted to twelve percent per
annum, computed from the time said judgment became final and executory until full satisfaction.
The award of attorney's fees is DELETED. LLphil

SO ORDERED.

Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ ., concur.

Footnotes
1.Rollo, pp. 20-32.

2.Tenth Division, composed of J . Fermin A. Martin, Jr., ponente; and JJ . Emeterio C. Cui
(chairman) and Eugenio S. Labitoria, concurring.

3.Rollo, pp. 15-18. The RTC decision was penned by Judge Lourdes K. Tayao-Jaguros, who was
later appointed to the Court of Appeals, from where she has now retired.

4.Ibid., pp. 17-18.

5.Petitioner's brief before the Court of Appeals, pp. 5-8; record of the Court of Appeals, pp. 21-24.

6.Rollo, p. 35.

7.The case was deemed submitted for resolution on June 3, 1996 upon this Court's receipt of
petitioner's memorandum.

8.Petitioner's memorandum, p. 4; Rollo, p. 87.

9.Magellan Mftg. Marketing Corp. vs. Court of Appeals, 201 SCRA 102, 110, August 22, 1991,
per Regalado, J .

10.13 C.J.S. 239. See also Pan American World Airways, Inc. vs. IAC , 164 SCRA 268, 275,
August 11, 1988; citing Ong Yiu vs. Court of Appeals, 91 SCRA 223, 231, June 29, 1979.

11.17 C.J.S. 672.

12.Saludo, Jr. vs. Court of Appeals, 207 SCRA 498, 527-528, March 23, 1992.

13.Ibid., p. 5; Rollo, p. 88.

14.Ibid., pp. 5-6; Rollo, pp. 88-89.

15.Petitioner's memorandum, pp. 9-10; Rollo, pp. 92-93.

16.See petitioner's motion for reconsideration before the Court of Appeals, p. 2; record of the
Court of Appeals, p. 81.

17.See Exhibit B, Folder of Exhibits, p. 2.

18.See Exhibit D, Folder of Exhibits, p. 5.

19.Decision of the Court of Appeals, pp. 4-5; Rollo, pp. 23-24.

20.Art. 1266 of the Civil Code provides:

"Art. 1266. The debtor in obligations to do shall also be released when the prestation becomes
legally or physically impossible without the fault of the obligor."

21.Sanchez vs. Court of Appeals, G.R. No. 108947, p. 28, September 29, 1997, per Panganiban,
J .; quoting Caltex (Philippines), Inc. vs. Court of Appeals, 212 SCRA 448, 461, August 10, 1992,
per Regalado, J .

22.22 U.S. (9 Wheat.) 362; 6 L. Ed. 111 (1824).

23.22 U.S. at 378.

24.Fuentes vs. Court of Appeals, G.R. No. 109849, p. 9, February 26, 1997, per Panganiban, J .

25.See computation of CBCS Guaranteed Fast Collection Services, Exh. F-1, Folder of Exhibits,
p. 8.

26.Exh. E, Folder of Exhibits, p. 6.

27.TSN, pp. 5-6, August 31, 1988.

28.Gilmore, Grant and Black, Charles, The Law of Admiralty, p. 120, 2nd ed. (1975).

29.See Irrevocable Letter of Credit No. 82-1858, rollo, p. 11.

30.Petitioner's memorandum, p. 10; Rollo, p. 93.

31.Eastern Shipping Lines, Inc. vs. Court of Appeals, 234 SCRA 88, July 12, 1994, per Vitug, J .
See also Philippine National Bank vs. Court of Appeals, 263 SCRA 766, 770, October 30, 1996.
32.Central Azucera de Bais vs. Court of Appeals, 188 SCRA 328, 339, August 3, 1990, per
Regalado, J .

33.263 SCRA at 772.

34.234 SCRA at 97.

35.Francel Realty Corporation vs. Court of Appeals, 252 SCRA 127, 134, January 22, 1996, per
Mendoza, J .; citing Buan vs. Camaganacan, 16 SCRA 321, February 28, 1966.

||| (Keng Hua Paper Products Co. Inc. v. Court of Appeals, G.R. No. 116863, [February 12, 1998],
349 PHIL 925-942)

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326 PHIL 309-326

FIRST DIVISION

[G.R. No. 113412. April 17, 1996.]

Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioners, vs. THE COURT OF
APPEALS and PHILIPPINE NATIONAL BANK, respondents.

Cuevas De la Cuesta & De las Alas for petitioners.

Cruz Cruz & Navarro III collaborating counsel for petitioners.

PNB Legal Department for private respondent.

SYLLABUS

1. CIVIL LAW; CONTRACTS; BINDING EFFECT OF AGREEMENT BETWEEN PARTIES;

PREMISED ON THE PRINCIPLE OF MUTUALITY AND OBLIGATORY. — The binding
effect of any agreement between parties to a contract is premised on two settled principles: (1) that
any obligation arising from contract has the force of law between the parties; and (2) that there
must be mutuality between the parties based on their essential equality. Any contract which
appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable
result is void. Any stipulation regarding the validity or compliance of the contract which is left
solely to the will of one of the parties, is likewise, invalid.

2. ID.; SPECIAL CONTRACTS; LOAN; INTEREST IS REQUIRED TO BE EXPRESSLY

STIPULATED IN WRITING. — The manner of agreement is itself explicitly stipulated by the
Civil Code when it provides, in Article 1956 that "No interest shall be due unless it has been
expressly stipulated in writing." What has been "stipulated in writing" from a perusal of interest
rate provision of the credit agreement signed between the parties is that petitioners were bound
merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the
circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and
(3) upon agreement.

3. ID.; ID.; ID.; LIFTING OF USURY CEILING; DOES NOT GRANT BANKS CARTE
BLANCHE AUTHORITY TO RAISE INTEREST; RULE UNDER CB CIRCULAR 905. —
While the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said
circular could possibly be read as granting respondent bank carte blanche authority to raise interest
rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their assets.
Borrowing represents a transfusion of capital from lending institutions to industries and businesses
in order to stimulate growth. This would not, obviously, be the effect of PNB's unilateral and
lopsided policy regarding the interest rates of petitioners' borrowings in the instant case.

4. ID.; ID.; ID.; ID.; CANNOT BE INVOKED TO JUSTIFY ESCALATION CLAUSES, NOT
BEING A GRANT OF SPECIFIC AUTHORITY. — Apart from violating the principle of
mutuality of contracts, there is authority for disallowing the interest rates imposed by respondent
bank, for the credit agreement specifically requires that the increase be "within the limits allowed
by law." In the case of PNB vs. Court of Appeals, cited above, this Court clearly emphasized that
C.B. Circular No. 905 could not be properly invoked to justify the escalation clauses of such
contracts, not being a grant of specific authority.

5. ID.; ID.; ID.; ESCALATION CLAUSES; VALID AS LONG AS NOT SOLELY

POTESTATIVE BUT BASED ON REASONABLE AND VALID GROUNDS. — Escalation
clauses are not basically wrong or legally objectionable so long as they are not solely potestative
but based on reasonable and valid grounds. Here, as clearly demonstrated above, not only the
increases of the interest rates on the basis of the escalation clause patently unreasonable and
unconscionable, but also there are no valid and reasonable standards upon which the increases are
anchored.
6. ID.; ID.; MORTGAGE; AUTOMATIC FORECLOSURE PROVISIONS OF PD 385; CAN BE
INVOKED AFTER SETTLEMENT OF QUESTION INVOLVING INTEREST AND ONLY
AFTER DEBTORS REFUSED TO MEET OBLIGATION FOLLOWING SUCH
DETERMINATION. — In the first place, because of the dispute regarding the interest rate
increases, an issue which was never settled on merit in the courts below, the exact amount of
petitioner's obligations could not be determined. Thus, the foreclosure provisions of P.D. 385
could be validly invoked by respondent only after settlement of the question involving the interest
rate on the loan, and only after the spouses refused to meet their obligations following such
determination.

7. STATUTORY CONSTRUCTION; THE PHRASE "WITHIN THE LIMITS ALLOWED BY

LAW" REFERS TO LEGISLATIVE ENACTMENTS NOT ADMINISTRATIVE CIRCULARS.
— The escalation clause of the credit agreement requires that the same be made "within the limits
allowed by law," obviously referring specifically to legislative enactments not administrative
circulars. Note that the phrase "limits imposed by law," refers only to the escalation clause.
However, the same agreement allows reduction on the basis of law or the Monetary Board. Had
the parties intended the word "law" to refer to both legislative enactments and administrative
circulars and issuances, the agreement would not have gone as far as making a distinction between
"law or the Monetary Board Circulars" in referring to mutually agreed upon reductions in interest
rates.

DECISION

KAPUNAN, J p:

On various dates in 1981, the Philippine National Bank granted to herein petitioners, the spouses
Ponciano L. Almeda and Eufemia P. Almeda several loan/credit accommodations totaling P18.0
Million pesos payable in a period of six years at an interest rate of 21% per annum. To secure the
loan, the spouses Almeda executed a Real Estate Mortgage Contract covering a 3,500 square
meter parcel of land, together with the building erected thereon (the Marvin Plaza) located at
Pasong Tamo, Makati, Metro Manila. A credit agreement embodying the terms and conditions of
the loan was executed between the parties. Pertinent portions of the said agreement are quoted
below:

SPECIAL CONDITIONS

xxx xxx xxx

The loan shall be subject to interest at the rate of twenty one per cent (21%) per annum, payable
semi-annually in arrears, the first interest payment to become due and payable six (6) months from
date of initial release of the loan. The loan shall likewise be subject to the appropriate service
charge and a penalty charge of three per cent (3%) per annum to be imposed on any amount
remaining unpaid or not rendered when due.
xxx xxx xxx

III. OTHER CONDITIONS

(c) Interest and Charges

(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any
time depending on whatever policy it may adopt in the future; provided, that the interest rate on
this/these accommodations shall be correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment
in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease
of the maximum interest rate. 1

Between 1981 and 1984, petitioners made several partial payments on the loan totaling
P7,735,004.66, 2 a substantial portion of which was applied to accrued interest. 3 On March 31,
1984, respondent bank, over petitioners' protestations, raised the interest rate to 28%, allegedly
pursuant to Section III-c (1) of its credit agreement. Said interest rate thereupon increased from an
initial 21% to a high of 68% between March of 1984 to September, 1986. 4

Petitioners protested the increase in interest rates, to no avail. Before the loan was to mature in
March, 1988, the spouses filed on February 6, 1988 a petition for declaratory relief with prayer for
a writ of preliminary injunction and temporary restraining order with the Regional Trial Court of
Makati, docketed as Civil Case No. 18872. In said petition, which was raffled to Branch 134
presided by Judge Ignacio Capulong, the spouses sought clarification as to whether or not the PNB
could unilaterally raise interest rates on the loan, pursuant to the credit agreement's escalation
clause, and in relation to Central Bank Circular No. 905. As a preliminary measure, the lower
court, on March 3, 1988, issued a writ of preliminary injunction enjoining the Philippine National
Bank from enforcing an interest rate above the 21% stipulated in the credit agreement. By this
time the spouses were already in default of their loan obligations.

Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the PNB
countered by ordering the extrajudicial foreclosure of petitioners' mortgaged properties and
scheduled an auction sale for March 14, 1989. Upon motion by petitioners, however, the lower
court, on April 5, 1989, granted a supplemental writ of preliminary injunction, staying the public
auction of the mortgaged property.

On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court dissolved the
supplemental writ of preliminary injunction. Petitioners filed a motion for reconsideration. In the
interim, respondent bank once more set a new date for the foreclosure sale of Marvin Plaza which
was March 12, 1990. Prior to the scheduled date, however, petitioners tendered to respondent bank
the amount of P40,142,518.00, consisting of the principal (P18,000,000.00) and accrued interest
calculated at the originally stipulated rate of 21%. The PNB refused to accept the payment. 5
As a result of PNB's refusal of the tender of payment, petitioners, on March 8, 1990, formally
consigned the amount of P40,142,518.00 with the Regional Trial Court in Civil Case No. 90-663.
They prayed therein for a writ of preliminary injunction with a temporary restraining order. The
case was raffled to Branch 147, presided by Judge Teofilo Guadiz. On March 15, 1990, respondent
bank sought the dismissal of the case.

On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order granting the writ of
preliminary injunction enjoining the foreclosure sale of "Marvin Plaza" scheduled on March 12,
1990. On April 17, 1990 respondent bank filed a motion for reconsideration of the said order.

On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66 presided by Judge
Eriberto Rosario who issued an order consolidating said case with Civil Case 18871 presided by
Judge Ignacio Capulong.

For Judge Ignacio Capulong's refusal to lift the writ of preliminary injunction issued March 30,
1990, respondent bank filed a petition for Certiorari, Prohibition and Mandamus with respondent
Court of Appeals, assailing the following orders of the Regional Trial Court:

1. Order dated March 30, 1990 of Judge Guadiz granting the writ of preliminary injunction
restraining the foreclosure sale of Marvin Plaza set on March 12, 1990;

2. Order of Judge Ignacio Capulong dated January 10, 1992 denying respondent bank's motion to
lift the writ of injunction issued by Judge Guadiz as well as its motion to dismiss Civil Case No.
90-663;

3. Order of Judge Capulong dated July 3, 1992 denying respondent bank's subsequent motion to
lift the writ of preliminary injunction; and

4. Order of Judge Capulong dated October 20, 1992 denying respondent bank's motion for
reconsideration.

On August 27, 1993, respondent court rendered its decision setting aside the assailed orders and
upholding respondent bank's right to foreclose the mortgaged property pursuant to Act 3135, as
amended and P.D. 385. Petitioners' Motion for Reconsideration and Supplemental Motion for
Reconsideration, dated September 15, 1993 and October 28, 1993, respectively, were denied by
respondent court in its resolution dated January 10, 1994.

Hence the instant petition.

This appeal by certiorari from the respondent court's decision dated August 27, 1993 raises two
principal issues namely: 1) Whether or not respondent bank was authorized to raise its interest
rates from 21% to as high as 68% under the credit agreement; and 2) Whether or not respondent
bank is granted the authority to foreclose the Marvin Plaza under the mandatory foreclosure
provisions of P.D. 385.

In its comment dated April 19, 1994, respondent bank vigorously denied that the increases in the
interest rates were illegal, unilateral, excessive and arbitrary, it argues that the escalated rates of
interest it imposed was based on the agreement of the parties. Respondent bank further contends
that it had a right to foreclose the mortgaged property pursuant to P.D. 385, after petitioners were
unable to pay their loan obligations to the bank based on the increased rates upon maturity in
1984.

The instant petition is impressed with merit.

The binding effect of any agreement between parties to a contract is premised on two settled
principles: (1) that any obligation arising from contract has the force of law between the parties;
and (2) that there must be mutuality between the parties based on their essential equality. 6 Any
contract which appears to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity or compliance of the contract
which is left solely to the will of one of the parties, is likewise, invalid.

It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank
unilaterally altered the terms of its contract with petitioners by increasing the interest rates on the
loan without the prior assent of the latter. In fact, the manner of agreement is itself explicitly
stipulated by the Civil Code when it provides, in Article 1956 that "No interest shall be due unless
it has been expressly stipulated in writing." What has been "stipulated in writing" from a perusal
of interest rate provision of the credit agreement signed between the parties is that petitioners were
bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the
circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3)
upon agreement.

Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in
this case was the 21% rate stipulated in the interest provision. Any doubt about this is in fact
readily resolved by a careful reading of the credit agreement because the same plainly uses the
phrase "interest rate agreed upon," in reference to the original 21% interest rate. The interest
provision states:

(c) Interest and Charges

(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any
time depending on whatever policy it may adopt in the future; provided, that the interest rate on
this/these accommodations shall be correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment
in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease
of the maximum interest rate.
In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized respondent bank from
unilaterally raising the interest rate in the borrower's loan from 18% to 32%, 41% and 48% partly
because the aforestated increases violated the principle of mutuality of contracts expressed in
Article 1308 of the Civil Code. The Court held:

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates —

'. . . increases in interest rates are not subject to any ceiling prescribed by the Usury Law.'

but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively
increase the agreed interest rates from 18% to 48% within a span of four (4) months, in violation
of P.D. 116 which limits such changes to once every twelve months.'

Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the
private respondent's loan, violated the mutuality of contracts ordained in Article 1308 of the Civil
Code:

ART. 1308. The contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them.

In order that obligations arising from contracts may have the force of law between the parties,
there must be mutuality between the parties based on their essential equality. A contract containing
a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of
the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even
assuming that the P1.8 million loan agreement between the PNB and the private respondent gave
the PNB a license (although in fact there was none) to increase the interest rate at will during the
term of the loan, that license would have been null and void for being violative of the principle of
mutuality essential in contracts. It would have invested the loan agreement with the character of a
contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the
debtor) participation being reduced to the alternative 'to take it or lease it' (Qua vs. Law Union &
Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the
courts of justice must protect against abuse and imposition.

PNB's successive increases of the interest rate on the private respondent's loan, over the latter's
protest, were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1)
Section 9.01 that its terms 'may be amended only by an instrument in writing signed by the party
to be bound as burdened by such amendment.' The increases imposed by PNB also contravene Art.
1956 of the Civil Code which provides that 'no interest shall be due unless it has been expressly
stipulated in writing.'

The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond
24% per annum, hence, he is not bound to pay a higher rate than that.

That an increase in the interest rate from 18% to 48% within a period of four (4) months is
excessive, as found by the Court of Appeals, is indisputable.

Clearly, the galloping increases in interest rate imposed by respondent bank on petitioners' loan,
over the latter's vehement protests, were arbitrary.

Moreover, respondent bank's reliance on C.B. Circular No 905, Series of 1982 did not authorize
the bank, or any lending institution for that matter, to progressively increase interest rates on
borrowings to an extent which would have made it virtually impossible for debtors to comply with
their own obligations. True, escalation clauses in credit agreements are perfectly valid and do not
contravene public policy. Such clauses, however, (as are stipulations in other contracts) are
nonetheless still subject to laws and provisions governing agreements between parties, which
agreements — while they may be the law between the contracting parties — implicitly incorporate
provisions of existing law. Consequently, while the Usury Law ceiling on interest rates was lifted
by C.B. Circular 905, nothing in the said circular could possibly be read as granting respondent
bank carte blanche authority to raise interest rates to levels which would either enslave its
borrowers or lead to a hemorrhaging of their assets. Borrowing represents a transfusion of capital
from lending institutions to industries and businesses in order to stimulate growth. This would not,
obviously, be the effect of PNB's unilateral and lopsided policy regarding the interest rates of
petitioners' borrowings in the instant case.

Apart from violating the principle of mutuality of contracts, there is authority for disallowing the
interest rates imposed by respondent bank, for the credit agreement specifically requires that the
increase be "within the limits allowed by law". In the case of PNB v. Court of Appeals, cited
above, this Court clearly emphasized that C.B. Circular No. 905 could not be properly invoked to
justify the escalation clauses of such contracts, not being a grant of specific authority.

Furthermore, the escalation clause of the credit agreement requires that the same be made "within
the limits allowed by law," obviously referring specifically to legislative enactments not
administrative circulars. Note that the phrase "limits imposed by law," refers only to the escalation
clause. However, the same agreement allows reduction on the basis of law or the Monetary Board.
Had the parties intended the word "law" to refer to both legislative enactments and administrative
circulars and issuances, the agreement would not have gone as far as making a distinction between
"law or the Monetary Board Circulars" in referring to mutually agreed upon reductions in interest
rates. This distinction was the subject of the Court's disquisition in the case of Banco Filipino
Savings and Mortgage Bank v. Navarro 8 where the Court held that:

What should be resolved is whether BANCO FILIPINO can increase the interest rate on the
LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered opinion that
it may not.

The Escalation Clause reads as follows:

I/We hereby authorize Banco Filipino to correspondingly increase

the interest rate stipulated in this contract without advance notice to me/us in the event.

a law

increasing

the lawful rates of interest

that may be charged

on this particular

kind of loan.' (Paragraphing and italics supplied)

It is clear from the stipulation between the parties that the interest rate may be increased 'in the
event a law should be enacted increasing the lawful rate of interest that may be charged on this
particular kind of loan.' The Escalation Clause was dependent on an increase of rate made by 'law'
alone.

CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly
issued is not strictly a statute or a law, it has, however, the force and effect of law." (Emphasis
supplied). "An administrative regulation adopted pursuant to law has the force and effect of law."
"That administrative rules and regulations have the force of law can no longer be questioned."

The distinction between a law and an administrative regulation is recognized in the Monetary
Board guidelines quoted in the latter to the BORROWER of Ms. Paderes of September 24, 1976
(supra). According to the guidelines, for a loan's interest to be subject to the increases provided in
CIRCULAR No. 494, there must be an Escalation Clause allowing the increase 'in the event that
any law or Central Bank regulation is promulgated increasing the maximum rate for loans.' The
guidelines thus presuppose that a Central Bank regulation is not within the term 'any law.'

The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding
Section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could
stipulate that the rate of interest agreed upon may be increased in the event that the applicable
maximum rate of interest is increased 'by law or by the Monetary Board.' To quote:

Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits
may stipulate that the rate of interest agreed upon may be increased in the event that the applicable
maximum rate of interest

is increased by law or by the Monetary Board:

Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement
that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate
of interest is reduced by law or by the Monetary Board;

Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or
after the effectivity of the increase or decrease in the maximum rate of interest.' (Paragraphing and
italics supplied).

It is now clear that from March 17, 1980, escalation clauses to be valid should specifically
provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board;
and (2) in order for such stipulation to be valid, it must include a provision for reduction of the
stipulated interest 'in the event that the applicable maximum rate of interest is reduced by law or
by the Monetary Board.'

Petitioners never agreed in writing to pay the increased interest rates demanded by respondent
bank in contravention to the tenor of their credit agreement. That an increase in interest rates from
18% to as much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984,
petitioners had paid an amount equivalent to virtually half of the entire principal (P7,735,004.66)
which was applied to interest alone. By the time the spouses tendered the amount of
P40,142,518.00 in settlement of their obligations, respondent bank was demanding
P58,377,487.00 over and above those amounts already previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as they are not solely
potestative but based on reasonable and valid grounds. 9 Here, as clearly demonstrated above, not
only the increases of the interest rates on the basis of the escalation clause patently unreasonable
and unconscionable, but also there are no valid and reasonable standards upon which the increases
are anchored.

We go now to respondent bank's claim that the principal issue in the case at bench involves its
right to foreclose petitioners' properties under P.D. 385. We find respondent's pretense untenable.

Presidential Decree No. 385 was issued principally to guarantee that government financial
institutions would not be denied substantial cash inflows necessary to finance the government's
development projects all over the country by large borrowers who resort to litigation to prevent or
delay the government's collection of their debts or loans. 10 In facilitating collection of debts
through its automatic foreclosure provisions, the government is however, not exempted from
observing basic principles of law, and ordinary fairness and decency under the due process clause
of the Constitution. 11

In the first place, because of the dispute regarding the interest rate increases, an issue which was
never settled on merit in the courts below, the exact amount of petitioner's obligations could not be
determined. Thus, the foreclosure provisions of P.D. 385 could be validly invoked by respondent
bank only after settlement of the question involving the interest rate on the loan, and only after the
spouses refused to meet their obligations following such determination. In Filipinas Marble
Corporation v. Intermediate Appellate Court, 12 involving P.D. 385's provisions on mandatory
foreclosure, we held that:

We cannot, at this point, conclude that respondent DBP together with the Bancom people actually
misappropriated and misspent the $5 million loan in whole or in part although the trial court found
that there is 'persuasive' evidence that such acts were committed by the respondent. This matter
should rightfully be litigated below in the main action. Pending the outcome of such litigation,
P.D. 385 cannot automatically be applied for if it is really proven that respondent DBP is
responsible for the misappropriation of the loan, even if only in part, then the foreclosure of the
petitioner's properties under the provisions of P.D. 385 to satisfy the whole amount of the loan
would be a gross mistake. It would unduly prejudice the petitioner, its employees and their
families.

Only after trial on the merits of the main case can the true amount of the loan which was applied
wisely or not, for the benefit of the petitioner be determined. Consequently, the extent of the loan
where there was no failure of consideration and which may be properly satisfied by foreclosure
proceedings under P.D. 385 will have to await the presentation of evidence in a trial on the merits.

In Republic Planters Bank v. Court of Appeals 13 the Court reiterating the dictum in Filipinas
Marble Corporation, held:

The enforcement of P.D. 385 will 'sweep under the rug' this iceberg of a scandal in the sugar
industry during the Marcos Martial Law years. This we can not allow to happen. For the benefit of
future generations, all the dirty linen in the PHILSUCOM/NASUTRA/RPB closets have to be
exposed in public so that the same may NEVER be repeated.

It is of paramount national interest, that we allow the trial court to proceed with dispatch to allow
the parties below to present their evidence.

Furthermore, petitioners made a valid consignation of what they, in good faith and in compliance
with the letter of the Credit Agreement, honestly believed to be the real amount of their remaining
obligations with the respondent bank. The latter could not therefore claim that there was no
honest-to-goodness attempt on the part of the spouses to settle their obligations. Respondent
bank's rush to inequitably invoke the foreclosure provisions of P.D. 385 through its legal
machinations in the courts below, in spite of the unsettled differences in interpretation of the credit
agreement was obviously made in bad faith, to gain the upper hand over petitioners.

In the face of the unequivocal interest rate provisions in the credit agreement and in the law
requiring the parties to agree to changes in the interest rate in writing, we hold that the unilateral
and progressive increases imposed by respondent PNB were null and void. Their effect was to
increase the total obligation on an eighteen million peso loan to an amount way over three times
that which was originally granted to the borrowers. That these increases, occasioned by crafty
manipulations in the interest rates is unconscionable and neutralizes the salutary policies of
extending loans to spur business cannot be disputed.
WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated August
27, 1993, as well as the resolution dated February 10, 1994 is hereby REVERSED AND SET
ASIDE. The case is remanded to the Regional Trial Court of Makati for further proceedings.

SO ORDERED.

Bellosillo and Hermosisima, Jr., JJ., concur.

Padilla and Vitug, JJ., took no part.

Footnotes
1.Rollo, pp. 48-55.

2.Id., at, 165.

3.Id.

4.Id.

5.The PNB claimed that as of March 12, 1990, the spouses balance was P58,377,487.31, using the
increased interest rates for computing accrued interest.

6.Garcia v. Legarda, 21 SCRA 555 (1967).

7.196 SCRA 536, 543 (1991).

8.152 SCRA 346 (1987).

9.Vitug's Compendium of Civil Law and Jurisprudence, Revised Edition, 1993, p. 533, citing PNB
v. IAC, 183 SCRA 133; PNB v. Court of Appeals, 196 SCRA 536.

10.Sections 1 and 2 of P.D. 385 provide:

Section 1. It shall be mandatory for government financial institutions, after the lapse of sixty (60)
days from the issuance of this Decree, to foreclose the collaterals and/or securities for any loan,
credit accommodation, and/or guarantees granted by them whenever the arrearages on such
account, concluding accrued interest and other obligations, including interest and other charges, as
appearing in the book of accounts and/or related records of the financial institution concerned.
This shall be without prejudice to the exercise by the government financial institution of such
rights and/or remedies available to them under their respective contracts with their debtors,
including the right to foreclose on loans, credits, accommodations, and/or guarantees on which the
arrearages are less than twenty percent (20%).
 Section 2. No restraining order, temporary or permanent injunction shall be issued by the court
against any government financial institution in any action taken by such institution in compliance
with the mandatory foreclosure provided in Section 1 hereof, whether such restraining order,
temporary or permanent injunction is sought by the borrower(s) or any third party or parties,
except after due hearing in which it is established by the borrower, and admitted by the
government financial institution concerned that twenty percent (20%) of the outstanding
arrearages has been paid after the filing of foreclosure proceedings.

11.Filipinas Marble Corporation v. Intermediate Appellate Court, 142 SCRA 181 (1986).

12.Id.

13.213 SCRA 413 (1992).

2
||| (Spouses Almeda v. Court of Appeals, G.R. No. 113412, [April 17, 1996], 326 PHIL 309-326)

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112 PHIL 720-733

EN BANC

[G.R. No. L-11827. July 31, 1961.]

FERNANDO A. GAITE, plaintiff-appellee, vs. ISABELO FONACIER, GEORGE KRAKOWER,
LARAP MINES & SMELTING CO., INC., SEGUNDINA VIVAS, FRANCISCO DANTE,
PACIFICO ESCANDOR and FERNANDO TY, defendants-appellants.

Alejo Mabanag for plaintiff-appellee.

Simplicio U. Tapia Antonio Barredo and Pedro Guevarra for defendants-appellants.

SYLLABUS

1. OBLIGATIONS AND CONTRACTS; CONDITIONAL OBLIGATIONS; EFFICACY

SUBORDINATED TO THE HAPPENING OF A FUTURE AND UNCERTAIN EVENT. — What
characterizes a conditional obligation is the fact that its efficacy or obligatory force is
subordinated to the happening of a future and uncertain event; so that if the suspensive condition
does not take place, the parties would stand as if the conditional obligation had never existed.

2. SALES; COMMUTATIVE AND ONEROUS NATURE OF CONTRACT OF SALES;

CONTINGENT CHARACTER OF OBLIGATION MUST CLEARLY APPEAR. — A contract of
sale is normally commutative and onerous: not only does each of the parties assume a correlative
obligation, but each party anticipates performance by the other from the very start. Although the
obligation of one party can be lawfully subordinated to an uncertain event, so that the other
understands that he assumes the risk of receiving nothing for what he gives, it is not in the usual
course of business to do so; hence, the contingent character of the obligation must clearly appear.

3. ID.; ID.; HOW DOUBT IN THE INTENTION OF PARTIES IS RESOLVED. — Sale is

essentially onerous, and if there is doubt whether the parties intended a suspensive condition or a
suspensive period for the payment of the agreed price, the doubt shall be settled in favor of the
greatest reciprocity of interests, which will obtain if the buyer's obligation is deemed to be actually
existing, with only its maturity postponed or deferred.

DECISION

REYES, J.B.L., J p:

This appeal comes to us directly from the Court of First Instance because the claims involved
aggregate more than P200,000.

Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself or in a
representative capacity, of 11 iron lode mineral claims, known as the Dawahan Group, situated in
the municipality of Jose Panganiban, province of Camarines Norte.

By a "Deed of Assignment" dated September 29, 1952 (Exhibit "3"), Fonacier constituted and
appointed plaintiff-appellee Fernando A. Gaite as his true and lawful attorney-in-fact to enter into
a contract with any individual or juridical person for the exploration and development of the
mining claims aforementioned on a royalty basis of not less than P0.50 per ton of ore that might
be extracted therefrom. On March 19, 1954, Gaite in turn executed a general assignment (Record
on Appeal, pp. 17-19) conveying the development and exploitation of said mining claims unto the
Larap Iron Mines, a single proprietorship owned solely by and belonging to him, on the same
royalty basis provided for in Exhibit "3". Thereafter Gaite embarked upon the development and
exploitation of the mining claims in question, opening and paving roads within and outside their
boundaries, making other improvements and installing facilities therein for use in the development
of the mines, and in time extracted therefrom what he claimed and estimated to be approximately
24,000 metric tons of iron ore.

For some reason or another, Isabelo Fonacier decided to revoke the authority granted by him to
Gaite to exploit and develop the mining claims in question, and Gaite assented thereto subject to
certain conditions. As a result, a document entitled "Revocation of Power of Attorney and
Contract" was executed on December 8, 1954 (Exhibit "A"), wherein Gaite transferred to
Fonacier, for the consideration of P20,000, plus 10% of the royalties that Fonacier would receive
from the mining claims, all his rights and interests on all the roads, improvements, and facilities in
or outside said claims, the right to use the business name "Larap Iron Mines" and its goodwill, and
all the records and documents relative to the mines. In the same document, Gaite transferred to
Fonacier all his rights and interests over the "24,000 tons of iron ore, more or less" that the former
had already extracted from the mineral claims, in consideration of the sum of P75,000, P10,000, of
which was paid upon the signing of the agreement, and

"b. The balance of SIXTY-FIVE "THOUSAND PESOS (P65,000) will be paid from and out of the
first letter of credit covering the first shipment of iron ores and or the first amount derived from
the local sale of iron ore made by the Larap Mines & Smelting Co., Inc., its assigns,
administrators, or successors in interests."

To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in favor of
Gaite a surety bond; and pursuant to the promise, Fonacier delivered to Gaite a surety bond dated
December 8, 1954 with himself (Fonacier) as principal and the Larap Mines and Smelting Co. and
its stockholders George Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante, and
Fernando Ty as sureties (Exhibit "A-1"). Gaite testified, however, that when this bond was
presented to him by Fonacier together with the "Revocation of Power of Attorney and Contract",
Exhibit "A", on December 8, 1954, he refused to sign said Exhibit "A" unless another bond
underwritten by a bonding company was put up by defendants to secure the payment of the
P65,000 balance of the price of the iron ore in the stockpiles in the mining claims. Hence, a
second bond, also dated December 8, 1954 (Exhibit "B"), was executed by the same parties to the
first bond Exhibit "A-I", with the Far Eastern Surety and Insurance Co. as additional surety, but it
provided that the liability of the surety company would attach only when there had been an actual
sale of iron ore by the Larap Mines & Smelting Co. for an amount of not less than P65,000, and
that, furthermore, the liability of said surety company would automatically expire on December 8,
1955. Both bonds were attached to the "Revocation of Power of Attorney and Contract", Exhibit
"A" and made integral parts thereof.
On the same day that Fonacier revoked the power of attorney he gave to Gaite and the two
executed and signed the "Revocation of Power of Attorney and Contract", Exhibit "A", Fonacier
entered into a "Contract of Mining Operation", ceding, transferring, and conveying unto the Larap
Mines and Smelting Co., Inc. the right to develop, exploit, and explore the mining claims in
question, together with the improvements therein and the use of the name "Larap Iron Mines" and
its goodwill, in consideration of certain royalties. Fonacier likewise transferred, in the same
document, the complete title to the approximately 24,000 tons of iron ore which he acquired from
Gaite, to the Larap Mines & Smelting Co., in consideration for the signing by the company and its
stockholders of the surety bonds delivered by Fonacier to Gaite (Record on Appeal, pp. 82-94).

Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the Far Eastern
Surety and Insurance Company, no sale of the approximately 24,000 tons of iron ore had been
made by the Larap Mines & Smelting Co., Inc., nor had the 65,000 balance of the price of said ore
been paid to Gaite by Fonacier and his sureties. Whereupon, Gaite demanded from Fonacier and
his sureties payment of said amount, on the theory that they had lost every right to make use of the
period given them when their bond, Exhibit "B", automatically expired (Exhibits "C" to "C-24").
And when Fonacier and his sureties failed to pay as demanded by Gaite, the latter filed the present
complaint against them in the Court of First Instance of Manila (Civil Case No. 29310) for the
payment of the P65,000 balance of the price of the ore, consequential damages, and attorney's
fees.

All the defendants except Francisco Dante set up the uniform defense that the obligation sued
upon by Gaite was subject to a condition that the amount of P65,000 would be payable out of the
first letter of credit covering the first shipment of iron ore and/or the first amount derived from the
local sale of the iron ore by the Larap Mines & Smelting Co., Inc.; that up to the time of the filing
of the complaint, no sale of the iron ore had been made, hence the condition had not yet been
fulfilled; and that consequently, the obligation was not yet due and demandable. Defendant
Fonacier also contended that only 7,573 tons of the estimated 24,000 tons of iron ore sold to him
by Gaite was actually delivered, and counterclaimed for more than P200,000 damages.

At the trial of the case, the parties agreed to limit the presentation of evidence to two issues:

(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite P65,000 became due
and demandable when the defendants failed to renew the surety bond underwritten by the Far
Eastern Surety and Insurance Co., Inc. (Exhibit "B") which expired on December 8, 1955, and

(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to defendant Fonacier
were actually in existence in the mining claims when these parties executed the "Revocation of
Power of Attorney and Contract", Exhibit "A."

On the first question, the lower court held that the obligation of defendants to pay plaintiff the
P65,000 balance of the price of the approximately 24,000 tons of iron ore was one with a term:
i.e., that it would be paid upon the sale of sufficient iron ore by defendants, such sale to be
effected within one year or before December 8, 1955; that the giving of security was a condition
precedent to Gaite's giving of credit to defendants; and that as the latter failed to put up a good and
sufficient security in lieu of the Far Eastern Surety bond (Exhibit "B") which expired on
December 8, 1955, the obligation became due and demandable under Article 1198 of the New
Civil Code.

As to the second question, the lower court found that plaintiff Gaite did have approximately
24,000 tons of the iron ore at the mining claims in question at the time of the execution of the
contract Exhibit "A."

Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants to pay him,
jointly and severally, P65,000 with interest at 6% per annum from December 9, 1965 until full
payment, plus costs. From this judgment, defendants jointly appealed to this Court.

During the pendency of this appeal, several incidental motions were presented for resolution: a
motion to declare the appellants Larap Mines & Smelting Co., Inc. and George Krakower in
contempt, filed by appellant Fonacier, and two motions to dismiss the appeal as having become
academic and a motion for new trial and/or to take judicial notice of certain documents, filed by
appellee Gaite. The motion for contempt is unmeritorious because the main allegation therein that
the appellants Larap Mines & Smelting Co., Inc. and Krakower had sold the iron ore here in
question, which allegedly is "property in litigation", has not been substantiated; and, even if true,
does not make these appellants guilty of contempt, because what is under litigation in this appeal
is appellee Gaite's right to the payment of the balance of the price of the ore, and not the iron ore
itself. As for the several motions presented by appellee Gaite, it is unnecessary to resolve these
motions in view of the result that we have reached in this case, which we shall hereafter discuss.

The main issues presented by appellants in this appeal are:

(1) that the lower court erred in holding that the obligation of appellant Fonacier to pay appellee
Gaite the P65,000 (balance of the price of the iron ore in question) is one with a period or term
and not one with a suspensive condition, and that the term expired on December 8, 1955; and

(2) that the lower court erred in not holding that there were only 10,954.5 tons in the stockpiles of
iron ore sold by appellee Gaite to appellant Fonacier.

The first issue involves an interpretation of the following provision in the contract Exhibit "A":

"7. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F. Fonacier all his rights
and interests over the 24,000 tons of iron ore, more or less, above-referred to together with all his
rights and interests to operate the mine in consideration of the sum of SEVENTY-FIVE
THOUSAND PESOS (P75,000) which the latter binds to pay as follows:

a. TEN THOUSAND PESOS (P10,000) will be paid upon the signing of this agreement.
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000) will be paid from and out of the
first letter of credit covering first shipment of iron ores and/or the first amount derived from the
local sale of iron ore made by the Larap Mines & Smelting Co., Inc., its assigns, administrators, or
successors in interest."

We find the court below to be legally correct in holding that the shipment or local sale of the iron
ore is not a condition precedent (or suspensive) to the payment of the balance of P65,000, but was
only a suspensive period or term. What characterizes a conditional obligation is the fact that its
efficacy or obligatory force (as distinguished from its demandability) is subordinated to the
happening of a future and uncertain event; so that if the suspensive condition does not take place,
the parties would stand as if the conditional obligation had never existed. That the parties to the
contract Exhibit "A" did not intend any such state of things to prevail is supported by several
circumstances:

1) The words of the contract express no contingency in the buyer's obligation to pay: "The balance
of Sixty-Five Thousand Pesos (P65,000) will be paid out of the first letter of credit covering the
first shipment of iron ore . . ." etc. There is no uncertainty that the payment will have to be made
sooner or later; what is undetermined is merely the exact date at which it will be made. By the
very terms of the contract, therefore, the existence of the obligation to pay is recognized; only its
maturity or demandability is deferred.

2) A contract of sale is normally commutative and onerous: not only does each one of the parties
assume a correlative obligation (the seller to deliver and transfer ownership of the thing sold and
the buyer to pay the price), but each party anticipates performance by the other from the very start.
While in a sale the obligation of one party can be lawfully subordinated to an uncertain event, so
that the other understands that he assumes the risk of receiving nothing for what he gives (as in the
case of a sale of hopes or expectations, emptio spei), it is not in the usual course of business to do
so; hence, the contingent character of the obligation must clearly appear. Nothing is found in the
record to evidence that Gaite desired or assumed to run the risk of losing his rights over the ore
without getting paid for it, or that Fonacier understood that Gaite assumed any such risk. This is
proved by the fact that Gaite insisted on a bond to guarantee payment of the P65,000, and not only
upon a bond by Fonacier, the Larap Mines & Smelting Co., and the company's stockholders, but
also on one by a surety company; and the fact that appellants did put up such bonds indicates that
they admitted the definite existence of their obligation to pay the balance of P65,000.

3) To subordinate the obligation to pay the remaining P65,000 to the sale or shipment of the ore as
a condition precedent, would be tantamount to leaving the payment at the discretion of the debtor,
for the sale or shipment could not be made unless the appellants took steps to sell the ore.

Appellants would thus be able to postpone payment indefinitely. The desirability of avoiding such
a construction of the contract Exhibit "A" needs no stressing.

4) Assuming that there could be doubt whether by the wording of the contract the parties intended
a suspensive condition or a suspensive period (dies ad quem) for the payment of the P65,000, the
rules of interpretation would incline the scales in favor of "the greatest reciprocity of interests",
since sale is essentially onerous. The Civil Code of the Philippines, Article 1378, paragraph 1, in
fine, provides:

"if the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of
interests."

and there can be no question that greater reciprocity obtains if the buyer's obligation is deemed to
be actually existing, with only its maturity (due date) postponed or deferred, than if such
obligation were viewed as non-existent or not binding until the ore was sold.

The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on credit,
and not an aleatory contract where the transferor, Gaite, would assume the risk of not being paid at
all; and that the previous sale or shipment of the ore was not a suspensive condition for the
payment of the balance of the agreed price, but was intended merely to fix the future date of the
payment.

This issue settled, the next point of inquiry is whether appellants, Fonacier and his sureties, still
have the right to insist that Gaite should wait for the sale or shipment of the ore before receiving
payment; or, in other words, whether or not they are entitled to take full advantage of the period
granted them for making the payment.

We agree with the court below that the appellants have forfeited the right to compel Gaite to wait
for the sale of the ore before receiving payment of the balance of P65,000, because of their failure
to renew the bond of the Far Eastern Surety Company or else replace it with an equivalent
guarantee. The expiration of the bonding company's undertaking on December 8, 1955
substantially reduced the security of the vendor's rights as creditor for the unpaid P65,000, a
security that Gaite considered essential and upon which he had insisted when he executed the deed
of sale of the ore to Fonacier (Exhibit "A"). The case squarely comes under paragraphs 2 and 3 of
Article 1198 of the Civil Code of the Philippines:

(1) . . .

(2) When he does not furnish to the creditor the guaranties or securities which he has promised.

(3) When by his own acts he has impaired said guaranties or securities after their establishment,
and when through fortuitous event they disappear, unless he immediately gives new ones equally
satisfactory."

Appellants' failure to renew or extend the surety company's bond upon its expiration plainly
impaired the securities given to the creditor (appellee Gaite), unless immediately renewed or
replaced.
There is no merit in appellants' argument that Gaite's acceptance of the surety company's bond
with full knowledge that on its face it would automatically expire within one year was a waiver of
its renewal after the expiration date. No such waiver could have been intended, for Gaite stood to
lose and had nothing to gain thereby; and if there was any, it could be rationally explained only if
the appellants had agreed to sell the ore and pay Gaite before the surety company's bond expired
on December 8, 1955. But in the latter case the defendants- appellants' obligation to pay became
absolute after one year from the transfer of the ore to Fonacier by virtue of the deed Exhibit "A."

All the alternatives, therefore, lead to the same result: that Gaite acted within his rights in
demanding payment and instituting this action one year from and after the contract (Exhibit "A")
was executed, either because the appellant debtors had impaired the securities originally given and
thereby forfeited any further time within which to pay; or because the term of payment was
originally of no more than one year, and the balance of P65,000 became due and payable
thereafter.

Coming now to the second issue in this appeal, which is whether there were really 24,000 tons of
iron ore in the stockpiles sold by appellee Gaite to appellant Fonacier, and whether, if there had
been a short-delivery as claimed by appellants, they are entitled to the payment of damages, we
must, at the outset, stress two things: first, that this is a case of a sale of a specific mass of fungible
goods for a single price or a lump sum, the quantity of "24,000 tons of iron ore, more or less",
stated in the contract Exhibit "A", being a mere estimate by the parties of the total tonnage weight
of the mass; and second, that the evidence shows that neither of the parties had actually measured
or weighed the mass, so that they both tried to arrive at the total quantity by making an estimate of
the volume thereof in cubic meters and then multiplying it by the estimated weight per ton of each
cubic meter.

The sale between the parties is a sale of a specific mass of iron ore because no provision was made
in their contract for the measuring or weighing of the ore sold in order to complete or perfect the
sale, nor was the price of P75,000 agreed upon by the parties based upon any such measurement
(see Art. 1480, second par., New Civil Code). The subject-matter of the sale is, therefore, a
determinate object, the mass, and not the actual number of units or tons contained therein, so that
all that was required of the seller Gaite was to deliver in good faith to his buyer all of the ore
found in the mass, notwithstanding that the quantity delivered is less than the amount estimated by
them (Mobile Machinery & Supply Co., Inc. vs. York Oilfield Salvage Co., Inc. 171 So. 872,
applying art. 2459 of the Luisiana Civil Code). There is no charge in this case that Gaite did not
deliver to appellants all the ore found in the stockpiles in the mining claims in question; Gaite had,
therefore, complied with his promise to deliver, and appellants in turn are bound to pay the lump
price.

But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy, not a definite
mass, but approximately 24,000 tons of ore, so that any substantial difference in this quantity
promised and the quantity delivered would entitle the buyers to recover damages for the short-
delivery, was there really a short- delivery in this case?

We think not. As already stated, neither of the parties had actually measured or weighed the whole
mass of ore cubic meter by cubic meter, or ton by ton. Both parties predicate their respective
claims only upon an estimated number of cubic meters of ore multiplied by the average tonnage
factor per cubic meter.

Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the stockpiles of ore
that he sold to Fonacier, while appellants contend that by actual measurement, their witness
Cipriano Manlañgit found the total volume of ore in the stockpiles to be only 6,609 cubic meters.
As to the average weight in tons per cubic meter, the parties are again in disagreement, with
appellants claiming the correct tonnage factor to be 2.18 tons to a cubic meter, while appellee
Gaite claims that the correct tonnage factor is about 3.7.

In the face of the conflict of evidence, we take as the most reliable estimate of the tonnage factor
of iron ore in this case to be that made by Leopoldo F. Abad, chief of the Mines and Metallurgical
Division of the Bureau of Mines, a government pensionado to the States and a mining engineering
graduate of the Universities of Nevada and California, with almost 22 years of experience in the
Bureau of Mines. This witness placed the tonnage factor of every cubic meter of iron ore at
between 3 metric tons as minimum to 5 metric tons as maximum. This estimate, in turn, closely
corresponds to the average tonnage factor of 3.3 adopted in his corrected report (Exhibits "FF" and
"FF- 1") by engineer Nemesio Gamatero, who was sent by the Bureau of Mines to the mining
claims involved at the request of appellant Krakower, precisely to make an official estimate of the
amount of iron ore in Gaite's stockpiles after the dispute arose.

Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles made by
appellants' witness Cipriano Manlañgit is correct, if we multiply it by the average tonnage factor
of 3.3 tons to a cubic meter, the product is 21,809.7 tons, which is not very far from the estimate
of 24,000 tons made by appellee Gaite, considering that actual weighing of each unit of the mass
was practically impossible, so that a reasonable percentage of error should be allowed anyone
making an estimate of the exact quantity in tons found in the mass. It must not be forgotten that
the contract Exhibit "A" expressly stated the amount to be 24,000 tons, more or less. (cf. Pine
River Logging & Improvement Co. vs. U. S., 186 U.S. 279, 46, L. Ed. 1164).

There was, consequently, no short-delivery in this case as would entitle appellants to the payment
of damages, nor could Gaite have been guilty of any fraud in making any misrepresentation to
appellants as to the total quantity of ore in the stockpiles of the mining claims in question, as
charged by appellants since Gaite's estimate appears to be substantially correct.

WHEREFORE, finding no error in the decision appealed from, we hereby affirm the same, with
costs against appellants.

Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon, De Leon and Natividad,
JJ., concur.
2
||| (Gaite v. Fonacier, G.R. No. L-11827, [July 31, 1961], 112 PHIL 720-733)

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373 PHIL 368-386
THIRD DIVISION

[G.R. No. 131784. September 16, 1999.]

FELIX L. GONZALES, petitioner, vs. THE HEIRS OF THOMAS and PAULA CRUZ, herein
represented by ELENA C. TALENS, respondents.

Felix L. Gonzales for and in his behalf.

Felix B. Lerio for private respondents.

SYNOPSIS

On December 1, 1983, Paula Ano Cruz, together with the respondents, entered into a contract of
lease/purchase with the petitioner, of a half-portion of a parcel of land containing an area of 12
hectares, more or less, and an accretion of 2 hectares more or less, situated in Rodriguez town,
Province of Rizal, and covered by Transfer Certificate of Title 12111. Petitioner paid the
P2,500.00 per hectare or P15,000.00 annual rental on the half portion of the property covered by
said title in accordance with the second provision of the contract of lease purchase and thereafter
took possession of the property installing Jesus Sambrano as his caretaker. Petitioner did not,
however, exercise his option to purchase the property immediately after the expiration of the one-
year lease on November 30, 1984, but remained in possession of the property without paying the
purchase price provided in the contract and without paying any further rentals thereon. Due to this
non-payment, demand letters were sent to petitioner demanding him to vacate the premises, but
the petitioner refused to vacate and continued possession thereof. Alleging breach of the
provisions of the contract of Lease/Purchase, the respondents filed a complaint for recovery of
possession of the property with damages. After the termination of the pre-trial conference, the trial
court proceeded to hear the case on the merits and thereafter, rendered a decision declaring that the
respondents cannot terminate the contract of lease due to their failure to notify the petitioner in
due time of their intention to that effect. Nor can they rescind the contract of purchase considering
that there was a condition precedent which the respondents failed to fulfill. The Court of Appeals
reversed the decision of the trial court and ruled that the transfer of title in the appellee's name
cannot be interpreted as a condition precedent to the payment of the agreed purchase price because
such interpretation not only run counter to the explicit provisions of the contract but also was
contrary to the normal course of things anent the sale of real property. Hence, the petition.

The Court found the petition meritorious. The Court ruled that the respondents cannot rescind the
contract because they have not caused the transfer of the TCT to their names, which is a condition
precedent to petitioner's obligations. Particularly, the ninth provision was intended to ensure that
respondents would have a valid title over the specific portion they were selling to petitioner. Only
after the title is assured may the obligation to buy the land and to pay the sums stated in the
contract be enforced within the period stipulated. Verily, the petitioner's obligation to purchase has
not yet ripened and cannot be enforced until and unless respondents can prove their title to the
property subject of the contract. Accordingly, the petition was granted and the appealed decision
was reversed and set aside.

SYLLABUS

1. CIVIL LAW; SALES; ONE CAN SELL ONLY WHAT ONE OWNS OR IS AUTHORIZED
TO SELL, AND THE BUYER CAN ACQUIRE NO MORE THAN WHAT THE SELLER CAN
TRANSFER LEGALLY; CASE AT BAR. — It is a well-settled principle in law that no one can
give what one does not have — nemo dat quod non habet. Accordingly, one can sell only what one
owns or is authorized to sell, and the buyer can acquire no more than what the seller can transfer
legally. Because the property remained registered in the names of their predecessors-in-interest,
private respondents could validly sell only their undivided interest in the estate of Severo Cruz, the
extent of which was however not shown in the records. There being no partition of the estate thus
far, there was no guarantee as to how much and which portion would be adjudicated to
respondents.

2. ID.; ID.; IN A CONTRACT OF SALE, TITLE TO THE PROPERTY PASSES TO THE

VENDEE UPON DELIVERY OF THING SOLD; CASE AT BAR. — In a contract of sale, the
title to the property passes to the vendee upon the delivery of the thing sold. In this case, the
respondent could not deliver ownership or title to a specific portion of the yet undivided property.
True, they could have intended to sell their hereditary interest, but in the context of the Contract of
Lease/Purchase, the parties under paragraph nine wanted the specific portion of the land to be
segregated, identified and specifically titled. Hence, by the said Contract, the respondents as
sellers were given a maximum of four years within which to acquire a separate TCT in their
names, preparatory to the execution of the deed of sale and the payment of the agreed price in the
manner described in paragraph nine. DHESca

3. ID.; OBLIGATIONS AND CONTRACTS; CONDITION DEFINED; WHEN THE CONSENT

OF A PARTY TO A CONTRACT IS GIVEN SUBJECT TO THE FULFILLMENT OF A
SUSPENSIVE CONDITION, THE CONTRACT IS NOT PERFECTED UNLESS THAT
CONDITION IS FIRST COMPLIED WITH; CASE AT BAR. — Condition has been defined as
"every future and uncertain event upon which an obligation or provision is made to depend. It is a
future and uncertain event upon which the acquisition or resolution of rights is made to depend by
those who execute the juridical act." Without it, the sale of the property under the Contract cannot
be perfected, and petitioner cannot be obliged to purchase the property. "When the consent of a
party to a contract is given subject to the fulfillment of a suspensive condition, the contract is not
perfected unless that condition is first complied with."

4. ID.; ID.; WHEN THE OBLIGATION ASSUMED BY A PARTY IS EXPRESSLY

SUBJECTED TO A CONDITION, THE OBLIGATION CANNOT BE ENFORCED AGAINST
HIM UNLESS THE CONDITION IS COMPLIED WITH; CASE AT BAR. — The Court has held
that "[w]hen the obligation assumed by a party to a contract is expressly subjected to a condition,
the obligation cannot be enforced against him unless the condition is complied with."
Furthermore, "[t]he obligatory force of a conditional obligation is subordinated to the happening
of a future and uncertain event, so that if that event does not take place, the parties would stand as
if the conditional obligation had never existed." In this case, the obligation of the petitioner to buy
the land cannot be enforced unless respondents comply with the suspensive condition that they
acquire first a separate and distinct TCT in their names. The suspensive condition not having been
fulfilled, then the obligation of the petitioner to purchase the land has not arisen.

5. ID.; ID.; THERE CAN BE NO RESCISSION OF AN OBLIGATION AS YET NON-

EXISTENT, BECAUSE THE SUSPENSIVE CONDITION HAS NOT HAPPENED; CASE AT
BAR. — Respondents cannot rescind the contract, because they have not caused the transfer of the
TCT to their names, which is a condition precedent to petitioner's obligation. This Court has held
that "there can be no rescission (or more properly, resolution) of an obligation as yet non-existent,
because the suspensive condition has not happened."

DECISION

PANGANIBAN, J p:

If a stipulation in a contract admits of several meanings, it shall be understood as bearing that

import most adequate to render it effectual. An obligation cannot be enforced unless the plaintiff
has fulfilled the condition upon which it is premised. Hence, an obligation to purchase cannot be
implemented unless and until the sellers have shown their title to the specific portion of the
property being sold. cda

The Case
Before us is a Petition for Review on Certiorari assailing the August 13, 1997 Decision 1 of the
Court of Appeals 2 in CA GR-CV No. 303754, which disposed as follows:

"WHEREFORE, the decision of the trial court dated November 16, 1990 is hereby REVERSED.
The appellee FELIX GONZALES is hereby ordered to surrender possession of the property
covered by the Contract of Lease/Purchase to the appellants, Heirs of Thomas and Paula Cruz, and
to pay to the appellants the following amounts:

1. P15,000.00 per annum as rentals counted from December 1, 1984 until the appellants shall have
recovered possession of the property subject of the Contract of Lease/Purchase;

2. P15,000.00 as attorney's fees; and

3. Costs of suit." 3

On the other hand, the trial court 4 Decision, 5 which was reversed by the CA, ruled as follows:

"WHEREFORE, premises considered, this Court hereby renders judgment in favor of the
defendant, Felix Gonzales, and against the plaintiffs, as follows:

(1) Ordering the dismissal of the case;

(2) Sentencing the plaintiffs, jointly and severally, the sum of P20,000.00 as moral damages and
the other sum of P10,000.00 as and for attorney's fees; and

(3) To pay the costs." 6

The Facts

We hereby reproduce, unedited, the Court of Appeals' summary of the facts of this case as follows:

"On December 1, 1983, Paula Año Cruz together with the plaintiffs heirs of Thomas and Paula
Cruz, namely Ricardo A. Cruz, Carmelita M. Cruz, Salome A. Cruz, Irenea C. Victoria, Leticia C.
Salvador and Elena C. Talens, entered into a Contract of Lease/Purchase with the defendant, Felix
L. Gonzales, the sole proprietor and manager of Felgon Farms, of a half-portion of a 'parcel of
land containing an area of 12 hectares, more or less, and an accretion of 2 hectares, more or less,
situated in Rodriguez Town, Province of Rizal' and covered by Transfer Certificate of Title No.
12111 (Exhibit A, p. 157, Records). The contract of Lease/Purchase contains the following
provisions:

'1. The terms of this Contract is for a period of one year upon the signing thereof. After the period
of this Contract, the LESSEE shall purchase the property on the agreeable price of One Million
Pesos (P1,000,000.00) payable within Two (2) Years period with an interest of 12% per annum
subject to the devalued amount of the Philippine Peso, according to the following schedule of
payment:

Upon the execution of the Deed of Sale 50% — and thereafter 25% every six (6) months
thereafter, payable within the first ten (10) days of the beginning of each period of six (6) months.

'2. The LESSEE shall pay by way of annual rental an amount equivalent to Two Thousand Five
Hundred (P2,500.00) Pesos per hectare, upon the signing of this contract on Dec. 1, 1983.

xxx xxx xxx

'9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and distinct
T.C.T. over the herein leased portion to the LESSEE within a reasonable period of time which
shall not in any case exceed four (4) years, after which a new Contract shall be executed by the
herein parties which shall be the same in all respects with this Contract of Lease/Purchase insofar
as the terms and conditions are concerned.

xxx xxx xxx

(Exhibits A, A-1; pp. 157-158. Records)'

"The defendant Gonzales paid the P2,500.00 per hectare or P15,000.00 annual rental on the half-
portion of the property covered by Transfer Certificate of Title No. 12111 in accordance with the
second provision of the Contract of Lease/Purchase (p. 12, TSN, September 14, 1989) and
thereafter took possession of the property, installing thereon the defendant Jesus Sambrano as his
caretaker (pp. 16-17, 27, TSN, December 12, 1989). The defendant Gonzales did not, however,
exercise his option to purchase the property immediately after the expiration of the one-year lease
on November 30, 1984 (pp. 19-20, TSN, September 14, 1989). He remained in possession of the
property without paying the purchase price provided for in the Contract of Lease/Purchase (Ibid.)
and without paying any further rentals thereon (p. 36, TSN, November 7, 1989). LLjur

"A letter was sent by one of the plaintiffs-heirs Ricardo Cruz to the defendant Gonzales informing
him of the lessors' decision to rescind the Contract of Lease/Purchase due to a breach thereof
committed by the defendant (Exhibit C; p. 162, Records). The letter also served as a demand on
the defendant to vacate the premises within 10 days from receipt of said letter (Ibid.).

"The defendant Gonzales refused to vacate the property and continued possession thereof (p. 2,
Record). The matter was therefore brought before the barangay captain of San Isidro, but owing to
the defendant's refusal to appear before the barangay, a certification allowing the case to be
brought to Court was issued on March 18, 1987 (Exhibit E; p. 165, Records).

"The lessor, Paula Año Cruz died the following day, March 19, 1987 (p. 9, TSN, September 14,
1989).

"A final demand letter to vacate the premises was sent by the remaining lessors who are also the
heirs of the deceased lessor Paula Año Cruz, through their counsel on August 24, 1987 which the
defendant Gonzales received but did not heed (Exhibits D and D-1; pp. 163-164, Records).

"The property subject of the Contract of Lease/Purchase is currently the subject of an Extra-
Judicial Partition (Exhibits G and G-1; pp. 168-169, Records). Title to the property remains in the
name of the plaintiffs' predecessors-in-interest, Bernardina Calixto and Severo Cruz (Exhibit B; p.
160, Records).

"Alleging breach of the provisions of the Contract of Lease/Purchase, the plaintiffs filed a
complaint for recovery of possession of the property — subject of the contract with damages, both
moral and compensatory and attorney's fees and litigation expenses (p. 3, Records).

"Alleging breach of paragraph nine of the Contract of Lease/Purchase, and payment of only
P50,000.00 of the P500,000.00 agreed down payment on the purchase price of P1,000,000.00, the
defendant Gonzales filed his answer on November 23, 1987 praying for a dismissal of the
complaint filed against him and an award of moral, exemplary and actual damages, as well as
litigation expenses (pp. 19-22, Records).

"The defendant Sambrano was, upon motion, declared in default for failure to file an answer
despite valid service of summons (p. 30, Records).

"The parties limited the issues to be resolved to:

(1) Whether or not paragraph 9 of the contract is a condition precedent before the defendant is to
pay the down payment;

(2) Whether or not plaintiffs can rescind the Contract of Lease/Purchase; and

(3) Whether or not plaintiffs can terminate the Contract of Lease. (p. 4, Decision; p. 262, Records)

"After the termination of the pre-trial conference, the trial court proceeded to hear the case on the
merits and arrived at its appealed decision based on the following findings and conclusions:

'Paragraph 9 of the contract clearly indicates that the lessors-plaintiffs shall obtain a Transfer
Certificate of Title in the name of the lessee within 4 years before a new contract is to be entered
into under the same terms and conditions as the original Contract of Lease/Purchase. Thus, before
a deed of Sale can be entered into between the plaintiffs and the defendant, the plaintiffs have to
obtain the Transfer Certificate of Title in favor of the defendant. Article 1181 of the New Civil
Code states that: 'In conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of the event
which constitutes the condition.' When the obligation assumed by a party to a contract is expressly
subjected to a condition, the obligation cannot be enforced against him unless the condition is
complied with (Wise & Co. vs. Kelly, 37 Phil. 695; PNB vs. Philippine Trust Co., 68 Phil. 48).
LLjur

'The failure of the plaintiffs to secure the Transfer Certificate of Title, as provided for in the
contract, does not entitle them to rescind the contract[.] Article 1191 of the New Civil Code states
that: 'The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him. The injured party may choose between the
fulfillment of the obligation, with the payment of damages in either case. He may seek rescission,
even after he has chosen fulfillment, if the latter should become impossible . . . .' The power to
rescind is given to the injured party. Where the plaintiff is the party who did not perform, he is not
entitled to insist upon the performance of the contract by the defendant or recover damages by
reason of his own breach (Mateos vs. Lopez, 6 Phil. 206; Borque vs. Yu Chipco, 14 Phil. 95). An
action for specific performance of a contract is an equitable proceeding, and he who seeks to
enforce it must himself be fair and reasonable, and do equity (Seva vs. Berwin, 48 Phil. 581). In
this case, plaintiffs failed to comply with the conditions precedent after 2-1/2 years from the
execution of the contract so as to entitle them to rescind the contract. Although the contract stated
that the same be done within 4 years from execution, still, the defendant has to be assured that the
land subject of the case will be transferred in his name without any encumbrances, as the Extra-
Judicial Partition dated July 17, 1989 was being processed, and continues to be in process to this
date. The failure to secure the Transfer Certificate of Title in favor of the defendant entitles not the
plaintiffs but, rather, the defendant to either rescind or to ask for specific performances.

'Are the plaintiffs entitled to terminate the Contract of Lease? Article 1670 of the New Civil Code
states that:

If at the end of the contract the lessee should continue enjoying the thing leased for fifteen days
with the acquies[c]ence of the lessor and unless a notice to the contrary by either party has
previously been given, it is understood that there is an implied new lease, not for the period of the
original contract, but for the time established in Articles 1682 and 1687. The other terms of the
original contract shall be revived.

'Article 1682 of the New Civil Code states that:

The lease of a piece of rural land, when its duration has not been fixed, is understood to have been
made for all the time necessary for the gathering of the fruits which the whole estate leased may
yield in one year, or which it may yield once, although two or more years may have to elapse for
the purpose.

'The plaintiffs filed the complaint on October 12, 1987 after making an extra-judicial demand on
July 2, 1986. The contract was entered into on December 1, 1983. The demand was thus made
more than a year and a half from the expiry date of the original lease considering that there was no
payment made for the second year of the lease. If one has to consider the fact that the defendant
was given the option to purchase the property after two years, then, the lease would presumably
run for at least two years. If that is so, then, the demand was made seven months after the
expiration of the two-year lease. Still, this demand by the plaintiffs will come under the implied
new lease of Articles 1682 and 1670 so that the plaintiffs are not entitled to terminate the Contract
of Lease.

'In sum, the plaintiffs cannot terminate the Contract of Lease due to their failure to notify the
defendant in due time of their intention to that effect. Nor can they rescind the Contract of
Purchase in view of the fact that there is a condition precedent which the plaintiffs have not
fulfilled. It is the defendant now who has the option to either rescind or demand the performance
of the contract. Moreover, according to Article 1654 of the New Civil Code, the lessor is obliged
to deliver the thing which is the object of the contract in such condition as to render it fit for the
use intended. Considering that the lessors-plaintiffs have not delivered the property in whole over
the protest of the defendant, the latter suffered damages therefor.' (p. 4-6, Decision; pp. 262-264,
Records)

"Their complaint thus dismissed, the plaintiffs, now appellants, assign the trial court of having
committed the following errors:

THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT PLAINTIFFS-APPELLANTS

COULD NOT VALIDLY RESCIND AND TERMINATE THE LEASE/PURCHASE
CONTRACT (EXHIBIT 'A') AND THEREAFTER TO TAKE POSSESSION OF THE LAND IN
QUESTION AND EJECT THEREFROM DEFENDANTS-APPELLEES.

II

THE TRIAL COURT EQUALLY ERRED IN NOT GRANTING THE RELIEFS PLEADED
AND PRAYED FOR BY PLAINTIFFS-APPELLANTS IN THEIR COMPLAINT. (p. 42, Rollo)

"The case was submitted for decision without the appellee's brief as per the Court's resolution
dated July 8, 1992 (p. 71, Rollo)." cdrep

Ruling of the Court of Appeals

The Court of Appeals reversed the trial court in this wise:

"The trial court, in its decision interpreted the ninth provision of the Contract of Lease/Purchase to
mean that before the appellee exercises his option to purchase the property by paying the 50% plus
interest on the P1,000,000.00 purchase price, the appellants must first transfer the title to the
property in the appellee's name. The Court finds this interpretation of the provision strained if not
altogether absurd. The transfer of title to the property in the appellee's name cannot be interpreted
as a condition precedent to the payment of the agreed purchase price because such interpretation
not only runs counter [to] the explicit provisions of the contract but also is contrary to the normal
course of things anent the sale of real properties. The terms of the contract [are] explicit and
require no interpretation. Upon the expiration of the lease, the lessee shall purchase the property.
Besides, the normal course of things anent the sale of real properties dictates that there must first
be payment of the agreed purchase price before transfer of title to the vendee's name can be made.

"This was precisely what the appellants and Paula Año Cruz had in mind when they had the ninth
provision incorporated in the Contract of Lease/Purchase. They had asked for a period of 4 years
from the time they receive the downpayment of 50% within which to have [the] title to the
property transferred in the name of the appellee. The reason for this four (4) year period is [that]
title to the property still remains in the name of the original owners, the predecessors-in-interest of
the herein appellants and [transferring] the title to their names and eventually to the lessee-
purchaser, appellee herein, would take quite some time.

"The appellee wanted to have the title to the property transferred in his name first before he
exercises his option to purchase allegedly in accordance with the ninth provision of the contract.
But the ninth provision does not give him this right. A reading of the contract in its entirety shows
that the 4 year period asked for by the appellants within which to have title to the property
transferred in the appellee's name will only start to run when the appellee exercises his option to
purchase. Since the appellee never exercised his option to purchase, then appellee is not entitled to
have the title to the property transferred in his name."

Attributing reversible errors to the appellate court, petitioner elevated the case to this Court. 7

The Issues

In his Memorandum, 8 petitioner submits the "following main issues":

"I. Whether or not the Court of Appeals has gravely erred and committed grave abuse of discretion
in the interpretation of [the] law between the parties.

"II. Whether or not the Court of Appeals committed serious mistakes in the finding of facts which
resulted [in] departing from the usual course of judicial proceedings."

For these issues to be resolved, petitioner asks this Court to answer the following questions:

"1. Is there a conflict between the statement in paragraph 1 of the Lease/Purchase Contract and
that [in] paragraph No. 9 thereof?

"2. Is paragraph 9 of the Lease/Purchase Contract a condition precedent before petitioner could
exercise his option to buy the property?

"3. Can plaintiff rescind or terminate the Contract of Lease after the one-year period?"
In fine, the resolution of this case depends upon the proper interpretation of paragraph nine of the
Contract.

The Court's Ruling

The Petition is meritorious.

Main Issue:
Interpretation of Paragraph Nine

In its first paragraph, the disputed agreement provides that petitioner shall lease the property for
one year, after which he "shall purchase" it. Paragraph nine, on the other hand, requires herein
respondents to obtain a separate and distinct Transfer Certificate of Title (TCT) over the property,
viz.:

"9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and distinct
T.C.T. over the lease portion to the LESSEE within a reasonable period of time which shall not in
any case exceed four (4) years, after which a new Contract shall be executed by the herein parties
which shall be the same in all respects with this Contract of Lease/Purchase insofar as the terms
and conditions are concerned."

Alleging that petitioner has not purchased the property after the lapse of one year, respondents
seek to rescind the Contract and to recover the property. Petitioner, on the other hand, argues that
he could not be compelled to purchase the property, because respondents have not complied with
paragraph nine, which obligates them to obtain a separate and distinct title in their names. He
contends that paragraph nine was a condition precedent to the purchase of the property. cdll

To be sure, this paragraph — and the entire agreement, for that matter — is not a model of how a
contract should be worded. It is an invitation to a litigation, as in fact the parties had to go all to
way up to this Court to plead for a resolution of their conflict which is rooted in their failure to
express themselves clearly. Small wonder, even the two lower courts gave contradictory
understanding of this provision, thereby necessitating the intervention of the highest court of the
land.

Both the trial court and the Court of Appeals (CA) interpreted this provision to mean that the
respondents had obliged themselves to obtain a TCT in the name of petitioner-lessee. The trial
court held that this obligation was a condition precedent to petitioner's purchase of the property.
Since respondents had not performed their obligation, they could not compel petitioner to buy the
parcel of land. The CA took the opposite view, holding that the property should be purchased first
before respondents may be obliged to obtain a TCT in the name of petitioner-lessee-buyer.

As earlier noted, petitioner disagrees with the interpretation of the two courts and maintains that
respondents were obligated to procure a TCT in their names before he could be obliged to
purchase the property in question.

Basic is the rule in the interpretation of contracts that if some stipulation therein should admit of
several meanings, it shall be understood as bearing that import most adequate to render it
effectual. 9 Considering the antecedents of the ownership of the disputed lot, it appears that
petitioner's interpretation renders clause nine most effectual.

The record shows that at the time the contract was executed, the land in question was still
registered in the name of Bernardina Calixto and Severo Cruz, respondents' predecessors-in-
interest. There is no showing whether respondents were the only heirs of Severo Cruz or whether
the other half of the land in the name of Bernardina Calixto was adjudicated to them by any
means. In fact, they admit that extrajudicial proceedings were still ongoing. Hence, when the
Contract of Lease/Purchase was executed, there was no assurance that the respondents were
indeed the owners of the specific portion of the lot that petitioner wanted to buy, and if so, in what
concept and to what extent.

Thus, the clear intent of the ninth paragraph was for respondents to obtain a separate and distinct
TCT in their names. This was necessary to enable them to show their ownership of the stipulated
portion of the land and their concomitant right to dispose of it. Absent any title in their names,
they could not have sold the disputed parcel of land.

It is a well-settled principle in law that no one can give what one does not have — nemo dat quod
non habet. Accordingly, one can sell only what one owns or is authorized to sell, and the buyer can
acquire no more than what the seller can transfer legally. 10

Because the property remained registered in the names of their predecessors-in-interest, private
respondents could validly sell only their undivided interest in the estate of Severo Cruz, the extent
of which was however not shown in the records. There being no partition of the estate thus far,
there was no guarantee as to how much and which portion would be adjudicated to respondents.

In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing
sold. 11 In this case, the respondent could not deliver ownership or title to a specific portion of the
yet undivided property. True, they could have intended to sell their hereditary interest, but in the
context of the Contract of Lease/Purchase, the parties under paragraph nine wanted the specific
portion of the land to be segregated, identified and specifically titled. Hence, by the said Contract,
the respondents as sellers were given a maximum of four years within which to acquire a separate
TCT in their names, preparatory to the execution of the deed of sale and the payment of the agreed
price in the manner described in paragraph nine. prLL

This interpretation is bolstered by the P50,000 petitioner advanced to respondents in order to help
them expedite the transfer of the TCT to their names. Ineluctably, the intention of the parties was
to have the title transferred first to respondents' names as a condition for the completion of the
purchase.
In holding that clause nine was not a condition precedent to the purchase of the property, the CA
relied on a literal interpretation to the effect that the TCT should be obtained in the name of the
petitioner-vendee. It reasoned that the title could be transferred to the name of the buyer only after
the completion of the purchase. Thus, petitioner should first purchase the property before
respondents could be obliged to transfer the TCT to his name.

