Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-32055 February 26, 1988

REYNALDO BERMUDEZ, SR., and, ADONITA YABUT BERMUDEZ petitioners-appellants,

vs.
HON. JUDGE A. MELENCIO-HERRERA, DOMINGO PONTINO y TACORDA and CORDOVA NG
SUN KWAN,respondents-appellees.

YAP, J.:

This is a direct appeal on pure questions of law from the Order of March 10, 1970 of the Honorable
Judge (now Supreme Court Justice) Ameurfina Melencio-Herrera of the defunct Court of First
Instance of Manila, Branch XVII, dismissing plaintiffs-appellants' complaint in Civil Case No. 77188
entitled "Reynaldo Bermudez, Sr. and Adonita Yabut Bermudez, plaintiffs, versus Domingo Pontino y
Tacorda and Cordova Ng Sun Kwan, defendants," and from the Order of May 7, 1970 denying
plaintiffs-appellants' Motion for Reconsideration.

The background facts of the case are as follows:

A cargo truck, driven by Domingo Pontino and owned by Cordova Ng Sun Kwan, bumped a jeep on
which Rogelio, a six-year old son of plaintiffs-appellants, was riding. The boy sustained injuries
which caused his death. As a result, Criminal Case No.92944 for Homicide Through Reckless
Imprudence was filed against Domingo Pontino by the Manila City Fiscal's Office. Plaintiffs-
appellants filed on July 27,1969 in the said criminal case "A Reservation to File Separate Civil
Action."

On July 28,1969, the plaintiffs-appellants filed a civil case for damages with the Court of First
Instance of Manila docketed as Civil Case No. 77188, entitled "Reynaldo Bermudez, Sr. et al.,
Plaintiffs vs. Domingo Pontino y Tacorda and Cordova Ng Sun Kwan, Defendants." Finding that the
plaintiffs instituted the action "on the assumption that defendant Pontino's negligence in the accident
of May 10, 1969 constituted a quasi-delict," the trial court stated that plaintiffs had already elected to
treat the accident as a "crime" by reserving in the criminal case their right to file a separate civil
action. That being so, the trial court decided to order the dismissal of the complaint against
defendant Cordova Ng Sun Kwan and to suspend the hearing of the case against Domingo Pontino
until after the criminal case for Homicide Through Reckless Imprudence is finally terminated. From
said order, plaintiffs filed the present appeal, stating as their main reasons the following:

I. The main issue brought before this Honorable Court is whether the present action
is based on quasi-delict under the Civil Code and therefore could proceed
independently of the criminal case for homicide thru reckless imprudence.

II. The second question of law is whether the lower court could properly suspend the
hearing of the civil action against Domingo Pontino and dismiss the civil case against
his employer Cordova Ng Sun Kwan by reason of the fact that a criminal case for
 homicide thru reckless imprudence is pending in the lower court against Domingo
Pontino

III. The last question of law is whether the suspension of the civil action against
Domingo Pontino and the dismissal of the civil case against his employer Cordova
Ng Sun Kwan by reason of the pending criminal case against Domingo Pontino for
homicide thru reckless imprudence in the lower court could be validly done
considering that the civil case against said defendants-appellees also sought to
recover actual damages to the jeep of plaintiffs-appellants."

We find the appeal meritorious.

The heart of the issue involved in the present case is whether the civil action filed by the plaintiffs-
appellants is founded on crime or on quasi-delict. The trial court treated the case as an action based
on a crime in view of the reservation made by the offended party in the criminal case (Criminal Case
No. 92944), also pending before the court, to file a separate civil action. Said the trial court:

It would appear that plaintiffs instituted this action on the assumption that defendant
Pontino's negligence in the accident of May 10, l969 constituted a quasi-delict. The
Court cannot accept the validity of that assumption. In Criminal Case No. 92944 of
this Court, plaintiffs had already appeared as complainants. While that case was
pending, the offended parties reserved the right to institute a separate civil action. If,
in a criminal case, the right to file a separate civil action for damages is reserved,
such civil action is to be based on crime and not on tort. That was the ruling in
Joaquin vs. Aniceto, L-18719, Oct. 31, 1964."

We do not agree. The doctrine in the case cited by the trial court is inapplicable to the instant case.
In Joaquin vs. Aniceto, the Court held:

The issue in this case is: May an employee's primary civil liability for crime and his
employer's subsidiary liability therefor be proved in a separate civil action even while
the criminal case against the employee is still pending?

To begin with, obligations arise from law, contract, quasi-contract, crime and quasi-
delict. According to appellant, her action is one to enforce the civil liability arising
from crime. With respect to obligations arising from crimes, Article 1161 of the New
Civil Code provides:

Civil obligations arising from criminal offenses shall be governed by

the penal laws, subject to the provisions of article 21 77, and of the
pertinent provisions of Chapter 2, Preliminary, Title, on Human
Relations, and of Title XVIII of this book, regulating damages.

xxx xxx xxx

It is now settled that for an employer to be subsidiarily liable, the following requisites
must be present: (1) that an employee has committed a crime in the discharge of his
duties; (2) that said employee is insolvent and has not satisfied his civil liability; (3)
that the employer is engaged in some kind of industry. (1 Padilla, Criminal Law,
Revised Penal Code 794 [1964])
 Without the conviction of the employee, the employer cannot be subsidiarily liable.

In cases of negligence, the injured party or his heirs has the choice between an action to enforce the
civil liability arising from crime under Article 100 of the Revised Penal Code and an action for quasi-
delict under Article 2176-2194 of the Civil Code. If a party chooses the latter, he may hold the
employer solidarity liable for the negligent act of his employee, subject to the employer's defense of
exercise of the diligence of a good father of the family.

In the case at bar, the action filed b appellant was an action for damages based on quasi-
delict. 1 The fact that appellants reserved their right in the criminal case to file an independent civil action
did not preclude them from choosing to file a civil action for quasi-delict.

The appellants invoke the provisions of Sections 1 and 2 of Rule 111 of the Rules of Court, which
provide:

Section 1. Institution of criminal and civil action. When a criminal action is

instituted, the civil action for recovery of civil liability arising from the offense charged
is impliedly instituted with the criminal action, unless the offended party expressly
waives the civil action or reserves his right to institute it separately.

Section 2. Independent civil action.-In the cases provided for in Articles 31, 32, 33,
34 and 2177 of the Civil Code of the Philippines, an independent civil action entirely
separate and distinct from the criminal action, may be brought by the injured party
during the pendency of the criminal case,provided the right is reserved as required in
the preceding section. Such civil action shall proceed independently of the criminal
prosecution, and shall require only a preponderance of evidence.

Article 2177 of the Civil Code, cited in Section 2, of Rule 111, provides that

Article 2177. Responsibility for fault or negligence under the preceding article is
entirely separate and distinct from the civil liability arising from negligence under the
Penal Code. But the plaintiff cannot recover damages twice for the same act or
omission of the defendant.

The appellant precisely made a reservation to file an independent civil action in accordance with the
provisions of Section 2 of Rule 111, Rules of Court. In fact, even without such a reservation, we
have allowed the injured party in the criminal 1 case which resulted in the acquittal of the accused to
recover damages based on quasi-delict. In People vs. Ligon, G.R. No. 74041, we held:

However, it does not follow that a person who is not criminally liable is also free from
civil liability. While the guilt of the accused in a criminal prosecution must be
established beyond reasonable doubt, only a preponderance of evidence is required
in a civil action for damages (Article 29, Civil Code). The judgment of acquittal
extinguishes the civil liability of the accused only when it includes a declaration that
the facts from which the civil liability might arise did not exist (Padilla vs. Court of
Appeals, 129 SCRA 559).

WHEREFORE, we grant the petition and annul and set aside the appealed orders of the trial court,
dated March 10, 1970 and May 7, 1970, and remand the case for further proceedings. No costs.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 73345. April 7, 1993.

SOCIAL SECURITY SYSTEM, petitioner,

vs.
MOONWALK DEVELOPMENT & HOUSING CORPORATION, ROSITA U. ALBERTO, ROSITA U.
ALBERTO, JMA HOUSE, INC., MILAGROS SANCHEZ SANTIAGO, in her capacity as Register of
Deeds for the Province of Cavite, ARTURO SOLITO, in his capacity as Register of Deeds for Metro
Manila District IV, Makati, Metro Manila and the INTERMEDIATE APPELLATE COURT,
respondents.

The Solicitor General for petitioner.

K.V. Faylona & Associates for private respondents.

DECISION

CAMPOS, JR., J p:

Before Us is a petition for review on certiorari of decision 1 of the then Intermediate Appellate Court
affirming in toto the decision of the former Court of First Instance of Rizal, Seventh Judicial District,
Branch XXIX, Pasay City.

The facts as found by the Appellate Court are as follows:

"On February 20, 1980, the Social Security System, SSS for brevity, filed a complaint in the Court of
First Instance of Rizal against Moonwalk Development & Housing Corporation, Moonwalk for short,
alleging that the former had committed an error in failing to compute the 12% interest due on
delayed payments on the loan of Moonwalk resulting in a chain of errors in the application of
payments made by Moonwalk and, in an unpaid balance on the principal loan agreement in the
amount of P7,053.77 and, also in not reflecting in its statement or account an unpaid balance on the
said penalties for delayed payments in the amount of P7,517,178.21 as of October 10, 1979.

Moonwalk answered denying SSS' claims and asserting that SSS had the opportunity to ascertain
the truth but failed to do so.

The trial court set the case for pre-trial at which pre-trial conference, the court issued an order giving
both parties thirty (30) days within which to submit a stipulation of facts.

The Order of October 6, 1980 dismissing the complaint followed the submission by the parties on
September 19, 1980 of the following stipulation of Facts:
"1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for an interim loan
in the amount of THIRTY MILLION PESOS (P30,000,000.00) for the purpose of developing and
constructing a housing project in the provinces of Rizal and Cavite;

"2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum of
P9,595,000.00 was released to defendant Moonwalk as of November 28, 1973;

"3. A third Amended Deed of First Mortgage was executed on December 18, 1973 Annex `D'
providing for restructuring of the payment of the released amount of P9,595,000.00.

"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter respectively, under
paragraph 5 of the aforesaid Third Amended Deed of First Mortgage substituted Associated
Construction and Surveys Corporation, Philippine Model Homes Development Corporation, Mariano
Z. Velarde and Eusebio T. Ramos, as solidary obligors;

"5. On July 23, 1974, after considering additional releases in the amount of P2,659,700.00, made to
defendant Moonwalk, defendant Moonwalk delivered to the plaintiff a promissory note for TWELVE
MILLION TWO HUNDRED FIFTY FOUR THOUSAND SEVEN HUNDRED PESOS
(P12,254,700.00) Annex `E', signed by Eusebio T. Ramos, and the said Rosita U. Alberto and Rosita
U. Alberto;

"6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal of
P12,254,700.00 released to it. The last payment made by Moonwalk in the amount of
P15,004,905.74 were based on the Statement of Account, Annex "F" prepared by plaintiff SSS for
defendant;

"7. After settlement of the account stated in Annex 'F' plaintiff issued to defendant Moonwalk the
Release of Mortgage for Moonwalk's mortgaged properties in Cavite and Rizal, Annexes 'G' and 'H'
on October 9, 1979 and October 11, 1979 respectively.

"8. In letters to defendant Moonwalk, dated November 28, 1979 and followed up by another letter
dated December 17, 1979, plaintiff alleged that it committed an honest mistake in releasing
defendant.

"9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had completely paid
its obligations to SSS;

"10. The genuineness and due execution of the documents marked as Annex (sic) 'A' to 'O'
inclusive, of the Complaint and the letter dated December 21, 1979 of the defendant's counsel to the
plaintiff are admitted.

"Manila for Pasay City, September 2, 1980." 2

On October 6, 1990, the trial court issued an order dismissing the complaint on the ground that the
obligation was already extinguished by the payment by Moonwalk of its indebtedness to SSS and by
the latter's act of cancelling the real estate mortgages executed in its favor by defendant Moonwalk.
The Motion for Reconsideration filed by SSS with the trial court was likewise dismissed by the latter.

These orders were appealed to the Intermediate Appellate Court. Respondent Court reduced the
errors assigned by the SSS into this issue: ". . . are defendants-appellees, namely, Moonwalk
Development and Housing Corporation, Rosita U. Alberto, Rosita U. Alberto, JMA House, Inc. still
liable for the unpaid penalties as claimed by plaintiff-appellant or is their obligation extinguished?" 3
As We have stated earlier, the respondent Court held that Moonwalk's obligation was extinguished
and affirmed the trial court.

Hence, this Petition wherein SSS raises the following grounds for review:

"First, in concluding that the penalties due from Moonwalk are "deemed waived and/or barred," the
appellate court disregarded the basic tenet that waiver of a right must be express, made in a clear
and unequivocal manner. There is no evidence in the case at bar to show that SSS made a clear,
positive waiver of the penalties, made with full knowledge of the circumstances.

Second, it misconstrued the ruling that SSS funds are trust funds, and SSS, being a mere trustee,
cannot perform acts affecting the same, including condonation of penalties, that would diminish
property rights of the owners and beneficiaries thereof. (United Christian Missionary Society v.
Social Security Commission, 30 SCRA 982, 988 [1969]).

Third, it ignored the fact that penalty at the rate of 12% p.a. is not inequitable.

Fourth, it ignored the principle that equity will cancel a release on the ground of mistake of fact." 4

The same problem which confronted the respondent court is presented before Us: Is the penalty
demandable even after the extinguishment of the principal obligation?

The former Intermediate Appellate Court, through Justice Eduard P. Caguioa, held in the negative. It
reasoned, thus:

"2. As we have explained under No. 1, contrary to what the plaintiff-appellant states in its Brief, what
is sought to be recovered in this case is not the 12% interest on the loan but the 12% penalty for
failure to pay on time the amortization. What is sought to be enforced therefore is the penal clause of
the contract entered into between the parties.

Now, what is a penal clause. A penal clause has been defined as

"an accessory obligation which the parties attach to a principal obligation for the purpose of insuring
the performance thereof by imposing on the debtor a special presentation (generally consisting in
the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or inadequately
fulfilled" (3 Castan 8th Ed. p. 118).

Now an accessory obligation has been defined as that attached to a principal obligation in order to
complete the same or take its place in the case of breach (4 Puig Pea Part 1 p. 76). Note therefore
that an accessory obligation is dependent for its existence on the existence of a principal obligation.
A principal obligation may exist without an accessory obligation but an accessory obligation cannot
exist without a principal obligation. For example, the contract of mortgage is an accessory obligation
to enforce the performance of the main obligation of indebtedness. An indebtedness can exist
without the mortgage but a mortgage cannot exist without the indebtedness, which is the principal
obligation. In the present case, the principal obligation is the loan between the parties. The
accessory obligation of a penal clause is to enforce the main obligation of payment of the loan. If
therefore the principal obligation does not exist the penalty being accessory cannot exist.

Now then when is the penalty demandable? A penalty is demandable in case of non performance or
late performance of the main obligation. In other words in order that the penalty may arise there
must be a breach of the obligation either by total or partial non fulfillment or there is non fulfillment in
point of time which is called mora or delay. The debtor therefore violates the obligation in point of
time if there is mora or delay. Now, there is no mora or delay unless there is a demand. It is
noteworthy that in the present case during all the period when the principal obligation was still
subsisting, although there were late amortizations there was no demand made by the creditor,
plaintiff-appellant for the payment of the penalty. Therefore up to the time of the letter of plaintiff-
appellant there was no demand for the payment of the penalty, hence the debtor was no in mora in
the payment of the penalty.

However, on October 1, 1979, plaintiff-appellant issued its statement of account (Exhibit F) showing
the total obligation of Moonwalk as P15,004,905.74, and forthwith demanded payment from
defendant-appellee. Because of the demand for payment, Moonwalk made several payments on
September 29, October 9 and 19, 1979 respectively, all in all totalling P15,004,905.74 which was a
complete payment of its obligation as stated in Exhibit F. Because of this payment the obligation of
Moonwalk was considered extinguished, and pursuant to said extinguishment, the real estate
mortgages given by Moonwalk were released on October 9, 1979 and October 10, 1979 (Exhibits G
and H). For all purposes therefore the principal obligation of defendant-appellee was deemed
extinguished as well as the accessory obligation of real estate mortgage; and that is the reason for
the release of all the Real Estate Mortgages on October 9 and 10, 1979 respectively.

Now, besides the Real Estate Mortgages, the penal clause which is also an accessory obligation
must also be deemed extinguished considering that the principal obligation was considered
extinguished, and the penal clause being an accessory obligation. That being the case, the demand
for payment of the penal clause made by plaintiff-appellant in its demand letter dated November 28,
1979 and its follow up letter dated December 17, 1979 (which parenthetically are the only demands
for payment of the penalties) are therefore ineffective as there was nothing to demand. It would be
otherwise, if the demand for the payment of the penalty was made prior to the extinguishment of the
obligation because then the obligation of Moonwalk would consist of: 1) the principal obligation 2)
the interest of 12% on the principal obligation and 3) the penalty of 12% for late payment for after
demand, Moonwalk would be in mora and therefore liable for the penalty.

Let it be emphasized that at the time of the demand made in the letters of November 28, 1979 and
December 17, 1979 as far as the penalty is concerned, the defendant-appellee was not in default
since there was no mora prior to the demand. That being the case, therefore, the demand made
after the extinguishment of the principal obligation which carried with it the extinguishment of the
penal clause being merely an accessory obligation, was an exercise in futility.

3. At the time of the payment made of the full obligation on October 10, 1979 together with the 12%
interest by defendant-appellee Moonwalk, its obligation was extinguished. It being extinguished,
there was no more need for the penal clause. Now, it is to be noted that penalty at anytime can be
modified by the Court. Even substantial performance under Art. 1234 authorizes the Court to
consider it as complete performance minus damages. Now, Art, 1229 Civil Code of the Philippines
provides:

"ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or unconscionable."

If the penalty can be reduced after the principal obligation has been partly or irregularly complied
with by the debtor, which is nonetheless a breach of the obligation, with more reason the penal
clause is not demandable when full obligation has been complied with since in that case there is no
breach of the obligation. In the present case, there has been as yet no demand for payment of the
penalty at the time of the extinguishment of the obligation, hence there was likewise an
extinguishment of the penalty.

Let Us emphasize that the obligation of defendant-appellee was fully complied with by the debtor,
that is, the amount loaned together with the 12% interest has been fully paid by the appellee. That
being so, there is no basis for demanding the penal clause since the obligation has been
extinguished. Here there has been a waiver of the penal clause as it was not demanded before the
full obligation was fully paid and extinguished. Again, emphasis must be made on the fact that
plaintiff-appellant has not lost anything under the contract since in got back in full the amount loan
(sic) as well as the interest thereof. The same thing would have happened if the obligation was paid
on time, for then the penal clause, under the terms of the contract would not apply. Payment of the
penalty does not mean gain or loss of plaintiff-appellant since it is merely for the purpose of
enforcing the performance of the main obligation has been fully complied with and extinguished, the
penal clause has lost its raison d' entre." 5

We find no reason to depart from the appellate court's decision. We, however, advance the following
reasons for the denial of this petition.

Article 1226 of the Civil Code provides:

"Art. 1226. In obligations with a penal clause, he penalty shall substitute the indemnity for damages
and the payment of interests in case of noncompliance, if there is no stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in
the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this
Code." (Emphasis Ours.)

A penal clause is an accessory undertaking to assume greater liability in case of breach. 6 It has a
double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the
obligation by the threat of greater responsibility in the event of breach. 7 From the foregoing, it is
clear that a penal clause is intended to prevent the obligor from defaulting in the performance of his
obligation. Thus, if there should be default, the penalty may be enforced. One commentator of the
Civil Code wrote:

"Now when is the penalty deemed demandable in accordance with the provisions of the Civil Code?
We must make a distinction between a positive and a negative obligation. With regard to obligations
which are positive (to give and to do), the penalty is demandable when the debtor is in mora; hence,
the necessity of demand by the debtor unless the same is excused . . ." 8

When does delay arise? Under the Civil Code, delay begins from the time the obligee judicially or
extrajudicially demands from the obligor the performance of the obligation.

"Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation."

There are only three instances when demand is not necessary to render the obligor in default. These
are the following:

"(1) When the obligation or the law expressly so declares;

(2) When from the nature and the circumstances of the obligation it appears that the designation of
the time when the thing is to be delivered or the service is to be rendered was a controlling motive
for the establishment of the contract; or

(3) When the demand would be useless, as when the obligor has rendered it beyond his power to
perform." 9

This case does not fall within any of the established exceptions. Hence, despite the provision in the
promissory note that "(a)ll amortization payments shall be made every first five (5) days of the
calendar month until the principal and interest on the loan or any portion thereof actually released
has been fully paid," 10 petitioner is not excused from making a demand. It has been established
that at the time of payment of the full obligation, private respondent Moonwalk has long been
delinquent in meeting its monthly arrears and in paying the full amount of the loan itself as the
obligation matured sometime in January, 1977. But mere delinquency in payment does not
necessarily mean delay in the legal concept. To be in default ". . . is different from mere delay in the
grammatical sense, because it involves the beginning of a special condition or status which has its
own peculiar effects or results." 11 In order that the debtor may be in default it is necessary that the
following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that
the debtor delays performance; and (3) that the creditor requires the performance judicially and
extrajudicially. 12 Default generally begins from the moment the creditor demands the performance
of the obligation. 13

Nowhere in this case did it appear that SSS demanded from Moonwalk the payment of its monthly
amortizations. Neither did it show that petitioner demanded the payment of the stipulated penalty
upon the failure of Moonwalk to meet its monthly amortization. What the complaint itself showed was
that SSS tried to enforce the obligation sometime in September, 1977 by foreclosing the real estate
mortgages executed by Moonwalk in favor of SSS. But this foreclosure did not push through upon
Moonwalk's requests and promises to pay in full. The next demand for payment happened on
October 1, 1979 when SSS issued a Statement of Account to Moonwalk. And in accordance with
said statement, Moonwalk paid its loan in full. What is clear, therefore, is that Moonwalk was never
in default because SSS never compelled performance. Though it tried to foreclose the mortgages,
SSS itself desisted from doing so upon the entreaties of Moonwalk. If the Statement of Account
could properly be considered as demand for payment, the demand was complied with on time.
Hence, no delay occurred and there was, therefore, no occasion when the penalty became
demandable and enforceable. Since there was no default in the performance of the main obligation
payment of the loan SSS was never entitled to recover any penalty, not at the time it made the
Statement of Account and certainly, not after the extinguishment of the principal obligation because
then, all the more that SSS had no reason to ask for the penalties. Thus, there could never be any
occasion for waiver or even mistake in the application for payment because there was nothing for
SSS to waive as its right to enforce the penalty did not arise.

SSS, however, in buttressing its claim that it never waived the penalties, argued that the funds it held
were trust funds and as trustee, the petitioner could not perform acts affecting the funds that would
diminish property rights of the owners and beneficiaries thereof. To support its claim, SSS cited the
case of United Christian Missionary Society v. Social Security Commission. 14

We looked into the case and found out that it is not applicable to the present case as it dealt not with
the right of the SSS to collect penalties which were provided for in contracts which it entered into but
with its right to collect premiums and its duty to collect the penalty for delayed payment or non-
payment of premiums. The Supreme Court, in that case, stated:
"No discretion or alternative is granted respondent Commission in the enforcement of the law's
mandate that the employer who fails to comply with his legal obligation to remit the premiums to the
System within the prescribed period shall pay a penalty of three (3%) per month. The prescribed
penalty is evidently of a punitive character, provided by the legislature to assure that employers do
not take lightly the State's exercise of the police power in the implementation of the Republic's
declared policy "to develop, establish gradually and perfect a social security system which shall be
suitable to the needs of the people throughout the Philippines and (to) provide protection to
employers against the hazards of disability, sickness, old age and death . . ."

Thus, We agree with the decision of the respondent court on the matter which We quote, to wit:

"Note that the above case refers to the condonation of the penalty for the non remittance of the
premium which is provided for by Section 22(a) of the Social Security Act . . . In other words, what
was sought to be condoned was the penalty provided for by law for non remittance of premium for
coverage under the Social Security Act.

The case at bar does not refer to any penalty provided for by law nor does it refer to the non
remittance of premium. The case at bar refers to a contract of loan entered into between plaintiff and
defendant Moonwalk Development and Housing Corporation. Note, therefore, that no provision of
law is involved in this case, nor is there any penalty imposed by law nor a case about non-remittance
of premium required by law. The present case refers to a contract of loan payable in installments not
provided for by law but by agreement of the parties. Therefore, the ratio decidendi of the case of
United Christian Missionary Society vs. Social Security Commission which plaintiff-appellant relies is
not applicable in this case; clearly, the Social Security Commission, which is a creature of the Social
Security Act cannot condone a mandatory provision of law providing for the payment of premiums
and for penalties for non remittance. The life of the Social Security Act is in the premiums because
these are the funds from which the Social Security Act gets the money for its purposes and the non-
remittance of the premiums is penalized not by the Social Security Commission but by law.

xxx xxx xxx

It is admitted that when a government created corporation enters into a contract with private party
concerning a loan, it descends to the level of a private person. Hence, the rules on contract
applicable to private parties are applicable to it. The argument therefore that the Social Security
Commission cannot waive or condone the penalties which was applied in the United Christian
Missionary Society cannot apply in this case. First, because what was not paid were installments on
a loan but premiums required by law to be paid by the parties covered by the Social Security Act.
Secondly, what is sought to be condoned or waived are penalties not imposed by law for failure to
remit premiums required by law, but a penalty for non payment provided for by the agreement of the
parties in the contract between them . . ." 15

WHEREFORE, in view of the foregoing, the petition is DISMISSED and the decision of the
respondent court is AFFIRMED. LLpr

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

G.R. No. 181206 October 9, 2009

MEGAWORLD GLOBUS ASIA, INC., Petitioner,
vs.
MILA S. TANSECO, Respondent.

DECISION

CARPIO MORALES, J.:

On July 7, 1995, petitioner Megaworld Globus Asia, Inc. (Megaworld) and respondent Mila S.
Tanseco (Tanseco) entered into a Contract to Buy and Sell1 a 224 square-meter (more or less)
condominium unit at a pre-selling project, "The Salcedo Park," located along Senator Gil Puyat
Avenue, Makati City.

The purchase price was P16,802,037.32, to be paid as follows: (1) 30% less the reservation fee
of P100,000, orP4,940,611.19, by postdated check payable on July 14, 1995; (2) P9,241,120.50
through 30 equal monthly installments of P308,037.35 from August 14, 1995 to January 14, 1998;
and (3) the balance of P2,520,305.63 on October 31, 1998, the stipulated delivery date of the unit;
provided that if the construction is completed earlier, Tanseco would pay the balance within seven
days from receipt of a notice of turnover.

Section 4 of the Contract to Buy and Sell provided for the construction schedule as follows:

4. CONSTRUCTION SCHEDULE The construction of the Project and the unit/s herein
purchased shall be completed and delivered not later than October 31, 1998 with additional grace
period of six (6) months within which to complete the Project and the unit/s, barring delays due to
fire, earthquakes, the elements, acts of God, war, civil disturbances, strikes or other labor
disturbances, government and economic controls making it, among others, impossible or difficult to
obtain the necessary materials, acts of third person, or any other cause or conditions beyond the
control of the SELLER. In this event, the completion and delivery of the unit are deemed extended
accordingly without liability on the part of the SELLER. The foregoing notwithstanding, the SELLER
reserves the right to withdraw from this transaction and refund to the BUYER without interest the
amounts received from him under this contract if for any reason not attributable to SELLER, such as
but not limited to fire, storms, floods, earthquakes, rebellion, insurrection, wars, coup de etat, civil
disturbances or for other reasons beyond its control, the Project may not be completed or it can only
be completed at a financial loss to the SELLER. In any event, all construction on or of the Project
shall remain the property of the SELLER. (Underscoring supplied)

Tanseco paid all installments due up to January, 1998, leaving unpaid the balance of P2,520,305.63
pending delivery of the unit.2 Megaworld, however, failed to deliver the unit within the stipulated
period on October 31, 1998 or April 30, 1999, the last day of the six-month grace period.

A few days shy of three years later, Megaworld, by notice dated April 23, 2002 (notice of turnover),
informed Tanseco that the unit was ready for inspection preparatory to delivery.3 Tanseco replied
through counsel, by letter of May 6, 2002, that in view of Megaworlds failure to deliver the unit on
time, she was demanding the return of P14,281,731.70 representing the total installment payment
she had made, with interest at 12% per annum from April 30, 1999, the expiration of the six-month
grace period. Tanseco pointed out that none of the excepted causes of delay existed.4

Her demand having been unheeded, Tanseco filed on June 5, 2002 with the Housing and Land Use
Regulatory Boards (HLURB) Expanded National Capital Region Field Office a complaint against
Megaworld for rescission of contract, refund of payment, and damages.5
In its Answer, Megaworld attributed the delay to the 1997 Asian financial crisis which was beyond its
control; and argued that default had not set in, Tanseco not having made any judicial or extrajudicial
demand for delivery before receipt of the notice of turnover.6

By Decision of May 28, 2003,7 the HLURB Arbiter dismissed Tansecos complaint for lack of cause
of action, finding that Megaworld had effected delivery by the notice of turnover before Tanseco
made a demand. Tanseco was thereupon ordered to pay Megaworld the balance of the purchase
price, plus P25,000 as moral damages, P25,000 as exemplary damages, and P25,000 as attorneys
fees.

On appeal by Tanseco, the HLURB Board of Commissioners, by Decision of November 28,

2003,8 sustained the HLURB Arbiters Decision on the ground of laches for failure to demand
rescission when the right thereto accrued. It deleted the award of damages, however. Tansecos
Motion for Reconsideration having been denied,9 she appealed to the Office of the President which
dismissed the appeal by Decision of April 28, 200610 for failure to show that the findings of the
HLURB were tainted with grave abuse of discretion. Her Motion for Reconsideration having been
denied by Resolution dated August 30, 2006,11 Tanseco filed a Petition for Review under Rule 43
with the Court of Appeals.12

By Decision of September 28, 2007,13 the appellate court granted Tansecos petition, disposing thus:

WHEREFORE, premises considered, petition is hereby GRANTED and the assailed May 28, 2003
decision of the HLURB Field Office, the November 28, 2003 decision of the HLURB Board of
Commissioners in HLURB Case No. REM-A-030711-0162, the April 28, 2006 Decision and August
30, 2006 Resolution of the Office of the President in O.P. Case No. 05-I-318, are
hereby REVERSED and SET ASIDE and a new one entered: (1)RESCINDING, as prayed for by
TANSECO, the aggrieved party, the contract to buy and sell; (2) DIRECTINGMEGAWORLD TO
PAY TANSECO the amount she had paid totaling P14,281,731.70 with Twelve (12%) Percent
interest per annum from October 31, 1998; (3) ORDERING MEGAWORLD TO
PAY TANSECO P200,000.00 by way of exemplary damages; (4) ORDERING MEGAWORLD TO
PAY TANSECO P200,000.00 as attorneys fees; and (5) ORDERING MEGAWORLD TO
PAY TANSECO the cost of suit. (Emphasis in the original; underscoring supplied)

The appellate court held that under Article 1169 of the Civil Code, no judicial or extrajudicial demand
is needed to put the obligor in default if the contract, as in the herein parties contract, states the date
when the obligation should be performed; that time was of the essence because Tanseco relied on
Megaworlds promise of timely delivery when she agreed to part with her money; that the delay
should be reckoned from October 31, 1998, there being no force majeure to warrant the application
of the April 30, 1999 alternative date; and that specific performance could not be ordered in lieu of
rescission as the right to choose the remedy belongs to the aggrieved party.

The appellate court awarded Tanseco exemplary damages on a finding of bad faith on the part of
Megaworld in forcing her to accept its long-delayed delivery; and attorneys fees, she having been
compelled to sue to protect her rights.

Its Motion for Reconsideration having been denied by Resolution of January 8, 2008,14 Megaworld
filed the present Petition for Review on Certiorari, echoing its position before the HLURB, adding that
Tanseco had not shown any basis for the award of damages and attorneys fees.15

Tanseco, on the other hand, maintained her position too, and citing Megaworlds bad faith which
became evident when it insisted on making the delivery despite the long delay,16 insisted that she
deserved the award of damages and attorneys fees.
Article 1169 of the Civil Code provides:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declares; or

(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be rendered was
a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power
to perform.

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. From the moment one of the parties
fulfills his obligation, delay by the other begins. (Underscoring supplied)

The Contract to Buy and Sell of the parties contains reciprocal obligations, i.e., to complete and
deliver the condominium unit on October 31, 1998 or six months thereafter on the part of Megaworld,
and to pay the balance of the purchase price at or about the time of delivery on the part of Tanseco.
Compliance by Megaworld with its obligation is determinative of compliance by Tanseco with her
obligation to pay the balance of the purchase price. Megaworld having failed to comply with its
obligation under the contract, it is liable therefor.17

That Megaworlds sending of a notice of turnover preceded Tansecos demand for refund does not
abate her cause. For demand would have been useless, Megaworld admittedly having failed in its
obligation to deliver the unit on the agreed date.

Article 1174 of the Civil Code provides:

Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be
responsible for those events which could not be foreseen, or which, though foreseen, were
inevitable.18

The Court cannot generalize the 1997 Asian financial crisis to be unforeseeable and beyond the
control of a business corporation. A real estate enterprise engaged in the pre-selling of condominium
units is concededly a master in projections on commodities and currency movements, as well as
business risks. The fluctuating movement of the Philippine peso in the foreign exchange market is
an everyday occurrence, hence, not an instance of caso fortuito.19 Megaworlds excuse for its delay
does not thus lie.

As for Megaworlds argument that Tansecos claim is considered barred by laches on account of her
belated demand, it does not lie too. Laches is a creation of equity and its application is controlled by
equitable considerations.20 It bears noting that Tanseco religiously paid all the installments due up to
January, 1998, whereas Megaworld reneged on its obligation to deliver within the stipulated period.
A circumspect weighing of equitable considerations thus tilts the scale of justice in favor of Tanseco.
Pursuant to Section 23 of Presidential Decree No. 95721 which reads:

Sec. 23. Non-Forfeiture of Payments. - No installment payment made by a buyer in a subdivision or

condominium project for the lot or unit he contracted to buy shall be forfeited in favor of the owner or
developer when the buyer, after due notice to the owner or developer, desists from further payment
due to the failure of the owner or developer to develop the subdivision or condominium project
according to the approved plans and within the time limit for complying with the same.
Such buyer may, at his option, be reimbursed the totalamount paid including amortization interests b
ut excluding delinquency interests, with interest thereon at thelegal rate. (Emphasis and
underscoring supplied),

Tanseco is, as thus prayed for, entitled to be reimbursed the total amount she paid Megaworld.

While the appellate court correctly awarded P14,281,731.70 then, the interest rate should, however,
be 6% per annum accruing from the date of demand on May 6, 2002, and then 12% per annum from
the time this judgment becomes final and executory, conformably with Eastern Shipping Lines, Inc.
v. Court of Appeals.22

The award of P200,000 attorneys fees and of costs of suit is in order too, the parties having
stipulated in the Contract to Buy and Sell that these shall be borne by the losing party in a suit based
thereon,23 not to mention that Tanseco was compelled to retain the services of counsel to protect her
interest. And so is the award of exemplary damages. With pre-selling ventures mushrooming in the
metropolis, there is an increasing need to correct the insidious practice of real estate companies of
proffering all sorts of empty promises to entice innocent buyers and ensure the profitability of their
projects.

The Court finds the appellate courts award of P200,000 as exemplary damages excessive,
however. Exemplary damages are imposed not to enrich one party or impoverish another but to
serve as a deterrent against or as a negative incentive to curb socially deleterious actions.24 The
Court finds that P100,000 is reasonable in this case.

Finally, since Article 119125 of the Civil Code does not apply to a contract to buy and sell, the
suspensive condition of full payment of the purchase price not having occurred to trigger the
obligation to convey title,cancellation, not rescission, of the contract is thus the correct remedy in the
premises.26

WHEREFORE, the challenged Decision of the Court of Appeals is, in light of the foregoing,
AFFIRMED with MODIFICATION.

As modified, the dispositive portion of the Decision reads:

The July 7, 1995 Contract to Buy and Sell between the parties is cancelled. Petitioner, Megaworld
Globus Asia, Inc., is directed to pay respondent, Mila S. Tanseco, the amount of P14,281,731.70, to
bear 6% interest per annum starting May 6, 2002 and 12% interest per annum from the time the
judgment becomes final and executory; and to pay P200,000 attorneys fees, P100,000 exemplary
damages, and costs of suit.

Costs against petitioner.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 73867 February 29, 1988

TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner,

vs.
IGNACIO CASTRO, SR., SOFIA C. CROUCH, IGNACIO CASTRO JR., AURORA CASTRO,
SALVADOR CASTRO, MARIO CASTRO, CONRADO CASTRO, ESMERALDA C. FLORO,
AGERICO CASTRO, ROLANDO CASTRO, VIRGILIO CASTRO AND GLORIA CASTRO, and
HONORABLE INTERMEDIATE APPELLATE COURT,respondents.

PADILLA, J.:

Petition for review on certiorari of the decision * of the Intermediate Appellate Court, dated 11 February 1986, in AC-G.R.
No. CV-70245, entitled "Ignacio Castro, Sr., et al., Plaintiffs-Appellees, versus Telefast Communication/Philippine Wireless, Inc., Defendant-
Appellant."

The facts of the case are as follows:

On 2 November 1956, Consolacion Bravo-Castro wife of plaintiff Ignacio Castro, Sr. and mother of
the other plaintiffs, passed away in Lingayen, Pangasinan. On the same day, her daughter Sofia C.
Crouch, who was then vacationing in the Philippines, addressed a telegram to plaintiff Ignacio
Castro, Sr. at 685 Wanda, Scottsburg, Indiana, U.S.A., 47170 announcing Consolacion's death. The
telegram was accepted by the defendant in its Dagupan office, for transmission, after payment of the
required fees or charges.

The telegram never reached its addressee. Consolacion was interred with only her daughter Sofia in
attendance. Neither the husband nor any of the other children of the deceased, then all residing in
the United States, returned for the burial.

When Sofia returned to the United States, she discovered that the wire she had caused the
defendant to send, had not been received. She and the other plaintiffs thereupon brought action for
damages arising from defendant's breach of contract. The case was filed in the Court of First
Instance of Pangasinan and docketed therein as Civil Case No. 15356. The only defense of the
defendant was that it was unable to transmit the telegram because of "technical and atmospheric
factors beyond its control." 1 No evidence appears on record that defendant ever made any attempt to
advise the plaintiff Sofia C. Crouch as to why it could not transmit the telegram.

The Court of First Instance of Pangasinan, after trial, ordered the defendant (now petitioner) to pay
the plaintiffs (now private respondents) damages, as follows, with interest at 6% per annum:

1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and

P20,000.00 as moral damages.

2. Ignacio Castro Sr., P20,000.00 as moral damages.

 3. Ignacio Castro Jr., P20,000.00 as moral damages.

4. Aurora Castro, P10,000.00 moral damages.

5. Salvador Castro, P10,000.00 moral damages.

6. Mario Castro, P10,000.00 moral damages.

7. Conrado Castro, P10,000 moral damages.

8. Esmeralda C. Floro, P20,000.00 moral damages.

9. Agerico Castro, P10,000.00 moral damages.

10. Rolando Castro, P10,000.00 moral damages.

11. Virgilio Castro, P10,000.00 moral damages.

12. Gloria Castro, P10,000.00 moral damages.

Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in the amount of
P1,000.00 to each of the plaintiffs and costs. 2

On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's decision but
eliminated the award of P16,000.00 as compensatory damages to Sofia C. Crouch and the award of
P1,000.00 to each of the private respondents as exemplary damages. The award of P20,000.00 as
moral damages to each of Sofia C. Crouch, Ignacio Castro, Jr. and Esmeralda C. Floro was also
reduced to P120,000. 00 for each. 3

Petitioner appeals from the judgment of the appellate court, contending that the award of moral
damages should be eliminated as defendant's negligent act was not motivated by "fraud, malice or
recklessness."

In other words, under petitioner's theory, it can only be held liable for P 31.92, the fee or charges
paid by Sofia C. Crouch for the telegram that was never sent to the addressee thereof.

Petitioner's contention is without merit.

Art. 1170 of the Civil Code provides that "those who in the performance of their obligations are guilty
of fraud, negligence or delay, and those who in any manner contravene the tenor thereof, are liable
for damages." Art. 2176 also provides that "whoever by act or omission causes damage to another,
there being fault or negligence, is obliged to pay for the damage done."

In the case at bar, petitioner and private respondent Sofia C. Crouch entered into a contract
whereby, for a fee, petitioner undertook to send said private respondent's message overseas by
telegram. This, petitioner did not do, despite performance by said private respondent of her
obligation by paying the required charges. Petitioner was therefore guilty of contravening its
obligation to said private respondent and is thus liable for damages.
This liability is not limited to actual or quantified damages. To sustain petitioner's contrary position in
this regard would result in an inequitous situation where petitioner will only be held liable for the
actual cost of a telegram fixed thirty (30) years ago.

We find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral damages include
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation,
moral damages may be recovered if they are the proximate results of the defendant's wrongful act or
omission." (Emphasis supplied).

Here, petitioner's act or omission, which amounted to gross negligence, was precisely the cause of
the suffering private respondents had to undergo.

As the appellate court properly observed:

[Who] can seriously dispute the shock, the mental anguish and the sorrow that the
overseas children must have suffered upon learning of the death of their mother after
she had already been interred, without being given the opportunity to even make a
choice on whether they wanted to pay her their last respects? There is no doubt that
these emotional sufferings were proximately caused by appellant's omission and
substantive law provides for the justification for the award of moral damages. 4

We also sustain the trial court's award of P16,000.00 as compensatory damages to Sofia C. Crouch
representing the expenses she incurred when she came to the Philippines from the United States to
testify before the trial court. Had petitioner not been remiss in performing its obligation, there would
have been no need for this suit or for Mrs. Crouch's testimony.

The award of exemplary damages by the trial court is likewise justified and, therefore, sustained in
the amount of P1,000.00 for each of the private respondents, as a warning to all telegram
companies to observe due diligence in transmitting the messages of their customers.

WHEREFORE, the petition is DENIED. The decision appealed from is modified so that petitioner is
held liable to private respondents in the following amounts:

(1) P10,000.00 as moral damages, to each of private respondents;

(2) P1,000.00 as exemplary damages, to each of private respondents;

(3) P16,000.00 as compensatory damages, to private respondent Sofia C. Crouch;

(4) P5,000.00 as attorney's fees; and

(5) Costs of suit.

SO ORDERED.

Yap (Chairman), Paras and Sarmiento, JJ., concur.

Separate Opinions

MELENCIO-HERRERA, J., concurring.

[I] concur.In addition to compensatory and exemplary damages, moral damages are recoverable in
actions for breach of contract, as in this case, where the breach has been wanton and reckless,
tantamount to bad faith.

Separate Opinions

MELENCIO-HERRERA, J., concurring.

[I] concur.In addition to compensatory and exemplary damages, moral damages are recoverable in
actions for breach of contract, as in this case, where the breach has been wanton and reckless,
tantamount to bad faith.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 92244 February 9, 1993

NATIVIDAD GEMPESAW, petitioner,

vs.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.

L.B. Camins for petitioner.

Angara, Abello, Concepcion, Regals & Cruz for private respondent

CAMPOS, JR., J.:

From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), petitioner, Natividad
Gempesaw, appealed to this Court in a Petition for Review, on the issue of the right of the drawer to
recover from the drawee bank who pays a check with a forged indorsement of the payee, debiting
the same against the drawer's account.

The records show that on January 23, 1985, petitioner filed a Complaint against the private
respondent Philippine Bank of Communications (respondent drawee Bank) for recovery of the
money value of eighty-two (82) checks charged against the petitioner's account with the respondent
drawee Bank on the ground that the payees' indorsements were forgeries. The Regional Trial Court,
Branch CXXVIII of Caloocan City, which tried the case, rendered a decision on November 17, 1987
dismissing the complaint as well as the respondent drawee Bank's counterclaim. On appeal, the
Court of Appeals in a decision rendered on February 22, 1990, affirmed the decision of the RTC on
two grounds, namely (1) that the plaintiff's (petitioner herein) gross negligence in issuing the checks
was the proximate cause of the loss and (2) assuming that the bank was also negligent, the loss
must nevertheless be borne by the party whose negligence was the proximate cause of the loss. On
March 5, 1990, the petitioner filed this petition under Rule 45 of the Rules of Court setting forth the
following as the alleged errors of the respondent Court: 1

THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE

NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE OF THE
RESULTING INJURY TO THE DRAWEE BANK, AND THE DRAWER IS
PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF AUTHORITY.

II

THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND

RULING THAT IT IS THE GROSS AND INEXCUSABLE NEGLIGENCE AND
FRAUDULENT ACTS OF THE OFFICIALS AND EMPLOYEES OF THE
RESPONDENT BANK IN FORGING THE SIGNATURE OF THE PAYEES AND THE
WRONG AND/OR ILLEGAL PAYMENTS MADE TO PERSONS, OTHER THAN TO
THE INTENDED PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND
PROXIMATE CAUSE OF THE DAMAGE TO PETITIONER WHOSE SAVING (SIC)
ACCOUNT WAS DEBITED.

III

THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING

THE RESPONDENT BANK TO RESTORE OR RE-CREDIT THE CHECKING
ACCOUNT OF THE PETITIONER IN THE CALOOCAN CITY BRANCH BY THE
VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH IS IN THE AMOUNT OF
P1,208,606.89 WITH LEGAL INTEREST.

From the records, the relevant facts are as follows:

Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located at
Rizal Avenue Extension and at Second Avenue, Caloocan City. Among these groceries are D.G.
Shopper's Mart and D.G. Whole Sale Mart. Petitioner maintains a checking account numbered 13-
00038-1 with the Caloocan City Branch of the respondent drawee Bank. To facilitate payment of
debts to her suppliers, petitioner draws checks against her checking account with the respondent
bank as drawee. Her customary practice of issuing checks in payment of her suppliers was as
follows: the checks were prepared and filled up as to all material particulars by her trusted
bookkeeper, Alicia Galang, an employee for more than eight (8) years. After the bookkeeper
prepared the checks, the completed checks were submitted to the petitioner for her signature,
together with the corresponding invoice receipts which indicate the correct obligations due and
payable to her suppliers. Petitioner signed each and every check without bothering to verify the
accuracy of the checks against the corresponding invoices because she reposed full and implicit
trust and confidence on her bookkeeper. The issuance and delivery of the checks to the payees
named therein were left to the bookkeeper. Petitioner admitted that she did not make any verification
as to whether or not the checks were delivered to their respective payees. Although the respondent
drawee Bank notified her of all checks presented to and paid by the bank, petitioner did not verify he
correctness of the returned checks, much less check if the payees actually received the checks in
payment for the supplies she received. In the course of her business operations covering a period of
two years, petitioner issued, following her usual practice stated above, a total of eighty-two (82)
checks in favor of several suppliers. These checks were all presented by the indorsees as holders
thereof to, and honored by, the respondent drawee Bank. Respondent drawee Bank correspondingly
debited the amounts thereof against petitioner's checking account numbered 30-00038-1. Most of
the aforementioned checks were for amounts in excess of her actual obligations to the various
payees as shown in their corresponding invoices. To mention a few:

. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in
favor of Kawsek Inc. (Exh. A-60), appellant's actual obligation to said payee was only
P895.33 (Exh. A-83); (2) in Check No. 652282 issued on September 18, 1984 in
favor of Senson Enterprises in the amount of P11,041.20 (Exh. A-67) appellant's
actual obligation to said payee was only P1,041.20 (Exh. 7); (3) in Check No. 589092
dated April 7, 1984 for the amount of P11,672.47 in favor of Marchem (Exh. A-61)
appellant's obligation was only P1,672.47 (Exh. B); (4) in Check No. 620450 dated
May 10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-31) her actual obligation
was only P677.10 (Exhs. C and C-1); (5) in Check No. 651862 dated August 9, 1984
in favor of Malinta Exchange Mart for P11,107.16 (Exh. A-62), her obligation was
only P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated August 11, 1984 in favor
of Grocer's International Food Corp. in the amount of P11,335.60 (Exh. A-66), her
obligation was only P1,335.60 (Exh. E and E-1); (7) in Check No. 589019 dated
March 17, 1984 in favor of Sophy Products in the amount of P11,648.00 (Exh. A-78),
her obligation was only P648.00 (Exh. G); (8) in Check No. 589028 dated March 10,
1984 for the amount of P11,520.00 in favor of the Yakult Philippines (Exh. A-73), the
latter's invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033 dated May 23,
1984 in the amount of P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-34),
her obligation was only P504.00 (Exhs. I-1 and I-2). 2

Practically, all the checks issued and honored by the respondent drawee bank were crossed
checks. 3 Aside from the daily notice given to the petitioner by the respondent drawee Bank, the latter
also furnished her with a monthly statement of her transactions, attaching thereto all the cancelled checks
she had issued and which were debited against her current account. It was only after the lapse of more
two (2) years that petitioner found out about the fraudulent manipulations of her bookkeeper.

All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L. Boon,
Chief Accountant of respondent drawee Bank at the Buendia branch, who, without authority therefor,
accepted them all for deposit at the Buendia branch to the credit and/or in the accounts of Alfredo Y.
Romero and Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y. Romero. Sixty-three
(63) out of the eighty-two (82) checks were deposited in Savings Account No. 00844-5 of Alfredo Y.
Romero at the respondent drawee Bank's Buendia branch, and four (4) checks in his Savings
Account No. 32-81-9 at its Ongpin branch. The rest of the checks were deposited in Account No.
0443-4, under the name of Benito Lam at the Elcao branch of the respondent drawee Bank.

About thirty (30) of the payees whose names were specifically written on the checks testified that
they did not receive nor even see the subject checks and that the indorsements appearing at the
back of the checks were not theirs.

The team of auditors from the main office of the respondent drawee Bank which conducted periodic
inspection of the branches' operations failed to discover, check or stop the unauthorized acts of
Ernest L. Boon. Under the rules of the respondent drawee Bank, only a Branch Manager and no
other official of the respondent drawee bank, may accept a second indorsement on a check for
deposit. In the case at bar, all the deposit slips of the eighty-two (82) checks in question were
initialed and/or approved for deposit by Ernest L. Boon. The Branch Managers of the Ongpin and
Elcao branches accepted the deposits made in the Buendia branch and credited the accounts of
Alfredo Y. Romero and Benito Lam in their respective branches.

On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit her
account with the money value of the eighty-two (82) checks totalling P1,208.606.89 for having been
wrongfully charged against her account. Respondent drawee Bank refused to grant petitioner's
demand. On January 23, 1985, petitioner filed the complaint with the Regional Trial Court.

This is not a suit by the party whose signature was forged on a check drawn against the drawee
bank. The payees are not parties to the case. Rather, it is the drawer, whose signature is genuine,
who instituted this action to recover from the drawee bank the money value of eighty-two (82)
checks paid out by the drawee bank to holders of those checks where the indorsements of the
payees were forged. How and by whom the forgeries were committed are not established on the
record, but the respective payees admitted that they did not receive those checks and therefore
never indorsed the same. The applicable law is the Negotiable Instruments Law 4(heretofore referred
to as the NIL). Section 23 of the NIL provides:

When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from setting up the
forgery or want of authority.

Under the aforecited provision, forgery is a real or absolute defense by the party whose
signature is forged. A party whose signature to an instrument was forged was never a party
and never gave his consent to the contract which gave rise to the instrument. Since his
signature does not appear in the instrument, he cannot be held liable thereon by anyone, not
even by a holder in due course. Thus, if a person's signature is forged as a maker of a
promissory note, he cannot be made to pay because he never made the promise to pay. Or
where a person's signature as a drawer of a check is forged, the drawee bank cannot charge
the amount thereof against the drawer's account because he never gave the bank the order
to pay. And said section does not refer only to the forged signature of the maker of a
promissory note and of the drawer of a check. It covers also a forged indorsement, i.e., the
forged signature of the payee or indorsee of a note or check. Since under said provision a
forged signature is "wholly inoperative", no one can gain title to the instrument through such
forged indorsement. Such an indorsement prevents any subsequent party from acquiring any
right as against any party whose name appears prior to the forgery. Although rights may
exist between and among parties subsequent to the forged indorsement, not one of them
can acquire rights against parties prior to the forgery. Such forged indorsement cuts off the
rights of all subsequent parties as against parties prior to the forgery. However, the law
makes an exception to these rules where a party is precluded from setting up forgery as a
defense.

As a matter of practical significance, problems arising from forged indorsements of checks may
generally be broken into two types of cases: (1) where forgery was accomplished by a person not
associated with the drawer for example a mail robbery; and (2) where the indorsement was
forged by an agent of the drawer. This difference in situations would determine the effect of the
drawer's negligence with respect to forged indorsements. While there is no duty resting on the
depositor to look for forged indorsements on his cancelled checks in contrast to a duty imposed
upon him to look for forgeries of his own name, a depositor is under a duty to set up an accounting
system and a business procedure as are reasonably calculated to prevent or render difficult the
forgery of indorsements, particularly by the depositor's own employees. And if the drawer (depositor)
learns that a check drawn by him has been paid under a forged indorsement, the drawer is under
duty promptly to report such fact to the drawee bank. 5 For his negligence or failure either to discover or
to report promptly the fact of such forgery to the drawee, the drawer loses his right against the drawee
who has debited his account under a forged indorsement. 6 In other words, he is precluded from using
forgery as a basis for his claim for re-crediting of his account.

In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted
employee, Alicia Galang, and were given to her for her signature. Her signing the checks made the
negotiable instrument complete. Prior to signing the checks, there was no valid contract yet.

Every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument to the payee for the purpose of giving effect thereto. 7 The first delivery of the instrument,
complete in form, to the payee who takes it as a holder, is called issuance of the instrument. 8 Without the
initial delivery of the instrument from the drawer of the check to the payee, there can be no valid and
binding contract and no liability on the instrument.

Petitioner completed the checks by signing them as drawer and thereafter authorized her employee
Alicia Galang to deliver the eighty-two (82) checks to their respective payees. Instead of issuing the
checks to the payees as named in the checks, Alicia Galang delivered them to the Chief Accountant
of the Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon. It was established
that the signatures of the payees as first indorsers were forged. The record fails to show the identity
of the party who made the forged signatures. The checks were then indorsed for the second time
with the names of Alfredo Y. Romero and Benito Lam, and were deposited in the latter's accounts as
earlier noted. The second indorsements were all genuine signatures of the alleged holders. All the
eighty-two (82) checks bearing the forged indorsements of the payees and the genuine second
indorsements of Alfredo Y. Romero and Benito Lam were accepted for deposit at the Buendia
branch of respondent drawee Bank to the credit of their respective savings accounts in the Buendia,
Ongpin and Elcao branches of the same bank. The total amount of P1,208,606.89, represented by
eighty-two (82) checks, were credited and paid out by respondent drawee Bank to Alfredo Y.
Romero and Benito Lam, and debited against petitioner's checking account No. 13-00038-1,
Caloocan branch.

As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot
charge the drawer's account for the amount of said check. An exception to this rule is where the
drawer is guilty of such negligence which causes the bank to honor such a check or checks. If a
check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the
forged indorsement by mere examination of his cancelled check. This accounts for the rule that
although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgery of
his own signature, he has no similar duty as to forged indorsements. A different situation arises
where the indorsement was forged by an employee or agent of the drawer, or done with the active
participation of the latter. Most of the cases involving forgery by an agent or employee deal with the
payee's indorsement. The drawer and the payee often time shave business relations of long
standing. The continued occurrence of business transactions of the same nature provides the
opportunity for the agent/employee to commit the fraud after having developed familiarity with the
signatures of the parties. However, sooner or later, some leak will show on the drawer's books. It will
then be just a question of time until the fraud is discovered. This is specially true when the agent
perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized payment is based on
failure of the depositor to act as a prudent businessman would under the circumstances. In the case
at bar, the petitioner relied implicitly upon the honesty and loyalty of her bookkeeper, and did not
even verify the accuracy of amounts of the checks she signed against the invoices attached thereto.
Furthermore, although she regularly received her bank statements, she apparently did not carefully
examine the same nor the check stubs and the returned checks, and did not compare them with the
same invoices. Otherwise, she could have easily discovered the discrepancies between the checks
and the documents serving as bases for the checks. With such discovery, the subsequent forgeries
would not have been accomplished. It was not until two years after the bookkeeper commenced her
fraudulent scheme that petitioner discovered that eighty-two (82) checks were wrongfully charged to
her account, at which she notified the respondent drawee bank.

It is highly improbable that in a period of two years, not one of Petitioner's suppliers complained of
non-payment. Assuming that even one single complaint had been made, petitioner would have been
duty-bound, as far as the respondent drawee Bank was concerned, to make an adequate
investigation on the matter. Had this been done, the discrepancies would have been discovered,
sooner or later. Petitioner's failure to make such adequate inquiry constituted negligence which
resulted in the bank's honoring of the subsequent checks with forged indorsements. On the other
hand, since the record mentions nothing about such a complaint, the possibility exists that the
checks in question covered inexistent sales. But even in such a case, considering the length of a
period of two (2) years, it is hard to believe that petitioner did not know or realize that she was
paying more than she should for the supplies she was actually getting. A depositor may not sit idly
by, after knowledge has come to her that her funds seem to be disappearing or that there may be a
leak in her business, and refrain from taking the steps that a careful and prudent businessman would
take in such circumstances and if taken, would result in stopping the continuance of the fraudulent
scheme. If she fails to take steps, the facts may establish her negligence, and in that event, she
would be estopped from recovering from the bank. 9

One thing is clear from the records that the petitioner failed to examine her records with
reasonable diligence whether before she signed the checks or after receiving her bank statements.
Had the petitioner examined her records more carefully, particularly the invoice receipts, cancelled
checks, check book stubs, and had she compared the sums written as amounts payable in the
eighty-two (82) checks with the pertinent sales invoices, she would have easily discovered that in
some checks, the amounts did not tally with those appearing in the sales invoices. Had she noticed
these discrepancies, she should not have signed those checks, and should have conducted an
inquiry as to the reason for the irregular entries. Likewise had petitioner been more vigilant in going
over her current account by taking careful note of the daily reports made by respondent drawee
Bank in her issued checks, or at least made random scrutiny of cancelled checks returned by
respondent drawee Bank at the close of each month, she could have easily discovered the fraud
being perpetrated by Alicia Galang, and could have reported the matter to the respondent drawee
Bank. The respondent drawee Bank then could have taken immediate steps to prevent further
commission of such fraud. Thus, petitioner's negligence was the proximate cause of her loss. And
since it was her negligence which caused the respondent drawee Bank to honor the forged checks
or prevented it from recovering the amount it had already paid on the checks, petitioner cannot now
complain should the bank refuse to recredit her account with the amount of such checks. 10 Under
Section 23 of the NIL, she is now precluded from using the forgery to prevent the bank's debiting of her
account.

The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Bank 11 is not
applicable to the case at bar because in said case, the check was fraudulently taken and the signature of
the payee was forged not by an agent or employee of the drawer. The drawer was not found to be
negligent in the handling of its business affairs and the theft of the check by a total stranger was not
attributable to negligence of the drawer; neither was the forging of the payee's indorsement due to the
drawer's negligence. Since the drawer was not negligent, the drawee was duty-bound to restore to the
drawer's account the amount theretofore paid under the check with a forged payee's indorsement
because the drawee did not pay as ordered by the drawer.

Petitioner argues that respondent drawee Bank should not have honored the checks because they
were crossed checks. Issuing a crossed check imposes no legal obligation on the drawee not to
honor such a check. It is more of a warning to the holder that the check cannot be presented to the
drawee bank for payment in cash. Instead, the check can only be deposited with the payee's bank
which in turn must present it for payment against the drawee bank in the course of normal banking
transactions between banks. The crossed check cannot be presented for payment but it can only be
deposited and the drawee bank may only pay to another bank in the payee's or indorser's account.

Petitioner likewise contends that banking rules prohibit the drawee bank from having checks with
more than one indorsement. The banking rule banning acceptance of checks for deposit or cash
payment with more than one indorsement unless cleared by some bank officials does not invalidate
the instrument; neither does it invalidate the negotiation or transfer of the said check. In effect, this
rule destroys the negotiability of bills/checks by limiting their negotiation by indorsement of only the
payee. Under the NIL, the only kind of indorsement which stops the further negotiation of an
instrument is a restrictive indorsement which prohibits the further negotiation thereof.

Sec. 36. When indorsement restrictive. An indorsement is restrictive which either

(a) Prohibits further negotiation of the instrument; or

xxx xxx xxx

In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in
express words at the back of the instrument, so that any subsequent party may be forewarned that
ceases to be negotiable. However, the restrictive indorsee acquires the right to receive payment and
bring any action thereon as any indorser, but he can no longer transfer his rights as such indorsee
where the form of the indorsement does not authorize him to do so. 12

Although the holder of a check cannot compel a drawee bank to honor it because there is no privity
between them, as far as the drawer-depositor is concerned, such bank may not legally refuse to
honor a negotiable bill of exchange or a check drawn against it with more than one indorsement if
there is nothing irregular with the bill or check and the drawer has sufficient funds. The drawee
cannot be compelled to accept or pay the check by the drawer or any holder because as a drawee,
he incurs no liability on the check unless he accepts it. But the drawee will make itself liable to a suit
for damages at the instance of the drawer for wrongful dishonor of the bill or check.

Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery by
reason of her gross negligence. But under Section 196 of the NIL, any case not provided for in the
Act shall be governed by the provisions of existing legislation. Under the laws of quasi-delict, she
cannot point to the negligence of the respondent drawee Bank in the selection and supervision of its
employees as being the cause of the loss because negligence is the proximate cause thereof and
under Article 2179 of the Civil Code, she may not be awarded damages. However, under Article
1170 of the same Code the respondent drawee Bank may be held liable for damages. The article
provides

Those who in the performance of their obligations are guilty of fraud, negligence or
delay, and those who in any manner contravene the tenor thereof, are liable for
damages.
There is no question that there is a contractual relation between petitioner as depositor (obligee) and
the respondent drawee bank as the obligor. In the performance of its obligation, the drawee bank is
bound by its internal banking rules and regulations which form part of any contract it enters into with
any of its depositors. When it violated its internal rules that second endorsements are not to be
accepted without the approval of its branch managers and it did accept the same upon the mere
approval of Boon, a chief accountant, it contravened the tenor of its obligation at the very least, if it
were not actually guilty of fraud or negligence.

Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with respect
to the acceptance of checks with second indorsement for deposit even without the approval of the
branch manager despite periodic inspection conducted by a team of auditors from the main office
constitutes negligence on the part of the bank in carrying out its obligations to its depositors. Article
1173 provides

The fault or negligence of the obligor consists in the omission of that diligence which
is required by the nature of the obligation and corresponds with the circumstance of
the persons, of the time and of the place. . . .

We hold that banking business is so impressed with public interest where the trust and confidence of
the public in general is of paramount importance such that the appropriate standard of diligence
must be a high degree of diligence, if not the utmost diligence. Surely, respondent drawee Bank
cannot claim it exercised such a degree of diligence that is required of it. There is no way We can
allow it now to escape liability for such negligence. Its liability as obligor is not merely vicarious but
primary wherein the defense of exercise of due diligence in the selection and supervision of its
employees is of no moment.

Premises considered, respondent drawee Bank is adjudged liable to share the loss with the
petitioner on a fifty-fifty ratio in accordance with Article 172 which provides:

Responsibility arising from negligence in the performance of every kind of obligation

is also demandable, but such liability may be regulated by the courts according to the
circumstances.

With the foregoing provisions of the Civil Code being relied upon, it is being made clear that the
decision to hold the drawee bank liable is based on law and substantial justice and not on mere
equity. And although the case was brought before the court not on breach of contractual obligations,
the courts are not precluded from applying to the circumstances of the case the laws pertinent
thereto. Thus, the fact that petitioner's negligence was found to be the proximate cause of her loss
does not preclude her from recovering damages. The reason why the decision dealt on a discussion
on proximate cause is due to the error pointed out by petitioner as allegedly committed by the
respondent court. And in breaches of contract under Article 1173, due diligence on the part of the
defendant is not a defense.

PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the
reception of evidence to determine the exact amount of loss suffered by the petitioner, considering
that she partly benefited from the issuance of the questioned checks since the obligation for which
she issued them were apparently extinguished, such that only the excess amount over and above
the total of these actual obligations must be considered as loss of which one half must be paid by
respondent drawee bank to herein petitioner.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 146141 October 17, 2008

ERNESTO CANADA, doing business under the name and style of HI-BALL FREIGHT
SERVICES, petitioners,
vs.
ALL COMMODITIES MARKETING CORPORATION, respondents.

DECISION

NACHURA, J.:

At bar is a petition for review on certiorari under Rule 45 of the Rules of Court filed by Ernesto P.
Canada, challenging the November 15, 1999 Decision1 and the October 11, 2000 Resolution2 of the
Court of Appeals (CA) in CA-G.R. CV No. 43476.

The facts:

Petitioner Ernesto P. Canada (petitioner) is engaged in business of providing trucking and hauling
services under the name Hi-Ball Freight Services. Respondent All Commodities Marketing
Corporation (respondent) has been a valued client of petitioner for several years.

On October 27, 1986, respondent contracted petitioners services to haul and deliver one thousand
(1,000) sacks of sugar from Pier 18, North Harbor in Tondo, Manila to the Pepsi Cola Plant at
Muntinlupa, Metro Manila (now Muntinlupa City). The transaction was covered by Way Bills/ Delivery
Receipt Nos. 53403 and 53414 of All Star Transport, Inc. (All Star), but duly signed by petitioners
driver. As agreed, petitioner loaded respondents 1,000 sacks of sugar into his two (2) trucks;
however, the same were never delivered to the Pepsi Cola Plant. The drivers of the trucks, along
with the helpers, had since vanished into thin air.

Respondent demanded payment of the value of the sugar, but the demand was not heeded.
Consequently, respondent filed a complaint5 against petitioner with the Regional Trial Court (RTC) of
Makati to recover the value of the lost sugar. The case was docketed as Civil Case No. 18826.

In his answer,6 petitioner admitted that respondent contracted him to haul and deliver 1,000 sacks of
sugar, but denied that the cargo did not reach their destination. He averred that the cargo were
delivered to the Pepsi Cola Plant in Muntinlupa City on October 27, 1986. He rejected responsibility
for the claim arguing that the loss of the goods was either due to respondents negligence or due to
fortuitous event.7 By way of counterclaim, petitioner asserted his right to payment of P350,000.00,
representing the value of the truck that was allegedly seized by respondent.

In due course, the RTC rendered judgment8 against petitioner, decreeing that:

IN VIEW THEREOF, this case is hereby resolved in favor of the [respondent] and [petitioner] is
hereby ordered to:
a. pay the [respondent] the sum of P350,000.00 representing the value of the sugar lost, plus the
interest that have accrued thereon from the filing of this complaint until its actual payment;

b. pay the [respondent] the other actual losses it suffered by reason of the non-delivery of the sugar
in terms of unearned income, cost of money and opportunity lost in the amount of P50,000.00;

c. pay the [respondent] the amount of P50,000.00 as and for exemplary damages;

d. pay the cost of suit, litigation expenses and attorneys fees in the sum equivalent to 20% of the
claim hereunder, plus the per appearance fee of P300.00.

SO ORDERED.9

Aggrieved, petitioner appealed to the CA. He raised an argument that was totally new and was never
raised before the RTC, to wit Hi Ball Freight Services was not the common carrier of respondent;
hence, cannot be held liable for the value of the lost sugar.

On November 15, 1999, the CA rendered the assailed Decision. Affirming the RTC and rejecting
petitioners new theory, the CA noted that petitioner had argued his case before the court a
quo without denying his contract with respondent; that it was only after the adverse judgment was
rendered that petitioner began to deny his contract with respondent. It thus ruled that petitioner is
estopped from presenting this issue for the first time on appeal. The CA also rejected petitioners
defense of fortuitous event for lack of basis, and sustained the finding of liability against him.

Petitioner filed a motion for reconsideration, but the CA struck it down on October 11, 2000.

Petitioner is now before us assailing the finding of liability against him. In gist, he denied his contract
of carriage with respondent and passes responsibility to All Star Transport Inc. (All Star), whose
name appeared in the Waybill/Delivery Receipt. Petitioner also assails the dismissal of his
counterclaim.

The petition is devoid of merit.

Records show that the theory of petitioner before the trial court was different from the one he
espoused in the appellate court. At the trial court stage, petitioner insisted that the goods were
delivered to the Pepsi Cola Plant. He further argued that the loss was either due to the fault of
respondent or due to fortuitous event. After the RTC rendered an adverse decision, petitioner
adopted a new theory, denying his contract with respondent and passing all the responsibility to All
Star.

As a rule, no question will be entertained on appeal unless it has been raised in the court below.
Points of law, theories, issues and arguments not brought to the attention of the lower court
ordinarily will not be considered by a reviewing court because they cannot be raised for the first time
at that late stage. Basic considerations of due process underlie this rule. It would be unfair to the
adverse party who would have no opportunity to present evidence in contra to the new theory, which
it could have done had it been aware of it at the time of the hearing before the trial court.10 To permit
petitioner at this stage to change his theory would thus be unfair to respondent, and offend the basic
rules of fair play, justice and due process.11

In this light, we agree with the following disquisition of the CA rejecting petitioners maneuver:
None whatsoever can be unraveled from the records which would show that [petitioner] was in no
way a party to the contract. There is nothing on record as well that would tend to show that a certain
All Star merely hired [petitioner]. As a matter of fact, during the trial the [respondents] witness
specifically testified that [petitioners] services have been engaged by All Commodities Marketing
Corporation for five years. Again, this was never disputed nor rebutted by the [petitioner].

[Petitioner] as a matter of fact had fought its case before the lower court without denying its
relationship or contract with the [respondent] until [the] judgment was rendered against him. He
raised the defense that the truck was hijacked. That it is only now that he belie the claim of the
[respondent] of the contract between them. Simply put, this was an issue never brought out before
the court a quo, hence, [petitioner] is now estopped to present as such before this Court.12

Just as meaningful, petitioner had admitted his contract of carriage with respondent in the court a
quo.

To recall, petitioner in his answer admitted paragraphs 5 and 6 of the complaint13 which referred to
the contract between him and respondent.14 During the trial, petitioner also admitted that the truck
drivers and helpers who loaded the goods were his employees.15 He even tried to settle the case
amicably, but negotiations for settlement had failed. These were unmistakable admissions of
petitioners contractual relation with respondent.

We have always adhered to the familiar doctrine that an admission made in the course of the trial,
either by verbal or written manifestations, or stipulations, cannot be controverted by the party making
such admission; they become conclusive on him, and all proofs submitted by him contrary thereto or
inconsistent therewith should be ignored, whether an objection is interposed by the adverse party or
not.16 This doctrine is embodied in Section 4, Rule 129 of the Rules of Court:

SEC. 4. Judicial admissions. An admission, verbal or written, made by a party in the course of the
proceedings in the same case, does not require proof. The admission may be contradicted only by
showing that it was made through palpable mistake or that no such admission was made.

In the absence of a compelling reason to the contrary, petitioners admission of his contract with
respondent is definitely binding on him. Accordingly, we sustain the CA in rejecting petitioners
newly-contrived assertion that he carried the goods for and in behalf of All Star.

Petitioner also attempted to exculpate himself from liability by insisting that the incident was a caso
fortuito.We disagree.

The exempting circumstance of caso fortuito may be availed of only when: (a) the cause of the
unforeseen and unexpected occurrence was independent of the human will; (b) it was impossible to
foresee the event which constituted the caso fortuito or, if it could be foreseen, it was impossible to
avoid; (c) the occurrence must be such as to render it impossible to perform an obligation in a
normal manner; and (d) the person tasked to perform the obligation must not have participated in
any course of conduct that aggravated the accident.17

None of these elements is present in this case. Other than petitioners bare-faced assertion that the
cargo were lost due to fortuitous event, no evidence was offered to substantiate it. On the contrary,
we find supported by evidence on record the conclusions of the trial court and the CA that the loss of
the sugar was due to the negligence of petitioner. The CA, therefore, committed no reversible error
in sustaining the finding of liability against petitioner.
However, it is error for the RTC and the CA to award actual damages of P350,000.00 for the value of
the lost sugar, and P50,000.00 for the actual losses that respondent allegedly suffered by reason of
the non-delivery of the cargo.

A perusal of the records discloses that no sufficient evidence was proffered to support respondents
plea for actual damages. Indeed, the statement in the complaint would suffice as a claim for
damages.18 However, mere allegation is not proof.19 It is elementary that to recover damages there
must be pleading and proof of actual damages suffered. Thus:

A party is entitled to an adequate compensation for such pecuniary loss actually suffered by him as
he has duly proved. Such damages, to be recoverable, must not only be capable of proof, but must
actually be proved with a reasonable degree of certainty. We have emphasized that these damages
cannot be presumed and courts, in making an award must point out specific facts which could afford
a basis for measuring whatever compensatory or actual damages are borne. 20

No actual damages can thus be awarded to respondent.

However, respondent may still be awarded damages in the concept of temperate or moderate
damages. When the court finds that some pecuniary loss has been suffered but the amount cannot,
from the nature of the case, be proven with certainty, temperate damages may be recovered.
Temperate damages may be allowed in cases where from the nature of the case, definite proof of
pecuniary loss cannot be adduced, although the court is convinced that the aggrieved party suffered
some pecuniary loss.21

Undoubtedly, pecuniary loss had been suffered by respondent in this case. But due to the
insufficiency of evidence before us, we cannot establish the amount of such loss with certainty. In
this regard, considering the attendant circumstances, we find the amount of P250,000.00 to be
sufficient.

The grant of temperate damages paves the way for the award of exemplary damages. Under Article
2234 of the Civil Code, a showing that the plaintiff is entitled to temperate damages allows the award
of exemplary damages.22 Thus, we uphold the award of P50,000.00 as exemplary damages.

Similarly, we uphold respondents entitlement to attorneys fees, but we fix the amount
at P50,000.00.

Finally, we sustain the dismissal of petitioners counterclaim for lack of merit. On this score, we are
in full accord with the CA.

WHEREFORE, the instant petition for certiorari is DENIED. The November 15, 1999 Decision of the
Court of Appeals in CA-G.R. CV No. 43476 is AFFIRMED with MODIFICATIONS. The award of
actual damages is deleted and, in lieu thereof, temperate damages amounting to P250,000.00 are
awarded. Petitioner is also ordered to pay P50,000.00 as exemplary damages and P50,000.00 by
way of attorneys fees. Petitioner shall also pay legal interest of 6% interest per annum on all sums
awarded from the date of the promulgation of the decision of the trial court, and 12% interest per
annum from the time the Decision of this Court attains finality until their full satisfaction. Costs
against petitioner.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-47851 October 3, 1986

JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners,

vs.
THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and
the PHILIPPINE BAR ASSOCIATION, respondents.

G.R. No. L-47863 October 3, 1986

THE UNITED CONSTRUCTION CO., INC., petitioner,

vs.
COURT OF APPEALS, ET AL., respondents.

G.R. No. L-47896 October 3, 1986

PHILIPPINE BAR ASSOCIATION, ET AL., petitioners,

vs.
COURT OF APPEALS, ET AL., respondents.

PARAS, J.:

These are petitions for review on certiorari of the November 28, 1977 decision of the Court of
Appeals in CA-G.R. No. 51771-R modifying the decision of the Court of First Instance of
Manila, Branch V, in Civil Case No. 74958 dated September 21, 1971 as modified by the Order
of the lower court dated December 8, 1971. The Court of Appeals in modifying the decision of
the lower court included an award of an additional amount of P200,000.00 to the Philippine
Bar Association to be paid jointly and severally by the defendant United Construction Co. and
by the third-party defendants Juan F. Nakpil and Sons and Juan F. Nakpil.

