[G.R. No. 133632. February 15, 2002] BPI INVESTMENT CORPORATION, petitioner, vs. HON.

COURT OF APPEALS and ALS MANAGEMENT & DEVELOPMENT CORPORATION,respondents. DECISION QUISUMBING, J.: This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals and its resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed the judgment of the Regional Trial Court of Pasig City, Branch 151, in (a) Civil Case No. 11831, for foreclosure of mortgage by petitioner BPI Investment Corporation (BPIIC for brevity) against private respondents ALS Management and Development Corporation and Antonio K. [1] Litonjua, consolidated with (b) Civil Case No. 52093, for damages with prayer for the issuance of a writ of preliminary injunction by the private respondents against said petitioner. The trial court had held that private respondents were not in default in the payment of their monthly amortization, hence, the extrajudicial foreclosure conducted by BPIIC was premature and made in bad faith. It awarded private respondents the amount of P300,000 for moral damages, P50,000 for exemplary damages, and P50,000 for attorneys fees and expenses for litigation. It likewise dismissed the foreclosure suit for being premature. The facts are as follows: Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a house on his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to AIDC to secure the loan. Sometime in 1980, Roa sold the house and lot to private respondents ALS and Antonio Litonjua for P850,000. They paid P350,000 in cash and assumed the P500,000 balance of Roas indebtedness with AIDC. The latter, however, was not willing to extend the old interest rate to private respondents and proposed to grant them a new loan of P500,000 to be applied to Roas debt and secured by the same property, at an interest rate of 20% per annum and service fee of 1% per annum on the outstanding principal balance payable within ten years in equal monthly amortization of P9,996.58 and penalty interest at the rate of 21% per annum per day from the date the amortization became due and payable. Consequently, in March 1981, private respondents executed a mortgage deed containing the above stipulations with the provision that payment of the monthly amortization shall commence onMay 1, 1981. On August 13, 1982, ALS and Litonjua updated Roas arrearages by paying BPIIC the sum of P190,601.35. This reduced Roas principal balance to P457,204.90 which, in turn, was liquidated when BPIIC applied thereto the proceeds of private respondents loan of P500,000. On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting to be what was left of their loan after full payment of Roas loan. In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground that they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted to Four Hundred Seventy Five Thousand Five Hundred Eighty Five and 31/100 Pesos (P475,585.31). A notice of sheriffs sale was published on August 13, 1984. On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They alleged, among others, that they were not in arrears in their payment, but in fact made an overpayment as of June 30, 1984. They maintained that they should not be made to pay amortization before the actual release of the P500,000 loan in August and September 1982. Further, out of the P500,000 loan, only the total amount of P464,351.77 was released to private respondents. Hence, applying the effects of legal compensation, the balance of P35,648.23 should be applied to the initial monthly amortization for the loan. On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and 52093, thus: WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development Corporation and Antonio K. Litonjua and against BPI Investment Corporation, holding that the amount of loan granted by BPI to ALS and Litonjua was only in the principal sum of P464,351.77, with interest at 20% plus service charge of 1% per annum, payable on equal monthly and successive amortizations at P9,283.83 for ten (10) years or one hundred twenty (120) months. The amortization schedule attached as Annex A to the Deed of Mortgage is correspondingly reformed as aforestated. The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused their publication in a newspaper of general circulation as defaulting debtors, and therefore orders BPI to pay ALS and Litonjua the following sums: a) P300,000.00 for and as moral damages;

b) P50,000.00 as and for exemplary damages; c) P50,000.00 as and for attorneys fees and expenses of litigation. The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature. Costs against BPI. [2] SO ORDERED. Both parties appealed to the Court of Appeals. However, private respondents appeal was dismissed for non-payment of docket fees. On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion reads: WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in toto. [3] SO ORDERED. In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the delivery of the object of the contract. The contract of loan between BPIIC and ALS & Litonjua was perfected only on September 13, 1982, the date when BPIIC released the purported balance of the P500,000 loan after deducting therefrom the value of Roas indebtedness. Thus, payment of the monthly amortization should commence only a month after the said date, as can be inferred from the stipulations in the contract. This, despite the express agreement of the parties that payment shall commence on May 1, 1981. From October 1982 to June 1984, the total amortization due was only P194,960.43. Evidence showed that private respondents had an overpayment, because as of June 1984, they already paid a total amount of P201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose the mortgage and cause the publication in newspapers concerning private respondents delinquency in the payment of their loan. This fact constituted sufficient ground for moral damages in favor of private respondents. The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this petition, where BPIIC submits for resolution the following issues: I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE LIGHT OF THE RULE LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125 SCRA 122. II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND EXEMPLARY DAMAGES AND ATTORNEYS FEES IN THE FACE OF IRREGULAR PAYMENTS MADE BY ALS AND OPPOSED TO THE RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS. COURT OF APPEALS, 120 SCRA 707. On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a simple loan is perfected upon the delivery of the object of the contract, the loan contract in this case was perfected only on September 13, 1982. Petitioner claims that a contract of loan is a consensual contract, and a loan contract is perfected at the time the contract of mortgage is executed conformably with our ruling in Bonnevie v. Court of Appeals, 125 SCRA 122. In the present case, the loan contract was perfected on March 31, 1981, the date when the mortgage deed was executed, hence, the amortization and interests on the loan should be computed from said date. Petitioner also argues that while the documents showed that the loan was released only on August 1982, the loan was actually released on March 31, 1981, when BPIIC issued a cancellation of mortgage of Frank Roas loan. This finds support in the registration on March 31, 1981 of the Deed of Absolute Sale executed by Roa in favor of ALS, transferring the title of the property to ALS, and ALS executing the Mortgage Deed in favor of BPIIC. Moreover, petitioner claims, the delay in the release of the loan should be attributed to private respondents. As BPIIC only agreed to extend a P500,000 loan, private respondents were required to reduce Frank Roas loan below said amount. According to petitioner, private respondents were only able to do so in August 1982. [4] In their comment, private respondents assert that based on Article 1934 of the Civil Code, a simple loan is perfected upon the delivery of the object of the contract, hence a real contract. In this case, even though the loan contract was signed on March 31, 1981, it was perfected only on September 13, 1982, when the full loan was released to private respondents. They submit that petitioner misread Bonnevie. To give meaning to Article 1934, according to private respondents, Bonnevie must be construed to mean that the contract to extend the loan was perfected onMarch 31, 1981 but the contract of loan itself was only perfected upon the delivery of the full loan to private respondents on September 13, 1982. Private respondents further maintain that even granting, arguendo, that the loan contract was perfected on March 31, 1981, and their payment did not start a month thereafter, still no default took place. According to private respondents, a perfected loan agreement imposes reciprocal obligations, where the obligation or promise of each party is the consideration of the other party. In this case, the consideration for BPIIC in entering into the loan contract is the promise of private

respondents to pay the monthly amortization. For the latter, it is the promise of BPIIC to deliver the money. 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. Therefore, private respondents conclude, they did not incur in delay when they did not commence paying the monthly amortization on May 1, 1981, as it was only on September 13, 1982 when petitioner fully complied with its obligation under the loan contract. We agree with private respondents. A loan contract is not a consensual contract but a real [5] contract. It is perfected only upon the delivery of the object of the contract. Petitioner misappliedBonnevie. The contract in Bonnevie declared by this Court as a perfected consensual contract falls under the first clause of Article 1934, Civil Code. It is an accepted promise to deliver something by way of simple loan. In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445, petitioner applied for a loan of P500,000 with respondent bank. The latter approved the application through a board resolution. Thereafter, the corresponding mortgage was executed and registered. However, because of acts attributable to petitioner, the loan was not released. Later, petitioner instituted an action for damages. We recognized in this case, a perfected consensual contract which under normal circumstances could have made the bank liable for not releasing the loan. However, since the fault was attributable to petitioner therein, the court did not award it damages. A perfected consensual contract, as shown above, can give rise to an action for damages. However, said contract does not constitute the real contract of loan which requires the delivery of the object of the contract for its perfection and which gives rise to obligations only on the part of the [6] borrower. In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other, was perfected only on September 13, 1982, the date of the second release of the loan. Following the intentions of the parties on the commencement of the monthly amortization, as found by the Court of Appeals, private respondents obligation to pay commenced only on October [7] 13, 1982, a month after the perfection of the contract. We also agree with private respondents that a contract of loan involves a reciprocal obligation, [8] wherein the obligation or promise of each party is the consideration for that of the other. As averred by private respondents, the promise of BPIIC to extend and deliver the loan is upon the consideration that ALS and Litonjua shall pay the monthly amortization commencing on May 1, 1981, one month after the supposed release of the loan. It is a basic principle in reciprocal obligations that neither party incurs in delay, if the other does not comply or is not ready to comply in [9] a proper manner with what is incumbent upon him. Only when a party has performed his part of the contract can he demand that the other party also fulfills his own obligation and if the latter fails, default sets in. Consequently, petitioner could only demand for the payment of the monthly amortization after September 13, 1982 for it was only then when it complied with its obligation under the loan contract. Therefore, in computing the amount due as of the date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is October 13, 1982 and not May 1, 1981. Other points raised by petitioner in connection with the first issue, such as the date of actual release of the loan and whether private respondents were the cause of the delay in the release of the loan, are factual. Since petitioner has not shown that the instant case is one of the exceptions to the basic rule that only questions of law can be raised in a petition for review under Rule 45 of the [10] Rules of Court, factual matters need not tarry us now. On these points we are bound by the findings of the appellate and trial courts. On the second issue, petitioner claims that it should not be held liable for moral and exemplary damages for it did not act maliciously when it initiated the foreclosure proceedings. It merely exercised its right under the mortgage contract because private respondents were irregular in their monthly amortization. It invoked our ruling in Social Security System vs. Court of Appeals, 120 SCRA 707, where we said: Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of Appeals the negligence of the appellant is not so gross as to warrant moral and temperate damages, except that, said Court reduced those damages by only P5,000.00 instead of eliminating them. Neither can we agree with the findings of both the Trial Court and respondent Court that the SSS had acted maliciously or in bad faith. The SSS was of the belief that it was acting in the legitimate exercise of its right under the mortgage contract in the face of irregular payments made by private respondents and placed reliance on the automatic acceleration clause in the contract. The filing alone of the foreclosure application should not be a ground for an award of moral damages in the same way that a clearly unfounded civil action is not among the grounds for moral damages.

Private respondents counter that BPIIC was guilty of bad faith and should be liable for said damages because it insisted on the payment of amortization on the loan even before it was released. Further, it did not make the corresponding deduction in the monthly amortization to conform to the actual amount of loan released, and it immediately initiated foreclosure proceedings when private respondents failed to make timely payment. But as admitted by private respondents themselves, they were irregular in their payment of monthly amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in bad [11] faith. Consequently, we should rule out the award of moral and exemplary damages. However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of mortgage, without checking and correspondingly adjusting its records on the amount actually released to private respondents and the date when it was released. Such negligence resulted in damage to private respondents, for which an award of nominal damages should be given in [12] recognition of their rights which were violated by BPIIC. For this purpose, the amount of P25,000 is sufficient. Lastly, as in SSS where we awarded attorneys fees because private respondents were compelled to litigate, we sustain the award of P50,000 in favor of private respondents as attorneys fees. WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution dated April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of damages. The award of moral and exemplary damages in favor of private respondents is DELETED, but the award to them of attorneys fees in the amount of P50,000 is UPHELD. Additionally, petitioner is ORDERED to pay private respondents P25,000 as nominal damages. Costs against petitioner. SO ORDERED. Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

[G.R.

No.

168523,

March

09,

2011] Upon the Edralins' failure to redeem the property during the one-year period provided under Act No. 3135, Veterans Bank acquired absolute ownership of the subject property. Consequently, Veterans Bank caused the consolidation of ownership of the subject [13] property in its name on January 19, 1994. The Register of Deeds of Paraaque, Metro Manila cancelled TCT No. 204889 under the name of Fernando Edralin and [14] replaced it with a new transfer certificate of title, TCT No. 78332, in the name of Veterans Bank on February 3, 1994. Despite the foregoing, the Edralins failed to vacate and surrender possession of the subject property to Veterans Bank. Thus, on May 24, 1996, Veterans Bank filed anExParte Petition for the Issuance of a Writ of Possession, docketed as Land Registration Case (LRC) No. 06-060 before Branch 274 of the Regional Trial Court (RTC) of Paraaque City. The same, however, was dismissed for Veterans Bank's failure to [15] prosecute. On July 29, 2003, Veterans Bank again filed an Ex-Parte Petition for Issuance of Writ of Possession,[16] this time docketed as Land Registration Case No. 03-0121, before the RTC of Paraaque City. Veterans Bank divulged in its Certification against Forum[17] Shopping that the earlier case, LRC No. 96-060, involving the same subject matter and parties, was dismissed. The Edralins moved to dismiss 96-060 Ruling of
[18]

SPOUSES FERNANDO AND ANGELINA EDRALIN, PETITIONERS, VS. PHILIPPINE VETERANS BANK, RESPONDENT. DECISION DEL CASTILLO, J.: The right to possess a property follows the right of ownership; consequently, it would be illogical to hold that a person having ownership of a parcel of land is barred from seeking possession thereof. Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of [1] [2] Court, assailing the Decision dated June 10, 2005 of the Court of Appeals (CA) in CAG.R. SP No. 89248. The dispositive portion of the assailed Decision reads: WHEREFORE, premises considered, the present petition is hereby GIVEN DUE COURSE and the writ prayed for accordingly GRANTED. The assailed Orders dated November 8, 2004 and January 28, 2005 dismissing the ex-parte petition for issuance of writ of possession and denying petitioner's motion for reconsideration, respectively, are hereby ANNULLED and SET ASIDE. Respondent Judge is hereby DIRECTED to issue the writ of possession prayed for by the petitioner Philippine Veterans Bank over the subject property covered by TCT No. 78332 of the Registry of Deeds for Paraaque City, Metro Manila. No SO ORDERED. Factual
[3]

the petition on the ground that the dismissal of LRC No. constituted res judicata. Regional Trial Court

pronouncement

as

to

costs.

the

Antecedents

The trial court denied the motion to dismiss explaining that the ground of failure to present evidence is not a determination of the merits of the case hence does not constitute res judicata on the petition for issuance of a writ of possession.[19] Nevertheless, the trial court found no merit in the Veterans Bank's application and [20] dismissed the same in its Order dated November 8, 2004. The trial court explained that, under paragraph (d) of the REM, the Veterans Bank agreed to take possession of the Edralins' property without any judicial intervention. The court held that granting the writ of possession to the Veterans Bank will violate the contractual agreement of the parties. Paragraph (d) reads: (d) Effective upon the breach of any condition of this mortgageand in addition to the remedies herein stipulated, the Mortgagee is hereby likewise appointed attorney-in-fact of the Mortgagor with full powers and authority, with the use of force, if necessary to take actual possession of the mortgaged property, without the necessity of any judicial order or any permission, or power, to collect rents, to eject tenants, to lease or sell the mortgaged property or any part thereof, at a private sale without previous notice or advertisement of any kind and execute the corresponding bills of sale, lease or other agreement that may be deemed convenient, to make repairs or improvements on the mortgaged property and pay for the same andperform any other act which the Mortgagee may deem convenient for the proper administration of the mortgaged property. The payment of any expenses advanced by the Mortgagee in connection with the purposes indicated herein is also guaranteed by this Mortgage and such amount advanced shall bear interest at the rate of 12% per annum. Any amount received from sale, disposal or administration above-mentioned may be applied to the payment of the repairs, improvements, taxes and any other incidental expenses and obligations and also the payment of the original indebtedness and interest thereof. The power herein granted shall not be revoked during the life of this mortgage, and all acts that may be executed by

Respondent Philippine Veterans Bank (Veterans Bank) is a commercial banking [4] [5] institution created under Republic Act (RA) No. 3518, as amended by RA No. 7169. On February 5, 1976, Veterans Bank granted petitioner spouses Fernando and Angelina Edralin (Edralins) a loan in the amount of Two Hundred Seventy Thousand Pesos (P270,000.00). As security thereof, petitioners executed a Real Estate [6] Mortgage (REM) in favor of Veterans Bank over a real property situated in the Municipality of Paraaque and registered in the name of petitioner Fernando Edralin. The mortgaged property is more particularly described in Transfer Certificate of Title (TCT) No. 204889. The REM was registered with the Registry of Deeds of the Province [7] [8] of Rizal. The REM and its subsequent amendments were all duly annotated at the back of TCT No. 204889.[9] The Edralins failed to pay their obligation to Veterans Bank. Thus, on June 28, 1983, [10] Veterans Bank filed a Petition for Extrajudicial Foreclosure of the REM with the Office of the Clerk of Court and Ex-Officio Sheriff of Rizal. In due course, the foreclosure sale was held on September 8, 1983, in which the ExOfficio Sheriff of Rizal sold the mortgaged property at public auction. Veterans Bank emerged as the highest bidder at the said foreclosure sale and was issued the corresponding Certificate of Sale.[11] The said Certificate of Sale was registered with the Registry of Deeds of the Province of Rizal and annotated at the back of TCT No. 204889 [12] under Entry No. 83-62953/T-No. 43153-A on October 25, 1983.

the Mortgagee by virtue of said power are hereby ratified. In addition to the foregoing, the Mortgagor also hereby agrees, that the Auditor General shall withhold any money due or which may become due the Mortgagor or debtor from the Government or from any of its instrumentalities, except those exempted by law from attachment or execution, and [21] apply the same in settlement of any and all amount due to the Mortgagee; The trial court held that, assuming the contract allowed for the issuance of a writ of possession, Veterans Bank's right to seek possession had already prescribed. Without citing authority and adequate explanation, the court held that Veterans Bank had only 10 years from February 24, 1983 to seek possession of the property. Veterans Bank moved for the reconsideration of the adverse decision. It directed the court's attention to paragraph (c) of the real estate mortgage, which expressly granted the mortgagee the right to avail itself of the remedy of extrajudicial foreclosure in case of the mortgagor's default. Paragraph (c) reads: (c) If at any time the Mortgagor shall fail or refuse to pay the obligations herein secured, or any of the amortizations of such indebtedness when due, or to comply with any of the conditions and stipulations herein agreed, or shall, during the time this mortgage is in force, institute insolvency proceedings or be involuntarily declared insolvent, or shall use the proceeds of this loan for purposes other than those specified herein, or if this mortgage cannot be recorded in the corresponding Registry of Deeds, then all the obligations of the Mortgagor secured by this Mortgage and all the amortization thereof shall immediately become due, payable and defaulted, and the Mortgagee may immediately foreclose this mortgage judicially in accordance with the Rules of Court, or extra-judicially in accordance with Act No. 3135, as amended, and under Act 2612, as amended. For the purpose of extra-judicial foreclosure the Mortgagor hereby appoints the Mortgagee his attorney-in-fact to sell the property mortgaged under Act No. 3135, as amended, to sign all documents and perform any act requisite and necessary to accomplish said purpose and to appoint its substitutes as such attorney-infact with the same powers as above specified. x x x[23] The motion for reconsideration was set for hearing on January 28, 2005. Due to a [24] conflict of schedule, Veterans Bank's counsel moved to reset the hearing on its motion. In apparent denial of the motion to reset, the trial court proceeded to deny Veterans Bank's motion for reconsideration in the Order dated January 28, 2005.[25] The trial court reiterated that paragraph (d) of the REM allowed Veterans Bank to take immediate possession of the property without need of a judicial order. It would be redundant for the court to issue a writ of possession in its favor. This prompted Veterans Bank to file a Petition for Mandamus with Prayer for Issuance of [26] a Preliminary Mandatory Injunction before the CA. First among its arguments, Veterans Bank maintained that it was the trial court's ministerial duty[27] to grant a writ of possession to the mortgagee who has consolidated and registered the property in its name. Veterans Bank then assailed the trial court's holding that its right to a writ of possession had already prescribed. Respondent maintained that the writ can be issuedat any [28] time after the mortgagor failed to redeem the foreclosed property. Lastly, Veterans Bank argued that, contrary to the trial court's finding, it did not contract away its right to an extrajudicial foreclosure under Act No. 3135, as amended, by the inclusion of paragraph (d) in the REM. Veterans Bank pointed out that, as evidenced by paragraph (c) of the REM, it expressly reserved the right to avail of the remedies under
[22]

Act Ruling The of appellate court the ruled

No. Court in favor of of

3135.

[29]

Appeals[30] Veterans Bank.

It held that the contractual provision in paragraph (d) to immediately take possession of the mortgaged property without need of judicial intervention is distinct from the right to avail of extrajudicial foreclosure under Section 7 of Act No. 3135, which was expressly reserved by Veterans Bank in paragraph (c) of the REM. The fact that the two paragraphs do not negate each other is evidenced by the qualifying phrase "in addition to the remedies herein stipulated" found in paragraph (c). Having availed itself of the remedy of extrajudicial foreclosure, Veterans Bank, as the highest bidder, has the right to a writ of possession. This right may be availed of any time after the buyer consolidates ownership. In fact, the issuance of the writ of possession is a ministerial function, the right to which cannot be enjoined or stayed, even by an action for annulment of the mortgage or the foreclosure sale itself. The trial court's ruling that Veterans Bank's right to possess has prescribed is likewise erroneous. As already stated, Veterans Bank's right to possess the property is not based on their contract but on Act No. 3135. Since the issuance of a writ of possession is a ministerial act of the trial judge, mandamus lies to compel the performance of the said duty. Petitioners immediately filed this petition for review. Issues Petitioners submit the following issues for our consideration: 1. Whether mandamus was resorted to as a substitute for a lost appeal 2. Whether mandamus is the proper remedy to seek a review of the final orders of the trial court 3. Whether the consolidation of ownership of the extrajudicially foreclosed property through a Deed of Sale is in accordance with law 4. Whether the issuance of a writ of possession under Act [No.] 3135 is subject to [31] the statute of limitations Our Ruling Propriety of the Remedy of Mandamus

Petitioners argue that Veterans Bank availed itself of the remedy of mandamus as a substitute for a lost appeal.[32] Petitioners narrate the relevant dates that allegedly show the belatedness and impropriety of the petition for mandamus. Veterans Bank received the Order dated November 8, 2004 on November 18, 2004, thus it had until December 3, 2004 to file a motion for reconsideration. Since December 3, 2004 was declared a nonworking holiday, Veterans Bank filed its motion for reconsideration on the next working day, December 6, 2004. With the said dates, it had only one day left from receipt of the January 28, 2005 Order, or until February 10, 2005, to file an appeal (citing Section 2, Rule 22) of the Rules of Court. Since Veterans Bank did not file an appeal on the following day, it had lost its right to appeal and the assailed orders allegedly attained finality.

Respondent counters that the issuance of a writ of possession is not an ordinary action for which the rules on appeal apply. The writ being a mere motion or an order of execution, appeal is not the proper remedy to question the trial court's ruling. In fact, Section 1, Rule 41 of the Rules of Court provides that no appeal may be taken from an [33] order of execution, but Rule 65 special civil actions are available. Given that the issuance of the writ of possession is a ministerial act of the judge, respondent maintains that a petition for mandamus is the proper remedy. Respondent adds that, even if appeal were available, the same is not the plain, speedy and adequate remedy to compel the performance of the ministerial act.[34] Respondent maintains that Section 3 of Rule 65 recognizes that the remedy of mandamus is available in conjunction with an appeal. The qualifying phrase "and there is no appeal [available]," which appears in certiorari and prohibition petitions, is conspicuously missing for petitions for mandamus. We rule that mandamus is a proper remedy to compel the issuance of a writ of possession. The purpose of mandamus is to compel the performance of a ministerial duty. A ministerial act is "one which an officer or tribunal performs in a given state of facts, in a prescribed manner, in obedience to the mandate of legal authority, without regard to or the exercise of his own judgment upon the propriety or impropriety of the act [35] done." The issuance of a writ of possession is outlined in Section 7 of Act No. 3135, as amended by Act No. 4118, which provides: SEC. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance of the province or place where the property or any part thereof is situated, to give him possession thereof during the redemption period, furnishing bond in an amount equivalent to the use of the property for a period of twelve months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or without complying with the requirements of [this] Act. Such petition shall be made under oath and filed in form of an ex parte motion x x xand the court shall, upon approval of the bond, order that a writ of possession issue, addressed to the sheriff of the province in which the property is situated, who shall execute said order immediately. During the period of redemption, the mortgagee is entitled to a writ of possession upon depositing the approved bond. When the redemption period expires without the mortgagor exercising his right of redemption, the mortgagor is deemed to have lost all interest over the foreclosed property, and the purchaser acquires absolute ownership of the property. The purchaser's right is aptly described thus: Consequently, the purchaser, who has a right to possession after the expiration of the redemption period, becomes the absolute owner of the property when no redemption is made. In this regard, the bond is no longer needed. The purchaser can demand possession at any time following the consolidation of ownership in his name and the issuance to him of a new TCT.After consolidation of title in the purchaser's name for failure of the mortgagor to redeem the property, the purchaser's right to possession ripens into the absolute right of a confirmed owner. At that point, the issuance of a writ of possession, upon proper application and proof of title becomes merely a ministerial function. Effectively, the court cannot exercise its discretion. Therefore, the issuance by the RTC of a writ of possession in favor of the respondent in this case is proper. We have consistently held that the duty of the trial court to grant a

writ of possession in such instances is ministerial, and the court may not exercise discretion or judgment x x x[36] With the consolidated title, the purchaser becomes entitled to a writ of possession and [37] the trial court has the ministerial duty to issue such writ of possession. Thus, "the remedy of mandamus lies to compel the performance of [this] ministerial duty."[38] Does prohibit the charter of extrajudicial Veterans Bank foreclosures?

Petitioners then assail Veterans Bank's power to extrajudicially foreclose on mortgages. They maintain that the legislature intended to limit Veterans Bank to judicial foreclosures [39] only, citing Section 18 of the Veterans Bank's charter, RA No. 3518, which provides: Section 18. Right of redemption of property foreclosed. - The mortgagor shall have the right, within one year after the sale of the real estate as a result of the foreclosure of a mortgage, to redeem the property by paying the amount fixed by the court in the order of execution, with interest thereon at the rate specified in the mortgage, and all the costs and other judicial expenses incurred by the Bank by reason of the execution and sale, and for the custody of said property. Respondent counters that the inclusion of the phrase "fixed by the Court" in Section 18 of RA No. 3518 does not necessarily mean that only judicial foreclosures are available to Veterans Bank. Moreover, resort to an extrajudicial foreclosure was voluntarily entered [40] into by the contracting parties in their REM. There is no merit in petitioners' contention.

The aforequoted Section 18 grants to mortgagors of Veterans Bank the right to redeem their judicially foreclosed properties. This provision had to be included because in judicial foreclosures, mortgagors generally do not have the right of redemption unless there is an [41] express grant by law. But, contrary to petitioners' averments, there is nothing in Section 18 which can be interpreted to mean that Veterans Bank is limited to judicial foreclosures only, or that it [42] cannot avail itself of the benefits provided under Act No. 3135, as amended, allowing extrajudicial foreclosures. Moreover, the availability of extra-judicial foreclosure to a mortgagee depends upon the agreement of the contracting parties. Section 1 of Act No. 3135 provides: Section 1. When a sale is made under a special power inserted in or attached to any real-estate mortgage hereafter made as security for the payment of money or the fulfillment of any other obligation, the provisions of the following sections shall govern as to the manner in which the sale and redemption shall be effected,whether or not provision for the same is made in the power. (Emphasis supplied.) In the case at bar, paragraph (c) of the parties' REM granted Veterans Bank the special power as attorney-in-fact of the petitioners to perform all acts necessary for the purpose of extrajudicial foreclosure under Act No. 3135. Thus, there is no obstacle preventing Veterans Bank from availing itself of the remedy of extrajudicial foreclosure. Was done the in consolidation accordance of with title law?

Petitioners argue that Veterans Bank is not entitled to a writ of possession because it failed to properly consolidate its title over the subject property.[43] They maintain that the Deed of Sale executed by the Veterans Bank in the bank's own favor during the consolidation of title constitutes a pactum commissorium, which is prohibited under Article 2088 of the Civil Code.[44] Respondent contends that petitioners never questioned the validity of the foreclosure proceedings or the auction sale. The failure to do so resulted in the ripening of the consolidation of ownership.[45] There is no merit in petitioners' argument.

such inaction, the Republic's right over the land had prescribed, been abandoned or waived. The Court's language in rejecting Calacala's theory is illuminating: [T]he Republic's failure to execute the acts referred to by the petitioners within ten (10) years from the registration of the Certificate of Sale cannot, in any way, operate to restore whatever rights petitioners' predecessors-in-interest had over the same. For sure, petitioners have yet to cite any provision of law or rule of jurisprudence, and we are not aware of any, to the effect that the failure of a buyer in a foreclosure sale to secure a Certificate of Final Sale, execute an Affidavit of Consolidation of Ownership and obtain a writ of possession over the property thus acquired, within ten (10) years from the registration of the Certificate of Sale will operate to bring ownership back to him whose property has been previously foreclosed and sold. x x x x x x x

Pactum commissorium is "a stipulation empowering the creditor to appropriate the thing given as guaranty for the fulfillment of the obligation in the event the obligor fails to live up to his undertakings, without further formality, such as foreclosure proceedings, and a [46] public sale." "The elements of pactum commissorium, which enable the mortgagee to acquire ownership of the mortgaged property without the need of any foreclosure proceedings, are: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period."[47] The second element is missing to characterize the Deed of Sale as a form of pactum commissorium. Veterans Bank did not, upon the petitioners' default, automatically acquire or appropriate the mortgaged property for itself. On the contrary, the Veterans Bank resorted to extrajudicial foreclosure and was issued a Certificate of Sale by the sheriff as proof of its purchase of the subject property during the foreclosure sale. That Veterans Bank went through all the stages of extrajudicial foreclosure indicates that there was no pactum commissorium. Does possession the right to a writ of prescribe?

Moreover, with the rule that the expiration of the 1-year redemption period forecloses the obligors' right to redeem and that the sale thereby becomes absolute, the issuance thereafter of a final deed of sale is at best a mere formality and mere confirmation of the title that is already vested in the purchaser. x x x[57] Moreover, the provisions cited by petitioners refer to prescription of actions. An actionis "defined as an ordinary suit in a court of justice, by which one party prosecutes another for the enforcement or protection of a right, or the prevention or redress of a wrong."[58] On the other hand "[a] petition for the issuance of the writ, under Section 7 of Act No. 3135, as amended, is not an ordinary action filed in court, by which one party `sues another for the enforcement or protection of a right, or prevention or redress of a wrong.' It is in the nature of an ex parte motion [in] which the court hears only one side. It is taken or granted at the instance and for the benefit of one party, and without notice to or consent by any party adversely affected. Accordingly, upon the filing of a proper motion by the purchaser in a foreclosure sale, and the approval of the corresponding bond, the writ of possession issues as a matter of course and the trial court has no discretion on [59] this matter." WHEREFORE, premises considered, the Petition is DENIED for lack of merit. The CA Decision dated June 10, 2005 in CA-G.R. SP No. 89248 is AFFIRMED. SO ORDERED.

Petitioners assail the CA's ruling that the issuance of a writ of possession does not [48] [49] [50] [51] prescribe. They maintain that Articles 1139, 1149, and 1150 of the Civil Code regarding prescriptive periods cover all kinds of action, which necessarily include the issuance of a writ of possession. Petitioners posit that, for purposes of the latter, it is the five-year prescriptive period provided in Article 1149 of the Civil Code which applies because Act No. 3135 itself did not provide for its prescriptive period. Thus, Veterans Bank had only five years from September 12, 1983, the date when the Certificate of Sale [52] was issued in its favor, to move for the issuance of a writ of possession. Respondent argues that jurisprudence has consistently held that a registered owner of the land, such as the buyer in an auction sale, is entitled to a writ of possession at any [53] time after the consolidation of ownership. We cannot accept petitioners' contention. We have held before that the purchaser's right [54] "to request for the issuance of the writ of possession of the land never prescribes." [55] "The right to possess a property merely follows the right of ownership," and it would be illogical to hold that a person having ownership of a parcel of land is barred from seeking possession thereof. In Calacala v. Republic of the Philippines,[56] the Republic was the highest bidder in the public auction but failed for a long period of time to execute an Affidavit of Consolidation and to seek a writ of possession. Calacala insisted that, by

Corona, C.J., (Chairperson), Velasco, Jr., Leonardo-De Castro, and Perez, JJ., concur.

G.R. No. 163512 February 28, 2007 DAISY B. TIU, Petitioner vs. PLATINUM PLANS PHIL., INC., Respondent. DECISION QUISUMBING, J.: For review on certiorari are the Decision1 dated January 20, 2004 of the Court of Appeals in CA-G.R. CV No. 74972, and its Resolution2 dated May 4, 2004 denying reconsideration. The Court of Appeals had affirmed the decision3 dated February 28, 2002 of the Regional Trial Court (RTC) of Pasig City, Branch 261, in an action for damages, ordering petitioner to pay respondent P100,000 as liquidated damages. The relevant facts are as follows: Respondent Platinum Plans Philippines, Inc. is a domestic corporation engaged in the pre-need industry. From 1987 to 1989, petitioner Daisy B. Tiu was its Division Marketing Director. On January 1, 1993, respondent re-hired petitioner as Senior Assistant VicePresident and Territorial Operations Head in charge of its Hongkong and Asean operations. The parties executed a contract of employment valid for five years.4 On September 16, 1995, petitioner stopped reporting for work. In November 1995, she became the Vice-President for Sales of Professional Pension Plans, Inc., a corporation engaged also in the pre-need industry. Consequently, respondent sued petitioner for damages before the RTC of Pasig City, Branch 261. Respondent alleged, among others, that petitioners employment with Professional Pension Plans, Inc. violated the non-involvement clause in her contract of employment, to wit: 8. NON INVOLVEMENT PROVISION The EMPLOYEE further undertakes that during his/her engagement with EMPLOYER and in case of separation from the Company, whether voluntary or for cause, he/she shall not, for the next TWO (2) years thereafter, engage in or be involved with any corporation, association or entity, whether directly or indirectly, engaged in the same business or belonging to the same pre-need industry as the EMPLOYER. Any breach of the foregoing provision shall render the EMPLOYEE liable to the EMPLOYER in the amount of 5 One Hundred Thousand Pesos (P100,000.00) for and as liquidated damages. Respondent thus prayed for P100,000 as compensatory damages; P200,000 as moral damages; P100,000 as exemplary damages; and 25% of the total amount due plus P1,000 per counsels court appearance, as attorneys fees. Petitioner countered that the non-involvement clause was unenforceable for being against public order or public policy: First, the restraint imposed was much greater than what was necessary to afford respondent a fair and reasonable protection. Petitioner contended that the transfer to a rival company was an accepted practice in the pre-need industry. Since the products sold by the companies were more or less the same, there was nothing peculiar or unique to protect. Second, respondent did not invest in petitioners training or improvement. At the time petitioner was recruited, she already possessed the knowledge and expertise required in the pre-need industry and respondent benefited tremendously from it. Third, a strict application of the non-involvement clause would amount to a deprivation of petitioners right to engage in the only work she knew.

In upholding the validity of the non-involvement clause, the trial court ruled that a contract in restraint of trade is valid provided that there is a limitation upon either time or place. In the case of the pre-need industry, the trial court found the twoyear restriction to be valid and reasonable. The dispositive portion of the decision reads: WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, ordering the latter to pay the following: 1. the amount of One Hundred Thousand Pesos (P100,000.00) for and as damages, for the breach of the non-involvement provision (Item No. 8) of the contract of employment; 2. costs of suit. There being no sufficient evidence presented to sustain the grant of attorneys fees, the Court deems it proper not to award any. SO ORDERED.6 On appeal, the Court of Appeals affirmed the trial courts ruling. It reasoned that petitioner entered into the contract on her own will and volition. Thus, she bound herself to fulfill not only what was expressly stipulated in the contract, but also all its consequences that were not against good faith, usage, and law. The appellate court also ruled that the stipulation prohibiting non-employment for two years was valid and enforceable considering the nature of respondents business. Petitioner moved for reconsideration but was denied. Hence, this appeal by certiorari where petitioner alleges that the Court of Appeals erred when: A. [IT SUSTAINED] THE VALIDITY OF THE NON-INVOLVEMENT CLAUSE IN PETITIONERS CONTRACT CONSIDERING THAT THE PERIOD FIXED THEREIN IS VOID FOR BEING OFFENSIVE TO PUBLIC POLICY B. [IT SUSTAINED] THE AWARD OF LIQUIDATED DAMAGES CONSIDERING THAT IT BEING IN THE NATURE OF A PENALTY THE SAME IS EXCESSIVE, INIQUITOUS OR UNCONSCIONABLE7 Plainly stated, the core issue is whether the non-involvement clause is valid. Petitioner avers that the non-involvement clause is offensive to public policy since the restraint imposed is much greater than what is necessary to afford respondent a fair and reasonable protection. She adds that since the products sold in the pre-need industry are more or less the same, the transfer to a rival company is acceptable. Petitioner also points out that respondent did not invest in her training or improvement. At the time she joined respondent, she already had the knowledge and expertise required in the pre-need industry. Finally, petitioner argues that a strict application of the non-involvement clause would deprive her of the right to engage in the only work she knows. Respondent counters that the validity of a non-involvement clause has been sustained by the Supreme Court in a long line of cases. It contends that the inclusion of the two-year non-involvement clause in petitioners contract of employment was reasonable and needed since her job gave her access to the companys confidential marketing strategies. Respondent adds that the noninvolvement clause merely enjoined her from engaging in pre-need business akin to respondents within two years from petitioners separation from respondent. She had not been prohibited from marketing other service plans.

As early as 1916, we already had the occasion to discuss the validity of a noninvolvement clause. In Ferrazzini v. Gsell,8 we said that such clause was unreasonable restraint of trade and therefore against public policy. InFerrazzini, the employee was prohibited from engaging in any business or occupation in the Philippines for a period of five years after the termination of his employment contract and must first get the written permission of his employer if he were to do so. The Court ruled that while the stipulation was indeed limited as to time and space, it was not limited as to trade. Such prohibition, in effect, forces an employee to leave the Philippines to work should his employer refuse to give a written permission. 9 In G. Martini, Ltd. v. Glaiserman, we also declared a similar stipulation as void for being an unreasonable restraint of trade. There, the employee was prohibited from engaging in any business similar to that of his employer for a period of one year. Since the employee was employed only in connection with the purchase and export of abaca, among the many businesses of the employer, the Court considered the restraint too broad since it effectively prevented the employee from working in any other business similar to his employer even if his employment was limited only to one of its multifarious business activities. However, in Del Castillo v. Richmond,10 we upheld a similar stipulation as legal, reasonable, and not contrary to public policy. In the said case, the employee was restricted from opening, owning or having any connection with any other drugstore within a radius of four miles from the employers place of business during the time the employer was operating his drugstore. We said that a contract in restraint of trade is valid provided there is a limitation upon either time or place and the restraint upon one party is not greater than the protection the other party requires. 11 Finally, in Consulta v. Court of Appeals, we considered a non-involvement 12 clause in accordance with Article 1306 of the Civil Code. While the complainant in that case was an independent agent and not an employee, she was prohibited for one year from engaging directly or indirectly in activities of other companies that compete with the business of her principal. We noted therein that the restriction did not prohibit the agent from engaging in any other business, or from being connected with any other company, for as long as the business or company did not compete with the principals business. Further, the prohibition applied only for one year after the termination of the agents contract and was therefore a reasonable restriction designed to prevent acts prejudicial to the employer. Conformably then with the aforementioned pronouncements, a non-involvement clause is not necessarily void for being in restraint of trade as long as there are reasonable limitations as to time, trade, and place. In this case, the non-involvement clause has a time limit: two years from the time petitioners employment with respondent ends. It is also limited as to trade, since it only prohibits petitioner from engaging in any pre-need business akin to respondents.1awphi1.net More significantly, since petitioner was the Senior Assistant Vice-President and Territorial Operations Head in charge of respondents Hongkong and Asean operations, she had been privy to confidential and highly sensitive marketing strategies of respondents business. To allow her to engage in a rival business soon after she leaves would make respondents trade secrets vulnerable

especially in a highly competitive marketing environment. In sum, we find the non-involvement clause not contrary to public welfare and not greater than is 13 necessary to afford a fair and reasonable protection to respondent. In any event, Article 1306 of the Civil Code provides that parties to a contract may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. Article 115914 of the same Code also provides that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Courts cannot stipulate for the parties nor amend their agreement where the same does not contravene law, morals, good customs, public order or public policy, for to do so would be to alter the real intent of the parties, and would run contrary to the function of the courts to give force and effect thereto.15 Not being contrary to public policy, the noninvolvement clause, which petitioner and respondent freely agreed upon, has the force of law between them, and thus, should be complied with in good faith.16 Thus, as held by the trial court and the Court of Appeals, petitioner is bound to pay respondent P100,000 as liquidated damages. While we have equitably reduced liquidated damages in certain cases,17 we cannot do so in this case, since it appears that even from the start, petitioner had not shown the least intention to fulfill the non-involvement clause in good faith. WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 20, 2004, and the Resolution dated May 4, 2004, of the Court of Appeals in CA-G.R. CV No. 74972, are AFFIRMED. Costs against petitioner. SO ORDERED.