We disagree. The literal interpretation not only ignores the factual backdrop of the case; it also
utilizes a faulty parsing of paragraph nine, which should purportedly read as follows: "The
lessors . . . shall undertake to obtain a separate and distinct TCT . . . to the LESSEE within a
reasonable period of time which shall not in any case exceed four (4) years . . . ." Read in its
entirety, however, paragraph nine does not say that the TCT should be obtained in the name of the
lessee. In fact, paragraph nine requires respondents to obtain a "TCT over the herein leased
portion to the LESSEE," thereby showing that the crucial phrase "to the LESSEE" adverts to "the
leased portion" and not to the name which should appear in the new TCT.

Furthermore, the CA interpretation ignores the other part of paragraph nine, stating that after a
separate TCT had been obtained, "a new contract shall be executed by the herein parties which
shall be the same in all respects with this Contract of Lease/Purchase insofar as the terms and
conditions are concerned."

If, as the CA held, petitioner should purchase the property first before the title can be transferred
to his name, why should there be a waiting period of four years before the parties can execute the
new contract evidencing the sale? Why should the petitioner still be required to pay rentals after it
purchases and pays for the property? The Contract could not have envisioned this absurd scenario.

Clearly, the appellate court's literal interpretation of the first portion of paragraph nine renders the
latter portion thereof ineffectual. In other words, that portion can only mean that the respondents
should first obtain a TCT in their names, after which petitioner is given time to purchase and pay
for the property.

Respondents insist that "the obligation of petitioner to buy the disputed land immediately after the
termination of the one year lease period is explicit." 12 However, it is more reasonable to state that
the first paragraph was effectively modified by the ninth. To repeat, petitioner can be compelled to
perform his obligation under the first paragraph, only after respondents have complied with the
ninth. Unless and until respondents have done so, the first paragraph cannot be enforced against
petitioner.

In sum, we hold that the ninth provision was intended to ensure that respondents would have a
valid title over the specific portion they were selling to petitioner. Only after the title is assured
may the obligation to buy the land and to pay the sums stated in the Contract be enforced within
the period stipulated. Verily, the petitioner's obligation to purchase has not yet ripened and cannot
be enforced until and unless respondents can prove their title to the property subject of the
Contract.

Secondary Issues:

Ninth Clause Was a Condition Precedent

Because the ninth clause required respondents to obtain a separate and distinct TCT in their names
and not in the name of petitioner, it logically follows that such undertaking was a condition
precedent to the latter's obligation to purchase and pay for the land. Put differently, petitioner's
obligation to purchase the land is a conditional one and is governed by Article 1181 of the Civil
Code. 13

Condition has been defined as "every future and uncertain event upon which an obligation or
provision is made to depend. It is a future and uncertain event upon which the acquisition or
resolution of rights is made to depend by those who execute the juridical act." 14 Without it, the
sale of the property under the Contract cannot be perfected, and petitioner cannot be obliged to
purchase the property. "When the consent of a party to a contract is given subject to the fulfillment
of a suspensive condition, the contract is not perfected unless that condition is first complied
with." 15

The Court has held that "[w]hen the obligation assumed by a party to a contract is expressly
subjected to a condition, the obligation cannot be enforced against him unless the condition is
complied with." 16 Furthermore, "[t]he obligatory force of a conditional obligation is subordinated
to the happening of a future and uncertain event, so that if that event does not take place, the
parties would stand as if the conditional obligation had never existed." 17

In this case, the obligation of the petitioner to buy the land cannot be enforced unless respondents
comply with the suspensive condition that they acquire first a separate and distinct TCT in their
names. The suspensive condition not having been fulfilled, then the obligation of the petitioner to
purchase the land has not arisen. LLpr

Respondents Cannot Rescind the Contract

In the same vein, respondents cannot rescind the contract, because they have not caused the
transfer of the TCT to their names, which is a condition precedent to petitioner's obligation. This
Court has held that "there can be no rescission (or more properly, resolution) of an obligation as
yet non-existent, because the suspensive condition has not happened." 18

Since the reversal of the CA Decision is inevitable, the trial court's judgment should be reinstated.
However, we find no sufficient factual or legal justifications for the awards of moral damages and
attorney's fees.

WHEREFORE, the petition is GRANTED and the appealed Decision is REVERSED and SET
ASIDE. The Decision of the trial court is REINSTATED, but the award of moral damages and
attorney's fees is DELETED for lack of basis. No costs.

SO ORDERED.

Melo, Purisima and Gonzaga-Reyes, JJ., concur.

Vitug, J., took no part; did not participate in deliberations (in PHILJA on official business).

Footnotes
1.Penned by Justice Ramon A. Barcelona; concurred in by Justices Jesus M. Elbinias (chairman)
and Artemio G. Tuquero (member)

2.Eleventh Division.

3.CA Decision, p. 14; rollo, p. 59.

4.Regional Trial Court of San Mateo, Rizal, Branch 75.

5.Written by Judge Cipriano D. Roma.

6.RTC Decision, pp. 6-7; rollo, pp. 43-44.

7.This case was deemed submitted for decision on January 6, 1999, upon receipt by this Court of
respondents' Memorandum. Petitioner's Memorandum was filed earlier.

8.See pp. 10-11; rollo, pp. 103-104.

9.Article 1373, Civil Code.

10.Segura v. Segura, 165 SCRA 368, September 19, 1988.

11.Dawson v. Register of Deeds, GR No. 120600, September 22, 1998, per Panganiban, J.; Salazar
v. Court of Appeals, 258 SCRA 317, July 5, 1996; Luzon Brokerage Co., Inc. v. Maritime
Building Co., Inc., 46 SCRA 381, August 18, 1972; Pingol v. Court of Appeals, 226 SCRA 118,
September 6, 1993.

12.Respondents' Memorandum, p. 11; rollo, p. 123.

13.The provision reads:

"ARTICLE 1181. In conditional obligations, the acquisition of rights, as well as the

extinguishment or loss of those already acquired, shall depend upon the happening of the event
which constitutes the condition."
14.Arturo Tolentino, Civil Code of the Philippines, Vol. IV, p. 144; citing Brugi, p. 108; 1
Rugigiero 289; 1 Colin & Capitant 194.

15.Ruperto v. Kosea, 26 Phil 227, December 4, 1913, per Torres, J.

16.Wise & Co. v. Kelly, 37 Phil 696, February 21, 1918, per Fisher J.; PNB v. Philippine Trust
Co., 68 Phil 48, May 12, 1939, per Diaz, J.; Roque v. Lapuz, 96 SCRA 741.

17.Rose Packing Company, Inc. v. Court of Appeals, 167 SCRA 309, November 14, 1988, per
Paras, J.; Gaite v. Fonacier, 2 SCRA 831.

18.Luzon Brokerage Co., Inc v. Maritime Building Co., Inc., 46 SCRA 381, August 18, 1972, per
Reyes, J.B.L., J.

2
||| (Gonzales v. Heirs of Cruz, G.R. No. 131784, [September 16, 1999], 373 PHIL 368-386)

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49 PHIL 142-146

EN BANC
[G.R. No. 24190. July 13, 1926.]

GEORGE L. PARKS, plaintiff-appellant, vs. TARLAC, MUNICIPALITY OF TARLAC,

CONCEPCION CIRER, and JAMES HILL, her husband, defendants-appellees.

Jos. N. Wolfson for appellant.

Provincial Fiscal Lopez de Jesus for the Province and Municipality of Tarlac.

SYLLABUS

1. IMMOVABLE PROPERTY; CONDITIONAL DONATION, CONDITION PRECEDENT. —

The characteristic of condition. precedent is that the acquisition of the right is not effected while
said condition is not complied with or is not deemed complied with. Meanwhile nothing is
acquired and there is only an expectancy of right. Consequently, when a condition is imposed, the
compliance of which cannot be effected except when the right is deemed acquired, such condition
cannot be a condition precedent.

2. ID.; ID.; ACTION FOR REVOCATION; PRESCRIPTION. — The action for the revocation of
a donation is not excluded from the statute of limitations And not only this, — the law itself
recognizes the prescriptibility of the action for the revocation of a donation, providing a special
period of five years for the revocation by the subsequent birth of children (art. 646, Civil Code),
and one year for the revocation by reason of ingratitude. If no special period is provided for the
prescription of the action for revocation for noncompliance of the conditions of the donation (art.
647, Civil Code), it is because, in this respect, the donation is considered onerous and is governed
by the law or contracts and the general rules of prescription. Under the laws in force (sec. 43,
Code of Civ. Proc.) the period of prescription of this class; of action is ten years.

DECISION

AVANCEÑA, C.J p:

On October 18, 1910, Concepcion Cirer and James Hill, the owners of parcel of land No. 2
referred to in the complaint, donated it perpetually to the municipality of Tarlac, Province of
Tarlac, under certain conditions specified in the public document in which they made this
donation. The donation was accepted by Mr. Santiago de Jesus in the same document on behalf of
the municipal council of Tarlac of which he was the municipal president. The parcel thus donated
was later registered in the name of the donee, the municipality of Tarlac. On January 15, 1921,
Concepcion Cirer and James Hill sold this parcel to the herein plaintiff George L. Parks. On
August 24, 1923, the municipality of Tarlac transferred the parcel to the Province of Tarlac which,
by reason of this transfer, applied for and obtained the registration thereof in its name, the
corresponding certificate of title having been issued to it.

The plaintiff, George L. Parks, alleging that the conditions of the donation had not been complied
with and invoking the sale of this parcel of land made by Concepcion Cirer and James Hill in his
favor, brought this action against the Province of Tarlac, the municipality of Tarlac, Concepcion
Cirer and James Hill and prayed that he be declared the absolute owner entitled to the possession
of this parcel, that the transfer of the same by the municipality of Tarlac to the Province of Tarlac
be annulled, and the transfer certificate issued to the Province of Tarlac cancelled.

The lower court dismissed the complaint.

The plaintiff has no right of action. If he has any, it is only by virtue of the sale of this parcel made
by Concepcion Cirer and James Hill in his favor on January 15, 1921, but that sale cannot have
any effect. This parcel having been donated by Concepcion Cirer and James Hill to the
municipality of Tarlac, which donation was accepted by the latter, the title to the property was
transferred to the municipality of Tarlac. It is true that the donation might have been revoked for
the causes, if any provided by the law, but the fact is that it was not revoked when Concepcion
Cirer and James Hill made the sale of this parcel to the plaintiff. Even supposing that causes
existed for the revocation of this donation, still, it was necessary, in order to consider it revoked,
either that the revocation had been consented to by the donee, the municipality of Tarlac, or that it
had been judicially decreed. None of these circumstances existed when Concepcion Cirer and
James Hill sold this parcel to the plaintiff. Consequently, when the sale was made Concepcion
Cirer and James Hill were no longer the owners of this parcel and could dot have sold it to the
plaintiff, nor could the latter have acquired it from them.

But the appellant contends that a condition precedent having been imposed in the donation and the
same not having been complied with, the donation never became effective. We find no merit in
this contention. The appellant refers to the condition imposed that one of the parcels donated was
to be used absolutely and exclusively for the erection of a central school and the other for a public
park, the work to commence in both cases within the period of six months from the date of the
ratification by the parties of the document evidencing the donation. It is true that this condition has
not been complied with. The allegation, however, that it is a condition precedent is erroneous. The
characteristic of a condition precedent is that the acquisition of the right is not effected while said
condition is not complied with or is not deemed complied with. Meanwhile nothing is acquired
and there is only an expectancy of right. Consequently, when a condition is imposed, the
compliance of which cannot be effected except then the right is deemed acquired, such condition
cannot a condition precedent. In the present case the condition that a public school be erected and
a public park made of the donated land, work on the same to commence within six months from
the date of the ratification of the donation by the parties, could not be complied with except after
giving effect to the donation. The donee could not do any work on the donated land if the donation
had not really been effected, because it would be an invasion of another's title, for the land would
have continued to belong to the donor so long as the condition imposed was not complied with.

The appellant also contends that, in any event, the condition not having been complied with, even
supposing that it was not a condition precedent but subsequent, the non-compliance thereof is
sufficient cause for the revocation of the donation. This is correct. But the period for bringing an
action for the revocation of the donation has prescribed. That this action is prescriptible, there is
no doubt. There is no legal provision which excludes this class of action from the statute of
limitations. And not only this, — the law itself recognizes the prescriptibility of the action for the
revocation of a donation, providing a special period of five years for the revocation by the
subsequent birth of children (art. 646, Civil Code), and one year for their revocation by reason of
ingratitude. If no special period is provided for the prescription of the action for revocation for
noncompliance of the conditions of the donation (art. 647, Civil Code), it is because in this respect
the donation is considered onerous and is governed by the law of contracts and the general rules of
prescription. Under the laws in force (sec. 43, Code of Civ. Proc.), the period of prescription of
this class of action is ten years. The action for the revocation of the donation for this cause arose
on April 19, 1911, that is, six months after the ratification of the instrument of donation of October
18, 1910. The complaint in this action was presented July 5, 1924, more than ten years after this
cause accrued.

By virtue of the foregoing, the judgment appealed from is affirmed with the costs against the
appellant. So ordered.

Street, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.

23
||| (Parks v. Tarlac, G.R. No. 24190, [July 13, 1926], 49 PHIL 142-146)

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360 PHIL 81-94

SECOND DIVISION

[G.R. No. 126444. December 4, 1998.]

ALFONSO QUIJADA, CRESENTE QUIJADA, REYNELDA QUIJADA, DEMETRIO

QUIJADA, ELIUTERIA QUIJADA, EULALIO QUIJADA, and WARLITO QUIJADA,
petitioners, vs. COURT OF APPEALS, REGALADO MONDEJAR, RODULFO GOLORAN,
ALBERTO ASIS, SEGUNDINO RAS, ERNESTO GOLORAN, CELSO ABISO, FERNANDO
BAUTISTA, ANTONIO MACASERO, and NESTOR MAGUINSAY, respondents.
SYLLABUS

1. CIVIL LAW; DONATION; DONATION WITH A RESOLUTORY CONDITION; IF

PERFECTED, DONEE BECOMES THE OWNER OF THE PROPERTY DONATED
NOTWITHSTANDING THE CONDITION IMPOSED. — When the Municipality's acceptance
of the donation was made known to the donor, the former became the new owner of the donated
property — donation being a mode of acquiring and transmitting ownership — notwithstanding
the condition imposed by the donee. The donation is perfected once the acceptance by the donee is
made known to the donor. Accordingly, ownership is immediately transferred to the latter and that
ownership will only revert to the donor if the resolutory condition is not fulfilled. aSATHE

2. ID.; ID.; ID.; NON-FULFILLMENT THEREOF, WHEN BROUGHT TO THE KNOWLEDGE

OF THE DONOR AUTOMATICALLY REVERTS OWNERSHIP OF THE PROPERTY
DONATED AS PROVIDED. — Since no period was imposed by the donor on when must comply
with the condition, the latter remains the owner so long as he has tried to comply with the
condition within a reasonable period. Such period, however, became irrelevant herein when the
donee-Municipality manifested through a resolution that it cannot comply with the condition of
building a school and the same was made known to the donor. Only then — when the non-
fulfillment of the resolutory condition was brought to the donor's knowledge — that ownership of
the donated property reverted to the donor as provided in the automatic reversion clause of the
deed of donation.

3. ID.; ID.; ID.; DONOR'S INCHOATE INTEREST IN THE DONATED PROPERTY MAY BE
THE SUBJECT OF CONTRACTS INCLUDING A CONTRACT OF SALE. — The donor may
have an inchoate interest in the donated property during the time that ownership of the land has
not reverted to her. Such inchoate interest may be the subject of contracts including a contract of
sale.

4. ID.; LACHES; IS NEGLIGENCE OR OMISSION TO ASSERT A RIGHT WITHIN A

REASONABLE TIME GIVING RISE TO A PRESUMPTION THAT THE PARTY ENTITLED
TO ASSERT IT EITHER HAS ABANDONED OR DECLINED TO ASSERT IT; CASE AT BAR.
— As to laches, petitioner's action is not yet barred thereby. Laches presupposes failure or neglect
for an unreasonable and unexplained length of time, to do that which, by exercising due diligence,
could or should have been done earlier; "it is negligence or omission to assert a right within a
reasonable time, thus, giving rise to a presumption that the party entitled to assert it either has
abandoned or declined to assert it." Petitioners' cause of action to quiet title commenced only
when the property reverted to the donor and/or his successors-in-interest in 1987. Certainly, when
the suit was initiated the following year, it cannot be said that petitioners had slept on their rights
for a long time. The 1960's sales made by Trinidad Quijada cannot be the reckoning point as to
when petitioners' cause of action arose. They had no interest over the property at the time except
under the deed of donation to which private respondents were not privy. Moreover, petitioners had
previously filed an ejectment suit against private respondents only that it did not prosper on a
technicality.
5. ID.; SALE; A CONSENSUAL CONTRACT PERFECTED BY MERE CONSENT;
OWNERSHIP BY THE SELLER OF THE THING SOLD IS NOT AN ELEMENT OF
PERFECTION. — Sale, being a consensual contract, is perfecting by mere consent, which is
manifested the moment there is a meeting of the minds as to the offer and acceptance thereof on
three (3) elements; subject matter, price and terms of payment of the price. Ownership by the
seller on the thing sold at the time of the perfection of the contract of sale is not an element for its
perfection. What the law requires is that the seller has the right to transfer ownership at the time
the thing sold is delivered. Perfection per se does not transfer ownership which occurs upon the
actual or constructive delivery of the thing sold. A perfected contract of sale cannot be challenged
on the ground of non-ownership on the part of the seller at the time of its perfection: hence, the
sale is still valid.

6. ID.; ID,; CONSUMMATION THEREOF OCCURS UPON THE CONSTRUCTIVE OR

ACTUAL DELIVERY OF THE SUBJECT MATTER TO THE BUYER; CASE AT BAR. — The
consummation, however, of the perfected contract is another matter. It occurs upon the
constructive or actual delivery of the subject matter to the buyer when the seller of her successors-
in-interest subsequently acquires ownership thereof. Such circumstance happened in this case
when petitioners — who are Trinidad Quijada's heirs and successors-in-interest — became the
owners of the subject property upon the reversion of the ownership of the land to them.
Consequently, ownership is transferred to respondent Mondejar and those who claim their right
from him. Article 1434 of the New Civil Code supports the ruling that the seller's "title passes by
operation of law to the buyer." This rule applies not only when the subject matter of the contract of
sale is goods, but also to other kinds of property, including real property. CADHcI

7. ID.; DONATION; DONOR MAY IMPOSE ONLY REASONABLE AND JUST CONDITIONS
THEREON. — Nowhere in Article 1409 (4) is it provided that the properties of a municipality,
whether it be those for public use or its patrimonial property are outside the commerce of men.
Besides, the lots in this case were conditionally owned by the municipality. To rule that the
donated properties are outside the commerce of men would render nugatory the unchallenged
reasonableness and justness of the condition which the donor has the right to impose as owner
thereof. Moreover, the objects referred to as outsides the commerce of men are those which cannot
be appropriated, such as the open seas and the heavenly bodies.

8. ID.; DAMAGES; ATTORNEY'S FEES, LITIGATION EXPENSES AND MORAL DAMAGES

CANNOT BE RECOVERED IN THE CASE AT BAR. — With respect to the trial court's award
of attorney's fees, litigation expenses and moral damages, there is neither factual nor legal basis
thereof. Attorney's fees and expenses of litigation cannot, following the general rule in Article
2208 of the New Civil Code, be recovered in this case, there being no stipulation to that effect and
the case does not fall under any of the exceptions. It cannot be said that private respondents had
compelled petitioners to litigate with third persons. Neither can it be ruled that the former acted in
"gross and evident bad faith" in refusing to satisfy the latter's claims considering that private
respondents were under an honest belief that they have legal right over the property by virtue of
the deed of sale. Moral damages cannot likewise be justified as one of the circumstances
enumerated under Article 2219 and 2220 of the New Civil Code concur in this case. CITaSA

DECISION

MARTINEZ, J p:

Petitioners, as heirs of the late Trinidad Quijada, filed a complaint against private respondents for
quieting of title, recovery of possession and ownership of parcels of land with claim for attorney's
fees and damages. The suit was premised on the following facts found by the Court of Appeals,
which is materially the same as that found by the trial court: prcd

"Plaintiffs-appellees (petitioners) are the children of the late Trinidad Corvera Vda. de Quijada.
Trinidad was one of the heirs of the late Pedro Corvera and inherited from the latter the two-
hectare parcel of land subject of the case, situated in the barrio of San Agustin, Talacogon, Agusan
del Sur. On April 5, 1956, Trinidad Quijada together with her sisters Leonila Corvera Vda. de
Sequeña and Paz Corvera Cabiltes and brother Epapiadito Corvera executed a conditional deed of
donation (Exh. C) of the two-hectare parcel of land subject of the case in favor of the Municipality
of Talacogon, the condition being that the parcel of land shall be used solely and exclusively as
part of the campus of the proposed provincial high school in Talacogon. Apparently, Trinidad
remained in possession of the parcel of land despite the donation. On July 29, 1962, Trinidad sold
one (1) hectare of the subject parcel of land to defendant-appellant Regalado Mondejar (Exh. 1).
Subsequently, Trinidad verbally sold the remaining one (1) hectare to defendant-appellant
(respondent) Regalado Mondejar without the benefit of a written deed of sale and evidenced solely
by receipts of payment. In 1980, the heirs of Trinidad, who at that time was already dead, filed a
complaint for forcible entry (Exh. E) against defendant-appellant (respondent) Regalado
Mondejar, which complaint was, however, dismissed for failure to prosecute (Exh. F). In 1987, the
proposed provincial high school having failed to materialize, the Sangguniang Bayan of the
municipality of Talacogon enacted a resolution reverting the two (2) hectares of land donated back
to the donors (Exh. D). In the meantime, defendant-appellant (respondent) Regalado Mondejar
sold portions of the land to defendants-appellants (respondents) Fernando Bautista (Exh. 5),
Rodolfo Goloran (Exh. 6), Efren Guden (Exh. 7) and Ernesto Goloran (Exh. 8).

"On July 5, 1988, plaintiffs-appellees (petitioners) filed this action against defendants-appellants
(respondents). In the complaint, plaintiffs-appellees (petitioners) alleged that their deceased
mother never sold, conveyed, transferred or disposed of the property in question to any person or
entity much less to Regalado Mondejar save the donation made to the Municipality of Talacogon
in 1956; that at the time of the alleged sale to Regalado Mondejar by Trinidad Quijada, the land
still belongs to the Municipality of Talacogon, hence, the supposed sale is null and void.

"Defendants-appellants (respondents), on the other hand, in their answer claimed that the land in
dispute was sold to Regalado Mondejar, the one (1) hectare on July 29, 1962, and the remaining
one (1) hectare on installment basis until fully paid. As affirmative and/or special defense,
defendants-appellants (respondents) alleged that plaintiffs' action is barred by laches or has
prescribed. cdphil

"The court a quo rendered judgment in favor of plaintiffs-appellees (petitioners): firstly because
'Trinidad Quijada had no legal title or right to sell the land to defendant Mondejar in 1962, 1966,
1967 and 1968, the same not being hers to dispose of because ownership belongs to the
Municipality of Talacogon' (Decision, p. 4; Rollo, p. 39) and, secondly, that the deed of sale
executed by Trinidad Quijada in favor of Mondejar did not carry with it the conformity and
acquiescence of her children, more so that she was already 63 years old at the time, and a widow
(Decision, p. 6; Rollo, p. 41)." 1

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

"WHEREFORE, viewed from the above perceptions, the scale of justice having tilted in favor of
the plaintiffs, judgment is, as it is hereby rendered:

1). ordering the Defendants to return and vacate the two (2) hectares of land to Plaintiffs as
described in Tax Declaration No. 1209 in the name of Trinidad Quijada;

2) ordering any person acting in Defendants' behalf to vacate and restore the peaceful possession
of the land in question to Plaintiffs;

3) ordering the cancellation of the Deed of Sale executed by the late Trinidad Quijada in favor of
Defendant Regalado Mondejar as well as the Deeds of Sale/Relinquishments executed by
Mondejar in favor of the other Defendants;

4) ordering Defendants to remove their improvements constructed on the questioned lot;

5) ordering the Defendants to pay Plaintiffs, jointly and severally, the amount of P10,000.00
representing attorney's fees;

6) ordering Defendants to pays the amount of P8,000.00 as expenses of litigation; and

7) ordering Defendants to pay the sum of P30,000.00 representing moral damages.

SO ORDERED." 2

On appeal, the Court of Appeals reversed and set aside the judgment a quo 3 ruling that the sale
made by Trinidad Quijada to respondent Mondejar was valid as the former retained an inchoate
interest on the lots by virtue of the automatic reversion clause in the deed of donation. 4
Thereafter, petitioners filed a motion for reconsideration. When the CA denied their motion, 5
petitioners instituted a petition for review to this Court arguing principally that the sale of the
subject property made by Trinidad Quijada to respondent Mondejar is void, considering that at
that time, ownership was already transferred to the Municipality of Talacogon. On the contrary,
private respondents contend that the sale was valid, that they are buyers in good faith, and that
petitioners' case is barred by laches. 6

We affirm the decision of the respondent court. cdlex

The donation made on April 5, 1956 by Trinidad Quijada and her brother and sisters 7 was subject
to the condition that the donated property shall be "used solely and exclusively as a part of the
campus of the proposed Provincial High School in Talacogon." 8 The donation further provides
that should "the proposed Provincial High School be discontinued or if the same shall be opened
but for some reason or another, the same may in the future be closed" the donated property shall
automatically revert to the donor. 9 Such condition, not being contrary to law, morals, good
customs, public order or public policy was validly imposed in the donation. 10

When the Municipality's acceptance of the donation was made known to the donor, the former
became the new owner of the donated property — donation being a mode of acquiring and
transmitting ownership 11 — notwithstanding the condition imposed by the donee. The donation
is perfected once the acceptance by the donee is made known to the donor. 12 Accordingly,
ownership is immediately transferred to the latter and that ownership will only revert to the donor
if the resolutory condition is not fulfilled.

In this case, that resolutory condition is the construction of the school. It has been ruled that when
a person donates land to another on the condition that the latter would build upon the land a
school, the condition imposed is not a condition precedent or a suspensive condition but a
resolutory one. 13 Thus, at the time of the sales made in 1962 towards 1968, the alleged seller
(Trinidad) could not have sold the lots since she had earlier transferred ownership thereof by
virtue of the deed of donation. So long as the resolutory condition subsists and is capable of
fulfillment, the donation remains effective and the donee continues to be the owner subject only to
the rights of the donor or his successors-in-interest under the deed of donation. Since no period
was imposed by the donor on when must the donee comply with the condition, the latter remains
the owner so long as he has tried to comply with the condition within a reasonable period. Such
period, however, became irrelevant herein when the donee-Municipality manifested through a
resolution that it cannot comply with the condition of building a school and the same was made
known to the donor. Only then — when the non-fulfillment of the resolutory condition was
brought to the donor's knowledge — that ownership of the donated property reverted to the donor
as provided in the automatic reversion clause of the deed of donation.

The donor may have an inchoate interest in the donated property during the time that ownership of
the land has not reverted to her. Such inchoate interest may be the subject of contracts including a
contract of sale. In this case, however, what the donor sold was the land itself which she no longer
owns. It would have been different if the donor-seller sold her interests over the property under the
deed of donation which is subject to the possibility of reversion of ownership arising from the
non-fulfillment of the resolutory condition.

As to laches, petitioners' action is not yet barred thereby. Laches presupposes failure or neglect for
an unreasonable and unexplained length of time, to do that which, by exercising due diligence,
could or should have been done earlier; 14 "it is negligence or omission to assert a right within a
reasonable time, thus, giving rise to a presumption that the party entitled to assert it either has
abandoned or declined to assert it." 15 Its essential elements of: prLL

a.) Conduct on the part of the defendant, or of one under whom he claims, giving rise to the
situation complained of;

b.) Delay in asserting complainant's right after he had knowledge of the defendant's conduct and
after he has an opportunity to sue;

c.) Lack of knowledge or notice on the part of the defendant that the complainant would assert the
right on which he bases his suit; and,

d.) Injury or prejudice to the defendant in the event relief is accorded to the complainant." 16

are absent in this case. Petitioners' cause of action to quiet title commenced only when the
property reverted to the donor and/or his successors-in-interest in 1987. Certainly, when the suit
was initiated the following year, it cannot be said that petitioners had slept on their rights for a
long time. The 1960's sales made by Trinidad Quijada cannot be the reckoning point as to when
petitioners' cause of action arose. They had no interest over the property at that time except under
the deed of donation to which private respondents were not privy. Moreover, petitioners had
previously filed an ejectment suit against private respondents only that it did not prosper on a
technicality.

Be that at it may, there is one thing which militates against the claim of petitioners. Sale, being a
consensual contract, is perfected by mere consent, which is manifested the moment there is a
meeting of the minds 17 as to the offer and acceptance thereof on three (3) elements: subject
matter, price and terms of payment of the price. 18 Ownership by the seller on the thing sold at the
time of the perfection of the contract of sale is not an element for its perfection. What the law
requires is that the seller has the right to transfer ownership at the time the thing sold is delivered.
19 Perfection per se does not transfer ownership which occurs upon the actual or constructive
delivery of the thing sold. 20 A perfected contract of sale cannot be challenged on the ground of
non-ownership on the part of the seller at the time of its perfection; hence, the sale is still valid.

The consummation, however, of the perfected contract is another matter. It occurs upon the
constructive or actual delivery of the subject matter to the buyer when the seller or her successors-
in-interest subsequently acquires ownership thereof. Such circumstance happened in this case
when petitioners — who are Trinidad Quijada's heirs and successors-in-interest — became the
owners of the subject property upon the reversion of the ownership of the land to them.
Consequently, ownership is transferred to respondent Mondejar and those who claim their right
from him. Article 1434 of the New Civil Code supports the ruling that the seller's "title passes by
operation of law to the buyer." 21 This rule applies not only when the subject matter of the
contract of sale is goods, 22 but also to other kinds of property, including real property. 23
There is also no merit in petitioners' contention that since the lots were owned by the municipality
at the time of the sale, they were outside the commerce of men under Article 1409 (4) of the NCC;
24 thus, the contract involving the same is inexistent and void from the beginning. However,
nowhere in Article 1409 (4) is it provided that the properties of a municipality, whether it be those
for public use or its patrimonial property 25 are outside the commerce of men. Besides, the lots in
this case were conditionally owned by the municipality. To rule that the donated properties are
outside the commerce of men would render nugatory the unchallenged reasonableness and
justness of the condition which the donor has the right to impose as owner thereof. Moreover, the
objects referred to as outsides the commerce of man are those which cannot be appropriated, such
as the open seas and the heavenly bodies. cdtai

With respect to the trial court's award of attorney's fees, litigation expenses and moral damages,
there is neither factual nor legal basis thereof. Attorney's fees and expenses of litigation cannot,
following the general rule in Article 2208 of the New Civil Code, be recovered in this case, there
being no stipulation to that effect and the case does not fall under any of the exceptions. 26 It
cannot be said that private respondents had compelled petitioners to litigate with third persons.
Neither can it be ruled that the former acted in "gross and evident bad faith" in refusing to satisfy
the latter's claims considering that private respondents were under an honest belief that they have a
legal right over the property by virtue of the deed of sale. Moral damages cannot likewise be
justified as none of the circumstances enumerated under Articles 2219 27 and 2220 28 of the New
Civil Code concur in this case.

WHEREFORE, by virtue of the foregoing, the assailed decision of the Court of Appeals is
AFFIRMED.

SO ORDERED.

Melo, Puno and Mendoza JJ ., concur. cda

Footnotes
1.Decision of Court of Appeals in CA-G.R. CV No. 44016 promulgated on May 31, 1996, pp. 2-5;
Rollo, pp. 41-44.

2.Regional Trial Court (Bayugan, Agusan del Sur) Decision dated July 16, 1993 penned by Judge
Zenaida Placer, p. 6; Annex "A" of Petition; Rollo, p. 21.

3.The decretal portion of the CA's decision states: "WHEREFORE, premises considered, the
decision appealed from is hereby REVERSED and SET ASIDE, and judgment rendered declaring
the defendants-appellants as the rightful and lawful owners and possessors of the subject land.
There is no pronouncement as to costs."
4.CA Decision, pp. 6-7; Rollo, pp. 45-46.

5.CA Resolution promulgated August 26, 1996; Rollo, p. 55.

6.Comment of Private Respondents, pp. 7-8; Rollo, pp. 67-68.

7.Her sisters were Leonila Corvera Vda. de Sequeña and Paz Corvera Cabiltes and the brother was
Epapiadito Corvera.

8.RTC Decision, p. 1; Rollo, p. 16.

9.CA Decision, pp. 5-6; Rollo, pp. 44-45.

10.City of Angeles v. CA, 261 SCRA 90.

11.Article 712, New Civil Code provides: "Ownership is acquired by occupation and by
intellectual creation.

"Ownership and other real rights over property are acquired and transmitted by law, by donation,
by testate and intestate succession, and in consequence of certain contracts, by tradition.

"They may also be acquired by means of prescription." (emphasis supplied).

12.Article 734, New Civil Code (NCC) reads: "The donation is perfected from the moment the
donor knows of the acceptance by the donee."

13.Central Philippine University v. CA, 246 SCRA 511.

14.Reyes v. CA, 264 SCRA 35; Republic v. Sandiganbayan, 255 SCRA 438; PAL Employees
Savings & Loan Association, Inc. v. NLRC, 260 SCRA 758.

15.Catholic Bishop of Balanga v. CA, 264 SCRA 181; Chavez v. Bonto-Perez, 242 SCRA 73;
Rivera v. CA, 244 SCRA 218; Cormero v. CA, 317 Phil. 348.

16.Santiago v. CA, 278 SCRA 98 (1997); Catholic Bishop of Balanga v. CA, 264 SCRA 181;
Claveria v. Quingco, 207 SCRA 66 (1992); Perez v. Ong Cho, 116 SCRA 732 (1982); Yusingco v.
Ong Hing Lian, 42 SCRA 589 (1971); I.E. Lotho, Inc. v. Ice and Cold Storage Industries, Inc., 3
SCRA 744; Go Chi Gun, et. al. v. Co Cho, et. al., 96 Phil. 622.

17.Article 1475, New Civil Code (NCC). "The contract of sale is perfected at the moment there is
a meeting of the minds upon the thing which is the object of the contract and upon the price. . . ."

18.Leabres v. CA, 146 SCRA 158 ( 1986); See also Navarro v. Sugar Producer's Corporation, 1
SCRA 1180.

19.Article 1459, NCC — "The thing must be licit and the vendor must have a right to transfer the
ownership thereof at the time it is delivered."

20.Article 712, NCC. ". . . Ownership and other real rights over property are acquired and
transmitted . . . in consequence of certain contracts, by tradition."

21.Article 1434, NCC provides: "When a person who is not the owner of a thing sells or alienates
and delivers it, and later the seller or grantor acquires title thereto, such title passes by operation of
law to the buyer or grantee."

22.Article 1505 of the NCC provides: "Subject to the provisions of this Title, where goods are sold
by a person who is not the owner thereof, and who does not sell them under authority or with the
consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the
owner of the goods is by his conduct precluded from denying the seller's authority to sell.

"xxx xxx xxx" (Emphasis supplied).

Other exceptions to the foregoing includes: (a) when the contrary is provided in recording laws,
(b) sales made under statutory power of sale or pursuant to a valid order from a court of competent
jurisdiction, and (c) sales made in a merchant's store in accordance with the Code of commerce
and special laws.

23.See Article 1434, NCC, supra.; Estoque v. Pajimula, 133 Phil. 55; 24 SCRA 59 (1968); Buctan
v. Gabar, 55 SCRA 499.

24.Article 1409 (4), NCC: "The following contracts are inexistent and void from the beginning;

xxx xxx xxx

(4) Those whose object is outside the commerce of men;

xxx xxx xxx"

25.Article 423, NCC: "The properties of provinces, cities and municipalities, is divided into
property for public use and patrimonial property."

Article 424 provides: "Property for public use, in the provinces, cities and municipalities, consist
of the provincial roads, city streets, municipal streets, the squares, fountains, public waters,
promenades, and public works for public service paid for by said provinces, cities, or
municipalities.

"All other property possessed by any of them is patrimonial and shall be governed by this Code,
without prejudice to the provisions of special laws."

26."In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial
costs, cannot be recovered except:

xxx xxx xxx

(2) when the defendant's act or omission has compelled the plaintiff to litigate with third persons
or to incur expenses to protect his interest.

xxx xxx xxx

(5) where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's
plainly valid, just and demandable claim.

xxx xxx xxx

27.Moral damages may be recovered in the following and analogous cases:

(1) a criminal offense resulting in physical injuries;

(2) quasi-delicts causing physical injuries;

(3) seduction, abduction, rape or other lascivious acts;

(4) adultery or concubinage;

(5) illegal or arbitrary detention or arrests;

(6) illegal search;

(7) libel, slander or any other form of defamation;

(8) malicious prosecution;

(9) acts mentioned in Article 309;

(10) acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34 and 35.

The parents of the female seduced, abducted, raped or abused referred to in no. 3 of this Article,
may also recover moral damages.

The spouse, ascendants, descendants and brothers and sisters may bring the action mentioned in
no. 9 of this Article, in the order named.
28.Article 2220, Willful injury to property may be a legal ground for awarding moral damages if
the court should find that, under the circumstances, such damages are justly due. The same rule
applies to breaches of contracts where the defendant acted fraudulently or in bad faith.

12
||| (Quijada v. Court of Appeals, G.R. No. 126444, [December 4, 1998], 360 PHIL 81-94)

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JURISPRUDENCE Jurisprudences icon 120x120
18d623f0c132036f56cae92fb52b20c2af27b43f2646c7ffa940287812634a6c
43 PHIL 873-880

EN BANC

[G.R. No. L-16109. October 2, 1922.]

M.D. TAYLOR, plaintiff-appellant, vs. Uy TIENG PIAO and TAN LIUAN, doing business under
the firm name and style of TAN LIUAN, & Company, defendant. UY TIENG PIAO, defendant-
appellant.

Cohn, Fisher & DeWitt and William C. Brandy for plaintiff and appellant.

Gabriel La O for defendant and appellant Uy Tieng Piao.

Crossfield & O'Brien for Tan Liuan and Tan Liuan & Co.

SYLLABUS

1. CONTRACT; RESOLUTORY CLAUSE; OPTION OF OBLIGOR TO CAN CONTRACT IN

CERTAIN CONTINGENCY. — Article 1256 of the Civil Code constitutes no impediment to the
insertion in a contract for personal service of a resolutory clause permitting the cancellation of the
contract by the employer in a certain contingency even though said contingency is under the
domination of the employer. Such stipulation does not make either the validity or the fulfillment of
the contract defendant upon the will of the employer; for where contracting parties have agreed
that the option shall exist, the exercise of the option is as much in the fulfillment of the contract as
any other act which may have been the subject of agreement. The cancellation of a contract in
accordance with conditions agreed upon beforehand is fulfillment.

2. ID.; ID.; OBLIGOR IMPEDING FULFILLMENT OF CONDITION. — Article 1119 of the

Civil Code, which declare that a condition shall be deemed fulfilled if the obligor intentionally
impedes its fulfillment, has no application to the case of the resolutory provision giving to the
obligor a right to cancel a contract upon a contingency within the control of the obligor.

3. ID.; ID.; CASE AT BAR. — The defendants employed the plaintiff for a term of two years as
superintendent of an oil mill which the defendants contemplated establishing. In the contract was
inserted a stipulation authorizing the defendants to cancel the contract if certain machinery
necessary for starting the mill should for any reason not arrive in Manila within six months. The
machinery not arriving within that period, the defendants gave notice of the cancellation of the
contract and discharged the plaintiff, whereupon the latter instituted an action for damages. Held:
That the defendants were acting within their rights in cancelling the contract at the expiration of
six months and it was immaterial whether the failure of the machinery to arrive was due to some
circumstance within the control of the defendants or not.

DECISION

STREET, J p:

This case comes by appeal from the Court of First Instance of the city of Manila, in a case where
the court awarded to the plaintiff the sum of P300, as damages for breach of contract. The plaintiff
appeals on the ground that the amount of damages awarded is inadequate; while the defendant Uy
Tieng Piao appeals on the ground that he is not liable at all. The judgment having been heretofore
affirmed by us in a brief opinion, we now avail ourselves of the occasion of the filing of a motion
to rehear by the attorneys for the plaintiff to modify the judgment in a slight measure and to slate
more fully the reason underlying our decision.

It appears that on December 12, 1918, the plaintiff contracted his services to Tan Liuan & Co., as
superintendent of an oil factory which the latter contemplated establishing in his this city. The
period of the contract extended over two years from the date mentioned; and the salary was to be
at the rate of P600 per month during the first year and P700 per month during the second, with
electric light and water for domestic consumption, and a residence to live in, or in lieu thereof P60
per month.

At the time this agreement was made the machinery for the contemplated factory had not been
acquired, though ten expellers had been ordered from the United States; and among the
stipulations inserted in the contract with the plaintiff was a provision to the following effect:
"It is understood and agreed that should the machinery to be installed in the said factory fail, for
any reason, to arrive in the city of Manila within a period of six months from date hereof, this
contract may be cancelled by the party at its option, such cancellation, however, not to occur
before the expiration of such six months,"

The machinery above referred to did not arrive in the city of Manila within the six months
succeeding the making of the contract; nor was other equipment necessary for the establish of the
factory at any time provided by the defendants. The reason for this does not appear with certainty,
but a preponderance of the evidence is to the effect that the defendants, in the first months of
1919, seeing that the oil business no longer promised large returns, either cancelled the order for
the machinery from choice or were unable to supply the capital necessary to finance the project.
At any rate on June 28, 1919, availing themselves in part of the option given the clause above
quoted, the defendants communicated in writing to the plaintiff the fact that they had decided to
rescind the contract, effective June 30th then current, upon which date he was discharged. The
plaintiff thereupon instituted action to recover damages in the amount of P13,000, covering salary
and perquisites due and to become due under the contract.

The case for the plaintiff proceeds on the idea that the stipulation above quoted, giving to the
defendants the right to cancel the contract upon the contingency of the non-arrival of the
machinery in Manila within six months, must be understood as applicable only in those cases
where such non-arrival is due to causes not having their origin in the will or act of the defendants,
as caused by strikes or unfavorable conditions of transportation by land or sea; and it is urged that
the right to cancel can not be admitted unless the defendants affirmatively show that the failure of
the machinery to arrive was due to causes of that character, and that it did not its origin in their
own act or volition. In this connection the plaintiff relies on article 1256 of the Civil Code, which
is to the effect that the validity and fulfillment of contracts cannot be left to the will of one of the
contracting parties, and to article 1119, which says that a condition shall be deemed fulfilled if the
obligator intentionally impedes its fulfillment.

It will be noted that the language conferring the right of cancellation upon the defendants is broad
enough to cover any case of the non-arrival of the machinery, due to whatever cause; and the
stress in the expression "for any reason" should evidently fall upon the word "any." It must fellow
of necessity that the defendants had the right to cancel the contract in the contingency that
occurred, unless some clear and sufficient reason can be adduced for limiting the operation of the
words conferring the right of cancellation. Upon this point it is our opinion that the language used
in the stipulation should be given effect in its ordinary sense, without technicality or
circumvention; and in this sense it is believed that the parties to the contract must have understood
it.

Article 1256 of the Civil Code in our opinion creates no impediment to the insertion in a contract
for personal service of a resolutory condition permitting the cancellation of the contract by one of
the parties. Such a stipulation, as can be readily seen, does not make either the validity or the
fulfillment of the contract dependent upon the will of the party to whom is conceded the privilege
of cancellation; for where the contracting parties have agreed that such option shall exist, the
exercise of the option is as much in the fulfillment of the contract as any other act which may have
been the subject of agreement. Indeed, the cancellation of a contract in accordance with conditions
agreed upon beforehand is fulfillment.

In this connection, we note that the commentator Manresa has the following observation with
respect to article 1256 of the Civil Code. Says he: "It is entirely licit to leave fulfillment to the will
of either of the parties in the negative form of rescission, a case frequent in certain contracts (the
letting of service for hire, the supplying of electrical energy, etc.), for in such supposed case
neither is the article infringed, nor is there any lack of quality between the persons contracting,
since they remain with the same faculties in respect to fulfillment." (Manresa, 2d ed., vol. 8,
p.610.)

Undoubtedly one of the consequences of this stipulation was that the employers were left in a
position where they could dominate the contingency, and the result was about the same as if they
had been given an unqualified option to disperse with the services of the plaintiff at the end of six
months. But this circumstance does not make the stipulation illegal.

The case of Hall vs. Hardaker (61 Fla., 267) cited by the appellant Taylor, though superficially
somewhat analogous, is not precisely in point. In that case one Hardaker had contracted to render
competent and efficient service as manager of a corporation, to which position it was understood
he was to be appointed. In the same contract it was stipulated that if "for any reason" Hardaker
should not be given that position, or if he should not be permitted to act in that capacity for a
stated period, certain things would be done by Hall. Upon being installed in the position aforesaid,
Hardaker failed to render efficient service and was discharged. It was held that Hall was released
from the obligation to do the things that he had agreed to perform. Some of the judges appear to
have thought that the case turned on the meaning of the phrase "for any reason," and the familiar
maxim was cited that no man shall take advantage of his own wrong. The result of the case must
have been the same from whatever point of view, as there was an admitted failure on the part of
Hardaker to render competent service. In the present case there was no breach of contract by the
defendants; and the arguments to the contrary apparently suffers from the logical defect of
assuming the very point at issue.

But it will be said that the question is not so much one concerning the legality of the clause
referred to as one concerning the interpretation of the resolutory clause as written, the idea being
that the court should adjust its interpretation of said clause to the supposed precepts of article
1256, by restricting its operation exclusively to cases where the non-arrival of the machinery may
be due to extraneous causes not referable to the will or act of the defendants. But even when the
question is viewed in this aspect the result is the same, because the argument for the restrictive
interpretation evidently proceeds on the assumption that the clause in question is illegal in so far
as it purports to concede to the defendants the broad right to cancel the contract upon non-arrival
of the machinery due to any cause; and the debate returns again to the point whether in a contract
for the presentation of service it is lawful for the parties to insert a provision giving to the
employer the power to cancel the contract in a contingency which may be dominated by himself.
Upon this point what has already been said must suffice.

As we view the case, there is nothing in article 1256 which makes it necessary for us to wrap the
language used by the parties from its natural meaning and thereby in legal effect to restrict the
words "for any reason," as used in the contract, to mean "for any reason not having its origin in the
will or acts of the defendants." To impose this interpretation upon those words would in our
opinion constitute an unjustifiable invasion of the power of the parties to establish the terms which
they deem advisable, a right which is expressed in article 1255 of the Civil Code and constitutes
one of the most fundamental conceptions of contract right enshrined in the Code.

The view already expressed with regard to the legality and interpretation of the clause under
consideration disposes in a great measure of the argument of the appellant in so far as the same is
based on article 1119 of the Civil Code. This provision supposes a case where the obligor
intentionally impedes the fulfillment of a condition which would entitle the obligee to exact
performance from the obligor; and an assumption underlying the provision is that the obligor
prevents the obligee from performing some act which the obligee is entitled to perform as a
condition precedent to the exaction of what is due to him. Such an act must be considered
unwarranted and unlawful, involving per se a breach of the implied terms of the contract. The
article can have no application to an external contingency which, like that involved in this case, is
lawfully within the control of the obligor.

In Spanish jurisprudence a condition like that here under discussion is designated by Manresa a
facultative condition (vol. 8, p. 611), and we gather from his comment on articles 1115 and 1119
of the Civil Code that a condition, facultative as to the debtor, is obnoxious to the first sentenced
contained in article 1115 and renders the whole obligation void (vol. 8, p. 131). That statement is
no doubt correct in the sense intended by the learned author, but it must be remembered that he
evidently has in mind the suspensive condition, such as is contemplated in article 1115. Said
article can have no application to the resolutory condition, the validity of which is recognized in
article 1113 of the Civil Code. In other words, a condition at once facultative and resolutory may
be valid even though the condition is made to depend upon the will of the obligor.

If it were apparent, or could be demonstrated, that the defendants were under a positive obligation
to cause the machinery to arrive in Manila, they would of course be liable, in the absence of
affirmative proof showing that the non-arrival of the machinery was due to some cause not having
its origin in their own act or will. The contract, however, expresses no such positive obligation,
and its existence cannot be implied in the face of stipulation, defining the conditions under which
the defendants can cancel the contract.

Our conclusion is that the Court of First Instance committed no error in r ejecting the plaintiff's
claim in so far as damages are sought for the period subsequent to the expiration of the first six
months, but in assessing the damages due for the six-month period, the trial judge evidently
overlooked the item of P60, specified in the plaintiff's fourth assignment of error, which represents
commutation of house rent for the month of June, 1919. This amount the plaintiff is clearly
entitled to recover, in addition to the P300 awarded in the court below.

We note that Uy Tieng Piao, who is sued as a partner with Tan Liuan, appealed from the judgment
holding him liable as a member of the firm of Tan Liuan & Co.; and it is insisted in his behalf that
he was not bound by the act of Tan Liuan as manager of Tan Liuan & o. in employing the plaintiff.
Upon this we will merely say that the conclusion stated by the trial court in the next to the last
paragraph of the decision with respect to the liability of this appellant is in our opinion in
conformity with the law and facts.

The judgment appealed from will be modified by declaring that the defendants shall pay to the
plaintiff the sum of P360, instead of P300, as allowed by the lower court, and as thus modified the
judgment will be affirmed with interest from November 4, 1919, as provided in section 510 of the
Code of Civil Procedure, and with costs. So ordered.

Araullo, C.J., Johnson, Malcolm, Avanceña, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.

||| (Taylor v. Uy Tieng Piao, G.R. No. L-16109, [October 2, 1922], 43 PHIL 873-880)

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JURISPRUDENCE Jurisprudences icon 120x120
18d623f0c132036f56cae92fb52b20c2af27b43f2646c7ffa940287812634a6c
44 PHIL 874-885

EN BANC

[G.R. No. 16570. March 9, 1922.]

SMITH, BELL & CO., LTD., plaintiff-appellant, vs. VICENTE SOTELO MATTI, defendant-
appellant.
Ross & Lawrence and Ewald E. Selph for plaintiff-appellant.

Ramon Sotelo for defendant-appellant.

SYLLABUS

1. CONTRACTS; PURCHASE AND SALE OF MERCHANDISE; UNCERTAINTY OF TIME

OF FULFILLMENT OF OBLIGATION. — As no definite date was fixed for the delivery of the
goods, which the plaintiff undertook to deliver, the term which the parties attempted to establish
being so uncertain that one cannot tell whether, as a matter of fact, the aforesaid goods could, or
could not, be imported into Manila, the obligation must be regarded as conditional and not one
with a term.

2. ID.; ID.; WHEN FULFILLMENT OF CONDITION NOT DEPENDENT ON THE WILL OF

OBLIGOR. — Where the fulfillment of the condition does not depend on the will of the obligor,
but on that of a third person who can in no way be compelled to carry it out, the obligor's part of
the contract is complied with, if he does all that is in his power, and it then becomes incumbent
upon the other contracting party to comply with the terms of the contract.

3. ID.; ID.; WHEN TIME NOT ESSENTIAL. — Where no date is fixed in the contract for the
delivery of the thing sold, time is considered unessential, and delivery must be made within a
reasonable time to be determined by the courts in accordance with the circumstances of the case.

4. PRINCIPAL AND AGENT; THIRD PERSONS. — When an agent acts in his own name, the
principal has no right of action against the persons with whom the agent has contracted, or such
persons against the principal. In such case, the agent is directly liable to the person with whom he
has contracted, as if the transaction were his own. (Art. 1717, Civil Code.)

DECISION

ROMUALDEZ, J p:

In August, 1918, the plaintiff corporation and the defendant, Mr. Vicente Sotelo, entered into
contracts whereby the former obligated itself to sell, and the latter to purchase from it, two steel
tanks, for the total price of twenty-one thousand pesos (21,000), the same to be shipped from New
York and delivered at Manila "within three or four months;" two expellers at the price of twenty
five thousand pesos (25,000) each, which were to be shipped from San Francisco in the month of
September, 1918, or as soon as possible; and two electric motors at the price of two thousand
pesos (2,000) each, as to the delivery of which stipulation was made, couched in these words:
"Approximate delivery within ninety days. — This is not guaranteed."

The tanks arrived at Manila on the 27th of April, 1919; the expellers on the 26th of October, 1918;
and the motors on the 27th of February, 1919.
The plaintiff corporation notified the defendant, Mr. Sotelo, of the arrival of these goods, but Mr.
Sotelo refused to receive them and to pay the prices stipulated.

The plaintiff brought suit against the defendant, based on four separate causes of action, alleging,
among other facts, that it immediately notified the defendant of the arrival of the goods, and asked
instructions from him as to the delivery thereof, and that the defendant refused to receive any of
them and to pay their price. The plaintiff, further, alleged that the expellers and the motors were in
good condition. (Amended complaint, pages 16-30, Bill of Exceptions.)

In their answer, the defendant, Mr. Sotelo, and the intervenor, the Manila Oil Refining and By-
Products Co., Inc., denied the plaintiff's allegations as to the shipment of these goods and their
arrival at Manila, the notification to the defendant, Mr. Sotelo, the latter's refusal to receive them
and pay their price, and the good condition of the expellers and the motors, alleging as special
defense that Mr. Sotelo had made the contracts in question as Manager of the intervenor, the
Manila Oil Refining and By-Products Co., Inc., which fact was known to the plaintiff, and that "it
was only in May, 1919, that it notified the intervenor that said tanks had arrived, the motors and
the expellers having arrived incomplete and long after the date stipulated." As a counterclaim or
set-off, they also allege that, as a consequence of the plaintiff's delay in making delivery of the
goods, which the intervenor intended to use in the manufacture of coconut oil, the intervenor
suffered damages in the sums of one hundred sixteen thousand seven hundred eighty-three pesos
and ninety-one centavos (116,788.91) for the nondelivery of the tanks, and twenty-one thousand
two hundred and fifty pesos (21,250) on account of the expellers and the motors not having
arrived in due time.

The case having been tried, the court below absolved the defendants from the complaint insofar as
the tanks and the electric motors were concerned, but rendered judgment against them, ordering
them to "receive the aforesaid expellers and pay the plaintiff the sum of fifty thousand pesos
(50,000), the price of the said goods, with legal interest thereon from July 26, 1919, and costs."

Both parties appeal from this judgment, each assigning several errors in the findings of the lower
court.

The principal point at issue in this case is whether or not, under the contracts entered into and the
circumstances established in the record, the plaintiff has fulfilled, in due time, its obligation to
bring the goods in question to Manila. If it has, then it is entitled to the relief prayed for;
otherwise, it must be held guilty of delay and liable for the consequences thereof.

To solve this question, it is necessary to determine what period was fixed for the delivery of the
goods.

As regards the tanks, the contracts A and B (pages 61 and 62 of the record) are similar, and in both
of them we find this clause:

"To be delivered within 3 or 4 months — The promise or indication of shipment carries with it
absolutely no obligation on our part — Government regulations, railroad embargoes, lack of
vessel space, the exigencies of the requirements of the United States Government, or a number of
causes may act to entirely vitiate the indication of shipment as stated. In other words, the order is
accepted on the basis of shipment at Mill's convenience, time of shipment being merely an
indication of what we hope to accomplish."

"The following articles, herein below more particularly described, to be shipped at San Francisco
within the month of September /18, or as soon as possible. — Two Anderson oil expellers . . ."

And in the contract relative to the motors (Exhibit D, page 64, rec.) the following appears:

"Approximate delivery within ninety days. — This is not guaranteed. — This sale is subject to our
being able to obtain Priority Certificate, subject to the United States Government requirements and
also subject to confirmation of manufactures."

In all these contracts, there is a final clause as follows:

"The sellers are not responsible for delays caused by fires, riots on land or on the sea, strikes or
other cause known as 'Force Majeure' entirely beyond the control of the sellers or their
representatives."

Under these stipulations, it cannot be said that any definite date was fixed for the delivery of the
goods. As to the tanks, the agreement was that the delivery was to be made "within 3 or 4
months," but that period was subject to the contingencies referred to in a subsequent clause. With
regard to the expellers, the contract says "within the month of September, 1918," but to this is
added "or as soon as possible." And with reference to the motors, the contract contains this
expressions, "Approximate delivery within ninety days," but right after this, it is noted that "this is
not guaranteed."

The oral evidence falls short of fixing such period.

From the record it appears that these contracts were executed at the time of the world war when
there existed rigid restrictions on the export from the United States of articles like the machinery
in question, and maritime, as well as railroad, transportation was difficult, which fact was known
to the parties; hence clauses were inserted in the contracts, regarding "Government regulations,
railroad embargoes, lack of vessel space, the exigencies of the requirements of the United States
Government," in connection with the tanks and "Priority Certificate, subject to the United States
Government requirements," with respect to the motors. At the time of the execution of the
contracts, the parties were not unmindful of the contingency of the United States Government not
allowing the export of the goods, nor of the fact that the other foreseen circumstances therein
stated might prevent it.

Considering these contracts in the light of the civil law, we cannot but conclude that the term
which the parties attempted to fix is so uncertain that one cannot tell just whether, as a matter of
fact, those articles could be brought to Manila or not. If that is the case, as we think it is, the
obligation must be regarded as conditional.

"Obligations for the performance of which a day certain has been fixed shall be demandable only
when the day arrives.

"A day certain is understood to be one which must necessarily arrive, even though its date be
unknown.

"If the uncertainty should consist in the arrival or non arrival of the day, the obligation is
conditional and shall be governed by the rules of the next preceding section" (referring to pure and
conditional obligations). (Art. 1125, Civ. Code.)

And as the export of the machinery in question was as stated in the contract, contingent upon the
sellers obtaining certificate of priority and permission of the United States Government, subject to
the rules and regulations, as well as to railroad embargoes, then the delivery was subject to a
condition the fulfillment of which depended not only upon the effort of the herein plaintiff, but
upon the will of third persons who could in no way be compelled to fulfill the condition. In cases
like this, which are not expressly provided for, but impliedly covered, by the Civil Code, the
obligor will be deemed to have sufficiently performed his part of the obligation, if he has done all
that was in his power, even if the condition has not been fulfilled in reality.

"In such cases, the decisions prior to the Civil Code have held that the obligee having done all that
was in his power, was entitled to enforce performance of the obligation. This performance, which
is fictitious — not real — is not expressly authorized by the Code, which limits itself only to
declare valid those conditions and the obligation thereby affected; but it is neither disallowed, and
the Code being thus silent, the old view can be maintained as a doctrine." (Manresa's
commentaries on the Civil Code [1907], vol. 8, page 132.)

The decisions referred to by Mr. Manresa are those rendered by the supreme court of Spain on
November 19, 1866, and February 23, 1871.

In the former it is held:

"First. That when the fulfillment of the condition does not depend on the will of the obligor, but on
that of a third person who can in no way be compelled to carry it out, and it is found by the lower
court that the obligor has done all in his power to comply with the obligation, the judgment of the
said court, ordering the other party to comply with his part of the contract, is not contrary to the
law of contracts, or to law 1, Tit. I, Book 10, of the 'Novisima Recopilacion,' or Law 12, Tit. 11, of
Partida 5, when in the said finding of the lower court, no law or precedent is alleged to have been
violate." (Jurisprudencia Civil published by the directors of the Revista General de Legislacion y
Jurisprudencia [1866], vol. 14, page 656.)
In the second decision, the following doctrine is laid down:

"Second. That when the fulfillment of the condition does not depend on the will of the obligor, but
on that of a third person, who can in no way be compelled to carry it out, the obligor's part of the
contract is complied with if he does all that is in his power, and has the right to demand
performance of the contract by the other party, which is the doctrine laid down also by the
supreme court."

(The same publication [1871]. vol. 23, page 492.)

It is sufficiently proven in the record that the plaintiff has made all the efforts it could possibly by
expected to make under the circumstances, to bring the goods in question to Manila, as soon as
possible. And, as a matter of fact, through such efforts, it succeeded in importing them and placing
them at the disposal of the defendant, Mr. Sotelo, in April, 1919. Under the doctrine just cited,
which, as we have seen is of the same juridical origin as our Civil Code, it is obvious that the
plaintiff has complied with its obligation.

In connection with this obligation to deliver, occurring in a contract of sale like those in question,
the rule in North America is that when the time of delivery is not fixed in the contract, time is
regarded unessential.

"When the time of delivery is not fixed or is stated in general and indefinite terms, time is not of
the essence of the contract." (35 Cyc., 179. And see Montgomery vs. Thompson, 152 Cal., 319; 92
Pac., 866; O'Brien vs. Higley, 162 Ind., 316; 70 N. E., 242; Pratt vs. Lincoln [Me. 1888], 13 Atl.,
689; White vs. McMillan, 114 N. c., 349; 19 S. E., 234; Ballantyne vs. Watson, 30 U. C. C. P.,
529.)

In such case, the delivery must be made within a reasonable time.

"The law implies, however, that if no time is fixed, delivery shall be made within a reasonable
time, in the absence of anything to show that an immediate delivery intended." (35 Cyc., 179,
180.)

"When the contract provides for delivery as soon as possible' the seller is entitled to a reasonable
time, in view of all the circumstances, such as the necessities of manufacture, or of putting the
goods in condition for delivery. The term does not men immediately or that the seller must stop all
his other work and devote himself to that particular order. But the seller must nevertheless act with
all reasonable diligence or without unreasonable delay. It has been held that a requirement that the
shipment of goods should be the earliest possible' must be construed as meaning that the goods
should be sent as soon as the seller could possibly send them, and that it signified rather more than
that the goods should be sent within a reasonable time.

"Delivery 'Shortly.' — In a contract for the sale of personal property to be delivered 'shortly,' it is
the duty of the seller to tender delivery within a reasonable time and if he tenders delivery after
such time the buyer may reject.

xxx xxx xxx

"The question as to what is a reasonable time for the delivery of the goods by the seller is to be
determined by the circumstances attending the particular transaction, such as the character of the
goods, and the purpose for which they are intended, the ability of the seller to produce the goods if
they are to be manufactured, the facilities available for transportation, and the distance the goods
must be carried, and the usual course of business in the particular trade." (35 Cyc., 181-184.)

Whether or not the delivery of the machinery in litigation was offered to the defendant within a
reasonable time, is a question to be determined by the court.

"Applications of rule. — A contract for delivery 'about Nov. 1' is complied with by delivery on
November 10 (White vs. McMillan, 114 N. C., 349; 19 S. E., 234. And see O'Brien vs. Higley, 162
Ind., 316; 70 N. E., 242); and a contract to deliver 'about the last of May or June' is complied with
by delivery on the last days of June (New Bedford Copper Co. vs. Southard, 95 Me., 209; 49 Atl.,
1062, holding also that if the goods were to be used for a ship to arrive 'about April' and the vessel
was delayed, the seller might deliver within a reasonable time after her arrival, although such
reasonable time extended beyond the last of June); so under a contract to deliver goods sold 'about
June, 1906,' delivery may be made during the month of June, or in a reasonable time thereafter
(Loomis vs. Norman Printers' Supply Co., 81 Conn., 343; 71 Atl., 358)." (35 Cyc., 180, note 16.)

The record shows, as we have stated, that the plaintiff did all within its power to have the
machinery arrive at Manila as soon as possible, and immediately upon its arrival it notified the
purchaser of the fact and offered to deliver it to him. Taking these circumstances into account, we
hold that the said machinery was brought to Manila by the plaintiff within a reasonable time.

Therefore, the plaintiff has not been guilty of any delay in the fulfillment of its obligation, and,
consequently, it could not have incurred any of the liabilities mentioned by the intervenor in its
counterclaim or set-off.

Besides, it does not appear that the intervenor, the Manila Oil Refining and By-Products Co., Inc.,
has in any way taken part in these contracts. These contracts were signed by the defendant, Mr.
Vicente Sotelo, in his individual capacity and own name. If he was then acting as agent of the
intervenor, the latter has no right of action against the herein plaintiff.

"When an agent acts in his own name, the principal shall have no right of action against the
persons with whom the agent has contracted, or such persons against the principal.

"In such case, the agent is directly liable to the person with whom he has contracted, as if the
transaction were his own. Cases involving things belonging to the principal are excepted.
"The provisions of this article shall be understood to be without prejudice to actions between
principal and agent." (Civil Code, art. 1717.)

"When the agent transacts business in his own name, it shall not be necessary for him to state who
is the principal and he shall be directly liable, as if the business were for his own account, to the
persons with whom he transacts the same, said persons not having any right of action against the
principal, nor the latter against the former, the liabilities of the principal and of the agent to each
other always being reserved." (Code of Com., art, 246.)

"If the agent transacts business in the name of the principal, he must state that fact; and if the
contract is in writing, he must state it therein or in the subscribing clause, giving the name,
surname, and domicile of said principal.

"In the case prescribed in the foregoing paragraph, the contract and the actions arising therefrom
shall be effective between the principal and the persons or person who may have transacted
business with the agent; but the latter shall be liable to the persons with whom he transacted
business during the time he does not prove the commission, if the principal should deny it, without
prejudice to the obligation and proper actions between the principal and agent." (Code of Com.,
art. 247.)

The foregoing provisions lead us to the conclusion that the plaintiff is entitled to the relief prayed
for in its complaint, and that the intervenor has no right of action, the damages alleged to have
been sustained by it not being imputable t the plaintiff.

Wherefore, the judgment appealed from is modified, and the defendant, Mr. Vicente Sotelo Matti,
sentenced to accept and receive from the plaintiff the tanks, the expellers and the motors is
question, and to pay the plaintiff the sum of ninety-six thousand pesos (96,000), with legal interest
thereon from July 17, 1919, the date of the filing of the complaint, until fully paid , and the costs
of both instances. So ordered.

Araullo, C.J., Johnson, Street, Malcolm, Avanceña, Villamor, Ostrand, and Johns, JJ., concur.

||| (Smith, Bell & Co., Ltd. v. Matti, G.R. No. 16570, [March 9, 1922], 44 PHIL 874-885)

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JURISPRUDENCE Jurisprudences icon 120x120
18d623f0c132036f56cae92fb52b20c2af27b43f2646c7ffa940287812634a6c

THIRD DIVISION

[G.R. No. 70789. October 19, 1992.]

RUSTAN PULP & PAPER MILLS, INC., BIENVENIDO R. TANTOCO, SR., and ROMEO S.
VERGARA, petitioners, vs. THE INTERMEDIATE APPELLATE COURT AND ILIGAN
DIVERSIFIED PROJECTS, INC., ROMEO A. LLUCH and ROBERTO G. BORROMEO,
respondents.

Napoleon J. Poblador for petitioner.

Pinito W. Mercado and Pablo S. Badong for respondents.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACT; POTESTATIVE CONDITION; MAY BE

OBLITERATED WITHOUT AFFECTING THE REST OF THE STIPULATIONS. — The matter
of Tantoco's and Vergara's joint and several liability as a result of the alleged breach of the contract
is dependent, first of all, on whether Rustan Pulp and Paper Mills may legally exercise the right of
stoppage should there be a glut of raw materials at its plant.

And insofar as the express discretion on the part of petitioners is concerned regarding the right of
stoppage, We feel that there is cogent basis for private respondents' apprehension on the illusory
resumption of deliveries inasmuch as the prerogative suggests a condition solely dependent upon
the will of petitioners. Petitioners can stop delivery of pulp wood from private respondents if the
supply at the plant is sufficient as ascertained by petitioners, subject to re-delivery when the need
arises as determined likewise by petitioners. This is Our simple understanding of the literal import
of paragraph 7 of the obligation in question. A purely potestative imposition of this character must
be obliterated from the face of the contract without affecting the rest of the stipulations
considering that the condition relates to the fulfillment of an already existing obligation and not to
its inception. It is, a truism in legal jurisprudence that a condition which is both potestative (or
facultative) and resolutory may be valid, even though the saving clause is left to the will of the
obligor.

2. ID.; ID.; ID.; RIGHT OF STOPPAGE GUARANTEED IN THE CONTRACT, HELD

INOPERATIVE; REASON. — Petitioners are of the impression that the letter dated September
30, 1968 sent to private respondents is well within the right of stoppage guaranteed to them by
paragraph 7 of the contract of sale which was construed by petitioners to be a temporary
suspension of deliveries. There is no doubt that the contract speaks loudly about petitioners'
prerogative but what diminishes the legal efficacy of such right is the condition attached to it
which, as aforesaid, is dependent exclusively on their will for which reason, We have no
alternative but to treat the controversial stipulation as inoperative (Article 1306, New Civil Code).
It is for this same reason that We are not inclined to follow the interpretation of petitioners that the
suspension of delivery was merely temporary since the nature of the suspension itself is again
conditioned upon petitioners' determination of the sufficiency of supplies at the plant.

3. ID.; ID.; FRUSTRATION OF COMMERCIAL OBJECT AS GROUND FOR TERMINATION

OF THE CONTRACT, NOT ACCEPTABLE; REASONS. — Neither are We prepared to accept
petitioners' exculpation grounded on frustration of the commercial object under Article 1267 of the
New Civil Code, because petitioners continued accepting deliveries from the suppliers. This
conduct will estop petitioners from claiming that the breakdown of the machinery line was an
extraordinary obstacle to their compliance to the prestation. It was indeed incongruous for
petitioners to have sent the letters calling for suspension and yet, they in effect disregarded their
own advice by accepting the deliveries from the suppliers. Knowing fully well that they will
encounter difficulty in producing output because of the defective machinery line, petitioners opted
to open the plant to greater loss, thus compounding the costs by accepting additional supply to the
stockpile. Verily, the Appellate Court emphasized the absurdity of petitioners' action when they
acknowledged that "if the plant could not be operated on a commercial scale, it would then be
illogical for defendant Rustan to continue accepting deliveries of raw materials."

4. ID.; AGENCY; OFFICERS OF CORPORATIONS NOT LIABLE INDIVIDUALLY UNDER

THE CONTRACT SIGNED BY THEM IN THEIR OFFICIAL CAPACITY; EXCEPTION. — We
have to agree with petitioners' citation of authority to the effect that the President and Manager of
a corporation who entered into and signed a contract in his official capacity, cannot be made liable
thereunder in his individual capacity in the absence of stipulation to that effect due to the
personality of the corporation being separate and distinct from the persons composing it (Bangue
Generale Belge vs. Walter Bull and Co., Inc., 84 Phil. 164). And because of this precept, Vergara's
supposed non-participation in the contract of sale although he signed the letter dated September
30, 1968 is completely immaterial. The two exceptions contemplated by Article 1897 of the New
Civil Code where agents are directly responsible are absent and wanting.

DECISION

MELO, J p:

When petitioners informed herein private respondents to stop the delivery of pulp wood supplied
by the latter pursuant to a contract of sale between them, private respondents sued for breach of
their covenant. The court of origin dismissed the complaint but at the same time enjoined
petitioners to respect the contract of sale if circumstances warrant the full operation in a
commercial scale of petitioners' Baloi plant and to continue accepting and paying for deliveries of
pulp wood products from Romeo Lluch (page 14, Petition; page 20, Rollo). On appeal to the then
Intermediate Appellate Court, Presiding Justice Ramon G. Gaviola, Jr., who spoke for the First
Civil Cases Division, with Justices Caguioa, Quetulio-Losa, and Luciano, concurring, modified
the judgment by directing herein petitioners to pay private respondents, jointly and severally, the
sum of P30,000.00 as moral damages and P15,000.00 as attorney's fees (pages 48-58, Rollo).

In the petition at bar, it is argued that the Appellate Court erred:

"A. . . . IN HOLDING PERSONALLY LIABLE UNDER THE CONTRACT OF SALE

PETITIONER TANTOCO WHO SIGNED MERELY AS REPRESENTATIVE OF PETITIONER
RUSTAN, AND PETITIONER VERGARA WHO DID NOT SIGN AT ALL;

B. . . . IN HOLDING THAT PETITIONER RUSTAN'S DECISION TO SUSPEND TAKING

DELIVERY OF PULP WOOD FROM RESPONDENT LLUCH, WHICH WAS PROMPTED BY
SERIOUS AND UNFORESEEN DEFECTS IN THE MILL, WAS NOT IN THE LAWFUL
EXERCISE OF ITS RIGHT UNDER THE CONTRACT OF SALE; and

C. . . . IN AWARDING MORAL DAMAGES AND ATTORNEY'S FEES IN THE ABSENCE OF

FRAUD OR BAD FAITH."(page 18, Petition; page 24, Rollo)

The generative facts of the controversy, as gathered from the pleadings, are fairly simple.

Sometime in 1966, petitioner Rustan established a pulp and paper mill in Baloi, Lanao del Norte.
On March 20, 1967, respondent Lluch, who is a holder of a forest products license, transmitted a
letter to petitioner Rustan for the supply of raw materials by the former to the latter. In response
thereto, petitioner Rustan proposed, among other things, in the letter-reply:

"2. That the contract to supply is not exclusive because Rustan shall have the option to buy from
other suppliers who are qualified and holder of appropriate government authority or license to sell
and dispose pulp wood."

These prefatory business proposals culminated in the execution, during the month of April, 1968,
of a contract of sale whereby Romeo A. Lluch agreed to sell, and Rustan Pulp and Paper Mill, Inc.
undertook to pay the price of P30.00 per cubic meter of pulp wood raw materials to be delivered at
the buyer's plant in Baloi, Lanao del Norte. Of pertinent significance to the issue at hand are the
following stipulations in the bilateral undertaking:

"3. That BUYER shall have the option to buy from other SELLERS who are equally qualified and
holders of appropriate government authority or license to sell or dispose, that BUYER shall not
buy from any other seller whose pulp woods being sold shall have been established to have
emanated from the SELLER'S lumber and/or firewood concession. . . ."