The dispositive portion of the modified decision of the lower court reads:

WHEREFORE, judgment is hereby rendered:

(a) Ordering defendant United Construction Co., Inc. and third-party

defendants (except Roman Ozaeta) to pay the plaintiff, jointly and severally,
the sum of P989,335.68 with interest at the legal rate from November 29, 1968,
the date of the filing of the complaint until full payment;

(b) Dismissing the complaint with respect to defendant Juan J. Carlos;

(c) Dismissing the third-party complaint;

 (d) Dismissing the defendant's and third-party defendants' counterclaims for
lack of merit;

(e) Ordering defendant United Construction Co., Inc. and third-party

defendants (except Roman Ozaeta) to pay the costs in equal shares.

SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169).

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the judgment appealed from is modified to include an award of

P200,000.00 in favor of plaintiff-appellant Philippine Bar Association, with
interest at the legal rate from November 29, 1968 until full payment to be paid
jointly and severally by defendant United Construction Co., Inc. and third party
defendants (except Roman Ozaeta). In all other respects, the judgment dated
September 21, 1971 as modified in the December 8, 1971 Order of the lower
court is hereby affirmed with COSTS to be paid by the defendant and third
party defendant (except Roman Ozaeta) in equal shares.

SO ORDERED.

Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan J.
Carlos in L-47863 seek the reversal of the decision of the Court of Appeals, among other
things, for exoneration from liability while petitioner Philippine Bar Association in L-47896
seeks the modification of aforesaid decision to obtain an award of P1,830,000.00 for the loss
of the PBA building plus four (4) times such amount as damages resulting in increased cost
of the building, P100,000.00 as exemplary damages; and P100,000.00 as attorney's fees.

These petitions arising from the same case filed in the Court of First Instance of Manila were
consolidated by this Court in the resolution of May 10, 1978 requiring the respective
respondents to comment. (Rollo, L-47851, p. 172).

The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp. 269-
348; pp. 520-521; Rollo, L-47851, p. 169) and affirmed by the Court of Appeals are as follows:

The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated under

the Corporation Law, decided to construct an office building on its 840 square meters lot
located at the comer of Aduana and Arzobispo Streets, Intramuros, Manila. The construction
was undertaken by the United Construction, Inc. on an "administration" basis, on the
suggestion of Juan J. Carlos, the president and general manager of said corporation. The
proposal was approved by plaintiff's board of directors and signed by its president Roman
Ozaeta, a third-party defendant in this case. The plans and specifications for the building
were prepared by the other third-party defendants Juan F. Nakpil & Sons. The building was
completed in June, 1966.

In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and its
environs and the building in question sustained major damage. The front columns of the
building buckled, causing the building to tilt forward dangerously. The tenants vacated the
building in view of its precarious condition. As a temporary remedial measure, the building
was shored up by United Construction, Inc. at the cost of P13,661.28.
On November 29, 1968, the plaintiff commenced this action for the recovery of damages
arising from the partial collapse of the building against United Construction, Inc. and its
President and General Manager Juan J. Carlos as defendants. Plaintiff alleges that the
collapse of the building was accused by defects in the construction, the failure of the
contractors to follow plans and specifications and violations by the defendants of the terms
of the contract.

Defendants in turn filed a third-party complaint against the architects who prepared the plans
and specifications, alleging in essence that the collapse of the building was due to the
defects in the said plans and specifications. Roman Ozaeta, the then president of the plaintiff
Bar Association was included as a third-party defendant for damages for having included
Juan J. Carlos, President of the United Construction Co., Inc. as party defendant.

On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and Juan F.
Nakpil presented a written stipulation which reads:

1. That in relation to defendants' answer with counterclaims and third- party

complaints and the third-party defendants Nakpil & Sons' answer thereto, the
plaintiff need not amend its complaint by including the said Juan F. Nakpil &
Sons and Juan F. Nakpil personally as parties defendant.

2. That in the event (unexpected by the undersigned) that the Court should find
after the trial that the above-named defendants Juan J. Carlos and United
Construction Co., Inc. are free from any blame and liability for the collapse of
the PBA Building, and should further find that the collapse of said building was
due to defects and/or inadequacy of the plans, designs, and specifications p
by the third-party defendants, or in the event that the Court may find Juan F.
Nakpil and Sons and/or Juan F. Nakpil contributorily negligent or in any way
jointly and solidarily liable with the defendants, judgment may be rendered in
whole or in part. as the case may be, against Juan F. Nakpil & Sons and/or
Juan F. Nakpil in favor of the plaintiff to all intents and purposes as if plaintiff's
complaint has been duly amended by including the said Juan F. Nakpil & Sons
and Juan F. Nakpil as parties defendant and by alleging causes of action
against them including, among others, the defects or inadequacy of the plans,
designs, and specifications prepared by them and/or failure in the performance
of their contract with plaintiff.

3. Both parties hereby jointly petition this Honorable Court to approve this
stipulation. (Record on Appeal, pp. 274-275; Rollo, L-47851,p.169).

Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which
among others, the parties agreed to refer the technical issues involved in the case to a
Commissioner. Mr. Andres O. Hizon, who was ultimately appointed by the trial court,
assumed his office as Commissioner, charged with the duty to try the following issues:

1. Whether the damage sustained by the PBA building during the August 2,
1968 earthquake had been caused, directly or indirectly, by:

(a) The inadequacies or defects in the plans and specifications prepared by

third-party defendants;
 (b) The deviations, if any, made by the defendants from said plans and
specifications and how said deviations contributed to the damage sustained;

(c) The alleged failure of defendants to observe the requisite quality of

materials and workmanship in the construction of the building;

(d) The alleged failure to exercise the requisite degree of supervision expected
of the architect, the contractor and/or the owner of the building;

(e) An act of God or a fortuitous event; and

(f) Any other cause not herein above specified.

2. If the cause of the damage suffered by the building arose from a

combination of the above-enumerated factors, the degree or proportion in
which each individual factor contributed to the damage sustained;

3. Whether the building is now a total loss and should be completely

demolished or whether it may still be repaired and restored to a tenantable
condition. In the latter case, the determination of the cost of such restoration
or repair, and the value of any remaining construction, such as the foundation,
which may still be utilized or availed of (Record on Appeal, pp. 275-276; Rollo,
L-47851, p. 169).

Thus, the issues of this case were divided into technical issues and non-technical issues. As
aforestated the technical issues were referred to the Commissioner. The non-technical issues
were tried by the Court.

Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it may
topple down in case of a strong earthquake. The motions were opposed by the defendants
and the matter was referred to the Commissioner. Finally, on April 30, 1979 the building was
authorized to be demolished at the expense of the plaintiff, but not another earthquake of
high intensity on April 7, 1970 followed by other strong earthquakes on April 9, and 12, 1970,
caused further damage to the property. The actual demolition was undertaken by the buyer of
the damaged building. (Record on Appeal, pp. 278-280; Ibid.)

After the protracted hearings, the Commissioner eventually submitted his report on
September 25, 1970 with the findings that while the damage sustained by the PBA building
was caused directly by the August 2, 1968 earthquake whose magnitude was estimated at 7.3
they were also caused by the defects in the plans and specifications prepared by the third-
party defendants' architects, deviations from said plans and specifications by the defendant
contractors and failure of the latter to observe the requisite workmanship in the construction
of the building and of the contractors, architects and even the owners to exercise the
requisite degree of supervision in the construction of subject building.

All the parties registered their objections to aforesaid findings which in turn were answered
by the Commissioner.

The trial court agreed with the findings of the Commissioner except as to the holding that the
owner is charged with full nine supervision of the construction. The Court sees no legal or
contractual basis for such conclusion. (Record on Appeal, pp. 309-328; Ibid).
Thus, on September 21, 1971, the lower court rendered the assailed decision which was
modified by the Intermediate Appellate Court on November 28, 1977.

All the parties herein appealed from the decision of the Intermediate Appellate Court. Hence,
these petitions.

On May 11, 1978, the United Architects of the Philippines, the Association of Civil Engineers,
and the Philippine Institute of Architects filed with the Court a motion to intervene as amicus
curiae. They proposed to present a position paper on the liability of architects when a
building collapses and to submit likewise a critical analysis with computations on the
divergent views on the design and plans as submitted by the experts procured by the parties.
The motion having been granted, the amicus curiae were granted a period of 60 days within
which to submit their position.

After the parties had all filed their comments, We gave due course to the petitions in Our
Resolution of July 21, 1978.

The position papers of the amicus curiae (submitted on November 24, 1978) were duly noted.

The amicus curiae gave the opinion that the plans and specifications of the Nakpils were not
defective. But the Commissioner, when asked by Us to comment, reiterated his conclusion
that the defects in the plans and specifications indeed existed.

Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord. No.
4131) and the 1966 Asep Code, the Commissioner added that even if it can be proved that the
defects in the constructionalone (and not in the plans and design) caused the damage to the
building, still the deficiency in the original design and jack of specific provisions against
torsion in the original plans and the overload on the ground floor columns (found by an the
experts including the original designer) certainly contributed to the damage which occurred.
(Ibid, p. 174).

In their respective briefs petitioners, among others, raised the following assignments of
errors: Philippine Bar Association claimed that the measure of damages should not be
limited to P1,100,000.00 as estimated cost of repairs or to the period of six (6) months for loss
of rentals while United Construction Co., Inc. and the Nakpils claimed that it was an act of
God that caused the failure of the building which should exempt them from responsibility and
not the defective construction, poor workmanship, deviations from plans and specifications
and other imperfections in the case of United Construction Co., Inc. or the deficiencies in the
design, plans and specifications prepared by petitioners in the case of the Nakpils. Both
UCCI and the Nakpils object to the payment of the additional amount of P200,000.00 imposed
by the Court of Appeals. UCCI also claimed that it should be reimbursed the expenses of
shoring the building in the amount of P13,661.28 while the Nakpils opposed the payment of
damages jointly and solidarity with UCCI.

The pivotal issue in this case is whether or not an act of God-an unusually strong
earthquake-which caused the failure of the building, exempts from liability, parties who are
otherwise liable because of their negligence.

The applicable law governing the rights and liabilities of the parties herein is Article 1723 of
the New Civil Code, which provides:
 Art. 1723. The engineer or architect who drew up the plans and specifications
for a building is liable for damages if within fifteen years from the completion
of the structure the same should collapse by reason of a defect in those plans
and specifications, or due to the defects in the ground. The contractor is
likewise responsible for the damage if the edifice fags within the same period
on account of defects in the construction or the use of materials of inferior
quality furnished by him, or due to any violation of the terms of the contract. If
the engineer or architect supervises the construction, he shall be solidarily
liable with the contractor.

Acceptance of the building, after completion, does not imply waiver of any of
the causes of action by reason of any defect mentioned in the preceding
paragraph.

The action must be brought within ten years following the collapse of the
building.

On the other hand, the general rule is that no person shall be responsible for events which
could not be foreseen or which though foreseen, were inevitable (Article 1174, New Civil
Code).

An act of God has been defined as an accident, due directly and exclusively to natural causes
without human intervention, which by no amount of foresight, pains or care, reasonably to
have been expected, could have been prevented. (1 Corpus Juris 1174).

There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act of
God.

To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an
obligation due to an "act of God," the following must concur: (a) the cause of the breach of
the obligation must be independent of the will of the debtor; (b) the event must be either
unforseeable or unavoidable; (c) the event must be such as to render it impossible for the
debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any
participation in, or aggravation of the injury to the creditor. (Vasquez v. Court of Appeals, 138
SCRA 553; Estrada v. Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA 527;
Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).

Thus, if upon the happening of a fortuitous event or an act of God, there concurs a
corresponding fraud, negligence, delay or violation or contravention in any manner of the
tenor of the obligation as provided for in Article 1170 of the Civil Code, which results in loss
or damage, the obligor cannot escape liability.

The principle embodied in the act of God doctrine strictly requires that the act must be one
occasioned exclusively by the violence of nature and all human agencies are to be excluded
from creating or entering into the cause of the mischief. When the effect, the cause of which
is to be considered, is found to be in part the result of the participation of man, whether it be
from active intervention or neglect, or failure to act, the whole occurrence is thereby
humanized, as it were, and removed from the rules applicable to the acts of God. (1 Corpus
Juris, pp. 1174-1175).

Thus it has been held that when the negligence of a person concurs with an act of God in
producing a loss, such person is not exempt from liability by showing that the immediate
cause of the damage was the act of God. To be exempt from liability for loss because of an
act of God, he must be free from any previous negligence or misconduct by which that loss
or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129;
Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604;
Lasam v. Smith, 45 Phil. 657).

The negligence of the defendant and the third-party defendants petitioners was established
beyond dispute both in the lower court and in the Intermediate Appellate Court. Defendant
United Construction Co., Inc. was found to have made substantial deviations from the plans
and specifications. and to have failed to observe the requisite workmanship in the
construction as well as to exercise the requisite degree of supervision; while the third-party
defendants were found to have inadequacies or defects in the plans and specifications
prepared by them. As correctly assessed by both courts, the defects in the construction and
in the plans and specifications were the proximate causes that rendered the PBA building
unable to withstand the earthquake of August 2, 1968. For this reason the defendant and
third-party defendants cannot claim exemption from liability. (Decision, Court of Appeals, pp.
30-31).

It is well settled that the findings of facts of the Court of Appeals are conclusive on the
parties and on this court (cases cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs.
Sandiganbayan, January 17, 1985, 134 SCRA 105, 121), unless (1) the conclusion is a finding
grounded entirely on speculation, surmise and conjectures; (2) the inference made is
manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment is based on
misapprehension of facts; (5) the findings of fact are conflicting , (6) the Court of Appeals
went beyond the issues of the case and its findings are contrary to the admissions of both
appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co., February 8, 1967, 19 SCRA 289,
291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651); (7) the findings of facts of the
Court of Appeals are contrary to those of the trial court; (8) said findings of facts are
conclusions without citation of specific evidence on which they are based; (9) the facts set
forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the
respondents (Garcia vs. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals,
July 30, 1979, 92 SCRA 322, 366); (10) the finding of fact of the Court of Appeals is premised
on the supposed absence of evidence and is contradicted by evidence on record (Salazar vs.
Gutierrez, May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v.
Sandiganbayan, July 10, 1986).

It is evident that the case at bar does not fall under any of the exceptions above-mentioned.
On the contrary, the records show that the lower court spared no effort in arriving at the
correct appreciation of facts by the referral of technical issues to a Commissioner chosen by
the parties whose findings and conclusions remained convincingly unrebutted by the
intervenors/amicus curiae who were allowed to intervene in the Supreme Court.

In any event, the relevant and logical observations of the trial court as affirmed by the Court
of Appeals that "while it is not possible to state with certainty that the building would not
have collapsed were those defects not present, the fact remains that several buildings in the
same area withstood the earthquake to which the building of the plaintiff was similarly
subjected," cannot be ignored.

The next issue to be resolved is the amount of damages to be awarded to the PBA for the
partial collapse (and eventual complete collapse) of its building.
The Court of Appeals affirmed the finding of the trial court based on the report of the
Commissioner that the total amount required to repair the PBA building and to restore it to
tenantable condition was P900,000.00 inasmuch as it was not initially a total loss. However,
while the trial court awarded the PBA said amount as damages, plus unrealized rental income
for one-half year, the Court of Appeals modified the amount by awarding in favor of PBA an
additional sum of P200,000.00 representing the damage suffered by the PBA building as a
result of another earthquake that occurred on April 7, 1970 (L-47896, Vol. I, p. 92).

The PBA in its brief insists that the proper award should be P1,830,000.00 representing the
total value of the building (L-47896, PBA's No. 1 Assignment of Error, p. 19), while both the
NAKPILS and UNITED question the additional award of P200,000.00 in favor of the PBA (L-
47851, NAKPIL's Brief as Petitioner, p. 6, UNITED's Brief as Petitioner, p. 25). The PBA further
urges that the unrealized rental income awarded to it should not be limited to a period of one-
half year but should be computed on a continuing basis at the rate of P178,671.76 a year until
the judgment for the principal amount shall have been satisfied L- 47896, PBA's No. 11
Assignment of Errors, p. 19).

The collapse of the PBA building as a result of the August 2, 1968 earthquake was only partial
and it is undisputed that the building could then still be repaired and restored to its
tenantable condition. The PBA, however, in view of its lack of needed funding, was unable,
thru no fault of its own, to have the building repaired. UNITED, on the other hand, spent
P13,661.28 to shore up the building after the August 2, 1968 earthquake (L-47896, CA
Decision, p. 46). Because of the earthquake on April 7, 1970, the trial court after the needed
consultations, authorized the total demolition of the building (L-47896, Vol. 1, pp. 53-54).

There should be no question that the NAKPILS and UNITED are liable for the damage
resulting from the partial and eventual collapse of the PBA building as a result of the
earthquakes.

We quote with approval the following from the erudite decision penned by Justice Hugo E.
Gutierrez (now an Associate Justice of the Supreme Court) while still an Associate Justice of
the Court of Appeals:

There is no question that an earthquake and other forces of nature such as

cyclones, drought, floods, lightning, and perils of the sea are acts of God. It
does not necessarily follow, however, that specific losses and suffering
resulting from the occurrence of these natural force are also acts of God. We
are not convinced on the basis of the evidence on record that from the
thousands of structures in Manila, God singled out the blameless PBA building
in Intramuros and around six or seven other buildings in various parts of the
city for collapse or severe damage and that God alone was responsible for the
damages and losses thus suffered.

The record is replete with evidence of defects and deficiencies in the designs
and plans, defective construction, poor workmanship, deviation from plans
and specifications and other imperfections. These deficiencies are attributable
to negligent men and not to a perfect God.

The act-of-God arguments of the defendants- appellants and third party

defendants-appellants presented in their briefs are premised on legal
generalizations or speculations and on theological fatalism both of which
ignore the plain facts. The lengthy discussion of United on ordinary
earthquakes and unusually strong earthquakes and on ordinary fortuitous
events and extraordinary fortuitous events leads to its argument that the
August 2, 1968 earthquake was of such an overwhelming and destructive
character that by its own force and independent of the particular negligence
alleged, the injury would have been produced. If we follow this line of
speculative reasoning, we will be forced to conclude that under such a
situation scores of buildings in the vicinity and in other parts of Manila would
have toppled down. Following the same line of reasoning, Nakpil and Sons
alleges that the designs were adequate in accordance with pre-August 2, 1968
knowledge and appear inadequate only in the light of engineering information
acquired after the earthquake. If this were so, hundreds of ancient buildings
which survived the earthquake better than the two-year old PBA building must
have been designed and constructed by architects and contractors whose
knowledge and foresight were unexplainably auspicious and prophetic.
Fortunately, the facts on record allow a more down to earth explanation of the
collapse. The failure of the PBA building, as a unique and distinct construction
with no reference or comparison to other buildings, to weather the severe
earthquake forces was traced to design deficiencies and defective
construction, factors which are neither mysterious nor esoteric. The
theological allusion of appellant United that God acts in mysterious ways His
wonders to perform impresses us to be inappropriate. The evidence reveals
defects and deficiencies in design and construction. There is no mystery about
these acts of negligence. The collapse of the PBA building was no wonder
performed by God. It was a result of the imperfections in the work of the
architects and the people in the construction company. More relevant to our
mind is the lesson from the parable of the wise man in the Sermon on the
Mount "which built his house upon a rock; and the rain descended and the
floods came and the winds blew and beat upon that house; and it fen not; for it
was founded upon a rock" and of the "foolish upon the sand. And the rain
descended and man which built his house the floods came, and the winds
blew, and beat upon that house; and it fell and great was the fall of it. (St.
Matthew 7: 24-27)." The requirement that a building should withstand rains,
floods, winds, earthquakes, and natural forces is precisely the reason why we
have professional experts like architects, and engineers. Designs and
constructions vary under varying circumstances and conditions but the
requirement to design and build well does not change.

The findings of the lower Court on the cause of the collapse are more rational
and accurate. Instead of laying the blame solely on the motions and forces
generated by the earthquake, it also examined the ability of the PBA building,
as designed and constructed, to withstand and successfully weather those
forces.

The evidence sufficiently supports a conclusion that the negligence and fault
of both United and Nakpil and Sons, not a mysterious act of an inscrutable
God, were responsible for the damages. The Report of the Commissioner,
Plaintiff's Objections to the Report, Third Party Defendants' Objections to the
Report, Defendants' Objections to the Report, Commissioner's Answer to the
various Objections, Plaintiffs' Reply to the Commissioner's Answer,
Defendants' Reply to the Commissioner's Answer, Counter-Reply to
Defendants' Reply, and Third-Party Defendants' Reply to the Commissioner's
Report not to mention the exhibits and the testimonies show that the main
arguments raised on appeal were already raised during the trial and fully
considered by the lower Court. A reiteration of these same arguments on
appeal fails to convince us that we should reverse or disturb the lower Court's
factual findings and its conclusions drawn from the facts, among them:

The Commissioner also found merit in the allegations of the defendants as to

the physical evidence before and after the earthquake showing the inadequacy
of design, to wit:

Physical evidence before the earthquake providing (sic) inadequacy of design;

1. inadequate design was the cause of the failure of the building.

2. Sun-baffles on the two sides and in front of the building;

a. Increase the inertia forces that move the building laterally toward the Manila
Fire Department.

b. Create another stiffness imbalance.

3. The embedded 4" diameter cast iron down spout on all exterior columns
reduces the cross-sectional area of each of the columns and the strength
thereof.

4. Two front corners, A7 and D7 columns were very much less reinforced.

Physical Evidence After the Earthquake, Proving Inadequacy of design;

1. Column A7 suffered the severest fracture and maximum sagging. Also D7.

2. There are more damages in the front part of the building than towards the
rear, not only in columns but also in slabs.

3. Building leaned and sagged more on the front part of the building.

4. Floors showed maximum sagging on the sides and toward the front corner
parts of the building.

5. There was a lateral displacement of the building of about 8", Maximum

sagging occurs at the column A7 where the floor is lower by 80 cm. than the
highest slab level.

6. Slab at the corner column D7 sagged by 38 cm.

The Commissioner concluded that there were deficiencies or defects in the

design, plans and specifications of the PBA building which involved
appreciable risks with respect to the accidental forces which may result from
earthquake shocks. He conceded, however, that the fact that those
deficiencies or defects may have arisen from an obsolete or not too
conservative code or even a code that does not require a design for
earthquake forces mitigates in a large measure the responsibility or liability of
the architect and engineer designer.
The Third-party defendants, who are the most concerned with this portion of
the Commissioner's report, voiced opposition to the same on the grounds that
(a) the finding is based on a basic erroneous conception as to the design
concept of the building, to wit, that the design is essentially that of a heavy
rectangular box on stilts with shear wan at one end; (b) the finding that there
were defects and a deficiency in the design of the building would at best be
based on an approximation and, therefore, rightly belonged to the realm of
speculation, rather than of certainty and could very possibly be outright error;
(c) the Commissioner has failed to back up or support his finding with
extensive, complex and highly specialized computations and analyzes which
he himself emphasizes are necessary in the determination of such a highly
technical question; and (d) the Commissioner has analyzed the design of the
PBA building not in the light of existing and available earthquake engineering
knowledge at the time of the preparation of the design, but in the light of recent
and current standards.

The Commissioner answered the said objections alleging that third-party

defendants' objections were based on estimates or exhibits not presented
during the hearing that the resort to engineering references posterior to the
date of the preparation of the plans was induced by the third-party defendants
themselves who submitted computations of the third-party defendants are
erroneous.

The issue presently considered is admittedly a technical one of the highest

degree. It involves questions not within the ordinary competence of the bench
and the bar to resolve by themselves. Counsel for the third-party defendants
has aptly remarked that "engineering, although dealing in mathematics, is not
an exact science and that the present knowledge as to the nature of
earthquakes and the behaviour of forces generated by them still leaves much
to be desired; so much so "that the experts of the different parties, who are all
engineers, cannot agree on what equation to use, as to what earthquake co-
efficients are, on the codes to be used and even as to the type of structure that
the PBA building (is) was (p. 29, Memo, of third- party defendants before the
Commissioner).

The difficulty expected by the Court if tills technical matter were to be tried and
inquired into by the Court itself, coupled with the intrinsic nature of the
questions involved therein, constituted the reason for the reference of the said
issues to a Commissioner whose qualifications and experience have eminently
qualified him for the task, and whose competence had not been questioned by
the parties until he submitted his report. Within the pardonable limit of the
Court's ability to comprehend the meaning of the Commissioner's report on
this issue, and the objections voiced to the same, the Court sees no
compelling reasons to disturb the findings of the Commissioner that there
were defects and deficiencies in the design, plans and specifications prepared
by third-party defendants, and that said defects and deficiencies involved
appreciable risks with respect to the accidental forces which may result from
earthquake shocks.

(2) (a) The deviations, if any, made by the defendants from the plans and
specifications, and how said deviations contributed to the damage sustained
by the building.
(b) The alleged failure of defendants to observe the requisite quality of
materials and workmanship in the construction of the building.

These two issues, being interrelated with each other, will be discussed
together.

The findings of the Commissioner on these issues were as follows:

We now turn to the construction of the PBA Building and the alleged
deficiencies or defects in the construction and violations or deviations from
the plans and specifications. All these may be summarized as follows:

a. Summary of alleged defects as reported by Engineer Mario M. Bundalian.

(1) Wrongful and defective placing of reinforcing bars.

(2) Absence of effective and desirable integration of the 3 bars in the cluster.

(3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires
no larger than 1 inch.

(4) Reinforcement assembly is not concentric with the column, eccentricity

being 3" off when on one face the main bars are only 1 1/2' from the surface.

(5) Prevalence of honeycombs,

(6) Contraband construction joints,

(7) Absence, or omission, or over spacing of spiral hoops,

(8) Deliberate severance of spirals into semi-circles in noted on Col. A-5,

ground floor,

(9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground
floor,

(10) Undergraduate concrete is evident,

(11) Big cavity in core of Column 2A-4, second floor,

(12) Columns buckled at different planes. Columns buckled worst where there
are no spirals or where spirals are cut. Columns suffered worst displacement
where the eccentricity of the columnar reinforcement assembly is more acute.

b. Summary of alleged defects as reported by Engr. Antonio Avecilla.

Columns are first (or ground) floor, unless otherwise stated.

(1) Column D4 Spacing of spiral is changed from 2" to 5" on centers,

(2) Column D5 No spiral up to a height of 22" from the ground floor,

(3) Column D6 Spacing of spiral over 4 l/2,

(4) Column D7 Lack of lateral ties,

(5) Column C7 Absence of spiral to a height of 20" from the ground level,
Spirals are at 2" from the exterior column face and 6" from the inner column
face,

(6) Column B6 Lack of spiral on 2 feet below the floor beams,

(7) Column B5 Lack of spirals at a distance of 26' below the beam,

(8) Column B7 Spirals not tied to vertical reinforcing bars, Spirals are
uneven 2" to 4",

(9) Column A3 Lack of lateral ties,

(10) Column A4 Spirals cut off and welded to two separate clustered vertical
bars,

(11) Column A4 (second floor Column is completely hollow to a height of 30"

(12) Column A5 Spirals were cut from the floor level to the bottom of the
spandrel beam to a height of 6 feet,

(13) Column A6 No spirals up to a height of 30' above the ground floor level,

(14) Column A7 Lack of lateralties or spirals,

c. Summary of alleged defects as reported by the experts of the Third-Party

defendants.

Ground floor columns.

(1) Column A4 Spirals are cut,

(2) Column A5 Spirals are cut,

(3) Column A6 At lower 18" spirals are absent,

(4) Column A7 Ties are too far apart,

(5) Column B5 At upper fourth of column spirals are either absent or

improperly spliced,

(6) Column B6 At upper 2 feet spirals are absent,

(7) Column B7 At upper fourth of column spirals missing or improperly
spliced.

(8) Column C7 Spirals are absent at lowest 18"

(9) Column D5 At lowest 2 feet spirals are absent,

(10) Column D6 Spirals are too far apart and apparently improperly spliced,

(11) Column D7 Lateral ties are too far apart, spaced 16" on centers.

There is merit in many of these allegations. The explanations given by the

engineering experts for the defendants are either contrary to general principles
of engineering design for reinforced concrete or not applicable to the
requirements for ductility and strength of reinforced concrete in earthquake-
resistant design and construction.

We shall first classify and consider defects which may have appreciable
bearing or relation to' the earthquake-resistant property of the building.

As heretofore mentioned, details which insure ductility at or near the

connections between columns and girders are desirable in earthquake
resistant design and construction. The omission of spirals and ties or hoops at
the bottom and/or tops of columns contributed greatly to the loss of
earthquake-resistant strength. The plans and specifications required that these
spirals and ties be carried from the floor level to the bottom reinforcement of
the deeper beam (p. 1, Specifications, p. 970, Reference 11). There were several
clear evidences where this was not done especially in some of the ground floor
columns which failed.

There were also unmistakable evidences that the spacings of the spirals and
ties in the columns were in many cases greater than those called for in the
plans and specifications resulting again in loss of earthquake-resistant
strength. The assertion of the engineering experts for the defendants that the
improper spacings and the cutting of the spirals did not result in loss of
strength in the column cannot be maintained and is certainly contrary to the
general principles of column design and construction. And even granting that
there be no loss in strength at the yield point (an assumption which is very
doubtful) the cutting or improper spacings of spirals will certainly result in the
loss of the plastic range or ductility in the column and it is precisely this
plastic range or ductility which is desirable and needed for earthquake-
resistant strength.

There is no excuse for the cavity or hollow portion in the column A4, second
floor, and although this column did not fail, this is certainly an evidence on the
part of the contractor of poor construction.

The effect of eccentricities in the columns which were measured at about 2 1/2
inches maximum may be approximated in relation to column loads and column
and beam moments. The main effect of eccentricity is to change the beam or
girder span. The effect on the measured eccentricity of 2 inches, therefore, is
to increase or diminish the column load by a maximum of about 1% and to
increase or diminish the column or beam movements by about a maximum of
2%. While these can certainly be absorbed within the factor of safety, they
nevertheless diminish said factor of safety.

The cutting of the spirals in column A5, ground floor is the subject of great
contention between the parties and deserves special consideration.

The proper placing of the main reinforcements and spirals in column A5,
ground floor, is the responsibility of the general contractor which is the UCCI.
The burden of proof, therefore, that this cutting was done by others is upon the
defendants. Other than a strong allegation and assertion that it is the plumber
or his men who may have done the cutting (and this was flatly denied by the
plumber) no conclusive proof was presented. The engineering experts for the
defendants asserted that they could have no motivation for cutting the bar
because they can simply replace the spirals by wrapping around a new set of
spirals. This is not quite correct. There is evidence to show that the pouring of
concrete for columns was sometimes done through the beam and girder
reinforcements which were already in place as in the case of column A4
second floor. If the reinforcement for the girder and column is to subsequently
wrap around the spirals, this would not do for the elasticity of steel would
prevent the making of tight column spirals and loose or improper spirals would
result. The proper way is to produce correct spirals down from the top of the
main column bars, a procedure which can not be done if either the beam or
girder reinforcement is already in place. The engineering experts for the
defendants strongly assert and apparently believe that the cutting of the
spirals did not materially diminish the strength of the column. This belief
together with the difficulty of slipping the spirals on the top of the column once
the beam reinforcement is in place may be a sufficient motivation for the
cutting of the spirals themselves. The defendants, therefore, should be held
responsible for the consequences arising from the loss of strength or ductility
in column A5 which may have contributed to the damages sustained by the
building.

The lack of proper length of splicing of spirals was also proven in the visible
spirals of the columns where spalling of the concrete cover had taken place.
This lack of proper splicing contributed in a small measure to the loss of
strength.

The effects of all the other proven and visible defects although nor can
certainly be accumulated so that they can contribute to an appreciable loss in
earthquake-resistant strength. The engineering experts for the defendants
submitted an estimate on some of these defects in the amount of a few
percent. If accumulated, therefore, including the effect of eccentricity in the
column the loss in strength due to these minor defects may run to as much as
ten percent.

To recapitulate: the omission or lack of spirals and ties at the bottom and/or at
the top of some of the ground floor columns contributed greatly to the collapse
of the PBA building since it is at these points where the greater part of the
failure occurred. The liability for the cutting of the spirals in column A5, ground
floor, in the considered opinion of the Commissioner rests on the shoulders of
 the defendants and the loss of strength in this column contributed to the
damage which occurred.

It is reasonable to conclude, therefore, that the proven defects, deficiencies

and violations of the plans and specifications of the PBA building contributed
to the damages which resulted during the earthquake of August 2, 1968 and
the vice of these defects and deficiencies is that they not only increase but
also aggravate the weakness mentioned in the design of the structure. In other
words, these defects and deficiencies not only tend to add but also to multiply
the effects of the shortcomings in the design of the building. We may say,
therefore, that the defects and deficiencies in the construction contributed
greatly to the damage which occurred.

Since the execution and supervision of the construction work in the hands of
the contractor is direct and positive, the presence of existence of all the major
defects and deficiencies noted and proven manifests an element of negligence
which may amount to imprudence in the construction work. (pp. 42-49,
Commissioners Report).

As the parties most directly concerned with this portion of the Commissioner's report, the
defendants voiced their objections to the same on the grounds that the Commissioner should
have specified the defects found by him to be "meritorious"; that the Commissioner failed to
indicate the number of cases where the spirals and ties were not carried from the floor level
to the bottom reinforcement of the deeper beam, or where the spacing of the spirals and ties
in the columns were greater than that called for in the specifications; that the hollow in
column A4, second floor, the eccentricities in the columns, the lack of proper length of
splicing of spirals, and the cut in the spirals in column A5, ground floor, did not aggravate or
contribute to the damage suffered by the building; that the defects in the construction were
within the tolerable margin of safety; and that the cutting of the spirals in column A5, ground
floor, was done by the plumber or his men, and not by the defendants.

Answering the said objections, the Commissioner stated that, since many of the defects were
minor only the totality of the defects was considered. As regards the objection as to failure to
state the number of cases where the spirals and ties were not carried from the floor level to
the bottom reinforcement, the Commissioner specified groundfloor columns B-6 and C-5 the
first one without spirals for 03 inches at the top, and in the latter, there were no spirals for 10
inches at the bottom. The Commissioner likewise specified the first storey columns where
the spacings were greater than that called for in the specifications to be columns B-5, B-6, C-
7, C-6, C-5, D-5 and B-7. The objection to the failure of the Commissioner to specify the
number of columns where there was lack of proper length of splicing of spirals, the
Commissioner mentioned groundfloor columns B-6 and B-5 where all the splices were less
than 1-1/2 turns and were not welded, resulting in some loss of strength which could be
critical near the ends of the columns. He answered the supposition of the defendants that the
spirals and the ties must have been looted, by calling attention to the fact that the missing
spirals and ties were only in two out of the 25 columns, which rendered said supposition to
be improbable.

The Commissioner conceded that the hollow in column A-4, second floor, did not aggravate
or contribute to the damage, but averred that it is "evidence of poor construction." On the
claim that the eccentricity could be absorbed within the factor of safety, the Commissioner
answered that, while the same may be true, it also contributed to or aggravated the damage
suffered by the building.
The objection regarding the cutting of the spirals in Column A-5, groundfloor, was answered
by the Commissioner by reiterating the observation in his report that irrespective of who did
the cutting of the spirals, the defendants should be held liable for the same as the general
contractor of the building. The Commissioner further stated that the loss of strength of the
cut spirals and inelastic deflections of the supposed lattice work defeated the purpose of the
spiral containment in the column and resulted in the loss of strength, as evidenced by the
actual failure of this column.

Again, the Court concurs in the findings of the Commissioner on these issues and fails to
find any sufficient cause to disregard or modify the same. As found by the Commissioner, the
"deviations made by the defendants from the plans and specifications caused indirectly the
damage sustained and that those deviations not only added but also aggravated the damage
caused by the defects in the plans and specifications prepared by third-party defendants.
(Rollo, Vol. I, pp. 128-142)

The afore-mentioned facts clearly indicate the wanton negligence of both the defendant and
the third-party defendants in effecting the plans, designs, specifications, and construction of
the PBA building and We hold such negligence as equivalent to bad faith in the performance
of their respective tasks.

Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379, 4380)
which may be in point in this case reads:

One who negligently creates a dangerous condition cannot escape liability for the natural and
probable consequences thereof, although the act of a third person, or an act of God for which
he is not responsible, intervenes to precipitate the loss.

As already discussed, the destruction was not purely an act of God. Truth to tell hundreds of
ancient buildings in the vicinity were hardly affected by the earthquake. Only one thing spells
out the fatal difference; gross negligence and evident bad faith, without which the damage
would not have occurred.

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special
and environmental circumstances of this case, We deem it reasonable to render a decision
imposing, as We do hereby impose, upon the defendant and the third-party defendants (with
the exception of Roman Ozaeta) asolidary (Art. 1723, Civil Code, Supra, p. 10) indemnity in
favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all
damages (with the exception of attorney's fees) occasioned by the loss of the building
(including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND
(P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality
of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum
shall be imposed upon afore-mentioned amounts from finality until paid. Solidary costs
against the defendant and third-party defendants (except Roman Ozaeta).

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. Nos. 103442-45 May 21, 1993

NATIONAL POWER CORPORATION, ET AL., petitioners,

vs.
THE COURT OF APPEALS, GAUDENCIO C. RAYO, ET AL., respondents.

The Solicitor General for plaintiff-appellee.

Ponciano G. Hernandez for private respondents.

DAVIDE, JR., J.:

This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court urging this
Court to set aside the 19 August 1991 consolidated Decision of the Court of Appeals in CA.-G.R. CV
Nos. 27290-93 1 which reversed the Decision of Branch 5 of the then Court of First Instance (now
Regional Trial Court) of Bulacan, and held petitioners National Power Corporation (NPC) and Benjamin
Chavez jointly and severally liable to the private respondents for actual and moral damages, litigation
expenses and attorney's fees.

This present controversy traces its beginnings to four (4) separate complaints 2 for damages filed
against the NPC and Benjamin Chavez before the trial court. The plaintiffs therein, now private
respondents, sought to recover actual and other damages for the loss of lives and the destruction to
property caused by the inundation of the town of Norzagaray, Bulacan on 26-27 October 1978. The
flooding was purportedly caused by the negligent release by the defendants of water through the
spillways of the Angat Dam (Hydroelectric Plant). In said complaints, the plaintiffs alleged, inter alia, that:
1) defendant NPC operated and maintained a multi-purpose hydroelectric plant in the Angat River at
Hilltop, Norzagaray, Bulacan; 2) defendant Benjamin Chavez was the plant supervisor at the time of the
incident in question; 3) despite the defendants' knowledge, as early as 24 October 1978, of the impending
entry of typhoon "Kading," they failed to exercise due diligence in monitoring the water level at the dam;
4) when the said water level went beyond the maximum allowable limit at the height of the typhoon, the
defendants suddenly, negligently and recklessly opened three (3) of the dam's spillways, thereby
releasing a large amount of water which inundated the banks of the Angat River; and 5) as a
consequence, members of the household of the plaintiffs, together with their animals, drowned, and their
properties were washed away in the evening of 26 October and the early hours of 27 October 1978. 3

In their Answers, the defendants, now petitioners, alleged that: 1) the NPC exercised due care,
diligence and prudence in the operation and maintenance of the hydroelectric plant; 2) the NPC
exercised the diligence of a good father in the selection of its employees; 3) written notices were
sent to the different municipalities of Bulacan warning the residents therein about the impending
release of a large volume of water with the onset of typhoon "Kading" and advise them to take the
necessary precautions; 4) the water released during the typhoon was needed to prevent the collapse
of the dam and avoid greater damage to people and property; 5) in spite of the precautions
undertaken and the diligence exercised, they could still not contain or control the flood that resulted
and; 6) the damages incurred by the private respondents were caused by a fortuitous event or force
majeure and are in the nature and character of damnum absque injuria. By way of special affirmative
defense, the defendants averred that the NPC cannot be sued because it performs a purely
governmental function. 4

Upon motion of the defendants, a preliminary hearing on the special defense was conducted. As a
result thereof, the trial court dismissed the complaints as against the NPC on the ground that the
provision of its charter allowing it to sue and be sued does not contemplate actions based on tort.
The parties do not, however, dispute the fact that this Court overruled the trial court and ordered the
reinstatement of the complaints as against the NPC. 5

Being closely interrelated, the cases were consolidated and trial thereafter ensued.

The lower court rendered its decision on 30 April 1990 dismissing the complaints "for lack of
sufficient and credible evidence." 6 Consequently, the private respondents seasonably appealed
therefrom to the respondent Court which then docketed the cases as CA-G.R. CV Nos. 27290-93.

In its joint decision promulgated on 19 August 1991, the Court of Appeals reversed the appealed
decision and awarded damages in favor of the private respondents. The dispositive portion of the
decision reads:

CONFORMABLY TO THE FOREGOING, the joint decision appealed from is hereby

REVERSED and SET ASIDE, and a new one is hereby rendered:

1. In Civil Case No. SM-950, ordering defendants-appellees to pay, jointly and

severally, plaintiffs-appellants, with legal interest from the date when this decision
shall become final and executory, the following:

A. Actual damages, to wit:

1) Gaudencio C. Rayo, Two Hundred Thirty One Thousand Two

Hundred Sixty Pesos (P231,260.00);

2) Bienvenido P. Pascual, Two Hundred Four Thousand Five

Hundred Pesos (P204.500.00);

3) Tomas Manuel, One Hundred Fifty Five Thousand Pesos

(P155,000.00);

4) Pedro C. Bartolome, One Hundred Forty Seven Thousand Pesos

(P147,000.00);.

5) Bernardino Cruz, One Hundred Forty Three Thousand Five

Hundred Fifty Two Pesos and Fifty Centavos (P143,552.50);

6) Jose Palad, Fifty Seven Thousand Five Hundred Pesos

(P57,500.00);

7) Mariano S. Cruz, Forty Thousand Pesos (P40,000.00);

 8) Lucio Fajardo, Twenty nine Thousand Eighty Pesos (P29,080.00);
and

B. Litigation expenses of Ten Thousand Pesos (P10,000.00);

2. In Civil case No. SM-951, ordering defendants-appellees to pay jointly and

severally, plaintiff-appellant, with legal interest from the date when this decision shall
have become final and executory, the following :

A. Actual damages of Five Hundred Twenty Thousand Pesos

(P520,000.00);.

B. Moral damages of five hundred Thousand Pesos (P500,000.00);

and.

C. Litigation expenses of Ten Thousand Pesos (P10,000.00);.

3. In Civil Case No. SM-953, ordering defendants-appellees to pay, jointly and

severally, with legal interest from the date when this decision shall have become final
and executory;

A. Plaintiff-appellant Angel C. Torres:

1) Actual damages of One Hundred Ninety Nine Thousand One Hundred Twenty
Pesos (P199,120.00);

2) Moral Damages of One Hundred Fifty Thousand Pesos (P150,000.00);

B. Plaintiff-appellant Norberto Torres:

1) Actual damages of Fifty Thousand Pesos (P50,000.00);

2) Moral damages of Fifty Thousand Pesos (P50,000.00);

C. Plaintiff-appellant Rodelio Joaquin:

1) Actual damages of One Hundred Thousand Pesos (P100,000.00);

2) Moral damages of One Hundred Thousand Pesos (P100,000.00);

and

D. Plaintifsf-appellants litigation expenses of Ten Thousand Pesos (P10,000.00);

4. In Civil case No. SM-1247, ordering defendants-appellees to pay, jointly and

severally, with legal interest from the date when this decision shall have become final
and executory :

A. Plaintiffs-appellants Presentacion Lorenzo and Clodualdo Lorenzo:

 1) Actual damages of Two Hundred Fifty Six Thousand Six Hundred
Pesos (P256,600.00);

2) Moral damages of Fifty Thousand Pesos (P50,000.00);

B. Plaintiff-appellant Consolacion Guzman :

1) Actual damages of One Hundred forty Thousand Pesos

(P140,000.00);

2) Moral damages of Fifty Thousand Pesos (P50,000.00);

C. Plaintiff-appellant Virginia Guzman :

1) Actual damages of Two Hundred Five Hundred Twenty Pesos

(205,520.00); and

D. Plaintiffs-appellants litigation expenses of Ten Thousand Pesos (10,000.00).

In addition, in all the four (4) instant cases, ordering defendants-appellees to pay,
jointly and severally, plaintiffs-appellants attorney fees in an amount equivalent to
15% of the total amount awarded.

No pronouncement as to costs. 7

The foregoing judgment is based on the public respondent's conclusion that the petitioners were
guilty of:

. . . a patent gross and evident lack of foresight, imprudence and negligence . . . in

the management and operation of Angat Dam. The unholiness of the hour, the extent
of the opening of the spillways, And the magnitude of the water released, are all but
products of defendants-appellees' headlessness, slovenliness, and carelessness.
The resulting flash flood and inundation of even areas (sic) one (1) kilometer away
from the Angat River bank would have been avoided had defendants-appellees
prepared the Angat Dam by maintaining in the first place, a water elevation which
would allow room for the expected torrential rains. 8

This conclusion, in turn, is anchored on its findings of fact, to wit:

As early as October 21, 1978, defendants-appellees knew of the impending

onslaught of and imminent danger posed by typhoon "Kading". For as alleged by
defendants-appellees themselves, the coming of said super typhoon was bannered
by Bulletin Today, a newspaper of national circulation, on October 25, 1978, as
"Super Howler to hit R.P." The next day, October 26, 1978, said typhoon once again
merited a headline in said newspaper as "Kading's Big Blow expected this afternoon"
(Appellee's Brief, p. 6). Apart from the newspapers, defendants-appellees learned of
typhoon "Kading' through radio announcements (Civil Case No. SM-950, TSN,
Benjamin Chavez, December 4, 1984, pp. 7-9).

Defendants-appellees doubly knew that the Angat Dam can safely hold a normal
maximum headwater elevation of 217 meters (Appellee's brief, p. 12; Civil Case No.
 SM-951, Exhibit "I-6"; Civil Case No. SM-953, Exhibit "J-6"; Civil Case No. SM-1247,
Exhibit "G-6").

Yet, despite such knowledge, defendants-appellees maintained a reservoir water

elevation even beyond its maximum and safe level, thereby giving no sufficient
allowance for the reservoir to contain the rain water that will inevitably be brought by
the coming typhoon.

On October 24, 1978, before typhoon "Kading" entered the Philippine area of
responsibility, water elevation ranged from 217.61 to 217.53, with very little opening
of the spillways, ranging from 1/2 to 1 meter. On October 25, 1978, when typhoon
"Kading" entered the Philippine area of responsibility, and public storm signal number
one was hoisted over Bulacan at 10:45 a.m., later raised to number two at 4:45 p.m.,
and then to number three at 10:45 p.m., water elevation ranged from 217.47 to
217.57, with very little opening of the spillways, ranging from 1/2 to 1 meter. On
October 26, 1978, when public storm signal number three remained hoisted over
Bulacan, the water elevation still remained at its maximum level of 217.00 to 218.00
with very little opening of the spillways ranging from 1/2 to 2 meters, until at or about
midnight, the spillways were suddenly opened at 5 meters, then increasing swiftly to
8, 10, 12, 12.5, 13, 13.5, 14, 14.5 in the early morning hours of October 27, 1978,
releasing water at the rate of 4,500 cubic meters per second, more or less. On
October 27, 1978, water elevation remained at a range of 218.30 to 217.05 (Civil
Case No. SM-950, Exhibits "D" and series, "L", "M", "N", and "O" and Exhibits "3"
and "4"; Civil Case No. SM-951, Exhibits "H" and "H-1"; Civil Case No. SM-953,
Exhibits "I" and "I-1"; Civil Case No. SM 1247, Exhibits "F" and "F-1").

xxx xxx xxx

From the mass of evidence extant in the record, We are convinced, and so hold that
the flash flood on October 27, 1978, was caused not by rain waters (sic), but by
stored waters (sic) suddenly and simultaneously released from the Angat Dam by
defendants-appellees, particularly from midnight of October 26, 1978 up to the
morning hours of October 27,
1978. 9

The appellate court rejected the petitioners' defense that they had sent "early warning written
notices" to the towns of Norzagaray, Angat, Bustos, Plaridel, Baliwag and Calumpit dated 24
October 1978 which read:

TO ALL CONCERN (sic):

Please be informed that at present our reservoir (dam) is full and that we have been
releasing water intermittently for the past several days.

With the coming of typhoon "Rita" (Kading) we expect to release greater (sic) volume
of water, if it pass (sic) over our place.

In view of this kindly advise people residing along Angat River to keep alert and stay
in safe places.

BENJAMIN L. CHAVEZ
Power Plant Superintendent 10
because:

Said notice was delivered to the "towns of Bulacan" on October 26, 1978 by
defendants-appellees driver, Leonardo Nepomuceno (Civil Case No. SM-950, TSN,
Benjamin Chavez, December 4, 1984, pp. 7-11 and TSN, Leonardo Nepomuceno,
March 7, 1985, pp. 10-12).

Said notice is ineffectual, insufficient and inadequate for purposes of the opening of
the spillway gates at midnight of October 26, 1978 and on October 27, 1978. It did
not prepare or warn the persons so served, for the volume of water to be released,
which turned out to be of such magnitude, that residents near or along the Angat
River, even those one (1) kilometer away, should have been advised to evacuate.
Said notice, addressed "TO ALL CONCERN (sic)," was delivered to a policeman
(Civil Case No. SM-950, pp. 10-12 and Exhibit "2-A") for the municipality of
Norzagaray. Said notice was not thus addressed and delivered to the proper and
responsible officials who could have disseminated the warning to the residents
directly affected. As for the municipality of Sta. Maria, where plaintiffs-appellants in
Civil Case No. SM-1246 reside, said notice does not appear to have been served. 11

Relying on Juan F. Nakpil & Sons vs. Court of Appeals, 12 public respondent rejected the petitioners'
plea that the incident in question was caused by force majeure and that they are, therefore, not liable to
the private respondents for any kind of damage such damage being in the nature of damnum absque
injuria.

The motion for reconsideration filed by the petitioners, as well as the motion to modify judgment filed
by the public respondents, 13 were denied by the public respondent in its Resolution of 27 December
1991. 14

Petitioners thus filed the instant petition on 21 February 1992.

After the Comment to the petition was filed by the private respondents and the Reply thereto was
filed by the petitioners, We gave due course to the petition on 17 June 1992 and directed the parties
to submit their respective Memoranda, 15 which they subsequently complied with.

The petitioners raised the following errors allegedly committed by the respondent Court :

I. THE COURT OF APPEALS ERRED IN APPLYING THE RULING OF NAKPIL &

SONS V. COURT OF APPEALS AND HOLDING THAT PETITIONERS WERE
GUILTY OF NEGLIGENCE.

II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE WRITTEN

NOTICES OF WARNING ISSUED BY PETITIONERS WERE INSUFFICIENT.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE DAMAGE

SUFFERED BY PRIVATE RESPONDENTS WAS NOT DAMNUM ABSQUE
INJURIA.

IV. THE COURT OF APPEALS ERRED IN NOT AWARDING THE COUNTERCLAIM

OF PETITIONERS FOR ATTORNEY'S FEES AND EXPENSES OF LITIGATION. 16
These same errors were raised by herein petitioners in G.R. No. 96410, entitled National Power
Corporation, et al., vs. Court of Appeals, et al., 17 which this Court decided on 3 July 1992. The said
case involved the very same incident subject of the instant petition. In no uncertain terms, We declared
therein that the proximate cause of the loss and damage sustained by the plaintiffs therein who were
similarly situated as the private respondents herein was the negligence of the petitioners, and that the
24 October 1978 "early warning notice" supposedly sent to the affected municipalities, the same notice
involved in the case at bar, was insufficient. We thus cannot now rule otherwise not only because such a
decision binds this Court with respect to the cause of the inundation of the town of Norzagaray, Bulacan
on 26-27 October 1978 which resulted in the loss of lives and the destruction to property in both cases,
but also because of the fact that on the basis of its meticulous analysis and evaluation of the evidence
adduced by the parties in the cases subject of CA-G.R. CV Nos. 27290-93, public respondent found as
conclusively established that indeed, the petitioners were guilty of "patent gross and evident lack of
foresight, imprudence and negligence in the management and operation of Angat Dam," and that "the
extent of the opening of the spillways, and the magnitude of the water released, are all but products of
defendants-appellees' headlessness, slovenliness, and carelessness." 18 Its findings and conclusions are
biding upon Us, there being no showing of the existence of any of the exceptions to the general rule that
findings of fact of the Court of Appeals are conclusive upon this Court. 19 Elsewise stated, the challenged
decision can stand on its own merits independently of Our decision in G.R. No. 96410. In any event, We
reiterate here in Our pronouncement in the latter case that Juan F. Nakpil & Sons vs. Court of
Appeals 20 is still good law as far as the concurrent liability of an obligor in the case of force majeure is
concerned. In the Nakpil case, We held:

To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach
of an obligation due to an "act of God," the following must concur: (a) the cause of
the breach of the obligation must be independent of the will of the debtor; (b) the
event must be either unforseeable or unavoidable; (c) the event must be such as to
render it impossible for the debtor to fulfill his obligation in a moral manner; and (d)
the debtor must be free from any participation in, or aggravation of the injury to the
creditor. (Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v. Consolacion, 71
SCRA 423; Austria v. Court of Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon
Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).

Thus, if upon the happening of a fortuitous event or an act of God, there concurs a
corresponding fraud, negligence, delay or violation or contravention in any manner of
the tenor of the obligation as provided for in Article 1170 of the Civil Code, which
results in loss or damage, the obligor cannot escape liability.

The principle embodied in the act of God doctrine strictly requires that the act must
be one occasioned exclusively by the violence of nature and all human agencies are
to be excluded from creating or entering into the cause of the mischief. When the
effect, the cause of which is to be considered, is found to be in part the result of the
participation of man, whether it be from active intervention or neglect, or failure to
act, the whole occurrence is thereby humanized, as it were, and removed from the
rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).

Thus it has been held that when the negligence of a person concurs with an act of
God in producing a loss, such person is not exempt from liability by showing that the
immediate cause of the damage was the act of God. To be exempt from liability for
loss because of an act of God, he must be free from any previous negligence or
misconduct by which that loss or damage may have been occasioned. (Fish &
Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan, 49 O.G. 4379; Limpangco
& Sons v. Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657). 21
Accordingly, petitioners cannot be heard to invoke the act of God or force majeure to escape liability
for the loss or damage sustained by private respondents since they, the petitioners, were guilty of
negligence. The event then was not occasioned exclusively by an act of God or force majeure; a
human factor negligence or imprudence had intervened. The effect then of the force majeure in
question may be deemed to have, even if only partly, resulted from the participation of man. Thus,
the whole occurrence was thereby humanized, as it were, and removed from the laws applicable to
acts of God.

WHEREFORE, for want of merit, the instant petition is hereby DISMISSED and the Consolidated
Decision of the Court of Appeals in CA-G.R. CV Nos. 27290-93 is AFFIRMED, with costs against the
petitioners.

SO ORDERED.

MALACAANG
Manila

PRESIDENTIAL DECREE No. 858 December 31, 1975

AMENDING FURTHER ACT NUMBERED TWO THOUSAND SIX HUNDRED FIFTY-FIVE, AS

AMENDED, OTHERWISE KNOWN AS THE "USURY LAW"

WHEREAS, there are transactions, which, although involving lending of funds, offer returns on
investment higher than the maximum ceilings prescribed in the Usury Law;

WHEREAS, the higher return of investment in the money market, among other factors, has drawn
money supply away from desirable areas of investment to the detriment of national interest;

WHEREAS, the interest rate, together with other monetary and credit policy instruments, plays a
vital role in directing domestic savings and capital resources to economic activities where they are
needed most;

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the

powers vested in me by the Constitution, do hereby declare and order the amendment of Act No.
2655, as amended, as follows:

Section 1. Section 1-a of Act No. 2655, as amended, is hereby amended to read as follows;

"Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of
interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to
change such rate of rates whenever warranted by prevailing economic and social conditions.

"In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum
rates for loans of low priority, such as consumer loans or renewals thereof as well as such loans
made by pawnshops, finance companies and other similar credit institutions although the rates
prescribed for these institutions need not necessarily be uniform. The Monetary Board is also
authorized to prescribe different maximum rate or rates for different types of borrowings, including
deposits and deposit substitutes, or loans of financial intermediaries."

Section 2. The same Act is hereby amended by adding the following section immediately after
Section 4 thereof, which reads as follows:
"Sec. 4-a. The Monetary Board may eliminate, exempt from, or suspend the effectivity of, interest
rate ceilings on certain types of loans or renewals thereof or forbearances of money, goods, or
credit, whenever warranted by prevailing economic and social conditions."

Section 3. Section 4-a of the same Act is hereby renumbered as Sec. 4-b.

Section 4. All Acts and parts of Acts inconsistent with the provisions of this Decree are hereby
repealed.

Section 5. This Decree shall take effect immediately.

Done in the City of Manila, this 31st day of December, in the year of Our Lord, nineteen hundred and
seventy-five.

MALACAANG
Manila

PRESIDENTIAL DECREE No. 1685 March 17, 1980

AMENDING PRESIDENTIAL DECREE NUMBERED THIRTEEN HUNDRED NINE AUTHORIZING

THE CENTRAL BANK OF THE PHILIPPINES TO ENGAGE IN SPECIAL BORROWING AND
LENDING OPERATIONS

WHEREAS, the Central Bank should be clothed with the necessary authority to tap low-cost medium
and long-term funds from international and regional financial institutions for relending to approved
development projects;

WHEREAS, the availment of the funds obtained by the Central Bank under the Consolidated Foreign
Borrowings Program should be easier by having more conduit financial institutions through which
said funds could be channeled and by liberalizing the constraints on borrowings by government-
owned or controlled financial institutions;

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the

powers vested in me by the Constitution, do hereby declare and order the amendment of
Presidential Decree No. 1309, as follows:

Section 1. Presidential Decree Numbered Thirteen hundred nine is hereby amended by adding a
new section to be known as Section 1-A to read as follows:

"Sec 1-A. Foreign loans obtained by the Central Bank from international or regional financial
organizations of which the Republic of the Philippines is a member may be guaranteed by the
Republic of the Philippines if required by the charter, regulation or policy of the lender."

Section 2. Section 2 of the same Decree is hereby amended to read as follows:

"Sec. 2. Under special circumstances where the Monetary Board deems it in the national interest,
and notwithstanding the provisions of any existing law to the contrary, the Central Bank may grant
loans to the Government or to qualified banking and non-bank financial institutions from the
proceeds of foreign loans obtained by it, subject to such terms and conditions as the Monetary
Board may prescribe, for the following and analogous purposes:
 "a. To lend to banking and non-bank financial institutions for relending, such funds to
finance approved projects;

"b. To finance Government development projects for which financing from official
development assistance (ODA) sources can not be obtained; and

"c. To refinance existing foreign obligations obtained at relatively more onerous

terms."

Section 3. The same Decree is hereby amended by adding a new section to be known as Section 3
to read as follows:

"Sec. 3. Notwithstanding the provisions of any existing law to the contrary, the Central Bank may, at
its discretion, extend the proceeds of loans obtained under this Decree to the Development Bank of
the Philippines, the Land Bank of the Philippines and other government-owned or controlled banks
whose borrowings are required under their respective charters to be guaranteed by the Republic of
the Philippines, without the guaranty of the Republic of the Philippines and the approval of the
President of the Philippines: Provided, That obligations of such government-owned or controlled
banks which are otherwise exempt from taxes imposed by the Government or any of its subdivisions
shall not lose their tax-exempt status solely as a result of the absence of such Government guaranty
or approval by the President.

Section 4. The same Decree is hereby amended by adding a new section to be known as Section 4
to read as follows:

"Sec. 4. The Monetary Board shall establish safeguards as it may deem proper to prevent undue
inflationary effect of the lending operations of the Central Bank and shall issue such rules and
regulations as may be necessary to implement this Decree and to insure a rational and coordinated
approach to the international capital markets."

Section 5. The same Decree is hereby amended by renumbering Section 3 as Section 5.

Section 6. Any provision of law, decree, rules and regulations inconsistent herewith are hereby
repealed, amended, or modified accordingly.

Section 7. This Decree shall take effect immediately.

DONE in the City of Manila, this 17th day of March, in the year of Our Lord, nineteen hundred and
eighty.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 131622 November 27, 1998

LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners,
vs.
COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES, JR.
doing lending business under the trade name and style "GONZALES CREDIT
ENTERPRISES", respondents.

PARDO, J.:

The case before the Court is a petition for review on certiorari, under Rule 45 of the Revised Rules
of Court, seeking to set aside the decision of the Court of Appeals, 1 and its resolution denying
reconsideration, 2 the dispositive portion of which decision reads as follows:

WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants

are hereby-ordered to pay the plaintiff: the sum of P500,000.00, plus 5.5% per month
interest and 2% service charge per annum effective July 23, 1986, plus 1% per
month of the total amount due and demandable as penalty charges effective August
23, 1986, until the entire amount is fully paid.

The award to the plaintiff of P50,000.00 as attorney's fees is affirmed. And so is the
imposition of costs against the defendants.

SO ORDERED. 3

The Court required the respondents to comment on the petition, 4 which was filed on April 3,
1998, 5 and the petitioners to reply thereto, which was filed on May 29, 1998. 6 We now resolve to give
due course to the petition and decide the case.

The facts of the case, as found by the Court of Appeals in its decision, which are considered binding
and conclusive on the parties herein, as the appeal is limited to questions of law, are as follows:

On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia)
obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money
lending business under the name "Gonzales Credit Enterprises", in the amount of P50,000.00,
payable in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she
retained P3,000.00, as advance interest for one month at 6% per month. Servando and Leticia
executed a promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.

On November 19, 1985, Servando and Liticia obtained from Veronica another loan in the amount of
P90,000.00, payable in two months, at 6% interest per month. They executed a promissory note to
evidence the loan, maturing on Janaury 19, 1986. They received only P84,000.00, out of the
proceeds of the loan.

On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.

On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amout of
P300,000.00, maturing in one month, secured by a real estate mortgage over a property belonging
to Leticia Makalintal Yaptinchay, who issued a special power of attorney in favor of Leticia Medel,
authorizing her to execute the mortgage. Servando and Leticia executed a promissory note in favor
of Veronica to pay the sum of P300,000.00, after a month, or on July 11, 1986. However, only the
sum of P275.000.00, was given to them out of the proceeds of the loan.

Like the previous loans, Servando and Medel failed to pay the third loan on maturity.

On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated all
their previous unpaid loans totaling P440,000.00, and sought from Veronica another loan in the
amount of P60,000.00, bringing their indebtedness to a total of P500,000.00, payable on August 23,
1986. They executed a promissory note, reading as follows:

Baliwag, Bulacan July 23, 1986

Maturity Date Augsut 23, 1986

P500,000.00

FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of
VERONICA R. GONZALES doing business in the business style of GONZALES
CREDIT ENTERPRISES, Filipino, of legal age, married to Danilo G. Gonzales, Jr., of
Baliwag, Bulacan, the sum of PESOS . . . FIVE HUNDRED THOUSAND . . .
(P500,000.00) Philippine Currency with interest thereon at the rate of 5.5 PER CENT
per month plus 2% service charge per annum from date hereof until fully paid
according to the amortization schedule contained herein. (Emphasis supplied)

Payment will be made in full at the maturity date.

Should I/WE fail to pay any amortization or portion hereof when due, all the other
installments together with all interest accrued shall immediately be due and payable
and I/WE hereby agree to pay an additional amount equivalent to one per cent (1%)
per month of the amount due and demandable as penalty charges in the form of
liquidated damages until fully paid; and the further sum of TWENTY FIVE PER CENT
(25%) thereof in full, without deductions as Attorney's Fee whether actually incurred
or not, of the total amount due and demandable, exclusive of costs and judicial or
extra judicial expenses. (Emphasis supplied).

I, WE further agree that in the event the present rate of interest on loan is increased
by law or the Central Bank of the Philippines, the holder shall have the option to
apply and collect the increased interest charges without notice although the original
interest have already been collected wholly or partially unless the contrary is required
by law.

It is also a special condition of this contract that the parties herein agree that the
amount of peso-obligation under this agreement is based on the present value of the
peso, and if there be any change in the value thereof, due to extraordinary inflation or
deflation, or any other cause or reason, then the peso-obligation herein contracted
shall be adjusted in accordance with the value of the peso then prevailing at the time
of the complete fulfillment of the obligation.

Demand and notice of dishonor waived. Holder may accept partial payments and
grant renewals of this note or extension of payments, reserving rights against each
and all indorsers and all parties to this note.
 IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors
waive all his/their rights under the provisions of Section 12, Rule 39, of the Revised
Rules of Court.

On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus interests
and penalties, evidenced by the above-quoted promissory note.

On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed with
the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the
full amount of the loan including interests and other charges.

In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando alleged
that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr. Rafael Medel
who borrowed from the plaintiffs the sum of P500,000.00, and actually received the amount and
benefited therefrom; that the loan was secured by a real estate mortgage executed in favor of the
plaintiffs, and that he (Servando Franco) signed the promissory note only as a witness.

In their separate answer filed on April 10, 1990, defendants Leticia and Rafael Medel alleged that
the loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the plaintiffs
over a parcel of real estate situated in San Juan, Batangas; that the interest rate is excessive at
5.5% per month with additional service charge of 2% per annum, and penalty charge of 1% per
month; that the stipulation for attorney's fees of 25% of the amount due is unconscionable, illegal
and excessive, and that substantial payments made were applied to interest, penalties and other
charges.

After due trial, the lower court declared that the due execution and genuineness of the four
promissory notes had been duly proved, and ruled that although the Usury Law had been repealed,
the interest charged by the plaintiffs on the loans was unconscionable and "revolting to the
conscience". Hence, the trial court applied "the provision of the New [Civil] Code" that the "legal rate
of interest for loan or forbearance of money, goods or credit is 12% per annum." 7

Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of which
reads as follows:

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

1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally,
to pay plaintiffs the amount of P47,000.00 plus 12% interest per annum from
November 7, 1985 and 1% per month as penalty, until the entire amount is paid in
full.

2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly
and severally the amount of P84,000.00 with 12% interest per annum and 1% per
cent per month as penalty from November 19, 1985 until the whole amount is fully
paid;

3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of
P285,000.00 plus 12% interest per annum and 1% per month as penalty from July
11, 1986, until the whole amount is fully paid;
 4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of
P50,000.00 as attorney's fees;

5. All counterclaims are hereby dismissed.

With costs against the defendants. 8

In due time, both plaintiffs and defendants appealed to the Court of Appeals.

In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the
unpaid loans of the defendants, is the law that governs the parties. They further argued that Circular
No. 416 of the Central Bank prescribing the rate of interest for loans or forbearance of money, goods
or credit at 12% per annum, applies only in the absence of a stipulation on interest rate, but not
when the parties agreed thereon.

The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law
having become 'legally inexistent' with the promulgation by the Central Bank in 1982 of Circular No.
905, the lender and borrower could agree on any interest that may be charged on the loan". 9 The
Court of Appeals further held that "the imposition of 'an additional amount equivalent to 1% per month of
the amount due and demandable as penalty charges in the form of liquidated damages until fully paid'
was allowed by
law". 10

Accordingly, on March 21, 1997, the Court of Appeals promulgated its decision reversing that of the
Regional Trial Court, disposing as follows:

WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants

are hereby ordered to pay the plaintiffs the sum of P500,000.00, plus 5.5% per
month interest and 2% service charge per annum effective July 23, 1986, plus 1%
per month of the total amount due and demandable as penalty charges effective
August 24, 1986, until the entire amount is fully paid.

The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is the
imposition of costs against the defendants.

SO ORDERED. 11

On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision. By
resolution dated November 25, 1997, the Court of Appeals denied the motion. 12

Hence, defendants interposed the present recourse via petition for review on certiorari. 13

We find the petition meritorious.

Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the question
presented is whether or not the stipulated rate of interest at 5.5% per month on the loan in the sum
of P500,000.00, that plaintiffs extended to the defendants is usurious. In other words, is the Usury
Law still effective, or has it been repealed by Central Bank Circular No. 905, adopted on December
22, 1982, pursuant to its powers under P.D. No. 116, as amended by P.D. No. 1684?
We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00
loan is excessive, iniquitous, unconscionable and exorbitant. 13 However, we can not consider the rate
"usurious" because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on
December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law 14 and that
the Usury Law is now "legally inexistent". 15

In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 16 the Court held
that CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but simply suspended the
latter's effectivity." Indeed, we have held that "a Central Bank Circular can not repeal a law. Only a law
can repeal another law." 17 In the recent case of Florendo vs. Court of Appeals 18, the Court reiterated the
ruling that "by virtue of CB Circular 905, the Usury Law has been rendered ineffective". "Usury has been
legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree
upon." 19

Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the
parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra
bonos mores"), if not against the law. 20 The stipulation is void. 21 The courts shall reduce equitably
liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or
unconscionable. 22

Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather, we
agree with the trial court that, under the circumstances, interest at 12% per annum, and an additional
1% a month penalty charge as liquidated damages may be more reasonable.

WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals
promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead, we render
judgment REVIVING and AFFIRMING the decision dated December 9, 1991, of the Regional Trial
Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving the same
parties.

No pronouncement as to costs in this instance.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner,

vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.

Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.

Zapa Law Office for private respondent.

VITUG, J.:

The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre
operator and the customs broker; (b) whether the payment of legal interest on an award for loss or
damage is to be computed from the time the complaint is filed or from the date the decision
appealed from is rendered; and (c) whether the applicable rate of interest, referred to above, is
twelve percent (12%) or six percent (6%).

The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed
facts that have led to the controversy are hereunder reproduced:

This is an action against defendants shipping company, arrastre operator and broker-
forwarder for damages sustained by a shipment while in defendants' custody, filed by
the insurer-subrogee who paid the consignee the value of such losses/damages.

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama,
Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern
Shipping Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance
Policy No. 81/01177 for P36,382,466.38.

Upon arrival of the shipment in Manila on December 12, 1981, it was discharged
unto the custody of defendant Metro Port Service, Inc. The latter excepted to one
drum, said to be in bad order, which damage was unknown to plaintiff.

On January 7, 1982 defendant Allied Brokerage Corporation received the shipment

from defendant Metro Port Service, Inc., one drum opened and without seal (per
"Request for Bad Order Survey." Exh. D).

On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries
of the shipment to the consignee's warehouse. The latter excepted to one drum
which contained spillages, while the rest of the contents was adulterated/fake (per
"Bad Order Waybill" No. 10649, Exh. E).

Plaintiff contended that due to the losses/damage sustained by said drum, the
consignee suffered losses totaling P19,032.95, due to the fault and negligence of
defendants. Claims were presented against defendants who failed and refused to
pay the same (Exhs. H, I, J, K, L).

As a consequence of the losses sustained, plaintiff was compelled to pay the

consignee P19,032.95 under the aforestated marine insurance policy, so that it
became subrogated to all the rights of action of said consignee against defendants
(per "Form of Subrogation", "Release" and Philbanking check, Exhs. M, N, and O).
(pp. 85-86, Rollo.)

There were, to be sure, other factual issues that confronted both courts. Here, the appellate court
said:
Defendants filed their respective answers, traversing the material allegations of the
complaint contending that: As for defendant Eastern Shipping it alleged that the
shipment was discharged in good order from the vessel unto the custody of Metro
Port Service so that any damage/losses incurred after the shipment was incurred
after the shipment was turned over to the latter, is no longer its liability (p. 17,
Record); Metroport averred that although subject shipment was discharged unto its
custody, portion of the same was already in bad order (p. 11, Record); Allied
Brokerage alleged that plaintiff has no cause of action against it, not having negligent
or at fault for the shipment was already in damage and bad order condition when
received by it, but nonetheless, it still exercised extra ordinary care and diligence in
the handling/delivery of the cargo to consignee in the same condition shipment was
received by it.

From the evidence the court found the following:

The issues are:

1. Whether or not the shipment sustained losses/damages;

2. Whether or not these losses/damages were sustained while in the

custody of defendants (in whose respective custody, if determinable);

3. Whether or not defendant(s) should be held liable for the

losses/damages (see plaintiff's pre-Trial Brief, Records, p. 34; Allied's
pre-Trial Brief, adopting plaintiff's Records, p. 38).

As to the first issue, there can be no doubt that the shipment

sustained losses/damages. The two drums were shipped in good
order and condition, as clearly shown by the Bill of Lading and
Commercial Invoice which do not indicate any damages drum that
was shipped (Exhs. B and C). But when on December 12, 1981 the
shipment was delivered to defendant Metro Port Service, Inc., it
excepted to one drum in bad order.

Correspondingly, as to the second issue, it follows that the

losses/damages were sustained while in the respective and/or
successive custody and possession of defendants carrier (Eastern),
arrastre operator (Metro Port) and broker (Allied Brokerage). This
becomes evident when the Marine Cargo Survey Report (Exh. G),
with its "Additional Survey Notes", are considered. In the latter notes,
it is stated that when the shipment was "landed on vessel" to dock of
Pier # 15, South Harbor, Manila on December 12, 1981, it was
observed that "one (1) fiber drum (was) in damaged condition,
covered by the vessel's Agent's Bad Order Tally Sheet No. 86427."
The report further states that when defendant Allied Brokerage
withdrew the shipment from defendant arrastre operator's custody on
January 7, 1982, one drum was found opened without seal, cello bag
partly torn but contents intact. Net unrecovered spillages was
15 kgs. The report went on to state that when the drums reached the
consignee, one drum was found with adulterated/faked contents. It is
obvious, therefore, that these losses/damages occurred before the
shipment reached the consignee while under the successive
 custodies of defendants. Under Art. 1737 of the New Civil Code, the
common carrier's duty to observe extraordinary diligence in the
vigilance of goods remains in full force and effect even if the goods
are temporarily unloaded and stored in transit in the warehouse of the
carrier at the place of destination, until the consignee has been
advised and has had reasonable opportunity to remove or dispose of
the goods (Art. 1738, NCC). Defendant Eastern Shipping's own
exhibit, the "Turn-Over Survey of Bad Order Cargoes" (Exhs. 3-
Eastern) states that on December 12, 1981 one drum was found
"open".

and thus held:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby

rendered:

A. Ordering defendants to pay plaintiff, jointly and severally:

1. The amount of P19,032.95, with the present legal interest of

12% per annum from October 1, 1982, the date of filing of this
complaints, until fully paid (the liability of defendant Eastern Shipping,
Inc. shall not exceed US$500 per case or the CIF value of the loss,
whichever is lesser, while the liability of defendant Metro Port
Service, Inc. shall be to the extent of the actual invoice value of each
package, crate box or container in no case to exceed P5,000.00
each, pursuant to Section 6.01 of the Management Contract);

2. P3,000.00 as attorney's fees, and

3. Costs.

B. Dismissing the counterclaims and crossclaim of

defendant/cross-claimant Allied Brokerage
Corporation.

SO ORDERED. (p. 207, Record).

Dissatisfied, defendant's recourse to US.

The appeal is devoid of merit.

After a careful scrutiny of the evidence on record. We find that the conclusion drawn
therefrom is correct. As there is sufficient evidence that the shipment sustained
damage while in the successive possession of appellants, and therefore they are
liable to the appellee, as subrogee for the amount it paid to the consignee. (pp. 87-
89, Rollo.)

The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of
discretion on the part of the appellate court when

I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE

ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF
PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;

II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE

RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE
COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF
FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE
RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.

The petition is, in part, granted.

In this decision, we have begun by saying that the questions raised by petitioner carrier are not all
that novel. Indeed, we do have a fairly good number of previous decisions this Court can merely tack
to.

The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the
time the articles are surrendered to or unconditionally placed in the possession of, and received by,
the carrier for transportation until delivered to, or until the lapse of a reasonable time for their
acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court
of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods
shipped either are lost or arrive in damaged condition, a presumption arises against the carrier of its
failure to observe that diligence, and there need not be an express finding of negligence to hold it
liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro
Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when
such presumption of fault is not observed but these cases, enumerated in Article 1734 1 of the Civil
Code, are exclusive, not one of which can be applied to this case.