G.R. No. 162994 September 17, 2004 DUNCAN ASSOCIATION OF DETAILMAN-PTGWO and PEDRO A. TECSON, petitioners, vs. GLAXO WELLCOME PHILIPPINES, INC., Respondent. RESOLUTION TINGA, J.: Confronting the Court in this petition is a novel question, with constitutional overtones, involving the validity of the policy of a pharmaceutical company prohibiting its employees from marrying employees of any competitor company. This is a Petition for Review on Certiorari assailing the Decision1 dated May 19, 2003 and 2 the Resolution dated March 26, 2004 of the Court of Appeals in CA-G.R. SP No. 62434. Petitioner Pedro A. Tecson (Tecson) was hired by respondent Glaxo Wellcome Philippines, Inc. (Glaxo) as medical representative on October 24, 1995, after Tecson had undergone training and orientation. Thereafter, Tecson signed a contract of employment which stipulates, among others, that he agrees to study and abide by existing company rules; to disclose to management any existing or future relationship by consanguinity or affinity with co-employees or employees of competing drug companies and should management find that such relationship poses a possible conflict of interest, to resign from the company. The Employee Code of Conduct of Glaxo similarly provides that an employee is expected to inform management of any existing or future relationship by consanguinity or affinity with co-employees or employees of competing drug companies. If management perceives a conflict of interest or a potential conflict between such relationship and the employees employment with the company, the management and the employee will explore the possibility of a "transfer to another department in a non-counterchecking position" or preparation for employment outside the company after six months. Tecson was initially assigned to market Glaxos products in the Camarines SurCamarines Norte sales area. Subsequently, Tecson entered into a romantic relationship with Bettsy, an employee of 3 Astra Pharmaceuticals (Astra), a competitor of Glaxo. Bettsy was Astras Branch Coordinator in Albay. She supervised the district managers and medical representatives of her company and prepared marketing strategies for Astra in that area. Even before they got married, Tecson received several reminders from his District Manager regarding the conflict of interest which his relationship with Bettsy might engender. Still, love prevailed, and Tecson married Bettsy in September 1998. In January 1999, Tecsons superiors informed him that his marriage to Bettsy gave rise to a conflict of interest. Tecsons superiors reminded him that he and Bettsy should decide which one of them would resign from their jobs, although they told him that they wanted to retain him as much as possible because he was performing his job well. Tecson requested for time to comply with the company policy against entering into a relationship with an employee of a competitor company. He explained that Astra, Bettsys employer, was planning to merge with Zeneca, another drug company; and Bettsy was planning to avail of the redundancy package to be offered by Astra. With Bettsys separation from her company, the potential conflict of interest would be eliminated. At the same time, they would be able to avail of the attractive redundancy package from Astra. In August 1999, Tecson again requested for more time resolve the problem. In September 1999, Tecson applied for a transfer in Glaxos milk division, thinking that since Astra did not have a milk division, the potential conflict of interest would be eliminated. His application was denied in view of Glaxos "least-movement-possible" policy. In November 1999, Glaxo transferred Tecson to the Butuan City-Surigao City-Agusan del Sur sales area. Tecson asked Glaxo to reconsider its decision, but his request was denied.

Tecson sought Glaxos reconsideration regarding his transfer and brought the matter to Glaxos Grievance Committee. Glaxo, however, remained firm in its decision and gave Tescon until February 7, 2000 to comply with the transfer order. Tecson defied the transfer order and continued acting as medical representative in the Camarines SurCamarines Norte sales area. During the pendency of the grievance proceedings, Tecson was paid his salary, but was not issued samples of products which were competing with similar products manufactured by Astra. He was also not included in product conferences regarding such products. Because the parties failed to resolve the issue at the grievance machinery level, they submitted the matter for voluntary arbitration. Glaxo offered Tecson a separation pay of one-half () month pay for every year of service, or a total of P50,000.00 but he declined the offer. On November 15, 2000, the National Conciliation and Mediation Board (NCMB) rendered its Decision declaring as valid Glaxos policy on relationships between its employees and persons employed with competitor companies, and affirming Glaxos right to transfer Tecson to another sales territory. Aggrieved, Tecson filed a Petition for Review with the Court of Appeals assailing the NCMB Decision. On May 19, 2003, the Court of Appeals promulgated its Decision denying the Petition for Review on the ground that the NCMB did not err in rendering its Decision. The appellate court held that Glaxos policy prohibiting its employees from having personal relationships with employees of competitor companies is a valid exercise of its management 4 prerogatives. Tecson filed a Motion for Reconsideration of the appellate courts Decision, but the 5 motion was denied by the appellate court in its Resolution dated March 26, 2004. Petitioners filed the instant petition, arguing therein that (i) the Court of Appeals erred in affirming the NCMBs finding that the Glaxos policy prohibiting its employees from marrying an employee of a competitor company is valid; and (ii) the Court of Appeals also erred in not finding that Tecson was constructively dismissed when he was transferred to a new sales territory, and deprived of the opportunity to attend products seminars and 6 training sessions. Petitioners contend that Glaxos policy against employees marrying employees of competitor companies violates the equal protection clause of the Constitution because it creates invalid distinctions among employees on account only of marriage. They claim that the policy restricts the employees right to marry.7 They also argue that Tecson was constructively dismissed as shown by the following circumstances: (1) he was transferred from the Camarines Sur-Camarines Norte sales area to the Butuan-Surigao-Agusan sales area, (2) he suffered a diminution in pay, (3) he was excluded from attending seminars and training sessions for medical representatives, and (4) he was prohibited from promoting respondents products which were competing 8 with Astras products. In its Comment on the petition, Glaxo argues that the company policy prohibiting its employees from having a relationship with and/or marrying an employee of a competitor company is a valid exercise of its management prerogatives and does not violate the equal protection clause; and that Tecsons reassignment from the Camarines NorteCamarines Sur sales area to the Butuan City-Surigao City and Agusan del Sur sales area does not amount to constructive dismissal.9 Glaxo insists that as a company engaged in the promotion and sale of pharmaceutical products, it has a genuine interest in ensuring that its employees avoid any activity, relationship or interest that may conflict with their responsibilities to the company. Thus, it expects its employees to avoid having personal or family interests in any competitor company which may influence their actions and decisions and consequently deprive Glaxo of legitimate profits. The policy is also aimed at preventing a competitor company 10 from gaining access to its secrets, procedures and policies.

It likewise asserts that the policy does not prohibit marriage per se but only proscribes existing or future relationships with employees of competitor companies, and is therefore not violative of the equal protection clause. It maintains that considering the nature of its 11 business, the prohibition is based on valid grounds. According to Glaxo, Tecsons marriage to Bettsy, an employee of Astra, posed a real and potential conflict of interest. Astras products were in direct competition with 67% of the products sold by Glaxo. Hence, Glaxos enforcement of the foregoing policy in Tecsons 12 case was a valid exercise of its management prerogatives. In any case, Tecson was given several months to remedy the situation, and was even encouraged not to resign but to ask his wife to resign form Astra instead.13 Glaxo also points out that Tecson can no longer question the assailed company policy because when he signed his contract of employment, he was aware that such policy was stipulated therein. In said contract, he also agreed to resign from respondent if the management finds that his relationship with an employee of a competitor company would 14 be detrimental to the interests of Glaxo. Glaxo likewise insists that Tecsons reassignment to another sales area and his exclusion from seminars regarding respondents new products did not amount to constructive dismissal. It claims that in view of Tecsons refusal to resign, he was relocated from the Camarines Sur-Camarines Norte sales area to the Butuan City-Surigao City and Agusan del Sur sales area. Glaxo asserts that in effecting the reassignment, it also considered the welfare of Tecsons family. Since Tecsons hometown was in Agusan del Sur and his wife traces her roots to Butuan City, Glaxo assumed that his transfer from the Bicol region to the Butuan City sales area would be favorable to him and his family as he would be 15 relocating to a familiar territory and minimizing his travel expenses. In addition, Glaxo avers that Tecsons exclusion from the seminar concerning the new anti-asthma drug was due to the fact that said product was in direct competition with a drug which was soon to be sold by Astra, and hence, would pose a potential conflict of interest for him. Lastly, the delay in Tecsons receipt of his sales paraphernalia was due to the mix-up created by his refusal to transfer to the Butuan City sales area (his paraphernalia was delivered to his new sales area instead of Naga City because the 16 supplier thought he already transferred to Butuan). The Court is tasked to resolve the following issues: (1) Whether the Court of Appeals erred in ruling that Glaxos policy against its employees marrying employees from competitor companies is valid, and in not holding that said policy violates the equal protection clause of the Constitution; (2) Whether Tecson was constructively dismissed. The Court finds no merit in the petition. The stipulation in Tecsons contract of employment with Glaxo being questioned by petitioners provides: 10. You agree to disclose to management any existing or future relationship you may have, either by consanguinity or affinity with co-employees or employees of competing drug companies. Should it pose a possible conflict of interest in management discretion, you agree to resign voluntarily from the Company as a matter of Company policy. 17 The same contract also stipulates that Tescon agrees to abide by the existing company 18 rules of Glaxo, and to study and become acquainted with such policies. In this regard, the Employee Handbook of Glaxo expressly informs its employees of its rules regarding conflict of interest: 1. Conflict of Interest Employees should avoid any activity, investment relationship, or interest that may run counter to the responsibilities which they owe Glaxo Wellcome. Specifically, this means that employees are expected:

a. To avoid having personal or family interest, financial or otherwise, in any competitor supplier or other businesses which may consciously or unconsciously influence their actions or decisions and thus deprive Glaxo Wellcome of legitimate profit. b. To refrain from using their position in Glaxo Wellcome or knowledge of Company plans to advance their outside personal interests, that of their relatives, friends and other businesses. c. To avoid outside employment or other interests for income which would impair their effective job performance. d. To consult with Management on such activities or relationships that may lead to conflict of interest. 1.1. Employee Relationships Employees with existing or future relationships either by consanguinity or affinity with co-employees of competing drug companies are expected to disclose such relationship to the Management. If management perceives a conflict or potential conflict of interest, every effort shall be made, together by management and the employee, to arrive at a solution within six (6) months, either by transfer to another department in a non-counter checking position, or by career preparation toward outside employment after Glaxo Wellcome. Employees must be prepared for possible resignation within six (6) months, if no other solution is 19 feasible. No reversible error can be ascribed to the Court of Appeals when it ruled that Glaxos policy prohibiting an employee from having a relationship with an employee of a competitor company is a valid exercise of management prerogative. Glaxo has a right to guard its trade secrets, manufacturing formulas, marketing strategies and other confidential programs and information from competitors, especially so that it and Astra are rival companies in the highly competitive pharmaceutical industry. The prohibition against personal or marital relationships with employees of competitor companies upon Glaxos employees is reasonable under the circumstances because relationships of that nature might compromise the interests of the company. In laying down the assailed company policy, Glaxo only aims to protect its interests against the possibility that a competitor company will gain access to its secrets and procedures. That Glaxo possesses the right to protect its economic interests cannot be denied. No less than the Constitution recognizes the right of enterprises to adopt and enforce such a policy to protect its right to reasonable returns on investments and to expansion and 20 growth. Indeed, while our laws endeavor to give life to the constitutional policy on social justice and the protection of labor, it does not mean that every labor dispute will be decided in favor of the workers. The law also recognizes that management has rights 21 which are also entitled to respect and enforcement in the interest of fair play. 22 As held in a Georgia, U.S.A case, it is a legitimate business practice to guard business confidentiality and protect a competitive position by even-handedly disqualifying from jobs male and female applicants or employees who are married to a competitor. Consequently, the court ruled than an employer that discharged an employee who was married to an employee of an active competitor did not violate Title VII of the Civil Rights 23 Act of 1964. The Court pointed out that the policy was applied to men and women equally, and noted that the employers business was highly competitive and that gaining inside information would constitute a competitive advantage. The challenged company policy does not violate the equal protection clause of the Constitution as petitioners erroneously suggest. It is a settled principle that the commands of the equal protection clause are addressed only to the state or those acting under color of its authority.24 Corollarily, it has been held in a long array of U.S. Supreme Court decisions that the equal protection clause erects no shield against merely private 25 conduct, however, discriminatory or wrongful. The only exception occurs when the 29 state in any of its manifestations or actions has been found to have become entwined or

involved in the wrongful private conduct. Obviously, however, the exception is not present in this case. Significantly, the company actually enforced the policy after repeated requests to the employee to comply with the policy. Indeed, the application of the policy was made in an impartial and even-handed manner, with due regard for the lot of the employee. In any event, from the wordings of the contractual provision and the policy in its employee handbook, it is clear that Glaxo does not impose an absolute prohibition against relationships between its employees and those of competitor companies. Its employees are free to cultivate relationships with and marry persons of their own choosing. What the company merely seeks to avoid is a conflict of interest between the employee and the company that may arise out of such relationships. As succinctly explained by the appellate court, thus: The policy being questioned is not a policy against marriage. An employee of the company remains free to marry anyone of his or her choosing. The policy is not aimed at restricting a personal prerogative that belongs only to the individual. However, an employees personal decision does not detract the employer from exercising management prerogatives to ensure maximum profit and business success. . .28 The Court of Appeals also correctly noted that the assailed company policy which forms part of respondents Employee Code of Conduct and of its contracts with its employees, such as that signed by Tescon, was made known to him prior to his employment. Tecson, therefore, was aware of that restriction when he signed his employment contract and when he entered into a relationship with Bettsy. Since Tecson knowingly and voluntarily entered into a contract of employment with Glaxo, the stipulations therein have the force 29 of law between them and, thus, should be complied with in good faith." He is therefore estopped from questioning said policy. The Court finds no merit in petitioners contention that Tescon was constructively dismissed when he was transferred from the Camarines Norte-Camarines Sur sales area to the Butuan City-Surigao City-Agusan del Sur sales area, and when he was excluded from attending the companys seminar on new products which were directly competing with similar products manufactured by Astra. Constructive dismissal is defined as a quitting, an involuntary resignation resorted to when continued employment becomes impossible, unreasonable, or unlikely; when there is a demotion in rank or diminution in pay; or when a clear discrimination, insensibility or disdain by an employer becomes unbearable to the employee.30 None of these conditions are present in the instant case. The record does not show that Tescon was demoted or unduly discriminated upon by reason of such transfer. As found by the appellate court, Glaxo properly exercised its management prerogative in reassigning Tecson to the Butuan City sales area: . . . In this case, petitioners transfer to another place of assignment was merely in keeping with the policy of the company in avoidance of conflict of interest, and thus validNote that [Tecsons] wife holds a sensitive supervisory position as Branch Coordinator in her employer-company which requires her to work in close coordination with District Managers and Medical Representatives. Her duties include monitoring sales of Astra products, conducting sales drives, establishing and furthering relationship with customers, collection, monitoring and managing Astras inventoryshe therefore takes an active participation in the market war characterized as it is by stiff competition among pharmaceutical companies. Moreover, and this is significant, petitioners sales territory covers Camarines Sur and Camarines Norte while his wife is supervising a branch of her employer in Albay. The proximity of their areas of responsibility, all in the same Bicol Region, renders the conflict of interest not only possible, but actual, as learning by one spouse of the others market strategies in the region would be inevitable. [Managements] appreciation of a conflict of interest is therefore 31 not merely illusory and wanting in factual basis

27

In Abbott Laboratories (Phils.), Inc. v. National Labor Relations Commission, which involved a complaint filed by a medical representative against his employer drug company for illegal dismissal for allegedly terminating his employment when he refused to accept his reassignment to a new area, the Court upheld the right of the drug company to transfer or reassign its employee in accordance with its operational demands and requirements. The ruling of the Court therein, quoted hereunder, also finds application in the instant case: By the very nature of his employment, a drug salesman or medical representative is expected to travel. He should anticipate reassignment according to the demands of their business. It would be a poor drug corporation which cannot even assign its representatives or detail men to new markets calling for opening or expansion or to areas where the need for pushing its products is great. More so if such reassignments are part of the employment contract.33 As noted earlier, the challenged policy has been implemented by Glaxo impartially and disinterestedly for a long period of time. In the case at bar, the record shows that Glaxo gave Tecson several chances to eliminate the conflict of interest brought about by his relationship with Bettsy. When their relationship was still in its initial stage, Tecsons supervisors at Glaxo constantly reminded him about its effects on his employment with the company and on the companys interests. After Tecson married Bettsy, Glaxo gave him time to resolve the conflict by either resigning from the company or asking his wife to resign from Astra. Glaxo even expressed its desire to retain Tecson in its employ because of his satisfactory performance and suggested that he ask Bettsy to resign from her company instead. Glaxo likewise acceded to his repeated requests for more time to resolve the conflict of interest. When the problem could not be resolved after several years of waiting, Glaxo was constrained to reassign Tecson to a sales area different from that handled by his wife for Astra. Notably, the Court did not terminate Tecson from employment but only reassigned him to another area where his home province, Agusan del Sur, was included. In effecting Tecsons transfer, Glaxo even considered the welfare of Tecsons family. Clearly, the foregoing dispels any suspicion of unfairness and bad 34 faith on the part of Glaxo. WHEREFORE, the Petition is DENIED for lack of merit. Costs against petitioners. SO ORDERED.

32

G.R. No. 164774 April 12, 2006 STAR PAPER CORPORATION, JOSEPHINE ONGSITCO & SEBASTIAN CHUA, Petitioners, vs. RONALDO D. SIMBOL, WILFREDA N. COMIA & LORNA E. ESTRELLA, Respondents. DECISION PUNO, J.: We are called to decide an issue of first impression: whether the policy of the employer banning spouses from working in the same company violates the rights of the employee under the Constitution and the Labor Code or is a valid exercise of management prerogative. At bar is a Petition for Review on Certiorari of the Decision of the Court of Appeals dated August 3, 2004 in CA-G.R. SP No. 73477 reversing the decision of the National Labor Relations Commission (NLRC) which affirmed the ruling of the Labor Arbiter. Petitioner Star Paper Corporation (the company) is a corporation engaged in trading principally of paper products. Josephine Ongsitco is its Manager of the Personnel and Administration Department while Sebastian Chua is its Managing Director. The evidence for the petitioners show that respondents Ronaldo D. Simbol (Simbol), Wilfreda N. Comia (Comia) and Lorna E. Estrella (Estrella) were all regular employees of 1 the company. Simbol was employed by the company on October 27, 1993. He met Alma Dayrit, also an employee of the company, whom he married on June 27, 1998. Prior to the marriage, Ongsitco advised the couple that should they decide to get married, one of them should 2 resign pursuant to a company policy promulgated in 1995, viz.: 1. New applicants will not be allowed to be hired if in case he/she has [a] relative, up to [the] 3rd degree of relationship, already employed by the company. 2. In case of two of our employees (both singles [sic], one male and another female) developed a friendly relationship during the course of their employment and then decided to get married, one of them should resign to preserve the 3 policy stated above. 4 Simbol resigned on June 20, 1998 pursuant to the company policy. Comia was hired by the company on February 5, 1997. She met Howard Comia, a coemployee, whom she married on June 1, 2000. Ongsitco likewise reminded them that pursuant to company policy, one must resign should they decide to get married. Comia 5 resigned on June 30, 2000. Estrella was hired on July 29, 1994. She met Luisito Zuiga (Zuiga), also a co-worker. Petitioners stated that Zuiga, a married man, got Estrella pregnant. The company allegedly could have terminated her services due to immorality but she opted to resign on 6 December 21, 1999. The respondents each signed a Release and Confirmation Agreement. They stated therein that they have no money and property accountabilities in the company and that they release the latter of any claim or demand of whatever nature.7 Respondents offer a different version of their dismissal. Simbol and Comia allege that they did not resign voluntarily; they were compelled to resign in view of an illegal company policy. As to respondent Estrella, she alleges that she had a relationship with co-worker Zuiga who misrepresented himself as a married but separated man. After he got her pregnant, she discovered that he was not separated. Thus, she severed her relationship with him to avoid dismissal due to the company policy. On November 30, 1999, she met an accident and was advised by the doctor at the Orthopedic Hospital to recuperate for twenty-one (21) days. She returned to work on December 21, 1999 but she found out that her name was on-hold at the gate. She was denied entry. She was directed to proceed to the personnel office where one of the staff handed her a memorandum. The memorandum stated that she was being dismissed for immoral

conduct. She refused to sign the memorandum because she was on leave for twenty-one (21) days and has not been given a chance to explain. The management asked her to write an explanation. However, after submission of the explanation, she was nonetheless dismissed by the company. Due to her urgent need for money, she later submitted a 8 letter of resignation in exchange for her thirteenth month pay. Respondents later filed a complaint for unfair labor practice, constructive dismissal, separation pay and attorneys fees. They averred that the aforementioned company policy is illegal and contravenes Article 136 of the Labor Code. They also contended that they were dismissed due to their union membership. On May 31, 2001, Labor Arbiter Melquiades Sol del Rosario dismissed the complaint for lack of merit, viz.: [T]his company policy was decreed pursuant to what the respondent corporation perceived as management prerogative. This management prerogative is quite broad and encompassing for it covers hiring, work assignment, working method, time, place and manner of work, tools to be used, processes to be followed, supervision of workers, working regulations, transfer of employees, work supervision, lay-off of workers and the discipline, dismissal and recall of workers. Except as provided for or limited by special law, an employer is free to regulate, according to his own discretion and judgment all the aspects of employment.9 (Citations omitted.) On appeal to the NLRC, the Commission affirmed the decision of the Labor Arbiter on 10 January 11, 2002. Respondents filed a Motion for Reconsideration but was denied by the NLRC in a 11 Resolution dated August 8, 2002. They appealed to respondent court via Petition for Certiorari. In its assailed Decision dated August 3, 2004, the Court of Appeals reversed the NLRC decision, viz.: WHEREFORE, premises considered, the May 31, 2002 (sic)12 Decision of the National Labor Relations Commission is hereby REVERSED and SET ASIDE and a new one is entered as follows: (1) Declaring illegal, the petitioners dismissal from employment and ordering private respondents to reinstate petitioners to their former positions without loss of seniority rights with full backwages from the time of their dismissal until actual reinstatement; and (2) Ordering private respondents to pay petitioners attorneys fees amounting to 10% of the award and the cost of this suit.13 On appeal to this Court, petitioners contend that the Court of Appeals erred in holding that: 1. x x x the subject 1995 policy/regulation is violative of the constitutional rights towards marriage and the family of employees and of Article 136 of the Labor Code; and 14 2. x x x respondents resignations were far from voluntary. We affirm. The 1987 Constitution15 states our policy towards the protection of labor under the following provisions, viz.: Article II, Section 18. The State affirms labor as a primary social economic force. It shall protect the rights of workers and promote their welfare. xxx Article XIII, Sec. 3. The State shall afford full protection to labor, local and overseas, organized and unorganized, and promote full employment and equality of employment opportunities for all. It shall guarantee the rights of all workers to self-organization, collective bargaining and negotiations, and peaceful concerted activities, including the right to strike in accordance with law. They shall be entitled to security of tenure, humane conditions of work, and a

living wage. They shall also participate in policy and decision-making processes affecting their rights and benefits as may be provided by law. The State shall promote the principle of shared responsibility between workers and employers, recognizing the right of labor to its just share in the fruits of production and the right of enterprises to reasonable returns on investments, and to expansion and growth. The Civil Code likewise protects labor with the following provisions: Art. 1700. The relation between capital and labor are not merely contractual. They are so impressed with public interest that labor contracts must yield to the common good. Therefore, such contracts are subject to the special laws on labor unions, collective bargaining, strikes and lockouts, closed shop, wages, working conditions, hours of labor and similar subjects. Art. 1702. In case of doubt, all labor legislation and all labor contracts shall be construed in favor of the safety and decent living for the laborer. The Labor Code is the most comprehensive piece of legislation protecting labor. The case at bar involves Article 136 of the Labor Code which provides: Art. 136. It shall be unlawful for an employer to require as a condition of employment or continuation of employment that a woman employee shall not get married, or to stipulate expressly or tacitly that upon getting married a woman employee shall be deemed resigned or separated, or to actually dismiss, discharge, discriminate or otherwise prejudice a woman employee merely by reason of her marriage. Respondents submit that their dismissal violates the above provision. Petitioners allege that its policy "may appear to be contrary to Article 136 of the Labor Code" but it assumes a new meaning if read together with the first paragraph of the rule. The rule does not require the woman employee to resign. The employee spouses have the right to choose who between them should resign. Further, they are free to marry persons other than coemployees. Hence, it is not the marital status of the employee, per se, that is being discriminated. It is only intended to carry out its no-employment-for-relatives-within-the16 third-degree-policy which is within the ambit of the prerogatives of management. It is true that the policy of petitioners prohibiting close relatives from working in the same company takes the nature of an anti-nepotism employment policy. Companies adopt these policies to prevent the hiring of unqualified persons based on their status as a 17 relative, rather than upon their ability. These policies focus upon the potential employment problems arising from the perception of favoritism exhibited towards relatives. With more women entering the workforce, employers are also enacting employment policies specifically prohibiting spouses from working for the same company. We note that two types of employment policies involve spouses: policies banning only spouses from working in the same company (no-spouse employment policies), and those banning all immediate family members, including spouses, from working in the same 18 company (anti-nepotism employment policies). Unlike in our jurisdiction where there is no express prohibition on marital discrimination,19 there are twenty state statutes20 in the United States prohibiting marital discrimination. Some state courts21 have been confronted with the issue of whether nospouse policies violate their laws prohibiting both marital status and sex discrimination. In challenging the anti-nepotism employment policies in the United States, complainants utilize two theories of employment discrimination: the disparate treatment and the disparate impact. Under the disparate treatment analysis, the plaintiff must prove that an employment policy is discriminatory on its face. No-spouse employment policies requiring an employee of a particular sex to either quit, transfer, or be fired are facially discriminatory. For example, an employment policy prohibiting the employer from hiring wives of male employees, but not husbands of female employees, is discriminatory on its 22 face.

On the other hand, to establish disparate impact, the complainants must prove that a facially neutral policy has a disproportionate effect on a particular class. For example, although most employment policies do not expressly indicate which spouse will be required to transfer or leave the company, the policy often disproportionately affects one 23 sex. The state courts rulings on the issue depend on their interpretation of the scope of marital status discrimination within the meaning of their respective civil rights acts. Though they agree that the term "marital status" encompasses discrimination based on a person's status as either married, single, divorced, or widowed, they are divided on whether the term has a broader meaning. Thus, their decisions vary.24 The courts narrowly25 interpreting marital status to refer only to a person's status as married, single, divorced, or widowed reason that if the legislature intended a broader definition it would have either chosen different language or specified its intent. They hold that the relevant inquiry is if one is married rather than to whom one is married. They construe marital status discrimination to include only whether a person is single, married, divorced, or widowed and not the "identity, occupation, and place of employment of one's spouse." These courts have upheld the questioned policies and ruled that they did not violate the marital status discrimination provision of their respective state statutes. The courts that have broadly26 construed the term "marital status" rule that it encompassed the identity, occupation and employment of one's spouse. They strike down the no-spouse employment policies based on the broad legislative intent of the state statute. They reason that the no-spouse employment policy violate the marital status provision because it arbitrarily discriminates against all spouses of present employees without regard to the actual effect on the individual's qualifications or work 27 performance. These courts also find the no-spouse employment policy invalid for failure of the employer to present any evidence of business necessity other than the general perception that spouses in the same workplace might adversely affect the 28 business. They hold that the absence of such a bona fide occupational 29 qualification invalidates a rule denying employment to one spouse due to the current employment of the other spouse in the same office.30 Thus, they rule that unless the employer can prove that the reasonable demands of the business require a distinction based on marital status and there is no better available or acceptable policy which would better accomplish the business purpose, an employer may not discriminate against an employee based on the identity of the employees spouse.31 This is known as the bona fide occupational qualification exception. We note that since the finding of a bona fide occupational qualification justifies an employers no-spouse rule, the exception is interpreted strictly and narrowly by these state courts. There must be a compelling business necessity for which no alternative 32 exists other than the discriminatory practice. To justify a bona fide occupational qualification, the employer must prove two factors: (1) that the employment qualification is reasonably related to the essential operation of the job involved; and, (2) that there is a factual basis for believing that all or substantially all persons meeting the qualification would be unable to properly perform the duties of the job.33 The concept of a bona fide occupational qualification is not foreign in our jurisdiction. We employ the standard ofreasonableness of the company policy which is parallel to the bona fide occupational qualification requirement. In the recent case of Duncan Association of Detailman-PTGWO and Pedro Tecson v. Glaxo Wellcome 34 Philippines, Inc., we passed on the validity of the policy of a pharmaceutical company prohibiting its employees from marrying employees of any competitor company. We held that Glaxo has a right to guard its trade secrets, manufacturing formulas, marketing strategies and other confidential programs and information from competitors. We considered the prohibition against personal or marital relationships with employees of competitor companies upon Glaxos employeesreasonable under the circumstances because relationships of that nature might compromise the interests of Glaxo. In laying

down the assailed company policy, we recognized that Glaxo only aims to protect its interests against the possibility that a competitor company will gain access to its secrets and procedures.35 The requirement that a company policy must be reasonable under the circumstances to qualify as a valid exercise of management prerogative was also at issue in the 1997 case of Philippine Telegraph and Telephone Company v. NLRC.36 In said case, the employee was dismissed in violation of petitioners policy of disqualifying from work any woman worker who contracts marriage. We held that the company policy violates the right against discrimination afforded all women workers under Article 136 of the Labor Code, but established a permissible exception, viz.: [A] requirement that a woman employee must remain unmarried could be justified as a "bona fide occupational qualification," or BFOQ, where the particular requirements of the job would justify the same, but not on the ground of a general principle, such as the desirability of spreading work in the workplace. A requirement of that nature would be valid provided it reflects an inherent quality reasonably necessary for satisfactory job 37 performance. (Emphases supplied.) The cases of Duncan and PT&T instruct us that the requirement of reasonableness must be clearly established to uphold the questioned employment policy. The employer has the burden to prove the existence of a reasonable business necessity. The burden was successfully discharged in Duncan but not in PT&T. We do not find a reasonable business necessity in the case at bar. Petitioners sole contention that "the company did not just want to have two (2) or more of 38 its employees related between the third degree by affinity and/or consanguinity" is lame. That the second paragraph was meant to give teeth to the first paragraph of the 39 questioned rule is evidently not the valid reasonable business necessity required by the law. It is significant to note that in the case at bar, respondents were hired after they were found fit for the job, but were asked to resign when they married a co-employee. Petitioners failed to show how the marriage of Simbol, then a Sheeting Machine Operator, to Alma Dayrit, then an employee of the Repacking Section, could be detrimental to its business operations. Neither did petitioners explain how this detriment will happen in the case of Wilfreda Comia, then a Production Helper in the Selecting Department, who married Howard Comia, then a helper in the cutter-machine. The policy is premised on the mere fear that employees married to each other will be less efficient. If we uphold the questioned rule without valid justification, the employer can create policies based on an unproven presumption of a perceived danger at the expense of an employees right to security of tenure. Petitioners contend that their policy will apply only when one employee marries a coemployee, but they are free to marry persons other than co-employees. The questioned policy may not facially violate Article 136 of the Labor Code but it creates a disproportionate effect and under the disparate impact theory, the only way it could pass judicial scrutiny is a showing that it is reasonable despite the discriminatory, albeit disproportionate, effect. The failure of petitioners to prove a legitimate business concern in imposing the questioned policy cannot prejudice the employees right to be free from arbitrary discrimination based upon stereotypes of married persons working together in 40 one company. Lastly, the absence of a statute expressly prohibiting marital discrimination in our jurisdiction cannot benefit the petitioners. The protection given to labor in our jurisdiction is vast and extensive that we cannot prudently draw inferences from the legislatures 41 silence that married persons are not protected under our Constitution and declare valid a policy based on a prejudice or stereotype. Thus, for failure of petitioners to present undisputed proof of a reasonable business necessity, we rule that the questioned policy is an invalid exercise of management prerogative. Corollarily, the issue as to whether respondents Simbol and Comia resigned voluntarily has become moot and academic.

As to respondent Estrella, the Labor Arbiter and the NLRC based their ruling on the singular fact that her resignation letter was written in her own handwriting. Both ruled that her resignation was voluntary and thus valid. The respondent court failed to categorically rule whether Estrella voluntarily resigned but ordered that she be reinstated along with Simbol and Comia. Estrella claims that she was pressured to submit a resignation letter because she was in dire need of money. We examined the records of the case and find Estrellas contention to be more in accord with the evidence. While findings of fact by administrative tribunals like the NLRC are generally given not only respect but, at times, finality, this rule admits of exceptions,42 as in the case at bar. Estrella avers that she went back to work on December 21, 1999 but was dismissed due to her alleged immoral conduct. At first, she did not want to sign the termination papers but she was forced to tender her resignation letter in exchange for her thirteenth month pay. The contention of petitioners that Estrella was pressured to resign because she got impregnated by a married man and she could not stand being looked upon or talked 43 about as immoral is incredulous. If she really wanted to avoid embarrassment and humiliation, she would not have gone back to work at all. Nor would she have filed a suit for illegal dismissal and pleaded for reinstatement. We have held that in voluntary resignation, the employee is compelled by personal reason(s) to dissociate himself from employment. It is done with the intention of relinquishing an office, accompanied by the act of abandonment. 44 Thus, it is illogical for Estrella to resign and then file a complaint for illegal dismissal. Given the lack of sufficient evidence on the part of petitioners that the resignation was voluntary, Estrellas dismissal is declared illegal. IN VIEW WHEREOF, the Decision of the Court of Appeals in CA-G.R. SP No. 73477 dated August 3, 2004 isAFFIRMED.1avvphil.net SO ORDERED.

G.R. No. 153674 December 20, 2006 AVON COSMETICS, INCORPORATED and JOSE MARIE FRANCO, petitioners, vs. LETICIA H. LUNA, respondent. DECISION CHICO-NAZARIO, J.: The Case Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, 1 seeking to reverse and set aside the Decision dated 20 May 2002 of the Court of Appeals in CA-G.R. CV No. 52550, which affirmed in totothe Decision2 dated 26 January 1996 of the Regional Trial Court (RTC) of Makati City, Branch 138, in Civil Case No. 882595, in favor of herein respondent Leticia H. Luna (Luna), rendered by the Honorable Ed Vicente S. Albano, designated as the "assisting judge" pursuant to Supreme Court Administrative Order No. 70-94, dated 16 June 1994. The Facts The facts of the case are not in dispute. As culled from the records, they are as follows: 3 The present petition stemmed from a complaint dated 1 December 1988, filed by herein respondent Luna alleging, inter alia that she began working for Beautifont, Inc. in 1972, first as a franchise dealer and then a year later, as a Supervisor. Sometime in 1978, Avon Cosmetics, Inc. (Avon), herein petitioner, acquired and took over the management and operations of Beautifont, Inc. Nonetheless, respondent Luna continued working for said successor company. Aside from her work as a supervisor, respondent Luna also acted as a make-up artist of petitioner Avons Theatrical Promotions Group, for which she received a per diem for each theatrical performance. On 5 November 1985, petitioner Avon and respondent Luna entered into an agreement, entitled Supervisors Agreement, whereby said parties contracted in the manner quoted below: The Company agrees: xxxx 1) To allow the Supervisor to purchase at wholesale the products of the Company. xxxx The Supervisor agrees: 1) To purchase products from the Company exclusively for resale and to be responsible for obtaining all permits and licenses required to sell the products on retail. xxxx The Company and the Supervisor mutually agree: xxxx 2) That this agreement in no way makes the Supervisor an employee or agent of the Company, therefore, the Supervisor has no authority to bind the Company in any contracts with other parties. 3) That the Supervisor is an independent retailer/dealer insofar as the Company is concerned, and shall have the sole discretion to determine where and how products purchased from the Company will be sold. However, the Supervisor shall not sell such products to stores, supermarkets or to any entity or person who sells things at a fixed place of business. 4) That this agreement supersedes any agreement/s between the Company and the Supervisor.

5) That the Supervisor shall sell or offer to sell, display or promote only and exclusively products sold by the Company. 6) Either party may terminate this agreement at will, with or without cause, at any time upon notice to the other. 4 x x x x. By virtue of the execution of the aforequoted Supervisors Agreement, respondent Luna became part of the independent sales force of petitioner Avon. Sometime in the latter part of 1988, respondent Luna was invited by a former Avon employee who was then currently a Sales Manager of Sandr Philippines, Inc., a domestic corporation engaged in direct selling of vitamins and other food supplements, to sell said products. Respondent Luna apparently accepted the invitation as she then became a Group Franchise Director of Sandr Philippines, Inc. concurrently with being a Group Supervisor of petitioner Avon. As Group Franchise Director, respondent Luna began selling and/or promoting Sandr products to other Avon employees and friends. On 23 September 1988, she requested a law firm to render a legal opinion as to the legal consequence of the Supervisors Agreement she executed with petitioner Avon. In response to her query, a lawyer of the firm opined that the Supervisors Agreement was "contrary to law and public policy." Wanting to share the legal opinion she obtained from her legal counsel, respondent Luna wrote a letter to her colleagues and attached mimeographed copies of the opinion and then circulated them. The full text of her letter reads: We all love our work as independent dealers and we all love to continue in this livelihood. Because my livelihood is important to me, I have asked the legal opinion of a leading Makati law office regarding my status as an independent dealer, I am sharing this opinion with you. I have asked their advice on three specific things: 1) May the company legally change the conditions of the existing "Supervisors Agreement" without the Supervisors consent? If I should refuse to sign the new Agreement, may the company terminate my dealership? On the first issue, my lawyers said that the company cannot change the existing "Agreement" without my consent, and that it would be illegal if the company will compel me to sign the new agreement. 2) Is Section 5 of the "Supervisors Agreement" which says that a dealer may only sell products sold by the company, legal? My lawyers said that Section 5 of the Supervisors Agreement is NOT valid because it is contrary to public policy, being an unreasonable restraint of trade. 3) Is Section 6 of the "Supervisors Agreement" which authorizes the company to terminate the contract at any time, with or without cause, legal? My lawyer said Section 6 is NOT valid because it is contrary to law and public policy. The company cannot terminate the "Supervisors Agreement" without a valid cause. Therefore, I can conclude that I dont violate Section 5 if I sell any product which is not in direct competition with the companys products, and there is no valid reason for the company to terminate my dealership contract if I sell a noncompetitive product. Dear co-supervisor[s], let us all support the reasonable and legal policies of the company. However, we must all be conscious of our legal rights and be ready to protect ourselves if they are trampled upon. I hope we will all stay together selling Avon products for a long time and at the same time increase our earning opportunity by engaging in other businesses without being afraid to do so. In a letter5 dated 11 October 1988, petitioner Avon, through its President and General Manager, Jose Mari Franco, notified respondent Luna of the termination or cancellation of her Supervisors Agreement with petitioner Avon. Said letter reads in part:

In September, (sic) 1988, you brought to our attention that you signed up as Group Franchise Director of another company, Sandr Philippines, Inc. (SPI). Not only that. You have also sold and promoted products of SPI (please refer for example to SPI Invoice No. 1695 dated Sept. 30, 1988). Worse, you promoted/sold SPI products even to several employees of our company including Mary Arlene Nolasco, Regina Porter, Emelisa Aguilar, Hermie Esteller and Emma Ticsay. To compound your violation of the above-quoted provision, you have written letters to other members of the Avon salesforce inducing them to violate their own contracts with our company. x x x. For violating paragraph 5 x x x, the Company, pursuant to paragraph 6 of the same Agreement, is terminating and canceling its Supervisors Agreement with you effective upon your receipt of this notice. We regret having to do this, but your repeated disregard of the Agreement, despite warnings, leaves (sic) the Company no other choice. xxxx Aggrieved, respondent Luna filed a complaint for damages before the RTC of Makati City, Branch 138. The complaint was docketed as Civil Case No. 88-2595. On 26 January 1996, after trial on the merits, the RTC rendered judgment in favor of respondent Luna stating that: WHEREFORE, in view of the foregoing premises, judgment is hereby rendered in favor of the plaintiff, and against defendant, Avon, ordering the latter: 1) to pay moral damages to the plaintiff in the amount of P100,000.00 with interest from the date of this judgment up to the time of complete payment; 2) to pay attorneys fees in the amount of P20,000.00; 3) to pay the costs.6 On 8 February 1996, petitioner Avon filed a Notice of Appeal dated the same day. In an 7 Order dated 15 February 1996, the RTC gave due course to the appeal and directed its Branch Clerk of Court to transmit the entire records of the case to the Court of Appeals, which docketed the appeal as CA G.R. CV No. 52550. On 20 May 2002, the Court of Appeals promulgated the assailed Decision, the dispositive part of which states thus: WHEREFORE, the foregoing premises considered, the decision appealed from is hereby AFFIRMED in toto.8 The Issues In predictable displeasure with the conclusions reached by the appellate court, petitioner Avon now implores this Court to review, via a petition for review on certiorari under Rule 45 of the Revised Rules of Court, the formers decision and to resolve the following 9 assigned errors: I. THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN DECLARING THAT THE SUPERVISORS AGREEMENT EXECUTED BETWEEN AVON AND RESPONDENT LUNA AS NULL AND VOID FOR BEING AGAINST PUBLIC POLICY; II. THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN HOLDING THAT AVON HAD NO RIGHT TO TERMINATE OR CANCEL THE SUPERVIOSRS AGREEMENT; III. THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN UPHOLDING THE AWARD OF MORAL DAMAGES AND ATTORNEYS FEES IN FAVOR OF RESPONDENT LUNA; and IV.

THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN NOT AWARDING ATTORNEYS FEES AND LITIGATION EXPENSES IN FAVOR OF PETITIONER. The Courts Ruling A priori, respondent Luna objects to the presentation, and eventual resolution, of the issues raised herein as they allegedly involve questions of facts. To be sure, questions of law are those that involve doubts or controversies on what the law is on certain state of facts; and questions of fact, on the other hand, are those in which there is doubt or difference as to the truth or falsehood of the alleged facts. One test, it has been held, is whether the appellate court can determine the issue raised without reviewing or evaluating the evidence, in which case it is a question of law, 10 otherwise it will be a question of fact. In the present case, the threshold issues are a) whether or not paragraph 5 of the Supervisors Agreement is void for being violative of law and public policy; and b) whether or not paragraph 6 of the Supervisors Agreement which authorizes petitioner Avon to terminate or cancel the agreement at will is void for being contrary to law and public policy. Certainly, it is quite obvious that the foregoing issues are questions of law. In affirming the decision of the RTC declaring the subject contract null and void for being against public policy, the Court of Appeals ruled that the exclusivity clause, which states that: The Company and the Supervisor mutually agree: xxxx 5) That the Supervisor shall sell or offer to sell, display or promote only and exclusively products sold by the Company. [Emphasis supplied.] should be interpreted to apply solely to those products directly in competition with those of petitioner Avons, i.e., cosmetics and/or beauty supplies and lingerie products. Its declaration is anchored on the fact that Avon products, at that time, were not in any way similar to the products sold by Sandr Philippines, Inc. At that time, the latter was merely selling vitamin products. Put simply, the products of the two companies do not compete with each other. The appellate court ratiocinated that: x x x If the agreement were interpreted otherwise, so as to include products that do not directly compete with the products of defendant-appellant Avon, such would result in absurdity. x x x [A]greements which prohibit a person from engaging in any enterprise whether similar or not to the enterprise of the employer constitute an unreasonable restraint of trade, thus, it is void as against 11 public policy. Petitioner Avon disputes the abovestated conclusion reached by the Court of Appeals. It argues that the latter went beyond the literal and obvious intent of the parties to the subject contract when it interpreted the abovequoted clause to apply only to those products that do not compete with that of petitioner Avons; and that the words "only and exclusively" need no other interpretation other than the literal meaning that "THE SUPERVISORS CANNOT SELL THE PRODUCTS OF OTHER COMPANIES WHETHER OR NOT THEY ARE COMPETING PRODUCTS."12 Moreover, petitioner Avon reasons that: The exclusivity clause was directed against the supervisors selling other products utilizing their training and experience, and capitalizing on Avons existing network for the promotion and sale of the said products. The exclusivity clause was meant to protect Avon from other companies, whether competitors or not, who would exploit the sales and promotions network already established by Avon at great expense and effort. xxxx Obviously, Sandre Phils., Inc. did not have the (sic) its own trained personnel and network to sell and promote its products. It was precisely why Sandre simply invited, and then and there hired Luna and other Avon supervisors and

dealers to sell and promote its products. They had the training and experience, they also had a ready market for the other products the customers to whom they had been selling the Avon products. It was easy to entice the supervisors to sign up. The supervisors could continue to sell Avon products, and at the same time earn additional income by selling other products. This is most unfair to Avon. The other companies cannot ride on and exploit the training and experience of the Avon sales force to sell and promote their own products. [Emphasis supplied.] On the other hand, in her Memorandum, respondent Luna counters that "there is no allegation nor any finding by the trial court or the Court of Appeals of an existing nationwide sales and promotions network established by Avon or Avons existing sales promotions network or Avons tried and tested sales and promotions network nor the alleged damage caused to such system caused by other companies." Further, well worth noting is the opinion of respondent Lunas counsel which started the set off the series of events which culminated to the termination or cancellation of the Supervisors 13 Agreement. In response to the query-letter of respondent Luna, the latters legal 14 counsel opined that, as allegedly held in the case of Ferrazzini v. Gsell, paragraph 5 of the subject Supervisors Agreement "not only prohibits the supervisor from selling products which compete with the companys product but restricts likewise the supervisor 15 from engaging in any industry which involves sales in general." Said counsel thereafter concluded that the subject provision in the Supervisors Agreement constitutes an unreasonable restraint of trade and, therefore, void for being contrary to public policy. At the crux of the first issue is the validity of paragraph 5 of the Supervisors Agreement, viz: The Company and the Supervisor mutually agree: xxxx 5) That the Supervisor shall sell or offer to sell, display or promote only and exclusively products sold by the Company. [Emphasis supplied.] In business parlance, this is commonly termed as the "exclusivity clause." This is defined as agreements which prohibit the obligor from engaging in "business" in competition with the obligee. This exclusivity clause is more often the subject of critical scrutiny when it is perceived to collide with the Constitutional proscription against "reasonable restraint of trade or occupation." The pertinent provision of the Constitution is quoted hereunder. Section 19 of Article XII of the 1987 Constitution on the National Economy and Patrimony states that: SEC. 19. The State shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed. First off, restraint of trade or occupation embraces acts, contracts, agreements or 16 combinations which restrict competition or obstruct due course of trade. Now to the basics. From the wordings of the Constitution, truly then, what is brought about to lay the test on whether a given agreement constitutes an unlawful machination or combination in restraint of trade is whether under the particular circumstances of the case and the nature of the particular contract involved, such contract is, or is not, against 17 public interest. Thus, restrictions upon trade may be upheld when not contrary to public welfare and not greater than is necessary to afford a fair and reasonable protection to the party in whose 18 favor it is imposed. Even contracts which prohibit an employee from engaging in business in competition with the employer are not necessarily void for being in restraint of trade. In sum, contracts requiring exclusivity are not per se void. Each contract must be viewed vis--vis all the circumstances surrounding such agreement in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.

The question that now crops up is this, when is a restraint in trade unreasonable? Authorities are one in declaring that a restraint in trade is unreasonable when it is contrary to public policy or public welfare. As far back as 1916, in the case of Ferrazzini 19 v. Gsell, this Court has had the occasion to declare that: There is no difference in principle between the public policy (orden pblico) in the in the two jurisdictions (United States and the Philippine Islands) as determined by the Constitution, laws, and judicial decisions. In the United States it is well settled that contracts in undue or unreasonable restraint of trade are unenforcible because they are repugnant to the established public policy in that country. Such contracts are illegal in the sense that the law will not enforce them. The Supreme Court in the United States, in Oregon Steam Navigation Co. vs. Winsor )20 Will., 64), quoted with approval in Gibbs v. Consolidated gas Co. of Baltimore (130 U.S., 396), said: Cases must be judged according to their circumstances, and can only be rightly judged when reason and grounds of the rule are carefully considered. There are two principle grounds on which the doctrine is founded that a contract in restraint of trade is void as against public policy. One is, the injury to the public by being deprived of the restricted partys industry; and the other is, the injury to the party himself by being precluded from pursuing his occupation, and thus being prevented from supporting himself and his family. And what is public policy? In the words of the eminent Spanish jurist, Don Jose Maria Manresa, in his commentaries of the Codigo Civil, public policy (orden pblico): Represents in the law of persons the public, social and legal interest, that which is permanent and essential of the institutions, that which, even if favoring an individual in whom the right lies, cannot be left to his own will. It is an idea which, in cases of the waiver of any right, is manifested with clearness and 20 force. As applied to agreements, Quintus Mucius Scaevola, another distinguished civilist gives the term "public policy" a more defined meaning: Agreements in violation of orden pblico must be considered as those which conflict with law, whether properly, strictly and wholly a public law (derecho) or whether a law of the person, but law which in certain respects affects the interest of society. 21 Plainly put, public policy is that principle of the law which holds that no subject or citizen can lawfully do that which has a tendency to be injurious to the public or against the 22 public good. As applied to contracts, in the absence of express legislation or constitutional prohibition, a court, in order to declare a contract void as against public policy, must find that the contract as to the consideration or thing to be done, has a tendency to injure the public, is against the public good, or contravenes some established interests of society, or is inconsistent with sound policy and good morals, or tends clearly to undermine the security of individual rights, whether of personal liability or of private property.23 From another perspective, the main objection to exclusive dealing is its tendency to foreclose existing competitors or new entrants from competition in the covered portion of 24 the relevant market during the term of the agreement. Only those arrangements whose probable effect is to foreclose competition in a substantial share of the line of commerce affected can be considered as void for being against public policy. The foreclosure effect, if any, depends on the market share involved. The relevant market for this purpose includes the full range of selling opportunities reasonably open to rivals, namely, all the product and geographic sales they may readily compete for, using easily convertible plants and marketing organizations.25 Applying the preceding principles to the case at bar, there is nothing invalid or contrary to public policy either in the objectives sought to be attained by paragraph 5, i.e.,

the exclusivity clause, in prohibiting respondent Luna, and all other Avon supervisors, from selling products other than those manufactured by petitioner Avon. We quote with approval the determination of the U.S. Supreme Court in the case of Board of Trade of 26 Chicago v. U.S. that "the question to be determined is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition, or whether it is such as may suppress or even destroy competition." Such prohibition is neither directed to eliminate the competition like Sandr Phils., Inc. nor foreclose new entrants to the market. In its Memorandum, it admits that the reason for such exclusion is to safeguard the network that it has cultivated through the years. Admittedly, both companies employ the direct selling method in order to peddle their products. By direct selling, petitioner Avon and Sandre, the manufacturer, forego the use of a middleman in selling their products, thus, controlling the price by which they are to be sold. The limitation does not affect the public at all. It is only a means by which petitioner Avon is able to protect its investment. It was not by chance that Sandr Philippines, Inc. made respondent Luna one of its Group Franchise Directors. It doesnt take a genius to realize that by making her an important part of its distribution arm, Sandr Philippines, Inc., a newly formed directselling business, would be saving time, effort and money as it will no longer have to recruit, train and motivate supervisors and dealers. Respondent Luna, who learned the tricks of the trade from petitioner Avon, will do it for them. This is tantamount to unjust enrichment. Worse, the goodwill established by petitioner Avon among its loyal customers will be taken advantaged of by Sandre Philippines, Inc. It is not so hard to imagine the scenario wherein the sale of Sandr products by Avon dealers will engender a belief in the minds of loyal Avon customers that the product that they are buying had been manufactured by Avon. In other words, they will be misled into thinking that the Sandr products are in fact Avon products. From the foregoing, it cannot be said that the purpose of the subject exclusivity clause is to foreclose the competition, that is, the entrance of Sandr products in to the market. Therefore, it cannot be considered void for being against public policy. How can the protection of ones property be violative of public policy? Sandr Philippines, Inc. is still very much free to distribute its products in the market but it must do so at its own expense. The exclusivity clause does not in any way limit its selling opportunities, just the undue use of the resources of petitioner Avon. It has been argued that the Supervisors Agreement is in the nature of a contract of adhesion; but just because it is does not necessarily mean that it is void. A contract of adhesion is so-called because its terms are prepared by only one party while the other 27 party merely affixes his signature signifying his adhesion thereto. Such contract is just as binding as ordinary contracts. "It is true that we have, on occasion, struck down such contracts as void when the weaker party is imposed upon in dealing with the dominant bargaining party and is reduced to the alternative of taking it or leaving it, completely deprived of the opportunity to bargain on equal footing. Nevertheless, contracts of adhesion are not invalid per se and they are not entirely prohibited. The one who adheres to the contract is in reality free to reject it entirely, if he adheres, he gives his consent."28 In the case at bar, there was no indication that respondent Luna was forced to sign the subject agreement. Being of age, financially stable and with vast business experience, she is presumed to have acted with due care and to have signed the assailed contract with full knowledge of its import. Under the premises, it would be difficult to assume that she was morally abused. She was free to reject the agreement if she wanted to. Accordingly, a contract duly executed is the law between the parties, and they are obliged to comply fully and not selectively with its terms. A contract of adhesion is no exception.29 The foregoing premises noted, the Court of Appeals, therefore, committed reversible error in interpreting the subject exclusivity clause to apply merely to those products in direct competition to those manufactured and sold by petitioner Avon. When the terms of

the agreement are clear and explicit, that they do not justify an attempt to read into any alleged intention of the parties, the terms are to be understood literally just as they appear on the face of the contract.30 Thus, in order to judge the intention of the contracting parties, "the circumstances under which it was made, including the situation of the subject thereof and of the parties to it, may be shown, so that the judge may be placed in the position of those whose language he is to interpret."31 It has been held that once this intention of the parties has been ascertained, it becomes an integral part of the 32 contract as though it has been originally expressed therein in unequivocal terms. Having held that the "exclusivity clause" as embodied in paragraph 5 of the Supervisors Agreement is valid and not against public policy, we now pass to a consideration of respondent Lunas objections to the validity of her termination as provided for under paragraph 6 of the Supervisors Agreement giving petitioner Avon the right to terminate or cancel such contract. The paragraph 6 or the "termination clause" therein expressly provides that: The Company and the Supervisor mutually agree: xxxx 6) Either party may terminate this agreement at will, with or without cause, at any time upon notice to the other. [Emphasis supplied.] In the case of Petrophil Corporation v. Court of Appeals,33 this Court already had the opportunity to opine that termination or cancellation clauses such as that subject of the case at bar are legitimate if exercised in good faith. The facts of said case likewise involved a termination or cancellation clause that clearly provided for two ways of terminating the contract, i.e., with or without cause. The utilization of one mode will not preclude the use of the other. Therein, we stated that the finding that the termination of the contract was "for cause," is immaterial. When petitioner terminated the contract "without cause," it was required only to give x x x a 30-day prior written notice, which it did. In the case at bar, the termination clause of the Supervisors Agreement clearly provides for two ways of terminating and/or canceling the contract. One mode does not exclude the other. The contract provided that it can be terminated or cancelled for cause, it also stated that it can be terminated without cause, both at any time and after written notice. Thus, whether or not the termination or cancellation of the Supervisors Agreement was "for cause," is immaterial. The only requirement is that of notice to the other party. When petitioner Avon chose to terminate the contract, for cause, respondent Luna was duly notified thereof. Worth stressing is that the right to unilaterally terminate or cancel the Supervisors Agreement with or without cause is equally available to respondent Luna, subject to the same notice requirement. Obviously, no advantage is taken against each other by the contracting parties. WHEREFORE, in view of the foregoing, the instant petition is GRANTED. The Decision dated 20 May 2002 rendered by the Court of Appeals in CA-G.R. CV No. 52550, affirming the judgment of the RTC of Makati City, Branch 138, in Civil Case No. 88-2595, are hereby REVERSED and SET ASIDE. Accordingly, let a new one be entered dismissing the complaint for damages. Costs against respondent Leticia Luna. SO ORDERED. Ynares-Santiago, (Working Chairman) and Austria-Martinez,, JJ., concur. Panganiban, CJ, retired as of 7 December 2006. Callejo, Sr., J., no part.

G.R. No. 119379 September 25, 1998 RODELO G. POLOTAN, SR., petitioner, vs. HON. COURT OF APPEALS (Eleventh Division), REGIONAL TRIAL COURT IN MAKATI CITY (Branch 132), and SECURITY DINERS INTERNATIONAL CORPORATION, respondents. ROMERO, J.: 1 Assailed before this Court in a Petition for Review on Certiorari is the decision of the Court of Appeals in CA-G.R. CV No. 33270 affirming the decision of Branch 132 of the Regional Trial Court of Makati City. Private respondent Security Diners International Corporation (Diners Club), a credit card company, extends credit accommodations to its cardholders for the purchase of goods and other services from member establishments. Said goods and services are reimbursed later on by cardholders upon proper billing. Petitioner Rodelo G. Polotan, Sr. applied for membership and credit accommodations with Diners Club in October 1985. The application form contained terms and conditions governing the use and availment of the Diners Club card, among which is for the cardholder to pay all charges made through the use of said card within the period indicated in the statement of account and any remaining unpaid balance to earn 3% interest per annum plus prime rate of Security Bank & Trust Company. Notably, in the application form submitted by petitioner, Ofricano Canlas obligated himself to pay jointly and severally with petitioner the latter's obligation to private respondent. Upon acceptance of his application, petitioner was issued Diners Club card No. 3651-212766-3005. As of May 8, 1987, petitioner incurred credit charges plus appropriate interest and service charges in the aggregate amount of P33,819.84 which had become due and demandable. Demands for payment made against petitioner proved futile. Hence, private respondent filed a Complaint for Collection of Sum of Money against petitioner before the lower court. The lower court rued, thus: WHEREFORE, judgment is hereby rendered ordering defendants to pay jointly and severally plaintiff: a) The amount of P33,819.84 and interest of 3% per annum plus prime rate of SBTC and service charges of 2% per month starting May 9, 1987 until the entire obligation is fully paid; b) An amount equivalent to 25% of any and all amounts due and payable as attorney's fees, plus costs of suit. With respect to the cross-claim of defendant Ofricano Canlas, defendant Rodelo G. Polotan, Sr. is ordered to indemnify and/or reimburse the former for whatever he may be ordered to pay plaintiff. The Court of Appeals affirmed the ruling of the lower court. Hence, this petition. Petitioner assigns the following errors: I RESPONDENT COURT OF APPEALS COMMITTED AN ERROR OF LAW IN RULING AS VALID AND LEGAL THE FOLLOWING PROVISION ON INTEREST IN THE DINERS CARD CONTRACT, TO WIT: PAYMENT OF CHARGES . . . The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank and Trust Company. . . . Provided that if there occurs any change in the prevailing market rates the new interest rate shall be the guiding rate of computing the interest due on the outstanding obligation without need of serving notice to the Cardholder other than the required posting on the monthly statement served to the Cardholder. The Cardholder hereby authorizes Security Diners to correspondingly increase the rate of such interest in the event of changes in prevailing market rates and to charge additional service fees as may be deemed necessary in order to maintain its service to the Cardholder. II RESPONDENT COURT OF APPEALS COMMITTED AN ERROR OF LAW IN RULING IN EFFECT THAT PRIVATE RESPONDENT'S STATEMENT OF ACCOUNT (Exh. "2"). AS A JUDICIAL ADMISSION THAT MRS. POLOTAN HAD ALREADY PAID COULD BE CONTRADICTED WITHOUT THE PRIVATE RESPONDENT LAYING THE PROPER BASIS FOR THE INTRODUCTION OF CONTRARY EVIDENCE; III

RESPONDENT COURT OF APPEALS COMMITTED A GRIEVOUS ERROR OF FACT IN FINDING AS CREDIBLE THE ILLOGICAL AND ABSURD EXPLANATION OF PRIVATE RESPONDENT'S MR. VICENTE; IV RESPONDENT COURT OF APPEALS ERRED IN NOT AWARDING DAMAGES TO PETITIONER. In the first assignment of error, petitioner argues that the provision on interest rate is "obscure and ambiguous and not susceptible of reasonable interpretation" particularly the terms "prime rate", "prevailing market rate" and "guiding rate". In effect, there was no meeting of minds. As such, this being a contract of adhesion, any ambiguity should be resolved against the one who caused it. Petitioner added that the said provision was also illegal as it violated the laws and Central Bank Circulars. While said proviso allowed for the escalation of interest, it did not allow for a downward adjustment of the same. In his second and third assignment of error, petitioner claimed that Diners Club admitted, through its statement of account, that petitioner's wife, Mrs. Polotan, had no more account with it. But then, he claimed that the lower court and the Court of Appeals allowed the testimony of one Mr. Vicente explaining that the reason why Mrs. Polotan had no more account with it was that being a supplementary cardholder, her account was consolidated with that of petitioner in accordance with its new policy. He argued that since Diners Club admitted that Mrs. Polotan had no more account with it, the only way it could contradict such admission was by declaring that the same was a result of a palpable mistake in accordance with Section 4 of Rule 129 of the Revised Rules on Evidence. In admitting said explanation, the lower court and the Court of Appeals violated the rule on the weight to be accorded conflicting evidence. In effect, petitioner insists that both courts favored the uncorroborated testimonial evidence of Mr. Vicente over the documentary evidence presented by petitioner and admitted by Diners Club. In its fourth assignment of error, petitioner claimed that he should have been awarded damages because of Diners Club's bad faith. This Court finds Petitioner's contentions without merit. The issues presented by petitioner are clearly questions of law. Notwithstanding petitioner's submission of the above errors, however, the core issue is basically one of fact. This case stemmed from a simple complaint for collection of sum of money. The lower court and the Court of Appeals found that petitioner indeed owed Diners Club the amount being demanded. 2 In the case of Reyes v. CA, this Court held that factual findings of the trial court, adopted and confirmed by the Court of Appeals, are final and conclusive and may not be reviewed on appeal. The exceptions to this rule are as follows: (1) when the inference made is manifestly mistaken, absurd or impossible; (2) when there is a grave abuse of discretion; (3) when the finding is grounded entirely on speculations, surmises or conjectures; (4) when the judgment of the Court of Appeals is based on misapprehension of facts; (5) when the findings of fact are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of the case and the same is contrary to the admissions of both appellant and appellee; (7) when the findings of the Court of Appeals are contrary to those of the trial court; (8) when the findings of fact are conclusions without citation of specific evidence on which they are based; (9) when the Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a different conclusion and (10) when the findings of fact of the Court of Appeals are premised on the absence of evidence and are contradicted by the evidence on record. Only a clear showing that any of the above-cited exceptions exists would justify a review of the findings of fact made by the lower court and upheld by the Court of Appeals. In the instant case, a review of the decisions of the lower court, as well as the Court of Appeals, shows that the conclusions have been logically arrived at and substantially supported by the evidence presented by the parties. Be that as it may, this Court sees it fit and proper to discuss the merits of this petition based on petitioner's claim that since the contract he signed with Diners Club was a contract of adhesion, the obscure provision on interest should be resolved in his favor. A contract of adhesion is one in which one of the contracting parties imposes a ready-made form of contract which the other party may accept or reject, but cannot modify. One party prepares the stipulation in the contract, while the other party merely affixes his signature or his "adhesion" thereto, giving no room for negotiation and depriving the latter of the opportunity to bargain on equal 3 footing. Admittedly, the contract containing standard stipulations imposed upon those who seek to avail of its credit services was prepared by Diners Club. There is no way a prospective credit card holder can

object to any onerous provision as it is offered on a take-it-or-leave-it basis. Being a contract of adhesion, any ambiguity in its provisions trust be construed against private respondent. Indeed, the terms "prime rate", "prevailing market rate", "2% penalty charge", "service fee", and "guiding rate" are technical terms which are beyond the ken of an ordinary layman. To be sure, petitioner hardly falls into the category of an "ordinary layman." As aptly observed by the Court of Appeals: . . . [A]ppellant by his own admission is a "lawyer by profession, a reputable businessman and a note leader of a number of socio-civic organizations." With such impressive credentials, this Court is hard-put to fathom someone of his 4 calibre entering into a contract with eyes "blindfolded". Nevertheless, these types of contracts have been declared as binding ordinary contracts, the reason 5 being that the party who adheres to the contract is free to reject it entirely. The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from a 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 6 which is left solely to the will of one of the parties, is likewise, invalid. It is important to stress that the Court is not precluded from ruling out blind adherence to their terms if the attendant facts and 7 circumstances show that they should be ignored for being obviously too one-sided. In this case, petitioner, in effect, claims that the subject contract is one-sided in that the contract allows for the escalation of interests, but does not provide for a downward adjustment of the same in violation of Central Bank Circular 905. The claim is without basis. First, by signing the contract, petitioner and private respondent agreed upon the rate as stipulated in the subject contract. Such is now allowed by C.B. Circular 8 905. Second, petitioner failed to cite any particular provision of said Circular which was allegedly violated by the subject contract. Be that as it may, there is nothing inherently wrong with escalation clauses. Escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money 9 in long term contracts. Petitioner further argues that the interest rate was unilaterally imposed and based on the standards and rate formulated solely by Diners Club. 10 In Florendo v. CA, this Court has held that: . . . the unilateral determination and imposition of increased interest rates by the herein respondent bank is obviously violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code. As this Court held in PNB v. CA (196 SCRA 536 [1991]): 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. . . . The contractual provision in question states that "if there occurs any change in the prevailing market rates, the new interest rate shall be the guiding rate in computing the interest due on the outstanding obligation without need of serving notice to the Cardholder other than the required posting on the monthly statement served to the Cardholder." This could not be considered an escalation clause for the reason that it neither states all increase nor a decrease in interest rate. Said clause simply states that the interest rate should be based on the prevailing market rate. Interpreting it differently, while said clause does not expressly stipulate a reduction in interest rate, it nevertheless provides a leeway for the interest rate to be reduced in case the prevailing market rates dictate its reduction. Admittedly, the second paragraph of the questioned proviso which provides that "the Cardholder hereby authorizes Security Diners to correspondingly increase the rate of such interest in the event of changes in prevailing market rates . . ." is an escalation clause. However, it cannot be said to be dependent solely on the will of private respondent as it is also dependent on the prevailing market rates. Escalation clauses are not basically wrong or legally objectionable as long as they are not solely 11 potestative but based on reasonable and valid grounds. Obviously, the fluctuation in the markets rates is beyond the control of private respondent.

As to the second and third assignments of error, it is misleading for petitioner to say that private respondent had judicially admitted that its statement of account is proof that Mrs. Polotan has already paid her account with private respondent. Proceeding from said premise, it is further misleading for petitioner to conclude that private respondent's testimonial evidence about a new policy contradicted its judicially admitted documentary evidence without laying the proper basis for the introduction of contrary evidence and in violation of Section 2, Rule 129 of the Revised Rules on Evidence, which provides that: Admissions made by the parties in the pleadings, or in the course of the trial or other proceedings do not require proof and can be contradicted unless previously shown to have been made through palpable mistake. Certainly, Diners Club could not deny the existence of Exhibit "2" which is the Statement of Account issued to Mrs. Polotan since, precisely, it was the one which issued said statement. But to conclude that said Statement of Account was likewise an admission that Mrs. Polotan has no more account with Diners Club would be equivocatory, or non-sequitur. While private respondent admitted the existence of Exhibit "2", it could not have agreed to the purpose for which the exhibit was presented. As satisfactorily found by the Court of Appeals and to which this Court agrees: Appellant's allegation is misleading. On the contrary, appellee's rebuttal witness, Alfredo Vicente, categorically stated that the reason the Statement of Account in the name of Alicia Polotan showed a zero balance (Exh. "2") was due to the fact that effective February 1989, under a new system, separate monthly statements were produced on supplementary card members. Prior to February 1989, the availment of Mr. and Mrs. Polotan were incorporated under one statement. Moreover, it is to be observed that while the Complaint was filed on 15 May 1987, the Diners Club Monthly Statement in the name of Alicia B. Polotan is dated almost two (2) years later or "02/08/89" (Exh. "2"). This bolsters the testimony of Alfredo Vicente regarding the entry of zero balance in Mrs. Polotan's name. Although said exhibit would, by itself, show that Mrs. Polotan had no more account with Diners Club, it would not have been conclusive to prove that said account was already paid. The proper evidence would have been a receipt of payment. Significantly, petitioner did not contest the purchases as indicated in the statements of account but merely alleged that some of the purchases being claimed to have been made by petitioner were not 12 supported by invoices. The lower court found otherwise. In light of the above, this Court sees no reason to award damages to petitioner. WHEREFORE, in view of the foregoing, the petition for certiorari is hereby DENIED and the Decision of the Court of Appeals AFFIRMED with the MODIFICATION that the attorney's fees are reduced to 15%. SO ORDERED. Narvasa, C.J. Kapunan and Purisima, JJ., concur.

FELICIDAD T. MARTIN, MELISSA M. ISIDRO, GRACE M. DAVID, CAROLINE M. GARCIA, VICTORIA M. ROLDAN, and BENJAMIN T. MARTIN, JR., Petitioners, - versus -

G.R. No. 174632

drainage system or the raising of the propertys ground level. In response, the Martins filled the propertys grounds with soil and rocks. But DBS lamented that the property remained unsuitable for its use since the Martins did not level the grounds. Worse, portions of the perimeter fence collapsed because of the excessive amount of soil and rock that were haphazardly dumped on it. In June 1998, DBS vacated the property but continued paying the monthly rents. On September 11, 1998, however, it made a final demand on the Martins to restore the leased premises to tenantable condition on or before [4] September 30, 1998, otherwise, it would rescind the lease contract. PERALTA, ABAD, and * PEREZ, JJ. On September 24, 1998 the Martins contracted the services of Altitude Systems & [5] Technologies Co. for the reconstruction of the perimeter fence on the property. On October 13, [6] 1998 DBS demanded the rescission of the lease contract and the return of its deposit. At that point, DBS had already paid the monthly rents from March 1997 to September 1998. The Martins refused, however, to comply with DBS demand. On July 7, 1999 DBS filed a complaint against the Martins for rescission of the contract of lease with damages before the Regional Trial Court (RTC) of Makati City, Branch 141, in Civil Case [7] 99-1266. Claiming that the leased premises had become untenantable, DBS demanded rescission of the lease contract as well as the return of its deposit ofP1,200,000.00. On November 12, 2001 the Makati City RTC rendered a decision, dismissing the [8] complaint against the Martins. The trial court found that, although the floods submerged DBS vehicles, the leased premises remained tenantable and undamaged. Moreover, the Martins had begun the repairs that DBS requested but were not given sufficient time to complete the same. It held that DBS unjustifiably abandoned the leased premises and breached the lease contract. Thus, the trial court ordered its deposit of P1,200,000.00 deducted from the unpaid rents due the Martins and ordered DBS to pay them the remaining P15,198,360.00 in unpaid rents. On appeal to the Court of Appeals (CA) in CA-G.R. CV 76210, the latter court rendered [9] judgment dated April 26, 2006, reversing and setting aside the RTC decision. The CA found that floods rendered the leased premises untenantable and that the RTC should have ordered the rescission of the lease contract especially since the contract provided for such remedy. The CA ordered the Martins to apply the deposit of P1,200,000.00 to the rents due up to July 7, 1999 when DBS filed the complaint and exercised its option to rescind the lease. The CA ordered the Martins to return the remaining balance of the deposit to DBS. DBS moved for partial reconsideration, claiming that it rescinded the lease contract on October 13, 1998 and not on July 7, 1999. The CA should not require DBS to pay rents from October 1998 to July 7, 1999. It should rather order the Martins to return its deposit in full. For their part, the Martins asked the CA to reconsider its decision, pointing out that they undertook the necessary repairs and restored the leased premises to tenantable condition. Thus, DBS no longer had the right to rescind the lease contract. With the denial of their separate motions for reconsideration, DBS and the Martins filed their respective petitions for review before this Court in G.R. 174632 and 174804. The Court [11] eventually consolidated the two cases.
[10]

Present: CARPIO, J., Chairperson, NACHURA,

DBS BANK PHILIPPINES, INC. (Formerly known as Bank of Southeast Asia) now merged with and into BPI FAMILY BANK, Respondent. x ------------------------------------------------ x DBS BANK PHILIPPINES, INC. G.R. No. 174804 (Formerly known as Bank of Southeast Asia) now merged with and into BPI FAMILY BANK), Petitioner, - versus FELICIDAD T. MARTIN, MELISSA M. ISIDRO, GRACE M. DAVID, CAROLINE M. GARCIA, Promulgated: VICTORIA M. ROLDAN, and BENJAMIN T. MARTIN, JR. Respondents.

June 16, 2010

x --------------------------------------------------------------------------------------- x DECISION ABAD, J.: This case is about the right of rescission provided in the contract of lease in the event of failure of the lessor to make repairs that would enable the lessee to continue with the intended use of the leased property. The Facts and the Case On March 27, 1997 Felicidad T. Martin, Melissa M. Isidro, Grace M. David, Caroline M. Garcia, Victoria M. Roldan, and Benjamin T. Martin, Jr. (the Martins), as lessors, entered into a lease [1] contract with the DBS Bank Philippines, Inc. (DBS), formerly known as Bank of Southeast Asia and now merged with Bank of the Philippine Islands, as lessee, covering a commercial warehouse and lots that DBS was to use for office, warehouse, and parking yard for repossessed vehicles. The lease was for five years, from March 1, 1997 to March 1, 2002, at a monthly rent of P300,000.00 for the first year, P330,000.00 for the second year, P363,000.00 for the third year, P399,300.00 for the [2] fourth year, and P439,230.00 for the final year, all net of withholding taxes. DBS paid a deposit of P1,200,000.00 and advance rentals of P600,000.00. On May 25 and August 13, 1997 heavy rains flooded the leased property and submerged into water the DBS offices there along with its 326 repossessed vehicles. As a result, on February 11, 1998 DBS wrote the Martins demanding that they take appropriate steps to make the leased [3] premises suitable as a parking yard for its vehicles. DBS suggested the improvement of the

The Issues Presented The issues presented in these cases are: 1. Whether or not the CA erred in holding that the Martins allowed the leased premises to remain untenantable after the floods, justifying DBS rescission of the lease agreement between them; and 2. In the affirmative, whether or not the CA erred in holding that DBS is entitled to the rescission of the lease contract only from July 7, 1999 when it filed its action for rescission, entitling the Martins to collect rents until that time.

The Courts Rulings One. Unless the terms of a contract are against the law, morals, good customs, and [12] InFelsan Realty & public policy, such contract is law between the parties and its terms bind them. [13] Development Corporation v. Commonwealth of Australia, the Court regarded as valid and binding a provision in the lease contract that allowed the lessee to pre-terminate the same when fire damaged the leased building, rendering it uninhabitable or unsuitable for living. Here, paragraph VIII of the lease contract between DBS and the Martins permitted rescission by either party should the leased property become untenantable because of natural causes. Thus: In case of damage to the leased premises or any portion thereof by reason of fault or negligence attributable to the LESSEE, its agents, employees, customers, or guests, the LESSEE shall be responsible for undertaking such repair or reconstruction. In case of damage due to fire, earthquake, lightning, typhoon, flood, or other natural causes, without fault or negligence attributable to the LESSEE, its agents, employees, customers or guests, the LESSOR shall be responsible for undertaking such repair or reconstruction. In the latter case, if the leased premises become untenantable, either party may demand for the rescission of this contract and in such case, the deposit referred to in paragraph III shall be returned to the LESSEE immediately. (Underscoring supplied.) The Martins claim that DBS cannot invoke the above since they undertook the repair and reconstruction of the leased premises, incurring P1.6 million in expenses. The Martins point out that the option to rescind was available only if they failed to do the repair work and reconstruction. But, under their agreement, the remedy of rescission would become unavailable to DBS only if the Martins, as lessors, made the required repair and reconstruction after the damages by natural cause occurred, which meant putting the premises after the floods in such condition as would enable DBS to resume its use of the same for the purposes contemplated in the agreement, namely, as office, warehouse, and parking space for DBS repossessed vehicles. Here, it is undisputed that the floods of May 25 and August 13, 1997 submerged the DBS offices and its 326 repossessed vehicles. The floods rendered the place unsuitable for its intended [15] uses. And, while the Martins did some repairs, they did not restore the place to meet DBS [16] needs. The photographs taken of the place show that the Martins filled the grounds with soil and rocks to raise the elevation but did not level and compact the same so they could accommodate the repossessed vehicles. Moreover, the heaviness of the filling materials caused portions of the [17] Indeed, the Office of the City Engineer advised perimeter walls to collapse or lean dangerously. DBS that unless those walls were immediately demolished or rehabilitated, they would endanger [18] passersby. For their part, although the Martins insisted that they successfully repaired and restored the leased areas, they failed to produce photographs that would contradict those that DBS presented in court. For one thing, the evidence for DBS shows that the Martins simply dumped soil and rocks on the grounds, creating an uneven terrain that would not permit vehicular parking. True, the Martins contracted the services of Altitude Systems and Technologies Co. but the scope of work covered only the construction of a new perimeter fence, leaving out works that are essential to the leveling and compacting of the grounds. Undeniably, the DBS suffered considerable damages when flood waters deluged its offices and 326 repossessed vehicles. Notably, DBS vacated the leased premises in June of 1998, without rescinding the lease agreement, evidently to allow for unhindered repair of the grounds. In fact, DBS continued to pay the monthly rents until September 1998, showing how DBS leaned back [19] The Martins provided to enable the Martins to finish the repair and rehabilitation of the place. basis for rescission by DBS when they failed to do so. The Martins point out that paragraph X of the contract forbade the pre-termination of the [20] lease. But, as the Court held in Manila International Airport Authority v. Gingoyon, the various
[14]

stipulations in a contract must be read together and given effect as their meanings warrant. Here, paragraph X, which barred pre-termination of the lease agreement, cannot be read in isolation. Paragraph VIII gave DBS and the Martins the right to rescind the agreement in the event the property becomes untenantable due to natural causes, including floods, unless proper repairs and rehabilitation are carried out. Two. As for the effective date of rescission, the record shows that DBS made a final demand on the Martins on September 11, 1998, giving the latter up to September 30, 1998 within which to fully restore the leased property to a tenantable condition, otherwise, it would rescind their [21] Consequently, the Martins may be regarded in default with respect to their lease contract. obligation to repair and rehabilitate the leased property by the end of September 1998 when they did not comply with the demand. Contrary to the ruling of the CA, it is not the filing of the action for rescission that marks the violation of the lease agreement but the failure of the Martins to repair and rehabilitate the property despite demand. Finally, Paragraph III of the lease contract states that the deposit DBS made is to apply to any: a) unpaid telephone, electric, and water bills, and b) unpaid rents. As it happened, DBS left no unpaid utility bills. Also, since DBS paid the rents up to September 1998, it owed no unpaid rents when it exercised its right to rescind its lease contract with the Martins. The latter must, therefore, return the full deposit of P1,200,000.00 to DBS. WHEREFORE, the Court DENIES the petition and AFFIRMS with MODIFICATION the April 26, 2006 decision of the Court of Appeals in CA-G.R. CV 76210 in that Felicidad T. Martin, Melissa M. Isidro, Grace M. David, Caroline M. Garcia, Victoria M. Roldan, and Benjamin T. Martin, Jr. are ORDERED to return the full deposit ofP1,200,000.00 to DBS Bank Philippines, Inc. (formerly known as Bank of Southeast Asia, now merged with and into BPI Family Bank) with interest of 12% per annum to be computed from the finality of this decision until the amount is fully paid. SO ORDERED.

HEIRS OF ALFREDO ZABALA, represented by G.R. No. 189602 MENEGILDA ZABALA, ROLANDO ZABALA, MANUEL ZABALA, MARILYN ZABALA, and Present: ADELINA ZABALA, Petitioners, CORONA, J., Chairperson, VELASCO, JR., - versus NACHURA, PERALTA, and MENDOZA, JJ. HON. COURT OF APPEALS, VICENTE T. MANUEL AND/OR Promulgated: HEIRS OF VICENTE T. MANUEL, Respondents. May 6, 2010 x-----------------------------------------------------------------------------------------x RESOLUTION NACHURA, J.:

Respondent subsequently filed a Motion for Judgment[3] on the ground of petitioners failure to file a responsive pleading or answer. The MTCC, in an Order dated May 27, 2003, granted Zabalas motion and dismissed the Complaint, holding that respondent indeed violated the requirement of barangayconciliation.[4] Respondent then appealed the ruling to the Balanga, Bataan Regional Trial Court (RTC). In a decision dated March 30, 2004,[5] the RTC reversed the MTCCs May 27, 2003 Order and rendered judgment directing Zabala, his heirs or subalterns to immediately vacate Lot No. 1483 and restore respondent to his peaceful possession thereof. The RTC also directed Zabala to pay respondent actual damages, moral damages, and attorneys fees. The RTC found that Zabala did not, in fact, file an answer to the Complaint. Thus, under Section 6 of the Revised Rules on Summary Procedure, respondent was entitled to judgment on the pleadings. Based on the allegations in respondents Complaint, the RTC held that respondent was entitled to the reliefs prayed for. Zabala then filed a Petition for Review before the Court of Appeals (CA).

The parties to this Petition for Certiorari seek this Courts approval of their Compromise Agreement. On April 1, 2002, respondent Vicente T. Manuel filed a Complaint[1] for ejectment with damages against Alfredo Zabala before the Municipal Trial Court in Cities (MTCC) of Balanga, Bataan. Respondent alleged that he was in actual and peaceful possession of a fishpond (Lot No. 1483) located in Ibayo, Balanga City. On October 15, 2001, Zabala allegedly entered the fishpond without authority, and dumped soil into the fishpond without an Environment Compliance Certificate. Zabala continued such action until the time of the filing of the Complaint, killing the crabs and the bangus that respondent was raising in the fishpond. Thus, respondent asked that Zabala be restrained from touching and destroying the fishpond; that Zabala be ejected therefrom permanently; and for actual and moral damages and attorneys fees. Zabala promptly moved for the dismissal of the Complaint for non-compliance with the requirement under the Local Government Code to bring the matter first to barangayconciliation before filing an action in court.[2]

On December 19, 2008, the CA promulgated a Decision[6] upholding the RTCs reversal of the MTCCs Order. The CA held that, based on the allegations in the Complaint, the requirement for prior conciliation proceedings under the Local Government Code was inapplicable to the suit before the MTCC, the action being one for ejectment and damages, with application for a writ of preliminary injunction, even without the use of those actual terms in the Complaint. However, the CA granted Zabalas prayer for the deletion of the awards for actual and moral damages, and for attorneys fees. Zabala filed a Motion for Reconsideration, which the CA denied in a Resolution dated August 26, 2009. On October 9, 2009, Zabalas heirs filed this Verified Petition for Certiorari.[7] They prayed for the annulment of the CAs December 19, 2008 Decision and August 26, 2009 Resolution, and for the reinstatement of the MTCCs May 27, 2003 Order. In the alternative, they prayed that the Court remand the records to the MTCC, so that they could file their Answer, and that due proceedings be undertaken before judgment.

In a Resolution dated November 18, 2009, respondents were required to file their Comment on the Petition. The parties now present before this Court a Compromise Agreement, viz.: COMPROMISE AGREEMENT THE PARTIES represented by their lawyers, respectfully submit the following compromise agreement: 1. Private respondents acknowledge that the owner of the subject parcel of land and the improvements thereon are the petitioners[;] 2. Private respondents filed an ejectment case against the said owners before the lower court which granted the reliefs sought for (due to failure of petitioners to file their answer)[;] 3. For and in consideration of the amount of Two Hundred Thousand Pesos (P200,000.00), receipt of the same is acknowledged hereof, private respondents hereby abandon the decision rendered in their favor by the lower courts and instead waive all their rights and interests to the subject property particularly their right to possession of the same and thus, hereby assure that petitioners Zabalas will have a peaceful, continuous and notious (sic) possession of the subject property. WHEREFORE, it is respectfully prayed of the Honorable Court that this Compromise Agreement be duly approved. Balanga City for Manila, April 8, 2010. For the petitioner heirs of For the respondents Alfredo Zabala Vicente Manuel and/or Heirs of Vicente Manuel By: (Signed) MENEGILDA ZABALA By: (Signed) PERFECTA MANUEL

Assisted by: (Signed) ATTY. VICTOR P. DIOS, JR. Counsel for petitioners

Assisted by: (Signed) DE ATTY. ANTONIO M. ORTIGUERA Counsel for respondents[8]

Under Article 2028 of the Civil Code, a compromise agreement is a contract whereby the parties, by making reciprocal concessions, avoid litigation or put an end to one already commenced. Compromise is a form of amicable settlement that is not only allowed, but also encouraged in civil cases.[9] Contracting parties may establish such stipulations, clauses, terms, and conditions as they deem convenient, provided that these are not contrary to law, morals, good customs, public order, or public policy.[10] Thus, finding the above Compromise Agreement to have been validly executed and not contrary to law, morals, good customs, public order, or public policy, we approve the same. WHEREFORE, the foregoing premises considered, the Compromise Agreement is hereby APPROVED and judgment is hereby rendered in accordance therewith. By virtue of such approval, this case is now deemed TERMINATED. No pronouncement as to costs. SO ORDERED.

G.R. No. 109125 December 2, 1994 ANG YU ASUNCION, ARTHUR GO vs. THE HON. COURT OF APPEALS and CORPORATION, respondents. Antonio M. Albano for petitioners. Umali, Soriano & Associates for private respondent.