And that SELLER has the priority to supply the pulp wood materials requirement of the BUYER;

xxx xxx xxx

7. That the BUYER shall have the right to stop delivery of the said raw materials by the seller
covered by this contract when supply of the same shall become sufficient until such time when
need for said raw materials shall have become necessary provided, however, that the SELLER is
given sufficient notice."(pages 8-9, Petition; pages 14-15, Rollo)

In the installation of the plant facilities, the technical staff of Rustan Pulp and Paper Mills, Inc.
recommended the acceptance of deliveries from other suppliers of the pulp wood materials for
which the corresponding deliveries were made. But during the test run of the pulp mill, the
machinery line thereat had major defects while deliveries of the raw materials piled up, which
prompted the Japanese supplier of the machinery to recommend the stoppage of the deliveries.
The suppliers were informed to stop deliveries and the letter of similar advice sent by petitioners
to private respondents reads:

"September 30, 1968

Iligan Diversified Projects, Inc.

Iligan City

Attention: Mr. Romeo A. Lluch.

Dear Mr. Lluch:

This is to inform you that the supply of raw materials to us has become sufficient and we will not
be needing further delivery from you. As per the terms of our contract, please stop delivery thirty
(30) days from today.

Very truly yours,

RUSTAN PULP AND PAPER

MILLS, INC.

By:

DR. ROMEO S. VERGARA

Resident Manager"

Private respondent Romeo Lluch sought to clarify the tenor of the letter as to whether stoppage of
delivery or termination of the contract of sale was intended, but the query was not answered by
petitioners. This alleged ambiguity notwithstanding, Lluch and the other suppliers resumed
deliveries after the series of talks between Romeo S. Vergara and Romeo Lluch.

On January 23, 1969, the complaint for contractual breach was filed which, as earlier noted, was
dismissed. In the process of discussing the merits of the appeal interposed therefrom, respondent
Court clarified the eleven errors assigned below by herein petitioners and it seems that petitioners
were quite satisfied with the Appellate Court's in seriatim response since petitioners trimmed
down their discourse before this Court to three basic matters, relative to the nature of liability, the
propriety of the stoppage, and the feasibility of awarding moral damages including attorney's fees.

Respondent Court found it ironic that petitioners had to exercise the prerogative regarding the
stoppage of deliveries via the letter addressed to Iligan Diversified Projects, Inc. on September 30,
1968 because petitioners never really stopped accepting deliveries from private respondents until
December 23, 1968. Petitioner's paradoxical stance was portrayed in this manner:

". . . We cannot accept the reasons given by appellees as to why they were stopping deliveries of
pulp wood materials. First, We find it preposterous for a business company like the appellee to
accumulate stockpiles of cut wood even after its letter to appellants dated September 30, 1968
stopping the deliveries because the supply of raw materials has become sufficient. The fact that
appellees were buying and accepting pulp wood materials from other sources other than the
appellants even after September 30, 1968 belies that they have more than sufficient supply of pulp
wood materials, or that they are unable to go into full commercial operation or that their
machineries are defective or even that the pulp wood materials coming from appellants are sub-
standard. Second, We likewise find the court a quo's finding that "even with one predicament in
which defendant Rustan found itself wherein commercial operation was delayed, it accommodated
all its suppliers of raw materials, including plaintiff, Romeo Lluch, by allowing them to deliver all
its stockpiles of cut wood" (Decision, page 202, Record on Appeal) to be both illogical and
inconsistent. Illogical, because as appellee Rustan itself claimed "if the plant could not be operated
on a commercial scale, it would then be illogical for defendant Rustan to continue accepting
deliveries of raw materials." Inconsistent because this kind of "concern" or "accommodation" is
not usual or consistent with ordinary business practice considering that this would mean adequate
losses to the company. More so, if We consider that appellee is a new company and could not
therefore afford to absorb more losses than it already allegedly incurred by the consequent defects
in the machineries. cdrep

Clearly therefore, this is a breach of the contract entered into by and between appellees and
appellants which warrants the intervention of this Court."

xxx xxx xxx

. . . The letter of September 30, 1968, Exh. "D" shows that defendants were terminating the
contract of sale (Exh. "A"), and refusing any future or further delivery — whether on the ground
that they had sufficient supply of pulp wood materials or that appellants cannot meet the standard
of quality of pulp wood materials that Rustan needs or that there were defects in appellees'
machineries resulting in an inability to continue full commercial operations.

Furthermore, there is evidence on record that appellees have been accepting deliveries of pulp
wood materials from other sources, i.e. Salem Usman, Fermin Villanueva and Pacasum even after
September 30, 1968.
Lastly, it would be unjust for the court a quo to rule that the contract of sale be temporarily
suspended until Rustan, et al., are ready to accept deliveries from appellants. This would make the
resumption of the contract purely dependent on the will of one party — the appellees, and they
could always claim, as they did in the instant case, that they have more than sufficient supply of
pulp wood when in fact they have been accepting the same from other sources. Added to this, the
court a quo was imposing a new condition in the contract, one that was not agreed upon by the
parties."(Pages 8-10, Decision; Pages 55-57, Rollo)

The matter of Tantoco's and Vergara's joint and several liability as a result of the alleged breach of
the contract is dependent, first of all, on whether Rustan Pulp and Paper Mills may legally exercise
the right of stoppage should there be a glut of raw materials at its plant.

And insofar as the express discretion on the part of petitioners is concerned regarding the right of
stoppage, We feel that there is cogent basis for private respondents' apprehension on the illusory
resumption of deliveries inasmuch as the prerogative suggests a condition solely dependent upon
the will of petitioners. Petitioners can stop delivery of pulp wood from private respondents if the
supply at the plant is sufficient as ascertained by petitioners, subject to re-delivery when the need
arises as determined likewise by petitioners. This is Our simple understanding of the literal import
of paragraph 7 of the obligation in question. A purely potestative imposition of this character must
be obliterated from the face of the contract without affecting the rest of the stipulations
considering that the condition relates to the fulfillment of an already existing obligation and not to
its inception (Civil Code Annotated, by Padilla, 1987 Edition, Volume 4, Page 160). It is, of
course, a truism in legal jurisprudence that a condition which is both potestative (or facultative)
and resolutory may be valid, even though the saving clause is left to the will of the obligor like
what this Court, through Justice Street, said in Taylor vs. Uy Tieng Piao and Tan Liuan (43 Phil.
873; 879; cited in Commentaries and Jurisprudence on the Civil Code, by Tolentino, Volume 4,
1991 edition, page 152). But the conclusion drawn from the Taylor case, which allowed a
condition for unilateral cancellation of the contract when the machinery to be installed on the
factory did not arrive in Manila, is certainly inappropriate for application to the case at hand
because the factual milieu in the legal tussle dissected by Justice Street conveys that the proviso
relates to the birth of the undertaking and not the fulfillment of an existing obligation. LLjur

In support of the second ground for allowance of the petition, petitioners are of the impression that
the letter dated September 30, 1968 sent to private respondents is well within the right of stoppage
guaranteed to them by paragraph 7 of the contract of sale which was construed by petitioners to be
a temporary suspension of deliveries. There is no doubt that the contract speaks loudly about
petitioners' prerogative but what diminishes the legal efficacy of such right is the condition
attached to it which, as aforesaid, is dependent exclusively on their will for which reason, We have
no alternative but to treat the controversial stipulation as inoperative (Article 1306, New Civil
Code). It is for this same reason that We are not inclined to follow the interpretation of petitioners
that the suspension of delivery was merely temporary since the nature of the suspension itself is
again conditioned upon petitioners' determination of the sufficiency of supplies at the plant.

Neither are We prepared to accept petitioners' exculpation grounded on frustration of the

commercial object under Article 1267 of the New Civil Code, because petitioners continued
accepting deliveries from the suppliers. This conduct will estop petitioners from claiming that the
breakdown of the machinery line was an extraordinary obstacle to their compliance to the
prestation. It was indeed incongruous for petitioners to have sent the letters calling for suspension
and yet, they in effect disregarded their own advice by accepting the deliveries from the suppliers.
The demeanor of petitioners along this line was sought to be justified as an act of generous
accommodation, which entailed greater loss to them and "was not motivated by the usual
businessman's obsession with profit" (Page 34, Petition; Page 40, Rollo). Altruism may be a noble
gesture but petitioners' stance in this respect hardly inspires belief for such an excuse is
inconsistent with a normal business enterprise which takes ordinary care of its concern in cutting
down on expenses (Section 3, (d), Rule 131, Revised Rules of Court). Knowing fully well that
they will encounter difficulty in producing output because of the defective machinery line,
petitioners opted to open the plant to greater loss, thus compounding the costs by accepting
additional supply to the stockpile. Verily, the Appellate Court emphasized the absurdity of
petitioners' action when they acknowledged that "if the plant could not be operated on a
commercial scale, it would then be illogical for defendant Rustan to continue accepting deliveries
of raw materials." (Page 202, Record on Appeal; Page 8, Decision; Page 55, Rollo).

Petitioners argue next that Tantoco and Vergara should not have been adjudged to pay moral
damages and attorney's fees because Tantoco merely represented the interest of Rustan Pulp and
Paper Mills, Inc. while Romeo S. Vergara was not privy to the contract of sale. On this score, We
have to agree with petitioners' citation of authority to the effect that the President and Manager of
a corporation who entered into and signed a contract in his official capacity, cannot be made liable
thereunder in his individual capacity in the absence of stipulation to that effect due to the
personality of the corporation being separate and distinct from the persons composing it (Bangue
Generale Belge vs. Walter Bull and Co., Inc., 84 Phil. 164). And because of this precept, Vergara's
supposed non-participation in the contract of sale although he signed the letter dated September
30, 1968 is completely immaterial. The two exceptions contemplated by Article 1897 of the New
Civil Code where agents are directly responsible are absent and wanting. LLjur

WHEREFORE, the decision appealed from is hereby MODIFIED in the sense that only petitioner
Rustan Pulp and Paper Mills is ordered to pay moral damages and attorney's fees as awarded by
respondent Court.

SO ORDERED.

Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ ., concur.

||| (Rustan Pulp & Paper Mills, Inc. v. Intermediate Appellate Court, G.R. No. 70789, [October 19,
1992])

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JURISPRUDENCE Jurisprudences icon 120x120
18d623f0c132036f56cae92fb52b20c2af27b43f2646c7ffa940287812634a6c
320 PHIL 269-284

THIRD DIVISION

[G.R. No. 107207. November 23, 1995.]

VIRGILIO R. ROMERO, petitioner, vs. HON. COURT OF APPEALS and ENRIQUETA CHUA
VDA. DE ONGSIONG, respondents. cdll

Antonio C. Cabreros, Jr. & Peter M. Porras Law Offices and Yap, Apostol, Gumaru & Balgua for
petitioner.

Joaquin "Bobby" Yuseco for private respondent.

SYLLABUS

1. CIVIL LAW; CONTRACTS; SALES; NATURE AND FORM; CONSTRUED. — A perfected

contract of sale may either be absolute or conditional depending on whether the agreement is
devoid of, or subject to, any condition imposed on the passing of title of the thing to be conveyed
or on the obligation of a party thereto. When ownership is retained until the fulfillment of a
positive condition the breach of the condition will simply prevent the duty to convey title from
acquiring an obligatory force. If the condition is imposed on an obligation of a party which is not
complied with, the other party may either refuse to proceed or waive said condition (Art. 1545,
Civil Code). Where, of course, the condition is imposed upon the perfection of the contract itself,
the failure of such condition would prevent the juridical relation itself from coming into existence.

2. ID.; ID.; CHARACTER THEREOF; DETERMINED BY THE SUBSTANCE, NOT BY THE

TITLE GIVEN BY THE PARTIES. — In determining the real character of the contract, the title
given to it by the parties is not as much significant as its substance. For example, a deed of sale,
although denominated as a deed of conditional sale, may be treated as absolute in nature, if title to
the property sold is not reserved in the vendor or if the vendor is not granted the right to
unilaterally rescind the contract predicated on the fulfillment or non-fulfillment, as the case may
be, of the prescribed condition.
3. ID.; ID.; ID.; TERM "CONDITION" IN THE CONTEXT OF A PERFECTED CONTRACT
OF SALE; CONSTRUED. — The term "condition" in the context of a perfected contract of sale
pertains, in reality, to the compliance by one party of an undertaking the fulfillment of which
would beckon, in turn, the demandability of the reciprocal prestation of the other party. The
reciprocal obligations referred to would normally be, in the case of vendee, the payment of the
agreed purchase price and, in the case of the vendor, the fulfillment of certain express warranties
(which, in the case at bench is the timely eviction of the squatters on the property).

4. ID.; ID.; ID.; WHEN PERFECTED. — A sale is at once perfected when a person (the seller)
obligates himself, for a price certain, to deliver and to transfer ownership of a specified thing or
right to another (the buyer) over which the latter agrees.

5. ID.; ID.; ID.; CONDITIONAL SALE; FULFILLMENT OF CONDITION; OPERATIVE ACT

SETTING INTO MOTION VENDEE'S OBLIGATION. — From the moment the contract is
perfected, the parties are bound not only to the fulfillment of what has been expressly stipulated
but also to all the consequences which, according to their nature, may be in keeping with good
faith, usage and law. Under the agreement, private respondent is obligated to evict the squatters on
the property. The ejectment of the squatters is a condition the operative act of which sets into
motion the period of compliance by petitioner of his own obligation, i.e., to pay the balance of the
purchase price. cdlex

6. ID.; ID.; ID.; ID.; RIGHT OF A VENDEE IN CASE OF NON-FULFILLMENT OF

CONDITION. — Private respondent's failure "to remove the squatters from the property" within
the stipulated period gives petitioner the right to either refuse to proceed with the agreement or
waive that condition in consonance with Article 1545 of the Civil Code. This option clearly
belongs to petitioner and not to private respondent. In contracts of sale particularly, Article 1545
of the Civil Code, aforementioned, allows the obligee to choose between proceeding with the
agreement or waiving the performance of the condition. It is this provision which is the pertinent
rule in the case at bench. Here, evidently, petitioner has waived the performance of the condition
imposed on private respondent to free the property from squatters.

7. ID.; ID.; ID.; ID.; CONDITION IN CASE AT BAR; NOT POTESTATIVE. — We share the
opinion of the appellate court that the undertaking required of private respondent does not
constitute a "potestative condition dependent solely on his will" that might, otherwise, be void in
accordance with Article 1182 of the Civil Code but a "mixed" condition "dependent not on the will
of the vendor alone but also of third persons like the squatters and government agencies and
personnel concerned." We must hasten to add, however, that where the so-called "potestative
condition" is imposed not on the birth of the obligation but on its fulfillment, only the condition is
avoided, leaving unaffected the obligation itself.

8. ID.; ID.; ID.; ID.; ACTION FOR RESCISSION; NOT WARRANTED IN CASE AT BAR. —
Private respondent's action for rescission is not warranted. She is not the injured party. The right of
resolution of a party to an obligation under Article 1191 of the Civil Code is predicated on a
breach of faith by the other party that violates the reciprocity between them. It is private
respondent who has failed in her obligation under the contract. Petitioner did not breach the
agreement. He has agreed, in fact, to shoulder the expenses of the execution of the judgment in the
ejectment case and to make arrangements with the sheriff to effect such execution. In his letter of
23 June 1989, counsel for petitioner has tendered payment and demanded forthwith the execution
of the deed of absolute sale. Parenthetically, this offer to pay, having been made prior to the
demand for rescission, assuming for the sake of argument that such a demand is proper under
Article 1592 of the Civil Code, would likewise suffice to defeat private respondent's prerogative to
rescind thereunder. cdlex

DECISION

VITUG, J p:

The parties pose this question: May the vendor demand the rescission of a contract for the sale of a
parcel of land for a cause traceable to his own failure to have the squatters on the subject property
evicted within the contractually-stipulated period?

Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of production,
manufacture and exportation of perlite filter aids, permalite insulation and processed perlite ore. In
1988, petitioner and his foreign partners decided to put up a central warehouse in Metro Manila on
a land area of approximately 2,000 square meters. The project was made known to several
freelance real estate brokers.

A day or so after the announcement, Alfonso Flores and his wife, accompanied by a broker,
offered a parcel of land measuring 1,952 square meters. Located in Barangay San Dionisio,
Parañaque, Metro Manila, the lot was covered by TCT No. 361402 in the name of private
respondent Enriqueta Chua vda. de Ongsiong. Petitioner visited the property and, except for the
presence of squatters in the area, he found the place suitable for a central warehouse. cdasia

Later, the Flores spouses called on petitioner with a proposal that should he advance the amount of
P50,000.00 which could be used in taking up an ejectment case against the squatters, private
respondent would agree to sell the property for only P800.00 per square meter. Petitioner
expressed his concurrence. On 09 June 1988, a contract, denominated "Deed of Conditional Sale,"
was executed between petitioner and private respondent. The simply-drawn contract read:

"DEED OF CONDITIONAL SALE

"KNOW ALL MEN BY THESE PRESENTS:

"This Contract, made and executed in the Municipality of Makati, Philippines this 9th day of June,
1988 by and between:

"ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age, widow, Filipino and residing at 105
Simoun St., Quezon City, Metro Manila, hereinafter referred to as the VENDOR;

— and —

"VIRGILIO R. ROMERO, married to Severina L. Lat, of legal age, Filipino and residing at 110
San Miguel St., Plainview Subd., Mandaluyong Metro Manila, hereinafter referred to as the
VENDEE: cdtai

"WITNESSETH: That

"WHEREAS, the VENDOR is the owner of One (1) parcel of land with a total area of ONE
THOUSAND NINE HUNDRED FIFTY TWO (1,952) SQUARE METERS, more or less, located
in Barrio San Dionisio, Municipality of Parañaque, Province of Rizal, covered by TCT No.
361402 issued by the Registry of Deeds of Pasig and more particularly described as follows:

xxx xxx xxx

"WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land as the VENDOR has
accepted the offer, subject to the terms and conditions hereinafter stipulated:

"NOW, THEREFORE, for and in consideration of the sum of ONE MILLION FIVE HUNDRED
SIXTY ONE THOUSAND SIX HUNDRED PESOS (P1,561,600.00) ONLY, Philippine Currency,
payable by VENDEE to in to (sic) manner set forth, the VENDOR agrees to sell to the VENDEE,
their heirs, successors, administrators, executors, assign, all her rights, titles and interest in and to
the property mentioned in the FIRST WHEREAS CLAUSE, subject to the following terms and
conditions: cdt

"1. That the sum of FIFTY THOUSAND PESOS (50,000.00) ONLY Philippine Currency, is to be
paid upon signing and execution of this instrument.

"2. The balance of the purchase price in the amount of ONE MILLION FIVE HUNDRED
ELEVEN THOUSAND SIX HUNDRED PESOS (P1,511,600.00) ONLY shall be paid 45 days
after the removal of all squatters from the above described property.

"3. Upon full payment of the overall purchase price as aforesaid, VENDOR without necessity of
demand shall immediately sign, execute, acknowledged (sic) and deliver the corresponding deed
of absolute sale in favor of the VENDEE free from all liens and encumbrances and all Real Estates
taxes are all paid and updated.

"It is hereby agreed, covenanted and stipulated by and between the parties hereto that if after 60
days from the date of the signing of this contract the VENDOR shall not be able to remove the
squatters from the property being purchased, the downpayment made by the buyer shall be
returned/reimbursed by the VENDOR to the VENDEE. aisadc
"That in the event that the VENDEE shall not be able to pay the VENDOR the balance of the
purchase price of ONE MILLION FIVE HUNDRED ELEVEN THOUSAND SIX HUNDRED
PESOS (P1,511,600.00) ONLY after 45 days from written notification to the VENDEE of the
removal of the squatters from the property being purchased, the FIFTY THOUSAND PESOS
(P50,000.00) previously paid as downpayment shall be forfeited in favor of the VENDOR.

"Expenses for the registration such as registration fees, documentary stamp, transfer fee, assurance
and such other fees and expenses as may be necessary to transfer the title to the name of the
VENDEE shall be for the account of the VENDEE while capital gains tax shall be paid by the
VENDOR.

"IN WITNESS WHEREOF, parties hereunto signed those (sic) presents in the City of Makati
MM, Philippines on this 9th day of June, 1988.

(Sgd.) (Sgd.)

VIRGILIO R. ROMERO ENREQUETA CHUA VDA.

DE ONGSIONG

Vendee Vendor

"SIGNED IN THE PRESENCE OF:

(Sgd.) (Sgd.)

Rowena C. Ongsiong Jack M. Cruz" 1

Alfonso Flores, in behalf of private respondent, forthwith received and acknowledged a check for
P50,000.00 2 from petitioner. 3 aisadc

Pursuant to this agreement, private respondent filed a complaint for ejectment (Civil Case No.
7579) against Melchor Musa and 29 other squatter families with the Metropolitan Trial Court of
Parañaque. A few months later, or on 21 February 1989, judgment was rendered ordering the
defendants to vacate the premises. The decision was handed down beyond the 60-day period
(expiring 09 August 1988) stipulated in the contract. The writ of execution of the judgment was
issued, still later, on 30 March 1989. cdll
In a letter, dated 07 April 1989, private respondent sought to return the P50,000.00 she received
from petitioner since, she said, she could not "get rid of the squatters" on the lot. Atty. Sergio A.F.
Apostol, counsel for petitioner, in his reply of 17 April 1989, refused the tender and stated:

"Our client believes that with the exercise of reasonable diligence considering the favorable
decision rendered by the Court and the writ of execution issued pursuant thereto, it is now possible
to eject the squatters from the premises of the subject property, for which reason, he proposes that
he shall take it upon himself to eject the squatters, provided, that expenses which shall be incurred
by reason thereof shall be chargeable to the purchase price of the land." 4

Meanwhile, the Presidential Commission for the Urban Poor ("PCUP"), through its Regional
Director for Luzon, Farley O. Viloria, asked the Metropolitan Trial Court of Parañaque for a grace
period of 45 days from 21 April 1989 within which to relocate and transfer the squatter families.
Acting favorably on the request, the court suspended the enforcement of the writ of execution
accordingly. cdta

On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of the 45-day grace
period and his client's willingness to "underwrite the expenses for the execution of the judgment
and ejectment of the occupants." 5

In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private respondent, advised
Atty. Apostol that the Deed of Conditional Sale had been rendered null and void by virtue of his
client's failure to evict the squatters from the premises within the agreed 60-day period. He added
that private respondent had "decided to retain the property." 6

On 23 June 1989, Atty. Apostol wrote back to explain:

"The contract of sale between the parties was perfected from the very moment that there was a
meeting of the minds of the parties upon the subject lot and the price in the amount of
P1,561,600.00. Moreover, the contract had already been partially fulfilled and executed upon
receipt of the downpayment of your client. Ms. Ongsiong is precluded from rejecting its binding
effects relying upon her inability to eject the squatters from the premises of subject property
during the agreed period. Suffice it to state that, the provisions of the Deed of Conditional Sale do
not grant her the option or prerogative to rescind the contract and to retain the property should she
fail to comply with the obligation she had assumed under the contract. In fact, a perusal of the
terms and conditions of the contract clearly shows that the right to rescind the contract and to
demand return/reimbursement of the downpayment is granted to our client for his protection. cdtai

"Instead, however, of availing himself of the power to rescind the contract and demand the return,
reimbursement of the downpayment, our client had opted to take it upon himself to eject the
squatters from the premises. Precisely, we refer you to our letters addressed to your client dated
April 17, 1989 and June 8, 1989.

"Moreover, it is basic under the law on contracts that the power to rescind is given to the injured
party. Undoubtedly, under the circumstances, our client is the injured party.

"Furthermore, your client has not complied with her obligation under their contract in good faith.
It is undeniable that Ms. Ongsiong deliberately refused to exert efforts to eject the squatters from
the premises of the subject property and her decision to retain the property was brought about by
the sudden increase in the value of realties in the surrounding areas.

"Please consider this letter as a tender of payment to your client and a demand to execute the
absolute Deed of Sale." 7 cdtai

A few days later (or on 27 June 1989), private respondent prompted by petitioner's continued
refusal to accept the return of the P50,000.00 advance payment, filed with the Regional Trial
Court of Makati, Branch 133, Civil Case No. 89-4394 for a rescission of the deed of "conditional"
sale, plus damages, and for the consignation of P50,000.00 cash.

Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued an alias writ of execution in
Civil Case No. 7579 on motion of private respondent but the squatters apparently still stayed on.

Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial Court of Makati 8 rendered
decision holding that private respondent had no right to rescind the contract since it was she who
"violated her obligation to eject the squatters from the subject property" and that petitioner, being
the injured party, was the party who could, under Article 1191 of the Civil Code, rescind the
agreement. The court ruled that the provision in the contract relating to (a) the
return/reimbursement of the P50,000.00 if the vendor were to fail in her obligation to free the
property from the squatters within the stipulated period or (b), upon the other hand, the sum's
forfeiture by the vendor if the vendee were to fail in paying the agreed purchase price, amounted
to "penalty clauses." The court added:

"This court is not convinced of the ground relied upon by the plaintiff in seeking the rescission,
namely: (1) he (sic) is afraid of the squatters; and (2) she has spent so much to eject them from the
premises (p. 6, tsn, ses. Jan. 3, 1990). Militating against her profession of good faith is plaintiff's
conduct which is not in accord with the rules of fair play and justice. Notably, she caused the
issuance of an alias writ of execution on August 25, 1989 (Exh. 6) in the ejectment suit which was
almost two months after she filed the complaint before this Court on June 27, 1989. If she were
really afraid of the squatters, then she should not have pursued the issuance of an alias writ of
execution. Besides, she did not even report to the police the alleged phone threats from the
squatters. To the mind of the Court, the so-called factor is simply factuitous (sic)." 9 cdasia

The lower court, accordingly, dismissed the complaint and ordered, instead, private respondent to
eject or cause the ejectment of the squatters from the property and to execute the absolute deed of
conveyance upon payment of the full purchase price by petitioner.

Private respondent appealed to the Court of Appeals. On 29 May 1992, the appellate court
rendered its decision. 10 It opined that the contract entered into by the parties was subject to a
resolutory condition, i.e., the ejectment of the squatters from the land, the non-occurrence of
which resulted in the failure of the object of the contract; that private respondent substantially
complied with her obligation to evict the squatters; that it was petitioner who was not ready to pay
the purchase price and fulfill his part of the contract, and that the provision requiring a mandatory
return/reimbursement of the P50,000.00 in case private respondent would fail to eject the squatters
within the 60-day period was not a penal clause. Thus, it concluded:

"WHEREFORE, the decision appealed from is REVERSED and SET ASIDE, and a new one
entered declaring the contract of conditional sale dated June 9, 1988 cancelled and ordering the
defendant-appellee to accept the return of the downpayment in the amount of P50,000.00 which
was deposited in the court below. No pronouncement as to costs." 11 cdt

Failing to obtain a reconsideration, petitioner filed this petition for review on certiorari raising
issues that, in fine, center on the nature of the contract adverted to and the P50,000.00 remittance
made by petitioner. cdll

A perfected contract of sale may either be absolute or conditional 12 depending on whether the
agreement is devoid of, or subject to, any condition imposed on the passing of title of the thing to
be conveyed or on the obligation of a party thereto. When ownership is retained until the
fulfillment of a positive condition the breach of the condition will simply prevent the duty to
convey title from acquiring an obligatory force. If the condition is imposed on an obligation of a
party which is not complied with, the other party may either refuse to proceed or waive said
condition (Art. 1545, Civil Code). Where, of course, the condition is imposed upon the perfection
of the contract itself, the failure of such condition would prevent the juridical relation itself from
coming into existence. 13

In determining the real character of the contract, the title given to it by the parties is not as much
as significant as its substance. For example, a deed of sale, although denominated as a deed of
conditional sale, may be treated as absolute in nature, if title to the property sold is not reserved in
the vendor or if the vendor is not granted the right to unilaterally rescind the contract predicated
on the fulfillment or non-fulfillment, as the case may be, of the prescribed condition. 14 aisadc

The term "condition" in the context of a perfected contract of sale pertains, in reality, to the
compliance by one party of an undertaking the fulfillment of which would beckon, in turn, the
demandability of the reciprocal prestation of the other party. The reciprocal obligations referred to
would normally be, in the case of vendee, the payment of the agreed purchase price and, in the
case of the vendor, the fulfillment of certain express warranties (which, in the case at bench is the
timely eviction of the squatters on the property).

It would be futile to challenge the agreement here in question as not being a duly perfected
contract. A sale is at once perfected where a person (the seller) obligates himself, for a price
certain, to deliver and to transfer ownership of a specified thing or right to another (the buyer)
over which the latter agrees. 15

The object of the sale, in the case before us, was specifically identified to be as 1,952-square meter
lot in San Dionisio, Parañaque, Rizal, covered by Transfer Certificate of Title No. 361402 of the
Registry of Deeds for Pasig and therein technically described. The purchase price was fixed at
P1,561,600.00, of which P50,000.00 was to be paid upon the execution of the document of sale
and the balance of P1,511,600 payable "45 days after the removal of all squatters from the above
described property." cdta

From the moment the contract is perfected, the parties are bound not only to the fulfillment of
what has been expressly stipulated but also to all the consequences which, according to their
nature, may be in keeping with good faith, usage and law. Under the agreement, private
respondent is obligated to evict the squatters on the property. The ejectment of the squatters is a
condition the operative act of which sets into motion the period of compliance by petitioner of his
own obligation, i.e., to pay the balance of the purchase price. Private respondent's failure to
"remove the squatters from the property" within the stipulated period gives petitioner the right to
either refuse to proceed with the agreement or waive that condition in consonance with Article
1545 of the Civil Code. 16 This option clearly belongs to petitioner and not to private respondent.

We share the opinion of the appellate court that the undertaking required of private respondent
does not constitute a "potestative condition dependent solely on his will" that might, otherwise, be
void in accordance with Article 1182 of the Civil Code 17 but a "mixed" condition "dependent not
on the will of the vendor alone but also of third persons like the squatters and government
agencies and personnel concerned." 18 We must hasten to add, however, that where the so-called
"potestative condition" is imposed not on the birth of the obligation but on its fulfillment, only the
condition is avoided, leaving unaffected obligation itself. 19

In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows the
obligee to choose between proceeding with the agreement or waiving the performance of the
condition. It is this provision which is the pertinent rule in the case at bench. Here, evidently,
petitioner has waived the performance of the condition imposed on private respondent to free the
property from squatters. 20

In any case, private respondent's action for rescission is not warranted. She is not the injured party.
21 The right of resolution of a party to an obligation under Article 1191 of the Civil Code is
predicated on a breach of faith by the other party that violates the reciprocity between them. 22 It
is private respondent who has failed in her obligation under the contract. Petitioner did not breach
the agreement. He has agreed, in fact, to shoulder the expenses of the execution of the judgment in
the ejectment case and to make arrangement with the sheriff to effect such execution. In his letter
of 23 June 1989, counsel for petitioner has tendered payment and demanded forthwith the
execution of the deed of absolute sale. Parenthetically, this offer to pay, having been made prior to
the demand for rescission, assuming for the sake of argument that such a demand is proper under
Article 1592 23 of the Civil Code, would likewise suffice to defeat private respondent's
prerogative to rescind thereunder. LexLibris
There is no need to still belabor the question of whether the P50,000.00 advance payment is
reimbursable to petitioner or forfeitable by private respondent, since, on the basis of our foregoing
conclusions, the matter has ceased to be an issue. Suffice it to say that petitioner having opted to
proceed with the sale, neither may petitioner demand its reimbursement from private respondent
nor may private respondent subject it to forfeiture.

WHEREFORE, the questioned decision of the Court of Appeals is hereby REVERSED AND SET
ASIDE, and another is entered ordering petitioner to pay private respondent the balance of the
purchase price and the latter to execute the deed of absolute sale in favor of petitioner. No costs.

SO ORDERED. cdlex

Feliciano, Romero, Melo and Panganiban, JJ., concur.

Footnotes
1.Records, pp. 60-61.

2.Exh. 9.

3.Exh. 2.

4.Records, p. 116.

5.Exh. 8-B.

6.Exh. D.

7.Records, pp. 74-75.

8.Presided by Judge Buenaventura J. Guerrero.

9.Records, p. 205.

10.Penned by Associate Justice Fermin A. Martin, Jr. and concurred in by Associate Justices
Emeterio C. Cui and Cezar D. Francisco.

11.Rollo, p. 46.

12.Art. 1458, second paragraph, Civil Code of the Philippines.

13.See Ang Yu Asuncion, et al. vs. Court of Appeals, 238 SCRA 602.
14.Ibid., Vol. V, p. 3 citing Dignos v. Court of Appeals, No. L-59266, February 29, 1988, 158
SCRA 375.

15.Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the
thing which is the object of the contract and upon the price.

From that moment, the parties may reciprocally demand performance, subject to the provisions
of the law governing the form of contracts.

16.Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition
which is not performed, such party may refuse to proceed with the contract or he may waive
performance of the condition. If the other party has promised that the condition should happen or
be performed, such first mentioned party may also treat the nonperformance of the condition as a
breach of warranty.

Where the ownership in the thing has not passed, the buyer may treat the fulfillment by the seller
of his obligation to deliver the same as described and as warranted expressly or by implication in
the contract of sale as a condition of the obligation of the buyer to perform his promise to accept
and pay for the thing.

17.Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the
conditional obligation shall be void. If it depends upon chance or upon the will of a third person,
the obligation shall take effect in conformity with the provisions of this Code.

18.Decision, p. 17.

19.See Osmeña vs. Rama, 14 Phil. 99.

20.See: Intestate Estate of the Late Ricardo P. Presbitero, Sr. v. Court of Appeals, 217 SCRA 372.

21.In Boysaw v. Interphil. Promotions, Inc. (148 SCRA 635, 643), the Court has said: "The power
to rescind is given to the injured party. 'Where the plaintiff is the party who did not perform the
undertaking which was bound by the terms of the agreement to perform, he is not entitled to insist
upon the performance of the contract by the defendant, or recover damages by reason of his own
breach.' "

22.Deiparine, Jr. v. Court of Appeals, 221 SCRA 503, 513 citing Universal Food Corporation v.
Court of Appeals, 33 SCRA 1.

23.See Ocampo v. Court of Appeals, supra. Art. 1592 states: "In the sale of immovable property,
even though it may have been stipulated that upon the failure to pay the price at the time agreed
upon the rescission of the contract shall of right take place, the vendee may pay, even after the
expiration of the period, as long as no demand for rescission of the contract has been made upon
him either judicially or by a notarial act. After the demand, the court may not grant him a new
term."

||| (Romero v. Court of Appeals, G.R. No. 107207, [November 23, 1995], 320 PHIL 269-284)

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275 PHIL 332-345

SECOND DIVISION

[G.R. No. 77425. June 19, 1991.]

THE ROMAN CATHOLIC ARCHBISHOP OF MANILA, THE ROMAN CATHOLIC BISHOP

OF IMUS, and the SPOUSES FLORENCIO IGNAO and SOLEDAD C. IGNAO, petitioners, vs.
HON. COURT OF APPEALS, THE ESTATE OF DECEASED SPOUSES EUSEBIO DE
CASTRO and MARTINA RIETA, represented by MARINA RIETA GRANADOS and THERESA
RIETA TOLENTINO, respondents.

[G.R. No. 77450. June 19, 1991.]

THE ROMAN CATHOLIC ARCHBISHOP OF MANILA, THE ROMAN CATHOLIC BISHOP

OF IMUS, and the SPOUSES FLORENCIO IGNAO and SOLEDAD C. IGNAO, petitioners, vs.
HON. COURT OF APPEALS, THE ESTATE OF DECEASED SPOUSES EUSEBIO DE
CASTRO and MARTINA RIETA, represented by MARINA RIETA GRANADOS and THERESA
RIETA TOLENTINO, respondents.

Severino C. Dominguez for petitioner Roman Catholic Bishop of Imus, Cavite.

Dolorfino and Dominguez Law Offices for Sps. Ignao.

Joselito R. Enriquez for private respondents.

SYLLABUS
1. CIVIL LAW; DEED OF DONATION; WHEN CONTENTS THEREOF PROVIDE FOR
AUTOMATIC REVERSION OF PROPERTY DONATED IN CASE OF VIOLATION OF
CONDITIONS SET FORTH THEREIN, JUDICIAL ACTION FOR RESCISSION, NOT
NECESSARY. — The deed of donation involved herein expressly provides for automatic
reversion of the property donated in case of violation of the condition therein, hence a judicial
declaration revoking the same is not necessary. As aptly stated by the Court of Appeals: "By the
very express provision in the deed of donation itself that the violation of the condition thereof
would render ipso facto null and void the deed of donation, WE are of the opinion that there would
be no legal necessity anymore to have the donation judicially declared null and void for the reason
that the very deed of donation itself declares it so. For where (sic) it otherwise and that the donors
and the donee contemplated a court action during the execution of the deed of donation to have the
donation judicially rescinded or declared null and void should the condition be violated, then the
phrase reading 'would render ipso facto null and void' would not appear in the deed of donation."
In support of its aforesaid position, respondent court relied on the rule that a judicial action for
rescission of a contract is not necessary where the contract provides that it may be revoked and
cancelled for violation of any of its terms and conditions. It called attention to the holding that
there is nothing in the law that prohibits the parties from entering into an agreement that a
violation of the terms of the contract would cause its cancellation even without court intervention,
and that it is not always necessary for the injured party to resort to court for rescission of the
contract. It reiterated the doctrine that a judicial action is proper only when there is absence of a
special provision granting the power of cancellation.

2. ID.; ID.; ID.; DE LUNA, ET AL., v. ABRIGO, ET AL. [181 SCRA 150], APPLICABLE IN
CASE AT BAR; RATIONALE FOR THE RULE. — The validity of such a stipulation in the deed
of donation providing for the automatic reversion of the donated property to the donor upon non-
compliance of the condition was upheld in the recent case of De Luna, et al. vs. Abrigo, et al., 181
SCRA 150 (1990). It was held therein that said stipulation is in the nature of an agreement
granting a party the right to rescind a contract unilaterally in case of breach, without need of going
to court, and that, upon the happening of the resolutory condition or non-compliance with the
conditions of the contract, the donation is automatically revoked without need of a judicial
declaration to that effect. While what was the subject of that case was an onerous donation which,
under Article 733 of the Civil Code is governed by the rules on contracts, since the donation in the
case at bar is also subject to the same rules because of its provision on automatic revocation upon
the violation of a resolutory condition, from parity of reasons said pronouncements in De Luna
pertinently apply. The rationale for the foregoing is that in contracts providing for automatic
revocation, judicial intervention is necessary not for purposes of obtaining a judicial declaration
rescinding a contract already deemed rescinded by virtue of an agreement providing for rescission
even without judicial intervention, but in order to determine whether or not the rescission was
proper.

3. ID.; ID.; ID.; GENERAL RULES ON CONTRACT AND PRESCRIPTION SHOULD APPLY,
NOT ART. 764 OF THE CODE. — When a deed of donation, as in this case, expressly provides
for automatic revocation and reversion of the property donated, the rules on contract and the
general rules on prescription should apply, and not Article 764 of the Civil Code. Since Article
1306 of said Code authorizes the parties to a contract to establish such stipulations, clauses, terms
and conditions not contrary to law, morals, good customs, public order or public policy, we are of
the opinion that, at the very least, that stipulation of the parties providing for automatic revocation
of the deed of donation, without prior judicial action for that purpose, is valid subject to the
determination of the propriety of the rescission sought. Where such propriety is sustained, the
decision of the court will be merely declaratory of the revocation, but it is not in itself the
revocatory act.

4. ID.; ID.; PROHIBITION AGAINST ALIENATION FOR AN UNREASONABLE LENGTH

OF TIME; CONTRARY TO PUBLIC POLICY. — The cause of action of private respondents is
based on the alleged breach by petitioners of the resolutory condition in the deed of donation that
the property donated should not be sold within a period of one hundred (100) years from the date
of execution of the deed of donation. Said condition, in our opinion, constitutes an undue
restriction on the rights arising from ownership of petitioners and is, therefore, contrary to public
policy. Donation, as a mode of acquiring ownership, results in an effective transfer of title over the
property from the donor to the donee. Once a donation is accepted, the donee becomes the
absolute owner of the property donated. Although the donor may impose certain conditions in the
deed of donation, the same must not be contrary to law, morals, good customs, public order and
public policy. The condition imposed in the deed of donation in the case before us constitutes a
patently unreasonable and undue restriction on the right of the donee to dispose of the property
donated, which right is an indispensable attribute of ownership. Such a prohibition against
alienation, in order to be valid, must not be perpetual or for an unreasonable period of time.

5. ID.; ID.; ID.; SHOULD BE DECLARED NULL AND VOID AS AN IMPOSSIBLE

CONDITION. — It is significant that the provisions therein regarding a testator also necessarily
involve, in the main, the devolution of property by gratuitous title hence, as is generally the case
of donations, being an act of liberality, the imposition of an unreasonable period of prohibition to
alienate the property should be deemed anathema to the basic and actual intent of either the donor
or testator. For that reason, the regulatory arm of the law is or must be interposed to prevent an
unreasonable departure from the normative policy expressed in the aforesaid Articles 494 and 870
of the Code. In the case at bar, we hold that the prohibition in the deed of donation against the
alienation of the property for an entire century, being an unreasonable emasculation and denial of
an integral attribute of ownership, should be declared as an illegal or impossible condition within
the contemplation of Article 727 of the Civil Code. Consequently, as specifically stated in said
statutory provision, such condition shall be considered as not imposed. No reliance may
accordingly be placed on said prohibitory paragraph in the deed of donation. The net result is that,
absent said proscription, the deed of sale supposedly constitutive of the cause of action for the
nullification of the deed of donation is not in truth violative of the latter hence, for lack of cause of
action, the case for private respondents must fail.

6. SUPREME COURT; HAS AUTHORITY TO REVIEW MATTERS EVEN IF THEY ARE NOT
ASSIGNED AS ERRORS ON APPEAL; CASE AT BAR. — It will readily be noted that the
provision in the deed of donation against alienation of the land for one hundred (100) years was
the very basis for the action to nullify the deed of donation. At the same time, it was likewise the
controverted fundament of the motion to dismiss the case a quo, which motion was sustained by
the trial court and set aside by respondent court, both on the issue of prescription. That ruling of
respondent court interpreting said provision was assigned as an error in the present petition. While
the issue of the validity of the same provision was not squarely raised, it is ineluctably related to
petitioner's aforesaid assignment of error since both issues are grounded on and refer to the very
same provision. This Court is clothed with ample authority to review matters, even if they are not
assigned as errors on appeal, if it finds that their consideration is necessary in arriving at a just
decision of the case. Thus, we have held that an unassigned error closely related to an error
properly assigned, or upon which the determination of the question properly assigned is
dependent, will be considered by the appellate court notwithstanding the failure to assign it as
error.

7. ID.; ID.; FOR THE EXPEDITIOUS ADMINISTRATION OF SUBSTANTIAL JUSTICE,

REMAND OF THE CASE TO THE LOWER COURT FOR FURTHER RECEPTION OF
EVIDENCE, NOT NECESSARY. — We have laid down the rule that the remand of the case to
the lower court for further reception of evidence is not necessary where the Court is in a position
to resolve the dispute based on the records before it. On many occasions, the Court, in the public
interest and for the expeditious administration of justice has resolved actions on the merits instead
of remanding them to the trial court for further proceedings, such as where the ends of justice,
would not be subserved by the remand of the case. The aforestated considerations obtain in and
apply to the present case with respect to the matter of the validity of the resolutory condition in
question.

DECISION

REGALADO, J p:

These two petitions for review on certiorari 1 seek to overturn the decision of the Court of Appeals
in CA-G.R. CV No. 05456 2 which reversed and set aside the order of the Regional Trial Court of
Imus, Cavite dismissing Civil Case No. 095-84, as well as the order of said respondent court
denying petitioner's motions for the reconsideration of its aforesaid decision.

On November 29, 1984, private respondents as plaintiffs, filed a complaint for nullification of
deed of donation, rescission of contract and reconveyance of real property with damages against
petitioners Florencio and Soledad C. Ignao and the Roman Catholic Bishop of Imus, Cavite,
together with the Roman Catholic Archbishop of Manila, before the Regional Trial Court, Branch
XX, Imus, Cavite and which was docketed as Civil Case No. 095-84 therein. 3

In their complaint, private respondents alleged that on August 23, 1930, the spouses Eusebio de
Castro and Martina Rieta, now both deceased, executed a deed of donation in favor of therein
defendant Roman Catholic Archbishop of Manila covering a parcel of land (Lot No. 626,
Cadastral Survey of Kawit), located at Kawit, Cavite, containing an area of 964 square meters,
more or less. The deed of donation allegedly provides that the donee shall not dispose or sell the
property within a period of one hundred (100) years from the execution of the deed of donation,
otherwise a violation of such condition would render ipso facto null and void the deed of donation
and the property would revert to the estate of the donors.

It is further alleged that on or about June 30, 1980, and while still within the prohibitive period to
dispose of the property, petitioner Roman Catholic Bishop of Imus, in whose administration all
properties within the province of Cavite owned by the Archdiocese of Manila was allegedly
transferred on April 26, 1962, executed a deed of absolute sale of the property subject of the
donation in favor of petitioners Florencio and Soledad C. Ignao in consideration of the sum of
P114,000.00. As a consequence of the sale, Transfer Certificate of Title No. 115990 was issued by
the Register of Deeds of Cavite on November 15, 1980 in the name of said petitioner spouses.

What transpired thereafter is narrated by respondent court in its assailed decision. 4 On December
17, 1984, petitioners Florencio Ignao and Soledad C. Ignao filed a motion to dismiss based on the
grounds that (1) herein private respondents, as plaintiffs therein, have no legal capacity to sue; and
(2) the complaint states no cause of action.

On December 19, 1984, petitioner Roman Catholic Bishop of Imus also filed a motion to dismiss
on three (3) grounds, the first two (2) grounds of which were identical to that of the motion to
dismiss filed by the Ignao spouses, and the third ground being that the cause of action has
prescribed.

On January 9, 1985, the Roman Catholic Archbishop of Manila likewise filed a motion to dismiss
on the ground that he is not a real party in interest and, therefore, the complaint does not state a
cause of action against him.

After private respondents had filed their oppositions to the said motions to dismiss and the
petitioners had countered with their respective replies, with rejoinders thereto by private
respondents, the trial court issued an order dated January 31, 1985, dismissing the complaint on
the ground that the cause of action has prescribed. 5

Private respondents thereafter appealed to the Court of Appeals raising the issues on (a) whether
or not the action for rescission of contracts (deed of donation and deed of sale) has prescribed; and
(b) whether or not the dismissal of the action for rescission of contracts (deed of donation and
deed of sale) on the ground of prescription carries with it the dismissal of the main action for
reconveyance of real property. 6

On December 23, 1986, respondent Court of Appeals, holding that the action has not yet
prescribed, rendered a decision in favor of private respondents, with the following dispositive
portion: Cdpr

"WHEREFORE, the Order of January 31, 1985 dismissing appellants' complaint is SET ASIDE
and Civil Case No. 095-84 is hereby ordered REINSTATED and REMANDED to the lower court
for further proceedings. No costs." 7

Petitioners Ignao and the Roman Catholic Bishop of Imus then filed their separate motions for
reconsideration which were denied by respondent Court of Appeals in its resolution dated
February 6, 1987, 8 a hence, the filing of these appeals by certiorari.

It is the contention of petitioners that the cause of action of herein private respondents has already
prescribed, invoking Article 764 of the Civil Code which provides that "(t)he donation shall be
revoked at the instance of the donor, when the donee fails to comply with any of the conditions
which the former imposed upon the latter," and that "(t)his action shall prescribe after four years
from the non-compliance with the condition, may be transmitted to the heirs of the donor, and may
be exercised against the donee's heirs."

We do not agree.

Although it is true that under Article 764 of the Civil Code an action for the revocation of a
donation must be brought within four (4) years from the non-compliance of the conditions of the
donation, the same is not applicable in the case at bar. The deed of donation involved herein
expressly provides for automatic reversion of the property donated in case of violation of the
condition therein, hence a judicial declaration revoking the same is not necessary. As aptly stated
by the Court of Appeals:

"By the very express provision in the deed of donation itself that the violation of the condition
thereof would render ipso facto null and void the deed of donation, WE are of the opinion that
there would be no legal necessity anymore to have the donation judicially declared null and void
for the reason that the very deed of donation itself declares it so. For where (sic) it otherwise and
that the donors and the donee contemplated a court action during the execution of the deed of
donation to have the donation judicially rescinded or declared null and void should the condition
be violated, then the phrase reading 'would render ipso facto null and void' would not appear in the
deed of donation." 9

In support of its aforesaid position, respondent court relied on the rule that a judicial action for
rescission of a contract is not necessary where the contract provides that it may be revoked and
cancelled for violation of any of its terms and conditions. 10 It called attention to the holding that
there is nothing in the law that prohibits the parties from entering into an agreement that a
violation of the terms of the contract would cause its cancellation even without court intervention,
and that it is not always necessary for the injured party to resort to court for rescission of the
contract. 11 It reiterated the doctrine that a judicial action is proper only when there is absence of a
special provision granting the power of cancellation. 12

It is true that the aforesaid rules were applied to the contracts involved therein, but we see no
reason why the same should not apply to the donation in the present case. Article 732 of the Civil
Code provides that donations inter vivos shall be governed by the general provisions on contracts
and obligations in all that is not determined in Title III, Book III on donations. Now, said Title III
does not have an explicit provision on the matter of a donation with a resolutory condition and
which is subject to an express provision that the same shall be considered ipso facto revoked upon
the breach of said resolutory condition imposed in the deed therefor, as is the case of the deed
presently in question. The suppletory application of the foregoing doctrinal rulings to the present
controversy is consequently justified.

The validity of such a stipulation in the deed of donation providing for the automatic reversion of
the donated property to the donor upon non-compliance of the condition was upheld in the recent
case of De Luna, et al. vs. Abrigo, et al. 13 It was held therein that said stipulation is in the nature
of an agreement granting a party the right to rescind a contract unilaterally m case of breach,
without need of going to court, and that, upon the happening of the resolutory condition or non-
compliance with the conditions of the contract, the donation is automatically revoked without need
of a judicial declaration to that effect. While what was the subject of that case was an onerous
donation which, under Article 733 of the Civil Code is governed by the rules on contracts, since
the donation in the case at bar is also subject to the same rules because of its provision on
automatic revocation upon the violation of a resolutory condition, from parity of reasons said
pronouncements in De Luna pertinently apply. prcd

The rationale for the foregoing is that in contracts providing for automatic revocation, judical
intervention is necessary not for purposes of obtaining a judicial declaration rescinding a contract
already deemed rescinded by virtue of an agreement providing for rescission even without judicial
intervention, but in order to determine whether or not the rescission was proper. 14

When a deed of donation, as in this case, expressly provides for automatic revocation and
reversion of the property donated, the rules on contract and the general rules on prescription
should apply, and not Article 764 of the Civil Code. Since Article 1306 of said Code authorizes the
parties to a contract to establish such stipulations, clauses, terms and conditions not contrary to
law, morals, good customs, public order or public policy, we are of the opinion that, at the very
least, that stipulation of the parties providing for automatic revocation of the deed of donation,
without prior judicial action for that purpose, is valid subject to the determination of the propriety
of the rescission sought. Where such propriety is sustained, the decision of the court will be
merely declaratory of the revocation, but it is not in itself the revocatory act.

On the foregoing ratiocinations, the Court of Appeals committed no error in holding that the cause
of action of herein private respondents has not yet prescribed since an action to enforce a written
contract prescribes in ten (10) years. 15 It is our view that Article 764 was intended to provide a
judicial remedy in case of non-fulfillment or contravention of conditions specified in the deed of
donation if and when the parties have not agreed on the automatic revocation of such donation
upon the occurrence of the contingency contemplated therein. That is not the situation in the case
at bar.
Nonetheless, we find that although the action filed by private respondents may not be dismissed
by reason of prescription, the same should be dismissed on the ground that private respondents
have no cause of action against petitioners.

The cause of action of private respondents is based on the alleged breach by petitioners of the
resolutory condition in the deed of donation that the property donated should not be sold within a
period of one hundred (100) years from the date of execution of the deed of donation. Said
condition, in our opinion, constitutes an undue restriction on the rights arising from ownership of
petitioners and is, therefore, contrary to public policy.

Donation, as a mode of acquiring ownership, results in an effective transfer of title over the
property from the donor to the donee. Once a donation is accepted, the donee becomes the
absolute owner of the property donated. Although the donor may impose certain conditions in the
deed of donation, the same must not be contrary to law, morals, good customs, public order and
public policy. The condition imposed in the deed of donation in the case before us constitutes a
patently unreasonable and undue restriction on the right of the donee to dispose of the property
donated, which right is an indispensable attribute of ownership. Such a prohibition against
alienation, in order to be valid, must not be perpetual or for an unreasonable period of time.

Certain provisions of the Civil Code illustrative of the aforesaid policy may be considered
applicable by analogy. Under the third paragraph of Article 494, a donor or testator may prohibit
partition for a period which shall not exceed twenty (20) years. Article 870, on its part, declares
that the dispositions of the testator declaring all or part of the estate inalienable for more than
twenty (20) years are void. LLphil

It is significant that the provisions therein regarding a testator also necessarily involve, in the
main, the devolution of property by gratuitous title hence, as is generally the case of donations,
being an act of liberality, the imposition of an unreasonable period of prohibition to alienate the
property should be deemed anathema to the basic and actual intent of either the donor or testator.
For that reason, the regulatory arm of the law is or must be interposed to prevent an unreasonable
departure from the normative policy expressed in the aforesaid Articles 494 and 870 of the Code.

In the case at bar, we hold that the prohibition in the deed of donation against the alienation of the
property for an entire century, being an unreasonable emasculation and denial of an integral
attribute of ownership, should be declared as an illegal or impossible condition within the
contemplation of Article 727 of the Civil Code. Consequently, as specifically stated in said
statutory provision, such condition shall be considered as not imposed. No reliance may
accordingly be placed on said prohibitory paragraph in the deed of donation. The net result is that,
absent said proscription, the deed of sale supposedly constitutive of the cause of action for the
nullification of the deed of donation is not in truth violative of the latter hence, for lack of cause of
action, the case for private respondents must fail.

It may be argued that the validity of such prohibitory provision in the deed of donation was not
specifically put in issue in the pleadings of the parties. That may be true, but such oversight or
inaction does not prevent this Court from passing upon and resolving the same.

It will readily be noted that the provision in the deed of donation against alienation of the land for
one hundred (100) years was the very basis for the action to nullify the deed of donation. At the
same time, it was likewise the controverted fundament of the motion to dismiss the case a quo,
which motion was sustained by the trial court and set aside by respondent court, both on the issue
of prescription. That ruling of respondent court interpreting said provision was assigned as an
error in the present petition. While the issue of the validity of the same provision was not squarely
raised, it is ineluctably related to petitioner's aforesaid assignment of error since both issues are
grounded on and refer to the very same provision. cdphil

This Court is clothed with ample authority to review matters, even if they are not assigned as
errors on appeal, if it finds that their consideration is necessary in arriving at a just decision of the
case. 16 Thus, we have held that an unassigned error closely related to an error properly assigned,
17 or upon which the determination of the question properly assigned is dependent, will be
considered by the appellate court notwithstanding the failure to assign it as error. 18

Additionally, we have laid down the rule that the remand of the case to the lower court for further
reception of evidence is not necessary where the Court is in a position to resolve the dispute based
on the records before it. On many occasions, the Court, in the public interest and for the
expeditious administration of justice, has resolved actions on the merits instead of remanding them
to the trial court for further proceedings, such as where the ends of justice, would not be subserved
by the remand of the case. 19 The aforestated considerations obtain in and apply to the present
case with respect to the matter of the validity of the resolutory condition in question.

WHEREFORE, the judgment of respondent court is SET ASIDE and another judgment is hereby
rendered DISMISSING Civil Case No. 095-84 of the Regional Trial Court, Branch XX, Imus,
Cavite.

SO ORDERED.

Melencio-Herrera and Paras, JJ., concur.

Padilla, J., took no part.

Sarmiento, J., is on leave.

Footnotes
1.G. R. No. 77425 was filed by petitioner Roman Catholic Bishop of Imus, and G.R. No. 77450
by petitioners Florencio and Soledad C. Ignao.

2.Penned by Justice Felipe B. Kalalo, with the concurrence of Justices Floreliana Castro-
Bartolome and Esteban M. Lising.
3.Original Record, 1-9.

4.Rollo, G.R. No. 77425, 20.

5.Original Record, 71-74.

6.Rollo, G.R. No. 77425, 27-28.

7.Ibid., id., 30.

8.Ibid., id., 32.

9.Ibid., id., 28.

10.Lopez vs. Commissioner of Customs, et al., 37 SCRA 327 (1971).

11.Froilan vs. Pan Oriental Shipping Co., et al., 12 SCRA 276 (1964).

12.De la Rama Steamship Co., Inc. vs. Tan, etc., et al., 99 Phil. 1034 (1956).

13.181 SCRA 150 (1990).

14.University of the Philippines vs. Angeles, etc., et al., 35 SCRA 102 (1970).

15.Art. 1144(1), Civil Code.

16.Insular Life Assurance Co., Ltd. Employees-NATU vs. Insular Life Assurance Co., Ltd., et al.,
76 SCRA 60 (1977).

17.Philippine Commercial and International Bank vs. Court of Appeals, et al, 159 SCRA 24
(1988).

18.Soco vs. Militante, etc., et al., 123 SCRA 160 (1983); Ortigas, Jr. vs. Lufthansa German
Airlines, 64 SCRA 610 (1975).

19.Escudero, et al. vs. Dulay, etc., et al., 158 SCRA 69 (1988); Lianga Bay Logging Co., Inc. vs.
Court of Appeals, et al., 157 SCRA 357 (1988).

||| (Roman Catholic Archbishop v. Court of Appeals, G.R. No. 77425, 77450, [June 19, 1991], 275
PHIL 332-345)
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219 PHIL 641-659

FIRST DIVISION

[G.R. No. 55744. February 28, 1985.]

JOSE V. HERRERA, petitioner, vs. LEVISTE & L.P. LEVISTE & CO., INC., JOSE T.
MARCELO, GOVERNMENT SERVICE INSURANCE SYSTEM, PROVINCIAL SHERIFF OF
RIZAL, REGISTER OF DEEDS OF RIZAL, and THE HON. COURT OF APPEALS,
respondents.

Amador Santiago, Jr., for the respondent L.P. Leviste & Co., Inc.

Benjamin Aquino for respondent J.T. Marcelo, Jr.

SYLLABUS

1. REMEDIAL LAW; JUDGMENT; MOTION FOR RECONSIDERATION; DENIAL;

GROUNDS. — Considering the grounds of petitioner's Motion for Reconsideration, the
arguments adduced during the oral argument and in the parties' respective Memoranda, we resolve
to deny reconsideration upon the following considerations: 1. (a) The GSIS has not benefited in
any way at the expense of petitioner. What it received, by way of redemption from respondent
Marcelo, was the mortgage loan it had extended plus interest and sundry charges. (b) Neither has
Marcelo benefited at the expense of petitioner. Said respondent had paid to GSIS the amount
P3,232,766.94, which is not far below the sum of P3,750,000.00, which was the consideration
petitioner would have paid to Leviste had his contract been consummated. (c) Leviste had neither
profited at the expense of petitioner. For Losing his Buendia Property, all he had received was
P1,854,311.50 from GSIS less amounts he had paid, plus P1,895,688.00 paid to him by petitioner,
the total of which is substantially a reasonable value of the Buendia Property. 2. It is quite true that
petitioner had lost the P1,895,688.00 he had paid to Leviste, plus P300,000.00 he had paid to
GSIS, less the rentals he had received when in possession of the Buendia Property. That loss is
attributable to his fault in: (a) Not having been able to submit collateral to GSIS in substitution of
the Parañaque Property; (b) Not paying off the mortgage debt when GSIS decided to foreclose;
and (c) Not making an earnest effort to redeem the property as a possible redemptioner. 3. It
cannot be validly said that petitioner had fully complied with all the conditions of his contract with
Leviste. For one thing, he was not able to substitute the Parañaque Property with another collateral
for the GSIS loan.

TEEHANKEE, J., dissenting:

1. CIVIL LAW; OBLIGATIONS AND CONTRACT SALE EXECUTION BY VENDOR OF

FINAL DEED OF SALE TO VENDEE AFTER RECEIPT OF FULL PAYMENT OF PRICE. —
Leviste patently had no justification to refuse to execute the final deed of sale to Herrera, after
receiving full payment of the stipulated amount, and thereby prevent fulfillment of the remaining
condition for Herrera's assumption of its mortgage obligation with GSIS, which it had expressly
undertaken to secure from GSIS. There was constructive fulfillment on Herrera's part of his
obligations under the Contract under Article 1186 of the Civil Code, "(T)he condition shall be
deemed fulfilled when the obligor voluntarily prevents its fulfillment."

2. ID.; ID.; PARTY GUILTY OF PREVENTING FULFILLMENT CANNOT ASK FOR

RESCISSION OF CONTRACT. — While it is true that under paragraph No. 11 of the Contract to
Sell, failure to comply with any of the conditions therein enumerated would render the contract
automatically cancelled and all the sums paid by petitioner forfeited, Herrera was prevented from
fulfilling the condition of assuming the GSIS mortgage because of Leviste's own non-compliance
with its obligation of securing the consent of GSIS thereto. The contract expressly obligated
Leviste to work out with the GSIS Herrera's assumption of the mortgage. But obviously because
of selfish and self-serving motives and designs, as borne out by the events, Leviste made no effort
to assist and arrange for Herrera's assumption of its mortgage obligation. In spite of the fact that
Herrera had already paid Leviste the full amount of P1,895,688.50, Leviste refused to execute the
final deed of sale in favor of Herrera as required by GSIS. If a party charges himself with an
obligation possible to be performed, he must abide by it unless performance is rendered
impossible by the act of God, the law, or the other party. (Labayen vs. Talisay Silay Milling Co.,
52 Phil. 440). By Leviste's unjustifiable act, it virtually prevented Herrera from complying with
his obligation to assume the GSIS mortgage and Leviste cannot now in equity and justice insist on
rescission of the contract because of Herrera's failure which Leviste itself had brought about. The
situation is analogous to that contemplated in Article 1266 of the Civil Code which provides that
"(T)he debtor in obligations to do shall also be released when the prestation becomes legally or
physically impossible without the fault of the obligor." Leviste's non-compliance with its own
undertaking which prevented Herrera from assuming the GSIS mortgage bars it from invoking the
rescission clause.

3. ID.; ID.; RECIPROCAL OBLIGATIONS; DELAY INCURRED BY ONE PARTY WHERE

OTHER PARTY FULFILLING HIS OBLIGATION. — Under par. 4 of the Contract to Sell, it was
expressly undertaken by Leviste that "the assumption of mortgage shall be arranged and
conformity thereto by GSIS obtained by the Vendor with the full cooperation of the Vendee." But
notwithstanding its having received the full amount due it, Leviste did not fulfill the essential
condition required by GSIS for Herrera's assumption of the mortgage -the execution by Leviste of
the final deed of sale. Article 1169 of the Civil Code expressly provides, in this regard, 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. From the moment one of the parties
fulfills his obligation, delay by the other begins."

4. ID.; HUMAN RELATIONS; UNJUST ENRICHMENT; CASE AT BAR. — In iniquitous

automatic rescission of the contract be sustained, Leviste would be unjustly enriched by (1)
P1,895,688.50, the principal amount directly paid to it by Herrera; (2) P300,000.00, the amount
paid by Herrera to GSIS for Leviste's arrearages; (3) the Parañaque property, which was returned
to him by Marcelo; (4) the and undisclosed proceeds of the sale of equity of redemption to
Marcelo (in effect a double payment to Leviste for the same property); and (5) moreover, GSIS
foreclosed the mortgage for Leviste's total outstanding indebtedness to GSIS in the sum of
P3,232,766.94 (pp. 2, 4, main Resolution); this was a total gain to Leviste, for it was thereby
discharged and relieved entirely of its said mortgage debt of P3,232,766.94 at the loss of only the
Buendia property, which it had already sold to and had been fully paid by, Herrera in the agreed
amount of P1,895,688.50. This constitutes unjust enrichment at the expense of Herrera whose
payments to Leviste and the GSIS, totaling almost P2.2-million were declared forfeited.

5. ID.; ID.; SALE; DEBTOR WHO INCURRED IN DELAY IN GOOD FAITH ENTITLED TO
RELIEF UNDER THE BASIC PRINCIPLES OF LAW, JUSTICE AND EQUITY. — Basic
principles of justice and equity cry out against such unjust enrichment and inequity. As we held in
Air Manila, Inc. vs. CIR, 83 SCRA 579, "(E)quity as the complement of legal jurisdiction seeks to
reach and do complete justice where courts of law, through the inflexibility of their rules and want
of power to adapt their judgments to the special circumstances of cases, are incompetent to do so.
'Equity regards the spirit and not the letter, the intent and not the form, the substance rather than
the circumstance, as it is variously expressed by different courts.'" Herrera is entitled to the relief
sought by him under these basic principles of law, justice and equity, as was extended by this
Court under analogous circumstances to the debtor in its recent decision in Republic of the Phil.
(NEDA) vs. Court of Appeals (G.R. No. 52774, Nov. 29, 1984) notwithstanding that the debtor in
"evident good faith" had incurred in delay in discharging its obligations to another government
agency, the NEDA, which had shown "clear procrastination and indecision" in seeking afterwards
to reject the payments made and cancel the previous authorization it had given for the sale of the
debtor's attached real property.

RESOLUTION

MELENCIO-HERRERA, J p:

Before the Court is petitioner's Motion, dated July 3, 1981, for the reconsideration of the
Resolution of this Court, dated April 1, 1981, denying due course to this Petition for Review on
Certiorari for lack of merit. LexLib
The Motion for Reconsideration was set for oral argument on June 13, 1984, after which, the
Court required the parties to submit simultaneously concise memoranda in amplification of their
oral arguments. All parties have complied with the Court's directive.

Briefly, the antecedent facts may be summarized as follows:

On June 10, 1969, L.P. Leviste & Co. (Leviste, for short) had obtained a loan from the
Government Service Insurance System (GSIS) in the amount of P1,854,311.50. As security
therefor, Leviste mortgaged two (2) lots, one located at Parañaque (the Parañaque Property), and
the other located at Buendia Avenue, Makati, with an area of approximately 2,775 square meters,
together with the 3-story building thereon (the Buendia Property).

On November 3, 1971, Leviste sold to Petitioner, Jose V. Herrera, the Buendia Property for the
amount of P3,750,000.00. The conditions were that petitioner would: (1) pay Leviste
P1,895,688.50; (2) assume Leviste's indebtedness of P1,854,311.50 to the GSIS; and (3) substitute
the Parañaque property with his own within a period of six (6) months.

For his part, Leviste undertook to arrange for the conformity of the GSIS to petitioner's
assumption of the obligation.

It was further stipulated in the Contract to Sell that "failure to comply with any of the conditions
contained therein, particularly the payment of the scheduled amortizations on the dates herein
specified shall render this contract automatically cancelled and any and all payments made shall
be forfeited in favor of the vendor and deemed as rental and/or liquidated damages."

Petitioner took possession of the Buendia property, received rentals of P21,000.00 monthly, and
collected approximately P800,000.00 from December, 1971, up to March, 1975. However,
petitioner remitted a total of only P300,000.00 to the GSIS. LLjur

On April 15, 1973, petitioner requested the GSIS for the restructuring of the mortgage obligation
because of his own arrearages in the payment of the amortizations. GSIS replied that as a matter of
policy, it could not act on his request unless he first made proper substitution of property, updated
the account, and paid 20% thereof to the GSIS. There was no requirement by the GSIS for the
execution of a final deed of sale by Leviste in favor of petitioner.

On June 2, 1974, GSIS sent notice to Leviste of its intention to foreclose the mortgaged properties
by reason of default in the payment of amortizations. An application for foreclosure was thereafter
filed by the GSIS with the Provincial Sheriff of Rizal, and on February 15, 1975, the foreclosed
properties were sold at public auction and a Certificate of Sale in favor of the GSIS, as the highest
bidder, was issued.

On March 3, 1975, Leviste assigned its right to redeem both foreclosed properties to respondent
Jose Marcelo, Jr. (Marcelo for brevity). Later, on November 20, 1975, Marcelo redeemed the
properties from the GSIS by paying it the sum of P3,232,766.94 for which he was issued a
certificate of redemption. The Parañaque property was turned over by Marcelo to Leviste upon
payment by the latter of approximately P250,000.00 as disclosed at the hearing. Leviste needed
the Parañaque Property as it had sold the same and suit had been filed against it for its recovery.

On May 6, 1975, petitioner wrote the GSIS (Exhibit "V") informing the latter of his right to
redeem the foreclosed properties and asking that he be allowed to do so in installments.
Apparently, the GSIS had not favorably acted thereon.

On May 13, 1975, petitioner instituted suit against Leviste before the Court of First Instance of
Rizal for "Injunction, Damages, and Cancellation of Annotation."

On December 20, 1977, the Trial Court rendered its Decision dismissing petitioner's Complaint for
lack of basis in fact and in law, and ordering all payments made by petitioner to Leviste forfeited
in favor of the latter pursuant to their contract providing for automatic forfeiture "in the event of
failure to comply with any of the conditions contained therein, particularly the payment of the
scheduled amortizations."

On appeal, the Appellate Court affirmed the judgment in toto, stating in part: LLpr

"It is to be noted that appellee L. P. Leviste and Co., Inc. was not in a financial position to redeem
the foreclosed property and there was no assurance that appellant would redeem the property
within the period. In this situation, appellee has no other alternative, but to assign the right of
redemption to a person willing and capable to assume the same, if only to protect his interest in
the said property. Likewise, when the equity to redeem was assigned, appellant could have
preserved and protected whatever right he may have to the property by tendering the redemption
price to Marcelo. He had up to February 24, 1976, to do so, but he did not. The record established
further that appellant did not redeem the property . . ." 1

Reconsideration sought by petitioner was met with denial by respondent Appellate Court. Hence,
the instant Petition seeking review by Certiorari before this instance.

As herein before stated, we denied the Petition for lack of merit.

Petitioner seeks reconsideration essentially on the contention that affirmance of the Appellate
Court's Decision would result in patent injustice as he would not only forfeit the Buendia Property
to Marcelo, but would also lose the amount of P1,895,688.50 and P300,000.00, which he paid to
Leviste and the GSIS, respectively; that it would result in the unjust enrichment of Leviste; and
that Leviste as well as the GSIS and Marcelo would be benefiting at petitioner's expense.

Considering the grounds of petitioner's Motion for Reconsideration, the arguments adduced during
the oral argument and in the parties' respective Memoranda, we resolve to deny reconsideration
upon the following considerations:
1. (a) The GSIS has not benefited in any way at the expense of petitioner. What it received, by
way of redemption from respondent Marcelo, was the mortgage loan it had extended plus interest
and sundry charges.

(b) Neither has Marcelo benefited at the expense of petitioner. Said respondent had paid to GSIS
the amount P3,232,766.94, which is not far below the sum of P3,750,000.00, which was the
consideration petitioner would have paid to Leviste had his contract been consummated.

(c) Leviste had neither profited at the expense of petitioner. For Losing his Buendia Property, all
he had received was P1,854,311.50 from GSIS less amounts he had paid, plus P1,895,688.00 paid
to him by petitioner, the total of which is substantially a reasonable value of the Buendia Property.

2. It is quite true that petitioner had lost the P1,895,688.00 he had paid to Leviste, plus
P300,000.00 he had paid to GSIS, less the rentals he had received when in possession of the
Buendia Property. That loss is attributable to his fault in: prLL

(a) Not having been able to submit collateral to GSIS in substitution of the Parañaque Property;

(b) Not paying off the mortgage debt when GSIS decided to foreclose; and

(c) Not making an earnest effort to redeem the property as a possible redemptioner.

3. It cannot be validly said that petitioner had fully complied with all the conditions of his contract
with Leviste. For one thing, he was not able to substitute the Parañaque Property with another
collateral for the GSIS loan. Moreover, as stated by the Court of Appeals, "nowhere in the letter
(of the GSIS) was mentioned that a final deed of sale must first be executed and presented before
the assumption may be considered. For if it was really the intention of GSIS, the requirement of
Deed of Sale should have been stated in its letter."

ACCORDINGLY, petitioner's Motion for Reconsideration is hereby denied.

SO ORDERED.

Plana Relova De la Fuente and Cuevas, JJ., concur.

Gutierrez, Jr., * and Alampay, JJ., took no part.

Separate Opinions

TEEHANKEE, J., dissenting:

I vote to grant petitioner's motion for reconsideration of the Court's earlier Resolution denying the
petition and instead to grant the relief sought therein by petitioner, for the grounds and
considerations hereinafter stated.

It can be inferred from the antecedent facts that respondent Leviste & Co., Inc. (Leviste) was
guilty of bad faith and of violating the terms and conditions of its Contract to Sell with petitioner
Jose V. Herrera.

On June 10, 1969, Leviste had secured a loan from the Government Service Insurance System in
the amount of P1,854,311.50, mortgaging two parcels of land, one located at Parañaque and the
other located at Buendia Avenue, Makati, with an area of 2,775 square meters and the building and
other improvements thereon (covered by TCT No. 9811 of the Registry of Deeds of the Province
of Rizal).