The question of charging both the carrier and the arrastre operator with the obligation of properly
delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund
Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the carrier and
the arrastre operator liable in solidum,thus:

The legal relationship between the consignee and the arrastre operator is akin to that
of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5
[1967]. The relationship between the consignee and the common carrier is similar to
that of the consignee and the arrastre operator (Northern Motors, Inc. v. Prince Line,
et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to take good care
of the goods that are in its custody and to deliver them in good condition to the
consignee, such responsibility also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore charged with the obligation to deliver
the goods in good condition to the consignee.

We do not, of course, imply by the above pronouncement that the arrastre operator and the customs
broker are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that
attendant facts in a given case may not vary the rule. The instant petition has been brought solely by
Eastern Shipping Lines, which, being the carrier and not having been able to rebut the presumption
of fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a
quo and the appellate court, we take note, is that "there is sufficient evidence that the shipment
sustained damage while in the successive possession of appellants" (the herein petitioner among
them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this
case, is inevitable regardless of whether there are others solidarily liable with it.

It is over the issue of legal interest adjudged by the appellate court that deserves more than just a
passing remark.

Let us first see a chronological recitation of the major rulings of this Court:

The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money arising out of short deliveries
and pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred
in its complaint that the total amount of its claim for the value of the undelivered goods amounted to
P3,947.20. This demand, however, was neither established in its totality nor definitely ascertained. In the
stipulation of facts later entered into by the parties, in lieu of proof, the amount of P1,447.51 was agreed
upon. The trial court rendered judgment ordering the appellants (defendants) Manila Port Service and
Manila Railroad Company to pay appellee Malayan Insurance the sum of P1,447.51 with legal interest
thereon from the date the complaint was filed on 28 December 1962 until full payment thereof. The
appellants then assailed, inter alia, the award of legal interest. In sustaining the appellants, this Court
ruled:

Interest upon an obligation which calls for the payment of money, absent a
stipulation, is the legal rate. Such interest normally is allowable from the date of
demand, judicial or extrajudicial. The trial court opted for judicial demand as the
starting point.

But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be
recovered upon unliquidated claims or damages, except when the demand can be
established with reasonable certainty." And as was held by this Court in Rivera
vs. Perez, 4 L-6998, February 29, 1956, if the suit were for damages, "unliquidated and
not known until definitely ascertained, assessed and determined by the courts after proof
(Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis
supplied)

The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of Damages for
Injury to Person and Loss of Property." After trial, the lower court decreed:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party
defendants and against the defendants and third party plaintiffs as follows:

Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay
jointly and severally the following persons:

xxx xxx xxx

(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00
which is the value of the boat F B Pacita III together with its accessories, fishing gear
and equipment minus P80,000.00 which is the value of the insurance recovered and
the amount of P10,000.00 a month as the estimated monthly loss suffered by them
as a result of the fire of May 6, 1969 up to the time they are actually paid or
 already the total sum of P370,000.00 as of June 4, 1972 with legal interest from the
filing of the complaint until paid and to pay attorney's fees of P5,000.00 with costs
against defendants and third party plaintiffs. (Emphasis supplied.)

On appeal to the Court of Appeals, the latter modified the amount of damages awarded but
sustained the trial court in adjudging legal interest from the filing of the complaint until fully
paid. When the appellate court's decision became final, the case was remanded to the lower
court for execution, and this was when the trial court issued its assailed resolution which
applied the 6% interest per annum prescribed in Article 2209 of the Civil Code. In their
petition for review on certiorari, the petitioners contended that Central Bank Circular
No. 416, providing thus

By virtue of the authority granted to it under Section 1 of Act 2655, as amended,

Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that
the rate of interest for the loan, or forbearance of any money, goods, or credits and
the rate allowed in judgments, in the absence of express contract as to such rate of
interest, shall be twelve (12%) percent per annum. This Circular shall take effect
immediately. (Emphasis found in the text)

should have, instead, been applied. This Court 6 ruled:

The judgments spoken of and referred to are judgments in litigations involving loans
or forbearance of any money, goods or credits. Any other kind of monetary judgment
which has nothing to do with, nor involving loans or forbearance of any money,
goods or credits does not fall within the coverage of the said law for it is not within
the ambit of the authority granted to the Central Bank.

xxx xxx xxx

Coming to the case at bar, the decision herein sought to be executed is one
rendered in an Action for Damages for injury to persons and loss of property and
does not involve any loan, much less forbearances of any money, goods or credits.
As correctly argued by the private respondents, the law applicable to the said case is
Article 2209 of the New Civil Code which reads

Art. 2209. If the obligation consists in the payment of a sum of

money, and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of
interest agreed upon, and in the absence of stipulation, the legal
interest which is six percent per annum.

The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated on 28 July
1986. The case was for damages occasioned by an injury to person and loss of property. The trial court
awarded private respondent Pedro Manabat actual and compensatory damages in the amount of
P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying on
the Reformina v. Tomol case, this Court 8 modified the interest award from 12% to 6% interest per annum
but sustained the time computation thereof, i.e., from the filing of the complaint until fully paid.

In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of damages
arising from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29,
1968, the date of the filing of the complaint until full payment . . . ." Save from the modification of the
amount granted by the lower court, the Court of Appeals sustained the trial court's decision. When taken
to this Court for review, the case, on 03 October 1986, was decided, thus:

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the
special and environmental circumstances of this case, we deem it reasonable to
render a decision imposing, as We do hereby impose, upon the defendant and the
third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723,
Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION
(P5,000,000.00) Pesos to cover all damages (with the exception to attorney's fees)
occasioned by the loss of the building (including interest charges and lost rentals)
and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for
attorney's fees, the total sum being payable upon the finality of this decision. Upon
failure to pay on such finality, twelve (12%) per cent interest per annum shall be
imposed upon aforementioned amounts from finality until paid. Solidary costs against
the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis
supplied)

A motion for reconsideration was filed by United Construction, contending that "the interest
of twelve (12%) per cent per annum imposed on the total amount of the monetary award was
in contravention of law." The Court 10 ruled out the applicability of the Reformina and Philippine
Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained:

There should be no dispute that the imposition of 12% interest pursuant to Central
Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2)
forbearance of any money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving
loans or forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines
Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260
[1985]). It is true that in the instant case, there is neither a loan or a forbearance, but
then no interest is actually imposed provided the sums referred to in the judgment
are paid upon the finality of the judgment. It is delay in the payment of such final
judgment, that will cause the imposition of the interest.

It will be noted that in the cases already adverted to, the rate of interest is imposed
on the total sum, from the filing of the complaint until paid; in other words, as part of
the judgment for damages. Clearly, they are not applicable to the instant case.
(Emphasis supplied.)

The subsequent case of American Express International, Inc., vs. Intermediate Appellate
Court 11 was a petition for review on certiorari from the decision, dated 27 February 1985, of the then
Intermediate Appellate Court reducing the amount of moral and exemplary damages awarded by the trial
court, to P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the
amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages and P400,000.00
as exemplary damages with interest thereon at 12% per annum from notice of judgment, plus costs of
suit. In a decision of 09 November 1988, this Court, while recognizing the right of the private respondent
to recover damages, held the award, however, for moral damages by the trial court, later sustained by the
IAC, to be inconceivably large. The Court 12 thus set aside the decision of the appellate court and
rendered a new one, "ordering the petitioner to pay private respondent the sum of One Hundred
Thousand (P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis
supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which arose from
a breach of employment contract. For having been illegally dismissed, the petitioner was awarded by the
trial court moral and exemplary damages without, however, providing any legal interest thereon. When
the decision was appealed to the Court of Appeals, the latter held:

WHEREFORE, except as modified hereinabove the decision of the CFI of Negros

Oriental dated October 31, 1972 is affirmed in all respects, with the modification that
defendants-appellants, except defendant-appellant Merton Munn, are ordered to pay,
jointly and severally, the amounts stated in the dispositive portion of the decision,
including the sum of P1,400.00 in concept of compensatory damages, with interest at
the legal rate from the date of the filing of the complaint until fully paid(Emphasis
supplied.)

The petition for review to this Court was denied. The records were thereupon transmitted to
the trial court, and an entry of judgment was made. The writ of execution issued by the trial
court directed that only compensatory damages should earn interest at 6% per annum from
the date of the filing of the complaint. Ascribing grave abuse of discretion on the part of the
trial judge, a petition for certiorari assailed the said order. This Court said:

. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the
legal rate"from the time of the filing of the complaint. . . Said circular [Central Bank
Circular No. 416] does not apply to actions based on a breach of employment
contract like the case at bar. (Emphasis supplied)

The Court reiterated that the 6% interest per annum on the damages should be computed
from the time the complaint was filed until the amount is fully paid.

Quite recently, the Court had another occasion to rule on the matter. National Power Corporation
vs. Angas, 14decided on 08 May 1992, involved the expropriation of certain parcels of land. After
conducting a hearing on the complaints for eminent domain, the trial court ordered the petitioner to pay
the private respondents certain sums of money as just compensation for their lands so expropriated "with
legal interest thereon . . . until fully paid." Again, in applying the 6% legal interest per annum under the
Civil Code, the Court 15 declared:

. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods

or credits but expropriation of certain parcels of land for a public purpose, the
payment of which is without stipulation regarding interest, and the interest adjudged
by the trial court is in the nature of indemnity for damages. The legal interest required
to be paid on the amount of just compensation for the properties expropriated is
manifestly in the form of indemnity for damages for the delay in the payment thereof.
Therefore, since the kind of interest involved in the joint judgment of the lower court
sought to be enforced in this case is interest by way of damages, and not by way of
earnings from loans, etc. Art. 2209 of the Civil Code shall apply.

Concededly, there have been seeming variances in the above holdings. The cases can perhaps be
classified into two groups according to the similarity of the issues involved and the corresponding
rulings rendered by the court. The "first group" would consist of the cases of Reformina
v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz(1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan
Insurance Company v.Manila Port Service (1969), Nakpil and Sons v. Court of
Appeals (1988), and American Express International v.Intermediate Appellate Court (1988).
In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code)
or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases
that there has been a consistent holding that the Central Bank Circular imposing the 12%
interest per annum applies only to loans or forbearance 16 of money, goods or credits, as well as to
judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest under
the Civil Code governs when the transaction involves the payment of indemnities in the concept of
damage arising from the breach or a delay in the performance of obligations in general. Observe, too, that
in these cases, a common time frame in the computation of the 6% interest per annum has been
applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.

The "second group", did not alter the pronounced rule on the application of the 6% or 12%
interest per annum, 17depending on whether or not the amount involved is a loan or forbearance, on the
one hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first group" which
remained consistent in holding that the running of the legal interest should be from the time of the filing of
the complaint until fully paid, the "second group" varied on the commencement of the running of the legal
interest.

Malayan held that the amount awarded should bear legal interest from the date of the decision of the
court a quo,explaining that "if the suit were for damages, 'unliquidated and not known until definitely
ascertained, assessed and determined by the courts after proof,' then, interest 'should be from the
date of the decision.'" American Express International v. IAC, introduced a different time frame for
reckoning the 6% interest by ordering it to be "computed from the finality of (the) decision until paid."
The Nakpil and Sons case ruled that 12% interest per annum should be imposed from the finality of
the decision until the judgment amount is paid.

The ostensible discord is not difficult to explain. The factual circumstances may have called for
different applications, guided by the rule that the courts are vested with discretion, depending on the
equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of
clarification and reconciliation, to suggest the following rules of thumb for future guidance.

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts 18 is breached, the contravenor can be held liable for damages. 19 The provisions under Title XVIII
on "Damages" of the Civil Code govern in determining the measure of recoverable damages. 20

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in
writing. 21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. 22 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 23 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 24 at the rate of 6% per
annum. 25 No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. 26 Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.

WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due
computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX
PERCENT (6%), shall be imposed on such amount upon finality of this decision until the payment
thereof.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. L-68053 May 7, 1990

LAURA ALVAREZ, FLORA ALVAREZ and RAYMUNDO ALVAREZ, petitioners,

vs.
THE HONORABLE INTERMEDIATE APELLATE COURT and JESUS YANES, ESTELITA
YANES, ANTONIO YANES, ROSARIO YANES, and ILUMINADO YANES, respondents.

Francisco G. Banzon for petitioner.

Renecio R. Espiritu for private respondents.

FERNAN, C.J.:

This is a petition for review on certiorari seeking the reversal of: (a) the decision of the Fourth Civil
Cases Division of the Intermediate Appellate Court dated August 31, 1983 in AC-G.R. CV No. 56626
entitled "Jesus Yanes et al. v. Dr. Rodolfo Siason et al." affirming the decision dated July 8, 1974 of
the Court of First Instance of Negros Occidental insofar as it ordered the petitioners to pay jointly
and severally the private respondents the sum of P20,000.00 representing the actual value of Lots
Nos. 773-A and 773-B of the cadastral survey of Murcia, Negros Occidental and reversing the
subject decision insofar as it awarded the sums of P2,000.00, P5,000.00 and P2,000.00 as actual
damages, moral damages and attorney's fees, respectively and (b) the resolution of said appellate
court dated May 30, 1984, denying the motion for reconsideration of its decision.
The real properties involved are two parcels of land identified as Lot 773-A and Lot 773-B which
were originally known as Lot 773 of the cadastral survey of Murcia, Negros Occidental. Lot 773, with
an area of 156,549 square meters, was registered in the name of the heirs of Aniceto Yanes under
Original Certificate of Title No. RO-4858 (8804) issued on October 9, 1917 by the Register of Deeds
of Occidental Negros (Exh. A).

Aniceto Yanes was survived by his children, Rufino, Felipe and Teodora. Herein private
respondents, Estelita, Iluminado and Jesus, are the children of Rufino who died in 1962 while the
other private respondents, Antonio and Rosario Yanes, are children of Felipe. Teodora was survived
by her child, Jovita (Jovito) Alib. 1 It is not clear why the latter is not included as a party in this case.

Aniceto left his children Lots 773 and 823. Teodora cultivated only three hectares of Lot 823 as she
could not attend to the other portions of the two lots which had a total area of around twenty-four
hectares. The record does not show whether the children of Felipe also cultivated some portions of
the lots but it is established that Rufino and his children left the province to settle in other places as a
result of the outbreak of World War II. According to Estelita, from the "Japanese time up to peace
time", they did not visit the parcels of land in question but "after liberation", when her brother went
there to get their share of the sugar produced therein, he was informed that Fortunato Santiago,
Fuentebella (Puentevella) and Alvarez were in possession of Lot 773. 2

It is on record that on May 19, 1938, Fortunato D. Santiago was issued Transfer Certificate of Title
No. RF 2694 (29797) covering Lot 773-A with an area of 37,818 square meters. 3 TCT No. RF 2694
describes Lot 773-A as a portion of Lot 773 of the cadastral survey of Murcia and as originally registered
under OCT No. 8804.

The bigger portion of Lot 773 with an area of 118,831 square meters was also registered in the
name of Fortunato D. Santiago on September 6, 1938 Under TCT No. RT-2695 (28192 ). 4 Said
transfer certificate of title also contains a certification to the effect that Lot 773-B was originally registered
under OCT No. 8804.

On May 30, 1955, Santiago sold Lots 773-A and 773-B to Monico B. Fuentebella, Jr. in
consideration of the sum of P7,000.00. 5 Consequently, on February 20, 1956, TCT Nos. T-19291 and
T-19292 were issued in Fuentebella's name. 6

After Fuentebella's death and during the settlement of his estate, the administratrix thereof (Arsenia
R. Vda. de Fuentebella, his wife) filed in Special Proceedings No. 4373 in the Court of First Instance
of Negros Occidental, a motion requesting authority to sell Lots 773-A and 773-B. 7 By virtue of a
court order granting said motion, 8 on March 24, 1958, Arsenia Vda. de Fuentebella sold said lots for
P6,000.00 to Rosendo Alvarez. 9 Hence, on April 1, 1958 TCT Nos. T-23165 and T-23166 covering Lots
773-A and 773-B were respectively issued to Rosendo Alvarez. 10

Two years later or on May 26, 1960, Teodora Yanes and the children of her brother Rufino, namely,
Estelita, Iluminado and Jesus, filed in the Court of First Instance of Negros Occidental a complaint
against Fortunato Santiago, Arsenia Vda. de Fuentebella, Alvarez and the Register of Deeds of
Negros Occidental for the "return" of the ownership and possession of Lots 773 and 823. They also
prayed that an accounting of the produce of the land from 1944 up to the filing of the complaint be
made by the defendants, that after court approval of said accounting, the share or money equivalent
due the plaintiffs be delivered to them, and that defendants be ordered to pay plaintiffs P500.00 as
damages in the form of attorney's fees. 11
During the pendency in court of said case or on November 13, 1961, Alvarez sold Lots 773-A, 773-B
and another lot for P25,000.00 to Dr. Rodolfo Siason. 12 Accordingly, TCT Nos. 30919 and 30920 were
issued to Siason, 13 who thereafter, declared the two lots in his name for assessment purposes. 14

Meanwhile, on November 6, 1962, Jesus Yanes, in his own behalf and in behalf of the other
plaintiffs, and assisted by their counsel, filed a manifestation in Civil Case No. 5022 stating that the
therein plaintiffs "renounce, forfeit and quitclaims (sic) any claim, monetary or otherwise, against the
defendant Arsenia Vda. de Fuentebella in connection with the above-entitled case." 15

On October 11, 1963, a decision was rendered by the Court of First Instance of Negros Occidental in
Civil Case No. 5022, the dispositive portion of which reads:

WHEREFORE, judgment is rendered, ordering the defendant Rosendo Alvarez to

reconvey to the plaintiffs lots Nos. 773 and 823 of the Cadastral Survey of Murcia,
Negros Occidental, now covered by Transfer Certificates of Title Nos. T-23165 and
T-23166 in the name of said defendant, and thereafter to deliver the possession of
said lots to the plaintiffs. No special pronouncement as to costs.

SO ORDERED. 16

It will be noted that the above-mentioned manifestation of Jesus Yanes was not mentioned in the
aforesaid decision.

However, execution of said decision proved unsuccessful with respect to Lot 773. In his return of
service dated October 20, 1965, the sheriff stated that he discovered that Lot 773 had been
subdivided into Lots 773-A and 773-B; that they were "in the name" of Rodolfo Siason who had
purchased them from Alvarez, and that Lot 773 could not be delivered to the plaintiffs as Siason was
"not a party per writ of execution." 17

The execution of the decision in Civil Case No. 5022 having met a hindrance, herein private
respondents (the Yaneses) filed on July 31, 1965, in the Court of First Instance of Negros Occidental
a petition for the issuance of a new certificate of title and for a declaration of nullity of TCT Nos. T-
23165 and T-23166 issued to Rosendo Alvarez. 18 Thereafter, the court required Rodolfo Siason to
produce the certificates of title covering Lots 773 and 823.

Expectedly, Siason filed a manifestation stating that he purchased Lots 773-A, 773-B and 658, not
Lots 773 and 823, "in good faith and for a valuable consideration without any knowledge of any lien
or encumbrances against said properties"; that the decision in the cadastral proceeding 19 could not
be enforced against him as he was not a party thereto; and that the decision in Civil Case No. 5022 could
neither be enforced against him not only because he was not a party-litigant therein but also because it
had long become final and executory. 20 Finding said manifestation to be well-founded, the cadastral
court, in its order of September 4, 1965, nullified its previous order requiring Siason to surrender the
certificates of title mentioned therein. 21

In 1968, the Yaneses filed an ex-parte motion for the issuance of an alias writ of execution in Civil
Case No. 5022. Siason opposed it. 22 In its order of September 28, 1968 in Civil Case No. 5022, the
lower court, noting that the Yaneses had instituted another action for the recovery of the land in question,
ruled that at the judgment therein could not be enforced against Siason as he was not a party in the
case. 23

The action filed by the Yaneses on February 21, 1968 was for recovery of real property with
damages. 24 Named defendants therein were Dr. Rodolfo Siason, Laura Alvarez, Flora Alvarez,
Raymundo Alvarez and the Register of Deeds of Negros Occidental. The Yaneses prayed for the
cancellation of TCT Nos. T-19291 and 19292 issued to Siason (sic) for being null and void; the issuance
of a new certificate of title in the name of the Yaneses "in accordance with the sheriffs return of service
dated October 20, 1965;" Siason's delivery of possession of Lot 773 to the Yaneses; and if, delivery
thereof could not be effected, or, if the issuance of a new title could not be made, that the Alvarez and
Siason jointly and severally pay the Yaneses the sum of P45,000.00. They also prayed that Siason
render an accounting of the fruits of Lot 773 from November 13, 1961 until the filing of the complaint; and
that the defendants jointly and severally pay the Yaneses moral damages of P20,000.00 and exemplary
damages of P10,000.00 plus attorney's fees of P4, 000.00. 25

In his answer to the complaint, Siason alleged that the validity of his titles to Lots 773-A and 773-B,
having been passed upon by the court in its order of September 4, 1965, had become res
judicata and the Yaneses were estopped from questioning said order. 26 On their part, the Alvarez
stated in their answer that the Yaneses' cause of action had been "barred by res judicata, statute of
limitation and estoppel." 27

In its decision of July 8, 1974, the lower court found that Rodolfo Siason, who purchased the
properties in question thru an agent as he was then in Mexico pursuing further medical studies, was
a buyer in good faith for a valuable consideration. Although the Yaneses were negligent in their
failure to place a notice of lis pendens "before the Register of Deeds of Negros Occidental in order to
protect their rights over the property in question" in Civil Case No. 5022, equity demanded that they
recover the actual value of the land because the sale thereof executed between Alvarez and Siason
was without court approval. 28 The dispositive portion of the decision states:

IN VIEW OF THE FOREGOING CONSIDERATION, judgment is hereby rendered in

the following manner:

A. The case against the defendant Dr. Rodolfo Siason and the Register of Deeds are
(sic) hereby dismmissed,

B. The defendants, Laura, Flora and Raymundo, all surnamed Alvarez being the
legitimate children of the deceased Rosendo Alvarez are hereby ordered to pay
jointly and severally the plaintiffs the sum of P20,000.00 representing the actual
value of Lots Nos. 773-A and 773-B of Murcia Cadastre, Negros Occidental; the sum
of P2,000.00 as actual damages suffered by the plaintiff; the sum of P5,000.00
representing moral damages and the sum of P2.000 as attorney's fees, all with legal
rate of interest from date of the filing of this complaint up to final payment.

C. The cross-claim filed by the defendant Dr. Rodolfo Siason against the defendants,
Laura, Flora and Raymundo, all surnamed Alvarez is hereby dismissed.

D. Defendants, Laura, Flora and Raymundo, all surnamed Alvarez are hereby
ordered to pay the costs of this suit.

SO ORDERED. 29

The Alvarez appealed to the then Intermediate Appellate Court which in its decision of August 31,
1983 30 affirmed the lower court's decision "insofar as it ordered defendants-appellants to pay jointly and
severally the plaintiffs-appellees the sum of P20,000.00 representing the actual value of Lots Nos. 773-A
and 773-B of the cadastral survey of Murcia, Negros Occidental, and is reversed insofar as it awarded the
sums of P2,000.00, P5,000.00 and P2,000.00 as actual damages, moral damages and attorney's fees,
respectively." 31 The dispositive portion of said decision reads:
 WHEREFORE, the decision appealed from is affirmed insofar as it ordered
defendants-appellants to pay jointly and severally the plaintiffs- appellees the sum of
P20,000.00 representing the actual value of Lots Nos. 773-A and 773-B of the
cadastral survey of Murcia, Negros Occidental, and is reversed insofar as it awarded
the sums of P2,000.00, P5,000.00 and P2,000.00 as actual damages, moral
damages and attorney's fees, respectively. No costs.

SO ORDERED. 32

Finding no cogent reason to grant appellants motion for reconsideration, said appellate court denied
the same.

Hence, the instant petition. ln their memorandum petitioners raised the following issues:

1. Whethere or not the defense of prescription and estoppel had been timely and
properly invoked and raised by the petitioners in the lower court.

2. Whether or not the cause and/or causes of action of the private respondents, if
ever there are any, as alleged in their complaint dated February 21, 1968 which has
been docketed in the trial court as Civil Case No. 8474 supra, are forever barred by
statute of limitation and/or prescription of action and estoppel.

3. Whether or not the late Rosendo Alvarez, a defendant in Civil Case No. 5022,
supra and father of the petitioners become a privy and/or party to the waiver (Exhibit
4-defendant Siason) in Civil Case No. 8474, supra where the private respondents
had unqualifiedly and absolutely waived, renounced and quitclaimed all their alleged
rights and interests, if ever there is any, on Lots Nos. 773-A and 773-B of Murcia
Cadastre as appearing in their written manifestation dated November 6, 1962
(Exhibits "4" Siason) which had not been controverted or even impliedly or indirectly
denied by them.

4. Whether or not the liability or liabilities of Rosendo Alvarez arising from the sale of
Lots Nos. 773-A and 773-B of Murcia Cadastre to Dr. Rodolfo Siason, if ever there is
any, could be legally passed or transmitted by operations (sic) of law to the
petitioners without violation of law and due process . 33

The petition is devoid of merit.

As correctly ruled by the Court of Appeals, it is powerless and for that matter so is the Supreme
Court, to review the decision in Civil Case No. 5022 ordering Alvarez to reconvey the lots in dispute
to herein private respondents. Said decision had long become final and executory and with the
possible exception of Dr. Siason, who was not a party to said case, the decision in Civil Case No.
5022 is the law of the case between the parties thereto. It ended when Alvarez or his heirs failed to
appeal the decision against them. 34

Thus, it is axiomatic that when a right or fact has been judicially tried and determined by a court of
competent jurisdiction, so long as it remains unreversed, it should be conclusive upon the parties
and those in privity with them in law or estate. 35 As consistently ruled by this Court, every litigation
must come to an end. Access to the court is guaranteed. But there must be a limit to it. Once a litigant's
right has been adjudicated in a valid final judgment of a competent court, he should not be granted an
unbridled license to return for another try. The prevailing party should not be harassed by subsequent
suits. For, if endless litigation were to be allowed, unscrupulous litigations will multiply in number to the
detriment of the administration of justice. 36

There is no dispute that the rights of the Yaneses to the properties in question have been finally
adjudicated in Civil Case No. 5022. As found by the lower court, from the uncontroverted evidence
presented, the Yaneses have been illegally deprived of ownership and possession of the lots in
question. 37 In fact, Civil Case No. 8474 now under review, arose from the failure to execute Civil Case
No. 5022, as subject lots can no longer be reconveyed to private respondents Yaneses, the same having
been sold during the pendency of the case by the petitioners' father to Dr. Siason who did not know about
the controversy, there being no lis pendens annotated on the titles. Hence, it was also settled beyond
question that Dr. Siason is a purchaser in good faith.

Under the circumstances, the trial court did not annul the sale executed by Alvarez in favor of Dr.
Siason on November 11, 1961 but in fact sustained it. The trial court ordered the heirs of Rosendo
Alvarez who lost in Civil Case No. 5022 to pay the plaintiffs (private respondents herein) the amount
of P20,000.00 representing the actual value of the subdivided lots in dispute. It did not order
defendant Siason to pay said amount. 38

As to the propriety of the present case, it has long been established that the sole remedy of the
landowner whose property has been wrongfully or erroneously registered in another's name is to
bring an ordinary action in the ordinary court of justice for reconveyance or, if the property has
passed into the hands of an innocent purchaser for value, for damages. 39 "It is one thing to protect an
innocent third party; it is entirely a different matter and one devoid of justification if deceit would be
rewarded by allowing the perpetrator to enjoy the fruits of his nefarious decided As clearly revealed by the
undeviating line of decisions coming from this Court, such an undesirable eventuality is precisely sought
to be guarded against." 40

The issue on the right to the properties in litigation having been finally adjudicated in Civil Case No.
5022 in favor of private respondents, it cannot now be reopened in the instant case on the pretext
that the defenses of prescription and estoppel have not been properly considered by the lower court.
Petitioners could have appealed in the former case but they did not. They have therefore foreclosed
their rights, if any, and they cannot now be heard to complain in another case in order to defeat the
enforcement of a judgment which has longing become final and executory.

Petitioners further contend that the liability arising from the sale of Lots No. 773-A and 773-B made
by Rosendo Alvarez to Dr. Rodolfo Siason should be the sole liability of the late Rosendo Alvarez or
of his estate, after his death.

Such contention is untenable for it overlooks the doctrine obtaining in this jurisdiction on the general
transmissibility of the rights and obligations of the deceased to his legitimate children and heirs.
Thus, the pertinent provisions of the Civil Code state:

Art. 774. Succession is a mode of acquisition by virtue of which the property, rights
and obligations to the extent of the value of the inheritance, of a person are
transmitted through his death to another or others either by his will or by operation of
law.

Art. 776. The inheritance includes all the property, rights and obligations of a person
which are not extinguished by his death.

Art. 1311. Contract stake 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 received from the decedent.

As explained by this Court through Associate Justice J.B.L. Reyes in the case of Estate of Hemady
vs. Luzon Surety Co., Inc. 41

The binding effect of contracts upon the heirs of the deceased party is not altered by
the provision of our Rules of Court that money debts of a deceased must be
liquidated and paid from his estate before the residue is distributed among said heirs
(Rule 89). The reason is that whatever payment is thus made from the state is
ultimately a payment by the heirs or distributees, since the amount of the paid claim
in fact diminishes or reduces the shares that the heirs would have been entitled to
receive.

Under our law, therefore. the general rule is that a party's contractual rights and
obligations are transmissible to the successors.

The rule is a consequence of the progressive "depersonalization" of patrimonial

rights and duties that, as observed by Victorio Polacco has characterized the history
of these institutions. From the Roman concept of a relation from person to person,
the obligation has evolved into a relation from patrimony to patrimony with the
persons occupying only a representative position, barring those rare cases where the
obligation is strictly personal, i.e., is contracted intuitu personae, in consideration of
its performance by a specific person and by no other.

xxx xxx xxx

Petitioners being the heirs of the late Rosendo Alvarez, they cannot escape the legal consequences
of their father's transaction, which gave rise to the present claim for damages. That petitioners did
not inherit the property involved herein is of no moment because by legal fiction, the monetary
equivalent thereof devolved into the mass of their father's hereditary estate, and we have ruled that
the hereditary assets are always liable in their totality for the payment of the debts of the estate. 42

It must, however, be made clear that petitioners are liable only to the extent of the value of their
inheritance. With this clarification and considering petitioners' admission that there are other
properties left by the deceased which are sufficient to cover the amount adjudged in favor of private
respondents, we see no cogent reason to disturb the findings and conclusions of the Court of
Appeals.

WHEREFORE, subject to the clarification herein above stated, the assailed decision of the Court of
Appeals is hereby AFFIRMED. Costs against petitioners.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION
G.R. No. 112127 July 17, 1995

CENTRAL PHILIPPINE UNIVERSITY, petitioner,

vs.
COURT OF APPEALS, REMEDIOS FRANCO, FRANCISCO N. LOPEZ, CECILIA P. VDA. DE
LOPEZ, REDAN LOPEZ AND REMARENE LOPEZ, respondents.

BELLOSILLO, J.:

CENTRAL PHILIPPINE UNIVERSITY filed this petition for review on certiorari of the decision of the
Court of Appeals which reversed that of the Regional Trial Court of Iloilo City directing petitioner to
reconvey to private respondents the property donated to it by their predecessor-in-interest.

Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a member of the Board of
Trustees of the Central Philippine College (now Central Philippine University [CPU]), executed a
deed of donation in favor of the latter of a parcel of land identified as Lot No. 3174-B-1 of the
subdivision plan Psd-1144, then a portion of Lot No. 3174-B, for which Transfer Certificate of Title
No. T-3910-A was issued in the name of the donee CPU with the following annotations copied from
the deed of donation

1. The land described shall be utilized by the CPU exclusively for the establishment
and use of a medical college with all its buildings as part of the curriculum;

2. The said college shall not sell, transfer or convey to any third party nor in any way
encumber said land;

3. The said land shall be called "RAMON LOPEZ CAMPUS", and the said college
shall be under obligation to erect a cornerstone bearing that name. Any net income
from the land or any of its parks shall be put in a fund to be known as the "RAMON
LOPEZ CAMPUS FUND" to be used for improvements of said campus and erection
of a building thereon. 1

On 31 May 1989, private respondents, who are the heirs of Don Ramon Lopez, Sr., filed an action
for annulment of donation, reconveyance and damages against CPU alleging that since 1939 up to
the time the action was filed the latter had not complied with the conditions of the donation. Private
respondents also argued that petitioner had in fact negotiated with the National Housing Authority
(NHA) to exchange the donated property with another land owned by the latter.

In its answer petitioner alleged that the right of private respondents to file the action had prescribed;
that it did not violate any of the conditions in the deed of donation because it never used the donated
property for any other purpose than that for which it was intended; and, that it did not sell, transfer or
convey it to any third party.

On 31 May 1991, the trial court held that petitioner failed to comply with the conditions of the
donation and declared it null and void. The court a quo further directed petitioner to execute a deed
of the reconveyance of the property in favor of the heirs of the donor, namely, private respondents
herein.
Petitioner appealed to the Court of Appeals which on 18 June 1993 ruled that the annotations at the
back of petitioner's certificate of title were resolutory conditions breach of which should terminate the
rights of the donee thus making the donation revocable.

The appellate court also found that while the first condition mandated petitioner to utilize the donated
property for the establishment of a medical school, the donor did not fix a period within which the
condition must be fulfilled, hence, until a period was fixed for the fulfillment of the condition,
petitioner could not be considered as having failed to comply with its part of the bargain. Thus, the
appellate court rendered its decision reversing the appealed decision and remanding the case to the
court of origin for the determination of the time within which petitioner should comply with the first
condition annotated in the certificate of title.

Petitioner now alleges that the Court of Appeals erred: (a) in holding that the quoted annotations in
the certificate of title of petitioner are onerous obligations and resolutory conditions of the donation
which must be fulfilled non-compliance of which would render the donation revocable; (b) in holding
that the issue of prescription does not deserve "disquisition;" and, (c) in remanding the case to the
trial court for the fixing of the period within which petitioner would establish a medical college. 2

We find it difficult to sustain the petition. A clear perusal of the conditions set forth in the deed of
donation executed by Don Ramon Lopez, Sr., gives us no alternative but to conclude that his
donation was onerous, one executed for a valuable consideration which is considered the equivalent
of the donation itself, e.g., when a donation imposes a burden equivalent to the value of the
donation. A gift of land to the City of Manila requiring the latter to erect schools, construct a
children's playground and open streets on the land was considered an onerous donation. 3 Similarly,
where Don Ramon Lopez donated the subject parcel of land to petitioner but imposed an obligation upon
the latter to establish a medical college thereon, the donation must be for an onerous consideration.

Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of the event
which constitutes the condition. Thus, when a person donates land to another on the condition that
the latter would build upon the land a school, the condition imposed was not a condition precedent or
a suspensive condition but a resolutory one.4 It is not correct to say that the schoolhouse had to be
constructed before the donation became effective, that is, before the donee could become the owner of
the land, otherwise, it would be invading the property rights of the donor. The donation had to be valid
before the fulfillment of the condition. 5 If there was no fulfillment or compliance with the condition, such as
what obtains in the instant case, the donation may now be revoked and all rights which the donee may
have acquired under it shall be deemed lost and extinguished.

The claim of petitioner that prescription bars the instant action of private respondents is unavailing.

The condition imposed by the donor, i.e., the building of a medical school upon the land
donated, depended upon the exclusive will of the donee as to when this condition shall be
fulfilled. When petitioner accepted the donation, it bound itself to comply with the condition
thereof. Since the time within which the condition should be fulfilled depended upon the
exclusive will of the petitioner, it has been held that its absolute acceptance and the
acknowledgment of its obligation provided in the deed of donation were sufficient to prevent
the statute of limitations from barring the action of private respondents upon the original
contract which was the deed of donation. 6

Moreover, the time from which the cause of action accrued for the revocation of the donation and
recovery of the property donated cannot be specifically determined in the instant case. A cause of
action arises when that which should have been done is not done, or that which should not have
been done is done. 7 In cases where there is no special provision for such computation, recourse must
be had to the rule that the period must be counted from the day on which the corresponding action could
have been instituted. It is the legal possibility of bringing the action which determines the starting point for
the computation of the period. In this case, the starting point begins with the expiration of a reasonable
period and opportunity for petitioner to fulfill what has been charged upon it by the donor.

The period of time for the establishment of a medical college and the necessary buildings and
improvements on the property cannot be quantified in a specific number of years because of the
presence of several factors and circumstances involved in the erection of an educational institution,
such as government laws and regulations pertaining to education, building requirements and
property restrictions which are beyond the control of the donee.

Thus, when the obligation does not fix a period but from its nature and circumstances it can be
inferred that a period was intended, the general rule provided in Art. 1197 of the Civil Code applies,
which provides that the courts may fix the duration thereof because the fulfillment of the obligation
itself cannot be demanded until after the court has fixed the period for compliance therewith and
such period has arrived. 8

This general rule however cannot be applied considering the different set of circumstances existing
in the instant case. More than a reasonable period of fifty (50) years has already been allowed
petitioner to avail of the opportunity to comply with the condition even if it be burdensome, to make
the donation in its favor forever valid. But, unfortunately, it failed to do so. Hence, there is no more
need to fix the duration of a term of the obligation when such procedure would be a mere technicality
and formality and would serve no purpose than to delay or lead to an unnecessary and expensive
multiplication of suits. 9 Moreover, under Art. 1191 of the Civil Code, when one of the obligors cannot
comply with what is incumbent upon him, the obligee may seek rescission and the court shall decree the
same unless there is just cause authorizing the fixing of a period. In the absence of any just cause for the
court to determine the period of the compliance, there is no more obstacle for the court to decree the
rescission claimed.

Finally, since the questioned deed of donation herein is basically a gratuitous one, doubts referring
to incidental circumstances of a gratuitous contract should be resolved in favor of the least
transmission of rights and interests. 10 Records are clear and facts are undisputed that since the
execution of the deed of donation up to the time of filing of the instant action, petitioner has failed to
comply with its obligation as donee. Petitioner has slept on its obligation for an unreasonable length of
time. Hence, it is only just and equitable now to declare the subject donation already ineffective and, for
all purposes, revoked so that petitioner as donee should now return the donated property to the heirs of
the donor, private respondents herein, by means of reconveyance.

WHEREFORE, the decision of the Regional Trial Court of Iloilo, Br. 34, of 31 May 1991 is
REINSTATED and AFFIRMED, and the decision of the Court of Appeals of 18 June 1993 is
accordingly MODIFIED. Consequently, petitioner is directed to reconvey to private respondents Lot
No. 3174-B-1 of the subdivision plan Psd-1144 covered by Transfer Certificate of Title No. T-3910-A
within thirty (30) days from the finality of this judgment.

Costs against petitioner.

SO ORDERED.

Quiason and Kapunan, JJ., concur.

 Separate Opinions

DAVIDE, JR., J., dissenting:

I agree with the view in the majority opinion that the donation in question is onerous considering the
conditions imposed by the donor on the donee which created reciprocal obligations upon both
parties. Beyond that, I beg to disagree.

First of all, may I point out an inconsistency in the majority opinion's description of the donation in
question. In one part, it says that the donation in question is onerous. Thus, on page 4 it states:

We find it difficult to sustain the petition. A clear perusal of the conditions set forth in
the deed of donation executed by Don Ramon Lopez, Sr., give us no alternative but
to conclude that his donation was onerous, one executed for a valuable
consideration which is considered the equivalent of the donation itself, e.g., when a
donation imposes a burden equivalent to the value of the donation . . . . (emphasis
supplied)

Yet, in the last paragraph of page 8 it states that the donation is basically a gratuitous one.
The pertinent portion thereof reads:

Finally, since the questioned deed of donation herein is basically a gratuitous one,
doubts referring to incidental circumstances of a gratuitous contract should be
resolved in favor of the least transmission of rights and interest . . . (emphasis
supplied)

Second, the discussion on conditional obligations is unnecessary. There is no conditional obligation

to speak of in this case. It seems that the "conditions" imposed by the donor and as the word is used
in the law of donations is confused with "conditions" as used in the law of obligations. In his
annotation of Article 764 of the Civil Code on Donations, Arturo M. Tolentino, citing the well-known
civilists such as Castan, Perez Gonzalez and Alguer, and Colin & Capitant, states clearly the context
within which the term "conditions" is used in the law of donations, to wit:

The word "conditions" in this article does not refer to uncertain events on which the
birth or extinguishment of a juridical relation depends, but is used in the vulgar sense
of obligations or charges imposed by the donor on the donee. It is used, not in its
technical or strict legal sense, but in its broadest sense. 1 (emphasis supplied)

Clearly then, when the law and the deed of donation speaks of "conditions" of a donation, what are
referred to are actually the obligations, charges or burdens imposed by the donor upon the donee
and which would characterize the donation as onerous. In the present case, the donation is, quite
obviously, onerous, but it is more properly called a "modal donation." A modal donation is one in
which the donor imposes a prestation upon the donee. The establishment of the medical college as
the condition of the donation in the present case is one such prestation.

The conditions imposed by the donor Don Ramon Lopez determines neither the existence nor the
extinguishment of the obligations of the donor and the donee with respect to the donation. In fact,
the conditions imposed by Don Ramon Lopez upon the donee are the very obligations of the
donation to build the medical college and use the property for the purposes specified in the deed
of donation. It is very clear that those obligations are unconditional, the fulfillment, performance,
existence or extinguishment of which is not dependent on any future or uncertain event or past and
unknown event, as the Civil Code would define a conditional obligation. 2

Reliance on the case of Parks vs. Province of Tarlac 3 as cited on page 5 of the majority opinion is
erroneous in so far as the latter stated that the condition in Parks is a resolutory one and applied this to
the present case. A more careful reading of this Court's decision would reveal that nowhere did we say,
whether explicitly or impliedly, that the donation in that case, which also has a condition imposed to build
a school and a public park upon the property donated, is a resolutory condition. 4 It is incorrect to say that
the "conditions" of the donation there or in the present case are resolutory conditions because, applying
Article 1181 of the Civil Code, that would mean that upon fulfillment of the conditions, the rights already
acquired will be extinguished. Obviously, that could not have been the intention of the parties.

What the majority opinion probably had in mind was that the conditions are resolutory because if
they are notcomplied with, the rights of the donee as such will be extinguished and the donation will
be revoked. To my mind, though, it is more accurate to state that the conditions here are not
resolutory conditions but, for the reasons stated above, are the obligations imposed by the donor.

Third, I cannot subscribe to the view that the provisions of Article 1197 cannot be applied here. The
conditions/obligations imposed by the donor herein are subject to a period. I draw this conclusion
based on our previous ruling which, although made almost 90 years ago, still finds application in the
present case. In Barretto vs. City of Manila, 5 we said that when the contract of donation, as the one
involved therein, has no fixed period in which the condition should be fulfilled, the provisions of what is
now Article 1197 (then Article 1128) are applicable and it is the duty of the court to fix a suitable time for
its fulfillment. Indeed, from the nature and circumstances of the conditions/obligations of the present
donation, it can be inferred that a period was contemplated by the donor. Don Ramon Lopez could not
have intended his property to remain idle for a long period of time when in fact, he specifically burdened
the donee with the obligation to set up a medical college therein and thus put his property to good use.
There is a need to fix the duration of the time within which the conditions imposed are to be fulfilled.

It is also important to fix the duration or period for the performance of the conditions/obligations in
the donation in resolving the petitioner's claim that prescription has already barred the present
action. I disagree once more with the ruling of the majority that the action of the petitioners is not
barred by the statute of limitations. There is misplaced reliance again on a previous decision of this
Court in Osmea vs. Rama. 6 That case does not speak of a deed of donation as erroneously quoted
and cited by the majority opinion. It speaks of a contract for a sum of money where the debtor herself
imposed a condition which will determine when she will fulfill her obligation to pay the creditor, thus,
making the fulfillment of her obligation dependent upon her will. What we have here, however, is not a
contract for a sum of money but a donation where the donee has not imposed any conditions on the
fulfillment of its obligations. Although it is admitted that the fulfillment of the conditions/obligations of the
present donation may be dependent on the will of the donee as to when it will comply therewith, this did
not arise out of a condition which the donee itself imposed. It is believed that the donee was not meant to
and does not have absolute control over the time within which it will perform its obligations. It must still do
so within a reasonable time. What that reasonable time is, under the circumstances, for the courts to
determine. Thus, the mere fact that there is no time fixed as to when the conditions of the donation are to
be fulfilled does not ipso facto mean that the statute of limitations will not apply anymore and the action to
revoke the donation becomes imprescriptible.
Admittedly, the donation now in question is an onerous donation and is governed by the law on
contracts (Article 733) and the case of Osmea, being one involving a contract, may apply. But we
must not lose sight of the fact that it is still a donation for which this Court itself applied the pertinent
law to resolve situations such as this. That the action to revoke the donation can still prescribe has
been the pronouncement of this Court as early as 1926 in the case of Parks which, on this point,
finds relevance in this case. There, this Court said,

[that] this action [for the revocation of the donation] is prescriptible, there is no doubt.
There is no legal provision which excludes this class of action from the statute of
limitations. And not only this, the law itself recognizes the prescriptibility of the action
for the revocation of a donation, providing a special period of [four] years for the
revocation by the subsequent birth of children [Art. 646, now Art. 763], and . . . by
reason of ingratitude. If no special period is provided for the prescription of the action
for revocation for noncompliance of the conditions of the donation [Art. 647, now Art.
764], it is because in this respect the donation is considered onerous and is
governed by the law of contracts and the general rules of prescription. 7

More recently, in De Luna v. Abrigo, 8 this Court reiterated the ruling in Parks and said that:

It is true that under Article 764 of the New Civil Code, actions for the revocation of a
donation must be brought within four (4) years from the non-compliance of the
conditions of the donation. However, it is Our opinion that said article does not apply
to onerous donations in view of the specific provision of Article 733 providing that
onerous donations are governed by the rules on contracts.

In the light of the above, the rules on contracts and the general rules on prescription
and not the rules on donations are applicable in the case at bar.

The law applied in both cases is Article 1144(1). It refers to the prescription of an action upon a
written contract, which is what the deed of an onerous donation is. The prescriptive period is ten
years from the time the cause of action accrues, and that is, from the expiration of the time within
which the donee must comply with the conditions/obligations of the donation. As to when this exactly
is remains to be determined, and that is for the courts to do as reposed upon them by Article 1197.

For the reasons expressed above, I register my dissent. Accordingly, the decision of the Court of
Appeals must be upheld, except its ruling that the conditions of the donation are resolutory.

Padilla, J., dissents

Separate Opinions

DAVIDE, JR., J., dissenting:

I agree with the view in the majority opinion that the donation in question is onerous considering the
conditions imposed by the donor on the donee which created reciprocal obligations upon both
parties. Beyond that, I beg to disagree.

First of all, may I point out an inconsistency in the majority opinion's description of the donation in
question. In one part, it says that the donation in question is onerous. Thus, on page 4 it states:
 We find it difficult to sustain the petition. A clear perusal of the conditions set forth in
the deed of donation executed by Don Ramon Lopez, Sr., give us no alternative but
to conclude that his donation was onerous, one executed for a valuable
consideration which is considered the equivalent of the donation itself, e.g., when a
donation imposes a burden equivalent to the value of the donation . . . . (emphasis
supplied)

Yet, in the last paragraph of page 8 it states that the donation is basically a gratuitous one.
The pertinent portion thereof reads:

Finally, since the questioned deed of donation herein is basically a gratuitous one,
doubts referring to incidental circumstances of a gratuitous contract should be
resolved in favor of the least transmission of rights and interest . . . (emphasis
supplied)

Second, the discussion on conditional obligations is unnecessary. There is no conditional obligation

to speak of in this case. It seems that the "conditions" imposed by the donor and as the word is used
in the law of donations is confused with "conditions" as used in the law of obligations. In his
annotation of Article 764 of the Civil Code on Donations, Arturo M. Tolentino, citing the well-known
civilists such as Castan, Perez Gonzalez and Alguer, and Colin & Capitant, states clearly the context
within which the term "conditions" is used in the law of donations, to wit:

The word "conditions" in this article does not refer to uncertain events on which the
birth or extinguishment of a juridical relation depends, but is used in the vulgar sense
of obligations or charges imposed by the donor on the donee. It is used, not in its
technical or strict legal sense, but in its broadest sense. 1 (emphasis supplied)

Clearly then, when the law and the deed of donation speaks of "conditions" of a donation, what are
referred to are actually the obligations, charges or burdens imposed by the donor upon the donee
and which would characterize the donation as onerous. In the present case, the donation is, quite
obviously, onerous, but it is more properly called a "modal donation." A modal donation is one in
which the donor imposes a prestation upon the donee. The establishment of the medical college as
the condition of the donation in the present case is one such prestation.

The conditions imposed by the donor Don Ramon Lopez determines neither the existence nor the
extinguishment of the obligations of the donor and the donee with respect to the donation. In fact,
the conditions imposed by Don Ramon Lopez upon the donee are the very obligations of the
donation to build the medical college and use the property for the purposes specified in the deed
of donation. It is very clear that those obligations are unconditional, the fulfillment, performance,
existence or extinguishment of which is not dependent on any future or uncertain event or past and
unknown event, as the Civil Code would define a conditional obligation. 2

Reliance on the case of Parks vs. Province of Tarlac 3 as cited on page 5 of the majority opinion is
erroneous in so far as the latter stated that the condition in Parks is a resolutory one and applied this to
the present case. A more careful reading of this Court's decision would reveal that nowhere did we say,
whether explicitly or impliedly, that the donation in that case, which also has a condition imposed to build
a school and a public park upon the property donated, is a resolutory condition. 4 It is incorrect to say that
the "conditions" of the donation there or in the present case are resolutory conditions because, applying
Article 1181 of the Civil Code, that would mean that upon fulfillment of the conditions, the rights already
acquired will be extinguished. Obviously, that could not have been the intention of the parties.
What the majority opinion probably had in mind was that the conditions are resolutory because if
they are notcomplied with, the rights of the donee as such will be extinguished and the donation will
be revoked. To my mind, though, it is more accurate to state that the conditions here are not
resolutory conditions but, for the reasons stated above, are the obligations imposed by the donor.

Third, I cannot subscribe to the view that the provisions of Article 1197 cannot be applied here. The
conditions/obligations imposed by the donor herein are subject to a period. I draw this conclusion
based on our previous ruling which, although made almost 90 years ago, still finds application in the
present case. In Barretto vs. City of Manila, 5 we said that when the contract of donation, as the one
involved therein, has no fixed period in which the condition should be fulfilled, the provisions of what is
now Article 1197 (then Article 1128) are applicable and it is the duty of the court to fix a suitable time for
its fulfillment. Indeed, from the nature and circumstances of the conditions/obligations of the present
donation, it can be inferred that a period was contemplated by the donor. Don Ramon Lopez could not
have intended his property to remain idle for a long period of time when in fact, he specifically burdened
the donee with the obligation to set up a medical college therein and thus put his property to good use.
There is a need to fix the duration of the time within which the conditions imposed are to be fulfilled.

It is also important to fix the duration or period for the performance of the conditions/obligations in
the donation in resolving the petitioner's claim that prescription has already barred the present
action. I disagree once more with the ruling of the majority that the action of the petitioners is not
barred by the statute of limitations. There is misplaced reliance again on a previous decision of this
Court in Osmea vs. Rama. 6 That case does not speak of a deed of donation as erroneously quoted
and cited by the majority opinion. It speaks of a contract for a sum of money where the debtor herself
imposed a condition which will determine when she will fulfill her obligation to pay the creditor, thus,
making the fulfillment of her obligation dependent upon her will. What we have here, however, is not a
contract for a sum of money but a donation where the donee has not imposed any conditions on the
fulfillment of its obligations. Although it is admitted that the fulfillment of the conditions/obligations of the
present donation may be dependent on the will of the donee as to when it will comply therewith, this did
not arise out of a condition which the donee itself imposed. It is believed that the donee was not meant to
and does not have absolute control over the time within which it will perform its obligations. It must still do
so within a reasonable time. What that reasonable time is, under the circumstances, for the courts to
determine. Thus, the mere fact that there is no time fixed as to when the conditions of the donation are to
be fulfilled does not ipso facto mean that the statute of limitations will not apply anymore and the action to
revoke the donation becomes imprescriptible.

Admittedly, the donation now in question is an onerous donation and is governed by the law on
contracts (Article 733) and the case of Osmea, being one involving a contract, may apply. But we
must not lose sight of the fact that it is still a donation for which this Court itself applied the pertinent
law to resolve situations such as this. That the action to revoke the donation can still prescribe has
been the pronouncement of this Court as early as 1926 in the case of Parks which, on this point,
finds relevance in this case. There, this Court said,

[that] this action [for the revocation of the donation] is prescriptible, there is no doubt.
There is no legal provision which excludes this class of action from the statute of
limitations. And not only this, the law itself recognizes the prescriptibility of the action
for the revocation of a donation, providing a special period of [four] years for the
revocation by the subsequent birth of children [Art. 646, now Art. 763], and . . . by
reason of ingratitude. If no special period is provided for the prescription of the action
for revocation for noncompliance of the conditions of the donation [Art. 647, now Art.
764], it is because in this respect the donation is considered onerous and is
governed by the law of contracts and the general rules of prescription. 7

More recently, in De Luna v. Abrigo, 8 this Court reiterated the ruling in Parks and said that:
 It is true that under Article 764 of the New Civil Code, actions for the revocation of a
donation must be brought within four (4) years from the non-compliance of the
conditions of the donation. However, it is Our opinion that said article does not apply
to onerous donations in view of the specific provision of Article 733 providing that
onerous donations are governed by the rules on contracts.

In the light of the above, the rules on contracts and the general rules on prescription
and not the rules on donations are applicable in the case at bar.

The law applied in both cases is Article 1144(1). It refers to the prescription of an action upon a
written contract, which is what the deed of an onerous donation is. The prescriptive period is ten
years from the time the cause of action accrues, and that is, from the expiration of the time within
which the donee must comply with the conditions/obligations of the donation. As to when this exactly
is remains to be determined, and that is for the courts to do as reposed upon them by Article 1197.

For the reasons expressed above, I register my dissent. Accordingly, the decision of the Court of
Appeals must be upheld, except its ruling that the conditions of the donation are resolutory.

Padilla, J., dissents

FIRST DIVISION

[G.R. No. 137823. December 15, 2000]

REYNALDO MORTEL, petitioner, vs. KASSCO, INC. and OSCAR

SANTOS, respondents.

DECISION
KAPUNAN, J.:

This is a petition for review on certiorari of the Decision of the Court of

Appeals,[1] dated September 30, 1998, in C.A. GR CV No. 52059 which affirmed the
Decision of the Regional Trial Court of Makati City, Branch 66, in Civil Case No. 89-
3260 dismissing petitioners complaint for specific performance and/or rescission with
damages.
The facts leading to the filing of the present petition are as follows:
KASSCO, Inc. is the registered owner of the lot covered by Transfer Certificate of
Title No. 137791 as well as the building (named Kassco Building) standing thereon
located at the corner of Cavite and Lico Streets, Rizal Avenue, Sta. Cruz, Manila. To
secure a loan obtained from the Philippine National Bank (PNB), which was renting the
first floor of the building, KASSCO, Inc. mortgaged such property to the latter. This
mortgage was duly annotated at the back of TCT No. 137791 on May 11, 1981.
 In 1985, KASSCO, Inc. applied for the conversion of the Kassco Building into a
condominium which application was approved by the then Human Settlements
Regulatory Commission (HSRC) on August 9, 1985.As a requirement for registration
and issuance of a license to sell, KASSCO, Inc. wrote PNB to secure its approval of the
said conversion and the partial release or cancellation of the mortgage over the fully-
paid units.
In the same year, KASSCO, Inc., represented by Oscar Santos, entered into an
Agreement with herein petitioner Reynaldo Mortel, the pertinent provisions of which
provide:

WHEREAS, the SELLER has offered to sell the second floor of the above-
mentioned building, with the floor area of One Hundred Sixty Five (165)
square meters, more or less, including common areas (referred to herein as
Second Floor) and the buyer has agreed to buy the same, subject to the terms
and conditions hereinafter set forth:

WHEREAS, the aforementioned property is the subject of an application for

conversion into a commercial condominium filed with the Human Settlements
Regulatory Commission of the Ministry of Human Settlements, which has
been recently approved:

NOW, THEREFORE, for and in consideration of the foregoing premises and

the mutual stipulations hereinafter set forth, the parties hereby agree and bind
themselves as follows:

1. Object of the Sale

xxx
2. Purchase Price
xxx
3. Manner of Payment

Upon securing the individual condominium certificate of title (CCT) over

the Kassco Building, which the SELLER undertakes to accomplish within one
year from execution hereof, the seller shall execute a Deed of Absolute sale in
favor and deliver to the buyer the CCT corresponding to the Second Floor,
free from any liens and encumbrances.Simultaneously, and to secure the
payment by the buyer of the purchase price or balance thereof, the BUYER
shall execute a Deed of Mortgage in favor of the SELLER over the said
second Floor. The buyer undertakes to pay the full purchase price, or the
remaining thereof, within two (2) months from the delivery of the CCT. Should
the buyer fail to pay in full the agreed purchase price within two (2) months as
herein agreed upon, the parties shall renegotiate the purchase price based on
the prevailing Market Value of the property.

Upon full payment of the BUYER of the purchase price, the SELLER shall
deliver to the BUYER a Deed of Release canceling the aforesaid mortgage.

4. Possession
xxx
5. Lease and Rental

Pending the delivery of the title to the BUYER and payment to the SELLER of
the full amount of the purchase price, a contract of lease for definite period of
one (1) year from the date of this agreement, is hereby constituted on the
aforementioned Second Floor of the Kassco Building, subject to the following
terms and conditions:

a. xxx

b. The lease herein constitute shall be deemed automatically terminated upon

full payment of the purchase price to the SELLER, or the expiration of the
agreed one (1) year lease period, whichever comes first.

c. If the Deed of Absolute Sale is not executed through no fault of the

SELLER, BUYER-LESSEE shall peacefully and voluntarily vacate the
premises upon the expiration of the one (1) year period. However, should
SELLER fail to obtain the CCT or authority to sell within the one (1) year
period agreed upon and delay or failure is attributable to the SELLER, the
buyer may exercise any of the following options: 1) renew and/or extend the
lease for another year under such terms and conditions mutually agreed upon
between the parties; or 1) vacate the premises but shall have the right to buy
the Second Floor for the purchase price reasonably fixed at such time that the
SELLER is ready to convey ownership thereof.

7. Improvements

xxx

The buyer may introduce additional improvements on the premises herein

agreed to be bought and sold but in case of non-payment of the purchase
price and expiration of the lease period, such improvement shall be forfeited in
favor of the SELLER. [2]
 KASSCO, Inc.s request for partial cancellation of mortgage and delivery of TCT No.
137791 remained unacted upon by PNB such that the one-year period of lease with
petitioner, as embodied in the Agreement expired without KASSCO securing and
delivering the Condominium Certificate of Title (CCT) to petitioner.
Thus, petitioner and private respondent executed another agreement which
substantially contained the same terms and conditions as the first agreement and
modified only insofar as the purchase price and monthly rental fee of P680,000.00 and
P5,000.00, respectively, were increased to P816,000.00 and P7,000.00.
The period covered by the second agreement again lapsed without KASSCO
obtaining the release of the mortgage with PNB and the Condominium Certificate of
Title. Nonetheless, petitioner remained in occupation of the premises at a monthly rental
fee of P7,000.00.
On November 10, 1988, KASSCO ordered petitioner to vacate the premises and to
pay an additional rental fee of P2,000.00 per month from October 18, 1987 to October
18,1988. KASSCO also increased the monthly rental fee to P11,550.00 effective
October 18, 1988.
On November 24, 1988, petitioner, in response, demanded from private respondent
the delivery of the CCT over the subject property and the execution of a Deed of
Absolute Sale in his favor.
This prompted KASSCO, Inc. to file a complaint for unlawful detainer against
petitioner on December 13, 1988. Petitioner Mortel, in turn, instituted the present case
for specific performance or rescission with damages against KASSCO, Inc. When Oscar
Santos failed to file his Answer within the reglementary period, he was declared in
default and herein petitioner presented evidence ex-parte. Meanwhile, during the
pendency of the case, the Kassco Building was foreclosed due to KASSCOs failure to
settle its obligation with PNB.
On November 29, 1995, the Regional Trial Court dismissed petitioners
complaint. This dismissal was affirmed by the Court of Appeals on September 30,
1998. Hence, the present petition.
Petitioner contends that since the 1985 and 1986 agreements were in the nature of
a contract to sell a condominium, then the pertinent provisions of the Condominium
Law, P.D. 957 and the Law on Sale of Real Estate on Installment, R.A. 6581, shall
apply such that he may recover whatever he has paid as partial payment and monthly
rental fees under said agreements and likewise be reimbursed the value of the
improvements he has introduced to the subject property.
Petitioner further attributes misrepresentation and bad faith to private respondent
KASSCO, Inc. for its alleged failure to inform petitioner that the property was mortgaged
to PNB and that it has not yet secured a license to sell at the time the subject
agreements were entered into.
The Court finds no merit in the petition.
 In interpretation of contracts, it is an elementary rule that if the terms of a contract
are clear and leave no doubt as to the intentions of the contracting parties, then the
literal meaning of its stipulations shall control.[3]
Clearly discernible from the subject Agreements is the existence of two contracts -
the first is the principal contract to sell the second floor of the Kassco Building, and
second is a contract of lease over the same property, pending delivery of title by
KASSCO, effective for a period of one year from date of execution of the said
agreements.
From its terms, the first contract is doubtlessly a contract to sell because ownership
is reserved in the vendor and title is not to pass until full payment of the purchase
price.[4] Moreover, this contract to sell is subject to a suspensive condition which is the
acquisition of individual condominium certificates of title (CCT) over the building which
private respondent undertook to accomplish within one year from date of execution. In
contracts subject to a suspensive condition, the birth or effectivity of such contracts only
takes place if and when the event constituting the condition happens or is fulfilled, and if
the suspensive condition does not take place, the parties would stand as if the
conditional obligation had never existed.[5]
In the present petition, the effectivity of the contract to sell is conditioned upon the
obtainment and delivery of the condominium certificate of title to petitioner by private
respondent. Under the terms of the agreement, title shall only pass and a deed of
absolute sale shall only be executed in favor of the buyer upon securing individual
CCTs over the subject property. The non-fulfillment of this condition is thus evident
when KASSCO, Inc. failed to secure the partial cancellation of its mortgage and the
return of its Transfer Certificate of Title by PNB, both of which were indispensable to
registration and the issuance of a license to sell a condominium, which in turn, are
prerequisites to the issuance of a CCT.
When private respondent thus failed to secure CCTs over the property subject of
this controversy, the contract to sell did not take into effect. Consequently, the laws
invoked by petitioner, PD 957 and RA 6581, find no application to the present case
because said laws presuppose the existence of a valid and effective contract to sell a
condominium. As succinctly pointed out by the Court of Appeals, the parties must have,
in fact, anticipated the non-fulfillment of the suspensive condition when they
incorporated the lease contract in their agreements.[6] Moreover, the subsequent act of
herein petitioner, specifically, the payment of monthly rental fees evidenced by receipts
denominated as rental confirm petitioners assent to the lease contract embodied in the
subject agreements. Since, the conditional obligation is deemed not to have existed by
reason of the non-fulfillment of the suspensive condition, the award of damages under
Art. 1191 of the Civil Code[7] is unwarranted.
As to the allegation of bad faith and misrepresentation on the part of private
respondent KASSCO, Inc., again, the contention is bereft of merit. It is well-settled
that bad faith cannot be presumed and must be established by clear and convincing
evidence.[8] And the person who seeks damages due to the acts of another has the
burden of proving that the latter acted in bad faith or with ill-motive.[9] In the case under
scrutiny, petitioner failed to show bad faith on the part of private respondent KASSCO,
Inc. We quote with approval the disquisitions of the court a quo on the matter as
affirmed by the Court of Appeals:

In the ordinary course of things, prudence dictates that a buyer of a real

property (plaintiff claims to be so) would look into the title thereof. xxx Plaintiff
is a sales manager of PHILAMLIFE Co. and it is expected that a person
holding such a position will not readily enter into a contract without exercising
ordinary care by checking the title covering the property.

Moreover, plaintiff testified that he learned of the mortgage in the middle of the
year 1986 when the first agreement was in operation (TSN, Oct. 23, 1993:
p.11-12). If this was so, plaintiff should have asked for explanation about the
said mortgage or protested the same. This, he did not do. Notwithstanding this
knowledge, he entered into another agreement for (sic) October 18, 1986 to
October 18, 1987 with the same terms and conditions as the 1985 agreement
except for the purchase price and the monthly rents. (Exh. B or 2). [10]

As to the alleged representations made by private respondent that it had license to

sell condominium units at the time the subject agreements were executed, the Court
finds no such misrepresentation. The only assurance given by private respondent to
herein petitioner is that its application for conversion of the Kassco Building into a
commercial condominium has been approved by the HSRC. In fact, the undertaking
assumed by herein private respondent to secure individual condominium certificates of
title over the subject property within one year from date of execution of the agreement is
an indication that its registration and the issuance of its license to sell was still in
process.
Finally, it must be pointed out that neither the law nor the courts will excuse a party
from an unwise or undesirable contract he or she entered into with all the required
formalities and with full awareness of its consequences [11] as in the case of herein
petitioner.
WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court of
Appeals, dated September 30, 1998, in CA-GR CV No. 52059 is hereby AFFIRMED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 4437 September 9, 1909

TOMAS OSMEA, plaintiff-appellee,
vs.
CENONA RAMA, defendant-appellant.

Filemon Sotto for appellant.

J. H. Junquera for appellee.

JOHNSON, J.:

It appears from the record that upon the 15th day of November, 1890, the defendant herein
executed and delivered to Victoriano Osmea the following contract:

EXHIBIT A.

P200.00.

CEBU, November 15, 1890.

I, Doa Cenona Rama, a resident of this city, and of legal age, have received from Don
Victoriano Osmea the sum of two hundred pesos in cash which I will pay in sugar in the
month of January or February of the coming year, at the price ruling on the day of delivering
the sugar into his warehouse, and I will pay him interest at the rate of half a cuartillo per
month on each peso, beginning on this date until the day of the settlement; and if I can not
pay in full, a balance shall be struck, showing the amount outstanding at the end of each
June, including interest, and such as may be outstanding against me shall be considered as
capital which I will always pay in sugar, together with the interest mentioned above. I further
promise that I will sell to the said Seor Osmea all the sugar that I may harvest, and as a
guarantee, pledge as security all of my present and future property, and as special security
the house with tile roof and ground floor of stone in which I live in Pagina; in proof whereof, I
sign this document, and he shall be entitled to make claim against me at the expiration of the
term stated in this document.

(Signed) CENON RAMA.

Witnesses:

FAUSTO PEALOSA.
FRANCISCO MEDALLE.

On the 27th day of October, 1891, the defendant executed and delivered to the said Victoriano
Osmea the following contract:

EXHIBIT B.

CEBU, October 27, 1891.

On this date I have asked for further loan and have received from Don Victoriano Osmea
the sum of seventy pesos in cash, fifty pesos of which I have loaned to Don Evaristo
Peares, which we will pay in sugar in the month of January of the coming year according to
the former conditions.
 (Signed) CENONA RAMA.

From Don Evaristo Peares P50

Doa Cenona Rama 20

P70

Received Evaristo Peares.

Some time after the execution and delivery of the above contracts, the said Victoriano Osmea died.
In the settlement and division of the property of his estate the above contracts became the property
of one of his estate the above contracts became the property of one of his heirs, Agustina Rafols.
Later, the date does not appear, the said Agustina Rafols ceded to the present plaintiff all of her right
and interest in said contracts.

On the 15th day of March, 1902 the plaintiff presented the contracts to the defendant for payment
and she acknowledged her responsibility upon said contracts by an indorsement upon them in the
following language:

EXHIBIT C.

CEBU, March 15, 1902.

On this date I hereby promise, in the presence of two witness, that if the house of strong
materials in which I live in Pagina is sold, I will pay my indebtedness to Don Tomas Osmea
as set forth in this document.

(Signed) CENONA RAMA.

The defendant not having paid the amount due on said contracts; the plaintiff, upon the 26th day of
June, 1906, commenced the present action in the Court of First Instance of the Province of Cebu.
The complaint filed in said cause alleged the execution and delivery of the above contracts, the
demand for payment, and the failure to pay on the part of the defendant, and the prayer for a
judgment for the amount due on the said contracts. The defendant answered by filing a general
denial and setting up the special defense of prescription.

The case was finally brought on to trial in the Court of First Instance, and the only witness produced
during the trial was the plaintiff himself. The defendant did not offer any proof whatever in the lower
court.

After hearing the evidence adduced during the trial, the lower court rendered a judgment in favor of
the plaintiff and against the defendant for the sum of P200 with interest at the rate of 18 3/4 per cent
per annum, from the 15th day of November, 1890, and for the sum of P20 with interest at the rate of
18 3/4 per cent per annum, from the 27th day of October, 1891, until the said sums were paid. From
this judgment the defendant appealed.

The lower court found that P50 of the P70 mentioned in Exhibit B had been borrowed by the
defendant, but by one Evaristo Peares; therefore the defendant had no responsibility for the
payment of the said P50.
The only questions raised by the appellant were questions of fact. The appellant alleges that the
proof adduced during the trial of the cause was not sufficient to support the findings of the lower
court. It was suggested during the discussion of the case in this court that, in the acknowledgment
above quoted of the indebtedness made by the defendant, she imposed the condition that she would
pay the obligation if she sold her house. If that statement found in her acknowledgment of the
indebtedness should be regarded as a condition, it was a condition which depended upon her
exclusive will, and is therefore, void. (Art. 1115, Civil Code.) The acknowledgment, therefore, was an
absolute acknowledgment of the obligation and was sufficient to prevent the statute of limitation from
barring the action upon the original contract.

We are satisfied, from all of the evidence adduced during the trial, that the judgment of the lower
court should be affirmed. So ordered.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-5267 October 27, 1953

LUZ HERMOSA, as administratrix of the Intestate Estate of Fernando Hermosa, Sr., and
FERNANDO HERMOSA, JR., petitioners,
vs.
EPIFANIO M. LONGARA, respondent.

Manuel O. Chan for petitioners.

Jacinto R. Bohol for respondent.

LABRADOR, J.:

This is an appeal by way of certiorari against a decision of the Court of Appeals, fourth division,
approving certain claims presented by Epifanio M. Longara against the testate estate of Fernando
Hermosa, Sr. The claims are of three kinds, namely, P2,341.41 representing credit advances made
to the intestate from 1932 to 1944, P12,924.12 made to his son Francisco Hermosa, and P3,772
made to his grandson, Fernando Hermosa, Jr. from 1945 to 1947, after the death of the intestate,
which occurred in December, 1944. The claimant presented evidence and the Court of Appeals
found, in accordance therewith, that the intestate had asked for the said credit advances for himself
and for the members of his family "on condition that their payment should be made by Fernando
Hermosa, Sr. as soon as he receive funds derived from the sale of his property in Spain." Claimant
had testified without opposition that the credit advances were to be "payable as soon as Fernando
Hermosa, Sr.'s property in Spain was sold and he receive money derived from the sale." The Court
of Appeals held that payment of the advances did not become due until the administratrix received
the sum of P20,000 from the buyer of the property. Upon authorization of the probate court in
October, 1947, and the same was paid for subsequently. The Claim was filed on October 2, 1948.

It is contended on this appeal that the obligation contracted by the intestate was subject to a
condition exclusively dependent upon the will of the debtor (a condicion potestativa) and therefore
null and void, in accordance with article 1115 of the old Civil Code. The case of Osmea vs. Rama,
(14 Phil. 99) is cited to support appellants contention. In this case, this court seems to have filed that
a promise to pay an indebtedness "if a house of strong materials is sold" is an obligation the
performance of which depended on the will of the debtor. We have examined this case and we find
that the supposed ruling was merely an assumption and the same was not the actual ruling of the
case.

A careful consideration of the condition upon which payment of the sums advanced was made to
depend, "as soon as he (intestate) receive funds derived from the sale of his property in Spain,"
discloses the fact that the condition in question does not depend exclusively upon the will of the
debtor, but also upon other circumstances beyond his power or control. If the condition were "if he
decides to sell his house." or "if he likes to pay the sums advanced," or any other condition of similar
import implying that upon him (the debtor) alone payment would depend, the condition would
be protestativa, dependent exclusively upon his will or discretion. In the form that the condition was
found by the Court of Appeals however the condition implies that the intestate had already decided
to sell his house, or at least that he had made his creditors believe that he had done so, and that all
that we needed to make his obligation (to pay his indebtedness) demandable is that the sale be
consummated and the price thereof remitted to the islands. Note that if the intestate would prevent
or would have prevented the consummation of the sale voluntarily, the condition would be or would
have been deemed or considered complied with (article 1119, old Civil Code).The will to sell on the
part of the intestate was, therefore, present in fact, or presumed legally to exist, although the price
and other conditions thereof were still within his discretion and final approval. But in addition of the
sale to him (the intestate-vendor), there were still other conditions that had no concur to effect the
sale, mainly that of the presence of a buyer, ready, able and willing to purchase the property under
the conditions demanded by the intestate. Without such a buyer the sale could not be carried out or
the proceeds thereof sent to the islands. It is evident, therefore sent to the islands. It is evident,
therefore, that the condition of the obligation was not a purely protestative one, depending
exclusively upon the will of the intestate, but a mixed one, depending partly upon the will of intestate
and partly upon chance, i.e., the presence of a buyer of the property for the price and under the
conditions desired by the intestate. The obligation is clearly governed by the second sentence of
article 1115 of the old Civil Code (8 Manresa, 126). The condition is, besides, a suspensive
condition, upon the happening of which the obligation to pay is made dependent. And upon the
happening of the condition, the debt became immediately due and demandable. (Article 1114, old
Civil Code; 8 Manresa, 119).

One other point needs to be considered, and this is the fact that the sale was not effected in the
lifetime of the debtor (the intestate), but after his death and by his administrator, the very wife of the
claimant. On this last circumstance we must bear in mind that the Court of Appeals found no
evidence to show that the claim was the product of a collusion or connivance between the
administratrix and the claimant. That there was really a promise made by the intestate to pay for the
credit advances maybe implied from the fact that the receipts thereof had been preserved. Had the
advances been made without intention of demanding their payment later, said receipts would not
have been preserved. Regularity of the advances and the close relationship between the intestate
and the claimant also support this conclusion.

As to the fact that the suspensive condition took place after the death of the debtor, and that
advances were made more than ten years before the sale, we supported in our conclusion that the
same is immaterial by Sanchez Roman, who says, among other things, as to conditional obligations:

1a La obligacion contractual afectada por condicion suspensiva. no es exigible hasta que se

cumpla la condicion, . . .

2 a El cumplimiento de la condicion suspensiva retrotae los efectos del acto juridico

originario de la obligacion a que aquella afecta, al tiempo de lacelebracion de este;
 3 a La referida retroaccion, no solo tiene lugar cuando el cumplimiento de la condicion se
verifica en vida de los contrayentes, que tambien se produce cuando aquel se realiza
despues de la muerte de estos. (4 Sanchez Roman, p. 122) (Emphasis supplied.)

As the obligation retroacts to the date when the contract was entered into, all amounts advanced
from the time of the agreement became due, upon the happening of the suspensive condition. As
the obligation to pay became due and demandable only when the house was sold and the proceeds
received in the islands, the action to recover the same only accrued, within the meaning of the
statute of limitations, on date the money became available here hence the action to recover the
advances has not yet prescribed.