AND BUEN

KEH REALTY

TIONG, petitioners, DEVELOPMENT

VITUG, J.: Assailed, in this petition for review, is the decision of the Court of Appeals, dated 04 December 1991, in CA-G.R. SP No. 26345 setting aside and declaring without force and effect the orders of execution of the trial court, dated 30 August 1991 and 27 September 1991, in Civil Case No. 8741058. The antecedents are recited in good detail by the appellate court thusly: On July 29, 1987 a Second Amended Complaint for Specific Performance was filed by Ang Yu Asuncion and Keh Tiong, et al., against Bobby Cu Unjieng, Rose Cu Unjieng and Jose Tan before the Regional Trial Court, Branch 31, Manila in Civil Case No. 87-41058, alleging, among others, that plaintiffs are tenants or lessees of residential and commercial spaces owned by defendants described as Nos. 630-638 Ongpin Street, Binondo, Manila; that they have occupied said spaces since 1935 and have been religiously paying the rental and complying with all the conditions of the lease contract; that on several occasions before October 9, 1986, defendants informed plaintiffs that they are offering to sell the premises and are giving them priority to acquire the same; that during the negotiations, Bobby Cu Unjieng offered a price of P6-million while plaintiffs made a counter offer of P5-million; that plaintiffs thereafter asked the defendants to put their offer in writing to which request defendants acceded; that in reply to defendant's letter, plaintiffs wrote them on October 24, 1986 asking that they specify the terms and conditions of the offer to sell; that when plaintiffs did not receive any reply, they sent another letter dated January 28, 1987 with the same request; that since defendants failed to specify the terms and conditions of the offer to sell and because of information received that defendants were about to sell the property, plaintiffs were compelled to file the complaint to compel defendants to sell the property to them. Defendants filed their answer denying the material allegations of the complaint and interposing a special defense of lack of cause of action. After the issues were joined, defendants filed a motion for summary judgment which was granted by the lower court. The trial court found that defendants' offer to sell was never accepted by the plaintiffs for the reason that the parties did not agree upon the terms and conditions of the proposed sale, hence, there was no contract of sale at all. Nonetheless, the lower court ruled that should the defendants subsequently offer their property for sale at a price of P11-million or below, plaintiffs will have the right of first refusal. Thus the dispositive portion of the decision states: WHEREFORE, judgment is hereby rendered in favor of the defendants and against the plaintiffs summarily dismissing the complaint subject to the aforementioned condition that if the defendants subsequently decide to offer their property for sale for a purchase price of Eleven Million Pesos or lower, then the plaintiffs has the option to purchase the property or of first refusal, otherwise, defendants need not offer the property to the plaintiffs if the purchase price is higher than Eleven Million Pesos. SO ORDERED. Aggrieved by the decision, plaintiffs appealed to this Court in CA-G.R. CV No. 21123. In a decision promulgated on September 21, 1990 (penned by Justice Segundino G. Chua and concurred in by Justices Vicente V. Mendoza and Fernando A. Santiago), this Court affirmed with modification the lower court's judgment, holding: In resume, there was no meeting of the minds between the parties concerning the sale of the property. Absent such

requirement, the claim for specific performance will not lie. Appellants' demand for actual, moral and exemplary damages will likewise fail as there exists no justifiable ground for its award. Summary judgment for defendants was properly granted. Courts may render summary judgment when there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law (Garcia vs. Court of Appeals, 176 SCRA 815). All requisites obtaining, the decision of the court a quo is legally justifiable. WHEREFORE, finding the appeal unmeritorious, the judgment appealed from is hereby AFFIRMED, but subject to the following modification: The court a quo in the aforestated decision gave the plaintiffs-appellants the right of first refusal only if the property is sold for a purchase price of Eleven Million pesos or lower; however, considering the mercurial and uncertain forces in our market economy today. We find no reason not to grant the same right of first refusal to herein appellants in the event that the subject property is sold for a price in excess of Eleven Million pesos. No pronouncement as to costs. SO ORDERED. The decision of this Court was brought to the Supreme Court by petition for review on certiorari. The Supreme Court denied the appeal on May 6, 1991 "for insufficiency in form and substances" (Annex H, Petition). On November 15, 1990, while CA-G.R. CV No. 21123 was pending consideration by this Court, the Cu Unjieng spouses executed a Deed of Sale (Annex D, Petition) transferring the property in question to herein petitioner Buen Realty and Development Corporation, subject to the following terms and conditions: 1. That for and in consideration of the sum of FIFTEEN MILLION PESOS (P15,000,000.00), receipt of which in full is hereby acknowledged, the VENDORS hereby sells, transfers and conveys for and in favor of the VENDEE, his heirs, executors, administrators or assigns, the abovedescribed property with all the improvements found therein including all the rights and interest in the said property free from all liens and encumbrances of whatever nature, except the pending ejectment proceeding; 2. That the VENDEE shall pay the Documentary Stamp Tax, registration fees for the transfer of title in his favor and other expenses incidental to the sale of above-described property including capital gains tax and accrued real estate taxes. As a consequence of the sale, TCT No. 105254/T-881 in the name of the Cu Unjieng spouses was cancelled and, in lieu thereof, TCT No. 195816 was issued in the name of petitioner on December 3, 1990. On July 1, 1991, petitioner as the new owner of the subject property wrote a letter to the lessees demanding that the latter vacate the premises. On July 16, 1991, the lessees wrote a reply to petitioner stating that petitioner brought the property subject to the notice of lis pendens regarding Civil Case No. 87-41058 annotated on TCT No. 105254/T-881 in the name of the Cu Unjiengs. The lessees filed a Motion for Execution dated August 27, 1991 of the Decision in Civil Case No. 87-41058 as modified by the Court of Appeals in CA-G.R. CV No. 21123. On August 30, 1991, respondent Judge issued an order (Annex A, Petition) quoted as follows: Presented before the Court is a Motion for Execution filed by plaintiff represented by Atty. Antonio Albano. Both defendants Bobby Cu Unjieng and Rose Cu Unjieng

represented by Atty. Vicente Sison and Atty. Anacleto Magno respectively were duly notified in today's consideration of the motion as evidenced by the rubber stamp and signatures upon the copy of the Motion for Execution. The gist of the motion is that the Decision of the Court dated September 21, 1990 as modified by the Court of Appeals in its decision in CA G.R. CV-21123, and elevated to the Supreme Court upon the petition for review and that the same was denied by the highest tribunal in its resolution dated May 6, 1991 in G.R. No. L-97276, had now become final and executory. As a consequence, there was an Entry of Judgment by the Supreme Court as of June 6, 1991, stating that the aforesaid modified decision had already become final and executory. It is the observation of the Court that this property in dispute was the subject of theNotice of Lis Pendens and that the modified decision of this Court promulgated by the Court of Appeals which had become final to the effect that should the defendants decide to offer the property for sale for a price of P11 Million or lower, and considering the mercurial and uncertain forces in our market economy today, the same right of first refusal to herein plaintiffs/appellants in the event that the subject property is sold for a price in excess of Eleven Million pesos or more. WHEREFORE, defendants are hereby ordered to execute the necessary Deed of Sale of the property in litigation in favor of plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go for the consideration of P15 Million pesos in recognition of plaintiffs' right of first refusal and that a new Transfer Certificate of Title be issued in favor of the buyer. All previous transactions involving the same property notwithstanding the issuance of another title to Buen Realty Corporation, is hereby set aside as having been executed in bad faith. SO ORDERED. On September 22, 1991 respondent Judge issued another order, the dispositive portion of which reads: WHEREFORE, let there be Writ of Execution issue in the above-entitled case directing the Deputy Sheriff Ramon Enriquez of this Court to implement said Writ of Execution ordering the defendants among others to comply with the aforesaid Order of this Court within a period of one (1) week from receipt of this Order and for defendants to execute the necessary Deed of Sale of the property in litigation in favor of the plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go for the consideration of P15,000,000.00 and ordering the Register of Deeds of the City of Manila, to cancel and set aside the title already issued in favor of Buen Realty Corporation which was previously executed between the latter and defendants and to register the new title in favor of the aforesaid plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go. SO ORDERED. On the same day, September 27, 1991 the corresponding writ of execution 1 (Annex C, Petition) was issued. On 04 December 1991, the appellate court, on appeal to it by private respondent, set aside and declared without force and effect the above questioned orders of the court a quo. In this petition for review on certiorari, petitioners contend that Buen Realty can be held bound by the writ of execution by virtue of the notice of lis pendens, carried over on TCT No. 195816 issued in the

name of Buen Realty, at the time of the latter's purchase of the property on 15 November 1991 from the Cu Unjiengs. We affirm the decision of the appellate court. A not too recent development in real estate transactions is the adoption of such arrangements as the right of first refusal, a purchase option and a contract to sell. For ready reference, we might point out some fundamental precepts that may find some relevance to this discussion. An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The obligation is constituted upon the concurrence of the essential elements thereof, viz: (a) The vinculum juris or juridical tie which is the efficient cause established by the various sources of obligations (law, contracts, quasi-contracts, delicts and quasi-delicts); (b) the object which is the prestation or conduct; required to be observed (to give, to do or not to do); and (c) the subject-persons who, viewed from the demandability of the obligation, are the active (obligee) and the passive (obligor) subjects. Among the sources of an obligation is a contract (Art. 1157, Civil Code), which is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service (Art. 1305, Civil Code). A contract undergoes various stages that include its negotiation or preparation, its perfection and, finally, its consummation. Negotiation covers the period from the time the prospective contracting parties indicate interest in the contract to the time the contract is concluded (perfected). The perfection of the contract takes place upon the concurrence of the essential elements thereof. A contract which is consensual as to perfection is so established upon a mere meeting of minds, i.e., the concurrence of offer and acceptance, on the object and on the cause thereof. A contract which requires, in addition to the above, the delivery of the object of the agreement, as in a pledge or commodatum, is commonly referred to as a real contract. In a solemn contract, compliance with certain formalities prescribed by law, such as in a donation of real property, is essential in order to make the act valid, the prescribed form being thereby an essential element thereof. The stage of consummationbegins when the parties perform their respective undertakings under the contract culminating in the extinguishment thereof. Until the contract is perfected, it cannot, as an independent source of obligation, serve as a binding juridical relation. In sales, particularly, to which the topic for discussion about the case at bench belongs, the contract is perfected when a person, called the seller, obligates himself, for a price certain, to deliver and to transfer ownership of a thing or right to another, called the buyer, over which the latter agrees. Article 1458 of the Civil Code provides: Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent. A contract of sale may be absolute or conditional. When the sale is not absolute but conditional, such as in a "Contract to Sell" where invariably the ownership of the thing sold is retained until the fulfillment of a positive suspensive condition (normally, the full payment of the purchase price), the breach of the condition will prevent the 2 obligation to convey title from acquiring an obligatory force. In Dignos vs. Court of Appeals (158 SCRA 375), we have said that, although denominated a "Deed of Conditional Sale," a sale is still absolute where the contract is devoid of any proviso that title is reserved or the right to unilaterally rescind is stipulated, e.g., until or unless the price is paid. Ownership will then be transferred to the buyer upon actual or constructive delivery (e.g., by the execution of a public document) of the property sold. Where the condition is imposed upon the perfection of the contract itself, the failure of 3 the condition would prevent such perfection. If the condition is imposed on the obligation of a party which is not fulfilled, the other party may either waive the condition or refuse to proceed with the sale 4 (Art. 1545, Civil Code). An unconditional mutual promise to buy and sell, as long as the object is made determinate and the price is fixed, can be obligatory on the parties, and compliance therewith may accordingly be 5 exacted. An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when coupled with a valuable consideration distinct and separate from the price, is what may properly be termed a perfected contract ofoption. This contract is legally binding, and in sales, it conforms with the second paragraph of Article 1479 of the Civil Code, viz: Art. 1479. . . . An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a 6 consideration distinct from the price. (1451a) 7 Observe, however, that the option is not the contract of sale itself. The optionee has the right, but not the obligation, to buy. Once the option is exercised timely, i.e., the offer is accepted before a

breach of the option, a bilateral promise to sell and to buy ensues and both parties are then 8 reciprocally bound to comply with their respective undertakings. Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect promise (policitacion) is merely an offer. Public advertisements or solicitations and the like are ordinarily construed as mere invitations to make offers or only as proposals. These relations, until a contract is perfected, are not considered binding commitments. Thus, at any time prior to the perfection of the contract, either negotiating party may stop the negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective immediately after its manifestation, such as by its mailing and not necessarily when the offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a period is given to the offeree within which to accept the offer, the following rules generally govern: (1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and has the right to withdraw the offer before its acceptance, or, if an acceptance has been made, before the offeror's coming to know of such fact, by communicating that withdrawal to the offeree (see Art. 1324, Civil Code; see also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is applicable to a unilateral promise to sell under Art. 1479, modifying the previous decision in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural Bank of Paraaque, Inc., vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right to withdraw, however, must not be exercised whimsically or arbitrarily; otherwise, it could give rise to a damage claim under Article 19 of the Civil Code which ordains that "every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith." (2) If the period has a separate consideration, a contract of "option" is deemed perfected, and it would be a breach of that contract to withdraw the offer during the agreed period. The option, however, is an independent contract by itself, and it is to be distinguished from the projected main agreement (subject matter of the option) which is obviously yet to be concluded. If, in fact, the optioner-offeror withdraws the offer before its acceptance(exercise of the option) by the optioneeofferee, the latter may not sue for specific performance on the proposed contract ("object" of the option) since it has failed to reach its own stage of perfection. The optioner-offeror, however, renders himself liable for damages for breach of the option. In these cases, care should be taken of the real nature of the consideration given, for if, in fact, it has been intended to be part of the consideration for the main contract with a right of withdrawal on the part of the optionee, the main contract could be deemed perfected; a similar instance would be an "earnest money" in a contract of sale that can evidence its perfection (Art. 1482, Civil Code). In the law on sales, the so-called "right of first refusal" is an innovative juridical relation. Needless to point out, it cannot be deemed a perfected contract of sale under Article 1458 of the Civil Code. Neither can the right of first refusal, understood in its normal concept, per se be brought within the purview of an option under the second paragraph of Article 1479, aforequoted, or possibly of an offer 9 10 under Article 1319 of the same Code. An option or an offer would require, among other things, a clear certainty on both the object and the cause or consideration of the envisioned contract. In a right of first refusal, while the object might be made determinate, the exercise of the right, however, would be dependent not only on the grantor's eventual intention to enter into a binding juridical relation with another but also on terms, including the price, that obviously are yet to be later firmed up. Prior thereto, it can at best be so described as merely belonging to a class of preparatory juridical relations governed not by contracts (since the essential elements to establish the vinculum juris would still be indefinite and inconclusive) but by, among other laws of general application, the pertinent scattered provisions of the Civil Code on human conduct. Even on the premise that such right of first refusal has been decreed under a final judgment, like here, its breach cannot justify correspondingly an issuance of a writ of execution under a judgment that merely recognizes its existence, nor would it sanction an action for specific performance without 11 thereby negating the indispensable element of consensuality in the perfection of contracts. It is not to say, however, that the right of first refusal would be inconsequential for, such as already intimated above, an unjustified disregard thereof, given, for instance, the circumstances expressed in Article 12 19 of the Civil Code, can warrant a recovery for damages. The final judgment in Civil Case No. 87-41058, it must be stressed, has merely accorded a "right of first refusal" in favor of petitioners. The consequence of such a declaration entails no more than what has heretofore been said. In fine, if, as it is here so conveyed to us, petitioners are aggrieved by the failure of private respondents to honor the right of first refusal, the remedy is not a writ of execution on the judgment, since there is none to execute, but an action for damages in a proper forum for the purpose.

Furthermore, whether private respondent Buen Realty Development Corporation, the alleged purchaser of the property, has acted in good faith or bad faith and whether or not it should, in any case, be considered bound to respect the registration of the lis pendens in Civil Case No. 87-41058 are matters that must be independently addressed in appropriate proceedings. Buen Realty, not having been impleaded in Civil Case No. 87-41058, cannot be held subject to the writ of execution issued by respondent Judge, let alone ousted from the ownership and possession of the property, without first being duly afforded its day in court. We are also unable to agree with petitioners that the Court of Appeals has erred in holding that the writ of execution varies the terms of the judgment in Civil Case No. 87-41058, later affirmed in CAG.R. CV-21123. The Court of Appeals, in this regard, has observed: Finally, the questioned writ of execution is in variance with the decision of the trial court as modified by this Court. As already stated, there was nothing in said 13 decision that decreed the execution of a deed of sale between the Cu Unjiengs and respondent lessees, or the fixing of the price of the sale, or the cancellation of title in the name of petitioner (Limpin vs. IAC, 147 SCRA 516; Pamantasan ng Lungsod ng Maynila vs. IAC, 143 SCRA 311; De Guzman vs. CA, 137 SCRA 730; Pastor vs. CA, 122 SCRA 885). It is likewise quite obvious to us that the decision in Civil Case No. 87-41058 could not have decreed at the time the execution of any deed of sale between the Cu Unjiengs and petitioners. WHEREFORE, we UPHOLD the Court of Appeals in ultimately setting aside the questioned Orders, dated 30 August 1991 and 27 September 1991, of the court a quo. Costs against petitioners. SO ORDERED. Narvasa, C.J., Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno and Mendoza, JJ., concur. Kapunan, J., took no part. Feliciano, J., is on leave.

G.R. No. 133107 March 25, 1999 RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs. COURT OF APPEALS and FELIPE LUSTRE, respondents. KAPUNAN, J.: A simple telephone call and an ounce of good faith on the part of petitioner could have prevented the present controversy. On March 10, 1993, private respondent Atty. Felipe Lustre purchased a Toyota Corolla from Toyota Shaw, Inc. for which he made a down payment of P164,620.00, the balance of the purchase price to be paid in 24 equal monthly installments. Private respondent thus issued 24 postdated checks for the amount of P14,976.00 each. The first was dated April 10, 1991; subsequent checks were dated every 10th day of each succeeding month. To secure the balance, private respondent executed a promissory note 1 and a contract 2 of chattel mortgage over the vehicle in favor of Toyota Shaw, Inc. The contract of chattel mortgage, in paragraph 11 thereof, provided for an acceleration clause stating that should the mortgagor default in the payment of any installment, the whole amount remaining unpaid shall become due. In addition, the mortgagor shall be liable for 25% of the principal due as liquidated damages. On March 14, 1991, Toyota Shaw, Inc. assigned all its rights and interests in the chattel mortgage to petitioner Rizal Commercial Banking Corporation (RCBC). All the checks dated April 10, 1991 to January 10, 1993 were thereafter encashed and debited by RCBC from private respondent's account, except for RCBC Check No. 279805 representing the payment for August 10, 1991, which was unsigned. Previously, the amount represented by RCBC Check No. 279805 was debited from private respondent's account but was later recalled and re-credited, to him. Because of the recall, the last two checks, dated February 10, 1993 and March 10, 1993, were no longer presented for payment. This was purportedly in conformity with petitioner bank's procedure that once a client's account was forwarded to its account representative, all remaining checks outstanding as of the date the account was forwarded were no longer presented for patent. On the theory that respondent defaulted in his payments, the check representing the payment for August 10, 1991 being unsigned, petitioner, in a letter dated January 21, 1993, demanded from private respondent the payment of the balance of the debt, including liquidated damages. The latter refused, prompting petitioner to file an action for replevin and damages before the Pasay City Regional Trial Court (RTC). Private respondent, in his Answer, interposed a counterclaim for damages. 3 After trial, the. RTC rendered a decision disposing of the case as follows: WHEREFORE, in view of the foregoing, judgment is hereby, rendered as follows: I. The complaint; for lack of cause of action, is hereby DISMISSED and plaintiff RCBC is hereby ordered, A. To accept the payment equivalent to the three checks amounting to a total of P44,938.00, without interest. B. To release/cancel the mortgage on the car . . . upon payment of the amount of P44,938.00, without interest. C. To pay the cost of suit. II. On The Counterclaim.

A. Plaintiff RCBC to pay Atty. Lustre the amount of P200,000.00 as moral damages. B. RCBC to pay P100,000.00 as exemplary damages. C. RCBC to pay Atty. Obispo P50,000.00 as Attorney's fees. Atty. Lustre is not entitled to any fee for lawyering for himself. All awards for damages are subject to payment of fees to be assessed by the Clerk of Court, RTC, Pasay City. SO ORDERED. On appeal by petitioner, the Court of Appeals affirmed the decision of the RTC, thus: We . . . concur with the trial court's ruling that the Chattel Mortgage contract being a contract of adhesion that is, one wherein a party, usually a corporation, prepares the stipulations in the contract, while the other party merely affixes his signature or his "adhesion" thereto . . . is to be strictly construed against appellant bank which prepared the form Contract . . . Hence . . . paragraph 11 of the Chattel Mortgage contract [containing the acceleration clause] should be construed to cover only deliberate and advertent failure on the part of the mortgagor to pay an amortization as it became due in line with the consistent holding of the Supreme Court construing obscurities and ambiguities in the restrictive sense against the drafter thereof . . . in the light of Article 1377 of the Civil Code. In the case at bench, plaintiff-appellant's imputation of default to defendant-appellee rested solely on the fact that the 5th check issued by appellee . . . was recalled for lack of signature. However, the check was recalled only after the amount covered thereby had been deducted from defendant-appellee's account, as shown by the testimony of plaintiff's own witness Francisco Bulatao who was in charge of the preparation of the list and trial balances of bank customers . . . . The "default" was therefore not a case of failure to pay, the check being sufficiently funded, and which amount was in fact already debited [sic] from appellee's account by the appellant bank which subsequently recredited the amount to defendant-appelle's account for lack of signature. All these actions RCBC did on its own without notifying defendant until sixteen (16) months later when it wrote its demand letter dated January 21, 1993. Clearly, appellant bank was remiss in the performance, of its functions for it could have easily called the defendant's attention to the lack of signature on the check and sent the check to or summoned, the latter to affix his signature. It is also to be noted that the demand letter contains no explanation as to how defendant-appellee incurred arrearages in the amount of P66,255.70, which is why defendantappellee made a protest notation thereon. Notably, all the other checks issued by the appellee dated subsequent to August 10, 1991 and dated earlier than the demand letter, were duly encashed. This fact should have already prompted the appellant bank to review its action relative to the unsigned check. . . . 4 We take exception to the application by both the trial and appellate courts of Article 1377 of the Civil Code, which states:

The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 5 It bears stressing that a contract of adhesion is just as binding as ordinary contracts. It is true that we have, on occasion, struck down such contracts as void when the weaker party is imposed upon in dealing with the dominant bargaining party and is reduced to the alternative of taking it or leaving it, completely deprived of the opportunity to bargain on 6 7 equal footing. Nevertheless, contracts of adhesion are not invalid per se; they are not 8 entirely prohibited. The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives his consent. 9 While ambiguities in a contract of adhesion are to be construed against the party that 10 prepared the same, this rule applies only if the stipulations in such contract are obscure or ambiguous. If the terms thereof are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. 11In the latter case, 12 there would be no need for construction. 13 Here, the terms of paragraph 11 of the Chattel Mortgage Contract are clear. Said paragraph states: 11. In case the MORTGAGOR fails to pay any of the installments, or to pay the interest that may be due as provided in the said promissory note, the whole amount remaining unpaid therein shall immediately become due and payable and the mortgage on the property (ies) herein-above described may be foreclosed by the MORTGAGEE, or the MORTGAGEE may take any other legal action to enforce collection of the obligation hereby secured, and in either case the MORTGAGOR further agrees to pay the MORTGAGEE an additional sum of 25% of the principal due and unpaid, as liquidated damages, which said sum shall become part thereof. The MORTGAGOR hereby waives reimbursement of the amount heretofore paid by him/it to the MORTGAGEE. The above terms leave no room for construction. All that is required is the application thereof. Petitioner claims that private respondent's check representing the fifth installment was 14 "not encashed," such that the installment for August 1991 was not paid. By virtue of paragraph 11 above, petitioner submits that it "was justified in treating the entire balance of the obligation as due and 15 demandable." Despite demand by petitioner, however, private respondent refused to pay the balance of the debt. Petitioner, in sum imputes delay on the part of private respondent. We do not subscribe to petitioner's theory. Art. 170 of the Civil Code states that those who in the performance of their obligations are guilty of delay are liable for damages. The delay in the performance of the obligation, 16 however, must be either malicious or negligent. Thus, assuming that private respondent was guilty of delay in the payment of the value of unsigned check, private respondent cannot be held liable for damages. There is no imputation, much less evidence, that private respondent acted with malice or negligence in failing to sign the check. Indeed, we agree with the Court of Appeals finding that such omission was mere "in advertence" on the part of private respondent. Toyota salesperson Jorge Geronimo testified that he even verified whether private respondent had signed all the checks and in fact returned three or four unsigned checks to him for signing: Atty. Obispo: After these receipts were issued, what else did you do about the transaction? A: During our transaction with Atty. Lustre, I found out when he issued to me the 24 checks, I found out

3 to 4 checks are unsigned and I asked him to signed these checks. Atty. Obispo: What did you do? A: I asked him to sign the checks. After signing the checks, I reviewed again all the documents, after I reviewed all the documents and found out that all are completed and the down payments was completed, 17 we realed to him the car. Even when the checks were delivered to petitioner, it did not object to the unsigned check. In view of the lack of malice or negligence on the part of private respondent, petitioner's blind and mechanical invocation of paragraph 11 of the contract of chattel mortgage was unwarranted. Petitioner's conduct, in the light of the circumstances of this case, can only be described as mercenary. Petitioner had already debited the value of the unsigned check from private respondent's account only to re-credit it much later to him. Thereafter, petitioner encashed checks subsequently dated, then abruptly refused to encash the last two. More than a year after the date of the unsigned check, petitioner, claiming delay and invoking paragraph 11, demanded from private respondent payment of the value of said check and that of the last two checks, including liquidated damages. As pointed out by the trial court, this whole controversy could have been avoided if only petitioner bothered to call up private respondent and ask him to sign the check. Good faith not only in compliance 18 with its contractual obligations, but also in observance of the standard in human relations, for every person "to act with justice, give everyone his due, and observe 19 honesty and good faith." behooved the bank to do so. Failing thus, petitioner is liable for damages caused to private respondent. 20 These include moral damages for the mental anguish, serious anxiety, besmirched reputation, 21 wounded feelings and social humiliation suffered by the latter. The trial court found that private respondent was: [a] client who has shared transactions for over twenty years with a bank . . ..The shabby treatment given the defendant is unpardonable since he was put to shame and embarrassment after the case was filed in Court. He is a lawyer in his own right, married to another member of the bar. He sired children who are all professionals in their chosen field. He is known to the community of golfers with whom he gravitates. Surely the filing of the case made defendant feel so bad and bothered. To deter others from emulating petitioner's callous example, we affirm the award of 22 23 exemplary damages. As exemplary damages are warranted, so are attorney's fees. We, however, find excessive the amount of damages awarded by the trial court in favor of private respondent with respect to his counterclaims and, accordingly, reduce the same as follows: (a) Moral damages from P200,000.00 to P100,000.00 (b) Exemplary damages from P100,000.00 to P75,000.00 (c) Attorney's fees from P50,000.00 to P 30,000.00 WHEREFORE, subject to these modifications, the decision of the Court of Appeals is AFFIRMED. SO ORDERED. Davide, Jr., C.J., Melo and Pardo, JJ., concur.

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES, Petitioner, - versus GOLDEN HORIZON REALTY CORPORATION, Respondent. x------------------------------------------x NATIONAL DEVELOPMENT COMPANY, Petitioner, - versus GOLDEN HORIZON REALTY CORPORATION, Respondent.

G.R. No. 183612

G.R. No. 184260 Present: PUNO, C.J., Chairperson, CARPIO MORALES, LEONARDO-DE CASTRO, BERSAMIN, and VILLARAMA, JR., JJ. Promulgated:

March 15, 2010 x-----------------------------------------------------------------------------------------x DECISION VILLARAMA, JR., J.: The above-titled consolidated petitions filed under Rule 45 of the 1997 Rules of Civil [1] Procedure, as amended, seek to reverse the Decision dated June 25, 2008 and Resolution dated August 22, 2008 of the Court of Appeals (CA) in CA-G.R. CV No. 84399 which affirmed the [2] Decision dated November 25, 2004 of the Regional Trial Court (RTC) of Makati City, Branch 144 in Civil Case No. 88-2238. The undisputed facts are as follows: Petitioner National Development Company (NDC) is a government- owned and controlled corporation, created under Commonwealth Act No. 182, as amended by Com. Act No. 311 and Presidential Decree (P.D.) No. 668. Petitioner Polytechnic University of the Philippines (PUP) is a public, non-sectarian, non-profit educational institution created in 1978 by virtue of P.D. No. 1341. In the early sixties, NDC had in its disposal a ten (10)-hectare property located along Pureza St., Sta. Mesa, Manila. The estate was popularly known as the NDC Compound and covered by Transfer Certificate of Title Nos. 92885, 110301 and 145470. On September 7, 1977, NDC entered into a Contract of Lease (C-33-77) with Golden Horizon Realty Corporation (GHRC) over a portion of the property, with an area of 2,407 square meters for a [3] period of ten (10) years, renewable for another ten (10) years with mutual consent of the parties. On May 4, 1978, a second Contract of Lease (C-12-78) was executed between NDC and GHRC covering 3,222.80 square meters, also renewable upon mutual consent after the expiration of the ten (10)-year lease period. In addition, GHRC as lessee was granted the option to purchase the area leased, the price to be negotiated and determined at the time the [4] option to purchase is exercised. Under the lease agreements, GHRC was obliged to construct at its own expense buildings of strong material at no less than the stipulated cost, and other improvements which shall automatically belong to the NDC as lessor upon the expiration of the lease period. Accordingly, GHRC introduced permanent improvements and structures as required by the terms of the contract. After the completion of the industrial complex project, for which GHRC spent P5 million, it was leased to [5] various manufacturers, industrialists and other businessmen thereby generating hundreds of jobs. On June 13, 1988, before the expiration of the ten (10)-year period under the second lease contract, GHRC wrote a letter to NDC indicating its exercise of the option to renew the lease for

another ten (10) years. As no response was received from NDC, GHRC sent another letter on August 12, 1988, reiterating its desire to renew the contract and also requesting for priority to [6] negotiate for its purchase should NDC opt to sell the leased premises. NDC still did not reply but continued to accept rental payments from GHRC and allowed the latter to remain in possession of the property. Sometime after September 1988, GHRC discovered that NDC had decided to secretly dispose the property to a third party. On October 21, 1988, GHRC filed in the RTC a complaint for specific [7] performance, damages with preliminary injunction and temporary restraining order. In the meantime, then President Corazon C. Aquino issued Memorandum Order No. 214 dated January 6, 1989, ordering the transfer of the whole NDC Compound to the National Government, which in turn would convey the said property in favor of PUP at acquisition cost. The memorandum order cited the serious need of PUP, considered the Poor Mans University, to expand its campus, which adjoins the NDC Compound, to accommodate its growing student population, and the willingness of PUP to buy and of NDC to sell its property. The order of conveyance of the 10.31-hectare property would automatically result in the cancellation of NDCs total obligation in favor of the National Government in [8] the amount of P57,193,201.64. On February 20, 1989, the RTC issued a writ of preliminary injunction enjoining NDC and its attorneys, representatives, agents and any other persons assisting it from proceeding with the sale [9] and disposition of the leased premises. On February 23, 1989, PUP filed a motion to intervene as party defendant, claiming that as a purchaser pendente lite of a property subject of litigation it is entitled to intervene in the proceedings. The RTC granted the said motion and directed PUP to file its Answer-in[10] Intervention. PUP also demanded that GHRC vacate the premises, insisting that the latters lease contract had already expired. Its demand letter unheeded by GHRC, PUP filed anejectment case (Civil Case [11] No. 134416) before the Metropolitan Trial Court (MeTC) of Manila on January 14, 1991. Due to this development, GHRC filed an Amended and/or Supplemental Complaint to include as additional defendants PUP, Honorable Executive Secretary Oscar Orbosand Judge Ernesto A. Reyes of the Manila MeTC, and to enjoin the afore-mentioned defendants from prosecuting Civil Case No. 134416 for ejectment. A temporary restraining order was subsequently issued by the RTC enjoining PUP from prosecuting and Judge Francisco Brillantes, Jr. from proceeding with [12] the ejectment case. In its Second Amended and/or Supplemental Complaint, GHRC argued that Memorandum Order No. 214 is a nullity, for being violative of the writ of injunction issued by the trial court, apart from being an infringement of the Constitutional prohibition against impairment of obligation of contracts, an encroachment on legislative functions and a bill of attainder. In the alternative, should the trial court adjudge the memorandum order as valid, GHRC contended that its existing right must [13] still be respected by allowing it to purchase the leased premises. Pre-trial was set but was suspended upon agreement of the parties to await the final resolution of a similar case involving NDC, PUP and another lessee of NDC, Firestone Ceramics, Inc. [14] (Firestone), then pending before the RTC of Pasay City. On November 14, 2001, this Court rendered a decision in G.R. Nos. 143513 (Polytechnic University of the Philippines v. Court of Appeals) and 143590 (National Development Corporation v. [15] Firestone Ceramics, Inc.), which declared that the sale to PUP by NDC of the portion leased by Firestone pursuant to Memorandum Order No. 214 violated the right of first refusal granted to Firestone under its third lease contract with NDC. We thus decreed: WHEREFORE, the petitions in G.R. No. 143513 and G.R. No. 143590 are DENIED. Inasmuch as the first contract of lease fixed the area of the leased premises at 2.90118 hectares while the second contract placed it at 2.60 hectares, let a ground survey of the leased premises be immediately conducted by a duly licensed, registered surveyor at the expense of private respondent FIRESTONE CERAMICS, INC., within two (2) months from the finality of the judgment in this case. Thereafter, private respondent FIRESTONE CERAMICS, INC., shall have six (6) months from receipt of the approved survey within which to exercise its right to purchase the leased property at P1,500.00 per square meter, and petitioner Polytechnic University of the Philippines is ordered to reconvey the property to FIRESTONE CERAMICS, INC., in the exercise of its right of first refusal upon payment of the purchase price thereof. SO ORDERED.
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The RTC resumed the proceedings and when mediation and pre-trial failed to settle the case [17] amicably, trial on the merits ensued. On November 25, 2004, the RTC rendered its decision upholding the right of first refusal granted to GHRC under its lease contract with NDC and ordering PUP toreconvey the said portion of the property in favor of GHRC. The dispositive portion reads: WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the defendants ordering the plaintiff to cause immediate ground survey of the premises subject of the leased contract under Lease Contract No. C-33-77 and C-12-78 measuring 2,407 and 3,222.8 square meters respectively, by a duly licensed and registered surveyor at the expense of the plaintiff within two months from receipt of this Decision and thereafter, the plaintiff shall have six (6) months from receipt of the approved survey within which to exercise its right to purchase the leased property at P554.74 per square meter. And finally, the defendant PUP, in whose name the property is titled, is hereby ordered to reconvey the aforesaid property to the plaintiff in the exercise of its right of its option to buy or first refusal upon payment of the purchase price thereof. The defendant NDC is hereby further ordered to pay the plaintiff attorneys fees in the amount of P100,000.00. The case against defendant Executive Secretary is dismissed and this decision shall bind defendant Metropolitan Trial Court, Branch 20 of Manila. With costs against defendants NDC and PUP. SO ORDERED.
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By Decision of June 25, 2008, NDC and PUP separately appealed the decision to the CA. [20] the CA affirmed in toto the decision of the RTC. Both the RTC and the CA applied this Courts ruling in Polytechnic University of the Philippines v. Court of Appeals (supra), considering that GHRC is similarly situated as a lessee of NDC whose right of first refusal under the lease contract was violated by the sale of the property to PUP without NDC having first offered to sell the same to GHRC despite the latters request for the renewal of the lease and/or to purchase the leased premises prior to the expiration of the second lease contract. The CA further agreed with the RTCs finding that there was an implied renewal of the lease upon the failure of NDC to act on GHRCs repeated requests for renewal of the lease contract, both verbal and written, and continuing to accept monthly rental payments from GHRC which was allowed to continue in possession of the leased premises. The CA also rejected the argument of NDC and PUP that even assuming that GHRC had the right of first refusal, said right pertained only to the second lease contract, C-12-78 covering 3,222.80 square meters, and not to the first lease contract, C-33-77 covering 2,407 square meters, which had already expired. It sustained the RTCs finding that the two (2) lease contracts were interrelated because each formed part of GHRCs industrial complex, such that business operations would be rendered useless and inoperative if the first contract were to be detached from the other, as similarly held in the afore-mentioned case of Polytechnic University of the Philippines v. Court of Appeals. Petitioner PUP argues that respondents right to exercise the option to purchase had expired with the termination of the original contract of lease and was not carried over to the subsequent implied new lease between respondent and petitioner NDC. As testified to by their witnesses Leticia Cabantog and Atty. Rhoel Mabazza, there was no agreement or document to the effect that respondents request for extension or renewal of the subject contracts of lease for another ten (10) years was approved by NDC. Hence, respondent can no longer exercise the option to purchase the leased premises when the same were conveyed to PUP pursuant to Memorandum Order No. 214 [21] dated January 6, 1989, long after the expiration of C-33-77 and C-12-78 in September 1988. Petitioner PUP further contends that while it is conceded that there was an implied new lease between respondent and petitioner NDC after the expiration of the lease contracts, the same did not include the right of first refusal originally granted to respondent. The CA should have applied the [22] ruling in Dizon v. Magsaysay that the lessee cannot any more exercise its option to purchase after the lapse of the one (1)-year period of the lease contract. With the implicit renewal of the lease on a monthly basis, the other terms of the original contract of lease which are revived in the implied

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new lease under Article 1670 of the Civil Code are only those terms which are germane to the lessees right of continued enjoyment of the property leased. The provision entitling the lessee the option to purchase the leased premises is not deemed incorporated in the impliedly renewed contract because it is alien to the possession of the lessee. Consequently, as in this case, respondents right of option to purchase the leased premises was not violated despite the impliedly renewed contract of lease with NDC. Respondent cannot favorably invoke the decision in G.R. Nos. 143513 and 143590 (Polytechnic University of the Philippines v. Court of Appeals) for the simple reason, among others, that unlike in said cases, the contracts of lease of respondent with NDC were not mutually extended or renewed for another ten (10) years. Thus, when the leased premises were conveyed to PUP, respondent did not any more have any right of first refusal, which incidentally [23] appears only in the second lease contract and not in the first lease contract. On its part, petitioner NDC assails the CA in holding that the contracts of lease were impliedly renewed for another ten (10)-year period. The provisions of C-33-77 and C-12-78 clearly state that the lessee is granted the option to renew for another ten (10) years with the mutual consent of both parties. As regards the continued receipt of rentals by NDC and possession by the respondent of the leased premises, the impliedly renewed lease was only month-to-month and not ten (10) years [24] since the rentals are being paid on a monthly basis, as held in Dizon v. Magsaysay. Petitioner NDC further faults the CA in sustaining the RTCs decision which erroneously granted respondent the option to purchase the leased premises at the rate ofP554.74 per square meter, the same rate for which NDC sold the property to petitioner PUP and/or the National Government, which is the mere acquisition cost thereof. It must be noted that such consideration or rate was imposed by Memorandum Order No. 214 under the premise that it shall, in effect, be a sale and/or purchase from one (1) government agency to another. It was intended merely as a transfer of one (1) user of the National Government to another, with the beneficiary, PUP in this case, merely returning to the petitioner/transferor the cost of acquisition thereof, as appearing on its accounting books. It does not in any way reflect the true and fair market value of the property, nor was it a price a willing seller would demand and accept for parting with his real property. Such benefit, therefore, cannot be extended to respondent as a private entity, as the latter does not share [25] the same pocket, so to speak, with the National Government. The issue to be resolved is whether or not our ruling in Polytechnic University of the Philippines v. Court of Appeals applies in this case involving another lessee of NDC who claimed that the option to purchase the portion leased to it was similarly violated by the sale of the NDC Compound in favor of PUP pursuant to Memorandum Order No. 214. We rule in the affirmative. The second lease contract contained the following provision: III. It is mutually agreed by the parties that this Contract of Lease shall be in full force and effect for a period of ten (10) years counted from the effectivity of the payment of rental as provided under sub-paragraph (b) of Article I, with option to renew for another ten (10) years with the mutual consent of both parties. In no case should the rentals be increased by more than 100% of the original amount fixed. Lessee shall also have the option to purchase the area leased, the price to be negotiated and determined at the time the option to purchase is exercised. [EMPHASIS SUPPLIED] An option is a contract by which the owner of the property agrees with another person that the latter shall have the right to buy the formers property at a fixed price within a certain time. It is a condition offered or contract by which the owner stipulates with another that the latter shall have the right to buy the property at a fixed price within a certain time, or under, or in compliance with certain terms and conditions; or which gives to the owner of the property the right to sell or demand a [26] sale. It binds the party, who has given the option, not to enter into the principal contract with any other person during the period designated, and, within that period, to enter into such contract with [27] the one to whom the option was granted, if the latter should decide to use the option. Upon the other hand, a right of first refusal is a contractual grant, not of the sale of a property, [28] As distinguished but of the first priority to buy the property in the event the owner sells the same. from an option contract, in a right of first refusal, while the object might be made determinate, the exercise of the right of first refusal would be dependent not only on the owners eventual intention to enter into a binding juridical relation with another but also on terms, including the price, that are yet [29] to be firmed up.