Later, or on November 3, 1971, Leviste sold to Herrera the Buendia property for the sum of
P3,750,000.00. Herrera agreed that (1) he would assume Leviste's indebtedness of P1,854,311.50
to the GSIS; (2) that he would pay Leviste the balance of P1,895,688.50 within two (2) years from
the date of the contract, with interest thereon at 12% per annum; and (3) that he would substitute
the Parañaque property with his own within a period of six months.

On the other hand, Leviste undertook that it would arrange for the conformity of the GSIS to
Herrera's assumption of its mortgage obligation.

The parties further stipulated that "failure to comply with any of the conditions contained therein,
particularly the payment of the scheduled amortization on the dates herein specified shall render
this contract automatically cancelled and any and all payments made shall be forfeited in favor of
the vendor and deemed as rental and/or unliquidated damages.

About the first week of December, 1971, Herrera took possession of the Buendia property and
received the monthly rentals of around P21,000.00.

On December 20, 1971, Herrera notified GSIS of the Contract to Sell executed by Leviste
providing for his assumption of Leviste's mortgage obligation. When no action was taken thereon
by the GSIS and Leviste failed to take any action to facilitate the assumption of the mortgage by
Herrera, the latter sent his administrator, Mr. Isidro Cavestany, to follow it up with the GSIS. In
the course thereof, Cavestany found that Leviste was in arrears in its amortization payments for 14
months, which Herrera did not know at the time of the sale.

The GSIS required Herrera to submit papers to support his assumption of the mortgage until
finally he was informed that the assumption could not be approved until Herrera could submit a
final deed of sale (the original contract being merely a contract to sell or a conditional sale) and
that he has no personality to represent Leviste in connection with the restructuring of the
mortgage. But nevertheless, the GSIS received payments from Herrera for the account of Leviste,
suggesting that this was necessary for "further actions" to be taken on the assumption of mortgage.
The Manager of the Collection Department even suggested to Cavestany to continue the payments
as a gesture of good faith. Herrera remitted a total of P300,000.00 to the GSIS, credited against
Leviste's account.

Meanwhile, Leviste continued to receive payments from Herrera under the Contract to Sell. Upon
full payment, Cavestany then requested Leviste to execute the final deed of sale for submission to
the GSIS but Leviste refused, alleging as an excuse Herrera's failure to assume the mortgage
(which Leviste itself had blocked).

Unknown to Herrera, Leviste alone was notified on June 21, 1974 by the GSIS of its intention to
foreclose the mortgage. Herrera came to know about it only on January 17, 1975. He immediately
wrote an urgent appeal to the GSIS reminding the GSIS that he had already paid in full the
principal of P1,895,688.50 to Leviste and P300.000.00 to the GSIS and asked that the foreclosure
be held in abeyance pending efforts to settle Leviste's account which Leviste had undertaken to
have Herrera assume. Nonetheless, the GSIS proceeded with the auction sale and itself bidded for
the property.

On March 3, 1975, Leviste (notwithstanding its having received full payment of P1,895,688.50
from Herrera) yet sold for undisclosed amount and considerations the equity of redemption (which
in justice and equity pertained to Herrera) to its co-respondent Jose T. Marcelo and eventually,
Herrera was ousted from the property in dispute.

On May 13, 1975, Herrera filed a complaint against Leviste before the Court of First Instance of
Rizal for injunction, damages and cancellation of annotation. The trial court dismissed the
complaint for alleged lack of basis in fact and in law, and ordered all payments made by Herrera
forfeited in favor of Leviste. Herrera appealed to the Court of Appeals which affirmed the lower
court's decision and denied reconsideration.

On January 23, 1981, Herrera filed the petition for review on certiorari which was denied by this
Court in a minute resolution dated April 1, 1981. Hence, Herrera's motion for reconsideration,
which was heard and argued before the Court on June 13, 1984. Herrera reiterated the main issues,
thus:

"— Can respondent Leviste lawfully refuse to issue a final deed of sale to the petitioner even after
it had already received full payment of what was due it under the Contract to Sell?

"— Can respondent Leviste lawfully refuse to comply with its obligation under the Contract to
Sell to secure the conformity of respondent GSIS to the assumption of the mortgage obligation by
petitioner?

"— Can respondent Leviste automatically cancel the Contract to Sell and forfeit all the sums paid
by petitioner thereunder when respondent Leviste was the one that voluntarily prevented the
petitioner from fulfilling his obligations under the Contract to Sell and by otherwise making it
legally or physically impossible for the petitioner to fulfill such obligations?
"— Can respondent Leviste lawfully assign its equity of redemption over the Buendia property to
respondent Marcelo, and can the latter's redemption of said property from respondent GSIS be
considered lawful?

"— Can respondent Leviste be lawfully awarded damages and attorney's fees in the instant case?"

Leviste patently had no justification to refuse to execute the final deed of sale to Herrera, after
receiving full payment of the stipulated amount, and thereby prevent fulfillment of the remaining
condition for Herrera's assumption of its mortgage obligation with GSIS, which it had expressly
undertaken to secure from GSIS. There was constructive fulfillment on Herrera's part of his
obligations under the Contract under Article 1186 of the Civil Code, "(T)he condition shall be
deemed fulfilled when the obligor voluntarily prevents its fulfillment."

The motion for reconsideration should be granted and the petition granted to obviate a miscarriage
of justice. While it is true that under paragraph No. 11 of the Contract to Sell, failure to comply
with any of the conditions therein enumerated would render the contract automatically cancelled
and all the sums paid by petitioner forfeited, Herrera was prevented from fulfilling the condition
of assuming the GSIS mortgage because of Leviste's own non-compliance with its obligation of
securing the consent of GSIS thereto. The contract expressly obligated Leviste to work out with
the GSIS Herrera's assumption of the mortgage. But obviously because of selfish and self-serving
motives and designs, as borne out by the events, Leviste made no effort to assist and arrange for
Herrera's assumption of its mortgage obligation. In spite of the fact that Herrera had already paid
Leviste the full amount of P1,895,688.50, Leviste refused to execute the final deed of sale in favor
of Herrera as required by GSIS.

The substitution of Leviste's Parañaque property with Herrera's own property as additional
security for Leviste's indebtedness could not be worked out and agreed upon by Herrera with
GSIS, which refused to deal with him without such final deed of sale from Leviste. Indeed,
Herrera was verily squeezed in this pincer movement: — Herrera could not assume Leviste's
mortgage obligation and restructure the same with GSIS which refused to recognize and deal with
him without a final deed of sale from Leviste. But Leviste refused to execute such final deed of
sale notwithstanding that he had been paid by Herrera the full amount of P1,895,688.50 due to
him and what was left was Leviste's outstanding mortgage indebtedness to GSIS. The GSIS, in
turn, notwithstanding Herrera's payment on account thereof directly to it of some P300,000.00 and
the more than sufficient security in its favor of the Buendia property alone, refused (abetted by
Leviste's absolute non-cooperation, contrary to his contractual obligation) to have Herrera assume
the mortgage obligation. Instead, GSIS without notice to Herrera foreclosed the mortgage and
completely shut off Herrera — even from his right of redemption as Leviste's vendee.

If a party charges himself with an obligation possible to be performed, he must abide by it unless
performance is rendered impossible by the act of God, the law, or the other party. (Labayen vs.
Talisay Silay Milling Co., 52 Phil. 440). By Leviste's unjustifiable act, it virtually prevented
Herrera from complying with his obligation to assume the GSIS mortgage and Leviste cannot now
in equity and justice insist on rescission of the contract because of Herrera's failure which Leviste
itself had brought about.

The situation is analogous to that contemplated in Article 1266 of the Civil Code which provides
that "(T)he debtor in obligations to do shall also be released when the prestation becomes legally
or physically impossible without the fault of the obligor." Leviste's non-compliance with its own
undertaking which prevented Herrera from assuming the GSIS mortgage bars it from invoking the
rescission clause.

Under par. 4 of the Contract to Sell, it was expressly undertaken by Leviste that "the assumption
of mortgage shall be arranged and conformity thereto by GSIS obtained by the Vendor with the
full cooperation of the Vendee." But notwithstanding its having received the full amount due it,
Leviste did not fulfill the essential condition required by GSIS for Herrera's assumption of the
mortgage -the execution by Leviste of the final deed of sale. Article 1169 of the Civil Code
expressly provides, in this regard, 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. From the moment one of the parties fulfills his obligation, delay by the other begins."

As documented by Herrera in his memorandum in amplification of oral argument (Record, pp.

314-315), "Leviste has clearly not complied with (its) obligation. Thus, when asked repeatedly by
this Honorable Court what definitive steps it took to arrange and secure such conformity of
respondent GSIS, respondent Leviste could not readily answer, as it could not point to any
definitive step that it had actually undertaken. Indeed, if respondent Leviste was acting in good
faith and was sincere in complying with its obligation, it could have at least done the following:

"1. Officially inform respondent GSIS about its execution of the Contract to Sell and officially
request GSIS to approve petitioner's assumption of its mortgage obligation, subject to the
condition stated in the contract.

"2. Officially inform respondent GSIS that petitioner had already paid to it the full amount due
under the Contract to Sell, and for this reason, it was willing to transfer the title of the Buendia
property to the petitioner, and for this purpose, issue a final Deed of Sale, even if subject to certain
conditions.

"3. If petitioner had indeed failed to comply with his obligations under the Contract to Sell, during
the period covering the years 1972 and 1973, then why did respondent Leviste continue receiving
payments from petitioner? It must be noted that respondent Leviste was paid the full amount of the
consideration (P1,895,688.50) due to it on installment basis, the last of which was on July 2, 1974
(Exhs. E', 'F', 'G', 'H', 'I', 'J', 'K', and 'L').

"4. Respondent Leviste could also have formally complained to petitioner or even respondent
GSIS about petitioner's alleged non-fulfillment of his obligations under the Contract to Sell, or
advise respondent GSIS not to receive any more payments from petitioner made in its name.
"Why did respondent Leviste keep quiet and allow respondent GSIS to continue receiving said
payments? It must be noted that petitioner made the following payments to respondent GSIS, for
the account of respondent Leviste:

P100,000.00 — 1973

50,000.00 — May 10, 1974

50,000.00 — May 24, 1974

50,000.00 — Nov. 5, 1974

50,000.00 — Jun. 22, 1975

[Exh. 'Y']

"From the above, it will be seen that respondent Leviste not only was the one that clearly failed to
comply with its obligations under the Contract to Sell, but also it was the one that prevented the
petitioner from fulfilling his obligation under said contract."

Even as to the restructuring of Leviste's mortgage obligation which Herrera had requested (since
Leviste's documented arrearages before the execution of the contract amounted to around
P800,000.00), GSIS had declined to entertain the same for lack of the final deed of sale, stating in
a letter to Herrera that.

"We wish to inform you that we cannot go on processing your papers in view of the fact that as of
this date L.P. Leviste and Co. is still the registered owner of the mortgaged property, hence, we
cannot entertain your request." (Exhibit O; emphasis supplied)

It also appears that respondent GSIS inexplicably did not sympathize with the plight of Herrera
(brought about by Leviste itself) as may be seen by the following circumstances:

(1) It required Herrera to submit supporting papers which led him to believe that the assumption of
the mortgage would be properly acted upon;

(2) It accepted payments from Herrera for the account of Leviste;

(3) It did not inform Herrera of its intention to foreclose the property knowing that Herrera had
purchased the same and hence had the right to redeem the property as Leviste's vendee,
notwithstanding its knowledge and that Herrera was directly making payments to it on account of
Leviste's mortgage indebtedness;
(4) It proceeded with the auction sale, notwithstanding the letter-appeal of Herrera, that he had
already paid in full the principal amount to Leviste and P300,000.00 to the GSIS and asking that
he be given a chance to settle Leviste's account;

(5) It allowed and recognized the sale of equity of redemption to a total stranger, Marcelo,
notwithstanding the offer of Herrera as Leviste's vendee and successor to redeem the property
within the period of redemption, as was Herrera's right in law and equity;

(6) The total stranger Marcelo was allowed to redeem the property, and returned the Parañaque
property to Leviste; and

(7) It departed from the established policy of government financial institutions of allowing the
restructuring of doubter's mortgage accounts, unless they were in extremes and violated its own
settled policy of giving due preference to the owner and vendee Herrera of redeeming and/or
requiring the foreclosed property. As the late Chief Justice Castro stated in his separate opinion in
DBP vs. Mirang, 66 SCRA 141, in taking notice of such policy and urging the DBP to extend such
assistance to the hapless respondent debtor therein. "(I)t is well to remember that uncompromising
or mechanical application of the letter of the law has resulted not infrequently, in the denial of
moral justice," after laying the premise that

"Justice Makasiar makes the pertinent suggestion that the DBP restructure the account of Mirang.
Like Justice Makasiar, I personally know that the DBP and similar Government financial
institutions (the Philippine National Bank, the Government Service Insurance System, and the
Social Security System) have restructured accounts of debtors. Considering the inordinate
appreciation of land values everywhere, there appears to be no insuperable obstacle to the DBP
restructuring the account of Mirang, not only to enable him to pay his indebtedness in easy terms
over a period of years but as well to make available additional funds to be utilized by him in the
development of his 18-1/2-hectare land. It is not too late in the day — in this, our compassionate
society — for the DBP to do so."

Respondent Marcelo was equally not in good faith when he purchased the equity of redemption.
Marcelo knew of the Contract to Sell with Herrera at the time the equity was assigned to him by
Leviste. Moreover, Herrera was still in material possession of the property then.

In iniquitous automatic rescission of the contract be sustained, Leviste would be unjustly enriched
by (1) P1,895,688.50, the principal amount directly paid to it by Herrera; (2) P300,000.00, the
amount paid by Herrera to GSIS for Leviste's arrearages; (3) the Parañaque property, which was
returned to him by Marcelo; (4) the and undisclosed proceeds of the sale of equity of redemption
to Marcelo (in effect a double payment to Leviste for the same property); and (5) moreover, GSIS
foreclosed the mortgage for Leviste's total outstanding indebtedness to GSIS in the sum of
P3,232,766.94 (pp. 2, 4, main Resolution); this was a total gain to Leviste, for it was thereby
discharged and relieved entirely of its said mortgage debt of P3,232,766.94 at the loss of only the
Buendia property, which it had already sold to and had been fully paid by, Herrera in the agreed
amount of P1,895,688.50. This constitutes unjust enrichment at the expense of Herrera whose
payments to Leviste and the GSIS, totaling almost P2.2-million were declared forfeited.

Basic principles of justice and equity cry out against such unjust enrichment and inequity. As we
held in Air Manila, Inc. vs. CIR, 83 SCRA 579, "(E)quity as the complement of legal jurisdiction
seeks to reach and do complete justice where courts of law, through the inflexibility of their rules
and want of power to adapt their judgments to the special circumstances of cases, are incompetent
to do so. 'Equity regards the spirit and not the letter, the intent and not the form, the substance
rather than the circumstance, as it is variously expressed by different courts.'" Herrera is entitled to
the relief sought by him under these basic principles of law, justice and equity, as was extended by
this Court under analogous circumstances to the debtor in its recent decision in Republic of the
Phil. (NEDA) vs. Court of Appeals (G.R. No. 52774, Nov. 29, 1984) notwithstanding that the
debtor in "evident good faith" had incurred in delay in discharging its obligations to another
government agency, the NEDA, which had shown "clear procrastination and indecision" in
seeking afterwards to reject the payments made and cancel the previous authorization it had given
for the sale of the debtor's attached real property.

The unkindest blow is that the Court has upheld even the award of P5,000. — nominal damages
and P75,000. — attorney's fees against Herrera for seeking the just vindication in court of his
rights.

Footnotes

1.Rollo, p. 67.

*Justice Serafin Cuevas was designated to sit in the First Division per Special Order No. 293,
dated October 5, 1984, vice Justice Hugo E. Gutierrez, Jr., who did not take part. Justice Nestor B.
Alampay took no part.

||| (Herrera v. L.P. Leviste & Co., Inc., G.R. No. 55744 (Resolution), [February 28, 1985], 219
PHIL 641-659)

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JURISPRUDENCE Jurisprudences icon 120x120
18d623f0c132036f56cae92fb52b20c2af27b43f2646c7ffa940287812634a6c
47 PHIL 821-830

FIRST DIVISION

[G.R. No. 23769. September 16, 1925.]

SONG FO & COMPANY, plaintiff-appellee, vs. HAWAIIAN PHILIPPINE CO., defendant-

appellant.

Hilado & Hilado, Ross, Lawrence & Selph and Antonio T. Carrascoso, Jr., for appellant.

Arroyo, Gurrea & Muller for appellee.

SYLLABUS

1. CONTRACTS; SALES; INSTANT CASE. — The written contract examined and found to
provide for the delivery by the Hawaiian-Philippine Co. to Song Fo & Company of 300,000
gallons of molasses.

2. ID.; ID,.; ID.; PAYMENT. — The terms of payment fixed by the parties are controlling. The
time of payment stipulated for in the contract should be treated as of the essence of the contract.

3. ID.; ID.; ID.; ID.; RESCISSION. — The general rule is that rescission will not be permitted for
a slight or casual breach of the contract, but only for such breaches as are so substantial and
fundamental as to defeat the object of the parties in making the agreement.

4. ID.; ID.; ID.; ID.; ID. — A delay in payment for a small quantity of molasses for some twenty
days is not such a violation of an essential condition of the contract as warrants rescission for non-
performance.

5. ID.; ID.; ID.; MEASURE OF DAMAGES FOR BREACH OF CONTRACT. — The facts
examined and Song Fo & Company allowed P3,000 on account of the greater expense to which it
was put in being compelled to secure molasses in the open market.

6. ID.; ID.; ID. — The facts examined and Song Fo & Company allowed nothing for lost profits
on account of the breach of the contract, because of failure of proof.

DECISION

MALCOLM, J p:
In the Court of First Instance of Iloilo, Song Fo & Company, plaintiff, presented a complaint with
two causes of action for breach of contract against the Hawaiian-Philippine Co., defendant, in
which judgment was asked for P70,369.50, with legal interest, and costs. In an amended answer
and cross-complaint, the defendant set up the special defense that since the plaintiff had defaulted
in the payment for the molasses delivered to it by the defendant under the contract between the
parties, the latter was compelled to cancel and rescind the said contract. The case was submitted
for decision on a stipulation of facts and the exhibits therein mentioned. The judgment of the trial
court condemned the defendant to pay for the plaintiff a total of P35,317.93, with legal interest
from the date of the presentation of the complaint, and with costs.

From the judgment of the Court of First Instance the defendant only has appealed. In this court it
has made the following assignment of errors: "I. The lower court erred in finding that the appellant
had agreed to sell to the appellee 400,000, and not only 300,000, gallons of molasses. II. The
lower court erred in finding that the appellant rescinded without sufficient cause the contract for
the sale of molasses executed by it and the appellee. III. The lower court erred in rendering
judgment in favor of the appellee and not in favor of the appellant in accordance with the prayer of
its answer and cross-complaint. IV. The lower court erred in denying appellant's motion for a new
trial." The specified errors raise three questions which we will consider in the order suggested by
the appellant.

1. Did the defendant agree to sell to the plaintiff 400,000 gallons of molasses or 300,000 gallons
of molasses? The trial court found the former amount to be correct. The appellant contends that
the smaller amount was the basis of the agreement.

The contract of the parties is in writing. It is found principally in the documents, Exhibits F and G.
The first mentioned exhibit is a letter addressed by the administrator of the Hawaiian-Philippine
Co. to Song Fo & Company on December 13, 1922. It reads:

"SILAY, OCC. NEGROS, P. I.

"December 13, 1922.

"MESSRS. SONG FO AND CO.

"Iloilo, Iloilo.

"DEAR SIRS: Confirming our conversation we had today with your Mr. Song Fo, who visited this
Central, we wish to state as follows:

"He agreed to the delivery of 300,000 gallons of molasses at the same price as last year under the
same condition, and the same to start after the completion of our grinding season. He requested if
possible to let you have molasses during January, February and March or in other words, while we
are grinding, and we agreed with him that we would to the best of our ability, altho we are
somewhat handicapped. But we believe we can let you have 25,000 gallons during each of the
milling months, altho it interfere with the shipping of our own and planters sugars to Iloilo. Mr.
Song Fo also asked if we could supply him with another 100,000 gallons of molasses, and we
stated we believe that this is possible and will do our best to let you have these extra 100,000
gallons during the next year the same to be taken by you before November 1st, 1923, along with
the 300,000, making 400,000 gallons in all.

"Regarding the payment for our molasses, Mr. Song Fo gave us to understand that you would pay
us at the end of each month for molasses delivered to you.

"Hoping that this is satisfactorily and awaiting your answer regarding this matter, we remain.

"Yours very truly,

"HAWAIIAN-PHILIPPINE COMPANY

"By: R.C. PITCAIRN

"Administrator."

Exhibit G is the answer of the manager of Song Fo & Company to the Hawaiian-Philippine Co. on
December 16, 1922. This letter reads:

"December 16th, 1922.

"MESSRS. HAWAIIAN-PHILIPPINE CO.,

"Silay, Neg. Occ., P. I.

"DEAR SIRS: We are in receipt of your favors dated the 9th and the 13th inst. and understood all
their contents.

"In connection to yours of the 13th inst, we regret to hear that you mentioned Mr. Song Fo the one
who visited your Central, but it was not for he was Mr. Song Heng, the representative and the
manager of Messrs. Song Fo & Co.

"With reference to the contents of your letter dated the 13th inst. we confirm all the arrangements
you have stated and in order to make the contract clear, we hereby quote below our old contract as
amended, as per our new arrangements.

"(a) Price, at 2 cents per gallon delivered at the central.

"(b) All handling charges and expenses at the central and at the dock at Mambaguid for our
account.
"(c) For services of one locomotive and flat cars necessary for our six tanks at the rate of P48 for
the round trip dock to central and central to dock. This service to be restricted to one trip for the
six tanks.

"Yours very truly,

"SONG FO & COMPANY

"By__________________

"Manager."

We agree with appellant that the above quoted correspondence is susceptible of but one
interpretation. The Hawaiian-Philippine Co. agreed to deliver to Song Fo & Company 300,000
gallons of molasses. The Hawaiian-Philippine Co. also believed it possible to accommodate Song
Fo & Company by supplying the latter company with an extra 100,000 gallons. But the language
used with reference to the additional 100,000 gallons was not a definite promise. Still less did it
constitute an obligation.

If Exhibit T relied upon by the trial court shows anything, it is simply that the defendant did not
consider itself obliged to deliver to the plaintiff molasses in any amount. On the other hand,
Exhibit A, a letter written by the manager of Song Fo & Company on October 17, 1922, expressly
mentions an understanding between the parties of a contract for 300,000 gallons of molasses.

We sustain appellant's point of view on the first question and rule that the contract between the
parties provided for the delivery by the Hawaiian-Philippine Co. to Song Fo & Company of
300,000 gallons of molasses.

2. Had the Hawaiian-Philippine Co. the right to rescind the contract of sale made with Song Fo &
Company? The trial judge answers No, the appellant Yes.

Turning to Exhibit F, we note this sentence: "Regarding the payment for our molasses, Mr. Song
Fo (Mr. Song Heng) gave us to understand that you would pay us at the end of each month for
molasses delivered to you." In Exhibit G, we find Song Fo & Company stating that they
understand the contents of Exhibit F, and that they "confirm all the arrangements you have stated,
and in order to make the contract clear, we hereby quote below our old contract as amended, as per
our new arrangements. (a) Price, at 2 cents per gallon delivered at the central." In connection with
the portion of the contract having reference to the payment for the molasses, the parties have
agreed on a table showing the date of delivery of the molasses, the account and date thereof, the
date of receipt of account by plaintiff, and date of payment. The table mentioned is as follows:

Date of receipt
Date of delivery Account and date of account by Date of payment

thereof plaintiff

1922 1923 1923

Dec. 18 P206.16 Dec. 26/22 Jan. 5 Feb. 20

Dec. 29 206.16 Jan. 3/23 do Do.

1923

Jan. 5 206.16 Jan. 9/23 Mar. 7 or 8 Mar. 31

Feb. 12 206.16 Mar. 12/23 do Do.

Feb. 27 206.16 do do Do.

Mar. 5 206.16 do do Do.

Mar. 16 206.16 Mar. 20/23 Apr. 2/23 Apr. 19

Mar. 24 206.16 Mar. 31/23 do Do.

Mar. 29 206.16 do do Do.

Some doubt has risen as to when Song Fo & Company was expected to make payments for the
molasses delivered. Exhibit F speaks of payments "at the end of each month." Exhibit G is silent
on the point. Exhibit M, a letter of March 28, 1923, from Warner, Barnes & Co., Ltd., the agent of
the Hawaiian-Philippine Co. to Song Fo & Company, mentions "payment on presentation of bills
for each delivery." Exhibit O, another letter from Warner, Barnes & Co., Ltd. to Song Fo &
Company dated April 2, 1923, is of a similar tenor. Exhibit P, a communication sent direct by the
Hawaiian-Philippine Co. to Song Fo & Company on April 2, 1923, by which the Hawaiian-
Philippine Co. gave notice of the termination of the contract, gave as the reason for the rescission,
the breach of Song Fo & Company of this condition: "You will recall that under the arrangements
made for taking our molasses, you were to meet our accounts upon presentation and at each
delivery." Not far removed from this statement, is the allegation of plaintiff in its complaint that
"plaintiff agreed to pay defendant, at the end of each month upon presentation of accounts."

Resolving such ambiguity as exists and having in mind ordinary business practice, a reasonable
deduction is that Song Fo & Company was to pay the Hawaiian-Philippine Co. upon presentation
of accounts at the end of each month. Under this hypothesis, Song Fo & Company should have
paid for the molasses delivered in December, 1922, and for which accounts were received by it on
January 5, 1923, not later than January 31 of that year. Instead, payment was not made until
February 20, 1923. All the rest of the molasses was paid for either on time or ahead of time.

The terms of payment fixed by the parties are controlling. The time of payment stipulated for in
the contract should be treated as of the essence of the contract. Theoretically, agreeable to certain
conditions which could easily be imagined, the Hawaiian-Philippine Co. would have had the right
to rescind the contract because of the breach of Song Fo & Company. But actually, there is her
present no outstanding fact which would legally sanction the rescission of the contract by the
Hawaiian-Philippine Co.

The general rule is that rescission will not be permitted for a slight or casual breach of the
contract, but only for such breaches as are so substantial and fundamental as to defeat the object of
the parties in making the agreement. A delay in payment for a small quantity of molasses for some
twenty days is not such a violation of an essential condition of the contract as warrants rescission
for non-performance. Not only this, but the Hawaiian-Philippine Co. waived this condition when it
arose by accepting payment of the overdue accounts and continuing with the contract. Thereafter,
Song Fo & Company was not in default in payment so that the Hawaiian-Philippine Co. had in
reality no excuse for writing its letter of April 2, 1923, cancelling the contract. (Warner, Barnes &
Co. vs. Inza [1922], 43 Phil., 505.)

We rule that the appellant had no legal right to rescind the contract of sale because of the failure of
Song Fo & Company to pay for the molasses within the time agreed upon by the parties. We
sustain the finding of the trial judge in this respect.

3. On the basis first, of a contract for 300,000 gallons of molasses, and second, of a contract
imprudently breached by the Hawaiian-Philippine Co., what is the measure of damages? We again
turn to the facts as agreed upon by the parties.

The first cause of action of the plaintiff is based on the greater expense to which it was put in
being compelled to secure molasses from other sources. Three hundred thousand gallons of
molasses was the total of the agreement, as we have seen. As conceded by the plaintiff 55,006
gallons of molasses were delivered by the defendant to the plaintiff before the breach. This leaves
244,994 gallons of molasses undelivered which the plaintiff had to purchase in the open market.
As expressly conceded by the plaintiff at page 25 of its brief 100,000 gallons of molasses were
secured from the Central North Negros Sugar Co., Inc., at two centavos a gallon. As this is the
same price specified in the contract between the plaintiff and the defendant, the plaintiff
accordingly suffered no material loss in having to make this purchase. So 244,994 gallons minus
the 100,000 gallons just mentioned leaves as a result 144,994 gallons. As to this amount, the
plaintiff admits that it could have secured it and more than the Central Victorias Milling Company
one and one-half centavos per gallon. In other words, the plaintiff had to pay the Central Victorias
Milling Company one and one-half centavos a gallon more for the molasses than it would have
had to pay the Hawaiian-Philippine Co. Translated into pesos and centavos, this meant a loss to
the plaintiff of approximately P2,174.91. As the conditions existing at the central of the Hawaiian-
Philippine Co. may have been different than those found at the Central North Negros Sugar Co.,
Inc., and the Central Victorias Milling Company, and as not alone through the delay but through
expenses of transportation and incidental expenses, the plaintiff may have been put to greater cost
in making the purchase of the molasses in the open market, we would concede under the first
cause of action in round figures P3,000.

The second cause of action relates to lost profits on account of the breach of the contract. The only
evidence in the record on this question is the stipulation of counsel to the effect that had Mr. Song
Heng, the manager of Song Fo & Company, been called as a witness, he would have testified that
the plaintiff would have realized a profit of P14,948.43, if the contract of December 13, 1922, had
been fulfilled by the defendant. Indisputably, this statement falls far short of presenting proof on
which to make a finding as to damages.

In the first place, the testimony which Mr. Song Heng would have given undoubtedly would
follow the same line of thought as found in the decision of the trial court, which we have found to
be unsustainable. In the second place, had Mr. Song Heng taken the witness-stand and made the
statement attributed to him, it would have been insufficient proof of the allegations of the
complaint, and the fact that it is a part of the stipulation by counsel does not change this result.
And lastly, the testimony of the witness Song Heng, if we may dignify it as such, is a mere
conclusion, not a proven fact. As to what items make up the more than P14,000 of alleged lost
profits, whether loss of sales or loss of customers, or what not, we have no means of knowing.

We rule that the plaintiff is entitled to recover damages from the defendant for breach of contract
on the first cause of action in the amount of P3,000 and on the second cause of action in no
amount. Appellant's assignments of error are accordingly found to be well in taken in part and not
well taken in part.

Agreeable to the foregoing, the judgment appealed from shall be modified and the plaintiff shall
have and recover from the defendant the sum of P3,000, with legal interest from October 2, 1923,
until payment. Without special finding as to costs in either instance, it is ordered.

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

||| (Song Fo & Co. v. Hawaiian Philippine Co., G.R. No. 23769, [September 16, 1925], 47 PHIL
821-830)
Cdasiaonline logo top
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JURISPRUDENCE Jurisprudences icon 120x120
18d623f0c132036f56cae92fb52b20c2af27b43f2646c7ffa940287812634a6c
220 PHIL 10-23

EN BANC

[G.R. No. L-42283. March 18, 1985.]

BUENAVENTURA ANGELES, ET AL., plaintiffs-appellees, vs. URSULA TORRES

CALASANZ, ET AL., defendants-appellants.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; RECIPROCAL OBLIGATIONS; RIGHT

TO RESCIND; MAY BE EXERCISED EXTRA-JUDICIALLY. — Article 1191 is explicit. In
reciprocal obligations, either party has the right to rescind the contract upon the failure of the other
to perform the obligation assumed thereunder. Moreover, there is nothing in the law that prohibits
the parties from entering into an agreement that violation of the terms of the contract would cause
its cancellation even without court intervention (Froilan v. Pan Oriental Shipping, Co., et al., 12
SCRA 276) — "Well settled is, however, the rule that a judicial action for the rescission of a
contract is not necessary where the contract provides that it may be revoked and cancelled for
violation of any of its terms and conditions' (Lopez v. Commissioner of Customs, 37 SCRA 327,
334, and cases cited therein) . . . .

2. ID.; ID.; ID.; ID.; ID.; NOTICE, INDISPENSABLE. — The rule that it is not always necessary
for the injured party to resort to court for rescission of the contract when the contract itself
provides that it may be rescinded for violation of its terms and conditions, was qualified by this
Court in University of the Philippines v. De los Angeles, (35 SCRA 102) where we explained that:
"Of course, it must be understood that the act of a party in treating a contract as cancelled or
resolved on account of infractions by the other contracting party must be made known to the other
and is always provisional, being ever subject to scrutiny and review by the proper court. If the
other party denies that rescission is justified, it is free to resort to judicial action in its own behalf,
and bring the matter to court. Then, should the court, after due hearing, decide that the resolution
of the contract was not warranted, the responsible party will be sentenced to damages; in the
contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party
prejudiced. . . .

3. ID.; ID.; ID.; ID.; NOT ABSOLUTE. — The right to rescind the contract for non-performance
of one of its stipulations, therefore, is not absolute. In Universal Food Corp. v. Court of Appeals
(33 SCRA 1) the Court stated that — "The general rule is that rescission of a contract will not be
permitted for a slight or casual breach, but only for such substantial and fundamental breach as
would defeat the very object of the parties in making the agreement. (Song Fo & Co. v. Hawaiian-
Philippine Co., 47 Phil. 821, 827) The question of whether a breach of a contract is substantial
depends upon the attendant circumstances. (Corpus v. Hon. Alikpala, et al., L-23707 & L-23720,
Jan. 17, 1968)." . . . .

4. ID.; ID.; ID.; RESCISSION NOT PROPER WHERE THERE IS SUBSTANTIAL

PERFORMANCE OF OBLIGATION. — The breach of the contract adverted to by the
defendants-appellants is so slight and casual when we consider that apart from the initial
downpayment of P392.00 the plaintiffs-appellees had already paid the monthly installments for a
period of almost nine (9) years. In other words, in only a short time, the entire obligation would
have been paid. Furthermore, although the principal obligation was only P3,920.00 excluding the
7 percent interests, the plaintiffs-appellees had already paid an aggregate amount of P4,533.38. To
sanction the rescission made by the defendants-appellants will work injustice to the plaintiffs-
appellees. (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA 829) It would unjustly enrich the
defendants-appellants. Article 1234 of the Civil Code which provides that: "If the obligation has
been substantially performed in good faith, the obligor may recover as though there had been a
strict and complete fulfillment, less damages suffered by the obligee."

5. ID.; ID.; ID.; RIGHT OF RESCISSION; ACCEPTANCE OF DELAYED PAYMENTS OF

INSTALLMENTS CONSTITUTES WAIVER AND ESTOPPEL. — The defendants-appellants'
contention is without merit. We agree with the plaintiffs-appellees that when the defendants-
appellants, instead of availing of their alleged right to rescind, have accepted and received delayed
payments of installments, though the plaintiffs-appellees have been in arrears beyond the grace
period mentioned in paragraph 6 of the contract, the defendants-appellants have waived and are
now estopped from exercising their alleged right of rescission.

6. ID.; ID.; CONTRACT TO SELL FALLS INTO THE CATEGORY OF A CONTRACT OF

ADHESION. — The contract to sell entered into by the parties has some characteristics of a
contract of adhesion. The defendants-appellants drafted and prepared the contract. The plaintiffs-
appellees, eager to acquire a lot upon which they could build a home, affixed their signatures and
assented to the terms and conditions of the contract. They had no opportunity to question nor
change any of the terms of the agreement. It was offered to them on a "take it or leave it" basis. In
Sweet Lines, Inc. v. Teves (83 SCRA 361).

7. ID.; ID.; ID.; CONSTRUED AGAINST ONE WHO CAUSED IT. — The contract to sell, being
a contract of adhesion, must be construed against the party causing it. We agree with the
observation of the plaintiffs-appellees to the effect that "the terms of a contract must be interpreted
against the party who drafted the same, especially where such interpretation will help effect justice
to buyers who, after having invested a big amount of money, are now sought to be deprived of the
same thru the prayed application of a contract clever in its phraseology, condemnable in its
lopsidedness and injurious in its effect which, in essence, and in its entirety is most unfair to the
buyers."

DECISION
GUTIERREZ, JR., J p:

This is an appeal from the decision of the Court of First Instance of Rizal, Seventh Judicial
District, Branch X, declaring the contract to sell as not having been validly cancelled and ordering
the defendants-appellants to execute a final deed of sale in favor of the plaintiffs-appellees, to pay
P500.00 attorney's fees and costs. cdrep

The facts being undisputed, the Court of Appeals certified the case to us since only pure questions
of law have been raised for appellate review.

On December 19, 1957, defendants-appellants Ursula Torres Calasanz and Tomas Calasanz and
plaintiffs-appellees Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece
of land located in Cainta, Rizal for the amount of P3,920.00 plus 7% interest per annum.

The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They
promised to pay the balance in monthly installments of P41.20 until fully paid, the installments
being due and payable on the 19th day of each month. The plaintiffs-appellees paid the monthly
installments until July 1966, when their aggregate payment already amounted to P4,533.38. On
numerous occasions, the defendants-appellants accepted and received delayed installment
payments from the plaintiffs-appellees.

On December 7, 1966, the defendants-appellants wrote the plaintiffs-appellees a letter requesting

the remittance of past due accounts.

On January 28, 1967, the defendants-appellants cancelled the said contract because the plaintiffs-
appellees failed to meet subsequent payments. The plaintiffs' letter with their plea for
reconsideration of the said cancellation was denied by the defendants-appellants.

The plaintiffs-appellees filed Civil Case No. 8943 with the Court of First Instance of Rizal,
Seventh Judicial District, Branch X to compel the defendants-appellants to execute in their favor
the final deed of sale alleging inter alia that after computing all subsequent payments for the land
in question, they found out that they have already paid the total amount of P4,533.38 including
interests, realty taxes and incidental expenses for the registration and transfer of the land.

The defendants-appellants alleged in their answer that the complaint states no cause of action and
that the plaintiffs-appellees violated paragraph six (6) of the contract to sell when they failed and
refused to pay and/or offer to pay the monthly installments corresponding to the month of August,
1966 for more than five (5) months, thereby constraining the defendants-appellants to cancel the
said contract. LLphil

The lower court rendered judgment in favor of the plaintiffs-appellees. The dispositive portion of
the decision reads:

"WHEREFORE, based on the foregoing considerations, the Court hereby renders judgment in
favor of the plaintiffs and against the defendants declaring that the contract subject matter of the
instant case was NOT VALIDLY cancelled by the defendants. Consequently, the defendants are
ordered to execute a final Deed of Sale in favor of the plaintiffs and to pay the sum of P500.00 by
way of attorney's fees. Costs against the defendants."

A motion for reconsideration filed by the defendants-appellants was denied.

As earlier stated, the then Court of Appeals certified the case to us considering that the appeal
involves pure questions of law.

The defendants-appellants assigned the following alleged errors of the lower court:

First Assignment of Error

THE LOWER COURT ERRED IN NOT HOLDING THE CONTRACT TO SELL (ANNEX "A"
OF COMPLIANCE) AS HAVING BEEN LEGALLY AND VALIDLY CANCELLED.

Second Assignment of Error

EVEN ASSUMING ARGUENDO THAT THE SAID CONTRACT TO SELL HAS NOT BEEN
LEGALLY AND VALIDLY CANCELLED, THE LOWER COURT ERRED IN ORDERING
DEFENDANTS TO EXECUTE A FINAL DEED OF SALE IN FAVOR OF THE PLAINTIFF.

Third Assignment of Error

THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO PAY PLAINTIFFS THE

SUM OF P500.00 AS ATTORNEY'S FEES.

The main issue to be resolved is whether or not the contract to sell has been automatically and
validly cancelled by the defendants-appellants.

The defendants-appellants submit that the contract was validly cancelled pursuant to paragraph six
of the contract which provides:

xxx xxx xxx

"SIXTH. — In case the party of the SECOND PART fails to satisfy any monthly installments, or
any other payments herein agreed upon, he is granted a month of grace within which to make the
retarded payment, together with the one corresponding to the said month of grace; it is understood,
however, that should the month of grace herein granted to the party of the SECOND PART
expired; without the payments corresponding to both months having been satisfied, an interest of
10% per annum will be charged on the amounts he should have paid; it is understood further, that
should a period of 90 days elapse, to begin from the expiration of the month of grace herein
mentioned, and the party of SECOND PART has not paid all the amounts he should have paid
with the corresponding interest up to that date, the party of the FIRST PART has the right to
declare this contract cancelled and of no effect, and as consequence thereof, the party of the
FIRST PART may dispose of the parcel of land covered by this contract in favor of other persons,
as if this contract had never been entered into. In case of such cancellation of the contract, all the
amounts paid in accordance with this agreement together with all the improvements made on the
premises, shall be considered as rents paid for the use and occupation of the above mentioned
premises, and as payment for the damages suffered by failure of the party of the SECOND PART
to fulfill his part of the agreement, and the party of the SECOND PART hereby renounces all his
right to demand or reclaim the return of the same and obliges himself to peacefully vacate the
premises and deliver the same to the party of the FIRST PART." (Italics supplied by appellant)

xxx xxx xxx

The defendants-appellants argue that the plaintiffs-appellees failed to pay the August, 1966
installment despite demands for more than four (4) months. The defendants-appellants point to
Jocson v. Capitol Subdivision (G.R. No. L-6573, February 28, 1955) where this Court upheld the
right of the subdivision owner to automatically cancel a contract to sell on the strength of a
provision or stipulation similar to paragraph 6 of the contract in this case. The defendants-
appellants also argue that even in the absence of the aforequoted provision, they had the right to
cancel the contract to sell under Article 1191 of the Civil Code of the Philippines.

The plaintiffs-appellees on the other hand contend that the Jocson ruling does not apply. They state
that paragraph 6 of the contract to sell is contrary to law insofar as it provides that in case of
specified breaches of its terms, the sellers have the right to declare the contract cancelled and of no
effect, because it granted the sellers an absolute and automatic right of rescission.

Article 1191 of the Civil Code on the rescission of reciprocal obligations provides:

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

"The injured party may choose between the fulfillment and the rescission of the obligation, with
the payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the later should become impossible."

xxx xxx xxx

Article 1191 is explicit. In reciprocal obligations, either party has the right to rescind the contract
upon the failure of the other to perform the obligation assumed thereunder. Moreover, there is
nothing in the law that prohibits the parties from entering into an agreement that violation of the
terms of the contract would cause its cancellation even without court intervention (Froilan v. Pan
Oriental Shipping, Co., et al., 12 SCRA 276) —
"Well settled is, however, the rule that a judicial action for the rescission of a contract is not
necessary where the contract provides that it may be revoked and cancelled for violation of any of
its terms and conditions' (Lopez v. Commissioner of Customs, 37 SCRA 327, 334, and cases cited
therein).

"Resort to judicial action for rescission is obviously not contemplated . . . The validity of the
stipulation can not be seriously disputed. It is in the nature of a facultative resolutory condition
which in many cases has been upheld by this Court. (Ponce Enrile v. Court of Appeals, 29 SCRA
504)."

The rule that it is not always necessary for the injured party to resort to court for rescission of the
contract when the contract itself provides that it may be rescinded for violation of its terms and
conditions, was qualified by this Court in University of the Philippines v. De los Angeles, (35
SCRA 102) where we explained that:

"Of course, it must be understood that the act of a party in treating a contract as cancelled or
resolved on account of infractions by the other contracting party must be made known to the other
and is always provisional, being ever subject to scrutiny and review by the proper court. If the
other party denies that rescission is justified, it is free to resort to judicial action in its own behalf,
and bring the matter to court. Then, should the court, after due hearing, decide that the resolution
of the contract was not warranted, the responsible party will be sentenced to damages; in the
contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party
prejudiced.

"In other words, the party who deems the contract violated many consider it resolved or rescinded,
and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the
final judgment of the corresponding court that will conclusively and finally settle whether the
action taken was or was not correct in law . . .

"We see no conflict between this ruling and the previous jurisprudence of this Court invoked by
respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation;
(Ocejo, Perez & Co. v. International Banking Corp., 37 Phil. 631; Republic v. Hospital de San
Juan de Dios, et al., 84 Phil. 820) since in every case where the extrajudicial resolution is
contested only the final award of the court of competent jurisdiction can conclusively settle
whether the resolution was proper or not. It is in this sense that judicial action will be necessary, as
without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation,
unless attack thereon should become barred by acquiescence, estoppel or prescription."

The right to rescind the contract for non-performance of one of its stipulations, therefore, is not
absolute. In Universal Food Corp. v. Court of Appeals (33 SCRA 1) the Court stated that —

"The general rule is that rescission of a contract will not be permitted for a slight or casual breach,
but only for such substantial and fundamental breach as would defeat the very object of the parties
in making the agreement. (Song Fo & Co. v. Hawaiian-Philippine Co., 47 Phil. 821, 827) The
question of whether a breach of a contract is substantial depends upon the attendant
circumstances. (Corpus v. Hon. Alikpala, et al., L-23707 & L-23720, Jan. 17, 1968)." . . .

The defendants-appellants state that the plaintiffs-appellees violated Section two of the contract to
sell which provides:

"SECOND. — That in consideration of the agreement of sale of the above described property, the
party of the SECOND PART obligates himself to pay to the party of the FIRST PART the Sum of
THREE THOUSAND NINE HUNDRED TWENTY ONLY (P3,920.00), Philippine Currency,
plus interest at the rate of 7% per annum, as follows:

"(a) The amount of THREE HUNDRED NINETY TWO only (P392.00) when this contract is
signed; and

"(b) The sum of FORTY ONE AND 20/100 ONLY (P41.20) on or before the 19th day of each
month, from this date until the total payment of the price above stipulated, including interest."

because they failed to pay the August installment, despite demand, for more than four (4) months.

The breach of the contract adverted to by the defendants-appellants is so slight and casual when
we consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had
already paid the monthly installments for a period of almost nine (9) years. In other words, in only
a short time, the entire obligation would have been paid. Furthermore, although the principal
obligation was only P3,920.00 excluding the 7 percent interests, the plaintiffs-appellees had
already paid an aggregate amount of P4,533.38. To sanction the rescission made by the
defendants-appellants will work injustice to the plaintiffs-appellees. (See J.M. Tuazon and Co.,
Inc. v. Javier, 31 SCRA 829) It would unjustly enrich the defendants-appellants.

Article 1234 of the Civil Code which provides that: cdphil

"If the obligation has been substantially performed in good faith, the obligor may recover as
though there had been a strict and complete fulfillment, less damages suffered by the obligee."

also militates against the unilateral act of the defendants-appellants in cancelling the contract.

We agree with the observation of the lower court to the effect that:

"Although the primary object of selling subdivided lots is business, yet, it cannot be denied that
this subdivision is likewise purposely done to afford those landless, low income group people of
realizing their dream of a little parcel of land which they can really call their own."

The defendants-appellants cannot rely on paragraph 9 of the contract which provides:

"NINTH. — That whatever consideration of the party of the FIRST PART may concede to the
party of the SECOND PART, as not exacting a strict compliance with the conditions of paragraph
6 of this contract, as well as any other condonation that the party of the FIRST PART may give to
the party of the SECOND PART with regards to the obligations of the latter, should not be
interpreted as a renunciation on the part of the party of the FIRST PART of any right granted it by
this contract, in case of default or non-compliance by the party of the SECOND PART."

The defendants-appellants argue that paragraph nine clearly allows the seller to waive the
observance of paragraph 6 not merely once, but for as many times as he wishes.

The defendants-appellants' contention is without merit. We agree with the plaintiffs-appellees that
when the defendants-appellants, instead of availing of their alleged right to rescind, have accepted
and received delayed payments of installments, though the plaintiffs-appellees have been in
arrears beyond the grace period mentioned in paragraph 6 of the contract, the defendants-
appellants have waived and are now estopped from exercising their alleged right of rescission. In
De Guzman v. Guieb (48 SCRA 68), we held that:

xxx xxx xxx

"But defendants do not deny that in spite of the long arrearages, neither they nor their predecessor,
Teodoro de Guzman, even took steps to cancel the option or to eject the appellees from the home-
lot in question. On the contrary, it is admitted that the delayed payments were received without
protest or qualification. . . . Under these circumstances, We cannot but agree with the lower court
that at the time appellees exercised their option, appellants had already forfeited their right to
invoke the above-quoted provision regarding the nullifying effect of the non-payment of six
months rentals by appellees by their having accepted without qualification on July 21, 1964 the
full payment by appellees of all their arrearages."

The defendants-appellants contend in the second assignment of error that the ledger of payments
show a balance of P671.67 due from the plaintiffs-appellees. They submit that while it is true that
the total monthly installments paid by the plaintiffs-appellees may have exceeded P3,920.00, a
substantial portion of the said payments were applied to the interests since the contract specifically
provides for a 7% interest per annum on the remaining balance. The defendants-appellants rely on
paragraph 2 of the contract which provides:

"SECOND. — That in consideration of the agreement of sale of the above described property, the
party of the SECOND PART obligates himself to pay to the party of the FIRST PART the Sum of
THREE THOUSAND NINE HUNDRED TWENTY ONLY (P3,920.00), Philippine Currency,
plus interest at the rate of 7% per annum . . . ." (Emphasis supplied)

The plaintiffs-appellees on the other hand are firm in their submission that since they have already
paid the defendants-appellants a total sum of P4,533.38, the defendants-appellants must now be
compelled to execute the final deed of sale pursuant to paragraph 12 of the contract which
provides:

"TWELFTH. — That once the payment of the sum of P3,920.00, the total price of the sale is
completed, the party to the FIRST PART will execute in favor of the party of the SECOND PART,
the necessary deed or deeds to transfer to the latter the title of the parcel of land sold, free from all
liens and encumbrances other than those expressly provided in this contract; it is understood,
however, that all the expenses which may be incurred in the said transfer of title shall be paid by
the party of the SECOND PART, as above stated."

Closely related to the second assignment of error is the submission of the plaintiffs-appellees that
the contract herein is a contract of adhesion.

We agree with the plaintiffs-appellees. The contract to sell entered into by the parties has some
characteristics of a contract of adhesion. The defendants-appellants drafted and prepared the
contract. The plaintiffs-appellees, eager to acquire a lot upon which they could build a home,
affixed their signatures and assented to the terms and conditions of the contract. They had no
opportunity to question nor change any of the terms of the agreement. It was offered to them on a
"take it or leave it" basis. In Sweet Lines, Inc. v. Teves (83 SCRA 361), we held that:

xxx xxx xxx

". . .' (W)hile generally, stipulations in a contract come about after deliberate drafting by the
parties thereto, .. there are certain contracts almost all the provisions of which have been drafted
only by one party, usually a corporation. Such contracts are called contracts of adhesion, because
the only participation of the party is the signing of his signature or his `adhesion' thereto.
Insurance contracts, bills of lading, contracts of sale of lots on the installment plan fall into this
category.' (Paras, Civil Code of the Philippines, Seventh ed., Vol. I, p. 80.)" (Emphasis supplied)

While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the
defendants-appellants the sum of P3,920.00 plus 7% interest per annum, it is likewise true that
under paragraph 12 the seller is obligated to transfer the title to the buyer upon payment of the
P3,920.00 price sale.

The contract to sell, being a contract of adhesion, must be construed against the party causing it.
We agree with the observation of the plaintiffs-appellees to the effect that "the terms of a contract
must be interpreted against the party who drafted the same, especially where such interpretation
will help effect justice to buyers who, after having invested a big amount of money, are now
sought to be deprived of the same thru the prayed application of a contract clever in its
phraseology, condemnable in its lopsidedness and injurious in its effect which, in essence, and in
its entirety is most unfair to the buyers."

Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-
appellees have already paid an aggregate amount of P4,533.38, the courts should only order the
payment of the few remaining installments but not uphold the cancellation of the contract. Upon
payment of the balance of P671.67 without any interest thereon, the defendants-appellants must
immediately execute the final deed of sale in favor of the plaintiffs-appellees and execute the
necessary transfer documents as provided in paragraph 12 of the contract. The attorney's fees are
justified. cdrep

WHEREFORE, the instant petition is DENIED for lack of merit. The decision appealed from is
AFFIRMED with the modification that the plaintiffs-appellees should pay the balance of SIX
HUNDRED SEVENTY ONE PESOS AND SIXTY-SEVEN CENTAVOS (671.67) without any
interests. Costs against the defendants-appellants.

SO ORDERED.

Melencio-Herrera, Plana, Relova De la Fuente and Alampay, JJ., concur.

Teehankee, J., took no part.

||| (Angeles v. Calasanz, G.R. No. L-42283, [March 18, 1985], 220 PHIL 10-23)

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28407c50f2de90cf9151d9a6b2c6c00634d54d501d3ebbf2753b29d2e99f7eb6
JURISPRUDENCE Jurisprudences icon 120x120
18d623f0c132036f56cae92fb52b20c2af27b43f2646c7ffa940287812634a6c
369 PHIL 243-257
FIRST DIVISION

[G.R. No. 97347. July 6, 1999.]

JAIME G. ONG, petitioner, vs. THE HONORABLE COURT OF APPEALS, SPOUSES

MIGUEL K. ROBLES and ALEJANDRA M. ROBLES, respondents.

Nelson A. Loyola for petitioner.

Alampay & Manhit Law Offices and Chaves Hechanova & Lim Law Offices for private
respondents.

SYNOPSIS

This is a petition for review on certiorari from a judgment of the Court of Appeals affirming the
decision of the Regional Trial Court which ordered the setting aside of an "Agreement of Purchase
and Sale" executed between petitioner and respondents. According to the Court of Appeals, the
failure of petitioner to completely pay the purchase price is a substantial breach of his obligation
which entitles the private respondents to rescind their contract under Article 1191 of the New Civil
Code.

The Supreme Court ruled that the agreement of the parties may be set aside, but not because of a
breach on the part of petitioner for failure to complete payment of the purchase price. Rather, his
failure to do so brought about a situation which prevented the obligation of respondent spouses to
convey title from acquiring an obligatory force. It must be stressed that the breach contemplated in
Article 1191 of the New Civil Code is the obligor's failure to comply with an obligation already
extant, not a failure of a condition to render binding that obligation.

As to petitioner's contention that the contract was novated as to the manner and time of payment,
the Court was not persuaded. The parties never even intended to novate their previous agreement.
The subsequent acts of the parties hardly demonstrate their intent to dissolve the old obligation as
a consideration for the emergence of the new one. Novation is never presumed, there must be an
express intention to novate.

SYLLABUS

1. REMEDIAL LAW; EVIDENCE; FINDINGS OF FACT OF TRIAL AND APPELLATE

COURTS, BINDING ON APPEAL; CASE AT BAR. — At the outset, it must be stated that the
issues raised by the petitioner are generally factual in nature and were already passed upon by the
Court of Appeals and the trial court. Time and again, we have stated that it is not the function of
the Supreme Court to assess and evaluate all over again the evidence, testimonial and
documentary, adduced by the parties to an appeal, particularly where, such as in the case at bench,
the findings of both the trial court and the appellate court on the matter coincide. There is no
cogent reason shown that would justify the court to discard the factual findings of the two courts
below and to superimpose its own. As regards the improvements introduced by petitioner to the
premises and for which he claims reimbursement, we see no reason to depart from the ruling of
the trial court and the appellate court that petitioner is a builder in bad faith. He introduced the
improvements on the premises knowing fully well that he has not paid the consideration of the
contract in full and over the vigorous objections of respondent spouses. Moreover, petitioner
introduced major improvements on the premises even while the case against him was pending
before the trial court.

2. CIVIL LAW; OBLIGATIONS AND CONTRACTS; RESCISSION AND RESOLUTION,

DISTINGUISHED. — Rescission, as contemplated in Articles 1380, et seq., of the New Civil
Code, is a remedy granted by law to the contracting parties and even to third persons, to secure the
reparation of damages caused to them by a contract, even if this should be valid, by restoration of
things to their condition at the moment prior to the celebration of the contract. It implies a
contract, which even if initially valid, produces a lesion or a pecuniary damage to someone. On
the other hand, Article 1191 of the New Civil Code refers to rescission applicable to reciprocal
obligations. Rescission of reciprocal obligations under Article 1191 of the New Civil Code should
be distinguished from rescission of contracts under Article 1383. Although both presuppose
contracts validly entered into and subsisting and both require mutual restitution when proper, they
are not entirely identical. While Article 1191 uses the term "rescission," the original term which
was used in the old Civil Code, from which the article was based, was "resolution." Resolution is a
principal action which is based on breach of a party, while rescission under Article 1383 is a
subsidiary action limited to cases of rescission for lesion under Article 1381 of the New Civil
Code. EaCSHI

3. ID.; ID.; RECIPROCAL OBLIGATIONS, CONSTRUED. — Reciprocal obligations are those

which arise from the same cause, and in which each party is a debtor and a creditor of the other,
such that the obligation of one is dependent upon the obligation of the other. They are to be
performed simultaneously such that the performance of one is conditioned upon the simultaneous
fulfillment of the other.

4. ID.; ID.; CONTRACT TO SELL, DIFFERENTIATED FROM CONTRACT OF SALE. — In a

contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold;
while in a contract to sell, ownership is, by agreement, reserved in the vendor and is not to pass to
the vendee until full payment of the purchase price. In a contract to sell, the payment of the
purchase price is a positive suspensive condition, the failure of which is not a breach, casual or
serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an
obligatory force.

5. ID.; ID.; RESCISSION; NON-FULFILLMENT OF SUSPENSIVE CONDITION; CASE AT

BAR. — Respondents in the case at bar bound themselves to deliver a deed of absolute sale and
clean title covering the two parcels of land upon full payment by the buyer of the purchase price of
P2,000,000.00. This promise to sell was subject to the fulfillment of the suspensive condition of
full payment of the purchase price by the petitioner. Petitioner, however, failed to complete
payment of the purchase price. The non-fulfillment of the condition of full payment rendered the
contract to sell ineffective and without force and effect. It must be stressed that the breach
contemplated in Article 1191 of the New Civil Code is the obligor's failure to comply with an
obligation already extant, not a failure of a condition to render binding that obligation. Failure to
pay, in this instance, is not even a breach but merely an event which prevents the vendor's
obligation to convey title from acquiring binding force. Hence, the agreement of the parties in the
case at bench may be set aside, but not because of a breach on the part of petitioner for failure to
complete payment of the purchase price. Rather, his failure to do so brought about a situation
which prevented the obligation of respondent spouses to convey title from acquiring an obligatory
force.
6. ID.; ID.; NOVATION; NEVER PRESUMED BUT MUST BE PROVED AS A FACT. —
Petitioner insists, however, that the contract was novated as to the manner and time of payment.
We are not persuaded. Article 1292 of the New Civil Code states that, "In order that an obligation
may be extinguished by another which substitutes the same, it is imperative that it be so declared
in unequivocal terms, or that the old and the new obligations be on every point incompatible with
each other." Novation is never presumed, it must be proven as a fact either by express stipulation
of the parties or by implication derived from an irreconcilable incompatibility between the old and
the new obligation.

7. ID.; ID.; ID.; REQUISITES. — In order for novation to take place, the concurrence of the
following requisites is indispensable: (1) there must be a previous valid obligation; (2) there must
be an agreement of the parties concerned to a new contract; (3) there must be the extinguishment
of the old contract; and (4) there must be the validity of the new contract. The aforesaid requisites
are not found in the case at bench. The subsequent acts of the parties hardly demonstrate their
intent to dissolve the old obligation as a consideration for the emergence of the new one. We
repeat to the point of triteness, novation is never presumed, there must be an express intention to
novate.

8. CIVIL LAW; DAMAGES; EXEMPLARY DAMAGES; DELETED IN CASE AT BAR. — The

award of exemplary damages was correctly deleted by the Court of Appeals inasmuch as no moral,
temperate, liquidated or compensatory damages in addition to exemplary damages were awarded.

DECISION

YNARES-SANTIAGO, J p:

Before us is a petition for review on certiorari from the judgment rendered by the Court of
Appeals which, except as to the award of exemplary damages, affirmed the decision of the
Regional Trial Court of Lucena City, Branch 60, setting aside the "Agreement of Purchase and
Sale" entered into by herein petitioner and private respondent spouses in Civil Case No. 85-85.
prLL

On May 10, 1983, petitioner Jaime Ong on the one hand, and respondent spouses Miguel K.
Robles and Alejandra Robles, on the other hand, executed an "Agreement of Purchase and Sale"
respecting two parcels of land situated at Barrio Puri, San Antonio, Quezon. The terms and
conditions of the contract read:

"1. That for and in consideration of the agreed purchase price of TWO MILLION PESOS
(P2,000,000.00), Philippine currency, the mode and manner of payment is as follows:

A. The initial payment of SIX HUNDRED THOUSAND PESOS (P600,000.00) as verbally

agreed by the parties, shall be broken down as follows:

1. P103,499.91 shall be paid, and as already paid by the BUYER to the SELLERS on March 22,
1983, as stipulated under the Certification of undertaking dated March 22, 1983 and covered by a
check voucher of even date.

2. That the sum of P496,500.09 shall be paid directly by the BUYER to the Bank of Philippine
Islands to answer for the loan of the SELLERS which as of March 15, 1983 amounted to
P537,310.10, and for the interest that may accrued (sic) from March 15, 1983, up to the time said
obligation of the SELLERS with the said bank has been settled, provided however that the amount
in excess of P496,500.09, shall be chargeable from the time deposit of the SELLERS with the
aforesaid bank.

B. That the balance of ONE MILLION FOUR HUNDRED THOUSAND (P1,400,000.00) PESOS
shall be paid by the BUYER to the SELLERS in four (4) equal quarterly installments of THREE
HUNDRED FIFTY THOUSAND PESOS (P350,000.00), the first to be due and payable on June
15, 1983, and every quarter thereafter, until the whole amount is fully paid, by these presents
promise to sell to said BUYER the two (2) parcels of agricultural land including the rice mill and
the piggery which are the most notable improvements thereon, situated at Barangay Puri, San
Antonio Quezon, . . . .

"2. That upon the payment of the total purchase price by the BUYER the SELLERS bind
themselves to deliver to the former a good and sufficient deed of sale and conveyance for the
described two (2) parcels of land, free and clear from all liens and encumbrances.

"3. That immediately upon the execution of this document, the SELLERS shall deliver, surrender
and transfer possession of the said parcels of land including all the improvements that may be
found thereon, to the BUYER, and the latter shall take over from the SELLER the possession,
operation, control and management of the RICEMILL and PIGGERY found on the aforesaid
parcels of land.

"4. That all payments due and payable under this contract shall be effected in the residence of the
SELLERS located at Barangay Puri, San Antonio, Quezon unless another place shall have been
subsequently designated by both parties in writing.

xxx xxx xxx." 1

On May 15, 1983, petitioner Ong took possession of the subject parcels of land together with the
piggery, building, ricemill, residential house and other improvements thereon.

Pursuant to the contract they executed, petitioner paid respondent spouses the sum of P103,499.91
2 by depositing it with the United Coconut Planters Bank. Subsequently, petitioner deposited sums
of money with the Bank of Philippine Islands (BPI), 3 in accordance with their stipulation that
petitioner pay the loan of respondents with BPI. LLpr
To answer for his balance of P1,400,000.00 petitioner issued four (4) post-dated Metro Bank
checks payable to respondent spouses in the amount of P350,000.00 each, namely: Check No.
157708 dated June 15, 1983, 4 Check No. 157709 dated September 15,1983, 5 Check No. 157710
dated December 15, 1983 6 and Check No. 157711 dated March 15, 1984. 7 When presented for
payment, however, the checks were dishonored due to insufficient funds. Petitioner promised to
replace the checks but failed to do so. To make matters worse, out of the P496,500.00 loan of
respondent spouses with the Bank of the Philippine Islands, which petitioner, as per agreement,
should have paid, petitioner only managed to dole out no more than P393,679.60. When the bank
threatened to foreclose the respondent spouses' mortgage, they sold three transformers of the rice
mill worth P51,411.00 to pay off their outstanding obligation with said bank, with the knowledge
and conformity of petitioner. 8 Petitioner, in return, voluntarily gave the spouses authority to
operate the rice mill. 9 He, however, continued to be in possession of the two parcels of land while
private respondents were forced to use the rice mill for residential purposes.

On August 2, 1985, respondent spouses, through counsel, sent petitioner a demand letter asking
for the return of the properties. Their demand was left unheeded, so, on September 2, 1985, they
filed with the Regional Trial Court of Lucena City, Branch 60, a complaint for rescission of
contract and recovery of properties with damages. Later, while the case was still pending with the
trial court, petitioner introduced major improvements on the subject properties by constructing a
complete fence made of hollow blocks and expanding the piggery. These prompted the respondent
spouses to ask for a writ of preliminary injunction. 10 The trial court granted the application and
enjoined petitioner from introducing improvements on the properties except for repairs. 11

On June 1, 1989 the trial court rendered a decision, the dispositive portion of which reads as
follows:

"IN VIEW OF THE FOREGOING, judgment is hereby rendered:

a) Ordering that the contract entered into by plaintiff spouses Miguel K. Robles and Alejandra M.
Robles and the defendant, Jaime Ong captioned 'Agreement of Purchase and Sale,' marked as
Exhibit 'A' set aside;

b) Ordering defendant, Jaime Ong to deliver the two (2) parcels of land which are the subject
matter of Exhibit 'A' together with the improvements thereon to the spouses Miguel K. Robles and
Alejandra M. Robles;

c) Ordering plaintiff spouses, Miguel Robles and Alejandra Robles to return to Jaime Ong the sum
of P497,179.51;

d) Ordering defendant Jaime Ong to pay the plaintiffs the sum of P100,000.00 as exemplary
damages; and

e) Ordering defendant Jaime Ong to pay the plaintiffs spouses Miguel K. Robles and Alejandra
Robles the sum of P20,000.00 as attorney's fees and litigation expenses.
"The motion of the plaintiff spouses Miguel K. Robles and Alejandra Robles for the appointment
of receivership is rendered moot and academic.

"SO ORDERED." 12

From this decision, petitioner appealed to the Court of Appeals, which affirmed the decision of the
Regional Trial Court but deleted the award of exemplary damages. In affirming the decision of the
trial court, the Court of Appeals noted that the failure of petitioner to completely pay the purchase
price is a substantial breach of his obligation which entitles the private respondents to rescind their
contract under Article 1191 of the New Civil Code. Hence, the instant petition. Cdpr

At the outset, it must be stated that the issues raised by the petitioner are generally factual in
nature and were already passed upon by the Court of Appeals and the trial court. Time and again,
we have stated that it is not the function of the Supreme Court to assess and evaluate all over again
the evidence, testimonial and documentary, adduced by the parties to an appeal, particularly
where, such as in the case at bench, the findings of both the trial court and the appellate court on
the matter coincide. There is no cogent reason shown that would justify the court to discard the
factual findings of the two courts below and to superimpose its own. 13

The only pertinent legal issues raised which are worthy of discussion are: (1) whether the contract
entered into by the parties may be validly rescinded under Article 1191 of the New Civil Code;
and (2) whether the parties had novated their original contract as to the time and manner of
payment.

Petitioner contends that Article 1191 of the New Civil Code is not applicable since he has already
paid respondent spouses a considerable sum and has therefore substantially complied with his
obligation. He cites Article 1383 instead, to the effect that where specific performance is available
as a remedy, rescission may not be resorted to.

A discussion of the aforesaid articles is in order.

Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy granted
by law to the contracting parties and even to third persons, to secure the reparation of damages
caused to them by a contract, even if this should be valid, by restoration of things to their
condition at the moment prior to the celebration of the contract. 14 It implies a contract, which
even if initially valid, produces a lesion or a pecuniary damage to someone. 15

On the other hand, Article 1191 of the New Civil Code refers to rescission applicable to reciprocal
obligations. Reciprocal obligations are those which arise from the same cause, and in which each
party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the
obligation of the other. 16 They are to be performed simultaneously such that the performance of
one is conditioned upon the simultaneous fulfillment of the other. Rescission of reciprocal
obligations under Article 1191 of the New Civil Code should be distinguished from rescission of
contracts under Article 1383. Although both presuppose contracts validly entered into and
subsisting and both require mutual restitution when proper, they are not entirely identical.

While Article 1191 uses the term "rescission," the original term which was used in the old Civil
Code, from which the article was based, was "resolution." 17 Resolution is a principal action
which is based on breach of a party, while rescission under Article 1383 is a subsidiary action
limited to cases of rescission for lesion under Article 1381 of the New Civil Code, which
expressly enumerates the following rescissible contracts: cda

1. Those which are entered into by guardians whenever the wards whom they represent suffer
lesion by more than one fourth of the value of the things which are the object thereof;

2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number;

3. Those undertaken in fraud of creditors when the latter cannot in any manner collect the claims
due them;

4. Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority;

5. All other contracts specially declared by law to be subject to rescission.

Obviously, the contract entered into by the parties in the case at bar does not fall under any of
those mentioned by Article 1381. Consequently, Article 1383 is inapplicable.

May the contract entered into between the parties, however, be rescinded based on Article 1191?

A careful reading of the parties' "Agreement of Purchase and Sale" shows that it is in the nature of
a contract to sell, as distinguished from a contract of sale. In a contract of sale, the title to the
property passes to the vendee upon the delivery of the thing sold; while in a contract to sell,
ownership is, by agreement, reserved in the vendor and is not to pass to the vendee until full
payment of the purchase price. 18 In a contract to sell, the payment of the purchase price is a
positive suspensive condition, the failure of which is not a breach, casual or serious, but a situation
that prevents the obligation of the vendor to convey title from acquiring an obligatory force. 19

Respondents in the case at bar bound themselves to deliver a deed of absolute sale and clean title
covering the two parcels of land upon full payment by the buyer of the purchase price of
P2,000,000.00. This promise to sell was subject to the fulfillment of the suspensive condition of
full payment of the purchase price by the petitioner. Petitioner, however, failed to complete
payment of the purchase price. The non-fulfillment of the condition of full payment rendered the
contract to sell ineffective and without force and effect. It must be stressed that the breach
contemplated in Article 1191 of the New Civil Code is the obligor's failure to comply with an
obligation already extant, not a failure of a condition to render binding that obligation. 20 Failure
to pay, in this instance, is not even a breach but merely an event which prevents the vendor's
obligation to convey title from acquiring binding force. 21 Hence, the agreement of the parties in
the case at bench may be set aside, but not because of a breach on the part of petitioner for failure
to complete payment of the purchase price. Rather, his failure to do so brought about a situation
which prevented the obligation of respondent spouses to convey title from acquiring an obligatory
force.

Petitioner insists, however, that the contract was novated as to the manner and time of payment.

We are not persuaded. Article 1292 of the New Civil Code states that, "In order that an obligation
may be extinguished by another which substitutes the same, it is imperative that it be so declared
in unequivocal terms, or that the old and the new obligations be on every point incompatible with
each other." cdrep

Novation is never presumed, it must be proven as a fact either by express stipulation of the parties
or by implication derived from an irreconcilable incompatibility between the old and the new
obligation. 22 Petitioner cites the following instances as proof that the contract was novated: the
retrieval of the transformers from petitioner's custody and their sale by the respondents to
MERALCO on the condition that the proceeds thereof be accounted for by the respondents and
deducted from the price of the contract; the take-over by the respondents of the custody and
operation of the rice mill; and the continuous and regular withdrawals by respondent Miguel
Robles of installment sums per vouchers (Exhs. "8" to "47") on the condition that these
installments be credited to petitioner's account and deducted from the balance of the purchase
price.

Contrary to petitioner's claim, records show that the parties never even intended to novate their
previous agreement. It is true that petitioner paid respondents small sums of money amounting to
P48,680.00, in contravention of the manner of payment stipulated in their contract. These
installments were, however, objected to by respondent spouses, and petitioner replied that these
represented the interest of the principal amount which he owed them. 23 Records further show that
petitioner agreed to the sale of MERALCO transformers by private respondents to pay for the
balance of their subsisting loan with the Bank of Philippine Islands. Petitioner's letter of
authorization reads:

"xxx xxx xxx

"Under this authority, it is mutually understood that whatever payment received from MERALCO
as payment to the transformers will be considered as partial payment of the undersigned's
obligation to Mr. and Mrs. Miguel K. Robles.

"The same will be utilized as partial payment to existing loan with the Bank of Philippine Islands.
"It is also mutually understood that this payment to the Bank of Philippine Islands will be
reimbursed to Mr. and Mrs. Miguel K. Robles by the undersigned." [Underscoring supplied] 24

It should be noted that while it was agreed that part of the purchase price in the sum of
P496,500.00 would be directly deposited by petitioner to the Bank of Philippine Islands to answer
for the loan of respondent spouses, petitioner only managed to deposit P393,679.60. When the
bank threatened to foreclose the properties, petitioner apparently could not even raise the sum
needed to forestall any action on the part of the bank. Consequently, he authorized respondent
spouses to sell the three (3) transformers. However, although the parties agreed to credit the
proceeds from the sale of the transformers to petitioner's obligation, he was supposed to reimburse
the same later to respondent spouses. This can only mean that there was never an intention on the
part of either of the parties to novate petitioner's manner of payment.

Petitioner contends that the parties verbally agreed to novate the manner of payment when
respondent spouses proposed to operate the rice mill on the condition that they will account for its
earnings. We find that this is unsubstantiated by the evidence on record. The tenor of his letter
dated August 12, 1984 to respondent spouses, in fact, shows that petitioner had a "little
misunderstanding" with respondent spouses whom he was evidently trying to appease by
authorizing them to continue temporarily with the operation of the rice mill. Clearly, while
petitioner might have wanted to novate the original agreement as to his manner of payment, the
records are bereft of evidence that respondent spouses willingly agreed to modify their previous
arrangement. LexLib

In order for novation to take place, the concurrence of the following requisites is indispensable:
(1) there must be a previous valid obligation; (2) there must be an agreement of the parties
concerned to a new contract; (3) there must be the extinguishment of the old contract; and (4)
there must be the validity of the new contract. 25 The aforesaid requisites are not found in the case
at bench. The subsequent acts of the parties hardly demonstrate their intent to dissolve the old
obligation as a consideration for the emergence of the new one. We repeat to the point of triteness,
novation is never presumed, there must be an express intention to novate.