The above considerations dispose of the most important questions raised on this appeal. It is also
contended that the third group of claims, i.e., credits furnished the intestate's grandson after his
(intestate's) death in 1944, should have been allowed. We find merit in this contention. Even if
authorization to furnish necessaries to his grandson may have been given, this authorization could
not be made to extend after his death, for two obvious reasons. First because the obligation to
furnish support is personal and is extinguished upon the death of the person obliged to give
support(article 150, old Civil Code), and second because upon the death of a principal (the intestate
in this case), his agent's authority or authorization is deemed terminated (article 1732, old Civil
Code). That part of the decision allowing this group of claims, amounting to P3,772 should be
reversed.

One last contention of the appellant is that the claims are barred by the statute of non-claims. It does
not appear from the record that this question was ever raised in any of the courts below. We are,
therefore, without authority under our rules to consider this issue at this stage of the proceedings.

The judgment appealed from is hereby affirmed in so far as it approves the claims of appellee in the
amounts of P2,341 and P12,942.12, and reversed as to that of P3,772. Without costs.

Bengzon, Padilla, Tuason, Montemayor, Reyes, Jugo, and Bautista Angelo, JJ., concur.

Separate Opinions

PARAS, C. J., concurring and dissenting:

I concur in the majority decision insofar as it reverses the appealed judgment allowing the claim for
P3,772, but dissent therefrom insofar as it affirms the appealed judgment approving appellee's other
claims.

The principal question is whether the stipulation to pay the advances "on condition that their
payment should be made by Fernando Hermosa, Sr. as soon as he receives funds derived from the
sale of his property in Spain, and making said advances "payable as soon as Fernando Hermosa,
Sr.'s property in Spain was sold and he received money derived from the sale," condicion
potestativa and therefore null and void in accordance with article 1115 of the old Civil Code. My
answer is in the affirmative, because it is very obvious that the matter of the sale of the house rested
on the sole will of the debtor, unaffected by any outside consideration or influence. The majority
admit that if the condition were "if he decides to sell his house" or "if he likes to pay the sums
advanced, the same would be potestative. I think a mere play or words is invoked, as I cannot see
any substantial difference. Under the condition imposed by Fernando Hermosa, Sr., it is immaterial
whether or not he had already decided to sell his house, since there is no pretence that acceptable
conditions of the sale had been made the subject of an agreement, such that if such conditions
presented themselves the debtor would be bound to proceed with the sale. In the case at bar, the
terms are still subject to the sale judgment if not whims and caprice of Fernando Hermosa, Sr.
In fact no sale was effected during his lifetime.

As the condition above referred to is null and void, the debt resulting from the advances made to
Fernando Hermosa, Sr. became either immediately demandable or payable within a term to be fixed
by the court. In both cases the action has prescribed after the lapse of ten years. In the case of
Gonzales vs. De Jose (66 Phil., 369, 371), this court already held as follows:

We hold that the two promissory notes are governed by article 1128 because under the
terms thereof the plaintiff intended to grant the defendant a period within which to pay his
debts. As the promissory notes do not affix this period, it is for the court to fix the same.
(Citing cases.) The action to ask the court to fix the period has already prescribed in
accordance with section 43 (1) of the Code of Civil Procedure. This period of prescription is
ten years, which has already elapsed from the execution of the promissory notes until the
filing of the action on June 1, 1934. The action which should be brought in accordance with
articles 1128 is different from the action for the recovery of the amount of the notes, although
the effects of both are the same, being, like other civil actions, subject to the rules of
prescription.

The majority also contend that the condition in question depended on other factors than the sole will
of the debtor, and cite the presence of a buyer, ready, able and willing to purchase the property. This
is of no moment, because, as already stated, in the absence of any contract setting forth the
minimum or maximum terms which would be acceptable to the debtor, nobody could legally compel
Fernando Hermosa, Sr. to make any sale.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-16109 October 2, 1922

M. D. TAYLOR, plaintiff-appellant,
vs.
UY TIENG PIAO and TAN LIUAN, doing business under the firm name and style of Tan Liuan
& Company, defendants.
Uy TIENG PIAO, defendant-appellant.

Cohn, Fisher and DeWitt and William C. Brady for plaintiff-appellant.

Gabriel La O for defendant-appellant Uy Tieng Piao.
Crossfield and O'Brien for Tan Liuan and Tan Liyan and Co.
STREET, J.:

This case comes by appeal from the Court of First Instance of the city of Manila, in a case where the
court awarded to the plaintiff the sum of P300, as damages for breach of contract. The plaintiff
appeals on the ground that the amount of damages awarded is inadequate; while the defendant Uy
Tieng Piao appeals on the ground that he is not liable at all. The judgment having been heretofore
affirmed by us in a brief opinion, we now avail ourselves of the occasion of the filing of a motion to
rehear by the attorneys for the plaintiff to modify the judgment in a slight measure and to state more
fully the reasons underlying our decision.

It appears that on December 12, 1918, the plaintiff contracted his services to Tan Liuan and Co., as
superintendent of an oil factory which the latter contemplated establishing in this city. The period of
the contract extended over two years from the date mentioned; and the salary was to be at the rate
of P600 per month during the first year and P700 per month during the second, with electric light and
water for domestic consumption, and a residence to live in, or in lieu thereof P60 per month.

At the time this agreement was made the machinery for the contemplated factory had not been
acquired, though ten expellers had been ordered from the United States; and among the stipulations
inserted in the contract with the plaintiff was a provision to the following effect:

It is understood and agreed that should the machinery to be installed in the said factory fail,
for any reason, to arrive in the city of Manila within a period of six months from date hereof,
this contract may be cancelled by the party of the second part at its option, such cancellation,
however, not to occur before the expiration of such six months.

The machinery above referred to did not arrive in the city of Manila within the six months succeeding
the making of the contract; nor was other equipment necessary for the establishment of the factory
at any time provided by the defendants. The reason for this does not appear with certainty, but a
preponderance of the evidence is to the effect that the defendants, in the first months of 1919,
seeing that the oil business no longer promised large returns, either cancelled the order for the
machinery from choice or were unable to supply the capital necessary to finance the project. At any
rate on June 28, 1919, availing themselves in part of the option given in the clause above quoted,
the defendants communicated in writing to the plaintiff the fact that they had decided to rescind the
contract, effective June 30th then current, upon which date he was discharged. The plaintiff
thereupon instituted this action to recover damages in the amount of P13,000, covering salary and
perquisites due and to become due under the contract.

The case for the plaintiff proceeds on the idea that the stipulation above quoted, giving to the
defendants the right to cancel the contract upon the contingency of the nonarrival of the machinery
in Manila within six months, must be understood as applicable only in those cases where such
nonarrival is due to causes not having their origin in the will or act of the defendants, as delays
caused by strikes or unfavorable conditions of transporting by land or sea; and it is urged that the
right to cancel cannot be admitted unless the defendants affirmatively show that the failure of the
machinery to arrive was due to causes of that character, and that it did not have its origin in their
own act or volition. In this connection the plaintiff relies on article 1256 of the Civil Code, which is to
the effect that the validity and fulfillment of contracts cannot be left to the will of one of the
contracting parties, and to article 1119, which says that a condition shall be deemed fulfilled if the
obligor intentially impedes its fulfillment.

It will be noted that the language conferring the right of cancellation upon the defendants is broad
enough to cover any case of the nonarrival of the machinery, due to whatever cause; and the stress
in the expression "for any reason" should evidently fall upon the word "any." It must follow of
necessity that the defendants had the right to cancel the contract in the contingency that occurred,
unless some clear and sufficient reason can be adduced for limiting the operation of the words
conferring the right of cancellation. Upon this point it is our opinion that the language used in the
stipulation should be given effect in its ordinary sense, without technicality or circumvention; and in
this sense it is believed that the parties to the contract must have understood it.

Article 1256 of the Civil Code in our opinion creates no impediment to the insertion in a contract for
personal service of a resolutory condition permitting the cancellation of the contract by one of the
parties. Such a stipulation, as can be readily seen, does not make either the validity or the fulfillment
of the contract dependent upon the will of the party to whom is conceded the privilege of
cancellation; for where the contracting parties have agreed that such option shall exist, the exercise
of the option is as much in the fulfillment of the contract as any other act which may have been the
subject of agreement. Indeed, the cancellation of a contract in accordance with conditions agreed
upon beforehands is fulfillment.

In this connection, we note that the commentator Manresa has the following observation with respect
to article 1256 of the Civil Code. Says he: "It is entirely licit to leave fulfillment to the will of either of
the parties in the negative form of rescission, a case frequent in certain contracts (the letting of
service for hire, the supplying of electrical energy, etc.), for in such supposed case neither is the
article infringed, nor is there any lack of equality between the persons contracting, since they remain
with the same faculties in respect to fulfillment." (Manresa, 2d ed., vol. 8, p. 610.) 1awph!l.net

Undoubtedly one of the consequences of this stipulation was that the employers were left in a
position where they could dominate the contingency, and the result was about the same as if they
had been given an unqualified option to dispense with the services of the plaintiff at the end of six
months. But this circumstance does not make the stipulation illegal.

The case of Hall vs. Hardaker (61 Fla., 267) cited by the appellant Taylor, though superficially
somewhat analogous, is not precisely in point. In that case one Hardaker had contracted to render
competent and efficient service as manager of a corporation, to which position it was understood he
was to be appointed. In the same contract it was stipulated that if "for any reason" Hardaker should
not be given that position, or if he should not be permitted to act in that capacity for a stated period,
certain things would be done by Hall. Upon being installed in the position aforesaid, Hardaker failed
to render efficient service and was discharged. It was held that Hall was released from the obligation
to do the things that he had agreed to perform. Some of the judges appear to have thought that the
case turned on the meaning of the phrase "for any reason," and the familiar maxim was cited that no
man shall take advantage of his own wrong. The result of the case must have been the same from
whatever point of view, as there was an admitted failure on the part of Hardaker to render competent
service. In the present case there was no breach of contract by the defendants; and the argument to
the contrary apparently suffers from the logical defect of assuming the very point at issue.

But it will be said that the question is not so much one concerning the legality of the clause referred
to as one concerning the interpretation of the resolutory clause as written, the idea being that the
court should adjust its interpretation of said clause to the supposed precepts of article 1256, by
restricting its operation exclusively to cases where the nonarrival of the machinery may be due to
extraneous causes not referable to the will or act of the defendants. But even when the question is
viewed in this aspect their result is the same, because the argument for the restrictive interpretation
evidently proceeds on the assumption that the clause in question is illegal in so far as it purports to
concede to the defendants the broad right to cancel the contract upon nonarrival of the machinery
due to any cause; and the debate returns again to the point whether in a contract for the prestation
of service it is lawful for the parties to insert a provision giving to the employer the power to cancel
the contract in a contingency which may be dominated by himself. Upon this point what has already
been said must suffice.

As we view the case, there is nothing in article 1256 which makes it necessary for us to warp the
language used by the parties from its natural meaning and thereby in legal effect to restrict the
words "for any reason," as used in the contract, to mean "for any reason not having its origin in the
will or acts of the defendants." To impose this interpretation upon those words would in our opinion
constitute an unjustifiable invasion of the power of the parties to establish the terms which they
deem advisable, a right which is expressed in article 1255 of the Civil Code and constitutes one of
the most fundamental conceptions of contract right enshrined in the Code.

The view already expressed with regard to the legality and interpretation of the clause under
consideration disposes in a great measure of the argument of the appellant in so far as the same is
based on article 1119 of the Civil Code. This provision supposes a case where the obligor
intentionally impedes the fulfillment of a condition which would entitle the obligee to exact
performance from the obligor; and an assumption underlying the provision is that the obligor
prevents the obligee from performing some act which the obligee is entitled to perform as a condition
precedent to the exaction of what is due to him. Such an act must be considered unwarranted and
unlawful, involving per se a breach of the implied terms of the contract. The article can have no
application to an external contingency which, like that involved in this case, is lawfully within the
control of the obligor.

In Spanish jurisprudence a condition like that here under discussion is designated by Manresa a
facultative condition (vol. 8, p. 611), and we gather from his comment on articles 1115 and 1119 of
the Civil Code that a condition, facultative as to the debtor, is obnoxious to the first sentence
contained in article 1115 and renders the whole obligation void (vol. 8, p. 131). That statement is no
doubt correct in the sense intended by the learned author, but it must be remembered that he
evidently has in mind the suspensive condition, such as is contemplated in article 1115. Said article
can have no application to the resolutory condition, the validity of which is recognized in article 1113
of the Civil Code. In other words, a condition at once facultative and resolutory may be valid even
though the condition is made to depend upon the will of the obligor.

If it were apparent, or could be demonstrated, that the defendants were under a positive obligation to
cause the machinery to arrive in Manila, they would of course be liable, in the absence of affirmative
proof showing that the nonarrival of the machinery was due to some cause not having its origin in
their own act or will. The contract, however, expresses no such positive obligation, and its existence
cannot be implied in the fact of stipulation, defining the conditions under which the defendants can
cancel the contract.

Our conclusion is that the Court of First Instance committed no error in rejecting the plaintiff's claim
in so far as damages are sought for the period subsequent to the expiration of the first six months,
but in assessing the damages due for the six-month period, the trial judge evidently overlooked the
item of P60, specified in the plaintiff's fourth assignment of error, which represents commutation of
house rent for the month of June, 1919. This amount the plaintiff is clearly entitled to recover, in
addition to the P300 awarded in the court below.

We note that Uy Tieng Piao, who is sued as a partner with Tan Liuan, appealed from the judgment
holding him liable as a member of the firm of Tan Liuan and Co.; and it is insisted in his behalf that
he was not bound by the act of Tan Liuan as manager of Tan Liuan and Co. in employing the
plaintiff. Upon this we will merely say that the conclusion stated by the trial court in the next to the
last paragraph of the decision with respect to the liability of this appellant in our opinion in conformity
with the law and facts.
The judgment appealed from will be modified by declaring that the defendants shall pay to the
plaintiff the sum of P360, instead of P300, as allowed by the lower court, and as thus modified the
judgment will be affirmed with interest from November 4, 1919, as provided in section 510 of the
Code of Civil Procedure, and with costs. So ordered.

Araullo, C.J., Johnson, Malcolm, Avancea, Villamor, Ostrand, Johns and Romualdez, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-16570 March 9, 1922

SMITH, BELL & CO., LTD., plaintiff-appellant,

vs.
VICENTE SOTELO MATTI, defendant-appellant.

Ross and Lawrence and Ewald E. Selph for plaintiff-appellant.

Ramon Sotelo for defendant-appellant.

ROMUALDEZ, J.:

In August, 1918, the plaintiff corporation and the defendant, Mr. Vicente Sotelo, entered into
contracts whereby the former obligated itself to sell, and the latter to purchase from it, two steel
tanks, for the total price of twenty-one thousand pesos (P21,000), the same to be shipped from New
York and delivered at Manila "within three or four months;" two expellers at the price of twenty five
thousand pesos (P25,000) each, which were to be shipped from San Francisco in the month of
September, 1918, or as soon as possible; and two electric motors at the price of two thousand pesos
(P2,000) each, as to the delivery of which stipulation was made, couched in these words:
"Approximate delivery within ninety days. This is not guaranteed."

The tanks arrived at Manila on the 27th of April, 1919: the expellers on the 26th of October, 1918;
and the motors on the 27th of February, 1919.

The plaintiff corporation notified the defendant, Mr. Sotelo, of the arrival of these goods, but Mr.
Sotelo refused to receive them and to pay the prices stipulated.

The plaintiff brought suit against the defendant, based on four separate causes of action, alleging,
among other facts, that it immediately notified the defendant of the arrival of the goods, and asked
instructions from him as to the delivery thereof, and that the defendant refused to receive any of
them and to pay their price. The plaintiff, further, alleged that the expellers and the motors were in
good condition. (Amended complaint, pages 16-30, Bill of Exceptions.)

In their answer, the defendant, Mr. Sotelo, and the intervenor, the Manila Oil Refining and By-
Products Co., Inc., denied the plaintiff's allegations as to the shipment of these goods and their
arrival at Manila, the notification to the defendant, Mr. Sotelo, the latter's refusal to receive them and
pay their price, and the good condition of the expellers and the motors, alleging as special defense
that Mr. Sotelo had made the contracts in question as manager of the intervenor, the Manila Oil
Refining and By-Products Co., Inc which fact was known to the plaintiff, and that "it was only in May,
1919, that it notified the intervenor that said tanks had arrived, the motors and the expellers having
arrived incomplete and long after the date stipulated." As a counterclaim or set-off, they also allege
that, as a consequence of the plaintiff's delay in making delivery of the goods, which the intervenor
intended to use in the manufacture of cocoanut oil, the intervenor suffered damages in the sums of
one hundred sixteen thousand seven hundred eighty-three pesos and ninety-one centavos
(P116,783.91) for the nondelivery of the tanks, and twenty-one thousand two hundred and fifty
pesos (P21,250) on account of the expellers and the motors not having arrived in due time.

The case having been tried, the court below absolved the defendants from the complaint insofar as
the tanks and the electric motors were concerned, but rendered judgment against them, ordering
them to "receive the aforesaid expellers and pay the plaintiff the sum of fifty thousand pesos
(P50,00), the price of the said goods, with legal interest thereon from July 26, 1919, and costs."

Both parties appeal from this judgment, each assigning several errors in the findings of the lower
court.

The principal point at issue in this case is whether or not, under the contracts entered into and the
circumstances established in the record, the plaintiff has fulfilled, in due time, its obligation to bring
the goods in question to Manila. If it has, then it is entitled to the relief prayed for; otherwise, it must
be held guilty of delay and liable for the consequences thereof.

To solve this question, it is necessary to determine what period was fixed for the delivery of the
goods.

As regards the tanks, the contracts A and B (pages 61 and 62 of the record) are similar, and in both
of them we find this clause:

To be delivered within 3 or 4 months The promise or indication of shipment carries with it

absolutely no obligation on our part Government regulations, railroad embargoes, lack of
vessel space, the exigencies of the requirement of the United States Government, or a
number of causes may act to entirely vitiate the indication of shipment as stated. In other
words, the order is accepted on the basis of shipment at Mill's convenience, time of shipment
being merely an indication of what we hope to accomplish.

In the contract Exhibit C (page 63 of the record), with reference to the expellers, the following
stipulation appears:

The following articles, hereinbelow more particularly described, to be shipped at San

Francisco within the month of September /18, or as soon as possible. Two Anderson oil
expellers . . . .

And in the contract relative to the motors (Exhibit D, page 64, rec.) the following appears:

Approximate delivery within ninety days. This is not guaranteed. This sale is subject to
our being able to obtain Priority Certificate, subject to the United States Government
requirements and also subject to confirmation of manufactures.

In all these contracts, there is a final clause as follows:

 The sellers are not responsible for delays caused by fires, riots on land or on the sea, strikes
or other causes known as "Force Majeure" entirely beyond the control of the sellers or their
representatives.

Under these stipulations, it cannot be said that any definite date was fixed for the delivery of the
goods. As to the tanks, the agreement was that the delivery was to be made "within 3 or 4 months,"
but that period was subject to the contingencies referred to in a subsequent clause. With regard to
the expellers, the contract says "within the month of September, 1918," but to this is added "or as
soon as possible." And with reference to the motors, the contract contains this expression,
"Approximate delivery within ninety days," but right after this, it is noted that "this is not guaranteed."

The oral evidence falls short of fixing such period.

From the record it appears that these contracts were executed at the time of the world war when
there existed rigid restrictions on the export from the United States of articles like the machinery in
question, and maritime, as well as railroad, transportation was difficult, which fact was known to the
parties; hence clauses were inserted in the contracts, regarding "Government regulations, railroad
embargoes, lack of vessel space, the exigencies of the requirements of the United States
Government," in connection with the tanks and "Priority Certificate, subject to the United State
Government requirements," with respect to the motors. At the time of the execution of the contracts,
the parties were not unmindful of the contingency of the United States Government not allowing the
export of the goods, nor of the fact that the other foreseen circumstances therein stated might
prevent it.

Considering these contracts in the light of the civil law, we cannot but conclude that the term which
the parties attempted to fix is so uncertain that one cannot tell just whether, as a matter of fact, those
articles could be brought to Manila or not. If that is the case, as we think it is, the obligations must be
regarded as conditional.

Obligations for the performance of which a day certain has been fixed shall be demandable
only when the day arrives.

A day certain is understood to be one which must necessarily arrive, even though its date be
unknown.

If the uncertainty should consist in the arrival or non-arrival of the day, the obligation is
conditional and shall be governed by the rules of the next preceding section. (referring to
pure and conditional obligations). (Art. 1125, Civ. Code.)

And as the export of the machinery in question was, as stated in the contract, contingent upon the
sellers obtaining certificate of priority and permission of the United States Government, subject to
the rules and regulations, as well as to railroad embargoes, then the delivery was subject to a
condition the fulfillment of which depended not only upon the effort of the herein plaintiff, but upon
the will of third persons who could in no way be compelled to fulfill the condition. In cases like this,
which are not expressly provided for, but impliedly covered, by the Civil Code, the obligor will be
deemed to have sufficiently performed his part of the obligation, if he has done all that was in his
power, even if the condition has not been fulfilled in reality.

In such cases, the decisions prior to the Civil Code have held that the obligee having done all
that was in his power, was entitled to enforce performance of the obligation. This
performance, which is fictitious not real is not expressly authorized by the Code, which
limits itself only to declare valid those conditions and the obligation thereby affected; but it is
 neither disallowed, and the Code being thus silent, the old view can be maintained as a
doctrine. (Manresa's commentaries on the Civil Code [1907], vol. 8, page 132.)

The decisions referred to by Mr. Manresa are those rendered by the supreme court of Spain on
November 19, 1896, and February 23, 1871.

In the former it is held:

First. That when the fulfillment of the conditions does not depend on the will of the obligor,
but on that of a third person who can in no way be compelled to carry it out, and it is found by
the lower court that the obligor has done all in his power to comply with the obligation, the
judgment of the said court, ordering the other party to comply with his part of the contract, is
not contrary to the law of contracts, or to Law 1, Tit. I, Book 10, of the "Novsima
Recopilacin," or Law 12, Tit. 11, of Partida 5, when in the said finding of the lower court, no
law or precedent is alleged to have been violated. (Jurisprudencia Civil published by the
directors of the Revista General de Legislacion y Jurisprudencia [1866], vol. 14, page 656.)

In the second decision, the following doctrine is laid down:

Second. That when the fulfillment of the condition does not depend on the will of the obligor,
but on that of a third person, who can in no way be compelled to carry it out, the obligor's
part of the contract is complied withalf Belisario not having exercised his right of repurchase
reserved in the sale of Basilio Borja mentioned in paragraph (13) hereof, the affidavit of
Basilio Borja for the consolidacion de dominio was presented for record in the registry of
deeds and recorded in the registry on the same date.

(32) The Maximo Belisario left a widow, the opponent Adelina Ferrer and three minor
children, Vitaliana, Eugenio, and Aureno Belisario as his only heirs.

(33) That in the execution and sales thereunder, in which C. H. McClure appears as the
judgment creditor, he was represented by the opponent Peter W. Addison, who prepared
and had charge of publication of the notices of the various sales and that in none of the sales
was the notice published more than twice in a newspaper.

The claims of the opponent-appellant Addison have been very fully and ably argued by his
counsel but may, we think, be disposed of in comparatively few words. As will be seen from
the foregoing statement of facts, he rest his title (1) on the sales under the executions issued
in cases Nos. 435, 450, 454, and 499 of the court of the justice of the peace of Dagupan with
the priority of inscription of the last two sales in the registry of deeds, and (2) on a purchase
from the Director of Lands after the land in question had been forfeited to the Government for
non-payment of taxes under Act No. 1791.

The sheriff's sales under the execution mentioned are fatally defective for what of sufficient
publication of the notice of sale. Section 454 of the Code of civil Procedure reads in part as
follows:

SEC. 454. Before the sale of property on execution, notice thereof must be given, as follows:

1. In case of perishable property, by posing written notice of the time and place of the sale in
three public places of the municipality or city where the sale is to take place, for such time as
may be reasonable, considering the character and condition of the property;
 2. * * * * * * *

3. In cases of real property, by posting a similar notice particularly describing the property,
for twenty days in three public places of the municipality or city where the property is
situated, and also where the property is to be sold, and publishing a copy thereof once a
week, for the same period, in some newspaper published or having general circulation in the
province, if there be one. If there are newspaper published in the province in both the
Spanish and English languages, then a like publication for a like period shall be made in one
newspaper published in the Spanish language, and in one published in the English
language: Provided, however, That such publication in a newspaper will not be required
when the assessed valuation of the property does not exceed four hundred pesos;

4. * * * * * * *

Examining the record, we find that in cases Nos. 435 and 450 the sales took place on October 14,
1916; the notice first published gave the date of the sale as October 15th, but upon discovering that
October 15th was a Sunday, the date was changed to October 14th. The correct notice was
published twice in a local newspaper, the first publication was made on October 7th and the second
and last on October 14th, the date of the sale itself. The newspaper is a weekly periodical published
every Saturday afternoon.

In case No. 454 there were only two publications of the notice in a newspaper, the first publication
being made only fourteen days before the date of the sale. In case No. 499, there were also only two
publications, the first of which was made thirteen days before the sale. In the last case the sale was
advertised for the hours of from 8:30 in the morning until 4:30 in the afternoon, in violation of section
457 of the Code of Civil Procedure. In cases Nos. 435 and 450 the hours advertised were from 9:00
in the morning until 4.30 in the afternoon. In all of the cases the notices of the sale were prepared by
the judgment creditor or his agent, who also took charged of the publication of such notices.

In the case of Campomanes vs. Bartolome and Germann & Co. (38 Phil., 808), this court held that if
a sheriff sells without the notice prescribe by the Code of Civil Procedure induced thereto by the
judgment creditor and the purchaser at the sale is the judgment creditor, the sale is absolutely void
and not title passes. This must now be regarded as the settled doctrine in this jurisdiction whatever
the rule may be elsewhere.

It appears affirmatively from the evidence in the present case that there is a newspaper published in
the province where the sale in question took place and that the assessed valuation of the property
disposed of at each sale exceeded P400. Comparing the requirements of section 454, supra, with
what was actually done, it is self-evident that notices of the sales mentioned were not given as
prescribed by the statute and taking into consideration that in connection with these sales the
appellant Addison was either the judgment creditor or else occupied a position analogous to that of a
judgment creditor, the sales must be held invalid.

The conveyance or reconveyance of the land from the Director of Lands is equally invalid. The
provisions of Act No. 1791 pertinent to the purchase or repurchase of land confiscated for non-
payment of taxes are found in section 19 of the Act and read:

. . . In case such redemption be not made within the time above specified the Government of
the Philippine Islands shall have an absolute, indefeasible title to said real property. Upon the
expiration of the said ninety days, if redemption be not made, the provincial treasurer shall
immediately notify the Director of Lands of the forfeiture and furnish him with a description of
the property, and said Director of Lands shall have full control and custody thereof to lease
 or sell the same or any portion thereof in the same manner as other public lands are leased
or sold: Provided, That the original owner, or his legal representative, shall have the right to
repurchase the entire amount of his said real property, at any time before a sale or contract
of sale has been made by the director of Lands to a third party, by paying therefore the
whole sum due thereon at the time of ejectment together with a penalty of ten per centum . . .
.

The appellant Addison repurchased under the final proviso of the section quoted and was allowed to
do so as the successor in interest of the original owner under the execution sale above discussed.
As we have seen, he acquired no rights under these sales, was therefore not the successor of the
original owner and could only have obtained a valid conveyance of such titles as the Government
might have by following the procedure prescribed by the Public Land Act for the sale of public lands.
he is entitled to reimbursement for the money paid for the redemption of the land, with interest, but
has acquired no title through the redemption.

The question of the priority of the record of the sheriff's sales over that of the sale from Belisario to
Borja is extensively argued in the briefs, but from our point of view is of no importance; void sheriff's
or execution sales cannot be validated through inscription in the Mortgage Law registry.

The opposition of Adelina Ferrer must also be overruled. She maintained that the land in question
was community property of the marriage of Eulalio Belisario and Paula Ira: that upon the death of
Paula Ira inealed from is modified, and the defendant Mr. Vicente Sotelo Matti, sentenced to accept
and receive from the plaintiff the tanks, the expellers and the motors in question, and to pay the
plaintiff the sum of ninety-six thousand pesos (P96,000), with legal interest thereon from July 17,
1919, the date of the filing of the complaint, until fully paid, and the costs of both instances. So
ordered.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 77425 June 19, 1991

THE ROMAN CATHOLIC ARCHBISHOP OF MANILA, THE ROMAN CATHOLIC BISHOP OF

IMUS, and the SPOUSES FLORENCIO IGNAO and SOLEDAD C. IGNAO, petitioners,
vs.
HON. COURT OF APPEALS, THE ESTATE OF DECEASED SPOUSES EUSEBIO DE CASTRO
and MARTINA RIETA, represented by MARINA RIETA GRANADOS and THERESA RIETA
TOLENTINO,respondents.

G.R. No. 77450 June 19, 1991

THE ROMAN CATHOLIC ARCHBISHOP OF MANILA, THE ROMAN CATHOLIC BISHOP OF

IMUS, and the SPOUSES FLORENCIO IGNAO and SOLEDAD C. IGNAO, petitioners,
vs.
HON. COURT OF APPEALS, THE ESTATE OF DECEASED SPOUSES EUSEBIO DE CASTRO
and MARTINA RIETA, represented by MARINA RIETA GRANADOS and THERESA RIETA
TOLENTINO,respondents.
Severino C. Dominguez for petitioner Roman Catholic Bishop of Imus, Cavite.
Dolorfino and Dominguez Law Offices for Sps. Ignao.
Joselito R. Enriquez for private respondents.

REGALADO, J.:

These two petitions for review on certiorari1 seek to overturn the decision of the Court of Appeals in
CA-G.R. CV No. 054562 which reversed and set aside the order of the Regional Trial Court of Imus,
Cavite dismissing Civil Case No. 095-84, as well as the order of said respondent court denying
petitioner's motions for the reconsideration of its aforesaid decision.

On November 29, 1984, private respondents as plaintiffs, filed a complaint for nullification of deed of
donation, rescission of contract and reconveyance of real property with damages against petitioners
Florencio and Soledad C. Ignao and the Roman Catholic Bishop of Imus, Cavite, together with the
Roman Catholic Archbishop of Manila, before the Regional Trial Court, Branch XX, Imus, Cavite and
which was docketed as Civil Case No. 095-84 therein.3

In their complaint, private respondents alleged that on August 23, 1930, the spouses Eusebio de
Castro and Martina Rieta, now both deceased, executed a deed of donation in favor of therein
defendant Roman Catholic Archbishop of Manila covering a parcel of land (Lot No. 626, Cadastral
Survey of Kawit), located at Kawit, Cavite, containing an area of 964 square meters, more or less.
The deed of donation allegedly provides that the donee shall not dispose or sell the property within a
period of one hundred (100) years from the execution of the deed of donation, otherwise a violation
of such condition would render ipso facto null and void the deed of donation and the property would
revert to the estate of the donors.

It is further alleged that on or about June 30, 1980, and while still within the prohibitive period to
dispose of the property, petitioner Roman Catholic Bishop of Imus, in whose administration all
properties within the province of Cavite owned by the Archdiocese of Manila was allegedly
transferred on April 26, 1962, executed a deed of absolute sale of the property subject of the
donation in favor of petitioners Florencio and Soledad C. Ignao in consideration of the sum of
P114,000. 00. As a consequence of the sale, Transfer Certificate of Title No. 115990 was issued by
the Register of Deeds of Cavite on November 15, 1980 in the name of said petitioner spouses.

What transpired thereafter is narrated by respondent court in its assailed decision.4

On December 17, 1984, petitioners Florencio Ignao and Soledad C. Ignao filed a motion to dismiss
based on the grounds that (1) herein private respondents, as plaintiffs therein, have no legal
capacity to sue; and (2) the complaint states no cause of action.

On December 19, 1984, petitioner Roman Catholic Bishop of Imus also filed a motion to dismiss on
three (3) grounds, the first two (2) grounds of which were identical to that of the motion to dismiss
filed by the Ignao spouses, and the third ground being that the cause of action has prescribed.

On January 9, 1985, the Roman Catholic Archbishop of Manila likewise filed a motion to dismiss on
the ground that he is not a real party in interest and, therefore, the complaint does not state a cause
of action against him.
After private respondents had filed their oppositions to the said motions to dismiss and the
petitioners had countered with their respective replies, with rejoinders thereto by private
respondents, the trial court issued an order dated January 31, 1985, dismissing the complaint on the
ground that the cause of action has prescribed.5

Private respondents thereafter appealed to the Court of Appeals raising the issues on (a) whether or
not the action for rescission of contracts (deed of donation and deed of sale) has prescribed; and (b)
whether or not the dismissal of the action for rescission of contracts (deed of donation and deed of
sale) on the ground of prescription carries with it the dismissal of the main action for reconveyance
of real property.6

On December 23, 1986, respondent Court of Appeals, holding that the action has not yet prescibed,
rendered a decision in favor of private respondents, with the following dispositive portion:

WHEREFORE, the Order of January 31, 1985 dismissing appellants' complaint is SET
ASIDE and Civil Case No. 095-84 is hereby ordered REINSTATED and REMANDED to the
lower court for further proceedings. No Costs.7

Petitioners Ignao and the Roman Catholic Bishop of Imus then filed their separate motions for
reconsideration which were denied by respondent Court of Appeals in its resolution dated February
6, 1987,8 hence, the filing of these appeals by certiorari.

It is the contention of petitioners that the cause of action of herein private respondents has already
prescribed, invoking Article 764 of the Civil Code which provides that "(t)he donation shall be
revoked at the instance of the donor, when the donee fails to comply with any of the conditions
which the former imposed upon the latter," and that "(t)his action shall prescribe after four years from
the non-compliance with the condition, may be transmitted to the heirs of the donor, and may be
exercised against the donee's heirs.

We do not agree.

Although it is true that under Article 764 of the Civil Code an action for the revocation of a donation
must be brought within four (4) years from the non-compliance of the conditions of the donation, the
same is not applicable in the case at bar. The deed of donation involved herein expressly provides
for automatic reversion of the property donated in case of violation of the condition therein, hence a
judicial declaration revoking the same is not necessary, As aptly stated by the Court of Appeals:

By the very express provision in the deed of donation itself that the violation of the condition
thereof would render ipso facto null and void the deed of donation, WE are of the opinion that
there would be no legal necessity anymore to have the donation judicially declared null and
void for the reason that the very deed of donation itself declares it so. For where (sic) it
otherwise and that the donors and the donee contemplated a court action during the
execution of the deed of donation to have the donation judicially rescinded or declared null
and void should the condition be violated, then the phrase reading "would render ipso facto
null and void" would not appear in the deed of donation.9

In support of its aforesaid position, respondent court relied on the rule that a judicial action for
rescission of a contract is not necessary where the contract provides that it may be revoked and
cancelled for violation of any of its terms and conditions.10 It called attention to the holding that there
is nothing in the law that prohibits the parties from entering into an agreement that a violation of the
terms of the contract would cause its cancellation even without court intervention, and that it is not
always necessary for the injured party to resort to court for rescission of the contract.11 It reiterated
the doctrine that a judicial action is proper only when there is absence of a special provision granting
the power of cancellation.12

It is true that the aforesaid rules were applied to the contracts involved therein, but we see no reason
why the same should not apply to the donation in the present case. Article 732 of the Civil Code
provides that donationsinter vivos shall be governed by the general provisions on contracts and
obligations in all that is not determined in Title III, Book III on donations. Now, said Title III does not
have an explicit provision on the matter of a donation with a resolutory condition and which is subject
to an express provision that the same shall be considered ipso facto revoked upon the breach of
said resolutory condition imposed in the deed therefor, as is the case of the deed presently in
question. The suppletory application of the foregoing doctrinal rulings to the present controversy is
consequently justified.

The validity of such a stipulation in the deed of donation providing for the automatic reversion of the
donated property to the donor upon non-compliance of the condition was upheld in the recent case
of De Luna, et al. vs. Abrigo, et al.13 It was held therein that said stipulation is in the nature of an
agreement granting a party the right to rescind a contract unilaterally in case of breach, without need
of going to court, and that, upon the happening of the resolutory condition or non-compliance with
the conditions of the contract, the donation is automatically revoked without need of a judicial
declaration to that effect. While what was the subject of that case was an onerous donation which,
under Article 733 of the Civil Code is governed by the rules on contracts, since the donation in the
case at bar is also subject to the same rules because of its provision on automatic revocation upon
the violation of a resolutory condition, from parity of reasons said pronouncements in De
Luna pertinently apply.

The rationale for the foregoing is that in contracts providing for automatic revocation, judicial
intervention is necessary not for purposes of obtaining a judicial declaration rescinding a contract
already deemed rescinded by virtue of an agreement providing for rescission even without judicial
intervention, but in order to determine whether or not the rescission was proper.14

When a deed of donation, as in this case, expressly provides for automatic revocation and reversion
of the property donated, the rules on contract and the general rules on prescription should apply,
and not Article 764 of the Civil Code. Since Article 1306 of said Code authorizes the parties to a
contract to establish such stipulations, clauses, terms and conditions not contrary to law, morals,
good customs, public order or public policy, we are of the opinion that, at the very least, that
stipulation of the parties providing for automatic revocation of the deed of donation, without prior
judicial action for that purpose, is valid subject to the determination of the propriety of the rescission
sought. Where such propriety is sustained, the decision of the court will be merely declaratory of the
revocation, but it is not in itself the revocatory act.

On the foregoing ratiocinations, the Court of Appeals committed no error in holding that the cause of
action of herein private respondents has not yet prescribed since an action to enforce a written
contract prescribes in ten (10) years.15 It is our view that Article 764 was intended to provide a judicial
remedy in case of non-fulfillment or contravention of conditions specified in the deed of donation if
and when the parties have not agreed on the automatic revocation of such donation upon the
occurrence of the contingency contemplated therein. That is not the situation in the case at bar.

Nonetheless, we find that although the action filed by private respondents may not be dismissed by
reason of prescription, the same should be dismissed on the ground that private respondents have
no cause of action against petitioners.
The cause of action of private respondents is based on the alleged breach by petitioners of the
resolutory condition in the deed of donation that the property donated should not be sold within a
period of one hundred (100) years from the date of execution of the deed of donation. Said
condition, in our opinion, constitutes an undue restriction on the rights arising from ownership of
petitioners and is, therefore, contrary to public policy.

Donation, as a mode of acquiring ownership, results in an effective transfer of title over the property
from the donor to the donee. Once a donation is accepted, the donee becomes the absolute owner
of the property donated. Although the donor may impose certain conditions in the deed of donation,
the same must not be contrary to law, morals, good customs, public order and public policy. The
condition imposed in the deed of donation in the case before us constitutes a patently unreasonable
and undue restriction on the right of the donee to dispose of the property donated, which right is an
indispensable attribute of ownership. Such a prohibition against alienation, in order to be valid, must
not be perpetual or for an unreasonable period of time.

Certain provisions of the Civil Code illustrative of the aforesaid policy may be considered applicable
by analogy. Under the third paragraph of Article 494, a donor or testator may prohibit partition for a
1wphi 1

period which shall not exceed twenty (20) years. Article 870, on its part, declares that the
dispositions of the testator declaring all or part of the estate inalienable for more than twenty (20)
years are void.

It is significant that the provisions therein regarding a testator also necessarily involve, in the main,
the devolution of property by gratuitous title hence, as is generally the case of donations, being an
act of liberality, the imposition of an unreasonable period of prohibition to alienate the property
should be deemed anathema to the basic and actual intent of either the donor or testator. For that
reason, the regulatory arm of the law is or must be interposed to prevent an unreasonable departure
from the normative policy expressed in the aforesaid Articles 494 and 870 of the Code.

In the case at bar, we hold that the prohibition in the deed of donation against the alienation of the
property for an entire century, being an unreasonable emasculation and denial of an integral
attribute of ownership, should be declared as an illegal or impossible condition within the
contemplation of Article 727 of the Civil Code. Consequently, as specifically stated in said statutory
provision, such condition shall be considered as not imposed. No reliance may accordingly be
placed on said prohibitory paragraph in the deed of donation. The net result is that, absent said
proscription, the deed of sale supposedly constitutive of the cause of action for the nullification of the
deed of donation is not in truth violative of the latter hence, for lack of cause of action, the case for
private respondents must fail.

It may be argued that the validity of such prohibitory provision in the deed of donation was not
specifically put in issue in the pleadings of the parties. That may be true, but such oversight or
inaction does not prevent this Court from passing upon and resolving the same.

It will readily be noted that the provision in the deed of donation against alienation of the land for one
hundred (100) years was the very basis for the action to nullify the deed of d donation. At the same
time, it was likewise the controverted fundament of the motion to dismiss the case a quo, which
motion was sustained by the trial court and set aside by respondent court, both on the issue of
prescription. That ruling of respondent court interpreting said provision was assigned as an error in
the present petition. While the issue of the validity of the same provision was not squarely raised, it
is ineluctably related to petitioner's aforesaid assignment of error since both issues are grounded on
and refer to the very same provision.
This Court is clothed with ample authority to review matters, even if they are not assigned as errors
on appeal, if it finds that their consideration is necessary in arriving at a just decision of the
case:16 Thus, we have held that an unassigned error closely related to an error properly
assigned,17 or upon which the determination of the question properly assigned is dependent, will be
considered by the appellate court notwithstanding the failure to assign it as error.18

Additionally, we have laid down the rule that the remand of the case to the lower court for further
reception of evidence is not necessary where the Court is in a position to resolve the dispute based
on the records before it. On many occasions, the Court, in the public interest and for the expeditious
administration of justice, has resolved actions on the merits instead of remanding them to the trial
court for further proceedings, such as where the ends of justice, would not be subserved by the
remand of the case.19 The aforestated considerations obtain in and apply to the present case with
respect to the matter of the validity of the resolutory condition in question.

WHEREFORE, the judgment of respondent court is SET ASIDE and another judgment is hereby
rendered DISMISSING Civil Case No. 095-84 of the Regional Trial Court, Branch XX, Imus, Cavite.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-42283 March 18, 1985

BUENAVENTURA ANGELES, ET AL., plaintiffs-appellees,

vs.
URSULA TORRES CALASANZ, ET AL., defendants-appellants.

GUTIERREZ, JR., J.:

This is an appeal from the decision of the Court of First Instance of Rizal, Seventh Judicial District,
Branch X, declaring the contract to sell as not having been validly cancelled and ordering the
defendants-appellants to execute a final deed of sale in favor of the plaintiffs-appellees, to pay
P500.00 attorney's fees and costs.

The facts being undisputed, the Court of Appeals certified the case to us since only pure questions
of law have been raised for appellate review.

On December 19, 1957, defendants-appellants Ursula Torres Calasanz and Tomas Calasanz and
plaintiffs-appellees Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of
land located in Cainta, Rizal for the amount of P3,920.00 plus 7% interest per annum.

The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They
promised to pay the balance in monthly installments of P 41.20 until fully paid, the installments being
due and payable on the 19th day of each month. The plaintiffs-appellees paid the monthly
installments until July 1966, when their aggregate payment already amounted to P4,533.38. On
numerous occasions, the defendants-appellants accepted and received delayed installment
payments from the plaintiffs-appellees.

On December 7, 1966, the defendants-appellants wrote the plaintiffs-appellees a letter requesting

the remittance of past due accounts.

On January 28, 1967, the defendants-appellants cancelled the said contract because the plaintiffs-
appellees failed to meet subsequent payments. The plaintiffs' letter with their plea for reconsideration
of the said cancellation was denied by the defendants-appellants.

The plaintiffs-appellees filed Civil Case No. 8943 with the Court of First Instance of Rizal, Seventh
Judicial District, Branch X to compel the defendants-appellants to execute in their favor the final
deed of sale alleging inter alia that after computing all subsequent payments for the land in question,
they found out that they have already paid the total amount of P4,533.38 including interests, realty
taxes and incidental expenses for the registration and transfer of the land.

The defendants-appellants alleged in their answer that the complaint states no cause of action and
that the plaintiffs-appellees violated paragraph six (6) of the contract to sell when they failed and
refused to pay and/or offer to pay the monthly installments corresponding to the month of August,
1966 for more than five (5) months, thereby constraining the defendants-appellants to cancel the
said contract.

The lower court rendered judgment in favor of the plaintiffs-appellees. The dispositive portion of the
decision reads:

WHEREFORE, based on the foregoing considerations, the Court hereby renders

judgment in favor of the plaintiffs and against the defendants declaring that the
contract subject matter of the instant case was NOT VALIDLY cancelled by the
defendants. Consequently, the defendants are ordered to execute a final Deed of
Sale in favor of the plaintiffs and to pay the sum of P500.00 by way of attorney's fees.
Costs against the defendants.

A motion for reconsideration filed by the defendants-appellants was denied.

As earlier stated, the then Court of Appeals certified the case to us considering that the appeal
involves pure questions of law.

The defendants-appellants assigned the following alleged errors of the lower court:

First Assignment of Error

THE LOWER COURT ERRED IN NOT HOLDING THE CONTRACT TO SELL

(ANNEX "A" OF COMPLIANCE) AS HAVING BEEN LEGALLY AND VALIDLY
CANCELLED.

Second Assignment of Error

EVEN ASSUMING ARGUENDO THAT THE SAID CONTRACT TO SELL HAS NOT
BEEN LEGALLY AND VALIDLY CANCELLED, THE LOWER COURT ERRED IN
ORDERING DEFENDANTS TO EXECUTE A FINAL DEED OF SALE IN FAVOR OF
THE PLAINTIFF.
 Third Assignment of Error

THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO PAY PLAINTIFFS

THE SUM OF P500.00 AS ATTORNEY'S FEES.

The main issue to be resolved is whether or not the contract to sell has been automatically and
validly cancelled by the defendants-appellants.

The defendants-appellants submit that the contract was validly cancelled pursuant to paragraph six
of the contract which provides:

xxx xxx xxx

SIXTH.In case the party of the SECOND PART fails to satisfy any monthly
installments, or any other payments herein agreed upon, he is granted a month of
grace within which to make the retarded payment, together with the one
corresponding to the said month of grace; it is understood, however, that should the
month of grace herein granted to the party of the SECOND PART expired; without
the payments corresponding to both months having been satisfied, an interest of
10% per annum will be charged on the amounts he should have paid; it is
understood further, that should a period of 90 days elapse, to begin from the
expiration of the month of grace herein mentioned, and the party of SECOND PART
has not paid all the amounts he should have paid with the corresponding interest up
to that date, the party of the FIRST PART has the right to declare this contract
cancelled and of no effect, and as consequence thereof, the party of the FIRST
PART may dispose of the parcel of land covered by this contract in favor of other
persons, as if this contract had never been entered into. In case of such cancellation
of the contract, all the amounts paid in accordance with this agreement together with
all the improvements made on the premises, shall be considered as rents paid for the
use and occupation of the above mentioned premises, and as payment for the
damages suffered by failure of the party of the SECOND PART to fulfill his part of the
agreement; and the party of the SECOND PART hereby renounces all his right to
demand or reclaim the return of the same and obliges himself to peacefully vacate
the premises and deliver the same to the party of the FIRST PART. (Emphasis
supplied by appellant)

xxx xxx xxx

The defendants-appellants argue that the plaintiffs-appellees failed to pay the August, 1966
installment despite demands for more than four (4) months. The defendants-appellants point
to Jocson v. Capitol Subdivision (G.R. No. L-6573, February 28, 1955) where this Court upheld the
right of the subdivision owner to automatically cancel a contract to sell on the strength of a provision
or stipulation similar to paragraph 6 of the contract in this case. The defendants-appellants also
argue that even in the absence of the aforequoted provision, they had the right to cancel the contract
to sell under Article 1191 of the Civil Code of the Philippines.

The plaintiffs-appellees on the other hand contend that the Jocson ruling does not apply. They state
that paragraph 6 of the contract to sell is contrary to law insofar as it provides that in case of
specified breaches of its terms, the sellers have the right to declare the contract cancelled and of no
effect, because it granted the sellers an absolute and automatic right of rescission.

Article 1191 of the Civil Code on the rescission of reciprocal obligations provides:
 The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.

xxx xxx xxx

Article 1191 is explicit. In reciprocal obligations, either party the right to rescind the contract upon the
failure of the other to perform the obligation assumed thereunder. Moreover, there is nothing in the
law that prohibits the parties from entering into an agreement that violation of the terms of the
contract would cause its cancellation even without court intervention (Froilan v. Pan Oriental
Shipping, Co., et al., 12 SCRA 276)

Well settled is, however, the rule that a judicial action for the rescission of a contract
is not necessary where the contract provides that it may be revoked and cancelled
for violation of any of its terms and conditions' (Lopez v. Commissioner of Customs,
37 SCRA 327, and cases cited therein)

Resort to judicial action for rescission is obviously not contemplated . . . The validity
of the stipulation can not be seriously disputed. It is in the nature of a facultative
resolutory condition which in many cases has been upheld by this Court. (Ponce
Enrile v. Court of Appeals, 29 SCRA 504).

The rule that it is not always necessary for the injured party to resort to court for rescission of the
contract when the contract itself provides that it may be rescinded for violation of its terms and
conditions, was qualified by this Court in University of the Philippines v. De los Angeles, (35 SCRA
102) where we explained that:

Of course, it must be understood that the act of a party in treating a contract as

cancelled or resolved on account of infractions by the other contracting party must be
made known to the other and is always provisional, being ever subject to scrutiny
and review by the proper court. If the other party denies that rescission is justified, it
is free to resort to judicial action in its own behalf, and bring the matter to court.
Then, should the court, after due hearing, decide that the resolution of the contract
was not warranted, the responsible party will be sentenced to damages; in the
contrary case, the resolution will be affirmed, and the consequent indemnity awarded
to the party prejudiced.

In other words, the party who deems the contract violated many consider it resolved
or rescinded, and act accordingly, without previous court action, but it proceeds at its
own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in law.
... .

We see no conflict between this ruling and the previous jurisprudence of this Court
invoked by respondent declaring that judicial action is necessary for the resolution of
a reciprocal obligation; (Ocejo, Perez & Co. v. International Banking Corp., 37 Phil.
631; Republic v. Hospital de San Juan de Dios, et al., 84 Phil. 820) since in every
case where the extrajudicial resolution is contested only the final award of the court
of competent jurisdiction can conclusively settle whether the resolution was proper or
 not. It is in this sense that judicial action will be necessary, as without it, the
extrajudicial resolution will remain contestable and subject to judicial invalidation,
unless attack thereon should become barred by acquiescence, estoppel or
prescription.

The right to rescind the contract for non-performance of one of its stipulations, therefore, is not
absolute. InUniversal Food Corp. v. Court of Appeals (33 SCRA 1) the Court stated that

The general rule is that rescission of a contract will not be permitted for a slight or
casual breach, but only for such substantial and fundamental breach as would defeat
the very object of the parties in making the agreement. (Song Fo & Co. v. Hawaiian-
Philippine Co., 47 Phil. 821, 827) The question of whether a breach of a contract is
substantial depends upon the attendant circumstances. (Corpus v. Hon. Alikpala, et
al., L-23707 & L-23720, Jan. 17, 1968). ... .

The defendants-appellants state that the plaintiffs-appellees violated Section two of the contract to
sell which provides:

SECOND.That in consideration of the agreement of sale of the above described

property, the party of the SECOND PART obligates himself to pay to the party of the
FIRST PART the Sum of THREE THOUSAND NINE HUNDRED TWENTY ONLY
(P3,920.00), Philippine Currency, plus interest at the rate of 7% per annum, as
follows:

(a) The amount of THREE HUNDRED NINETY TWO only (P392.00) when this
contract is signed; and

(b) The sum of FORTY ONE AND 20/100 ONLY (P4l.20) on or before the 19th day of
each month, from this date until the total payment of the price above stipulated,
including interest.

because they failed to pay the August installment, despite demand, for more than four (4) months.

The breach of the contract adverted to by the defendants-appellants is so slight and casual when we
consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had already paid
the monthly installments for a period of almost nine (9) years. In other words, in only a short time,
the entire obligation would have been paid. Furthermore, although the principal obligation was only P
3,920.00 excluding the 7 percent interests, the plaintiffs- appellees had already paid an aggregate
amount of P 4,533.38. To sanction the rescission made by the defendants-appellants will work
injustice to the plaintiffs- appellees. (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA 829) It would
unjustly enrich the defendants-appellants.

Article 1234 of the Civil Code which provides that:

If the obligation has been substantially performed in good faith, the obligor may
recover as though there had been a strict and complete fulfillment, less damages
suffered by the obligee.

also militates against the unilateral act of the defendants-appellants in cancelling the contract.

We agree with the observation of the lower court to the effect that:
 Although the primary object of selling subdivided lots is business, yet, it cannot be
denied that this subdivision is likewise purposely done to afford those landless, low
income group people of realizing their dream of a little parcel of land which they can
really call their own.

The defendants-appellants cannot rely on paragraph 9 of the contract which provides:

NINTH.-That whatever consideration of the party of the FIRST PART may concede
to the party of the SECOND PART, as not exacting a strict compliance with the
conditions of paragraph 6 of this contract, as well as any other condonation that the
party of the FIRST PART may give to the party of the SECOND PART with regards
to the obligations of the latter, should not be interpreted as a renunciation on the part
of the party of the FIRST PART of any right granted it by this contract, in case of
default or non-compliance by the party of the SECOND PART.

The defendants-appellants argue that paragraph nine clearly allows the seller to waive the
observance of paragraph 6 not merely once, but for as many times as he wishes.

The defendants-appellants' contention is without merit. We agree with the plaintiffs-appellees that
when the defendants-appellants, instead of availing of their alleged right to rescind, have accepted
and received delayed payments of installments, though the plaintiffs-appellees have been in arrears
beyond the grace period mentioned in paragraph 6 of the contract, the defendants-appellants have
waived and are now estopped from exercising their alleged right of rescission. In De Guzman v.
Guieb (48 SCRA 68), we held that:

xxx xxx xxx

But defendants do not deny that in spite of the long arrearages, neither they nor their
predecessor, Teodoro de Guzman, even took steps to cancel the option or to eject
the appellees from the home-lot in question. On the contrary, it is admitted that the
delayed payments were received without protest or qualification. ... Under these
circumstances, We cannot but agree with the lower court that at the time appellees
exercised their option, appellants had already forfeited their right to invoke the
above-quoted provision regarding the nullifying effect of the non-payment of six
months rentals by appellees by their having accepted without qualification on July 21,
1964 the full payment by appellees of all their arrearages.

The defendants-appellants contend in the second assignment of error that the ledger of payments
show a balance of P671,67 due from the plaintiffs-appellees. They submit that while it is true that the
total monthly installments paid by the plaintiffs-appellees may have exceeded P3,920.00, a
substantial portion of the said payments were applied to the interests since the contract specifically
provides for a 7% interest per annum on the remaining balance. The defendants-appellants rely on
paragraph 2 of the contract which provides:

SECOND.That in consideration of the agreement of sale of the above described

property, the party of the SECOND PART obligates himself to pay to the party of the
FIRST PART the Sum of THREE THOUSAND NINE HUNDRED TWENTY ONLY (P
3,920.00), Philippine Currency, plus interest at the rate of 7% per annum ... .
(Emphasis supplied)
The plaintiffs-appellees on the other hand are firm in their submission that since they have already
paid the defendants-appellants a total sum of P4,533.38, the defendants-appellants must now be
compelled to execute the final deed of sale pursuant to paragraph 12 of the contract which provides:

TWELFTH.That once the payment of the sum of P3,920.00, the total price of the
sale is completed, the party to the FIRST PART will execute in favor of the party of
the SECOND PART, the necessary deed or deeds to transfer to the latter the title of
the parcel of land sold, free from all hens and encumbrances other than those
expressly provided in this contract; it is understood, however, that au the expenses
which may be incurred in the said transfer of title shall be paid by the party of the
SECOND PART, as above stated.

Closely related to the second assignment of error is the submission of the plaintiffs-appellees that
the contract herein is a contract of adhesion.

We agree with the plaintiffs-appellees. The contract to sell entered into by the parties has some
characteristics of a contract of adhesion. The defendants-appellants drafted and prepared the
contract. The plaintiffs-appellees, eager to acquire a lot upon which they could build a home, affixed
their signatures and assented to the terms and conditions of the contract. They had no opportunity to
question nor change any of the terms of the agreement. It was offered to them on a "take it or leave
it" basis. In Sweet Lines, Inc. v. Teves (83 SCRA 36 1), we held that:

xxx xxx xxx

... (W)hile generally, stipulations in a contract come about after deliberate drafting by
the parties thereto. . . . there are certain contracts almost all the provisions of which
have been drafted only by one party, usually a corporation. Such contracts are called
contracts of adhesion, because the only participation of the party is the signing of his
signature or his "adhesion" thereto. Insurance contracts, bills of lading, contracts of
sale of lots on the installment plan fall into this category. (Paras, Civil Code of the
Philippines, Seventh ed., Vol. 1, p. 80.) (Emphasis supplied)

While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the
defendants-appellants the sum of P3,920.00 plus 7% interest per annum, it is likewise true that
under paragraph 12 the seller is obligated to transfer the title to the buyer upon payment of the
P3,920.00 price sale.

The contract to sell, being a contract of adhesion, must be construed against the party causing it.
We agree with the observation of the plaintiffs-appellees to the effect that "the terms of a contract
must be interpreted against the party who drafted the same, especially where such interpretation will
help effect justice to buyers who, after having invested a big amount of money, are now sought to be
deprived of the same thru the prayed application of a contract clever in its phraseology,
condemnable in its lopsidedness and injurious in its effect which, in essence, and in its entirety is
most unfair to the buyers."

Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-appellees
have already paid an aggregate amount of P4,533.38, the courts should only order the payment of
the few remaining installments but not uphold the cancellation of the contract. Upon payment of the
balance of P671.67 without any interest thereon, the defendants-appellants must immediately
execute the final deed of sale in favor of the plaintiffs-appellees and execute the necessary transfer
documents as provided in paragraph 12 of the contract. The attorney's fees are justified.
WHEREFORE, the instant petition is DENIED for lack of merit. The decision appealed from is
AFFIRMED with the modification that the plaintiffs-appellees should pay the balance of SIX
HUNDRED SEVENTY ONE PESOS AND SIXTY-SEVEN CENTAVOS (P671.67) without any
interests. Costs against the defendants-appellants.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 111238 January 25, 1995

ADELFA PROPERTIES, INC., petitioner,

vs.
COURT OF APPEALS, ROSARIO JIMENEZ-CASTAEDA and SALUD JIMENEZ, respondents.

REGALADO, J.:

The main issues presented for resolution in this petition for review on certiorari of the judgment of
respondent Court of appeals, dated April 6, 1993, in CA-G.R. CV No. 34767 1 are (1) whether of not
the "Exclusive Option to Purchase" executed between petitioner Adelfa Properties, Inc. and private
respondents Rosario Jimenez-Castaeda and Salud Jimenez is an option contract; and (2) whether or
not there was a valid suspension of payment of the purchase price by said petitioner, and the legal effects
thereof on the contractual relations of the parties.

The records disclose the following antecedent facts which culminated in the present appellate
review, to wit:

1. Herein private respondents and their brothers, Jose and Dominador Jimenez, were the registered
co-owners of a parcel of land consisting of 17,710 square meters, covered by Transfer Certificate of
Title (TCT) No. 309773, 2situated in Barrio Culasi, Las Pias, Metro Manila.

2. On July 28, 1988, Jose and Dominador Jimenez sold their share consisting of one-half of said
parcel of land, specifically the eastern portion thereof, to herein petitioner pursuant to a "Kasulatan
sa Bilihan ng Lupa." 3Subsequently, a "Confirmatory Extrajudicial Partition Agreement" 4 was executed by
the Jimenezes, wherein the eastern portion of the subject lot, with an area of 8,855 square meters was
adjudicated to Jose and Dominador Jimenez, while the western portion was allocated to herein private
respondents.

3. Thereafter, herein petitioner expressed interest in buying the western portion of the property from
private respondents. Accordingly, on November 25, 1989, an "Exclusive Option to Purchase" 5 was
executed between petitioner and private respondents, under the following terms and conditions:
 1. The selling price of said 8,655 square meters of the subject property is TWO
MILLION EIGHT HUNDRED FIFTY SIX THOUSAND ONE HUNDRED FIFTY
PESOS ONLY (P2,856,150.00)

2. The sum of P50,000.00 which we received from ADELFA PROPERTIES, INC. as

an option money shall be credited as partial payment upon the consummation of the
sale and the balance in the sum of TWO MILLION EIGHT HUNDRED SIX
THOUSAND ONE HUNDRED FIFTY PESOS (P2,806,150.00) to be paid on or
before November 30, 1989;

3. In case of default on the part of ADELFA PROPERTIES, INC. to pay said balance
in accordance with paragraph 2 hereof, this option shall be cancelled and 50% of the
option money to be forfeited in our favor and we will refund the remaining 50% of
said money upon the sale of said property to a third party;

4. All expenses including the corresponding capital gains tax, cost of documentary
stamps are for the account of the VENDORS, and expenses for the registration of
the deed of sale in the Registry of Deeds are for the account of ADELFA
PROPERTIES, INC.

Considering, however, that the owner's copy of the certificate of title issued to respondent Salud
Jimenez had been lost, a petition for the re-issuance of a new owner's copy of said certificate of title
was filed in court through Atty. Bayani L. Bernardo, who acted as private respondents' counsel.
Eventually, a new owner's copy of the certificate of title was issued but it remained in the possession
of Atty. Bernardo until he turned it over to petitioner Adelfa Properties, Inc.

4. Before petitioner could make payment, it received summons 6 on November 29, 1989, together with
a copy of a complaint filed by the nephews and nieces of private respondents against the latter, Jose and
Dominador Jimenez, and herein petitioner in the Regional Trial Court of Makati, docketed as Civil Case
No. 89-5541, for annulment of the deed of sale in favor of Household Corporation and recovery of
ownership of the property covered by TCT No. 309773. 7

5. As a consequence, in a letter dated November 29, 1989, petitioner informed private respondents
that it would hold payment of the full purchase price and suggested that private respondents settle
the case with their nephews and nieces, adding that ". . . if possible, although November 30, 1989 is
a holiday, we will be waiting for you and said plaintiffs at our office up to 7:00 p.m." 8 Another letter of
the same tenor and of even date was sent by petitioner to Jose and Dominador Jimenez. 9 Respondent
Salud Jimenez refused to heed the suggestion of petitioner and attributed the suspension of payment of
the purchase price to "lack of word of honor."

6. On December 7, 1989, petitioner caused to be annotated on the title of the lot its option contract
with private respondents, and its contract of sale with Jose and Dominador Jimenez, as Entry No.
1437-4 and entry No. 1438-4, respectively.

7. On December 14, 1989, private respondents sent Francisca Jimenez to see Atty. Bernardo, in his
capacity as petitioner's counsel, and to inform the latter that they were cancelling the transaction. In
turn, Atty. Bernardo offered to pay the purchase price provided that P500,000.00 be deducted
therefrom for the settlement of the civil case. This was rejected by private respondents. On
December 22, 1989, Atty. Bernardo wrote private respondents on the same matter but this time
reducing the amount from P500,000.00 to P300,000.00, and this was also rejected by the latter.
8. On February 23, 1990, the Regional Trial Court of Makati dismissed Civil Case No. 89-5541.
Thus, on February 28, 1990, petitioner caused to be annotated anew on TCT No. 309773 the
exclusive option to purchase as Entry No. 4442-4.

9. On the same day, February 28, 1990, private respondents executed a Deed of Conditional
Sale 10 in favor of Emylene Chua over the same parcel of land for P3,029,250, of which P1,500,000.00
was paid to private respondents on said date, with the balance to be paid upon the transfer of title to the
specified one-half portion.

10. On April 16, 1990, Atty. Bernardo wrote private respondents informing the latter that in view of
the dismissal of the case against them, petitioner was willing to pay the purchase price, and he
requested that the corresponding deed of absolute sale be executed. 11 This was ignored by private
respondents.

11. On July 27, 1990, private respondents' counsel sent a letter to petitioner enclosing therein a
check for P25,000.00 representing the refund of fifty percent of the option money paid under the
exclusive option to purchase. Private respondents then requested petitioner to return the owner's
duplicate copy of the certificate of title of respondent Salud Jimenez. 12 Petitioner failed to surrender
the certificate of title, hence private respondents filed Civil Case No. 7532 in the Regional Trial Court of
Pasay City, Branch 113, for annulment of contract with damages, praying, among others, that the
exclusive option to purchase be declared null and void; that defendant, herein petitioner, be ordered to
return the owner's duplicate certificate of title; and that the annotation of the option contract on TCT No.
309773 be cancelled. Emylene Chua, the subsequent purchaser of the lot, filed a complaint in
intervention.

12. The trial court rendered judgment 13 therein on September 5, 1991 holding that the agreement
entered into by the parties was merely an option contract, and declaring that the suspension of payment
by herein petitioner constituted a counter-offer which, therefore, was tantamount to a rejection of the
option. It likewise ruled that herein petitioner could not validly suspend payment in favor of private
respondents on the ground that the vindicatory action filed by the latter's kin did not involve the western
portion of the land covered by the contract between petitioner and private respondents, but the eastern
portion thereof which was the subject of the sale between petitioner and the brothers Jose and
Dominador Jimenez. The trial court then directed the cancellation of the exclusive option to purchase,
declared the sale to intervenor Emylene Chua as valid and binding, and ordered petitioner to pay
damages and attorney's fees to private respondents, with costs.

13. On appeal, respondent Court of appeals affirmed in toto the decision of the court a quo and held
that the failure of petitioner to pay the purchase price within the period agreed upon was tantamount
to an election by petitioner not to buy the property; that the suspension of payment constituted an
imposition of a condition which was actually a counter-offer amounting to a rejection of the option;
and that Article 1590 of the Civil Code on suspension of payments applies only to a contract of sale
or a contract to sell, but not to an option contract which it opined was the nature of the document
subject of the case at bar. Said appellate court similarly upheld the validity of the deed of conditional
sale executed by private respondents in favor of intervenor Emylene Chua.

In the present petition, the following assignment of errors are raised:

1. Respondent court of appeals acted with grave abuse of discretion in making its finding that the
agreement entered into by petitioner and private respondents was strictly an option contract;

2. Granting arguendo that the agreement was an option contract, respondent court of Appeals acted
with grave abuse of discretion in grievously failing to consider that while the option period had not
lapsed, private respondents could not unilaterally and prematurely terminate the option period;
3. Respondent Court of Appeals acted with grave abuse of discretion in failing to appreciate fully the
attendant facts and circumstances when it made the conclusion of law that Article 1590 does not
apply; and

4. Respondent Court of Appeals acted with grave abuse of discretion in conforming with the sale in
favor of appellee Ma. Emylene Chua and the award of damages and attorney's fees which are not
only excessive, but also without in fact and in law. 14

An analysis of the facts obtaining in this case, as well as the evidence presented by the parties,
irresistibly leads to the conclusion that the agreement between the parties is a contract to sell, and
not an option contract or a contract of sale.

1. In view of the extended disquisition thereon by respondent court, it would be worthwhile at this
juncture to briefly discourse on the rationale behind our treatment of the alleged option contract as a
contract to sell, rather than a contract of sale. The distinction between the two is important for in
contract of sale, the title passes to the vendee upon the delivery of the thing sold; whereas in a
contract to sell, by agreement the ownership is reserved in the vendor and is not to pass until the full
payment of the price. In a contract of sale, the vendor has lost and cannot recover ownership until
and unless the contract is resolved or rescinded; whereas in a contract to sell, title is retained by the
vendor until the full payment of the price, such payment being a positive suspensive condition and
failure of which is not a breach but an event that prevents the obligation of the vendor to convey title
from becoming effective. Thus, a deed of sale is considered absolute in nature where there is neither
a stipulation in the deed that title to the property sold is reserved in the seller until the full payment of
the price, nor one giving the vendor the right to unilaterally resolve the contract the moment the
buyer fails to pay within a fixed period. 15

There are two features which convince us that the parties never intended to transfer ownership to
petitioner except upon the full payment of the purchase price. Firstly, the exclusive option to
purchase, although it provided for automatic rescission of the contract and partial forfeiture of the
amount already paid in case of default, does not mention that petitioner is obliged to return
possession or ownership of the property as a consequence of non-payment. There is no stipulation
anent reversion or reconveyance of the property to herein private respondents in the event that
petitioner does not comply with its obligation. With the absence of such a stipulation, although there
is a provision on the remedies available to the parties in case of breach, it may legally be inferred
that the parties never intended to transfer ownership to the petitioner to completion of payment of the
purchase price.

In effect, there was an implied agreement that ownership shall not pass to the purchaser until he had
fully paid the price. Article 1478 of the civil code does not require that such a stipulation be expressly
made. Consequently, an implied stipulation to that effect is considered valid and, therefore, binding
and enforceable between the parties. It should be noted that under the law and jurisprudence, a
contract which contains this kind of stipulation is considered a contract to sell.

Moreover, that the parties really intended to execute a contract to sell, and not a contract of sale, is
bolstered by the fact that the deed of absolute sale would have been issued only upon the payment
of the balance of the purchase price, as may be gleaned from petitioner's letter dated April 16,
1990 16 wherein it informed private respondents that it "is now ready and willing to pay you simultaneously
with the execution of the corresponding deed of absolute sale."
Secondly, it has not been shown there was delivery of the property, actual or constructive, made to
herein petitioner. The exclusive option to purchase is not contained in a public instrument the
execution of which would have been considered equivalent to delivery. 17 Neither did petitioner take
actual, physical possession of the property at any given time. It is true that after the reconstitution of
private respondents' certificate of title, it remained in the possession of petitioner's counsel, Atty. Bayani
L. Bernardo, who thereafter delivered the same to herein petitioner. Normally, under the law, such
possession by the vendee is to be understood as a delivery. 18 However, private respondents explained
that there was really no intention on their part to deliver the title to herein petitioner with the purpose of
transferring ownership to it. They claim that Atty. Bernardo had possession of the title only because he
was their counsel in the petition for reconstitution. We have no reason not to believe this explanation of
private respondents, aside from the fact that such contention was never refuted or contradicted by
petitioner.

2. Irrefragably, the controverted document should legally be considered as a perfected contract to

sell. On this particular point, therefore, we reject the position and ratiocination of respondent Court of
Appeals which, while awarding the correct relief to private respondents, categorized the instrument
as "strictly an option contract."

The important task in contract interpretation is always the ascertainment of the intention of the
contracting parties and that task is, of course, to be discharged by looking to the words they used to
project that intention in their contract, all the words not just a particular word or two, and words in
context not words standing alone. 19Moreover, judging from the subsequent acts of the parties which will
hereinafter be discussed, it is undeniable that the intention of the parties was to enter into a contract to
sell. 20 In addition, the title of a contract does not necessarily determine its true nature. 21 Hence, the fact
that the document under discussion is entitled "Exclusive Option to Purchase" is not controlling where the
text thereof shows that it is a contract to sell.

An option, as used in the law on sales, is a continuing offer 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 sale. It is also sometimes called an "unaccepted offer." An
option is not of itself a purchase, but merely secures the privilege to buy. 22 It is not a sale of property
but a sale of property but a sale of the right to purchase. 23 It is simply a contract by which the owner of
property agrees with another person that he shall have the right to buy his property at a fixed price within
a certain time. He does not sell his land; he does not then agree to sell it; but he does sell something, that
it is, the right or privilege to buy at the election or option of the other party. 24 Its distinguishing
characteristic is that it imposes no binding obligation on the person holding the option, aside from the
consideration for the offer. Until acceptance, it is not, properly speaking, a contract, and does not vest,
transfer, or agree to transfer, any title to, or any interest or right in the subject matter, but is merely a
contract by which the owner of property gives the optionee the right or privilege of accepting the offer and
buying the property on certain terms. 25

On the other hand, a contract, like a contract to sell, involves a meeting of minds two persons
whereby one binds himself, with respect to the other, to give something or to render some
service. 26 Contracts, in general, are perfected by mere consent, 27 which is manifested by the meeting of
the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer
must be certain and the acceptance absolute. 28

The distinction between an "option" and a contract of sale is that an option is an unaccepted offer. It
states the terms and conditions on which the owner is willing to sell the land, if the holder elects to
accept them within the time limited. If the holder does so elect, he must give notice to the other
party, and the accepted offer thereupon becomes a valid and binding contract. If an acceptance is
not made within the time fixed, the owner is no longer bound by his offer, and the option is at an end.
A contract of sale, on the other hand, fixes definitely the relative rights and obligations of both parties
at the time of its execution. The offer and the acceptance are concurrent, since the minds of the
contracting parties meet in the terms of the agreement. 29

A perusal of the contract in this case, as well as the oral and documentary evidence presented by
the parties, readily shows that there is indeed a concurrence of petitioner's offer to buy and private
respondents' acceptance thereof. The rule is that except where a formal acceptance is so required,
although the acceptance must be affirmatively and clearly made and must be evidenced by some
acts or conduct communicated to the offeror, it may be made either in a formal or an informal
manner, and may be shown by acts, conduct, or words of the accepting party that clearly manifest a
present intention or determination to accept the offer to buy or sell. Thus, acceptance may be shown
by the acts, conduct, or words of a party recognizing the existence of the contract of sale. 30

The records also show that private respondents accepted the offer of petitioner to buy their property
under the terms of their contract. At the time petitioner made its offer, private respondents suggested
that their transfer certificate of title be first reconstituted, to which petitioner agreed. As a matter of
fact, it was petitioner's counsel, Atty. Bayani L. Bernardo, who assisted private respondents in filing a
petition for reconstitution. After the title was reconstituted, the parties agreed that petitioner would
pay either in cash or manager's check the amount of P2,856,150.00 for the lot. Petitioner was
supposed to pay the same on November 25, 1989, but it later offered to make a down payment of
P50,000.00, with the balance of P2,806,150.00 to be paid on or before November 30, 1989. Private
respondents agreed to the counter-offer made by petitioner. 31 As a result, the so-called exclusive
option to purchase was prepared by petitioner and was subsequently signed by private respondents,
thereby creating a perfected contract to sell between them.

It cannot be gainsaid that the offer to buy a specific piece of land was definite and certain, while the
acceptance thereof was absolute and without any condition or qualification. The agreement as to the
object, the price of the property, and the terms of payment was clear and well-defined. No other
significance could be given to such acts that than they were meant to finalize and perfect the
transaction. The parties even went beyond the basic requirements of the law by stipulating that "all
expenses including the corresponding capital gains tax, cost of documentary stamps are for the
account of the vendors, and expenses for the registration of the deed of sale in the Registry of
Deeds are for the account of Adelfa properties, Inc." Hence, there was nothing left to be done except
the performance of the respective obligations of the parties.

We do not subscribe to private respondents' submission, which was upheld by both the trial court
and respondent court of appeals, that the offer of petitioner to deduct P500,000.00, (later reduced to
P300,000.00) from the purchase price for the settlement of the civil case was tantamount to a
counter-offer. It must be stressed that there already existed a perfected contract between the parties
at the time the alleged counter-offer was made. Thus, any new offer by a party becomes binding
only when it is accepted by the other. In the case of private respondents, they actually refused to
concur in said offer of petitioner, by reason of which the original terms of the contract continued to be
enforceable.

At any rate, the same cannot be considered a counter-offer for the simple reason that petitioner's
sole purpose was to settle the civil case in order that it could already comply with its obligation. In
fact, it was even indicative of a desire by petitioner to immediately comply therewith, except that it
was being prevented from doing so because of the filing of the civil case which, it believed in good
faith, rendered compliance improbable at that time. In addition, no inference can be drawn from that
suggestion given by petitioner that it was totally abandoning the original contract.

More importantly, it will be noted that the failure of petitioner to pay the balance of the purchase price
within the agreed period was attributed by private respondents to "lack of word of honor" on the part
of the former. The reason of "lack of word of honor" is to us a clear indication that private
respondents considered petitioner already bound by its obligation to pay the balance of the
consideration. In effect, private respondents were demanding or exacting fulfillment of the obligation
from herein petitioner. with the arrival of the period agreed upon by the parties, petitioner was
supposed to comply with the obligation incumbent upon it to perform, not merely to exercise an
option or a right to buy the property.