As the option to purchase clause in the second lease contract has no definite period within which the leased premises will be offered for sale to respondent lessee and the price is made subject to negotiation and determined only at the time the option to buy is exercised, it is obviously a mere right of refusal, usually inserted in lease contracts to give the lessee the first crack to buy the property in case the lessor decides to sell the same. That respondent was granted a right of first refusal under the second lease contract appears not to have been disputed by petitioners. What petitioners assail is the CAs erroneous conclusion that such right of refusal subsisted even after the expiration of the original lease period, when respondent was allowed to continue staying in the leased premises under an implied renewal of the lease and without the right of refusal carried over to such month-to-month lease. Petitioners thus maintain that no right of refusal was violated by the sale of the property in favor of PUP pursuant to Memorandum Order No. 214. Petitioners position is untenable. When a lease contract contains a right of first refusal, the lessor has the legal duty to the lessee not to sell the leased property to anyone at any price until after the lessor has made an offer to sell the property to the lessee and the lessee has failed to accept it. Only after the lessee has failed to exercise his right of first priority could the lessor sell the property to other buyers under the same terms and conditions offered to the lessee, or under terms and conditions more favorable to [30] the lessor. Records showed that during the hearing on the application for a writ of preliminary injunction, respondent adduced in evidence a letter of Antonio A. Henson dated 15 July 1988 addressed to Mr. Jake C. Lagonera, Director and Special Assistant to Executive Secretary Catalino Macaraeg, reviewing a proposed memorandum order submitted to President Corazon C. Aquino transferring the whole NDC Compound, including the premises leased by respondent, in favor of petitioner PUP. This letter was offered in evidence by respondent to prove the existence of documents as of that date and even prior to the expiration of the second lease contract or the lapse of the ten (10)-year period counted from the effectivity of the rental payment -- that is, one hundred and fifty (150) days from the signing of the contract (May 4, 1978), as provided in Art. I, paragraph (b) of C-12-78, or on October 1, 1988. Respondent thus timely exercised its option to purchase on August 12, 1988. However, considering that NDC had been negotiating through the National Government for the sale of the property in favor of PUP as early as July 15, 1988 without first offering to sell it to respondent and even when respondent communicated its desire to exercise the option to purchase granted to it under the lease contract, it is clear that NDC violated respondents right of first refusal. Under the premises, the matter of the right of refusal not having been carried over to the impliedly renewed month-to-month lease after the expiration of the second lease contract on October 21, 1988 becomes irrelevant since at the time of the negotiations of the sale to a third party, petitioner PUP, respondents right of first refusal was still subsisting. Petitioner NDC in its memorandum contended that the CA erred in applying the ruling in Polytechnic University of the Philippines v. Court of Appeals pointing out that the case of lessee Firestone Ceramics, Inc. is different because the lease contract therein had not yet expired while in this case respondents lease contracts have already expired and never renewed. The date of the expiration of the lease contract in said case is December 31, 1989 which is prior to the issuance of Memorandum Order No. 214 on January 6, 1989. In contrast, respondents lease contracts had [31] already expired (September 1988) at the time said memorandum order was issued. Such contention does not hold water. As already mentioned, the reckoning point of the offer of sale to a third party was not the issuance of Memorandum Order No. 214 on January 6, 1989 but the commencement of such negotiations as early as July 1988 when respondents right of first refusal was still subsisting and the lease contracts still in force. Petitioner NDC did not bother to respond to respondents letter of June 13, 1988 informing it of respondents exercise of the option to renew and requesting to discuss further the matter with NDC, nor to the subsequent letter of August 12, 1988 reiterating the request for renewing the lease for another ten (10) years and also the exercise of the option to purchase under the lease contract. Petitioner NDC had dismissed [32] these letters as mere informative in nature, and a request at its best. Perusal of the letter dated August 12, 1988, however, belies such claim of petitioner NDC that it was merely informative, thus: August 12, 1988 HON. ANTONIO HENSON General Manager NATIONAL DEVELOPMENT COMPANY

377 Se(n). Gil J. Puyat Avenue Makati, Metro Manila REF: Dear Sir: This is further to our earlier letter dated June 13, 1988 formally advising your goodselves of our intention to exercise our option for another ten (10) years. Should the National Development Company opt to sell the property covered by said leases, we also request for priority to negotiate for its purchase at terms and/or conditions mutually acceptable. As a backgrounder, we wish to inform you that since the start of our lease, we have improved on the property by constructing bodega-type buildings which presently house all legitimate trading and manufacturing concerns. These business are substantial taxpayers, employ not less than 300 employees and contribute even foreign earnings. It is in this context that we are requesting for the extension of the lease contract to prevent serious economic disruption and dislocation of the business concerns, as well as provide ourselves, the lessee, an opportunity to recoup our investments and obtain a fair return thereof. Your favorable consideration on our request will be very much appreciated. very truly yours, TIU HAN TENG [33] President As to petitioners argument that respondents right of first refusal can be invoked only with respect to the second lease contract which expressly provided for the option to purchase by the lessee, and not in the first lease contract which contained no such clause, we sustain the RTC and CA in finding that the second contract, covering an area of 3,222.80 square meters, is interrelated to and inseparable from the first contract over 2,407 square meters. The structures built on the leased premises, which are adjacent to each other, form part of an integrated system of a commercial complex leased out to manufacturers, fabricators and other businesses. Petitioners submitted a sketch plan and pictures taken of the driveways, in an effort to show that the leased premises can be used separately by respondent, and that the two (2) lease contracts are distinct from each [34] other. Such was a desperate attempt to downplay the commercial purpose of respondents substantial improvements which greatly contributed to the increased value of the leased premises. To prove that petitioner NDC had considered the leased premises as a single unit, respondent submitted evidence showing that NDC issued only one (1) receipt for the rental [35] payments for the two portions. Respondent further presented the blueprint plan prepared by its witness, Engr. Alejandro E. Tinio, who supervised the construction of the structures on the leased premises, to show the building concept as a one-stop industrial site and integrated commercial [36] complex. In fine, the CA was correct in declaring that there exists no justifiable reason not to apply the same rationale in Polytechnic University of the Philippines v. Court of Appealsin the case of respondent who was similarly prejudiced by petitioner NDCs sale of the property to PUP, as to entitle the respondent to exercise its option to purchase until October 1988 inasmuch as the May 4, 1978 contract embodied the option to renew the lease for another ten (10) years upon mutual consent and giving respondent the option to purchase the leased premises for a price to be negotiated and determined at the time such option was exercised by respondent. It is to be noted that Memorandum Order No. 214 itself declared that the transfer is subject to such liens/leases existing [on the subject property]. Thus: ...we now proceed to determine whether FIRESTONE should be allowed to exercise its right of first refusal over the property. Such right Contract of Lease Nos. C-33-77 & C-12-78

was expressly stated by NDC and FIRESTONE in par. XV of their third contract denominated as A-10-78 executed on 22 December 1978 which, as found by the courts a quo, was interrelated to and inseparable from their first contract denominated as C-30-65 executed on 24 August 1965 and their second contract denominated as C-26-68 executed on 8 January 1969. Thus Should the LESSOR desire to sell the leased premises during the term of this Agreement, or any extension thereof, the LESSOR shall first give to the LESSEE, which shall have theright of first option to purchase the leased premises subject to mutual agreement of both parties. In the instant case, the right of first refusal is an integral and indivisible part of the contract of lease and is inseparable from the whole contract. The consideration for the right is built into the reciprocal obligations of the parties. Thus, it is not correct for petitioners to insist that there was no consideration paid by FIRESTONE to entitle it to the exercise of the right, inasmuch as the stipulation is part and parcel of the contract of lease making the consideration for the lease the same as that for the option. It is a settled principle in civil law that when a lease contract contains a right of first refusal, the lessor is under a legal duty to the lessee not to sell to anybody at any price until after he has made an offer to sell to the latter at a certain price and the lessee has failed to accept it. The lessee has a right that the lessors first offer shall be in his favor. The option in this case was incorporated in the contracts of lease by NDC for the benefit of FIRESTONE which, in view of the total amount of its investments in the property, wanted to be assured that it would be given the first opportunity to buy the property at a price for which it would be offered. Consistent with their agreement, it was then implicit for NDC to have first offered the leased premises of 2.60 hectares to FIRESTONE prior to the sale in favor of PUP. Only if FIRESTONE failed to exercise its right of first priority could NDC lawfully sell the property to [37] [EMPHASIS SUPPLIED] petitioner PUP. As we further ruled in the afore-cited case, the contractual grant of a right of first refusal is enforceable, and following an earlier ruling in Equatorial Realty Development, Inc. v. Mayfair [38] Theater, Inc., the execution of such right consists in directing the grantor to comply with his obligation according to the terms at which he should have offered the property in favor of the grantee and at that price when the offer should have been made. We then determined the proper rate at which the leased portion should be reconveyedto respondent by PUP, to whom the lessor NDC sold it in violation of respondent lessees right of first refusal, as follows: It now becomes apropos to ask whether the courts a quo were correct in fixing the proper consideration of the sale at P1,500.00 per square meter. In contracts of sale, the basis of the right of first refusal must be the current offer of the seller to sell or the offer to purchase of the prospective buyer. Only after the lessee-grantee fails to exercise its right under the same terms and within the period contemplated can the owner validly offer to sell the property to a third person, again, under the same terms as offered to the grantee. It appearing that the whole NDC compound was sold to PUP forP554.74 per square meter, it would have been more proper for the courts below to have ordered the sale of the property also at the same price. However, since FIRESTONE never raised this as an issue, while on the other hand it admitted that the value of the property stood at P1,500.00 per square meter, then we see no compelling reason to modify the holdings of the courts a quothat the leased premises [39] be sold at that price. [EMPHASIS SUPPLIED]

In the light of the foregoing, we hold that respondent, which did not offer any amount to petitioner NDC, and neither disputed the P1,500.00 per square meter actual value of NDCs property at that time it was sold to PUP at P554.74 per square meter, as duly considered by this Court in the Firestone case, should be bound by such determination. Accordingly, the price at which the leased premises should be sold to respondent in the exercise of its right of first refusal under the lease contract with petitioner NDC, which was pegged by the RTC at P554.74 per square meter, should be adjusted to P1,500.00 per square meter, which more accurately reflects its true value at that time of the sale in favor of petitioner PUP. Indeed, basic is the rule that a party to a contract cannot unilaterally withdraw a right of first [40] refusal that stands upon valuable consideration. We have categorically ruled that it is not correct to say that there is no consideration for the grant of the right of first refusal if such grant is embodied in the same contract of lease. Since the stipulation forms part of the entire lease contract, the consideration for the lease includes the consideration for the grant of the right of first refusal. In entering into the contract, the lessee is in effect stating that it consents to lease the premises and to pay the price agreed upon provided the lessor also consents that, should it sell the leased property, then, the lessee shall be given the right to match the offered purchase price and to buy the property [41] at that price. We have further stressed that not even the avowed public welfare or the constitutional priority accorded to education, invoked by petitioner PUP in the Firestone case, would serve as license for us, and any party for that matter, to destroy the sanctity of binding obligations. While education may be prioritized for legislative and budgetary purposes, it is doubtful if such importance can be used to confiscate private property such as the right of first refusal granted to a lessee of petitioner [42] NDC. Clearly, no reversible error was committed by the CA in sustaining respondents contractual right of first refusal and ordering the reconveyance of the leased portion of petitioner NDCs property in its favor. WHEREFORE, the petitions are DENIED. The Decision dated November 25, 2004 of the Regional Trial Court of Makati City, Branch 144 in Civil Case No. 88-2238, as affirmed by the Court of Appeals in its Decision dated June 25, 2008 in CA-G.R. CV No. 84399, is hereby AFFIRMED with MODIFICATION in that the price to be paid by respondent Golden Horizon Realty Corporation for the leased portion of the NDC Compound under Lease Contract Nos. C-33-77 and C-12-78 is hereby increased to P1,500.00 per square meter. No pronouncement as to costs.

G.R. No. 156841 June 30, 2005 GF EQUITY, INC., petitioner, vs. ARTURO VALENZONA, respondent. DECISION CARPIO-MORALES, J.: On challenge via Petition for Review on Certiorari is the Court of Appeals October 14, 1 2002 Decision reversing that of the Regional Trial Court (RTC) of Manila dated June 28, 2 1997 which dismissed the complaint of herein respondent Arturo Valenzona (Valenzona) for breach of contract with damages against herein petitioner GF Equity, Inc. (GF Equity). The factual antecedents of the case are as follows: GF Equity, represented by its Chief Financial Officer W. Steven Uytengsu (Uytengsu), hired Valenzona as Head Coach of the Alaska basketball team in the Philippine Basketball Association (PBA) under a Contract of Employment.3 As head coach, the duties of Valenzona were described in the contract to include the following: xxx 1. . . . coaching at all practices and games scheduled for the CORPORATIONs TEAM during the scheduled season of the ASSOCIATION . . ., coaching all exhibition games scheduled by the corporation as approved by the PBA during and prior to the scheduled season, coaching (if invited to participate) in the ASSOCIATIONs All Star Game and attending every event conducted in association with the All Star Game,and coaching the play-off games subsequent to the scheduled season based on the athletic program of the PBA. xxx 3. The COACH agrees to observe and comply with all requirements of the CORPORATION respecting conduct of its TEAM and its players, at all times whether on or off the playing floor. The CORPORATION may, from time to time during the continuance of this contract, establish reasonable rules for the government of its players "at home" and "on the road"; and such rules shall be part of this contract as fully is (sic) if herein written and shall be the responsibility of the COACH to implement; x x x 4. The COACH agrees (a) to report at the time and place fixed by the CORPORATION in good physical condition; (b) to keep himself throughout the entire season in good physical condition; (c) to give his best services, as well as his loyalty to the CORPORATION, and to serve as basketball coach for the CORPORATION and its assignees; (d) to be neatly and fully attired in public and always to conduct himself on and off the court according to the highest standards of honesty, morality, fair play and sportsmanship; (e) not to do anything which is detrimental to the best interests of the CORPORATION. xxx 7. The COACH agrees that if so requested by the CORPORATION, he will endorse the CORPORATIONs products in commercial advertising, promotions and the like. The COACH further agrees to allow the CORPORATION or the ASSOCIATION to take pictures of the COACH alone or together with others, for still photographs, motion pictures or television, at such times as the CORPORATION or the ASSOCIATION may designate, and no matter by whom taken may be used in any manner desired by either of them for publicity or promotional purposes. (Underscoring supplied). xxx Even before the conclusion of the contract, Valenzona had already served GF Equity under a verbal contract by coaching its team, Hills Brothers, in the 3rd PBA Conference of 1987 where the team was runner-up.

Under the contract, GF Equity would pay Valenzona the sum of Thirty Five Thousand Pesos (P35,000.00) monthly, net of taxes, and provide him with a service vehicle and gasoline allowance. While the employment period agreed upon was for two years commencing on January 1, 1988 and ending on December 31, 1989, the last sentence of paragraph 3 of the contract carried the following condition: 3. x x x If at any time during the contract, the COACH, in the sole opinion of the CORPORATION, fails to exhibit sufficient skill or competitive ability to coach the team, the CORPORATION may terminate this contract. (Emphasis supplied) Before affixing his signature on the contract, Valenzona consulted his lawyer who pointed out the one-sidedness of the above-quoted last sentence of paragraph 3 thereof. The caveat notwithstanding, Valenzona still acceded to the terms of the contract because he had trust and confidence in Uytengsu who had recommended him to the management of GF Equity. During his stint as Alaskas head coach, the team placed third both in the Open and AllFilipino PBA Conferences in 1988. Valenzona was later advised by the management of GF Equity by letter of September 26, 1988 of the termination of his services in this wise: We regret to inform you that under the contract of employment dated January 1, 1988 we are invoking our rights specified in paragraph 3. You will continue to be paid until your outstanding balance which, as of September 25, 1988, is P75,868.38 has been fully paid. Please return the service vehicle to my office no later than September 30, 4 1988. (Emphasis supplied) Close to six years after the termination of his services, Valenzonas counsel, by letter of July 30, 1994,5 demanded from GF Equity payment of compensation arising from the arbitrary and unilateral termination of his employment. GF Equity, however, refused the claim. Valenzona thus filed on September 26, 1994 before the Regional Trial Court of Manila a complaint6 against GF Equity for breach of contract with damages, ascribing bad faith, malice and "disregard to fairness and to the rights of the plaintiff" by unilaterally and arbitrarily pre-terminating the contract without just cause and legal and factual basis. He prayed for the award of actual damages in the amount of P560,000.00 representing his unpaid compensation from September 26, 1988 up to December 31, 1989, at the rate of P35,000.00 a month; moral damages in the amount of P100,000.00; exemplary damages in the amount of P50,000.00; attorneys fees in the amount of P100,000.00; and costs of suit. Before the trial court, Valenzona challenged the condition in paragraph 3 of the contract as lacking the element of mutuality of contract, a clear transgression of Article 1308 of the New Civil Code, and reliance thereon, he contended, did not warrant his unjustified and arbitrary dismissal. GF Equity maintained, on the other hand, that it merely exercised its right under the contract to pre-terminate Valenzonas employment due to incompetence. And it posited that he was guilty of laches and, in any event, his complaint should have been instituted before a labor arbiter. The trial court, upholding the validity of the assailed provision of the contract, dismissed, by decision of June 28, 1997,7 the complaint of Valenzona who, it held, was fully aware of entering into a bad bargain. The Court of Appeals, before which Valenzona appealed, reversed the trial courts 8 decision, by decision of October 14, 2002, and accordingly ordered GF Equity to pay him damages. In its decision, the appellate court held that the questioned provision in the contract "merely confers upon GF Equity the right to fire its coach upon a finding of inefficiency, a valid reason within the ambit of its management prerogatives, subject to limitations

imposed by law, although not expressly stated in the clause"; and "the rightgranted in the contract can neither be said to be immoral, unlawful, or contrary t o public policy." It concluded, however, that while "the mutuality of the clause" is evident, GF Equity "abused its right by arbitrarily terminating . . . Valenzonas employment and opened itself to a charge of bad faith." Hence, finding that Valenzonas claim for damages is "obviously . . . based on Art. 19 of the Civil Code" which provides: Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith., the appellate court awarded Valenzona the following damages, furnishing the justification therefor: . . . a) Compensatory damages representing his unearned income for 15 months. Actual and compensatory damages are those recoverable because of a pecuniary loss in business, trade, property, profession, job or occupation. As testified, his employment contract provided a monthly income of PhP35,000, which he lost from September 26, 1988 up to December 31, 1989 as a consequence of his arbitrary dismissal; b) Moral damages of PhP20,000. The act caused wounded feelings on the part of the plaintiff. Moral damages is recoverable under Article 2220 and the chapter on Human Relations of the Civil Code (Articles 1936) when a contract is breached in bad faith; c) Exemplary damages of PhP20,000, by way of example or correction for the public good; and d) When exemplary damages are awarded, attorneys fees can also be given. We deem it just to grant 10% of the actual damages as attorneys fees. (Underscoring supplied) Hence, this petition at bar, GF Equity faulting the appellate court in . . . CONCLUD[ING] WRONGLY FROM ESTABLISHED FACTS IN A MANNER 9 VIOLATIVE OF APPLICABLE LAWS AND ESTABLISHED JURISPRUDENCE. GF Equity argues that the appellate court committed a non-sequitur when it agreed with the findings of fact of the lower court but reached an opposite conclusion. It avers that the appellate court made itself a guardian of an otherwise intelligent individual well-versed in tactical maneuvers; that the freedom to enter into contracts is protected by law, and the courts will not interfere therewith unless the contract is contrary to law, morals, good customs, public policy or public order; that there was absolutely no reason for the appellate court to have found bad faith on its part; and that, at all events, Valenzona is guilty of laches for his unexplained inaction for six years. Central to the resolution of the instant controversy is the determination of whether the questioned last sentence of paragraph 3 is violative of the principle of mutuality of contracts. Mutuality is one of the characteristics of a contract, its validity or performance or 10 compliance of which cannot be left to the will of only one of the parties. This is enshrined in Article 1308 of the New Civil Code, whose underlying principle is 11 explained in Garcia v. Rita Legarda, Inc., viz: Article 1308 of the New Civil Code reads as follows: "The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them." The above legal provision is a virtual reproduction of Article 1256 of the old Civil Code but it was so phrased as to emphasize the principle that the contract must bind both parties. This, of course is based firstly, on the principle that obligations arising from contracts have the force of law between the contracting parties and secondly, that there must be mutuality between the parties based on their essential equality to which is repugnant to have one party bound by the contract leaving the other free therefrom (8 Manresa 556). Its ultimate purpose is to render void a contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties. x x x (Emphasis, italics and underscoring supplied)

The ultimate purpose of the mutuality principle is thus to nullify a contract containing a condition which makes its fulfillment or pre-termination dependent exclusively upon the uncontrolled will of one of the contracting parties. Not all contracts though which vest to one party their determination of validity or compliance or the right to terminate the same are void for being violative of the mutuality principle. Jurisprudence is replete with instances of cases12 where this Court upheld the legality of contracts which left their fulfillment or implementation to the will of either of the parties. In these cases, however, there was a finding of the presence of essential equality of the parties to the contracts, thus preventing the perpetration of injustice on the weaker party. In the case at bar, the contract incorporates in paragraph 3 the right of GF Equity to preterminate the contract that "if the coach, in the sole opinion of the corporation, fails to exhibit sufficient skill or competitive ability to coach the team, the corporation may terminate the contract." The assailed condition clearly transgresses the principle of mutuality of contracts. It leaves the determination of whether Valenzona failed to exhibit sufficient skill or competitive ability to coach Alaska team solely to the opinion of GF Equity. Whether Valenzona indeed failed to exhibit the required skill or competitive ability depended exclusively on the judgment of GF Equity. In other words, GF Equity was given an unbridled prerogative to pre-terminate the contract irrespective of the soundness, fairness or reasonableness, or even lack of basis of its opinion. To sustain the validity of the assailed paragraph would open the gate for arbitrary and illegal dismissals, for void contractual stipulations would be used as justification therefor. The assailed stipulation being violative of the mutuality principle underlying Article 1308 of the Civil Code, it is null and void. The nullity of the stipulation notwithstanding, GF Equity was not precluded from the right to pre-terminate the contract. The pre-termination must have legal basis, however, if it is to be declared justified. GF Equity failed, however, to advance any ground to justify the pre-termination. It simply invoked the assailed provision which is null and void. While GF Equitys act of pre-terminating Valenzonas services cannot be considered willful as it was based on a stipulation, albeit declared void, it, in doing so, failed to consider the abuse of rights principle enshrined in Art. 19 of the Civil Code which provides: Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. This provision of law sets standards which must be observed in the exercise of ones rights as well as in the performance of its duties, to wit: to act with justice; give every one his due; and observe honesty and good faith. Since the pre-termination of the contract was anchored on an illegal ground, hence, contrary to law, and GF Equity negligently failed to provide legal basis for such pretermination, e.g. that Valenzona breached the contract by failing to discharge his duties thereunder, GF Equity failed to exercise in a legitimate manner its right to pre-terminate the contract, thereby abusing the right of Valenzona to thus entitle him to damages under Art. 19 in relation to Article 20 of the Civil Code the latter of which provides: Art. 20. Every person who, contrary to law, willfully or negligently causes damage to another, shall indemnify the latter for the same. In De Guzman v. NLRC,13 this Court quoted the following explanation of Tolentino why it is impermissible to abuse our rights to prejudice others. The exercise of a right ends when the right disappears, and it disappears when it is abused, especially to the prejudice of others. The mask of a right without the spirit of justice which gives it life is repugnant to the modern concept of social law. It cannot be said that a person exercises a right when he unnecessarily prejudices another or offends morals or good customs. Over and above the specific precepts of positive law are the supreme norms of justice which the law develops and which are expressed in three

principles: honeste vivere, alterum non laedere and jus suum quique tribuere; and he who violates them violates the law. For this reason, it is not permissible to abuse our rights to prejudice others. 17 The disquisition in Globe Mackay Cable and Radio Corporation v. Court of Appeals is just as relevant as it is illuminating on the present case. In that case, this Court declared that even granting that the therein petitioners might have had the right to dismiss the therein respondent from work, the abusive manner in which that right was exercised amounted to a legal wrong for which the petitioners must be held liable. One of the more notable innovations of the New Civil Code is the codification of "some basic principles that are to be observed for the rightful relationship between human beings and for the stability of the social order." [REPORT ON THE CODE COMMISSION ON THE PROPOSED CIVIL CODE OF THE PHILIPPINES, p. 39]. The framers of the Code, seeking to remedy the defect of the old Code which merely stated the effects of the law, but failed to draw out its spirit, incorporated certain fundamental precepts which were "designed to indicate certain norms that spring from the fountain of good conscience" and which were also meant to serve as "guides for human conduct [that] should run as golden threads through society, to the end that law may approach its supreme ideal, which is the sway and dominance of justice" (Id.) Foremost among these principles is that pronounced in Article 19 which provides: Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. This article, known to contain what is commonly referred to as the principle of abuse of rights, sets certain standards which must be observed not only in the exercise of one's rights but also in the performance of one's duties. These standards are the following: to act with justice; to give everyone his due; and to observe honesty and good faith. The law, therefore, recognizes a primordial limitation on all rights; that in their exercise, the norms of human conduct set forth in Article 19 must be observed. A right, though by itself legal because recognized or granted by law as such, may nevertheless become the source of some illegality. When a right is exercised in a manner which does not conform with the norms enshrined in Article 19 and results in damage to another, a legal wrong is thereby committed for which the wrongdoer must be held responsible. But while Article 19 lays down a rule of conduct for the government of human relations and for the maintenance of social order, it does not provide a remedy for its violation. Generally, an action for damages under either Article 20 or Article 21 would be proper.18 Emphasis and underscoring supplied). As for GF Equitys defense of laches on account of Valenzonas invocation of his right under the contract only after the lapse of six years, the same fails. Laches has been defined as the 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, thus giving rise to a presumption that the party entitled to assert it either has abandoned or declined to assert it. It is not concerned with mere lapse of time; the fact of 19 delay, standing alone, is insufficient to constitute laches. Laches applies in equity, whereas prescription applies at law. Our courts are basically courts of law, not courts of equity. Laches cannot thus be invoked to evade the enforcement of an existing legal right. Equity, which has been aptly described as a "justice outside legality," is applied only in the absence of, and never against, statutory law.Aequetas nunquam contravenit legis. Thus, where the claim was filed within the statutory period of prescription, recovery therefor cannot be barred by laches. The doctrine of laches should never be applied earlier than the expiration of time limited for 20 the commencement of actions at law, unless, as a general rule, inexcusable delay in asserting a right and acquiescense in existing conditions are proven.21 GF Equity has not proven, nay alleged, these. 22 Under Article 1144 of the New Civil Code, an action upon a written contract must be brought within 10 years from the time the right of action accrues. Since the action filed by

14

15

16

Valenzona is an action for breach upon a written contract, his filing of the case 6 years from the date his cause of action arose was well within the prescriptive period, hence, the defense of laches would not, under the circumstances, lie. Consequently, Valenzona is entitled to recover actual damages his salary which he should have received from the time his services were terminated up to the time the employment contract expired.23 As for moral damages which the appellate court awarded, Article 2220 of the New Civil Code allows such award to breaches of contract where the defendant acted fraudulently or in bad faith. Malice or bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity. It contemplates a state of mind affirmatively operating with furtive design or ill-will.24 Bad faith means a breach of a known duty through some motive of interest or ill will. It must, however, be substantiated by evidence. Bad faith under the law cannot be presumed, it must be established by clear and convincing evidence. As earlier stated, however, the pre-termination of the contract was not willful as GF Equity based it on a provision therein which is void. Malice or bad faith cannot thus be ascribed to GF Equity. The unbroken jurisprudence is that in breach of contract cases where a party is not shown to have acted fraudulently or in bad faith, liability for damages is limited to the natural and probable consequences of the breach of the obligation which the parties had foreseen or could reasonably have foreseen. The damages, however, do not include moral damages.25 The award by the appellate court of moral damages must thus be set aside. And so must the award of exemplary damages, absent a showing that GF Equity acted in a wanton, 26 fraudulent, reckless, oppressive or malevolent manner. The award to Valenzona of attorneys fees must remain, however, GF Equity having refused to pay the balance of Valenzonas salaries to which he was, under the facts and circumstances of the case, entitled under the contract, thus compelling him to litigate to 27 protect his interest. WHEREFORE, the decision of the Court of Appeals dated October 14, 2002 is hereby SET ASIDE and another rendered declaring the assailed provision of the contract NULL AND VOID and ORDERING petitioner, GF Equity, to pay private respondent, Arturo Valenzona, actual damages in the amount of P525,000.00 and attorneys fees in the amount of P60,000.00. Costs against petitioner. SO ORDERED. Panganiban, (Chairman), Sandoval-Gutierrez, Corona, and Garcia, JJ., concur.

G.R. No. 124290 January 16, 1998 ALLIED BANKING CORPORATION, petitioner, vs. COURT OF APPEALS , HON. JOSE C. DE GUZMAN, OSCAR D. TAN-QUECO, LUCIA D. TANQUECO-MATIAS, RUBEN D. TANQUECO and NESTOR D. TANQUECO, respondents. BELLOSILLO, J.: There are two (2) main issues in this petition for review: namely, (a) whether a stipulation in a contract of lease to the effect that the contract "may be renewed for a like term at the option of the lessee" is void for being potestative or violative of the principle of mutuality of contracts under Art. 1308 of the Civil Code and, corollarily, what is the meaning of the clause "may be renewed for a like term at the option of the lessee;" and, (b) whether a lessee has the legal personality to assail the validity of a deed of donation executed by the lessor over the leased premises. Spouses Filemon Tanqueco and Lucia Domingo-Tanqueco owned a 512-square meter lot located at No. 2 Sarmiento Street corner Quirino Highway, Novaliches, Quezon City, covered by TCT No. 136779 in their name. On 30 June 1978 they leased the property to petitioner Allied Banking Corporation (ALLIED) for a monthly rental of P1,000.00 for the 1 first three (3) years, adjustable by 25% every three (3) years thereafter. The lease contract specifically states in its Provision No. 1 that "the term of this lease shall be fourteen (14) years commencing from April 1, 1978 and may be renewed for a like term at the option of the lessee." Pursuant to their lease agreement, ALLIED introduced an improvement on the property consisting of a concrete building with a floor area of 340-square meters which it used as a branch office. As stipulated, the ownership of the building would be transferred to the lessors upon the expiration of the original term of the lease. Sometime in February 1988 the Tanqueco spouses executed a deed of donation over the subject property in favor of their four (4) children, namely, private respondents herein Oscar D. Tanqueco, Lucia Tanqueco-Matias, Ruben D. Tanqueco and Nestor D. Tanqueco, who accepted the donation in the same public instrument. On 13 February 1991, a year before the expiration of the contract of lease, the Tanquecos notified petitioner ALLIED that they were no longer interested in renewing the lease. 2 ALLIED replied that it was exercising its option to renew their lease under the same terms with additional proposals. 3 Respondent Ruben D. Tanqueco, acting in behalf 4 of all the donee-lessors, made a counter-proposal. ALLIED however rejected the counter-proposal and insisted on Provision No. 1 of their lease contract. When the lease contract expired in 1992 private respondents demanded that ALLIED vacate the premises. But the latter asserted its sole option to renew the lease and enclosed in its reply letter a cashier's check in the amount of P68,400.00 representing the advance rental payments for six (6) months taking into account the escalation clause. Private respondents however returned the check to ALLIED, prompting the latter to consign the amount in court. An action for ejectment was commenced before the Metropolitan Trial Court of Quezon City. After trial, the MeTC-Br. 33 declared Provision No. 1 of the lease contract void for being violative of Art. 1308 of the Civil Code thus . . . but such provision [in the lease contract], to the mind of the Court, does not add luster to defendant's cause nor constitutes as an unbridled or unlimited license or sanctuary of the defendants to perpetuate its occupancy on the subject property. The basic intention of the law in any contract is mutuality and equality. In other words, the validity of a contract cannot be left at (sic) the will of one of the contracting parties. Otherwise, it infringes (upon) Article 1308 of the New Civil Code, which provides: The contract must bind both

contracting parties; its validity or compliance cannot be left to the will of one of them . . . Using the principle laid down in the case of Garcia v. Legarda as cornerstone, it is evident that the renewal of the lease in this case cannot be left at the sole option or will of the defendant notwithstanding provision no. 1 of their expired contract. For that would amount to a situation where the continuance and effectivity of a contract will depend only upon the sole will or power of the lessee, which is repugnant to the very spirit envisioned under Article 1308 of the New Civil Code . . . . the theory adopted by this Court in the case at bar finds ample affirmation from the principle echoed by the Supreme Court in the case of Lao Lim v. CA, 191 SCRA 150, 154, 155. On appeal to the Regional Trial Court, and later to the Court of Appeals, the assailed 5 decision was affirmed. On 20 February 1993, while the case was pending in the Court of Appeals ALLIED 6 vacated the leased premises by reason of the controversy. ALLIED insists before us that Provision No. 1 of the lease contract was mutually agreed upon hence valid and binding on both parties, and the exercise by petitioner of its option to renew the contract was part of their agreement and in pursuance thereof. We agree with petitioner. Article 1308 of the Civil Code expresses what is known in law as the principle of mutuality of contracts. It provides that "the contract must bind both the contracting parties; its validity or compliance cannot be left to the will of one of them." This binding effect of a contract on both parties is based on the principle that the obligations arising from the contracts have the force of law between the contracting parties, and there must be mutuality between them based essentially on their equality under which it is repugnant to have one party bound by the contract while leaving the other free therefrom. The ultimate purpose is to render void a contract containing a condition which makes its fulfillment dependent solely upon the uncontrolled will of one of the contracting parties. An express agreement which gives the lessee the sole option to renew the lease is frequent and subject to statutory restrictions, valid and binding on the parties. This option, which is provided in the same lease agreement, is fundamentally part of the consideration in the contract and is no different from any other provision of the lease carrying an undertaking on the part of the lessor to act conditioned on the performance by the lessee. It is a purely executory contract and at most confers a right to obtain a renewal if there is compliance with the conditions on which the rights is made to depend. The right of renewal constitutes a part of the lessee's interest in the land and forms a substantial and integral part of the agreement. The fact that such option is binding only on the lessor and can be exercised only by the lessee does not render it void for lack of mutuality. After all, the lessor is free to give or not to give the option to the lessee. And while the lessee has a right to elect whether to continue with the lease or not, once he exercises his option to continue and the lessor accepts, both parties are thereafter bound by the new lease agreement. Their rights and obligations become mutually fixed, and the lessee is entitled to retain possession of the property for the duration of the new lease, and the lessor may hold him liable for the rent therefor. The lessee cannot thereafter escape liability even if he should subsequently decide to abandon the premises. Mutuality obtains in such a contract and equality exists between the lessor and the lessee since they remain with the same faculties in respect to 7 fulfillment. 8 The case of Lao Lim v. Court of Appeals relied upon by the trial court is not applicable here. In that case, the stipulation in the disputed compromise agreement was to the effect that the lessee would be allowed to stay in the premises "as long as he needs it and can pay the rents." In the present case, the questioned provision states that the lease "may be renewed for a like term at the option of the lessee." The lessor is bound by the option he has conceded to the lessee. The lessee likewise becomes bound only when he

exercises his option and the lessor cannot thereafter be executed from performing his part of the agreement. Likewise, reliance by the trial court on the 1967 case of Garcia v. Rita Legarda, Inc., 9 is misplaced. In that case, what was involved was a contract to sell involving residential lots, which gave the vendor the right to declare the contract called and of no effect upon the failure of the vendee to fulfill any of the conditions therein set forth. In the instant case, we are dealing with a contract of lease which gives the lessee the right to renew the same. With respect to the meaning of the clause "may be renewed for a like term at the option of the lessee," we sustain petitioner's contention that its exercise of the option resulted in the automatic extension of the contract of lease under the same terms and conditions. The subject contract simply provides that "the term of this lease shall be fourteen (14) years and may be renewed for a like term at the option of the lessee." As we see it, the only term on which there has been a clear agreement is the period of the new contract, i.e., fourteen (14) years, which is evident from the clause "may be renewed for a like term at the option of the lessee," the phrase "for a like term"referring to the period. It is silent as to what the specific terms and conditions of the renewed lease shall be. Shall it be the same terms and conditions as in the original contract, or shall it be under the terms and conditions as may be mutually agreed upon by the parties after the expiration of the existing lease? 10 In Ledesma v. Javellana this Court was confronted with a similar problem. In the case the lessee was given the sole option to renew the lease, but the contract failed to specify the terms and conditions that would govern the new contract. When the lease expired, the lessee demanded an extension under the same terms and conditions. The lessor expressed conformity to the renewal of the contract but refused to accede to the claim of the lessee that the renewal should be under the same terms and conditions as the original contract. In sustaining the lessee, this Court made the following pronouncement: . . . in the case of Hicks v. Manila Hotel Company, a similar issue was resolved by this Court. It was held that "such a clause relates to the very contract in which it is placed, and does not permit the defendant upon the renewal of the contract in which the clause is found, to insist upon different terms and those embraced in the contract to be renewed;" and that "a stipulation to renew always relates to the contract in which it is found and the rights granted thereunder, unless it expressly provides for variations in the terms of the contract to be renewed." The same principle is upheld in American Law regarding the renewal of lease contracts. In 50 Am. Jur. 2d, Sec. 1159, at p. 45, we find the following citations: "The rule is well-established that a general covenant to renew or extend a lease which makes no provision as to the terms of a renewal or extension implies a renewal or extension upon the same terms as provided in the original lease." In the lease contract under consideration, there is no provision to indicate that the renewal will be subject to new terms and conditions that the parties may yet agree upon. It is to renewal provisions of lease contracts of the kind presently considered that the principles stated above squarely apply. We do not agree with the contention of the appellants that if it was intended by the parties to renew the contract under the same terms and conditions stipulated in the contract of lease, such should have expressly so stated in the contract itself. The same argument could easily be interposed by the appellee who could likewise contend that if the intention was to renew the contract of lease under such new terms and conditions that the parties may agree upon,

the contract should have so specified. Between the two assertions, there is more logic in the latter. The settled rule is that in case of uncertainty as to the meaning of a provision granting extension to a contract of lease, the tenant is the one favored and not the landlord. "As a general rule, in construing provisions relating to renewals or extensions, where there is any uncertainty, the tenants is favored, and not the landlord, because the latter, having the power of stipulating in his own favor, has neglected to do so; and also upon the principle that every man's grant is to be taken most strongly against himself (50 Am Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S. 599). Besides, if we were to adopt the contrary theory that the terms and conditions to be embodied in the renewed contract were still subject to mutual agreement by and between the parties, then the option which is an integral part of the consideration for the contract would be rendered worthless. For then, the lessor could easily defeat the lessee's right of renewal by simply imposing unreasonable and onerous conditions to prevent the parties from reaching an agreement, as in the case at bar. As in a statute no word, clause, sentence, provision or part of a contract shall be considered surplusage or superfluous, meaningless, void, insignificant or nugatory, if that can be reasonably avoided. To this end, a construction which will render every word operative is to be 11 preferred over that which would make some words idle and nugatory. Fortunately for respondent lessors, ALLIED vacated the premises on 20 February 1993 indicating its abandonment of whatever rights it had under the renewal clause. Consequently, what remains to be done is for ALLIED to pay rentals for the continued use of premises until it vacated the same, computed from the expiration of the original term of the contract on 31 March 1992 to the time it actually left the premises on 20 February 1993, deducting therefrom the amount of P68,400.00 consigned in court by ALLIED and any other amount which it may have deposited or advanced in connection with the lease. Since the old lease contract was deemed renewed under the same terms and conditions upon the exercise by ALLIED of its option, the basis of the computation of rentals should be the rental rate provided for in the existing contract. Finally, ALLIED cannot assail the validity of the deed of donation, not being a party thereto. A person who is not principally or subsidiarily bound has no legal capacity to challenge the validity of the contract. 12 He must first have an interest in it. "Interest" within the meaning of the term means material interest, an interest to be affected by the deed, as distinguished from a mere incidental interest. Hence, a person who is not a party to a contract and for whose benefit it was not expressly made cannot maintain an action on it, even if the contract, if performed by the parties thereto would incidentally 13 affect him, except when he is prejudiced in his rights with respect to one of the contracting parties and can show the detriment which could positively result to him from 14 the contract in which he had no intervention. We find none in the instant case. WHEREFORE, the Decision of the Court of Appeals is REVERSED and SET ASIDE. Considering that petitioner ALLIED BANKING CORPORATION already vacated the leased premises as of 20 February 1993, the renewed lease contract is deemed terminated as of that date. However, petitioner is required to pay rentals to respondent lessors at the rate provided in their existing contract, subject to computation in view of the consignment in court of P68,400.00 by petitioner, and of such other amounts it may have deposited or advanced in connection with the lease. SO ORDERED. Davide, Jr., Vitug and Kapunan, JJ., concur.

G.R. No. 159912 UNITED COCONUT PLANTERS BANK, Petitioner, Present: YNARES-SANTIAGO, J., Chairperson, AUSTRIA-MARTINEZ, CHICO-NAZARIO, NACHURA, and REYES, JJ. Promulgated:

PN # 97-00363-1 98-00002-4

Date of PN 11 December 1997 2 January 1998

Maturity Date 28 1998 28 1998 February February

Amount Secured P 200,000 P 150,000

- versus -

However, the spouses Beluso alleged that the amounts covered by these last two promissory notes were never released or credited to their account and, thus, claimed that the principal indebtedness was only P2 Million. In any case, UCPB applied interest rates on the different promissory notes ranging from 18% to 34%. From 1996 to February 1998 the spouses Beluso were able to pay the total sum of P763,692.03. From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and penalty on the obligations of the spouses Beluso, as follows: PN # 97-00363-1 97-00366-6 97-00368-2 98-00002-4 Amount Secured P 200,000 P 700,000 P 1,300,000 P 150,000 Interest 31% 30.17% (7 days) 28% (2 days) 33% (102 days) Penalty 36% 32.786% (102 days) 30.41% (102 days) 36% Total P 225,313.24 P 795,294.72 P 1,462,124.54 P 170,034.71

SPOUSES SAMUEL and ODETTE BELUSO, Respondents.