As regards the improvements introduced by petitioner to the premises and for which he claims
reimbursement, we see no reason to depart from the ruling of the trial court and the appellate court
that petitioner is a builder in bad faith. He introduced the improvements on the premises knowing
fully well that he has not paid the consideration of the contract in full and over the vigorous
objections of respondent spouses. Moreover, petitioner introduced major improvements on the
premises even while the case against him was pending before the trial court.

The award of exemplary damages was correctly deleted by the Court of Appeals inasmuch as no
moral, temperate, liquidated or compensatory damages in addition to exemplary damages were
awarded. prcd

WHEREFORE, the decision rendered by the Court of Appeals is hereby AFFIRMED with the
MODIFICATION that respondent spouses are ordered to return to petitioner the sum of
P48,680.00 in addition to the amounts already awarded. Costs against petitioner.

SO ORDERED.

Davide, Jr., C.J., Melo, Kapunan and Pardo, JJ., concur.

Footnotes
1.Exhibits "A" and "1."

2.Exhibits "6" and "H."

3.TSN, October 11, 1985, pp. 9-11.

4.Exh. "C."

5.Exh. "D."

6.Exh. "E."

7.Exh. "F."

8.Exh. "48."

9.Exh. "P."

10.Records, Vol. 1, p. 388.

11.Records, Vol. 1, p. 414.

12.Rollo, pp. 109-119.

13.Odyssey Park Inc. vs. Court of Appeals, 280 SCRA 253 [1997].

14.IV Tolentino, Civil Code 570 (1991), citing 8 Manresa 748-749.

15.Ibid., at 571, citing 2 Castan 652.

16.Areola vs. Court of Appeals, 236 SCRA 643 [1994].

17.Article 1191 was based on Article 1124 of the old Civil Code.

18.PNB vs. Court of Appeals, 262 SCRA 464 [1996]; Salazar vs. Court of Appeals, 258 SCRA
317 [1996].
19.Agustin vs. Court of Appeals, 186 SCRA 375 [1990]; Roque vs. Lapuz, 96 SCRA 741 [1980];
Manuel vs. Rodriguez, 109 Phil 1 [1960].

20.Ibid.

21.Villaflor vs. Court of Appeals, 280 SCRA 297 [1997].

22.Uraca vs. Court of Appeals, 278 SCRA 702 [1997]; Ajax Marketing and Development
Corporation vs. Court of Appeals, 248 SCRA 222 [1995].

23.TSN, December 2, 1987, pp. 30-33.

24.Exhibit "48."

25.Reyes vs. Court of Appeals, 264 SCRA 35 [1996].

||| (Ong v. Court of Appeals, G.R. No. 97347, [July 6, 1999], 369 PHIL 243-257)

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418 PHIL 286-298

SECOND DIVISION

[G.R. No. 129107. September 26, 2001.]

ALFONSO L. IRINGAN, petitioner, vs. HON. COURT OF APPEALS and ANTONIO PALAO,
represented by his Attorney-in-Fact, FELISA P. DELOS SANTOS, respondents.

Espejo & Volante Law Office for petitioner.

Padilla Jimenez Kintanar & Asuncion Law Offices for private respondent.

SYNOPSIS
Private respondent and petitioner executed a Deed of Sale whereby the former sold to the latter an
undivided portion of Lot No. 992 covered by Transfer Certificate of Title No. T-5790, the purchase
price of which shall be paid in three installments. When petitioner failed to pay the full amount of
the second installment, private respondent wrote a letter informing petitioner that he considered
the contract as rescinded. Petitioner did not oppose the revocation of the contract but proposed for
reimbursement of the amount, which he had already paid, or private respondent could sell to him
an equivalent portion of the land. Private respondent, however, did not agree.

On July 1, 1991, private respondent filed a complaint for Judicial Confirmation of Rescission and
Damages against petitioner to compel the latter to formalize in a public document their mutual
agreement of revocation and rescission and to have a judicial confirmation of the said revocation
under the terms and conditions fair, proper and just for both parties. Petitioner opposed the
rescission of the contract contending that the proper remedy of private respondent is for collection
of the balance of the purchase price. The trial court ruled in favor of private respondent. It
affirmed the rescission of the contract of sale and ordered petitioner to pay moral and exemplary
damages and attorney's fees. On appeal, the decision of the trial court was affirmed by the Court
of Appeals but deleted the award of attorney's fees. Hence, petitioner filed this petition for review
asserting that a judicial or notarial act is necessary before one party can unilaterally effect a
rescission. Petitioner also claimed that the appellate court erred in finding bad faith on his part
when he resisted the rescission and claimed that he was ready to pay private respondent.

The Supreme Court ruled that the letter written by private respondent declaring his intention to
rescind did not operate to validly rescind the contract since a judicial of notarial act is required by
law for a valid rescission to take place. The operative act, which produces the resolution of the
contract, is the decree of the court and not the mere act of the vendor. Notwithstanding this,
however, the Court found that private respondent had complied with the requirement of the law
for judicial decree of rescission when he filed an action for Judicial Confirmation of Rescission
and Damages.

Moreover, the Court found the award of moral and exemplary damages to private respondent
proper. Petitioner did not substantiate by clear and convincing proof his allegation that he was
ready and willing to pay private respondent. The Court was more inclined to believe that
petitioner's claim of readiness to pay was an afterthought intended to evade the consequence of his
breach.

Petition denied and the Decision of the Court of Appeals was affirmed.

SYLLABUS

1. CIVIL LAW; SALES; SALE OF IMMOVABLE PROPERTY; RESCISSION OF CONTRACT;

REQUIRES A NOTARIAL OR JUDICIAL ACT. — Article 1592 of the Civil Code is the
applicable provision regarding the sale of an immovable property. Article 1592 requires the
rescinding party to serve judicial or notarial notice of his intent to resolve the contract. In the case
of Villaruel v. Tan King, we ruled in this wise, . . . since the subject-matter of the sale in question
is real property, it does not come strictly within the provisions of article 1124 (now Article 1191)
of the Civil Code, but is rather subjected to the stipulations agreed upon by the contracting parties
and to the provisions of article 1504 (now Article 1592) of the Civil Code." Citing Manresa, the
Court said that the requirement of then Article 1504, "refers to a demand that the vendor makes
upon the vendee for the latter to agree to the resolution of the obligation and to create no obstacles
to this contractual mode of extinguishing obligations." Clearly, a judicial or notarial act is
necessary before a valid rescission can take place, whether or not automatic rescission has been
stipulated. It is to be noted that the law uses the phrase "even though" emphasizing that when no
stipulation is found on automatic rescission, the judicial or notarial requirement still applies.

2. ID.; OBLIGATIONS; RESCISSION; JUDICIAL DECREE OF RESCISSION IS A

REQUISITE; RIGHT TO RESCIND CANNOT BE EXERCISED SOLELY ON A PARTY'S
JUDGMENT THAT THE OTHER COMMITTED A BREACH OF THE OBLIGATION. — Both
the trial and appellate courts affirmed the validity of the alleged mutual agreement to rescind
based on Article 1191 of the Civil Code, particularly paragraphs 1 and 2 thereof. But in our view,
even if Article 1191 were applicable, petitioner would still not be entitled to automatic rescission.
In Escueta v. Pando, we ruled that under Article 1124 (now Article 1191) of the Civil Code, the
right to resolve reciprocal obligations, is deemed implied in case one of the obligors shall fail to
comply with what is incumbent upon him. But that right must be invoked judicially. The same
article also provides: "The Court shall decree the resolution demanded, unless there should be
grounds which justify the allowance of a term for the performance of the obligation." This
requirement has been retained in the third paragraph of Article 1191, which states that "the court
shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period."
Consequently, even if the right to rescind is made available to the injured party, the obligation is
not ipso facto erased by the failure of the other party to comply with what is incumbent upon him.
The party entitled to rescind should apply to the court for a decree of rescission. The right cannot
be exercised solely on a party's own judgment that the other committed a breach of the obligation.
The operative act which produces the resolution of the contract is the decree of the court and not
the mere act of the vendor. Since a judicial or notarial act is required by law for a valid rescission
to take place, the letter written by respondent declaring his intention to rescind did not operate to
validly rescind the contract.

3. ID.; ID.; ID.; CROSSCLAIM FOUND IN THE ANSWER CONSTITUTES JUDICIAL

DEMAND FOR RESCISSION. — However, in our view when private respondent filed an action
for Judicial Confirmation of Rescission and Damages before the RTC, he complied with the
requirement of the law for judicial decree of rescission. The complaint categorically stated that the
purpose was 1) to compel appellants to formalize in a public document, their mutual agreement of
revocation and rescission; and/or 2) to have a judicial confirmation of the said
revocation/rescission under terms and conditions fair, proper and just for both parties. In Luzon
Brokerage Co., Inc. v. Maritime Building Co., Inc., we held that even a crossclaim found in the
Answer could constitute a judicial demand for rescission that satisfies the requirement of the law.

4. ID.; ID.; ID.; PRESCRIPTIVE PERIOD; CASE AT BAR. — Petitioner contends that even if
the filing of the case were considered the judicial act required, the action should be deemed
prescribed based on the provisions of Article 1389 of the Civil Code. This provision of law applies
to rescissible contracts, as enumerated and defined in Articles 1380 and 1381. We must stress
however, that the "rescission" in Article 1381 is not akin to the term "rescission" in Article 1191
and Article 1592. In Articles 1191 and 1592, the rescission is a principal action which seeks the
resolution or cancellation of the contract while in Article 1381, the action is a subsidiary one
limited to cases of rescission for lesion as enumerated in said article. The prescriptive period
applicable to rescission under Articles 1191 and 1592, is found in Article 1144, which provides
that the action upon a written contract should be brought within ten years from the time the right
of action accrues. The suit was brought on July 1, 1991, or six years after the default. It was filed
within the period for rescission. Thus, the contract of sale between the parties as far as the
prescriptive period applies, can still be validly rescinded.

5. ID.; DAMAGES; AWARD OF MORAL AND EXEMPLARY DAMAGES, PROPER IN CASE

AT BAR. — On the issue of moral and exemplary damages, petitioner claims that the Court of
Appeals erred in finding bad faith on his part when he resisted the rescission and claimed he was
ready to pay but never actually paid respondent, notwithstanding that he knew that appellee's
principal motivation for selling the lot was to raise money to pay his SSS loan. Petitioner would
have us reverse the said CA findings based on the exception that these findings were made on a
misapprehension of facts. The records do not support petitioner's claims. First, per the records,
petitioner knew respondent's reason for selling his property. As testified to by petitioner and in the
deposition of respondent, such fact was made known to petitioner during their negotiations as well
as in the letters sent to petitioner by Palao. Second, petitioner adamantly refused to formally
execute an instrument showing their mutual agreement to rescind the contract of sale,
notwithstanding that it was petitioner who plainly breached the terms of their contract when he did
not pay the stipulated price on time, leaving private respondent desperate to find other sources to
pay off his loan. Lastly, petitioner did not substantiate by clear and convincing proof, his
allegation that he was ready and willing to pay respondent. We are more inclined to believe his
claim of readiness to pay was an afterthought intended to evade the consequence of his breach.
There is no record to show the existence of such amount, which could have been reflected, at the
very least, in a bank account in his name, if indeed one existed; or, alternatively, the proper deposit
made in court which could serve as a formal tender of payment. Thus, we find the award of moral
and exemplary damages proper.

DECISION

QUISUMBING, J p:

This petition assails the Decision 1 dated April 30, 1997 of the Court of Appeals in CA G.R. CV
No. 39949, affirming the decision of the Regional Trial Court and deleting the award of attorney's
fee.
The facts of the case are based on the records.

On March 22, 1985, private respondent Antonio Palao sold to petitioner Alfonso Iringan, an
undivided portion of Lot No. 992 of the Tuguegarao Cadastre, located at the Poblacion of
Tuguegarao and covered by Transfer Certificate of Title No. T-5790. The parties executed a Deed
of Sale 2 on the same date with the purchase price of P295,000.00, payable as follows:

(a) P10,000.00 — upon the execution of this instrument, and for this purpose, the vendor
acknowledges having received the said amount from the vendee as of this date;

(b) P140,000.00 — on or before April 30, 1985;

(c) P145,000.00 — on or before December 31, 1985. 3

When the second payment was due, Iringan paid only P40,000. Thus, on July 18, 1985, Palao sent
a letter 4 to Iringan stating that he considered the contract as rescinded and that he would not
accept any further payment considering that Iringan failed to comply with his obligation to pay the
full amount of the second installment.

On August 20, 1985, Iringan through his counsel Atty. Hilarion L. Aquino, 5 replied that they were
not opposing the revocation of the Deed of Sale but asked for the reimbursement of the following
amounts:

(a) P50,000.00 — cash received by you;

(b) P3,200.00 — geodetic engineer's fee;

(c) P500.00 — attorney's fee;

(d) the current interest on P53,700.00. 6

In response, Palao sent a letter dated January 10, 1986, 7 to Atty. Aquino, stating that he was not
amenable to the reimbursements claimed by Iringan.

On February 21, 1989, Iringan, now represented by a new counsel — Atty. Carmelo Z. Lasam,
proposed that the P50,000 which he had already paid Palao be reimbursed 8 or Palao could sell to
Iringan, an equivalent portion of the land.

Palao instead wrote Iringan that the latter's standing obligation had reached P61,600, representing
payment of arrears for rentals from October 1985 up to March 1989. 9 The parties failed to arrive
at an agreement.

On July 1, 1991, Palao filed a Complaint 10 for Judicial Confirmation of Rescission of Contract
and Damages against Iringan and his wife.
In their Answer, 11 the spouses alleged that the contract of sale was a consummated contract,
hence, the remedy of Palao was for collection of the balance of the purchase price and not
rescission. Besides, they said that they had always been ready and willing to comply with their
obligations in accordance with said contract.

In a Decision 12 dated September 25, 1992, the Regional Trial Court of Cagayan, Branch I, ruled
in favor of Palao and affirmed the rescission of the contract. It disposed,

WHEREFORE, the Court finds that the evidence preponderates in favor of the plaintiff and
against the defendants and judgment is hereby rendered as follows:

(a) Affirming the rescission of the contract of sale;

(b) Cancelling the adverse claim of the defendants annotated at the back of TCT No. T-5790;

(c) Ordering the defendants to vacate the premises;

(d) Ordering the defendants to pay jointly and severally the sum of P100,000.00 as reasonable
compensation for use of the property minus 50% of the amount paid by them; and to pay
P50,000.00 as moral damages; P10,000.00 as exemplary damages; and P50,000.00 as attorney's
fee; and to pay the costs of suit.

SO ORDERED. 13

As stated, the Court of Appeals affirmed the above decision. Hence, this petition for review.

Iringan avers in this petition that the Court of Appeals erred:

1. In holding that the lower court did not err in affirming the rescission of the contract of sale; and

2. In holding that defendant was in bad faith for "resisting" rescission and was made liable to pay
moral and exemplary damages. 14

We find two issues for resolution: (1) whether or not the contract of sale was validly rescinded,
and (2) whether or not the award of moral and exemplary damages is proper.

On the first issue, petitioner contends that no rescission was effected simply by virtue of the letter
15 sent by respondent stating that he considered the contract of sale rescinded. Petitioner asserts
that a judicial or notarial act is necessary before one party can unilaterally effect a rescission.

Respondent Palao, on the other hand, contends that the right to rescind is vested by law on the
obligee and since petitioner did not oppose the intent to rescind the contract, Iringan in effect
agreed to it and had the legal effect of a mutually agreed rescission.
Article 1592 of the Civil Code is the applicable provision regarding the sale of an immovable
property.

ARTICLE 1592. In the sale of immovable property, even though it may have been stipulated that
upon failure to pay the price at the time agreed upon the rescission of the contract shall of right
take place, the vendee may pay, even after the expiration of the period, as long as no demand for
rescission of the contract has been made upon him either judicially or by a notarial act. After the
demand, the court may not grant him a new term. (Emphasis supplied)

Article 1592 requires the rescinding party to serve judicial or notarial notice of his intent to
resolve the contract. 16

In the case of Villaruel v. Tan King, 17 we ruled in this wise,

. . .since the subject-matter of the sale in question is real property, it does not come strictly within
the provisions of article 1124 (now Article 1191) of the Civil Code, but is rather subjected to the
stipulations agreed upon by the contracting parties and to the provisions of article 1504 (now
Article 1592) of the Civil Code. 18

Citing Manresa, the Court said that the requirement of then Article 1504, "refers to a demand that
the vendor makes upon the vendee for the latter to agree to the resolution of the obligation and to
create no obstacles to this contractual mode of extinguishing obligations." 19

Clearly, a judicial or notarial act is necessary before a valid rescission can take place, whether or
not automatic rescission has been stipulated. It is to be noted that the law uses the phrase "even
though" 20 emphasizing that when no stipulation is found on automatic rescission, the judicial or
notarial requirement still applies.

On the first issue, both the trial and appellate courts affirmed the validity of the alleged mutual
agreement to rescind based on Article 1191 of the Civil Code, particularly paragraphs 1 and 2
thereof.

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

The injured party may choose between the fulfillment and the rescission of the obligation, with
payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible. [Emphasis ours.]

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.

This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

But in our view, even if Article 1191 were applicable, petitioner would still not be entitled to
automatic rescission. In Escueta v. Pando, 21 we ruled that under Article 1124 (now Article 1191)
of the Civil Code, the right to resolve reciprocal obligations, is deemed implied in case one of the
obligors shall fail to comply with what is incumbent upon him. But that right must be invoked
judicially. The same article also provides: "The Court shall decree the resolution demanded, unless
there should be grounds which justify the allowance of a term for the performance of the
obligation." acHITE

This requirement has been retained in the third paragraph of Article 1191, which states that "the
court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period."

Consequently, even if the right to rescind is made available to the injured part, 22 the obligation is
not ipso facto erased by the failure of the other party to comply with what is incumbent upon him.
The party entitled to rescind should apply to the court for a decree of rescission. 23 The right
cannot be exercised solely on a party's own judgment that the other committed a breach of the
obligation. 24 The operative act which produces the resolution of the contract is the decree of the
court and not the mere act of the vendor. 25 Since a judicial or notarial act is required by law for a
valid rescission to take place, the letter written by respondent declaring his intention to rescind did
not operate to validly rescind the contract.

Notwithstanding the above, however, in our view when private respondent filed an action for
Judicial Confirmation of Rescission and Damages 26 before the RTC, he complied with the
requirement of the law for judicial decree of rescission. The complaint 27 categorically stated that
the purpose was 1) to compel appellants to formalize in a public document, their mutual
agreement of revocation and rescission; and/or 2) to have a judicial confirmation of the said
revocation/rescission under terms and conditions fair, proper and just for both parties. 28 In Luzon
Brokerage Co., Inc. v. Maritime Building Co., Inc., 29 we held that even a crossclaim found in the
Answer could constitute a judicial demand for rescission that satisfies the requirement of the law.
30

Petitioner contends that even if the filing of the case were considered the judicial act required, the
action should be deemed prescribed based on the provisions of Article 1389 of the Civil Code. 31

This provision of law applies to rescissible contracts, 32 as enumerated and defined in Articles
1380 33 and 1381. 34 We must stress however, that the "rescission" in Article 1381 is not akin to
the term "rescission" in Article 1191 and Article 1592. 35 In Articles 1191 and 1592, the rescission
is a principal action which seeks the resolution or cancellation of the contract while in Article
1381, the action is a subsidiary one limited to cases of rescission for lesion as enumerated in said
article. 36
The prescriptive period applicable to rescission under Articles 1191 and 1592, is found in Article
1144, 37 which provides that the action upon a written contract should be brought within ten years
from the time the right of action accrues. The suit was brought on July 1, 1991, or six years after
the default. It was filed within the period for rescission. Thus, the contract of sale between the
parties as far as the prescriptive period applies, can still be validly rescinded.

On the issue of moral and exemplary damages, petitioner claims that the Court of Appeals erred in
finding bad faith on his part when he resisted the rescission 38 and claimed he was ready to pay
but never actually paid respondent, notwithstanding that he knew that appellee's principal
motivation for selling the lot was to raise money to pay his SSS loan. 39 Petitioner have us reverse
the said CA findings based on the exception 40 that these findings were made on a
misapprehension of facts.

The records do not support petitioner's claims. First, per the records, petitioner knew respondent's
reason for selling his property. As testified to by petitioner 41 and in the deposition 42 of
respondent, such fact was made known to petitioner during their negotiations as well as in the
letters sent to petitioner by Palao. 43 Second, petitioner adamantly refused to formally execute an
instrument showing their mutual agreement to rescind the contract of sale, notwithstanding that it
was petitioner who plainly breached the terms of their contract when he did not pay the stipulated
price on time, leaving private respondent desperate to find other sources of funds to pay off his
loan. Lastly, petitioner did not substantiate by clear and convincing proof, his allegation that he
was ready and willing to pay respondent. We are more inclined to believe his claim of readiness to
pay was an afterthought intended to evade the consequence of his breach. There is no record to
show the existence of such amount, which could have been reflected, at the very least, in a bank
account in his name, if indeed one existed; or, alternatively, the proper deposit made in court
which could serve as a formal tender of payment. 44 Thus, we find the award of moral and
exemplary damages proper.

WHEREFORE, the petition is DENIED. The assailed decision dated April 30, 1997 of the Court
of Appeals in CA-G.R. CV No. 39949, affirming the Regional Trial Court decision and deleting
the award of attorney's fees, is hereby AFFIRMED. Costs against the petitioner.

SO ORDERED.

Bellosillo, Mendoza, Buena and De Leon, Jr., JJ., concur.

Footnotes
1.Rollo, pp. 31-39.

2.Records, pp. 13-14.

3.Id. at 13.
4.Id. at 15.

5.Id. at 16.

6.Ibid.

7.Id. at 19-20.

8.Id. at 21.

9.Id. at 22.

10.Id. at 1-12.

11.Id. at 53-64.

12.Id. at 180-184.

13.Id. at 184.

14.Rollo, p. 18.

15.Supra, note 4.

16.Villaruel v. Tan King, 43 Phil. 251, 256 (1922).

17.43 Phil. 251 (1922); See also Dignos v. Court of Appeals, 158 SCRA 375 (1988).

18.Id. at 255; See also Bucoy v. Paulino, 23 SCRA 248 (1968).

19.Id. at 257.

20.E. Paras. CIVIL CODE OF THE PHILIPPINES ANNOTATED 230 (14th ed. 2000).

21.76 Phil. 256, 260 (1946).

22.Mateos v. Lopez, 6 Phil. 206, 210 (1906); Bosque v. Yu Chipco, 14 Phil. 95, 98 (1910).

23.Rubio de Larena v. Villanueva, 53 Phil 923, 929 (1928).

24.Tan v. CA, 175 SCRA 656, 662 (1989); Philippine Amusement Enterprises, Inc. v. Natividad,
21 SCRA 284, 289 (1967).
25.Ocejo, Perez & Co. v. International Bank, 37 Phil. 631, 642 (1918).

26.Supra, note 10.

27.Records, pp. 1-12

28.Id. at 10.

29.43 SCRA 93 (1972).

30.Id. at 104 (1972).

31.Art. 1389. The action to claim rescission must be commenced within four years.

For persons under guardianship and for absentees, the period of four years shall not begin until
the termination of the former's incapacity, or until the domicile of the latter is known.

32.Chapter 6, Title II, Book IV of the Civil Code.

33.Article 1380. Contracts validly agreed upon may be rescinded in the cases established by law.

34.Article 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom they represent suffer
lesion by more than one-fourth of the value of the things which are the object thereof;

(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number;

(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the
claims due them;

(4) Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority;

(5) All other contracts specially declared by law to be subject to rescission.

35.Ong v. CA, 310 SCRA 1, 9 (1999).

36.Ibid.

37.Art. 1144. The following actions must be brought within ten years from the time the right of
action accrues:
(1) upon a written contract:

xxx xxx xxx

38.Supra, note 1 at 38.

39.Ibid.

40.Fuentes v. CA, 268 SCRA 703, 708 (1997); Solid Homes, Inc. v. CA, 275 SCRA 267, 279
(1997).

41.TSN, June 17, 1992, p. 81.

42.Records, pp. 107-122.

43.Id. at 109-110, 15.

44.See Arts. 1256-1261, Civil Code, on Tender of Payment and Consignation.

||| (Iringan v. Court of Appeals, G.R. No. 129107, [September 26, 2001], 418 PHIL 286-298)

*********************

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JURISPRUDENCE Jurisprudences icon 120x120
18d623f0c132036f56cae92fb52b20c2af27b43f2646c7ffa940287812634a6c
322 PHIL 280-342

THIRD DIVISION
[G.R. No. 115849. January 24, 1996.]

FIRST PHILIPPINE INTERNATIONAL BANK (Formerly Producers Bank of the Philippines)

and MERCURIO RIVERA, petitioners, vs. COURT OF APPEALS, CARLOS EJERCITO, in
substitution of DEMETRIO DEMETRIA, and JOSE JANOLO, respondents.

Ongkiko, Dizon, Ongkiko & Panga Law Office and Domingo and Dizon for petitioners.

Castillo, Laman, Tan, Pantalleon & San Jose for Carlos Ejercito. cdta

SYLLABUS

1.CIVIL LAW; PRIVATE INTERNATIONAL LAW; ORIGIN OF FORUM-SHOPPING. —

Forum-shopping originated as a concept in private international law, where non-resident litigants
are given the option to choose the forum or place wherein to bring their suit for various reasons or
excuses, including to secure procedural advantages, to annoy and harass the defendant, to avoid
overcrowded dockets, or to select a more friendly venue. To combat these less than honorable
excuses, the principle of forum non conveniens was developed whereby a court, in conflict of law
cases, may refuse impositions on its jurisdiction where it is not the most "convenient" or available
forum and the parties are not precluded from seeking remedies elsewhere. Hence, according to
Words and Phrases, "a litigant is open to the charge of 'forum shopping' whenever he chooses a
forum with the slight connection to factual circumstances surrounding his suit, and litigants should
be encouraged to attempt to settle their differences without imposing undue expense and vexatious
situations on the courts." cdasia

2.REMEDIAL LAW; CIVIL PROCEDURE; FORUM-SHOPPING; AS A CHOICE OF VENUE

AND AS A CHOICE OF REMEDY; CONSTRUED. — In the Philippines, forum shopping has
acquired a connotation encompassing not only a choice of venues, as it was originally understood
in conflicts of law, but also to a choice of remedies. As to the first (choice of venues), the Rules of
Court, for example, allow a plaintiff to commence personal actions "where the defendant or any of
the defendants resides or may be found, or where the plaintiff or any of the plaintiffs resides, at the
election of the plaintiff" (Rule 4, Sec. 2 [b]). As to remedies, aggrieved parties, for example, are
given a choice of pursuing civil liabilities independently of the criminal, arising from the same set
of facts. A passenger of a public utility vehicle involved in a vehicular accident may sue on culpa
contractual, culpa aquiliana or culpa criminal — each remedy being available independently of the
others — although he cannot recover more than once. "In either of these situations (choice of
venue or choice of remedy), the litigant actually shops for a forum of his action. This was the
original concept of the term forum-shopping.

3.ID.; ID.; ID.; AS AN UNETHICAL PRACTICE; WHEN PRESENT. — What originally started
both in conflicts of laws and in our domestic law as a legitimate device for solving problems has
been abused and mis-used to assure scheming litigants of dubious reliefs. To avoid or minimize
this unethical practice of subverting justice, the Supreme Court, as already mentioned,
promulgated Circular 28-91. And even before that, the Court had proscribed it in the Interim Rules
and Guidelines issued on January 11, 1983 and had struck down in several cases the inveterate use
of this insidious malpractice. Forum-shopping as "the filing of repetitious suits in different courts"
has been condemned by Justice Andres R. Narvasa (now Chief Justice) in Minister of Natural
Resources, et al., vs. Heirs of Orval Hughes, et al., "as a reprehensible manipulation of court
processes and proceedings . . .." When does forum shopping take place? "There is forum-shopping
whenever, as a result of an adverse opinion in one forum, a party seeks a favorable opinion (other
than by appeal or certiorari) in another. The principle applies not only with respect to suits filed in
the courts but also in connection with litigations commenced in the courts while an administrative
proceeding is pending, as in this case, in order to defeat administrative processes and in
anticipation of an unfavorable administrative ruling and a favorable court ruling. This is specially
so, as in this case, where the court in which the second suit was brought, has no jurisdiction."
cdasia

4.ID; ID.; ID.; AS A GROUND FOR SUMMARY DISMISSAL.— The test for determining
whether a party violated the rule against forum shopping has been laid down in the 1986 case of
Buan vs. Lopez, 145 SCRA 34 (October 13, 1986), also by Chief Justice Narvasa, and that is,
forum shopping exists where the elements of litis pendentia are present or where a final judgment
in one case will amount to res judicata in the other. Consequently, where a litigant (or one
representing the same interest or person) sues the same party against whom another action or
actions for the alleged violation of the same right and the enforcement of the same relief is/are still
pending, the defense of litis pendencia in one case is a bar to the others; and, a final judgment in
one would constitute res judicata and this would cause the dismissal of the rest. In either case,
forum-shopping could be cited by the other party as a ground to ask for summary dismissal of the
two (or more) complaints or petitions, and for the imposition of the other sanctions, which are
direct contempt of court, criminal prosecution, and disciplinary action against the erring lawyer.
What is truly important to consider in determining whether forum-shopping exists or not is the
vexation caused the courts and parties-litigant by a party who asks different courts and/or
administrative agencies to rule on the same or related causes and/or to grant the same or
substantially the same reliefs, in the process creating the possibility of conflicting decisions being
rendered by the different fora upon the same issue.

5. D.; ID.; ID.; ID.; APPLICATION OF PRINCIPLE IN CASE AT BAR. — Applying the
foregoing principles in the present case and comparing it with the Second Case, it is obvious that
there exist identity of parties or interests represented, identity of rights or causes and identity of
reliefs sought. Very simply stated, the original complaint in the court a quo which gave rise to the
instant petition was filed by the buyer to enforce the alleged perfected sale of real estate. On the
other hand, the complaint in the Second Case seeks to declare such purported sale involving the
same real property "as unenforceable as against the Bank," which is the petitioner herein. In other
words, in the Second Case, the majority stockholders, in representation of the Bank, are seeking to
accomplish what the Bank itself failed to do in the original case in the trial court. In brief, the
objective or the relief being sought, though worded differently, is the same, namely, to enable the
petitioner Bank to escape from the obligation to sell the property to respondent. In this case, a
decision recognizing the perfection and directing the enforcement of the contract of sale will
directly conflict with a possible decision in the Second Case barring the parties from enforcing or
implementing the said sale. Indeed, a final decision in one would constitute res judicata in the
other.

6.COMMERCIAL LAW; CORPORATION CODE;DERIVATIVE SUIT, CONSTRUED. — "An

individual stockholder is permitted to institute a derivative suit on behalf of the corporation
wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of
the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In
such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real
party in interest (Gamboa v. Victoriano, 90 SCRA 40, 47 [1979]). cdasia

7.ID.; ID.; WHEN THE VEIL OF CORPORATE FICTION MAY BE LIFTED. — Petitioner also
tried to seek refuge in the corporate fiction that the personality of the Bank is separate and distinct
from its shareholders. But the rulings of this Court are consistent: "When the fiction is urged as a
means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, the achievement or perfection of a monopoly or
generally the perpetration of knavery or crime, the veil with which the law covers and isolates the
corporation from the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals." In addition to the many cases where the
corporate fiction has been disregarded, we now add the instant case, and declare herewith that the
corporate veil cannot be used to shield an otherwise blatant violation of the prohibition against
forum-shopping. Shareholders, whether suing as the majority in direct action or as the minority in
a derivative suit, cannot be allowed to trifle with court processes, particularly where, as in this
case, the corporation itself has not been remiss in vigorously prosecuting or defending corporate
causes and in using and applying remedies available to it. To rule otherwise would be to encourage
corporate litigants to use their shareholders as fronts to circumvent the stringent rules against
forum shopping.

8.CIVIL LAW; CONTRACT; REQUISITES. — Article 1318 of the Civil Code enumerates the
requisites of a valid and perfected contract as follows: "(1) Consent of the contracting parties; (2)
Object certain which is the subject matter of the contract; (3) Cause of the obligation which is
established."

9.COMMERCIAL LAW; CORPORATION CODE;BANKS; DOCTRINE OF APPARENT

AUTHORITY; CONSTRUED. — The authority of a corporate officer in dealing with third
persons may be actual or apparent. The doctrine of "apparent authority," with special reference to
banks, was laid out in Prudential Bank vs. Court of Appeals, 223 SCRA 350 (June 14, 1993),
where it was held that: "Conformably, we have declared in countless decisions that the principal is
liable for obligations contracted by the agent. The agent's apparent representation yields to the
principal's true representation and the contract is considered as entered into between the principal
and the third person (citing National Food Authority vs. Intermediate Appellate Court, 184 SCRA
166)." A bank is liable for wrongful acts of its officers done in the interests of the bank or in the
course of dealing of the officers in their representative capacity but not for acts outside the scope
of their authority (9 C.J.S., P. 417). A bank holding out its officers and agents as worthy of
confidence will not be permitted to profit by the frauds they may thus be enabled to perpetrate in
the apparent scope of their employment; nor will it be permitted to shirk its responsibility for such
frauds, even though no benefit may accrue to the bank therefrom (10 Am Jur 2d, p. 114).
Accordingly, a banking corporation is liable to innocent third persons where the representation is
made in the course of its business by an agent acting within the general scope of his authority even
though, in the particular case, the agent is secretly abusing his authority and attempting to
perpetrate a fraud upon his principal or some other person, for his own ultimate benefit (McIntosh
v. Dakota Trust Co., 52 ND 752, 204 NW 818, 40 ALR 1021). "Application of these principles is
especially necessary because banks have a fiduciary relationship with the public and their stability
depends on the confidence of the people in their honesty and efficiency. Such faith will be eroded
where banks do not exercise strict care in the selection and supervision of its employees, resulting
in prejudice to their depositors."

10.CIVIL LAW; CONTRACTS; WHEN DEFECTS THEREOF UNDER STATUTE OF FRAUD

DEEMED WAIVED. — The statute of frauds will not apply by reason of the failure of petitioners
to object to oral testimony proving petitioner Bank's counter-offer of P5.5 million. Hence,
petitioners — by such utter failure to object — are deemed to have waived any defects of the
contracts under the statute of frauds, pursuant to Article 1405 of the Civil Code. As private
respondent pointed out in his Memorandum, oral testimony on the reaffirmation of the counter-
offer of P5.5 million is aplenty — and the silence of petitioners all throughout the presentation
makes the evidence binding on them.

11.REMEDIAL LAW; PETITION FOR REVIEW; FINDINGS OF FACTS BY THE COURT OF

APPEALS; NOT REVIEWABLE BY THE SUPREME COURT; RULE AND EXCEPTION. —
Basic is the doctrine that in petitions for review under Rule 45 of the Rules of Court, findings of
fact by the Court of Appeals are not reviewable by the Supreme Court. However, there are settled
exceptions where the Supreme Court may disregard findings of fact by the Court of Appeals.
Indeed, conclusions of fact of a trial judge — as affirmed by the Court of Appeals — are
conclusive upon this Court, absent any serious abuse or evident lack of basis or capriciousness of
any kind, because the trial court is in a better position to observe the demeanor of all the witnesses
and their courtroom manner as well as to examine the real evidence presented .

12.POWERS OF THE CONSERVATOR. — While admittedly, the Central Bank law gives vast
and far-reaching powers to the conservator of a bank, it must be pointed out that such powers must
be related to the "(preservation of) the assets of the bank (the reorganization of) the management
thereof and (the restoration of) its viability." Such powers, enormous and extensive as they are,
cannot extend to the post-facto repudiation of perfected transactions, otherwise they would
infringe against the non-impairment clause of the Constitution. If the legislature itself cannot
revoke an existing valid contract, how can it delegate such non-existent powers to the conservator
under Section 28-A of said law? Obviously, therefore, Section 28-A merely gives the conservator
power to revoke contracts that are, under existing law, deemed to be defective — i.e., void,
voidable, unenforceable or rescissible. Hence, the conservator merely takes the place of a bank's
board of directors. What the said board cannot do — such as repudiating a contract validly entered
into under the doctrine of implied authority — the conservator cannot do either. Ineluctably, his
power is not unilateral and he cannot simply repudiate valid obligations of the Bank. His authority
would be only to bring court actions to assail such contracts — as he has already done so in the
instant case. A contrary understanding of the law would simply not be permitted by the
Constitution. Neither by common sense. To rule otherwise would be to enable a failing bank to
become solvent, at the expense of third parties, by simply getting the conservator to unilaterally
revoke all previous dealings which had one way or another come to be considered unfavorable to
the Bank, yielding nothing to perfected contractual rights nor vested interests of the third parties
who had dealt with the Bank.

DECISION

PANGANIBAN, J p:

In the absence of a formal deed of sale, may commitments given by bank officers in an exchange
of letters and/or in a meeting with the buyers constitute a perfected and enforceable contract of
sale over 101 hectares of land in Sta. Rosa, Laguna? Does the doctrine of "apparent authority"
apply in this case? If so, may the Central Bank-appointed conservator of Producers Bank (now
First Philippine International Bank) repudiate such "apparent authority" after said contract has
been deemed perfected? During the pendency of a suit for specific performance, does the filing of
a "derivative suit" by the majority shareholders and directors of the distressed bank to prevent the
enforcement or implementation of the sale violate the ban against forum-shopping?

Simply stated, these are the major questions brought before this Court in the instant Petition for
review on certiorari under Rule 45 of the Rules of Court, to set aside the Decision promulgated
January 14, 1994 of the respondent Court of Appeals 1 in CA-G.R. CV No. 35756 and the
Resolution promulgated June 14, 1994 denying the motion for reconsideration. The dispositive
portion of the said Decision reads:

"WHEREFORE, the decision of the lower court is MODIFIED by the elimination of the damages
awarded under paragraphs 3, 4 and 6 of its dispositive portion and the reduction of the award in
paragraph 5 thereof to P75,000.00, to be assessed against defendant bank. In all other aspects, said
decision is hereby AFFIRMED. cdta

"All references to the original plaintiffs in the decision and its dispositive portion are deemed,
herein and hereafter, to legally refer to the plaintiff-appellee Carlos C. Ejercito.

"Costs against appellant bank."

The dispositive portion of the trial court's 2 decision dated July 10, 1991, on the other hand, is as
follows:

"WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and
against the defendants as follows:
"1.Declaring the existence of a perfected contract to buy and sell over the six (6) parcels of land
situated at Don Jose, Sta. Rosa, Laguna with an area of 101 hectares, more or less, covered by and
embraced in Transfer Certificates of Title Nos. T-106932 to T-106937, inclusive, of the Land
Records of Laguna, between the plaintiffs as buyers and the defendant Producers Bank for an
agreed price of Five and One Half Million (P5,500,000.00) Pesos; cdta

"2.Ordering defendant Producers Bank of the Philippines, upon finality of this decision and receipt
from the plaintiffs the amount of P5.5 Million, to execute in favor of said plaintiffs a deed of
absolute sale over the aforementioned six (6) parcels of land, and to immediately deliver to the
plaintiffs the owner's copies of T.C.T. Nos. T-106932 to T-106937, inclusive, for purposes of
registration of the same deed and transfer of the six (6) titles in the names of the plaintiffs;

"3.Ordering the defendants, jointly and severally, to pay plaintiffs Jose A. Janolo and Demetrio
Demetria the sums of P200,000.00 each in moral damages;

"4.Ordering the defendants, jointly and severally, to pay plaintiffs the sum of P100,000.00 as
exemplary damages; cdta

"5.Ordering the defendants, jointly and severally, to pay the plaintiffs the amount of P400,000.00
for and by way of attorney's fees;

"6.Ordering the defendants to pay the plaintiffs, jointly and severally, actual and moderate
damages in the amount of P20,000.00;

"With costs against the defendants."

After the parties filed their comment, reply, rejoinder, sur-rejoinder and reply to sur-rejoinder, the
petition was given due course in a Resolution dated January 18, 1995. Thence, the parties filed
their respective memoranda and reply memoranda. The First Division transferred this case to the
Third Division per resolution dated October 23, 1995. After carefully deliberating on the aforesaid
submissions, the Court assigned the case to the undersigned ponente for the writing of this
Decision. cdta

The Parties

Petitioner First Philippine International Bank (formerly Producers Bank of the Philippines;
petitioner Bank, for brevity) is a banking institution organized and existing under the laws of the
Republic of the Philippines. Petitioner Mercurio Rivera (petitioner Rivera, for brevity) is of legal
age and was, at all times material to this case, Head Manager of the Property Management
Department of the petitioner Bank.

Respondent Carlos Ejercito (respondent Ejercito, for brevity) is of legal age and is the assignee of
original plaintiffs-appellees Demetrio Demetria and Jose Janolo.
Respondent Court of Appeals is the court which issued the Decision and Resolution sought to be
set aside through this petition. cdta

The Facts

The facts of this case are summarized in the respondent Court's Decision 3 , as follows:

"(1)In the course of its banking operations, the defendant Producer Bank of the Philippines
acquired six parcels of land with a total area of 101 hectares located at Don Jose, Sta. Rosa,
Laguna, and covered by Transfer Certificates of Title Nos. T-106932 to T-106937. The property
used to be owned by BYME Investment and Development Corporation which had them
mortgaged with the bank as collateral for a loan. The original plaintiffs, Demetrio Demetria and
Jose O. Janolo, wanted to purchase the property and thus initiated negotiations for that purpose.

"(2)In the early part of August 1987 said plaintiffs, upon the suggestion of BYME Investment's
legal counsel, Jose Fajardo, met with defendant Mercurio Rivera, Manager of the Property
Management Department of the defendant bank. The meeting was held pursuant to plaintiffs' plan
to buy the property (TSN of Jan. 16, 1990, pp. 7-10). After the meeting, plaintiff Janolo, following
the advice of defendant Rivera, made a formal purchase offer to the bank through a letter dated
August 30, 1987 (Exh. "B"), as follows:

August 30, 1987

The Producers Bank of the Philippines cdta

Makati, Metro Manila

Attn.Mr. Mercurio Q. Rivera

Manager, Property Management Dept.

Gentlemen:

I have the honor to submit my formal offer to purchase your properties covered by titles listed
hereunder located at Sta. Rosa, Laguna, with a total area of 101 hectares, more or less.

TCT No.AREA

T-106932113,580 sq.m.

T-10693370,899 sq.m.
T-10693452,246 sq.m.

T-10693596,768 sq.m.

T-106936187,114 sq.m.

T-106937481,481 sq.m.

My offer is for PESOS: THREE MILLION FIVE HUNDRED THOUSAND (P3,500,000.00)

PESOS, in cash. cdta

Kindly contact me at Telephone Number 921-1344.

"(3)On September 1, 1987, defendant Rivera made on behalf of the bank a formal reply by letter
which is hereunder quoted (Exh. "C"):

September 1, 1987

J-P M-P GUTIERREZ ENTERPRISES

142 Charisma St., Doña Andres II

Rosario, Pasig, Metro Manila

Attention:JOSE O. JANOLO

Dear Sir: cdta

Thank you for your letter-offer to buy our six (6) parcels of acquired lots at Sta. Rosa, Laguna
(formerly owned by Byme Industrial Corp.). Please be informed however that the bank's counter-
offer is at P5.5 million for more than 101 hectares on lot basis.

We shall be very glad to hear your position on the matter.

Best regards.
"(4)On September 17, 1987, plaintiff Janolo, responding to Rivera's aforequoted reply, wrote
(Exh. "D"):

September 17, 1987

Producers Bank

Paseo de Roxas

Makati, Metro Manila cdta

Attention:Mr. Mercurio Rivera

Gentlemen:

In reply to your letter regarding my proposal to purchase your 101-hectare lot located at Sta. Rosa,
Laguna, I would like to amend my previous offer and I now propose to buy the said lot at P4.250
million in CASH.

Hoping that this proposal meets your satisfaction.

"(5)There was no reply to Janolo's foregoing letter of September 17, 1987. What took place was a
meeting on September 28, 1987 between the plaintiffs and Luis Co, the Senior Vice-President of
defendant bank. Rivera as well as Fajardo, the BYME lawyer, attended the meeting. Two days
later, or on September 30, 1987, plaintiff Janolo sent to the bank, through Rivera, the following
letter (Exh. "E"): cdta

The Producers Bank of the Philippines

Paseo de Roxas, Makati

Metro Manila

Attention:Mr. Mercurio Rivera

Re:101 Hectares of Land in Sta. Rosa, Laguna

Gentlemen:

Pursuant to our discussion last 28 September 1987, we are pleased to inform you that we are
accepting your offer for us to purchase the property at Sta. Rosa, Laguna, formerly owned by
Byme Investment, for a total price of PESOS: FIVE MILLION FIVE HUNDRED THOUSAND
(P5,500,000.00).

Thank you.

"(6)On October 12, 1987, the conservator of the bank (which has been placed under
conservatorship by the Central Bank since 1984) was replaced by an Acting Conservator in the
person of defendant Leonida T. Encarnacion. On November 4, 1987, defendant Rivera wrote
plaintiff Demetria the following letter (Exh. "F"): cdta

Attention:Atty. Demetrio Demetria

Dear Sir:

Your proposal to buy the properties the bank foreclosed from Byme Investment Corp. located at
Sta. Rosa, Laguna is under study yet as of this time by the newly created committee for
submission to the newly designated Acting Conservator of the bank.

For your information.

"(7)What thereafter transpired was a series of demands by the plaintiffs for compliance by the
bank with what plaintiff considered as a perfected contract of sale, which demands were in one
form or another refused by the bank. As detailed by the trial court in its decision, on November 17,
1987, plaintiffs through a letter to defendant Rivera (Exhibit "G") tendered payment of the amount
of P5.5 million "pursuant to (our) perfected sale agreement." Defendants refused to receive both
the payment and the letter. Instead, the parcels of land involved in the transaction were advertised
by the bank for sale to any interested buyer (Exhs. "H" and "H-1"). Plaintiffs demanded the
execution by the bank of the documents on what was considered as a "perfected agreement." Thus:
cdta

Mr. Mercurio Rivera

Manager, Producers Bank

Paseo de Roxas, Makati

Metro Manila

Dear Mr. Rivera:

This is in connection with the offer of our client, Mr. Jose O. Janolo, to purchase your 101-hectare
lot located in Sta. Rosa, Laguna, and which are covered by TCT No. T-106932 to 106937.

From the documents at hand, it appears that your counter-offer dated September 1, 1987 of this
same lot in the amount of P5.5 million was accepted by our client thru a letter dated September 30,
1987 and was received by you on October 5, 1987.

In view of the above circumstances, we believe that an agreement has been perfected. We were
also informed that despite repeated follow-up to consummate the purchase, you now refuse to
honor your commitment. Instead, you have advertised for sale the same lot to others. cdta

In behalf of our client, therefore, we are making this formal demand upon you to consummate and
execute the necessary actions/documentation within three (3) days from your receipt hereof. We
are ready to remit the agreed amount of P5.5 million at your advice. Otherwise, we shall be
constrained to file the necessary court action to protect the interest of our client.

We trust that you will be guided accordingly.

"(8)Defendant bank, through defendant Rivera, acknowledged receipt of the foregoing letter and
stated, in its communication of December 2, 1987 (Exh. "I"), that said letter has been "referred . . .
to the office of our Conservator for proper disposition". However, no response came from the
Acting Conservator. On December 14, 1987, the plaintiffs made a second tender of payment (Exh.
"L" and "L-1"), this time through the Acting Conservator, defendant Encarnacion. Plaintiffs' letter
reads: cdta

PRODUCERS BANK OF

THE PHILIPPINES

Paseo de Roxas,

Makati, Metro Manila

Attn.:Atty. NIDA ENCARNACION

Central Bank Conservator

Gentlemen:

We are sending you herewith, in-behalf of our client, Mr. JOSE O. JANOLO, MBTC Check No.
258387 in the amount of P5.5 million as our agreed purchase price of the 101-hectare lot covered
by TCT Nos. 106932, 106933, 106934, 106935 106936 and 106937 and registered under
Producers Bank.

This is in connection with the perfected agreement consequent from your offer of P5.5 Million as
the purchase price of the said lots. Please inform us of the date of documentation of the sale
immediately. cdasia

Kindly acknowledge receipt of our payment.

"(9)The foregoing letter drew no response for more than four months. Then, on May 3, 1988,
plaintiff, through counsel, made a final demand for compliance by the bank with its obligations
under the considered perfected contract of sale (Exhibit "N"). As recounted by the trial court
(Original Record, p. 656), in a reply letter dated May 12, 1988 (Annex "4" of defendant's answer
to amended complaint), the defendants through Acting Conservator Encarnacion repudiated the
authority of defendant Rivera and claimed that his dealings with the plaintiffs, particularly his
counter-offer of P5.5 Million are unauthorized or illegal. On that basis, the defendants justified the
refusal of the tenders of payment and the non-compliance with the obligations under what the
plaintiffs considered to be a perfected contract of sale.

"(10)On May 16, 1988, plaintiffs filed a suit for specific performance with damages against the
bank, its Manager Rivera and Acting Conservator Encarnacion. The basis of the suit was that the
transaction had with the bank resulted in a perfected contract of sale. The defendants took the
position that there was no such perfected sale because the defendant Rivera is not authorized to
sell the property, and that there was no meeting of the minds as to the price." cdasia

On March 14, 1991, Henry L. Co (the brother of Luis Co), through counsel Sycip Salazar
Hernandez and Gatmaitan, filed a motion to intervene in the trial court, alleging that as owner of
80% of the Bank's outstanding shares of stock, he had a substantial interest in resisting the
complaint. On July 8, 1991, the trial court issued an order denying the motion to intervene on the
ground that it was filed after trial had already been concluded. It also denied a motion for
reconsideration filed thereafter. From the trial court's decision, the Bank, petitioner Rivera and
conservator Encarnacion appealed to the Court of Appeals which subsequently affirmed with
modification the said judgment. Henry Co did not appeal the denial of his motion for intervention.

In the course of the proceedings in the respondent Court, Carlos Ejercito was substituted in place
of Demetria and Janolo, in view of the assignment of the latters' rights in the matter in litigation to
said private respondent.

On July 11, 1992, during the pendency of the proceedings in the Court of Appeals, Henry Co and
several other stockholders of the Bank, through counsel Angara Abello Concepcion Regala and
Cruz, filed an action (hereafter, the "Second Case") — purportedly a "derivative suit" — with the
Regional Trial Court of Makati, Branch 134, docketed as Civil Case No. 92-1606, against
Encarnacion, Demetria and Janolo "to declare any perfected sale of the property as unenforceable
and to stop Ejercito from enforcing or implementing the sale". 4 In his answer, Janolo argued that
the Second Case was barred by litis pendentia by virtue of the case then pending in the Court of
Appeals. During the pre-trial conference in the Second Case, plaintiffs filed a Motion for Leave of
Court to Dismiss the Case Without Prejudice. "Private respondent opposed this motion on the
ground, among others, that plaintiff's act of forum shopping justifies the dismissal of both cases,
with prejudice." 5 Private respondent, in his memorandum, averred that this motion is still pending
in the Makati RTC. cdasia

In their Petition 6 and Memorandum, 7 petitioners summarized their position as follows:

I.

"The Court of Appeals erred in declaring that a contract of sale was perfected between Ejercito (in
substitution of Demetria and Janolo) and the bank.

II.

"The Court of Appeals erred in declaring the existence of an enforceable contract of sale between
the parties.

III.

"The Court of Appeals erred in declaring that the conservator does not have the power to overrule
or revoke acts of previous management. cdasia

IV.

"The findings and conclusions of the Court of Appeals do not conform to the evidence on record."

On the other hand, private respondents prayed for dismissal of the instant suit on the ground 8
that:

I.

"Petitioners have engaged in forum shopping. cdasia

II.

"The factual findings and conclusions of the Court of Appeals are supported by the evidence on
record and may no longer be questioned in this case.

III.

"The Court of Appeals correctly held that there was a perfected contract between Demetria and
Janolo (substituted by respondent Ejercito) and the bank.

IV.

"The Court of Appeals has correctly held that the conservator, apart from being estopped from
repudiating the agency and the contract, has no authority to revoke the contract of sale." cdasia

The Issues

From the foregoing positions of the parties, the issues in this case may be summed up as follows:

1)Was there forum-shopping on the part of petitioner Bank?

2)Was there a perfected contract of sale between the parties?

3)Assuming there was, was the said contract enforceable under the statute of frauds?

4)Did the bank conservator have the unilateral power to repudiate the authority of the bank
officers and/or to revoke the said contract? cdasia

5)Did the respondent Court commit any reversible error in its findings of facts?

The First Issue: Was There Forum-Shopping?

In order to prevent the vexations of multiple petitions and actions, the Supreme Court promulgated
Revised Circular No. 28-91 requiring that a party "must certify under oath . . . [that] (a) he has not
(t)heretofore commenced any other action or proceeding involving the same issues in the Supreme
Court, the Court of Appeals, or any other tribunal or agency; (b) to the best of his knowledge, no
such action or proceeding is pending" in said courts or agencies. A violation of the said circular
entails sanctions that include the summary dismissal of the multiple petitions or complaints. To be
sure, petitioners have included a VERIFICATION/CERTIFICATION in their Petition stating "for
the record(,) the pendency of Civil Case No. 92-1606 before the Regional Trial Court of Makati,
Branch 134, involving a derivative suit filed by stockholders of petitioner Bank against the
conservator and other defendants but which is the subject of a pending Motion to Dismiss Without
Prejudice." 9

Private respondent Ejercito vigorously argues that in spite of this verification, petitioners are
guilty of actual forum shopping because the instant petition pending before this Court involves
"identical parties or interests represented, rights asserted and reliefs sought (as that) currently
pending before the Regional Trial Court, Makati Branch 134 in the Second Case. In fact, the
issues in the two cases are so intertwined that a judgment or resolution in either case will
constitute res judicata in the other." 10 cdasia

On the other hand, petitioners explain 11 that there is no forum-shopping because:

1)In the earlier or "First Case" from which this proceeding arose, the Bank was impleaded as a
defendant, whereas in the "Second Case" (assuming the Bank is the real party in interest in a
derivative suit), it was the plaintiff;

2)"The derivative suit is not properly a suit for and in behalf of the corporation under the
circumstances";

3)Although the CERTIFICATION/VERIFICATION (supra) signed by the Bank president and

attached to the Petition identifies the action as a "derivative suit," it "does not mean that it is one"
and "(t)hat is a legal question for the courts to decide; cdasia

4)Petitioners did not hide the Second Case as they mentioned it in the said
VERIFICATION/CERTIFICATION.

We rule for private respondent.

To begin with, forum-shopping originated as a concept in private international law 12 , where non-
resident litigants are given the option to choose the forum or place wherein to bring their suit for
various reasons or excuses, including to secure procedural advantages, to annoy and harass the
defendant, to avoid overcrowded dockets, or to select a more friendly venue. To combat these less
than honorable excuses, the principle of forum non conveniens was developed whereby a court, in
conflicts of law cases, may refuse impositions on its jurisdiction where it is not the most
"convenient" or available forum and the parties are not precluded from seeking remedies
elsewhere.

In this light, Black's Law Dictionary 13 says that forum shopping "occurs when a party attempts to
have his action tried in a particular court or jurisdiction where he feels he will receive the most
favorable judgment or verdict." Hence, according to Words and Phrases 14 , "a litigant is open to
the charge of 'forum shopping' whenever he chooses a forum with slight connection to factual
circumstances surrounding his suit, and litigants should be encouraged to attempt to settle their
differences without imposing undue expense and vexatious situations on the courts". cdasia

In the Philippines, forum shopping has acquired a connotation encompassing not only a choice of
venues, as it was originally understood in conflicts of laws, but also to a choice of remedies. As to
the first (choice of venues), the Rules of Court, for example, allow a plaintiff to commence
personal actions "where the defendant or any of the defendants resides or may be found, or where
the plaintiff or any of the plaintiffs resides, at the election of the plaintiff" (Rule 4, Sec. 2 [b]). As
to remedies, aggrieved parties, for example, are given a choice of pursuing civil liabilities
independently of the criminal, arising from the same set of facts. A passenger of a public utility
vehicle involved in a vehicular accident may sue on culpa contractual, culpa aquiliana or culpa
criminal — each remedy being available independently of the others — although he cannot
recover more than once.

"In either of these situations (choice of venue or choice of remedy), the litigant actually shops for
a forum of his action. This was the original concept of the term forum shopping.

"Eventually, however, instead of actually making a choice of the forum of their actions, litigants,
through the encouragement of their lawyers, file their actions in all available courts, or invoke all
relevant remedies simultaneously. This practice had not only resulted to (sic) conflicting
adjudications among different courts and consequent confusion enimical (sic) to an orderly
administration of justice. It had created extreme inconvenience to some of the parties to the action.

"Thus, 'forum shopping' had acquired a different concept — which is unethical professional legal
practice. And this necessitated or had given rise to the formulation of rules and canons
discouraging or altogether prohibiting the practice." 15 cdasia

What therefore originally started both in conflicts of laws and in our domestic law as a legitimate
device for solving problems has been abused and misused to assure scheming litigants of dubious
reliefs.

To avoid or minimize this unethical practice of subverting justice, the Supreme Court, as already
mentioned, promulgated Circular 28-91. And even before that, the Court had proscribed it in the
Interim Rules and Guidelines issued on January 11, 1983 and had struck down in several cases 16
the inveterate use of this insidious malpractice. Forum shopping as "the filing of repetitious suits
in different courts" has been condemned by Justice Andres R. Narvasa (now Chief Justice) in
Minister of Natural Resources, et al. vs. Heirs of Orval Hughes, et al., "as a reprehensible
manipulation of court processes and proceedings. . . ." 17 When does forum shopping take place?

"There is forum-shopping whenever, as a result of an adverse opinion in one forum, a party seeks
a favorable opinion (other than by appeal or certiorari) in another. The principle applies not only
with respect to suits filed in the courts but also in connection with litigations commenced in the
courts while an administrative proceeding is pending, as in this case, in order to defeat
administrative processes and in anticipation of an unfavorable administrative ruling and a
favorable court ruling. This is specially so, as in this case, where the court in which the second suit
was brought, has no jurisdiction." 18

The test for determining whether a party violated the rule against forum-shopping has been laid
down in the 1986 case of Buan vs. Lopez 19 , also by Chief Justice Narvasa, and that is, forum-
shopping exists where the elements of litis pendentia are present or where a final judgment in one
case will amount to res judicata in the other, as follows: cdasia

"There thus exists between the action before this Court and RTC Case No. 86-36563 identity of
parties, or at least such parties as represent the same interests in both actions, as well as identity of
rights asserted and relief prayed for, the relief being founded on the same facts, and the identity on
the two preceding particulars is such that any judgment rendered in the other action, will,
regardless of which party is successful, amount to res adjudicata in the action under consideration:
all the requisites, in fine, of auter action pendant."

xxx xxx xxx

"As already observed, there is between the action at bar and RTC Case No. 86-36563, an identity
as regards parties, or interests represented, rights asserted and relief sought, as well as basis
thereof, to a degree sufficient to give rise to the ground for dismissal known as auter action
pendant or lis pendens. That same identity puts into operation the sanction of twin dismissals just
mentioned. The application of this sanction will prevent any further delay in the settlement of the
controversy which might ensue from attempts to seek reconsideration of or to appeal from the
Order of the Regional Trial Court in Civil Case No. 86-36563 promulgated on July 15, 1986,
which dismissed the petition upon grounds which appear persuasive."

Consequently, where a litigant (or one representing the same interest or person) sues the same
party against whom another action or actions for the alleged violation of the same right and the
enforcement of the same relief is/are still pending, the defense of litis pendencia in one case is a
bar to the others; and, a final judgment in one would constitute res judicata and thus would cause
the dismissal of the rest. In either case, forum shopping could be cited by the other party as a
ground to ask for summary dismissal of the two 20 (or more) complaints or petitions, and for the
imposition of the other sanctions, which are direct contempt of court, criminal prosecution, and
disciplinary action against the erring lawyer. cdasia

Applying the foregoing principles in the case before us and comparing it with the Second Case, it
is obvious that there exist identity of parties or interests represented, identity of rights or causes
and identity of reliefs sought.

Very simply stated, the original complaint in the court a quo which gave rise to the instant petition
was filed by the buyer (herein private respondent and his predecessors-in-interest) against the
seller (herein petitioners) to enforce the alleged perfected sale of real estate. On the other hand, the
complaint 21 in the Second Case seeks to declare such purported sale involving the same real
property "as unenforceable as against the Bank", which is the petitioner herein. In other words, in
the Second Case, the majority stockholders, in representation of the Bank, are seeking to
accomplish what the Bank itself failed to do in the original case in the trial court. In brief, the
objective or the relief being sought, though worded differently, is the same, namely, to enable the
petitioner Bank to escape from the obligation to sell the property to respondent. In Danville
Maritime, Inc. vs. Commission on Audit 22 , this Court ruled that the filing by a party of two
apparently different actions, but with the same objective, constituted forum shopping:

"In the attempt to make the two actions appear to be different, petitioner impleaded different
respondents therein — PNOC in the case before the lower court and the COA in the case before
this Court and sought what seems to be different reliefs. Petitioner asks this Court to set aside the
questioned letter-directive of the COA dated October 10, 1988 and to direct said body to approve
the Memorandum of Agreement entered into by and between the PNOC and petitioner, while in
the complaint before the lower court petitioner seeks to enjoin the PNOC from conducting a
rebidding and from selling to other parties the vessel "T/T Andres Bonifacio", and for an extension
of time for it to comply with the paragraph 1 of the memorandum of agreement and damages. One
can see that although the relief prayed for in the two (2) actions are ostensibly different, the
ultimate objective in both actions is the same, that is, the approval of the sale of vessel in favor of
Petitioner, and to overturn the letter-directive of the COA of October 10, 1988 disapproving the
sale." (Emphasis supplied)

In an earlier case 23 , but with the same logic and vigor, we held: cdasia

"In other words, the filing by the petitioners of the instant special civil action for certiorari and
prohibition in this Court despite the pendency of their action in the Makati Regional Trial Court, is
a species of forum-shopping. Both actions unquestionably involve the same transactions, the same
essential facts and circumstances. The petitioners' claim of absence of identity simply because the
PCGG had not been impleaded in the RTC suit, and the suit did not involve certain acts which
transpired after its commencement, is specious. In the RTC action, as in the action before this
Court, the validity of the contract to purchase and sell of September 1, 1986, i.e., whether or not it
had been efficaciously rescinded, and the propriety of implementing the same (by paying the
pledgee banks the amount of their loans, obtaining the release of the pledged shares, etc.) were the
basic issues. So, too, the relief was the same: the prevention of such implementation and/or the
restoration of the status quo ante. When the acts sought to be restrained took place anyway despite
the issuance by the Trial Court of a temporary restraining order, the RTC suit did not become
functus oficio. It remained an effective vehicle for obtention of relief; and petitioners' remedy in
the premises was plain and patent: the filing of an amended and supplemental pleading in the RTC
suit, so as to include the PCGG as defendant and seek nullification of the acts sought to be
enjoined but nonetheless done. The remedy was certainly not the institution of another action in
another forum based on essentially the same facts. The adoption of this latter recourse renders the
petitioners amenable to disciplinary action and both their actions, in this Court as well as in the
Court a quo, dismissible."

In the instant case before us, there is also identity of parties, or at least, of interests represented.
Although the plaintiffs in the Second Case (Henry L. Co, et al.) are not name parties in the First
Case, they represent the same interest and entity, namely, petitioner Bank, because:
Firstly, they are not suing in their personal capacities, for they have no direct personal interest in
the matter in controversy. They are not principally or even subsidiarily liable; much less are they
direct parties in the assailed contract of sale; and

Secondly, the allegations of the complaint in the Second Case show that the stockholders are
bringing a "derivative suit". In the caption itself, petitioners claim to have brought suit "for and in
behalf of the Producers Bank of the Philippines" 24 . Indeed, this is the very essence of a
derivative suit: cdasia

"An individual stockholder is permitted to institute a derivative suit on behalf of the corporation
wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of
the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In
such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real
party in interest. (Gamboa v. Victoriano, 90 SCRA 40, 47 [1979]; Emphasis supplied).

In the face of the damaging admissions taken from the complaint in the Second Case, petitioners,
quite strangely, sought to deny that the Second Case was a derivative suit, reasoning that it was
brought, not by the minority shareholders, but by Henry Co et al., who not only own, hold or
control over 80% of the outstanding capital stock, but also constitute the majority in the Board of
Directors of petitioner Bank. That being so, then they really represent the Bank. So, whether they
sued "derivatively" or directly, there is undeniably an identity of interests/entity represented.

Petitioner also tried to seek refuge in the corporate fiction that the personality of the Bank is
separate and distinct from its shareholders. But the rulings of this Court are consistent: "When the
fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of
an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly
or generally the perpetration of knavery or crime, the veil with which the law covers and isolates
the corporation from the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals." 25

In addition to the many cases 26 where the corporate fiction has been disregarded, we now add the
instant case, and declare herewith that the corporate veil cannot be used to shield an otherwise
blatant violation of the prohibition against forum-shopping. Shareholders, whether suing as the
majority in direct actions or as the minority in a derivative suit, cannot be allowed to trifle with
court processes, particularly where, as in this case, the corporation itself has not been remiss in
vigorously prosecuting or defending corporate causes and in using and applying remedies
available to it. To rule otherwise would be to encourage corporate litigants to use their
shareholders as fronts to circumvent the stringent rules against forum shopping. cdasia

Finally, petitioner Bank argued that there cannot be any forum shopping, even assuming arguendo
that there is identity of parties, causes of action and reliefs sought, "because it (the Bank) was the
defendant in the (first) case while it was the plaintiff in the other (Second Case)", citing as
authority Victronics Computers, Inc. vs. Regional Trial Court, Branch 63, Makati, etc. et al., 27
where the Court held:
"The rule has not been extended to a defendant who, for reasons known only to him, commences a
new action against the plaintiff — instead of filing a responsive pleading in the other case —
setting forth therein, as causes of action, specific denials, special and affirmative defenses or even
counterclaims. Thus, Velhagen's and King's motion to dismiss Civil Case No. 91-2069 by no
means negates the charge of forum-shopping as such did not exist in the first place." (Emphasis
supplied)

Petitioner pointed out that since it was merely the defendant in the original case, it could not have
chosen the forum in said case.

Respondent, on the other hand, replied that there is a difference in factual setting between
Victronics and the present suit. In the former, as underscored in the above-quoted Court ruling, the
defendants did not file any responsive pleading in the first case. In other words, they did not make
any denial or raise any defense or counter-claim therein. In the case before us however, petitioners
filed a responsive pleading to the complaint — as a result of which, the issues were joined. cdasia

Indeed, by praying for affirmative reliefs and interposing counter-claims in their responsive
pleadings, the petitioners became plaintiffs themselves in the original case, giving unto themselves
the very remedies they repeated in the Second Case.

Ultimately, what is truly important to consider in determining whether forum-shopping exists or

not is the vexation caused the courts and parties-litigant by a party who asks different courts
and/or administrative agencies to rule on the same or related causes and/or to grant the same or
substantially the same reliefs, in the process creating the possibility of conflicting decisions being
rendered by the different fora upon the same issue. In this case, this is exactly the problem: a
decision recognizing the perfection and directing the enforcement of the contract of sale will
directly conflict with a possible decision in the Second Case barring the parties from enforcing or
implementing the said sale. Indeed, a final decision in one would constitute res judicata in the
other. 28

The foregoing conclusion finding the existence of forum-shopping notwithstanding, the only
sanction possible now is the dismissal of both cases with prejudice, as the other sanctions cannot
be imposed because petitioners' present counsel entered their appearance only during the
proceedings in this Court, and the Petition's VERIFICATION/CERTIFICATION contained
sufficient allegations as to the pendency of the Second Case to show good faith in observing
Circular 28-91. The lawyers who filed the Second Case are not before us; thus the rudiments of
due process prevent us from motu propio imposing disciplinary measures against them in this
Decision. However, petitioners themselves (and particularly Henry Co, et al.) as litigants are
admonished to strictly follow the rules against forum-shopping and not to trifle with court
proceedings and processes. They are warned that a repetition of the same will be dealt with more
severely. cdasia
Having said that, let it be emphasized that this petition should be dismissed not merely because of
forum-shopping but also because of the substantive issues raised, as will be discussed shortly.

The Second Issue: Was The Contract Perfected?

The respondent Court correctly treated the question of whether or not there was, on the basis of
the facts established, a perfected contract of sale as the ultimate issue. Holding that a valid
contract has been established, respondent Court stated:

"There is no dispute that the object of the transaction is that property owned by the defendant bank
as acquired assets consisting of six (6) parcels of land specifically identified under Transfer
Certificates of Title Nos. T-106932 to T-106937. It is likewise beyond cavil that the bank intended
to sell the property. As testified to by the Bank's Deputy Conservator, Jose Entereso, the bank was
looking for buyers of the property. It is definite that the plaintiffs wanted to purchase the property
and it was precisely for this purpose that they met with defendant Rivera, Manager of the Property
Management Department of the defendant bank, in early August 1987. The procedure in the sale
of acquired assets as well as the nature and scope of the authority of Rivera on the matter is clearly
delineated in the testimony of Rivera himself, which testimony was relied upon by both the bank
and by Rivera in their appeal briefs. Thus (TSN of July 30, 1990. pp. 19-20): cdasia

A:The procedure runs this way: Acquired assets was turned over to me and then I published it in
the form of an inter-office memorandum distributed to all branches that these are acquired assets
for sale. I was instructed to advertise acquired assets for sale so on that basis, I have to entertain
offer; to accept offer, formal offer and upon having been offered, I present it to the Committee. I
provide the Committee with necessary information about the property such as original loan of the
borrower, bid price during the foreclosure, total claim of the bank, the appraised value at the time
the property is being offered for sale and then the information which are relative to the evaluation
of the bank to buy which the Committee considers and it is the Committee that evaluate as against
the exposure of the bank and it is also the Committee that submit to the Conservator for final
approval and once approved, we have to execute the deed of sale and it is the Conservator that
sign the deed of sale, sir.

"The plaintiffs, therefore, at that meeting of August 1987 regarding their purpose of buying the
property, dealt with and talked to the right person. Necessarily, the agenda was the price of the
property, and plaintiffs were dealing with the bank official authorized to entertain offers, to accept
offers and to present the offer to the Committee before which the said official is authorized to
discuss information relative to price determination. Necessarily, too, it being inherent in his
authority, Rivera is the officer from whom official information regarding the price, as determined
by the Committee and approved by the Conservator, can be had. And Rivera confirmed his
authority when he talked with the plaintiff in August 1987. The testimony of plaintiff Demetria is
clear on this point (TSN of May 31, 1990, pp. 27-28):

Q:When you went to the Producers Bank and talked with Mr. Mercurio Rivera, did you ask him
pointblank his authority to sell any property?

A:No, sir. Not point blank although it came from him. (W)hen I asked him how long it would take
because he was saying that the matter of pricing will be passed upon by the committee. And when
I asked him how long it will take for the committee to decide and he said the committee meets
every week. If I am not mistaken Wednesday and in about two week's (sic) time, in effect what he
was saying he was not the one who was to decide. But he would refer it to the committee and he
would relay the decision of the committee to me. cdasia

Q:Please answer the question.

A:He did not say that he had the authority(.) But he said he would refer the matter to the
committee and he would relay the decision to me and he did just like that.

"Parenthetically, the Committee referred to was the Past Due Committee of which Luis Co was the
Head, with Jose Entereso as one of the members.

"What transpired after the meeting of early August 1987 are consistent with the authority and the
duties of Rivera and the bank's internal procedure in the matter of the sale of bank's assets. As
advised by Rivera, the plaintiffs made a formal offer by a letter dated August 20, 1987 stating that
they would buy at the price of P3.5 Million in cash. The letter was for the attention of Mercurio
Rivera who was tasked to convey and accept such offers. Considering an aspect of the official
duty of Rivera as some sort of intermediary between the plaintiffs-buyers with their proposed
buying price on one hand, and the bank Committee, the Conservator and ultimately the bank itself
with the set price on the other, and considering further the discussion of price at the meeting of
August resulting in a formal offer of P3.5 Million in cash, there can be no other logical conclusion
than that when, on September 1, 1987, Rivera informed plaintiffs by letter that "the bank's
counter-offer is at P5.5 Million for more than 101 hectares on lot basis," such counter-offer price
had been determined by the Past Due Committee and approved by the Conservator after Rivera
had duly presented plaintiffs' offer for discussion by the Committee of such matters as original
loan of borrower, bid price during foreclosure, total claim of the bank, and market value. Tersely
put, under the established facts, the price of P5.5 Million was, as clearly worded in Rivera's letter
(Exh. "E"), the official and definitive price at which the bank was selling the property.