The obligation of petitioner on November 30, 1993 consisted of an obligation to give something, that
is, the payment of the purchase price. The contract did not simply give petitioner the discretion to
pay for the property. 32It will be noted that there is nothing in the said contract to show that petitioner was
merely given a certain period within which to exercise its privilege to buy. The agreed period was
intended to give time to herein petitioner within which to fulfill and comply with its obligation, that is, to pay
the balance of the purchase price. No evidence was presented by private respondents to prove
otherwise.

The test in determining whether a contract is a "contract of sale or purchase" or a mere "option" is
whether or not the agreement could be specifically enforced. 33 There is no doubt that the obligation of
petitioner to pay the purchase price is specific, definite and certain, and consequently binding and
enforceable. Had private respondents chosen to enforce the contract, they could have specifically
compelled petitioner to pay the balance of P2,806,150.00. This is distinctly made manifest in the contract
itself as an integral stipulation, compliance with which could legally and definitely be demanded from
petitioner as a consequence.

This is not a case where no right is as yet created nor an obligation declared, as where something
further remains to be done before the buyer and seller obligate themselves. 34 An agreement is only
an "option" when no obligation rests on the party to make any payment except such as may be agreed on
between the parties as consideration to support the option until he has made up his mind within the time
specified. 35 An option, and not a contract to purchase, is effected by an agreement to sell real estate for
payments to be made within specified time and providing forfeiture of money paid upon failure to make
payment, where the purchaser does not agree to purchase, to make payment, or to bind himself in any
way other than the forfeiture of the payments made. 36 As hereinbefore discussed, this is not the situation
obtaining in the case at bar.

While there is jurisprudence to the effect that a contract which provides that the initial payment shall
be totally forfeited in case of default in payment is to be considered as an option contract, 37 still we
are not inclined to conform with the findings of respondent court and the court a quo that the contract
executed between the parties is an option contract, for the reason that the parties were already
contemplating the payment of the balance of the purchase price, and were not merely quoting an agreed
value for the property. The term "balance," connotes a remainder or something remaining from the
original total sum already agreed upon.

In other words, the alleged option money of P50,000.00 was actually earnest money which was
intended to form part of the purchase price. The amount of P50,000.00 was not distinct from the
cause or consideration for the sale of the property, but was itself a part thereof. It is a statutory rule
that whenever earnest money is given in a contract of sale, it shall be considered as part of the price
and as proof of the perfection of the contract. 38 It constitutes an advance payment and must, therefore,
be deducted from the total price. Also, earnest money is given by the buyer to the seller to bind the
bargain.

There are clear distinctions between earnest money and option money, viz.: (a) earnest money is
part of the purchase price, while option money ids the money given as a distinct consideration for an
option contract; (b) earnest money is given only where there is already a sale, while option money
applies to a sale not yet perfected; and (c) when earnest money is given, the buyer is bound to pay
the balance, while when the would-be buyer gives option money, he is not required to buy. 39

The aforequoted characteristics of earnest money are apparent in the so-called option contract
under review, even though it was called "option money" by the parties. In addition, private
respondents failed to show that the payment of the balance of the purchase price was only a
condition precedent to the acceptance of the offer or to the exercise of the right to buy. On the
contrary, it has been sufficiently established that such payment was but an element of the
performance of petitioner's obligation under the contract to sell. 40

II

1. This brings us to the second issue as to whether or not there was valid suspension of payment of
the purchase price by petitioner and the legal consequences thereof. To justify its failure to pay the
purchase price within the agreed period, petitioner invokes Article 1590 of the civil Code which
provides:

Art. 1590. Should the vendee be disturbed in the possession or ownership of the
thing acquired, or should he have reasonable grounds to fear such disturbance, by a
vindicatory action or a foreclosure of mortgage, he may suspend the payment of the
price until the vendor has caused the disturbance or danger to cease, unless the
latter gives security for the return of the price in a proper case, or it has been
stipulated that, notwithstanding any such contingency, the vendee shall be bound to
make the payment. A mere act of trespass shall not authorize the suspension of the
payment of the price.

Respondent court refused to apply the aforequoted provision of law on the erroneous assumption
that the true agreement between the parties was a contract of option. As we have hereinbefore
discussed, it was not an option contract but a perfected contract to sell. Verily, therefore, Article
1590 would properly apply.

Both lower courts, however, are in accord that since Civil Case No. 89-5541 filed against the parties
herein involved only the eastern half of the land subject of the deed of sale between petitioner and
the Jimenez brothers, it did not, therefore, have any adverse effect on private respondents' title and
ownership over the western half of the land which is covered by the contract subject of the present
case. We have gone over the complaint for recovery of ownership filed in said case 41 and we are not
persuaded by the factual findings made by said courts. At a glance, it is easily discernible that, although
the complaint prayed for the annulment only of the contract of sale executed between petitioner and the
Jimenez brothers, the same likewise prayed for the recovery of therein plaintiffs' share in that parcel of
land specifically covered by TCT No. 309773. In other words, the plaintiffs therein were claiming to be co-
owners of the entire parcel of land described in TCT No. 309773, and not only of a portion thereof nor, as
incorrectly interpreted by the lower courts, did their claim pertain exclusively to the eastern half
adjudicated to the Jimenez brothers.

Such being the case, petitioner was justified in suspending payment of the balance of the purchase
price by reason of the aforesaid vindicatory action filed against it. The assurance made by private
respondents that petitioner did not have to worry about the case because it was pure and simple
harassment 42 is not the kind of guaranty contemplated under the exceptive clause in Article 1590
wherein the vendor is bound to make payment even with the existence of a vindicatory action if the
vendee should give a security for the return of the price.
2. Be that as it may, and the validity of the suspension of payment notwithstanding, we find and hold
that private respondents may no longer be compelled to sell and deliver the subject property to
petitioner for two reasons, that is, petitioner's failure to duly effect the consignation of the purchase
price after the disturbance had ceased; and, secondarily, the fact that the contract to sell had been
validly rescinded by private respondents.

The records of this case reveal that as early as February 28, 1990 when petitioner caused its
exclusive option to be annotated anew on the certificate of title, it already knew of the dismissal of
civil Case No. 89-5541. However, it was only on April 16, 1990 that petitioner, through its counsel,
wrote private respondents expressing its willingness to pay the balance of the purchase price upon
the execution of the corresponding deed of absolute sale. At most, that was merely a notice to pay.
There was no proper tender of payment nor consignation in this case as required by law.

The mere sending of a letter by the vendee expressing the intention to

pay, without the accompanying payment, is not considered a valid tender of payment. 43 Besides, a
mere tender of payment is not sufficient to compel private respondents to deliver the property and
execute the deed of absolute sale. It is consignation which is essential in order to extinguish petitioner's
obligation to pay the balance of the purchase price. 44 The rule is different in case of an option
contract 45 or in legal redemption or in a sale with right to repurchase, 46 wherein consignation is not
necessary because these cases involve an exercise of a right or privilege (to buy, redeem or repurchase)
rather than the discharge of an obligation, hence tender of payment would be sufficient to preserve the
right or privilege. This is because the provisions on consignation are not applicable when there is no
obligation to pay. 47 A contract to sell, as in the case before us, involves the performance of an obligation,
not merely the exercise of a privilege of a right. consequently, performance or payment may be effected
not by tender of payment alone but by both tender and consignation.

Furthermore, petitioner no longer had the right to suspend payment after the disturbance ceased
with the dismissal of the civil case filed against it. Necessarily, therefore, its obligation to pay the
balance again arose and resumed after it received notice of such dismissal. Unfortunately, petitioner
failed to seasonably make payment, as in fact it has deposit the money with the trial court when this
case was originally filed therein.

By reason of petitioner's failure to comply with its obligation, private respondents elected to resort to
and did announce the rescission of the contract through its letter to petitioner dated July 27, 1990.
That written notice of rescission is deemed sufficient under the circumstances. Article 1592 of the
Civil Code which requires rescission either by judicial action or notarial act is not applicable to a
contract to sell. 48 Furthermore, judicial action for rescission of a contract is not necessary where the
contract provides for automatic rescission in case of breach, 49 as in the contract involved in the present
controversy.

We are not unaware of the ruling in University of the Philippines vs. De los Angeles, etc. 50 that the
right to rescind is not absolute, being ever subject to scrutiny and review by the proper court. It is our
considered view, however, that this rule applies to a situation where the extrajudicial rescission is
contested by the defaulting party. In other words, resolution of reciprocal contracts may be made
extrajudicially unless successfully impugned in court. If the debtor impugns the declaration, it shall be
subject to judicial determination 51 otherwise, if said party does not oppose it, the extrajudicial rescission
shall have legal effect. 52

In the case at bar, it has been shown that although petitioner was duly furnished and did receive a
written notice of rescission which specified the grounds therefore, it failed to reply thereto or protest
against it. Its silence thereon suggests an admission of the veracity and validity of private
respondents' claim. 53 Furthermore, the initiative of instituting suit was transferred from the rescinder to
54
the defaulter by virtue of the automatic rescission clause in the contract. But then, the records bear out
the fact that aside from the lackadaisical manner with which petitioner treated private respondents' latter
of cancellation, it utterly failed to seriously seek redress from the court for the enforcement of its alleged
rights under the contract. If private respondents had not taken the initiative of filing Civil Case No. 7532,
evidently petitioner had no intention to take any legal action to compel specific performance from the
former. By such cavalier disregard, it has been effectively estopped from seeking the affirmative relief it
now desires but which it had theretofore disdained.

WHEREFORE, on the foregoing modificatory premises, and considering that the same result has
been reached by respondent Court of Appeals with respect to the relief awarded to private
respondents by the court a quo which we find to be correct, its assailed judgment in CA-G.R. CV No.
34767 is hereby AFFIRMED.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 124874 March 17, 2000

ALBERT R. PADILLA, petitioner,

vs.
SPOUSES FLORESCO PAREDES and ADELINA PAREDES, and THE HONORABLE COURT OF
APPEALS,respondents.

DECISION

QUISUMBING, J.:

For resolution is a petition for review on certiorari, seeking reversal of the decision of the Court of
Appeals in CA G.R. CV No. 33089, which set aside the decision of the Regional Trial Court in Civil
Case No. 4357 and confirmed the rescission of the contract between petitioner and private
respondents.

From the records, we glean the following antecedent facts:

On October 20, 1988, petitioner Albert R. Padilla and private respondents Floresco and Adelina
Paredes entered into a contract to sell1 involving a parcel of land in San Juan, La Union. At that time,
the land was untitled although private respondents were paying taxes thereon. Under the contract,
petitioner undertook to secure title to the property in private respondents' names. Of the
P312,840.00 purchase price, petitioner was to pay a downpayment of P50,000.00 upon signing of
the contract, and the balance was to be paid within ten days from the issuance of a court order
directing issuance of a decree of registration for the property.

On December 27, 1989, the court ordered the issuance of a decree of land registration for the
subject property. The property was titled in the name of private respondent Adelina Paredes. Private
respondents then demanded payment of the balance of the purchase price, per the second
paragraph of the contract to sell,2 which reads as follows:
 VENDEE agrees to pay the balance of the purchase price of subject property in the amount
of TWO HUNDRED SIXTY TWO THOUSAND EIGHT HUNDRED FORTY (P262,840.00)
PESOS, within ten (10) days counted from issuance of the Order of the Court for the
issuance of a decree pursuant to an application for registration and confirmation of title of
said subject property, of which the VENDEE is under obligation to secure the title of subject
property at his own expense.

Petitioner made several payments to private respondents, some even before the court issued an
order for the issuance of a decree of registration.3 Still, petitioner failed to pay the full purchase price
even after the expiration of the period set. In a letter dated February 14, 1990,4 private respondents,
through counsel, demanded payment of the remaining balance, with interest and attorney's fees,
within five days from receipt of the letter. Otherwise, private respondents stated they would consider
the contract rescinded.

On February 28, 1990, petitioner made a payment of P100,000.00 to private respondents,5 still
insufficient to cover the full purchase price. Shortly thereafter, in a letter dated April 17,
1990,6 private respondents offered to sell to petitioner one-half of the property for all the payments
the latter had made, instead of rescinding the contract. If petitioner did not agree with the proposal,
private respondents said they would take steps to enforce the automatic rescission of the contract. 1wphi1.nt

Petitioner did not accept private respondents' proposal. Instead, in a letter dated May 2, 1990,7 he
offered to pay the balance in full for the entire property, plus interest and attorney's fees. Private
respondents refused the offer.

On May 14, 1990, petitioner instituted an action for specific performance against private
respondents, alleging that he had already substantially complied with his obligation under the
contract to sell. He claimed that the several partial payments he had earlier made, upon private
respondents' request, had impliedly modified the contract. He also averred that he had already spent
P190,000.00 in obtaining title to the property, subdividing it, and improving its right-of-way.8

For their part, private respondents claimed before the lower court that petitioner maliciously delayed
payment of the balance of the purchase price, despite repeated demand and despite his knowledge
of private respondents' need therefor.9 According to private respondents, their acceptance of partial
payments did not at all modify the terms of their agreement, such that the failure of petitioner to fully
pay at the time stipulated was a violation of the contract. 10 Private respondents claimed that this
violation led to the rescission of the contract, of which petitioner was formally informed. 11

After trial, the lower court ruled in favor of petitioner, saying that even if petitioner indeed breached
the contract to sell, it was only a casual and slight breach that did not warrant rescission of the
contract. The trial court pointed out that private respondents themselves breached the contract when
they requested and accepted installment payments from petitioner, even before the land registration
court ordered issuance of a decree of registration for the property. 12 According to the trial court, this
constituted modification of the contract, though not reduced into writing as required by the contract
itself. The payments, however, were evidenced by receipts duly signed by private respondents.
Acceptance of delayed payments estopped private respondents from exercising their right of
rescission, if any existed. 13

The Court of Appeals, however, reversed the ruling of the trial court and confirmed private
respondents' rescission of the contract to sell. According to the Court of Appeals, the issue of
whether or not the breach of contract committed is slight or casual is irrelevant in the case of a
contract to sell, where title remains in the vendor if the vendee fails to "comply with the condition
precedent of making payment at the time specified in the contract." 14
The Court of Appeals rejected petitioner's claim that there had been a novation of the contract when
he tendered partial payments for the property even before payment was due. The Court of Appeals
noted that the contract itself provides that no terms and conditions therein shall be modified unless
such modification is in writing and duly signed by the parties. The modification alleged by petitioner
is not in writing, much less signed by the parties. 15Moreover, the Court of Appeals ruled that private
respondents made a timely objection to petitioner's partial payments when they offered to sell to
petitioner only one-half of the property for such partial payments. 16

The Court of Appeals ruled that private respondents are entitled to rescission under Article 1191 of
the Civil Code, but with the obligation to return to petitioner the payments the latter had made,
including expenses incurred in securing title to the property and in subdividing and improving it right
of way. Whatever damages private respondents had suffered should be deemed duly compensated
by the benefits they derived from the payments made by petitioner. 17

Hence, this petition, wherein petitioner assigns the following errors allegedly committed by the Court
of Appeals:

1. . . . HOLDING THAT: "THE APPELLANTS ARE ENTITLED TO RESCISSION UNDER

ARTICLE 1191 OF THE CIVIL CODE.

2. . . . IN CONFIRMING THE UNILATERAL RESCISSION OF THE CONTRACT TO SELL

BY THE PRIVATE RESPONDENTS.

3. . . . WHEN IT INTERPRETED AND APPLIED LIBERALLY IN FAVOR OF THE PRIVATE

RESPONDENTS AND STRICTLY AGAINST THE HEREIN PETITIONERS, THE
PROVISIONS OF ARTICLE 1191 AND OTHER PROVISIONS OF THE CIVIL CODE. 18

Petitioner contends that private respondents are not entitled to rescission, because rescission
cannot be availed of when the breach of contract is only slight or casual, and not so substantial and
fundamental as to defeat the object of the parties in making the contract. Petitioner points out that he
made partial payments even before they were due in fact, even before the land registration court
issued an order for the issuance of a decree of registration for the property since private
respondents requested it. Private respondents' acceptance of the payments amounted to a
modification of the contract, though unwritten. Petitioner believed in good faith that private
respondents would honor an alleged verbal agreement that the latter would not strictly enforce the
period for the payment of the remaining balance.

Petitioner additionally argues that private respondents were also guilty of breach of contract since
they failed to deliver the three-meter wide additional lot for a right-of-way, as agreed upon in their
contract.

For their part, private respondents reiterate that, as ruled by the Court of Appeals, the issue of
whether or not the breach is slight or casual is irrelevant in a contract to sell. They contend that in
such a contract, the non-payment of the purchase price is not a breach but simply an event that
prevents the vendor from complying with his obligation to transfer title to the property to the vendee.
Moreover, they point out that the degree of breach was never raised as an issue during the pre-trial
conference nor at trial of this case.

Private respondents also aver that petitioner cannot avail of an action for specific performance since
he is not an injured party as contemplated in Article 1191 of the Civil Code.
Private respondents admit having requested cash advances from petitioner due to dire financial
need. Such need, they point out, is the same reason why time is of the essence in the payment of
the balance of the purchase price. They claim that petitioner offered to pay the balance only after
more than three months had lapsed from the date his obligation to pay became due.

Private respondents argue that their acceptance of advance payments does not amount to a
novation of the contract since, as provided in the contract itself, modification of the contract would
only be binding if written and signed by the parties, which is not the case here. Acceptance of
advance payments is a mere act of tolerance, which under the contract would not be considered as
a modification of the terms and conditions thereof.

The core issue in this case is whether the respondent Court of Appeals erred in reversing and
setting aside the judgment of the trial court, by holding that private respondents are entitled to
rescind their "contract to sell" the land to petitioner.

To begin with, petitioner is alleging that the contract entered into between the parties is a contract of
sale, in which case rescission will not generally be allowed where the breach is only slight or casual.
Petitioner insists that the title "Contract to Sell" does not reflect the true intention of the parties, which
is to enter into a contract of sale.

We note, however, that petitioner only made this claim as to the nature of the contract in his reply to
the comment of private respondents to his petition for review. In his complaint in the RTC and in his
petition for review, petitioner refers to the subject contract as a contract to sell. The nature of the
contract was never in issue in the proceedings in the courts below. Moreover, petitioner does not
deny private respondents' allegation that it was he and his counsel who prepared the contract. Thus,
the ambiguity, if any exists, must be resolved strictly against him as the one who caused the same. 19

At any rate, the contract between the parties in our view is indeed a contract to sell, as clearly
inferrable from the following provisions thereof:

xxx xxx xxx

That the VENDORS hereby agree and bind themselves not to allienate (sic), encumber, or in
any manner modify the right of title to said property.

xxx xxx xxx

That the VENDORS agree to pay real estate taxes of said subject property until the same will
have been transferred to the VENDEE.

That on payment of the full purchase price of the above-mentioned property the VENDORS
will execute and deliver a deed conveying to the VENDEE the title in fee simple of said
property free from all lien and encumbrances . . . (Emphasis supplied.)20

These provisions signify that title to the property remains in the vendors until the vendee should
have fully paid the purchase price, which is a typical characteristic of a contract to sell.

Now, admittedly, petitioner failed to comply with his obligation to pay the full purchase pride within
the stipulated period. Under the contract, petitioner was to pay the balance of the purchase price
within 10 days from the date of the court order for the issuance of the decree of registration for the
property. Private respondents claim, and petitioner admits, that there was delay in the fulfillment of
petitioner's obligation. The order of the court was dated December 27, 1989. By April 1990, or four
months thereafter, petitioner still had not fully paid the purchase price, clearly in violation of the
contract.

Petitioner's offer to pay is clearly not the payment contemplated in the contract. While he might have
tendered payment through a check, this is not considered payment until the check is
encashed.21 Besides, a mere tender of payment is not sufficient. Consignation is essential to
extinguish petitioner's obligation to pay the purchase price.22

We sustain the decision of the Court of Appeals, to the effect that private respondents may
validly cancel the contract to sell their land to petitioner. However, the reason for this is not that
private respondents have the power to rescind such contract, but because their obligation
thereunder did not arise.

Art. 1191 of the Civil Code, on rescission, is inapplicable in the present case. This is apparent from
the text of the article itself:

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

The injured party may choose between the fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the
fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired
the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

Art. 1191 speaks of obligations already existing, which may be rescinded in case one of the obligors
fails to comply with what is incumbent upon him. However, in the present case, there is still no
obligation to convey title of the land on the part of private respondents. There can be no rescission of
an obligation that is non-existent, considering that the suspensive condition therefor has not yet
happened.23

In Rillo v. Court of Appeals,24 we ruled:

The respondent court did not err when it did not apply Articles 1191 and 1592 of the Civil
Code on rescission to the case at bar. The contract between the parties is not an absolute
conveyance of real property but a contract to sell. In a contract to sell real property on
installments, the full payment of the purchase price is a positive suspensive condition, the
failure of which is not considered a breach, casual or serious, but simply an event which
prevented the obligation of the vendor to convey title from acquiring any obligatory force. The
transfer of ownership and title would occur after full payment of the purchase price.25

We reiterated this rule in Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (1997). Moreover,
we held inOdyssey:

The breach contemplated in Article 1191 of the Code is the obligor's failure to comply with an
obligation already extant, not a failure of a condition to render binding that obligation.26
Under the parties' contract, the property will be transferred to petition only upon the latter's "complete
compliance of his obligation provided in [the] contract." Because of petitioner's failure to fully pay the
purchase price; the obligation of private respondents to convey title to the property did not
arise.27 Thus, private respondents are under no obligation, and may not be compelled, to convey title
to petitioner and receive the full purchase price.

Petitioner's reliance on Article 1592 of the Civil Code is misplaced. It provides:

Art. 1592. In the sale of immovable property, even though it may have been stipulated that
upon failure to pay the price at the time agreed upon the rescission of the contract shall of
right take place, the vendee may pay, even after the expiration of the period, as long as no
demand for rescission of the contract has been made upon him either judicially or by a
notarial act. After the demand, the court may not grant him a new term.

Clearly, what this provision contemplates is an absolute sale and not a contract to sell as in the
present case.

Private respondents' acceptance of several partial payments did not modify the parties' contract as
to exempt petitioner from complying with his obligation to pay within the stipulated period. The
contract itself provided:

No terms and conditions shall be considered modified, changed, altered, or waived by any
verbal agreement by and between the parties hereto or by an act of tolerance on the parties
unless such modification, change, alteration or waiver appears in writing duly signed by the
parties hereto.28

Acceptance of the partial payments is, at best, an act of tolerance on the part of private respondents
that could not modify the contract, absent any written agreement to that effect signed by the parties.

The Court of Appeals is correct in ordering the return to petitioner of the amounts received from him
by private respondents, on the principle that no one may unjustly enrich himself at the expense of
another.

WHEREFORE, the petition is DENIED, for lack of merit. Costs against petitioner.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 149322 November 28, 2008

JAIME L. YANEZA, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, MANUEL A. DE JESUS and
WILHELMINA M. MANZANO, respondents.
 DECISION

NACHURA, J.:

In this petition for certiorari and prohibition under Rule 65, Jaime L. Yaneza,
petitioner, assails the Court of Appeals' denial of his Motion for Extension of
Time to File Petition for Review on the ground that it was filed after the lapse
of the reglementary period for filing the appeal.

Petitioner is the owner of a 603-square-meter parcel of land, denominated as

Lot 2730-A and situated along Calle Kay Rumagit, Sitio Haligionan, Brgy. San
Juan, Baras, Rizal. He purchased the property from a certain Rudy Llagas on
June 19, 1990.

Respondents, Manuel A. de Jesus and Wilhelmina M. Manzano, are the

owners of Lot 2732 which is adjacent to Lot 2730-A. The respondents' lot has
no access to the nearest road except through a road which they constructed
over a portion of Lot 2730-A.

On September 26, 1995, petitioner sent a letter to respondents informing them

that he is the owner of Lot 2730-A and that he does not agree with the use of
the portion of his lot as an access road because it will affect the configuration
of his property. As an option, petitioner offered to sell to the respondents the
entire property.1

Apparently, respondents did not agree to the proposition because two days
later, petitioner wrote another letter to them, offering instead a perpetual
easement of right of way (4 meters wide) and stating that he will prepare the
necessary document to facilitate the transaction.2

Instead of a deed of perpetual easement, it appears that petitioner and

respondents executed a Deed of Absolute Sale3 on October 20, 1995 over a
175-sq m portion of Lot 2730-A, to be used as an access road 5-meters wide,
for a consideration of P20,000.00. The Deed of Absolute Sale contained the
following terms and conditions:

1] The portion subject of this sale agreement is as per the sketch plan
attached herein as Annex "A" and made as an integral part of this
instrument;

2] The total purchase for the aforesaid portion of lot shall be in the sum
of TWENTY THOUSAND (P20,000.00) PESOS, Philippine Currency,
 payable on cash basis upon the signing and execution of this deed, the
signature of the VENDOR being his acknowledgment that he already
received the said amount satisfactorily;

3] The realty taxes and assessments on the lot subject of this sale
agreement, costs of preparation of the document of sale, all other taxes,
cost of subdivision survey to segregate the portion of lot, and all the
incidental expenses to facilitate issuance of the individual transfer
certificate of titles for the resulting lots shall be for the sole account and
expense of the VENDEE;

4] The use of the aforesaid portion of lot sold shall be for the purpose
of the right of way of and for the abovesaid property of the VENDEE,
whereby the VENDOR, by virtue whereof, shall have the perpetual right
and/or privilege to use the same as right of way for his own purposes.

Almost a year later, or on September 12, 1996, petitioner informed

respondents that he is canceling the deed of sale by way of a Deed of
Cancellation4 which he executed on his own.5

When respondents refused to honor the cancellation, petitioner filed a

Complaint6 for Cancellation of Contract with the Municipal Circuit Trial Court
(MCTC) of Teresa-Baras on April 22, 1997. The complaint alleged that,
contrary to what was stated in the Deed of Absolute Sale, respondents
constructed an access road 8-m wide (with an area of 280 sq m); that the
respondents have not complied with the conditions stated in the Deed of
Absolute Sale and the Deed of Undertaking attached thereto; and that
respondents have been dumping high piles of gravel, sand and soil along the
access road in violation of the condition in the deed of sale that the access
road will be used only for the purpose of a right of way. The complaint prayed
for the court to declare as canceled the grant of right of way to respondents
and to order them to pay moral and exemplary damages and attorney's fees.

In their Answer with Counterclaims, respondents averred that they purchased

the disputed 280-sq m portion of Lot 2730-A from its previous owner, Rudy
Llagas, as early as March 2, 1994. After the sale, they immediately
constructed a 7 by 35-m road with a total area of 245 sq m, leaving a 1 by 35-
m strip along the western portion as an easement along the irrigation canal.
However, to buy peace and avoid any conflict with the petitioner, who was
claiming to be the new owner, respondents agreed to pay P20,000.00 in
consideration of the petitioner's desistance from further pursuing his claim
over the 280 sq m area. Petitioner prepared the Deed of Absolute Sale and
respondents agreed to sign it without prejudice to the resolution of the civil
case (Civil Case No. 777-M), filed by Llagas against the petitioner, on the
issue of the ownership of the property.7

Respondents narrated that, after they signed the Deed of Absolute Sale but
before they could deliver the P20,000.00, they discovered that it covered only
175 sq m, not 280 sq m. There was an immediate renegotiation between the
parties and, for an additional consideration of P40,000.00, petitioner agreed to
sell the entire 280 sq m. Relying on the petitioner's assurance that he will
prepare a new deed of sale to reflect the new agreement, respondents paid
him the additionalP40,000.00 as evidenced by an Acknowledgment Receipt.
Despite several demands, petitioner failed to present the new deed of sale.8

According to the respondents, petitioner initially allowed them peaceful

possession and use of the area even when he started constructing his house
adjacent to the access road. However, while petitioner was constructing his
house, a serious misunderstanding took place between petitioner and
respondents' caretaker, Benjamin Manzano, brought about by the latter's
refusal to allow petitioner to tap water and electricity from the respondents'
property. Petitioner allegedly retaliated and took possession of the eastern
half portion of the 280-sq-m area by constructing a fence along the length of
the access road, which reduced it to a narrow passage that could not allow
trucks to pass through. On account of this dispute, Manzano, upon
respondents' authority, filed a complaint before theBarangay Lupon to compel
the petitioner to remove the fence but the petitioner did not attend the
conciliation proceedings. Respondents obtained from the barangay a
certification to file an action in court, but petitioner preempted them by filing
the instant case. Respondents pointed out that the petitioner did not seek the
intervention of the Barangay Lupon before he filed the instant case; hence,
the petitioner's complaint should be dismissed for failure to state a cause of
action.9

In claiming damages, respondents alleged that the construction of the fence

caused them difficulties when they started developing their property because
the trucks that carried the necessary materials could not pass through the
access road. They purportedly incurred additional costs since they had to hire
laborers to manually carry the construction materials from the barangay road
to the construction site.10

Respondents further asserted that what was agreed upon was a sale and not
only an easement of right of way. They denied the existence of the Deed of
Undertaking which does not even bear their signatures. And respondents
argued that the deed of sale may not be canceled unilaterally by the petitioner
since they already acquired full ownership over the property by virtue
thereof.11

Finally, respondents stressed that it is the petitioner who is actually enjoying a

right of way along the access road in compliance with the condition stated in
the Deed of Absolute Sale. It is the petitioner who violated the terms of the
contract when he obstructed the access road with the concrete fence he built
thereon. For this violation, petitioner should be denied his right of way over the
access road. Moreover, petitioner's property abuts the barangay road; hence,
there is actually no need for him to be granted a right of way.

During trial, petitioner testified for himself and presented his brother, Cesar
Yaneza, as witness. Petitioner narrated that Cesar handed to him
the P20,000.00 and that he constructed the iron fence during the latter part of
1996 because respondents did not comply with the conditions set out in the
Deed of Undertaking. Cesar Yaneza testified that he was the one who
delivered the Deed of Absolute Sale to the office of respondent Manuel de
Jesus in Manila and that the latter requested that he leave the Deed of
Undertaking so that his wife can also sign the same, but he never returned the
document despite several demands.

For the respondents, respondent Manuel de Jesus, Rudy Llagas and

Benjamin Manzano testified. Rudy Llagas admitted that he indeed sold to the
respondents the subject property which is on the western side; what he sold to
the petitioner was on the eastern side of his property.12 Respondent Manuel
de Jesus swore that he and petitioner agreed on a price of P20,000.00 for the
5-m by 35-m area and an additional P40,000.00 to increase the area to 8-m
by 35-m, so that the total consideration was P60,000.00. He claimed he had
to agree to the additional amount because by then he had already constructed
the gate to, and trucks could not enter, their property.13 And finally, Benjamin
Manzano attested that when petitioner started constructing his house,
petitioner asked him if he could tap water and electricity from respondents'
property, but he did not agree. He said that, after a few days from said
incident, petitioner constructed the low level iron fence in the middle of the
road right of way.14

On September 6, 1999, the MCTC promulgated its decision dismissing the

complaint and granting the respondents' counterclaims, thus:

In view of the foregoing considerations, this Court hereby resolves to

order the following:
1. To dismiss the complaint as well as the plaintiff's claim for
damages and attorney's fees;

2. For plaintiff to execute a new deed of absolute sale covering

the access road or road right of way of 8 meters wide by 35 meter
long, including the meter easement beside the irrigation canal;
with a total area of 280 sq. m. from the northwest portion of Lot
2730, now covered by TCT No. 50181 of the Register of Deeds of
Rizal, Morong Branch, without prejudice to the outcome of Civil
Case No. 777-M filed by Rudy Llagas against plaintiff Jaime
Yaneza;

3. To cancel and declare as null and void the plaintiff's right of

way over the access road of defendants;

4. For plaintiff to remove at his expense, the steel fence or

structure he caused to be constructed at about the middle of
defendants' access road or found within the 280 sq.m. area that
obstruct, impede or alter the full and peaceful use by defendants
of subject realty;

5. To restore defendants to the full, adequate and peaceful

possession and use of subject realty;

6. For plaintiff to pay to the defendants the following:

a. P1,000,000.00 as actual damages;

b. P1,300,000.00 as moral damages;

c. P300,000.00 as exemplary damages;

d. P300,000.00 as attorney's fees;

e. P30,000.00 as reimbursement for incidental litigation

expenses;

f. 6% interest on the actual damages from the time they

were incurred up to the time of finality of the decision;
 g. 6% interest on the award for moral, exemplary, attorney's
fees and litigation expenses from the promulgation of the
decision until its finality;

h. Costs.

SO ORDERED.15

On January 5, 2001, the Regional Trial Court (RTC), Morong, Rizal Branch
78, rendered a Decision16 on petitioner's appeal affirming the MCTC Decision
with the modification that the monetary award (item no. 6 of the dispositive
portion) in favor of the respondents was deleted.

Respondents filed a motion for reconsideration with respect to the deletion of

the award of damages, but the same was denied for failure to include a Notice
of Hearing. Respondents filed a Petition for Relief from Judgment, the status
of which was not disclosed by the parties in this petition.

Meanwhile, petitioner's counsel received a copy of the RTC Decision on

February 6, 2001. On February 9, 2001, he withdrew his appearance for the
petitioner. On February 22, 2001, petitioner, through his new counsel, filed an
Urgent Motion for Extension of Time to File Petition for Review praying that
they be given a period of 15 days from February 24, 2001, or until March 12,
2001, within which to file the petition.

On February 28, 2001, the CA issued a Resolution17 denying the Urgent

Motion for having been filed one day late and, consequently, dismissed the
appeal. On March 27, 2001, petitioner filed a Motion for Reconsideration and
a Motion for Leave of Court to Admit Petition for Review, but the CA denied
the motions in its Resolution18 dated July 25, 2001.

Disgruntled with the CA Resolutions, petitioner filed this Petition for Certiorari
and Prohibition, raising the following issues:

WHETHER THE PETITION SHOULD BE GIVEN DUE COURSE IN

THE LIGHT OF THE CIRCUMSTANCES AFFECTING THE
TIMELINESS OF THE FILING THEREOF.

WHETHER THE APPEALED DECISION OF THE REGIONAL TRIAL

COURT WAS RENDERED AND WRITTEN AS REQUIRED BY THE
1987 PHILIPPINE CONSTITUTION AND THE RULES OF COURT.
 WHETHER THE PLAINTIFF HAS NO CAUSE OF ACTION.

WHETHER THE PETITIONER MAY BE COMPELLED TO EXECUTE A

DEED OF CONVEYANCE AGAINST HIS WILL AND IN VIOLATION OF
HIS CONSTITUTIONAL RIGHT AGAINST

DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW,

AND THE CIVIL LAW AGAINST UNJUST ENRICHMENT.19

The petition has no merit.

In the interest of substantial justice, petitioner begs this Court's indulgence for
the late filing of his motion for extension of time, which he claims is due to an
honest mistake.

Certainly, we cannot ascribe grave abuse of discretion upon a court that

denies a motion for extension of time filed after the expiration of the
reglementary period to file a petition. A motion for extension of time to file a
petition should be filed prior to the expiration or lapse of the period set by law,
otherwise, there is no longer any period to extend and the judgment or order
to be appealed from will have become final and executory.20 Once the
judgment becomes final and executory, the appellate court is without
jurisdiction to modify or reverse it.

We have repeatedly pronounced that perfection of an appeal in the manner

and within the period prescribed by law is mandatory and jurisdictional.21 The
failure to perfect an appeal is not a mere technicality as it deprives the
appellate court of jurisdiction over the appeal.22 Hence, anyone seeking an
exemption from the application of the reglementary period for filing an appeal
has the burden of proving the existence of an exceptionally meritorious
instance warranting such deviation.23 But none obtains in this case.

Even on the merits, we find the petition noticeably infirm. The petitioner's
complaint for cancellation of the contract was correctly dismissed by the
MCTC.

Petitioner's cause of action for cancellation of the contract is based on a

breach of contract as provided in Article 119124 of the Civil Code and is
properly denominated "rescission," or "resolution" under the Old Civil Code. It
is grounded on the respondents' alleged noncompliance with the conditions
embodied in the Deed of Absolute Sale and the Deed of Undertaking. In
particular, petitioner claims that respondents constructed a road three meters
wider than what was agreed upon in the deed of sale and failed to comply with
their undertaking to facilitate the transfer of the title over the subject area.

To state the obvious, the construction of the road beyond the stipulated area
does not constitute a breach of contract. Breach of contract implies a failure,
without legal excuse, to perform any promise or undertaking that forms part of
the contract.25 Although the contract specifically stated the area covered by
the sale, it did not contain a promise by the respondents that they will only
occupy such area. Albeit apparently wrong, petitioner's cause of action should
not have been based on the contract of sale.

Neither could the respondent be faulted for not facilitating the transfer of the
title over the subject area. Respondents did not sign the Deed of Undertaking,
and thus, could not have assumed the obligations contained therein.
Moreover, considering that the respondents specifically denied the existence
of the document and petitioner failed to authenticate it, the RTC was correct in
declaring that it has no probative weight.

Besides, rescission of a contract will not be permitted for a slight or casual

breach but only for a substantial and fundamental breach as would defeat the
very object of the parties in making the agreement.26 It must be a breach of
faith that destroys or violates the reciprocity between the parties.27 The
alleged breach by the respondents was definitely not of such level and
magnitude.

Most importantly, rescission of a contract presupposes the existence of a valid

and subsisting obligation. The breach contemplated in Article 1191 is the
obligor's failure to comply with an existing obligation.28 It would be useless to
rescind a contract that is no longer in existence. Here, we find that the
contract of sale sought to be canceled by the petitioner does not exist
anymore; hence, the filing of the petition for cancellation was an exercise in
futility.

The records show that the parties' original agreement, embodied in the Deed
of Absolute Sale, had already been superseded or novated by a new contract,
albeit an oral one, covering an increased area of 280 sq m. In his testimony,
petitioner admitted that he received from his brother, Cesar Yaneza,
the P20,000.00 that respondents paid. This, taken with the respondents'
narration of the circumstances surrounding the signing of the deed of sale and
the subsequent renegotiation for an increased area, together with the
Acknowledgment Receipt showing that an additional P40,000.00 was paid to
the petitioner, reasonably leads us to believe that the parties had actually
entered into a new agreement which covered the entire 280-sq m area where
the access road was laid.

The new contract of sale between the parties is valid despite it not being
evidenced by any writing.29The requirement under the Statute of Frauds does
not affect the validity of the contract of sale but is needed merely for its
enforceability. In any case, it applies only to contracts which are executory,
and not to those which have been consummated either totally or partially,30 as
in the new contract of sale herein.

The existence of the new contract of sale over the 280-sq m area therefore
having been established, it follows that the petitioner may be compelled to
execute the corresponding deed of sale reflecting this new agreement. After
the existence of the contract has been admitted, the party bound thereby may
be compelled to execute the proper document.31 This is clear from Article
1357, viz.:

Art. 1357. If the law requires a document or other special form, as in the
acts and contracts enumerated in the following article [Article 1358], the
contracting parties may compel each other to observe that form, once
the contract has been perfected. This right may be exercised
simultaneously with the action upon the contract.

WHEREFORE, the petition is DISMISSED. The assailed CA Resolutions

dated February 28, 2001 and July 25, 2001 are AFFIRMED.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 176217 August 13, 2008

STA. LUCIA REALTY & DEVELOPMENT INC., petitioner,

vs.
ROMEO UYECIO, AMARIS UYECIO, REYNALDO UYECIO AND MANUEL
UYECIO, respondents.

DECISION
CARPIO MORALES, J.:

Sta. Lucia Realty Development, Inc. (petitioner), developer of "The Royale

Tagaytay Estates" which is a subdivision project located in Alfonso, Cavite,
offered lots for sale payable on installments, proffering that the development
of the project would be completed by September 1999. The sales brochures
of the project detailed the following improvements and amenities:

1. Church

2. Grand Clubhouse

3. Landscaped gardens and promenade

4. Basketball court

5. Adult pool

6. Kiddie swimming pool

7. Multipurpose hall

8. Function room system

9. Billiards

10. Grand Entrance (Ph. I)

11. Perimeter fence for security and privacy

12. Cemented roads, curbs and gutters

13. Cemented sidewalk

14. Storm drainage system

15. Electrical facilities

16. Mercury street lamps

17. Centralized interrelated water system with deepwell and overhead

water tank
 18. Concrete electrical posts

19. Tennis court1

Respondents Romeo, Amaris, Reynaldo and Manuel, all surnamed Uyecio,

entered into contracts to sell with petitioner covering seven lots in petitioners
Phase II project. Under the contracts to sell which were all dated May 21,
1999, each of the respondents would and did in fact pay a downpayment
of P240,000, and the balance of P960,000 would be paid in 10 years at 21%
interest per annum. Respondents paid their monthly amortizations until April
2001 when they suspended further payments, the promised delivery date of
the project not having been met, and the improvements and amenities
reflected in the sales brochures were yet to be introduced or completed.2

Respondents thus sent petitioner a letter demanding the completion of the

entire project and informing it that they were suspending the payment of
monthly amortizations on account of "contractual breach."3

Petitioner for its part also sent letters to respondents advising them of their
default in the payment of their monthly amortizations covering the period
March 2001 up to the third quarter of 2002.4

On August 22, 2002, respondents lodged a complaint5 against petitioner at

the Housing and Land Use Regulatory Board (HLURB) Regional Field Office
No. IV, praying for the completion of the project within six months or, in the
alternative, for the refund of their total payments to bear interest at 21% per
annum reckoned from February 1999 until said payments are finally paid, and
for the award of moral and exemplary damages and attorneys fees.

In an ocular inspection of the subdivision conducted on December 3, 2002,

the HLURB Regional Office found that, indeed, the project remained
unfinished. In his Report,6 Engineer Rey E. Musa of the said office reflected
the following findings:

xxxx

1. The following features and amenities for the whole Phase II indicated
in the brochure are yet to be provided/constructed, to wit:

a. Church
 b. Electrical facilities including concrete posts & mercury street
lamps

b. Clubhouse

1. Basketball court

2. Tennis court

3. Swimming pool

4. Multi-purpose Hall

d. Property perimeter wall for security and privacy

e. Landscaped garden & promenade

2. There is an existing water tanks [sic] in Phase II, however, not yet
operational.

3. There is no sewerage water treatment plant within the whole project.

(Emphasis supplied)

By petitioners claim, "the basic components of [the] subdivision development

are almost 100% complete,"7 in support of which it submitted the report of its
project engineer Gregorio Evangelio8stating that all constructions relating to
earthworks, concrete works and drainage system had been done with, while
the water distribution system was 98% finished. The report went on to state,
however, that works on the electrical distribution system and perimeter fence
remained at 5% and 50%, respectively, as of September 2002.9

Petitioner disclaimed having had any participation in the preparation of the

advertising materials distributed by the marketing firm Asian Pacific Realty &
Brokerage, Inc., a separate and distinct entity.10

To further shore up its case, petitioner reiterated that it is not precluded from
asking from the HLURB for extension of time to complete the project, citing
License to Sell No. R4-98-12-020311 which provides, among other things, that
it could

xxxx
 2. Apply for an extension of time to complete the development in case
the project cannot be completed within the prescribed period before its
expiration;

x x x x (Underscoring supplied)

HLURB, by letter dated November 5, 2003,12 in fact granted petitioner an

extension until September 2004 to complete Phase II-B of the project.

By Decision13 of June 23, 2003, the HLURB ruled in favor of respondents,

disposing as follows:

WHEREFORE, premises considered, judgment is hereby rendered in

favor of the complainants and against the respondent to read as follows:

1. Ordering the rescission of the Contracts to Sell between the

complainants and respondent;

2. Ordering the respondent to refund complainant Romeo Uyecio the

amount of P1,224,000.00 with interest at 12% per annum from the filing
of the complaint until full payment;

3. Ordering the respondent to refund the complainant Reynaldo Uyecio

the amount of P816,000.00 with interest at 12 % per annum from the
filing of the complaint until full payment;

4. Ordering the respondent to refund complainants Amaris Uyecio and

Manuel Uyecio the amount of P408,000.00 each with interest at 12 %
per annum from the filing of the complaint until full payment;

5. Ordering the respondent to pay complainant(s) the amount of

P100,000.00 as moral damages, P100,000.00 as exemplary damages,
P50,000.00 as attorneys fees to be divided among the complainants in
proportion to their respective claims;

6. Ordering the respondent to pay this Board P20,000.00 as

administrative fine for violation of Sections 19 and 20 in relation to
Section 38 of P.D. 957.

SO ORDERED. (Emphasis and underscoring supplied)

The HLURB Board of Commissioners (First Division) to which petitioner
appealed the decision via petition for review denied its petition by
Decision14 of December 5, 2003 and Resolution15 of March 31, 2004.

The Office of the President (OP) affirmed the HLURB decision. The Court of
Appeals in turn affirmed16 that of the HLURB.

Hence, the present petition for review, petitioner faulting the Court of Appeals
in upholding the rescission of the contracts to sell, in granting respondents
prayer for refund with exorbitant interest, and in upholding the award of moral
and exemplary damages and attorneys fees.17

The Court finds the issues raised by petitioner bearing on findings of facts to
be mere rehash of those already passed upon by the HLURB, the OP and the
appellate court.

In the absence of substantial showing that the findings of facts of

administrative bodies charged with their specific field of expertise were arrived
at from an erroneous estimation of the evidence presented, they are
considered conclusive, and in the interest of stability of the governmental
structure, are not to be disturbed.18

In the present case, petitioner has not shown any ground to merit a
disturbance of the findings of the HLURB which have been sustained by the
OP and the appellate court.

It bears noting that petitioners project accomplishment report and the HLURB
letter dated November 5, 2003 granting petitioners request for the completion
of the subdivision until September 2004, which request does not even appear
to have been made "within the prescribed period before its expiration,"
corroborate the findings in the HLURB ocular inspection report and
respondents claim that petitioner did not finish the project within the
announced time frame. Petitioners counterclaim that it was respondents who
were in default is immaterial to the issue of its failure to finish its project on
time.

En passant, even assuming arguendo that respondents defaulted, albeit the

evidence shows otherwise, that did not prevent petitioner from exercising its
option to cancel the contracts to sell. It did not, however. It merely demanded
in May 2002 the payment of overdue amortizations from respondents, after
the lapse of 14 months of alleged default.
The, fact is that respondents suspended their payment of monthly
amortizations pending compliance by petitioner with its contractual obligation,
which is justified under Section 23 of Presidential Decree No.
957.19 Petitioners attempt at reversal of the Court of Appeals decision thus
fails.

A word on the application by the HLURB, the OP, and the appellate court of
Article 119120 of the Civil Code on rescission.

The case involves contracts to sell, not a contract which absolutely conveys
real property. Distinguishing the two contracts, the Court, in Rillo v. Court of
Appeals,21 held:

x x x In a contract to sell real property on installments, the full

payment of the purchase price is a positive suspensive condition,
the failure of which is not considered a breach, casual or serious, but
simply an event which prevented the obligation of the vendor to convey
title from acquiring any obligatory force. The transfer of ownership and
title would occur after full payment of the purchase price. We held in
Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc. that there can
be no rescission of an obligation that is still non-existent,
the suspensive condition not having happened. (Citations omitted;
emphasis and underscoring supplied)

Articles 1191 of the Civil Code does not thus apply to a contract to sell since
there can be no rescission of an obligation that is still non-existent, the
suspensive condition not having occurred. In other words, the breach
contemplated in Article 1191 is the obligors failure to comply with an
obligation already extant, like a contract of sale, not a failure of a condition to
render binding that obligation.22

Cancellation, not rescission, of the contract to sell is thus the correct remedy
in the premises.

On the issue of damages, the Court sustains the award of moral and
exemplary damages given the testimonial evidence of respondents thereon.

As for the award of P50,000 attorneys fees, the Court sustains it too,
respondents having been compelled to litigate with petitioner and incur
expenses to enforce and protect their interests.23
On the issue of interest, the imposition of 12% per annum interest on the
amount of refund must be reduced to 6%, conformably with this Courts ruling
in Eastern Shipping Lines, Inc. v. Court of Appeals24 and in Fil-Estate
Properties, Inc. v. Go,25 the amount to be refunded being neither a loan nor a
forbearance of money, goods or credit.

WHEREFORE, the October 16, 2006 Decision and January 10, 2007
Resolution of the Court of Appeals in CA-G.R. SP No. 87027 are AFFIRMED
with MODIFICATION in light of the foregoing disquisitions.

As modified, the dispositive portion of the decision reads:

WHEREFORE, judgment is rendered in favor of the plaintiffs and

against the defendant to read as follows:

1. Ordering the cancellation of the Contracts to Sell between the

plaintiffs and defendant;

2. Ordering the defendant to refund the plaintiff Romeo Uyecio the

amount of P1,224,000 with interest at 6% per annum from the filing of
the complaint until full payment;

3. Ordering the defendant to refund the plaintiff Reynaldo Uyecio the

amount of P816,000 with interest at 6% per annum from the filing of the
complaint until full payment;

4. Ordering the defendant to refund plaintiffs Amaris Uyecio and Manuel

Uyecio the amount ofP408,000 each with interest at 6% per annum from
the filing of the complaint until full payment;

5. Ordering the defendant to pay plaintiffs the amount of P100,000 as

moral damages,P100,000 as exemplary damages, P50,000 as
attorneys fees to be divided among the plaintiffs in proportion to their
respective claims;

6. Ordering the defendant to pay [the Housing and Land Use

Regulatory] Board P20,000 as administrative fine for violation of
Sections 19 and 20 in relation to Section 38 of P.D. 957.

Costs against petitioner.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-11827 July 31, 1961

FERNANDO A. GAITE, plaintiff-appellee,

vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES & SMELTING CO., INC.,
SEGUNDINA VIVAS, FRNACISCO DANTE, PACIFICO ESCANDOR and FERNANDO
TY, defendants-appellants.

Alejo Mabanag for plaintiff-appellee.

Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for defendants-appellants.

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

This appeal comes to us directly from the Court of First Instance because the claims involved
aggregate more than P200,000.00.

Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself or in a
representative capacity, of 11 iron lode mineral claims, known as the Dawahan Group, situated in
the municipality of Jose Panganiban, province of Camarines Norte.

By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"), Fonacier constituted and
appointed plaintiff-appellee Fernando A. Gaite as his true and lawful attorney-in-fact to enter into a
contract with any individual or juridical person for the exploration and development of the mining
claims aforementioned on a royalty basis of not less than P0.50 per ton of ore that might be
extracted therefrom. On March 19, 1954, Gaite in turn executed a general assignment (Record on
Appeal, pp. 17-19) conveying the development and exploitation of said mining claims into the Larap
Iron Mines, a single proprietorship owned solely by and belonging to him, on the same royalty basis
provided for in Exhibit "3". Thereafter, Gaite embarked upon the development and exploitation of the
mining claims in question, opening and paving roads within and outside their boundaries, making
other improvements and installing facilities therein for use in the development of the mines, and in
time extracted therefrom what he claim and estimated to be approximately 24,000 metric tons of iron
ore.

For some reason or another, Isabelo Fonacier decided to revoke the authority granted by him to
Gaite to exploit and develop the mining claims in question, and Gaite assented thereto subject to
certain conditions. As a result, a document entitled "Revocation of Power of Attorney and Contract"
was executed on December 8, 1954 (Exhibit "A"),wherein Gaite transferred to Fonacier, for the
consideration of P20,000.00, plus 10% of the royalties that Fonacier would receive from the mining
claims, all his rights and interests on all the roads, improvements, and facilities in or outside said
claims, the right to use the business name "Larap Iron Mines" and its goodwill, and all the records
and documents relative to the mines. In the same document, Gaite transferred to Fonacier all his
rights and interests over the "24,000 tons of iron ore, more or less" that the former had already
extracted from the mineral claims, in consideration of the sum of P75,000.00, P10,000.00 of which
was paid upon the signing of the agreement, and
 b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid from and out
of the first letter of credit covering the first shipment of iron ores and of the first amount
derived from the local sale of iron ore made by the Larap Mines & Smelting Co. Inc., its
assigns, administrators, or successors in interests.

To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in favor of
Gaite a surety bond, and pursuant to the promise, Fonacier delivered to Gaite a surety bond dated
December 8, 1954 with himself (Fonacier) as principal and the Larap Mines and Smelting Co. and its
stockholders George Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante, and
Fernando Ty as sureties (Exhibit "A-1"). Gaite testified, however, that when this bond was presented
to him by Fonacier together with the "Revocation of Power of Attorney and Contract", Exhibit "A", on
December 8, 1954, he refused to sign said Exhibit "A" unless another bond under written by a
bonding company was put up by defendants to secure the payment of the P65,000.00 balance of
their price of the iron ore in the stockpiles in the mining claims. Hence, a second bond, also dated
December 8, 1954 (Exhibit "B"),was executed by the same parties to the first bond Exhibit "A-1", with
the Far Eastern Surety and Insurance Co. as additional surety, but it provided that the liability of the
surety company would attach only when there had been an actual sale of iron ore by the Larap
Mines & Smelting Co. for an amount of not less then P65,000.00, and that, furthermore, the liability
of said surety company would automatically expire on December 8, 1955. Both bonds were attached
to the "Revocation of Power of Attorney and Contract", Exhibit "A", and made integral parts thereof.

On the same day that Fonacier revoked the power of attorney he gave to Gaite and the two
executed and signed the "Revocation of Power of Attorney and Contract", Exhibit "A", Fonacier
entered into a "Contract of Mining Operation", ceding, transferring, and conveying unto the Larap
Mines and Smelting Co., Inc. the right to develop, exploit, and explore the mining claims in question,
together with the improvements therein and the use of the name "Larap Iron Mines" and its good will,
in consideration of certain royalties. Fonacier likewise transferred, in the same document, the
complete title to the approximately 24,000 tons of iron ore which he acquired from Gaite, to the
Larap & Smelting Co., in consideration for the signing by the company and its stockholders of the
surety bonds delivered by Fonacier to Gaite (Record on Appeal, pp. 82-94).

Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the Far Eastern Surety
and Insurance Company, no sale of the approximately 24,000 tons of iron ore had been made by the
Larap Mines & Smelting Co., Inc., nor had the P65,000.00 balance of the price of said ore been paid
to Gaite by Fonacier and his sureties payment of said amount, on the theory that they had lost right
to make use of the period given them when their bond, Exhibit "B" automatically expired (Exhibits "C"
to "C-24"). And when Fonacier and his sureties failed to pay as demanded by Gaite, the latter filed
the present complaint against them in the Court of First Instance of Manila (Civil Case No. 29310) for
the payment of the P65,000.00 balance of the price of the ore, consequential damages, and
attorney's fees.

All the defendants except Francisco Dante set up the uniform defense that the obligation sued upon
by Gaite was subject to a condition that the amount of P65,000.00 would be payable out of the first
letter of credit covering the first shipment of iron ore and/or the first amount derived from the local
sale of the iron ore by the Larap Mines & Smelting Co., Inc.; that up to the time of the filing of the
complaint, no sale of the iron ore had been made, hence the condition had not yet been fulfilled; and
that consequently, the obligation was not yet due and demandable. Defendant Fonacier also
contended that only 7,573 tons of the estimated 24,000 tons of iron ore sold to him by Gaite was
actually delivered, and counterclaimed for more than P200,000.00 damages.

At the trial of the case, the parties agreed to limit the presentation of evidence to two issues:
(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite P65,000.00 become due
and demandable when the defendants failed to renew the surety bond underwritten by the Far
Eastern Surety and Insurance Co., Inc. (Exhibit "B"), which expired on December 8, 1955; and

(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to defendant Fonacier were
actually in existence in the mining claims when these parties executed the "Revocation of Power of
Attorney and Contract", Exhibit "A."

On the first question, the lower court held that the obligation of the defendants to pay plaintiff the
P65,000.00 balance of the price of the approximately 24,000 tons of iron ore was one with a term:
i.e., that it would be paid upon the sale of sufficient iron ore by defendants, such sale to be effected
within one year or before December 8, 1955; that the giving of security was a condition precedent to
Gait's giving of credit to defendants; and that as the latter failed to put up a good and sufficient
security in lieu of the Far Eastern Surety bond (Exhibit "B") which expired on December 8, 1955, the
obligation became due and demandable under Article 1198 of the New Civil Code.

As to the second question, the lower court found that plaintiff Gaite did have approximately 24,000
tons of iron ore at the mining claims in question at the time of the execution of the contract Exhibit
"A."

Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants to pay him,
jointly and severally, P65,000.00 with interest at 6% per annum from December 9, 1955 until
payment, plus costs. From this judgment, defendants jointly appealed to this Court.

During the pendency of this appeal, several incidental motions were presented for resolution: a
motion to declare the appellants Larap Mines & Smelting Co., Inc. and George Krakower in
contempt, filed by appellant Fonacier, and two motions to dismiss the appeal as having become
academic and a motion for new trial and/or to take judicial notice of certain documents, filed by
appellee Gaite. The motion for contempt is unmeritorious because the main allegation therein that
the appellants Larap Mines & Smelting Co., Inc. and Krakower had sold the iron ore here in
question, which allegedly is "property in litigation", has not been substantiated; and even if true, does
not make these appellants guilty of contempt, because what is under litigation in this appeal is
appellee Gaite's right to the payment of the balance of the price of the ore, and not the iron ore itself.
As for the several motions presented by appellee Gaite, it is unnecessary to resolve these motions in
view of the results that we have reached in this case, which we shall hereafter discuss.

The main issues presented by appellants in this appeal are:

(1) that the lower court erred in holding that the obligation of appellant Fonacier to pay appellee
Gaite the P65,000.00 (balance of the price of the iron ore in question)is one with a period or term
and not one with a suspensive condition, and that the term expired on December 8, 1955; and

(2) that the lower court erred in not holding that there were only 10,954.5 tons in the stockpiles of
iron ore sold by appellee Gaite to appellant Fonacier.

The first issue involves an interpretation of the following provision in the contract Exhibit "A":

7. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F. Fonacier all his
rights and interests over the 24,000 tons of iron ore, more or less, above-referred to together
with all his rights and interests to operate the mine in consideration of the sum of SEVENTY-
FIVE THOUSAND PESOS (P75,000.00) which the latter binds to pay as follows:
 a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the signing of this agreement.

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)will be paid from and out of
the first letter of credit covering the first shipment of iron ore made by the Larap Mines &
Smelting Co., Inc., its assigns, administrators, or successors in interest.

We find the court below to be legally correct in holding that the shipment or local sale of the iron ore
is not a condition precedent (or suspensive) to the payment of the balance of P65,000.00, but was
only a suspensive period or term. What characterizes a conditional obligation is the fact that its
efficacy or obligatory force (as distinguished from its demandability) is subordinated to the
happening of a future and uncertain event; so that if the suspensive condition does not take place,
the parties would stand as if the conditional obligation had never existed. That the parties to the
contract Exhibit "A" did not intend any such state of things to prevail is supported by several
circumstances:

1) The words of the contract express no contingency in the buyer's obligation to pay: "The balance of
Sixty-Five Thousand Pesos (P65,000.00) will be paid out of the first letter of credit covering the first
shipment of iron ores . . ." etc. There is no uncertainty that the payment will have to be made sooner
or later; what is undetermined is merely the exact date at which it will be made. By the very terms of
the contract, therefore, the existence of the obligation to pay is recognized; only
its maturity or demandability is deferred.

2) A contract of sale is normally commutative and onerous: not only does each one of the parties
assume a correlative obligation (the seller to deliver and transfer ownership of the thing sold and the
buyer to pay the price),but each party anticipates performance by the other from the very start. While
in a sale the obligation of one party can be lawfully subordinated to an uncertain event, so that the
other understands that he assumes the risk of receiving nothing for what he gives (as in the case of
a sale of hopes or expectations, emptio spei), it is not in the usual course of business to do so;
hence, the contingent character of the obligation must clearly appear. Nothing is found in the record
to evidence that Gaite desired or assumed to run the risk of losing his right over the ore without
getting paid for it, or that Fonacier understood that Gaite assumed any such risk. This is proved by
the fact that Gaite insisted on a bond a to guarantee payment of the P65,000.00, an not only upon a
bond by Fonacier, the Larap Mines & Smelting Co., and the company's stockholders, but also on
one by a surety company; and the fact that appellants did put up such bonds indicates that they
admitted the definite existence of their obligation to pay the balance of P65,000.00.

3) To subordinate the obligation to pay the remaining P65,000.00 to the sale or shipment of the ore
as a condition precedent, would be tantamount to leaving the payment at the discretion of the
debtor, for the sale or shipment could not be made unless the appellants took steps to sell the ore.
Appellants would thus be able to postpone payment indefinitely. The desireability of avoiding such a
construction of the contract Exhibit "A" needs no stressing.

4) Assuming that there could be doubt whether by the wording of the contract the parties indented a
suspensive condition or a suspensive period (dies ad quem) for the payment of the P65,000.00, the
rules of interpretation would incline the scales in favor of "the greater reciprocity of interests", since
sale is essentially onerous. The Civil Code of the Philippines, Article 1378, paragraph 1, in fine,
provides:

If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of
interests.
and there can be no question that greater reciprocity obtains if the buyer' obligation is deemed to be
actually existing, with only its maturity (due date) postponed or deferred, that if such obligation were
viewed as non-existent or not binding until the ore was sold.

The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on credit,
and not an aleatory contract where the transferor, Gaite, would assume the risk of not being paid at
all; and that the previous sale or shipment of the ore was not a suspensive condition for the payment
of the balance of the agreed price, but was intended merely to fix the future date of the payment.

This issue settled, the next point of inquiry is whether appellants, Fonacier and his sureties, still have
the right to insist that Gaite should wait for the sale or shipment of the ore before receiving payment;
or, in other words, whether or not they are entitled to take full advantage of the period granted them
for making the payment.

We agree with the court below that the appellant have forfeited the right court below that the
appellants have forfeited the right to compel Gaite to wait for the sale of the ore before receiving
payment of the balance of P65,000.00, because of their failure to renew the bond of the Far Eastern
Surety Company or else replace it with an equivalent guarantee. The expiration of the bonding
company's undertaking on December 8, 1955 substantially reduced the security of the vendor's
rights as creditor for the unpaid P65,000.00, a security that Gaite considered essential and upon
which he had insisted when he executed the deed of sale of the ore to Fonacier (Exhibit "A"). The
case squarely comes under paragraphs 2 and 3 of Article 1198 of the Civil Code of the Philippines:

"ART. 1198. The debtor shall lose every right to make use of the period:

(1) . . .

(2) When he does not furnish to the creditor the guaranties or securities which he has
promised.

(3) When by his own acts he has impaired said guaranties or securities after their
establishment, and when through fortuitous event they disappear, unless he immediately
gives new ones equally satisfactory.

Appellants' failure to renew or extend the surety company's bond upon its expiration plainly impaired
the securities given to the creditor (appellee Gaite), unless immediately renewed or replaced.

There is no merit in appellants' argument that Gaite's acceptance of the surety company's bond with
full knowledge that on its face it would automatically expire within one year was a waiver of its
renewal after the expiration date. No such waiver could have been intended, for Gaite stood to lose
and had nothing to gain barely; and if there was any, it could be rationally explained only if the
appellants had agreed to sell the ore and pay Gaite before the surety company's bond expired on
December 8, 1955. But in the latter case the defendants-appellants' obligation to pay became
absolute after one year from the transfer of the ore to Fonacier by virtue of the deed Exhibit "A.".

All the alternatives, therefore, lead to the same result: that Gaite acted within his rights in demanding
payment and instituting this action one year from and after the contract (Exhibit "A") was executed,
either because the appellant debtors had impaired the securities originally given and thereby
forfeited any further time within which to pay; or because the term of payment was originally of no
more than one year, and the balance of P65,000.00 became due and payable thereafter.
Coming now to the second issue in this appeal, which is whether there were really 24,000 tons of
iron ore in the stockpiles sold by appellee Gaite to appellant Fonacier, and whether, if there had
been a short-delivery as claimed by appellants, they are entitled to the payment of damages, we
must, at the outset, stress two things: first, that this is a case of a sale of a specific mass of fungible
goods for a single price or a lump sum, the quantity of "24,000 tons of iron ore, more or less," stated
in the contract Exhibit "A," being a mere estimate by the parties of the total tonnage weight of the
mass; and second, that the evidence shows that neither of the parties had actually measured of
weighed the mass, so that they both tried to arrive at the total quantity by making an estimate of the
volume thereof in cubic meters and then multiplying it by the estimated weight per ton of each cubic
meter.

The sale between the parties is a sale of a specific mass or iron ore because no provision was made
in their contract for the measuring or weighing of the ore sold in order to complete or perfect the
sale, nor was the price of P75,000,00 agreed upon by the parties based upon any such
measurement.(see Art. 1480, second par., New Civil Code). The subject matter of the sale is,
therefore, a determinate object, the mass, and not the actual number of units or tons contained
therein, so that all that was required of the seller Gaite was to deliver in good faith to his buyer all of
the ore found in the mass, notwithstanding that the quantity delivered is less than the amount
estimated by them (Mobile Machinery & Supply Co., Inc. vs. York Oilfield Salvage Co., Inc. 171 So.
872, applying art. 2459 of the Louisiana Civil Code). There is no charge in this case that Gaite did
not deliver to appellants all the ore found in the stockpiles in the mining claims in questions; Gaite
had, therefore, complied with his promise to deliver, and appellants in turn are bound to pay the
lump price.

But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy, not a definite
mass, but approximately 24,000 tons of ore, so that any substantial difference in this quantity
delivered would entitle the buyers to recover damages for the short-delivery, was there really a
short-delivery in this case?

We think not. As already stated, neither of the parties had actually measured or weighed the whole
mass of ore cubic meter by cubic meter, or ton by ton. Both parties predicate their respective claims
only upon an estimated number of cubic meters of ore multiplied by the average tonnage factor per
cubic meter.

Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the stockpiles of ore that
he sold to Fonacier, while appellants contend that by actual measurement, their witness Cirpriano
Manlagit found the total volume of ore in the stockpiles to be only 6.609 cubic meters. As to the
average weight in tons per cubic meter, the parties are again in disagreement, with appellants
claiming the correct tonnage factor to be 2.18 tons to a cubic meter, while appellee Gaite claims that
the correct tonnage factor is about 3.7.

In the face of the conflict of evidence, we take as the most reliable estimate of the tonnage factor of
iron ore in this case to be that made by Leopoldo F. Abad, chief of the Mines and Metallurgical
Division of the Bureau of Mines, a government pensionado to the States and a mining engineering
graduate of the Universities of Nevada and California, with almost 22 years of experience in the
Bureau of Mines. This witness placed the tonnage factor of every cubic meter of iron ore at between
3 metric tons as minimum to 5 metric tons as maximum. This estimate, in turn, closely corresponds
to the average tonnage factor of 3.3 adopted in his corrected report (Exhibits "FF" and FF-1") by
engineer Nemesio Gamatero, who was sent by the Bureau of Mines to the mining claims involved at
the request of appellant Krakower, precisely to make an official estimate of the amount of iron ore in
Gaite's stockpiles after the dispute arose.
Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles made by
appellant's witness Cipriano Manlagit is correct, if we multiply it by the average tonnage factor of
3.3 tons to a cubic meter, the product is 21,809.7 tons, which is not very far from the estimate of
24,000 tons made by appellee Gaite, considering that actual weighing of each unit of the mass was
practically impossible, so that a reasonable percentage of error should be allowed anyone making
an estimate of the exact quantity in tons found in the mass. It must not be forgotten that the contract
Exhibit "A" expressly stated the amount to be 24,000 tons, more or less. (ch. Pine River Logging &
Improvement Co. vs U.S., 279, 46 L. Ed. 1164).

There was, consequently, no short-delivery in this case as would entitle appellants to the payment of
damages, nor could Gaite have been guilty of any fraud in making any misrepresentation to
appellants as to the total quantity of ore in the stockpiles of the mining claims in question, as
charged by appellants, since Gaite's estimate appears to be substantially correct.

WHEREFORE, finding no error in the decision appealed from, we hereby affirm the same, with costs
against appellants.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 150887 August 14, 2009

FRANCISCO MADRIDo and EDGARDO BERNARDO, Petitioners,

vs.
SPOUSES BONIFACIO MAPOY and FELICIDAD MARTINEZ, Respondents.

DECISION

BRION, J.:

Before us is the Petition for Review on Certiorari1 filed by petitioners Francisco Madrid and Edgardo
Bernardo (petitioners-defendants) to reverse and set aside the Decision2 dated July 16, 2001 and
Resolution3 dated November 19, 2001 of the Former Second Division of the Court of Appeals (CA) in
CA-G.R. CV No. 47691 entitled "Spouses Bonifacio Mapoy and Felicidad Martinez v. Edgardo
Bernardo and Francisco Madrid."

FACTUAL BACKGROUND

The facts of the case, based on the records, are summarized below.

The spouses Bonifacio and Felicidad Mapoy (respondents-plaintiffs) are the absolute owners of two
parcels of land (the properties) known as Lot Nos. 79 and 80 of Block No. 27 of the Rizal Park
Subdivision, located at No. 1400 Craig Street corner Maria Clara Street, Sampaloc, Manila, under
Transfer Certificate of Title (TCT) Nos. 130064 and 130065 of the Registry of Deeds of Manila. The
properties have a combined area of two-hundred seventy (270) square meters.

On April 4, 1988, the respondents-plaintiffs sought to recover possession of the properties through
an accion publiciana filed with the Regional Trial Court (RTC) of Manila4 against Gregorio Miranda
and his family (Mirandas) and two other unnamed defendants. After the pre-trial conference, the
unnamed defendants were identified as the present petitioners and summons were duly served on
them. These defendants are referred to in this Decision as the petitioners-defendants. The Mirandas
are no longer parties to the present case; they did not appeal the lower court decision to the CA.

The respondents-plaintiffs alleged that they acquired the properties from the spouses Procopio and
Encarnacion Castelo under a Deed of Absolute Sale dated June 20, 1978. They merely tolerated the
petitioners-defendants continued occupancy and possession until their possession became illegal
when demands to vacate the properties were made. Despite the demands, the petitioners-
defendants continued to occupy and unlawfully withhold possession of the properties from the
respondents-plaintiffs, to their damage and prejudice. Efforts to amicably settle the case proved
futile, leaving the respondents-plaintiffs no recourse but to file a complaint for ejectment which the
lower court dismissed because the respondents-plaintiffs should have filed an accion publiciana.
Thus, they filed their complaint for accion publiciana, praying for recovery of possession of the
properties and the payment of P1,000.00 as monthly rental for the use of the properties from
January 1987 until the petitioners-defendants vacate the properties, plus P50,000.00 as moral and
exemplary damages, and P30,000.00 as attorneys fees.

The Mirandas countered that Gregorio Miranda owned the properties by virtue of an oral sale made
in his favor by the original owner, Vivencio Antonio (Antonio). They claimed that in 1948, Gregorio
Miranda was Antonios carpenter, and they had a verbal contract for Miranda to stay in, develop, fix
and guard the properties; in 1972, Antonio gave the properties to Gregorio Miranda in consideration
of his more than twenty (20) years of loyal service.

Petitioner-defendant Bernardo also asserted ownership over the portion he occupies based on an
oral sale to him by Antonio. He alleged that he became a ward of Gregorio Miranda in 1965 when he
was 10 years old and helped in the development of the properties; he helped construct a bodega
and a house within the properties. He and Antonio met in 1975, and Antonio promised that the
bodega would be given to him in gratitude for his work.1avvphi 1

Petitioner-defendant Madrid, for his part, claimed that he started occupying a portion of the
properties in 1974, and constructed a house on this portion in 1989 with the permission of Bernardo,
the son of Gregorio Miranda.

On the basis of the length of their claimed occupation of the properties, the petitioners-defendants
likewise invoked Section 6 of Presidential Decree No. 1517 (PD 1517), also known as the Urban
Land Reform Law, which provides that legitimate tenants of 10 year or more, who have built their
homes on these lands and who have continuously resided thereon for the past ten years, shall not
be dispossessed of their occupied lands and shall be allowed the right of first refusal to purchase
these lands within a reasonable time and at reasonable prices.

THE RTC RULING

On July 21, 1994, the RTC-Manila, Branch 3, rendered its decision,5 the dispositive portion of which
states:

WHEREFORE, judgment is rendered, ordering the defendants and all persons claiming rights
thereto to vacate the premises located at the corner of Ma. Clara and Craig Streets, Sampaloc,
Manila, evidenced by TCT No. 130064 and 130065 and restore the same to the plaintiffs. The
defendants are hereby ordered to pay plaintiff the sum ofP10,000.00 as attorneys fees and the sum
of P1,000.00 as reasonable rental for the use and occupation of the premises beginning from the
filing of this complaint until they vacated the premises.
SO ORDERED.6

The RTC upheld the respondents-plaintiffs right of possession as registered owners of the
properties. It found no merit in the petitioners-defendants claims of ownership via an oral sale given
the absence of any public instrument or at least a note or memorandum supporting their claims. The
RTC also found the petitioners-defendants invocation of PD 1517 futile, since its Section 6 refers to
a legitimate tenant who has legally occupied the lands by contract; the petitioners-defendants are
mere squatters.

The petitioners-defendants elevated the RTC decision to the CA via an ordinary appeal under Rule
41 of the Rules of Court. The Mirandas did not join them, and thus failed to file a timely appeal. The
petitioners-defendants objected to the RTCs ruling that the sale or promise of sale should appear in
a public instrument, or at least in a note or memorandum, to be binding and enforceable. They
argued that the RTC failed to consider the respondents-plaintiffs bad faith in acquiring the properties
since they knew of the defects in the title of the owner. They further argued that the CA should have
noted Gregorio Mirandas occupancy since 1948, Bernardos since 1966 and Madrids since 1973.
The petitioners-defendants further submitted that their continuous residence for more than ten (10)
years entitled them to the rights and privileges granted by PD 1517. They also argued that the RTC
should not have applied the pre-trial order to them, since they had not then been served with
summons and were not present during the pre-trial.

THE CA RULING

The CA dismissed the appeal in its decision7 of July 16, 2001, affirming as a consequence the RTC
decision of July 21, 1994. The CA held that the certificate of title in the name of the respondents-
plaintiffs serves as evidence of an indefeasible and incontrovertible title to the properties. The CA
found that the petitioners-defendants never submitted any proof of ownership. Also, their reliance on
their alleged continuous occupation is misplaced since petitioner-defendant Bernardos occupation in
the concept of owner started only in 1975 when Antonio allegedly gave him a portion of the
properties as a gift, while petitioner-defendant Madrids occupation could not have been in the
concept of an owner, as he recognized Gregorio Miranda as the owner and paid him rents. The CA
noted that the petitioners-defendants are not covered by PD 1517 because the law does not apply to
occupants whose possession is by the owners mere tolerance. The CA also observed that the RTC
did not err in applying the pre-trial order to the petitioners-defendants because they derive the right
of possession from the principal defendants, the Mirandas, who were duly represented at the pre-
trial; they waived their right to pre-trial by failing to move that one be held.

The petitioners-defendants moved8 but failed9 to secure a reconsideration of the CA decision; hence,
they came to us through the present petition.

THE PETITION and THE PARTIES POSITIONS

The petitioners-defendants essentially reiterate the issues they raised before the CA, i.e., that the
ruling court failed to consider: (1) the respondents-plaintiffs bad faith in the acquisition of the
properties; (2) the occupancy of Gregorio Miranda since 1948, Bernardos since 1966, and Madrids
since 1973; and, (3) petitioners-defendants continuous residence for more than ten (10) years
entitling them to the rights and privileges granted by PD 1517. They also contend that the principle of
indefeasibility of the certificate of title should not apply in this case because fraud attended the
respondents-plaintiffs acquisition of title. They again point out that the pre-trial order should not have
been applied to them since they were not present during the pre-trial conference.
The respondents-plaintiffs counter-argue that the issues raised by the petitioners-defendants are
essentially factual in nature and all have been well-considered and adequately refuted in the
challenged CA decision.