August 17, 2007 x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION CHICO-NAZARIO, J.: This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which [1] [2] seeks to annul the Court of Appeals Decision dated 21 January 2003 and its Resolution dated 9 September 2003 in CA-G.R. CV No. 67318. The assailed Court of Appeals Decision and Resolution [4] [3] affirmed in turn the Decision dated 23 March 2000 and Order dated 8 May 2000 of the Regional Trial Court (RTC), Branch 65 of Makati City, in Civil Case No. 99-314, declaring void the interest rate provided in the promissory notes executed by the respondents Spouses Samuel and Odette Beluso (spouses Beluso) in favor of petitioner United Coconut Planters Bank (UCPB). The procedural and factual antecedents of this case are as follows: On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under a Credit Agreement whereby the latter could avail from the former credit of up to a maximum amount of P1.2 Million pesos for a term ending on 30 April 1997. The spouses Beluso constituted, other than their promissory notes, a real estate mortgage over parcels of land in Roxas City, covered by Transfer Certificates of Title No. T-31539 and T-27828, as additional security for the obligation. The Credit Agreement was subsequently amended to increase the amount of the Promissory Notes Line to a maximum of P2.35 Million pesos and to extend the term thereof to 28 February 1998. The spouses Beluso availed themselves of the credit line under the following Promissory Notes: PN # 8314-96-00083-3 8314-96-00085-0 8314-96-000292-2 Date of PN 29 April 1996 2 May 1996 20 November 1996 Maturity Date 27 August 1996 30 August 1996 20 March 1997 Amount Secured P 700,000 P 500,000 P 800,000

The spouses Beluso, however, failed to make any payment of the foregoing amounts. On 2 September 1998, UCPB demanded that the spouses Beluso pay their total obligation of P2,932,543.00 plus 25% attorneys fees, but the spouses Beluso failed to comply therewith. On 28 December 1998, UCPB foreclosed the properties mortgaged by the spouses Beluso to secure their credit line, which, by that time, already ballooned toP3,784,603.00. On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting and Damages against UCPB with the RTC of Makati City. On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the case as follows: PREMISES CONSIDERED, judgment is hereby rendered declaring the interest rate used by [UCPB] void and the foreclosure and Sheriffs Certificate of Sale void. [UCPB] is hereby ordered to return to [the spouses Beluso] the properties subject of the foreclosure; to pay [the spouses Beluso] the amount of P50,000.00 by way of attorneys fees; and to pay the costs of suit. [The spouses Beluso] are hereby ordered to pay [UCPB] the sum [5] of P1,560,308.00. On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration, prompting UCPB to appeal the RTC Decision with the Court of Appeals. The Court of Appeals affirmed the RTC Decision, to wit: WHEREFORE, premises considered, the decision dated March 23, 2000 of the Regional Trial Court, Branch 65, Makati City in Civil Case No. 99314 is hereby AFFIRMED subject to the modification that defendant-appellant [7] UCPB is not liable for attorneys fees or the costs of suit.
[6]

The three promissory notes were renewed several times. On 30 April 1997, the payment of the principal and interest of the latter two promissory notes were debited from the spouses Belusos account with UCPB; yet, a consolidated loan for P1.3 Million was again released to the spouses Beluso under one promissory note with a due date of 28 February 1998. To completely avail themselves of the P2.35 Million credit line extended to them by UCPB, the spouses Beluso executed two more promissory notes for a total ofP350,000.00:

On 9 September 2003, the Court of Appeals denied UCPBs Motion for Reconsideration for lack of merit. UCPB thus filed the present petition, submitting the following issues for our resolution: I WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH DECLARED VOID THE PROVISION ON INTEREST RATE AGREED UPON BETWEEN PETITIONER AND RESPONDENTS II WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE COMPUTATION BY THE TRIAL COURT OF RESPONDENTS INDEBTEDNESS AND ORDERED RESPONDENTS TO PAY PETITIONER THE AMOUNT OF ONLY ONE MILLION FIVE HUNDRED SIXTY THOUSAND THREE HUNDRED EIGHT PESOS (P1,560,308.00) III WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH ANNULLED THE FORECLOSURE BY PETITIONER OF THE SUBJECT PROPERTIES DUE TO AN ALLEGED INCORRECT COMPUTATION OF RESPONDENTS INDEBTEDNESS IV

the time of execution thereof, at the rate indicative of the DBD retail rate. UCPB contends that said provision must be read with another stipulation in the promissory notes subjecting to review the interest rate as fixed: The interest rate shall be subject to review and may be increased or decreased by the LENDER considering among others the prevailing financial and monetary conditions; or the rate of interest and charges which other banks or financial institutions charge or offer to charge for similar accommodations; and/or the resulting profitability to the LENDER after due consideration of all [10] dealings with the BORROWER. In this regard, UCPB avers that these are valid reference rates akin to a prevailing rate [11] or prime rate allowed by this Court in Polotan v. Court of Appeals. Furthermore, UCPB argues that even if the proviso as determined by the branch head is considered void, such a declaration would not ipso facto render the connecting clause indicative of DBD retail rate void in view of the separability clause of the Credit Agreement, which reads: Section 9.08 Separability Clause. If any one or more of the provisions contained in this AGREEMENT, or documents executed in connection herewith shall be declared invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions [12] hereof shall not in any way be affected or impaired. According to UCPB, the imposition of the questioned interest rates did not infringe on the principle of mutuality of contracts, because the spouses Beluso had the liberty to choose whether or [13] UCPB also claims that not to renew their credit line at the new interest rates pegged by petitioner. assuming there was any defect in the mutuality of the contract at the time of its inception, such defect was cured by the subsequent conduct of the spouses Beluso in availing themselves of the credit line from April 1996 to February 1998 without airing any protest with respect to the interest [14] rates imposed by UCPB. According to UCPB, therefore, the spouses Beluso are in estoppel. We agree with the Court of Appeals, and find no merit in the contentions of UCPB.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH FOUND PETITIONER LIABLE FOR VIOLATION OF THE TRUTH IN LENDING ACT V WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT FAILED TO ORDER THE DISMISSAL OF THE CASE BECAUSE THE RESPONDENTS ARE GUILTY OF [8] FORUM SHOPPING held:

Article 1308 of the Civil Code provides: Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. We applied this provision in Philippine National Bank v. Court of Appeals,
[15]

where we

Validity of the Interest Rates The Court of Appeals held that the imposition of interest in the following provision found in the promissory notes of the spouses Beluso is void, as the interest rates and the bases therefor were determined solely by petitioner UCPB: FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND ODETTE BELUSO (BORROWER), jointly and severally promise to pay to UNITED COCONUT PLANTERS BANK (LENDER) or order at UCPB Bldg., Makati Avenue, Makati City, Philippines, the sum of ______________ PESOS, (P_____), Philippine Currency, with interest thereon at the rate [9] indicative of DBD retail rate or as determined by the Branch Head. UCPB asserts that this is a reversible error, and claims that while the interest rate was not numerically quantified in the face of the promissory notes, it was nonetheless categorically fixed, at

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 leave 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. The provision stating that the interest shall be at the rate indicative of DBD retail rate or as determined by the Branch Head is indeed dependent solely on the will of petitioner UCPB. Under such provision, petitioner UCPB has two choices on what the interest rate shall be:

(1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head. As UCPB is given this choice, the rate should be categorically determinable in both choices. If either of these two choices presents an opportunity for UCPB to fix the rate at will, the bank can easily choose such an option, thus making the entire interest rate provision violative of the principle of mutuality of contracts. Not just one, but rather both, of these choices are dependent solely on the will of UCPB. Clearly, a rate as determined by the Branch Head gives the latter unfettered discretion on what the rate may be. The Branch Head may choose any rate he or she desires. As regards the rate indicative of the DBD retail rate, the same cannot be considered as valid for being akin to a prevailing rate or prime rate allowed by this Court in Polotan. The interest rate in Polotan reads: The Cardholder agrees to pay interest per annum at 3% plus the prime rate of [16] Security Bank and Trust Company. x x x. In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the parties can easily determine the interest rate by applying simple arithmetic. On the other hand, the provision in the case at bar does not specify any margin above or below the DBD retail rate. UCPB can peg the interest at any percentage above or below the DBD retail rate, again giving it unfettered discretion in determining the interest rate. The stipulation in the promissory notes subjecting the interest rate to review does not render the imposition by UCPB of interest rates on the obligations of the spouses Beluso valid. According to said stipulation: The interest rate shall be subject to review and may be increased or decreased by the LENDER considering among others the prevailing financial and monetary conditions; or the rate of interest and charges which other banks or financial institutions charge or offer to charge for similar accommodations; and/or the resulting profitability to the LENDER after due consideration of all [17] dealings with the BORROWER. It should be pointed out that the authority to review the interest rate was given UCPB alone as the lender. Moreover, UCPB may apply the considerations enumerated in this provision as it wishes. As worded in the above provision, UCPB may give as much weight as it desires to each of the following considerations: (1) the prevailing financial and monetary condition; (2) the rate of interest and charges which other banks or financial institutions charge or offer to charge for similar accommodations; and/or (3) the resulting profitability to the LENDER (UCPB) after due consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case of the interest rate provision, there is no fixed margin above or below these considerations. In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB as to the interest to be imposed, as both options violate the principle of mutuality of contracts. UCPB likewise failed to convince us that the spouses Beluso were in estoppel. Estoppel cannot be predicated on an illegal act. As between the parties to a contract, [18] validity cannot be given to it by estoppel if it is prohibited by law or is against public policy. The interest rate provisions in the case at bar are illegal not only because of the provisions of the Civil Code on mutuality of contracts, but also, as shall be discussed later, because they violate the Truth in Lending Act. Not disclosing the true finance charges in connection with the extensions of credit is, furthermore, a form of deception which we cannot countenance. It is against the policy of the State as stated in the Truth in Lending Act: Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing [19] the uninformed use of credit to the detriment of the national economy.

Moreover, while the spouses Beluso indeed agreed to renew the credit line, the offending provisions are found in the promissory notes themselves, not in the credit line. In fixing the interest rates in the promissory notes to cover the renewed credit line, UCPB still reserved to itself the same two options (1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head. Error in Computation UCPB asserts that while both the RTC and the Court of Appeals voided the interest rates imposed by UCPB, both failed to include in their computation of the outstanding obligation of the spouses Beluso the legal rate of interest of 12% per annum. Furthermore, the penalty charges were also deleted in the decisions of the RTC and the Court of Appeals. Section 2.04, Article II on Interest and other Bank Charges of the subject Credit Agreement, provides: Section 2.04 Penalty Charges. In addition to the interest provided for in Section 2.01 of this ARTICLE, any principal obligation of the CLIENT hereunder which is not paid when due shall be subject to a penalty charge of one percent (1%) of the amount of such obligation per month computed from due date until the obligation is paid in full. If the bank accelerates teh (sic) payment of availments hereunder pursuant to ARTICLE VIII hereof, the penalty charge shall be used on the total principal amount outstanding and unpaid [20] computed from the date of acceleration until the obligation is paid in full. Paragraph 4 of the promissory notes also states: In case of non-payment of this Promissory Note (Note) at maturity, I/We, jointly and severally, agree to pay an additional sum equivalent to twentyfive percent (25%) of the total due on the Note as attorneys fee, aside from the expenses and costs of collection whether actually incurred or not, and a penalty charge of one percent (1%) per month on the total amount due and unpaid from [21] date of default until fully paid. Petitioner further claims that it is likewise entitled to attorneys fees, pursuant to Section 9.06 of the Credit Agreement, thus: If the BANK shall require the services of counsel for the enforcement of its rights under this AGREEMENT, the Note(s), the collaterals and other related documents, the BANK shall be entitled to recover attorneys fees equivalent to not less than twenty-five percent (25%) of the total amounts due [22] and outstanding exclusive of costs and other expenses. Another alleged computational error pointed out by UCPB is the negation of the Compounding Interest agreed upon by the parties under Section 2.02 of the Credit Agreement: Section 2.02 Compounding Interest. Interest not paid when due shall form part of the principal and shall be subject to the same interest rate as herein [23] stipulated. and paragraph 3 of the subject promissory notes: Interest not paid when due shall be added to, and become part of the principal [24] and shall likewise bear interest at the same rate. UCPB lastly avers that the application of the spouses Belusos payments in the disputed computation does not reflect the parties agreement. The RTC deducted the payment made by the

spouses Beluso amounting to P763,693.00 from the principal of P2,350,000.00. This was allegedly inconsistent with the Credit Agreement, as well as with the agreement of the parties as to the facts of the case. In paragraph 7 of the spouses Belusos Manifestation and Motion on Proposed Stipulation of Facts and Issues vis--visUCPBs Manifestation, the parties agreed that the amount of P763,693.00 was applied to the interest and not to the principal, in accord with Section 3.03, Article II of the Credit Agreement on Order of the Application of Payments, which provides: Section 3.03 Application of Payment. Payments made by the CLIENT shall be applied in accordance with the following order of preference: 1. 2. 3. 4. 5. 6. 7. 8. Accounts receivable and other out-of-pocket expenses Front-end Fee, Origination Fee, Attorneys Fee and other expenses of collection; Penalty charges; Past due interest; Principal amortization/Payment in arrears; Advance interest; Outstanding balance; and [25] All other obligations of CLIENT to the BANK, if any.

2. By way of example for the public good against the Banks taking unfair advantage of the weaker party to their contract, declaring the legal rate of 12% per annum, as the imposable rate of interest up to February 28, 1999 on [28] the loan of 2.350 million. All these show that the spouses Beluso had acknowledged before the RTC their obligation to pay a 12% legal interest on their loans. When the RTC failed to include the 12% legal interest in its computation, however, the spouses Beluso merely defended in the appellate courts this noninclusion, as the same was beneficial to them. We see, however, sufficient basis to impose a 12% legal interest in favor of petitioner in the case at bar, as what we have voided is merely the stipulated rate of interest and not the stipulation that the loan shall earn interest. We must likewise uphold the contract stipulation providing the compounding of interest. The provisions in the Credit Agreement and in the promissory notes providing for the compounding of interest were neither nullified by the RTC or the Court of Appeals, nor assailed by the spouses Beluso in their petition with the RTC. The compounding of interests has furthermore [29] been declared by this Court to be legal. We have held in Tan v. Court of Appeals, that: Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest. As regards the imposition of penalties, however, although we are likewise upholding the imposition thereof in the contract, we find the rate iniquitous. Like in the case of grossly excessive interests, the penalty stipulated in the contract may also be reduced by the courts if it is iniquitous or [30] unconscionable. We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be iniquitous considering the fact that this penalty is already over and above the compounded interest likewise imposed in the contract. If a 36% interest in itself has been declared unconscionable by this [31] Court, what more a 30.41% to 36% penalty, over and above the payment of compounded interest? UCPB itself must have realized this, as it gave us a sample computation of the spouses Belusos obligation if both the interest and the penalty charge are reduced to 12%. As regards the attorneys fees, the spouses Beluso can actually be liable therefor even if there had been no demand. Filing a case in court is the judicial demand referred to in Article [32] 1169 of the Civil Code, which would put the obligor in delay. The RTC, however, also held UCPB liable for attorneys fees in this case, as the spouses Beluso were forced to litigate the issue on the illegality of the interest rate provision of the promissory notes. The award of attorneys fees, it must be recalled, falls under the sound discretion [33] Since both parties were forced to litigate to protect their respective rights, and both of the court. are entitled to the award of attorneys fees from the other, practical reasons dictate that we set off or compensate both parties liabilities for attorneys fees. Therefore, instead of awarding attorneys fees in favor of petitioner, we shall merely affirm the deletion of the award of attorneys fees to the spouses Beluso. In sum, we hold that spouses Beluso should still be held liable for a compounded legal interest of 12% per annum and a penalty charge of 12% per annum. We also hold that, instead of awarding attorneys fees in favor of petitioner, we shall merely affirm the deletion of the award of attorneys fees to the spouses Beluso. Annulment of the Foreclosure Sale

Thus, according to UCPB, the interest charges, penalty charges, and attorneys fees had been erroneously excluded by the RTC and the Court of Appeals from the computation of the total amount due and demandable from spouses Beluso. The spouses Belusos defense as to all these issues is that the demand made by UCPB is for a considerably bigger amount and, therefore, the demand should be considered void. There being no valid demand, according to the spouses Beluso, there would be no default, and therefore the interests and penalties would not commence to run. As it was likewise improper to foreclose the mortgaged properties or file a case against the spouses Beluso, attorneys fees were not warranted. We agree with UCPB on this score. Default commences upon judicial or extrajudicial The excess amount in such a demand does not nullify the demand itself, which is valid demand. with respect to the proper amount. A contrary ruling would put commercial transactions in disarray, as validity of demands would be dependent on the exactness of the computations thereof, which are too often contested.
[26]

There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso are considered in default with respect to the proper amount and, therefore, the interests and the penalties began to run at that point. As regards the award of 12% legal interest in favor of petitioner, the RTC actually recognized that said legal interest should be imposed, thus: There being no valid stipulation as to [27] It seems that the RTC inadvertently interest, the legal rate of interest shall be charged. overlooked its non-inclusion in its computation. The spouses Beluso had even originally asked for the RTC to impose this legal rate of interest in both the body and the prayer of its petition with the RTC: 12. Since the provision on the fixing of the rate of interest by the sole will of the respondent Bank is null and void, only the legal rate of interest which is 12% per annum can be legally charged and imposed by the bank, which would amount to only about P599,000.00 since 1996 up to August 31, 1998. xxxx WHEREFORE, in view of the foregoing, petiitoners pray for judgment or order: xxxx

Properties of spouses Beluso had been foreclosed, titles to which had already been consolidated on 19 February 2001 and 20 March 2001 in the name of UCPB, as the spouses Beluso failed to exercise their right of redemption which expired on 25 March 2000. The RTC, however,

annulled the foreclosure of mortgage based on an alleged incorrect computation of the spouses Belusos indebtedness. UCPB alleges that none of the grounds for the annulment of a foreclosure sale are present in the case at bar. Furthermore, the annulment of the foreclosure proceedings and the certificates of sale were mooted by the subsequent issuance of new certificates of title in the name of said bank. UCPB claims that the spouses Belusos action for annulment of foreclosure constitutes a collateral attack on its certificates of title, an act proscribed by Section 48 of Presidential Decree No. 1529, otherwise known as the Property Registration Decree, which provides: Section 48. Certificate not subject to collateral attack. A certificate of title shall not be subject to collateral attack. It cannot be altered, modified or cancelled except in a direct proceeding in accordance with law. The spouses Beluso retort that since they had the right to refuse payment of an excessive demand on their account, they cannot be said to be in default for refusing to pay the same. Consequently, according to the spouses Beluso, the enforcement of such illegal and overcharged demand through foreclosure of mortgage should be voided. We agree with UCPB and affirm the validity of the foreclosure proceedings. Since we already found that a valid demand was made by UCPB upon the spouses Beluso, despite being excessive, the spouses Beluso are considered in default with respect to the proper amount of their obligation to UCPB and, thus, the property they mortgaged to secure such amounts may be foreclosed. Consequently, proceeds of the foreclosure sale should be applied to the extent of the amounts to which UCPB is rightfully entitled. As argued by UCPB, none of the grounds for the annulment of a foreclosure sale are present in this case. The grounds for the proper annulment of the foreclosure sale are the following: (1) that there was fraud, collusion, accident, mutual mistake, breach of trust or misconduct by the purchaser; (2) that the sale had not been fairly and regularly conducted; or (3) that the price was [34] inadequate and the inadequacy was so great as to shock the conscience of the court.

asserts that per the records of the case, the latest of the subject promissory notes had been executed on 2 January 1998, but the original petition of the spouses Beluso was filed before the RTC on 9 February 1999, which was after the expiration of the period to file the same on 2 January 1999. On the matter of allegation of the violation of the Truth in Lending Act, the Court of Appeals ruled: Admittedly the original complaint did not explicitly allege a violation of the Truth in Lending Act and no action to formally admit the amended petition was made either by [respondents] spouses Beluso and the lower court. In such transactions, the debtor and the lending institutions do not deal on an equal footing and this law was intended to protect the public from hidden or undisclosed charges on their loan obligations, requiring a full disclosure thereof by the lender. We find that its infringement may be inferred or implied from allegations that when [respondents] spouses Beluso executed the promissory notes, the interest rate chargeable thereon were left blank. Thus, [petitioner] UCPB failed to discharge its duty to disclose in full to [respondents] Spouses [36] Beluso the charges applicable on their loans. We agree with the Court of Appeals. The allegations in the complaint, much more than the title thereof, are controlling. Other than that stated by the Court of Appeals, we find that the allegation of violation of the Truth in Lending Act can also be inferred from the same allegation in the complaint we discussed earlier: b.) In unilaterally imposing an increased interest rates (sic) respondent bank has relied on the provision of their promissory note granting respondent bank the power to unilaterally fix the interest rates, which rate was not determined in the promissory note but was left solely to the will of the Branch [37] Head of the respondent Bank, x x x. The allegation that the promissory notes grant UCPB the power to unilaterally fix the interest rates certainly also means that the promissory notes do not contain a clear statement in writing of (6) the finance charge expressed in terms of pesos and centavos; and (7) the percentage that the finance charge bears to the amount to be financed expressed as a simple annual rate on the [38] Furthermore, the spouses Belusos prayer for outstanding unpaid balance of the obligation. such other reliefs just and equitable in the premises should be deemed to include the civil penalty provided for in Section 6(a) of the Truth in Lending Act. UCPBs contention that this action to recover the penalty for the violation of the Truth in Lending Act has already prescribed is likewise without merit. The penalty for the violation of the act is P100 or an amount equal to twice the finance charge required by such creditor in connection with such transaction, whichever is greater, except that such liability shall not exceed P2,000.00 on any [39] credit transaction. As this penalty depends on the finance charge required of the borrower, the borrowers cause of action would only accrue when such finance charge is required. In the case at bar, the date of the demand for payment of the finance charge is 2 September 1998, while the foreclosure was made on 28 December 1998. The filing of the case on 9 February 1999 is therefore within the one-year prescriptive period. UCPB argues that a violation of the Truth in Lending Act, being a criminal offense, cannot [40] be inferred nor implied from the allegations made in the complaint. Pertinent provisions of the Act read: Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation of this Act or any regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount equal to twice the finance charge required by such creditor in connection with such transaction, whichever is the greater, except that such liability shall not exceed P2,000 on any credit transaction. Action to

Liability for Violation of Truth in Lending Act The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for UCPBs alleged violation of Republic Act No. 3765, otherwise known as the Truth in Lending Act. UCPB challenges this imposition, on the argument that Section 6(a) of the Truth in Lending Act which mandates the filing of an action to recover such penalty must be made under the following circumstances: Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation of this Act or any regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount equal to twice the finance charge required by such creditor in connection with such transaction, whichever is greater, except that such liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. x x x (Emphasis ours.) According to UCPB, the Court of Appeals even stated that [a]dmittedly the original complaint did not explicitly allege a violation of the Truth in Lending Act and no action to formally admit the amended petition [which expressly alleges violation of the Truth in Lending Act] was made [35] either by [respondents] spouses Beluso and the lower court. x x x. UCPB further claims that the action to recover the penalty for the violation of the Truth in Lending Act had been barred by the one-year prescriptive period provided for in the Act. UCPB

recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. In any action under this subsection in which any person is entitled to a recovery, the creditor shall be liable for reasonable attorneys fees and court costs as determined by the court. xxxx (c) Any person who willfully violates any provision of this Act or any regulation issued thereunder shall be fined by not less than P1,000 or more than P5,000 or imprisonment for not less than 6 months, nor more than one year or both. As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the said Act gives rise to both criminal and civil liabilities. Section 6(c) considers a criminal offense the willful violation of the Act, imposing the penalty therefor of fine, imprisonment or both. Section 6(a), on the other hand, clearly provides for a civil cause of action for failure to disclose any information of the required information to any person in violation of the Act. The penalty therefor is an amount of P100 or in an amount equal to twice the finance charge required by the creditor in connection with such transaction, whichever is greater, except that the liability shall not exceed P2,000.00 on any credit transaction. The action to recover such penalty may be instituted by the aggrieved private person separately and independently from the criminal case for the same offense. In the case at bar, therefore, the civil action to recover the penalty under Section 6(a) of the Truth in Lending Act had been jointly instituted with (1) the action to declare the interests in the promissory notes void, and (2) the action to declare the foreclosure void. This joinder is allowed under Rule 2, Section 5 of the Rules of Court, which provides: SEC. 5. Joinder of causes of action.A party may in one pleading assert, in the alternative or otherwise, as many causes of action as he may have against an opposing party, subject to the following conditions: (a) The party joining the causes of action shall comply with the rules on joinder of parties; (b) The joinder shall not include special civil actions or actions governed by special rules; (c) Where the causes of action are between the same parties but pertain to different venues or jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes of action falls within the jurisdiction of said court and the venue lies therein; and (d) Where the claims in all the causes of action are principally for recovery of money, the aggregate amount claimed shall be the test of jurisdiction. In attacking the RTCs disposition on the violation of the Truth in Lending Act since the same was not alleged in the complaint, UCPB is actually asserting a violation of due process. Indeed, due process mandates that a defendant should be sufficiently apprised of the matters he or she would be defending himself or herself against. However, in the 1 July 1999 pretrial brief filed by the spouses Beluso before the RTC, the claim for civil sanctions for violation of the Truth in Lending Act was expressly alleged, thus: Moreover, since from the start, respondent bank violated the Truth in Lending Act in not informing the borrower in writing before the execution of the Promissory Notes of the interest rate expressed as a percentage of the total loan, the respondent bank instead is liable to pay petitioners double the amount [41] the bank is charging petitioners by way of sanction for its violation. In the same pre-trial brief, the spouses Beluso also expressly raised the following issue:

b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth in Lending Act provision to express the interest rate as a simple [42] annual percentage of the loan? These assertions are so clear and unequivocal that any attempt of UCPB to feign ignorance of the assertion of this issue in this case as to prevent it from putting up a defense thereto is plainly hogwash. Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction to try and adjudicate the alleged violation of the Truth in Lending Act, considering that the present action allegedly involved a single credit transaction as there was only one Promissory Note Line. We disagree. We have already ruled that the action to recover the penalty under Section 6(a) of the Truth in Lending Act had been jointly instituted with (1) the action to declare the interests in the promissory notes void, and (2) the action to declare the foreclosure void. There had been no question that the above actions belong to the jurisdiction of the RTC. Subsection (c) of the abovequoted Section 5 of the Rules of Court on Joinder of Causes of Action provides: (c) Where the causes of action are between the same parties but pertain to different venues or jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes of action falls within the jurisdiction of said court and the venue lies therein. Furthermore, opening a credit line does not create a credit transaction of loan or mutuum, since the former is merely a preparatory contract to the contract of loan ormutuum. Under such credit line, the bank is merely obliged, for the considerations specified therefor, to lend to the other party amounts not exceeding the limit provided. The credit transaction thus occurred not when the credit line was opened, but rather when the credit line was availed of. In the case at bar, the violation of the Truth in Lending Act allegedly occurred not when the parties executed the Credit Agreement, where no interest rate was mentioned, but when the parties executed the promissory notes, where the allegedly offending interest rate was stipulated. UCPB further argues that since the spouses Beluso were duly given copies of the subject promissory notes after their execution, then they were duly notified of the terms thereof, in substantial compliance with the Truth in Lending Act. Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure statement must be furnished prior to the consummation of the transaction: SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the following information: (1) (2) (3) (4) the cash price or delivered price of the property or service to be acquired; the amounts, if any, to be credited as down payment and/or trade-in; the difference between the amounts set forth under clauses (1) and (2) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; the total amount to be financed;

(5)

(6) (7)

the finance charge expressed in terms of pesos and centavos; and the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation.

SECTION 1. Grounds.Within the time for but before filing the answer to the complaint or pleading asserting a claim, a motion to dismiss may be made on any of the following grounds: (a) That the court has no jurisdiction over the person of the defending party; (b) That the court has no jurisdiction over the subject matter of the claim; (c) That venue is improperly laid; (d) That the plaintiff has no legal capacity to sue; (e) That there is another action pending between the same parties for the same cause; (f) That the cause of action is barred by a prior judgment or by the statute of limitations; (g) That the pleading asserting the claim states no cause of action;

The rationale of this provision is to protect users of credit from a lack of awareness of the true cost thereof, proceeding from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount, and the like. The law thereby seeks to protect debtors by permitting them to fully appreciate the true cost of their loan, to enable them to give full consent to the contract, and to properly evaluate their options in arriving at business decisions. Upholding UCPBs claim of substantial compliance would defeat these purposes of the Truth in Lending Act. The belated discovery of the true cost of credit will too often not be able to reverse the ill effects of an already consummated business decision. In addition, the promissory notes, the copies of which were presented to the spouses Beluso after execution, are not sufficient notification from UCPB. As earlier discussed, the interest rate provision therein does not sufficiently indicate with particularity the interest rate to be applied to the loan covered by said promissory notes. Forum Shopping UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in RTC, Makati City) on the ground that the spouses Beluso instituted another case (Civil Case No. V7227) before the RTC of Roxas City, involving the same parties and issues. UCPB claims that while Civil Case No. V-7227 initially appears to be a different action, as it prayed for the issuance of a temporary restraining order and/or injunction to stop foreclosure of spouses Belusos properties, it [43] poses issues which are similar to those of the present case. To prove its point, UCPB cited the spouses Belusos Amended Petition in Civil Case No. V-7227, which contains similar allegations as those in the present case. The RTC of Makati denied UCPBs Motion to Dismiss Case No. 99-314 for lack of merit. Petitioner UCPB raised the same issue with the Court of Appeals, and is raising the same issue with us now. The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC of Roxas City, a Petition for Injunction Against Foreclosure, is the propriety of the foreclosure before the true account of spouses Beluso is determined. On the other hand, the issue in Case No. 99-314 before the RTC of Makati City is the validity of the interest rate provision. The spouses Beluso claim that Civil Case No. V-7227 has become moot because, before the RTC of Roxas City could act on the restraining order, UCPB proceeded with the foreclosure and auction sale. As the act sought to be restrained by Civil Case No. V-7227 has already been accomplished, the spouses Beluso had to file a different action, that of Annulment of the Foreclosure Sale, Case No. 99-314 with the RTC, Makati City. Even if we assume for the sake of argument, however, that only one cause of action is involved in the two civil actions, namely, the violation of the right of the spouses Beluso not to have their property foreclosed for an amount they do not owe, the Rules of Court nevertheless allows the filing of the second action. Civil Case No. V-7227 was dismissed by the RTC of Roxas City before the filing of Case No. 99-314 with the RTC of Makati City, since the venue of litigation as provided for in the Credit Agreement is inMakati City. Rule 16, Section 5 bars the refiling of an action previously dismissed only in the following instances: SEC. 5. Effect of dismissal.Subject to the right of appeal, an order granting a motion to dismiss based on paragraphs (f), (h) and (i) of section 1 hereof shall bar the refiling of the same action or claim. (n) Improper venue as a ground for the dismissal of an action is found in paragraph (c) of Section 1, not in paragraphs (f), (h) and (i):

(h) That the claim or demand set forth in the plaintiffs pleading has been paid, waived, abandoned, or otherwise extinguished; (i) That the claim on which the action is founded is unenforceable under the provisions of the statute of frauds; and (j) That a condition precedent for filing the claim has not been [44] complied with. (Emphases supplied.) When an action is dismissed on the motion of the other party, it is only when the ground for the dismissal of an action is found in paragraphs (f), (h) and (i) that the action cannot be refiled. As regards all the other grounds, the complainant is allowed to file same action, but should take care that, this time, it is filed with the proper court or after the accomplishment of the erstwhile absent condition precedent, as the case may be. UCPB, however, brings to the attention of this Court a Motion for Reconsideration filed by the spouses Beluso on 15 January 1999 with the RTC of Roxas City, which Motion had not yet been ruled upon when the spouses Beluso filed Civil Case No. 99-314 with the RTC of Makati. Hence, there were allegedly two pending actions between the same parties on the same issue at the time of the filing of Civil Case No. 99-314 on 9 February 1999 with the RTC of Makati. This will still not change our findings. It is indeed the general rule that in cases where there are two pending actions between the same parties on the same issue, it should be the later case that should be dismissed. However, this rule is not absolute. According to this Court in Allied Banking Corporation [45] v. Court of Appeals : In these cases, it is evident that the first action was filed in anticipation of the filing of the later action and the purpose is to preempt the later suit or provide a basis for seeking the dismissal of the second action. Even if this is not the purpose for the filing of the first action, it may nevertheless be dismissed if the later action is the more appropriate vehicle for the ventilation of the issues between the parties. Thus, in Ramos v. Peralta, it was held: [T]he rule on litis pendentia does not require that the later case should yield to the earlier case. What is required merely is that there be another pending action, not

a prior pending action. Considering the broader scope of inquiry involved in Civil Case No. 4102 and the location of the property involved, no error was committed by the lower court in deferring to theBataan court's jurisdiction. Given, therefore, the pendency of two actions, the following are the relevant considerations in determining which action should be dismissed: (1) the date of filing, with preference generally given to the first action filed to be retained; (2) whether the action sought to be dismissed was filed merely to preempt the later action or to anticipate its filing and lay the basis for its dismissal; and (3) whether the action is the appropriate vehicle for litigating the issues between the parties. In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an action for injunction against a foreclosure sale that has already been held, while Civil Case No. 99-314 before the RTC of Makati City includes an action for the annulment of said foreclosure, an action certainly more proper in view of the execution of the foreclosure sale. The former case was improperly filed in Roxas City, while the latter was filed in Makati City, the proper venue of the action as mandated by the Credit Agreement. It is evident, therefore, that Civil Case No. 99-314 is the more appropriate vehicle for litigating the issues between the parties, as compared to Civil Case No. V-7227. Thus, we rule that the RTC of Makati City was not in error in not dismissing Civil Case No. 99-314. WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the following MODIFICATIONS: 1. In addition to the sum of P2,350,000.00 as determined by the courts a quo, respondent spouses Samuel and Odette Beluso are also liable for the following amounts: [46] a. Penalty of 12% per annum on the amount due from the date of demand; and [47] b. Compounded legal interest of 12% per annum on the amount due from date of demand; The following amounts shall be deducted from the liability of the spouses Samuel and Odette Beluso: a. Payments made by the spouses in the amount of P763,692.00. These payments shall be applied to the date of actual payment of the following in the order that they are listed, to wit: i. penalty charges due and demandable as of the time of payment; ii. interest due and demandable as of the time of payment; iii. principal amortization/payment in arrears as of the time of payment; iv. outstanding balance. b. Penalty under Republic Act No. 3765 in the amount of P26,000.00. This amount shall be deducted from the liability of the spouses Samuel and Odette Beluso on9 February 1999 to the following in the order that they are listed, to wit: i. penalty charges due and demandable as of time of payment; ii. interest due and demandable as of the time of payment; iii. principal amortization/payment in arrears as of the time of payment; iv. outstanding balance. The foreclosure of mortgage is hereby declared VALID. Consequently, the amounts which the Regional Trial Court and the Court of Appeals ordered respondents to pay, as modified in this Decision, shall be deducted from the proceeds of the foreclosure sale.

SO ORDERED.

2.

3.

ANICETO G. SALUDO, JR., Petitioner,

G.R.

No. 18404 1

Present: CORONA,C.J ., Chairpers -versuson NACHURA,* LEONARDODE CASTRO, DELCASTILL O, and PEREZ, JJ.

On 16 June 2000, SBC filed against Booklight and herein petitioner an action for collection of sum of money with the RTC. Booklight initially filed a motion to dismiss, which was later on denied for lack of merit. In his Answer, Booklight asserted that the amount demanded by SBC was not based on the omnibus credit line facility of 30 May 1996, but rather on the amendment of the credit facilities on 15 October 1996 increasing the loan line from P8,000,000.00 to P10,000,000.00. Booklight denied executing the promissory notes. It also claimed that it was not in default as in fact, it paid the sum of P1,599,126.11 on 30 September 1999 as a prelude to restructuring its loan for which it earnestly negotiated for a mutually acceptable agreement until 5 July 2000, without knowing that SBC had already filed the collection case.[10] In his Answer to the complaint, herein petitioner alleged that under the Continuing Suretyship, it was the parties understanding that his undertaking and liability was merely as an accommodation guarantor of Booklight. He countered that he came to know that Booklight offered to pay SBC the partial payment of the loan and proposed the restructuring of the obligation. Petitioner argued that said offer to pay constitutes a valid tender of payment which discharged Booklights obligation to the extent of the offer. Petitioner also averred that the imposition of the penalty on the supposed due and unpaid principal obligation based on the penalty rate of 2% per month is clearly [11] unconscionable. On 7 March 2005, Booklight was declared in default. Consequently, SBC presented its evidence ex-parte. The case against petitioner, however, proceeded and the latter was able to present evidence on his behalf. After trial, the RTC ruled that petitioner is jointly and solidarily liable with Booklight under the Continuing Suretyship Agreement. The dispositive portion reads: WHEREFORE, in view of the foregoing considerations, the Court hereby finds in favor of the plaintiff against the defendants by ordering the defendants Booklight, Inc. and Aniceto G. Saludo, Jr., jointly and severally liable (solidarily liable) to plaintiff [sic], the following sums of Philippine Pesos: PN No. 74/787/98 74/788/98 74/789/98 74/791/98 74/792/98 74/793/98 74/808/98 74/822/98 74/823/98 Amount P1,927,000.00 913,545.00 1,927,090.00 500,000.0 800,000.00 665,000.00 970,000.00 975,000.00 975,000.00 Interest Rate (per annum) 20.189% 20.189% 20.189% 20.178% 20.178% 20.178% 20.178% 20.178% 20.178% BeginningUntil fully paid November 2, 1998 November 2, 1998 November 2, 1998 November 4, 1998 November 4, 1998 November 3, 1998 November 9, 1998 November 12, 1998 November 12, 1998

SECURITY BANK CORPORATION, Respondent.

Promulgated: October 2010 x---------------------------------------------------------------------------------------- x DECISION PEREZ, J.: Before this Court is a petition for review on certiorari seeking the reversal of the [1] Decision of the Court of Appeals in CA-G.R. CV No. 88079 dated 24 January 2008 [2] which affirmed the Decision of Branch 149 of the Regional Trial Court (RTC) of Makati City, finding petitioner Aniceto G. Saludo, Jr. and Booklight, Inc. (Booklight) jointly and severally liable to Security Bank Corporation (SBC). The basic facts follow On 30 May 1996, Booklight was extended an omnibus line credit facility by SBC [4] in the amount of P10,000,000.00. Said loan was covered by a Credit Agreement and a [5] Continuing Suretyship with petitioner as surety, both documents dated 1 August 1996, to secure full payment and performance of the obligations arising from the credit accommodation. Booklight drew several availments of the approved credit facility from 1996 to 1997 and faithfully complied with the terms of the loan. On 30 October 1997, SBC approved the renewal of credit facility of Booklight in the amount of P10,000,000.00 under the [6] prevailing security lending rate. From August 3 to 14, 1998, Booklight executed nine (9) [7] promissory notes in favor of SBC in the aggregate amount of P9,652,725.00. For [8] failure to settle the loans upon maturity, demands were made on Booklight and petitioner for the payment of the obligation but the duo failed to pay. As of 15 May 2000, the obligation of Booklight stood at P10,487,875.41, inclusive of interest past due and [9] penalty.
[3]

13,

with attorneys fee of P100,000.00 plus cost of suit.[12] The Court of Appeals affirmed in toto the ruling of the RTC. Petitioner filed a [14] motion for reconsideration but it was denied by the Court of Appeals on 7 August 2008.
[13]

Hence, the instant petition on the following arguments: 1. The first credit facility has a one-year term from 30 June 1996 to 30 June 1997 while the second credit facility runs from 30 October 1997 to 30 October 1998. When the first credit facility expired, its accessory contract, the Continuing Surety agreement likewise expired. The second credit facility is not covered by the Continuing Suretyship, thus, availments made in 1998 by Booklight are not covered by the Continuing Suretyship. The approval of the second credit facility necessitates the consent of petitioner for the latters Continuing Suretyship to be effective. The nine (9) promissory notes executed and drawn by Booklight in 1998 did not specify that they were drawn against and subject to the Continuing Suretyship. Neither was it mentioned in the Continuing Suretyship that it was executed to serve as collateral to the nine (9) promissory notes. The Continuing Suretyship is a contract of adhesion and petitioners participation to it is his signing of his contract. The approval of the second credit facility is considered a novation of the first sufficient to extinguish the Continuing Suretyship and discharge petitioner. The 20.178% interest rate imposed by the RTC is [15] unconscionable.

hereafter owing to the Bank, as appears in the accounts, books and records of the Bank, whether direct or indirect, and (ii) any and all expenses which the Bank may incur in enforcing any of its rights, powers and remedies under the [16] Credit Instruments as defined hereinbelow; (Emphasis supplied.) Whether the second credit facility is considered a renewal of the first or a brand new credit facility altogether was indirectly answered by the trial court when it invoked paragraph 10 of the Continuing Suretyship which provides: 10. Continuity of Suretyship. This Suretyship shall remain in full force and effect until full and due payment and performance of the Guaranteed Obligations. This Suretyship shall not be terminated by the partial payment to the Bank of Guaranteed Obligations by any other surety or sureties of the Guaranteed Obligations, even if the particular surety or sureties are relieved of further liabilities.[17]

2. 3.

4.

5.

and concluded that the liability of petitioner did not expire upon the termination of the first credit facility. It cannot be gainsaid that the second credit facility was renewed for another oneyear term by SBC. The terms of renewal read: 30 October 1997 BOOKLIGHT, INC. xxxx Gentlemen: We are pleased to advise you that the Bank has approved the renewal of your credit facility subject to the terms and conditions set forth below: Facility Amount Collateral : Loan Line : P10,000,000.00 : Existing JSS of Atty. Aniceto Saludo (marital consent waived) Term : 180 day Promissory Notes Interest Rate : Prevailing SBC lending rate; subject to monthly setting and payment Expiry : October 31, 1998 x x x x.
[18]

6. 7.

8.

The main derivative of these averments is the issue of whether or not petitioner should be held solidarily liable for the second credit facility extended to Booklight. We rule in the affirmative. There is no doubt that Booklight was extended two (2) credit facilities, each with a one-year term, by SBC. Booklight availed of these two (2) credit lines. While Booklight was able to comply with its obligation under the first credit line, it defaulted in the payment of the loan obligation amounting to P9,652,725.00 under the second credit line. There is likewise no dispute that the first credit line facility, with a term from 30 June 1996 to 30 June 1997, was covered by a Continuing Suretyship with petitioner acting as the surety. The dispute is on the coverage by the Continuing Suretyship of the loan contracted under the second credit facility. Under the Continuing Suretyship, petitioner undertook to guarantee the following obligations: a) Guaranteed Obligations the obligations of the Debtor arising from all credit accommodations extended by the Bank to the Debtor, including increases, renewals, roll-overs, extensions, restructurings, amendments or novations thereof, as well as (i) all obligations of the Debtor presently or

This very renewal is explicitly covered by the guaranteed obligations of the Continuing Suretyship. The essence of a continuing surety has been highlighted in the case of Totanes v. China Banking Corporation[19] in this wise: Comprehensive or continuing surety agreements are, in fact, quite commonplace in present day financial and commercial practice. A

bank or financing company which anticipates entering into a series of credit transactions with a particular company, normally requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal [20] debtor. In Gateway Electronics Corporation v. Asianbank Corporation,[21] the Court emphasized that [b]y its nature, a continuing suretyship covers current and future loans, provided that, with respect to future loan transactions, they are x x x within the description or contemplation of the contract of guaranty. Petitioner argues that the approval of the second credit facility necessitates his consent considering the onerous and solidary liability of a surety. This is contrary to the express waiver of his consent to such renewal, contained in paragraph 12 of the Continuing Suretyship, which provides in part: 12. Waivers by the Surety. The Surety hereby waives: x x x (v) notice or consent to any modification, amendment, renewal, extension or grace period granted by the Bank to the Debtor with respect to the [22] Credit Instruments.

may accept or reject, but which the latter cannot modify. One party prepares the stipulation in the contract, while the other party merely affixes his signature or his adhesion thereto, giving no room for negotiation and depriving the latter of the opportunity to bargain on [24] equal footing. A contract of adhesion presupposes that the party adhering to the contract is a weaker party. That cannot be said of petitioner. He is a lawyer. He is deemed knowledgeable of the legal implications of the contract that he is signing. It must be borne in mind, however, that contracts of adhesion are not invalid per se. Contracts of adhesion, where one party imposes a ready-made form of contract on the other, are not entirely prohibited. The one who adheres to the contract is, in reality, free to [25] reject it entirely; if he adheres, he gives his consent. Finally, petitioner challenges the imposition of 20.189% interest rate as unconscionable. We rule otherwise. In Development Bank of the Philippines v. Family Foods Manufacturing Co. Ltd.,[26] this Court upheld the validity of the imposition of 18% and 22% stipulated rates of interest in the two (2) promissory notes. Likewise in Spouses [27] Bacolor v. Banco Filipino Savings and Mortgage Bank, the 24% interest rate agreed upon by parties was held as not violative of the Usury Law, as amended by Presidential Decree No. 116. WHEREFORE, the petition is DENIED. The Decision dated 24 January 2008 of the Court of Appeals in CA-G.R. CV No. 88079 is AFFIRMED in toto.
SO ORDERED.