"There were averments by defendants below, as well as before this Court, that the P5.5 Million
price was not discussed by the Committee and that it was merely quoted to start negotiations
regarding the price. As correctly characterized by the trial court, this is not credible. The
testimonies of Luis Co and Jose Entereso on this point are at best equivocal and considering the
gratuitous and self-serving character of these declarations, the bank's submission on this point
does not inspire belief. Both Co and Entereso, as members of the Past Due Committee of the bank,
claim that the offer of the plaintiff was never discussed by the Committee. In the same vein, both
Co and Entereso openly admit that they seldom attend the meetings of the Committee. It is
important to note that negotiations on the price had started in early August and the plaintiffs had
already offered an amount as purchase price, having been made to understand by Rivera, the
official in charge of the negotiation, that the price will be submitted for approval by the bank and
that the bank's decision will be relayed to plaintiffs. From the facts, the amount of P5.5 Million
has a definite significance. It is the official bank price. At any rate, the bank placed its official,
Rivera, in a position of authority to accept offers to buy and negotiate the sale by having the offer
officially acted upon by the bank. The bank cannot turn around and later say, as it now does, that
what Rivera states as the bank's action on the matter is not in fact so. It is a familiar doctrine, the
doctrine of ostensible authority, that if a corporation knowingly permits one of its officers, or any
other agent, to do acts within the scope of an apparent authority, and thus holds him out to the
public as possessing power to do those acts, the corporation will, as against any one who has in
good faith dealt with the corporation through such agent, he estopped from denying his authority
(Francisco v. GSIS, 7 SCRA 577, 583-584; PNB v. Court of Appeals, 94 SCRA 357, 369-370;
Prudential Bank v. Court of Appeals, G.R. No. 103957, June 14, 1993)." 29

Article 1318 of the Civil Code enumerates the requisites of a valid and perfected contract as
follows: "(1) Consent of the contracting parties; (2) Object certain which is the subject matter of
the contract; (3) Cause of the obligation which is established."

There is no dispute on requisite no. 2. The object of the questioned contract consists of the six (6)
parcels of land in Sta. Rosa, Laguna with an aggregate area of about 101 hectares, more or less,
and covered by Transfer Certificates of Title Nos. T-106932 to T-106937. There is, however, a
dispute on the first and third requisites.

Petitioners allege that "there is no counter-offer made by the Bank, and any supposed counter-
offer which Rivera (or Co) may have made is unauthorized. Since there was no counter-offer by
the Bank, there was nothing for Ejercito (in substitution of Demetria and Janolo) to accept." 30
They disputed the factual basis of the respondent Court's findings that there was an offer made by
Janolo for P3.5 million, to which the Bank counter-offered P5.5 million. We have perused the
evidence but cannot find fault with the said Court's findings of fact. Verily, in a petition under
Rule 45 such as this, errors of fact — if there be any — are, as a rule, not reviewable. The mere
fact that respondent Court (and the trial court as well) chose to believe the evidence presented by
respondent more than that presented by petitioners is not by itself a reversible error. In fact, such
findings merit serious consideration by this Court, particularly where, as in this case, said courts
carefully and meticulously dismissed their findings. This is basic.

Be that as it may, and in addition to the foregoing disquisitions by the Court of Appeals, let us
review the question of Rivera's authority to act and petitioner's allegations that the P5.5 million
counter-offer was extinguished by the P4.25 million revised offer of Janolo. Here, there are
questions of law which could be drawn from the factual findings of the respondent Court. They
also delve into the contractual elements of consent and cause.

The authority of a corporate officer in dealing with third persons may be actual or apparent. The
doctrine of "apparent authority", with special reference to banks, was laid out in Prudential Bank
vs. Court of Appeals 31 , where it was held that:

"Conformably, we have declared in countless decisions that the principal is liable for obligations
contracted by the agent. The agent's apparent representation yields to the principal's true
representation and the contract is considered as entered into between the principal and the third
person (citing National Food Authority vs. Intermediate Appellate Court, 184 SCRA 166).

"A bank is liable for wrongful acts of its officers done in the interest of the bank or in the course of
dealings of the officers in their representative capacity but not for acts outside the scope of their
authority (9 C.J.S., p. 417). A bank holding out its officers and agents as worthy of confidence will
not be permitted to profit by the frauds they may thus be enabled to perpetrate in the apparent
scope of their employment; nor will it be permitted to shirk its responsibility for such frauds, even
though no benefit may accrue to the bank therefrom (10 Am Jur 2, p. 114) Accordingly, a banking
corporation is liable to innocent third persons where the representation is made in the course of its
business by an agent acting within the general scope of his authority even though, in the particular
case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his
principal or some other person, for his own ultimate benefit (McIntosh v. Dakota Trust Co., 52 ND
752, 204 NW 818, 40 ALR 1021).

"Application of these principles is especially necessary because banks have a fiduciary

relationship with the public and their stability depends on the confidence of the people in their
honesty and efficiency. Such faith will be eroded where banks do not exercise strict care in the
selection and supervision of its employees, resulting in prejudice to their depositors. "

From the evidence found by respondent Court, it is obvious that petitioner Rivera has apparent or
implied authority to act for the Bank in the matter of selling its acquired assets. This evidence
includes the following:

(a)The petition itself in par. II-1 (p. 3) states that Rivera was "at all times material to this case,
Manager of the Property Management Department of the Bank." By his own admission, Rivera
was already the person in charge of the Bank's acquired assets (TSN, August 6, 1990, pp. 8-9);

(b)As observed by respondent Court, the land was definitely being sold by the Bank. And during
the initial meeting between the buyers and Rivera, the latter suggested that the buyers' offer should
be no less than P3.3 million (TSN, April 26, 1990, pp. 16-17);

(c)Rivera received the buyers' letter dated August 30, 1987 offering P3.5 million (TSN, 30 July
1990, p. 11 );

(d)Rivera signed the letter dated September 1, 1987 offering to sell the property for P5.5 million
(TSN, July 30, p. 11);

(e)Rivera received the letter dated September 17, 1987 containing the buyers' proposal to buy the
property for P4.25 million (TSN, July 30, 1990, p. 12);
(f)Rivera, in a telephone conversation, confirmed that the P5.5 million was the final price of the
Bank (TSN, January 16, 1990, p. 18);

(g)Rivera arranged the meeting between the buyers and Luis Co on September 28, 1987, during
which the Bank's offer of P5.5 million was confirmed by Rivera (TSN, April 26, 1990, pp. 34-35).
At said meeting, Co, a major shareholder and officer of the Bank, confirmed Rivera's statement as
to the finality of the Bank's counter-offer of P5.5 million (TSN, January 16, 1990, p. 21; TSN,
April 26, 1990, p. 35);

(h)In its newspaper advertisements and announcements, the Bank referred to Rivera as the officer
acting for the Bank in relation to parties interested in buying assets owned/acquired by the Bank.
In fact, Rivera was the officer mentioned in the Bank's advertisements offering for sale the
property in question (cf. Exhs. "S" and "S-1").

In the very recent case of Limketkai Sons Milling, Inc. vs. Court of Appeals, et al. 32 , the Court,
through Justice Jose A. R. Melo, affirmed the doctrine of apparent authority as it held that the
apparent authority of the officer of the Bank of P.I. in charge of acquired assets is borne out by
similar circumstances surrounding his dealings with buyers.

To be sure, petitioners attempted to repudiate Rivera's apparent authority through documents and
testimony which seek to establish Rivera's actual authority. These pieces of evidence, however, are
inherently weak as they consist of Rivera's self-serving testimony and various inter-office
memoranda that purport to show his limited actual authority, of which private respondent cannot
be charged with knowledge. In any event, since the issue is apparent authority, the existence of
which is borne out by the respondent Court's findings, the evidence of actual authority is
immaterial insofar as the liability of a corporation is concerned. 33

Petitioners also argued that since Demetria and Janolo were experienced lawyers and their "law
firm" had once acted for the Bank in three criminal cases, they should be charged with actual
knowledge of Rivera's limited authority. But the Court of Appeals in its Decision (p. 12) had
already made a factual finding that the buyers had no notice of Rivera's actual authority prior to
the sale. In fact, the Bank has not shown that they acted as its counsel in respect to any acquired
assets; on the other hand, respondent has proven that Demetria and Janolo merely associated with
a loose aggrupation of lawyers (not a professional partnership), one of whose members (Atty.
Susana Parker) acted in said criminal cases.

Petitioners also alleged that Demetria's and Janolo's P4.25 million counter-offer in the letter dated
September 17, 1987 extinguished the Bank's offer of P5.5 million. 34 They disputed the
respondent Court's finding that "there was a meeting of minds when on 30 September 1987
Demetria and Janolo through Annex 'L' (letter dated September 30, 1987) 'accepted' Rivera's
counter offer of P5.5 million under Annex 'J' (letter dated September 17, 1987)", citing the late
Justice Paras 35 , Art. 1319 of the Civil Code 36 and related Supreme Court rulings starting with
Beaumont vs. Prieto. 37
However, the above-cited authorities and precedents cannot apply in the instant case because, as
found by the respondent Court which reviewed the testimonies on this point, what was "accepted"
by Janolo in his letter dated September 30, 1987 was the Bank's offer of P5.5 million as confirmed
and reiterated to Demetria and Atty. Jose Fajardo by Rivera and Co during their meeting on
September 28, 1987. Note that the said letter of September 30, 1987 begins with "(p)ursuant to our
discussion last 28 September 1987 . . ."

Petitioners insist that the respondent Court should have believed the testimonies of Rivera and Co
that the September 28, 1987 meeting "was meant to have the offerors improve on their position of
P5.5 million". 38 However, both the trial court and the Court of Appeals found petitioners'
testimonial evidence "not credible", and we find no basis for changing this finding of fact.

Indeed, we see no reason to disturb the lower courts' (both the RTC and the CA) common finding
that private respondents' evidence is more in keeping with truth and logic — that during the
meeting on September 28, 1987, Luis Co and Rivera "confirmed that the P5.5 million price has
been passed upon by the Committee and could no longer be lowered (TSN of April 27, 1990, pp.
34-35)". 39 Hence, assuming arguendo that the counter-offer of P4.25 million extinguished the
offer of P5.5 million, Luis Co's reiteration of the said P5.5 million price during the September 28,
1987 meeting revived the said offer. And by virtue of the September 30, 1987 letter accepting this
revived offer, there was a meeting of the minds, as the acceptance in said letter was absolute and
unqualified.

We note that the Bank's repudiation, through Conservator Encarnacion, of Rivera's authority and
action, particularly the latter's counter-offer of P5.5 million, as being "unauthorized and illegal"
came only on May 12, 1988 or more than seven (7) months after Janolo's acceptance. Such delay,
and the absence of any circumstance which might have justifiably prevented the Bank from acting
earlier, clearly characterizes the repudiation as nothing more than a last-minute attempt on the
Bank's part to get out of a binding contractual obligation.

Taken together, the factual findings of the respondent Court point to an implied admission on the
part of the petitioners that the written offer made on September 1, 1987 was carried through during
the meeting of September 28, 1987. This is the conclusion consistent with human experience, truth
and good faith.

It also bears noting that this issue of extinguishment of the Bank's offer of P5.5 million was raised
for the first time on appeal and should thus be disregarded.

"This Court in several decisions has repeatedly adhered to the principle that points of law,
theories, issues of fact and arguments not adequately brought to the attention of the trial court need
not be, and ordinarily will not be, considered by a reviewing court, as they cannot be raised for the
first time on appeal (Santos vs. IAC, No. 74243, November 14, 1986, 145 SCRA 592)." 40

". . . It is settled jurisprudence that an issue which was neither averred in the complaint nor raised
during the trial in the court below cannot be raised for the first time on appeal as it would be
offensive to the basic rules of fair play, justice and due process (Dihiansan vs. CA, 153 SCRA 713
[1987]; Anchuelo vs. IAC, 147 SCRA 434 [1987]; Dulos Realty & Development Corp. vs. CA,
157 SCRA 425 [1988]; Ramos vs. IAC, 175 SCRA 70 [1989]; Gevero vs. IAC, G.R. 77029,
August 30, 1990)." 41

Since the issue was not raised in the pleadings as an affirmative defense, private respondent was
not given an opportunity in the trial court to controvert the same through opposing evidence.
Indeed, this is a matter of due process. But we passed upon the issue anyway, if only to avoid
deciding the case on purely procedural grounds, and we repeat that, on the basis of the evidence
already in the record and as appreciated by the lower courts, the inevitable conclusion is simply
that there was a perfected contract of sale.

The Third Issue: Is the Contract Enforceable?

The petition alleged: 42

"Even assuming that Luis Co or Rivera did relay a verbal offer to sell at P5.5 million during the
meeting of 28 September 1987, and it was this verbal offer that Demetria and Janolo accepted with
their letter of 30 September 1987, the contract produced thereby would be unenforceable by action
— there being no note, memorandum or writing subscribed by the Bank to evidence such contract.
(Please see Article 1403[2], Civil Code.)"

Upon the other hand, the respondent Court in its Decision (p. 14) stated:

". . . Of course, the bank's letter of September 1, 1987 on the official price and the plaintiffs'
acceptance of the price on September 30, 1987, are not, in themselves, formal contracts of sale.
They are however clear embodiments of the fact that a contract of sale was perfected between the
parties, such contract being binding in whatever form it may have been entered into (case citations
omitted). Stated simply, the bank's letter of September 1, 1987, taken together with plaintiffs' letter
dated September 30, 1987, constitute in law a sufficient memorandum of a perfected contract of
sale."

The respondent Court could have added that the written communications commenced not only
from September 1, 1987 but from Janolo's August 20, 1987 letter. We agree that, taken together,
these letters constitute sufficient memoranda — since they include the names of the parties, the
terms and conditions of the contract, the price and a description of the property as the object of the
contract.

But let it be assumed arguendo that the counter-offer during the meeting on September 28, 1987
did constitute a "new" offer which was accepted by Janolo on September 30, 1987. Still, the
statute of frauds will not apply by reason of the failure of petitioners to object to oral testimony
proving petitioner Bank's counter-offer of P5.5 million. Hence, petitioners — by such utter failure
to object — are deemed to have waived any defects of the contract under the statute of frauds,
pursuant to Article 1405 of the Civil Code:

"Art. 1405.Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are
ratified by the failure to object to the presentation of oral evidence to prove the same, or by the
acceptance of benefits under them."

As private respondent pointed out in his Memorandum, oral testimony on the reaffirmation of the
counter-offer of P5.5 million is aplenty — and the silence of petitioners all throughout the
presentation makes the evidence binding on them thus:

AYes, sir. I think it was September 28, 1987 and I was again present because Atty. Demetria told
me to accompany him and we were able to meet Luis Co at the Bank.

xxx xxx xxx

QNow, what transpired during this meeting with Luis Co of the Producers Bank?

AAtty. Demetria asked Mr. Luis Co whether the price could be reduced, sir.

QWhat price?

AThe 5.5 million pesos and Mr. Luis Co said that the amount cited by Mr. Mercurio Rivera is the
final price and that is the price they intends (sic) to have, sir.

QWhat do you mean?

AThat is the amount they want, sir.

QWhat is the reaction of the plaintiff Demetria to Luis Co's statment (sic) that the defendant
Rivera's counter-offer of 5.5 million was the defendant's bank (sic) final offer?

AHe said in a day or two, he will make final acceptance, sir.

QWhat is the response of Mr. Luis Co?

AHe said he will wait for the position of Atty. Demetria, sir.

[Direct testimony of Atty. Jose Fajardo, TSN, January 16, 1990, at pp. 18-21.]

xxx xxx xxx

QWhat transpired during that meeting between you and Mr. Luis Co of the defendant Bank?
AWe went straight to the point because he being a busy person, I told him if the amount of P5.5
million could still be reduced and he said that was already passed upon by the committee. What
the bank expects which was contrary to what Mr. Rivera stated. And he told me that is the final
offer of the bank P5.5 million and we should indicate our position as soon as possible.

QWhat was your response to the answer of Mr. Luis Co?

AI said that we are going to give him our answer in a few days and he said that was it. Atty.
Fajardo and I and Mr. Mercurio [Rivera] was with us at the time at his office.

QFor the record, your Honor please, will you tell this Court who was with Mr. Co in his office in
Producers Bank Building during this meeting?

AMr. Co himself, Mr. Rivera, Atty. Fajardo and I.

QBy Mr. Co you are referring to?

AMr. Luis Co.

QAfter this meeting with Mr. Luis Co, did you and your partner accede on (sic) the counter offer
by the bank?

AYes, sir, we did. Two days thereafter we sent our acceptance to the bank which offer we
accepted, the offer of the bank which is P5.5 million."

[Direct testimony of Atty. Demetria, TSN, 26 April 1990, at pp. 34-36.]

xxx xxx xxx

QAccording to Atty. Demetrio Demetria, the amount of P5.5 million was reached by the
Committee and it is not within his power to reduce this amount. What can you say to that
statement that the amount of P5.5 million was reached by the Committee?

AIt was not discussed by the Committee but it was discussed initially by Luis Co and the group of
Atty. Demetrio Demetria and Atty. Pajardo (sic) in that September 28, 1987 meeting, sir."

[Direct testimony of Mercurio Rivera, TSN, 30 July 1990, pp. 14-15.]

The Fourth Issue: May the Conservator Revoke the Perfected and Enforceable Contract?

It is not disputed that the petitioner Bank was under a conservator placed by the Central Bank of
the Philippines during the time that the negotiation and perfection of the contract of sale took
place. Petitioners energetically contended that the conservator has the power to revoke or overrule
actions of the management or the board of directors of a bank, under Section 28-A of Republic Act
No. 265 (otherwise known as the Central Bank Act) as follows:

"Whenever, on the basis of a report submitted by the appropriate supervising or examining

department, the Monetary Board finds that a bank or a non-bank financial intermediary
performing quasi-banking functions is in a state of continuing inability or unwillingness to
maintain a state of liquidity deemed adequate to protect the interest of depositors and creditors, the
Monetary Board may appoint a conservator to take charge of the assets, liabilities, and the
management of that institution, collect all monies and debts due said institution and exercise all
powers necessary to preserve the assets of the institution, reorganize the management thereof, and
restore its viability. He shall have the power to overrule or revoke the actions of the previous
management and board of directors of the bank or non-bank financial intermediary performing
quasi-banking functions, any provision of law to the contrary notwithstanding, and such other
powers as the Monetary Board shall deem necessary."

In the first place, this issue of the Conservator's alleged authority to revoke or repudiate the
perfected contract of sale was raised for the first time in this Petition — as this was not litigated in
the trial court or Court of Appeals. As already stated earlier, issues not raised and/or ventilated in
the trial court, let alone in the Court of Appeals, "cannot be raised for the first time on appeal as it
would be offensive to the basic rules of fair play, justice and due process." 43

In the second place, there is absolutely no evidence that the Conservator, at the time the contract
was perfected, actually repudiated or overruled said contract of sale. The Bank's acting
conservator at the time, Rodolfo Romey, never objected to the sale of the property to Demetria and
Janolo. What petitioners are really referring to is the letter of Conservator Encarnacion, who took
over from Romey after the sale was perfected on September 30, 1987 (Annex V, petition) which
unilaterally repudiated — not the contract — but the authority of Rivera to make a binding offer
— and which unarguably came months after the perfection of the contract. Said letter dated May
12, 1988 is reproduced hereunder:

"May 12, 1988

"Atty. Noe C. Zarate

Zarate Carandang Perlas & Ass.

Suite 323 Rufino Building

Ayala Avenue, Makati, Metro Manila

Dear Atty. Zarate:

This pertains to your letter dated May 5, 1988 on behalf of Attys. Janolo and Demetria regarding
the six (6) parcels of land located at Sta. Rosa, Laguna.
We deny that Producers Bank has ever made a legal counter-offer to any of your clients nor
perfected a 'contract to sell and buy' with any of them for the following reasons.

In the 'Inter-office Memorandum' dated April 25, 1986 addressed to and approved by former
Acting Conservator Mr. Andres I. Rustia, Producers Bank Senior Manager Perfecto M. Pascua
detailed the functions of Property Management Department (PMD) staff and officers (Annex A),
you will immediately read that Manager Mr. Mercurio Rivera or any of his subordinates has no
authority, power or right to make any alleged counter-offer. In short, your lawyer-clients did not
deal with the authorized officers of the bank.

Moreover, under Sec. 23 and 36 of the Corporation Code of the Philippines (Batas Pambansa Blg.
68) and Sec. 28-A of the Central Bank Act (Rep. Act No. 265, as amended), only the Board of
Directors/Conservator may authorize the sale of any property of the corporation/bank.

Our records do not show that Mr. Rivera was authorized by the old board or by any of the bank
conservators (starting January, 1984) to sell the aforesaid property to any of your clients.
Apparently, what took place were just preliminary discussions/consultations between him and
your clients, which everyone knows cannot bind the Bank's Board or Conservator.

We are, therefore, constrained to refuse any tender of payment by your clients, as the same is
patently violative of corporate and banking laws. We believe that this is more than sufficient legal
justification for refusing said alleged tender.

Rest assured that we have nothing personal against your clients. All our acts are official, legal and
in accordance with law. We also have no personal interest in any of the properties of the Bank.

Please be advised accordingly.

Very truly yours,

(Sgd.) Leonida T. Encarnacion

Acting Conservator"

In the third place, while admittedly, the Central Bank law gives vast and far-reaching powers to
the conservator of a bank, it must be pointed out that such powers must be related to the
"(preservation of) the assets of the bank, (the reorganization of) the management thereof and (the
restoration of) its viability." Such powers, enormous and extensive as they are, cannot extend to
the post-facto repudiation of perfected transactions, otherwise they would infringe against the non-
impairment clause of the Constitution. 44 If the legislature itself cannot revoke an existing valid
contract, how can it delegate such non-existent powers to the conservator under Section 28-A of
said law?

Obviously, therefore, Section 28-A merely gives the conservator power to revoke contracts that
are, under existing law, deemed to be defective — i.e., void, voidable, unenforceable or
rescissible. Hence, the conservator merely takes the place of a bank's board of directors. What the
said board cannot do — such as repudiating a contract validly entered into under the doctrine of
implied authority — the conservator cannot do either. Ineluctably, his power is not unilateral and
he cannot simply repudiate valid obligations of the Bank. His authority would be only to bring
court actions to assail such contracts — as he has already done so in the instant case. A contrary
understanding of the law would simply not be permitted by the Constitution. Neither by common
sense. To rule otherwise would be to enable a failing bank to become solvent, at the expense of
third parties, by simply getting the conservator to unilaterally revoke all previous dealings which
had one way or another come to be considered unfavorable to the Bank, yielding nothing to
perfected contractual rights nor vested interests of the third parties who had dealt with the Bank.

The Fifth Issue: Were There Reversible Errors of Fact?

Basic is the doctrine that in petitions for review under Rule 45 of the Rules of Court, findings of
fact by the Court of Appeals are not reviewable by the Supreme Court. In Andres vs.
Manufacturers Hanover & Trust Corporation, 45 we held:

". . . . The rule regarding questions of fact being raised with this Court in a petition for certiorari
under Rule 45 of the Revised Rules of Court has been stated in Remalante vs. Tibe, G.R. No.
59514, February 25, 1988, 158 SCRA 138, thus:

'The rule in this jurisdiction is that only questions of law may be raised in a petition for certiorari
under Rule 45 of the Revised Rules of Court.' 'The jurisdiction of the Supreme Court in cases
brought to it from the Court of Appeals is limited to reviewing and revising the errors of law
imputed to it, its findings of the fact being conclusive' '[Chan vs. Court of Appeals, G.R. No. L-
27488, June 30, 1970, 33 SCRA 737, reiterating a long line of decisions]. This Court has
emphatically declared that' 'it is not the function of the Supreme Court to analyze or weigh such
evidence all over again, its jurisdiction being limited to reviewing errors of law that might have
been committed by the lower court' (Tiongco v. De la Merced, G.R. No. L-24426, July 25, 1974,
58 SCRA 89; Corona vs. Court of Appeals, G.R. No. L-62482, April 28, 1983, 121 SCRA 865;
Baniqued vs. Court of Appeals, G.R. No. L-47531, February 20, 1984, 127 SCRA 596).' 'Barring,
therefore, a showing that the findings complained of are totally devoid of support in the record, or
that they are so glaringly erroneous as to constitute serious abuse of discretion, such findings must
stand, for this Court is not expected or required to examine or contrast the oral and documentary
evidence submitted by the parties' [Santa Ana, Jr. vs. Hernandez, G.R. No. L-16394, December 17,
1966, 18 SCRA 973] [at pp. 144-145.]' "
Likewise, in Bernardo vs. Court of Appeals, 46 we held:

"The resolution of this petition invites us to closely scrutinize the facts of the case, relating to the
sufficiency of evidence and the credibility of witnesses presented. This Court so held that it is not
the function of the Supreme Court to analyze or weigh such evidence all over again. The Supreme
Court's jurisdiction is limited to reviewing errors of law that may have been committed by the
lower court. The Supreme Court is not a trier of facts. . . ."

As held in the recent case of Chua Tiong Tay vs. Court of Appeals and Goldrock Construction and
Development Corp.: 47

"The Court has consistently held that the factual findings of the trial court, as well as the Court of
Appeals, are final and conclusive and may not be reviewed on appeal. Among the exceptional
circumstances where a reassessment of facts found by the lower courts is allowed are when the
conclusion is a finding grounded entirely on speculation, surmises or conjectures; when the
inference made is manifestly absurd, mistaken or impossible; when there is grave abuse of
discretion in the appreciation of facts; when the judgment is premised on a misapprehension of
facts; when the findings went beyond the issues of the case and the same are contrary to the
admissions of both appellant and appellee. After a careful study of the case at bench, we find none
of the above grounds present to justify the re-evaluation of the findings of fact made by the courts
below."

In the same vein, the ruling of this Court in the recent case of South Sea Surety and Insurance
Company, Inc. vs. Hon. Court of Appeals, et al. 48 is equally applicable to the present case:

"We see no valid reason to discard the factual conclusions of the appellate court. . . . (I)t is not the
function of this Court to assess and evaluate all over again the evidence, testimonial and
documentary, adduced by the parties, particularly where, such as here, the findings of both the trial
court and the appellate court on the matter coincide." (Emphasis supplied)

Petitioners, however, assailed the respondent Court's Decision as "fraught with findings and
conclusions which were not only contrary to the evidence on record but have no bases at all,"
specifically the findings that (1) the "Bank's counter-offer price of P5.5 million had been
determined by the past due committee and approved by conservator Romey, after Rivera presented
the same for discussion" and (2) "the meeting with Co was not to scale down the price and start
negotiations anew, but a meeting on the already determined price of P5.5 million." Hence, citing
Philippine National Bank vs. Court of Appeals 49 , petitioners are asking us to review and reverse
such factual findings.

The first point was clearly passed upon by the Court of Appeals, 50 thus:

"There can be no other logical conclusion than that when, on September 1, 1987, Rivera informed
plaintiffs by letter that 'the bank's counter-offer is at P5.5 Million for more than 101 hectares on lot
basis,' such counter-offer price had been determined by the Past Due Committee and approved by
the Conservator after Rivera had duly presented plaintiffs' offer for discussion by the Committee. .
. . Tersely put, under the established fact, the price of P5.5 Million was, as clearly worded in
Rivera's letter (Exh. 'E'), the official and definitive price at which the bank was selling the
property." (p. 11, CA Decision).

xxx xxx xxx

" . . . The argument deserves scant consideration. As pointed out by plaintiff, during the meeting of
September 28, 1987 between the plaintiffs, Rivera and Luis Co, the senior vice-president of the
bank, where the topic was the possible lowering of the price, the bank official refused it and
confirmed that the P5.5 Million price had been passed upon by the Committee and could no longer
be lowered (TSN of April 27, 1990, pp. 34-35)" (p. 15, CA Decision).

The respondent Court did not believe the evidence of the petitioners on this point, characterizing it
as "not credible" and "at best equivocal and considering the gratuitous and self-serving character
of these declarations, the bank's submissions on this point do not inspire belief."

To become credible and unequivocal, petitioners should have presented then Conservator Rodolfo
Romey to testify on their behalf, as he would have been in the best position to establish their
thesis. Under the rules on evidence, 51 such suppression gives rise to the presumption that his
testimony would have been adverse, if produced.

The second point was squarely raised in the Court of Appeals, but petitioners' evidence was
deemed insufficient by both the trial court and the respondent Court, and instead, it was
respondent's submissions that were believed and became bases of the conclusions arrived at.

In fine, it is quite evident that the legal conclusions arrived at from the findings of fact by the
lower courts are valid and correct. But the petitioners are now asking this Court to disturb these
findings to fit the conclusion they are espousing. This we cannot do.

To be sure, there are settled exceptions where the Supreme Court may disregard findings of fact
by the Court of Appeals. 52 We have studied both the records and the CA Decision and we find no
such exceptions in this case. On the contrary, the findings of the said Court are supported by a
preponderance of competent and credible evidence. The inferences and conclusions are reasonably
based on evidence duly identified in the Decision. Indeed, the appellate court patiently traversed
and dissected the issues presented before it, lending credibility and dependability to its findings.
The best that can be said in favor of petitioners on this point is that the factual findings of
respondent Court did not correspond to petitioners' claims, but were closer to the evidence as
presented in the trial court by private respondent. But this alone is no reason to reverse or ignore
such factual findings, particularly where, as in this case, the trial court and the appellate court
were in common agreement thereon. Indeed, conclusions of fact of a trial judge — as affirmed by
the Court of Appeals — are conclusive upon this Court, absent any serious abuse or evident lack
of basis or capriciousness of any kind, because the trial court is in a better position to observe the
demeanor of the witnesses and their courtroom manner as well as to examine the real evidence
presented.

Epilogue

In summary, there are two procedural issues involved — forum-shopping and the raising of issues
for the first time on appeal [viz., the extinguishment of the Bank's offer of P5.5 million and the
conservator's powers to repudiate contracts entered into by the Bank's officers] — which per se
could justify the dismissal of the present case. We did not limit ourselves thereto, but delved as
well into the substantive issues — the perfection of the contract of sale and its enforceability,
which required the determination of questions of fact. While the Supreme Court is not a trier of
facts and as a rule we are not required to look into the factual bases of respondent Court's
decisions and resolutions, we did so just the same, if only to find out whether there is reason to
disturb any of its factual findings, for we are only too aware of the depth, magnitude and vigor by
which the parties, through their respective eloquent counsel, argued their positions before this
Court.

We are not unmindful of the tenacious plea that the petitioner Bank is operating abnormally under
a government-appointed conservator and "there is need to rehabilitate the Bank in order to get it
back on its feet . . . as many people depend on (it) for investments, deposits and well as
employment. As of June 1987, the Bank's overdraft with the Central Bank had already reached
P1.023 billion . . . and there were (other) offers to buy the subject properties for a substantial
amount of money." 53

While we do not deny our sympathy for this distressed bank, at the same time, the Court cannot
emotionally close its eyes to overriding considerations of substantive and procedural law, like
respect for perfected contracts, non-impairment of obligations and sanctions against forum-
shopping, which must be upheld under the rule of law and blind justice.

This Court cannot just gloss over private respondent's submission that, while the subject properties
may currently command a much higher price, it is equally true that at the time of the transaction in
1987, the price agreed upon of P5.5 million was reasonable, considering that the Bank acquired
these properties at a foreclosure sale for no more than P3.5 million. 54 That the Bank
procrastinated and refused to honor its commitment to sell cannot now be used by it to promote its
own advantage, to enable it to escape its binding obligation and to reap the benefits of the increase
in land values. To rule in favor of the Bank simply because the property in question has
algebraically accelerated in price during the long period of litigation is to reward lawlessness and
delays in the fulfillment of binding contracts. Certainly, the Court cannot stamp its imprimatur on
such outrageous proposition.

WHEREFORE, finding no reversible error in the questioned Decision and Resolution, the Court
hereby DENIES the petition. The assailed Decision is AFFIRMED. Moreover, petitioner Bank is
REPRIMANDED for engaging in forum-shopping and WARNED that a repetition of the same or
similar acts will be dealt with more severely. Costs against petitioners.

SO ORDERED.

Narvasa, C.J., Davide, Jr., Melo and Francisco, JJ., concur.

Footnotes

1.Eleventh Division, J. Emeterio C. Cui, Chairman and ponente, and JJ. Quirino D. Abad Santos,
Jr. and Buenaventura J. Guerrero, members.

2.Regional Trial Court, National Capital Region, Branch 59, Makati City, Hon. Lucia Violago-
Isnani, presiding judge.

3.Rollo, pp. 101-107.

4.Memorandum for Petitioners, p. 30; Rollo, p. 997.

5.Memorandum for Respondent, p. 18; Rollo, p. 1074.

6.Rollo, p. 43.

7.Rollo, pp. 995-996.

8.Rollo, pp. 1094-1095.

9.Rollo, p. 96.

10.Memorandum for Respondent, pp. 21-22; Rollo, pp. 1077-1078.

11.Memorandum for Petitioners, pp. 31-36; Rollo, pp. 998-1003.

12.Cf. Salonga, Private International Law, 1995 ed., p. 56 et seq.

13.Fifth edition, 1979, p. 590.

14.Permanent edition, Vol. 17, p. 646.

15.Annotation on Forum Shopping, by David G. Nitafan, 179 SCRA 157-162.

16.See "Annotation" referred to in footnote No. 15, supra, for a summary of these cases.

17.155 SCRA 566, at pp. 568 and 575 (November 12, 1987).

18.Villanueva vs. Adre, 178 SCRA 876, at p. 882 (April 27, 1989). Also cited in Crisostomo vs.
Securities and Exchange Commission, 179 SCRA 146 (November 6, 1989), and Earth Minerals
Exploration, Inc. vs. Macaraig, Jr., 194 SCRA 1 (February 11, 1991).

19.145 SCRA 34 (October 13, 1986).

20.In Buan vs. Lopez, supra, the Court expressly ruled: "That same identity puts into operation the
sanction of twin dismissals just mentioned."

21.Rollo, pp. 534-541.

22.175 SCRA 701 (July 28, 1989). In this case, petitioner filed with the Supreme Court a petition
for certiorari questioning a letter-directive of the Commission on Audit ordering the re-bidding of
a vessel, then "T/T Andres Bonifacio", being sold by the Philippine National Oil Company
(PNOC). Simultaneously, a separate complaint for injunction and damages was filed by the same
petitioner before the Makati RTC to enjoin PNOC from conducting such a re-bidding.

23.Palm Avenue Realty Development Corporation, et al. vs. PCGG, et al., 153 SCRA 579 (August
31, 1987); at pp. 591-592.

24.See Footnote 21, supra.

25.Villa-Rey Transit, Inc. vs. Ferrer, 25 SCRA 845, (October 29, 1968), at pp. 857-858.

26.This Court has pierced the veil of corporate fiction in numerous cases where it was used,
among others, to avoid a judgment credit (Sibagat Timber Corp. vs. Garcia, 216 SCRA 470
[December 11, 1992]; Tan Boon Bee & Co., Inc. vs. Jarencio, 163 SCRA 205 [June 30, 1988]); to
avoid inclusion of corporate assets as part of the estate of a decedent (Cease vs. CA, 93 SCRA 483
[October 18, 1979]); to avoid liability arising from debt (Arcilla vs. CA, 215 SCRA 120 [October
23, 1992]; Philippine Bank of Communications vs. CA, 195 SCRA 567 [March 22, 1991]); or
when made use of as a shield to perpetrate fraud and/or confuse legitimate issues (Jacinto vs. CA,
198 SCRA 211 [June 6, 1991]); or to promote unfair objectives or otherwise to shield them
(Villanueva vs. Adre, 172 SCRA 876 [April 27, 1989]).

27.217 SCRA 517 (Jan. 25, 1993).

28.See footnote 15 for further discussion on forum shopping.

29.Rollo, pp. 108-111.

30.Memorandum for Petitioners, p. 42; Rollo, p. 1009.

31.223 SCRA 350 (June 14, 1993).

32.G.R. No. 118509 (December 1, 1995).

33.2 Fletcher 351.

34Petition, p. 56 et seq.; Rollo, p. 64 et seq. Memorandum, p. 54 et seq.; Rollo, p. 1021 et seq.

35.IV E. Paras, Civil Code of the Philippines (1971 ed.), pp. 462-463.

36.Art. 1319 of Civil Code reads as follows:

"Art. 1319.Consent is manifested by the meeting of the offer and the acceptance upon the thing
and the cause which are to constitute the contract. The offer must be certain and the acceptance
absolute. A qualified acceptance constitutes a counter-offer.

"Acceptance made by letter or telegram does not bind the offerer except from the time it came to
his knowledge. The contract, in such a case, is presumed to have been entered into in the place
where the offer was made."

37.41 Phil. 670 (March 30, 1916); see also Batañgan vs. Cojuangco, 78 Phil. 481.

38.Memorandum, p. 64; Rollo, p. 1031.

39.CA Decision, p. 15; Rollo, p. 114.

40.Berin vs. Court of Appeals, 194 SCRA 508, 512 (February 27, 1991).

41.The Reparations Commission vs. The Visayan Packing Corporation, 193 SCRA 531, 539-540
(February 6, 1991).

42.At p. 75; Rollo, p. 83.

43.Dihiansan vs. CA, 153 SCRA 713 (September 14, 1987); Anchuelo vs. IAC, 147 SCRA 434
(January 29, 1987); Dulos Realty & Development Corp. vs. CA, 157 SCRA 425 (January 28,
1988); Ramos vs. IAC, 175 SCRA 70 (July 5, 1989); Gevero vs. IAC, 189 SCRA 201 (August 30,
1990); The Reparations Commission vs. The Visayan Packing Corporation, 193 SCRA 531, 540
(February 6, 1991).

44.Section 10 of Art. III of the Constitution reads as follows:

"Sec. 10.No law impairing the obligation of contracts shall be passed."

45.199 SCRA 618, 624 (September 15, 1989).

46.216 SCRA 224, 232 (December 7, 1992).

47.G.R. No. 112130 (March 31, 1995).

48.G.R. No. 102253 (June 2, 1995).

49.187 SCRA 735, 739 (July 24, 1990).

50.CA Decision, pp. 11 and 15.

51.Sec. 3 (e), Rule 131, Rules of Court.

52.Vide Regalado, Remedial Law Compendium, 1988 ed., Vol. I, pp. 352-353. See also Chua
Tiong Tay vs. Court of Appeals, et al., supra.

53Memorandum for Petitioners, p. 76; Rollo, p. 1043.

54.In his Memorandum, private respondent alleged (and petitioners have not denied) that (a) the
property was sold at foreclosure for only P3,033,264.00 and (b) in a suit for deficiency judgment
against the property's former owner and mortgage debtor, the petitioner Bank maintained that the
value of the property was only P3 million.

||| (First Philippine International Bank v. Court of Appeals, G.R. No. 115849, [January 24, 1996],
322 PHIL 280-342)

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JURISPRUDENCE Jurisprudences icon 120x120
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2
208 PHIL 95-124

SECOND DIVISION
[G.R. No. L-45645. June 28, 1983.]

FRANCISCO A. TONGOY, for himself and as Judicial Administrator of the Estate of the Late
Luis D. Tongoy and Ma. Rosario Araneta Vda. de Tongoy, petitioners, vs. THE HONORABLE
COURT OF APPEALS, MERCEDES T. SONORA, JUAN T. SONORA, JESUS T. SONORA,
TRINIDAD T. SONORA, RICARDO P. TONGOY, CRESENCIANO P. TONGOY, AMADO P.
TONGOY, and NORBERTO P. TONGOY, respondents.

Tañada, Sanchez, Tañada & Tañada Law Office for petitioners.

Reyes & Pablo Law Office for respondents.

SYLLABUS

1. REMEDIAL LAW; EVIDENCE; FINDINGS OF FACT OF THE APPELLATE COURT,

BINDING ON APPEAL; CASE AT BAR, NOT AN EXCEPTION. — The Court of Appeals
found enough convincing evidence not barred by the aforecited survivorship rule to time effect
that the transfers made by the co-owners in favor of Luis D. Tongoy were simulated. All these
findings of fact, as general rule, are conclusive upon US and beyond OUR power to review. It has
been well-settled that the jurisdiction of the Supreme Court in cases brought to IT from the Court
of appeals is limited to reviewing and revising errors of law imputed to it, its findings of fact being
conclusive a as matter of general principle (Chan vs. C.A., 33 SCRA 737, 744; Alquiza vs.
Alquisa, 22 SCRA 494, 497). The proofs submitted by petitioners do not place the factual findings
of the Court of appeals under any of the recognized to the aforesaid general rule.

2. CIVIL LAW; OBLIGATIONS AND CONTRACTS; VOID CONTRACTS; EFFECTS. — A

void or in existent contract is one which has no force and effect from the very beginning, as if it
has never been into. and which cannot be validated either by time or by ratification (p. 592, Civil
Code of the Philippines, Vol. IV, Tolentino, 1973 Ed.). A void contract procedures no effect what
so ever either against or in favor of anyone; it does not create, modify or extinguish the juridicial
relation to which refers.

3. ID.; ID.; ID.; SIMULATED CONTRACTS; CHARACTERISTICS THEREOF. — Time

characteristic of simulation is the fact that the apparent contract is not really desired nor intended
to produce legal effects nor any way alter the juridical situation of the parties. Thus, where a
person, in order to place his Property beyond the reach of his creditors, simulates to transfer of it
to another, he does not really intend to divest himself of his title and control of the property;
hence, the does of transfer is but a sham. This characteristics of simulation was defined by this
Court in this case of Rodriguez vs. Rodriguez, No. L-23002, July 31, 1967, 20 SCRA 908.

4. ID.; ID.; ID.; FUNDAMENTAL CHARACTERISTICS. — The following are the most
fundamental characteristics of avoid or inexistent contracts: 1) As a general rule, they produce no
legal effects whatsoever in accordance with the principle "quod nullum est nullum producit
effectum." 2) They are not susceptible of ratification. 3) The right to set up the defense inexistent
or absolute -nullity cannot be waived or renounce. 4) The action or defense for the declaration of
their inexistence or absolute nullity is imprescriptible. 5) Time inexistence or absolute nullity of a
contract cannot be invoked by a person whose interest are not directly affected (p.444, Comments
and jurisprudence on obligation and contracts, Jurado, 1969 Ed., emphasis supplied)

5. ID.; ID.; ID.; CANNOT BE CURED BY RATIFICATION. — The nullity of these contracts is
definite and cannot be cured by ratification. The nullity is permanent, even if the cause thereof has
created to exist, or even when the parties have complied with the contracts spontaneously

6. ID.; ID.; ID.; DEED OF TRANSFER EXECUTED TO RESTRUCTURE MORTGAGE TO

PREVENT ITS FORECLOSURE, VOID CONTRACT. — Evidently, therefore, the deeds of
transfer executed in favor of Luis Tongoy were from the very beginning. absolutely simulated or
fictitious, since the same were made merely for the purpose of restructuring the mortgage over the
subject properties and thus preventing the foreclosure by the PNB.

7. ID.; ID.; ID.; SIMULATED TRANSFER CANNOT GIVE RISE TO IMPLIED TRUST. — The
is no implied trust that was generated by the simulated transfers; because being fictitious or
simulated, the transfers were null and void ab initio- from the very beginning-and thus vested no
rights whatsoever in favor in Luis Tongoy or his heirs. That which is inexistent cannot give life to
anything.

8. ID.; PRESCRIPTION ; ACTION FOR RECONVEYANCE BASED ON IMPLIED TRUST

PRESCRIBED IN YEARS. — But even assuming arguendo that such an implied trust exist
between Luis Tongoy as trustee and the private respondent as cestui que trust, still the rights of
private respondent to claim reconveyance is not barred by prescription or laches. Implied or
constructive trusts prescribe in ten years. The prescriptibility of an action for reconveyance based
on implied or constructive trust, is now a settled question in this jurisdiction. It prescribes in ten
years (Boniga vs. Soler, et al., 2 SCRA 755; J.M. Tauzan and Co., Inc. vs. Magdangal, 4 SCRA 88,
special attention to footnotes).

9. ID.; ID.; ID.; CASE AT BAR. — Considering that the implied trust resulted from the simulated
sales which were made for the purpose of enabling the transferee, Luis D. Tongoy, to save the
properties from foreclosure for the benefit of the co-workers it would not do to apply the theory of
constructive notice resulting from the registration in the trustee's name. Hence, the ten-year
prescriptive period old not be counted from the date of registration in the name of the trustee, as
contemplated in the earlier case of Juan vs. Zuñiga (4 SCRA 1221). Rather, it should be counted
from the date of recording of the release of mortgage in the Registry of Deeds, on which dates —
May 5, 1958 — the cestui que trust were charged with the knowledge of the settlement of the
mortgage obligation, the attainment of the purpose for which the trust was constituted.

10. REMEDIAL LAW; SPECIAL PROCEEDINGS; ADMINISTRATORS OF ESTATE OF

DECEASED; OBLIGATION TO RENDER ACCOUNTING OF FRUITS OF PROPERTIES
SUBJECT OF ADMINISTRATION; CASE AT BAR. — Petitioner Francisco A. Tongoy as
successor-in-interest and/or administration of the estate of the late Luis D. Tongoy, is under
obligation to return the shares of his co-heirs and co-owners in the subject properties and, until it
is done, to render an accounting of the fruits thereof from the time that the obligation to make a
return arose, which in the case should be May 5, 1958, the date of registration of the document of
release of mortgage. Hence, We find no evidence of abuse of discretion on the part of respondent
Court of Appeals when it ordered such accounting from May 5,1958, as well as the imposition of
legal interest on the fruits and income corresponding to the shares that should have been returned
to the private respondents, from the date of actual demand which has been made on January 26,
1966 by the demand letter (Exh. TT) of respondent Jesus T. Sonora to deceased Luis D. Tongoy.

11. CIVIL LAW; DAMAGES; ATTORNEY'S FEES; AWARD PROPER WHERE PARTY
COMPELLED TO LITIGATE. — With respect to the award of attorney's fees in the sum of
P20,000.00, the same appears to have been made, considering that private respondent were
unnecessarily compelled to litigate (Flordelis vs. Mar, 114 SCRA 41; Sarsosa Vda. de Barsobin vs.
Cuenco, 113 SCRA 547; Phil. Air Lines vs. Phil. 1017).

12. ID.; PATERNITY AND FILIATION; CONTINUOUS POSSESSION OF STATUS ONLY A

GROUND TO COMPEL. — Of course, the overwhelming evidence found by respondent Court of
Appeals conclusively shows that respondent Amado, Ricardo, Cresenciano and Norberto have
been in continuous possession of the status of natural, or even legitimated, children. Still, it
recognizes the fact that such continuous possession of status is not, per se, a sufficient
acknowledgment but only a ground to compel recognition (Alabat vs. Alabat, 21 SCRA 1479; Pua
vs. Chan, 21 SCRA 753; Larena vs. Rubio, 43 Phil. 1017).

13. ID.; ID.; NATURAL CHILDREN; LIBERAL VIEW IN FAVOR THEREOF. — It is time that
WE, too, take a liberal view in favor of natural children who, because they enjoy the blessings and
privileges of an acknowledged natural child and even of a legitimated child, found it rather
awkward, if not unnecessary, to institute an action for recognition against their natural parents
who, without their asking, have been showering them with the same love, care and material
support as are accorded to legitimate children. The right to participate in their father's inheritance
should necessarily follow.

14. ID.; SUCCESSION; LAW APPLICABLE WHERE DECEDENT DIED BEFORE THE
EFFECTIVITY OF THE CIVIL CODE. — The contention that the said respondent-Tongoys have
prescribed, is without merit. The death Francisco Tongoy having occurred on September 15,1926,
the provisions of the Spanish Civil Code is applicable to this case, following the doctrine laid
down in Villaluz vs. Neme (7 SCRA 27).

DECISION

MAKASIAR, J p:

This is a petition for certiorari, to review the decision of respondent Court of Appeals in CA-G.R.
No. 45336-R, entitled "Mercedes T. Sonora, et al. versus Francisco A. Tongoy, et al.", promulgated
on December 3, 1975.

The antecedent facts which are not controverted are quoted in the questioned decision, as follows:

"The case is basically an action for reconveyance respecting two (2) parcels of land in Bacolod
City. The first is Lot No. 1397 of the Cadastral Survey of Bacolod, otherwise known as Hacienda
Pulo, containing an area of 727,650 square meters and originally registered under original
Certificate of Title No. 2947 in the names of Francisco Tongoy, Jose Tongoy, Ana Tongoy, Teresa
Tongoy and Jovita Tongoy in pro-indiviso equal shares. Said co-owners were all children of the
late Juan Aniceto Tongoy. The second is Lot No. 1395 of the Cadastral Survey of Bacolod, briefly
referred to as Cuaycong property, containing an area of 163,754 square meters, and formerly
covered by Original Certificate of Title No. 2674 in the name of Basilisa Cuaycong.

"Of the original registered co-owners of Hacienda Pulo, three died without issue, namely: Jose
Tongoy, who died a widower on March 11, 1961; Ana Tongoy, who also died single on February
6, 1957, and Teresa Tongoy who also died single on November 3, 1949. The other two registered
co-owners, namely, Francisco Tongoy and Jovita Tongoy, were survived by children. Francisco
Tongoy, who died on September 15, 1926, had six children; Patricio D. Tongoy and Luis D.
Tongoy by the first marriage; Amado P. Tongoy, Ricardo P. Tongoy; Cresenciano P. Tongoy and
Norberto P. Tongoy by his second wife Antonina Pabello whom he subsequently married
sometime after the birth of their children. For her part, Jovita Tongoy (Jovita Tongoy de Sonora),
who died on May 14, 1915, had from children: Mercedes T. Sonora, Juan T. Sonora, Jesus T.
Sonora and Trinidad T. Sonora.

"By the time this case was commenced. the late Francisco Tongoy's aforesaid two children by his
first marriage, Patricio D. Tongoy and Luis D. Tongoy, have themselves died. It is claimed that
Patricio D. Tongoy left three acknowledged natural children named Fernando, Estrella and
Salvacion, all surnamed Tongoy. On the other hand, there is no question that Luis D. Tongoy left
behind a son, Francisco A. Tongoy, and a surviving spouse, Ma. Rosario Araneta Vda. de Tongoy.

"The following antecedents are also undisputed, though by no means equally submitted as the
complete facts, nor seen in identical lights: On April 17, 1918, Hacienda Pulo was mortgaged by
its registered co owners to the Philippine National Bank (PNB), Bacolod Branch, as security for a
loan of P11,000.00 payable in ten (10) years at 8% interest per annum. The mortgagors however
were unable to keep up with the yearly amortizations. as a result of which the PNB instituted
judicial foreclosure proceedings over Hacienda Pulo on June 18, 1931. To avoid foreclosure, one
of the co-owners and mortgagors, Jose Tongoy, proposed to the PNB an amortization plan that
would enable them to liquidate their account. But, on December 23, 1932, the PNB Branch
Manager in Bacolod advised Jose Tongoy by letter that the latter's proposal was rejected and that
the foreclosure suit had to continue. As a matter of fact, the suit was pursued to finality up to the
Supreme Court which affirmed on July 31, 1935 the decision of the CFI giving the PNB the right
to foreclose the mortgage on Hacienda Pulo. In the meantime, Patricio D. Tongoy and Luis
Tongoy executed on April 29, 1933 a Declaration of Inheritance wherein they declared themselves
as the only heirs of the late Francisco Tongoy and thereby entitled to the latter's share in Hacienda
Pulo. On March 13, 1934, Ana Tongoy, Teresa Tongoy, Mercedes Sonora, Trinidad Sonora, Juan
Sonora and Patricio Tongoy executed an 'Escritura de Venta' (Exh. 2 or Exh. W, which by its terms
transferred for consideration their rights and interests over Hacienda Pulo in favor of Luis D.
Tongoy. Thereafter, on October 23, 1935 and November 5, 1935, respectively, Jesus Sonora and
Jose Tongoy followed suit by each executing a similar 'Escritura de Venta' (Exhs. 3 or DD and 5 or
AA) pertaining to their corresponding rights and interests over Hacienda Pulo in favor also of Luis
D. Tongoy. In the case of Jose Tongoy, the execution of the 'Escritura de Venta' (Exh. 5 or AA)
was preceded by the execution on October 14, 1935 of an Assignment of Rights (Exh. 4 or Z) in
favor of Luis D. Tongoy by the Pacific Commercial Company as judgment lien-holder
(subordinate to the PNB mortgage) of Jose Tongoy's share in Hacienda Polo. On the basis of the
foregoing documents, Hacienda Pulo was placed on November 8, 1935 in the name of Luis D.
Tongoy, married to Maria Rosario Araneta, under Transfer Certificate of Title No. 20154 (Exh.
20). In the following year, the title of the adjacent Cuaycong property also came under the name of
Luis D. Tongoy, married to Maria Rosario Araneta, per Transfer Certificate of Title No. 21522, by
virtue of an 'Escritura de Venta' (Exh. 6) executed in his favor by the owner Basilisa Cuaycong on
June 22, 1936 purportedly for P4,000.00. On June 26, 1936, Luis D. Tongoy executed a real estate
mortgage over the Cuaycong property in favor of the PNB, Bacolod Branch, as security for loan of
P4,500.00. Three days thereafter, on June 29, 1936, he also executed a real estate mortgage over
Hacienda Pulo in favor of the same bank to secure an indebtedness of P21,000.00, payable for a
period of fifteen (15) years at 8% per annum. After two decades, on April 17, 1956, Luis D.
Tongoy paid off all his obligations with the PNB, amounting to a balance of P34,410.00, including
the mortgage obligations on the Cuaycong property and Hacienda Pulo. However, it was only on
April 22, 1958 that a release of real estate mortgage was executed by the bank in favor of Luis D.
Tongoy. On February 5, 1966, Luis D. Tongoy died at the Lourdes Hospital in Manila, leaving as
heirs his wife Maria Rosario Araneta and his son Francisco A. Tongoy. Just before his death,
however, Luis D. Tongoy received a letter from Jesus T. Sonora, dated January 26, 1966,
demanding the return of the shares in the properties to the co-owners. prLL

"Not long after the death of Luis D. Tongoy, the case now before Us was instituted in the court
below on complaint filed on June 2, 1966 by Mercedes T. Sonora, Juan T. Sonora **, Jesus T.
Sonora, Trinidad T. Sonora, Ricardo P. Tongoy and Cresenciano P. Tongoy. Named principally as
defendants were Francisco A. Tongoy, for himself and as judicial administrator of the estate of the
late Luis D. Tongoy, and Maria Rosario Araneta Vda. de Tongoy. Also impleaded as defendants,
because of their unwillingness to join as plaintiffs were Amado P. Tongoy, Norberto P. Tongoy **
and Fernando P. Tongoy. Alleging in sum that plaintiffs and/or their predecessors transferred their
interests on the two lots in question to Luis D. Tongoy by means of simulated sales, pursuant to a
trust arrangement whereby the latter would return such interests after the mortgage obligations
thereon had been settled, the complaint prayed that 'judgment be rendered in favor of the plaintiffs
and against the defendants —

'(a) Declaring that the HACIENDA PULO, Lot 1397-B-3 now covered by T.C.T. No. 29152,
Bacolod City, and the former Cuaycong property, Lot 1395 now covered by T.C.T. No. T-824 (RT-
4049) (21522), Bacolod City, as trust estate belonging to the plaintiffs and the defendants in the
proportion set forth in Par. 26 of this complaint;

'(b) Ordering the Register of Deeds of Bacolod City to cancel T.C.T. No. 29152 and T.C.T. No. T-
824 (RT-4049) (21522), Bacolod City, and to issue new ones in the names of the plaintiffs and
defendants in the proportions set forth in Par. 26 thereof, based on the original area of
HACIENDA PULO;

'(c) Ordering the defendants Francisco A. Tongoy and Ma. Rosario Araneta Vda. de Tongoy to
render an accounting to the plaintiffs of the income of the above two properties from the year 1958
to the present and to deliver to each plaintiff his corresponding share with legal interest thereon
from 1958 and until the same shall have been folly paid;

'(d) Ordering the defendants Francisco Tongoy and Ma. Rosario Araneta Vda. de Tongoy to pay to
the plaintiffs as and for attorney's fees an amount equivalent to twenty four per cent (24%) of the
rightful shares of the plaintiffs over the original HACIENDA PULO and the Cuaycong property,
including the income thereof from 1958 to the present; and

'(e) Ordering the defendants Francisco A. Tongoy and Ma. Rosario Vda. de Tongoy to pay the
costs of this suit.

'Plaintiffs also pray for such other and further remedies just and equitable in the premises.'

"Defendants Francisco A. Tongoy and Ma. Rosario Vda. de Tongoy filed separate answers,
denying in effect plaintiffs' causes of action, and maintaining, among others, that the sale to Luis
D. Tongoy of the two lots in question was genuine and for a valuable consideration, and that no
trust agreement of whatever nature existed between him and the plaintiffs. As affirmative
defenses, defendants also raised laches, prescription, estoppel, and the statute of frauds against
plaintiffs. Answering defendants counter claimed for damages against plaintiffs for allegedly
bringing an unfounded and malicious complaint.

"For their part, defendants Norberto Tongoy and Amado Tongoy filed an answer under oath,
admitting every allegation of the complaint. On the other hand, defendant Fernando Tongoy
originally joined Francisco A. Tongoy in the latter's answer, but after the case was submitted and
was pending decision, the former filed a verified answer also admitting every allegation of the
complaint.

"Meanwhile, before the case went to trial, a motion to intervene as defendants was filed by and
was granted to Salvacion Tongoy and Estrella Tongoy, alleging they were sisters of the full blood
of Fernando Tongoy. Said intervenors filed an answer similarly admitting every allegation of the
complaint.

"After trial on the merits, the lower court rendered its decision on October 15, 1968 finding the
existence of an implied trust in favor of plaintiffs, but at the same time holding their action for
reconveyance barred by prescription, except in the case of Amado P. Tongoy, Ricardo P. Tongoy,
Cresenciano P. Tongoy, and Norberto P. Tongoy, who were adjudged entitled to reconveyance of
their corresponding shares in the property left by their father Francisco Tongoy having been
excluded therefrom in the partition had during their minority, and not having otherwise signed any
deed of transfer over such shares. The dispositive portion of the decision reads:

'IN VIEW OF ALL THE FOREGOING considerations, judgment is hereby rendered dismissing
the complaint, with respect to Mercedes, Juan, Jesus and Trinidad, all surnamed Sonora. The
defendants Francisco Tongoy and Rosario Araneta Vda. de Tongoy are hereby ordered to reconvey
the proportionate shares of Ricardo P., Cresenciano P., Amado P., and Norberto P., all surnamed
Tongoy in Hda. Pulo and the Cuaycong property. Without damages and costs.

'SO ORDERED.'

"Upon motion of plaintiffs, the foregoing dispositive portion of the decision was subsequently
clarified by the trial court through its order of January 9, 1969 in the following tenor:

'Considering the motion for clarification of decision dated November 7, 1968 and the opposition
thereto, and with the view to avoid further controversy with respect to the share of each heir, the
dispositive portion of the decision is hereby clarified in the sense that, the proportionate legal
share of Amado P. Tongoy, Ricardo P. Tongoy, Cresenciano P. Tongoy and the heirs of Norberto P.
Tongoy, in Hda. Pulo and Cuaycong property consist of 4/5 of the whole trust estate, leaving 1/5
of the same to the heirs of Luis D. Tongoy.

'SO ORDERED.'" (pp. 157-166, Vol. 1, rec.).

Both parties appealed the decision of the lower court to respondent appellate court. Plaintiffs-
appellants Mercedes T. Sonora, Jesus T. Sonora, Trinidad T. Sonora and the heirs of Juan T.
Sonora questioned the lower court's decision dismissing their complaint on ground of prescription,
and assailed it insofar as it held that the agreement created among the Tongoy-Sonora family in
1931 was an implied, and not an express, trust; that their action had prescribed; that the
defendants-appellants were not ordered to render an accounting of the fruits and income of the
properties in trust; and that defendants were not ordered to pay the attorney's fees of plaintiffs-
appellants. For their part, defendants-appellants Francisco A. Tongoy and Ma. Rosario Araneta
Vda. de Tongoy not only refuted the errors assigned by plaintiffs-appellants, but also assailed the
findings that there was preponderance of evidence in support of the existence of an implied trust;
that Ricardo P. Tongoy, Amado P, Tongoy and Norberto P. Tongoy are the legitimate half-brothers
of the late Luis D. Tongoy; that their shares in Hacienda Pulo and Cuaycong property should be
reconveyed to them by defendants-appellants; and that an execution was ordered pending appeal.
LLphil

On December 3, 1975, respondent court rendered the questioned decision, the dispositive portion
of which is as follows:

"WHEREFORE, judgment is hereby rendered modifying the judgment and Orders appealed from
by ordering Maria Rosario Araneta Vda. de Tongoy and Francisco A. Tongoy —

"1) To reconvey to Mercedes T. Sonora, Juan T. Sonora (as substituted and represented by his
heirs), Jesus T. Sonora and Trinidad T. Sonora each a 7/60th portion of both Hacienda Pulo and the
Cuaycong property, based on their original shares;

"2) To reconvey to Ricardo P. Tongoy, Cresenciano P. Tongoy, Amado P. Tongoy and Norberto P.
Tongoy (as substituted and represented by his heirs each a 14/135th portion of both Hacienda Pulo
and the Cuaycong property, also based on their original shares; provided that the 12 hectares
already reconveyed to them by virtue of the Order for execution pending appeal of the judgment
shall be duly deducted;

"3) To render an accounting to the parties named in pars. 1 and 2 above with respect to the income
of Hacienda Polo and the Cuaycong property from May 5, 1958 up to the time the reconveyances
as herein directed are made; and to deliver or pay to each of said parties their proportionate shares
of the income, if any, with legal interest thereon from the date of filing of the complaint in this
case, January 26, 1966, until the same is paid;

"4) To pay unto the parties mentioned in par. 1 above attorney's fees in the sum of P20,000.00; and

"5) To pay the costs.

"SO ORDERED" (pp. 207-208, Vol. I, rec.).

Petitioners Francisco A. Tongoy and Ma. Rosario Araneta Vda. de Tongoy (defendants-appellants)
have come before Us on petition for review on certiorari with the following assignments of errors
(pp. 23 24, Brief for Petitioners):

I. The Court of Appeals erred in finding that there was a trust constituted on Hacienda Pulo.

II. The Court of Appeals erred in finding that the purchase price for the Cuaycong property was
paid by Jose Tongoy and that said property was also covered by a trust in favor of respondents.

III. Conceding, for the sake of argument, that respondents have adequately proven an implied trust
in their favor, the Court of Appeals erred in not finding that the rights of respondents have
prescribed, or are barred by laches.

IV. The Court of Appeals erred in finding that the respondents Tongoy are the legitimated children
of Francisco Tongoy.

V. Granting arguendo that respondents Tongoy are the legitimated children of Francisco Tongoy,
the Court of Appeals erred in not finding that their action against petitioners has prescribed.

VI. The Court of Appeals erred in ordering petitioners to pay attorney's fees of P20,000.00.

VII. The Court of Appeals erred in declaring that execution pending appeal in favor of respondents
Tongoys was justified.

It appears to US that the first and second errors assigned by petitioners are questions of fact which
are beyond OUR power to review.

Thus, as found by the respondent Court of Appeals:

"xxx xxx xxx

"We shall consider first the appeal interposed by plaintiffs-appellants. The basic issues underlying
the disputed errors raised suggest themselves as follows: 1) whether or not the conveyance
respecting the questioned lots made in favor of Luis D. Tongoy in 1934 and 1935 were conceived
pursuant to a trust agreement among the parties; 2) if so, whether the trust created was an express
or implied trust; and 3) if the trust was not an express trust, whether the action to enforce it has
prescribed.

"The first two issues indicated above will be considered together as a matter of logical necessity,
being so closely interlocked. To begin with, the trial court found and ruled that the transfers made
in favor of Luis D. Tongoy were clothed with an implied trust, arriving at this conclusion as
follows:

'The Court finds that there is preponderance of evidence in support of the existence of
constructive, implied or tacit trust. The hacienda could have been leased to third persons and the
rentals would have been sufficient to liquidate the outstanding obligation in favor of the Philippine
National Bank. But the co-owners agreed to give the administration of the property to Atty. Luis
D. Tongoy, so that the latter can continue giving support to the Tongoy-Sonora family and at the
same time, pay the amortization in favor of the Philippine National Bank, in the same manner that
Jose Tongoy did. And of course, if the administration is successful, Luis D. Tongoy would benefit
with the profits of the hacienda. Simulated deeds of conveyance in favor of Luis D. Tongoy were
executed to facilitate and expedite the transaction with the Philippine National Bank. Luis D.
Tongoy supported the Tongoy-Sonora family, defrayed the expenses of Dr. Jesus Sonora and Atty.
Ricardo P. Tongoy, in their studies. Luis Tongoy even gave Sonoras their shares in the
"beneficacion" although the "beneficacion" were included in the deeds of sale. The amount of
consideration of the one-fifth (1/5) share of Jose Tongoy is one hundred (P100.00) pesos only.
Likewise the consideration of the sale of the interests of the Pacific Commercial Company is only
P100.00 despite the fact that Jose Tongoy paid in full his indebtedness in favor of said company.
The letter of Luis D. Tongoy dated November 5, 1935 (Exhibit 'BB-1') is very significant, the
tenor of which is quoted hereunder:

'Dear Brother Jose:

'Herewith is the deed which the bank sent for us to sign. The bank made me pay the Pacific the
sum of P100.00 so as not to sell anymore the land in public auction. This deed is for the purpose
of dispensing with the transfer of title to the land in the name of the bank, this way we will avoid
many expenses.

Yours,

'Luis D. Tongoy'

'Jose Tongoy signed the deed because he incurred the obligation with the Pacific and paid it. In
releasing the second mortgage, Luis Tongoy paid only P100.00 and the deed was in favor of Luis
Tongoy. This was done in order "to avoid many expenses" of both Jose and Luis as obviously
referred to in the word "WE".

'Those two transactions with nominal considerations are irrefutable and palpable evidence of the
existence of constructive or implied trust.

'Another significant factor in support of the existence of constructive trust is the fact that in 1933-
34, when proposals for amicable settlement with the Philippine National Bank were being
formulated and considered, Luis D. Tongoy was yet a neophite (sic) in the practice of law, and he
was still a bachelor. It was proven that it was Jose Tongoy, the administrator of Hda. Pulo, who
provided for his expenses when he studied law, when he married Maria Araneta, the latter's
property were leased and the rentals were not sufficient to cover all the considerations stated in the
deeds of sale executed by the co-owners of Hda. Pulo, no matter how inadequate were the
amounts so stated. These circumstances fortified the assertion of Judge Arboleda that Luis D.
Tongoy at that time was in no condition to pay the purchase price of the property sold.

'But the Court considers the evidence of execution of express trust agreement insufficient. Express
trust agreement was never mentioned in the plaintiffs' pleading nor its existence asserted during
the pre-trial hearings. It was only during the trial on the merits when Atty. Eduardo P. Arboleda
went on to testify that he prepared the deed of trust agreement.

'Indeed the most formidable weapon the plaintiff could have used in destroying the "impregnable
walls of the defense castle consisting of public documents" is testimony of Atty. Eduardo P.
Arboleda. He is most qualified and in a knowable position to testify as to the truth of the existence
of the trust agreement, because he was not only the partner of the late Luis D. Tongoy in their
practice of law especially during the time he prepared and/or notarized the deeds of sale but he
was also his colleague in the City Council. But however forceful would be the impact of his
testimony, it did not go beyond the establishment of constructive or implied trust agreement. In the
first place, if it is true that written trust agreement was prepared by him and signed by Luis D.
Tongoy for the security of the vendor, why is it that only two copies of the agreement were
prepared, one copy furnished Jose Tongoy and the other kept by Luis Tongoy, instead of making
five copies and furnished copy to each co-owner, or at least one copy would have been kept by
him? Why is it that when Atty. Arboleda invited Mrs. Maria Rosario Araneta Vda. de Tongoy and
her son to see him in his house, Atty. Arboleda did not reveal or mention the fact of the existence
of a written trust agreement signed by the late Luis D. Tongoy? The revelation of the existence of
a written trust agreement would have been a vital and controlling factor in the amicable settlement
of the case, which Atty. Arboleda would have played an effective role as an unbiased mediator.
Why did not Atty. Arboleda state the precise context of the written agreements; its form and the
language it was written, knowing as he should, the rigid requirements of proving the contents of a
lost document. It is strange that when Mrs. Maria Rosario Araneta Vda. de Tongoy and her son
were in the house of Atty. Arboleda, in compliance with his invitation for the supposed friendly
settlement of the case, Atty. Arboleda did not even submit proposals for equitable arbitration of the
case. On the other hand, according to Mrs. Tongoy, Mrs. Arboleda intimated her desire to have
Atty. Arboleda be taken in. The Court refuses to believe that Judge Arboleda was aware of the
alleged intimations of Mrs. Arboleda, otherwise he would not have tolerated or permitted her to
indulge in such an embarrassing and uncalled for intrusion. The plaintiffs evidently took such
ungainly insinuations with levity so much so that they did not think it necessary to bring Mrs.
Arboleda to Court to refute this fact.'

"The parties, on either side of this appeal take issue with the conclusion that there was an implied
trust, one side maintaining that no trust existed at all, the other that the trust was an express trust.

"To begin with, We do not think the trial court erred in its ultimate conclusion that the transfers of
the two lots in question made in favor of the late Luis D. Tongoy by his co-owners in 1933 and
1934 created an implied trust in favor of the latter. While, on one hand, the evidence presented by
plaintiffs-appellants to prove an express trust agreement accompanying the aforesaid transfers of
the lots are incompetent, if not inadequate, the record bears sufficiently clear and convincing
evidence that the transfers were only simulated to enable Luis D. Tongoy to save Hacienda Pulo
from foreclosure for the benefit of the co-owners, including himself. Referring in more detail to
the evidence on the supposed express trust, it is true that plaintiffs-appellants Jesus T. Sonora,
Ricardo P. Tongoy, Mercedes T. Sonora and Trinidad T. Sonora have testified with some vividness
on the holding of a family conference in December 1931 among the co-owners of Hacienda Pulo
to decide on steps to be taken vis-a-vis the impending foreclosure of the hacienda by the PNB
upon the unpaid mortgage obligation thereon. Accordingly, the co-owners had agreed to entrust
the administration and management of Hacienda Pulo to Luis D. Tongoy who had newly emerged
as the lawyer in the family. Thereafter, on the representation of Luis D. Tongoy that the bank
wanted to deal with only one person — it being inconvenient at time to transact with many
persons, specially when some had to be out of town — the co-owners agreed to make simulated
transfers of their participation in Hacienda Pulo to him. As the evidence stands, even if the same
were competent, it does not appear that there was an express agreement among the co-owners for
Luis D. Tongoy to hold Hacienda Pulo in trust, although from all the circumstances just indicated
such a trust may be implied under the law Art. 1453, Civil Code; also see Cuaycong vs. Cuaycong,
L-21616, December 11, 1967, 21 SCRA 1192, 1197-1198). But, whatever may be the nature of the
trust suggested in the testimonies adverted to, the same are incompetent as proof thereof amend
the timely objections of defendants-appellees to the introduction of such testimonial evidence on
the basis of the survivorship rule. The witnesses being themselves parties to the instant case, suing
the representatives of the deceased Luis D. Tongoy upon a demand against the latter's estate, said
witnesses are barred by the objections of defendants-appellees from testifying on matters of fact
occurring before the death of the deceased (Sec. 20[a], Rule 130), more particularly where such
occurrences consist of verbal agreements or statements made by or in the presence of the
deceased.

"Neither has the existence of the alleged contra-documento — by which Luis D. Tongoy
supposedly acknowledged the transfers to be simulated and bound himself to return the shares of
his co-owners after the mortgage on the Hacienda had been discharged - been satisfactorily
established to merit consideration as proof of the supposed express trust. We can hardly add to the
sound observations of the trial court in rejecting the evidence to the effect as insufficient, except to
note further that at least plaintiffs-appellants Mercedes T. Sonora and Trinidad T. Sonora have
testified having been apprised of the document and its contents when Luis D. Tongoy supposedly
delivered one copy to Jose Tongoy. And yet as the trial court noted, no express trust agreement
was ever mentioned in plaintiffs-appellants' pleadings or at the pre-trial.

"Nevertheless, there is on record enough convincing evidence not barred by the survivorship rule,
that the transfers made by the co-owners in favor of Luis D. Tongoy were simulated and that an
implied or resulting trust thereby came into existence, binding the latter to make reconveyance of
the co-owners' shares after the mortgage indebtedness on Hacienda Pulo has been discharged.
Thus it appears beyond doubt that Hacienda Polo has been the source of livelihood to the co-
owners and their dependents, when the subject transfers were made. It is most unlikely that all of
the several other co-owners should have come at the same time to one mind about disposing of
their participation to the hacienda, when the same counted so much in their subsistence and self-
esteem. Only extreme necessity would have forced the co-owners to act in unison towards
earnestly parting with their shares, taking into account the meager considerations mentioned in the
deeds of transfer which at their most generous gave to each co-owner only P2,000.00 for a 1/5 part
of the hacienda. As it appears to Us, the impending foreclosure on the mortgage for P11,000.00
could not have created such necessity. Independent of testimony to the effect, it is not hard to
surmise that the hacienda could have been leased to others on terms that would leave satisfied the
mortgage obligation. Moreover, as it turned out, the PNB was amenable. and did actually accede,
to a restructuring of the mortgage loan in favor of Luis D. Tongoy, thereby saving the hacienda
from foreclosure. As a matter of fact, the co-owners must have been posted on the attitude of the
bank regarding the overdue mortgage loan, and its willingness to renew or restructure the same
upon certain conditions. Under such circumstances, it is more reasonable to conclude that there
was no compelling reason for the other co owners to sell out their birthrights to Luis D. Tongoy,
and that the purported transfers were, as claimed by them in reality simulated pursuant to the
suggestion that the bank wanted to deal with only one person. In fact, as recited in the Escritura de
Venta (Exh. AA) executed between Luis. D. Tongoy and Jose Tongoy, it appears that the series of
transfers made in favor of the former by the co-owners of Hacienda Polo followed and was made
pursuant to a prior arrangement made with the PNB by Luis D. Tongoy to redeem the shares or
participation of his co-owners. That this was readily assented to in the anxiety to save and preserve
Hacienda Pulo for all its co-owners appears very likely anent undisputed evidence that the said co-
owners had been used to entrusting the management thereof to one among them, dating back to
the time of Francisco Tongoy who once acted as administrator, followed by Jose Tongoy, before
Luis D. Tongoy himself took over the hacienda.