OUR RULING

We resolve to deny the petition for lack of merit.

a. Accion Publiciana and Ownership

Accion publiciana, also known as accion plenaria de posesion,10 is an ordinary civil proceeding to
determine the better right of possession of realty independently of title.11 It refers to an ejectment suit
filed after the expiration of one year from the accrual of the cause of action or from the unlawful
withholding of possession of the realty.12

The objective of the plaintiffs in accion publiciana is to recover possession only, not
ownership.13 However, where the parties raise the issue of ownership, the courts may pass upon the
issue to determine who between or among the parties has the right to possess the property. This
adjudication, however, is not a final and binding determination of the issue of ownership; it is only for
the purpose of resolving the issue of possession, where the issue of ownership is inseparably linked
to the issue of possession. The adjudication of the issue of ownership, being provisional, is not a bar
to an action between the same parties involving title to the property.14 The adjudication, in short, is
not conclusive on the issue of ownership.15

In the present case, both the petitioners-defendants and the respondents-plaintiffs raised the issue
of ownership. The petitioners-defendants claim ownership based on the oral sale to and occupation
by Gregorio Miranda, their predecessor-in-interest, since 1948. On the other hand, the respondents-
plaintiffs claim that they are the owners, and their ownership is evidenced by the TCTs in their
names. Under this legal situation, resolution of these conflicting claims will depend on the weight of
the parties' respective evidence, i.e., whose evidence deserves more weight.

b. Findings of Fact Below Final and Conclusive

A weighing of evidence necessarily involves the consideration of factual issues an exercise that is
not appropriate for the Rule 45 petition that the petitioners-defendants filed; under the Rules of
Court, the parties may raise only questions of law under Rule 45, as the Supreme Court is not a trier
of facts.16 As a rule, we are not duty-bound to again analyze and weigh the evidence introduced and
considered in the tribunals below.17 This is particularly true where the CA has affirmed the trial
court's factual findings, as in the present case. These trial court findings, when affirmed by the CA,
are final and conclusive and are not open for our review on appeal.18

In the present case, both the RTC and the CA gave more weight to the certificate of title the
respondents-plaintiffs presented, and likewise found that the petitioners-defendants' possession of
the properties was merely upon the respondents-plaintiffs tolerance. We see no reason to doubt or
question the validity of these findings and thus recognize their finality.

As a matter of law, a Torrens Certificate of Title is evidence of indefeasible title of property in favor of
the person in whose name the title appears. The title holder is entitled to all the attributes of
ownership of the property, including possession, subject only to limits imposed by law.19 In the
present case, the respondents-plaintiffs are indisputably the holders of a certificate of title against
which the petitioners-defendants claim of oral sale cannot prevail. As registered titleholders, they
are entitled to possession of the properties.
c. Claim of Fraud a Prohibited Collateral Attack

Registration of land under the Torrens system, aside from perfecting the title and rendering it
indefeasible after the lapse of the period allowed by law, also renders the title immune from collateral
attack.20 A collateral attack transpires when, in another action to obtain a different relief and as an
incident of the present action, an attack is made against the judgment granting the title.21 This
manner of attack is to be distinguished from a direct attack against a judgment granting the title,
through an action whose main objective is to annul, set aside, or enjoin the enforcement of such
judgment if not yet implemented, or to seek recovery if the property titled under the judgment had
been disposed of.22 To permit a collateral attack on respondents-plaintiffs title is to water down the
integrity and guaranteed legal indefeasibility of a Torrens title.23

The petitioners-defendants attack on the validity of respondents-plaintiffs title, by claiming that fraud
attended its acquisition, is a collateral attack on the title. It is an attack incidental to their quest to
defend their possession of the properties in an "accion publiciana," not in a direct action whose main
objective is to impugn the validity of the judgment granting the title.24 This is the attack that
possession of a Torrens Title specifically guards against; hence, we cannot entertain, much less
accord credit to, the petitioners-defendants claim of fraud to impugn the validity of the respondents-
plaintiffs title to their property.

d. Claimed Protection under PD 1517

To qualify for protection under PD 1517 and avail of the rights and privileges granted by the said
decree, the claimant must be: (1) a legitimate tenant of the land for ten (10) years or more; (2) must
have built his home on the land by contract; and, (3) has resided continuously for the last ten (10)
years. The "tenant" covered by PD 1517 is, as defined under Section 3(f) thereof, "the rightful
occupant of land and its structures, but does not include those whose presence on the land is merely
tolerated and without the benefit of contract, those who enter the land by force or deceit, or those
whose possession is under litigation."

Stated differently, those whose possession or occupation of land is devoid of any legal authority or
those whose contracts of lease are already terminated, or had already expired, or whose possession
is under litigation are not considered "tenants" under the decree. Conversely, a legitimate tenant is
one who is not a usurper or an occupant by tolerance.25 The petitioners-defendants whose
occupation has been merely by the owners tolerance obviously fall outside the coverage of PD 1517
and cannot seek its protection.

e. The Pre-Trial-based Objection

Without doubt, the petitioners-defendants, having been belatedly served summons and brought into
the case, were entitled to a pre-trial as ordained by Section 2, Rule 18 of the Rules of Court. Unless
substantial prejudice is shown, however, the trial courts failure to schedule a case for new trial does
not render the proceedings illegal or void ab initio.26 Where, as in this case, the trial proceeded
without any objection on the part of the petitioners-defendants by their failure to bring the matter to
the attention of the RTC, the petitioners-defendants are deemed to have effectively forfeited a
procedural right granted them under the Rules. Issues raised for the first time on appeal and not
raised timely in the proceedings in the lower court are barred by estoppel.27 Points of law, theories,
issues and arguments not brought to the attention of the trial court ought not to be considered by a
reviewing court, as these cannot be raised for the first time on appeal.28 To consider the alleged facts
and arguments raised belatedly would amount to trampling on the basic principles of fair play,
justice, and due process.
In arriving at this conclusion, we considered, as the CA did, that the petitioners-defendants anchored
their right to possess the property on the defenses raised by the original defendant, Gregorio
Miranda, their predecessor-in-interest. While belatedly summoned, the petitioners-defendants did
not raise a substantial matter in their answer differently from those propounded by Gregorio Miranda;
they merely echoed Mirandas positions and arguments. Thus, no prejudice could have resulted to
the petitioners-defendants, especially after they entered trial and had the opportunity to fully ventilate
their positions.

f. Attorneys Fees

As a general rule, the appellate court may only pass upon errors assigned by the parties. By way of
exception, even unassigned errors may be taken up by the court on appeal if they involve (1) errors
affecting the lower court's jurisdiction over the subject matter, (2) plain errors not specified, and (3)
clerical errors.29 In the present case, we note that the award of attorney's fees appears only in the
dispositive portion of the RTC decision without any elaboration, explanation, and justification. The
award stood there all by itself. We view this as a plain legal error by the RTC that must be rectified.

Article 2208 of the Civil Code enumerates the instances justifying the grant of attorneys fees; in all
cases, the award must be reasonable, just and equitable. Attorney's fees as part of damages are not
meant to enrich the winning party at the expense of the losing litigant. They are not awarded every
time a party prevails in a suit because of the policy that no premium should be placed on the right to
litigate.30 The award of attorney's fees is the exception rather than the general rule. Thus, findings
reflecting the conditions imposed by Article 2208 are necessary to justify an award; attorney's fees
mentioned only in the dispositive portion of the decision without any prior justification in the body of
the decision is a baseless award that must be struck down.31

WHEREFORE, premises considered, we here DENY the petition for lack of any reversible error, and
consequentlyAFFIRM the decision of July 16, 2001 of the Court of Appeals in CA-G.R. CV No.
47691, with theMODIFICATION that the attorney's fees awarded to respondents-plaintiffs are
hereby DELETED. Costs against the petitioners-defendants.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-22558 May 31, 1967

GREGORIO ARANETA, INC., petitioner,

vs.
THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO., LTD., respondent.

Araneta and Araneta for petitioner.

Rosauro Alvarez and Ernani Cruz Pao for respondent.

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

Petition for certiorari to review a judgment of the Court of Appeals, in its CA-G.R. No. 28249-R,
affirming with modification, an amendatory decision of the Court of First Instance of Manila, in its
Civil Case No. 36303, entitled "Philippine Sugar Estates Development Co., Ltd., plaintiff, versus J.
M. Tuason & Co., Inc. and Gregorio Araneta, Inc., defendants."

As found by the Court of Appeals, the facts of this case are:

J. M. Tuason & Co., Inc. is the owner of a big tract land situated in Quezon City, otherwise known as
the Sta. Mesa Heights Subdivision, and covered by a Torrens title in its name. On July 28, 1950,
through Gregorio Araneta, Inc., it (Tuason & Co.) sold a portion thereof with an area of 43,034.4
square meters, more or less, for the sum of P430,514.00, to Philippine Sugar Estates Development
Co., Ltd. The parties stipulated, among in the contract of purchase and sale with mortgage, that the
buyer will

Build on the said parcel land the Sto. Domingo Church and Convent

while the seller for its part will

Construct streets on the NE and NW and SW sides of the land herein sold so that the latter
will be a block surrounded by streets on all four sides; and the street on the NE side shall be
named "Sto. Domingo Avenue;"

The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction of Sto.
Domingo Church and Convent, but the seller, Gregorio Araneta, Inc., which began constructing the
streets, is unable to finish the construction of the street in the Northeast side named (Sto. Domingo
Avenue) because a certain third-party, by the name of Manuel Abundo, who has been physically
occupying a middle part thereof, refused to vacate the same; hence, on May 7, 1958, Philippine
Sugar Estates Development Co., Lt. filed its complaint against J. M. Tuason & Co., Inc., and
instance, seeking to compel the latter to comply with their obligation, as stipulated in the above-
mentioned deed of sale, and/or to pay damages in the event they failed or refused to perform said
obligation.

Both defendants J. M. Tuason and Co. and Gregorio Araneta, Inc. answered the complaint, the latter
particularly setting up the principal defense that the action was premature since its obligation to
construct the streets in question was without a definite period which needs to he fixed first by the
court in a proper suit for that purpose before a complaint for specific performance will prosper.

The issues having been joined, the lower court proceeded with the trial, and upon its termination, it
dismissed plaintiff's complaint (in a decision dated May 31, 1960), upholding the defenses
interposed by defendant Gregorio Araneta, Inc. 1w ph1.t

Plaintiff moved to reconsider and modify the above decision, praying that the court fix a period within
which defendants will comply with their obligation to construct the streets in question.

Defendant Gregorio Araneta, Inc. opposed said motion, maintaining that plaintiff's complaint did not
expressly or impliedly allege and pray for the fixing of a period to comply with its obligation and that
the evidence presented at the trial was insufficient to warrant the fixing of such a period.

On July 16, 1960, the lower court, after finding that "the proven facts precisely warrants the fixing of
such a period," issued an order granting plaintiff's motion for reconsideration and amending the
dispositive portion of the decision of May 31, 1960, to read as follows:
 WHEREFORE, judgment is hereby rendered giving defendant Gregorio Araneta, Inc., a
period of two (2) years from notice hereof, within which to comply with its obligation under
the contract, Annex "A".

Defendant Gregorio Araneta, Inc. presented a motion to reconsider the above quoted order, which
motion, plaintiff opposed.

On August 16, 1960, the lower court denied defendant Gregorio Araneta, Inc's. motion; and the latter
perfected its appeal Court of Appeals.

In said appellate court, defendant-appellant Gregorio Araneta, Inc. contended mainly that the relief
granted, i.e., fixing of a period, under the amendatory decision of July 16, 1960, was not justified by
the pleadings and not supported by the facts submitted at the trial of the case in the court below and
that the relief granted in effect allowed a change of theory after the submission of the case for
decision.

Ruling on the above contention, the appellate court declared that the fixing of a period was within the
pleadings and that there was no true change of theory after the submission of the case for decision
since defendant-appellant Gregorio Araneta, Inc. itself squarely placed said issue by alleging in
paragraph 7 of the affirmative defenses contained in its answer which reads

7. Under the Deed of Sale with Mortgage of July 28, 1950, herein defendant has a
reasonable time within which to comply with its obligations to construct and complete the
streets on the NE, NW and SW sides of the lot in question; that under the circumstances,
said reasonable time has not elapsed;

Disposing of the other issues raised by appellant which were ruled as not meritorious and which are
not decisive in the resolution of the legal issues posed in the instant appeal before us, said appellate
court rendered its decision dated December 27, 1963, the dispositive part of which reads

IN VIEW WHEREOF, judgment affirmed and modified; as a consequence, defendant is given

two (2) years from the date of finality of this decision to comply with the obligation to
construct streets on the NE, NW and SW sides of the land sold to plaintiff so that the same
would be a block surrounded by streets on all four sides.

Unsuccessful in having the above decision reconsidered, defendant-appellant Gregorio Araneta, Inc.
resorted to a petition for review by certiorari to this Court. We gave it due course.

We agree with the petitioner that the decision of the Court of Appeals, affirming that of the Court of
First Instance is legally untenable. The fixing of a period by the courts under Article 1197 of the Civil
Code of the Philippines is sought to be justified on the basis that petitioner (defendant below) placed
the absence of a period in issue by pleading in its answer that the contract with respondent
Philippine Sugar Estates Development Co., Ltd. gave petitioner Gregorio Araneta, Inc. "reasonable
time within which to comply with its obligation to construct and complete the streets." Neither of the
courts below seems to have noticed that, on the hypothesis stated, what the answer put in issue was
not whether the court should fix the time of performance, but whether or not the parties agreed that
the petitioner should have reasonable time to perform its part of the bargain. If the contract so
provided, then there was a period fixed, a "reasonable time;" and all that the court should have done
was to determine if that reasonable time had already elapsed when suit was filed if it had passed,
then the court should declare that petitioner had breached the contract, as averred in the complaint,
and fix the resulting damages. On the other hand, if the reasonable time had not yet elapsed, the
court perforce was bound to dismiss the action for being premature. But in no case can it be logically
held that under the plea above quoted, the intervention of the court to fix the period for performance
was warranted, for Article 1197 is precisely predicated on the absence of any period fixed by the
parties.

Even on the assumption that the court should have found that no reasonable time or no period at all
had been fixed (and the trial court's amended decision nowhere declared any such fact) still, the
complaint not having sought that the Court should set a period, the court could not proceed to do so
unless the complaint in as first amended; for the original decision is clear that the complaint
proceeded on the theory that the period for performance had already elapsed, that the contract had
been breached and defendant was already answerable in damages.

Granting, however, that it lay within the Court's power to fix the period of performance, still the
amended decision is defective in that no basis is stated to support the conclusion that the period
should be set at two years after finality of the judgment. The list paragraph of Article 1197 is clear
that the period can not be set arbitrarily. The law expressly prescribes that

the Court shall determine such period as may under the circumstances been probably
contemplated by the parties.

All that the trial court's amended decision (Rec. on Appeal, p. 124) says in this respect is that "the
proven facts precisely warrant the fixing of such a period," a statement manifestly insufficient to
explain how the two period given to petitioner herein was arrived at.

It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court must
first determine that "the obligation does not fix a period" (or that the period is made to depend upon
the will of the debtor)," but from the nature and the circumstances it can be inferred that a period was
intended" (Art. 1197, pars. 1 and 2). This preliminary point settled, the Court must then proceed to
the second step, and decide what period was "probably contemplated by the parties" (Do., par. 3).
So that, ultimately, the Court can not fix a period merely because in its opinion it is or should be
reasonable, but must set the time that the parties are shown to have intended. As the record stands,
the trial Court appears to have pulled the two-year period set in its decision out of thin air, since no
circumstances are mentioned to support it. Plainly, this is not warranted by the Civil Code.

In this connection, it is to be borne in mind that the contract shows that the parties were fully aware
that the land described therein was occupied by squatters, because the fact is expressly mentioned
therein (Rec. on Appeal, Petitioner's Appendix B, pp. 12-13). As the parties must have known that
they could not take the law into their own hands, but must resort to legal processes in evicting the
squatters, they must have realized that the duration of the suits to be brought would not be under
their control nor could the same be determined in advance. The conclusion is thus forced that the
parties must have intended to defer the performance of the obligations under the contract until the
squatters were duly evicted, as contended by the petitioner Gregorio Araneta, Inc.

The Court of Appeals objected to this conclusion that it would render the date of performance
indefinite. Yet, the circumstances admit no other reasonable view; and this very indefiniteness is
what explains why the agreement did not specify any exact periods or dates of performance.

It follows that there is no justification in law for the setting the date of performance at any other time
than that of the eviction of the squatters occupying the land in question; and in not so holding, both
the trial Court and the Court of Appeals committed reversible error. It is not denied that the case
against one of the squatters, Abundo, was still pending in the Court of Appeals when its decision in
this case was rendered.
In view of the foregoing, the decision appealed from is reversed, and the time for the performance of
the obligations of petitioner Gregorio Araneta, Inc. is hereby fixed at the date that all the squatters on
affected areas are finally evicted therefrom.

Costs against respondent Philippine Sugar Estates Development, Co., Ltd.

So ordered.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 172428 November 28, 2008

HERMAN C. CRYSTAL, LAMBERTO C. CRYSTAL, ANN GEORGIA C.

SOLANTE, and DORIS C. MAGLASANG, as Heirs of Deceased SPOUSES
RAYMUNDO I. CRYSTAL and DESAMPARADOS C.
CRYSTAL, petitioners,
vs.
BANK OF THE PHILIPPINE ISLANDS, respondent.

DECISION

TINGA, J.:

Before us is a Petition for Review1 of the Decision2 and Resolution3 of the

Court of Appeals dated 24 October 2005 and 31 March 2006, respectively, in
CA G.R. CV No. 72886, which affirmed the 8 June 2001 decision of the
Regional Trial Court, Branch 5, of Cebu City.4

The facts, as culled from the records, follow.

On 28 March 1978, spouses Raymundo and Desamparados Crystal obtained

a P300,000.00 loan in behalf of the Cebu Contractors Consortium Co.
(CCCC) from the Bank of the Philippine Islands-Butuan branch (BPI-Butuan).
The loan was secured by a chattel mortgage on heavy equipment and
machinery of CCCC. On the same date, the spouses executed in favor of BPI-
Butuan a Continuing Suretyship5 where they bound themselves as surety of
CCCC in the aggregate principal sum of not exceeding P300,000.00.
Thereafter, or on 29 March 1979, Raymundo Crystal executed a promissory
note6 for the amount of P300,000.00, also in favor of BPI-Butuan.
Sometime in August 1979, CCCC renewed a previous loan, this time from
BPI, Cebu City branch (BPI-Cebu City). The renewal was evidenced by a
promissory note7 dated 13 August 1979, signed by the spouses in their
personal capacities and as managing partners of CCCC. The promissory note
states that the spouses are jointly and severally liable with CCCC. It appears
that before the original loan could be granted, BPI-Cebu City required CCCC
to put up a security.

However, CCCC had no real property to offer as security for the loan; hence,
the spouses executed a real estate mortgage8 over their own real property on
22 September 1977.9 On 3 October 1977, they executed another real estate
mortgage over the same lot in favor of BPI-Cebu City, to secure an additional
loan of P20,000.00 of CCCC.10

CCCC failed to pay its loans to both BPI-Butuan and BPI-Cebu City when they
became due. CCCC, as well as the spouses, failed to pay their obligations
despite demands. Thus, BPI resorted to the foreclosure of the chattel
mortgage and the real estate mortgage. The foreclosure sale on the chattel
mortgage was initially stalled with the issuance of a restraining order against
BPI.11 However, following BPIs compliance with the necessary requisites of
extrajudicial foreclosure, the foreclosure sale on the chattel mortgage was
consummated on 28 February 1988, with the proceeds amounting
to P240,000.00 applied to the loan from BPI-Butuan which had then
reached P707,393.90.12Meanwhile, on 7 July 1981, Insular Bank of Asia and
America (IBAA), through its Vice-President for Legal and Corporate Affairs,
offered to buy the lot subject of the two (2) real

estate mortgages and to pay directly the spouses indebtedness in exchange

for the release of the mortgages. BPI rejected IBAAs offer to pay.13

BPI filed a complaint for sum of money against CCCC and the spouses before
the Regional Trial Court of Butuan City (RTC Butuan), seeking to recover the
deficiency of the loan of CCCC and the spouses with BPI-Butuan. The trial
court ruled in favor of BPI. Pursuant to the decision, BPI instituted extrajudicial
foreclosure of the spouses mortgaged property.14

On 10 April 1985, the spouses filed an action for Injunction With Damages,
With A Prayer For A Restraining Order and/ or Writ of Preliminary
Injunction.15 The spouses claimed that the foreclosure of the real estate
mortgages is illegal because BPI should have exhausted CCCCs properties
first, stressing that they are mere guarantors of the renewed loans. They also
prayed that they be awarded moral and exemplary damages, attorneys fees,
litigation expenses and cost of suit. Subsequently, the spouses filed an
amended complaint,16 additionally alleging that CCCC had opened and
maintained a foreign currency savings account (FCSA-197) with bpi, Makati
branch (BPI-Makati), and that said FCSA was used as security for
a P450,000.00 loan also extended by BPI-Makati. The P450,000.00 loan was
allegedly paid, and thereafter the spouses demanded the return of the FCSA
passbook. BPI rejected the demand; thus, the spouses were unable to
withdraw from the said account to pay for their other obligations to BPI.

The trial court dismissed the spouses complaint and ordered them to pay
moral and exemplary damages and attorneys fees to BPI.17 It ruled that since
the spouses agreed to bind themselves jointly and severally, they are
solidarily liable for the loans; hence, BPI can validly foreclose the two real
estate mortgages. Moreover, being guarantors-mortgagors, the spouses are
not entitled to the benefit of exhaustion. Anent the FCSA, the trial court found
that CCCC originally had FCDU SA No. 197 with BPI, Dewey Boulevard
branch, which was transferred to BPI-Makati as FCDU SA 76/0035, at the
request of Desamparados Crystal. FCDU SA 76/0035 was thus closed, but
Desamparados Crystal failed to surrender the passbook because it was lost.
The transferred FCSA in BPI-Makati was the one used as security for
CCCCs P450,000.00 loan from BPI-Makati. CCCC was no longer allowed to
withdraw from FCDU SA No. 197 because it was already closed.

The spouses appealed the decision of the trial court to the Court of Appeals,
but their appeal was dismissed.18 The spouses moved for the reconsideration
of the decision, but the Court of Appeals also denied their motion for
reconsideration.19 Hence, the present petition.

Before the Court, petitioners who are the heirs of the spouses argue that the
failure of the spouses to pay the BPI-Cebu City loan of P120,000.00 was due
to BPIs illegal refusal to accept payment for the loan unless the P300,000.00
loan from BPI-Butuan would also be paid. Consequently, in view of BPIs
unjust refusal to accept payment of the BPI-Cebu City loan, the loan obligation
of the spouses was extinguished, petitioners contend.

The contention has no merit. Petitioners rely on IBAAs offer to purchase the
mortgaged lot from them and to directly pay BPI out of the proceeds thereof to
settle the loan.20 BPIs refusal to agree to such payment scheme cannot
extinguish the spouses loan obligation. In the first place, IBAA is not privy to
the loan agreement or the promissory note between the spouses and BPI.
Contracts, after all, take effect only between the parties, their successors in
interest, heirs
and assigns.21 Besides, under Art. 1236 of the Civil Code, the creditor is not
bound to accept payment or performance by a third person who has no
interest in the fulfillment of the obligation, unless there is a stipulation to the
contrary. We see no stipulation in the promissory note which states that a third
person may fulfill the spouses obligation. Thus, it is clear that the spouses
alone bear responsibility for the same.

In any event, the promissory note is the controlling repository of the obligation
of the spouses. Under the promissory note, the spouses defined the
parameters of their obligation as follows:

On or before June 29, 1980 on demand, for value received, I/we

promise to pay, jointly and severally, to the BANK OF THE PHILIPPINE
ISLANDS, at its office in the city of Cebu Philippines, the sum of ONE
HUNDRED TWENTY THOUSAND PESOS (P120,0000.00), Philippine
Currency, subject to periodic installments on the principal as
follows: P30,000.00 quarterly amortization starting September 28, 1979.
x x x 22

A solidary obligation is one in which each of the debtors is liable for the entire
obligation, and each of the creditors is entitled to demand the satisfaction of
the whole obligation from any or all of the debtors. 23 A liability is solidary "only
when the obligation expressly so states, when the law so provides or when
the nature of the

obligation so requires."24 Thus, when the obligor undertakes to be "jointly and

severally" liable, it means that the obligation is solidary,25 such as in this case.
By stating "I/we promise to pay, jointly and severally, to the BANK OF THE
PHILIPPINE ISLANDS," the spouses agreed to be sought out and be
demanded payment from, by BPI. BPI did demand payment from them, but
they failed to comply with their obligation, prompting BPIs valid resort to the
foreclosure of the chattel mortgage and the real estate mortgages.

More importantly, the promissory note, wherein the spouses undertook to be

solidarily liable for the principal loan, partakes the nature of a suretyship and
therefore is an additional security for the loan. Thus we held in one case that if
solidary liability was instituted to "guarantee" a principal obligation, the law
deems the contract to be one of suretyship.26 And while a contract of a surety
is in essence secondary only to a valid principal obligation, the suretys liability
to the creditor or promisee of the principal is said to be direct, primary, and
absolute; in other words, the surety is directly and equally bound with the
principal. The surety therefore becomes liable for the debt or duty of another
even if he possesses no direct or personal interest over the obligations nor
does he receive any benefit therefrom.27

Petitioners contend that the Court of Appeals erred in not granting their
counterclaims, considering that they suffered moral damages in view of the
unjust refusal of BPI to accept the payment scheme proposed by IBAA and
the allegedly unjust and illegal foreclosure of the real estate mortgages on
their property.28 Conversely, they argue that the Court of Appeals erred in
awarding moral damages to BPI, which is a corporation, as well as exemplary
damages, attorneys fees and expenses of litigation.29

We do not agree. Moral damages are meant to compensate the claimant for
any physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation and similar
injuries unjustly caused.30 Such damages, to be recoverable, must be the
proximate result of a wrongful act or omission the factual basis for which is
satisfactorily established by the aggrieved party.31 There being no wrongful or
unjust act on the part of BPI in demanding payment from them and in seeking
the foreclosure of the chattel and real estate mortgages, there is no lawful
basis for award of damages in favor of the spouses.

Neither is BPI entitled to moral damages. A juridical person is generally not

entitled to moral damages because, unlike a natural person, it cannot
experience physical suffering or such sentiments as wounded feelings,
serious anxiety, mental anguish or moral shock.32 The Court of Appeals found
BPI as "being famous and having gained its familiarity and respect not only in
the Philippines but also in the whole world because of its good will and good
reputation must protect and defend the same against any unwarranted suit
such as the case at bench."33 In holding that BPI is entitled to moral damages,
the Court of Appeals relied on the case of People v. Manero,34 wherein the
Court ruled that "[i]t is only when a juridical person has a good reputation that
is debased, resulting in social humiliation, that moral damages may be
awarded."35

We do not agree with the Court of Appeals. A statement similar to that made
by the Court in Manerocan be found in the case of Mambulao Lumber Co. v.
PNB, et al.,36 thus:

x x x Obviously, an artificial person like herein appellant corporation

cannot experience physical sufferings, mental anguish, fright, serious
anxiety, wounded feelings, moral shock or social humiliation which are
basis of moral damages. A corporation may have good reputation
 which, if besmirched may also be a ground for the award of moral
damages. x x x (Emphasis supplied)

Nevertheless, in the more recent cases of ABS-CBN Corp. v. Court of

Appeals, et al.,37 and Filipinas Broadcasting Network, Inc. v. Ago Medical and
Educational Center-Bicol Christian College of Medicine (AMEC-BCCM),38 the
Court held that the statements in Manero and Mambulao were mere obiter
dicta, implying that the award of moral damages to corporations is not a hard
and fast rule. Indeed, while the Court may allow the grant of moral damages
to corporations, it is not automatically granted; there must still be proof of the
existence of the factual basis of the damage and its causal relation to the
defendants acts. This is so because moral damages, though incapable of
pecuniary estimation, are in the category of an award designed to
compensate the claimant for actual injurysuffered and not to impose a
penalty on the wrongdoer.39

The spouses complaint against BPI proved to be unfounded, but it does not
automatically entitle BPI to moral damages. Although the institution of a
clearly unfounded civil suit can at times be a legal

justification for an award of attorney's fees, such filing, however, has almost
invariably been held not to be a ground for an award of moral damages. The
rationale for the rule is that the law could not have meant to impose a penalty
on the right to litigate. Otherwise, moral damages must every time be awarded
in favor of the prevailing defendant against an unsuccessful plaintiff.40 BPI
may have been inconvenienced by the suit, but we do not see how it could
have possibly suffered besmirched reputation on account of the single suit
alone. Hence, the award of moral damages should be deleted.

The awards of exemplary damages and attorneys fees, however, are proper.
Exemplary damages, on the other hand, are imposed by way of example or
correction for the public good, when the party to a contract acts in a wanton,
fraudulent, oppressive or malevolent manner, while attorneys fees are
allowed when exemplary damages are awarded and when the party to a suit
is compelled to incur expenses to protect his interest.41 The spouses instituted
their complaint against BPI notwithstanding the fact that they were the ones
who failed to pay their obligations. Consequently, BPI was forced to litigate
and defend its interest. For these reasons, BPI is entitled to the awards of
exemplary damages and attorneys fees.

WHEREFORE, the petition is DENIED. The Decision and Resolution of the

Court of Appeals dated 24 October 2005 and 31 March 2006, respectively,
are hereby AFFIRMED, with the MODIFICATION that the award of moral
damages to Bank of the Philippine Islands is DELETED.

Costs against the petitioners.

SO ORDERED.

THIRD DIVISION

INTERNATIONAL FINANCE G.R. No. 160324

CORPORATION,
Petitioner, Present:
Panganiban, J.,
Chairman,
- versus - Sandoval-Gutierrez,*
Corona,
Carpio Morales, and
Garcia, JJ
IMPERIAL TEXTILE MILLS, Promulgated:
INC.,**
Respondent. November 15, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, J.:

T he terms of a contract govern the rights and obligations of the

contracting parties. When the obligor undertakes to be jointly and

severally liable, it means that the obligation is solidary.
If solidary liability was instituted to guarantee a principal obligation, the law

deems the contract to be one of suretyship.

The creditor in the present Petition was able to show convincingly that,

although denominated as a Guarantee Agreement, the Contract was

actually a surety. Notwithstanding the use of the words guarantee and

guarantor, the subject Contract was indeed a surety, because its terms were

clear and left no doubt as to the intention of the parties.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of

Court, assailing the February 28, 2002 Decision[2] and September 30, 2003
Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 58471. The
challenged Decision disposed as follows:
WHEREFORE, the appeal is PARTIALLY GRANTED. The
decision of the trial court is MODIFIED to read as follows:

1. Philippine Polyamide Industrial Corporation is ORDERED to

pay [Petitioner] International Finance Corporation, the following
amounts:

(a) US$2,833,967.00 with accrued interests as

provided in the Loan Agreement;

(b) Interest of 12% per annum on accrued interest,

which shall be counted from the date of filing of
the instant action up to the actual payment;
 (c) P73,340.00 as attorneys fees;

(d) Costs of suit.

2. The guarantor Imperial Textile Mills, Inc. together with

Grandtex is HELD secondarily liable to pay the amount herein
adjudged to [Petitioner] International Finance Corporation.[4]

The assailed Resolution denied both parties respective Motions for

Reconsideration.

The Facts

The facts are narrated by the appellate court as follows:

On December 17, 1974, [Petitioner] International Finance
Corporation (IFC) and [Respondent] Philippine Polyamide Industrial
Corporation (PPIC) entered into a loan agreement wherein IFC
extended to PPIC a loan of US$7,000,000.00, payable in sixteen
(16) semi-annual installments of US$437,500.00 each, beginning
June 1, 1977 to December 1, 1984, with interest at the rate of 10%
per annum on the principal amount of the loan advanced and
outstanding from time to time. The interest shall be paid in US
dollars semi-annually on June 1 and December 1 in each year and
interest for any period less than a year shall accrue and be pro-rated
on the basis of a 360-day year of twelve 30-day months.

On December 17, 1974, a Guarantee Agreement was

executed with x x x Imperial Textile Mills, Inc. (ITM), Grand Textile
Manufacturing Corporation (Grandtex) and IFC as parties thereto.
ITM and Grandtex agreed to guarantee PPICs obligations under the
loan agreement.

PPIC paid the installments due on June 1, 1977, December 1,

1977 and June 1, 1978. The payments due on December 1, 1978,
June 1, 1979 and December 1, 1979 were rescheduled as
requested by PPIC. Despite the rescheduling of the installment
payments, however, PPIC defaulted. Hence, on April 1, 1985, IFC
served a written notice of default to PPIC demanding the latter to
pay the outstanding principal loan and all its accrued interests.
Despite such notice, PPIC failed to pay the loan and its interests.

By virtue of PPICs failure to pay, IFC, together with DBP,

applied for the extrajudicial foreclosure of mortgages on the real
estate, buildings, machinery, equipment plant and all improvements
owned by PPIC, located at Calamba, Laguna, with the regional
sheriff of Calamba, Laguna. On July 30, 1985, the deputy sheriff of
Calamba, Laguna issued a notice of extrajudicial sale. IFC and DBP
were the only bidders during the auction sale. IFCs bid was
for P99,269,100.00 which was equivalent to US$5,250,000.00 (at
the prevailing exchange rate of P18.9084 = US$1.00). The
outstanding loan, however, amounted to US$8,083,967.00 thus
leaving a balance of US$2,833,967.00. PPIC failed to pay the
remaining balance.

Consequently, IFC demanded ITM and Grandtex, as

guarantors of PPIC, to pay the outstanding balance. However,
despite the demand made by IFC, the outstanding balance remained
unpaid.

Thereafter, on May 20, 1988, IFC filed a complaint with the

RTC of Manila against PPIC and ITM for the payment of the
outstanding balance plus interests and attorneys fees.

The trial court held PPIC liable for the payment of the
outstanding loan plus interests. It also ordered PPIC to pay IFC its
claimed attorneys fees. However, the trial court relieved ITM of its
obligation as guarantor. Hence, the trial court dismissed IFCs
complaint against ITM.

xxxxxxxxx

Thus, apropos the decision dismissing the complaint against

ITM, IFC appealed [to the CA].[5]

Ruling of the Court of Appeals

The CA reversed the Decision of the trial court, insofar as the latter
exonerated ITM from any obligation to IFC. According to the appellate
court, ITM bound itself under the Guarantee Agreement to pay PPICs
obligation upon default.[6]ITM was not discharged from its obligation as
guarantor when PPIC mortgaged the latters properties to IFC.[7] The CA,
however, held that ITMs liability as a guarantor would arise only if and when
PPIC could not pay. Since PPICs inability to comply with its obligation was
not sufficiently established, ITM could not immediately be made to assume
the liability.[8]

The September 30, 2003 Resolution of the CA denied

reconsideration.[9]Hence, this Petition.[10]
The Issues

Petitioner states the issues in this wise:

I. Whether or not ITM and Grandtex[11] are sureties and therefore,

jointly and severally liable with PPIC, for the payment of the
loan.

II. Whether or not the Petition raises a question of law.

III. Whether or not the Petition raises a theory not raised in the lower
court.[12]

The main issue is whether ITM is a surety, and thus solidarily liable
with PPIC for the payment of the loan.
 The Courts Ruling

The Petition is meritorious.

 Main Issue:
Liability of Respondent Under
the Guarantee Agreement

The present controversy arose from the following Contracts: (1) the
Loan Agreement dated December 17, 1974, between IFC and PPIC;[13] and
(2) the Guarantee Agreement dated December 17, 1974, between ITM and
Grandtex, on the one hand, and IFC on the other.[14]

IFC claims that, under the Guarantee Agreement, ITM bound itself
as a surety to PPICs obligations proceeding from the Loan
Agreement.[15] For its part, ITM asserts that, by the terms of the Guarantee
Agreement, it was merely a guarantor[16] and not a surety. Moreover, any
ambiguity in the Agreement should be construed against IFC -- the party
that drafted it.[17]
Language of the
Contract

The premise of the Guarantee Agreement is found in its preambular

clause, which reads:
Whereas,

(A) By an Agreement of even date herewith between IFC and

PHILIPPINE POLYAMIDE INDUSTRIAL CORPORATION
(herein called the Company), which agreement is herein called
the Loan Agreement, IFC agrees to extend to the Company a
loan (herein called the Loan) of seven million dollars
($7,000,000) on the terms therein set forth, including a
provision that all or part of the Loan may be disbursed in a
currency other than dollars, but only on condition that the
Guarantors agree to guarantee the obligations of the
Company in respect of the Loan as hereinafter provided.

(B) The Guarantors, in order to induce IFC to enter into the Loan
Agreement, and in consideration of IFC entering into said
Agreement, have agreed so to guarantee such obligations of
the Company.[18]

The obligations of the guarantors are meticulously expressed in the

following provision:

Section 2.01. The Guarantors jointly and severally,

irrevocably, absolutely and unconditionally guarantee, as primary
obligors and not as sureties merely, the due and punctual payment
of the principal of, and interest and commitment charge on, the
Loan, and the principal of, and interest on, the Notes, whether at
stated maturity or upon prematuring, all as set forth in the Loan
Agreement and in the Notes.[19]
 The Agreement uses guarantee and guarantors, prompting ITM to
base its argument on those words.[20] This Court is not convinced that the
use of the two words limits the Contract to a mere guaranty. The specific
stipulations in the Contract show otherwise.

Solidary Liability
Agreed to by ITM

While referring to ITM as a guarantor, the Agreement specifically

stated that the corporation was jointly and severally liable. To put emphasis
on the nature of that liability, the Contract further stated that ITM was a
primary obligor, not a mere surety. Those stipulations meant only one thing:
that at bottom, and to all legal intents and purposes, it was a surety.

Indubitably therefore, ITM bound itself to be solidarily[21] liable with

PPIC for the latters obligations under the Loan Agreement with IFC. ITM
thereby brought itself to the level of PPIC and could not be deemed merely
secondarily liable.
 Initially, ITM was a stranger to the Loan Agreement between PPIC
and IFC. ITMs liability commenced only when it guaranteed PPICs
obligation. It became a surety when it bound itself solidarily with the
principal obligor. Thus, the applicable law is as follows:
Article 2047. By guaranty, a person, called the guarantor binds
himself to the creditor to fulfill the obligation of the principal in case
the latter should fail to do so.

If a person binds himself solidarily with the principal debtor,

the provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract shall be called suretyship.[22]

The aforementioned provisions refer to Articles 1207 to 1222 of the

Civil Code on Joint and Solidary Obligations. Relevant to this case is
Article 1216, which states:
The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand made
against one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has
not been fully collected.

Pursuant to this provision, petitioner (as creditor) was justified in

taking action directly against respondent.
No Ambiguity in the
Undertaking

The Court does not find any ambiguity in the provisions of the
Guarantee Agreement. When qualified by the term jointly and severally, the
use of the word guarantor to refer to a surety does not violate the
law.[23] As Article 2047 provides, a suretyship is created when a guarantor
binds itself solidarily with the principal obligor. Likewise, the phrase in the
Agreement -- as primary obligor and not merely as surety -- stresses that
ITM is being placed on the same level as PPIC. Those words emphasize
the nature of their liability, which the law characterizes as a suretyship.
The use of the word guarantee does not ipso facto make the contract one of
guaranty.[24] This Court has recognized that the word is frequently
employed in business transactions to describe the intention to be bound by
a primary or an independent obligation.[25] The very terms of a contract
govern the obligations of the parties or the extent of the obligors liability.
Thus, this Court has ruled in favor of suretyship, even though contracts
were denominated as a Guarantors Undertaking [26] or a Continuing
Guaranty.[27]

Contracts have the force of law between the parties,[28] who are free
to stipulate any matter not contrary to law, morals, good customs, public
order or public policy.[29] None of these circumstances are present, much
less alleged by respondent. Hence, this Court cannot give a different
meaning to the plain language of the Guarantee Agreement.
 Indeed, the finding of solidary liability is in line with the premise
provided in the Whereas clause of the Guarantee Agreement. The
execution of the Agreement was a condition precedent for the approval of
PPICs loan from IFC. Consistent with the position of IFC as creditor was
its requirement of a higher degree of liability from ITM in case PPIC
committed a breach. ITM agreed with the stipulation in Section 2.01 and is
now estopped from feigning ignorance of its solidary liability. The literal
meaning of the stipulations control when the terms of the contract are
clear and there is no doubt as to the intention of the parties.[30]

We note that the CA denied solidary liability, on the theory that the
parties would not have executed a Guarantee Agreement if they had
intended to name ITM as a primary obligor.[31] The appellate court opined
that ITMs undertaking was collateral to and distinct from the Loan
Agreement. On this point, the Court stresses that a suretyship is merely an
accessory or a collateral to a principal obligation.[32] Although a surety
contract is secondary to the principal obligation, the liability of the surety is
direct, primary and absolute; or equivalent to that of a regular party to the
undertaking.[33] A surety becomes liable to the debt and duty of the
principal obligor even without possessing a direct or personal interest in
the obligations constituted by the latter.[34]
ITMs Liability as Surety

With the present finding that ITM is a surety, it is clear that the CA
erred in declaring the former secondarily liable.[35] A surety is considered in
law to be on the same footing as the principal debtor in relation to
whatever is adjudged against the latter.[36] Evidently, the dispositive portion
of the assailed Decision should be modified to require ITM to pay the
amount adjudged in favor of IFC.

Peripheral Issues

In addition to the main issue, ITM raised procedural infirmities

allegedly justifying the denial of the present Petition. Before the trial court

and the CA, IFC had allegedly instituted different arguments that

effectively changed the corporations theory on appeal, in violation of this

Courts previous pronouncements.[37] ITM further

claims that the main issue in the present case is a question of fact that is

not cognizable by this Court.[38]

These contentions deserve little consideration.

Alleged Change of
Theory on Appeal

Petitioners arguments before the trial court (that ITM was a primary

obligor) and before the CA (that ITM was a surety) were related and

intertwined in the action to enforce the solidary liability of ITM under the

Guarantee Agreement. We emphasize that the terms primary obligor and

surety were premised on the same stipulations in Section 2.01 of the

Agreement. Besides, both terms had the same legal consequences. There

was therefore effectively no change of theory on appeal. At any rate, ITM

failed to show to this Court a disparity between IFCs allegations in the trial

court and those in the CA. Bare allegations without proof deserve no

credence.
Review of Factual
Findings Necessary

As to the issue that only questions of law may be raised in a Petition

for Review,[39] the Court has recognized exceptions,[40] one of which applies

to the present case. The assailed Decision was based on a misapprehension

of facts,[41] which particularly related to certain stipulations in the

Guarantee Agreement -- stipulations that had not been disputed by the

parties. This circumstance compelled the Court to review the Contract

firsthand and to make its own findings and conclusions accordingly.

 WHEREFORE, the Petition is hereby GRANTED, and the assailed

Decision and Resolution MODIFIED in the sense that Imperial Textile

Mills, Inc. is declared a surety to Philippine Polyamide Industrial

Corporation. ITM isORDERED to pay International Finance

Corporation the same amounts adjudged against PPIC in the assailed

Decision. No costs.

SO ORDERED.
SECOND DIVISION

[G.R. No. 101723. May 11, 2000]

INDUSTRIAL MANAGEMENT INTERNATIONAL DEVELOPMENT CORP.

(INIMACO), petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION,
(Fourth Division) Cebu City, and ENRIQUE SULIT, SOCORRO MAHINAY,
ESMERALDO PEGARIDO, TITA BACUSMO, GINO NIERE, VIRGINIA
BACUS, ROBERTO NEMENZO, DARIO GO, and ROBERTO
ALEGARBES,respondents.

DECISION

BUENA, J.:

This is a petition for certiorari assailing the Resolution dated September 4,

1991 issued by the National Labor Relations Commission in RAB-VII-0711-84
on the alleged ground that it committed a grave abuse of discretion amounting
to lack of jurisdiction in upholding the Alias Writ of Execution issued by the
Labor Arbiter which deviated from the dispositive portion of the Decision dated
March 10, 1987, thereby holding that the liability of the six respondents in the
case below is solidary despite the absence of the word "solidary" in the
dispositive portion of the Decision, when their liability should merely be joint. S-
jcj
The factual antecedents are undisputed: Supr-eme

In September 1984, private respondent Enrique Sulit, Socorro Mahinay,

Esmeraldo Pegarido, Tita Bacusmo, Gino Niere, Virginia Bacus, Roberto
Nemenzo, Dariogo, and Roberto Alegarbes filed a complaint with the
Department of Labor and Employment, Regional Arbitration Branch No. VII in
Cebu City against Filipinas Carbon Mining Corporation, Gerardo Sicat,
Antonio Gonzales, Chiu Chin Gin, Lo Kuan Chin, and petitioner Industrial
Management Development Corporation (INIMACO), for payment of separation
pay and unpaid wages. Sc-jj

In a Decision dated March 10, 1987, Labor Arbiter Bonifacio B. Tumamak held
that:

"RESPONSIVE, to all the foregoing, judgment is hereby entered,

ordering respondents Filipinas Carbon and Mining Corp. Gerardo
Sicat, Antonio Gonzales/Industrial Management Development
Corp. (INIMACO), Chiu Chin Gin and Lo Kuan Chin, to pay
complainants Enrique Sulit, the total award of P82,800.00;
ESMERALDO PEGARIDO the full award of P19,565.00; Roberto
Nemenzo the total sum of P29,623.60 and DARIO GO the total
award of P6,599.71, or the total aggregate award of ONE
HUNDRED THIRTY-EIGHT THOUSAND FIVE HUNDRED
EIGHTY-EIGHT PESOS AND 31/100 (P138,588.31) to be
deposited with this Commission within ten (10) days from receipt
of this Decision for appropriate disposition. All other claims are
hereby Dismiss (sic) for lack of merit. Jjs-c

"SO ORDERED.

"Cebu City, Philippines.

"10 March 1987."0 [1]

No appeal was filed within the reglementary period thus, the above Decision
became final and executory. On June 16, 1987, the Labor Arbiter issued a writ
of execution but it was returned unsatisfied. On August 26, 1987, the Labor
Arbiter issued an Alias Writ of Execution which ordered thus: Ed-pm-is

"NOW THEREFORE, by virtue of the powers vested in me by law,

you are hereby commanded to proceed to the premises of
respondents Antonio Gonzales/Industrial Management
 Development Corporation (INIMACO) situated at Barangay
Lahug, Cebu City, in front of La Curacha Restaurant,and/or to
Filipinas Carbon and Mining corporation and Gerardo Sicat at 4th
Floor Universal RE-Bldg. 106 Paseo de Roxas, Legaspi Village,
Makati Metro Manila and at Philippine National Bank, Escolta,
Manila respectively, and collect the aggregate award of ONE
HUNDRED THIRTY-EIGHT THOUSAND FIVE HUNDRED
EIGHTY-EIGHT PESOS AND THIRTY ONE CENTAVOS
(P138,588.31) and thereafter turn over said amount to
complainants ENRIQUE SULIT, ESMERALDO PEGARIDO,
ROBERTO NEMENZO AND DARIO GO or to this Office for
appropriate disposition. Should you fail to collect the said sum in
cash, you are hereby authorized to cause the satisfaction of the
same on the movable or immovable property(s) of respondents
not exempt from execution. You are to return this writ sixty (6)
(sic) days from your receipt hereof, together with your
corresponding report.

"You may collect your legal expenses from the respondents as

provided for by law.

"SO ORDERED." [2]

On September 3, 1987, petitioner filed a "Motion to Quash Alias Writ of

Execution and Set Aside Decision," alleging among others that the alias writ
[3]

of execution altered and changed the tenor of the decision by changing the
liability of therein respondents from joint to solidary, by the insertion of the
words "AND/OR" between "Antonio Gonzales/Industrial Management
Development Corporation and Filipinas Carbon and Mining Corporation, et al."
However, in an order dated September 14, 1987, the Labor Arbiter denied the
motion. Mis-oedp

On October 2, 1987, petitioner appealed the Labor Arbiters Order dated

[4]

September 14, 1987 to the respondent NLRC. Mis-edp

The respondent NLRC dismissed the appeal in a Decision dated August 31,
[5]

1988, the pertinent portions of which read:

"In matters affecting labor rights and labor justice, we have always
adopted the liberal approach which favors the exercise of labor
rights and which is beneficial to labor as a means to give full
meaning and import to the constitutional mandate to afford
 protection to labor. Considering the factual circumstances in this
case, there is no doubt in our mind that the respondents herein
are called upon to pay, jointly and severally, the claims of the
complainants as was the latters prayers. Inasmuch as
respondents herein never controverted the claims of the
complainants below, there is no reason why complainants prayer
should not be granted. Further, in line with the powers granted to
the Commission under Article 218 (c) of the Labor code, to waive
any error, defect or irregularity whether in substance or in form in
a proceeding before Us, We hold that the Writ of Execution be
given due course in all respects." Ed-p

On July 31, 1989, petitioner filed a "Motion To Compel Sheriff To Accept

Payment Of P23,198.05 Representing One Sixth Pro Rata Share of
Respondent INIMACO As Full and Final Satisfaction of Judgment As to Said
Respondent." The private respondents opposed the motion. In an
[6]

Order dated August 15, 1989, the Labor Arbiter denied the motion ruling
[7]

thus:

"WHEREFORE, responsive to the foregoing respondent

INIMACOs Motions are hereby DENIED. The Sheriff of this Office
is order (sic) to accept INIMACOs tender payment (sic) of the sum
of P23,198.05, as partial satisfaction of the judgment and to
proceed with the enforcement of the Alias Writ of Execution of the
levied properties, now issued by this Office, for the full and final
satisfaction of the monetary award granted in the instant case.

"SO ORDERED." Ed-psc

Petitioner appealed the above Order of the Labor Arbiter but this was again
dismissed by the respondent NLRC in its Resolution dated September 4,
[8]

1991 which held that:

"The arguments of respondent on the finality of the dispositive

portion of the decision in this case is beside the point. What is
important is that the Commission has ruled that the Writ of
Execution issued by the Labor Arbiter in this case is proper. It is
not really correct to say that said Writ of Execution varied the
terms of the judgment. At most, considering the nature of labor
proceedings there was, an ambiguity in said dispositive portion
which was subsequently clarified by the Labor Arbiter and the
Commission in the incidents which were initiated by INIMACO
 itself. By sheer technicality and unfounded assertions, INIMACO
would now reopen the issue which was already resolved against
it. It is not in keeping with the established rules of practice and
procedure to allow this attempt of INIMACO to delay the final
disposition of this case.

"WHEREFORE, in view of all the foregoing, this appeal is

DISMISSED and the Order appealed from is hereby
AFFIRMED. Sce-dp

"With double costs against appellant."

Dissatisfied with the foregoing, petitioner filed the instant case, alleging that
the respondent NLRC committed grave abuse of discretion in affirming the
Order of the Labor Arbiter dated August 15, 1989, which declared the liability
of petitioner to be solidary.

The only issue in this petition is whether petitioners liability pursuant to the
Decision of the Labor Arbiter dated March 10, 1987, is solidary or not. Calrs-pped

Upon careful examination of the pleadings filed by the parties, the Court finds
that petitioner INIMACOs liability is not solidary but merely joint and that the
respondent NLRC acted with grave abuse of discretion in upholding the Labor
Arbiters Alias Writ of Execution and subsequent Orders to the effect that
petitioners liability is solidary.

A solidary or joint and several obligation is one in which each debtor is liable
for the entire obligation, and each creditor is entitled to demand the whole
obligation. In a joint obligation each obligor answers only for a part of the
[9]

whole liability and to each obligee belongs only a part of the correlative
rights.
[10]

Well-entrenched is the rule that solidary obligation cannot lightly be

inferred. There is a solidary liability only when the obligation expressly so
[11]

states, when the law so provides or when the nature of the obligation so
requires. [12]

In the dispositive portion of the Labor Arbiter, the word "solidary" does not
appear. The saidfallo expressly states the following respondents therein as
liable, namely: Filipinas Carbon and Mining Corporation, Gerardo Sicat,
Antonio Gonzales, Industrial Management Development Corporation
(petitioner INIMACO), Chiu Chin Gin, and Lo Kuan Chin. Nor can it be inferred
therefrom that the liability of the six (6) respondents in the case below is
solidary, thus their liability should merely be joint.

Moreover, it is already a well-settled doctrine in this jurisdiction that, when it is

not provided in a judgment that the defendants are liable to pay jointly and
severally a certain sum of money, none of them may be compelled to satisfy
in full said judgment. In Oriental Commercial Co. vs. Abeto and
Mabanag this Court held:
[13]

"It is of no consequence that, under the contract of suretyship

executed by the parties, the obligation contracted by the sureties
was joint and several in character. The final judgment, which
superseded the action for the enforcement of said contract,
declared the obligation to be merely joint, and the same cannot be
executed otherwise."[14]

Granting that the Labor Arbiter has committed a mistake in failing to indicate
in the dispositive portion that the liability of respondents therein is solidary, the
correction -- which is substantial -- can no longer be allowed in this case
because the judgment has already become final and executory. Scc-alr

It is an elementary principle of procedure that the resolution of the court in a

given issue as embodied in the dispositive part of a decision or order is the
controlling factor as to settlement of rights of the parties. Once a decision or
[15]

order becomes final and executory, it is removed from the power or

jurisdiction of the court which rendered it to further alter or amend it. It
[16]

thereby becomes immutable and unalterable and any amendment or

alteration which substantially affects a final and executory judgment is null and
void for lack of jurisdiction, including the entire proceedings held for that
purpose. An order of execution which varies the tenor of the judgment or
[17]

exceeds the terms thereof is a nullity. [18]

None of the parties in the case before the Labor Arbiter appealed the Decision
dated March 10, 1987, hence the same became final and executory. It was,
therefore, removed from the jurisdiction of the Labor Arbiter or the NLRC to
further alter or amend it. Thus, the proceedings held for the purpose of
amending or altering the dispositive portion of the said decision are null and
void for lack of jurisdiction. Also, the Alias Writ of Execution is null and void
because it varied the tenor of the judgment in that it sought to enforce the final
judgment against "Antonio Gonzales/Industrial Management Development
Corp. (INIMACO) and/orFilipinas Carbon and Mining Corp. and Gerardo
Sicat," which makes the liability solidary. Ca-lrsc
WHEREFORE, the petition is hereby GRANTED. The Resolution dated
September 4, 1991 of the respondent National Labor Relations is hereby
declared NULL and VOID. The liability of the respondents in RAB-VII-0711-84
pursuant to the Decision of the Labor Arbiter dated March 10, 1987 should be,
as it is hereby, considered joint and petitioners payment which has been
accepted considered as full satisfaction of its liability, without prejudice to the
enforcement of the award, against the other five (5) respondents in the said
case. Sppedsc

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-42391 October 10, 1934

ORIENTAL COMMERCIAL CO., INC., petitioner,

vs.
QUIRICO ABETO and ALEJO MABANAG, respondents.

Pastor A. Gonzales for petitioner.

C. P. Primicias for respondents.

IMPERIAL, J.:

In civil case No. 35897 of the Court of First Instance of Manila, the herein petitioner sought to
recover from Gregorio Bugayong, Vicente Rosario and the herein respondent Alejo Mabanag a
certain sum of money, interest, penalty and costs. After trial, judgment was rendered ordering
Bugayong alone to pay the sum of P5,742.73 with legal interest thereon from August 15, 1929, plus
the costs, and absolving Mabanag and Rosario from the complaint. Appeal was taken therefrom and
the case was docketed in this court as case No. 37624. After the same had been submitted for
decision, judgment was rendered as follows: 1

On the whole case we believe that P1,000 should be awarded appellant for attorney's fees
and that judgment should be entered against all the defendants and appellees in the sum of
P5,742.73, with legal interest from the 15th of August, 1929, until paid, together with the sum
of P1,000 as attorney's fees, and the costs in both instances.

As thus modified, the judgment of the Court of First Instance of Manila is affirmed. So
ordered.
Said judgment having become final, the clerk of court issued the following decree.

By virtue thereof it is hereby adjudged and decreed that the judgment of the Court of First
Instance of Manila, dated the 18th day of February, nineteen hundred and thirty-two, and
from which the above-entitled appeal was taken, be, and the same is hereby, affirmed with
the modification that judgment is entered against all the defendants and appellees in the sum
of P5,742.73, with legal interest from the 15th of August, 1929, until paid, together with the
sum of P1,000 as attorney's fees, and the costs in both instances.

It further ordered that the plaintiff-appellant recover from the defendants-appellees the sum
of P143, as costs.

After the case had been remanded to the court of origin, the petitioner applied for and obtained a writ
of execution of the judgment. By virtue of said writ, real and personal properties belonging to Rosario
and the respondent Mabanag were levied upon. The latter executed in favor of the petitioner a
promissory note for the sum of P1,000 as partial payment of the judgment and succeeded in having
the execution suspended in that state. Inasmuch as the judgment was not executed in full in spite of
the time that elapsed, the petitioner obtained from the clerk of court an alias writ of execution against
the respondent Mabanag, and the provincial sheriff of Rizal levied upon two pieces of real property
belonging to him, fixing their sale at public auction for August 10, 1934. The said respondent then
filed a motion praying the court to enjoin the sheriff from proceeding with the sale, alleging that,
according to the terms of the judgment, he was a mere joint obligor with Rosario, for which reason
he was not liable to satisfy in full the unpaid balance of the judgment which, according to the last writ
of execution, amounted to P1,750.16. Lastly, he claimed that, being a mere surety, execution did not
lie against him until after the property of the principal debtor Gregorio Bugayong is exhausted. The
court sustained said motion and on August 4, 1934, it ordered the sheriff to abstain from proceeding
with the advertised sale, and directed that no writ of execution be issued against the respondent
Mabanag until after the property of Bugayong is exhausted or Bugayong should happen to be
insolvent.

The petitioner filed this petition for a writ of certiorari to have said order of August 4, 1934, set aside.

The only to be decided by this court is whether or not the trial court, in issuing the order in question,
acted without or in excess of its jurisdiction or abused its sound discretion. In deciding such
question, we should first determine the rights and obligations created by the final judgment rendered
by this court. It is beyond question that said judgment is binding upon the parties to the case and
that it superseded the action brought by the petitioner.

A claim or demand, being put in suit and passing to final judgment, is merged or swallowed
up in the judgment, loses its vitality, and cannot thereafter be used either as a cause of
action or as a set-off, unless the statute otherwise provides; and this rule applies to a final
decree in a court of equity. Moreover, as a general rule all the peculiar qualities of the claim
are merged in the judgment, which then stands on the same footing as all other judgments.
And these rules apply to all species of demands, including contracts, bonds, and promissory
notes, but not, according to the weight of authority, a judgment on which a new judgment is
recovered. (34 C. J., pp. 752-754.)

It being settled that the final judgment determines and is the source of the rights and obligations of
the parties to that case, let us find out what obligations are derived therefrom in favor of the
petitioner and against the respondent Mabanag and his co-defendants therein. In the judgment of
this court, notice of which was served by the clerk on the trial court and the parties, it is simply stated
that judgment be entered against all the defendants and appellees in the sum of P5,742.73, with
legal interest from the 15th of August, 1929, until paid, together with the sum of P1,000 as attorney's
fees, and costs, but it does not specify the kind of obligation imposed upon the defendants in
connection with the payment or the manner in which said payment should be made by them. In other
words, the judgment failed to state whether or not the defendants should pay said sums jointly and
severally.

As to obligations, the Civil Code provides as follows:

ART. 1137. The concurrence of two or more creditors, or of two or more debtors, in a single
obligation, does not imply that each one of the former has a right to ask, nor that each one of
the latter is bound to comply in full with the things which are the objects of the same. This
shall only take place when the obligation determines it expressly, being constituted as a joint
and several obligation.

ART. 1138. If from the context of the obligation referred to in the preceding article, any other
thing does not appear, the credit or the debt shall be presumed as divided in as many equal
parts as there are creditors or debtors, and shall be considered as credits or debts, each one
different from the other.

In the case of De Leon vs. Nepomuceno and De Jesus (37 Phil., 180), this court, in determining the
manner in which the costs should be paid in conformity with the language of the judgment rendered
in an election case, said:

Examining the language of the judgment for costs, which is set out in the foregoing
statement of facts, it is manifest that it is merely a joint judgment against the protestado y
tercerista, and does not permit of construction or interpretation as a "joint and several"
judgment. No argument is necessary. It is sufficient to cite here articles 1137 and 1138 of the
Civil Code as to the rule in this jurisdiction.

ART. 1137. The concurrence of two or more creditors, or of two or more debtors, in a single
obligation, does not imply that each one of the former has a right to ask, nor that each one of
the latter is bound to comply in full with the things which are the objects of the same. This
shall only take place when the obligation determines it expressly, being constituted as a joint
and several obligation.

ART. 1138. If from the context of the obligation referred to in the preceding article, any other
thing does not appear, the credit or the debt shall be presumed as divided in as many equal
parts as there are creditors or debtors, and shall be considered as credits or debts, each one
different from the other.

"A joint obligation under the Law of Louisiana binds the parties thereto only for their
proportion of the debt, whilst a solidary obligation, on the contrary, binds each of the
obligors for the whole debt." (Groves vs. Sentell; 14 Sup. Ct., 898, 901; 153 U. S.,
465; 38 L. ed., 785.)

And in the case of Sharruf vs. Tayabas Land Co. and Ginainati (37 Phil., 655), wherein the case of
De Leon was again favorably cited, the same rule was reiterated in the following terms:

We agree with the appellant that this promissory note evidences a joint and not a joint and
several obligation, but it appearing that the trial judge correctly rendered judgment holding
the defendants "jointly" liable, there is no necessity for any modification of the terms of the
judgment in that regard. Our decision in the case of De Leon vs. Nepomuceno and De
 Jesus (p. 180, ante) should make it quite clear that in this jurisdiction at least, the word
"jointly" when used by itself in a judgment rendered in English is equivalent to the
word mancomunadamente, and that it is necessary to use the words "joint and several" in
order to convey the idea expressed in the Spanish term solidariamente (in solidum); and
further, that a contract, or a judgment based thereon, which fails to set forth that a particular
obligation is "joint and several" must be taken to have in contemplation a "joint"
(mancomunada), and not a "joint and several" (solidary) obligation.

Therefore, it is already a well established doctrine in this jurisdiction that, when it is not provided in a
judgment that the defendants are liable to pay jointly and severally a certain sum of money, none of
them may be compelled to satisfy in full said judgment. And applying said doctrine to the case under
consideration, it follows that the respondent Mabanag is not in fact liable to satisfy in full the amount
of the judgment rendered against him and the other two co-defendants.

It is of no consequence that, under the written contract of suretyship executed by the parties, the
obligation contracted by the sureties was joint and several in character. The final judgment, which
superseded the action brought for the enforcement of said contract, declared the obligation to be
merely joint, and the same cannot be executed otherwise. lawphi1.net

In the court's order it is decreed that no writ of execution be issued against the respondent Mabanag
until after the property of the co-defendant Bugayong is exhausted. This court is of the opinion that
there was excess of jurisdiction upon this point. In the final judgment nothing can be inferred giving
any of the defendants therein the benefit of order. The final judgment rendered against them does
not consider any of them as surety.

Wherefore, it being understood that the respondent Mabanag is not entitled to the benefit of
exhaustion, the petition is denied, without special pronouncement as to costs. So ordered.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-7721 March 25, 1914

INCHAUSTI & CO., plaintiff-appellant,

vs.
GREGORIO YULO, defendant-appellee.

Hausserman, Cohn and Fisher for appellant.

Rohde and Wright for appellee.
Bruce, Lawrence, Ross and Block, Amici Curiae, for Manuel, Francisco and Carmen Yulo.

ARELLANO, C.J.:

This suit is brought for the recovery of a certain sum of money, the balance of a current account
opened by the firm of Inchausti & Company with Teodoro Yulo and after his death continued with his
widow and children, whose principal representative is Gregorio Yulo. Teodoro Yulo, a property
owner of Iloilo, for the exploitation and cultivation of his numerous haciendas in the province of
Occidental Negros, had been borrowing money from the firm of Inchausti & Company under specific
conditions. On April 9, 1903; Teodoro Yulo died testate and for the execution of the provisions of his
will he had appointed as administrators his widow and five of his sons, Gregorio Yulo being one of
the latter. He thus left a widow, Gregoria Regalado, who died on October 22d of the following year,
1904, there remaining of the marriage the following legitimate children: Pedro, Francisco, Teodoro,
Manuel, Gregorio, Mariano, Carmen, Concepcion, and Jose Yulo y Regalado. Of these children
Concepcion and Jose were minors, while Teodoro was mentally incompetent. At the death of their
predecessor in interest, Teodoro Yulo, his widow and children held the conjugal property in common
and at the death of this said widow, Gregoria Regalado, these children preserved the same relations
under the name of Hijos de T. Yulo continuing their current account with Inchausti & Company in the
best and most harmonious reciprocity until said balance amounted to two hundred thousand pesos.
In for the payment of the disbursements of money which until that time it had been making in favor of
its debtors, the Yulos.

First. Gregorio Yulo, for himself and in representation of his brothers Pedro Francisco, Manuel,
Mariano, and Carmen, executed on June 26, 1908, a notarial document (Exhibit S) whereby all
admitted their indebtedness to Inchausti & Company in the sum of P203,221.27 and, in order to
secure the same with interest thereon at 10 per cent per annum, they especially mortgaged an
undivided six-ninth of their thirty-eight rural properties, their remaining urban properties, lorchas, and
family credits which were listed, obligating themselves to make a forma inventory and to describe in
due form all the said properties, as well as to cure all the defects which might prevent the inscription
of the said instrument in the registry of property and finally to extend by the necessary formalities the
aforesaid mortgage over the remaining three-ninths part of all the property and rights belonging to
their other brothers, the incompetent Teodoro, and the minors Concepcion and Jose.

Second. On January 11, 1909, Gregorio Yulo in representation of Hijos de T. Yulo answered a letter
of the firm of Inchausti & Company in these terms: "With your favor of the 2d inst. we have received
an abstract of our current account with your important firm, closed on the 31st of last December, with
which we desire to express our entire conformity as also with the balance in your favor of
P271,863.12." On July 17, 1909, Inchausti & Company informed Hijos de T. Yulo of the reduction of
the said balance to P253,445.42, with which balance Hijos de T. Yulo expressed its conformity by
means of a letter of the 19th of the same month and year. Regarding this conformity a new
document evidencing the mortgage credit was formalized.

Third. On August 12, 1909, Gregorio Yulo, for himself and in representation of his brother Manuel
Yulo, and in their own behalf Pedro Yulo, Francisco Yulo, Carmen Yulo, and Concepcion Yulo, the
latter being of age at the time, executed the notarial instrument (Exhibit X). Through this, the said
persons, including Concepcion Yulo ratified all the contents of the prior document of June 26, 1908,
severally and jointly acknowledged and admitted their indebtedness to Inchausti & Company for the
net amount of two hundred fifty-three thousand four hundred forty-five pesos and forty-two centavos
(P253,445.42) which they obligated themselves to pay, with interest at ten per cent per annum, in
five installments at the rate of fifty thousand pesos (P50,000), except the last, this being fifty-three
thousand four hundred forty-five pesos and forty-two centavos (P53,445.42), beginning June 30,
1910, continuing successively on the 30th of each June until the last payment on June 30, 1914.
Among other clauses, they expressly stipulated the following:

Fifth. The default in payment of any of the installments established in clause 3, or the
noncompliance of any of the other obligations which by the present document and that of
June 26, 1908, we, the Yulos, brothers and sisters, have assumed, will result in the maturity
of all the said installments, and as a consequence thereof, if they so deem expedient
Messrs. Inchausti & Company may exercise at once all the rights and actions which to them
appertain in order to obtain the immediate and total payment of our debt, in the same
manner that they would have so done at the maturity of the said installments.
 Fifteenth. All the obligations which by this, as well as by the document of June 26, 1908,
concern us, will be understood as having been contradicted in solidum by all of us, the Yulos,
brothers and sisters.

Sixteenth. It is also agreed that this instrument shall be confirmed and ratified in all its parts,
within the present week, by our brother Don Mariano Yulo y Regalado who resides in
Bacolod, otherwise it will not be binding on Messrs. Inchausti & Company who can make use
of their rights to demand and obtain immediate payment of their credit without any further
extension or delay, in accordance with what we have agreed.

Fourth. This instrument was neither ratified nor confirmed by Mariano Yulo.

Fifth. The Yulos, brothers and sisters, who executed the preceding instrument, did not pay the first
installment of the obligation.

Sixth. Therefore, on March 27, 1911, Inchausti & Company brought an ordinary action in the Court of
First Instance of Iloilo, against Gregorio Yulo for the payment of the said balance due of two hundred
fifty-three thousand, four hundred forty-five pesos and forty-two centavos P253,445.42) with interest
at ten per cent per annum, on that date aggregating forty-two thousand, nine hundred forty-four
pesos and seventy-six centavos (P42,944.76)

Seventh. But, on May 12, 1911, Francisco, Manuel, and Carmen Yulo y Regalado executed in favor
Inchausti & Company another notarial instrument in recognition of the debt and obligation of
payment in the following terms: "First, the debt is reduce for them to two hundred twenty-five
thousand pesos (P225,000); second, the interest is likewise reduced for them to 6 percent per
annum, from March 15, 1911; third, the installments are increase to eight, the first of P20,000,
beginning on June 30, 1911, and the rest of P30,000 each on the same date of each successive
year until the total obligation shall be finally and satisfactorily paid on June 30, 1919," it being
expressly agreed "that if any of the partial payments specified in the foregoing clause be not paid at
its maturity, the amount of the said partial payment together with its interest shall bear interest at the
rate of 15 per cent per annum from the date of said maturity, without the necessity of demand until
its complete payment;" that "if during two consecutive years the partial payments agreed upon be not
made, they shall lose the right to make use of the period granted to them for the payment of the debt
or the part thereof which remains unpaid, and that Messrs. Inchausti & Company may consider the
total obligation due and demandable, and proceed to collect the same together with the interest for
the delay above stipulated through all legal means." (4th clause.)

Thus was it stipulated between Inchausti & Company and the said three Yulos, brothers and sisters
by way of compromise so that Inchausti & Company might, as it did, withdraw the claims pending
in the special proceedings for the probate of the will of Don Teodoro Yulo and of the intestacy of
Doa Gregoria Regalado stipulating expressly however in the sixth clause that "Inchausti &
Company should include in their suit brought in the Court of First Instance of Iloilo against Don
Gregorio Yulo, his brother and joint co-obligee, Don Pedro Yulo, and they will procure by all legal
means and in the least time possible a judgment in their favor against the said Don Gregorio and
Don Pedro, sentencing the later to pay the total amount of the obligation acknowledged by them in
the aforementioned instrument of August 12, 1909; with the understanding that if they should deem it
convenient for their interests, Don Francisco, Don Manuel, and Doa Carmen Yulo may appoint an
attorney to cooperate with the lawyers of Inchausti & Company in the proceedings of the said case."

Eighth. Matters being thus on July 10, 1911, Gregorio Yulo answered the complaint and alleged as
defenses; first, that an accumulation of interest had taken place and that compound interest was
asked for the Philippine currency at par with Mexican; second, that in the instrument of August 21,
1909, two conditions were agreed one of which ought to be approved by the Court of First Instance,
and the other ratified and confirmed by the other brother Mariano Yulo, neither of which was
complied with; third , that with regard to the same debt claims were presented before the
commissioners in the special proceedings over the inheritances of Teodoro Yulo and Gregoria
Regalado, though later they were dismissed, pending the present suit; fourth and finally, that the
instrument of August 12, 1909, was novated by that of May 12, 1911, executed by Manuel,
Francisco and Carmen Yulo.

Ninth. The Court of First Instance of Iloilo decided the case "in favor of the defendant without
prejudice to the plaintiff's bringing within the proper time another suit for his proportional part of the
joint debt, and that the plaintiff pay the costs." (B. of E., 21.)

The plaintiff appealed from this judgment by bill of exceptions and before this court made the
following assignment of errors:

I. That the court erred in considering the contract of May 12, 1911, as constituting a novation of that
of August 12, 1909.

II. That the court erred in rendering judgment in favor of the defendant.

III. And that the court erred n denying the motion for a new trial.

"No one denies in this case," says the trial judge, "that the estate of Teodoro Yulo or his heirs owe
Inchausti & Company an amount of money, the object of this action, namely, P253,445.42" (B. of E.
18). "The fact is admitted," says the defendant, "that the plaintiff has not collected the debt, and that
the same is owing" (Brief, 33). "In the arguments of the attorneys," the judge goes on, "it was really
admitted that the plaintiff had a right to bring an action against Gregorio Yulo, as one of the conjoint
and solidary obligors in the contract of August 12, 1909; but the defendant says that the plaintiff has
no right to sue him alone, since after the present suit was brought, the plaintiff entered into a
compromise with the other conjoint and solidary debtors, the result being the new contract of May
12, 1911, by virtue of which the payments were extended, the same constituting a novation of the
contract which gave him the same privileges that were given his conjoint and solidary codebtors.
This (the judge concludes) is the only question brought up by the parties." (B. of E., 19.)

And this is the only one which the Supreme Court has to solve by virtue of the assignments of errors
alleged. Consequently, there is no need of saying anything regarding the first three defenses of the
answer, nor regarding the lack of the signature of Mariano Yulo ratifying and confirming the
instrument of August 12, 1909, upon which the appellee still insists in his brief for this appeal;
although it will not be superfluous to state the doctrine that a condition, such as is contained in the
sixteenth clause of the said contract (third point in the statement of facts), is by no means of
suspensive but a resolutory condition; the effect of the failure of compliance with the said clause,
that is to say, the lack of the ratification and confirmance by Mariano Yulo being not to suspend but
to resolve the contract, leaving Inchausti & Company at liberty, as stipulated, "to make use of its
rights to demand and obtain the immediate payment of its credit."

The only question indicated in the decision of the inferior court involves, however, these others: First,
whether the plaintiff can sue Gregorio Yulo alone, there being other obligors; second, if so, whether
it lost this right by the fact of its having agreed with the other obligors in the reduction of the debt, the
proroguing of the obligation and the extension of the time for payment, in accordance with the
instrument of May 12, 1911; third, whether this contract with the said three obligors constitutes a
novation of that of August 12, 1909, entered into with the six debtors who assumed the payment of
two hundred fifty-three thousand and some odd pesos, the subject matter of the suit; and fourth, if
not so, whether it does have any effect at all in the action brought, and in this present suit.

With respect to the first it cannot be doubted that, the debtors having obligated themselves in
solidum, the creditor can bring its action in toto against any one of them, inasmuch as this was
surely its purpose in demanding that the obligation contracted in its favor should be solidary having
in mind the principle of law that, "when the obligation is constituted as a conjoint and solidary
obligation each one of the debtors is bound to perform in full the undertaking which is the subject
matter of such obligation." (Civil Code, articles 1137 and 1144.)

And even though the creditor may have stipulated with some of the solidary debtors diverse
installments and conditions, as in this case, Inchausti & Company did with its debtors Manuel,
Francisco, and Carmen Yulo through the instrument of May 12, 1911, this does not lead to the
conclusion that the solidarity stipulated in the instrument of August 12, 1909 is broken, as we already
know the law provides that "solidarity may exist even though the debtors are not bound in the same
manner and for the same periods and under the same conditions." (Ibid, article 1140.) Whereby the
second point is resolved.