Respondent, as last resort, harps on the novation of the first credit facility to exculpate itself from liability from the second credit facility. At the outset, it must be pointed out that the Credit Agreement is actually the principal contract and it covers all credit facilities now or hereafter extended by [SBC] to [23] [Booklight]; and that the suretyship agreement was executed precisely to guarantee these obligations, i.e., the credit facilities arising from the credit agreement. The principal contract is the credit agreement covered by the Continuing Suretyship. The two loan facilities availed by Booklight under the credit agreement are the Omnibus Line amounting to P10,000,000.00 granted to Booklight in 1996 and the other one is the Loan Line of the same amount in 1997. Petitioner however seeks to muddle the issue by insisting that these two availments were two separate principal contracts, conveniently ignoring the fact that it is the credit agreement which constitutes the principal contract signed by Booklight in order to avail of SBCs credit facilities. The two credit facilities are but loans made available to Booklight pursuant to the credit agreement. On these facts the novation argument advanced by petitioner must fail. There is no novation to speak of. It is the first credit facility that expired and not the Credit Agreement. There was a second loan pursuant to the same credit agreement. The terms and conditions under the Credit Agreement continue to apply and the Continuing Suretyship continues to guarantee the Credit Agreement. The lameness of petitioners stand is pointed up by his attempt to escape from liability by labelling the Continuing Suretyship as a contract of adhesion. A contract of adhesion is defined as one in which one of the parties imposes a ready-made form of contract, which the other party

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, Petitioner,

G.R. No. 171351

to the payment of COLA during the period that it was suspended under DBM Circular No. 10. The OGCC summarized its opinion, thus: In recapitulation, we are of the opinion; relative to the questions/issues raised herein, that:

- versus -

Present: 1. Employees in government-owned and controlled corporations are entitled to the payment of Cost of Living Allowance and Amelioration Allowance without need of any prior determination by the DBM of whether or not these allowances have, indeed, been integrated into the standardized salaries. The incumbents, as well as non-incumbents, including those hired in corporations established after the passage of RA 6758, are entitled to avail of these benefits from the time said benefits were disallowed, discontinued or withdrawn up to fifteen (15) days from publication in the Official Gazette of DBM CCC No. [10] 1.
[11]

GENARO C. BAUTISTA, YNARES-SANTIAGO, J., MAMERTO G. ACLASA, ANGEL P. Chairperson, ADONIS, CARLOS G. AGUSTIN, AUSTRIA-MARTINEZ, BERNARDITA A. ALANO, CHICO-NAZARIO, GERMAN A. ALCARAZ, CESAR B. NACHURA, and ALCOBA, ARIEL ALLADO, REYES, JJ. VINLUAN, BRIGIDO YEBRA, EDUARDO YUMANG, LORETO D. Promulgated: YLAGAN, RUDY ZEMA, ET.AL Respondents. March 14, 2008 x--------------------------------------------------x DECISION

2.

MWSS, however, granted only 5% COLA to its employees in a Board Resolution on May 23, 2003, which reads: REYES, R.T., J.: THIS is a sequel to the cases of De Jesus v. Commission on Audit and Philippine Ports [2] Authority (PPA) Employees Hired After July 1, 1989 v. Commission on Audit (COA) involving, yet again, the obstinate refusal of another government-owned and controlled corporation to pay its employees their Cost of Living Allowance (COLA) from 1989 to 1999. Before Us is a petition for review on certiorari of the Amended Decision of the Court of [4] Appeals (CA), which affirmed with modification the Decision of the Regional Trial Court (RTC) in Quezon City ordering petitioner Metropolitan Waterworks and Sewerage System (MWSS) to pay private respondents the 95% balance of their COLA fromNovember 16, 1989 up to March 16, 1999. Facts Petitioner MWSS is a government-owned and controlled corporation organized under Republic Act (R.A.) No. 6234. Private respondents are incumbent and former employees of [5] MWSS. Prior to November 1, 1989, private respondents have been receiving allowances, fringe benefits and COLA. They were receiving COLA equivalent to forty percent of their basic monthly salary or P300.00 a month, whichever is higher. These benefits were discontinued under R.A. No. 6758 entitled An Act Prescribing a Revised Compensation and Position Classification System in [6] Government and for other Purposes, otherwise known as the Salary Standardization Law. Implementing R.A. No. 6758, the Department of Budget and Management (DBM) issued Corporate Circular No. 10 (DBM Circular No. 10) which provided, among others, the discontinuance without qualification of all allowances and fringe benefits, including COLA, of government employees [7] over and above their basic salaries starting November 1, 1989. In De Jesus v. Commission on Audit, this Court declared DBM Circular No. 10 ineffective for lack of publication. The DBM later remedied the fatal defect when it published the Circular in the [9] March 1999 issue of the Official Gazette. After vigorous complaints and requests from government employees, the Office of the Government Corporate Counsel (OGCC) issued a Memorandum opining that employees of government-owned and controlled corporations, whether incumbent or non-incumbents, are entitled
[8] [3] [1]

issued

RESOLVED, further, to APPROVE and CONFIRM the initial payment of COLA to former employees for the period 1989 to July 1997, equivalent to FIVE PERCENT (5%), amounting to ONEHUNDRED FIVE MILLION PESOS (P105,000,000.00), chargeable against free cash of the System (Annex A hereof), which will be available upon recovery of the P2.372 Billion advances made to Maynilad Water Services, Inc. (MWSI), to be derived from the US$100 Million loan releases from the Deutsche Bank expected to be released by June 2002. It is understood that payment hereof shall be subject to the guidelines to be issued by Management and the usual accounting and auditing rules and [12] regulations. Shortchanged, private respondents demanded the 95% balance of their COLA. MWSS denied their request. MWSS Administrator Orlando Hondrade informed private respondents in a letter dated September 24, 2003 that MWSS was willing to pay the 95% balance, but it opted to defer payment because of the dismissal of a similar claim by theRTC, Branch 96, Quezon City in Erlich Barraquias, et al. v. Metropolitan Waterworks and Sewerage System. MWSS further averred [13] that it had no available funds to pay the balance. Aggrieved, private respondents filed a petition for mandamus with the RTC in Quezon City to compel MWSS to pay the balance of their COLA. During the proceedings, other aggrieved MWSS employees represented by Joaquin Pacis, et al. moved to intervene but their motion was [15] denied. RTC Disposition On August 17, 2004, the RTC rendered a Decision
[16] [14]

granting the petition, with a fallo reading:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the petitioners ordering respondent Metropolitan Waterworks and Sewerage System (MWSS), its Administrator and Board of Trustees:

1. To pay petitioners and other employees who are similarly situated, whether incumbents or non-incumbents, the balance in the amount equivalent to ninety-five (95%) of their Cost of Living Allowance (COLA) from the date it was discontinued up to the present if employment with the MWSS has continued, or up to the time of their separation from MWSS, and to restore the same to the salary of the incumbent employees. 2. To segregate the amount equivalent to ten percent (10%) of the amount payable to each petitioner, and others who are similarly benefited, as and by way of litigation expenses. Said amount shall be paid directly to their attorney-in-fact, Genaro C. Bautista, pursuant to the Special Power of Attorney executed by petitioners in favor of the latter. SO ORDERED.
[17]

for the release of their COST OF LIVING ALLOWANCE (COLA) but the same proved futile. Thus, petitioners have no resource but to seek the intervention of the Court, there being no plain, speedy and adequate remedy in the ordinary course of law. xxxx Considering that respondent MWSS has recognized petitioners entitlement to the subject COLA and inasmuch as the payment of the same is supported by law and jurisprudence, respondent has the legal duty and obligation to grant the same. Otherwise, petitioners and others similarly situated, would be unjustifiably denied of their right to the allowance to which [18] they are entitled by reason of their employment. The RTC later amended its decision to include interest and 5% attorneys fees. The fallo of the amended decision reads: WHEREFORE, premises considered, judgment is hereby rendered in favor of the petitioners ordering respondent Metropolitan Waterworks and Sewerage System (MWSS), its Administrator and Board of Trustees: 1. To pay petitioners and other employees who are similarly situated, whether incumbents or non-incumbents, the balance in the amount equivalent to ninety-five (95%) of their Cost of Living Allowance (COLA) beginning November 1989 when it was discontinued up to the present, if employment with the MWSS continues or up to the time of their separation from MWSS, with legal rate of interest at six (6%) percent per annum beginning August 1998 when DBM CCC No. 10 was declared as without force and effect. The monetary judgment shall earn interest at twelve (12%) percent per annum from the date of finality of the decision until satisfaction; 2. To pay attorneys fees equivalent to five (5%) percent of the total claims of petitioners; 3. To segregate the amount equivalent to ten percent (10%) of the amount payable to each petitioner, and others who are similarly benefited, as and by way of litigation expenses. Said amount shall be paid directly to their attorney-in-fact, Genaro C. Bautista, pursuant to the Special Power of Attorney executed by petitioners in favor of the latter. SO ORDERED.
[19]

In granting the petition, the RTC ratiocinated: This case revolves around the following legal issues, viz.: 1. Whether or not petitioners are entitled to the payment of the COLA from the time it was discontinued up to the present or from the time they were separated/retired from service; and 2. petition. Whether or not mandamus lies under the facts set forth in the

The Court answers both issues in the affirmative and will be discussed in seriatem (sic). First. Republic Act No.6758 entitled An Act Prescribing a Revised Compensation and Position Classification System in the Government and for Other Purposes, otherwise known as Salary Standardization Law, was passed into law on July 1, 1989. Section 12 of said law provides for the consolidation of allowances and additional compensation into the standardized salary rates. xxxx No court has, as yet, declared the payment of COLA to government employees/offices as violative of R.A. 6758. In fact, several government-owned and controlled corporations have restored the grant of said allowance to its employees, the payment of the same having been clarified in an Inter-Office Memorandum dated March 20, 2002 issued by the Office of the Government Corporate Council.

MWSS appealed to the CA. On October 13, 2004 and May 26, 2005, MWSS issued two Board Resolutions granting additional 20% COLA to incumbent and non-incumbent employees of MWSS. The 20% was in addition to the 5% earlier paid to private respondents.
[20]

In addition, respondent is estopped from claiming the illegality of the grant of COLA. In a letter dated September 24, 2003, addressed to Mr. Genaro C. Bautista (Annex D, petition), respondent admitted that petitioners are entitled to the payment of said benefit. xxxx Second. It is the Courts opinion that mandamus is proper in the case at bench. x x x Petitioners have shown that they are entitled to avail of this remedy. Records will bear that on two occasions, petitioner Genaro Bautista requested respondent MWSS, through its Administrator and Board of Trustees,

CA Disposition On August 17, 2004, the CA rendered the RTC amended decision, disposing as follows: a decision affirming with modification

WHEREFORE, in the light of the foregoing disquisitions, the appealed decision is hereby MODIFIED. The grant of litigation expenses, equivalent to ten percent (10%) of the amount payable to each petitioner, and others who are similarly benefited payable to Genaro Bautista as appellees attorney-in-fact, is hereby DELETED. A fixed amount of Five Hundred Thousand Pesos (PhP500,000.00) is, instead, granted to the appeleess attorney-in-fact. We AFFIRM in all other respects.

SO ORDERED.

[21]

In modifying the RTC decision and fixing the grant of litigation expenses at P500,000.00, the CA ratiocinated:

In affirming the RTC decision, the CA stated: In the case at bench, appellees have convincingly shown that they satisfied the requisites of a mandamus proceeding. First, only specific legal rights may be enforced by mandamus if they are clear and certain. If the legal rights of the appellees are not well-defined, clear, and certain, the petition must be dismissed, however, the contrary is obtaining. Appellees have shown that they are legally entitled to their accrued COLA as a matter of right. The Supreme Court, in the case of De Jesus v. COA, made the pronouncement that DBM CCC No. 10 was ineffective because of its lack of publication. In the said decision, the Court ordered the Commission to pass on audit the honoraria of therein petitioners. Precipitated by the above-mentioned ruling, the herein appellees filed a petition before the court a quoclaiming for the return of COLA and back payment of the said allowance from the time it was discontinued. A review of the records of this case would reveal that the Office of the Government Corporate Counsel (OGCC), Department of Justice issued Opinion No. 086 dated May 21, 2001. In the said opinion, the OGCC opined that employees in all government-owned and controlled corporations are entitled to the payment of Cost of Living Allowance and Amelioration Allowance without a need of any prior determination by the DBM of whether or not these allowances have, indeed, been integrated into the standardized salaries. Furthermore, in the same opinion, the OGCC explained that both the incumbent and nonincumbent employees are entitled to these benefits. More importantly, in the recent case of Philippine Ports Authority Employees v. Commission on Audit, the High Court made an imprimatur regarding the employees entitlement to COLA and amelioration allowances. The Court said that during the period that DBM CCC No. 10 was in legal limbo, the COLA and the amelioration allowance were not effectively integrated into the standardized salaries. x x x Consequently, no less than the High Court made this declaration as to the employees entitlement to COLA and other allowances. We find no cogent reason to rule otherwise. It bears stressing too, that appellant MWSS recognizes the right of herein appellees to the said allowances evidenced by the letter sent by appellants Administrator, Orlando C. Hondrade. However, appellant made it clear that it could not effect the immediate payment because of the dismissal of an earlier case filed by Barraquias and the unavailability of funds. In other words, while appellant acknowledges appellees legal right to COLA, it is prevented from making the payments because of those two (2) predicaments. Second, the writ will not issue to compel an official to do anything, which is not his duty to do, or which is his duty not to do, or give to the applicant anything to which he is not entitled by law. The writ neither confers powers nor imposes duties. It is simply a command to exercise a power already possessed and to perform a duty already imposed. xxxx In the case at bar, the payment of the appellees allowances does not require appellant to fulfill contractual obligations or to compel a course of conduct, nor to control or review the exercise of discretion. If judgment is, at all, necessary in this case, it would only be the determination as to whether the appellees are employees of MWSS or not, nothing more, nothing less. A purely ministerial act on the part of the appellant is, therefore, availing in the instant [22] case. As regards the last issue, we, however, are inclined to overturn the ruling of the lower court with respect to the segregation of the amount equivalent to 10% of the amount payable to each petitioner as payment to the appellees attorney-in-fact. The general rule is that attorneys fees and litigation expenses cannot be recovered as part of damages because of the policy that no premium should be placed on the right to litigate. In short, the grant of attorneys fees as part of damages is the exception rather than the rule; counsels fees are not awarded every time a party prevails in a suit. It can be awarded only in the cases enumerated in Article 2208 of the Civil Code, and in all cases, it must be reasonable. We cannot give our affirmance to the segregation of an amount equivalent to ten percent (10%) of the amount payable to each petitioner, and others who are similarly benefited by way of litigation expenses, in favor of Genaro Bautista, as appellees attorney-in-fact. Under Article 2208, while it may allow the courts to grant litigants an award of attorneys fees and litigation expenses, the same must be reasonable. It is true that appellee Genaro Bautista was authorized to deduct, collect, and receive the sum equivalent to ten percent (10%) of the total amount of differential that each appellee may receive. Sadly, we are of the considered view, however, that the amount is unconscionable considering the number of employees involved in the instant case, and considering the amount that each employee may receive by way of back payment. We, therefore, deem it appropriate to grant a fixed amount of Five Hundred Thousand Pesos (PhP500,000.00) to the appellees attorney-infact, Genaro Bautista, by way of attorneys fees and litigation expenses. The reduction of unreasonable attorneys fees is within the regulatory powers of the [23] courts (Taganas v. NLRC, 248 SCRA 133). On January 31, 2006, the CA issued an Amended Decision on motion for reconsideration of both parties, with the following fallo: WHEREFORE, the instant Motion for Reconsideration is PARTIALLY GRANTED. Our decision promulgated on October 5, 2005, which is the subject of the instant motion, is herebyAMENDED, such that the judgment shall now read as follows: WHEREFORE, in the light of the foregoing disquisitions, the appealed decision is hereby MODIFIED. Appellant MWSS is ordered to pay appellees and other employees who are similarly situated, whether incumbents or non-incumbents, the balance in the amount equivalent to ninety-five percent (95%) percent of their Cost of Living Allowance (COLA) beginning November 1989, when it was discontinued up to March 16, 1999, the date of the effectivity of DBM CCC No. 10. The award of attorneys fees equivalent to five (5%) percent of the total claims of appellees is DELETED. The award of interests, over and

above the COLA is, likewise, DELETED for basis. We AFFIRM in all other respects. SO ORDERED.
[24]

lack

of

this Courts decision in De Jesus and PPA. MWSS insists that private respondents are not entitled to the 95% balance of their COLA from 1989 to 1999. It argues that they have not proven any clear right to the allowance because it [27] was already deemed integrated into their salaries. MWSS avers that it issued four (4) board resolutions, granting a total of 30% COLA to private respondents, as a mere act of generosity to [28] them, not in payment of a legally enforceable right. MWSS also argues that it needs to obtain [29] prior DBM approval before it can pay the balance. We do not agree. This Court had long settled the issues hoisted by MWSS. We find no cogent reason to deviate, much less modify, settled jurisprudence. In the En banc case of De Jesus v. Court of Appeals, declared ineffective for lack of publication, thus:
[30]

In granting reconsideration, the appellate court held as valid the agreement between private respondent Bautista and the other respondents segregating 10% of their monetary claims as payment for litigation expenses and attorneys fees, viz.: The 10% litigation expenses in favor of Bautista has (sic) for its basis the Special Power of Attorney executed by the appellees. As borne by the records, the contract was freely and voluntarily executed by the appellees in favor of Bautista. Thus, the segregation of an amount equivalent to 10% of the amount due each appellee, and others who are similarly benefited, payable to Genaro C. Bautista is well-founded. Anent the award of attorneys fees, in the absence of any stipulation, it can be awarded only in the cases enumerated in Article 2208 of the Civil Code, none of which is present in the case at bar. It bears stressing that the SPA provided that Genaro C. Bautista is authorized and empowered to deduct, collect, and receive the sum equivalent to 10% of the total amount of differential that each appellee may receive, to be paid to the lawyer/legal counsel, as and by way of attorneys fees and litigation expenses. Thus, the segregated amount taken from each employee necessarily includes both the attorneys fees and litigation expenses. Undeniably, the award of attorneys fees equivalent to 5% of the total claims of the appellees must, therefore, be [25] deleted. MWSS then filed the present petition with this Court. On December 15, 2005, MWSS issued another board resolution granting an additional 5% COLA to private respondents. To date and on record, MWSS had paid 30% of the COLA of private respondents from 1989-1999. Issues Petitioner MWSS, through the OGCC, assigns twin errors to the CA in the following tenor: I. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN DISREGARDING HEREIN PETITIONERS ARGUMENT THAT THE FILING OF A MANDAMUS CASE TO ENFORCE IMMEDIATE AND FULL PAYMENT OF COLA IS IMPROPER. II. THE APPELLATE COURT ERRED IN AWARDING ATTORNEYS [26] FEES AND LITIGATION EXPENSES TO RESPONDENTS. (Underscoring supplied) Our Ruling The petition is partly meritorious. MWSS raises two issues for Our consideration. The first is the substantive issue of private respondents entitlement to the balance of their COLA from 1989-1999, when DBM Circular No. 10 was ineffective. The second involves attorneys fees and litigation expenses. We shall deal with the issues in seriatim. Private respondents are entitled to COLA from 1989 to 1999 in line with

DBM Circular No. 10 was

On the need for publication of subject DBM CCC No. 10, we rule in the affirmative. Following the doctrine enunciated in Tanada, publication in the Official Gazette or in a newspaper of general circulation in the Philippines is required since DBM CCC No. 10 is in the nature of an administrative circular the purpose of which is to enforce or implement an existing law. Stated differently, to be effective and enforceable, DBM CCC No. 10 must go through the requisite publication in the Official Gazette or in a newspaper of general circulation in the Philippines. In the present case under scrutiny, it is decisively clear that DBM CCC No. 10, which completely disallows payment of allowances and other additional compensation to government officials and employees, starting November 1, 1989, is not a mere interpretative or internal regulation. It is something more than that. And why not, when it, tends to deprive government workers of their allowances and additional compensation sorely needed to keep body and soul together. At the very least, before the said circular under attack may be permitted to substantially reduce their income, the government officials and employees concerned should be apprised and alerted by the publication of subject circular in the Official Gazette or in a newspaper of general circulation in the Philippines to the end that they be given amplest opportunity to voice out whatever opposition they may have, and to ventilate their stance on the matter. This approach is more in keeping with democratic precepts and rudiments of fairness and transparency. Being ineffective, DBM Circular No. 10 cannot affect government employees entitlement to fringe benefits, allowances and COLA from 1989 to 1999. Thus, in De Jesus, the Local Water Utilities Administration was ordered to pay the honoraria of petitioners which were disallowed by the Circular. Contrary to its present posturing, the OGCC itself issued a Memorandum, entitled Opinion and Guidelines on the Payment of Cost of Living Allowance (COLA), Amelioration Allowance and other Forms of Allowance, opining that employees of government-owned and controlled corporations are entitled to COLA from 1989 to 1999 even without prior determination from DBM on whether or not the COLA was deemed integrated into their salaries. We are surprised that the OGCC now argues for a position totally inconsistent with its earlier opinion. Worse, MWSS unnecessarily passes the buck to the DBM when it had earlier opined that no prior DBM approval is required. De Jesus was affirmed in the recent case of Philippine Ports Authority (PPA) Employees [31] Hired After July 1, 1989 v. Commission on Audit (COA) where this Court held that the COLA of government employees from 1989 to 1999 was not deemed integrated into their salaries. This means that the COLA during that period is a legally demandable and enforceable right. This Court stated:

A reading of the first sentence of this provision readily reveals that all allowances are deemed included or integrated into the prescribed standardized salary rates, except the following: (a) representation and transportation allowances, (b) clothing and laundry allowances, (c) subsistence allowances of marine officers and crew on board government vessels, (d) subsistence allowances of hospital personnel, (e) hazard pay, (f) allowances of foreign service personnel stationed abroad, and (g) such other additional compensation not otherwise specified in Section 12. These additional non-integrated benefits (item g) were to be determined by the Department of Budget and Management (DBM) in an appropriate issuance. xxxx In other words, during the period that DBM CCC No. 10 was in legal limbo, the COLA and the amelioration allowance were not effectively integrated into the standardized salaries. Hence, it would be incorrect to contend that because those allowances were not effectively integrated under the first sentence, then they were non-integrated benefits falling under the second sentence of Section 12 of RA 6758. Their characterization must be deemed to have also been in legal limbo, pending the effectivity of DBMCCC No. 10. Consequently, contrary to the ruling of the COA, the second sentence does not apply to the present case. By the same token, the policy embodied in the provision the non-diminution of benefits in favor of incumbents as of July 1, 1989 is also inapplicable.

MWSS has a ministerial duty to pay the COLA; mandamus is a proper remedy to compel MWSS to perform its ministerial duty. We also agree with the CA that mandamus is a proper remedy to compel MWSS to pay the COLA balance. Payment of the allowance is a mere ministerial duty. In De Jesus and PPA, the Local Water Utilities Administration and the Philippine Ports Authority, respectively, were ordered to pay the honoraria and COLA of employees of government-owned and controlled corporations which were discontinued by DBM Circular No. 10. Private respondents are similarly situated. We find no compelling reason to deny them their legal entitlement to the allowance. We quote with approval the CA decision on this point, thus: Second, the writ will not issue to compel an official to do anything, which is not his duty to do, or which is his duty not to do, or give to the applicant anything to which he is not entitled by law. The writ neither confers powers nor imposes duties. It is simply a command to exercise a power already possessed and to perform a duty already imposed. A purely ministerial act, as distinguished from a discretionary act, is one which an officer or tribunal performs in a given state of facts, in a prescribed manner, in obedience to the mandate of legal authority, without regard to or exercise of his own judgment upon the propriety or impropriety of the act done. The duty is ministerial only when the discharge of the same requires neither the exercise of official discretion nor judgment. In the case at bar, the payment of the appellees allowances does not require appellant to fulfill contractual obligations or to compel a course of conduct, nor to control or review the exercise of discretion. If judgment is, at all, necessary in this case, it would only be the determination as to whether the appellees are employees of MWSS or not, nothing more, nothing less. A purely ministerial act on the part of the appellant is, therefore, availing in the instant [33] case. The 10% agreement between Bautista and other respondents is valid. But the agreement is binding only on private respondents, not all MWSS employees. MWSS also questions the agreement between private respondent Bautista and other respondents which provided for the segregation of 10% of their COLA claims in payment of litigation expenses and attorneys fees. MWSS claims that such agreement is unconscionable and [34] scandalous. It avers that the agreement is similar to the get-rich-quick schemes wherein private respondents lawyers receive a windfall from a simple case entailing no substantial expense or [35] extraordinary legal service. Private respondents counter that the 10% agreement is fair and reasonable. They contend that the agreement is binding only on private respondents, not MWSS. As such, MWSS will not suffer any loss because it is private respondents who will shoulder the litigation expenses and [36] attorneys fees. In short, MWSS will pay no more than the COLA due them. Jurisprudence on the courts power to award and reduce attorneys fees and litigation expenses is well settled. Tersely put, irrespective of the contractual agreement between the lawyer and the client, the lawyer is entitled only to a reasonable compensation for services rendered. The courts have plenary power to reduce the compensation due a lawyer if it is unreasonable and unconscionable. Section 24, Rule 138 of the Rules of Court provides: An SEC. 24. Compensation of attorneys, agreement as to fees. attorney shall be entitled to have and recover from his client no more than a reasonable compensation for his services, with a view to the importance of the subject matter of the controversy, the extent of the services rendered, and the professional standing of the attorney. x x x A written contract for services shall

The parties fail to cite any law barring the continuation of the grant of the COLA and the amelioration allowance during the period when DBM CCC No. 10 was in legal limbo. xxxx To stress, the failure to publish DBM CCC No. 10 meant that the COLA and the amelioration allowance were not effectively integrated into the standardized salaries of the PPA employees as ofJuly 1, 1989. The integration became effective only on March 16, 1999. Thus, in between those two dates, they were still entitled to receive the two allowances. xxxx As pointed out by the OSG, until and unless the DBM issued those Implementing Rules categorically excluding the COLA and the amelioration allowance, there could not have been any valid notice to the government employees concerned that, indeed, those allowances were deemed included in the standardized salary rates. Consequently, there was no reason or basis to distinguish or classify PPA employees into two categories for purposes of determining their entitlement to the back payment of those unpaid allowances during the period in dispute. Hence, in consonance with the equal-protection clause of the Constitution, and considering that the employees were all similarly situated as to the matter of the COLA and the amelioration allowance, they should all be treated similarly. All not only incumbents as of July 1, 1989 should be allowed to receive back pay corresponding to the said benefits, from July 1, [32] 1989 to the new effectivity date of DBM CCC No. 10 March 16, 1999.

The ruling in De Jesus and PPA is clear. Employees of government-owned and controlled corporations, whether incumbent or not, are entitled to the COLA from 1989 to 1999 as a matter of right. The argument of MWSS that private respondents have not proven any clear legal right to the allowance and that they need prior DBM approval is without merit.

control the amount to be paid therefor unless found by the court to be unconscionable or unreasonable. The power of the courts to reduce unconscionable attorneys fees is based on the basic principle that the legal profession is not a commercial enterprise where profit maximization is a paramount consideration. The legal profession is imbued with public interest. We deliver justice, not [37] a simple commercial service. In Canlas v. Court of Appeals, this Court stated: x x x The Court finds the occasion fit to stress that lawyering is not a moneymaking venture and lawyers are not merchants, a fundamental standard that has, as a matter of judicial notice, eluded not a few law advocates. The petitioners efforts partaking of a shakedown of his own client are not becoming of a lawyer and certainly, do not speak well of his fealty to his oath to delay no man for money. It is true that lawyers are entitled to make a living, in spite of the fact that the practice of law is not a commercial enterprise; but that does not furnish an excuse for plain lust for material wealth, more so at the expense of another. Law advocacy, we reiterate, is not capital that yields profits. The returns it births are simple rewards for a job done or service rendered. It is a calling that, unlike mercantile pursuits which enjoy a greater deal of freedom from government interference, is impressed with a public interest, for which it is [38] subject to State regulation. x x x Here, We do not find anything unjust or inequitable in the 10% agreement between private respondent Bautista and other respondent employees. The percentage and the corresponding amount to be deducted from each employee is only minimal when compared to the benefits that they will derive from the payment of the COLA. The 10% fee is also a customary charge for similar legal services. Under the Labor Code, a 10% agreement for payment of attorneys fees based on the [39] monetary claim of an employee is valid and binding. The agreement between Bautista and the other respondents conforms to that allowed under the Labor Code.

or arrangements signed by other MWSS employees with their respective agents/lawyers are also declared valid and binding. 3. Only respondent employees are liable to pay litigation expenses and attorneys fees to respondent Bautista. Other MWSS employees who signed similar contracts, agreements or arrangements with their respective agents/lawyers are bound by their own contracts. SO ORDERED.

We note, however, that the RTC and the CA erred in ruling that all MWSS employees eligible to receive COLA are liable to pay attorneys fees and/or litigation expenses to respondent Bautista. Records disclose that only 522 out of the more than 7000 MWSS employees signed such [40] agreement. Other MWSS employees signed similar contracts, agreements or arrangements with their own respective agents/lawyers, which are similarly recognized as valid and binding. It is basic that only parties to a contract are bound by its terms. This is based on the principle of relativity of contracts which provides that contracts take effect only between the parties, [41] their assigns and heirs. It cannot favor or prejudice third persons. Applying this principle, only private respondents are bound by the terms of their agreement with respondent Bautista. Those who have signed similar contracts with their own agents/lawyers are bound by their own contracts. Res inter alios acta alteri nocere non debet a third party may not be prejudiced by the act, declaration [42] or omission of another. WHEREFORE, the MODIFICATION in that: Court of


Appeals

Amended

Decision

is AFFIRMED

WITH

1. Petitioner Metropolitan Waterworks and Sewerage System is ordered to pay respondents and other employees who are similarly situated, whether incumbents or non-incumbents, the balance in the amount equivalent to ninety-five percent (95%) of their Cost of Living Allowance beginning November 1989, when it was discontinued up to March 16, 1999, the date of the effectivity of DBM Circular No. 10. 2. The agreement between respondent Genaro Bautista and the other respondents to segregate ten percent (10%) of the amount payable to each of respondents, as and by way of litigation expenses and attorneys fees, is declared valid and binding. Similar contracts, agreements

SPS. NESTOR AND MA. NONA BORROMEO, Petitioners,

G . R . No . 1 6 9 8 4 6 Present:

protest EPCIBs continued failure to provide them copies of the loan documents and its imposition of an interest rate higher than that agreed upon. From the time petitioners began paying their monthly amortizations on 21 April 2001 until the time they stopped, petitioners made total payments of [12] approximately P500,000.00. In reply to the petitioners letter dated 6 August 2003, the Vice President of EPCIB, Gary [13] Vargas, sent to the petitioners a letter dated 27 August 2003 explaining that as a matter of practice, their clients were given original copies of the loan documents only upon full release of the amount loaned. EPCIB clarified that since petitioners loan had not been fully released, the original documents were not yet sent to them. Petitioners were also informed that the applicable interest rate was set at the time the loan was released, not at the time the loan was approved, and that the prevailing interest when the first four installments of the loan were released ranged from 9.5% to 16%. In the meantime, on 13 August 2003, respondent, through counsel, also sent a letter to the petitioners demanding payment for their obligation, which, as of 15 August 2003, amounted to P4,097,261.04, inclusive of interest and other charges. Respondent informed petitioners that failure to pay their obligation would result in its pursuing legal action against petitioners, including foreclosure proceedings on their REM. In a letter dated 18 September 2003, respondent, through counsel, reiterated to petitioners its demand for the full settlement of their obligation on or before 30 September 2003. Finally, on 3 October 2003, petitioners received copies of the loan documents which they [16] had earlier signed in blank. According to petitioners, they were surprised to find out that the Loan Agreement and REM designated respondent ESB as lender and mortgagor, instead of EPCIB with whom they allegedly entered into the agreement. However, in contrast to the Loan Agreement and the REM, the four Promissory Notes designated EPCIB as the lender. Petitioners also alleged that [17] instead of the prevailing interest rates of 8% to 10% annually, which the parties agreed upon, the [18] four Promissory Notes were set at the following interest rates: DATE 25 April 2001 18 January 2002 29 June 2001 19 September 2002 AMOUNT P1,200,000.00 P 800,000.00 P 800,000.00 P 800,000.00 INTEREST RATE 16% 14.0% 15% 9.0%
[15] [14]

- versus -

HONORABLE COURT OF APPEALS and EQUITABLE SAVINGS BANK , R es pondents. x---------------------------- ---------------------x DECISION CHICO-NAZARIO, J.:

AUSTRIA-MARTINEZ, J., Acting Chairperson, TINGA,* CHICO-NAZARIO, NACHURA, and REYES, JJ. Promulgated: March 28, 2008

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the [2] [1] Decision, dated 29 April 2005, thereafter, upheld in a Resolution dated 16 September 2005, both rendered by the Court of Appeals in CA-G.R. SP No. 85114. The Court of Appeals, in its assailed Decision, reversed the Order dated 3 March 2004 of Branch 215 of the Regional Trial Court (RTC) of Quezon City in Civil Case No. Q-03-51184, and denied the issuance of a Writ of Preliminary Injunction enjoining respondent Equitable Savings Bank (ESB) from executing the extra-judicial foreclosure of the mortgaged property owned by petitioners, Spouses Nestor and Nona Borromeo. Respondent is a domestic savings bank corporation with principal office and place of [3] business at EPCIB Tower 2, Makati Avenue, Salcedo Village, Makati City. At the time the dispute began, it was a subsidiary of Equitable PCI Bank (EPCIB), a domestic universal banking corporation with principal office at Makati Avenue, Salcedo Village,Makati City. After the merger of EPCIB [4] and Banco De Oro (BDO), they have adopted the corporate name Banco De Oro. Petitioners were client-depositors of EPCIB for more than 12 years. Petitioners alleged that sometime in mid-1999, the branch manager of EPCIB, J.P. Rizal Branch, offered a loan to the petitioners under its Own-a-Home Loan Program. Petitioners applied for a loan of P4,000,000.00 and were informed of the approval of their loan application sometime in October 1999. It was in the early part of 2000 that petitioners signed blank loan documents consisting of the Loan Agreement, [5] Promissory Notes, a Real Estate Mortgage (REM) and Disclosure Statements. To secure the payment of the loan, petitioners executed an REM over their land, registered under Transfer Certificate of Title (TCT) No. N-203923, located at Loyola Grand Villas, Quezon City, consisting of 303 square meters; and the proposed house that was to be built [6] thereon. Petitioners asserted that even if the loan documents were signed in blank, it was [7] understood that they executed the REM in favor of EPCIB. From April 2001 to September 2002, respondent released a total amount of P3,600,000.00 [8] in four installments, while the balance of P400,000.00 was not drawn by petitioners. On the other [9] hand, petitioners started to pay their monthly amortizations on 21 April 2001. Petitioners made repeated verbal requests to EPCIB to furnish them their copies of the [10] [11] loan documents. On 6 August 2003, they sent the president of EPCIB a letter which reiterated their request for copies of the loan documents. In addition, petitioners stated that the interest rate of 14% to 17% that was charged against them was more than the interest rate of 11% or 11.5% that the parties agreed upon. They further claimed that they purposely did not draw the remaining balance of the loan in the amount of P400,000.00 and stopped paying their loan amortizations to

When the petitioners failed to pay for the loan in full by 30 September 2003, respondent sought to extra-judicially foreclose the REM. Upon the respondents petition for foreclosure, the Office of the Ex-Officio Sheriff of Quezon City issued a Notice of Extrajudicial Sale dated 16 October [19] The Extrajudicial Sale was set to take 2003, wherein the mortgage debt was set atP5,114,601.00. place on 26 November 2003. On 14 November 2003, petitioners received Notice of Extrajudicial [20] Sale of their property. On 20 November 2003, petitioners filed with the RTC a Complaint for Injunction, Annulment of Mortgage with Damages and with Prayer for Temporary Restraining Order and Preliminary and Mandatory Injunction against EPCIB and respondent, docketed as Civil Case No. Q03-51184. In their Complaint, petitioners alleged that the loan documents failed to reflect the true agreement between the parties. Firstly, the agreement was between the petitioners and EPCIB and, consequently, respondent had no interest in the REM. Secondly, the interest rates reflected in the Promissory Notes were not the interest rates on which the parties had settled. They also averred in their Complaint that EPCIB committed a breach of contract when it failed to release the fifth and last [21] installment of the loan to petitioners. Petitioners sought to prevent the Extrajudicial Sale from taking place on 26 November 2003. Petitioners maintained that EPCIB acted in bad faith when it foreclosed the subject property simply because petitioners complained that the interest rates unilaterally imposed by EPCIB were excessive. It further averred that their deposit accounts with EPCIB were more than sufficient to pay [22] for the amortizations due on the housing loan.