"Strongly supported the theory that the transfers were only simulated to enable Luis D. Tongoy
(to) have effective control and management of the hacienda for the benefit of all the co-owners is
preponderant evidence to the effect that he was in no financial condition at the time to purchase
the hacienda. Witness Eduardo Arboleda who was a law partner of Luis D. Tongoy when the
transfers were made, and who is not a party in this case, emphatically testified that Luis D. Tongoy
could not have produced the money required for the purchase from his law practice then. On the
other hand, the suggestion that his wife Ma. Rosario Araneta had enough income from her landed
properties to sufficiently augment Luis D. Tongoy's income from his practice is belied by evidence
that such properties were leased, and the rentals collected in advance, for eleven (11) crop years
beginning 1931 (Exh. EEE), when they were not yet married.

"The financial incapacity of Luis D. Tongoy intertwines, and together gains strength, with proof
that the co-owners as transferors in the several deeds of sale did not receive the considerations
stated therein. In addition to the testimony of the notary public, Eduardo P. Arboleda, that no
consideration as recited in the deeds of transfer were ever paid in his presence, all the transferors
who testified including Jesus T. Sonora, Mercedes T. Sonora and Trinidad T. Sonora — all denied
having received the respective considerations allegedly given them. While said transferors are
parties in this case, it has been held that the survivorship rule has no application where the
testimony offered is to the effect that a thing did not occur (Nantz vs. Agbulos, CA-G.R. No.
4098-R, January 13, 1951; Mendoza v. C. Vda. de Goitia, 54 Phil. 557, cited by Mora, Comments
on the Rules of Court, 1970 ed., Vol. 5, p. 174).

"Also of some significance is the fact that the deeds of transfer executed by Ana Tongoy, Teresa
Tongoy, Mercedes Sonora, Trinidad Sonora, Juan Sonora, and Patricio Tongoy (Exh. W) as well as
that by Jesus Sonora (Exh. DD), did not even bother to clarify whether Luis D. Tongoy as
transferee of his co-owners' share was assuming the indebtedness owing to the PNB upon the
mortgage on Hacienda Pulo. In an honest-to-goodness sale, it would have been most unlikely that
the transferors would have paid no attention to this detail, least of all where, as in this case, the
transfers ware apparently prompted by the inability of the co-owners to discharge the mortgage
obligation and were being pressed for payment.

"Furthermore, the tenor of the letter from Luis D. Tongoy to Jose Tongoy, dated November 5,
1935 (Exhibit Bb-1), as heretofore quote with portions of the decision on appeal, is very revealing
of the fact that the steps taken to place Hacienda Pulo in the name of Luis D. Tongoy were made
for the benefit not only of himself but for the other co-owners as well. Thus, the letter ends with
the clause — 'this way we will avoid many expenses.'
"Finally, it is not without significance that the co-owners and their dependents continued to
survive apparently from the sustenance from Hacienda Pulo for a long time following the alleged
transfers in favor of Luis D. Tongoy. In fact, it does not appear possible that Jesus T. Sonora and
Ricardo P. Tongoy could have finished medicine and law, respectively, without support from Luis
D. Tongoy as administrator of the common property.

"All the foregoing, considered together, constitute clear and convincing evidence that the transfers
made in favor of Luis D. Tongoy by his co-owners were only simulated, under circumstances
giving rise to an implied or resulting trust whereby Luis D. Tongoy is bound to hold title in trust
for the benefit of his co-owners (cf. de Buencamino, et al. vs. De Matias, et al., L-19397, April 30,
1966, 16 SCRA 849) " [pp. 170-181, Vol. I, rec.].

The Court of Appeals found enough convincing evidence not barred by the aforecited survivorship
rule to the effect that the transfers made by the co-owners in favor of Luis D. Tongoy were
simulated.

All these findings of fact, as a general rule, are conclusive upon US and beyond OUR power to
review. It has been well-settled that the jurisdiction of the Supreme Court in cases brought to IT
from the Court of Appeals is limited to reviewing and revising errors of law imputed to it, its
findings of fact being conclusive as a matter of general principle (Chan vs. C.A., 33 SCRA 737,
744; Alquiza vs. Alquiza, 22 SCRA 494, 497). LibLex

The proofs submitted by petitioners do not place the factual findings of the Court of Appeals under
any of the recognized exceptions to the aforesaid general rule.

The initial crucial issue therefore is — whether or not the rights of herein respondents over subject
properties, which were the subjects of simulated or fictitious transactions, have already prescribed.

The negative answer to the aforesaid query is found in Articles 1409 and 1410 of the New Civil
Code. Said provision state thus:

"Art. 1409. The following contracts are inexistent and void from the beginning:

"xxx xxx xxx

"2) Those which are absolutely simulated or fictitious;.

"xxx xxx xxx

"These contracts cannot be ratified. Neither can the right to set up the defense of illegality be
waived" (italics supplied).

"Art. 1410. The action or defense for the declaration of the inexistence of a contract does not
prescribe."

The characteristic of simulation is the fact that the apparent contract is not really desired nor
intended to produce legal effects nor in any way alter the juridical situation of the parties. Thus,
where a person, in order to place his property beyond the reach of his creditors, simulates a
transfer of it to another, he does not really intend to divest himself of his title and control of the
property; hence, the deed of transfer is but a sham. This characteristic of simulation was defined
by this Court in the case of Rodriguez vs. Rodriguez, No. L-23002, July 31, 1967, 20 SCRA 908.
prLL

A void or inexistent contract is one which has no force and effect from the very beginning, as if it
had never been entered into, and which cannot be validated either by time or by ratification (p.
592, Civil Code of the Philippines, Vol. IV, Tolentino, 1973 Ed.).

A void contract produces no effect whatsoever either against or in favor of anyone; hence, it does
not create, modify or extinguish the juridical relation to which it refers (p. 594, Tolentino, supra).

The following are the most fundamental characteristics of void or inexistent contracts:

1) As a general rule, they produce no legal effects whatsoever in accordance with the principle
"quod nullum est nullum producit effectum."

2) They are not susceptible of ratification.

3) The right to set up the defense of inexistence or absolute nullity cannot be waived or renounced.

4) The action or defense for the declaration of their inexistence or absolute nullity is
imprescriptible.

5) The inexistence or absolute nullity of a contract cannot be invoked by a person whose interests
are not directly affected (p. 444, Comments and Jurisprudence on Obligations and Contracts,
Jurado, 1969 Ed.; italics supplied).

The nullity of these contracts is definite and cannot he cured by ratification. The nullity is
permanent, even if the cause thereof has ceased to exist, or even when the parties have complied
with the contract spontaneously (p. 595, Tolentino, supra).

In Eugenio vs. Perdido, et al., No. L-7083, May 19, 1955, 97 Phil. 41, this Court thus reiterated:

"Under the existing classification, such contract would be "inexisting' and the 'action or defense
for declaration' of such inexistence 'does not prescribe' (Art. 1410 New Civil Code). While it is
true that this is a new provision of the New Civil Code, it is nevertheless a principle recognized
since Tipton vs. Velasco, 6 Phil. 67 that 'mere lapse of time cannot give efficacy to contracts that
are null and void.'"

Consistently, this Court held that "where the sale of a homestead is null and void, the action to
recover the same does not prescribe because mere lapse of time cannot give efficacy to the
contracts that are null and void and inexistent" (Angeles, et al. vs. Court of Appeals, et al., No. L-
11024, January 31, 1958, 102 Phil. 1006).

In the much later case of Guiang vs. Kintanar (Nos. L-49634-36, July 25, 1981, 106 SCRA 49),
this Court enunciated thus:

"It is of no consequence, pursuant to the same article, that petitioners, the Guiang spouses.
executed on August 21, 1975, apparently in ratification of the impugned agreement, the deeds of
sale covering the two lots already referred to and that petitioners actually received to part or in
whole the money consideration stipulated therein, for according to the same Article 1409,
contracts contemplated therein, as the one We are dealing with, 'cannot be ratified nor the defense
of its illegality be waived.' Neither is it material, much less decisive, that petitioners had not
earlier judicially moved to have the same annulled or set aside. Under Article 1410 of the Civil
Code, '(t)he action or defense for declaration of the inexistence of a contract does not prescribe.'"

Evidently, therefore, the deeds of transfer executed in favor of Luis Tongoy were from the very
beginning absolutely simulated or fictitious, since the same were made merely for the purpose of
restructuring the mortgage over the subject properties and thus preventing the foreclosure by the
PNB.

Considering the law and jurisprudence on simulated or fictitious contracts as aforestated, the
within action for reconveyance instituted by herein respondents which is anchored on the said
simulated deeds of transfer cannot and should not be barred by prescription. No amount of time
could accord validity or efficacy to such fictitious transactions, the defect of which is permanent.
Cdpr

There is no implied trust that was generated by the simulated transfers; because being fictitious or
simulated, the transfers were null and void ab initio — from the very beginning — and thus vested
no rights whatsoever in favor of Luis Tongoy or his heirs. That which is inexistent cannot give life
to anything at all.

II

But even assuming arguendo that such an implied trust exists between Luis Tongoy as trustee and
the private respondents as cestui que trust, still the rights of private respondents to claim
reconveyance is not barred by prescription or laches.
Petitioners maintain that, even conceding that respondents have adequately proven an implied
trust in their favor, their rights have already prescribed, since actions to enforce an implied trust
created under the old Civil Code prescribes in ten years.

"Under Act No. 190, whose statute of limitation would apply if there were an implied trust as in
this case, the longest period of extinctive prescription was only ten years" (Salao vs. Salao, 20
SCRA 84; Diaz vs. Gorricho and Aguado, 103 Phil. 261, 226).

On the other hand, private respondents contend that prescription cannot operate against the cestui
que trust in favor of the trustee, and that actions against a trustee to recover trust property held by
him are imprescriptible (Manalang vs. Canlas, 50 OG 1980). They also cite other pre-war cases to
bolster this contention, among which are: Camacho vs. Municipality of Baliwag, 28 Phil. 46; Uy
vs. Cho Jan Ling, 19 Phil. 202 [pls- see pp. 258-259, Brief for Respondents, p. 398, rec.]. They
further allege that possession of a trustee is, in law, possession of the cestui que trust and,
therefore, it cannot be a good ground for title by prescription (Laguna vs. Levantino, 71 Phil. 566;
Cortez vs. Oliva, 33 Phil. 480, cited on p. 261, Brief for Respondents, supra).

The rule now obtaining in this jurisdiction is aptly discussed in the case of Bueno vs. Reyes (27
SCRA 1179, 1183), where the Court through then Mr. Justice Makalintal, held: LLjur

"While there are some decisions which hold that an action upon a trust is unprescriptible, without
distinguishing between express and implied trusts, the better rule, as laid down by this Court in
other decisions, is that prescription does supervene where the trust is merely an implied one. The
reason has been expressed by Mr. Justice J.B.L. Reyes in J.M. Tuazon and Co., Inc. vs.
Magdangal, 4 SCRA 84, 88, as follows:

'Under Section 40 of the Old Code of Civil Procedure, all actions for recovery of real property
prescribe in ten years, excepting only actions based on continuing or subsisting trusts that were
considered by section 38 as unprescriptible. As held in the case of Diaz vs. Gorricho, L-11229,
March 29, 1958, however, the continuing or subsisting trusts contemplated in Sec. 38 of the Code
of Civil Procedure referred only to express unrepudiated trusts, and did not include constructive
trusts (that are imposed by law) where no fiduciary relation exists and the trustee does not
recognize the trust at all.'"

This doctrine has been reiterated in the latter case of Escay vs. C.A. (61 SCRA 370, 387), where
WE held that implied or constructive trusts prescribe in ten years. "The prescriptibility of an
action for reconveyance based on implied or constructive trust, is now a settled question in this
jurisdiction. It prescribes in ten years" (Boñaga vs. Soler, et al., 2 SCRA 755; J.M. Tuazon and
Co., Inc. vs. Magdangal, 4 SCRA 88, special attention to footnotes).

Following such proposition that an action for reconveyance such as the instant case is subject to
prescription in ten years, both the trial court and respondent appellate court are correct in applying
the ten-year prescriptive period.

The question, however, is, from what time should such period be counted?

The facts of the case at bar reveal that the title to Hacienda Pulo was registered in the name of
Luis D. Tongoy with the issuance of TCT No. 20154 on November 8, 1935; that the title to the
adjacent Cuaycong property was transferred to Luis D. Tongoy with the issuance of TCT No.
21522 on June 22, 1936. The properties were mortgaged in the year 1936 by said Luis D. Tongoy
for P4,500.00 and P21,000.00; respectively, for a period of fifteen years; that the mortgage
obligations to the PNB were fully paid on April 17, 1956; that the release of mortgage was
recorded in the Registry of Deeds on May 5, 1958; and that the case for reconveyance was filed in
the trial court on June 2, 1966.

Considering that the implied trust resulted from the simulated sales which were made for the
purpose of enabling the transferee, Luis D. Tongoy, to save the properties from foreclosure for the
benefit of the co-owners, it would not do to apply the theory of constructive notice resulting from
the registration in the trustee's name. Hence, the ten-year prescriptive period should not be counted
from the date of registration in the name of the trustee, as contemplated in the earlier case of Juan
vs. Zuñiga (4 SCRA 1221). Rather, it should be counted from the date of recording of the release
of mortgage in the Registry of Deeds, on which date — May 5, 1958 — the cestui que trust were
charged with the knowledge of the settlement of the mortgage obligation, the attainment of the
purpose for which the trust was constituted. cdphil

Indeed, as respondent Court of Appeals had correctly held:

". . . as already indicated, the ten-year prescriptive period for bringing the action to enforce the
trust or for reconveyance of plaintiffs-appellants' shares should be tolled from the registration of
the release of the mortgage obligation, since only by that time could plaintiffs-appellants be
charged with constructive knowledge of the liquidation of the mortgage obligations, when it
became incumbent upon them to expect and demand the return of their shares, there being no
proof that plaintiffs-appellants otherwise learned of the payment of the obligation earlier. More
precisely then the prescriptive period should be reckoned from May 5, 1958 when the release of
the mortgage was recorded in the Registry of Deeds, which is to say that the present complaint
was still filed within the period on June 4, 1966" (p. 35 of questioned Decision, on p. 191, rec.).

Consequently, petitioner Francisco A. Tongoy as successor-in-interest and/or administrator of the

estate of the late Luis D. Tongoy, is under obligation to return the shares of his co-heirs and co-
owners in the subject properties and, until it is done, to render an accounting of the fruits thereof
from the time that the obligation to make a return arose, which in this case should be May 5, 1958,
the date of registration of the document of release of mortgage.

Hence, WE find no evidence of abuse of discretion on the part of respondent Court of Appeals
when it ordered such accounting from May 5, 1958, as well as the imposition of legal interest on
the fruits and income corresponding to the shares that should have been returned to the private
respondents, from the date of actual demand which has been determined to have been made on
January 26, 1966 by the demand letter (Exh. TT) of respondent Jesus T. Sonora to deceased Luis
D. Tongoy.

III

With respect to the award of attorney's fees in the sum of P20,000.00, the same appears to have
been properly made, considering that private respondents were unnecessarily compelled to litigate
(Flordelis vs. Mar, 114 SCRA 41; Sarsosa Vda. de Barsobin vs. Cuenco, 113 SCRA 547; Phil. Air
Lines vs. C.A., 106 SCRA 393). As pointed out in the questioned decision of the Court of Appeals:

"As for the claim for attorney's fees, the same appears to be well taken in the light of the findings
WE have made considering that prevailing plaintiffs-appellants were forced to litigate to enforce
their rights, and that equity under all the circumstances so dictate, said plaintiffs-appellants should
recover attorney's fees in a reasonable amount. We deem P20,000.00 adequate for the purpose (p.
36 of Decision, p. 151, rec.).

IV

The remaining assignment of error dwells on the question of whether or not respondents Amado,
Ricardo, Cresenciano and Norberto, all surnamed Tongoy, may be considered legitimated by
virtue of the marriage of their parents, Francisco Tongoy and Antonina Pabello, subsequent to
their births and shortly before Francisco died on September 15, 1926, Petitioners maintain that
since the said respondents were never acknowledged by their father, they could not have been
legitimated by the subsequent marriage of their parents, much less could they inherit from the
estate of their father, the predecessor-in-interest of Luis D. Tongoy, who is admittedly the half
brother of the said respondents.

Both the trial court and the respondent appellate court have found overwhelming evidence to
sustain the following conclusions: that Amado P. Tongoy. Ricardo P. Tongoy, Cresenciano P.
Tongoy and Norberto P. Tongoy were born illegitimate to Antonina Pabello on August 19, 1910
(Exh. A), August 12, 1914 (Exh. B), December 1, 1915 (Exhs. C and C-1) and August 4, 1922
(Exh. D), respectively; that Francisco Tongoy was their father; that said Francisco Tongoy had
before them two legitimate children by his first wife, namely, Luis D. Tongoy and Patricio D.
Tongoy; that Francisco Tongoy and Antonina Pabello were married sometime before his death on
September 15, 1926 (Exh. H); that shortly thereafter, Luis D. Tongoy and Patricio D. Tongoy
executed an Extra-Judicial Declaration of Heirs, leaving out their half-brothers Amado, Ricardo,
Cresenciano, and Norberto, who were then still minors; that respondents Amado, Ricardo,
Cresenciano and Norberto were known and accepted by the whole clan as children of Francisco;
that they had lived in Hacienda Pulo with their parents, but when they went to school, they stayed
in the old family home at Washington Street, Bacolod, together with their grandmother, Agatona
Tongoy, as well as with the Sonoras and with Luis and Patricio Tongoy; that everybody in Bacolod
knew them to be part of the Tongoy-Sonora clan; and that Luis D. Tongoy as administrator of
Hacienda Pulo, also spent for the education of Ricardo Tongoy until he became a lawyer; and that
even petitioners admit the fact that they were half-brothers of the late Luis D. Tongoy.

The bone of contention, however, hinges on the absence of an acknowledgment through any of the
modes recognized by the Old Civil Code (please see Articles 131 and 135 of the Old Civil Code),
such that legitimation could not have taken place in view of the provisions of Art. 121 of the same
Code which states that "children shall be considered legitimated by a subsequent marriage only
when they have been acknowledged by the parents before or after the celebration thereof."

Of course, the overwhelming evidence found by respondent Court of Appeals conclusively shows
that respondents Amado, Ricardo, Cresenciano and Norberto have been in continuous possession
of the statue of natural, or even legitimated, children. Still, it recognizes the fact that such
continuous possession of status is not, per se, a sufficient acknowledgment but only a ground to
compel recognition (Alabat vs. Alabat, 21 SCRA 1479; Pua vs. Chan, 21 SCRA 753; Larena vs.
Rubio, 43 Phil. 1017). Cdpr

Be that as it may, WE cannot but agree with the liberal view taken by respondent Court of Appeals
when it said:

". . . It does seem equally manifest, however, that defendants-appellants stand on a purely
technical point in the light of the overwhelming evidence that appellees were natural children of
Francisco Tongoy and Antonina Pabello, and were treated as legitimate children not only by their
parents but also by the entire clan. Indeed, it does not make much sense that appellees should be
deprived of their hereditary rights as undoubted nature children of their father, when the only
plausible reason that the latter could have had in mind when he married his second wife Antonina
Pebello just over a month before his death was to give legitimate status to their children. It is not
in keeping with the more liberal attitude taken by the New Civil Code towards illegitimate
children and the more compassionate trend of the New Society to insist on a very literal
application of the law in requiring the formalities of compulsory acknowledgment, when the only
result is to unjustly deprive children who are otherwise entitled to hereditary rights. From the very
nature of things, it is hardly to be expected of appellees, having been reared as legitimate children
of their parents and treated as such by everybody, to bring an action to compel their parents to
acknowledge them. In the hitherto cited case of Ramos vs. Ramos, supra, the Supreme Court
showed the way out of patent injustice and inequity that might result in some cases simply because
of the implacable insistence on the technical amenities for acknowledgment. Thus, it held —

'Unacknowledged natural children have no rights whatsoever (Buenaventura vs. Urbano, 5 Phil. 1;
Siguiong vs. Siguiong, 8 Phil. 5, 11; Infante vs. Figueras, 4 Phil. 738; Crisolo vs. Macadaeg, 94
Phil. 862). The fact that the plaintiffs, as natural children of Martin Ramos, received shares in his
estate implied that they were acknowledged. Obviously, defendants Agustin Ramos and Granada
Ramos and the late Jose Ramos and members of his family had treated them as his children.
Presumably, that fact was well-known in the community. Under the circumstances, Agustin Ramos
and Granada Ramos and the heirs of Jose Ramos, are estopped from attacking plaintiffs' status as
acknowledged natural children (See Arts. 283 [4] and 2666 [3], New Civil Code). [Ramos vs.
Ramos, supra].'
"With the same logic, estoppel should also operate in this case in favor of appellees, considering,
as already explained in detail, that they have always been treated as acknowledged and legitimated
children of the second marriage of Francisco Tongoy, not only by their presumed parents who
raised them as their children, but also by the entire Tongoy-Sonora clan, including Luis D. Tongoy
himself who had furnished sustenance to the clan in his capacity as administrator of Hacienda
Pulo and had in fact supported the law studies of appellee Ricardo P. Tongoy in Manila, the same
way he did with Jesus T. Sonora in his medical studies. As already pointed out, even defendants-
appellants have not questioned the fact that appellees are half-brothers of Luis D. Tongoy. As a
matter of fact, that are really children of Francisco Tongoy and Antonina Pabello, and only the
technicality that their acknowledgment as natural children has not been formalized in any of the
modes prescribed by law appears to stand in the way of granting them their hereditary rights. But
estoppel, as already indicated, precludes defendants-appellants from attacking appellees' status as
acknowledged natural or legitimated children of Francisco Tongoy. In addition to estoppel, this is
decidedly one instance when technicality should give way to conscience, equity and justice (cf.
Vda. de Sta. Ana vs. Rivera, L-22070, October 29, 1966, 18 SCRA 588)" [pp. 196-198, Vol. I,
rec.].

It is time that WE, too, take a liberal view in favor of natural children who, because they enjoy the
blessings and privileges of an acknowledged natural child and even of a legitimated child, found it
rather awkward, if not unnecessary, to institute an action for recognition against their natural
parents, who, without their asking, have been showering them with the same love, care and
material support as are accorded to legitimate children. The right to participate in their father's
inheritance should necessarily follow.

The contention that the rights of the said respondents-Tongoys have prescribed, is without merit.
The death of Francisco Tongoy having occurred on September 15, 1926, the provisions of the
Spanish Civil Code is applicable to this case, following the doctrine laid down in Villaluz vs.
Neme (7 SCRA 27) where this Court, through Mr. Justice Paredes, held:

"Considering that Maria Rocabo died (on February 17, 1937) during the regime of the Spanish
Civil Code. the distribution of her properties should be governed by said Code, wherein it is
provided that between co-heirs, the act to demand the partition of the inheritance does not
prescribe (Art. 1965 [Old Civil Code]; Baysa, et al. vs. Baysa, 53 Off. Gaz. 7272). Verily, the 3
living sisters were possessing the property as administratices of the other co-heirs, plaintiffs-
appellants herein, who have the right to vindicate their inheritance regardless of the lapse of time
(Sevilla vs. De los Angeles, L-7745, 51 Off. Gaz. 5590, and cases cited therein)."

Even following the more recent doctrine enunciated in Gerona vs. de Guzman (11 SCRA 153) that
"an action for reconveyance of real property based upon a constructive or implied trust, resulting
from fraud, may be barred by the statute of limitations" (Candelaria vs. Romero, L-12149, Sept.
30, 1960; Alzona vs. Capunita, L-10220, Feb. 28, 1962)", and that "the action therefor may be
filed within four years from the discovery of the fraud . . .", said period may not be applied to this
case in view of its peculiar circumstances. The registration of the properties in the name of Luis D.
Tongoy on November 8, 1935 cannot be considered as constructive notice to the whole world of
the fraud. llcd

It will be noted that the foreclosure on the original mortgage over Hacienda Pulo was instituted by
PNB as early as June 18, 1931, from which time the members of the Tongoy-Sonora clan had been
in constant conference to save the property. At that time all the respondents-Tongoys were still
minors (except Amado, who was already 23 years old then), so that there could be truth to the
allegation that their exclusion in the Declaration of Inheritance executed by Patricio and Luis
Tongoy on April 29, 1933 was made to facilitate matters - as part of the general plan arrived at
after the family conferences to transfer the administration of the property to the latter. The events
that followed were obviously in pursuance of such plan, thus:

March 13, 1934 — An Escritura de Venta (Exh. 2 or W) was executed in favor of Luis D. Tongoy
by Ana Tongoy, Teresa Tongoy, Mercedes Sonora, Trinidad Sonora, Juan Sonora and Patricio
Tongoy, transferring their rights and interests over Hacienda Pulo to the former.

October 23, 1935 — An Escritura de Venta (Exh. 3 or DD) was executed by Jesus Sonora,
likewise transferring his rights and interests over Hacienda Pulo to Luis D. Tongoy;

"November 5, 1935 — An Escritura de Venta (Exh. 5 or AA) was also executed by Jose Tongoy in
favor of Luis D. Tongoy for the same purpose; (Note: This was preceded by the execution on
October 14, 1935 of an Assignment of Rights [4 or Z] in favor of Luis D. Tongoy by the Pacific
Commercial Company as judgment lien-holder [subordinate of the PNB mortgage] of Jose Tongoy
on Hacienda Pulo.

"November 5, 1935 — Hacienda Pulo was placed in the name of Luis D. Tongoy married to Ma.
Rosario Araneta with the issuance of TCT 20154 (Exh. 20);

June 22, 1936 — An Escritura de Venta was executed by Basilisa Cuaycong over the Cuaycong
property in favor of Luis D. Tongoy, thereby resulting in the issuance of TCT No. 21522 in the
name of Luis D. Tongoy married to Ma. Rosario Araneta;

June 26, 1936 — Luis D. Tongoy executed a real estate mortgage over the Cuaycong property in
favor of the PNB to secure a loan of P4,500.00; and

June 29, 1936 — Luis D. Tongoy executed a real estate mortgage over Hacienda Pulo to secure a
loan of P21,000.00 payable for fifteen years.

When the mortgages were constituted. respondents Cresenciano Tongoy and Norberto Tongoy
were still minors, while respondent Amado Tongoy became of age on August 19, 1931, and
Ricardo Tongoy attained majority age on August 12, 1935. Still, considering that such transfer of
the properties in the name of Luis D. Tongoy was made in pursuance of the master plan to save
them from foreclosure, the said respondents were precluded from doing anything to assert their
rights. It was only upon failure of the herein petitioner, as administrator and/or successor-in-
interest of Luis D. Tongoy, to return the properties that the prescriptive period should begin to run.

As above demonstrated, the prescriptive period is ten years from the date of recording on May 5,
1958 of the release of mortgage in the Registry of Deeds.

WHEREFORE, THE JUDGMENT APPEALED FROM IS HEREBY AFFIRMED IN TOTO.

SO ORDERED.

Guerrero and Escolin, JJ., concur.

Aquino andAbad Santos, JJ., in the result.

Concepcion, Jr., and De Castro, JJ., took no part.

Footnotes

**During the pendency of the case below, the defendant Norberto P. Tongoy died and was
substituted by his widow Eva Mabugat Tongoy, all his children Madonna, Majesty and Francisco,
all surnamed Tongoy. Subsequently, plaintiff Juan T. Sonora also died and was substituted by his
widow Elisa Cuison Sonora and his children Clarabelle and Romulo, both surnamed Sonora.

2
||| (Tongoy v. Court of Appeals, G.R. No. L-45645, [June 28, 1983], 208 PHIL 95-124)

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2
112 PHIL 135-141

EN BANC
[G.R. No. L-15127. May 30, 1961.]

EMETERIO CUI, plaintiff-appellant, vs. ARELLANO UNIVERSITY, defendant-appellee.

G.A.S. Sipin, Jr. for plaintiff-appellant.

E. Voltaire Garcia, for defendant-appellee.

SYLLABUS

1. CONTRACTS; STUDENTS AND EDUCATIONAL INSTITUTIONS; SCHOLARSHIPS;

STIPULATION WHEREBY STUDENT CANNOT TRANSFER TO ANOTHER SCHOOL
WITHOUT REFUNDING SCHOLARSHIP CASH NULL AND VOID. — The stipulation in a
contract, between a student and the school, that the student's scholarship is good only if he
continues in the same school, and that he waives his right to transfer to another school without
refunding the equivalent of his scholarship in cash, is contrary to public policy and, hence, null
and void, because scholarships are awarded in recognition of merit and to help gifted students in
whom society has an established interest or a first lien, and not to keep outstanding students in
school to bolster its prestige and increase its business potential.

DECISION

CONCEPCION, J p:

Appeal by plaintiff Emeterio Cui from a decision of the Court of First Instance of Manila,
absolving defendant Arellano University from plaintiff's complaint, with costs against the plaintiff,
and dismissing defendant's counterclaim, for insufficiency of proof thereon.

In the language of the decision appealed from:

"The essential facts of this case are short and undisputed. As established by the agreement of facts
Exhibit X and by the respective oral and documentary evidence introduced by the parties, it
appears conclusive that plaintiff, before the school year 1948-1949 took up preparatory law course
in the defendant University. After finishing his preparatory law course plaintiff enrolled in the
College of Law of the defendant from the school year 1948-1949. Plaintiff finished his law studies
in the defendant university up to and including the first semester of the fourth year. During all the
school years in which plaintiff was studying law in defendant law college, Francisco R.
Capistrano, brother of the mother of plaintiff, was the dean of the College of Law and legal
counsel of the defendant university. Plaintiff enrolled for the last semester of his law studies in the
defendant university but failed to pay his tuition fees, because his uncle Dean Francisco R.
Capistrano having severed his connection with defendant and having accepted the deanship and
chancellorship of the College of Law of Abad Santos University, plaintiff left the defendant's law
college and enrolled for the last semester of his fourth year law in the college of law of the Abad
Santos University graduating from the college of law of the latter university. Plaintiff, during all
the time he was studying law in defendant university was awarded scholarship grants, for
scholastic merit, so that his semestral tuition fees were returned to him after the ends of semesters
and when his scholarship grants were awarded to him. The whole amount of tuition fees paid by
plaintiff to defendant and refunded to him by the latter from the first semester up to and including
the first semester of his last year in the college of law or the fourth year, is in total P1,033.87.
After graduating in law from Abad Santos University he applied to take the bar examination. To
secure permission to take the bar he needed the transcripts of his records in defendant Arellano
University. Plaintiff petitioned the latter to issue to him the needed transcripts. The defendant
refused until after he had paid back the P1,033.87 which defendant refunded to him as above
stated. As he could not take the bar examination without those transcripts, plaintiff paid to
defendant the said sum under protest. This is the sum which plaintiff seeks to recover from
defendant in this case.

"Before defendant awarded to plaintiff the scholarship grants as above stated, he was made to sign
the following contract, covenant and agreement:

'In consideration of the scholarship granted to me by the University, I hereby waive my right to
transfer to another school without having refunded to the University (defendant) the equivalent of
my scholarship cash.

(Sgd.) Emeterio Cui'."

It is admitted that, on August 16, 1949, the Director of Private Schools issued Memorandum No.
38, series of 1949, on the subject of "Scholarships", addressed to "All heads of private schools,
colleges and universities", reading:

"1. School catalogs and prospectuses submitted to this Bureau show that some schools offer full or
partial scholarships to deserving students — for excellence in scholarship or for leadership in
extracurricular activities. Such inducements to poor but gifted students should be encouraged. But
to stipulate the condition that such scholarships are good only if the students concerned continue
in the same school nullifies the principle of merit in the award of these scholarships.

"2. When students are given full or partial scholarships, it is understood that such scholarships are
merited and earned. The amount in tuition and other fees corresponding to these scholarships
should not be subsequently charged to the recipient students when they decide to quit school or to
transfer to another institution. Scholarships should not be offered merely to attract and keep
students in a school.

"3. Several complaints have actually been received from students who have enjoyed scholarships,
full or partial, to the effect that they could not transfer to other schools since their credentials
would not be released unless they would pay the fees corresponding to the period of the
scholarships. Where the Bureau believes that the right of the student to transfer is being denied on
this ground, it reserves the right to authorize such transfer."
that defendant herein received a copy of this memorandum; that plaintiff asked the Bureau of
Private Schools to pass upon the issue on his right to secure the transcript of his record in
defendant University, without being required to refund the sum of P1,033.87; that the Bureau of
Private Schools upheld the position taken by the plaintiff and so advised the defendant; and that,
this notwithstanding, the latter refused to issue said transcript of record, unless said refund were
made, and even recommended to said Bureau that it issue a written order directing the defendant
to release said transcript of record, "so that the case may be presented to the court for judicial
action". As above stated, plaintiff was, accordingly, constrained to pay, and did pay under protest,
said sum of P1,033.87, in order that he could take the bar examinations in 1953. Subsequently, he
brought this action for the recovery of said amount, aside from P2,000 as moral damages, P500 as
exemplary damages, P2,000 as attorney's fees, and P500 as expenses of litigation.

In its answer, defendant reiterated the stand it took vis-a-vis the Bureau of Private Schools,
namely, that the provisions of its contract with plaintiff are valid and binding, and that the
memorandum above-referred to is null and void. It, likewise, set up a counterclaim for P10,000.00
as damages, and P3,000 as attorney's fees.

The issue in this case is whether the above quoted provision of the contract between plaintiff and
the defendant whereby the former waived his right to transfer to another school without refunding
to the latter the equivalent of his scholarships in cash, is valid or not. The lower court resolved this
question in the affirmative, upon the ground that the aforementioned memorandum of the Director
of Private Schools is not a law; that the provisions thereof are advisory, not mandatory in nature;
and that, although the contractual provision "may be unethical, yet it was more unethical for
plaintiff to quit studying with the defendant without good reasons and simply because he wanted
to follow the example of his uncle". Moreover, defendant maintains in its brief that the
aforementioned memorandum of the Director of Private Schools is null and void because said
officer had no authority to issue it, and because it had been neither approved by the corresponding
department head nor published in the official gazette.

We do not deem it necessary or advisable to consider, as the lower court did, the question whether
plaintiff had sufficient reasons or not to transfer from defendant University to the Abad Santos
University. The nature of the issue before us, and its far reaching effects, transcend personal
equations and demand a determination of the case from a high impersonal plane. Neither do we
deem it essential to pass upon the validity of said Memorandum No. 38, for, regardless of the
same, we are of the opinion that the stipulation in question is contrary to public policy and hence,
null and void. The aforesaid memorandum merely incorporates a sound principle of public policy.
As the Director of Private Schools correctly pointed out in his letter, Exhibit B, to the defendant,

"There is one more point that merits refutation and that is whether or not the contract entered into
between Cui and Arellano University on September 10, 1951 was void as against public policy. In
the case of Zeigler vs. Illinois Trust and Savings Bank, 245 Ill. 180, 19 Ann. Case 127, the court
said: 'In determining a public policy of the state, courts are limited to a consideration of the
Constitution, the judicial decisions, the statutes, and the practice of government officers.' It might
take more than a government bureau or office to lay down or establish a public policy, as alleged
in your communication, but courts consider the practices of government officials as one of the
four factors in determining a public policy of the state. It has been consistently held in America
that under the principles relating to the doctrine of public policy, as applied to the law of contracts,
courts of justice will not recognize or uphold a transaction which in its object, operation, or
tendency, is calculated to be prejudicial to the public welfare, to sound morality, or to civic
honesty (Ritter vs. Mutual Life Ins. Co., 169 U. S. 139; Heding vs. Gallaghere, 64 L.R.A. 811;
Veazy vs. Allen, 173 N.Y. 359). If Arellano University understood clearly the real essence of
scholarships and the motives which prompted this office to issue Memorandum No. 38, s. 1949, it
should have not entered into a contract of waiver with Cui on September 10, 1951, which is a
direct violation of our Memorandum and an open challenge to the authority of the Director of
Private Schools because the contract was repugnant to sound morality and civic honesty. And
finally, in Gabriel vs. Monte de Piedad, Off. Gazette Supp. Dec. 6, 1941, p. 67 we read: 'In order
to declare a contract void as against public policy, a court must find that the contract as to
consideration or the thing to be done, contravenes some established interest of society, or is
inconsistent with sound policy and good morals, or tends clearly to undermine the security of
individual rights.' The policy enunciated in Memorandum No. 33, s. 1949 is sound policy.
Scholarships are awarded in recognition of merit not to keep outstanding students in school to
bolster its prestige. In the understanding of that university scholarships award is a business scheme
designed to increase the business potential of an educational institution. Thus conceived it is not
only inconsistent with sound policy but also good morals. But what is morals? Manresa has this
definition. It is good customs; those generally accepted principles of morality which have received
some kind of social and practical confirmation. The practice of awarding scholarships to attract
students and keep them in school is not good customs nor has it received some kind of social and
practical confirmation except in some private institutions as in Arellano University. The University
of the Philippines which implements Section 5 of Article XIV of the Constitution with reference to
the giving of free scholarships to gifted children, does not require scholars to reimburse the
corresponding value of the scholarships if they transfer to other schools. So also with the leading
colleges and universities of the United States after which our educational practices or policies are
patterned. In these institutions scholarships are granted not to attract and to keep brilliant students
in school for their propaganda value but to reward merit or help gifted students in whom society
has an established interest or a first lien." (Emphasis supplied.)

WHEREFORE, the decision appealed from is hereby reversed, and another one shall be entered
sentencing the defendant to pay to the plaintiff the sum of P1,033.87, with interest thereon at the
legal rate from September 1, 1954, date of the institution of this case, as well as the costs, and
dismissing defendant's counterclaim. It is so ordered.

Bengzon, C.J., Padilla, Labrador, Reyes, J.B.L., Barrera, Paredes, Dizon, De Leon and Natividad,
JJ., concur.

Bautista Angelo, J., reverses his vote.

2
||| (Cui v. Arellano University, G.R. No. L-15127, [May 30, 1961], 112 PHIL 135-141)

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175 PHIL 28-39

SECOND DIVISION

[G.R. No. L-27841. October 20, 1978.]

MARIA ENCARNACION CASTILLO, ELISEA GALVAN, and PATROCINIO GALVAN,

plaintiffs-appellants, vs. JOSEFA GALVAN, EMILIO SAMSON, and NATIVIDAD GALVAN,
defendants-appellees.

SYNOPSIS

Six years after the registration of a Deed of Absolute Sale of certain parcels of land in favor of
defendants by plaintiffs' predecessor in interest, plaintiffs filed an action for the annulment of the
deed on the grounds of fraud in securing the signatures of the vendors and want of consideration.
Before the trial, defendants, with leave of court, amended their answer so as to include the defense
of statute of limitations, and thereafter moved to dismiss the complaint. On the assumption that
plaintiffs' cause of action was fraud, which prescribed in four years after the registration of the
deed of sale with the Register of Deeds, the trial court dismissed the case. Plaintiffs claim that
defendants were estopped from pleading the statute of limitations by their omission to plead the
same in their original answer, and that the inclusion of such a defense substantially altered the
defense.

The Supreme Court held that defendants can amend their answer with leave of court after the case
has been set for hearing but before trial, and that the inclusion of the defense of prescription in the
amended answer is not a substantial alteration within the meaning of the Rules since it may be
soundly estimated as having been interposed to strengthen their previous defense of estoppel and it
can not have placed plaintiffs at a disadvantage. The High Tribunal, however, found that plaintiffs'
cause of action is for a judicial declaration of nullity of a contract of sale, which action is
imprescriptible.

Judgment reversed and the case remanded to the court of origin for further proceedings.

SYLLABUS

1. ANSWER; AMENDMENT AFTER THE CASE IS SET FOR HEARING BUT BEFORE
TRIAL; SECTIONS 2 AND 3, RULE 10, RULES OF COURT. — After a case is set for hearing,
substantial amendments may be made in a pleading only upon leave of court. But such leave may
be refused if it appears that the motion was made with intent to delay the action or that the cause
of action or defense is substantially altered.

2. ID.; ID.; ID.; INCLUSION OF DEFENSE OF PRESCRIPTION NOT A SUBSTANTIAL

ALTERATION. — The inclusion of the defense of prescription in an amended answer does not
constitute a substantial alteration within the meaning of the rule, if there are no allegations in the
amended answer which are wholly different from those stated in the original answer apart from
such inclusion, and the inclusion could not have placed the plaintiffs at a disadvantage.

3. ID.; ID.; DEFENDANT MAY SET FORTH AS MANY DEFENSES; SECTION 2, RULE 8,
RULES OF COURT. — Section 2, Rule 8, Rules of Court, provides that a party may set forth in
his pleading two or more statements or a claim or defense alternatively or hypothetically either in
one cause of action or defense or in separate causes of action or defenses. And a defendant may set
forth by his answer as many defenses and counterclaim as he may whatever be their nature
regardless of consistency, provided, that each is consisted with itself.

4. ACTION; DECLARATION OF NULLITY OF A CONTRACT; IMPRESCRIPTIBLE. —

Where an action seeks to declare void and inexistent a deed of sale upon the grounds that there
was fraud in securing the signatures of the vendors in the deed of sale, and that there was no
consideration given at the time of the transaction, the action is imprescriptible.

AQUINO, J., concurring:

1. ACTIONS; PRESCRIPTION. — An action to declare void or inexistent a fictitious deed of sale

on the ground that its consideration did not exist at the time of transaction is imprescriptible. (Arts.
1409 [3], and 1410, Civil Code)

2. ID.; VOID CONTRACTS; ACTION TO DECLARE NULLITY IS IMPRESCRIPTIBLE. — A

contract of sale is void and produces no effect whatsoever where the price which appears thereon
as paid, has in fact never been paid by the purchaser to the vendor, or where the signature of the
vendor has been secured fraudulently. Such a sale is nonexistent and cannot be considered
consummated. In such a case the compulsory heirs of the alleged vendor, upon the latter's death,
have the imprescriptible right to sue to declare the sale void because they have been deprived of
their legitimate in the estate of the deceased.
DECISION

CONCEPCION, JR., J p:

Appeal from the order of the Court of First Instance of Pangasinan dismissing the complaint filed
in Civil Case No. D-1227 and the order denying the motion for the reconsideration of said order.

The complaint, filed on August 1, 1961, is for the annulment of a document, denominated "DEED
OF ABSOLUTE SALE", executed on August 3, 1955, by and between Paulino Galvan,
professedly the predecessor-in-interest of herein plaintiffs, and defendants Josefa Galvan and
Natividad S. Galvan, and for damages and attorney's fees. The plaintiffs therein alleged that
Paulino Galvan, during his lifetime, was the registered owner of an undivided one-half (1/2)
interest over two parcels of land, known as Lot Nos. 4541 and 4542 of the Dagupan Cadastre and
covered by OCT Nos. 38131 and 39317, respectively, of the Register of Deeds of Dagupan City.
The other undivided half is owned by his two daughters by a first marriage, herein defendants
Josefa Galvan and Natividad Galvan. On these lots, which are contiguous, is built the family
home. On February 10, 1961, Paulino Galvan died and the plaintiffs, out of "delicadeza" waited
for the defendants to initiate the move for the settlement of his estate. But, after waiting for some
time and finding that none was forthcoming, the plaintiffs became apprehensive, so that they
began to go over the papers concerning the properties of the decedent. In the office of the Register
of Deeds of Dagupan City, they were surprised to find a deed of sale, signed by the late Paulino
Galvan and the plaintiff, Maria Encarnacion Castillo, whereby they had purportedly sold for
P500.00 the one-half undivided portion of Paulino Galvan over said lots in favor of defendants.
When apprised of the existence of a deed of sale, plaintiff Maria Encarnacion Castillo remembered
that way back in 1953, she and her husband Paulino Galvan were made to sign a certain document
by Josefa Galvan "upon the fraudulent misrepresentation that the said document was only for the
purpose of enabling them, the co-owners of the parcels of land in question, to have their separate
tax declarations for the respective portions owned by them so that they can pay their respective
real estate taxes separately, the said spouses not knowing that the said document is a deed of sale
for which no consideration was even paid." The plaintiffs further alleged that Paulino Galvan
could not have intended to sell his share and participation over the lots in question during his
lifetime as he had no other residential lot to live in and there is no necessity for him to sell the
same as he and his wife had sufficient income to sustain them. Besides, the undivided half share of
Paulino Galvan was worth around P22,500.00 so that he could not have sold it for only P500.00.
Wherefore, they prayed that the deed of sale be declared null and void; that the plaintiffs be
declared the owners of four-sixths (4/6) of the undivided half share pertaining to Paulino Galvan;
that the defendants be ordered to pay the amount of P1,500.00, as attorney's fees; and to pay the
costs of suit. 1

The defendants filed their answer with counterclaim on August 23, 1961 wherein they interposed
negative and affirmative defenses. As their affirmative defense, the defendants claim that "they are
the absolute and exclusive owners of whose parcels of land described in the complaint for having
acquired the portions belonging to their late father Paulino Galvan through legal and valid
conveyance and this fact is known to the plaintiffs long before the filing of the complaint." 2
Three years thereafter, or on August 24, 1964, but before the case was tried, the defendants filed
an amended answer with the corresponding motion to admit it, which amended answer contained
an allegation that "the action of plaintiffs is barred by the statute of limitations." 3

The plaintiffs filed objections to the defendants' motion to amend their answer. Plaintiffs' principal
objection was their contention that the defendants had waived the right to plead the statute of
limitations and were estopped from pleading it by reason of the fact that they had tried to do so
after the filing of their answer to the complaint. The plaintiffs further contend that the inclusion of
the defense of prescription substantially altered the defense. 4

Over plaintiffs' objections, the trial court permitted the defendants to amend their answer by
adding the defense of statute of limitations. 5

Then two more years later or on August 27, 1966, the defendants filed a motion to dismiss the
complaint upon the ground that the action is barred by the statute of limitations for the reason that
the present action for the annulment of the instrument of sale is based upon fraud which should be
brought within four (4) years from the time of the discovery of the same in accordance with
Article 1391 of the Civil Code; and fraud, as a ground for annulment, shall be deemed to be
discovered from the date of the registration of the alleged fraudulent documents; and considering
that the deed of sale in question was registered on August 4, 1955, while the action for its
annulment was commenced only on August 1, 1961, or after the lapse of more than four (4) years
from its registration with the Register of Deeds, the action for annulment had prescribed. 6

The trial court sustained the defendants' contention, and, consequently, dismissed the complaint
without costs, on September 22, 1966. 7 A motion for the reconsideration of this order having
been denied on November 2, 1966, 8 the plaintiffs interposed the present appeal. llcd

The appeal raises two issues for determination, the first of which is whether or not the trial court
erred in admitting the amended answer which incorporated a defense of prescription not
heretofore pleaded in the original answer.

The plaintiffs insist that the defendants, by their omission to plead the statute of limitations in their
original answer, waived and relinquished that plea for all time, and that it was therefore, error for
the trial court to permit the plea. On this contention, plaintiffs direct our attention to Sec. 2, Rule
9, of the Rules of Court which reads as follows:

"Section 2. Defenses and objections not pleaded deemed waived.— Defenses and objections not
pleaded either in a motion to dismiss or in the answer are deemed waived; except the failure to
state a cause of action which may be alleged in a later pleading, if one is permitted, or by motion
for judgment on the pleadings, or at the trial on the merits; but in the last instance, the motion shall
be disposed of as provided in Section 5 of Rule 10 in the light of any evidence which may have
been received. Whenever it appears that the court has no jurisdiction over the subject matter, it
shall dismiss the action."

The plaintiffs have apparently ignored the rule that a party may amend his pleading once as a
matter of course at any time before a responsive pleading is served, or, if the pleading is one to
which no responsive pleading is permitted and the action has not been placed upon the trial
calendar, he may so amend it at any time within ten (10) days after it is served. After the case is set
for hearing, substantial amendments may be made only upon leave of court. But such leave may
be refused if it appears to the court that the motion was made with intent to delay the action or that
the cause of action or defense is substantially altered. 9

Here, leave to file an amended answer was sought after the case had been set for trial but before
the trial thereof, 10 so that it is well within the ambit of the rule aforementioned. Indeed, if the
plaintiffs believed that the trial court gravely abused its discretion in allowing the amendments to
the answer, they should have filed the proper corrective action earlier.

The inclusion of the defense of statute of limitations is also claimed to have substantially altered
the defense, in that in the original answer, the defendants invoked only "specific denial" as their
defense, which means that they deny the truth of the allegations of fact constituting the fraud as
alleged in the complaint, whereas the defense of statute of limitations impliedly admits the truth of
facts alleged in the complaint as constituting the fraud, and, therefore, inadmissible. LibLex

The alteration pointed to by the plaintiffs is but nominal, and can not be considered a substantial
alteration in the defense within the meaning of the rule. Comparing the original answer with
amendments made thereto, there are no allegations in the amended answer wholly different from
those which were stated in the original answer, except for the addition of the allegation that "the
action of the plaintiffs is barred by the statute of limitations." As in their original answer, the
defendants have maintained that "they are absolute and exclusive owners of whole parcels of land
described in the complaint for having acquired the portions belonging to their late father Paulino
Galvan through legal and valid conveyance and this fact is known to plaintiffs long before the
filing of the complaint." Even the prayer is the same. It is a sound estimate that the defense of
prescription was interposed to strengthen their previous defense of estoppel or laches. The
plaintiffs could not have been placed at a disadvantage for as a matter of fact, the plaintiffs had
anticipated the defense of prescription in their complaint by pleading that they came to know of
the existence of the deed of sale only after they went over the papers concerning the land in the
office of the register of Deeds of Dagupan City in 1961, after the death of Paulino Galvan. 11

At any rate, under Section 2, Rule 8 of the Rules of Court, a party is allowed to set forth in his
pleading two or more statements or a claim or defense alternatively or hypothetically either in one
cause of action or defense or in separate causes of action or defenses. And a defendant may set
forth by his answer as many defenses and counterclaim as he may whatever be their nature
regardless of consistency, provided, that each is consisted with itself. 12

The other issue raised is whether or not the trial court improperly dismissed the complaint on the
ground of prescription. In its order dated September 22, 1966, dismissing the complaint, the trial
court said: cdphil

"The complaint, among others, prays for the annulment of document, which is a deed of sale dated
August 3, 1955, purporting conveyance of the two parcels described in the complaint in favor of
defendants Josefa Galvan and Natividad Galvan and Emilio Samson. Said document (Exh. 1 for
defendants) was registered on August 4, 1955 (Exhs. 1-A and 1-B). It is the contention of the
defendants that plaintiffs' action has prescribed as the same was not presented within four years
from the registration of the document.

"The court sustains defendants' contention. The basis of the annulment is alleged fraud, and the
action for the annulment of the document should be brought within 4 years from the discovery of
fraud (Mauricio vs. Villanueva, L-11072, September 24, 1959), and that such discovery of fraud is
deemed to have taken place when the instrument was filed and registered with the Register of
Deeds and new transfer certificate of title is issued in the name of the vendee for the registration of
the deed constitutes constructive notice to the whole world (Diaz vs. Gorricho, L-11229, March
29, 1958; Ignacio Gerona, et al. vs. Carmen de Guzman, et al., L-19060, May 29, 1964).

"In view of the foregoing, the court resolves to dismiss, as it hereby dismisses, the complaint
without costs." 13

The allegations of the complaint show, however, that the plaintiffs' action is to declare void and
inexistent the deed of sale executed by Paulino Galvan and Encarnacion Castillo on August 3,
1955 in favor of Josefa and Natividad Galvan, upon the grounds that (a) there is fraud in securing
the signatures of the vendors in said deed of sale; and (b) there was no consideration given at the
time of the transaction. In other words, the plaintiffs are seeking a judicial declaration that the
deed of sale in question is void ab initio, which action is imprescriptible. 14 The trial court erred,
therefore, in dismissing the complaint for the reasons stated.

WHEREFORE, the judgment appealed from is reversed and the order of September 22, 1966,
dismissing the complaint, is hereby set aside. Let this case be remanded to the court of origin for
further proceedings. Without costs.

SO ORDERED.

Fernando (Chairman), Antonio, Aquino, and Santos, JJ., concur.

Separate Opinions

BARREDO, J., concurring:

Because I am in favor of liberalizing the rule on waiver of defenses in order to promote substantial
justice: The main opinion as well as that of Justice Concepcion Jr., have that tendency. See
attached concurring opinion.
AQUINO, J., concurring:

I concur. The trial court committed a grievous error in dismissing the complaint on the ground of
prescription. It erroneously assumed that plaintiffs' cause of action is for the annulment of a deed
of sale on the ground of fraud.

In reality, plaintiffs' action is to declare void or inexistent the fictitious deed of sale of August 3,
1955 on the ground that its consideration did not exist at the time of the transaction. That action is
imprescriptible [Arts. 1409[3] and 1410, Civil Code).

Fraud was alleged in the complaint merely to show why the alleged vendor (the septuagenarian
father of the vendees) signed the deed of sale.

The plaintiffs categorically alleged in paragraph 9 of the complaint that no consideration was paid
for the sale. They prayed that the sale "be declared null and void" (pp. 4-6, Record on Appeal).
The thrust of the action is to secure a judicial declaration that the sale is void ab initio.

A contract of sale is void and produces no effect whatsoever where the price, which appears
thereon as paid, has in fact never been paid by the purchaser to the vendor (Arts. 1352 and 1353,
Civil Code; Ocejo, Perez and Co. vs. Flores and Bas, 40 Phil. 921; Mapalo vs. Mapalo, L-21489,
May 19, 1966, 17 SCRA 114, 122).

Such a sale is nonexistent and cannot be considered consummated (Borromeo vs. Borromeo, 98
Phil. 432; Cruzado vs. Bustos and Escaler, 34 Phil. 17; Garanciang vs. Garanciang, L-22361, May
21, 1969, 28 SCRA 229).

Plaintiffs' cause of action is supported by the following ultimate facts alleged in their complaint:

Paulino Galvan married twice. By his first marriage, he begot two daughters, defendants Josefa
Galvan and Natividad Galvan. His second wife was Encarnacion Castillo with whom he begot
three children named Elisea, Patrocinio and Florangel. LLpr

Paulino Galvan was the owner of a one half proindiviso share in two parcels of land located at
Burgos Street, Dagupan City with a total area of 1,116 square meters. The other one-half share is
owned by Natividad Galvan and Josefa Galvan, his two daughters of the first marriage.

Existing on those two lots in the conjugal house of the spouses Paulino Galvan and Encarnacion
Castillo. The house is made of wood with galvanized iron roofing.

On August 3, 1955, when Paulino Galvan, who did not have much education, was already
seventy-eight years old, his daughter, Josefa, asked him and his wife, Encarnacion, also old and
not highly educated, to sign a document which, according to Josefa, was necessary in order to
have separate tax declarations for their respective one-half portions of the two lots.
The Galvan spouses signed the document. Paulino Galvan died on February 10, 1961 at the age of
eighty-four years. He was survived by his second wife and his five above-named children.

It was only after the death of Paulino Galvan that his widow and their three children discovered
that the document, which Josefa had asked her father to sign, was a deed of sale, which is in
English, a language not known to the Galvan spouses.

Paulino Galvan could not have sold his one-half share in the two lots for a measly sum of P500,
the price stated in the deed of sale, because in 1961 the two lots were worth P45,000, at forty
pesos a square meter. Paulino Galvan's one-half share was worth at least P22,500.

The action to declare the sale void was filed on August 1, 1961 against Natividad Galvan and
Josefa Galvan. They pleaded as a defense that the sale was valid. Later, they amended their answer
by pleading prescription. The trial court dismissed the complaint on that ground.

The trial court overlooked the fact that the fraudulent manner by which the signatures of the
Galvan spouses in the deed were obtained strengthens plaintiffs' theory that the sale is void or
inexistent because it would appear that the said spouses did not consent at all to the sale.

In the Mapalo case, supra, the spouses, Miguel Mapalo and Candida Quiba, illiterate farmers,
decided to donate to Maximo Mapalo the brother of Miguel, the eastern half of their 1,635-square
meter residential land located in Manaoag, Pangasinan.

However, they were deceived into signing on October 15, 1936 a deed of absolute sale for the
entire land in favor of Miguel Mapalo. Their signatures were procured by fraud. They were made
to believe by Maximo and the notary public that the document was a deed of donation covering
the eastern half of their land.

Although the deed of sale stated a consideration of P500 (as in the instant case), the said spouses
did not receive anything of value for the land. The spouses remained in possession of the western
half of the land.

On March 15, 1938 Maximo Mapalo registered the sale and obtained a Torres title for the entire
land. On October 20, 1951 Maximo sold the entire land to Evaristo, Petronila, Pacifico and
Miguel, all surnamed Narciso. A transfer certificate of title was issued to the Narcisos for the
whole land. They took possession of the eastern half of the land.

On February 7, 1952 the Narcisos sued the Mapalo spouses. They prayed that they be declared the
owners of the entire land. They sought to recover possession of its western portion. The Mapalo
spouses filed a counterclaim, wherein they prayed that the western half of the land be conveyed to
them. They alleged that their signatures to the deed of sale were obtained through fraud. They
sued the Narcisos in 1957. They asked that the 1936 and 1951 deeds of sale be declared void as to
the western portion. LLjur

The Court of Appeals held that the sale was merely voidable on the ground of fraud; that the
action for annulment should have been brought within four years from the registration of the sale,
and that, as that period had already expired, the action had also prescribed.

This Court, reversing the decision of the Court of Appeals, held that the 1936 sale was not merely
voidable but was void or inexistent and that the "inexistence of a contract is permanent and
incurable and cannot be the subject of prescription". The holding of the trial court that the Mapalo
spouses should be issued a Torrens title for the western half of the land was affirmed.

The ruling in the Mapalo case is squarely applicable to this case.

In the instant case, the plaintiffs, the widow and a child of the first marriage, as compulsory heirs
of Paulino Galvan, the victim of the alleged fraud, have the right to sue to declare the sale void
because they were deprived of their legitimate in the estate of Paulino Galvan (Art. 221[4], Civil
Code; Reyes vs. Court of Appeals, 95 Phil. 952; Armentia vs. Patriarca, L-18210, December 29,
1966, 18 SCRA 1253, 1258-1260).

Footnotes
1.p. 2, Record on appeal.

2.p. 9, ibid.

3.p. 16, ibid.

4.p. 22, ibid.

5.p. 28, ibid.

6.p. 29, ibid.

7.p. 32, ibid.

8.p. 41, ibid.

9.Secs. 2 and 3, Rule 10, Rules of Court.

10.See p. 17, 33, Original Record.

11.See pars. 5, 6, 8, Complaint.

12.Castle Bros. Wolf & Sons vs. Go-Juno, 7 Phil. 144.

13.Record on Appeal, p. 33.

14.Art. 1410 in relation to Art. 1409(3) of the Civil Code.

||| (Castillo v. Galvan, G.R. No. L-27841, [October 20, 1978], 175 PHIL 28-39)

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JURISPRUDENCE Jurisprudences icon 120x120
18d623f0c132036f56cae92fb52b20c2af27b43f2646c7ffa940287812634a6c
490 PHIL 268-285

THIRD DIVISION

[G.R. No. 153201. January 26, 2005.]

JOSE MENCHAVEZ, JUAN MENCHAVEZ JR., SIMEON MENCHAVEZ, RODOLFO

MENCHAVEZ, CESAR MENCHAVEZ, REYNALDO, MENCHAVEZ, ALMA MENCHAVEZ,
ELMA MENCHAVEZ, CHARITO M. MAGA, FE M. POTOT, THELMA M. REROMA,
MYRNA M. YBAÑEZ, and SARAH M. VILLABER, petitioners, vs. FLORENTINO TEVES JR.,
respondent.

DECISION

PANGANIBAN, J p:

A void contract is deemed legally nonexistent. It produces no legal effect. As a general rule, courts
leave parties to such a contract as they are, because they are in pari delicto or equally at fault.
Neither party is entitled to legal protection.

The Case

Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, assailing the February
28, 2001 Decision 2 and the April 16, 2002 Resolution 3 of the Court of Appeals (CA) in CA-GR
CV No. 51144. The challenged Decision disposed as follows:
"WHEREFORE, the assailed decision is hereby MODIFIED, as follows:

"1. Ordering [petitioners] to jointly and severally pay the [respondent] the amount of P128,074.40
as actual damages, and P50,000.00 as liquidated damages;

"2. Dismissing the third party complaint against the third party defendants;

"3. Upholding the counterclaims of the third party defendants against the [petitioners. Petitioners]
are hereby required to pay [the] third party defendants the sum of P30,000.00 as moral damages
for the clearly unfounded suit;

"4. Requiring the [petitioners] to reimburse the third party defendants the sum of P10,000.00 in
the concept of attorney's fees and appearance fees of P300.00 per appearance;

"5. Requiring the [petitioners] to reimburse the third party defendants the sum of P10,000.00 as
exemplary damages pro bono publico and litigation expenses including costs, in the sum of
P5,000.00." 4

The assailed Resolution denied petitioners' Motion for Reconsideration. IEHScT

The Facts

On February 28, 1986, a "Contract of Lease" was executed by Jose S. Menchavez, Juan S.
Menchavez Sr., Juan S. Menchavez Jr., Rodolfo Menchavez, Simeon Menchavez, Reynaldo
Menchavez, Cesar Menchavez, Charito M. Maga, Fe M. Potot, Thelma R. Reroma, Myrna
Ybañez, Sonia S. Menchavez, Sarah Villaver, Alma S. Menchavez, and Elma S. Menchavez, as
lessors; and Florentino Teves Jr. as lessee. The pertinent portions of the Contract are herein
reproduced as follows:

"WHEREAS, the LESSORS are the absolute and lawful co-owners of that area covered by
FISHPOND APPLICATION No. VI-1076 of Juan Menchavez, Sr., filed on September 20, 1972,
at Fisheries Regional Office No. VII, Cebu City covering an area of 10.0 hectares more or less
located at Tabuelan, Cebu;

xxx xxx xxx

"NOW, THEREFORE, for and in consideration of the mutual covenant and stipulations
hereinafter set forth, the LESSORS and the LESSEE have agreed and hereby agree as follows:

"1. The TERM of this LEASE is FIVE (5) YEARS, from and after the execution of this Contract
of Lease, renewable at the OPTION of the LESSORS;

"2. The LESSEE agrees to pay the LESSORS at the residence of JUAN MENCHAVEZ SR., one
of the LESSORS herein, the sum of FORTY THOUSAND PESOS (P40,000.00) Philippine
Currency, annually . . . ;

"3. The LESSORS hereby warrant that the above-described parcel of land is fit and good for the
intended use as FISHPOND;

"4. The LESSORS hereby warrant and assure to maintain the LESSEE in the peaceful and
adequate enjoyment of the lease for the entire duration of the contract;

"5. The LESSORS hereby further warrant that the LESSEE can and shall enjoy the intended use of
the leased premises as FISHPOND FOR THE ENTIRE DURATION OF THE CONTRACT;

"6. The LESSORS hereby warrant that the above-premises is free from all liens and
encumbrances, and shall protect the LESSEE of his right of lease over the said premises from any
and all claims whatsoever;

"7. Any violation of the terms and conditions herein provided, more particularly the warranties
above-mentioned, the parties of this Contract responsible thereof shall pay liquidated damages in
the amount of not less than P50,000.00 to the offended party of this Contract; in case the
LESSORS violated therefor, they bound themselves jointly and severally liable to the LESSEE;"

xxx xxx xxx. 5

On June 2, 1988, Cebu RTC Sheriffs Gumersindo Gimenez and Arturo Cabigon demolished the
fishpond dikes constructed by respondent and delivered possession of the subject property to other
parties. 6 As a result, he filed a Complaint for damages with application for preliminary
attachment against petitioners. In his Complaint, he alleged that the lessors had violated their
Contract of Lease, specifically the peaceful and adequate enjoyment of the property for the entire
duration of the Contract. He claimed P157,184.40 as consequential damages for the demolition of
the fishpond dikes, P395,390.00 as unearned income, and an amount not less than P100,000.00 for
rentals paid. 7

Respondent further asserted that the lessors had withheld from him the findings of the trial court in
Civil Case No. 510-T, entitled "Eufracia Colongan and Paulino Pamplona v. Juan Menchavez Sr.
and Sevillana S. Menchavez." In that case involving the same property, subject of the lease, the
Menchavez spouses were ordered to remove the dikes illegally constructed and to pay damages
and attorney's fees. 8

Petitioners filed a Third Party Complaint against Benny and Elizabeth Allego, Albino Laput,
Adrinico Che and Charlemagne Arendain Jr., as agents of Eufracia Colongan and Paulino
Pamplona. The third-party defendants maintained that the Complaint filed against them was
unfounded. As agents of their elderly parents, they could not be sued in their personal capacity.
Thus, they asserted their own counterclaims. 9

After trial on the merits, the RTC ruled thus:

"[The court must resolve the issues one by one.] As to the question of whether the contract of lease
between Teves and the [petitioners] is valid, we must look into the present law on the matter of
fishponds. And this is Pres. Decree No. 704 which provides in Sec. 24:

'Lease of fishponds-Public lands available for fishpond development including those earmarked
for family-size fishponds and not yet leased prior to November 9, 1972 shall be leased only to
qualified persons, associations, cooperatives or corporations, subject to the following conditions.
DEcITS

'1. The lease shall be for a period of twenty five years (25), renewable for another twenty five
years;

'2. Fifty percent of the area leased shall be developed and be producing in commercial scale within
three years and the remaining portion shall be developed and be producing in commercial scale
within five years; both periods begin from the execution of the lease contract;

'3. All areas not fully developed within five years from the date of the execution of the lease
contract shall automatically revert to the public domain for disposition of the bureau; provided that
a lessee who failed to develop the area or any portion thereof shall not be permitted to reapply for
said area or any portion thereof or any public land under this decree; and/or any portion thereof or
any public land under this decree;

'4. No portion of the leased area shall be subleased.'

The Constitution, (Sec. 2 & 3, Art. XII of the 1987 Constitution) states:

'Sec. 2. — All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils,
all forces of potential energy, fisheries, forests, or timber, wild life, flora and fauna and other
natural resources are owned by the state.

'Sec. 3. — Lands of the public domain are classified into agricultural, forest or timber, mineral
lands and national parks. Agricultural lands of the public domain may be further classified by law
according to the uses to which they may be devoted. Alienable lands of the public domain shall be
limited to agricultural lands . . . .'

"As a consequence of these provisions, and the declared public policy of the State under the
Regalian Doctrine, the lease contract between Florentino Teves, Jr. and Juan Menchavez Sr. and
his family is a patent nullity. Being a patent nullity, [petitioners] could not give any rights to
Florentino Teves, Jr. under the principle: 'NEMO DAT QUOD NON HABET' — meaning ONE
CANNOT GIVE WHAT HE DOES NOT HAVE, considering that this property in litigation
belongs to the State and not to [petitioners]. Therefore, the first issue is resolved in the negative, as
the court declares the contract of lease as invalid and void ab-initio.
"On the issue of whether [respondent] and [petitioners] are guilty of mutual fraud, the court rules
that the [respondent] and [petitioners] are in pari-delicto. As a consequence of this, the court must
leave them where they are found. . . . .

xxx xxx xxx

“. . . . Why? Because the defendants ought to have known that they cannot lease what does not
belong to them for as a matter of fact, they themselves are still applying for a lease of the same
property under litigation from the government. DISTcH

"On the other hand, Florentino Teves, being fully aware that [petitioners were] not yet the
owner[s], had assumed the risks and under the principle of VOLENTI NON FIT INJURIA
NEQUES DOLUS — He who voluntarily assumes a risk, does not suffer damage[s] thereby. As a
consequence, when Teves leased the fishpond area from [petitioners] — who were mere holders or
possessors thereof, he took the risk that it may turn out later that his application for lease may not
be approved.

"Unfortunately however, even granting that the lease of [petitioners] and [their] application in
1972 were to be approved, still [they] could not sublease the same. In view therefore of these, the
parties must be left in the same situation in which the court finds them, under the principle IN
PARI DELICTO NON ORITOR ACTIO, meaning[:] Where both are at fault, no one can found a
claim.

"On the third issue of whether the third party defendants are liable for demolishing the dikes
pursuant to a writ of execution issued by the lower court[, t]his must be resolved in the negative,
that the third party defendants are not liable. First, because the third party defendants are mere
agents of Eufracia Colongan and Eufenio Pamplona, who are the ones who should be made liable
if at all, and considering that the demolition was pursuant to an order of the court to restore the
prevailing party in that Civil Case 510-T, entitled: Eufracia Colongan v. Menchavez.

"After the court has ruled that the contract of lease is null and void ab-initio, there is no right of
the [respondent] to protect and therefore[,] there is no basis for questioning the Sheriff's authority
to demolish the dikes in order to restore the prevailing party, under the principle VIDETUR
NEMO QUISQUAM ID CAPERE QUOD EI NECESSE EST ALII RESTITUERE — He will not
be considered as using force who exercise his rights and proceeds by the force of law.

"WHEREFORE, in view of all foregoing [evidence] and considerations, this court hereby renders
judgment as follows:

"1. Dismissing the . . . complaint by the [respondent] against the [petitioners];

"2. Dismissing the third party complaint against the third party defendants;
"3. Upholding the counterclaims of the third party defendants against the [petitioners. The
petitioners] are hereby required to pay third party defendants the sum of P30,000.00 as moral
damages for this clearly unfounded suit;

"4. Requiring the [petitioners] to reimburse the third party defendants the sum of P10,000.00 in
the concept of attorney's fees and appearance fees of P300.00 per appearance;

"5. Requiring the [petitioners] to pay to the third party defendants the sum of P10,000.00 as
exemplary damages probono publico and litigation expenses including costs, in the sum of
P5,000.00." 10 (Underscoring in the original)

Respondent elevated the case to the Court of Appeals, where it was docketed as CA-GR CV No.
51144. aIcHSC

Ruling of the Court of Appeals

The CA disagreed with the RTC's finding that petitioners and respondent were in pari delicto. It
contended that while there was negligence on the part of respondent for failing to verify the
ownership of the subject property, there was no evidence that he had knowledge of petitioners'
lack of ownership. 11 It held as follows:

". . . . Contrary to the findings of the lower court, it was not duly proven and established that Teves
had actual knowledge of the fact that [petitioners] merely usurped the property they leased to him.
What Teves admitted was that he did not ask for any additional document other than those shown
to him, one of which was the fishpond application. In fact, [Teves] consistently claimed that he did
not bother to ask the latter for their title to the property because he relied on their representation
that they are the lawful owners of the fishpond they are holding for lease. (TSN, July 11, 1991, pp.
8-11)" 12

The CA ruled that respondent could recover actual damages in the amount of P128,074.40. Citing
Article 1356 13 of the Civil Code, it further awarded liquidated damages in the amount of
P50,000, notwithstanding the nullity of the Contract. 14

Hence, this Petition. 15

The Issues

Petitioners raise the following issues for our consideration:

"1. The Court of Appeals disregarded the evidence, the law and jurisprudence when it modified
the trial court's decision when it ruled in effect that the trial court erred in holding that the
respondent and petitioners are in pari delicto, and the courts must leave them where they are
found;
"2. The Court of Appeals disregarded the evidence, the law and jurisprudence in modifying the
decision of the trial court and ruled in effect that the Regional Trial Court erred in dismissing the
respondent's Complaint." 16

The Court's Ruling

The Petition has merit.

Main Issue:
Were the Parties in Pari Delicto?

The Court shall discuss the two issues simultaneously.

In Pari Delicto Rule

on Void Contracts

The parties do not dispute the finding of the trial and the appellate courts that the Contract of
Lease was void. 17 Indeed, the RTC correctly held that it was the State, not petitioners, that owned
the fishpond. The 1987 Constitution specifically declares that all lands of the public domain,
waters, fisheriesand other natural resources belong to the State. 18 Included here are fishponds,
which may not be alienated but only leased. 19 Possession thereof, no matter how long, cannot
ripen into ownership. 20

Being merely applicants for the lease of the fishponds, petitioners had no transferable right over
them. And even if the State were to grant their application, the law expressly disallowed sublease
of the fishponds to respondent. 21 Void are all contracts in which the cause, object or purpose is
contrary to law, public order or public policy. 22

A void contract is equivalent to nothing; it produces no civil effect. 23 It does not create, modify
or extinguish a juridical relation. 24 Parties to a void agreement cannot expect the aid of the law;
the courts leave them as they are, because they are deemed in pari delicto or "in equal fault." 25 To
this rule, however, there are exceptions that permit the return of that which may have been given
under a void contract. 26 One of the exceptions is found in Article 1412 of the Civil Code, which
states:

"Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a
criminal offense, the following rules shall be observed:

"(1) When the fault is on the part of both contracting parties, neither may recover what he has
given by virtue of the contract, or demand the performance of the other's undertaking;

"(2) When only one of the contracting parties is at fault, he cannot recover what he has given by
reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is
not at fault, may demand the return of what he has given without any obligation to comply with
his promise." EADSIa

On this premise, respondent contends that he can recover from petitioners, because he is an
innocent party to the Contract of Lease. 27 Petitioners allegedly induced him to enter into it
through serious misrepresentation. 28

Finding of In Pari Delicto:

A Question of Fact

The issue of whether respondent was at fault or whether the parties were in pari delicto is a
question of fact not normally taken up in a petition for review on certiorari under Rule 45 of the
Rules of Court. 29 The present case, however, falls under two recognized exceptions to this rule.
30 This Court is compelled to review the facts, since the CA's factual findings are (1) contrary to
those of the trial court; 31 and (2) premised on an absence of evidence, a presumption that is
contradicted by the evidence on record. 32

Unquestionably, petitioners leased out a property that did not belong to them, one that they had no
authority to sublease. The trial court correctly observed that petitioners still had a pending lease
application with the State at the time they entered into the Contract with respondent. 33

Respondent, on the other hand, claims that petitioners misled him into executing the Contract. 34
He insists that he relied on their assertions regarding their ownership of the property. His own
evidence, however, rebuts his contention that he did not know that they lacked ownership. At the
very least, he had notice of their doubtful ownership of the fishpond.