With respect to the third, there can also be no doubt that the contract of May 12, 1911, does not
constitute a novation of the former one of August 12, 1909, with respect to the other debtors who
executed this contract, or more concretely, with respect to the defendant Gregorio Yulo: First,
because "in order that an obligation may be extinguished by another which substitutes it, it is
necessary that it should be so expressly declared or that the old and the new be incompatible in all
points" (Civil Code, article 1204); and the instrument of May 12, 1911, far from expressly declaring
that the obligation of the three who executed it substitutes the former signed by Gregorio Yulo and
the other debtors, expressly and clearly stated that the said obligation of Gregorio Yulo to pay the
two hundred and fifty-three thousand and odd pesos sued for exists, stipulating that the suit must
continue its course and, if necessary, these three parties who executed the contract of May 12,
1911, would cooperate in order that the action against Gregorio Yulo might prosper (7th point in the
statement of facts), with other undertakings concerning the execution of the judgment which might
be rendered against Gregorio Yulo in this same suit. "It is always necessary to state that it is the
intention of the contracting parties to extinguish the former obligation by the new one" (Judgment in
cassation, July 8, 1909). There exist no incompatibility between the old and the new obligation as
will be demonstrated in the resolution of the last point, and for the present we will merely reiterate
the legal doctrine that an obligation to pay a sum of money is not novated in a new instrument
wherein the old is ratified, by changing only the term of payment and adding other obligations not
incompatible with the old one. (Judgments in cassation of June 28, 1904 and of July 8, 1909.)

With respect to the last point, the following must be borne in mind:

Facts. First. Of the nine children of T. Yulo, six executed the mortgage of August 12, 1909,
namely, Gregorio, Pedro, Francisco, Manuel, Carmen, and Concepcion, admitting a debt of
P253,445.42 at 10 per cent per annum and mortgaging six-ninths of their hereditary properties.
Second. Of those six children, Francisco, Manuel and Carmen executed the instrument of May 12,
1911, wherein was obtained a reduction of the capital to 225,000 pesos and of the interest to 6 per
cent from the 15th of March of the same year of 1911. Third. The other children of T. Yulo named
Mariano, Teodoro, and Jose have not taken part in these instruments and have not mortgaged their
hereditary portions. Fourth. By the first instrument the maturity of the first installment was June 30,
1910, whereas by the second instrument, Francisco, Manuel, and Carmen had in their favor as the
maturity of the first installment of their debt, June 30, 1912, and Fifth, on March 27, 1911, the action
against Gregorio Yulo was already filed and judgment was pronounced on December 22, 1911,
when the whole debt was not yet due nor even the first installment of the same respective the three
aforesaid debtors, Francisco, Manuel, and Carmen.

In jure it would follow that by sentencing Gregorio Yulo to pay 253,445 pesos and 42 centavos of
August 12, 1909, this debtor, if he should pay all this sum, could not recover from his joint debtors
Francisco, Manuel, and Carmen their proportional parts of the P253,445.42 which he had paid,
inasmuch as the three were not obligated by virtue of the instrument of May 12, 1911, to pay only
225,000 pesos, thus constituting a violation of Gregorio Yulo's right under such hypothesis, of being
reimbursed for the sum paid by him, with the interest of the amounts advanced at the rate of one-
sixth part from each of his five codebtors. (Civ. Code, article 1145, par. 2). This result would have
been a ponderous obstacle against the prospering of the suit as it had been brought. It would have
been very just then to have absolved the solidary debtor who having to pay the debt in its entirety
would not be able to demand contribution from his codebtors in order that they might reimburse
him pro rata for the amount advanced for them by him. But such hypothesis must be put out of
consideration by reason of the fact that occurred during the pendency of the action, which fact the
judge states in his decision. "In this contract of May last," he says, "the amount of the debt was
reduced to P225,000 and the attorney of the plaintiff admits in his plea that Gregorio Yulo has a right
to the benefit of this reduction." (B. of E., 19.) This is a fact which this Supreme Court must hold as
firmly established, considering that the plaintiff in its brief, on page 27, corroborates the same in
these words: "What effect," it says, "could this contract have over the rights and obligations of the
defendant Gregorio Yulo with respect to the plaintiff company? In the first place, we are the first to
realize that it benefits him with respect to the reduction of the amount of the debt. The obligation
being solidary, the remission of any part of the debt made by a creditor in favor of one or more of the
solidary debtors necessarily benefits the others, and therefore there can be no doubt that, in
accordance with the provision of article 1143 of the Civil Code, the defendant has the right to enjoy
the benefits of the partial remission of the debt granted by the creditor."

Wherefore we hold that although the contract of May 12, 1911, has not novated that of August 12,
1909, it has affected that contract and the outcome of the suit brought against Gregorio Yulo alone
for the sum of P253,445.42; and in consequence thereof, the amount stated in the contract of
August 12, 1909, cannot be recovered but only that stated in the contract of May 12, 1911, by virtue
of the remission granted to the three of the solidary debtors in this instrument, in conformity with
what is provided in article 1143 of the Civil Code, cited by the creditor itself.

If the efficacy of the later instrument over the former touching the amount of the debt had been
recognized, should such efficacy not likewise be recognized concerning the maturity of the same? If
Francisco, Manuel, and Carmen had been included in the suit, they could have alleged the defense
of the nonmaturity of the installments since the first installment did not mature until June 30, 1912,
and without the least doubt the defense would have prospered, and the three would have been
absolved from the suit. Cannot this defense of the prematurity of the action, which is implied in the
last special defense set up in the answer of the defendant Gregorio Yulo be made available to him in
this proceeding?

The following commentary on article 1140 of the Civil Code sufficiently answers this question: ". . . .
Before the performance of the condition, or before the execution of a term which affects one debtor
alone proceedings may be had against him or against any of the others for the remainder which may
be already demandable but the conditional obligation or that which has not yet matured cannot be
demanded from any one of them. Article 1148 confirms the rule which we now enunciate inasmuch
as in case the total claim is made by one creditor, which we believe improper if directed against the
debtor affected by the condition or the term, the latter can make use of such exceptions as are
peculiarly personal to his own obligation; and if against the other debtors, they might make use of
those exceptions, even though they are personal to the other, inasmuch as they alleged they are
personal to the other, inasmuch as they alleged them in connection with that part of the
responsibility attaching in a special manner to the other." (8 Manresa, Sp. Civil Code, 196.)

Article 1148 of the Civil Code. "The solidary debtor may utilize against the claims of the creditor of
the defenses arising from the nature of the obligation and those which are personal to him. Those
personally pertaining to the others may be employed by him only with regard to the share of the debt
for which the latter may be liable."

Gregorio Yulo cannot allege as a defense to the action that it is premature. When the suit was
brought on March 27, 1911, the first installment of the obligation had already matured of June 30,
1910, and with the maturity of this installment, the first not having been paid, the whole debt had
become mature, according to the express agreement of the parties, independently of the resolutory
condition which gave the creditor the right to demand the immediate payment of the whole debt upon
the expiration of the stipulated term of one week allowed to secure from Mariano Yulo the ratification
and confirmation of the contract of August 12, 1909.

Neither could he invoke a like exception for the shares of his solidary codebtors Pedro and
Concepcion Yulo, they being in identical condition as he.

But as regards Francisco, Manuel, and Carmen Yulo, none of the installments payable under their
obligation, contracted later, had as yet matured. The first payment, as already stated, was to mature
on June 30, 1912. This exception or personal defense of Francisco, Manuel, and Carmen Yulo "as to
the part of the debt for which they were responsible" can be sent up by Gregorio Yulo as a partial
defense to the action. The part of the debt for which these three are responsible is three-sixths of
P225,000 or P112,500, so that Gregorio Yulo may claim that, even acknowledging that the debt for
which he is liable is P225,000, nevertheless not all of it can now be demanded of him, for that part of
it which pertained to his codebtors is not yet due, a state of affairs which not only prevents any
action against the persons who were granted the term which has not yet matured, but also against
the other solidary debtors who being ordered to pay could not now sue for a contribution, and for this
reason the action will be only as to the P112,500.

Against the propriety and legality of a judgment against Gregorio Yulo for this sum, to wit, the three-
sixths part of the debt which forms the subject matter of the suit, we do not think that there was any
reason or argument offered which sustains an opinion that for the present it is not proper to order
him to pay all or part of the debt, the object of the action.

It has been said in the brief of the appellee that the prematurity of the action is one of the defenses
derived from the nature of the obligation, according to the opinion of the commentator of the Civil
Code, Mucius Scaevola, and consequently the defendant Gregorio Yulo may make use of it in
accordance with article 1148 of the said Code. It may be so and yet, taken in that light, the effect
would not be different from that already stated in this decision; Gregorio Yulo could not be freed from
making any payment whatever but only from the payment of that part of the debt which corresponds
to his codebtors Francisco, Manuel, and Carmen. The same author, considering the case of the
opposing contention of two solidary debtors as to one of whom the obligation is pure and
unconditional and as to the other it is conditional and is not yet demandable, and comparing the
disadvantages which must flow from holding that the obligation is demandable with these which
must follow if the contrary view is adopted, favors this solution of the problem:

There is a middle ground, (he says), from which we can safely set out, to wit, that the creditor
may ofcourse, demand the payment of his credit against the debtor not favored by any
condition or extension of time." And further on, he decides the question as to whether the
whole debt may be recovered or only that part unconditionally owing or which has already
 matured, saying, "Without failing to proceed with juridical rigor, but without falling into
extravagances or monstrosities, we believe that the solution of the difficulty is perfectly
possible. How? By limiting the right of the creditor to the recovery of the amount owed by the
debtors bound unconditionally or as to whom the obligation has matured, and leaving in
suspense the right to demand the payment of the remainder until the expiration of the term of
the fulfillment of the condition. But what then is the effect of solidarity? How can this
restriction of right be reconciled with the duty imposed upon each one of the debtors to
answer for the whole obligation? Simply this, by recognizing in the creditor the power, upon
the performance of the condition or the expiration of the term of claiming from any one or all
of the debtors that part of the obligation affected by those conditions. (Scaevola, Civil Code,
19, 800 and 801.)

It has been said also by the trial judge in his decision that if a judgment be entered against Gregorio
Yulo for the whole debt of P253,445.42, he cannot recover from Francisco, Manuel, and Carmen
Yulo that part of the amount which is owed by them because they are obliged to pay only 225,000
pesos and this is eight installments none of which was due. For this reason he was of the opinion
that he (Gregorio Yulo) cannot be obliged to pay his part of the debt before the contract of May 12,
1911, may be enforced, and "consequently he decided the case in favor of the defendant, without
prejudice to the plaintiff proceeding in due time against him for his proportional part of the joint debt."
(B. of E., 21 and 22.)

But in the first place, taking into consideration the conformity of the plaintiff and the provision of
article 1143 of the Civil Code, it is no longer possible to sentence the defendant to pay the
P253,445.42 of the instrument of August 12, 1909, but, if anything, the 225,000 of the instrument of
May 12, 1911.

In the second place, neither is it possible to curtail the defendant's right of recovery from the signers
of the instrument of May 12, 1911, for he was justly exonerated from the payment of that part of the
debt corresponding to them by reason of there having been upheld in his favor the exception of an
unmatured installment which pertains to them.

In the third place, it does not seem just, Mucius Scaevola considers it "absurd," that, there being a
debtor who is unconditionally obligated as to when the debt has matured, the creditor should be
forced to await the realization of the condition (or the expiration of the term.) Not only is there no
reason for this, as stated by the author, but the court would even fail to consider the special law of
the contract, neither repealed nor novated, which cannot be omitted without violating article 1091 of
the Civil Code according to which "the obligations arising from contracts have the force of law
between the contracting parties and must be complied with in accordance with the tenor of the
same." Certain it is that the trial court, in holding that this action was premature but might be brought
in the time, regarded the contract of August 12, 1909, as having been expressly novated; but it is
absolutely impossible in law to sustain such supposed novation, in accordance with the legal
principles already stated, and nevertheless the obligation of the contract of May 12, 1911, must
likewise be complied with in accordance with its tenor, which is contrary in all respects to the
supposed novation, by obliging the parties who signed the contract to carry on the suit brought
against Gregorio Yulo. The contract of May 12, 1911, has affected the action and the suit, to the
extent that Gregorio Yulo has been able to make in his favor the defense of remission of part of the
debt, thanks to the provision of article 1148, because it is a defense derived from the nature of the
obligation, so that although the said defendant was not party to the contract in question, yet because
of the principle of solidarity he was benefited by it.
The defendant Gregorio Yulo cannot be ordered to pay the P253,445.42 claimed from him in the suit
here, because he has been benefited by the remission made by the plaintiff to three of his
codebtors, many times named above.

Consequently, the debt is reduced to 225,000 pesos.

But, as it cannot be enforced against the defendant except as to the three-sixths part which is what
he can recover from his joint codebtors Francisco, Manuel, and Carmen, at present, judgment can
be rendered only as to the P112,500.

We therefore sentence the defendant Gregorio Yulo to pay the plaintiff Inchausti & Company
P112,500, with the interest stipulated in the instrument of May 12, 1911, from March 15, 1911, and
the legal interest on this interest due, from the time that it was claimed judicially in accordance with
article 1109 of the Civil Code, without any special finding as to costs. The judgment appealed from is
reversed. So ordered.

Carson, Trent, and Araullo, JJ., concur.

Separate Opinions

MORELAND, J., dissenting:

In my judgment the action must be dismissed, as it was brought prematurely. The defendant was
entitled to all of the benefits of the contract of May 12, 1911, between the plaintiff and Francisco,
Manuel, and Carmen. One of these provisions was that the first payment need not be made until
June 30, 1912. The action was commenced on the 27t of March, 1911, and although this date was
prior to the date of the second contract, that is, the contract with Francisco, Manuel, and Carmen,
said contract was executed before the trial of the action, and some of the beneficial provisions
therein contained were to produce their effects from March 15, 1911, a date prior to the
commencement of the action. At the time of the trial the defendant could, in my judgment, have
interposed, under the allegations of the amended answer, any of the defenses which could have
been made use of by Francisco, Manuel, or Carmen if they had been the defendant. That being the
case, nothing was due the plaintiff at the time it sued and accordingly its action must be dismissed
with costs.

For these reasons I vote to affirm.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-5942 May 14, 1954

REHABILITATION FINANCE CORPORATION, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, ESTELITO MADRID and JESUS
ANDUIZA, respondents.

Sixto de la Costa for petitioner.

Zacarias Gutierrez Lora for respondent Jesus de Anduiza.
Sabido and Sabido for respondent Estelito Madrid.

CONCEPCION, J.:

This is an appeal by certiorari, taken by the Rehabilitation Finance Corporation, hereinafter referred
to as the Bank, from a decision of the Court of Appeals. The pertinent facts are set forth in said
decision, from which we quote:

"On or before October 31, 1951 for value received, I/we, jointly executed the following
promissory note

"P13,800.00 Legaspi, Albay, October 31, 1941

"On or before October 31, 1951 for value received, I/we, jointly and severally, promise to pay
the AGRICULTURAL AND INDUSTRIAL BANK, or order, at its office at Manila or Agency at
Legaspi, Albay, Philippines, the sum of THIRTEEN THOUSAND EIGHT HUNDRED PESOS
(P13,800.00), Philippine currency, with interest at the rate of six per centum, (6%) per
annum, from the date hereof until paid. Payments of the principal and the corresponding
interest are to be made in ten (10 years equal annual installments of P1,874.98 each in
accordance with the following schedule of amortizations:

xxx xxx xxx

All unpaid installments shall bear interest at the rate of six per centum, (6%) per annum.

(Sgd.) QUINTANA CANO (Sgd.) JESUS DE ANDUIZA

Mortgagor Mortgagor

(Exhibit "C")

Mortgagors Anduiza and Cano failed to pay the yearly amortizations that fell due on October
31, 1942 and 1943. As plaintiff Estelito Madrid, who was at the outbreak of the last war the
manager of the branch office of the National Abaca and other Fiber Corporation in Sorsogon,
and who temporarily lived in the house of Jesus de Anduiza in said province during the
Japanese occupation, learned of the latters' failure to pay the aforesaid amortizations due
the creditor Agricultural and Industrial Bank, he went to its central office in Manila in October,
1944, and offered to pay the indebtedness of Jesus de Anduiza. Accordingly, he paid on
October 23, 1944, P7,374.83 for the principal, and 2,625.17 for the interest, or a total of
P10,000.00 (Exh. "A"), thereby leaving a balance of P6,425.17 which was likewise paid on
October 30th of the same year (Exh. "B").

Alleging that defendant Jesus de Anduiza has failed to pay the plaintiff in the amount of
P16,425.17 inspite of demands therefor, and that defendant Agricultural and Industrial Bank
(now R. F. C.) refused to cancel the mortgage executed by said Anduiza, Estelito Madrid
instituted the present action on July 3, 1948, in the Court of First Instance of Manila, praying
for judgment (a) declaring as paid the indebtedness amounting to P16,425.17 of Jesus de
Anduiza to the Agricultural and Industrial Bank; (b) ordering the Agricultural and Industrial
Bank (now R. F. C.) to release the properties mortgaged to it and to execute the
corresponding cancellation of the mortgage; (c) condemning defendant Jesus de Anduiza to
pay plaintiff the amount of P16,425.17, with legal interest from the filing of the complaint until
completely paid, declaring such obligation a preferred lien over Anduiza's properties which
plaintiff freed from the mortgage, and sentencing the defendants to pay the plaintiff the sum
of P2,000.00 as damages and the costs, without prejudice to conceding him other remedies
just and equitable.

On July 14, 1948, defendant Agricultural and Industrial Bank (now R. F. C.) filed its answer,
alleging that the loan of P13,800.00 had not become due and demandable in October, 1944,
as the same was payable in ten years at P1,874.98 annually; that up to October 30, 1944,
plaintiff delivered the total sum of P16,425.17 to the Agricultural Bank which accepted the
same as deposit pending proof of the existence of Jesus de Anduiza's authority and approval
which plaintiff promised to present; that it was agreed that if plaintiff could not prove said
authority the deposit will be annulled; and that the Agricultural and Industrial Bank and its
successor the Rehabilitation Finance Corporation cannot release the properties mortgaged
because defendant Anduiza refused to approve, authorize or recognize said deposit made
by plaintiff. It is further averred, as special defense, that the amount of P16,425.17, in view of
the refusal of defendant Jesus de Anduiza to approve and authorize same for payment of his
loan, was declared null and void by Executive Order No. 49 of June 6, 1945; that on June 4,
1948, defendant Anduiza personally came to the office of the Rehabilitation Finance
Corporation, apprising it that he did not authorize the plaintiff to pay for his loan with the
Agricultural and Industrial Bank; and that on June 4, 1948, he paid the sum of P2,000.00 on
account of his loan and interest in arrears. Defendant Agricultural and Industrial Bank (now
R. F. C.) therefore prayed (1) to dismiss the complaint and to declare plaintiff's deposit in the
sum of P16,245.17 null and void in accordance with the provisions of Executive Order No. 49
series of 1945; (2) to concede to defendant Agricultural and Industrial Bank such other legal
remedies which may be justified in the premises; and (3) to order plaintiff to pay the costs.

Defendant Jesus de Anduiza filed his answer on August 9, 1948, with special defenses and
counterclaim, alleging that when plaintiff paid the total amount of P16,425.17 to the
Agricultural and Industrial Bank his indebtedness thereto was not yet due and demandable;
that the payment was made without his knowledge and consent; that the Agricultural and
Industrial Bank did not accept the amount of P16,425.17 from Estelito Madrid as payment of
his loan but as mere deposit to be applied later as payment in the event he would approve
the same; that said deposit was declared null and void by Executive Order No. 49 of June 6,
1945; that on June 4, 1948, he personally informed the official of the Rehabilitation Finance
Corporation that he did not authorize the plaintiff to pay the Agricultural and Industrial Bank
for his loan; and the same date he paid the corporation the sum of P2,000.00 on account of
his loan and the interest in arrears.

On June 20, 1949, the trial court rendered in favor of the plaintiff a judgment which was set
aside later on upon motion of counsel for the Rehabilitation Finance Corporation on June
28th, in which it was alleged that his failure to appear at the hearing on June 9, 1949, was
due to a misunderstanding. Consequently, and later defendant corporation had introduced its
evidence, the court on August 11, 1949, rendered decision dismissing plaintiff's complaint
without pronouncement as to costs.

On or about September 7, 1949, defendant Jesus de Anduiza filed an amended answer

which the trial court, upon considering the same as well as his co-defendant's opposition
thereto, denied its admission on September 20, 1949. The motion for new trial filed by
 defendant Anduiza and plaintiff Estelito Madrid was likewise denied for lack of merit on the
same date, September 20th. Consequently, plaintiff Estelito Madrid and defendant Jesus de
Anduiza brought this case to this Court by way of appeal, ... . (Pp. 1-6, Decision, C. A.)

Upon the foregoing facts, the Court of Appeals rendered the aforementioned decision, the
dispositive part of which reads as follows:

Wherefore, the judgment appealed from is hereby reversed, directing the Rehabilitation
Finance Corporation, successor in interest of the Agricultural and Industrial Bank, to cancel
the mortgage executed by Jesus de Anduiza and Quintana Cano in favor of said bank; and
ordering Jesus de Anduiza to pay plaintiff Estelito Madrid the amount of P16,425.17, without
pronouncement as to costs. (Pp. 17-18, idem.)

The Bank assails said decision of the Court of Appeals upon the ground that payments by
respondent Estelito Madrid had been made against the express will of Anduiza and over the
objection of the Bank; that the latter accepted said payments, subject to the condition that a written
instrument, signed by Anduiza, authorizing the same, would be submitted by Madrid, who has not
done so; that the payments in question were made by Madrid in the name of Anduiza and, therefore,
through misrepresentation and without good faith; that said payments were not beneficial to Anduiza;
and that the obligation in question was not fully due and demandable at the time of the payments
aforementioned.

At the outset, it should be noted that the makers of the promissory note quoted above promised to
pay the obligation evidenced thereby "on or before October 31, 1951." Although the full amount of
said obligation was not demandable prior to October 31, 1951, in view of the provision of the note
relative to the payment in ten (10) annual installments, it is clear, therefore, that the makers or
debtors were entitled to make a complete settlement of the obligation at any time before said date.

With reference to the other arguments of petitioner herein, Article 1158 of the Civil Code of Spain,
which was in force in the Philippines at the time of the payment under consideration and of the
institution of the present case (July 3, 1948,) reads:

Payment maybe made by any person, whether he has an interest in the performance of the
obligation or not, and whether the payment is known and approved by the debtor or whether
he is unaware of it.

One who makes a payment for the account of another may recover from the debtor the
amount of the payment, unless it was made against his express will.

In the latter case he can recover from the debtor only in so far as the payment has been
beneficial to him.

It is clear therefrom that respondent Madrid was entitled to pay the obligation of Anduiza irrespective
of the latter's will or that of the Bank, and even over the objection of either or both. Commencing on
said Article 1158, Manresa says:

Si es amplio el principio declarado en el art. 1158 por razonde las personas o que exteinde,
no lo es menos por la ausencia de restricciones basadas en la voluntad del deudor. La
primera parte de dicho articulo parece limitar la posibilidad del pago por untercero a los
casos en que el deudor conozca y aprueba tal hecho olo ignore. Pero los dos parrafos
siguentes extienden tal posibilidadal caso en que el deudor desapruebe el pago y aun se
oponga a que lo verifiquen, puesto que determinado la ley los efectos, si bien parciales,
 limitados, que un pago hecho en tales condiciones puede producir contra el mismo
deudor que a el se opuso, es claro que al atribuirle tales efectos le atribuye plena eficacia
respecto del acreedo, que no esta autorizado para hacer oposicion alguna.

Menos duda aun puede ofrecer la validez del pago, conociendolo el deudor y omitiendo
expresar su conformidad; hipotesis menos extrema que la anterior, y en la cual puede verse
incluso una aprobacion tacita, aprobacion que autoriza, inclusa la subrogacion misma del
tercero, segun veremos al hablar de la novacion.

Tenemos, por tanto, que sea cual fuere la situacion en que este o se coloque el deudor
respecto del pago hecho por un tercero, no impide a este verificarlo con eficacia respecto
del acreedor, y aun tambienrespecto de aquel mismo, segun se expresa luego.

La jurisprudencia, confirmado el sentido de la ley, ha venido a declarar tambien que no es

necesario para el pago el concurso deldeudor; asi vienen a establecerlo la sentencia de 4 de
Noviembre de 1897, que ratifica los preceptos contenidos en el art. 1158 y en el siguiente, y
la de 5 de Abril de 1913, declarativa de que, siendo el pago de una deuda el medio mas
directo de extinguir la obligacion, acto que mejora la situacion del prestatario, puede
realizarlo cualquiera aun contradiciendolo o ignorandolo aquel. En la jurisprudencia
hipotecaria hay una resolucion de la Direccion general de losRegistros de 22 de Marso de
1893, muy explicita e importante, en la cual se declara respecto de esta cuestion que puede
'el pago es un actojuridico tan independiente del deudor, que puede ser firme y valedero
hecho por tercera persona que no tenga interes en la obligacion, y aun cuando el deudor lo
ignore totalmente, segun el art. 1158 del Codigo Civil; que "de ese principio legal se deduce
que no cabe reputar nulo el pago de una obligacion porque falte el consentimiento del
deudor, ni menos estimar nula la escritura en que el pago conste, por carecer de ni la firma
de este"; que en ese modo de extinguirse las obligaciones, lo verdaderamente capital es la
voluntad del acreedor, y asi lo ha entendido el articulo 82 de la Ley Hipotecaria, al no exigir
para la cancelacion de las hipotecas mas que el consentimiento de aquel en cuyo favor se
hallen constituidas; y por ultimo, que "aunque el art. 27 de la Ley del Notariado exige bajo
pena de nulidad que se firmen la escrituras, se refiere a los que en ellas intervien en
encalidad de otorgantes, denominacion que en los actos unilaterales cuadra tan solo al que
en virtud de los mismos queda obligado".

No ha sido menos explicita y fundala la jurisprudencia en cuanto a declarar que tampoco el

acreedor puede impedir validamente elpago hecho por un tercero, declarandose en la
sentencia de 4 de Noviembre de 1897, a que antes de hizo referencia, que ni estos
preceptos que comentamos, ni los demas de esta seccion o de otros lugares del Codigo",
aplicables a la materia, "ni el art. 1161 de la Ley Procesal, requiren el consentimiento del
acreedor para la eficacia del pago y para la consiguiente subrogacion, porque de derecho,
que nova mas alla del cumplimiento de la obligaciones, se acoba o extingue con el pago.
Pudiera creerse que la doctrina de dicha sentencia era opuesta a la de la Direccion, que
antes hemos transcrito, y que esta reconocia la facultad del acreedor para consentir o
impedir el pago; pero lejos de ser asi no hay contradiccion, limitandose dicho Centro registro
no pueden considerarse extinguidos los derechos del acreedor sin que este intervenga en el
pago; pero esto no incluyo que se le pueda imponer la admision de este contra su voluntad.
(8 Manresa,4th ed., pp. 242-243; Emphasis supplied.)

This is in line with the view of Mucius Scaevola, which is as follows:

En efecto; el unico derecho del acreedor en las obligaciones es el de que se le pague. No

puede, por lo tanto, oponerse a que la obligacion le sea cumplida por una persona distinta
 del deudor. Por otra parte, el deudor queda libre de su compromiso desde el momento en
que el credito esta satisfecho, puesto que, a partir de entonces, nada se debe. Podran,
pues, discutirse los efectos del pago hecho por una tercera persona en cuanto a la relacion
que de esto se deduzca para lo sucesivo entre el tercero y el deudor; pero negar que al
deuda quede liberada, desatado el vinculado, perdida en el acreedor la facultad de reclamar
e insubsistente sobre el deudor el peso de su compromiso, seria de todo punto temerario.

Lo presumible es que tenga interes en el cumplimiento de la obligacion quien trata de

sustituirse al deudor en el pago; es natural la defensa de los intereses propios, y poco
corriente y poco acostumbrado que, por pura generosidad, se satisfaga la deuda de otro
sinalgun beneficio por parte del que de esta manera procede. En este sentido, el fiador, que
es, si no un deudor principal, deudor al fin, puesto que ha enlazado sus intereses, con su
cuenta y razon, a los de la persona obligada, y se ha comprometido subsidiriamente con ella
a; pago de lo que debia, se adelantara muchas veces, por distintos motivos, a pagar la
deuda, teniendo en ello propio y legitimo beneficio. Aparte del interes juridico, motivos
particulares de otro orden, que implican un genero cualquiera de provecho, pueden mover
tambien el animo de una persona para sustituirse en el lugar del deudor.

Pero ni siquiera se necesita que esto suceda. Las doctrinas juridicas han permitido que haga
el pago cualquiera persona, tenga o no interes en el cumplimiento de la obligacion, segun
expresamentedetermina el art. 1158 del Codigo. Es de suponer el interes, naturalmente, por
lo que decimos mas arriba; pero la ley se reconoce sin facultades para entrar en este
terreno, y obedeciendo a las meras consideraciones juridicas de la satisfaccion del
compromiso por la entrega de la cosa o prestacion del hecho y de la liberacion
consiguientedel deudor, prescinde del genero de motivos interesados o desinteresados,
incluso de mera liberalidad, que hayan polido producir la determinacion de la tercer persona
que ofrece al acreedor la realizacion del compromiso.

Y no para en esto; sino que el mismo art. 1158 establece que podra hacer el pago
cualquiera persona, ya lo conozca o lo apruebe, ya lo ignore el deudor. Anticipandose,
ademas, a la pregunta de loque sucedera en el caso de que en deudor lo conozca y no lo
apruebe, aade a continuacion que el que pague por cuenta de otro podra reclamar del
deudor lo que hubiese pagado, a no haberlo hecho contra su expresa voluntad. Es lo que se
decia en la ya citada Ley dePartidas: "aunque el deudor lo supiese y lo contradijese".

Ahora bien; en algun caso de estos, podra acreedor negarse a recibar la deuda? Ya hemos
dicho que no. Su derecho se reduce en todo caso a pedir y a recibir lo que se le debe. Es
indiferente para el la cualidad de la persona que llega a su presencia, poniendo en sus
manos el hecho o la cosa que son debidas. Habra ocasiones en que, por motivos de endole
particular, el acreedor se sienta contrariado en recibir la prestacion de un tercero. El
prestamista, por ejemplo, que crea haberse asegurado el disfructe perpetuo de las rentas de
su deudor, se vera amargamente sorprendido con el pago hecho por un tercero, que da al
traste de esta manera en un segundo con las risueas esperanzas de toda la vida. Motivos
de este orden, y tambien otras veces algunos mas elevados, impulsaran al acreedor a
resistir el pago de lo que se debe. Sin embargo, el derecho no ha podido tomar en cuenta
ninguna de tales consideraciones, con las que se iria en definitiva contra el principio de
haber de aceptarse todo aquello que resulte favorable para el deudor. Por lo tanto, en caso
de resistencia, el tercero que ofrece el pago tendra derecho a consignar la cosa debida
como si fuese al deudor mismo, dando a la consignacion cuantos efectos le estan asignados
por la ley. (19 Scaevola, pp. 881-883; emphasis supplied.)

The opinion of Sanchez Roman is couched in the following language:

 Los terceros extraos a la obligacion pueden pagar, ignorandolo el deudor, sabiendolo y no
contraciendolo osabiendolo y contradiciendolo. En el primer caso existe una gestion de
negocios; en el segundo, un mandato tacito; y en el tercero, se produce una cesion de
crediton. . . . .

xxx xxx xxx

En el caso de pago hecho por un tercero, el acreedor no puede negarse a recibirlo, y

cualquiera le contituira en la responsibilidad de la mora accipiendi. Cierto que esta no es
regla expresa de ley ni de jurisprudencia, pero es buena doctrina de Derecho cientifico,
generalizada entre los escritores, y de la cual dice Goyena, con razon: "La ley no puede
permitir que el acreedor se obstinemaliciosamente en conservar la facultad de atormenter a
su deudor, que un hijo no pueda extinguir la obligacion de su padre, ni este la de su hijo a su
amigo, o un hombre beneficio la de un desgraciado ausente. Y no se diga que el tercero no
tiene mas que entregar el dinero al deudor para que haga directamente el pago; pues en el
caso de ausencia esto es imposible, y en otras ocasiones la delicadeza frustraria las miras
del hombre bienhechor. (4 Sanchez Roman, 259-260; Emphasis supplied.)

It may not be amiss to add that, contrary to petitioner's pretense, the payments in question were not
made against the objection either of Anduiza or of the Bank. And although, later on, the former
questioned the validity of the payments, subsequently, he impliedly, but clearly, acquiesced therein,
for he joined Madrid in his appeal from the decision of the Court of First Instance of Manila, referred
to above. Similarly, the receipts issued by the Bank acknowledging said payments without
qualification, belie its alleged objection thereto. The Bank merely demanded a signed statement of
Anduiza sanctioning said payments, as a condition precedent, not to its acceptance, which had
already been made, but to the execution of the deed of cancellation of the mortgage constituted in
favor of said institution.

Needless to say, this condition was null and void, for, as pointed out above, the Bank, as creditor,
had no other right than to exact payment, after which the obligation in question, as regards said
creditor, and, hence, the latter's status and rights as such, become automatically extinguished.

Two other consequences flow from the foregoing, namely:

(1) The good or bad faith of the payor is immaterial to the issue before us. Besides, the exercise of a
right, vested by law without any qualification, can hardly be legally considered as tainted with bad
faith. Again, according to Sanchez Roman "para que el pago hecho por el tercero extinga la
obligacion, es preciso que se realice a nombre del deudor". (4 Sanchez Roman, 260.) Accordingly,
the circumstance that payment by Madrid had been effected in the name of Anduiza, upon which the
Bank relies in support of its aforesaid allegation of bad faith, does not prove the existence of the
latter.

(2) The Bank can not invoke the provision that the payor "may only recover from the debtor insofar
as the payment has been beneficial to him," when made against his express will. This is a defense
that may be availed of by the debtor, not by the Bank, for it affects solely the rights of the former. At
any rate, in order that the rights of the payor may be subject to said limitation, the debtor must
oppose the payments before or at the time the same were made, not subsequently thereto.

Entendemos como evidente, que los preceptos del art. 1158 que comentamos, y las
distintas hipotesis que establece, giran sobre la base de que la oposicion del deudor al pago
ha de monstrarse con anterioridad a la realization de este pues de ser aquella posterior, no
cabe estimar verdadera y eficaz opocision de buena fe, ya que en el caso de que antes
 hubiera conocido el proyecto de pago, habria en su silencio una aprobacion tacita que
autorizaria incluso la subrogacion del tercero, y si lo habia ignorado antes de realizarse, se
estaria en la situacion distinta prevista y regulada en los dos primeros parrafos del articulo
1158 y en el 1159. (8 Manresa, 4th ed., pp. 248-249.)

Indeed, it is only fair that the effects of said payments be determined at the time it was made, and
that the rights then acquired by the payor be not dependent upon, or subject to modification by,
subsequent unilateral acts or omissions of the debtor. At any rate, the theory that Anduiza had not
been benefited by the payments in question is predicated solely upon his original refusal to
acknowledge the validity of said payments. Obviously, however, the question whether the same
were beneficial or not to Anduiza, depends upon the law, not upon his will. Moreover, his former
animosity towards Madrid sufficed to negate the beneficial effects of the payment under
consideration, the subsequent change of front of Anduiza, would constitute an admission and proof
of said beneficial effects.

Being in conformity with law, the decision appealed from is hereby affirmed, therefore, in toto.

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

SECOND DIVISION

[G.R. No. 138842. October 18, 2000]

NATIVIDAD P. NAZARENO, MAXIMINO P. NAZARENO,

JR., petitioners, vs. COURT OF APPEALS, ESTATE OF
MAXIMINO A. NAZARENO, SR., ROMEO P. NAZARENO and
ELIZA NAZARENO, respondents.

DECISION
MENDOZA, J.:

This is a petition for review on certiorari of the decision [1] of the Court of Appeals in
CA-GR CV No. 39441 dated May 29, 1998 affirming with modifications the decision of
the Regional Trial Court, Branch 107, Quezon City, in an action for annulment of sale
and damages.
The facts are as follows:
Maximino Nazareno, Sr. and Aurea Poblete were husband and wife. Aurea died on
April 15, 1970, while Maximino, Sr. died on December 18, 1980. They had five children,
namely, Natividad, Romeo, Jose, Pacifico, and Maximino, Jr. Natividad and Maximino,
Jr. are the petitioners in this case, while the estate of Maximino, Sr., Romeo, and his
wife Eliza Nazareno are the respondents.
 During their marriage, Maximino Nazareno, Sr. and Aurea Poblete acquired
properties in Quezon City and in the Province of Cavite. It is the ownership of some of
these properties that is in question in this case.
It appears that after the death of Maximino, Sr., Romeo filed an intestate case in the
Court of First Instance of Cavite, Branch XV, where the case was docketed as Sp. Proc.
No. NC-28. Upon the reorganization of the courts in 1983, the case was transferred to
the Regional Trial Court of Naic, Cavite. Romeo was appointed administrator of his
fathers estate.
In the course of the intestate proceedings, Romeo discovered that his parents had
executed several deeds of sale conveying a number of real properties in favor of his
sister, Natividad. One of the deeds involved six lots in Quezon City which were allegedly
sold by Maximino, Sr., with the consent of Aurea, to Natividad on January 29, 1970 for
the total amount of P47,800.00. The Deed of Absolute Sale reads as follows:

DEED OF ABSOLUTE SALE

KNOW ALL MEN BY THESE PRESENTS:

I, MAXIMINO A. NAZARENO, Filipino, married to Aurea Poblete-Nazareno, of

legal age and a resident of the Mun. of Naic, Prov. of Cavite, Philippines,

-WITNESSETH-

That I am the absolute registered owner of six (6) parcels of land with the
improvements thereon situated in Quezon City, Philippines, which parcels of land are
herewith described and bounded as follows, to wit:

TRANS. CERT. OF TITLE NO. 140946

A parcel of land (Lot 3-B of the subdivision plan Psd-47404, being a portion of Lot 3,
Block D-3 described on plan Bsd-10642, G.L.R.O. Record No.) situated in the
Quirino District, Quezon City.Bounded on the N., along line 1-2 by Lot 15, Block D-3
of plan Bsd - 10642; along line 2-3 by Lot 4, Block D-3 of plan Bsd-10642; along line
3-4 by Aurora Boulevard (Road Lot-1, Bsd-10642); and along line 4-1 by Lot 3-D of
the subdivision plan. Beginning at a point marked 1 on plan, being S.29 deg. 26E.,
1156.22 m. from B.L.L.M. 9, Quezon City,

thence N. 79 deg. 53E., 12.50 m. to point 2;

thence S. 10 deg. 07E., 40.00 m. to point 3;

thence S. 79 deg. 53W., 12.50 m. to point 4;

thence N. 10 deg. 07W., 40.00 m. to the point

of beginning; containing an area of FIVE HUNDRED (500) SQUARE METERS. All

points referred to are indicated on the plan and are marked on the ground as
follows: points 1 and 4 by P.L.S. Cyl. Conc. Mons. bearings true; date of the original
survey, April 8-July 15, 1920 and that of the subdivision survey, March 25, 1956.

TRANS. CERT. OF TITLE NO. 132019

A parcel of land (Lot 3, Block 93 of the subdivision plan Psd-57970 being a portion of
Lot 6, Pcs-4786, G.L.R.O. Rec. No. 917) situated in Quirino District Quezon
City. Bounded on the NW., along line 1-2, by Lot 1, Block 93; on the NE., along line
2-3, by Road Lot 101; on the SE., along line 3-4, by Road Lot 100; on the SW., along
line 4-1, by Lot 4, Block 93; all of the subdivision plan.Beginning at point marked 1
on plan, being S. 65 deg. 40 3339.92 m. from B.L.L.M. No. 1, Marikina, Rizal;

thence N. 23 deg. 28 min. E., 11.70 m. to point 2;

thence S. 66 deg. 32 min. E., 18.00 m. to point 3;

thence S. 23 deg. 28 min. W., 11.70 m. to point 4;

thence N. 66 deg. 32. min. W., 18.00 m. to the point

of beginning; containing an area of TWO HUNDRED TEN SQUARE METERS

AND SIXTY SQUARE DECIMETERS (210.60). All points referred to are indicated
on the plan and are marked on the ground by B.L. Cyl. Conc. Mons. 15 x 60 cm.;
bearings true; date of the original survey, Nov. 10, 1920 and Jan. 31-March 31, 1924
and that of the subdivision survey, February 1 to September 30, 1954. Date approved -
March 9, 1962.

TRANS. CERT. OF TITLE NO. 118885

A parcel of land (Lot No. 10, of the consolidation and subdivision plan Pcs-988, being
a portion of the consolidated Lot No. 26, Block No. 6, Psd-127, and Lots Nos. 27-A
and 27-B, Psd-14901, G.L.R.O.Record No. 917), situated in the District of Cubao,
Quezon City, Island of Luzon. Bounded on the NE., by Lot No. 4 of the consolidation
and subdivision plan; on the SE., by Lot No. 11 of the consolidation and subdivision
plan; on the SW., by Lot No. 3 of the consolidation and subdivision plan; and on the
NW., by Lot No. 9 of the consolidation and subdivision plan. Beginning at a point
marked 1 on the plan, being S. 7 deg. 26W., 4269.90 m. more or less from B.L.L.M.
No. 1, Mp. of Mariquina;
thence S. 25 deg. 00E., 12.00 m. to point 2;

thence S. 64 deg. 59W., 29.99 m. to point 3;

thence N. 25 deg. 00W., 12.00 m to point 4;

thence N. 64 deg. 59E., 29.99 m. to the point of

beginning; containing an area of THREE HUNDRED SIXTY SQUARE METERS

(360), more or less. All points referred to are indicated on the plan and on the ground
are marked by P.L.S. Conc. Mons. 15 x 60 cm.; bearings true; declination 0 deg. 50E.,
date of the original survey, April 8 to July 15, 1920, and that of the consolidation and
subdivision survey, April 24 to 26, 1941.

TRANS. CERT. OF TITLE NO. 118886

A parcel of land (Lot No. 11, of the consolidation and subdivision plan Pcs-988, being
a portion of the consolidated Lot No. 26, Block No. 6, Psd-127, and Lots Nos. 27-A
and 27-B, Psd-14901, G.L.R.O. Record No. 917), situated in the District of Cubao,
Quezon City, Island of Luzon. Bounded on the NE., by Lot No. 4 of the consolidation
and subdivision plan; on the SE., by Lot No. 12 of the consolidation and subdivision
plan; on the SW., by Lot No. 3 of the consolidation and subdivision plan; on the NW.,
by Lot No. 10 of the consolidation and subdivision plan. Beginning at a point marked
1 on plan, being S. 79 deg. 07W., 4264.00 m. more or less from B.L.L.M. No. 1, Mp.
of Mariquina;

thence S. 64 deg. 59W., 29.99 m. to point 2;

thence N. 25 deg. 00W., 12.00 m. to point 3;

thence N. 64 deg. 59E., 29.99 m. to point 4;

thence S. 26 deg. 00E., 12.00 m. to the point of

beginning; containing an area of THREE HUNDRED SIXTY SQUARE METERS

(360), more or less. All points referred to are indicated on the plan and on the ground,
are marked by P.L.S. Conc. Mons. 15 x 60 cm.; bearings true; declination 0 deg. 50E.;
date of the original survey, April 8 to July 15, 1920, and that of the consolidation and
subdivision survey, April 24 to 26, 1941.

A parcel of land (Lot No. 13 of the consolidation and subdivision plan Pcs-988, being
a portion of the consolidated Lot No. 26, Block No. 6, Psd-127, and Lots Nos. 27-A
and 27-B, Psd-14901, G.L.R.O.Record No. 917), situated in the District of Cubao,
Quezon City, Island of Luzon. Bounded on the NE., by Lot No. 4 of the consolidation
and subdivision plan; on the SE., by Lot No. 14, of the consolidation; and subdivision
plan; on the SW., by Lot No. 3 of the consolidation and subdivision plan; and on the
NW., by Lot No. 12, of the consolidation and subdivision plan. Beginning at the point
marked 1 on plan, being S.78 deg. 48W., 4258.20 m. more or less from B.L.L.M. No.
1, Mp. of Mariquina;

thence S. 64 deg. 58W., 30.00 m. to point 2;

thence N. 25 deg. 00W., 12.00 m. to point 3;

thence N. 64 deg. 59E., 29.99 m. to point 4;

thence S.25 deg. 00E., 12.00 m. to point of

beginning; containing an area of THREE HUNDRED SIXTY SQUARE METERS

(360, more or less.All points referred to are indicated on the plan and on the ground
are marked by P.L.S. Conc. Mons. 15 x 60 cm.; bearings true; declination 0 deg. 50E.,
date of the original survey, April 8 to July 15, 1920, and that of the consolidation and
subdivision survey, April 24 to 26, 1941.

A parcel of land (Lot No. 14, of the consolidation and subdivision plan Pcs-988, being
a portion of the consolidated Lot No. 26, Block No. 6, Psd-127, and Lots Nos. 27-A
and 27-B, Psd-14901, G.L.R.O. Record No. 917), situated in the District of Cubao,
Quezon City, Island of Luzon. Bounded on the NE., by Lot No. 4 of the consolidation
and subdivision plan; on the SE., by Lot No. 15, of the consolidation and subdivision
plan; on the SW., by Lot No. 3 of the consolidation and subdivision plan; and on the
NW., by Lot No. 13 of the consolidation and subdivision plan. Beginning at the point
marked 1 on plan, being S.78 deg. 48W., 4258.20 m. more or less from B.L.L.M. No.
1, Mp. of Mariquina;

thence S. 25 deg. 00E., 12.00 m. to point 2;

thence S. 65 deg. 00W., 30.00 m. to point 3;

thence S. 65 deg. 00W., 12.00 m. to point 4;

thence N.64 deg. 58E., 30.00 m. to the point of

beginning; containing an area of THREE HUNDRED SIXTY SQUARE METERS

(360), more or less. All points referred to are indicated on the plan and on the ground
are marked by P.L.S. Conc. Mons. 15 x 60 cm.; bearings true; declination 0 deg. 50E.,
date of the original survey, April 8 to July 15, 1920, and that of the consolidation and
subdivision survey, April 24 to 26, 1941.

That for and in consideration of the sum of FORTY THREE THOUSAND PESOS
(P43,000.00) PHILIPPINE CURRENCY, to me in hand paid by NATIVIDAD P.
NAZARENO, Filipino, single, of legal age and a resident of the Mun. of Naic, Prov.
of Cavite, Philippines, the receipt whereof is acknowledged to my entire satisfaction, I
do hereby CEDE, SELL, TRANSFER, CONVEY and ASSIGN unto the said
Natividad P. Nazareno, her heirs, administrators and assigns, all my title, rights,
interests and participations to the abovedescribed parcels of land with the
improvements thereon, with the exception of LOT NO. 11 COVERED BY T.C.T.
NO. 118886, free of any and all liens and encumbrances; and

That for and in consideration of the sum of FOUR THOUSAND EIGHT HUNDRED
PESOS (P4,800.00) PHILIPPINE CURRENCY, to me in hand paid by NATIVIDAD
P. NAZARENO, Filipino, single, of legal age and a resident of the Mun. of Naic,
Prov. of Cavite, Philippines, the receipt whereof is acknowledged to my entire
satisfaction, I do hereby CEDE, SELL, TRANSFER, CONVEY and ASSIGN unto
the said Natividad P. Nazareno, her heirs, administrators and assigns, all my title,
rights, interests and participations in and to Lot No. 11 covered by T.C.T. No. 118886
above-described, free of any and all liens and encumbrances, with the understanding
that the title to be issued in relation hereto shall be separate and distinct from the title
to be issued in connection with Lots Nos. 13 and 14, although covered by the same
title.

IN WITNESS WHEREOF, I have hereunto signed this deed of absolute sale in the
City of Manila, Philippines, this 29th day of January, 1970.[2]

By virtue of this deed, transfer certificates of title were issued to Natividad, to wit:
TCT No. 162738 (Lot 3-B),[3] TCT No. 162739 (Lot 3),[4] TCT No. 162735 (Lot 10),[5] TCT
No. 162736 (Lot 11),[6] and TCT No. 162737 (Lots 13 and 14),[7] all of the Register of
Deeds of Quezon City.
Among the lots covered by the above Deed of Sale is Lot 3-B which is registered
under TCT No. 140946. This lot had been occupied by Romeo, his wife Eliza, and by
Maximino, Jr. since 1969. Unknown to Romeo, Natividad sold Lot 3-B on July 31, 1982
to Maximino, Jr.,[8]for which reason the latter was issued TCT No. 293701 by the
Register of Deeds of Quezon City.[9]
When Romeo found out about the sale to Maximino, Jr., he and his wife
Eliza lockedMaximino, Jr. out of the house. On August 4, 1983, Maximino, Jr. brought
an action forrecovery of possession and damages with prayer for writs of preliminary
injunction and mandatory injunction with the Regional Trial Court of Quezon City. On
December 12, 1986, the trial court ruled in favor of Maximino, Jr. In CA-G.R. CV No.
12932, the Court of Appeals affirmed the decision of the trial court.[10]
On June 15, 1988, Romeo in turn filed, on behalf of the estate of Maximino, Sr., the
present case for annulment of sale with damages against Natividad and Maximino,
Jr. The case was filed in the Regional Trial Court of Quezon City, where it was docketed
as Civil Case No. 88-58.[11] Romeo sought the declaration of nullity of the sale made on
January 29, 1970 to Natividad and that made on July 31, 1982 to Maximino, Jr. on the
ground that both sales were void for lack of consideration.
On March 1, 1990, Natividad and Maximino, Jr. filed a third-party complaint against
the spouses Romeo and Eliza.[12] They alleged that Lot 3, which was included in the
Deed of Absolute Sale of January 29, 1970 to Natividad, had been surreptitiously
appropriated by Romeo by securing for himself a new title (TCT No. 277968) in his
name.[13] They alleged that Lot 3 is being leased by the spouses Romeo and Eliza to
third persons. They therefore sought the annulment of the transfer to Romeo and the
cancellation of his title, the eviction of Romeo and his wife Eliza and all persons
claiming rights from Lot 3, and the payment of damages.
The issues having been joined, the case was set for trial. Romeo presented
evidence to show that Maximino and Aurea Nazareno never intended to sell the six lots
to Natividad and that Natividad was only to hold the said lots in trust for her siblings. He
presented the Deed of Partition and Distribution dated June 28, 1962 executed by
Maximino Sr. and Aurea and duly signed by all of their children, except Jose, who was
then abroad and was represented by their mother, Aurea. By virtue of this deed, the
nine lots subject of this Deed of Partition were assigned by raffle as follows:
1. Romeo - Lot 25-L (642 m2)
2. Natividad - Lots 23 (312 m2) and 24 (379 m2)
3. Maximino, Jr. - Lots 6 (338 m2) and 7 (338 m2)
4. Pacifico - Lots 13 (360 m2) and 14 (360 m2)
5. Jose - Lots 10 (360 m2) and 11 (360 m2)
Romeo received the title to Lot 25-L under his name,[14] while Maximino, Jr. received
Lots 6 and 7 through a Deed of Sale dated August 16, 1966 for the amount
of P9,500.00.[15]Pacifico and Joses shares were allegedly given to Natividad, who
agreed to give Lots 10 and 11 to Jose, in the event the latter came back from
abroad. Natividads share, on the other hand, was sold to third persons[16] because she
allegedly did not like the location of the two lots. But, Romeo said, the money realized
from the sale was given to Natividad.
Romeo also testified that Lot 3-B was bought for him by his father, while Lot 3 was
sold to him for P7,000.00 by his parents on July 4, 1969. [17] However, he admitted that a
document was executed by his parents transferring six properties in Quezon
City, i.e., Lots 3, 3-B, 10, 11, 13, and 14, to Natividad.
Romeo further testified that, although the deeds of sale executed by his parents in
their favor stated that the sale was for a consideration, they never really paid any
amount for the supposed sale. The transfer was made in this manner in order to avoid
the payment of inheritance taxes.[18] Romeo denied stealing Lot 3 from his sister but
instead claimed that the title to said lot was given to him by Natividad in 1981 after their
father died.
Natividad and Maximino, Jr. claimed that the Deed of Partition and Distribution
executed in 1962 was not really carried out. Instead, in December of 1969, their parents
offered to sell to them the six lots in Quezon City, i.e., Lots 3, 3-B, 10, 11, 13 and
14. However, it was only Natividad who bought the six properties because she was the
only one financially able to do so. Natividad said she sold Lots 13 and 14 to Ros-Alva
Marketing Corp.[19] and Lot 3-B to Maximino, Jr. for P175,000.00.[20] Natividad admitted
that Romeo and the latters wife were occupying Lot 3-B at that time and that she did not
tell the latter about the sale she had made to Maximino, Jr.
Natividad said that she had the title to Lot 3 but it somehow got lost. She could not
get an original copy of the said title because the records of the Registrar of Deeds had
been destroyed by fire. She claimed she was surprised to learn that Romeo was able to
obtain a title to Lot 3 in his name.
Natividad insisted that she paid the amount stated in the Deed of Absolute Sale
dated January 29, 1970. She alleged that their parents had sold these properties to their
children instead of merely giving the same to them in order to impose on them the value
of hardwork.
Natividad accused Romeo of filing this case to harass her after Romeo lost in the
action for recovery of possession (Civil Case No. Q-39018) which had been brought
against him by Maximino, Jr. It appears that before the case filed by Romeo could be
decided, the Court of Appeals rendered a decision in CA-GR CV No. 12932 affirming
the trial courts decision in favor of Maximino, Jr.
On August 10, 1992, the trial court rendered a decision, the dispositive portion of
which states:

WHEREFORE, judgment is hereby rendered declaring the nullity of the Deed of Sale
dated January 29, 1970. Except as to Lots 3, 3-B, 13 and 14 which had passed on to
third persons, the defendant Natividad shall hold the rest in trust for Jose Nazareno to
whom the same had been adjudicated. The Register of Deeds of Quezon City is
directed to annotate this judgment on Transfer Certificate of Titles Nos. 162735 and
162736 as a lien in the titles of Natividad P. Nazareno.

The defendants counterclaim is dismissed. Likewise, the third-party complaint is

dismissed.

The defendants are hereby directed to pay to the plaintiff jointly and severally the sum
of P30,000 as and for attorneys fees. Likewise, the third-party plaintiff is directed to
pay the third-party defendants attorneys fees of P20,000.

All other claims by one party against the other are dismissed.
SO ORDERED.[21]

Natividad and Maximino, Jr. filed a motion for reconsideration. As a result, on

October 14, 1992 the trial court modified its decision as follows:

WHEREFORE, the plaintiffs Partial Motion for Reconsideration is hereby

granted. The judgment dated August 10, 1992 is hereby amended, such that the first
paragraph of its dispositive portion is correspondingly modified to read as follows:

WHEREFORE, judgment is hereby rendered declaring the nullity of the Deeds of

Sale dated January 29, 1970 and July 31, 1982.

Except as to Lots 3, 13 and 14 which had passed on to third person, the defendant
Natividad shall hold the rest OF THE PROPERTIES COVERED BY THE DEED OF
SALE DATED JANUARY 29, 1970 (LOTS 10 and 11) in trust for Jose Nazareno to
whom the same had been adjudicated.

The Register of Deeds of Quezon City is directed to annotate this judgment on

Transfer Certificates of Title No. 162735 and 162736 as a lien on the titles of
Natividad P. Nazareno.

LIKEWISE, THE SAID REGISTER OF DEEDS IS DIRECTED TO CANCEL TCT

NO. 293701 (formerly 162705) OVER LOT 3-B AND RESTORE TCT NO. 140946
IN THE NAME OF MAXIMINO NAZARENO SR. AND AUREA POBLETE.[22]

On appeal to the Court of Appeals, the decision of the trial court was modified in the
sense that titles to Lot 3 (in the name of Romeo Nazareno) and Lot 3-B (in the name of
Maximino Nazareno, Jr.), as well as to Lots 10 and 11 were cancelled and ordered
restored to the estate of Maximino Nazareno, Sr. The dispositive portion of the decision
dated May 29, 1998 reads:

WHEREFORE, the appeal is GRANTED. The decision and the order in question are
modified as follows:

1. The Deed of Absolute Sale dated 29 January 1970 and the Deed of Absolute Sale
dated 31 July 1982 are hereby declared null and void;

2. Except as to Lots 13 and 14 ownership of which has passed on to third persons, it is

hereby declared that Lots 3, 3-B, 10 and 11 shall form part of the estate of the
deceased Maximino Nazareno, Sr.;
3. The Register of Deeds of Quezon City is hereby ordered to restore TCT No.
140946 (covering Lot 3-B), TCT No. 132019 (covering Lot 3), TCT No. 118885
(covering Lot 10), and TCT No. 118886 (covering Lot 11).[23]

Petitioners filed a motion for reconsideration but it was denied in a resolution dated
May 27, 1999. Hence this petition.
Petitioners raise the following issues:
1. WHETHER OR NOT THE UNCORROBORATED TESTIMONY OF PRIVATE
RESPONDENT ROMEO P. NAZARENO CAN DESTROY THE FULL FAITH AND
CREDIT ACCORDED TO NOTARIZED DOCUMENTS LIKE THE DEED OF
ABSOLUTE SALE DATED JANUARY 29, 1970 (EXH. 1) EXECUTED BY THE
DECEASED SPOUSES MAXIMINO A. NAZARENO, SR. AND AUREA POBLETE
IN FAVOR OF PETITIONER NATIVIDAD P. NAZARENO.
2. WHETHER OR NOT THE RESPONDENT COURT GROSSLY MISAPPRECIATED
THE FACTS OF THE CASE WITH RESPECT TO THE VALIDITY OF THE SAID
DEED OF ABSOLUTE SALE DATED JANUARY 29, 1970 (EXH. 1) IN THE LIGHT
OF THE FOLLOWING:
A) THE DOCUMENTARY EVIDENCE, ALL OF WHICH ARE NOTARIZED,
EXECUTED BY THE DECEASED SPOUSES DURING THEIR LIFETIME
INVOLVING SOME OF THEIR CONJUGAL PROPERTIES.
B) THE EXECUTION OF AN EXTRA-JUDICIAL PARTITION WITH WAIVER OF
RIGHTS AND CONFIRMATION OF SALE DATED MAY 24, 1975 (EXH. 14A) OF
THE ESTATE OF AUREA POBLETE BY THE DECEASED MAXIMINO A.
NAZARENO, SR. AND THEIR CHILDREN INVOLVING THE ONLY REMAINING
ESTATE OF AUREA POBLETE THUS IMPLIEDLY ADMITTING THE VALIDITY
OF PREVIOUS DISPOSITIONS MADE BY SAID DECEASED SPOUSES ON
THEIR CONJUGAL PROPERTIES, HALF OF WHICH WOULD HAVE BECOME
A PART OF AUREA POBLETES ESTATE UPON HER DEMISE.
C) THE ADMISSION MADE BY MAXIMINO A. NAZARENO, SR. IN HIS
TESTIMONY IN OPEN COURT ON AUGUST 13, 1980 DURING HIS LIFETIME
IN CIVIL CASE NO. NC-712 (EXH. 81, 81B) THAT HE HAD SOLD CERTAIN
PROPERTIES IN FAVOR OF NATIVIDAD P. NAZARENO THUS BELYING THE
CLAIM OF ROMEO P. NAZARENO THAT THE DEED OF ABSOLUTE SALE
DATED JANUARY 29, 1970 IS ONE AMONG THE DOCUMENTS EXECUTED
BY THE DECEASED SPOUSES TO BE WITHOUT CONSIDERATION.
D) THE ADMISSIONS MADE BY ROMEO P. NAZARENO HIMSELF CONTAINED
IN A FINAL DECISION OF THE RESPONDENT COURT IN CA-GR CV NO.
12932 DATED AUGUST 31, 1992 AND AN ANNEX APPEARING IN HIS
ANSWER TO THE COMPLAINT IN CIVIL CASE NO. Q-39018 (EXH. 11-B)
INVOLVING LOT 3B, ONE OF THE PROPERTIES IN QUESTION THAT THE
SAID PROPERTY IS OWNED BY PETITIONER NATIVIDAD P. NAZARENO.
E) THE PARTIAL PROJECT OF PARTITION DATED MAY 24, 1995 WHICH WAS
APPROVED BY THE INTESTATE COURT IN SP. PROC. NO. NC-28 AND
EXECUTED IN ACCORDANCE WITH THE LATTER COURTS FINAL ORDER
 DATED JULY 9, 1991 DETERMINING WHICH WERE THE REMAINING
PROPERTIES OF THE ESTATE.
3. WHETHER OR NOT THE DEED OF ABSOLUTE SALE DATED JANUARY 29, 1970
EXECUTED BY THE DECEASED SPOUSES MAXIMINO A. NAZARENO, SR. AND
AUREA POBLETE DURING THEIR LIFETIME INVOLVING THEIR CONJUGAL
PROPERTIES IS AN INDIVISIBLE CONTRACT? AND IF SO WHETHER OR NOT
UPON THEIR DEATH, THE ESTATE OF MAXIMINO A. NAZARENO, SR. ALONE
CAN SEEK THE ANNULMENT OF SAID SALE?
4. WHETHER OR NOT THE SALE OF LOT 3 UNDER THE DEED OF ABSOLUTE
SALE DATED JANUARY 29, 1970 IN FAVOR OF PETITIONER NATIVIDAD P.
NAZARENO, IS VALID CONSIDERING THAT AS PER THE ORDER OF THE
LOWER COURT DATED NOVEMBER 21, 1990. ROMEO NAZARENO ADMITTED
THAT HE DID NOT PAY THE CONSIDERATION STATED IN THE DEED OF
ABSOLUTE SALE DATED JULY 4, 1969 EXECUTED BY THE DECEASED
SPOUSES IN HIS FAVOR (EXH. M-2).
5. WHETHER OR NOT AS A CONSEQUENCE, THE TITLE ISSUED IN THE NAME
OF ROMEO P. NAZARENO, TCT NO. 277968 (EXH. M) SHOULD BE
CANCELLED AND DECLARED NULL AND VOID AND A NEW ONE ISSUED IN
FAVOR OF NATIVIDAD P. NAZARENO PURSUANT TO THE DEED OF
ABSOLUTE SALE EXECUTED IN THE LATTERS FAVOR ON JANUARY 29, 1970
BY THE DECEASED SPOUSES.[24]
We find the petition to be without merit.
First. Petitioners argue that the lone testimony of Romeo is insufficient to overcome
the presumption of validity accorded to a notarized document.
To begin with, the findings of fact of the Court of Appeals are conclusive on the
parties and carry even more weight when these coincide with the factual findings of the
trial court.This Court will not weigh the evidence all over again unless there is a showing
that the findings of the lower court are totally devoid of support or are clearly erroneous
so as to constitute serious abuse of discretion.[25] The lone testimony of a witness, if
credible, is sufficient. In this case, the testimony of Romeo that no consideration was
ever paid for the sale of the six lots to Natividad was found to be credible both by the
trial court and by the Court of Appeals and it has not been successfully rebutted by
petitioners. We, therefore, have no reason to overturn the findings by the two courts
giving credence to his testimony.
The fact that the deed of sale was notarized is not a guarantee of the validity of its
contents. As held in Suntay v. Court of Appeals:[26]

Though the notarization of the deed of sale in question vests in its favor the
presumption of regularity, it is not the intention nor the function of the notary public
to validate and make binding an instrument never, in the first place, intended to have
any binding legal effect upon the parties thereto. The intention of the parties still and
always is the primary consideration in determining the true nature of a contract.
 Second. Petitioners make capital of the fact that in C.A.-G.R. CV No. 12932, which
was declared final by this Court in G.R. No. 107684, the Court of Appeals upheld the
right of Maximino, Jr. to recover possession of Lot 3-B. In that case, the Court of
Appeals held:

As shown in the preceding disquisition, Natividad P. Nazareno acquired the property

in dispute by purchase in 1970. She was issued Transfer Certificate of Title No.
162738 of the Registry of Deeds of Quezon City. When her parents died, her mother
Aurea Poblete-Nazareno in 1970 and her father Maximino A. Nazareno, Sr. in 1980,
Natividad P. Nazareno had long been the exclusive owner of the property in
question. There was no way therefore that the aforesaid property could belong to the
estate of the spouses Maximino Nazareno, Sr. and Aurea Poblete. The mere fact that
Romeo P. Nazareno included the same property in an inventory of the properties of
the deceased Maximino A. Nazareno, Sr. will not adversely affect the ownership of
the said realty. Appellant Romeo P. Nazarenos suspicion that his parents had entrusted
all their assets under the care and in the name of Natividad P. Nazareno, their eldest
living sister who was still single, to be divided upon their demise to all the
compulsory heirs, has not progressed beyond mere speculation. His barefaced
allegation on the point not only is without any corroboration but is even belied by
documentary evidence. The deed of absolute sale (Exhibit B), being a public
document (Rule 132, Secs. 19 and 23, Revised Rules on Evidence), is entitled to great
weight; to contradict the same, there must be evidence that is clear, convincing and
more than merely preponderant (Yturralde vs. Aganon, 28 SCRA 407; Favor vs.
Court of Appeals, 194 SCRA 308). Defendants-appellants own conduct disproves
their claim of co-ownership over the property in question. Being themselves the
owner of a ten-unit apartment building along Stanford St., Cubao Quezon City,
defendants-appellants, in a letter of demand to vacate addressed to their tenants
(Exhibits P, P-1 and P-2) in said apartment, admitted that the house and lot located at
No. 979 Aurora Blvd., Quezon City where they were residing did not belong to
them. Also, when they applied for a permit to repair the subject property in 1977, they
stated that the property belonged to and was registered in the name of Natividad P.
Nazareno. Among the documents submitted to support their application for a building
permit was a copy of TCT No. 162738 of the Registry of Deeds of Quezon City in the
name of Natividad Nazareno (Exhibit O and submarkings; tsn March 15, 1985, pp. 4-
5).[27]

To be sure, that case was for recovery of possession based on ownership of Lot 3-
B.The parties in that case were Maximino, Jr., as plaintiff, and the spouses Romeo and
Eliza, as defendants. On the other hand, the parties in the present case for annulment
of sale are the estate of Maximino, Sr., as plaintiff, and Natividad and Maximino, Jr., as
defendants. Romeo and Eliza were named third-party defendants after a third-party
complaint was filed by Natividad and Maximino, Jr. As already stated, however, this
third-party complaint concerned Lot 3, and not Lot 3-B.
 The estate of a deceased person is a juridical entity that has a personality of its
own.[28]Though Romeo represented at one time the estate of Maximino, Sr., the latter
has a separate and distinct personality from the former. Hence, the judgment in CA-GR
CV No. 12932 regarding the ownership of Maximino, Jr. over Lot 3-B binds Romeo and
Eliza only, and not the estate of Maximino, Sr., which also has a right to recover
properties which were wrongfully disposed.
Furthermore, Natividads title was clearly not an issue in the first case. In other
words, the title to the other five lots subject of the present deed of sale was not in issue
in that case. If the first case resolved anything, it was the ownership of Maximino, Jr.
over Lot 3-B alone.
Third. Petitioners allege that, as shown by several deeds of sale executed by
Maximino, Sr. and Aurea during their lifetime, the intention to dispose of their real
properties is clear.Consequently, they argue that the Deed of Sale of January 29, 1970
should also be deemed valid.
This is a non-sequitur. The fact that other properties had allegedly been sold by the
spouses Maximino, Sr. and Aurea does not necessarily show that the Deed of Sale
made on January 29, 1970 is valid.
Romeo does not dispute that their parents had executed deeds of sale. The
question, however, is whether these sales were made for a consideration. The trial court
and the Court of Appeals found that the Nazareno spouses transferred their properties
to their children by fictitious sales in order to avoid the payment of inheritance taxes.
Indeed, it was found both by the trial court and by the Court of Appeals that
Natividad had no means to pay for the six lots subject of the Deed of Sale.

All these convince the Court that Natividad had no means to pay for all the lots she
purportedly purchased from her parents. What is more, Romeos admission that he did
not pay for the transfer to him of lots 3 and 25-L despite the considerations stated in
the deed of sale is a declaration against interest and must ring with resounding
truth. The question is, why should Natividad be treated any differently, i.e., with
consideration for the sale to her, when she is admittedly the closest to her parents and
the one staying with them and managing their affairs? It just seems without
reason. Anyway, the Court is convinced that the questioned Deed of Sale dated
January 29, 1970 (Exh. A or 1) is simulated for lack of consideration, and therefore
ineffective and void.[29]

In affirming this ruling, the Court of Appeals said:

Facts and circumstances indicate badges of a simulated sale which make the Deed of
Absolute Sale dated 29 January 1970 void and of no effect. In the case of Suntay vs.
Court of Appeals (251 SCRA 430 [1995]), the Supreme Court held that badges of
simulation make a deed of sale null and void since parties thereto enter into a
transaction to which they did not intend to be legally bound.
It appears that it was the practice in the Nazareno family to make simulated transfers
of ownership of real properties to their children in order to avoid the payment of
inheritance taxes. Per the testimony of Romeo, he acquired Lot 25-L from his parents
through a fictitious or simulated sale wherein no consideration was paid by him. He
even truthfully admitted that the sale of Lot 3 to him on 04 July 1969 (Deed of
Absolute Sale, Records, Vol. II, p. 453) likewise had no consideration. This document
was signed by the spouses Max, Sr. and Aurea as vendors while defendant-appellant
Natividad signed as witness.[30]

Fourth. Petitioners argue further:

The Deed of Absolute Sale dated January 29, 1970 is an indivisible contract founded
on an indivisible obligation. As such, it being indivisible, it can not be annulled by
only one of them. And since this suit was filed only by the estate of Maximino A.
Nazareno, Sr. without including the estate of Aurea Poblete, the present suit must
fail. The estate of Maximino A. Nazareno, Sr. can not cause its annulment while its
validity is sustained by the estate of Aurea Poblete.[31]

An obligation is indivisible when it cannot be validly performed in parts, whatever

may be the nature of the thing which is the object thereof. The indivisibility refers to the
prestation and not to the object thereof.[32] In the present case, the Deed of Sale of
January 29, 1970 supposedly conveyed the six lots to Natividad. The obligation is
clearly indivisible because the performance of the contract cannot be done in parts,
otherwise the value of what is transferred is diminished. Petitioners are therefore
mistaken in basing the indivisibility of a contract on the number of obligors.
In any case, if petitioners only point is that the estate of Maximino, Sr. alone cannot
contest the validity of the Deed of Sale because the estate of Aurea has not yet been
settled, the argument would nonetheless be without merit. The validity of the contract
can be questioned by anyone affected by it.[33] A void contract is inexistent from the
beginning. Hence, even if the estate of Maximino, Sr. alone contests the validity of the
sale, the outcome of the suit will bind the estate of Aurea as if no sale took place at all.
Fifth. As to the third-party complaint concerning Lot 3, we find that this has been
passed upon by the trial court and the Court of Appeals. As Romeo admitted, no
consideration was paid by him to his parents for the Deed of Sale. Therefore, the sale
was void for having been simulated. Natividad never acquired ownership over the
property because the Deed of Sale in her favor is also void for being without
consideration and title to Lot 3 cannot be issued in her name.
Nonetheless, it cannot be denied that Maximino, Sr. intended to give the six Quezon
City lots to Natividad. As Romeo testified, their parents executed the Deed of Sale in
favor of Natividad because the latter was the only female and the only unmarried
member of the family.[34] She was thus entrusted with the real properties in behalf of her
siblings. As she herself admitted, she intended to convey Lots 10 and 11 to Jose in the
event the latter returned from abroad. There was thus an implied trust constituted in her
favor. Art. 1449 of the Civil Code states:

There is also an implied trust when a donation is made to a person but it appears that
although the legal estate is transmitted to the donee, he nevertheless is either to have
no beneficial interest or only a part thereof.

There being an implied trust, the lots in question are therefore subject to collation in
accordance with Art. 1061 which states:

Every compulsory heir, who succeeds with other compulsory heirs, must bring into
the mass of the estate any property or right which he may have received from the
decedent, during the lifetime of the latter, by way of donation, or any other gratuitous
title, in order that it may be computed in the determination of the legitime of each
heir, and in the account of the partition.

As held by the trial court, the sale of Lots 13 and 14 to Ros-Alva Marketing, Corp.
on April 20, 1979[35] will have to be upheld for Ros-Alva Marketing is an innocent
purchaser for value which relied on the title of Natividad. The rule is settled that every
person dealing with registered land may safely rely on the correctness of the certificate
of title issued therefor and the law will in no way oblige him to go behind the certificate
to determine the condition of the property.[36]
WHEREFORE, the decision of the Court of Appeals is AFFIRMED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 163898 December 23, 2008

ROBERTO BARBASA, petitioner,

vs.
HON. ARTEMIO G. TUQUERO, in his capacity as Secretary of the Department of Justice,
GRACE GUARIN, NESTOR SANGALANG, VICTOR CALLUENG, respondents.

DECISION

QUISUMBING, J.:

Petitioner assails the Decision1 dated July 29, 2003 and the Resolution2 dated May 21, 2004 of the
Court of Appeals in CA-G.R. SP No. 62610, which dismissed his petition for certiorari and denied his
motion for reconsideration, respectively. The appellate court had found no reason to reverse the
Resolution3 of the Secretary of Justice ordering the City Prosecutor of Manila to move for the
dismissal of Criminal Case No. 336630 against private respondents.

Petitioner avers that he is the president of Push-Thru Marketing, Inc., which leases commercial stalls
CS-PL 05, 19 and 30 in Tutuban Center, owned by Tutuban Properties, Inc., (TPI). On June 30,
1999, Angelina Hipolito, merchandising officer of Push-Thru Marketing, received a notice of
disconnection of utilities from private respondent Grace Guarin, the Credit and Collection Manager of
TPI, for failure of Push-Thru Marketing to settle its outstanding obligations for Common Usage and
Service Area (CUSA) charges, utilities, electricity and rentals.

Petitioner settled the charges for CUSA, utilities and electricity, which payment was accepted by
private respondent Guarin, but petitioner failed to pay the back rentals. Thus, on July 1, 1999,
private respondents Guarin, Nestor Sangalang, engineering manager of TPI, and Victor Callueng,
TPI head of security, together with several armed guards, disconnected the electricity in the stalls
occupied by Push-Thru Marketing.

Aggrieved, petitioner filed a criminal complaint for Grave Coercion against TPI and its officers, David
Go, Robert Castanares, Buddy Mariano, Art Brondial, and herein private respondents before the
Office of the City Prosecutor of Manila.4 The complaint dated July 13, 1999 alleged that TPI and its
officers cut off the electricity in petitioners stalls "in a violent and intimidating manner"5 and by
unnecessarily employing "several armed guards to intimidate and frighten"6 petitioner and his
employees and agents.

The respondents in the criminal complaint filed separate counter-affidavits7 which presented a
common defense: that the July 1, 1999 cutting off of electrical supply was done peacefully; that it
was an act performed in the lawful performance of their assigned duties, and in accordance with the
covenants set forth in the written agreements previously executed between petitioner and TPI; that
petitioner was not present when the alleged acts were committed; and that petitioner had
outstanding accumulated unpaid rentals, CUSA billings, electrical and water bills, unpaid interest
and penalty charges (from June 1998 to May 1999) in the amount of P267,513.39 for all his rented
stalls, as reflected in three Interest-Penalty Reports8 duly sent to him. Petitioner was likewise given
demand letter-notices in writing at least three times wherein it was stated that if he did not settle his
arrears in full, electricity would be cut.9 Of the total amount due from him, petitioner paid
only P127,272.18 after receipt of the third notice. Accordingly, private respondents proceeded with
the power cut-off, but only after sending a "Notice of Disconnection of Utilities"10 to petitioners stalls
informing him of the impending act.