The scheduled date for the Extrajudicial Foreclosure, namely, 26 November 2003, fell on the holiday Eid-el-Fitr, and as a result, it did not push through. In an Order dated5 December 2003, the RTC determined that there was no longer any need to issue a temporary restraining order (TRO) [23] and/or preliminary injunction. On 14 December 2003, respondent re-filed its petition for extrajudicial foreclosure of the REM. The Ex-Officio Sheriff of Quezon City set the auction sale on 14 January 2004. Petitioners reacted by filing with the RTC a Motion for Reconsideration of its Order dated 5 December 2003, again praying for the issuance of a TRO and/or preliminary injunction to forestall [24] the extrajudicial sale of their property scheduled for 14 January 2004. On 3 March 2004, the RTC granted petitioners motion for reconsideration and ordered the issuance of a preliminary injunction after declaring that the validity of the REM was yet to be determined. It found that petitioners were bound to suffer grave injustice if they were deprived of their property before the RTC could rule on the validity of the REM constituted on the same. On the other hand, it held that respondents interest was amply protected, since petitioners mortgaged property was valued at P12,000,000.00, which was more than sufficient to answer for petitioners obligation pegged at P4,097,261.00, and respondents REM over said property remained in effect. Moreover, petitioners posted a bond in the amount of P3,500,000.00 to cover their unpaid [25] [26] liabilities. In its Order dated 3 March 2004, the RTC ordered that : With all the foregoing disquisitions and finding merit in plaintiffs application, the same [is] hereby GRANTED. Let a writ of preliminary injunction issue upon plaintiffs posting of a bond in the amount of three million five hundred thousand (P3,500,000.00) pesos. Respondent filed a Motion for Reconsideration of the afore-quoted Order, which was denied for lack of merit by the RTC in an Order dated 29 April 2004. Thereafter, respondent filed on 14 July 2004 a Special Civil Action for Certiorari before the Court of Appeals, docketed as CA-G.R. SP No. 85114. During the proceedings before the Court of Appeals, petitioner presented a letter dated 19 December 2002, with supporting documents, written and compiled by EPCIB for Home Guaranty Corporation, wherein EPCIB included petitioners loan among its housing loans for which it sought [27] insurance coverage. In reversing the RTC Order dated 3 March 2004, the Court of Appeals decreed that pending the RTCs determination of the validity of the REM, its validity should be presumed. It further ruled that the intended foreclosure of the mortgage by respondent was a proper exercise of its right after petitioners admittedly stopped paying their loan amortizations. Moreover, it held that the foreclosure of the REM would not result in any grave and irreparable damage to the petitioners since petitioners, as mortgagors, may redeem the subject property or avail themselves of the [28] remedy of claiming damages or nullifying the sale. The dispositive portion of the Court of Appeals [29] Decision, dated 29 April 2005, reads: WHEREFORE, in view of the foregoing, the assailed Orders dated March 3, 2004 and April 29, 2004 issued by the Regional Trial Court of Quezon City, Branch 215 in Civil Case No. Q-03-51184 are hereby ANNULLED and SET ASIDE. Petitioners filed a Motion for Reconsideration of the foregoing Decision, which the Court of [30] Appeals denied in a Resolution dated 16 September 2005. Hence, the present Petition, in which the following issues are raised I
[31]

WHETHER OR NOT THE PRIVATE RESPONDENT SAVINGS BANK IS THE REAL PARTY-IN-INTEREST. II WHETHER OR NOT PETITIONERS ARE ENTITLED TO THE RELIEF DEMANDED, THAT THE FORECLOSURE AND PUBLIC AUCTION OF THE PROPERTY BELONGING TO PETITIONERS DURING THE LITIGATION PROCEEDINGS IN THE LOWER COURT WOULD PROBABLY WORK INJUSTICE TO THEM SUCH THAT THE JUDGMENT WHICH MAY BE ISSUED BY THE SAID COURT WILL BE RENDERED INEFFECTUAL BY SUCH FORECLOSURE AND PUBLIC AUCTION OF SAID PROPERTY. III WHETHER OR NOT THE LOWER COURT WAS CORRECT IN GRANTING THE WRIT OF PRELIMINARY INJUNCTION, ALL REQUISITES BEING PRESENT The petition is meritorious. The only issue that needs to be determined in this case is whether or not a writ of preliminary injunction should be issued to enjoin the foreclosure and public auction of petitioners property during the proceedings and pending determination of the main cause of action for annulment of the REM on said property. By no means is this a final determination of the merits of [32] the main case still before the RTC. Section 3, Rule 58 of the Rules of Court provides that: SEC. 3. Grounds for issuance of preliminary injunctions.A preliminary injunction may be granted when it is established: (a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in restraining the commission or continuance of the act or acts complained of, or in requiring the performance of an act or acts, either for a limited period or perpetually; (b) That the commission, continuance or non-performance of the act or acts complained of during the litigation would probably work injustice to the applicant; or (c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or suffering to be done, some act or acts probably in violation of the rights of the applicant respecting the subject of the action or proceeding, and tending to render the judgment ineffectual. As such, a writ of preliminary injunction may be issued only upon clear showing of an actual existing right to be protected during the pendency of the principal action. The twin requirements of a valid injunction are the existence of a right and its actual or threatened violations. Thus, to be entitled to an injunctive writ, the right to be protected and the violation against [33] that right must be shown. In this case, petitioners rights to their property is restricted by the REM they executed over it. Upon their default on the mortgage debt, the right to foreclose the property would be vested [34] Nevertheless, the right of foreclosure cannot be exercised against upon the creditor-mortgagee. the petitioners by any person other than the creditor-mortgagee or its assigns. According to the pertinent provisions of the Civil Code:

Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent. If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. (Emphasis ours.) An extrajudicial foreclosure instituted by a third party to the Loan Agreement and the REM would, therefore, be a violation of petitioners rights over their property. It is clear that under Article 1311 of the Civil Code, contracts take effect only between the [35] Where there is no privity of contract, there is likewise no obligation or parties who execute them. [36] liability to speak about. The civil law principle of relativity of contracts provides that contracts can only bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he is [37] Since a contract may be violated aware of such contract and has acted with knowledge thereof. only by the parties thereto as against each other, a party who has not taken part in it cannot sue for [38] performance, unless he shows that he has a real interest affected thereby. In the instant case, petitioners assert that their creditor-mortgagee is EPCIB and not respondent. While ESB claims that petitioners have had transactions with it, particularly the five check payments made in the name of ESB, it fails to categorically state that ESB and not EPCIB is the real creditor-mortgagor in this loan and mortgage transaction. This Court finds the position taken by the petitioners to be more credible. The four Promissory Notes designate EPCIB as the [39] In a letter dated 19 December 2002, addressed to Home Guaranty Corporation, EPCIB lender. Vice President Gary Vargas even specified petitioners loan as one of its housing loans for which it [40] sought insurance coverage. Records also show that petitioners repeatedly dealt with EPCIB. When the petitioners complained of not receiving the loan documents and the allegedly excessive [41] The interest charges, they addressed their letter dated 3 August 2003 to the president of EPCIB. response, which explained the loan transactions in detail in a letter dated 27 August 2003, was [42] Of almost three years amortizations, the checks written by Gary Vargas, EPCIB Vice President. were issued by petitioners in the name of EPCIB, except only for five checks which were issued in [43] respondents name. Respondent, although a wholly-owned subsidiary of EPCIB, has an independent and separate juridical personality from its parent company. The fact that a corporation owns all of the stocks of another corporation, taken alone, is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiarys separate existence shall be respected, and the liability of the parent corporation, as well as the subsidiary, shall be confined to those arising from their respective businesses. A corporation has a separate personality distinct from its [44] Any claim or suit of the parent stockholders and other corporations to which it may be conducted. corporation cannot be pursued by the subsidiary based solely on the reason that the former owns the majority or even the entire stock of the latter. From a perusal of the records, petitioners did not enter into a Loan Agreement and REM with respondent. Respondent, therefore, has no right to foreclose the subject property even after default, since this right can only be claimed by the creditor-mortgagor, EPCIB; and, consequently, the extrajudicial foreclosure of the REM by respondent would be in violation of petitioners property rights. This Court takes note of the fact that in several cases the Court denied the application for a Writ of Preliminary Injunction that would enjoin an extrajudicial foreclosure of a mortgage, and declared that foreclosure is proper when the debtors are in default of the payment of their obligation. Where the parties stipulated in their credit agreements, mortgage contracts and promissory notes that the mortgagee is authorized to foreclose the mortgaged properties in case of default by the mortgagors, the mortgagee has a clear right to foreclosure in case of default, making
[45]

the issuance of a Writ of Preliminary Injunction improper. However, the doctrine in these cases is not applicable to the case at bar where the identity of the creditor-mortgagor is highly disputable. This Court emphasizes that the determination of who is the creditor-mortgagee is only for purposes of determining the propriety of issuing a writ of preliminary injunction, based on the evidence presented before the hearing for the issuance of a preliminary injunction. It will not bar the RTC from making its own determination as to who is the true creditor-mortgagee after trial and presentation of evidence on the main case. To establish the essential requisites for a preliminary injunction, the evidence submitted by the plaintiff need not be conclusive and complete. The plaintiffs are only required to show that they have an ostensible right to the final relief prayed for in [46] In Urbanes, Jr. v. Court of Appeals, this Court expounded that: their complaint. A writ of preliminary injunction is generally based solely on initial and incomplete evidence. The evidence submitted during the hearing on an application for a writ of preliminary injunction is not conclusive or complete for only a sampling is needed to give the trial court an idea of the justification for the preliminary injunction pending the decision of the case on the merits. As such, the findings of fact and opinion of a court when issuing the writ of preliminary injunction are interlocutory in nature and made even before the trial on the merits is commenced or terminated. There are vital facts that have yet to be presented during the trial which may not be obtained or presented during the hearing on the application for the injunctive writ. The trial court needs to conduct substantial proceedings in order to put the main controversy to rest. It does not necessarily proceed that when a writ of preliminary injunction is issued, a final [47] injunction will follow. (Emphasis provided.) The extrajudicial foreclosure of the petitioners property pending the final determination by the RTC of their complaint for annulment of the REM and claim for damages would result in an injustice to the petitioners. If the RTC would subsequently declare that respondent was entitled to have petitioners property foreclosed, it may still foreclose the subject property which is valued [48] at P12,000,000.00, to answer for the debt which is estimated at P5,000,000.00, and further claim the P3,500,000.00 surety bond posted by petitioners with the RTC. On the other hand, if the RTC later finds that respondent is not the creditor-mortgagee and, therefore, the foreclosure of the property is invalid, petitioners would be placed in an oppressively unjust situation where they will be tied up in litigation for the recovery of their property while their debt to the real creditor-mortgagee, EPCIB, would remain unpaid and continue to accrue interest and other charges. The sole object of a preliminary injunction is to maintain the status quo until the merits can be heard. A preliminary injunction is an order granted at any stage of an action prior to judgment of final order, requiring a party, court, agency, or person to refrain from a particular act or acts. It is a preservative remedy to ensure the protection of a partys substantive rights or interests pending the final judgment on the principal action. A plea for an injunctive writ lies upon the existence of a claimed emergency or extraordinary situation which should be avoided for, otherwise, the outcome [49] of a litigation would be useless as far as the party applying for the writ is concerned. IN VIEW OF THE FOREGOING, the instant Petition is GRANTED. This Court REVERSES the assailed Decision dated 29 April 2005 of the Court of Appeals inCA-G.R. SP No. 85114, and REINSTATES the Order dated 3 March 2004 of Branch 215 of the Regional Trial Court of Quezon City in Civil Case No. Q-03-51184 ordering the issuance of a Writ of Preliminary Injunction. SO ORDERED.

G.R. No. 132196, December 9, 2005 SPOUSES SEGUNDO RAMOS AND FELISA VALDEZ, PETITIONERS, VS. HON. COURT OF APPEALS, LEILA VALDEZ-PASCUAL, ARACELI VALDEZ, GLICERIA VALDEZ, JUANA VALDEZ, SIMEON VALDEZ, CONRADA VALDEZ, SEVERINO VALDEZ, MARIO VALDEZ, ADORACION VALDEZ, JOSE VALDEZ, DIONISIA VALDEZ, DANILO VALDEZ, SERAPIO VALDEZ, HELEN VALDEZ, PERLA VALDEZ, AND DELIA VALDEZ, RESPONDENTS. DECISION Chico-Nazario, J.: This case presents a tangled tale involving the conflicting accounts of petitioners and private respondents over a piece of land sold by Gregorio Valdez (private respondents father) to petitioners in 1948 and which ostensibly became the subject of a compromise agreement in 1977. Through the instant Petition for Review on certiorari, spouses Segundo Ramos and Felisa Valdez seek the reversal of the Decision[1] of the Court of Appeals dated 31 July 1997 which reversed the Decision[2] of the Regional Trial Court (RTC), Branch 48, Urdaneta, Pangasinan. The RTC decision dismissed the case filed by private respondents for Quieting of Title, Ownership, Possession plus Damages with prayer for Writ of Preliminary Injunction and adjudged petitioners as the lawful owners of a piece of land, with an area of 3,036 square meters, and which forms part of a bigger tract of land covered by Original Certificate of Title (OCT) No. 48824 of the Registry of Deeds of the Province of Pangasinan in the name of Gregorio Valdez. Under review as well is the Court of Appeals Resolution[3] dated 08 December 1997 denying petitioners motion for reconsideration. Private respondents are the children[4] of Gregorio Valdez. In 1948, Gregorio Valdez sold the subject land to petitioners. The absolute deed of sale was subsequently annotated at the back of OCT No. 48824 as Entry No. 377847. It is the contention of private respondents that as early as 1977, petitioners no longer owned subject land as they had renounced their rights thereto as evidenced by a compromise agreement dated 02 June 1977. Sometime in 1991, Gregorio Valdez died. Private respondents allege that immediately after the death of their father, petitioners disturbed their possession of subject land by cultivating the same and by enclosing it with a fence. As petitioners did not heed their demands to vacate, they were constrained to file a case for Quieting of Title, Ownership, Possession plus Damages with prayer for Writ of Preliminary Injunction. Petitioners, in their Answer with Counterclaim, maintain that they remain owners of the subject land as the compromise agreement being relied upon by private respondents refers to another piece of land. Thus, they argue that the compromise agreement constitutes a cloud on their title. They prayed, among other things, for the quieting of their title and that they be adjudged lawful owners of the subject land. The trial court believed petitioners. It sided with petitioners by declaring them owners of the subject land by virtue of the absolute deed of sale dated 06 January 1948. The dispositive portion of its decision reads: WHEREFORE, premises considered, judgment is hereby rendered in favor of the defendants and against the plaintiffs and declaring the defendants to be the lawful owners of the land in question.[5] The Court of Appeals reversed the trial courts ruling. It held that the land renounced by petitioners was the subject land and that it was made in favor of Gregorio Valdez, thus: WHEREFORE, premises considered the decision appealed from is hereby REVERSED and SET ASIDE and another one entered declaring plaintiffs as owner of the land in question, and ordering defendants-appellees to vacate the same. With costs against defendants-appellees. Aggrieved by the aforecited ruling, and their motion for reconsideration having been denied by the Court of Appeals, petitioners assert before us that I. THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE TRIAL COURTS FINDINGS WHICH TOOK INTO ACCOUNT THE INTENTIONS OF THE PARTIES IN THE COMPROMISE AGREEMENT IN QUESTION BY CONSIDERING CIRCUMSTANCES PREVIOUS AND SIMULTANEOUS TO THE EXECUTION OF THE AGREEMENT. II. WHILE THE HONORABLE COURT OF APPEALS CORRECTLY STATED THE UNDERLYING REASONS BEHIND THE EXECUTION OF THE COMPROMISE AGREEMENT IN QUESTION, IT SERIOUSLY ERRED IN UPHOLDING THE VALIDITY OF THE COMPROMISE AGREEMENT WITH RESPECT TO A THIRD PERSON WHO WAS A STRANGER THERETO AND


INVOLVING A PARCEL OF LAND WHICH IS FOREIGN TO THE DISPUTE IN THE LAND REGISTRATION CASE THAT GAVE LIFE TO THE COMPROMISE AGREEMENT. III. THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE TRIAL COURTS DECISION FINDING NO LEGAL AND FACTUAL BASES TO UPHOLD THE VALIDITY OF THE ALLEGED RENUNCIATION OF PETITIONERS RIGHTS OVER THE NORTHERN PORTION OF THE TITLED LAND IN QUESTION INSTEAD OF THE INTENDED SOUTHERN PORTION OF AN UNTITILED LAND SUBJECT OF THE LRC.[6] In order to get to the bottom of this land dispute, the primary and most basic question that has to be asked is this: Is the absolute deed of sale dated 06 January 1948 between petitioners and private respondents predecessor-in-interest, Gregorio Valdez, annotated at the back of OCT No. 48824, a cloud on such title that has to be removed under the grounds stated in the Civil Code? Articles 476 and 478 of the Civil Code provide: Art. 476. Whenever there is a cloud on title to real property or any interest therein, by reason of any instrument, record, claim, encumbrance or proceeding which is apparently valid or effective but is in truth and in fact invalid, ineffective, voidable, or unenforceable, and may be prejudicial to said title, an action may be brought to remove such cloud or to quiet the title. An action may also be brought to prevent a cloud from being cast upon title to real property or any interest therein. Art. 478. There may also be an action to quiet title or remove a cloud therefrom when the contract, instrument or other obligation has been extinguished or has terminated, or has been barred by extinctive prescription. In herein case, private respondents, as plaintiffs in the case for quieting of title, allege that their fathers obligation under the deed of absolute sale has been extinguished or has been terminated by virtue of the compromise agreement dated 02 June 1977 whereby petitioners ostensibly renounced their rights over the subject property. Petitioners, on the other hand, claim that the same compromise agreement constitutes a cloud on their title. The Compromise Agreement[7] states: REPUBLIC OF THE PHILIPPINES COURT OF FIRST INSTANCE OF PANGASINAN THIRD JUDICIAL DISTRICT 9th Branch, Urdaneta SEGUNDO RAMOS, ET AL., Applicants. LAND REG. CASE No. U-843 LRC Rec. No. N-48993 - versus THE DIRECTOR OF LANDS, ET AL., Oppositors. x-x COMPROMISE AGREEMENT COME NOW, the parties in the above-entitled case duly assisted by their respective counsels and to this Honorable Court submit this compromise agreement, to wit: 1. That the oppositor Felipe Cabero hereby withdraw (sic) his opposition in the aboveentitled case; 2. That the applicants Segundo Ramos and Felisa Valdez hereby also quitclaim and renounce whatever rights in the document registered under entry No. 377847 annotated at the back of O.C.T. No. 48824 of Gregorio Valdez; 3. That the parties hereby waive any claim for and against the other. WHEREFORE, the parties should abide the foregoing compromise agreement and that each of them shall respect the right of the other. IN WITNESS WHEREOF, the parties duly assisted by their respective counsels set their hands this 2nd day of June, 1977, at Urdaneta, Pangasinan. SEGUNDO RAMOS FELISA VALDEZ Applicant Applicant FELIPE CABERO Oppositor ASSISTED BY: ATTY. ELISEO E. VERSOZA ATTY. NICANOR CALDITO Counsel for the Applicants Counsel for Oppositor Soconi, Bugallon, Pang. Pozorrubio, Pang.

To get a proper grip of the controversial compromise agreement, a narration of the circumstances surrounding its execution is in order. The compromise agreement was entered into between petitioners and a certain Felipe Cabero in connection with petitioners application for registration of a piece of untitled land adjacent to the subject land filed with the Court of First Instance of Pangasinan in LRC Case No. U-843. This untitled land was purchased by petitioners from a certain Alejandro Alcantara.[8] Apparently, Cabero was the actual occupant of the southern portion of this land, thus, he opposed petitioners application for registration. Petitioners explained that the southern portion occupied by Cabero was purchased by Cabero from Gregorio Valdez who sold it by mistake as he (Valdez) thought that the land he was selling was part of his titled land. Petitioners version To save himself from the quagmire he created, Gregorio Valdez entreated upon petitioners to give up the southern portion of their untitled land in exchange for Caberos withdrawal of his opposition to petitioners application for registration. Petitioners agreed. Thus, during the pendency of the land registration proceedings, petitioners and Cabero entered into a compromise agreement. The agreement was written in English. Its contents were not translated into Ilocano for petitioners but they did not mind as they were represented by their counsel. The signatories to the said agreement were petitioners, Cabero and their respective counsels. Petitioners, being unlettered, were not aware that the property they were renouncing under the compromise agreement was the subject property as, definitely, this was not their intention. Thus, they argued that the compromise agreement contained a false cause and that they gave their consent thereto by mistake. Private Respondents version The compromise agreement categorically states that the property being renounced is the subject property and that the same is made in favor of private respondents late father, Gregorio Valdez. Gregorio Valdez was a party to said compromise agreement as his signature is also affixed thereto. The decision of the trial court As articulated earlier, the trial court ruled in favor of herein petitioners. It held: After carefully perusing the records and the evidence adduced, this Court is left to resolve the issues agreed upon by the parties as indicated in the pre-trial order. However, before this Court could arrive at a proper solution of the issues, it is imperative to determine the true intentions of the parties in the controversial compromise agreement (Exh. B) by considering all the surrounding circumstances previous and simultaneous to the execution of the same. It is not disputed that the property in question with an area of 3,036 square metes on the northern portion of a parcel of land was owned by the plaintiffs late father Gregorio Valdez covered by TCT No. 48824 (Exh. A). Sometime in the year 1948, the late Gregorio Valdez sold the said property to defendant-spouses Segundo Ramos and Felisa Valdez. That sale was annotated at the back of said title as Entry No. 377847 (Exh. A-1). Defendant Segundo Ramos also bought an untitled land from Alejandro Alcantara in 1945 evidenced by a deed of absolute sale marked as Exhibit 6. When Segundo Ramos applied for registration of title of the said land, Felipe Cabero opposed the same. During the pendency of the land registration case, a compromise agreement (Exh. B) was concluded by the herein defendants as applicants and oppositor Felipe Cabero. The Court noted that the portion of land referred to in the said compromise agreement and to have been renounced allegedly is the northern portion. This is clear in the Entry No. 377847 (Exh. A-1). In contrast, what has been relinquished and renounced by Segundo Ramos was the southern portion of the same land being occupied, at that time, by Felipe Cabero. It appears therefore, that there is a different portion of land that was the real subject of renunciation other than that indicated in the compromise agreement. Hence, such agreement expresses wrong intentions of the parties. The mistake in the compromise agreement was recognized and admitted by plaintiff Lilia Valdez when she testified as rebuttal witness, to wit: Q. According to Segundo Ramos there was no consideration whatsoever in favor of your father Gregorio Valdez that the compromise agreement was executed, what can you say about that? A. That is not true sir. Q. What is the truth? A. That is not true sir actually the compromise agreement was made to correct a mistake which was committed because the deed of sale was executed covering the portion which was titled property when it should pertain to the untitled property of Gregorio Valdez. (TSN-Felix, 3-11-92, pp. 8-9) The renunciation of the southern portion by Segundo Ramos, as he claimed, is interrelated to the conflict of encroachment of ownership of the land between him and Felipe Cabero. It is

unthinkable and unusual for defendant-spouses to renounce the very portion of land they bought from late Gregorio Valdez to the latter without any consideration at all. Morever, a scrutiny of the compromise agreement reveals that the alleged renunciation was not expressly made in favor of Gregorio Valdez and worst of all, the latter was never a party in the registration case although his signature was affixed therein (Exh. B-1 and 1-a) without any designation, nor reference to the land registration case. If ever there was a renunciation, it should be in favor of Felipe Cabero because he was the oppositor, but he did not anymore pursue his opposition. In view of the foregoing findings, it could not be said that defendant-spouses did renounce the property in question which is the northern portion to late Gregorio Valdez from whom they bought it.[9] The Ruling of the Court of Appeals The reversal by the Court of Appeals of the afore-quoted decision was based on the following ratiocination, to wit: We agree with appellants contention that the identity of the land subject of the compromise agreement vis--vis that covered by the Deed of Sale executed between Gregorio Valdez and defendants-appellees is no longer open to question having been made the subject of pre-trial stipulation (Pre-Trial Order dated November 19, 1991, supra). Moreover, the evidence presented supports this contention. As can be seen from the decision dated 19 March 1979 of the Court of First Instance of Pangasinan in Land Registration Case No. U-843 Record No. N-48998 entitled Segundo Ramos, et al. vs. The Director of Lands, et al. (Exh. 3, Folder of Exhibits, pp. 15-17) only Felipe Cabero and the Director of Lands opposed defendants-appellees application for original registration. The subject of this land registration case was that parcel of land previously owned by Alejandro Alcantara, situated at Barrio Maambal, Municipality of Pozorrubio, Province of Pangasinan containing an area of 7,073 square meters, more or less, and more particularly described in Plan Psu-1-002310. As indicated in the aforesaid decision Felipe Cabero withdrew his opposition. The Decision however does not make any reference to the Compromise Agreement executed in the same case two (2) years before, on June 2, 1977 marked as Exhibit B (Folder of Exhibits, p. 2). In the Compromise Agreement (supra), the applicants in the land registration case, Segundo Ramos and Felisa Valdez had expressed their renunciation of their rights in the document registered under Entry No. 377847 annotated at the back of O.C.T. No. 48824 of Gregorio Valdez. This entry is a Deed of Absolute Sale (Exhibit 7) executed by Gregorio Valdez married to Maria Soriano in favor of Segundo Ramos married to Felisa Valdez, the subject of which is a parcel of land consisting of 3,036 square meters of the northern portion of the land covered by OCT No. 48824 (Exhibit A). It is manifest from the foregoing that while the land registration case covered that parcel of land purchased by appellees from Alejandro Alcantara, which was ultimately decreed in favor of appellees in the Decision of the LRC marked Exhibit 3; the Compromise Agreement wherein appellees declared their renunciation/quitclaim of their rights referred to another parcel of land consisting of 3,036 sq. m. that was the subject of a Deed of Absolute Sale executed by Gregorio Valdez that was a part of, hence annotated on OCT No. 48824 registered in Valdez name, which property had been earlier sold to the Spouses Ramos by Gregorio Valdez. The Spouses Ramos renounced their rights over the latter property in the Compromise Agreement marked as Exhibit B/1 to effect the withdrawal of the opposition of Felipe Cabero to their application for registration in the aforesaid LRC No. U-843 (TSN, February 17, 1992, pp. 9-11). Caberos opposition was predicated on his perceived ownership of the southern portion of the land which was formerly owned by Alejandro Alcantara that was the subject of the land registration proceedings. This southern portion adjoins another (untitled) property of Gregorio Valdez (Exhibit E, Folder of Exhibits p. 13). This had been mistakenly sold by Valdez to Cabero in the belief that it belonged to him (Valdez). When Valdez recognized his error, and by way of disentangling a conflict that he had caused, Valdez persuaded Ramos to renounce his rights over the 3,036 sq. m. portion of his titled property, and at the same time for Cabero to withdraw his opposition to the application by Spouses Ramos for the registration in their name of the entire lot formerly belonging to Alejandro Alcantara. Conceivably, Caberos withdrawal of his opposition along with his occupied southern portion of Alejandro Alcantaras property, was to be exchanged with the 3,036 sq. m. portion renounced by Spouses Ramos. In his testimony Segundo Ramos spoke of accommodating the entreaties of Gregorio Valdez whom he called his father in law (TSN, February 17, 1992, p. 11). As a consequence, applicants Spouses Segundo and Felisa Ramos in the LRC case, executed a Compromise Agreement with Felipe Cabero witnessed by Gregorio Valdez that was meant to renounce their (Ramos) claim or rights over that portion of the land which they had
 

purchased from Gregorio Valdez in exchange for the southern portion of the land that was being occupied by Felipe Cabero. To repeat, Felipe Cabero had occupied the southern portion by virtue of a deed of sale from Gregorio Valdez but Valdez actually had no right to sell this portion, it being owned by the adjoining owner Alejandro Alcantara. This is shown by the fact that although the Absolute Deed of Sale executed by Alejandro Alcantara in favor of Spouses Segundo Valdez conveyed only an area of 3,000 sq. m. (Exhibit 6, Folder of Exhibits, p. 37) the total area applied for and decreed by the Land Registration Court in LRC No. U-843 in favor of applicant Spouses Segundo Ramos (Exhibit 3, Folder of Exhibits, p. 15) had a total area of 7,073 sq. m. which fact was admitted by appellee Segundo Ramos on re-cross (TSN, March 11, 1992, p. 3). On this point, Natalia Alcantara dela Cruz, daughter of Alejandro Alcantara testified on rebuttal. ... As already stated, the LRC Decision dated 19 March 1979 (Exhibit 3) did not take cognizance of the Compromise Agreement dated 2 June 1977 although it noted that oppositor Felipe Cabero had withdrawn his opposition to the application of Spouses Ramos in the LRC case (Exhibits 3-a-1, Folder of Exhibits, p. 16). The simple explanation is that the Compromise Agreement referred to another parcel of land that was not the subject of the land registration case. In withdrawing his opposition, Felipe Cabero paved the way for Spouses Segundo Ramos to have the entire property of Alejandro Alcantara registered in their names, and not just the 3,000 sq. m. that was the subject of the deed of sale signed by Alcantara in their favor, marked Exhibit 6. Thus, Gregorio Valdez was able to effect the solution to the imbroglio he had caused by selling to Felipe Cabero land that did not belong to him but to the adjoining owner Alejandro Alcantara. This is shown by the testimony of Lilia Valdez. ... On the part of appellees, the loss of the 3,036 sq. m. portion was amply compensated by approximately 4,000 sq. m. of the southern portion that had been occupied by Felipe Cabero but which had been included in their land registration application. The evidence of the defendantsappellees shows that (b)ecause of his mistake, vendor Gregorio Valdez intervened and pleaded to appellees to just relinquish the area he mistakenly sold to Cabero who in exchange was to withdraw his opposition, hence the compromise agreement in question was drawn (TSN, February 17, 1999, p. 11; January 29 1992, pp. 8-10; Appellees Brief, p. 7). It is to be noted that Gregorio Valdez and Felipe Cabero were closely associated and even shared the same counsel Atty. Nicanor Caldito who notarized the Deed of Sale executed by Gregorio Valdez in favor of Segundo Ramos (Exhibits B/1 and 2; Folder of Exhibits, pp. 2 and 14) and who later appeared as counsel for oppositor Felipe Cabero in the land registration case. Although the withdrawal of opposition of Felipe Cabero along with his occupation of the southern portion was successfully effected by the Compromise Agreement, later events showed that Cabero was eventually removed from the picture of both parcels of land. Evidence shows that Gregorio Valdez continued to occupy the renounced portion until his death in 1991 (TSN, January 6, 1991, pp. 3-4; Pre-Trial Order, Record, p. 58). His occupation evidences his continued dominion and exercise of ownership over the entire land covered by OCT No. 48824.[10] To state the obvious, much ado has been made over the compromise agreement. After having reviewed the records of the case, however, it has become even more obvious that private respondents cannot assert any rights under said compromise agreement, thus, it cannot be used by them to defeat petitioners claim over the subject land. The compromise agreement, like any other contract, takes effect only between the parties, their assigns and heirs.[11] In herein case, the parties to the compromise agreement were petitioners and Felipe Cabero only as the same was executed by them in connection with LRC Case No. U-843 wherein petitioners were the applicants and Cabero the oppositor.[12] Gregorio Valdez, although he was very much interested in the compromise agreement as the same would solve the problem he created of selling to Cabero a piece of land not belonging to him, was not a party thereto. As correctly pointed out by petitioners, his signature might have appeared in the compromise agreement but it does not appear in what capacity he was signing. In juxtaposition, the compromise agreement expressly states in what capacity the other signatories were signing. Thus, typewritten in the agreement are the following entries: SEGUNDO RAMOS FELISA RAMOS Applicant Applicant FELIPE CABERO Oppositor ASSISTED BY:

ATTY. ELISEO E. VERSOZA ATTY. NICANOR CALDITO Counsel for the Applicants Counsel for Oppositor Soconi, Bugallon, Pang. Pozorrubio, Pang. The persons whose names were typewritten on the compromise agreement signed above their names. Gregorio Valdezs name, on the other hand, as well as the role he played in the execution of the document, was not typewritten on the document. His signature, however, appears on the same line as the phrase assisted by just above the signature of Atty. Caldito. Petitioner Segundo Ramos swears that he did not see Gregorio Valdez sign the document at the time of the execution of the same.[13] Witness for petitioners, Leonardo Quesora, who was present at the time of the execution of the compromise agreement, likewise testified that he did not see Gregorio Valdez sign.[14] Moreover, none of the private respondents or their witnesses testified as to having witnessed Gregorio Valdez sign the compromise agreement. It is axiomatic that a contract cannot be binding upon and cannot be enforced against one who is not a party to it, even if he is aware of such contract and has acted with knowledge thereof.[15] A person who is not a party to a compromise agreement cannot be affected by it.[16] This is already well-settled. Thus, in Young v. Court of Appeals[17] we stressed: The main issue in this case is whether or not petitioner can enforce a compromise agreement to which she was not a party. This issue has already been squarely settled by this Court in the negative in J.M. Tuason & Co., Inc. v. Cadampog (7 SCRA 808 [1963]) where it was ruled that appellant is not entitled to enforce a compromise agreement to which he was not a party and that as to its effect and scope, it has been determined in the sense that its effectivity if at all, is limited to the parties thereto and those mentioned in the exhibits (J.M. Tuason & Co., Inc. v. Aguirre, 7 SCRA 112 [1963]). It was reiterated later that a compromise agreement cannot bind persons who are not parties thereto (Guerrero v. C.A., 29 SCRA 791 [1969]). Consequently, Gregorio Valdez not being a party to the compromise agreement, his heirs (private respondents) cannot sue for its performance. Be that as it may, private respondents additionally harp on the reference to their father made in the body of the compromise agreement itself which they claim is proof of renunciation of subject land by petitioners in favor of their father, to wit: 2. That the applicants Segundo Ramos and Felisa Valdez hereby also quitclaim and renounce whatever rights in the document registered under entry No. 377847 annotated at the back of O.C.T. No. 48824 of Gregorio Valdez; Contrary to the position taken by private respondents, the reference to their father, Gregorio Valdez, seems to us to be a mere description of the land being renounced. Nothing in the compromise agreement would suggest that the renunciation of the subject land was to be made in Gregorio Valdezs favor. Verily, for this Court to interpret the stipulation as conferring some right to a third person (i.e., stipulation pour autrui), the following requisites must concur: 1. There must be a stipulation in favor of a third person; 2. The stipulation in favor of a third person should be a part, not the whole, of the contract; 3. The contracting parties must have clearly and deliberately conferred a favor upon a third person, not a mere incidental benefit or interest; 4. The third person must have communicated his acceptance to the obligor before its revocation; and 5. Neither of the contracting parties bears the legal representation or authorization of the third party.[18] To constitute a valid stipulation pour autrie, it must be the purpose and intent of the stipulating parties to benefit the third person, and it is not sufficient that the third person may be incidentally benefited by the stipulation.[19] In herein case, from the testimony of petitioner Segundo Ramos who is undoubtedly a party to the compromise agreement, and from the rest of the evidence on hand, any benefit which accrued to private respondents father was merely incidental. WHEREFORE, premises considered, the Decision of the Court of Appeals dated 31 July 1997 is REVERSED and SET ASIDE. The Decision of the Regional Trial Court of Urdaneta, Pangasinan, Branch 48, insofar as it dismissed the complaint filed by herein private respondents, is hereby AFFIRMED. No costs. SO ORDERED. Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.

STA. LUCIA REALTY & DEVELOPMENT, INC., Petitioner, - versus -

G.R. No. 177113 Present:

On June 16, 1998, the HLURBs Arbiter for the National Capital Region (NCR) Field Office issued a Decision the dispositive portion of which states: Wherefore, premises considered, judgment is hereby rendered as follows: 1. Directing respondent Sta. Lucia Realty and Development Corporation, Inc. to cause to be vacated complainants lot denominated as Lot No. 3, Block No. 4, Phase II, Greenwood Executive Village, Cainta, Rizal; 2. In the alternative, the aforesaid respondent is ordered to reimburse the complainant the current market value of the subdivision lot which shall in no case be less than P4,500.00 per square meter, the prevailing price in the area; 3. Directing the same respondent to pay complainant the following amount: a. b. c. 4. P100,000.00 as and by way of moral damages; P50,000.00 as and by way of exemplary damages; P50,000.00 as and by way of attorneys fees; While the third party complaint is dismissed for lack of merit.
[8]

[7]

SPOUSES FRANCISCO & EMELIA BUENAVENTURA, as represented by RICARDO SEGISMUNDO, Promulgated: Respondents. October 2, 2009 x ---------------------------------------------------------------------------------------- x DECISION YNARES-SANTIAGO, J.: Assailed is the December 21, 2006 Decision of the Court of Appeals in CA-G.R. SP No. [2] 81732, affirming the July 18, 2003 Decision of the Office of the President in O.P. Case No. 20-A[3] [4] 8937. Also assailed is the March 21, 2007 Resolution denying the Motion for Reconsideration. The facts are as follows: On January 16, 1996, respondent-spouses Francisco Segismundo and Emilia Buenaventura, represented by Ricardo Segismundo, filed before the Housing and Land Use Regulatory Board (HLRUB) a Complaint against petitioner Sta. Lucia Realty & Development, Inc. for [5] Specific Performance, Damages and Attorneys Fees. Respondents alleged that they bought a lot known as Lot 3, Block 4, Phase II at Greenwood Executive Village, Cainta, Rizal from Loida Gonzales Alfonso (Alfonso) on August 16, 1989; that the said lot is part of a subdivision project owned and being developed by petitioner; that in the course of the construction of their house, respondents discovered that their lot had been subdivided and occupied by Marilou Panlaque (Panlaque) and Ma. Veronica Banez (Banez); and that like respondents, the two occupants were also issued a construction permit by petitioner. Respondents thus demanded from petitioner the rightful possession of their lot; but to no avail. In its Answer, petitioner averred that respondents had no cause of action against it because it has no transaction record regarding Lot 3, Block 4, Phase II; that the said lot actually belonged to ACL Development Corporation, its joint-venture partner; that it was RCD Realty Corporation which caused the subdivision of the lot and constructed separate residential buildings thereon; that RCD Realty Corporations lot was actually Lot 3, Block 4, Phase II-A; and that respondents, in bad faith and in a retaliatory manner, erected their own house on Lot 4 which belonged to a different owner. Petitioner suggested that to remedy the situation, respondents, RCD Realty Corporation, and the real owner of Lot 4, should agree to a three-way exchange of their respective properties as it has been verified that the areas of their lots are the same. On September 1, 1997, petitioner filed a third-party complaint against ACL Development Corporation and RCD Realty Corporation. Petitioner prayed that in the event that it be adjudged liable for any of the claims of respondents, ACL Development Corporation and RCD Realty Corporation should be held jointly and severally liable for said claims or an amount equivalent thereto. ACL Development Corporation alleged that petitioner was responsible for the issuance of all construction permits on the subdivision project; hence, it was the one that caused the confusion among all parties. On the other hand, RCD Realty Corporation alleged that it was a builder in good faith; that it constructed the residential building on Lot 3, Block 4, Phase II upon issuance of a construction permit by petitioner.
[6] [1]

Ynares-Santiago, J. (Chairperson), Chico-Nazario, Velasco, Jr., Nachura, and Peralta, JJ.

SO ORDERED. The HLURB Arbiter found that while RCD Realty Corporation constructed a residential building on the wrong lot, such construction was allowed by petitioner as evidenced by the permit it issued. As the owner-developer of the subdivision project, petitioner knew the location of all lots therein and was tasked to properly enforce the restrictions it caused to be annotated on their corresponding certificates of title. The HLURB Arbiter thus concluded that it was petitioners neglect that ultimately led to the instant dispute. On June 24, 1999, the HLURB Board of Commissioners affirmed the Decision of the HLURB Arbiter with modification that the market value of the subject lot, stated in paragraph 2 of the dispositive portion, be reduced from P4,500.00 to P3,200.00 per square meter, plus 12% interest per annum from the time of the filing of the complaint. On July 18, 2003, the Office of the President issued a Decision affirming the June 24, 1999 Decision of the HLURB Board of Commissioners. Subsequently, it issued a [10] [11] Resolution dated November 28, 2003 denying petitioners Motion for Reconsideration. On December 21, 2006, the Court of Appeals affirmed the Decision of the Office of the President. The appellate court found that it was petitioner who caused the confusion in the identity of the lots by its issuance of a construction permit to RCD Realty Corporation; that petitioner was remiss and negligent in complying with its obligations towards its buyers, their heirs, assignees, and/or successors-in-interest when it failed to deliver the property described in respondents title. On March 21, 2007, the Court of Appeals denied petitioners Motion Reconsideration. Hence, this Petition for Review on Certiorari, raising the following issues: THE HONORABLE COURT OF APPEALS x x x COMMITTED SERIOUS REVERSIBLE ERROR IN AFFIRMING THAT PETITIONER STA. LUCIA IS LIABLE IN A COMPLAINT FOR SPECIFIC PERFORMANCE. THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS REVERSIBLE ERROR IN SUSTAINING THE AWARD OF REFUND WITH INTEREST, MORAL AND EXEMPLARY DAMAGES AS WELL AS [12] ATTORNEYS FEES TO RESPONDENTS-SPOUSES BUENAVENTURA. Petitioner alleges that it has no privity of contract with respondents as it did not directly sell the subject property to them; that it was RCD Realty Corporation which erroneously erected for
[9]

structures on Lot 3, Block 4, Phase II; that respondents are in bad faith for constructing their residential house on Lot 4, Block 4, Phase II despite knowledge that it belongs to another person; that respondents seller, Alfonso, should have been impleaded as an indispensable party to the instant case; that respondents should also have impleaded the present occupants of Lot 3, Block 4, Phase II as additional indispensable parties; and that the award of damages is without basis in fact and in law. The petition is without merit. Petitioner originally sold the subject lot to Alfonso, and the latter subsequently sold the same to herein respondents. As assignees or successors-in-interest of Alfonso to Lot 3, Block 4, Phase II in petitioners subdivision project, respondents succeed to what rights the former had; and what is valid and binding against Alfonso is also valid and binding as against them. In effect, respondents stepped into the shoes of Alfonso and such transfer of rights also vests upon them the power to claim ownership and the authority to demand to build a residential house on the lot to the same extent as Alfonso could have enforced them against petitioner. Article 1311 of the New Civil Code states that, contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. In this case, the rights and obligations between petitioner and Alfonso are transmissible. There was no mention of a contractual stipulation or provision of law that makes the rights and obligations under the original sales contract for Lot 3, Block 4, Phase II intransmissible. Hence, Alfonso can transfer her ownership over the said lot to respondents and petitioner is bound to honor its corresponding obligations to the transferee or new lot owner in its subdivision project. Having transferred all rights and obligations over Lot 3, Block 4, Phase II to respondents, Alfonso could no longer be considered as an indispensable party. An indispensable party is one who has such an interest in the controversy or subject matter that a final adjudication cannot be [13] made in his absence, without injuring or affecting that interest. Contrary to petitioners claim, Alfonso no longer has an interest on the subject matter or the present controversy, having already sold her rights and interests on Lot 3, Block 4, Phase II to herein respondents. We agree with the appellate courts finding that petitioner was remiss and negligent in the performance of its obligations towards its buyers, their heirs, assignees, and/or successors-ininterest; and that it was petitioners negligence which caused the confusion on the identity of the lot, which likewise resulted to the erroneous construction done by RCD Realty Corporation. Petitioner cannot pass the blame to RCD Realty Corporation because it is undisputed that it issued a construction permit for Lot 3, Block 4, Phase II the property of respondents. In its letter to petitioner, RCD Realty Corporation explained that it constructed a house on Lot 3, Block 4, Phase II based on the following: a. Construction Permit and Certificate of Relocation issued by petitioners engineering department; b. The agent who sold the property pointed the lot in Phase II and not in Phase II-A. RCD Realty Corporation further stated that it had no reason to doubt its claim over the lot in Phase II, especially since petitioner never warned them of any inadvertent switching of lots. For its gross negligence which resulted to the erroneous construction on Lot 3, Block 4, Phase II and caused respondents undue damage and prejudice, petitioner is rightfully adjudged by the HLURB Arbiter liable for P100,000.00 moral damages, P50,0000.00 exemplary damages, and P50,000.00 attorneys fees. Although respondents prayed for specific performance to place them in possession of Lot 3, Block 4, Phase II, the actual occupants therein were not impleaded. As correctly pointed out by the HLURB Arbiter, the situation created an impossibility to grant the prayer of respondents despite


their ownership of the subject property and the finding that petitioner was the cause of the inadvertent switching of lots. We agree with the ruling of the HLURB Arbiter that it will be more equitable and [14] practicable to rescind the obligation of petitioner to deliver possession of Lot 3, Block 4, Phase II to respondents; and in exchange, pay the value of the lot by way of reimbursement in accordance with the price modification stated by the HLURB Board of Commissioners. Moreover, this ruling comes within the purview of respondents final prayer for other reliefs, just or equitable under the premises and they are evidently in accord with such outcome as they did not appeal the case or insist on claiming back their lot. However, we find that the applicable interest rate for the amount to be reimbursed to respondents is 6% per annum, reckoned from the time of the filing of the complaint, because the case at bar involves a breach of obligation and not a loan or forbearance of money. In Eastern [15] Shipping Lines Inc. v. Court of Appeals, we explained that: 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. 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 can be 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 [16] equivalent to a forbearance of credit. Moreover, pursuant to the above rules, in case the judgment remains unsatisfied after it becomes final and executory, the interest rate shall be 12% per annum from the finality of the judgment until the amount awarded is fully paid. As regards respondents alleged construction of a house on Lot 4, Block 4, Phase II, the records of the case are bereft of evidence for this Court to make a judgment on the matter. Nevertheless, our ruling in the present case will not affect in any way whatever action petitioner and/or the owner of the said lot would file against respondents. WHEREFORE, the Petition for Review on Certiorari is PARTIALLY GRANTED. The assailed Decision of the Court of Appeals in CA-G.R. SP No. 81732, affirming the July 18, 2003 Decision of the Office of the President in O.P. Case No. 20-A-8937, and the Resolution denying the motion for reconsideration are AFFIRMED with MODIFICATION that the applicable interest rate for the amount to be reimbursed to respondents is 6% per annum, computed from the time of the filing of respondents complaint, and 12% per annum from the finality of the judgment until the amount awarded is fully paid. SO ORDERED.