Respondent himself admitted that he was aware that the petitioners' lease application for the
fishpond had not yet been approved. 35 Thus, he knowingly entered into the Contract with the risk
that the application might be disapproved. Noteworthy is the fact that the existence of a fishpond
lease application necessarily contradicts a claim of ownership. That respondent did not know of
petitioners' lack of ownership is therefore incredible.

The evidence of respondent himself shows that he negotiated the lease of the fishpond with both
Juan Menchavez Sr. and Juan Menchavez Jr. in the office of his lawyer, Atty. Jorge Esparagoza. 36
His counsel's presence during the negotiations, prior to the parties' meeting of minds, further
debunks his claim of lack of knowledge. Lawyers are expected to know that fishponds belong to
the State and are inalienable. It was reasonably expected of the counsel herein to advise his client
regarding the matter of ownership.

Indeed, the evidence presented by respondent demonstrates the contradictory claims of petitioners
regarding their alleged ownership of the fishpond. On the one hand, they claimed ownership and,
on the other, they assured him that their fishpond lease application would be approved. 37 This
circumstance should have been sufficient to place him on notice. It should have compelled him to
determine their right over the fishpond, including their right to lease it.
The Contract itself stated that the area was still covered by a fishpond application. 38 Nonetheless,
although petitioners declared in the Contract that they co-owned the property, their erroneous
declaration should not be used against them. A cursory examination of the Contract suggests that it
was drafted to favor the lessee. It can readily be presumed that it was he or his counsel who
prepared it — a matter supported by petitioners' evidence. 39 The ambiguity should therefore be
resolved against him, being the one who primarily caused it. 40

The CA erred in finding that petitioners had failed to prove actual knowledge of respondent of the
ownership status of the property that had been leased to him. On the contrary, as the party alleging
the fact, it was he who had the burden of proving — through a preponderance of evidence 41 —
that they misled him regarding the ownership of the fishpond. His evidence fails to support this
contention. Instead, it reveals his fault in entering into a void Contract. As both parties are equally
at fault, neither may recover against the other. 42

Liquidated Damages
Not Proper

The CA erred in awarding liquidated damages, notwithstanding its finding that the Contract of
Lease was void. Even if it was assumed that respondent was entitled to reimbursement as provided
under paragraph 1 of Article 1412 of the Civil Code, the award of liquidated damages was
contrary to established legal principles. HIcTDE

Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of a
breach thereof. 43 Liquidated damages are identical to penalty insofar as legal results are
concerned. 44 Intended to ensure the performance of the principal obligation, such damages are
accessory and subsidiary obligations. 45 In the present case, it was stipulated that the party
responsible for the violation of the terms, conditions and warranties of the Contract would pay not
less than P50,000 as liquidated damages. Since the principal obligation was void, there was no
contract that could have been breached by petitioners; thus, the stipulation on liquidated damages
was inexistent. The nullity of the principal obligation carried with it the nullity of the accessory
obligation of liquidated damages. 46

As explained earlier, the applicable law in the present factual milieu is Article 1412 of the Civil
Code. This law merely allows innocent parties to recover what they have given without any
obligation to comply with their prestation. No damages may be recovered on the basis of a void
contract; being nonexistent, the agreement produces no juridical tie between the parties involved.
Since there is no contract, the injured party may only recover through other sources of obligations
such as a law or a quasi-contract. 47 A party recovering through these other sources of obligations
may not claim liquidated damages, which is an obligation arising from a contract.

WHEREFORE, the Petition is GRANTED and the assailed Decision and Resolution SET ASIDE.
The Decision of the trial court is hereby REINSTATED.

No pronouncement as to costs. SATDEI

SO ORDERED.

Sandoval-Gutierrez, Corona, Carpio-Morales and Garcia, JJ., concur.

Footnotes
1.Rollo, pp. 6-14.

2.Id., pp. 45-52. Tenth Division. Penned by Justice Eloy R. Bello Jr., with the concurrence of
Justices Eugenio S. Labitoria (Division chairman) and Perlita J. Tria Tirona (member).

3.Id., p. 53.

4.Assailed Decision, p. 8; rollo, p. 51.

5.Contract of Lease (rollo, pp. 15-17); Assailed Decision, p. 2 (rollo, p. 45-A).

6.Assailed Decision, p. 2; rollo, p. 45-A.

7.Ibid.

8.Ibid.

9.Id., pp. 3 & 46.

10.RTC Decision, pp. 6-9; rollo, pp. 23-26.

11.Assailed Decision, p. 7; rollo, p. 50.

12.Ibid.

13."Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into,
provided all the essential requisites for their validity are present. However, when the law requires
that a contract be in some form in order that it may be valid or enforceable, or that a contract be
proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of
the parties stated in the following article cannot be exercised."

14.Assailed Decision, p. 8; rollo, p. 51.

15.The case was deemed submitted for decision on March 1, 2004, upon this Court's receipt of
respondent's Memorandum, signed by Atty. Jorge L. Esparagoza. Petitioners' Memorandum,
signed by Atty. Recto A. de Dios, was received by this Court on March 2, 2004.

16.Petitioners' Memorandum, p. 5; rollo, p. 144.

17.See Petitioners' Memorandum, p. 7 (rollo, p. 146); respondent's Brief filed with the CA, p. 7
(rollo, p. 33).

18.§2, Article XII of the 1987 Constitution.

19.The law in force at the time the Contract was executed was PD 704, "The Fisheries Decree of
1975," approved on May 16, 1975. Under Sec. 23 of this decree, public lands suitable for fishpond
purposes were not to be disposed of by sale.

On this matter, the applicable law now is RA 8550, "The Philippine Fisheries Code of 1998,"
approved on February 25, 1998. Its pertinent provision reads:

"Section 45. Disposition of Public Lands for Fishery Purposes. — Public lands such as tidal
swamps, mangroves, marshes, foreshore lands and ponds suitable for fishery operations shall not
be disposed or alienated. Upon effectivity of this Code, [Fishpond Lease Agreements or] FLA may
be issued for public lands that may be declared available for fishpond development primarily to
qualified fisherfolk cooperatives/associations: Provided, however, That upon the expiration of
existing FLAs the current lessees shall be given priority and be entitled to an extension of twenty-
five (25) years in the utilization of their respective leased areas. Thereafter, such FLAs shall be
granted to any Filipino citizen with preference, primarily to qualified fisherfolk
cooperatives/associations as well as small and medium enterprises as defined under Republic Act
No. 8289: Provided, further, That the Department shall declare as reservation, portions of
available public lands certified as suitable for fishpond purposes for fish sanctuary, conservation,
and ecological purposes: Provided, finally, That two (2) years after the approval of this Act, no
fish pens or fish cages or fish traps shall be allowed in lakes."

20.See Republic of the Philippines v. Court of Appeals, 374 Phil. 209, 219, September 30, 1999.

21.In PD 704, the prohibition on subleasing a fishpond was retained in RA 8550, from which we
quote:

"Section 46. Lease of Fishponds. — Fishpond leased to qualified persons and fisherfolk
organizations/cooperatives shall be subject to the following conditions:

"a. Areas leased for fishpond purposes shall be no more than 50 hectares for individuals and 250
hectares for corporations or fisherfolk organizations;

"b. The lease shall be for a period of twenty-five (25) years and renewable for another twenty-
five (25) years: Provided, That in case of the death of the lessee, his spouse and/or children, as his
heirs, shall have preemptive rights to the unexpired term of his Fishpond Lease Agreement subject
to the same terms and conditions provided herein provided that the said heirs are qualified;

"c. Lease rates for fishpond areas shall be determined by the Department: Provided, That all fees
collected shall be remitted to the National Fisheries Research and Development Institute and other
qualified research institutions to be used for aquaculture research development;

"d. The area leased shall be developed and producing on a commercial scale within three (3)
years from the approval of the lease contract: Provided, however, That all areas not fully
producing within five (5) years from the date of approval of the lease contract shall automatically
revert to the public domain for reforestation;

"e. The fishpond shall not be subleased, in whole or in part, and failure to comply with this
provision shall mean cancellation of FLA;

"f. The transfer or assignment of rights to FLA shall be allowed only upon prior written approval
of the Department;

"g. The lessee shall undertake reforestation for river banks, bays, streams, and seashore fronting
the dike of his fishpond subject to the rules and regulations to be promulgated thereon; and

"h. The lessee shall provide facilities that will minimize environmental pollution, i.e., settling
ponds, reservoirs, etc: Provided, That failure to comply with this provision shall mean cancellation
of FLA." (emphasis supplied)

22.Art. 1409, Civil Code.

23.Tolentino, Civil Code of the Philippines (1991), Vol. IV, p. 629; Tongoy v. Court of Appeals,
208 Phil. 95, 113, June 28, 1983.

24.Id., p. 632; Tongoy v. Court of Appeals, supra.

25.Sodhi, Latin Words and Phrases for Lawyers (1980), p. 115.

In pari delicto is "a universal doctrine which holds that no action arises, in equity or at law, from
an illegal contract; no suit can be maintained for its specific performance, or to recover the
property agreed to be sold or delivered, or the money agreed to be paid, or damages for its
violation; and where the parties are in pari delicto, no affirmative relief of any kind will be given
to one against the other." Moreno, Philippine Law Dictionary (1988), p. 451 (citing Rellosa v.
Gaw, 93 Phil. 827, 831, September 29, 1953).

26.Justice Vitug cites some of these exceptions, under which recovery may be made by any of the
following
 "(a) The innocent party (Arts. 1411-1412, Civil Code);

"(b) The debtor who pays usurious interest (Art. 1413, Civil Code);

"(c) The party repudiating the void contract before the illegal purpose is accomplished or before
damage is caused to a third person and if public interest is subserved by allowing recovery (Art.
1414, Civil Code);

"(d) The incapacitated party if the interest of justice so demands (Art. 1515, Civil Code);

"(e) The party for whose protection the prohibition by law is intended if the agreement is not
illegal per se but merely prohibited and if public policy would be enhanced by permitting recovery
(Art. 1416, Civil Code); and

"(f) The party for whose benefit the law has been intended such as in price ceiling laws (Art.
1417, Civil Code) and labor laws (Arts. 1418-1419, Civil Code)." Vitug, Civil Law Annotated,
Vol. III (2003), pp. 159-160.

27.Appellant's Brief filed by herein respondent with the CA, p. 7; rollo, p. 33.

28.Ibid.

29.§1, Rule 45, Rules of Court.

30.Mighty Corporation v. E&J Gallo Winery, GR No. 154342, July 14, 2004; CIR v. Embroidery
and Garments Industries (Phil.), Inc., 364 Phil. 541, 546, March 22, 1999; Asia Brewery, Inc. v.
Court of Appeals, 224 SCRA 437, 443, July 5, 1993.

31.Yobido v. Court of Appeals, 346 Phil. 1, 9, October 17, 1997; Co v. Court of Appeals, 317 Phil.
230, 238, August 11, 1995.

32.Salazar v. Gutierrez, 144 Phil. 233, 239, May 29, 1970.

33.RTC Decision, p. 7; rollo, p. 24.

34.Respondent's Memorandum, p. 11; rollo, p. 132.

35.RTC Decision, p. 3; rollo, p. 20.

36.Id., pp. 2 & 19.

37.Id., pp. 3 & 20.

38.Whereas clause, Contract of Lease, p. 1; rollo, p. 15.

39.Juan Menchavez Jr. gave his testimony — as part of petitioners' defense — that it was
Florentino Teves who had brought the Contract to him and his father, Juan Menchavez Sr., for
signature. RTC Decision, p. 4; rollo, p. 21.

40.Art. 1377 of the Civil Code states that "[t]he interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity."

See Padilla v. Sps. Paredes, 385 Phil. 128, 139, March 17, 2000; Garcia v. Court of Appeals, 327
Phil. 1097, 1111, July 5, 1996; Villamil v. Court of Appeals, 208 SCRA 643, 650, May 8, 1992; De
Borja v. Court of Agrarian Relations, 79 SCRA 557, 565, October 25, 1977.

41.The burden of proof in civil cases is the preponderance of evidence or the superior weight of
evidence for the issues involved. §1, Rule 133, Rules of Court.

42.Art. 1412 of the Civil Code.

43.Art. 2226 of the Civil Code.

44.Tolentino, Civil Code of the Philippines, Vol. V (1992), p. 662.

45.Tolentino, Civil Code of the Philippines, Vol. IV (1991), p. 264.

46.Ibid. Under Article 1230 of the Civil Code, the nullity of the principal obligation carries with it
that of the penal clause. See also SSS v. Moonwalk Development and Housing Corporation, 221
SCRA 119, April 7, 1993.

47.Art. 1157 of the Civil Code states that obligations arise from law, contracts, quasi-contracts,
delicts and quasi-delicts.

||| (Menchavez v. Teves, Jr., G.R. No. 153201, [January 26, 2005], 490 PHIL 268-285)

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465 PHIL 632-640

THIRD DIVISION

[G.R. No. 145031. January 22, 2004.]

SPS. RUFINO ANGEL and EMERITA ANGEL, petitioners, vs. SIMPLICIO ALEDO and
FELIXBERTO MODALES, respondents.

DECISION

CARPIO MORALES, J p:

The facts material to the decision of the present petition for review on certiorari of the decision of
the Court of Appeals in CA-G.R. CV No. 44679 are as follows:

In November 1984, the spouses Rufino and Emerita Angel (spouses Angel or the Angels), herein
petitioners, engaged the services of respondent Felixberto Modales (Modales) to construct a two-
storey residential building at GSIS La Mesa Homesite in Novaliches, Quezon City.

In their November 22, 1984 contract denominated "Construction Agreement," 1 since Modales
was at the time an engineer under the employ of the Department of Public Works and Highways,
the parties made it appear that the contractor was Modales' father-in-law, his herein co-respondent
Simplicio Aledo (Aledo). The said agreement was for the construction of the building up to its
"rough finish" stage.

After the completion of the building in its "rough finish" stage, 2 another "Construction
Agreement" dated February 11, 1985 3 was forged by the spouses Angel and Aledo for effecting
the "finishing touches" of the building.

Completion of the "finishing touches" was certified 4 to by Mrs. Angel on April 31, 1985.

On September 27, 1988, Aledo filed before the Quezon City Regional Trial Court (RTC) a
Complaint 5 for collection of sum of money against the spouses Angel, alleging that despite the
completion of the construction of their building and their acceptance thereof, they failed to pay,
demands notwithstanding, the amount of P22,850.00 representing the balance of "the
consideration of the contract" and P6,713.00 representing the cost of materials supplied by him.

In their Answer, 6 the spouses Angel claimed that Aledo has no cause of action as he is only a
dummy of his son-in-law Modales who was "the actual contractor" with whom they contracted for
the construction of their residential building; and that, in any event, there were defects in the
construction and some of the materials "deposited" by Modales in the construction site were not
used. By way of counterclaim, the Angels alleged that as a result of the filing of the unfounded
complaint, they were forced to retain the services of counsel with whom they agreed to pay
P10,000.00 as attorney's fees and they stood to incur P5,000.00 as litigation expenses.

In July 1989, the spouses Angel filed a Third Party Complaint 7 against Modales, alleging that he
failed to comply with his obligation under the "Construction Agreements" as, among other things,
the building had a lot of defects, to correct or remedy which would cost them the amount of
Eighty Five Thousand (P85,000.00) Pesos, hence, Modales should be held liable for moral
damages and attorney's fees.

Modales in his Answer to the Third Party Complaint 8 alleged that the Angels have no cause of
action against him as he had nothing to do with the contracts; and that "[he] (sic) never acted as a
'dummy'" and, in any event, the Angels never complained of any defect in the construction, hence,
they are in estoppel and are guilty of laches. AHcDEI

During the pre-trial of the case, only the defendant-third party plaintiff spouses Angel showed up.
The plaintiff Aledo did not show up, albeit their counsel had priorly filed a motion to withdraw as
counsel in view of his appointment as Special Prosecutor and to postpone the pre-trial to afford his
client ample time to seek the services of a new counsel, which motion was not, however, passed
upon by the trial court, Branch 97 of the Quezon City RTC. Neither did third party defendant
Modales who, by his claim, was not duly notified thereof as, indeed, the Order of January 31,
1991 9 shows that only the plaintiff Aledo and the defendants-third party plaintiffs spouses Angel
and their respective counsels were furnished copies thereof.

On motion of the Angels, the trial court declared the plaintiff Aledo non-suited and accordingly
dismissed his complaint by Order made in open court on March 1, 1991. 10 On a subsequent
motion of the Angels, they prayed that third party defendant Modales be declared as in default and
that the dismissal Order of March 1, 1991 should apply only to the original complaint.

The plaintiff Aledo later filed a Motion for Reconsideration of the March 1, 1991 Order of the trial
court.

By Order of April 16, 1991, 11 the trial court clarified its Order of March 1, 1991, stating that the
latter order "shall be for the dismissal of the original complaint but reserving to the defendant[s]
[-] third party plaintiffs the right to prove, their counterclaim and third party complaint against the
plaintiff and third party defendant, respectively." (Emphasis and underscoring supplied)

The defendants-third party plaintiffs spouses Angel were thus allowed to present before the branch
clerk of court evidence ex-parte consisting of the testimony of an engineer (whom the Angels
claimed to have hired regarding the alleged defects in the construction) and documentary evidence
including the "Construction Agreements."

The trial court, by Decision of March 30, 1993, 12 rendered judgment in favor of the defendants-
third party plaintiffs Angels, the dispositive portion of which judgment reads:
WHEREFORE, premises considered, judgment is hereby rendered ordering plaintiff to pay
defendants/third-party plaintiffs P10,000.00 for attorney's fees and P5,000.00 for litigation
expenses and cost of suit and third-party defendant to pay third-party plaintiffs the sum of
P85,000.00 as actual damages and P50,000.00 by way of moral damages. (Emphasis and
underscoring supplied)

Aledo and Modales appealed to the Court of Appeals. Aledo's appeal was dismissed, however, for
failure to file Appellant's Brief within the reglementary period. He filed a motion for
reconsideration of the resolution of dismissal but as it was belatedly filed, it was denied.

As for Modales, since he failed to file Appellant's Brief, the Court of Appeals likewise dismissed
his appeal by Resolution of February 6, 1996. 13 He received on February 21, 1996 a copy of the
said Resolution of the Court of Appeals dismissing his appeal, and filed by mail on March 11,
1996 14 a "Verified Motion for Reconsideration [thereof] and To Admit [his] Appellant's Brief"
which was granted.

By the now assailed Decision of September 7, 2000, 15 the Court of Appeals reversed and set
aside the decision of the trial court and entered a new one dismissing the Angels' Counterclaim
and Third-Party Complaint.

In dismissing the Counterclaim and Third-Party Complaint, the Court of Appeals held that the
"Construction Agreements," which were entered into by the parties "with the knowledge that
[Modales] [wa]s prohibited from contracting without the requisite permission from the proper
government authorities," were contrary to law and public policy, hence, following Article 1412 of
the Civil Code which reads:

ART. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a
criminal offense, the following rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may recover what he has given
by virtue of the contract, or demand the performance of the other's undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover what he has given by
reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is
not at fault, may demand the return of what he has given without any obligation to comply with
his promise (Underscoring supplied),

they were in pari delicto and, therefore, they have "no action against each other."

Thus spawned the present petition for review on certiorari filed by the spouses Angel (hereinafter
referred to as petitioners), assigning the following errors to the Court of Appeals:

A. THE COURT OF APPEALS HAD DEPARTED FROM THE ADOPTED COURSE OF

JUDICIAL PROCEEDINGS BY REVERSING THE DECISION OF THE TRIAL COURT
WHICH HAD LONG BEEN FINAL AND EXECUTORY.

B. THE COURT OF APPEALS, IN ITS DECISION DATED SEPTEMBER 7, 2000, DECIDED A

QUESTION OF SUBSTANCE IN A MANNER THAT IS NOT IN ACCORD WITH THE LAW
AND APPLICABLE JURISPRUDENCE. ADSTCI

and proffering the following as grounds for the allowance of the petition:

1. THE COURT OF APPEALS ERRED AND ACTED WITHOUT JURISDICTION WHEN IT

REVERSED A DECISION OF THE TRIAL COURT WHICH HAD LONG BEEN FINAL AND
EXECUTORY.

2. THE COURT OF APPEALS ERRED IN HOLDING THAT THE PARTIES WERE IN PARI
DELICTO, HENCE, THEY SHALL HAVE NO ACTION AGAINST EACH OTHER AND
SHOULD BE LEFT AS THEY ARE.

Petitioners argue that the Court of Appeals erred in taking jurisdiction over the case of the plaintiff
Aledo, given its dismissal of his appeal which had long become final and executory.

And they argue that the Court of Appeals had no jurisdiction over the appeal of the third party
defendant Modales because his Motion for Reconsideration of the Resolution of the Court of
Appeals dismissing his appeal was filed beyond the reglementary period.

On petitioners' argument that it was error for the Court of Appeals to still consider the appeal of
Aledo as it had long dismissed it and had become final and executory: There was nothing for
Aledo to appeal from, for the counterclaim of petitioners, which was compulsory, hence, could not
remain pending for independent adjudication by the court, 16 was, along with Aledo's complaint,
dismissed on the counterclaimant-defendants' motion on March 1, 1991. The trial court's Order of
April 16, 1991 clarifying that only Alejo's "original complaint" was dismissed and accordingly
giving due course to petitioners' counterclaim was thus null and void. It being void ab initio, the
Order of April 16, 1991 had no legality from its inception, and the decision of the trial court
against the plaintiff Aledo was itself void as it emanated from a void order. 17

With respect to petitioner's argument that the Motion for Reconsideration of Modales from the
Court of Appeals' Resolution of dismissal of his appeal was filed beyond the reglementary period:
As reflected above, the motion was mailed on March 7, 1996, 18 albeit received by the Court of
Appeals on March 11, 1996. It bears stressing that it is the date of mailing, not the date of receipt,
of the mail matter, which shall be considered as the date of filing. 19

In sum, since admittedly it was with respondent Modales that petitioners contracted to construct
their residential building but that his father-in-law co-respondent Aledo, his "mere" dummy, was
named in the "Construction Agreements," the Court of Appeals did not err in holding that said
agreements were contrary to law and public policy, hence, petitioners and respondents Aledo and
Modales were in pari delicto, and in accordingly pronouncing the dismissal of petitioners'
Counterclaim and dismissing their Third-Party Complaint. Ex dolo malo non oritur actio. In pari
delicto potior est conditio defendentis.

WHEREFORE, the petition is, in light of the foregoing discussions, hereby DISMISSED.

SO ORDERED.

Vitug, Sandoval-Gutierrez and Corona, JJ., concur.

Footnotes
1.Records at 5-7. It was later Amended (Id. at 151-155) and Re-amended (Id. at 195-199).

2.Id. at 9.

3.Id. at 10-12.

4.Id. at 15.

5.Id. at 1-4.

6.Id. at 65-70.

7.Id. at 43-46.

8.Id. at 87-89.

9.Record at 227.

10.Vide April 16, 1991 Order, Id. at 262.

11.Ibid.

12.Id. at 303-310.

13.Court of Appeals Rollo at 27.

14.Vide brown envelope stapled to p. 53 of Court of Appeals Rollo which bears the stamp mark
showing that it was sent by registered mail on March 11, 1996.

15.Rollo at 41-50.
16.Sec. 2 of Rule 17, Revised Rules of Court which was in force at the time the March 1, 1991
Order was issued, reads:

Dismissal by order of the court. — Except as provided in the preceding section, an action shall
not be dismissed at the plaintiff's instance save upon order of the court and upon such terms and
conditions as the court deems proper. If a counterclaim has been pleaded by a defendant prior to
the service upon him of the plaintiff's motion to dismiss, the action shall not be dismissed against
the defendant's objection unless the counterclaim can remain pending for independent adjudication
by the court. Unless otherwise specified in the order, a dismissal under this paragraph shall be
without prejudice. (Emphasis supplied)

17.Vide Caseñas v. Rosales, et al., 19 SCRA 463 (1967).

18.Vide note 13.

19.Sec. 1, Rule 13, Revised Rules of Court, now Sec. 3, Rule 13 of the 1997 Rules of Civil
Procedure.

||| (Spouses Angel v. Aledo, G.R. No. 145031, [January 22, 2004], 465 PHIL 632-640)

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2
102 PHIL 577-588

FIRST DIVISION

[G.R. No. L-11240. December 18, 1957.]

CONCHITA LIGUEZ, petitioner, vs. THE HONORABLE COURT OF APPEALS, MARIA NGO
VDA. DE LOPEZ, ET AL., respondents.

Ruiz, Ruiz & Ruiz for appellant.

Laurel Law Offices for appellees.

SYLLABUS

1. DONATION; CAUSE OR CONSIDERATION; LIBERALITY OF DONOR WHEN DEEMED

"CAUSA". — Under Article 1274, of the Civil Code of 1889, liberality of the donor is deemed
causa only in those contracts that are of "pure" beneficience that is to say, contracts designed
solely and exclusively to procure the welfare of the beneficiary, without any intent of producing
any satisfaction for the donor; contacts, in other words, in which the idea of self-interest is totally
absent on the part of the transferor. For this very reason, the same Article 1274 provides that in
remuneratory contracts, the consideration is the service or benefit for which the remuneration is
given; causa is not liberality in these cases because the contract or conveyance is not made out of
pure beneficience, but "solvendi animo".

2. ID.; ID.; MOTIVE REGARDED AS "CAUSA.". — The motive of the parties may be regarded
as causa when it predetermines the purpose of the contract.

3. ID.; DONATION OF CONJUGAL PROPERTY BY THE HUSBAND, EFFECT OF. — The

right of the husband to donate community property is strictly limited by law (Article 1409, 1413,
1415, Civil Code of 1889; Baello vs. Villanueva, 54 Phil. 213). However, the donation made in
contravention of the law is not void in its entirely, but only in so far as it prejudices the interest of
the wife. The rule applies whether the donation is gratuitous or for a consideration.

4. ID.; ID.; LEGITIMATE OF FORCED HEIRS UNAFFECTED; LEGITIMATE, HOW

COMPUTED. — The forced heirs are entitled to have the donation set aside in so far as
inofficious; i.e., in excess of the portion of free disposal (Civil Code of 1889, Arts. 636, 654),
computed as provided in Article 818 and 819, and bearing in mind that "collationable gifts" under
Article 818 should include gifts made not only in favor of the forced heirs, but even those made in
favor of strangers. (Decision of the Supreme Court Spain, May 4, 1889 and June 16, 1902.)

5. "PARI DELICTO" PARTIES TO ILLEGAL CONTRACT BARRED FROM PLEADING

ILLEGALITY OF BARGAIN. — The rule that the parties to an illegal contract, if equally guilty,
will not be aided by the law but will both be left where it finds them, has been interpreted by this
Court as barring the party from pleading the illegality of the bargain either as a cause of action or
as a defense.

6. ACCESSION; RULES GOVERNING IMPROVEMENTS MADE IN GOOD FAITH. —

Improvements made in good faith are governed by the rules of accession and possession in good
faith.

DECISION

REYES, J. B. L., J p:
From a decision of the Court of Appeals, affirming that of the Court of First Instance of Davao
dismissing her complaint for recovery of land, Conchita Liguez has resorted to this Court, praying
that the aforesaid decision be reversed on points of law. We granted certiorari on October 9, 1956.

The case began upon complaint filed by petitioner-appellant against the widow and heirs of the
late Salvador P. Lopez to recover a parcel of 51.84 hectares of land, situated in Barrio Bogac-
Linot, of the municipality of Mati, Province of Davao. Plaintiff averred to be its legal owner,
pursuant to a deed of donation of said land, executed in her favor by the late owner, Salvador P.
Lopez, on 18 May 1943. The defense interposed was that the donation was null and void for
having an illicit causa or consideration, which was plaintiff's entering into marital relations with
Salvador P. Lopez, a married man; and that the property had been adjudicated to the appellees as
heirs of Lopez by the Court of First Instance, since 1949.

The Court of Appeals found that the deed of donation was prepared by the Justice of the Peace of
Mati, Davao, before whom it was signed and ratified on the date aforesaid. At the time, appellant
Liguez was a minor, only 16 years of age. While the deed recites —

"That the DONOR, Salvador P. Lopez, for and in consideration of his love and affection for the
said DONEE, Conchita Liguez, and also for the good and valuable services rendered to the
DONOR by the DONEE, does by these presents, voluntarily give, grant and donate to the said
donee, etc." (Paragraph 2, Exhibit "A")

the Court of Appeals found that when the donation was made, Lopez had been living with the
parents of appellant for barely a month; that the donation was made in view of the desire of
Salvador P. Lopez, a man of mature years to have sexual relations with appellant Conchita Liguez;
that Lopez had confessed to his love for appellant to the instrumental witnesses, with the remark
that her parents would not allow Lopez to live with her unless he first donated the land in
question; that after the donation, Conchita Liguez and Salvador P. Lopez lived together in the
house that was built upon the latter's orders, until Lopez was killed on July 1st, 1943, by some
guerrillas who believed him to be pro-Japanese.

It was also ascertained by the Court of Appeals that the donated land originally belonged to the
conjugal partnership of Salvador P. Lopez and his wife, Maria Ngo; that the latter had met and
berated Conchita for living maritally with her husband, sometime during June of 1943; that the
widow and children of Lopez were in possession of the land and made improvements thereon; that
the land was assessed in the tax rolls first in the name of Lopez and later in that of his widow; and
that the need of donation was never recorded.

Upon these facts, the Court of Appeals held that the deed of donation was inoperative, and null
and void (1) because the husband, Lopez, had no right to donate conjugal property to the plaintiff
appellant; and (2) because the donation was tainted with illegal causa or consideration, of which
donor and donee were participants.
Appellant vigorously contends that the Court of First Instance as well as the Court of Appeals
erred in holding the donation void for having an illicit causa or consideration. It is argued that
under Article 1274 of the Civil Code of 1889 (which was the governing law in 1943, when the
donation was executed), "in contracts of pure beneficence the consideration is the liberality of the
donor", and that liberality per se can never be illegal, since it is neither against law or morals or
public policy.

The flaw in this argument lies in ignoring that under Article 1274, liberality of the donor is
deemed causa only in those contracts that are of "pure" beneficence; that is to say, contracts
designed solely and exclusively to procure the welfare of the beneficiary, without any intent of
producing any satisfaction for the donor; contracts, in other words, in which the idea of self-
interest is totally absent on the part of the transferor. For this very reason, the same Article 1274
provides that in remuneratory contracts, the consideration is the service or benefit for which the
remuneration is given; causa is not liberality in these cases because the contract or conveyance is
not made out of pure beneficence, but "solvendi animo." In consonance with this view, this
Supreme Court in Philippine Long Distance Co. vs. Jeturian* G. R. L-7756, July 30, 1955, like the
Supreme Court of Spain in its decision of 16 Feb. 1899, has ruled that bonuses granted to
employees to excite their zeal and efficiency, with consequent benefit for the employer, do not
constitute donation having liberality for a consideration.

Here the facts as found by the Court of Appeals (and which we can not vary) demonstrate that in
making the donation in question, the late Salvador P. Lopez was not moved exclusively by the
desire to benefit appellant Conchita Liguez, but also to secure her cohabiting with him, so that he
could gratify his sexual impulses. This is clear from the confession of Lopez to the witnesses
Rodriguez and Ragay, that he was in love with appellant, but her parents would not agree unless
he donated the land in question to her. Actually, therefore, the donation was but one part of an
onerous transaction (at least with appellant's parents) that must be viewed in its totality. Thus
considered, the conveyance was clearly predicated upon an illicit causa.

Appellant seeks to differentiate between the alleged liberality of Lopez, as causa for the donation
in her favor, and his desire for cohabiting with appellant, as motives that impelled him to make the
donation, and quotes from Manresa and the jurisprudence of this Court on the distinction that must
be maintained between causa and motives (De Jesus vs. Urrutia and Co., 33 Phil. 171). It is well to
note, however, that Manresa himself (Vol. 8, pp. 641-642), while maintaining the distinction and
upholding the inoperativeness of the motives of the parties to determine the validity of the
contract, expressly excepts from the rule those contracts that are conditioned upon the attainment
of the motives of either party.

". . . distincion importantisima, que impide anular el contrato por la sola influencia de los motivos
a no ser que se hubiera subordinado al cumplimiento de estos como condiciones la eficacia de
aquel."

The same view is held by the Supreme Court of Spain, in its decisions of February 4, 1941, and
December 4, 1946, holding that the motive may be regarded as causa when it predetermines the
purpose of the contract.

In the present case, it is scarsely disputable that Lopez would not have conveyed the property in
question had he known that appellant would refuse to cohabit with him; so that the cohabitation
was an implied condition to the donation, and being unlawful, necessarily tainted the donation
itself.

The Court of Appeals rejected the appellant's claim on the basis of the well-known rule "in pari
delicto non oritur actio" as embodied in Article 1306 of the Code of 1889 (reproduced in Article
1412 of the new Civil Code):

"ART. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a
criminal offense, the following rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may recover what he has given
by virtue of the contract, or demand the performance of the other's undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover what he has given by
reason of the contract, or ask for fulfillment of what has been promised him. The other, who is not
at fault, may demand the return of what he has given without any obligation to comply with his
promise."

In our opinion, the Court of Appeals erred in applying to the present case the pari delicto rule.
First, because it can not be said that both parties here had equal guilt when we consider that as
against the deceased Salvador P. Lopez, who was a man advanced in years and mature experience,
the appellant was a mere minor, 16 years of age, when the donation was made; that there is no
finding made by the Court of Appeals that she was fully aware of the terms of the bargain entered
into by and between Lopez and her parents; that her acceptance in the deed of donation (which
was authorized by Article 626 of the old Civil Code) did not necessarily imply knowledge of
conditions and terms not set forth therein; and that the substance of the testimony of the
instrumental witnesses is that it was the appellant's parents who insisted on the donation before
allowing her to live with Lopez. These facts are more suggestive of seduction than of immoral
bargaining on the part of appellant. It must not be forgotten that illegality is not presumed, but
must be duly and adequately proved.

In the second place, the rule that parties to an illegal contract, if equally guilty, will not be aided
by the law but will both be left where it finds them, has been interpreted by this Court as barring
the party from pleading the illegality of the bargain either as a cause of action or as a defense.
Memo auditor propriam turpitudinem allegans. Said this Court in Perez vs. Herranz, 7 Phil. 695-
696:

"It is unnecessary to determine whether a vessel for which a certificate and license have been
fraudulently obtained incurs forfeiture under these or any other provisions of this act. It is enough
for this case that the statute prohibits such an arrangement as that between the plaintiff and
defendant so as to render illegal both the arrangement itself and all contracts between the parties
growing out of it.

It does not, however, follow that the plaintiff can succeed in this action. There are two answers to
his claim as urged in his brief. It is a familiar principle that the courts will not aid either party to
enforce an illegal contract, but will leave them both where it finds them; but where the plaintiff
can establish a cause of action without exposing its illegality, the vice does not affect his right to
recover. The American authorities cited by the plaintiff fully sustain this doctrine. The principle
applies equally to a defense. The law in those Islands applicable to the case is found in article
1305 of the Civil Code, shutting out from relief either of the two guilty parties to an illegal or
vicious contract.

In the case at bar the plaintiff could establish prima facie his sole ownership by the bill of sale
from Smith, Bell & Co. and the official registration. The defendant, on his part, might overthrow
this title by proof through a certain subsequent agreement between him and the plaintiff, dated
March 16, 1902, that they had become owners in common of the vessel, the agreement not
disclosing the illegal motive for placing the formal title in the plaintiff. Such an ownership is not
in itself prohibited, for the United States courts recognize the equitable ownership of a vessel as
against the holder of a legal title, where the arrangement is not one in fraud of the law. (Weston vs.
Penniman, Federal Case 17455; Scudder vs. Calais Steamboat Company, Federal Case 12566.)

On this proof, the defendant being a part owner of the vessel, would have defeated the action for
its exclusive possession by the plaintiff. The burden would then be cast upon the plaintiff to show
the illegality of the arrangement, which under the cases cited he would not be allowed to do."

The rule was reaffirmed in Lim vs. Lim ChuKao, 51 Phil. 477.

The situation confronting us is exactly analogous. The appellant seeks recovery of the disputed
land on the strength of a donation regular on its face. To defeat its effect, the appellees must plead
and prove that the same is illegal. But such plea on the part of the Lopez heirs is not receivable,
since Lopez himself, if living, would be barred from setting up that plea; and his heirs, as his
privies and successors in interest, can have no better rights than Lopez himself.

Appellees, as successors of the late donor, being thus precluded from pleading the defense of
immorality or illegal causa of the donation, the total or partial ineffectiveness of the same must be
decided by different legal principles. In this regard, the Court of Appeals correctly held that Lopez
could not donate the entirety of the property in litigation, to the prejudice of his wife Maria Ngo,
because said property was conjugal in character, and the right of the husband to donate community
property is strictly limited by law (Civil Code of 1889, Arts. 1409, 1415, 1413; Baello vs.
Villanueva, 54 Phil. 213).

"ART. 1409. The conjugal partnership shall also be chargeable with anything which may have
been given or promised by the husband alone to the children born of the marriage in order to
obtain employment for them or give them a profession or by both spouses by common consent,
should they not have stipulated that such expenditures should be borne in whole or in part by the
separate property of one of them."

"ART. 1415. The husband may dispose of the property of the conjugal partnership for the purposes
mentioned in Article 1409."

"ART. 1413. In addition to his powers as manager the husband may for a valuable consideration
alienate and encumber the property of the conjugal partnership without the consent of the wife."

The text of the articles makes it plain that the donation made by the husband in contravention of
law is not void in its entirety, but only in so far as it prejudices the interest of the wife. In this
regard, as Manresa points out (Commentaries, 5th Ed., pp. 650-651, 652-653), the law makes no
distinction between gratuitous transfers and conveyances for a consideration.

"Puede la mujer como proprietaria hacer anular las donaciones aun durante el matrimonio? Esta
es, en suma, la cuestion, reducida a determinar si la distinta naturaleza entre los actos a titulo
oneroso y los actos a titulo lucrativo, y sus especiales y diversas circunstancias, pueden motivar
una solucion diferente en cuanto a la epoca en que la mujer he de reclamar y obtener la nulidad del
acto; cuestion que no deja de ser interesantisima.

El Codigo, a pesar de la variacion que ha introducido en el proyecto de 1851, poniendo como

segundo parrafo del articulo 1.413, o como limitacion de las enajenaciones uobligaciones a titulo
oneroso, lo que era una limitacion general de todos los actos del marido, muestra, sin embargo,
que no ha variado de criterio, y que para el las donaciones deben en todo equipararse a cualquier
otro acto ilegal o fraudulento de caracter oneroso, al decir en el art. 1.419: 'Tambien se traera a
colacion en el inventario de la sociedad — el importe de las donaciones y enajenaciones que
deban considerarse ilegales o fraudulentas, con sujecion al art. 1.413.' (Debio tambien citarse el
articulo 1.415, que es el que habla de donaciones.)"

"En resumen: el marido solo puede donar los bienes gananciales dentro de los limites marcados en
el art. 1.415. Sin embargo, solo la mujer o sus herederos pueden reclamar contra la valides de la
donacion, pues solo eusuinteres se establece la prohibicion. La mujer o sus herederos, para poder
dejar sin efecto el acto, han de sufrir verdadero perjuicio, entendiendose que no le hay hasta, tanto
que, terminada por cualquier causa la sociedad de gananciales, y hecha suliquidacion, no pueda
imputarse lo donado al haber por cualquier concepto del marido, ni obtener en suconsecuencia la
mujer la dibida indemnizacion. La donacion reviste por tanto legalmente, una eficacia condicional,
y en armonia con este caracter, deben fijarse los efectos de la misma con relacion a los adquirentes
y a los terceros poseedores, teniendo, en sucaso, en cuenta lo dispuesto en la ley Hipotecaria. Para
prevenir todo perjuicio, puede la mujer, durante el matrimonio inmediatamente al acto, hacer
constar ante los Tribunales suexistencia y solicitar medidas de precaucion, como ya se ha dicho.
Para evitarlo en lo sucesivo, y cuando las circunstancias lo requieran, puede instar la declaracion
de prodigalidad."
To determine the prejudice to the widow, it must be shown that the value of her share in the
property donated can not be paid out of the husband's share of the community profits. The
requisite data, however, are not available to us and necessitate a remand of the records to the court
of origin that settled the estate of the late Salvador P. Lopez.

The situation of the children and forced heirs of Lopez approximates that of the widow. As privies
of their parent, they are barred from invoking the illegality of the donation. But their right to a
legitime out of his estate is not thereby affected, since the legitime is granted them by the law
itself, over and above the wishes of the deceased. Hence, the forced heirs are entitled to have the
donation set aside in so far as inofficious: i.e., in excess of the portion of free disposal (Civil Code
of 1889, Articles 636, 654), computed as provided in Articles 818 and 819, and bearing in mind
that "collationable gifts" under Article 818 should include gifts made not only in favor of the
forced heirs, but even those made in favor of strangers, as decided by the Supreme Court of Spain
in its decisions of 4 May 1899 and 16 June 1902. So that in computing the legitimes, the value of
the property donated to herein appellant, Conchita Liguez, should be considered part of the
donor's estate. Once again, only the court of origin has the requisite date to determine whether the
donation is inofficious or not. With regard to the improvements in the land in question, the same
should be governed by the rules of accession and possession in good faith, it being undisputed that
the widow and heirs of Lopez were unaware of the donation in favor of the appellant when the
improvements were made.

The appellees, relying on Galion vs. Garayes, 53 Phil. 43, contend that by her failure to appear at
the liquidation proceedings of the estate of Salvador P. Lopez in July 1943, the appellant has
forfeited her right to uphold the donation if the prejudice to the widow Maria Ngo resulting from
the donation could be made good out of the husband's share in the conjugal profits. It is also
argued that appellant was guilty of laches in failing to enforce her rights as donee until 1951. This
line of argument overlooks the capital fact that in 1943, appellant was still a minor of sixteen; and
she did not reach the age of majority until 1948. Hence, her action in 1951 was only delayed three
years. Nor could she be properly expected to intervene in the settlement of the estate of Lopez:
first, because she was a minor during the great part of the proceedings; second, because she was
not given notice thereof; and third, because the donation did not make her a creditor of the estate.
As we have ruled in Lopez vs. Olbes, 15 Phil. 547-548:

"The prima facie donation inter vivos and its acceptance by the donees having been proved by
means of a public instrument, and the donor having been duly notified of said acceptance, the
contract is perfect and obligatory and it is perfectly in order to demand its fulfillment, unless an
exception is proved which is based on some legal reason opportunely alleged by the donor or her
heirs.

So long as the donation in question has not been judicially proved and declared to be null,
inefficacious, or irregular, the land donated is of the absolute ownership of the donees and
consequently, does not form a part of the property of the estate of the deceased Martina Lopez,
wherefore the action instituted demanding compliance with the contract, the delivery by the
deforciant of the land donated, or that it be prohibited to disturb the right of the donees, should not
be considered as incidental to the probate proceedings aforementioned."

The case of Galion vs. Gayares, supra, is not in point. First, because that case involved a simulated
transfer that can have no effect, while a donation with illegal causa may produce effects under
certain circumstances where the parties are not of equal guilt; and again, because the transferee in
the Galion case took the property subject to lis pendens notice, that in this case does not exist.

In view of the foregoing, the decisions appealed from are reversed and set aside, and the appellant
Conchita Liguez declared entitled to so much of the donated property as may be found, upon
proper liquidation, not to prejudice the share of the widow Maria Ngo in the conjugal partnership
with Salvador P. Lopez or the legitimes of the forced heirs of the latter. The records are ordered
remanded to the court of origin for further proceedings in accordance with this opinion. Costs
against appellees. So ordered.

Paras, C. J., Bengzon, Padilla, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion
and Endencia, JJ., concur.

Footnotes
*97 Phil., 981.

2
||| (Liguez v. Court of Appeals, G.R. No. L-11240, [December 18, 1957], 102 PHIL 577-588)

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JURISPRUDENCE Jurisprudences icon 120x120
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2
93 PHIL 827-843
EN BANC

[G.R. No. L-1411. September 29, 1953.]

DIONISIO RELLOSA, petitioner, vs. GAW CHEE HUN, respondent.

Macapagal & Eusebio and Conrado Manalansan for petitioner.

Alafriz & Alafriz for respondent.

Quisumbing, Sycip & Quisumbing as amici curiæ.

SYLLABUS

1. CONSTITUTIONAL LAW; SALE OF LAND DURING JAPANESE MILITARY

OCCUPATION, NULL AND VOID; VENDOR CANNOT RECOVER PROPERTY, CONTRACT
HAVING BEEN ENTITLED IN "PARI DELICTO". — The phrase "private agricultural land"
employed in the Constitution of September 4, 1943 of the then Republic of the Philippines
includes residential lands (Krivenko vs. Register of Deeds, 42 Off. Gaz., 471). But the vendor in a
sale of residential land executed in February 1944 cannot have the sale declared null and void nor
rescind the contract and recover the property, because both vendor and vendee are in pari delicto
(Cabauatan vs. Uy Hoo, L-2207, January 23, 1951; Bough and Bough vs. Cantiveros and
Hanopol, 40 Phil., 210, 216).

2. D.; ID.; ID.; EXCEPTIONS TO "PARI DELICTO" DOCTRINE, EXPLAINED. —The

doctrine of pari delicto is subject to one important limitation, namely, "whenever public policy is
considered as advanced by allowing either party to sue for relief against the transaction" (3
Pomeroy's Equity Jurisprudence, 5th ed., p. 733). But not all contracts which are illegal for being
opposed to public policy come under this limitation. The cases in which this limitation may apply,
only "include the class of contracts which are intrinsically contrary to public policy, — contracts
in which the illegality itself consists in their opposition to public policy, and any other species of
illegal contracts in which, from their particular circumstances, incidental and collateral motives of
public policy require relief." Examples of this class of contracts are usurious contracts, marriage-
brokerage contracts and gambling contracts. (Idem, pp. 735-737.) A sale of residential land
executed during the Japanese military occupation wherein both parties were in pari delicto does
not come under this exception because it is not intrinsically contrary to public policy, nor one
where the illegality itself consists in its opposition to public policy. It is illegal not because it is
against public policy but because it is against the Constitution.

DECISION

BAUTISTA ANGELO, J p:

This is a petition for review of a decision of the Court of Appeals holding that the sale in question
is valid and, even if it were invalid, plaintiff cannot maintain the action under the principle of pari
delicto.

On February 2, 1944, Dionisio Rellosa sold to Gaw Chee Hun a parcel of land, together with the
house erected thereon, situated in the City of Manila, Philippines, for the sum of P25,000. The
vendor remained in possession of the property under a contract of lease entered into on the same
date between the same parties. Alleging that the sale was executed subject to the condition that the
vendee, being a Chinese citizen, would obtain the approval of the Japanese Military
Administration in accordance with (seirei) No. 6 issued on April 2, 1943, by the Japanese
authorities, and said approval has not been obtained, and that, even if said requirement were met,
the sale would at all events be void under article XIII, section 5, of our Constitution, the vendor
instituted the present action in the Court of First Instance of Manila seeking the annulment of the
sale as well as the lease covering the land and the house above mentioned, and praying that, once
the sale and the lease are declared null and void, the vendee be ordered to return to vendor the
duplicate of the title covering the property, and be restrained from in any way dispossessing the
latter of said property.

Defendant answered the complaint setting up as special defense that the sale referred to in the
complaint was absolute and unconditional and was in every respect valid and binding between the
parties, it being not contrary to law, morals and public order, and that plaintiff is guilty of estoppel
in that, by having executed a deed of lease over the property, he thereby recognized the title of
defendant to that property.

Issues having been joined, and the requisite evidence presented by both parties, the court declared
both the sale and the lease valid and binding and dismissed the complaint. The court likewise
ordered plaintiff to turn over the property to defendant and to pay a rental of P50 a month from
August 1, 1945 until the property has been actually delivered. As this decision was affirmed in
toto by the Court of Appeals, plaintiff sued out the present petition for review.

One of the issues raised by petitioner refers to the validity of Seirei No. 6 issued on April 2, 1943
by the Japanese authorities which prohibits an alien from acquiring any private land not
agricultural in nature during the occupation unless the necessary approval is obtained from the
Director General of the Japanese Military Administration. Petitioner contends that the sale in
question cannot have any validity under the above military directive in view of the failure of
respondent to obtain the requisite approval and it was error for the Court of Appeals to declare
said directive without any binding effect because the occupation government could not have
issued it under article 43 of the Hague Regulations which command that laws that are municipal in
character of an occupied territory should be respected and cannot be ignored unless prevented by
military necessity.

We do not believe it necessary to consider now the question relative to the validity of Seirei No. 6
of the Japanese Military Administration for the simple reason that in our opinion the law that
should govern the particular transaction is not the above directive but the Constitution adopted by
the then Republic of the Philippines on September 4, 1943, it appearing that the aforesaid
transaction was executed on February 2, 1944. Said Constitution, in its article VIII, section 5,
provides that "no private agricultural land shall be transferred or assigned except to individuals,
corporations, or associations qualified to acquire or hold lands of the public domain in the
Philippines", which provisions are similar to those contained in our present Constitution. As to
whether the phrase "private agricultural land" employed in said Constitution includes residential
lands, as the one involved herein, there can be no doubt because said phrase has already been
interpreted in the affirmative sense by this court in the recent case of Krivenko vs. Register of
Deeds, 79 Phil. 461, wherein this court held that "under the Constitution aliens may not acquire
private or public agricultural lands, including residential lands." This matter has been once more
submitted to the court for deliberation, but the ruling was reaffirmed. This ruling fully disposes of
the question touching on the validity of the sale of the property herein involved.

The sale in question having been entered into in violation of the Constitution, the next question to
be determined is, can petitioner have the sale declared null and void and recover the property
considering the effect of the law governing rescission of contracts? Our answer must of necessity
be in the negative following the doctrine laid down in the case of Trinidad Gonzaga de Cabauatan,
et al. vs. Uy Hoo, et al., 88 Phil. 103, wherein we made the following pronouncement: "We can,
therefore, say that even if the plaintiffs can still invoke the Constitution, or the doctrine in the
Krivenko Case, to set aside the sale in question, they are now prevented from doing so if their
purpose is to recover the lands that they have voluntarily parted with, because of their guilty
knowledge that what they were doing was in violation of the Constitution. They cannot escape this
conclusion because they are presumed to know the law. As this court well said: 'A party to an
illegal contract cannot come into a court of law and ask to have his illegal objects carried out. The
law will not aid either party to an illegal agreement; it leaves the parties where it finds them.' The
rule is expressed in the maxims: 'Ex dolo malo non oritur actio,' and 'In pari delicto potior est
conditio defendentis.' (Bough and Bough vs. Cantiveros and Hanopol, 40 Phil., 210, 216.)"

The doctrine above adverted to is the one known as In Pari Delicto. This is well known not only in
this jurisdiction but also in the United States where common law prevails. In the latter jurisdiction,
the doctrine is stated thus: "The proposition is universal that no action arises, in equity or at law,
from an illegal contract; no suit can be maintained for its specific performance, or to recover the
property agreed to be sold or delivered, or the money agreed to be paid, or damages for its
violation. The rule has sometimes been laid down as though it were equally universal, that where
the parties are in pari delicto, no affirmative relief of any kind will be given to one against the
other." (Pomeroy's Equity Jurisprudence, Vol. 3, 5th ed., p. 728.)

It is true that this doctrine is subject to one important limitation, namely, "whenever public policy
is considered as advanced by allowing either party to sue for relief against the transaction" (idem,
p. 733). But not all contracts which are illegal because opposed to public policy come under this
limitation. The cases in which this limitation may apply only "include the class of contracts which
are intrinsically contrary to public policy, — contracts in which the illegality itself consists in their
opposition to public policy, and any other species of illegal contracts in which, from their
particular circumstances, incidental and collateral motives of public policy require relief."
Examples of this class of contracts are usurious contracts, marriage-brokerage contracts and
gambling contracts. (Idem. pp. 735-737.)

In our opinion, the contract in question does not come under this exception because it is not
intrinsically contrary to public policy, nor one where the illegality itself consists in its opposition
to public policy. It is illegal not because it is against public policy but because it is against the
Constitution. Nor may it be contended that to apply the doctrine of pari delicto would be
tantamount to contravening the fundamental policy embodied in the constitutional prohibition in
that it would allow an alien to remain in the illegal possession of the land, because in this case the
remedy is lodged elsewhere. To adopt the contrary view would be merely to benefit petitioner and
not to enhance public interest.

The danger foreseen by counsel in the application of the doctrine above adverted to is more
apparent than real. If we go deeper in the analysis of our situation we would not fail to see that the
best policy would be for Congress to approve a law laying down the policy and the procedure to
be followed in connection with transactions affected by our doctrine in the Krivenko case. We
hope that this should be done without much delay. And even if this legislation be not forthcoming
in the near future, we do not believe that public interest would suffer thereby if only our executive
department would follow a more militant policy in the conservation of our natural resources as or
dained by our Constitution. And we say so because there are at present two ways by which this
situation may be remedied, to wit, (1) action for reversion, and (2) escheat to the state. An action
for reversion is slightly different from escheat proceeding, but in its effects they are the same.
They only differ in procedure. Escheat proceedings may be instituted as a consequence of a
violation of article XIII, section 5 of our Constitution, which prohibits transfers of private
agricultural lands to aliens, whereas an action for reversion is expressly authorized by the Public
Land Act (sections 122, 123, and 124 of Commonwealth Act No. 141).

In the United States, as almost everywhere else, the doctrine which imputes to the sovereign or to
the government the ownership of all lands and makes such sovereign or government the original
source of private titles, is well recognized (42 Am. Jur., 785). This doctrine, which was expressly
affirmed in Lawrence vs. Garduño, G. R. No. 16542, and which underlies all titles in the
Philippines, (See Ventura, Land Registration and Mortgages, 2nd ed., pp. 2-3) has been enshrined
in our Constitution (article XIII). The doctrine regarding the course of all titles being the same
here as in the United States, it would seem that if escheat lies against aliens holding lands in those
states of the Union where common law prevails or where similar constitutional or statutory
prohibitions exist, no cogent reason is perceived why similar proceedings may not be instituted in
this jurisdiction.

"Escheat is an incident or attribute of sovereignty, and rests on the principle of the ultimate
ownership by the state of all property within its jurisdiction.' (30 C.J.S., 1164.)

". . . America escheats belong universally to the state or some corporation thereof as the ultimate
proprietor of land within its Jurisdiction." (19 Am. Jur., 382.)

"An escheat is nothing more or less than the reversion of property to the state, which takes place
when the title fails." (Delany vs. State, 42 N. D., 630, 174 N.W., 290, quoted in footnote 6, 19 Am.
Jur., 381.)
"As applied to the right of the state to lands purchased by an alien, it would more properly be
termed a 'forfeiture' at common law." (19 Am. Jur., 381.)

"In modern law escheat denotes a falling of the estate into the general property of the state because
the tenant is an alien or because he has died intestate without lawful heirs to take his estate by
succession, or because of some other disability to take or hold property imposed by law." (19 Am.
Jur.,

With regard to an action for reversion, the following sections of Commonwealth Act No. 141 are
pertinent:

"SEC. 122. No land originally acquired in any manner under the provisions of this Act, nor any
permanent improvement on such land, shall be encumbered, alienated, or transferred, except to
persons, corporations, associations, or partnerships who may acquire lands of the public domain
under this Act or to corporations organized in the Philippines authorized therefor by their
charters."

"SEC. 123. No land originally acquired in any manner under the provisions of any previous Act,
ordinance, royal decree, royal order, or any other provision of law formerly in force in the
Philippines with regard to public lands, terrenos baldios y realenqos, or lands of any other
denomination that were actually or presumptively of the public domain or by royal grant or in any
other form, nor any permanent improvement on such land, shall be encumbered, alienated, or
conveyed, except to persons, corporations or associations who may acquire land of the public
domain under this Act or to corporate bodies organized in the Philippines whose charters authorize
them to do so: Provided, however, That this prohibition shall not be applicable to the conveyance
or acquisition by reason of hereditary succession duly acknowledged and legalized by competent
courts; Provided, further, That in the event of the ownership of the lands and improvements
mentioned in this section and in the last preceding section being transferred by judicial decree to
persons, corporations or associations not legally capacitated to acquire the same under the
provisions of this Act, such persons, corporation, or associations shall be obliged to alienate said
lands or improvements to others so capacitated within the precise period of five years; otherwise,
such property shall revert to the Government."

"SEC. 124. Any acquisition, conveyance, alienation, transfer, or other contract made or executed
in violation of any of the provisions of sections one hundred and eighteen, one hundred and
twenty, one hundred and twenty-one, one hundred and twenty-two, and one hundred and twenty-
three of this Act shall be unlawful and null and void from its execution and shall produce the
effect of annulling and cancelling the grant, title, patent, or permit originally issued, recognized or
confirmed, actually or presumptively, and cause the reversion of the property and its
improvements to the State."

Note that the last quoted provision declared any prohibited conveyance not only unlawful but null
and void ab initio. More important yet, it expressly provides that such conveyances will produce
"the effect of annulling and cancelling the grant, title, patent, or permit, originally issued,
recognized of confirmed, actually or presumptively", and of causing "the reversion of the property
and its improvements to the State." The reversion would seem to be but a consequence of the
annulment and cancellation of the original grant or title, and this is so for in the event of such
annulment or cancellation no one else could legitimately claim the property except its original
owner or grantor — the state.

We repeat. There are two ways now open to our government whereby it could implement the
doctrine of this Court in the Krivenko case thereby putting in force and carrying to its logical
conclusion the mandate of our Constitution. By following either of these remedies, or by
approving an implementary law as above suggested, we can enforce the fundamental policy of our
Constitution regarding our natural resources without doing violence to the principle of pari delicto.
With these remedies open to us, we see no justifiable reason for pursuing the extreme unusual
remedy now vehemently urged by the amici curiae.

In view of the foregoing, we hold that the sale in question is null and void, but plaintiff is barred
from taking the present action under the principle of pari delicto.

The decision appealed from is hereby affirmed without pronouncement as to costs.

Labrador, J., concurs.

Paras, C.J., Tuason and Montemayor, JJ., concur in theresult.

Separate Opinions

BENGZON, J., concurring:

I wish to say that I regard the precedents of Bough vs. Cantiveros and Perez vs. Herranz
inapplicable because the parties therein were not equally at fault.

However I do not believe that the two ways suggested to solve the problem of alien-acquired lands
are exclusive. Perhaps the innocent spouse of the seller and his creditors are not barred from
raising the issue of invalidity.

PABLO, M., disidente:

No estoy conforme eon la teoria de la mayoria de que el demandante no puede pedir la declaracion
de nulidad de la venta de un terreno a un extranjero.

El articulo 1306, regla 1.a, del Codigo Civil Español, en que se funda la defensa del demandado,
dice asi: "Cuando la culpa estè de parte de ambos contratantes, ninguno de ellos podra repetir lo
que hubiera dado a virtud del contrato."
"Culpa es falta mas o menos grave, cometida a sabiendas y voluntariamente." (Diccionario de la
Real Academia Española).

No existe ley que castiga la venta de un inmueble a un extranjero. ¿Han cometido culpa el
comprador, el vendedor, o ambos a la vez? Creemos que no, porque la venta de un terreno es la
cosa mas ordinaria del mundo. No hubo cusa torpe en el contrato. No se probo que alguno de ellos
o ambos, sabiendo que estaba prohibida la venta, la realizaron. No habian cometido falta alguna.
Ambas partes realizaron el convenio de venta con la mejor buena fe. Bueno es hacer constar que
no se ha probado que alguna de las partes o ambas hayan obrado de mala fe, ni existe pruebas de
que, sabiendo las partes que estaba prohibida la venta, la efectuaron sin embargo. La mala fe no se
presume: debe probarse. A falta de prueba, la presuncion es que las partes obraron de buena fe. No
es aplicable al caso presente el articulo 1306 del Codigo Civil. En el asunto de Bough contra
Cantiveros (40 Jur. Fil., 221), estos son los hechos probados: Matilde Cantiveros era la mas rica
residente de Carigara, Leyte; ella y su esposo Jose Vasquez firmaron un contrato de separacion
conyugal. Basilia Hanopol, prima y protegida de Matilde, y su esposo Gustavos Bough marearon a
Matilde con la cantinela de "que Josè Vasquez estaba en el pueblo y podria impugnar el contrato
de separacion de bienes conyugales." Los esposos Bough la indujeron a que les vendiese
simuladamente por P10,000 sus bienes inmuebles que valian mas de P30,000; ella firmo ante
notario la escritura de venta ficticia (Exhibit A). Para convencer a Matilde de que no tenian el
proposito de engañarla y privarla de sus bienes, los esposos Bough suscribieron otro documento
(Exhibit 1), en virtud del cual donaban a ella todos los bienes que aparecian en el Exhibit A,
"donacion que tendria efecto en el caso de que tanto ellos como sus hijos fallecieran antes que
Matilde Cantiveros." Matilde, a pesar de la escritura de venta ficticia, continuo poseyendo sus
bienes. Despuès de algun tiempo, los esposos Bough presentaron demanda contra Matilde,
pidiendo que se les restituyera en la posesion de dichos bienes, fundandose la accion en la venta
simulada. Porque el Exhibit A es un documento ficticio y ha sido obtenido por medios
fraudulentos, este Tribunal confirmo el sobreseimiento de la demanda.

En el asunto de Perez contra Herranz y otros (7 Jur. Fil., 715), el demandante pedia la posesion del
vapor "Alfred", fundada la accion en un documento en que la propiedad del buque se hizo constar
"a nombre tan solo del demandante, por razon de que el, como natural de Filipinas, podia, segun
nuestras leyes, aparecer como dueño, al paso que el demandante por ser español no podia aparecer
como tal" cuando en realidad el demandante solo era dueño de las 10/58 partes del buque y el
demandado, de las 48/58 partes del mismo.

En los dos asuntos citados, los demandantes pedian el cumplimiento de unos contratos con causa
torpe, unos contratos falsos, simulados. que no existen ante los ojos de la ley. Por eso este tribunal
aplico en ambos el principio bien establecido de "Ex dolo malo non oritur actio," e "In pari delicto
potior est conditio dependentis." "La ley no amparara a ninguna de las partes en un contrato ilicito;
les deja en la situacion en que se han colocado." (Bough y otro contra Cantiveros y otro, 40 Jur.
Fil., 221), o en otras palabras, "los tribunales no ayudaran ni a una ni a otra parte para hacer
cumplir un contrato ilegal, sino que dejan a ambas alli donde las encuentran." (Perez contra
Herranz y otros, 7 Jur. Fil., 715.)

Pero en el caso presente, el demandante no pide el cumplimiento de la venta anticonstitucional,

todo lo contrario, pide que sea declarada nula y que se ordene la devolucion de la cosa que cada
parte habia recibido en virtud del contrato. En la venta no medio engaño, causa torpe, delito o
falta.

Los tratadistas clasifican los contratos en nulos y anulables: los primeros son nulos per se, nulos
ab initio, no tienen existencia legal; los segundos son anulables por haber sido obtenidos mediante
violencia, engaño, dolo, delito o falta, etc. Un contrato simulado, un contrato en que no concurren
los requisitos que expresa el articulo 1261, son considerados no existentes ante el Derecho. Los
contratos celebrados en contravencion de una prohibicion legal se consideran tambien contratos
inexistentes.

Castan, hablando del origen de la distincion entre actos nulos y anulables, dice que "La distincion
entre dos grandes categorias de invalidez: la del acto nulo de pleno derecho o inexistente, de una
parte, y la del acto anulable o rescindible, de otra, procede ya del Derecho romano. El acto
inexistente no engendraba ningun efecto juridico; era nulo de pleno derecho ab initio. . . . Asi
sucedia cuando el acto no reunia las condiciones necesarias para su formacion (por ejemplo, venta
sin objeto) o cuando estaba prohibido por la ley (como la donacion entre esposos.)" (2 Castan,
640.)

El derecho frances, segun el mismo autor, distingue dos categorias de actos nulos con nulidad
absoluta: (a) el acto inexistente (al que falta uno de los elementos esenciales para su formacion) y
(b) el acto nulo de pleno derecho (que viola una prescripcion legal). (2 Castan, 641).

Sanchez Roman dice que "La causa que no es licita es como si no existiera para el Derecho y
degenera, por tanto, en inexistente y no verdadera o falsa para el mismo, produciendo el
consiguiente resultado de viciar el consentimiento y anular el contrato." (4 Sanchez Roman, 207).

"El contrato Supuesto o falso, — dice Manresa — en cuanto lo es y se demuestra destruyendo la

apariencia del mismo, es el caso mas claro de inexistencia, a tal extremo, que en el se identifican
el sentido usual y el juridico de esa palabra." (8 Manresa, 699).

En sentencia de 26 de junio de 1903, el Tribunal Supremo de España declaro:

"Que el articulo 1806 del Codigo Civil es inaplicable cuando no se trata de un contrato real y
efectivo, aunque calebrado con causa torpe, sino simulado:

"Que dada tal simulacion, es perfectamente indiferente que el temor que indujo a los otorgantes a
figurar el contrato fuese mas o menos fundado y mas o menos licito, puesto que su nulidad e
ineficacia no depende de vicio en el consentimiento sino de su real y efectiva inexistencia." (95
Jurisprudencia Civil, 1028).
y en 30 de noviembre de 1909 el mismo Tribunal dijo:

"Que no es dable confundir un contrato simulado con un contrato nulo o rescindible, toda vez que
la simulacion significa indudablemente, por su propia naturaleza, la inexistencia del contrato, al
contrario de lo que acontece respecto de los segundos, en los que, supuesta su realidad y certeza,
es obligado examinar las condiciones de su celebracion para resolver acerca de la precedencia da
la nulidad o rescision, examen absolutamente improcedente por contradictorio cuando el contrato
no ha existidc, ya que de la inexistencia no se pueden deducir mas consecuencias juridicas que las
que necesariamente se derivan de esta misma inexistencia, o sean las precedentes cual si no se
hubiese intentado siquiera la celebracion de tales supuestos contratos." (116 Jurisprudencia Civil,
501.)

"Los contratos con causa u objeto ilicitos dice Manresa, se deben reputar ante el derecho
inexistentes. Para afirmarlo asi, nos fundamos en que si otros defectos de menor gravedad juridica
tal vez son irremediables, no ha de tener mayor eficacia lo ilicito que puede suponer la oposicion
mas abierta al derecho, del que no puede exigir amparo lo ilicito. Ademas el interes publico que
determina la nulidad, principalmente en estos casos, no ha de quedar a la voluntad, abandono o
confirmacion de las partes que lo olvidaron infringiendo la ley." (8 Manresa, 4.a ed., 715.)

Y en tratando de contratos celebrados en contravencion de la ley, el Tribunal Supremo de España

dijo en su sentencia de 11 de abril de 1894:

"Que todo contrato otorgado contra precepto expreso de una ley prohibitiva, engendra la accion
necesaria para restablecer la virtualidad de la prohibicion, infringida accion que, teniendo este
origen y alcance, no puede menos de ser eficaz desde el momento mismo de la celebracion del
referido contrato." (75 Jurisprudencia Civil, 503).

El articulo 1334 del Codigo Civil español declara nulas las donaciones entre conyuges durante el
matrimonio. Geronima Uy Coque dono a su esposo Juan Navas L. Sioca todos sus bienes
consistentes en la mitad de los bienes gananciales. Fallecida ella, sus hijos reclamaron la anulacion
de la donacion, y este Tribunal, confirmando la decision del juzgado inferior, declaro nulas las
escrituras de donacion "A" a "F". (Uy Coque contra Navas L. Sioca, 45 Jur. Fil., 452). En dicha
donacion no medio fraude, engaño o causa torpe, violencia, delito o falta. Marido y mujer por
simple ignorancia de la ley efectuaron la donacion con la mejor buena fe (del modo como obraron
el demandante y el demandado en la presente causa), creyendo que no estaba prohibida la
donacion entre ellos. Se declaro nula la donacion porque esta prohibida por la ley, porque es
contrato considerado inexistente ante el Derecho. Los herederos de la finada consiguieron la
declaracion judicial de invalidez de la donacion y recobraron los bienes donados por su madre.

¿Que diremos de la venta de un inmueble a un extranjero, cosa que esta expresamente prohibida
por la Constitucion? Es sencillamente un contrato inexistente bajo la ley y la Constitucion. No
debe depender de la voluntad de las partes contratantes o de su abandono o ignorancia o buena fe
la existencia de ese contrato anticonstitucional. El interes publico debe prevalecer sobre el acuerdo
de las partes.
Es absurda la teoria de que el vendedor no puede pedir la rescision del contrato hecho en
contravencion de la Constitucion para "restablecer la virtualidad de la prohibicion" constitucional
o procurar que las cosas vuelvan a su estado normal anterior. Si los herederos de Uy Coque
consiguieron la anulacion de las donaciones hechas por su madre — porque la donacion entre
conyuges es nula — ¿por que el vendedor (demandante en la presente causa) no puede pedir la
rescision de la venta realizada contra la prohibicion constitucional? ¿Por que es rescindible una
donacion hecha en contravencion del Codigo Civil y no es rescindible la venta hecha contra la
expresa prohibicion de la Constitucion?

La nulidad absoluta, segun Castan, "puede ser reclamada mediante accion o excepcion, por toda
persona que tenga interes en ella, porque no afecta la nulidad de los contratos al interes publico, la
accion no es en nuestro Derecho publica o cuasipublica, como lo es en otras legislaciones." (El
articulo 1047 del Codigo Civil argentino dispone que la nulidad absoluta puede y debe ser
declarada por el Juez, aun sin peticion de parte, cuando aparece manifiesta en el acto, y puede
pedirse su declaracion por el Ministerio publico, en el interes de la moral o de la ley.) La
inexistencia del contrato, segun Castan, "es perpetua e insubsanable, no pudiendo ser objeto de
confirmacion ni prescripcion, excluyendo sin embargo los contratos que reunen los requisitos
expresados en el articulo 1261." (2 Castan, 644).

"Evidente es — dice Valverde — que nuestro codigo admite tal distincion de nulidad absoluta e
inexistencia y nulidad relativa o anulabilidad; mas para el legislador español, la nulidad solo
interesa a los contratantes, pues aun cuando existen contratos que afectan al orden publico y social
y en los cuales la nulidad deberia pedirse de oficio, para el codigo tal accion tiene que ser
ejercitada a instancia de parte." (3 Valverde, 299).

Declarar que el vendedor no puede recobrar, a cambio de lo que habia pagado, devolviendolo
previamente, es frustrar el espiritu que informa la Constitucion; es consentir que los extranjeros
continuen acaparando bienes inmuebles en daño y perjuicio del pueblo, en vez de juzgar de
acuerdo con el Codigo Civil, inspirandose en el elevado proposito de la Asemblea Constituyente
de "conservar y acrecentar el patrimonio de la nacion" y evitar que, por un error judicial, los
filipinos — al cabo de una generacion - sean simples peones en su propia tierra. Desatender la
demanda del vendedor y dejar que el comprador continue gozando de la propiedad comprada a
pesar de la prohibicion, no es cumplir con la Constitucion: es violar su espiritu y minar su
principio fundamental de propia conservacion.

El comprador no puede acogerse a las disposiciones del articulo 1306 del Codigo Civil español
que es inaplicable, segun el Tribunal Supremo de España, a contratos inexistentes. Con mayor
razon dicho articulo no puede oponerse con exito como defensa en una demanda en que se pide la
declaracion de nulidad de la venta de un inmueble por ser contraria a la Constitucion y la
devolucion de las cosas que las partes habian recibido.
En mi opinion, la decision debe ser revocada, la venta debe ser declarada nula y las cosas
recibidas por las partes sean restituidas. (Articulo 1303, Codigo Civil.)

REYES, J., dissenting:

I dissent. The majority opinion holds the sale in question void but denies relief on the ground that
the parties were in pari delicto. The doctrine invoked by the majority has no application where, as
in the present case, the contract sought to be annulled is against public policy, the same being
forbidden by the Constitution. (Vol. 3, Pomeroy's Equity Jurisprudence, 5th ed., see. 941.) The
present case is to be distinguished from that of Trinidad Gonzaga de Cabautan et al. vs. Uy Hoo et
al., 88 Phil. 103, where the sale took place when the Constitution was not in force.

2
||| (Rellosa v. Gaw Chee Hun, G.R. No. L-1411, [September 29, 1953], 93 PHIL 827-843)