Private respondents also pointed out that aside from the above arrears, petitioner has outstanding
accountabilities with respect to "Priority Premium Fees" in the amount of P5,907,013.10.11

They likewise stressed that their Agreement12 with petitioner contains the following stipulations:

CONTRACT OF LEASE
Prime Block Cluster Stall

xxxx

PRIORITY PREMIUM : P *2,367,750.00

xxxx
RENT PER MONTH : P *******378.00 per sq. m (Plus P*******37.80 10% VAT)

xxxx

OTHER FEES AND EXPENSES CHARGEABLE

TO THE LESSEE:

xxxx

B. COMMON USAGE AND SERVICE AREA (CUSA) CHARGES

Minimum rate of P190.00/sq. m./mo. to cover expenses stipulated in Section 6 hereof,

subject to periodic review and adjustment to reflect actual expenses.

C. INDIVIDUAL UTILITIES
ELECTRIC CONSUMPTION : metered + reasonable service

(meter to be provided by the LESSOR, for the account

of the LESSEE)

OTHER SERVICES : metered and/or reasonable

service charge

xxxx

7. PAYMENTS

xxxx

In cases where payments made by the LESSEE for any given month is not sufficient
to cover all outstanding obligations for said period, the order of priority in the
application of the payments made is as follows:

a. Penalties

b. Interests

c. Insurance

d. CUSA Charges

e. Rent

f. Priority Premium

xxxx

21. PENALTY CLAUSE

 xxxx

It is also expressly agreed that in case the LESSEE fails to pay at any time the
installments on the priority premium, lease rentals or CUSA and utility charges
corresponding to a total of three (3) months, even if not consecutively incurred, the
LESSOR is hereby granted the option to cut off power and other utility services to the
LESSEE until full payment of said charges, expenses, penalty and interest is made,
without prejudice to any other remedies provided under this Contract, including the
termination of this Contract.

x x x x (Emphasis supplied.)

Petitioner filed his Reply Affidavit,13 claiming that Go, Castanares, Mariano, Brondial, Guarin and
Sangalang, while not personally present at the scene at the time, were to be held liable as the
authors of the criminal design since they were the ones who ordered the cutting off of petitioners
electricity. Petitioner admitted that none of the armed personnel drew his gun, much more aimed or
fired it, but insisted that he was unduly prevented from using electricity to the detriment of his
business and his person. He claimed that the officers of TPI were unable to show the amount and
extent of his unpaid bills; that as to the electric bills, the same were paid; and that there was an
ongoing negotiation with respect to the matter of rentals and for reformation of the lease
agreements.14

The Office of the City Prosecutor of Manila, through Prosecutor Venus D. Marzan, dismissed the
complaint against David Go, Roberto Castanares, Buddy Mariano and Art Brondial but found
probable cause against private respondents Grace Guarin, Nestor Sangalang and Victor Callueng.
On January 13, 2000, an Information15 for grave coercion was filed in court, but proceedings therein
were deferred when the private respondents filed an appeal to the Secretary of Justice.

On August 23, 2000, the Secretary of Justice reversed the City Prosecutors Resolution, as follows:

WHEREFORE, the assailed resolution is hereby REVERSED and SET ASIDE. The City
Prosecutor is directed to move, with leave of court, for the dismissal of Criminal Case No.
336630 of the Metropolitan Trial Court of Manila and to report the action taken within ten (10)
days from receipt hereof.

SO ORDERED.16

His motion for reconsideration having been denied, petitioner assailed the Resolution of the
Secretary of Justice before the Court of Appeals through a petition for certiorari, which was,
however, dismissed by the appellate court for lack of merit. The appellate court likewise denied his
motion for reconsideration. Hence this petition.

Petitioner raises the sole issue of whether private respondents act of disconnecting the supply of
electricity to petitioners stalls and the manner by which it was carried out constitute grave coercion.

After carefully considering petitioners appeal, we are in agreement to deny it for utter lack of merit.

The crime of grave coercion has three elements: (a) that a person is prevented by another from
doing something not prohibited by law, or compelled to do something against his or her will, be it
right or wrong; (b) that the prevention or compulsion is effected by violence, either by material force
or such a display of it as would produce intimidation and, consequently, control over the will of the
offended party; and (c) that the person who restrains the will and liberty of another has no right to do
so; in other words, that the restraint is not made under authority of law or in the exercise of any
lawful right.17

Petitioners appeal gives us no sufficient reason to deviate from what has already been found by the
Secretary of Justice and the Court of Appeals.

The records show that there was no violence, force or the display of it as would produce intimidation
upon petitioners employees when the cutting off of petitioners electricity was effected. On the
contrary, it was done peacefully and after written notice to petitioner was sent. We do not subscribe
to petitioners claim that the presence of armed guards were calculated to intimidate him or his
employees. Rather, we are more inclined to believe that the guards were there to prevent any
untoward or violent event from occurring in the exercise of TPIs rights under the lease agreements.
If the respondents desired a violent result, they would have gone there unannounced or cut
petitioners electricity through less desirable and conspicuous means.

It is likewise clear from the penalty clause in the Contracts of Lease entered into by the parties that
TPI is given the option to cut off power and other utility services in petitioners stalls in case
petitioner fails to pay at any time the installments on the priority premium, lease rentals or CUSA and
utility charges corresponding to a total of three months until full payment of said charges, expenses,
penalty and interest is made.18 The stipulation under said clause is clear; there is no ambiguity in
what is stated. There could be no grave coercion in the private respondents act of exercising in
behalf of TPI a right afforded to TPI under the solemn and unequivocal covenants of a contract to
which petitioner had agreed and which he did execute and sign.

As held by this Court in a previous case which we find instructive:

Contracts constitute the law between the parties. They must be read together and interpreted
in a manner that reconciles and gives life to all of them. The intent of the parties, as shown
by the clear language used, prevails over post facto explanations that find no support from
the words employed by the parties or from their contemporary and subsequent acts showing
their understanding of such contracts.19

We could not see how the Office of the City Prosecutor of Manila, through Prosecutor Venus D.
Marzan, could have made a finding of probable cause to file a criminal case for grave coercion
against private respondents, in light of the evidence then and now prevailing, which will show that
there was a mutual agreement, in a contract of lease, that provided for the cutting off of electricity as
an acceptable penalty for failure to abide faithfully with what has been covenanted. Although the
propriety of its exercise may be the subject of controversy, mere resort to it may not so readily
expose the lessor TPI to a charge of grave coercion. Considering that petitioner owed TPI the total
amount of more than P5 million, which was undisputed, we find that the resort to the penalty clause
under the lease agreements was justified. As held in Pryce Corporation v. Philippine Amusement
and Gaming Corporation:

A penal clause is "an accessory obligation which the parties attach to a principal
obligation for the purpose of insuring the performance thereof by imposing on the
debtor a special prestation (generally consisting in the payment of a sum of money) in
case the obligation is not fulfilled or is irregularly or inadequately fulfilled."

Quite common in lease contracts, this clause functions to strengthen the coercive
force of the obligation and to provide, in effect, for what could be the liquidated damages
resulting from a breach. There is nothing immoral or illegal in such indemnity/penalty clause,
 absent any showing that it was forced upon or fraudulently foisted on the
obligor.20 (Emphasis supplied.)

In this connection, counsels must be reminded that equally important, as their duty to clients, is their
duty as officers of the court to see to it that the orderly administration of justice is not unduly
impeded or delayed. Counsel needs to advise a client, ordinarily a layman unaccustomed to the
intricacies and vagaries of the law, concerning the objective merit of his case. If counsel finds that
his clients cause lacks merit, then it is his bounden duty to advise accordingly. Indeed a lawyers
oath to uphold the cause of justice may supersede his duty to his clients cause; for such fealty to
ethical concerns is indispensable to the success of the rule of law.21

WHEREFORE, the instant petition is DENIED. The Decision dated July 29, 2003 and the Resolution
dated May 21, 2004 of the Court of Appeals in CA-G.R. SP No. 62610 are hereby AFFIRMED.
Costs against petitioner.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 73345. April 7, 1993.

SOCIAL SECURITY SYSTEM, petitioner,

vs.
MOONWALK DEVELOPMENT & HOUSING CORPORATION, ROSITA U. ALBERTO, ROSITA U.
ALBERTO, JMA HOUSE, INC., MILAGROS SANCHEZ SANTIAGO, in her capacity as Register of
Deeds for the Province of Cavite, ARTURO SOLITO, in his capacity as Register of Deeds for Metro
Manila District IV, Makati, Metro Manila and the INTERMEDIATE APPELLATE COURT,
respondents.

The Solicitor General for petitioner.

K.V. Faylona & Associates for private respondents.

DECISION

CAMPOS, JR., J p:

Before Us is a petition for review on certiorari of decision 1 of the then Intermediate Appellate Court
affirming in toto the decision of the former Court of First Instance of Rizal, Seventh Judicial District,
Branch XXIX, Pasay City.

The facts as found by the Appellate Court are as follows:

"On February 20, 1980, the Social Security System, SSS for brevity, filed a complaint in the Court of
First Instance of Rizal against Moonwalk Development & Housing Corporation, Moonwalk for short,
alleging that the former had committed an error in failing to compute the 12% interest due on
delayed payments on the loan of Moonwalk resulting in a chain of errors in the application of
payments made by Moonwalk and, in an unpaid balance on the principal loan agreement in the
amount of P7,053.77 and, also in not reflecting in its statement or account an unpaid balance on the
said penalties for delayed payments in the amount of P7,517,178.21 as of October 10, 1979.

Moonwalk answered denying SSS' claims and asserting that SSS had the opportunity to ascertain
the truth but failed to do so.

The trial court set the case for pre-trial at which pre-trial conference, the court issued an order giving
both parties thirty (30) days within which to submit a stipulation of facts.

The Order of October 6, 1980 dismissing the complaint followed the submission by the parties on
September 19, 1980 of the following stipulation of Facts:

"1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for an interim loan
in the amount of THIRTY MILLION PESOS (P30,000,000.00) for the purpose of developing and
constructing a housing project in the provinces of Rizal and Cavite;

"2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum of
P9,595,000.00 was released to defendant Moonwalk as of November 28, 1973;

"3. A third Amended Deed of First Mortgage was executed on December 18, 1973 Annex `D'
providing for restructuring of the payment of the released amount of P9,595,000.00.

"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter respectively, under
paragraph 5 of the aforesaid Third Amended Deed of First Mortgage substituted Associated
Construction and Surveys Corporation, Philippine Model Homes Development Corporation, Mariano
Z. Velarde and Eusebio T. Ramos, as solidary obligors;

"5. On July 23, 1974, after considering additional releases in the amount of P2,659,700.00, made to
defendant Moonwalk, defendant Moonwalk delivered to the plaintiff a promissory note for TWELVE
MILLION TWO HUNDRED FIFTY FOUR THOUSAND SEVEN HUNDRED PESOS
(P12,254,700.00) Annex `E', signed by Eusebio T. Ramos, and the said Rosita U. Alberto and Rosita
U. Alberto;

"6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal of
P12,254,700.00 released to it. The last payment made by Moonwalk in the amount of
P15,004,905.74 were based on the Statement of Account, Annex "F" prepared by plaintiff SSS for
defendant;

"7. After settlement of the account stated in Annex 'F' plaintiff issued to defendant Moonwalk the
Release of Mortgage for Moonwalk's mortgaged properties in Cavite and Rizal, Annexes 'G' and 'H'
on October 9, 1979 and October 11, 1979 respectively.

"8. In letters to defendant Moonwalk, dated November 28, 1979 and followed up by another letter
dated December 17, 1979, plaintiff alleged that it committed an honest mistake in releasing
defendant.
"9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had completely paid
its obligations to SSS;

"10. The genuineness and due execution of the documents marked as Annex (sic) 'A' to 'O'
inclusive, of the Complaint and the letter dated December 21, 1979 of the defendant's counsel to the
plaintiff are admitted.

"Manila for Pasay City, September 2, 1980." 2

On October 6, 1990, the trial court issued an order dismissing the complaint on the ground that the
obligation was already extinguished by the payment by Moonwalk of its indebtedness to SSS and by
the latter's act of cancelling the real estate mortgages executed in its favor by defendant Moonwalk.
The Motion for Reconsideration filed by SSS with the trial court was likewise dismissed by the latter.

These orders were appealed to the Intermediate Appellate Court. Respondent Court reduced the
errors assigned by the SSS into this issue: ". . . are defendants-appellees, namely, Moonwalk
Development and Housing Corporation, Rosita U. Alberto, Rosita U. Alberto, JMA House, Inc. still
liable for the unpaid penalties as claimed by plaintiff-appellant or is their obligation extinguished?" 3
As We have stated earlier, the respondent Court held that Moonwalk's obligation was extinguished
and affirmed the trial court.

Hence, this Petition wherein SSS raises the following grounds for review:

"First, in concluding that the penalties due from Moonwalk are "deemed waived and/or barred," the
appellate court disregarded the basic tenet that waiver of a right must be express, made in a clear
and unequivocal manner. There is no evidence in the case at bar to show that SSS made a clear,
positive waiver of the penalties, made with full knowledge of the circumstances.

Second, it misconstrued the ruling that SSS funds are trust funds, and SSS, being a mere trustee,
cannot perform acts affecting the same, including condonation of penalties, that would diminish
property rights of the owners and beneficiaries thereof. (United Christian Missionary Society v.
Social Security Commission, 30 SCRA 982, 988 [1969]).

Third, it ignored the fact that penalty at the rate of 12% p.a. is not inequitable.

Fourth, it ignored the principle that equity will cancel a release on the ground of mistake of fact." 4

The same problem which confronted the respondent court is presented before Us: Is the penalty
demandable even after the extinguishment of the principal obligation?

The former Intermediate Appellate Court, through Justice Eduard P. Caguioa, held in the negative. It
reasoned, thus:

"2. As we have explained under No. 1, contrary to what the plaintiff-appellant states in its Brief, what
is sought to be recovered in this case is not the 12% interest on the loan but the 12% penalty for
failure to pay on time the amortization. What is sought to be enforced therefore is the penal clause of
the contract entered into between the parties.

Now, what is a penal clause. A penal clause has been defined as

"an accessory obligation which the parties attach to a principal obligation for the purpose of insuring
the performance thereof by imposing on the debtor a special presentation (generally consisting in
the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or inadequately
fulfilled" (3 Castan 8th Ed. p. 118).

Now an accessory obligation has been defined as that attached to a principal obligation in order to
complete the same or take its place in the case of breach (4 Puig Pea Part 1 p. 76). Note therefore
that an accessory obligation is dependent for its existence on the existence of a principal obligation.
A principal obligation may exist without an accessory obligation but an accessory obligation cannot
exist without a principal obligation. For example, the contract of mortgage is an accessory obligation
to enforce the performance of the main obligation of indebtedness. An indebtedness can exist
without the mortgage but a mortgage cannot exist without the indebtedness, which is the principal
obligation. In the present case, the principal obligation is the loan between the parties. The
accessory obligation of a penal clause is to enforce the main obligation of payment of the loan. If
therefore the principal obligation does not exist the penalty being accessory cannot exist.

Now then when is the penalty demandable? A penalty is demandable in case of non performance or
late performance of the main obligation. In other words in order that the penalty may arise there
must be a breach of the obligation either by total or partial non fulfillment or there is non fulfillment in
point of time which is called mora or delay. The debtor therefore violates the obligation in point of
time if there is mora or delay. Now, there is no mora or delay unless there is a demand. It is
noteworthy that in the present case during all the period when the principal obligation was still
subsisting, although there were late amortizations there was no demand made by the creditor,
plaintiff-appellant for the payment of the penalty. Therefore up to the time of the letter of plaintiff-
appellant there was no demand for the payment of the penalty, hence the debtor was no in mora in
the payment of the penalty.

However, on October 1, 1979, plaintiff-appellant issued its statement of account (Exhibit F) showing
the total obligation of Moonwalk as P15,004,905.74, and forthwith demanded payment from
defendant-appellee. Because of the demand for payment, Moonwalk made several payments on
September 29, October 9 and 19, 1979 respectively, all in all totalling P15,004,905.74 which was a
complete payment of its obligation as stated in Exhibit F. Because of this payment the obligation of
Moonwalk was considered extinguished, and pursuant to said extinguishment, the real estate
mortgages given by Moonwalk were released on October 9, 1979 and October 10, 1979 (Exhibits G
and H). For all purposes therefore the principal obligation of defendant-appellee was deemed
extinguished as well as the accessory obligation of real estate mortgage; and that is the reason for
the release of all the Real Estate Mortgages on October 9 and 10, 1979 respectively.

Now, besides the Real Estate Mortgages, the penal clause which is also an accessory obligation
must also be deemed extinguished considering that the principal obligation was considered
extinguished, and the penal clause being an accessory obligation. That being the case, the demand
for payment of the penal clause made by plaintiff-appellant in its demand letter dated November 28,
1979 and its follow up letter dated December 17, 1979 (which parenthetically are the only demands
for payment of the penalties) are therefore ineffective as there was nothing to demand. It would be
otherwise, if the demand for the payment of the penalty was made prior to the extinguishment of the
obligation because then the obligation of Moonwalk would consist of: 1) the principal obligation 2)
the interest of 12% on the principal obligation and 3) the penalty of 12% for late payment for after
demand, Moonwalk would be in mora and therefore liable for the penalty.

Let it be emphasized that at the time of the demand made in the letters of November 28, 1979 and
December 17, 1979 as far as the penalty is concerned, the defendant-appellee was not in default
since there was no mora prior to the demand. That being the case, therefore, the demand made
after the extinguishment of the principal obligation which carried with it the extinguishment of the
penal clause being merely an accessory obligation, was an exercise in futility.

3. At the time of the payment made of the full obligation on October 10, 1979 together with the 12%
interest by defendant-appellee Moonwalk, its obligation was extinguished. It being extinguished,
there was no more need for the penal clause. Now, it is to be noted that penalty at anytime can be
modified by the Court. Even substantial performance under Art. 1234 authorizes the Court to
consider it as complete performance minus damages. Now, Art, 1229 Civil Code of the Philippines
provides:

"ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or unconscionable."

If the penalty can be reduced after the principal obligation has been partly or irregularly complied
with by the debtor, which is nonetheless a breach of the obligation, with more reason the penal
clause is not demandable when full obligation has been complied with since in that case there is no
breach of the obligation. In the present case, there has been as yet no demand for payment of the
penalty at the time of the extinguishment of the obligation, hence there was likewise an
extinguishment of the penalty.

Let Us emphasize that the obligation of defendant-appellee was fully complied with by the debtor,
that is, the amount loaned together with the 12% interest has been fully paid by the appellee. That
being so, there is no basis for demanding the penal clause since the obligation has been
extinguished. Here there has been a waiver of the penal clause as it was not demanded before the
full obligation was fully paid and extinguished. Again, emphasis must be made on the fact that
plaintiff-appellant has not lost anything under the contract since in got back in full the amount loan
(sic) as well as the interest thereof. The same thing would have happened if the obligation was paid
on time, for then the penal clause, under the terms of the contract would not apply. Payment of the
penalty does not mean gain or loss of plaintiff-appellant since it is merely for the purpose of
enforcing the performance of the main obligation has been fully complied with and extinguished, the
penal clause has lost its raison d' entre." 5

We find no reason to depart from the appellate court's decision. We, however, advance the following
reasons for the denial of this petition.

Article 1226 of the Civil Code provides:

"Art. 1226. In obligations with a penal clause, he penalty shall substitute the indemnity for damages
and the payment of interests in case of noncompliance, if there is no stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in
the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this
Code." (Emphasis Ours.)

A penal clause is an accessory undertaking to assume greater liability in case of breach. 6 It has a
double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the
obligation by the threat of greater responsibility in the event of breach. 7 From the foregoing, it is
clear that a penal clause is intended to prevent the obligor from defaulting in the performance of his
obligation. Thus, if there should be default, the penalty may be enforced. One commentator of the
Civil Code wrote:
"Now when is the penalty deemed demandable in accordance with the provisions of the Civil Code?
We must make a distinction between a positive and a negative obligation. With regard to obligations
which are positive (to give and to do), the penalty is demandable when the debtor is in mora; hence,
the necessity of demand by the debtor unless the same is excused . . ." 8

When does delay arise? Under the Civil Code, delay begins from the time the obligee judicially or
extrajudicially demands from the obligor the performance of the obligation.

"Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation."

There are only three instances when demand is not necessary to render the obligor in default. These
are the following:

"(1) When the obligation or the law expressly so declares;

(2) When from the nature and the circumstances of the obligation it appears that the designation of
the time when the thing is to be delivered or the service is to be rendered was a controlling motive
for the establishment of the contract; or

(3) When the demand would be useless, as when the obligor has rendered it beyond his power to
perform." 9

This case does not fall within any of the established exceptions. Hence, despite the provision in the
promissory note that "(a)ll amortization payments shall be made every first five (5) days of the
calendar month until the principal and interest on the loan or any portion thereof actually released
has been fully paid," 10 petitioner is not excused from making a demand. It has been established
that at the time of payment of the full obligation, private respondent Moonwalk has long been
delinquent in meeting its monthly arrears and in paying the full amount of the loan itself as the
obligation matured sometime in January, 1977. But mere delinquency in payment does not
necessarily mean delay in the legal concept. To be in default ". . . is different from mere delay in the
grammatical sense, because it involves the beginning of a special condition or status which has its
own peculiar effects or results." 11 In order that the debtor may be in default it is necessary that the
following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that
the debtor delays performance; and (3) that the creditor requires the performance judicially and
extrajudicially. 12 Default generally begins from the moment the creditor demands the performance
of the obligation. 13

Nowhere in this case did it appear that SSS demanded from Moonwalk the payment of its monthly
amortizations. Neither did it show that petitioner demanded the payment of the stipulated penalty
upon the failure of Moonwalk to meet its monthly amortization. What the complaint itself showed was
that SSS tried to enforce the obligation sometime in September, 1977 by foreclosing the real estate
mortgages executed by Moonwalk in favor of SSS. But this foreclosure did not push through upon
Moonwalk's requests and promises to pay in full. The next demand for payment happened on
October 1, 1979 when SSS issued a Statement of Account to Moonwalk. And in accordance with
said statement, Moonwalk paid its loan in full. What is clear, therefore, is that Moonwalk was never
in default because SSS never compelled performance. Though it tried to foreclose the mortgages,
SSS itself desisted from doing so upon the entreaties of Moonwalk. If the Statement of Account
could properly be considered as demand for payment, the demand was complied with on time.
Hence, no delay occurred and there was, therefore, no occasion when the penalty became
demandable and enforceable. Since there was no default in the performance of the main obligation
payment of the loan SSS was never entitled to recover any penalty, not at the time it made the
Statement of Account and certainly, not after the extinguishment of the principal obligation because
then, all the more that SSS had no reason to ask for the penalties. Thus, there could never be any
occasion for waiver or even mistake in the application for payment because there was nothing for
SSS to waive as its right to enforce the penalty did not arise.

SSS, however, in buttressing its claim that it never waived the penalties, argued that the funds it held
were trust funds and as trustee, the petitioner could not perform acts affecting the funds that would
diminish property rights of the owners and beneficiaries thereof. To support its claim, SSS cited the
case of United Christian Missionary Society v. Social Security Commission. 14

We looked into the case and found out that it is not applicable to the present case as it dealt not with
the right of the SSS to collect penalties which were provided for in contracts which it entered into but
with its right to collect premiums and its duty to collect the penalty for delayed payment or non-
payment of premiums. The Supreme Court, in that case, stated:

"No discretion or alternative is granted respondent Commission in the enforcement of the law's
mandate that the employer who fails to comply with his legal obligation to remit the premiums to the
System within the prescribed period shall pay a penalty of three (3%) per month. The prescribed
penalty is evidently of a punitive character, provided by the legislature to assure that employers do
not take lightly the State's exercise of the police power in the implementation of the Republic's
declared policy "to develop, establish gradually and perfect a social security system which shall be
suitable to the needs of the people throughout the Philippines and (to) provide protection to
employers against the hazards of disability, sickness, old age and death . . ."

Thus, We agree with the decision of the respondent court on the matter which We quote, to wit:

"Note that the above case refers to the condonation of the penalty for the non remittance of the
premium which is provided for by Section 22(a) of the Social Security Act . . . In other words, what
was sought to be condoned was the penalty provided for by law for non remittance of premium for
coverage under the Social Security Act.

The case at bar does not refer to any penalty provided for by law nor does it refer to the non
remittance of premium. The case at bar refers to a contract of loan entered into between plaintiff and
defendant Moonwalk Development and Housing Corporation. Note, therefore, that no provision of
law is involved in this case, nor is there any penalty imposed by law nor a case about non-remittance
of premium required by law. The present case refers to a contract of loan payable in installments not
provided for by law but by agreement of the parties. Therefore, the ratio decidendi of the case of
United Christian Missionary Society vs. Social Security Commission which plaintiff-appellant relies is
not applicable in this case; clearly, the Social Security Commission, which is a creature of the Social
Security Act cannot condone a mandatory provision of law providing for the payment of premiums
and for penalties for non remittance. The life of the Social Security Act is in the premiums because
these are the funds from which the Social Security Act gets the money for its purposes and the non-
remittance of the premiums is penalized not by the Social Security Commission but by law.

xxx xxx xxx

It is admitted that when a government created corporation enters into a contract with private party
concerning a loan, it descends to the level of a private person. Hence, the rules on contract
applicable to private parties are applicable to it. The argument therefore that the Social Security
Commission cannot waive or condone the penalties which was applied in the United Christian
Missionary Society cannot apply in this case. First, because what was not paid were installments on
a loan but premiums required by law to be paid by the parties covered by the Social Security Act.
Secondly, what is sought to be condoned or waived are penalties not imposed by law for failure to
remit premiums required by law, but a penalty for non payment provided for by the agreement of the
parties in the contract between them . . ." 15

WHEREFORE, in view of the foregoing, the petition is DISMISSED and the decision of the
respondent court is AFFIRMED. LLpr

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-21780 June 30, 1967

MAKATI DEVELOPMENT CORPORATION, plaintiff-appellant,

vs.
EMPIRE INSURANCE CO., defendant-appellee.
RODOLFO P. ANDAL, third-party defendant-appellee.

Salvador J. Lorayes for plaintiff-appellant Makati Development Corporation.

Tomacruz and Ferrer for defendant-appellee Empire Insurance Company, Inc.
Crispin D. Baizas and Associates for defendant-appellee Rodolfo Andal.

CASTRO, J.:

On March 31, 1959, the Makati Development Corporation sold to Rodolfo P. Andal a lot, with an
area of 1,589 square meters, in the Urdaneta Village, Makati, Rizal, for P55,615. 1w ph1.t

A so-called "special condition" contained in the deed of sale provides that "[T]he VENDEE/S shall
commence the construction and complete at least 50% of his/her/their/its residence on the property
within two (2) years from March 31, 1959 to the satisfaction of the VENDOR and, in the event of
his/her/their/its failure to do so, the bond which the VENDEE/S has delivered to the VENDOR in the
sum of P11,123.00 and evidenced by a cash bond receipt dated April 10, 1959 will be forfeited in
favor of the VENDOR by the mere fact of failure of the VENDEE/S to comply with this special
condition." To insure faithful compliance with this "condition," Andal gave a surety bond on April 10,
1959 wherein he, as principal, and the Empire Insurance Company, as surety, jointly and severally,
undertook to pay the Makati Development Corporation the sum of P12,000 in case Andal failed to
comply with his obligation under the deed of sale.

Andal did not build his house; instead he sold the lot to Juan Carlos on January 18, 1960. As neither
Andal nor Juan Carlos built a house on the lot within the stipulated period, the Makati Development
Corporation, on April 3, 1961, that is, three days after the lapse of the two-year period, sent a notice
of claim to the Empire Insurance Co. advising it of Andal's failure to comply with his undertaking.
Demand for the payment of P12,000 was refused, whereupon the Makati Development Corporation
filed a complaint in the Court of First Instance of Rizal on May 22, 1961 against the Empire
Insurance Co. to recover on the bond in the full amount, plus attorney's fees. In due time, the Empire
Insurance Co. filed its answer with a third-party complaint against Andal. It asked that the complaint
be dismissed or, in the event of a judgment in favor of the Makati Development Corporation, that
judgment be rendered ordering Andal to pay the Empire Insurance Co. whatever amount it maybe
ordered to pay the Makati Development Corporation, plus interest at 12%, from the date of the filing
of the complaint until said amount was fully reimbursed, and attorney's fees.

In his answer, Andal admitted the execution of the bond but alleged that the "special condition" in the
deed of sale was contrary to law, morals and public policy. He averred that, at any rate, Juan Carlos
had started construction of a house on the lot.

Hearing was held and, on March 28, 1963, the lower court rendered judgment, sentencing the
Empire Insurance Co. to pay the Makati Development Corporation the amount of P1,500, with
interest at the rate of 12% from the time of the filing of the complaint until the amount was fully paid,
and to pay attorney's fees in the amount of P500, and the proportionate part of the costs. The court
directed that in case the amount of the judgment was paid by the Empire Insurance Co., Andal
should in turn pay the former the sum of P1,500 with interest at 12% from the time of the filing of the
complaint to the time of payment and to pay attorney's fees in the sum of P500 and proportionate
part of the costs. The Makati Development Corporation appealed directly to this Court.

In reducing Andal's liability for breach of his undertaking from P12,000, as stipulated in the bond to
P1,500, the court noted that

While no building has actually been constructed before the target date which is March 31,
1961, it is also a fact that even before that date the entire area was already fenced with a
stone wall and building materials were also stocked in the premises which are clear indicia of
the owner's desire to construct his house with the least possible delay. As a matter of fact
the incontrovertible testimony of Juan Carlos is to the effect that by the end of April 1961, he
had finished very much more than the required 50% stipulated in the contract of sale. In
short there was only really a little delay.

But the appellant argues that Andal became liable for the full amount of his bond upon his failure to
build a house within the two-year period which expired on March 31, 1961 and that the trial court
was without authority to reduce Andal's liability on the basis of Carlos' construction of a house a
month after the stipulated period because there was no privity of contract between Carlos and the
Makati Development Corporation.

To begin with, the so-called "special condition" in the deed of sale is in reality an obligation1 to
build a house at least 50 per cent of which must be finished within two years. It was to secure the
performance of this obligation that a penal clause was inserted.

While it is true that in obligations with a penal sanction the penalty takes the place of "damages and
the payment of interest in case of non-compliance"2 and that the obligee is entitled to recover upon
the breach of the obligation without the need of proving damages,3 it is nonetheless true that in
certain instances a mitigation of the obligor's liability is allowed. Thus article 1229 of the Civil Code
states:

The judge shall equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or unconscionable.

Here the trial court found that Juan Carlos had finished more than 50 per cent of his house by April,
1961, or barely a month after the expiration on March 31, 1961 of the stipulated period. There was
therefore a partial performance of the obligation within the meaning and intendment of article
1229.4 The case of General Ins. & Surety Corp. vs. Republic, G.R. L-13873, Jan. 31, 19635 cannot
be invoked as authority for the forfeiture of the full amount of the bond because unlike this case
there was in that case no performance at all of any part of the obligation to secure the payment of
salaries to teachers. Indeed, it has been held that where there has been partial or irregular
compliance with the provisions in a contract for special indemnification in the event of failure to
comply with its terms, courts will rigidly apply the doctrine of strict construction against the
enforcement in its entirety of the indemnification, where it is clear from the contract that the amount
or character of the indemnity is fixed without regard to the probable damages which might be
anticipated as a result of a breach of the terms of the contract, or, in other words, where the
indemnity provided for is essentially a mere penalty having for its object the enforcement of
compliance with the contract.6 The penal clause in this case was inserted not to indemnify the Makati
Development Corporation for any damage it might suffer as a result of a breach of the contract but
rather to compel performance of the so-called "special condition" and thus encourage home building
among lot owners in the Urdaneta Village.

Considering that a house had been built shortly after the period stipulated, the substantial, if tardy,
performance of the obligation, having in view the purpose of the penal clause, fully justified the trial
court in reducing the penalty.

Still it is insisted that Carlos' construction of a house on the lot sold cannot be considered a partial
performance of Andal's obligation because Carlos bears no contractual relation to the Makati
Development Corporation. This case is in many respects analogous to Insular Gov't. vs.
Amechazurra, 10 Phil. 637 (1908) where a similar claim was made by a party and rejected by this
Court. There the defendant gave a bond for $800 to guarantee the return to the plaintiff of four
firearms issued to him "on demand" of the Government. Three of the firearms were stolen from the
defendant so that on demand of the Government he was able to produce only one. Subsequently the
constabulary recovered two of the missing guns and the question was whether defendant was
entitled to a mitigation of liability even if recovery of the firearms was made possible through the
efforts of third parties (the Constabulary) This Court gave an affirmative answer.

Indeed the stipulation in this case to commence the construction and complete at least 50 per cent
of the vendee's house within two years cannot be construed as imposing a strictly personal
obligation on Andal. To adopt such a construction would be to limit Andal's right to dispose of the lot.
There is nothing in the deed of sale restricting Andal's right to sell the lot at least within the two-year
period and we think it plain that a reading of such a limitation on one of the rights of ownership must
rest on more explicit language in the contract. It cannot be left to mere inference.

Accordingly, the decision appealed from is affirmed, at appellant's cost.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 85161 September 9, 1991

COUNTRY BANKERS INSURANCE CORPORATION and ENRIQUE SY, petitioners,

vs.
COURT OF APPEALS and OSCAR VENTANILLA ENTERPRISES CORPORATION, respondents.

Esteban C. Manuel for petitioners.

Augusta Gatmaytan for OVEC.

MEDIALDEA, J.:p

Petitioners seek a review on certiorari of the decision of the Court of Appeals in CA-G.R. CV No.
09504 "Enrique Sy and Country Bankers Insurance Corporation v. Oscar Ventanilla Enterprises
Corporation" affirming in toto the decision of the Regional Trial Court, Cabanatuan City, Branch XXV,
to wit:

WHEREFORE, the complaint of the plaintiff Enrique F. Sy is dismissed, and on the

counterclaim of the defendant O. Ventanilla Enterprises Corporation, judgment is
hereby rendered:

1. Declaring as lawful, the cancellation and termination of the Lease Agreement

(Exh. A) and the defendant's re-entry and repossession of the Avenue, Broadway
and Capitol theaters under lease on February 11, 1980;

2. Declaring as lawful, the forfeiture clause under paragraph 12 of the Id Lease

Agreement, and confirming the forfeiture of the plaintiffs remaining cash deposit of
P290,000.00 in favor of the defendant thereunder, as of February 11, 1980;

3. Ordering the plaintiff to pay the defendant the sum of P289,534.78, representing
arrears in rentals, unremitted amounts for amusement tax delinquency and accrued
interest thereon, with further interest on said amounts at the rate of 12% per annum
(per lease agreement) from December 1, 1980 until the same is fully paid;

4. Ordering the plaintiff to pay the defendant the amount of P100,000.00,

representing the P10,000.00 portion of the monthly lease rental which were not
deducted from the cash deposit of the plaintiff from February to November, 1980,
after the forfeiture of the said cash deposit on February 11, 1980, with interest
thereon at the rate of 12% per annum on each of the said monthly amounts of
P10,000.00 from the time the same became due until it is paid;

5. Ordering the plaintiff to pay the defendant through the injunction bond, the sum of
P100,000.00, representing the P10,000.00 monthly increase in rentals which the
defendant failed to realize from February to November 1980 result from the
injunction, with legal interest thereon from the finality of this decision until fully paid;

6. Ordering the plaintiff to pay to the defendant the sum equivalent to ten per centum
(10%) of the above-mentioned amounts of P289,534.78, P100,000.00 and
P100,000.00, as and for attorney's fees; and

7. Ordering the plaintiff to pay the costs. (pp. 94-95, Rollo)

The antecedent facts of the case are as follows:

Respondent Oscar Ventanilla Enterprises Corporation (OVEC), as lessor, and the petitioner Enrique
F. Sy, as lessee, entered into a lease agreement over the Avenue, Broadway and Capitol Theaters
and the land on which they are situated in Cabanatuan City, including their air-conditioning systems,
projectors and accessories needed for showing the films or motion pictures. The term of the lease
was for six (6) years commencing from June 13, 1977 and ending June 12,1983. After more than
two (2) years of operation of the Avenue, Broadway and Capitol Theaters, the lessor OVEC made
demands for the repossession of the said leased properties in view of the Sy's arrears in monthly
rentals and non-payment of amusement taxes. On August 8,1979, OVEC and Sy had a conference
and by reason of Sy's request for reconsideration of OVECs demand for repossession of the three
(3) theaters, the former was allowed to continue operating the leased premises upon his conformity
to certain conditions imposed by the latter in a supplemental agreement dated August 13, 1979.

In pursuance of their latter agreement, Sy's arrears in rental in the amount of P125,455.76 (as of
July 31, 1979) was reduced to P71,028.91 as of December 31, 1979. However, the accrued
amusement tax liability of the three (3) theaters to the City Government of Cabanatuan City had
accumulated to P84,000.00 despite the fact that Sy had been deducting the amount of P4,000.00
from his monthly rental with the obligation to remit the said deductions to the city government.
Hence, letters of demand dated January 7, 1980 and February 3, 1980 were sent to Sy demanding
payment of the arrears in rentals and amusement tax delinquency. The latter demand was with
warning that OVEC will re-enter and repossess the Avenue, Broadway and Capital Theaters on
February 11, 1980 in pursuance of the pertinent provisions of their lease contract of June 11, 1977
and their supplemental letter-agreement of August 13, 1979. But notwithstanding the said demands
and warnings SY failed to pay the above-mentioned amounts in full Consequently, OVEC padlocked
the gates of the three theaters under lease and took possession thereof in the morning of February
11, 1980 by posting its men around the premises of the Id movie houses and preventing the lessee's
employees from entering the same.

Sy, through his counsel, filed the present action for reformation of the lease agreement, damages
and injunction late in the afternoon of the same day. And by virtue of a restraining order dated
February 12, 1980 followed by an order directing the issuance of a writ of preliminary injunction
issued in said case, Sy regained possession and operation of the Avenue, Broadway and Capital
theaters.

As first cause of action, Sy alleged that the amount of deposit P600,000.00 as agreed upon,
P300,000.00 of which was to be paid on June 13, 1977 and the balance on December 13, 1977
was too big; and that OVEC had assured him that said forfeiture will not come to pass. By way of
second cause of action, Sy sought to recover from OVEC the sums of P100,000.00 which Sy
allegedly spent in making "major repairs" on Broadway Theater and the application of which to Sy's
due rentals; (2) P48,000.00 covering the cost of electrical current allegedly used by OVEC in its
alleged "illegal connection" to Capitol Theater and (3) P31,000.00 also for the cost of electrical
current allegedly used by OVEC for its alleged "illegal connection" to Broadway Theater and for
damages suffered by Sy as a result of such connection. Under the third cause of action, it is alleged
in the complaint that on February 11, 1980, OVEC had the three theaters padlocked with the use of
force, and that as a result, Sy suffered damages at the rate of P5,000.00 a day, in view of his failure
to go thru the contracts he had entered into with movie and booking companies for the showing of
movies at ABC. As fourth cause of action, Sy prayed for the issuance of a restraining
order/preliminary injunction to enjoin OVEC and all persons employed by it from entering and taking
possession of the three theaters, conditioned upon Sy's filing of a P500,000.00 bond supplied by
Country Bankers Insurance Corporation (CBISCO).

OVEC on the other hand, alleged in its answer by way of counterclaims, that by reason of Sy's
violation of the terms of the subject lease agreement, OVEC became authorized to enter and
possess the three theaters in question and to terminate said agreement and the balance of the
deposits given by Sy to OVEC had thus become forfeited; that OVEC would be losing P50,000.00
for every month that the possession and operation of said three theaters remain with Sy and that
OVEC incurred P500,000.00 for attorney's service.
The trial court arrived at the conclusions that Sy is not entitled to the reformation of the lease
agreement; that the repossession of the leased premises by OVEC after the cancellation and
termination of the lease was in accordance with the stipulation of the parties in the said agreement
and the law applicable thereto and that the consequent forfeiture of Sy's cash deposit in favor of
OVEC was clearly agreed upon by them in the lease agreement. The trial court further concluded
that Sy was not entitled to the writ of preliminary injunction issued in his favor after the
commencement of the action and that the injunction bond filed by Sy is liable for whatever damages
OVEC may have suffered by reason of the injunction.

On the counterclaim of OVEC the trial court found that the said lessor was deprived of the
possession and enjoyment of the leased premises and also suffered damages as a result of the filing
of the case by Sy and his violation of the terms and conditions of the lease agreement. Hence, it
held that OVEC is entitled to recover the said damages in addition to the arrears in rentals and
amusement tax delinquency of Sy and the accrued interest thereon. From the evidence presented, it
found that as of the end of November, 1980, when OVEC finally regained the possession of the
three (3) theaters under lease, Sy's unpaid rentals and amusement tax liability amounted to
P289,534.78. In addition, it held that Sy was under obligation to pay P10,000.00 every month from
February to November, 1980 or the total amount of P100,000.00 with interest on each amount of
P10,000.00 from the time the same became due. This P10,000.00 portion of the monthly lease
rental was supposed to come from the remaining cash deposit of Sy but with the consequent
forfeiture of the remaining cash deposit of P290,000.00, there was no more cash deposit from which
said amount could be deducted. Further, it adjudged Sy to pay attorney's fees equivalent to 10% of
the amounts above-mentioned.

Finally, the trial court held Sy through the injunction bond liable to pay the sum of P10,000.00 every
month from February to November, 1980. The amount represents the supposed increase in rental
from P50,000.00 to P60,000.00 in view of the offer of one RTG Productions, Inc. to lease the three
theaters involved for P60,000.00 a month.

From this decision of the trial court, Sy and (CBISCO) appealed the decision in toto while OVEC
appealed insofar as the decision failed to hold the injunction bond liable for an damages awarded by
the trial court.

The respondent Court of Appeals found no ambiguity in the provisions of the lease agreement. It
held that the provisions are fair and reasonable and therefore, should be respected and enforced as
the law between the parties. It held that the cancellation or termination of the agreement prior to its
expiration period is justified as it was brought about by Sy's own default in his compliance with the
terms of the agreement and not "motivated by fraud or greed." It also affirmed the award to OVEC of
the amount of P100,000.00 chargeable against the injunction bond posted by CBISCO which was
soundly and amply justified by the trial court.

The respondent Court likewise found no merit in OVECS appeal and held that the trial court did not
err in not charging and holding the injunction bond posted by Sy liable for all the awards as the
undertaking of CBISCO under the bond referred only to damages which OVEC may suffer as a
result of the injunction.

From this decision, CBISCO and Sy filed this instant petition on the following grounds:

PRIVATE RESPONDENT SHOULD NOT BE ALLOWED TO UNJUSTLY ENRICH

OR BE BENEFITTED AT THE EXPENSE OF THE PETITIONERS.
B

RESPONDENT COURT OF APPEALS CO D SERIOUS ERROR OF LAW AND

GRAVE ABUSE OF DISCRETION IN NOT SETTING OFF THE P100,000.00
SUPPOSED DAMAGE RESULTING FROM THE INJUNCTION AGAINST THE
P290,000.00 REMAINING CASH DEPOSIT OF PETITIONER ENRIQUE SY.

RESPONDENT COURT OF APPEALS FURTHER COMMITTED SERIOUS ERROR

OF LAW AND GRAVE ABUSE OF DISCRETION IN NOT DISMISSING PRIVATE
RESPONDENTS COUNTER-CLAIM FOR FAILURE TO PAY THE NECESSARY
DOCKET FEE. (p. 10, Rollo)

We find no merit in petitioners' argument that the forfeiture clause stipulated in the lease agreement
would unjustly enrich the respondent OVEC at the expense of Sy and CBISCO contrary to law,
morals, good customs, public order or public policy. A provision which calls for the forfeiture of the
remaining deposit still in the possession of the lessor, without prejudice to any other obligation still
owing, in the event of the termination or cancellation of the agreement by reason of the lessee's
violation of any of the terms and conditions of the agreement is a penal clause that may be validly
entered into. A penal clause is an accessory obligation which the parties attach to a principal
obligation for the purpose of insuring the performance thereof by imposing on the debtor a special
presentation (generally consisting in the payment of a sum of money) in case the obligation is not
fulfilled or is irregularly or inadequately fulfilled. (Eduardo P. Caguioa, Comments and Cases on Civil
Law, Vol. IV, First Edition, pp. 199-200) As a general rule, in obligations with a penal clause, the
penalty shall substitute the indemnity for damages and the payment of interests in case of non-
compliance. This is specifically provided for in Article 1226, par. 1, New Civil Code. In such case,
proof of actual damages suffered by the creditor is not necessary in order that the penalty may be
demanded (Article 1228, New Civil Code). However, there are exceptions to the rule that the penalty
shall substitute the indemnity for damages and the payment of interests in case of non-compliance
with the principal obligation. They are first, when there is a stipulation to the contrary; second, when
the obligor is sued for refusal to pay the agreed penalty; and third, when the obligor is guilty of fraud
(Article 1226, par. 1, New Civil Code). It is evident that in all said cases, the purpose of the penalty is
to punish the obligor. Therefore, the obligee can recover from the obligor not only the penalty but
also the damages resulting from the non-fulfillment or defective performance of the principal
obligation.

In the case at bar, inasmuch as the forfeiture clause provides that the deposit shall be deemed
forfeited, without prejudice to any other obligation still owing by the lessee to the lessor, the penalty
cannot substitute for the P100,000.00 supposed damage resulting from the issuance of the
injunction against the P290,000.00 remaining cash deposit. This supposed damage suffered by
OVEC was the alleged P10,000.00 a month increase in rental from P50,000.00 to P60,000,00),
which OVEC failed to realize for ten months from February to November, 1980 in the total sum of
P100,000.00. This opportunity cost which was duly proven before the trial court, was correctly made
chargeable by the said court against the injunction bond posted by CBISCO. The undertaking
assumed by CBISCO under subject injunction refers to "all such damages as such party may sustain
by reason of the injunction if the Court should finally decide that the Plaintiff was/were not entitled
thereto." (Rollo, p. 101) Thus, the respondent Court correctly sustained the trial court in holding that
the bond shall and may answer only for damages which OVEC may suffer as a result of the
injunction. The arrears in rental, the unmeritted amounts of the amusement tax delinquency, the
amount of P100,000.00 (P10,000.00 portions of each monthly rental which were not deducted from
plaintiffs cash deposit from February to November, 1980 after the forfeiture of said cash deposit on
February 11, 1980) and attorney's fees which were all charged against Sy were correctly considered
by the respondent Court as damages which OVEC sustained not as a result of the injunction.

There is likewise no merit to the claim of petitioners that respondent Court committed serious error of
law and grave abuse of discretion in not dismissing private respondent's counterclaim for failure to
pay the necessary docket fee, which is an issue raised for the first time in this petition. Petitioners
rely on the rule in Manchester Development Corporation v. Court of Appeals, G.R. No. 75919, May
7, 1987, 149 SCRA 562 to the effect that all the proceedings held in connection with a case where
the correct docket fees are not paid should be peremptorily be considered null and void because, for
all legal purposes, the trial court never acquired jurisdiction over the case. It should be remembered
however, that in Davao Light and Power Co., Inc. v. Dinopol, G.R. 75195, August 19, 1988, 164
SCRA 748, this Court took note of the fact that the assailed order of the trial court was issued prior
to the resolution in the Manchester case and held that its strict application to the case at bar would
therefore be unduly harsh. Thus, We allowed the amendment of the complaint by specifying the
amount of damages within a non-extendible period of five (5) days from notice and the re-
assessment of the filing fees. Then, in Sun Insurance Office, Ltd. v. Asuncion, G.R. 79937-38,
February 3, 1989, 170 SCRA 274, We held that where the filing of the initiatory pleading is not
accompanied by payment of the docket fee, the court may allow payment of the fee within a
reasonable time but in no case beyond the applicable prescriptive or reglemen tary period.

Nevertheless, OVEC's counterclaims are compulsory so no docket fees are required as the following
circumstances are present: (a) they arise out of or are necessarily connected with the transaction or
occurrence that is subject matter of the opposing party's claim; (b) they do not require for their
adjudication the presence of third parties of whom the court cannot acquire jurisdiction; and (c) the
court has jurisdiction to entertain the claim (see Javier v. Intermediate Appellate Court, G.R. 75379,
March 31, 1989, 171 SCRA 605). Whether the respective claims asserted by the parties arise out of
the same contract or transaction within the limitation on counterclaims imposed by the statutes
depends on a consideration of all the facts brought forth by the parties and on a determination of
whether there is some legal or equitable relationship between the ground of recovery alleged in the
counterclaim and the matters alleged as the cause of action by the plaintiff (80 C.J.S. 48). As the
counterclaims of OVEC arise from or are necessarily connected with the facts alleged in the
complaint for reformation of instrument of Sy, it is clear that said counterclaims are compulsory.

ACCORDINGLY, finding no merit in the grounds relied upon by petitioners in their petition, the same
is hereby DENIED and the decision dated June 15, 1988 and the resolution dated September 21,
1988, both of the respondent Court of Appeals are AFFIRMED.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 101163 January 11, 1993

STATE INVESTMENT HOUSE, INC., petitioner,

vs.
COURT OF APPEALS and NORA B. MOULIC, respondents.
Escober, Alon & Associates for petitioner.

Martin D. Pantaleon for private respondents.

BELLOSILLO, J.:

The liability to a holder in due course of the drawer of checks issued to another merely as security,
and the right of a real estate mortgagee after extrajudicial foreclosure to recover the balance of the
obligation, are the issues in this Petition for Review of the Decision of respondent Court of Appeals.

Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to
be sold on commission, two (2) post-dated Equitable Banking Corporation checks in the amount of
Fifty Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and the other, 30 September
1979. Thereafter, the payee negotiated the checks to petitioner State Investment House. Inc.
(STATE).

MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity of the
checks. The checks, however, could no longer be retrieved as they had already been negotiated.
Consequently, before their maturity dates, MOULIC withdrew her funds from the drawee bank.

Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20
December 1979, STATE allegedly notified MOULIC of the dishonor of the checks and requested that
it be paid in cash instead, although MOULIC avers that no such notice was given her.

On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and
expenses of litigation.

In her Answer, MOULIC contends that she incurred no obligation on the checks because the jewelry
was never sold and the checks were negotiated without her knowledge and consent. She also
instituted a Third-Party Complaint against Corazon Victoriano, who later assumed full responsibility
for the checks.

On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint, and
ordered STATE to pay MOULIC P3,000.00 for attorney's fees.

STATE elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed the
trial court on the ground that the Notice of Dishonor to MOULIC was made beyond the period
prescribed by the Negotiable Instruments Law and that even if STATE did serve such notice on
MOULIC within the reglementary period it would be of no consequence as the checks should never
have been presented for payment. The sale of the jewelry was never effected; the checks, therefore,
ceased to serve their purpose as security for the jewelry.

We are not persuaded.

The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at the
pre-trial, the parties agreed to limit the issue to whether or not STATE was a holder of the checks in
due course. 1

In this regard, Sec. 52 of the Negotiable Instruments Law provides

 Sec. 52. What constitutes a holder in due course. A holder in due course is a
holder who has taken the instrument under the following conditions: (a) That it is
complete and regular upon its face; (b) That he became the holder of it before it was
overdue, and without notice that it was previously dishonored, if such was the fact;
(c) That he took it in good faith and for value; (d) That at the time it was negotiated to
him he had no notice of any infirmity in the instrument or defect in the title of the
person negotiating it.

Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable
instrument is a holder in due course. 2 Consequently, the burden of proving that STATE is not a holder
in due course lies in the person who disputes the presumption. In this regard, MOULIC failed.

The evidence clearly shows that: (a) on their faces the post-dated checks were complete and
regular: (b) petitioner bought these checks from the payee, Corazon Victoriano, before their due
dates; 3 (c) petitioner took these checks in good faith and for value, albeit at a discounted price; and, (d)
petitioner was never informed nor made aware that these checks were merely issued to payee as security
and not for value.

Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free from
any defect of title of prior parties, and from defenses available to prior parties among themselves;
STATE may, therefore, enforce full payment of the checks. 4

MOULIC cannot set up against STATE the defense that there was failure or absence of
consideration. MOULIC can only invoke this defense against STATE if it was privy to the purpose for
which they were issued and therefore is not a holder in due course.

That the post-dated checks were merely issued as security is not a ground for the discharge of the
instrument as against a holder in due course. For the only grounds are those outlined in Sec. 119 of
the Negotiable Instruments Law:

Sec. 119. Instrument; how discharged. A negotiable instrument is discharged: (a)

By payment in due course by or on behalf of the principal debtor; (b) By payment in
due course by the party accommodated, where the instrument is made or accepted
for his accommodation; (c) By the intentional cancellation thereof by the holder; (d)
By any other act which will discharge a simple contract for the payment of money; (e)
When the principal debtor becomes the holder of the instrument at or after maturity in
his own right.

Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the discharge of
the instrument. But, the intentional cancellation contemplated under paragraph (c) is that
cancellation effected by destroying the instrument either by tearing it up, 5 burning it, 6 or writing the
word "cancelled" on the instrument. The act of destroying the instrument must also be made by the holder
of the instrument intentionally. Since MOULIC failed to get back possession of the post-dated checks, the
intentional cancellation of the said checks is altogether impossible.

On the other hand, the acts which will discharge a simple contract for the payment of money under
paragraph (d) are determined by other existing legislations since Sec. 119 does not specify what
these acts are, e.g., Art. 1231 of the Civil Code 7 which enumerates the modes of extinguishing
obligations. Again, none of the modes outlined therein is applicable in the instant case as Sec. 119
contemplates of a situation where the holder of the instrument is the creditor while its drawer is the
debtor. In the present action, the payee, Corazon Victoriano, was no longer MOULIC's creditor at the time
the jewelry was returned.
Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere
expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no legal
basis to excuse herself from liability on her checks to a holder in due course.

Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The
need for such notice is not absolute; there are exceptions under Sec. 114 of the Negotiable
Instruments Law:

Sec. 114. When notice need not be given to drawer. Notice of dishonor is not
required to be given to the drawer in the following cases: (a) Where the drawer and
the drawee are the same person; (b) When the drawee is a fictitious person or a
person not having capacity to contract; (c) When the drawer is the person to whom
the instrument is presented for payment: (d) Where the drawer has no right to expect
or require that the drawee or acceptor will honor the instrument; (e) Where the
drawer had countermanded payment.

Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when she
returned the jewelry. She simply withdrew her funds from her drawee bank and transferred them to
another to protect herself. After withdrawing her funds, she could not have expected her checks to
be honored. In other words, she was responsible for the dishonor of her checks, hence, there was
no need to serve her Notice of Dishonor, which is simply bringing to the knowledge of the drawer or
indorser of the instrument, either verbally or by writing, the fact that a specified instrument, upon
proper proceedings taken, has not been accepted or has not been paid, and that the party notified is
expected to pay it. 8

In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering
or hampering transactions in commercial paper. Thus, the said statute should not be tampered with
haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single
case. 9

The drawing and negotiation of a check have certain effects aside from the transfer of title or the
incurring of liability in regard to the instrument by the transferor. The holder who takes the negotiated
paper makes a contract with the parties on the face of the instrument. There is an implied
representation that funds or credit are available for the payment of the instrument in the bank upon
which it is drawn. 10 Consequently, the withdrawal of the money from the drawee bank to avoid liability on
the checks cannot prejudice the rights of holders in due course. In the instant case, such withdrawal
renders the drawer, Nora B. Moulic, liable to STATE, a holder in due course of the checks.

Under the facts of this case, STATE could not expect payment as MOULIC left no funds with the
drawee bank to meet her obligation on the checks, 11 so that Notice of Dishonor would be futile.

The Court of Appeals also held that allowing recovery on the checks would constitute unjust
enrichment on the part of STATE Investment House, Inc. This is error.

The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation of
Corazon Victoriano and her husband at the time their property mortgaged to STATE was
extrajudicially foreclosed amounted to P1.9 million; the bid price at public auction was only P1
million. 12 Thus, the value of the property foreclosed was not even enough to pay the debt in full.

Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of
mortgage, the mortgagee is entitled to claim the deficiency from the debtor. 13 The step thus taken by
the mortgagee-bank in resorting to an extra-judicial foreclosure was merely to find a proceeding for the
sale of the property and its action cannot be taken to mean a waiver of its right to demand payment for
the whole debt. 14 For, while Act 3135, as amended, does not discuss the mortgagee's right to recover
such deficiency, it does not contain any provision either, expressly or impliedly, prohibiting recovery. In
this jurisdiction, when the legislature intends to foreclose the right of a creditor to sue for any deficiency
resulting from foreclosure of a security given to guarantee an obligation, it so expressly provides. For
instance, with respect to pledges, Art. 2115 of the Civil Code 15 does not allow the creditor to recover the
deficiency from the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold
on installment basis, in the event of foreclosure, the vendor "shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to the contrary will be void". 16

It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it cannot be
concluded that the creditor loses his right recognized by the Rules of Court to take action for the
recovery of any unpaid balance on the principal obligation simply because he has chosen to
extrajudicially foreclose the real estate mortgage pursuant to a Special Power of Attorney given him
by the mortgagor in the contract of mortgage. 17

The filing of the Complaint and the Third-Party Complaint to enforce the checks against MOULIC
and the VICTORIANO spouses, respectively, is just another means of recovering the unpaid balance
of the debt of the VICTORIANOs.

In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due
course, STATE, without prejudice to any action for recompense she may pursue against the
VICTORIANOs as Third-Party Defendants who had already been declared as in default.

WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a new
one entered declaring private respondent NORA B. MOULIC liable to petitioner STATE
INVESTMENT HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in the
total amount of P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without prejudice to
any action for recompense she may pursue against the VICTORIANOs as Third-Party Defendants.

Costs against private respondent.

SO ORDERED.

Cruz and Grio-Aquino, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-26339 December 14, 1979

MARIANO C. PAMINTUAN, petitioner-appellant,

vs.
COURT OF APPEALS and YU PING KUN CO., INC., respondent-appellees.

V. E. del Rosario & Associates for appellant.

Sangco & Sangalang for private respondent.

AQUINO, J.:

This case is about the recovery compensatory, damages for breach of a contract of sale in addition
to liquidated damages.

Mariano C. Pamintuan appealed from the judgment of the Court of Appeals wherein he was ordered
to deliver to Yu Ping Kun Co., Inc. certain plastic sheetings and, if he could not do so, to pay the
latter P100,559.28 as damages with six percent interest from the date of the filing of the complaint.
The facts and the findings of the Court of Appeals are as follows:

In 1960, Pamintuan was the holder of a barter license wherein he was authorized to export to Japan
one thousand metric tons of white flint corn valued at forty-seven thousand United States dollars in
exchange for a collateral importation of plastic sheetings of an equivalent value.

By virtue of that license, he entered into an agreement to ship his corn to Tokyo Menka Kaisha, Ltd.
of Osaka, Japan in exchange for plastic sheetings. He contracted to sell the plastic sheetings to Yu
Ping Kun Co., Inc. for two hundred sixty-five thousand five hundred fifty pesos. The company
undertook to open an irrevocable domestic letter of credit for that amount in favor of Pamintuan.

It was further agreed that Pamintuan would deliver the plastic sheetings to the company at its
bodegas in Manila or suburbs directly from the piers "within one month upon arrival of" the carrying
vessels. Any violation of the contract of sale would entitle the aggreived party to collect from the
offending party liquidated damages in the sum of ten thousand pesos (Exh. A).

On July 28, 1960, the company received a copy of the letter from the Manila branch of Toyo Menka
Kaisha, Ltd. confirming the acceptance by Japanese suppliers of firm offers for the consignment to
Pamintuan of plastic sheetings valued at forty-seven thousand dollars. Acting on that information,
the company lost no time in securing in favor of Pamintuan an irrevocable letter of credit for two
hundred sixty-five thousand five hundred fifty pesos.

Pamintuan was apprised by the bank on August 1, 1960 of that letter of credit which made reference
to the delivery to Yu Ping Kun Co., Inc. on or before October 31, 1960 of 336, 360 yards of plastic
sheetings (p. 21, Record on Appeal).

On September 27 and 30 and October 4, 1960, the Japanese suppliers shipped to Pamintuan,
through Toyo Menka Kaisha, Ltd., the plastic sheetings in four shipments to wit: (1) Firm Offer No.
327 for 50,000 yards valued at $9,000; (2) Firm Offer No. 328 for 70,000 yards valued at $8,050; (3)
Firm Offers Nos. 329 and 343 for 175,000 and 18,440 yards valued at $22,445 and $2,305,
respectively, and (4) Firm Offer No. 330 for 26,000 yards valued at $5,200, or a total of 339,440
yards with an aggregate value of $47,000 (pp. 4-5 and 239-40, Record on Appeal).

The plastic sheetings arrived in Manila and were received by Pamintuan. Out of the shipments,
Pamintuan delivered to the company's warehouse only the following quantities of plastic sheetings:

November 11, 1960 140 cases, size 48 inches by 50 yards. November 14, 1960
258 cases out of 352 cases. November 15, 1960 11 cases out of 352 cases.
November 15, 1960 10 cases out of 100 cases. November 15, 1960 30 cases
out of 100 cases.
Pamintuan withheld delivery of (1) 50 cases of plastic sheetings containing 26,000 yards valued at
$5,200; (2) 37 cases containing 18,440 yards valued at $2,305; (3) 60 cases containing 30,000
yards valued at $5,400 and (4) 83 cases containing 40,850 yards valued at $5,236.97. While the
plastic sheetings were arriving in Manila, Pamintuan informed the president of Yu Ping Kun Co., Inc.
that he was in dire need of cash with which to pay his obligations to the Philippine National Bank.
Inasmuch as the computation of the prices of each delivery would allegedly be a long process,
Pamintuan requested that he be paid immediately.

Consequently, Pamintuan and the president of the company, Benito Y.C. Espiritu, agreed to fix the
price of the plastic sheetings at P0.782 a yard, regardless of the kind, quality or actual invoice value
thereof. The parties arrived at that figure by dividing the total price of P265,550 by 339,440 yards,
the aggregate quantity of the shipments.

After Pamintuan had delivered 224,150 yards of sheetings of interior quality valued at P163,.047.87,
he refused to deliver the remainder of the shipments with a total value of P102,502.13 which were
covered by (i) Firm Offer No. 330, containing 26,000 yards valued at P29,380; (2) Firm Offer No.
343, containing 18,440 yards valued at P13,023.25; (3) Firm Offer No. 217, containing 30,000 yards
valued at P30,510 and (4) Firm Offer No. 329 containing 40,850 yards valued at P29,588.88 (See
pp. 243-2, Record on Appeal).

As justification for his refusal, Pamintuan said that the company failed to comply with the conditions
of the contract and that it was novated with respect to the price.

On December 2, 1960, the company filed its amended complaint for damages against Pamintuan.
After trial, the lower court rendered the judgment mentioned above but including moral damages.

The unrealized profits awarded as damages in the trial court's decision were computed as follows
(pp. 248-9, Record on Appeal):

(1) 26,000 yards with a contract price of Pl.13 per yard and a selling price at the time
of delivery of Pl.75 a yard........................................................... P16,120.00

(2) 18,000 yards with a contract price of P0.7062 per yard and selling price of Pl.20
per yard at the time of delivery......................................... 9,105.67

(3) 30,000 yards with a contract price of Pl.017 per yard and a selling price of Pl.70
per yard. 20,490.00

(4) 40,850 yards with a contract price of P0.7247 per yard and a selling price of
P1.25 a yard at the time of delivery.............................................. 21,458.50 Total
unrealized profits....................... P67,174.17

The overpayment of P12,282.26 made to Pamintuan by Yu Ping Kun Co., Inc. for the 224,150 yards,
which the trial court regarded as an item of damages suffered by the company, was computed as
follows (p. 71, Record on Appeal):

Liquidation value of 224,150 yards at P0.7822 a yard

.............................................................................. P175,330.13

Actual peso value of 224,150 yards as per firm offers or as per

contract............................................ 163,047.87
 Overpayment................................................................ P 12,282.26

To these two items of damages (P67,174.17 as unrealized profits and P12,282.26 as overpayment),
the trial court added (a) P10,000 as stipulated liquidated damages, (b) P10,000 as moral damages,
(c) Pl,102.85 as premium paid by the company on the bond of P102,502.13 for the issuance of the
writ of preliminary attachment and (d) P10,000 as attorney's fees, or total damages of P110,559.28)
p. 250, Record on Appeal). The Court of Appeals affirmed that judgment with the modification that
the moral damages were disallowed (Resolution of June 29, 1966).

Pamintuan appealed. The Court of Appeals in its decision of March 18, 1966 found that the contract
of sale between Pamintuan and the company was partly consummated. The company fulfilled its
obligation to obtain the Japanese suppliers' confirmation of their acceptance of firm offers totalling
$47,000. Pamintuan reaped certain benefits from the contract. Hence, he is estopped to repudiate it;
otherwise, he would unjustly enrich himself at the expense of the company.

The Court of Appeals found that the writ of attachment was properly issued. It also found that
Pamintuan was guilty of fraud because (1) he was able to make the company agree to change the
manner of paying the price by falsely alleging that there was a delay in obtaining confirmation of the
suppliers' acceptance of the offer to buy; (2) he caused the plastic sheetings to be deposited in the
bonded warehouse of his brother and then required his brother to make him Pamintuan), his
attorney-in-fact so that he could control the disposal of the goods; (3) Pamintuan, as attorney-in-fact
of the warehouseman, endorsed to the customs broker the warehouse receipts covering the plastic
sheetings withheld by him and (4) he overpriced the plastic sheetings which he delivered to the
company.

The Court of Appeals described Pamintuan as a man "who, after having succeeded in getting
another to accommodate him by agreeing to liquidate his deliveries on the basis of P0.7822 per
yard, irrespective of invoice value, on the pretense that he would deliver what in the first place he
ought to deliver anyway, when he knew all the while that he had no such intention, and in the
process delivered only the poorer or cheaper kind or those which he had predetermined to deliver
and did not conceal in his brother's name and thus deceived the unwary party into overpaying him
the sum of P 1 2,282.26 for the said deliveries, and would thereafter refuse to make any further
delivery in flagrant violation of his plighted word, would now ask us to sanction his actuation" (pp. 61-
62, Rollo).

The main contention of appellant Pamintuan is that the buyer, Yu Ping Kun Co., Inc., is entitled to
recover only liquidated damages. That contention is based on the stipulation "that any violation of
the provisions of this contract (of sale) shall entitle the aggrieved party to collect from the offending
party liquidated damages in the sum of P10,000 ".

Pamintuan relies on the rule that a penalty and liquidated damages are the same (Lambert vs. Fox
26 Phil. 588); that "in obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of non-compliance, if there is no stipulation to the
contrary " (1st sentence of Art. 1226, Civil Code) and, it is argued, there is no such stipulation to the
contrary in this case and that "liquidated damages are those agreed upon by the parties to a
contract, to be paid in case of breach thereof" (Art. 2226, Civil Code).

We hold that appellant's contention cannot be sustained because the second sentence of article
1226 itself provides that I nevertheless, damages shall be paid if the obligor ... is guilty of fraud in the
fulfillment of the obligation". "Responsibility arising from fraud is demandable in all obligations" (Art.
1171, Civil Code). "In case of fraud, bad faith, malice or wanton attitude, the obligor shall be
responsible for an damages which may be reasonably attributed to the non-performance of the
obligation" (Ibid, art. 2201).

The trial court and the Court of Appeals found that Pamintuan was guilty of fraud because he did not
make a complete delivery of the plastic sheetings and he overpriced the same. That factual finding is
conclusive upon this Court.

There is no justification for the Civil Code to make an apparent distinction between penalty and
liquidated damages because the settled rule is that there is no difference between penalty and
liquidated damages insofar as legal results are concerned and that either may be recovered without
the necessity of proving actual damages and both may be reduced when proper (Arts. 1229, 2216
and 2227, Civil Code. See observations of Justice J.B.L. Reyes, cited in 4 Tolentino's Civil Code, p.
251).

Castan Tobeas notes that the penal clause in an obligation has three functions: "1. Una funcion
coercitiva o de garantia, consistente en estimular al deudor al complimiento de la obligacion
principal, ante la amenaza de tener que pagar la pena. 2. Una funcion liquidadora del dao, o sea la
de evaluar por anticipado los perjuicios que habria de ocasionar al acreedor el incumplimiento o
cumplimiento inadecuado de la obligacion. 3. Una funcionestrictamente penal, consistente en
sancionar o castigar dicho incumplimiento o cumplimiento inadecuado, atribuyendole consecuencias
mas onerosas para el deudor que las que normalmente lleva aparejadas la infraccion contractual. "
(3 Derecho Civil Espanol, 9th Ed., p. 128).

The penalty clause is strictly penal or cumulative in character and does not partake of the nature of
liquidated damages (pena sustitutiva) when the parties agree "que el acreedor podra pedir, en el
supuesto incumplimiento o mero retardo de la obligacion principal, ademas de la pena, los danos y
perjuicios. Se habla en este caso de pena cumulativa, a differencia de aquellos otros ordinarios, en
que la pena es sustitutiva de la reparacion ordinaria." (Ibid, Castan Tobenas, p. 130).

After a conscientious consideration of the facts of the case, as found by Court of Appeals and the
trial court, and after reflecting on the/tenor of the stipulation for liquidated damages herein, the true
nature of which is not easy to categorize, we further hold that justice would be adequately done in
this case by allowing Yu Ping Kun Co., Inc. to recover only the actual damages proven and not to
award to it the stipulated liquidated damages of ten thousand pesos for any breach of the
contract. The proven damages supersede the stipulated liquidated damages.

This view finds support in the opinion of Manresa (whose comments were the bases of the new
matter found in article 1226, not found in article 1152 of the old Civil Code) that in case of fraud the
difference between the proven damages and the stipulated penalty may be recovered (Vol. 8, part.
1, Codigo Civil, 5th Ed., 1950, p. 483).

Hence, the damages recoverable by the firm would amount to ninety thousand five hundred fifty-nine
pesos and twenty-eight centavos (P90,559.28), with six percent interest a year from the filing of the
complaint.

With that modification the judgment of the Court of Appeals is affirmed in all respects. No costs in
this instance.

SO ORDERED.

Barredo, Concepcion, Jr., and Santos, JJ., concur.

Abad Santos, J., concur in the result.

Separate Opinions

ANTONIO, J., concurring:

As a general rule, the penalty takes the place of the indemnity for damages and the payment of
interest. 1 This was also the rule under the Old Civil Code. Thus, Article 1152 of the Spanish Civil Code
provided that in "obligations with a penal clause the penalty shall substitute indemnity for damages and
the payment of interest in case of non-performance should there be no agreement to the contrary. " As an
exception to this rule, the penalty and the indemnity for damages and payment of interest may be
recovered when there is an express stipulation to that effect. Aside from incorporating the provisions of
Article 1152 of the Spanish Civil Code, Article 1226 of the New Civil Code also added two other
exceptions when indemnity for damages, in addition to and part from the penalty for damages, in addition
to and apart from the penalty stipulated, may be recovered: (1) when the obligor having failed to comply
with the principal obligation also refuses to pay the penalty, in which case the creditor is entitled to
interest in the amount of the penalty, in accordance with Article 2209; or (2) when the obligor is guilty of
fraud in the fulfillment of the obligation. 2 The reason for the third exception is based on the principle that
an action to enforce is based on the principle that an action to enforce liability for future fraud cannot be
renounced, as that would be against public policy and would contravene the express provisions of Article
1171 of the Civil Code which states that "any waiver of an action for future fraud is void. "

On this matter, Manresa commented, thus:

La pena y la indemnizacion por dolo. Es en nuestra opinion, otrocaso de

excepcion a la regla general de incompatibilidad y lo entendemos asi, no ya por el
primer parrafo del articulo 1.102, que declara exigible la responsibilidad del dolo
procedente en toda clase de obligaciones, sino principalmente por la segunda parte
de dicho articulo, que se opone a la validez de toda renuncia anticipada de la accion
para exigir tal responsibilidad. En efecto, este supone que la ley no autoriza en modo
alguno la impunidad del dolo por cause de convenios anteriores, y por tanto, rechaza
lo mismo la impunidad completa que la parcial ,es decir referira a aquellos perjuicios
que no quedan satisfechos con el importe de la pena convenida. Limitada asi la
cuestion, y no olividando que, a falta de convenio especial, tiene la pena asignado el
fin de reparar los perjuicios, concretamos asi nuestra opinion: 1.0, que en caso de
dolo de una obligacion con clausula penal, la prueba de de aquel para reclamar mas
indemnizacion corresponde al actor; 2. 0, que tambien, caso pedirla, le corresponde
la de existencia y cuantra los perjuicio; y 3.0, que probando ambos extremos, podra
pedir la differencia de dicha sobre el importe de la pena estipulada. 3

It is evident from tile foregoing that in case of fraud in the fulfillment of an obligation with a penal
clause, proof of such fraud is incumbent upon the creditor, and in case he demands indemnity in
addition to the penalty stipulated, proof of the existence and amount of the damages shall also
correspond to him. However, the creditor may demand only the difference of such amount over the
amount of the penalty stipulated as the creditor cannot recover both the proven damages and the
stipulated penalty. In the case at bar, he is only entitled to the stipulated
penalty plus the difference between the proven damages and the stipulated penalty.
# Separate Opinions

ANTONIO, J., concurring:

As a general rule, the penalty takes the place of the indemnity for damages and the payment of
interest. 1 This was also the rule under the Old Civil Code. Thus, Article 1152 of the Spanish Civil Code
provided that in "obligations with a penal clause the penalty shall substitute indemnity for damages and
the payment of interest in case of non-performance should there be no agreement to the contrary. " As an
exception to this rule, the penalty and the indemnity for damages and payment of interest may be
recovered when there is an express stipulation to that effect. Aside from incorporating the provisions of
Article 1152 of the Spanish Civil Code, Article 1226 of the New Civil Code also added two other
exceptions when indemnity for damages, in addition to and part from the penalty for damages, in addition
to and apart from the penalty stipulated, may be recovered: (1) when the obligor having failed to comply
with the principal obligation also refuses to pay the penalty, in which case the creditor is entitled to
interest in the amount of the penalty, in accordance with Article 2209; or (2) when the obligor is guilty of
fraud in the fulfillment of the obligation. 2 The reason for the third exception is based on the principle that
an action to enforce is based on the principle that an action to enforce liability for future fraud cannot be
renounced, as that would be against public policy and would contravene the express provisions of Article
1171 of the Civil Code which states that "any waiver of an action for future fraud is void. "

On this matter, Manresa commented, thus:

La pena y la indemnizacion por dolo. Es en nuestra opinion, otrocaso de

excepcion a la regla general de incompatibilidad y lo entendemos asi, no ya por el
primer parrafo del articulo 1.102, que declara exigible la responsibilidad del dolo
procedente en toda clase de obligaciones, sino principalmente por la segunda parte
de dicho articulo, que se opone a la validez de toda renuncia anticipada de la accion
para exigir tal responsibilidad. En efecto, este supone que la ley no autoriza en modo
alguno la impunidad del dolo por cause de convenios anteriores, y por tanto, rechaza
lo mismo la impunidad completa que la parcial ,es decir referira a aquellos perjuicios
que no quedan satisfechos con el importe de la pena convenida. Limitada asi la
cuestion, y no olividando que, a falta de convenio especial, tiene la pena asignado el
fin de reparar los perjuicios, concretamos asi nuestra opinion: 1.0, que en caso de
dolo de una obligacion con clausula penal, la prueba de de aquel para reclamar mas
indemnizacion corresponde al actor; 2. 0, que tambien, caso pedirla, le corresponde
la de existencia y cuantra los perjuicio; y 3.0, que probando ambos extremos, podra
pedir la differencia de dicha sobre el importe de la pena estipulada. 3

It is evident from tile foregoing that in case of fraud in the fulfillment of an obligation with a penal
clause, proof of such fraud is incumbent upon the creditor, and in case he demands indemnity in
addition to the penalty stipulated, proof of the existence and amount of the damages shall also
correspond to him. However, the creditor may demand only the difference of such amount over the
amount of the penalty stipulated as the creditor cannot recover both the proven damages and the
stipulated penalty. In the case at bar, he is only entitled to the stipulated
penalty plus the difference between the proven damages and the stipulated penalty.